Thiess v Queensland Power Company Limited
[2010] QSC 461
•7 December 2010
SUPREME COURT OF QUEENSLAND
CITATION:
Thiess & Anor v Queensland Power Company Limited & Ors [2010] QSC 461
PARTIES:
ALAN CHARLES ALEXANDER THIESS
(First plaintiff/respondent)
and
MARIAN INVESTMENTS PTY LTD
ACN 009 901 151
(Second plaintiff/respondent)
v
QUEENSLAND POWER COMPANY LIMITED
ARBN 087 295 583
(First defendant/applicant)
and
QUEENSLAND POWER (AUSTRALIA) PTY LTD
ACN 087 293 409
(Second defendant)
and
MILLMERRAN INVESTMENT COMPANY I PTE LTD
ARBN 088 432 599
(Third defendant)
and
MILLMERRAN INVESTMENT COMPANY II PTE LTD
ARBN 088 432 615
(Fourth defendant)
and
MILLMERRAN INVESTMENT COMPANY III PTE LTD
ARBN 088 432 642
(Fifth defendant)
and
MILLMERRAN INVESTMENT COMPANY IV PTE LTD
ARBN 088 432 679
(Sixth defendant)
and
MILLMERRAN INVESTMENT COMPANY V PTE LTD
ARBN 088 432 722
(Seventh defendant)
and
MILLMERRAN INVESTMENT COMPANY VI PTE LTD
ARBN 088 432 795
(Eighth defendant)FILE NO/S:
7486 of 2010
PROCEEDING:
Application
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
7 December 2010
DELIVERED AT:
Brisbane
HEARING DATE:
7 September 2010
JUDGE:
Ann Lyons J
ORDER:
APPLICATION FOR A STAY IS REFUSED
CATCHWORDS:
PROCEDURE – SUPREME COURT PROCEDURE – QUEENSLAND – STAYING PROCEEDINGS – Where applicants operate a coal-fired power station at Millmerran - where the respondents and applicants are parties to a royalty agreement pursuant to which the applicants agreed to pay the respondents royalty payments – where the respondents have instituted proceedings seeking declarations and orders in relation to the calculation and payment of royalties from the applicants – where by this application the applicants seek that the respondents’ proceedings be stayed and referred to arbitration – where the royalty deed between the parties requires certain disputes be referred to arbitration – where the royalty deed imposes time limits in relation to a reference to arbitration – whether the disputes are subject to the relevant clause and should be referred to arbitration – whether some or all of the disputes are outside the time limit – whether the time limits apply to court proceedings as well as arbitration – whether a stay should be granted.
Commercial Arbitration Act 1990 (Qld), s 53
Supreme Court Act 1995 (Qld) s 47A.B.B. Power Plants Limited v Electricity Commission of New South Wales (1995) 35 NSWLR 596
Anderson v GH Michell & Sons Ltd (1941) 65 CLR 543
Global Partners Fund Ltd v Babcock & Brown Ltd (in liq) 2010] NSWCA 196
Huddart Parker Ltd v The Ship “Mill Hill” (1950) 81 CLR 502
Manningham City Council v Dura (Australia) Constructions Pty Ltd [1999] 3 VR 13
W Bruce Ltd v J Strong [1951] 2 KB 447COUNSEL:
LF Kelly SC, with P D Hay for the first defendant/applicant
D Jackson QC with D Keane for the plaintiffs/respondentsSOLICITORS:
Russell and Company for the defendants
Walsh Halligan Douglas for the plaintiffsAnn LYONS J:
The applicants, whom I shall refer to collectively as Millmerran, operate a coal-fired power station at Millmerran. As part of that operation, coal is mined from an open cut mine adjacent to the power station and then conveyed to the power station where it is dried, pulverised and blown into a boiler for combustion which then drives the turbines. Three products are thereby produced, namely, electricity, ‘fly ash’ and carbon dioxide. The carbon dioxide is released into the air and generates no revenue. A small amount of ‘fly ash’ is able to be sold. The majority of the electricity is sold on the National Electricity Market, with some used internally in the operation of the power station.
There is a dispute about the calculation of royalty payments which were paid to the respondents, whom I shall refer to as Thiess, in the period from December 2004 to March 2008.
On 10 July 2010, Thiess, by Claim and Statement of Claim, instituted proceedings seeking declarations and orders in relation to the calculation and payment of those royalties.
By this application filed on 23 August 2010, Millmerran seek an order that, pursuant to s 53 of the Commercial Arbitration Act 1990 (Qld) (the CAA), the court should stay those proceedings and refer the dispute to arbitration.
