Wellington & Ors v Huaxin Energy

SUPREME COURT OF QUEENSLAND

CITATION: Wellington & Ors v Huaxin Energy (Aust) Pty Ltd (formerly Cuesta Coal Limited) & Anor [2020] QCA 114

PARTIES: OWEN REGINALD WELLINGTON AND ROXANNE WELLINGTON AS TRUSTEES FOR THE OR & R WELLINGTON SUPERFUND / ABN 81 576 722 911 / (first appellant) / OWEN REGINALD WELLINGTON AS TRUSTEE FOR OR & R PARTNERSHIP / ABN 84 165 075 135 / (second appellant) / FOX INVESTMENTS (QLD) PTY LTD ACN 159 501 845 AS TRUSTEE FOR THE FOX FAMILY TRUST / (third appellant) / v / HUAXIN ENERGY (AUST) PTY LTD (FORMERLY CUESTA COAL LIMITED) / ACN 153 351 994 / (first respondent) / BLACKWOOD EXPLORATION PTY LTD / ACN 142 208 982 / (second respondent)

FILE NO/S: Appeal No 2611 of 2019

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Brisbane – [2019] QSC 18 (Jackson J)

DELIVERED ON: 29 May 2020

DELIVERED AT: Brisbane

HEARING DATE: 13 June 2019

JUDGES: Morrison and Philippides JJA and Ryan J

ORDERS: The appeal is dismissed.The appellants pay the respondents’ costs of the appeal.

CATCHWORDS: CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – IMPLIED TERMS – TERMS ESSENTIAL TO ENABLE PERFORMANCE – where the parties entered into a contract for the sale of an exploration permit for coal (EPC) and the related environmental authority and mining information as property (the Assets) – where there were various iterations of the contract for the sale of the Assets, culminating in the “final contract” between the appellants and respondents – where the respondents made three payments pursuant to the relevant iteration of the agreement and the EPC was transferred to the second respondent – where the consideration for the purchase of the assets also included the issue of Third Tranche Shares and Third Tranche Options (as those terms were defined in the final contract), conditional on a Competent Person estimating the existence of a Measured Mineral Resource within the EPC area of 100 million tonnes (Mt), or if not, an amount of 40 Mt or greater (as those terms are defined in the final contract and an industry code called the “JORC Code”) – where, on 28 November 2013, the first respondent made an announcement to the ASX that a Competent Person estimated the existence of an Inferred Mineral Resource (as that term is defined in the JORC Code) of 364.1 Mt – where, following that announcement, the second respondent did not carry out further exploratory work that would be necessary to further upgrade the mineral resource – where the appellants contended at trial that there was an implied duty on the first respondent to cooperate by causing to be obtained “detailed and reliable exploration, sampling and testing information” so that the appellants could have the benefit comprised in the Third Tranche Shares and Options consequent on the existence of the existence of a Measured Mineral Resource in the contemplated quantity – whether there was an implied duty to cooperate as alleged by the appellants as a matter of law – whether the trial judge erred in rejecting the existence of an implied duty to cooperate in the circumstances / CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – IMPLIED TERMS – GENERALLY – where the appellants alleged in the alternative that it was a term implied in fact in the final contract that the first respondent would obtain “detailed and reliable exploration, sampling and testing information” through appropriate techniques as would enable a Competent Person to calculate the level of Measured Mineral Resource in the EPC area (“the implied exploration term) – where the term was alleged to arise as a matter of business efficacy – where the trial judge rejected the existence of the implied exploration term on the basis that two of the requirements for the implication of terms set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 were not met – whether the trial judge erred in rejecting that the implied exploration term arose / DAMAGES – GENERAL PRINCIPLES – GENERAL AND SPECIAL DAMAGES – where the appellants claimed $2,540,607 in damages on the basis of loss of a valuable commercial opportunity, based on an assessment of the likelihood of a drilling program referred to by experts resulting in the existence of a Measured Mineral Resource in the contemplated quantity, applied pro rata to the value of the Third Tranche Shares and Options as at the date of the alleged breach of contract – where the trial judge accepted that the prospect of the appellants receiving the Third Tranche Shares and Options constituted a valuable commercial opportunity, but after reviewing the evidence of experts relied upon by the parties at trial, outlined weaknesses in the opinions on both sides – where the trial judge then proceeded to assess damages on a global basis at $750,000 – whether the trial judge erred in his assessment of damages on a global basis / Mineral Resources Act 1989 (Qld), s 133, s 141 / Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104, cited / BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; [1977] UKPCHCA 1, followed / Butt v M’Donald (1896) 7 QLJ 68, cited / Byrne v Australian Airlines Ltd (1995) 185 CLR 410; [1995] HCA 24, cited / Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24, followed / Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32, followed / Jackson Nominees Pty Ltd v Hanson Building Products Pty Ltd [2006] QCA 126, cited / Mackay v Dick (1881) 6 App Cas 251, cited / Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Ltd [2018] 2 Qd R 584; [2017] QCA 254, cited / Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51, followed / Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4, cited

COUNSEL: G A Thompson QC, with D M Favell, for the appellants / D G Clothier QC, with D de Jersey, for the respondents

SOLICITORS: Rouse Lawyers for the appellants / Thomson Geer for the respondents

1. MORRISON JA: I have read the reasons of Philippides JA and agree with those reasons and the orders her Honour proposes.

2. PHILIPPIDES JA: This appeal is from a decision of the Supreme Court dismissing the appellants’ claim for damages for breach of contract. The claim arose from the sale by the first and second appellants, Owen Reginald and Roxanne Wellington, and Ronald Fox (who was later replaced by the third appellant, Fox Investments (Qld) Pty Ltd) as the “Vendors”, to the second respondent, Blackwood Exploration Pty Ltd, as the “Purchaser”, and Blackwood Coal Pty Ltd (which was later replaced by the first respondent) of an exploration permit for coal, EPC 1802, and the related environmental authority and mining information as property (the Assets).

3. The three issues that arise in the appeal are whether the trial judge was correct:(a)in rejecting the appellants’ contention that an implied term to cooperate arose (the implied duty to cooperate);(b)in rejecting that an implied term to undertake particular exploration work arose (the implied exploration term); and(c)in his Honour’s quantification of damages for loss of opportunity arising from a breach of the implied terms.

Factual background

4. The factual background is set out concisely by Jackson J in his reasons as follows.

5. On or around 1 July 2009, Mr Owen Reginald Wellington (Mr Wellington) applied for an EPC over an area comprising 130 sub-blocks (45,000 hectares) of land that is located approximately 150 km south of Charters Towers, which is part of an of area in Queensland known as the Galilee Basin.¹

6. On 6 July 2010, the original Vendors entered into a heads of agreement for the sale with the Purchaser and Blackwood Coal Pty Ltd (Heads of Agreement).² On 29 October 2010, EPC 1802 was granted to Mr Wellington.³ On 17 November 2010, the Vendors, the Purchaser and Blackwood Coal Pty Ltd entered into a contract styled the Tenement Sale Agreement, in substitution for the Heads of Agreement (Tenement Sale Agreement).⁴ On 13 December 2010, the cash component of the consideration payable under the Tenement Sale Agreement was paid.⁵

7. On 9 May 2011, the parties varied the terms of the Tenement Sale Agreement by a contract styled the “Amended and Restated Tenement Sale Agreement” (Amended and Restated Tenement Sale Agreement).⁶ On 28 October 2011, the parties to the Amended and Restated Tenement Sale Agreement and the first respondent, then named Cuesta Coal Ltd, entered into a contract that was called the “Cuesta Deed” in evidence and submissions, varying the parties to the contract up to that time by substituting the first respondent for Blackwood Coal Pty Ltd, and varying the consideration payable to the Vendors for purchase of the Assets.⁷ On 8 December 2011 and 3 January 2012, that part of the consideration payable under the Amended and Restated Tenement Sale Agreement defined as the “First Tranche Payment” was paid.⁸ On 18 January 2012, EPC 1802 was transferred to the second respondent.⁹

8. On 10 December 2012, the parties to the contract at that point and the third appellant entered into a contract styled a Deed of Assignment under which the third appellant became a party to the Amended and Restated Tenement Sale Agreement, as varied by the Cuesta Deed, in replacement for Mr Fox.

