Park v Murray Irrigation Ltd

[2018] NSWCA 166

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Park v Murray Irrigation Limited [2018] NSWCA 166

Hearing dates:

20, 21 June 2018

Decision date:

02 August 2018

Before:

Bathurst CJ at [1];
Leeming JA at [2]
Sackville AJA at [3]

Decision:

1.    Appeal dismissed;
2.    Appellant to pay the respondent’s costs of the appeal.

Catchwords:

CONTRACT – contractual arrangements between an irrigation corporation and an irrigator – irrigator entitled to separate water entitlements (WEs) and delivery entitlements (DEs) – whether corporation’s unilateral changes to Policies so as to require a transferor of WEs to surrender DEs and pay termination fees constituted a breach of contract

 

UNCONSCIONABLE CONDUCT – whether corporation’s actions in changing the Policies constituted unconscionable conduct in contravention of s 51AC of the Trade Practices Act 1979 (Cth)

  DAMAGES – whether the irrigator, had he established a breach of contract, was entitled to damages equivalent to the termination fees he paid to the corporation – whether the irrigator showed that had the (assumed) breach not occurred he would have received a higher net sale price for his WEs

Legislation Cited:

Australian Consumer Law (Sch 2, Competition and Consumer Act 2010 (Cth)), s 21
Corporations Act 2001 (Cth), s 140(1)
Trade Practices Act 1974 (Cth), s 51AC
Water Act 2007 (Cth), s 92
Water Charges (Termination Fees) Rules 2009 (Cth)

  Irrigation Corporation Act 1994 (NSW), ss 19, 30, 36, 38, 39, 48, 74
Water Management Act 2000 (NSW), ss 15, 371(1), 401, 403, 116, 117, 119, 120, 122, 123

Cases Cited:

Boucher v Murray Irrigation Ltd; Pratt v Murray Irrigation Ltd; Park v Murray Irrigation Ltd [2017] NSWSC 1268
Browne v Dunn (1893) 6 R 67
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Fox v Percy (2003) 214 CLR 118
Hole v Garnsey [1930] AC 472
Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15
Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; [2006] FCAFC 144
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37
Paciocco v Australian & New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28
Paciocco v Australian and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50
PT Ltd v Spuds Surf Chatswood Ltd [2013] NSWCA 446
Re Golden Key [2009] EWCA Civ 636
Re Media, Entertainment and Arts Alliance; Ex parte Hoyts Corporation Pty Ltd (1993) 178 CLR 379; [1993] HCA 40
Robinson v Harman (1848) 1 Ex Rep 850
Robinson Helicopter Company Incorporated v McDermott (2016) 331 ALR 550; [2016] HCA 22
Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443; 12 BPR 23,923
Tabcorp Holdings Pty Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272

Category:

Principal judgment

Parties:

James Scott Park (Appellant)
Murray Irrigation Limited (Respondent)

Representation:

Counsel:
Mr D Pritchard SC / Mr A Macauley (Appellant)
Mr I Pike SC / Ms J Granger (Respondent)

  Solicitors:
McKell’s Solicitors (Appellant)
Addisons Lawyers (Respondent)

File Number(s):

2017/315971

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Common Law

Citation:

[2017] NSWSC 1268

Date of Decision:

21 September 2017

Before:

Button J

File Number(s):

2014/279366

HEADNOTE

[This headnote is not to be read as part of the judgment]

The appellant was a farmer working properties located in south-western New South Wales. Between 2002 and 2005, he acquired 2,845 water entitlements (WEs) as a result of purchasing properties in the irrigation area managed by Murray Irrigation Limited (Murray).

Prior to 2007, WEs could not be transferred separately from an entitlement to delivery of water, known as a delivery entitlement (DE). In mid-2007, and as a result of recommendations made by the ACCC, Murray’s rules were amended to “unbundle” WEs and DEs. Thereafter, WEs and DEs were regulated by: Murray’s Company Constitution, a standard form Water Entitlements Contract (WE Contract), Murray’s Transfer Rules Policy (Transfer Policy) and Murray’s Charges Policy (together, the Policies). Clause 3A.4.1 of the WE Contract provided that the holder of a DE could surrender the DE at any time and pay the termination fee or continue to hold the DE but pay an annual access fee.

In April 2008, the Murray Board of Directors resolved that a member who transferred WEs would be required to terminate an equivalent number of DEs and pay termination fees. Clause 3.11 of the Transfer Policy was amended to provide that where WEs are transferred without an equal number of DEs, then the transferor shall pay a termination fee to terminate that number of DEs corresponding to the number of WEs to be transferred.

In October 2008, the appellant sold 2,800 WEs for $1250 per WE. The sale contracts required the appellant’s solicitors to pay the termination fees (amounting to $931,139.60) to Murray out of the purchase price.

On 1 September 2009, the Water Charges (Termination Fees) Rules 2009 (Cth) came into force. Rule 5 prohibited an irrigation infrastructure operator from imposing, demanding or receiving a fee or charge for or in respect of the surrender of the whole or part of a right of access to the operator’s network.

In 2014, the appellant commenced proceedings against Murray for breach of contract or restitution for moneys unlawfully demanded. The appellant accepted that Murray had the power to alter the contractual arrangements between the parties, but contended that its conduct constituted a breach of its contractual obligations. In the alternative, the appellant argued that Murray’s actions amounted to unconscionable conduct in contravention of s 51AC of the Trade Practices Act 1974 (Cth).

The issues on appeal were whether the primary Judge erred:

(i)   in failing to hold that Murray’s conduct in requiring the appellant to terminate 2,800 DEs and to pay $931,139.60 in termination fees as a pre-condition for granting its consent to the appellant’s transfer breached cl 3A.4.1 of the WE Contract;

(ii)   assuming that Murray breached the WE Contract, in holding that the appellant did not suffer any loss by reason of Murray’s breach of contract;

(iii)   alternatively to (ii), in failing to hold that Murray was liable to make restitution; and

(iv)   in failing to hold that Murray’s conduct was unconscionable.

The court held (Sackville AJA, Bathurst CJ and Leeming JA agreeing), dismissing the appeal:

In relation to (i):

(1) Murray’s amendments to the Policies were not only valid but its actions in amending the Policies did not breach its contractual obligations to the appellant: [1], [2]; [100].

(2) It can be accepted that cl 3A.4.1 was inserted into the WE Contract to give effect to the policy of “unbundling” recommended by the ACCC. It is, however, one thing to accept that cl 3A.4.1 was intended to prevent Murray requiring a member seeking to transfer WEs to surrender an equivalent number of DEs and to pay termination fees. It is quite another to construe cl 3A.4.1 as conferring an “immutable” entitlement, such that Murray lacked the power to change its Policies: [1], [2]; [90].

(3) Not only is there nothing in the language of cl 3A.4.1 to prevent such a change in Murray’s rules, the Constitution and the WE Contract expressly contemplate that transfers of WEs are to be regulated by the terms of the WE Contract and the Policies. The Constitution also expressly states that the terms and conditions applicable to DEs shall be as determined by the Board from time to time: [1], [2]; [91].

In relation to (ii):

(1) There is no need to consider whether his Honour was correct in concluding that the appellant suffered no compensable loss by being forced to pay termination fees as a condition of transferring 2,800 WEs. Nonetheless the issue should be addressed for the sake of completeness and because it is relevant to issue (iv): [1], [2]; [101].

(2) The relevant question is what the appellant would have received for the sale of 2,800 WEs if Murray had performed the contract in accordance with its obligations. It is necessary to determine the price the appellant would have received for the sale had Murray not amended and enforced the Policies: [1], [2]; [114].

(3) When the totality of the evidence is taken into account, there was no error in the primary Judge finding that the appellant had not established that he had sustained a loss by reason of any contractual breach by Murray. In particular, the “Permanent Water Sale History” provided some evidence, albeit far from conclusive, that the price was likely to have been considerably less: [1], [2]; [122].

In relation to (iii):

(1) The appellant’s claim in restitution depended on establishing that Murray’s amendments to the Policies breached its contractual obligations. It was therefore not necessary to consider the restitution claim: [1], [2]; [133].

In relation to (iv):

(1) Since the appellant did not suffer any relevant loss or damage, there was no need to determine the unconscionability claim. In any case, there was no error on the part of the primary judge in relation to this ground: [1], [2]; [136].

Judgment

1. BATHURST CJ: I agree with Sackville AJA and with his Honour’s reasoning.

2. LEEMING JA: I agree with Sackville AJA.

3. SACKVILLE AJA: This is an appeal from a judgment of a Judge of the Common Law Division (Button J). [1] The primary Judge rejected a claim by the appellant against the respondent, Murray Irrigation Ltd (Murray), for damages and other relief.

   1. Boucher v Murray Irrigation Ltd [2017] NSWSC 1268 (Primary Judgment). The primary Judge heard claims by two other plaintiffs against Murray. The claims were heard together and evidence in one was evidence in the others. The appeals by the other plaintiffs have not proceeded because the matters settled.

4. At the material times, the appellant was a farmer working properties located in south-western New South Wales growing (so the Court was informed) rice, wheat and fodder. He was a shareholder and member of Murray, a not-for-profit irrigation corporation. The appellant’s primary contention was that he suffered losses because Murray, in breach of its contractual obligations, changed its rules in April 2008 to require members to pay “termination fees” to Murray when they transferred water entitlements to a third party. The appellant sold his water entitlements in October 2008 for $3.5 million to a State instrumentality. His principal contention was that Murray unlawfully required him to surrender an equivalent number of “delivery entitlements” and to pay $931,139.60 in termination fees, thereby reducing the net sale price he received on the sale of the water entitlements.

Overview

5. Between February 2002 and April 2005, the appellant acquired 2,845 Water Entitlements (WEs) as the result of purchasing three properties in the irrigation area managed by Murray. [2] Prior to 2007, WEs could not be transferred separately from an entitlement to delivery of water.

   2.    The properties were referred to as Landholder Reference Number (LRN) D125, LRN D127 and LRN W005.

6. In mid-2007, Murray’s rules were amended to “unbundle” WEs and Delivery Entitlements (DEs). This was achieved, in part, by creating an entitlement on each member to receive one DE for each WE held by that member as at 4 May 2007. [3] Thereafter, until the rules were again changed in April 2008, the appellant (like other members of Murray) held two separate sets of entitlements under the contractual arrangements with Murray:

• WEs; and

• DEs.

  3. See cl 3A.2.1(a) of the Water Entitlements Contract reproduced at [50] below.

7. The “unbundling” of WEs and DEs came about in consequence of recommendations made by the Australian Competition and Consumer Commission (ACCC) in a report presented in 2006. [4] Murray implemented the substance of the recommended unbundling arrangements in mid-2007 by amending the contractual arrangements with its members.

   4. See at [22] below.

8. As from the implementation of the new arrangements, WEs and DEs were regulated by a number of documents having contractual force between Murray and the appellant. These documents were:

• Murray’s Company Constitution (Constitution), which had effect as a contract between Murray and each of its members and directors and between each member and each other member; [5]

• a standard form Water Entitlements Contract (WE Contract) entered into between Murray and the appellant;

• Murray’s Transfer Rules Policy (Transfer Policy), given contractual force as between Murray and its members by the Constitution; and

• Murray’s Charges Policy, also given contractual force by the Constitution.

