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High Court of New Zealand Decisions |
Last Updated: 24 October 2018
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IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
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CIV-2016-409-709
[2018] NZHC 100 |
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UNDER
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the Companies Act 1993 section 284 and Part 19 of the High Court
Rules
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IN THE MATTER OF
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an application to reverse a decision of the
liquidators of MINTAGO INVESTMENTS LIMITED (In Liquidation)
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BETWEEN
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DEPOT CORPORATION LIMITED
Applicant
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AND
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MALCOLM GRANT HOLLIS and MAURICE GEORGE NOONE
as liquidators of MINTAGO INVESTMENTS LIMITED (In Liquidation)
Respondents
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Hearing:
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1 December 2016 (in Christchurch) and
8 December 2016 (in Auckland)
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Appearances:
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J E Bayley for the Applicant
K C Francis and T C Clark for the Respondents
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Judgment:
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12 February 2018
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JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 12 February 2018 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
.......................................
Deputy Registrar
Solicitors:
Rhodes & Co (J E Bayley/R Espie), Christchurch, for the Applicant Meredith Connell (K C Francis/T C Clark), Auckland, for the Respondents
DEPOT CORPORATION LIMITED v HOLLIS and NOONE [2018] NZHC 100 [12 February 2018]
Index
Introduction [1]
Companies and personnel [4]
Procedural matters [15]
The approach on review of a liquidator’s rejection of a claim [17] Some facts [23]
Contract interpretation principles [36]
The competing interpretations [38]
Depot’s interpretation [38]
The liquidators’ interpretation [45]
Discussion [54]
From formation of agreement [55]
After payment of option fee [57]
After exercise of the option [59]
After Mintago starts mining [61]
Rectification [71]
No outward expression of accord? [86]
Content of “offer back” [96]
Do the words in cl 10.4 speak for themselves? [99] Does the entire agreement clause bar a rectification claim? [100] A mistake about the interpretation of the agreement? [104]
Is cl 10.4 consistent with what Depot sought? [108]
Can Mr Batt’s evidence be accepted? [109]
Laches [113]
Summary on rectification [141]
Outcome [144]
Introduction
[1] I heard this case more than a year ago. The delay in giving a decision must have inconvenienced the parties. I apologise for the time taken.
[2] The case is about clause 10.4 in an option agreement dated 1 September 1994, which said:
Except in the case of disposal referred to in Clauses 10.2 or 10.3 should a Party (“the Selling Party”) wish to sell, assign or otherwise dispose all or any part of its interest in this Agreement the other Party (“the Continuing Party”) shall have the first right of refusal of the interest disposed at a cash price equal to the highest cash offer obtainable by the Selling Party from a bona fide third party buyer...
The main questions are what does the clause mean and should it be rectified?
[3] Depot Corporation Ltd says that Mintago Investments Ltd breached this clause by disposing of assets in a gold mining operation (mining permits and interests in land) without first offering them to it under the clause. The contrary view is that the clause does not apply in that way, but only to the disposal of rights under the agreement, such as rights to mining royalties. Mintago is in liquidation. The respondents, Mintago’s liquidators, have rejected Depot’s claim for breach of contract. Depot has applied under s 284 of the Companies Act 1993 for an order reversing their decision. The parties agreed that I am to decide liability only. On a finding of liability for Depot, the amount of its claim will be decided later. Depot believes that the amount of its losses is at least $400,000.
Companies and personnel
[4] Depot Corporation Ltd was incorporated in October 1987 as a mining company with a focus on gold mining in Central Otago. The man behind the company has always been Mr “Kim” Bunting. Part of his interest in Depot is through another company in his control, Minex Services Ltd, later renamed Minex Resources Ltd. Depot applied for prospecting and mining licences on the Earnscleugh Flats, an area with significant deposits of alluvial gold on the west side of the Clutha River between Clyde and Alexandra in Central Otago.
[5] Mintago Investments Ltd, incorporated in January 1987, was a subsidiary of an Australian mining corporation, Perilya Mines NL. Under an agreement of March 1990 Mintago exercised an option to carry on a mining joint venture with Depot in its licence areas at Earnscleugh. On 1 September 1994 Depot and Mintago made an agreement under which Depot gave Mintago an option to buy out its interest in the joint venture. Mintago exercised the option, but did not begin mining straight away. The option agreement provides a right of first refusal to both parties, clause 10.4, which Depot relies on.
[6] In 1991 Mintago made an agreement with March Mining (Central) Ltd which allowed March to acquire up to 50% of Mintago’s interest in the joint venture. March does not have a significant part in this case.
[7] In 1999 Mintago’s New Zealand parent company was sold to the L&M Group, a privately-owned group of mining companies associated with Mr Geoff Loudon. Mintago’s shareholder is L&M Earnscleugh Ltd (formerly Perilya (NZ) Ltd). In 2011 the L&M Group’s premises in Christchurch were affected by the February earthquake. It was not able to retrieve all its records from before the earthquake.
[8] Mintago extracted gold at Earnscleugh between 2010 and 2014. In 2015 Mintago disposed of its assets and interests in land used for mining and surrendered its mining licences. It did not offer any of these assets to Depot. Mintago was put into solvent liquidation by shareholder’s resolution on 10 June 2016. Depot lodged a claim which the liquidators rejected on 2 August 2016.
[9] Mr Bunting has always been director and had effective control of Depot. He has had over 40 years’ exploration mining experience. He negotiated the joint venture agreement and the option agreement with Mintago.
[10] Mr Warren Batt, a geologist with 45 years’ experience in exploration and mining, was a director of Mintago between 1990 and 1998, that is, while it was a Perilya subsidiary. He represented Mintago when it negotiated a joint venture with Depot in 1990 and the option agreement with Depot in 1994. He retired from Mintago before its shareholder was sold to the L&M Group. He later worked for Depot as a
consultant. Mr Batt has always been on good terms with Mr Bunting. They live in the same suburb in Auckland. He supports Depot’s case.
[11] The remaining personnel are associated with the L&M Group and became involved only from 1998 when the group became interested in acquiring Mintago’s holding company. Mr Loudon is Mintago’s sole director. He has been associated with the L&M Group since 1997. While there were other shareholders at the outset, he has been sole owner since 2013. He also has had about 40 years’ experience in mining. He was not directly involved in negotiating any of the agreements in this case.
[12] Mr David Manhire is the exploration manager of the L&M Group with nearly 40 years’ resource extraction experience, including alluvial gold mining. On its behalf, he was involved with initial investigations in 1998 to decide whether to take control of Mintago.
[13] While all the others have experience and qualifications in geology and mining, Mr Gregory Hogan has accounting qualifications and experience. All the same he has worked in the resource industry for at least 25 years. He joined the L&M Group as managing director in 2002, when it was winding down its gold mining. He was not involved in negotiating any of the agreements but dealt with Mr Bunting from 2005 when differences arose. He resigned in 2015.
[14] A law firm engaged by Mintago drafted the option agreement in this case. Later, after Mintago came under the control of the L&M Group and differences arose, Depot used that law firm to act on its behalf. That firm is not currently retained by any party.
Procedural matters
[15] For an application to review a liquidator’s rejection of a claim a creditor needs leave under s 284(1) of the Companies Act. In a joint memorandum of 13 September 2016, the parties agreed that leave should be granted. In his minute of 14 September 2016 Associate Judge Matthews gave leave by consent to proceed by originating application but did not deal expressly with leave under s 284. I take it as implicit that
he did grant that leave because he gave directions for hearing, but in case there is any doubt on the matter, I expressly give leave to Depot under s 284.
[16] In his minute, Associate Judge Matthews stated that the issue for determination is whether:
(a) the applicant has a claim against Mintago Investments Ltd (in liq) for breach of clause 10.4 of an option agreement dated 1 September 1994 arising from the cessation of mining and disposal of assets in 2014 and/or subsequently; and, consequently
(b) the respondents erred in rejecting the applicant creditor’s claim.
As part of its case Depot seeks rectification of the option agreement. The liquidators object that rectification is not within the issue stated by Associate Judge Matthews. I do not accept that. In its originating application, Depot made it clear that its interpretation case included a claim for rectification. Associate Judge Matthews’ statement of the issue is descriptive, not prescriptive. It is not to be taken as barring either side from running issues raised in the pleadings. If Associate Judge Matthews had intended to give leave for a case where the current text of the agreement was to be construed without recourse to rectification, he would have said so. That would have required a ruling (possibly a strike-out) barring Depot from running rectification. His statement of the issue is wide enough to cover Depot’s pleaded claim for rectification. The parties’ joint memorandum of 13 September 2016 that led to his minute did not suggest that the issue to be decided should be limited in the way the liquidators propose. While the liquidators took the point in their notice of opposition, they were not prejudiced. They prepared evidence and argument on the issue.
The approach on review of a liquidator’s rejection of a claim
[17] In its application, Depot pleads that the liquidators acted unreasonably in rejecting its claim, but that misstates the way the court reviews liquidators’ rejections of claims. The question is whether Depot has an enforceable claim recognised at law. Depot alleges a breach of contract by Mintago. On liquidation Depot’s right to sue for
breach of contract is transmuted into a right to claim in the liquidation and to share pari passu with other unsecured creditors. In Government of India v Taylor Viscount Simonds said:1
I conceive that it is the duty of the liquidator to discharge out of the assets in his hands those claims which are legally enforceable, and to hand over any surplus to the contributories. I find no words which vest in him a discretion to meet claims which are not legally enforceable...an additional purpose of a winding up is to secure that creditors who have enforceable claims shall be treated equally, subject only to the priorities for which the statute provides.
[18] On an application to reverse a liquidator’s decision to reject a claim the court decides the matter de novo.2 Pearson J, an authority on liquidation law, described Australian procedure:3
What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge, who determines that appeal de novo primarily on affidavit material. ... There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances that on appeal it is possible under modern rules of procedure for the Judge in appropriate cases to make orders for discovery even before the delivery of pleadings where it appears necessarily desirable to do so...
In New Zealand proceedings to review a liquidator’s rejection of a creditor’s claim are brought under Part 18 of the High Court Rules4 (under which there are standard pleadings and discovery) or by leave by originating application under Part 19 (under which discovery is available only by leave and not as of right). With those qualifications, Pearson J’s description broadly applies in New Zealand.
[19] In Re HIH Casualty and General Insurance (NZ) Ltd Associate Judge Christiansen refused to deal with a proceeding challenging a liquidators’ decision rejecting a claim under s 284, ruling instead that the creditor should seek leave under s 248(1)(c) of the Companies Act to bring an ordinary proceeding against the
1 Government of India v Taylor [1955] AC 491 (HL), 509.
3 Re Gordon, Grant and Grant Pty Ltd [1983] 2 Qd R 314 at 316-317.
4 High Court Rules, r 18.1(b)(iii).
company.5 His comments about assessing the reasonableness of a liquidator’s assessment should be read in context6 – that an ordinary proceeding was more appropriate in that case. I do not understand him to say that the court’s powers are limited to assessing reasonableness of a liquidator’s decision, as opposed to deciding the matter on the merits de novo.
[20] The liquidators submitted that an application under s 284 was not a suitable vehicle to decide a claim for rectification. They complained about inability to cross- examine Depot’s witnesses. They did not raise that question until they filed their submissions.7 They did not give a notice requiring deponents to attend for cross- examination. They said that Depot should have sought consent to bring an ordinary proceeding against the company under s 248(1)(c) of the Companies Act. A better way of putting that is to say that Depot should have filed its proceeding under Part 18 of the High Court Rules. They raised that objection too late. If they considered that the originating application procedure was inappropriate, they should have raised the matter earlier when case management directions were given. They did not do so. A claim in a liquidation may require recognition of a rectified contract. If the liquidators do not accept the claim, the creditor may have to seek rectification in its application to reverse the liquidator’s decision. But as the creditor can prove in the liquidation for any enforceable claim, there is no reason for excluding claims that rely on rectifying documents.
[21] In Tanning Research Laboratories Inc v O’Brien Brennan and Dawson JJ described the role of liquidators in these applications:8
In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed while acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor’s claim on any ground on which the company might have defended the claim had it been sued by the creditor.
6 At [28].
8 Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 at 341.
[22] Because the court hears the application to reverse the liquidators’ decision de novo, neither the creditor nor the liquidators are held to the positions they stated when the liquidators considered the creditor’s claim. The court may consider evidence and information that were not available to the liquidators when they rejected the claim. The creditor needs to prove its case to the civil standard, but, that aside, there is no presumption that the liquidator’s decision is correct.
Some facts
[23] In 1990 Mintago had a property on the Clutha River which Mr Batt identifies as the Island Block. He became aware that Depot had obtained a prospecting permit (31-2388), had applied for another prospecting permit (31-2390) and a mining permit (32-2970) for properties at Earnscleugh. The permits were under the Mining Act 1971 (now repealed) and the Crown Minerals Act 1991, but it is not necessary for this case to consider those acts, except to note that permits have a fixed term, are subject to conditions and may be revoked, surrendered and transferred.9 Depot’s applications and permits were later brought under one permit, 41462.10 Mr Batt saw benefits in the two companies combining forces. On 8 March 1990 Depot and Mintago made an agreement for a joint venture for alluvial gold mining under Depot’s licences (called “tenements”). The agreement was in a letter signed by Mr Batt as director of Mintago and by Mr Bunting as director of Depot and Minex. It includes these terms:
(a) Mintago would lend Depot and Minex $12,500 repayable within 12 months of a mining operation starting (cl 1);
(b) Depot gave Mintago an option to enter into a joint venture to explore and if feasible to establish an alluvial gold mining operation on the tenements, the option to be exercised within two months (cl 2 and 3);
9 See Crown Minerals Act 1991, ss 30-42.
10 While there were changes, the final area of that permit was 919.4 ha: Mintago’s final report for alluvial gold mining project, MR 5243, page 3. Mintago later obtained permits for other areas at Earnscleugh. For reporting requirements, see Crown Minerals (Minerals other than Petroleum) Regulations 2007, Part 3.
