Huntsman Corporation Australia Pty Ltd v Qenos Pty Ltd

[2007] NSWCA 97

NEW SOUTH WALES COURT OF APPEAL

CITATION:      Huntsman Corporation Australia Pty Ltd v Qenos Pty Ltd   [2007]  NSWCA 97

FILE NUMBER(S):
40568/05

HEARING DATE(S):               29, 30 January 2007

JUDGMENT DATE: 30 April 2007

PARTIES:
HUNTSMAN CORPORATION AUSTRALIA PTY LTD  ACN 083 984 187  (Appellant) 
QENOS PTY LTD  ACN 054 196 771  (First Respondent) 
OLEFINES PTY LTD  ACN 005 625 276  (Second Respondent)

JUDGMENT OF:       Mason P Hodgson JA Santow JA   

LOWER COURT JURISDICTION: Supreme Court - Common Law Division

LOWER COURT FILE NUMBER(S):          SC 50057/04

LOWER COURT JUDICIAL OFFICER:     McDougall J

LOWER COURT DATE OF DECISION:    3 June 2005

LOWER COURT MEDIUM NEUTRAL CITATION:
[2005] NSWSC 494

COUNSEL:
F M DOUGLAS QC/ D VILLA  (Appellant) 
J GLEESON SC/R FRANCOIS  (Respondents) 

SOLICITORS:
Minter Ellison  (Appellant) 
Cornwall Stodart (by its agents Hicksons)  (Respondents) 

CATCHWORDS:
CONTRACT – Construction – Whether basis for setting price had changed such as to constitute a “change” that was “material” in terms of the relevant provision of the contract. 

LEGISLATION CITED:

CASES CITED:
Browne v Dunn (1893) 6 R 67
Jones v Dunkel (1959) 101 CLR 298

DECISION:
Appeal dismissed.  Appellant to pay the first respondent’s costs. 

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40568/05
SC 50057/04

MASON P
HODGSON JA
SANTOW JA

30 APRIL 2007

HUNTSMAN CORPORATION AUSTRALIA PTY LTD v QENOS PTY LTD

Judgment

1. MASON P:  I agree with Santow JA. 

2. HODGSON JA:  I agree with Santow JA. 

3. SANTOW JA: 

   INTRODUCTION 

   The appellant, Huntsman Corporation Australia Pty Ltd (“Huntsman”) is the purchaser of ethylene from Qenos Pty Ltd (“Qenos”) the first respondent, pursuant to an Ethylene Supply Agreement dated 23 December 1998 (“the Agreement”) (Blue, 1, 103ff).  The Agreement was originally made between Huntsman as purchaser and Orica Australia Pty Ltd as supplier.  The obligations of Orica under the Agreement were novated to Qenos (then known as Kemcor Australia Pty Ltd) by deed made on 30 June 1999 (Red, 33T-34E).  The second respondent, Olefines Pty Ltd, is the owner of the Botany ethylene plant, and the guarantor of Qenos’ obligations to Huntsman. 

4. Pursuant to the Agreement, Orica agreed to supply and Huntsman agreed to purchase “Ethylene for the Purchase Price … until at least 30 June 2011” (cl 2), the latter being based on a particular published index selected for that purpose.  However, if that index used to calculate the Purchase Price “changes in a material way”, the Agreement in that event requires substitution of another index by a particular procedure.  This appeal challenges the decision of McDougall J, the trial judge, that such event had not occurred, that is to say there was no such change to the chosen index, but if there was it was not material.  To succeed the appellant must establish both that there had been such a change and that it was material. 

   OVERVIEW OF AGREEMENT 

5. “Purchase Price” is defined under the Agreement to mean “the purchase price set in accordance with clause 6” (cl 1.1).  Clause 6.1 in turn provided that the Purchase Price was to be the “US Gulf Contract Price” less certain export rebates, the details of which are not presently material. 

6. “US Gulf Coast Contract Price” is defined to mean: 

   “…the US Gulf Coast Contract ethylene ‘net transaction contract price’ per tonne for ethylene sales on the US Gulf Coast as published by CMAI at the end of each Month for the penultimate Month prior to the Month of delivery, converted into A$ using the daily average of the Hedge Settlement Rate for the penultimate Month prior to the Month of delivery.” 

7. CMAI is Chemical Market Associates, Inc. an organisation that publishes the monthly “Monomers Market Report”.  It publishes what it calls the “net transaction contract price” for ethylene sales on the US Gulf Coast, by way of an index utilised for pricing of ethylene. Other descriptive data and tables are provided.  The expression “net transaction contract price” is referred to throughout the transcript of evidence as the “NTCP” or the “NTP”, and also in other materials. 

8. The Agreement also contained a provision requiring the index used to calculate the Purchase Price to be redefined in the event of certain contingencies.  Clause 6.4 provided: 

   “If any published value or index (including the US Gulf Contract Price) used to calculated the Purchase Price changes in a material way, no longer reflects the US Gulf Coast contract price for ethylene, is discontinued or is otherwise unavailable, HCA and Orica must determine a substitute value or index.  If the parties cannot agree on a substitute value or index, the parties agree to appoint an independent expert to determine the substitute value or index.  The dispute resolution procedure set out in clause 16 will apply to the appointment.” 

   The published value or index relevant in this case is the NTCP. 

9. It should be noted that the expression “US Gulf Coast contract price for ethylene” (with lower case “contract”) is, I infer, not the same as the defined term “US Gulf Contract Price” (which is simply the NTCP). 

10. By way of Second Further Amended Summons (Red, 1) Huntsman sought various declarations and consequential relief, contending in paragraph 10 that by February 2001 the NTCP: 

    (a)          had changed in a material way; or

    (b)          no longer reflected the US Gulf Coast contract price for ethylene.

11. On 3 December 2004 Bergin J made orders for the separate determination of the issues raised by paragraph 10 of the contentions in the Second Further Amended Summons and in paragraphs 7, 23 and 24 of the Defence (Red, 28V-X).  The determination of those issues was heard by the trial judge, McDougall J, on 2-5 May 2005 and on 3 June 2005.  Judgment was delivered in which the trial judge held that: 

    (a)there had been a change in the methodology by which the NTCP was derived; 

    (b)nonetheless, the change was not of such significance as to constitute a change in the NTCP itself; 

    (c)even if it had changed, it had not changed “in a material way”; and 

    (d)the NTCP continued to reflect the US Gulf Coast Contract price for ethylene. 

12. As a consequence of that separate determination Huntsman accepted that the Second Further Amended Summons should be dismissed, and orders to that effect were made on 16 June 2005 (Red, 84). 

13. Huntsman now appeals against the findings referred to in 9(a) to (c) above.  Huntsman does not appeal against the finding in paragraph 9(d) above. 

    Background

14. The following background is intended to be non-controversial, save where a difference of view is identified between appellant and respondent. 

15. The trial judge adopted the following description of the Gulf Coast ethylene market from a Mr McElliott, an experienced buyer of ethylene. The US Gulf Coast market for ethylene is distinguished by significant infrastructure, being a series of pipelines connecting all participants and their storage facilities; judgment [13]. This level of connectivity gives the market significant flexibility, and the number of participants make it a very dynamic market; judgment [13]. Large buyers meet their ethylene supply needs by means of a number of short term contracts, between 3 to 5 years, and by “spot” purchases month to month for unexpected or very short-term needs.

16. During the 1970’s the market was very “structured” and “transparent” with respect to the prices paid by market participants; judgment [14]. Prices were determined by a fixed price discount level off a defined supplier announced market price; judgment [14]. However during the mid to late 1980s participants began using pricing mechanisms in supply contracts which required them to negotiate each month the price of the ethylene supplied for that month; judgment [15]. These private negotiations between individual sellers and buyers meant that the market was no longer transparent with respect to the price paid for ethylene supplied under those contracts; judgment [15] – [16]. This process of negotiation often worked with the supplier sending out list or benchmark prices to the buyer, and with discounts from those prices being negotiated between the supplier and buyer. Larger buyers would obviously have had greater negotiating power to negotiate any discounts. In this context, organisations such as CMAI began to publish reports to fill the information void and develop indices such as the NTCP; evidence of Mr McElliott affidavit 6 April 2005 para 19 (Blue, 82).

