Merewether v Scottish Australian Mining Co Ltd [1907] HCA 8; (1907) 4 CLR 953 (4 April 1907)

Merewether and Others Plaintiffs, Appellants; and The Scottish Australian Mining Co. Ltd. Defendants, Respondents.

The Full Court directed a new trial, being, as I understand the judgment of the learned Chief Justice, of opinion that the question whether the mode which the defendants adopted of working the seam, namely leaving the portion below the "morgan" in situ, was in fact the best and most approved method of working that seam, was open upon the true construction of the covenant. In that view, as this question had not been determined, a new trial was obviously necessary. The plaintiffs now appeal to this Court, claiming to be entitled to judgment on the admitted facts. The defendants gave notice that they would ask for judgment to be entered for them. This notice was, however, founded upon a mistaken interpretation of a special finding of the learned Judge to which it is not necessary further to refer.

The first question for consideration is as to the construction of the covenant. Some reliance was placed by the plaintiffs upon the words "continuously" and "uninterruptedly" as indicating an intention that the whole of the seam should be taken out. They also relied on the proviso for terminating the lease on the mine being "completely and effectually worked out and exhausted," and on the stipulation contained in the provision for the case of faults or dislocations, in which the obligation of the lessees was made to depend upon the coal when found beyond the fault being workable and marketable. In my opinion, although of course all parts of the deed may and should be considered in construing any part of it, none of these phrases afford any assistance in the construction of the covenants "to work in the best and most approved method." Whatever obligation is imposed by those covenants is to be performed "continuously" and "uninterruptedly" during the term, and until by its performance the mine is "completely worked out and exhausted," unless the term comes to an end before that point is reached; but the nature of the obligation itself is not affected by those words.

In construing the language of the covenants it is important to bear in mind that the subject matter was a seam of coal not yet discovered, although assumed to exist under the land demised. It was not known whether the seam would prove to be of such a character that a person entitled to work it would, if he had a prudent regard for his own interests, be likely to work the whole thickness. Nor was it known what would prove to be the best method of working a seam of such a character as it might prove to possess. The obligations imposed by the covenants were therefore undefined and could only be determined after discovery of the seam and of its character.

It was contended by the plaintiffs that the language of the covenants creates two distinct obligations:—(1) To work the seam, and (2) to work it in the best and most approved method; that the former imports an obligation to work the whole thickness of the seam; and that the latter obligation relates to manner only and not to subject matter. On the other hand, it was contended that the covenant is single and not double, and that, even if it is construed as comprising two obligations, still the words must be read so as to give effect to both, and that in this view the obligation to work in the best and most approved method qualifies the obligation to "work," whatever that may mean, at least so far as to forbid any working which would not be in accordance with the best and most approved method of working a seam of such a character. I cannot see any answer to this latter contention. If, therefore, the defendants can establish that working in any manner other than that which they in fact adopted would not have been working in the best and most approved method, I think that they would be entitled to judgment. I agree that it would be no answer to a complaint that the defendants did not work the seam at all to say that leaving it altogether unworked was the best and most approved method of working it. That was the only point decided in the case of Watson v. Charlesworth[1], which is certainly not a direct authority on the question whether leaving a part of a seam unworked is a breach of a covenant to "work" the seam.