(c) The parties’ joint venture interests would be Mintago 80%, Depot 20% (cl 5);
(d) Mintago would contribute $400,000 as expenditure for the joint venture (cl 6);
(e) When that was completed Depot may elect to contribute to joint venture expenditure in proportion to its 20% interest or to dilute its interest in the venture to 15%. In the latter case, it shall repay Mintago for its share of contributions from its after tax cash flow from the joint venture (cl 7 and 8);
(f) Mintago would be manager so long as its interest in the joint venture was 50% or more (cl 9);
(g) Mintago could withdraw from the agreement at any time, but if it did so before completing the expenditure requirement, it had to sell its 80% joint venture interest to Depot for $10.00 and would have no interest in the joint venture assets (cl 11);
(h) Mintago would engage Minex to complete processing of current tenement applications at fair and reasonable fees and to provide technical services (cl 15);
(i) Both Depot and Mintago were required to offer to the joint venture any additional tenements acquired that abutted or were contiguous to the tenements (cl 16);
(j) Mintago could assign, transfer of dispose of its interest at any time subject to abiding with the terms of the agreement (cl 17);
(k) Mintago had first option to buy Minex’s shareholding in Depot or Depot’s joint venture interest at a fair market price established at arm’s length (cl 18).
[24] Although the agreement provided for a formal joint venture agreement to be prepared and signed, that was not done. Mintago did go ahead with the joint venture and incurred expenses. Minex continued with its applications for licences and negotiated access with landowners (which usually involved obtaining a right to purchase the land).
[25] In 1991 Mintago made an agreement with March Mining (Central) Ltd which allowed March to acquire up to 50% of Mintago’s interest in the joint venture.
[26] On 1 September 1994 Depot and Mintago entered into the option agreement with the right of first refusal which Depot relies on in this proceeding. Mr Batt says that the impetus for the agreement was the success of mining operations on the Island Block. Mining methodology, plant and equipment used on Island Block could be used on Depot’s on the joint venture licences. Mintago sent Depot a letter setting out basic terms on 6 July 1994. These were:
(a) Mintago would have an option to buy all Depot’s interest in the licences and the joint venture;
(b) The option fee would be two payments - $20,000 after signing and
$30,000 after access arrangements had been completed;
(c) The option was to be exercised within six months;
(d) The purchase price was:
(i) $150,000 payable within six months of exercising the option;
(ii) $175,000 within 30 days of the grant of all permits and consents needed to start mining; and
(iii) A royalty of 1% of the value of the gold payable quarterly in arrears from the start of mining.
(e) The transfer of licences and land to Mintago would not take place until the $175,000 had been paid. At any time before then Mintago could withdraw from the purchase but any payments would not be refunded;
(f) If Mintago withdrew, the parties would go back to the joint venture.
Mr Bunting co-signed the letter on behalf of Depot to show its agreement to these terms subject to formal documentation.
[27] There were negotiations that led to Depot and Mintago making the option agreement of 1 September 1994. To decide the meaning of the agreement it is not necessary to go into those negotiations, but it will be when I deal with Depot’s rectification claim. I will come back to them at the rectification part of the decision.11
[28] Relevant parts of the option agreement of 1 September 1994 between Depot and Mintago provide:
(a) Mintago was given the sole and exclusive right to purchase “free from Encumbrances Depot’s right title and interest in the Interests and all rights and privileges attaching thereto” within the option period ending 6 January 1995 (cl 3.1);
(b) “Interests” is defined:
“Interests” means Depot’s right, title and interest in the Joint Venture, the Permits and the Access Agreements and, for the avoidance of doubt, without Depot being required to perfect, carry out, define or quantify its interest in the Joint Venture the Permits and Access Agreements.
(c) The definitions include these:
(i) “Access Agreement” means an access arrangement permitting access to the Permits entered into pursuant to the Act;
11 See paragraphs [77]-[85].
(ii) “Joint Venture” means the joint venture between Depot and Mintago formed to exploit the Permits in the terms of the Joint Venture Agreement;
(iii) “Joint Venture Agreement” means the letter agreement between Mintago, Depot and Minex dated 8 March 1990;
(iv) “Land” means the land described in and comprising the Permits.
(v) “Permits” means Mining Licence 32-2970 and Prospecting Licences 31-2388 and 31-2390...and any permit under the Act issued from the Permits;
(vi) “Land” means the land described in and comprising the Permits;
(vii) “Technical information” shall mean but shall not be limited to all exploration, geological and mining data and information, hydrological, engineering, environmental and information in relation to the Resource Management Act whether in possession of Depot or its constituents pertaining to the Permits.
(d) The consideration for the purchase was:
(1) $150,000 plus GST on the completion date, seven days after exercise of the option;
(2) $150,000 plus GST six months from the date the option is exercised;
(3) $175,000 plus GST on the earlier of 30 days of Mintago being notified of RMA consents and other regulatory approvals or two years from completion date.
(4) Forgiveness of loan of $12,500 payable by Minex to Mintago.
(5) Royalty of 1% plus GST of the net value of gold produced from the permits.
(e) Clause 3.1(5)(b) said:
In respect of such Royalty Mintago acknowledges and agrees that the obligation to pay Royalty to Depot shall be a contractual obligation imposed upon Mintago and/or its successors in title (as provided hereunder) and in the event that Mintago assigns its interest in the Joint Venture and/or in the Permit (or any part thereof) at any time provided Mintago procures that such assignee enters into a covenant with Depot to assume the obligations to pay Royalty to Depot hereunder (or a pro rata part thereof as appropriate) Mintago shall thereupon be released from any further obligations to pay Royalty (or such pro rata part thereof as appropriate) to Depot hereunder.
(f) Under cl 4 there was an option fee of $50,000. If Mintago did not exercise the option, Depot could keep the fee and the parties would continue with the joint venture;
(g) Transfer of all Depot’s interest in the joint venture, including technical information, to Mintago was to take place on the completion date (cl 6);
(h) Under cl 7.5 (as part of the warranties and covenants) neither party was to mortgage or otherwise encumber its “Interest in this Agreement” without the prior consent of the other party, which was not to be withheld unreasonably;
(i) Clause 8 provided for termination for non-payment by Mintago or by Mintago giving notice. Mintago could withdraw before the payment of
$175,000. In that event Depot could keep all payments already made. Mintago would be under no further liability to Depot.
(j) Under clause 9 if the agreement was terminated under cl 8 or Mintago did not exercise the option, the joint venture was reinstated. Depot acknowledged that Mintago had assigned 50% of its interest in the joint venture to March and it holds March’s interest on trust while formal documents are completed (cl 9.5).
(k) Clause 10 dealt with assignment:
- 10.1 No Party may assign, sell or otherwise dispose the whole or any part of its Interest in this Agreement to any person or entity not being a party to the Agreement unless such party or entity agrees to be unconditionally bound by the Agreement.
10.2 Depot agrees to the assignment by Mintago of all or part of its interest in this Agreement to March, and agrees, March having taken such assignment, to any reassignment by March of all or part of its interest to Mintago.
10.3 A Party may sell or assign its interest in this Agreement to a Related Company provided that such Related Company agrees with the Parties to reassign all of its rights and interests to the assignee (sic) should the assignee cease to be a Related Company within three years of the assignment.
10.4 except in the case of disposal referred to in Clauses 10.2 and 10.3 should a Party (“the Selling Party”) wish to sell, assign or otherwise dispose all or any part of its interest in this Agreement the other Party (“the Continuing Party”) shall have first right of refusal of the interest being disposed of at a cash price equal to the highest cash offer obtainable by the Selling Party from a bona fide third party buyer. If the Continuing Party does not accept an offer of the interest being disposed of within thirty days of the offer, the offer shall be deemed to be declined and the Selling Party may sell or dispose of its interest at a price not lower than the highest cash offer at any time within three months after the offer is declined or deemed to be declined without once more offering the rights and interests to be disposed of to the Continuing Party.
(l) Clause 11, “Acquisitions”, dealt with “Additional Tenements”, mining permits and property interests in areas outside the land for which Depot had obtained mining licences and land interests. The additional tenements were outside the joint venture, but on reinstatement under cl 9, Mintago would offer Depot a 20% interest in these tenements, for which it would have to pay.
(m) There are boilerplate clauses, including an entire agreement clause (cl 12) and a severance clause (cl 15).
(n) Clause 1, “Definitions”, defines words “unless the context requires otherwise”. It also provides that the omission of capital letters for a word or expression shall not affect the interpretation of the agreement.
(o) Schedules to the agreement set out the mining permits, the joint venture agreement, the agreement between Mintago and March and a list of landowners for the properties for which access was sought or obtained.
The parties did not refer to or rely on other provisions of the option agreement.
[29] On 23 December 1994, Mintago gave notice to Depot under clause 3.1 of the option agreement to exercise the option from 6 January 1995. It paid the three tranches under clause 3.1 by 1997. Depot transferred its licences and land interests to Mintago.
[30] Between 1994 and 1999, Mintago spent significant sums (about $10 million) on the Earnscleugh project including carrying out feasibility studies and exploration, finalising the permits required, expanding the area proposed for mining and buying land. Although a joint venture partner, March did not contribute any funds and as a result its interest was diluted to about 17%, with Mintago holding the remaining 83%. Mintago did not however begin mining.
[31] In 1999 Mintago’s New Zealand parent company was sold to the L&M Group. Mr Manhire was involved in initial inquiries for the L&M Group before the purchase and dealt with Mr Batt. Mr Batt advised that March had a pre-emptive right over Mintago’s interest in their joint venture, but did not refer to any pre-emptive rights held by Depot. Perilya’s detailed 33-page information memorandum12 given to the L&M Group refers to Depot’s right to 1% royalty on gold from the Depot tenements, but does not refer to Depot having any pre-emptive rights. On 1 October 1999 L&M Mining Ltd sent a fax with questions including:
Has the full amount been paid to Depot. Are there any further liabilities in relation to this agreement.
Perilya replied:
All amounts owed to Depot Corporation Limited in accordance with the Agreement dated 1 September 1994 have been satisfied (including all payments noted in clause 3.1 of the Agreement). However, there is a royalty of 1% of the net value of gold royalty earned from Mining Licence 31-2970 and Prospecting Licences 312383 and 31-2390.
As requested I have couriered to you today a copy of the Depot Corporation Ltd Agreement.
12 Not counting extensive appendices.
Mintago says that L&M Mining Ltd bought the shares in the holding companies not knowing of the pre-emption rights that Depot now asserts. Mintago refers to this term in the agreement of 8 September 1999:
Perilya does warrant however that to the best of its knowledge, information and belief, all documents provided to L&M in relation to this transaction are materially correct and contain no false or incorrect statements.
[32] Mintago applied for resource consents, which were not granted until 2004. It did not however begin mining. It would not have been economic. In March 2005, it advised Depot that it planned to surrender its permits and resource consents. Mr Bunting, then at sea and without the option agreement to hand, replied suggesting that they should go back to Depot. Mr Manhire says that he and Mr Hogan checked the agreement but came to the view that Depot did not have a right of first refusal. Mr Hogan advised Mr Bunting of this. Putting the legalities aside, Mintago gave Depot information to see whether the matter could be resolved on a commercial basis, but nothing came of that.
[33] In the event Mintago mined the Earnscleugh Flats, including permit area 41462, from 2010 to 2015. Mr Bunting says that there were delays and irregularities in royalty payments. The last payment was made in August 2015. Depot does not pursue any royalty issues in this proceeding. From 2009 to 2014 there was spasmodic correspondence between the parties about the effect of cl 10.4. Mintago’s lawyers advised it that the option agreement did not require it to offer mining assets to Depot.
[34] Mr Bunting was one of the addressees of an email by Mr Loudon dated 31 July 2015 offering mining equipment for sale. On 19 August Mr Bunting emailed Mr Loudon stating Depot’s interest in acquiring permit 41462 before its expiry in 2016 and before it was disposed of. Mr Loudon replied on 21 August that Mintago had surrendered the permit. Mr Bunting found out that it had been surrendered on 27 July 2015. Mintago has disposed of all its assets used in the Earnscleugh mining operation, including plant and machinery, interests in land, mining permits and resource consents without giving Depot the opportunity to buy them.
[35] Mr Bunting says that there are potentially 83,000 ounces of residual gold which may be mined. Depot has applied for a new consent and permits, but for a smaller
area. The costs of starting afresh will be much more than if it had been able to arrange a transfer of assets back from Mintago. Mintago on the other hand does not accept that it was under any obligation to offer the assets to Depot when it decided to dispose of them.
Contract interpretation principles
[36] Interpretation of a contract is a question of law. There is no starting presumption that one interpretation is better than the other. Each side carries the burden of persuading the court that its interpretation is to be preferred. The majority in the Supreme Court in Firm PI 1 Ltd v Zurich Australian Ltd stated in general terms the accepted approach to contractual interpretation:13
Given the issues in the case, it is not necessary that we discuss the approach to contractual interpretation in any detail. It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.
It should not be over-looked, however, that the language of many commercial contracts will have features that ordinary language (even a “serious utterance”) is unlikely to have, namely that it will result from a process of negotiation, will attempt to record in a formal way the consensus reached and will have the important purpose of creating certainty, both for the parties and for third parties (such as financiers). The fact that parties are aware their contract might be relied upon by a third party may justify a more restrictive approach to the use of background in some instances, the parties’ awareness being itself part of the relevant background. In Re Sigma, where the interpretation of security trust deed was in issue, Lord Collins said that the background was not relevant “except in the most generalised way” and went on to say:
13 Firm PI 1 Ltd v Zurich Australian Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]- [63].
Where a security document secures a number of creditors who have advanced funds over a long period it would be quite wrong to take account of circumstances which are not known to all of them. In this type of case it is the wording of the instrument which is paramount. The instrument must be interpreted as a whole in the light of the commercial intention which may be inferred from the face of the instrument and from the nature of the debtor’s business. Detailed semantic analysis must give way to business common sense ...
