MATTER : Commercial Arbitration Act 1985

BETWEEN : CALTEX PETROLEUM PTY LTD (ACN 000 007 876)

Citation : CALTEX PETROLEUM PTY LTD v THE COMMISSIONER FOR MAIN ROADS

Valuation of land - Lease agreement with clause allowing termination if substantial portion of land is resumed - Term of lease for valuation purposes - Tenure of land interrupted - Whether loss or damage under Land Administration Act s 241(6)

Commercial Arbitration Act 1985 (WA), s 38

Land Administration Act 1997 (WA), s 241(6)

Petroleum Retail Marketing Franchise Act 1980 (Cth), s 7, s 16

Cerini v Minister for Transport [2001] WASC 309

Konowalow & Felber v Minister for Works [1961] WAR 40

Masawa Australia Pty Ltd v Jcorp Pty Ltd [2000] WASC 5

Rugby Joint Water Board v Shaw-Fox [1973] AC 202

The Road Construction Authority v Tiligadis [1988] ACLD 203

Ansett Transport Industries (Operations) Pty Ltd v Wardley [1980] HCA 8; (1980) 142 CLR 237

Byrne & Frew v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410

Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693

Cook v Cook [1986] HCA 73; (1986) 162 CLR 376

Esso Australia Ltd v RT & MI Abela Pty Ltd [1989] FCA 523; (1989) 91 ALR 476

Federal Commissioner of Taxation v Murry - (1998) 193 CLR 605

Gifford v Strang Patrick Stevedoring Pty Ltd (2003) 198 ALR 100

Pointe Gourde Quarrying & Transport Co Ltd v Sub-Intendent of Crown Lands [1947] AC 565

Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355

Queensland Medical Laboratory v Blewett [1988] FCA 423; (1988) 84 ALR 615

Ranoa Pty Ltd v B P Oil Distribution Ltd (1989) 91 ALR 251

Road Construction Authority v Tiligadis [1988] ACLD 203

Vodafone Pty Ltd v Supercall Pty Ltd [2003] NSWSC 302

Waters v Welsh Development Agency [2004] UKHL 19; [2004] 1 WLR 1304

1 This is an application brought under the Commercial Arbitration Act s 38. By a consent order made 4 August 2004 by Master Sanderson, the application for leave to appeal and the argument on the appeal have been heard together. There is a difference: Masawa Australia Pty Ltd v Jcorp Pty Ltd [2000] WASC 5 per Parker J at [5]. The Commercial Arbitration Act 1985 s 38(5) sets pre-conditions for a grant of leave. I am satisfied that the determination of the question of law in the appeal substantially affects the right of the parties to the arbitration agreement.

2 Given that there has been full argument on the error of law, the test of manifest error of law has less significance. Resolution of the appeal will determine whether or not there was a manifest error of law on the face of the award.

3 The arbitration and this appeal have proceeded on a statement of agreed facts which I summarise. Caltex Petroleum Pty Ltd ("Caltex") owned land located at 1375 Great Eastern Highway, Midvale, just east of Roe Highway, which it leased to Asterian Pty Ltd ("Asterian") under a Dealer Franchise Agreement ("the Agreement"), to which I will make further reference in due course. The first Agreement was for 3 years and commenced on 12 September 1995. The Agreement was renewed from 12 September 1998 for a further 3 years ("the Renewed Agreement"). The purpose of the Agreement was to enable Asterian to carry on the Caltex franchise at the Midvale site.

4 The Commissioner of Main Roads ("the Commissioner") needed to acquire a substantial part of the premises for the purposes of widening Great Eastern Highway.

5 It appears that negotiations between Caltex and Asterian fell down. Accordingly, Caltex and the Commissioner entered into a Deed dated 27 October 1998 whereby the Commissioner would publish in the Government Gazette a notice of resumption and compulsory taking for the required land and Caltex would serve a notice of termination of the Renewed Agreement on Asterian pursuant to the terms of the lease.

6 The Deed between the parties provided that in the event Asterian made a claim for compensation against the Commissioner, Caltex would indemnify the Commissioner for any amount of compensation which may reasonably be agreed between Asterian and the Commissioner which in total was in excess of $150,000. In the event of disagreement as to the reasonableness of the amount so agreed or determined the dispute was to go to arbitration.

