Powercor Australia Ltd v Pacific Power
[1999] VSC 110
•18 November 1999
SUPREME COURT OF VICTORIA
COMMERCIAL JURISDICTION Do not Send for Reporting Not Restricted
No. 2067 of 1998
Folio 4931
| POWERCOR AUSTRALIA LTD (ACN 064 651 109) | Plaintiff |
| v | |
| PACIFIC POWER | Defendant |
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JUDGE: | Gillard J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10, 15-18, 22-25 and 29-31 March 1999; 7, 8, 12-15, 19-22, 28 and 29 April 1999; 3-6 , 17-20, 24-27 and 31 May 1999; 1-3, 7, 8, 10, 15-17, 21-24, 28-30 June 1999; 1, 5-7, 12-15, 19-22, 26-29 July 1999; 10, 11, 12, 16-19, 23-26, 30 and 31 August 1999; 1, 2, 5 and 6 September 1999. | |
DATE OF JUDGMENT: | 18 November 1999 | |
CASE MAY BE CITED AS: | Powercor Australia Ltd v Pacific Power | |
MEDIA NEUTRAL CITATION: | [1999] VSC 110 | |
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Commodity Derivative Contracts – electricity industry – hedge against risk
ISDA Master Agreement – purpose – future transactions – effect on negotiations – transaction part of Master Agreement
Formation of contract – intention to contract
Estoppel by convention – no change to contractual provisions
Equitable estoppel – to establish contract – no estoppel established
Authority of employee to conclude a contract – apparent authority – authority to convey offer and receive an acceptance
Ratification of alleged lack of authority in employee to make a contract – ratification after contract repudiated – ratification after contract commenced
Mistake – common and unilateral mistake in contract
Section 52 Trade Practices Act – claims for alleged breach
Specific performance – possible division of relief between damages and performance
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr A. Myers, QC with Mr J. Delaney and Mr M. Carey | Phillips Fox |
| For the Defendant | Mr G. Downes, QC with Mr G. Blake, Mr P.R. Moloney and Mr D.T. Forbes | Davis O'Neill Sistrom Hassall & Byrne (as agents for Davis O'Neill Sistrom) |
TABLE OF CONTENTS
PARTIES..................................................................................................................................................................................... [2]
GENERATION, SUPPLY AND RISK............................................................................................................................. [7]
THE ELECTRICITY INDUSTRY IN VICTORIA AND NEW SOUTH WALES.......................................... [14]
EXEMPT FUTURES MARKET........................................................................................................................................ [35]
DERIVATIVE CONTRACTS........................................................................................................................................... [41]
BASIC FACTS........................................................................................................................................................................ [76]
THE PROCEEDING............................................................................................................................................................. [91]
PERSONNEL.......................................................................................................................................................................... [92]
PATTERN OF TRADING.................................................................................................................................................. [95]
DISPUTED CONTRACTS............................................................................................................................................... [121
ISSUES.................................................................................................................................................................................... [141]
THE WITNESSES AND CREDIBILITY.................................................................................................................... [144]
25 NOVEMBER 1997.......................................................................................................................................................... [195]
THE ISDA MASTER AGREEMENT........................................................................................................................... [255]
THE EFFECT......................................................................................................................................................................... [337]
WHEN A BINDING CONTRACT?............................................................................................................................. [354]
TELEPHONE DEALING SUPPLEMENT.................................................................................................................. [380]
AUTHORITY........................................................................................................................................................................ [393]
ESTOPPEL BY CONVENTION.................................................................................................................................... [398]
ESTOPPEL BY CONVENTION - PRINCIPLES..................................................................................................... [416]
ESTOPPEL - CONCLUSION......................................................................................................................................... [457]
CONTRACT OR NO CONTRACT?............................................................................................................................ [482]
A. Contract - Principles......................................................................................................................................... [491]
B. Was there a contract?....................................................................................................................................... [546]
C. Essential minimum terms................................................................................................................................... [570]
(I) Contract No. 33 (formerly 22)......................................................................................................................... [582]
PP'S SUBMISSIONS......................................................................................................................................................... [657]
(II) Contract No. 35.................................................................................................................................................. [686]
PP'S SUBMISSIONS......................................................................................................................................................... [717]
(III) Contract No. 38.................................................................................................................................................. [755]
PP'S SUBMISSIONS......................................................................................................................................................... [783]
(IV) Contracts Nos. 39, 40 and 41.......................................................................................................................... [798]
PP'S SUBMISSIONS......................................................................................................................................................... [861]
(V) Contracts 43-47.................................................................................................................................................. [912]
PP'S SUBMISSIONS......................................................................................................................................................... [991]
SUMMARY ON 11 DISPUTED CONTRACTS.................................................................................................... [1017]
INTENTION AND ALLEGED HOLDING BACK.............................................................................................. [1019]
PCA'S RELIANCE ON ESTOPPEL........................................................................................................................... [1094]
AUTHORITY...................................................................................................................................................................... [1190]
A. The Contentions................................................................................................................................................. [1198]
B. Principles Concerning Authority.............................................................................................................. [1210]
C. Authority of Mr Murphy............................................................................................................................ [1257]
I. Actual authority................................................................................................................................................... [1257]
OSTENSIBLE AUTHORITY........................................................................................................................................ [1453]
AUTHORITY TO COMMUNICATE OFFERS AND ACCEPTANCES...................................................... [1473]
AUTHORITY OF MR TREACY.................................................................................................................................. [1478]
RATIFICATION............................................................................................................................................................... [1539]
MISTAKE............................................................................................................................................................................ [1581]
COMMON MISTAKE.................................................................................................................................................... [1609]
UNILATERAL MISTAKE............................................................................................................................................. [1653]
COUNTERCLAIM........................................................................................................................................................... [1670]
SECTION 52....................................................................................................................................................................... [1690]
FIRST REPRESENTATION......................................................................................................................................... [1703]
THE THIRD REPRESENTATION............................................................................................................................. [1715]
FOURTH REPRESENTATION................................................................................................................................... [1752]
FIFTH REPRESENTATION......................................................................................................................................... [1757]
SIXTH REPRESENTATION........................................................................................................................................ [1812]
THE SEVENTH REPRESENTATION...................................................................................................................... [1846]
CONCLUSION.................................................................................................................................................................. [1881]
SECTION 53(G)................................................................................................................................................................. [1882]
SUMMARY......................................................................................................................................................................... [1886]
CONCLUSION AND RELIEF..................................................................................................................................... [1886]
HIS HONOUR:
This is a proceeding instituted by writ wherein the plaintiff seeks specific performance of 12 alleged agreements together with equitable damages and in the alternative, a common law claim for damages. In final address counsel for the plaintiff abandoned its claim in respect of the 12th alleged agreement. The defendant counter-claims a number of causes of action, seeks rectification, in the alternative variation of various agreements pursuant to the Trade Practices Act 1974 and in the alternative damages.
Parties
The plaintiff, Powercor Australia Ltd (“PCA”), is a supplier of electricity to consumers in the north and western suburbs of Melbourne and the north and western parts of the State of Victoria. Its office is in Melbourne.
It is wholly owned by a large American corporation Pacificorp ("Pacificorp"), based in Portland, Oregon.
The defendant Pacific Power (“PP”) is a corporation established by the Electricity (Pacific Power) Act 1950 (NSW) ("the Act") and is a generator of electricity. The defendant is one of a number of generators of electricity in New South Wales. It generates electricity mainly at the Erraring Power Station. It also generates from other sources. It is located in Sydney.
Both parties are and were engaged in the business of dealing in commodity derivative contracts in the electricity industry in Australia. This case is concerned with 11 such contracts.
The relevant circumstances occurred during the period from April 1996 to the end of June 1998.
Generation, supply and risk
At all relevant times the generators in this State and New South Wales (N.S.W.) generated electricity which was supplied to a pool in each State. A body managed the pool in each State. If a distributor wishes to purchase electricity it does so at a price called "the spot price" which is determined every half hour of every day of the year. The price fluctuates according to supply and demand.
In Victoria and N.S.W. bodies are licensed to generate and sell electricity. PCA is permitted to sell retail electricity in both States. PP generates electricity which it supplies to the N.S.W. pool.
After the dispute arose between PCA and PP (which was June 1998) the National Electricity Market commenced on 13 December 1998 and all electricity is now sold to the National Electricity Market Management Company Ltd which fixes the spot price each half hour in accordance with a code.
The spot price ranged between August 1996 and June 1998 from $10 per megawatt hour up to $30 per megawatt hour. On occasions it has reached $100 but that was unusual. On one day, 25 November 1997, due to cut back of production due to maintenance and an extremely hot day in Victoria, the spot price rose to approximately $4,800. The price was also high on the following day. The price also rose in N.S.W. but it was in the low hundreds. For the distributor of electricity such as PCA a spot price of this magnitude is disastrous. It buys at that price and supplies the electricity to its retail consumer at a contract price ranging between $20-$50 a MWhr.
Those in the industry, particularly the generator, and the distributor are anxious to hedge against extremes in prices. Accordingly, commodity derivative contracts ("c.d. contracts") are entered into between the various sections of the industry and financiers to hedge against the risk associated with supplying electricity to or purchasing electricity from, the pool at the prices fixed by the authorities. Contracts are entered into with the object of minimising the risks involved in trading in a potentially volatile market.
The hedge contracts can take a variety of forms.
The consumer of electricity, especially the big consumer is eager to enter into long term contracts at fixed prices. PCA as a large distributor competes with other suppliers for the big consumer and has to be competitive. It is faced with the dilemma of offering fixed prices for long periods to win customers and purchasing electricity every half hour at the prevailing spot price. Hence the need for c.d. contracts to minimise the risk of potential loss caused by changing spot prices of electricity.
The electricity industry in Victoria and New South Wales
Up to about 1990 in Victoria and N.S.W. the electricity industry was in the hands of State owned authorities. The authorities controlled generation, transmission and distribution of electricity.
In 1991 the development of the National Electricity Market commenced with the aim of introducing competition in the wholesale supply and purchase of electricity employing open access to electricity networks across the Australian Capital Territory, New South Wales, Queensland, South Australia and Victoria. The ultimate objective was the establishment of the National Electricity Market by late 1998 to deliver electricity at lower prices to all consumers.
From about 1990 onwards various government initiatives occurred as a result of which the electricity industry has been restructured and privatised in Victoria, and also but to a much lesser extent, in N.S.W.
What has happened in Victoria is that the distribution process has been privatised and as a result there are a number of companies permitted to sell electricity in this State, one of which is PCA. Victorian generators are also in private hands.
In order to give effect to this restructuring a pool was established from which authorised entities could purchase electricity. This was established in 1994 and is known as Vicpool. The generators supply the electricity into the pool at a price and the electricity is sold to the distributor at the spot prices. The prices are fixed by the manager of the pool every half hour and in accordance with supply and demand.
At the beginning each of the distributor companies was given a particular region in which to distribute electricity and it was permitted to contest for the business within that area. It was also permitted to sell to others outside its area but was limited as to who it could deal with.
PCA was allotted a region and was permitted to contest for the supply of electricity to large consumers both in its region and other places in Victoria. Other distributors could come into PCA's area and deal with certain types of consumers. PCA could enter into agreements with particular companies to supply electricity for long periods. Customers were graded according to the volume of electricity used, and at a set date became available to contract with any distributor. The customer was said to be contestable.
