Obligations increased for State Agreement participants

IF you currently rely on a State Agreement or are a third-party beneficiary to an agreement or contract, you may need to be aware of the recent decision of the Full Court of the Supreme Court in Hancock Prospecting Pty Ltd v BHP Minerals Pty Ltd.

State Agreements are generally infrastructure or project facilitation agreements between the State Government and the participants.

They also aim to benefit third parties who use the infrastructure developed by the participants.

A third party that has been deemed a beneficiary under an agreement has the legal right to enforce its benefit in certain circumstances.

The parties to the agreement must notify the third party beneficiaries and obtain their consent to any modifications or cancellation, where the third party has adopted, accepted or relied on the agreement.

The Hancock decision concerned a State Agreement between the WA Government and a group of mining companies. and related to the carriage of iron ore over a railway constructed and operated by those companies.

The central issue was whether the State Agreement created rights enforceable against the participants by third parties wishing to have their ore carried over the railway.

The appellants were prospective iron ore producers who wanted to enter these negotiations.

The participants refused, arguing those not currently operating a mine were not a ‘third party’ and had no right to negotiate.

The court held the right to negotiate and the right to have iron ore carried over the railway were benefits conferred on third parties.

These rights were enforceable under the Property Law Act, provided the claimants were ‘third parties’, the court held that a contract only needed to specify an ‘identifiable class of third-party beneficiary, which may, in certain circumstances, extend to prospective members of that class’.

The court recognised that if the class of third parties did not include prospective iron ore producers, producers would need to establish a mine and commence operations before they could negotiate to assess transportation costs.

While it was accepted the participants would incur negotiations costs, this was considered necessary for the privileged position held under the state agreement.

The court also recognised two limitations: the development plans must be well advanced and the third party must be in a position to enter into detailed contractual arrangements; and the nature of the benefit (a right to negotiate) and the commercial and practical context of enforcing this benefit meant ‘third parties’; must include prospective producers.

In other circumstances, such a broad interpretation may not be required.

This decision suggests courts are willing to broadly interpret contracts to ensure third-party beneficiaries can enforce them, an approach that may be followed in other jurisdictions.

For State Agreements, this has widespread consequences as the class of actual and potential beneficiaries under a State Agreement could be extremely wide.

As a result, participants’ obligations to notify or obtain the consent of third-party beneficiaries who have adopted, accepted or relied on the contract before modifying or cancelling it, will become increasingly onerous.

Third parties should also be aware that they may have rights of enforcement even where they are only potential third-party beneficiaries.

Participants now need to take this into account in negotiating concessions under State Agreements.

As prospective third parties may be entitled to enforce contractual benefits to commence operating and using infrastructure developed by the participants, this may diminish the profitability and overall competitive advantage in the market that the proponents originally anticipated.

Maria Lamattina

9429 7621