Callide Power Management P/L & Ors v Callide Coalfields

On application 12122/13, the order of the Court is that:

1. Pursuant to r.171 of the Uniform Civil Procedure Rules 1999 (Qld) the following parts of the respondents' amended defence be struck out:

the increased costs of mining and reduced profitability under the Coal Supply Agreement caused by the geological features encountered by the respondents in mining the Callide Mine (as defined in paragraph 7 of the respondents' counterclaim),

in the circumstances pleaded in paragraphs 19 to 28 and 122 of the respondents' counterclaim

the increased costs of mining and reduced profitability under the Coal Supply Agreement caused by the rainfall events, constituted, together with

in the circumstances pleaded in paragraphs 29 to 48 and 122 of the respondents' counterclaim,

the increased costs of mining and reduced profitability under the Coal Supply Agreement constituted, together with

in the circumstances pleaded in paragraphs 62 to 105 and 122 of the respondents' counterclaim

the fact that the Coal Mine Owners have ceased to benefit under the Coal Supply Agreement constituted, together with

in the circumstances pleaded at paragraphs 106 to 107 and 122 of the respondents' counterclaim,

as a consequence of the change or changes in circumstances identified in the respondents' counterclaim,

(xi) the following words in subparagraph 47(ga)(i):

as a consequence of the change or changes in circumstances identified in the respondents' counterclaim.

2. The respondents be given leave to amend the defence.

3. The respondents pay the applicants' costs of the application.

On application 12138/13, the order of the Court is that:

1. Strike out the words "as a consequence of the change or changes in circumstances identified in the Respondent's counterclaim" in the 12B of the defence

2. Strike out the words "as a consequence of the change or changes in circumstances identified in the Respondent's counterclaim" in paragraph 12FA(1) of the defence

3. Strike out the words "in the circumstances pleaded in the respondent's counterclaim" in paragraph13(a)(2) of the defence

4. Respondents pay the applicant's costs of the application

PROCEDURE - SUPREME COURT PROCEDURE - QUEENSLAND - PROCEDURE UNDER THE UNIFORM CIVIL PROCEDURE RULES AND PREDECESSORS - DEFAULT OF PLEADING - where the coal supply contract between the parties provided a process for amendment by agreement upon a "Change Event" occurring - where the contract stipulated that notice of a "Change Event" must be given - where the applicants challenge the validity of the respondents' notice of Change Event - where, in defending the validity of the notice and counterclaiming that the contract is void for frustration, the respondents allege the occurrence of the facts relied upon as constituting the relevant event or events in the notice of the Change Event -- whether the relevant paragraphs should be struck out as unnecessary, or tending to prejudice or delay the fair trial of the proceeding

Uniform Civil Procedure Rules 1999 (Qld), r 166(4), r 171

A v Ipec Australia Ltd & Anor [1973] VicRp 4; (1973) VR 39, cited

Dey v Victorian Railways Commissioners (1948-1949) 78 CLR 62, cited

Knowles v Roberts (1888) 38 Ch D 263, cited

Rassam v Budge (1893) 1 QB 571, cited

T O'Sullivan QC, with J O'Regan, for the applicants

D Clothier QC, with SJ Webster, for the respondents in both proceedings

Gilbert and Tobin Lawyers for the respondents in both proceedings

[2] These are the reasons for orders I made in these two proceedings on 26 June 2014.

[3] These two proceedings are managed together on the Commercial List because they raise nearly identical issues. Each stems from a long term coal supply agreement ("CSA") between the owners and operators of a coal mine and their sales company, the seller, on the one hand and the owners and operators of a power station and their management company, the buyer, on the other hand.[1] In proceeding 12122/13, the subject contract relates to a mine known as known as the Callide Coalfields and the Callide C Power Station. In proceeding 12138/13, the contract relates to a mine known as the Callide Mine and the Callide B Power Station.

