Enron Australia Finance v Yallourn Energy

[2005] NSWSC 56

CITATION:	Enron Australia Finance v Yallourn Energy [2005] NSWSC 56
HEARING DATE(S):	3 February 2005
JUDGMENT DATE :	24 February 2005
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	(a) no; (b) no; (c) yes

CATCHWORDS:	CONTRACTS - electricity swap contracts in form of 1992 Master Agreement of International Swap Dealers Association Inc - (a) whether interest payable by defaulting party before it can designate an Early Termination Date - (b) whether non-defaulting party can avoid designation of an Early Termination Date by paying an amount exclusive of interest - (c) whether non-defaulting party obliged to pay interest once Early Termination Date is designated. ENERGY AND RESOURCES - Electricity - electricity swap contracts in form of 1992 Master Agreement of International Swap Dealers Association Inc - (a) whether interest payable by defaulting party before it can designate an Early Termination Date - (b) whether non-defaulting party can avoid designation of an Early Termination Date by paying an amount exclusive of interest - (c) whether non-defaulting party obliged to pay interest once Early Termination Date is designated
PARTIES:	Enron Australia Finance Pty Limited (in liq) - Plaintiff Yallourn Energy Pty Ltd - Defendant
FILE NUMBER(S):	SC 5942/04
COUNSEL:	J C Sheahan SC; V F Kerr - Plaintiff H Sifris SC - Defendant
SOLICITORS:	Blake Dawson Waldron - Plaintiff Baker & McKenzie - Defendant

LOWER COURT JURISDICTION:

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

CAMPBELL J

24 FEBRUARY 2005

5942/04 ENRON AUSTRALIA FINANCE PTY LIMITED (IN LIQUIDATION ) v YALLOURN ENERGY PTY LTD

JUDGMENT

HIS HONOUR:

Nature of Case

1 This case concerns the construction of the provisions for interest in an agreement under which electricity swap contracts were entered.

Factual Background

2 The plaintiff (“Enron”) carried on a business of trading. One of the ways by which it traded was by entering into electricity swap contracts, concerning electricity to be supplied in the Australian national electricity market. Such contracts are referred to as “trades”.

3 An electricity swap contract is a species of futures contract. One party agrees to pay a fixed price for designated electricity at a particular future time in return for which the other party agrees to pay a floating price. The floating price is the spot price of the designated electricity at that future time. Thus if, at the relevant time, the spot price exceeds the nominated fixed price then the floating price payer pays the difference to the fixed price payer, and vice versa. Mr Sheahan SC, counsel for Enron, accurately described such contracts as ones:

“… in which the parties made bets, as it were, against each other as to the future price of electricity. In the case of parties to such transactions who are in fact participants in the electricity market, such contracts can provide a form of insurance against adverse future outcomes in the market.”

4 Enron entered into a written agreement dated 10 August 2001 (“the Agreement”) with the defendant (“Yallourn”) which governed trades between them. That agreement was in the form of the Master Agreement adopted by the International Swap Dealers Association Inc. in 1992, with certain amendments and addenda.

5 Enron thereafter entered into various swap contracts with Yallourn. In some of those trades Enron took the fixed price position and Yallourn took the floating price position, and in others the position was reversed. It is the nature of an electricity swap contract that, until the time arrives at which the spot price of the electricity is known, one cannot tell whether the spot price will exceed the fixed price or vice versa, nor by how much one will exceed the other. It follows that, until the time for performance of the contract has arrived, one cannot tell which party will owe money to the other under it, nor how much will be owed. During the period that the contract is on foot and there is this uncertainty, it is referred to as an “open trade”.

6 On 3 December 2001 administrators were appointed to Enron. On 29 January 2002 the creditors of Enron resolved that it be placed into liquidation, and that the administrators become the liquidators.

7 As at 3 December 2001 there were thirty-three open trades between Enron and Yallourn relating to the price of electricity at various future times. The last of those times was 31 December 2003.

8 The appointment of administrators to Enron, and Enron being placed into liquidation, each constituted an Event of Default under the Agreement. The occurrence of each of those Events of Default entitled Yallourn to terminate the Agreement by designating an Early Termination Date (“ETD”). If an ETD had been designated by Yallourn, this would have entitled Yallourn to “close out” the futures contracts which were then open, and thus to crystallise the amount of the liability of the parties to each other under those contracts. However, Yallourn has not designated an ETD – rather, it has allowed each of the contracts which were “open trades” on 3 December 2001 to remain open until its maturity date.

