QNI Resources Pty Ltd & Anor v North Queensland Pipeline No 1 Pty Ltd & Anor

[2023] HCATrans 69

[2023] HCATrans 069

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B44 of 2022

B e t w e e n -

QNI RESOURCES PTY LTD ABN 14 054 117 921

First Applicant

QNI METALS PTY LTD ABN 56 066 656 175

Second Applicant

and

NORTH QUEENSLAND PIPELINE NO 1 PTY LTD

First Respondent

NORTH QUEENSLAND PIPELINE NO 2 PTY LTD

Second Respondent

Application for special leave to appeal

GORDON J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO CONNECTION

ON FRIDAY, 19 MAY 2023, AT 1.33 PM

Copyright in the High Court of Australia

____________________

GORDON J:   In accordance with the Court’s protocol for remote hearings, I will announce the appearance for the parties.

MR D.F. VILLA, SC appears with MR P.F. SANTUCCI and MR S. HOARE for the applicants.  (instructed by Alexander Law)

MR G.D. BEACHAM, KC appears with MS B.J. O’BRIEN for the respondents.  (instructed by King & Wood Mallesons)

GORDON J:   Yes, Mr Villa.

MR VILLA:   Your Honours, there are two special leave issues that arise in this application.  The first relates to the question of whether or not Australian law recognises an implied contractual obligation of good faith, and the second relates to the operation of the doctrine of penalties in the context of what might be described as a take or pay contract where the innocent party had various self‑help remedies available to it to protect its interests.

Your Honours, in respect of the first issue, this Court has, on a number of occasions, been presented with opportunities to determine whether or not Australian law recognises an implied contractual obligation of good faith.  It would be sufficient for our purposes to contend that an obligation of good faith should be implied at law into that category of contracts that may be described as relational or cooperative commercial contracts.  But your Honours will appreciate there is, discussed in the authorities and the academic literature, the possibility that such a duty might be implied into all contracts or at least into all commercial contracts.  Your Honours, by relational ‑ ‑ ‑

EDELMAN J:   Mr Villa, the specific content of the good faith obligation that you seek the Court to recognise is the failure to exercise the clause 14.9 power to correct the positive imbalance.  Is that right?

MR VILLA:   In the particular circumstances, yes, your Honour.  We would say that that in the specific context of this contract and the facts as they occurred would fall

within the third of the rules that Justice Allsop spoke of in Macquarie International and which your Honour discussed with apparent approval in your Honour’s judgment in Mineralogy v Sino.

Your Honours, what I mean by relational cooperative contracts as the subcategory of contracts in which we say such a good faith obligation should be implied are, of course, contracts of the kind in these proceedings where, over a long period of time, the parties require ongoing cooperation in order to ensure the management of gas flows through the pipeline.

GORDON J:   Mr Villa, I think we are aware of the facts.  Can I ask you a direct question and that is this:  what are we to make of the questions of construction which, on its face – and this appears, I think, at least put against you, that this alleged implied duty of good faith in respect of the exercise of the clause 14.9 power is inconsistent with a number of the express terms of the agreement.  The trouble is one never even does get to this question.

MR VILLA:   Well, your Honour, that is put against us.  And we say that that is not a fair characterisation of the way that the contract works.  Of course, both the parties to this contract and indeed the other users of the pipeline have an interest in the efficient management and operational integrity of the pipeline and, to that end, various provisions in the contract impose obligations on both the customers and on the pipeliners to ensure that that flow can occur.

Your Honours, what we say ultimately is that the exercise of the power in clause 14.9 is in fact consistent with the interests of all users in that by enabling the pipeliners to take action to reduce imbalances in circumstances such as occurred from March 2016 when the nickel refinery was closed, that is, in circumstances where the customers themselves cannot take steps to reduce a positive imbalance, that in fact the obligation of good faith that we submit ought to be implied into this category of contracts and which, in the particular circumstances of this case required the exercise of the power under 14.9, is in fact consistent with and productive of amplifying the obligations of pipeliners to ensure the operational integrity of the pipeline.

EDELMAN J:   Mr Villa, assume for a moment that the Court were to accept your submission that, as a general baseline, there is an implied obligation of good faith which contains, as one general element of it, an obligation that powers be exercised in a reasonable way.  When one descends to this contract, one of the issues you would have to confront, would you not, is whether or not, in relation to clause 14.9, any such good faith obligation would be negated, rendered nugatory by, for example, clause 14.5 if (a) (b) and (c) are not met?

