Gunns Limited v N D Jackman Pty Ltd
[2006] TASSC 29
•21 April 2006
[2006] TASSC 29
CITATION: Gunns Limited v N D Jackman Pty Ltd [2006] TASSC 29
PARTIES: GUNNS LIMITED
v
N D JACKMAN PTY LTD
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: LDR M5/2006
DELIVERED ON: 21 April 2006
DELIVERED AT: Hobart
HEARING DATE: 20 March 2006
JUDGMENT OF: Underwood CJ
CATCHWORDS:
Arbitration – The Award – Appeal or judicial review – Procedure – Appeals and leave to appeal – Leave to appeal from decision of arbitrator – Question or error of law – Manifest error of law on the face of the award or strong evidence of error of law.
Commercial Arbitration Act 1986 (Tas), s38(5).
Forestry (Fair Contract Codes) Act 2001 (Tas), s13.
Aust Dig Arbitration [96].
REPRESENTATION:
Counsel:
Applicant: S B McElwaine
Respondent: M J Crisp and M C Rapley
Solicitors:
Applicant: S B McElwaine
Respondent: Page Seager
Judgment Number: [2006] TASSC 29
Number of paragraphs: 40
Serial No 29/2006
File No LDR M5/2006
GUNNS LIMITED v N D JACKMAN PTY LTD
REASONS FOR JUDGMENT UNDERWOOD CJ
21 April 2006
Introduction
The originating application seeks an order that the applicant be given leave to appeal against an arbitrator's Award delivered on 31 January 2006 ("the Award"). The Court's leave is required because the Commercial Arbitration Act 1986 ("the Arbitration Act"), s38, provides that:
· an appeal to the Court is limited to "any question of law arising out of an Award"; but
· absent the consent of all parties to the arbitration agreement, leave of the Court is required before an appeal can be brought; and
· the Court shall not grant leave unless it considers that:
"(5) …
(a)having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement; and
(b)there is ¾
(i) a manifest error of law on the face of the award; or
(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law."
If leave is granted, the originating application sets out two questions of law and seeks consequential orders in the event that they are answered in favour of the applicant and errors of law are identified.
The factual background
The applicant is engaged in the business (inter alia) of buying logs, chipping them and selling the woodchips overseas. The respondent is a company engaged in the business of harvesting logs and selling them to the applicant.
On 5 May 2000, the respondent entered into an agreement with Derwent Forestry Co Pty Ltd whereby it was agreed that the respondent would supply logs to this company. On 13 December 2001, Derwent Forestry assigned its interest in the contract to the applicant. On 23 December 2004, the applicant and the respondent varied the terms of the contract so that it became what is known as an "evergreen" contract which, as I understand it, means a contract for no fixed period of time.
Meanwhile, in March or April 2002, the applicant and the respondent entered into a second wood supply contract. This contract was for the supply of 30,000 tonnes of pulpwood per annum, "plus saw logs" for three years. In January 2003, the contract was varied to extend it from three years to five years. The terms of the contract enabled the applicant to specify the area from which the logs were to be harvested and the mill to which they were to be delivered. In the main, the logs harvested pursuant to this contract were taken from the Southern State Forests.
It appears from the Award that woodchips come in three different grades; high quality chips, medium quality chips, and low quality chips. About 30 per cent of the pulpwood harvested pursuant to the second contract comprised low quality chips. By letters dated 14 April 2005 and 28 June 2005, the applicant purported to terminate the second contract. The respondent did not accept the purported termination, a dispute arose, and the dispute was referred to arbitration. By the Award, the arbitrator determined that the applicant was not entitled to terminate the contract.
The reason for the purported termination
The arbitrator found that the applicant entered into the contract in order to increase its market for low quality woodchips. Prior to 1999, this market did not exist. Low quality and medium quality chips were blended with high quality chips. Established overseas customers of the applicant put pressure on it to lift the quality of the blend of woodchips. At the same time, a market for low quality chips began to emerge in other overseas countries, so the applicant started to separate the low quality chips from the better quality product. The demand increased in 2000 and 2001 to such an extent that the manager of the Triabunna mill was asked to increase the production of low quality woodchips to provide for 200,000 tonnes in the next year.