It is convenient to refer to the Transfer Policy and the Charges Policy together as the Policies.

5. Corporations Act 2001 (Cth), s 140(1).

9. Clause 3A.4.1 of the WE Contract is critical to the appellant’s argument. It provided at all material times as follows:

“3A.4   Termination of Delivery Entitlement

3A.4.1   The Holder of a Delivery Entitlement may:

(a)   Surrender the Delivery Entitlement at any time and pay the Termination Fee to the Company; or

(b)   Continue to hold the Delivery Entitlement and pay the annual Access Fee levied on the entitlement from time to time.”

The appellant’s argument is that Murray’s actions in changing the Policies to require a member to surrender DEs and pay termination fees when transferring WEs breached cl 3A.4.1 of the WE Contract.

10. Under the arrangements in force from mid-2007 to April 2008 a member of Murray was required to pay an annual access fee in respect of each DE. The member was not required to surrender his or her DEs but if the DEs were surrendered the member had to pay termination fees to Murray. The fee structure recognised that Murray incurred costs in maintaining the infrastructure for the delivery of water to members’ properties and that the removal of a property from the network had cost implications for Murray.

11. These contractual arrangements entitled members to transfer WEs to third parties (whether or not members of Murray) without transferring or surrendering an equivalent number of DEs. Accordingly, a member of Murray could sell WEs but retain his or her holding of DEs and thus avoid incurring any liability to pay termination fees to Murray. However, the member would have to continue paying access fees in respect of the retained DEs.

12. The transferability of WEs assumed particular importance in late 2007 because the newly elected Federal Labor Government announced the “Water in the Future Plan” which implemented a policy of actively buying back WEs from willing sellers. At the same time, the Commonwealth indicated that it planned to provide several billion dollars of funding over ten years in order to address the over-allocation of water to users in the Murray-Darling Basin.

13. On 7 April 2008 the Board of Directors of Murray, without notice to members, changed the then current arrangements by passing a resolution purportedly pursuant to the Constitution. The effect of the resolution was that a member who transferred a particular number of WEs was required to terminate an equivalent number of DEs and to pay Murray the appropriate termination fees in respect of the terminated DEs. The Board implemented the resolution by amending the Policies on 15 May 2008. The amendments were expressed to apply in respect of all applications for transfer received by Murray on and after 8 April 2008. No amendments were made to the WE Contract as in force immediately before 8 April 2008.

14. In or about October 2008, the appellant entered into three “Contracts for the sale of water entitlements in [Murray]”. [6] The purchaser under each contract was the Water Administration Ministerial Corporation (WAMC), a body established by State legislation. [7] The appellant sold a total of 2,800 WEs to WAMC for $1,250 per WE.

    6. See at [105] below.

    7. Water Management Act 2000 (NSW) (Water Management Act), s 371(1).

15. Each contract contained a clause stating that the price of $1,250 per WE was calculated on the basis that “it presently includes a sum of $382.00 which is the current [DE] termination fee”. The contracts required the appellant’s solicitors to pay the termination fees to Murray out of the purchase price. A total of $931,139.60 was paid to Murray in respect of the termination fees.

16. On 1 September 2009, the Water Charges (Termination Fees) Rules 2009 (Cth) (Rules), made pursuant to s 92 of the Water Act 2007 (Cth), came into force. The effect of r 5 of the Rules was to prohibit an irrigation infrastructure operator from imposing, demanding or receiving a fee or charge for or in respect of the surrender of the whole or part of a right of access to the operator’s network. The making of the Rules effectively prevented Murray from continuing with its policy of charging termination fees on the transfer of WEs.

17. On 23 September 2014, nearly six years after the sale of the WEs settled, the appellant commenced proceedings against Murray. (A limitation defence had been pleaded, but this appears to have been abandoned no later than the hearing; it formed no part of the appeal.) He claimed damages for breach of contract or, alternatively, restitution of moneys unlawfully demanded by Murray. The appellant alleged that the contractual arrangements with Murray did not permit Murray to amend the Policies so as to impose compulsory termination fees on a transferor of WEs. The appellant claimed, in the alternative, that Murray’s actions amounted to unconscionable conduct in contravention of s 51AC of the Trade Practices Act 1974 (Cth) (Trade Practices Act). [8] The appellant sought damages equivalent to the termination fees it had paid to Murray, less an amount of $318,208.10 which Murray later refunded to the appellant. [9]

    8. Now s 21 of the Australian Consumer Law (Sch 2, Competition and Consumer Act 2010 (Cth)). See at [134] below.

    9.    In December 2010, Murray refunded this sum to the appellant because the termination fees had included a component for company tax. Murray later determined that it was not liable to pay company tax and refunded the tax component of the fees.

18. The critical holdings by the primary Judge for the purposes of the appeal were as follows:

(i)   the promulgation and implementation of the changes to the Policies were not inconsistent with the contractual arrangements between Murray and the appellant;

(ii)   had it been necessary to assess damages for breach of contract, his Honour would have concluded that the appellant had suffered no compensable loss, except for the loss of so-called “efficiency dividends” totalling $137,004 which would have been payable by Murray to the appellant had he retained 2,800 DEs following the sale of the WEs;

(iii)   the appellant’s claim based on unconscionable conduct failed, in part because his Honour accepted the evidence of Mr Ellis, a former director of Murray, that the changes to the Policies were made out of a sincere concern for the financial position facing Murray as a result of the 2007 decision to unbundle WEs and DEs; and

(iv)   Murray’s conduct did not cause any injustice of the kind that would enliven a claim for unjust enrichment.

19. Mr Pritchard SC, who appeared with Mr Macauley for the appellant, identified four issues on the appeal. The issues were whether the primary Judge had erred:

(i)   in failing to hold that Murray’s conduct in requiring the appellant to terminate 2,800 DEs and to pay $931,139.60 in termination fees as a pre-condition for granting its consent to the appellant’s transfer of 2,800 WEs breached cl 3A.4.1 of the WE Contract (Ground 1);

(ii)   assuming that Murray breached the WE Contract, in holding that the appellant did not suffer any loss by reason of Murray’s breach of contract and in failing to include in the award of damages the sum of $749,935.90, being the unrefunded portion of the termination fee plus the value of the foregone water efficiency dividends (Grounds 2 and 3);

(iii)   in the alternative to (ii) above, in failing to hold that Murray was liable to make restitution to the appellant in the amount of $612,931.90, being the unrefunded portion of the termination fees (Ground 4); and

(iv) in failing to hold that Murray’s conduct was unconscionable, contrary to s 51AC of the Trade Practices Act and that damages of $749,935.90 should be awarded by reason of Murray’s contravention (Grounds 5 and 6).

20. In the course of argument in this Court Mr Pritchard pointed out that Murray had not filed a notice of contention challenging the primary Judge’s contingent finding that the appellant would be entitled to claim damages for loss of water efficiency dividends had his Honour found that Murray breached its contract. Mr Pike SC, who appeared with Ms Granger for Murray, was given leave to file a notice of contention in the following terms:

“Contrary to [159] of the Reasons for Judgment, the trial judge should have held that, if [the appellant] was entitled to damages for lost water efficiency dividends which he would have received had he retained the delivery entitlements, [Murray] was entitled to set off the cost of annual fees which [the appellant] would have been liable to pay on those delivery entitlements.”

Mr Pritchard was given leave to file further written submissions on the ground identified in the notice of contention and did so.

The context

21. For the most part the parties, particularly the appellant, approached the appeal as though the construction of the contractual arrangements between Murray and the appellant could be dealt with independently of the statutory and regulatory context. It is true that the appellant’s argument requires close consideration of the terms of the WE Contract and the other documents having contractual force between the parties. But they must be construed having regard to the powers and functions conferred on Murray by legislation and the extent to which the exercise of those powers and the discharge of those functions were susceptible to changes in the regulatory environment.

Historical context

22. The ACCC’s report was presented to the Governments of the Commonwealth, New South Wales, Victoria and South Australia in November 2006. The report bore the formidable title of “A regime for the calculation and implementation of exit, access and termination fees charged by irrigation water delivery businesses in the Southern Murray-Darling Basin” (ACCC Report). As has been noted, the ACCC Report led directly to the “unbundling” in 2007 of WEs and DEs held by members of Murray, including the appellant. Murray’s amendments to the Policies in April 2008 – in effect an attempt to rebundle WEs and DEs, at least for certain purposes – generated the present dispute.

23. The ACCC Report explained the historical context of the regime it was proposing as follows:

“Historically, the right to access water outside riparian zones came in the form of licences issued by state and territory governments to landholders to access and use water for irrigation.

In conjunction with this, many of the irrigation districts within the Murray-Darling Basin were developed by governments as part of wider social and economic policies. The infrastructure associated with delivering water, which was often initially funded by governments and managed by state authorities, was designed to provide services to the landholders that held licences.

With increasing policy recognition of water as a scarce resource, particularly following the cap on water use in the Murray-Darling Basin, it was also recognised that a market for water would facilitate more efficient use of water, both through making the value of water (that is, its opportunity cost) transparent and providing a mechanism for water to move from lower to higher value uses (that is, increase allocative efficiency).

The process for developing water markets was formalised through the 1994 COAG water reform framework, in which the state and territory governments agreed to introduce arrangements for water trading.

The various jurisdictional governments subsequently developed separate water entitlements that were, for the most part, perpetual, separate from land titles, and provided guaranteed access to a share of the consumptive water pool. In general, the entitlements were allocated on a ‘grandfathering’ arrangement on the basis of existing licences and irrigation activities.” (Emphasis in original.)

It will be necessary to return to the ACCC Report’s recommendations. [10]

10. See at [34] below.

Murray’s functions

24. Murray was incorporated on 17 February 1995 as part of what the ACCC Report described as the “water reform framework” and what was described in evidence as the “privatisation process” for water in the Murray-Darling Basin. As from 3 March 1995, Murray became a “class 2 irrigation corporation” for the purposes of the Irrigation Corporations Act 1994 (NSW) (Irrigation Corporations Act). [11] A class 2 irrigation corporation (unlike a class 1 irrigation corporation) did not represent the State. [12] However, it was granted an operating licence authorising it to carry on the business of supplying water provided to it under an irrigation corporation licence and to exercise its functions under the Irrigation Corporations Act. [13] Murray also received an irrigation corporation works management licence authorising it to take water from rivers and other sources in accordance with the terms of the licence. [14] The legislation created certain rights and immunities for a class 2 irrigation corporation when carrying out its functions. [15]

    11. Irrigation Corporations Act, s 19(4).

    12. Irrigation Corporations Act, s 30.

    13. Irrigation Corporations Act, s 39(3).

    14. Irrigation Corporations Act, s 48.

    15. See, for example, Irrigation Corporations Act, ss 36, 38, 75.

25. Irrigators within the region for which Murray became responsible received shares in the corporation and a commensurate number of WEs in exchange for their previous entitlements.

26. The licensing scheme established by the Irrigation Corporations Act and Murray’s role within that scheme continued until the Act was repealed in 2000 by the Water Management Act 2000 (NSW) (Water Management Act). [16] The Water Management Act provides that Murray’s operating licence under the Irrigation Corporations Act continues under the new legislation. [17] However, Mr Watts, a former officer of Murray, gave evidence that Murray holds (and presumably held at the relevant times) an operating licence issued under the Water Management Act.