Background
On 13 March 1980, Thiess and Millmerran Coal Pty Ltd entered into a Royalty Deed with two iron ore development companies, namely Amax Iron Ore Corporation and Mitsui Iron Ore Development Pty Ltd. Pursuant to a series of transactions, a different corporation assumed the obligations of those two iron ore companies. The new entity was Normandy Pacific Energy Limited (NPE).
On 5 August 1999, a Royalty Assumption Deed was entered into where, by cl 4(a), Millmerran covenanted and agreed with Thiess that they would be bound by the terms and conditions of the Royalty Deed in respect of the obligations imposed by that deed on NPE, including the obligations to pay the Royalty Payment referred to.
On 11 November 2002, Thiess and Millmerran entered into an Amending Deed.
Accordingly, the terms of the agreement between the parties (the Royalty Agreement) are contained by reading together:
(i) the ‘Royalty Deed’ of 1980;
(ii) the ‘Royalty Assumption Deed’ of 1999; and
(iii) the ‘Royalty Amendment Deed’ of 2002.
Pursuant to the Royalty Agreement, Millmerran agreed to pay Thiess royalty payments, as calculated under cl 2 of the Royalty Deed. From 31 December 1999, it was agreed that for all coal produced from a mine within the tenements, the royalty payments were to be calculated at the greater of:
(i) 75 cents per tonne for all coal sold (per tonnage method) (cl 3.1(d) of the Royalty Deed);
(ii) The rate of 1.5% of the F.O.R. selling price of the coal (ad valorem method) (cl 3.1(d) of the Royalty Deed);
(iii) The rate of 1% of the value of all products produced from such coal by the plant or process which consumes or converts the coal (value of products method) (cl 4 of the Royalty Deed).
In relation to this third calculation option, cl 4 of the Royalty Deed provides:
“In respect of all coal produced from a mine … and such coal is consumed or converted by any means and for any purpose whatsoever … and any related corporation of the [defendants] is a participant in such consumption or conversion … the Royalty Payment for each quarter year period referred to in clause 8 hereof shall be at the rates set out in paragraphs (a), (b), (c) or (d) of sub‑clause 3 hereof as appropriate or at the rate of 1% of the value of all the products produced from such coal by the plant or process which consumes or converts such coal whichever is the greater …”
Prior to the December 2004 quarter year period, coal produced from the mine has been consumed or converted by the Millmerran Power Station.
Since the December 2004 quarter year period, most of the electricity has been sold although some of the electricity has been consumed in the Millmerran Power Station. Some of the fly ash has been sold.
Accordingly, the value of electricity produced has become relevant to the calculation of the royalty payments.
Thiess argues that, on the proper construction of cl 4 of the Royalty Deed, the value of the electricity produced from the consumption or conversion of coal is the sale price of the electricity without the deduction of costs, and that the value of the fly ash sold is the same price as the fly ash produced without deduction of costs. Accordingly, the essential argument by Thiess is that no costs are to be deducted in ascertaining those values.
Thiess claims that following the June 2002 quarter year period all royalty payments have been paid and calculated on the per tonnage method and that Millmerran have failed to calculate the value of products method of the royalty payment in accordance with the proper construction of cl 4 of the Deed.
Thiess’s Claim
By a Claim and Statement of Claim filed on 19 July 2010, Thiess seek:
A.A declaration that within the meaning of clause 4 of the Royalty Agreement the value of electricity produced from consumption or conversion of coal is the sale price of the electricity without the deduction of costs;
B.A declaration that within the meaning of clause 4 of the Royalty Agreement the value of fly ash produced from consumption or conversion of coal is the sale price of the fly ash without the deduction of costs;
C.Damages for breach of the Royalty Agreement for $1,220,163.30;
D.Interest pursuant to s 47 of the Supreme Court Act 1995 (Qld) as particularised in the Statement of Claim.
E.Costs
F.Further or alternatively:
I.An account of the Royalty Agreement
II.An Order for payment by the defendants to the plaintiffs of the amount found to be due to them on the taking of the account; and
III. Interest pursuant to s 47 of the Supreme Court Act 1995 at the rate of 10% per annum for such periods on the amounts found to be due as the Court shall think fit.
Essentially, then, Thiess allege that Millmerran have failed to calculate the value of products method of the royalty payment in accordance with the proper construction of the Royalty Agreement. Thiess allege that using the proper calculation of the value of products method for the electricity sold and the fly ash sold a further sum of $1,220,163.30 should have been paid to the plaintiffs and that this amount is due to them as Royalty Payments.
Alternatively, it is claimed that Millmerran are in breach of cl 4(a) of the Royalty Assumption Deed and have failed to pay the sum of $1,220,163.30 in royalty payments. Thiess also claim interest at the rate of 10 per cent per annum.