Victoria has a timetable based on customer consumption of electricity and as each date is reached, suppliers such as PCA are permitted to contest for new business wherever the consumer is located.
Domestic users in this State become contestable in January 2001.
In N.S.W. privatisation has been partial. PP is a N.S.W. statutory corporation owned by the State.
It and two other generators from 1 March 1996 sold electricity to Transgrid, the body administering the N.S.W. electricity market for the wholesale supply of electricity. Since 10 May 1996 the spot price is determined by a code on a half hourly basis. The generators state their price and Transgrid fixes it. Since 1 May 1997 the Victorian spot price was taken into account.
Another generator entered the field in July 1997.
Prior to 1 October 1996 electricity was supplied by about 26 distributors at regulated prices and within specified areas. After that date there were six electricity distributors and since then they have been permitted to contest for consumers outside their area on a progressive basis.
In October 1996, 47 sites in New South Wales became contestable increasing to 660 sites and 3,500 sites in April and July 1997 respectively. The de-regulation has progressed ever since.
The market to supply the consumer is very competitive and PCA in 1997 was competing with the other suppliers in Victoria and N.S.W. to contract the big consumer for long periods who required low prices and attractive terms.
The objective of PCA was to participate as a distributor in the New South Wales electricity market as it became progressively de‑regulated.
PCA received a retail licence from the New South Wales Department of Energy and a wholesale trading authority in October 1996. This enabled it to trade in New South Wales to supply electricity and also trade c.d. contracts. It is important to distinguish between the wholesale and retail supply of electricity and the commodity derivative market. The latter is also referred to as wholesale trading. The former are concerned with actual supply whereas the latter is concerned with notional supply.
In New South Wales the de-regulated electricity market commenced operation on 1 March 1996 with an eight week period of specified prices. PP together with all other generators had to sell all its power to a pool and the retailers had to purchase from the pool.
From 1 May 1996 the spot price in the pool depended upon supply and demand. PP determined in April 1996 to transact c.d. contracts to hedge against the risk of spot price fluctuations. It was guaranteed the spot price for its generated electricity but it wished to sell notional electricity pursuant to c.d. contracts to minimise losses due to fluctuating prices. It generated electricity at a cost and it was important that it covered its costs. A spot price less than its costs meant a loss. Hence the need for a c.d. contract to avoid the risk. Further, it wanted its income stream to be at a certain level to plan for the future. Its main objective in c.d. contract trading was to minimise the risk of price fluctuations i.e. hedge against them but PP also traded in c.d. contracts for profit.
On 13 December 1998 the National Electricity Market commenced and the New South Wales and Victorian markets ceased. The National Market is managed by the National Electricity Market Management Company Limited ("NEMMCO") and all electricity is sold to NEMMCO in accordance with the National Electricity Code.
The events in this case span the period from April 1996 to late June 1998 and it is unnecessary to further consider the National Market. During this period there were Victorian and N.S.W. electricity pools.
Exempt Futures Market
This case is concerned with 11 alleged commodity derivative contracts. The contracts were purely financial and involve the notional supply of electricity. They were transacted over the counter and not through any exchange. The trading was subject to very few rules and was a matter of private treaty.
However, such a transaction is a trade in futures and is covered by the Corporations Law which prohibits private trading in futures. The prohibition is subject to a Minister of the Crown declaring a specified futures market to be an Exempt Futures Market pursuant to s.1127(1) of the Corporations Law.
On 3 May 1995 a declaration was made which established an Exempt Futures Market relating to the wholesale electricity. Named facility providers were permitted to trade on the market. PCA was a facility provider named in the declaration of 3 May 1995. PP became a facility provider by another declaration made on 3 May 1996. This meant that both parties were permitted to transact commodity derivative contracts of the type which are in dispute, over the counter and not through any exchange.
The declaration prescribed certain conditions in respect of the Exempt Futures Market but they are not relevant to the issues in this case.
The Sydney Futures Exchange was established and commenced conducting futures transactions relating to electricity in New South Wales and Victoria on 1 November 1997. However, the Exchange is concerned with transactions which have fixed characteristics relating to notional volume and period and there is a limitation on the types of contract. This case is not concerned with the Sydney Futures Exchange.
In contrast the transactions on the Exempt Market are far more flexible allowing for variable notional volume, and differing electricity periods and commencement dates.
Derivative contracts
The 11 alleged contracts were negotiated during the period from 13 November 1997 to 11 June 1998. They are commodity derivative contracts. Each concerns a notional supply of electricity of an agreed volume at stated prices over a set period. Although most of the contracts were negotiated by PCA with particular or potential retail contracts in mind, that is retail consumers, the fact is the hedge contracts do not involve the supply of actual electricity. In the end result the contracts involve the payment of money to and from each party to the derivative contract depending on the spot price every half hour, three hundred and sixty five days of the year. Settlement occurs each month.
The expression "derivates" is used to cover a variety of financial and investment products and includes futures contracts of all kinds. A derivative product is a financial product that is derived from another product such as a commodity transaction.
The contracts in dispute are commodity derivative contracts. They are futures contracts and can also be described as hedge contracts.
The 11 disputed contracts will be hereafter described as hedge contracts.
A hedge contract in simple terms is one in which one party called a hedger who is exposed to trading at a particular time in the market seeks to offset his risk of fluctuating prices by an opposite commitment in the futures market. The aim of the exercise is to provide for the payment of compensation from the other party when prices reach a level which will cause a loss. The hedger seeks to protect himself against loss resulting from price changes by transferring the risk to a speculator who relies upon his skill in forecasting price movements in the future.
At the relevant time the actual electricity markets in Victoria and N.S.W. were spot markets which meant that PCA when purchasing electricity to supply to its retail consumers had to pay the price fixed at the time. It sought to contract with large consumers for long periods at agreed prices. In so doing it was exposed to purchasing electricity at a price higher than the price it received from its consumer. Hence the need for a hedge contract to reduce the risk of loss.
The practice of hedging has been in existence for many, many years. There are two main reasons for hedging.
The first and primary one is to reduce the risk to the hedger by transferring the risk to speculators who assume the risk sometimes on the payment by the hedger of a premium. It is a form of insurance against the risk of fluctuating prices. In simple terms the hedger does not wish to carry the risk on its own.
The other reason for hedging is profit making. The hedger makes an assessment of what the future holds in respect to the market and speculates on the market moving in a way that results in a profit.
Experience invariably shows that hedging, although a form of insurance, seldom provides total protection. The risk is always there and there have been some spectacular losses experienced in the global markets in recent years usually due to lack of adequate internal controls over those doing the trading.
PP and PCA are involved in the electricity industry as generator and supplier respectively. They are permitted to transact hedge contracts on the Exempt Electricity Futures Market. In addition banks, financial institutions and others not involved in the industry were also permitted to trade in that market in 1997 and 1998.
To demonstrate how the hedging transaction operated in practice in the electricity industry it is convenient to trace through an example of PCA’s trading in electricity during the period up to 30 June 1998.
PCA is in the market of selling electricity to consumers. In order to provide electricity pursuant to a supply contract it had to purchase electricity at the prevailing cost which was the spot price for electricity in the Victorian or New South Wales pool depending on where its retail customer was.
PCA was competing with other retail suppliers of electricity. Accordingly, its prices had to be competitive.
Accordingly, consumers, and especially large consumers of electricity such as some of the big manufacturing companies in this State, wished to purchase electricity at a set price over a period which may vary from one year up to ten years. PCA offered fixed prices with a price escalation clause. The retail customer wished to know what its future costs would be in order to determine the cost of making its products, it wanted certainty and accordingly was prepared to enter into long term contracts. But the privatised industry was in its infancy, there was little historical information to use as a basis for forecasting the future and hence some large consumers wanted protection against a long term contract with prices which were above the market price. Consumers demanded special conditions to meet this concern.
PCA knew that if it agreed to supply electricity at a certain cost per megawatt hour then it was running the risk that the spot price in the Victorian pool may be greater than the price which it charged to its customer. It could not afford to carry that risk indefinitely.
PCA turned to others who were in the market of assuming risks.
PCA approached PP in August 1996. Both parties were keen to do business. Although PCA did not inform PP of the details of particular retail contracts, it adopted a practice of trying to match retail contracts with the hedge contracts. In other words, if PCA was to supply X with a volume electricity at a certain cost over a certain period then PCA would seek to match that contract with a hedge contract relating to the same volume and period. But this involved a degree of juggling. Retail contracts of supply were negotiated on the basis that hedge offers were on the table or the hedge contract was agreed. In addition, a hedge contract or the offers on the table were often used to support a parcel of retail contracts. The aim was to consummate the hedge and retail deals simultaneously but this was not always possible.
The first hedge contract entered into between PCA and PP was negotiated in October/November 1996 and from that time through to mid 1997 the paramount object of PCA entering into the hedge contracts was to hedge against the risk of exposure to fluctuating prices in the electricity pools, i.e. Victoria and N.S.W.
However, in June 1997 by which time the parties had entered into 18 hedge contracts, PCA’s reason for entering into hedge contracts changed with the arrival of two Americans from its parent company Pacificorp, namely, Greg Duvall and Peter Johnson. Each of these men were experienced in futures trading especially the latter and after their arrival another reason was added to the hedge contract process, namely, trading to derive a profit.
The primary reason for PP’s involvement in the futures market was hedging its risks in supplying electricity to the pool but it also was concerned to make money out of hedging and during 1997 made substantial money from its trading.
Those involved in transacting hedge contracts have to make an assessment as to the future movements in market prices, demand and supply. There is a degree of speculation involved. Forecasting the future accurately is impossible and accordingly, trading is based upon a combination of history, experience, knowledge, intelligence and luck.
Both PCA and PP , unlike some other speculators in the futures market, already had a degree of protection by reason of their respective positions in the industry.
PCA through the retail contract received the price agreed and PP received the price for the supply of electricity to the pool. PCA's risk was the spot price being higher than the retail contract price and PP's risk was the price paid to it for electricity being lower than its costs and profit margin.
Hence the need for a hedge contract.
The contract provided for a notional volume of electricity to be supplied during half hour intervals at a specified price. PCA was to pay the fixed price under the contract and PP paid the moving price, i.e. the spot price fixed each half hour.
If the spot price for electricity was less than the price fixed under the hedge contract then PCA had to pay the difference to PP but if the price was higher PCA received the difference.
Settlement took place each month, at which point the amounts were calculated, set‑off one against the other and the balance paid depending upon who was entitled to be compensated. This is known as "netting" and as a result one party is said "to be in the money".
During the period from November 1996 through to mid June 1998 PCA and PP entered into 35 hedge contracts which were honoured by the parties.
Two of the contracts, namely, 36 and 37, were entered into on the same day as a number of the disputed contracts and PCA relies upon the fact that contracts 36 and 37 have been honoured. The point is made that the balance of the parcel of contracts which are disputed were negotiated in the same circumstances as contracts
numbered 36 and 37 which were honoured by PP and contained the same or similar terms.
The 11 disputed contracts comprise nine two-way swap contracts and two collar contracts.
A two-way swap contract is an agreement between two parties, that is, PCA and PP, by which each agrees to pay to the other on a particular date or dates an amount calculated by reference to the volume of notional electricity at a fixed price at a particular time compared with the spot price for the volume of electricity at that time. The volumes and the prices specified varied according to whether the hours were peak or off‑peak, and whether the days were weekends or holidays.
In a two-way swap contract the price of the unit of notional electricity is fixed at a certain sum.
