Pipe Networks Pty Ltd v 148 Brunswick Street Pty Ltd (Trustee)
[2019] FCA 598
•2 May 2019
FEDERAL COURT OF AUSTRALIA
Pipe Networks Pty Ltd v 148 Brunswick Street Pty Ltd (Trustee) [2019] FCA 598
File number: QUD 940 of 2016 Judge: DERRINGTON J Date of judgment: 2 May 2019 Catchwords: CONTRACTS – interpretation of contracts – deed amending lease – outgoings to be charged by lessor at rate (if more than one then the highest) which would have been charged to lessee had supply been direct to lessee – meaning and effect of clause in relation to electricity outgoings – limits on relevance of financial consequences of proffered constructions – limits of construing contracts by reference to commercial business sense
CONTRACTS – illegality – contract to do that which is expressly prohibited – contract to sell energy where not authorised or exempt under National Energy Retail Law – whether charges for outgoings unenforceable due to illegality – whether backdated registration by AER effective to exempt lessor
Legislation: Competition and Consumer Act 2001 (Cth), s 44AE
National Energy Retail Law (Queensland) Act 2014 (Qld)
National Energy Retail Law (South Australia) Act 2011 (SA), Schedule, National Energy Retail Law, s 88
National Gas (South Australia) Act 2008 (SA), Schedule, National Gas Law, Sch 2
National Energy Retail Rules
Cases cited: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27
Arnold v Britton [2015] AC 1619
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2007) 232 CLR 1
Australian Competition and Consumer Commission v EnergyAustralia Pty Ltd [2015] FCA 274
Barclays Bank Plc v HHY Luxembourg SARL [2010] EWCA Civ 1248
Blatch v Archer (1774) 1 Cowp 63; 98 ER 969
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
Co-operative Wholesale Society Ltd v National Westminster Bank Plc [1995] 1 EGLR 97
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544
Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2002) 250 CLR 503
Fitzgerald v FJ Leonardt Pty Ltd (1997) 189 CLR 215
Gnych v Polish Club Ltd (2015) 255 CLR 414
Gramotnev v Queensland University of Technology [2015] QCA 127
Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43
International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151
Kilkerrin Investments Pty Ltd v Yiu Ying Mei Pty Ltd (2001) Q ConvR 54-551
Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101
Medtel Pty Ltd v Courtney (2003) 130 FCR 182, [76]; Apollo Shower Screens Pty Ltd v Building & Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104
Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984
Plaintiff M47/2012 v Director-General of Security (2012) 251 CLR 1
Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900
Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732
Transport Workers’ Union of New South Wales v Australian Industrial Relations Commission (2008) 166 FCR 108
Vautin v BY Winddown, Inc. (formerly Bertram Yachts) (No 4) [2018] FCA 426
Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1
Wyzenbeek v Australasian Marine Imports Pty Ltd (No 2) [2018] FCA 1517
Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410
Date of hearing: 28 May 2018, 10 December 2018, 11 December 2018 and 12 December 2018 Date of last submissions: 18 December 2018 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 205 Counsel for the Applicant / Cross-Respondent: Mr P McQuade QC, with Mr A O’Brien Solicitor for the Applicant / Cross-Respondent: RBG Lawyers Counsel for the Respondent / Cross-Claimant: Mr M Stewart QC, with Mr S Monks Solicitor for the Respondent / Cross-Claimant: Lillas & Loel ORDERS
QUD 940 of 2016 BETWEEN: PIPE NETWORKS PTY LTD ACN 099 104 122
Applicant
AND: 148 BRUNSWICK STREET PTY LTD ACN 117 914 664 AS TRUSTEE FOR THE 148 BRUNSWICK STREET DISCRETIONARY TRUST
Respondent
AND BETWEEN: 148 BRUNSWICK STREET PTY LTD ACN 117 914 664 AS TRUSTEE FOR THE 148 BRUNSWICK STREET DISCRETIONARY TRUST
Cross-Claimant
AND: PIPE NETWORKS PTY LTD ACN 099 104 122
Cross-Respondent
JUDGE:
DERRINGTON J
DATE OF ORDER:
2 MAY 2019
THE COURT ORDERS THAT:
1.The cross-claim is dismissed.
2.It is declared that pursuant to the terms of a written lease entered into on 19 May 2016, the rate at which 148 Brunswick Street Pty Ltd is entitled to charge Pipe Networks Pty Ltd for the supply of electricity at the demised premises is the rate which Origin Energy Limited would have charged Pipe Networks Pty Ltd had those parties entered into a contestable contract for the supply of electricity to the demised premises the major terms of which were:
(a)the supply of electricity was to be directly to Pipe Networks Pty Ltd as a large on-market customer;
(b)the supply would commence on 1 June 2017;
(c)the duration of the contestable contract is that which would have been agreed as between Origin Energy Limited and Pipe Networks Pty Ltd or any extension, renewal or replacement thereof; and
(d)the supply of electricity was to be for that consumed by Pipe Networks Pty Ltd solely at the demised premises.
3.The cross-claimant pay the cross-respondent’s costs of the cross-claim.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DERRINGTON J:
Introduction
These reasons concern the resolution of a remaining issue in the proceedings brought by Pipe Networks Pty Ltd (Pipe) against 148 Brunswick Street Pty Ltd (148). Pipe’s action, as originally constituted, traversed a number of matters including damages for breach of a lease as well as claims arising under the Trade Practices Act and the Australian Consumer Law. 148 pursued a cross-claim in which it also made claims under the Trade Practices Act and for damages for breach of a lease. It also sought declarations as to the correct interpretation of a clause of the lease which permitted it to charge Pipe for the electricity which it consumed at certain leased premises. During the course of the interlocutory processes the parties resolved all but one issue. That which remains arises from 148’s cross-claim and concerns the interpretation of a clause in a deed entered into by the parties in 2016 (the 2016 Deed). That deed amended the terms of a lease of certain premises which 148 leases to Pipe.
The clause in question regulates the amount which 148, as Lessor, might charge Pipe, as Lessee, for various utility and other services supplied to the demised premises. In dispute is the rate at which 148 is entitled to charge Pipe for the supply of electricity. In general terms, Pipe propounds an interpretation of the clause which is likely to restrict the amount by which 148 might profit on the re-sale of electricity to it. Conversely, on 148’s interpretation, it would be entitled to purchase electricity at the lower end of the market and sell to Pipe at a significantly higher price. From one point of view, the essential question may be whether the clause permits 148 to sell electricity to Pipe at the highest rate which Pipe “could” have been charged had it purchased electricity directly from the relevant supplier or whether the rate to be charged is that which Pipe “would” have paid had it entered into a direct supply agreement.
Prima facie, the meaning of the clause is relatively clear. It permits the Lessor to sell various utility services, being water, gas, electricity, other metered services and the like, to the tenant at the rate which the tenant would have paid had it acquired the supply directly from a supplier and, if there were more than one rate at which the service would have been supplied, then the higher rate. If the Lessor can acquire the services consumed at the demised premises at a lower rate than they would have been supplied directly to the tenant, it will profit on the resale of those services to the tenant. The central question here concerns the rate at which the Lessor can sell the service to the tenant. On Pipe’s construction, 148 may only charge it at the rate which it would have paid had it acquired the service directly. Conversely, 148 asserts that it may charge the highest of any price which the tenant may have paid had it been supplied the service directly.
In relation to the supply of electricity, 148 advanced the case that, due to Pipe’s size and electricity needs, it would be able to secure a very low price for electricity if it were supplied directly with the result that it, 148, would derive little or no profit on the resale of electricity. Indeed, it said that in some circumstances it might make a loss. There was no evidence as to the profit which 148 would make on the resale of other utilities to Pipe, if any. So the argument went, 148 said that this consequence of the operation of the clause was uncommercial, particularly because it had reduced Pipe’s rental from the immediately preceding lease. On this basis it submitted an “alternative” construction being that the applicable rate which Pipe should be charged for electricity is the highest of those contained in a schedule of standard rates for large customers which Pipe “could” or “might” have been charged from the supplier of electricity. Those rates were higher than that which Pipe would have secured had it negotiated its own supply of electricity. In support of its argument 148 submits that that this is how a similar clause in a lease between the parties, which existed some ten years previously, had operated.
In effect, 148’s argument is that the financial operation of the clause according to its ordinary meaning is uncommercial for it but that, if the clause is given another meaning, it operates in a way that, in the present market, it receives a slight benefit. It submitted that this “more commercial” construction should be adopted because it would not have entered into a lease in the circumstances in which it did unless it was able to make a significant profit on the resale of electricity. In this way 148’s argument seems to invert the usual process of construction. Rather than there being two alternative constructions of the clause where the Court will prefer that which does not flout commercial common sense, it asserts that the only real construction results in an uncommercial result for it such that some alternative construction must be adopted. Its argument is derived more from the perceived commerciality of the operation of the clause in particular circumstances rather than on any linguistic analysis. In that sense the tacit argument was, seemingly, that there exists a form of implied term which controls the operation of the clause in question, at least to the extent to which it applies to the supply of electricity, although no express attempt was made to advance the case in that manner.
The facts
To the extent to which the matter was considered as one of the construction of the 2016 Deed, the parties accepted that the clause in question was sufficiently ambiguous to permit the Court to consider the circumstances surrounding its formation: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 (Ecosse), [16]. That is, if such ambiguity was needed: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350-352; Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1. The purpose of considering those circumstances is that they shed light on the imputed intention of the parties as to what they sought to achieve by the words which they have used and the manner in which they have expressed their agreement: Gramotnev v Queensland University of Technology [2015] QCA 127 per Jackson J. In this case the parties had entered into a number of prior agreements in relation to the tenancy and there was no relevant dispute that these prior commercial arrangements were background circumstances against which the present agreement ought to be considered.
The demise which is the subject of these proceedings is of part of a commercial building and surrounds located at 148 Brunswick Street, Fortitude Valley in Brisbane. The part leased to Pipe is referred to in these reasons as being “the Property” and is slightly less than 12% of the total building area.
Pipe’s business involves operating data centres which, presumably, involves the storage and provision of access to large volumes of electronic data. One such data centre is located in the Property. Pipe is part of a group of companies which include large businesses identified as TPG Telecom and AAPT, both of which are significant participants in the data and telecommunications industry. Pipe’s business necessarily involves the consumption of substantial amounts of electricity, the price of which is an important part of the cost structure of its operations.
The various lease arrangements of the premises
The sequence of leases between Pipe and 148 in respect of the Property commenced in 2006 and a number of variations have occurred. To differing extents the parties each rely upon the existence and performance of these prior agreements as supporting their submissions as to the correct interpretation of the existing lease terms.
