Rizhao Steel Holding Group Co Ltd v Koolan Iron Ore Pty Ltd [No 2] - [2010] WASC 385

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION: RIZHAO STEEL HOLDING GROUP CO LTD -v- KOOLAN IRON ORE PTY LTD [No 2] [2010] WASC 385

CORAM: KENNETH MARTIN J

HEARD: 16 NOVEMBER 2010

DELIVERED : 16 NOVEMBER 2010

PUBLISHED : 16 DECEMBER 2010

FILE NO/S: ARB 24 of 2010

BETWEEN: RIZHAO STEEL HOLDING GROUP CO LTD
Appellant
AND
KOOLAN IRON ORE PTY LTD
Respondent

FILE NO/S :ARB 26 of 2010

BETWEEN :RIZHAO STEEL HOLDING CO LTD
Appellant
AND
MOUNT GIBSON MINING LTD
Respondent

Catchwords:

Arbitral awards - Leave to appeal - Error of law needed - Strong evidence - Exclusion agreement - Causation issues - Mitigation of damages - Loss of bargain damages - Opportunity to renegotiate price in better market - Reasonableness - Questions of fact, not law - Error point to be of broader commercial application

Legislation:

Commercial Arbitration Act 1985 (WA)
International Arbitration Act 1974 (Cth)
Sale of Goods Act 1895 (WA), s 49

Result:

Leave refused

Category: B

Representation:

ARB 24 of 2010

Counsel:

Appellant: Mr F M Douglas QC & Mr S K Dharmananda
Respondent: Mr B Coles QC & Mr K J Mony de Kerloy

Solicitors:

Appellant: Holman Fenwick & Willan
Respondent: Freehills

ARB 26 of 2010

Counsel:

Appellant: Mr F M Douglas QC & Mr S K Dharmananda
Respondent: Mr B Coles QC & Mr K J Mony de Kerloy

Solicitors:

Appellant: Holman Fenwick & Willan
Respondent: Freehills

Case(s) referred to in judgment(s):

Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192
Dunkirk Colliery Company v Lever (1878) 9 Ch D 20
Ferris v Plaister (1994) 34 NSWLR 474
Koch Marine Inc v D'Amica Societa di Navigazione ARL [1980] 1 Lloyd Rep 75
Morrison v Town of Victoria Park [2007] WASCA 164
Payzu Ltd v Saunders [1919] 2 KB 581
Raguz v Sullivan [2000] NSWCA 240; (2000) 50 NSWLR 236
Roper v Johnson (1873) LR8CP 167
The 'Asia Star' [2010] 2 Lloyd's Rep 121

KENNETH MARTIN J:
(This judgment was delivered extemporaneously on 16 November 2010 and has been edited from the transcript. For convenience this decision, as part of a series of extempore reasons for decision, will be referred to as 'Rizhao 4'.)

Overview

I am dealing with two applications for leave to appeal under the Commercial Arbitration Act 1985 (WA) in respect of two arbitral awards of the honourable Murray Gleeson AC QC, delivered 16 August 2010.
The two applications replicate each other in terms of their substantive content. In aggregate the two arbitral awards are for (without interest) slightly over $US114 million.
I will refer to the application in ARB 24 of 2010 as the template. Here the applicant for leave is Rizhao Steel Holding Group Co Ltd (Rizhao) and the respondent is Koolan Iron Ore Pty Ltd (Koolan).
Rizhao is again the applicant in ARB 26 of 2010. But the respondent in that matter is Mount Gibson Mining Ltd (Mount Gibson).
The two respondent corporations are related corporations, through a parent corporation, Mount Gibson Iron Ltd (MGIL).
The respective reasoned arbitral awards are found in an Application Book (AB) which was put before me without controversy, for the purposes of these leave application proceedings. The final arbitral award in respect of Koolan, as claimant in the arbitration and Rizhao as respondent (and counterclaimant) in the arbitration, commences at AB 9.
The reasoned award of the learned arbitrator in respect of Mount Gibson as arbitral claimant and the respondent to the counterclaim of Rizhao, commences at AB 95.
As is customary, the leave applications are heard discretely. Were leave to appeal to be granted then a full scale hearing of the appeals would need to follow.

