TEC Pipe Pty Ltd v FMG Solomon Pty Ltd
[2018] WASC 115
•12 APRIL 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: TEC PIPE PTY LTD -v- FMG SOLOMON PTY LTD [2018] WASC 115
CORAM: MASTER SANDERSON
HEARD: 23 MARCH 2018
DELIVERED : 12 APRIL 2018
FILE NO/S: CIV 2963 of 2017
BETWEEN: AND
TEC PIPE PTY LTD
Plaintiff
AND
FMG SOLOMON PTY LTD
First Defendant
FORTESCUE METALS GROUP LTD
Second Defendant
AND
FMG SOLOMON PTY LTD
First Plaintiff by Counterclaim
FORTESCUE METALS GROUP LTD
Second Plaintiff by Counterclaim
AND
TEC PIPE PTY LTD
Defendant by counterclaim
Catchwords:
Summary judgment - Plaintiff seeking judgment pursuant to terms of contract - Turns on own facts
Legislation:
A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Category: B
Representation:
Original Action
Counsel:
| Plaintiff | : | Mr S K Dharmananda SC & Mr E M Heenan |
| First Defendant | : | Mr B Dharmananda SC & Ms C V Wren |
| Second Defendant | : | Mr B Dharmananda SC & Ms C V Wren |
Solicitors:
| Plaintiff | : | Holman Fenwick Willan (Perth) |
| First Defendant | : | Corrs Chambers Westgarth |
| Second Defendant | : | Corrs Chambers Westgarth |
Counterclaim
Counsel:
| First Plaintiff by Counterclaim | : | Mr B Dharmananda SC & Ms C V Wren |
| Second Plaintiff by Counterclaim | : | Mr B Dharmananda SC & Ms C V Wren |
| Defendant by counterclaim | : | Mr S K Dharmananda SC & Mr E M Heenan |
Solicitors:
| First Plaintiff by Counterclaim | : | Corrs Chambers Westgarth |
| Second Plaintiff by Counterclaim | : | Corrs Chambers Westgarth |
| Defendant by counterclaim | : | Holman Fenwick Willan (Perth) |
Case(s) referred to in decision(s):
Midford v Deputy Commissioner of Taxation [2005] AATA 623
MASTER SANDERSON:
By amended chamber summons filed 22 February 2018 the plaintiff sought the following orders:
1.Judgment be entered for the plaintiff for the amounts of:
(a)USD 8,848,796.31, being the balance of the Redemption Payment due but unpaid on the transfer from the plaintiff to the first defendant of the Solomon Power Station;
(b)AUD 43,400,855.37 in respect of good and services tax payable on the transfer from the plaintiff to the first defendant of the Solomon Power Station;
(c)if judgment is entered after 30 April 2018, damages to be quantified at the date of judgment, calculated as the interest due by the plaintiff to the Deputy Commissioner of Taxation in accordance with Part 11A of the Taxation Administration Act 1953 (Cth) from 30 April 2018 to the date of judgment at the rate or rates determined pursuant to s 8AAD(1) of that Act.
2.Interest at the rate of 6% per annum on the sum of USD 8,848,796.31 pursuant to s 32(1) of the Supreme Court Act 1935 (WA) until judgment or earlier payment.
2A.Interest at the rate or rates determined pursuant to s 8AAD(1) of the Taxation Administration Act 1953 (Cth) on the sum of the amounts in orders 1(b) and 1(c) above from the date of judgment until the date of payment, pursuant s8(1) of the Civil Judgments Enforcement Act 2004 (WA).
3.The defendants pay the plaintiff's costs of this application and the proceeding, to be assessed if not agreed.
In my view judgment should be entered for the plaintiff in terms of pars 1(b) and par 2A amended to remove the reference to par 1(c). I would dismiss the claim in par 1(a). Given that the issue raised by par 1(a) will proceed to trial it is inappropriate for me to make any findings of fact or express any views as to the likely outcome. However, in deference to the comprehensive arguments put by counsel I will set out the respective arguments to demonstrate why it is I am of the view that summary judgment is inappropriate.
