ONTARIO

SUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

COURT FILE NO.: CV-12-9556-00CL

DATE: 20130115

IN THE MATTER OF the Arbitration Act, 1991, S.O. 1991, c. 17

AND IN THE MATTER OF an Arbitration Award dated September 22, 2011

AND IN THE MATTER OF an Arbitration between Southwestern Gold (Bermuda) Ltd. and Minera Meridian Peru S.A.C. and Meridian Gold Holdings II
Cayman Ltd. and Minera Meridian Peru S.A.C.

BETWEEN:

MERIDIAN GOLD HOLDINGS II CAYMAN LTD. and MINERA MERIDIAN PERU S.A.C.

Appellants

– and –

SOUTHWESTERN GOLD (BERMUDA) LTD. and MINERA DEL SUROESTE S.A.C.

Respondents

Benjamin Zarnett and Lauren Butti, for the Appellants

Alexander Rose, Jonathan Levy and Aaron Kreaden, for the Respondents

HEARD: September 13 and 14, 2012

L.A. PATTILLO J.:

Introduction

[1] This is an appeal, with leave granted by this Court on April 23, 2012, pursuant to s. 45(1) of the Arbitration Act, 1991, S.O. 1991, c.17 (the “Act”). The Appellants, Minera Meridian Peru S.A.C. (“Minera Meridian”) and Meridian Gold Holdings II Cayman Ltd. (“MGH”), appeal from an arbitration award dated September 22, 2011 and February 8, 2012 (together, the “Award”) made by the Hon. Dennis Lane Q.C. (“the Arbitrator”).

[2] The dispute arises out of letters of understanding entered into between Minera Meridian and the Respondent Minera Del Suroeste S.A.C. (“Misosa”) setting out the terms of the ownership, management and development of mining concessions for two early stage gold mining properties in Peru known as the Millo and Azucar properties (the “Concessions”). The letters of understanding contained a right of first offer clause that applied if either party wished to “dispose of any or all interests” in, among other things, the Concessions. In late December 2009, the Appellants decided to enter into a cesión minera in respect of the Concessions with a third party as part of a larger share purchase transaction. A cesión minera is a specific type of assignment of a mining Concession under Peruvian law.

[3] At issue on the appeal is whether the Arbitrator was correct in deciding that by entering into the cesión minera, the Respondents breached both the right of first offer provision in the letters of understanding and the fiduciary duties the Arbitrator found they owed to the Respondents and whether the remedy granted by the Arbitrator was appropriate.

The Parties

[4] MGH is the parent company of Minera Meridian. The Respondent Southwestern Gold (Bermuda) Ltd. (“Southwestern”) is the parent of Misosa.

Background Facts

[5] In Peru, all mining rights belong to the state, which grants concessions to mining companies to explore and develop specific properties.

[6] In 2004, the Peruvian government sought to auction off the Concessions. Both Misosa and Minera Meridian simultaneously applied for the Concessions. Rather than bid against each other, Misosa and Minera Meridian entered into two letters of understanding dated August 10, 2004 in respect of each of the Millo and Azucur properties (collectively the “LOU”). The LOU provided, among other things, that both parties would bid for the Concessions and if either of them were successful, that party would hold the Concessions 50% for itself and 50% for the other party.

[7] The LOU further set out the terms of the ownership and development of the Concessions. The parties agreed that the structure of their relationship was to be a joint venture. Minera Meridian was appointed as the “Initial Operator” responsible for managing the project. Paragraphs 5 to 7 of the LOU provide for the creation of a management committee, equally representing each corporation, which was to guide the project. Funding and voting was to be done based on the parties’ then present interest in the joint venture. If a party elected not to contribute, that party’s interest was to be diluted on a straight line basis at 100% of the rate of expenditure by the contributing party. The LOU provided for arbitration in the event any dispute could not be resolved between the parties.