Evidence

Apart from materials in the AB, reliance was placed upon, in each application for leave, affidavits sworn by Mr Nicholas Poynder of the solicitors for Rizhao. It is convenient to refer to one of those affidavits. They are both sworn 21 September 2010.
In his affidavit sworn in ARB 24 of 2010 Mr Poynder says:
In June 2007, the Appellant (Rizhao) entered into a long term contract (the Contract) with the Respondent (Mount Gibson) for the purchase of iron ore.
Mount Gibson terminated the Contract in November 2008 following breach by Rizhao and subsequently entered into substitute contracts with two related third parties (the Substitute Contracts). One of those third parties, APAC, was at the time of entering into the Substitute Contracts reportedly the largest shareholder of Mount Gibson's parent company, holding some 20.41% of its shares. APAC was also closely related to the other third party to the Substitute Contracts.
The price payable under the Substitute Contracts was, in the long term, 10% less than the price under the Contract. However, the Substitute Contracts also provided at clause 4.6 that if the applicable price index, the Hamersley Benchmark price, ceased to exist, …[4] ‑ [6].
Mr Poynder then quotes part of cl 4.6, but by reason of its importance, I will set out its content in full.
Clause 4.6 reads:
If the Hamersley Benchmark price ceases to exist, and a new benchmark index becomes the new standard market long term iron ore benchmark index, the parties shall use all reasonable endeavours to negotiate in good faith and agree a price in lieu of the Price per DMTU [dry metric tonne unit] and/or a calculations methodology, which shall apply for future price periods.
Mr Poynder then relates at pars 7 ‑ 8 that:
7.'Price per DMTU' [quoting from clause 4.6] was defined in the Substitute Contracts as the 'Hamersley Benchmark price less 10%'.
8.The clear and unambiguous reading of clause 4.6 was that the parties were obliged on the occurrence of the specified event to use all reasonable endeavours to renegotiate in good faith the Price per DMTU.
I interpolate at this point that Mr Poynder is now referring to a substitute contract. In this particular case the parties were Koolan, and a Shougang party (Shougang Concord Steel International Trading Co Ltd), with whom contractual relationships were entered in or about November 2008, by way of the substitute contract. Mr Poynder continues:
It was accepted that the Hamersley Benchmark price had at some stage between April and July 2010 ceased to exist and that it had been replaced by a new index, and further that market conditions during that time were more favourable to Mount Gibson than when the discounted price was agreed under the Substitute Contracts. The only evidence on the market conditions prevailing in July 2010 was that the 10% discount on Mount Gibson's ore could have been eliminated if the ore were to be resold at market price.
It was further accepted by all parties that the timeline for negotiations set out in clause 4.5 of the Substitute Contracts applied to negotiations under clause 4.6, the effect being that if the parties were unable to reach agreement on a price in lieu of the Price per DMTU within 3 months of 30 June 2010, Mount Gibson had a right to terminate the Substitute Contracts on 1 month's notice.
Notwithstanding this, Mount Gibson contended during the arbitration hearing that it was entitled, after the triggering of clause 4.6, effectively to ignore its obligation to renegotiate the 10% discount in the Price per DMTU and to recover that 10% discount in price from Rizhao as damages for breach of the Contract. Mount Gibson calculated that part of its claim at $14,155,305 [9] ‑ [11].
Mr Poynder's affidavit sworn in the Mount Gibson application, ARB 26 of 2010, for all intents and purposes, is the same up to par 11, save that the amount of damages is higher in respect of this aspect of the grievance sought to be challenged by leave to appeal and is calculated at $28,825,502.
It will be seen then that as between the two par 11s, found in each of Mr Poynder's affidavits, that the amount at issue, said to be the subject matter of the appeal point now sought to be raised by leave to appeal against the arbitrator's awards, is a significant amount of money, in US dollars exceeding $US40 million. The quantum at issue on the leave applications is relevant to one of the considerations, applicable under the Commercial Arbitration Act, to a grant of leave (ie, the points under determination substantially affecting the rights of one or more parties: see s 38(5)(a) of the Commercial Arbitration Act).

Proposed grounds of appeal to support the grant of leave

Having identified the way the challenge is explained in Mr Poynder's respective affidavits, I can now refer more precisely to Rizhao's proposed grounds of appeal, found in respect of each appeal notice. They again replicate each other.
In ARB 24 of 2010, it will be seen that the contentions as to error of law are found in pars 1 ‑ 5, at between AB 3 ‑ 4 for the matter of Koolan. In respect of the second application by Rizhao concerning Mount Gibson, identical grounds in respect of the alleged error of law are found at AB 7 ‑ 8.
It is important that it be seen at the outset that a central foundation stone in terms of the applications for leave to appeal, centres around the cl 4.6, I have already set out. That clause is not the found in the Supply Contracts of June 2007, entered as between the parties to the two arbitrations (the 2007 Supply Contracts). Rather, cl 4.6 is found in the substitute contracts entered in November 2008 by Koolan and Mount Gibson with other iron ore purchasers. The substitute iron ore sale contracts were entered in a wake of terminations for breach of the 2007 Supply Contracts with Rizhao - which the learned arbitrator, in his reasoned arbitral awards, found to be justified. The terminations for breach occurred in November of 2008.
I will set out, for convenience, three of five aspects of alleged error of law in respect of each application for leave, which proceed as follows (see AB 3 ‑ 4):
[T]he arbitrator erred in law in :
(1)failing to find that, on a proper construction of clause 4.6 of the Substitute Contracts:
(i)the good faith negotiations required by that clause did not permit Koolan to advance the interests of the counter‑parties to the Substitute Contracts, and to sacrifice its own self‑interest by refusing to renegotiate the discount of 10%; and
(ii)Koolan's ability to negotiate was not limited to matters relevant to any change in circumstances that brought the clause into play;
(2)finding that Koolan's voluntary decision not to renegotiate the discount of 10% was 'reasonable', and failing to take such voluntary conduct into account in determining the damages payable to Koolan;
(3)failing properly to consider what good faith negotiations required, and did not require, in the face of clause 4.6, and in particular, failing to consider from an objective perspective what price may have been agreed, or determined, pursuant to clause 4.6 of the Substitute Contracts between the two contracting parties, each having regard to their own self‑interest, in determining the damages payable by Rizhao.

