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  • Unreported Judgment

Callide Coalfields (Sales) Pty Ltd v CS Energy Ltd

 

[2008] QSC 124

 

SUPREME COURT OF QUEENSLAND

 

CITATION:

Callide Coalfields (Sales) P/L v CS Energy Ltd & Anor [2008] QSC 124

PARTIES:

CALLIDE COALFIELDS PTY LTD ACN 082 543 986

(applicant)

v

CS ENERGY LIMITED ACN 078 848 745

(first respondent)

CALLIDE POWER MANAGEMENT PTY LIMITED   ACN 082 468 700

(second respondent)

FILE NO/S:

BS 1625 of 2008

DIVISION:

Trial Division

PROCEEDING:

Trial

DELIVERED ON:

11 June 2008

DELIVERED AT:

Brisbane 

HEARING DATE:

2 June 2008

JUDGES:

de Jersey CJ

ORDER:

1.That the application filed 22 February 2008 be dismissed;

2.That the applicant pay the respondents’ costs of and incidental to the application, to be assessed on the standard basis.

CATCHWORDS:

COAL SUPPLY CONTRACTS – PROVISION FOR REVIEW – whether to be construed so that in the event of dispute over price variation, the dispute could validly be referred for expert determination – whether ‘review’ process should be construed as obliging the parties to renegotiate and agree to variations, to restore consistency between agreement and certain specified ‘principles’

John Grant & Sons v Trocadero Building & Investment Co. Ltd (1938) 60 CLR 1, cited

COUNSEL:

R W Gotterson QC, with P Franco for the applicant

W Sofronoff QC SG, with D O’Sullivan for the respondent

SOLICITORS:

Minter Ellison for the applicant

Freehills for the respondent

  1. de Jersey CJ: The applicant seeks declarations that it is in dispute with each of the respondents within the meaning of contracts to which they are respectively parties, and that the applicant has either referred the disputes for determination by an expert under cl 10.2(n) of the contracts, or that those disputes are subject to determination under another provision of the contracts, cl 13.2. 
  1. The applicant seeks associated declaratory relief. The determination of the application depends on the proper construction of the contracts. To the extent possibly relevant facts are contested, that contest has no relevance to my determination. No party placed significance on any factual dispute.
  1. The applicant, which is a related company of Anglo Coal Australia Pty Ltd, supplies coal to the respondents. The coal comes from the Callide Mine situated near Biloela. The first respondent owns and operates the Callide B Power Station. The second respondent manages the Callide C Power Station.
  1. The applicant supplies the first respondent pursuant to the Callide B Coal Supply Agreement, which is dated 11 May 1998. The applicant supplies the second respondent under the Callide Power Project Coal Supply Agreement, also dated 11 May 1998.  The agreements are in materially identical terms.

The contract provisions

  1. It is convenient that I now set out the principally relevant provisions of the contracts, albeit they are extensive. Subject to some subsequent supplementation, what follows should facilitate comprehension of the parties’ contentions, and my analysis.

3.1Term

Subject to Clause 3.2, this Agreement commences on the date of execution of this Agreement and terminates on the last day of the Term, unless terminated earlier in accordance with this Agreement.

  1. Option Terms

(a)This Agreement may be extended at the Buyer’s option (which option is exercisable at the Buyer’s sole and absolute discretion) beyond the initial Term for up to four successive Option Terms, as follows:

(iv)if the Parties fail to agree on all the terms and conditions including price by the dates referred to in Clause 3.2(a)(iii), and the Buyer exercises in its sole and absolute discretion its option to extend this Agreement, this Agreement will be extended on the same terms and conditions including the price, applying at the conclusion of the previous Initial Term or Option Term as the case may be; and…

  1. Calculation of Contract Price

The Contract Price:

(a)in any Quarter is the Base Price escalated in accordance with the following formula:

CP   =   BP[1 + 0.9  (CPIn – CPIBP  ]

                                                                (CPIBP)

Where:

CP is the Contract Price in the Quarter current at the time of escalation in accordance with this Clause 10.1.

BP is the Base Price at the Base Date.

CPIBP is the CPI Index for the June quarter 1997.

CPIN is the CPI Index for the lagging Quarter determined in accordance with Part B, Schedule 4;

  1. FOR EACH Quarter will be calculated on 1 January, 1 April, 1 July and 1 October in each Calendar Year by reference to the CPI Index for the lagging Quarter determined in accordance with Part B, Schedule 4 and the Contract Price, calculated in accordance with this clause 10.1, will apply to Coal delivered from the date of that calculation.
  1. Replacement of CPI Index as Escalator in Favour of EMI Escalation

(a)The method of calculating the Contract Price in this Clause 10 (including the method of calculating escalation) is subject to the review provisions set out in Clause 12.

  1. The Parties acknowledge and agree that a possible EMI must:

(i)reflect underlying long term trends in electricity prices;

  1. exclude taxes; and
  1. incorporate on a basis acceptable to the Parties any market movements or aberrations which occur and which cannot be taken as indicative over the Review. [sic] Period of underlying long term trends in electricity prices.