9 Even though all the contracts which were “open trades” on 3 December 2001 have now reached their maturity date, Enron and Yallourn have still not paid any amounts to each other with respect to those contracts.

10 The Agreement provides a procedure whereby a party with respect to whom an Event of Default has occurred (here, Enron) can make certain payments to the other party concerning transactions entered into under the Agreement in which Enron lost the bet. If Yallourn then refuses to make a payment to Enron concerning transactions in which Yallourn lost the bet, then, in certain circumstances, Enron acquires the right itself to designate an ETD.

11 The liquidators of Enron wish to cause Enron to pay the amount it must pay to Yallourn to initiate this procedure. Then, if Yallourn refuses to make a payment to Enron of amounts which Enron claims, Enron will nominate an ETD. However, Enron and Yallourn disagree about three matters. The first is whether, if Enron is to acquire the right itself to designate an ETD, the amount it must pay to Yallourn is the capital amount of its indebtedness to Yallourn pursuant to those contracts which have resulted in Enron owing money to Yallourn, or whether it is that capital amount plus interest. The second is whether, after Enron has made the payment which is a precondition to Enron having the right to designate an ETD, if Yallourn is then to avoid Enron having a right to nominate an ETD, Yallourn must pay to Enron not only the capital amount which would have been (if there had been no Event of Default) owing by Yallourn under those trades which have now passed their performance date, but must also pay interest on that amount for the period from the performance date to the date when Yallourn makes its payment. The third dispute concerns whether, if Enron is able to designate an ETD, Yallourn is then liable to pay interest to Enron.

Provisions of the Agreement

12 The Agreement starts with a recital that the parties:

“have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this Master Agreement, which includes the schedule (the “Schedule”), and the documents and other confirming evidence (each a “Conformation”) exchanged between the parties confirming those Transactions.”

13 Section 2(a)(i) said:

“Each party will make each payment … specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.”

14 Section 2 continued:

“(a)(ii) Payments under this Agreement will be made on the due date …
(a)(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated …”

15 Section 2(e) says:

“Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed …”

16 Section 5(a) of the Agreement set out a list of Events of Default, which included a party being subject to the appointment of an administrator, or having a resolution passed for its winding up.

17 Section 5(b) set out a different list of events which constituted Termination Events. There was provision for the Schedule to add to that list by specifying an Additional Termination Event. Part 1(g) of the Schedule identified such an Additional Termination Event, namely:

“An Event of Default occurs with respect to a party (“Party X”), Party X has satisfied all its payment … obligations under Section 2(a)(i) with respect to all Transactions and has no future payment … obligations to the other party (“Party Y”) whether absolute or contingent under Section 2(a)(i), and Party Y refuses to make a payment to Party X based upon the conditions precedent in Section 2(a)(iii).
For the purpose of the foregoing Termination Event, the Affected Party shall be Party X. However, despite Section 6(b)(iv), Party X is the party entitled to give the notice under Section 6(b)(iv) designating the Early Termination Date for the foregoing Termination Event.”

I will sometimes refer to an Additional Termination Event as an “ATE”.

18 Section 6(a) conferred on either party the right to designate a day as an ETD in respect of all outstanding Transactions if an Event of Default had occurred with respect to the other party. This right is the one which, in the present case, Yallourn has not exercised.

19 Section 6(b) confers a right to designate an ETD if a Termination Event occurs. The presently relevant provision is:

(iv) Right to Terminate. If:— …
(2) … an Additional Termination Event occurs, …
… the party which is not the Affected Party in the case of … an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions.”

20 The effect of designation of an ETD is set out in Section 6(c):

“(i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.
(ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments … under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e).”

21 Section 6(e)(ii)(1) has the effect that if an ETD results from a Termination Event and there is (as here) one Affected Party the amount payable is determined in accordance with Section 6(e)(i)(3), except that:

“… references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively …”

22 Section 6(e)(i)(3) provides that:

“… an amount will be payable equal to (A) the sum of the Settlement Amount … in respect of the Terminated Transactions and …the Unpaid Amounts owing to the Non-defaulting Party less (B) …the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.”

