Campbelltown City Council & Ors v WSN Environmental Solutions Pty Ltd

Supreme Court of NSW|2015-02-20|Before: Sackar J

Judgment

These proceedings concern the interaction between two dispute resolution clauses in the contract (Contract) that subsists between the plaintiffs (Councils) and the defendant (WSN Solutions). The Councils seek a declaration that WSN Solutions had no entitlement to refer to an expert, purportedly pursuant to cl 25 of the Contract, a dispute concerning whether WSN Solutions should be compensated for a demonstrable material increase in costs incurred due to what is alleged to be a reasonably unforeseeable and unforseen event beyond the control of WSN Solutions.

Background facts

The plaintiffs are four councils operating in and around south west Sydney and the defendant is a waste management services company. They are parties to a contract entitled "Contract for Processing Waste, Recyclables and Garden Organics" dated 14 August 2006. The contract provides for a fifteen year term. WSN Solutions receives and processes waste materials including mixed solid waste, recyclables, organics and non-putrescible waste.
WSN Solutions is subject to performance criteria and must undergo performance reviews at the instigation of the Councils (cl 13). Clause 5 provides for the payment of a periodic processing fee by the Councils to WSN Solutions. The Councils have the right to an annual review of the processing fee, but WSN does not have a similar right. Clause 2.4 incorporates into the Contract the Tender Questions and Responses, the Terms of the Tender and the terms of the Request for Tender Document (RFT) issued by the Councils. To the extent of any inconsistency between the terms of those documents and the Contract, the Contract prevails. The Councils are represented by a Contract Manager appointed pursuant to cl 3.2.

19.3 Settlement of the Dispute by mediation (1) If the Dispute cannot be resolved by staged consultation in accordance with Clause 19.2 then the Dispute must be submitted to mediation: (a) by a mediator selected by the President of the Australian Commercial Disputes Centre; and (b) in accordance with the mediation guidelines implemented from time to time by the Australian Commercial Disputes Centre; and (2) Each party is to bear its own costs incurred in the mediation of the dispute. 19.4 Settlement of the Dispute by arbitration (1) If the Dispute is not resolved to the satisfaction of the parties within 20 Business Days of the commencement of mediation in accordance with Clause 19.3 then the Dispute must be referred to arbitration: (a) by a single arbitrator nominated by the President of the Australian Commercial Disputes Centre; and (b) in accordance with the arbitration rules implemented from time to time by the Australian Commercial Disputes Centre; and (c) in the English language; and (d) conducted in Sydney, Australia. (2) The parties must do all such acts and things as are necessary to facilitate the expeditious hearing of the Dispute by the arbitrator. (3) The costs of the arbitrator are to be borne: (a) as ordered by the arbitrator; or (b) in the absence of a direction from the arbitrator - equally by the parties. (4) The decision of the arbitrator (in the absence of an error of law) is binding on both parties in relation to Disputes that are settled up to the value of $500,000. Except where the Dispute relates to a settlement of more than $500,000 neither party is, after completion of the arbitration, entitled to commence proceedings to litigate the Dispute in any court of competent jurisdiction. 19.5 Exclusivity of dispute resolution procedure (1) All parties must adhere to the dispute resolution procedure set out in this Contract. (2) The only time that either party may depart from the dispute resolution procedure set out in this Clause 19 is when urgent interlocutory relief is required to restrain a breach or threatened breach of this Contract. 19.6 Suspension of performance No party may, unless otherwise expressly permitted under this Contract, suspend performance of their obligations under this Contract as a consequence of the occurrence of a Dispute.

