CHAPTER 11 OFFTAKE AGREEMENTS: A CANADIAN PERSPECTIVE

• Jurisdiction: United States

Mining Agreements: Contracting for Goods & Services
(Sep 2015)
CHAPTER 11
OFFTAKE AGREEMENTS: A CANADIAN PERSPECTIVE
Erik Goldsilver
Partner
Borden Ladner Gervais LLP
Scotia Plaza, 40 King Street West, 44th Floor
Toronto
Joelle Kabouchi ¹
Articling Student
Borden Ladner Gervais LLP
Toronto, Ontario, Canada, M5H 3Y4

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ERIK GOLDSILVER is a partner in the Securities and Capital Markets Group at Borden Ladner Gervais LLP in Toronto, and practices in the area of corporate and commercial law with specific expertise in the mining and natural resources sectors. He regularly acts for Canadian and international mining companies on acquisitions and dispositions of mines, mining projects, and mining companies; project development; and mine operations in Canada and throughout the world. Erik also advises on the structuring and negotiation of option and joint venture agreements, shareholder agreements, royalty arrangements, offtake agreements, and streaming agreements. Erik has extensive experience with all legal aspects of the development, construction, and operation of mining projects, including advising on environmental and regulatory compliance matters, permitting issues and mine closure, decommissioning, and reclamation issues. He advises mining clients on First Nation/Inuit exploration agreements, impact benefit agreements, and other commercial agreements for mine exploration and development and other infrastructure requirements. Erik also advises clients on energy-related issues, such as power procurement, interconnection, and transmission services.

Introduction

Offtake agreements are a key aspect of a successful mining project. Whether it be to secure project finance or a long-term customer, an offtake agreement formalizes promises made between buyers and sellers for the purchase and sale of production from a mining company's mine. Offtake agreements take many forms, ranging from long-term sales agreements, to spot sales contracts. Commodity sales often involve offtake agreements, and the legal complexities that surround them.

This paper is structured to provide an overview of various legal issues related to offtake agreements, adopting a Canadian perspective. It will begin by addressing how basic contract law affects agreements to agree found within offtake agreements, providing topical U.K. case law as the framework to how the area is expected to develop in Canada. Next, through recent case law, the paper will address how offtake agreements often involve the sale of commodities across multiple jurisdictions, which can create problems for secured parties dealing with commodity sellers. This part will also address how the priority of creditor claims may be addressed when offtake agreements are involved, and why registering a security interest may be beneficial to purchasers of commodities under a long-term sales contract. Finally, the paper will address and explain the legal concept of force majeure, and the value it adds to offtake agreements generally.

Part I: MRI Trading: Offtake agreements and agreements to agree

Introduction

The foundation of any enforceable contract, such as an offtake agreement, includes an agreement between the parties. Practically, this means that courts become reluctant to construct contracts for parties that do not clearly create them.² This relates to contractual certainty, the main concern surrounding agreements to agree.

This section will explore agreements to agree, as they are commonly found within offtake commodity contracts. Generally, agreements to agree are considered unenforceable, since important aspects of the intended contract have not been determined or are left to be determined

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at a later date.³ As commercial transactions often span long periods of time, leaving commercial terms open for future agreement seems to be conducive to effective business relationships. In fact, when it comes to the negotiation of certain commercial terms, such as a price, the courts in Canada have found contracts enforceable. For instance, in Mannpar Enterprises Ltd. v Canada,⁴ although a renewal clause was unclear to the British Columbia Court of Appeal because the price remained to be settled, the contract was still enforced. As a result, instead of finding agreements that include a promise to agree on a commercial term, such as price, unenforceable, Canadian courts have found a duty to negotiate (not bargain) in good faith and not withhold agreement unreasonably.⁵ In fact, in the recent Supreme Court of Canada ("SCC") decision in Potter v New Brunswick (Legal Aid Services Commission),⁶ the Court held that "good faith" in contractual dealings, at minimum, "means being honest, reasonable, candid, and forthright".⁷