[4] Each CSA was originally made on 11 May 1998 and was for an initial term of ten years, to be followed by four successive option terms of five years. An obvious risk in relation to a long term CSA as between a coal miner and a power generator is that the operating conditions and the market conditions of either the coal industry or power generation industry may change in such a way as to affect the profitability of the operation conducted by the seller or buyer. Each of the CSAs contained a clause intended to meet some such contingencies in cl 12 as follows:

(i) subject to Clause 12.1(a)(ii), the Coal Mine Owners and the Buyer have an expectation of benefiting under this Agreement;

(ii) subject to Clause 12.1(a)(iii), each Party supports the process of review set out in this Clause 12 to ensure both the Coal Mine Owners and the Buyer remain competitive in relation to their respective industries; and

(iii) during the Initial Term, the competitive position of the Power Station relative to other power stations operating in the Power Station's industry in Queensland as at the Effective Date should be restored, having regard to the viability of the Coal Mine Owners' mine in its industry.

(b) Each Party agrees that circumstances may change during the Term of this Agreement which may require the terms of this Agreement to be reviewed to ensure those terms remain consistent with the principles set out in Clause 12.1(a).

(a) convene a meeting of the Parties within 30 days of the fifth anniversary of the Commercial Load Date for Unit 1;

(b) at that meeting, review the consistency of the operation of this Agreement against the principles set out in Clause 12.1(a);

(c) within 14 days of that meeting, exchange all data which the Parties hold which is relevant to reviewing the consistency of the operation of this Agreement against the principles set out in Clause 12.1(a); and

(d) use their best endeavours to review the consistency of the operation of this Agreement against the principles set out in Clause 12.1(a) without 90 days of that meeting.

(a) A 'Change Event' is a change in circumstances which has, or will have, a material effect on the competitiveness of either the Coal Mine Owners or the Buyer (in the reasonable opinion of a Party) in relation to the industry in which it operates, and includes, without limitation:

(i) the Commercial Load Date of Unit 2 occurring more than 18 months after the Effective Date;

(ii) if the Buyer reasonably demonstrates, by the elimination of other relevant factors, that there is a change in coal prices being paid by other power stations. The Parties acknowledge that the Buyer must reasonably demonstrate, by the elimination of other relevant factors, that there is a material adverse change in the competitive position of the Power Station which is due to changes in coal prices being paid by other power stations, before the Parties will be obliged to review this Agreement against the principle set out in Clause 12.1(a)(iii).

(iii) major changes to working conditions within the coal mining industry, including, without limitation, advances in technology which were not foreseen at the date of this Agreement;

(iv) a demonstrated (by the Seller) increase in the long term (being at least five years) trend in electricity price occurring during the whole or any part of any period when an EMI is not operative; and

(v) a change in governmental policy, or a change in a law or regulation, relating to environmental standards and compliance with those standards.

(b) If at any time after the date of execution of this Agreement there occurs, or either Party considers there may occur, a Change Event, then:

(i) a Party (the 'Notifying Party') may notify the other (the 'Receiving Party') in writing promptly when that Change Event becomes known to the Notifying Party that it is the Notifying Party's intention to initiate a review of this Agreement which may lead to an Adjustment;

(ii) if it wishes to proceed with a review of this Agreement, the Notifying Party must, as soon as practicable in all the circumstances, submit a formal notice of a Change Event (the 'Change Event Notice') to the Receiving Party, which will include:

(A) all data which the Notifying Party holds which is relevant both to the Change Event including detailed information regarding the nature, extent and quantum of the cost and revenue impacts of the Change Event and to calculating those costs and revenue impacts as they relate to all of the options and alternatives identified by the Notifying Party available to accommodate or mitigate the Change Event; and

(B) options and alternatives identified by the Notifying Party and the Notifying Party's recommended option,

and a Change Event will be deemed to have occurred;

(iii) As soon as possible after a Notifying Party becomes aware that an estimate of the financial effect is likely to be incorrect, the Notifying Party must amend that estimate and give copies of the amended estimate and the estimate it amends to the Receiving Party;

(iv) The onus is upon the Notifying Party to establish the impact of the Change Event.

