INDIAN MOLYBDENUM LTD. v. THE KING

Supreme Court of Canada, Taschereau, Rand, Estey, Cartwright and Fauteur JJ. May 10, 1951.

J. W. Pickup, K.C. and W. B. Williston, for appellant. J. Singer, K.C. and D. H. W. Henry, for respondent. The judgment of TASCHEaEAu, RAND and FAUTEUX JJ. was

delivered by RAND J.: This appeal arises out of a contract made in 1942

between His Majesty, represented by the Minister of Munitions and Supply and the Done Exploration Co. (Que.) Ltd., of the interest of which the appellant is the assignee. The contract looked to the exploitation of a deposit of mineral containing molybdenum, a metallic element required for war purposes. The Minister was given the exclusive right to purchase the first 2,000,000 pounds produced at a basic price of 85c. a pound,

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but he might terminate the agreement at any time. Besides the basic price, the Minister guaranteed a "fair profit" upon the quantity delivered up to an additional sum of 15c. a pound. For the ascertainment of that profit, the cost was to include reasonable and proper allowances for depreciation of plant. and equipment, pre-production development and depletion. in the event of termination before the quantity named was taken, a further guarantee was provided of payment of the difference between the sum of $300,000 and the operating profit after de-duction of income taxes but before the writing-off of allowances.

The contract was terminated when approximately 700,000 pounds had been purchased. In ascertaining the cost, the Minister allowed deductions for depreciation, development and depletion in sums that are "reasonable and proper" if the total amount of expenditure is not available as a deduction; and the narrow question is whether or not it is.

The controversy hinges on the basis on which the depreciation should be allowed. The case for the appellant is that the plant was built and the expenditure incurred for the purpose of carrying out the contract with the Crown; and the accounting principle advanced by the accountant witness is rested on the assumption "that the Indian properties and plant and equip-ment were acquired specifically for the purpose of fulfilling the Crown contract, thus limiting the period of useful life to the period of the contract, and assuming also that the mine had no assurance of foreseeable production at the date of the cancella-tion of the contract, my opinion is that a reasonable and proper write-off for depreciation for the purpose of calculating cost un-der clause 6 would be the total of the expenditures on plant and equipment at the 30th of April, 1944, less the residual value at the sane date."

In this, as is seen, the witness was expressing his opinion on the question to be decided by the Court. The cost of a pound of the metal is therefore to be calculated by setting-off the total expenditure, less any residual value of plant or equipment, against the total receipts and dividing the balance by the number of pounds taken by the Government. A fair profit above that would lie in sound business judgment.

The controlling clause of the accountant's assumption, "thus limiting the period of useful life to the period of the contract", however it is intended to be modified by the next following clause, is basic to the contention advanced; but it involves a matter of fact which has been found adversely to the company by Cameron J. The development was undertaken, not for the

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purpose of carrying out the contract, but as á business venture; the company had declined to act as a managing agent of the Crown in return for a management fee; and even though the contract may have been the condition of entering upon the venture, the enterprise, from the beginning, was a commercial project. The capital outlay was, undoubtedly, related to the mineral deposit, but that is something quite different from being related to the contract. That view of the facts taken by Cam-eron J. is amply supported by evidence from which I would have difficulty in drawing any other conclusion.

This, strictly, seems sufficient to dispose of the appeal; but as the principle advanced, somewhat confusedly I think, seemed to straddle ,both these aspects of the purpose of the contract, I shall deal with it more fully.

What is argued is that the "useful life" to which depreciation is related, although ordinarily treated in terms of a physical functional life, is essentially a commercial or value functional life, which in this case is dependent upon the market price of the product; that as it was the contract price only, in the actual circumstances, that made commercial operation possible, once it was ended the life of plant and machinery vanished; and necessarily the total capital outlay, less residual value, must be charged as depreciation against the receipts to that moment: in other words, depreciation is in respect of value and not of use : life of use is, by a subtle transition, converted into life of value. It will have been seen that this is not stated as an ac-cepted accounting principle but is a conclusion formulated as an interpretation of cl. 7 of the contract : it was indeed conceded that no accounting precedent could be shown to justify ít.

What we are to ascertain is the profit that accrued on the ma-terial delivered under the contract that means the operating profit; neither the exploitation of this mineral deposit nor the company was intended, upon that production, to end .or to go into liquidation; so far as the Crown was concerned, it was as if the enterprise were to continue indefinitely: the Crown was not interested in the total result of things upon the conclusion of the venture. Profit means gain, a gain over or in relation to some datum; and the datum is the outgoings, the economic values consumed in the operations. Capital is furnished as the formal or structural means to or of production; it may be em-bodied in any number of usable forms; it is intended throughout to maintain its structural continuity and for that reason its sub-stance must be kept distinct from its use; but it is a fundamen-tal principle of accounting that no part of fixed capital other

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than its use can properly be taken to enter into the determina-tion of profit.

