Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd
[2011] WASC 268
•30 NOVEMBER 2011
ELECTRICITY GENERATION CORPORATION t/as VERVE ENERGY -v- WOODSIDE ENERGY LTD [2011] WASC 268
Pending Appeal
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2011] WASC 268 | |
| 30/11/2011 | |||
| Case No: | CIV:1548/2009 | 14-17 MARCH 2011 | |
| Coram: | LE MIERE J | 30/09/11 | |
| 33 | Judgment Part: | 1 of 1 | |
| Result: | Interpretation of contract determined | ||
| A | |||
| PDF Version |
| Parties: | ELECTRICITY GENERATION CORPORATION t/as VERVE ENERGY WOODSIDE ENERGY LTD BP DEVELOPMENTS AUSTRALIA PTY LTD CHEVRON TEXACO AUSTRALIA PTY LTD BHP BILLITON PETROLEUM (NORTH WEST SHELF) PTY LTD SHELL DEVELOPMENT (AUSTRALIA) PTY LTD |
Catchwords: | Contract Construction and interpretation Gas Supply Agreement Alleged breach Failure to deliver gas Failure to make good shortfall Contractual limitation on liability Damages Torts Economic duress Whether defendants' exerted illegitimate economic pressure on plaintiff |
Legislation: | Nil |
Case References: | Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964 Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] 2 Lloyd's Rep 251 Glenmont Investments Pty Ltd v O'Loughlin [No 2] (2000) 79 SASR 185 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 March v E & M H Stramare (1991) 171 CLR 506 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
WOODSIDE ENERGY LTD
First Defendant
BP DEVELOPMENTS AUSTRALIA PTY LTD
Second Defendant
CHEVRON TEXACO AUSTRALIA PTY LTD
Third Defendant
BHP BILLITON PETROLEUM (NORTH WEST SHELF) PTY LTD
Fourth Defendant
SHELL DEVELOPMENT (AUSTRALIA) PTY LTD
Fifth Defendant
(Page 2)
Catchwords:
Contract - Construction and interpretation - Gas Supply Agreement - Alleged breach - Failure to deliver gas - Failure to make good shortfall - Contractual limitation on liability
Damages - Torts - Economic duress - Whether defendants' exerted illegitimate economic pressure on plaintiff
Legislation:
Nil
Result:
Interpretation of contract determined
Category: A
Representation:
Counsel:
Plaintiff : Mr N C Hutley QC & Mr J C Giles
First Defendant : Mr C L Zelestis QC & Mr B Dharmananda & Ms S E Russell
Second Defendant : Mr C L Zelestis QC & Mr B Dharmananda & Ms S E Russell
Third Defendant : Mr C L Zelestis QC & Mr B Dharmananda & Ms S E Russell
Fourth Defendant : Mr C L Zelestis QC & Mr B Dharmananda & Ms S E Russell
Fifth Defendant : Mr C L Zelestis QC & Mr B Dharmananda & Ms S E Russell
Solicitors:
Plaintiff : Jackson McDonald
First Defendant : Lavan Legal
Second Defendant : Lavan Legal
Third Defendant : Lavan Legal
Fourth Defendant : Lavan Legal
Fifth Defendant : Lavan Legal
Case(s) referred to in judgment(s):
Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964
Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500
Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] 2 Lloyd's Rep 251
Glenmont Investments Pty Ltd v O'Loughlin [No 2] (2000) 79 SASR 185
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181
March v E & M H Stramare (1991) 171 CLR 506
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
(Page 4)
1 LE MIERE J: The defendants are participants in the North West Shelf Venture which produces gas to Australian and international markets from gas fields on the North West continental shelf. Each defendant has an entitlement to gas produced from petroleum titles held by the defendants, which is produced from a gas production plant at Karratha operated by Woodside Energy Ltd (Woodside). North West Shelf Gas Pty Ltd (NWSG) is a marketing agency established by the North West Shelf Venturers to market domestic gas and administer contracts with gas distribution companies, electricity producers, industrial customers and others in Western Australia.
2 Western Power Corporation (Western Power) was Western Australia's major electricity supplier until 2006 when it was disaggregated into a number of companies including the plaintiff, Verve Energy (Verve). Verve operates power stations which supply electricity to the south west of Western Australia. Verve's power stations operate principally on coal, gas or diesel. In 2004 Western Power and each defendant made a contract for the supply of gas. The separate contracts between Western Power and each defendant are contained in a single document entitled 'Sale and Purchase Agreement' and generally referred to as the GSA. Verve is the successor in title to Western Power and a party to the contract with each defendant within the GSA.
3 Under the GSA the Seller (the defendants) agreed to sell and make available for delivery gas to the Buyer (Verve) and the Buyer agreed to receive and pay for, or pay for if not taken, gas from the Seller in the quantities at the price and in the manner determined under the agreement. Gas made available for delivery by the Sellers under the agreement is delivered in a common and commingled stream through the Dampier to Bunbury natural gas pipeline and each Seller is deemed to have made available for delivery its proportionate share of all the gas made available for delivery.
4 The maximum quantity of gas that the defendants are required to make available for delivery on any Day is the Maximum Daily Quantity or MDQ in effect for that Day. A Day means the 24 hour period starting at 8.00 am on a day and ending at 8.00 am the following day. The MDQ is [suppressed] terajoules (TJ) in summer and [suppressed] TJ in winter. Clause 9 of the GSA provides for Verve to give notice to the defendants' representative, NWSG, nominating the quantity of gas which it requires for each Day for the following seven Days. The nominated quantity may exceed the MDQ. If Verve's nomination for a Day exceeds the MDQ the defendants must use reasonable endeavours to make available for delivery
(Page 5)
- up to an additional [suppressed] TJ/Day in excess of MDQ. This further amount is called the Supplemental Maximum Daily Quantity or SMDQ. The GSA provides that in determining whether they are able to supply SMDQ on a Day, the defendants may take into account all relevant commercial, economic and operational matters.
5 The GSA states the price at which each defendant agreed to sell and Verve agreed to buy gas. The prices are commercially sensitive and confidential. The exact price between June and September 2008 is not important. I will refer to the price of SMDQ gas in that period as the SMDQ price.
6 Verve alleges that each defendant has breached the GSA in relation to two separate series of events - the interruption of supply in January 2008 and the failure or refusal to supply SMDQ gas between June and September 2008.
January 2008 supply interruption
7 For each of the Days commencing at 8.00 am on 26 and 27 January 2008 Verve nominated its full entitlement of [suppressed] TJ of MDQ gas. Clause 9.10 of the GSA allows for a variance in the quantity of gas actually supplied of plus or minus [suppressed] of the quantity of MDQ nominated by the Buyer. The defendants are required by the GSA to supply not less than the Lower Limit, that is, [suppressed] of the quantity of MDQ nominated by Verve. Consequently, on each of the Days commencing at 8.00 am on 26 and 27 January 2008 the defendants were required to supply a minimum of [suppressed] TJ of gas to Verve. The defendants did not supply [suppressed] TJ of gas to Verve on either of those Days. The defendants only supplied [suppressed] TJ of gas on the Day commencing on 26 January and supplied only [suppressed] TJ of gas on the Day commencing on 27 January. That is, the defendants failed to supply [suppressed] TJ on the Day commencing on 26 January and [suppressed] TJ on the Day commencing on 27 January.
8 Verve was only informed by the defendants of the amount of the shortfall of gas delivered following each relevant Day, that is, on 27 and 28 January. That is because the allocation by the defendants of the amount of gas delivered to Verve on each Day is made on the day following the relevant Day. The consequence is that on the Days commencing at 8.00 am on 26 January and at 8.00 am on 27 January the plaintiff drew more than its allocation of gas out of the Dampier to Bunbury natural gas pipeline.