  1. If an EMI meets the requirements set out in Clause 10.2(e), the Parties:

(i)must only determine that an EMI is acceptable if its application will result in the reasonable expectation that the net present value to the Seller, calculated in accordance with the methodology and assumptions exampled in Schedule 5 (NPV7’) in respect of the Initial Term will be preserved over the balance of the Initial Term when applied to the Initial Term and will be preserved over the balance of any Option Term exercised by the Buyer when applied to that option Term as the case may be; and

  1. if NPV7 will not be so preserved, will examine:

(A)the proportion of the Base Price to which EMI will apply and the proportion of the Base Price to which CPI Index will apply; and

(B)changes to the Base Price (subject to reviews that may have occurred),

so as to ensure that NPV7 will be preserved over the balance of the Term of this Agreement.

  1. If the Parties agree the matters set out in Clause 10.3(k), then:

(i)from the next Quarter following that agreement:

(A)any alterations to the Base Price; and

(B)the extent to which the CPI Index is replaced in the price formula in Clause 10.1

will take effect for calculating the Contract Price; and

(ii)

(n)Any dispute or matter between the Parties as to any matter set out in this Clause 10.2 must be referred to determination by an Expert in accordance with Clauses 13.3 to 13.6 inclusive.  The Parties acknowledge and agree that Clauses 13.1 and 13.2 will not apply, and will be of no force or effect in relation to such a dispute or matter.

  1. Principles

(a)Each Party acknowledges and agrees:

(i)subject to Clause 12.1.(a)(ii), the Coal Mine Owners and the Station Owners have an expectation of benefiting under this Agreement;

(ii)subject to clause 12.1.(a)(iii), each Party supports the process of review set out in this Clause 12 to ensure both the Coal Mine Owners and the Station Owners remain competitive in relation to their respective industries; and

(iii)during the Initial Term, the competitive position of the Power Station relative to other power stations operating in the Power Station’s industry in Queensland as at the Effective Date should be restored, having regard to the viability of the Coal Mine Owners’ mine in its industry.

  1. Each Party agrees that circumstances may change during the Term of this Agreement which may require the terms of this Agreement to be reviewed to ensure those terms remain consistent with the principles set out in clause 12.1(a).
  1. Five Yearly Review Meeting

During this Agreement, the Parties must:

(a)convene a meeting of the Parties within 30 days of the fifth anniversary of the Effective Date of this Agreement;

  1. at that meeting, review the consistency of the operation of this Agreement against the principles set out in Clause 12.1(a);
  1. within 14 days of that meeting, exchange all data which the Parties hold which is relevant to reviewing the consistency of the operation of this Agreement against the principles set out in Clause 12.1(a); and
  1. use their best endeavours to review the consistency of the operation of this Agreement against the principles set out in Clause 12.1(a) within 90 days of that meeting.

  1. Scope

Unless otherwise expressly agreed to the contrary in this Agreement, this Clause 13 applies to all disputes between the Parties under this Agreement.

  1. Chief Executive Resolution

The Parties agree that any dispute, on relevant matters arising out of this Agreement, to be referred to the dispute resolution procedure set out in this Clause 13 must be referred to a nominated senior executive (or, in the case of the Seller, a nominated senior executive of the Shell Coal group) of the Parties’ Relevant Holding Companies for resolution.  Failing such resolution within 10 Business Days of that referral, the relevant dispute must be referred, by those chief executives, for final determination by:

(a)an Expert; or

  1. arbitration; or
  1. a court of competent jurisdiction,

in accordance with this Clause 13 and as selected by those chief executives.  In default of such a selection the dispute will be referred to a court of competent jurisdiction for final determination.

  1. Expert

(a)Where any dispute or matter is referred to an Expert pursuant to Clause 13.2 or Clause 10.2(n) or otherwise in accordance with the terms of this Agreement, an Expert must be appointed by the Parties, or in default of agreement within 10 Business Days of the referral, in the case of financial matters, by the President for the time being of the Institute of Chartered Accountants, Australia, and, in the case of technical matters, the President ‘for the time being of the Institute of Engineers, Australia.

  1. Decisions of Expert

Subject to Clauses 13.16 and 13.17, and in the absence of manifest error, the decisions of the Expert will be final and binding upon the Parties.

13.6Information and Representation

The Parties must give the Expert all information and assistance that the Expert may reasonably require.  The Parties will be entitled to be legally represented in respect of any written representations that they may wish to make to the Expert.

  1. Further Disputes

In any arbitration proceedings, any Party may raise by way of a further claim, set-off, defence or cross-claim and subject to any conditions as to costs or otherwise that may be imposed by the arbitrator, any dispute or matter whatever relating to the construction of this Agreement or as to any matter or thing of whatever nature arising under or in connection with this Agreement.

SCHEDULE 1 (of the Callide B Agreement)

“Commercial Load Date” means:

(a) per Unit 1, the date Unit 1 achieves practical completion…;

Effective Date” means the 1 January 1998;

Initial Term” means a period commencing on the Effective Date and terminating on the day being 10 years after the Commercial Load Date of Unit 1;

