Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd

[2021] NSWSC 24

Supreme Court

New South Wales

Medium Neutral Citation:

Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd [2021] NSWSC 24

Hearing dates:

7, 8, 9, 10, 11, 14, 15, 18 and 21 December 2020; further written submissions ending 23 December 2020

Date of orders:

29 January 2021

Decision date:

29 January 2021

Jurisdiction:

Equity - Expedition List

Before:

Parker J

Decision:

See [659]-[664]

Catchwords:

CONTRACTS – construction – interpretation – co-location of refinery plant – owner’s obligation to make capital payments based on operator’s installation expenditure – later informal variation for further expenditure – whether effective – operator’s obligations to maintain expenditure records and submit to audit – whether complied with – expert determination of “written down value” – whether binding – whether owner entitled to leave plant behind on termination of contract – whether owner obliged to remove plant on termination of contract

CONTRACTS – breach of contract – co-location of refinery plant – operator’s obligation to maintain co-located plant – whether obligation breached – whether owner’s obligation to pay tolling fees dependent on operator’s compliance – whether tolling fees already paid recoverable as damages – owner contractually entitled to remove plant – operator’s obligation to co-operate – whether obligation breached by interfering with owner’s contractors – operator’s obligation to manage refinery feedstock – whether obligation breached by mixing contaminated and non-contaminated feedstock

TORTS – interference with goods – conversion – co-location of refinery plant – owner contractually entitled to remove plant – whether interference by operator with owner’s contractors would amount to conversion of plant

EQUITY – equitable remedies – injunction – trespass – co-location of refinery plant – plant abandoned on land by owner after termination of contract – whether abandonment effective – whether damages an adequate remedy – mandatory injunction for removal

GUARANTEE AND INDEMNITY – discharge of guarantor -– variation increasing principal’s liability to creditor – whether surety consented – whether creditor breached record-keeping duties and obligation to co-operate with principal – whether surety discharged by such breaches

EVIDENCE – character evidence – tendency rule – application of rule to corporate entity – probative value

Legislation Cited:

Polychlorinated Biphenyl (PCB) Chemical Control Order 1997, ord 4.17

Evidence Act 1995 (NSW), pt 3.6, ss 38(1)(b), 97, 98, 135(c)

Cases Cited:

Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99

Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558

Cenric Group v TWT Property Group [2018] NSWSC 1570

Combined Insurance Company of America v Trifunovski (No 4) [2011] FCA 271

Elomar v R [2014] NSWCCA 303

Gilgandra Marketing Co-operative Ltd v Australian Commodities & Merchandise Pty Ltd [2011] NSWSC 16

Hillam v Iacullo (2015) 90 NSWLR 422

Hughes v The Queen (2017) 263 CLR 338

Jacara Pty Ltd v Perpetual Trustees WA Ltd (2000) 106 FCR 51

Mackay v Dick (1881) 6 App Cas 251

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500

Okwume v Commonwealth of Australia [2016] FCA 1252

Orr v Lane (1951) 52 SR (NSW) 37

Petkovski v Huang [2018] NSWSC 1667

Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355

Re Gillie (1996) 70 FCR 254

Reliance Financial Services Pty Ltd v Allyma Express Holdings Pty Ltd (No 2) [2018] NSWSC 1776

Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596

Thomas v Van Den Yssel (1976) 14 SASR 205

Tito v Waddell (No 2) [1977] Ch 106

TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4

Vincent v State Bank of NSW Ltd (Supreme Court of New South Wales, Young J, 30 July 1993)

Texts Cited:

Heydon, JD, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015)

Sappideen, C and P Vines, Fleming’s The Law of Torts (Thomson Reuters, 10th ed, 2011)

Category:

Principal judgment

Parties:

Southern Oil Refining Pty Ltd (Plaintiff)
Hydrodec Australia Pty Ltd (First Defendant)
Hydrodec Group Plc, UK Company Number 05188355 (Second Defendant)
Greenbottle Re-Refining (UK) Limited, UK Company number 09237640 (Third Defendant)

Representation:

Counsel:
JJ Hutton/E Bartley (Plaintiff)
T Rollo (First and Second Defendants)

Solicitors:
Cooper Grace Ward (Plaintiff)
Carroll & O’Dea Lawyers (First and Second Defendants)

File Number(s):

2019/310622

Publication restriction:

Nil

Judgment

1. These proceedings arise out of a commercial dispute concerning an oil re-refining venture at an industrial site at Bomen. Bomen is a suburb of Wagga Wagga in country New South Wales.

2. As its name suggests, re-refining is a process which takes waste oil and by refining it again removes the contaminants so that it can be reused. The process can be used for various different grades and types of oil. The venture in the present case concerned the re-refining of transformer oil. That is a type of oil used in electrical transformers, particularly in electricity substations.

3. The second defendant, Hydrodec Group Plc (“HG”) is the holding company for a corporate group which specialises in the re-refining of waste transformer oil. HG’s shares are listed on the London Stock Exchange. Except where it is necessary to refer to specific company, I will refer to the corporate group collectively as “Hydrodec”.

4. Hydrodec’s transformer oil re-refining business uses proprietary technology which it has commercialised and for which it holds patents in various countries around the world. The re-refined product which results from the process is called “SUPERFINE”.

5. The first defendant, Hydrodec Australia Pty Ltd (“HA”) is an indirectly wholly owned subsidiary of HG. Until 2018 HA carried on a transformer oil re-refining operation in New South Wales, first at Young (also in country New South Wales) and then at Bomen. This was one of Hydrodec’s two transformer oil re-refining operations. The other was (and is) at Canton, Ohio, in the United States of America.

6. Hydrodec’s site at Young was (and still is) owned by it. The Bomen site is not. It belongs to the plaintiff, Southern Oil Refining Pty Ltd (“SOR”). The site is mainly occupied by SOR’s own oil re-refining plant. That plant handles a different type of waste oil, namely lubrication oil from cars and other machinery. The process it uses is different from Hydrodec’s.

7. The core of Hydrodec’s process is a collection of refining plant and equipment known as the “Hydrotreater”. The Hydrotreater for the New South Wales operation was installed at the Young site in 2007.

8. In November 2013 HA and HG entered into a written contract with SOR, styled “Transformer Oil Plant Co-location and Tolling Agreement” (the “Co-location Agreement”). That Agreement provided for the Hydrotreater and some related plant and equipment to be moved from the Young site to the Bomen site, where it was to be maintained and operated by SOR. Once the Hydrotreater was operating at Bomen, HA was to pay fees to SOR, referred to in the Agreement as “tolling fees”, for a ten year term (subject to earlier termination of the Agreement).

9. Installation of the Hydrotreater at the Bomen site required the development of supporting infrastructure. Under the Agreement most of this was to be provided by SOR at its cost, and HA was to make regular payments, referred to in the Agreement as “capital charges”, to SOR by way of reimbursement of SOR’s capital expenditure. In certain circumstances a capital payment was also required on termination. HA’s obligations to pay the tolling fees and the capital charges were effectively guaranteed by HG, which undertook to procure that HA made those payments.

10. The Co-location Agreement was put into effect and the Hydrotreater began operation at the Bomen site in April 2015. It did not prove as profitable as Hydrodec had hoped. In the first half of 2018, Hydrodec decided to sell its Australian operation so as to concentrate on its larger and more prospective re-refining operations in the United States. There were some negotiations between SOR and Hydrodec for SOR to buy Hydrodec out but the parties could not agree on terms. In July 2018, in accordance with a discretionary power conferred on it by the Co-location Agreement, Hydrodec gave SOR 360 days’ notice of termination of the Agreement.

11. Following the giving of the notice, the Hydrotreater continued to operate, albeit at a limited capacity owing to shortage of feedstock. But a few weeks later, in August 2018, the Hydrotreater was shut down by SOR. The reason for the shutdown was that some of the components of the Hydrotreater required, or at least were said to require, certification or replacement so as to ensure safety. As events transpired, the Hydrotreater remained shut down until the expiry of the 360 day notice period in July 2019.

12. Hydrodec was unsuccessful in finding a buyer for its Australian operations. Apart from some components which had been removed for repair, the Hydrotreater and its associated plant and equipment remained at Bomen when the Agreement expired. The Hydrotreater itself remained HA’s property upon termination of the Agreement. So too did a group of receiving tanks erected at the Bomen site. The remaining infrastructure which had been installed to accommodate the Hydrotreater belonged to SOR.

13. At the time that the Agreement expired, the receiving tanks contained approximately 430,000 litres of unprocessed transformer oil feedstock belonging to HA. Most of that oil (approximately 390,000 litres) exceeded the applicable regulatory limit for PCBs (polychlorinated biphenyls). PCBs are carcinogenic and are subject to strict environmental controls. It was a feature of Hydrodec’s re-refining process that it would remove PCBs, along with other contaminants in the oil, when processing the feedstock into SUPERFINE. But if not processed through the Hydrotreater the contaminated oil required removal and the affected facilities required decontamination.

14. At the termination of the contract the Hydrotreater remained a valuable piece of plant. HA has entered into a contract with Greenbottle Re-Refining (UK) Limited (“Greenbottle”) to sell the Hydrotreater to it. Greenbottle is a company controlled by Mr Andrew Black. He is a wealthy British investor who is a director of, and a major investor in, HG.

15. Under the contract, HA is to deliver the Hydrotreater to Melbourne, from where Greenbottle will ship it to the United Kingdom to operate it. Property in the Hydrotreater will not pass to Greenbottle until the Hydrotreater reaches Melbourne. The contract price is $2 million.

16. Hydrodec has been saying since before the Co-location Agreement expired in July 2019 that it proposed to remove the Hydrotreater from the Bomen site. But Hydrodec did not wish to remove the receiving tanks and the PCB-contaminated oil in them, no doubt because the cost of removal and decontamination would exceed the residual value (if any) of the tanks and the oil. In October 2019 Hydrodec purported to disclaim ownership of the tanks and the oil in favour of SOR.

Issues for determination

17. As already mentioned, SOR is the plaintiff in these proceedings and HA and HG are the first and second defendants. HA has cross-claimed against SOR. Greenbottle is named as the third defendant but has played no active role in the proceedings.

18. The claims and counter-claims in the proceedings, as pleaded, fall into five areas of dispute. They can be summarised as follows.

19. First, there is a dispute about the tolling fees. HA failed to pay the fees for the period from June 2019 onwards. SOR claims from HA (and from HG as surety) the outstanding balance up to the end of the Agreement in July 2019. The amount is approximately $400,000.

20. For its part, HA contends that it has overpaid, because it was not obliged to pay during periods when the Hydrotreater was not operating. HA alleges that the shutdown resulted from breaches by SOR of its maintenance obligations under the Agreement. HA by its cross-claim seeks repayment of $2.4 million.

21. The second area of dispute concerns the capital charges. SOR claims from HA (and HG as surety) payment of approximately $1.177 million. This claim consists of unpaid monthly charges from June 2019 onwards ($65,000) and the balance payable on termination of the Agreement ($1.112 million).

22. One of the items of capital expenditure which underlies SOR’s capital charge claims is a sum of approximately $340,000 spent by SOR on the construction of a driveway at the Bomen site in 2016-2017. The driveway provided access to the area of the site occupied by Hydrodec’s plant. SOR claims that this sum is properly included in the calculation of the capital charges due, but if it fails in its contractual claim it asserts a claim to payment both from HA and HG, by way of estoppel.

23. These claims are denied by HA. HA contends that SOR’s capital cost figure (putting aside the cost of the driveway, for which it completely denies responsibility) is incorrect and the actual amount of SOR’s qualifying capital expenditure has never been properly determined in accordance with the Agreement. By its cross-claim HA seeks orders in the nature of an account to determine the amount properly due. HA also contends that a valuation obtained by SOR which forms an integer of the termination balance component of the claim was not properly done.

