Tips for addressing dispute risk in mining joint ventures — a litigator’s perspective

Joint Ventures are a regularly used and time-tested vehicle for large mining projects (as well as an array of other commercial activities such as property development). The Joint Venture structure provides many benefits for mining projects as it allows participants to:

• share exploration risks;
• share significant capital and operating costs;
• access greater financial resources than a party might access on its own;
• achieve economies of scale and take advantage of size;
• gain access to new markets and customers;
• create stronger and more competitive business units;
• create synergies;
• transfer technology and skills; and
• diversify into new areas^[1].

While both incorporated and unincorporated Joint Venture structures are adopted in Australia, the most commonly used for mining projects is the unincorporated Joint Venture. The principal features of an unincorporated Joint Venture are that:

• The Joint Venture has no legal identity separate from its members and the relationship between the participants is contractual as set out in the Joint Venture agreement; and
• Ownership of the Joint Venture assets is retained by the participants.

While conferring many benefits the unincorporated Joint Venture structure has also been the subject of large and complex commercial disputes where substantial royalty streams or potential financial losses are at stake.

Recent high-profile disputes such as those between Jervois Mining Limited and EMC Metals Corp (Nyngan scandium project in New South Wales), AMCI (IO) Pty Ltd and Aquila Steel Pty Ltd (Australian Premium Iron project in Western Australia) come to mind.

The formation of a mining Joint Venture is usually undertaken against the background of optimism and expected future gain regarding the commercial exploitation of the mineral resource, however parties are well warned to keep an eye to the potential risks of dispute when entering and documenting such arrangements.

Failure to do so can be catastrophic in terms of lost revenue, wasted executive time, significant expenditure on legal costs and even financial collapse.

Based on our experience with Joint Venture disputes (largely involving unincorporated Joint Ventures) some of the issues that prospective Joint Venturers need to consider are discussed below.

Finding the right participant

While it makes sense commercially to enter into a Joint Venture with a company with similar technical experience, risk appetite and balance sheet, commercial drivers have resulted in a different trend. In recent times largely due to capital markets pressure, junior exploration companies have been seeking out Joint Venture opportunities with larger mining houses. The hook for a large mining company is access to new and attractive exploration opportunities while in return the junior miner gets:

• increased credibility by association with the more established participant;
• greater mining experience and technical expertise;
• access to more capital and a greater array of sources; and
• access to more established off-take markets.

However problems can occur due to differences in:

Commercial objectives —for example, one party might be interested in long-term exploitation of a resource while the other is looking short term to sell its interest once the resources are identified but before the large capital investment to exploit the resource is incurred. Even in an operating mine, simple commercial differences like a preference for the spot market for selling product over long term contracts can cause disputes between joint venture participants where the offtake includes product from both participants.

Financial capacity — significant balance sheet inequality can also result in disputes between participants such as where one party is having difficulty financing its share of the operating costs or cash calls. Such budget disputes have the potential to significantly affect the scheduling and completion of critical path items and hence delay the development of the mining project. In addition, where a decision to mine is to be made, disputes can arise in respect of whether or not the feasibility study is of a requite standard (to support a decision to grant finance) and the project sufficiently advanced to allow such a vote to be made (see Aquila Steel Pty Ltd v AMCI (IO) Pty Ltd [2010] WASC 410)..

Risk appetite — large mining companies often prefer to spend time and money up front on proving up the identified resource and assessing the feasibility of a project before committing the large capital resources to fully develop the project. On the other hand, junior miners often prefer the opposite approach being to develop a project in stages and to establish a cash flow before development of the project is fully completed. Such differences can and do lead to disputes. Another area of dispute can be whether or not the project has secured port and rail logistics in terms of the mine’s supply chain. In the case of Aquila Steel, it was argued that a decision to establish mine development could not occur until the uncertainty regarding both the proponent and timing of a port development was resolved.

A well drafted Joint Venture Agreement

While self-evident, a well drafted Joint Venture Agreement is essential and in our experience, against the background of the time pressure to have the deal completed sometimes important issues are overlooked. The other issue is that when the Joint Venture Agreement is being drafted the emphasis is generally not on what go wrong. In terms of areas of dispute, the following issues (which are not exhaustive) need to be carefully considered:

Objectives and scope — Participants should carefully review the objectives and scope of the Joint Venture and ensure to the extent possible they are common to both parties. This means that the nature of the venture activities needs to be carefully defined as well as the project development process and attendant timeframes.

Forum Control — It is important to ensure that the most convenient and appropriate jurisdiction for your company is selected as the forum for any dispute. This is particularly relevant to Joint Ventures with international participants.

Management Committee — It is typical for a Management Committee to be constituted to control and provide direction to the operator or manager of the Joint Venture. It is important to set out in detail the Joint Venture Agreement the level of control the Management Committee will exert or have over the Manager/Operator.

Deadlock — A workable and prompt deadlock breaking mechanism needs to be included particularly for 50/50 Joint Ventures so that the development of the project is not impeded by voting deadlocks at the Management Committee level. Many companies avoid this equal share structure simply because of this very issue. A good example of a mechanism which can be ineffective is where the deadlock or dispute is referred to an independent third party such as an arbitrator to determine purely commercial decisions such as a budget or mine development decision — participants rarely wish to place these decisions in the hands of an outsider. A “high stakes” mechanism for resolving deadlocks is one where a participant is required to sell its stake to the other participant — in our experience such a mechanism can lead to disputes about whether a participant is, in the specific circumstances of the deadlock, required by the Joint Venture Agreement to sell its share and also by parties strategically using the threat of a party losing their interest to compel agreement.