A collar, on the other hand, is a different form of contract in that there is a price band with a capped upper price and a fixed lower price called the floor price. If the spot price exceeded the cap price then PP was obliged to compensate PCA, whereas if the price went below the floor price then PCA was obliged to compensate PP. If the spot price is within the band nobody pays. Sometimes a premium is paid in respect of a collar contract.
The whole process is complicated by the fact that the working days divided up into off-peak and peak hours varied between Victoria and N.S.W. In N.S.W. there were shoulder periods, that is, periods between peak and off‑peak. In addition, in long term contracts there were provisions inserted which were aimed at giving a party the opportunity to bring the contract to an end. The move in this direction came from a number of large retail consumers who wished to have the opportunity in long term contracts to revert to market prices and as a result the hedge contracts contained similar terms.
Basic facts
The basic facts which led to the dispute between the parties and ultimately the proceeding in this court can be briefly stated.
In about August 1996 representatives of the parties commenced exploratory discussions in respect to futures trading.
The initial discussions culminated in an agreement known as the ISDA Master Agreement ("the Master Agreement") being entered into between the parties dated 21 November 1996 but exchanged on or about 16 December 1996. Pursuant to that agreement the parties agreed to enter into futures transactions in the New South Wales and Victorian electricity market on the terms and conditions contained therein. The terms of the Master Agreement form part of each transaction by reason of the fact that the parties provided that each futures transaction was to be an amendment to the Master Agreement.
The Master Agreement was varied on or about 8 October 1997.
During the period from 4 November 1996 to 27 May 1998 the parties entered into 35 separate undisputed commodity transaction agreements in respect to the provision of notional electricity. The periods of the contracts varied from one month to 10 years.
These contracts are not in dispute. They have been or are being performed.
PCA alleges that between 13 November 1997 to 15 June 1998 the parties entered into 11 additional contracts in respect of the notional supply of electricity for periods ranging from 2.5 years up to 10 years. These alleged contracts are in dispute. PCA originally asserted there were 12 but in final address PCA's counsel abandoned the claim in respect of disputed contract number 12.
In respect of each contract, PP denies that any final binding contract was concluded because the parties were still negotiating. In the alternative it alleges it was agreed that no contract was concluded until a confirmation agreement was signed and exchanged. Further it alleges the person acting on behalf of PP was not authorised to enter into the particular contract on behalf of PP. PP further asserts that the employee of PCA who negotiated each agreement was not authorised to conclude the particular contract on behalf of PCA.
PP raised issues of mistake and conventional estoppel and PCA delivered a reply raising, inter alia, estoppel.
PP also counter-claimed relying upon Sections 52 and 53 of the Trade Practices Act.
PP at all times had in place a trading policy to the effect that it would not hedge in excess of 85% of its generated electricity.
At the end of May 1998 the senior trader at PP, Mr Murphy, realised that PP had or was about to exceed 85% of its capacity. On 29 May 1998 he wrote a letter to PCA which contrary to the hitherto harmonious trading relationship raised doubts about a number of transactions.
It appears that Mr Murphy took it upon himself to break off relations but his conduct over the following 12 days was bizarre. The letter of 29 May 1998 contained errors of fact and is confusing. Thereafter he had further discussions of a relatively friendly nature with PCA, blamed the confrontation on others, continued negotiations and then wrote a letter on 10 June 1998 disputing there was agreement and raising questions of authority.
On 19 June 1998 PP wrote a letter in which it stated it was not bound and thereafter refused to honour the alleged agreements.
On 21 August 1998 PCA issued a writ against PP seeking specific performance of the disputed agreements, sought equitable damages and in the alternative sought damages in lieu of specific performance.
The Proceeding
The parties at the outset of the trial sought an order that the issues of liabilty be heard before any question of damages or relief and I ordered pursuant to Rule 47.04 of the Rules of Court that the question whether PP was liable to PCA in respect of any of the contracts set out in paragraph six of the statement of claim be tried separately from any question of damages.
Personnel
It is convenient to list the personnel of each party who were mentioned in evidence. Not all were called as witnesses.
The personnel at PCA who were involved in the events relevant to this case were
Mr Daniel Spalding Chairman and Chief Executive Officer of Powercor Mr Shane Breheny Company Secretary and General Manager Finance *Mr Gregory Duvall Assistant Vice President – Energy Trading from July 1997. Employed by Pacificorp. *Mr Christopher Treacy Trading Business Development Manager. Manager Energy Purchasing (NSW) Mr David Cornelius Energy Trading Manager – left June 1997. Mr Geoffrey Widmer General Manager – Retail *Mr Douglas Telford Manager Trading Development *Mr Carl Daley Trading Business Development Manager *Mr Peter McGarry Principal Pricing Analyst *Mrs Lena Sim Contracts Administrator Mr Jamie Catt Trading Operations Manager *Dr Robert Nelson Trading Business Development Manager. Manager Energy Purchasing (Vic) Mr Brian Sickels Vice President of Global Wholesale Sales & Energy Trading of PacifiCorp. Mr Peter Johnson Futures Trader from July 1997 *gave evidence
The personnel at PP were
Mr Ross Bunyen Chief Executive Officer to 30 June 1996 Mr Peter Graham Acting Chief Executive Officer from 1 July 1996 until appointed CEO in early 1997 *Dr Robert Lang Until 31 December 1997 – General Manager/Development.
Since 1 January 1998 – General Manager/Operations & Marketing
*Mr Robert Murphy Manager Energy & Marketing *Mr Russell Petch Manager/Energy Trading *Mr David Trethewy Account Manager *Mr Methsiri Aratchige Senior Energy Trader *Mr Yatish Kumar Manager/Energy Settlements Mr Lindsay Oates Manager/Energy Development *gave evidence
Pattern of Trading
The person at PCA who negotiated each of the 11 disputed contracts and who according to PCA was authorised to enter into final concluded and binding contracts on its behalf was Mr Chris Treacy. The disputed contracts were entered into during the period from 13 November 1997 through to June 1998 and during this period Mr Treacy's position as an employee of PCA was Manager, Energy Trading. His immediate superior during the period was Mr Duvall.
The person at PP who was responsible for negotiating the 11 disputed contracts was Mr Robert Murphy. During the period when the disputed contracts were under negotiation his position with the defendant was Manager/Energy Marketing. Mr Trethewy who was answerable to Mr Murphy was also involved but to a lesser extent.
Prior to this period Mr Murphy had on occasions acted as Manager of Trading whilst Dr Lang was absent.
It will be necessary to trace through the authority of both Mr Treacy and Mr Murphy to bind their employers.
According to PP's hierarchy Dr Lang was answerable to the CEO who was in effect PP by reason of the provisions of the Act. Mr Murphy reported to Dr Lang.
The evidence shows that Mr Treacy's background is in commerce. He is an accountant by training who has been involved in business for approximately 20 years. He had no experience in futures trading prior to commencing employment with PCA in early 1996.
Mr Murphy's training was in engineering and he had been employed with PP from 5 March 1980. PP was then part of a Statutory Corporation which generated, transmitted and sold electricity. As part of the privatisation strategy PP was created by the Electricity (Pacific Power) Act at the beginning of 1996.
Mr Murphy was very experienced in transacting commodity contracts by the time he first met Mr Treacy. He has written and presented papers to conferences, and sat on committees in New South Wales looking into the de‑regulated electricity industry and in particular trading in electricity futures.
Mr Treacy met Mr Murphy in Sydney in August 1996 and the first meeting was an introductory meeting with the object of meeting the personnel on each side, exploring the possibilities of trading in hedge contracts and discussing the bases of dealing which were to be governed by the ISDA Master Agreement.
During the following months the parties negotiated the terms of the Master Agreement.
This agreement was finally signed and exchanged on or about 16 December 1996.
The first hedge contract was entered into on or about 4 November 1996 for the supply of 191 GWH of notional electricity and the contract was for a period from 1 January 1997 to 31 December 1997. Thereafter some 34 contracts were negotiated and concluded for varying quantities of notional electricity for varying periods in respect of both the Victorian and New South Wales electricity pools.
Each undisputed contract negotiations followed a pattern. The terms were negotiated per telephone, by facsimile and face to face meetings, usually in Sydney. Offers were made by each party, the period during which the offer was to remain open was specified by PP (called "the validity period"), the validity period was extended from time to time, discussions took place on a variety of matters and agreement was reached. Once all the terms were agreed PP, except for two early contracts (prepared by PCA), prepared what was known as a confirmation letter. This was a standard form. In each of the 35 undisputed contracts, a letter of confirmation was signed by senior personnel in each party's organisation. Mr Treacy never signed a confirmation letter. He was not authorised to do so. Mr Murphy did sign some but only for agreements of one month or less or when he was acting in Dr Lang’s position in his absence.
Dr Lang signed most of the confirmation letters on behalf of PP. The senior personnel in PCA who signed the confirmation letters were Messrs Cornelius and Widmer and after his arrival in July 1997 Mr Greg Duvall.
In some 25 contracts the confirmation letter was not executed until after the parties had actually commenced honouring the contract. Indeed in respect of one contract the period was 70 days after commencement.
PCA relies heavily on the fact that many contracts commenced prior to the confirmation letter being signed by the parties. In particular, it relies on contracts 36 and 37 which were concluded on 28 November 1997, at the time when some of the disputed contracts were concluded. The confirmation letters were executed on or about 2 March 1998, well after each contract had commenced which was on 1 January 1998.
PP asserts that a contract did not come into being until the confirmation letter was signed and exchanged.
PCA alleges that the confirmation letter is nothing more than a confirmation letter, i.e., the written record of a contract that is already final, concluded and binding on the parties.
There is no confirmation letter signed in respect of any of the 11 disputed contracts.
By 13 November 1997 Messrs Treacy and Murphy had negotiated many contracts. They negotiated in a friendly atmosphere and at arm's length. They trusted each other. Each set out to negotiate a deal which was in the interests of their employer.
They used jargon and shorthand in their oral and written communications which made sense to them. Often deals were concluded without the necessity of mentioning and spelling out particular terms. Their past trading did a lot of the talking and it was unnecessary to expressly mention a term. Particular terms were implicit in their negotiations.
For those unfamiliar with their language of negotiation, to make sense of what they said or wrote would be impossible.
The court in determining the issues relating to contract and construction must take into account the pattern of the trading between Messrs Treacy and Murphy. In doing this, the court places itself in the shoes of the two men to determine what they intended and what they meant. It is a barren exercise to focus on the words used by them and seek to determine what they meant based upon plain English. They had their own dictionary.
PP's counsel spent considerable time focussing on the words agreed to by the negotiators and based upon the ordinary use of the English language argued that what had been agreed either did not make sense, was ambiguous, uncertain or unworkable. Such an approach is not helpful and lacks commercial reality.
It overlooks the fact that commercial men seek to arrive at an agreement and will use their own language to effect it.
The disputed contracts were negotiated by non-lawyers and without the assistance of lawyers. In the end it is necessary to look at what the parties did based on their language as understood by them to determine on an objective basis what they intended.