To some extent, then, the scope for resort to background is itself contextual. We also note at this point that Lord Collins’ reference to “business common sense” is one that is echoed in many interpretation cases, as we discuss ... below.
While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
(Citations omitted)
Their judgment reviewed authorities on commercial absurdity and concluded:14
All this means that where contractual language, viewed in the context of the whole contract, has an ordinary and natural meaning, a conclusion that it produces a commercially absurd result should be reached only in the most obvious and extreme of cases.
[37] While broad scope is given to the background material that may be considered, evidence of the parties’ negotiations, drafts of agreements and declarations of their subjective intentions are excluded.15 On the other hand those matters are admissible in claims to rectify written agreements.
14 At [93].
15 Prenn v Simonds [1971] 1 WLR 1381 (HL), 1384-5, Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL), 913, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, [28]-[42].
The competing interpretations
[38] Depot says that under cl 10.4 Mintago was required to give it the opportunity to buy back assets Mintago took under the agreement. It breached the clause by disposing of them without giving it a right of first refusal. Here is the relevant part of clause 10.4 again:
Except in the case of disposal referred to in Clauses 10.2 or 10.3 should a Party (“the Selling Party”) wish to sell, assign or otherwise dispose all or any part of its interest in this Agreement the other Party (“the Continuing Party”) shall have the first right of refusal of the interest disposed at a cash price equal to the highest cash offer obtainable by the Selling Party from a bona fide third party buyer...
[39] Depot accepts that the question is whether “interest in this Agreement” means rights and powers in the option agreement or also includes the substantive interests the subject of the agreement. In support of the wider meaning, it refers to the negotiations: Mr Bunting’s response to the first draft of the option agreement, asking for a right of first refusal to be included, and Mr Batt’s acceptance of that. The new clause was added to provide for that. The clause should not be interpreted to defeat that purpose. That submission relies on evidence that is not admissible for contract interpretation.
[40] It also submits that the narrow interpretation is not commercially sensible. Mintago’s rights under the option agreement effectively cease on Depot’s interests being transferred to it. After that transfer the right of first refusal would be meaningless to Depot as there would be no assets it could attach to. Mintago would still have a right of first refusal over Depot’s royalty right, but Depot would have no corresponding right. While Depot might have a right of first refusal pending completion, there would be a considerable period where the option agreement would subsist without Depot enjoying any pre-emptive rights. After the completion date clause 10 would not bind Mintago even though clause 10.3 was intended to apply after completion for a longer period (see the three years within which a related company must re-assign if it ceases to be related). On the narrow interpretation clause 10.4 would give Depot little of substance. It would mean that if Mintago decided to sell or assign to a third party its unexecuted option to acquire Depot’s interests, Depot would
be entitled to meet the third party’s price. All the right of first refusal would give Depot is a right to buy Depot’s own interests so as to return to the status quo under the joint venture. That smacks of circularity.
[41] Any argument suggesting that Depot could use this circular right to prevent Depot’s interests getting into the hands of an undesirable purchaser is weak because, on Mintago’s interpretation, after completion Mintago could sell to any third party it wishes.
[42] Instead Depot had a legitimate ongoing interest in protecting its income after completion. Depot would want the ability to take over the project if it did not have confidence in the purchaser. Under the narrow interpretation, Depot would have to put up with a new owner. There is no provision that its consent must be sought before assignment. Under cl 3.1(5)(b) Mintago is released once it provides a covenant by the purchaser, regardless of the purchaser’s ability to pay.
[43] Depot also submitted that the wider interpretation does not place an undue burden on Mintago. That was directed at assertions by Mr Loudon that a right of pre- emption would be a “game-changer”.
[44] The wide interpretation of “interest in this agreement” in cl 10.4 is consistent with the same meaning applied to the term in cl 7.5 and 10.1-10.3. The context of cl 7.5 requires that the definition of “Interest” – Depot’s interest in the joint venture – not apply. It clearly goes to both parties’ interests. Under the narrow interpretation cl
7.5 would apply only to prohibiting encumbrance of option rights rather than the substantive interests subject to the option.
The liquidators’ interpretation
[45] The liquidators say that cl 10.4 applies to the disposal of executory rights, the parties’ respective rights to performance under the option agreement, but not to disposal of other assets such as interests in mining permits it acquired under the option. They claim that this interpretation has the advantages of simplicity and consistency
with the plain and natural meaning of the words, and meets the commercial purpose of the agreement.
[46] As to purpose, the option agreement was to allow Mintago to obtain all of Depot’s mining interests in the joint venture. The transfer of Depot’s interest in the joint venture was to be absolute and unconditional. It would cut across that to impose an obligation on Mintago to offer those assets to Depot. The structure of the agreement is consistent with that purpose.
[47] They note the varying use of “interest” in the option agreement. “Interests” is defined to refer to Depot’s interest in the joint venture and related assets: that is, what Mintago may acquire under the option (cl 3.1). Mintago’s “interest in the joint venture” is used in those parts of the agreement that refer to its assignment of a half interest to March (recital B and cl 9.5). Depot’s “interest in the joint venture” is used in cl 9.3 and 9.4 to refer to its position if the joint venture is reinstated (because of termination or non-exercise of the option). In cl 11.1. and 11.2 Mintago has an “interest” in additional tenements. These uses of “interest” are distinct from “interest in this agreement” which appears in cl 7.5 and 10.1-10.4. These different uses of “interest” make it clear that “interest in this agreement” is distinct from interests in assets such as mining permits, land and the like.
[48] Clause 10 deals with assignment. Clause 10.1 is said to restrict assignment without the consent of the other party, but the consent is not to be withheld unreasonably.16 The purpose of “no assignment” clauses is to prevent assignment of a party’s right to performance (the burden of a contract cannot be assigned), so that the other side know who they are dealing and that that will not change. Such clauses are not meant to restrict dealing in assets that a party has bought and paid for under an agreement. After settlement neither party has any interest in the assets that it has transferred under the agreement and no reason to restrict dealings in those assets. It is not necessary to give clause 10.4 any wider scope.
[49] “Interest in the agreement” is used in cl 7.5, which restrains any party from encumbering its interest without the consent of the other. If “interest in the agreement”
16 Clause 10 does not say this, although an earlier draft did.
has the meaning Depot contends for, that would impose a perpetual fetter on Mintago being able to use its assets as security for finance.
[50] Clause 3.1(5)(b) makes Mintago liable for royalty payments to Depot even if it transfers title, unless the transferee gives Depot a covenant assuming Mintago’s royalty obligations. That gives Depot adequate protection for its royalty interest without giving a strained interpretation to cl 10.4.
[51] The agreement lacks the machinery provisions typically found in pre-emption clauses to ascertain the assets subject to the right of first refusal and to fix the price.
[52] The liquidators say that the drafting history is not relevant, but if it were, it does not support Depot’s case. Mr Bunting’s subjective intentions are irrelevant.
[53] There are potential difficulties with restraints on alienation. They may be invalid and unenforceable as making property inalienable. While the liquidators do not say that on Depot’s interpretation clause 10.4 would fall foul of that rule, they submit an experienced commercial lawyer would not knowingly draw the clause widely to run that risk.
Discussion
[54] Under the option agreement performance goes through phases marked by these milestones:
(a) Agreement signed on 1 September 1994;
(b) Payment by Mintago to Depot of option fee;
(c) Exercise of option by Mintago by 6 January 1996;
(d) Completion – delivery of transfer documents to Mintago and payment of $150,000 plus GST to Depot;
(e) Further payments of $150,000 and $175,000 (both plus GST) to Depot;
(f) Payments of royalties if Mintago mines for gold.
It is useful to see how the liquidators’ interpretation applies at different stages.
From formation of agreement
[55] While the agreement is wholly executory, Depot is under no obligation to perform, save for these matters. It may come under an obligation to transfer assets if Mintago exercises its option. It is restrained from disposing of its interest in the joint venture assets because it must hold them in case Mintago exercises its option. Mintago’s only obligation is to pay the option fee. Until it exercises the option, it is not under any other obligation. On Mintago’s interpretation, if Depot wishes to assign its interest in being paid the option fee by Mintago, it must offer it to Mintago for whatever price a bona fide third party buyer would pay for it. There is something unrealistic about this – offering a debtor the chance to pay for the right to be paid by itself. If the parties intended that, it would more likely be drawn as a surrender provision. There is also little likelihood of Depot wanting to assign its right to the option fee in the week between signing the agreement and payment.
[56] Mintago’s power to exercise the option is within its interpretation of cl 10.4. It would have to offer the option to Depot for whatever price a bona fide third party buyer would pay for it. If Mintago were no longer interested in exercising the option itself, it is more likely to terminate under cl 8 of the agreement, but the termination provision by itself does not mean that an assignment to a third party is not available. Still an assignment to a third party is likely to arise only if mining for gold at Earnscleugh becomes more profitable than it seemed when the parties made the agreement. That has to be seen in light of the short time for payment of the option fee. On Mintago’s interpretation cl 10.4 is very unlikely to have any practical application at this phase.
After payment of option fee
[57] After Mintago pays the option fee, Depot remains under the same restraints as in paragraph [55] above. It has nothing to assign except the contingency that Mintago
might exercise its option. While there may be cases where the grantor of an option may have a marketable asset, in this case that is not a realistic possibility.
[58] For Mintago, the result is similar. Suppose that a surge in the price of gold made gold mining at Earnscleugh more profitable but Perilya wanted to do its mining elsewhere. An offer to quit its mining prospects at Earnscleugh to a third party may be attractive. Cl 10.4 would require Mintago to offer the option power to Depot, but, on Mintago’s interpretation, not its interest under the joint venture. There are practical difficulties in establishing what a third party might offer for the option, as opposed to Mintago’s interest under the joint venture. Again, while the termination clause in the agreement does not preclude an assignment to a third party, an obligation on the grantee of an option to purchase to give the grantor a right of first refusal seems unwieldly and impractical in the context of a buy-out of a joint venture partner in a potential mining enterprise.
After exercise of the option
[59] After exercise of the option Depot has enforceable rights against Mintago: the right to payment of $150,000 on completion and the two later payments totalling
$325,000. The first is interdependent with Depot’s obligation to transfer title on completion. After transfer Depot is under no further obligation to Mintago (barring any liabilities for breach of warranty). Mintago will have no interest under the agreement which it might offer to a third party or would be caught by cl 10.4.
[60] Under Mintago’s interpretation Depot must first offer to Mintago its rights to be paid by Mintago for a cash price obtainable from a bona fide third party buyer. A third party is not likely to offer Depot the face value of the debts. It will offer less so as to make a profit when paid by Mintago. On Mintago’s interpretation it is to be given the same opportunity under cl 10.4. These were miners, not financiers. The suggestion that Mintago should be given a pre-emptive right to make an early discounted payment ahead of any third party (typically a financier) is incongruous in the circumstances of this agreement.
After Mintago starts mining
[61] Depot is the only party with enforceable rights under the option agreement – to be paid royalties. Mintago cannot require performance by Depot, which has already carried out all its obligations. Whether Mintago mines and if so for how long and how much gold it extracts are all in its own discretion. Given those uncertainties, the right to royalties is hardly a marketable asset in Depot’s hands. Any third party who could be interested in buying is likely to weigh those uncertainties heavily in deciding what to offer. On the other hand, Mintago will have a far better idea of the value of any potential royalty stream. Depot is hardly likely to be interested in selling its royalty rights when any sale will be subject to heavy discounting because of contingencies which Mintago will be able to exploit if the rights are offered to it first.
[62] For Depot’s interpretation, it is not necessary to work through each phase in the same way. Depot says that cl 10.4 applies to mining assets (mining permits and land access rights), not just contractual rights. It gave Mintago an option by which it could acquire all of Depot’s mining assets at Earnscleugh. Mintago did not need a right of first refusal because it had an option to purchase instead. Depot could not dispose of its mining assets because it had to hold them for Mintago during the option period. If Mintago did not exercise the option, the joint venture was reinstated. Instead cl 10.4 would apply only if Mintago exercised the option and acquired Depot’s mining assets. If Mintago decided to sell to a third party, it had to offer them to Depot first. Depot would not be required to offer anything to Mintago under cl 10.4.
[63] There are clear difficulties with the liquidators’ interpretation in its application. There is an artificiality about the assignment of contractual rights and powers in the context of a buy-out of joint venture rights in a mining enterprise. The parties are miners, not financiers or dealers in arcane financial instruments. Any price paid under the right of first refusal is to be fixed by what a bona fide third party purchaser would pay, but it is hard to envisage in any case that any third party would be interested in buying any rights or powers under the agreement. In many cases valuing the rights or powers in the absence of an actual interested purchaser would be very speculative. While there may be textual support for Mintago’s interpretation, it is incongruous in the context of this agreement and the circumstances of the parties.
[64] On the other hand, Depot’s approach has the attraction of practicality. While Depot gave Mintago an option to buy out its interest in the joint venture, it wanted the opportunity to mine for gold at Earnscleugh if Mintago abandoned the project. It would pay market value for the mining assets. Valuing them would be more straightforward than setting a price for contractual rights and powers. Such a right of first refusal is not out of place. The difficulty for Depot is that the draftsman ought to have done more to make it clear that that was intended.