[8] Paragraph 9 of the LOU sets out a reciprocal right of first offer that would apply if a party wished to dispose of its interests in the Concessions or Joint Venture. Paragraph 9 states:

If a party wishes to dispose of any or all of its interests in the Concessions or Joint Venture it must first offer such interest to the other party for a period of 60 days. If the offer is not accepted by the other party then the first party will have the right to complete the sale or disposition of its interest for a period of 60 days thereafter to third parties on terms and conditions not less favourable than those offered to the other party.

[9] Ultimately, the Concessions were awarded to Minera Meridian, who became the registered owner of all of the rights and interests in the Concessions; although pursuant to the LOU it held 50% of these rights and interests for the benefit of Misosa.

[10] Although the LOU contemplates that the parties would later enter into a more comprehensive agreement concerning the corporate and transaction structure, they did not do so. On December 31, 2008, Southwestern and MGH entered into a memorandum of understanding (“MOU”) that provided, if warranted, that it was open to MGH to cause Minera Meridian to incorporate a new company (“Newco”) to be jointly held by Minera Meridian and Misosa. In such circumstances and if Minera Meridian, at its sole expense and risk, advanced the Concessions to the pre-feasibility stage, it could, at its sole election, obtain an additional 20% interest in Newco thereby reducing Misosa’s interest to 30%. However, these steps were never taken.

[11] Paragraph 26 of the MOU provided for a right of first offer which applied in the event that either party “wishes to transfer or assign in any way its rights or interest in Newco…”

The Option and Operations Agreement

[12] On April 21, 2009, the Appellants ultimate parent-company, Yamana Gold Inc. (“Yamana”) announced that it was offering the shares of Minera Meridian for sale. Although the Respondents’ ultimate parent-company, Hochschild Mining PLC (“Hochschild”), bid on the sale, Yamana favoured the bid of a third party, Consorcio Minero Horizonte S.A. (“Horizonte”).

[13] On December 22, 2009, Yamana, MGH, and 6855237 Canada Inc. (the immediate parent of MGH) entered into an Option and Operations Agreement with Horizonte, pursuant to which Horizonte could purchase up to 100% of the issued and outstanding share capital and voting rights of MGH from 6855237 Canada Inc. over a term of up to 36 months beginning December 22, 2009.

[14] The Option and Operations Agreement gives Horizonte an option to acquire 50%, 73% or 100% of the shares of MGH by making payments to MGH, performing certain work on Minera meridian’s assets including the Concessions as operator and by choosing to exercise “subscription receipts” and/or a “Class A Shares Option”. Schedule “I” to the Option and Operations Agreement sets out the allocation of the cash payments required to be paid by Horizonte to MGH in respect of each step in the option process.

[15] One of the terms of Option and Operations Agreement provides that for the 36 month period following the execution of the Agreement, Horizonte will be appointed as Operator of the Concessions in which Minera Meridian had an interest. Further, paragraph 5.3 of the Option and Operations Agreement contemplates that Horizonte will enter into a cesión minera (the Cesión Minera) regarding Minera Meridian’s properties, including the Millo and Azucar Properties, in order to provide it with the right under the laws of Peru to perform its obligations as Operator. The Cesión Minera remained in effect for so long as Horizonte was entitled to serve as Operator under the Option and Operations Agreement. The Cesión Minera was appended as Schedule G to the Option and Operations Agreement.

[16] Accordingly, on December 22, 2009, Minera Meridian and Horizonte entered into the Cesión Minera for a 36 month term.

[17] Hochschild took the position that the Option and Operations Agreement had the effect of assigning Meridian’s interest in the Concessions to Horizonte, without complying with the right of first offer provisions of the LOU. Pursuant to the LOU, and the subsequently signed MOU, the parties took the dispute to arbitration. The Arbitration took place on June 28, 29 and 30, 2011.

The Award

[18] In the First Procedural Award dated August 19, 2010, the Arbitrator held, among other things, that the right of first offer contained in the LOU remained in place notwithstanding the subsequent MOU.

