Sanrus P/L & Ors v Monto Coal 2 P/L

Russell and Company for the applicants Corrs Chambers Westgarth for the respondent

[1] The applicants and the respondent are parties to a Joint Venture Agreement dated 16 May 2002 under which they agreed to carry on a joint venture, described as the "Monto Coal Joint Venture", for the purpose of developing and operating a coal mine. As is usual in such agreements, there are restrictions on the rights of the parties to assign their respective joint venture interests. Under clause 12.2 of the Joint Venture Agreement a joint venturer may transfer the whole or part of its interest to a non joint venturer only if it first offers to transfer such interest to the other joint venturers for a cash consideration on certain prescribed terms.

[2] By letters to each of the applicants dated 4 August 2005, the respondent, purportedly pursuant to clause 12.2 of the Joint Venture Agreement, offered to transfer one half of its existing 51% interest in the joint venture "for a cash purchase price of A$29.423 million ... and otherwise on the terms and conditions contained in the attached Sale Agreement (which forms part of this offer)".

[3] The Sale Agreement, as the letter asserted, was one entered into on 28 July 2004 between the respondent as vendor, Huakong Aus Holdings Pty Ltd (the prospective purchaser), China Hua Neng Group Hong Kong Limited and Macarthur Coal Limited. Huakong is a wholly owned subsidiary of the China Hua Neng Group Hong Kong Limited. The respondent is a wholly owned subsidiary of Macarthur Coal Limited.

[4] The applicants contend that "the notice is not a valid 'offer' under clause 12.2 of the Joint Venture Agreement and is, in addition, void for uncertainty". They seek a declaration to that effect. The 60 day offer period expired on 3 October, the day chosen by the applicants to have their application heard. At the conclusion of the hearing I declared that:

"The notices dated 4 August 2005 given by the respondent to each of the applicants are of no effect for the purposes of clause 12.2 of the Joint Venture Agreement ...".

[5] Having regard to the lateness of the hour and the obvious importance to the parties of the question under consideration, I concluded that it would be appropriate to deliver written reasons at a later date. These are those reasons.

Relevant provisions of the Joint Venture Agreement

"12.2 In addition to the rights of transfer conferred on the Participants by clause 12.1 a Participant may at any time transfer the whole or any proportion of its Interest, subject to the following provisions of this clause 12.2:

(a) No transfer may be made by a Transferring Participant unless the consideration is cash and, before making the transfer, the transferring Participant first makes an Offer to transfer the Applicable Interest to each of the Non-Transferring Participants for a specific cash consideration and on terms and conditions to be set out in the Offer which are consistent with this clause 12.

(b) An Offer made pursuant to clause 12.2(a) must remain open for a period of 60 days after the date on which it is made and within the period of 60 days a Non-transferring Participant may accept the Offer in whole (but not in part).

(c) If the Accepting Participant accepts the Offer in whole, then the Transferring Participant must transfer the Applicable Interest to the Accepting Participant for the cash consideration and on the terms and conditions of the Offer and if the transfer is effected in accordance with clause 12.4 and within 30 days after the date of acceptance by the Accepting Participant.

(d) If a Non-Transferring Participant does not accept the Offer in whole, the Offer lapses and the Transferring Participant may transfer the Applicable Interest to another person with the prior written consent of the Non-Transferring Participants which consent must not be unreasonably withheld and which, in any case, must not be withheld in the context where such person reasonably demonstrates its ability to meet all anticipated costs and liabilities relating to the Applicable Interest for a cash consideration and on terms and conditions which are not more favourable to such person than those contained in the Offer and if the transfer is effected in accordance with clause 12.4 and within 30 days after the date when the Offer lapses."

[7] "Interest" is defined in clause 1 as meaning:

".. in relation to a Participant, that Participant's undivided right, title and interest, at the relevant point in time (as set out in clause 2.2 and as may be varied in accordance with this Agreement or by any sales, assignments, transfers, disposals or acquisitions of the whole or any part of a Participant's Interest pursuant to this Agreement), in

(a) the Joint Venture Assets including, subject to clause 2.7, the Coal; and

(b) the Project Documents including this Agreement,

and may be expressed as a percentage of the aggregate of both the Participant's Interest at that time."

[8] "Joint Venture" is defined in clause 1 as "the joint venture between the Participants established pursuant to clause 2".

"The Participants agree to establish and engage in an unincorporated joint venture, on and from the Commencement Date to be known as the 'Monto Coal Joint Venture', for the purpose of carrying out the Monto Coal Project and to develop a mine and associated infrastructure capable of producing 10 million tonnes or more of saleable coal per annum."