Disputed Contracts
The disputed contracts can be divided into three groups as follows -
| GROUP 1 - ALLEGED CONCLUDED CONTRACTS ON 13 NOVEMBER 1997 | ||||||||||
| Contract No. | Type of Contract | Electricity Pool | Volume of Notional Energy | Start Contract | Finish Contract | Period | MTM | Monthly Flex. | Xmas Hols. | Annual Load Shape |
| PP/PC 0033 Known as Visy‑Air Liquide | 2 way | Vic. | GWH | 1.7.1998 | 8.3.2007 | 8.75 yrs | Yes | Yes | Yes | Yes |
| PP/PC 0035 Known as Smorgon | 2 way | Vic | 340GWH | 1.8.2001 | 30.6.2007 | Approx. 6 yrs | Yes | Yes | Yes | Yes |
The contract number is the reference of PP.
The column "MTM" means that there was a "meet the market" clause. Briefly, this means that at a certain point in time, usually at the end of each year of the contract, the prices would be reviewed in accordance with a certain procedure which enabled PCA at its option in certain circumstances to bring the contract to an end on one month's notice, or continue with different prices.
This was to meet the contingency that the market price in the future was substantially lower than the fixed contract price.
The reference to "monthly flex" is to a term of the agreement which enabled PCA to inform PP to vary the amount of notional volume for any particular period of the notional supply by a fixed percentage upon notice prior to the relevant month.
The reference to "Xmas holidays" is a reference to a term in the agreement that the notional quantity would be zero from about Christmas Eve to 20 January the following year.
The reference to "Annual Load Shape" is a reference to a term which allowed PCA to revise the load shape which also had the effect of varying the notional quantity of electricity to be supplied at any point in time. It is to be revised by notice given at a certain time.
The contract provided for a total volume of electricity to be provided. The volume of electricity would be spread over the period of the contract with the result that the volume at any one time may be different from another time.
For example in disputed contract number 35 PCA suggested the quantity on a working Monday at 1 a.m. be 19.84MWh at a certain price and at 2.00 a.m. be 17.28 MWh.
A summary sheet was prepared for all half hour periods of the contract which specified volumes and prices. This was described as the load shape. It had to meet a formula which was agreed between the parties. In respect of contract 35 the load shape had to meet "a minimum load factor of 38%".
The average minimum load factor of 38% was determined by dividing the average load demand over a period of one year by the maximum load demand at any point in time.
The practical result was that one could look at a load shape document and determine that at any particular point in time a certain quantity of notional electricity was to be supplied at a certain price. By altering the load shape it was possible to revise the amount of notional electricity to be supplied at any point in time by PP.
A draft confirmation document was prepared for contract number 33 (then called 22) and forwarded to PCA in August 1997. No draft confirmations were sent after 13 November in respect to contracts numbered 33 and 35.
| GROUP 2 - ALLEGED CONCLUDED CONTRACTS ON 28 NOVEMBER 1997 | ||||||||||
| Contract No. | Type of Contract | Electricity Pool | Volume of Notional Energy | Start Contract | Finish Contract | Period | MTM | Monthly Flex. | Xmas Hols. | Annual Load Shape |
| PP/PC 0038 | Off-Peak Collar | NSW | 300GWH | 1.7.1998 | 30.6.2001 | 3 yrs | N/A | N/A | N/A | N/A |
| PP/PC 0039 | 2 way | Vic | 800GWH | 1.7.98 | 30.12.200 | 2.5 yrs | Yes | Yes | Yes | Yes |
| (Contract varied on 4 June 1998 and 11 June 1998) | ||||||||||
| PP/PC 0040 | 2 way | Vic | 391GWH | 1.1.2001 | 30.6.2007 | 6.5 yrs | Yes | Yes | Yes | Yes |
| (Contract varied on 11 June 1998) | ||||||||||
| PP/PC 0041 | 2 way | NSW | 410GWH | 1.1.2001 | 30.6.2007 | 6.5 yrs | Yes | Yes | Yes | Yes |
| (Contract varied on 11 June 1998) | ||||||||||
Off-peak collar contracts did not have terms for MTM, Monthly flex, Christmas holidays or load shapes. The load shape was in fact flat i.e. constant volume for whole period.
In respect of the contracts in Group 2, contracts No. 39, 40 and 41 were the subject of draft confirmation letters which were never executed.
PCA alleges that contracts 39, 40 and 41 were varied in June 1998.
One other feature of the contracts in Group 2 is the "linking of contracts". PCA had retail contracts with a MTM clause which could be invoked. It wanted the opportunity to invoke the MTM clause in the hedge contract if that happened but some retail contracts were supported by various hedge contracts. Hence it wished to link various hedge contracts together so that if a MTM clause was invoked in one it passed through to the others linked to it. PCA sought to link contract 36 with contracts 39 and 41 and contract 37 with contract 41.
| GROUP 3 – ALLEGED CONCLUDED CONTRACTS ON 29 MAY 1998 | ||||||||||
| Contract No. | Type of Contract | Electricity Pool | Volume of Notional Energy | Start Contract | Finish Contract | Period | MTM | Monthly Flex | Xmas Hols | Annual Load Shape |
| PP/PC 0043 | 2 way | NSW Vic | 50MW 300GWH | 6.6.1998 1.7.1998 | 30.6.1998 30.6.2000 | 5 yrs | No | Yes | Yes | Yes |
| PP/PC 0044 | 2 way | Vic | 310GWH | 1.7.98 | 30.6.2003 | 5 yrs | Yes | Yes | Yes | Yes |
| PP/PC 0045 | 2 way | NSW | 440GWH | 1.7.98 | 30.6.2003 | 5 yrs | No | Yes | Yes | Yes |
| PP/PC 0046 | 2 way | NSW | 760GWH | 1.7.98 | 30.6.2008 | 10 yrs | Yes | Yes | Yes | Yes |
| PP/PC 0047 | Collar | NSW | 500GWH | 1.7.98 | 30.6.2001 | 3 yrs | No | No | No | No |
Other than the collar contract No. 47, the other four contracts were negotiated as a single contract but at the request of PCA the contract was divided up into four.
In respect of each alleged contract in Group 3 no draft confirmation document was prepared by either side.
The claim in respect of disputed contract number 12 was abandoned by PCA during final address.
Issues
The pleadings and rival contentions of the parties raise a substantial number of issues for consideration and determination.
It is convenient at this stage to state the general issues to understand the case. It is noted there are many sub-issues which have to be considered and determined.
I summarise the general issues –
(i) The ISDA Master Agreement and its effect on trading between the parties.
(ii) The authority of PP's personnel and in particular Mr Murphy to negotiate and conclude contracts on behalf of PP.
(iii) The authority of Mr Treacy of PCA to negotiate and conclude contracts on behalf of PCA.
(iv) If PCA's personnel did not have authority did PCA ratify the disputed contracts?
(v) With respect to each of the 11 disputed hedge contracts did the parties enter into a final and concluded agreement?
(vi) Was it a condition of each agreement that it was subject to the parties executing a written confirmation document and if not, as a result of their prior trading was a convention established to that effect estopping the parties from denying the necessity of a written confirmation document to conclude the contract?
(vii) Is PP estopped from denying the existence of a binding and concluded contract prior to the execution and exchange of a confirmation document?
(viii) Were any of the disputed contracts entered into under common mistake by the parties or unilateral mistake by of PP?
(ix) Did PCA make any representations contrary to the provisions of ss.52 and 53(g) of the Trade Practices Act and if so, what relief is PP entitled to?
(x) If PCA is successful what relief is it entitled to?
(xi) If PP is successful on any part of its counterclaim what relief is it entitled to?
The witnesses and credibility
Each party called a substantial body of evidence. A number of employees were called.
Each employee is an intelligent, articulate person. Most had tertiary qualifications and the evidence established that from October 1997 onwards they were experienced, competent employees who had a good working knowledge and understanding of their duties.
I have no doubt that by November 1997 when the first of the disputed contracts was allegedly concluded, each party employed personnel who had a very good understanding of the intricacies and details of negotiating and entering into hedge contracts.
The two main witnesses were Mr Chris Treacy of PCA and Mr Robert Murphy of PP. Each spent many days in the witness box and were cross‑examined at length.
Mr Murphy prior to November 1997 had lectured and delivered papers on the subject of futures trading in electricity and had been a member of committees looking into various aspects associated with the electricity industry in Australia including trading in hedge contracts.
Mr Treacy whose background was in commerce was an experienced negotiator who had all the hallmarks of a good salesman. His easy going manner belied a resolve to negotiate to the best of his ability to get the best deal for his employer.
Each employee called had a good understanding of the issues in the case.
Indeed, it reached farcical proportions as the trial progressed as each employee witness sought to avoid saying something which would amount to an admission. PCA's witnesses were anxious to tell the court at every opportunity there was a contract before the confirmation document was signed and PP's witnesses were equally anxious to say there was no contract before confirmation.
I repeat what I said in final address. Where a witness expressed an opinion on the question of contract or no contract or what a term meant, it is to be treated for what it is worth, namely, an expression of opinion by a non-expert on a question which the court had to decide.
Some witnesses spent an inordinate time preparing their witness statement and themselves to give evidence.
Both Mr Treacy and Mr Murphy spent months going through the documents discovered by both parties. Each had every opportunity to consider their evidence and refresh their memory before finally settling their witness statement and giving evidence.
To a lesser extent but still for long periods Messrs Duvall, Telford and Daley and Mrs Sim of PCA and Mr Trethewy of PP also spent time looking at documents and preparing themselves as witnesses.
Messrs Murphy and Trethewy of PP spent long periods with counsel preparing their witness statements.
One might think that in those circumstances the witnesses would have good memories in respect to important matters.
The relevant period spans August 1996 to the end of June 1998 with particular emphasis during the period March 1997 to the end of June 1998.
The court must in assessing a witness take into account that in giving evidence the witness is not embarking upon a memory test unaided by documents to refresh the memory or by appropriate prompting. In the end, of course, it is a question of what memory a witness does have of the events. But also important are questions of truthfulness, accuracy, detail and demeanour, not to mention a motive for departing from, or distorting the truth. It is appropriate to test evidence based on plausibility or reasonableness in the circumstances.
The first observation I make is that each employee witness was aware of the issues and each was determined not to say anything which might prejudice his or her employer's case.
Secondly, some gave evidence which was slanted to assist the employer.
Thirdly, most guessed in respect of the events and circumstances.
Most witnesses reconstructed the events based upon contemporaneous documents not necessarily their own and sometimes documents produced by the other side. This observation particularly applies to Mr Murphy.
As I have said, the main witnesses were Mr Treacy of PCA and Mr Murphy of PP.
It was clear in the course of this long trial that both men had a very good understanding of the issues and were careful in the witness box to avoid giving evidence which was prejudicial to his employer.
Both men spent in excess of four months in preparing for the case. Each combed through most if not all the documents. Further, Mr Murphy had the advantage of sitting in court during most of the evidence adduced by PCA which was presented over approximately 40 days. He was present throughout the evidence of Mr Treacy and observed the long detailed cross‑examination of him which lasted about 12 days.
An order was made excluding witnesses from the hearing but he was excepted from the order. Mr Myers QC at the time of the application observed that a comment would be made in final address if Mr Murphy stayed in court. Mr Downes QC pressed for the exception which was granted.
In those circumstances, one would expect that Mr Murphy would have a good understanding of the events which occurred and a reasonably good memory of the circumstances. He had the not inconsiderable benefit of watching and absorbing the evidence and issues as the case unfolded. It is a matter that must be taken into account in assessing his memory, truthfulness, accuracy and reliability as a witness.
