Waste Recycling and Processing Corporation v Global Renewables Eastern Creek Pty Ltd

[2009] NSWCA 315

New South Wales

Court of Appeal

CITATION:	Waste Recycling and Processing Corporation v Global Renewables Eastern Creek Pty Ltd [2009] NSWCA 315
HEARING DATE(S):	11 September 2009
JUDGMENT DATE:	6 October 2009
JUDGMENT OF:	Ipp JA at 1; Tobias JA at 2; Basten JA at 51
DECISION:	Appeal dismissed with costs
CATCHWORDS:	CONTRACTS – General contractual principles – Construction and interpretation of contracts – Waste Processing Deed – Under clause 6.2(a) respondent entitled to notify appellant of its intention to reject certain material upon delivery to waste processing facility – Whether clause 6.2(a) allowed respondent to notify its intention to reject entire Delivery or only so much thereof as contained Out of Specification Material (as defined) – Whether respondent required to pre-sort Delivery – Considerations of business commonsense – Requirement to construe clause in light of surrounding circumstances and purpose of entire transaction – Not useful to assess competing constructions by reference to extreme and commercially unrealistic examples which produce absurd results
LEGISLATION CITED:	Waste Recycling and Processing Corporation Act 2001
CATEGORY:	Principal judgment
CASES CITED:	Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337 GMA Garnet Pty Ltd v Barton International Inc [2009] FCA 439 Waste Recycling and Processing Corporation v Global Renewables Eastern Creek Pty Ltd [2009] NSWSC 453
PARTIES:	Waste Recycling and Processing Corporation Global Renewables Eastern Creek Pty Limited
FILE NUMBER(S):	CA 40188/09
COUNSEL:	A: D F Jackson QC / J A C Potts R: F Gleeson SC / R M Foreman
SOLICITORS:	A: Clayton Utz, Sydney R: Watson Mangioni Lawyers, Sydney
LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	SC 50020/09
LOWER COURT JUDICIAL OFFICER:	Einstein J
LOWER COURT DATE OF DECISION:	29 May 2009
LOWER COURT MEDIUM NEUTRAL CITATION:	Waste Recycling & Processing Corporation v Global Renewables Eastern Creek Pty Limited [2009] NSWSC 453

CA 40188/09
SC 50020/09

IPP JA
TOBIAS JA
BASTEN JA

Tuesday 6 October 2009

WASTE RECYCLING AND PROCESSING CORPORATION t/as WSN ENVIRONMENTAL SOLUTIONS v GLOBAL RENEWABLES EASTERN CREEK PTY LIMITED

Judgment

1 IPP JA: I agree with Tobias JA.

2 TOBIAS JA: The appellant, Waste Recycling and Processing Corporation (WSN) is a statutory corporation established under the Waste Recycling and Processing Corporation Act 2001. The respondent, Global Renewables (Eastern Creek) Pty Limited (GRL) is a company which has technical expertise in building and operating waste technology facilities for the processing and recycling of domestic and commercial waste.

3 On 11 March 2003 the parties entered into an agreement referred to as a “Waste Processing Deed” (the WPD) pursuant to which WSN was to lease to GRL a site at Eastern Creek (the site) upon which GRL was to construct and operate a waste technology facility (the Facility) to receive waste from WSN supplied to it by local government councils.

4 On 30 June 2008 a Deed of Amendment (the Amending Deed) was entered into by the parties which amended various terms of the WPD. Relevantly for present purposes, it deleted from the WPD the existing clauses 6.2(a), (b) and (c) and substituted a new clauses 6.2(a), (b) and (c). The issue on the appeal concerns the construction of those substituted provisions and, in particular, clause 6.2(a).

5 According to the primary judge there were three issues calling for his determination of which the second was as follows:

“The extent of GRL’s contractual right to reject waste that does not conform with specifications in the WPD. This issue primarily involves the determination of the proper construction of clause 6.2 of the WPD.”

6 His Honour found in favour of GRL with respect to all three issues: Waste Recycling and Processing Corporation v Global Renewables Eastern Creek Pty Ltd [2009] NSWSC 453. However, it is only the second issue which is the subject of WSN’s appeal.

The relevant provisions of the WPD

7 Before referring to the substantive provisions of the WPD relied upon by the parties, it is necessary to set out a number of relevant definitions referred to in the Dictionary, being Attachment A, to the WPD.

“ Delivery means a single truckload of material delivered to or removed from the Facility.
…
Facility means all of the plant and equipment located at the Site used by GRL in carrying out its obligations under this deed.
…
Hazardous Material means any material which the Facility is not permitted or licensed to receive or process under any applicable Approval and includes material identified as ‘Hazardous Material’ in Schedules 8 and 12.
…
Input Material means MSW and any other material (other than Green Waste) GRL and WSN agree will be supplied by WSN and accepted for processing by GRL using the Facility, including any material supplied by WSN under clause 17(d).
…
MSW means class 3 putrescible waste as defined in Table 1 of the Draft Environmental Guidelines February 2002 published by the EPA.
…
Out of Specification Material means Input Material which is not Specification Material.
…
Reject Bin means a receptacle, which is capable of being lifted and tipped by a standard skip bin truck, for the storage of Input Material rejected by GRL under clause 6.2, which is located at the Collection Point.
Reject Material means Input Material rejected by GRL under clause 6.2(a).
…
Services means, in respect of GRL subject to the terms of this deed, the acceptance of Input Material to enable the Facility to process:
…
Specification Material means material which meets the specifications in Schedule 12.”

8 Recital D to the WPD stated that the parties had agreed to structure their relationship relating to the Facility in two phases. The first phase was known as the Operational Phase in which the Facility would be constructed upon the site. Recital E stated that GRL was to operate the Facility and WSN was to supply Input Material to the Facility. It further recited that

“GRL will process Specification Material (and may process Out of Specification Material) using the Facility once it is constructed”.

9 Clause 4.3 obligated GRL to supply

“the Services to WSN during the Operational Phase
…
(a) to the standards specified in this deed …”.

10 Clause 4.4 relevantly provided that

“GRL must accept all Specification Material … delivered to the Facility by or on behalf of WSN”.

11 Clause 4.4(e) relevantly provided that the consequences of GRL not complying with sub-clause (a)

“are limited to the consequences set out in clause 6.2 …”

12 Clause 6.1 of the WPD provided as follows:

“ 6.1 No obligation to deliver Specification Material or Specification Green Waste
(a) WSN and GRL acknowledge and agree that:

(i) Input Material and Green Waste delivered to the Facility will contain Out of Specification Material and Hazardous Material;
(ii) if Input Material or Green Waste delivered to the Facility contains Hazardous Material, prior to GRL processing that Input Material or Green Waste, GRL may place that Hazardous Material in a Reject Bin and that if GRL does not do so, that Hazardous Material may become part of the Residual Material stream, and as such WSN may be required to collect that Residual Material containing Hazardous Material from the Collection Point on the terms of this deed;
(iii) at the date of this deed, GRL has analysed the composition of 100 mobile garbage bins from each of Blacktown City Council, Fairfield City Council, Holroyd City Council, Parramatta City Council and Penrith City Council; and
(iv) GRL and WSN will work together to manage the quality, composition and characterisation of Input Material and Green Waste delivered to the Facility, including by liaising with Councils.
(b) WSN has no obligation to ensure Input Material delivered to the Facility is Specification Material or that Green Waste delivered to the Facility is Specification Green Waste.
(c) WSN makes no warranty or representation that Input Material or Green Waste delivered to the Facility will be Specification Material or Specification Green Waste (as applicable) or that Input Material or Green Waste delivered to the Facility will not contain Hazardous or Out of Specification Material.
(d) All Input Material and Green Waste delivered to the Facility and accepted by GRL for processing is deemed to be Specification Material or Specification Green Waste (as applicable) from the time of acceptance by GRL:
(i) under clause 6.2, in the case of Input Material, for the purposes of WSN’s obligations under clause 5.1(a), the Throughput Schedule and the Daily Throughput Requirement.
(ii) under clause 5.4, in the case of Green Waste, for the purposes of WSN’s obligations under clause 5.4.
(e) To the extent that GRL accepts Input Material which contains Hazardous Material, GRL bears the risk that such Hazardous Material may affect the operation of, or production of Recyclables by, the Facility.”