SCHEDULE 2

  1. Headings are for ease of reference only and do not affect the meaning of this Agreement.”

Synopsis of the contractual situation

  1. The agreements commenced upon execution, that is 11 May 1998. The initial 10 year term of each agreement will terminate on 14 August 2011.  That is the date 10 years after the “Commercial Load Date of Unit 1” in terms of the definitions in sch 1.
  1. Under cl 3.2(a) the relevant respondent has the option to extend the agreement beyond the initial term, for up to four successive “Option Terms”. The expression “Option Term” is defined in Schedule 1 to mean a period of five years. The agreements therefore have a prospective life of 30 years.
  1. In the event that the respondent exercises the option, “the Parties must meet and negotiate all terms and conditions including price” (cl 3.2(a)(ii)). Failing their agreement, the “Agreement will be extended on the same terms and conditions including price” as previously applied (cl 3.2(a)(iv)).
  1. The agreements contemplated the supply of substantial quantities of coal. The Callide B Agreement, for example, provides for the supply of between 2.4 million and 2.8 million tonnes every year (cl 5.1). There is provision for the purchase of additional coal (cl 5.1A).
  1. The “Contract Price” falls to be calculated in accordance with cl 10.1. It is a “base price” escalated in accordance with a formula which invokes the Consumer Price Index. 
  1. At present, the base price is $16.53 per tonne (sch 4). The base price at the commencement of the contract was $21.945, reducing to $17.86 as from 14 August 2001, with the present rate applying from 31 December 2005. The present base price will apply until the end of the initial term, that is, until 14 August 2011.
  1. The contracts provide for the contingency that the Consumer Price Index might be discontinued. In short, should the parties be unable to agree on a replacement index, it is to be determined by an expert. That emerges from the following definition of “CPI Index” in sch 1 (and see sch 4):

“CPI Index’ means “the weighted average of the Consumer Price Index (ABS Cat. No. 6401 Table 1 – All Groups) for Brisbane published by the Australian Bureau of Statistics or, if that index is discontinued, such index as may replace it and in the event that the Parties are unable to agree on the replacement index the index most closely serving the same function as certified by an actuary appointed by the President for the time being of the Law Society of Queensland whose certification will be final and binding on the Parties and that actuary will be deemed to act as an expert and not as an arbitrator and his certificate will be final and binding on the Parties.”

  1. At the time the agreements were executed, the electricity industry in Queensland was entering a newly competitive phase, following a restructuring on 1 July 1997 which anticipated the introduction of a “national electricity market”, or NEM.  The impact of the NEM on operations such as the respondents’ was uncertain.
  1. A deponent Mr Craven, an industry consultant, has sworn in these terms:

“When the agreements were negotiated and executed, the NEM was in its formative stages of development.  The electricity supply business was changing from a regulated, risk-free, cost-plus business to a risk-managed, price-driven business, known as the wholesale electricity market (NEM)…When the agreements were executed there was uncertainty in the industry as to how the deregulated electricity market would evolve.  It was unclear how participants in the NEM would behave over time in their bidding practices and what impacts that behaviour would have on participants’ commercial outcomes.  As a result, it was not certain what impact the introduction of the NEM would have on base load power stations such as the Callide Power Stations.”

  1. That context may explain why the parties contemplated the “review” of their agreements during the currency of the agreements, and included provisions such as cl 10.2 (replacement of CPI with EMI) and cl 12.3 (“change events”).
  1. Clause 12 of each agreement provides for two types of review. The clause begins by reciting some expectations (cl 12.1(a)), and then says, in (b):

“Each Party agrees that circumstances may change during the Term of this Agreement which may require the terms of this Agreement to be reviewed to ensure those terms remain consistent with the principles set out in Clause 12.1(a).”

  1. The first type of review is provided for by cl 12.2. It is a once-only review, to be carried out over an approximately three month period beginning in mid to late 2006 (approaching five years after the commencement of the agreement). The parties are obliged to “review the consistency of the operation of [the] Agreement against the principles set out in Clause 12.1(a)”, “exchange all data…relevant to reviewing the consistency”, and “use their best endeavours to review the consistency…within 90 days” of their meeting.
  1. That provision is important to the applicant’s position. One of the applicant’s contentions is that having proposed a new contract price in the course of that process, which was rejected by the respondents, a dispute arose apt for determination under the “dispute resolution” provisions in cl 13, to which I will come.
  1. The second type of review is provided for by the lengthy cls 12.3 to 12.8, which I must now set out in full:

12.3Change Events

(a)A ‘Change Event’ is a change in circumstances which has, or will have, a material effect on the competitiveness of either the Coal Mine Owners or the Buyer (in the reasonable opinion of a Party) in relation to the industry in which it operates, and includes, without limitation:

(i)the Commercial Load Date of Unit 2 occurring more than 18 months after the Effective Date;

(ii)if the Buyer reasonably demonstrates, by the elimination of other relevant factors, that there is a change in coal prices being paid by other power stations.  The Parties acknowledge that the buyer must reasonably demonstrate, by the elimination of other relevant factors, that there is a material adverse change in the competitive position of the Power Station which is due to changes in coal prices being paid by other power stations, before the Parties will be obliged to review this Agreement against the principle set out in Clause 12.2(a)(iii).

(iii)major changes to working conditions within the coal mining industry, including, without limitation, advances in technology which were not foreseen at the date of this Agreement;

(iv)a demonstrated (by the Seller) increase in the long term (being at least five years) trend in electricity price occurring during the whole or any part of any period when an EMI is not operative; and

(v)a change in governmental policy, or a change in a law or regulation, relating to environmental standards and compliance with those standards.

