Jixing Industries Ltd v Aitape Metropolitan Forest Investment Ltd [2013] PGSC 52; SC1294 (4 July 2013)

SC1294

PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]

SCA NO 63 OF 2011

BETWEEN

JIXING INDUSTRIES LIMITED formerly FUSEN INDUSTRY (PNG) PTY LIMITED
First Appellant

AND

PIXING GONG, SHUN FU FENG & YAN ZENG GAO
Second Appellants

AND

AITAPE METROPOLITAN FOREST INVESTMENT LIMITED
Respondent

Waigani: Gavara-Nanu, Davani & Makail, JJ
2013: 29th February & 4th July

SUPREME COURT APPEAL – CONTRACT LAW – Memorandum of Understanding – Whether legally binding – Agreement to agree – Enforceability of

Facts

This was an appeal from the decision of the National Court which held that a memorandum of understanding between the appellants and the respondent was a legally binding contract and enforceable at law.

Held:

1. The question of whether a memorandum of understanding is a legally binding contract is a question of fact and must be decided according to the intention of the parties having regard to all the circumstances of the case.

2. In the present case, the memorandum of understanding is an agreement to agree. It is not a legally binding contract and is unenforceable at law.

3. The primary judge's finding that the memorandum of understanding was a legally binding contract and enforceable at law is wrong.

4. The appeal is allowed and decision of the National Court is quashed.

Cases cited:

Papua New Guinea cases

Re The Companies Act Chapter 146 and Pacific Rim Corporation Holdings Pty Ltd [1992] PNGLR 491
Nings Trading Pty Ltd -v- ANZ Banking Group (PNG) Limited (1995) N1700
Tian Chen Limited -v- Tower Insurance Limited (2003) N2319
Shell Papua New Guinea Ltd -v- Specko Investment Limited (2004) SC767
Mathew Tolanas -v- Collin Gipe (2008) N3536
Raphael Loowa & Ors -v- Kanawi Pouru & The State (2009) N4029
Madang Timbers Limited -v- Valentine Kambori & National Forest Authority (2009) SC1000

Overseas cases

Masters -v- Cameron (1954) 91 CLR 358
Courtney & Fairburn Ltd -v- Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297
GR Securities -v- Baulkham Hills Private Hospitals Pty Ltd (1986) 40 NSWLR 631
Rushton (Qld) Pty Ltd & Ors -v- Rushton (NSW) Pty Ltd & Ors [2003] QSC 8 (24th January 2003)

Counsel:

Mr I Shepherd, for Appellants
Ms G Kubak, for Respondent

4th July, 2013

DECISION

1. BY THE COURT: The primary Judge determined a preliminary issue which concerned a memorandum of understanding ("MOU") between the appellants and the respondent in proceedings WS No 482 of 2007, in particular, whether it was as a legally binding contract and enforceable at law. On 13th May 2011, his Honour found that the MOU was a legally binding contract and also ordered the appellants to pay the respondent's costs. This is an appeal from that decision. As it was an interlocutory decision, leave was applied for and granted on 23rd August 2011.

Background Facts

3. On 22nd November 1996, the respondent entered into the MOU with the first appellant which was formerly known as Fusen Industry (PNG) Pty Limited having changed its name on 13th February 2003 to establish an agro forest project on 300,000 hectares of land in Aitape, West Sepik Province. The main features of the MOU were:

(a) The parties would apply for and take all steps necessary to obtain a permit to develop the resources under the Forest Management Agreement ("FMA").

(b) The first appellant would undertake that it has the financial and technical resources necessary to carry out the proposed project being the development of the forest resource.

(c) The first appellant would be responsible for employment of the necessary personnel and providing the necessary financial backing for the project and including preparation of feasibility studies, etc.

(d) The parties would enter into a joint venture agreement for the project being the logging activities.

4. On 03rd May 2007, the respondent instituted legal proceedings in the National Court for breach of contract and claimed a sum of K10,000,000.00 or alternatively, damages to be assessed. It alleged that the appellants failed to provide funding of K250,000.00 to enable it to mobilise landowners and apply for the licences and permits. The appellants filed a defence denying the claim relying on:

(a) Doctrine of res judicata.

