Bay of Plenty Electricity Ltd v Natural Gas Corporation Energy Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

CA 161/00

BETWEEN	BAY OF PLENTY ELECTRICITY LTD
Appellant

AND	NATURAL GAS CORPORATION ENERGY LTD
Respondent

Hearing:	16 July 2001
Coram:	Thomas J Fisher J Chambers J
Appearances:	J R F Fardell and C B Hall for Appellant I R Millard QC and N MacFarlane for Respondent
Judgment:	28 August 2001

JUDGMENT OF THE COURT DELIVERED BY THOMAS J

The question in issue

The essential question in issue in this appeal is whether, in the context of the respondent’s application for summary judgment pursuant to r 136(1) of the High Court Rules, the appellant can tenably resist the respondent’s claim that the appellant’s assignor was estopped from relying on a term in the contract assigned to it and that it is bound by that estoppel.

The background facts

The appellant, Bay of Plenty Electricity Ltd (BOPE2) and the respondent, Natural Gas Corporation Energy Ltd (NGCEL) are parties to a Joint Venture known as the Kapuni Energy Joint Venture.
Originally, the Joint Venture Agreement was entered into between Kapuni Energy Ltd, a wholly owned subsidiary of Bay of Plenty Electricity Ltd (BOPE1) and NGCEL. The main purpose of the Joint Venture was to construct and operate a gas-fired co-generation plant at Kapuni to produce steam and electricity from natural gas. The gas is supplied by NGCEL’s ultimate parent company, Natural Gas Corporation of New Zealand Ltd (NGCNZ). NGCNZ also purchases steam from the Joint Venture for use at its Kapuni treatment plant.
BOPE1 entered into the Joint Venture in order to supply the Lactose Company of New Zealand Ltd with steam and electricity pursuant to an agreement it had completed with that company in 1996. The steam requirements of Lactose and NGCNZ resulted in considerably more electricity being generated than Lactose and NGCNZ required. BOPE1, as the general electricity trader, undertook to purchase the surplus electricity. The contract for the purchase of this electricity is the agreement at issue in this proceeding, the Energy Supply Agreement between NGCEL and BOPE1 dated 26 March 1997.
Subject to supervision, the design and construction of the co-generation plant was carried out by third parties independent of the Joint Venture partners. It comprises two gas turbines together with steam turbines. The plant started producing electricity in December 1997, but at that stage not all the electricity generation component of the plant was in operation. BOPE1 retained RMB Energy Group New Zealand Ltd (RMB) to manage electricity sales prior to the commencement of the Energy Supply Agreement. The Joint Venture sold the electricity to RMB at 3.24c/kWh (3.24 cents per kilowatt hour) (plus GST). This price can be compared with the price under the Energy Supply Agreement of 4.4c/kWh (plus GST) adjusted as from 1 October 1997 in accordance with the escalation provision in the Joint Venture Agreement.
On 18 March 1998, the installation of a second gas turbine was completed and handed over to the Joint Venture. This installation allowed the facility to produce electricity at its intended capacity. Evidence confirmed that the co-generation plant has been fully operational since that date. It produced quantities of steam and electricity which BOPE1 has sold under separate supply agreements.
The Electricity Industry Reform Act was passed in 1998. The relevant provisions of the Act came into force on 9 July 1998. As a result of this legislation, BOPE1 had to decide whether to become an energy supply business only or a lines business only. It decided on the latter and put its generation and retail business up for sale. Due diligence was required on the part of tenderers.
A consortium led by Todd Energy Ltd carried out due diligence and became the purchaser. The agreement to purchase required the purchaser to acquire all “business contracts” as set out in the Second Schedule to that Agreement. There is no suggestion that any contract for the supply of electricity by the Joint Venture other than the Energy Supply Agreement is included in that Schedule.
On 10 March 1999, BOPE1 requested NGCEL’s consent to the assignment to a company to be nominated by the consortium of Kapuni Energy Ltd’s and BOPE1’s interest in the Energy Supply Agreement (and a Gas Supply Agreement). There was, again, no suggestion of any other agreement for the supply of electricity being assigned. The request for consent to the assignment stated that the terms of the agreement would remain the same and that the consortium would have the same rights and obligations as BOPE1. NGCEL consented to that request, provided that any company nominated by the consortium was a company of substance with the ability to perform and meet its obligations under the agreement. In due course the consortium did nominate a company, which was acceptable to NGCEL. That company took the name Bay of Plenty Electricity Limited. It is that company which is the current appellant and which is referred to in this judgment as BOPE2. BOPE1 changed its name.
The assignment was settled on 31 March 1999. Almost immediately, BOPE2 complained of pricing or “value” imbalances in all contracts in the Joint Venture. BOPE2 paid only half the invoices for electricity charged to it for the months of April and May. It claimed to be entitled to retain the other half of the invoiced amount on the basis that it was a fifty per cent Joint Venture partner. The Joint Venture and NGCEL objected to this underpayment. In June, BOPE2 also began withholding payments under other contracts.
Following a sharp letter from the Co-generation Plant Manager, BOPE2 made out and delivered a cheque to the Joint Venture for the full amount of the invoice rendered for the month of June. But the cheque was dishonoured. No alternative payment was made. On 10 August 1999, BOPE2 sent a letter to NGCNZ and the Joint Venture claiming for the first time that the Energy Supply Agreement had not commenced “because the ‘Energy Supply Facility’ construction had not been completed in accordance with that Agreement”. For this reason, it said, BOPE2 was not obliged to purchase the electricity. It indicated that it would continue to purchase electricity from NGCEL on a monthly basis at a price of $0.022 per c/kWh until further notice. It stated that it would only accept electricity delivered on those pricing terms and that, if such terms were not acceptable, NGCEL should make other arrangements for the sale of electricity.
Not unexpectedly, this claim was promptly and emphatically rejected by NGCEL on 19 August 1999. The present proceedings were issued one month later, on 1 September 1999.
Electricity continued to be supplied to BOPE2. The company was invoiced at the rate specified in the agreement for the four months, September to December 1999. Despite the statement that BOPE2 would continue to purchase electricity at 2.2c/kWh, no payments at all were made in respect of June, July or August. In October a direct credit of $526,148.18 was made by BOPE2, purportedly for the period April to October at a rate of 2.2c/kWh.
On 14 December 1999, BOPE2 purported to terminate the alleged month to month agreement with effect from 14 January 2000. NGCEL made it clear in return that it did not agree with BOPE2’s analysis of the Energy Supply Agreement and stipulated that BOPE2 was obliged to take all surplus electricity generated at the facility and to pay for it at the contract rate. It stated that it would continue to enforce the agreement.