But capital form by its use and by effluxion of time, suffers at-trition, and quite logically, depreciation measuring that loss has become universally an allowance against revenue; but as representing what? Only as representing an exhaustion of use-ful life; value is only the mode of measuring that loss: the un-derlying and essential matter is physical. Capital value may be affected by many outside factors and its confusion with use leads, I think, to a misconception of the basis of such an allowance. What it docs is to maintain the capital form intact by restoring from productive revenue what production has ex-hausted or consumed of its useful life. If machinery and plant materials had doubled in market value, would that supersede a depreciation charge? I should say clearly not. Neither should it be affected in any other manner by the fluctuation of any other value: to be exhausted or consumed is to be lost absolutely, and to that, external value is irrelevant : London County Coun-cil v. Edwards (1909), 100 L.T. 444 in which at p. 446 Chan-nell J., on the question of obsolescence, observes: "Of course there is no ground whatever for saying that the appellants would have any deduction for such depreciation as was occasioned by their plant becoming obsolete and getting out of fashion."

Another national emergency might transform the position of the company financially. A great many gold mines have sus-pended operations from time to time depending on the market price of gold or on the amount of Government subsidy: at what point is their capital cost of plant to be written off finally as depreciation? on the first closing down or the second or third? At what amount or level of profit should operations stop or be renewed? These questions indicate how accounting would be confounded by treating depreciation in terms of value rather than of useful life.

On the assumption of the company, the original value of capital assets arose from the prospective benefits under the contract; but the contract could be terminated at any time and even with the guarantees under it, what would that value be? If only a quantity of 100 pounds, say, had been purchased, the entire cost, on the contention made, would have been charged against its production; but the accounting reality would have been that the capital asset itself had been lost: it would have been a capital expenditure of $1,000,000 to exploit a value of $100. If writing-off is called for, it is a writing-off of capital and not of depreciation.

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From the assumptions underlying the Income Tax laws of both the United Kingdom and this country, capital in no form, whether by depreciation or depletion or pre-development allow-ances, can be deducted from operating revenue without express authority and depreciation when authorized is unquestionably assumed to be addressed to the exhaustion of useful life, not of value. In the presence of that uniformity, based upon the vocabulary, concepts and practices of the business accounting world, and notwithstanding specific variations in the statutes, we would be quite unwarranted in interpreting the language here as importing a new conception fundamentally different from it. In the absence of a contrary intention, the ordinary signification of the words would be attributed to them, and it has not been suggested that the agreement indicates anything else.

When the operation was ended, the mineral remaining was at least several times the quantity removed, and the plant, as a capital asset, was in condition to complete the recovery of it; and the ratio of the useful life then remaining to that ex-hausted was at least equal to the ratio of the remaining metal to what had been extracted. If this formula were not applied, the risk of any failure in ore affecting the life of production would be transferred from the company to the Crown, a com-plete reversal of what was contemplated by the contract.

Allowances for depletion and pre-production development are in a somewhat different category; but as they are expressly provided, their capital cost should be conceived as distributed over the entire mineral deposit and they should be proportion-ate to the portion removed. From this it follows that the total amounts cannot be charged against the operating revenue re-lated to the mineral delivered.

The appeal must, therefore, be dismissed with costs. ESTEŸ J. :—The appellant, as assignee of the Dome Explora-

tion (Que.) Limited (hereinafter referred to as the company), mined and delivered to the respondent 699,054 pounds of moly-bdenum concentrate. In payment therefor it received 85c per pound and in this action alleges that it did not realize a profit and is, therefore, entitled to a further 15c per pound ($104,-858.10) by virture of the terms of para. 6 of the contract.

The contract, dated September 29, 1942, made between the company and the respondent provided, inter αliα, that the re-spondent would buy and the company would sell "all of the molybdenite produced from ... Indian Peninsula ... between the date hereof and the 31st day of December, 1944, not ex-

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ceeding, however, in the aggregate Two Million (2,000,000) pounds". The company, as agreed, brought the property into production and commenced deliveries as soon as possible. The respondent had the right to and did cancel the contract as of April 30, 1944.

The material part of para. 6 of the contract reads as follows; "6. As soon as possible after the completion of delivery of

the contract quantity, or after the termination or expiration of this contract, a cost audit shall be made by a Cost Accountant appointed or approved by the Minister, to determine the cost of production of the concentrate delivered hereunder (which cost shall include reasonable and proper write-offs for deprecia-tion of plant and equipment, pre-production development .and depletion) and promptly after completion of such cost audit His Majesty will pay to the Contractor to realize a fair profit upon the concentrate delivered hereunder, provided, however, that the total amount to be paid by His Majesty to the Con-tractor under the provisions of Sections 4 and 6 hereof shall not exceed Inc Dollar ($1.00) per pound of contained molyb-. denum sulphide in the concentrate delivered hereunder, E.O.B. Ottawa. "

The parties did not follow the procedure provided in para. 6 for the determination of the "cost of production". When the respondent refused to pay the additional 15c per pound the. appellant brought this action in the Exchequer Court and the parties agreed that all of the issues should be there determined. The appellant's action was in that Court dismissed and from that dismissal this appeal is taken.

The issue turns mainly upon the construction of the fore-going para. 6 and in particular the meaning to be attributed to the words "reasonable and proper write-offs" and "a fair profit upon the concentrate delivered hereunder".

