Sageinvest AG v Western Metals Copper Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5996/01 SAGEINVEST AKTIENGESELLSCHAFT v WESTERN METALS COPPER LTD JUDGMENT 1 HIS HONOUR: These proceedings arise out of an agreement whereby an option was granted for the purchase of certain mining tenements in Queensland ("the agreement"). The option was subsequently exercised and the tenements sold. The agreement was made on 15 December 1968 between Melvin Ellery Morrison, Leonore Veronica Morrison, Edward William Arthurs and Shirley Margaret Arthurs as vendors and Vam Ltd as purchaser. 2 The question of construction that is in issue arises from clause 14 of the agreement, which contains the following provisions: "(b) The vendor shall be entitled to receive from time to time royalty payments equivalent in value to five (5%) percentum of the net profits (as hereinafter defined).

(c) Net profits as used in this agreement shall mean that amount in dollars as represents the taxable income of the company prior to the deduction of income tax attributable to exploration, development, production, treatment, manufacture, fabrication, marketing and sale by the company of any minerals, metals or other materials from the tenements as the same may be calculated in accordance with the Income Tax Assessment Act 1936 as amended.

(d) Royalties payable pursuant hereto shall be payable quarterly not in advance on the basis of net profits as herein defined accruing to the previous financial quarter year. The vendor shall be entitled to call upon the company to produce its accounts and calculations upon which such royalties are computed and in the event of any dispute between the parties with respect to the interpretation of the accounting provisions of this schedule such dispute shall be finally resolved by a firm of independent chartered accountants agreed upon by the parties or if they are unable to reach agreement by such firm to be nominated by the president for the time being of the institute of chartered accountants to serve in that capacity."

Other provisions of the agreement also relevant to that question of construction are as follows: "4 The vendor covenants and agrees that during the term of this agreement but subject always to the provision of the Act as amended from time to time the company shall have the exclusive right, leave and licence to do all or any of the following acts or things: …… 26 Reference in this agreement to the Act shall mean the Mining Acts of 1962 as amended for the State of Queensland and any regulations, proclamations or declarations made pursuant thereto as amended from time to time. 22 This agreement and any amendments thereof shall be deemed to be a New South Wales contract governed by the laws for the time being in force in the State of New South Wales. All questions with respect to jurisdiction, validity, interpretation and performance of this agreement and all such amendments as may be made hereto from time to time shall be determined according to the laws of New South Wales in force from time to time subject to any provisions to the contrary contained in the Act." 3 The question that arises is as to the meaning to be attributed to "the Income Tax Assessment Act 1936 as amended" ("the ITAA") where it appears in clause 14(c). The question is as to whether that expression should be given a static or an ambulatory construction, that is, whether the taxable income should be determined by reference to the Income Tax Assessment Act 1936 as it stood when the agreement was entered into on 15 December 1968 or whether the reference should be taken to be to the Income Tax Assessment Act 1936 as in force from time to time. 4 It is common ground between the parties that the plaintiff has acquired from the original vendors a right to 14 per cent of the royalties and that the defendant now stands in the shoes of the original purchaser so as to be bound by the agreement. 5 The matter has proceeded on the further amended summons. Prayers 1, 2 and 3 of the further amended summons are as follows: "1 A declaration that the Plaintiff is entitled to 14% of such royalty ('the Royalty') as may be payable pursuant to clause 14(b) of an agreement made on 15 December 1968 between Melvin Ellery Morrison, Leonore Veronica Morrison, Edward William Arthur of the one part and Vam Limited of the other part ('the Agreement').

2 A declaration that the Defendant is obliged to pay the Plaintiff 14% of any Royalty payable under the Agreement.

3 A declaration that on the proper construction of the Agreement, 'net profits' as defined in clause 14(c) of the Agreement, are to be calculated quarterly and in arrears as the difference between: (a) The Defendant's income accruing to the preceding quarter from the sale of any minerals, metals or other materials derived from the Tenements (as defined in the Agreement) assessed according to the Income Tax Assessment Act 1936 as it existed on the date of the Agreement ('the Act'); and

(b) The Defendant's allowable deductions under the Act accruing to the preceding quarter that are attributable to the exploration for, and the development, production, treatment, manufacture, fabrication and marketing of any minerals metals or other materials derived from the Tenements (and no other deductions)."

There is an order for separate decision of questions in the following terms: "Order that the questions raised by prayers 1, 2 and 3 of the further amended summons be decided separately from and prior to all other questions in the proceedings".