[19] In the Initial Award dated September 22, 2011, the Arbitrator held:

• The sale of Minera Meridian to Horizonte did not constitute a breach of the right of first offer;

• While a Cesión Minera does not grant title or grant the right to transfer title, it assigns all rights and obligations inherent in the concession such that the assignee replaces the assignor in all respects and assumes all rights and obligations granted by the Concessions;

• Minera Meridian’s decision to enter into a Cesión Minera triggered the right of first offer, whether it was the LOU or MOU which was in effect. When Minera Meridian began to contemplate entry into the Cesión Minera, it became obliged to advise Misosa of its intentions and to offer the opportunity to Misosa on the same terms as it was willing to accept from Horizonte;

• Minera Meridian’s holding of Misosa’s 50% interest in the Concessions constituted a classic trust relationship which inherently imposes fiduciary duties upon the trustee;

• Since the corporate vehicle contemplated by the MOU (Newco) did not come into existence, Minera Meridian and Misosa were partners who carried on business together with a view of profit and thus had fiduciary duties to each other in that capacity;

• Minera Meridian was, by agreement, the operator of the project and was therefore a fiduciary;

• By entering into the Cesión Minera, Minera Meridian effected a dissolution of the Joint Venture created by the LOU and continued by the MOU, without the consent or knowledge of Misosa;

• In failing to inform Misosa of the Cesión Minera, Minera Meridian acted in bad faith; and

• Giving effect to the right of first offer is the preferable remedy because it comes closest to putting Misosa in the position it would have been in but for the breach of the relevant agreements. Accordingly, if Misosa was willing to acquire the rights disposed of to Horizonte, such rights should be transferred to it and the Cesión Minera should be cancelled.

[20] As a result of his findings, the Arbitrator ordered that if Misosa was willing to acquire the rights disposed of to Horizonte on appropriate terms; such rights should be transferred to Misosa forthwith. He further ordered that the Cesión Minera in favour of Horizonte was to be cancelled by Minera Meridian and removed from the mining registry.

[21] Following a subsequent attendance and further written submissions by the parties, the Arbitrator issued a supplementary award dated February 8, 2012 (the “Supplementary Award”) whereby he ordered Minera Meridian to offer to Misosa “the whole of the interest heretofore transferred or assigned to [Horizonte] in the Concessions …. on terms substantially equivalent to those contained in the Option and Operations Agreement read as a whole, including but not limited to the payments in Schedule “I” and those provisions appointing Horizonte as Operator and granting it a cesión minera, plus US$1.00.”

The Issues

[22] On April 23, 2012, Wilton-Siegel J. granted the Appellants leave to appeal the Award on the following grounds:

1. Did the Arbitrator err in finding that Minera Meridian’s entry into the Cesión Minera as contemplated by the Option and Operations Agreement triggered the right of first offer under the LOU?

2. Did the Arbitrator err in finding that Minera Meridian breached its fiduciary duties as a partner or otherwise by entering into the Cesión Minera?

3. Did the Arbitrator err in granting the remedy that he did?

Standard of Review

[23] Pursuant to s. 45(1) of the Act, this is an appeal with leave on questions of law only. The standard of review is correctness: Housen v. Nikolaisen, 2002 SCC 33, 2002 S.C.C. 33, [2002] 2 S.C.R. 235 at para. 8.

Law and Analysis

(i) Breach of the LOU

[24] The Appellants submit that the Arbitrator erred in law in holding that the right of first offer was breached when Minera Meridian decided to enter into the Cesión Minera. In support of that submission, they argue that the Arbitrator failed to interpret the meaning of the words in the right of first offer in accordance with established principles of contractual interpretation. The Appellants further argue that the Arbitrator failed to consider or apply the dictionary definitions of the term “disposed of” under Ontario law. Finally they submit that the Arbitrator erred in failing to consider the lack of finality of the Cesión Minera.

[25] Turning to the Appellants’ first submission, when the Arbitrator’s reasons for decision are viewed as a whole, including the First Procedural Award which was incorporated into the Initial Award, I do not consider that the Arbitrator failed to apply the proper principles in interpreting the right of first offer in the LOU or the MOU.