17. During the 1990s the types of pricing mechanisms and ways in which buyers could achieve discounts increasingly varied.  Pricing concepts such as blended prices began to be used which, in addition to the monthly negotiation, incorporated a specific element designed to achieve a lower overall price such as requiring or permitting a percentage of the amount purchased to be at spot prices or at tolled or export support prices.  Such pricing mechanisms were sometimes referred to as “blended” pricing mechanisms or contracts.  Other contracts, not relevant to this case, introduced margin sharing concepts and “virtual cracker” concepts; judgment [17] – [18] and McElliott affidavit paras 26-28 (Blue, 84-5). 

18. It was in this context that CMAI published a number of price indices in relation to the US Gulf Coast ethylene market as follows: 

• “contract benchmark price” or the ethylene benchmark contract price, being an attempt to reflect the list price or rack rate for ethylene.  This is the amount that a small buyer might expect to pay for ethylene supplied under contract without a discount; 

• “spot price” – a reflection of the price at which non-contract ethylene could be purchased;

• “net transaction contract price” or NTCP – this was the index the subject of the proceedings to which I have earlier made reference.  The trial judge found, contrary to Huntsman’s pleadings, that the NTCP was an attempt to reflect the discounted price paid by the top 10 volume US Gulf purchasers for “pure contract” volume.  The latter excluded volume purchased at spot prices, non-contract prices or export support prices or tolled prices; judgment [57] and earlier at [47] – [49].   Notably, Ms Hubbard, the Court Appointed Expert, in her further reports also agreed that NTCP was only intended to measure the “pure contract” element of prices being achieved by the large buyers; Ms Hubbard’s Second Supplementary Report dated 22 April 2005, page 3. 

• “average acquisition price” or AAP – this was an attempt to reflect the weighted average price of contract volume purchased at both “pure contract” price and volume purchased under contract but incorporating any other discounts (i.e. spot blend, tolled ethylene, export support). This average acquisition or AAP price was calculated by CMAI by using a blend of NTCP and the spot price index; judgment [26].

  NTCP Prior to February 2001

1. Prior to February 2001, and at the time the contract between the parties was entered into, the trial judge found that the two key CMAI indices, Contract Benchmark Price and NTCP, operated as follows: 

   (a)CMAI would form an “opinion” as to the monthly “Benchmark Price”, being the amount small buyers could expect to pay, by moving the previous month’s “Benchmark Price” in accordance with what it considered to be the “movement” in price agreed during that month (eg, up 1 cent, down ½ cent or steady); judgment [22] to [24].  

   (b)CMAI would then form an opinion about the monthly NTCP, being the amount large buyers could expect to pay, by trying to ascertain by how much the large buyers had negotiated a discount below the Benchmark Price; judgment [23] – [24]. 

2. The respondent in its written submissions fairly summarised the evidence said to underlie and explain these findings as to the process by which CMAI formed its opinion on the Benchmark Price and the NTCP (Orange, 30 paras 12-22). 

3. First, at the time CMAI first introduced the NTCP in the late 1980’s and early 1990’s, the most common pricing mechanism applicable to the volume which a buyer was contractually committed to buy was the monthly-negotiated price.  A small buyer would expect to buy at a posted or Benchmark Price level, whereas the top 10 buyers would expect to buy at a lower level.  Each month there would be a movement (up, down or steady) evident at both levels.  Because most of the contract volume was priced as per the monthly agreements, CMAI’s opinion as to NTCP was a good measure of the range of discounts available to the large buyers in the contract market; see letter dated 2 March 2004 (Blue, 1294) of Mr Eramo, author of the ethylene section of the CMAI Monomer Market Reports as Vice-President of CMAI, who gave evidence in the trial by audiovisual link. 

4. Second, by no later than early 1998, that is before the present parties made their agreement in December 1998, CMAI was as Qenos put it, confronted with a challenge.  CMAI received market feedback that parties were agreeing upon contracts where part of the minimum contractual volume would be priced as per the monthly settlement negotiations, whereas other parts of the minimum contract volume would be priced at export support, spot or tolled ethylene price (Eramo, Black, T, 80M-81T).  By purchasing part of the minimum contractual volume at a price set by reference to export support, spot or tolling, the contract buyer was able to achieve a discount bringing the average price for the contract volume down (Eramo, Black, T, 815).  Mr Eramo confirmed that CMAI took a decision by May 1998 that the NTCP Index would continue to focus solely on the discounted price which the large buyer was able to achieve for contract volume through the monthly settlement process.  Conversely, it would not seek to measure or incorporate discounts being obtained through the use of export support, spot or tolling in obtaining the contract minimum (Eramo, Black, T, 81U-82B). 

5. Third, CMAI also came to learn before the end of 1998 from market feedback that contracts were emerging where the price for contract volume would not be set through a monthly negotiation.  Rather the price would be whatever was the NTCP identified by CMAI for the month, sometimes with a further discount taken off (Eramo, Black, T, 84H-U).  This was therefore another form of discounting occurring in the market for pure contract volume.  The position was taken by CMAI in 1998 that it would not attempt to capture, within its NTCP index, a measure of discounts which buyers were receiving who specified as the contractual price NTCP itself less a discount, as this would drive down the price.  “We end up with a death spiral in the industry” as he put it (Eramo, Black, T, 100K and see also Eramo, Black, T, 85N, 96S and 100K). 

6. Fourth, the corollary of the decision of CMAI as early as 1998 to continue to confine NTCP to an opinion of a discounted price being achieved by large buyers for that part of their contract volume the subject of monthly settlement, was that CMAI commenced, from as early as 1998, to develop a different index being the Average Acquisition Price (“AAP”).  Mr Eramo confirmed that AAP had been developed and included in the CMAI report in 1998 and indeed was already included in charts comparing AAP and NTCP at that time (Eramo, Black, T, 90M-Q; Blue, 200-1, 218, 230).  Qenos submits as follows.  Although it may not have been entirely clear from the face of Mr Eramo’s 2 March 2004 letter (Blue, 1295), nonetheless when Mr Eramo referred to CMAI’s development of AAP Mr Eramo confirmed that the concept he was referring to had been developed no later than May to July of 1998 (Black, T, 107F-I).  Mr Eramo also confirmed that when he said in his letter that AAP was similar to the original intent of NTCP, he was referring to the original intent back in the late 1980’s and early 1990’s (Black, T, 107K). 

7. Fifth, Qenos submits that what follows from the above is that in 1998, and before the contract date, NTCP had been confirmed by CMAI as an index representing its opinion of how well large buyers could obtain that part of their contract volume which was the subject of negotiation on the monthly settlements.  When faced with information that large buyers were now acquiring significant parts of their contract volume in other ways, and thereby achieving other discounts, Qenos submits that CMAI did not change NTCP so as to capture all of the available discounts achieved by large buyers for their contract volume.  Instead, it created the new index AAP, which would achieve this broader task.  Although Mr Eramo described AAP as being similar to the original intent of NTCP, this did not represent any change in NTCP.  Rather it was that, in the new market conditions, where a broader range of discounts is available for contract volume, NTCP continues to measure what it always did; that is, the price for “pure” contract volume.  The new index, AAP, was established which seeks to capture a broader range of discounts available under contract (through use of export support, spot or tolling as the reference point for portion of the volume).  In any event, all this has been confirmed in respect to NTCP prior to the critical date of December 1998. 

8. Sixth, Qenos then poses this as a critical question.  What, prior to December 1998, was the process by which CMAI formed its opinion under NTCP of the discounts being achieved by the large buyer for that part of their contractual volume which was priced on the monthly settlements?  Mr Eramo’s evidence on this question is set out in the judgment at [83] quoted below. 

   “QHave a look if you need to at any of the subsequent reports through to December 1998, but what I wanted to suggest is that when we read your text boxes at the time, you do not make any reference to some extra check for discounting of NTP over and above doing your very best to ascertain what is happening on the monthly settlements. Take your time if you need to look at your other reports, but that is what I suggest you get from the text box for the rest of the year? 

   ANo, I — I really don't need to look at the rest of them. You are absolutely correct. The text box is designed to provide our clients with an assessment of the monthly negotiations surrounding the contract reference prices and — and then our opinion, of course, as it is being expressed in there through the net transaction price. The — the piece that you are missing here is in order to assess the reality in the market place, we also have all kinds of discussions, lots of them confidential, with our clients and if we start publishing those in our reports then we won't be in business very long but the idea is to try to represent what is happening in the market place, what is a reasonable assessment, after the negotiations have completed, after the reference prices have moved, what is a reasonable assessment of where those net discount prices wound up. That's what we were trying to do and you will find going backwards from 98 from the time the net transaction price started, that there was lots of movement in that number which was as a result of those discussions with — with buyers and sellers to try to understand the reality in the market place. 

