N7700
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS (COMM) 824 of 2015

BETWEEN:
INDEPENDENT STATE OF
PAPUA NEW GUINEA
Plaintiff

AND:
INDEPENDENT TIMBERS &
STEVEDORING LIMITED
Defendant

Waigani: Hartshorn J.
2017: 10th May
2018: 19th October

TRIAL
Cases Cited:
Papua New Guinea Cases

Jixing Industries Ltd v. Aitape Metropolitan Forest Investment Ltd (2013) SC1294 
Kumul Consolidated Holdings v. Kurkuramb Estates Ltd (2017) N7429
Niugini Civil and Petroleum Ltd v. West New Britain Development Corporation Ltd (2005) N2909 
Shell Papua New Guinea Ltd v. Speko Investment Ltd (2004) SC767 

Overseas Cases 

Aitken v. Batchelor (1893) 68 LT Rep N.S. 530
Cape Distribution Ltd v. Cape Intermediate Holdings Plc [2016] EWHC 119 
Excomm Ltd v. Ahmed Abdul–Qawi Bamaodah (The “St. Raphael”) [1985] 1 Lloyd’s Rep 403
Masters v. Cameron (1954) HCA 72 
RTS Flexible Systems Ltd v. Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14 
Reveille Independent Llc v. Anotech International (UK) [2016] EWCA Civ at 443

Counsel:

Mr. E.G. Andersen and Ms. S. Kirriwom, for the Plaintiff 
Mr. D.H. Katter and Mr. P.A. Lowing, for the Defendant

19th October, 2018

1.   HARTSHORN, J: The plaintiff (State), the defendant (ITSL) and others entered into a Project Agreement for a proposed development project called the Trans-Papua Highway (Project Agreement). 

2.   In August 2014, ITSL purportedly issued a notice of arbitration claiming amongst others that the State did not meet its obligations under the Project Agreement and that this had resulted in ITSL suffering damages exceeding USD$400 million at that time and USD$1.4 billion in total. The State denies the allegations of default or breach of the Project Agreement. The State commenced this proceeding seeking declaratory relief to the effect that the Project Agreement is inoperative and unenforceable and that ITSL is not entitled to commence and prosecute arbitration proceedings against the State under the Project Agreement. Consequential orders are also sought.

3.  The State submits that the relief that it seeks should be granted as:

a)	the State disputes that ITSL has any basis upon which to have 	commenced arbitration proceedings and have the Appointing 	Authority and Sole Arbitrator appointed;

b)	a necessary party, the Fly River Provincial Government (FRPG), has 	not executed the Project Agreement or become bound by it and in the absence of that party there is no intention to create legal relations and the Project Agreement has not come into legal effect as between the 	parties who have signed;

c)	the clause in the Project Agreement whereby the State submitted certain disputes to a specific form of arbitration does not encompass 	the form of arbitration commenced by ITSL and therefore the State 	has not submitted to the arbitration commenced by ITSL;

d)	the arbitration clause in the Project Agreement contains the extent to which the State agreed to submit certain disputes to arbitration;

e)	this obligation to arbitrate disputes is expressly conditional upon certain conditions precedent being fulfilled. Those conditions precedent have not been fulfilled. Therefore the arbitration clause has 	not been enlivened, and there can be no submission to arbitration by the State;

f)	on the face of the Project Agreement, the FRPG is a necessary party and in the absence of FRPG’s execution, the Project Agreement has not come into effect and is inoperative and unenforceable.

4.   ITSL submits that the relief sought by the State should not be granted as amongst others:

a)	the Project Agreement is enforceable notwithstanding that it was not 	executed by the FRPG;

b)	the claims of the State fall within the definition of “Dispute” in the Project Agreement and this Court does not have jurisdiction in respect of those claims;

c)	the originating summons seeks declarations without reference to any basis in statute or pursuant to the National Court Rules;

d)	the arbitration dispute clause in the Project Agreement is sufficiently broad in its terms to resolve any uncertainty, and by referring to the UNCITRAL arbitration rules as to arbitration, and the procedural 	rules therein, the parties wanted to ensure that the arbitration would be 	operable and took into account circumstances such as the discontinuance of the PNGCDC;

e)	it is not appropriate to seek the relief that the State seeks, by 	declaration;

f)	there is no public policy in Papua New Guinea that overrides a 	decision of parties, in this instance, the State, to arbitrate.

