Having warned against the danger of judges departing from the plain wording of commercial contracts, a majority of judges in the Supreme Court decided a US$80 million contract dispute between Bathurst Resources and L&M Holdings was in part resolved by making some judicial assumptions about the mining companies commercial motives.
Two Supreme Court justices decided Bathurst was in breach of contract with US$80 million still owing for its 2010 purchase of West Coast coal mining concessions. Three justices decided otherwise; US$40 million only was outstanding.
Bathurst purchased the Denniston and Stockton mining permits on the West Coast with the international price for coking coal peaking at US$330 per tonne in mid-2011, sinking to a low point of US$80 over the next five years. When Bathurst was looking to raise capital to finance mine expansion, its potential revenue stream was shrinking.
Bathurst’s 2010 purchase from L&M Holdings required payment of US$40 million upfront with subsequent payments triggered when stated volumes of coal were ‘shipped’ from the permit areas. Claims by Bathurst that ‘shipped’ meant exported offshore were dismissed by the Supreme Court; ‘shipped’ meant sold and transported from the mine site. Domestic sales of 25,000 tonnes of coal counted, triggering a US$40 million payment.
The Supreme Court was told of further agreements negotiated between Bathurst and L&M Holdings intended to assist Bathurst in its capital raising: failure to pay on time lump sum scheduled amounts as Bathurst ramped up production would not be treated as a ‘default;’ payments were rescheduled with royalty rates increased as compensation for late payment. The effect of these further agreements was thrashed out in the Supreme Court after Bathurst suspended mining on the West Coast, concentrating on other mining concessions taken over after the break-up of government-controlled Solid Energy. The earlier rescheduling assisted Bathurst when raising some A$165 million through two equity raising rounds in the 2010/11 financial year.
In the Supreme Court, two justices ruled Bathurst still owed L&M US$80 million, unpaid as part of the purchase price. The other three justices ruled only US$40 million was due for the tonnage ‘shipped;’ the remaining US$40 million was not part of the purchase price but rather a scheduled ‘performance payment’. L&M was not bargaining up front for an agreed purchase price payable by instalments; its economic return was tied to Bathurst’s ability to exploit the mining concession, they decided. L&M Holdings’ motive in agreeing to reschedule further performance payments was to assist Bathurst’s capital raising, they said. It was in L&M’s interest to see Bathurst increase mine production. As part of the rescheduling, L&M did not impose any legal obligation on Bathurst to actually ramp up production on the West Coast. No further payment was due if production stopped. It was up to an experienced mining investor like L& M to protect itself from that potential downside, the majority said. It was not for the court to read extra terms into the contract to protect L&M against that eventuality, they ruled.
Of the US$120 million potentially payable by Bathurst: US$40 million was paid on signing the 2010 contract; US$40 million was ordered to be paid with Bathurst having ‘shipped’ 25,000 tonnes of coal following domestic sales; the final tranche of US$40 million was not payable because Bathurst shut down production.
Bathurst Resources Ltd v. L & M Holdings Ltd – Supreme Court (14.07.21)
21.122