(Page 6)
9 The shortfall in delivery of gas was caused by a production dysfunction at the Karratha plant. On 26 January a heat detector signal at the plant caused a stage 3 compressor to shut down disrupting production and supply of gas to the Dampier to Bunbury natural gas pipeline. After several attempts, another stage 3 compressor was started, but a recycle valve became stuck in a partially open position, limiting gas flow capacity until the compressor was started. During a period of about 4.5 hours when no stage 3 compressor was operating, other parts of the plant were running at minimal levels but producing no gas for delivery into the pipeline. In the result there was a period of no gas flow from the plant into the pipeline and a period of reduced gas flow on 26 and 27 January. The defendants curtailed supplies of gas to customers where the defendants were contractually entitled to curtail supply without notice and also to customers where the defendants had contracted only to exercise reasonable endeavours to supply gas.
Interruption of supply of SMDQ gas
10 In early June 2008 the reliable gas production capacity of the Karratha plant was approximately [suppressed] TJ per day. It was possible to increase production, temporarily and not reliably by about [suppressed] TJ per day. The aggregate firm supply obligations of the defendants and MIMI, a company involved in a further joint venture with the defendants to supply gas, subject to buyers' particular nominations, was approximately [suppressed] TJ's of gas per day excluding obligations to make reasonable endeavours to supply gas.
11 Apache Corporation (Apache) is an energy company that produces natural gas. In 2008 Apache processed gas at facilities at Varanus Island and delivered gas to customers through the Dampier to Bunbury natural gas pipeline. On 3 June 2008 a fire at Apache's Varanus Island facility caused a cessation of the production of natural gas at that facility and reduced the supply of natural gas to Western Australia by a significant proportion.
12 For several years prior to 2008 it had been the practice of the defendants and MIMI on the one hand and Apache on the other hand to endeavour to supply gas to each other when production difficulties affected one party's capacity to supply its customers. Between mid-2007 and 6 June 2008 those parties negotiated and concluded an agreement in writing, the terms of which were intended to apply to any such sales. As a result of the explosion at Varanus Island production plant, Apache sought supply of gas from the defendants (and MIMI) for various customers of
(Page 7)
- Apache, including customers who required gas for electricity generation in regional areas of Western Australia. As well, there were many other customers seeking to buy substantial quantities of gas from the defendants at prices well above the price payable by Verve for SMDQ gas under the GSA. The aggregate quantities of gas sought were far in excess of those which the defendants could produce and supply, after taking into account their existing firm supply commitments.
13 On 4 June 2008 the defendants informed Verve that following the disruption to Apache's gas supply they could not supply Verve with SMDQ in June but they could supply Verve with an equivalent quantity of gas at a nominated price for the rest of the month. I will refer to the nominated price as the June price. The defendants offered to sell to Verve [suppressed] TJ of gas a day at the June price, a price significantly greater than the SMDQ price. The defendants offered to buyers, including Verve, short term gas supply agreements for the period 4 June 2008 to 29 June 2008. Under protest, Verve entered into separate short term gas supply agreements, recorded in a single document, with each of the defendants and MIMI to buy [suppressed] TJ of gas a day at the June price (the June Agreement). Verve executed the June Agreement to buy [suppressed] TJ of gas rather than [suppressed] TJ because the value of a contract for [suppressed] TJ would have exceeded the authority of the Verve executive who signed the contract. Verve's managing director had the authority to enter into a contract for [suppressed] TJ of gas a day but she was unavailable to sign the agreement and Verve needed the gas without delay.
14 The defendants entered into a number of short term contracts with various buyers other than Verve. Their agreements are on similar terms, other than as to volume. Each short term agreement confers on the defendants and MIMI an unfettered discretion whether to supply gas to the buyer on any day or at all. The agreements are described as being fully interruptible.
15 In mid-June 2008 the defendants offered further short term contracts for the period 30 June to 29 September 2008. They carried out a tender process. Verve, under protest, lodged a tender to buy [suppressed] TJ a day at its tender price. The tender price was higher than the June price. The tender was successful and Verve entered into a further short term contract with each of the defendants and MIMI in materially the same terms as the first short term contract other than the higher price (the Further Agreement). The defendants entered into further short term contracts with other buyers on similar terms. The contracts again
(Page 8)
- conferred on the defendants an unfettered discretion to supply or not supply, that is, they were fully interruptible.
16 Throughout the period from 4 June to 29 September 2008, Verve continued to nominate SMDQ. The defendants refused to supply the SMDQ nominated but did sell gas to Verve under the June Agreement and the Further Agreement. Verve says that the defendants' conduct was a breach of the GSA.
The issues
17 There are broadly four issues or sets of issues. First, Verve says that the failure of the defendants to deliver the Lower Limit of gas on each of 26 and 27 January 2008 was a breach of the GSA. Further, Verve says that the failure of the defendants to make good the shortfall within five days in accordance with the GSA was a further breach of the agreement. Secondly, Verve says that the refusal or failure of the defendants to deliver SMDQ gas between 4 June and 29 September 2008 was a breach of the GSA. Thirdly, Verve says that by their conduct in refusing to supply SMDQ gas but offering and agreeing to provide an equivalent amount of gas under the short term contracts at a significantly higher price in circumstances where Verve could not otherwise obtain a sufficient quantity of gas to perform its statutory and/or contractual functions the defendants exerted illegitimate economic pressure and committed the tort of economic duress. Fourthly, if Verve is entitled to relief, there are questions concerning the contractual limitation of the defendants' liability.
January 2008 - interruption of supply
18 The defendants say that they incurred no liability for the failure to supply gas in the amount of the Lower Limit on 26 and 27 January or for the failure to deliver shortfall gas within five days of being requested to do so. The defendants rely upon cl 11.2 of the GSA, which is in these terms:
11.2 Permitted interruptions
(a) [suppressed]
(b) [suppressed]
19 The effect of cl 11.2(b) is that the defendants are not liable for the failure to deliver the Lower Limit of gas on 26 and 27 January 2008 if in failing to supply that gas the defendants:
(Page 9)
- (1) interrupted the supply of gas to Verve;
(2) on account of unplanned activities;
(3) the interruption was not for an amount greater than the prevailing MDQ; and
(4) to the extent that the onshore domestic gas processing trains ceased to operate that was necessary for safety or integrity reasons in accordance with Good Engineering and Operating Practices.
Elements (2) and (4) are in issue. I will consider each in turn.
Unplanned activities
20 The issue is whether the failure to deliver the Lower Limit of gas on 26 and 27 January 2008 was an interruption, or interruptions, 'on account of unplanned activities'.
21 After gas enters the Karratha gas plant the domestic gas portion is fed into one of two dehydration units that remove water. The dehydrated gas is then fed into a mercury removal unit. Gas exiting the mercury removal unit is fed into one of the two domgas (domestic gas) trains. The trains are named 'Train 1' and 'Train 2' and each component in the train is prefixed with either 1 or 2 to denote which train the component belongs to. The trains operate in several configurations. Each train consists of:
(a) an extraction train made up of an extraction unit that removes LPG, a first stage compressor and a second stage compressor;
(b) a third stage compressor (1KT2430, 2KT2430); and
(c) an after cooler.
After cooling in the after coolers the gas is exported into the Burrup expansion pipeline (BEP) and the Dampier to Bunbury natural gas pipeline (DBNGP).
22 [Suppressed] Gas from both extraction trains can flow through either third stage KT2430 compressor depending on which compressor is on line. The configuration of the trains will depend on the extraction train availability, the availability of the third stage compressors (1KT2430, 2KT2430) and gas demand from both DBNGP and BEP. The normal mode of operating is when [suppressed]. That was the mode of operation on the evening of 26 January 2008.