Where the language in a contract is clear and unambiguous, it alone can be looked at to ascertain the intent of the parties. Where, however, as here, the words are ambiguous, in the sense that they are susceptible of more than one meaning, evidence of the surrounding circumstances may be admitted, not to vary, add to, or contradict the terms of the contract, but to enable the Court to read and construe the language in relation to the facts and circumstances in which they adapted it to express their in-tention.

The parties have adduced evidence of the surrounding circum-stances. As part thereof they included declarations and state-ments of intention made during the course of negotiations, as

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well as certain drafts discarded in the process of arriving at the terms agreed upon and embodied in the letter of September 29, 1942 (to be hereafter further discussed). In Nat'l Bank of Australasia Ltd. v. J. Falkingham & Sons, [1902] A.C. 585, the Privy Council construed the terms of an assignment and, speak-ing particularly of the discarded drafts thereof, stated at p. 591: "No claim is made to rectify this deed. The drafts cannot, therefore, properly be received in evidence to alter its language; still less to explain or assist in the interpretation of the deed as finally executed."

Not only are such drafts not admissible to assist in the con-struction of the language finally adopted by the parties, but words deleted by the drawing of a line through them, and this deletion initialled by the parties, cannot be looked at: A. & J. Inglis ν. Jno. Buttery & Co., (1878), 3 App. Cas. 552. These drafts, deleted words, correspondence and statements made in the course of negotiations are superseded by the language finally adopted by the parties and embodied in the written agree-ment to express their common intention. Blackburn on Sale, 3rd ed., p. 51: "The general rule seems to be, that all facts are admissible which tend to show the sense the words bear with reference to the surrounding circumstances concerning which the words were used, but that such facts as only tend to show that the writer intended to use words bearing a particular sense are to be rejected." This is an oft-quoted passage: Grant v. Grant (1870), L.R. 5 C.Π. 727 at p. 728; Bk. of New Zealand ν. Simpson, [1900] A.C. 182 at p. 188; Gt. Western Ry. and Midland By. v. Bristol (1918), 87 L.J. Ch. 414 at p. 424.

It follows that not only the draft letters, but all expressions of intention made by the respective parties in the course of ne-gotiations would not be admissible. However, the evidence ad-missible would include the facts in proof of the urgent need of the molybdenum, the acquisition of the mine and the results of the diamond drilling, as known to the parties, as well as the fact that all parties to the negotiations were associated with mining enterprises.

In 1942 the Government, in the prosecution of the war, ur-gently needed molybdenum concentrate. The Metals Controller, George C. Bateman, consulting mining engineer, who for 18 years, was Secretary of the Ontario Mining Association prior to his appointment in 1940 as Metals Controller, made it known in 1942 to those engaged in mining that the Government par-ticularly required molybdenum and tungsten.

The company, in June, 1942, obtained an option on the prop-

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erty in question on which work had been done during the first war and was known to contain some molybdenum. It commenced diamond drilling operations which at first disclosed poor, but later very encouraging, possibilities. The average grade was .90% MoS, and the ore body "continued to expand somewhat". The Metals Controller was kept informed in a general way of the results 0f the diamond drilling and deposed: "In fact it was the best show that had ever turned up in Canada, and richer than anything I knew of in comparable size in the United States.''

An official of the Dome interests deposed: "Our drilling con-tinued favourably and it lóoked as if we had found at that time the biggest single deposit of molybdenum yet found in Canada."

Under date of September 15, 1942, an official of the Dome interests wrote to the Metals Controller, in part: "It looks as if we might have a real molybdenum show and we are as-suming that if we have, you will want it pushed hard."

On or about September 23, 1942, representatives of the com-pany and respondent met at Ottawa. It was decided to take immediate steps to bring the mine into production. When the Metals Controller suggested that the Government would finance the project and pay the company a fee for management, or en-ter into a contract for the purchase of the molybdenum from the company, the latter expressed a preference for the contract. The parties soon agreed upon the general terms, including the price, and Mr. Calvin, on behalf of the company, and Mr. Jar-vis, on behalf of the respondent, were directed to prepare a letter under which the company might proceed, it being under-stood that a formal contract would be subsequently entered into.

This letter was completed on September 29, 1942, and a subsequent contract executed embodying all the terms material hereto from the letter without change. This contract was given the same date, September 29, 1942, and included the foregoing para. 6.

The appellant's submission is that the learned trial Judge should have adopted, as a basis of determining "reasonable and proper write-off's", the actual cost of producing the quantity of molybdenum concentrate which was delivered under the contract prior to the effective date of cancellation, less residual value and moneys received by the appellant under the con-tract. Under this submission it computed its loss by totalling the actual cost of the mine, preproduction work, plant and equipment, and operating expenses. From this it deducted

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the residual or salvage value of the plant and equipment and, as, at the date of cancellation, the mine had "no market value", it valued it at nil. On this basis the appellant arrived at a total cost of producing the molybdenum of $1,071,918.42. It received from the respondent $300,000 on account of its capital outlay, as provided under para. 7 of the contract, when the Government exercised its right of termination. If the appellant should receive a total of $1 per pound, that would provide an additional $699,054, or a total received from the respondent of $999,054, leaving the appellant, upon this basis, a loss of $72,-864.42.