Thiess also seek Orders that Millmerran are liable to account to them for royalty payments due under the Royalty Agreement.
Is the dispute subject to an arbitration agreement?
Millmerran argue that the provisions of the Royalty Deed require that this dispute be referred to arbitration and that the Thiess proceedings in this Court should therefore be stayed.
Clauses 7 and 15.1 of the Royalty Deed provide.
“7.If it is not possible for the royalty payments to be calculated in accordance with any of Clauses 3, 4, 5 or 6 hereof due to:
(i)unavailability of any information to A and M, or to the First Assignee or to the Second Assignee; or
(ii)if the Parties are unable to agree on the tonnage of coal consumed or converted or the value of the coal consumed or converted or the value of the products produced pursuant to any of Clauses 4, 5 or 6 for any period in respect of which a Royalty Payment is payable
then the tonnage of coal consumed or converted or the value of the coal consumed or converted or the value of the products produced or extracted (as the case may be) shall be determined by arbitration as hereinafter provided. A reference to arbitration under paragraph (i) above may be made after 30 days of the end of the period in respect of which the Royalty in question is payable and under paragraph (ii) above after 90 days of the end of the period in respect of which the Royalty in question is payable and in any event no later than 180 days after the delivery of an auditor’s certificate under Clause 8.2 in respect of the period of which the Royalty in question is payable.
…
15.1All questions or differences arising hereunder which are to be referred to arbitration shall be determined by a single arbitrator appointed for that purpose by the President for the time being of the Australasian Institute of Mining and Metallurgy or if he is unable or unwilling to appoint an arbitrator within 30 days of a request by any Party to do so then by a single arbitrator appointed for that purpose under the Arbitration Act 1973 of the State of Queensland (including any amendment or statutory replacement for or re-enactment thereof) and in any event such arbitration shall be conducted under and in accordance with such Act.”
Section 53 of the CAA is in the following terms:
“53 Power to stay court proceedings
(1)If a party to an arbitration agreement commences proceedings in a court against another party to the arbitration agreement in respect of a matter agreed to be referred to arbitration by the agreement, that other party may, subject to subsection (2), apply to that court to stay the proceedings and that court, if satisfied—
(a)that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement; and
(b)that the applicant was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary for the proper conduct of the arbitration;
may make an order staying the proceedings and may further give such directions with respect to the future conduct of the arbitration as thinks fit.
(2)An application under subsection (1) shall not, except with the leave of the court in which the proceedings have been commenced, be made after the applicant has delivered pleadings or taken any other step in the proceedings other than the entry of an appearance.
(3)Notwithstanding any rule of law to the contrary, a party to an arbitration agreement shall not be entitled to recover damages in any court from another party to the agreement by reason that that other party takes proceedings in a court in respect of the matter agreed to be referred to arbitration by the arbitration agreement.”
In Huddart Parker Ltd v The Ship “Mill Hill”[1] Dixon J discussed a similar provision of the Victorian Arbitration Act 1928 in the following way:
“Under the statutory power expressed in s 5 of the Arbitration Act 1928 (Vict) the Court or the judge, assuming that the other necessary conditions are fulfilled, must be satisfied that there is no sufficient reason why the matter should not be referred in accordance with the submission. This language might appear to place the burden upon the defendants applying for a stay. But the Courts begin with the fact that there is a special contract between the parties to refer, and therefore in the language of Lord Moulton in Bristol Corporation v John Aird & Co, consider the circumstances of a case with a strong bias in favour of maintaining the special bargain or as Scrutton LJ said in Metropolitan Tunnel and Public Works Ld v London Electric Railway Co. ‘A guiding principle on one side and a very natural and proper one, is that parties who have made a contract should keep it’.”
[1](1950) 81 CLR 502 at 508-509.
There is no doubt that there is a strong argument in favour of holding the parties to the agreement that they made. Accordingly, if there is an agreement to arbitrate in relation to this particular dispute, and the other conditions are satisfied, then Thiess would need to establish that there are good reasons to justify a refusal of the stay as discussed in Manningham City Council v Dura (Australia) Constructions Pty Ltd[2] as follows:
“The language of s 53(1)(a) appears to cast upon the applicant for a stay of litigation the burden of satisfying the court that ‘there is no sufficient reason why the dispute should not be referred to arbitration. However, the courts have taken the view that as parties have entered into a contract referring all disputes to arbitration, they should be kept to their bargain unless a good reason is shown to the contrary … The onus is one to remove a presumption created by evidence of the special agreement, not one resting upon a party to displace a statutory presumption arising under the section.”