(Page 10)
23 At approximately 9.00 pm the train one third stage compressor (1KT2430) tripped and the total domgas flow dropped to zero. No domgas was leaving the Karratha plant when the total domgas flow was zero. The compressor tripped because of a heat detector fault. The operators started the second stage 3 compressor (2KT2430) but it tripped before reaching full load. A second and third attempt to start the compressor also failed. The operators discovered that an auxiliary lube oil pump was in manual mode and needed to be put into the automatic mode for the compressor to start up. That was corrected and a fourth attempt to start the compressor was successful. The train 2 third compressor (2KT2430) came on line at approximately 1.30 am on 27 January 2008.
24 [Suppressed]. It has no fuel. When the first compressor trips operators must go out in the field to give the second compressor gas and start it. Normally that takes about half an hour.
25 The defendants interrupted the supply of gas to Verve on 26 and 27 January 2008. The meaning of 'interrupt supply of Gas to the Buyer' in cl 11.2(b) is a question of the proper construction of cl 11.2(b) having regard to both the text and context of the clause. Properly construed, interrupting supply of gas to the Buyer includes partly or totally reducing the supply of gas to the Buyer. Clause 11.2(b) permits the Sellers to interrupt supply to the Buyer for a period provided that the reduction in the amount of gas supplied because of the interruption does not exceed [suppressed] of MDQ in aggregate per Contract Year (that is a period of 12 months beginning at 8.00 am on 1 July each year and ending at 8.00 am on 1 July the following year). Clause 8.1 of the GSA provides that the Sellers make gas available at the Delivery Point (which is identified on a map) but in recognition of the operating arrangements between the Sellers and the operator of the Dampier to Bunbury natural gas pipeline, on any particular Day gas made available may be a combination of physical delivery at the Delivery Point and line-pack deemed to have been made available at the Delivery Point through the arrangements with the operator of the pipeline. The quantity of gas will have been delivered by the Sellers to the Buyer when that quantity of gas has passed the Delivery Point or was otherwise deemed to have been made available for delivery pursuant to cl 8.1. Some gas passed the Delivery Point and hence was delivered to Verve on each of 26 and 27 January 2008. Hence there was a partial, not total, reduction in the supply of gas on those Days. In any event, whether the reduction of gas delivered on a particular Day is partial or total, where activities, whether manual or automatic operations of the plant, result in no gas flowing from
(Page 11)
- the plant into the pipeline for a period of time that is an interruption of supply and the activities interrupt supply of gas for the purposes of cl 11.2(b).
26 On 26 and 27 January 2008 the reduction, or cessation, of supply of gas occurred because when the compressor tripped the flow of gas through the train and into the pipeline ceased. As part of the plant control system there are heat detectors set up to trigger an alarm and activate precautionary measures if heat is detected above a certain level in the load compartment of the stage 3 compressor. If heat detectors detect heat above that level the alarm is triggered and the control system is automatically activated. The system shuts down the turbine by cutting off the fuel gas that powers the turbine. This in turn cuts off the power source for the compressor and the compressor stops operating. The control system opens the recycle valve so that gas that would otherwise feed into the compressor flows around the compressor to prevent it from surging and causing damage to the compressor. When there is no stage 3 compressor operating it is not possible to keep processing gas normally in stage 2 of the plant because protective devices would trip stage 2 so as to prevent that plant operating abnormally with potentially harmful pressure and temperature build ups in the system. On the evening of 26 January 2008 the domgas trains were shut down because the heat detectors detected heat above the level which set off the alarm.
27 'Unplanned activities' includes the activity or activities of shutting down equipment in response to a fault or apparent fault, and doing what is necessary to enable the plant to start operating safely again. That is so whether the plant is shut down manually or by automated controls. I find that on 26 and 27 January 2008 on account of unplanned activities the defendants interrupted supply of gas to Verve.
Safety or integrity reasons
28 The plaintiff says that cl 11.2(b) does not excuse the defendants from the consequences of failing to supply MDQ gas to Verve on 26 and 27 January 2008 because to the extent that the onshore domestic gas processing trains ceased to operate that was not because it was necessary for safety or integrity reasons as required in cl 11.2(b).
29 The plaintiff submits that to engage the operation of cl 11.2(b) the defendants must prove that the second train was not operating for safety reasons. The plaintiff submits that the argument that the second train was not operating for safety reasons should be rejected for the following reasons. Clause 11.2(b) directs attention to why the second train was not
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- operating. It was not operating because, despite repeated attempts, the defendants could not turn it on. That had nothing to do with the gas flow or safety reasons. Put another way, the gas flow would have restarted as soon as the 2K2430 compressor was switched on and operating.
30 I do not accept the plaintiff's argument. The clause refers to 'one onshore domestic gas processing train'. On 26 January 2008 both domestic gas processing trains were operating with [suppressed]. When the heat detector caused the stage 3 compressor to close down that in turn caused both processing trains to shut down. Both processing trains ceased operating for safety or integrity reasons. It was necessary for safety or integrity reasons that neither domestic gas processing train continue to operate.
31 The phrase 'on account of' means 'because'. The phrase requires a causal connection between the interruption of supply and the unplanned activities. Whether both processing trains not operating between 9.00 pm on 26 January and 1.30 am on 27 January can properly be described as being on account of safety or integrity reasons should be determined by applying commonsense to the facts of each case. The question to be asked is whether safety or integrity reasons can fairly and properly be considered a reason for the processing trains not operating. The 'commonsense' approach to causation adopted by the High Court in March v E & M H Stramare (1991) 171 CLR 506 is a test of causation in negligence cases. This is not a negligence case but the concept of causation in cl 11.2(b) is similar.
32 The plaintiff says that the processing trains continued to cease to operate because of the failure to start the 2K2430 compressor rather than because of the unplanned activity consisting of or resulting from the 1K2430 compressor tripping. I do not accept that argument. The delay in starting the 2K2430 compressor and hence in the processing trains starting to operate again is not properly to be characterised as a causally independent event. Where the plant, or part of the plant, is stopped operating as a planned or unplanned activity, the activity should properly be regarded as including the steps necessary to restart the stage 3 compressor, or the other stage 3 compressor, and the processing train or trains. There may be instances where an intervening event may properly be characterised as independent of the planned or unplanned activity. An explosion at the plant, such as that referred to by the plaintiff, may be such an example. However, the delay in starting up the 2KT2430 compressor is not a causally independent event in this case. The delay in starting up the 2KT2430 compressor and bringing it to full
(Page 13)
- load occurred because an auxiliary lube oil pump had to be changed from manual mode to automatic mode. The evidence is that that was an action that the plant operators had to undertake to start or restart the compressor. In this case the starting of the 2KT2430 compressor and what had to be done to bring it to full load, should all be regarded as part of the unplanned activity that started with the tripping of the 1KT2430 compressor. It follows that cl 11.2(b) applies to the supply interruption on 26 and 27 January 2008.
Obligation to supply shortfall gas
33 The effect of cl 9.10 of the GSA is that each Seller is required to supply not less than the Lower Limit, that is, [suppressed] of the quantity of MDQ nominated by Verve for each Day. Clause 9.11 provides that, subject to two exceptions not presently relevant, if the quantity of delivered gas for a Day is less than the Lower Limit the difference between the quantity of delivered gas for that Day and the Lower Limit for that Day is Shortfall Gas. Clause 9.11(b) provides that the Sellers' representative must notify the Buyer if there is Shortfall Gas on a Day as soon as reasonably practicable. Clause 9.11(c) provides that the Buyer must, not later than one Day after each Day on which Shortfall Gas arises, notify the Sellers' representative that it requires some or all of that Shortfall Gas quantity to be delivered (the specified quantity being the Shortfall Recovery Quantity) or that it does not require any of the Shortfall Gas quantity to be delivered. Clause 9.12 provides that if the Buyer gives a notice in accordance with cl 9.11 that it requires Shortfall Gas to be delivered the Sellers must use reasonable endeavours to make the Shortfall Recovery Quantity available for delivery within [suppressed] Days after the Day on which that Shortfall Gas arises (the Shortfall Recovery Period).