(b)If at any time after the date of execution of this Agreement there occurs, or either Party considers there may occur, a Change Event, then:

(i)a Party (the ‘Notifying Party’) may notify the other (the ‘Receiving Party’) in writing promptly when that Change Event becomes known to the Notifying Party that it is the Notifying Party’s intention to initiate a review of this Agreement which may lead to an Adjustment;

  1. if it wishes to proceed with a review of this Agreement, the Notifying Party must, as soon as practicable in all the circumstances, submit a formal notice of a Change Event (the ‘Change Event Notice’) to the Receiving Party, which will include:
  1. all data which the Notifying Party holds which is relevant both to the Change Event including detailed information regarding the nature, extent and quantum of the cost and revenue impacts of the Change Event and to calculating those costs and revenue impacts as they relate to all of the options and alternatives identified by the Notifying Party available to accommodate or mitigate the Change Event; and
  1. options and alternatives identified by the Notifying Party and the Notifying Party’s recommended option,

and a Change Event will be deemed to have occurred;

  1. As soon as possible after a Notifying Party becomes aware than an estimate of the financial effect is likely to be incorrect, the Notifying Party must amend that estimate and give copies of the amended estimate and the estimate it amends to the Receiving Party.
  1. The onus is upon the Notifying Party to establish the impact of the Change Event.
  1. The Parties must use their best endeavours to review and to attempt to agree an Adjustment generally in accordance with the principles set out in Clause 12.1.
  1. Receiving Party’s Notice Not Accepting Options

(a)If a Receiving Party notifies the Notifying Party that it does not accept any of the options proposed or financial effects estimated in the Change Event Notice, then it may propose alternative options for the Notifying Party’s consideration.

  1. The Notifying Party must respond within 10 Business Days of its receipt of any response from the Receiving Party pursuant to Clause 12.4(a).
  1. Convene Meeting of Parties

The Change Event Notice issued pursuant to Clause 12.3(b)(ii) must specify a time (being at least 30 days but less than 45 days after the date of receipt of the Change Event Notice) and a place in Brisbane at which a meeting will be held and attended by a senior officer of the Notifying Party (who must be named in the Change of Event Notice) and a senior officer of the Receiving Party.

  1. Receiving Party’s Senior Officer

Within 7 days of receipt of the Change Event Notice, the Receiving Party must give the Notifying Party written notice of the name of a representative of the Receiving Party who must be its senior officer for the purpose of attending the proposed meeting specified under Clause 12.5.

  1. Review of Options

(a)The senior officers must attend the meeting specified under Clause 12.5 and must review the options set out in the Change Event Notice and the detailed information included in the Change Event Notice.

  1. The Senior officers must, as soon as practicable, attempt to:

(i)agree an option or determine an appropriate course of action; and

(ii)agree on the nature and quantum of the financial effect of the Change Event.

  1. Mitigation

The Parties must have regard to the desirability to preclude the occurrence of, or to mitigate any adverse consequences flowing from or contributing to, any Change Event.”

  1. The third prospect for change, no doubt countenanced because of the industry uncertainties to which I have referred, concerns the possible substitution for the CPI, as the accelerant in determining the contract price, of a different index, termed the “EMI”. Schedule 1 to the agreements defines “EMI” as “the electricity market based index that reasonably reflects the underlying long term trend in electricity prices and which is to be determined in accordance with Clause 10.2”.
  1. I must now set out cl 10.2, because it featured substantially in the parties’ submissions:

10.2Replacement of CPI Index as Escalator in Favour of EMI Escalation

(a)The method of calculating the Contract Price in this Clause 10 (including the method of calculating escalation) is subject to the review provisions set out in Clause 12.

(b)The Parties agree that the provisions set out in Clause 10.1 providing for the escalation of the Contract Price will apply up to and including the Effective Date and thereafter for so long as an EMI is undetermined, or during any period referred to in Clause 10.2(m) during which an EMI selected by the Parties in accordance with this Clause 10.2 becomes inappropriate.

  1. The Parties agree that:

(i)an EMI may be a more appropriate index for the escalation of the Contract Price than CPI Index; and

(ii)as at the date of this Agreement, an EMI does not exist.

  1. The Parties acknowledge and agree that a possible EMI may be:

(i)published by either Party or any person; and

  1. based on calculations made by either Party or any person.
  1. The Parties acknowledge and agree that a possible EMI must:

(i)reflect underlying long term trends in electricity prices;

  1. exclude taxes; and
  1. incorporate on a basis acceptable to the Parties any market movements or aberrations which occur and which cannot be taken as indicative over the Review Period of underlying long term trends in electricity prices.
  1. Upon the execution of this Agreement, or as soon as practicable thereafter, the Parties may nominate a possible EMI, or a number of possible EMI’s.
  1. The Review Period will commence upon the nomination referred to in Clause 10.2(f).
  1. If more than one EMI is nominated under Clause 10.2(f), then the same Review Period will apply to all EMI’s so nominated.
  1. Until the determination of an EMI, in accordance with Clause 10.2(k) the Parties may continue to nominate possible EMI’s and, despite Clause 10.2(h), Review Periods will commence in respect of each nominated possible EMI upon its nomination.
  1. During the Review Period the Parties must examine the nominated EMI or EMI’s in order to ascertain whether the EMI or any of them meets the requirements set out I clause 10.2(e).
  1. If an EMI meets the requirements set out in Clause 10.3(e), the Parties:

(i)must only determine that an EMI is acceptable if its application will result in the reasonable expectation that the net present value to the Seller, calculated in accordance with the methodology and assumptions exampled in Schedule 5 (‘NPV7’) in respect of the Initial Term will be preserved over the balance of the Initial Term when applied to the Initial Term and will be preserved over the balance of any Option Term exercised by the Buyer when applied to that Option Term as the case may be; and

  1. if NPV7 will not be so preserved, will examine:

(A)the proportion of the Base Price to which EMI will apply and the proportion of the Base Price to which CPI Index will apply; and

(B)changes to the Base Price (subject to reviews that may have occurred),

so as to ensure that NPV7 will be preserved over the balance of the Term of this Agreement.