The proceeding

NGCEL’s application for summary judgment sought judgment against BOPE2 in the sum of $1,036,708.65, together with interest calculated at the default interest rate under the contract. It also sought summary judgment for $493,045.50, also with interest, in respect of the cheque which had been dishonoured.
It is difficult to conceive of a defence which BOPE2 did not raise in its effort to avoid summary judgment. Most proved implausible. It is not an unfair simile to say that the company has wriggled and twisted like an eel on a gaff.
Apart from the issues which have been raised in this appeal, BOPE2 argued in the High Court that the Energy Supply Agreement had not been validly assigned; that NGCEL did not have the authority of the Joint Venture to sue; and that the parties had agreed to the supply of electricity on monthly terms. In addition, it pressed the point, now in issue on appeal, that the electricity supplied by NGCEL to BOPE2 was not supplied pursuant to the Energy Supply Agreement because the co-generation plant had not been “commissioned” in terms of the contract and, thus, the contract had not yet commenced.
The application for summary judgment came before Master Thomson on 9 February. He had little difficulty in disposing of the various defences. In a reserved judgment delivered on 31 May 2000, the Master granted NGCEL’s application for summary judgment.
BOPE2 appealed to this Court against the Master’s decision on the principal ground that the Energy Supply Agreement had not yet commenced. In the result, it claimed, the electricity supplied to BOPE2 was not supplied pursuant to the Agreement and BOPE2 was therefore not required to make any payments in accordance with that contract. The requirement that the plant be commissioned in terms of the contract had never been waived by BOPE1 or BOPE2.
Mr Fardell, who appeared for BOPE2, also pressed a submission at the hearing to the effect that, if BOPE1 had waived the requirement or was estopped from asserting that the contract had not commenced, such waiver or estoppel was not binding on BOPE2 as the assignee of the agreement as it did not have notice of the waiver or estoppel. It is not clear just when this argument occurred to Mr Fardell, and Mr Millard, who appeared for NGCEL, was rightly critical of its belated appearance. We will deal with the point in due course, however, as we consider that it can be quickly and roundly rejected.
Finally, reference should be made to Mr Fardell’s application for leave to adduce further evidence. We accepted the affidavit of a Mr Smyth on a provisional basis. This affidavit has not been overlooked. In our deliberations we have had regard to the affidavit but found it to be of limited assistance.
In a collateral proceeding NGCEL obtained summary judgment against BOPE2 on 22 December 1999 in respect of that company’s breach of the Gas Supply Agreement. The Master held that BOPE2 (among others) had no defence to NGCEL’s claim and that NGCEL had clearly shown that it had no defence. That proceeding, however, has no direct bearing on the present case.