34 Clause 9.12(a)(vi) provides:
[suppressed]
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36 The defendants say that the GSA provides, on its proper construction, that they may, on account of unplanned activities, interrupt supply of gas to the plaintiff without liability, to the extent of [suppressed] of MDQ in aggregate per Contract Year and that such interruptions do not constitute a shortfall under cl 9.11. Accordingly, the defendants submit, the plaintiff had no entitlement to require that the claimed Shortfall Gas be delivered as Shortfall Recovery Quantities under cl 9.11 and the defendants were under no obligation to make the Shortfall Recovery Quantity available for delivery, or to use reasonable endeavours to do so.
37 The plaintiff submits that on its proper construction cl 11.2(b) permits the defendants, in the circumstances stated in the clause, to interrupt supply without liability for loss caused by that interruption. If the clause is otherwise triggered, it might (subject to the proper construction of cl 9.12(a)(vi)) provide a defence to a claim for loss suffered during the 'unplanned activity' on the Days commencing at 8.00 am on 26 and 27 January 2008. However, cl 11.2(b) neither conditions the obligation in cl 9.11 and cl 9.12 nor provides a defence to an action for breach of cl 9.11 and cl 9.12. Clause 11.2(b), the plaintiff submits, relieves the defendants from liabilities, not obligations created, relevantly, by cl 9.11 and cl 9.12.
38 The defendants say that there is a distinct difference between cl 9.11 and cl 9.12 on the one hand and cl 11.2 on the other. Clauses 9.11 and 9.12 deal with the case where failure to supply attracts liability, whereas cl 11.2 deals with interruption of supply 'without liability'. When cl 11.2 operates, the regime under cl 9.11 and cl 9.12 is inapplicable. The defendants submit that if the position was otherwise, no meaning would be accorded to the words 'without liability' in each limb of cl 11.2.
39 Clause 11.2 is a form of exemption or exception clause. Senior counsel for the defendants referred to the problem in juristic theory that often arises from exception clauses. The problem is discussed by Justice Kim Lewison in The Interpretation of Contracts (4th ed, 1989) ch 12. The problem was referred to by Windeyer J in Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353:
The question is whether the effect of an exception clause in a contract is to absolve a party from liability for the consequences of a breach of duty, or whether its effect is to define substantively the limits of his duty by negativing obligations that the law would otherwise impose and undertakings that it would otherwise imply. The answer in any given case may, I think, depend upon the actual words of the contract (385).
(Page 15)
40 In construing an exemption clause, it must be construed in the context of the contract as a whole, rather than in isolation. Exemption clauses are construed strictly but the court must not give a strained interpretation to an exclusion clause. In Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 the High Court said:
… the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity (510).
41 I find that, on its proper construction, cl 11.2(b) absolves the Sellers from liability for the consequences of interrupting the supply of gas to the Buyer. Clause 11.2(b) does not define the limits of the Sellers' duty to supply gas by negativing the obligations to supply gas that the GSA imposes. Clause 9.12(a)(i) imposes on the Sellers a duty to use reasonable endeavours to make the Shortfall Recovery Quantity available for delivery within [suppressed] Days after the Day on which that Shortfall Gas arises. Clause 11.2(b) does not negative that obligation and does not absolve the Sellers from liability for the consequences of breaching that obligation unless the failure to use reasonable endeavours to make the Shortfall Recovery Quantity available for delivery was 'on account of unplanned activities' within the meaning of cl 11.2(b). That interpretation is consistent with the contract viewed as a whole. Clause 9.11 expressly states that certain interruptions are excluded from the obligations it imposes. Clause 9.11(a)(i) expressly provides that where the quantity of gas delivered is less than the Lower Limit as the result of Force Majeure that does not give rise to Shortfall Gas. The consequence is that where the Seller delivers less than the Lower Limit as a result of a Force Majeure the Seller is not under any obligation to deliver the Shortfall Recovery Quantity of gas required by the Buyer or any amount of Shortfall Gas. There is no similar express exclusion where the quantity of delivered gas is less than the Lower Limit as a result of an interruption permitted by cl 11.2.
42 The plaintiff's construction is consistent with the operation of the GSA as a whole. The plaintiff's construction is also consistent with the mutually known extrinsic material, namely the effect of a shortfall in supply of gas. As the allocation of gas to the plaintiff occurs on the day following the Day, the likely consequence of a shortfall in supply is that the plaintiff will draw too much gas from the DBNGP on the Day on which the shortfall occurs. The consequence of that is that the plaintiff
(Page 16)
- will have an imbalance in the DBNGP because it has taken more gas out of the DBNGP than it was entitled to take. The plaintiff must pay the operator for each day of the imbalance. The object of cl 9.11 and cl 9.12 is to allow the plaintiff to make up that imbalance while still taking its full quota of MDQ on the subsequent [suppressed] Days.
43 The obligation on the Sellers to deliver Shortfall Gas is not absolute. Clause 9.12(a)(i) obliges the Sellers to use reasonable endeavours to make the Shortfall Recovery Quantity available for delivery within [suppressed] Days after the Day on which that Shortfall Gas arises. Thus, following an interruption permitted by cl 11.2, if the Sellers are unable to deliver the Shortfall Recovery Quantity then they will incur no liability for a failure to deliver the Shortfall Recovery Quantity.
44 In this case the defendants failed to use reasonable endeavours to make the Shortfall Recovery Quantity available for delivery within the Shortfall Recovery Period and thereby breached cl 9.12 for which breach the plaintiff is entitled to damages.
Equitable allocation during curtailment
45 The plaintiff further submits that the defendants' obligation was to curtail supply to all of their customers equitably (subject to an exception relating to part of the supply to Alinta) in accordance with cl 12.1. Clause 12.1 provides:
12.1 Restricted capacity
[suppressed]
46 The plaintiff says that the defendants failed to comply with their obligations under cl 12 to allocate gas on an equitable basis. The plaintiff says that equitably means proportionately, subject to any greater obligations under agreements the defendants had entered in to at the date of the GSA (see cl 12.2). The plaintiff submits that on the proper construction of the agreements entered in to prior to 4 March 2004, with the exception of the [suppressed] supply referred to in cl 12.1(a), the defendants had no obligation to deliver to their customers other than proportionately in the event of a curtailment of supply. The defendants did not proportionately reduce supply. They reduced supply primarily to the plaintiff and another customer. That, it was submitted, was not an equitable reduction.
47 The defendants submit first that cl 12 does not apply to interruptions to supply of the kind which are permitted under cl 11.2(a) or (b) and
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- which operate to relieve the defendants of what would otherwise have been a supply obligation. I do not accept that submission, neither the text nor context of cl 11.2 and cl 12 support that construction.
48 The defendants submit that under cl 12, the reference to allocation on an equitable basis with the delivery obligations to all other customers, requires that account be taken of the nature, terms and stringency of those other obligations. That will extend, it is submitted, to consideration of whether other obligations are firm, require the exercise of reasonable endeavours to supply gas, or whether they are qualified by entitlements to interrupt supply with or without notice or liability. The relevant terms of other contracts also include the curtailment provisions of those contracts.
49 I prefer the defendants' construction of cl 12.1. The concept of allocation of gas on an equitable basis with the delivery obligations to all other customers is a broad criterion, which may have to be applied in unfolding circumstances. The criterion will not necessarily produce a single, uniquely correct outcome in each case. In substance, the defendants are required to do what is reasonably practicable, in the prevailing circumstances, to achieve an equitable allocation. By cl 12.2 the requirement of equitable allocation is subject to, in the sense of being subordinate to, the curtailment provisions of existing sales contracts which the defendants had with others when the GSA was entered into on 4 March 2004. That is to say, such curtailment provisions, if expressed to give priority to the respective buyers or if otherwise inconsistent with the concept of equitable allocation invoked by cl 12.1, will prevail over that provision.