For the purposes of this application the relevant facts were not in dispute. They were set out in par 4 through to par 13 of the statement of claim. Rather than paraphrase what was pleaded I will simply recite these paragraphs as the nature of the claim is clear from their terms:
4.By an agreement in writing between TEC Pipe, TransAlta Corporation (TransAlta), FMG Solomon, and Fortescue, dated 4 September 2012 (Solomon PPA):
(a)TEC Pipe agreed to own, operate and maintain a power station located near the Solomon mine site in the Pilbara (Power Station) and to convert fuel provided by FMG Solomon into electricity and supply electricity to FMG Solomon at certain delivery points according to the terms and conditions of the Solomon PPA; and
(b)Fortescue agreed to guarantee the obligations of FMG Solomon under the Solomon PPA.
5.The Solomon PPA was amended relevantly by the following written agreements made by TEC Pipe, TransAlta, FMG Solomon, and Fortescue:
(a)a Modification Works letter agreement entitled 'Solomon Gas Reticulation Project' dated 6 March 2014; and
(b)a Tariff and Power Station Purchase Price Adjustment letter agreement dated 14 March 2016.
6.The Solomon PPA relevantly expressly provides in effect:
(a)Notwithstanding any other clause in the Solomon PPA, at any time during the term of the Solomon PPA, FMG Solomon may, in its absolute discretion, terminate the Solomon PPA for its convenience by giving TEC Pipe at least 3 months' written notice (Solomon PPA, cl 21.10(a)).
(b)Termination of the Solomon PPA operates without prejudice to any claims or any rights to damages that may have accrued to any party prior to termination (Solomon PPA, cl 21.11(a)).
(c)If FMG Solomon terminates for convenience under the provision referred to in paragraph 6(a) above, FMG Solomon will be deemed to have issued a notice (Transfer Notice) to TEC Pipe requiring TEC Pipe to transfer the Power Station to FMG Solomon or a related body corporate of FMG Solomon on a date specified in that notice (Termination Purchase Date) (Solomon PPA, cl 21.13(a)(ii)).
(d)If FMG Solomon elects to terminate pursuant to the provision of the Solomon PPA referred to in paragraph 6(a) above, FMG Solomon must pay to TEC Pipe on the Termination Purchase Date the 'Redemption Payment' (Solomon PPA, cl 21.10(b)).
(e)The following terms have the following meanings (Solomon PPA, cl 1.1):
(i)'Redemption Payment' means, relevantly, if a notice is issued under clause 21.10(a), the 'Power Station Purchase Price' at the time the notice is issued plus 6% (Solomon PPA, cl 1.1).
(ii)'Power Station Purchase Price' means the amount calculated pursuant to Schedule 12 to the Solomon PPA (as amended), a copy of which is annexed to this statement of claim as Annexure A.
(f)On the Termination Purchase Date:
(i)FMG Solomon must pay to TEC Pipe the Redemption Payment in immediately available funds (Solomon PPA, cl 21.16(d)(i));
(ii)TEC Pipe must undertake steps to effect the transfer of the Power Station to FMG Solomon and provide vacant possession of the Power Station (Solomon PPA, cl 21.16(d)(ii) and (iii)).
(g)If any goods and services tax (GST) as defined in the A New Tax System (Goods and Services Tax) Act 1999 (Cth)) (GST law) is payable by TEC Pipe in relation to any supply that it makes under or in connection with the Solomon PPA, the parties agree that:
(i)any consideration provided for that supply under or in connection with, or set out and calculated pursuant to a formula in the Solomon PPA (Agreed Amount) is exclusive of GST;
(ii)an additional amount will be payable by FMG Solomon equal to the amount of GST payable by TEC Pipe on that supply; and
(iii)the additional amount is payable at the same time as any part of the Agreed Amount is to be first provided for that supply and TEC Pipe will provide a tax invoice to FMG Solomon in respect of that supply, no later than that time,
(Solomon PPA, cl 33.2(a), (b) and (c)).