[65] When the option agreement is analysed, there is a better fit with the liquidators’ interpretation:
- (a) Depot’s case is that cl 10.4 is primarily for its benefit. It will arise only if Mintago wishes to dispose of assets after the exercise of the option. The clause however contemplates that either party may have the right of first refusal and it may arise at any time;
(b) “Interest in the agreement” is more apt to refer to contractual rights and powers, which may be assignable, than to mining permits and land access rights. That is borne out by the use of “interest in the joint venture” to refer to matters outside rights and powers under the option agreement. As an example, cl 9.5 records Mintago’s assignment of half of its joint venture interest to March, whereas cl 10.2 separately refers to Depot’s agreement to Mintago assigning its interest in the agreement to March;
(c) “Interest in the agreement” is distinct from “Interests”, which is defined to refer to Depot’s interest in the joint venture;
(d) “Interest in the agreement” is inapt to refer to Mintago’s interest in the joint venture, rights it held outside the option agreement. Depot says that it wants to use the right of first refusal to resume mining in place of Mintago, not just reinstating the joint venture;
(e) The restriction in cl 7.5 on encumbering a party’s “Interest in the agreement” without consent may apply so long as there are outstanding
obligations under the agreement, including paying royalties, but Mintago has a sound point that an indefinite fetter on a party’s power to mortgage its assets is less likely, even if its purpose is to protect another party’s pre-emptive rights;
[66] That does not mean that I accept all the liquidators’ submissions on the construction of the option agreement. I do not regard a pre-emptive right in favour of Depot as being contrary to the purpose of the option agreement. While the agreement allowed Mintago to buy Depot’s interest in the joint venture, a right of first refusal is an extra provision, an add-on. Just as an agreement for sale and purchase may give the vendor a right of first refusal if the purchaser sells,17 so may an option to purchase. Similarly the argument as to potential invalidity is unpersuasive. There is case law that a total contractual restraint on alienation may be void.18 Restrictions which have the practical effect of making property unsaleable may fall foul of this rule. In Re Rosher, a devise of property was subject to a right of first refusal to buy at one fifth of market value. The condition was void.19 The rule is not absolute. Relevant factors are said to include the scope of the initial prohibition, whether the right exists for a limited period or indefinitely, whether the grantor must obtain a similar promise from later purchasers and whether the right is to be exercised by reference to a fixed price.20 It is not necessary to go into the finer points because Mintago does not submit that a pre-emptive right of the sort Depot contends for is contrary to public policy. Indeed, a right of first refusal under which mining assets are to be sold at market value and only if Depot accepts within 30 days hardly makes the mining assets inalienable. Instead Mintago has raised the public policy argument only as a way of trying to suggest that the draftsman would not have intended to infringe the rule. As he clearly did not, even on Depot’s interpretation, the argument is weak.
17 E.g. Keith v Waerenga Land Company Ltd [2015] NZHC 1192.
18 See Dixon CJ in Hall v Busst [1960] HCA 84, (1960) 104 CLR 206. It is based on the doctrine that all property is alienable – Re Ridley, Buckton v Hay (1879) 11 Ch D 645, 648-649.
19 Re Rosher (1884) LR 26 Ch D 801. See also the erudite discussion by Campbell JA in Bondi Beach Astra Retirement Village Pty Ltd v Gora [2011] NSWCA 396, (2011) 82 NSWLR 665, [141]-[318].
20 John Nitschke Nominees Pty Ltd v Hahndorf Golf Club Inc [2004] SASC 128, (2004) 88 SASR 334 at [122].
[67] On the liquidators’ interpretation cl 10.4 gives pre-emption rights only for rights and powers in the option agreement, but for the reasons given in paragraphs [55]-[61] and [63] above, I do not consider that the clause is in any sense practicable or achieves any significant commercial purpose. It is implausible that two mining companies setting terms for an option for one to buy out the interest of the other in a joint venture would intend that each should have pre-emption rights only for rights in the option agreement. In Lord Hoffmann’s words, something has gone wrong with the language.21 If a plain reading of the agreement gives an interpretation that does not serve any useful commercial purpose, can a more sensible result be achieved by a corrective construction, as Lord Diplock contemplated in The Antaios, Antaios Compania SA v Salen AB?22
...if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.
[68] Interpreting a contract in such a way that mistakes are recognised in finding the meaning of the agreement is well-established. In Wilson v Wilson Lord St Leonards said:23
Now it is a great mistake if it is supposed that even a Court of Law cannot correct a mistake, or error, on the face of an instrument: there is no magic in words. If you find a clear mistake, and it admits of no other construction, a Court of Law, as well as a Court of Equity, without impugning any doctrine about correcting those things which can only be seen by parol evidence to be mistakes-without, I say, going into those cases at all, both Courts of Law and of Equity may correct an obvious mistake on the face of an instrument without the slightest difficulty.
As Lord Hoffmann explained in Chartbrook Ltd v Persimmon Homes Ltd, that is not a separate rule of construction and there is no longer a requirement that the mistake appear on the face of the document.24 Background and context are considered. The correction may involve adding and deleting words and giving them a meaning that they would not ordinarily have. It must still be clear what correction is required to fix the mistake.
21 Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749 (HL), 775, Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL), 913, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [26].
22 The Antaios, Antaios Compania SA v Salen AB [1985] AC 191 (HL), 201.
23 Wilson v Wilson [1854] EngR 513; (1854) 5 HL Cas 40, 66-67.
24 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, [22]-[24].
[69] If “interest in the agreement” is not to have the narrow meaning claimed by the liquidators, what is the scope of the wider meaning? In “Sale of Land” Dr McMorland makes the point that in drafting a right of first refusal it is necessary to provide for the usual requirements of parties, price and property.25 There is no difficulty with the first two. Only the parties to the option agreement are subject to or may invoke the right of first refusal. The price is ascertained by reference to the highest cash offer by a bona fide third party buyer. On property, the matter is however not clear. What was Mintago supposed to offer to Depot before selling to a third party? Was it the 20% interest in the joint venture for which it had the option? Was it all the joint venture mining assets at the date of the agreement or just some of them? Or does cl 10.4 also include future-acquired assets: resource consents26, fresh mining permits for areas outside the original joint venture, land later acquired, or mining plant and equipment? A reasonable person with all the background knowledge reading the option agreement would not know. I might guess what the parties could have inserted in the agreement if they had considered the matter, but then I would be making an agreement for the parties and that goes beyond interpretation. Any attempt to give cl 10.4 a wider meaning than the liquidators’ narrow but impractical interpretation cannot succeed because the agreement read in context does not tell a reasonable reader what property is subject to the right of first refusal. It fails for uncertainty.
[70] When ordinary interpretation principles are applied, Depot’s claim for breach of contract fails because it cannot show that when Mintago disposed of its mining assets in 2015 cl 10.4 required it to offer them to Depot first. That leads to the question, whether the agreement can be rectified so as to cover the disposal of those assets.
Rectification
[71] The object of a claim for rectification is to make a document conform with the intentions of the parties to the transaction the subject of the document. The transaction is not rectified, only its documented expression. The claim succeeds if the court finds
25 Sale of Land D W McMorland 3rd ed, paragraph 3.15(a), page 114.
26 Under the Resource Management Act 1991, s 122, a resource consent is neither real nor personal property. Under s 134 land use consents (for example, for earthworks) run with the land, but under s 137 discharge permits (for example, for air discharges or for discharges of contaminants to water) must be specifically transferred.
that the document does not accurately record the parties’ transaction. An order for rectification has retrospective effect: the agreement will be read as if it had been originally drawn up in the rectified terms.
[72] This is a common mistake case. Depot says that it and Mintago were under the same mistaken belief about cl 10.4. There is also rectification for unilateral mistake, where one party is estopped from denying that it was mistaken or one knowlingly misled the other into error, but that is not in issue here.27
[73] Depot says that it and Mintago intended cl 10.4 to give it a right of first refusal if Mintago ever disposed of its mining assets for the Earnscleugh venture. They decided this during negotiations for the option agreement. Clause 10.4 was inserted for that purpose. They kept that intention until they signed the agreement. If cl 10.4 does not do what the parties intended, it should be rectified to record what they intended. Depot has not however provided an amended version of the agreement showing its proposed rectification.
[74] The liquidators oppose the claim for these main reasons:28
(a) There is no outward expression of accord of the alleged common intention;
(b) The words in cl 10.4 speak for themselves. Rectification is not required;
(c) The entire agreement clause bars a claim for rectification;
(d) Depot is only mistaken about the interpretation of the agreement and its effect, and that does not give grounds for rectification;
27 The Court of Appeal has said that the Contractual Mistakes Act 1977 (now Contract and Commercial Law Act 2017, Part 2, Subpart 3) did away with rectification for unilateral mistake: Tri-Star Customs and Forwarding Ltd v Denning [1999] 1 NZLR 33 (CA), notwithstanding the saving for rectification in (now) Contract and Commercial Law Act 2017, s 22(3)(b).
28 There are others but they are inconsequential.
(e) The insertion of cl 10.4 is consistent with what Depot sought in negotiations;
(f) The reliability of Mr Batt’s evidence is suspect, given his failure to tell the L&M Group in 1998 about the effects of cl 10.4 which he now contends for;
(g) The claim for rectification should be barred for laches.
[75] The courts have always scrutinised rectification claims carefully. In the nineteenth century judges required proof to be irrefragable. That may have softened since but the case must still be convincing. In Thomas Bates & Sons Ltd v Wyndham’s Lingerie Ltd, Brightman J said:29
The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself. It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties’ intention because it is a document signed by the parties.
A relevant consideration is that lawyers who draft transactional documents for their clients do not ordinarily misstate their clients’ intentions. The authors of Meagher, Gummow & Lehane’s Equity Doctrines and Remedies comment:30
Where the parties to an instrument have each had legal advice, and the instrument has been prepared by solicitors, the party seeking rectification must overcome the court’s doubts that it is inherently unlikely that the solicitors on each side will have failed to grasp and express the intention of the client.
[76] In a claim for rectification the admissible evidence is more extensive than for interpretation of an agreement. Evidence of the parties’ negotiations is admitted. Drafts of agreements are to be expected.
29 Thomas Bates & Sons Ltd v Wyndham’s Lingerie Ltd [1980] EWCA Civ 3; [1981] 1 WLR 505 (CA) at 521.
[77] Now for evidence of the negotiations. On 6 July 1994 Mr Batt for Mintago and Mr Bunting for Depot signed the letter in paragraph [26] above setting out the basic terms for the option agreement. The letter did not have any rights of first refusal for either party.
[78] Mintago’s lawyers sent Mr Bunting a draft agreement on 18 July. It dealt separately dealt with assignment by Mintago (cl 10) and by Depot (cl 11). Under cl 10 Mintago was not to dispose of or charge its interest in the agreement without the consent of Depot, which was not to be withheld unreasonably; it was to obtain a deed of covenant from its assignee as to performance of Mintago’s obligations under the agreement; and it could assign its interest in the agreement to a related company without having to obtain Depot’s consent. Under cl 11 if Depot wished to assign its rights to be paid under the agreement (including royalties), it was to offer to release Mintago in return for it paying Depot a sum it would receive from a third party assignee. The draft did not give Depot a right of first refusal for any proposed disposal by Mintago.
[79] On 21 July Mr Bunting sent Mr Batt a letter proposing many amendments to the draft, including this for cl 10:
There needs to be first assignment offer back to Depot.
Mr Bunting says that he was concerned to ensure that Depot had the ability to re- acquire the licences, the joint venture interest, and any additional rights should Mintago wish to dispose of its interest. He saw this as consistent with Depot’s rights under the joint venture letter under which, on Mintago’s withdrawal, all licences and rights are transferred back to Depot. The transfer back could not be at a peppercorn, as under the joint venture letter. Depot would have to pay market value.
[80] Another amendment Mr Bunting sought was for the clause that became cl 3.1(5)(b) of the option agreement:
To be amended to acknowledge Depot’s first right of refusal to assignment as per to be amended clause 10.
[81] Mr Batt says that he was comfortable with Mintago giving Depot a right of first refusal to buy the permits, licences and joint venture interests against Mintago having a corresponding right of first refusal to purchase Depot’s ongoing interests, specifically Depot’s royalty rights. He thought that the right of first refusal in favour of Depot may protect its ongoing interests, including its royalty rights, and there was no reason for not giving Depot the right of first refusal.
[82] Mintago’s lawyers sent another draft on 15 August. This version had a new cl 10.4, which is in the same terms as the clause in the signed agreement. The copy of the draft in evidence has a note by Mr Bunting beside the clause, “Seems OK Check with Renwick.” Renwick was Depot’s lawyer, who had received copies of earlier letters. Mr Bunting was satisfied with the new clause as meeting what he had asked for. He understood the clause to give Depot a right of first refusal to buy Mintago’s licences, joint venture interests and any land acquired under the access arrangements, should Mintago wish to dispose of its interest in the project, including surrendering the licences. In 1994 it was not possible to see where the project was going and he wanted to preserve a way back in if Mintago decided not to pursue it.
[83] Mr Batt says that he did not have any specific input into the wording of cl 10.4. He left that to Mintago’s lawyer. When he read the draft, he saw that it gave Mintago a right of first refusal over Depot’s royalty entitlement. This is a reference to cl 11 in paragraph [78] above, which remained in the agreement. He assumed that the reference to “interest in the agreement” was a catchall phrase and would cover the entirety of either party’s rights in the project. He did not intend cl 10.4 to exclude a right of pre-emption for Depot to buy permits, licences and joint venture interests, even after the assets had been transferred to Mintago.
[84] In the signed option agreement cl 11 found in the drafts has been deleted. There is no separate provision for assignment by Depot. What became cl 3.1(5)(b) did not expressly refer to any right of first refusal. Whereas cl 10.1 in the first draft barred Mintago from disposing of or encumbering its interest in the agreement without the consent of Depot, which was not to be withheld unreasonably, cl 10.1 of the signed agreement did not make disposal of an interest subject to other party’s consent. There
are other differences between the drafts and the signed agreement, but none appear relevant to the rectification question.
