Jixing Industries Limited formerly Fusen Industry (PNG) Pty Limited and Pixing Gong, Shun Fu Feng & Yan Zeng Gao v Aitape Metropolitan Forest Investment Limited (2013) SC1294

• Jurisdiction: Papua New Guinea
• Judge: Gavara-Nanu, Davani & Makail, JJ
• Judgment Date: 04 July 2013
• Court: Supreme Court
• Citation: (2013) SC1294
• Docket Number: SCA NO 63 OF 2011
• Year: 2013
• Judgement Number: SC1294

Full Title: SCA NO 63 OF 2011; Jixing Industries Limited formerly Fusen Industry (PNG) Pty Limited and Pixing Gong, Shun Fu Feng & Yan Zeng Gao v Aitape Metropolitan Forest Investment Limited (2013) SC1294

Supreme Court: Gavara-Nanu, Davani & Makail, JJ

Judgment Delivered: 4 July 2013

SC1294

PAPUA NEW GUINEA

[IN THE SUPREME COURT OF JUSTICE]

SCA NO 63 OF 2011

BETWEEN

JIXING INDUSTRIES LIMITED formerly FUSEN INDUSTRY (PNG) PTY LIMITED

First Appellant

AND

PIXING GONG, SHUN FU FENG & YAN ZENG GAO

Second Appellants

AND

AITAPE METROPOLITAN FOREST INVESTMENT LIMITED

Respondent

Waigani: Gavara-Nanu, Davani & Makail, JJ

2013: 29th February & 4th July

SUPREME COURT APPEAL – CONTRACT LAW – Memorandum of Understanding – Whether legally binding – Agreement to agree – Enforceability of

Facts

This was an appeal from the decision of the National Court which held that a memorandum of understanding between the appellants and the respondent was a legally binding contract and enforceable at law.

Held:

1. The question of whether a memorandum of understanding is a legally binding contract is a question of fact and must be decided according to the intention of the parties having regard to all the circumstances of the case.

2. In the present case, the memorandum of understanding is an agreement to agree. It is not a legally binding contract and is unenforceable at law.

3. The primary judge’s finding that the memorandum of understanding was a legally binding contract and enforceable at law is wrong.

4. The appeal is allowed and decision of the National Court is quashed.

Cases cited:

Papua New Guinea cases

Re The Companies Act Chapter 146 and Pacific Rim Corporation Holdings Pty Ltd [1992] PNGLR 491

Nings Trading Pty Ltd -v- ANZ Banking Group (PNG) Limited (1995) N1700

Tian Chen Limited -v- Tower Insurance Limited (2003) N2319

Shell Papua New Guinea Ltd -v- Specko Investment Limited (2004) SC767

Mathew Tolanas -v- Collin Gipe (2008) N3536

Raphael Loowa & Ors -v- Kanawi Pouru & The State (2009) N4029

Madang Timbers Limited -v- Valentine Kambori & National Forest Authority (2009) SC1000

Overseas cases

Masters -v- Cameron (1954) 91 CLR 358

Courtney & Fairburn Ltd -v- Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297

GR Securities -v- Baulkham Hills Private Hospitals Pty Ltd (1986) 40 NSWLR 631

Rushton (Qld) Pty Ltd & Ors -v- Rushton (NSW) Pty Ltd & Ors [2003] QSC 8 (24th January 2003)

Counsel:

Mr I Shepherd, for Appellants

Ms G Kubak, for Respondent

4th July, 2013

DECISION

1. BY THE COURT: The primary Judge determined a preliminary issue which concerned a memorandum of understanding (“MOU”) between the appellants and the respondent in proceedings WS No 482 of 2007, in particular, whether it was as a legally binding contract and enforceable at law. On 13th May 2011, his Honour found that the MOU was a legally binding contract and also ordered the appellants to pay the respondent’s costs. This is an appeal from that decision. As it was an interlocutory decision, leave was applied for and granted on 23rd August 2011.

Background Facts

3. On 22nd November 1996, the respondent entered into the MOU with the first appellant which was formerly known as Fusen Industry (PNG) Pty Limited having changed its name on 13th February 2003 to establish an agro forest project on 300,000 hectares of land in Aitape, West Sepik Province. The main features of the MOU were:

(a) The parties would apply for and take all steps necessary to obtain a permit to develop the resources under the Forest Management Agreement (“FMA”).

