SPI Networks (Gas) Pty Ltd v AGL Victoria Pty Ltd & Anor

[2007] HCATrans 53

[2007] HCATrans 053

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M121 of 2006

B e t w e e n -

SPI NETWORKS (GAS) PTY LTD (FORMERLY TXU NETWORKS (GAS) PTY LTD)

Applicant

and

AGL VICTORIA PTY LTD

First Respondent

VICTORIAN ENERGY NETWORKS CORPORATION

Second Respondent

Application for special leave to appeal

KIRBY J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

FROM MELBOURNE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 9 FEBRUARY 2007, AT 11.00 AM

Copyright in the High Court of Australia

MR D.G. COLLINS, SC:   If the Court pleases, I appear with my learned friend, MS G.H. THOMAS, for the applicant.  (instructed by Johnson Winter & Slattery)

MR S.J. GAGELER, SC:   If the Court pleases, I appear with MS R.C.A. HIGGINS for the first respondent.  (instructed by Gilbert + Tobin)

KIRBY J:   Yes, Mr Collins.

MR COLLINS:   Your Honour, the…..of gas withdrawn from the transmission system by SPI for AGL being factor D in the relevant formula, was not a fact identified in the distribution tariff agreement.  VENCorp was required to ascertain and calculate factor D as one of the steps in the calculation of the reconciliation amount.  So much is clear from paragraphs 67 and 68 of Justice Nettle’s judgment at appeal book 52.

The mistake made by VENCorp in ascertaining the wrong quantity of gas, being factor D, was therefore a mistake made in performing part of the task entrusted to VENCorp by the distribution tariff agreement.  As clause 8.5(b) of the distribution tariff agreement provided that:

The calculation by VENCorp of the Reconciliation Amount shall be final and binding on –

the parties.  The calculation was binding even though the mistake made in performing part of that calculation which did not involve a degree of discretion, opinion or judgment.

The error in the judgment of the Court of Appeal which gives rise to the point of principle in respect of which we seek special leave is that clauses such as clause 8.5(b) by which parties agree that third parties shall be final and binding on them should be interpreted so that a wrong determination will only be binding if the mistake is made in a step in the determination involving a degree of discretion, opinion or judgment but will not be final and binding if the mistake is made in a step in ascertaining a fact or performing a mechanical process.

That is a principle, if not corrected, which would have general application to clauses by which parties expressly seek to achieve finality and certainty, albeit at the cost of the risk of being bound by a wrong determination.

KIRBY J:   You referred to a decision of the Court of Appeal of New South Wales where Justice McHugh, I think, put his finger on this issue.  I looked at that case.  Justice Mahoney took a different view.  Were the seeds of the issue that you seek to bring to the Court presented in that case or not?

MR COLLINS:   It is to this extent.  That principle has been often applied and the principle as stated by Justice McHugh is that once you get to the point where the determination is final and binding, that that is what the parties have agreed, the question is not whether the mistake was a mistake in a matter of judgment, discretion or opinion, the question is whether the mistake was made in the course of performing the task entrusted to the third party.  That is not the issue.  That cannot be an issue in this case because it is clear that the parties wished the determination to be final and binding.  They expressly provided that it was so.

KIRBY J:   I thought Justice McHugh said the search is for what the parties intended and if that were so then the question would be are the sub‑categorisations that have been proffered really helpful, at least as rules of general principle?

MR COLLINS:  With respect, in applying the principle the issue has been, consistent with the principle as stated by Justice McHugh, did the party responsible for making the determination depart from not what the contract required them to do?  The test and approach of Justice Nettle applied principles that are relevant when there is a provision for a third party determination but the absence of an express term stating that their determination will be final and binding.

In those circumstances, in deciding whether the parties intended that the determination should be binding the courts are assisted by the character of the tasks.  For example, in the absence of an express term, if the task is one involving judgment, opinion or discretion, it would be expected and presumed as a matter of construction or interpretation that the parties intended to be bound by the determination.