  1. If the Parties agree the matters set out in Clause 10.2(k), then:

(i)from the next Quarter following that agreement:

(A)any alterations to the Base Price; and

(B)the extent to which CPI Index is replaced in the price formula in Clause 10.1,

will take effect for calculating the Contract Price; and

  1. The combination of CPI Index (if any) and EMI will be collectively referred to as the ‘EMI’ for the purposes of the balance of these provisions (except Clause 10.2(o)).
  1. (i)              If in the Parties’ opinion, the implemented

EMI consistently fails to satisfy the criteria set out in Clause 10.2(e) or operates in a manner unsatisfactory to the Parties, whether or not it has operated satisfactorily in the past:

(A)the Parties must determine the date from which that EMI is no longer to operate (‘De-selection Date’); and

(B)the implemented EMI will be replaced with the escalation referred to in Clause 10.1 with effect from the De-selection Date and, unless the Parties otherwise agree, the Base Price applying immediately prior to the determination made by the Parties under this Clause 10.2(m), adjusted to negate the effect of any review of the Base Price carried out in accordance with Clause 10.2(k)(ii)(B).

(ii)Either Party may re-instigate the process set out in this Clause 10.2(f) to (m) by again nominating an EMI (other than the EMI referred to in this Clause 10.2(m)) in accordance with clause 10.2(f).

  1. Any dispute or matter between the Parties as to any matter set out in this clause 10.2 must be referred to determination by an Expert in accordance with Clauses 13.3 to 13.6 inclusive.  The Parties acknowledge and agree that Clauses 13.1 and 13.2 will not apply, and will be of no force or effect in relation to such a dispute or matter.
  1. After the determination of an EMI, any Party can continue to examine a possible EMI or EMI’s (‘Further EMI’) in which event:

(i)if following a Review Period in respect of the Further EMI a Party can demonstrate that the Further EMI meets the requirements of Clause 10.2(e), then that Party can propose to the other Party that the current EMI be replaced by the Further EMI; and

(ii)if the other Party agrees, then Clauses 10.2(k), 10.2(l), 10.2(m), 10.2(n) and this Clause 10.2(o) will apply to the replacement of the current EMI by the Further EMI; and

(iii)if the other Party does not agree, the existing EMI will continue to apply.”

  1. No EMI was ever determined upon.
  1. I now set out the material parts of the dispute resolution provision, cl 13:

13.DISPUTE RESOLUTION

  1. Scope

Unless otherwise expressly agreed to the contrary in this Agreement, this Clause 13 applies to all disputes between the Parties under this Agreement.

  1. Chief Executive Resolution

The Parties agree that any dispute, on relevant matters arising out of this Agreement, to be referred to the dispute resolution procedure set out in this Clause 13 must be referred to a nominated senior executive (or, in the case of the Seller, a nominated senior executive of the Shell Coal group) of the Parties’ Relevant Holding Companies for resolution.  Failing such resolution within 10 Business Days of that referral, the relevant dispute must be referred, by those chief executives, for final determination by:

(a)an Expert; or

  1. arbitration; or

(c)a court of competent jurisdiction,

in accordance with this clause 13 and as selected by those chief executives.  In default of such a selection the dispute will be referred to a court of competent jurisdiction for final determination.

  1. Expert

(a)Where any dispute or matter is referred to an Expert pursuant to Clause 13.2 or Clause 10.2(n) or otherwise in accordance with the terms of this Agreement, an Expert must be appointed by the Parties, or in default of agreement within 10 Business Days of the referral, in the case of financial matters, by the President for the time being of the Institute of Chartered Accountants, Australia, and, in the case of technical matters, the President for the time being of the Institute of Engineers, Australia.”

  1. The provision goes on to prescribe how an expert should proceed. Clause 13.4 provides that the expert’s decision will be “final and binding upon the Parties”. Under cl 13.6 the parties are obliged to “give the Expert all information and assistance that the Expert may reasonably require”.
  1. It remains to mention cl 20.4, which provides:

“Each Party must do or cause to be done all things necessary or desirable to give effect to, and must refrain from doing anything that would hinder the performance of, this Agreement.”

The circumstances in which any dispute arose

  1. The five yearly review process was to be commenced by mid-September 2006. An approval of the ACCC to conduct a price review was obtained by mid-November that year, with an interim approval forthcoming earlier, on 13 September.
  1. The parties first met on 13 September 2006. It was evident that price and the price calculation formula were important topics for discussion. The parties exchanged data. Further review meetings took place on 11 October, 25 October and 29 November 2006. The 90 day review period (cl 12.2(d)) expired in mid-December 2006. The review process had not by then been completed. In fact six further review meetings took place, between 30 January and 10 October 2007.
  1. At a meeting on 28 August 2007, the applicant contended that the contracts had a “negative value” for Anglo Coal Australia Pty Ltd of -$74 million. The applicant then sought an increase in the base price of between 35 and 40 per cent, together with adjustment of the escalator.  That claim was refined in subsequent correspondence to the point where the increase on the base price levelled to 25 to 30 per cent.  At the tenth and final meeting on 10 October 2007, the respondents rejected the applicant’s claim.
  1. The parties were at odds as to whether all relevant data had been exchanged, the respondents rejecting the applicant’s contention that it had fully discharged its obligation. That remains a matter of dispute, but it is immaterial to my determination.
  1. On 30 November 2007, the applicant took steps to refer the “dispute” for expert determination. It purported to proceed under cl 10.2(n) of the agreements. The respondents disputed the validity of the reference on the basis that the review process under cl 12.2 had not been completed (whether it had also remains a matter of dispute, but that is again immaterial to my determination). In the event, the President of the Institute of Chartered Accountants, Australia declined to appoint an expert because the parties had not executed a deed indemnifying the Institute against certain risks.