Criterion for a decision to mine — As this is a rich area for dispute it is essential that the Joint Venture agreement clearly articulate how such a vote is effected, the percentage approval required and the criterion upon which the decision is to be based—such as the investment return percentage, the standard or content of any underpinning feasibility study, whether project finance has to been in place or whether the logistics supply chain is required to be contracted to name just a few examples.

Dispute resolution — An appropriate and workable dispute resolution clause is essential and commonly these involve an escalation of the dispute through an initial meeting of the management committee or senior executives to a meeting between the CEOs. Beyond resolution or agreement by these steps it is common for the dispute to be elevated to formal mediation, litigation or arbitration where the most severe of the sanctions involved might include one participant losing its interest. Careful consideration needs to be given to such clauses and the forum for the remedies they are to provide.

Default — A workable mechanism needs to be included in the Joint Venture Agreement to address defaults. Common defaults include a failure to pay a cash call, disclosing confidential Joint Venture information to an outside party, and encumbering assets so as to impact that participant’s ability to satisfy its Joint Venture obligations. Remedies for a default can be addressed in Joint Venture Agreement in a variety of ways:

• Loss of certain rights such as voting rights or the suspension of offtake rights;
• Buy-out of the defaulting participants' rights;
• Enforcement of a cross-charge by appointing an administrator to sell that participant’s interest to recover any amounts to owing (ie. for a cash call etc); and
• Dilution of the defaulting participant’s interest.

Access to Joint Venture documents — Whether a Joint Venture participant is entitled to access all documents or records of the Joint Venture will depend on the terms of the Joint Venture Agreement. Accordingly, the Joint Venture Agreement should make it clear that a participants’ interest includes all of the records of the Joint Venture and there should be an express right for the participant to access Joint Venture records.

In the case of Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd [2013] HCA Trans 215, the High Court refused a special leave application by Alliance Craton Explorer Pty Ltd to appeal a decision by the Full Federal Court that held that it didn’t have a right to access all records of the Joint Venture which were created or held by the Manager — this was because it was held that an agency and principal relationship did not exist between the Manager and participants based on the terms of the Joint Venture Agreement.

Awareness of your obligations

It is important that a good understanding of the obligations owed by a participant and its personnel under the Joint Venture Agreement (and related documents such as any Management Agreement) is obtained right from the drafting stage. This will need to flow through once the Joint Venture is operational and the formation of a dedicated team will go a long way to addressing this risk. Issues where a lack of understanding of the obligations can lead to disputes includes:

• Where are the demarcation lines between the participant company, a parent company, the Manager and the Management Committee?
• What information about the Joint Venture is confidential?
• How confidential information is to be dealt with by the participants in the Joint Venture?
• What is the role of the Manager?
• What process and time lines are in place to deal with notices of dispute and default and for calling Management Committee meetings, adding agenda items and confirming minutes under the Joint Venture Agreement?
• What obligations are required to be complied with regarding public announcements by the partici- pants to the Joint Venture?

Establish a dedicated Joint Venture team

The proper management of a participant’s interest in a successful Joint Venture is an important task and requires a dedicated team with the appropriate skills, background and understanding of the Joint Venture relationship. The following are important features of that team:

• The core team should include a mix of commercial and legal personnel including external lawyers;
• The specialist knowledge and focus they have will assist in managing any disputes;
• It will lead to better and more consistent compliance with the obligations imposed by the Joint Venture Agreement;
• There should be clear and effective reporting lines within the core team;
• Dispute issues should be circulated beyond the core team only where absolutely necessary or where specialist expertise is required;
• The ability for decisions to be made quickly will be aided by a smaller team;
• Legal personnel should not be embroiled in requests for commercial advice (to protect privilege claims) and legal matters should be separated from commercial matters in email communications to the extent possible.

Potential Management Company conflicts

Conflict issues can arise where a Management Company is established to manage the Joint Venture and that manager is either a participant in the Joint Venture or it is jointly owned by both participants. A dispute can quickly shift from participant level to the Manager and this can embroil the directors of the Manager in a conflict between their duties owned to the Manager and the interests of their participant company.

Effective document management

The operation of a Joint Venture and any dispute regarding Joint Venture matters will invariably involve large numbers of documents. Accordingly it is important that as a participant in a Joint Venture you take the following steps with respect to relevant documents:

• File and store Joint Venture documents on the one server and in a specific central area. This will enable relevant material to be located easily when and if required;
• Copies of all Board meetings and minutes and Management Committee agendas and minutes of meetings should be retained as they will provide valuable insight into the decisions and views of participants on issues which may later be in dispute;
• Specific arrangements and protocols should be put in place for dealing with any documents created or files maintained by your in-house legal team so as to preserve any legal professional privilege in those communications (to the extent possible);
• Emails which are circulated within the business may become important evidence in any dispute and also have the potential to create smoking guns if not subject to valid claims for legal professional privilege.
• A large Joint Venture dispute will usually result in a correspondence war between the participants — ways this can be managed include:
  • establishing a small dedicated team within the core team looking after the Joint Venture to prepare, review and issue all correspondence;
  • ensuring the dedicated team has both commercial and legal personnel with their respect roles clearly defined and reporting lines made clear; and
  • ensuring the dedicated team follows and is on top of the correspondence chains and they are alive to any deadlines which may have ramifications for compliance with provisions of the Joint Venture Agreement.

While working through and addressing these issues in the formative stages of a Joint Venture relationship may not always prevent participants from being embroiled in a Joint Venture dispute it will go some way towards preparing for those circumstances and lessening the risk of certain types of disputes arising.

This article was first published in Inhouse Counsel, Vol 18 No 6, August 2014.