50 The plaintiff provided particulars of [14C] of the statement of claim in which the plaintiff pleaded that it incurred loss and suffered damage by reason of the defendants' breach of cl 12 of the GSA. The claim for breach of cl 12 was advanced only with respect to non-delivery on 26 January 2011.
51 The defendants agree that if, as I have found, cl 12 does apply to interruptions to supply of the kind which are permitted under cl 11.2(b) then the defendants did not perform their obligations under cl 12.1. The parties have agreed that if, as I have found, the defendants breached cl 12 of the agreement then it is unnecessary for the court to determine what would have been an equitable allocation in the circumstances. The parties have agreed the quantum of the plaintiff's loss and damage for the breach of cl 12.
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Limitation of liability
52 Clause 9.12(a)(vi)(B)(3) of the GSA provides that if at the end of the Shortfall Recovery Period the Shortfall Recovery Quantity has not been delivered to the Buyer, the Buyer's sole remedy (other than the potential right to terminate the Agreement) is to sue the Sellers for damages (subject to the limitations in cl 22.7). Clause 22.7 limits the liability of the Sellers. Clause 22.7(a) provides the Sellers are only liable for direct and foreseeable loss incurred by the Buyer as a result of a Seller default excluding loss of profits. The Sellers have no liability to the Buyer for loss of profit or anticipated profit, business interruption, loss of opportunity, indirect or consequential loss or loss of use suffered by the Buyer. Clause 22.7(b) limits the liability of the Sellers. Clause 22.7(b) provides:
(b) The maximum aggregate liability of each Seller under this Agreement is limited to its Proportionate Share of:
[suppressed]
53 I have found that the Sellers have no liability in respect of, or as a result of, the interruption of supply on 26 and 27 January 2008 except for their failure to deliver Shortfall Recovery Quantity gas pursuant to their obligation under cl 9.12 and their failure to comply with their obligations under cl 12 to allocate gas on an equitable basis. The liability of each Seller is limited to its proportionate share of the pro-rata proportion [suppressed] in respect of the period where the Sellers failed to supply gas.
June to September 2008 - SMDQ non-delivery
54 From 4 June to 29 September 2008 the Sellers did not deliver SMDQ gas to Verve. The plaintiff initially alleged that the defendants had committed two breaches of the GSA. The first breach was alleged to be that each defendant had supplied gas to the plaintiff under the GSA at a price in excess of the contractual price. The plaintiff alleged that the defendants had supplied exactly the same gas as required by the GSA but not at the price provided for in the GSA but at a much higher price. That was said to be a breach of cl 1.1 and cl 6 of the GSA. However, the plaintiff does not now pursue that claim. The plaintiff claims that in relation to the portion of gas the sellers were required to supply but did not supply the defendants failed to use reasonable endeavours to supply SMDQ in breach of cl 3.3 of the GSA.
55 Clause 3.3 of the GSA provides:
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- 3.3 Supplemental Maximum Daily Quantity
(a) [suppressed]
(b) [suppressed]
(c) [suppressed]
57 Clause 9 of the GSA provides for the Buyer to nominate its gas requirements. Clause 9.1(a) provides that, [suppressed] the Buyer must, by notice to the Sellers' Representative, nominate the quantity of Gas, which may exceed the MDQ, which the Buyer requires for each day for the following seven days. The notice is called a Rolling Nomination Notice. Clause 9.1(b) provides that the Sellers' Representative must, within four hours after receiving a Rolling Nomination Notice, notify the Buyer of the aggregate quantity of Gas which the Sellers intend to make available for delivery to the Buyer for each Day for the following seven days.
58 The plaintiff pleads that on various dates in May and June 2008 it nominated to NWSG on behalf of the defendants, the required total quantity of daily gas required by it on each of the Days for June 2008, including the maximum amount of SMDQ gas for each Day.
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Plaintiff's construction of cl 3.3
59 The plaintiff says that once it has nominated SMDQ the defendants were required to use their reasonable endeavours to make available for delivery gas up to the amount of the nominated SMDQ. The plaintiff submitted that the reasonable endeavours obligation is given further content by cl 3.3(b). The reasonable endeavours obligation focuses on whether the defendants are 'able' to supply SMDQ (or part of the SMDQ). That is, the question is whether the defendants are able to supply SMDQ, not whether they wish to supply SMDQ. The 'relevant commercial, economic and operational matters' referred to in cl 3.3(b) are those relevant to whether the defendants are 'able' to supply SMDQ. The plaintiff submits that the clause does not confer an option to supply and that construing cl 3.3 as conferring on the defendants an option to supply is inimical to the reasonable endeavours obligation.
Defendants' construction of cl 3.3
60 The defendants submit that cl 3.3 requires them to use reasonable endeavours to make available for delivery additional nominated gas, up to the designated daily limit in excess of MDQ. This provision relates to the practical steps that can reasonably be taken to make gas available for delivery, if SMDQ is to be supplied. The defendants submit that this obligation cannot be considered in isolation from, or in disregard of, the logically anterior question which is dealt with in cl 3.3(b), namely, whether the defendants are able to supply SMDQ gas, after taking into account all relevant commercial, economic and operational matters. Under this element of cl 3.3, the defendants are given the right to determine their own ability to supply SMDQ gas on any given Day.
61 The defendants submit that cl 3.3(b) employs two distinct concepts. The first is that the Sellers are given the entitlement to determine whether they are able to supply SMDQ on a Day and the manner in which and the criteria by reference to which they are entitled to make that determination are spelled out. The second part of cl 3.3(b) provides examples of circumstances in which the Sellers are not required by cl 3.3(a) to make SMDQ available. Senior counsel for the defendants, Mr Zelestis QC, submitted that cl 3.3(b) does two distinct things. First, it deals with the separate topic of determining the Sellers ability to supply and secondly it elucidates the scope of the obligation under cl 3.3(a).
62 The defendants submit that the opening two lines of cl 3.3(b) deal with what is logically the anterior question. There is a difference between the parties concerning the effect or significance of the word 'able'. The
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- defendants submit that the word 'able' takes its meaning and content from the provision that the Sellers may take into account all relevant commercial, economic and operational matters. The defendants submit that under cl 3.3(b) the Sellers determine whether they are 'able' to supply SMDQ on a Day by taking into account all relevant commercial, economic and operational matters. In doing so they have regard only to the interests of the Sellers. If they determine that having regard to those matters they are able to supply SMDQ on a Day then they must use reasonable endeavours to make available for delivery the nominated SMDQ. The requirement that they must use all reasonable endeavours takes account of practical matters relating to the supply and delivery of gas on that day.
Plaintiff's submissions concerning defendants' construction of cl 3.3
63 The plaintiff submits that the defendants' construction of cl 3.3(b) amounts to reading 'able' to mean 'willing'. The plaintiff submits that if the Sellers can have regard to all matters which they consider are in their commercial interests in determining whether they are able to supply SMDQ they are only able to supply if they are willing to supply. Senior counsel for the plaintiff, Mr Hutley QC, submitted that on the defendants' construction of cl 3.3(b) if the defendants determine it is in their commercial interest to leave the gas in the ground then they are not able to supply it. No concept of 'reasonableness' can qualify what the Sellers consider to be in their best interests. It may be that to attract business of another buyer the Sellers considered it was in their interest to sell the gas to a third party at a price less than that charged for SMDQ, believing they would benefit in the long term. In those circumstances even if they sold on a fully interruptible basis the defendants would say they were unable to supply SMDQ. Mr Hutley submitted that on the defendants' argument, if the Sellers considered that there are commercial, economic or operational matters which will disincline them to supply the gas then they are not able to supply the gas even though there is plenty of gas available to be supplied profitably such that one could say that the Sellers were perfectly capable of supplying the gas having regard to the commercial and economic and operational matters.