In the present case it is agreed that the Settlement Amount is zero.

23 The expression “Unpaid Amounts” is defined in Section 14 as:

“owing to any party means, with respect to an Early Termination Date, … in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date … together with (to the extent permitted under applicable law) interest, … from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. …”

24 As the combined effect of the definitions of “Terminated Transactions” and “Affected Transactions” contained in Section 14 the “Terminated Transactions” in respect of an ETD resulting from an Additional Termination Event are “all Transactions”.

25 It is common ground between the parties that the Events of Default which occurred with respect to Enron had the effect of suspending any obligations which Yallourn might have had to make payment to Enron concerning those trades which, if there had been no Event of Default, would have resulted in Yallourn owing money to Enron. This suspension arose because the condition precedent, set out in Section 2(a)(iii)(1) to there being an obligation to pay under Section 2(a)(i), had not occurred. Yallourn’s obligation to make the payments concerning those trades is only suspended, rather than completely obliterated, because of the possibility that Enron might be able to designate an ETD if the ATE occurs. If that happens, however, it is the effect of Section 6(c)(ii) that any payments which must be made are determined pursuant to Section 6(e), not pursuant to Section 2(a)(i).

26 In many of the circumstances concerning which the Agreement allows the designation of an ETD, there will be futures contracts on foot, which can be closed out and (through the operation of the definition of “Settlement Amount”) an amount which becomes owing by one party to the other in consequence of the closing out can be ascertained. In such a case, there is indeed early termination of the futures contracts which are then on foot. The circumstances in which the ATE can occur, requiring as it does Enron to have satisfied all its obligations under Section 2(a)(i) with respect to all Transactions (whether present or future, absolute or contingent) could occur only once all those futures contracts had reached their end date. Only then is it possible to know what obligation Enron has under Section 2(a)(i) with respect to a Transaction. In this way, the definition of ETD is extended to a situation which is not an early termination date in the ordinary meaning of that expression. The occurrence of the ATE and the consequences which flow from the designation of an ETD on the basis of the ATE provide a contractual power, enabling a party with respect to whom an Event of Default has occurred to obtain payment with respect to a Transaction concerning which it has been unable to obtain payment under Section 2(a)(i).

Whether Interest Payable by Yallourn After Designation of an ETD

27 In para [11] above I stated the three disputes between Enron and Yallourn in the order in which they arise in working through the definition of Additional Termination Event, and then working out the consequences of there being an Additional Termination Event. However, I will deal with them in a different order. It is common ground that, after designation of an ETD, Yallourn is liable to pay, in relation to each Terminated Transaction concerning which it lost the bet, the capital amount of the price difference which there has turned out to be in relation to that Transaction, and which has not been paid. It is that amount which is:

“the amounts that became payable (or that would have become payable but for section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date …”

within the meaning of the definition of “Unpaid Amounts” in Section 14.

28 As well, Enron submits that, in that circumstance, Yallourn is obliged to pay interest on that amount from the date when that principal would have been required to be paid but for Section 2(a)(iii), at the Applicable Rate. This latter obligation arises, Enron says, from the obligation under Section 6(e)(ii)(1) to pay the amount determined in accordance with Section 6(e)(i)(3), and from Section 6(e)(i)(3) requiring payment of the “Unpaid Amount”. The definition of “Unpaid Amount” makes express provision for such interest being paid.

29 The contrary argument advanced by Yallourn does not, it seems to me, give effect to the words in the definition of “Unpaid Amounts” which require interest to be paid from the date those amounts “were or would have been required to have been paid … to such … Early Termination Date” (emphasis added). The hypothetical situation that the words “or would have been” there refers to is the same hypothetical situation that the definition refers to concerning principal amounts, namely “would have become payable but for Section 2(a)(iii)).

30 The obligation to pay interest which is part of the definition of “Unpaid Amounts” is not to pay the same interest as would have been payable under Section 2(e) if the Event of Default had not occurred. Rather, the definition of “Unpaid Amounts” creates its own freestanding obligation to pay interest. Further, that interest is payable at the Applicable Rate, which is not necessarily the same as the Default Rate.