The respondent was supplying the Triabunna mill and in response to the demand, the second contract was entered into. In addition, to boost the supply to the Triabunna mill, three other suppliers had their quotas increased and seven additional contracts were entered into.
Much of the demand for low quality chips came from one overseas buyer, but it was thought likely that demand would develop from other mills, some in other countries. The arbitrator found, at par33 of the Award:
"It is plain from the whole of the evidence (about which there is no dispute) that it was the actual and perceived market demand which led Gunns to increase contractor production capacity and to enter into the contract."
It did not work out as planned. Shipments were made in 2000 and 2001. However, in the second half of 2001, the one overseas buyer ran into financial difficulties and the applicant had to reduce the price of woodchips to accommodate that. Agreements for future shipments were made, but they were not all delivered as the one overseas buyer was shutting down mills.
The Award sets out in some detail the demise of the market for low quality woodchips. The financial difficulties of the one overseas buyer worsened and shipments were cancelled. The cost of shipping increased and there was a disadvantageous shift in the exchange rate. By the end of November 2004, the one overseas buyer owed the applicant $US2.24m and, despite the applicant's best endeavours to keep the market alive, shipments stopped.
The arbitrator found that the applicant persisted with the overseas buyer for as long as it could because it saw this buyer as the best way of finding a market for the low quality chips. Unsuccessful attempts to sell these chips to other overseas buyers has left the applicant with a substantial stockpile of this product. The arbitrator found, at par62 of the Award:
"Having regard to the whole of the evidence, and for the reasons which follow, I am satisfied that the essential reason for [the applicant] seeking to terminate the contract was the 'loss' (for want of a better expression) of the [business from the one overseas buyer] due mainly to its financial difficulties, the non-fulfilment, in broad terms, of [the applicant's] expectations for other Asian markets, and the continued inability to establish substantive commercial relationship with buyers of the [low quality woodchips]."
The terms of the contract
Although there was an exchange of letters, the terms of the contract were never finalised. A draft agreement was prepared, but not executed.
On 17 December 2001, the Forestry (Fair Contract Codes) Act 2001 ("the Forestry Act") came into operation. The long title optimistically declares that it is:
"An Act to provide for the approval of codes developed by the forestry industry for the purpose of improving the fairness of contracts for services within that industry, to provide for the legal effect of such codes, to repeal section 32 of the Forestry Act 1920 and for related purposes."
The Forestry Act empowers the Minister, after wide consultation, to draw up "Forestry Contract Codes". The Forestry Act, s7, provides that a Code must identify "the kind of forestry contracts" to which it applies, and "clearly identify the set of standard conditions that it is prescribing in relation to those contracts". By s11, the Code "is not capable of coming into force" unless it has been approved by both Houses of Parliament, but the section also provides (inter alia) that approval is achieved if there is no motion to disapprove the Code at the end of five sitting days after the Code is laid before the House. The Forestry Act, s12, provides that a Code comes into force on such date after approval by Parliament as the Minister specifies and publishes as prescribed. The Forestry Act, s13, is a critical provision. It provides:
"13 Effect of Codes when in force
(1) When a Code is in force ¾
(a)a forestry contract of the kind to which the Code applies, whether entered into before or after the Code came into force, is taken to contain the conditions prescribed in the Code; and
(b)if one of the conditions prescribed in the Code is inconsistent with another condition of the contract, the latter condition is, to the extent of the inconsistency, void and unenforceable.
(2) …".
I have to say that it is a somewhat startling proposition that a contract entered into prior to a Code "coming into force" can be statutorily rewritten with retrospective effect, but that is the prerogative of Parliament.
