Mark it essential – failure to meet minimum expenditure requirements INSUFFICENT for right to terminate

The Western Australia Court of Appeal has found that a tenement manager’s failure to meet contractual expenditure requirements did not constitute breach of a material term of the contract and that, as a result, the other parties to the contract were unable to terminate the agreement on the basis of the tenement manager’s breach of contract.

Background

Cougar Metals NL (Subject to DOCA) v Richore Pty Ltd [2024] WASCA 36 concerns a dispute regarding an option agreement between Cougar Metals NL (Cougar) and Pyke Hill Resources Pty Ltd (Pyke Hill) dated 30 April 2004 (Option Agreement). Under the Option Agreement, Pyke Hill granted Cougar an option to acquire the rights to explore for and mine lateritic nickel and cobalt on a mining lease held by Pyke Hill (Tenement). On 24 November 2008, Richore Pty Ltd (Richore), acquired a 50% registered interest in the Tenement.

The terms of the Option Agreement obliged Cougar to manage the Tenement, including by attending to all proper administration in respect of the Tenement and to maintain the Tenement in good standing, including payment of all statutory minimum annual expenditure commitments in respect of the Tenement.

In late 2005, Cougar exercised its option and acquired the nickel and cobalt mining rights.

The Disputed Right to Terminate

In July 2021, Pyke Hill issued a notice terminating the Option Agreement, alleging that Cougar was in breach because it did not ensure that the statutory minimum annual expenditure requirements were met for the year ending 29 August 2020.

Pyke Hill and Richore commenced proceedings in the Warden’s Court seeking a declaration that the Option Agreement was validly terminated. The Warden dismissed the proceedings on the basis that Cougar’s failure to comply with its minimum expenditure obligations was not a breach of an “essential promise” (i.e. an essential term) of the Option Agreement, and therefore didn’t warrant termination.

On appeal to the General Division of the Supreme Court of Western Australia (the Court), Justice Archer held that the failure to meet expenditure requirements was, indeed, a breach of an essential term of the Option Agreement.

Being dissatisfied with the Court’s decision, Cougar appealed to the Western Australia Court of Appeal (Court of Appeal) on two grounds, the second ground being that:

“having regard to the breadth of the obligations… in the Option Agreement, the objectively discerned intention of the parties to the Option Agreement could not be that any breach of those obligations, however minor, would entitle Pyke Hill to terminate the Option Agreement“. Although the Court of Appeal found that Cougar’s failure to meet the minimum payment obligations was a breach of the Option Agreement, it agreed with Cougar’s analysis and held that the term breached was not an essential term of the parties’ contract and, accordingly, Pyke Hill was not entitled to terminate the Option Agreement.

Commentary

The decision serves as a reminder that, if you wish to have a clear right to terminate a contract in the event that a particular term is breached, you should seek to ensure that this is expressly stated in the agreement.

Careful drafting can, in many cases, prevent disputes from arising which, given the time, costs and reputational damage that are associated with litigation, should always be at the forefront of contracting parties’ minds. We recommend seeking expert, legal advice when entering into (or varying) any contracts and would be happy to discuss should you wish to review your contractual arrangements.