Enron Australia Finance Pty Limited (in Liquidation) v Integral Energy Australia

[2002] NSWSC 802

CITATION:	Enron Australia Finance Pty Limited (in Liquidation) v Integral Energy Australia [2002] NSWSC 802
FILE NUMBER(S):	SC 50042/02
HEARING DATE(S):	19/8/02, 20/08/02
JUDGMENT DATE:	20 August 2002
PARTIES :	Enron Australia Finance Pty Limited (in Liquidation (Plaintiff) Integral Energy Australia (Defendant)
JUDGMENT OF:	Einstein J

COUNSEL :	Mr D Hammelschlag SC, Mr V Kerr (Plaintiff) Mr R Ellicott QC, Mr D Knoll (Defendant)
SOLICITORS:	Blake Dawson Waldron (Plaintiff) Corrs Chambers Westgarth (Defendant)
CATCHWORDS:	Evidence - Expert Evidence
LEGISLATION CITED:	Energy Service Corporations Act 1995 (NSW). Evidence Act 1995, S.79
CASES CITED:	Idoport Pty Ltd & Anor v National Australia Bank Ltd & Ors 50 NSWLR 640
DECISION:	Neither expert qualified in terms of having specialised knowledge so as to be in a position to express an opinion on proper construction of ISDA Master Agreement in issue.

IN THE SUPREME COURT
OF OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Tuesday 20 August 2002 ex tempore
Revised 4 September 2002

50042/02 Enron Australia Finance Pty Limited (in liquidation) & Anor v Integral Energy Australia

JUDGMENT on section 79 issues

1 Each party has taken objections to the opinions of the witness put forward by the other as having section 79 qualifications to express expert opinions.

2 The plaintiff puts forward Mr Lonergan as having specialised knowledge on the basis of which to be in a position to express the particular opinions to be found in his report. The defendant puts forward Mr Green in the same way.

3 The proceedings concern the proper construction of a particular clause in an agreement known as the ISDA Master Agreement, which is apparently part of a suite of agreements brought into existence by the International Swaps and Derivatives Association Inc., formerly known as the International Swap Dealers Association Inc.

4 The defendant contends that the contract is contained in the following documents.

· ISDA Master Agreement dated as of 10 September 1999 (“ISDA Master”).

· Schedule to the Master Agreement (Multi-Currency - Cross Border) dated as of 10 September 1999 (“Schedule”).

· March 1994 Australian Addendum No. 11 - Commodity Transactions.

· June 1997 Australian Addendum No. 13 - Electricity Transactions.

5 The plaintiff, Enron Australia Finance Pty Ltd (in liquidation) [“Enron”] was together with a number of other companies, a subsidiary of Enron Corporation, which until it was placed into liquidation on 2 December 2001, was the largest power trading company in the world. On that date it filed in the United States for chapter 11 bankruptcy and ceased trading.

6 On the following day 3 December 2001 [“the date of administration”], Mr Singleton and Mr Sims of Sims Lockwood in Sydney were appointed joint and several administrators of Enron. At the second meeting of creditors on 29 January 2002 a resolution was passed that Enron be placed into liquidation and the administrators then became liquidators of Enron.

7 Between December 1998 and December 2001 Enron had traded, amongst other things, electricity derivatives or electricity swap contracts in relation to electricity to be supplied in the national electricity market.

8 The defendant, Integral Energy Australia [“Integral”] is a statutory state- owned corporation constituted under the Energy Service Corporations Act 1995 (NSW).

9 These proceedings concern a series of electricity swap contracts entered into between Enron and Integral under the ISDA Master Agreement, which the defendant asserts was effectively an umbrella agreement. The particular dispute arises in circumstances where in reliance upon the appointment of the administrators as an event of default within the meaning of clause 5 (a) (viii) (2) and (4), Integral designated 5 December 2001 as the early termination date for all outstanding electricity swap contracts (“outstanding transactions”) under the agreement.

10 The dispute concerns the operation of the provisions governing the occurrence under the ISDA Master Agreement of an event of default in terms of the determination of the amount, if any, owing by Enron to Integral under clause 6 (e) of the agreement.

