BETWEEN : STRAITS EXPLORATION (AUSTRALIA) PTY LTD (ACN 061 614 695)

RENISON BELL LTD (SUBJECT TO DEED OF COMPANY ADMINISTRATION) (ACN 008 596 272)

Contract - Interpretation of contractual term limiting jurisdiction of court - Turns on own facts

Baulderstone Hornibrook Engineering Pty Ltd v Kayah Holdings Pty Ltd (1998) 14 BCL 277

Cathedral Place Pty Ltd & Anor v Hyatt of Australia Ltd & Anor [2003] VSC 385

Dobbs v National Bank of Australasia Ltd [1935] HCA 49; (1935) 53 CLR 643

Re Gibbs Houlder Brothers & Co Ltd's Lease (1925) Ch 198

South Australian Railway Commissioner v Egan [1973] HCA 5; (1973) 130 CLR 506

Australian Securities Commission v Lord (1991) 33 FCR 144

Badgin Nominees Pty Ltd v Oneida Ltd & Anor [1998] VSC 188

Bateman Project Engineering v Resolute Ltd [2000] WASC 284; (2000) 23 WAR 493

Bickel v Duke of Westminster [1977] QB 517

Bond v Larobi Pty Ltd (1992) 6 WAR 489

Fletcher Construction Australia Ltd v MPN Group Pty Ltd, unreported; SCt of NSW; 14 July 1997

IBM Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466

International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 Ch 513

JA McBeath Nominees Pty Ltd v Jenkins Development Corporation Pty Ltd [1992] 2 Qd R 121

Jons & Ors v Sherwood Computer Services plc (1992) 2 All ER 170

Rember Pty Ltd v Western Glade Pty Ltd & Anor, unreported; SCt of WA; Library No 970378; 2 July 1997

Savcor Pty Ltd v State of New South Wales [2001] NSWSC 596; (2001) 52 NSWLR 587

The Heart Research Institute Ltd & Anor v Psiron Ltd [2002] NSWSC 646

1 MASTER SANDERSON: By way of originating summons, the plaintiffs seek certain declarations as to the proper interpretation of provisions of a deed entered into between the plaintiffs and the defendants. The application is brought under O 58 r 10. Before detailing the application, I should say something about the background facts. There is no dispute between the parties as to the circumstances which give rise to this application.

2 By a written agreement between the plaintiffs and the defendants dated 19 October 1995 ("the agreement"), the first plaintiff and the defendants agreed to associate as an exploration joint venture in respect of certain mining leases. The second plaintiff guaranteed the performance of the agreement by the first plaintiff. On or about 24 January 2003 the first plaintiff and Birla Maroochydore, a subsidiary of Birla Mineral Resources Pty Ltd, a wholly owned subsidiary of Hindalco Industries, entered into an agreement in which the first plaintiff agreed, subject to its obligations pursuant to cl 15.2 of the agreement, to assign its interest arising pursuant to the agreement to Birla Maroochydore.

3 A copy of the agreement is to be found as annexure "NLJ6" to the affidavit of Nigel Lloyd Johnson ("Mr Johnson"), sworn 24 December 2003. Clause 15 of the agreement relevantly provides:

(a) A Party may not assign its Interest under this Agreement without first offering the Interest in writing to the other Party.

(b) If the other Party does not accept the offer within 28 days after receipt of the offer, then the offering Party may, at any time during the 3 month period after the expiration of that 28 days, sell the Interest to a third party, on terms no more favourable to such third party than those offered to the other Party.

(c) Any proposed assignee shall be subject to the approval of the non-assigning Party, which approval shall not be unreasonably withheld."

4 By letter dated 3 February 2003, the second plaintiff made the offer required in cl 15.2(a) of the agreement. By letter dated 12 February 2003 the defendants rejected the second plaintiff's offer. Subsequent to rejecting this offer, the defendants have refused to grant their approval pursuant to cl 15 of the agreement to Hindalco or its nominee becoming assignee in accordance with the proposed assignment. The various letters which make up this chain of events are found as annexures to the affidavit of Mr Johnson referred to above.

5 Clause 17 of the agreement is headed "Dispute Resolution". It is in the following terms:

"17.1 Further steps required before proceedings

If any dispute or difference arises between the Parties in respect of any matter under or in relation to this agreement, either Party may by notice in writing to the other, specify the nature of the dispute and call for submission of the dispute to an independent Expert in accordance with the provisions of this Part.