The 2006 Agreement to Lease
Initially, the Property was leased to Pipe pursuant to an Agreement to Lease entered into on 17 October 2006. In it Pipe agreed to pay for service charges pursuant to the following term:
SERVICE CHARGES: The Lessee shall be liable to pay electricity consumption, telephone, water consumption, all metered services and meter charges and maintenance charges, air conditioning service and maintenance charges (no capital costs) and security systems service charges.
Where applicable, such payments shall be made to the Lessor within fourteen (14) days of being billed by the Lessor at the rate (if more than one than [sic] the highest) which would have been charged by the relevant Authority had supply been direct to the Lessee in the first place.
This clause was copied and inserted into the lease which is the subject of the present dispute.
The Agreement to Lease also contained special condition 1.2 which provided:
1.2 Electricity Charges
Lessor to use best endeavours to ensure Lessee’s electricity tariff is the most cost-effective tariff for Lessee’s electricity requirements. Lessor to use best endeavours to assist Lessee to become a ‘contestable’ customer (as that term is defined in the Electricity Act 1994 (Qld)). Lessee reserves the right to negotiate electricity rates directly with electricity provider.
As will become apparent from these reasons, there is some inconsistency between the above two clauses. If, as 148 submits is the case with the present lease, the service charges clause operates to allow it to charge the highest rate which may have been charged to Pipe had it acquired the service directly, the first sentence of the obligation in cl 1.2 was nugatory. On the argument now advanced by 148, the cost effectiveness of the “Lessee’s electricity tariff” would have been irrelevant as it was not actually being charged any tariff but charged at a notional rate derived from what it might have been charged had supply been direct from the electricity supplier. Additionally, 148 submits the service charges clause permits it to charge Pipe at the highest available rate whereas the first sentence of cl 1.2 obliges it to secure the most cost effective tariff for the lessee.
The 2007 Lease
It appears that the Agreement to Lease led to the execution of a lease on 16 February 2007 (“the 2007 Lease”). It contained terms in relation to the supply of electricity which were not entirely dissimilar to those in the Agreement to Lease. The terms of the lease provided:
3.6Light, Power, Electricity and Gas: Subject to clause 24.2 all charges for electricity and gas consumed on the Leased Premises during the Term shall be paid by the Lessee. Subject to clause 24.2, such payments shall be made by the due date for payment if assessed directly against the Lessee and, if assessed against the Lessor, within fourteen (14) days of being billed by the Lessor at the rate which would have been charged by the relevant Authority had supply been direct to the Lessee in the first place.
…
24.2Electricity charges: The Lessor will use best endeavours to ensure the Lessee’s electricity tariff is the most cost-effective tariff for the Lessee’s electricity requirements. The Lessor to use best endeavours to assist the Lessee to become a ‘contestable’ customer (as that term is defined in the Electricity Act 1994 (Qld)). The Lessee reserves the right to negotiate electricity rates directly with electricity provider.
These two clauses had slightly greater compatibility than those which appeared in the Agreement to Lease. That was achieved by removing the words “(if more than one [then] the highest)”. It would seem that the object of the combined effect of cll 3.6 and 24.2 was to ensure that the Lessee paid the lowest possible rate, being either what the Lessor had negotiated as being the most cost-effective or that which the Lessee could have negotiated directly. At the very least, cl 3.6 seems to acknowledge that Pipe should pay no more than the rate at which it would have been able to purchase electricity in the market were it able to have a supplier sell directly to it.
Both the Agreement to Lease and the 2007 Lease disclosed that the cost of electricity was an important issue for Pipe. The relevant clauses seemingly imposed on 148 the obligation to obtain the most cost effective tariffs for Pipe. They also reflected that Pipe was desirous of becoming a “contestable customer” which would have afforded it an opportunity to negotiate very low rates for electricity supply. Indeed, 148 was obliged to use its best endeavours to ensure that Pipe achieved that status.
Pipe commenced consuming electricity at the Property on 16 June 2007. It had taken some time since the signing of the Agreement to Lease on 17 October 2006 for the premises to be prepared and adapted for occupation. For present purposes it appears that Pipe was only ever charged for electricity pursuant to the clauses in the 2007 Lease and not pursuant to the terms in the Agreement for Lease.
Mr McNair, who is involved in the electricity supply industry and who is engaged by 148, analysed the first invoice rendered to Pipe by 148 which was in respect of the period from 17 June to 31 July 2007. He also identified his working papers used for the calculation of the amount charged. The working papers revealed that Pipe was charged pursuant to Tariff 20 which was a regulated government tariff charged at a rate of 15.2422 cents/kWh. That rate was calculated by Mr McNair on the basis that the period in question covered an increased gazetted rate, necessarily different rates applied for different periods. That is, the period in respect of which the charge was made traversed an increase in the applicable rate of supply and the calculation accommodated that.
Mr McNair also produced his working sheets for the period August 2007 to July 2008 which, he asserted, revealed that all electricity in that period was charged by reference to a different tariff, being Tariff 41, which he said was a much lower charge than Tariff 20 save for an additional demand charge calculated by reference to peak usage of the consumer. At that time Tariff 41 was available to all consumers regardless of their amount of consumption. Mr McNair identified that some of the working sheets relevant to this period incorrectly referred to “Tariff 20” when they ought to have referred to Tariff 41, but he identified that as an error. He confirmed this by identifying reference on the papers to a “Demand Charge” which did not apply to Tariff 20 but which did apply to Tariff 41.
The apparent import of this evidence is found in the affidavit of Ms O’Connor (26 May 2018), bookkeeper, to the effect that in the period from June 2007 through to November 2008, being the period covered by the 2007 Lease, Pipe paid all of the electricity bills rendered and at no time made any complaint that the bill had not been calculated correctly or that the amounts due were not otherwise payable. Certainly, Pipe did not suggest that it should be charged at a rate applicable to a “contestable customer” in its position. 148 relies on the absence of any complaint by Pipe as to the manner in which it charged electricity under the 2007 Lease as evidencing the parties understanding that 148 was not obliged to charge electricity at the rates which Pipe might acquire as a large “on-market customer” pursuant to a contestable contract. It submits the terms of the 2007 Lease were relevantly similar to the terms of the 2017 Lease and this evidences the objective understanding of the parties as to the effect of the relevant clauses in that latter lease.
148 asserts that it is a matter worthy of comment that the final three invoices for the period covered by the 2007 Lease, being the months of August, September and October 2008, were calculated on a different basis. Those invoices charged Pipe by reference to the actual amount paid by 148 (calculated on an average basis) plus an additional margin of 25%. 148 makes the submission that this was shown on the working sheets and it appears from the evidence of Ms O’Connor that the working sheets accompanied the invoices to Pipe. Again, it appears that Pipe made no complaint about the way in which 148’s invoices were charged and it paid them.
As is discussed later in these reasons, because of the variations in the manner in which 148 charged Pipe it is difficult to accept that the parties attributed to the charging clause in the 2007 Lease any particular meaning. It might also be the case that the absence of comment by Pipe when the method of charging changed is indicative that it was prepared to accept whatever was billed at that time. Unfortunately there is no evidence as to what, if any, difference there would have been had Pipe been charged as a “contestable customer”.
In his affidavit Mr McNair indicated that the structure of the electricity market was somewhat different in 2007 and 2008 compared to the present. In 2007, the Tariff 20 was a rate which was available to both small and large customers regardless of the amount of electricity consumed. It also seems that Tariff 41, which was lower, became available to large consumers and he then adopted that rate. Apparently, this is no longer the case.
148 submitted that the terms of the 2017 Lease are more favourable to it than were the terms of the 2007 Lease. Pursuant to the latter, if Pipe was not supplied directly, it was to charge Pipe “the rate which would have been charged by the relevant Authority had supply been direct to [Pipe] in the first place”. It also obliged it to use its best endeavours to ensure that Pipe’s electricity tariff was the most cost effective for its requirements. The 2007 Lease did not afford 148 the opportunity to charge the higher of the rates which might have been assessed against Pipe. 148 also submitted that the evidence revealed that in the period of the 2007 Lease it acted in accordance with its obligations by charging electricity to Pipe using Tariff 41 in the period 8 May to 5 June 2008 and, if it had used Tariff 20, a significantly higher bill would have been delivered. The difficulty here is that there was no consistency in the manner in which the electricity was charged under the 2007 Lease.
The above evidence of performance of the 2007 Lease is, perhaps, some general indication that, pursuant to the terms of that lease, Pipe was prepared to accept that it should pay for electricity at the lowest general tariff rate available. That said, it was in the context that 148 would use its best endeavours to secure the most cost-effective tariff for Pipe and to assist it to become a contestable customer. Those obligations did not become part of the 2017 Lease.
The 2008 Lease
Despite the 2007 Lease having a term of 10 years, a new lease was entered into on 17 November 2008. In it the parties reached a different agreement with respect to 148’s charging for electricity. Relevantly, cl 3.7 provided:
3.7 Electricity
The parties agree to the following with regards to electricity:
(a)all charges for electricity consumed on the Leased Premises during the Term shall be paid by the Lessee. Such payment shall be made by the due date for payment if assessed directly against the Lessee and, if assessed against the Lessor, within 14 days of being billed by the Lessor (who will bill the Lessee for the exact amount that was assessed against the Lessor); and
(b)if the Lessor’s contract for the supply of electricity to the Building expires or is otherwise terminated and the Lessor is to negotiate a new contract for the supply of electricity to the Building:
(i)the Lessor will notify the Lessee the contract is to be negotiated; and
(ii)the Lessee will be entitled to make a submission to the Lessor within 14 days of receiving the notification in clause 3.7(b)(i) about:
(A)the terms of the proposed supply contract; and
(B)which supplier to contract with; and
(iii)the Lessor must:
(A)take the Lessee’s submission into account; and
(B)obtain at least three quotes for the supply of electricity to the Building;
but the Lessor will enter into a contract with a supplier on terms commercially reasonable to the Lessor at the Lessor’s absolute discretion.
It seems to be accepted that, during the term of this lease, 148 on-sold electricity to Pipe at the same price at which it purchased it from its supplier. There was no evidence as to the performance or otherwise of cl 3.7(b) by the parties. That said, it can be observed that cl 3.7 sought to protect the Lessee from incurring electricity costs above a reasonable market rate. It also prevented 148 from profiting from the sale of electricity.