13 Clauses 6.2 and 6.3 of the WPD (as amended) were in the following terms:

“ 6.2 GRL may reject material which is Out of Specification Material
(a) If GRL acting reasonably, believes a Delivery of Input Material contains Out of Specification Material, GRL may, either accept that material, in GRL’s absolute discretion, for processing using the Facility or notify WSN of its intention to place that material in a Reject Bin.
(b) If upon notification under paragraph (a) WSN or its representative inspects the Reject Material and reasonably determines that it contains Specification Material and that such Specification Material can be and is separated from the Out of Specification Material within 24 hours of such notification, GRL must accept that Specification Material which WSN or its representative separates from the Out of Specification Material for processing at the Facility and place the remaining Out of Specification Material in a Reject Bin.
(c) WSN must remove all Reject Material (other than Reject Material deemed to be Specification Material under paragraph (b) or (d)) in accordance with the Collection Procedures. If GRL does not accept the Specification Material that has been separated in accordance with paragraph (b), GRL and WSN must procure the audit of the Reject Material in accordance with clause 6.3.
(d) To the extent to which Reject Material audited under clause 6.3 is determined to be:
(i) Out of Specification Material, WSN must, unless otherwise agreed, promptly pay the costs (if any) of the audit under clause 6.3; or
(ii) Specification Material (or if GRL otherwise agrees that the Reject Material is Specification Material):
A. that material shall be deemed to be Residual Material for the purposes of Schedule 6 and shall be counted as Specification Material for the purposes of WSN’s obligations under the Throughput Schedule; and
B. GRL must promptly pay the costs (if any) of the audit under clause 6.3.
(e) If, in respect of any Month, it is determined under paragraph (d) that GRL has rejected a quantity of Specification Material in that Month which is greater than 20% of the Monthly Base Capacity referrable to that Month, GRL must within 14 days after the last day after that Month, give to WSN a written report which sets out, in reasonable detail, GRL’s opinion as to the cause of, and potential remedies for, the rejection of that Specification Material.
(f) Within 7 days after receipt of the report by WSN under paragraph (e), the parties must meet to discuss any wrongful rejection of Specification Material the subject of the report, and to agree (but with no legal obligation to do so) how WSN may be compensated for such wrongful rejection and how such wrongful rejection may be avoided in the future.
(g) If the parties cannot agree under paragraph (f) as to how WSN is to be compensated for such wrongful rejection and how such wrongful rejection may be avoided in the future, to compensate WSN for the increased cost and expense of removing, handling and transporting the wrongfully rejected Specification Material, GRL (in addition to all other amounts payable by GRL under this deed in respect of the rejection of the Specification Material) must pay to WSN, within 7 days of the meeting under paragraph (f), an amount equal to $2.00 per tonne multiplied by the number of tonnes of Specification Material wrongfully rejected by GRL in that Month under paragraph (a).
6.3 Audit
(a) GRL and WSN will agree the procedure for auditing Reject Material under clause 6.2 from time to time.
(b) If GRL and WSN cannot agree the procedure under paragraph (a) within 7 days after the disagreement arises, GRL and WSN must engage the Independent Expert to determine an appropriate procedure.”

14 As the relevant dispute between the parties arose out of the requirements of Schedule 12 which governed the composition of Input Material which was Specification Material, it is appropriate to record it:

“ SCHEDULE 12
SPECIFICATION OF INPUT MATERIAL
Specification Material is material which satisfies each of the following criteria:
(a) satisfies all EPA licences and other Approvals applicable to the Site, the WSN Site and the Development Consent from time to time;
(b) has not been subjected to a compaction process greater than good industry practice at the date of this deed from the point of collection at kerbside to delivery at the Facility;
(c) does not contain:
(i) any material with two of any three of its dimensions greater than 400mm or any one of its three dimensions greater 1000mm;
(ii) any single item weighing more than 18kg; or
(iii) stringy objects such as carpet, large textiles, rope, electrical cables or string; and
(d) has waste components within the ranges specified in the following table:

Waste Component	% of total Input Material	Sub-Component	Sub-Component % of total Input Material
Organic Material*	up to 55%	Food	minimum 20%
Recyclables **	up to 30%	Metal Glass	minimum 3% maximum 5%
Residual Material ***	up to 23%	-	-
Hazardous Material ****	0%	-	-	“

15 There then followed a description of Organic Material (food and vegetation material); Recyclables (which included aluminium cans, glass, PET plastic bottles, cardboard and paper); Residual Material (which included PVC packaging, plastics, textiles, clothing, leather and nappies) and Hazardous Material (which included general household materials such as batteries, medicines, electrical and electronic goods, paints, vacuum cleaner bags and lead items as well as garden chemicals, motor vehicle waste and “Other Hazardous Materials” such as asbestos products, explosives and ammunition.

The relevant pleadings

16 In WSN’s Second Further Amended Commercial List Statement filed in Court on 18 May 2009, under the heading “Out of Specification Material”, the following was pleaded:

“43. It is a term of the WPD that WSN and GRL acknowledge and agree that Input Material delivered to the Facility will contain Out of Specification Material and Hazardous Material.
Particulars
WPD, Clause 6.1(a)(i)
44. It is a term of the WPD that WSN has no obligation to ensure that Input Material delivered to the Facility is Specification Material.
Particulars
WPD, Clause 6.1(b)
45. It is a term of the WPD that ‘Delivery’ is defined as a single truckload of material delivered to or removed from the Facility.
Particulars
WPD, Dictionary (being Attachment A), p 6.
46 It is a term of the WPD, as amended on 30 June 2008 by the Amending Deed, that if a Delivery contains Out of Specification Material, GRL may either accept that material or notify WSN of its intention to place that material in a Reject Bin.
Particulars
WPD, Clause 6.2(a) as amended by the Amending Deed.
47. The only way in which GRL may deal with Out of Specification Material contained within Input Material in a Delivery to the Facility is as pleaded in paragraph 46 above.
48. GRL is not entitled to reject an entire Delivery of Input Material that contains Out of Specification Material.
49. GRL is not entitled to place, or notify WSN of its intention to place, an entire Delivery in a Reject Bin if the Delivery contains Out of Specification Material.
50. On 9 February 2009, GRL wrote to WSN asserting that if a Delivery contains Out of Specification Material, GRL may notify WSN that it intends to place the entire Delivery in a Reject Bin.
Particulars
Letter from Nathan Lopez, GRL, to Steve Richards, WSN, dated 9 February 2009.
51. On 10 February 2009, GRL wrote to WSN threatening to reject Deliveries of Input Material if they contained Out of Specification Material.
Particulars
Letter from Nathan Lopez, GRL, to Steve Richards, WSN dated 10 February 2009.
52. On 12 February 2009 GRL, without admissions, gave undertakings to the Court until the hearing or further order, undertaking that it would not reject an entire Delivery on the basis that it contained Out of Specification Material.
53. Absent the interlocutory undertakings referred to in the preceding paragraph, WSN fears that GRL may reject Deliveries of Input Material on the basis that they contain Out of Specification Material, thereby causing WSN loss and damage.”

