AGL Victoria Pty Ltd v TXU Networks (Gas) Pty Ltd
[2004] VSC 225
•2 July 2004
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 2056 of 2003
F5580
| AGL VICTORIA PTY LTD (ACN 090 538 337) | Plaintiff |
| v | |
| TXU NETWORKS (GAS) PTY LTD And VICTORIAN ENERGY NETWORKS CORPORATION | First Defendant Second Defendant |
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JUDGE: | Byrne J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 31 May and 1 June 2004 | |
DATE OF JUDGMENT: | 2 July 2004 | |
CASE MAY BE CITED AS: | AGL Victoria Pty Ltd v TXU Networks (Gas) Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2004] VSC 225 | |
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Contract – Expert determination - Whether determination may be reopened and revised for factual error – Whether expert performed contractual task.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr Stephen J Gageler SC with Mr J. D. Elliott | Brand Partners |
| For the First Defendant | Mr D. G. Collins SC | Baker & McKenzie |
| For the Second Defendant | Mr Stewart M Anderson | Phillips Fox |
HIS HONOUR:
This case concerns the finality of the calculation by the secondnamed defendant, Victorian Energy Networks Corporation ("VENCorp"), of the reconciliation amount for certain unaccounted for gas with respect to the TXU distribution system for each of the calendar years 1999 and 2000. These calculations were required to be carried out by VENCorp by cl. 16(b) of the Systems Connection Deed entered into between VENCorp and two companies, Westar (Assets) Pty Ltd and Westar Pty Ltd, which were, respectively, the owner and lessee of the distribution system which was later known as the TXU distribution system. On 24 February 1999 the business of Westar was acquired by the firstnamed defendant, TXU Networks (Gas) Pty Ltd, and, unless it is necessary to distinguish between them, I shall describe that company or its predecessors in this judgment simply as "TXU".
The Gas Industry Background
The natural gas industry in Victoria comprises four stages: production, transmission, distribution and retail. The gas, when produced, is first injected into a system or network of high pressure transmission pipelines. While some large industrial customers are connected directly to this transmission system, the majority of customers receive gas via a lower pressure distribution system or network. In 1997 three distribution companies were established, each with its own geographically distinct distribution network. That owned and operated by Westar, and, after February 1999, by TXU, was to the west of Melbourne. As a distributor, TXU owned and operated this TXU distribution network; it had possession and control of, but did not own, the gas passing through that distribution network.
The point at which the gas passes from the transmission system to the distribution system is known as a connection point or transfer point. At each such point there is, typically, a custody transfer meter which measures the transfer of the gas from one system to the other. This may be considered the point of entry into the distribution system.
The gas then passes through the distribution system to the point where it enters the system of the customer. This point of exit from the distribution system is known as a customer supply point or distribution supply point. There are in fact two categories of supply points in the TXU distribution system: a Class A supply point through which a large volume of gas passes, and a Class B supply point for customers with lesser requirements.
The actual sale of gas to the customer is achieved by a retailer who is also called in the documents before me, a shipper. In 1997 three new gas retail companies were incorporated in Victoria. One of these was Ikon Energy Pty Ltd (Ikon 1) which was granted a licence to act as a host retailer for part of the TXU distribution network. On or about 30 March 1999 this licence was transferred to Energy Partnership (Retail) Pty Ltd (Ikon 2)[1] and, on or about 31 December 2000, to Pulse Energy Pty Ltd. Pulse later changed its name to AGL Victoria Pty Ltd and is the plaintiff to this proceeding. Unless it is necessary that I distinguish between them, I shall refer to this company or to its predecessors simply as "AGL".
[1]TXU defence, para 1(2)
As host retailer, AGL was licensed to retail gas exclusively to non-contestable customers within a designated part of the TXU distribution network[2].
[2]Statement of claim, para 12h; TXU defence para 12
As a retailer, AGL sells gas to customers at customer supply points. For this purpose it buys gas from producers, transmission services from the owner of the transmission network and distribution services from a distributor, such as TXU. The quantity of gas which it purchases for this purpose is taken from meter readings at the customer supply points.
Unaccounted for Gas
This dispute concerns payment for unaccounted for gas in the TXU distribution system. Unaccounted for gas is defined in the Gas Distribution Code glossary[3] in these terms:
"unaccounted for gas Is the difference between the amount of gas injected into the distribution system at all transfer points and the amount of gas withdrawn from the distribution system at all distribution supply points including but not limited to leakage or other actual losses, discrepancies due to metering inaccuracies and variations of temperature, pressure and other parameters."
In cl. 1.1 of the Distribution Tariff Agreement it is defined in these terms:
"Unaccounted for gas has the same meaning as in the Distribution System Code in relation to Gas injected on behalf of Shipper into the Distribution System at all Connection Points and Gas withdrawn from the Distribution System at all Supply Points for supply to Customers.