A noticeable difference between this lease and the 2007 Lease was the absence of the “best endeavours” obligations of Pipe. From the evidence of Mr Purdon, an employee of Pipe, it seems that by the time of entry into this lease Pipe accepted it could not become a “contestable customer”. In order to do so it would require its own direct supply to the building and, so the evidence revealed, Pipe reached the belief that the governmental regulations prohibited the existence of more than one direct supply point to any building.
The 2008 Lease contained specific provisions which accorded Pipe exclusive access to the 1500 kVA transformers located in the ground floor of the Amelia Street side of the building (cl 24.1). 148 also agreed to provide Pipe with access to half of the existing generator capacity until Pipe installed three additional generators (cl 24.2). Importantly, by cl 24.5 Pipe agreed to pay an amount called a Substation, Generator and Essential Services Fee which was referred to as the “SGES Fee”. This monthly fee appeared to relate to Pipe’s exclusive use of the transformers for drawing its power. In the last 12 months of the 2008 Lease Pipe paid $18,560.26 per month as the SGES Fee. That was in addition to the monthly rental of $48,972.76.
Under the subsequent 2017 Lease there was no obligation to pay the SGES Fee. 148 relies upon the restructuring of the lease arrangements in this respect, and the amount of revenue which it obtained under the 2008 Lease, as circumstances relevant to the construction of the 2017 Lease. It says that if the 2017 Lease is construed as Pipe submits, it would have the consequence that its recoverable revenue from the lease of the Property would be almost halved and there is no valid commercial reason why it would enter into such an agreement.
Because 148 submitted that it sustained a decline in revenue when it entered the 2017 Lease, it is necessary to observe that the rent under the 2008 Lease increased yearly by a minimum of 4% with reviews to market at the commencement of any option period. In a period where the ratcheted rent increases exceed any market increase, it can be expected that at any renewal the market rent may be substantially less than the current rental actually being paid. As is identified below, the rental payable under the 2017 Lease did decrease substantially from that payable under the 2008 Lease. The cause of that is not known. It may have been that the ratcheting of the rent had the consequence that the rent paid under the final months of the 2008 Lease were higher than the market rent or the market may have shifted. There was no evidence one way or the other.
The 2016 Deed and the 2017 Lease
By a Deed entered into on 19 May 2016 the parties agreed to vary the 2008 Lease by amending it and extending its terms. The recitals to the Deed are suggestive of some disputation having occurred between the parties although there was no clear indication of its nature or cause. In particular, 148 relies on the following recital:
148 Brunswick asserts that due to the ongoing breaches of the covenants contained in the Lease and in particular clause 5.18, it has been unable to lease the space known as BS as indicated on the Plan attached as a result of which it has suffered significant loss and damage estimated at $785,894.36 at 31 December 2014.
In the course of argument 148 appeared to elevate the recital of its assertion of its inability to lease the area known as BS into actuality and says that the parties entered into the arrangement acknowledging that Pipe had caused significant loss as a result of the alleged breaches. Whilst that may be so, it is not particularly clear how, save in a very general sense, this affects the construction of the electricity charges clause.
The new term of the amended lease, which is referred to as the “2017 Lease”, was 10 years commencing on 1 June 2017. The rental payable was $672.21 per square metre per year in respect of a demised area of 758 square metres. The rent of $509,535.18 for the first year increased by 3.5% per year, and market reviews were to occur at the commencement of the option periods being at the end of the initial term of 10 years and five years thereafter. Additionally, a rent rebate of 25% of the face rent apparently applied during the initial term. It should be noted that in post-hearing submissions 148 suggested that this rebate is not now available to Pipe although why that is so was not explained. For present purposes the agreement for such a reduction appears to exist.
It is not controversial that pursuant to the 2017 Lease, Pipe agreed to pay outgoings based upon an area greater than its tenancy. In substance, the calculation of Pipe’s outgoings included the floor space of that part of the building containing certain electricity transformers, substations and switchboards which were used solely for Pipe’s benefit even though they were only accessible by Energex and were not part of the leased area.
The service charges were calculated in accordance with the following agreed term:
SERVICE CHARGES: The Lessee shall be liable to pay electricity consumption, telephone, water consumption, all metered services and meter charges and maintenance charges, air conditioning service and maintenance charges (no capital costs) and security systems service charges.
Where applicable, such payments shall be made to the Lessor within twenty-one (21) days of being billed by the Lessor at the rate (if more than one than [sic] the highest) which would have been charged by the relevant Authority had supply been direct to the Lessee in the first place.
In these reasons that clause is referred to as the “Service Charges clause”. It did not appear to be in contest that the word “than” where it appeared on the second occasion in the words in parentheses ought to have been “then”.
Other clauses of the 2017 Lease which were introduced by the 2016 Deed included covenants that:
(a)The Lessor warrants that the Lessee will have access to any or all of three transformers on site and further warranted that at all times there will be N+1 capacity in the infrastructure where N+1 is the Lessee’s total requirement to a maximum of 3,000 kVA.
(b)The Lessee was to have access to the building’s main switchboard.
(c)Clause 24.5 of the 2008 Lease would be deleted. That clause had imposed the SGES Fee which was payable in respect of Pipe’s access to substation areas, generator areas and other essential services. In effect 148 surrendered its rights to recover the fee.
The manner in which the 2016 Deed varied the 2008 Lease was somewhat haphazard and ill thought-out. In some respects the 2016 Deed expressly deleted clauses in the 2008 Lease, such as clause 24.5. However, in relation to service charges, the adoption of the new clause implicitly altered clause 3.7 of the existing terms, though the extent of that alteration is unclear. Pipe submitted that the introduction of the Service Charges clause had the effect of overriding cl 3.7(a) but left cl 3.7(b) in place. That seemed to suggest that it had some continuing relevance although what that might be was not clear.
Similarly, the 2016 Deed did not expressly purport to alter the terms of cl 3.6 concerning water charges or cl 3.5 concerning gas supply even though, on its face, the new Service Charges clause would seem to affect those as well. Clause 3.5 is of some importance as it was in terms similar to the second limb of the Service Charges clause. It read:
All charges for gas consumed on the Leased Premises during the Term shall be paid by the Lessee. Such payments shall be made by the due date for payment if assessed directly against the Lessee and, if assessed against the Lessor, within 14 days of being billed by the Lessor at the rate (if more than one then the highest) which would have been charged by the relevant Authority had supply been direct to the Lessee in the first place.
As it was, Pipe did not consume gas at the Property such that no payments were made pursuant to that clause.
The charging for electricity under the 2017 Lease
Since the commencement of the 2017 Lease, 148 has charged Pipe for electricity at the rate Pipe would have paid had it received supply directly from Origin pursuant to a Standard Large Customer Retail Contract. Origin regularly published a list of prices called “Standard Electricity Prices for Customers on the Standard Large Customer Retail Contract” and it was from this list that Mr McNair, for 148, calculated the rate at which Pipe was charged. That list of rates contains four different rates for business customers and Mr McNair said that he applied the rate which he considered was most appropriate for Pipe. Mr McQuade QC for Pipe submitted that involved a subjective choice by Mr McNair which was not in keeping with the terms of the Service Charges clause.
It is relevant that 148 did not charge Pipe at the rate of Tariff 20 or Tariff 41. It may well be that those rates were not available to large customers such as Pipe since the commencement of the 2017 Lease.
Pipe submitted that it would have been possible for Mr McNair to go to the market and seek a quote for the supply of electricity to Pipe as a “contestable customer”. That, however, was not done. In this respect Mr McNair gave evidence that, in his opinion, it would have been relatively easy for Pipe, from 2006 to now, to obtain information about the cost of purchasing electricity in the contestable market. On this point the evidence appears to be that, for the purposes of the Service Charges clause, there would have been no difficulty in ascertaining the rate which Pipe would have paid if it had been a contestable customer. In that respect the interpretation advanced by Pipe as to the operation of the Service Charges clause would not be unworkable.
148 relies upon the nature of the electricity market at the time of entering into the 2016 Deed and 2017 Lease as a relevant background fact. In particular, it refers to Mr McNair’s explanation of the nature of the electricity market so far as it might pertain to the supply at the Property as follows:
(a)Any customer who has a direct connection to the electricity network (which is operated by Energex) is described as an “on-market” customer. 148 was an on-market customer in respect of the Property because it received electricity directly from Origin.
(b)On-market customers have the ability to choose from which electricity retailer they will purchase electricity and, depending upon the nature of the usage and the volume of their usage, they may choose between various terms and prices for that supply.
(c)Customers who do not have direct connections to the electricity network are regarded as “off-market” customers. Their electricity is supplied via a landlord or body corporate and they are regarded as being part of an “embedded network”. In respect of the receipt of electricity at the Property, Pipe was an off-market customer within an embedded network.
(d)Within the category of on-market customers there were two types. A “small” on-market customer who consumed less than 100,000 kWh per annum and a “large” on-market customer who consumed more than 100,000 kWh per annum. However, that dichotomy is not always precisely reflected in the market due to the fact that some customers’ requirements change over time.
(e)By 1 July 2016 no on-market customer in South East Queensland (being the Energex distribution area) had access to a regulated arrangement where the tariff rates are fixed by the Government.
(f)All electricity retailers have what is known as “standing offer arrangements” which are set tariff rates that are available to all customers. The different tariffs are identified by tariff reference numbers which are used by all retailers who make available similar standing offers. Standard domestic power is Tariff 11. Domestic night rate (super economy) is Tariff 31. Business general supply is Tariff 20.
(g)Large on-market customers are able to enter into a “negotiated retail” or “contestable” contract. This may occur in a number of ways but generally by the customer seeking tenders from the various suppliers or approaching individual suppliers to negotiate terms.
(h)“Contestable contracts” will vary in their terms, including prices, depending upon, amongst other things, the volume of electricity to be consumed and the “load profile” of the customer. The load profile is the typical pattern of usage of electricity by the consumer. Suppliers prefer customers whose load profile is constant rather than of a fluctuating nature. Other factors will determine the rates at which suppliers will offer electricity through contestable contracts.
(i)Usually, large on-market customers will be on contestable contracts, although for various business reasons they may choose to remain on fixed rates.
(j)Fixed rates for large customers operate a similar way to standing offer arrangements for small customers. They are published by retailers and remain, in general terms, valid for 12 months.
A difficulty with the above is that whilst it appears that Mr McNair’s evidence established the state of the electricity market at the time of entry into the 2017 Lease, it lacked precision as to its relevance at other times. Whilst there are some temporal indicators in his affidavit, they were somewhat vague. Ultimately, it did not seem to be in contest that his analysis represented the state of the market when the 2017 Lease was agreed. That said, it is not likely that it represented the state of the market as at 2008 and various indications reveal that the market changed over time. Mr McNair’s evidence of the changes to the availability of Tariff 20 and Tariff 41 for entities such as Pipe suggest that to be the case.