If the Parties cannot reach agreement on the identity of the Expert within 14 days after receipt of the notice under clause 17.1, then the Expert shall be determined in the following manner:

(a) if the dispute or difference relates to the conduct of Mining Operations or other work, or usual industry practices or matters related thereto, then the Expert shall be nominated by the President of the Australasian Institute of Mining & Metallurgy or such person occupying his or her position or performing his or her role from time to time;

(b) if the dispute relates to any financial or accounting matter including the computation of Costs and the keeping of accounts, then the Expert shall be nominated by the President of the Institute of Chartered Accountants or such person occupying his or her position or performing his or her role from time to time;

(c) if the dispute relates to any terms of any proposed project loan, the Expert shall be nominated by the Chief Executive officer of the Australian Merchant Bankers' Association or such person occupying his or her position or performing his or her role from time to time; and

(d) if the dispute relates to the interpretation of this Agreement or the Heads of Agreement the Expert shall be nominated by the President of the Law Society of Western Australia.

In any event, the Expert shall have a reasonable commercial, practical and technical experience in the area of dispute. The Expert will act as an expert and not as an arbitrator.

The Parties shall lodge written submissions as to the subject matter of the dispute to the Expert within 14 days of the Expert's appointment. The Expert shall be required to state his determination in writing within 28 days of his appointment.

17.4 Powers of Expert

The Expert shall have the following powers:-

(a) to inform himself independently as to facts and if necessary technical matters to which the dispute relates;

(b) to receive written submissions sworn and unsworn written statements and photocopy documents and to act upon the same;

(c) to consult with such other professionally qualified persons as he in his absolute discretion thinks fit;

(d) to take such measures as he thinks fit to expedite the completion of the dispute resolution.

17.5 Location

The dispute resolution shall be held in Perth, Western Australia unless the parties to the dispute otherwise agree.

The determination of the Expert shall be final and binding on the Parties other than in the case of fraud or manifest error.

The costs of the Expert shall be to the account of the party who is unsuccessful in relation to the issue in dispute. If there is more than one issue in dispute, the cost shall be pro-rated amongst each of the issues according to the time the Expert has spent considering each of them. The Expert's determination on this issue shall be final and binding on the parties other than in the case of fraud or manifest error.

Irrespective of the provisions of this clause nothing in this agreement will prevent a party from seeking or obtaining an injunction to prevent a breach of this agreement."

6 By notice dated 25 March 2003, purportedly issued in accordance with cl 17.1, the second plaintiff sought to have a dispute referred to an expert. A copy of the notice appears as part of annexure "NLJ15" to Mr Johnson's affidavit. In the notice under the heading "Matters in Dispute", there appears the following:

"Straits gives notice to Murchison and Renison that pursuant to clause 17.1 of the Agreement that the following dispute has arisen between the parties:

1.1 The true interpretation and proper construction of clause 15.2(c) of the Agreement; and

1.2 Whether Murchison and Renison have unreasonably refused to grant their approval pursuant to clause 15.2(c) of the Agreement to Birla Maroochydore becoming an assignee of Straits' interest under the Agreement."

7 The second plaintiff also nominated an expert to resolve the dispute. On 9 April 2004 the defendants indicated that they would decide whether to accept the second defendant's nominated expert on or about 15 April 2003. On 14 May 2003 the defendants stated they will "revert to (the second defendant) on the question of a nomination of an expert shortly". Again, these letters appear as annexures to Mr Johnson's affidavit. Despite the contents of these letters it is common ground that the defendants have refused to nominate an expert.

8 On 14 April 2003 the first plaintiff, purportedly in accordance with cl 17.2 of the agreement, referred the matter to the President of the Law Society of Western Australia, with a view to the President nominating an expert to determine the issues raised in the notice. On 9 May 2003 the then President of the Law Society nominated Roger Davis, a barrister, as the expert to determine the issues raised in the notice. The defendants have refused to submit to the jurisdiction of the expert appointed by the President of the Law Society. Again, all of this correspondence appears as annexure to Mr Johnson's affidavit. None of it is controversial.

9 Against that background, the plaintiffs seek, by their originating summons, a declaration that:

(i) there is a dispute between the parties as to whether the Defendants have unreasonably withheld their consent to the assignment of the First Plaintiff's interest in the written Heads of Agreement between the parties dated 19 October 1995 ('Agreement') to Birla (Maroochydore) Pty Ltd pursuant to clause 15.2(c) of the Agreement ('Dispute'); and

(ii) the parties have not reached agreement on the identity of an independent expert to determine the Dispute pursuant to clause 17.2 of the Agreement;

(b) on a proper construction of clause 17.2(d) of the Agreement, there is a dispute falling within the scope of clause 17.2(d) of the Agreement such that the President of the Law Society of Western Australia may appoint an expert to determine the Dispute."