The appellant, in effect, says that these expenditures were made specifically for the fulfilment of this contract. It is ad-mitted that at the time of the negotiations it was hoped further operations would continue after the expiration of this contract, but, having regard to the state of the market on April 30, 1944, when this contract terminated, that would have been unprofit-able. Therefore, as its disbursements exceeded its receipts, it suffered a loss upon its operations and is, as it contends, entitled to the additional amount under para. 6. In effect, that would mean a guarantee against any loss, at least up to a payment of $1 per pound. Yet the language is not that of guarantee. If the parties had been apprehensive either that the quantity might be much less than anticipated, the grade lower, the expenses of production prohibitive, or for any similar reason the company might deem it undesirable to continue, the language of guar-antee or indemnity might well have been adopted. On the con-trary the parties to the contract;, experienced in, or familiar with, mining operations, adopted language that in plain terms provides for the determination of the cost of production of the concentrate delivered which "shall include reasonable and proper write-offs for depreciation of plant and equipment, pre-production development and depletion". This is the language appropriate to continuous or successive operations rather than to the execution of one contract.

Moreover, if the appellant's submission is in accord with the intention of the parties, the provision in para.. 7 for the payment of an amount expended by the company for "capital expend-itures and pre-production development" up to $300,000 in the event of termination by the respondent would have been un-necessary.

The only chartered accountant who gave evidence was Mr. George A. Adamson, called by appellant, who arrived at the figures already indicated by "assuming that the Indian proper-

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ties and plant and equipment were acquired specifically for the purpose of fulfilling the Crown contract, thus limiting the period of useful life to the period of the contract, and assuming also that the mine had no assurance of foreseeable production at the date of the cancellation of the contract, my opinion is that. a reasonable and proper write-off for depreciation for the pur-pose of calculating cost under cl. 6 would be the total of the expenditures on plant and equipment at April 30, 1944, less the residual value at the same date".

This assumption underlies the appellant's contention through-out and is emphasized by á statement from its factum : "Mr. Adamson's evidence was that the basis of depreciation which he stated as being correct should be applied where property is acquired and capital expenditures made specifically for the purpose of fulfilling a contract. It was no part of his evidence or of the evidence of any other witness that the property should be acquired or the expenditures made solely or en-tirely for the purposes of the contract."

The assumption that the mine, plant and equipment were "acquired specifically for the purpose of fulfilling the con-tract" is not supported by the language of the contract, nor by the conduct of the parties—more particularly that of the company—either before or after the concluding of the contract. The subsequent conduct is also indicative of the company's in-tentions.

Tindal C.J. stated: "There is no better way of seeing what they [the parties] intended than seeing what they did, under the instrument in dispute": Chapman v. Bluck (1838), 4 Bing. N.C. 187 at p. 193, 132 E.R. 760.

Viscount Cave L.C. stated: "There is no doubt that, where a document is ambiguous, evidence of a course of conduct which is sufficiently early and continuous may be taken into account as bearing upon the construction of the document": Re Labrador Boundary, [1927] 2 D.L.R. 401 at p. 422.

On January 15, 1943, the company wrote: " Tonnage and grade have been adequately established to an average depth of 200 feet down the dip ... Ore above the first level has been estimated at about 200,000 tons with an average grade of ,90%ο MoS2."

On September 16, 1943, the company protested by letter to Mr. Bateman with regard to the disposition of the concentrates and wrote, in part: "The discussion that we had with your qfficials regarding a roasting plant at the mine had quite en-couraged me to think of the possibility of post-war operation

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of our mine .... From our standpoint, it is very discouraging because if the war ends before we get our money back it looks, from my viewpoint, that we would be in a very unenviable position.''

The evidence does not indicate the estimated quantity of molybdenum in the mine when the terms of the letter of Sep-tember 23, 1942, were agreed upon. It does disclose that the grade was good and, as the investigation had proceeded, the "ore body continued to expand somewhat". The record, however, discloses that on January 15, 1943, it was estimated there were 200,000 tons of molybdenum in the mine and that when the contract was terminated "there were 125,000 tons known there". The content of the mine was, therefore, never disappointing. It was the change in market conditions that dictated the discontinuance of operations. Indeed, throughout the month of April, 1944, the company knew cancellation would take place and was considering "what we were going to do with the property ... whether we would continue to mine and stock and try to sell molybdenum sulphide, or exactly what we would do". A market was not available either in England or in the United States. As one of the officials stated: "We could not see any single hope of disposing of molybdenum sulphide in the near future."

In May, 1944, in the report to the annual meeting of the shareholders, it was stated, in part: "When notice of cancella-tion was given our plant was functioning splendidly and had we been allowed to continue we would probably have repaid the total expenditure we had made."

And then at the trial it was deposed to on behalf of the com-pany:. "The entire property was acquired for the sole, purpose of going into the molybdenum business, and our reason for going into the molybdenum business was the urging we had had in prior times by Mr. Bateman to try and do something; and the other thing was later to fill the contract of 2,000,000 pounds. It was for no other reason that we put up a mill than to mill and recover the MoS2 in that deposit. The mill was put up for that purpose only."