On 10 October 2013 the Councils responded, disputing that any such cl 24.4 variation circumstance existed and agreeing to meet without admission and without prejudice to consider any further material WSN Solutions wished to provide.
On 11 April 2014 the Councils informed WSN Solutions that it should make a formal claim under the Contract in order to proceed with its allegation that a cl 24.4 variation circumstance existed. Further correspondence between the parties ensued from 7 July 2014 to 21 November 2014, on which date the Councils proposed an informal mediation of the dispute outside the dispute resolution mechanisms provided for within the Contract.
On 5 December 2014 WSN Solutions purported to refer the dispute between the parties to expert determination pursuant to cl 25. On 17 December 2014 each of the Councils issued a Notice of Dispute under cl 19.1 of the Contract. These requested an undertaking from WSN Solutions that an expert would not be appointed. The Councils made an application for injunctive relief to this Court on 18 December 2014. On 19 December 2014 an undertaking was provided by WSN Solutions and orders were made by consent.
The issue that arises between the parties in these proceedings can be characterised as a "threshold entitlement dispute" (whether or not a variation circumstance exists) should be referred to expert determination as provided by cl 25, or whether the dispute resolution machinery of cl 19 should be engaged.
On 20 January 2015 WSN Solutions filed a cross-claim seeking a declaration that they are entitled to refer the dispute to an expert in accordance with cl 25 and a declaration that: 1. The dispute resolution mechanism provided for in cls 24.2(2) and 25 of the contract applies to the parties' dispute as to whether and how WSN Solutions should be compensated for a material increase in costs pursuant to cl 24.4 of the Contract; 2. This dispute resolution mechanism is an exception to, and applies exclusively of, the dispute resolution provided for in cl 19 of the Contract; and 3. The Dispute Notices purportedly issued by the Councils on 17 December 2014 are invalid and of no effect.
Further or in the alternative, the Councils seek a declaration that, on the proper construction of cl 24, WSN Solutions is entitled to payment of compensation for additional costs: 1. If the parties agree, following notice of a variation circumstance pursuant to cl 24.3 of the Contract, whether and how WSN Solutions is to be compensated; 2. If the parties agree that a variation circumstance applies pursuant to cl 24.4 of the Contract and agree as to how WSN Solutions is to be compensated; or 3. In the event of a dispute in relation to whether and how WSN Solutions is to be compensated for additional costs pursuant to cl 23.4 or cl 24.4 of the Contract, in accordance with a final and binding expert determination made pursuant to cl 25 of the Contract.
Neither party relies on any surrounding circumstances as an aid to the construction exercise, although both parties draw upon the Contract as a whole in contextualising the operation of cls 24 and 25. WSN Solutions points to the operation of cl 5, which deals with the processing fee. The fee is fixed, though it is to be adjusted in line with CPI (cl 5.10). It is reviewable at the instigation of the Councils, but not WSN Solutions (cl 5.9). For their part, the Councils draw attention to Annexure 2, which stipulates the services to be provided by WSN Solutions, and Annexure 3, which deals with warranties given by WSN Solutions in relation to the Contract. Clause 7 puts in place mechanisms for delivery and processing of input streams, including provisions imposing costs on WSN Solutions if larger amounts of landfill than anticipated are produced.
Clause 8 sets out the particulars for the construction of the Facility and cls 9-12 deal further with the equipment and operation of the Facility. Importantly, in the view of the Councils, cl 13 imposes performance obligations upon WSN Solutions. A failure to meet the cl 13 benchmarks gives rise to an entitlement to terminate (in addition to potential liability in damages). Annexure 3 gives content to the cl 13 specifications. The Councils submit that cl 24 must be construed having regard to this risk profile, with the cl 24.3 variation circumstances relating to factors outside the Facility.