The substitute contracts

The four substitute contracts that were each entered in November 2008, are found in the AB respectively at AB 296, 347, 399 and 449. Clause 4.6, the centrepiece of the challenges now advanced under both applications for leave, will be found within the substitute contracts of 22 or 23 November 2008 between the Shougang parties, Koolan and MGIL, commencing at AB 310.
Relevantly (and common to all four substitute contracts), I will note the definitions in the substitute contracts of 'Hamersley Benchmark Price', which appears at AB 304 and of 'DMTU' at AB 303. The important definition of 'Price per DMTU' as, 'at any time means the Hamersley Benchmark Price less 10% at that time', is seen at AB 306.
A common dispute resolution clause is found as cl 20, in each substitute contact: see AB 328.
Of key relevance to each substitute contract is cl 21.7, which provides that the governing law of the substitute contracts is the law in force in Western Australia, and where applicable the Commonwealth of Australia. Moreover, the parties to the contracts submit to the exclusive jurisdiction of the Courts of Western Australia or any courts that may hear appeals therefrom in respect of any proceedings in connection with that agreement.
These clauses are replicated in each of the other three substitute contracts. In fact, clauses in the substitute contracts choosing the application of Western Australian law replicate the express choice of law provision and submission to the jurisdiction found in the 2007 Supply Contracts involving both Koolan and Mount Gibson - by reference to cl 21.7 of those original iron ore supply contracts of June 2007: see AB 200, 248.

Part V of the Commercial Arbitration Act

It is necessary to turn to the provisions of the Commercial Arbitration Act to make some mention of the more important provisions relied upon.
There is of course no right of appeal against the learned arbitrator's awards of 16 August 2010.
The position in respect of a potential curial challenge to such awards, is dealt with in pt V of the Commercial Arbitration Act. It can be seen immediately that the scope for challenge to an arbitrator's award is extremely truncated within pt V, in particular by s 38 of that Act.
I refer to s 38(2) which provides:
Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.
Section 38(4) then says:
An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement -
...
(b)subject to section 40, with the leave of the Supreme Court.
The basis upon which leave to appeal may be granted by a court is further constrained under s 38(5) which provides:
The Supreme Court shall not grant leave under subsection (4)(b) unless it considers that -
Two subparagraphs (a) and (b) then follow, imposing conjoint criteria:
(a)having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement; and
[I interpolate that the question of law raised by the present application is that the amount of approximately $US40 million being at stake, in terms of Rizhao's potential obligation for that amount and the potential undermining of that obligation in the event that leave to appeal is granted, and allowed, all indicates self-evidently, that Rizhao's rights could be substantially affected, assuming it could establish a question of law. So the threshold under s 38(5)(a) at least would otherwise be met.] However, the conjoint s 38(5)(b) further requirement goes on to impose in terms of criteria that:
(b)there is -
(i)a manifest error of law on the face of the award; or
[Again I pause to interpolate that the criteria under s 38(5)(b)(i) as regards demonstration of a manifest error of law is not relied upon by Rizhao in this application. Section 38(5)(b)(i) is not relevant to considerations which follow.]
However, s 38(5)(b)(ii) is relied upon by Rizhao and its criteria requires,
(ii)strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.
It will be seen that within s 38(5)(b)(ii), there are essentially dual criteria to be fulfilled. First is the demonstration by strong evidence of an error of law. But even if that is surmounted, there is a second threshold in (b)(ii) that provides for the error of law and its determination to be assessed as having broader application than simply the interests of the parties to the dispute - by a potential utility to the certainty of commercial law, more generally.
The substantial questions under s 38(5)(b) for determination on this leave application then may be summarised as, whether the error sought to be raised on both applications does raise a question of law (ie, not of fact) and then, whether there is strong evidence that the learned arbitrator here made that error, and whether more generally, the determination of that issue of law in the appeal may add, or be likely to add, to the certainty of commercial law.
Section 40 of the Commercial Arbitration Act is also relevant to this application. It provides, on the respondent's arguments, a potential 'shut‑out', even to the very truncated basis allowed for seeking to challenge an award laid down under the regime imposed by s 38.