For the purposes of this matter it is said to be relevant that the electricity supplied to Pipe at the Property passed through two meters. Further, only electricity supplied to Pipe passed through those meters. They had been allocated national meter identifiers (NMIs) on the meter number register which were 213231852 E2 and 213232181 E3. The evidence before the Court revealed that in the period 1 June 2017 to 30 June 2017, Pipe consumed a significant amount of electricity which was measured through those meters at 184,491.8 kWh and 197,140.9 kWh respectively. This consumption qualified Pipe as a large consumer with the result that, if it had acquired supply directly from an energy retailer, it could have done so as a contestable customer. There was no dispute that, at all relevant times during the 2017 Lease, Pipe would qualify as a large customer which could secure a contestable contract if it had direct access to a supplier.
Revenue from the property under the 2017 Lease
As a consequence of entry into the 2016 Deed, which varied the 2008 Lease and resulted in the 2017 Lease, there were changes which were said to result in a decrease of direct revenue for 148. Under the 2008 Lease, as at May 2017, Pipe paid an effective rent of $68,138.02 per month. That consisted of rent at $48,972.76 plus the SGES Fee of $18,560.26 as well as the cost of car parks at $605.00. That figure did not include outgoings which were simply the recovery of Lessor’s costs. As mentioned, under that Lease the Lessor was obliged to charge the Lessee its actual costs. Under the 2017 Lease, in June 2017 Pipe paid an effective rent of $35,965.54. That was constituted by rent of $35,030.54 which took into account a 25% rebate of the face rent on the Lease, which was less than the last rent paid under the 2008 Lease, as well as $935.00 for car parks. By the 2016 Deed the parties agreed to delete cl 24.5 of the old lease which had obliged Pipe to pay the SGES Fee.
148 submits that the above changes to the revenue stream as between the two leases had the consequence that it would suffer a decrease of 47.2% in its revenue in the absence of recovering a profit on the service charges and, in particular, in relation to electricity. By comparison it says that, based on its construction of the Service Charges clause, the consequence of entering into the 2016 Deed was an increase in 1.13% of revenue under the terms of the 2017 Lease. It says that for the month of May 2017, which was immediately prior to the commencement of the 2017 Lease, Pipe paid a total of $174,283.40. That figure consisted of the effective rent of $68,138.02 identified above, plus electricity at $100,398.41 plus outgoings of $5,746.97. For the month of June 2007, being the first month of the 2017 Lease, on 148’s construction, Pipe would pay $176,259.12 in total. That would be constituted by rent of $35,030.54, electricity of $133,007.52, outgoings of $7,286.06 and $935.00 for car parks. In effect the difference was $1,975.72. 148 says its construction of the Service Charges clause gives the Deed a reasonable commercial operation in that it avoids a substantial decrease in revenue receipts from the Property for which there is no rational explanation.
Trade Coast Properties Pty Ltd
A further fact relied upon was that since 2006, the company Trade Coast Properties Pty Ltd (Trade Coast Properties), which is associated with 148, has been purchasing electricity for consumption in the properties owned by it and other companies in the group, including 148, on the contestable electricity market. By aggregating the consumption from the several properties and companies, Trade Coast Properties has been able to negotiate a lower rate than if it obtained separate supply contracts for each. It appears that 148 had no agreement with Origin for the supply of electricity to the Property even though it “on-sold” electricity to Pipe.
THE CONSTRUCTION OF THE SERVICE CHARGES CLAUSE
The question of construction centres upon the second limb of the Service Charges clause which reads:
Where applicable, such payments shall be made to the Lessor within twenty-one (21) days of being billed by the Lessor at the rate (if more than one than [sic] the highest) which would have been charged by the relevant Authority had supply been direct to the Lessee in the first place.
The payments to which reference is made are those which the first limb of that clause render Pipe liable to pay and include charges for the supply of electricity. It is important to keep steadily in mind that the Service Charges clause is generic and operates with respect to a range of services such as telephone, water, all metered services and meter charges and maintenance charges, air conditioning service and maintenance charges and security systems service charges. The import of this is that the broadly worded charging clause is intended to be malleable so as to be applicable across the wide range of identified services. It could not have been the intention of the parties that it is to be construed in a manner which conforms solely to the process of charging for electricity in the market as it exists from time to time.
The Service Charges clause is not unusual in the sense that most leases impose upon the Lessee the obligation to pay for the cost of utility services and the like provided to the demised premises. As a clause between a landlord and tenant of commercial premises relating to outgoings, its purpose or object is relatively clear. In general terms it imposes upon the Lessee the obligation to pay for the services to the property which they consume. It also permits the Lessor to on-sell those utilities to its Lessees at a margin above the price at which it acquires them. In the ordinary course, a Lessor of a commercial building with multiple tenants is likely to be able to acquire utilities at a lower price than the individual tenants due to the volume of the acquisition. It is not an unreal expectation that the greater the amount of utility service purchased, whether that be water, gas or electricity, the lower will be the price per unit. In that way a Lessor can aggregate the tenants’ demand for the services, acquire them at lower per unit prices than the individual tenants might and on-sell them to the tenants at a profit. So here, the Service Charges clause affords the Lessor the opportunity to purchase the utility at a “bulk rate” and sell it to the individual tenants at the rate which they would each have paid had they each acquired the utility directly from the supplier which, most likely, would have been higher. The rate at which the relevant service is on-sold to the tenant is, in the first instance, the rate they would have paid had they acquired the service directly.
However, the clause also includes the words in parentheses being, “if more than one then the highest” when referring to the rate at which the utility “would have” been provided to the tenant. That phrase suggests the possibility of several rates which “might” have been charged. Prima facie, that creates some tension given the clause primarily focuses upon the rate which the tenant “would have” been charged. It is likely the phrase operates when it cannot be precisely determined at what rate a tenant would have been charged for a utility, such that the applicable rate is the highest of those which “might” have been charged. In such circumstances it is the highest rate which is used to calculate the price at which the Lessor can charge the tenant. The effect of 148’s submission was that, even if there exists a rate which can be identified as the rate which Pipe would have been charged had it been supplied directly, that rate should not be used. It submits that the clause requires the consideration of a range of rates so it can charge the highest.
Principles of construction
There was no dispute between the parties as to the general principles which the Court ought to apply in resolving the question of the correct construction of a commercial agreement. The applicants referred to the observations of the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116-117, [46]-[51] (Mount Bruce Mining) by French CJ, Nettle and Gordon JJ where the principles of contractual construction were identified as follows:
[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
[47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
[48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
[49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
[50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
[51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties ... intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”. (footnotes omitted)
Both parties sought to have recourse to the alleged commerciality of their proffered constructions. That said neither addressed the Court in any great detail as to the manner in which a Court construing an agreement might assess the commerciality of the consequences of a particular construction. No doubt a construction which “flouts” commercial common sense is to be avoided and it is a particularly relevant consideration in the construction of a contract that on one interpretation an unreasonable result arises. However, there is a distinction between the commerciality of the legal effect or construction of a clause on the one hand and, on the other, the commerciality of the operation of the contract as a whole. 148’s submissions focussed on the latter though it is obvious that, in respect of the lease under consideration, a court cannot reasonably assess that save in a very general sense. It is one thing to consider the legal operation of a clause in a contract consequent upon a particular construction as flouting business common sense. However, given the myriad factors impacting upon commerciality of the whole contract, it is another thing for a court to conclude that a contract is or is not a commercial deal. That is particularly so when any such assessment would need to be made in an artificial environment where the motives and intentions of the parties for entering into the agreement cannot be known.
148 relied upon the learned reasons for judgment of Muir J in Kilkerrin Investments Pty Ltd v Yiu Ying Mei Pty Ltd (2001) Q ConvR 54-551, [27] to the effect that that it is desirable to construe commercial documents so as to make commercial sense of them. However, the context of his Honour’s observation was where two constructions of the clause in question were equally open and a choice had to be made between them. His Honour was not giving any imprimatur to the proposition that an agreement should be given an interpretation which is not actually open on the text of the words merely because that might be, on one view, more commercial than a competing contention. Indeed (at [31]), Muir J expressly referred to the observations of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 as follows:
It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”, to use the words from earlier authority cited in Locke v Dunlop, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley’s Case. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. (footnotes omitted)
These observations were largely reaffirmed by the High Court in the passage from Mount Bruce Mining cited above.
However, a rule which supports a preference for one of two alternative constructions that will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust does not greatly assist where neither proffered construction meets that description. Here 148 submitted that if it can be said that neither proffered construction is of the type identified, if one is “more commercial” than the other, the impasse may be answered by the observations of Kiefel, Bell and Gordon JJ in Ecosse at [16]:
It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it. (footnotes omitted)
It was submitted that the hypothetical reasonable business person placed in the position of the parties will interpret the words used by the parties in a way that has greater commercial common sense. This was the opinion of Longmore LJ in Barclays Bank Plc v HHY Luxembourg SARL [2010] EWCA Civ 1248 where his Lordship said:
The Judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.
Those observations were expressly approved of by the UK Supreme Court in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 (Rainy Sky), [29]-[30].
Importantly, in the speeches of their Lordships in Rainy Sky, the focus of the application of the “business common sense test” was the clause or clauses in respect of which the parties were in dispute rather than of the contract as a whole. No doubt the court assesses the commercial operation of the legal effect of the clause in the context of the contract, but it could not easily assess the commerciality of the contract as a whole as influenced by the alternative constructions. Commercial agreements are inevitably the product of negotiations with each party applying their own perception of the value of each separate integer. In the course of negotiations a party may be prepared to suffer a loss on the operation of a clause or clauses because of perceived benefits from other clauses or from entry into the agreement as a whole. Such a dynamic renders it extremely difficult for a court to analyse the commerciality of the operation of a contract as a whole. Indeed, the consideration of the commerciality of the operation of a clause in isolation from the operation of the whole of the agreement is also a difficult task.