On the other hand, in the absence of an express term stating that the determination is to be final and binding, if the character of what is to be determined involves merely ascertaining an object of fact or a mechanical process which can be demonstrated to be clearly right or wrong, then in the absence of an express term it would usually be presumed that the parties had provided a mechanism for determination without intending that the determination by the third party involved in that mechanism would be final and binding.  But that approach ‑ ‑ ‑

KIRBY J:   Well, if Justice Heydon and I were still sitting in a Court of Appeal the matter would have a certain interest, but it does not strike me, at least at the moment, as a High Court point.  Why is it important for the High Court to deal for a second appellate time with what the semi‑final appellate court of Victoria has decided, having gone through all the matters and in a particular statutory context?  It does not shout out as a matter that the national final Court has to deal with.

MR COLLINS:   With respect, it is, as the ability of contracting parties to achieve finality and certainty at the cost of the risk of being bound by wrong determination is of importance.  The principles applied as to the proper approach to the construction of such a clause which, on the reasoning, in the decision, involves an analysis of the steps involved in the determination and then characterising the steps as either involving a matter of judgment, opinion or discretion, or, alternatively, a mechanical process where the ascertainment of a fact is likely to frustrate the contractual objectives of the party and will lead to the application of a principle established at intermediate appellate court level and to be applied by the courts at trial level and to be taken into account by lawyers working in their offices attempting to achieve the objectives of their clients.

KIRBY J:   What is the practical problem in that context of the decision of Justice Nettle?

MR COLLINS:   If, as it is submitted was the objective of the parties in this case and the intention to be ascertained from the language of the contract, was to preclude the risk of disputes and litigation, as many commercial parties wish to achieve that objective, how else could the relevant clause have been drafted to make the achievement of that objective more certain?  It is very plain language:  “Shall be final and binding”.  The importance is that this decision involves an approach to the interpretation and application of contractual provisions such as clause 8.5(b), which ‑ ‑ ‑

KIRBY J:   The devil is in those words “such as clause 8,” because I just question whether or not what has been said by the Court of Appeal of Victoria is anything more than a determination in this particular contract and in this regulatory environment.

MR COLLINS:   Well, with respect, the regulatory environment has no relevance to the question of principle, that is, when the parties have expressly provided that a determination by a third party, which involves as part of its steps a matter not involving judgment, discretion or opinion, it should be presumed that the parties did not intend that a mistake in performing those tasks meant that the determination would not be final and binding.  That has very broad application, it is submitted, given ‑ ‑ ‑

KIRBY J:   It would be an application that would be open to rather unjust results sometimes in the event of a major obvious and lately revealed mistake.  It could lead to very great injustice and absolute principle such as you were propounding.

MR COLLINS:   With respect, no, it is not an injustice because the parties have expressly accepted the risk of being bound ‑ ‑ ‑

KIRBY J:   That is one way to put it.  The other way to put it is they have expressly agreed to that on a premise that egregious mistakes, lately discovered, will undermine the process.

MR COLLINS:   That is a different question, with respect, your Honour.  That is whether a sufficiently gross mistake would be a basis for a decision ‑ ‑ ‑

KIRBY J:   Once you allow a gross mistake, then you have allowed a chink in your armour.

MR COLLINS:   I did not allow it, with respect.  I am pointing out it is a different principle.  The proposition that your Honour has suggested might be a proposition that ought to be accepted, that even where the parties have expressly provided that the determination is to be final and binding, the courts should impose a limit on that by implying provided it is not so gross that the parties could not have been intended to be bound by it.

That would be inconsistent with the statement of principle by Justice McHugh in Legal & General which seems to have been generally accepted, but that is a different reason for not being bound.  That is not because the mistake did not involve judgment, discretion or opinion.  It is because it is a big mistake with a big number and a big consequence and if parties agree to be bound by a determination and they take the risk and the risk goes badly for them, it is a question whether the court should then imply a clause which would say, provided it is not too big a mistake with too big a consequence, that is not this principle.  That is not the basis upon which the case was decided in the Court of Appeal.