    16. Water Management Act, s 401, Sch 7.

    17. Water Management Act, s 403, Sch 9, cl 35.

27. Part 1 of Chapter 4 of the Water Management Act applies to all irrigation corporations under the former Irrigation Corporations Act, [18] including Murray. Part 1 provides (as did the Irrigation Corporations Act) that an irrigation corporation owns all water management works it has installed on land, whether or not it owns the land. [19] An irrigation corporation has power to enter land within its area of operations for specified purposes, including constructing, installing and maintaining water management works. [20] Part 3 of the Water Management Act authorises the preparation of management plans which may include provisions with respect to water conservation, the conditions to which licences are to be subject and water sharing arrangements. “Management plan” is defined to mean a plan dealing with any aspect of water management, including but not limited to such matters as water sharing and water source protection. [21]

    18. Water Management Act, ss 116, 117, Sch 1. Schedule 1 specifies the areas for which Murray is responsible. These correspond to the areas for which it was previously responsible.

    19. Water Management Act, s 119(1).

    20. Water Management Act, s 120(1).

    21. Dictionary, referring to s 15 of the Water Management Act.

28. An irrigation corporation’s operating licence authorises it to carry on the business of supplying water provided to it by the WAMC and to exercise the functions conferred on it by Part 1. [22] The operating licence held by Murray was not in evidence, but s 123(2) of the Water Management Act provides examples of terms and conditions that may be (and presumably are) imposed. The examples include:

    22. Water Management Act, s 122.

“(a)   a requirement that the irrigation corporation will (in accordance with any applicable management program and the corporation’s business plan) provide, construct, maintain, manage and operate:

(i)   efficient, co-ordinated and commercially viable systems and services for supplying water from both surface and subsurface sources, and

(ii)   surface and subsurface drainage networks that have sufficient capacity having regard to specified factors, including the amount of water supplied by the corporation to users,

…

(c)   a requirement that the irrigation corporation is to comply with the provisions of any applicable management program, either in all respects or in certain respects,

…”

29. Murray also holds a number of access licences[23] which entitle it to a share of water in the Murray River on terms specified in the licences. Murray has been issued with water use approvals and water management work approvals entitling it to use water it extracts from the Murray River and to undertake water supply works. [24]

    23. Issued pursuant to Part 2 of Chapter 3 of the Water Management Act.

    24. Issued pursuant to Part 3 of Chapter 3 of the Water Management Act.

30. It can be seen that the contractual arrangements between an irrigation corporation and its members operate within a legislative framework that identifies the functions of the corporation and subjects it to a regulatory regime designed to allocate and preserve a vital but scarce resource.

The ACCC Report

31. The ACCC Report argued that the imposition of exit fees on the sale of WEs reduced economic efficiency. It explained the emergence of exit fees as follows:

“Some infrastructure operators have responded to [the] potential for a decrease in demand for delivery services by introducing exit fees on the sale of water entitlements out of their irrigation districts. In general, these exit fees have been calculated to collect the net present value of future revenue that the infrastructure operator would have received to cover fixed costs, had that water continued to be delivered within its network. This arrangement, which fully insulates the infrastructure operator from the financial effects of water trade, will generally be supported by a majority of its customers because it is likely that only a minority of irrigators in each district will substantially reduce their holding of water entitlements and have to pay an exit fee.”

32. Exit fees were said to reduce economic efficiency for these reasons:

“•   Exit fees are a barrier to the trade of water from relatively lower to higher value uses. This results in a loss of economic welfare, since the full potential gains from trade are not realised. The welfare loss increases at an increasing rate as exit fees become larger relative to the traded price of water.

•   Exit fees dampen the signal to infrastructure operators that rationalisation of the network may be warranted, since some irrigators will sub-optimally remain in the network. They also dampen the signal to remaining irrigators as to the actual cost of continuing to provide them with delivery services.

•   Because exit fees are levied on the sale of water entitlements rather than the termination of delivery capacity, it is not clear to what extent the irrigator values the bundled delivery right when water entitlements are sold. Where irrigators do not have the option of continuing to pay access fees rather than an exit fee upon the sale of water entitlements, the irrigator is not able to keep their delivery rights even though these may be of value. On the other hand, where exit fees are deemed to be a prepayment of future access fees, the infrastructure operator is obligated to continue to maintain the network to be able to provide delivery, even when this may be of little, if any, value.”

33. The solution proposed was to “unbundle” WEs and the entitlement to delivery of water. According to the ACCC, the separation of the two entitlements would provide the trading of water to more highly valued uses:

“In an unbundled situation, water access rights are unbundled from delivery access rights through the creation of separate water and delivery entitlements. Under this arrangement, the access fee paid by an irrigator to an infrastructure operator reflects the fixed costs of delivering a specified volume of water to a specified delivery point. This access fee is levied on the delivery entitlement rather than the water entitlement. As the access fee is independent of the water entitlement, the irrigator’s decision to purchase or sell part of their water entitlement will not impact on the infrastructure access charges they pay. Similarly the infrastructure access charges have no direct impact on the irrigator’s decision to buy or sell water entitlements.

…

Unbundling in this manner allows water to be traded to the most highly valued use. In addition, those irrigators remaining within the network are not faced with higher infrastructure charges as the proportion of fixed delivery costs paid by each individual irrigator would not change. Thus, unbundling reduces the need for an exit fee on water entitlements that leave an irrigation area.

Unbundling water entitlements and delivery rights and attaching access fees to the delivery right means water trade no longer affects the distribution of the fixed costs of delivery. Unbundling separates the fixed costs of operating the network from the volume of water held by irrigators in the area, allowing irrigators to trade water entitlements at prices that reflect the true costs and returns from water use.

Unbundling also allows irrigators to maintain access to delivery infrastructure independent of their water entitlements holdings. Irrigators could therefore:

•   adopt different water sourcing options, such as leasing or buying seasonal allocations

•   sell excess water without incurring an exit fee, and

•   make decisions about their holdings of water entitlements and holdings of delivery entitlements independently and at different times, based on information relevant to each asset available at the time.”

34. The ACCC Report summarised the proposed regime as incorporating the following elements:

“1   Unbundling of water rights and delivery rights

1.1   The right to have water delivered should be unbundled from any water entitlement, and should be recognised through a separate delivery entitlement.

1.2   The rights and obligations of this delivery entitlement should be clearly specified including, permissible extraction/supply rates, specified times, locations, circumstances and service levels.

1.3   The fixed costs of providing delivery services should be recovered through an access fee levied on delivery entitlements.

1.4   There should be no fees levied on the sale of water entitlements out of an irrigation district (i.e. exit fees).

1.5   Delivery entitlement (and therefore any obligations associated with holding the delivery entitlement) should be tradeable. As delivery entitlements will be heterogeneous due to location specific factors, transfer should be subject to the infrastructure operator’s approval to allow it to consider the implications of any proposed transfer on its overall water delivery operations.

1.6    Access fees can be charged on implicit delivery entitlements until June 2010, by which time water entitlements and delivery entitlements should be fully unbundled, and the latter tradeable.

…

2    Termination of delivery entitlements

2.1   The owner of a delivery entitlement should have the right to be able to surrender (terminate) some part or all of that entitlement, subject to the payment of any termination fee. The process for such should be clearly specified.

2.2    Upon the termination of a delivery entitlement:

•   the infrastructure operator should no longer be obligated to deliver water, or be obligated to be able to deliver water, as specified under the delivery entitlement, and

•   any obligation to pay on-going access fees in relation to the delivery entitlement are cancelled.

3   Security over on-going access fees

3.1   The requirement to provide security over an obligation to pay on-going access fees should not be a general condition of sale of water entitlements. Infrastructure operators should only seek appropriate security as a condition of the sale of water entitlements where:

•   the value of the seller’s remaining water entitlements (at the time of sale) is less than 50 per cent of the termination fee associated with any remaining delivery entitlements, and

•   the infrastructure operator has significant concerns with respect to the possibility of the seller defaulting on the payment of ongoing access fees.

…

4   Calculation of access fees

4.1   The annual access fee should be levied on the delivery entitlement to recover the fixed costs of providing on-going access to core water delivery services to customers within the infrastructure operator’s area of operations. This includes:

•   Fixed operating expenditure (e.g. annual maintenance, administration costs, debt servicing costs).

•   Any annuity for operating expenditure associated with periodic network maintenance and renewal, based on forecasts of prudent and efficient costs.

…

5   Calculation of termination fees

5.1   The termination fee should be based on the actual annual access fee levied on the delivery entitlement at the time of termination.

…

5.7   The termination fee should be a multiple of the actual annual access fee levied on the delivery entitlement at the time of termination. The termination fee should be no more than Y times the access fee (adjusted for any avoidable fixed costs), where Y follows the following schedule:

Financial Year	Y
2007-08*	12.0
2008-09	11.5

…

* includes pre 30 June 2007”

35. The ACCC Report recognised that there was likely to be a need for a “review of the efficacy or the proposed regime”.

Schedule E Protocol

36. In 2007, the Murray-Darling Basin Agreement (Basin Agreement) then in force was an agreement signed in 1992 by the Governments of the Commonwealth, New South Wales, Victoria and South Australia. All participating jurisdictions (including Queensland which joined in 1996) enacted legislation satisfying the Basin Agreement. Schedule E of the Basin Agreement dealt with “Transferring Water Entitlements and Allocations”.

37. In late 2006 or early 2007, the parties to the Basin Agreement agreed on a Protocol made under Schedule E to the Basin Agreement. The Protocol stated that its purposes were, relevantly, to specify principles about access, exit and termination fees and to adopt certain recommendation of the ACCC Report. The clauses of the Protocol provided, among other things, that:

• any implicit entitlement to have water delivered within an irrigation district should be unbundled from any entitlement to the water and recognised through a separate, explicit delivery entitlement (DE) (cl 6.1(a));

• a DE be made transferable subject to the approval of the infrastructure operator (cl 6(3));

• the holder of a DE should be able to surrender it upon payment of a termination fee by a process specified by the infrastructure operator (cl 7(1));

• no exit fees should be levied (cl 8); and

• a termination fee should be calculated by reference to the annual access fee actively levied at the date of termination (cl 11(1)).

38. The Protocol also expressly provided that:

“(1)   A termination fee should be calculated by reference to the annual access fee actually levied at the time of termination.

…

(3)   The holder of a delivery entitlement should be able to choose whether:

(a)   to surrender the delivery entitlement and pay the relevant termination fee; or

(b)   to continue to hold the delivery entitlement and to pay the annual access fee, actually levied from time to time.”

This language corresponds closely to cl 3A.4.1 of the WE Contract.

Murray’s implementation of the changes

39. It is not clear from the evidence whether Murray was given a formal direction to implement the unbundling arrangements and, if so, what form such a direction took. In any event, as the public statements by Murray indicate, it apparently regarded itself compelled to implement the unbundling proposals endorsed by the Protocol made under Schedule E to the Basin Agreement. It did so by amending the WE Contract and the terms of the Policies.

40. In a publication entitled “Talking Water”, Murray advised its members on 7 May 2007 that it would issue a DE for each WE on a landholding on 4 May 2007. The DE would be the basis of a fixed charge to replace a fixed charge per WE. The publication stated as follows:

“Murray Irrigation is only introducing these changes because of explicit Commonwealth and NSW Government requirements that prohibit most of the costs of delivering water through our infrastructure being collected through water entitlement charges.