Provisions of the contract

Clauses 4.1(1)(b)(iii) and 4.2(2) of the final contract

15. The central issues as to the implication of terms centre on cl 4.1(1)(b)(iii) and cl 4.2(2) of the final contract which relevantly provide:

“4.1 Consideration

(1)The consideration for the purchase of the Assets is:

…

(b)Subject to Completion occurring, any necessary shareholder approvals being obtained (including approvals required under the ASX Listing Rules), the Vendors entering into any restriction agreement required by the ASX under the ASX Listing Rules and doing anything else required in accordance with the ASX Listing Rules:

…

(iii)the issue of the Third Tranche Shares and Third Tranche Options by Cuesta to the Vendors on the date that is:

(a)10 Business Days after the Third Milestone occurred if Cuesta is listed on the ASX as at the date the Third Milestone occurred; or

(b)10 Business Days after the Third Milestone occurred and the Purchaser receives a valuation from an Independent Expert which is carried out in accordance with clause 4.1(2) if Cuesta is not listed on the ASX as at the date the Third Milestone occurred…

4.2 Failure to Meet Second Milestone and Third Milestone¹⁹

(1)…

(2)If the Purchaser fails to meet the Third Milestone by the 5th anniversary of the grant of the Tenement (Third Milestone Date) but a Competent Person infers the existence of a Measured Mineral Resource with an estimated tonnage of at least 40,000,000 but less than 100,000,000 tonnes of coal in the Tenement Area as at the Third Milestone Date, then Cuesta must issue the Third Tranche Shares and the Third Tranche Options²⁰ to the Vendors (adjusted on a pro rate basis) on the date that is

(a) 10 Business Days after the Third Milestone Date if Cuesta is listed on the ASX at the time; or

(b) 10 Business Days after the Third Milestone Date and the Purchaser receives a valuation from an Independent Expert which is carried out in accordance with clause 4.1(2) if Cuesta is not listed on the ASX at the time.” (emphasis added)

Other provisions

16. The three milestones were defined as follows:

“First Milestone means the earlier to occur of:

(a)the first anniversary of the grant of the Application; and

(b)the date that coal is intersected on the Purchaser’s initial drill program on the Tenement.”²¹

“Second Milestone means the date a Competent Person²² infers the existence of an Inferred Mineral Resource with an estimated tonnage of 100,000,000 tonnes or more of coal in the Tenement Area.”²³

“Third Milestone means the date a Competent Person infers the existence of a Measured Mineral Resource with an estimated tonnage of 100,000,000 tonnes or more of coal in the Tenement Area.”²⁴

17. “Inferred Mineral Resource” and “Measured Mineral Resource” were all respectively defined in accordance with the “JORC Code”,²⁵ which itself was defined as:²⁶

“… the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (2004 Edition) published by The Joint Ore Reserves Committee of The Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia, and any revisions to, or replacements of, it.”

18. It is useful to set out these definitions in the JORC Code.²⁷ For context, the 2004 JORC Code contains a definition of “Mineral Resource” as follows:²⁸

“… a concentration or occurrence of material of intrinsic economic interest in or on the Earth's crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral Resources are sub-divided, in order of increasing geological confidence, into Inferred, Indicated and Measured categories.”

19. Three categories of mineral resource are identified in the 2012 edition of the JORC Code.

20. “Inferred Mineral Resource” is defined as:²⁹

“[T]hat part of a Mineral Resource for which quantity and grade (or quality) are estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply but not verify geological and grade (or quality) continuity. It is based on exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.

An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource and must not be converted to an Ore Reserve. It is reasonably expected that the majority of Inferred Mineral Resources could be upgraded to Indicated Mineral Resources with continued exploration.”

21. “Indicated Mineral Resource” is defined as:³⁰

“[T]hat part of the Mineral Resource for which quantity, grade (or quality), densities, shape and physical characteristics are estimated with sufficient confidence to allow the application of Modifying Factors in sufficient detail to support mine planning and evaluation of the economic viability of the deposit.

Geological evidence is derived from adequately detailed and reliable exploration, sampling and testing gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes, and is sufficient to assume geological and grade (or quality) continuity between points of observation where data and samples are gathered.

An Indicated Mineral Resource has a lower level of confidence than that applying to a Measured Mineral Resource and may only be converted to a Probable Ore Reserve.”

22. “Measured Mineral Resource” is defined as:³¹

“[T]hat part of a Mineral Resource for which quantity, grade (or quality), densities, shape and physical characteristics are estimated with confidence sufficient to allow the application of Modifying Factors to support detailed mine planning and final evaluation of the economic viability of the deposit.

Geological evidence is derived from detailed and reliable exploration, sampling and testing gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes, and is sufficient to confirm geological and grade (or quality) continuity between points of observation where data and samples are gathered.

A Measured Mineral Resource has a higher level of confidence than applying to either an Indicated Mineral Resource or an Inferred Mineral Resource. It may be converted to a Proved Ore Reserve or under certain circumstances to a Probable Ore Reserve.”

The appellants’ case at trial

23. The trial judge summarised the appellants’ pleaded case in relation to the implication of the two terms as alleging as follows:³²(a)first, that it was an implied term of the final contract (the implied duty of cooperation) that the first respondent owed a duty of cooperation that required it to do all things necessary to give the appellants the benefit of the Amended and Restated Tenement Sale Agreement and not to do anything that would derogate from the benefit of the Amended and Restated Tenement Sale Agreement;³³ and(b)second, that it was an implied term of the final contract, (the implied exploration term) that the first respondent:³⁴would obtain detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations spaced closely enough to confirm the geological and grade continuity of the coal deposit within the EPC 1802 area sufficient for a Competent Person to undertake an analysis to calculate the Measured Mineral Resource, andprovide that information to the Competent Person and obtain from the Competent Person the relevant calculation.

24. The implied duty to cooperate was pleaded to be implied as a matter of law³⁵ while the implied exploration term was alleged to arise as a matter of business efficacy.³⁶

25. The content of the contractual obligation alleged to arise under both implied terms was the same; namely that the second respondent was obliged to carry out further exploratory work after having undertaken necessary work for the Inferred Mineral Resource estimate. In particular, it was alleged that the second respondent was obliged to cause to be obtained “detailed and reliable exploration, sampling and testing information”, through “appropriate techniques from locations spaced closely enough” to confirm the geological and grade continuity of the coal deposit within the EPC 1802 area, “sufficient” for a Competent Person to undertake an analysis to calculate the Measured Mineral Resource”.³⁷ The obligation was particularised as that outlined in para 4(a)(v) of Mr Troy’s report dated March 2017³⁸ and is the subject of agreement at para 4a of the Joint Expert Report dated 23 April 2018. This was known as the “21 hole exploration program”. It was the failure to conduct such a drilling program that constituted a breach of both the implied duty to cooperate and the implied exploration term.