[3]Clause 15.1
I pause to note the reference in cl.1.1 to gas being injected "on behalf of Shipper". Shipper is the retailer, AGL in this case. Gas is injected from the transmission system into the distribution system for purchase by the shipper to meet its contractual commitments to its customers. A quantity of gas may be so injected at this time to meet the requirements of retailers other than AGL and the customers of those other retailers. Counsel for AGL said that the meter at the transfer point does not differentiate between these; for this purpose it would be necessary to gather together information from a number of sources.
As the definition indicates, it is accepted that there will be some leakage of gas within any distribution system. The amount of this unaccounted for gas will depend upon the efficiency of the distribution network. The Gas Distribution Code seeks to encourage the distributor to maintain and operate its system efficiently by allocating the risk of this unaccounted for gas between it and the retailer. A benchmark quantity of this unaccounted for gas is established in Schedule 1 of the code. That for TXU's predecessor was in 1998 set at 2.1 percent for Class B supply points and at 0.1 percent for Class A supply points. Pursuant to cl. 10.1(d) and (e) of the code, the distributor accepts the risk of loss of this gas in excess of the benchmark quantity and the retailer accepts the risk of loss of all other gas injected by it into the distribution system. This risk is adjusted each year by a payment for this unaccounted for gas of the reconciliation amount to which I now turn.
Clause 8 of the Distribution Tariff Agreement provides for payment by the shipper or the distributor to the other of a reconciliation amount for unaccounted for gas for Class B supply points in the distribution system. This amount is that calculated by VENCorp in accordance with Schedule 8 of that agreement. But VENCorp is not a party to this agreement; its obligation to calculate this amount arises from cl. 16(b) of the Systems Connection Deed entered into between it and the predecessor of TXU, under which it is to carry out the calculation in accordance with Schedule 5 to the deed. I was told that this schedule is in terms which are equivalent to Schedule 8 of the Distribution Tariff Agreement.[4] The immediately relevant provisions of cl. 8 of the Distribution Tariff Agreement are the following:
8.4 Unaccounted for Gas
(a)The parties agree that the Reconciliation Amount for Unaccounted for Gas for Class B Supply Points in the Distribution System will be calculated by VENCorp under the VENCorp Connection Deed in accordance with Schedule 8.
(b)The party liable to pay the Reconciliation Amount for Unaccounted for Gas for Class B Supply Points (as determined by VENCorp in accordance with Schedule 8) must pay the Reconciliation Amount within 30 days of the parties receiving written notification of the Reconciliation Amount from VENCorp.
(c)Distributor is not liable to Shipper for Unaccounted for Gas other than as provided for in this clause 8.4.
[4]In fact Schedule 5 was amended for the year 1999 and thereafter but I was informed, nevertheless, that I should ignore this amendment for present purposes.
8.5 Calculation of Unaccounted for Gas
(a)Distributor must give VENCorp written notice by 31 March in each year of the volume of Gas withdrawn by Distributor for Shipper at all Class A Supply Points and Class B Supply Points for the previous calendar year provided that in respect of the period 1 July 1998 to 31 December 1998:
(1)the volumes notified by Distributor on 31 March 1999 will be only for that period; and
(2)no Reconciliation Amount will be payable in respect of that period.
(b)The calculation by VENCorp of the Reconciliation Amount shall be final and binding on Distributor and Shipper."
On or about 15 December 2000 VENCorp issued two statements showing the reconciliation amount – one for the period 1 January 1999 to 30 June 1999 and one for the period 1 July 1999 to 31 December 1999. They show the reconciliation amounts to be as follows:
January – June 1999 $2,870,856.73 July – December 1999 $ 381,895.97 $3,252,752.70
The reconciliation amount for the calendar year 2000 was issued on or about 27 November 2001. The amount for this was $2,979,482,91. These amounts were, in terms of cl. 8.4(b), payable by the shipper to the distributor, the predecessors of AGL and TXU respectively, within 30 days of those dates, and this was done.
The Dispute
In May 2002 it was discovered that gas was flowing through an unmetered valve on a pipe connecting the transmission system and the portion of the TXU distribution area for which AGL was the host retailer. The unmetered valve was immediately closed.
Investigations showed that this flow had been in existence since at least March 1999. The consequence of this flow was that a quantity of gas greater than had previously been known had flowed into the TXU distribution system. This quantity over the two calendar years 1999 and 2000 was about 4 petajoules, about 6.5 percent of the total gas previously thought to have flowed into that distribution system. This represented a very significant increase in unaccounted for gas in that distribution system which had not been brought to account in the VENCorp calculations of the reconciliation amounts for those years.
By letter dated 7 March 2003, AGL requested VENCorp to perform a re-calculation taking into account the unmetered in-flows and to re-issue a statement of the reconciliation amounts for the years 1999 and 2000. TXU took the position that this was neither appropriate nor legally possible, for the earlier calculations by VENCorp were final and binding in terms of cl. 8.5(b) of the Distribution Tariff Agreement. VENCorp, in response, said that it would not amend or correct the published reconciliation amounts for the two years; it had no authority to do so without the agreement of TXU. It nevertheless offered to perform the recalculation for the information only of the parties.