[85] There is no evidence of any other communications between Depot and Mintago between 6 July and 1 September 1994. That may be because with the lapse of time Mr Bunting and Mr Batt can no longer recall what was negotiated except by referring to drafts and correspondence. Clause 10.4 was added at Mr Bunting’s request, but his letter of 21 July does not elaborate on what he meant by “first assignment offer back to Depot”. In this case, he says what he meant by it, but there is no evidence that he expressly told Mr Batt in 1994. For his part Mr Batt says that his understanding of what the right of first refusal was for is the same as Mr Bunting’s, even though there is no evidence that they conferred about it. Depot does not say that any subsequent conduct can be used to prove a common intention.
No outward expression of accord?
[86] The liquidators say that for common mistake rectification, it is not sufficient that Mr Bunting and Mr Batt had the same mistaken belief that cl 10.4 did not provide the “offer back” that Mr Bunting sought. In their submission there must be an outward expression of accord. In my judgment the correct position is that while the parties must share with each other the same mistaken belief and it must be objectively proved, it may take the form of unspoken assumptions and implied understandings. While an outward expression of accord will help establish a common intention, it is not a necessary condition.
[87] In recent times the Court of Appeal has recited without discussion Peter Gibson LJ’s test in Swainland Buildings Ltd v Freehold Properties Ltd:31
The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect the common intention.
Lord Hoffmann approved the test obiter in Chartbrook Ltd v Persimmon Homes Ltd.32 The Court of Appeal applied the test in cases where it said that there was no dispute as to the applicable principles.33 For New Zealand however the matter is not straightforward. There is High Court authority that an outward expression of accord is not required, Tipping J’s decision in Westland Savings Bank v Hancock:34
I am of the view that some outward expression of accord is not necessary but that before rectification can be ordered the Court must be satisfied that the following points are established:
(1) That, whether there is in antecedent agreement or not, the parties formed and continued to hold a single corresponding intention on the point in question.
(2) That such intention continued to exist in the minds of both or all parties right up to the moment of execution of the formal instrument of which rectification is sought.
(3) That while there need be no formal communication of the common intention by each party to the other or outward expression of accord, it must be objectively apparent from the words or actions of each party that each party held and continued to hold an intention on the point in question corresponding with the same intention held by each other party.
(4) That the document sought to be rectified does not reflect that matching intention but would do so if rectified in the manner requested.
...
As is apparent, I prefer a formulation which does not require outward expression of accord, which pertains more to the establishment of a contract, but rather a formulation which requires the appearance from the words or actions of the parties of the existence of a concurrent continuing common intention.
[88] The significance of any requirement for an outward expression of accord can be seen in Clarke J’s judgment in NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd:35
It would mean that in a case in which both parties came before the court and gave evidence that they had intended to bind themselves in terms different from the terms of the written document, properly construed, but in which there was no outward expression of accord, the court would be powerless to rectify
32 At [48].
34 Westland Savings Bank v Hancock [1987] 2 NZLR 21 (HC) at 29-30.
their contract. The qualification may also have a bearing on the evidence which is admitted to prove the common continuing intention of the parties. On one view the plaintiff may be limited, in proving intention, to outward expressions of accord. On the other view, the parties may be free to establish their subjective intentions by direct evidence of those intentions or by evidence, including post contractual conduct, from which the court can be asked to infer that their intentions were identical and did not accord with the written document.
[89] For many years Westland Savings Bank v Hancock was the “go to” authority for rectification in New Zealand.36 That needs to be reconsidered, given the Court of Appeal’s decisions in Hanover Group Holdings Ltd v AIG Insurance New Zealand Ltd and Davey v Baker. While the Court of Appeal appears to have treated the requirement for an outward expression of accord as uncontroversial, it did not refer to Westland Savings Bank and did not expressly overrule it. As Tipping J gave careful reasons for his view and the Court of Appeal gave none for its position, it would be odd to regard Westland Savings Bank as no longer applying. In these circumstances, I regard the statements in the Court of Appeal as obiter, as the court did not expressly consider the competing positions on outward expression of accord.
[90] While Westland Savings Bank has not been overruled, should it still be followed in the light of later case law, especially English decisions? In English law the requirement for an outward expression of accord was established before Westland Savings Bank. The English Court of Appeal stated it in Joscelyne v Nissen,37 in which it decided that in a claim for contractual rectification it was not necessary to prove a prior concluded contract, but that rectification would be ordered on proof of a common continuing intention as to a part of the agreement. In Westland Savings Bank Tipping J declined to follow that part of its decision requiring an outward expression of accord. English courts have on the whole followed Joscelyne v Nissen, although they have not always agreed the basis for the requirement. Some have seen it as an evidential
37 Joscelyne v Nissen [1970] 2 QB 86 (CA) at 98.
requirement only.38 Others have stated that it is substantive.39 Another has seen “outward expression of accord” and “common continuing intention” as two sides of the same coin.40 In England the obiter dictum of Lord Hoffmann in Chartbrook Ltd v Persimmon Ltd is taken as stating a substantive requirement:
Now that it has been established that rectification is also available when there was no binding antecedent agreement but the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified, it would be anomalous if the “common continuing intention” were to be an objective fact if it amounted to an enforceable contract but a subjective belief if it did not.
Ardern J gave a policy justification for the requirement in Grand Metropolitan plc v The William Hill Group Ltd:41
...there could be no certainty at all in business dealings if a party who had entered into a firm contract could afterwards turn around and claim to have it rectified on the ground that the parties intended something different.
[91] Tipping J took guidance from Australian cases and texts, as well as an article by L Bromley QC, “Rectification in Equity”, which challenged the requirement for an outward expression of accord.42 The Australians have repaid the compliment by citing his decision. The current texts are consistent with earlier editions Tipping J referred to.43 The High Court of Australia has not decided the question.44 Other Australian courts have emphasised the need for a common, that is, a shared intention, even if proof of an outward expression of accord is not required. While there are many cases,
38 Weeds v Blaney [1978] 2 EGLR 84 (CA) at 85, JIS (1974) Ltd v MCP Investment Nominees I Ltd [2003] EWCA Civ 721 at [33]- [34] (upholding the dismissal of a summary judgment application where the defendant sought rectification), Munt v Beasley [2006] EWCA Civ 370 at [36], Platinum Investment Trust Plc v Knox D’Arcy Asset Management Ltd [2006] EWHC 1893 (Ch) at [26], Sargent v Reece [2007] EWHC 2663 (Ch), [2008] 1 P & CR at [45], Chartbrook Ltd v Persimmon Ltd [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 784 at [44]- [48] (but see the decision of the House of Lords).
39 Snamprogetti Ltd v Phillips Petroleum Co UK Ltd [2001] EWCA Civ 889 at [31]- [37], Grand Metropolitan plc v The William Hill Group Ltd [1997] 1 BCLC 390 at 395, T & N Ltd v Royal & Sun Alliance Plc [2003] EWHC 1016 (Ch), [2003] 2 All ER (Comm) 939 at [133]- [134].
40 Day v Day [2013] EWCA Civ 280, [2014] Ch 114 at [46]- [47].
41 Grand Metropolitan plc v The William Hill Group Ltd [1997] 1 BCLC 390 at 395
42 Rectification in Equity (1971) 87 LQR 532, L Bromley QC.
43 Equitable Remedies, 9th ed, ICF Spry, 634-635; Meagher, Gummow & Lehane’s Equity Doctrines and Remedies, D Heydon, MJ Leeming and PJ Turner (5th ed, LexisNexis, Chatswood (NSW), 2015) at [27-050]-[27-060].
44 Pukallus v Cameron [1982] HCA 63, (1994) 180 CLR 447 at 452.
I take Ryledar Pty Ltd v Euphoric Pty Ltd, a decision of the New South Wales Court of Appeal, as representative. Campbell JA said:45
Caution is needed in evaluating the case law relating to whether or not an outward expression of accord is needed. That is because it is not clear how much (or how little) is involved in an assertion, or denial, of the need for an “outward expression of accord”. It is not clear just what the phrase means. One possibility is that the parties have said “we agree”, or something similar, or performed an act like shaking hands or opening a bottle of champagne that is commonly recognised as an indication of a consensus having been reached. Another possibility is that each of the parties has in some fashion stated (though not to each other) his or her belief that an accord has been reached. Another is that the expression should be taken as performing the work that, in its context in Joscelyne v Nissen, it was designed to perform, namely of indicating that identical subjective intentions, of parties involved in a contractual negotiation, to use a word with a meaning different to its actual meaning is not enough to give rise to rectification unless those subjective intentions of the negotiators have not only become known to each other, but as well they have in some way stated that they propose to use the word with a meaning different to its actual meaning. There is no point in multiplying examples.
In my view, when the fundamental requirement for granting rectification is a continuing common intention of the parties, it is of more assistance to concentrate on what is needed before an intention of the parties to a negotiation counts as a common intention. In my view, when that intention relates to the terms upon which they will contract with each other, it is still necessary for them to know enough of each other's intentions for it to be said that there is a common intention. They might come to know of each other’s intentions in this way through those intentions being directly stated, or they might come to know of them through the various other means by which one person’s intention can become known to another person. Those means can sometimes involve a process of conscious and deliberate inference. Those means can sometimes involve simply perceiving a gestalt in a series of events. Those means can depend to some extent on the people involved sharing a common understanding of how particular bodies of knowledge or markets or social institutions they are operating in work – the experienced surgeon, or the experienced chess player, can sometimes see what another surgeon, or chess player, is seeking to do, in a way that an inexperienced person cannot. What matters for present purposes is that for a negotiating party to perform actions or say words from which the other party can gather his or her intention is itself a form of communication. Negotiation of any contract takes place in a context in which various facts are known or assumed by the negotiating parties. Sometimes, for example, if a contract is negotiated in a context where there are well understood business practices and conventions, and nothing is said about those practices and conventions not applying, it can be legitimate to conclude that both parties to the contract intended to act in accordance with those practices and conventions, even if they did not expressly communicate to each other that they intended to act in accordance with those practices and conventions. This view of what is needed before an intention is a common
45 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65, (2007) 69 NSWLR 603 at [280]- [281] and [315]. Other Australian cases are reviewed extensively. A later decision of the same court, Newey v Westpac Banking Corpn [2014] NSWCA 319, follows Ryledar.
intention, accords, it seems to me, with the Australian case law since
Joscelyne.
...
That the rationale for granting rectification is to avoid unconscientious departure from the common intention assists in deciding what is required for there to be a "common intention". If two negotiating parties each had a particular intention about the agreement they would enter, and their intentions were identical, but that intention was disclosed by neither of them, and they later entered a document that did not accord with that intention, what would be the injustice or unconscientiousness in either of them enforcing the document according to its terms?
[92] While the Australian courts agree with Tipping J in rejecting any need to prove an outward expression of accord, there is a difference. Tipping J accepts that there may be parallel matching intentions that are not shared. His phrase, “concurrent continuing common intention” can be understood as meaning that each party at the same time continues to have the same belief about the proposed agreement, even if they do not share the belief with each other, inferentially or expressly. That is consistent with his four-step test.
[93] In my judgment, the Australian approach is to be preferred to the English. The requirement to prove an outward expression of accord adds an unnecessary extra test, when proof of a shared intention as to what an agreement should say gives the required rigour. The different English positions, evidential or substantive, different sides of the same coin, reflect uncertainty which may not have been resolved by Chartbrook.46 A strict insistence on outward expression of accord may defeat worthy claims.47 Rectification is an equitable remedy which is ordered to prevent unconscientious reliance on the written text of a document.48 It focuses on intentions. A common law test akin to establishing the terms for a contract is a misfit. Case law in Australia and New Zealand does not suggest that the courts are a soft touch when the requirement is dispensed with. On the other hand Westland Savings Bank seems to be an outlier if it means that rectification is available if the parties have parallel but unshared intentions as to the same matter. As Campbell JA pointed out, it cannot be unconscientious to
46 Daventry District Council v Daventry & District Housing Ltd [2010] EWCA Civ 1153, [2012] 1 WLR 1333 at [195].
47 See the English Court of Appeal’s decision upholding a refusal to enter summary judgment when the common intention was based on an assumption rather than an outward expression of accord: JJS (1974) Ltd v MCP Investment Nominees Ltd [2003] EWCA Civ 721.
48 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65, (2007) 69 NSWLR 603 at [305]- [313].
rely on the written text of the agreement, if the parties did not share with each other their beliefs as to what the agreement should say. In that respect, Tipping J went further than equity requires and, with great respect, I decline to follow Westland Savings Bank.
[94] I would reformulate Tipping J’s test as follows.
(a) In a case of rectification of a document for a multi-party transaction on the ground of common mistake, it is not necessary to prove an outward expression of accord, but all the parties to the transaction must share with each other a single corresponding intention as to the point in question.
(b) They must keep that intention until they sign the document to be rectified.
(c) The sharing of the common intention must be objectively apparent from the parties’ words and actions, as must keeping that intention.
(d) The document to be rectified does not reflect that shared intention but would do so if rectified.
[95] For this case Depot does not need to prove an outward expression of accord but it must still show a common intention, a shared belief, as to what the right of first refusal was for. Its evidence shows that Mr Bunting and Mr Batt separately believed that Mr Bunting’s request “There needs to be first assignment offer back to Depot” in his letter of 21 July 1994 was for a right of first refusal for Mintago’s assets if it disposed of them. There is no evidence aside from the letter what they said to each other about the offer back. In the absence of any other evidence of express communications between the parties, can it be inferred that there was shared knowledge of what Mr Bunting meant, that is, common intention in the sense used in the Australian cases? In my judgment it can, because of what Mr Bunting said and what Mr Batt did in response. “Offer back” can be read in context. Depot had first applied for prospecting rights for the Earnscleugh Flats, had then made a joint venture
agreement with Mintago to mine together and was now giving Mintago an option under which Depot would no longer be involved in mining at Earnscleugh, except to be paid royalties. A request for an “offer back” can only refer to obtaining again what Depot had given to Mintago, the Earnscleugh mining assets. It can hardly refer to contractual rights and powers under the option agreement, which the liquidators contend for. Those did not yet exist and could not be offered back. Mr Batt’s understanding of what Mr Bunting meant can be seen in his having instructed Mintago’s lawyers to include a new clause to meet Mr Bunting’s request. There is no other explanation for inserting the new cl 10.4. The new clause did not achieve what Mr Bunting wanted but the point here is that Mr Batt did understand what Mr Bunting meant and he showed it. There was accordingly a common intention as to what the offer back was for.
