Contract – Iron ore royalty - Construction of terms – Meaning of phrase "deriving title through or under".

In George RR Martin’s series of novels “A Song of Ice and Fire”, adapted by HBO for television as “Game of Thrones”,  paying the “iron price” has a typically bloodthirsty connotation. Without going into gory detail, it refers to acquiring something at, let’s just say, a high cost. 

The “iron price” is very much a part of the local nomenclature in Western Australia, though (more recently) for the opposite reason. However, a recent High Court decision had all the makings of an epic novel: two well-known names, a long battle and, in the end, perhaps a sense of at least one party having paid a heavy price by reason of a royalty agreed to back in 1970. 

On 14 October 2015, the High Court of Australia delivered its decision in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited; Wright Prospecting Pty Limited v Mount Bruce Mining Pty Limited[2015] HCA 37.

Both parties had appealed decisions of the Court of Appeal of New South Wales. An interesting aspect of the decision concerns the High Court’s findings as to the meaning of the phrase “deriving title through or under” in a royalty agreement.

On 5 May 1970 Wright Prospecting Pty Ltd, Hancock Prospecting Pty Ltd (together, Hanwright), Hamersley Iron Pty Ltd and Mount Bruce Mining Pty Ltd (MBM) entered into an agreement (1970 Agreement) whereby MBM acquired from Hanwright the entire rights in relation to the MBM Area. Royalties were payable to Hanwright on “ore won by MBM from the MBM Area.” The obligation to pay royalties extended to “all persons or corporations deriving title through or under” MBM to the MBM Area. This was because “the Purchaser” was defined to include “[MBM], its successors and assigns and all persons or corporations deriving title through or under the Purchaser to any areas of land in respect of which an obligation to pay any amount has arisen or may arise.

The Court had to decide whether the Channar Joint Venturers were “persons or corporations deriving title through or under” MBM to the area known as Channar A. That area is now held by the Channar Joint Venturers. One of the Channar Joint Venturers is Channar Mining Pty Ltd, a wholly owned subsidiary of Hamersley Holdings Pty Ltd and part of the Hamersley group.

This question presented the Court with a “constructional choice”: was the phrase “deriving title through or under” limited to succession, assignment or conveyance, or was it broad enough to cover a close practical or causal connection between the rights exercised by the Channar Joint Venturers and the rights which MBM obtained from Hanwright under the 1970 Agreement? 

The Court favoured the wider construction because:

  • it was consistent with the purpose of objects of the agreement between Hanwright and MBM. The Court noted that the relevant clause did not refer to deriving title “from”, but rather to deriving title “through or under”, which is a relatively flexible expression. Further, the inclusion of the words “successors and assigns” in the definition of “Purchaser” meant that “deriving title through or under” had to refer to something other than succession, assignment or conveyance; 
  • the surrounding circumstances supported the wider construction. For example, the Court found that, when the 1970 Agreement was executed, the MBM Area was defined by reference to temporary reserves, which the parties knew permitted temporary occupancy for mineral exploration purposes, but the obligation to pay the royalty arose when ore was won from that area. In other words, the 1970 Agreement was drafted on the basis that it was unlikely that title, in a legal sense, to the temporary reserves included in the MBM Area would remain static;
  • it accords with commercial reality. The Court considered that the extent of an ore body is unknown and work on one area is often dependent on work undertaken on an area adjacent to or near another area the subject of current exploration. After the allocation of the MBM Area to MBM, it was the Hamersley group that had control over by whom, where and when the MBM Area was developed. The price to be paid was that when ore was won from the MBM Area "through or under" MBM, a royalty was payable to Hanwright.

​In reaching its decision, the High Court summarised the following settled rules of contractual construction:

  • the rights and liabilities of parties under a provision of a contract are to be determined objectively, by reference to its text, context and purpose;
  • in determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. This will require consideration of the language used in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract;
  • ordinarily, the process of construction is possible by reference to the contract alone. If an expression in a contract is capable of only one meaning, evidence of the surrounding circumstances cannot be adduced to contradict its plain meaning;
  • sometimes it is necessary to consider events, circumstances and things external to the contract. For example, the court may need to understand the genesis of the transaction, the background, the context, and the market in which the parties are operating, in order to identify the commercial purpose or objects of the contract. It may also be necessary in determining the proper construction where there is a constructional choice (as there was in this case);
  • the court cannot consider evidence of the parties' statements and actions reflecting their actual intentions and expectations; and
  • unless a contrary intention is indicated in the contract, a court is entitled to assume that the parties intended to produce a commercial result. A commercial contract should be construed so as to avoid it making commercial nonsense or creating commercial inconvenience.

The Court distinguished a previous decision, Sahab Holdings Pty Ltd v Registrar General (No 2) (2012) 16 BPR 30, which concerned the statutory phrase “any person claiming through or under that person” in theReal Property Act 1900 (NSW). The question in that case was whether title to land acquired by registration of a transfer could be said to be claimed through or under the previous holder of the title to the same parcel of land. The Court observed that the statutory provision in question in that case assumed the possibility of succession to title between registered owners. The Court found that this was entirely different to the 1970 Agreement, which made it “tolerably clear” that the reference to title derived “through or under” MBM did not require a title acquired from MBM via an unbroken chain of title over Channar A linking the present owners to MBM. ​

This case is instructive as to the meaning of “deriving title through or under” (or similar phrases) in royalty agreements between mining companies. More broadly, though, the case highlights the importance of context where there is an ambiguous phrase in a contract. It is preferable not to have any ambiguous clauses when negotiating the terms of an agreement but, if that cannot be avoided, it is advisable to bear in mind the rules set out above. Courts will use them to interpret ambiguous clauses and, as can be seen from this decision, the consequences can be significant if the court takes a different view about what a clause means.