   QWould you agree that in 1998, what is recorded in the text box as to the movement in the monthly settlement up or down by a cent or so then gets faithfully reflected in the box or the table showing the NTP price each month? 

   AThat's correct. 

   QAnd would you also agree that nowhere in the 1998 reports can we find any discussion of discounts other than the monthly settlement which you are bringing into account in NTP? 

   AThat is correct. 

   QSo that a reader of your reports would conclude that you are doing your best to measure the movement on the monthly settlement between the large buyers and the sellers and when you formed a view that the market has settled, you then adjust NTP by that amount? 

   ……

   AThat's correct. (T 89.7-.58) 

1. Two steps were involved.  The first step was that CMAI would obtain the feedback from the large buyers as to what had occurred on the monthly settlements (up, down or steady).  This would be reported in the CMAI monthly reports and prima facie the reported NTCP price would move up or down from the previous month’s price in accordance with this movement in the monthly settlement. 

2. The second step in the process, although one not expressly referred to in the CMAI reports, was that CMAI would seek to do a form of reality check on the NTCP it obtained by reference to the monthly settlements to see if it really reflected the price being achieved by the large buyer for contract volume through the monthly settlement process.  In cross-examination Mr Eramo affirmed that there was this process of testing the discounts evident from the monthly settlements in the marketplace (Eramo, Black, T, 82F and 87O-T).  The outcome of this process of testing in terms of adjustments the trial judge records; judgment [57]: 

   “57……

   (4)      A special adjustment was needed in the second half of 2000 (as it had been needed in 1993 and 1995) to ensure that the NTCP remained in line with prices actually being paid by those top ten buyers for their pure contract ethylene requirements; and that adjustment was made.” 

3. When asked to explain how a large buyer could achieve a discount for that part of its contractual volume subject to monthly negotiation other than through the settlement itself, Mr Eramo gave two instances:

   (a)that the discount would be locked in up front by providing a discount off a reference price that may be greater than other large buyers had achieved (Eramo, Black, T, 93L-P); 

   (b)that on a particular monthly settlement an individual buyer might be able to force a larger discount on the seller, perhaps through presenting a competitive situation, than other large buyers were achieving through the monthly settlement (Eramo, black, 94B-H). 

4. I would agree with Qenos’ summation that, on the evidence, the focus of NTCP was on the discounted prices which large buyers were able to achieve on the part of the contract volume exposed to the monthly settlements.  This required CMAI’s primary focus on feedback which it was achieving on how the price moved in the monthly settlement for large buyers, but also included a form of reality testing. 

5. Seventh, although the CMAI reports refer to both a Benchmark Price and NTCP, Mr Eramo confirmed that at least by 1999, 

   (i)most of the dealings between large buyers and sellers were largely done without reference to the sellers’ list prices or Benchmark Prices (Eramo, Black, T, 940), and 

   (ii)the Benchmark or list price remained very important for the medium tier or small buyers (Eramo, black, T, 94V).  By the time 2001 was reached Mr Eramo confirmed that the Benchmark or list price was virtually irrelevant to what the major buyers and sellers were doing as they settled the contract each month (Eramo, Black T, 97T). 

6. Eighth, it is important to understand what happened in the fall of 2000 (October).  Mr Eramo confirmed that large buyers brought to his attention that the prices they were achieving on the monthly settlements were lower than the published NTCP, meaning that it was about one cent out of step (Eramo, Black, T, 90C-J).  CMAI confirmed in its June 2000 report (Blue, 483-4) that NTCP would continue to do what it had always done, which was to capture the net contract price for those traditional contracts that involved arms’ length fully negotiated prices on a monthly basis.  However, because of the feedback from buyers and sellers, it would consider reducing NTCP by between 0.50 – 0.75 cents per pound.  This it subsequently did.  This is the special adjustment referred by the trial judge in the passage at [57] quoted above. 

7. CMAI confirmed the decision it had made as early as 1998 that NTCP would continue to focus solely on the form of discount which it had originally sought to capture, but making the special adjustment as it had earlier in 1993 and 1995 in the light of this market feedback (Eramo cross-examination Black T, 92D-S). 

   NTCP After February 2001

8. Huntsman at para 20 of its written submissions described what from February 2001 occurred in these terms: 

   “20.From February 2001 the method of deriving the NTCP changed.  It was no longer an estimate made by CMAI as to the level at which top buyers were able to purchase ethylene following the monthly settlements and taking into account discounts available to those purchasers: Blue 6/1294U-W; 1303H-I.  Since February 2001, the difference between NTCP and  the Benchmark Contract Price [was] fixed at 4 cents per pound: Blue 6/1303J; Black 44R-W; 97X-98R.” 

9. Qenos at trial successfully characterised this not as a change in the NTCP, but in its methodology; and as in any event not a material change. 

10. The trial judge then stated his conclusions on what happened in terms which are not entirely accepted by either side, depending however on what it is understood the trial judge actually meant: 

    “[44]I conclude that the method by which CMAI derived, or calculated, the NTCP changed after January 2001, substantially for the reason given by Mr Eramo: because CMAI ceased to attempt to calculate discounts from contract settlement prices and from February 2001 moved the index only by reference to reported movements in the contract settlement price. 

    [45]In substance, CMAI assumed the level of discounting from February 2001. Mr Eramo explained this as a fixed US$0.04 discount to the contract settlement, or benchmark, ethylene price. Instead of focusing on the settlement price and the reported level of discounting, CMAI focussed on movements from the previous month’s prices: what Mr Eramo called the “delta”. It adjusted the previous month’s NTCP by reference to its understanding, or opinion, of the average movement over the top ten buyers from their previous monthly contract price.” 

11. Upon the conclusion of oral argument on appeal the Court gave limited leave, to make further written submissions concerning the proper meaning to be given to these findings, with that leave extending to permit Qenos to file any necessary notice of contention as to what the trial judge should have found on this question if [44] and [45] of the judgment were construed as Huntsman contends. 

12. This led to the filing of an amended notice of contention and written submissions from Qenos, a reply by Huntsman followed by further submissions by way of competing notes on whether: 

    (a)Qenos in its written submissions had filed what amounted to fresh submissions outside the leave insofar as they went beyond “an attempt to bring the record in line with the argument already presented”, and 

    (b)Huntsman had gone beyond both the leave granted and grounds 9 to 11 in the Notice of appeal on the basis that those grounds “do not clearly or at all raise any challenge to the specific finding by the trial judge that there was no significant shift in the relationship between the NTCP and such other indicia of price as may be derived from the evidence before him” (Judgment at [1193]) and in seeking to challenge the findings of fact made elsewhere at judgment [108] to [112] and [122], as well relying on a two-page aide memoire headed “Analysis of Respondents’ Pricing Data” which was never placed before the trial judge or the Court of Appeal prior to the appellant’s later submission of 12 February 2007 and thus should “not be entertained by the Court of Appeal”. 

13. I deal under Disposition with these various submissions to the extent they require to be resolved. 

    The Primary Judgment 

14. What follows is a summation of the way in which the trial judge portrayed the evidence and sets out his Honour’s reasons for concluding that clause 6.4 did not apply in the circumstances as he so found them.  It should be read with the above.  I will, in setting out that summation concentrate on those grounds of appeal that are still pressed. 

15. Four witnesses gave evidence on how the NTCP methodology had changed in February 2001; Mr Eramo from CMAI, Ms Hubbard from Union Carbide (a major buyer appointed as a court expert), Mr Culpon from Huntsman and Mr McElliott, another experienced major buyer. 

16. Mr Eramo’s evidence was that from the late 1990s the relevant ethylene supply agreements began to set prices by reference to the NTCP less a discount. As such, as of January 2001, CMAI stopped estimating the average negotiated discount (as negotiated by large buyers) when calculating the NTCP and instead used a fixed US$0.04 discount to the benchmark price. This was to avoid what Mr Eramo called the “death spiral” in prices (see earlier) whereby the supply agreements would be setting prices with a discount applied upon CMAI’s already discounted index. (See [34]-[36]). The trial judge accepted this evidence as to the change in methodology, which was also supported by Ms Hubbard and not contradicted by the other witnesses on the issue ([40]).