Commercial purpose, genesis, background, context and the market of the final agreement

27. Before turning to the trial judge’s consideration of the allegations as to the implied terms, it is useful to refer to some general matters of commercial purpose, background and context and the like that were outlined by the trial judge.

The application and permit under the MRA

28. The application for EPC 1802 was made under the Mineral Resources Act 1989 (Qld) (the MRA) which, by s 133(f)(i)-(ii), required that an application for an exploration permit be accompanied by a statement specifying a description of the program of work proposed to be carried out under the authority of the exploration permit, if granted, and specifying the estimated human, technical and financial resources proposed to be committed to exploration work during each year of the exploration permit. It was a condition of the grant of the application that the Minister has approved the program of work that accompanied the application.

29. The application for the permit that became EPC 1802 contained a proposed work program as follows:

“Proposed Exploration Program

Initial exploration on the project will take approximately 1-2 years to complete and will consist of the following program;

Collection and correlation of all historical data into a modern data package

Access and compensation agreements

Scout rotary drilling to determine the presence of coal seams

Design detail drill evaluation programs

Carry out preliminary resource drilling programs

Assuming the first phase study is favourable the second phase (years 3-4) of exploration will incorporate the following;

Resource modelling and mine design

Coal separation test work

Engineering design

Environmental Impact Study

Project Economics with a goal of proceeding to a Mining Lease Application

Proposed Exploration Programme and Budget

It is proposed that the term of the EPM is for five years. The proposed exploration programme and budget is as follows:-

Year 1-2 Proposed Budget $250,000.

Year 3-4 Proposed Budget $450,000.”

30. An exploration permit is subject to a condition that the holder shall carry out such programs of work and such studies for the purposes for which the exploration permit was granted and in accordance with the MRA and the conditions of the exploration permit and for no other purposes: s 141(1)(a). The holder is required to provide the Minister with reports containing prescribed information, which then included information about compliance with the program of work and its results: s 141(1)(f)(i) – see s 13A of the now repealed Mineral Resources Regulation 2003 (Qld).

31. The MRA provided that when an exploration permit was granted, the program of work and the studies to be carried out under it were required to be stated: s 137A(h). EPC 1802 contained a condition that the holder would carry out the work program and comply with the expenditure commitments detailed in an annexure to it. The work program required work by way of review, drilling, assaying and interpretation in each of years 1 to 4 and expenditure of $105,000 for year 1, $100,000 for year 2 and $210,000 in each of year 3 and year 4. The work was to be done over an area of 130 sub-blocks in each of years 1 and 2, an area of 100 sub-blocks in year 3 and the area of 80 sub-blocks in year 4. It provided for the relinquishment of 30 sub-blocks at the end of year 2, 20 sub-blocks at the end of year 3 and 20 percent of the remaining sub‑blocks if renewal of the permit was sought.

32. The trial judge observed that:⁴⁰

“As at November 2010, and up to this day, it was commonly known and would have been mutually known to the parties that no coal resource in the Galilee Basin in the area of EPC 1802 had been developed into an operating mine. There was no infrastructure, either for the production of coal or for the transport of coal by rail to market. In this sense, any market for coal to be produced from the Galilee Basin was a future market, dependent on future events.

A relevant part of EPC 1802 of interest in this case is located approximately 25 kilometres from what was the proposed Adani Carmichael mine rail head. It is now known as the ‘Yellow Jacket’ area of deposit.”

JORC Code

33. In relation to the JORC Code, the trial judge observed:⁴¹

“The JORC Code sets a required minimum standard for public reporting and also recommends its adoption as a minimum standard for other reporting. The 2004 edition JORC Code was replaced by the 2012 edition JORC Code. Although it is a code for public reporting, it does not provide for the manner in which a Competent Person estimates a mineral resource. Thus, the words ‘JORC Compliant’ should be interpreted to mean ‘reported in accordance with the JORC Code and estimated (or based on documentation prepared) by a Competent Person, as defined by the JORC Code’. Figure 1 of the 2012 edition JORC Code illustrates that as the level of geological knowledge and confidence for a mineral deposit increases, utilising exploration results and other techniques, a mineral resource may be found to be an ‘inferred’ mineral resource, then upgraded to ‘indicated’ mineral resource and then further upgraded to a ‘measured’ mineral resource.”

34. His Honour stated further:⁴²

“As defined, the crux of the distinction between an indicated mineral resource and a measured mineral resource lies in the degree of confidence. Thus, for an indicated mineral resource, the data must be such ‘as to allow confident interpretation of the geological framework and assume continuity of mineralisation’, whereas for a measured mineral resource, the data must be such as ‘to leave no reasonable doubt, in the opinion of the Competent Person determining the mineral resource, that the tonnage and grade of the mineralisation can be estimated to within close limits, and that any variation from the estimate would be unlikely to significantly affect potential economic viability’. The measured mineral resource category requires ‘a high level of confidence in, and understanding of, the geological properties and controls of the mineral deposit’.

Clauses 42 to 44 of the 2012 edition JORC Code relate specifically to the public reporting of coal resources. They provide that for guidance on the estimation of coal resources, readers are referred to the “Australian Guidelines for Estimating and Reporting of Inventory Coal, Coal Resources and Coal Reserves” as published from time to time by the Coalfields Geology Council of New South Wales and the Queensland Resources Council. The 2003 edition of those guidelines deals with the estimation of coal resources from points of observation or “POB”. Paragraph 4.5.3 provides that measured coal resources may be estimated using data obtained from POBs normally less than 500 metres apart, but the distance may be extended if there is sufficient technical justification to do so; for example, if supported by geostatistical analysis.”

Evidence as to the 21 hole exploration program

35. His Honour observed that it was not in dispute at trial that the exploration and drilling program carried out by the first respondent in the relevant areas of EPC 1802 constituted a total of up to 45 drill holes of which six were POB quality. The POBs were spaced between 3,000 and 4,000 metres apart, which exceeded the maximum spacing that is permissible to estimate or determine a Measured Mineral Resource.⁴³

36. The trial judge referred to the expert evidence concerning a 21 hole exploration program for upgrading to a Measured Mineral Resource:⁴⁴

“The [appellants’] expert, Troy Turner, proposes that a drilling program of 21 x 63 millimetre dome and core holes and 21 pilot open chip holes would be required to ‘convert’ (upgrade) the most prospective zone of the current 364.1 Mt Inferred Mineral Resource area on EPC 1802, in the Yellow Jacket area of the EPC, to approximately 100 Mt of Measured Mineral Resource. The proposed area was described in the evidence of the case as the ‘100 Mt polygon’. I will describe this proposed drilling program as the ‘21 hole exploration program’. The [respondents’] experts agreed that the 21 hole exploration program is a reasonable approach to a first stage of drilling with the intention to define a Measured Mineral Resource, but reserved whether further in-fill drilling or possibly step-out drilling and drilling into adjacent areas may be required. However, the [appellants] contend, for the purposes of their case, that it was the 21 hole exploration program that the first [respondent] failed to carry out, in breach of the implied duty to cooperate or the detailed and reliable exploration implied term.

Mr Turner opined that the 21 hole exploration program would have cost in the range between $0.73 million and $1.1 million and would have taken 70 days to complete the exploration work and a further 90 days to carry out the associated laboratory and assessment work, in accordance with the proposed exploration budget attached as Appendix D to his first report.”

