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Client Update: Security of the Cape Preston port affirmed in appeal decision

7 April 2017

In brief: The Full Federal Court has unanimously dismissed an appeal by former federal MP Clive Palmer's company Mineralogy against a decision that gave his former business partner, CITIC Limited and its subsidiaries, the right to operate and maintain the port at Cape Preston for the Sino Iron Project. As Partner Phil Blaxill and Lawyer Jeremy Rich report, the decision affirms that commercial agreement terms between parties can be impacted by later agreements between those parties and by state agreements, and emphasises the care commercial drafters need to take. 

Background

CITIC constructed facilities at the Cape Preston port at its own cost so that it can export iron ore produced from the Sino Iron Project. In 2012, Mineralogy brought proceedings in the Federal Court seeking, among other forms of relief, a declaration that  the facilities constructed by CITIC had 'vested in' Mineralogy, under the terms of the agreement between Mineralogy and CITIC.

Mineralogy later issued termination notices. Its primary claim for relief then became a declaration that these termination notices were valid, that the facilities deed (the documents that govern operations at the port) had terminated and that CITIC was required to vacate the port area.

First decision

In 2015, Justice Edelman in the Federal Court dismissed all of Mineralogy's claims. His Honour found that Mineralogy did not have the rights to possess, control, own, operate or manage the port terminal facilities at Cape Preston, and CITIC and its subsidiaries were under a duty to operate and maintain them by the operation of provisions in later agreements. The court also made orders permanently restraining Mineralogy from acting upon termination notices issued by Mineralogy to the CITIC parties in November 2014.

The appeal

Mineralogy appealed Justice Edelman's decision, relying on 17 grounds of appeal. All of Mineralogy's grounds of appeal were dismissed in a joint judgment by Justices Besanko, Beach and McKerracher.

In dismissing Mineralogy's appeal, the judges confirmed that a state agreement 'lies at the apex of the suite of agreements pertaining to the Sino Iron Project' and that the terms of the state agreement and the approved proposals meant that CITIC and its subsidiaries were solely responsible for the operation of the port facilities they had constructed.

The court also said that, if they were wrong in their construction of the various agreements, CITIC and its subsidiaries had constructed the port on a common assumption shared with Mineralogy that they would be responsible for all project aspects and Mineralogy were prevented by law from asserting otherwise.

How does this affect you?

The Full Court's decision confirms the fundamental propositions advanced by Justice Edelman in his judgment. In particular, it confirms the following:

  • The interaction between rights/obligations in a state agreement and the terms of your commercial agreements with co-venturers/suppliers/customers is an important consideration because approved proposals under a state agreement will take precedence over the terms of commercial agreements. Therefore you should:
    • ensure that, when preparing project proposals under a state agreement, they properly reflect the commercial arrangements between the parties; and
    • ensure alignment between state agreement/approved proposals and any future commercial arrangements (eg termination and suspension powers).
  • It is important to be cautious about allowing projects to proceed on the basis of a ‘common assumption’. This is because that may give rise to an estoppel by convention, even where there has been no ‘representation’ by one party to another. If a common assumption arises, you may be unable to ‘claw back’ your contractual rights.
  • Unless a state agreement for a project expressly varies the underlying regulatory framework, commercial arrangements for that project must be consistent with that regulatory framework.
  • Commercial drafting points that are emphasised by the decision and the appeal are:
    • Courts will make ‘linguistic nonsense’ work by applying orthodox principles of construction.
    • Subsequent contracts will override earlier contracts between the same parties to the extent of inconsistency.
    • Don’t assume subsequent letter agreements are subordinate to formal definitive prior agreements.

 

 

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