The Forestry Contract Code applicable to the forestry contract entered into between the applicant and the respondent came into force on 1 July 2003. The Forestry Act, s13(1), provides that when a Code comes into force a contract to which it applies "is taken to contain the conditions prescribed in the Code." It also provides that in the case of an inconsistency between a provision in the Code and a provision in the contract, the former prevails over the latter. The problem is that the Code applicable to this contract does not just set out a list of conditions. The Code is in the form of a draft contract and, in common with many commercial contracts, the operation of its provisions is dependent upon the completion of a Schedule which specifies such important matters as the names of the contracting parties, a description of the "services" provided by the contract, the rate to be paid and so on. Whether the Schedule was completed in this case is not apparent from the documents before the Court, but it seems unlikely that it was completed given that the contract was entered into before the Code was made. However, it appears that this point was not debated before the arbitrator and the parties agreed that, with respect to early termination of the contract, they were bound by the relevant provisions in the Forestry Contract Code. Those provisions are cl 12.1 to 12.5 inclusive. I endorse without reservation the following observation made by the arbitrator about these provisions in cl 11 of the Award:
"As becomes immediately apparent, these provisions are very poorly drafted. Obscurities, ambiguities and internal inconsistencies are rife. It is most unfortunate that contracting parties have foisted on them such unsatisfactory provisions, which become conditions of their contract, irrespective of how meticulous they have otherwise been in the documentation of the relationship between them."
Clause 12.1 is a definition clause. It provides:
"12.1 - In this clause, unless the context precludes it:
(a) 'supervening event' means an event on which the affected party seeks to rely, to obtain one of the remedies under this clause.
(b)'affected party' means the party that is affected by a supervening event.
(c)'non-affected party' means each party that is not the affected party, in relation to a particular supervening event."
Clause 12.2 is a primary clause. It provides:
"12.2 - If a supervening event frustrates the affected party’s ability to perform its obligations under this Forestry Contract, then the affected party may seek:
(a)to terminate this Forestry Contract under this clause; or
(b)to delay the affected party’s performance of its obligations under this Forestry Contract; or
(c)to extend the time for the affected party to complete particular obligations under this Forestry Contract; or
(d)to extend the Term of this Forestry Contract."
The only right conferred on the affected party by cl 12.2 is to seek to do one of the things listed in pars(a) to (d). The primary definition in the Shorter Oxford English Dictionary of "seek" is "try to find, look for, (a thing or person of uncertain whereabouts) make a search or enquiry for, attempt to discover, (a thing or person suitable for a purpose etc, an unknown thing)". An affected party does not need a contractual right to seek to terminate the contract. However, an affected party does need a contractual right to terminate a contract, but does not acquire that right by the Forestry Contract Code, cl 12.2 if the word "seek" is given its ordinary meaning. Curiously, the immediately following clause, cl 13, is headed "Termination" and prescribes, in the customary direct language, the circumstances in which the contract may be terminated.
Clause 12.3 also uses the verb "seek" but that clause is not material to the present case. Clause 12.4 provides:
"12.4 - If the affected party seeks to obtain the benefit of this (sic) clause 12 to excuse their (sic) non-performance, then:
(a)the affected party must:
i promptly give notice to the other parties of the occurrence and circumstances of the supervening event;
ii promptly take all reasonable steps to mitigate the effects of, and remedy the consequences of, the supervening event; and
iii resume performance of its obligations, in full, under this Forestry Contract as soon as reasonably practicable, unless a termination of this Forestry Contract is sought.
If the affected party does not do all of those things, they will not be entitled to the remedy sought.
(b)the event alleged as a supervening event by the affected party on which that party relies as a reason for non-performance, must:
i have been beyond the affected party’s control;
ii not have been the result of the affected party’s fault or negligence; and
iii not be a matter on which the affected party has given a warranty to the non-affected party."
Clause 12.5 relevantly provides:
"12.5 - The initial burden of proof lies with the affected party.