With that in mind it can be accepted that in construing the subject clause where two reasonable constructions are open, the interpretation to be preferred is that which a reasonable business person, placed in the position of the parties, including the circumstances surrounding the contract and its commercial purposes and object, would perceive to be more commercial. In this respect consideration must be given to the evidence which is adduced in respect of those surrounding circumstances. Here Pipe submitted that, whilst there may exist various reasons why the parties agreed upon the terms they did, in the absence of admissible evidence, such speculation is irrelevant. There is force in that submission in two respects. First, the motivation of the parties as to why they agreed to any particular term is irrelevant to the question of construction: Gramotnev v Queensland University of Technology [2015] QCA 127. Secondly, to the extent to which the evidence meets the character of surrounding circumstances known to both parties, it can be taken into account, but the Court cannot engage in speculation as to what other evidence may or may not exist. For instance, Pipe submits that the change to the rental structure brought about by the 2017 Lease may have been due to a decline in the market for the tenancy. However, there is no evidence that such was the case or, if it was, that it was a fact known to both parties. Similarly, Pipe suggests that the SGES Fee was removed from the Lease Agreement, perhaps, because the infrastructure associated with it had amortised over the initial period of 10 years. Again, there is no evidence of that either. Equally there is no evidence for 148’s suggestion that the quid pro quo for the deletion of the SGES Fee was the entitlement of 148 to profit on the supply of utility services to an almost equivalent degree. If the above facts were matters known to both parties and agreed upon they may have been relevant. However, that was not the case.
The above difficulties emphasise, if that be needed, the caution which a Court must have in the application of perceived business common sense to the interpretation of commercial contracts. The question of construction of contracts must begin with the words which the parties have used, for they have been chosen by the parties as the expression of their agreement. That is especially so in carefully drafted ad hoc agreements. Attempts to derive a meaning supported by business common sense does not authorise the application of principles of construction which ignore the words used by the parties but commence in a search for a perceived commercial position which the parties ought have to have agreed upon had they considered the issue more closely. The court is not to rewrite the agreement between the parties in order to make it conform to its view of what satisfies business common sense: Co-operative Wholesale Society Ltd v National Westminster Bank Plc [1995] 1 EGLR 97 (CA) at 99 per Hoffmann LJ. Whilst commercial common sense is an important factor, a court should be slow to reject the natural meaning of the words used so as to save a party from an imprudent contract, a bad bargain or the consequences of poor advice: Arnold v Britton [2015] AC 1619, 1629. For what may appear to be lacking in business common sense by one party may be a reflection of astute negotiation or prescience by another and the application of the rule must be evaluated from both sides. Further, a distinction must be drawn between the unintended economic consequences of the businesslike construction of a clause and the construction itself, even though the two may be closely intertwined. In this respect, Neuberger LJ’s words of admonition in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 at [21]-[22], particularly those in the latter paragraph, should be kept firmly in mind:
21. As already mentioned, the interpretation of the provision in the commercial contract is not to be assessed purely by reference to the words the parties have used within the four corners of the contract, but must be construed also by reference to the factual circumstances of commercial common sense. However, it seems to me right to emphasise that the surrounding circumstances and commercial common sense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise. The contract will contain the words the parties have chosen to use in order to identify their contractual rights and obligations. At least between them, they have control over the words they use and what they agree, and in that respect the words of the written contract are different from the surrounding circumstances or commercial common sense which the parties cannot control, at least to the same extent.
22. Particularly in these circumstances, it seems to me that the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood. Of course, in many cases, the commercial common sense of a particular interpretation, either because of the peculiar circumstances of the case or because of more general considerations, is clear. Furthermore, sometimes it is plainly justified to depart from the primary meaning of words and given them what might, on the face of it, appear to be a strained meaning, for instance where the primary meaning of the words leads to a plainly ridiculous or unreasonable result.
That is not to say that judges ought not seek to identify the commercial purpose of a clause or feel shy about doing so: cf Lord Drummond Young in Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43, [10]; but caution ought to be exercised before proceeding too far from the words of the contract.
Even if it is correct to say that the iterative process of construction of contracts involves testing the possible interpretations of a clause against the commercial consequences: per Lewison LJ in Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984, [32]-[33]; there is a difference between identifying a sensible commercial operation of a clause in a legal sense on the one hand and, on the other, the financial or economic consequences of the operation of a particular part of the clause as construed in particular market circumstances. Courts are particularly good at ascertaining the legal consequences of competing interpretations of a disputed clause and, indeed, ascribing to those consequences a general level of commerciality. However, ascertaining the economic or financial consequences of competing constructions in particular circumstances and attributing to them a relevant degree of commerciality is vastly more difficult. There is a danger in inflating the importance of the financial or economic consequences of the competing constructions into a metric of the veracity of a proffered construction. First, save in a general sense, it is often difficult to foresee how a particular clause will operate especially when, as in this case, it operates in the context of a market and involves agreements with third parties to the agreement. Secondly, to travel the path of examining the economic consequence of competing constructions requires a wide ranging inquiry of potentially numerous market scenarios, the validity of which will necessarily be speculative or dubious. Thirdly, it is often difficult to assess the overall economic advantages to one party flowing from the performance of a commercial agreement and even more difficult to assess the economic impact of the consequences of the operation of a particular clause. Fourthly, the exclusion of evidence of the parties’ intentions by reason of the parol evidence rule prevents the Court from examining the reasoning process which led a party to accept the term in question. Necessarily that excludes consideration of questions of whether, in relation to the operation of a particular clause in a particular scenario, a party was prepared to suffer a loss in the hope of greater gains by the operation of other parts of the agreement.
It may be that, save in the most obvious of circumstances, the economic or financial consequences of the particular construction of a clause are unlikely to be a suitable mechanism for determining the commerciality of competing constructions. The obvious circumstances are where the consequences of a particular construction are capricious, unreasonable, inconvenient or unjust. Where, however, the economic or financial consequences do not reach that level, the qualitative weighing of such consequences of the competing constructions is an inappropriate tool for discovering the correct interpretation of a clause. Were it to be otherwise, any party who realises, with the benefit of hindsight, that they have entered into an improvident bargain will seek to find an ambiguity which will offer a pathway to more favourable interpretation. More apposite for the construction of contracts is a consideration of the commerciality of the consequential legal positions of the parties derived from the various possible interpretations. In that sense the commerciality of any postulated interpretation is ascertained by reference to the resulting distribution of the relative commercial, economic or fiscal power to the parties flowing from the legal rights and obligations inherent in that interpretation. Generally, it is the distribution of commercial power or rights produced by the interpretation of a clause which is relevant to ascertaining the commerciality of a construction, and not the perceived financial consequence of that interpretation in either the operation of the clause or the contract as a whole.
The competing constructions and alleged ambiguity
There appeared to be no dispute in this matter that the Service Charges clause permitted 148 to charge Pipe for the supply of the identified services at rates higher than which it acquired those services. Pipe accepted that, in some instances, it might be charged at a higher rate than it would have paid had it received the supply directly. It was also accepted by the parties that the expression “relevant Authority” was a reference to the authority which supplied electricity, telephone services, water and the like as is referred to in the first clause of the Service Charges clause. Although the word “Authority” is used with a capital “A” which appeared to indicate it was defined term, there was no such defined term in the lease. In this case the authority which supplied the electricity was Origin Energy (“Origin”).
In general terms the competing constructions were said to be as follows:
(a)Pipe submitted that where there were two relevant rates at which an Authority might charge if it acquired the services directly, 148 could charge the higher when on-selling the service to it. However, in the case of electricity, that higher price had to be determined by reference to the following:
(i)The rate at which Origin, as the relevant Authority, would supply electricity to Pipe as a “contestable consumer”;
(ii)Pipe’s consumption and demand for the consumption of electricity at the Property considered alone. That is, even if Pipe could negotiate a lower price through an agreement with other companies in its group, TPG or AAPT, that further reduction should be ignored.
(iii)The period of the assumed supply ought to be the same as that which 148 has actually entered into for the supply of electricity to the Property.
(iv)The assumed terms and conditions on which the supply is given should be the same as those to which 148 actually agreed.
(b)148 submitted that, in considering what were the prices which Origin might charge Pipe if it were supplied directly, the only characteristic of Pipe which had to be considered was that it was a large consumer of electricity, being one which consumed more than 100,000 kWh per annum, such that it would be eligible for a “Standard large customer retail contract”. It asserted that it could charge Pipe the highest of the rates available under such contracts and that it had done so since 1 June 2017.
Neither of these proffered “constructions” were strictly or solely constructions of the words of the Service Charges clause. They do not provide a meaning to the words used. They were, in fact, proposals as to the manner in which the words of the clause were to be applied in the particular factual situation of the supply of electricity in the identified market. That is, they sought to identify the legal effect of the words used: McMeel on the Construction of Contracts, McMeel, (3rd ed) Oxford University Press, p 7; see also the learned discussion by JW Carter in “Commercial Construction and Contract Doctrine” (2009) 25 Journal of Contract Law 83; although both the meaning and effect may be seen as constituent parts of the broader task of construction.
As mentioned previously, in the abstract, the meaning of the words of the clause is not inherently difficult. 148 is entitled to charge Pipe in relation to the identified services at the rate at which Pipe would have been supplied by the relevant authority had there been a direct supply to it in the first place and, if there were more than one rate, 148 is entitled to charge the higher. Such a clause is a rather blunt instrument, although probably adequate in some markets where the variation in rate correlates to the volume of acquisition. In the case of the supply of electricity, where the chargeable rate is dependent upon other factors such as a pattern of usage or time of usage and there are a variety of contractual arrangements which might entered into for its supply, greater difficulty arises in the application of the clause.
In general terms the two potential meanings of the clause, which can be derived from the parties’ submissions as to its effect, are:
(a)First, that the rate at which 148 may charge Pipe is that which Pipe would have paid had it been supplied directly from the Authority and where there are several rates at which Pipe “might” have been charged but it cannot be ascertained which, then the highest of those rates. This construction accords prominence to the words “which would have been charged” which, concurrently, reduces the influence of the words “(if more than one then the highest)”. This is the more natural meaning of the words and that which produces an outcome more favourable to Pipe. Pipe says that this construction requires consideration of what rate it would actually have paid to the Authority, taking into account its actual circumstances and the notional agreement it would have struck with the Authority for the supply of electricity. That said, it seems that it perceived that, because of its unique circumstances, it might actually be able to secure a lower rate than 148 and such a result may be uncommercial. To avoid such a scenario it submits that the circumstances which should be taken into account when identifying the rate at which it would have been supplied, are those which exist solely because it consumes electricity at the Property.