The trial judge’s decision as to the implied duty to cooperate

37. His Honour observed⁴⁵ that the common starting point for the parties’ submissions on the implied duty to cooperate was the following passage of Mason J in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd:⁴⁶

“But it is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract. As Lord Blackburn said in Mackay v Dick…:

‘as a general rule … where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.’

It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith CJ said in Butt v M’Donald…:

‘It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.’

It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.”

38. The appellants’ case was that there was an implied duty on the first respondent to cooperate so that the appellants could have the benefit comprised in the Third Tranche Shares and Third Tranche Options to be issued. The content of the duty comprised doing acts, such as the 21 hole exploration program, to enable an assessment by the Competent Person that the contractual threshold of 100 Mt of measured mineral resource was present or, if not, that an amount of 40 Mt or greater was present.

39. In ultimately finding that the implication of the duty to cooperate contended for by the appellants was not made out, the trial judge also rejected a number of general submissions advanced by the respondents against the implication of a duty to cooperate.

40. Firstly, the trial judge rejected the contention that cl 15.1 of the final agreement (the further assurance clause)⁴⁷ covered the ground which might be covered by the implied duty to cooperate and thus excluded it, finding that the clause did not negate the existence of the implied duty of cooperation.⁴⁸

41. Secondly, his Honour rejected the submission that the implied duty of cooperation only operates to oblige a party to cooperate in performing fundamental obligations of the other party that require the joint cooperation of both parties; that is, that “the implied duty to cooperate is confined to cooperation to enable the other party to perform”.⁴⁹ Although accepting that this was significant in the operation of the implied duty, his Honour found that neither Secured Income nor Mackay v Dick so confined it.⁵⁰

42. Thirdly, the trial judge considered the respondents’ argument that the implied duty obligation alleged by the appellants was to be addressed by reference to the tests enunciated in Codelfa Construction Pty Ltd v State Rail Authority (NSW),⁵¹ as a term implied in fact.⁵² This argument was premised on the contention that exploration such as the 21 hole exploration program was not essential to the performance of the first respondent’s obligations and not fundamental to the final contract, so as to engage the application of the implied duty to cooperate. In relation to the latter proposition, his Honour observed:

“A fundamental obligation of the [respondents] was to pay the consideration for the purchase of the Assets. In a general sense, there is no more ‘fundamental’ obligation or act more ‘essential’ to the performance of a buyer under a contract of sale than payment of the purchase price. Under the final contract, the obligation to issue the Third Tranche Shares and the Third Tranche Options to the sellers, by way of payment, was expressly part of the consideration moving from the buyer for the Vendors’ transfer of the Assets. However, the obligation was contingent, because it was conditioned on the quantity and quality of the mineral resource contained in the permit area and on those matters being established by a ‘sunset’ date.”

43. His Honour noted⁵⁵ that no authority was put forward by the parties as to the obligation of a promisor to do acts in relation to the satisfaction of a contingent condition to the performance of a contract, either as a matter of the implied duty to cooperate or as a term implied in fact. Having analysed various authorities, his Honour stated:⁵⁶

“In accordance with the statements of principle from these sources, in my view, the question in the present case might have been whether the final contract on its proper construction impliedly obliged the second [respondent] to carry out the exploration work reasonably required to assess whether the Third Milestone was achieved or whether it left the second [respondent] at liberty to decide for itself whether any exploration work should be carried out, notwithstanding that the consequence of not doing so would be to disentitle the [appellants] to the benefit of the promise to pay the Third Tranche Shares and Third Tranche Options if the Third Milestone was met.”

44. His Honour concluded that the correct construction of the contract depends on the “objectively ascertained and attributed intention of the parties as manifested by the terms and context of the contract”.⁵⁷ However, his Honour did not accept that the proper construction of the contract as so ascertained by reference to the principle underlying the duty to cooperate required the application of the BP Refinery (Westernport) Pty Ltd v Shire of Hastings⁵⁸ analysis, finding that that “would make application of the Secured Income duty to cooperate largely irrelevant in a context like the present case”.⁵⁹ His Honour also concluded⁶⁰ that Secured Income itself did not “support the requirement to apply the five BP Refinery (Westernport) factors in all cases falling within the last paragraph of the statement of Mason J in Secured Income set out above”. However, his Honour nevertheless observed⁶¹ that the “cases demonstrate that not every hoped for or conditionally promised benefit to a promisee obliges a promisor to do all possible acts to bring the benefit about under the duty to cooperate”. Rather, it depended on the context of the class of contract or particular terms of the contract.⁶²

45. Fourthly, the trial judge rejected a general submission that the implied duty to cooperate only operates with respect to matters that the contract requires to be done; that is, for the implied duty to cooperate to be engaged one must find something that the contract requires to happen. The contention advanced was that the appellants’ chance of entitlement to receive the Third Tranche Shares and Third Tranche Options, which depended on satisfaction of the condition as to the Measured Mineral Resource contained in the Third Milestone, was not something that the contract required to happen. The argument was that therefore there could be no implied duty to cooperate so as to give the chance any particular likelihood of occurring by doing any of the further exploration work required for satisfaction of the condition. His Honour referred to a number of authorities relied on by the respondents in that regard, particularly Australis Media. His Honour concluded that the authorities did not support the proposition that, “where an obligation of one party to perform is conditional upon a contingency which requires action by that party before the contingency can be satisfied, the conditional obligation is something which the contract does not require to happen”. In that regard, his Honour stated that there was “nothing untoward about a contract where the consideration is a conditional promise being aptly characterised as a contract to provide the promisee with the chance of obtaining a reward or benefit”.

“On 9 May 2011, that sub-clause was deleted by the Amended and Restated Tenement Sale Agreement. In effect, the [respondents] submit that the deletion had the effect of making the fifth anniversary a “sunset date” for any entitlement to the Third Tranche Shares and Third Tranche Options, and that it was obvious that any obligation of the first [respondent] to carry out further exploration work, before the sunset date expired, should have been provided for, but was not. In my view, this argument does not persuasively detract from the contention that there was such an obligation as part of the implied duty to cooperate or the detailed and reliable exploration implied term. When considering an implied term constructional argument, it is rarely a decisive consideration that the parties could have, but did not provide for the matter expressly.⁶⁷”

47. His Honour also rejected⁶⁸ the proposition that it should be accepted, as a surrounding circumstance for the purpose of construing the final contract, that the amount of financial and other resources that might be required to enable a Competent Person to make the assessment of whether there was 100 Mt of measured resource in the EPC was likely to be substantial but was also indeterminate. His Honour held that the history and evidence did not clearly support the notion that a reasonable budget figure could not have been determined as at the time of the parties entering into the Amended and Restated Tenement Sale Agreement for any hypothetical exploration program. However, his Honour did accept⁶⁹ the respondents’ submission that, depending on the economic circumstances, the interests of the appellants on the one hand and the respondents on the other hand as to when and in what amounts further expenditure on exploration should be undertaken were not identical.

48. In relation to the above contentions advanced by the respondents, his Honour concluded:⁷⁰

“Overall, in my view, at a high level of abstraction, these considerations do not generally favour the conclusion that the parties’ objectively ascertained intention was that neither of the [respondents] was under an obligation to carry out any exploration work to enable assessment of any Measured Mineral Resource. On the contrary, they tend to suggest that in the absence of such an obligation, at least from 9 May 2011, when the Tenement Sale Agreement was amended by the Amended and Restated Tenement Sale Agreement the [appellants’] conditional entitlement to the Third Tranche Shares and Third Tranche Options was virtually valueless, unless there was otherwise a commercial likelihood that the [respondents]⁷¹ would, in any event, carry out or pay for exploration work to be carried out that would show whether either the 100 Mt or 40 Mt threshold quantities for a Measured Mineral Resource quality was achieved, before expiry of the sunset date.”