VENCorp, in April 2003, accordingly performed a fresh calculation of the reconciliation amounts, taking into account the unmetered flow. The amounts so calculated are shown on the following table:
Calculation 2003 Calculation Difference January June 1999 2,870,856.73 - 217,199.63 $ - 3,088,056.36 July – December 1999 381,895.97 - 2,264,781.73 $ - 2,646,677.71 January – December 2000 2,979,482.91 - 1,988,008.97 $ - 4,967,491.88 6,232,235.61 - 4,469,990.33 $-10,702,225.95 Positive amounts are payable by AGL to TXU; negative amounts are payable by TXU to AGL. The difference represents the amounts payable by TXU to AGL under the 2003 calculation plus the refund by TXU to AGL of the amount paid under the earlier calculation.
This Proceeding
By writ filed on 25 August 2003, AGL brought this proceeding seeking declarations as to the correct reconciliation amounts and that VENCorp had not performed its contractual obligations under cl. 16 of the Connection Deed. It also sought injunctive orders that VENCorp perform its obligations under that clause, alternatively, that TXU take steps to compel VENCorp to do this. The injunctive relief was not pressed before me. On 12 December 2003, I ordered, pursuant to Rule 47.04, that there be a preliminary trial of all questions other than the questions: what were the materially correct figures for factor D in the calculations of the reconciliation amounts for the periods January to June 1999, July to December 1999 and January to December 2000?
With the cooperation of the parties, an extensive statement of agreed facts and a bundle of agreed documents were prepared and these, together with a number of admissions made pursuant to Rule 35.03, formed the factual basis for the preliminary trial.
The principal issue in this case, as I have mentioned at the outset, is whether the calculation by VENCorp is final and binding on the parties notwithstanding that it was predicated upon an erroneous quantity of gas entering into the distribution system. Given that the task of undertaking this calculation is that of an expert determination, it was accepted that mere error did not invalidate it. It would be invalid only where the expert, VENCorp, had failed to perform the task entrusted to it by the contract. Counsel for AGL contended that, by adopting an erroneous input quantity of gas for the calculation, VENCorp did not perform the calculation which was required of it under cl. 16 of the Connection Deed and that referred to in cl. 8 of the Distribution Tariff Agreement. Accordingly, its calculations were ineffective to create the obligation to pay the reconciliation amount which is imposed by cl. 8.4(a) of the Distribution Tariff Agreement.
TXU resisted this contention and raised a subsidiary question in the alternative, that the principal question before me had been settled by an agreement entered into between AGL and TXU called the Cross Boundary Flow Deed dated 6 November 2000.
A further point taken by TXU arose from the fact that AGL was not a party to the Connection Deed made between TXU and VENCorp which imposed on VENCorp the obligation to calculate the reconciliation amounts. Accordingly, AGL could not seek specific performance of that obligation against VENCorp. This point, however, was not pressed before me. Counsel for TXU said that, if it should be held that VENCorp had failed to perform its contractual obligation to calculate the reconciliation amount, TXU would require it to do so without any injunctive order.
The Reconciliation Amount Calculation
In order to understand the principal submission put on behalf of AGL, that VENCorp had failed to perform the calculation contemplated in cl. 8.4 of the Distribution Tariff Agreement, it is necessary to outline what this calculation was.
It will be recalled that the calculation which VENCorp was required by cl. 16(b) of the Systems Connection Deed to undertake is a calculation of the reconciliation amount for unaccounted for gas for Class B supply points in the TXU distribution system for the year in question. This had to be done in accordance with Schedule 5 of that deed. The calculation to be undertaken is that contained in the following formula:
"Reconciliation Amount = (X+Y) x (B-A)"
In the Schedule these variables or factors are defined as follows:
"Where:
X = the quantity weighted annual price of Gas, using spot and contract prices and quantities, as determined by VENCorp for the previous calendar year expressed in $ per gigajoule.
Y = the average transmission tariff for the previous calendar year expressed in $ per gigajoule determined under Part A 3.4 of Schedule 5 of the Tariff Order.
A = D-(E/(1-G))
Where:
D = the volume of Gas withdrawn from the Transmission System by Distributor for Retailer under the Distribution Tariff Agreement at the Connection Points for the previous calendar year; and
E = the volume of Gas withdrawn by Distributor for Retailer under the Distribution Tariff Agreement at all Class A Supply Points for the previous calendar year.
B = H/(1-F)
Where: H = the quantity of Gas withdrawn by Distributor for Retailer under the Distribution Tariff Agreement at all Class B Supply Points for the previous calendar year.
Where:
F = the benchmark flow rate for Gas for Class B Supply Points being 2.5% until 31 December 2002 and thereafter to be reviewed and determined by the ORG.[5]
G = the benchmark flow rate of Gas for Class A Supply Points, being 0.1% until 31 December 2002 and thereafter to be reviewed and determined by the ORG."
[5]The Office of the Regulator-General of Victoria, now the Essential Services Commission.