(b)The alternative construction is that 148 may charge Pipe at the highest rate at which the Authority might have charged Pipe had supply of the service been provided to it directly. In general terms, the result of this construction would favour 148. Such a construction gives the words “(if more than one then the highest)” a controlling influence over the clause because it focuses attention on the existence of a variety of rates as opposed to the rate “which would have been charged”. It is a construction that eschews the existence of a notional contestable contract between Pipe and Origin for the supply of electricity, but focuses on the rates which Origin might have charged Pipe of its own accord if it was supplying directly. However, 148’s submissions recognise that such a broad construction would be unlikely as it would have the effect that it could charge Pipe at a rate far in excess of that which it would actually have paid for the service. It, therefore, adopts a half way position and submits that, in the calculation of the rate, consideration should be given to the circumstance that Pipe is a “large consumer” and the relevant rate will be the highest paid by large consumers. The basis for adopting only one particular characteristic of Pipe for the assessment of the rate was never explained.
148’s attempt to identify the legal effect of the clause by reference to the particular facts of the electricity supply market was based upon the assumption that it was inappropriate to use the actual rate at which Pipe would have been charged had it been supplied directly. In particular, it said the use of the actual rate would not give effect to the words “(if more than one then the highest)”, although, as is explained below, that submission is not sustainable. Secondly, it submitted that the application of the clause according to its terms in the case of electricity supply to Pipe would not make commercial common sense or would have an uncommercial outcome. More precisely, the submission was that Pipe’s proffered construction would result in the operation of the lease having less favourable financial consequences for it than its proposed construction. Ultimately, 148’s asserted operation of the clause is, in effect, a default position which is governed, not by the words of the clause, but by the particular circumstances of the case.
Textual matters
In the course of the hearing the parties focused attention on the construction and effect of the words “at the rate (if more than one then the highest) which would have been charged by the relevant Authority had supply been direct to the Lessee in the first place”. Although the parties tended to parse the terms of this phrase it is more appropriate to assess the operative effect of the phrase as a whole. That said, it can be accepted that the clause requires consideration of two separate matters. Firstly, the identification of the manner in which the relevant service would be supplied to Pipe directly by the Authority. Secondly, given that scenario, at what rate or rates would the service have been charged. Necessarily, when those matters are considered the terms of a notional agreement between Origin and Pipe will be assumed to exist and the rate charged under the Service Charges clause can be identified. For ease of reference this notional agreement will be referred to by the shorthand expression, “Notional Supply Agreement”.
The meaning of the words used
As to the legal effect of the Service Charges clause in relation to the supply of electricity in the current market, 148 submits that the expression “would have been charged” should be read in a limited way as meaning “would” or “might” have been charged from a list of standard rates applicable to large customers. In effect, it submits that the clause operates to allow it to charge the highest rate which Pipe “might” have been charged. There is very little in the way of linguistic support for that construction in the words of the clause. On the other hand, Pipe submits that the clause operates in the present circumstances to require 148 to charge at the rate ascertained by determining what rate it would have paid if it had entered into an agreement for the supply directly from Origin as the Authority, save that, where there are two possible rates, the higher is to apply. That suggested construction does less violence to the words of the clause.
Words in parentheses
Although it is far from being decisive in the construction of the Service Charges clause, it is relevant that the weight given to the words “(if more than one then the highest)” could have a not insignificant effect on the conclusion. Absent those words, the remainder of the clause seems to be one where the rate at which Origin would supply electricity to Pipe under a Notional Supply Agreement is the rate which 148 might charge. However, the inclusion of the words in parentheses tends to diminish the dominance of the Notional Supply Agreement and suggest the relevant rate is the highest of a range of rates which “might” be charged. As the discussion below reveals, the clause operates with greater coherency if the words in parentheses are given work to do as words of clarification or, at least, words which seek to provide for those circumstances where the remainder of the sentence cannot apply. That is, they do not change the primary meaning of the clause, but clarify what the position is where there is more than one possible rate which “would have been charged”. Where it cannot be ascertained which of several rates would have been charged by the supplier, the higher of the possibilities is adopted. On this basis, where the rate can be ascertained there is no need to have recourse to the words of clarification or extension.
Assuming a direct supply to Pipe
A hypothetical direct supply by Origin to Pipe
On the face of the words used, the Service Charges clause operates upon the supposition that the authority, Origin, supplies electricity directly to Pipe. In the circumstances that was not a presumption of any great moment. It is apparent that Pipe’s exclusive use of two transformers and associated electricity meters would have permitted it to secure direct supply from Origin had that been required. It might be assumed that such was the recent contemplation of the parties on 19 May 2016 when the 2016 Deed was entered into even though it was not until late November 2016 that Pipe was, in fact, billed from two meter numbers being Number 205035796 and Number 205035797 which were the meters connected to the two transformers utilised by Pipe. The unchallenged evidence of Mr McNair was that it would be relatively simple for Pipe to move from being an off-market customer to an on-market customer. As the two transformers used by Pipe had their own meter numbers no physical work would have been required for Pipe to secure a national meter identifier (or NMI) in respect of those two meters and with those NMIs to secure the direct provision of electricity. That would necessarily require agreement from 148 to allow Pipe to continue to use, on an exclusive basis, all of the plant and equipment including cables and the like which are 148’s property. It was submitted by 148 that for the purpose of applying or construing the clause it needed to be assumed that it would give its consent to Pipe’s use of the plant and equipment in this way.
It follows that whilst it can be appreciated that on 148’s construction it might receive substantial revenue from the sale of electricity, the total revenue received from the Property as between the 2008 Lease and the 2016 Deed is not significantly altered. Again, the respective benefits and detriments of the rights and obligations of the parties under the 2017 Lease provide an insufficient foundation on which to construe the Service Charges clause. The full nature and value of the respective benefits under the lease cannot be ascertained in a way which provides any sure footing for determining how the clause should be applied.
Conclusion on the question of construction of the Service Charges clause
The necessary conclusion from the above is that, under the Service Charges clause of the 2017 Lease, the rate at which 148 may charge Pipe under the 2017 Lease is that which Pipe would have been charged by Origin had Pipe entered into a contestable contract with Origin commencing on the date on which the 2017 Lease commenced. Necessarily, it follows that the rates at which Origin supplies electricity under its standard contracts for large customers are irrelevant to the operation of the clause. The rate charged by Origin will reflect the terms of an agreement which Pipe would have entered into taking into accounts its consumption demand and demand profile for its use of electricity at the premises at 148 Brunswick Street, Fortitude Valley, Brisbane. The term of any such agreement will be that which Pipe, acting reasonably, would have entered into for the purposes of obtaining direct supply at the demised premises from the date of the commencement of the lease. If that contestable contract would have come to an end, the current rate is to be ascertained by reference to any extension or replacement agreement.
It follows that, in the circumstances and on the correct construction of the Service Charges clause, it ought to be declared that pursuant to the terms of a written lease entered into on 19 May 2016, the rate at which 148 Brunswick Street Pty Ltd is entitled to charge Pipe Networks Pty Ltd for the supply of electricity at the demised premises is the rate which Origin Energy Limited would have charged Pipe Networks Pty Ltd had those parties entered into a contestable contract for the supply of electricity to the demised premises the major terms of which were:
(a)the supply of electricity was to be directly to Pipe Networks Pty Ltd as a large on-market customer;
(b)the supply would commence on 1 June 2017;
(c)the duration of the contestable contract is that which would have been agreed as between Origin Energy Limited and Pipe Networks Pty Ltd or any extension, renewal or replacement thereof; and
(d)the supply of electricity was to be for that consumed by Pipe Networks Pty Ltd solely at the demised premises.
As a consequence of the correct construction of the Service Charges clause, the cross-claim seeking the alternative construction ought to be dismissed.
It is therefore not strictly necessary to resolve the question of whether the claimed unpaid electricity charges were otherwise unenforceable, however it is appropriate to briefly set out some conclusions in the event a different view were taken as to the correct construction of the clause.
ILLEGALITY IN THE SALE OF ELECTRICITY
Pipe alleges 148’s electricity charges are not enforceable
Pipe alleges that by charging for electricity pursuant to the 2017 Lease, 148 has sold energy without an authorisation or exemption, in contravention of s 88 of the National Energy Retail Law (NERL). As such, Pipe alleges that 148’s claim in respect of those charges is not enforceable. As at 3 May 2018, 148 identified the sum of $802,022.37 as being unpaid.
The NERL is scheduled to the National Energy Retail Law (South Australia) Act 2011 (SA), and is part of a national scheme of laws, applied and modified in Queensland by s 4 of the National Energy Retail Law (Queensland) Act 2014 (Qld). The Queensland law is referred to as the National Energy Retail Law (Queensland) (NERLQ). Section 15 of the NERLQ gives force of law to the National Energy Retail Rules (NERR).
Section 88 of the NERLQ requires those selling electricity in Queensland to hold authorisation or exemption. Subject to a potentially retrospective exemption registration, discussed further below, 148 did not hold authorisation or an exemption at the material times.
Therefore, the question arises whether the contractual obligations relating to the charges are unenforceable because of illegality. If so, Pipe will not be liable for payment of electricity charges made by 148 prior to it gaining the relevant exemption.
Principles
In Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 (Equuscorp) at 513, French CJ, Crennan and Kiefel JJ identified the three recognised categories of cases where an agreement (or part thereof) may be unenforceable for statutory illegality, where:
(i)the making of the agreement or the doing of an act essential to its formation is expressly prohibited absolutely or conditionally by the statute;
(ii)the making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute;
(iii)the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a “contract associated with or in the furtherance of illegal purposes”.
In the third category of case, the court acts to uphold the policy of the law, which may make the agreement unenforceable. That policy does not impose the sanction of unenforceability on every agreement associated with or made in furtherance of illegal purposes. The court must discern from the scope and purpose of the relevant statute “whether the legislative purpose will be fulfilled without regarding the contract or the trust as void and unenforceable”. As in the case when a plaintiff sues another for damages sustained in the course of or as a result of illegal conduct of the plaintiff, “the central policy consideration at stake is the coherence of the law”. (footnotes omitted)
The consequence of illegality “is a matter of statutory construction whatever category of illegality is involved”: Gnych v Polish Club Ltd (2015) 255 CLR 414 (Gnych), 425 [36]. It “does not always follow from a prohibition directed to one party to an agreement that the contract is void”: Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 (Ketchell), 109 [16]. It “depends upon the mischief which the statute is designed to prevent, its language, scope and purpose, the consequences for the innocent party, and any other relevant considerations”: Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2007) 232 CLR 1 (ACCC v Baxter), 29 [45].
The task of statutory construction must start with the text: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, 46 [47]; and, with the text, so must the task end: Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2002) 250 CLR 503, 519 [39].
The statutory prohibition
Section 88 of the NERL provides:
(1)A person (the seller) must not, in this jurisdiction, engage in the activity of selling energy to a person for premises unless—
(a) the seller is the holder of a current retailer authorisation; or
(b) the seller is an exempt seller.