(v) The Parties must use their best endeavours to review and to attempt to agree an Adjustment generally in accordance with the principles set out in Clause 12.1."[2]

[5] On 6 November 2013, the seller under each of the CSAs delivered a letter entitled "Notice of a Change Event on behalf of the Seller" to the buyer, purportedly pursuant to cl 12.3(b)(i) of the CSA.

[6] On 12 November 2013, the seller under each of the CSAs delivered to the buyer a document entitled "Change Event Notice Callide [B or C] Coal Supply Agreement", purportedly pursuant to cl 12.3(b)(ii) of the CSA.

[7] On 17 December 2013, the buyer under each of the CSAs started the proceeding seeking declaratory relief that the letter dated 6 November 2013 was not a notice given in accordance with cl 12.3(b)(i) and that the purported change event notice was not a notice given in accordance with cl 12.3(b)(ii).

[8] On 28 March 2014, the buyer in each proceeding filed and served a statement of claim, setting out the grounds of alleged invalidity. It is unnecessary to refer to the grounds in detail for present purposes.

[9] On 23 June 2014, the seller in each proceeding filed and served their amended defence and counterclaim. The defence defends the buyer's claims of invalidity. The counterclaim alleges breaches of contract on the part of the buyer in failing to comply with the contractual mechanism to agree upon appropriate amendments to the CSA. The counterclaim alternatively claims that the CSA is void, as frustrated, by reason of the same matters relied upon as the basis for the 6 November letter and the purported change event notice.

[10] Thus, in support of the counterclaim for frustration, the seller alleges the truth of the facts which were the basis of the 6 November letter and the purported change event notice.

[11] In contrast, the buyer's statement of claim does not allege that any of those facts did not occur. With an exception I will mention, the grounds of the buyer's claims of invalidity do not turn on whether or not they did. Rather, the buyer's claims for declarations of invalidity raise questions as to whether the matters which are relied upon in the purported change event notice satisfy the requirements of the contract for the notices. The exception to that general position is that one class of the buyer's grounds of invalidity is that neither the 6 November letter nor the purported change event notice was given timeously, respectively because the 6 November letter was not given promptly upon a relevant change event having become known to the seller and because the purported change event notice was not submitted as soon as practicable in all the circumstances. Proof that a notice is not given promptly, or as soon as practicable, by definition requires identification of the time when the thing or event to be notified occurs and after which notice must be given.

[12] In a number of places in the defence, the seller responds to a particular allegation made by the buyers as to a reason why the purported change event notice did not comply with cl 12.3(b)(ii). In each relevant place, the challenge made by the buyer to the validity of that notice is that a matter or matters specified in the notice do not, on the proper construction of cl 12.3(b), meet the requirements of a notice given in accordance with the contractual mechanism provided to initiate a review.

[13] So, for example, the buyer alleges that the notices are invalid because the purported change event notice "does not identify a single event (or closely related series of events) that constitutes the 'Change Event', but rather identifies 12 different categories of alleged changes in circumstances which 'together and cumulatively', constitute a 'change event'".

[14] The seller denies that allegation "because the changes in circumstances referred to in the change event notice and identified in the [seller's] counter-claim acted together to cause the effect specified in the definition of a change event ...".

[15] The buyer challenges that form of pleading on two grounds. First, they submit that by that form of pleading the seller alleges the fact of the occurrence of the matters which are the subject of the purported change event notice, which is not responsive to the allegation that the document based on those matters is not a change event notice given in accordance with cl 12.3(b)(i) and (ii). Second, they submit that this form of pleading potentially relies on changes in circumstances outside the scope of the purported change event notice to the extent that any additional matter is identified in the counterclaim. The buyer contends that those additional allegations are irrelevant and unnecessary. They submit that they are, therefore, embarrassing and will cause delay and expense in deciding whether or not their claim as to the validity or invalidity of the notices is a good one.