(b) Frauds and Limitations Act 1988 as the action was not commenced within six years of the date of the MOU.

(c) The MOU did not confer any contractual obligations on the parties or in any event, it was frustrated or terminated.

5. Prior to these proceedings, Richard Waisu commenced proceedings WS No 1104 of 2000, based in the same MOU. Those proceedings were dismissed for failing to disclose a cause of action. On 16th November 2000, in proceedings WS No 645 of 1998, a third party called Palmai Timber Resources Company Limited also commenced proceedings against the first appellant basing its cause of action on the same MOU. Those proceedings were also dismissed.

Grounds of Appeal

6. The appellants raised three grounds. First the MOU was an agreement to agree and therefore was unenforceable. Secondly, they submit the claim is statute barred and thirdly, the claim is res-judicata.

Parties' Submissions

7. In their respective submissions, parties focused on the first ground. The appellants submitted that the MOU is an agreement to agree because the necessary elements of a contract are absent. There is no offer, acceptance and consideration. Given this, there is no binding contract between the parties. They relied on a number of cases including Shell Papua New Guinea Ltd -v- Specko Investment Limited (2004) SC767 ('Shell').

8. The respondent submitted that the primary Judge looked at the whole circumstances of how the MOU was formed and signed, and correctly found that it was a contract and binding on the parties. His Honour found that parties clearly expressed their intention in the MOU to be bound by it up to a period of three years after the commencement of the project. He further found that it clearly stipulated the obligations of the respective parties and provided for punitive action in the event of breach.

9. The respondent further submitted that clause 9 of the MOU provided for enforcement of the MOU by each party in the event of its breach in a court of law and in the case of breach by the first appellant, it will compensate the respondent for any loss of revenues and premiums due for the period of the dispute. It is submitted, this clause clearly envisaged a long term existence and application of the MOU even up to the time revenues and premiums would begin to fall due and payable. This strongly supports the proposition that parties have intended to be bound by the MOU and therefore it is a valid contract.

10. Finally, the Respondents submit that at a time when Papua New Guineans are exposed to the dynamics of modern commerce and business as a result of development of their natural resources, the National and Supreme Courts have a constitutional duty under Schedule 2.3 of the Constitution to develop the underlying law to ensure that the adopted common law principles of contract law are developed to suit the emerging trends that less commercially sophisticated Papua New Guineans find themselves in. For these reasons, we are urged to give effect to the MOU as was done by the primary judge in the Court below and also in past cases such as Tian Chen Limited -v- Tower Insurance Limited (2003) N2319.

Legal status of MOU

11. We point out that there are two different MOUs before the Court. The first one is dated 22nd November 1996 ("1996 MOU") and the second is dated 22nd November 1997 ("1997 MOU"). In our view, the entire appeal hinges on them. The decision that is the subject of this appeal arises from the 1996 MOU. In his written decision, the primary Judge considered and focused only on the 1997 MOU. We make this finding based on the fact that whilst the trial Judge mentioned the 1996 MOU, his discussions in his decision is based on or revolves around the 1997 MOU. The respondent's cause of action is based on the 1996 MOU. Given this, we are of the view that his Honour fell into error when he relied on the 1997 MOU and held that it was the MOU that was legally binding on the parties and enforceable at law. For this reason, the appeal should be allowed.

12. Notwithstanding this finding, we will also consider the ground in relation to the legal status of the MOU. Except in exceptional circumstances, the Court will not recognise an agreement to agree as having any legal effect: Lewison, The Interpretation of Contract 1st ed, 1989. At 179, the authors quoted Lord Denning M.R in Courtney & Fairburn Ltd -v- Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297 who held:

"If the law does not recognize a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me that it cannot recognize a contract to negotiate. The reason is because it is too uncertain to have any binding force. No court could estimate the damages because no one can tell whether the negotiations would be successful or would fall through, or if successful what the result would be. It seems to me that a contract to negotiate, like a contract to enter into a contract, is not a contract known to law."