17 The letter from GRL to WSN referred to in paragraph 50 of the pleading, relevantly stated as follows:

“As indicated in my letter of Friday 6 February 2009, GRL is continuing to review its operations with a view to improving the operational and financial efficiency of the facility at Eastern Creek. As part of this review, GRL has been assessing the extent to which Input Material delivered by WSN under the Waste Processing Deed (WPD) contains Out of Specification Material. As we have raised on a number of occasions, GRL is concerned at the extent to which Out of Specification Material has been delivered to the Facility.
One of our principal concerns has been the extent that waste components of the Input Material delivered have been outside the ranges specified in paragraph (d) of Schedule 12 to the WPD. Not only have the components of Organic Material and Recyclables in Deliveries commonly been outside the percentages specified, but the amount of Residual Material has been significantly in excess of the 23% maximum mandated by Schedule 12 of the WPD.
We have drawn this to your attention on a number of occasions over the last 2 years. To ensure the availability of accurate information in assessing this issue, WSN and GRL jointly engaged EC Sustainable and Environmental Consultants to undertake audits of Deliveries of Input Material received at the Facility. These audits clearly show that the Input Material of these Deliveries have been consistently outside the ranges required by Schedule 12.
This has been confirmed by the latest report issued for the one day audits undertaken in January 2009. In respect of the sample load sourced from Blacktown Council, Organic Material represented 64.6% of the Input Material, in excess of the 55% maximum permitted by Schedule 12. In the case of the sample delivery sourced from Fairfield Council, Residual Material made up 27.5% of the Delivery, in excess of the 23% maximum permitted by Schedule 12. Similarly, the sample Transfer Trailer Delivery audited revealed Residual Materials of 39.9%, significantly above the 23% maximum.

Consistent with its rights under clause 6.2(a) of the WPD, if GRL reasonably determines that a Delivery of Input Material contains Out of Specification Material, GRL proposes to decline to accept that material for processing using the Facility and will notify WSN of its intention to place that material in a Reject Bin.
In Steve Richards’ letter of 2 February 2009, it was suggested that GRL is obliged to accept that part of Input Material that is Specification Material and either accept that part of a Delivery that is considered Out of Specification Material or place that material in a Reject Bin. GRL does not accept this interpretation of its obligations under Clause 6.2. It is not, and cannot be, the responsibility of GRL to undertake a pre-sorting of Input material to ensure that a Delivery contains only Specification Material. Such sorting of Input Material is an integral part of the processing of Input Material undertaken at the Facility. To do otherwise is to require GRL to accept all Input Material for processing with a view to subsequently rejecting part of that Input Material as Out of Specification. This clearly is contrary to both the intent of the WPD and operational reality.
GRL considers that Clause 6.2 only requires GRL to reasonably assess a Delivery being an individual truck load of Input Material, to determine whether it contains Out of Specification Material. If a Delivery contains Out of Specification Material, GRL may either accept that Delivery or notify WSN of its intention to place that Delivery in its entirety in a Reject Bin. If WSN wishes to bring that Delivery within the agreed specifications by removing waste from that Delivery, it may do so and return that Delivery for processing by GRL. …”


The issue of construction, which led to the present litigation, is conveniently encapsulated in the last two paragraphs of this letter. Further, the reason for the dispute is made plain by the fourth paragraph of the letter.

The decision of the primary judge

18 The essence of WSN’s submission both before the primary judge and this Court was that the expression “that material” where appearing twice in clause 6.2(a) was a reference not to the Input Material the subject of a Delivery, but to the Out of Specification Material believed to be contained in that Input Material. It was WSN’s contention that the sub-clause did not, on its true construction, authorise GRL to notify WSN of its intention to place the whole of the Input Material in a Delivery in a Reject Bin but only so much thereof as contained Out of Specification Material. In this context WSN sought relief in the form of draft Short Minutes of Order handed to the Court which relevantly included the following:

“(b) that, on the proper construction of clause 6.2 of the WPD, in the event that GRL gives notice of intention under clause 6.2(a), GRL is obliged to separate the Out of Specification Material in the Delivery from the other Input Material, and is [then] entitled to reject the Out of Specification Material sorted in this way;
(c) in the alternative to (b), that, on the proper construction of clause 6.2 of the WPD, in the event that GRL gives notice of an intention under clause 6.2(a), GRL is obliged to separate out (or otherwise identify) the material the subject of such notice from the other Input Material in such Delivery to the extent reasonably necessary to enable WSN or its representative to inspect the material the subject of such notice for the purpose of making a determination of the nature referred to in clause 6.2(b);”

19 With respect to the alternative declaration (c), it was not made clear in submissions how GRL was to identify the material the subject of the clause 6.2(a) notice to the extent reasonably necessary to enable WSN or its representative to exercise its rights under clause 6.2(b) and without GRL separating or removing the Out of Specification Material which, acting reasonably, it believed was contained in a Delivery of Input Material as required by declaration (b).

20 Before the primary judge, WSN sought to advance its argument using a hypothetical example of an entire truckload of Input Material containing a single item of Out of Specification Material such as a battery or a length of rope. On GRL’s construction, it would be entitled to reject the entire truckload. On WSN’s construction GRL would be required to “identify” or “separate out” the battery or length of rope from the balance of the Input Material comprising the Delivery. To construe clause 6.2(a) as authorising the rejection of the whole of the Input Material the subject of a Delivery, would, so WSN submitted, result in a “commercial absurdity” or would at least work a “commercial inconvenience”.

21 His Honour’s response to that submission (at [135]) was that

“the only commercial inconvenience that could occur if GRL repeatedly engaged in the conduct described in WSN’s hypothetical example would be that WSN might need to have one of its employee’s exercise its clause 6.2(b) [rights] on its behalf from time to time.”

22 According to his Honour (at [136]) this was hardly the kind of “commercial nonsense” or “inconvenience” to which the authorities referred. His Honour further considered (at [137]) that it would be commercially irrational for GRL to act in the manner suggested as it would result in GRL incurring increased handling costs and the floor space of the receival hall would be engaged for longer periods whilst the relevant Delivery was made available by GRL to WSN for inspection.

23 After considering the definition of the terms “Specification Material” and “Non-specification Material”, his Honour (at [140]) concluded that

“[a] given Delivery of Input Material is either Specification Material or Out of Specification Material and cannot contain both”.

24 Accordingly, he considered (at [141]) that where a single truckload of material delivered to the Facility did not satisfy the compositional requirements of the specifications in Schedule 12 (such as containing one piece of Hazardous Material such as a battery) the entire Delivery contained “Out of Specification Material”.

25 In my view, this finding of his Honour cannot be sustained as it is clear, as clause 6.1(a)(i) acknowledges, that Input Material will contain not only Specification Material but also Out of Specification Material and Hazardous Material. However, his Honour’s error does not necessarily lead to a different result so far as the true construction of clause 6.2(a) is concerned.

26 The nub of the primary judge’s reasoning is set out at [142]-[147] of his judgment. In essence, his Honour rejected WSN’s construction that GRL was required to separate any Out of Specification Material from the Input Material comprising a Delivery before notifying WSN of its intention to reject. This was because clause 6.2(a) required GRL to form a “belief” (acting reasonably) whereas, by way of contrast, WSN was required under clause 6.2(b) to make a “reasonable determination” that the material intended to be rejected contained Specification Material. Such a determination required a higher level of satisfaction than that required to form a belief under clause 6.2(a).

27 His Honour noted (at [145]) that clause 6.2(b) expressly required WSN to separate Specification Material from Out of Specification Material if it reasonably determined that this could be achieved. There was no suggestion, his Honour noted, that GRL was required to sort the Delivery of Input Material under clause 6.2(a) to separate the Out of Specification Material from the Specification Material.

28 His Honour’s ultimate reasoning to his conclusion (at [148]) that GRL was entitled to notify WSN of its intention to reject an entire Delivery, was as follows:

“146. As noted above, Reject Material is defined as the Input Material that GRL has rejected pursuant to clause 6.2(a), not the Out of Specification Material that GRL has rejected pursuant to clause 6.2(a). If it was intended that GRL would be required to separate Out of Specification Material from Specification Material, then Reject Material would have been defined as the Out of Specification Material rejected by GRL pursuant to clause 6.2(a).”