7 Those steps were duly effected. Pursuant to a notice published in the Government Gazette on 13 October 1998 the required land was compulsorily taken. Thirty days notice of termination of the Renewed Agreement was given by Caltex to Asterian on 14 October 1998. On 14 November 1998 the termination of the Renewed Agreement became effective.

8 In due course, on 12 April 1999, Asterian lodged a claim for compensation. The Commissioner obtained three valuations, by licensed valuers as to the value of Asterian's business, each of which valued (a) the whole of the balance of the term of the Renewed Agreement after the resumption of the premises to 12 September 2001; and (b) the right of renewal under the Renewed Agreement for the period commencing 12 September 2001 and ending on 11 September 2004. The Commissioner selected the lowest valuation by Fin-Com and, in due course, by offer which was accepted on 14 August 2003, paid Asterian the sum of $186,000 in compensation, together with interest at 6 per cent, making a total of $234,492.49.

9 Caltex disputed whether the amount of $234,492.49 was an amount of compensation reasonably agreed between the Commissioner and Asterian for the resumption of Asterian's interest in the premises and so the matter was referred to arbitration.

10 The Arbitrator confirmed the reasonableness of the settlement and ordered Caltex to pay to the Commissioner for Main Roads the sum of $84,492.49 (being the difference between $150,000 and $234,492.49) together with pre-award interest on that sum at the rate of 6 per cent per annum from 26 August 2003 until the date of his award pursuant to s 31 of the Commercial Arbitration Act 1985.

11 From that arbitration Caltex appeals on a number of grounds one of which to my mind is central and decisive in Caltex's favour.

12 As Asterian was a franchisee the Agreement was covered by the Petroleum Retail Marketing Franchise Act 1980 (Cth). By s 7(2) nothing in the PRMF Act shall be taken to affect the operation of an agreement to the extent that the agreement is capable of operating consistently with the Act. In the circumstances here, obviously cl 491(ix) is so capable. Clause 49 of the Agreement headed "Termination" reproduced and made express terms of the Agreement, the provisions of s 16 of the PRMF Act. Clause 49.1(ix) provided for termination by Caltex when:

"the whole or a substantial part of the Premises is, or is to be, acquired by, or by a public authority, of the Commonwealth, a State or the Northern Territory under a law relating to the compulsory acquisition of land;".

13 The notice of termination listed as a ground at cl 3.2:

"That acquisition is a ground upon which Caltex as franchisor may terminate the Agreement pursuant to paragraph 16(2)(ja) of the Act and paragraph 49.1(xi) (sic) of the Agreement."

14 Whether the statute applied of its own force or by necessary implication into the Agreement is irrelevant. The Agreement between Caltex and Asterian clearly provided for circumstances of termination in the event of a compulsory acquisition of a substantial part of the land. Clause 53 of the Agreement provided:

"Goodwill

The Dealer acknowledges that he has not paid to Caltex any amount for goodwill in connection with this Agreement or the service station business and further that he has no right or entitlement to receive from Caltex any payment for goodwill upon the expiration or termination of this Agreement. The Dealer acknowledges that any and all goodwill established through the use of the CALTEX Identifications ensures to the benefit of Caltex."

15 To summarise then, while the Agreement provided that in the ordinary course renewals of the Agreement might continue until 2004, it also provided for early termination without default on the part of Asterian on the happening of a particular event; namely, the acquisition or intention to acquire a substantial portion of the property by a public authority.

16 The three valuations which were obtained by the Commissioner appear to have valued the property on the basis that the options would have been exercised and the business continued until 2004. One valuer noted:

"In this valuation I have assumed that the September 1995 Dealer Agreement was the commencement of a new franchise agreement under the Petroleum Marketing Sites Act. Thus Mr Bridger, via his company Asterian Pty Ltd, had tenure until 11 September 2004. However, legal advice should be obtained to determine if this is the case. If the September 1995 agreement in fact expired on the 11 September 1998, no compensation would be payable."

17 The valuer noted cl 49.1(ix) and cl 53 of the Agreement and further noted that it was assumed that Asterian was entitled to compensation for goodwill.

18 The Commissioner ultimately offered Asterian the sum of $186,000. A breakdown of the offer reveals that included as the major component was an allowance for goodwill at $146,000.

"...the interest held by Asterian at the date of acquisition was a right which was terminable at 30 days notice. ... If compensation under the Land Administration Act was confined to the value of that interest in the land, so that the interest to be valued was a right determinable at 30 days notice, then an amount based upon Asterian having interests under the lease for a further 7 years would, in my opinion, be unreasonable."