Every commercial relationship is different, and will be treated as such by the courts. Not every agreement to agree is unenforceable, and not every clause that is left for negotiation will be validated by courts. Ultimately, courts are looking for consensus ad idem, or a "meeting of the minds". When interpreting agreements to agree in offtake agreements, the courts will find a meeting of the minds when there is a sufficient degree of certainty. This will exist where, "it is clear to the objective reasonable bystander, in light of all the material facts, that the parties intended to contract and the essential terms of that contract can be determined with a reasonable degree of certainty".⁸ As succinctly stated in G.H.L Fridman's textbook, "The Law of Contract in Canada":

Constantly reiterated in the judgements is the idea that the test of agreement for legal purposes is whether parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract. The law is not concerned with their intentions, but with their manifested intentions. It is not what an individual party believed or understood was the meaning of what the other party said or did that is the criterion of the agreement; it is whether a reasonable man in the situation of that party would have believed and understood that the other party was consenting to the identical terms". ⁹

MRI Trading

In the 2013 England and Wales Court of Appeal ("EWCA") decision in MRI Trading AG v Erdenet Mining Corporation LLC ("MRI Trading"),¹⁰ the Court discusses these principles in the context of agreements to agree found within offtake agreements. The EWCA comes to the ultimate conclusion that agreeing to agree on treatment and refining charges will not render an offtake agreement unenforceable, specifically when essential terms have been agreed to, and a

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commercial relationship calls for the uncertainty created in the contract. Of course, each contract needs to be assessed on its own merits, as not all offtake agreements will be analogous to the one in MRI Trading.

The facts in MRI Trading are not new to the world of offtake contracts. Essentially, the purchaser (MRI Trading) and seller (Erdenet Mining Corporation "EMC") entered into an offtake agreement for the supply of copper concentrates. A dispute subsequently arose concerning the performance of the contract. The dispute was referred to arbitration, which was then terminated by the parties, as they entered into a settlement agreement dated January 30th, 2009 ("2009 Settlement Agreement"). Three offtake contracts were entered into under the 2009 Settlement Agreement for the supply of copper concentrate. Under the third contract ("2010 Contract"), three terms were left for agreement: the shipping schedule, the treatment charges, and the refining charges. EMC refused to perform the 2010 Contract because it left the above three matters for agreement "during the negotiation of terms for 2010". EMC believed that the 2010 contract was an agreement to agree that was too uncertain to be enforced.

The London Metal Exchange's Decision:

The Arbitrators, the London Metal Exchange ("LMC"), concluded that since the 2010 Contract left material terms as "agreements to agree", EMC's obligation was non-existent on account of uncertainty. The effect of the uncertainty rendered the 2010 Contract unenforceable. In reaching this decision, the Arbitrators chose to ignore the 2009 Settlement Agreement when analyzing the certainty of the 2010 Contract. In terms of what the Arbitrators did consider, they provided various factors that should be evaluated when interpreting agreements to agree, including:

• Facts and circumstances of the agreement;

• Acting in such a way that would suggest they believed they had a binding contract;

• The need to leave matters to be adjusted in the working out of the contract - particularly where there has been part performance. The Arbitrator did not consider this factor in MRI's favour, since it was decided that there was no part performance, and resultantly no need to leave matters to be adjusted;

• Express stipulations for "reasonable" or "fair" measures;

• Provisions for a "machinery" for determining the matter in the future. The court may also provide its own "machinery";

• The presence of an arbitration clause;

• The parties' intent regarding contract formation.

The England and Wales Court of Appeal Decision

Although not dismissing the relevance of the factors outlined by the Arbitrators, the EWCA strongly disagreed with their conclusion and analysis. In fact, the EWCA was so opposed to the decision of the Arbitrators, that it varied the award on its own, without remitting it back to the Arbitrators for reassessment. In upholding the decision of the Court of First Instance, the EWCA varied the award in favour of the buyer, MRI. Lord Justice Tomlinson, who provided the

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reasons for the EWCA's unanimous decision, held that MRI and EMC had a binding contract that should be construed in a matter that would allow the contract to be carried out.

The EWCA further held that the Arbitrator's...