11 The central question concerns the proper construction of the agreement and, in particular, the proper construction of the words “market quotation” as relevantly used in section 14. That definition was as follows:

““ Market Quotation ” means, with respect to … [the Non-defaulting Party, in this case Integral], an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to [Integral] (expressed as a negative number) or by [Integral] (expressed as a positive number) in consideration of an agreement between … [Integral] and the quoting Reference Market-maker to enter into a transaction (the “Replacement Transaction”) that would have the effect of preserving for [Integral] the economic equivalent of any payment … by [Integral and the quoting Reference Market-maker] under [the Confirmation evidencing such Replacement Transaction] .… If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations .… “

12 At this stage in the proceedings the Court is faced with the difficulty of endeavouring to identify precisely what opinions the expert sought to be put forward by both parties seek to express, there being two relevant aspects falling for consideration:

1. The first concerns whether the term “market quotation” is a technical term or term of art or a term explicable by reference to custom or usage and/or whether for other reasons, the parties are to be permitted to seek to prove that they intended to use the word by reference to a specialised meaning. The matter may arise in a number of ways:

· In the case of custom it is well established that the custom must be notorious, certain, legal and reasonable.

· Where a word has a particular meaning among a particular class of person, evidence is admissible to show that the parties intended to give the word that meaning, so that upon proof of that intention, the word should be construed accordingly.

This principle complements, and to some extent, overlaps with the principle that the court will interpret non-legal technical terms in their technical sense, if it appears from the circumstances that the parties intended the words to be so construed. It is difficult to distinguish, if distinction is needed, between cases in which the court is construing a technical term, and cases where the court is recognising a trade usage.

· Where parties have previously dealt with each other on a regular basis, so that there is a course of dealing, evidence of this may also be used to incorporate terms into the contract or to negative the implication of a term which may otherwise be implied. If the course of dealing has the effect of placing a particular meaning on the terms of a document, the parties may be bound by that course of dealing, arguably even if it involves the admission of subsequent conduct as evidence.

· Where a word has both an ordinary meaning and a specialised meaning, evidence is not admitted of the specialised meaning unless it is proved first, that the parties intended to use the word in the latter sense.

· Where both parties are aware of a secondary meaning and that fact is proved by evidence, the secondary meaning will be given effect, even though it may not amount to a technical term or trade custom. In Scragg 1976 2 Lloyds reports 227 a question arose as to whether a sprint event was within the words “motor racing” in an insurance policy. The holding was that as a matter ordinary English it was, but that both the insured and the insurer had been aware that the words were used in a special sense by those interested in motor sports, and admitted evidence as to that special meaning. Many words, however, do not have a recognised “ordinary” or “primary” meaning. In such a case the court selects the meaning to be given to the word from an examination of the context in which it is used and of the facts to which the word is to be applied

2. The second relevant aspect which falls for consideration concerns the section 79 Evidence Act, parameters that is to say, whether or not the person put forward to express relevant expert opinions has been shown by his or her training study or experience to have acquired specialised knowledge on the basis, wholly or partly, of which to be in a position to express the subject opinions.

13 In my view neither of the witnesses sought to be put forward has been shown to be qualified in terms of having relevant specialised knowledge so as to be in a position to express an opinion as to the proper construction or interpretation of the words “market quotation” as used in the agreement. This is a matter for the Court.

14 That having been said, both witnesses clearly have expertise in a number of areas, which may well have a relevance to the question of construction, which is ultimately a matter for the Court.

15 It is clear that the matrix of relevant facts, matters and circumstances which operated at the time when the parties entered into the agreement, may be taken into account in construing the agreement. Apparently the construction issue raised in the proceedings, at least as the defendant submits, requires some significant adjectival knowledge as to the genesis of the so-called umbrella agreement because that agreement had been in operation for approximately seven years before that form of the agreement into which the parties entered, was executed. Hence the matrix of fact legitimate to be taken into account in construing the umbrella agreement in this case may require to include the manner in which, to the knowledge of both parties (if such knowledge can be established), the umbrella agreement had been utilised as a working document for some time before the 1999 agreement was entered into.

16 If it be that on the evidence, there was real precision in the manner in which the umbrella agreement had been treated or construed or utilised in the working out of disputes four square with the instant dispute, that matter may arguably be taken into account by the Court in construing the subject clause and certainly falls well within the expansive definition of ‘relevance’ to be found in section 55 of the Evidence Act.

17 Likewise, because of the necessity to construe the 1999 agreement, it is plainly necessary for the Court to take into account the context in which that agreement was entered into. That context requires the Court to examine many aspects of the market for electricity swap contracts including the manner in which the market works and the terminology used in that market.