Section 40 exclusion agreements

I turn to s 40. First I should note that the applications for leave to appeal under s 38(4)(b) are conditioned by being made subject to s 40. So there can be no grant of leave - and I am summarising the effect of s 40(1) - if there is in force an agreement in writing (which is defined and referred to in s 40 and s 41 as an 'exclusion agreement') between the parties to the arbitration agreement.
Section 40(3) says:
An agreement may be an exclusion agreement for the purposes of this section whether it is entered into before or after the commencement of this Act and whether or not it forms part of an arbitration agreement.
Arguments emerged in terms of a potential exclusion agreement here, which would debar Rizhao from seeking leave to appeal under s 38(2). They turn upon the 2007 Supply Contracts, and to cl 20 therein (see AB 198, 246) in those contracts.
The 2007 Supply Contract between Koolan and Rizhao can be found at AB 166.
The provision relied upon as an exclusion agreement by the respondents, in opposing these applications for leave, is cl 20.6 (AB 198). It provides, under a heading 'Arbitration award final':
(a)Any arbitral award shall be final and binding on the Parties;
(b)The Parties shall carry out any arbitral award without delay. The arbitral tribunal shall state the reasons upon which the award is based. No Party shall appeal to any court against an arbitral award which is properly and lawfully made in accordance with this agreement. (emphasis added)
A number of case authorities were cited to me in respect of exclusion agreements. Essentially, the argument of the respondent is that cl 20.6, read in overall context, is an exclusion agreement, for the purpose of s 40(1)(a), and rendering these applications for leave to appeal, impermissible. I was referred to the leading authority Raguz v Sullivan[2000] NSWCA 240; (2000) 50 NSWLR 236, and the observations of Spigelman CJ and Mason P of the New South Wales Court of Appeal. That decision in turn considered some earlier case authorities concerning exclusion agreements for the purposes of the New South Wales Act (the provisions of which are in like terms of the Western Australian Commercial Arbitration Act).
In Raguz, it was held by the Court of Appeal that the provision under consideration was an exclusion agreement. Hence its effect was to debar a challenge by way of an application for leave to appeal, even if there was shown to be an error of law the determination of which had a broad commercial application. Raguz confirmed that a base provision in a contractual arrangement between parties, merely providing that an arbitral award shall be 'final and binding', was not sufficient (see observations in the joint judgment at [87]) to constitute an exclusion agreement. So then, here, reference to the arbitral award being 'final and binding on the Parties' in cl 20.6(a), would not go far enough to constitute an exclusion agreement, for the purposes of s 40(1) of the Commercial Arbitration Act.
However, cl 20.6(b) goes further. See particularly, its last sentence, which I have identified in bold. The question then is whether that provision is sufficient to constitute a bar as an exclusion agreement against Rizhao's applications for leave to appeal challenging the arbitral awards.
I prefer not to decide this matter on the s 40 point, on the basis that it seems to me overall, that the third sentence within cl 20.6(b), may be problematic. The sentence begins:
No Party shall appeal to any court against an arbitral award.

If the sentence had finished at that point, I think such words alone would have been clear, definitive and final enough (with sufficient similarity to the clause considered in Raguz) to constitute an effective exclusion provision for the purposes of s 40 of the Western Australian Act. However, the concluding words of the sentence - 'which is properly and lawfully made in accordance with this agreement' - seem to me to deliver uncertainty. What precisely their intent and effect is, in overall circumstances, is not clear from the provision.
The law after Raguz appears to be that an exclusionary agreement does have to expressly identify itself as being an exclusionary agreement for the purposes of s 40(1) of the Commercial Arbitration Act, in order to effectively constitute a provision of that status. But some clear drafting in those terms would no doubt help.
In the present case, there seems to me to be sufficient doubt over the cl 20.6(b) construction as an exclusion agreement under s 40, to compel me to go further, to assess the substantive leave to appeal arguments of Rizhao, made by reference to s 38(5) and Rizhao's arguments about strong evidence of error of law and of a potential applicability of the argued error of law to commercial law generally.
That approach also obviates the need to resolve some further subsidiary s 40 issues raised by Rizhao against exclusion, in relation to whether the accepted fact of the termination of the 2007 Supply Contracts on 6 November 2008 carries a consequence that cl 20.6 ceased to be in force, and using 'force' in the proviso context in s 40(1) of the Commercial Arbitration Act. The argument of Rizhao was that in termination circumstances, any exclusionary agreement that existed had, as a provision, then been substantively terminated as to its future performance, upon the acceptance of Rizhao's repudiatory breach or renunciation. When that occurred, the effect, in consequence would have been to remove any former applicability of cl 20.6, so it is argued by Rizhao.
There are some difficulties, I think, in that analysis, by reason of lines of authority considered by Allsop J (as his Honour then was whilst a member of the Full Federal Court) in Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192, 219 ‑ 229. That was a decision decided in the context of perhaps a slightly different question, concerning the continued applicability of a provision submitting parties to dispute resolution by arbitration, and following a line of authority including a decision of Kirby P (as his Honour then was) in the New South Wales Court of Appeal, in Ferris v Plaister (1994) 34 NSWLR 474.
That line of authority established firmly and conclusively that arbitration provisions and submissions to arbitration do remain viable and in force, notwithstanding a contractual termination.
The point raised here is similar, but distinct, as regards the continuing force of an exclusionary agreement provision, post a termination. It is not necessary for me to resolve.
There is also a potential Rizhao argument against exclusion, arising out of ramifications of the International Arbitration Act 1974 (Cth) and some amendments which were carried by amending Act No 97 of 2010, which seems to have taken effect after 5 July 2010. The substantive changes brought under those 2010 amendments to the Commonwealth Act, look to have had the effect of removing and replacing the former s 21 of the International Arbitration Act, as it had stood prior to July 2010. Section 21 had allowed the parties to, effectively, 'opt out' of the provisions of a model law, by agreement.
But it would seem that the effect of the 2010 amendments will be to remove the opt‑out provision. The new s 21 provides that if the model law applies to the arbitration, that the law of a state or territory relating to arbitration does not apply to that arbitration.
The consequence of this Rizhao argument, were it necessary to be pursued, gives rise to arguments by reference to s 40(5) of the Commercial Arbitration Act - which provides that an exclusion agreement shall be of no effect in relation to an award made on, or a question of law arising in the course of an arbitration being an arbitration under any other act (such as under the International Arbitration Act (as amended) and bearing in mind the arbitrator's observations about it being common ground that these were international arbitrations: see AB 16 par 19(g) and AB 101 par 19(g).
Since I do propose to render a substantive decision upon the leave applications in terms of s 38(5)(b)(ii) as to error of law, this means that I will not need to resolve the s 40 implications of issues carried under the 2010 amendments concerning international arbitrations and the mandatory model law that is found scheduled to the Commonwealth Act.