17. The trial judge held that it was the NTCP method for deriving the NTCP that changed after January 2001 ([44]) not the index itself; with greater focus on changes from month to month in prices rather than efforts to estimate the average discount achieved by large buyers. 

    Did the change in methodology mean that the NTCP changed? 

18. The trial judge accepted that despite the “change in methodology”, the NTCP was still designed to perform the same role after February 2001 and measure the same price movements ([46]). 

19. The question of any change needed to be considered by reference to the NTCP as it stood in 1998 when the relevant contract was made ([48]). 

20. In 2000 a special adjustment was made to the NTCP after market feedback that the index had moved out of line with real prices ([50]).  Similar adjustments had been made in 1993 and 1995.  The trial judge rejected the view that after 2001 no further such special adjustments would be made ([52]).  The trial judge considered that Mr Eramo had given inconsistent evidence on the issue ([52]).  CMAI reports into 2002 continued to state that special adjustments would be made if warranted ([53]).  The trial judge held that the NTCP and AAP indices continued to be used for their pre-existing purposes into 2002 ([54]) and that CMAI remained prepared to make special adjustments if necessary ([55]).  No such adjustment was however warranted by market conditions.  At [57] the trial judge sets out his conclusions on these and related issues; the appellant’s challenge being only to that quoted in (4) and (8) below: 

    “(1)Prior to February 2001, the NTCP was CMAI’s opinion of the “pure contract” ethylene price paid by the ten largest buyers in the US Gulf Coast market. 

    (2)Both before and after February 2001, the NTCP was adjusted to reflect movements in monthly contract settlement prices. 

    (3)The NTCP was not intended before or after February 2001 to capture prices achieved other than by monthly negotiated settlements, or overall prices (or “discounts”) achieved by the use of spot, export support or tolled prices. 

    (4)A special adjustment was needed in the second half of 2000 (as it had been needed in 1993 and 1995) to ensure that the NTCP remained in line with prices actually being paid by those top ten buyers for their pure contract ethylene requirements; and that adjustment was made. 

    (5)As at January and February 2001, the NTCP remained CMAI’s opinion of the price paid by the top ten ethylene buyers for their pure contract requirements.

    (6)Some of the largest top ten buyers continued after February 2001 and to the present day to use the monthly settlement negotiations to determine part of their overall ethylene pricing, and continued to report the results of those negotiations to Mr Eramo.

    (7)From February 2001 on, the NTCP tracked movements in monthly settlement prices as reported by those buyers (and their sellers) to Mr Eramo, at a fixed discount of 4 cents per pound to Mr Eramo’s opinion or understanding of those monthly settlement prices. 

    (8)CMAI remained willing to make further special adjustments if market evidence required this to be done, to ensure that the NTCP remained in alignment with those prices. 

    (9)No top ten buyer has suggested to Mr Eramo after November 2000 that a further, special, or one off, adjustment was necessary to bring the NTCP into line with market prices. (Nor, lest it be thought that Mr Eramo did not sufficiently have his ear to the ground, is there any evidence to suggest that any other market participant thought after November 2000 that any such adjustment was necessary.)” 

    Other relevant circumstances

21. The trial judge found three further issues that showed the NTCP had not changed in the relevant period: 

    (1)CMAI retained the NTCP in its reports and saw it as of continuing commercial significance ([59]); 

    (2)CMAI continued to provide comparative data quoting the NTCP before and after February 2001 without any notation or caveat indicating a change in the significance of the index ([60]); 

    (3)CMAI continued to use the NTCP as an element in calculating the AAP without any notation or caveat indicating a change in the significance of the NTCP index ([63]). 

    Ms Hubbard’s evidence

22. The trial judge rejected Ms Hubbard’s evidence to the effect that the NTCP had changed in around January 2001 ([66]).  The trial judge preferred the view that although the methodology changed, the index itself (in terms of purpose and significance) did not (see [90]).  That Ms Hubbard was the court appointed expert, cross-examined as such, did not remove the necessity to assess that evidence ([66] to [71]). 

    Statement of opinion or statement of fact

23. The trial judge rejected the appellant’s submission that the NTCP became a statement of fact rather than opinion after January 2001, concluding that the settlement price continued to be based on opinion after January 2001 ([78]).  The trial judge considered that the text boxes included in CMAI reports over the relevant years showed that the index remained an opinion (see [81]-[83], [86]-[88]). 

    Conclusion

24. The trial judge concluded that the change in methodology in February 2001 was not a change in the NTCP as it stood from December 1998 ([91]).  The trial judge continued however, to consider whether, if he were wrong in this conclusion, any change was “material” in terms of cl 6.4. 

    Was the change material?

25. The trial judge considered that a material change would mean either that the NTCP no longer represented the same information or that adopting the NTCP imposed different obligations in relation to some objective reference point ([94]).  For the reasons above, the trial judge reiterated that no material change in the sense of the NTCP no longer representing the same information had occurred ([96]). 

26. The trial judge then considered materiality in the second sense (i.e. of imposing objectively different obligations).  His Honour observed that while there was no clear external reference point for this purpose ([100]), there was scope for comparison between the NTCP and other objectively determined prices or indices ([101]). 

27. The trial judge rejected Ms Hubbard’s evidence on this point as unclear and unsubstantiated by other evidence ([106]).  The trial judge accepted Mr McElliott’s evidence that the NTCP tracked the real prices he observed, albeit at a higher level.  The differential was remarkably consistent such that the NTCP was an accurate measure, notwithstanding that the weighted average was consistently below the NTCP ([111]).  This was borne out by the fact that for the period from January 1998 until about September 1999, the average “discount” to the NTCP was 16% and from about September 2001 to about September 2003, 17%; see exhibit RM4 (being now Confidential Blue, 292).  Thus

    “Although (as one might expect) the relationship changes from month to month, it is, as with the other material identified by Mr McElliott, substantially consistent. The actual contract price is always lower than the NTCP, and they move in unison. The negotiated price tracks with substantial accuracy the movements in the NTCP.” 

28. Qenos also provided evidence of the consistent relationship between the total weighted average price and the NTCP, which further supported the view that there was no material change ([112]).  Here I should quote the trial judge as to the position pre and post mid 2001 as derived from Qenos’ analysis of the pricing data, itself said to be not challenged at trial: 

    “Although it is correct to say that the relationship was more closely consistent up until about mid 2001 than it was thereafter, the two lines move in the same way thereafter although there is more fluctuation in the interval between them.” 

29. The trial judge concluded first that there was no significant shift in the relationship between the NTCP and other price indicia ([119]) and second that any change in the NTCP was not material ([124]).  To the extent that, at trial, the appellant took issue, it was not with the first proposition.  Rather its challenge was based on the evidence of Mr Evans supported by the evidence of the court expert Ms Hubbard. 

30. Given the trial judge’s primary conclusion that the NTCP had not changed, it was not necessary for him to deal with the submission that a Jones v Dunkel inference was justified by the appellant’s failure to provide pricing data ([114]-[118]).  

31. The trial judge likewise considered that it was not necessary to consider the Browne v Dunn submission from Huntsman regarding the extent to which Qenos put the pricing data before the appellant’s witnesses ([152]).

    DISPOSITION

32. The essence of Huntsman’s appeal argument can be distilled in these terms.  That a change did occur in the NTCP; one which was moreover material in terms of clause 6.4.  This was by reason of what occurred after January 2001, relying, inter alia, upon what the trial judge concluded in the earlier quoted [44] to [45] of the judgment.  The appellant seeks to dispel the trial judge’s later conclusion that the change there referred to was a change not in the NTCP as such, but merely a “change in methodology”; one moreover that was not material. 

33. I set out below in summary form the arguments marshalled by Huntsman and evidence relied upon by Huntsman in support of the first finding, namely that there was a change to the NTPC, and not merely a change in its methodology: 

    (a)Mr Eramo gave evidence the NTCP had changed and this was not contradicted (Black T, 92X-93D; 99M-P; 105F-K; Blue, 1295M-Q and see para 25 of appellant’s written submissions of 14 July 2006); 

    (b)In finding that Mr Eramo would be prepared to make adjustments to the NTCP in the future if there was a need to do it, the trial judge did not understand that Mr Eramo was only referring to the ratio used to blend NTCP with the spot price and not to the NTCP itself (see Black T, 102F-11, 102M-S, 103B-C and para 29 of appellant’s written submissions); 

    (c)The fact that CMAI continued to report and rely upon NTCP after February 2001 did not mean there had not been a change “to the concept” (Black T, 77L-T; appellant’s written submissions para 31); 

    (d)The trial judge’s rejection of Ms Hubbard’s evidence that there was a change in NTCP misunderstood her assertion that the NTCP had changed because CMAI would no longer make any adjustments to it (compare judgment [69] – [70] to Blue, 6/1303G-M; Black T, 60P-S; appellant’s written submissions para 35);  and

    (e)The trial judge’s finding that the monthly movement was not a statement of fact but involved an element of opinion misunderstood the evidence (compare judgment at [72] and following to the appellant’s written submissions para 37 and following).

