Basslink Pty Ltd v Hydro-Electric Corporation
[2013] VSC 746
•28 February 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
ARBITRATION LIST
S CI 7214 of 2012
IN THE MATTER OF AN APPLICATION
under s 17J of the COMMERCIAL ARBITRATION ACT 2011
BETWEEN
| BASSLINK PTY LTD (ACN 090 996 231) | Plaintiff |
| v | |
| HYDRO-ELECTRIC CORPORATION (ABN 48 072 377 158) | Defendant |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27 February 2013 | |
DATE OF JUDGMENT: | 28 February 2013 | |
CASE MAY BE CITED AS: | Basslink Pty Ltd v Hydro-Electric Corporation | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 746 | |
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COMMERCIAL ARBITRATION – Application to restrain contracting party issuing default notice under contract – Contract contained arbitration clause - Principles relevant to grant of interlocutory injunction – Balance of convenience - Undertaking as to damages - Commercial Arbitration Act2011 (Vic) 13J, and Supreme Court Act1986 (Vic) 37(1).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr CJ Delany SC, with Mr T Clarke | DLA Piper |
| For the Defendant | Mr JWK Burnside QC, with Mr ND Hopkins SC and Mr KJ Naish | Clayton Utz |
HIS HONOUR:
Introduction
Basslink Pty Ltd (BPL) and Hydro-Electric Corporation (HT) are parties to the Basslink Services Agreement (BSA). On 24 December 2012 HT served on BPL a notice of breach of the BSA alleging default in performance.
On 27 December 2012 BPL issued to HT a notice of dispute, pursuant to the BSA. The BSA contains an arbitration clause. BPL now seeks an order pursuant to s 13J of the Commercial Arbitration Act2011 (Vic) (the Act) and s 37(1) of the Supreme Court Act1986 (Vic) that HT be restrained from issuing a default notice pursuant to clause 12.1 of the Basslink Services Agreement (BSA), until:
(a) further order of this court; or
(b)the disputes the subject of the notice of dispute are resolved by arbitration award or by agreement between BPL and HT.
BPL is the owner and operator of the electricity cable that runs from Victoria to Tasmania known as the Basslink connector. HT is the sole generator in Tasmania whose electricity is exported from Tasmania to Victoria to the National Electricity Market using the Basslink connector.
In 2000, BPL and HT entered into an agreement for the transmission of HT’s electricity using the Basslink connector known as the BSA. The BSA was last amended in 2007.
Under the BSA, the Basslink facilities would meet a minimum capacity level to convey HT’s electricity over the Basslink connector. The minimum capacity is measured in megawatts and varies over certain periods of time. For example, within a 24 hour period the BPL facilities may have to provide a capacity of 630 megawatts for a continuous period of six hours and a lower capacity during the rest of the 24 hour period.
In July 2012, BPL experienced an outage that it says led to significant damage to its equipment. After the outage, both parties agreed that the capacity should be no more than 500 megawatts until matters were resolved. BPL sought advice from Siemens, the manufacturer of relevant equipment used by BPL, and from a Mr Scechtman, an expert in underwater cabling who was from Brazil.
The various capacity limits that BPL was to provide to HT over a period of one or two days is described as a dynamic protocol. As a result of the advice from Siemens and Mr Scechtman, BPL issued a dynamic protocol to HT on 20 December 2012.
HT was of the view that observance of the dynamic protocol would be a breach of the BSA. As a consequence, on 24 December 2012, HT served a notice on BPL under the BSA alleging that BPL had failed to bid, or otherwise indicate, what BPL would make available for dispatch during the export periods at the maximum thermal capacity and otherwise in accordance with the technical envelope.
HT said that the dynamic protocol was invalid and in breach of the BSA. HT informed BPL that if the alleged breach was not remedied on or before 31 December 2012, HT would serve a notice of default under clause 12.1 of the BSA. On 27 December 2012, BPL denied the alleged breach. BPL issued a notice of dispute under clause 21 of the BSA alleging that HT’s 24 December 2012 notice of dispute was invalid and that BPL did not breach the BSA as alleged in the 24 December 2012 notice of dispute.
Following an inconclusive board level meeting, the matters raised in the notice of dispute were referred for arbitration to the Honourable Murray Gleeson AC QC, who was already appointed as an arbitrator of existing disputes between BPL and HT. Although the issue about the validity of the 24 December 2012 notice of dispute was referred to arbitration, HT declined to defer the issuing of a default notice pursuant to clause 12.1 until after the underlying dispute was resolved through arbitration. As a consequence, BPL sought an interim injunction to restrain HT from issuing a default notice. The matter came on before Bell J and the parties agreed that on an appropriate undertaking as to damages by BPL, HT would not issue a default notice without giving at least 14 days’ notice. Accordingly, no injunction was given.