Substantive issue as to leave applications made under s 39(5)(b)(ii) of the Commercial Arbitration Act

I turn then to the substantive issue, which is the question of whether the requirements of s 38(5) in terms of thresholds for leave are surmounted by Rizhao.
It is necessary in this context to refer first to the learned arbitrator's final award and reasons. It is convenient to do that by reference to the Koolan award, which commences at AB 9. At AB 58 par 148, the learned arbitrator said:
It follows from XII [of his reasons] that the Claimant is entitled to damages in respect of the three missed shipments and also, in principle, to loss of bargain damages.
I mention without quoting what the learned arbitrator said in his reasons at the ensuing par 155 AB 60; par 158 AB 61, 161 ‑ 164; and par 2165 AB 66 ‑ 67 - before he came to address the issues which are the subject matter of the substantive challenge under the applications for leave to appeal.
For Koolan, they are found at AB 79, commencing at par 202 in the learned arbitrator's reasons, as he turned to Rizhao's arguments for limiting the extent of Koolan's entitlement to loss of bargain damages to a particular date.
At the end of par 203, after rejecting an argument (which is no longer relevant), the learned arbitrator concluded, 'there is no justification for confining damages to losses suffered before 15 March 2010'.
The arbitrator then moved, relevantly to this leave application, to address another Rizhao argument, made by reference to asserted implications arising under cl 4.6 in the substitute contracts. The arbitrator then said at par 204:
The Respondent argued, alternatively, that loss of bargain damages should be confined to a period ending on 30 October 2010. The basis of this argument was the following feature of the APAC Shougang long term contracts. It is convenient to refer only to the Shougang contract. Price per DMTU is defined to mean, at any time, Hamersley Benchmark Price less 10%. Clause 4.6 provides:
'4.6New benchmark index
If the Hamersley Benchmark price ceases to exist and a new benchmark index becomes the new standard market long term iron ore benchmark index, the parties shall use all reasonable endeavours to negotiate in good faith and agree a price in lieu of the Price per DMTU and/or a calculations methodology, which shall apply for future price periods.'
It is common ground that both conditions are satisfied, that is, that earlier this year the Hamersley Benchmark Price ceased to exist and that a new benchmark index became the new standard. It is also common ground that the dispute resolution provisions of the contract, including the arbitration clause, apply to setting a new price. Mr Tonkin gave evidence that negotiations are under way. However, he made it plain that the Claimant's approach to those negotiations is not that the new price is completely at large, so that the existence and extent of the discount is itself up for re‑negotiation. He said that MGI's approach to the good faith negotiations was, in effect, to seek a new price that fairly reflected the effect of the change in index. He was not seeking to take an opportunity for a complete price revision. He regarded the good faith negotiations as aimed at making any price adjustment appropriate to reflect the change in circumstances which brought clause 4.6 into play, not as a complete and unfettered reconsideration of market price. This gave rise to an issue, accepted by both counsel to be an issue of causation, formulated by counsel for the Respondent in final argument as follows: knowing that the evidence shows that the claimant's ore would now achieve the current equivalent of benchmark price without a structural discount, is the refusal to renegotiate the 10% so unreasonable as to defeat a further claim for damages?
The premise upon which the last question was formulated is contentious, but it is clear that the market conditions today are substantially more favourable to sellers than they were in October‑November 2008, and that alone is sufficient to raise the issue that has been agitated [204] ‑ [205].
I interpolate, as to the temporal context of the arbitrator's observations at this point in his reasons, that this was an arbitration conducted in the middle of 2010 by the learned arbitrator. That was the context of his observation that negotiations in terms of cl 4.6 in the substitute contracts as referred to, were 'under way', but (inferentially), had not then been completed. The arbitral awards were subsequently delivered, on 16 August 2010.
That is the temporal context for the Rizhao argument that there was an opportunity by reason of cl 4.6, essentially as from 30 October 2010 for Koolan (and Mount Gibson) to renegotiate with the APAC and the Shougang parties, the sale price for iron ore sold to these parties. Such a renegotiated price would be more reflective of what had been assessed at that point as an improvement in world iron ore market conditions - in contrast to a lower iron ore price as at October and November 2008 - when all the substitute contracts had been entered, following the termination of the 2007 Supply Contracts by reason of Rizhao's breach.
The substitute contracts, of course, were entered in November 2008, in circumstances where there had been found to be a renunciation of the obligations of performance under the original 2007 Supply Contracts by Rizhao. The learned arbitrator's remarks at par 204 were made in the context of his earlier findings as to breach and the respondent's entitlement to loss of bargain breach damages, assessed against Rizhao.
It is in that overall context that par 206 of the arbitrator's reasons are to be viewed, where the learned arbitrator concluded:
I would answer the question formulated by counsel in the negative. There is much to be said for Mr Tonkin's view that cl 4.6 and the good faith negotiations it contemplates, should be aimed at responding to a certain change by making such price adjustment as reasonably reflects or allows for that change. He did not accept that, once the change that triggers cl 4.6 occurs, the previous history of the contract is to be disregarded and the price is to re‑negotiate afresh, unfettered by any considerations of how the original price came to be set. Mr Tonkin's approach is reasonable, and the consequences for which the respondent contends, in particular the consequence as to causation, do not follow.
I believe there is significance in the arbitrator's reference, which is seen to be expressed in both pars 204 and 206, to the issue being one of 'causation', and to this having been accepted by both counsel in the arbitration. I refer to the formulation of the causation question arising for determination at par 204, and then, the way that causation question is answered at par 206 by the arbitrator.
Causation, of course, is always a question of fact.
Questions of fact do not provide a sufficient foundation in order to establish error of law, for the purposes of meeting the first threshold that must be surmounted by an applicant for leave under s 38(5)(b)(ii) - in terms of identifying, by strong evidence, that the arbitrator or umpire has made an error of law.
The overall context of pars 204 and 206 is mitigation of damages, where there is already an entitlement established to loss of bargain damages, for contractual breach. In that context the concepts of 'causation' and 'reasonableness' - in terms of a court's assessment of the innocent party's steps taken (ie, steps by the party not found to be in breach) in seeking to mitigate its damages, or the damage position in which it finds itself exposed, by reason of a breach - are used with some conceptual intersection: see Koch Marine Inc v D'Amica Societa di Navigazione ARL [1980] 1 Lloyd Rep 75, 88 (column 2) (by Goff J, as he then was).