Content of “offer back”
[96] The question here is whether “offer back” is enough to work out how the option agreement should be rectified. In Crane v Hegeman-Harris Co Inc Simon J said:49
It is, of course, true for the purposes of rectification you must find that which was specifically intended, but the exact form of words in which the common intention is to be framed appears to me to be immaterial as long as in substance and in detail their intention is to be ascertained.
That has been consistently applied in England.50 Older cases had held that there had to be agreement as to the exact words, but that is no longer the law, just as there is no longer a requirement for a prior concluded agreement.
[97] I have referred to “mining assets” but what were they? Mr Bunting responded to Mintago’s draft of 18 July 1994. That had the same definitions of “access agreement”, “interest”, “joint venture”, “joint venture agreement”, “land”, “permits” and “technical information” as in the signed agreement.51 The agreement was to have schedules of permits and landowners. On completion Depot was to provide Mintago
49 Crane v Hegeman-Harris Co Inc [1939] 4 All ER 68, [1971] 1 WLR 1390 (Note) at 1399.
50 Co-operative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 (CA) at 54, Grand Metropolitan Plc v The William Hill Group Ltd [1997] 1 BCLC 390, 395, Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560.
51 See paragraph [28] above.
with transfer documents for the “interests”, that is, Depot’s interest in the joint venture, and with technical information. The copies of the permits attached to the signed agreement show that they were all held by Depot, not Mintago. Under the draft agreement on completion Mintago would become the sole owner of the permits, land interests and technical information that Depot had held for the joint venture. On the other hand, Mintago had taken an interest in another permit, 41-005 and in land for another exploration licence application, which were outside the joint venture. The draft (cl 12 - acquisitions) recorded that Mintago had offered those interests to Depot for the joint venture but Depot had not taken the offer up. There could not be an offer back for assets in which Depot had not had an interest. On the other hand, for the joint venture Depot had held applications and permits, interests in land and technical information. An offer back would give it the opportunity to reacquire them. The draft agreement provided for reinstatement of the joint venture if Mintago cancelled or did not exercise the option. An “offer back” means something more than reinstating the joint venture in circumstances when the venture had originally been Depot’s alone and where any offer back would occur if Mintago were to abandon the project. The “offer back” was accordingly for applications and permits, interests in land and technical information that Depot had held for the joint venture and transferred to Mintago. The applications and permits could be identified from the proposed schedule, as could the interests in land. The “offer back” would not involve reinstatement of the joint venture. That removes the uncertainty in paragraph [69] above.
[98] The offer back would not operate if Mintago withdrew or did not exercise the option. There was already separate provision for that in the draft, cl 8 and 9. It would therefore come into play only if Mintago exercised the option. In that event it was foreseeable that Mintago would further develop the assets it would take under the option: completing applications under the Crown Minerals Act, obtaining rights in land that were under negotiation and building up more technical information. Those would have been part of the joint venture if Mintago did not exercise the option and as such are mining assets under the “offer back”. Mintago is protected. Under its right of first refusal, Depot has to pay market value for the assets as at the time of offer. Mr Bunting’s evidence is clear on the need to pay market value. In short there is enough substance and detail for rectification.
Do the words in cl 10.4 speak for themselves?
[99] The liquidators say that clause 10.4 deals only with the parties’ “interest in this agreement”, not with other interests in land, licences or other assets. That is correct as a matter of interpretation but it is not a reason to refuse rectification. For rectification, a plaintiff says that the words of the document do not correspond with what the parties intended it should say. There is therefore an enquiry whether the words match what the parties intended. If it is shown that the common intention and the text of the document do not correspond, it is fallacious to say the text cannot be rectified because it says what it says. To elaborate, it is necessary to distinguish between “presumed intention”, as used in contract formation and interpretation, and “actual intention”, as used in rectification. Interpretation of a contract involves ascertaining what the document would convey to a reasonable person with all background knowledge. The intentions of the parties expressed in the document are ascertained objectively. The parties’ subjective intentions as to what they meant do not count. And in contract formation the parties’ intentions are found objectively by reference to their conduct instead of their beliefs.52 That is a “presumed intention”. On the other hand, in rectification the parties’ own intentions as to what the contract should say do count. Those are actual intentions. In rectification you need to keep in mind the difference between presumed and actual intentions.53
Does the entire agreement clause bar a rectification claim?
[100] The liquidators rely on this entire agreement clause to say that Depot cannot seek rectification:
Subject to the terms of this Agreement this document embodies the entire understanding and agreement between the Parties to this Agreement as to the subject matter of this document. Subject to the terms of this Agreement all previous negotiations, understandings, representations, warranties, memoranda or commitments in relation to, in any way affecting, the subject matter of this document are merged in and superseded by this document and shall be of no force or effect whatever and no Party to this Agreement shall be
52 Smith v Hughes (1871) LR 6 QB 597 (DC) at 606, 607
liable to any other Party to this Agreement in respect of those matters. No oral explanation or information provided by any Party to this Agreement to another shall affect the meaning or interpretation of this document or constitute any collateral agreement, warranty or understanding between any of the Parties to this Agreement.
This is cl 12 in the option agreement. It was cl 13 in the drafts. Its terms were consistent throughout. There is no evidence that either party discussed it or sought amendments. While the liquidators did not develop their submission, it may involve two propositions:
[101] On the question whether it is possible to contract out of the equitable remedy or to be estopped, Lord Maugham gave a useful lead-in in Greer v Kettle:54
Estoppel by deed is a rule of evidence founded on the principle that a solemn and unambiguous statement or engagement in a deed must be taken as binding between parties and privies and therefore as not admitting any contradictory proof. It is important to observe that this is a rule of common law, though it may be noted that an exception arises when the deed is fraudulent or illegal. The position in equity is and was always different in this respect, that where there are proper grounds for rectifying a deed, e.g., because it is based upon a common mistake of fact, then to the extent of the rectification there can plainly be no estoppel based on the original form of the instrument.
English courts have dealt with entire agreement clauses in rectification claims.55 This passage from “Equitable Remedies” has been influential:56
Where a document contains a provision which states that the document sets out the entire agreement of the parties or which otherwise expressly negates
54 Greer v Kettle [1938] AC 156 (HL) at 171.
55 JJ Huber (Investments) Ltd v The Private DIY Co Ltd [1995] NPC 102, Phillips Petroleum Co UK Ltd v Snamprogetti Ltd [2001] EWCA Civ 889 (2001) 79 Con LR 80 at [32], Surgicraft Ltd v Paradigm Biodevices Inc [2010] EWHC 1291 (Ch) at [70]-[76], Proctor & Gamble Co v Svenska Cellulosa Aktiebolaget SCA [2012] EWHC 498 (Ch) at [99]- [109] and DS-Rendite Fonds Nr 106 VLCC Titan Glory GmbH & Co Tankschiff KG v Titan Maritime SA [2013] EWHC 3492 (Comm) at [48].
56 Equitable Remedies, 9th ed, ICF Spry, 636.
the existence of terms not set out in it, that provision does not exclude rectification if rectification is appropriate under general equitable principles. However it may affect the actual operation of those principles because, for example, it may tend to show that in fact no inconsistent governing intention has subsisted, and that hence no basis for rectification has arisen, because the parties have intended to be bound by the document in the material respects regardless of prior or other intentions.
The general approach in England is that an entire agreement clause is not a bar to rectification. It defines where to find the terms by which the parties agreed to be bound. Rectification does not seek to find contractual terms outside the document but instead to ensure that the document says what it was supposed to say. Depending on the facts, it may be relevant in deciding whether a common intention was intended to be given effect by the final contract.
[102] In rejecting a defence based on an entire agreement clause, the Queensland Court of Appeal has held that rectification operates outside the contract and despite the parol evidence rule.57
[103] In the light of these authorities the entire agreement clause cannot effectively exclude Depot’s rectification claim absolutely but may be a factor in deciding whether Depot and Mintago continued to have their mistaken common intention when they signed the agreement. In this case the clause was there from the first draft. There is nothing to suggest that the parties gave it any attention. Their mistaken common intention arose after Mintago’s lawyer sent the second draft, which set out cl 10.4 for the first time. That is different from the entire agreement clause being inserted at the end. That would suggest that the parties had agreed then that the document did record what they had agreed and any common intention that clause 10.4 applied to mining assets was no longer operative. Because the clause was there from the outset, that inference cannot be drawn. The clause is neutral. It does not bar the rectification claim.
57 Macdonald v Shinko Australia Pty Ltd [1998] QCA 53, [1998] Qd R 152.
A mistake about the interpretation of the agreement?
[104] The liquidators say that Depot has misunderstood the legal effect of clause 10.4 and such a mistake does not give grounds to rectify an agreement. They refer to the Court of Appeal’s decision in Davey v Baker:58
It is suggested that a mistake in the interpretation of an instrument or in the legal consequences of entering into an instrument is regarded as insufficient to ground rectification; rectification is a remedy to ensure the instrument contains the provisions which the parties intended it to contain, and not those which it would have contained had the parties been better informed. The remedy of rectification is strictly limited to a clearly established disparity between the words of the document and the intentions of the parties.
[105] It is necessary to identify the mistake in this case. Mr Batt and Mr Bunting intended that the option agreement should give Depot a right of first refusal if Mintago disposed of Earnscleugh mining assets. They believed that it did, but that was a mistake. In Re Butlin’s Settlement Trusts Brightman J held that such a mistake could be rectified by changing the document to what was intended:59
Furthermore, rectification is available not only in a case where particular words have been added, omitted or wrongly written as the result of careless copying or the like. It is also available where the words of the document were purposely used but it was mistakenly considered that they bore a different meaning from their correct meaning as a matter of true construction. In such a case, which is the present case, the court will rectify the wording of the document so that it expresses the true intention.
(Citations omitted)
[106] There is no inconsistency between what the Court of Appeal said in Davey v Baker and Brightman J’s dictum in Re Butlin’s Settlement Trusts. They deal with different mistakes, although the difference may be hard to discern. In the first there is no mismatch between what the parties intended and what the agreement says, but only a failure to appreciate the consequences of the words used. In the second, their
58 Davey v Baker [2016] NZCA 313, [2016] 3 NZLR 776 at [40].
59 Re Butlin’s Settlement Trusts [1976] Ch 251 at 260-1. Approved by Lord Hoffmann in Chartbrook Ltd v Persimmon Ltd [2009] UKHL 38; [2009] AC 1101 (HL) at [46] and extensively applied, including Swainland Buildiers Ltd v Freehold Properties Ltd [2012] EWCA Civ 560, [2002] 2 EGLR 71 at [34], Co- operative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 at 56, AMP (UK) Plc v Barker [2000] EWHC (Ch), [2001] PLR 77 at [69]-[71], T & N Ltd v Royal & Sun Alliance plc [2003] EWHC 1016 (Ch0, [2003] 2 All ER (Comm) 939 at [136], Ahmad v Secret Garden (Cheshire) Ltd [2013] EWCA Civ 1005, [2013] 2 EGLR 42 at [27].
intentions and the text of the document do not correspond although the parties wrongly believe them to do so. Rectification is not available for the first mistake but is for the second. In Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd, McLelland A- JA described the difference this way:60
In general, the remedy of rectification of an instrument is available where it is established by clear and convincing proof that at the time of execution of the instrument the relevant party or parties as the case may be had an actual intention (if more than one, a common intention) as to the effect which the instrument would have which was inconsistent with the effect which the instrument as executed did have in some clearly identified way. In this context “effect” means the legal and factual operation of the instrument according to its true construction, but does not include legal or factual consequences of the operation of the instrument of a more remote, or collateral, kind (for example, its liability to stamp duty).
[107] Here the mistake is within Brightman J’s dictum. Mr Bunting and Mr Batt wanted a provision for an offer back of the mining assets. Having received a draft from the lawyer with a new provision for a right of first refusal they believed that cl
10.4 meant what they wanted. Such a mistake can be rectified.
Is cl 10.4 consistent with what Depot sought?
[108] The liquidators submit that cl 10.4 is consistent with what Depot sought. They characterise the request in the letter of 21 July 1994 as for a right of first refusal, which is what the clause provides. They refer to the restrictions on assignment by Mintago in cl 10 of the first draft, Mintago’s right of first refusal if Depot wished to assign its rights as payee under cl 11 and say that the absence of any right of first refusal in that first draft was changed by adding cl 10.4. That misses the point that Depot wanted an offer back, an opportunity to buy back mining assets, and the signed option did not provide that. It is not consistent with what Depot asked for.
Can Mr Batt’s evidence be accepted?
[109] It is understandable that the liquidators focus on Mr Batt’s reliability. He was Mintago’s director but is now in the Depot camp. He is a friend of Mr Bunting and
has worked for Depot. He has turned against Mintago, the company he once worked for. They say that his credibility is suspect because of his later conduct when Perilya sold Mintago’s holding company. On 10 August 1998 Mr Batt sent Mr Manhire a letter with an information memorandum as to the Earnscleugh gold project. Mr Batt’s letter advised that March had pre-emptive rights over Perilya’s interest in the project, but he did not say anything about Depot having equivalent rights. The information memorandum said that Mintago had bought the balance of Depot’s interest in the joint venture through the option agreement and that Depot had a continuing royalty right, but said nothing about a pre-emptive right in mining assets.61 Given Mr Batt’s failure to mention any right of pre-emption in 1998, his statements as to those rights in 2016 must be unreliable.