Failure of FRPG to execute the Project Agreement

5.   The State submits that FRPG is an essential party to the developments canvassed by the Project Agreement as all the activities contemplated by it are to take place in its province. The activities are subject to FRPG jurisdiction in all relevant areas and particularly in forestry and agro-forestry; renewable and non-renewable natural resources; agriculture; community, urban and rural development; and transportation and facilities. In the absence of execution and accession by a necessary party who was intended by the other parties to be bound by the Project Agreement, the Project Agreement has not yet come into force and is inoperative and unenforceable.

6.   ITSL submits amongst others that:

a)	the Supreme Court has held that signing a formal agreement is not necessary to bind the parties to a contract. The parties conduct establishes that the FRPG was a party to the Project Agreement, whether or not it signed the Project Agreement;

b)	the Deputy Governor of FRPG attended the signing ceremony for the Project Agreement on 23rd May 2011 and no objection was taken by the FRPG to the signing of the Project Agreement;

c)	the State agreed to several recitals in the Project Agreement reflecting that the FRPG was in agreement with the project and was a party to 	the Project Agreement;

d)	the State has recognised and acknowledged since the Project 	Agreement was signed that it is valid and binding;

e)	the State has issued authorisations and approvals, including the FCA Roadline Permit, environmental permits, approvals of road and bridge design and the Department of Agriculture and Livestock has approved the Agriculture plan for Agriculture and Reforestation. This reflects 	the State’s understanding that the Project Agreement is a binding and enforceable contract;

f)	the State’s actions, after filing the originating summons, in requiring ITSL to maintain a performance bond for the FCA Roadline Permit and complaining about an alleged failure by ITSL to begin 	construction on the subject highway, reflects the State’s understanding 	that the Project Agreement is binding and enforceable;

g)	State officials by stating that the State is in breach of the Project Agreement, have demonstrated that the State believes that the Project Agreement is valid and binding.

Consideration

7.   The law concerning whether a contract is binding was considered in Shell Papua New Guinea Ltd v. Speko Investment Ltd (2004) SC767. The Supreme Court stated that:

“Notwithstanding the absence of a formal written agreement, it is possible for a binding contract to be entered into either in writing, or oral, or by conduct, or a mixture of those methods.  The question is whether it can be said that a binding contract was entered into in the circumstances of this case. 

In determining this issue, the intention of the parties to enter into an enforceable contract is critical.  The Court will have to infer from the conduct as would (sic) a reasonable person would do.  The test is an objective one.”

8.    The Court then reproduced a passage from the Australian High Court case of Masters v. Cameron (1954) HCA 72 [9]-[12]. That passage detailed three classes of agreement and the principles to be considered in determining whether they are binding. I refer also to the Supreme Court case of Jixing Industries Ltd v. Aitape Metropolitan Forest Investment Ltd (2013) SC1294. After referring to Rushton (Qld) Pty Ltd & Ors v. Rushton (NSW) Pty Ltd & Ors [2003] QSC 8, the Supreme Court at [18] said:

“… 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)”

9.    In the English and Wales Supreme Court case of RTS Flexible Systems Ltd v. Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, Lord Clarke at [45] stated:

“Whether there is a binding contract between the parties and, if so, upon what terms depends on what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.”

10.  Then in the English and Wales Court of Appeal case of Reveille Independent Llc v. Anotech International (UK) [2016] EWCA Civ at 443 at [40] Cranston J said:

“First, classical analysis finds the parties’ consent to a contract in the acceptance of an offer, and it is well accepted that acceptance can be by the conduct of the offeree so long as that conduct, as a matter of objective analysis, is intended to constitute acceptance: Brogden v. Metropolitan Railway Co (1877) 2 App Cas 666. Secondly, as in Brogden, acceptance can be of an offer on the terms set out in a draft agreement drawn up between the parties but never signed. Thirdly, if a party has a right to sign a contract before being bound, it is open to it by clear and unequivocal words or conduct to waive the requirement and to conclude the contract without insisting on its signature: Oceanografia SA de Cv v. DSND Subsea AS (The Botnica) [2006] EWHC 1360 (Comm);[2007] 1 All E.R. (Comm) 28 at [94], per Aikens J.