148’s submissions do not appear to cavil with the proposition that it engaged in the activity of selling energy to Pipe, however it is necessary to consider the nature and scope of the prohibition more broadly in assessing whether it is intended to have the consequence of unenforceability.
“Selling energy”
“Energy” means electricity or gas or both: s 2(1).
“Selling energy” is not a defined term, although the statutory context might provide some guidance. As is foreshadowed in s 2(2), the terms “sale” and “supply” are used somewhat interchangeably in the NERLQ, with the distinction seeming to be that “sale” connotes something more than a mere supply, involving the process of charging of sums of money for a supply.
There are various references to “sale of energy” or cognate terms throughout the NERLQ: see eg s 2(1) “customer retail service” and “market offer prices”; s 5(1); s 56(2); s 122 “RoLR event” sub-paragraph (f); s 130(1); s 136(6)(b) and s 150. The parties also referred to the Exempt Selling Guidelines in the NERR made pursuant to s 188 of the NERLQ.
This statutory context indicates that “sale of energy” and “selling energy” refer to the execution of a seller’s obligations that might be found in a “contract for the sale of energy” (as used in eg ss 141(1), 148(1) and 173(2)), rather than the making of the agreement to sell itself.
However, the “attempt” provision in s 299 should be kept in mind, as it means that the prohibition in s 88 might extend to executory contracts or rejected offers to sell. The accessorial conduct of a purchaser is also potentially exposed to liability: s 298.
“Engag[ing] in the activity of selling energy to a person for a premises”
It is potentially important that the prohibition is not on “selling energy” simpliciter, but rather on “engag[ing] in the activity of selling energy to a person for a premises”.
Prima facie, the first half of that phrase points towards a construction akin to s 8 of the Banking Act 1959 (Cth) considered in Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 (Yango), which prohibited a body corporate from “carry[ing] on any banking business”. That prohibition was said not to be directed at the particular contracts, even though the contracts were of a kind central to the banking business: Yango at 415, 423-426 and 433-434.
However, although referring to “activity” generally, the statutory prohibition in s 88(1) is narrowed by the words “to a person for a premises”. More than one customer was required for a “banking business” in Yango, but that is not the case here. The “activity” not to “engage in” is (as a compound expression): “selling energy to a person for a premises”.
The meaning of the prohibition
Section 88 in its statutory context conditionally prohibits the carrying out of the seller’s obligations in a contract for the sale of energy (being supplying and charging for energy), rather than the making of such a contract. Thus the case would seem to fall within the second category of illegality identified in Equuscorp above: the making of the agreement is impliedly prohibited as the agreement is to do an act the doing of which is conditionally prohibited by statute.
However, as there is no express reference to contracts or agreements in the provision, it is necessary to consider the broader legislative scheme to confirm a conclusion which has the effect of rendering the electricity charges unenforceable (if there is no effective retrospective exemption).
The legislative scheme
Interpretive rules
Under s 8(1) of the NERLQ, Schedule 2 of the National Gas Law (the Interpretive Schedule) (which is itself scheduled to the National Gas (South Australia) Act 2008 (SA)) provides the interpretive framework for the NERLQ. The Acts Interpretation Acts of Queensland and South Australia do not apply: National Energy Retail Law (Queensland) Act 2014 (Qld) s 7.
Section 7 of the Interpretive Schedule provides:
(1)In the interpretation of a provision of this Law, the interpretation that will best achieve the purpose or object of this Law is to be preferred to any other interpretation.
(2)Subclause (1) applies whether or not the purpose is expressly stated in this Law.
Section 13 of the NERLQ provides:
The objective of this Law is to promote efficient investment in, and efficient operation and use of, energy services for the long term interests of consumers of energy with respect to price, quality, safety, reliability and security of supply of energy.
Section 11(1) of the Interpretive Schedule provides:
If this Law defines a word or expression, other parts of speech and grammatical forms of the word or expression have corresponding meanings.
Although “selling” and “sale” are not expressly defined in the NERLQ (except in the expression “sale and supply of energy” in s 2(2)), it is consistent to adopt corresponding meanings for the terms, as has been done above.
Compliance regime
Part 13 of the NERLQ provides an extensive regime for ensuring compliance with its provisions. Section 288 provides that the Australian Energy Regulator (AER) may accept enforceable undertakings. Sections 292 and 293 provide a regime for private actions for compensation for breaches of ‘conduct provisions’ (although no provisions have yet been designated as such under the mechanism in s 2(1)). Section 291 empowers courts (on the application of the regulator under s 289) to, among other things, make declarations that provisions have been breached, and grant mandatory or prohibitory injunctions to prevent further breaches.
Consequences of contravention of statutory prohibition
The NERLQ also contains a regime of civil penalty provisions. Section 295 provides that a breach of a civil penalty provision is not an offence.
Section 88 is one of the civil penalty provisions identified in s 4(1). The maximum amount of a civil penalty is defined in s 2(1) as follows:
civil penalty means–
(a)in the case of a breach of a civil penalty provision by a natural person–
(i)an amount not exceeding $20 000; and
(ii)an amount not exceeding $2 000 for every day during which the breach continues; or
(b)in the case of a breach of a civil penalty provision by a body corporate–
(i)an amount not exceeding $100 000; and
(ii)an amount not exceeding $10 000 for every day during which the breach continues;
The amounts in (i) and (ii) of each sub-paragraph are cumulative. Section 294 provides that all relevant matters must be considered in determining the amount of a civil penalty, including the nature and extent of the breach and the loss or damage that results, as well as the surrounding circumstances.
Section 297 provides that a person will not be liable for more than one civil penalty if the same conduct constitutes a breach of two or more civil penalty provisions, however conduct of the same nature in respect of different customers will not necessarily be treated as a single course of conduct, but rather may be treated as a separate course of conduct in relation to each affected customer: Australian Competition and Consumer Commission v EnergyAustralia Pty Ltd [2015] FCA 274, [120] per Gordon J.
Section 298 extends liability for breach of a civil penalty provision to a person who does “aid, abet, counsel or procure a breach” or is “in any way directly or indirectly knowingly concerned in, or a party to, a breach”. Section 299 extends liability to include attempts to breach a civil penalty provision.
The correct construction
The above consideration of the legislative scheme, and in particular the extensive compliance regime, might affect the correct construction of s 88 and the effect of its prohibition on selling electricity.
148’s submissions
148 submitted that the agreement for it to sell electricity to Pipe should not be treated as void or unenforceable simply because it contravened the NERLQ. Reference was made to the succinct statement of principle by Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ in ACCC v Baxter at 29 [45]-[46]:
In Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd, Mason J said:
“The principle that a contract the making of which is expressly or impliedly prohibited by statute is illegal and void is one of long standing but it has always been recognized that the principle is necessarily subject to any contrary intention manifested by the statute. It is perhaps more accurate to say that the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contract, a question of statutory construction and that the principle to which I have referred does no more than enunciate the ordinary rule which will be applied when the statute itself is silent upon the question.”
That passage was cited by Kerr LJ in Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd, where his Lordship said that when a statute contains a unilateral prohibition on entry into a contract, it does not follow that the contract is void. Whether or not the statute has this effect depends upon the mischief which the statute is designed to prevent, its language, scope and purpose, the consequences for the innocent party, ad any other relevant considerations. Ultimately, the question is one of statutory construction. As was pointed out in SST Consulting Services Pty Ltd v Rieson, the Act is far from being silent upon the question of the consequences of illegality, but, rather, contains elaborate provisions. That is not to say that the express provisions of the Act answer all questions that may arise, but they answer many of them, and set the context in which others are to be resolved. (footnotes omitted)
148 submitted that the agreement should not be unenforceable for a number of reasons:
(a)Firstly, it submitted that the NERLQ contemplated that contracts survived contraventions, because the NERLQ affords the regulator various powers to oblige persons engaged in contraventions to remedy them. Reference was made to ss 288, 289 and 291. However, nothing in those provisions requires contravening contracts to remain enforceable. They might equally be taken as indicators for the regulator to act to prevent persons being affected by contraventions and, in particular, contraventions of civil penalty provisions. Although s 289(1) prevents individuals from taking action against a contravener, that need not be taken to require an individual to remain subject to obligations in a contravening contract.
(b)Secondly, it submitted that a contravening contract is not intended to be rendered void by the NERLQ, because it contains detailed discretionary remedial powers (including for civil penalties) to regulate the consequences of contraventions. There is some force in that submission, especially by analogy to the provisions and decisions in Yango and Gnych discussed below.
(c)Thirdly, it submitted that the NERLQ does not prohibit entry into the contract (but, impliedly, only its performance). That may be so (subject to the effects of the accessory and attempt liability provisions in ss 298 and 299), however it does not answer the case under the second category restated in Equuscorp, but is merely a factor to consider in construing the statutory intention.
(d)Fourthly, it submitted that the regulator’s choice in the present case not to take any steps against 148 and simply to amend the registered exemptions indicates that the scheme of the NERLQ does not support unenforceability. That submissions is really a particularisation of the submission about the existence of a detailed compliance regime and, in any case, depends upon the veracity of the submission that contravention could be cured by retrospective amendment to the register, discussed below.
(e)Fifthly, it submitted that the consequences of unenforceability of energy sale agreements might be severe. It may result in a consumer receiving a windfall at the expense of an on-supplier. Such consequences may be relevant: see eg Yango at 426-427 per Mason J. In this case the severity is likely to be directed at the contravener, more so than the “innocent” party, however there remains some force to the argument.
Consideration
Here the transaction in question is the agreement to sell energy provided for in the Service Charges clause. The selling of energy other than as permitted by the NERLQ is expressly prohibited by s 88(1) and enforced by the imposition of a civil penalty. It necessarily follows that any court giving judgment to a seller of energy who has acted in contravention of s 88 will be enforcing the agreement to sell and necessarily bringing the seller within the contravention. Indeed, in order to recover under the Service Charges clause, 148 would necessarily have to plead and prove the particular essential act which is a breach of the statutory prohibition. It cannot be said that the illegality was incidental to the course of the performance of the agreement: Fitzgerald v FJ Leonardt Pty Ltd (1997) 189 CLR 215.
It is also relevant that NERLQ does not provide a remedy for a breach of the civil penalty provision which is enforceable by a person affected. Proceedings can be instituted by the regulator which will require a person to pay a penalty if found in contravention, however, it does not appear that the person so affected is entitled to compensation. (Although the ‘conduct provisions’ regime might provide for such an outcome, there are presently no provisions designated as ‘conduct provisions’, so that regime has no effect.) This may be seen as an indicator that the promotion of compliance with the requirements of s 88 will be enhanced by rendering the agreement unenforceable: cf Ketchell, [28]-[31].