49. His Honour returned to consider⁷² a common aspect of the Mackay v Dick and Butt v M’Donald formulations, limiting the obligation under the duty to cooperate to what is necessary, contained within the statement of Mason J from Secured Income. That is, as formulated by Lord Blackburn, “that each agrees to do all that is necessary to be done on his part for the carrying out of that thing…” and, as formulated by Griffith CJ, “that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit”.

50. His Honour noted⁷³ that it was agreed by cl 7.1 of the Amended and Restated Tenement Sale Agreement that “transfers of the EPC and associated environmental authority were to be registered as soon as practicable after the date of the Tenement and Sale Agreement” and that the appellants were dependent on the respondents (particularly from 18 January 2012 when EPC 1802 was transferred to the second respondent) carrying out or paying for the relevant exploration work before any entitlement to payment of the Third Tranche Shares or the Third Tranche Options could accrue.

51. His Honour continued:⁷⁴

“The difficult question remains, however, as to the uncertain scope of the exploration or other work that might be required to answer the question of the existence of a measured resource of 100 Mt or 40 Mt or above in EPC 1802. The EPC comprised the whole of the 130 sub‑blocks, not the particular target area of interest that subsequently emerged. The cost estimate to carry out the 21 hole exploration program was at least $0.73 million but could have been be as high as $1.1 million. On top of that, the whole of the exploration costs for the EPC to date already exceed $4 million. What was it that the parties are to be presumed to have agreed would be the scope of the necessary exploration to be performed by the [respondents] when the relevant terms of the final agreement were made?”

52. In answer to that question, his Honour did not accept:⁷⁵

“… that the purchaser impliedly agreed by the implied duty to cooperate to undertake whatever work was necessary to ascertain whether there was a Measured Mineral Resource of 100 Mt or 40 Mt or above across the whole of the EPC, if that would require that many areas over the whole of the 130 sub-blocks must be drilled in the fashion of the 21 hole exploration program.”

53. His Honour held that the duty to cooperate was qualified and that it was not made out on the evidence:⁷⁶

“A possible limitation to the extent of the work that might be required to meet the obligations of the duty to cooperate by carrying out or paying for the relevant exploration work is that the obligation is only to do that which is reasonable in the circumstances. But there are two significant difficulties in reasoning that way. First, the [appellants do]…not allege that the obligation under the implied duty of cooperation was limited by a standard of what was reasonable in the circumstances. They allege that the implied term was that the [first respondent] owed a duty to cooperate that required it do all things necessary to give the [appellants] the benefit of the Amended and Restated Tenement Sale Agreement, and that required the work of the 21 hole exploration program.

Second, there was no evidence in the case as to the factors that would inform any assessment of what was reasonable by way of exploration work and expenditure upon EPC 1802, from the point of view of any or all the parties, as at the date of either the final agreement or the Amended and Restated Tenement Sale Agreement.

In the result, in my view, the [appellants] have failed to establish that the duty to cooperate required the [respondents] to do the work of or such as the 21 hole exploration program.”

The trial judge’s decision as to the implied exploration term

54. His Honour also rejected the existence of the implied term on the basis that two of the requirements for the implication of terms set out in BP Refinery (Westernport) were not met. Firstly, the implied term contended for did not meet the requirement that it was “so obvious that it goes without saying” that the particular term requiring further exploratory work had been contemplated by both parties. His Honour found that for reasons similar to those on which the implied duty of cooperation failed, the appellants were unable to show that either of the respondents would have answered “yes” to the suggestion that they agreed to an open ended commitment to exploration work over a period of five years, regardless of market and economic conditions or their own commercial circumstances.

55. Further, the alleged implied term was required to be capable of clear expression. In that regard, a term may fail if it lacked sufficient precision among a range of possibilities. The trial judge referred to the statement of Mason J in Codelfa Construction where his Honour stated that that case was one:⁷⁷

“… in which the parties made a common assumption which masked the need to explore what provision should be made to cover the event which occurred. In ordinary circumstances negotiation about that matter might have yielded any one of a number of alternative provisions, each being regarded as a reasonable solution.”

56. His Honour found that for the same reason the implied exploration term failed; in ordinary circumstances, negotiations about the extent of the exploration work that the second respondent would carry out or pay for “might have yielded a number of alternative provisions, each being regarded as a reasonable solution” and it was “no answer to that weakness to say that without any implied term to do exploration work beyond the scope of the work program for EPC 1802, the Vendors were at a considerable risk that the second [respondent] would not do sufficient work to reach the Third Milestone in the five year period”.⁷⁸

Grounds of appeal as to the implied terms

57. Grounds 1 to 4 of the appeal allege that in rejecting the implied duty to cooperate contended for, his Honour:

Erred in characterising the obligation described by Mason J in Secured Income as limited to what is “necessary” (at [93]).

In responding at [96] to [98] to the question posed in the last sentence of [95] of his reasons, misdirected himself.

Erred in finding that the appellants had failed to establish that the duty to cooperate required the respondents to do the work of or such as the 21 hole exploration program (at [99]).

Ought to have found that what was reasonably necessary within the formulation of the obligation described by Mason J in Secured Income was at least drilling that would permit a Competent Person, as defined in the JORC Code, to infer the existence (or otherwise) of a Measured Mineral Resource.

58. By ground 5 it is contended that his Honour erred in rejecting as an implied term of the final contract that the first respondent would obtain detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations spaced closely enough to confirm the geological and grade continuity of the coal deposit within the EPC 1802 area, sufficient for a Competent Person to undertake an analysis to calculate the Measured Mineral Resource, provide that information to the Competent Person and obtain from the Competent Person the relevant calculation.

Notice of contention as to the implied terms

59. By an amended notice of contention, the respondents contended that, in the event that one or more of the grounds of appeal are made out, the trial judge’s decision as to the implication of the two terms should be affirmed, essentially on the basis of the contentions advanced by the respondents and rejected at trial as outlined below.

Grounds 1 to 4: The implied duty to cooperate

The appellants’ submissions

60. The appellants submitted that the intentions of the parties, as objectively ascertained and construed from the terms of the final contract, imposed an obligation on the respondents to, at the very least, undertake drilling that would permit a Competent Person to make an inference as to the existence of a Measured Mineral Resource as contemplated by the Third Milestone.⁷⁹ The appellants submitted it was common ground that such drilling did not take place, though this is disputed by the respondents who submit that money was spent on exploration and development during the initial term of the EPC.⁸⁰ The appellants reject this and contend that the drilling to which they refer is the drilling beyond that which was required to determine the Inferred Mineral Resource.⁸¹ In any event, it was the appellants’ contention that in the absence of drilling data, a Competent Person could not undertake the assessment required to make such an inference.⁸²

61. The final contract imposed obligations and conferred benefits respectively on each party and the objective intention of the parties was that the appellants would be entitled to the benefit of the Third Tranche payment consequent on the inference of the existence of a Measured Mineral Resource in the magnitude contemplated by the contract. The existence of this objective intention is supported by “the variation stipulating that a benefit would be earned by the existence of a lower inferred Measured Mineral Resource”.⁸³ The appellants had provided consideration for the opportunity to receive this benefit by the transfer of EPC 1802 to the respondents and there was nothing in the contract which indicated that the respondents would have an “unfettered right” to decide whether or not a Competent Person would be precluded from being given relevant drilling information necessary to determine the existence of a Measured Mineral Resource.⁸⁴ The respondents breached the contract by failing to take steps to enable an assessment of the existence of a Measured Mineral Resource by a Competent Person, resulting in “the impossibility of performance” of the contract.⁸⁵

62. What was required of the respondents to comply with their obligations was the undertaking of sufficient drilling as would enable a Competent Person to make an inference regarding the existence or otherwise of a Measured Mineral Resource. His Honour therefore erred in so far as he held that that the respondents were required to:

“… undertake whatever work was necessary to ascertain whether there was a Measured Mineral Resource of 100 Mt or 40 Mt or above across the whole of the EPC, if that would require that many areas over the whole of the 130 sub-blocks must be drilled in the fashion of the 21 hole exploration program.” (emphasis added).

