MINERALOGY PTY LTD -v- SINO IRON PTY LTD [No 13] [2016] WASC 403 (13 December 2016)

MINERALOGY PTY LTD -v- SINO IRON PTY LTD [No 13] [2016] WASC 403 (13 December 2016) - WASC 2016 case summary — Zoe

[154]

The underlying machinery for Royalty Component A can be seen via cl 8.2(a) to be tied to item 5 of the Schedule in both MRSLAs. There is also via cl 8.2(b) a regular review of the level of Royalty Component A. This is conducted on a quarterly basis, by reference to 'CPI Movement'.
Whilst item 5 of the Schedule shows that Royalty Component A is payable by reference to Magnetite Ore taken, the underlying referenced subject matter in respect of the other aspect of the royalty is differently constructed in terms of the underlying subject matter. Both the components A and B are necessary to in aggregate derive the 'Mineralogy Royalty'.
By cl 8.2(a) of the MRSLAs the Mineralogy Royalty is an amount of money which needs to be 'calculated'. An arithmetic formula is provided to complete this calculation. It is the summation of Royalty Component A and Royalty Component B.
The word 'calculated' is seen then to be used yet again later in cl 8.2(a), now in a context of defining the basis upon which the Royalty Component B is to be ascertained. A second mathematical formula is provided in order to perfect this calculation for RCB.
As seen, the formula provided for the calculation of the monetary quantum of what is referred to as Royalty Component B provides a more complex algebraic formula. As an objective assessment, the provision of that formulae and the calculations to be undertaken all suggest to me a laying down, at this point, of elaborate machinery - in order to derive with precision the royalty money amounts which are to fall due to Mineralogy, on a quarterly basis.
As now seen, certain pricing ingredients used within the Royalty Component B formula post 2006 have proven, or are said to be, problematic in terms of their ascertainment. That is the case particularly as regards the subject matter that is referred to by the acronym PP (which I assume for present purposes is meant to signify a reference to pellet price) and also a counterpart formulae acronym CP (which I assume for present purposes signifies concentrate price - although those conclusions concerning the meaning of the two acronyms are an inference I have drawn, rather than being matters that are explicitly stated).
It is apparent from the defined term 'Product' that it is the commencing point in the equation for both the PP and CP components in the formula specified to derive Royalty Component B. 'Products' is defined in the MRSLAs' early definition clause (cl 1.1) as:

[162]

Expansive as the definition of 'Product' is now seen to be under cl 1.1, it would not appear to extend to include iron ore 'fines'.
For present purposes, it is significant that all argument before me has proceeded upon the basis that, to date, the only derived subject matter from the iron ore 'taken' at Mineralogy's Cape Preston mining leases as worked by Korean and Sino (from the magnetite iron ore which has been taken since 2013) is iron ore 'concentrate'. No other subject matter potentially capable of fulfilling the nominated MRSLA definition of 'Product' looks to have been derived to date. It would appear to be that to date no pellets or HBI has been produced, just concentrate.
The last negative observation is significant, once the dual halved parts in the RCB formula are examined, noting again that the acronyms PP and CP in that formula both envisage use of FOB (shipping) prices for the two distinct underlying subject matters that are chosen. The chosen subject matters in the formula are the price of iron ore pellets originating from Brazil, but in the other half of the formula the other distinctly chosen subject matter is of Mount Newman iron ore fines for export.
The Royalty Component B formula on close examination is seen first to halve the overall quantum of produced Product (as defined). Relevantly, for present purposes, since 2013 this has been only iron ore concentrate which has been produced from the extracted magnetite ore. Having halved the quantum of the produced Product, the RCB formula then proceeds to multiply that halved amount of Product by an FOB shipping price for each of the two chosen underlying subject matters, across the distinct halves of the formula. Hence, taking half the tonnage of the iron ore concentrate product (as Product), that tonnage amount is then multiplied, in the case of PP, by a shipping price in US dollars per dry metric tonne for Brazilian sourced iron ore pellets. The same methodology is used in respect of the other half of the calculation taking the halved Product tonnage and applying the US dollars shipping price (FOB), this time for the subject matter of Mount Newman fines for export (noting as dual curiosities that, first, fines would not appear to fall within the definition of 'Product' and, second (and in passing) that Mount Newman fines are actually derived from hematite ore, not magnetite ore: see ts 1412).
For each of PP and CP the FOB price nominated for either subject matter (pellets or fines) is indicated to be the annual shipping price for the subject matter.
Further, that annual nominated shipping price is identified as having been 'published' - indicating prima facie that the price used is in the international public domain, rather than being pricing information that is kept confidential.
A further aspect in each of the PP and CP price definitions is that these annual prices to be used are specified to be 'prevailing' - indicating prima facie a specification of a market price which may change over time - and presumably here, annually.
Each half of the specified Royalty Component B formula is then to be multiplied by a percentage for PR and CR. This percentage proceeds to manifest on a sliding scale, depending upon the level of the price for pellets or, in the case of CR, Mount Newman fines (albeit referred to as Concentrate Price in CR).

[199]

[22] The total effect of the decisions at first instance is that Sino Iron and Korean Steel have been permitted to receive all the contractual benefits to which they would be entitled under the MRSLAs whilst refusing to pay any amount on account of RCB and having the benefit of interlocutory injunctions preventing Mineralogy from exercising its contractual rights under cl 30.4(d) of the MRSLA.

[23] I agree with Newnes JA that the primary judge erred in failing to make an assessment of the strength of the CITIC parties' primary defence that RCB is uncertain, void and severable. Courts go to very considerable lengths to uphold agreements and the terms thereof. Ambiguity does not mean (legal) uncertainty. Courts will always strive to give a businesslike or commercial meaning to contractual terms. This preparedness to uphold the validity of a contract or its terms is further heightened when, as in this case, the agreement is a long term contract which is partially performed.

[24] There are separate aspects to the proper construction and application of the RCB in cl 8.2 of the MRSLA. The first is the identification of the relevant standard for determining the Brazilian pellet price (PP) and the Mount Newman fines concentrate price (CP) in the RCB formula. The ABPS provided the published market price of the relevant products for the relevant quarter. That is confirmed by CITIC in its 2006 announcement to the Hong Kong stock exchange. Prima facie, the standard for the calculation of RCB is the published market price for the relevant products (PP and CP) during the relevant quarter. The fact that (unlike the ABPS) the market price changes during the relevant period does not make the standard legally uncertain. How best to achieve and quantify the market price for the relevant period is a matter for expert evidence on a subject involving a well understood process that is neither ambiguous nor uncertain. Up to now, the CITIC parties have been successful without adducing expert evidence on this subject.

[25] Alternatively, it is arguable that the agreement to refer disputes to an expert under cl 8(6) of the MRSLA extends to both the standard and the quantification of the RCB. See Foley v Classique Coaches Ltd [1934] 2 KB 1; F & G Sykes (Wessex) Ltd v Fine Fare Ltd (1967) 1 Lloyd's Rep 53. Either way, the claim that RCB is uncertain, void and severable faces formidable obstacles.

[26] However, Mineralogy's insistence on an urgent hearing means this court cannot itself determine the application without infringing the respondent's right to procedural fairness. The application should be remitted to Chaney J who is responsible for the management of the action.

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