The foregoing indicates that the company contemplated "going into the molybdenum business" because of the demand and the prospects at this mine. The company no doubt would have made further explorations before constructing a mill had it not been that the Metals Controller was then} prepared to enter into the contract. He appreciated the urgent need for molyb-denum and the company, upon -the terms offered, was prepared

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to commence production. The delivery of molybdenum in terms of the contract was, without question, the immediate concern, but the preparations were not made specifically with regard to that contract. The mill itself, according to the foregoing evi-dence, was constructed not only for the purpose of this contract but to "recover the MoS2 in that deposit".

The evidence read as a whole discloses a consistent course of conduct on the part of the company. It acquired the property, made its investigation and negotiated the contract. Under its terms the company did not obligate itself to deliver any quantity other than "all of the molybdenite produced". More-over, if unusual expenses were encountered in the course of mining operations that prevented the realization of a fair profit computed as specified, the respondent would pay an additional amount up to the limit of $1 per pound. If again, the re-spondent terminated the contract, it would pay an amount up to $300,000 on account of capital expenditures. These were the contingencies contemplated and expressly provided for in the contract.

The assumption that the properties, plant and equipment were acquired specifically "for the purpose of fulfilling the Crown contract, thus limiting the period of useful life to the period of the contract", upon this record is not justified. It is clear from Mr. Adamson's evidence that his figures were arrived at only upon the basis of this assumption, and that apart there-from his results would have been quite different.

Moreover, the language of the contract does not, in these circumstances, justify the conclusion that in the event of ad-verse market conditions, dictating discontinuance of operations, all capital expenditures may be treated as "reasonable and proper write-offs" in determining "a fair profit upon the con-centrate delivered hereunder".

The appellant, as plaintiff, has not, upon the evidence, es-tablished that it is entitled to the additional payment of 15c per pound. The judgment of the learned trial Judge must, therefore, be confirmed and this appeal dismissed with costs.

CARTWRIGHT J. (dissenting) :— This is an appeal from a judgment of Cameron J. pronounced on May 12, 1949, whereby the appellant's petition of right was dismissed with costs.

The appellant's claim is founded on a contract under seal dated September 29, 1942, made between the respondent and Dome Exploration Co. (Quebec) Ltd. and validly assigned to the appellant. Both Dome Exploration Co. (Quebec) Ltd.

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and the appellant are wholly owned subsidiaries of Dome Mines Ltd., hereinafter referred to as "Dome''.

In the year 1942 the Government of Canada was urgently in need of molybdenum and the Metals Controller suggested that Dome should endeavour to find supplies of this element. Dome had not previously been interested in the production of molybdenum, but it immediately commenced investigations as to possible sources of supply. It obtained options on a property in the Province of Quebec known as the St. Maurice mine. Some preliminary diamond drilling indicated a substantial body of ore and the assays averaged between .8 and .9% molyb-denum which is said to be an unusually high percentage.

Discussions followed between officers of Dome, the Metals Controller, and other Government officials and, after somewhat lengthy negotiations, the contract of September 29, 1942, was executed. Evidence was given by both parties as to what was said at meetings between the Government officials and the ap-pellant's officers which preceded the execution of the contract and drafts of letters prepared and revised during the period of such negotiations were filed as exhibits. In my view, such evidence was inadmissible and cannot be considered in in-terpreting the contract. There is no suggestion that the con-tract does not express the intention of the parties and the pleadings contain no allegation of mistake or claim for rectifi-cation. The petition is based upon the contract and the state-ment of defence reiterates that the contract will speak for it-self. Section 17 of the contract is as follows:

"17. This contract shall supersede all previous communica-tions and negotiations, either verbal or written, between the Contractor and His Majesty or the Minister or any of their respective agents or representatives with reference to the sub-ject matter hereof."

Under the contract the appellant agreed to sell and deliver to the respondent, in the form of a molybdenite concentrate of merchantable quality containing not less than 80% of molyb-denum sulphide, all of the molybdenite produced from its property between the date of the contract and December 31, 1944, not exceeding however in the aggregate two million pounds of contained molybdenum sulphide, to bring the prop-erty into production and commence deliveries as soon as pos-sible and to continue deliveries at as high a rate as possible.

By s. 4 of the contract the respondent agreed to pay for all concentrate delivered in accordance with the terms of the con-

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tract at the rate of ,85c per pound of contained molybdenum sulphide.