(a)As part of the burden of proof, the affected party has a duty to show:
i that all of the conditions in sub-clause 12.4 are satisfied;
ii that the supervening event operated in a manner that prevented the affected party from performing its obligations under this Forestry Contract;
iii that the supervening event in fact prevented the affected party from fulfilling its obligations under this Forestry Contract;
iv that the supervening event was the cause, and the only relevant cause, of the affected party’s inability to perform its obligations under this Forestry Contract;
v that if it had not been for the supervening event, the affected party was ready, willing and able to perform its obligations under this Forestry Contract, without the benefit of the remedy sought;
vi that the affected party has the resources available to meet its obligations under this Forestry Contract, and would do so but for the supervening event;
vii that the supervening event was not induced by the affected party;
viii what action has been taken to perform its obligations under this Forestry Contract, regardless of the occurrence of the supervening event.
(b)If the affected party has discharged the burden of proof under sub-clause 12.5(a), then the non-affected party bears the burden of proof to show that the affected party would not have performed its obligations under this Forestry Contract in any event.
(c)The affected party cannot rely on the benefit of this clause if the supervening event is:
i a pre-existing cause, or state of affairs, known to the affected party; or
ii intentionally or negligently caused by the affected party; or
iii reasonably foreseeable by the affected party in the context of the warranties as to competence, capacity, expertise and otherwise given by the affected party, and not expressly disclosed to the non-affected party before the date of this Forestry Contract; or
iv an act of a third party making performance impossible, if that act of a third party was reasonably foreseeable by the affected party, and not expressly disclosed to the non-affected party before the date of this Forestry Contract; or
v a lack of funds, or an inability to use available funds."
Clause 12.5 speaks not of the rights of the parties but of the "burden of proof". Why it does this is inexplicable. Burdens of proof concern the conduct of litigation and identify which party has to adduce evidence on, and establish which, issue. The general rule is that the party who asserts a fact carries the burden of proving it. Thus, cl 12.5(a)(i) is unnecessary and adds nothing to cl 12.4. Clause 12.5(a)(ii) and (iii) are repetitive of each other and of the primary clause, cl 12.2, which refers to a supervening event that frustrates the affected party's ability to perform its obligations under the contract. Clause 12.5(a)(iv) is another repetition. Clause 12.5(a)(vi) is a repetition of cl 12.5(a)(v). Clause 12.5(a)(viii) which reads, "As part of the burden of proof, the affected party has a duty to show what action has been taken to perform its obligations under this Forestry Contract, regardless of the occurrence of the supervening event", is meaningless. Fortunately, par(b) does not fall for consideration in the present matter. I say fortunately, because its meaning is difficult to discern. If the affected party has established that a supervening event has frustrated its ability to perform its obligations under the contract and the supervening event in fact prevented the affected party from fulfilling its obligations (if there is any difference between those two expressions), it is difficult to see the relevance of a hypothetical future event which did not, and will not, arise. In any event, the clause spells out no consequence in the event of the non-affected party either discharging or failing to discharge the "burden of proof" referred to in par(b). Equally fortunately, par(c) is also not relevant to this contract.
Clause 12.7 of the Forestry Contract Code provides that "If this Forestry Contract is terminated under this clause", the affected party must give at least 15 days' notice to the non-affected party. Presumably it does not mean "this clause", but means under some other clause, for cl 12.7 confers no right to terminate anything. Even if that assumption is correct, it is completely unclear whether a failure to give 15 days' notice will defeat the right of termination or merely sound in damages to the non-affected party.
Clause 12.8 provides that "If this Forestry Contract is terminated under this clause" the principal must pay for contract services completed before the effective date of termination, but no other payments. Presumably that would follow as a matter of common law if the contract is terminated. Clauses 12.7 and 12.8 have no particular bearing in this case, but do have a bearing on the provisions of cl 12.2 because it seems to me that they indicate an intention on the part of the Parliament in drafting this Code, to give an affected party the right to terminate a forestry contract if the supervening event frustrates the affected party's ability to perform its obligations and provided there has been compliance with the conditions set out in cl 12.4 and cl 12.5. Although this construction strains the language of cl 12.2, not to so construe it would deprive it of any effect.
