N5613
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS NO 43 OF 2014

RAIKOS HOLDINGS LIMITED
Plaintiff

V

G & S LIMITED
First Defendant

GROWOOD (PNG) LIMITED
Second Defendant

Madang: Cannings J
2014: 8 May, 13 June

CONTRACTS – variation – whether purported instrument of variation of written contract effective – termination of contract – whether contract terminated in accordance with its terms

The plaintiff sought a declaration that it had lawfully terminated a written contract with the first defendant and consequential declarations and orders regarding the legality of the conduct of the first defendant and the second defendant. The second defendant, which appeared to have been unnecessarily joined, failed to defend the matter. The first defendant argued that the plaintiff had not lawfully terminated the contract as it had not followed the procedures in an instrument of variation of the contract executed shortly after execution of the principal contract, which inserted a detailed termination clause. The plaintiff contended that the instrument of variation was a forgery. The result of the case turned on whether the purported variation was effective.

Held:

(1)	The question of whether the instrument of variation was genuine was a question of fact. As the first defendant was the party asserting its genuineness, it bore the evidentiary burden of proof. It discharged that burden as (a) the instrument has been the subject of a Police investigation, which concluded that the signatures on the document, including that of the plaintiff's managing director, are genuine; (b) the regulatory authority, the PNG Forest Authority, had accepted the instrument as a genuine and effective variation of the principal contract; (c) a lawyer gave convincing evidence that he was a witness to the managing director executing the variation on behalf of the plaintiff.

(2)	The question of the effect of the instrument of variation on the principal contract, in particular whether it replaced the general termination clause in the principal contract or was to be read alongside it, was a question of law. Contracts are like a piece of legislation: they create a written law that operates between the parties to the contract. The terms of the contract must be read in context of the whole contract and given their plain and ordinary meaning so as to give effect to the intention of the parties. Applying that approach, the terms in the instrument of variation amount to an implied removal of the general termination clause in the principal contract and its replacement by the detailed provisions in the instrument of variation.

(3)	The plaintiff failed to follow the detailed provisions in the instrument of variation, so there was no lawful basis for termination of the contract.

(4)	The declarations and orders sought by the plaintiff were refused and the proceedings wholly dismissed and the plaintiff was ordered to pay the first defendant's costs.

Cases cited

The following cases are cited in the judgment:

Central Provincial Government v National Capital District Commission (2013) N5262
Huon Electrical Ltd v RD Tuna Cannery Ltd [2000] PNGLR 213
Niugini Civil & Petroleum Ltd v WNB Development Corporation Ltd (2005) N2909
Nivani Ltd v China Jiangsu International Ltd (2007) N3147
Pama Anio v Aho Baliki (2004) N2719
Peter Aigilo v The State (2001) N2102

ORIGINATING SUMMONS

The plaintiff sought a declaration that it lawfully terminated a contract that it entered into with the first defendant, and consequential relief.

Counsel

B Tabai, for the Plaintiff
I Shepherd, for the First Defendant

13th June, 2014

1. CANNINGS J: The plaintiff Raikos Holdings Ltd seeks a declaration that on 25 April 2013 it lawfully terminated the logging and marketing agreement it had entered into in 2011 with the first defendant, G & S Ltd. Raikos also seeks consequential declarations and orders, in particular:

•	a declaration that G & S has been operating illegally in the Rai Coast Timber Rights Purchase (TRP) area (over which Raikos is the permit holder, under the Forestry Act 1991) since 25 April 2013;

•	an order in the nature of a permanent injunction requiring the first defendant to cease operations in and vacate the TRP area within 30 days;

•	similar declarations and orders against the second defendant, Growood (PNG) Ltd.

2. The second defendant has not been involved in this case. It did not file a notice of intention to defend and no lawyer appeared on its behalf at the trial. The reason it was joined as a defendant is a mystery. It is not mentioned in the evidence. Mr Tabai for the plaintiff could not enlighten the court. I take that as a concession that it was unnecessarily joined. The dispute to be resolved is therefore only between the parties to the logging and marketing agreement, the plaintiff, Raikos, and the first defendant, G & S.