…

If you are not involved in transactions that separate water entitlements from landholdings the changes announced will not significantly impact on your business.”

41. On 21 May 2007, Murray issued a “Q&A” document to members. The document explained the new system. It advised that the new DEs only related to operations within Murray Irrigation. Thus:

“If you transfer water entitlements externally you can leave the delivery entitlements on your landholding, trade or transfer them to another eligible landholding, or pay a one off termination fee.”

42. The Q&A document informed members that Murray intended to impose two charges for water usage:

“a base usage charge for water use per ML, up to the number of delivery entitlements held, and a higher charge applied for water use above 100% of delivery entitlements held. The base rate will be the price for most water delivered throughout Murray Irrigation, even in very good water supply years. Obviously, the more delivery entitlements you own, the more water you will be able to use at a lower rate. The second tier of the water usage charge for water used without corresponding delivery entitlements, will be significantly dearer”.

The document pointed out that the more DEs a member owned the more the annual infrastructure charges would be regardless of the number of WEs or the quantity of water used.

43. The Q&A document explained the reasons for the changes:

“The changes will ensure we comply with recommendations resulting from the Australian Competition and Consumer Council (ACCC) inquiry into the way irrigation companies charge for their fixed costs, as well as a number of other pricing and entitlement-ownership issues. The NSW and Federal Government endorsed the ACCC recommendations in November 2006, effectively making Murray Irrigation’s exit fee on the permanent transfer of water entitlements from our bulk Water Access Licence (WAL) unworkable and illegal.

…

Murray Irrigation’s Board has now confirmed new arrangements which clarify the basis for future fixed charges and allow us to comply with the ACCC recommendations. The ACCC, in a recent response to an enquiry from a local solicitor, has also confirmed that Murray Irrigation’s policy is in accord with its requirements.”

44. In a press release dated 5 July 2007 Murray announced that it had met the “deadline” of 1 July 2007 to comply with the ACCC’s water trading and pricing recommendations.

45. On a date not precisely identified in the submissions, the Board varied the terms of the WE Contract to incorporate changes intended to give effect to the new arrangements. The variations were made pursuant to cl 6(b) of the Constitution. [25] It is common ground that the WE Contract in this form bound Murray and the appellant. The Policies approved by the Board also were consistent with the new unbundling arrangements.

Contractual documents

25. Reproduced at [47] below.

Constitution

46. The version of Murray’s Constitution in evidence was that in force as at 15 December 2007. The Constitution states that Murray is a non-profit making organisation the objects of which include:

“(a)   supply[ing] water at the lowest sustainable price to its Members;

(b)   establish[ing] and maintain[ing] prudent Reserves for the ongoing viability of the business, as provided in this Constitution”.

Murray’s ancillary objects include applying for, obtaining and holding all licences, authorities and permits necessary for it to carry on the undertaking of an irrigation corporation within the meaning of the Water Management Act.

47. The following provisions of the Constitution are relevant for present purposes:

“2   SHARES, WATER AND DELIVERY ENTITLEMENTS

…

2.3   Board to Issue Delivery Entitlements

(a)   The Board shall issue Delivery Entitlements to Members in accordance with the Charges Policy.

(b)   A Delivery Entitlement may be terminated by a Member upon application to the Board and payment of the termination fee, or otherwise by the Board in accordance with the Water Entitlements Contract and the Policies of the Company.

(c)   …

…

2.11   Terms on which Water and Delivery Entitlements are held

Water and Delivery Entitlements may only be held subject to the terms and conditions of a Water Entitlements Contract between the Holder and the Company. The Holder shall be responsible for such charges and fees in relation to the Water and Delivery Entitlements as are determined by the Board from time to time pursuant to the terms of that Water Entitlements Contract.

3   TRANSFERS, DEALINGS WITH AND TRANSMISSION OF SHARES, WATER AND DELIVERY ENTITLEMENTS

3.1   Transfers

(a)   Shares;

…

(b)   Water Entitlements;

(i)    any person, whether a Member or not, may be the holder of Water Entitlements.

(ii)   [W]ater Entitlements are held subject to the terms and conditions of a Water Entitlements Contract between the Water Entitlements Holder and the Company.

(c)   Delivery Entitlements;

(i)   [D]elivery Entitlements may only be held by a Member.

(ii)   the terms and conditions applicable to Delivery Entitlements shall be as determined by the Board from time to time.

(d)   Transfers;

(i)   transfers of Water Entitlements and Delivery Entitlements shall be regulated by the terms of the Water Entitlements Contract and the Policies of the Company.

…

3.7   Dealings with Water Entitlements and Delivery Entitlements

(a)(Dealings): Dealings with Water Entitlements and Delivery Entitlements shall be in accordance with the Policies of the Company and pursuant to the terms of the Water Entitlements Contract.

(b)   (NWI Agreement): The Board in approving or refusing to approve any dealing with Water Entitlements or Delivery Entitlements must have due and proper regard to the provisions of the Act and the principles of the NWI Agreement then in force, subject to any contrary applicable law.

…

5   QUALIFICATIONS FOR MEMBERSHIP AND HOLDING WATER AND DELIVERY ENTITLEMENTS

5.1   Eligibility for Membership

Subject to Rule 5.2, on or prior to holding Shares in the Company, a person must be a Landholder.

…

5.3   Eligibility to Hold Water Entitlements Independently of Shares

A person holding Water Entitlements (independently of Shares in the Company);

(a)   may or may not be a Landholder; and

(b)   must be a party to a Water Entitlement Contract.

5.4   Eligibility to Hold Delivery Entitlements

(a)    only a Member may hold Delivery Entitlements.

(b)   delivery Entitlements are attached to the Member’s Landholding.

6   WATER ENTITLEMENT CONTRACTS

(a)(Terms and conditions): The terms and conditions of each Water Entitlements Contract will bind the Company and the Member or the Water Entitlements Holder, notwithstanding the absence of a separate Water Entitlement Contract being signed by the Company and each Member or Water Entitlements Holder.

(b)   (Variation to terms and conditions): The Board may vary from time to time the terms and conditions of the Water Entitlements Contract and shall publish the varied Water Entitlement Contract on the Company’s Website. The varied Water Entitlements Contract shall be deemed to bind;

(i)   the Company; and

(ii)   each Member or Water Entitlements Holder from the date of such publication,

and the fact of the Member or Water Entitlements Holder drawing receiving or otherwise dealing with water notwithstanding the absence of the signature of the Company and of either the Member or the Water Entitlements Holder to the varied shall be conclusive evidence of the acceptance by the Member or Water Entitlements Holder of the terms of the varied Water Entitlements Contract.” (Emphasis to cl 3.1(d)(i) added.)

48. The definition clause of the Constitution (cl 1.2) contains definitions that apply unless “there is something in the subject matter or context inconsistent”. The definitions include the following definitions:

“‘Act’ means the Water Management Act 2000 (NSW).

…

‘Board’ means the Board of Directors of the Company as it may be constituted from time to time.

…

‘Charge’ means the monetary payment, including any Termination fee, required by the Company to be paid by Landholders and Water Entitlements Holders in respect of Water Entitlements and Delivery Entitlements pursuant to the Charges Policy.

…

‘Charges Policy’ means the Company’s policy on Charges and fees relating to Water and Delivery Entitlements.

…

‘Delivery Entitlement’ is the right of a Member to the delivery to the Member’s Landholding of the Member’s allocation attaching to one Water Entitlement at the Standard Water Usage Charge.

…

‘Holder’ refers to the holder of a Water Entitlement or Delivery Entitlement.

…

‘Licences’ means the Operating Licence and all other licences and authorities required by the Company to permit it to lawfully carry on business as an irrigation corporation.

…

‘Member’ means a person who is the registered holder of a Share or Shares.

…

‘NWI Agreement’ means the Intergovernmental Agreement on a National Water Initiative between the Commonwealth of Australia and the Governments of New South Wales, Victoria, Queensland, South Australia, the

Australian Capital Territory and the Northern Territory, dated 25 June 2004.

…

‘Policies of the Company’ means … the Charges Policy and includes the Water Entitlements Contract and any other policy adopted by the Board from time to time and notified to the Member and where appropriate, to Water Entitlements Holder, by publication on the Company's Website, and which the Board determines to be appropriate for the Company in carrying on its business and to comply with any conditions of the Licences, …

…

‘Termination fee’ means the fee, determined by the Board, payable to [Murray] to terminate a Delivery Entitlement.

…

‘Transfer Rules’ means the rules adopted by the Board from time to time governing the transfer of;

(a)   Shares, Water Entitlements and Delivery Entitlements between Members; and

(b)   Water Entitlements between non-Members and between Members and non-Members.

…

‘Water Entitlement’ means the contractual and other rights evidenced by a Certificate and by an entry in the Water Entitlements Register to a supply in a Year of a nominal quantity of one Megalitre of water as though measured at a Diversion Point and inclusive of a component for Transmission Losses.

…

‘Water Entitlements Contract’ means the contract made between the Company and the Member and/or Water Entitlements Holder, approved by the Board from time to time, and containing the terms and conditions pursuant to which a Water Entitlements Holder holds and may deal with Water Entitlements and the terms and conditions attaching to Delivery Entitlements and includes any such contract entitled a ‘Water Supply Contract’.

…

‘Water Entitlements Holder’ means a Member or Non-Member holding Water Entitlements.”

49. Headings in the Constitution are said to be for ease of reference only and must be ignored in construing the Constitution (cl 1.3).

WE Contract

50. The WE Contract in the form it took after the 2007 amendments included the following provisions: [26]

    26.    The version of the WE Contract signed by the appellant in evidence was dated 14 January 2009, after the relevant events. The Court was told that nothing turns on this and that the terms were unchanged from those in force from mid-2007.

“PART A:   INTRODUCTION AND INTERPRETATION

INTRODUCTION

A. [Murray] is an irrigation corporation holding Water Access Licences issued to it under the Water Management Act 2000 (NSW) and pursuant to the Act and its Constitution has or may issue Water Entitlements to Members and Non Members.

B.    This Contract sets out the terms and conditions pursuant to which those Water Entitlements are held, how dealings may be effected and the basis on which water pursuant to those Water Entitlements may be supplied to or at the direction of Members and Non Members.

…

PART B: WATER AND DELIVERY ENTITLEMENTS: GENERAL AND DEALINGS

2   WATER ENTITLEMENTS: GENERAL

2.1   Water Entitlements Contract Binding

2.1.1 Each Water Entitlements Holder shall be bound by the terms of the Water Entitlements Contract whether a Member or Non Member and whether an actual signatory to the Contract or a party to a Deemed Contract by virtue of Rule 6 of the Constitution.

2.2   Water Entitlements Certificates

…

2.2.7   Qualification for Ownership

Any person may be a Water Entitlements Holder whether or not a Member of the Company or a Landholder.

2.2.8   Terms on which Water Entitlements are held

Water Entitlements are held by the Water Entitlements Holder subject to the terms and conditions of this Contract. The Water Entitlements Holder shall be responsible for such Charges in relation to the Water Entitlements as are determined by the Board from time to time pursuant to the terms of the Charges Policy.