[2][1999] 3 VR 13.
Millmerran argue there is an agreement to arbitrate in relation to this particular dispute because the terms of the agreement are clear and there is no option but to submit to arbitration. The basis of this argument is that pursuant to cl 7(ii) the parties have agreed to submit to arbitration upon the occurrence of the specified event, namely a disagreement concerning “the value of the products produced pursuant to any of clauses 4, 5 or 6 for any period in respect of which a royalty payment is payable”. Millmerran argue that that event has occurred and no election is required because the positive and mandatory words of the deed carry a negative promise not to litigate. Millmerran argue that the terms of the deed do not allow for any choice in the matter and the proceedings in this Court must be stayed.
Is there a valid agreement to arbitrate?
There is no doubt that pursuant to the express provisions of cl 7(ii) of the Royalty Deed the parties have indeed agreed to submit to arbitration in certain circumstances. Those circumstances include the happening of a certain event namely a particular specified disagreement about the value of the products produced pursuant to clauses 4, 5, or 6 for any period in respect of which a Royalty Payment is payable.
It is necessary, in order for s 53 of the CAA to be invoked, that the proceedings in court must be “in respect of the matter agreed to be referred to arbitration by the agreement.” I also accept that such agreements are not to be narrowly interpreted.
Millmerran submit that the dispute here concerns the value of products produced pursuant to cl 4 of the Royalty Deed and that the existence of that type of dispute is evident on the face of the statement of claim. Millmerran argue that the dispute directly concerns the value of products, namely electricity and fly ash produced in the consumption of coal at the Millmerran Power Station.
Thiess contend that the agreement to arbitrate was simply a limited agreement to arbitrate and that agreement does not confer a power to determine a dispute about the meaning of the contract when it is not attached to a “specific royalty payment.”
Thiess also argues the dispute is about the meaning of the word ‘value’ which has not been defined. Thiess clearly argues that the value of the electricity and fly ash is simply the gross sale price received by Millmerran from the sale of the products and that no costs are to be deducted in ascertaining those values. Millmerran, however, disagree with that approach and contend that the assessment of the value must take into account the net effect of hedging transactions which means that costs are to be deducted.
Apparently, hedging transactions are entered into by generators and sellers of electricity as a way of ensuring the viable production and sale of electricity. Hedging is apparently a method by which sellers protect their electricity generating business from dramatic fluctuations in price.
It is clear that the current dispute arises in circumstances where the Royalty Deed does not define the meaning of “the value of all the products produced from such coal”. It is argued that the dispute is, in essence, a construction dispute as to the terms of the contract as a whole, rather than a particular dispute about a particular payment event.
This is essentially conceded by Millmerran in their letter dated 28 August 2009,[3] in which Millmerran not only concede that the term ‘value’ is not defined, but agree that the term could in fact be interpreted to mean, among other things, either market value, book value or replacement value. It is also clear that Millmerran have then unilaterally assigned a definition to the term which clearly was to their benefit, given they defined the term to mean “the overall economic benefit the partners derive from selling the output of the station in the ordinary course of business”, rather than the selling price.
[3]See [39].
There is no doubt that Thiess and Millmerran have advanced competing constructions and competing calculations of the value of the products. Those arguments are obviously based on different interpretations of the calculation of ‘value’.
In any event, it would seem clear that the dispute in fact centres around the value of products. However, even if the dispute is in reality a dispute of law because it is a dispute about the construction of a contract, that does not mean it is not within the scope of the arbitration clause. I consider that such a dispute comes within cl 7 of the Royalty Deed.
Accordingly, I consider that the dispute arises in respect of a matter agreed to be referred to arbitration by the agreement and the first requirement of s 53 of the CAA has been satisfied.
Delay
Not only does Millmerran argue that this dispute is subject to the arbitration clause in cl 7(ii) of the Royalty Deed, but also that Thiess has been guilty of delay in raising this dispute about the ‘value’ of products.
Millmerran contends that two years before the Supreme Court proceedings were instituted Thiess were advised by letter that the effect of the hedging contracts were being taken into account in ascertaining ‘value’. That letter[4] of 15 April 2008 provided as follows:
[4]Letter from D Coucill to I Howard Smith.
“I have … completed an interim review of your enquiry and found:
1.That the estimated value of product produced was calculated using methodology consistent with prior year calculations and also consistent throughout each quarter of 2007. The dollar values used were sourced from the General Ledger and tonnages were provided directly by the plant.
2.That the value realised is a product of all revenues received from the production of electricity at Millmerran. These revenue streams are a combination of revenue at market (the spot pool price) and from electricity sale contractual arrangements (hedge contracts).