(b) The first appellant would undertake that it has the financial and technical resources necessary to carry out the proposed project being the development of the forest resource.

(c) The first appellant would be responsible for employment of the necessary personnel and providing the necessary financial backing for the project and including preparation of feasibility studies, etc.

(d) The parties would enter into a joint venture agreement for the project being the logging activities.

4. On 03rd May 2007, the respondent instituted legal proceedings in the National Court for breach of contract and claimed a sum of K10,000,000.00 or alternatively, damages to be assessed. It alleged that the appellants failed to provide funding of K250,000.00 to enable it to mobilise landowners and apply for the licences and permits. The appellants filed a defence denying the claim relying on:

(a) Doctrine of res judicata.

(b) Frauds and Limitations Act 1988 as the action was not commenced within six years of the date of the MOU.

(c) The MOU did not confer any contractual obligations on the parties or in any event, it was frustrated or terminated.

5. Prior to these proceedings, Richard Waisu commenced proceedings WS No 1104 of 2000, based in the same MOU. Those proceedings were dismissed for failing to disclose a cause of action. On 16th November 2000, in proceedings WS No 645 of 1998, a third party called Palmai Timber Resources Company Limited also commenced proceedings against the first appellant basing its cause of action on the same MOU. Those proceedings were also dismissed.

Grounds of Appeal

6. The appellants raised three grounds. First the MOU was an agreement to agree and therefore was unenforceable. Secondly, they submit the claim is statute barred and thirdly, the claim is res-judicata.

Parties’ Submissions

7. In their respective submissions, parties focused on the first ground. The appellants submitted that the MOU is an agreement to agree because the necessary elements of a contract are absent. There is no offer, acceptance and consideration. Given this, there is no binding contract between the parties. They relied on a number of cases including Shell Papua New Guinea Ltd -v- Specko Investment Limited (2004) SC767 (‘Shell’).

8. The respondent submitted that the primary Judge looked at the whole circumstances of how the MOU was formed and signed, and correctly found that it was a contract and binding on the parties. His Honour found that parties clearly expressed their intention in the MOU to be bound by it up to a period of three years after the commencement of the project. He further found that it clearly stipulated the obligations of the respective parties and provided for punitive action in the event of breach.

9. The respondent further submitted that clause 9 of the MOU provided for enforcement of the MOU by each party in the event of its breach in a court of law and in the case of breach by the first appellant, it will compensate the respondent for any loss of revenues and premiums due for the period of the dispute. It is submitted, this clause clearly envisaged a long term existence and application of the MOU even up to the time revenues and premiums would begin to fall due and payable. This strongly supports the proposition that parties have intended to be bound by the MOU and therefore it is a valid contract.

10. Finally, the Respondents submit that at a time when Papua New Guineans are exposed to the dynamics of modern commerce and business as a result of development of their natural resources, the National and Supreme Courts have a constitutional duty under Schedule 2.3 of the Constitution to develop the underlying law to ensure that the adopted common law principles of contract law are developed to suit the emerging trends that less commercially sophisticated Papua New Guineans find themselves in. For these reasons, we are urged to give effect to the MOU as was done by the primary judge in the Court below and also in past cases such as Tian Chen Limited -v- Tower Insurance Limited (2003) N2319.

Legal status of MOU

11. We point out that there are two different MOUs before the Court. The first one is dated 22nd November 1996 (“1996 MOU”) and the second is dated 22nd November 1997 (“1997 MOU”). In our view, the entire appeal hinges on them. The decision that is the subject of this appeal arises from the 1996 MOU. In his written decision, the primary Judge considered and focused only on the 1997 MOU. We make this finding based on the fact that whilst the trial Judge mentioned the 1996 MOU, his discussions in his decision is based on or revolves around the 1997 MOU. The respondent’s cause of action is based on the 1996 MOU. Given this, we are of the view that his Honour fell into error when he relied on the 1997 MOU and held that it was the MOU that was legally binding on the parties and enforceable at law. For this reason, the appeal should be allowed.

12. Notwithstanding this finding, we will also consider the ground in relation to the legal status of the MOU. Except in exceptional circumstances, the Court will not recognise an agreement to agree as having any legal effect: Lewison, The Interpretation of Contract 1st ed, 1989. At 179, the authors quoted Lord Denning M.R in Courtney & Fairburn Ltd -v- Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297 who held:

“If the law does not recognize a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me that it cannot recognize a contract to...