10 The plaintiffs' position is entirely straightforward. They say that a dispute has arisen which has triggered the operation of cl 17 and in particular, cl 17.1. They say further that the parties have not been able to reach agreement as to the identity of the expert and that the dispute relates to interpretation of the agreement. Thus, they say, the expert is to be nominated by the President of the Law Society of Western Australia pursuant to cl 17.2(d). It is implicit in this formulation of the dispute, and indeed from the notice of dispute itself, that what is to be determined by the expert is whether or not the defendants have unreasonably refused to grant their approval pursuant to cl 15.2(c) of the agreement to the second plaintiff assigning its interest under the agreement.

11 The defendants contend that the declaratory relief should be refused for two reasons. First, they say that the dispute between the parties as to whether the defendants have reasonably withheld their consent to the assignment of the first plaintiff's interest in the agreement is not a dispute which falls within the scope of cl 17.2(d) of the agreement. Alternatively, they say that cl 17 of the agreement is invalid as an impermissible ouster of the court's jurisdiction.

12 I am satisfied that both of the submissions made on behalf of the defendant must be upheld. For reasons which will become apparent, it is convenient if I deal with the second submission made by the defendants first.

13 This submission relied squarely upon the decision of Heenan J in Baulderstone Hornibrook Engineering Pty Ltd v Kayah Holdings Pty Ltd (1998) 14 BCL 277. This case concerned the interpretation of a dispute resolution clause which was in the following terms (at 279):

" 'This Agreement shall be governed by and construed in accordance with the laws of Western Australia. If any dispute arises out of this Agreement, the Parties shall in the first instance attempt to resolve such dispute by mutual consultation between the Chief Executive Officers of the Parties, and any Party may at any time serve a notice on the other Party requesting such consultation and stating the nature of the dispute.

If after fourteen [14] days of service of such notice the dispute has not been settled, then either party may serve a notice on the other requiring that the dispute be resolved by the determination of an independent third party [the "Referee"] acceptable to both parties. If the parties cannot agree on the Referee within seven [7] days of the date of service of the notice then either party may request the Chairman of the Institute of Arbitrators Australia to nominate the Referee.

The Referee who has been agreed upon or appointed shall act as an expert and not as an arbitrator.

The Referee shall investigate the dispute and make his decision on it in any manner that he shall see fit, subject to the following:

(a) He shall observe the principle of procedural fairness and natural justice.

(b) He shall make his decision in writing and include in it a statement of the reasons for making his decision.

(c) The investigation and decision shall be kept confidential between the parties and the Referee.

The decision of the Referee shall be final and binding upon the parties, except that the Referee may correct his decision where in his opinion it contains a clerical mistake, an error arising from an accidental slip or omission, a defect of form, a material miscalculation of figures or a material mistake in the description of any person, thing or matter referred to in the decision.

The Parties shall at all times do all things which the Referee requires to enable a just award to be made, including making available any documents he requests to inspect or any employees he requests to interview. The Parties shall not act so as to delay or prevent an award being made.

Each party shall bear its own costs of the determination and the parties shall share equally the costs of the Referee and the determination.' "

14 The similarity between the dispute clause in the Baulderstone case and cl 17 of the agreement is striking. Both clauses anticipate the service of a notice of dispute and reference of the dispute to an independent third party acceptable to both sides. In the event of a failure to agree on the identity of the independent third party, the president of a professional association is to nominate an expert. Both clauses anticipate the person so nominated acting as an expert and not an arbitrator. Both clauses anticipate that the determination of the expert will be final and binding, save for certain very precise exceptions. Each of the clauses deals with the question of costs.

15 In my view, on a fair reading of these two clauses, there is no material difference between them. It is true that cl 17 anticipates and indeed permits an application to the court for an injunction to prevent breach of the agreement. There is no such provision in the clause in question in the Baulderstone case. But I very much doubt that the clause in the Baulderstone case could have been construed in such a way as to prevent a party to the agreement containing that clause from applying for an interlocutory injunction. But whether that be right or wrong, it is not a difference of great moment. It remains the fact that clauses are virtually identical. In Baulderstone, Heenan J concluded that the clause was unenforceable. His Honour said (at 280):

"As a general rule, the court will recognise as proper any procedure which the parties have agreed upon to settle a dispute. As the provisions of the Commercial Arbitration Act 1985 show, if they have agreed in writing to refer present or future disputes to arbitration their agreement will be recognised and enforced. Even if the procedure agreed upon is not arbitration, the agreement might well be enforceable as a matter of contract. Thus the court usually will not intervene when the parties have referred a matter for the determination of an expert if such determination is within the referee's particular field of expertise (for example, see the judgment of the Court of Appeal in Jones v Sherwood Computer Services [1992] 2 All ER 170). However, on behalf of the plaintiff it is contended that the procedure agreed upon in this case is so contrary to fundamental principles that it must be treated as against public policy and void.