3.InterGen use hedge contracts to lock in value with certainty, which is a requirement of InterGen corporate governance and the Millmerran project financing arrangements. The liquid market for hedge contracts is three years forward. This means that a significant part of 2007 realised revenues would have been locked in through hedge contracts entered into over 2004, 2005 and 2006 on the basis on how attractive the price was at that point in time. The effect of these will generate variations from time to time in any comparison to NEMMCO pool price data.
4.In the years prior to 2007 the value of the electricity hedge contracts entered into routinely added to the total value achieved as was the situation through 2006 for example. In 2007 the usual situation was reversed as longer term electricity hedge arrangements in place delivered revenue outcomes less than if revenues were sourced from only the market itself (June 2007 quarter being the prime example of this).
5.2007 was an unusual year in that the prolonged drought in South East Queensland led to the government restricting generation from Tarong and Swanbank plants in early 2007 (as a water conservation measure). This action resulted in a sudden and then prolonged increase in pool prices and future electricity contract values. Calculated values achieved for 2007 in total have been an excellent result for the business, though as you have noted, at times significantly below what a pure energy to market result could have delivered in 2007. This is the most significant cause of the variations you have noted.”
There is no doubt that the question of the valuation of the products produced at the power station has been the subject of correspondence since early 2008. The affidavits of Ray Lindwall and Terry McBride, the solicitors for Thiess, exhibit the history of the correspondence between the parties in recent years. That history clearly chronicles the efforts by the Thiess parties to ascertain the basis upon which the Royalty Payments were being calculated. Despite the letter of 15 April 2008, it would seem to me that it was not until the letter from Millmerran dated 28 August 2009 that Millmerran’s interpretation of ‘value’ was in fact made clear. That letter stated:
“This letter is to address the issue of the appropriate Methodology for determining the “value of all products produced from such coal.”
Background
As you are aware, the Royalty Deed, in general terms (and assuming no sales of coal) states that the royalty payment for each quarter shall be the greater of:
·0.75cents per tonne of the coal consumed, or
·1% of the value of all products produced from such coal by the plan or process which consumes or converts such coal.
We set out below our interpretation of the phrase ‘value of all products produced’.
Value of Product Produced
I refer to the comment made in your letter of 8 July 2009 wherein it is stated that ‘The basis for calculation of the 1% royalty is on the value of all the products produced (i.e. primarily sale of electricity ….’. In relation to this we note that the Deed refers to ‘value’ and not ‘revenue’ in determining the amount on which the 1% royalty would be calculated. As a result, we do not believe the 1% royalty should be based on the revenue derived from the sale of electricity.
We note the phrase, ‘value of all the products produced’, is not defined in the Deed so for the purposes of determining the amount to be paid under this clause we have referred to what we believe is a commercial meaning of the term. In addition, the term ‘value’ is also not defined and could be interpreted to mean, among other things, either market value, book value or replacement value.
After seeking appropriate input from our Auditors, we interpret ‘value’ to mean the overall economic benefit the partners derive from selling the output of the station in the ordinary course of business.
In that regard it is worth noting how the Australian Electricity Market has evolved and what represents the main revenue sources forming part of a Generator’s economic benefit.” (my emphasis)
Thiess was, therefore, aware of Millmerran’s interpretation of ‘value’ in August 2009. It was, however, still unaware of the actual calculations in the relevant periods. Those calculations were requested in the letter to Millmerran dated 4 September 2009 in the following terms:
“Thank you for your letter of 28 August. We are now aware of how the calculation has been approached, and what methodology has been used in calculating the royalty.
Allow me to compliment you, Mr. Tengdahl, and your Auditors, for a creative and innovative response. Thank you, also, for your explanation of the Australian Electricity Market, Derivatives Market, and Summary. And, whilst in other circumstances we might applaud your imaginative interpretation of the terms of the 1980 Royalty Deed, the methodology used is not just flawed, but is simply wrong and is inconsistent with the 1980 Royalty Deed.
As a consequence, we require a complete review of all calculations, and of each royalty payment made since March 2003. We set out in this letter the basis of why the methodology is incorrect, and what the correct approach is, based on the 1980 Royalty Deed.”
In an email dated 18 December 2009,[5] Thiess complained of the inordinate delay and Millmerran’s failure to provide that information and stated “...we remain unsure whether there was an honest mistake made by others some years ago that finally came into clear focus earlier this year, or whether there has been, and continues to be, a deliberate intent to limit the royalty payments owing to us”. The email concluded “we require a complete back review of all quarterly royalty payments made to us since March 2003 to June 2009”.
[5]From Ian Howard Smith to Brad Mills.