Mr Treacy's main duties during the period from early 1997 to the end of June 1998 were concerned with trading with PP. His focus was on those matters. He had other things to do in the course of his employment but his primary duty was to trade hedge contracts with PP. He was not employed in the retail side of the business i.e. retail sale of electricity to consumers. That is not to say that he was unfamiliar with this side of the business. I am satisfied that after the arrival of Mr Duvall in mid 1997 regular meetings took place to ensure that personnel on both sides of the business were aware of the total trading.
In contrast, Mr Murphy's activities ranged over many areas. During the period he was negotiating hedge contracts with parties in addition to PCA, supervising staff under his control, preparing monthly reports, acting in Dr Lang's position when he was absent and continuing studies for a further degree. On any view he was a busy man in a government owned operation.
The modus operandi of the two men are in sharp contrast.
Mr Treacy took notes of most conversations and meetings and kept them, often typed up minutes and noted items that had to be attended to, and on some occasions forwarded agendas and minutes of meetings to representatives of PP. He was quick to send correspondence setting out discussions and what was agreed. Further, PCA had in place an excellent system of recording deals and transactions. When Mrs Sim arrived in November 1997 a trade ticket procedure was put in place to record contracts. Mrs Sim was a very experienced contract administrator in dealing with hedge‑type contracts.
Further, Mr Treacy regularly attended meetings between Mr Duvall and the traders. I have no doubt that by November 1997 PCA operated an efficient and organised business in relation to hedge contracts.
Mr Treacy is intelligent, business and street wise and in his dealings with PP efficient and well organised. He was able in giving evidence to look at many contemporaneous documents prepared by him.
In contrast, PP had an ad hoc system. At no point in time during the period up to 30 June 1998 did it have a summary record of the hedge contract offers that had been made let alone the terms agreed concerning contracts. Deals were negotiated over a period of time and terms were progressively agreed. Within PP the negotiations and discussions were left to the memory of traders and incomplete notes and correspondence in files. Once a contract was negotiated a confirmation document was prepared, usually by Mr Trethewy based upon a precedent and after consultation with the trader concerned and was presented for signature by Dr Lang. Once the confirmation was completed it was handed over to the settlements department and it was at this point a record of the transaction was established.
There was no record of the offers that were made and no summary of the negotiations. To ascertain what the position was within PP it would be necessary to talk to the trader and peruse the correspondence file. Hardly an efficient way to conduct a futures business with all the risk of potential loss inherent in the trading.
The lack of an efficient system led to the realisation within PP by Mr Murphy in late May 1998 that PP was about to enter into contracts with PCA which would exceed its permitted supply of notional electricity energy. This caused it to cease to deal with PCA.
Very shortly after PP informed PCA that it was not proceeding with the 12 disputed transactions, PP engaged Price WaterhouseCoopers to consider its business practices and to report on an appropriate system to govern its trading. In the light of its dealings to the end of June 1998 the step to establish an efficient organised trading system was well overdue.
Mr Murphy made very few notes of discussions and conversations, and frankly conceded that he relied upon his memory and any document in the correspondence file with PCA to determine what the negotiations were. As I have said, he was an extremely busy man during the relevant period but in particular from November 1997 to the end of June 1998.
It is clear that in preparing himself for this case Mr Murphy had to reconstruct events and discussions from the documents of both PCA and PP. He had very few notes to assist him and his diary did not provide much information, to assist him.
In early March 1998, PCA without informing PP established a recording system whereby each telephone call to and from PCA was recorded.
The Telephone Dealing Supplement executed by the parties in November-December 1996 provided for the recording of telephone calls between the parties.
I agree with the observations made by Mr Downes QC that PCA should have told PP what it was doing once recording commenced. Recording of business telephone calls may be appropriate in this day and age, but if done, those participating should be made aware of the fact. PCA was being less than frank in failing to inform PP of the recording. But in its favour it may be said that it did not fear truth and accuracy.
The recording of the telephone calls provided reliable evidence as to discussions between the parties from the beginning of March 1998.
The employee witnesses on both sides have had access to the transcripts of these recorded telephone calls to enable them to refresh their memory to give evidence.
I am satisfied that from time to time Mr Murphy was careless in performing his duties in relation to his dealings. This is made clear by evidence relating to his attitude to discussing things at meetings and indicating he was happy with the contents of a document even though the other side wished him to go through it. An example of this is the Draw Down document which was to be discussed at a meeting held on 13 November 1997 but when Mr Daley and Dr Nelson raised the topic he said, "Don't worry, I've read it. Everything's okay". He later said he was mistaken about the load formula set out in the document. Further, when he did calculations in relation to load shapes he did not appreciate that there was a difference between a minimum annual load factor and a minimum annual peak load factor provided for in the document. He did calculations in January 1998 after the load shapes were forwarded and did not appreciate the practical difference. He said that he only realised there was a difference between the two terms in October 1998 during the preparation of the case. There is a difference and if he was careful he would have observed the difference in early 1998. He made very few notes of meetings and discussions. He rarely typed up minutes let alone exchange them.
As a witness he was prone to guess.
I add to this the general ad hoc system employed by PP. Whilst it may be said that Mr Murphy was somewhat careless in his dealings, on the other hand the criticism could probably be directed to his employer which did not have in place proper procedures to monitor hedge contracts. It did not have any system in place which recorded the offers that were out in the market to the various counter parties it was dealing with.
Further, in assessing the credibility of both men it must be borne in mind that both have interests to protect in this case. This is graphically illustrated by the fact that on 25 November 1997 the Victorian spot price literally went "through the roof" and it cost PP approximately M$9 on that and the following day in respect of hedge contracts which Mr Murphy had been involved in negotiating. In making that observation I am not for one minute suggesting that Mr Murphy was at fault in any way but a valuable lesson was learned on that day. The potential for huge losses in respect of inappropriate hedge contracts is ever present.
On one view, if the 11 disputed contracts are specifically performed there is a risk of movement of hundreds of millions of dollars between the parties with the prospect that, as it is likely the spot price of electricity will rise over the years to come, PP could suffer considerable losses. Mr Murphy negotiated the 11 alleged contracts. He was the one at PP who did the calculations and was responsible for the pricing and periods of the contracts. If PP is bound by the contracts and suffers losses it is Mr Murphy's conduct which would be under scrutiny.
Further, it was Mr Murphy who decided of his own volition to write the letter of 29 May 1998 which was the start of the events which ultimately led to the breakdown of the trading relationship between the parties in mid June 1998 and the issue of the proceeding. Subsequently senior management in PP supported Mr Murphy but his trading and decision to repudiate 11 disputed contracts are at the heart of this case.
On the other hand, Mr Treacy also has an interest to protect.
On one view of the evidence, during the first five months of 1998 PCA did not proceed with due diligence in respect to contracts allegedly negotiated in November 1997. There are a number of reasons which I will hereafter have to consider to explain this conduct, but it is said against PCA, that Mr Treacy thought that he could improve on some of the terms in relation to the alleged contracts, and delayed the signing of confirmation documents. In late May 1998 when PP first indicated that it would not proceed with the disputed contracts one could easily imagine the panic within PCA especially when it was asserted by PP that since PCA had taken so much time to finalise confirmation documents the offers were no longer available.
Before stating my assessment of Messrs Treacy and Murphy as witnesses it is necessary to consider the events of 25 November 1997.
25 November 1997
On 25 November 1997 a meeting took place in Sydney between representatives of the parties. Messrs Treacy and Daley of PCA visited PP in Sydney on that day on their way through to Brisbane.
There is no doubt, and this was common ground, that they visited the offices of PP during the course of that day and had a meeting.
It is asserted by PCA that on that day at the meeting Mr Murphy on behalf of PP agreed to extending the time during which offers were to be kept open. This is the "validity period". Also that he said in effect it did not matter whether PCA was on selling the PP hedge contracts to other wholesale traders. (This is relevant to one of the alleged s.52 Trade Practices Act claims).
The 25th November 1997 is the most famous day in the history of electricity in this country since the State governments embarked upon privatisation.
The usual spot price for electricity in the Victorian pool at that time, namely, the spot price in the Victorian pool, was somewhere between $10 to $20 per MWh. That was the range during 1997.
On 25 November 1997 because of a number of factors, including a very hot day in Victoria and a substantial drop in supply of electricity because of maintenance and repairs, the spot price in Victoria reached somewhere in the vicinity of $4,800 per MWh.
According to one witness it was apparent as early as 8.00 a.m. on that morning that the prices were going to skyrocket and by the middle of the day, around 1.00 p.m., the prices were substantial. The evidence revealed that as a result PP had to pay out M$9 on its hedge contracts.
It was and should have been an unforgettable day.
In the witness statements exchanged between the parties at the beginning of March this year and before the trial commenced, Messrs Treacy and Daley said that during that day Mr Murphy attended a meeting with them. Mr Murphy in his witness statement stated that he was absent from the office between 17 and 26 November 1997 on study leave.
In addition, a number of witnesses whose statements were exchanged on behalf of PP after the trial commenced denied that Mr Murphy was present in the office on that day.
On that day Mr Murphy during the afternoon attended an examination at a centre some 25 kilometres south of Sydney.
In opening the case, Mr Myers QC on behalf of PCA asserted in what could be described as a challenging voice that Mr Murphy denied he was present on that day at PP's office, clearly imputing that he was mistaken or even lying.
In his evidence‑in‑chief Mr Treacy was adamant that he met with Mr Murphy on that day. He made a note of the meeting but did not record who was present. He was cross-examined. It became apparent during the course of his cross‑examination and as a result of documents being produced that his memory of the events of that day was subject to doubt. There was doubt as to when the meeting took place. At one stage he had the meeting early morning, despite his diary showing it occurred between 1.30 and 3.00 p.m. Later in cross‑examination he accepted the meeting took place at 1.30 p.m. and possibly later. In the end he thought the meeting occurred between 1.00 and 5.00 p.m.
Mr Daley, who was called after Mr Treacy, on about the twentieth day of the trial maintained that he could remember Mr Murphy being present in the office.
Various documents were produced to show that the memories of both witnesses was open to doubt. Reference was made to mobile telephone records, Cab Charges, Frequent Flyer statements and the like, and it soon became apparent that Messrs Treacy and Daley were uncertain about a number of aspects of that day. Mr Daley stated that the most likely time when Mr Murphy was in the office was no earlier than 1.52 p.m. and probably some time thereafter.
Mr Murphy gave evidence in which he denied going to the office that day and further stated that he attended an examination at Miranda. Records were produced which showed he did sit the examination that day at Miranda about 25 kilometres south of Sydney. Evidence from Charles Sturt University personnel showed that Mr Murphy did sit the examination at Miranda and was present no later than 2.30 p.m. If the meeting commenced at 1.52 p.m. at PP's office in central Sydney and Mr Murphy was present then he had only 35 minutes or thereabouts to talk to Messrs Treacy and Daley and travel to Miranda 25 kilometres from PP's offices to attend the examination. Whilst I accept there is no evidence as to the likely time it would take to travel 25 kilometres from central Sydney south to Miranda I find that it would have been impossible for Murphy to have attended a meeting, travelled to Miranda by car and be in the examination centre by 2.30 p.m.
Mr Murphy was cross-examined to suggest he was wrong. However, he maintained throughout that he did not attend the office on that day.
Messrs Trethewy, Aratchige, Kumar and Dr Lang gave evidence on behalf of PP and all stated that they did not see Mr Murphy in the office that day.
Mr Petch who had had little contact with PCA's representatives was somewhat vague and could not say whether Mr Murphy was present or not.