I will, however, assume for a moment that the covenant to work the seam is, so far as regards quantity, distinct from, and unqualified by, the words "in the best and most approved manner." There is no doubt that a lessees' covenant to "work" a seam of coal itself implies an obligation to use such reasonable care and skill in doing so as a prudent owner would use. But I do not think that, of itself, such a covenant implies any stipulation as to the quantity to be extracted. Words which have no technical legal signification are to be construed according to their ordinary use. The word "work" has no technical legal meaning. An ordinary person, if asked whether the defendants were working the "Borehole" seam would undoubtedly say "Yes." A covenant to work the whole of a seam of coal is not uncommon in a mining lease, as was shown by the precedents cited to us by Mr. Lamb, in some of which special provision is made for estimating the damages in respect of coal left unworked in breach of such a covenant. In the case of Jegon v. Vivian[2], in which it was contended that a covenant to work in a proper and workmanlike manner implied an absolute obligation to work continuously, Lord Hatherley L.C. said:—"Then as to the continuous working: It must be remembered that the subject-matter is a coal mine, and there are various provisions about working coal. An obvious remark on that would be that where one person is taking a mine and another person is letting a mine, they both think the mine will be worked; and in numerous leases which have come before the Court, there is a covenant on the part of the lessee to work the mines continuously, and there are other provisions of that kind. But when that is intended it is stated. A lessee entering into such a covenant cannot complain if he is unable to fulfil his engagement, but here there is nothing of the sort. It is said, that because the lessee covenants that he will do the work in a workmanlike manner, he has covenanted to be always working. But there are various approved modes of effecting such a purpose. One is to take so heavy a dead rent as to make the lessee find it to his own benefit to work, because the rent must be paid whether he works the mine or not. Another mode is to have an express covenant that he shall continuously work. Another mode is to say that so much coal shall be raised per annum; but to say that this is to be implied from a covenant to work in a workmanlike manner would be a very great stretch of the terms actually employed. If the parties meant the lessee to work continuously, they ought to have said so. It is true that there is no dead rent reserved of such an amount as to compel him to work; but I cannot say there is anything on the face of the lease to justify me in saying that this mine was intended to be continuously worked, and I cannot strain the words so far as to say that the lessor has secured it by any covenant or engagement in the lease." So in this case, in my opinion, if the plaintiffs desired to impose an obligation to work the whole of the then undiscovered seam, i.e., to take out all the coal, they ought to have said so in plain words, and I do not see my way to "strain the words so far as to say that the lessors have secured it by any covenant" in the lease, unless such working should turn out to be the "best and most approved method." The defendants rely on these same words as excusing them from taking out the whole of the seam.

Assuming, however, that a covenant to work the seam simpliciter would primâ facie impose an obligation to work the whole of it, I will proceed to consider how far such an obligation is qualified by the obligation, equally explicit, to work the seam in the best and most approved method. Although the plaintiffs' counsel urged that the words "best and most improved method" relate only to the mode of working, and have no application to the subject matter of the work, they were obliged to admit that "working in the best and most improved method" may in some cases, easily suggested, be consistent with leaving a portion of the seam unworked. For instance, it might be practically necessary to leave a small portion of coal for support of the roof. Or a portion—say a foot in thickness—at the top or bottom of what is, strictly speaking, the seam might be so divided into layers of coal and rock or earth that working it would be a mere waste of labour. Or a layer of coal, say six inches in thickness, might be separated from the rest of the seam at top or bottom by a single layer of very hard mineral under such circumstances that the coal could not be obtained without great and useless expense and perhaps danger, or without injury to the quality or diminution of the quantity of the rest of the coal. I cannot doubt that in any such cases, which may be indefinitely multiplied, the best and most approved method, indeed, the only rational method, of working the seam would or might be to leave the portion in question unworked, and that to work it would be a breach of the covenant.

If this is the true construction, the question of what is the best and most approved method must in each case be a question of degree, i.e., a question of fact. It is contended by the appellants that questions of mere expense of working are irrelevant. In the case of an absolute and unqualified covenant to work the whole of the seam no doubt that would be so. But the covenant now under consideration is, as I have shown, not unqualified, and I am not prepared to say that when the obligation is to work in the best and most approved method such questions are necessarily irrelevant. If one method of working would produce a somewhat larger output than another otherwise unobjectionable, but at an unreasonably disproportionate increase of cost, I think that the less expensive method might be reasonably regarded by experts in coal mining as the best, and would therefore be the most approved, method. But I agree that in the case of an absolute covenant to work a mine in the best and most approved method the element of cost is only a subordinate consideration.

For these reasons I am of opinion that the defendants were not bound to work the whole of the seam, if leaving part of it unworked was, as a matter of fact, the best and most approved method of working that seam. As this question of fact has not been determined, the plaintiffs are not entitled to judgment, and the order for a new trial must stand.