I make a number of observations about this formula and the factors referred to in it.
v The reconciliation amount is an amount of money expressed in dollars; it is not, as the heading to cl. 8.5 might suggest, a calculation of a quantity of gas.
v The factors X and Y together provide the price per gigajoule for the quantity of gas represented by the factors B-A.
v In factors A and B and those making up those factors, the subject matter is the amount of gas, whether this be described as its quantity or its volume. As will appear, the amount is in fact expressed, not in units of volume, but in units of energy.
v Factor B is based on factor H, the quantity of gas measured in gigajoules withdrawn from the TXU distribution system for AGL at all Class B supply points. It will be recalled that the calculation mentioned in cl. 8.4(a), with which this case is concerned, is for unaccounted for gas for Class B supply points only.
v Factor H is adjusted to allow for a stipulated benchmark flow-rate which is an accepted standard quantity of unaccounted for gas for Class B supply points.
v Factor A is based on the factors D and E.
v Factor D represents the quantity of gas measured in gigajoules injected into the TXU distribution system for AGL at the connection points, from the transmission system. From factor D is deducted factor E representing the quantity of gas withdrawn from the TXU distribution system for AGL at all Class A supply points.
v Factor E is adjusted to allow for a stipulated benchmark flow-rate which is an accepted standard quantity of unaccounted for gas for Class A supply points.
v Putting to one side the benchmark adjustments, the quantity of gas which is priced is, broadly speaking, the quantity drawn from the TXU distribution system by AGL for its smaller customers less the amount injected into the TXU distribution system for those customers.
I have mentioned that this Schedule 5 was said to be equivalent to Schedule 8 in the Distribution Tariff Agreement. This was accepted to be the case by counsel for all parties and no point was taken of any textural discrepancy between the two schedules. Notwithstanding verbal differences between the schedules, I am content to proceed on this basis.
Where the adjusted quantity of gas drawn by AGL from the TXU distribution system exceeds the adjusted quantity injected into that distribution system, the resultant figure is positive. This means that the TXU distribution system is operating efficiently and, as a consequence, TXU receives a payment from AGL. Where, on the other hand, the resultant figure is negative, there has been a loss of gas and TXU must make payment to AGL as a consequence. It will be seen, therefore, that the failure in this case to include in the D factor and, as a consequence, in the A factor, the amount of gas which was unmetered for the years 1999 and 2000 meant that an apparently efficient TXU system was in fact very much less so.
The error in the published VENCorp calculations for 1999 and 2000 appeared in the figures inserted in the equation for the D factor. In essence, the submission put on behalf of AGL was that the task entrusted by the Connection Deed to VENCorp required it to take the figure for the D factor and to feed this into the equation to produce the reconciliation amount. Since VENCorp adopted an erroneous figure for the D factor, it failed to carry out the calculation entrusted to it, for the error occurred at a stage before VENCorp undertook the required calculation. The position adopted on behalf of TXU was that the calculation involved VENCorp arriving at the correct figure for the D factor so that the error arose within its calculation process.
The Contentions of the Parties
Each party took as its starting point the decision of the New South Wales Court of Appeal in Legal & General Life of Aust Ltd v A Hudson Pty Ltd[6], a case where the determination of an expert valuer under a rent revision clause in a lease was challenged. McHugh JA, in a passage which has been frequently cited with approval,[7] said this:
"In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied. This was pointed out by Sir David Cairns in the Court of Appeal in Baber v Kenwood Manufacturing Co Ltd[8]. A valuation obtained by fraud or collusion can usually be disregarded even in an action at law. For in a case of fraud or collusion the correct conclusion to be drawn will almost certainly be that there has been no valuation in accordance with the terms of the contract. As Sir David Cairns pointed out, it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer's mistake or because the valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is 'final and binding on the parties'. By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. It is now settled that an action for damages for negligence will lie against a valuer to whom the parties have referred the question of valuation if one of them suffers loss as the result of his negligent valuation.[9] But as between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract."[10]
[6](1985) 1 NSWLR 314, upheld by the Privy Council without expressing any view on the question here under consideration (1986) 61 ALJR 280
[7]See Holt v Cox (1997) 23 ACSR 590 at 595 per Mason P
[8][1978] 1 Lloyd’s Rep 175 at 181
[9]Sutcliffe v Thackrah [1974] AC 727; Arenson v Arenson [1977] AC 405.
[10](1985) 1 NSWLR 314 at 335-6. References in the quoted passage have been taken to footnote.
There is in this case no suggestion of fraud or collusion or any want of honesty or impartiality on the part of VENCorp; it is said on behalf of AGL that VENCorp's calculation was based on an error in the figure inserted for factor D.
In Holt v Cox[11] a valuer of shares charged with the duty of fixing the fair price for them failed to have regard to certain considerations and this led Santow J, at first instance, to conclude that the valuation was not in accordance with the contract. Mason P analysed the dictum of McHugh JA which I have quoted, as meaning that the parties must abide a mistake by the valuer unless the mistake shows that the valuer has not performed the task entrusted to him or her by the contract. So, too, where the valuer has taken into consideration a matter which he or she ought not to have taken into account this will not be relevant unless it shows that the valuation was not in accordance with the contract[12]. His Honour agreed with the conclusion of Santow J on the facts of that case that the failure of the valuer to have regard to certain scenarios identified by Santow J, meant that he failed to determine the fair price of the shares so that the valuation was ineffective.