Section 6 of the contract reads in part as follows : "6. As soon as possible after the completion of delivery of

the contract quantity, or after the termination or expiration of this contract, a cost audit shall be made by a Cost Account-ant appointed or approved by the Minister, to determine the cost of production of the concentrate delivered hereunder (which cost shall include reasonable and proper write-offs for deprecia-tion of plant and equipment, preproduction development and depletion) and promptly after completion of such cost audit His Majesty will pay to the Contractor such (if any) additional amount as may be necessary to enable the Contractor to realize a fair profit upon the concentrate delivered hereunder, provided, however, that the total amount to be paid by His Majesty to the Contractor under the provisions of Sections 4 and 6 hereof shall not exceed One Dollar ($1.00) per pound of contained molybdenum sulphide in the concentrate delivered hereunder, F.O.B. Ottawa. In the event that the Minister and the Con-tractqr are unable to agree upon the amount (if any) to be paid to the Contractor under the provisions of this Section 6, such amount shall be determined by arbitration in accordance with the following provisions:"

Section 7 is as follows: "7. Notwithstanding anything herein contained, the Minister

may at any time by notice in writing to the Contràctor, term-inate this contract (save and except the provisions of this Section 7 and of Section 16 hereof), and in that event His Majesty shall pay to the Contractor:

"(a) any sums payable or which may become payable to the Contractor under the provisions of Section 4 and/or Section 6 hereof in respect of concentrate delivered hereunder prior to such termination; and

" (b) an amount equal to the amount reasonably and properly expended by the Contractor in respect of the said property for capital expenditures and preproduction development, after deducting therefrom the Contractor's operating profits (less taxes on income but before write-offs derived from the sale of concentrate to His Majesty hereunder; provided however that the amount payable by His Majesty to the Contractor under the provisions of this paragraph (b) of Section 7 shall not ex-ceed Three Hundred Thousand Dollars ($300,000.00). The Contractor shall monthly, or at such longer ,intervals as the Minister may approve, furnish to the Minister • statements in

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such form and detail as the Minister may direct or approve showing the nature and amount of the capital expenditures made and/or contemplated by the Contractor up to the date of each such statement. Notwithstanding any payment made by His Majesty to the Contractor hereunder, title to the said property and to the structures and equipment thereon shall remain in the Contractor."

Section 16, referred to in s. 7, deals only with the keeping and preservation of records and its terms do not affect the matters in question in this appeal.

Immediately after the parties had come to an agreement, Dome took up its option and proceeded to bring the property into production as quickly as possible. Production commenced in September, 1943, and deliveries in October, 1943.

Pursuant to the terms of s. 7, the respondent cancelled the contract, the effective date of cancellation being April 30, 1944. The respondent agreed to accept delivery of all concentrate produced up to the date of cancellation. In the result, a total of 699,054 pounds of contained molybdenum sulphide was de-livered and paid for at the rate of 85c per pound. The respond-ent also paid to the appellant the sum of $300,000 in accordance with the provisions of s. 7(b) of the contract. The appellant claimed the further sum of $104,858.10, being an additional 15e per pound, under the provisions of s. 6 of the contract, quoted above.

The respondent having refused to make this payment, the ap-pellant called upon him to . appoint a cost accountant as con-templated in s. 6. The appellant also appointed an arbitrator and called upon the respondent to do likewise. The respondent refused to appoint either a cost accountant or an arbitrator, taking the position that a settlement had been agreed upon between the parties under which the payments already made by the respondent to the appellant were accepted in full of all the appellant's claims under the contract. The respond-ent's advisers were apprehensive that the appointment of a cost accountant or of an arbitrator might prejudice the posi-tion taken in regard to settlement. It was agreed by counsel at the trial that the rights of the parties should be determined by the Exchequer Court, subject to appeal, and that no ob-jection should be taken .based upon the failure of the respond-ent to appoint such cost accountant or arbitrator.

On conflicting evidence, the learned trail Judge found that no settlement had been agreed to. Counsel for the respondent conceded before us that there was evidence on which the

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learned trial Judge could properly reach this conclusion and this finding of fact was not attacked.

The main matter of disagreement between the parties is as to the proper interpretation of the words in s. 6 "the cost of production of the concentrate delivered hereunder (which cost shall include reasonable and proper write-offs for deprecia-tion of plant and equipment, preproduction development and depletion) ".

It was not questioned that at the date of the cancellation of the contract the condition of the mine and the world price of molybdenum were such that it was not commercially pos-sible to continue to operate the mine at a profit and that the mining claims were of no value.

Mr. Adamson, a partner in the firm of Clarkson, Gordon & Co., a cost accountant of high standing and great experience called as a witness by the appellant testified that assuming the property, plant and equipment were acquired specifically for the purpose of fulfilling the cóntract in question and that at the date of the cancellation of the contract there was no prospect of further production the period of the useful life of the plant and equipment would be limited to the period of the contract and the total amount of the expenditures on plant, equipment, preproduction development and mining claims as at April 30, 1944, less the residual value at the same date should be written off for depreciation and depletion. Expressed in another way it was Mr. Adamson 's opinion, based on the assumption stated above, that the total expenditures made by the appellant on plant, equipment, pre-production develop-ment and mining claims, less the residual value thereof at the date of cancellation of the contract, formed part of the cost of production of the concentrate delivered under the con-tract.

It was not disputed that if this method of calculating the cost were correct the resulting figure would be $744,527.29 which added to the operating costs of $329,391.13 would show a total cost of $1,071,918.82. It at once becomes apparent that even if the appellant were paid for the concentrate at $1 per pound, the maximum price mentioned in s. 6, the total it would receive including the $300,000 paid under s. 7 (.b) would be $999,054, leaving a net loss of $72,864.82. The appellant sub-mits that this is the correct method of arriving at the cost.