It will, however, I think, be found that, after all, the question of the construction of the covenants is not of so much consequence in the present case as appeared at first sight. The defendants contend that upon any construction the damages have been assessed on the wrong basis, and as the case must go for a new trial it is desirable that the Court should express its opinion upon that point.

The damages recoverable for a breach of covenant (apart from nominal damages) are such a sum as will put the covenantee in the same pecuniary position as if there had been no breach. The mere breach of a covenant to work a mine in a particular manner may or may not cause an actual pecuniary loss, present or future. The breach of a covenant to work the whole of a seam of coal may, as in the present case, if the covenants impose that obligation, result in depriving the lessors of the value of the portion left unworked. But if the output of the mine during the term is not diminished by the failure, the royalty payable is not diminished, and the lessors do not sustain any immediate loss. The injury in that case is to the reversion, and the damages must be measured by the diminution in the value of the reversion. There is not in the present case any stipulation as to the minimum quantity of coal to be worked during the lease, or during any year. The lessors could not, therefore, found any complaint on the basis that too little coal has been won. The learned Judge, as already stated, estimated the damages on the basis of an additional output during the period in question of coal the royalty on which would have amounted to £1,838. On careful consideration it will be apparent that this basis was erroneous.

In the first place it does not appear, nor is there any reason for assuming, that the total annual output of round coal from the mine would have been increased if the seam had been worked as desired by the plaintiffs. On the contrary, there was evidence that it would have been diminished. Again, there was evidence that the quality of the coal would have been injuriously affected by working the whole seam. In either view the royalty payable during the period would have been diminished, so that, if this evidence were to be relied on, the immediate effect to the plaintiffs has been to increase, and not to diminish, the royalty presently payable to them.

If it be assumed that the value of the annual output would have been equal, the only damage to the plaintiffs would be that at the termination of the lease there would have been so much less workable coal left in the mine; and to the extent of the present value to the lessors of the coal, which would have been, but will not be, left, the value of the reversion has been diminished. But no further. If, on the other hand, by working the whole of the seam the total annual output would have been diminished, the quantity left at the end of the lease would be pro tanto increased, and the assumed diminution of the value of the reversion would be pro tanto lessened. Again, if by working the whole seam the value of the total output, and consequently the royalty payable in respect of it, would have been diminished by reason either of quantity or quality, the plaintiffs have in effect received royalty in excess of that which they would have received if the defendants had worked the whole of the seam. That is to say, they will during the lease have received royalty in respect of part of the coal which they claim should have been left in the mine at the end of the lease. It is clear that they cannot receive this value twice over. It would, therefore, have to be deducted from the assumed value of the coal that ought to have been left in the mine at the end of the lease. Further, if the quantity or value of the output has been actually increased by the defendants' error, the actual loss sustained by the plaintiffs cannot be ascertained without their giving credit for the benefit arising from the acceleration of payment of royalty thus accruing.

In short, in order to assess the real damages two calculations must be made. On the one hand, it must be ascertained what pecuniary benefit the plaintiffs would have derived from the lease if the covenants had been strictly observed, making allowances for possible diminution in output and in price, and for the possibly increased quantity of coal remaining unworked and workable at the end of the lease. On the other hand, it must be ascertained what profit the plaintiffs will have derived from the lease under the actual circumstances, making allowance for all the contingencies to which I have called attention. It is not at all certain on which side the ultimate balance would be found. It is, at least, quite possible that the two amounts would be equal or substantially equal, in which event it would be found that it was for the mutual benefit of the lessors and lessees to work the mine in the same way as a prudent owner in fee simple would work it. It is in this view that I said that the construction of the covenant may turn out to be of comparatively little importance.

The learned Judge has taken only one side of the account, and that, as I have shown, on an erroneous basis. There must, therefore, in any event, be a re-assessment of damages, and for the reasons I have given in the first part of this judgment, there must, in my opinion, be a new trial to determine whether the defendants have in fact committed any breaches of covenant.