Principles of construction
64 The language of cl 3.3 has more than one possible meaning. The words of the clause are reasonably capable of each of the constructions advanced by the plaintiff and the defendants. The court must approach the task of ascertaining the meaning of cl 3.3 objectively by applying the meaning that an objective outsider would attribute to the contract in the
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- circumstances. In Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, Gleeson CJ, Gummow and Hayne JJ held that determination of the objective meaning requires:
… the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract [11].
Furthermore, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ held:
References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purposes and object of the transaction [40].
In the case of a disputed clause in a commercial agreement, therefore, the essential question is what would reasonable business people in the position of the parties have taken the clause to mean.
- See also Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 [22].
Preferred construction of cl 3.3
66 The plaintiff submits that cl 3.3(a) creates an obligation imposed on the defendants to use reasonable endeavours to supply SMDQ. Clause 3.3(b) gives content to that obligation. There are a number of considerations favouring the plaintiff's construction. The plaintiff's construction is that [(a)] of cl 3.3 contains the primary obligation which is then elucidated or qualified by [(b)]. On the other hand, the defendants' construction requires that the first part of [(b)] of cl 3.3 to be considered, and satisfied, before considering the obligation imposed by [(a)]. The plaintiff submits, in effect, that it would be unusual for the 'anterior question' to be placed after a secondary question, which the plaintiff says is the effect of the construction advanced by the defendants. Furthermore, the defendants' construction involves a bifurcation of cl 3.3(b) into two parts, the second commencing 'and without limiting those matters'. As a matter of structure, impression and syntax, the first part (pt 1) is linked to
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- both cl 3.3(a) and the second part (pt 2). An important aspect of the process of using reasonable endeavours would be to form a view as to the ability to supply the gas. That ability could be affected by commercial matters, for example legal commitments with respect to supplying gas, economic matters, for example whether the supply was profitable, and operational matters. Part 2 commences with the words 'without limiting those matters'. That suggests that what follows is of the same genus as that which precedes it. The circumstances set out in cl 3.3(b)(i) refers to circumstances which would inform a determination of ability to supply under pt 1 of cl 3.3(b). The defendants submit that pt 2 of cl 3.3(b) is an aspect of cl 3.3(a), it elucidates cl 3.3(a). Each of pt 1 and pt 2 of cl 3.3(b) involve forming states of mind - what Mr Hutley describes as practical steps in using reasonable endeavours. Mr Hutley submits that there is no good reason why 'determining' whether the Sellers are 'able to supply' does not consist of a practical step in using reasonable endeavours.
67 Those arguments have some force but are not decisive. It is not unusual for a draftsman to first set out an obligation upon a party and then state a precondition to the obligation arising and then to give examples of circumstances in which the obligation does not arise. That is consistent with the structure of cl 3.3. For the following reasons I prefer the defendants' construction.
68 The context of the obligation to supply SMDQ is important. Under the GSA there is no obligation imposed on the Sellers to reserve gas or production capacity for the supply of SMDQ gas if it is required by the plaintiff. Nor is there any obligation imposed on the plaintiff to take or pay for any SMDQ gas. The plaintiff is under no commitment to buy SMDQ gas and the Sellers have made no commitment to sell or to reserve gas or production capacity. The Sellers are under no obligation to the plaintiff to refrain from agreeing to sell gas to third parties on commercial terms, even if such sales reduce or eliminate the Sellers capacity to supply additional gas to the plaintiff.
69 Clause 3.3(b)(i), (ii) and (iii) set out circumstances in which the Sellers are not obliged to provide SMDQ gas. Clause 3.3(b)(i) provides that the Sellers are not required to make SMDQ gas available for delivery where they form the reasonable view that there is insufficient capacity available throughout the Sellers' facilities having regard to all existing and likely commitments of each Seller and each Sellers' obligations regarding maintenance, replacement, safety and integrity of the Sellers' facilities. If the Sellers have a contractual commitment to supply gas such that it has insufficient additional gas available to supply SMDQ gas then it is not
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- required to supply that SMDQ gas to the plaintiff. The commitments referred to in cl 3.3(b)(i) are not confined to commitments existing at the time the GSA was entered into. The Sellers are at liberty to enter into new contracts with third parties by which they commit to supply gas even if that commitment has the effect that the sellers will have insufficient additional gas to be able to meet nominations of SMDQ gas by the plaintiff.
70 These considerations lead to the conclusion that cl 3.3(b) conditions the Sellers' obligation to use reasonable endeavours to make available for delivery SMDQ on the Sellers being 'able to supply SMDQ on a Day'. The meaning and content of 'able' is informed by the words 'the Sellers may take into account all relevant commercial, economic and operational matters'. In the context of cl 3.3(b) commercial matters include the sale of gas to other customers or potential customers and the profitability of such sales compared with the profitability of supplying SMDQ under the GSA. The Sellers may take such matters into consideration in determining whether they are 'able to supply SMDQ on a Day'.
The nominations point
71 Clause 9.1 to cl 9.6 of the GSA creates a regime for nominating gas to be supplied under the GSA, including nominations for SMDQ. The clauses provide for nominations to be made seven Days in advance, with rolling nominations to be given every Day. The defendants plead that certain of the nominations pleaded by the plaintiff were not made in conformity with cl 9.1 and that they were not nominations for the next seven Days. The plaintiff accepts that some of its nominations were for more than seven Days but says that they were nonetheless effective.
72 The plaintiff says that the parties adopted a convention that the plaintiff gave nominations for a period, usually for about 14 Days, in advance. Those nominations were not given daily, but a new nomination was given prior to the expiry of the previous nomination. The plaintiff says that the defendants always treated those nominations as effective. The plaintiff argues that the convention adopted by the parties effected a variation to the GSA. Alternatively, the plaintiff says that the convention created a conventional estoppel and that convention was never resiled from by the defendants. During the period from 4 June to 30 September 2008 the defendants, by NWSG, informed the plaintiff that they would not supply SMDQ in accordance with the nominations. The plaintiff says that the defendants dispensed with the requirement that the plaintiff nominate in accordance with cl 9.1, either by their course of conduct in accepting
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- nominations which were not in accordance with cl 9.1 or by informing the plaintiff on 4 June 2008 that they would not supply SMDQ gas. The plaintiff continued to nominate SMDQ gas throughout the period from 4 June to 30 September 2008.
73 I find that the defendants, by NWSG, responded to the plaintiff's nominations by accepting the nominations but only for those parts of the nominations which related to the following seven Days. The standard form of response used by NWSG stated the quantities of nominated gas which were 'accepted'. The fact that the defendants did not reject the nominations did not result in any variation of the agreement or any estoppel. The position communicated to the plaintiff was that the nominations which were for periods of more than seven Days were not being acted upon or treated as valid under the agreement except as regards to the following seven Days.
74 The defendants submit, and I accept, that cl 3.3, read with cl 9, does not impose on the Sellers an obligation to use their best endeavours to supply SMDQ for the seven Days after a nomination has been made. Upon its proper construction cl 3.3(a) imposes on the Sellers an obligation to use reasonable endeavours to make SMDQ gas available for the current Day under consideration. Clause 3.3(a) operates upon the Buyer's nomination for a Day, not for the whole of the seven Day period.
June 2008
75 As at 4 June 2008, the committed contractual obligations of the defendants and MIMI to supply domestic gas from the Karratha production plant was [suppressed] TJ/Day excluding SMDQ gas under the GSA. As a result of the explosion on 3 June 2008 Apache was unable to make delivery of gas from its facilities at Varanus Island. Customers of Apache sought to obtain gas supplies from NWSG. Gas production lost from the Varanus Island gas plant as a result of the Varanus Island explosion was approximately [suppressed] TJ/Day. The market price of gas prior to 3 June 2008 was in excess of the price payable by Verve under the GSA for SMDQ gas.