So while I recognise it is certainly arguable that the proposition your Honour advances might be worthy of consideration, it is not an answer to the proposition we advance and the proposition we submit ought to be given consideration by the court.  It is not to say we are certain of success.  We are saying it is a principle of importance.  This is the first time, so far as we are aware, that this test examining the steps in the determination, commencing from the premise that they are steps in the task the third party is required to perform, and presuming that only those steps involving judgment, discretion or opinion are those which are final and binding.

If that is a proper approach to the construction of these clauses and their application, parties might as well not include them, because if that is the nature of the step that they have entrusted to a third party and the third party makes the determination, the principles would mean that it would be final and binding in any event, the parties having entrusted it to the third party.  That is a reason not to commence with the presumption that Justice Nettle did.

Once that is accepted, if it is, to move from the point that the mistake made was a mistake in the ascertainment of a fact and that fact was one of the facts required to be identified for the performance of a calculation.  To say that because the contract contemplated it would be correct means you have not done it in accordance with the contract is circular.  To accept that process of reasoning means that while accepting that one of the tasks of the third party was to ascertain the fact, it had not performed its task unless it got it right.

To construe a contract in that way when the parties have expressly provided that the task of which that step is a part is final and binding is to give the clause no meaning and it really follows from what is submitted is an artificial attempt to avoid what might be perceived as an unjust result by artificially presuming that the parties did not intend to be bound by each step in the determination they have agreed shall be final and binding, but only those steps which have a particular character.

KIRBY J:   You accept that what Justice Byrne held leads to an intuitively unjust result?

MR COLLINS:   It leads in one sense to an unjust result, but not in an absolute sense because both parties took the risk of being bound by the wrong result and if it had gone the other way, SPI, it is a bit like saying, “Because I could not afford to lose $5,000 and I thought I was backing the right horse, when it got beaten it is a very harsh result because I have lost the money I could not afford to lose.  It is not unfair because I took the gamble, I took the risk”.  In this case, by agreeing to a provision that said the determination of a third party shall be final and binding, that was the risk the parties agreed to take as the price of achieving their objective of certainty, finality, the avoidance of disputes and, importantly in the context of commercial agreements, the risk of being involved in litigation.

KIRBY J:   You are seeking to extend now?

MR COLLINS:   No, quite the opposite, with respect, we are entrapped contrary to our agreement.

KIRBY J:   I see, I understand.  You say you are merely trying to uphold the principle of the contract?

MR COLLINS:   Yes.

KIRBY J:   Yes, you are becoming a little repetitive now.  I think we understand your argument.

MR COLLINS:   Yes, if the Court pleases. 

KIRBY J:   Yes, the Court does not need your assistance, Mr Gageler.  I will ask Justice Heydon to give the reasons and pronounce the orders of the Court.

HEYDON J:   The applicant complains about calculations made by the second respondent of the reconciliation amounts for unaccounted‑for gas with respect to the TXU distribution network for 1999 and 2000.  The Supreme Court of Victoria, Justice Byrne, held that the calculations should be treated as final notwithstanding that they were predicated on an error as to a quantity of gas which entered the distribution network.  The Court of Appeal, Nettle JA the President and Bongiorno AJA concurring, allowed an appeal. 

The Court of Appeal construed the relevant contract as requiring the second respondent to determine the amounts on the basis of the volume of gas involved, an objective fact, and treated the area in which the second respondent’s judgment was to operate with finality as being limited to the determination of the reconciliation amount on that basis and as not extending to that basis. 

If special leave were granted the issues in the appeal would turn on the terms of a particular contract arrived at against a particular complex regulatory background.  Both the contractual arrangements and the regulatory background have now changed.  The controversy has been examined in detail and with care by two courts and there is no advantage in a further examination by a third.  No point of general law is involved and there are insufficient prospects of success. 

Special leave is refused with costs.

AT 11.21 AM THE MATTER WAS CONCLUDED