Preliminary issue

A submission was made by the Councils that the cross-claim should be struck out and that the Court had no power to give WSN Developments the declaratory relief sought: see [8]-[13] of the Councils' submissions. This submission is put on two bases. The first is that the relief sought is a "hypothetical declaration" because the cross-claim does not seek an injunction, the restraint of the implementation of the cl 19 processes, or an order setting aside the notices. The second is that the provisions of the Commercial Arbitration Act 2010 (NSW) prohibit the court from intervening in the arbitral process initiated by the Councils.
To deal first with the latter, s 5 of the Commercial Arbitration Act provides: 5 Extent of court intervention In matters governed by this Act, no court must intervene except where so provided by this Act.
Section 8 goes on: 8 Arbitration agreement and substantive claim before court (1) A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so request not later than when submitting the party's first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. (2) Where an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.
WSN Solutions makes two submissions in response to this point. The first is that this issue was not raised by the pleadings; it was first referenced in the Councils' submissions a short time before the hearing. In response, the Councils say that the time at which the issue was raised is of no note because the question is whether or not the Court has power to grant the relief sought.
Second, WSN Solutions points to s 8 and submits that the "action" referred to is the cross-claim. It says that the Councils joined issue without raising the issue of jurisdiction, and thus the Court is empowered to grant the relief sought in the cross-claim. WSN Solutions says that it was incumbent upon the Councils to request the court refer the matter to arbitration when they filed their Technology and Construction List Cross-Claim Response (Cross-Claim Response) on 28 January 2015 and that, as they did not, they have no entitlement now to assert that this Court does not have jurisdiction to make the orders sought.
I consider the submission of WSN Solutions to be correct. The opportunity to pursue this point was foreclosed by s 8 of the Commercial Arbitration Act when the Councils filed their Cross-Claim Response without raising the issue.
In relation to the question of whether the declaratory relief is "hypothetical" in nature, the Councils say that because WSN Solutions does not seek to enjoin the arbitral process the relief sought is effectively an advisory opinion. The Councils submit that these declarations should not be made absent utility. I accept the submission of WSN Solutions that the declarations sought are effective in that they will create an estoppel between the parties such that if the Councils sought to appoint an arbitrator WSN Solutions would be able to inform that arbitrator that they were purporting to act under an instrument the Court has determined is invalid.