76 On the morning of 4 June 2008 Mr De La Fuente, marketing manager for NWSG, telephoned Ms Clare who was gas contracts manager at Verve. Mr De La Fuente informed Ms Clare that following the disruption to Apache's gas supply the Sellers could not supply Verve with SMDQ in June but could supply Verve with an equivalent quantity of gas at the June price for the rest of the month. The agreement subsequently entered into by the defendants and MIMI on 4 June 2008 show that the
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- market price for gas under short term contracts at that time was the June price. Ms Clare said that Verve should be entitled to SMDQ and not gas at a higher price. Mr De La Fuente said that was not possible because the Sellers did not have any SMDQ gas to offer Verve. There were then discussions amongst Verve managers. Later that day Ms Clare telephoned Mr De La Fuente. She said that Verve had decided to take the gas under the short term contract for Verve's SMDQ quantity. Mr De La Fuente said that it was a normal short term contract standard form, take or pay, finishing at the end of June and can be terminated by either the buyer or the seller on 24 hours notice. Mr De La Fuente said that he estimated Verve could get [suppressed] TJ that day, that is, the Day ending 8.00 am 5 June 2008. Later that day Mr De La Fuente forwarded to Ms Clare the proposed short term gas sales agreement. Jason Waters, Verve's general manager of trading and fuel, executed the short term gas purchase agreement (the June Agreement) on behalf of Verve. Mr Waters only had authority to enter into contracts with a total price corresponding to [suppressed] TJ/Day. Verve's CEO was out of the office and could not be contacted to obtain her authority to enter into the agreement for [suppressed] TJ/Day. Accordingly, Mr Waters entered into the agreement for [suppressed] TJ/Day which gave a total price which was within his authority.
77 I find that in not supplying SMDQ gas for the Day commencing on 4 June 2008 and for the remaining Days in June 2008 the defendants did not breach cl 3.3 of the GSA. The market price for gas under short term contracts was in excess of the price for SMDQ gas under the GSA. The Sellers determined that they were not able to supply SMDQ on 4 June 2008 or the remaining days in June 2008 after taking into account all relevant commercial, economic and operational matters.
Further short term contracts
78 On or about 20 June 2008 NWSG informed Verve that Verve would not be obtaining SMDQ under the GSA and, if Verve wanted additional gas above its MDQ contract quantities, Verve would have to enter a tender process. Verve received the tender package. Verve decided to tender at a price which would ensure that its tender for gas was successful while still complying with its obligation to act commercially. Verve submitted a tender for [suppressed] TJ of gas per day for the period 30 June to 30 September 2008 at its tender price. The tender was successful. The Sellers subsequently supplied gas to Verve under the second supplemental gas agreement resulting from the tender process.
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79 I find that the defendant did not breach cl 3.3 of the GSA in not supplying SMDQ gas to Verve for the period covered by the second supplemental gas agreement. The Sellers genuinely determined that they were not able to supply SMDQ on each day during that period taking into account all relevant commercial, economic and operational matters.
Alleged breaches in August and following in any event
80 The plaintiff submits that by 12 June 2008 the defendants knew that the capacity of the Karratha gas plant was [suppressed] TJ/Day. In late June 2008 the Sellers entered into a series of gas supply agreements. These agreements were terminable on 72 hours notice. By mid-August 2008 Apache had a gas train operating and was supplying gas again. Some of the defendants' short term contracts were terminated. By 18 August 2008 the defendants committed gas plus the short term contracts provided for supply of less than [suppressed] TJ/Day. That is, the plaintiff argues, from no later than 18 August 2008 the defendants had [suppressed] TJ/Day capacity, being [suppressed] TJ less [suppressed] TJ, available to supply SMDQ to the plaintiff. Despite nominations by the plaintiff the defendants continued to refuse to supply SMDQ gas to the plaintiff. On 19 August 2008 the plaintiff asked the defendants whether SMDQ gas was available. On 27 August the Sellers, through NWSG, replied that they were not yet in a position to supply any SMDQ volumes at that time as the Sellers were still attempting to supply gas to Apache impacted customers.
81 The defendants submit that the plaintiff's case referred to in the previous paragraph is not pleaded in the statement of claim or particulars and was 'mentioned in the briefest possible way' in the plaintiff's opening submissions. I find it unnecessary to resolve that issue. I find that the plaintiff has not established that the defendants had sufficient gas, after taking into account the defendants' commitments to supply gas under gas sales agreements including the short term contracts, to supply SMDQ gas nominated by the plaintiff between June and September 2008.
82 The plaintiff's case depends upon the Karratha plant having a capacity of [suppressed] TJ/Day each day. The only witness to give evidence about the capacity of the Karratha gas plant was Mr Blackburn, who in 2008 was employed by Woodside Energy Ltd as a business planner for the production planning group. He was responsible for senior technical queries, forecasting and planning the production of gas from the Karratha gas plant. He gave evidence by way of a written witness statement. The plaintiff did not cross-examine him. In his witness
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- statement Mr Blackburn said that, amongst other things, the capacity of the Karratha gas plant is dependant on the amount of gas it is able to put into the pipelines. The plant 'floats' on the pressure in the pipelines. If the pressure in the pipelines is low, there is capacity in the pipelines and gas will flow from the plant into the pipelines. The capacity of the plant is also dependant on the ambient temperatures. On warmer days the capacity is lower than on cooler days. Mr Blackburn said that the flow rate in terajoules per day (TJ/Day) that the gas plant can reliably supply to customers on an interruptible basis is called the committable capacity and has been [suppressed] TJ/Day since 1998. Amounts of gas sold above the committable capacity are less reliable. When Apache went offline on 3 June 2008 a void of approximately [suppressed] TJ was created in the pipeline because Apache was not putting any gas into the pipeline. The void in the pipeline enabled the Karratha gas plant to ramp up its production and put more gas into the pipeline.
83 Mr Blackburn said that there was a meeting of people who worked on the gas plant to review the plant's capacity. The planning review involved, among other things, a desktop review of likely points of mechanical vibration in the plant. A team was then mobilised to physically check vibration limits in the plant. The test ran the plant to a maximum instantaneous rate of [suppressed] TJ/Day. That is not a rate that can be sustained for a Day. On 11 June 2008 Mr Gallatly, the domgas and services superintendent at the Karratha gas plant, informed Mr Blackburn that an integrity review and testing of the operation of the domgas machines had been completed and the data was being analysed. In his witness statement Mr Blackburn said:
Based on the data the KGP had an unchanged committable capacity of [suppressed] TJ/Day. That is because the 2K30 still limited the KGP's capacity. While Apache was offline planning was being undertaken to supply an interruptible capacity of [suppressed] TJ/Day, to handle pipeline pressure and variations the maximum instantaneous domgas flow was [suppressed] TJ/Day.
84 In his witness statement Mr Blackburn maintained that the gas plant had 'an unchanged committable capacity of [suppressed] TJ/Day'. The effect of Mr Blackburn's evidence is that the Sellers could not commit to supplying more than [suppressed] TJ/Day. The plaintiff did not cross-examine Mr Blackburn. It was not put to him that the Sellers could have known in advance of any particular Day that they could supply [suppressed] TJ/Day or any volume of gas in excess of [suppressed] TJ/Day. Furthermore, around mid-August 2008 Apache started to produce some gas. As Apache put more gas into the pipeline that would
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- have reduced the amount of gas that the Sellers could put into the pipeline. The figures referred to by Mr Blackburn as a result of the reviews undertaken in June 2008 were based on Apache not putting any gas into the pipeline. The actual amount of gas produced by the Karratha gas plant varied from day to day. There is no evidence that the Sellers would have known in advance of any particular Day that they could commit to supply more than [suppressed] TJ/Day in total. In the absence of these matters having been put to Mr Blackburn and it having been put to him that the Sellers could have produced [suppressed] TJ/Day or some other quantity in excess of [suppressed] TJ/Day for any day between June and September 2008, and known in advance of any Day that they could produce that amount, I find that the plaintiff has not made out that case.