The parties’ submissions on the appeal

29 WSN contended that read in context the expression “that material” where appearing in clause 6.2(a) was a reference to the “Out of Specification Material” believed by GRL to be contained in a “Delivery of Input Material” and not, as the primary judge had held, a reference to the Input Material the subject of that Delivery. Its submissions in support of this proposition may be summarised as follows:

(a) The first reference to “ that material ” immediately follows the reference to “ Out of Specification Material ” rather than “ Delivery of Input Material ”.

(b) Clause 6.2(a) gives WSN a discretion to accept for processing Out of Specification Material which it believes is contained in a Delivery of Input Material as well as the discretion to notify WSN of its intention to place that material in a Reject Bin; the discretion in both cases was directed only to Out of Specification Material.

(c) Clause 6.1(a)(i) contemplates that Input Material will contain Out of Specification Material and Hazardous Material; and clause 6.1(a)(ii) authorises GRL, prior to it processing that Input Material, to place the Hazardous Material contained in the Input Material in a Reject Bin. In order to exercise that right it would be necessary for GRL to separate out the Hazardous Material from the Input Material in order to place it in a Reject Bin. This is to occur prior to GRL processing the Input Material.

(d) Accordingly, GRL is required, if it wishes to reject Hazardous Material pursuant to clause 6.1(a)(ii), to, in effect, pre-sort and separate that material from the Input Material. It would be unusual if GRL is not required to perform the same exercise where Input Material is believed to contain Out of Specification Material in respect of which it wishes to notify WSN of its intention under clause 6.2(a) to place that material in a Reject Bin. In other words, where Input Material contains Hazardous Material, GRL is confined by clause 6.1(a)(ii) to placing that material in a Reject Bin and is not authorised to reject the whole of the Input Material. A similar construction should be applied to clause 6.2(a).

(e) The construction contended for gains support from the provisions of clause 6.1(c) and (d) which relevantly provide that WSN does not warrant or represent that the Input Material would be Specification Material or would not contain Hazardous or Out of Specification Material and that all Input Material delivered to the Facility and accepted by GRL for processing is deemed to be Specification Material from the time of GRL’s acceptance of it.

(f) It follows that under clause 6.1, if GRL wishes to avoid the effect of clause 6.1(d), it has to separate out any Hazardous Material from the Input Material which is to be placed in a Reject Bin.

(g) As it is not open to GRL pursuant to clause 6.1(a)(ii) to reject the whole of a Delivery of Input Material which contains Hazardous Material, so too clause 6.2(a) does not authorise GRL to notify WSN of its intention to place the whole of such a Delivery into a Reject Bin simply because it was believed to contain some Out of Specification Material.

(h) If clause 6.2(a) operates to permit rejection of an entire Delivery of Input Material simply because it contains Out of Specification Material, then GRL would never need to utilise the power conferred by clause 6.1(a)(ii) to reject Hazardous Material. Instead, upon this construction, GRL could simply rely on the power conferred by clause 6.2(a) to reject the entirety of a Delivery because it contains Out of Specification Material (comprising Hazardous Material): a result that was not likely to have been intended by the parties.

(i) Furthermore, the structure of the WPD tells against GRL’s construction. Thus, clause 4.4 sets out circumstances in which GRL might refuse to accept a Delivery of Input Material whereas clause 5.4(c) authorises GRL to refuse to accept a Delivery of Green Waste in the circumstances there referred to. Accordingly, if clause 6.2(a) was intended to authorise GRL to give a notice of intention to reject an entire Delivery of Input Material, it would have been drafted in a manner more akin to clauses 4.4 and 5.4(c) so as to empower GRL to refuse to accept any Delivery of Input Material which, in its belief, contained Out of Specification Material. In other words, the expression “ that material ” where appearing in clause 6.2(a) would have been substituted for “ that Delivery ”.

(j) In any event there is nothing surprising about a construction of clause 6.2(a) which required GRL to sort Out of Specification Material from the remainder of a Delivery of Input Material before it was entitled to notify WSN of its intention to reject that Out of Specification Material. It would be a strange construction if the obligation fell on WSN to pre-sort a Delivery of Input Material at GRL’s facility before GRL was obliged to process it. It was not so required under clause 6.1 and logic and common sense dictates that it should not be so required under clause 6.2(a).

(k) Finally, there is nothing in clause 6.2(b) that detracts from the construction contended for. Clause 6.2(c) admits of the possibility of disputes as to whether or not Out of Specification Material, the subject of a notice under clause 6.2(a), is or is not properly so classified. It provides a mechanism to enable WSN to inspect the Out of Specification Material in respect of which a notice has been given and, if it reasonably determines that it contains Out of Specification Material, to separate it out in circumstances where, having done so, GRL must accept it subject only to the audit process. In the event that GRL does not accept that material as Specification Material pursuant to clause 6.2(c), on WSN’s construction of clause 6.2(a) there is still plenty of work for clause 6.2(b) to do.

(l) Accordingly, GRL is required to sort Out of Specification Material from a Delivery of Input Material, at least in circumstances where the entire delivery is not Out of Specification Material.

30 GRL submitted that the primary judge was correct in finding that it was not obliged to separate Specification Material from Out of Specification Material as a precondition to the exercise of its clause 6.2(a) right to give a notice of intention to place a Delivery of Input Material in a Reject Bin. Its submissions in support of that proposition may be summarised as follows:

(a) The definitions of “ Reject Bin ” as meaning a receptacle for the storage of “ Input Material rejected by GRL under clause 6.2 ” and “ Reject Material ” as meaning “ Input Material rejected by GRL under clause 6.2(a) ” support the conclusion that the words “ that material ” in clause 6.2(a) were intended as a reference to Input Material and not Out of Specification Material.

(b) Although it is correct, as WSN submitted, that clause 6.2 admits of the possibility of disputes as to whether or not a Delivery of Input Material does or does not contain Out of Specification Material, the definitions of Reject Bin and Reject Material both refer to Input Material and it is pure speculation on the part of WSN to suggest that those definitions were framed in a manner that was, in effect, neutral in respect of the outcome of any such disputes.

(c) Given the definition of Reject Material as meaning Input Material rejected by GRL under clause 6.2(a), it is that material, under clause 6.2(b) that WSN is entitled to inspect. If WSN reasonably determines that that Input Material contains Specification Material, it may separate the latter from any Out of Specification Material within the time limited by the sub-clause.

(d) Clause 6.2 contains a detailed, multi-step regime for dealing with the rejection of material including a detailed audit, reporting and consultation system which culminates in consequential reductions in the Waste Processing Fee and additional compensatory payments to WSN when GRL wrongfully rejects Specification Material: see clauses 6.2(d)-(g). Of particular significance is the fact that whereas clause 6.2(d) contains an express requirement, if WSN wishes to contest GRL’s notification of its intention to reject notified under clause 6.2(a), for it to separate out Specification Material from Reject Material, no such separation is contemplated, either expressly or implicitly, in the text of clause 6.2(a). In other words, there is no suggestion in clause 6.2(a) that GRL is required to sort through the Delivery of Input Material to separate therefrom Out of Specification Material whereas such an obligation is expressly imposed on WSN (where it elects to exercise its clause 6.2(b) right to challenge GRL’s notification under clause 6.2(a)).

(e) The radical difference in language between clauses 6.2(a) and 6.2(b) and the absence from the former of any suggestion of pre-sorting or separation of Specification Material from Out of Specification Material inevitably leads to the conclusion that under clause 6.2(a), once GRL, acting reasonably, believes a Delivery of Input Material contains Out of Specification Material, it may either accept that material for processing or notify WSN of its intention to reject it. The onus and risk then passes to WSN under clause 6.2(b) to, if it so elects, separate out such Specification Material as can be separated from the Input Material the subject of the notification.