The relief claimed in this proceeding

  1. On 22 February 2008, the applicant filed an originating application in which it sought the following relief against the first respondent:

“1.A declaration that a dispute (“the Callide B dispute”) has arisen between the applicant and the first respondent as to the method of calculating the Contract Price (including the method of calculating escalation) under the written contract between the applicant and the first respondent, dated 11 May 1998 (“the Callide B Contract”).

  1. A declaration that the Callide B dispute is a “dispute between the Parties as to any matter set out in this Clause 10.2”, within the meaning of that phrase in clause 10.2(n) of the Callide B contract.
  1. A declaration that the Callide B dispute has been validly referred to determination by an expert, pursuant to clause 10.2(n) of the Callide B contract.
  1. A declaration that the applicant and the first respondent are obliged to give any expert appointed by the President of the Institute of Chartered Accountants, to determine the Callide B dispute, all information and assistance that the expert may reasonably require.
  1. In the alternative to paragraphs 2 to 4 above, a declaration that the Callide B dispute is a dispute to which clause 13.2 of the Callide B contract applies.”
  1. The applicant sought parallel relief against the second respondent in relation to the Callide C Contract.

The parties’ principal contentions

For the applicant

  1. Mr Gotterson QC, who appeared with Mr Franco for the applicant, naturally focused on the language of cl 12.1(b) where that clause states the object of the five year review: “to ensure those terms remain consistent with the principles” set out in para (a). The review process, he submitted, did not come to an end with the circumstance of disagreement about a new pricing formula. That disagreement gave rise to a “dispute” (John Grant & Sons v Trocadero Building & Investment Co. Ltd (1938) 60 CLR 1, 15) “under this Agreement” (cl 13.1), and the dispute was appropriate for determination by an expert (cl 13.2(a)). 
  1. The applicant’s primary position was, however, that the subject of the dispute concerned a “matter” within the scope of cl 10.2(n), which must therefore be referred for determination by an expert. Notwithstanding the extensive treatment of the EMI in cl 10.2, the opening words of (a) were, Mr Gotterson submitted, apt to catch the subject matter of this dispute.
  1. Mr Gotterson submitted that the parties would be obliged to execute a deed of variation in order to implement any determination by the expert, as part of their obligation under cl 20.4 to “do all things necessary…to give effect to…this Agreement”.
  1. He submitted that the reference of a dispute to an expert was not contractually subject to the satisfaction of any precondition, such as that the review process be complete, or that there must have been full exchange of relevant data (although the applicant submitted those situations did in fact obtain).

For the respondents

  1. Mr Sofronoff QC, who appeared with Mr O’Sullivan for the respondents, pointing to the generality of the principles expressed in cl 12.1, submitted that they were not apt for application as objective criteria by an arbitrator or court.
  1. Clause 12.2(b) would open up, at the five year review, all provisions of the contract, and he submitted that the parties could not (implicitly) have contemplated an external expert’s effectively rewriting their contract.
  1. He submitted the contracts were clear, in specifying when particular issues fell for external determination where the parties were unable to reach agreement, and there were only two of them: the certification of a substitute index for the CPI (sch 4), and the determination of EMI matters under cl 10 (cl 10.2(n)).
  1. Mr Sofronoff submitted that cl 10.2 was concerned solely with the possible adoption of EMI escalation, and that the applicant could not rely on cl 10.2(a), in invoking cl 10.2(n). 
  1. He compared and contrasted the language of the agreements for a contention that where cl 12.2 refers to “review”, it contemplates no more than a survey, and does not extend to obliging the parties to work a variation to their agreement.
  1. On that basis, the parties’ disagreement as to whether there should be a pricing change did not give rise to a justiciable issue. It was therefore significant, Mr Sofronoff submitted, that the dispute resolution provision (cl 13.2) contemplated the referring of disputes to “a court of competent jurisdiction” in addition to reference to an expert or to arbitration, and he relied especially upon the default position, which mandates reference to a court.
  1. Mr Sofronoff submitted that the cl 12.2 review process was probably intended simply to inform the parties’ progressive understanding of the financial viability of their respective operations, where the continuing viability of each was, presumably, in operations of this magnitude, very important to the other. 
  1. Mr Sofronoff contrasted the generality of the situation under cl 12.2 with the much more specific description of the obligations of the parties in relation to “changed events” under cl 12.3. Because under the latter provision, the adjustment of the contract was not guaranteed, then a fortiori, he submitted, the intention underlying cl 12.2 must not have extended to the external imposition of a variation.