The purpose of the NERLQ is to regulate an important market. Whilst that market will include businesses, some of them large, it will necessarily include millions of individual consumers. In this respect the legislation offers an element of consumer protection. Within that concept there exists regulation of those entities which may engage in the selling of electricity. It would, therefore, undermine an important part of the regulatory regime were the control of suppliers to be easily bypassed.
In relation to the civil penalty regime, it is perhaps also relevant to refer to the statement of Mason J (with whom Aickin J agreed) in Yango at 429:
There is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished.
As in Yango, here there is a large initial penalty as well as a recurrent penalty for each day the section is contravened.
As in Gnych (at 428 [51]), the prohibition here is conditional, in that it contemplates that electricity will be supplied in circumstances such as these: the mischief is not selling energy itself, but doing so without authorisation or exemption.
As in Gnych (at 428-430 [52]-[57]), there is a compliance regime and a regulator empowered to take various actions should it consider them to be necessary.
However, unlike Yango, the prohibition (and daily penalty) is not linked to the overall conduct of the contravener in respect of multiple transactions, but to each particular transaction. And unlike Gnych, here the statute does not permit carrying out of the contract even if entered in breach, but rather the statute, by its express terms, prohibits the carrying out of a contract for selling energy.
If in a suit by Pipe seeking performance of the 2017 Lease this Court ordered 148 to continue selling energy without authorisation or exemption, it would be ordering 148 to breach the statutory prohibition. If this Court ordered Pipe to pay for such energy, it may be ordering it to “aid, abet, counsel or procure” or be “knowingly concerned in, or a party to,” that breach.
Declining to order payment will not frustrate the objective of the statutory regime, which is directed at “the interests of consumers of energy”: s 13. While it might increase the consequences of 148’s breach in one respect, such consequences might be relevant circumstances taken into account in fixing any civil penalty under s 294.
The question in this case is in some respects balanced. The role of the common law rules of illegality appears to continue to diminish in the line of authority beginning with Yango. This may reflect the explosion of legislative enactments over that period touching upon all aspects of economic and commercial life.
Section 88 is part of a detailed regime directed at the “long term interests of consumers of energy”. Its breach is not an offence, although the statute provides for a penalty. However, the prohibition is directed at individual transactions (cf Yango), is on the performance of the contract (cf Gnych), extends accessorily to the “innocent” party (cf ACCC v Baxter), is not the subject of statutory relief as between the parties (cf Ketchell), and refusing to enforce contracts will only have serious consequences on the contravening seller.
The legislature has expressly prohibited the carrying out of the obligations under the Service Charges clause. 148 has not overcome the consequence that the making of a contract to do the very thing prohibited must impliedly be prohibited.
Therefore, unless 148 was retrospectively exempted from compliance, its breach of s 88 of the NERLQ will render unenforceable the Service Charges clause in respect of electricity outgoings.
A retrospective exemption?
The evidence
The evidence of Mr Scott Heckenberg was not relevantly contested in the hearing. He gave evidence that he has searched the AER’s Public Register of Authorised Retailers and Exempt Sellers. He gave evidence that his search has revealed that at no time had 148 or its associated company, Trade Coast Properties, been recorded as ever having been an authorised retailer. He also gave evidence that 148 was not recorded, at the time of the affidavit, as currently having or ever having had a network exemption for 148 Brunswick Street. Nevertheless, Trade Coast Properties was recorded as being an exempt retailer for a number of sites including the Property. However, it is not Trade Coast Properties which supplies the electricity or with whom Pipe has any agreement for supply under the 2016 Deed. The obligation to supply the electricity and the entitlement to charge for it belongs to 148.
It appears that, subsequent to Mr Heckenberg having searched the register, 148 has become registered. That seems to have occurred in about early July 2018. Mr McNair sought and obtained the registration of 148 as an exempt seller retrospectively. Again, this evidence did not appear to be contentious.
Did retrospective registration validate the non-compliance?
Little attention was given by 148 in its submissions to this issue. Generally, its claims are centred upon the AER amending the register. It is uncontentious that Trade Coast Properties had a registered exemption with the AER in respect of the Property at 148 Brunswick Street, Fortitude Valley. That exemption had an AER reference “E-2773” with an effective date of 29 August 2016. As mentioned, Trade Coast Properties is controlled by Mr Smith and Mr Loel. It appears that at some relevantly recent time, Trade Coast Properties and 148 have sought from the AER the substitution of 148 for Trade Coast Properties as the exempt supplier. Exhibit 18, which was tendered without objection, shows the results of a search of the Public Register of Network Exemptions. It now shows 148 as holding the exemption identified as E-2773 which relates to the Property. The effective date of the exemption is identified as being 29 August 2016.
148 submits that because the registered exemptions both have an effective date of 29 August 2016 and are in its name, it follows that it had not breached the NERLQ such that there is no reason for it to be precluded from recovering or retaining amounts charged for electricity supplied to Pipe.
The apparent difficulty is that, at the time when 148 supplied the electricity to Pipe up until at least 20 June 2018 it did not, in fact, hold a retail exemption or a network exemption for the Property. It is apparent that the AER has purported to grant the exemption from the date on which it granted the exemption to Trade Coast Properties. It is also apparent that the AER has “back-dated” the exemption or, at least, misstated the date from which the exemption was granted.
148 submitted that it did not matter that, at the time the electricity was sold, it had no entitlement to do so, and further submitted that the effect of the recent registration was to exempt it nunc pro tunc. In response, Pipe submitted that the AER had no ability to effectively backdate the granting of an exemption.
Section 119 of the NERLQ imposes an obligation on the AER to maintain a Public Register of Authorised Retailers and Exempt Sellers. The section mandates that the register include particulars of authorised retailers and exempt sellers and other particulars as required by the Rules. The register may include other particulars or other information as permitted by the Rules. Rule 164 of the NERR required the register to contain certain information, being:
(a) The names and business addresses of persons who hold retailer authorisations;
(b)The names and business addresses of exempt sellers who are subject to an individual exemption;
(c)A list of the classes of persons in respect of whom deemed exemptions are in force;
(d) A list of classes of persons in respect of whom an exemption is registrable; and
(e)The names and business addresses of exempt sellers who have registered with the AER as belonging to a class of persons subject to a registrable exemption.
There is nothing in s 119, nor r 164, which suggests that the AER might alter the rights and entitlements of energy suppliers by the mere alteration of the particulars in the register. The public register is a source of information from which interested persons might acquire knowledge of the entities which are entitled to supply and sell energy. There is nothing in the power to create and maintain a register which suggests that the AER might alter a party’s right simply by an entry in the register. That would be contrary to the scheme whereby the AER is obliged to take into account certain matters when it exercises its exempt selling regulatory functions or powers (ss 114, 115 and 116). It is, perhaps, important that pursuant to Pt V of the NERLQ the AER might transfer a retailer authorisation from one entity to another. Specific power is granted for that purpose. However, there appears to be no such similar power in relation to exempt sellers. The AER’s purported transfer of the exemption from Trade Coast Properties to 148 perhaps attempted to deem the transfer to have retrospective effect, but no provision was identified which might authorise that conduct.
Pipe identifies that, pursuant to s 110(2)(c), a registrable exemption becomes a registered exemption in respect of particular persons when the persons are registered under the Rules. Rule 151 of the NERR provides:
(2)A registrable exemption becomes a registered exemption in respect of a particular person when the person is registered as such on the Public Register of Authorised Retailers and Exempt Sellers.
(3)A registered exemption comes into force from the date the person who is subject to the exemption is registered as such on the Public Register of Authorised Retailers and Exempt Sellers.
It follows that, for the purposes of s 88 and the definition of “exempt seller” in s 2 of the NERLQ, the registered exemption in respect of 148 only came into force from the date 148 was registered as such on the Public Register of Authorised Retailers and Exempt Sellers. The natural meaning of those words is that the exemption takes effect from the date of registration not from the date particularised on the register.
Given that the legislation makes specific reference to the date a registered exemption is made, it is most unlikely that the “backdating” of the register would have any operative effect on the existence of contraventions of s 88 which occurred prior to actual registration.
Whilst the AER, which is established under s 44AE of the Competition and Consumer Act 2001 (Cth), has power to do all things necessary or convenient to be done in connection with the performance of its functions, the exercise of its essential powers must be in accordance with the legislative prescriptions. The power to make minor amendments and corrections to a register which AER is required to maintain pursuant to s 199 of the NERLQ is necessary for the carrying out of the statutory purpose to maintain an accurate register. In general terms it can be accepted that where a statute expressly confers on a body a power, function or duty there is necessarily implied an unexpressed ancillary power to do all things necessary or convenient in connection with the performance and exercise of the primary power: Plaintiff M47/2012 v Director-General of Security (2012) 251 CLR 1 at [48] per French CJ. However, the ancillary powers are necessarily confined to assisting the performance of the essence of the primary power: Transport Workers’ Union of New South Wales v Australian Industrial Relations Commission (2008) 166 FCR 108 at [38].
In the present case the power conferred on the AER to maintain a register might carry with it whatever necessary or ancillary power is required for that to occur. Such a power may include making corrections to the register to ensure it accurately reflects the exemptions granted and the dates on which they were granted. However, the ancillary powers do not confer fresh and alternative powers to the exercise of the AER statutory powers to grant exemptions.
There is no suggestion in the present case that the entry of Trade Coast Properties becoming the holder of the registered exemption was an error. The application was lodged on 29 August 2016 in its name and it became registered. The evidence of Mr McNair in re-examination was to the effect that at the time of registration it was intended that Trade Coast Properties would be registered as the supplier of electricity but, subsequently, Mr Smith and Mr Loel realised that Trade Coast Properties had no direct contractual relationship with Pipe and it could not be the supplier. That error on the part of Mr Smith and Mr Loel does not constitute any error in the creation of the register which required rectification. What it required was seeking the inclusion of 148 within the registered exemption. That seems to have been done and it was not until, at the latest, 20 June 2018 when that occurred.
It follows that, on the evidence, 148 was not effectively retrospectively exempted. Therefore selling electricity to Pipe in the period to 20 June 2018 contravened s 88 of the NERLQ, and the Service Charges clause is therefore unenforceable for the relevant times in this proceeding.
I certify that the preceding two hundred and five (205) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington. Associate:
Dated: 2 May 2019
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