2.3   Dealings with Water Entitlements

2.3 1   Transfers

A Water Entitlements Holder may not transfer a Water Entitlement or any interest in any Water Entitlement unless approved by the Board.

2.3.2   Notification of Refusal to Register

The Board may only decline to register any transfer or dealing in respect of Water Entitlements for a good reason including without limitation where the transferor or transferee owes the Company any Charge where the Company refuses to register a transfer or a dealing, for any reason, the Company must, within 21 days from the date of lodgement of the transfer or dealing, send to the transferor and transferee written notice of refusal.

…

3   WATER ENTITLEMENTS: DEALINGS

3.1   The Water Entitlement Holder may not sell, transfer, or otherwise deal with the Water Entitlements or the Annual Allocation (in whole or in part) except in accordance with the requirements and procedures of the Transfer Rules Policy.

3.2   No Transfer will be approved which reduces the number of Water Entitlements held in connection with a Landholding:

(a)   to less than 5; [27] or

27.    A minimum holding of WEs is required in order to ensure delivery of sufficient water for domestic purposes.

(b)   …

…

3A   DELIVERY ENTITLEMENTS: GENERAL

3A.1   Water Entitlements Contract Binding

3A.1.1 Each Delivery Entitlements Holder shall be bound by the terms of the Water Entitlements Contract whether an actual signatory to the Contract or a party to a Deemed Contract by virtue of Rule 6 of the Constitution.

3A.2   Delivery Entitlements Statement

3A.2.1    Creation of Delivery Entitlements

(a)   Each Member shall be entitled to and shall receive one Delivery Entitlement for each Water Entitlement held by that Member as at 4th May 2007.

…

3A.2.7 Qualification for Ownership

Only a Member may hold a Delivery Entitlement.

3A.3   Dealings with Delivery Entitlements

3A.3.1    Transfers

A Member may not transfer a Delivery Entitlement or any interest in any Delivery Entitlement unless approved by the Board.

3A.3.2   Notification of Refusal to Register

The Board may only decline to register any transfer or dealing in respect of Delivery Entitlements for a good reason including without limitation where the transferor or transferee owes the Company any Charge where the Company refuses to register a transfer or a dealing, for any reason, the Company must, within 21 days from the date of lodgment of the transfer or dealing, send to the transferor and transferee written notice of refusal.

…

3A.4   Termination of Delivery Entitlement

3A.4.1   The Holder of a Delivery Entitlement may:

(a)   Surrender the Delivery Entitlement at any time and pay the Termination Fee to the Company; or

(b)   Continue to hold the Delivery Entitlement and pay the annual Access Fee levied on the entitlement from time to time.

3A.4.2   Where the Delivery Entitlement is terminated;

(a)   the Company shall no longer be obliged to delivery, or to be able to deliver water, as specified under the Delivery Entitlements; and

(b)   any obligation to pay on-going access fees in connection with the Delivery Entitlement are cancelled from the date of termination.

…

3A.6   Nature of Delivery Entitlements

3A.6.1   A Delivery Entitlement confers, on a Member, subject to payment of the annual access fee, a right to have water delivered to the landholding at the standard usage charge.

3A.6.2   Where water is delivered to a landholding otherwise than pursuant to a Delivery Entitlement then the premium usage charge shall be payable in respect of the volume of water delivered.

…

PART F: CHARGES, THE CHARGES POLICY AND LWMPS

10   CHARGES AND THE CHARGES POLICY

10.1   The Water Entitlement Holder agrees to pay to the Company as and when required all bulk water Charges payable by the Company in respect of the Water Entitlements in accordance with the Charges Policy.

10.2   The Member agrees to pay to the Company;

10.2.1   all access fees and other charges due including termination fees in respect of Delivery Entitlements held; and

10.2.2   all usage fees including standard water usage fees and premium water usage fee in respect of water delivered to the Member’s Point of Supply.

…

10.6   The Company may at any time vary the Charges, if actual or anticipated expenses or liabilities warrant such a variation.

20   AMENDMENT OF THIS CONTRACT

20.1   The Holder acknowledges that the Board may vary the terms of this Contract, or amend it, from time to time. The Holder agrees to be bound by the terms as varied, or amended, upon receipt of notice of the varied terms or amended contract.

…”   (Emphasis added.)

51. The WE Contract permitted Murray to take security from a member in certain circumstances where the member applied to sell WEs permanently and was in arrears with access fees (cl 3A.5). The member agreed that Murray’s right to take security and other specified rights constituted caveatable interests over the member’s Landholding (cl 3A.7). In the event of default by a member, Murray could suspend water supply to that member’s Landholding and charge the member for all expenses or losses incurred as a result of the default (cll 11.2, 11.5).

52. The definition clause in the WE Contract generally mirrored the definitions in the Constitution. However some definitions were different. For example “Charge” was defined to mean and include:

“the monetary payment, including a Standard or Premium Water Usage Charge or other water usage charge, termination fee … or any other charge, fee or sum determined by the Company to be paid in respect of a Water Entitlement, Delivery Entitlement or other matter or thing whether under the Charges Policy or otherwise under or in connection with this Contract or its subject matter …”

The Policies

53. Prior to April 2008, consistently with the terms of the WE Contract, the Policies permitted a member of Murray to transfer DEs independently of WEs. WEs could be transferred without the member having to surrender any DEs or being required to pay termination fees. DEs could be transferred, but only between members of Murray, reflecting the fact that a DE was an entitlement of a member to the delivery of one WE to the member’s Landholding (that is, a parcel of land within Murray’s “Area of Operation”).

53. In an information document published on 9 April 2008 Murray explained to members the changes that were said to have been made to the Policies (although the amendments were not in fact made until 4 May 2008). The information document included the following:

“1.   What changes have been introduced?

…

The changes introduced will require:

a)   Where Water Entitlements are transferred from one Murray Irrigation landholding to another Murray Irrigation landholding, the corresponding number of delivery entitlements will also need to be transferred or terminated.

b)   Where Water Entitlements are transferred to a Water Entitlement Only Holder Account (i.e. a non-landholding account) or from the Murray Irrigation Limited Water Access Licence, termination of a corresponding number of Delivery Entitlements will be required.

…

3.   Why has Murray Irrigation introduced these changes?

Murray Irrigation has introduced these changes to assist the Company manage the financial and infrastructure impacts of the sale of Water Entitlements in the best interests of the Company, irrigators and the community.

Recent increases in the number of Water Entitlements sold without Delivery Entitlements has highlighted concerns that our previous rules did not allow the Company to adequately manage the financial and infrastructure impacts of the sale of Water Entitlements.

The result of transfers to Water Entitlement Holder (non-landholding) Accounts to date is that although the termination fee has generally been calculated into the sale price, the transfer has not involved termination of the corresponding Delivery Entitlements. In the majority of cases where Water Entitlements are transferred to a Water Entitlement Holder Account, the majority of Water Entitlements on the landholding have been transferred and in most cases the seller has not terminated the corresponding Delivery Entitlements.

Our previous rules, where termination of Delivery Entitlements was only required in specific circumstances (where landholdings have a history of being “non financial” and the majority of Water Entitlements were being sold) did not provide the Company with any direction about the selling of landholdings requirements for irrigation supply infrastructure.

4.   Can Water Entitlement owners continue to transfer or sell their Water Entitlements?

These changes continue to allow individuals to make decisions about the sale of their Water Entitlements. However, these changes introduce a greater recognition of the mutual dependence of irrigators within Murray Irrigation on the water supply infrastructure.

5.   What is the termination charge and how was it calculated?

Murray Irrigation’s termination charge is $382.95 per Delivery Entitlement including tax. This is 15 times a “shadow” access charge. A “shadow” access charge is what the annual access fee per Delivery Entitlement would be if Murray Irrigation collected 100% of its fixed costs through its annual infrastructure access charge. Murray Irrigation currently recovers its fixed costs from both the annual (infrastructure access) charge and a per megalitre water use charge.

The calculation of the termination charge was based on Schedule E of the Murray Darling Basin Agreement.

…

10.   Why has Murray Irrigation’s structure become so complicated?

In response to changed government legislation, policies and intergovernmental agreements, Murray Irrigation changed its Constitution in January 2006 so that the Company’s policies did not conflict with the NSW Water Management Act, introduced Delivery Entitlements in May 2007, and introduced a different charging policy in 2007/08.

11.   Will this be Murray Irrigation’s last change?

No. Murray Irrigations’ Directors need to make decisions in the interests of the Company and all of its members whilst complying with State and Commonwealth legislation. The Water Act 2007 includes development of water market rules and water charge rules. These rules, once established, may require further changes to our policies.” (Emphasis in original)

55. Clause 3 of the Transfer Policy dealt with “Transfers and Restrictions Generally”. As amended in 2008, cll 3.1 and 3.2 provided as follows:

“3.1   A Water Entitlements Holder may effect an Internal or External Annual or Permanent Transfer to any person or entity whether a Member or not.

3.2   A Delivery Entitlement:

(a)   may only be held by, and transferred to, a Member; and

(b)   may be transferred Permanently, or

(c)   may be transferred for a Season only by way of the transfer of a Delivery Right.”

56. The key amendment to the Transfer Policy in 2008 was the introduction of cl 3.11, which provided as follows:

“Where Water Entitlements are permanently transferred without an equal number of Delivery Entitlements accompanying the Transfer, then the Transferor shall pay a termination fee to terminate that number of Delivery Entitlements corresponding to the number of Water Entitlements to be transferred. Delivery Entitlements may not be permanently traded unless accompanied by a permanent transfer of an equal number of Water Entitlements. This requirement shall apply in respect of all applications received by MIL on and from 8th April 2008 except for applications for permanent transfer of:

(a)   Water Entitlements held in existing separate allocation accounts or where the Water Entitlements remaining on the landholding after transfer approval would be equal to or greater than the number ofDelivery Entitlements applicable thereto; or

(b)   Delivery Entitlements where held without corresponding Water Entitlements.”

57. “Termination Fee” was defined to mean:

“the fee determined by the Board payable to Murray, required to terminate a Delivery Entitlement”.

The evidence indicated that the termination fee in fact charged was fifteen times the “shadow access fee”. [28]

28. See at [54] above.

58. A corresponding amendment was made to the Charges Policy by the introduction of a new provision (cl 6.1) substantially in the same terms as cl 3.11 of the Transfer Policy.

The Primary Judgment

Factual findings

59. Since it was part of the appellant’s case that the Board of Murray had acted in bad faith, the Primary Judge first considered whether Mr Ellis’ evidence was to be accepted. Mr Ellis gave evidence that the Board’s decision in April 2008 was motivated by the fear that the continued transfer of WEs by members would create a significant risk of serious harm to Murray’s viability and was not motivated by a desire to harm members. The appellant invited his Honour to reject Mr Ellis’ evidence.

60. The primary Judge found that although Mr Ellis had reconstructed some of the events, he had not given dishonest evidence. [29] His Honour accepted that the motivation of Mr Ellis and of other directors who spoke to Mr Ellis for implementing the changes of April 2008 was to protect Murray’s financial position. [30] The primary Judge acknowledged that Murray had “some weapons in its armoury with regard to farmers who defaulted on their access fees for DEs”, but inferred that as farmers were experiencing drought and financial stress these remedies “were not of the greatest efficacy”. [31]

    29. Primary Judgment at [95].

    30. Primary Judgment at [96].

    31. Primary Judgment at [98].

61. The primary Judge made additional findings of fact as follows: [32]

“I accept the evidence of Mr Ellis that a significant motivation for the change was to cause the Federal Government to come to the negotiating table with regard to its water policy.