A number of PP's witnesses were cross-examined by Mr Myers QC in which he highlighted the fact that in witness statements exchanged during March each witness anticipated the issue whether Mr Murphy was present or not, which until the opening of the case on 15 March 1999 did not appear to be an important issue. However, the pleadings and particulars of PCA do make it clear that it is alleged that a meeting did take place in late November at which it was alleged Mr Murphy agreed to extending the validity period.
Criticism was made of some of PP's witnesses in respect of their credibility some of which was justified. I may say Mr Trethewy was a witness whose honesty and accuracy are very much in doubt. I have to weigh all these matters up.
Having done so I am satisfied on the totality of the evidence that Mr Murphy was not present in the office on that day. Messrs Treacy and Daley were mistaken in giving that evidence.
The question is whether they were telling deliberate untruths when they continued to assert that he was present on that day after evidence was adduced in their cross‑examination raising substantial doubts as to their memories of the events of that day.
In my view, Messrs Treacy and Daley were wrong in their recollection when they prepared their witness statements and this reflects upon their accuracy. In addition, by the time Mr Daley got in the witness box the topic had been well and truly looked at over many days not only in court but I would expect in discussions out of court. By that time records had been examined establishing the movements of both men in Sydney that day. He nevertheless in evidence‑in‑chief maintained what he had said in the witness statement.
As the cross‑examination of Mr Treacy progressed it became increasingly apparent that his memory of the events of that day and in particular the sequence of events were wrong. Nevertheless, despite the production of documents and him changing his evidence as to where he was at particular times he still maintained Mr Murphy was present.
In my opinion whilst their memories may have initially let them down, I am satisfied by the end of Mr Treacy's evidence he could not have continued to assert that Mr Murphy was present. He must have had doubts. This reflects upon his truthfulness. Equally, by the time Mr Daley had completed his evidence he must also have had considerable doubts. This also reflects upon his truthfulness.
In addition there were other aspects of Mr Treacy's evidence which were unsatisfactory.
The first relates to the withdrawal of offer issue in May 1997 when a dispute arose between Messrs Treacy and Murphy over prices and a withdrawal of offers. There was disagreement between Messrs Murphy and Treacy which resulted in a telephone conversation between Dr Lang and Mr David Cornelius who was then Mr Treacy's superior.
Mr Treacy, despite the fact that there were a number of documents, some prepared by him which referred to the question of authority, said in cross‑examination that he had no memory of any such discussions taking place. He had prior to giving evidence read Mr Murphy's statement and must have appreciated the significance of what can be described as the May 1997 offer and authority question. In my opinion, he was telling an untruth when he consistently stated he had no recollection of the circumstances. In my opinion he must have had some memory of the events. I say that because of his involvement over a long period in the preparation of PCA's case. It will be necessary to consider the evidence on the topic and what inferences should be drawn when considering the issue of authority but for present purposes it is a matter which Mr Treacy was less than frank with the court.
The next matter which reflects upon the honesty of Mr Treacy is his evidence concerning what was being done within PCA in respect to the confirmation documents for the Visy, Smorgon and the November contracts.
PP attacked PCA by contending that the disputed contracts allegedly made in November 1997 were still in a state of negotiation right up to the end of May/early June 1998.
It was said that PCA was adopting a wait and see policy during this period as to whether or not it would finally agree to the alleged contracts.
Mr Treacy was cross-examined at length in respect to this contention. He denied throughout that PCA had any doubts about the alleged contracts made in November 1997 and denied that he had ever given any instructions to anybody in PCA to hold back finalisation of the alleged contracts. This is despite the fact that there are a number of documents in PCA's possession which arguably support an inference that he did request personnel within PCA not to finalise the confirmation documents.
Again, in my opinion Mr Treacy told a deliberate untruth to the court in respect to this matter when he stated that he had no knowledge of the various instructions that were recorded in PCA's records stating in effect to hold back confirmations.
Fourth representation
The fourth alleged misrepresentation pleaded by PP is as follows –
"That on 11 May 1998 PCA represented to PP that the option for the commodity transaction agreement it was seeking from PP related to a retail 'back to back' contract for the supply of electricity."
The cause of action is based upon a telephone conversation which occurred on 11 May 1998 and which was recorded.
In the course of that telephone conversation Mr Treacy raised the question of transacting a deal. The deal was concerned with disputed contract No. 12.
PCA has abandoned its claim in respect to disputed contract No. 12. It is clear from the evidence of Mr Murphy that if there was a misrepresentation it only caused damage if PP was bound by disputed contract No. 12.
Accordingly, the cause of action is no longer relevant. Mr Downes QC expressly abandoned it on the last day of the hearing.
Fifth representation
The fifth alleged misrepresentation is pleaded by PP as follows -
"That during the period from 26 August 1997 to 13 November 1997 PCA represented to PP that the meet the market clause in the retail contracts for the supply of electricity between PCA and Visy and Air Liquide which PCA had entered or was proposing to enter into would be back to back with the commodity transaction agreement then being negotiated with PP and was in substantially identical terms to meet the market clause in that agreement and that the review dates specified in that meet the market clause was or would be 1st March in each year from 2000 up to and including 2006."
(Emphasis added.)
This cause of action concerns disputed contract 33 that is in respect to two retail contracts being the Visy and Air Liquide contracts.
Mr Murphy's evidence‑in‑chief is found in paragraph s 468 and 469 of his witness statement.
He said he formed a belief based on two facsimiles sent by Mr Treacy to him on 26 August 1997 and the Draw Down Product.
His belief was, first that the Meet the Market clauses in the proposed retail contracts were "in substantially identical terms to the meet the market clause in the Draw Down Product" and secondly, that the MTM clause review date in each retail contract "would be one of 1 January, 1 April, 1 July and 1 October of each year".
He stated that if he had been told the correct position he would have broken off negotiations and traded with other "facility providers".
The relevant period for the alleged misrepresentation is from 26 August 1997 to 13 November 1997 and during this period neither retail contract had been concluded. Each was the subject of negotiation. The Visy contract was concluded 15 months later on 18 February 1997 and Air Liquid six weeks later on 24 December 1997.
He admitted in cross‑examination that paragraphs 468 and 469 of his witness statement were drafted with the assistance of counsel and that there were errors in relation to his evidence on the review date expected in the Meet the Market clause. He stated that what he meant to say was that the review date was 1 March in each year.
The first observation I make is to the uncertainty of what is meant by the phrase "was in substantially identical terms".
Contract 33 was concluded on 13 November 1997. It was known as the Visy/Air Liquide transaction because from the earliest negotiations PCA informed PP that it was to be a hedge contract for a large retail supply of electricity to the two companies named.
In fact, the negotiations between PP and PCA commenced in March 1997 and were well advanced by 18 August 1997 when PP forwarded a draft confirmation concerning the deal.
The initial discussions involved the inclusion of an MTM clause which PP was not prepared to include. Eventually it indicated it would do so and the terms were agreed in November 1997. As Mr Treacy stated in his evidence, "It was important to PCA that the MTM clause obtained from PP at least matched the obligations that PCA had to Visy."
Mr Murphy in his witness statement alleged that he formed the belief as set out in the pleaded representation based on a number of documents one of which was the Draw Down Product.
But this could not be so. The negotiations in respect of contract 33 and negotiations in respect to the Draw Down Product were separate and continued for a period side by side but were discrete. Contract 33 had its genesis in discussions held in March 1997. The Draw Down Product negotiations began in August 1997 and were treated separately from contract 33.
On 10 November 1997 Mr Treacy sent a facsimile to Mr Murphy which was concerned with "Visy Contract 0022" and no other negotiation. It set out the details and attached was a MTM clause which had been modified to take into account discussions had between Messrs Daley and Murphy.
On 12 November 1997 Mr Treacy sent a facsimile to Mr Murphy detailing the matters to be discussed at a meeting on 13 November 1997 and the Visy contract and the Ten Year Draw Down product were separately noted.
On 13 November Mr Murphy agreed to the Visy deal but the Draw Down Product was still under discussion on 13 November 1997. At that time the Visy contract and the Draw Down Product were treated separately. Whilst the MTM clause in contract 33 is in the same terms as that attached to the Draw Down Product the fact is that contract 33 was concluded separately from the Draw Down Product.
Insofar as Mr Murphy says he relied upon the Draw Down Product as a basis for forming his alleged belief I reject his evidence.
The contract contained its own term with respect to when it was to be exercised.
Further his evidence found in paragraph 469 concerning the review date being on one of four specified dates is wrong.
Based on his evidence PCA did not make the representation as pleaded.
However, if I am wrong I am for other reasons of the opinion that PP has not proved its cause of action.
As at 13 November 1997 PCA's retail staff were still negotiating the electricity contracts with the consumers.
In fact the Visy retail contracts were negotiated over the next 15 months and were not executed until 18 February 1999. All told there were three separate contracts. The Air Liquide retail contract was executed on 24 December 1997.
At no stage was PP informed as to the details of the retail contracts.
When the documents were discovered by PCA in late 1998 it was ascertained by PP that the MTM clauses in the retail contracts were different to the standard clause agreed to in the draw down products.
And so was born another s.52 cause of action. Mr Murphy and PP's legal team trawled through all the documents and events to seek support for what turned out to be the fifth alleged misrepresentation.
Mr Murphy has given evidence that he believed somewhere between 26 August 1997 and 13 November 1997 he formed the belief that the MTM clause in the retail contracts which PCA was proposing to enter into "was in substantially identical terms to the MTM clause in the Draw Down product". (Emphasis added.)
He then stated in his evidence‑in‑chief that "The review date specified in the MTM clause in the retail contract" would be one of 1 January, 1 April, 1 July or 1 October of each year. As I have stated Mr Murphy accepted the evidence was wrong.
Mr Murphy's belief is based upon a number of events. Whilst his evidence of what he believed PCA was representing to PP is relevant and admissible, in the end his belief is but part of the evidence and the question is whether as at 13 November 1997 PCA did represent what has been pleaded and whether it was false or misleading when represented.
A matter of substance against PP's claim is that there is no evidence of an express statement that the MTM clauses which would eventually be in the retail contracts then under negotiation would be "substantially identical" to the MTM clause in concluded contract 33.
It follows that PP has to establish facts which lead to the inference. Mr Treacy conceded that the MTM clause in the hedge contract should at least match the obligations under the retail contracts and he expected the review dates would match.
However, it must be pointed out that he was not responsible for negotiating the retail contracts. His job was to secure an adequate MTM clause to provide some measure of protection for PCA in its dealings with the retail consumers.
The alleged representation defies commercial reality. Contract 33, concluded on 13 November 1997, was to hedge substantial retail contracts then under negotiation. At that point in time there was no guarantee that the retail contracts would be concluded. No doubt PCA had high expectations that they would but as events showed Visy was not concluded for 15 months.
As at 13 November 1997 the reality was that the retail consumer could request any number of changes to the proposed MTM clause. There is no basis for thinking that as at 13 November 1997 the MTM clause in contract 33 would be totally or substantially in the terms in a MTM clause in any contract that PCA may enter into thereafter in respect to retail supply.
It is in this context that the court has to determine whether the representation was made and if so whether it was false at that date.
The evidence relied on comprises two facsimiles from Mr Treacy to Mr Murphy and a telephone call, all dated 26 August 1997.