[11](1997) 23 ACSR 590
[12](1997) 23 ACSR 590 at 597
Priestley JA, who concurred with the President in Holt v Cox, was also a member of the court in the Legal & General case. In the earlier case, his Honour concluded that error in the valuation had not been demonstrated so that it was not necessary to consider the questions discussed by McHugh JA.
The third member of the court in Holt v Cox, Cole J, dissented. His Honour was of opinion that the task of the valuer was to determine the fair price of the shares having regard to the circumstances which the valuer considered relevant. The determination could not be upset by the court taking the view that a matter which the valuer ignored was in fact relevant to his task. In Email Ltd v Robert Bray (Langwarrin) Pty Ltd[13] the Full Court of this Court had earlier expressed the same view and did so in terms which appear to have been adopted by Cole J.
[13][1984] VR 16 at 21
In another decision of the Full Court of this Court, Karenlee Nominees Pty Ltd v Gollin & Co Ltd[14], it was again said of a rental valuation that it was for the valuer to determine what matters were relevant and to give them such weight as he or she thinks fit. In words which are echoed by Mason P in Holt v Cox[15] 15 years later, the court observed that the determination might be set aside for mistake, but only for "mistake in a relevant sense"[16]. Examples of such mistake given were mistake as to the property to be valued and an apparent gross mathematical inaccuracy[17].
[14][1983] 1 VR 657 at 668-71
[15](1997) 23 ACSR 590 at 597
[16][1983] 1 VR at 657 at 669
[17][1983] 1 VR 657 at 670-1
Clause 8.5(b) of the Distribution Tariff Agreement provides that the VENCorp calculation "shall be final and binding on Distributor and Shipper". In argument, counsel for AGL submitted that these words do not especially add anything to the present case. If the determination complies with the requirements of Schedule 8, then it is final and binding; if it does not, then it is bad[18].
[18]See Holt v Cox (1997) 23 ACSR 590 at 605, per Mason P.
On behalf of TXU, it was accepted that a final and binding clause would not save a determination which was not performed in accordance with the contractual mandate. Where, however, the determination was arrived at in accordance with the contract, the parties would be bound notwithstanding error in a matter of judgment entrusted to the valuer. Where, however, in arriving at such a determination, there was error in a merely mechanical or arithmetic process, then, it could be impugned unless the parties had agreed that it was final and binding.
Reference in support of this analysis was made to the judgment of the Full Court of the Supreme Court of Western Australia in WMC Resources Ltd v Leighton Contractors Pty Ltd[19]. This case, as the name suggests, arose out of a building dispute. It considered the vexed question whether, in such cases, the determination of a certifier or of one party to the contract made in accordance with the contract is reviewable by an arbitrator or the court[20]. Ipp J, delivering the judgment of the court, drew a distinction between a determination calling for discretionary judgment and that involving a mechanical exercise. The former class of determination will not be reviewable unless the contract empowers the arbitrator to open up and review it. A determination involving a merely mechanical exercise may be set aside and corrected by the arbitrator or the court[21] unless the contract by a final and binding clause, or otherwise, indicated that this remedy was not available[22].
[19](1999) 20 WAR 489
[20]See Brooking on Building Contracts, 3rd ed 1995 at [9.15]
[21]WMC Resources Ltd v Leighton Contractors Pty Ltd (1999) 20 WAR 489 at 494-9
[22]Horwitz Grahame Books Pty Ltd v Mid-City Centre Pty Ltd (1990) NSW, Conv R 55-514. And see M Jacobs QC, "Impugning Expert Determinations in Australia" (2000) 74 ALJ 858
In Jones v Sherwood Computer Services Plc[23], a case concerning the valuation of shares, Dillon LJ rejected an argument that a certificate, which fell within the agreement, but which was obviously based on a wrong principle, might be reopened by the Court. His Lordship expressed himself in these terms:
"That approach, however, of treating the certificate as mere machinery for calculation which can automatically be overridden by the court if it appears to be wrong, cannot be enough where the expert or certifier is to certify the fair value of property for which there is no absolute objective criterion, or where, as in the present case, the parties have expressly declared that the determination of the accountants or expert is to be conclusive, final and binding for all purposes, and where they have further shown that, as would be inherently likely where an issue of further shares is in question, they want a speedy determination without the delays and complexities of arbitration, let alone court proceedings: see in particular the requirement in paragraph 4 of appendix 1 that the expert is to provide his report 'within the shortest practicable time'."[24]
[23][1992] 1 WLR 277
[24][1992] 1 WLR 277 at 285
Given the way the case was presented on behalf of AGL it is not necessary that I enter upon this interesting question. It was accepted that if the error was not made by VENCorp in carrying out its contractual obligations then the calculation was conclusive.