It seems to me, that the learned arbitrator's remarks at pars 204 and 206 by reference to 'causation', were made in the context of assessing the reasonableness of attempts to mitigate losses ‑ by the innocent contracting parties, that is, by Koolan (and Mount Gibson), by entering into the substitute contracts in November 2008 with new purchasers for its iron ore that was no longer going to Rizhao.
Koolan entered those substitute contracts in November 2008, post the global financial crisis. By then, the market for iron ore had turned from being very much a seller's market in 2007, to a buyer's market.
But, notwithstanding consummation of the substitute contracts in November 2008, there arose thereafter, a cessation for the purposes of the substitute contracts, of the concept known as the Hamersley Benchmark Price (HBP).
That concept (HBP) had been used, as between the parties in the substitute contracts, to set sale price. The subsequent cessation in existence of an HBP, triggered the applicability of cl 4.6. That in turn gave rise, in 2010, to an opportunity under each substitute contract for a further price negotiation on the substitute contracts, by reason of cl 4.6.
That is the context in which the arbitrator's observations at pars 204 ‑ 206, are made.
As to the concept of mitigation of damage, it is helpful, I think, to refer to some case authorities that counsel on both sides were good enough to refer to me to, in arguments which were submitted both in writing and orally.
In this State the Court of Appeal has accepted, see Morrison v Town of Victoria Park [2007] WASCA 164 [38], that longstanding common law mitigation principles in Dunkirk Colliery Company v Lever(1878) 9 Ch D 20 are applicable. See also Payzu Ltd v Saunders[1919] 2 KB 581.
Those mitigation authorities establish, conclusively, that when an innocent party that is exposed to a breach of contract, is taking steps in order to mitigate its damages, the assessment as to the reasonableness of the steps that are taken, by way of mitigation against its damage, raise only questions of fact, and not questions of law. Again, that is relevant to the criteria under s 38(5)(b)(ii), which requires an error of law, not of fact, to be shown.
It is helpful in a context of mitigation of damage to refer to a 2008 article by Harvey McGregor QC, The Role of Mitigation in the Assessment of Damages, which was cited. The article contains a useful analysis in respect of mitigation rules. The article is published in a text in Contract Damages: Domestic and International Perspectives, Saidov K Cunnington (eds) 2008 (Hart). I refer without citing to what that learned author says at page 331 ‑ 332, in particular, to two principles he identifies as both favouring the aggrieved party, in a context of an assessment of damages.
The first principle is established by reference to an early decision Roper v Johnson (1873) LR8CP 167. It is that the burden of proof on an issue of mitigation (ie, as to showing the unreasonableness of a step taken in attempted mitigation of damage by the party not in breach), lies on the breach party. That position is in contrast to an assessment as regards remoteness of damage, where the onus falls on the party seeking to prove its damages, to show that the damages it claims were reasonably foreseeable losses (ie, were not too remote).
The second important mitigatory principle identified by McGregor QC, is set out at page 332. The author says:
The second feature favourable to the complaining party is that the standard of reasonableness is not an exacting one. The rationale for this has been best put by Lord Macmillan in Banco de Portugal v Waterlow [1932] AC 452, 506.
In this area I was also assisted, as to the state of the law, by a very contemporary analysis of principles of mitigation found in a decision of the Singapore Court of Appeal in The 'Asia Star' [2010] 2 Lloyd's Rep 121, particularly in the reasons for judgment of V K Rajah JA between [22] ‑ [32] commencing under the heading, 'Overview of the law of mitigation'. See the full and helpful analysis of case authority that follows.
In particular, I refer to the conclusion at [32] in V K Rajah JA's reasons, where the learned justice of appeal said (and I observe in passing that I do not believe that anything there said as to the law is contrary to the common law applicable in Western Australia as regards mitigation principles in respect of damages for breach of contract and loss of bargain damages):
The concept of reasonableness in the context of mitigation is a flexible one. In essence, it bars an aggrieved party from profiting or behaving unreasonably at the expense of the defaulting party, and encapsulates complex interplaying notions of responsibility and fairness. As with any principle of law that encapsulates notions of fairness, the principle of mitigation confers on the courts considerable discretion in evaluating the facts of the case at hand in order to arrive at a commercially just determination. The principle embodies a fact‑centric flexibility which, whilst remaining in harmony with sound business practice, stands in vivid contrast to the strictness with which rules in other areas of contact law are applied.
Those observations, as to a factual ('fact‑centric') analysis, are of clarifying assistance here, I think, in the overall context of Rizhao searching for an error of law, (more correctly, showing strong evidence of an error of law).
If the issue raised, on the $US40 million leave point, as it might be colloquially referred, is really just an argument over the reasonableness of steps in mitigation taken, or not taken, by Koolan and by Mount Gibson - in terms of their approach to a negotiating opportunity in 2010, in their substitute contracts with parties that they contracted with, in circumstances which arose that triggered cl 4.6 (by reason of the cessation in the existence of a HBP), then a characterisation of the Rizhao challenge as simply being criticisms as to the reasonableness of steps and decisions taken by Koolan Iron and by Mount Gibson - would mean that the point of challenge (even if correct), would be only raising matters of fact, rather than errors of law. That of course will not be sufficient, for the purposes of meeting s 38(5)(b)(ii).
However, Rizhao's arguments were fashioned by accepting essentially this body of law and the legal characterisation of mitigation or causation issues as being factual.
Nevertheless, Rizhao's challenge began from the premise that the correct understanding of cl 4.6 in the substitute contracts and its proper construction and interpretation as a clause in a contract, was a matter of law, not fact.
Rizhao then says that the analysis of cl 4.6 found in the learned arbitrator's reasons, demonstrates that he failed to undertake a sufficient or correct analysis of cl 4.6 in the substitute contracts. On that basis the process derailed, it is said.
There was, it is put, a failure by the learned arbitrator to understand the proper construction of cl 4.6 as a matter of law. Rizhao argues that properly construed cl 4.6 in the substitute contracts meant that Koolan and Mount Gibson, by reference to a phrase, '[s]hall use all reasonable endeavours to negotiate in good faith and agree a price in lieu of the price per DMTU', had the obligation to bear in mind not just the self-interested position of Koolan or Mount Gibson, but also to take into account the damages exposure position of Rizhao. So it is argued that any failure by Koolan and Mount Gibson to seize an opportunity in 2010, in a better world iron ore market for sellers (than in 2008), to renegotiate with purchasers under the substitute contracts, a higher iron ore price, and without fetter of a 10% discount, would not be a reasonable endeavour to negotiate in good faith, on the correct understanding of cl 4.6.