The respondent submits that, on a proper construction of the contract, the appellant was entitled to include in the cost of production of the concentrate only such write-offs as would

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be allowed to a mining company under the normal practice of the Income Tax Division, that is to say, for depreciation of assets and pre-production development 15% per annum and for depletion one-third of net profits. It is not disputed that if this method of calculation be held to be proper it would show that at the price of 85c per pound the appellant would have made a profit of 19c per pound upon the concentrate delivered under the contract. The finding of the learned trial Judge that such a profit would be a fair profit within the meaning of s. 6 could not successfully be questioned.

The learned trial Judge accepted the respondent's conten-tion as to the proper construction of the contract and par-ticularly as to the meaning to be given to the words "reason-able and proper write-offs" in s. 6. It appears from his reasons thαt he was brought to this conclusion in part by a consideration of the evidence as to the negotiations which preceded the making of the contract, which, in my view, as indicated above, was inadmissible, and in part by a finding of fact which is expressed as follows: "In my opinion, therefore, the officers of the negotiating company and the suppliant company did not enter into the contract or lay out their capital expenditures entirely for the purpose of carrying out the contract with the respondent. While no doubt it was the most important thing then under consideration, there was also the intention, if market conditions so warranted, of carrying on production quite apart from the Government contract and the outlays were made and the plant constructed with that in mind. The assumption on which Mr. Adamson based his opinion is therefore, in my view, insupportable on the established facts and it would be im-proper to hold that reasonable and proper write-offs for de-preciation for plant and equipment and for preproduction development and depletion would be the total outlay in respect thereof.''

It is clear from the evidence that the officers of Dome en-tertained hopes that after completing the contract in question the appellant would have a mine which it could continue to work profitably and it may well be that such hopes influenced their decision to have Dome Exploration enter into the con-tract. If, however, it was the view of the learned trial Judge that the appellant, by reason of such hopes, made any capital expenditure over and above what it deemed necessary for the proper performance of its contract with the respondent, I think that such view is not supported by the evidence.

The officers of the company who speak of the matter say

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that they had hopes that they would have a profitable mine but none of them say that any additional capital was expended for this reason. An analysis of the production figures ap-pears to indicate that had the contract not been cancelled it would have taken the appellant until the end of 1944 to complete the delivery of the two million pounds of concentrate. It must be remembered that the contract required the appellant to commence deliveries as soon as possible and to continue de-liveries at as high a rate as possible, the product being urgently required for war purposes. The respondent stresses the fact that during the discussions which preceded the signing of the contract, the capital expenditures were estimated by the officers of Dome at between $300,000 and $350,000 and argues that the fact that such expenditures actually ran to a figure in the neighbourhood of $800,000 indicates that a large part there-of must have been made for purposes other than the fulfilment of the contract. This inference appears to me to be negatived by the evidence of the appellant's witnesses, particularly Mr. McCrea, who explained how the increased expenses came to be

• incurred. The findings in this regard made by the learned trial Judge

do not appear to depend upon the view which he took as to the credibility of witnesses whose evidence was in conflict. The evidence does not seem to me to warrant an inference that capital expenditure was made beyond that which the appel-lant's officers regarded as reasonably necessary to enable them to produce the two million pounds of concentrate within the time stipulated in the contract.

The evidence shows that the appellant's officers would have preferred to delay the erection of a mill until after they had done enough work underground to prove the ore, but that they yielded to the urgings of the Metals Controller not to delay. It seems contrary to all business probabilities that the appellant should in such circumstances go to the expense of building a plant larger than was necessary for carrying out the contract.

In my opinion the proper finding of fact in this regard is that all the capital expenditure made by the appellant was necessarily and properly made for the purpose of carrying out its con-tract with the respondent. The respondent argues that even on this view of the facts, s. 6 of the contract should be con-strued as limiting the write-offs to the normal write-offs allowed by the Income Tax authorities in the case of a mining com-pany. It seems to me that if this had been the intention of

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the parties it would have been easy to say so, and, instead of the words used in the contract, the parties would have used some such form of expression as: "Which cost shall include such write-offs for depreciation of plant and equipment, pre-production development and depletion as are allowed to mining companies in the normal practice of the Income Tax Division."

In construing s. 6 it is important to bear in mind that its provisions were to come into operation only after the termina-tion of the contract, whether by completion of delivery of the contract quantity, cancellation or expiration. The parties in-tended that the determination of the cost of production of the concentrate delivered should be made at a time when all deliveries had been completed, all relevant facts ascertained and nothing was left to conjecture. The purpose of determining the cost was to find out whether or not the appellant would be making a fair profit upon the concentrate delivered if paid at the rate of 85e a pound. In my view it could not be said that the appellant had realized a fair profit upon the concentrate delivered unless there were included in the calculation of the cost of production the capital expense necessarily undertaken to make such production possible less the residual value of the capital assets produced by such èxpendíture. If the matter were doubtful it might well be said that the intention of the parties, as expressed in the contract, was that the cost should be determined by a cost accountant upon the principles which govern the making of a cost audit and that the only evidence in the record as to how such cost should be computed by a cost accountant is that of Mr. Adamson whose experience and high qualifications were not questioned before us.