(f) As to the suggestion that on GRL’s construction it can give a notice of intention with respect to the whole of a Delivery of Input Material where it reasonably believes that it contains only a single battery or vacuum cleaner bag, if that occurs clause 6.2(b) then gives WSN the right to separate that single battery or vacuum cleaner bag from the balance of the Input Material. If the latter is otherwise all Specification Material, then GRL is bound to accept it (subject only to the provisions of clause 6.2(c)). However, to the extent that there is any practical difficulty in separating Specification Material from the Input Material the subject of a particular Delivery, clause 6.2(b) imposes the burden of resolving that difficulty upon WSN and not GRL.

(g) As to WSN’s reliance upon clause 6.1(a)(ii), that provision grants GRL an additional right in respect of Hazardous Material but it does not confine or limit its rights in respect of such material. It merely means that so far as Hazardous Material is concerned as distinct from Out of Specification Material which does not contain Hazardous Material, clause 6.1(a)(ii) authorises GRL to place that material directly into a Reject Bin without having to follow the notification procedure in clause 6.2. The right of rejection is immediate.

(h) This is not surprising given the nature of Hazardous Material which can require immediate disposal compared to non-Hazardous Out of Specification Material which does not. There can be no doubt that with respect to some Hazardous Material (such as medical equipment, being needles, tubes and bags, clinical waste, asbestos products, explosives and ammunition), GRL would not wish to handle it or accept the risk of sorting it out from a Delivery of Input Material for the purpose of clause 6.1(a)(ii) but, pursuant to clause 6.2(a), would wish to reject the whole Delivery thereby casting upon WSN the risks associated with any sorting or separation activities. On the other hand, Hazardous Material such as batteries and vacuum cleaner bags could easily be disposed of pursuant to clause 6.1(a)(ii) without rejection of an entire Delivery of Input Material.

(i) The fact that WSN has no obligation to ensure that the Input Material delivered to the Facility is only Specification Material (clause 6.1(a)(i)) serves to emphasise the importance of clause 6.2 to the structure of the overall regime. That provision is GRL’s only protection to prevent it from having to process a Delivery of Out of Specification Material. WSN’s proposed construction of clause 6.2(a) would denude it of that protection. Moreover, it is not inevitable that a high percentage of Deliveries would contain Out of Specification Material. In any event, GRL has no ability to control the contracts that WSN enters into with councils noting that Recital B to the WPD states that WSN has expertise in obtaining Input Material from councils and the obligation placed upon both parties by clause 6.1(a)(iv) to work together to manage the quality, composition and characteristics of Input Material delivered to the Facility including by liaising with councils.

(j) Accordingly, WSN bears the risk of sourcing waste from councils that does not meet the specifications of the WPD. GRL has no direct control over the composition of a Delivery with the result that it is WSN and not GRL that is intended to bear the risk under clause 6.2(a) of a Delivery of Input Material containing Out of Specification Material (including Hazardous Material).

(k) Clause 6.2(a) requires GRL to form a belief, acting reasonably, that a Delivery of Input Material contains Out of Specification Material. Once that belief is formed GRL’s rights under clause 6.2(a) are triggered. A Delivery that contains Out of Specification Material that fails to satisfy any of the Schedule 12 criteria will be required to be looked at in its entirety.

(l) Finally, there will be many cases where it will be difficult, if not impossible, for GRL to separate Out of Specification Material from any particular Delivery of Input Material under clause 6.2(a). Thus, where a Delivery contains asbestos, paint or other solvents or liquids, which may have contaminated the Specification Material in such a Delivery, it would be nonsensical to require GRL to separate this type of Out of Specification Material (including Hazardous Material) from the Specification Material in the Delivery of Input Material. On the contrary, such an example is an appropriate case where it would be proper for GRL to reject the whole Delivery. It was submitted that GRL would be far more likely to be confronted with such a situation than with a Delivery of Input Material which was found to contain one or more batteries which could easily be separated out by WSN under clause 6.2(b).

(m) A fortiori, the example of a Delivery of Input Material containing both Specification Material and Out of Specification Material which was Hazardous but which had contaminated the whole or a substantial part of the Delivery, was more likely to have been intended to be covered by clause 6.2(b). That is, such a Delivery would be inspected by WSN who would then be required to determine whether the Out of Specification Material could be separated from the Specification Material in the Delivery.

(n) In the example posed in (l) above, in all probability the Delivery could not be separated into Specification Material and Out of Specification Material, with the consequence that the whole of the Delivery should be rejected. The point sought to be made is that once GRL, acting reasonably, believes a Delivery of Input Material contains Out of Specification Material, it is open to it to give a notice of its intention to place that material in a Reject Bin. The onus thus passes to WSN under clause 6.2(b) to determine whether the Specification Material contained in the Input Material is capable of being separated from the Out of Specification Material: that decision is to be made by WSN alone.

GRL’s submissions should be accepted

31 As I have indicated, the current clauses 6.2(a), (b) and (c) were substituted for the original clauses 6.2(a), (b) and (c) by the Amending Deed. In their original form those provisions of clause 6.2 were as follows:

“(a) If GRL, acting reasonably, believes a Delivery of Input Material is Out of Specification Material, GRL may, either accept that material, in GRL’s absolute discretion, for processing using the Facility or place that material in a Reject Bin.
(b) WSN may inspect, or procure the inspection of, each Reject Bin containing Reject Material.
(c) WSN must remove all Reject Material in accordance with the Collection Procedures. If WSN or its representative, acting reasonably, believes Reject Material is Specification Material, unless otherwise agreed, GRL and WSN must procure the audit of the Reject material in accordance with clause 6.3.”

32 It is noteworthy that no consequential amendments were made to any of the relevant Definitions including, in particular, the definitions of “Reject Bin” and “Reject Material”. The original clause 6.2(a) was engaged only where GRL, acting reasonably, believed a delivery of Input Material “is” (as distinct from “contains”) Out of Specification Material. If it was, Out of Specification Material, then GRL was entitled either to accept that material for processing or place it in a Reject Bin. On placing the material in a Reject Bin, it could be said to have been rejected under clause 6.2 and thus the definitions of Reject Bin and Reject Material would be consistent with that consequence.

33 The effect of the new clause 6.2(a) is that Input Material is no longer rejected under that provision: rather, a notice of intention to reject must be given. Rejection does not occur until after compliance with the processes in clause 6.2(b). Accordingly, the definition of Reject Material ought to have been amended to read

“ Reject Material means Input Material intended to be rejected by GRL under clause 6.2(a)”.

This would have been appropriate given the use of the expression Reject Material in the opening words of clause 6.2(b).

34 Nevertheless, in my opinion the definition of Reject Material should be so read so that the reference to that expression in clause 6.2(b) is a reference to such material in respect of which a notice of intention to place it in a Reject Bin has been given by GRL under clause 6.2(a).

35 There is also a significant difference between the second sentence of the original clause 6.2(c) and the second sentence of the current clause 6.2(c). This is because the new clause 6.2(b), to an extent, involves a combination of the original clauses 6.2(b) and (c).

36 WSN’s construction of the current clause 6.2(a) in my view comes close to seeking to reinstate the original clause 6.2(a). Clearly, in that provision the reference to “that material” was a reference to Out of Specification Material. But the changes effected by the Amending Deed by substituting the word “contains” for the word “is”, requiring notification of intention to reject rather than permitting an outright rejection and providing WSN with the right to elect under clause 6.2(b) to separate Specification Material from Reject Material (as defined) leads, in my view, to the construction of clause 6.2(a) adopted by the primary judge and supported by GRL on the appeal.

37 I would come to the same view even disregarding the original version of clauses 6.2(a), (b) and (c). The provisions of clause 6.1(a)(ii), relied upon by WSN, support the construction adopted by his Honour rather than that contended for by WSN. I do not find any incongruity between on the one hand the fact that, to engage clause 6.1(a)(ii), GRL is required to separate Hazardous Material from the Delivery of Input Material before it could place that material in a Reject Bin and, on the other, the provisions of clause 6.2(a) which are directed not at a Delivery of Input Material containing Hazardous Material but a Delivery of Input Material containing Out of Specification Material (which may or may not include Hazardous Material). Given the express requirement for separation in clause 6.2(b), there is no indication in clause 6.2(a) that before an intention to reject can be notified to WSN, GRL must not only reasonably believe that a Delivery of Input Material contains Out of Specification Material but also separate that Out of Specification Material from the Input Material for the purpose of enabling WSN or its representative to inspect that material pursuant to clause 6.2(b).