Although amended points of claim were filed, they have not been adverted to in the course of argument before me and I have not paid any regard to them. Equally many arguments put in written submissions originally filed were not put to me. This is in part because some other questions in the proceedings as to construction of the agreement have been agreed between the parties after a conference was held between their expert witnesses at the direction of the Court. 6 The only question that has been argued before me is the question referred to above as to whether the reference to the ITAA "1936 as amended" in clause 14(c) of the agreement should be given a static or an ambulatory construction. Even some of the arguments originally put concerning that in the written submissions have not been agitated before me. 7 As to the general principles of construction of commercial agreements, I have been referred to what was said by Kirby P (as his Honour then was) in Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313 - 314: "Between two such substantial businesses, there are sound reasons of principle and policy for determining their respective rights and duties, if at all possible, by reference to the written terms by which they expressed those rights and duties. No other approach is as likely to command general acceptance in the commercial community. No other approach is as efficient in the containment of litigation. None is so effective in conserving the economic and entrepreneurial decisions which lie behind contract law to business people rather than lawyers. But language, including that used in commercial agreements, is often ambiguous. It may be so even in agreements between substantial parties which are well advised by lawyers. The ambiguities may arise from a deliberate decision to keep the terms of the agreement between the parties vague, because they are difficult to define and, it is hoped there will be no occasion for disagreement. It may be so because the parties, and those advising them, do not foresee the infinite variety of circumstances which later arise calling for resolution by reference to their agreement. Or it may be so for no better reason than that the inherent contradictions that lie in the words of the agreement between the parties were not recognised at the time those words were agreed to. It then falls to the parties in the first instance, and a court ultimately, to give meaning to those words.

Whoever may be the parties to the agreement, it is the fundamental rule, that a court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, courts will endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient. This is because courts will infer that commercial parties would not themselves normally agree in such a way." 8 It must be remembered always that words in an agreement must be construed in the context of the whole agreement: Re Media, Entertainment and Arts Alliance; Ex parte Hoyts Corporation Pty Ltd (1993) 178 CLR 379 at 386 - 387; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588 at 609. I also bear in mind what was said by Harman LJ in Cartwright v MacCormack; Trafalgar Insurance Company Ltd third party [1963] 1 WLR 18 at 21 to the effect that one must "give proper weight if possible to every word used". Equally, in approaching an exercise of construction it is important to be aware of the habits of legal draftsmen, as this agreement bears the marks of being prepared by lawyers. Prestcold (Central) Ltd v Minister of Labour [1969] 1 WLR 89 is a case concerning the interpretation of a statute, but Lord Diplock at 97 made remarks that apply to legal draftsmen more generally: "But there are other habits of professional legal draftsmen which are less widely shared by other kinds of writers or not shared by them at all. Some expressions in common use in documents dealing with legal rights or obligations acquire in a legal context a special meaning different from, or more precise than, their meaning in common speech; they become 'terms of art.' Again, the habit of a legal draftsman is to eschew synonyms. He uses the same words throughout the document to express the same thing or concept, and consequently if he uses different words the presumption is that he means a different thing or concept. Another habit, relevant to this case, is that a legal draftsman aims at uniformity in the structure of his draft. If he has thought it desirable to qualify what he has stated in one part of the document and has omitted to qualify a statement of a similar kind in another part of the document, the presumption is that the latter statement is to be understood as not being subject to a similar qualification, even though the natural meaning of the second statement would otherwise have been understood sub silentio as subject to it." 9 There are a number of cases which deal with the incorporation of statutes, rules of procedure or standard form contracts into contractual documents. In Brett v Brett Essex Golf Club Ltd (1986) 52 P & CR 330, Slade LJ said at 339: "For my part, I agree with Mr Steinffeld that in many, perhaps the majority of, cases where parties to a written contract have incorporated in it a reference to a statute which has been amended, it may be reasonable to impute to them an intention to refer to the statute in its amended form. However, no authority has been cited to us which suggests that under the ordinary law there is any presumption of construction to this effect."

In Bunge SA v Kruse [1979] 1 Lloyd's Rep 279 Brandon J said at 286: "There is, as it seems to me, a difference between a clause incorporating a code containing mainly substantive provisions, ie provisions defining or affecting the substantive rights of the parties, on the one hand, and a clause incorporating a code containing mainly procedural provisions, ie provisions laying down the procedure to be followed in the arbitration of disputes, on the other hand. In the case of the first kind of clause, of which the provision in the present contract incorporating GAFTA form 100 is an example, it is clear that the code incorporated is that contained in form 100 as existing and in force at the date of the contract. In the case of the second kind of clause, of which cl 30(a) of GAFTA 100 incorporating the arbitration rules in GAFTA 125 is an example, the prima facie inference, I think, is that the code incorporated is that in force when the time for invoking and acting on the procedural provisions concerned arises."