The relevant terms of the Energy Supply Agreement

The key definitions of the “commencement date” of the agreement and the “commissioning period”, which precedes the commencement date, are contained in clause 1.1 of the Energy Supply Agreement and read as follows:
“Commencement Date” means the day following the expiration of the Commissioning Period.
“Commissioning Period” means the period commencing on completion of construction of the Energy Supply Facility (when all plant has successfully passed any tests called for in the contracts for construction of the Energy Supply Facility and has been satisfactorily put into service) and ending on the date on which the Energy Supply Facility has produced a minimum of 3.3 GWh of electricity equating to an average generation over 7 days minimum of 20 MW.
The term of the agreement is set out in clause 3.1:
Term: This agreement shall commence on the Commencement Date and, subject to clauses 3.2 and 4, shall continue in force for the Initial Term.

“Initial term”, in clause 1.1, means the period commencing on the commencement date and ending on the date falling ten years from the commencement date.

Clause 2.1.1 provides that NGCEL will supply and BOPE1 will purchase the surplus electricity. It reads:
Purchase Requirements: During the term of this agreement the Purchaser shall purchase from the Supplier and the Supplier shall supply to the Purchaser the Surplus electricity upon the terms and conditions contained in this agreement.

Clause 1.1 provides the definition of “surplus electricity”:

“Surplus electricity” means all of the electricity which has been generated by the Energy Supply Facility of which delivery has not been taken and which remains available for sale after the Supplier has met its contractual obligations to NGC and LCNZ as referred to in Recital C.

Finally, clause 12.3 of the Energy Supply Agreement provides:
Variations in Writing: No amendment, variation or waiver of any provision of this agreement shall be binding unless it is in writing and signed by the parties.

Our decision

We do not propose to deal with Mr Fardell’s argument that BOPE2 is not liable as the commissioning period had not ended and that, as a result, the contract has not commenced. The argument is based on the assertion that the plant had not successfully passed all the tests required under the contract or produced the minimum quantity of electricity referred to in the definition. NGCEL accept that not all the tests were carried out, although it contends that these tests were unrelated to the capacity of the plant to generate electricity in quantities for sale to BOPE1. Both gas turbines, the main generation equipment on which the generation of electricity depends, have been in operation since March 1998. In contrast, the completion of the plant involves the installation, testing and signing off of every item making up the co-generation facility, including such minor items as removing temporary equipment, improving access and repairing paintwork.
The reason why we are not entering upon this question is that we have a clear view BOPE1 is estopped from denying that the contract has commenced and that BOPE2 cannot now renounce that position. While acknowledging that the question whether an estoppel exists is ordinarily not suitable for the summary judgment procedure, we take the view that the answer in this case is so patently clear that there is no tenable defence to the claim. We will move directly to these questions:
Was BOPE1 estopped from denying that the contract had commenced?
Is BOPE2 separately estopped from denying that the contract had commenced?
Is BOPE2 bound by any estoppel which NGCEL could raise against BOPE1?