I am of the same opinion, and it is not my purpose to express myself at any very great length, but merely to address myself to one or two phases of the case.

One principle for the construction of deeds or agreements containing a number of covenants or promises has been very clearly stated by Lord Denman C.J. in Aspdin v. Austin[3], where he said:—"Where words of recital or reference manifested a clear intention that the parties should do certain acts, the Courts have from these inferred a covenant to do such acts, and sustained actions of covenant for the nonperformance, as if the instruments had contained express covenants to perform them. But it is a manifest extension of that principle to hold that, where parties have expressly covenanted to perform certain acts, they must be held to have impliedly covenanted for every act convenient or even necessary for the perfect performance of their express covenants. Where parties have entered into written engagements with expressed stipulations, it is manifestly not desirable to extend them by any implication: the presumption is that, having expressed some, they have expressed all the conditions by which they intend to be bound under that instrument ... It is one thing for the Court to effectuate the intention of the parties to the extent to which they may have, even imperfectly, expressed themselves, and another to add to the instrument all such covenants as upon a full construction the Court may deem fitting for completing the intentions of the parties, but which they, either purposely or unintentionally, have omitted. The former is but the application of a rule of construction to that which is written; the latter adds to the obligations by which the parties have bound themselves, and is of course quite unauthorized, as well as liable to great practical injustice in the application." This principle is again exemplified in the case of Hamlyn & Co. v. Wood & Co.[4], where Kay L.J. said:—"The Court ought not to imply a term in a contract unless there arises from the language of the contract itself, and the circumstances under which it is entered into, such an inference that the parties must have intended the stipulation in question that the Court is necessarily driven to the conclusion that it must be implied." In Charlesworth v. Watson[5] the very thing which we are here asked to imply was expressed, and I am unable to agree that it applies to this case. We must take this covenant to mean all that it says and no more, according to the ordinary meaning of the words used, which are not technical in the sense that they have acquired a new meaning in relation to coal mining. I do not see how we can imply a covenant either to work the whole seam or to work the mine to exhaustion. Nor can we read the existing covenant to continuously work and carry on the coal mines, according to the most approved method of mining, uninterruptedly, and with full and unabated vigor during the term, as itself meaning a covenant to work the whole seam or to exhaust the coal, whether we read the words as one or as several covenants. But the contention is that it is a covenant to work the whole seam, so that not only that part of it above the "morgan," which the defendants have treated as the limit of their workings, must be taken out, but also the part below the "morgan," which has been given a technical name in the discussion, "the four inch" or "little tops."

