GRT Lawyers recently represented a client in the Court of Appeal and succeeded in having an appeal by Mineralogy Pty Ltd (Mineralogy), an entity associated with Clive Palmer, dismissed. The appeal sought to overturn a judgment of Jackson J of the Supreme Court of Queensland (Supreme Court) who confirmed the validity of a guarantee given by Mineralogy.

Background

On 28 July 2010, Palmer Petroleum Pty Ltd (then known as Chinampa Pty Ltd) (PP), entered into a contract by which BGP Geoexplorer Pte Ltd (BGP) agreed to perform various works relating to seismic exploration of 3 mining tenements then owned by PP in the Gulf of Papua New Guinea (Contract). Mineralogy executed a guarantee by Mineralogy by which Mineralogy guaranteed the performance of PP’s obligations under the Contract.

By Clause 4 of the Guarantee, Mineralogy agreed it would not be discharged from its obligations under the Guarantee by reason of “any” alteration, addition or deletion from the Contract or the scope of works to be performed under the Contract. Between 2010 and 2012, the Contract was amended on at least 3 occasions to include a third vessel (whereas the Contract provided for 2 vessels), to extend the approximate time frames provided in the Contract for the vessels to commence and finish seismic survey of the tenements and to impose a cap on PP’s liability to US$35 million. Mineralogy was not a party to the deeds of amendment.

After completing all works under the Contract, BGP sought payment of the balance of invoices owing by PP and a deferred payment fee agreed under the Contract. PP refused and was subsequently wound up in insolvency in 2016 due to its failure to pay the debt to BGP. Mineralogy subsequently commenced proceedings in the Supreme Court seeking declarations it was not liable under the Guarantee.

In the Supreme Court, Mineralogy argued it was not liable under the Guarantee because (among other things:

  1. the amendments to the Contract (it alleged) amounted to a variation of the Contract or scope of works to avoid BGP breaching the Contract which was not a variation contemplated by the Guarantee; and
  2. BGP had breached the Contract (or there was an anticipated breach in that BGP could not perform the Contract) which was waived by PP which was detrimental to Mineralogy’s position as guarantor such that it was released from its obligations.

On 9 October 2017, Jackson J of the Supreme Court rejected all arguments advanced by Mineralogy, dismissed Mineralogy’s claim, and ordered Mineralogy to pay BGP a sum of US$17,629,628. In doing so, Jackson J held there was no principal at law which supported Mineralogy’s position. It was this decision that Mineralogy appealed.

The decision

On appeal, Mineralogy sought to make further arguments as to why Mineralogy was released from the Guarantee. One argument was that the terms of the Guarantee should be read strictly in favour of Mineralogy as guarantor so that the word “Contract” appearing in the Guarantee was not to have the same meaning given to that word in the Contract itself. The effect of this was to limit Mineralogy’s guarantee only to the original Contract, not the Contract as varied by the deeds of amendment.

Three judges of the Court of Appeal (Fraser, Gotterson and McMurdo JJA) delivered judgment on 31 July 2018 and unanimously dismissed Mineralogy’s appeal. The Court of Appeal found there was no error in Jackson J’s judgment and confirmed that his Honour was correct in holding that:

  1. there is no principle of law which permits “words of generality” in a contract of guarantee to be read down; and
  2. there is no general principle of law that a guarantor is discharged from liability by reason of the creditor to the principal contract (here, BGP) breaching that contract where the debtor (here, PP) does not terminate for that breach.

The Court of Appeal also rejected Mineralogy’s arguments as to the correct interpretation of “Contract” in the Guarantee.

Key to their decision (both in the Court of Appeal and at first instance) was the fact that the parties to the Guarantee intentionally used broad and general terms in the Guarantee and Mineralogy’s arguments sought to limit the scope of the wide words used. Further, the Court considered the Guarantee could not be read in isolation and had to be interpreted with regard to the principal Contract which was entered into at the same time as the Guarantee. In doing so, it was clear that the Guarantee applied to the Contract as varied from time to time and the Guarantee extended to variations and that “any variation”, including any variation which may result in a waiver by PP of any breach of the Contract, would not discharge Mineralogy from liability under the Guarantee.

Conclusion

Continued liability under a guarantee following an amendment to, or breach of, the principal contract will depend on the terms of the guarantee itself. This case is an important reminder for drafters of guarantees to ensure that broad language is used when dealing with variations and to ensure the guarantee identifies whether or not the guarantor’s liability is intended to continue despite a breach of variation or amendment to the Contract.

At the time of publication of this article, Mineralogy has filed an application for special leave to appeal to the High Court of Australia.