(h)Fortescue irrevocably and unconditionally:
(i)guarantees to TEC Pipe the due and punctual performance by FMG Solomon of all obligations contained in the Solomon PPA that must be performed and observed by FMG Solomon (Guaranteed Obligations);
(ii)undertakes that, whenever Fortescue does not perform the Guaranteed Obligations, it must immediately perform, or procure the performance of, the Guaranteed Obligations as if it were the principal obligor; and
(iii)indemnifies TEC Pipe against all losses, damages, costs and expenses which TEC Pipe incurs as a result of any breach by FMG Solomon of a Guaranteed Obligation,
(Solomon PPA, cl 27.1(a)(i), (ii) and (iii)).
7.On 1 August 2017, FMG Solomon issued a notice of termination for convenience under the provision of the Solomon PPA referred to in paragraph 6(a) above (Termination Notice) in which it specified that the Solomon PPA would terminate in 3 months' and 1 day from the date of the notice, being 1 November 2017.
8.The effect of the Termination Notice and the provisions of the Solomon PPA referred to in paragraphs 6(c), (d) and (e) above is that:
(a)FMG Solomon is deemed to have issued a Transfer Notice to TEC Pipe requiring TEC Pipe to transfer the Power Station to FMG Solomon on 1 November 2017;
(b)The Power Station Purchase Price is calculated as at the time the Termination Notice was issued, being 1 August 2017;
(c)The GST inclusive Redemption Payment is USD 366,316,239.59, being an amount of USD 314,164,871 (being the Power Station Purchase Price at 1 August 2017 as set out in Schedule 12) plus 6%.
9.Pursuant to the GST law, GST in the amount of AUD 43,400,855.37 (the AUD value of USD 33,301,476.33 on 31 October 2017) is payable by TEC Pipe in relation to the transfer of the Power Station to FMG Solomon.
10.On 31 October 2017, TEC Pipe issued a tax invoice to FMG Solomon, pursuant to the provision of the Solomon PPA referred to in paragraph 6(g) above, for payment of the sum of USD 366,316,239.59 due on the Termination Purchase Date, comprising:
(a)the sum of USD 333,014,763.26 in respect of the Redemption Payment; and
(b)the sum of AUD 43,400,855.37 (USD 33,301,476.33) in respect of GST payable on transfer of the Power Station.
11.On or before 1 November 2017, TEC Pipe did all things it was required to do to transfer the Power Station to FMG Solomon as referred to in paragraph 6(f)(ii) above.
12.On or about 1 November 2017, FMG Solomon:
(a)paid to TEC Pipe by electronic funds transfer to TEC Pipe's bank account the sum of USD 331,628,650.02 in part payment of the tax invoice issued on 31 October 2017;
(b)in breach of the provisions of the Solomon PPA referred to in paragraph 6(e) and 6(f)(i) above, failed or refused to pay to TEC Pipe:
(i)an amount of USD 8,848,796.31, being the balance of the GST exclusive amount of the Redemption Payment due pursuant to the Solomon PPA; and
(ii)an amount of USD 33,301,476.33 (AUD 43,400,855.37) in respect of GST payable on the transfer of the Power Station.
13.By reason of the matters pleaded above, TEC Pipe has suffered loss and damage.
Particulars
(a)USD 8,848,796.31 being the balance of the GST exclusive amount of the Redemption Payment due pursuant to the Solomon PPA.
(b)AUD 43,400,855.37 in respect of GST payable on the transfer of the Power Station.
Insofar as the claim in par 13(a) of the statement of claim is concerned, the defendant says two things. First, that the plaintiff miscalculated the 'Power Station Purchase Price' pursuant to sch 12 of the Solomon PPA. Second, the defendant says that upon handover of the power station it was required to undertake Remedial Works (as that term is defined in the Solomon PPA) and the cost of those works was USD 7,462,683.07. As an alternative to the contractual claim for set off the defendant says it is entitled to an equitable set off. There was no argument for the purposes of a summary judgment application as to the correctness or otherwise of the amount claimed by the defendant for the remedial works. It was the plaintiff's case that the defendant was not entitled pursuant to the contract to deduct any amount for remedial works and that in the circumstances an equitable set off was not available.