It is clear that ultimately the statement of claim filed some seven months later on 10 July 2010 did not raise disputes about all the quarterly payments since March 2003, but only the royalty payments made in the following quarters:
(i) December 2004
(ii) March 2007
(iii) June 2007
(iv) September 2007
(v) March 2008
The essential dispute in the present case is, as I have already indicated, about what meaning is to be attributed to the word ‘value’. The dispute, however, is not just about a particular Royalty Payment in a particular period, but about the construction of the agreement between the parties. Clearly, the dispute about the payments in those periods did not arise in the period within which Thiess could refer a dispute about a particular payment to arbitration, given Thiess was still waiting for clarification from Millmerran in December 2009 as to whether there was, in fact, a dispute about all the quarterly payments and what the extent of the dispute was.
I do not therefore consider that Millmerran’s complaints about delay are well founded.
This issue of delay, however, also raises issues as to whether the requirements of s 53(1) (a) and (b) have been satisfied?
In relation to s 53(1)(b), the question which needs to be answered is whether Millmerran was, at the time when the proceedings were commenced and is it currently ready and willing to do all things necessary for the proper conduct of the arbitration?
Significantly, Millmerran admits that it seeks to rely on the time periods to exclude the possibility of a referral to arbitration.
The Time Limits for Disputes about Royalties
It is clear that there are time limits in relation to a reference to arbitration in the Royalty Deed. Clause 7(ii) provides that:
“A reference to arbitration under paragraph (i) above may be made after 30 days of the end of the period in respect of which the Royalty in question is payable and under paragraph (ii) above after 90 days of the end of the period in respect of which the Royalty in question is payable and in any event no later than 180 days after the delivery of an auditor’s certificate under Clause 8.2 in respect of the period of which the Royalty in question is payable.”
Millmerran argue that the auditor’s certificate was delivered in respect of each of the periods the subject of the claim, and for the ensuing quarterly periods. I note, however, that Thiess disputes that they were auditor’s certificates. It is, therefore, argued by Millmerran that neither party is now entitled to refer a specific dispute in relation to a particular time period to arbitration, given the clear words that the referral to arbitration was in relation to the value of products for periods not more than 180 days from the delivery of those certificates.
Millmerran also argue that the proceedings instituted by Thiess are an attempt to circumvent the agreement to arbitrate and set it at naught. Furthermore, Millmerran argue that the dispute, which has now arisen, was contemplated by the parties as a dispute which would arise from time to time and, therefore, a process was put in place to determine those disputes as they arose, but that there was a time limit on the bringing on of those sorts of disputes, namely, 180 days.
Millmerran therefore argue that the parties entered into an agreement of indefinite duration, which could result in royalties being payable each quarter of each year, and that agreement provided for mechanisms for the royalty payers to provide certificates to the royalty recipients setting out details relating to the calculation of such royalties. A further safety mechanism was provided in clause 8.3 which was that, at the end of each financial year, the royalty payer had to procure its auditors to deliver a certificate verifying the calculations to the royalty recipients.
Millmerran submit that a further checking mechanism was that the royalty recipients were given the contractual right on two occasions during each calendar year and on seven days notice to arrange an independent audit (cl 9.1 of the Royalty Deed). The parties then agreed that a dispute about the value of the products would be determined by arbitration by an arbitrator appointed by a person with relevant industry knowledge, namely, the President of the Australasian Institute of Mining and Metallurgy (cl 15.1 of the Royalty Deed).
That agreement then provided that a reference to arbitration was to take place no later than 180 days after the delivery of the certificate. Millmerran argue, therefore, that the parties clearly intended that any contest over the calculation of royalties was to be determined expeditiously by referral to arbitration.
Millmerran argue that the parties did not therefore intend that disputes about the correct amount of royalties were ever to be pursued after the expiration of their agreed time limits. In particular, it was not intended for disputes to arise years after the royalties had been paid and after the royalty recipients had already had the advantage of the various checking mechanisms, which the contract provided for.
Millmerran argue that there is good commercial sense in this approach and that in a commercial agreement such as this, which is of indefinite duration, there would otherwise be a potential for parties to raise disputes about matters that are years in the past. Millmerran submitted that such a construction would render unworkable the arrangements that have been provided for in the Royalty Deed, which deliberately sought to avoid the raising of stale dispute.
It is argued that the claim was made well outside the 180 day time limit if the auditor’s certificate for 2008 was in fact a certificate as required and it was forwarded by letter dated 21 May 2009. A period of 180 days after this would have elapsed on 17 November 2009.
Thiess says that the fact that Millmerran intend to rely on this indicates that Millmerran does not satisfy the requirement that it must be willing to arbitrate as required by s 53 of the CAA.