38 In essence, therefore, my views may be summarised as follows:

(a) Under clause 4.4(a) GRL must accept all Specification Material delivered to the Facility by or on behalf of WSN.

(b) GRL is not bound to accept Out of Specification Material (including Hazardous Material) notwithstanding that under clause 6.1(a)(i) it is acknowledged that Input Material delivered to the Facility will contain Out of Specification and Hazardous Material.

(c) Where a Delivery of Input Material contains Hazardous Material, clause 6.1(a)(ii) enables GRL, immediately and without notice to WSN, to place that material in a Reject Bin, although it is not obliged to do so. In order to place Hazardous Material in a Reject Bin pursuant to that provision, GRL would need to extract that material from the Input Material before taking that action.

(d) However, GRL is not bound to deal with Hazardous Material pursuant only to clause 6.1(a)(ii): it may also deal with such material pursuant to clause 6.2 given that Out of Specification Material includes, by definition, Hazardous Material.

(e) Clause 6.2 provides, in effect, a system or structural process for dealing with Out of Specification Material reasonably believed to be contained in a Delivery of Input Material. Under clause 6.2(a) GRL must first form such a belief in which event it may either accept the Input Material containing Out of Specification Material or notify WSN of its intention to place that Input Material in a Reject Bin.

(f) The onus then passes to WSN under clause 6.2(b) to inspect the Reject Material (which by definition means Input Material) in respect of which a notice of intention has been given under clause 6.2(a) and then, if it so elects, to reasonably determine first, that the Reject Material contains Specification Material and, second, that that material can be separated from the Out of Specification Material and to carry out that separation process within 24 hours of the notification. If there is a dispute, then the parties must procure an audit of the Reject Material in accordance with clause 6.3 with the consequences set forth in clause 6.2(d).

(g) Given the structure of clauses 6.2(a) and (b), the text of those provisions requires no more of GRL at the first stage under clause 6.2(a), once it has formed the necessary belief and does not propose to accept the material, to give notice of its intention to place that material in a Reject Bin. There is nothing in the text of clause 6.2(a) which imposes any obligation upon GRL as a condition precedent to giving a notification of its intention to place the relevant material in a Reject Bin to either identify, let alone separate out, the Out of Specification Material from the Specification Material within any particular Delivery of Input Material. Such a task of identifying and separating at that stage would be both onerous and expensive and one would expect that if GRL was to carry out those tasks, that obligation would be squarely placed upon it by clause 6.2(a) in the same manner in which it is expressly placed upon WSN by clause 6.2(b). Thus clause 6.2(b) provides WSN with the choice of the whole Delivery being rejected or reasonably determining that it contains Specification Material which can be separated from the Out of Specification Material and is in fact so separated within the time limited by the provision.

(h) As a matter of orthodox linguistic construction, clause 6.2(a) is to be construed as meaning that GRL has an “ absolute discretion ” to either accept the entire Delivery of Input Material or, if it does not wish to do so, to notify WSN of its intention to place that Delivery in its entirety in a Reject Bin. The difference in wording between clauses 6.2(a) and (b) with respect to the requirement to separate Specification Material from Out of Specification Material is telling.

(i) In the context of the WPD as a whole, which deals generally with Deliveries of Input Material, there is little scope for inferring that the parties intended in clause 6.2(a) to deal only with Out of Specification Material rather than an entire Delivery of Input Material.

39 The construction of clause 6.2(a) which I have adopted and which accords with that accepted by the primary judge, is reinforced by the significant changes effected to clauses 6.2(a), (b) and (c) by the Amending Deed. Furthermore, I am fortified in my view that his Honour’s construction was correct when one considers how the dispute in the present case arose as described in the letter of 9 February 2009 which I have recorded at [17] above.

40 Furthermore, extreme examples such as those suggested by WSN to the effect that the construction adopted by the primary judge leads to a commercial nonsense where an entire Delivery is rejected because it contains one battery, are not helpful where the problem in reality is of the nature of that referred to in GRL’s letter. When construing a commercial agreement such as the WPD, it is more appropriate to test the competing constructions by reference to what are or are likely to be commercially realistic examples rather than those which test the theoretical result of competing constructions upon hypothetical commercially unrealistic situations.

41 In other words, it is commercially unrealistic to suggest that in the context of the WPD, GRL would give a notice of intention to place an entire Delivery of Input Material in a Reject Bin merely because it believed that it contained a single domestic battery, a vacuum cleaner bag, a piece of rope or a carpet. Although on the one hand it may be accepted that such a response by GRL was not one intended by the parties when they agreed on the terms of the current clause 6.2(a), on the other it should not be assumed that GRL would act capriciously, unreasonably and uncommercially if it was confronted with the example postulated.

42 In this context the Court was referred to the operations of the Facility described at paragraph 13 of the affidavit of Naveen David Singh sworn 1 May 2009. Relevantly, the Facility operates (and, I would infer, was intended by the parties at the time the WPD was entered into to so operate) in the following manner:

“(a) Waste is delivered to the Facility by Council trucks and, in limited circumstances, trucks operated by WSN referred to as transfer trailers. Waste is usually dumped through a number of doors directly into a receivals hall … Delivery of 600 tonnes of Input Material in a day will represent approximately 65-70 truckloads. …

(b) The receivals hall has approximately 750 square metres of usable space and has the capacity to store around 1,000 tonnes of waste. The receivals hall is primarily used to stockpile waste prior to processing … The general practice is for waste to remain in the receivals hall for a maximum period of 24 hours. Some space within the receivals hall is used to test waste received at the Facility for compliance with the specifications for which the Facility was designed as set out in the Waste Processing Deed. Space is also used for bins to receive material that is outside the specifications for the Facility including Hazardous Material and incompatible material generally. These bins are either hooklift bins or walking floor trailers and are referred to as Reject Bins. These bins have a capacity of approximately 6 and 20 tonnes respectively. …

(c) Waste stockpiled in the receivals hall is placed on a conveyor to an elevated platform known as the pre-sort station. … At this station, GRL employees manually sort the waste to extract Hazardous Material, material that is otherwise incompatible with the Facility and some material capable of recycling being paper and some glass to the extent it is outside garbage bags. Garbage bags containing domestic waste are not opened at the pre-sort station unless torn when arriving at the pre-sort station. Such garbage bags are opened by a bag-opening device in the next stage of the processing plant. ...

(d) Once pre-sorting is completed, waste progresses through 3 separate sections of the Facility being the sorting plant, the percolation and digestion plant and the composting plant.
(e) After pre-sorting, waste is placed on a conveyer which takes it to the sorting plant. …”

43 It is to be noted that although waste is to be tested within the receivals hall prior to processing for compliance with the relevant specifications and Reject Bins are available to take Hazardous Material and other incompatible material discarded, presumably, as a result of that testing, a further extraction of such material is undertaken by GRL after the material in the receival hall has been placed on a conveyor and reached the pre-sort station, being the next stage of the process.

44 My point is that the Facility was, to the knowledge of the parties, designed to deal in a practical manner with material destined for the Reject Bins without, in an inappropriate case, requiring rejection of an entire Delivery.

45 Of course, one can imagine many extreme examples which, if GRL’s construction of clause 6.2(a) is to be adopted, could lead to an absurd result. But as Barker J recently stated in GMA Garnet Pty Ltd v Barton International Inc [2009] FCA 439 at [93], referring to the judgment of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337 at 352, it is

“commonly understood that the proper construction of a contract should reflect what reasonable people in the position of the contracting parties would have understood by the relevant clauses, considering not only their text, but also the surrounding circumstances and the purpose and object of the entire transaction and its elements.”