Put in its starkest form, the fundamental submission advanced on behalf of AGL was that the contractual obligation of VENCorp for the purposes of cl. 8.4 of the Distribution Tariff Agreement was to take the value of factor D and to manipulate it and the other factors as is required by the simple equation contained in Schedule 8 in order to produce the reconciliation amount. The validity of its operation and of the resultant figure depended upon the accuracy of the values which were inserted for those factors. If they were correct, the parties were bound by the result notwithstanding subsequent arithmetic or other error by VENCorp. If they were wrong, the exercise was ineffective and the purported reconciliation amount was a nullity upon which cl. 8.4(b) had no operation.
In support of their submission that the error in this case meant that the contractual task of VENCorp was not in fact undertaken, counsel for AGL relied upon "two textual considerations" which appear to fasten upon the purely mechanical nature of VENCorp's task. The quantity of gas injected into the TXU distribution system is simply the volume of gas – an objective fact – and not VENCorp's opinion as to this. Second, the formula involves a simple arithmetic calculation into which the quantities of gas are inserted. Again, the absence of any discretion or judgment was emphasised.
The data from which factor D is derived is provided to VENCorp by GasNet which is the responsible person with respect to the metering installation at the transfer point where the gas is injected into the TXU system. Part 4.4 of the Victorian Gas Industry Market and System Operations Rules (“MSO Rules”) made pursuant to s. 48N of the Gas Industry Act 1994 deals with metering. By cl. 4.4.18(a) of the MSO Rules, VENCorp is obliged to collect such data from the meters as is required for settlement purposes[25] and retain it in a database. I shall return to this question of settlement. Part 4.4 contains elaborate provisions for ensuring the accuracy of data obtained from meters and, significantly, in cl. 4.4.24 it contains procedures to deal with detected inaccuracies in this data. I note in passing that, by cl. 4.4.26, VENCorp is not liable to any person in respect of inaccuracies, discrepancies or other defects in metering data.
[25]See too cl. 4.4.26(a)
Where there is loss of metering data or inaccuracies in that data are detected, VENCorp must notify all participants and must adopt substitute readings. In sub-cl. 4.4.24(e) to (h) there is established a procedure for VENCorp to determine the correct substitute readings. I will not summarise them here, but they do include in part (h) matters involving technical expertise and judgment where meter readings are not available.
The data which is made available to VENCorp from the meters is the quantity of gas passing through the meter. This may be measured by volume in cubic metres or mass in kilograms. This quantity is then standardised by making corrections for pressure, temperature and natural gas composition. To this standardised volume or mass is applied a heating value in order to produce the quantity of energy of the gas which is expressed in joules or multiples of joules. This data is then validated by checking to see that it falls within an accepted range and, if it does not, substituted data obtained under cl. 4.4.24 of the MSO Rules is inserted.
This process of standardising, converting and validating data applies to data received at the transfer points and, similarly, to data received by VENCorp from meters at the customer supply points. The detail of this is set out in Notice to Admit paragraphs 78 to 89 (insofar as they were not challenged).
I have mentioned that a shipper such as AGL must pay to those responsible for the production and distribution of the gas which it onsells to its customers. These payments are made to VENCorp which is charged with responsibility of operating and administering the market.[26] VENCorp then by adjustment or payment pays this money to the participants who are entitled. For this purpose it is obliged to give to each market participant a final statement or settlement in respect of each billing period showing the amounts payable by the participant to VENCorp or from VENCorp to the participant.[27] The Rules make provision for the issue by VENCorp of a revised statement where a dispute over a final statement has been resolved in a way which causes the amount payable to differ from that shown in the final statement.[28] Significantly for my purposes, cl. 3.6.19(b) permits VENCorp to issue a revised statement where it becomes aware of an error in the final statement which materially affects a participant. Clause 3.6.18 contemplates that a participant may dispute such a revised statement, in which case the dispute may be resolved by agreement or by reference to the dispute resolution procedures of cl. 7.2.
[26]Victorian Gas Industry Market and System Operations Rules ("MSO Rules") cl. 1.2.1(a)
[27]MSO Rules cl. 3.6.15
[28]cl. 3.6.19(a)
This power to review an issued final statement or settlement was relied on in argument by counsel for AGL. They pointed that, in this case, VENCorp did issue revised statements to AGL under which AGL was obliged to pay approximately $12.1M to VENCorp for the unmetered gas which was discovered to have been injected into the TXU distribution system by AGL for its customers in the relevant years. On its behalf, it was put that, if the reconciliation amount was incapable of revision for the same reason, AGL would be obliged to pay double: first, to VENCorp under the revised settlement amount for the gas which it was now shown to have purchased, and second, to TXU under the unrevised reconciliation amount for the supposed efficiency of the TXU distribution system which is now known not to have been so efficient.
Counsel for TXU, too, relied on the existence of the power and obligation in VENCorp to issue revised settlement statements in the case of mistake. They contrasted this provision with those in cl. 8.4 of the Distribution Tariff Agreement which contained no such power. Rather the contrary, it asserted that the reconciliation amount was final and binding on the parties.