The Award
The arbitrator's approach to the issue of whether the applicant was entitled to terminate the contract was to construe cl 12.2 and cl 12.5 as conferring a right to terminate if a supervening event frustrated the applicant's ability to "perform its obligations" under the contract. The arbitrator said that "frustrate" should be given its ordinary meaning, and that it was common ground at the arbitration that the common law doctrine of frustration had no "real part to play in the interpretation of cl 12". He concluded that the right to terminate should be interpreted in the light of the provisions of cl 12.5(a)(ii), (iii) and (iv). He noted the repetitious nature of these provisions and concluded that the issue was whether the supervening events relied upon by the applicant operated in a manner that prevented it from performing its contractual obligations, had that effect, and was the only relevant cause of the inability to perform those obligations.
At par73 of his Award, the arbitrator said that Mr McElwaine, who was counsel for the applicant at the arbitration and upon this application, correctly identified the relevant obligations of the applicant under the contract as follows:
"— To make available the monthly quota for harvesting and delivery;
· To accept and unload all wood delivered within specification to the destinations controlled by Gunns;
· To pay the contractor for each tonne or cubic metre of wood delivered in accordance with the agreement at the specified rates."
There was no issue that as at the date of the purported determination of the contract the applicant was, and still is, able to pay for each tonne or cubic metre of wood delivered at the agreed rate.
The applicant's case at the arbitration and on this application was described by the arbitrator as being put on the basis that "the supervening events made it commercially unacceptable to continue to buy a product which could not be sold" and that "… the relevant circumstances made the continuation of the contract commercially unrealistic and lacking business sense".
The arbitrator rejected this submission and found, at par75:
"However, in my opinion the concept cannot be extended that far. To my mind, there is no warrant to read 'prevent' in 12.5(a)(ii) and (iii), as having anything other than its ordinary meaning. According to the Shorter Oxford Dictionary 'prevent' is 'to stop, keep, or hinder from doing something … to defeat, bring to naught …'. In my opinion clause 12.2 and 12.5(ii) and (iii) are intended to provide for the situation where the supervening event prevents the performance of obligations in a direct and immediate sense, and not in the sense of economic changes making performance commercially more onerous or less attractive, however significantly, than might have been originally contemplated by the affected party." [original emphasis]
Mr McElwaine submitted that it is apparent on the face of the Award that an error of law occurred in that paragraph by confining the meaning of cl 12.2 to a situation where the supervening event "prevents the performance of obligations in a direct and immediate sense, and not in the sense of economic changes making performance commercially more onerous …".
The contract was for the delivery of 30,000 tonnes of pulpwood per annum, plus saw logs. The arbitrator found that, based on performance to the date of the hearing, of the pulpwood delivered, only approximately 30 to 34 per cent comprised the unsaleable low quality woodchips. Thus, the alleged supervening event only affected about one-third of the contractual obligations identified by Mr McElwaine. The arbitrator found, at par76 of his reasons, that the contract was not severable and that on any view of the supervening event, a substantial part of the contract could still be performed. He said:
"Further, clause 12 does not seem to contemplate the severability of discrete obligations under a contract, so as to entitle termination where a substantial part of the contract can still be performed. On its face it must relate to the 'essence' of contract; ie, the fundamental obligation or set of obligations of each party."
Mr McElwaine contended that this also constituted an error of law.
Should leave to appeal be granted?
The originating summons identifies the following questions of law:
"(i)whether upon a proper construction of the provisions of clause 12 of the Forestry Fair Contract Code 2003 (the Code) the arbitrator correctly determined that a supervening event does not include economic changes which make performance of a contract commercially more onerous or less attractive, however significantly, than might have been originally contemplated by the affected party; and
(ii)whether upon a proper construction of the provisions of the Code the arbitrator correctly determined that a supervening event is not applicable to circumstances which relate only to one third of the product the subject of the contract which is claimed to be the subject of a supervening event."