Whether Yallourn Must Pay Interest Before Enron can Designate an ETD

31 The definition of ATE, as applied in the facts of the present case, contains three elements:

1. An Event of Default occurs with respect to Enron. This has clearly happened.

2. Enron has satisfied all its payment obligations under Section 2(a)(i) with respect to all transactions and has no future payment or delivery obligations to Yallourn whether absolute or contingent under Section 2(a)(i).

3. Yallourn refuses to make a payment to Enron based upon the conditions precedent in Section 2(a)(iii).

32 Yallourn asserts that, once Enron has satisfied the second of these conditions, it will be open to Yallourn to ensure that no ATE arises by Yallourn paying to Enron the principal amount which Yallourn would have owed in relation to Transactions if there had been no Event of Default, without any interest. Yallourn submits that if it were asked to pay the principal, it would pay it. It submits that if it paid the principal the occasion for an ATE to arise would not occur. Yallourn’s reasoning goes this way. The obligation to pay interest under Section 2(e) is one which is imposed only on “a party that defaults in the performance of any payment obligation”. Yallourn submits that once the first of Enron’s Events of Default had occurred, Yallourn had no obligation to make payments under Section 2(a)(i), and so, even though it did not pay, it was not in default in performance of any payment obligation. Hence, it submits, it never had any obligation to pay interest under Section 2(e). A refusal by Yallourn to pay interest would, it submits, be based upon the fact that it never had any obligation to pay interest with respect to those principal amounts. Thus it would not be based upon the conditions precedent in Section 2(a)(iii). Further, Yallourn points out that it is only the obligation to pay principal under Section 2(a)(i) which has as a condition precedent that no Event of Default has occurred – Section 2(e), in particular, contains no such condition precedent.

33 Enron accepts that in fact there was no obligation, under Section 2(e) for Yallourn to pay any interest to it. However, Enron asks the Court to consider the situation there would be if it were to make a demand to Yallourn to pay both principal, and the interest which would have been payable under Section 2(e) if there had been no Event of Default. If Yallourn were to say, in effect, “we will not pay the interest, because it never accrued due, because we were never in default of payment of the obligation, because the principal was not due, because you had committed an Event of Default” Enron submits that that would be, in substance Yallourn refusing to make a payment to Enron based upon the conditions precedent in Section 2(a)(iii). Enron contrasts that situation with what would happen if it were to demand that Yallourn pay the principal which would have been owing under the futures contracts if there had been no Event of Default, together with damages for a motor car accident. Yallourn would be free to decline to pay the damages connected with the motor car accident, without the third condition for an ATE arising being satisfied, if its refusal was on a basis which had nothing to do with Enron having committed an Event of Default under the Agreement. However, if Yallourn’s refusal to pay interest is the result of a chain of reasoning in which the occurrence of an Event of Default, and hence the failure of the condition precedent to occur is a significant part, that is a refusal “based upon” the conditions precedent in Section 2(a)(iii).

34 In my view, Enron’s argument on this topic is correct. The language in which the third condition for occurrence of an ATE is framed, involving refusal of one party to make a payment “based upon” the conditions precedent, presupposes a request that a payment be made, and a refusal of that request for reasons which can be said to be “based upon” the condition precedent. For the refusal of a request to be “based upon” a matter M, it is not necessary that M be the only reason for the refusal. It suffices if M is a sufficiently important part of a chain of reasoning for it to be fairly said that the refusal is “based upon” M. That is the situation in the example I am considering.

35 Mr Sifris SC, counsel for Yallourn, submits that there is an anomaly in adopting this approach, as it means that an ATE can arise if Yallourn refuses to make a payment that it never had a liability to make. I do not see that as being an anomaly, for two reasons. First, all that will happen if an ATE arises is that Enron will be given the trigger for designating an ETD, which will enable the rights of the parties to be worked out under Section 6. That in turn will involve each accounting to the other for the Unpaid Amounts it owes to the other, including interest on the principal amounts each would have owed the other if no Event of Default had occurred, for the time each such principal amount has been unpaid. The definition of Applicable Rate in Section 14, when applied to Yallourn as a non-defaulting party, is the Non-default Rate. Section 14 says:

“Non-default Rate” means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount.”