[16] The seller justifies that form of pleading on three grounds. First, they submit that because there is an issue of fact whether the notices were given promptly, or as soon as practicable in all the circumstances, it is relevant to allege that the facts which constitute a change event occurred (and presumably when they occurred). Second, they submit that it is relevant for the seller to articulate why they contend the notices are valid, including by reference to the underlying facts which support their validity. Thirdly, they submit that, as the seller contends that the CSA has been discharged by frustration, it is relevant to set up the facts relating to frustration in the defence, because it would be "inappropriate and otiose" to make the declarations claimed by the buyer, if the underlying agreement has been discharged by frustration.

[17] There are different ways in which a party may challenge a question raised by their opponent's pleading. Where the object of the challenge is to strike out part of a defence, on the ground that it is unnecessary or has a tendency to prejudice or delay the fair trial of a proceeding, provision is made for application to strike out part of the pleading under UCPR r 171 which provides as follows:

(1) This rule applies if a pleading or part of a pleading -

(a) discloses no reasonable cause of action or defence; or

(b) has a tendency to prejudice or delay the fair trial of the proceeding; or

(e) is otherwise an abuse of the process of the court.

(2) The court, at any stage of the proceeding, may strike out all or part of the pleading and order the costs of the application to be paid by a party calculated on the indemnity basis.

(3) On the hearing of an application under subrule (2), the court is not limited to receiving evidence about the pleading."

[18] Rule 171 operates in the context of r 5, as to the purpose of the UCPR, including the direction to apply the rules with the objective of avoiding undue delay and expense and technicality, and UCPR r 367, as to the power to make an appropriate order or direction, even though it may be inconsistent with another provision of the rules.

[19] The point of both applications in the present case is that the challenged parts of the relevant paragraphs raise matters, purportedly in defence, which are unnecessary, because they do not operate in defence of the buyer's claim. Having set out an example of how the argument arises, it is appropriate to identify the relevant principles of pleading with some precision.

[20] Under the UCPR, a proceeding started by claim proceeds upon pleadings identified as the statement of claim, defence and reply in accordance with specific rules.[3] It is trite that the conceptual model for the present rules is that derived from the Judicature Act 1876 (Qld). By s 16 of that Act, the rules of court in the schedule to that Act ("the Judicature Act Rules") came into force on its commencement. Order XIX of those rules was based on the Rules of the Supreme Court which had come into effect in England with the passage of the Judicature Act 1875 (UK). A central concept in the system of pleading introduced by those reforms remains in UCPR r 149, that each pleading must "contain a statement of all the material facts on which the party relies but not the evidence by which the facts to be proved" and "be as brief as the nature of the case permits".

[21] The common law system of pleading which preceded the Judicature Act was in many respects abolished by the rules made under it. However, in other respects, the concept or model of pleading at common law, as affected by statute up until that time, informed the system of pleading under the Judicature Act and still does so today.

[22] Thus, at common law, a defendant faced with a declaration (as the pleading corresponding to a statement of claim was known before the Judicature Act) might respond by a plea in bar of the action by way of traverse.[4] A traverse was a denial or non-admission of the relevant fact or facts alleged in the declaration. Alternatively, the defendant might confess and avoid the fact or facts alleged in the declaration. If the defendant confessed and avoided, the plaintiff was called upon by its replication to either traverse or, in turn, confess and avoid the defendant's plea. There might thus be further pleadings in response to further confession and avoidance. However, once there was a traverse, the parties joined the issue thereby created, which was tendered as the issue for trial.

[23] However, there was an alternative response that might be made by the defendant in response to the declaration, or the plaintiff in replication to a plea in confession and avoidance, called a joinder in demurrer.[5] There was more than one form of demurrer. One of them was a special demurrer. By that proceeding, a party could challenge the matter alleged to be irrelevant in the opponent's prior pleading, as where "the traverse ... in the opinion of the plaintiff, could be so framed as to involve a part immaterial or insufficient to decide the action".[6]

[24] This was consistent with the rule of pleading which existed then, that "surplusage was to be avoided, 'including unnecessary matter of whatever description'".[7]