… I am not satisfied that the intention of the directors in implementing the change was to behave so intolerably as to cause the protests of some of the members of Murray to be so loud as to force the Government to change its policy. I do accept, however, that their intention was to let the Government see, in a stark way, the assertion of Murray about the drawbacks of government policy, by way of the adverse consequences of the change upon a number of members of Murray.” (Emphasis in original)

32.    Primary Judgment at [100]-[101].

Breach of contract

62. The primary Judge rejected the appellant’s submission that the WE Contract had “primacy” over the Policies and thus it was not open to Murray to change the Policies so that they were inconsistent with the appellant’s rights under the WE Contract. The primary Judge gave four reasons for construing the contractual relationship between Murray and the appellant so as to permit the changes effected in April 2008: [33]

“First, the relationship between the [appellant] and Murray (and of course between other member farmers and Murray) was not a single transaction; rather, it was an ongoing relationship that facilitated irrigation for farming, in the long term, within a region of New South Wales. That temporal aspect is suggestive of an objective intention to provide flexibility.

Secondly, similarly suggestive of flexibility is the fact that farming in particular – especially in Australia – is susceptible to variations in climate and conditions that are completely beyond human control. Sometimes an area will be in drought; sometimes in flood; sometimes conditions will be fruitful. In short, the subject matter of the contract bespeaks flexibility, not rigidity.

Thirdly, even adopting to a degree the “hierarchical” analysis of the [appellant], and according the Constitution primacy, one can see from the extracts from it above that it repeatedly speaks of the rules and policies, just as much as it speaks of the WEs Contract. Reading all of the instruments as a whole, the Transfer Rules and the Charges Policy are not a footnote or afterthought. The repeated reference to them in the Constitution objectively suggests that they were not relegated to some lesser level, below the WEs Contract, and with regard to which they must be read down.

Fourthly, I accept the submission of senior counsel for Murray that the policies and rules as amended on 7 April 2008 can be read harmoniously with the Constitution and, more importantly, with the WEs Contract. That is because they can be read as a “carve-out” from the WEs Contract, limited as they are to a number of delineated circumstances. The Constitution having made mention of them, and they having specific work to do, I think it would be a large step to set them at nought on the basis of the WEs Contract.”

33.    Primary Judgment at [108]-[111]. The findings were expressed to apply also to the cases brought by the other appellants whose cases have been settled. Nothing turns on this.

Contractual damages

63. The primary Judge stated that although he had rejected the appellant’s claim founded on breach of contract he would deal briefly with the question of damages. [34] His Honour noted that the appellant’s submissions concentrated on mitigation of loss whereas in his Honour’s view the only question was whether the appellant had suffered a compensable loss by reason of Murray’s (assumed) breach.

    34.    Primary Judgment at [147]-[148].

64. The primary Judge considered that the appellant was not “out of pocket” as a result of the amendments to the Policies and Murray’s implementation of the changes. [35] While his Honour did not explain why he reached that conclusion, it appears that he found that termination fees had not been borne by the appellant but by WAMC pursuant to the terms of the contracts for the sale of the WEs. Accordingly, his Honour would not have awarded damages by reason of the requirement imposed on the appellant that he pay termination fees.

    35. Primary Judgment at [156].

65. The primary Judge reached a different conclusion on the appellant’s claim for the “efficiency dividends” that he would have received had he retained 2,800 DEs after disposing of 2,800 WEs. His Honour did not say why he would have allowed the claim, but he did say that he was not prepared (as Murray submitted) to set off the access fee that the appellant would have had to pay had he retained the DEs. His Honour considered that a set off should not be allowed because there had been insufficient compliance with the rule in Browne v Dunn [36] , in that the issue of access fees had not been put to the appellant in cross-examination.

    36. (1893) 6 R 67.

Unconscionability

66. The appellant’s pleaded case alleged that Murray engaged in unconscionable conduct in contravention of both ss 51AA and 51AC of the Trade Practices Act. However, his submissions to the primary Judge relied only on s 51AC. [37] The primary Judge accepted that the concept of unconscionability in s 51AC of the Trade Practices Act is broader than the equitable doctrine incorporated in the “unwritten law” referred to in s 51AA. [38] His Honour also accepted that while unconscionability is often co-extensive with a high level of “moral obloquy”, it is not limited to such cases. [39] The issue to be determined was whether the appellant had established that, having regard to all the circumstances, Murray acted towards the appellant in a way that was against conscience.

    37. Section 51AA(1) of the Trade Practices Act provided that a corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law of the States and Territories. Section 51AA(2) stated that the section did not apply to conduct prohibited by s 51AC. Section 51AC is reproduced at [134] below.

    38. Primary Judgment at [175].

    39. Primary Judgment at [178]-[179], citing Paciocco v Australian & New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 at [305] (Allsop CJ, Besanko and Middleton JJ agreeing) (Paciocco (FC)). The decision of the Full Federal Court was affirmed by Paciocco v Australian & New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 (Paciocco (HCA)).

67. The primary Judge observed that although the appellant relied on a number of matters his principal contention was that Murray was motivated by an “ulterior purpose” rather than a genuine concern about the financial consequences of the unbundling arrangements then in place. Murray’s ulterior motive, so the appellant argued, was to engineer change in government policy by “exact[ing] millions of dollars from the members of [Murray] and compell[ing] them to complain to the Government”. [40]

    40. Primary Judgment at [173].

68. The primary Judge recognised that “unconscionability” for the purposes of s 51AC of the Trade Practices Act is not necessarily co-extensive with “moral obloquy” and that all of the circumstances have to be considered. In short, the question that his Honour asked was whether the appellant had established that Murray, having regard to all the circumstances, acted in a way that was against conscience. [41]

    41. Primary Judgment at [180].

69. His Honour gave twelve reasons for not being satisfied that Murray had acted against conscience. The first reason was his Honour’s finding, based on acceptance of Mr Ellis’ evidence, that the changes to the Policies were “implemented out of a sincere concern for the financial position of Murray”. [42] Among the other matters his Honour took into account were the following: [43]

    42. Primary Judgment at [182].

    43.    Primary Judgment at [183]-[192].

• the appellant was not forced to sell his WEs and made the decision to sell in the context of the changes;

• the appellant was in “a position to renegotiate [his] contract for the sale of [his] WEs, in order to accommodate the termination fees”;

• the appellant was not targeted personally by the changes to the Policies;

• the members of Murray were farmers rather than sophisticated business people, but so were the directors of Murray;

• although Mr Ellis said in evidence that he believed the changes to the Policy might be unlawful, in fact they did not involve any breach of contract; and

• if Murray had given advance notice of the changes (as the appellant contended it should have), the exercise would have been “rendered … largely futile”.

70. The primary Judge gave additional reasons as follows: [44]

“I have already accepted that the change [to the Policies] was made, at least in part, to cause the Federal Government to reflect on its water policy, and with the hope that it would lead the Government to the negotiating table, with an eye to having the Government change its policy. And I accept that the passage of a mere 72 hours or so between the meeting with [the Minister and Board members] and the making of the change is not coincidental.

That finding of fact has given me significant pause for thought in the context of assessing asserted unconscionability. Ultimately, however, I do not believe that the conduct of Murray in making the change was intended to treat some of its members so harshly or unfairly as to cause the Government to rethink its policy, as a reaction to any such blatant unfairness. Rather, I think that Murray was seeking to show the Government that it could not comply with the recommendations of the ACCC, and that Murray urgently needed to adopt a different structural relationship with its members.

In other words, I consider that the ulterior purpose of causing the Government to change it water policy was not unconscionable, either by its nature (that is, in the ultimate, an attempt to protect the financial position of Murray and its members), or because of the way it was implemented.”

Breach of contract claim

44.    Primary Judgment at [193]-[195].

Submissions

Appellant’s argument

71. The appellant’s written submissions on the appeal contended that although Murray had power under its Constitution to vary the Policies, that power was not unfettered. According to Mr Pritchard, it was not open to Murray to amend the Policies to alter all facets of the contractual relationship between Murray and the appellant. In particular, Murray could not amend the Policies so as to detract from cl 3A.4.1 of the WE Contract, which gave the holder of a DE an election to surrender and pay a termination fee or to continue to hold the DE and pay the annual access fee levied on the entitlement.

72. Mr Pritchard invoked two principles. First, where a contract empowers one party to impose further contractual terms, as with Murray’s power to amend the Policies and the WE Contract, the power is to be understood as constrained by the express terms of the contract. In this case any amendments to the Policies had to be consistent with the express agreement embodied in cl 3A.4.1 of the WE Contract.

73. Secondly, a power to amend a contract must be confined to amendments reasonably within the contemplation of the parties at the time the contract was made, having regard to the nature and circumstances of the contract. [45] It could not be supposed that the parties had in mind that the express contractual entitlement conferred by cl 3A.4.1 of the WE Act could be curtailed by amending the Policies. It was necessary, so Mr Pritchard argued, to read in the contractual documents in a “hierarchical fashion”, with the Policies subordinate to the terms of the WE Contract. Contrary to the reasoning of the primary Judge, cl 3.11 of the Transfer Rules and cl 6.1 of the Charges Policy could not be regarded as “carve-outs” to the terms of the WE Contract. It if were otherwise, the Board could alter its Policies so as to change a member’s entitlements under the WE Contract.

    45. Citing Hole v Garnsey [1930] AC 472 at 500 (Lord Tomlin).

74. Mr Pritchard acknowledged that cl 20.1 of the WE Contract[46] entitled Murray to vary the terms of the WE Contract or to amend it from time to time. He pointed out, however, that Murray had not attempted to amend the WE Contract. Instead it had amended the Policies and left intact the appellant’s rights under the WE Contract.

Murray’s argument

46. Reproduced at [50] above.

75. Murray submitted that the primary Judge correctly applied orthodox principles of contractual construction. His Honour took into account the terms of Murray’s Constitution which provided for dealings with WEs and DEs to be in accordance with the Policies. The WE Contract itself recognised that the transfer of WEs could only be undertaken in accordance with the requirements and procedures of the Transfer Policy. There was nothing in the language of the various instruments that gave the WE Contract “primacy” over the Policies. Clause 3A.4.1 of the WE Contract could operate harmoniously with cl 3.11 of the Transfer Policy and cl 6.1 of the Charges Policy by reading cl 3A.4.1 as a general provision and cll 3.11 and 6.1 as provisions intended to operate in specific circumstances.

Submissions

Appellant’s submissions

108. In his written submissions the appellant contended that he had discharged the onus of proving that he had sustained a loss of $612,931.90, being the unrefunded portion of the termination fee, as a consequence of Murray’s breach of contract. On the appellant’s case, Murray breached cl 3A.4.1 of the WE Contract by amending the Policies and requiring the appellant to surrender 2,800 DEs and pay termination fees as a condition of granting approval to the sale of 2,800 WEs. The appellant would not have had to pay termination fees of $931,140 but for Murray’s breach of contract. It followed that the appellant’s loss was equivalent to the termination fees exacted from him by Murray in breach of its contractual obligation, subject to adjustment to take account of the amount refunded by Murray.