This was adverted to in the Federal Court by Finkelstein J in Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Limited [2002] FCA 1156, where his Honour said at [6]: "In May 2000 Ford published a new set of standard terms and conditions. The new terms differ in some material respects from those which they replaced. Ford contends that the new terms and not the 1997 standard terms form part of the contract with ROH. I do no agree. The cases show that prima facie a reference to standard terms and conditions is a reference to the terms and conditions current at the date of the contract: Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165, 171. There will be occasions when the incorporation includes amendments made from time to time: Offshore International SA v Banco Central SA [1976] 2 Lloyd's Rep 402; Mitsui OSK Lines Ltd v AGIP SpA [1978] 1 Lloyd's Rep 263. Usually this will only occur when the amendments are of a procedural, and not a substantive, type: Bunge SA v Kruse [1979] 1 Lloyd's Rep 279. Here, however, the 1997 standard terms were expressly incorporated, and there is no basis upon which the new terms could replace them. "

However, one must never forget that the primary exercise is to construe the words used by the parties in the context of the whole of the document with which one is concerned. 10 Each party argued from the principle against inconvenient interpretation. The plaintiff argued that the freezing of the financial obligations as between the vendor and purchaser would make sense. The clause under consideration was to provide a considerable portion of what the vendors were to obtain as consideration for the sale of their tenements. It would be improbable and inconvenient that the parties to an agreement would intend a calculation of the royalties that would vary over the years and perhaps from year to year. They would not willingly subject themselves to the basis of royalty being changed by the unforeseeable act of a third party, ie, legislation changing the content of the concept of taxable income. 11 The defendant argued that the inconvenience arising from a static interpretation outweighs the factors relating to uncertainty. It must have been recognised in 1968 that a 1968 criterion would be of declining relevance as the years went by. It must always have been apparent to the parties that, if a mining operation were commenced, the agreement would last for the life of the mine. The operation of the agreement would not be static in any event. The parties would have been aware that there were ongoing developments both technical and commercial that might affect a mining operation. It would be commercially nonsensical to have the contents of the royalties dependent on the 1968 environment. If the interpretation were static, the decisions and ATO rulings bearing on the quantum of taxable income would recede into the past as the ITAA was changed to respond to changing circumstances. Furthermore, it would be inconvenient for the purchaser to be compelled to go on producing a separate set of accounts or calculations based on antiquated tax principles. 12 In this case the principle that one must look at the precise words used in the agreement are of importance. The plaintiff points to the use of "from time to time" in connexion with the operation of law, both statutory and generally. If this usage were consistent it would, indeed, be of importance. However, the usage is not consistent. In clause 26 the language refers to "the Mining Acts of 1962 as amended", but refers to regulations, proclamations or declarations under them "as amended from time to time". The plaintiff says that "from time to time" at the end of the clause governs "as amended" after both the reference to the Acts and the reference to the regulations, etc. But I do not think that this is so, in view of the use of the separate expressions "as amended" and "as amended from time to time" after the Acts and the regulations, etc, respectively. It would be ridiculous if clause 26 were taken to refer to the Acts in a static fashion but to the regulations, etc, in an ambulatory way. This, to me, indicates that "as amended" and "as amended from time to time" are used indifferently in the language of this agreement and the significance argued for by the plaintiff cannot be attributed to their omission in clause 14(c). This is of some importance in deriving the intention of the parties to the agreement. 13 Despite the dicta in the authorities cited above, I do not think it is established that there is any presumption, or any strong or well established presumption, that a statute by reference to which substantive rights are defined in an agreement is to be taken as frozen at the date of the agreement. It may be better established by those authorities that in the case of procedural provisions an ambulatory interpretation is likely. But I prefer the view of Slade LJ in Brett supra that there is no presumption either way. 14 Had the parties to the agreement intended to render the references to the ITAA static, they could easily have done so by reference to the ITAA 1936 - 1968 (a form of citation then available, although abolished by the Acts Citation Act 1976 (Cth)) or by the use of the expression "as amended to the date of this agreement". The plaintiff's argument that the parties should be taken to have intended to fix their substantive rights so as to be constant is not without some force, but the defendant's argument of the inconvenience of adherence to a tax regime receding into the past and the ongoing necessity of separate accounting calculations is also of force. I bear in mind, though, that to parties in commerce "taxable income" is always an inconstant concept, changing in some fashion, or at least liable to change, virtually year by year. Yet it is by reference to that expression that the parties to the agreement chose to define their rights, though it must have been clear that the agreement had the potential for operation for years or decades into the future. 15 Though the matter is not without some difficulty, it is my view, looking at the whole of the terms of the agreement in the light of its potential long term operation, that the parties to it are to be taken as referring in clause 14(c) to the ITAA as amended from time to time. 16 Arguments have been put to me as to the form of the declaration which should be made. I am prepared to make the orders sought in prayers 1 and 2 of the further amended summons, which the parties deem useful and consent to, although there is no real dispute as to these matters. As is apparent, there is a real dispute as to the declaration sought by prayer 3. The plaintiff presses me to make the declarations in ample form that embody the full context of the clause. The defendant argues that this creates the risk of a gloss on the agreement. The argument as to the ambit of "as amended" was the only real dispute which the Court was asked do determine. Where there is lack of agreement as to the form which the declaration should take, the declaration should be limited to determination of the actual dispute before the Court and should avoid the risk of placing any gloss on the terms of the agreement as to which no argument took place. 17 Short minutes should be brought in to embody the decisions that I have come to. The plaintiff must bear the defendant's costs of the proceedings to date. **********

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