[25] With the advent of the Judicature Act in England, and the forms of pleading provided for by the rules made under it, the demurrer was initially retained (Order XXVIII r 1). As well, express provision was made in those rules for the court to strike out any matter in a pleading which was scandalous, or which may tend to prejudice, embarrass or delay the fair trial of the action (Order XXXVII r 1). In part, that rule is a progenitor to UCPR r 171. The court also retained an inherent jurisdiction to strike out in relation to proceedings involving an abuse of process.[8] However, in England, the Rules of the Supreme Court 1883 abolished the demurrer and replaced it with proceedings in lieu of demurrer, to decide a point of law raised in a pleading (Order XXV, rr 2 and 3) or to strike out a pleading on the ground that it did not disclose a reasonable cause of action or defence (Order XXV, r 4).

[26] As it happened, the adoption of the Judicature Act system of pleading in Queensland did not follow exactly the same model. That is because the demurrer was not abolished in this State until 1999 by the repeal of the Rules of the Supreme Court 1900 (Qld), upon the introduction of the UCPR. Before then, there was some change to the process of demurrer effected by the Common Law Pleading Act 1867 (Qld), ss 14, 15, 16 and 17. Section 15 confined objections which could formerly be taken only by special demurrer. Section 17, perhaps partly in lieu thereof,[9] empowered the court to strike out or amend a pleading so framed as to prejudice embarrass or delay the fair trial of the action. That section too is, in part, a progenitor to UCPR 171. But even after the introduction of the Judicature Act 1876 (Qld), demurrers were retained in this State in a way which permitted a plaintiff to demur to part of a pleading of the defendant, on the ground that the facts alleged therein did not show a distinct ground of defence - see the Judicature Act Rules, Order XXXVIII, r 1 and, later, the Rules of the Supreme Court 1900, Order 29, rr 1 and 2. The ongoing utility of demurrers was affected by a number of matters which need not be discussed.

[27] Returning to the English practice, when demurrers were abolished, the courts quickly confirmed that unnecessary matters in a pleading should be struck out under the progenitors of UCPR r 171. So, for example, in Knowles v Roberts,[10] irrelevant and unnecessary allegations in a statement of claim were struck out as tending to embarrass the defendant in his defence, because they would tender further issues that did not need to be tried for the determination of judge or jury. The question raised by the statement of claim in that case was whether the plaintiff was entitled to certain rights, on the proper construction of an agreement made in settlement of an earlier action. The plaintiff sought to plead that its claim in the earlier action was a good one, as a matter which would go to the proper construction on the settlement agreement. The Court of Appeal held that the factual allegations going to the plaintiff's original rights were irrelevant to the proper construction of the agreement and therefore should be struck out of the statement of claim.

[28] Similarly, in Rassam v Budge,[11] a defendant did not simply traverse the plaintiff's allegation that he had spoken and published alleged defamatory matter, but pleaded that he had in fact said something else which was not defamatory. The Court of Appeal struck out the defendant's allegation of what he had said, and that it was not defamatory, on the ground that it was embarrassing and that it did not raise an issue as to whether the words alleged in the statement of claim were written or spoken and published, or whether those words were true, or whether the publication was privileged.

[29] In a similar fashion, in A v Ipec Australia Ltd & Anor,[12] another defamation action, it was held that "if ... surplusage is set forth in such a way that the [party] must plead to it and thus raise a false issue at the trial, the court will strike it out ...".[13]

[30] Consistently with those decisions, Cairns, Australian Civil Procedure,[14] says "a pleading that pleads irrelevant matter, or that raises false issues, can be struck out as being prejudicial, embarrassing or delaying".

[31] UCPR r 150(4) provides that in a defence a party must specifically plead a matter that "the party alleges makes a claim of the opposite party not maintainable" or "raises a question of fact not arising out of a previous pleading" or "if not specifically pleaded might take the opposite party by surprise". However, that sub-rule, in my view, does not authorise the pleading of a fact or matter which is unnecessary or surplusage, in the sense described above.