24. The third area of dispute concerns HA’s remaining plant and equipment on the site, principally the Hydrotreater and the receiving tanks. SOR contends that upon termination of the Co-location Agreement, HA had a contractual obligation to remove its plant and equipment. Alternatively, even if there was no contractual obligation, by leaving its property on the site, HA is committing a trespass.

25. As will be seen, there appears to be no dispute now that HA will remove the Hydrotreater. SOR earlier sought a mandatory injunction requiring HA to remove all of the plant, including the receiving tanks. But SOR is now, so far as the tanks are concerned, claiming damages for the cost of removing them.

26. HA contends for the opposite interpretation of the relevant provisions of the Agreement. Its argument is that, on the proper construction of the Agreement, it was entitled to leave any of the plant and equipment which it owned on the site when the Agreement expired. On this argument, decontamination and removal of the receiving tanks, which HA has purportedly disclaimed, is SOR’s responsibility.

27. HA alleges that, although SOR formally consented to the Hydrotreater’s removal, in fact SOR frustrated HA’s attempts to arrange for contractors to remove it. HA contends that by doing so SOR breached its obligations under the Agreement. HA also contends that SOR converted the Hydrotreater, and it is entitled to damages from SOR representing the value of the Hydrotreater.

28. Despite its conversion claim it became clear at the trial that HA would still prefer, if it can, to remove the Hydrotreater and have it delivered to Melbourne in accordance with the contract is has with Greenbottle. HA sought a mandatory injunction of its own requiring SOR to permit removal of the Hydrotreater (but not the receiving tanks). As I understood HA’s case, damages for conversion were only pursued if for some reason this order proved ineffective.

29. Given that by the end of the hearing the parties had apparently agreed on the removal of the Hydrotreater, I invited them to agree on orders being made to get the process underway before I reserved my decision. The parties were unable to agree at that time. They may have been able to do so since; if that has not happened by the time this judgment is delivered, it can be addressed in the course of making orders to give effect to the judgment.

30. The fourth area of dispute concerns the PCB-contaminated oil in the receiving tanks. Initially SOR sought orders that this oil be removed along with the Hydrotreater and the receiving tanks. The claim was resisted by HA on the ground that responsibility had passed to SOR. But shortly before the trial took place, SOR found a buyer for the oil, who has removed it at no cost to SOR. SOR’s claim has thus fallen away.

31. There remains however a claim by HA associated with the oil. It was originally delivered to the Bomen site in more than one batch. Only about 80,000 litres were, when delivered, contaminated with PCBs. But those deliveries became mixed in the receiving tanks with other feedstock deliveries which were not PCB-contaminated. The result was a mixture which exceeded the relevant environmental limit for PCB contamination.

32. HA alleges that the effect of this mixing was to “damage” the feedstock not contaminated with PCBs by depriving that feedstock of the market value it would otherwise have had if removed from the plant and sold. HA alleges that, although the mixing of the oil would have been irrelevant had it been processed by the Hydrotreater, that mixing nevertheless represented a breach of SOR’s obligations under the Agreement. The damages claimed were said in opening to be about $150,000. The claim is disputed by SOR both on liability and quantum grounds.

33. The final area of dispute concerns SOR’s claims against HG. HG propounds various defences to the claim against it which mean that, so it contends, it is not liable for the tolling fees and capital charges even if SOR’s claims against HA succeed.

34. HG contends in particular that the arrangements with respect to the driveway amounted to a variation of the Agreement without its consent which discharged it as surety. For the same reason HG contends that SOR has no entitlement to payment from it for the cost of the driveway by way of estoppel outside the Agreement, even if SOR does have such an entitlement as against HA.

35. HG propounds a further defence to the termination balance component of SOR’s capital charge claim. HG purported to terminate the Agreement between itself and SOR, and thus to terminate its obligations as surety, in September 2019 and again in November 2019. At the time, the quantum of the capital payment due on termination of the Agreement had not been finally determined, because the necessary valuation had not been completed. HG contends that its termination was valid and that this means that it cannot be liable for the capital payment even if HA is liable.

36. HG seeks to justify its termination by alleging that SOR had committed repudiatory breaches of the Agreement. For the first termination, HG relies upon alleged breaches of SOR’s record-keeping obligations. For the second, HG relies upon alleged failure to co-operate in the removal of the Hydrotreater. SOR denies these breaches and also contends that if established they were not repudiatory.

Summary and analysis of evidence

Chronology of key events

37. The negotiations between the parties for the relocation of the Hydrotreater from Young to Bomen began early in 2013. The parties referred to the proposal as “Project Cricket”. The negotiations followed an offer by Hydrodec to sell the Australian business to SOR; the sale did not proceed because the price and terms proposed by SOR were insufficiently attractive from Hydrodec’s point of view.

38. As part of the negotiations, the parties prepared a budget for the cost of relocation. That budget included figures for the capital costs to be incurred in constructing the infrastructure at Bomen which would be required to accommodate the Hydrotreater.

39. Hydrodec’s senior management was based in the United Kingdom. Its most senior executive was the CEO, Ian Smale. The CFO, Christopher John Ellis, was also based in the United Kingdom.

37. Within Hydrodec, immediate responsibility for the Australian operations was held by Mark Dominic McNamara. His job title was Head of Technology and International Projects (he had previously been CEO until replaced by Mr Smale in early 2012). Mr McNamara worked out of an Australian office maintained by Hydrodec at Chatswood in Sydney.

38. On SOR’s side, the negotiations were led by Timothy Ross Rose, SOR’s managing director. He was assisted by David Bruce Onions. Mr Onions’ job title was Refinery and Plans Manager.

39. The Co-location Agreement was dated 13 November 2013. The parties were HA, SOR and HG. The Agreement’s principal features were as follows:

1. Clause 3 dealt with the co-location of the Hydrotreater at SOR’s Bomen site. HA was responsible for transporting the Hydrotreater to Bomen and SOR was responsible for the works required to allow the Hydrotreater to be installed at the site.

2. Under clause 2, the parties’ obligations under clause 3 were conditional on SOR obtaining the necessary local government and environmental consents. But in anticipation of obtaining consent, HA and SOR were to prepare a detailed plan, including a budget, for the co-location and commissioning of the Hydrotreater at Bomen.

3. Clause 9 dealt with default and termination. Clause 9.1 allowed for termination on 90 business days’ in the event of breach, insolvency or force majeure subsisting for more than six months. Clause 9.2 gave HA a discretionary right to terminate on 360 days’ notice if in HA’s opinion the Hydrotreater’s operation would not be, or was not, commercially satisfactory from Hydrodec’s point of view.

4. Clause 10 dealt with force majeure. It specified various force majeure events and provided a procedure for suspension of a party’s obligations if that party was unable because of such an event to comply with those obligations.

5. Clause 3.10 provided that SOR was responsible for the capital costs of constructing the facilities and improvements required to accommodate the Hydrotreater. The resulting plant, equipment and improvements were to be SOR’s property. In the rest of judgment, I will refer to this as the “Hydrotreater Infrastucture”. In return, HA was to repay that expenditure by annual instalments (referred to as the “Capital Charge”) over a period of seven years after the Hydrotreater began operating (the “Capital Term”). The Capital Charge payments were also to include interest.

6. If HA exercised its right to terminate under clause 9.2 before the expiry of the Capital Term, HA was obliged on termination to pay the Net Realisable Value of the Hydrotreater Infrastructure. The Net Realisable Value was the “written down” value of the assets, less their residual value, as determined by sale or valuation.

7. Clause 4 dealt with the Hydrotreater itself and other plant and equipment (which included laboratory facilities and the receiving tanks) belonging to Hydrodec which were to be set up at Bomen. This plant and equipment was defined in the Agreement as the “Transformer Oil Processing Facilities” (which included both the Hydrotreater and the receiving tanks) and the “Laboratory Facilities”. In the rest of this judgment, I will use the term “Hydrodec Plant” to cover both.

8. Under clause 4.1 the items of Hydrodec Plant were chattels not fixtures. Title remained with HA, which had the right to remove them during the Agreement and on termination or expiry, subject to compliance with SOR’s reasonable safety and environmental requirements. HA also had the right under clause 4.3 to make capital improvements to its plant and equipment, including by installing new plant and equipment at the site.

9. It was SOR’s obligation to carry out all maintenance and repairs to the Hydrodec Plant. The Agreement allocated the risk, cost and expense of “routine operational maintenance” to SOR, but not for “major periodical maintenance” or “major repairs”. Replacement of “major components”, unless attributable to SOR’s conduct, were to be treated as capital improvements by HA under clause 4.3.

10. For the purpose of maintenance and repair, HA was obliged to transport its store of critical spares (the “Critical Spares Inventory”) from Young to Bomen where it was to be housed by SOR. HA was to be responsible for replacing, re-stocking and supplementing the Critical Spares Inventory.

11. Clause 5 dealt with Tolling. SOR was required to operate and maintain the Hydrotreater for the processing of feedstock into SUPERFINE (“Tolling Services”) for a period of ten years after it began operating (the “Tolling Term”). In return, HA would pay SOR an annual fee (the “Tolling Fee”) of $2.25 million. There was provision for the Tolling Fee to be reviewed and increased annually.

12. HA was to pay both the Tolling Fee and the Capital Charge by monthly instalments. SOR was to issue invoices for each monthly instalment by the fifth business day of the following month, with payment to be made by the fifteenth day of that month. HG was to procure payment by HA of the Tolling Fees and Capital Charges, as well as the Net Realisable Value of SOR’s plant equipment and improvements in the event of termination under clause 9.2.

13. Clause 5.10 obliged SOR to prepare and maintain records of matters “relating to” the Agreement and SOR’s performance of its obligations thereunder. HA was entitled (at its own cost) to inspect the records and have them audited.

14. Clause 6 provided for the establishment of a committee consisting of two representatives of HA and two from SOR (the “Operating Committee”). The Operating Committee was to be responsible for technical and engineering supervision of the co-location and commissioning, and later of the maintenance improvement and operation, of the Hydrotreater. It was also to be responsible for supervising the provision of Tolling Services more generally, and “related matters”. In particular, the Operating Committee had power to determine the “detail” of SOR’s record-keeping obligations under clause 5.10, and the format of those records.

43. Following the parties’ entry into the Agreement, SOR made application in December 2013 for development approval for the necessary works. Approval was obtained from Wagga Wagga City Council in June 2014. SOR also required a variation of its licence from the Environmental Protection Authority of New South Wales (“EPA”) to cover the new processing activities to be undertaken at Bomen. The varied EPA licence was issued in August 2014.

44. In late August or early September 2014 Mr Rose travelled to the United Kingdom to discuss the project with Hydrodec’s UK management. During the course of the visit a further agreement, referred to at the hearing as the “Sanction Agreement”, was prepared and signed.

45. The Sanction Agreement was dated 3 September 2014. It acknowledged that the parties’ obligations under the Co-location Agreement were now unconditional, and authorised various specific steps for the next phase of the project. Among other things, SOR agreed to cap the recoverable capital expenditure under the Capital Charge at $2.22 million.

46. Following the execution of the Sanction Agreement, Hydrodec proceeded with the removal of the Hydrodec Plant from Young and its delivery to Bomen where it was installed on the Hydrotreater Infrastructure which had been constructed by SOR. The executives of the two parties principally responsible for this were Mr Onions for SOR and Brian Davies for Hydrodec. Mr Davies had extensive experience of commissioning oil and gas plants. He had previously been a Hydrodec executive and at the time was a consultant. The Hydrotreater went into service and production began on 28 April 2015.

47. The Hydrotreater was built on a container skid to facilitate transport. A second skid contained control and ancillary equipment. A photograph of the Hydrotreater is reproduced below.