I do not see any anomaly in a construction of the definition of Additional Termination Event which brings these practical consequences about.

36 Second, Yallourn accepts that, if asked, it would pay the principal amount which it would have had to pay if there had been no Event of Default. Yet it is the effect of the condition precedent that it has no obligation to pay that amount once an Event of Default has occurred. Why is it not equally anomalous (or lacking in anomaly) for there to be an ATE if Yallourn refuses to pay that principal amount?

37 Indeed, in my view there would be an anomaly in a construction of the Agreement which left Enron in a position where it was obliged to pay amounts falling due under the futures contracts pursuant to Section 2(a)(i) either as each payment fell due, or with interest at the Default Rate under Section 2(e) if not paid promptly, but which allowed Yallourn to not pay amounts which, but for the Event of Default it would have had to pay, and to pay no interest on those amounts.

38 I use these arguments about whether particular constructions of the Agreement are, or are not, anomalous as a check on whether the construction which I have arrived at based on the wording of the definition of ATE is correct, rather than as a primary reason favouring that construction.

Whether Enron Must Pay Interest to Trigger an ATE

39 Enron contends that, to satisfy the second condition for occurrence of an ATE, it need pay only the principal amount owing under Section 2(a)(i) with respect to all Transactions. Enron submits that, even though, in relation to amounts of principal which have fallen due and not been paid, it owes interest under Section 2(e), payment of that interest is not one of the preconditions for occurrence of the ATE. The only amounts which Enron must pay, to satisfy the second condition for occurrence of an ATE, are amounts for which there is an obligation “under Section 2(a)(i)”. And it is only principal amounts in relation to which there is an obligation to pay under Section 2(a)(i). In my view that submission is right.

40 Enron accepts that, if it were to pay only those principal amounts, it would continue to have an unperformed obligation to pay interest under Section 2(e). If Enron were able to designate an ETD its obligation to pay that interest would, pursuant to Section 6(c) (to which Section 2(e) is expressly made subject) cease. In its place would arise the obligation to pay an amount in accordance with Section 6(e), which includes an amount of interest. Thus, if Enron were to pay only the principal, it would have a contingent obligation (dependent upon whether an ETD was designated) to pay an amount, based upon that interest, to Yallourn under Section 6(e). However, that contingent obligation is not a contingent obligation “under Section 2(a)(i)”.

41 Yallourn submits that Enron must pay not only principal, but also interest at the Default Rate, before the second condition is satisfied. It points to the fact that Section 2(e) says:

“Prior to the … effective designation of an Early Termination Date … a party that defaults … will … be required to pay interest …”

It submits that the payment of such interest is thereby made a condition precedent to the entitlement of Enron to designate an Additional Termination Event. While the words quoted from Section 2(e) might in some contexts be effective to state an additional condition precedent to the effective designation of an ETD, in the context of the present agreement they do not have that effect. Rather, the words simply state the time period during which an obligation to pay interest under Section 2(e) can arise.

42 A second basis upon which Yallourn submits that payment of interest is required before the second condition for an ATE is satisfied is that Section 2(a)(i) contains the words “subject to the other provisions of this Agreement”, and thereby incorporates into Section 2(a)(i) the obligation to pay interest arising under Section 2(e). I do not accept that that is the correct construction of the Agreement. In this context, the words “subject to” refer to matters of qualification or exception, which alter the obligation arising from the words “each party will make each payment … specified in each Confirmation to be made by it”. The conditions precedent in Section 2(a)(iii) are one such qualification or exception. An obligation which is an additional one, such as the obligation to pay interest arising under Section 2(e), is thus not incorporated by reference into Section 2(a)(i).

43 A third submission of Yallourn is that the obligation under Section 2(a)(i) is to make “each payment… specified in each Confirmation”. A sample of a Confirmation is in evidence. It identifies who is the fixed price payer and who is the floating price payer, identifies the particular time periods in relation to which a futures contract is entered, identifies the fixed price that is to apply during each of those time periods, and identifies the means of ascertaining what is the floating price during each of those time periods. The Confirmation contains a clause that

“This Confirmation supplements and forms part of, and is subject to the Master Agreement dated 15 December 2000 … between you and us. All provisions of this agreement govern this confirmation unless expressly modified above”.