[32] In a similar vein, UCPR r 166(4) provides that an allegation of fact made by a party in a pleading is taken to be admitted by an opposite party unless the allegation is denied or stated to be not admitted, and also requires that a party's denial or non-admission of an allegation of fact must be accompanied by a direct explanation for the party's belief that the allegation is untrue or cannot be admitted. The purpose of the sub-rule is to make a defendant disclose the explanation or ground for a denial and in that way avoid surprise. There is no doubt that the requirement of the sub-rule, attended by the consequence that a non-compliant party is taken to have admitted the allegation, has changed the content of pleadings in this State in a significant way. Nevertheless, the sub-rule does not justify the positive pleading by a party of a fact or matter which is unnecessary or surplusage, in the sense described above. The requirement is that there be a direct explanation for the belief that "the allegation is untrue or cannot be admitted", which ties the explanation back to the allegation which is being denied or not admitted. It does not justify the pleading of facts which would not operate under the common law model either as a traverse (by denial or non-admission) or as a plea in confession and avoidance (admission and allegation of other facts which would defeat the plaintiff's claim for relief).[15]

[33] With these matters in mind, I return to the disposition of the issues in the present case.

[34] In my view, none of the seller's submissions is wholly persuasive. First, whilst I accept that the buyer's allegations of invalidity based on the alleged facts that the notices were not given promptly, or as soon as practicable in all the circumstances, engage as possible issues of fact when the change in circumstances occurred, and when the seller knew of that, it is not necessary to make findings as to those facts in order to deal with most of the buyer's grounds of alleged invalidity.

[35] Second, although I accept that it is relevant for the seller to articulate why they contend the notices are valid, that does not justify reference to underlying facts that are neither a traverse of nor a plea in confession and avoidance of the facts alleged by the buyer. Unless otherwise justified, other facts are not material and unnecessary, and therefore are irrelevant and embarrassing.

[36] Third, the seller's primary contention is not that the contract is void as frustrated and therefore frustrated. Their primary contention is that, upon delivery of the notices, the buyer was obliged to engage upon a review of the contract terms under cl 12. The counterclaim alleges breach of contract on the part of the buyers, based on their failure to do so. The seller's claim in the counterclaim that the contract is void as frustrated is made as an inconsistent alternative claim. Whilst an inconsistent allegation maybe pleaded in a defence in the alternative - UCPR r 154(1) - that does not justify a plea that the contract is frustrated as a defence to the buyer's claim that the notices are invalid. Indeed, if the contract was frustrated, the seller's notices were invalid for that reason as well. However, that is not the buyer's case and is not a necessary plea or answer to their claim as plaintiffs. Further ascertainment of the underlying facts in order to determine whether the contract is frustrated as an answer to the buyer's claim if otherwise established, would be time consuming and expensive, and not a "just and expeditious resolution of the real issue in [the] civil proceeding... at a minimum of expense" as required by UCPR r 5(1).

[37] For those reasons, I concluded that the buyer's challenge to the relevant parts of some of the paragraphs of the seller's amended defence in each proceeding was well made. On 26 June 2014, I made orders accordingly, in each proceeding, that parts of the relevant paragraphs be struck out and that the seller have leave to amend the defence. I also ordered that the seller pay the buyer's costs of the application.

[1] In these reasons, having regard to the full terms of the contracts, I use "buyer" and "seller" slightly inaccurately. But I do so to make the expression of the reasons simpler.

[2] The extract is taken from the [which CSA]].There are immaterial differences in cl 12 of the [other CSA].

[3] UCPR, rr 22(2)(b), 139(1)(b), 164(2) and 169(a).

[4] Stephen_, Principles of Pleading in Civil Actions,_ 7th ed (1866), 51.

[8] Dey v Victorian Railways Commissioners (1948-1949) 78 CLR 62, 91.

[10] (1888) 38 Ch D 263.

[11] (1893) 1 QB 571.

[12] [1973] VicRp 4; (1973) VR 39.

[13] [1973] VicRp 4; (1973) VR 39, 43.

[14] Cairns, Australian Civil Procedure, 9th ed, 248.