48. Reproduced below is a plan showing the facilities the of the Bomen site.

49. In the plan, the facilities used by SOR for its operations are shown in black, with street access from the front (western) end of the site. The Hydrotreater and its associated plant and infrastructure are shown in red. Access to those facilities for trucks and tankers came via the rear (eastern) end of the site. The concrete driveway across the rear of the site which is shown in the plan was not built until later (see below); at the time production began in April 2015, the rear access route was unsealed. The plan shows the Hydrotreater itself in the centre of the site. To the north of the Hydrotreater there are two bunded areas containing oil tanks. A larger-scale plan of those areas is reproduced below.

50. On the eastern side of the plan are the tanks which were used for feedstock. They include four large vertical tanks (capacity 100,000 litres) numbered F1, F2, F3 and F4. These are the receiving tanks which belonged to HA and are the subject of SOR’s trespass claim. Next to them are two smaller-capacity horizontally mounted tanks numbered R1 and R2. They were used as feeder, or “guard”, tanks for the large storage tanks.

51. In the bunded area immediately to the west of the receiving tanks are the production tanks which were used for the SUPERFINE produced by the Hydrotreater. Again the tank farm consisted of four vertically mounted 100,000 litre tanks (they had a greater diameter, and therefore a lower height, than the receiving tanks). These are numbered P1, P2, P3 and SOCOA and were used for storage. They are not contaminated with PCBs and belong to SOR. Again there are two smaller horizontally mounted feeder/guard tanks (numbered Q1 and Q2).

52. With the transfer of the Hydrotreater from Young to Bomen, Hydrodec no longer needed to employ staff to operate it. The Young site was retained in a moth-balled state. Hydrodec retained its Sydney office with some local staff to conduct the Australian business (buying the feedstock, selling the finished product, and administering the contractual relationship with SOR).

53. Hydrodec had two Australian companies, HA and another company called Hydrodec Development Corporation Pty Ltd which does not come into this judgment. Hydrodec’s Australian staff included employees and contractors engaged in performing operational tasks for those companies, but the companies appear not to have had their own management independent of Hydrodec’s. The board of directors of HA, at least, was made up of Hydrodec executives. As at April 2015, these were Mr Smale, Mr McNamara, and Mr Ellis.

54. Apart from Mr McNamara, Hydrodec’s Australian management included Paul Evans, whose job title was Asia-Pacific Business Development Manager. From April 2015 Mr McNamara and Mr Evans were HA’s representatives on the Operating Committee.

55. SOR’s representatives on the Committee from April 2015 were Terry Luce and Daniel Czubala. Mr Luce’s job title was Commercial Manager. As that job title suggests, he appears to have worked on the commercial and financial side of SOR’s business. Mr Czubala’s job title was Refinery Manager. He appears to have had immediate operational responsibility for the plant.

56. Once production was running, the monthly tolling fee and capital charge payments began from HA to SOR. In order to calculate the amount of the capital charge, it was necessary to fix the amount of the total capital expenditure by SOR on the Hydrotreater Infrastructure. SOR produced a spreadsheet recording the capital expenditure. This was audited by Hydrodec.

57. The audit was carried out by Dympna Baker. She was an accountant with Hydrodec, based in Sydney. The audit was handled for SOR by Mr Luce.

58. The audit began in August 2015 and involved visits by Ms Baker to Bomen as well as discussions between her and Mr Luce. Ms Baker produced three reports, the last of which was completed at the end of December 2015. There is a dispute about whether the audit was actually completed. But there is no dispute that as from January 2016 HA made monthly capital charge payments to SOR based on a total capital cost figure of $2.2 million ($20,000 less than the maximum fixed by the Sanction Agreement).

59. Towards the end of the audit process, Mr Smale had left Hydrodec and been replaced as CEO by Mr Ellis. This happened in early December 2015. Mr Ellis was replaced as CFO by David Dinwoodie. This left Mr McNamara and Mr Ellis as the directors of HA.

60. The Agreement appears to have operated smoothly for about two years after January 2016. During this time (in late 2016 and early 2017) the rear access driveway the cost of which is now the subject of dispute, was built. I describe this in detail below. Costs totalling about $340,000 were borne by SOR. From May 2017 onwards, the monthly capital charge was increased to reflect this.

61. Ms Baker left Hydrodec in July 2017. Soon afterwards Mr McNamara resigned as well. From September William Hand took over Mr McNamara’s position on the Operating Committee. Mr Hand had an engineering background. His job title at the time was Quality Control and Quality Assurance (QA/QC) Manager. Later evidence shows him as a director of HA, and I assume he was appointed when Mr McNamara left so as to maintain a board of two (the other director at the time being Mr Ellis).

62. In November 2017 both the SOR members of the Committee were also replaced. Mr Luce left SOR and his place was taken by Murray Baker, whose job title was Business Development Manager. Mr Czubala’s place was taken by Christopher David Clarke. Mr Clarke is a chemical engineer. He replaced Mr Czubala as Refinery Manager for SOR. From this point, day-to-day dealings between the parties on a technical level took place between Mr Clarke and Mr Hand.

63. By February 2018, Hydrodec’s Australian operations were faltering. Among the problems was a lack of available feedstock which meant that the plant was not capable of being operated at full capacity.

64. At this point, the then chairman of the board of HG, Lord Moynihan, comes into the picture. In the late 1980s and early 1990s he was a minister in the British government, and later a shadow minister. He continues to describe himself as a politician as well as a businessman.

65. In mid-February Lord Moynihan wrote a memorandum for the board of HG on Hydrodec’s future. In that memorandum he stated that he and Mr Ellis recommended the sale of Hydrodec’s Australian operations, hopefully to SOR.

66. The board accepted that the recommendation should be taken further. Hydrodec was already being advised on other transactions by Mr Nick Dalgarno of Simmons & Company, an international investment bank. On 10 April Mr Dalgarno sent a memorandum to Mr Rose asking whether SOR was interested.

67. Meanwhile, on 4 April Mr Ellis resigned as the CEO of Hydrodec and as a director of HG. He was replaced as interim CEO of Hydrodec by Lord Moynihan and as a director of HG by Mr Dinwoodie. Later, in May, Mr Dinwoodie replaced him as a director of HA.

68. Mr Dalgarno’s memorandum resulted in an indicative offer from SOR which was sent on 13 April. For SOR the resulting negotiations were handled by Mr Rose. On Hydrodec’s side they were handled by Lord Moynihan and Mr Dalgarno with assistance from Mr Dinwoodie.

69. Meanwhile payment disputes had arisen under the Co-location Agreement. HA failed to pay the monthly tolling fee and capital charge invoices for March, which had been due on 15 April. Mr Rose and Lord Moynihan exchanged correspondence about this, which I set out in more detail below. As a result of the dispute, SOR retained its current lawyers, Cooper Grace Ward (“CGW”). Their first correspondence to Hydrodec was dated 30 April.

70. The payment disputes did not prevent the negotiations from continuing. A meeting took place in Sydney on 30 May between Mr Rose and Lord Moynihan (accompanied by Mr Dinwoodie). There is a dispute between the parties about what was said during that meeting, which I deal with in more detail below. In the end Hydrodec did not consider the terms offered by SOR were satisfactory. The Hydrodec representatives thought Mr Rose was trying to buy the Hydrotreater effectively for nothing.

71. By June 2018 HA had lost its major customer, a company called Hanwha. The HG board made a formal decision to sell the Australian operation.

72. Meanwhile, the dispute about SOR’s charges under the Co-location Agreement had not been resolved. In late June, CGW issued a statutory demand on behalf of SOR against HA.

73. It is not clear from the evidence exactly when Hydrodec’s current solicitors, Carroll & O’Dea (“COD”), were first retained. But it seems to have happened in late June or early July 2018. The lead solicitor at COD was (and is) Mr Selwyn Black. The first letter from COD to CGW in what was to become a lengthy and acrimonious correspondence was sent on 11 July. Without formally making any concessions, Hydrodec agreed to pay SOR’s outstanding invoices without deduction, and regular payments resumed.

74. On 30 July 2018 COD sent a long letter to CGW. The letter set out a raft of complaints about the way in which SOR was conducting itself under the Agreement. Less than an hour later, COD forwarded a notice of termination under clause 9.2 of the Co-location Agreement (see [42(3)10] above). The effect was that the Agreement would expire after 360 days, on 26 July in the following year.

75. In the letter, COD accused SOR of breaching the Agreement by:

1. misusing HA’s confidential information to appropriate HA’s customers (including HA’s largest customer Hanwha) and to enhance SOR’s own operations;

2. sabotaging HA’s business further by imposing unnecessary plant shutdowns and going slow on tests required for the production process;

3. telling HA’s customers and suppliers it was insolvent;

4. failing to provide HA with SOR’s internal safety committee minutes; and

5. failing to provide information required for the tolling fee review process.

76. The letter claimed that the damages from these breaches exceeded $2 million, and gave formal notice requiring rectification of breaches (4) and (5) within 30 days in accordance with the Agreement’s procedure for termination for breach. The letter went on to revive the allegation that HA was entitled to a refund of tolling fees for periods when the plant was not operating.

77. Soon afterwards the Hydrotreater was shut down by SOR because of a safety issue. The issue was notified to Mr Hand by Mr Clarke in an email on 7 August. By 6.00 am on 9 August the shutdown had begun.

78. I deal in more detail below with the reasons for the shutdown. For present purposes, it is enough to say that the chemical processes used in the Hydrotreater required hydrogen gas. A number of issues eventually emerged with the safety of various hydrogen-related components of the Hydrotreater, and which required, or allegedly required, parts to be replaced.

79. In the letter of 30 July, COD had sought SOR’s formal consent in principle to HA exercising its power under clause 4.1 of the Agreement to remove the Hydrotreater (see [42(8)] above). In September, Hydrodec retained Mr Davies (see [46] above) to manage the removal project. Mr Davies did some initial budgeting work but the project was not for the moment taken any further.

80. Meanwhile, it had become accepted between the parties that getting the Hydrotreater back into service would be Hydrodec’s financial responsibility under the Agreement (see [42(9)] above). The shutdown dragged on into November, by which time the receiving tanks were virtually full. Meetings of the Operating Committee had now ceased and SOR was waiting for Hydrodec to get two of the Hydrotreater components fixed.

81. In order to help get the Hydrotreater back into service, Hydrodec had retained Cornelis Johannes (known as “Keith”) Koomen. Mr Koomen is an engineer who formerly worked for Hydrodec on a contract basis. He was familiar with the plant as a result of previous work with Hydrodec.

82. Mr Hand and Mr Koomen considered a number of options and eventually Mr Koomen fabricated some spare parts for one of the components himself. SOR raised objections. Eventually the two components were removed from the Hydrotreater and sent to Mr Koomen for him to get them fixed. This happened just before Christmas 2018.

76. The shutdown continued into 2019. By March Hydrodec had organised for replacement parts to be shipped to Mr Koomen from its Canton plant. On 22 March, COD wrote a letter to CGW giving formal notice to SOR to prepare to resume production once the parts arrived.

77. The parts were shipped from Canton but it became clear that there were other problems with the components which had been removed from the Hydrotreater. By the beginning of April, Mr Koomen was concerned that there would not be enough time to get the Hydrotreater back into service before the Agreement expired in July. At Mr Hand’s request, Mr Davies drew up a removal plan for the Hydrodec Plant, which was sent to CGW by COD.

78. SOR (by CGW) provided its consent to the removal plan on 24 April, but the debate between the solicitors about the removal of the Hydrodec Plant (and the PCB-contaminated oil) continued. By this stage Hydrodec had accepted that it would not be practicable to get the Hydrotreater working before the Agreement expired. Mr Koomen dropped out of the picture.

79. Meanwhile, HA had requested an audit of the records maintained under clause 5.10 of the Co-location Agreement. This audit was carried out by a firm of accountants, Crowe Horwath, in February 2019. It was followed by correspondence between COD and CGW about the adequacy of SOR’s capital expenditure records. That correspondence ended in stalemate in September 2019, as I describe in more detail below.

