Contract involved one of world's largest lithium mining projects
In ruling that an agreement to purchase a lithium mine royalty over video call and email was an enforceable contract, an Ontario Superior Court has reinforced the principles of contract formation in application to the modern world, say lawyers from Lenczner Slaght who acted for the purchaser.
In Lithium Royalty Corporation v. Orion Resource Partners, the court found that Lithium Royalty Corporation and Orion Resource Partners had agreed to the essential terms of the deal for the former to purchase the royalty interest despite a hasty transaction and lack of a signed term sheet.
The contract negotiation “was made in the depths of COVID… through Zoom and email,” says Kate Costin, who acted for Lithium Royalty Corp (LRC) with Brendan Morrison. “That’s just an important layer on top of it that in this non-traditional setting, the principles of contractual interpretation and formation are still applied strictly.”
The Thacker Pass mine is one of the world’s largest and most promising lithium projects, says Morrison. Being a key chemical element in electric vehicle batteries, lithium is becoming one of the hottest commodities on the planet, he says.
“The rights to streams of revenue from the Thacker Pass mine are therefore quite valuable, and the mining industry and markets have already given the case quite a bit of attention.”
Orion launched a bid process to sell its royalty interest in Thacker Pass in June 2019. LRC submitted a bid for the indicative proposal phase, but Orion did not invite the company to the next phase, the definitive proposal phase. Ultimately, the bid process was terminated, and no bid was successful. The process was repeated in August 2020, when Orion initiated another bidding process, rejected LRC’s bid, but then folded the process.
Orion and LRC reconnected in January 2021, and LRC offered USD$20 million for 100 percent of the royalty. Negotiations occurred via videoconference between an Orion portfolio manager, Philip Clegg, and LRC’s president, Ernie Ortiz, on Jan. 20, and the two sides had different versions of how the call unfolded. LRC said Clegg counteroffered to sell 85 percent of the royalty interest for USD$18.7 million based on its position that the entire royalty was worth $22 million. Orion said Clegg never made the offer, nor did he indicate that he had the authority to make a binding offer to sell any part of the royalty.
But after the video call, Ortiz emailed Clegg and said LRC accepted the offer. Clegg replied, “OK, sounds good.”
Four days later, another company, Trident, expressed interest in the Royalty. Orion told LRC that it had received and was considering an unsolicited proposal for the royalty and was determining whether it preferred a sale of the royalty split in two or through an assignment. LRC replied, saying that it considered their agreement enforceable.
Two days later, LRC returned the term sheet that Orion had revised, but Orion did not sign it and entered a deal with Trident. On March 19, Trident announced it had acquired 60 percent of the royalty.
As to whether the agreement was enforceable, the court examined whether a contract was formed between LRC and Orion and, if it were, whether it was void by operation of Nevada’s Statute of Frauds.
“Disputes about contract formation are highly fact-specific,” says Morrison, “and as the trial judge noted throughout this decision, turn heavily on the credibility assessment of the parties involved in the negotiations.”
Noting that industry or commercial customs specific to the type of contract are relevant considerations, Justice Susan Vella said that in UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd., 2009 ONCA 328, the Court of Appeal accepted that “oral agreements were customary in the securities business given the speedy nature of trades.” The contracting party obligated to secure third-party consent also cannot rely on its own failed attempt to do so as grounds for “thwarting contract formation.” The parties also need not formalize essential terms into comprehensive written form if, viewed from an objective perspective, this is “not considered an essential term by the parties,” she said.
According to LRC, a mutual intention existed to enter a binding agreement, and a signed comprehensive contract would follow. Orion said that LRC “misconstrued its intention” amid ongoing discussions and that they never agreed on the essential terms. In “customary industry practice for royalty purchases,” a comprehensive signed contract is an essential term of any royalty agreement, argued Orion.
In assessing witness credibility, Vella said the court will examine “surrounding circumstances,” the coherence of an account and its consistency with other versions of the same events, industry customs, a witness’s potential motivational factors, and “common sense” from an “objective perspective.”
Vella found Clegg “did not present as a credible witness.” He was “defensive” and that his testimony was “implausible and inconsistent with his own documentation” and “revealed that he did not have a clear recollection of the events surrounding the videoconference.” Clegg’s evidence was also inconsistent with that of an Orion colleague on how the videoconference ended, she said.
The circumstances of the deal included the fact that Orion’s fund holding the royalty was nearing maturity, and the two prior failed bids informed the 2021 negotiations, said Vella. The judge found that Ortiz’s email accepting Orion’s offer sealed the essential terms, and LRC had accepted the term sheet Orion had revised without change or condition. She said the videoconference was the “culmination of negotiations,” spanning back to the bid processes, and “concluded with the mutual understanding and intention that if LRC accepted the counteroffer, on an unconditional, all-cash, basis, then the deal was done.”
The speed and lack of formalized terms are “understandable from a commercial efficacy perspective,” given the circumstances, said Vella. “[A] fully executed Term Sheet and/or a mutually acceptable comprehensive agreement of purchase (referenced in the partially executed Term Sheet) were not preconditions to a binding agreement between LRC and Orion or essential terms of the deal,” she said.