3. G & S argues that all relief sought by Raikos should be refused. Mr Shepherd submitted that Raikos did not lawfully terminate the contract, as it did not follow the procedures in a written variation of the contract, executed shortly after execution of the principal contract. The variation inserted a detailed termination clause, which replaced a more general termination clause in the principal contract.

4. Raikos argues that the instrument of variation is a nullity as none of its officers or employees signed it. Mr Tabai submitted that it is a fraudulent document as it contains a forged signature of the managing director of Raikos, Andrew Sallel.

5. The following issues arise:

1	Is the instrument of variation a genuine document?

2	If the instrument is genuine, what is its effect?

3	Was the logging and marketing agreement lawfully terminated?

4	What declarations or orders should the Court make?

1	IS THE INSTRUMENT OF VARIATION A GENUINE DOCUMENT?

6. This is a question of fact. G & S introduced the instrument into evidence and is the party asserting its genuineness. It therefore has the burden of proving that it is genuine. I consider that it has discharged that burden. Though the managing director of Raikos, Mr Andrew Sallel, has given evidence that he did not sign the instrument and that his signature (shown on the instrument as having signed for Raikos) is a forgery, I am driven to the opposite conclusion by the evidence presented by G & S, in particular:

(a)	the forgery claim has been investigated by the Fraud & Anti-Corruption Squad of the Royal Papua New Guinea Constabulary, and the conclusion has been reached – for the purposes of deciding whether to charge anyone with fraud – that the signatures on the document, including that of the managing director of Raikos, Mr Sallel, are genuine;

(b)	the regulatory authority, the PNG Forest Authority, has accepted the instrument as a genuine and effective variation of the principal contract;

(c)	a lawyer, Mr David Dotaona, recalls being a witness to Mr Sallel executing the instrument on behalf of Raikos.

I find that the instrument of variation is a genuine document.

2	IF THE INSTRUMENT IS GENUINE, WHAT IS ITS EFFECT?

7. This is a question of law. Does the variation replace the general termination clause, 17.1, in the logging and marketing agreement? Or is it to be read alongside clause 17.1? This is not a straightforward issue as the instrument of variation does not expressly state that it repeals and replaces clause 17.1. The question becomes clearer by quoting verbatim both clause 17.1 and the instrument of variation; though it should be noted that both are poorly drafted and contain numerous grammatical errors.

8. Clause 17.1 states:

Notwithstanding anything herein contained, and without prejudice to such other remedies as may be available at law or in equity to a party as a consequence of a breach of this Agreement if:-

(a)	An order is made or an effective resolution passed for the winding up of the Permit Holder or the Contractor other than for the purpose of reconstruction; or

(b)	An official manager or receiver of the whole or any part of the property or undertaking of the Permit Holder of the Contractor is appointed; or

(c)	The Contractor is prevented for a continuous period of three (3) months from carrying out its duties hereunder properly efficiently by any reason outside the control of the Permit Holder and the Contractor including inaccessibility and/or unavailability of forest resources the definition of which shall be subject to an independent assessment commissioned by the Secretary of Forest; or

(d)	The Contractor or Permit Holder defaults in the performance or observance of a term or condition of this Agreement on its part to be performed or observed and, in the case of a default capable of being remedied, fails to remedy the same for a period of thirty (30) days after required to do so by notice in writing.

Then the party not in default of the performance and observance of as term or condition of this Agreement on its part to be performed or observed may, by giving notice in writing to the other party, terminate this Agreement PROVIDED THAT such notice is in writing and is given at least 90 days prior to termination. [sic]

9. The instrument of variation states:

VARIATION OF THE LOGGING AND MARKETING AGREEMENT BETWEEN RAIKOS HOLDINGS LIMITED AND G & S LIMITED

With respect to our Logging and Marketing Agreement signed on 7th July 2011, both party has now agreed to insert the following clause to the agreement:-

1.	TERMINATION

1.1	Events Permitting termination

The parties hereto agree that in any of the following events namely;-

(a)	If;-

(i)	The Permit Holder of the Contractor makes default in the due observance or performance of any of the terms and conditions of the agreement;-

(ii)	Such default is material and goes to the root of the fundamental undertakings of the Permit Holder or the Contractor as contained in the agreement;-

(iii)	Such default is not remedied within ninety (90) days after notice specifying the default is given to the Permit Holder in the event that it is contested by the Permit Holder or the Contractor as to whether a default as aforesaid has occurred and within sixty (60) days after such notice it is submitted to arbitration and question is decided against the Permit Holder or Contractor THEN in the case and arbitration award supporting the right to terminate if such default is not then remedied within ninety (90) days after the date of arbitration award.