63. In the alternative, relying on Secured Income, it was submitted that to comply with their obligations, the respondents were impliedly required to do what was “reasonably necessary” and his Honour erred in so far as he characterised the implied duty under Secured Income as one of doing all that was necessary.⁸⁸ The appellants acknowledged that a requirement of reasonableness was not part of their pleaded case, but nevertheless submitted that Senior Counsel for the appellants opened their case at trial with reference to “reasonableness” as being part of the requirement to do all things necessary.⁸⁹

64. As to what particular work would provide sufficient data to allow an assessment for inferring the existence of a Measured Mineral Resource to fulfil the respondents’ obligations, the appellants referred to the evidence of the 21 hole exploration program. This was proposed by the appellants’ expert, Mr Turner, as being ought to take place in the north-western corner of the tenement, which on the earlier data obtained with respect to the Inferred Mineral Resource was the area most likely to contain the best quality and quantity of coal deposits.⁹⁰ The respondents’ two experts agreed that that exploration program was “a reasonable approach to a first stage of drilling with the intention to define a Measured Mineral Resource”.⁹¹

The respondents’ submissions

65. The respondents submitted that there are three aspects of the appellants’ contention that there is obligation on the respondents to obtain sufficient information for the assessment of a Measured Mineral Resource to be considered.⁹² Firstly, while the alleged obligation is directed towards the assessment of the level of Measured Mineral Resource across the whole tenement area, the alleged breach of the term (being the failure to carry out the 21 hole exploration program), was relevant to a much smaller area of the tenement. Secondly, the alleged obligation was directed towards the first respondent, even though the first respondent did not actually hold the EPC and had no right to perform work on the tenement and no term of the final contract made it responsible for the performance of the Purchaser’s obligations. Thirdly, the terminology used by the appellants as to the particulars of the exploration required lacked precision and left room for dispute as to compliance. For example, terms such as “detailed and reliable”; “appropriate techniques”; “spaced closely enough”; and “sufficient for a Competent Person” were unclear and lack precision.⁹³

66. Further, neither the appellants’ pleaded case, nor the evidence that supported it, concerned an allegation that the respondents had an obligation to act reasonably or that not conducting the 21 hole exploration program was unreasonable. Moreover, the respondents disputed the appellants’ submission that the appellants’ case was opened as importing a requirement of “reasonableness” as part of the implied duty of cooperation. Rather, in the passage referred to by the appellants, Senior Counsel for the appellant “confirmed that the [appellants’] case was that the respondents were contractually obliged to do the things the subject of the detailed and reliable exploration implied term”.⁹⁴ The “reasonableness” referred to was in reference to the proposed exploration program producing sufficient data as would enable the Competent Person to make an inference regarding the existence of a Measured Mineral Resource.⁹⁵

67. The respondents submitted that the trial judge correctly concluded that the proper interpretation of the final contract depended on the intention of the parties as ascertained by the contract itself, rather than any rule of construction.⁹⁶ That question was to be considered in the context that the bargain underlying the final agreement was “an uncertain and conditional opportunity” and, while substantial exploration work might have maximised the chance of that opportunity crystallising, it would not inevitably do so. That depended on circumstances outside the respondents’ control such as the results of the exploration work and whether the Competent Person made the inference contemplated by the Third Milestone.

Consideration

70. The appellants argued that the present case came within that category identified by Mason J in Secured Income, where the implication of a duty to cooperate concerns the doing of acts by the respondents which are necessary to the performance of a fundamental obligation under the contract and as such arises by implication of law. The duty so implied, being a rule of construction importing a duty to do that which was reasonably necessary, did not require that to be pleaded. The respondents’ argument, in essence, relying on Jackson Nominees Pty Ltd v Hanson Building Products Pty Ltd¹⁰³ was that this was a case where a duty to cooperate had to be found in “the intention of the parties as manifested by the contract itself”, that is by a term implied in fact, since the relevant acts were not necessary to the performance of fundamental obligations. The trial judge observed¹⁰⁴ that no subsequent case has analysed the operation of the duty to cooperate through the legal test for a “term implied in fact”.

71. In Commonwealth Bank of Australia v Barker,¹⁰⁵ a decision considered by the trial judge, the plurality considered an argument,¹⁰⁶ that “some ‘terms’ said to be implied in law are in fact rules of construction and that all implied ‘terms’ of universal application fall into that category” and that while “[d]ebates about characterisation have attracted persuasive protagonists on both sides”, they “involve taxonomical distinctions which do not necessarily yield practical differences” and are “not concerned with the distinct question whether, and when, implication of a term is to be regarded as an exercise in the construction of a contract or class of contract”. The plurality noted¹⁰⁷ that High Court authority had accepted that some rules treated as implications of terms in law in particular classes of contract, or contracts generally, can also be characterised as rules of construction and that Mason J in Secured Income so characterised the principle in Mackay v Dick.

72. The source for the implication of the duty to cooperate is the criterion of “necessity” and in that regard the plurality in Barker also explained, in a passage quoted by the trial judge:¹⁰⁸

“In Byrne v Australian Airlines Ltd, McHugh and Gummow JJ emphasised that the ‘necessity’ which will support an implied term in law is demonstrated where, absent the implication, ‘the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined’ or the contract would be ‘deprived of its substance, seriously undermined or drastically devalued’. The criterion of ‘necessity’ in this context has been described as ‘elusive’ and the suggestion made that ‘there is much to be said for abandoning’ the concept. Necessity does, however, remind courts that implications in law must be kept within the limits of the judicial function. They are a species of judicial law-making and are not to be made lightly. It is a necessary condition that they are justified functionally by reference to the effective performance of the class of contract to which they apply, or of contracts generally in cases of universal implications, such as the duty to co-operate. Implications which might be thought reasonable are not, on that account only, necessary. The same constraints apply whether or not such implications are characterised as rules of construction.” (footnotes omitted)

73. Also in Barker, Kiefel J (as her Honour then was) also referred to Byrne v Australian Airlines Ltd where McHugh and Gummow JJ explained that:¹⁰⁹

“… many of the terms now said to be implied by law in various categories of cases reflect the concern of the courts that, without the term, the enjoyment of the rights conferred would be ‘rendered nugatory, worthless, or … seriously undermined’. It is in this sense that the word ‘necessity’ is used. In their Honours’ view, the notion of necessity has been crucial in modern cases when the law has implied a term as a matter of law for the first time. In Breen v Williams, Gaudron and McHugh JJ observed that the notion of necessity is central to the rationale for an implication of this kind. The requirement of necessity has been confirmed by a number of decisions of this Court since Byrne and Breen.” (footnotes omitted)

74. Her Honour referred to the concept of “necessity” as the common source for the Secured Income implied duty to cooperate and the implication of a term to ensure business efficacy:¹¹⁰

“The courts will also imply an obligation on the part of each party to a contract to co-operate in the doing of acts necessary to performance, or to enable the other party to secure a benefit provided by the contract. Such an obligation may be traced to Mackay v Dick.