The first facsimile of 26 August 1997 from Mr Treacy referred to "various issues", one of which was expressed as –
"· MtM – Wanted to ensure that if one of the customers who have a MtM clause, does trigger it, then it automatically triggers the MtM with PP. We will link the customer's name to the contract. This is to ensure that the differential in pricing between the Retail and Wholesale does not mean that Retail is triggered while Wholesale is not. This would need to cover all contracts that have a MtM clause in place."
A conversation took place between the two men after the receipt of a facsimile. It will be necessary to return to this conversation.
Subsequently to the conversation Mr Treacy sent another facsimile confirming the discussion and he wrote –
"· MtM – Agreed to link the retail customer with the hedge so if the customer triggered the MtM clause then this would flow through to the wholesale hedge contract with PP. I will organise some words to wrap around this for the contracts in question."
In fact Mr Treacy never did draft any words to "wrap around" the contracts. As I have found PCA did not proceed with the automatic triggering concept.
According to his witness statement Mr Murphy also relied upon the Draw Down Product. It attached a standard MTM clause which provided for a review on the contract anniversary.
Clause 3.2 of the product provided –
"3.2 The annual Meet-the-Market review may apply for any of the following dates so as to accommodate varying customer contract start dates each customer with a Meet-the-Market (ie not all customers will be entitled to an annual review) will have one of the following dates nominated as a review date. The proposed dates have been set on a quarterly basis using 1 January, 1 April, 1 July or 1 October of each year."
In my opinion none of the documentary material relied upon by PP establishes the representation as pleaded by it. A perusal of the MTM clause attached to the Draw Down Product shows that it contained a variety of terms.
There is nothing in the material which would support the belief of Mr Murphy as stated in his witness statement or as pleaded.
However, in cross‑examination when asked about his belief and the date when he formed it, Mr Murphy stated that in a conversation with Mr Treacy on 26 August 1997 that Mr Treacy had said that the MTM clauses in the Visy and Air Liquide retail contracts "would be in essentially the same terms as the Meet the Market clause in the Pacific Power/Powercor hedge contract".
This piece of evidence came out in cross‑examination, was not included in his witness statement, was not given in evidence‑in‑chief and was not put to Mr Treacy.
These facts raise considerable doubts as to whether or not Mr Treacy did make such a statement.
The cross‑examination of Mr Murphy in relation to this alleged fifth representation demonstrated that he was assisted in preparing his evidence by the lawyers, that the paragraphs in the witness statement were done quickly and without proper thought and contained errors.
Mr Murphy gave conflicting evidence as to whether the words in paragraph 468 were his, he conceded that the lawyers developed the standard formula and it was he who chose the dates, the letters and the conversations to support the written evidence, that he was uncertain as to when he held the belief other than he held it on 13 November 1997 and further, there was no evidence that at any point in time other than this alleged conversation on 26 August was it ever said that the terms of the Meet the Market clauses in both contracts would be substantially identical.
On proper consideration of the evidence and the way it was given I reject the evidence of Mr Murphy given late in cross‑examination that Mr Treacy told him that the clauses would be in substantially identical terms.
I find that PCA did not make the representation alleged by PP as being the fifth representation.
In any event I reject the lawyers' drafted paragraph 469 of Mr Murphy's evidence that he would have broken off negotiations with PCA if he had been told the retail contracts would not contain a substantially identical MTM clause and would have entered into negotiations with other facility providers. I do not accept that that is what he would have done. If apprised that there was the risk the Visy and Air Liquide retail contracts may contain different types of MTM clauses because of the demands of the retail customer I have little doubt that Mr Murphy would not have responded at all. He was anxious to do the business.
In other words I do not accept Mr Murphy's evidence that he would have broken off negotiations. The fact was the negotiations had progressed for months. But more importantly PCA proposed the connection. PP never raised the question that the hedge contracts and the retail contracts should be substantially identical in respect o MTM clauses.
It follows that PP fails to prove its cause of action in respect of the fifth alleged misrepresentation.
Sixth representation
The sixth alleged misrepresentation is pleaded by PP as follows -
"That during the period from 26 August 1997 to 13 November 1997 PCA represented to PP that the review dated specified in the Meet the Market clause in each retail contract for supply of electricity between PCA and its customer, which PCA had entered or was proposing to enter into and which would be back to back with the commodity transaction agreement then being negotiated with PP was and would be one of the dates in each calendar year referred to in clause 3.2 of the Draw Down product."
The evidence relied upon by PP and the submissions in respect to this alleged cause of action are similar to PP's claim in respect to the fifth alleged misrepresentation.
But the emphasis is on the review date of each retail contract being one of the dates set out in clause 3.2 of the Draw Down Product.
I have set out the sub-clause and it does state the proposed dates which would be nominated for the review will be one of "1 January, 1 April, 1 July or 1 October of each year".
The evidence is based upon the two facsimiles dated 26 August 1997 and in addition relies upon clauses in the Draw Down Product dated 12 November 19997.
In the counsel drafted paragraph 470 of his witness statement Mr Murphy stated that he had a belief during the period from 26 August 1997 to 28 November 1997 that any Meet the Market clause in any retail contract "was in substantially identical terms to the Meet the Market clause in the draw down product". But this is not what was pleaded. The issue concerns the alleged falsity of the proposed review dates.
He goes on to state that if he had known that this was not PCA's intention then he would have broken off the negotiations with PCA and gone elsewhere with the notional supply of electricity he had available to sell pursuant to a commodity derivative contract.
He said that he also had the same belief on 11 May 1998 and also as at 29 May 1998.
In cross‑examination he said that the belief was fully developed by 12 November 1997.
The genesis for this cause of action can be found in the discovery and inspection of PCA's documents. After reviewing a number of retail contracts Mr Murphy found that the review dates of MTM clauses in the retail contracts did not coincide with any of the dates in clause 3.2 of the Draw Down Product and further, that the evidence adduced by PCA in support of its equitable estoppel case through the affidavit of Mr Reid sworn 13 May 1999, contained a schedule which referred to some 300 retail contracts, only 14 contain an MTM clause and of those 14 none have the review dates that coincide with the dates in clause 3.2 of the Draw Down Product.
Once ascertaining that, it then became a question of going back over the events to see whether PCA did represent the retail contracts would have a review date the same as the Draw Down Product.
This cause of action also demonstrates a lack of commercial reality. Mr Murphy asserts in his witness statement that if he had known the true position he would have broken off negotiations in relation to contracts 39, 40 and 41 and contracts 43 – 47 (inclusive).
If Mr Murphy had turned his mind to the question as at 13 November 1997 he would have realised that the hedge contracts were there to hedge against risks in relation to future retail contracts. Whether or not any particular retail contract thereafter which relied on these hedge contracts had a MTM clause which contained a review date was a matter for future negotiation.
The first question like the first question in the alleged fifth misrepresentation claim concerns whether or not PCA made the representation as pleaded.
The evidence relied upon is Mr Murphy's understanding based on the facsimiles of 26 August 1997 and the Draw Down Product.
But the only evidence which could support the representation is found in clause 3.2 of the Draw Down Product. What is represented is that if a retail customer has a MTM clause with an annual review then the proposed dates have been set on a quarterly basis using "1 January, 1 April, 1 July or 1 October of each year".
Was that a false or misleading statement when made? It is emphasised that the sub‑clause only applies if the retail contract contains a MTM clause with an annual review and that PCA was proposing to have such a clause in future retail contracts.
The representation has to be understood in context. PCA wished to use the c.d. contract to hedge the risks with its retail contracts. Not all retail contracts would have a MTM clause. Its aim was to have review dates at certain dates where the contract had an annual review. But the questions of whether a retail contract would have a MTM clause and one with an annual review were a matter for future negotiation.
There is no evidence that when PCA made the representation it was false or misleading or likely to be false or misleading. PP relies upon evidence concerning retail contracts to show that the representation must have been false or misleading.
PP was granted leave to re-open its case to place in evidence retail contracts which it is alleged contain MTM clauses with review dates which do not correspond with the dates in clause 2.3. It produced 16 contracts. In addition, in its written submissions PP referred to other contracts but only a Telstra contract which is also included in the additional material had a Meet the Market clause.
Of the 16 contracts, nine pre-dated the date of 12 November 1997 which was the date when the representation was made. In my opinion the representation was made as to the intention of PCA with respect to retail contracts entered into after the relevant hedge contract which contained the MTM clause provided in the Draw Down Product. Accordingly, in my opinion the nine contracts which pre‑dated 12 November 1997 are irrelevant and do not establish falsity in the statement made.
Of the balance of seven contracts relied upon, the review dates of four were different by one day from that asserted in the Draw Down Product and PP does not rely upon those contracts.
Of the remaining three, two did not contain an annual review and the final one, Telstra, had a review date of any time between 1 January 2000 and 31 December 2000.
In my opinion the representation was only concerned with Meet the Market clauses which were to be reviewed annually. That is made clear by the terms of clause 3.2 of the Draw Down Product.
In order to establish the falsity PP can only refer to one contract which was made on 28 January 1998. That one instance does not establish that the statement of intention was false or misleading when made.
Indeed, as I have already stated the context in which the Draw Down Product came into existence strongly supports the inference that PCA was proposing to enter into retail contracts with review dates specified in accordance with clause 3.2.
PP have failed to prove that the representation when made was false or misleading.
If I am wrong in relation to that finding I am not persuaded that if Mr Murphy had been told that there was the prospect that the review dates would be different in the retail contracts from the dates specified in the Draw Down Product that he would have broken off any negotiations.
It is pertinent to observe that in no point in time did Mr Murphy ever raise with Mr Treacy this requirement in relation to the retail contracts.
Again, the evidence of Mr Murphy is in a drafted form produced in consultation with his lawyers and involves him in casting his mind back to what he would have done if he had been apprised of the alleged true position. A court must in those circumstances closely scrutinise the evidence.
The complaint here is that PP expected that PCA would enter into retail contracts which if they contained an annual MTM clause then the review would be on particular dates which were set out. If Mr Murphy had been told that there was a prospect that the review date in any particular year might be some other date other than those specified, in my opinion he would not have broken off negotiations. I reject his assertions in his witness statements that he would have. I also note that in his witness statement he relies upon a further assertion concerning the question of identical terms. That is not how the case was pleaded or presented.
I do not accept that he would have ceased negotiations if he had been told that the dates set out in the Draw Down Product might not be met in respect to every retail contract.
The fact is, and I have said this a number times, PP was in the business of making money out of commodity derivative contracts and there would be no reason for Mr Murphy to cease negotiations because of the possibility that a retail contract would not have the same review dates as in clause 3.2 of the Draw Down Product.
PP fails in its claim based upon the alleged sixth misrepresentation.
The seventh representation
The claim based upon the seventh misrepresentation is a variation on the claim made in respect to the fifth alleged misrepresentation. This alleged misrepresentation relates to the Smorgon retail contract and not the Visy/Air Liquide contracts.
PP pleads the seventh alleged misrepresentation as follows –
"That during the period from 30 July 1997 to 13 November 1997 PCA represented to PP that the Meet the Market clause in the retail contract for the supply of electricity between PCA and Smorgon which PCA had entered or was proposing to enter into and which would be back to back with the commodity transaction agreements then being negotiated with PP was in substantially identical terms to the Meet the Market clause in that commodity transaction agreement and that the review date specified in that Meet the Market clause was or would be at the end of years 1, 3 and 5."
The emphasis in relation to this cause of action is that the Smorgon retail contract would contain a Meet the Market clause which was in substantially identical terms to the terms of contract No. 35 and the review dates were the same.