Furthermore, it was said for Rizhao, that the arbitrator's error, in failing to properly construe and reach the correct interpretation of cl 4.6, infected his subsequent approach to mitigation and his assessment of the reasonableness of what was done. This, it was said, also demonstrated error of law, on a basis that the correct questions in terms of the assessment of reasonableness, in overall context, had never been posed.
Essentially then, Rizhao argued the mitigation assessment exercise had miscarried on this point. This was, Rizhao said, a sufficient basis in order to demonstrate error of law to sustain a grant of leave.
It was further said by Rizhao that the following s 38(5)(b)(ii) hurdle, in terms of it demonstrating that the error of law was not only strongly established, but was of a broader commercial application, in that the error question's determination - may add or is likely to add substantially to the certainty of commercial law - was easily established here - by reference to context and the fact that clauses like cl 4.6, which give an opportunity to a party in an ongoing contractual relationship to renegotiate a price, could be of very considerable significance to the commercial community, particularly to West Australian commodity exporters, familiar with clauses of this kind - they being clauses commonly incorporated into contracts that commodity exporters enter from time to time. Therefore, the point's determination was of a broader commercial utility, Rizhao said.
Rizhao's arguments were all strongly opposed by the respondents on each leave application.
They say essentially, that the issues sought to be raised, including any assessment as to what amounts to good faith in negotiations, are solely questions of fact - not matters of law.
They also say that there is no evidence at all to suggest that cl 4.6 that is here in question, is of any broader applicability than just to the parties who have entered the substitute contracts, in the contexts which have been described.