[10] It will be recalled that the offer was made "for the price and otherwise on the terms and conditions contained in" the Sale Agreement, attached to the offer which was expressed to form part of it. The Sale Agreement recited that the respondent agreed to sell half its interest in the Joint Venture to Huakong upon the terms set out in the Sale Agreement.

[11] Clause 2.2 of the Sale Agreement states the consideration to be "the Purchase Price" which is a defined term meaning "the sum of A$29,423,000 plus the Adjustment Amount."

[12] Clause 2.3 requires the Purchase Price to be paid by a payment of A$12,000,000 plus the Adjustment Amount on completion, and by a second payment of A$17,423,000, 30 business days after the date on which certain conditions are satisfied. Those conditions are:

(i) the proving up of at least 133,000,000 metric tonnes of marketable coal reserves within specific mining tenements by a specified exploration drilling programme;

(ii) the completion of a specified feasibility study;

(iii) the making of a decision by the joint venturers (including the buyer) to proceed with a specified mining development.

[13] The "Adjustment Amount" is an amount equal to a specified proportion of cash calls made on joint venturers and paid by the respondent during the period between the date of the Sale Agreement and "the Completion Date".

The sale and purchase of the Sale Interest as contemplated in this Agreement is subject to and conditional upon:

(e) the Buyer, the Seller and each of the other parties to the relevant documents agreeing and executing:

(i) the Deed of Assignment and Assumption, which effects (among other things) the giving by the Other Participants of their prior written consent to the transfer of the Sale Interest to the Buyer;

(ii) the Project Documents Amendment Deed, which effects the amendments to the Project Documents as outlined in the Project Documents Amendment Paper including, without limitation, amendments to reflect the mine development proposal as referred to the New Development Plan Proposal; and

(iii) the deed of priority referred to in clause 5.2(e)(ii);

(a) The Seller and the Buyer must each do, or cause to be done, all things and execute, or cause to be executed, all documents which it is within their respective powers to do or execute, or cause to be done or executed (as the case may be), which are reasonably necessary in order to procure as soon as reasonably practicable the satisfaction of the conditions referred to in clause 3.1."

[16] The "Project Documents" are defined in the Sale Agreement as, in effect, those documents constituting the joint venture and those entered into between the joint venturers for joint venture purposes. Such documents include the Joint Venture Agreement, a management agreement and a marketing agreement.

[17] The "Project Documents Amendment Deed" is defined as:

"...a deed in the form (or substantially in the form) of the project documents amendment deed contained in schedule 8, but which will need to be completed to include the detailed amendments required to give effect to the amendments to the specified Project Documents as outlined in the Project Documents Amendment Paper."

[18] The "Project Documents Amendment Paper" is a document set out in Schedule 7. It specifies at considerable length the substance of amendments required to be made to the project documents, including the Marketing Agreement and the Joint Venture Agreement.

(a) Permitting Huakong to sell its share of coal other than through the Joint Venture's marketing agent;

(b) Relieving Huakong of an obligation to pay a share of marketing costs;

(c) The entering into of a new coal handling and transport agreement for Huakong's share of the coal;

(d) The placing of selling restrictions on the marketing agent;

(e) The adoption of development plan proposal for the mine; and

(f) Provision for "sole risk development" of coal mining activities if other joint venturers elect not to proceed with a development proposed by one of them.

[20] Schedule 8 to the Sale Agreement contains the "Project Documents Amendment Deed". That Deed recites that the Joint Venture Agreement, Management Agreement and Marketing Agreement are to be amended as contemplated by it. Clause 3.1 of that Deed provides:

"With effect on and from the Effective Date, the Joint Venture Agreement is amended in the manner shown as mark ups in the version of the Joint Venture Agreement contained in schedule 1."

[21] There was no schedule 1 (to schedule 8) contained in the Sale Agreement accompanying the offer. In fact, the proposed amendments to the Joint Venture Agreement to be shown "as mark ups" are still the subject of negotiation at the date of the offer. They were not finally agreed by the parties to the Sale Agreement until shortly prior to 5 September 2005.

[22] (a) The offer price is not a "specific cash consideration but consists partly of cash and is "partly comprised of valuable promises made by the incoming purchaser";

(b) The second payment of $17,423,000 required under the Sale Agreement is payable only upon fulfilment of the conditions contained in clause 2.3. The "specific cash consideration" required by clause 12.2 is a fixed sum of money payable for and at the time of the transfer of the interest in the joint venture. The promise to pay the balance moneys does not meet the requirements of clause 12.2.