Estoppel against BOPE1

The reasons why we have unhesitatingly concluded that BOPE1 is estopped from denying that the contract has commenced may be shortly stated.
The evidence is overwhelming. BOPE1 itself regarded the contract as having commenced as at 18 March 1998. It acted on that basis. By 18 March the second gas turbine had been installed and become operational. The plant was then able to produce electricity at its intended capacity. Prior to this date the “commissioning” rate had been 3.24 c/kWh and invoices had been debited to RMB at that rate. After 18 March the Joint Venture began invoicing BOPE1 direct at the contract rate in the Energy Supply Agreement. The amount charged was 4.41712 c/kWh, this being the contract price of 4.4c/kWh with a factor added for escalation in accordance with the First Schedule in the Energy Supply Agreement. These invoices were accepted and paid by BOPE1 on a regular basis until it assigned the Energy Supply Agreement a year later on 31 March 1999. The price was again increased pursuant to the escalation clause with effect from 1 October 1998 and accepted and paid for by BOPE1 in accordance with invoices rendered to it by the Joint Venture.
We agree with Mr Millard that the change in invoicing from RMB to BOPE1 and the change in the per unit price must have created reciprocal paper work within BOPE1. It was a significant new account requiring a long-term commitment. The new payments would require internal authorisation and explanation. Yet, BOPE2 has not provided any documentary evidence from the records it has inherited from BOPE1 to substantiate its current assertion that BOPE1 did not accept that the Energy Supply Agreement had commenced. There is a complete absence of any suggestion that the contract had not commenced or of any interim arrangement of the kind now asserted by BOPE2.
The absence of any such record or suggestion is to be expected as it is clear that the parties did not contemplate a prolonged commissioning period. Once the requisite quantity of electricity was being produced there was no reason to delay the operation of the contract. The commencement of the contract also had the effect of fixing the term of the contract as the ten-year term ran from that date.
BOPE1 was shedding, as it was required to do under the new legislation, its energy supply business. Thus, when it sought NGCNZ’s consent to an assignment it expressly stated that the terms of the agreement would remain the same and that the assignee would have the “same rights and obligations” as BOPE1 currently had. No reference was made to any interim arrangement, and it is certain that if any such arrangement had existed, BOPE1 would have wished to assign it rather than remaining liable on it without recourse to BOPE2. Indeed, BOPE1 would not only have wished to assign any such interim arrangement, it would have been bound to do so in order to avoid committing a breach of the Electricity Industry Reform Act. Thus, it is inconceivable that BOPE1 would for one moment have contemplated not assigning an interim arrangement such as that now asserted by BOPE2. Quite clearly, in seeking consent to the assignment of the Energy Supply Agreement, BOPE1 positively confirmed that the contract had commenced, and impliedly represented that no other agreement relating to the purchase of the electricity from NGCEL existed.
We agree with the Master: “…the plain fact is that BOPE1 who was the contracting party at the relevant time accepted 18 March 1998 as the commencement date of the Energy Supply Agreement”.
NGCEL clearly relied upon BOPE1’s representation that the contract had commenced and suffered sufficient detriment to found an estoppel against that company. It supplied electricity to BOPE1 in accordance with the contract in the belief that it was secure in supplying the electricity for a period of ten years. It will have made its corporate plans and strategic policies on that basis. While still contractually bound to complete the residual tests which were required under the contract, the tests could be carried out while the contract was on foot. Moreover, by accepting that the contract had commenced, NGCEL also accepted the risk as to what would happen at the end of the finite term of the contract.
We therefore conclude that the claim that BOPE1 was estopped from asserting that the contract had not commenced is unanswerable.