By cl 21.10(a) of the Solomon PPA the first defendant was permitted to terminate the agreement for convenience at any time by giving the plaintiff at least 3 months' written notice. If the first defendant elected to terminate for convenience then by cl 21.10(b)(i) it was relevantly required to pay the plaintiff 'on the Termination Purchase Date' the 'redemption payment'. The term 'Termination Purchase Date' is defined by cl 21.13(a) of the Solomon PPA. It reads as follows:
(a)If:
(i)Customer does not issue a notice pursuant to clause 3.2(c) by the date required by that clause ‑ Customer will be deemed to have issued;
(ii)Customer terminates for convenience - Customer will be deemed to have issued;
(iii)Customer notifies Supplier that it does not elect to extend the Initial Supply Period pursuant to clause 3 ‑ Customer will be deemed to have issued; or
(iv)this Agreement is terminated pursuant to a Customer Event of Default, Supplier may provide notice that Customer must issue;
(v)this Agreement is terminated pursuant to clause 21.9(a) - Customer will be deemed to have issued;
(vi)this Agreement is terminated for any other reason (other than pursuant to clause 21.8 (Customer Insolvency)) by Customer or by Supplier, including pursuant to this clause 21 and clause 25 - Customer may (in its absolute discretion) within 10 Business Days of termination issue:
a notice (Transfer Notice) to Supplier requiring Supplier to transfer the Power Station to Customer or a Related Body Corporate of Customer on a date specified in that Notice (Termination Purchase Date). Unless otherwise agreed by the Parties the Termination Purchase Date must be no later than the last day of the Supply Period, provided that in the case of a Transfer Notice given in the circumstances referred to in clause 21.13(a)(vi), both Parties must use reasonable endeavours to minimise the time periods required for the processes in this clause 21.13 and endeavour to achieve a Termination Purchase date as soon as reasonably practicable.
It is the plaintiff's position that the 'Termination Purchase Date' is the date specified in a notice issued by the first defendant pursuant to cl 21.10(a) as the date (which must be at least 3 months after the date of the issue of the notice itself) the first defendant specifies as the date for termination of the agreement. The term 'Redemption Payment' is defined in cl 1.1 of the Solomon PPA to mean relevantly:
(b)if a notice is issued under clause 21.10 … at any time during contract years 6 - 10 inclusive, the Power Station Purchase Price at that time plus 6%.
'Power Station Purchase Price' is defined by cl 1.1 to mean 'the amount calculated pursuant to schedule 12'. It is common ground that schedule 12 of the Solomon PPA was amended by a 'Tariff and Power Station Purchase Price Adjustment' letter agreement dated 14 March 2016.
When the plaintiff calculated the 'Redemption Payment' pursuant to schedule 12 it took as the relevant date 1 August 2017. In doing so by reference to schedule 12 (as amended) it used as it base price an amount of USD 314,164,871. There is no doubt that as at 1 August 2017 that was the appropriate figure to use. Schedule 12 actually anticipates a sliding scale. So if the first defendant had terminated the Solomon PPA as at 1 September 2015 it would have been obliged to pay an amount of USD 324,940,730. As can be seen the figure payable on 1 August 2017 was some $20,000,000 less than it would have been two years earlier. If the notice had been given on 1 June 2023 the amount would have been $266,743,834. It was the defendant's position this sliding scale meant that on a proper interpretation of the relevant provision of the Solomon PPA the figure to use was the prescribed amount as at the date of handover. That interpretation was consistent both with the wording of the relevant clause and a practical application of the principles.
For present purposes I need say nothing more than I am satisfied the position is arguable. Had the defendant applied for summary judgment then it probably would have been necessary for me to reach a concluded view on the proper operation of the provision. But the defendant chose not to take that course.