34. Huntsman then seeks to challenge the second finding, namely that if change there were, it was not material.  That challenge is based on the following arguments: 

    (a)a change from exercising an opinion to undertaking a mere mathematical calculation is a material change (appellant’s written submissions at para 45), “whereas previously it was an expression of opinion as to the level of pure contract discounting, thereafter it became a fixed differential below the Benchmark Contract Price”; 

    (b)the NTCP no longer reflected an opinion about “what discounts were being achieved by top ten buyers on the US Gulf Coast”.  As the appellant’s written submissions put it (para 47) “it was important to [the parties to the contract] that the price to be paid by Huntsman was a price that reflected the expression of an opinion that itself was based upon market information derived directly from market participants as to the levels of discounting, rather than a price that was to be arrived at artificially and irrespective of what opinions may have been expressed about the levels of available discounting”; and 

    (c)the fact that the relationship between NTCP and actual pure contract being achieved by top 10 buyers had not changed was not determinative because the change in methodology meant there was the potential in the future for the NTCP to fall out of line with the prices being achieved by the top 10 buyers on the US Gulf Coast and have a financial impact (appellant’s written submissions at paras 49 to 50).

1. I shall refer later, in relation to [44]-[45] of the judgment and the further submissions made after close of oral argument, to the evidence sought to be relied on by the appellant over the respondent’s objection, said by the appellant to be by way of submission only.  It concerns in particular a spreadsheet, not itself before the trial judge but supposedly based on evidence before the Court of Appeal and said to summarise the NTCP compared to a calculation of Total Weighted Average price paid.  The period covered is: 

   (a)between 1998 to 2000, before the January/February 2001 claimed change in the NTCP, and 

   (b)from 2001 to 2004 after that claimed change. 

2. It is said by the appellant, but disputed by the respondent, to demonstrate: 

   (a)a significant difference between NTCP and the total weighted average price paid by those buyers from whom pricing data was available, and 

   (b)that the NTCP was thus shown to have “fallen out of line as a result of the change”. 

3. It is instructive to consider the two questions of whether there was a change and whether that change was material, recognising that their separation is to a degree artificial.  Inherent in both questions is a difference of degree.  Thus it is a question of degree as to whether the NTCP continued to represent that which, before the change relied upon, it had previously represented or purported to represent, focusing on the characterisation of the NTCP in that before and after sense.  Likewise questions of degree enter into whether, as a result of the change and compared to some external and objective or quantifiable reference point, the pricing obligations imposed by adoption of the NTCP became materially different or imposed materially different benefits and obligations on the parties in terms of consequences; judgment [94] and [95]. 

4. The appellant and respondent take a radically different view as to the nature of that change which occurred after January 2001.  To the appellant, the change which occurred after January 2001 was to fix the differential between the benchmark price and the NTCP at 4 cents per pound, ceasing to calculate the discount negotiated monthly between buyer and seller.  This meant deriving the NTCP from the benchmark price less 4 cents per pound; see Appeal transcript T, 50.20-.36.  In so doing, the appellant relies upon expressions used in the judgment at [44] quoted above in referring to “discounts from contract settlement prices” as in effect a top-down calculation process to get to the NTCP.  The appellant also relies on the first two sentences of the judgment at [45], which read:  “In substance, CMAI assumed a level of discounting from February 2001.  Mr Eramo explained this as a fixed US$0.04 discount to the contract settlement, or benchmark, ethylene price”. 

5. The respondent takes issue with this interpretation of the judgment at [44] to [45].  But in any event the respondent contends that this interpretation, even if correct, could not stand with the trial judge’s other findings and with the evidence.  Essentially, the respondent’s contention was that “when the differential between NTCP and benchmark was ‘locked in’ at 4 cents, CMAI was using the information from the monthly settlements to derive the NTCP and arithmetically adding on 4 cents for the benchmark” (see evidence of Mr Eramo at Black T, 98H).  In other words, the process was not top-down but bottom-up.  From 2001, the NTCP drove the Benchmark Price and not vice versa (evidence of Mr Eramo at Black T, 98L).  The other related evidence was that Mr Eramo made clear that by the late 1990’s the seller’s best price or Benchmark price was largely irrelevant.  This was because the large buyers were focusing on negotiating the actual price month to month on an arm’s length basis (Eramo Black T, 94X).  Moreover, from 2003 onwards, the benchmark price ceased to be reported next to the NTCP in the table in the monthly reports (evidence of Mr Eramo, Black T, 98S). 

6. This provides a basis for the finding of the trial judge at [85] as follows: 

   “Throughout 1998 (and specifically as of December 1998 when the supply agreement was made), Mr Eramo was seeking to adjust the NTCP monthly by the measure of the movement in the monthly settlement between large buyers and sellers.  In substance this is precisely what Mr Eramo continued to do in February 2001 and thereafter.” 

   I consider that the trial judge was entitled to make that finding.  To the extent the conclusion he expresses earlier at [44] to [45] is inconsistent, it is an inaccurate statement of the evidence from Mr Eramo that the trial judge appears to have accepted.  That emerges from the analysis below of the appellant’s various submissions. 

7. I start with the proposition that Mr Eramo gave evidence that the NTCP had changed and this was not contradicted. 

8. It is necessary to look more closely at Mr Eramo’s actual evidence.  It is here not so much to interpret clause 6.4 of the contract, as its meaning is relatively clear.  Rather it is to apply that contractual provision to the circumstances properly understood.  The question is whether those circumstances properly understood demonstrate a change of the kind to which cl 6.4 applies, namely both a change in the NTCP and one which is material. 

9. When Mr Eramo’s evidence is examined more closely, what he does is explicate the nature of what the trial judge described as a change in methodology or change in method.  Clearly if such change as a matter of degree were to work a significant difference in outcome, either immediately or in terms of reasonable probability in the future, such a change could be described as a change to the NTCP.  To take a hypothetical example, if the NTCP were not merely fine tuned in regard to the calculation but were to have one of its essential integers changed, as, for example, by substituting the AAP, in effect reversing what occurred in July 1998 when the AAP was displaced by the NTCP, that would be a change in the NTCP.  Indeed it would be a material change.  Though that did not occur, it is instructive to record how Mr Eramo in his letter of 2 March 2004 to Huntsman Corporation described the AAP concept being “the average acquisition contract ethylene price concept”.  This I quote below (Blue, 1295): 

   “Therefore, as a means of continuing to track CMAI’s opinion of a discounted contract ethylene price, we developed the average acquisition contract ethylene price concept.  Similar to the original intent of the net transaction contract ethylene price, this price represents CMAI’s opinion of a discounted ethylene price being paid by large buyers on the US Gulf Coast.  The price is arrived at using a hypothetical contract mechanism that assumes a ratio of a reference contract price (the net transaction contract price) and average spot pricing in the industry.  It is important for clients to note that the average acquisition price represents CMAI’s opinion of a discounted contract price for a hypothetical large volume ethylene buyer utilizing a negotiated pricing mechanism in a purchase agreement.  This estimate does not take into account formula based mechanisms indexed to production costs or raw material prices, which could be resulting in ethylene prices that are higher or lower than the average acquisition price estimate.”  [emphasis added] 

10. The appellant cites this paragraph as demonstrating that the fact Mr Eramo “said on a number of occasions that the nature of the NTCP had changed from February 2001” misses the point.  The AAP was not ever substituted for the NTCP or the NTCP for the AAP, during the life of this contract.  What actually occurred was that before the contract was entered into on 23 December 1998 for the supply of ethylene to Huntsman, the concept of the NTCP operated as the relevant index.  This was explained by Mr Eramo in pinpointing May to July 1998 as the date by which the concept of AAP had been developed (Black T, 107E-L).  The AAP thereafter continued to be calculated and published but that was all. 

