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This case considered the proper construction of an agreement for the transportation of gas on a pipeline. The issue was whether the appellants were liable to pay certain charges under that agreement. The Court of Appeal unanimously dismissed an appeal against the primary judge’s conclusion that they were. Notably, the Court considered whether certain amounts were unenforceable as contractual penalties, and whether there was an implied contractual obligation of good faith.
Morrison JJA and Ryan and Kelly JJ
2 September 2022
This case concerns an agreement for the transportation of gas on a pipeline, which runs from gas fields near Morabah to Yabulu (in north Queensland). . The transportation capacity was provided by the respondents to this appeal – “the Pipeliners”. . The capacity was sought by Queensland Nickel Pty Ltd, which executed the agreement with the Pipeliners in its capacity as manager of the Queensland Nickel Joint Venture and as agents for and on behalf of the participants in that joint venture, QNI Resources Pty Ltd (“QNR”) and QNI Metals Pty Ltd (“QNM”). . The joint venture used gas for the operation of a nickel refinery. .
In 2016 Queensland Nickel entered into voluntary administration. . Since about that time, it has not used the transportation capacity provided by the Pipeliners. . However, the agreement was not terminated. . In the proceedings below, the Pipeliners claimed charges said to be owing under the agreement from QNR and QNM. . Despite QNR and QNM disputing liability, the Pipeliners were successful at trial. .
QNR and QNM appealed against the primary judgment. . There were three grounds of appeal, which concerned: first, whether QNR and QNM were liable under the contract for unpaid amounts; second, whether certain of the claimed amounts were unenforceable as contractual penalties; and third, whether the respondents owed the appellants a contractual obligation of good faith to avoid the accrual of certain charges. In the result, the appellants were unsuccessful on each ground. .
Whether QNR and QNM were liable on the proper construction of the contract
QNR and QNM contended that the primary judge had erred in concluding that they owed a direct obligation to the appellants to pay amounts owing under the agreement. . They submitted that the payment obligation was on Queensland Nickel, and that certain references to “QNI” in the contract, were to Queensland Nickel only, and not to them. .
However, the Court concluded that “QNI” as used in the relevant clauses was to be taken as a reference to all three of Queensland Nickel, QNR and QNM. . The commercial intent of the agreement was that all three entities may be liable. . In particular, the Court placed emphasis on a particular clause of the agreement (41.6.3), which provided that in certain circumstances “all liability to pay” may be “borne by QNR and QNM severally”. . The appellants had failed to demonstrate error in the primary judge’s construction of that clause. .
Whether certain amounts were unenforceable as contractual penalties
QNR and QNM contended that certain “Imbalance Charges” under the agreement were unenforceable because they constituted contractual penalties. . Those charges were payable if the amount of gas that Queensland Nickel placed in the pipeline exceeded (a “positive imbalance”) or fell below (“a negative imbalance”) certain levels. –. The appellants contended that these charges were penalties because they were grossly disproportionate to any loss that could conceivably be experienced by the Pipeliners from any imbalance. .
The Court observed that the proper question was whether the contractual provision required an amount to be paid that is “out of all proportion” to or in “gross disproportion” to the interests damaged or which are sought to be protected (citing Paciocco v ANZ Banking Group Ltd (2016) 258 CLR 525). . Importantly, QNR and QNM bore the “evidentiary and persuasive onus” of establishing that the impugned charges were penalties. .
The Court was not persuaded that the Imbalance Charges were penalties because there were likely negative consequences for the Pipeliners in the event of any imbalances, which the charges sought to deter. –, . This included that, if the imbalance was positive, it may impact on the Pipeliner’s ability to sell storage services (because effectively it would involve the storage of Queensland Nickel’s gas in the pipeline); and if the imbalance was negative, there may not be enough pressure in the pipeline, which could impact the ability of other customers to receipt or deliver gas – which would have commercial consequences for the Pipeliners. . It was difficult to estimate in advance the losses consequent upon any imbalances. . However, QNR and QNM had not provided sufficient evidence to show that the charges were out of all proportion to those likely losses. , .
Whether the appellants were owed a contractual duty of good faith
Finally, QNR and QNM contended that the agreement with the Pipeliners included an obligation of good faith which, in the circumstances, required them to eliminate or correct an imbalance in the pipeline before imposing an Imbalance Charge (as discussed above). . QNR and QNM contended that the primary judge had erred in failing to find that such an obligation was implied, either as a matter of law or fact. .
The Court rejected this ground of appeal. . It was observed following a review of the authorities that:
“The state of intermediate appellate authority does not support the implication of an implied term to act in good faith as a general legal incidence of commercial contracts.” .
Until such a time as the High Court recognises such an obligation as a matter of law, it was not appropriate to proceed on such a basis. . Further, the circumstances of this case provided no basis for the recognition of such an obligation as a matter of fact (as reflecting the supposed contractual intentions of the parties). . To be recognised by a court, an implied term must be “so obvious it goes without saying” and “necessary to give business efficacy to the contract”, amongst other criteria (citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337)). . In this case, the alleged obligation was not “so obvious it goes without saying”. . To the contrary, it would contradict express language of the contract, by requiring the Pipeliners to exercise certain discretionary powers in a particular way. .