This contrast between the finality of the reconciliation amount and the adjustability of the settlement amount is also reflected in the obligation of VENCorp under the MSO Rules cl. 4.4.24, in the case of detected error in metering data, to advise participants of the error and to adopt substitute readings in subsequent statements. Again, there is in these clauses, procedures for a participant to dispute the substituted readings and for the resolution of these disputes by agreement or by decision of the adviser under cl. 7.2.
Within the context of these textual considerations, I was reminded on behalf of TXU of the factors upon which the Court of Appeal in Jones v Sherwood Computer Services Plc laid weight in the passage quoted above.[29] These included, not only an express provision that the determination was to be final and binding and conclusive, but also that the terms of the agreement showed that the parties wanted "a speedy determination without the delays and complexities of arbitration". In this case, payment under the VENCorp determination of the reconciliation amount is to be made within 30 days.[30] The time for VENCorp to carry out its task is also relatively short: 14 days after receipt of information from TXU.[31] Nevertheless, I do not place much weight upon this matter. The time for calculation by VENCorp of the final statement under cl. 3.6.15 of the MSO Rules is 18 days from the end of the billing period and that for the payment by a participant is only two business days after receiving the statement.[32] These short times appear to sit comfortably with the provisions for disputation and revision to which I have referred.
[29]See [37] above
[30]Distribution Tariff Agreement cl. 8.4(b)
[31]Systems Connections Deed cl. 16(b)
[32]MSO Rules cll. 3.6.16, 3.6.17
In the end, both sides before me came back to the legal analysis contained in the dictum of McHugh JA in the Legal and General case which I have quote above.[33] The matter falls to be determined by an examination of the task to be performed by VENCorp in arriving at the determination which the parties agreed to accept. This task was to calculate the reconciliation amount in accordance with Schedule 8 of the Distribution Tariff Agreement.
[33]See [28] above
There are a number of factors which, like factor D, must be used in calculating this reconciliation amount. Factor X, which is the quantity weighted annual price of gas, is to be determined by VENCorp using spot and contract prices and quantities. In Schedule 8 there is a requirement that this be calculated under the VENCorp Connection Agreement. It would seem that the determination of the value of this factor is more than a mere mechanical task. In any event, its determination is part of the task of VENCorp in producing the reconciliation amount. The same may be said for factor Y, which is to be determined under Part A 3.4 of Schedule 5 of the Tariff Order. This calculation under the Tariff Order appears to be a complicated one.
The determination of the quantities of gas to be inserted as factors A, B, D, E and H require VENCorp to carry out adjustments and conversion into units of energy. It follows, for example, that the figures for factors E and H involve VENCorp in doing more than merely taking up the figures provided to it by TXU under cl. 16(a) of the Connection Deed, which may, in turn, have been provided to TXU by AGL pursuant to cl. 10.1 of the Distribution Tariff Agreement. I have already referred to the steps which are to be undertaken by VENCorp in arriving at the values for these factors. The same may be said of the value for factor D.
I conclude from all of this that part of the task of VENCorp under cl. 16 of the Connection Deed and in arriving at a reconciliation amount in accordance with Schedule 8 of the Distribution Tariff Agreement, is the determination of the appropriate values for each of these factors, including factor D. The parties have in cl. 8.5 agreed to abide its determination of these values in the same way as they have agreed to abide its performance of the relatively simple calculation which the formula in those schedules requires to be undertaken upon those values.
The facts of the present case, perhaps, provide a demonstration of the reason for the parties to the current Distribution Tariff Agreement agreeing to accept the determination of VENCorp as to the reconciliation amount. It was accepted before me that the actual amount of unmetered gas may never be known and may be incapable of precise determination. In such a case, the attribution to factor D of any value might always be said to be incorrect. In such a case, if the contention of AGL be valid, it could never be said that VENCorp could ever issue an effective reconciliation amount. It may, of course, be as counsel for AGL contended, that this impasse could be resolved by a degree of commercial give and take between the parties, but in a comprehensive contract such as the Distribution Tariff Agreement, it might have been expected that some specific provision had been made for this.
This brings me to the final consideration which confirms the conclusion which I have reached. Unlike the MSO Rules to which I have referred, there is no express contractual procedure in the Distribution Tariff Agreement for the revision of the reconciliation amount in the event of discovered error. The Connection Deed under which VENCorp assumed the obligation to make the calculation contains in Schedule 4 a procedure for the resolution of disputes which are, under the terms of the deed, to be so decided. A dispute as to the calculation of the reconciliation amount is not referred to this procedure. This must be because that task has been entrusted to VENCorp as an expert and because its calculation is to be final and binding, as indeed is the determination of the expert him or herself under Schedule 4.
It follows that the calculation of VENCorp of the reconciliation amount cannot be challenged by AGL or TXU or their predecessors for error of the kind presently disclosed.