80. Although the sale of the Hydrotreater to Greenbottle was not documented until August, the terms of the sale reflected a bid lodged by Greenbottle at the end of May, apparently as part of a competitive bidding process instigated by Hydrodec. Mr Ellis recommended Greenbottle’s bid to the Hydrodec board on 18 June. The tolling fee and capital charge for May were paid (late) at the end of June but no further payments were made, and this too became grist for the lawyers’ mill.

81. On 18 July, a revised plan for removal of the Hydrodec Plant, originally drafted by Mr Davies, was sent by COD to CGW. But the plan was a preliminary one, and beyond lining up (but not formally engaging) the necessary contractors, nothing had been done to get it ready to be put into effect. This remained the position when the Co-location Agreement expired on 26 July 2019.

82. Under the terms of the Agreement, it was necessary to determine the residual value of the Hydrotreater Infrastructure for the purpose of determining the final capital payment to be made to SOR (see [42(6)] above). On the day the Agreement expired, CGW wrote to COD proposing that an auction firm, Pickles, be appointed to sell the assets. In response, COD argued that nothing could be done until the alleged deficiencies in the capital expenditure records were rectified. SOR then tried to convene a meeting of the Operating Committee to take the next step. Hydrodec resisted this for similar reasons. Eventually, in early October, Hydrodec agreed to a meeting, but subject to conditions, and SOR abandoned the idea.

83. Meanwhile, the sparring between CGW and COD about the removal of the Hydrodec Plant and the feedstock oil continued. On 21 August, COD wrote to CGW articulating for the first time a further claim against SOR for damages for mixing PCB-contaminated deliveries with the other feedstock oil while the plant had been shut down between August and November the previous year. This led to a further debate between the solicitors.

84. COD also separately drew attention to a feature of the revised plan sent to CGW on 18 July. Unlike the earlier plan, the revised plan called for removal to take place in two distinct stages. The Hydrotreater was to be removed first. The receiving tanks were to be removed later, after the PCB-contaminated oil was removed (which was now of course the subject of a further dispute).

85. Mr Rose was suspicious. He thought that all of the Hydrodec Plant (and the contaminated oil) should be removed at once. His concern was that if Hydrodec removed the Hydrotreater first, it might not come back for the receiving tanks and the contaminated oil.

86. Mr Davies had been overseas, but returned on 10 September and began the steps required to formally engage the necessary contractors. He also spoke to Mr Onions about what would be needed to comply with SOR’s OHS requirements. But no action resulted on the ground. Meanwhile the flow of solicitors’ correspondence continued. On 16 September, COD issued a letter on behalf of HG, purporting to terminate its surety obligations under the Co-location Agreement. The ground for the purported termination was an alleged failure by SOR to keep proper records.

87. On 4 October 2019 SOR began these proceedings, opening another front in the battle between COD and CGW. SOR sought expedition, which was granted on 1 November.

88. In the meantime, on 9 October, SOR set in motion the mechanism to appoint a valuer. This was a protracted process. Eventually, SOR obtained a valuation report in June 2020. The report was prepared by Ross Henderson. He had been appointed through the Australian Property Institute under one of the clauses of the Co-location Agreement.

89. On 31 October 2019 COD wrote to CGW purporting to disclaim ownership of the receiving tanks and the contaminated oil. The validity of this disclaimer was, naturally, disputed by CGW.

90. Meanwhile, earlier in October Mr Ellis had been reappointed as CEO of Hydrodec (he had returned to the HG board as a non-executive director in March). At the very end of October, internal Hydrodec approval was obtained to proceed with stage one (removal of the Hydrotreater only). Mr Davies set out to confirm the contractors’ availability and have them re-quote.

91. On 7 November, there was a volte-face from one of the contractors, Riverina Cranes (“RC”). RC sent an email stating that it would not be quoting “at this time”. Hydrodec’s UK executives and COD seem to have believed that Mr Rose was behind RC’s decision and might block attempts by Hydrodec to retain other contractors. They apparently thought this was part of a strategy to obtain the Hydrotreater without having to pay for it. COD took the issue up with CGW, demanding that SOR provide letters to the contractors signed by Mr Rose asking them to help Hydrodec to remove the Hydrotreater.

92. On 13 November, SOR filed a notice of motion in these proceedings. The motion sought orders preventing HA from further encumbering the Hydrotreater or dissipating the proceeds of its sale. Orders were made to this effect, initially on an interim basis on 28 November and then until further order.

93. Meanwhile, on 22 November, COD issued a further second purported notice of termination of its guarantee obligations. The grounds for this purported termination included the failure to deal with the contractor issue to COD’s satisfaction.

94. By this stage, Hydrodec’s Australian presence had wound down to almost nothing. Mr Evans was made redundant in August, with effect from 13 September. Mr Dinwoodie resigned as a director of HG and HA on 30 September. This apparently left Mr Hand as the sole director of HA. Mr Hand then gave notice of his resignation on 25 October.

95. It was proposed that the consultants who would be removing the Hydrotreater would be formally retained and paid through Mr Black of COD, reporting to Mr Ellis in the United Kingdom. Mr Hand left on 25 November, to be replaced by Mr Ellis as sole HA director. Then on 27 November Mr Davis terminated his consultancy. In the following month, Lord Moynihan resigned as Hydrodec chairman.

96. Early in January 2020 Mr Ellis lined up another consultant, Garry Armand, to take over from Mr Davies. But no progress appears to have been made with the removal of the Hydrotreater and Mr Armand dropped out of the picture in March. At some point the Hydrotreater appears to have been removed from its shed and placed under a tarpaulin. The receiving tanks and the contaminated oil remained in situ.

97. In July 2020 Mr Black obtained a written offer from a company called Benzoil Pty Ltd (“Benzoil”) to take the contaminated feedstock away. This resulted in a further exchange of correspondence between COD and CGW in which CGW raised various technical difficulties with the proposal. These were addressed by COD in letters dated 11 and 19 August, but CGW failed to respond and Hydrodec let the proposal drop. Shortly before the trial began, Hydrodec made its own arrangements (which the evidence does not describe in any detail) to dispose of the oil.

98. The contract between HA and Greenbottle remains on foot. In the absence of anyone with any technical knowledge in Australia, Greenbottle has over the last few months itself been trying to organise the removal of the Hydrotreater (apparently on the basis that it will charge the cost back to HA). This is being undertaken on Greenbottle’s behalf by Kieran Walter Channon. Mr Channon is an employee of Slicker Recycling Limited, a subsidiary of Greenbottle.

Witnesses

106. SOR’s main witness was Mr Rose. His evidence was supported with evidence from Mr Onions and from Hydrodec’s former Australian executive, Mr McNamara.

107. SOR also led evidence from Mr Clarke and from Mr Czubala. Mr Clarke’s evidence concerned the shutdown. Mr Czubala’s evidence was a response to evidence which had been foreshadowed from Hydrodec about the abortive offer from Benzoil in July 2020 (see [120] below).

108. A report was obtained for SOR from Mr Henderson concerning his valuation of the Hydrotreater Infrastructure (see [95] above). The report was prepared in the conventional form for a report by an expert witness. It was included along with the other witness evidence in the relevant part of the Court Book and Mr Henderson was required for cross-examination.

109. At the hearing, counsel for SOR contended that the report was admissible without the need to produce Mr Henderson to verify it. Counsel’s contention was that the report was simply a document having contractual force which could be tendered, presumably as a business record.

110. Whatever the theoretical merits of this position, it did not reflect the way in which the case had been prepared for hearing. I accordingly required Mr Henderson to attend and be available for cross-examination, on the basis that the relevance of any evidence that he might give in cross-examination could be the subject of submission in due course.

111. All of SOR’s lay witnesses were also cross-examined. There was no challenge to the credibility of Mr Onions. But in the course of cross-examination, counsel for Hydrodec accused Mr Rose, Mr Clarke and Mr Czubala of lying in their affidavits about various points. Each of these allegations was denied.

112. I think it was regrettable that counsel went so far. Counsel may have thought that he needed to do so to comply with the rule in Browne v Dunn. But the rule requires only that the cross-examiner squarely put to the witness the factual case which the cross-examiner intends to put by way of final submission. Once that has been done, and the witness has responded with a negative answer, the rule does not require the cross-examiner to go on and put to the witness that the negative answer is a lie. To do so can be needlessly offensive: Thomas v Van Den Yssel (1976) 14 SASR 205 at 207.

113. The allegations put to Mr Rose, Mr Clarke and Mr Czubala were unnecessary for another reason. The main issues in the case were contractual ones which turned on the objective effect of what the parties had done, and were largely matters of record. As will be seen, the points on which the witnesses were accused of lying were of little, if any, significance in the resolution of the case.

114. On one point I have preferred Lord Moynihan’s evidence to that of Mr Rose. But it is only fair to Mr Rose to say that I was not at all persuaded that his evidence on this point was consciously and deliberately false. I also thought that the evidence went nowhere near sustaining the allegations against Mr Clarke that he was lying. I see no reason not to accept his evidence, so far as it goes.

115. For Hydrodec, evidence was called from Mr Ellis, Ms Baker and Lord Moynihan. Evidence was also called from Hydrodec’s contractors Mr Davies and Mr Koomen.

116. It is notable that the only Hydrodec employees which it called had an accounting, rather than an engineering, background. As already mentioned, Mr McNamara gave evidence for SOR. Hydrodec called no evidence from Mr Evans or Mr Hand or anyone else from the Australian operational management. The result was that SOR’s evidentiary case, so far as it concerned operational dealings with Hydrodec, was largely uncontradicted.

117. Each of the Hydrodec witnesses was called and cross-examined. There was some challenge to the affidavit evidence of Mr Ellis and Ms Baker which I address in more detail below. But as I have already explained, the issues in the proceedings (at least to the extent that they were within the knowledge of the witnesses called by Hydrodec) largely turn on matters of record.

118. Hydrodec called Mr Channon of Greenbottle as a witness. His affidavit dealt with matters of opinion and was largely ruled inadmissible. He was, however, briefly cross-examined about his involvement in trying to get the Hydrotreater for Greenbottle (see [105] above).

119. Hydrodec also called Steven Mullins who is the managing director of RC. Mr Mullins was not co-operative and an affidavit could not be obtained. Mr Mullins gave evidence (by video link) on subpoena. After counsel had questioned him for some time about the refusal to quote in November 2019, I acceded to counsel’s application to treat him as an adverse witness for the remainder of his examination in chief. He was not cross-examined by counsel for SOR. I refer to his credibility in somewhat more detail below.

120. In advance of the hearing, Hydrodec had indicated that it wished to call evidence from three further witnesses about their dealings with SOR in connection with the abortive Benzoil offer. The proposed witnesses were also apparently unco-operative, and outlines of proposed evidence were served. As I explain in more detail below, I decided in the end that this proposed evidence was inadmissible.

121. Finally, there was expert evidence on some of the technical issues relating to the shutdown. Hydrodec qualified Mr Wolfgang Mika and in response SOR qualified Dr Peter McGowan. Both of them are mechanical engineers. They gave evidence (by video link) concurrently and I deal with their evidence below when discussing the detailed factual evidence concerning the shutdown.

Co-location capital expenditure and audit

122. The Co-location Agreement provided (in terms which are set out in full at [460] below) for the Operating Committee to prepare a budget for, among other things, the capital expenditure by SOR at the Bomen site required to co-locate the Hydrotreater there. That budget was also to provide for the repayment of that expenditure by HA under the capital charge mechanism in clause 3.10 of the Agreement (see [42(5)] above). It was to include a summary which was defined in the Agreement as the “Capex and Capital Charge Budget”. That document was to be in the “indicative” form of an “indicative summary” document annexed to the Agreement.

123. Clause 3.10 also required the parties to maintain a schedule of the resulting plant, equipment and improvements. This was defined in the Agreement as the “Plant and Equipment Schedule”. The Agreement made no further provision as to the form of this document.