Dr. Sly has appealed to several other portions of the deed as furnishing an implication to support this contention. With every endeavour to follow his argument, if I could, because there is much in the reason of the case, apart from its purely legal aspect, that would tend to lead one to that mental position, I have not found any justification for the inference which is sought to be drawn from the rest of the deed. I think it is to be read according to the principle laid down in the two cases to which I have referred. Passing from the application to covenants generally of the principles laid down in those cases and coming to their application to coal mining covenants in particular, the case of Jegon v. Vivian[6] is very much in point. In that case Lord Hatherley L.C., in dealing with a coal mining lease, said[7]:—"It has further been argued, that giving the lessees power to do certain acts implies a covenant on their part to do them; but that is a complete inversion. The lessee has secured to himself certain advantages, without introducing any corresponding obligation." That is one of a class of cases like Eadon v. Jeffcock[8] and Lewis v. Fothergill[9], which exemplify the principle that, if the parties intend to bind one another to obligations which are outside the ordinary meaning of the words used in the covenant, it is their duty to express them in the document that they have together framed. So in the case of Jegon v. Vivian[10] it was held that, if the lessors intended to compel the lessees to work the coal from the deep, that is, to sink a deep pit, and not to work by instroke, they should have so provided. So here, if the lessors wanted the lessees to work the entire seam of coal, they should have stipulated for it in the covenant. We find no such words in the covenant, though we find expressions from which Dr. Sly endeavoured to draw the implication. But the principle laid down in the case of Hamlyn & Co. v. Wood & Co.[11] by Kay L.J. is that the intention of the parties is not to be left to inference, unless from the language and the circumstances there arises an inference so absolutely necessary to the general intent of the deed that it must be supplied. A covenant to work according to the best and most approved method is somewhat similar to a covenant to work in a proper and workmanlike manner, and as to the latter Lord Hatherley L.C. in Lewis v. Fothergill[12] made some reference to the principle of construction:—"A proper and workmanlike manner may not mean the best possible mode of working for the lessor, but it means in such a manner as shall not be simply an attempt to get out of the earth as much mineral as can be got for the particular purpose of the lessee, regardless of any ordinary or workmanlike proceeding. That is the extreme contention on the one side, and the extreme contention on the side of the landlord is to say that these words proper and workmanlike manner mean that the lessees are to take means the most expensive possible, and the least likely to produce profit for themselves, for the express purpose of putting the lessor in the best possible position at the time when the lessees give up the mine. Either one or the other of those views is extreme, and we must look to see what the landlord has done with reference to protecting himself by the agreement. The landlord must be supposed to have known through his agents what it was he was dealing with, and to have known what was the ordinary course of protecting himself if he wished to be protected. Now as to the two systems in question, the one of working by instroke, and the other of working by means of a pit, they occur continually in mining leases, and provisions are often made expressly upon that subject." As to the meaning of this covenant the two contentions which His Lordship thought to be extreme ones have been put with extreme vigour and ability on the respective sides of this case. It seems to me that the true meaning lies between. It is impossible to say that a covenant for working the seam in a proper and workmanlike manner or according to the best and most approved methods, means that the element of profit can be left altogether out of consideration, or on the other hand that that is to be the leading consideration. That would be to say that to work a mine in the best and most approved method would mean that it ought to be worked entirely in the interest of one or the other of the parties according to their extreme contentions. An analogy to a covenant of this kind is to be found in Jones v. Shears[13], in which there was an agreement to continue to work a colliery rented by the defendant, so long as it was "fairly workable." A breach was assigned in terms, and traversed. There was still coal, but such as it would not pay to work. Coleridge J. held that under those words the defendant was not obliged to go on working the mine "at a dead loss." That was not saying that profit or loss is the entire consideration, but that the covenant must be construed reasonably. So that the work is not to be abandoned simply because it cannot be carried on without some loss. There may be periods during the lease when the profits from the working of the mine under a particular system are large, while at other times they are small or perhaps disappear altogether, according to the market value of the coal. But the whole period must be considered together, or else there will have to be a different reading of the covenant at every variation of the market. In Griffiths v. Rigby[14], there was a proviso for cesser of rent if the coal, so far as it could be "fairly wrought," should be worked out and gotten before the expiration of the term. That is similar to the provision here with reference to the exhaustion of the mine and giving notice of the termination of the tenancy in case of that occurring. In that case Pollock C.B. said[15]:—"Profit is not the test whether this coal can be fairly wrought, though in one sense it is so, because the usages of mining are founded on what can be done advantageously. Fairly wrought means, that which can be fairly and properly gotten," (that is, I suppose, according to a fair and reasonable system of working) "according to mining usage, without extraordinary difficulty or expense." So that, while on the one hand we find it laid down that the lessee is not bound to work the mine at a dead loss, on the other hand he is expected to carry on operations continuously unless what it is endeavoured to drive him to do involves extraordinary difficulty and expense. In Lewis v. Fothergill[16], Lord Hatherley L.C., after stating the extremes of argument, did not, in dealing further with the case in which that covenant existed, define the meaning of the covenant in absolute terms, nor is it absolutely defined in any case cited to us. It is a matter of very great difficulty to define it. But one would say that a covenant of this kind must necessarily be interpreted with reference to the subject matter and the circumstances of the mine and the place. What would be a proper and workmanlike method in one district, might not be so in another. What would be proper in the case of a fairly defined and established seam may cease to be so where the seam narrows to a point of extreme contraction. And these are questions of fact applicable to the circumstances of the place and the conditions of the mine to be worked. In that aspect they are questions for a jury, to be decided on the evidence of those who have knowledge of the circumstances in question, and have experience in the working of mines. In the present case His Honor does not appear in his findings to have applied his mind to these questions. Finally, it may be gathered from what I have said and the authorities I have cited that this covenant cannot be taken to be an absolute covenant to work the whole seam. But it is a very material question whether, under the circumstances of the place and the mine, it would not be a proper and workmanlike method of mining to take out the coal below the "morgan." That depends wholly on circumstances, and no line can be laid down judicially upon it. If it had been intended as a covenant to work the whole seam in all events, it would have been so expressed, but that has not been expressed. But as it is in terms a covenant to work the mine according to the best and most approved methods of mining, it becomes the most material question in the case whether to work only the coal above the "morgan" and to take out the pillars as that work goes from stage to stage, instead of taking out the whole seam together, or instead of coming back while the pillars stand to take out the coal below the "morgan," is under the circumstances a working according to the best and most approved method. In deciding that question it is quite competent to take into consideration that no man can be expected to work a mine at a dead loss, and, on the other hand, to take into consideration the question whether the covenant did not cast on the lessees the burden of working the mine according to the best and most approved method, even though at times that might involve them in some loss. That is a question of evidence to which the Judge did not apply his mind as a question of fact.