Clauses 19.4 and 19.5 deal with circumstances where a payment is to be made by one party to another: they are in the following terms:
19.4Payment
Customer must pay the amount set out in Supplier's invoice under clause 19.1:
(a)by electronic funds transfer to the bank account nominated from time to time by Supplier, or as otherwise advised by Supplier in writing; and
(b)no later than 30 days after receiving the invoice (Due Date), except where:
(i)Customer exercises its right to retain part of the amount set out in Supplier's invoice pursuant to this clause 19.4; or
(ii)Customer disputes the invoice, in which case:
(A)Customer will pay the undisputed part of the relevant invoice (if any) and dispute the balance; and
(B)if the resolution of the dispute determines that Customer is to pay an amount to Supplier, Customer will pay that amount upon resolution of that dispute.
(c)The making of any payment to Contractor will not be taken or construed as proof or admission of the Power Station or Supplier's Activities or any part thereof having been performed to the satisfaction of Customer but will only be taken to be payment on account.
(d)Customer may set off from any money due to Supplier pursuant to this Agreement, including but not limited to all debts, damages, costs, expenses or any other moneys due from Supplier to Customer under or by virtue of any provision of this Agreement, the performance or non‑performance of Supplier's obligations under this Agreement.
(e)If Customer is required by Law to deduct any Taxes from any payment due to Supplier, Supplier authorises this deduction and agrees that payment to the appropriate Authority of the amount deducted will constitute good and full payment by Customer to Supplier of an equivalent amount.
(f)If Supplier is required by Law to deduct any Taxes from any payment due to Customer, Customer authorises this deduction and agrees that payment to the appropriate Authority of the amount deducted will constitute good and full payment by Supplier to Customer of an equivalent amount.
19.5Disputed Amounts
(a)If any Party (Disputing Party) disputes in good faith the amounts owed to it by the other Party, then the Disputing Party must:
(i)pay the undisputed portion of the amount by the Due Date; and
(ii)give the other party a notice specifying the amount in dispute.
(b)Any dispute as to any amount owed in respect of which the Parties do not reach agreement within 20 Business Days following the date on which that amount should, but for the dispute, have been paid, may be referred by either Party to that dispute for determination under clause 32.
(c)If the Parties agree or it is determined pursuant to clause 32 that the balance (in whole or in part) of the disputed amount is:
(i)due and payable, then that amount must be paid by the Disputing Party no later than 30 days after that determination being made plus interest calculated at the Prescribed Rate from the Due Date until the date the amount is paid; and
(ii)not due and payable, then that amount is not required to be paid.
The plaintiff says cl 19.4 and in particular cl 19.4(d) require the defendant to make payment of the 'Power Station Purchase Price' without any deduction. That is because no amount has been assessed as owing by the plaintiff to the first defendant pursuant to any dispute resolution procedure. On the other hand the first defendant says it has a claim in damages and therefore it is entitled to withhold payment pursuant to cl 19.4(d) because that is specifically what the clause says.
In my view there is a serious question to be tried on this issue. It should await determination at trial.
That leaves the question as to the goods and services tax (GST) payment. The requirement to pay GST is covered by cl 33 of the Solomon PPA. Relevantly the clauses read as follows:
33.1Definitions
(a)In this clause 33:
(i)GST, GST law and other terms which are defined in or for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) or any amending or replacement or other relevant legislation and regulations have the meanings so ascribed to them, except that GST law also includes any other legislation enacted to validate, recapture or recoup tax collected as GST;
(ii)a reference to GST payable by a Party includes any GST payable by the representative members of any GST group of which that Party is a member; and
(iii)a reference to input tax credits to which a Party is entitled includes input tax credits to which the representative member of any GST group of which that Party is a member is entitled.
(b)If the GST law treats part of a supply as a separate supply for the purpose of determining whether GST is payable on that part of the supply, or for the purpose of determining the tax period to which that part of the supply will be attributable, such part of the supply will be treated as a separate supply for the purposes of this clause 33.
(c)In this Agreement:
(i)a reference to costs, fees, charges or other expenditures (Costs) in this Agreement is a reference to the amount of those Costs excluding any part of those Costs which is attributable to GST for which a Party (or the representative member of a GST group of which that Party is a member) is entitled to an input tax credit; and
(ii)a reference to revenue must be calculated without including any amount received or receivable as reimbursement for GST (whether that amount is separate or included as part of a larger amount).