18 Mr Green has been shown by his training, study and experience to have acquired specialised knowledge on the basis, whether wholly or partly, of which to be in a position to express opinions within section 79 in relation to the workings of the ISDA Agreement up to September 1999. He is also shown to have acquired the relevant specialized knowledge upon the basis of which to express opinions as to how market quotations work in relation to derivative markets, at least during the period up to September 1999, for the purpose of the defendant seeking to establish that a particular approach has been taken in close-out circumstances where the same clause has been enlivened and seeking to have the Court infer as a practice which both parties were well aware of at all material times prior to and at the time when the agreement was entered into.

19 The evidence may not bear out any such attempts but the defendant is entitled to endeavour to succeed in such attempt. The time has long passed when agreements were isolated from the matrix of facts in which they were set and interpreted purely on the internal linguistic considerations. The court inquires beyond the language and sees what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. These are simply matrices of admissibility permitting the adducing of evidence of what are said to have been mutually known facts to identify, if this can be done, which is itself a matter of evidence, the meaning of descriptive terms. There is then a further area to be considered.

20 It is well established that the first port of call is to see what the parties have agreed to remit to an expert. The next step is to see what the nature of the alleged mistake was. If there is evidence to show that a mistake was made, for example, that the expert departed from his instructions in a material respect as in the expert valuing the wrong number of shares or valuing shares in the wrong company or valuing an asset himself whereas his instructions were to employ an expert valuer of his choice to do that, either party would be able to say that the expert had not done what he was appointed to do. That issue does permit the adducing of expert evidence in order to ascertain what precisely the relevant expert, or in this case, the market makers have done.

21 Sometimes the factual material does not amount to sufficient for the Court to be in a position, even on receipt of evidence from expert witnesses, to follow precisely what, for example, a valuation expert may have done, but that is not to say that the Court rejects as of no relevance, evidence in that regard, to be adduced from a person having section 79 qualifications.

22 In this case, albeit quarantining the first category matters (referred to in the judgment or amendments) for a hearing in the second tranche, the evidence which would be relevant appears to, of necessity, include quite a deal of material going to the manner in which electricity swap contracts are dealt with and going to the manner in which those who trade electricity swap contracts carry out their usual operations and going to the considerations which are suggested as underpinning the parties’ respective perceptions when entering into such contracts. Likewise, the evidence which would appear to be relevant would appear to, of necessity, include a deal of material going to the common sense or logic which each party seeks to put forward by way of supporting what they seek to have the Court ultimately infer and take into account in the Courts reaching of a decision as to the proper construction of the contract.

23 Mr Lonergan clearly has extensive valuation experience. Whilst he does not, as I understand it, put forward the proposition that the term “market quotation” is a technical valuation term, this is not to say that he is not qualified to give evidence in relation to many valuation concepts which may be of assistance as having a relevance to the issue.

24 In Idoport Pty Ld & Anor v National Australia Bank & Ors 50 NSWLR 640 at 658, reference was made to the fact that expert evidence on the question of effect of foreign law was necessary to inform the court of a matter in respect of which it was, ex-hypothesi, ignorant. To my mind, precisely the same may be said of a circumstance in which questions of the definition of particular terms for valuating purposes relate.

25 Whilst I readily accept that by reference to section 80 of the Evidence Act, evidence of an opinion is not inadmissible only because it is about a fact in issue or an ultimate issue, real questions concerning the elucidation of section 80 do arise and these were conveniently the subject of some examination in Idoport Pty Ltd & Anor v National Australia Bank Ltd & Ors 50 NSWLR 640, which treated with the core component of the so-called ultimate issue rule, which concerns evidence of an expert as to the satisfaction or not of a standard which had legal effect. That decision further dealt with the question of whether the ultimate issue rule was affected by the enactment of section 80 of the Evidence Act. The holding was that the section was enacted by reason of a clear intention to abolish the rule which prevented a properly qualified expert from expressing an opinion as to the satisfaction or otherwise of a certain legal standard. The effect of the section was not to permit evidence which went to an ultimate issue, at all events, and was not to exclude evidence. Its effect was to remove the fact that the evidence goes to an ultimate issue from the reasons for which the court must or could exclude the evidence.

I certify that paragraphs 1- 25
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on Tuesday 20 August 2002
ex tempore revised 4 September 2002

___________________
Susan Piggott
Associate

4 September 2002

Last Modified: 09/10/2002