(c) The offer is void for uncertainty. Clause 3.1(e) of the Sale Agreement made it a condition precedent of the sale and transfer that the buyer/seller and other joint venturers agreed and executed, inter alia, the Project Documents Amendment Deed. The Project Documents Amendment Deed was incomplete in that, amongst other things, it lacked schedule 1. That remained to be agreed. Additionally, proposed amendments to the Management Agreement and Marketing Agreement had yet to be agreed.

(d) A condition precedent to the transfer to Huakong is that, if Huakong so requests, it and Monto Coal Pty Ltd are to agree and execute the "Coal Off Take Management Agreement". That Agreement was yet to be made at the time of the offer, thus providing another ground of uncertainty.

(e) The offer is unintelligible as an offer to the applicants. Some of its language is not able to be adapted to an agreement between the respondent and one or more of the applicants. For example, clause 3.1(h) of the Sale Agreement makes it a condition of the sale and purchase that the buyer has "obtained all the People's Republic of China Government approvals, permits and clearances that are required in connection with the acquisition of the Sale Interest".

(f) Under clause 12.2 the applicants are entitled to pay a price in exchange for the interest being sold. The conditions precedent in clauses 3.1(a) to 3.1(e) in the Sale Agreement, however, may be waived only with the agreement of both the respondent and the applicant buyers. If the respondent does not waive the benefit of any of these provisions, it has the ability to terminate the Sale Agreement pursuant to clause 3.2 and a transfer of the interest sold would thus not occur.

(g) The purpose of clause 12.2 is to protect joint venture participants from having an outsider foisted upon them as a joint venture partner without their agreement and without their having an opportunity to prevent that by paying the cash price for the sale of the interest which the would be purchaser would be prepared to pay. Although under the Joint Venture Agreement no amendment can be made without the agreement of all parties, the proposed offer puts the applicants at risk of having to accept a new joint venture partner if they do not accept the terms that such new partner is prepared to accept. Consequently, the respondent, if its argument is correct, can require the applicants to accept changes to the Joint Venture Agreement under the guise of making an offer to sell part of its interest.

[23] In order to resolve this question I do not find it necessary to consider all of the arguments advanced on behalf of the applicants.

[24] It is, I think, not quite accurate to describe offers as "void for uncertainty". The more conventional approach is to consider whether the offer, if accepted, would give rise to a binding contract having regard to lack of certainty in the offer's terms. If such a question is resolved in the applicants' favour, there remains, in my view, the need to determine whether a clause 12.2 offer must be one which will give rise to a binding contract if accepted. I will dispose of this latter point immediately.

[25] A clause 12.2 offer is one "to transfer the Applicable Interest ...for a specific cash consideration and on terms and conditions set out in the Offer ...".[1] The offer must remain open for 60 days, during which period it may be accepted in whole by the offeree.[2] If accepted by an "accepting participant" (an existing joint venturer offeree) the offeror must transfer the applicable interest for the cash consideration and on the terms and conditions of the offer within 30 days after the date of acceptance of the offer.[3]

[26] The Joint Venture Agreement is a contractual instrument. It uses conventional contractual terminology and, as the applicants argue, clause 12.2 is designed to give certainty to joint venturers' dealings with their respective joint venture interests. There is thus little reason to suppose that the offer referred to in clause 12.2 for "a specific cash consideration" and having the "terms and conditions" set out in it is not intended to be one which is sufficiently certain in its terms so as to give rise to a binding contract on acceptance. The "terms and conditions" of an offer are intended, on acceptance of the offer, to become terms and conditions of contract.

[27] On one view of it, clause 12.2(c) may detract from this conclusion because it is a contractual provision which stipulates the consequences of accepting an offer whether or not it is deficient in its terms. That clause, however, is incapable of operating effectively and in the way intended by the parties unless "the terms and conditions of the Offer" are capable of precise ascertainment at the time of the offer. The terms and conditions of these offers were not capable of precise ascertainment on the date of the offers. I will return to this point shortly.

[28] It is my conclusion that the offers, if accepted, would not give rise to binding contracts. Clause 3.1(e) of the Sale Agreement makes the sale and purchase subject to the parties to "the relevant documents agreeing and executing" documents dealing with matters of considerable substance, the terms and conditions of which were unascertained and unascertainable at the time of the offer.