[110] Mr Manhire’s affidavit also notes that in the agreement of 8 September 1999 Perilya gave a warranty that to the best of its knowledge, information and belief all documents provided to L&M are materially correct and contain no false or misleading statements. Mr Manhire considers that if Depot’s claim is valid, then Perilya breached that warranty but any claim would be statute-barred. He also refers to correspondence with Perilya in which L&M was advised of the royalty right but that all amounts owed to Depot under the option agreement had been satisfied. The 1999 correspondence is not relevant to the present matter, Mr Batt’s reliability. The correspondence was with Perilya, not Mr Batt, who had finished as Mintago’s director in 1998.
[111] While Mr Batt’s conduct in 1998 is inconsistent with what he says as to the negotiations in 1994, that does not mean that his evidence must be rejected. I consider it in context. After receiving the first draft of the option agreement Mr Bunting wrote to Batt on 21 July 1994 with proposed amendments, including the “offer back”. In response, a new draft was prepared, this time with cl 10.4. Clearly Mr Batt must have understood something. Mintago would not have instructed its lawyer to include a provision such as cl 10.4, if it had no understanding of what Mr Bunting wanted. Mr Batt’s explanation of his understanding is that the offer back was to give Depot the opportunity to take up the mining assets if Mintago disposed of them. Now consider what else Mr Batt might have thought in 1994. Suppose that he understood what
61 Pages 11 and 31 of memorandum.
Mr Bunting wanted but decided that Depot should not have it. Cynically he instructed Mintago’s lawyer to put a clause in the agreement which might look as if it gave pre- emptive rights for mining assets but did not have that effect. That would be a matter of unilateral mistake (for which rectification is doubtful in New Zealand). That is implausible. If he considered that Depot should not have pre-emptive rights, Mr Batt would have told Mr Bunting as much. There is nothing in the case to suggest that he would be duplicitous. Since Mr Batt did understand something, I am not sure what else he might have understood by Mr Bunting’s email.
[112] There is the liquidators’ point that Mr Batt did not refer to his understanding when dealing with the L&M Group in 1998. Mr Batt says that the purpose of the information memorandum was to summarise Mintago’s title and to give enough information for an interested party to decide whether it wished to go ahead with due diligence. He would expect L&M to raise the question of cl 10.4 in any due diligence. He believes that he probably overlooked the clause or believed that Depot did not intend to exercise any pre-emption rights. The liquidators criticise his response as unsatisfactory. I accept their point that any rights of pre-emption are important enough to require mention at the introductory stage, even before due diligence. They are a fetter on Mintago’s ability to dispose of the mining assets and do not appear on any title record. One explanation for Mr Batt’s failure to refer to any pre-emption rights under cl 10.4 is that he did not believe that they related to disposal of mining assets. No doubt the liquidators would prefer that explanation as counting against Mr Batt’s stated understanding in 1994. But there are other potential explanations: he did not appreciate the importance of those rights or he overlooked them. These are at least as plausible as that preferred by the liquidators and do not count against his account of his intention in 1994. On balance, it is more likely that Mr Batt did understand in July 1994 that Depot did seek pre-emption rights for mining assets, but that had slipped his mind in 1998, unfortunate as that was for the L&M Group.
Laches
[113] The liquidators say that rectification should not be ordered because of laches, a discretionary ground for denying relief.62 Mere delay is not without more ground to deny relief, as the Supreme Court recognised in Eastern Services Ltd v No 68 Ltd63 (26 years) and the House of Lords in Fisher v Brooker64 (38 years). Rectification was ordered many years after the original transaction in these cases: M’Cormack v M’Cormack (36 years)65, Johnson v Bragge66 (35 years), Re Butlin’s Settlement Trusts67 (26 years), Gallaher Ltd v Gallaher Pensions Ltd68 (17 years).
[114] In Erlanger v New Sombrero Phosphate Co69 Lord Blackburn said:
In Lindsay Petroleum Company v. Hurd70, it is said: “The doctrine of laches in Courts of Equity is not an arbitrary or a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has, by his conduct done that which might fairly be regarded as equivalent to a waiver of it, or where, by his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases lapse of time and delay are most material. But in every case if an argument against relief, which otherwise would be just, is founded upon mere delay, that delay of course not amounting to a bar by any statute of limitations, the validity of that defence must be tried upon principles substantially equitable. Two circumstances always important in such cases are the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy.” I have looked in vain for any authority which gives a more distinct and definite rule than this; and I think, from the nature of the inquiry, it must always be a question of more or less, depending on the degree of diligence which might reasonably be required, and the degree of change, which has occurred, whether the balance of justice or injustice is in favour of granting the remedy or withholding it. The determination of such a question must largely depend on the turn of mind of those who have to decide, and must therefore be subject to uncertainty; but that, I think, is inherent in the nature of the inquiry.
62 The discretionary ground is saved under the Limitation Act 2010, s 8.
63 Eastern Services Ltd v No 68 Ltd [2006] NZSC 42, [2006] 3 NZLR 335.
64 Fisher v Brooker [2009] UKHL 41, [2009] 1 WLR 1764.
65 M’Cormack v M’Cormack (1877) 1 LR Ir 119,
66 Johnson v Bragge [1901] 1 Ch 28.
67 Re Butlin’s Settlement Trusts [1976] Ch 251.
68 Gallaher Ltd v Gallaher Pensions Ltd [2005] EWHC 42 (Ch), [2005] PLR 103.
69 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1279-80.
70 Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221, 229
[115] These more recent decisions give useful guidance. In T & N Ltd v Royal & Sun Alliance Plc, Lawrence Collins J said:71
If the party seeking equitable relief has not been reasonably diligent in seeking it, and in consequence the position of the other party has been prejudiced or it would not be unjust or unreasonable to grant the relief, the party seeking it will be debarred from pursuing his remedy on the ground of laches. What amounts to reasonable diligence and what circumstances will render it inequitable to grant the relief will vary with the type of relief sought and the facts of the particular case...But for the purposes of laches time runs only from notice of the error...
(Citations omitted)
In Frawley v Neill Aldous LJ said:72
In my view the more modern approach should not require an inquiry as to whether the circumstances can be fitted within the confines of a preconceived formula derived from earlier cases. The inquiry should require a broad approach, directed to ascertaining whether it would in all the circumstances be unconscionable for a party to be permitted to assert his beneficial right. No doubt the circumstances which give rise to a particular right in the decided cases are relevant to the question whether or not it would be conscionable or unconscionable for the relief to be asserted, but each case has to be decided on its facts applying the broad approach.
In Fisher v Brooker Lord Neuburger commented:73
Although I would not suggest that it is an immutable requirement, some sort of detrimental reliance is usually an essential ingredient of laches, in my opinion.
[116] Beale v Kyte is authority that in cases of mistake time runs from notice of the error:74
...in all cases of mistake in order that laches or acquiescence may be a defence there must be notice of the error, and time runs from the date of the notice and not from the time when the error is committed.
[117] In Misner v Australian Capital Territory Crispin J noted the need for a cautious approach when denying rectification on discretionary equitable principles:75
71 T & N Ltd v Royal & Sun Alliance Plc [2003] EWHC (Ch)[2003] EWHC 1016; , [2003] 2 All ER (Comm) 939 at [140].
73 Fisher v Brooker [2009] UKHL 41, [2009] 1 WLR 1764 at [64].
74 Beale v Kyte [1907] 1 Ch 564, 566.
75 Misner v Australian Capital Territory [2001] ACTSC 8; (2000) 147 ACTR 1 at [20].
It is true that rectification is an equitable remedy subject to the discretion of the court which must, of course, be exercised according to general equitable principles...However, the discretion must commonly be exercised in a somewhat different context from those that attend other equitable remedies, such as specific performance because damages or other forms of alternative relief are not normally available if rectification is refused. As a result a plaintiff may suffer significant hardship. Accordingly, it has been said that when the right to rectification has been established, relief will be refused on discretionary grounds only in exceptional cases.
[118] As the party alleging laches the liquidators have the burden of establishing the defence.76 They say that laches can be found because of these matters:
(a) L&M Group acquired Mintago from Perilya without notice of any rectification claim;
(b) L&M Group has not and cannot sue Perilya or Mr Batt for any breach of warranty arising from non-disclosure of a rectification claim;
(c) In 1999 and 2001 Mintago entered into joint venture agreements with March without notice of any rectification claim;
(d) In assessing the financial viability of operational mining and deciding to proceed, Mintago acted on the basis that Depot did not have any rights of first refusal in the mining permits or other mining assets;
(e) Mintago mined for gold on the basis that it had been advised of all of Depot’s claims. It took legal advice which confirmed that Depot did not have a right of first refusal for mining assets. It told Depot its position;
(f) When it finished, mining Mintago sold its assets and surrendered its permits believing that there was no rectification claim;
(g) Mintago was in solvent liquidation: Mr Loudon had resolved that Mintago would be able to pay its debts;
76 Neylon v Dickens [1987] NZCA 55; [1987] 1 NZLR 402 (CA) at 407.
(h) Depot did not raise rectification in its claim lodged with the liquidators.
[119] The liquidators rely in part on prejudice to the L&M Group generally, but that is not relevant. Depot’s agreement was with Mintago, not other companies in the group. For laches the inquiry is how Depot dealt with Mintago, not other L&M companies. The change in the shareholding in Mintago’s holding company does not affect that. The only relevant prejudice is Mintago’s. The L&M Group took control of Mintago through a share purchase. It acquired the company subject to all its liabilities - actual, prospective or contingent, known or unknown. That includes any liabilities arising on rectification of an agreement. While it clearly carried out due diligence, it was subject to the risk of Mintago being found to have undisclosed liabilities. For Depot the change of control in Mintago meant that there was a change in personnel it dealt with. Changes of personnel may lead to difficulties if new people are not aware of understandings or arrangements made by their predecessors. That is a practical difficulty but no more than that.
[120] The strongest point for the liquidators is that Mintago took legal advice about cl 10.4; it told Depot that the clause did not require it to give Depot a right of first refusal for mining assets; Depot did not take any proceeding to have its interpretation of cl 10.4 upheld; and Mintago sold the assets without knowing that its failure to offer them to Depot would put it in breach of a rectified contract. If Depot had sued for rectification earlier, it could have avoided breaking the rectified contract.
[121] The correspondence between Depot and Mintago shows that Mr Bunting raised the right of first refusal when he became aware that it may be in issue. Depot maintained that it had a right of first refusal for mining assets and never relented from that. Mintago for its part took legal advice and rejected Depot’s claim. There was a stand-off.
[122] Depot raised the matter for the first time in early 2005. In March Mr Manhire emailed Mr Bunting that Crown Minerals had been advised that L&M would not be proceeding with the Earnscleugh project. Mr Bunting, in Panama and without the
agreement to hand,77 replied asking whether there was a clause “that they go back to Depot for one dollar if they are not advanced?” Mr Manhire answered that Mintago was unaware of it and asked Mr Bunting to refer to it. In July, there were emails between Mr Hogan and Mr Bunting, now in Tonga. Mr Hogan confirmed that the mining project would be abandoned and that Mintago could see no basis for Depot to reacquire the permits, which would be surrendered. Mr Bunting, wanting to keep the project alive, asked to consider a commercial resolution. While a confidentiality agreement was signed for information to be disclose, nothing came of it. Nor did Mintago surrender its mining permits.
[123] There was fresh correspondence in 2009. Mr Bunting found out from reports in the news media that the L&M Group was to begin mining. Mintago did not tell him. He contacted Mintago asking for information. Mr Hogan asked for a copy of the option agreement, which he supplied. Mintago denied that “commercial mining operations” under the agreement had started. Depot instructed lawyers, the firm that had acted for Mintago on the option agreement, and Mintago’s new lawyers replied. The lawyers’ letters made passing reference to cl 10, but any right of first refusal for mining assets was not in issue.
[124] On 24 September 2009 Depot wrote to Mr Hogan with questions as to Depot’s royalty interest in the Earnscleugh project and included:
3 Has there been any disposal of Mintago’s interests?
Any disposal (sale, assignment or relinquishment) whole or part of Mintago’s interests, (Permits and land purchased for the purpose of mining) are protected by pre-emptive clause 10.
For example, it is apparent that the northern part of 31-2390 is not included in 41462, an area containing gold resources that Mintago under Perilya delineated for a possible follow on stage 2 mining operation.
Mr Hogan replied on 16 October 2009 stating that mining under the option agreement had not started and no royalty payments were due. He added:
77 Although this was not in evidence, Mr Bunting was on a voyage on his yacht from March 2004 to August 2005 from the Mediterranean, across the Atlantic and Pacific to New Zealand. See www.starofthewest.co.nz. His circumnavigation had started some years before.
I should point out for future reference that you are entirely misreading clause
10. Clause 10 refers to assignment of a party’s interest in the Option Agreement; it is clause 3.1(5)(b) which is relevant if an interest in the Joint Venture that existed between Depot and Mintago (which has ceased), or in the Permits, is assigned (either Mintago maintains the royalty obligation or is released if the assignee assumes it).
As we have said to you separately, Mintago is well aware of its obligations to Depot, and of the clause 10 restrictions on assignment of the Option Agreement. It will honour them as and when they arise.
We do not wish to spend more time on this but will be in touch if and when mining commences in the “Permits” areas as defined in the 1994 Option Agreement.