11. Reference to the other parts of his evidence relied upon by Huntsman (Black T, 92X-93D; 99M-P; 105F-K) does not bear out any unequivocal opinion by Mr Eramo that what occurred was a change to the NTCP itself as distinct from the methodology of establishing it; or if such were a change to the NTCP, that it was material. 

12. Thus to take the first of these (T, 92X-93D): 

    Q.And on page 5 [of the 31 August 2000 monthly CMAI report] in the second paragraph, you confirm in the second sentence that NTP [i.e. NTCP] is your opinion as to the level at which top buyers can purchase ethylene on the monthly arm’s length negotiation process and that is a true statement about NTP in 1998, 2000 and today, isn’t it? 

    A.That is a true statement about the NTP in 98, 2000, but that definition does not apply to the net transaction price today.” 

13. The passage in the 31 August 2000 monthly report to which Mr Eramo’s attention was directed was as follows: 

    “Strictly defined, CMAI’s net transaction contract ethylene price is a weighted average calculation of net contract prices (after discounts) that CMAI assumes the top ten buyers in the industry are paying for ‘pure contract’ ethylene requirements.  The prices that are used in the calculation are CMAI’s opinion of the level at which top buyers are able to purchase ethylene within the terms of a contract that requires monthly ‘arms-length’ negotiations to determine the contract price …

    … Formula mechanisms and spot blends will not be included in the net transaction contract price methodology.”  [emphasis added and see Blue, 504 and judgment [20]] 

14. What follows immediately after that quoted part of the cross-examination of Mr Eramo is itself highly significant.  This is in describing the evolution of the NTCP pricing mechanism after 1998 into 1999 and following. 

15. At Black T, 93L and following through to 95B, the respondent’s version of how discounts were taken into account was confirmed.  The cross-examination supported these propositions: 

    (a)before 1999, a discount would typically be agreed by reference to a reference or benchmark price, albeit one which “will move up and down each month but … will provide you a discount off that price” (Black T, 93N-P); 

    (b)by 1999, many of the dealings between the large buyers and the sellers were done without reference to the seller’s list price, viewed in retrospect – to quote Mr Eramo’s words, “in retrospect I would say yes.  I think that was definitely starting to occur” (Black T, 92M-O); 

    (c)that said, that benchmark or list price was an important reference number for medium tier or small buyers in the marketplace but the largest buyers started adopting a different mechanism (Black T, 94T-V); and 

    (d)this had the result that whilst for small buyers and the overseas buyers the benchmark or list price might be important, in terms of the large buyers by the late 1990’s the seller’s list price was largely irrelevant and what the parties were focusing on was negotiating the actual price month to month on an arm’s length basis (Black 94W-95B). 

16. Mr Eramo gave further evidence as to the position as it evolved from November 2000 into 2001.  This is important because it spans what the trial judge characterised as the change in methodology or method in January 2001, so that I quote it in full below (Black T, 97G-98R): 

    “Q.And so as of November [2000 see Blue, 547] you have basically done this:  The feedback from the monthly settlement was that it was unchallenged but you have made your third adjustment so that you would get an overall NTP of 29.25 cents, correct? 

    A.That’s correct. 

    Q.As we move into 2001 you report each month your opinion as to what is happening on the settlement and what is happening to NTP; you agree? 

    A.Yes. 

    Q.So, for example, in report 484 for January [Blue, 568] it is your opinion that the NTP is now at 31.75 cents? 

    A.That is correct. 

    Q.And you have got to that because of feedback that there was a 2 cent increase on the monthly negotiated settlements? 

    A.That’s correct. 

    Q.In this text box [Blue, 571] for example, we don’t see reference to the benchmark price, do we? 

    A.That’s correct. 

    Q.Would you agree that by this time, although the benchmark makes one or two intermittent appearances from hereon in in the text box it is largely ignored and you are now speaking simply in terms of net contract pricing? 

    A.that’s correct in the text box where I am talking about contract price settlement. 

    Q.Was the reason for that that the benchmark or list price was becoming virtually irrelevant to what the major buyers and selling were doing as they settled the contract each month? 

    A.That’s correct. 

    Q.Indeed, it was largely irrelevant to all of the dealings between the large buyers and the sellers from this time onwards? 

    A.I can’t say that for a fact.  That is certainly the view that we took. 

    Q.If we look at January for instance [Blue, 568] in the table at the bottom where you have opined that NTP is 31.75 you make the benchmark 35.75 because you’re arithmetically adding 4 cents to the NTP? 

    A.that is – its at that point in time, what we have done is we have locked the differential between benchmark and NTP. 

    Q.Yes? 

    A.At that point in time we were basically starting to take the position that we would only move the NTP in the benchmark at 4 cents differential in line with the settlement. 

    Q.And what I want to get from you is which of those two were the driver of that process and I want to suggest that because the list price was becoming virtually irrelevant to what the large buyers and sellers were doing, you were using the information from the monthly settlements to derive the NTP and then simply arithmetically adding 4 cents on for the benchmark? 

    A.Yes, I would say that is correct. 

    Q.That remained the position thereafter, didn’t it? 

    A.Yes, that remains the means in which we adjust net transaction and benchmark till today. 

    Q.So that it would be correct to say that the net transaction price, certainly from this time on, is driving the benchmark price and not vice versa? 

    A.Umm, yes, I guess you could say that.  I wouldn’t disagree with that.  I would say that the net transaction price is the primary focus in the industry.  It is the primary number that the buyers and sellers adopted as another benchmark, if you will.  We maintained the benchmark at 4 cent differential to continue to publish it only because there is a liquid ethylene market that utilised that number in our client base and that is why it exists. I should say that plus there were also derivative agreements that used the differential between benchmark price as a component of derivative price.  But certainly net transaction has became the primary focus for our client base?”  [emphasis added]

17. This is the clearest statement that: 

    (a)the benchmark or list price was becoming virtually irrelevant to the price-setting mechanism; that mechanism was by reference to market intelligence on what the major buyers and sellers were settling their contracts at, each month; 

    (b)the 4 cents introduced was simply added to the NTCP (or NTP) to derive a benchmark, with the result that the seller’s list price had become virtually irrelevant to what the large buyers and sellers were actually doing;

    (c)the net transaction price or NTCP was driving the benchmark price and not vice versa; and

    (d)the purpose of stating the benchmark price was to accommodate those clients who were using it as their reference point, but this was not the case in the present contract. 

18. I would be satisfied to adopt those propositions from Mr Eramo’s evidence.  I consider that the trial judge effectively did so, despite the lack of precision in his formulation of his conclusion at [44] to [45] quoted above.  That conclusion as I will explain later has implications for the other arguments advanced by the appellant. 

19. Turning to the position from about 2003 onwards, the following passage of evidence makes clear that the foregoing propositions continued in effect as attested to by Mr Eramo: 

    “Q.Indeed from about 2003 onwards you ceased reporting the benchmark in the little table next to NTP and average spot that we have otherwise seen every year; correct? 

    A.That is correct and if I may for a point of clarification, if I could explain the way many of our clients utilise our services.  You will notice that the first 3 pages after the summary page are what we call price pages.  Those are the pages that people transact off of on many contractual arrangements.  You will notice that the benchmark price has never been removed from that price for that very reason which is the same reason why we didn’t remove net transactions.  The table that you see there reference after the text box was as a matter of convenience so that our clients could see out of ongoing trends since the price pages would only provide a point in reference for one month this table was requested and we developed it so that people could see the trends on that sort of basis. 

    HIS HONOUR: Q. I just wonder if you could help me, looking at pages 5 of your issue number 484, am I right in thinking that the net transaction contract price shown for January 2001 represents CMAI’s opinion of the settlement between major buyers and sellers based on the market information available to CMAI? 

    A.I would state it that it represents the price movement that occurred as a result of the agreed to settlement in that it was maintained – it arrived at 31.75 – I guess the best way to say it, we arrived at 31.75 based on the agreed to settlement as opposed to in the past basing it on some weighted average calculation of net contract values.  As a result of the adjustments we made in the Fall we realised that we can no long area [sic] just NTP based on our opinion because we were then setting the market price because so many clients had written NTP into their contract and were discounting from NTP both Ethylene agreements and ethylene derivative agreements that if we were to continue to move NTP based on our opinion, then we would be in a position of setting the market price which is what we did not want to do.  So at that point when we went from December to January 1 and then forward from January 1 we would only move and we have only moved NTP in alignment with the agreed to settlement increment either up, down or flat. 