41. Fourthly, if signature is the prescribed mode of acceptance an offeror will be bound by the contract if it waves that requirement and acquiesces in a different mode of acceptance. In my view it follows that where signature as the prescribed mode of acceptance is intended for the benefit of the offeree, and the offeree accepts in some other way, that should be treated as effective unless it can be shown that the failure to sign has prejudiced the offeror: see Chitty on Contracts, 32nd ed, 2015, 2-066, 2-067; MSM Consulting Ltd v. United Republic of Tanzania [2009] EWHC 121 (QB), at [119] per Christopher Clark J. Fifthly, a draft agreement can have contractual force, although the parties do not comply with the requirement that to be binding it must be signed, if essentially all the terms have been agreed and their subsequent conduct indicates this, albeit a court will not reach this conclusion likely: RTS Flexible Systems v. Molkeroi Alois Muller GmbH (supra) at [54]-[56]. Finally, the subsequent conduct of the parties is admissible to prove the existence of a contract, and its terms, although not as an aid to its interpretation: Chitty on Contracts, 32nd ed, 2015, 13-129.

42. These rules take effect against the background of legal policies recognised in the case law. One such policy is the need for certainty in commercial contracts, a policy which since Lord Mansfield’s time has run as a thread through the jurisprudence. That need for certainty applies as well in commercial negotiations and to the question of whether a contract has come into existence: see Cobbe v. Yeoman’s Row Management Ltd [2008] UKHL 55; 1 WLR 1752, at [91] per Lord Walker. A second policy is that in commercial dealings the reasonable expectations of honest, sensible business persons must be protected. In giving the judgement of the Supreme Court in RTS Flexible Systems Ltd v. Molkerei Alois Muller GmbH, Lord Clarke, at [50], approved dicta of Steyn LJ in G. Percy Trentham Ltd v. Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25, that when considering whether a contract has come into existence, “the governing criterion is the reasonable expectations of honest sensible businessman. Contracts may come into existence, not as a result of offer and acceptance, but during and as a result of performance” (see also First Energy (UK) Ltd v. Hungarian National Bank Ltd [1993] BCC 533, 533, per Steyn J).”

11.    Specifically as to whether a signature is required, in Aitken v. Batchelor (1893) 68 LT Rep N.S. 530 at 531, Collins J, referring to Baker v. Yorkshire Fire and Life Insurance Company (1892) 66 LT Rep N.S. 161 said:

“It is clear from that case that there may be an agreement taken in writing and signed by one side only, if the court is satisfied that sets out the intention of both parties.”

12. Then in the Court of Appeal case of Excomm Ltd v. Ahmed Abdul–Qawi Bamaodah (The “St. Raphael”) [1985] 1 Lloyd’s Rep 403 at 409, Lloyd J said:

“If it were necessary to decide, I should say that the whole of the contract between the parties here was contained in the broker’s note, one copy of which was signed by the plaintiffs and another copy of which was sent by Marpro Ltd to Saudi Marketing Establishment for onward transmission to the defendant. When I refer to the broker’s note I include, of course, the documents incorporated in the broker’s note by reference. The fact that the broker’s note was never signed by the defendant makes no difference.”

13.   The State submits that it was absolutely critical that FRPG be a party to the Project Agreement as all the activity as contemplated by it are to take place in the Fly River Province and the FRPG has jurisdiction in all relevant areas pursuant to The Organic Law on Provincial Governments and Local level Governments. As the FRPG did not sign, the other parties are not bound. Reliance is placed upon the case of John Spencer Harvey v. Dunbar Assets plc [2013] EWCA Civ 952. That case concerned whether an intended guarantor was liable under a composite joint and several guarantee in circumstances where one of the other four intended guarantors had not signed the instrument. It was held that liability as a “Guarantor” was only imposed on an individual signatory to the Deed in circumstances where all the named individuals together defined as “Guarantor” did sign the Deed, as the Deed on its true construction was subject to a condition that it would be signed by all the intended guarantors named as such in the Deed.