(b)	If the Permit holder or the Contractor abandons the agreement or repudiates its material obligations hereunder; or

(c)	If the Permit Holder or the Contractor fails for the three (3) months period to pay its debts as they fail due or a resolution is passed by the Permit Holder or the Contractor for its voluntary winding up (other than for the purposes) of (reconstruction) or an order is made by the Court for the winding up of the Permit Holder or the Contractor or the Permit Holder or Contractor makes any composition or arrangement with its creditors any of which events being deemed to be an act of default;

Then the party not in default may by notice in writing given to the other party terminate this Agreement upon the expiration or Thirty (30) days of the said period the Agreement shall be terminated, unless the parties by writing otherwise agree in the meantime.

1.2	Notice of termination

The notice of termination to be given by a party pursuant to this Clause shall specify the nature of the default or other ground so entitling the party to exercise such right of termination.

2.	The Contractor agreed to undertake the infrastructure development on behalf of Permit Holder under Clause 4.5 and 4.6 of the Timber Permit No. 12-18.

The above variation is to take effect from 12th July 2011. [sic]

10. I repeat, the question of interpretation that has arisen is this: do the terms of the instrument of variation repeal and replace clause 17.1? Or do they sit alongside clause 17.1, so that clause 17.1 does not cease to exist and the two sets of clauses co-exist and are to be read together?

11. In resolving this issue it is useful to bear in mind that written contracts are like a piece of legislation. They create a written law that sets out the rights and obligations of persons: the parties to the contract. Just as the court, when interpreting an Act of Parliament, will attempt to discern the intention of the body that made that law – the Parliament – when interpreting a contract the court will attempt to discern the intention of the body that made the contract – the parties to the contract – and give effect to that intention (Huon Electrical Ltd v RD Tuna Cannery Ltd [2000] PNGLR 213, Peter Aigilo v The State (2001) N2102, Pama Anio v Aho Baliki (2004) N2719, Niugini Civil & Petroleum Ltd v WNB Development Corporation Ltd (2005) N2909, Nivani Ltd v China Jiangsu International Ltd (2007) N3147).

12. There are many principles of statutory interpretation that can be applied by parity of reasoning to interpretation of contracts. For example, if an Act of Parliament amends some provisions of an existing Act but does not expressly state whether the provisions of the existing Act are to be repealed and replaced, the court will apply well-defined principles of interpretation to resolve the ambiguity, in particular to determine whether enactment of the later law amounts to an implied repeal of the earlier, existing law. I set out the principles of implied repeal in Central Provincial Government v National Capital District Commission (2013) N5262:

•	The court should be slow to infer an unstated intention to repeal an earlier law, the reason being that if the Parliament had intended to repeal it, surely it would have expressly stated its intention.

•	Two pieces of legislation, even if they appear on a first reading to be in conflict, should be read in such a way that they are able to stand together.

•	If two provisions are inconsistent or in conflict such that effect cannot be given to both at the same time, the later law will prevail and be regarded as having impliedly repealed the earlier law.

•	If the later law evinces an intention to 'cover the field' or to exhaustively set out the law on a particular subject it should be regarded as having impliedly repealed the earlier law.

13. I now apply those principles by parity of reasoning to the facts of this case, where an instrument of variation of an existing agreement has been executed and the question arises whether the instrument of variation has impliedly repealed and replaced a similar clause (17.1) in the existing agreement:

•	The presumption to begin with – which is a rebuttable presumption – is that the instrument of variation is not intended to be an entire substitute for clause 17.1, the reason being that if the parties had intended to remove clause 17.1, surely they would have said so in the instrument of variation.

•	Two sets of contractual provisions, even if they appear on a first reading to be in conflict, should be read in such a way that they are able to stand together. However, clause 17.1 and the instrument of variation are materially inconsistent. On the one hand clause 17.1 creates four grounds of termination:

(a)	winding up;
(b)	appointment of an official manager or receiver;
(c)	contractor prevented for three months from carrying out its duties; or
(d)	failure to remedy a default within 30 days after being given notice of default.

