The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 56 of 1997

 

Auag Resources Limited Appellant

v.

Waihi Mines Limited Respondent

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 23rd March 1998

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Present at the hearing:-

Lord Goff of Chieveley

Lord Lloyd of Berwick

Lord Nolan

Lord Hoffmann

Lord Hope of Craighead

  ·[Delivered by Lord Hoffmann]

 

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1. This is an appeal from a judgment of the Court of Appeal of New Zealand which set aside a judgment of the High Court (Cartwright J.) awarding $3,315,000 damages for breach of contract, together with interest and costs.  The contract in question was a Joint Venture Agreement ("JVA") dated 17th July 1987 for the exploitation of a mine at Martha Hill, Waihi.  The original parties to the agreement were four specially incorporated subsidiaries of substantial mining companies and a fifth company designated the project manager.  The JVA referred to the subsidiary parties as "participants" and their parent companies as "principals".  In 1991 there was a rearrangement of interests whereby one of the principals sold the shares in its participant to the other three principals.  In July 1993, when the events giving rise to these proceedings took place, the participants were Amax Gold Mines New Zealand Limited ("Amax NZ") of which the principal was Amax Gold Inc. ("Amax Gold"), Auag Resources  Limited  ("Auag")  of  which  the  principal was Mineral Resources Limited ("MRL"), Welcome Gold Mines Limited ("Welcome"), of which the principal was Australian Consolidated Minerals Limited ("ACM") and Martha Mining Limited ("Martha"), of which the shares were held by the three other principals. 

 

2. Clause 6.01 contained a general prohibition against the assignment by any participant of its interest in the joint venture.  But such a prohibition would have been of little effect if the principals had been free to dispose of their shareholdings in their subsidiary participants, which could have had the same economic effect as an assignment of the underlying interest in the joint venture.  Clause 6.03 therefore dealt with this type of transaction by creating a deemed offer by a participant to sell its interest in the joint venture if it ceased to be a "related company" to its principal.  The clause then went on to create machinery conferring rights of pre-emption upon the other participants.  "Related" in relation to companies was defined as involving either a direct or indirect holding or control of more than 50% of the voting share capital or relationship as defined in the Companies Act 1955.

 

3. The pre-emption machinery lies at the heart of the dispute in this appeal.  By clause 6.03(a), a participant which had ceased to be a related company to its principal was deemed to have elected to withdraw from the joint venture (sub-paragraph (ii)) and to have offered its participating interest for sale to the other participants (sub-paragraph (iii)).  Paragraphs (e) and (f) of clause 6.03 dealt with the mechanism by which the other participants were to be notified that such a deemed offer had been made:-

"(e)A Withdrawing Participant upon ceasing to be a related company of its Principal forthwith shall give notice thereof to the Other Participants and to the Project Manager.

 

(f)In the event that the Withdrawing Participant fails to give notice as required by clause 6.03(e) any Other Participant or the Project Manager being aware of the Withdrawing Participant ceasing to be a related company of its Principal forthwith shall give notice thereof to the Other Participants including the Withdrawing Participant and to the Project Manager."

 

 

4. Clause 6.03(a)(ii) provided that the deemed election to withdraw from the joint venture should take effect on the date when all the other participants had received notice of the cessation of the relationship and clause 6.03(b) gave the other participants 30 days from that date to give written notice accepting the offer, either unconditionally or conditionally upon the price being acceptable.  In the latter case, the accepting participant had 3 days from the determination of the price to give notice that its acceptance had been withdrawn.  By clause 6.05, the price was either to be agreed between the parties or determined by an expert.