Is Millmerran willing to Arbitrate?
Under s 53 of the CAA, a stay may be granted only if the applicant is ready and willing to do all things necessary for the proper conduct of the arbitration. It is a precondition to the exercise of the power to stay under s 53 that the court is satisfied that the applicant for a stay, that is Millmerran, “was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary for the proper conduct of the arbitration”.
It is clear that, at the time when these proceedings were commenced by Thiess, Millmerran disputed Thiess’s entitlement to any further payment and stated that time restrictions applied. At that stage Millmerran were not willing to arbitrate and, indeed, have not subsequently referred any matter to arbitration. Neither did Millmerran refer the matter to arbitration when Thiess queried the calculations in July and September 2009. They have not at any time made a request to the President of the Australasian Institute of Mining and Metallurgy, as provided for under clause 15.1 of the Royalty Deed.
Millmerran acknowledges that if the matter was to be referred to arbitration now, then Thiess would be exposed to the risk of a time bar. Millmerran argue, however, that this is irrelevant to the court’s consideration because, if that was a factor the court could take into account. it would render the effect of the arbitration agreement nugatory because a party would only have to wait for the relevant time limit to elapse and then elect to litigate in court.
In W Bruce Ltd v J Strong,[6] the English Court of Appeal held that an applicant, who intended to rely on a time bar to prevent the arbitration, still satisfied the condition of a willingness to arbitrate in the circumstances of that case. I do not see how that can be so. If a party intends to prevent the arbitration taking place because the time for reference has expired, then it seems to me that that party is not willing to do all things necessary fro the proper conduct of the arbitration.
[6][1951] 2 KB 447.
In Bruce the reasoning was in part based on a concern that a party could circumvent the agreement to arbitrate by simply delaying. The dispute related to the delivery of dried fruit where the relevant contract had incorporated the rules of the trade association. Rule 50 provided that “Any dispute arising out of a contract, shall be determined by arbitration”[7] and rule 21A required that “Any demand for arbitration shall be made in writing within two months after the arrival of the goods... Should the demand not be so made, the same shall be considered to be waived and absolutely barred”. Rule 21 then provided that a referral to arbitration was a condition precedent “to the right of either contracting party to sue the other or take any other legal proceedings in respect of any claim arising out of such a contract.”[8] Singleton LJ, who agreed with Somervell LJ, as did Denning LJ, stated:
“Those words in s 4 mean that in respect of any matter connected with arbitration, according to the contract for arbitration, the applicant must show his readiness and willingness; but they do not mean that he cannot get a stay if the other party has allowed the time to run out.” (my emphasis)
[7]By R 50 of London Dried Fruit Trade Association Rules.
[8]By R 21 of London Dried Fruit Trade Association Rules.
Notably in that case the actual dispute between the parties became clear within the time period for referral to arbitration and there had in fact been a discussion between the parties about referral to arbitration “back in December, when the time limit had not expired”.[9] There had therefore been a willingness to arbitrate by the party seeking the stay during the relevant referral period.
[9]at p 455.
The dispute between Thiess and Millmerran about the calculation of royalty payments for the period since 2004 first became clear in September 2009, but the parameters of the dispute were not clarified by Millmerran until December 2009.
The time limit with respect to the March 2008 payment arguably expired on 17 November 2009, 180 days after the auditor’s certificate was forwarded on 21 May 2009. The time limits in relation to the other earlier payments would therefore have expired earlier. As I have previously outlined, arbitration was never suggested by Millmerran at any stage of the evolving dispute. In my view in the present case where Millmerran intends not only to prevent the arbitration taking place, because the time for the reference has expired and has never suggested arbitration prior to that point, then it seems to me that Millmerran is not willing to do all things necessary for the proper conduct of the arbitration. I consider that W Bruce Ltd v J Strong was factually different from the present case as in that case the clear dispute between the parties arose during the period when the matter could have been referred to arbitration and the party opposing the stay had ‘allowed the time to run out’. In the present case on the facts before me it would seem that it was Millmerran, that is the party seeking the stay and not Thiess (‘the other party’) that has allowed the time to run. Thiess were still trying to ascertain whether there was in fact a dispute and the parameters of such a dispute in the email of 18 December 2010 which was after the time for referral expired.
In ABB Power Plants Limited v Electricity Commission of New South Wales, [10] Cole JA said:
“In either circumstance the agreement to refer to arbitration contained in [the relevant clause of the contract] exists, and, if the subject matter of the litigation falls within the scope of that clause, operates to confer upon the court the power conferred by s 53. To litigate where there has been a valid election by either party to resolve the dispute by arbitration, is to act contrary to the arbitration agreement, thus permitting consideration of exercise of the power to stay the litigation. However where there has been no exercise of a power of election by one or both parties having that power, s 53(1)(a) would not be satisfied, and nor, in many instances, would s 53(1)(b).” (my emphasis)
[10](1995) 35 NSWLR 596 at 625.