14.   In this instance, I am not satisfied that there is any such condition that may be construed from the provisions of the Project Agreement such that all parties are to execute the Project Agreement for it to become binding and enforceable.

15.   From the evidence, and relying upon the authorities to which I have referred I am satisfied that there was a meeting of minds between the parties to the Project Agreement and that the State by the conduct of its officers, has recognized, acknowledged and proceeded on the basis that the Project Agreement is valid and binding and that the State is bound by and to the Project Agreement. Examples of this include correspondence from the Secretary of the National Executive Council to the Acting Secretary Department of Commerce and Industry, enclosing a copy of the executed Project Agreement and stating amongst others, that the Project Agreement is therefore binding, the issuing by the State of authorisations and approvals required under the Project agreement, and the requiring of ITSL to maintain a performance bond for the FCA Roadline Permit that was issued under the Project Agreement. That the FRPG did not execute the Project Agreement does not to my mind, render the Project Agreement as unenforceable or non-binding. The submissions of the State on this issue are rejected. Given this finding, the next issue for consideration is whether this court has jurisdiction under the Project Agreement.

Whether this court has jurisdiction

16. ITSL submits that this court does not have jurisdiction over the State’s claims in its originating summons. This is because all of the relief sought by the State and the factual and legal issues that the State submits for determination by this court, fall within the definition of “Dispute” under the Project Agreement. Only matters which are “not a Dispute referable to arbitration under Clause 27 or a difference of view or disagreement referable to a Sole Expert under Clause 27.7” may be submitted to the “non-exclusive jurisdiction of the National Court of Papua New Guinea.” The term “Dispute” includes “any dispute, disagreement, controversy, or claim arising out of or relating to this Agreement or the interpretation or performance of provisions of this Agreement or the breach, termination or validity thereof, which the Parties are unable to resolve by mutual agreement within a reasonable time.”

17. As the State seeks relief requiring the interpretation of the provisions of the Project Agreement, ITSL submits that this is a dispute which the State contractually agreed must be referred to arbitration under clause 27.

18. The UNCITRAL Rules to which the State agreed, provide amongst others, that “the arbitral tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.” Therefore the proper and only forum in which the State can object to ITSL’s commencement and prosecution of arbitration proceedings, is the arbitration itself, ITSL submits.

Consideration

19. To determine whether this court has jurisdiction, it is necessary to give consideration to the wording of the Project Agreement. In this regard, as I did in Kumul Consolidated Holdings v. Kurkuramb Estates Ltd (2017) N7429, I refer to and am mindful of the following statements:

a)	In Niugini Civil and Petroleum Ltd v. West New Britain Development 	Corporation Ltd (2005) N2909 the court said in regard to an 	arbitration clause:
	“It is necessary to ask this question so as not to lose sight of the fundamental task 	of the court, which is to ascertain the intention of the parties, evidenced by the 	agreement that they have lawfully entered into. Sakora J made the point pithily in Huon Electrical Ltd v. RD Tuna Cannery Ltd (2000) N2005, when granting an application by a defendant to stay proceedings and refer a dispute to arbitration. His Honour stated:
	The… point to make is that the contract containing the arbitration clause … is an 	agreement, a mutual agreement at that, between the parties. It is, therefore, no 	function of the Court to write up new contracts for the parties, as it were. The 	Court’s function is only to interpret the contract, according to law, to determine 	what was it that the parties intended and entered into, and with what legal 	consequences, if any.”
b)	In Cape Distribution Ltd v. Cape Intermediate Holdings Plc [2016] 	EWHC 119, the Court said:
	“Where the parties have expressed their agreement in a written document, the 	primary source of information about the agreement and the parties’ intention is 	the document itself. What the parties meant is most obviously to be gleaned from 	the language of the provision because, unlike commercial common sense and the 	surrounding circumstances, the parties have control over the language they use in 	a contract. Again save perhaps in a very unusual case, the parties must have been 	specifically focusing on the issue covered by the provision when agreeing the 	wording of that provision: Arnold at [17] per Lord Neuberger. Thus, where the 	parties have used  unambiguous language, the court has to apply it (Rainy Sky at 	[23] per Lord Clarke) and if the words used yield a fairly clear solution, then a 	court should pause long before concluding that the draftsman has used words 	with a meaning that do not fit the objective he was seeking to attain …”