109. In anticipation of an argument that Murray might advance, Mr Pritchard submitted that the so-called avoided loss principle did not apply in this case. That principle has been described as follows:[55]

“If the innocent party [takes] action to mitigate the loss to it consequent on the guilty party’s wrong, even if the action goes beyond reasonable action, in general the guilty party is entitled to an allowance for the benefit to the innocent party”.

Mr Pritchard accepted that each contract of sale notionally apportioned a portion of the purchase price to the termination fees. But that apportionment did not establish that the purchaser had met the termination fees, thereby relieving Murray from liability to compensate for the appellant’s loss. Accordingly, Murray was not entitled to any benefit from the apportionment in the contracts.

Murray’s submissions

55. Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443; 12 BPR 23,923 at [40] (Giles JA, Santow JA and Hunt AJA agreeing).

110. Murray submitted that the primary Judge’s approach reflected orthodox principles governing the award of damages. According to Mr Pike, the appellant is entitled to be put in the same position as he would have been had Murray performed its contractual obligations. In circumstances where the purchaser of the WEs expressly agreed to pay a specific amount in respect of termination fees, it could readily be inferred that if the appellant had not been required to pay the termination fees the purchase price would have been reduced accordingly.

111. Mr Pike submitted that this analysis has nothing to do with the avoided loss principle, which applies only once the loss attributable to the breach of contract has been assessed in accordance with ordinary principles. The principle, so Mr Pike argued, is only relevant to whether the quantum of damages that otherwise would be assessed should be diminished by reason of events occurring after the date of the breach.

112. In the alternative, Mr Pike submitted that if the appellant’s negotiation of a price for the WEs so as to include a component for the termination fees is not relevant to the assessment of damages on ordinary principles, the appellant’s conduct should be taken into account in assessing damages by applying the avoided loss principle. That principle allows the court to balance losses and gains by considering all the circumstances including actions arising out of transactions which comprise the subject matter of the contract. On that approach the appellant had not sustained a loss.

Termination fees

113. There is no dispute between the parties that the principle governing the assessment of damages is that:[56]

“when a party sustains a loss by reason of a breach of contract, he [or she] is, so far as money can do it, to be placed in the same position, with respect to damages, as if the contract had been performed”.

56. Tabcorp Holdings Pty Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13] per curiam, citing Robinson v Harman (1848) 1 Ex Rep 850 at 855; 154 ER at 365 (Parke B).

114. The application of this principle is not always straightforward. But in this case the relevant question to ask is what the appellant would have received for the sale of 2,800 WEs if Murray had performed the contract in accordance with its obligations. On that basis, it is necessary to determine the price the appellant would have received for the sale of 2,800 WEs in October 2008 had Murray not amended and enforced the Policies (since the amendments, on the appellant’s case, were in breach of contract). The answer to the question requires consideration of the net price the appellant would have received under the contractual regime in force prior to April 2008, under which the appellant could have transferred WEs to a third party without being required to surrender any DEs or to pay any termination fees to Murray. More specifically the question is what price the appellant would have received for each WE, had he agreed to transfer 2,800 WEs to WAMC or to another willing but not anxious purchaser, under the pre-existing contractual regime.

115. Mr Pike submitted that the terms of the sales contracts between the appellant and WAMC demonstrated that the appellant succeeded in shifting the burden of paying the termination fees onto WAMC and thus avoided any loss as a result of the changes to Murray’s policies. The terms of the sales contracts were sufficient to establish, so he argued, that the market price for WEs in October 2008 was in the order of $900 per WE rather than the contract price of $1,250. [57] At the very least, the fact that the parties had appropriated a specific portion of the purchase price to the payment of termination fees prevented the appellant claiming that it had suffered a loss equivalent to the moneys so appropriated.

     57. Under the sales contracts the appellant was required to pay the termination fee of $382 per WE to Murray, leaving a net price before other expenses of $868 per WE. If the actual termination fee paid by the appellant of $332.55 per WE is used, the net purchase price was $917.45 per WE.

116. The terms of the sales contracts, of themselves, do not necessarily contradict the appellant’s case on damages. The contractual provisions indicate that the WAMC, as the purchaser, was concerned to ensure that the purchase price included the termination fees and that the appellant discharged his obligation to pay the termination fees to Murray. It is a possible but not necessarily compelling inference that WAMC agreed to a higher purchase price in order to relieve the appellant from the economic burden of paying the termination fees. In the absence of further evidence, the terms of the sales contracts are not necessarily inconsistent with the appellant’s contention that, but for Murray’s breach of contract, he would have received $1,250 per WE on the sale of 2,800 WEs free from any obligation to pay termination fees to Murray.

117. Mr Pike relied on other evidence to bolster the inference that a sale of WEs in October 2008, assuming the previous contractual regime to be in force, would not have realised anything like $1,250 per WE. Mr Pike submitted that the additional evidence showed that WAMC was prepared, in effect, to increase the price it paid for WEs so as to relieve sellers of the burden of paying the termination fees levied by Murray. He relied on three matters.

118. First, at some time shortly after 12 June 2008, Murray published a document entitled “Permanent Water Sale History”. The document recorded the price per WE of 25 transfers of WEs by Murray’s members between 7 April 2008 and 12 June 2008. However, the document warned that:

“The information published is not a complete record of all permanent transfers and many include related parties, therefore should not be taken as necessarily representing true market value.”

119. Four of the recorded transactions involved the transfer of fewer than 100 WEs and in each of these cases, the price did not exceed $625 per WE. The price per WE in the remaining transactions varied from $600 to a maximum of $1,000 per WE. The maximum price was received by the sellers in two transactions, both of which were apparently completed on 16 April 2008. One involved the transfer of 1,662 WEs and the other the transfer of 1,456 WEs. The evidence does not establish whether the transferors had to pay termination fees out of the price paid by the purchaser. The amendments to Murray’s Policies applied to applications for approval received on and after 8 April 2008, but it is not clear when approval was sought for these two transfers.

120. Secondly, the primary Judge found that the Bouchers, whose case was heard with those of the appellant and the Pratts, [58] agreed to sell 670 WEs to DECC at an “original price” of $950. DECC agreed to increase the price to $1,225 when it became clear that the Bouchers would have to pay termination fees on the transfer of the 670 WEs. [59] Documentary evidence indicates that DECC agreed to the increased price per WE after the Bouchers unsuccessfully appealed to Murray to exempt them from the termination fees. The sale of WEs by the Bouchers settled in February 2009.

     58.    As noted earlier, all three cases were heard together. Evidence in each was evidence in the others.

     59. Primary Judgment at [73].

121. Thirdly, the primary Judge found that the Pratts transferred a total of 470 WEs in two separate transactions at an “original price” of $1,000 per WE. [60] The Pratts were required to pay termination fees of $180,121.50 out of the proceeds of sale ($383.24 per WE), but it is not clear whether the price of $1,000 per WE was adjusted (or had been adjusted) to take account of the termination fees. The Pratts’ sales settled, respectively, in June 2008 and November 2008.

     60. Primary Judgment at [74].

122. When the totality of the evidence is taken into account, in my view there was no error in the primary Judge finding that the appellant had not established that he had sustained a loss by reason of any contractual breach by Murray. It is true, as Mr Pritchard submitted, that the price list published by Murray in mid-2008 has to be treated with caution because of the warning contained in the document. Nonetheless it is striking that the highest price recorded in the document is $1,000 per WE, substantially below the price agreed between the appellant and WAMC. The list provides no support for any contention that the price for WEs in October 2008 would have been in the order of $1,250 per WE free from any obligation to pay termination fees. The list provides some evidence, albeit far from conclusive, that the price was likely to have been considerably less.

123. The most significant evidence on this issue is the arrangement between the Bouchers and DECC (or WAMC). It is clear that in this case DECC was prepared to increase the price it would pay for WEs in order to ensure that it would meet the cost of the termination fees the Bouchers would have to pay to Murray. The evidence does not establish whether the increase in price ($275 per WE) represented the entirety of the termination fees payable by the Bouchers, but it is likely to have been a very high percentage of the amount payable.

124. The arrangement with the Bouchers sheds light on the purpose of the contractual arrangements between the appellant and WAMC. The appropriation of a portion of the purchase price to the termination fees, coupled with the requirement that the fees be paid out of the purchase price, suggests that WAMC was prepared to increase the price payable to the appellant for the WEs above the price that would otherwise be payable with the intent that WAMC should ultimately bear the termination fees payable to Murray. This conclusion is consistent with a finding made by the primary Judge when considering the appellant’s contention that Murray had engaged in unconscionable conduct. His Honour found that:

“two of the three plaintiffs were in a position to negotiate their contract for sale of their WEs, in order to accommodate the termination fees that would need to be paid on their DEs”. [61]

The parties to whom the primary Judge referred were the Bouchers and the appellant.

61. Primary Judgment at [184].

125. For these reasons the primary Judge was correct to find that the appellant had not established that the termination fees paid to Murray out of the proceeds of sale of the 2,800 WEs constituted a loss in respect of which he would have recovered damages had he established that Murray breached its contractual obligations.

Efficiency dividends

126. The primary Judge allowed in full the appellant’s claim to be compensated for the “efficiency dividends” that would have been paid by Murray had the appellant retained 2,800 DEs should be allowed in full. His Honour declined to set off against the efficiency dividends the annual access fees the appellant would have had to pay to Murray in respect of the DEs. His Honour declined to do so because the appellant had not been cross-examined about the quantum of fees that would have been payable to Murray.

127. The Primary Judgment does not identify any particular issue on which the appellant could and should have been cross-examined. In the course of argument before the primary Judge, however, Mr Pritchard suggested that the appellant might have said that he was not bound to pay the access fees. This seems to be what his Honour had in mind.

128. In his written submissions in this Court Mr Pritchard contended that the appellant should have been given notice that Murray intended to claim that the access fees should be offset against any award of damages to compensate for the loss of efficiency dividends. Mr Pritchard also submitted that Murray had not sufficiently identified that this was an issue in the proceedings.

129. Contrary to Mr Pritchard’s submissions, whether the access fees should be taken into account in assessing damages was always in issue in the proceedings. The defence expressly pleaded that the appellant was contractually obliged to pay the termination fees and that:

“If the 2,800 [DEs] had not been terminated, then the [appellant] would have been liable to pay annual fees on such [DEs].”

130. Moreover, the appellant bore the burden of proving his loss. If there was some basis on which he might have been relieved from his contractual liability to pay access fees in respect of the DEs he should have adduced evidence to that effect. At that point the failure to cross-examine the appellant on the issue of access fees might have had some significance. But in the absence of any such evidence, Murray was entitled to rely on documentary evidence establishing the amount the appellant would have to pay by way of access fees during the period he would have benefited from efficiency dividends.

131. Mr Pike handed up a schedule which set out the access fees that would have been payable by the appellant in respect of the DEs from 2008/2009 to 2015/2016 (omitting the 2014/2015 years). The schedule is based on documents annexed to Mr Watts’ affidavit itemising the charges payable in each of the years. Mr Watts’ affidavit also directed attention to cl 5 of the Charges Policy which obliged each member to pay the access fee in respect of DEs held by that member. The chart indicates that the access fees payable by the appellant for the seven financial years would have totalled about $195,000, or some $58,000 more than the total of the efficiency dividends.

