Chink in the Armour: Ambiguity leads to dispute

Armour Energy Limited v AEGP Australia Pty Ltd [2016] QSC 153

The Supreme Court of Queensland’s recent decision in Armour Energy Limited v AEGP Australia Pty Ltd [2016] QSC 153 considered the appropriate construction of a condition precedent in an exploration farmout agreement. The decision reinforces the need for clear and unambiguous drafting, properly reflecting the parties’ intentions, to avoid disputes.

Armour Energy Limited (Armour) is the holder of a number of petroleum exploration permits in the Northern Territory. By a Farmout Agreement executed in September 2015, Armour agreed to farmout to AEGP Australia Pty Ltd (AEGP) a 75% interest in Armour’s existing exploration permits, in addition to a 75% interest in several applications Armour had made for additional exploration permits.

The facts

The Farmout Agreement contained a number of conditions precedent. In February 2016, Armour applied, for declaratory relief and specific performance of the Farmout Agreement. AEGP defended the proceedings.

For the purposes of the proceedings, the key condition precedent required the execution of a deed assigning Armour’s interests under a number of native title agreements pertaining to the tenements.

The relevant clause 2.1(e) of the Farmout Agreement (native title condition) was in the following terms:

‘Native Title Agreement: execution by the NLC [Northern Land Council] in respect of each Native Title Agreement and the other parties thereto of a deed, subject to satisfactory due diligence by the Buyer, substantially in the form attached hereto as Annexure 6, or otherwise approved by Buyer.’

Annexure 6 of the Farmout Agreement contained a proforma Deed of Assignment and Assumption (DOAA). The DOAA made reference to Armour, AEGP, NLC and the native title parties, listed in a schedule to the DOAA. The native title party schedule was blank. Nevertheless, the recitals indicated that the signature of each continuing party, being the native title parties and NLC, was said to be a consent to the assignment of the interest of Armour and of the assumption of the corresponding obligations by AEGP.

There were two separate types of native title agreements relating to the exploration permits, namely Deeds of Co-Existence and Exploration (CEEDs) and Tripartite Deeds. The Northern Land Council (NLC) was designated as a representative of the native title parties under the native title agreements.

The NLC did not execute the DOAA. Instead, Armour procured the NLC to enter into a Deed of Covenant in respect of each CEED, but had not procured the execution of a DOAA or other deed by the specific native title parties to each agreement. The Deeds of Covenant stated that NLC had been appointed as the legal representative of the native title parties, and thereby entered into the Deed of Covenants on their behalf. The Deeds of Covenant were in similar terms to the DOAA, except that various references to the continuing native title parties were replaced by references to NLC only.

The issues

The court was asked to determine whether the entry by NLC into the Deeds of Covenant was sufficient to satisfy the native title condition precedent.

The decision focussed upon the construction of the underlying CEEDs, and specifically whether the deed, permitted an effective transfer of obligations to take place by the alleged authority of NLC, on behalf of the native title parties. The CEED for exploration permits 171 and 176 included an assignment provision whereby assignment was permitted with the written consent of the native title party representative (being NLC). The CEED contained additional provisions regarding the presentation and execution of a deed of assumption. With some minor differences, each of the CEEDs included similar terms.

Armour contended that the provisions of the CEEDs permitted novation with consent of the NLC only, and that the agreement of each native title party was not required to satisfy the condition precedent. In upholding Armour’s submissions, the court agreed that the terms of the CEEDs did not require the execution by the native title parties of any further consent for there to be an effective novation.

AEGP argued that, regardless of the construction of the right of novation of the CEEDs by consent of the NLC only, it was open for Armour and AEGP to have required the specific consent of the native title parties for the transfer to occur and that, since the DOAA contemplated a requirement for the native title parties to consent directly, consideration of whether the Deed of Covenants executed by NLC satisfied the requirements of the native title agreements was irrelevant.

AEGP argued that the reference to ‘the other parties thereto’ in the native title condition unambiguously included a reference to the requirement for the consent by the specific native title parties, to satisfy the condition.

Justice Atkinson disagreed, and found that there was a degree of ambiguity in the native title condition, commenting that:

In her reasoning, Atkinson J noted that the clause required only that the deed signed be ‘substantially in the form’ of the proforma DOAA annexed to the Farmout Agreement. It was also noted that the DOAA included provisions for the execution in one section ‘by the native title parties’ and yet, in other sections, made provision, for execution ‘by and on behalf of the native title parties’.

The court ultimately found that, as the Deeds of Covenant bound the native title parties by the execution of NLC, the ambiguity created by the drafting of the native title condition and the proforma DOAA had been overcome, and the native title condition precedent in the Farmout Agreement had been satisfied. It followed that the Farmout Agreement should be specifically performed.

Conclusion

While the outcome reached in this case was very much dependent upon its own facts and the unique underlying contractual framework, the decision highlights the willingness of the courts, to give their own meaning to contractual provisions where the drafting is uncertain. Parties risk being subject to unintended consequences, unless their drafting is clear and unambiguous.

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¹ Armour Energy Limited v AEGP Australia Pty Ltd [2016] QSC 153 [77].

This article may provide CPD/CLE/CIP points through your relevant industry organisation.

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