As to damages I entirely agree with what His Honor the Chief Justice has said. I have endeavoured to arrive at some other method of ascertaining the damages, but I have not been able to arrive at anything that seems as reasonable as that which he has suggested.

I am also of opinion that there must be a new trial. I only wish to say a few words with regard to the defendants' contention, that, if a prudent owner would not work below the "morgan" simply on account of the unprofitableness of the lower coal, they are not obliged to do so.

In my opinion, that contention cannot be sustained. It is not a question of what a prudent owner, free to act as he pleases with his own property, and free to base his judgment upon considerations as to an indefinite future, would do. The real question is, what have the defendants covenanted to do? Shortly put, I think they have covenanted to work the seam as fully as it is workable by the best and most approved method of getting out the coal, irrespective of whether the operation of mining so carried on results in an eventual loss or gain to the lessees. Looking at the matter only from the prudent owner's standpoint entirely ignores the lessors' claims under their contract. They have, as I read the lease, parted for a term with the right to raise the mineral themselves, and permitted the defendants to make what they can out of the coal, provided they work it all so far as the seam is workable by the best and most approved method. If, for instance, by reason of a drop in the price of coal or a rise in the price of labour, the whole operation became unprofitable, the defendants would still be bound to get out the coal and hand the lessors their proportion of the selling price: See Gowan v. Christie[17]. They take the risk of whatever expense is entailed by getting it out according to the best and most approved method of working the seam. The test of what is the best and most approved method has been stated in the judgment of the learned Chief Justice, with which I entirely agree.

[1] (1905) 1 K.B., 74; (1906) A.C., 14.

[2] L.R. 6 Ch., 742, at p. 757.

[3] 5 Q.B., 671, at p. 683.

[4] (1891) 2 Q.B., 488, at p. 494.

[5] (1906) A.C., 14.

[6] L.R. 6 Ch., 742.

[7] L.R. 6 Ch., 742, at p. 755.

[8] L.R. 7 Ex., 379.

[9] L.R. 5 Ch., 103.

[10] L.R. 6 Ch., 742.

[11] (1891) 2 Q.B., 488.

[12] L.R. 5 Ch., 103, at p. 108.

[13] 7 C. & P., 346.

[14] [1846] EngR 785; 1 H. & N., 237; 25 L.J. Ex., 284.

[15] [1846] EngR 785; 1 H. & N., 237, at p. 241.

[16] L.R. 5 Ch., 103.

[17] L.R. 2 H.L., Sc., 273.

High Court of Australia

Merewether v Scottish Australian Mining Co Ltd [1907] HCA 8; (1907) 4 CLR 953 (4 April 1907)

HIGH COURT OF AUSTRALIA