[125] In an email reply of 28 October on this and other matters, Mr Bunting said:
Depot considers your interpretation of clause 10 understated. The agreement originally provided the royalty assignment in clause 3.1 but clause 10 was later added as further protection and the clauses cannot be considered alone. The intent and full development of the agreement through the drafts are still on our files. The agreement is still in force and cannot be unilaterally assigned, sold, disposed or terminated without either party approval and this includes all interests as defined having to remain intact unless otherwise prior agreed. I am awaiting legal input to further clarify this for you and this will be addressed to you directly. I presume you have not addressed the question if the contractual mining operations involve tribute or gold sharing arrangements because of your interpretation of clause 3.1(5)(b) without clause 10. Likewise you have not addressed whether disposal of interests has already occurred. Please note, that as Depot disagrees with your interpretation of clause 10, (subject to Legal advice and without prejudice with respect to clause 10 and any disposal that may have already occurred), Depot registers its interest in the event that Mintago decide to dispose of their interests in the Agreement which include permits or land subject to the permits. Depot reserves the right to take appropriate action in the event that Mintago disposes of those interests without offering them to Depot. By virtue of clause 10, Depot would also like to register its interest in acquiring Mintago if that is an avenue that L&M decide to dispose of its interests.
(Emphasis added)
[126] Mr Hogan took legal advice and responded on 14 November reaffirming Mintago’s position on cl 10 and other matters and stating its intention to comply with the option agreement. The tone of the email suggests that it found Mr Bunting irksome.
[127] On 21 December 2009 Depot’s lawyer, who had drafted the option agreement, wrote to Mintago’s lawyers:
I have been asked to consider the point, raised in Mintago’s 16 October and 14 November letters, that clause 10 of the 1 September 1994 agreement regulates just an assignment of the option itself and not the “interests” the subject of the option. I presume your client, as a corollary, is arguing that since it has exercised the option conferred by the agreement clause 10 is of no further effect.
With respect I cannot see how this argument can be right. The 1994 Agreement does more than simply confer the option for Mintago to acquire the Depot interests...
(the letter set out further argument as to interpreting the agreement)
I have advised Mr Bunting there is no merit in us continuing to correspond on this matter. Our views differ and the point for the moment is academic given your assurance Mintago has not assigned, sold or disposed of the interests acquired. But the point will not be academic if Mintago has already decided (contrary to your advice) or decides upon a sale, assignment or disposal (in whole or in part). Depot reserves all rights as far as this question is concerned.
[128] Mintago began mining in 2010 and advised Depot. The liquidators have included in their evidence an opinion of March 2010 by Mintago’s lawyers supporting the interpretation contended for in this case.
[129] By 2013 Depot had instructed another solicitor. On 27 August 2013 he wrote to Mintago regarding resolution of differences that had arisen. As well as royalty payments and other matters, he noted that a key issue for Depot was “Retention of Depot’s contractual pre-emption rights”. On 19 April 2014 Mr Bunting emailed Mr Loudon about anomalies in royalty payments and added:
Pre-emptive rights
Our stance, backed by records, regarding these rights is at loggerheads with Greg’s view. (Mr Hogan) The clause is not onerous on either party; it would be good to be able to agree on this to eliminate any conflict should it arise from holding differing viewpoints into the future.
(Emphasis added)
[130] To repeat, Mintago wound up its Earnscleugh mining operation in 2015, surrendered its permits and disposed of its other mining assets without informing Depot or offering it the opportunity to buy them. Depot did not find out until afterwards.
[131] When considering Depot’s claim the liquidators obtained an opinion from one of the lawyers who had acted for Mintago before liquidation. She said among other things:
The Mintago stance has been to squarely reject the allegations, leave it to Depot to initiate proceedings if it is serious, and make its case clear. No formal claim or proceedings have ever been forthcoming. Months or years of silence are occasionally interrupted by another letter advancing the same unsubstantiated claims.
[132] Under Beale v Kyte, time does not run against Depot until it is aware of the mistake that cl 10.4 does not mean what Mr Bunting and Mr Batt thought it did. Depot’s position has been cl 10.4 means that it has a right of first refusal on Mintago’s disposal of mining assets. Depot asserted that in correspondence with Mintago and in this proceeding. Rectification was run as second string argument. This was not an obvious mistake as when words are omitted or the subject matter is misdescribed (e.g. wrong measurements, wrong property identification or description). Errors in meaning of the sort identified by Brightman J in Re Butlin’s Settlement Trusts are harder to detect.
[133] The correspondence in 2005 is not enough to fix Mr Bunting with notice of the error in drafting the option agreement. He did not have the agreement while at sea. On the other hand, in his email of 28 October 2009 Mr Bunting supported his argument with references to the drafting history of the agreement. Mr Bunting as a layman cannot be expected to know that drafting history has limited if any relevance in construing an agreement but is of key importance in a rectification claim. All the same his email shows that he understood that for Depot to pursue its claim that it had a right of first refusal of mining assets it would have to refer to other documents and the negotiations before the agreement. That is enough to be notice of the error. For laches time ran from the fourth quarter of 2009. Events earlier than that do not count against Depot.
[134] In December 2009 Depot’s lawyer advised Mr Bunting that at that stage the point was academic because Mintago had advised that it had not disposed of mining assets. It would not be academic if Mintago did decide on disposal. The lawyer’s letter to Mintago reserved Depot’s rights. The decision not to sue then needs to be
assessed against the alternative – taking a proceeding to obtain a declaration as to the interpretation of the agreement and also applying for rectification. It has been said that a court of equity will not make an order in vain,78 but it is unlikely that in 2009- 2010 the court would have considered that a proceeding for rectification of the option agreement moot or academic. There was an unresolved dispute as to the effect of cl
10.4. While it was not a pressing matter, it would need to be resolved sooner or later, but before Mintago began disposing of any mining assets. Depot could not count on resolving the matter in time unless Mintago told it that it was winding down its mining operation. Mr Bunting should have worked out that he could not count on Mintago telling him. It was not going out of its way to help Depot, as he knew from his experiences in obtaining royalty payments. While Depot’s decision not to sue then counts against it, it asserted its rights in its lawyer’s letter of 27 August 2013 and Mr Bunting’s letter of 19 April 2014. Depot took a risk in not seeking a declaration as to the meaning of the agreement or an order for rectification in anticipation of any disposal of mining assets.
[135] For its part, Mintago intended to comply with its obligations under the option agreement but no more than that. Having received legal advice, it did not believe that cl 10.4 gave Depot the rights it was claiming. At the same time it kept its cards close to its chest. It did not tell Depot about its plans to stop mining and dispose of its assets, even though it knew that Depot would require it to offer its mining assets to it under the option agreement. It knew that Depot would rely on the history of the negotiations and the exchange of drafts, but it did not take that seriously. It did not ask for copies and did not obtain legal advice about it. Mintago also took a chance in disposing of its assets without telling Depot.
[136] The liquidators say that mining has special considerations which count against those who delay in seeking equitable relief. They cite Lord Chelmsford LC in Clarke v Hart:79
The case of mines has always been considered by a court of equity to be a peculiar one. The property is of a very precarious description, fluctuating continually, sudden emergencies arising which require an instant supply of capital, and in which the faithful performance of engagements is absolutely
78 New Brunswick Railway v Muggeridge [1859] EngR 80; (1859) 4 Drew 686, 699.
79 Clarke v Hart [1858] EngR 475; (1858) 6 HLC 633, 656.
necessary for the prosperity and even the existence of the concern. And, therefore, where parties under these circumstances stand by and watch the progress of the adventure, to see whether it is prosperous or the contrary, determining that they will intervene only in case the affairs of the mine should turn out prosperous, but determining to hold off if a different state of things should exist, courts of equity have said that those are parties who are to receive no encouragement; that if they come to the Court for relief, its doors will be closed to them; that their conduct being inequitable, they have no right to equitable relief.
And the United States Supreme Court in Patterson v Hewitt:80
There is no class of property more subject to sudden and violent fluctuations of value than mining lands. A location which today may have no saleable value may in a month become worth its millions. Years may be spent in working such property, apparently to no purpose, when suddenly a mass of rich ore may be discovered from which an immense fortune is realised. Under such circumstances, persons having claims to such property are bound to the utmost diligence in enforcing them, and there is no class of cases in which the doctrine of laches has been more relentlessly enforced.
Although the liquidators did not cite it, Lord Hatherley made much the same point in
Erlanger v New Sombrero Phosphate Co:81
No doubt the case of a mine is one which we must look into with very great accuracy; and if once we saw the slightest appearance of mala fides, if we saw the slightest indication of wavering and indecision as to whether or not the remedy should be taken until they saw how the thing would turn out, that might be a very different matter.
[137] Putting aside the fact that more recent history has shown far more volatile lines of business than mining, these cases do not help the liquidators. The cases concern investors (shareholders, joint venturers, partners, trust beneficiaries) who hold off injecting capital until they know whether the venture will be profitable. In this case after the exercise of the option Mintago alone had the mining rights and other assets. It was the only investor. It could decide whether and how much to invest and whether to begin and to stop mining. Depot’s right of first refusal was only triggered on Mintago’s disposal of mining assets. The rationale in these cases does not apply here.
[138] Clarke v Hart helps Depot. There was a joint venture agreement for mining in the West Country on the “cost-book” principle, under which each partner was to
80 Patterson v Hewitt [1904] USSC 185; 195 US 309 (1904) at 38
81 Erlanger v New Sombrero Phosphate Co 3 App Cas 1218 (HL) at 1254.
contribute capital. One of them did not make the required contributions. The other two purported to forfeit his share, although they had no right to do so. While the plaintiff appeared not to contest that in one letter, in another he asserted his rights. He succeeded. Lord Chelmsford said:82
So far from there having been any acquiescence, or from there having been anything like waiver or abandonment of his right, that right has been invariably insisted upon...
[139] It is a matter of finding whether Mintago has an equity which outweighs Depot’s right.83 Both sides can be criticised. Depot could have done more than write warning letters. Mintago took a chance in selling its assets without telling Depot. It did not take the warning letters seriously enough. But it is hard to say that Depot has been sleeping on its rights when it has asserted them and has remained alert to any disposal of mining assets. Mintago disregarded Depot, because it did not take it seriously, not because of a failure of Depot to assert its rights. The balance of equities is not on Mintago’s side. The laches defence fails.
[140] The events after the disposal of assets do not change that position. There is no information as to what assets, if any, may be available to Depot under the liquidation. It may be that Depot might have received more if it had sued before Mintago went into liquidation. If so, the failure to sue before liquidation has its own detriment, but that is not a reason to deny rectification.
Summary on rectification
[141] Under ordinary interpretation principles cl 10.4 has little, if any, practical or commercial effect. The context suggests that something more was intended, but it is uncertain what that something more should be, while evidence of negotiations is excluded. Once that evidence is considered, as it may be in a rectification claim, the matter is clearer. The offer back sought by Depot was to give it the opportunity to acquire the interests in land, mining permits and technical knowledge that it had held for the joint venture and had transferred to Mintago, if Mintago were to dispose of them. Mr Batt understood that and instructed Mintago’s lawyer to provide for it in the
82 At 659-660. See also Lord Cranworth at 666, Lord Wensleydale at 670-671.
83 Eastern Services Ltd v No 68 Ltd [2006] NZSC 42, [2006] 3 NZLR 335 at [13].
joint venture agreement. Both Depot and Mintago mistakenly believed that cl 10.4 had that effect and continued to do so until the option agreement was signed. Another drafting change supports this. In the first draft under cl 10.1 Mintago could not dispose or encumber without Depot’s consent (not to be withheld unreasonably). Under the signed agreement, Depot’s power to vet an assignee had been removed from cl 10.1. Clause 10.4 took its place. Depot had a right of first refusal instead of a right to vet. These make more sense when they are seen as applying to mining assets, not contractual rights. None of the matters raised by the liquidators prevent rectification being ordered. The test for rectification is a stiff one, especially where a lawyer has drawn the agreement. In my judgment, it is plain that cl 10.4 does not do what the parties intended it to do. There is a clear case for rectification.
[142] Depot has not however stated how the agreement should be rectified. It should do so now. I propose these specifications:
(a) The agreement is to provide a right of first refusal in favour of Depot;
(b) The trigger for the offer to Depot is whenever Mintago wishes to dispose of its interests in mining assets as described in paragraph [97];
(c) The offer is to be for a fixed period, such as the thirty days in cl 10.4;
(d) Depot is to be able to offer to pay fair market value. “Cash price equal to the highest cash offer obtainable by Mintago from a bona fide third party buyer” or similar terms may be used;
(e) Elaborate machinery provisions are not required, but the agreement is to be workable;
(f) The provision is to apply independently of other terms in the agreement. Overriding words such as “notwithstanding” may be used;
(g) The provision should be drawn as it should have been in 1994 without regard to later events or changes in the law.84
[143] Depot is to submit its proposed rectification to the liquidators for comment. If the parties agree, a joint memorandum should be filed. In the absence of agreement, separate memoranda are to be filed. I shall then consider what further directions are required. Rectification takes effect from when the option agreement was signed. Mintago breached the agreement as rectified by disposing of mining assets without first offering them to Depot.
Outcome
[144] I make these orders:
(a) I grant leave under s 284(1) of the Companies Act to Depot to apply to reverse the liquidators’ decision rejecting its claim;
(b) I reverse the liquidators’ rejection of Depot Corporation Ltd’s claim in the liquidation of Mintago Investments Ltd (in liq);
(c) I order rectification of the option agreement of 1 September 1994 to provide Depot with a right of first refusal of joint venture mining assets. The terms of the rectification are to be fixed after considering the parties’ memoranda under paragraphs [142] and [143];
(d) I direct the Registrar to arrange a telephone conference to give directions for a hearing to decide the amount of Depot’s claim in the liquidation. I encourage the parties to confer as to directions. If they agree, a joint memorandum may be filed;
(e) The liquidators are to pay Depot’s costs for the proceeding to date. If the parties cannot agree costs, memoranda may be filed and I shall decide costs on the papers;
84 See Ash v Singh [2017] NZHC 2909 at [22] for an example of what not to do.
(f) Leave is reserved to apply for further directions.
.....................................
Associate Judge R M Bell
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