Here there has not been an election by one or both parties. In my view, in the circumstances of the present case, it would seem clear that, the requirements of s 53 have not been satisfied.
Millmerran also argues that the agreement to arbitrate and the time limits operate as a bar to litigation in the Court. It is clear that there is no express clause in the Royalty Agreement which provides that there is such a bar to litigation. In W Bruce Ltd v J Strong, rules 21 and 21A made it very clear that arbitration was a condition precedent to the right of either contracting party to sue the other or take any other legal proceedings whatsoever. Millmerran argue that despite the absence of such a clause there is nevertheless an absolute bar to litigation.
Do the time limits in relation to referral to arbitration also operate as time limits on Court proceedings?
It is clear that these Supreme Court proceedings commenced in July 2010 and that the statement of claim raises disputes about royalty payments made in the quarters from December 2004 to March 2008.
Accordingly, the Supreme Court proceedings were commenced after the time limit for arbitration. Millmerran argue that Thiess are confronted with a time bar irrespective of whether the matter is litigated or the subject of arbitration. Millmerran argue that by agreeing to the time bar, Thiess have in fact contracted out of the limitation period which would otherwise have applied to their claim at common law, and accordingly, they have entered into an agreement fixing a shorter period in which disputes are to be resolved.
The real issue is whether the failure to refer each individual dispute about the calculation of the individual Royalty Payment operates as a general bar or impediment to litigation in this court. Is referral to arbitration essentially a condition precedent to litigation?
The High Court examined that issue in Anderson v GH Michell & Sons Ltd[11] where the sole question for determination was
“whether, upon the proper interpretation of a contract made by the appellant as seller with the respondents as buyers for the sale of certain lambs, the former may maintain an action against the latter for non acceptance, notwithstanding that he did not first submit his claim to arbitration and notwithstanding that the time named in the contract for going to arbitration expired before the commencement of the action.”
[11](1941) 65 CLR 543.
After a thorough examination of the authorities the Court concluded;
“In our opinion, the foregoing authorities do not justify a construction of the arbitration clause in the contract now in question which would make arbitration a condition precedent to liability, or to the commencement of an action, or a construction which would convert the time expressly provided for arbitration into a limitation of the period within which an action might be brought.
...
With respect, it appears to us that in the absence of some express agreement limiting the time for commencing an action or some sufficient indication of an actual intention to so agree, the party had nothing to free himself from. Restrictions upon a contracting party’s capacity or opportunity to enforce the contract ought not lightly to be implied”.
A consideration of the language of the Royalty Deed does not, in my mind, give rise to such an implication. The arbitration clause in 7(ii) does not expressly state that there is a specific agreement limiting the time for commencing an action, nor is there, in my view, “some sufficient indication of an actual intention to so agree”.[12]
[12](1941) 65 CLR 543.
Accordingly, whilst the time periods for reference to arbitration were limited by the contract, there was no limitation on the period to commence litigation.
Should the discretion be exercised?
Accordingly, I am not satisfied that the requirements of s 53 have been fulfilled.
If I am wrong in that regard, I consider in any event that the discretion is s 53 should not be exercised. Section 53 provides that the court may make an order staying the proceedings provided there is no sufficient reason why the matter should not be referred to arbitration. If there is a sufficient reason, then the discretion to stay should not be exercised.
In my view, there are sufficient reasons why the matter should not be stayed. In my view this dispute should not be referred to arbitration.
First, as I have indicated, the essence of the dispute is arguably a construction dispute about the meaning of the word ‘value’. Although the dispute may be more correctly characterised as a dispute about what matters are legally relevant to the determination of ‘value’ under the Royalty Deed. This is a legal question which in my view it is a question which is better made by a judge than an arbitrator. I also consider that the determination of this question is a question of general importance and may have significance beyond this actual dispute.
Secondly, not only are Millmerran not currently willing to arbitrate, they have not taken any steps to have the matter referred to arbitration. I consider that Millmerran in fact unilaterally assigned an interpretation to the word ‘value’ and then took some years to actually explain that they had done so.
Furthermore, an examination of the statement of claim indicates that the plaintiff seeks an account. Whilst Millmerran argue that an arbitrator can actually grant all the relief sought by the claim, I consider once again that this is a matter best dealt with by the court.
In my view, the application for a stay should be refused.
I will hear from Counsel as to the form of the Order and as to Costs.
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