The matter has now come on before me to decide whether an interlocutory injunction should be granted restraining HT from issuing a default notice pursuant to clause 12.1 without giving at least 14 days’ notice.
The pending arbitrations
There are three disputes under the BSA that have been referred to arbitration. The first two have been referred to arbitration before Mr Gleeson AC QC. BPL has indicated that it is agreeable to appointing Mr Gleeson AC QC as an arbitrator for the third dispute concerning the validity of the notice of dispute which was issued on 27 December 2012 by BPL.
In the arbitrations, HT has now, through its statement of claim, sought declarations that, “(a) the implementation of the dynamic protocol of 24 December 2012 is a performance default under the BSA; (b) the 24 December notice of HT was a valid notice; and (c) HT is entitled to issue a notice of default pursuant to Clause 12.1 of the BSA.”
Under the BSA, a procedure is laid down for the resolving of all disputes between the parties. If the parties are unable to agree during the dispute resolution process, the dispute must be referred to arbitration. If there is a dispute as to whether or not a party is entitled to issue a notice of default, the agreement is silent as to whether or not the party may issue that notice while the alleged default is being resolved in arbitration.
As I said, BPL seeks an injunction under s 17J of the Act in order to maintain the commercial status quo, namely the bidding of BPL in accordance with the dynamic protocol, pending a determination of the parties’ underlying contractual dispute by arbitration. It appears to me that maintaining the status quo may also include BPL not being obliged to respond to a notice of default and not having to deal with other consequences that are provided for under the notice of default that may impair BPL’s commercial and financial interests and reputation.
BPL referred to s 17J and s 9 of the Act in support of its arguments. Section 9 provides that it is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant the measure.
Section 17J provides that:
(1) The court has the same power of issuing an interim measure in relation to arbitration proceedings as it has in relation to proceedings in courts.
(2) The court is to exercise the power in accordance with its own procedures taking into account the special specific features of a domestic commercial arbitration.
Reference was also made to s 17 which relevantly provides:
(1) Unless otherwise agreed by the parties the arbitral tribunal may at the request of a party grant interim measures.
(2) an “interim measure” is any temporary measure whether in the form of an award or in another form by which at any time prior to the issuance of the award whilst the dispute is finally decided the arbitral tribunal orders a party to
(a) maintain or restore the status quo pending determination of the dispute; or
(b) take action that would prevent or refrain from taking action that is likely to cause current or imminent harm or prejudice to the arbitral process itself...
Although these are powers given to the Court and to an arbitral tribunal, BPL submits that they disclose objectives that the Act seeks to achieve, and that I should bear in mind those objectives when considering whether or not to grant the injunction sought in this case.
To obtain an interlocutory injunction, BPL must establish two matters. First, it must make out a prima facie case in the sense that if the evidence remains as it is, there is a probability that at the trial of the application for a permanent injunction, BPL will be held entitled to relief.
The High Court in Beecham Group Ltd v Bristol Laboratories Pty Ltd[1] said:
How strong the probability needs to be depends upon the nature of the rights the plaintiff asserts and the practical consequences likely to flow from the order he seeks.
If merely pecuniary interests are involved some probability of success is enough.
[1](1968) 113 CLR 618 (Beecham Group), 622 (Kitto, Taylor, Menzies and Owen JJ).
Secondly, BPL must establish that the balance of convenience favours the grant of the injunction. In Beecham Group, the High Court said:[2]
The relevant test is whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.
[2]Ibid, 623.
Of course, as Beecham Group held, if an injunction is granted, ‘it will be upon terms of [BPL] submitting, in the event of [its] ultimately failing, to such order as to damages as the Court may make in order to compensate [HT] for any injury caused by the injunction’.[3]
Has BPL shown that there is a probability that it will be entitled to the relief it seeks at the trial?
[3]Ibid..
For BPL to succeed at the trial of this application for an injunction, it must establish that HT was not entitled to issue the 24 December 2012 breach notice, or in other words, that by operating the Basslink connector in accordance with the 20 December 2012 dynamic protocol BPL was not in breach of the BSA as alleged by HT.
HT says that BPL breached the BSA in two respects. First, HT says that the BSA specifies for both a maximum and minimum capacity of operation of Basslink known as “the technical envelope”. HT says that BPL must always operate the Basslink connector to ensure it meets the minimum capacity of the technical envelope.
HT says that clause 8.2 sets out a procedure for ascertaining the maximum capacity of the technical envelope. HT says that BPL is bound to offer the Basslink connector at the maximum thermal capacity, that is, at the outer edge of the technical envelope. HT says that the 20 December 2012 dynamic protocol is not at the maximum level of the technical envelope, that is, the maximum thermal capacity. HT says that the dynamic protocol is at the minimum level, that is, the minimum technical envelope.