For the applicant in reply

  1. Anticipating those submissions, Mr Gotterson submitted, in his initial presentation, that because this dispute concerns “the method of calculating the contract price” (cl 10.2(a)), cl 10.2(n) was engaged. 
  1. He submitted that cl 10.2 was not just concerned with EMI escalation.
  1. Mr Gotterson sought to explain the comparative precision of cl 12.3 on the basis that a particular event with particular consequences will under cl 12.3 have occurred, whereas the cl 12.2 review could seek to address what he called “the insidious erosion over time” of the parties’ positions under the agreements.
  1. As to the respondents’ submission that cl 13 contemplated that the subject matter of all disputes be apt for determination by a court, he submitted that “the default provision does not preclude disputes which are not justiciable from being determined by either expert determination or arbitral determination”.
  1. I am aware that I have not mentioned all of the parties’ contentions, and I have covered those mentioned with brevity. I have endeavoured to mention only those which featured prominently in the submissions, especially the oral submissions.
  1. I respectfully commend counsel for the precision and comprehensiveness of their submissions, which I have found most helpful in my resolution of this matter.

Analysis

  1. The applicant primarily relies on a referral under cl 10.2(n), which depends upon the characterization of its claim for a price increase as a “matter” set out in cl 10.2.
  1. It is true that cl 10.2(a) speaks of “the method of calculating the Contract Price in this Clause 10 (including the method of calculating escalation)”. But every other provision in cl 10.2 deals with the EMI. I consider the apparent purpose of cl 10.2(a) is not to broaden the “matters” to which cl 10.2 applies, beyond the EMI concept, but to confirm that the EMI issue, which concerns “the method of calculating the Contract Price in this Clause 10 (including the method of calculating escalation)” is “subject to the review provisions set out in cl 12”. 
  1. I take that to mean, simply, that the adoption or imposition and subsequent maintenance of an EMI under cl 10.2, does not absolve the parties from the obligation to engage in the five yearly review under cl 12.2, or the “change events” process under cl 12.3.
  1. The reason why the parties included para (n) in cl 10.2 was to ensure that the issues which may result in disputes under that provision, for example whether a proposed EMI meets the criteria specified in (e) and (k), would as necessary be determined by an expert. Those issues would be quintessentially appropriate for expert determination, whereas they would be quite inappropriate for determination by a court in particular. The parties would therefore have been concerned to ensure that those issues, if they arose, would not fall within the compass of the general dispute resolution provision cl 13, especially with its default provision, involving curial determination.
  1. The applicant’s alternate position is that its dispute “on relevant matters arising out of this agreement” is referable to an expert under cl 13.2.  Because the subject issue is non-justiciable – as appeared to be common ground, the applicant faces the obstacle that cl 13.2 does not discriminate between those disputes which may be referred to an expert, and those which may be referred to an arbitrator or court of law.  In addition and importantly cl 13.2 provides for the default position, that “in default of such a selection the dispute will be referred to a court of competent jurisdiction for final determination”.  That strongly warrants the conclusion that the parties contemplated that any dispute, in order to fall within the scope of cl 13.2, must concern a justiciable matter. 
  1. Mr Gotterson submitted that acting reasonably and in good faith, the parties’ chief executives would be bound to refer a non-justiciable dispute to expert determination or arbitration, “when the only alternative (i.e. referral to a court) is illusory”. But that would involve a tortured, indirect and disparate construction of cl 13 where, were that position intended, one might have expected the parties to say so plainly.
  1. The matter pursued by the applicant is non-justiciable essentially because the respondents are not subject to any contractual obligation to agree to a price variation. There is no legally protectable interest at stake, such as might be the subject of judicial determination. Clause 12.1(b) speaks of a review of the contract “to ensure” that its terms remain consistent with the principles in cl 12.1(a).  But in delineating the scope of the five year review, cl 12.2 stops short of obliging the parties to agree on a variation where there is inconsistency.  All (b) does is oblige the parties to “use their best endeavours” to review the matter of consistency. 
  1. A court could be asked to compel an errant party to participate properly in that process, but that is not what the applicant seeks. The applicant seeks, in reality, the expert determination of a new contract price in circumstances where the respondents were not contractually obliged to agree to one.
  1. In their written submissions in reply, counsel for the applicant say that

“the subject matter of the dispute which the applicant has referred to expert determination is whether or not to ensure consistency with the principles, the method of calculating the Contract Price (including the method of calculating escalation) requires variation”. 

That may be so, but the critical point for the present is that the agreement does not oblige the parties to agree upon a variation, should a variation be necessary in order to restore consistency.

  1. There are a number of textual indications that the parties did not contemplate that the cl 12.2 review would necessarily lead to variation of the agreement. Apart from the consideration just mentioned, the language of cl 12.2 is to be contrasted with that of other provisions dealing with review. In dealing with “change events”, cl 12.3, for example, speaks not just of “review”, but “review of this Agreement which may lead to an Adjustment” – albeit that no adjustment could ultimately be imposed in the absence of agreement.  Where the agreement seeks to oblige the parties to do more than “review” the agreement (in the natural sense, of surveying its operation) , the agreement says so.  An example is cl 3.2(a), which deals with the parties’ obligation to “negotiate” terms following the exercise of an option to extend.  Clause 3.2(c) speaks of a “review” in the course of “negotiations”, on the basis they are distinct concepts.
  1. I was given the dictionary definitions of the word “review”. These agreements use the term in the sense of a “general survey”. Mr Gotterson particularly relied on the first Oxford English Dictionary definition: “the act of looking over something (again), with a view to correction or improvement”. The difficulty, however, in the end, is that cl 12.2 does not go beyond obliging the parties to use their best endeavours to review the consistency of the agreement with the principles. It does not go on to say, for argument’s sake, “and having identified any inconsistency, the parties must negotiate and agree upon any variation necessary to remove that inconsistency”.
  1. If possible, and obviously enough, the word “review” should be read in the same sense wherever it appears in the agreements, subject to any evident contrary intention. There is none. I consider that the word “review” is used throughout these agreements in the “general survey” sense.
  1. In their written submissions in reply, counsel for the applicant submitted that the word bears differing meanings in cl 12.2(b) and cl 12.2(d). Paragraph (b) speaks of an obligation to review, and, it was submitted, para (d) speaks of an obligation to use “best endeavours to review”. But that would involve a misreading of (d), which deals only with the timing of the review: the parties are to use their best endeavours to complete it within 90 days of a particular meeting.
  1. I accept the submission made by counsel for the respondents, that “the word review does not mean, as the applicant has assumed, “reach agreement about” or “renegotiate or vary””.
  1. In their written submissions in reply, counsel for the applicant submitted that