124. The document annexed to the Agreement to specify the “indicative” form of the Capex and Capital Charge Budget was a spreadsheet page (extending over two printed pages) which had presumably been prepared by the parties as part of their negotiations which preceded entry into the Agreement. The spreadsheet was headed “Project Cricket – Relocation Budget” and was dated 30 September 2013. I will refer to the spreadsheet page as the Project Cricket capital budget.

125. The Project Cricket capital budget specified various items of “equipment” with specified “tasks”, suppliers, and costs (for instance, the “process shed” was one item, with associated “tasks” of “footings”, “frames”, “cladding” and “roller doors”). As well as the “equipment” items, there were items for “commissioning”, “demolition costs”, “on-site labour” and “project management”. The total cost was $1,824,251.

126. In the September 2014 Sanction Agreement, the parties agreed a budget for the purposes of the Co-location Agreement, as set out in a document referred to as the “Consolidated Budget”. A copy of this document, so far as it related to capital expenditure, is in evidence. It was a spreadsheet page (extending over four printed pages) dated August 2014.

127. It is apparent that the Consolidated Budget spreadsheet, although a separate document, was a development of the Project Cricket spreadsheet. It had been updated as time went on to reflect actual expenditure. It also contained a column showing what the corresponding Project Cricket budget figure had been.

128. The capital expenditure page of the Consolidated Budget had the same basic structure as the relocation budget summary attached to the Co-location Agreement. The “item” and “task” columns in the relocation summary were consolidated into a single column which grouped the expenditure into a list of items, grouped under an “activity”, and each specifying a “task”.

129. There were also columns allocating expenditure between SOR and Hydrodec. This reflected the fact that only some of the capital expenditure involved in relocating the plant was covered by clause 3.10. What appears to have been the relevant column for clause 3.10 was headed “SOR capital – infrastructure (capital charge)”.

130. The first “activity” on the page was “permitting, consents & approvals”. The costs were about $127,000. These were not included in the allocation column for clause 3.10 expenditure. Instead they were allocated between two columns representing 50/50 shared costs of SOR and Hydrodec.

131. Following the Sanction Agreement, the Consolidated Budget capital expenditure page continued to be revised as the expenditure was incurred (or as the budget changed). It was also altered slightly. The column showing the comparison with the Project Cricket budget was removed and replaced with a column showing variation to the Sanction Agreement budget. Columns were added for each “task” showing a date and an indication of whether the relevant cost was a budgeted or actual one.

132. The latest revision of the capital expenditure page of the Consolidated Budget in evidence is dated 26 May 2015. This was produced about four weeks after operations began at Bomen. Most of the costs were shown as actual, but some were shown as “invoice” (presumably to denote a cost for which the cost had been invoiced but not paid) and a few were shown as “quote” or “estimate”.

133. The Consolidated Budget capital expenditure for May 2015 still showed the costs for “permitting, approvals and expenditure” as split equally between SOR and HA, and not as clause 3.10 expenditure. But in one of his affidavits, Mr Rose stated that SOR paid these costs, “never received” payment from HA of its share, and “accordingly treated” those costs as expenditure under clause 3.10. This would presumably have involved negotiations with Hydrodec, but Mr Rose did not give any more detail about when and how those negotiations proceeded. He was not asked about the subject in cross-examination.

134. In order to invoice the capital charge, it was necessary to calculate the total capital expenditure on the Hydrotreater Infrastructure, and to determine the method for calculating interest. There were also other issues about capital expenditure. Some capital expenditure (for instance on the Hydrotreater itself) was for Hydrodec’s account alone. There were also questions about the allocation of labour costs.

135. The evidence does not explain how these issues were resolved, but I suspect that the change in the treatment of the commissioning costs described by Mr Rose may have been part of it. At one stage it seems that Mr Rose was trying to get Hydrodec just to accept a round figure of $2.2 million for the Hydrotreater Infrastructure under clause 3.10, but in the end it was accepted that SOR would produce calculations and supporting records for verification by Hydrodec, which the parties described as an “audit”.

122. The audit became an agenda item for the Operating Committee. Invoicing of the capital charge began on the basis of the $2.2 million figure, but subject to the audit’s outcome. On 15 June 2015, which was the due date for payment of the May charges, Ms Baker wrote to Mr Luce advising that a payment had been made, but “noting all charges relating to capital/interest are yet to be confirmed pending audit of the asset register as discussed”.

123. In order to calculate the amount of the monthly charge and interest a spreadsheet was prepared by SOR to calculate, and record, the interest on the monthly capital payments. I will refer to this as the “interest schedule”. Although Mr Rose stated in his affidavit that he instructed Mr Onions to prepare it, I assume it was in fact prepared by Mr Luce.

124. The interest schedule was used throughout the period up to July 2019, and a copy of the final version is in evidence. It recorded the opening capital balance and, for each month thereafter, the monthly capital payment, the resulting capital balance, and the monthly interest payment.

125. As already noted, the May 2015 capital summary in the Consolidated Budget was not final. It appears that, rather than continue to update the Consolidated Budget, Mr Luce created a separate list of capital expenditure items to which he added further expenses as they came in. The list was inserted at the top of the interest schedule.

126. On 14 August, Mr Luce emailed Ms Baker a copy of the interest schedule in this form, in advance of her first visit to Bomen for the audit. The schedule contained expenses up to 31 July, which covered three and a half pages and totalled $2,212,111. Below that was the $2.2 million figure and the capital charge and interest payments for May, June and July, based on that figure.

127. For the purpose of the audit, Mr Luce later prepared a further spreadsheet with the filename “summarising costs by supplier (capital summary)”. I will refer to this as the “asset cost schedule”. SOR’s own copy of the schedule does not appear to be in evidence, but a reproduction of it in its then form appears in Ms Baker’s last audit report.

128. The asset cost schedule took the form of a table. Each row had an asset number; acquisition date; “vendor” (supplier); asset description; and cost. I assume that it was a summary of the expenditure items listed in the interest schedule. Those items were then supported by three lever arch folders of invoices and supplier documents.

129. The audit itself was an iterative process. Ms Baker’s initial approach was to review a selection of expenditure items or categories. She found errors and omissions among the supporting documents. The audit was then expanded so as to cover all of the items of expenditure. In the course of the process, further expenditure items were added to the schedule by Mr Luce and further supporting documents were produced at Ms Baker’s request.

130. Ms Baker was very critical of the state of SOR’s records and the length of time which it took to conduct the audit. It seems that Hydrodec withheld payment of the November capital charge, perhaps to focus SOR’s attention on the process.

131. Ms Baker’s first audit report was produced in August 2015 and her second in October 2015. By that point the amount claimed by SOR and recorded in the capital summary schedule was $2,204,936.

132. Ms Baker’s third audit report was dated 31 December 2015. It took the form of an update which incorporated her earlier reports. The report identified disallowances totalling $14,727. This yielded a revised capital summary figure of $2,190,209. The report identified further expenditure items of $28,377 which required clarification with SOR and which were described as “potential further reductions”. The report stated that there were further errors or omissions, but these were not material and overall were in Hydrodec’s favour. They had “not been highlighted at this point in time” but would be “reviewed with management” (it is unclear whether this was a reference to the management of SOR or Hydrodec).

133. On 4 January 2016 Ms Baker sent to Mr McNamara and Mr Ellis an email attaching her report. The email also contained a “management report” concerning the audit and summarising its conclusions. Ms Baker stated that the audit was “expected to be completed in January 2016 with agreement on the final capital charge with SOR”.

134. Ms Baker followed up with an email to Mr McNamara, copied to Mr Ellis, on 14 January. The email was prepared in advance of a meeting to take place between Ms Baker and Mr McNamara that afternoon. It attached a copy of Ms Baker’s reconciliation from the audit, SOR’s capital summary schedule and SOR’s interest schedule together with rival interest schedules prepared by Ms Baker.

135. The email was surprisingly vehement considering that on any view Hydrodec appears to have been conceding more than 98 per cent of SOR’s claimed expenditure. It contained a list of complaints about the manner in which SOR had conducted its side of the audit. Ms Baker stated that “none are significant in isolation but combined it is concerning let alone time-consuming and frustrating”. Apparently anticipating Mr McNamara’s reaction, Ms Baker acknowledged that the list of complaints was “probably way too detailed”.

136. The matter was considered by the Operating Committee on 21 January. The practice was for the minutes of the Committee’s meetings to be prepared in the form of a table of items, with columns for each item headed “Notes” and “Actions”. The minutes for the meeting of 21 January, which were circulated by Mr McNamara following the meeting (with a copy to Mr Ellis), include in the “financials” item:

Note

Asset register audit complete and other than rechecking interest calc all issues are agreed.

Action

TLU [Mr Luce] is checking DBA [Ms Baker]’s interest calculations.

151. Ms Baker agreed in cross-examination that the interest issue was later sorted out. Payments of the monthly capital charge were thereafter made based on an initial capital cost figure of $2,200,000. The Capital Term under the Agreement was seven years; as production had started in April 2015, the Term was to expire in April 2022. The monthly capital charge was fixed at $26,190.48 (plus GST). This represented one eighty-fourth of $2,200,000, and reflected a “straight line” repayment of the capital cost over the seven years of the Capital Term.

152. In her affidavit Ms Baker referred to her dealings with Mr Luce up until December 2015 and said (this evidence was admitted as her belief only):

Based on my audit I concluded that:

SOR had overcharged on the capital charge, due to the issues referred to above;

…

SOR was not able to substantiate the remaining items examined in the audit that were outstanding;

many of the expenses included were for expenses occurring after the plant was already up and running at Bomen.

153. The last document referred to in Ms Baker’s affidavit was dated 16 December 2015. She stated that thereafter she “did not receive any documents from SOR to substantiate the charges and did not continue with the audit”.

154. In cross-examination, Ms Baker was taken through the audit reports that she had prepared, her January emails and the 21 January Operating Committee minutes. She conceded that she had been incorrect in saying that the audit process was left unfinished in December 2015. That concession was clearly correct. Ms Baker explained her mistake on the basis that she had not been shown all the relevant documents by Hydrodec’s solicitors.

155. The documentary evidence expressly records that at the Operating Committee meeting on 21 January 2016 the representatives of Hydrodec and SOR reached an agreed resolution of the capital expenditure issues which had been raised by the audit. Clearly this involved splitting the difference between the parties’ positions and fixing the total repayable capital expenditure at $2.2 million. It also clearly carried through to fixing the capital charge repayment schedule on the “straight-line” basis described above.

156. It is also quite clear that this agreed resolution was sanctioned by Mr Ellis. Ms Baker may have nursed a residual concern about SOR’s claims and supporting documents, but that was not important because she was not the decision-maker.

Construction of rear driveway

157. When the Hydrotreater was at Young, Hydrodec produced its own supplies of hydrogen gas using generation equipment known as the “HOGEN” units. That equipment was not put into use at Bomen. Instead hydrogen gas was brought in by truck from a commercial supplier (referred to in the evidence as “regional” gas). This was at Hydrodec’s cost.

158. Mr McNamara was asked to look into this. On 24 August 2015 he presented his findings in an email to Mr Ellis, Mr Rose and Mr Smale. Mr McNamara reported:

It has taken me several weeks to work through the process of seeking quotes (on a common scope of work) to put a price on options for resolving the Hydrogen question at Bomen. I think we have a likely outcome now though.

By way of background, in the plant relocation plan, from Hydrodec’s end, there was approximately a $200-400k budget for refurbishing the HOGEN systems we had installed at Young in order to get them to a reliable operating condition for the next say 10 years. In speaking with Chris [Ellis] about this some time ago, he requested some verification of the cost and a comparison to replacement before we acted. This prompted a program of Identifying and qualifying multiple alternate suppliers and seeking pricing against comparable scopes from them all.

[The quotes were then summarised]

Applying Dympna [Baker]'s NPV calc (attached) makes it clear that either replace or refurbishment based on these prices is a no go, even before we negotiate a term deal with regional gas. Regional gas discussions are indicating a significant further reduction in delivered gas costs under a term agreement.