The main limitation imposed upon the power of the parties to prescribe their own rules of procedure is that they cannot by contractual provision oust the jurisdiction of the court (Scott v Avery (1856) 5 HL 810 and Dobbs v National Bank of Australasia Ltd [1935] HCA 49; (1935) 53 CLR 643). For a recent discussion of the topic see the judgment of Drummond J in Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540 at 548-549. In this case, cl20 provides for the resolution by the referee of any dispute arising out of the contract, whether or not the determination of the dispute is within the referee's particular field of expertise. Further, the clause purports to make the referee's decision final, rather than making the determination nothing more than a condition precedent to a legal right capable of enforcement by action through the court. To that extent it operates to oust the jurisdiction of the court and will not be recognised."

16 In my view, I should follow the Baulderstone decision, which has now stood for some years, if for no other reason than to provide commercial certainty. Having said that, I would with respect agree entirely with his Honour's conclusions. In my view the reasoning is compelling.

17 I must acknowledge that there is a difference of judicial opinion as to whether or not, as a matter of public policy, clauses such as cl 17 of the agreement are an ouster of jurisdiction and unenforceable. In Fletcher Construction Australia Ltd v MPN Group Pty Ltd, unreported; SCt of NSW; 14 July 1997, Rolfe J was dealing with a clause in not dissimilar terms. The case itself related to the provision by MPN of structural engineering services to Fletcher Construction. The written agreement contained the following clause:

"6.1 Expert Determination

If the Proprietor and the Engineer are in dispute regarding any matter arising from the performance or as to the meaning of the Agreement, then either party shall by notice in writing served on the other require that such dispute be resolved by the determination of any independent third party acceptable to both parties. If the parties cannot agree on an independent third party within 7 days of the date of service of the notice then either shall request the President for the time being of The Project Manager's Forum of Australia, to nominate the third party. The third party who has been agreed upon or appointed shall act as an expert and not as an arbitrator and that party's decision shall be final and binding upon the Proprietor and the Engineer."

18 Once again, it is difficult to see that there is any material difference between this clause and cl 17 of the agreement, and the clause in question in the Baulderstone decision. After examining the authorities, including the High Court decisions of Dobbs v National Bank of Australasia Ltd [1935] HCA 49; (1935) 53 CLR 643 and South Australian Railway Commissioner v Egan [1973] HCA 5; (1973) 130 CLR 506, Rolfe J concluded that the clause was not an ouster of jurisdiction and was not void as a matter of public policy. His Honour said (at 18):

"In my opinion, Cl 6.1 does not purport to oust the jurisdiction of the Court. It is an agreement between the parties that the specified disputes shall be determined by an expert. There is nothing unusual about such a provision and parties are held to their bargain if they agree to such a clause.

Nor is there anything unusual about the clause providing that the expert's opinion shall be 'final and binding' or 'conclusive', and provisions such as that do not oust the jurisdiction of the Court. The effect of the clause is to make the decision of the expert final and binding provided the matters referred to him are ones which the agreement contemplates. The expert's decision is, however, susceptible of attack in a Court if there is a failure to comply with the contract or there is some vitiating factor relevant to the decision."

19 With respect, his Honour's conclusion is somewhat difficult to follow. His Honour says that the expert's decision is final and binding "provided the matters referred to him are ones which the agreement contemplates". But the clause itself contemplates the parties being in dispute "regarding any matter arising from the performance or as to the meaning of the agreement". It is difficult to imagine what other matters the parties might be in dispute about. If this is a point of difference between the clause in question in the Fletcher Construction case and the clauses under consideration in the agreement and in the Baulderstone case, then the latter two clauses are wider in scope. Clause 17.1 in the agreement refers to "any dispute or difference". The reference in Baulderstone was to "any dispute". It may be that the Fletcher Construction case could be distinguished on that basis.