Legal principles

The principles applicable to the construction of the Contract are not in dispute between the parties and may be shortly stated. The starting point for construction is the plain and ordinary meaning of the words used: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 348 per Mason J. The construction given to particular language may vary depending on the context and circumstances: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]. A court will construe the contract as a whole in order to determine the effect and meaning of a particular term: Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588.
The following summary was given by Bathurst CJ, with whom Macfarlan and Meagher JJA agreed, in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52]: 52 The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Limited v Alphafarm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Limited v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Limited [2011] HCA 45; (2011) 282 ALR 604.
In 2014, the High Court considered the applicable principles in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 (Woodside Energy). The majority observed (citations omitted): 35 Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties ... intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
The relevant portion of Re Golden Key Ltd (in rec) [2009] EWCA Civ 636 is as follows: APPROACH TO INTERPRETATION [25] It goes almost without saying that what the court has to do in this case is find the true interpretation of the contractual documents and that the court is not entitled to rewrite the contractual documents, or more precisely to write some provision into the contractual documents, to reflect some provision that the court considers that it would have been reasonable for the parties to have agreed or to reflect some provision that the court considers would have made more commercial sense. But that leads to the question as to the weight to be given to the commerciality of a particular interpretation. [26] In his skeleton argument, Mr Zacaroli submits: "Recourse to the 'commercial expectations of the parties' is meaningless, since there is no evidence as to the expectations of the parties other than the contents of the documents under consideration." (Paragraph 58). It is well-known that the court is not concerned with the subjective intentions of the parties: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98, [1998] 1 BCLC 493, [1998] 1 WLR 896 ("the ICS case"). I thus read the reference in Mr Zacaroli's submission to commercial expectations of the parties as a reference to what objectively was their commercial aim. This submission raises the very question that I identified in the preceding paragraph. [27] In his famous speech in the ICS case, Lord Hoffmann set out the modern approach to the interpretation of documents. The first principle is that: "Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in a situation in which they were at the time of the contract." (page 912). Lord Hoffmann does not explicitly refer to the need to have regard to what objectively is the aim of the transaction, but he approved the speech of Lord Wilberforce of the House of Lords in Prenn v Simmonds [1971] 3 All ER 237, [1971] 1 WLR 1381, [1971] 1 WLR 1381. In his speech in that case, with which the other members of the House agreed, Lord Wilberforce makes it clear that, if it can be shown that a particular interpretation would further the parties' intention, the court should take that into account. Accordingly, this court must have regard to the parties' aim, objectively ascertained, as part of the process of interpretation, if that aim can be ascertained. [28] In my judgment, this must be the case even if (as here) there is little evidence as to the circumstances surrounding the parties' agreement to the transaction other than the terms of the transaction itself. Even in that event, the court must consider whether the objective aim can be ascertained from the documentation. (Moreover, when the issue of interpretation arises as to documentation to which, as here, parties adhere at different points in time, the commercial aims as shown by the documentation are for obvious reasons of practicality of particular significance.) To that end, unless the contrary appears, the court must assume that the parties to a commercial document intended to produce a commercial result, and the court must thus take into account the commerciality of the rival constructions, if that commerciality can be identified. The commerciality of a particular construction may be a crystallising factor in its favour where it is implausible that parties would have intended any other result. [29] The line between giving weight to the commerciality of a provision and writing a provision into an agreement can become a fine one when the court finds that there are deficiencies in the drafting of the contractual documents. There are cases where the documentation simply leaves the parties' intentions as to what should happen in a foreseeable set of circumstances quite unclear. This is particularly liable to happen in what might be called multi-dimensional documentation because of the sheer number of permutations that those who negotiate and draft the documents have to take into account. The court can spend a great deal of time immersed in the detail of lengthy contractual documents searching for clues. That task has to be carried out but if, despite a thorough search, the position is still unclear, and more than one meaning is properly available, the right approach is surely to give greater weight to the presumption that the parties must have intended some commercial result than to the textual clues if the latter yields an uncommercial result. I make these observations, because the judge may have been adopting a different approach at the end of para 98 of his judgment, which I have set out above.
The New South Wales Court of Appeal recently considered Woodside Energy in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184: see Leeming JA (with whom Ward and Emmett JJA agreed) at [69]-[86]. More recently, Gleeson JA (Basten and Meagher JJA agreeing) made the following observations in Newey v Westpac Banking Corporation [2014] NSWCA 319: 89 As subsequently observed by Leeming JA (Ward and Emmett JJA agreeing) in Mainteck Services Pty Ltd v Stein Heurtey SA (Mainteck) [2014] NSWCA 184 at [71], Woodside endorses and requires a contextual approach to the construction of commercial contracts and "ambiguity" is to be evaluated having regard to surrounding circumstances and commercial purposes or objects. To the extent that what was said in the reasons of three members of the High Court when refusing special leave in Western Export Services Inc v Jireh International Pty Ltd (Jireh) [2011] HCA 45; 86 ALJR 1 supports the contrary proposition, Jireh should be regarded as inconsistent with what was said in Woodside at [35], for the reasons explained in Mainteck at [72]-[86]. See also Stratton Finance Pty Ltd v Webb (Stratton Finance) [2014] FCAFC 110 at [41] where the Full Court of the Federal Court of Australia (Allsop CJ, Siopis and Flick JJ) agreed with the conclusion in Mainteck and with the reasons given there in elaboration at [72]-[86]. 90 Nonetheless it is also important to bear in mind the extent to which context and legitimate surrounding circumstances can be used as an aid in the construction of a written agreement. In McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) [2011] NSWCA 315; 81 NSWLR 690 at [17]-[18] Bathurst CJ (Macfarlan JA and Sackville AJA agreeing) said: "[17] ... Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 350, 352) even in cases where there is an absence of apparent ambiguity (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [8]; Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317 at [39]; Franklins Pty Ltd v Metcash Trading Ltd at [14], [63], [305]) that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. [18] This does not mean that there are not exceptional cases where, to use the words of Lord Hoffmann, something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense: see Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 at [15]-[16]; Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [55], [60]. In such a case, in my opinion, a court is entitled to depart from the ordinary meaning to give effect to what objectively speaking the parties intended ... ." 91 The reference in McGrath v Sturesteps at [17] to the well-known observation of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd at 109, is a strong reminder that there is no licence for "judicial rewriting" of an agreement: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27] (Basten JA; Giles and Tobias JJA agreeing); Franklins at [23] (Allsop P). The ability of courts to give commercial agreements a commercial and business-like interpretation is constrained by the language used by the parties. If, after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation: Jireh International Pty Ltd v Western Exports Services Inc at [55] (Macfarlan JA; Young JA and Tobias AJA agreeing).
A contract should be construed in a way that avoids commercially nonsensical outcomes or commercial inconvenience: Zhu v Treasurer (NSW) (2004) 218 CLR 530 at [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. In Dance With Mr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332 at [52] Hammerschlag J commented: When parties to a commercial contract agree, at the time of making the contract, and before any disputes have yet arisen, to refer to arbitration any dispute or difference arising out of the agreement, their agreement should not be construed narrowly. They are unlikely to have intended that different disputes should be resolved before different tribunals, or that the appropriate tribunal should be determined by fine shades of difference in the legal character of individual issues, or by the ingenuity of lawyers in developing points of argument: Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 at 165 per Gleeson CJ. The same considerations apply, in my view, to agreed alternative dispute resolution mechanisms such as expert determination.