Determination as to leave

The leave question under s 38(5)(b)(ii) falls for my determination as to whether the thresholds established in order to demonstrate an arguable error of law and an error of law of broader commercial applicability, have been established.
This needs to be answered and addressed in the overall context of the learned arbitrator's reasons for decision, read in the context of his assessments as to loss of bargain damages for breach against Rizhao.
I have referred already to the paragraphs which I identified in the reasons of the learned arbitrator, as regards his assessment of the entitlement to loss of bargain damages, in a context of the early termination for breach, of long-term 2007 Supply Contracts and the following arguments made, in terms of mitigation of damages or, as the learned arbitrator phrased it, by reference to an issue posed and accepted by both counsel before him, namely an issue of causation.
In my assessment, the observations of the learned arbitrator at between pars 204 ‑ 206, essentially deal with what is a factual question. It is true that cl 4.6 features centrally in the determination of that factual question. But it features, I think, not on a basis of the learned arbitrator erring, by accepting Mr Tonkin's subjective view as to a proper interpretation of that clause, as a matter of its contractual construction. Rather, the reasons when read in overall context, are, I think, the learned arbitrator's assessment as to the reasonableness of the conduct of the respondent parties (not being in breach) - after being placed, by Rizhao's breach, in a position of needing to take steps to mitigate their damages. The arbitrator's assessment is as to how those innocent parties responded to the opportunity provided by a cessation of the HBP, whilst the substitute contracts (long‑term contracts entered in substitution for the original supply contacts with Rizhao, albeit at lower ore prices), are on foot.
It is clear, from earlier reference in the learned arbitrator's reasons for decision to the Sale of Goods Act 1895 (WA) s 49, particularly the flexibility he refers to, at par 161, from s 49(3), that the task that engaged the arbitrator in dealing with this Rizhao argument, was framed in the overall context of his assessing the reasonableness of the responses by the innocent parties, to the position in which they were placed by Rizhao.
Thus par 204 of the reasons refers to Mr Tonkin's approach to the negotiations, by reference to the opportunity that cl 4.6 gave, in terms of renegotiating price.
The issue as to whether or not it was unreasonable for Mr Tonkin, on behalf of the innocent parties, to take the approach that those companies did, and which he identified in the negotiations - by approaching the negotiations on the basis that a new price to be negotiated in 2010 was not completely at large, so that the existence and extent of a price discount was not an issue up for wholesale renegotiation - seems to me to be entirely a question of fact.
A determination of a question of fact challenged, or sought to be challenged through these grounds of appeal, does not qualify as identifying an arguable error of law, let alone by the words of s 38(5)(b)(ii), as strong evidence that there had been an error of law.
On that basis, I find that the first threshold required to be surmounted by Rizhao, in order to get through the gateway to obtain leave, has not been surmounted.
Moreover, I would accept the submission of the respondents that the error point sought to be raised by Rizhao by reference to the terms of cl 4.6 and the approach taken to its potential application, in a context of a renegotiation of a price, seems to me to be a fairly unique fact situation and not a broadly applicable set of underlying circumstances. I accept there may be clauses which provide for price renegotiation opportunities, in certain circumstances. But it seems to be that is not so much the point at issue between pars 204 ‑ 206, correctly understood.
Rather, the point seems to me to be an assessment as to a particular party's own response to being placed in a position where it is entitled to loss of bargain damages and whether it has taken reasonable steps to mitigate, in its particular circumstances at the time.
The two principles that I identified from the article from McGregor QC, intrude into that analysis. Moreover, it seems to me that they both only raise factual considerations, not errors of law.
Therefore, the circumstance in which the HBP ceased to exist in 2010, seems to me to be a rather unique situation of fact. It does not, I think, manifest the broader applicability required in order for the second limb of s 38(b)(5)(ii) to be satisfied.
For those reasons, I refuse leave to appeal.