[26] It is clear from a review of the reasons of the Arbitrator that he was writing for the parties. He addressed complex issues in a succinct way. This alone does not render his ultimate legal conclusion incorrect. There is no general requirement at law that a decision-maker must dissect every detail of evidence in his reasons or note every authority that he considered in coming to his conclusion: Bjornson v. Shaw, 2010 BCCA 510, at para. 26.

[27] The Arbitrator specifically referred to the use of extrinsic evidence in the interpretation of a commercial document in paragraph 12 of the First Procedural Award. He considered the facts surrounding the entry into the LOU and the MOU. It is clear that in reaching the decision he did, the Arbitrator did not simply consider the words of the right of first offer in isolation.

[28] I am also satisfied from reviewing the Arbitrator’s reasons as a whole and particularly paragraph 12 of his Initial Award that the Arbitrator understood that the legal determinations he made regarding the right of first offer in both the LOU and the MOU were to be governed by Ontario law.

[29] The Appellants argue the term “dispose of” as defined in the Canadian Oxford Dictionary and the Ontario jurisprudence requires that the transfer at issue have an element of finality to it. They submit that since the Cesión Minera was temporally limited by a three year term, the use of the words “dispose of” in the right of first offer means that it was not meant to apply to the Cesión Minera.

[30] In reaching the conclusion he did, the Arbitrator found that although the wording of the Cesión Minera was temporally limited, this limitation was really “illusory” since, pursuant to the terms of the Option and Operations Agreement the parties could extend the term of the Cesión Minera for as long as Horizonte is entitled to serve as operator pursuant to the terms of the Option and Operations Agreement.

[31] Although, given the complexity of the various contingencies under the Option and Operations Agreement, it may have been a stretch to call the temporal limit of the Cesión Minera “illusory”, in my view it is not necessary to determine whether or not the Cesión Minera was likely to terminate after the prescribed three years in order to interpret the term “disposed of” within the meaning of the right of first offer. In this respect, I accept the Respondents’ submission that the crux of “disposing” of an interest in this context is ceding control over the thing to be disposed of. The question at issue therefore is whether entering into the Cesión Minera amounted to ceding control over the Concessions. The Arbitrator found as a fact that the Cesión Minera assigned all the rights and obligations of the underlying Concessions on an exclusive basis to Horizonte, meaning that once in effect, Minera Meridian would no longer benefit from or bear the obligations granted in the Concessions for the prescribed period of time. This factual finding is not subject to review. It is, in my view, equivalent to finding that Minera Meridian ceded total control over the Concessions by entering into the Cesión Minera.

[32] There is support in the Ontario jurisprudence that, generally speaking, finality is not required to “dispose” of an interest. The Ontario Court of Appeal, relying on the definition provided in the 6th edition of Black’s Law Dictionary, has noted the definition of “disposal” to be “to pass over into the control of someone else; to alienate, bestow or part with”: Doherty v. Southgate (Township) (2006), 2006 24231 (ON CA), 271 D.L.R. (4th) 59 at para. 25.

[33] This interpretation of the use of “dispose of” in the right of first offer is also supported by a reading of the LOU as a whole, bearing in mind the right of first offer’s purposes. The right of first offer was designed by the parties to prevent one party from being forced, against its will, into partnership with a third party that may lack the risks, interests, skills, financing or compatible objectives with respect to the project. This is of particular importance in the mining context where the success or failure of the project is often dependent upon its operator.

[34] In my view, the Arbitrator was alive to the purpose of the right of first offer as evidenced by his reference to Irving v. Canadian Long Island Petroleums, [1975] 2 S.C.R. 717 at p. 728.

[35] Furthermore, I note that if interpreted otherwise Minera Meridian’s offer to enter into the Cesión Minera with Horizonte would effectively defeat Misosa’s rights under other provisions in the LOU, including Misosa’s right to participate in a Management Committee that is empowered to guide the work of the Operator of the Concessions.