Second, HT now says that even if BPL were entitled to offer capacity at the lower level, the 20 December 2012 dynamic protocol falls short of the minimum technical envelope. As I will discuss later, this alleged breach was not expressly relied on in the 24 December 2012 notice of breach.
As to the first ground concerning the maximum thermal capacity, BPL contends it has a sound case that it was not in breach of the BSA as alleged by HT. BPL accepts that during an export period it must offer to operate the Basslink connector at the maximum thermal capacity, but says that under clause 10.6 the obligation is subject to the proviso that the Basslink connector is always operated within the technical envelope.
BPL says that under clause 9.1, BPL is obliged to operate Basslink in accordance with Good Electricity Industry Practice (“GEIP”). BPL says that by implementing the dynamic protocol, it is complying with the overriding clause 10.6 obligation to bid so that Basslink is always operated within the technical envelope, and with the clause 9.1 obligation to operate in accordance with GEIP.
BPL says that it received advice from Siemens, the manufacturer of Basslink’s converter stations, after the July 2012 outage. The advice was that the Basslink connector could safely and reliably operate within the three dynamic scenarios specified in clause 8.1.
Clause 8.1 provides that, “Basslink will meet the minimum technical specifications set out below.” Under 8.1B, the specification is, “A dynamic transfer on a continual daily basis defined by sub-clauses (1), (2) and (3).” Sub-clause (1) contains the first scenario and provides, “Within any period of 24 hours a transfer capacity of 604 megawatts from Tasmania to Victoria for a period of ten hours. During the remaining 14 hours of the same 24 hour period a minimum transfer capacity of up to 312 megawatts.”
Further, Mr Scechtman of Dual Consulting produced a report recommending that BPL “Strictly follow the design outputs guaranteed by Siemens, i.e. allow the interconnect to make available to the market at this time the three possible dynamic range scenarios for overload cycling.”
In view of that evidence, in my opinion, BPL does have a probable chance of success on this issue at the trial of this proceeding.
I also find that it is reasonably arguable that in light of the obligation to observe the GEIP, BPL was entitled to specify the dynamic protocol of 20 December 2012.
I turn to HT’s second argument; the issue of whether the 20 December 2012 dynamic protocol falls short of the three scenarios in clause 8.1. As I mentioned above, the issue is not relied upon expressly by HT in its 24 December 2012 notice of breach. It was raised for the first time in the 15 February 2013 statement of claim filed by HT in the arbitrations before Mr Murray Gleeson AC QC.
Mr Davey, in his affidavit of 15 February 2013, suggests that the 20 December 2012 dynamic protocol, as he calls it, is inconsistent with the minimum technical specifications set out in clause 8.1.
HT says that on proper construction of clause 8.1, over the 24 hour period, HT could utilise the higher capacity in discrete segments so that, for example, two hours at 604 megawatts could be taken followed by two hours taken at 312 megawatts followed by two hours taken at 604 megawatts. On the other hand, BPL says that on the BSA’s proper construction the opportunity to take 604 megawatts can only be taken as a ten hour uninterrupted block followed by taking 14 uninterrupted hours at 312 megawatts. I consider that BPL does have a realistic and probable prospect of success on the construction it advances.
HT points out, however, that there is no logical reason why the Basslink could not be operated as HT contends. HT says that the heating issue, which is the main limiting factor, will be less of an issue on the construction HT puts forward. There appears to be some merit in this point.
Further, HT points out that in the third scenario reference is made to a continuous period of six hours. HT submits that where a continuing period is intended the scenario says so. On the other hand, BPL says that the reference to a period of ten hours in the first scenario is a reference to a single period, that is, a period means a single period. Similarly, they say that the same approach applies to the construction of the second scenario.
Scenario 2, however, has caused me some concern. I have had difficulty in seeking to reconcile the 20 December 2012 dynamic protocol with clause 8.1B(2). Mr Davey’s affidavit of 19 February 2013, where he seeks to explain the inconsistencies, did not make the picture any clearer.
In those circumstances where the construction of the BSA provision is unclear, I conclude that BPL may establish that it is not in breach of the BSA.
I therefore find that the first limb of the test for an interlocutory injunction is made out.
I now turn to consider other factors. In deciding whether to grant an injunction, the Court will have regard to such factors as the adequacy of damages, the possibilities of alternative remedies, whether there has been any laches in delay, the strength of the defence, what if any undertakings the party seeking the injunction is prepared to give, hardship, as well as the balance of convenience.
As indicated above, the balance of convenience requires the Court to take into account the effects that the granting of the injunction will have on both parties and, in particular, whether to grant one would cause hardship to the defendant or to refuse one would cause hardship to the plaintiff.