See generally, his Honour’s discussion of the relevant principles at [90]-[100].

46 At [96] Barker J also observed that in a commercial setting, the business objectives of the parties should be accounted for and the relevant provisions given a “business commonsense” or a “business-like” construction. In my view, given the contemplated operation of the Facility to which I have referred above and which provides the surrounding circumstances as well as an insight into the purpose and object of the WPD, it would neither accord with “business commonsense” nor would it be “business-like” to utilise the extreme examples advanced by WSN to support a construction of clause 6.2(a) which would require GRL to carry out the process of separation for which WSN contends.

47 Accordingly, If one takes the problem that is described in the letter of 9 February, namely, where an audit of sample loads has indicated that the permissible compositional percentages referred to in paragraph (d) of Schedule 12 have been significantly exceeded, then one can readily understand that it would make commercial nonsense for GRL to be obligated under clause 6.2(a) to separate from a Delivery of Input Material the Out of Specification Material comprising the excess percentage of the relevant waste component from Specification Material being the relevant percentage permitted by the table to paragraph (d) rather than rejecting the Delivery in its entirety. Where a Delivery fails to meet the specification in the manner and to the extent referred to in the fourth paragraph of the letter of 9 February 2009, it makes commercial sense that in such circumstances GRL is empowered to give notice of its intention to place the whole Delivery in a Reject Bin. It would then be a matter for WSN as to whether it was able to reasonably determine that the excess percentage of the relevant waste components could be separated out.

48 As GRL submitted, clause 6.2 is all about risk allocation. If Out of Specification Material is to be separated from Specification Material, the risk of so doing is placed fairly and squarely by clause 6.2(b) upon WSN.

Conclusion

49 For the foregoing reasons in my opinion the primary judge’s construction of clause 6.2(a) to the effect that the words “that material” where appearing in that provision mean “Input Material” was correct with the consequence that where, acting reasonably, GRL believes that a Delivery of Input Material contains Out of Specification Material, it is empowered to either accept that material for processing or to notify WSN of its intention to place it in a Reject Bin.

50 I would therefore propose that the appeal be dismissed with costs.

51 BASTEN JA: The respondent is the commercial operator of a waste processing facility at Eastern Creek. It receives waste for processing from the appellant. A “Waste Processing Deed” identified the kinds of waste material which are to be supplied by the appellant and processed at the facility. The facility is said to be a state of the art operation which seeks not merely to recycle waste materials where appropriate, but to use other materials in a productive and energy efficient manner. That which cannot be used is turned into landfill, but there is a financial incentive for the respondent to minimise that which goes into landfill.

52 That which is to be processed at the facility is described in the deed as “Specification Material”. How it is defined is a matter of some importance. That which is not specification material is described as “Out of Specification Material”.

53 In broad terms, the appellant is required to supply, and the respondent to accept and process, specification material. However, it is acknowledged and agreed that trucks delivering waste material to the facility are likely to include both specification and out of specification material. Some out of specification material can be processed, but there appear to be technical or commercial limits on the capability of the facility in that regard. If the respondent “accepts” out of specification material it is deemed to be specification material.

54 A sub-category of out of specification material is “Hazardous Material”. The deed deals separately with the rejection by the respondent of both hazardous and out of specification material. The present dispute is limited to the proper construction of the clause in the deed which deals with the rejection of out of specification material: cl 6.2, set out at [13] above.

55 The conflicting positions of the parties may be shortly stated. The respondent says that whenever it has reason to believe that a truckload of “Input Material” contains out of specification material, it may give notice to the appellant of its intention to reject that material. It may do so by reference to the whole of a truckload. It is then a matter for the appellant, if it so wishes, to inspect the material and separate it into specification material and out of specification material and require the respondent to accept the former.

56 The appellant’s position is that it is necessary for the respondent, in giving a notice of intention to reject, to identify that which is to be rejected as out of specification material. To do so, it must, in effect, separate that material from any specification material. The appellant is then entitled to inspect that asserted to be out of specification material and, if it thinks that it can be separated into specification material and out of specification material within a given timeframe, to undertake that task. If that task results in the identification of specification material, the respondent must accept that material, subject to its power to require an independent audit.

57 The difference between the two positions may vary depending on the circumstances of the case and, stated in the bland form set out above, may not appear to involve issues of significance. However, there are clearly degrees of responsibility involved in the identification, separation and disposal of out of specification material, the cost of which will tend to fall more heavily on one party than the other, depending on which approach is adopted.

58 To understand the place of cl 6.2 in the scheme of the deed, it is necessary to have regard to four earlier provisions. The first is cl 4.3, which requires that the respondent supply services to the appellant. Those services are “the acceptance of Input Material to enable the facility to process” identified tonnages of “Specification Material”, in each year.

59 Clause 4.4 requires, subject to certain qualifications, that the respondent accept “all Specification Material … delivered to the Facility by or on behalf of [the appellant]”. (The qualifications are not presently relevant.)

60 Clause 5.1 deals with the obligations of the appellant. Paragraph (a) obliges the appellant to procure “the delivery of a quantity of Input Material to the Facility such that Specification Material is delivered …” in accordance with an identified “Daily Base Capacity” measured in tonnes per day. (After the “ramp up period”, the daily tonnage varied from approximately 500 to 700: Schedule 4.) The fee payable by the appellant to the respondent is fixed by reference to the required level of tonnage, whether that tonnage is in fact delivered or not.

61 Finally, it is necessary to refer to cl 6.1, set out at [12] above. That clause had three functions. The first was an acknowledgment and agreement by the parties that input material delivered to the facility would contain both out of specification and hazardous material; that the appellant had no obligation to ensure that the input material delivered to the facility was specification material and that the appellant made no warranty or representation that input material would be specification material. Secondly, cl 6.1 provided a right in the respondent to reject hazardous material.

62 A third function of cl 6.1 was to provide that all input material delivered to the facility and “accepted” by the respondent was “deemed to be Specification Material … from the time of acceptance”.

63 Turning to cl 6.2, which deals with “Out of Specification Material”, a different regime is provided to that which permits the unchallengeable rejection by the respondent of hazardous material. First, cl 6.2(a) is premised upon the respondent, acting reasonably, forming a belief that a delivery of input material “contains” out of specification material. Having formed that belief, the respondent may either accept “that material” or notify the appellant of its intention to reject “that material”.

64 The belief in question must be one about the contents of a “Delivery”, which is defined to mean a single truckload of material delivered to the facility. The subject-matter of the belief relates to the contents of that truckload, namely that it contains out of specification material. In the context of a deed which requires the respondent to accept specification material but makes other provision in relation to hazardous material and out of specification material, the natural reading of the “material”, which the respondent must either decide to accept or notify an intention to reject, is the out of specification material believed to be in the delivery.

65 Before the amendments of June 2008, cl 6.2(a) required a belief that the delivery “is” out of specification material. In that form, it was reasonably arguable that the belief had to relate to the whole of the delivery; the use of the word “contains” suggests that the current situation is otherwise.

66 It remains to consider whether there are factors which tend to support a different construction. On first reading, the reference to “a delivery of Input Material” in par (a) seems to involve an elision of the differently expressed sub-paragraphs of 6.1(a)(i) and (ii). However, there are circumstances in which the respondent’s belief as to there being out of specification material delivered to the facility may in fact be formed only by reference to a delivery. That is because specification material is defined to mean material which meets the specifications in Schedule 12 of the deed: see [14**] above. Schedule 12 has four parts. Paragraph (a) requires that the material satisfy the conditions of licenses and approvals relating to the facility. No reliance was placed on this provision by either party. Paragraphs (b) and (c) are expressed in exclusionary terms. Paragraph (d) identifies proportions by reference to ranges.