[29] I doubt that upon mere acceptance of the offers, an intention on the part of all parties to be bound immediately could be inferred. Any such acceptance would not give rise, in my view, to the type of case in which it would be possible to discern an intention on the part of the parties to be bound immediately and exclusively to the ascertained terms agreed upon "whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms".[4] The nature and extent of the matters left to be determined and the language of the Sale Agreement and ancillary documents make it unlikely that the parties contemplated proceeding on the basis of the matters specified at the date of the offer should there be no further agreement on outstanding matters. I note in passing that this is a reason why the respondent's severance of argument should be rejected.[5]

[30] If the offer were to be accepted, and an intention to enter into contractual relations could be discerned, matters of substance amounting to "essential" or "critical" terms would remain to be settled by agreement between the parties.[6] In those circumstances, a binding contract would not come into existence.[7]

[31] Even if, which I very much doubt, it could be concluded that a binding contract may have existed between the named parties to the Sale Agreement at the date of the offers, it would not follow that the same result would apply, should the offers be accepted by the applicants. There is no similarity between the nature and history of the two sets of contractual dealings and no good reason why clause 3.1 of the Sale Agreement should not be taken at face value.

[32] The respondent argues that provisions such as clause 3.1 are not conditions precedent to the formation of the offer, "but rather preconditions to the performance of the obligations under any sale agreement... whether or not an agreement is reached and documents are executed are events which may or may not occur. The amendments need only be considered if acceptance of the offer occurs".

[33] This argument, which refers to a passage from the reasons of Mason J in Perri v Coolangatta Investments Pty Ltd[8] does not meet the uncertainty problems just identified. A central question in Perri v Coolangatta was whether a special condition of a contract for the sale and purchase of land, which made the contract subject to the purchasers completing a sale of another property of theirs, constituted a condition precedent to the formation of the contract or a condition in the contract on which performance of other obligations under the contract depended. The case was not one concerning uncertainty.

[34] I accept also the applicants' contentions that the offers are not "for a specific cash consideration". It is submitted on behalf of the respondent that it may be discerned from clause 12.4(a), as well as other parts of clause 12, that the parties had in contemplation that promises for valuable consideration may be made by the incoming purchaser. Consequently, it is urged that:

"The parties do not intend clause 12.2(a) to be read strictly so as to confine the consideration moving from the non-transferring participants only to cash."

[35] It may be accepted that clause 12.2 does not produce the result that the terms and conditions of the offers (other than those providing for a cash consideration) must be such that they do not provide for "valuable consideration" moving from one party to another. But, in my view, appropriate weight must be given to the words "for a specific cash consideration" in clause 12.2(a). The "cash consideration" theme is continued in paragraphs (c) and (d). It is apparent that the intention of the parties is to require an intending transferor to make an offer which, in substance, is an offer to sell for cash. The value of an offer may thus be assessed promptly and conveniently.

[36] There are other reasons for requiring a cash consideration. Existing joint venturers can avoid being put in a position of disadvantage as a result of the intending transferor's ability to agree with a third party terms and conditions which suit their interests of that entity, but which are of no or lesser value to the existing joint venturers. Also, in the case of offers like the subject one, it may be extremely difficult to determine whether a subsequent offer to a non-participant is for a consideration and on terms and conditions "not more favourable" than those offered to participants.

[37] Perusal of the Project Documents Amendment Paper reveals that if the offers are accepted, changes will be made to the Joint Venture Agreement and related documents which substantially alter the rights and obligations of the parties. Those changes are designed to bestow significant benefits on the respondent and Huakong. Having regard to the nature and extent of these benefits (and detriments to other joint venturers), it is apparent that the consideration for the offers cannot be regarded as a specific cash consideration.

[38] The words "terms and conditions ...set out in the Offer" and the requirement of "a specific cash consideration" are also designed to ensure that upon the making of the offer the offeree, being able to gauge its worth precisely, will have the benefit of a 60 day period within which to accept. If the precise content of the rights and obligations which might flow from acceptance of the offer cannot be determined at the time of the offer or for an indefinite period thereafter, the offeree may be deprived of much of the benefit of the 60 day acceptance period. Indeed the precise content of the parties' bargain may not be known until after the expiration of the offer period. There is no justification for construing the Joint Venture Agreement so as to produce this result.

[39] There is no good reason why costs should not follow the event. Accordingly, it is ordered that the respondent pay the applicants' costs of and incidental to the application to be assessed on the standard basis.

[4] See Sinclair Scott & Company Limited v Naughton [1929] HCA 34; (1929) 43 CLR 310 at 317 and cf Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601 at 619.

[5] cf Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60 and Whitlock v Brew [1968] HCA 71; (1968) 118 CLR 445 at 461.

[6] cf Thorby v Goldberg [1964] HCA 41; (1964) 112 CLR 597 at 607 and Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 436-7.

[7] May & Butcher Ltd v R [1934] 2 KB 17 at 21, HL.

[8] (1982) 149 CLR 537 at 552.