20 The Commissioner on appeal submits that regard can be had to the full term of the Renewed Agreement and the right of renewal under s 241(2) of the Land Administration Act because the terms of the lease had not altered following the resumption of the required land. What changed was the value of the leasehold interest, in circumstances where the land was to be resumed so that, under those unaltered terms of the Renewed Agreement, the applicant could activate those provisions relating to early termination. The Commissioner also submitted it was the resumption of the required land alone which gave rise to Caltex's right to terminate the Renewed Agreement on 30 days' notice, with the consequent loss of business to Asterian. By agreeing to compensate Asterian in a manner that had regard to that loss, the Commissioner was compensating Asterian, only for the direct result of the taking.

21 In my view, this argument cannot be accepted. The Arbitrator's award on this point is correct.

22 A similar situation arose in the unreported decision The Road Construction Authority v Tiligadis [1988] ACLD 203, a decision of Gobbo J of the Supreme Court of Victoria, 1987 LVA 4, (1988) ACLD 203.

23 In the course of his judgment Gobbo J said at 12:

"...If a prospective lessee is informed by his lessor that he anticipates a certain event and he expressly provides in the lease that upon that eventuality the lease shall be terminated then as a matter of contract the lease comes to an end. It is difficult to see why there should be any distinction in principle between that case and one where the lease specifies the events as being a compulsory acquisition.

...

...In my view, the true analysis of the situation is that the claimant was given only a three year lease. His right to further renewals under the Franchise Act was in effect subject to a range of matters including there being no acquisition of the lessor's interest. Viewed in this way, the lessee never really had a right to renewal or at any rate it was readily able to be removed if the lessor gave an appropriate notice. For these reasons the invitation to have regard to the inherent justice of the matter does not lead me to find that this claimant would be unjustly treated if he were not recognised as having a right to two further terms of three years."

24 These words can be precisely adapted to this case. The contract between Caltex and Asterian provided for the very eventuality which did occur. In that eventuality the terms of the lease did not provide for further renewals but for termination. Further support for the principle is found in Rugby Joint Water Board v Shaw-Fox [1973] AC 202 at 216.

25 As I have said, the Arbitrator accepted this principle. He decided at [49]:

"That the valuation which forms the basis of the Commissioner's offer to Asterian did not purport to value an interest terminable at 30 days notice..."

26 However, the Arbitrator nevertheless made an award in favour of the Commissioner because of his view of s 241(6) of the Land Administration Act 1997. He said at [51]:

"...The reasonableness of the amount of compensation agreed for an acquisition under the Land Acquisition Act cannot be looked at solely by reference to the value of the interest taken. Under s 241, regard may also be had to the s 241(6) factors. By reference to those matters, a valuation which takes account the tenure which would have been enjoyed but for the resumption is not made unreasonably."

27 Caltex challenges this conclusion most strongly. The Land Administration Act provides by s 241 how compensation is to be assessed for interest in the land taken. Section 241(6) provides:

"Regard is to be had to the loss or damage, if any, sustained by the claimant by reason of -

(a) removal expenses;

(b) disruption and reinstatement of a business;

(c) the halting of building works in progress at the date when the interest is taken and the consequential termination of building contracts_;_

(d) architect's fees or quantity surveyor's fees actually incurred by the claimant in respect of proposed buildings or improvements which cannot be commenced or continued in consequence of the taking of the interest_;_ or

(e) any other facts which the acquiring authority or the court considers it just to take into account in the circumstances of the case."

28 This provision has been the subject of judicial decision in this Court. In Konowalow & Felber v Minister for Works [1961] WAR 40 Virtue J considered the predecessor to s 241(6)(e) of the Land Administration Act then found in s 63(aa) of the Public Works Act 1902. In that case the defendant resumed a portion of the plaintiff's land for a road. On the balance of the land was a partly erected house. There was a claim for injurious affection. In that case it was argued by the plaintiff that the words used in the section should be taken in an unrestricted sense and that they gave the Court the widest discretion to take such facts into account as it thought proper for the purpose of doing justice in the circumstances. The defendants submitted that the ejusdem generis rule should be applied and that the Court's powers under the section were in fact restricted to facts of the same kind as those applicable in the preceding paragraphs. The genus in which the pars (i) - (iv) came and which limited the exercise of powers under par (v) in accordance with the ejusdem generis rule are: types of damage or loss sustained through a man's having to give up his land and go somewhere else. The Court upheld this contention.