67 Paragraph (b) excludes material which has been subjected to a “compaction process greater than good industry practice … from the point of collection at kerbside”. The purpose of the provision is to ensure that the waste material is in a state in which it can be separated into component parts at the facility. Whether it could apply only to a complete truckload or might apply to parts thereof was not addressed in argument.

68 Paragraph (c) requires that “material” must not contain material over a certain size, or greater than a specified weight or “stringy objects”. The terminology, “does not contain”, suggests a larger volume within which the prohibited items or material may be found. However, there is no clear indication that the larger volume is a delivery, nor that, if the offending item or material were removed, the rest of the delivery would not be specification material.

69 Paragraph (d) has a different operation. It requires that a proportion of “total Input Material” be within a specified percentage. The categories include “Organic Material”, “Recyclables”, “Residual Material” and “Hazardous Material”. Each of these categories is defined in Schedule 12.

70 The reference to “total” input material requires the specification of a form of delivery or period of delivery. It was accepted by the appellant (with the concurrence of the respondent) that the proportions were to be measured by reference to a “Delivery”, namely a single truckload of material delivered to the facility.

71 For the purposes of the appeal, nothing appeared to turn on the fact that paragraph (d) of Schedule 12 was concerned not merely with material delivered to the facility, but with “Input Material”. Input material is not defined as the content of a delivery, but, with certain additions, as “MSW”. “MSW” was in turn defined (by reference to an environmental instrument) as “class 3 putrescible waste”. The relationship between the definitions of “Input Material” and “Specification Material” was not explored.

72 The respondent’s contention was that if a delivery was believed to contain any material excluded from specification material under Schedule 12, it could give a notice of intention to reject the whole delivery. The appellant argued that such a construction was not only inconsistent with the reading of cl 6.2(a), set out above, but was also inconsistent with the process which followed a notice of intention to reject, namely that the appellant could inspect and separate specification material from out of specification material, and require the respondent to accept the specification material (subject to a process of independent audit, which does not affect the argument).

73 These arguments may have differential consequences, depending on the paragraph of Schedule 12 which is engaged in a particular case. Thus, in the case of the exclusions contained in paragraphs (b) and (c), it is by no means clear why the removal of (say) an offending section of electrical cable would not permit the remaining material to be specification material.

74 The operation of paragraph (d) is less clear. If a delivery has more than 55% organic material, it will be excluded from the definition of specification material. That decision can only be made (on the assumption noted at [70]) by reference to the whole of the delivery. If, on inspection, the appellant were merely to separate the excess of (say) 10%, there is, again, no obvious reason why the remainder should not be “Specification Material”.

75 A greater and separate difficulty arises in respect of hazardous material, which is contained within paragraph (d) but has a proscribed proportion of 0%. Hazardous material includes a range of items varying from “treated and painted timber”, which may readily be separated, to liquids, which may escape from containers and permeate surrounding material. Further, hazardous material may be rejected without notice of intention to reject by the respondent but, if it is not rejected, the appellant will need to collect it as “Residual Material”: cl 6.1.

76 Given the breadths of the exclusions and the kind of material which is likely to be contained in household waste, it seems likely that most if not all deliveries might engage the relevant belief on the part of the respondent and thus be subject to a notice of intention to reject, if the respondent’s construction were correct. The consequence of adopting that approach would be to impose on the appellant an obligation to separate non-specification material at the facility. As the appellant submitted, such a construction would not sit well with the acknowledgment and agreement that input material will contain out of specification material and hazardous material (cl 6.1(a)(i)), that the appellant has no obligation to ensure that input material is specification material (cl 6.1(b)) and that the appellant made no warranty or representation that input material delivered to the facility will be specification material and will not contain hazardous or out of specification material (cl 6.1(c)).

77 If the respondent is required to form a belief in respect of specific out of specification material, and not simply impose an obligation to separate every delivery into specification material and out of specification material, then it must have a basis for its belief in respect of any particular notification of intention to reject. The parties were each inclined to base their respective constructions upon extreme examples designed to demonstrate the commercial unreality of the alternative construction. However, these arguments were not persuasive. Thus, it is unlikely that significant difficulties would arise in respect of small quantities of material which were readily identifiable as out of specification material. There would no doubt be a commercial cost to the respondent in invoking the “intention to reject” power, which may not be fully off-set by any later saving if it were required to accept the bulk of the load after inspection and separation by the appellant. There would also be a commercial cost for the appellant if it took steps under cl 6.2(b) to inspect and separate out the specification material. However, it does not have to exercise that right and no doubt would not exercise it unless the respondent were threatening to place the whole or a large part of a delivery into the reject bin.

78 Clause 6.2(a) envisages that the respondent may accept out of specification material, and would no doubt do so if the amount or nature of it was not significant in terms of the capability of the facility to deal with it and the volume would not greatly increase the material which would need to form landfill. Further, there would, presumably, be some commercial disincentive for the respondent giving notice of intention to reject whole deliveries, which could not then be immediately processed.

79 It is apparent from the evidence that the present dispute arose because the respondent was concerned at the volume of out of specification material being delivered to the facility and the appellant was concerned as to the costs imposed on it in having to inspect and separate significant volumes of material, pursuant to cl 6.2(b). Nevertheless, the point of construction appears to have been argued largely in the abstract, without reference to specific circumstances. This causes some difficulty in formulating appropriate declaratory relief.

80 Furthermore, declaratory relief formulated in general terms will be inappropriate if, as indicated above, cl 6.2 will operate differentially depending upon the basis for believing that a delivery contains out of specification material.

81 The evidence does not suggest that all deliveries are being rejected on the basis that the respondent has a generalised belief that they contain out of specification material and it is entitled to reject them all in toto. Whether such a view would be justifiable in any circumstances would depend upon the evidence, and not on the construction of the deed in the abstract.

82 Once that position is put to one side, the question is whether there is some basis for the respondent, acting reasonably, to form the view that a particular delivery contains out of specification material. If the reason for the belief depends on the operation of paragraphs (b), (c), or (d) (in relation to hazardous material) such a belief is likely to be based upon some inspection of the particular delivery.

83 The next question is, assuming that the appellant did not exercise its rights of inspection and separation, whether the respondent would then be entitled to reject the whole of the delivery.

84 The answer to this question is by no means clear, in part because cl 6.2 does not expressly deal with the situation. It must be inferred that the respondent is entitled to place the out of specification material in the reject bin, in accordance with its notice of intention, in the event that the appellant does not exercise its rights under cl 6.2(b). However, if it is not the whole delivery which may be rejected, but only the part which the respondent believes to be out of specification material, it must undertake the process of separation. Nevertheless, there may be circumstances in which the separation of material is not readily achievable and the respondent is therefore entitled to place in the reject bin material which it may not believe to be out of specification material but which can properly be identified as including out of specification material which is not readily separable.

85 In relation to material sought to be rejected because the proportions in a particular delivery were outside the proportions prescribed by (d) of Schedule 12 (other than hazardous material) it would seem that the only basis upon which a notice of intention to reject could be given would be one that referred to the whole of the delivery. Accordingly, if the appellant did not exercise its rights of inspection and separation, the whole of the delivery could be placed in the reject bin in accordance with the respondent’s notification of intention.

86 To the extent that this last element in the construction of cl 6.2 and Schedule 12 imposes an obligation on the appellant which is inconsistent with the acknowledgments, together with the absence of obligations, warranties and representations, in cl 6.1, the implication derived from that clause is limited by the express language of cl 6.2 and Schedule 12.

87 Although the primary contentions of the respondent in relation to cl 6.2 should not be accepted, it is also necessary to reject the general form of declaratory relief sought by the appellant. Whether it is possible to formulate more specific declaratory relief, absent specific circumstances identified in the evidence, is a matter for speculation. It is sufficient for present purposes to say that the relief sought by the appellant is not available in the circumstances presented to the Court. Accordingly the appeal must be dismissed. Costs should follow the event because, although the construction contended for by the appellant is not wholly erroneous, the appellant submitted the issues for determination in a form which do not permit the grant of the relief sought.

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