Australia: Are your conditions precedent to the agreement clear enough?

Clearly-drafted conditions precedent are important to ensure there is no dispute in the first place as to whether the conditions have been satisfied and the contract has come into force.

Any ambiguity in a condition precedent to an agreement can create uncertainty around whether or not the condition precedent is satisfied.

As illustrated in a recent Queensland Supreme Court decision, such uncertainty can lead to a dispute and the non-performance of an agreement which may be crucial to your business. The case of Armour Energy Limited v AEGP Australia Pty Ltd [2016] QSC 153 is a reminder that conditions precedent to an agreement should be result-focused and should not be left incomplete.

Armour Energy Limited and AEGP Australia Pty Ltd entered into a Farm-Out Agreement for the purpose of joint exploration and development of Armour's McArthur Basin Project in the Northern Territory.

The Agreement included a condition precedent requiring:

"execution by the NLC [Northern Land Council] in respect of each Native Title Agreement [being the Co-Existence and Exploration Deed (CEED) and the Tripartite Deed attached to the application for each exploration permit for the project] and the other parties thereto of a deed, subject to satisfactory due diligence by the Buyer [AEGP], substantially in the form attached hereto as Annexure 6, or otherwise approved by Buyer [AEGP]."

Annexure 6 of the Farm-Out Agreement contained a draft Deed of Assumption and Assignment (DOAA). The parties to the DOAA were said to be Armour as assignor, AEGP as assignee, the Northern Land Council and the Native Title Parties. No Native Title Parties were listed, however in the CEEDs, "Native Title Parties" was defined to mean those Aboriginal people who have or claim Native Title in the application area.

The DOAA was never executed. However, Armour procured the Northern Land Council's execution of a Deed of Covenant for each CEED. The Deeds of Covenant were not signed by any Native Title Parties.

What was the issue?

The primary issue was whether the condition precedent was satisfied by the execution by the Northern Land Council of the Deed of Covenant in relation to each CEDD.

Justice Atkinson was required to consider the following questions:

  • did the CEEDs authorise the Northern Land Council to consent to the novation of the CEEDs and the assignment of Armour's interests in a way which bound the Native Title Parties such that their signing the Deeds of Covenant was not required?
  • regardless of the authorisation in the CEEDs, did the condition precedent in the Farm-Out Agreement unambiguously require the Native Title Parties to sign the Deeds of Covenant?

Did the CEEDs authorise the Northern Land Council to consent on the Native Title Parties' behalf?

The CEEDs contained a provision dealing with assignment, which provided that Armour may only assign its interest in the exploration permits with the prior consent of the Northern Land Council.

Armour submitted that under the CEEDs, the Native Title Parties had agreed in advance to a mechanism for novation of the CEEDs by the assignment of part of Armour's interest in the exploration permits and the assumption by the assignee of obligations under the CEEDs. Armour submitted that the Northern Land Council was therefore authorised to consent to an assignment and novation in a way that bound the Native Title Parties.

Justice Atkinson reviewed various authorities and concluded that a party to a contract can agree to a later novation of the rights given and the obligations imposed by the contract in advance of any proposed novation. In other words, the original contract may, on its proper construction, authorise a party to substitute a contracting party in its place without need for a further tri-partite agreement.

Justice Atkinson therefore concluded that the CEEDs did not require the execution by the Native Title Parties of any further form of consent in order for there to be an effective novation, and therefore an effective assignment of a part of Armour's interest in the exploration permits.

Did the condition precedent require the signature of the Native Title Parties?

AEGP contended that, regardless of the interpretation of the CEEDs, the condition precedent in the Farm-Out Agreement objectively required execution by the Native Title Parties as well as execution by the Northern Land Council.

Justice Atkinson rejected that argument. She noted that the grammatical construction of the condition precedent was awkward. The clause was ambiguous as to whether the execution of the deed is to be by the Northern Land Council for the parties to each Native Title Agreement, or whether execution is to be by the Northern Land Council and the parties to each Native Title Agreement.

Justice Atkinson said that the ambiguity should be resolved by reference to the CEEDs, which had been incorporated by reference into the Farm-Out Agreement. As discussed above, the CEEDs did not require any further form of consent from the Native Title Parties for there to be an effective novation. Under the CEEDs, the signature of the Northern Land Council in the Deed of Covenant was sufficient to bind the assignee (AEGP) to the rights and obligations owed to the Native Title Parties under the exploration permits.

On that basis, the signature of the Native Title Parties was not required under the condition precedent. The Deed of Covenant for each CEED was substantially in the form of Annexure 6 of the Farm-Out Agreement.

Key lesson: conditions precedent should focus on results

Armour was successful in showing that the condition precedent had been satisfied and that the contract should be specifically performed. However, the case highlights the importance of clearly-drafted conditions precedent to ensure there is no dispute in the first place as to whether the conditions have been satisfied and the contract has come into force.

In addition to being drafted clearly and unambiguously, conditions precedent should be result focused and set out the clear intentions of the parties. In this case, for example, it would have been preferable for the condition precedent to specify the outcome that the parties sought to be achieved (ie. the novation of the CEEDs and the assignment and assumption of Armour's obligations under them) rather than the means by which that outcome was to be brought about.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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