13. In Papua New Guinea, the principles relating to agreements to agree have been discussed by the Court on a number of occasions including Nings Trading Pty Ltd -v- ANZ Banking Group (PNG) Limited (1995) N1700 and Shell (supra). It is worth restating them. The former case was an action by the plaintiff for specific performance of an alleged agreement for sale of a property by the defendant. Woods, J referred to the case Masters -v- Cameron (1954) 91 CLR 358 being the relevant authority on agreements to sell subject to contract where distinct classes were identified and summarized as:

(a) Where the parties have finalized negotiations and intend to be bound by the agreed terms and wish to have those terms "restated in a form which will be fuller or precise but no different in effect." In this case there is a binding contract whether or not the formal agreement comes into existence or not.

(b) Where the parties have agreed on all the terms except that they have made one or more of those terms conditional on execution of a formal document. In this case, there is a contract "which binds the parties to join bringing the formal contract into existence and then carry it into execution."

(c) Where the parties do not intend to make "a concluded bargain at all unless and until they execute a formal contract." What has been agreed on must be regarded merely as an intended basis for a future contract and not as constituting a contract.

14. The question of whether a MOU is a legally binding contract is a question of fact and must be decided according to the intention of the parties having regard to the whole circumstances of the case. In Re The Companies Act Chapter 146 and Pacific Rim Corporation Holdings Pty Ltd [1992] PNGLR 491, Brown, J held that the question of whether or not there was a concluded contract is a question of fact. In that case there had been a number of documents prepared with respect to the proposed sale of certain assets of the company in liquidation, by the liquidator. His Honour was satisfied that the case fell within the third category described in Masters -v- Cameron. That is, the intention was not to make a concluded bargain "unless and until there was a concluded contract."

15. In Mathew Tolanas -v- Collin Gipe (2008) N3536, Gabi, J had before him a "letter of intent" for the sale of the plaintiff's property. His Honour reviewed the principles set out in Masters -v- Cameron and formed the view that the letter of intent was a statement of the parties' intention to enter into an agreement in the future and found "an agreement to enter into an agreement at some future date is not a contract", citing Masters -v- Cameron and Shell.

16. In Shell, the trial Judge found that the parties had entered into a valid contract for the construction of a service station and that the appellant had breached it thereby resulting in loss and damage to the respondent. On appeal, the Supreme Court noted the principles set out in Masters -v Cameron and adopted by Gabi, J in Mathew Tolanas' case and applied those principles in that case. It found that the facts of the case fell into the third category and that from the evidence the parties intended "That no bargain would be concluded at all, in respect of any of the three options or even in respect of the K70,000.00 alone until a formal contract was signed and executed." The appeal was upheld and the respondent's action in the National Court, dismissed

17. Finally, in Australia, the same principles have been applied. For example, in Rushton (Qld) Pty Ltd & Ors -v- Rushton (NSW) Pty Ltd & Ors [2003] QSC 8 (24th January 2003), the case hinged on whether a memorandum of understanding could be construed as a concluded agreement. The defendants claimed that they did not intend to be bound by the MOU until a formal contract was executed and that the case fell within the third category of Masters -v- Cameron. Muir. J found that whether the parties to a MOU intended it to be a binding agreement is to be "determined objectively by reference to the words and actions of the parties".

18. In this regard, the existence of an agreement may be inferred from subsequent conduct of the parties. (That is a possible 4th category to the three identified in Masters -v- Cameron). His Honour quoted McHugh, JA in GR Securities -v- Baulkham Hills Private Hospitals Pty Ltd (1986) 40 NSWLR 631 observing that: "However the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances." His Honour found that there were strong indications that the parties intended the MOU to be a binding agreement. One of which, importantly was that certain proceedings be compromised immediately and brought to an end.

Present Case

19. In the present case, we note his Honour correctly restated the principles of a contract and also, correctly noted that whether a MOU is a legally binding contract is a question of fact and must be decided according to the intention of the parties having regard to the whole circumstances of the case. Further, his Honour correctly noted that John Siren for the respondent alleged that he did do certain work in the project area and introduced the appellants to the resource owners prior to the signing of the MOU. After the signing of the MOU, it is unclear what transpired although there were two different proceedings commenced in 1998 and 2000. Finally, and very importantly, his Honour correctly noted it was not disupted that no Joint Venture Agreement ("JVA") was entered into between the parties following the signing of the MOU.