Duress
85 The plaintiff further claims damages for the tort of duress. The plaintiff says that at all times from and including 4 June 2008 the defendants knew that the plaintiff required the defendants supply to it the SMDQ gas nominated by the plaintiff so that the plaintiff could perform its statutory functions or its contractual duties. The plaintiff says that the defendants further knew that the plaintiff could not obtain a sufficient quantity of gas from another source at a price lower than that demanded by the defendants. The plaintiff says that by refusing to supply SMDQ gas and offering to supply an equivalent quantity of gas at the higher price demanded the defendants exerted illegitimate economic pressure on the plaintiff to enter into the June short term gas supply agreement (the June Agreement) and the subsequent short term gas supply agreement (the Further Agreement). The plaintiff says that it is entitled to damages equivalent to the difference between the prices paid under the short term agreements and the price for SMDQ under the GSA.
86 In Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, McHugh JA listed the two elements required to maintain an action in economic duress:
The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? (46).
- McHugh JA went on to say that 'pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct' although the categories are not closed.
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87 I have found that the defendants did not breach the GSA by failing, or refusing, to supply SMDQ gas on 4 June or their continuing failure or refusal to supply SMDQ gas from June to September 2008. To establish a cause of action in duress the plaintiff must establish that it entered into the June Agreement and Further Agreement as a result of illegitimate pressure applied by the defendants. The defendants were at liberty to refuse to enter into any contract to supply gas to the plaintiff beyond the gas they were obliged to supply under the GSA. A supplier of goods is generally free to refuse to supply goods to another party unless the other party agrees to pay whatever price is demanded. The defendants were at liberty to demand the price they did for the supply of gas to the plaintiff beyond the gas they were obliged to supply under the GSA. It makes no difference that the defendants knew that the plaintiff required the additional gas in order to meet its statutory or contractual obligations and that there was no alternative source from which the plaintiff could obtain the gas.
88 The plaintiff has not made out its case of duress.
Limitation of liability
89 If, contrary to my findings, the defendants are liable for failure to supply nominated SMDQ gas then a question arises concerning the application of the limitation clause.
90 Clause 9.1(a) provides for the Buyer to give a Rolling Nomination Notice to the Sellers' representative (NWSG), nominating the quantity of gas which the Buyer requires for the following seven days. Clause 9.1(b) requires the Sellers' representative within four hours after receiving a Rolling Nomination Notice to notify the Buyer of the aggregate quantity of gas which the Sellers intend to make available for delivery for the following seven days.
91 Clause 22.7 provides:
(a) [suppressed]
(b) [suppressed]
(i) [suppressed]
(ii) [suppressed]
(c) [suppressed]
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92 The defendants plead that if they breached the GSA by failing to use reasonable endeavours to make SMDQ gas available as claimed by the plaintiff or if the defendants are otherwise liable to the plaintiff then the plaintiff's remedies are confined to damages which are subject to the limitations provided in cl 22.7(a), (b) and (c) of the GSA and the maximum liability of each defendant for a failure to supply SMDQ gas is limited to the defendants' proportionate share of the amount by which the actual costs incurred by the plaintiff in obtaining alternative fuel exceed the amount equivalent to the applicable gas prices, up to a maximum of that defendant's share of the [suppressed] price per gigajoule. I have found that the defendants did not breach cl 3.3 of the GSA. However, I will state my findings in relation to this issue.
93 The plaintiff says that upon its proper construction cl 27 does not apply to a wilful or deliberate breach of cl 3.3 of the GSA. The plaintiff submits that exclusion clauses such as cl 22.7(c), in the absence of express language, do not apply to wilful or deliberate breaches of contract. The plaintiff says that the defendants did not attempt to supply SMDQ to the plaintiff but rather deliberately refused to use reasonable endeavours to supply SMDQ to the plaintiff on 4 June 2008 and throughout the period to 29 September 2008. Furthermore, the defendant says that cl 22.7(c) does not apply to the claim for duress.
94 Whether a clause exempts a party from liability for a deliberate (but not fraudulent) breach of contract is a question of construction of the clause. Exemption clauses have traditionally been subjected to special scrutiny by the courts. However, effect must be given to the natural meaning of a limitation clause. In Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 the High Court held that the interpretation of a limitation clause:
… is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity (510).
95 The plaintiff submits that, in the absence of express language, exclusion or limitation clauses such as cl 22.7(c) do not apply to wilful or deliberate breaches of contract. Whether or not a limitation clause applies to limit a party's liability in particular circumstances is a question of the proper construction of the limitation clause in question. In Darlington Futures Ltd v Delco Australia Pty Ltd the plaintiff sued its broker, which had engaged in speculation beyond the ambit of authority conferred on it,
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- causing heavy losses. The broker was held not to be protected by a clause in the brokerage contract excluding liability for losses arising 'in any way out of any trading activity undertaken on behalf of the client whether pursuant to this agreement or not'. The High Court held that read in context, those words referred to trading activity undertaken with authority and not to trading activity in which the broker presumed to engage on behalf of the client when it had no authority to do so. However, the broker successfully relied on a clause in the brokerage contract which limited its liability to $100 'in respect of any claim arising out of or in connection with the relationship established by this agreement'. The High Court rejected the plaintiff's argument that the clause did not apply to claims arising out of conduct unauthorised by the contract because that was:
… to place a more restrictive interpretation on the clause than its language will naturally bear. In particular, it is expressed to comprehend claims arising out of or in connexion with the relationship established by the agreement. A claim in respect of an unauthorized transaction may nonetheless have a connexion, indeed a substantial connexion, with the relationship … established by the agreement [511].
97 It is from the contractual wording, read in context, that the parties' intentions must be ascertained. In this case cl 22.7(c) specifically addresses the liability of the Sellers 'in respect of a failure to use reasonable endeavours to meet a Buyer nomination above MDQ up to SMDQ' and limits that liability. The policy behind the modern approach to interpretation of exclusion clauses is based on the concept that the court should not impose a strained construction upon an exclusion clause, but should give effect to the intentions of the contracting parties who are capable of protecting their interests and deciding how to allocate risks: Glenmont Investments Pty Ltd v O'Loughlin [No 2] (2000) 79 SASR 185 [258]. Furthermore, cl 22.7(c) is a limitation clause not an exemption clause; the courts do not regard limitation clauses with the same hostility as exclusion clauses: Ailsa Craig Fishing Co Ltd v Malvern FishingCo
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- Ltd [1983] 1 WLR 964, 966 (Lord Wilberforce), 970 (Lord Fraser). The subject matter of the limitation clause is the obligation of the Sellers to use reasonable endeavours to make available SMDQ, which obligation is created by cl 3.3 of the GSA. It is a strained meaning of the clause to confine the words 'a failure to use reasonable endeavours to meet a Buyer nomination above MDQ up to SMDQ' to apply to a failure which is not wilful or deliberate. The natural and ordinary meaning of 'a failure to use reasonable endeavours' is that the party did not use reasonable endeavours, whether deliberately or otherwise.
98 I find that if the Sellers breached cl 3.3 of the GSA then cl 22.7(c) entitles the defendants to limit their liability in respect of that breach. Each Seller's liability for that breach is limited to its 'Proportionate Share of the amount by which the actual costs incurred by the Buyer in obtaining alternative fuel exceed the amount equivalent to the Gas Price, up to a maximum liability of that Seller's share of the [suppressed] price per GJ'.
Damages
99 I have made no assessment, or provisional assessment, of damages because the parties agreed that I should deliver my reasons for judgment without assessing damages and allow the parties to consider the reasons for judgment and attempt to reach agreement on any matters relating to damages.
100 I will hear from the parties as to the orders that should be made to give effect to these reasons for judgment.