Walking on a drem: Royalty holder comes out on top in Supreme Court tussle

In Drem Pty Limited v LRL (AUST) Pty Ltd [2024] NSWSC 1422, the Supreme Court of New South Wales (Court) addressed a dispute concerning royalty obligations under historical deeds related to mining tenements at Kathleen Valley, Western Australia.

Background

This case concerned the interpretation of the royalty clause in a 1994 Royalty Deed, which specified that royalties would be calculated based on the payer’s “proportionate share or interest (as varied from time to time)” in, among others, the tenements making up the Kathleen Valley Joint Venture (Joint Venture). Drem Pty Ltd (Drem), the current royalty holder, submitted that LRL (AUST) Pty Ltd (LRL), the current royalty payer, owed royalties based on its current 100% ownership of the Kathleen Valley tenements. Conversely, LRL contended that its royalty obligation should be limited to 87.15%, reflecting the final joint venture interest held by a predecessor party before the Joint Venture was terminated.

The initial interests in the Joint Venture were held by Hunter Resources (Hunter) and Giralia Resources. In 1994, Hunter assigned its rights in the Joint Venture and another joint venture to Sir Samuel Mines NL (SSM), which covenanted to pay Hunter a 2% royalty on proceeds from mining operations on the Joint Venture tenements, the tenements from the other joint venture, and another tenement. This agreement included terms allowing the royalty obligation to vary with the payer’s “proportionate share or interest.” Over time, the Kathleen Valley tenements changed hands, with Ramelius Resources acquiring them in 2014, followed by LRL in 2016. In 2020, LRL executed a Deed of Acknowledgment with Drem, agreeing to be bound by the 1994 Royalty Deed.

The Court’s Interpretation of the Royalty Obligation

Drem argued that the broad language of the 1994 Royalty Deed, coupled with LRL’s 100% ownership of the Kathleen Valley tenements, required royalties to be calculated based on the entire proceeds from the exploitation of those tenements. It asserted that the historical context of Joint Venture interests was irrelevant following the termination of the Joint Venture in 2014 and that the 2020 Deed did not limit LRL’s obligations to the 87.15% interest held by a predecessor party. LRL maintained that its obligations were tied to the Joint Venture structure and could not exceed the 87.15% interest held by SSM at the Joint Venture’s conclusion.

The Court ruled in favour of Drem, finding that the language of the 1994 Royalty Deed was intentionally broad and applied to all of the tenements the subject of the deed, regardless of whether the interests arose from the Joint Venture. Justice Hmelnitsky noted that the 1994 Royalty Deed contemplated variations in ownership and explicitly included non-joint venture tenements.

Further, the Court emphasized that the 2020 Deed did not introduce any limitation on the royalty obligations tied to LRL’s 100% ownership. Whilst acknowledging that Drem’s position could result in a windfall gain, the Court held that such an outcome was consistent with the agreement originally negotiated under the 1994 Royalty Deed.

HFW comment

This case is yet another example of a royalty agreement falling for interpretation long after the deed is drafted and the initial parties have been replaced. It highlights the importance of considered advice when negotiating or acquiring an interest in, or subject to, a royalty agreement, to ensure you get what you paid for (and pay for what you get).