132. The appellant’s written submissions offered some criticisms of the calculations in the chart, but none of the criticisms demonstrate that the total of the access fees payable by the appellant would have been less than the efficiency dividends claimed as a head of contractual damages.

Restitution

133. Mr Pritchard made it clear that the appellant’s claim in restitution depended entirely on establishing that Murray’s amendments to the Policies breached its contractual obligations. As the contractual argument has not succeeded, it is not necessary to consider the restitution claims further.

Unconscionability

Legislation

134. Section 51AC of the Trade Practices Act relevantly provided as follows:

“(1)A corporation must not, in trade or commerce, in connection with:

(a)   the supply or possible supply of goods or services to a person (other than a listed public company); …

engage in conduct that is, in all the circumstances, unconscionable.

(3)Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a corporation or a person (the supplier) has contravened subsection (1) or (2) in connection with the supply or possible supply of goods or services to a person or a corporation (the business consumer), the court may have regard to:

(a)   the relative strengths of the bargaining positions of the supplier and the business consumer; and

(b)   whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c)   whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and

…

(e)   the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(f)   the extent to which the supplier’s conduct towards the business consumer was consistent with the supplier’s conduct in similar transactions between the supplier and other like business consumers; and

…

(j)   the extent to which the supplier was willing to negotiate the terms and condition of any contract for supply of the goods or services with the business consumer; and

(ja)   whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the business consumer for the supply of the goods or services; and

(k)   the extent to which the supplier and the business consumer acted in good faith.”

135. Section 82(1) of the Trade Practices Act provided that a person who suffers loss or damage by conduct of another person in contravention of a provision of Part IVA (including s 51AC) may recover the amount of the loss or damage by an action against that other person.

Significance of the unconscionability claim

136. The appellant’s contention both at trial and in this Court was that he was entitled to recover damages pursuant to s 82(1) of the Trade Practices Act for the loss or damage he sustained by Murray’s unconscionable conduct. The loss or damage was said to be the same as that which formed the basis of his claim for damages for breach of contract. Since I have concluded that the appellant did not suffer any relevant loss or damage, there is no need to determine his unconscionability claim. Nonetheless, as the issue was addressed in argument, I propose to address it briefly. In doing so I bear in mind two matters. First, Mr Pritchard did not submit that the primary Judge misstated or misunderstood the relevant principles governing the construction of s 51AC of the Trade Practices Act.

137. Secondly, although there was some ambivalence about Mr Pritchard’s approach to the evidence of Mr Ellis, it is fair to say that there was no serious challenge to his Honour’s credit-based acceptance of Mr Ellis as an honest witness. If such a challenge was intended it cannot succeed. On established principles of appellate review of credit-based findings,[62] there is no justification for overturning his Honour’s finding as to Mr Ellis’ credibility. Indeed, a reading of the transcript of Mr Ellis’ cross-examination suggests, if anything, that Mr Ellis was surprisingly willing to accede to propositions apparently adverse to Murray’s interests. The documentary evidence indicates that Mr Ellis may have been justified in resisting some of the propositions.

     62. Fox v Percy (2003) 214 CLR 118 at [28]-[29]; Robinson Helicopter Company Incorporated v McDermott (2016) 331 ALR 550; [2016] HCA 22.

Principles

138. Although there was no dispute between the parties as to the relevant principles, it is convenient to refer to the recent restatement by this Court in Ipstar Australia Pty Ltd v APS Satellite Pty Ltd (Ipstar). [63] Bathurst CJ pointed out that despite criticism in some authorities of using the concept of “moral obloquy” in determining whether the statutory standard of “unconscionable” conduct has been breached,[64] the use of the concept has some support. [65] The support includes the observation of Gageler J in Paciocco (HCA)[66] that the ordinary meaning of “unconscionable” requires a “high level of moral obloquy”.

     63. [2018] NSWCA 15.

     64. Referring particularly to Paciocco (FC) at [262], [304], [305]; PT Ltd v Spuds Surf Chatswood Ltd [2013] NSWCA 446 at [102]-[106] (Sackville AJA, McColl and Leeming JJA agreeing).

     65. Ipstar at [193].

     66. Paciocco (H Ct) at [188]. Gageler J did not refer to the authorities suggesting that this proposition might require qualification.

138. In Ipstar, Bathurst CJ summarised the position as follows: [67]

“[195]   It seems to me that it is unhelpful to seek to redefine the statutory concept of unconscionability. However, the use of terms such as “moral obloquy” may be of assistance to the extent that they emphasise that what is required is such a departure from accepted community standards as can objectively be seen to be against conscience.

[196]   In this context, it is important to bear in mind that the question of whether certain conduct is unconscionable does not involve an idiosyncratic determination of what is “fair” and “just” in a particular case. Rather, it involves a consideration of all the circumstances to conclude whether or not the conduct in question falls below acceptable norms, standards or values such as to warrant it being determined to be unconscionable.

[197]   In considering that question, it is appropriate to have regard to, first, the terms of the statute itself, second, the approach taken by the courts in dealing with cases under the unwritten law, whilst recognising these cases do not limit the scope of the provision, and third, judgments in related areas including cases involving want of good faith. It is also necessary to have regard to all the circumstances surrounding the transaction.”

67.    Ipstar at [195]-[197] (Beazley P and Leeming JA agreeing).

Appellant’s submissions

140. Mr Pritchard challenged three findings made by the primary Judge. He submitted that his Honour erred:

(i)   in finding that there was a basis for Murray to believe that its existing rights were insufficient to compel the payment or collection of access fees;

(ii)   in failing to find that Murray’s objectives included treating “certain members” so harshly that they would “vociferously complain to the Commonwealth and pressure that polity into changing its buy-back program”; and

(iii)   in finding that the Board had a sincere concern for Murray’s financial position, given that the concern was “irrational, unsupported by any evidence and was motivated by ulterior and improper motives”.

No error

141. Mr Ellis gave a detailed explanation for the decision he and his co-directors made to change Murray’s Policies so as to effectively reverse the unbundling of WEs and DEs. He referred in his affidavit to the particular difficulties Murray had experienced by reason of the reductions in water allocations during the 2006-2007 and 2007-2008 “water years”. He stated that he had:

“understood that Murray Irrigation would be in a compromised position when attempting to collect its fees with regards to delivery entitlements from members who held no water entitlements or relatively few of them. Members who held water entitlements would at some point have water allocation available to them, and Murray Irrigation was generally able to obtain payment of delivery entitlement fees by withholding the supply of water pursuant to clause 6.1(c) of the Water Entitlements Contract until the delivery entitlement fees were paid. However, if a member had no water entitlements and no water allocation which could be delivered to them, withholding supply would do nothing to encourage them to pay their delivery entitlement fees.

I recall that Murray Irrigation’s members told me that they were concerned that other members were selling their water entitlements to non-landholders and then creating what I knew to be commonly referred to as ‘dry farms’, being farms with no entitlement to water except for the minimum 5 entitlements. Although I cannot recall specific names and dates of these conversations, I do recall that I held multiple conversations of this nature at the time and most of them were with members who had not participated in the trade of water entitlements to non-landholders. I recall that the Murray Irrigation Board discussed that those members who chose to retain their water entitlements had expressed concern that they would become subject to

increasingly higher delivery entitlement fees in order to maintain and operate Murray Irrigation’s infrastructure so that they could receive delivery of their water.”

142. Mr Ellis gave the following evidence in re-examination:

“Q.   Mr Ellis, you were asked a question along these lines, that the intention of the change of policy was to produce a lot of money, to which you responded to this effect, ‘With a view to preventing a shortage of funds to run the system.’ Do you recall that?

A.   Yes, I do.

Q.   My question is this, could you please describe to his Honour what the system was and why the funds were needed.

A.   Murray Irrigation is a water supply company that supplied water, at that time, to about two and a half farms through a 3000 kilometre, some 3000 kilometre channel system, over three quarters of a million hectares in area, and my concern as a director of the business was that if the government came into our business and bought 30 to 50 per cent of the water entitlements without reducing the size of the footprint, that the business, or the remaining irrigator shareholders, would not have been able to fund the cost of running the entire system, so there was a real risk to us with such large amounts of water starting to leave the system.

Q.   And by the remaining irrigators, do you mean those who were not selling water entitlements?

A.   Yes. Yes, certainly.”

143. Mr Pritchard’s contention that Murray was adequately protected by the enforcement rights conferred on it by the WE Contract overlooks that the directors had to consider not merely Murray’s legal entitlements but the predictability and desirability of invoking legal mechanisms against members, particularly during times of drought or economic adversity. The primary Judge found that the “weapons” available to Murray were “not of the greatest efficacy” since they aimed at the assets of farmers suffering drought and financial stress. [68] It was hardly unconscionable for the Board to elect not to rely upon potentially draconian powers, which might have inflicted further hardship on members and created conflict within the membership.

     68. Primary Judgment at [98].

144. Nor was it “irrational” for Board members to rely, in part, on their own experience as farmers and irrigators to assess whether the responses of members to the unbundling arrangements instituted in 2007 were likely to create financial difficulties for the non-profit corporation. Mr Pritchard’s submissions seemed to assume that the Board was not entitled to make decisions perceived to be in the interests of the corporation and most members without undertaking detailed analyses of the available data. On Mr Ellis’ evidence, the Board was faced with a difficult and deteriorating situation. The question before the primary Judge was not whether the Board’s decision was necessarily the best that could have been made or whether the decision-making process could have been conducted differently. The question was whether the Board’s conduct could be characterised as unconscionable in all the circumstances.

145. The primary Judge considered the significance of Mr Ellis’ evidence that one factor motivating him and other Board members was a desire to influence government policy. His Honour accepted that a desire to change government policy which was thought to be harmful to Murray’s financial interests or even its survival did not demonstrate a want of good faith on the part of the Board. There are many circumstances in which directors consider that it is in the interests of the corporation to attempt to influence government policies considered to be harmful to the activities or financial stability of the corporation.

146. The primary Judge correctly took into account that the changes to the Policies were not directed against particular members and that no member was forced to sell WEs against his or her will. His Honour also found that although the changes were instituted abruptly, a period of notice would have made the exercise largely futile. Moreover, his Honour accepted that while the changes were not the subject of specific consultation with members, there had been discussions between the Board and members about the measures needed to protect Murray’s financial position. [69]

     69. Primary Judgment at [192].

147. No submissions were made that the changes were “illegal” and it is not clear what Mr Ellis meant when he said he thought they were. It may be he thought that proposals by the ACCC have the force of law but if he did he was mistaken. The concession that the changes would harm some members was made in the context of a decision intended (as Mr Ellis said) to protect Murray’s interests and those of the members as a whole. The members who were harmed were those who wished to transfer WEs without surrendering DEs. But as has been noted, no member was forced to transfer WEs and prompt action was required if the changes were not to be rendered futile.

Orders

148. The appeal must be dismissed. The appellant must pay the respondent’s costs of the appeal.

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Endnotes

Amendments

03 August 2018 - Headnote: (i)(1) - inclusion at end of sentence of "appellant: [1], [2]; [100]."

Decision last updated: 03 August 2018