33.2GST payable
If GST is payable by an entity (in this clause 33 the Supplier) in relation to any supply that it makes under or in connection with this Agreement, the Parties agree that:
(a)any consideration (including the value of any non‑monetary consideration) provided for that supply under or in connection with, or set out and calculated pursuant to a formula in this Agreement other than under this clause 33.2 (the Agreed Amount) is exclusive of GST;
(b)an additional amount will be payable by the recipient equal to the amount of GST payable by the Supplier on that supply;
(c)except to the extent that clause 33.2(d) is applicable, the additional amount is payable at the same time as any part of the Agreed Amount is to be first provided for that supply and the Supplier will provide a tax invoice to the Recipient in respect of that supply, no later than that time; and
(d)where additional amounts are payable between Parties to this Agreement pursuant to clause 33.2(b) and where the amounts fall due at the same time, amounts so payable, to the extent they are equivalent in amount, must be set off against each other as if paid and each Party will be obliged only to give the other the tax invoice referred to in clause 33.2(b).
To the extent, if any, that any consideration (or part thereof) is specified in this Agreement to be inclusive of GST, that consideration (or the relevant part) will be excluded from the Agreed Amount for the purposes of calculating the additional amount under clause 33.2(b).
When it issued its tax invoice to the first defendant on 31 October 2017 the plaintiff included an amount for GST. In conformity with the legislation the plaintiff elected to convert the GST payable into Australian dollars using the relevant exchange rate as at 31 October 2017. The first defendant declined to make payment of the GST because it said that the transaction 'represents a "supply of a going concern"'. This picks up s 38‑325(1) of the GST Act which provides:
(1)The *supply of a going concern is GST-free if:
(a)the supply is for *consideration; and
(b)the *recipient is *registered or *required to be registered; and
(c)the supplier and the recipient have agreed in writing that the supply is of a going concern.
A 'supply of a going concern' is defined in s 38‑325(2) as follows:
(2)A supply of a going concern is a supply under an arrangement under which:
(a)the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and
(b)the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).
Counsel spent quite some time arguing as to whether or not this transaction was within the definition and therefore not subject to GST. A number of decisions of the Administrative Appeals Tribunal were referred to. In particular Midford v Deputy Commissioner of Taxation [2005] AATA 623. The only authority on the question is found in the decisions of AAT and on balance it would seem to favour a conclusion that GST would be payable on this transaction. Everything depends on whether the Solomon PPA can be said to embody a written agreement that the purchase of the power station is supply of a going concern so as to satisfy the requirements of s 38‑325(1)(c).
When a dispute arose between the parties as to whether or not this transaction satisfied the definition the plaintiff obtained a private ruling from the Australian Tax Office. That ruling was to the effect that the section was not satisfied and GST was payable. However as was pointed out by counsel for the defendants the facts put before the Australian Tax Office included a statement the parties had not agreed in writing that the sale of the power station was a supply as a going concern. The first defendant said this statement was a mistake - the Solomon PPA properly considered represented such an agreement. The first defendant said there was no liability to pay GST and it was justified in refusing payment.
In my view what is important is the fact that the Australian Tax Office has determined GST is payable and has issued an assessment accordingly. The tax must be paid and pursuant to cl 33.2(b) an additional payment by the first defendant to the plaintiff is required to allow for payment of the GST. What happens after the tax is paid is not relevant to whether the tax must actually be paid. Doubtless the first defendant will want to argue GST is not payable. There may well be implied into the contract an obligation on the part of the plaintiff at the first defendant's request to object to the assessment. It is difficult to see the plaintiff would in any circumstances have any objection to the first defendant challenging the assessment once the assessment has been paid and the plaintiff is absolved from all past and future liability. But none of that alters the fact that at present there is an 'amount of GST payable by the supplier'. The first defendant is liable to pay that amount to the plaintiff.
For these reasons I am satisfied that summary judgment ought be entered on part of the claim. On publication of these reasons I will give the parties the opportunity to consult as to the form of orders and as to costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DG
ASSOCIATE TO MASTER SANDERSON12 APRIL 2018
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