“it would be a curious and, it is submitted, uncommercial conclusion if the parties were obliged to look at the terms of the Agreements with a view to their correction but were not obliged to do anything if variation were required”. 

That of course picked up the Oxford English Dictionary definition of “review”, as “the act of looking over something (again), with a view to correction…”. 

  1. The submission is answered by the range of considerations telling the other way. In summary, there is the language of cl 12.2 and the fact that it does not express an obligation to negotiate and vary. There is the contrast between that language, and the much more precise prescription in cl 12.3, which goes to the point of expressing the possibility of an adjustment, while stopping short of ordaining it. Also, there is the consideration that the word “review” may be read uniformly, as involving a general survey, in the course of an ordinary, natural construction of the agreements. Further, the text of the agreements indicates a conscious distinction between a “review” on the one hand, and negotiation or “adjustment” on the other, the latter term being defined in sch 1 as “an adjustment to this Agreement”. Finally, there is the existence of possible explanations why these parties may have seen the necessity for review in that sense.
  1. The parties may perhaps have wanted to keep track of their respective economic performances in a context where it was especially important that the commercial arrangement between them not be put at risk. Notwithstanding that, they may not have wished to take the further step of commanding variation, save in the particular situations expressly covered, that is, the “variation” (in a sense) involved with the certification of a new index in substitution for the CPI (sch 4 Pt B(1)), and expert determination of EMI issues under cl 10.2. Also, the parties may have seen the review process, in the “survey” sense, as possibly useful in informing the EMI prospect under cl 10.2 or the “change event” process under cl 12.3 – each of which could lead to price adjustment to reflect changed market conditions etc.
  1. Counsel for the applicant quite fairly made the uncontroversial submission that “where possible a commercial agreement should be given a commercially sensible construction”. They continued:

“The Agreements are long-term supply agreements in a changing industry.  Absent an appropriate price review mechanism, the respondents could require the applicant to supply them with coal for several decades, with the price being set at the start of that period, subject only to escalation at 90 % of CPI.  The price of the coal supplied over the life of the Agreements (even if the price was never increased) would total several billion dollars.  It is also relevant that the Agreements were entered into at a time of great uncertainty in the electricity market.”

  1. Reference should at once be made to the mechanisms of cl 10.2 (EMI) and cl 12.3 (Change Events), and the possibility of adjustment they raise. But more fundamentally, that the applicant may perceive itself as subject to financial disadvantage, because of trends in the industry since the execution of the agreements, should not lead to any creative construction of the agreements, to ameliorate disadvantage which may exist; where the parties could themselves, and with comparative ease, have provided for the contractual provision for which the applicant now contends, but did not do so.
  1. The submission really amounts to an invitation to engage in impermissible speculation as to the parties’ particular expectations, without regard to the contractual charter upon which they have actually agreed. It should not be overlooked that these parties are undoubtedly commercially astute and experienced and guided by a welter of high level legal and commercial advice.
  1. During the argument I mentioned that the agreements are currently apparently working quite well for the respondents. That may be. Each of the parties exercised its own commercial judgment, based on its perception of likely industry trends, when entering into the agreements. The parties chose to craft their agreements in this way. The role of the court now is to construe them, not re-craft them by reference to some indeterminate notion of “fairness” in light of subsequent events.

Conclusion

  1. While I am satisfied that a dispute has in fact arisen between the applicant and each respondent, as to the method of calculating the contract price into the future, it is not a dispute as to any matter set out in cl 10.2 of the agreements, because it did not concern a possible EMI. Accordingly, it was not apt for expert determination under cl 10.2(n).
  1. Further, it was not, in terms of cl 13.2, a dispute “in relation to matters arising out of this Agreement”, because so far as it drew on the review process under cl 12.2, it did not “arise out of the agreement”: that process of review did not extend to obliging the parties to agree on a variation to their contract, should that be necessary to restore consistency.

Orders

  1. Accordingly, these orders must be made:
  1. that the application filed 22 February 2008 be dismissed;
  1. that the applicant pay the respondents’ costs of and incidental to the application, to be assessed on the standard basis.
Close

Editorial Notes

  • Published Case Name:

    Callide Coalfields (Sales) P/L v CS Energy Ltd & Anor

  • Shortened Case Name:

    Callide Coalfields (Sales) Pty Ltd v CS Energy Ltd

  • MNC:

    [2008] QSC 124

  • Court:

    QSC

  • Judge(s):

    de Jersey CJ

  • Date:

    11 Jun 2008

Litigation History

No Litigation History

Appeal Status

No Status