MR VILLA:   Yes, your Honour.  So, in relation to the operation of 14.5, that of course occurs in the context of the issuing of an operational flow order.  Your Honours, there is one issue with the construction of clause 14.9, and that is this, although paragraphs (a) and (b) in 14.9 referred to an imbalance which Queensland Nickel has not corrected in accordance with clause 14.5, that language of correction of an imbalance is in fact language that is picked up in clause 14.4 which is the provision that enables the pipeliners to issue a correction notice and to provide the customer to rectify the imbalance by undertaking some of the steps that are provided for in 14.8.

So, there may be a constructional issue as to whether or not the reference to 14.5 in 14.9 should in fact be a reference to clause 14.4.  But coming back directly to your Honour’s question, we accept that there is the difficulty that the pipeliners have identified in the way that 14.9 would operate in conjunction with 14.5 in this particular scenario.  What we would say is that in fact, in terms of clause 14.9(a), there has in fact not been a correction of the imbalance and otherwise, your Honours, we accept the difficulty that there is inherent in the way that 14.5 operates.

Of course, if 14.5 is not engaged because neither (a), (b) nor (c) were in fact satisfied or could have been satisfied during the period of the positive imbalance, we would nonetheless rely upon that as a factor going towards our penalty argument, which is the second issue that we seek to agitate in these proceedings.

GORDON J:   Mr Villa, have you finished addressing the implied duty of good faith argument yet, that aspect of that ground?  Can I just ask one question.

MR VILLA:   Yes, your Honour.

GORDON J:   What do I do, if at all, with what appears at application book 69 where it is apparent that the court went on to consider that:

Even if there was an obligation to act in good faith –

there was difficulty:

to discern a breach –

in any event.

MR VILLA:   Yes, your Honour.  So, your Honour, what we say about that is this, and it really requires me to descend into some of the detail of the way that the contract works.

GORDON J:   I do not want you to do that because you have not got time, but is it the position that there is a contractual answer, or is there a difficulty that it requires, in effect, assessment of the facts?

MR VILLA:   Your Honour, it does require an assessment of the facts, but those facts are within a fairly narrow scope and are largely not in dispute.  The practical proposition is twofold.  One is Queensland Nickel had no practical capacity to be able to remove the positive imbalance from 10 March 2016 when the nickel refinery was closed because the only way that it could be taken off by Queensland Nickel was to in fact use it up in the nickel refining process.

The other answer, your Honours, is this – and this, again, feeds somewhat into the penalty argument – the interest that is being protected by clause 14, dealing with imbalances, is the operational integrity of the pipeline.  So long as the positive imbalance is lower than the reserved capacity in Queensland Nickel’s favour, then there cannot possibly have been any interference with the operational integrity of the pipeline by having a positive imbalance within that reserved capacity, because that reserve capacity could have been used either by transporting gas up to 14.9 terajoules – whether it is just sitting there as a positive imbalance or actually being transported makes no difference to the operation of the pipeline.

EDELMAN J:   Is there any question of principle that is involved in your penalties argument or is it simply a dispute whether, on the proper characterisation of the contract, the doctrine is engaged?

MR VILLA:   Your Honour, there is this question of principle – that is, the question of the way the penalty doctrine will apply in a take or pay context where the legitimate interest of the innocent party is already protected by the other powers that it has under the contract, even absent the imposition of the imbalance charge.  By that, I mean, your Honours have gone to clause 14.5 – which is where there is some issue with the operation of the pipeline – operational flow orders can be issued – and what we say is, that because that self‑help remedy is available to the pipeliners, then the imposition of the imbalance charge – at least to the extent that it is an imbalance lower than the reserve capacity – cannot be anything other than an in terrorem charge to secure compliance with the obligation under section 14.3 not to have an imbalance.

So, that is the issue of principle, your Honour.  This is not simply a question of financial costs, as was the case in Andrews and Paciocco.  This is a scenario where those interests can, in fact, be protected by non‑monetary means and there is a specific regime to enable it to do so.

GORDON J:   Is there anything else you wish to add, Mr Villa, in relation to either ground?

MR VILLA:   No, your Honours, we are otherwise content to rely on the written application.

GORDON J:   Thank you, Mr Villa.  The Court will adjourn for the moment to consider the course it will then take.

AT 1.46 PM SHORT ADJOURNMENT 

UPON RESUMING AT 1.48 PM:

GORDON J:   The Court is of the view that none of the applicants’ proposed grounds of appeal enjoy sufficient prospects of success to warrant the grant of special leave to appeal.  Special leave to appeal is refused, with costs.  Thank you.

The Court will adjourn.

AT 1.49 PM THE MATTER WAS CONCLUDED