In brief 6 min read
In the recent decision of Pilbara Iron Ore Pty Ltd v Ammon  WASCA 92, the WA Court of Appeal considered a farm-in agreement where one party had to pay for a 'feasibility study' in order to acquire an interest in a mining tenement. The primary question for the Court of Appeal was whether the feasibility study had to be 'bankable' or if it could be of a lower standard.
This case will be of interest to anyone who deals with farm-in agreements or other resource sector agreements where one party agrees to commission a 'feasibility study'.
- People drafting agreements should not assume that there is an industry-accepted meaning of 'feasibility study' that will automatically be imported into agreements.
- The decision, and the history of this case, shows the importance of defining terms, particularly those that are central to one party's obligations under the agreement. In this case, the parties' failure to define 'feasibility study' resulted in ten years of litigation.
- Absent a definition of 'feasibility study', the Court of Appeal applied the fundamental principles of contractual interpretation – considering what a reasonable person would have understood the term to mean, taking into consideration the language used in the agreement as well as the context and the purpose of the agreement.
- Applying that test, the Court of Appeal ultimately held that, on a proper construction of the agreement, the obligation to prepare a feasibility study was a requirement to prepare a study that by 'its nature, scope, and analysis would meet the minimum criteria that financiers to the mining industry would ordinarily require before considering a proposal to finance the development and mining of the exploration licence.'
Pilbara Iron Ore Pty Ltd (Pilbara) and Derek Ammon (Ammon) entered into a joint venture agreement (JVA) whereby Pilbara was entitled to acquire an 80% interest in joint venture property ('EL 47') upon completion of a feasibility study.
Relevantly under the JVA:
- Pilbara had to reimburse Ammon's past expenditure on the exploration licence and then spend at least $1m on joint venture expenditure prior to arranging for a feasibility study to be prepared.
- The term 'feasibility study' was not defined in the agreement.
- The feasibility study had to be completed within five years. If Pilbara did not complete the feasibility study within this time, it was deemed to have withdrawn from the JVA. If Pilbara did complete a feasibility study within the required time, it was deemed to have acquired an 80% interest in the JVA.
- There was nothing in the JVA requiring a minimum amount to be spent on the feasibility study or prescribing the content of the study.
- On completion of the feasibility study, Ammon had the option to withdraw from the JVA or seek finance for the project.
Whilst a study was completed by Pilbara, Ammon contended it did not constitute a 'feasibility study' as required by the JVA, primarily as the study was not 'bankable'. Ammon sought a declaration from the Warden's Court that Pilbara was deemed to have withdrawn from the JVA.
At first instance, the dispute was resolved on the basis of certain terms that Ammon asserted should be implied into the JVA.
The Warden agreed with Ammon and held that terms were implied into the JVA to the effect that the feasibility study was required to be:
- accurate enough to allow raising of project finance (including reserve statements);
- independently verified (ie not just prepared by one participant); and
- reliable (ie not inaccurate or incomplete).1
The Warden found in favour of Ammon on the basis that the feasibility study didn't comply with these implied terns.
The case was appealed to the Supreme Court, which broadly upheld the decision of the Warden in relation to the terms being implied into the JVA. Pilbara then appealed to the Court of Appeal.
The Court of Appeal disagreed with the decision by the Supreme Court and the Warden. It held that the terms asserted by Ammon did not meet the criteria set out in BP Refinery because they were 'too imprecise and vague' to be applied.
However, the Court of Appeal came to a similar result as the lower courts, not by way of implied terms, but by assessing the proper construction of the express terms of the JVA.
In formulating this construction, taking into account all the relevant terms as well as the context and purpose of the agreement, the Court of Appeal considered the following relevant:
- The general purpose of the JVA, as well as the overall scheme and structure of the JVA, suggested the parties contemplated a process where the feasibility study would provide the information necessary for Ammon to decide whether to withdraw from the JVA or seek project finance.4
- Pilbara's farming obligations were staged. It first had to contribute $1 million on joint venture operations. That meant there was no obligation to go any further (by producing the feasibility study) if Pilbara concluded, at the end of that expenditure, that the development and mining of EL 47 was unlikely to be technically or economically feasible. It only had to prepare the feasibility study if it wanted to proceed and earn the right to acquire an 80% interest in the JVA.
- There were provisions of the JVA that made it clear that one of the purposes of the feasibility study was to provide an opinion on the net present value of the project that was examined in the study.
On that basis, the court held that the parties had not failed to agree upon the standard applicable to 'a feasibility study' upon which the significant changes to the parties' relationship and interests turned. Rather, the court held that, on a proper construction of the JVA, the parties had objectively intended that the standard of feasibility study required by the JVA was a study which 'in its nature, scope, and analysis would meet the minimum criteria that financiers to the mining industry would ordinarily require before considering a proposal to finance the development and mining of the exploration licence.'5
This construction was based on the express terms of the JVA in question – it does not establish a general meaning of the term 'feasibility study' that will be applied by courts.
Although this finding was a success for Ammon, the Court of Appeal decision turned on arguments that were not litigated in the lower courts. As a consequence, in the interests of justice the matter was remitted to the Warden's Court to determine the question of whether the feasibility study met the necessary requirements of the JVA.6 The saga continues!
Pilbara Iron Ore Pty Ltd v Ammon  WASCA 92 .
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 (BP Refinery) at 283.
Pilbara v Ammon .
Pilbara v Ammon -.