HT asserts that an injunction would cause it hardship as it would be denied its contractual rights. In particular, it would be denied the right to be given a draft cure plan by BPL in respect of the event of default and the opportunity to have any issues about the cure plan determined by an expert determination.
In my view, that proposition requires qualification. If the arbitrator decides there was no performance breach, then HT will have suffered no hardship. If, on the other hand, the arbitrator finds that there was a performance breach and that HT is entitled to serve a notice of default, then HT will have been delayed in taking the measures that it is contractually entitled to. Any loss suffered by the delay would be financial and should be met by BPL’s undertaking as to damages.
On the other hand, what is the hardship to BPL if the injunction is not granted? If the arbitrator decides that the proposed notice of default was invalid, BPL would have been put to the trouble and expense of responding to the notice and the possible risk of damage to its commercial and financial reputation.
In its written submissions, BPL elaborated on the commercial and financial damage. BPL says:
After a Default Notice is served in respect of a Performance Default and:
(a)the Performance Default is incapable of being cured;
(b)the Defaulting Party is not diligent in pursuing rectification of the Performance Default in accordance with the Cure Plan; or
(c)the Performance Default is not rectified within a Cure Period,
then HT is obliged under the Inter-Creditor Agreement not to exercise its rights to step in or terminate the BSA until 30 days after it notifies the Finance Trustee. During that 30 day period the Finance Trustee may appoint an “Enforcing Party” (a receiver or similar) to remedy the Performance Default.
Moreover, under Claus 5.1(a) of the Inter-Creditor Agreement the Default Notice must be served on the finance Trustee as HT has expressly foreshadowed in the 24 December breach notice.
BPL submits further that:
This not only has the potential to impair its standing with its lenders but would also require the Finance Trustee itself to assess the validity of that notice in order to determine what action, if any, should be taken on behalf of the lenders it represents. Under the Security Trust Deed the issuing of a Default Notice raises the question whether an Event of Default has in fact occurred under the BSA which would in turn constitute an Event of Default under that Deed.
Under the Bond Trustee Deed the Reimbursement Agreement and the Working Capital Facility Agreement an Event of Default may be asserted to have arisen if the alleged Event of Default under the BSA has not been cured before the expiry of half of the cure period under the BSA.
I accept that BPL may suffer irremediable damage if HT proceeds to issue a default notice, but BPL later succeeds in the arbitration. As I said, by contrast it is clear that HT’s alleged potential losses are solely monetary and are compensable in damages.
I consider that there is a further factor that is relevant for the Court to consider when deciding whether to grant the injunction or not. The parties have agreed that if there is dispute between them, including a dispute as to whether a party may issue a default notice, then pursuant to clause 21 that dispute must be arbitrated. Accordingly, the validity of the notice of breach issued by HT is to be arbitrated.
In considering whether HT would suffer any hardship if the injunction were given, it is relevant to observe that HT has, as it is required to under the BSA, submitted to arbitration in respect of the notice of breach. HT’s agreement to do so appears to carry with it a recognition that its entitlement to issue the notice of default must be resolved by arbitration. This is so despite the fact that the BSA is silent as to whether a party may issue a notice of default while the validity of the notice of breach is being arbitrated. The notice of default procedure provided for in clause 12 must be construed in the light of the obligation to refer all disputes to arbitration. In my view, the benefits to be derived by BPL under the arbitration agreement would be diminished and damaged if HT were permitted to issue a default notice while the validity of the notice of breach, the source of the power to issue a default notice, is still being resolved by the arbitrator. So for all those reasons, I find that the balance of convenience favours granting the injunction.
Undertaking as to damages
I now turn to the question about whether the necessary undertaking for damages should be supported by a guarantee or security. When determining the undertaking as to damages and any supporting guarantee, the focus should be on the damages that HT could suffer by virtue of the injunction.[4] Mr Davey estimates that HT’s damages flowing from the alleged breaches could be up to $11m for 2013.
[4]Beecham Group, 623.
HT produced a report by John Martin, an independent financial adviser with considerable financial experience. He carried out the three normal methods of valuation to estimate the net market value of the business of BPL. He concluded that the net market value was between $475m and $732m. He says that the secured financing debt owed by BPL is $716m. I was not taken to any evidence about BPL’s operating profits or losses. On the other hand, Mr Delany said, and the affidavit material establishes, that BPL has approximately $20m in funds in the bank.
In my opinion, HT has satisfied me that if it succeeds, damages through the delay caused by the injunction could be extensive. Accordingly, in view of the evidence of BPL’s financial position, I propose to order that any undertaking as to damages be secured by a bank guarantee of $5m on the assumption that the arbitrations will be concluded by 30 June 2013. I will reserve HT’s liberty to apply in the event that the issues raised in this matter are not resolved in the arbitrations by that date.
I will make orders accordingly.
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