The purpose of "write-offs for depreciation" or "transfers to depreciation reserve" is to provide out of earnings over the useful life " of an asset used in their production the cost of such asset less its residual value, if any. It is only after an amount adequate for such purpose has been transferred to depreciation reserve that a true calculation of profits can be made. In most cases the transfer is made annually and it is necessary in determining its amount to estimate in advance the probable useful life of the asset and its probable residual value at the end of such life; but in the case at bar at the time of the cancellation of the contract the ascertained fact was that the useful life of the plant, equipment and mining claims had come to an end. Had it been otherwise, had the hopes entertained in 1942 been realized in 1944 and had the appel-lant's mine been then capable of continued profitable operation

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it would have been necessary to estimate what portion of the useful life of the assets had expired and what portion re-maíned and to work out the reasonable and proper write-offs accordingly. But no such difficulty was encountered; the use-ful life was over; and, in my opinion, the reasonable and proper write-offs under the circumstances are those for which the appellant contends.

The respondent argues that, this construction would bring about the result that under the terms of s. 6 the appellant is to be repaid part of its capital expenditure over and above the $300,000 repaid pursuant to s. 7(b) and undoubtedly this is so. The respondent submits that, when the contract is read as a whole it appears. that s. 7(b) and that section only, deals with the repayment of capital and that therefore s. 6 should not be construed as providing a. further repayment of capital. I do not think that this argument is entitled to prevail. Section 7 in its opening sentence gives the respondent the right to cancel the contract and goes on in cls. (a) and (b) to set out his obligations in the event of the exercise of such right. It will be observed that the payments which the respondent is required to make under cis. (a) and (b) are cumulative. Clause (a) imports the terms of s. 6, which provides that (subject always to the limit of $1 per pound) the respondent shall pay to the appellant a sum sufficient to yield it a fair profit over and above the cost of production of the concentrate. Since such cost of production is to include reasonable and proper write-offs of capital cost it is obvious that the sum paid will repre-sent in part a repayment of such capital cost. Any risk of a duplication of such payment under cl. (b) is prevented by the provision in cl. (b) that the appellant 's operating profits before write-offs shall be deducted from the capital expendi-tures in calculating the respondent's liability. Applying the terms of s. 6, interpreted in the manner which I have indicated above to be, in my opinion, the proper one, to the actual figures, it appears that the cost of production amounts to $1,071,918.42, made up as follows:

Plant and equipment $596,003.28 Pre-production development 193,724.68 Cost of mining claims 51,150.00

$840,877.96 Deduct residual values 96,350.67

Total of reasonable and proper write-offs .. $ 744,527.29

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Operating costs 327,391.13

$1,071,918.42 If from this amount is deducted the maximum price payable

under s. 6, $699,054, the resulting figure is a loss of $372,864.42 and it is clear that under s. 6 the appellant is entitled to be paid at the rate of $1 per pound as, even at that price, no profit results.

Passing to s. 7(b) it appears that "the amount reasonably and properly expended in respect of the said property for capital expenditures and pre-production development" is, after de-duction of residual values, $744,527.29. The operating profits before write-offs are $371,662.87 made up as follows:

Price of concentrate at $1 per pound -$699.054.00- Operating expenses 327,391.13

$371,662.87 It appears therefore that, but for the limitation of $300,000

the amount payable under cl. (b) would be $744,527.29 less $371,662.87, that is $372,864.42; and, iii the result, under cl. (b) the appellant is entitled to be paid $300,000. In my view there is no difficulty in giving full effect to both cl. (a) and cl. (b) and no duplication of payment results from so doing.

Reading the contract as a whole, it seems to me that the parties intended that if after the termination of the contract it appeared that if paid for all concentrate delivered at 85c per pound the appellant would not have realized a fair profit upon such concentrate it was to be paid at such higher price per pound as might be necessary to enable it to realize a fair profit, provided however that the total price per pound must not exceed $1.

The facts as at the termination of the contract are not in eontroversy. The appellant had made the following expend-itures:

Plant and equipment $ 596,003.28 Preproduction development 193,724.68 Cost of mining claims 51,150.00 Operating costs 327,391.13

Total $1,168,269.09 Further operation of the mine was commercially impossible.

The mining claims were of no value. The residual value of the plant and equipment was $96,350.67. The appellant had re-

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ceived $300,000 under s. 7(b) of the contract and $594,195.90 under s. 4 of the contract: The appellant had therefore credits totalling $990,546.57 to set against its cash outlay of $1,168,-269.09 I can find nothing in the words of the contract to in-dicate that it was the intention of the parties that such a re-sult should be regarded as the realization by the appellant of a fair profit upon the concentrate delivered. Even if its claim to be paid at the ráte of $1 instead of 85c per poundis allowed, the appellant, far from realizing a fair profit, will have suffered a heavy loss.

I would allow the appeal and direct that judgment be en-tered declaring that the appellant is entitled to be paid the sum of $104,858.10, together with its costs in the Exchequer Court and in this Court.

Appeal dismissed.

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