 

5. In 1991 ACM, the principal of Welcome, had been acquired by Normandy Poseidon Limited ("NPL").  This transaction did not trigger the pre-emption machinery under clause 6.03 because the relationship between Welcome and ACM remained undisturbed.  In 1993, however, Amax Gold agreed to sell its entire interest in the joint venture to NPL for $25 million.  This was the economic effect of the transaction and Amax Gold made an appropriate notification to the Stock Exchange.  But the legal form of the transaction, contained in a series of documents executed on 4th June 1993, was elaborately designed to leave Amax Gold holding all the voting shares in Amax NZ and so, it was claimed, to leave Amax Gold and Amax NZ as related companies.  The effect of the surrounding terms of the transaction (in particular, the use of preference shares with special rights which were issued to a subsidiary of NPL) was such as to deprive the voting shares of all power and value.

 

6. Consistently with its view that no cessation of relationship had occurred, Amax NZ gave no notice under clause 6.03(e).  Auag, although it had not at that stage seen the documents by which the sale had been carried out, decided on the basis of the Stock Exchange announcement that there had been a cessation and gave notice under paragraph (f) to Amax NZ and the other participants three days later.  It then gave notice of conditional acceptance, as did Welcome and Martha, although the latter two, being in the NPL camp, did so without prejudice to their view that no cessation had occurred.  There was no agreement on price and the procedure for valuation by an expert was put in motion.  A good deal of delay then occurred, partly because Amax NZ successfully challenged the appointment of the first expert and partly on account of litigation on procedural  issues.   The  second  expert  did  not  give his valuation (as of 4th June 1993) until 23rd August 1995.  By that time Auag no longer wanted to buy.  It gave notice that the price was not acceptable and its acceptance thereupon lapsed.  The result was that PSL was left in possession of the field.

 

7. In these proceedings, Auag claims damages against Amax NZ for breach of contract.  The principal breach relied upon is failure to give notice under clause 6.03(e).  Amax NZ is also alleged to have been in breach of clause 2.07(b), by which each party to the JVA covenants with the others "to be just and faithful in all its activities and dealings with other Participants with respect to the Joint Venture ...".  The breaches of this covenant alleged in the pleadings are (1) failure to disclose the negotiations which led up to the sale of Amax Gold's interest on 4th June 1993 (2) failure to give a notice under clause 6.03(e) and (3) incorrectly claiming and continuing incorrectly to claim that the transaction was not a cessation of the relationship.

 

8. Cartwright J. held that there had been a breach of clause 6.03(e) and made no finding on the other alleged breaches.  She said that if such a notice had been given, it must be assumed that there would not have been two years of litigation which had "distorted the transaction".  It was "necessary to assume that [Amax NZ] would have followed the procedures of cl. 6 in good faith and co-operatively".  After hearing witnesses on the question of what in such a case would have happened, she held that the most likely outcome was that Amax Gold would have sold its interests to Auag for the $25 million for which it had sold them to NPL.  The breach of clause 6.03(e) had deprived Auag of the opportunity to acquire the interest, which she held (basing herself upon the subsequent valuation) would in fact have been worth $28.9 million.  She assessed the chances of the sale having proceeded at 85% and therefore awarded damages in the sum of $3,315,000, being 85% of $3.9m.

 

9. The Court of Appeal affirmed the judge's findings that there had been a cessation and consequently a breach of clause 6.03(e).  Amax NZ challenge this finding in their printed case but their Lordships have not found it necessary to hear argument on the point.  The Court of Appeal nevertheless allowed the appeal on the ground that the failure to give notice had not caused Auag any loss:-

 

"The fact that Auag itself gave notice within 3 days remedied any failure on Amax NZ's part ... In the result, there was no damage from the breach and no loss of commercial opportunity."

 

10. Their Lordships respectfully agree with the Court of Appeal.  The only effect of a notice under paragraph (e) would have been to notify the other participants that a deemed offer had been made under clause 6.03(a)(iii) and, from the date of receipt of the notice by all participants, to start running the 30 day period for acceptance.  As the same consequences followed from the notice under paragraph (f), the breach cannot be said to have caused more than 3 days' delay in the commencement of the 30 day period.