In the sphere of terms implied to render efficacious a particular contract, necessity is also required. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings, it was said that no term will be implied if the contract is effective without it and that any implied term must be so obvious that it ‘goes without saying’.” (footnotes omitted)

75. Although identifying a common source in necessity, her Honour nevertheless distinguished between the distinct spheres of an implied duty to cooperate and a BP Refinery (Westernport) implied term. The trial judge was correct in finding that the Secured Income implied duty to cooperate is not necessarily required to be parsed through the BP Refinery (Westernport) test as to do so would restrict its proper application.¹¹¹

76. In the present case, the trial judge found that, in the absence of an obligation to carry out any exploration work to enable assessment of any Measured Mineral Resource, at least from when the Tenement Sale Agreement was amended by the Amended and Restated Tenement Sale Agreement, the appellants’ conditional entitlement to the Third Tranche Shares and Third Tranche Options was virtually valueless. This was unless there was otherwise a commercial likelihood that exploration work to show whether the existence of a Measured Mineral Resource in the contemplated quantity was achieved, would in any event be carried out before expiry of the sunset date. Further, his Honour observed that from 18 January 2012 when EPC 1802 was transferred to the second respondent, the appellants were dependent on the respondents conducting the relevant exploration.

77. The difficulty identified by the trial judge was in relation to the scope of the necessary exploration to be performed by the respondents. It is important to bear in mind that, notwithstanding that necessity is the source of the implication of the Secured Income duty to cooperate, the rationale being to prevent the enjoyment of the rights conferred by the contract being rendered nugatory, worthless, or seriously undermined, as stated in Australis:¹¹² “It would be, however, fallacious to elide the purpose of implying such terms with the terms themselves. To do so would replace necessity with desirability”.

78. The content of the duty to cooperate in the present case is not one to do all things necessary (in effect “to do whatever it takes”) to enable the other party to have the benefit of the contract, rather the scope of the implied duty is conditioned by the concept of reasonableness. The content of the implied duty to cooperate is, as stated by Mason J in Secured Income, that each party agrees to do what was “reasonably necessary to secure performance of their contract”.¹¹³ The trial judge’s rejection of the proposition that the respondents impliedly agreed by the implied duty to cooperate to undertake whatever work was necessary to ascertain whether there was a Measured Mineral Resource of 100 Mt or 40 Mt or above across the whole of the EPC, would require that many areas over the whole of the 130 sub-blocks must be drilled in the fashion of the 21 hole exploration program, is to be understood not as misconceiving the appellants’ case but as finding that the content of the implied duty was not unqualified.

The implied exploration term

83. The respondents contended that in addition to the matters identified by the trial judge, the implied term did not meet the other requirements set out in BP Refinery (Westernport). The respondents submitted that the term is not reasonable and equitable since it imposed obligations on the respondents which might conflict with their legitimate commercial interests and otherwise be disproportionate to any benefit that the appellants may receive because of them.¹¹⁵ The appellants submitted that the implied exploration term met the test set out in BP Refinery (Westernport)¹¹⁶ in that it was reasonable and equitable. Without the implied term, the respondents had complete and unfettered discretion as to what information might be provided to the Competent Person and, in that respect, the implied term was necessary to give business efficacy to the final contract.¹¹⁷ As such, the implied term was so obvious that, it went without saying, it was capable of clear expression and did not contradict any express term in the agreement.

84. The appellants’ submission amounted to a contention that since they were at risk that the second respondent would not do sufficient work to reach the Third Milestone in the five year period, the term pleaded was required as a matter of business efficacy. The appellants’ contention that the implied term was reasonable did not counter the trial judge’s correct finding that further consideration by the parties as to what was a reasonable solution “might have yielded a number of alternative provisions”.¹¹⁸ This was particularly so given that his Honour found that the parties’ economic interests “as to when and in what amounts further expenditure on exploration should be undertaken were not identical”.¹¹⁹

85. There was no error in the trial judge’s rejection of the implied exploration term.

86. Since grounds 1 to 5 are not made out, it is not necessary to address the matters raised in the notice of contention as an alternative basis for affirming the trial judge’s decision in respect of the two alleged implied terms.

Damages

87. Notwithstanding that, for the reasons stated above, I am of the view that the appellants’ contentions that the trial judge erred in not finding a breach of contract are not made out, it is nevertheless necessary to make some comments on the question of the quantum of damages.

The trial judge’s decision

88. The appellants claimed damages on the basis of loss of a valuable commercial opportunity to receive the Third Tranche Shares and Third Tranche Options, using an assessment of the likelihood that the 21 hole drilling program resulting in a Competent Person inferring the existence of a Measured Mineral Resource in a quantity, between 40 Mt and 100 Mt, applied pro rata to the value of the Third Tranche Shares and Third Tranche Options at the date of the alleged breach of contract, being $2,540,607. A range for damages addressing variables of quantity and degree of possibility was put forward in a table in Mr Turner’s third report which was extracted in the trial judge’s reasons as follows:¹²⁰

Quantity Percentage possibility Amount

40 Mt 100 $1,106,242

50 Mt 95 $1,206,788

60 Mt 90 $1,371,927

70 Mt 85 $1,511,611

80 Mt 80 $1,625,988

90 Mt 75 $1,714,909

100 Mt 70 $1,778,424

89. The trial judge accepted¹²¹ that the prospect of the appellants receiving the Third Tranche Shares and Third Tranche Options constituted a valuable commercial opportunity, assessed by reference to the principles enunciated in Sellars v Adelaide Petroleum NL¹²² as approved in Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Ltd.¹²³ His Honour reviewed the evidence of the three experts, Mr Turner (relied on by the appellants) and Mr Noppe and Mr Knowles (relied on by the respondents) and the joint reports. His Honour outlined weaknesses in the reports and opinions on both sides as to the questions to be answered, observing:¹²⁴

“In particular, on Mr Turner’s side, it has been accepted that his ultimate opinions as to the likelihood of converting the inferred mineral resource in the Yellow Jacket area of the proposed 21 hole exploration program into a 40 Mt measured mineral resource, or more, up to 100 Mt, is subjective and involves what appear to be fairly high conversion rates from the Inferred Mineral Resource assessment. However, on Mr Knowles’ side, there seems to be an unwillingness to accept that anything other than a compliant JORC assessment of a Measured Mineral Resource could ground a finding of a significant possibility of achieving a measured mineral resource of 40 Mt or more.”

90. His Honour concluded:¹²⁵

“In the result, I do not accept that there is a 100 percent probability of a conversion of the coal resource in the area of the 21 hole exploration program into a Measured Mineral Resource of 40 Mt or that there was a 70 percent chance of converting the coal resource in that area into a Measured Mineral Resource of 100 Mt. But I also do not accept that Mr Knowles’ conversion ratios of 20 to 30 percent provide a reasonable range of possible outcomes (let alone 10 percent). Even if the assessment of the prospects of achieving particular outcomes made by Mr Turner were halved, the [appellants] have lost a valuable commercial opportunity of a significant value.”