I therefore think we can conclude then that we will be mothballing the HOGEN units and re-setting the tolling rate to compensate for changed operating costs.

There are consequences for SOR in that the site was not set up to permanently operate from trailers as now seems to be the most cost effective longer term outcome. I would therefore like to request SOR's input in understanding the consequences of this outcome and scoping out any further activities made necessary, before we recalculate the tolling costs.

159. The issue was taken up at the Operating Committee meeting on 14 October 2015. The minutes record:

Note:

HOGENS- HYD is also looking at other alternatives. It appears that long term trailer supply is a significant cost saving but will require some further capital works.

Action:

SOR to scope site upgrade requirements to move to trailer gas supply permanently. Opcom to review upgrade costs, supply agreement then vary tolling and remove monthly excess hydrogen charges.

160. Following this meeting, Mr Czubala obtained a quote for the construction of a concrete driveway to link the Hydrotreater facilities to the road at the rear of the site. He sent the quote, together with costings for some other expenditure by Hydrodec, to Mr McNamara. On 15 December Mr McNamara wrote:

Dan, sorry I did not get this response to you sooner but please accept this email as confirmation that Hydrodec accepts these costs and proposed implementation schedule.

161. There were regular meetings of Hydrodec’s Australian management, minutes of which were circulated after the meetings by Mr McNamara (with copies to Hydrodec’s UK management, including Mr Ellis). The minutes of the management meeting on 21 December 2015 record:

Hogen issue resolved and SOR progressing. This will become an adjustment to capital charge in 2016.

162. On 21 January 2016 there was a further mention of the matter in the Operating Committee. The minutes noted:

Site rear access is being planned. Financial structures yet to be resolved.

163. Following the meeting SOR proceeded with the necessary planning steps. On 9 February 2016, Mr Onions wrote to Wagga Wagga City Council, the consent authority, to prepare the way for the lodgement of the development application, which also involved a small land swap with the council. SOR lodged the development application on 28 April.

164. On 26 May there was an incident in which a hydrogen trailer became bogged at the rear entrance to the plant. At first it appeared that the Hydrotreater would have to be shut down. But SOR organised a crane to clear the access and the possible shutdown was averted.

165. The minutes of the Operating Committee meeting on 1 June record:

Site rear access is being planned. Financials to be finalized.

166. There is evidence which casts further light on what was discussed. Mr McNamara reported to Mr Ellis in a separate email on 3 June:

OpCom was fairly mundane although it confirmed a couple of key things, the most immediately important from a finance point of view being that the additional access works would proceed and that in accordance with the agreement between you and Tim [Rose], that Hydrodec would pay the for the works rather than add to the capital charge. DA consent to proceed with these works is expected in the coming weeks. SOR are pursuing this.

167. On 6 June the development approval was granted. Then on 17 June there was an exchange of emails between Mr Rose and Mr Ellis prompted by delays in Hydrodec paying its monthly bills under the Agreement:

[Rose to Ellis 17 June 8:07 am]

You have not paid your invoice as per the agreed terms - you have offered excuses I do not accept and are clearly a delaying tactic. Unless this situation is rectified by cob Monday when I return to Australia I will have to stop the operation of the plant until I can be assured HYR can meet further operational costs.

The back driveway is ready to commence build. I will need to see some definitive proof that HYR has the capacity to pay for this before we start. This may result in further plant outages as the Hydrogen trailers cannot access the loading bay safely.

We've tried to be accommodating to your requests but you've pushed this one too far.

[Ellis to Rose 17 June 5:2 pm]

Apologies. I have just dug into this and Mark [McNamara] has raised an issue that he was seeking a response to. I have instructed them to pay the 50% that should have been paid last week on Monday with the other 50% as per our revised terms as scheduled on the due date next week. In between time he can discuss his issue with you when you are back.

On a separate note I haven't seen I don't think the costings for the driveway. Is that something that you sent to Mark? Could I get a copy so I can ensure that funds are provisioned for it?

168. Mr Rose undertook to send the costings and proceeded to let the contract for building the driveway. Starting on 10 August there was a further email exchange between Mr Ellis and Mr Rose:

[Ellis to Rose 10 August 12:56 am]

As discussed if possible I need to address payment for the access road in a way that is different to the way I had envisaged if possible. Paying outright for an asset on a third party’s site where it is clear that I have no ownership rights will oblige me to impair it straight away and from an accounts point of view it is not helpful in having to explain that to shareholders and investors. My thought therefore was to pay through a combination of the capital charge and a fixed payment once the work is completed. I can probably justify carrying a value of circa 30% ie $Au 100k in my books which I can then amortise over the remaining contract term with the balance paid through the capital charge. Hopefully this makes sense and you can accommodate me.

[Rose to Ellis 11 August 12:32 am]

Sorry mate – with the biofuels plant development I’ve got some significant calls on my capital coming up so I really need the cash. Besides – I am concerned about the Hydrodec payment record – there are still some outstanding bills that have not been paid and the local guys do try it on (I don’t mind that a bit but it happens too often).

Is there any other way we can help out? We might be able to shift the payment timing a couple of months by us paying the August and September bills and you paying us back in October.

[Ellis to Rose13 August 1:27 am]

Understood although I am not aware of any unpaid bills so have someone let me know what they are and I will follow up on it. The only one I was aware of was a largish charge for hydrogen which seemed odd as it related to a period of low production.

Certainly the later the better would help. Having a larger part of it spilling into 2017 if at all possible would help with my auditors.

Let’s chat next week to see if we can find a suitable solution.

169. The Operating Committee minutes for its meeting on 24 August 2016 recorded, in connection with the driveway:

Progress invoices expected to start this month. HYR is expected to pay these invoices on receipt. Cost forecast to be about $350k over 2 months. Expected starting in December. Payment has been discussed between CEOs.

170. In the event the contractors’ costs were paid by SOR and re-invoiced to Hydrodec. But by March 2017 at least some of SOR’s invoices remained unpaid. This was the context for a further email exchange between Mr Ellis and Mr Rose:

[Ellis to Rose 3 March 4:30 am]

In term of the drive given the access etc and how it is integrated into your site to me the best way of treating this would be as follows;

1)   Payment made so far – I will capitalize and write off this year

2)   The balance – why don’t we set up a rental agreement for this ie you capitalize the balance and we pay a quarterly rental until the termination of the tolling agreement. The rental should recover the portion you paid less any residual value for it at the end eg I would give something like this a value of 10% say at the end of 5 years although as part of the whole site its likely worth more. At the end of the tolling period the lease is renewed on a peppercorn rental of a nominal sum eg $500 assuming the tolling agreement is renewed at that time.

3)   On the above my rough figures give a value of approximately $120k over 5 years ie $6,000 a quarter plus implied interest so you probably end up at $6,500 a quarter or something like that.

Hope all of the above makes sense and of course happy to look at it any other way you think might be better.

[Rose to Ellis 6 March12:32 am]

All seems overly complicated – and I’m a little confused by it all so please correct me if I’ve missed the point.

After analysis by you guys it was decided not to repair the Hogens and to have Hydrogen delivered. This analysis was done by comparing the cost of the Hogen repair against installing a driveway to allow all weather access for Hydrogen trailers. It was always understood and agreed that Hydrodec would pay for the installation of the driveway and this formed the basis of the analysis. This has been recorded in the OpCom minutes and we have proceeded with that decision on good faith.

Look, I did not want to lend any more money but if it helps I will add the outstanding balance to the loan to be repaid over the life of the existing agreement but I will not be accepting a discount on the deal as agreed.

[Ellis to Rose 7 March 4:30 am]

Apologies if I confused you and I am certainly not trying to get you to discount anything so my maths is probably out if that's what came across. I am travelling to the US tomorrow but I will try and get you over the next couple of days to clarify and sort one way or another.

171. There is no evidence of any further discussion over the following days. But about six weeks later the issue came up again in emails between Mr Rose and Mr Ellis:

[Rose to Ellis 20 April 11:04 pm]

Forgot whilst catching up - I'll just add the remaining balance of the driveway to the loan?

[Ellis to Rose 24 April 6:47 pm]

Yes you and me both. I think that makes most sense. If you can have someone send me through the final account to be added I can liaise with Mark to authorise.

172. As from the end of April 2017, the interest schedule was adjusted. The principal amount shown as owing was increased by the sum of $151,298. This sum was made up of seven specified invoices, evidently representing some of the costs of the construction of the driveway. The monthly charge was increased to $28,712.10 per month. This represented slightly less than one sixty-first of the adjusted capital amount outstanding. That compares with the sixty months which then remained before the expiry of the Capital Term in April 2022. The discrepancy is not explained in the evidence.

572. In my view it would be commercially unreal to see the correspondence as evincing a refusal by SOR to comply with its obligation of co-operation. The need to interpret obligations in business contracts in a commercially practicable way must surely apply with the greatest force to obligations of co-operation. While some of CGW’s correspondence also contained an unnecessary degree of asperity, as a matter of substance CGW was right in saying to COD that the solution to the problem lay in their client’s hands and their client should get on with solving it. I reject HA’s contention.

573. If I had been of a different view, I would still have doubted that it was correct to characterise SOR’s conduct as conversion. While it is true the conversion may take different forms, the essential element of the action is conduct by the defendant which denies the plaintiff’s title to the asset in question: see Sappideen and Vines, Fleming’s The Law of Torts (Thomson Reuters, 10^th ed, 2011) at [4.110]. It seems to me that conduct which has the indirect effect of impeding the exercise of the plaintiff’s rights could rarely, if ever, amount to conversion.

574. At no time did SOR make any claim for ownership of the Hydrotreater; its position was always that the Hydrotreater belonged to HA but it was up to HA to remove it. Even if I had been satisfied that SOR interfered with HA’s contractors, the appropriate tort would seem to be interference with contractual relations, or perhaps conspiracy. But HA never put its case that way. The case it did put fails.

Receiving tanks

585. Leaving the Agreement to one side, the position is quite clear. It was stated by Slattery J in Petkovski v Huang [2018] NSWSC 1667 (at [447], citations omitted):

If a structure was initially placed upon a plaintiff’s land with consent, subsequent termination of an implied licence creates a duty to remove it, and a continuing trespass is committed by the defendant’s failure to do so within a reasonable time.

586. HA did not dispute that prima facie it was liable for trespass in leaving the receiving tanks behind after the expiry of the Agreement. HA advanced two affirmative defences.

587. HA’s first defence involved reliance on its disclaimer. I am not sure how strongly this was ultimately pressed by counsel for HA. In any event, I think it is clearly unsustainable.

588. In Vincent v State Bank of NSW Ltd (Supreme Court of New South Wales, Young J, 30 July 1993) Young J said (at 12):

In a note, presumably by Pollock in (1894) 10 LQR 293, in commenting upon Arrow Shipping Co Ltd v Tyne Improvement Commissioners (The Crystal) [1894] AC 508, it is said: "We humbly conceive the true doctrine to be that possession of goods is never absolutely vacant in law, and that an express abandonment is, in point of law, merely a licence to the first man who will take the goods for his own; which taking will be justified and will finally change the property if complete before the taker has notice that the licence is revoked." The principle is affirmed in the judgment of Farwell J in Attorney General v Trustees of British Museum [1903] 2 Ch 598, 608 to 609. See also Johnstone and Wilmot Pty Ltd v Kaine supra; Moorhouse v Angus and Robertson (No 1) Pty Ltd [1981] 1 NSWLR 700, 706 and Cook v Saroukos (1989) 97 FLR 33, 40 to 41.

589. What this means is that the effect of the disclaimer was to allow SOR to assume ownership of the tanks; or to arrange for someone else to come in and take the tanks away, at which point that person would become the owner. It was not to confer ownership on SOR against its will. As Young J said in Vincent at 11:

One could not get rid of a liability for radioactive waste merely by renouncing one’s property in it.