20. In this regard, we further note that although his Honour acknowledged what the parties had agreed to do was to enter into a JVA on unspecified terms, he found that "nothing else was left to further agreement insofar as what was needed for the parties to have, do and give each other to arrive at their agreed joint venture project." The question is, if the parties had agreed to be bound by the MOU, why do they want to enter into a JVA?

21. The JVA was for logging activities and apart from the shareholding nothing could be agreed as at the time the MOU was entered into, it is clear that the parties had not even lodged an application for a timber permit with the PNG Forest Authority, nor carried out any feasibility studies or in fact, done any work which would be required before a JVA could be finalised. In other words, the essential terms were still to be agreed and could not, in fact, be agreed until all the preliminary work including the application for a timber permit and compliance with statutory requirements had been completed.

22. The compliance with the statutory requirements is mandatory and necessary for the timber project. The process for applying for a timber permit is not that simple. It is stringent. The party applying must go through the process set out in ss. 61 to 73 of the Forestry Act 1991 starting with a development optional study. After going through evaluation and approvals by the relevant government authorities including the Provincial Forest Management Committee and the National Forest Board, a project agreement is entered into with the National Forest Authority. Then under s.73(1), if the Minister for Forest accepts the recommendation from the National Forest Board, he shall invite the party with whom the Authority entered into a project agreement with and within 30 days of a duly completed application being made, grant a timber permit to the party. For a detailed discussion on the process, see Raphael Loowa & Ors -v- Kanawi Pouru & The State (2009) N4029 and Madang Timbers Limited -v- Valentine Kambori & National Forest Authority (2009) SC1000.

23. Thus, while parties may have agreed in the MOU that they will be bound by it for a period of three years after the commencement of the project, and that the MOU clearly stipulated the obligations of the respective parties including providing punitive action in the event of breach, they were still required to apply for a timber permit. However, it is noted also that applying for a timber permit is no guarantee that it will be granted: s. 73(4).

24. While we accept the respondent's submission that this Court has a constitutional duty to develop the underlying law under Sch. 2.3 of the Constitution that is relevant and applicable to the circumstances of this country, we are not persuaded that the principles of common law developed in Masters -v- Cameron and adopted by the National and Supreme Courts are inappropriate to the circumstances of Papua New Guinea. On the contrary, they are relevant, especially in cases such as the one under consideration where resource owners decide to develop their customary land for commercial purposes and need to obtain statutory approvals. The requirement to obtain statutory approvals must be seen as measure to safeguard and protect them and their resources from exploitation and to maximize the benefits for them.

25. The respondent has not produced any evidence that the MOU was in fact acted upon sufficiently so that it could be regarded as an agreement in the nature of the first class of agreements referred to in Masters -v- Cameron or indeed, the fourth class as identified by McHugh JA in GR Securities -v- Baulkham Hills Private Hospitals Pty Ltd.

26. In conclusion, it is clear from a reading of the MOU that it was only an agreement to agree, that is, to enter into a JVA once certain preliminary steps and studies had been completed.

27. The JVA was never entered into and none of the preliminary steps had been undertaken or completed. We are satisfied that this case falls under the third class of agreements identified in Masters -v- Cameron. The MOU was an agreement to agree and we find that his Honour's finding that it was a legally binding contract and enforceable at law, is wrong. We uphold this ground and allow the appeal.

28. Therefore, in view of that finding, it is not necessary to consider the remaining grounds.

Order

29. The formal orders of the Court are:

1. The appeal is upheld.

2. The decision of the National Court of 13th May 2011 is quashed.

3. The respondent shall pay the appellants' costs of the appeal to be taxed if not agreed.
___________________________________________________________
Ashurst Lawyers: Lawyers for Appellants
Kubak & Co Lawyers: Lawyers for Respondent