    Q.But it remains a figure based on the real world data available to you, does it? 

    A.It remains a figure that is now being adjusted, yes, based on real world in point on whether the agreements were to – an agreement to either increase or decrease the number.  It no longer remains my opinion of how well the large buyer could buy under a certain type of contract mechanism.”  (Black T, 98R-99P) 

20. Finally, in describing the function of the NTCP or NTP Mr Eramo’s evidence confirmed that what mattered was the month to month variation in settlements, not the 4 cent differential between NTCP and benchmark price.  I should add that the reference to “the delta” should be understood as representing the first-mentioned differential, that is to say the differential between the previous month and the current month in terms of the opinion formed by the CMAI as to that outcome, based on market intelligence. 

    “Q.But taking that last answer, you know that a large buyer in 1998 and ’99 would often have a contract mechanism that included expert support or spot blending, don’t you? 

    A.Yes. 

    Q.And what the buyer would achieve under that contract would be a function of all elements of the pricing formula including those ones; correct? 

    A.Sure, yes. 

    Q.At no time has NTP sought to capture those elements, has it? 

    A.That is correct. 

    Q.What it has sought to do is measure what is happening on the monthly settlements as the price goes up, down or stays steady; true? 

    A.Are you talking in today’s terms or in the past because there is a distinct difference in the methodology that I employ.  You see in today’s terms it measures the delta and only the delta, because what we know, what we learn – and this is to the point, what we know today is that there are many agreements in the market place that say take NTP and blend it with a spot number to achieve a discounted number.  It has got nothing to do with export support, it has got nothing to do with tolls, it is the primary contract mechanism where they say NTP, blend it with a spot number is going to give you a contract price applied to the committed volume and I could no longer try to make NTP equal that number or we end up in a death spiral in the industry, we end up driving the industry into the ground, so we made the decision we could no longer do that? 

    Q.I accept the concerns you have just raised.  What I am suggesting to you is that the notion that there were contracts out there using your index plus or minus a discount as the pricing mechanism is not something that NTP would ever have sought to measure because NTP’s focus was on a monthly negotiated price and it just wasn’t interested in contracts that had no element of monthly negotiation in them.  Would you agree with that? 

    A.I would agree with that, yes.”  (Black T, 99Q to 100K)  [emphasis added] 

1. Finally, the respondent relies on the cross-examination of Mr Eramo at Black T, 105F-K, in relation to what Mr Eramo said concerning AAP or average acquisition contract ethylene price in the letter of 2 March 2004 earlier quoted (Blue, 1295). 

2. The passage is as follows: 

   “Q.Third paragraph, page 2? 

   A.May that paragraph best be defined as to what we mean there, it does not take into account the various discounts that we have talked about before.  It certainly takes into account the discount that would be achieved by the spot, the amount of spot ratio that is used in the mechanism, whether it was 50/50 or 60/40 or 70/30, the spot component is what achieves the discount and that is what is being referred to there.  So what we were saying in that paragraph when I was communicating that paragraph that since NTP is now nothing more than a reference price, I will now use average acquisition.  I adopted average acquisition as my means of trying to reflect a discounted price as a means of looking at how well could large buyers purchase ethylene.  I developed that –“  (Black T, 105F-L) 

3. In subsequent cross-examination Mr Eramo agreed that the AAP as there described was in fact first developed in July 1998 (T, 107E-G).  The purpose, as Mr Eramo put it, was “to explain what was going on in the marketplace”, not to displace the NTP (T, 107J-L).  Clearly some people were using the AAP as a reference point instead of the NTP or NTCP. 

4. The totality of this evidence does not establish that Mr Eramo was of the view that the NTCP had changed.  Rather it establishes he was of the view that the methodology had changed and in the way which emerged from this quoted cross-examination.  It is equally obvious that Mr Eramo was not here postulating that there had been a material change. 

5. The next argument really amounts to a suggestion that the trial judge misunderstood Mr Eramo’s evidence with respect to his preparedness to make any future adjustments of NTCP.  In particular that the trial judge should have appreciated that Mr Eramo was not only referring to changes resulting from the ratio used to blend NTCP with the spot price, but also to changes in the NTCP itself. 

6. The short answer, derived from a reading of the evidence of Mr Eramo cited by Huntsman (T, 102F-S; 103B-C) is that Mr Eramo’s evidence, properly understood is this.  Mr Eramo was willing to make a further adjustment if compelled by market evidence but he did not anticipate the necessity to do so.  I agree with what the trial judge concludes at [52] to [56], which I quote below: 

   [52]Mr Eramo suggested that, after February 2001, he would not make any further adjustment. This was relied upon to found a submission that there had been a change, and of a material kind, in the NTCP. However, I do not accept that evidence. Firstly, Mr Eramo’s oral evidence that he would not make such a change (T 102.21–103.26) is difficult to understand and hardly conclusive. Secondly, it is inconsistent with earlier oral evidence given by him. 

   If we came across — came upon a reason to — for some reason adjustment [sic] NTCP that we discover a reason to do it, then, yeah, we probably would. (T 102.12-.15) 

   [53]Thirdly, and most importantly, it is inconsistent with CMAI’s stated position in its report No 510 dated 28 February 2002:

   “Over the years, as the net transaction contract price was assimilated into contract and transfer price mechanisms, it has left CMAI in a position whereby adjusting the net transaction price by any amount other than the agreed to market settlement is difficult and would result in unintended market price movements. As a result, CMAI is basically using the net transaction contract price to reflect market price movements, until a time when an additional adjustment would be warranted. We will continue to adjust and track an average acquisition price in order to assess current market economics as well as for forecasting purposes.” (emphasis supplied) 

   [54]This passage shows two things. The first is that, as at February 2002 (a year after the supposed change in the NTCP had occurred) NTCP and AAP were still being used for their pre-existing, although different, purposes. The second is that, if circumstances arose (such as had arisen in the second half of the calendar year 2000) that necessitated a movement in the NTCP other than one required to reflect monthly market settlements, CMAI would make it. 

   [55]Thus, I conclude, CMAI remained prepared after February 2001 to make special adjustments to the amount of the NTCP, as it had done in 1993, 1995 and 2000. Historically, those adjustments had been made to ensure that the NTCP remained in line with the pure contract ethylene price. There is no basis to think that any such special adjustment made after February 2001 would have been made for any different purpose. 

   [56]Further, although (as I conclude the better view of the evidence is) CMAI remained prepared after November 2000 to adjust the NTCP if necessary to bring it into line with the market, there has been no market feedback or market conditions, known to CMAI, that have required such an adjustment to be made. Mr Eramo agreed (as I have noted in paras [37] and [38] above) that some of the largest top ten buyers were still using traditional monthly settlements, and still giving him information as to monthly price changes that were reflected in the movement of the NTCP. He agreed that those people had not come to him over the last four years and said to him “Mr Eramo, NTCP is totally out of whack. You must adjust it in the same way that you did in 2000” (T 103.33-.37).” 

7. Turning to the next argument of the appellant, to the effect that CMAI continuing to report and rely upon NTCP after February 2001 did not mean there had been a change “to the concept”, this is really answered by what has gone before.  As the respondent said in its written submissions: 

   “(c)CMAI’s continued use of NTCP was properly taken into account by the trial Judge.  As his Honour noted, the “concept” after February 2001 remained the same because it was defined in a similar manner,55 was used in comparative tables both before and after February 2001 as if was the same and it continued to be used by CMAI to derive the AAP index.56  This continuity, as found by his Honour, could only

   occur if NTCP was continuing to represent what it had previously and CMAI’s analysis and use was “comparing like with like”57; 

   55  At [20] to [21].
   56  At [59] to [63].

   57 At [61].

8. The appellant sought to rely on Ms Hubbard’s evidence that there was a change in NTCP and to challenge the trial judge’s rejection of that evidence. 

9. I agree with the respondent’s submission that Ms Hubbard’s evidence essentially could rise no higher than Mr Eramo’s evidence.  Mr Eramo’s evidence leads inevitably to the conclusion that there was no material change to the NTCP.  Moreover, the trial judge properly took into account the inconsistencies between Ms Hubbard’s evidence as to what Mr Eramo was doing on the one hand and Mr Eramo’s actual oral evidence and his written CMAI reports (Judgment [69]-[71]). 

10. Next, the appellant challenges the trial judge’s finding that the monthly movement was not a statement of a fact but involved an element of opinion.  It is submitted by the appellant that the trial judge misunderstood the evidence.  I consider to the contrary that there was no misunderstanding by the trial judge of the evidence. 