Estoppel against BOPE2

The question arises as to whether, apart altogether from the position in respect of BOPE1, BOPE2’s subsequent conduct is such as to amount in itself to a representation that the company accepted that the contract had commenced. We believe that BOPE2’s actions do give rise to an estoppel, although we would concede that, if this point stood alone, it may not justify summary judgment. Nevertheless, it must be acknowledged that the reasons why it can be held that an estoppel can be raised against BOPE2 direct are formidable.
First, looking at BOPE2’s position in relation to NGCEL does not mean that the fact BOPE2 took an assignment from BOPE1 and stepped into that company’s shoes must be ignored. It is impossible to believe that BOPE2 was not fully aware BOPE1 had accepted that the contract had commenced. This was the contract subject to the assignment. The consortium had exercised due diligence before taking over the Energy Supply Agreement and BOPE1’s interest in the Joint Venture. BOPE2 had been the recipient of all BOPE1’s relevant records; and had also acquired one or more of BOPE1’s senior staff. It knew that the contract price was being invoiced and had been paid by BOPE1. Mr Fardell’s argument that BOPE2 would have been aware of the price being paid, but not that it was being paid pursuant to the contract which had commenced, borders on the specious. If BOPE2 did not accept or doubted that the contract had commenced it is inevitable that it would have said something to that effect. Apart from its direct knowledge, BOPE2’s silence on the point clearly indicates an acquiescence in the position that had been reached as between BOPE1 and NGCEL.

Secondly, BOPE2 no sooner took over the contract than it indicated considerable dissatisfaction with the contractual imbalances. The basis of this dissatisfaction is clearly an assumption that the contract was in force. Even when a representative of BOPE2 told NGCEL at a meeting in early May 1999 that the surplus electricity price was in dispute because the contract price was unrealistically high, the complaint was made on the basis that the contract price was currently payable. In short, when complaining about the contractual imbalance and contract price, BOPE2 accepted that the contract was in force.
Thirdly, BOPE2 acknowledged the contract when it paid one-half of the contractual price for the electricity taken by it in April and May 1999 and retained the other half itself, not on the basis that there was no contractual price, but for the decidedly odd reason that, as it was a Joint Venture partner, it only had to pay half the amount due under the contract. Then, the company’s later refusal to make further payments was based on the fact that there were set-offs available to it, not that the contract had not commenced.
Fourthly, BOPE2 must be regarded as having affirmed the contract when it resisted the Joint Venture’s proposal to “island” the co-generation plant during the Y2K roll-over. While BOPE2 did not expressly refer to the contract, its facsimile response indicates that it was prepared to rely upon the contract to assert its right to a continued supply of electricity.
Finally, it was not until 10 August 1999 that BOPE2 advised in writing that the Energy Supply Agreement had not commenced and that, for that reason, it was not obliged to purchase electricity. It said it would do so on a monthly basis. NGCEL rejected this proposal and affirmed that the contract had commenced in “April (sic) 1998”. The arrangement proposed by BOPE2 was never acted upon and the company continued to purchase electricity. Apart from all else, the delay between the assignment to it and the time when the claim the contract had not commenced was first raised confirms that BOPE2 had accepted that the contract had commenced.
NGCEL’s response that BOPE2’s “excuses” for non-payment were “transparent” is undoubtedly correct and, indeed, in the circumstances, possibly restrained. Mr Millard’s assertion is persuasive: until quite late in the piece BOPE2 plainly accepted that the contract was operating. It just did not like the contract.
In short, therefore, we consider that BOPE2’s conduct following the assignment of the contract to it is sufficient to found an estoppel as between it and NGCEL. We reiterate, however, that we do not want it thought that such an issue is ordinarily suitable for the summary judgment procedure. In this case, however, the estoppel created by BOPE2 follows the undeniable estoppel against BOPE1, and therefore supports the Master’s decision to enter summary judgment in NGCEL’s favour. But we do not need to reach a final decision on this issue as we consider BOPE2 is nevertheless bound by the estoppel which could be raised against BOPE1 had that company chosen to assert that the contract had not commenced. We turn to that issue.