Yallourn submits that thereby the payments required under the Confirmation are not just capital amounts but also interest under Section 2(e).

44 I will assume that the Master Agreement between Yallourn and Enron which is intended to be referred to in the Confirmation is the one dated 10 August 2001. Even so, when one reads the Confirmation and that Master Agreement together, the obligation to pay interest under Section 2(e) is not one which is specified (ie, identified with specificity) in the Confirmation. Rather, the payments specified in the Confirmation are the payments of principal, which are to be made in relation to each of the time periods. For those payments, the confirmation specifically identifies the manner of calculation.

45 Fourthly, Yallourn submits that the point of allowing a defaulting party to designate an ATE is to give it a means of recovering money in relation to Transactions for which, if there had been no Event of Default, money would have become payable to that defaulting party, but only if the defaulting party first pays all amounts that it owes to the non-defaulting party. I do not agree. All that the designation of an ETD does is to allow the rights of the parties to be worked out under Section 6, in the manner referred to in para [35] above. There is no commercial anomaly in the precondition for that working out being the making by a Defaulting Part of a payment which still leaves that Defaulting Party to be debited with interest, in the working through of the calculation under Section 6.

46 A fifth submission that Yallourn puts is that “future payment obligations … whether absolute or contingent under Section 2(a)(i)” should be read so that its syntactic structure was:

“future payment obligations, whether
(a) absolute, or
(b) contingent under Section 2(a)(i)”

So read, Yallourn submits, all absolute payment obligations, whether arising under Section 2(a)(i) or otherwise, must be satisfied.

47 I do not accept that submission, because I do not accept that the syntactic structure is as Yallourn contends. Rather, a more natural reading is that “under Section 2(a)(i)” describes both the absolute and the contingent obligations.

48 Finally, Yallourn draws attention to the fact that until recently, correspondence between the solicitors for Enron and Yallourn proceeded on the basis that Enron would need to pay interest before an ATE would arise. That is not a matter that can be taken into account on a question of construction.

1. Declare that on the proper construction of Part 1(g) of the Schedule to the contract entitled ISDA Master Agreement between the plaintiff and the defendant dated 10 August 2001 (“the Contract”), and in the events which have happened the amount required to be paid by the defendant to avoid the occurrence of an Additional Termination Event, after the plaintiff has satisfied all of its payment and delivery obligations under Section 2(a)(i) with respect to all Transactions and has no future payment or delivery obligations to the defendant whether absolute or contingent under Section 2(a)(i), is the aggregate of:

(a) each amount that would have become payable by the defendant under Section 2(a)(i), but for Section 2(a)(iii), and which remains unpaid,

together with

(b) the interest that would have become payable under Section 2(e) on each such amount as though the defendant had defaulted in the performance of its obligation to pay that amount under Section 2(a)(i).

2. Declare that, on the proper construction of Part 1(g) of the Schedule to the Contract, and in the events which have happened, the amount required to be paid by the plaintiff to satisfy all its payment obligations under Section 2(a)(i) with respect to all Transactions and to have no future payment obligations to the defendant whether absolute or contingent under Section 2(a)(i), is:

(a) each payment specified in each Confirmation to be made by the plaintiff which has not been paid

and does not include:

(b) interest, if any, payable or which would in any circumstances be payable by the plaintiff under Section 2(e).

3. Declare that if:

(a) an Additional Termination Event, as described in Part 1(g) of the Schedule to the Contract, occurs in respect of which the plaintiff is Party X and the defendant is Party Y; and

(b) the plaintiff gives a notice to the defendant designating an Early Termination Date in accordance with Section 6(b)(iv),

then, on the proper construction of the Contract, the Unpaid Amounts owing to the plaintiff (the Defaulting Party), as referred to in Section 6(e)(i)(3), comprise the aggregate of:

(a) each amount that would have become payable by the defendant under Section 2(a)(i), but for Section 2(a)(iii), and which remains unpaid,

together with

(b) interest from (and including) the date such amounts would have been required to have been paid to (but excluding) such Early Termination Date at a rate per annum equal to the cost to the defendant if it were to fund such amounts.

4. Defendant to pay plaintiff’s costs.

**********