The dispute resolution regime

In my view it is clear that the parties intended to create two quite distinct dispute resolution regimes; one to deal with the two different types of variation circumstance (cl 24.3(1) and (2)) and the one deemed variation circumstance (cl 24.4), and the other concerning all other disputes (cl 19). The differences between the parties arises as to whether the latitude of an expert appointed under cl 25 is restricted to questions of quantum, and the extent to which the two regimes are mutually exclusive.
The Councils characterise cl 24.3 variation circumstances as objective and closely prescribed, being potential risks identified by the parties and factored into the contract. The Councils contrast this with the cl 24.4 variation circumstances, which they say may include normative considerations and are, potentially, unlimited in character. The Councils submit that this difference in character between cl 24.3 variation circumstances and cl 24.4 variation circumstances supports the construction that cl 24.2 provides each party with a right of recourse to an expert who will act as a valuer to determine a quantum dispute where a cl 24.3 variation circumstance exists, while cl 24.4 imposes upon the parties an obligation only to negotiate to resolve a disagreement.
The Councils say that if the parties do not reach an agreement that a cl 24.4 variation circumstance applies - that is, the threshold entitlement dispute - either party can then invoke cl 19. They similarly submit that a dispute about the existence of a cl 24.3 variation circumstance would be determined by the cl 19 dispute resolution processes rather than an expert, though the question of quantum could then be referred to expert determination pursuant to cl 25.
The Councils submit that cl 24.2 reflects the expectations of the parties that the only real dispute that could emerge about the subject matter of a cl 24.3 variation was one of quantum - that is the amount ("whether") and the mode ("how") of compensation. The position, they say, is different with regard to cl 24.4, which contemplates agreement between the parties as to the existence of a deemed variation circumstance before a dispute about quantum can be referred to an expert. The Councils suggest that this is attributable to the parties' awareness that an assertion by WSN Solutions made under cl 24.4 would likely give rise to controversy. The Councils accept that where there is no threshold entitlement dispute concerning a deemed cl 24.4 variation, the question of quantum is referrable to expert determination pursuant to cl 25.