[36] The Appellants submit that since the Arbitrator found that the offering of the shares of Minera Meridian for sale by Yamana did not trigger the right of first offer, it is inconsistent to hold that entering into the Cesión Minera triggered the right of first offer.

[37] Based on the factual findings made by the Arbitrator regarding the effect of the Cesión Minera, I do not consider the Arbitrator to have erred in law in concluding that the right of first offer was triggered when Minera Meridian decided to enter into the Cesión Minera with Horizonte.

(ii) Trust, Partnership and/or Breach of Fiduciary Duties

[38] The Appellants do not contest the Arbitrator’s conclusion that Minera Meridian’s agreement to hold 50% of the Concessions for the benefit of Misosa gave rise to a classic trust relationship.

[39] In my view, the existence of a bare trust is indisputable on the facts. Further, I agree that the terms of the trust are governed by the terms of the LOU. As a result, by breaching the right of first offer in the LOU, Minera Meridian was in breach of the trust.

[40] In my view, however, the Arbitrator erred in law in further concluding that the relationship between the parties was a partnership or that further fiduciary duties arose over and above those as defined in the LOU.

[41] Fiduciary relationships do not generally arise between business entities dealing at arm’s length given that such parties are not unequal in their bargaining power and there is an absence of vulnerability between them.

[42] The Arbitrator also found that the relationship gave rise to sui generis fiduciary duties. In my view, however, the relationship between the parties does not possess the requisite indicia of a fiduciary relationship.

[43] In particular, the relationship in question here as defined by the LOU lacks the degree of vulnerability on the part of Misosa that is required.

[44] In any event, given the Arbitrator’s finding that the right of first offer was breached and that there was a breach of trust, the Arbitrator’s error regarding a broader finding of partnership and related breaches of fiduciary duty are of no effect.

(iii) Remedy

[45] The Arbitrator found that the preferable remedy was to give effect to the right of first offer as this came closest to placing Misosa in the position it would have been in if there had been no breach of the relevant agreements.

[46] The Appellants submit that the Arbitrator erred in law in requiring that Minera Meridian offer to Misosa the share sale agreement on terms substantially equivalent to those contained in the Option and Operations Agreement.

[47] Although he did not expressly state it in his reasons, the Arbitrator awarded specific performance of the right of first offer.

[48] In my view, however, the Arbitrator erred in law in providing for the remedy in the manner in which he did.

[49] Accordingly, the Arbitrator provided for a remedy that was not rationally connected to the breach. This, in my view, is an error of law.

[50] In my view, the Appellants’ submission to cancel the Cesión Minera alone is not sufficient, since what Misosa actually lost was the opportunity to acquire the right to be the operator of the Concessions for a period of time through a cesión minera.

[51] Paragraph 5.3 of the Option and Operations Agreement limits the authority of Horizonte under the Cesión Minera to exploration activities and Operations contemplated by the Agreement.

[52] It is also not clear what the length of the term should be for a cesión minera to act as operator of the Concessions.

[53] The result is that it is not possible on the record before me to determine either the proper length of term or the consideration, if any, which is required to be paid to Minera Meridian in order for Misosa to obtain a cesión minera for the Concessions similar to that granted to Horizonte by Minera Meridian. Accordingly, the matter must be remitted back to the Arbitrator for such determinations, after further evidence.

Conclusion

[54] The appeal is therefore allowed in part and the matter is remitted back to the Arbitrator for a determination of the terms and conditions applicable to the grant of a cesión minera to Misosa for the Concessions in accordance with these reasons. Misosa shall have 60 days following such determination to advise Minera Meridian if it is prepared to accept the cesión minera on such terms and conditions.

[55] In the event the parties are unable to resolve costs of the appeal within 30 days from today, each party shall make brief submissions in writing of no more than three pages including a costs outline. The Appellants shall deliver first followed within seven days by the Respondents.

L. A. Pattillo J.

Released: January 15, 2013