Contract 35 was concluded on 13 November 1997 and was known as the Smorgon transaction because from the very earliest negotiations PCA informed PP that the proposed hedge contract was for a large retail supply of electricity to Smorgon.
The negotiations commenced in late July 1997 between Messrs Murphy and Treacy.
At that point in time PCA did have a retail contract with Smorgon but differences arose in relation to it and as a result of a compromise it was agreed that the agreement would be extended for a further six years from 1 August 2001 to 30 June 2007. Mr Treacy was not involved in the Smorgon retail negotiations.
Although PCA and Smorgon had agreed in principle, they had not finally agreed to all terms for execution and eventually the retail contract was executed on 21 November 1997. This was some eight days after contract No. 35 was concluded.
Mr Murphy in his witness statement in paragraph 481 said that he formed a belief during the period from 30 July 1997 to 13 November 1997 that the MTM clause in the Smorgon retail contract would be "in substantially identical terms to the MTM clause in the Draw Down Product and that the review date specified" in the retail contract would be "one of 1 January, 1 April, 1 July or 1 October of each year."
It is asserted that PCA conveyed a representation which formed the basis for that belief and that at the time it was false.
In considering the evidence as to whether PCA did convey that representation it is noted that there is a difference between the pleading and the evidence given by Mr Murphy as to the review dates. Further, there is no evidence that PCA expressly stated through anybody that the Smorgon retail contract would be in substantially identical terms to that in the Draw Down Product or that the review dates would be one of any date in a particular year.
The date to determine when the alleged representation was made is 13 November 1997.
The proposal in relation to Smorgon was separate and discrete from other proposals. Negotiations commenced with PP on 29 July 1997 and like the Visy contract 33 were separate from the negotiations in respect of the Draw Down Product.
As early as 30 July 1997 Mr Murphy offered on behalf of PP terms concerning what became contract 35 and in respect of the MTM clause offered one to be reviewed at the end of Year 1, Year 3 and Year 5.
The terms were finally agreed on 13 November 1997 and subsequently the form of the MTM clause was accepted by Mr Murphy.
Although the clause is the same as attached to the Draw Down Product the latter proposal was still under discussion. What was agreed on 13 November was distinct from the Draw Down Product and the review dates were agreed at the end of Years 1, 3 and 5.
In the light of that evidence, what Mr Murphy said in paragraph 481 is wrong. There was no question of him forming the belief based on the Draw Down Product or as to the review dates being on any of the dates stated.
His evidence in paragraph 482 is likewise wrong.
I reject his evidence.
There is no basis for saying that PCA made the representation as alleged.
The cause of action fails.
But if I am wrong I reject the cause of action by reason of the following.
The first piece of evidence relied upon by Mr Murphy to form his belief is a facsimile dated 30 July 1997 which notes that the MTM was – "End year one, year three and year five." It is noted that Mr Treacy referred to the terms of the offer agreed to by PP.
Mr Murphy then goes on to rely upon the facsimiles dated 26 August 1997 and the telephone conversation of that date which I have already discussed in relation to alleged cause of action based upon the fifth alleged misrepresentation.
For the reasons that I have already stated, in my opinion PCA was not representing in the facsimiles and discussion on 26 August that the retail contracts would have an MTM clause in substantially identical terms.
The reference to this evidence in my view confuses the point that PP is attempting to make. The point it is attempting to make is based upon the allegation that the review date specified in the MTM clause in the retail contract was to be at the end of years one, three and five. Indeed, that is what the evidence appears to address. However, the evidence given by Mr Murphy in paragraph 481 of his witness statement is wrong.
Further, the Draw Down Product had nothing to do with the Smorgon contract.
Despite that observation PP in its submissions then seeks to show that a comparison between the MTM clause in contract 35 and the retail contract was not substantially identical.
It was no doubt on this basis that this cause of action has been prepared for trial.
The real issue comes down to whether PCA represented that the MTM clause in the Smorgon retail contract would be substantially identical to the hedge contract and secondly, that the review dates in it would be at the end of years one, three and five.
Whilst there was some discussion concerning the review date in the hedge contract there is no basis in my opinion for coming to the conclusion that it was represented that the Smorgon retail contract would have either a substantially identical MTM clause to that in the commodity contract or that the review dates would be at a particular time. I reject Mr Murphy's evidence that he understood that the review dates would be exactly the same.
The fact was that the commodity contract was being negotiated between PCA and PP and what PCA did in relation to its retail contract was a matter for it.
There is no basis in my opinion for a conclusion that the representation was made by PCA.
In any event, if it was I reject the evidence that if Mr Murphy had known that the review dates would be different that he would have broken off negotiations.
To suggest that he would have defies commercial reality. The parties were negotiating a large contract and had negotiated the hedge contract over a long period. PP was more than happy to do business. As long as the terms in the hedge contract were to its satisfaction there would be no reason why it would break off negotiations if the review dates in the retail contract which PCA was entering into were different.
It follows that PP fails in its claim based upon the seventh alleged misrepresentation.
Conclusion
PP fails in its six causes of action based upon alleged breaches of s.52 of the Trade Practices Act.
Section 53(g)
PP has also pleaded that in making the alleged first, fifth, sixth and seventh misrepresentations PCA contravened s.53(g) of the Trade Practices Act.
Section 53(g) relevantly provides –
"A corporation shall not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services:
…
(g) make a false or misleading representation concerning the existence exclusion or effect of any condition or warranty guarantee right or remedy."
In making its submissions PP did not draw a distinction between the causes of action based on s.52(1) and s.53(g).
In order to establish a breach of s.53(g) it is necessary for PP to prove that there was a false or misleading representation. In relation to the first, fifth, sixth and seventh alleged misrepresentations I have held that PCA did not make any false or misleading representation in respect to the matters pleaded. Accordingly, the claims based upon s.53(g) also fail.
Summary
Conclusion and relief
PCA has established the 11 disputed contracts were agreed to by PP and are concluded, final and binding on the parties. However PCA failed to prove the linking of contracts 39, 40 and 41.
It follows it is unnecessary for PCA to rely upon equitable estoppel to establish its case but if it had to do so, in my opinion it has failed to establish equitable estoppel precluding PP from relying upon the exchange of a signed confirmation as constituting the concluded contract between the parties.
I reject PP's defences of lack of authority and mistake.
PP fails in its counterclaim.
At the outset of the hearing PCA's counsel supplied the court with 12 documents in the form of draft confirmations which it seeks to specifically perform. I marked them aide memoires 1 to 12. The claim in respect of number 12 is no longer pressed.
PCA seeks specific performance of contracts Nos. 33, 35, 38 – 41 and 43 – 47, all told 11 contracts.
Mr Downes QC on behalf of PP agreed that specific performance was the appropriate form of relief but submitted that the decree should only operate in the future, that is, from the date orders are made by the court. That in respect to the past, PP contends that PCA should prove the damages it has suffered which can be calculated without much difficulty. The basis of the submission is that damages are an adequate remedy for the past.
Mr Myers QC seeks a decree operating from the date when each contract was to commence.
The commencement dates are –
Contract 33 –
1.7.1998
Contract 35 –
1.8.2001
Contracts 38 and 39 -
1.7.1998
Contracts 40 and 41 -
1.1.2001
Contracts 43 – 47 -
1.7.1998
Contracts 35, 40 and 41 are to commence in the future.
Mr Downes QC foreshadowed that PP would rely upon the fact that if on the netting process money was to be paid to PCA, the latter in the past may have taken out other hedge contracts to minimise its loss and accordingly reduced its loss and in the alternative if it did not, rely upon a failure to mitigate its loss as a basis for reducing damages.
PP has not pleaded mitigation but it has raised the question during the course of the trial.
I indicated that I would hear the parties on the appropriate relief after I had published my reasons on liability.
The relevant dates are that PP made it clear by 19 June 1998 that it repudiated the 11 disputed contracts, PCA issued the writ on 21 August 1998 in the Commercial List and the trial commenced on 10 March 1999. It continued for 85 sitting days.
PCA submits it is entitled to specific performance of each of the 11 contracts; that is what it sought as its primary relief and justice demands no less.
Mr Downes QC submitted that specific performance is a discretionary remedy which as a general rule is not granted if damages are an adequate remedy. He submitted that damages for the past from 1 July 1998 can easily be calculated, as indeed they can, and therefore damages are an adequate remedy.
He does not argue against specific performance for the future.
I will hear counsel on the form of relief but it is appropriate I should make some provisional observations.
When PP repudiated the 11 contracts in June 1998 PCA had a number of options open to it. In accordance with well established common law principles it could have accepted the repudiation, rescinded the contracts and sued for damages.
PCA did not go down that path.
Instead of rescission PCA could have affirmed the contracts and sued for damages. This remedy would involve a number of proceedings in the future if PP did not perform its side of the bargain.
The other option was to seek an order that PP perform its side of the bargain. PCA was entitled to sue for specific performance.
The remedy of specific performance is a creature of equity and it evolved to overcome deficiencies in the remedies available at common law.
Writing in his first edition in 1858 Edward Fry in his treatise on The Specific Performance of Contracts wrote at p.1 –
"The specific performance of contracts is an ancient branch of the equitable jurisdiction of the Court of Chancery, arising out of the incapacity of the courts of common law to enforce the actual performance of the contract: for these courts, they recognising the obligation of the parties to a contract to perform their respective parts, enforce its obligation, not specifically, but only by way of damages."
As a general rule specific performance is not available if damages that can be awarded give the victim full compensation, but it is an essential condition of that rule that the award will put the victim in a position as good as he would have been in if the agreement had been performed.
It follows that in cases involving payment of money specific performance is not usually granted. But again that is only a general rule and if money is to be paid pursuant to a contract periodically, common sense and justice demands that the contract be specifically performed to avoid numerous proceedings being brought to recover payment. See Beswick v Beswick (1967) Ch. 538 at 560-61. The reasoning of Danckwerts LJ was expressly approved in the House of Lords – see (1968) AC at 97.
The principle was stated by Lord Upjohn in the Beswick case when he said –
"Equity is to do true justice to enforce the true contract that the parties have made and to prevent the trouble and expense of a multiplicity of actions. This has been well settled for over a century."
No doubt Mr Downes QC had these principles in mind when he accepts that specific performance is appropriate in respect of future obligations.
What Mr Downes QC is seeking to do is to divide up the remedies available to PCA between common law damages for the past and the equitable remedy of specific performance for the future.
PCA has elected to claim specific performance. It is entitled to do so. It has the carriage of the proceeding and is entitled to pursue any remedy that the law permits it.
Whether or not it is open to divide remedies in the way submitted by PP is a moot point. I suspect the issue is not one of jurisdiction because this court has unlimited jurisdiction but a question of whether the court should divide up the remedy in the circumstances. If this is correct, in the end it is a question of doing practical justice between the parties.
The fact is that PCA has the legal right to have its contracts fully performed. That right it seeks in the present proceeding. This means the contracts in their entirety and not portion thereof.
PCA referred to Turner v Bladin (1951) 82 CLR 463. This is an example of specific performance being decreed in respect of past and future obligations. The case does not address the issue whether a court should divide up the remedy in the way sought by PP. See also the observations of Lord Pearce in Beswick v Beswick, supra, at p.92 (B-C).
I will adjourn the further hearing to enable the parties to make submissions on the relief in accordance with my reasons for judgment and also the question of costs.
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