20 Rolfe J also says that the expert's decision is "susceptible of attack in a Court if there is a failure to comply with a contract or there is some other vitiating factor relevant to the decision". It is a little difficult to see how the expert, when appointed, could fail "to comply with the contract". Perhaps if the expert purported to act as an arbitrator he might fall foul of cl 16. But otherwise the clause is in such broad terms and so lacking in direction to an expert that it is hard to see that he could fail to comply with its terms. It is also possible that there may be some vitiating factor which would allow an attack upon the expert's decision in a court. For instance, if the expert failed to observe the rules of natural justice. But given that the clause says that the expert's decision shall be "final and binding", the scope for the intervention of a court must be severely prescribed. What, for instance, if there was an error on the face of the record? It is by no means clear that a court would have the power to intervene if full force and effect was given to the clause. The reasoning of Rolfe J, is that the parties to an agreement should be given all possible scope to negotiate terms and conditions that they see as appropriate, including terms and conditions dealing with dispute resolution. But it is a question of degree. This clause goes too far. It is in terms so broad as to run counter to public policy and should be regarded as void.

21 Turning then to the defendants' second argument, it is said that there are no circumstances which has arisen which would allow for the appointment of an expert nominated by the President of the Law Society. What is said is that the present dispute between the parties does not involve an interpretation of the agreement. It is said that the provisions of cl 15.2 are clear. All parties accept that the non-assigning party (to use the description found in cl 15.2(c)) shall not unreasonably withhold its approval to the assignment. The defendants submit that it is a question of fact whether or not the assignment has been unreasonably withheld and not a question of the interpretation of the agreement. A necessary corollary to that submission is that cl 17.2 does not identify an expert whom it would be appropriate to appoint, given the nature of the dispute. That being so, it is said, cl 17 does not operate, the notice of dispute is of no force and effect and the plaintiff is not entitled to the declaration sought.

22 On behalf of the plaintiff, it was submitted that in any case where the question at issue was whether or not consent to an assignment had been unreasonably withheld, it was first necessary to determine what factors are relevant in considering whether the assignment is reasonable. Once those factors are determined, the facts of the particular case are to be considered and a conclusion reached as to whether the refusal to consent is reasonable.

23 In support of his submission, counsel for the plaintiffs referred to a number of decisions, most of which were considered by Nettle J in Cathedral Place Pty Ltd & Anor v Hyatt of Australia Ltd & Anor [2003] VSC 385. In particular, counsel referred to what was said by Warrington LJ in Re Gibbs Houlder Brothers & Co Ltd's Lease (1925) Ch 198 at 575:

"The question whether a particular act is reasonable or unreasonable is obviously one that cannot be determined on abstract considerations. An act must be regarded as reasonable or unreasonable in reference to the circumstances under which it is committed, and when the question arises on the construction of a contract the outstanding circumstances to be considered are the nature of the contract to be construed, and the relations between the parties resulting from it.

The first question that arises is: What is the inference to be drawn as to the intention of the parties in inserting in the lease a provision of this kind? What was the danger which the lessor contemplated, and against which the lessee was content to allow the lessor to protect himself?"

24 Putting that into practice, counsel for the plaintiff submitted that it would be necessary for an expert to interpret the contract by asking the danger against which the non-assigning party might protect itself. For instance, it may have been concerned to ensure that the party to whom the interest was assigned had some experience in mineral exploration; or that the assignee had the financial capacity to meet its obligations under the agreement. All of these are matters, it was submitted, which relate to the interpretation of the contract.

25 There is a difficulty with that submission. If it is right, the expert appointed under cl 17.2(d) is empowered to determine what factors are properly to be considered when the issue is whether or not consent has been unreasonably withheld. Having reached that determination - or as the plaintiffs' counsel would have it - having interpreted the contract - does the expert then go on and relate the interpretation of the contract to the facts of the case? If so, on what basis does he take that additional step? Counsel's answer to that difficulty was to refer to cl 17.4. This clause empowers the expert "to take such measures as he thinks fit to expedite the completion of the dispute resolution". With respect, I have some doubts as to whether or not that clause can be read so widely as to require the expert not only to interpret the contract but to also consider the facts and determine whether or not consent has been unreasonably withheld.

26 In my view, the defendants' submissions on this question ought be upheld. There is no real question as to the proper interpretation of cl 15.2. Its operation is well understood by all parties. What has to be determined is whether, as a matter of fact, the consent has been unreasonably upheld. There is no particular reason why a lawyer should be charged with that task. That being the case, it is not within the terms of the contract to purport to appoint a lawyer as an expert under cl 17.2 in the circumstances of this case.

27 For these reasons I am satisfied that the plaintiffs' application ought be dismissed. Subject to hearing from counsel, the plaintiffs ought pay the defendants' costs of the application, including reserved costs.