Interaction between cls 24.2, 24.3 and 24.4

A question arises as to how a dispute concerning the existence of a cl 24.4 variation could engage the dispute resolution machinery of 24.2(2). The Councils submit that cl 24.2(4) stands separately from the preceding sub-clauses, which deal with cl 24.3 variation circumstances. They argue that 24.2(4) merely identifies the existence of another type of variation circumstance, but emphasise the last portion of cl 24.4; that "the Parties agree to negotiate reasonably and in good faith as to whether a variation circumstance should apply."
The Councils say that the obligation to negotiate concerning the existence of a cl 24.4 variation does not give the expert the right to determine quantum in the absence of agreement between the parties, nor the right to determine the threshold entitlement of whether a variation circumstance exists. In that sense, they argue that without consensus no cl 24.4 variation circumstance can be said to exist. To the contrary, WSN Solutions submits that compliance with the cl 24.4 process of negotiation, whether or not an agreement is reached, is a variation circumstance to which cl 24.2 attaches. In this way, they submit that the reference in cl 24.2(1) to cl 24.3 does not qualify cl 24.2(2).
I consider that cl 24.2(4) is, in effect, a deeming provision. The situation described in cl 24.4 does not fall within the ordinary meaning of the word "variation" and thus it is the operation of cl 24.2(4) that brings an unforeseen event that has led to a demonstrable material increase in cost within the definition of a variation circumstance.

Interaction between cl 24 and cl 19

As mentioned at [14], the Councils submit that cl 24.4 must be construed having regard to the risk profile in the rest of the Contract. They point out that the variation circumstances identified in cl 24.3 are matters outside of the operation of the Facility, which WSN Solutions warranted to construct with certain performance characteristics. The Councils submit that, following the negotiations to be undertaken reasonably and in good faith in compliance with cl 24.4, their agreement is a precondition to the deemed existence of a variation circumstance.
The Councils initially submitted that this is a residual discretion that operates in their favour and that is susceptible to review only if there is evidence that negotiations have not been undertaken in good faith. They said further that, even were it objectively demonstrated that a demonstrable material increase in costs beyond the control of WSN Solutions had taken place, they nonetheless had latitude to refuse to agree that a variation circumstance existed. Counsel for the Councils eventually conceded that, should there be a demonstrable material increase in costs, which was reasonably unforeseeable at the time the Contract was entered into, it would be impossible for the Councils, in good faith, to refuse to accept that a variation circumstance existed.
It must be the case that a failure to reach agreement as to whether a variation circumstance should apply under cl 24.4 does not lead to an abyss; there must be a mechanism through which such a disagreement can be resolved. That being the case, the question becomes whether the dispute should be dealt with through cl 25, cl 19, or a combination of the two. The Councils maintain that the threshold dispute would need to be resolved under cl 19 before a cl 24.4 quantum issue could be referred to an expert. The hybrid approach to dispute resolution urged by the Councils encounters a number of practical difficulties, which will be dealt with further below. Before reaching that point, however, some characteristics of cl 24 should be noted.
Regard should be had to the choice by the parties to separate the cl 24.4 variation circumstances from those listed in cl 24.3. On one view, this might indicate a desire by the parties to isolate cl 24.4 from the dispute resolution mechanisms identified in cl 24.2. It is also true that the use of the phrase "additional costs" in cl 24.2(2) appears to be a reference to cl 24.3, rather than to the "demonstrable material increase in costs" specified by cl 24.4.
The preferable view, however, is that the parties chose to create a separate category of cl 24.4 variations because they were aware that unforeseeable events beyond the control of WSN Solutions would likely require a longer period for resolution than the 28 days referred to in cl 24.2(1). Nonetheless, cl 24.4 variations still exist under the rubric of cl 24 variations and cl 24 must be read alongside cl 25. The word "[w]here" in cl 25 should be read as referring to a situation where the parties cannot reach agreement.
Further, it is clear in my view that cl 24 and cl 25 are self-contained provisions designed to operate in favour of WSN Solutions, as discussed at [36] above. WSN Solutions submits, and I accept, that the purpose of these clauses was to deal with unforeseen events arising in a long-term, fixed-price contract based on the commercial reality that it would avail the Councils little if WSN Solutions were driven into insolvency or operating on an uneconomic basis because a cl 24.4 variation circumstance had arisen. Variation of the Contract for the benefit of WSN Solutions is possible only in the limited circumstances specified in cl 24.

