New frontier in contractual interpretation

The recent Supreme Court decision Bathurst Resources Ltd v L & M Coal Holdings Ltd (Bathurst Case) is poised to mark a turning point in contract interpretation. In addressing an enduring contractual dispute arising from a multi-million dollar mining contract between Bathurst Resources Limited (Bathurst) and L & M Coal Holdings Limited (L & M), the Supreme Court reached a unanimous agreement on two key principles of contract interpretation. Considering the basis on which terms may be implied; and what evidence of conduct may be admissible in interpreting contracts has provided some much anticipated clarity to the contract law field following Vector Gas Limited v Bay of Plenty Energy Limited. While the application of these to the facts resulted in a split decision to allow Bathurst’s appeal, we anticipate that this guidance will significantly impact how parties not only go about contracting, but how they act once the contract is signed.

A brief overview

For context, this issue arises from a 2010 agreement and subsequent deeds between Bathurst and L & M, wherein Bathurst agreed to purchase coal exploration rights and permits for two areas on the West Coast from L & M.  In return, L & M would receive two performance payments (each for $40million USD) upon the shipping of set quantities of coal, along with other further benefits; or Bathurst would be required to pay a royalty rate for any coal being mined from the permit areas.

The judgments have considered two issues:

1. What the meaning of ‘shipped’ was, as this would trigger one of the $40 million payment obligations on Bathurst; and
2. Where a payment obligation had been triggered, how the deferred payment provision (clause 3.10) operated.

Most relevant is where clause 3.10 appeared to give Bathurst an option to defer the payment obligation, as it provided that:

For the avoidance of doubt, the parties acknowledge and agree that a failure by [Bathurst] to make, when and as due, a Performance Payment is not an actionable breach of or default under this Agreement for so long as the relevant royalty payments continue to be made under the Royalty Deed.

The contention arose about what the ‘relevant royalty payments’ would be, with Bathurst contending that where there was no mining (as was the case where mining operations were suspended in 2016), no royalty payments could be due: any % of nil remains nil. On the other hand, L & M has argued that the royalties payable are equal to what the royalties would have been contemporaneously to the payment obligation being triggered. Despite the Supreme Court reaching different conclusions on what the proper interpretation of clause 3.10 was, all five of the sitting judges confirmed a consistent approach towards these issues.

The admissibility of evidence in contract interpretation

In reliance on the continued confirmation that contract interpretation is an objective exercise, the Bathurst Case changes the framework under which pre-contractual negotiations and post-contractual conduct can be examined where previously, these have been generally excluded from interpretation on the basis that these actions necessarily represent subjective intentions.

Now, it is clear that when these may or may not be considered depends on admissibility under the Evidence Act 2006 (Act), which governs what any other extrinsic evidence can be examined in any other civil proceeding. Where this was previously considered to operate independently to contract law, the Supreme Court has given that “the law of evidence serves the law of contract”.

The fundamental principle in the Act excludes any evidence that:

• Lacks a tendency to prove or disprove anything that is of consequence to a proceeding’s determination;
• Will have an unfairly prejudicial effect on the proceeding; or
• Will needlessly prolong the proceeding.

While this is still narrow and imposes a high bar for someone wishing to introduce evidence of the parties’ mutual intention, this new framework opens a door that was previously kept tightly shut. Instead, the objective quality of contract interpretation is retained in considering what is evidence will be relevant.

Implying terms

Prior to the Bathurst Case, there have been two competing Privy Council tests for when a term that is not expressly provided for will be implied into a contract.

The first test comes from the 1977 judgment BP Refinery (Westernport) Pty Ltd v Shire of Hastings, which requires the proposed term must:

1. Be reasonable and equitable;
2. Be necessary to the business efficacy of the contract (i.e. contract must not be able to function without it);
3. Be so obvious ‘it goes without saying’;
4. Be capable of clear expression; and
5. Not contradict any express term of the contract.

The second test comes from 2009’s Attorney General of Belize v Belize Telecom Ltd, which condensed these requirements to see an implied term as merely a restatement of what a contract means, asking about “what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”.

As you can predict, the result of this has been an uneasy tension that has had the tendency of undermining certainty in contracting. This unease has lasted until now, when the Supreme Court clarified that the true bar for implied terms lies somewhere between the earlier terms: the conditions given in BP Refinery are useful tools in considering implied terms, but do not make up a definitive checklist. Instead, while the fourth and fifth terms must always be met, the first three have been recognised as overlapping, but not cumulative.

So, in examining if a term is implied or not, this test is one applied in accordance with the following key principles:

1. The bar for implication is necessarily high;
2. Any implication starts with considering the words of the contract and usual inference that if an outcome is not specifically provided for then there is no contractual provision for it;
3. An implied term is one that exists as part of the contract as a whole, and so an unexpressed term can only be implied if it would express what the contract would be reasonably understood as meaning; and
4. What a contract is reasonably understood as meaning is an objectively assessed matter, taken from the point of view of the notional reasonable person with all of the background knowledge reasonably available to the parties at the time of contracting; and
5. Like any contract interpretation, what is objectively understood does not have rely on proof of actual intentions or what parties would have wanted if predicting an outcome.

Conclusion

The Bathurst Case has provided some long awaited clarification on contractual interpretation. While impact of this is clear as it applies to disputes we consider the Bathurst Case to highlight the importance of careful drafting. Ensuring that the wording of an agreement reflects your intentions, and considers a range of potential outcomes is pivotal to ensuring that if something does go wrong, you and your assets are best protected.

If you need any assistance in considering your options or would like to discuss these matters, then please do not hesitate to get in touch.

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