14. It then provides that in any of those four situations the party not in default may terminate the agreement by giving to the defaulting party a 90-day written notice of termination.

15. On the other hand the instrument of variation provides three grounds of termination:

(a)	the permit holder or the contractor makes a material default that goes to the root of fundamental undertakings, which default is not remedied within 90 days after a notice of default is given by the non-defaulting party and within 90 days after an arbitration award;
(b)	one of the parties abandons the agreement or repudiates its material obligations;
(c)	one of the parties fails to pay its debts for three months or passes a resolution for its voluntary winding-up or an order for winding-up is made by the Court or one of the parties makes a composition or arraignment with its creditors.

16. It then provides that in any of those three situations the party not in default may terminate the agreement by giving to the defaulting party a 30-day written notice of termination, unless the parties by writing otherwise agree in the meantime.

17. I consider that the two sets of provisions are so much in conflict it is impossible to read them together. Effect cannot be given to both at the same time. Therefore the later set of provisions (the instrument of variation) must prevail and be regarded as having impliedly repealed the earlier set (clause 17). The initial presumption that the instrument of variation was not intended to be an entire substitute for clause 17.1 has been rebutted.

•	Furthermore, the instrument of variation is so detailed that it evinces an intention to 'cover the field' and exhaustively set out the circumstances in which the agreement can be terminated and the procedures to be followed by the non-defaulting party before the agreement can be lawfully terminated.

18. I conclude that the effect of the instrument of variation is to remove clause 17.1 from the principal agreement and replace it with the provisions of the instrument of variation.

3	WAS THE LOGGING AND MARKETING AGREEMENT LAWFULLY TERMINATED?

19. As the instrument of variation removed and replaced clause 17.1, the question of whether the logging and marketing agreement was lawfully terminated becomes a simple matter of determining as a fact what procedures were followed and then determining whether those actual procedures were compliant with the procedures required by the instrument of variation.

20. This is what actually happened:

•	On 12 February 2013 Raikos gave a written show cause notice to G & S, alleging that G & S had failed to: (a) comply with the 'cut levels' stipulated in the agreement, (b) provide evidence of insurance, (c) submit returns and reports to the Forest Authority and Raikos, (d) lodge a bank guarantee, (e) withhold export premiums from four log shipments and (f) pay other levies based on log harvests. The notice gave G & S 30 days to make representations as to why the logging and marketing agreement should not be cancelled.

•	G & S did not respond to the show cause notice.

•	On 23 April 2013 Raikos gave written notice to G & S of "cancellation" of the agreement, effective from 24 April 2013, requiring G & S to immediately cease operations and giving G & S three months to clean up and remove their machinery from the project area.

21. As Raikos was, through the notice to show cause, making serious allegations of default, it should have relied on scenario (a) of the instrument of variation, ie it should have been alleging 'material default that goes to the root of fundamental undertakings', in which case it was required to:

•	serve a notice of default allowing G & S 90 days to remedy the default; and then if the default were not remedied,

•	obtain an arbitration award in favour of Raikos.

22. Once those procedures were followed, Raikos would then have been able to lawfully give a notice of termination.

23. Those procedures were obviously not followed. Raikos breached the procedures in the first instance by giving a 30-day default notice, rather than the required 90 days. It then proceeded to terminate the agreement without taking the matter to arbitration and obtaining an arbitration award in its favour. It follows that the logging and marketing agreement was not lawfully terminated.

4	WHAT DECLARATIONS OR ORDERS SHOULD THE COURT MAKE?

24. The plaintiff has failed to establish that the logging and marketing agreement was lawfully terminated, so it is not eligible to be granted any of the relief sought in the originating summons. All relief sought will be refused. The proceedings will be wholly dismissed, with costs.
 
ORDER

(1)	The proceedings are wholly dismissed and all claims for relief are refused.

(2)	The plaintiff shall pay the first defendant's costs of the proceedings on a party-party basis, which shall, if not agreed, be taxed.
__________________________________________________________
Tabai Lawyers: Lawyers for the plaintiff 
Ashurst Lawyers: Lawyers for the first defendant