590. HA’s second defence was that the effect of the Agreement was to confer ownership on the tanks on SOR if HA chose not to remove them. This does not reflect the express language of clause 2.1; an implication would be required. For multiple reasons, I do not think that any such implication arises.

591. First, there is no need for any such implication. The Agreement expressly preserved the parties’ non-contractual rights, which would include rights incident to ownership: clause 17.9.

592. Secondly, an implied term conferring a discretion on HA to renounce property following the termination of the contract would presumably require some sort of period during which it would have to be exercised, and an associated notice procedure. It is far from clear what these would have been (and consequently whether HA validly would have exercised the putative contractual right). Such an implied term would also have had to provide that in the event of the exercise of the right, the property in the item in question would pass to SOR. Otherwise there would be potential for conflict between the contractual right and HA’s tortious liability in trespass as continuing owner. But that seems a most unlikely implication from SOR’s point of view.

593. Thus even if there was a need for some sort of implied term to address the contingency that HA wished to leave property behind, it is quite unclear what particular term would necessarily or reasonably have been implied. For these reasons, the proposed term fails multiple elements of the test for implication.

594. For its part, SOR also sought the implication of a contractual term. Counsel for SOR submitted that alongside its rights in trespass (and nuisance), SOR had a contractual right to require removal which could be enforced by mandatory injunction.

595. I do not agree with this. The same objections to the implication of the term for which HA contended apply equally to this proposed implied term. In my view, so far as the receiving tanks are concerned there are no contractual rights either way and SOR’s rights lie in trespass.

596. As I have mentioned, SOR sought an order for removal in aid of its rights of trespass. But in his closing submissions, counsel for SOR stated that SOR elected in favour of pursuing a claim for damages. Counsel made it clear, however, that SOR continued to seek an order for removal if for some reason a damages award was not available.

597. Certainly a litigant who chooses to enforce a claim for damages for trespass cannot thereafter make a claim for an order for removal. But the contrary does not apply. An example of what can happen is furnished by my decision in Reliance Financial Services Pty Ltd v Allyma Express Holdings Pty Ltd (No 2) [2018] NSWSC 1776.

598. In that case, the plaintiff financier exercised a right of repossession over some vehicles. The vehicles had been in the borrower’s possession and the plaintiff obtained a mandatory injunction requiring them to be delivered up. The order was not fully complied with. Some of the vehicles were not delivered up because they were no longer in the borrower’s possession.

599. As I noted at [107] there seemed no reason in principle why the plaintiff, having been unable to enforce an order for delivery up of the missing vehicles, could not revert to a claim for damages. The reason for making an order for specific delivery is that damages are an inadequate remedy, but that should not mean that if the order cannot be enforced damages cannot be obtained at all. However, in that case no further claim for damages was actually made.

600. The difficulty with the “election” in this case is that the evidence of damages was not satisfactory. Counsel for SOR sought to construct a rough calculation by reference to various quotes found in the evidence. The calculation yielded $232,610. But it was not clear to me whether any of the quotes contained an identifiable figure for decontaminating the tanks, and there were other expenses such as transport which I thought could not reasonably be extrapolated from the information to which I was referred. In my view, the amount claimed was nothing more than guesswork.

601. In his submissions, counsel for Hydrodec noted that on the evidence there may be a question about HA’s solvency should it fail in these proceedings. Counsel submitted however that this was not a reason for the Court to make an order requiring HA to remove the property. That, it was said, would be an “end run” around insolvency.

602. Given the principles I have just stated, the prospect of insolvency cannot of itself be a reason to refuse to make an order for removal of a trespassing chattel if that is otherwise justified. Just because the Court makes an order does not mean it will necessarily be enforceable. HA cannot be required to remove anything from SOR’s land if it lacks the means to do so. If HA were to become insolvent and the order could not be enforced, SOR would be remitted to a claim for damages for which it would prove as an unsecured creditor.

603. But HA might not go into liquidation. Its parent, HG, might choose for reputational or other reasons not to let it collapse. In that event there is no reason why the order should not be complied with.

604. The real question is therefore whether an order for specific removal of the tanks is appropriate. SOR’s cause of action is in trespass, but the Court has power to order specific removal if damages are not an adequate remedy or there is some other reason for equity to intervene: Heydon, Leeming and Turner, Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 5^th ed, 2015) at [21-120].

605. Counsel for Hydrodec referred me to the decision of Slattery J in Gilgandra Marketing Co-operative Ltd v Australian Commodities & Merchandise Pty Ltd [2011] NSWSC 16 at [111]-[112]. His Honour acknowledged that there is a “diversity of views” on whether an award of damages, if otherwise adequate, becomes inadequate because of the defendant’s insolvency so as to justify an order for specific performance (see now Meagher, Gummow & Lehane [20-030]). On the other hand, the Court’s power to order specific removal in the present case is analogous to its power to order specific delivery of a chattel (see generally Meagher, Gummow & Lehane chapter 22). In such cases an award of damages has been seen as inadequate because of the possibility that the award might be defeated by insolvency: Orr v Lane (1951) 52 SR (NSW) 37 at 41; Re Gillie (1996) 70 FCR 254 at 259A.

606. In the Gilgandra case the defendant was already in administration and was found to be insolvent. His Honour was satisfied that an order for specific performance would prejudice other creditors. In my view the present situation is different. It is not certain that HA will fail. If it does, then for reasons I have given prejudice to other creditors is unlikely. I see nothing wrong in principle with the Court making an order on a “wait and see” basis.

607. There is I think a further distinguishing factor in the present case. The removal of the receiving tanks is a delicate and specialised task. The cost of removal is likely to be difficult to estimate in advance of doing the work. The assessment of damages is far removed from the simple exercise of determining the market price of a shipment of commodities, as in Gilgandra.

608. Finally, there is the fact that HA itself wishes to obtain the assistance of the Court in removing the Hydrotreater. Although HA has a contractual right to remove the Hydrotreater only, the grant of specific performance can be made on terms. It is also relevant that the Hydrotreater is still connected to the receiving tanks and the most efficient and least disruptive course may well be to remove all of the plant at once, rather than have it done by two successive contractors.

609. Accordingly, I propose to make an order requiring HA to remove the receiving tanks. I do not however propose to go so far as to make the order for removal of the Hydrotreater conditional on the removal of the tanks at the same time. If it emerges that the order for removal of the tanks cannot be enforced against HA, then SOR will need to remove the tanks itself, and at that point will be able to make a claim for damages based on the actual cost of removal, rather than have the Court speculate.

PCB-contaminated feedstock

610. The Agreement defined the “Delivery Point” as the flexible hose connection through which feedstock was discharged from tankers, for holding in the feedstock tanks. Similarly, it defined the Transfer Point as the flexible hose connection through which SUPERFINE stored in the production tanks was made available. Handling and storage of feedstock once received were relevantly dealt with in clauses 5.5 and 5.7:

5.5    Title and risk

(a)    Title to the Tolling Feedstock at any point from supply to the Delivery Point through tolling, as SUPERFINE and through to transfer from the Transfer Point to tankers remains with Hydrodec and at no point passes to SOR nor does SOR have or acquire any interest of any nature whatsoever in the Tolling Feedstock or SUPERFINE by custom, operation of law or otherwise.

(b)    SOR bears the risk of any loss or damage to Tolling Feedstock and SUPERFINE from delivery until transfer.

…

5.7    Storage

SOR must ensure safe and secure storage of Tolling Feedstock and SUPERFINE Procedures and specifications for storage may be specified by the Operating Committee.

611. For its claim, HA first relies on clause 5.5(b), arguing that the contamination resulting from the blending of the non-PCB contaminated oil is “damage” the risk of which is allocated to SOR pursuant to that clause. Alternatively, HA contends that the blending resulted in damage which is actionable in trespass, it being the owner of the oil.

612. Clause 5.7 obliged SOR to store the oil. At all relevant times HA was asserting that it would restart the Hydrotreater. In that context, and having regard to the applicable operating procedures (see [294] above), I find that the blending was authorised. Its effect on the value of the non-PCB feedstock was not part of the “risk” allocated to SOR by clause 5.5(b). Nor was it a trespass.

613. Secondly, HA relies on breach of clause 3.9 which provided:

3.9    Compliance with law

(a)    SOR is responsible for ensuring that all Co-location activities at the Bomen Site comply with applicable laws. regulations, approvals and planning instruments.

(b)    Hydrodec is responsible for ensuring that all transport and delivery activities contemplated by this clause 3 comply with all applicable laws, regulations, approvals and planning instruments.

614. This clause is part of a group of clauses dealing with the commissioning of the Hydrotreater. In my view that is what it is concerned with. It does not apply to later conduct associated with processing the oil under clause 5. In any event, for the reasons given at [295] above, blending was authorised under the terms of the SOR licence. There was no relevant breach by SOR.

615. If I had taken a different view, it would have been necessary to consider the quantum of HA’s damages. For the reasons I discussed in summarising the evidence on receipt and mixing of the feedstock, that is problematical. I am quite unable to assess the damages on the material which I have.

616. Counsel for Hydrodec urged me that if that was my view I should not let it defeat HA’s claim. Counsel drew an analogy with the problematical evidence about damages on SOR’s claim for removal of the receiving tanks. Counsel submitted that I should adjourn to allow a proper analysis to be done.

617. Had it been necessary to rule on this argument, I would not have accepted it. The analogy is not exact.

618. In the first place, the uncertainty with respect to HA’s claim is more than an uncertainty about the quantum of damages. It goes to the underlying question of breach. I simply do not know which batches were mixed when so as to give rise to the supposed breaches.

619. Secondly, SOR’s claim for damages was always made alongside an alternative claim for specific relief in the form of an order to remove the receiving tanks. HA’s claim is, and always has been, just a claim for damages. Ordinarily, unless an order for separate issues has been made beforehand, the Court expects a party to put forward its case on damages at the hearing. In the present case there is even less reason for allowing even HA a further opportunity because HA has attempted to lead evidence on the question but failed to prove its case. On any view, the claim must be dismissed.

Liability of HG

620. SOR’s claims against HG as surety were made under clauses 3.10(b) (monthly capital charge for June and July 2019); 3.10(e) (clause 9.2 termination capital payment); and 4.2(a) (monthly tolling fee for June and July 2019). In each case HG was obliged to “procure” the making of the relevant payment by HA. The obligation was not expressed in the language of guarantee or indemnity, but the parties agreed that the contractual rules applicable to a surety applied.

621. In closing submissions, counsel for SOR clarified how he put the claim. His contention was that in each case the payment obligation has accrued and HA has failed to pay. From the moment of default, therefore, HG has been in breach by failing to procure the payment.

622. SOR thus claims damages on the footing that it is entitled to be put in the position it would have been in had HG complied with its obligations. Had HG procured the payments when they fell due, SOR would now have the money. Accordingly, SOR is entitled to judgment against HG now, without waiting to see whether, following the entry of judgment against HA, HA satisfies that judgment. Counsel for HG did not dispute this analysis.

623. In its defence, HG pleads three answers to SOR’s claim. The first is that its surety obligations were discharged by variation as a result of the agreement concerning the driveway, to which HG contended it was not party. Second, HG pleads that it validly terminated its surety obligations on account of breach by SOR on 16 September 2019. Third, if the September 2019 termination was not effective, then HG pleads that its November 2019 termination brought its obligations to an end.

Effect of driveway agreement

624. In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 the High Court discussed the principle of discharge by variation and concluded (at 559):

According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety’s rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety’s risk, e.g., a reduction in the debtor’s debt or in the interest payable by the surety.

625. What the Court said was qualified by reference to “the English cases”. Ankar was a case about discharge by breach rather than discharge by variation. The Court did not definitively adopt the principle in the terms stated. But both parties in the present case were content to apply it in those terms.

626. The driveway agreement increased the amount repayable under clause 3.10. The question therefore is whether the variation was consented to by HG.

627. At the time the Agreement was made, Mr Ellis was CEO of HG. I have already explained why clause 17.7 of the Agreement, which required variations to be in writing, was no obstacle to the efficacy of the driveway agreement as against HA. The same logic would apply to HG.