91. Because the evidence did not supply any reliable or useful methodology for further analysis, his Honour proceeded on the basis that the value of the possibilities should be assessed on a global basis and assessed damages on a global basis at $750,000, reflecting that: ¹²⁶

“… approximately 120 Mt of the Inferred Mineral Resource is located in the 100 Mt polygon of the Yellow Jacket area and as stated in the first joint expert report, it would be reasonable to expect that the majority of the Inferred Mineral Resource would be upgraded to a Measured Mineral Resource with continued exploration.”

Submissions

92. The appellants contended¹²⁷ that his Honour erred in limiting the assessment of damages to $750,000 as the value of the loss of the commercial opportunity suffered by the appellants. The appellants relied heavily on his Honour’s reference to “approximately 120 Mt of the Inferred Mineral Resource is located in the 100 Mt polygon of the Yellow Jacket area” and particularly to his Honour’s consideration of the statement in the first joint expert report that it would be reasonable to expect that the majority of the Inferred Mineral Resource would be upgraded to a Measured Mineral Resource with continued exploration.¹²⁸ The appellants submitted that the trial judge ought to have assessed damages in the amount of $1,371,927, based on a quantity of 60 Mt of Measured Mineral Resource being assessed to exist by the Competent Person on or before the Third Milestone Date and a 90 per cent likelihood of that being achieved. That would more appropriately reflect the approximately 120 Mt of Inferred Mineral Resource being upgraded to a Measured Mineral Resource.¹²⁹

93. The respondents contended¹³⁰ the assessment of damages should have been limited to $150,000 as the trial judge failed to adequately consider the uncertainty associated with a determination of a Measured Mineral Resource. They pointed to the amount of Inferred Mineral Resource for the whole of the EPC area as approximately 364.1 Mt,¹³¹ while the 21 hole drilling program only related to the 100 Mt polygon, which contained an Inferred Mineral Resource of approximately 120 Mt. No specific submission was made before the trial judge in relation to the apparent 90 per cent likelihood of the existence of 60 Mt of Measured Mineral Resource.¹³² The trial judge was correct in not adopting any particular aspect of Mr Turner’s assessment, as it was not made according to any industry standard or recognised method and was otherwise subjective and involved “high conversion rates” from the Inferred Mineral Resource assessment.¹³³

94. The respondents submitted that Mr Turner’s two earlier reports contained “material overstatements” in relation to, for example, inappropriate methodological approaches (such as an assessment of the coal inventory and the amount of Inferred Mineral Resource for the entire EPC area which was inappropriate) and failed to address the differences in information and the applicable confidence level required for an Inferred as opposed to Measured Mineral Resource, which led him to include extensive qualifications on his findings in the first joint expert report. The respondents argued that Mr Turner’s third report, addressing percentage likelihood of particular quantities of Measured Mineral Resource, were partly based on his earlier two reports which used deficient methodologies such as assessing the entire coal inventory and the amount of Inferred Mineral Resource for the whole of the EPC area. The respondents contended that the trial judge’s assessment was equivalent to an approximate 50 per cent chance of the 21 hole drilling program revealing 60 Mt of Measured Mineral Resource and given the uncertainties in the expert evidence, this was excessive. A more reasonable assessment would be of a 10 per cent chance of a 60 Mt resource (equating to $150,000). The data that facilitated the determination of an Inferred Mineral Resource could not be used to then base a determination of the existence of a Measured Mineral Resource and the adequacy of the 21 hole drilling program was doubtful in relation to the geological grade and continuity of the resource. The appellants did not adduce any substantial evidence going to the issue of reasonable prospects of economic extraction.

Consideration

95. It is correct to state that the appellants’ contention before this Court relied heavily on the statement in the first joint expert report quoted by the trial judge that “it would be reasonable to expect that the majority of the Inferred Mineral Resource would be upgraded to a Measured Mineral Resource with continued exploration”.¹³⁶ However, his Honour’s initial reference to that statement of the first joint report included the qualifications immediately following it that:¹³⁷

“… due to the uncertainty of inferred mineral resources, it should not be assumed that such upgrading will always occur. There is therefore no certainty that the results from the proposed exploration program will result in the determination of a measured mineral resource from the current inferred mineral resource of at least 100,000,000 tonnes from the area of the proposed 21 hole exploration program or at least 40,000,000 from the alternative smaller area.”

96. Further, the first joint expert report resulted in agreement among the experts only that the proposed drill spacing for the 21 hole exploration program was a reasonable approach “to a first stage of drilling” with the intention to define a Measured Mineral Resource. As the respondents submitted, the experts did not agree that the 21 hole drilling program would likely lead to the majority of the Inferred Mineral Resource in the 100 Mt polygon area being upgraded to a Measured Mineral Resource and there was no certainty between the experts that the 21 hole drilling program would result in a Measured Mineral Resource such that further drilling (potentially outside the 100 Mt polygon) might be required.¹³⁸

97. In addition, the experts agreed that the final determination of a Measured Mineral Resource would include the assessment by a Competent Person of the results of the exploration program to ensure the confidence required by the JORC Code in quantity, grade and physical characteristics.¹³⁹ In addition, as the trial judge observed, the experts jointly agreed that the final determination of the existence of Measured Mineral Resource, by a Competent Person must “satisfy the requirement that there are reasonable prospects for eventual economic extraction and provide a summary of the assumptions applied.”¹⁴⁰ Further, his Honour identified such matters relevant to reasonable prospects for eventual economic extraction as likely to include the “approximate mining parameters”.¹⁴¹

98. The respondents’ submissions pointed to defects in Mr Turner’s report, but the trial judge referred to and took into account the deficiencies in declining to adopt the percentage chances put forward by Mr Turner of converting the coal resource in that area into a Measured Mineral Resource. However, there were also deficiencies identified by the trial judge in the position of the respondents’ expert, Mr Knowles, leading to the trial judge’s rejection of his conversion rates.¹⁴² Given the state of the expert evidence as reviewed and critiqued by his Honour and his Honour’s identification of the lack of reliable or useful methodology, his Honour proceeded appropriately in taking a global approach. It cannot be said that it was not open to his Honour to significantly discount Mr Turner’s assessments while also being sceptical of Mr Knowles assessment as his Honour did. On the contrary, the assessment made by his Honour was open and took into account the difficulties in the expert evidence on both sides, while also having regard to the joint expert evidence including as to the qualified expectation of upgrading of the resource. Conversely, I do not think there is any basis for the increased damages sought by the appellants, given the deficiencies in the appellants’ evidence.

Orders

100. For the reasons stated above, the orders I would propose are:

That the appeal be dismissed.

That the appellants pay the respondents’ costs of the appeal.

101. RYAN J: I have read the reasons of Philippides JA and agree with those reasons and the orders her Honour proposes.

Footnotes

1. Wellington v Huaxin Energy (Aust) Pty Ltd (formerly Cuesta Coal Limited) [2019] QSC 18 (Reasons) at [2]. ↩

2. Reasons at [3]. ↩

3. AB1 at 52. ↩

4. Reasons at [5]. ↩

5. Reasons at [6]. ↩

6. Reasons at [7]. ↩

7. Reasons at [8]. ↩

8. Reasons at [9]. ↩

9. Reasons at [10]. ↩

10. Reasons at [11]. ↩

11. Reasons at [12]. ↩

12. Reasons at [13]. ↩

13. Reasons at [14]. ↩

14. Reasons at [15]. ↩

15. Reasons at [6]. ↩