 

11. The effect of the judgment of Cartwright J. is to treat the unco-operative behaviour of Amax NZ as a consequence of the failure of Amax NZ to serve a notice.  Hence her hypothesis that "Amax NZ would have followed the procedures of cl 6 in good faith and cooperatively".  But Amax NZ's attitude was not a consequence of the failure to serve a notice.  The failure to serve the notice and the unco-operative attitude were each consequences of Amax NZ's belief that no cessation had occurred but one was not a consequence of the other.  Unless, therefore, Amax NZ's entering into the June 1993 transaction or its insistence upon its efficacy were independent breaches of contract, it is illegitimate to hold Amax NZ liable for their consequences.

 

12. Mr. Goldsmith argued that the Court of Appeal should not have reversed the judge's finding of fact as to what would have happened.  She saw the witnesses and there was evidence to support her conclusion.  But their Lordships do not think that the Court of Appeal was intending to question the correctness of her findings upon the hypothesis which she made, namely, that Amax NZ would have been co-operative.  What they said was that the finding "missed the point", which was that there was no basis in law for such a hypothesis.  Unless the failure to be co-operative was itself a breach of contract, or the consequence of a breach of contract, there was no room for any assumption other than the reality of what happened.

 

13. In order to establish the necessary causal link with a breach of contract, Mr. Goldsmith put the argument in two ways.   First,  he  said that if Amax NZ had duly given notice under clause 6.03(e), it would thereby have acknowledged that a cessation had occurred and its negotiating stance would thereafter have been different.  If this simply means that the giving of a notice would have been evidence of a different attitude on the part of Amax NZ to whether there had been a cessation or not, their Lordships think it is open to the same objection, namely that any change in negotiating stance would have been a consequence of the change in attitude rather than the giving of the notice.  If it means that, as a matter of construction, the giving of a notice would necessarily have been an admission that there had been a cessation from which Amax NZ could not afterwards resile, their Lordships disagree.  They consider that the scheme of having paragraph (f) as what the Court of Appeal called a "backstop" to paragraph (e) indicates that the parties contemplated that the pre-emption mechanism could perfectly well be set in motion even when there was an underlying dispute as to whether a cessation had occurred.  Consistently with this view, their Lordships think it would have been open to Amax NZ to give a notice under paragraph (e) without prejudice to a contention that no cessation had in fact occurred, or (which comes to the same thing) to comply with the obligation to "give notice thereof" by disclosing the terms of the transaction without committing itself to whether it amounted to a cessation or not.  Their Lordships would be reluctant to construe paragraph (e) to mean that a participant, who believed in good faith that no cessation had occurred but realised that the matter was open to argument, could not comply with the contract without surrendering the right to maintain its point of view.

 

14. Secondly, Mr. Goldsmith relied upon the alleged breaches of clause 2.07(b), the "just and faithful" covenant, upon which neither the judge nor the Court of Appeal had found it necessary to pronounce.  So far as the breaches consist of failure to give prior or subsequent notice of the transaction, their Lordships think that, for the reasons already discussed, they cannot be said to have caused any loss.  Auag had full information about the transaction by the end of June 1993.  The remaining allegation is of "incorrectly claiming" that the transaction was not a cessation.  Mr. Goldsmith rightly says that the words of the covenant "just and faithful in all its activities and dealings" are very wide.  But their Lordships think that they cannot preclude a participant from putting forward a view on the construction of the JVA which is held in  good faith, even to the point of requiring the matter to be determined in litigation.  Whatever may be said about the way in which the transaction was structured, there is no finding by Cartwright J. that Amax NZ did not honestly believe that it had hit upon a scheme which would work.  It is not clear whether she was invited to make any such finding and their Lordships certainly think that it would be wrong to send this much-travelled litigation back to her to find out.  There is accordingly no evidence to support the allegation that Amax NZ's stance was a breach of covenant.

 

15. Their Lordships will humbly advise Her Majesty that the appeal should be dismissed.  The appellant must pay the respondent's costs before their Lordships' Board.

 

© CROWN COPYRIGHT as at the date of judgment.