628. HG’s liability thus depends on whether, when Mr Ellis made the agreement with Mr Rose to add the cost of the driveway to the capital expenditure for the purposes of the Agreement, his actions were actions of HG. The question is one attribution to a company of the activities of an individual who is an officer or employee of it. The test depends upon the objective circumstances, having regard to the rationale of the rule under which the question of attribution arises: Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506-507.

625. In my view, there are two objective circumstances of great importance. The first is the context for the communications. At [194] above I have set out the details of the email footer which Mr Ellis used in communicating with Mr Rose. The footer described Mr Ellis as the CEO of HG. It did not mention HA at all. It quoted the hydrodec.com email address which likewise was identified with HG rather than with Hydrodec’s Australian companies.

626. I accept that some of the communications between Mr Ellis and Mr Rose took place on iPhone or iPad which would not have included that footer. But objectively such communications represented a continuation of the communications sent by Mr Ellis using the HG email footer. The same logic applies to oral communications.

627. Counsel for Hydrodec suggested that the force of this point was reduced by the circumstance that the email footer would have been added automatically to the email by the computer application responsible for sending it. But I do not see why that is so. Counsel accepted that I could take judicial notice that Mr Ellis or someone else at HG would have been responsible for setting the email footer up in the form in which it appears. In my view it is no different from Mr Ellis writing to Mr Rose on a paper letterhead supplied by his employer with HG’s name and the other details printed on it.

628. The second relevant factor is that in offering his explanation to Mr Rose for what he wanted, Mr Ellis said that it was because it would suit him in his dealings with “his” shareholders and “his” auditors (see [168] above). In the context, that could only have meant HG’s shareholders and HG’s auditors.

629. In these circumstances, I consider that the proper objective interpretation of Mr Ellis’ communications with Mr Rose is that they were communications on behalf of HG. Whether the communications about the driveway are properly regarded as a stand-alone agreement between HA and SOR to which HG was also party, or as giving rise to a separate consent by HG, does not matter. On either view HG is bound.

Purported termination 16 September 2019

634. This defence is based on breach, rather than variation, of the principal agreement. In Ankar the High Court stated the applicable principle as follows (at 561):

If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety’s obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. If on its true interpretation the term is not intended so to operate, it is not easy to understand why the surety should be discharged by its breach.

635. On the interpretation question, the Court referred to the general rule that the law will lean against interpreting a term as a condition and will instead lean towards interpreting it as a warranty or an intermediate (or “innominate”) term. But the Court went on (at 561):

The doctrine of strictissimi juris provides a counterpoise to the law’s preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety and so the provision should be interpreted as a condition, or perhaps as an innominate term, instead of a mere warranty.

636. The breaches identified as justifying the termination were those associated with alleged failures of record keeping concerning the Plant and Equipment Schedule. Counsel for HG submitted that this prejudiced HG because it was “deprived of necessary information” in understanding the nature and scope of the liability for which it was surety.

637. I am not sure that HG had any entitlement to rely upon these alleged breaches. The audit was carried out for HA purportedly pursuant to HA’s rights under clause 5.10. The obligation to co-operate in the preparation of the Plant and Equipment Schedule under clause 3.10(a) was an obligation owed by SOR to HA. In any event, for reasons I have already given, I am not satisfied that there was any relevant breach.

638. Even if I had taken a different view, I would not have gone so far as to conclude that the relevant terms should be interpreted as conditions. At most they might be interpreted as intermediate terms. But even if so, I would not have been satisfied that HG was prejudiced by any breach on the part of SOR.

639. The question of substance was how much was owing. Had I accepted Hydrodec’s arguments, I might have ordered an account, but there would have been no reason for HG to escape liability for the amount determined through that account. There is no evidence, and no reason to think, that HG made any commercial decision based on the existence or otherwise of records concerning the quantum of its liability under clause 3.10(e).

640. In fact the opposite was the case. Mr Ellis was informed of the outcome of Ms Baker’s audit in 2015 and I am satisfied that he approved the actions of the Hydrodec representatives at the Operating Committee meeting on 21 January 2016 which in effect accepted the documentation put forward by SOR as adequate subject to a minor financial adjustment. I think the objective context makes it clear that this participation and approval was in Mr Ellis’ capacity as Hydrodec CFO, and thus on behalf of HG. I have already concluded that Mr Ellis also approved the driveway expenditure on behalf of HG; indeed he requested it.

641. Counsel for SOR argued that it was not necessary even to consider the merits of HG’s contention concerning this purported termination. Counsel pointed out (and counsel for Hydrodec agreed) that the liability to pay the monthly capital charges and monthly tolling fees had already accrued. Later termination could not affect HG’s liability as surety.

642. Counsel for SOR submitted that the same was so for the liability to make the termination payment under clause 3.10(e). Counsel submitted that that liability accrued on the date of termination, namely 26 July 2019. But I am not sure that this is correct.

643. Under clause 3.10(f), the Net Realisable Value of the relevant assets could not be determined unless the assets were either sold or valued. If the assets had been sold under sub-clause (i), the credit against Net Realisable Value would have represented the actual amount received at the actual date of sale. It is not easy to see why valuation of the assets under sub-clause (ii) should have followed a different approach.

644. Furthermore, even if the Agreement had required the valuation to be conducted as at the termination date, for practical purposes the amount of the credit would not have been quantified until the valuation had taken place. It seems to me that the scheme of the valuation provisions, which imposed a series of short deadlines, favours the view that the parties intended that payment would not fall due until the valuation had taken place. It was only at that point that the GST could have been calculated and the necessary tax invoice issued.

645. It is not necessary to resolve this question finally for the purposes of the present judgment. It will however be relevant to determining how much interest should be carried by the judgment that I will give. Should SOR wish to contest the preliminary view which I have expressed, there can be further submissions at that stage.

Purported termination on 22 November 2019

646. The basis for this purported termination was SOR’s alleged breaches of the Agreement in connection with the removal of the Hydrotreater. Counsel for Hydrodec submitted that by obstructing the removal of the Hydrotreater, SOR deprived HA of the opportunity to apply the proceeds to the discharge of its obligations, and thereby prejudiced HG.

647. I have already concluded that there was no relevant breach and that the real reason for the removal of the Hydrotreater had nothing to do with any conduct of SOR. For these reasons the defence fails.

SOR taking advantage of its own wrong

648. This defence was also based on the allegedly wrongful conduct of SOR in connection with the removal of the Hydrotreater, but extended beyond breach of the Agreement. It also covered wrongful conduct in the form of the alleged conversion of the Hydrotreater by SOR. The contention was that in depriving HA of the Hydrotreater (and thus of funds to meet SOR’s claim) and then pursuing a claim against HG as surety, SOR was taking advantage of its own wrong.

649. Had I concluded that there was some wrongful conduct by SOR in connection with the removal of the Hydrotreater, it would have been necessary to consider carefully just when the conduct took place, so as to see whether it took place before the liability to make the termination payment accrued. As it is, on my findings this defence also fails.

Amendment application

650. On the last day of the evidence (15 December), HG applied for leave to amend its defence to raise a further answer to SOR’s claims. After hearing the application, I refused it and said I would give my reasons when I published my judgment. Those reasons now follow.

651. The debate before me focused on the insertion of proposed paragraphs 54A-54D in the defence. The paragraphs referred to the arrangement described in Mr Rose’s affidavit evidence whereby the “permitting, approvals and expenditure” costs which had been allocated by the sanction agreement to be borne equally by SOR and HA were reallocated to expenditure under clause 3.10 (see [133] above). The proposed amendment alleged that this was a variation to the terms of the Co-location Agreement and the Sanction Agreement, which was adverse to HG’s interests, and had not been consented to by HG.

652. Counsel for SOR protested that allowing the amendment after the evidence had been completed would be prejudicial. It was too late for SOR to lead evidence, or cross-examine Hydrodec’s witnesses, about the issue of consent.

653. In this I think counsel was clearly correct. There was some debate about whether the onus lay on HG to plead a lack of consent, or SOR to plead consent by way of reply. I do not think this matters. Even if the onus lay on SOR, the pleading of the issue by way of amendment to HG’s defence was necessary to avoid surprise.

654. Given the stage of the hearing when the amendment was proposed, an adjournment was unthinkable, and was not suggested by counsel for Hydrodec. In these circumstances, I considered that the application had to be refused. I should note in passing that no explanation was given as to why the point had only been brought forward when it was. It would have been available from the outset, and Hydrodec’s pleadings went through multiple iterations.

655. I should note that in preparing the judgment I have noticed that there were two other proposed paragraphs, 56E and 56F, which sought to supplement the grounds for termination by relying to other alleged breaches by SOR. In the course of argument these were briefly referred to by counsel for Hydrodec, and counsel for SOR said he would need to think about them. They were not referred to again in the leave argument.

656. At the same time as I considered the proposed amendments to HG’s defence, counsel for Hydrodec applied for leave to amend HA’s statement of cross-claim. That amendment was not opposed by counsel for SOR. The amended pleading was subsequently filed. But although it was unclear whether SOR actually opposed the proposed amendment to HG’s defence by way of paragraphs 56E and 56F, no further defence was filed. Nor was the issue referred to in closing submissions.

657. I do not know what, if any, further discussion took place between the parties’ legal representatives about proposed paragraphs 56E and 56F. However at the time I said that I would refuse the amendments, I only had proposed paragraphs 56A-56D in mind.

658. I am not making final orders on the delivery of this judgment. Therefore, should counsel for Hydrodec wish, I will entertain the rest of the application to amend so as to add paragraphs 56E and 56F. I will then direct supplementary submissions if those amendments are consented to or, after argument, permitted.

Conclusions and orders

659. I have concluded that:

1. SOR is entitled to judgment against HA in the sums of $64,685 (representing monthly capital charge payments for June and July 2019) and $1,112,096 (representing the capital payment due on termination), and HA’s cross-claim for an account to determine the amount of the clause 3.10 capital expenditure fails;

2. SOR is entitled to judgment against HA in the further sum of $417,652 (representing monthly tolling fee payments for June and July 2019) and HA’s cross-claim for repayment of previously paid tolling fees fails;

3. SOR is entitled to orders requiring HA to remove the Hydrotreater Plant (including the PCB-contaminated receiving tanks) from the Bomen site, with liberty to apply for an award of damages instead should some or all of those assets not be removed in accordance with the order, and HA’s cross-claim for damages for conversion (to the extent pressed) fails;

4. so too HA’s cross-claim for damages against SOR for mixing PCB-contaminated deliveries of oil feedstock with other feedstock fails;

5. SOR is entitled to judgment against HG, jointly and severally with HA, for the sums in (1) and (2).

660. It will be necessary to calculate interest down to the entry of judgment, and to settle the form of the order for removal of the Hydrodec plant. HA’s cross-claim will be dismissed.

661. The asset preservation orders made in December 2019 remain in force until further order. SOR should consider whether, once final orders are made, it wishes to have any asset preservation orders continue, and if so in what form, until the judgments against HA are satisfied.

662. I shall stand the proceedings over for a short period of time to allow the parties to formulate orders giving effect to my judgment. The proposed orders should also deal with costs, and the form of any asset preservation orders which are to apply until the judgments against HA have been satisfied.

663. Conclusion (5) is subject to the possibility of HG pursuing its application to amend its defence by adding proposed paragraphs 56E and 56F. If any such application is to be pursued, the Court should be notified as quickly as possible.

664. The orders of the Court are:

1. Adjourn the proceedings until 9.30am on 5 February 2021 or such other time as may be arranged with my Associate.

2. Direct that, no later than 48 hours before the time fixed by order 1, the parties confer and lodge with the Court proposed orders to give effect to this judgment and also dealing with costs and any continuation beyond the making of final orders of asset preservation orders against the first defendant.

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Decision last updated: 29 January 2021