20. Clause 26.1 of the Project Agreement is as follows:

“26. LAW AND JURISDICTION
26.1 Governing Law
The Agreement and the performance of all obligations hereunder will be governed by the internal laws of the State of Papua New Guinea, without reference to or application of its rules of conflict of laws. Notwithstanding the foregoing, the law of the State of Papua New Guinea shall not control the arbitration or mediation clauses.”

“arbitration or mediation clauses” are not defined in the Project Agreement. No issue was taken with clause 27 of the Project Agreement being an arbitration clause and in submissions the State referred to clause 27 as the arbitration clause. The State therefore, agreed that the law of Papua New Guinea shall not control clause 27 of the Project Agreement

21. Clause 26.2 of the Project Agreement is as follows:

“26.2 Submission to Jurisdiction
The parties hereby submit to the non-exclusive jurisdiction of the National Court of Papua New Guinea:

(a)	the determination of any matter arising out of this Agreement or the Project which is not a Dispute referable to arbitration under clause 27 or a difference of view or disagreement referable to a Sole Expert under clause 27.7; and

(b)	the enforcement of any award resulting from arbitration under clause 27.”

22. For the matter to be able to be submitted to the non-exclusive jurisdiction of the National Court of Papua New Guinea under clause 26.2(a), it must be a matter arising out of the Project Agreement or the Project which is not a Dispute preferable to arbitration under clause 27, or is not a difference of view or disagreement referable to a Sole Expert under clause 27.7.

23. Clause 27.1 of the Project Agreement is as follows:

“27.1 Disputes
For the purposes of this Clause 27, “Dispute” means any dispute, disagreement, controversy, or claim arising out of or relating to this Agreement or the interpretation or performance of the provisions of this Agreement or the breach, termination or validity thereof, which the Parties are unable to resolve by mutual agreement within a reasonable time. It does not include any difference of view or disagreement, which, pursuant to provisions of this Agreement, has been submitted for determination of a Sole Expert.”

24. The State seeks as its relief, declarations that the Arbitration Agreement in clause 27 of the Project Agreement is inoperative and unenforceable and that ITSL is not entitled to commence and prosecute arbitration proceedings against the State under clause 27 of the Project Agreement. This requires an interpretation of the provisions of the Project Agreement including clause 27.

25. As the determination of the relief that the State seeks requires an interpretation of the provisions of the Project Agreement, the State’s claims fall within “Dispute” as defined in clause 27.1 of the Project Agreement and are disputes that must be submitted for settlement by arbitration under clause 27.

26. The State’s claims are not therefore, matters that the parties including the State, have agreed are able to be submitted to the non-exclusive jurisdiction of the National Court of Papua New Guinea. The parties by virtue of their agreement in clause 26.2 of the Project Agreement as to submission to jurisdiction, have agreed that this court does not have jurisdiction to determine claims such as those of the State that are set out in its originating summons. Consequently I find that this court does not have the necessary jurisdiction and that the originating summons should be dismissed. Given this, it is not necessary to consider the other submissions of counsel.

Orders

27.  The Court orders that:

a)	The originating summons filed 22nd December 2015 is dismissed;

b)	The plaintiff shall pay the defendant’s costs of and incidental to the hearing of the originating summons to be taxed if not otherwise agreed;

c)	Time is abridged.

Dentons PNG:  Lawyers for the Plaintiff                     
Leahy Lewin Lowing Sullivan: Lawyers for the Defendant