"I think possibly a better way to describe it is as compensation for loss or damage resulting from interference with the activities being carried on by the plaintiff on the land. Under paragraphs (i) to (iv) for example he gets compensation for removal expenses, for interference with his business, for the discontinuance of building works in progress and for architect's or surveyor's fees. In each case there has been some activity on his part carried on on the land; he has used the land for a particular purpose and the resumption has interfered with this and he is entitled to compensation because of what it is necessary for him to do in respect of such interference, or because of money which he has spent on such activity having been thrown away by reason of the resumption.

Bearing this in mind I find it impossible to impute to the Legislature an intention to introduce into the section by par (v) a general provision of such wide import as that suggested, or of any import unrelated to that of the other paragraphs. If it had been intended to do so the place for such an amendment was not in the amending subsection but as a completely separate subsection following all the others in s 63 as indicating a separate and distinct category under which compensation can be claimed."

30 This decision was followed by Parker J in Cerini v Minister for Transport [2001] WASC 309 where he held at [282] that the section indicated a legislative intention that the longstanding interpretation in Konowalow & Felber v Minister for Works would be applied in construing s 241(6)(e) of the Land Administration Act.

31 The Arbitrator purported to apply these decisions when he concluded at [50]:

"... Even on that construction, however, Asterian would be entitled to have the Commissioner (or the compensation court) take into account the effect of the acquisition in interfering with its ability to carry on business on the land. Put another way, were it not for the acquisition which has interfered with Asterian's activities on the land, the right to terminate would not have arisen."

32 The Arbitrator then concluded in [51] as set out.

33 It is not easy to follow what I might respectfully say is a bit of a jump in logic. On the one hand, the Arbitrator acknowledges that s 241(6) of the Land Administration Act must be construed ejusdem generis. On the other hand, he construes the section to take into account the tenure which would have been enjoyed but for the resumption.

34 However, the tenure which would have been enjoyed but for the resumption is a tenure of 30 days as the Arbitrator found and I conclude. Konowalow & Felber v Minister for Works does not provide a warrant to value the compensation under s 241(6) as encompassing the entire value of the leasehold through to 2004 in the hands of Asterian. Moreover, it is difficult to do so on the admitted facts. The evidence before the Arbitrator was the value of goodwill contained in the valuation relied upon. Such evidence as there was in the valuations did not support a finding of loss and damage pursuant to s 241(6) in excess of $150,000 and the Arbitrator did not so find. The conclusion is that the Arbitrator erred in finding that Asterian was entitled to claim the sum of $186,000 which comprised a substantial component of goodwill on the basis of loss of tenure.

35 In my opinion, the Arbitrator erred in his application of s 241(6) to the facts of this case. What follows from this?

36 The Commissioner argued that the question of "reasonableness" is a question of fact not a question of law. While on some occasions it might be a question of fact, in the present case I consider it is a question of law or at least mixed law and fact. The Arbitrator misdirected himself as to the law in accordance with the questions of fact which he had to answer. As a result he concluded that the Commissioner acted reasonably.

37 I consider this to be a "manifest" error within the meaning of the Commercial Arbitration Act. The result of the error is that Caltex has to pay a significant amount of money. I would grant leave to appeal: s 38. The Commissioner did not act reasonably in settling Asterian's compensation claim. He certainly acted reasonably in seeking three valuations and in making an offer based on a moderate valuation. However, the valuations were made on the erroneous assumption that Asterian had rights of renewal until 2004.

38 A valuation on a correct basis would have resulted in a payment by the Commissioner of an amount less than $150,000. Within the meaning of the Deed between Caltex and the Commissioner, the compensation between the Commissioner and Asterian therefore was not "reasonably agreed".

39 What I have said is sufficient to deal with the major points and the notice of contention. Caltex mounted a further argument pursuant to the Constitution s 109 submitting there was an inconsistency between the provision of the Land Administration Act 1997 and the Petroleum Retail Marketing Franchise Act 1980. I have reached my decision on the basis of the Agreement between Caltex and Asterian which define the rights of the parties. It so happens that those rights for all relevant purposes were coterminous with the rights of each party under the Act. However, as I have confined my consideration to the express terms of the Agreement, it is unnecessary to deal with the inconsistency argument.

40 I grant leave to appeal, allow the appeal, set aside the arbitration award and, in lieu, declare that the Commissioner did not reasonably settle the claim of Asterian.