11. Indeed the trial judge was entitled to conclude as he did concerning the elements of opinion, based both on Mr Eramo’s evidence to which I have earlier made reference and the unchallenged evidence of Mr McElliott quoted below: 

    “20.In my experience, the NTP was never an accurate reflection of prices actually being paid by large buyers.  That is, I always achieved prices significantly lower than NTP (discussed more fully below) and was told by other large market participants that their prices were also significantly below NTP.  In my view, one reason why the NTP did not reflect actual prices is that as the market is not transparent NTP can only ever be based on the limited and sometimes questionable information the market is prepared to divulge.  For example, I was occasionally contacted by Mr Gary Adams at CMAI for information about actual monthly prices and prices movements I had negotiated.  I am also aware from conversations with my staff that Mr Adams replacement, Mr Eramo, sought similar information from them.  However, whilst I spoke generally about the market with Mr Adams, I never discussed actual prices or price movements with CMAI or any other Industry consultant.  I also instructed my staff never to discuss actual price or price movements with industry consultants. 

    … …

    23.In my experience, NTP was, and remains, a relatively accurate measure of the general monthly price movements negotiated by the larger market participants under their contracts.  That is, NTP in so far as it moved up, down or remained steady usually reflected the price movements I negotiated in my contracts or the general price movements other buyers and sellers told me they had negotiated in their contracts.” 

12. There was further evidence for the trial judge to find that the monthly movement involved an element of opinion, given the nature of the incomplete information that had to be gleaned from buyers and sellers who were not fully frank for obvious commercial reasons as to the details of the deal that they had achieved. 

    Materiality of any change 

13. In turning to the question of the materiality of change in Huntsman’s challenges to the trial judge’s finding that any change that occurred was not material, the first two arguments are answered by what has been said before, particularly in relation to Mr Eramo’s evidence.  It was never a mere mathematical calculation or one that could be done without bringing to bear opinion.  Nor was it correct to say that the NTCP no longer reflected an opinion about what discounts were being achieved by top ten buyers in the US Gulf Coast.  I have referred earlier to Mr McElliott’s evidence. 

14. The final argument put by the appellant was essentially based on the notion that though the evidence was undeniable that the relationship between NTCP and actual pure contract being achieved by the top ten buyers had not in practice changed, this was not determinative.  This was because the change in methodology meant there was the potential for future change; that is to say potential in the future for the NTCP to fall out of line with the prices being achieved by the top ten buyers on the US Gulf Coast and to have a financial impact. 

15. I have referred earlier to the material which demonstrates that NTP was and remained a relatively accurate measure of the general monthly price movements negotiated by the larger market participants under their contract.  Annexure A to the respondent’s submissions demonstrates that consistency also.  Beyond that, I would agree and adopt the respondent’s submissions which I quote below: 

    “43.Finally, in so far as the Appellant submits that the “change” might have a potential to create a significant financial impact in the future, such an argument:

    (a)      concedes, having regard to the actual pricing data, that there has not yet been any material change in the relationship between actual “pure contract” prices and the NTCP; and

    (b)      relies upon this Court to reject McDougall J’s finding that CMAI would adjust the NTCP if it received market feedback that it was necessary to do so [at [55]],  and

    (c)      denudes the concept of “materiality” of any real work.  A change (if it be that) which at the most has some speculative potential at a future date to have a real financial impact on the parties could not be described yet as material.” 

    The further written submissions 

16. I am not persuaded by the appellant’s further written submissions that there was any change to NTCP or if there were, that it was material.  Even were the appellant’s two page aide memoire to be taken into account as a submission extrapolating evidence before the trial judge I do not consider that the greater differential it demonstrates between AAP and NTCP pre and post January 2001 (comparing 1998 to 2000 to 2001 to 2004) alters that conclusion.  I would here adopt the conclusions of the respondent, quoted below: 

    (d)further, the argument and aide memoire fail to address all the pricing data that was before the trial judge, in particular the unchallenged and compelling evidence of Mr McElliott charting the relationship between NTCP and the actual prices he obtained (J111 and Respondents’ oral submissions at Transcript Day 1 page 43.15-.56 and Transcript Day 2 page 43.54-.10); 

    (e)the original analysis before the trial judge showed that in years before February 2001 the annual difference between the NTCP and the “total weighed average” of the other pricing data before him (now relied upon by the Appellant) had varied from between 7.02% (2001) to 11.84% (1998) and after 2001 varied from between 8.07% (2004) to 13.72% (2003).  The trial judge also had the benefit of hearing the Respondents’ analysis of the CMAI Monomers Market Reports to explain the factors in the market which were likely to be creating these differences in price volatility from year to year; 

    (f)the trial judge clearly turned his mind to the question of the differences in the relationship between the NTCP and “total weighted average” observing that the “relationship was more closely consistent up until about mid 2001 than it was thereafter, the two lines move in the same way thereafter although there is more fluctuation in the interval between them” (J112).  Having taken this difference (which is now relied upon by the Appellant) into account, and noting that neither party provided any statistical analysis of the data (J119), the trial judge made the finding open on the evidence that the data did not demonstrate any significant shift in relationship;” 

    OVERALL CONCLUSION 

17. In my view the evidence supported the findings made by the trial judge and fully justified them.  Though the conclusions stated at [44] to [45] were imprecise and could be understood as suggesting that the 4 cents discount was taken from the benchmark price, the evidence to the contrary is so strong as to leave no other conclusion than that the 4 cents discount was done simply as a last step to calculate, with some degree of arbitrariness, a benchmark ethylene price.  The rest of the judgment is not to be reconciled with the proposition that the 4 cents discount was taken from the benchmark price, though if need be the judgment could be upheld on the respondent’s amended Notice of Contention (para 2).  I quote this below: 

    “2. Further, the court should have concluded that:

    (a)      prior to February 2001 the NTCP:

    (i)       attempted to capture the prices paid by large buyers under traditional contracts involving arms-length freely negotiated prices on a monthly basis (Black 91N – V;  Blue 1/201M; Blue 2/484H; Blue 3/504J):

    (ii)      was calculated by CMAI:

    (A)forming an opinion about the amount of the movement in the monthly settlement (that is, the amount by which prices in the market had moved up or down or remained steady) (Black 82H); and

    (B)doing a reality check on the number so generated to see whether the top ten large buyers (or any of them) had obtained a settlement (on a new or continuing contract) which was better than the market monthly settlement (Black 87L-S);

    (b)      after February 2001 the NTCP:

    (i)       attempted to capture the prices paid by large buyers under traditional contracts involving arms-length freely negotiated prices on a monthly basis (Black 91N-V; Blue 3/362M):

    (ii)      was calculated by CMAI:

    (A)forming an opinion about the amount of the movement in the monthly settlement (that is, the amount by which prices in the market had moved up or down or remained steady) (Blue 6/1294V/Black 76P);

    (B)making a working assumption each month that, unless the market informed it otherwise, moving the NTCP in line with the movement in the monthly settlement would adequately reflect the prices large buyers were paying under the traditional contracts (Blue 3/747K, Orange 46 – 48); and

    (C)      remaining receptive to varying that assumption if feedback showed it needed to (J52 – J56, J57(8)).

    (c)      the NTCP was at all relevant times (specifically from at least 1998 onwards) the primary focus in the industry and it was the calculation of NTCP which drove the benchmark price, that is, NTCP was not calculated by CMAI as a discount from the benchmark price but rather, having calculated NTCP, an amount was then added to create the benchmark price (Black 98G - Q)  That amount was 3.3 cents or 3.25 cents from March 1998 to September 2000 and thereafter 4 cents, pending the reporting of further circumstances requiring a special change.

18. I conclude that any negotiated discounts were reflected in the monthly settlements.  It was movement month to month in the overall result of purchases by the ten largest buyers which determined the NTCP and which in turn drove the stated benchmark price.  As from September 2000 and certainly from January 2001 the NTCP was first calculated and the 4 cents added to it to create the benchmark price, not the other way round.  That did not constitute a change to the NTCP as such.  But if it were a change, it was not one that was material. 

19. Accordingly, I consider that Huntsman’s appeal should be dismissed with costs.  I propose orders as follows:

    (1)          Appeal dismissed.

    (2)          The appellant to pay the first respondent’s costs. 

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LAST UPDATED:     30 April 2007