Royalty rights survive Arrium DOCAs

The Supreme Court of Western Australia has ruled that royalty rights held by Franco-Nevada Australia Pty Ltd survived the 2017 deeds of company arrangement implemented in the restructuring of the Arrium Group, rejecting arguments that the DOCAs extinguished or novated the claimant’s entitlement to ongoing payments.

Arrium Group was a major Australian mining and steel manufacturing company, best known for owning the integrated Whyalla steelworks. After Arrium entered administration in April 2016 with debts of roughly $4 billion, the administrators conducted an extensive sale process. In June 2017, creditors voted in favour of DOCA proposals put forward by Liberty House Group, the steel arm of Sanjeev Gupta’s GFG Alliance. The DOCAs provided for the transfer of the Whyalla steelworks and associated mining assets to Liberty for $700 million, recapitalisation of the business, and a return to creditors funded through the transaction structure. The sale completed in September 2017.

The dispute in this case centred on iron ore mined at Peculiar Knob in South Australia. Franco-Nevada contended that it remained entitled to royalties from mining operations conducted by Southern Iron Pty Ltd, a former Arrium subsidiary, notwithstanding the group’s restructuring under Part 5.3A of the Corporations Act 2001. Franco-Nevada argued that the 2003 Peculiar Knob Access and Royalty Deed between the parties was not released under the DOCAs, while Southern Iron argued that the DOCAs had the effect of extinguishing, releasing, abandoning, or novating any such claims.

The Court declared that Franco-Nevada’s claim to royalties was not released or compromised by the DOCAs, but dismissed Franco-Nevada’s further claims that the royalty formula had been varied by oral agreement or conduct. Justice Hill approached the matter as one of construction, focusing closely on the terms of the DOCAs and the royalty deed. Her Honour held that, properly construed, the DOCAs did not clearly or expressly compromise Franco-Nevada’s ongoing proprietary or contractual right to royalties tied to future production. In the absence of clear language demonstrating an intention to extinguish those rights, the Court declined to read the DOCA regime as achieving that result.

The Court also rejected Southern Iron’s contention that Franco-Nevada’s claim had been novated through subsequent restructuring steps. The evidence did not establish the necessary tripartite agreement to substitute a new obligor in place of the original party. Nor did the relevant clauses in the DOCAs operate as a global novation mechanism for contingent or future royalty liabilities.

Franco-Nevada advanced an alternative estoppel by convention argument, asserting that the parties had proceeded on a shared assumption that the royalty deed remained on foot after the restructuring. While it was unnecessary to decide the point in light of the primary findings, Justice Hill indicated that the evidentiary foundation for estoppel was weak. The communications relied upon did not clearly bind Southern Iron, and detriment was not convincingly established.

On the contractual variation issue, Franco-Nevada contended that the parties had altered the royalty calculation formula by oral agreement or by a course of dealing. The royalty deed contained a defined formula for calculating royalties payable on iron ore extracted from Peculiar Knob. Over time, however, the royalty payments actually made did not always align neatly with the literal terms of that formula. Franco-Nevada pointed to instances where the calculation methodology appeared to depart from the strict wording of the deed, particularly in how certain pricing components or deductions were treated. Franco-Nevada’s case was that the parties, through discussions and subsequent conduct, had effectively agreed to adjust the formula.

The Court rejected that submission, finding no evidence of unanimous agreement among all parties to the royalty deed to amend its terms. The payment history and accounting spreadsheets did not displace the formal requirements for contractual variation.

Read the decision here.

Professionals involved:

• Stewart Maiden KC of the Victorian Bar & Rachael Young SC of Shoreline Chambers, counsel, and Blackwall Legal, solicitors, for Franco-Nevada Australia Pty Ltd 

• Steven Penglis SC & James Sippe of Fourth Floor Chambers, counsel, and Clayton Utz, solicitors, for Southern Iron Pty Ltd

• Arnold Bloch Leibler, solicitors, for Mark Mentha, Martin Madden, Cassandra Mathews and Bryan Webster