I think that the provisions of the Commercial Arbitration Act, s38(5)(a), are satisfied. Clearly, the determination of those questions of law could substantially affect the rights of both parties to the contract. However, in addition to par(a), the grant of leave is dependent upon the applicant satisfying the provisions of s38(5)(b), namely, by showing either manifest error on the face of the award or strong evidence of error of law and that determination of the questions "may add or may be likely to add substantially to the certainty of commercial law".
With respect to error on the face of the Award, recourse is often had to the following passage taken from the judgment of Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 203 at 225:
"The expression 'error of law on the face of the award' is one of a type well-known to courts. The award having been examined the question is whether there is apparent (and such is the denotation of the word 'manifest') an error of law. 'Manifest error' is an expression sometimes used in reference to reasons given by judges or the approach taken by juries: see, eg, s 107(c)(iii) of the Supreme Court Act 1970 and the judgments of Kirby P in Azzopardi v Tasman UEB Industries Ltd (at 151) and Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 171 at 181. It is used to indicate something evident or obvious rather than arguable: see generally per McHugh JA in Larkin v Parole Board (1987) 10 NSWLR 57 at 70 – 71. Nothing more is to be learnt from the language used but of course the discretion of the court as to whether or not it will grant leave remains and regard must be had to the requirement of subs (5)(a). The matters referred to by Lord Diplock in The Nema remain important factors in determining whether leave should be given."
In her judgment in Anaconda v Fluor Australia Pty Ltd [2003] VSC 575, Dodds-Streeton J set out a number of other authorities to the same effect at pars31 – 43. Included in those authorities is Energy Brix Australia Corp Pty Ltd v National Logistics Co-Ordinators (Morwell) Pty Ltd (2002) 5 VR 353 in which case Ormiston JA said, at 368:
"In the circumstances it is unnecessary to examine the relevant test as to what is 'manifest error of law' other than to cite the frequently quoted passage from the judgment of Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 203 to the effect that a manifest error may be demonstrated if there 'be powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law'."
There is, in my opinion, neither manifest error on the face of the award, nor strong evidence of error. In my opinion, the construction the arbitrator put on cl 12 of the conditions of contract is correct. Mr McElwaine submitted that cl 12.2 was anticipatory in expression and afforded a right to relief before non-performance actually occurred. That submission may be correct, but it does not assist the applicant in this case. The relevant event, as found by the arbitrator, was the loss of a market for the sale of approximately one-third of the wood supplied to the applicant in accordance with the contract. That event had no impact on the applicant's ability to make available the monthly quota, to accept and unload all wood delivered, nor to pay the contractor for such wood in accordance with the agreement. Clause 12.2 must be construed from an objective point of view, even if it was imposed on the parties by the provisions of the Forestry Act. As Isaacs J said in Cohen & Co v Ockerby & Co Limited (1917) 24 CLR 288 at 300:
"… the expressions, and particularly any elliptical expressions, in a mercantile contract are to be read in no narrow spirit of construction, but as the Court would suppose two honest business men would understand the words they have actually used with reference to their subject matter and the surrounding circumstances."
The argument advanced on behalf of the applicant would lead to great uncertainty. What if the market had not disappeared but become uneconomical so that the applicant had to sell the product at a loss or even at cost? Would that be a supervening event within the meaning of cl 12.2? I do not think so. I doubt if a reasonable business person in the shoes of the respondent, had he or she applied his or her mind to the construction of cl 12.2, would have regarded the clause as meaning that part of the contract could be excised from the whole if continued performance of that part ceased to be economically viable to the applicant. Such a construction would have to apply to saw logs and better quality woodchips, as well as the poor quality ones. It would lead to termination of parts of the contract whenever continued performance of those parts frustrated, not the applicant's ability to fulfil its obligations under the contract, but its ability to make a profit out of fulfilling its obligations under the contract.
In these circumstances I find that there is neither manifest error on the face of the Award, nor strong evidence that the arbitrator made an error of law. Leave to appeal is refused and the originating application is dismissed.
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