The Cross Boundary Flow Deed
The statement issued by VENCorp showing its calculation of the 1999 reconciliation amount was issued on or about 15 December 2000. In fact, there were earlier calculations for this period previously issued by VENCorp, the first of which was notified on 26 June 2000. Between this date and 6 November 2000 errors identified in this calculation were the subject of much correspondence between TXU, AGL and VENCorp. The detail of these errors is not important for my purposes. They did, however, include errors in the quantities of gas inserted into the formula contained in Schedule 5 and Schedule 8. In this period, VENCorp on 6 July 2000 and 7 July 2000 purported to issue a revised calculation correcting the insertion of an incorrect benchmark rate for class A supply points in factor G and correcting a transcription error in the quantity of gas in factor E. Under this revised calculation a further $1,762,690 was payable by the predecessor of AGL to the predecessor of TXU. The right of VENCorp to do this was challenged. These matters and other discovered errors are documented in the correspondence. The outcome of this correspondence was that the parties finally agreed that VENCorp might recalculate the reconciliation amount for 1999 based on revised data obtained from GasNet which was to represent the quantity of gas withdrawn from the transmission system operated by GasNet and injected into the TXU distribution system for distribution by AGL. The agreement of the parties as to this was contained in a document dated 6 November 2000 called the Cross Boundary Flow Deed entered into by TXU and the predecessor of AGL and other interested parties, but not including VENCorp.
It is apparent from the terms of this deed that the retailer considered that there were other errors in the reconciliation amount calculation and that there was "an imbalance between injections and withdrawals attributed to IKON's franchise area located within TXU Networks' distribution area for the calendar year 1999 of up to 0.5 petajoules ("the Missing Gas"). The deed addressed this in cl. 5(b) as follows:
"…
(b)until 30 November 2000 IKON or Pulse [AGL][34] may by notice in writing require the other parties to consent to reopen this Deed (including without limitation, refund of any payments made to date) to take into account a need to reallocate responsibility for that Missing Gas, provided that IKON or Pulse [AGL] proves to the reasonable satisfaction of the other parties that:
[34]I have inserted the current parties for ease of reference
(i)the Missing Gas was originally incorrectly attributed to IKON [AGL] and should have been attributed to TXU Retail; or
(ii)there was an error in the original calculation of gross injections into the Overlap Area.
In this event, TXU Networks will use all reasonable endeavours to ensure that VENCorp will re-issue for calendar year 1999:
(i)further UAFG [unaccounted for gas] Reconciliation Statement; and[35]
(ii)further market settlement revision statement (if necessary)."
In fact, AGL did not exercise its right under this sub-clause.[36] It is common ground, too, that, at the time that this deed was entered into the unmetered gas with which this litigation is concerned had not been discovered.
[35]I have inserted the current parties for ease of reference
[36]TXU defence para. 60, AGL reply para. 5
By cl. 4(b) of the deed the parties agreed that VENCorp might issue a revised reconciliation amount calculation.
The reconciliation amount issued on 15 December 2000 was issued pursuant to this agreement.
The deed also contains releases in the following terms:
"3. Release
TXU Networks and TXU Retail each hereby releases and forever discharges Pulse and/or IKON [AGL] from any liability whatsoever (apart from the express obligations to make payment pursuant to this Deed) and convenants not to claim against or sue in respect of or arising out of:
(a)the purported notices referred to in recitals C and D hereof;
(b)any notice of an UAFG Reconciliation issued hereafter by VENCorp for 1999 and 2000 to the extent that it fails to incorporate any of the adjustments contemplated by clauses 1 and 2 hereof."
Against this background it was contended on behalf of TXU that, if contrary to my view, it be otherwise lawful for VENCorp to issue a further revised calculation of the reconciliation amount for 1999, it is not open to AGL to reopen the calculation of 15 December 2000 or to claim a refund of payments made under it, alternatively, it is estopped from doing so.[37]
[37]TXU defence para. 61
The contention of AGL was that the parties by the deed settled all disputes as to the 1999 calculation. This cannot be by operation of the release contained in cl. 3 because this is a release given by TXU to the predecessor of AGL. It says nothing of the liability of TXU towards that other party. Furthermore, the release in sub-paragraph (a) refer to notices of revised calculations issued by VENCorp on 6 June 2000 and 7 July 2000 which are referred to in recitals C and D. It may be that the date of the former notice should be 6 July 2000 but, in any event, these notices are not the subject of the present litigation. The release under sub-paragraph (b) likewise does not cover the present dispute. The adjustments contemplated by cls. 1 and 2 of the deed relate to suggested misallocations of gas flows at custody transfer meters at Craigieburn and Laverton. Again, this is not a matter now in issue. So much was not disputed.
What was put on behalf of TXU was that, since the deed provides in cl. 5 a right in AGL to reopen a reconciliation amount calculation which is limited in time and scope, then, by implication, any other right to reopen it is abandoned.
I am not persuaded that this is a good answer to the claim of AGL, if it be otherwise a good claim. In a sophisticated commercial environment such as existed between the parties at this time, I would not construe the deed as containing such an implication.
Conclusion
I conclude therefore that the determinations of VENCorp as to the reconciliation amounts for 1999 and 2000 are valid and binding on the parties; they cannot be reopened or revised.
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