A final escape attempt

As noted above, Mr Fardell argued at the hearing of the appeal that BOPE2 could not be held to any waiver or estoppel created by the actions of BOPE1 as it had not received notice of any such waiver or estoppel. His argument must be rejected outright.
In taking an assignment of the contract BOPE2 took an assignment of both the benefits and burdens of that contract. It cannot have the benefit of the electricity supplied under the contract without also acknowledging the corresponding burden or obligation to pay for that electricity. The benefits and burdens it obtains are the benefits and burdens of the assignor, BOPE1, under the contract. If NGCEL was in breach of the contract, BOPE2 could sue on the contract, but it cannot disown the burden which BOPE1 accepted under the contract which was assigned to it. In so far as the operation of the contract is concerned, BOPE2 stands in BOPE1’s shoes. In some circumstances the absence of notice (although it is certain that in this case BOPE2 would have had notice that BOPE1 had agreed that the contract had commenced) could possibly give rise to a cause of action against the assignor, but it cannot affect the basic principle that the assignee takes the benefits and burdens of the contract assigned to it.
A moment’s reflection reveals that the law could not be otherwise. Suppose that the contract had been operating for, say, five years before BOPE2 asserted that not all the requisite tests had been carried out at the time the contract was said to have commenced and that it was not bound by the contract. It would be absurd to suggest that BOPE2 was not bound by the waiver or estoppel created by BOPE1 five years earlier. Then, and more fundamentally, how can it be tenably suggested that BOPE2 could be in a better position under the contract than BOPE1? The assignee of the contract would have a cause of action under the contract not open to the assignor. At the same time, NGCEL would be in a worse position under the contract as a result of the assignment to which it had consented – and to which it could not unreasonably withhold its consent. Rights which it could enforce under the contract would be lost to it against the assignee. Finally, if Mr Fardell is correct, the situation could exist whereby BOPE2 would not be liable under the contract which BOPE1 purported to assign to it. These propositions only have to be stated to make it clear that Mr Fardell’s submission cannot be the law.
If authority be required, however, it is to be found in such cases as Mangles v Dixon (1852) 3 HLC 702, where it was held that the assignee of a chose in action, where there has been no fraud, stands in exactly the same situation as the assignor in respect of equities arising upon it. Lord St Leonards states (at 735): “The authorities upon the subject, as to liabilities, show that if a man does take an assignment of a chose in action he must take his chance as to the exact position in which the party giving it stands.” See also Phips v Lovegrove (1873) LR 16 EQ 80 in which it was held that, where a chose in action is assigned, the person who holds that debt or obligation has, as against the assignee, exactly the same equities that he would have had against the assignor. See also Roxburghe v Cox (1881) 17 Ch D 520, at 526, and Southern British National Trust Ltd (In Liq) v Pither (1937) 57 CLR 89, at 105.
We acknowledge that cl 12.3 of the contract provides that no amendment, variation or waiver is binding unless it is in writing signed by the parties. We do not consider, however, that this clause is of any assistance to Mr Fardell. In the first place, the provision cannot be construed so as to prevent a party being estopped from relying on a provision in the contract. Indeed, we understand that Mr Fardell did not go so far as to make this claim. In the second place, the provision gives rise to an evidential issue only. The unequivocal actions of the parties show that BOPE1 had accepted that the Energy Supply Agreement had commenced. The parties’ intention must prevail.

Conclusion

The history of this proceeding discloses that BOPE2 has determinedly sought to escape the burden of a contract which it formally took an assignment of on 31 March 1998. It has adopted a number of strategies no doubt designed to strengthen its negotiating power as against NGCEL. Such matters are not within the purview of the Court until they become the subject of a proceeding. Once relevant to a proceeding, however, the Court must be zealous to ensure that its processes are not abused. It is an abuse to use the Court’s processes to pursue strategies which should be kept outside the courtroom. We have the impression that BOPE2 has not been alert to this imperative. Untenable defences have been pursued both before the Master and in this Court.
But for one factor, we would be minded to award solicitor and client costs against BOPE2. The factor which averts this outcome is that NGCEL initially launched its application for summary judgment on the basis that there was a clear breach of the contract. Argument has now extended beyond that basis. NGCEL has finally succeeded on the footing of an estoppel which, as we have already said, would ordinarily be an unsuitable ground for the summary judgment procedure. For that reason, the costs against BOPE2 will be limited to party and party costs.
The appeal is dismissed. The summary judgment entered by the Master is confirmed. BOPE2 is ordered to pay NGCEL’s costs in the sum of $10,000, together with disbursements which, failing agreement, are to be fixed by the Registrar.
Solicitors
Bell Gully, Wellington for Appellant
Chapman Tripp, Wellington for Respondent

[2001] NZCA 337

28 August 2001