Construction of the terms "whether" and "how"

As mentioned at [31], the Councils submit that "whether" should be understood as a reference to the question of whether there were additional costs, and "how" to the mode of compensation. WSN Solutions submits that the construction pressed by the Councils "proves too much", in the sense that if there cannot be a dispute about whether a variation circumstance exists, and there is a need to demonstrate a material increase in cost as a predicate fact, there is no "whether" or "how" to dispute.
I do not accept the Councils' submission that the word "whether" should be understood to mean the quantum of the compensation. The ordinary meaning of the word "whether", according to the Macquarie Dictionary, is as follows: conjunction 1. (used in dependent clauses or the like, to introduce the first of two or more alternatives, and sometimes repeated before the second or later alternative and used in correlation with or): it matters little whether we go or whether we stay.
The Oxford English Dictionary definition is to similar effect: conjunction expression a doubt or choice between alternatives: he seemed undecided whether to go or stay | it is still not clear whether or not he realizes.
I consider that "whether" encompasses "whether (or not)" the threshold question is answerable in the affirmative. As WSN Solutions submits, "whether" can be taken to include the question of the amount of the costs and the causation of those costs.
The Macquarie Dictionary contains the following definition of "variation": The act or process of varying; change in condition, character, degree, etc.
The Oxford English Dictionary provides as follows: noun…a change or slight difference in condition, amount, or level, typically within certain limits.
As discussed at [34], cl 24.2(4) operates as a deeming provision because the circumstances outlined in cl 24.4 do not fit naturally within the definition of the word "variation".

Jurisdiction of the expert and questions of commerciality

Character of the expert determination and intentions of the parties

There are two primary issues in relation to the intentions of the parties. The first deals with the Councils' argument that a reasonable person could not understand the parties to have intended that the expert's decision would be final and binding (cl 25.3) if the jurisdiction of the expert included the determination as to whether a variation circumstance existed. The second deals with the selection of the expert and the appropriateness of that expert determining the threshold question.
Clause 19.4(4) for example provides that a decision of an arbitrator pursuant to the cl 19 dispute resolution process is binding (in the absence of an error of law) on the parties if the dispute is settled to a value of less than $500,000. The parties may litigate if the settlement sum is more than this amount. The Councils argue that the parties cannot be understood to have intended that an expert's final determination about the existence of a unlimited set of circumstances, not only unforeseen but reasonably unforeseeable, would bind the parties in a manner that would severely circumscribe the circumstances in which they could appeal such a decision, particularly where the compensation awarded might greatly exceed $500,000.
This argument is not consonant with the Councils' concession that a quantum question arising from a cl 24.4 variation circumstance should be referred to an expert. The cost of a cl 24.4 variation circumstance, given the length of the contract term and the potentially significant cost impact of unforeseen circumstances, may well (and perhaps is even likely to) exceed $500,000. There is no reason in principle, therefore, to assume that the entirety of a cl 24.4 dispute that might see compensation of over $500,000 awarded should engage the cl 19 process rather than cl 24.
It is also telling that in circumstances where the parties are unable to agree on an expert, that person is to be selected by the President of the NSW chapter of the Institute of Mediators and Arbitrators Australia. There is no reason that this person, or a person agreed upon by the parties, could not be legally qualified and quite able to determine the threshold dispute. Clause 25 does not provide for the appointment of a valuer; an arbitrator or mediator is likely to be amply qualified to determine the full ambit of disputes that might arise under cl 24.4.
Another issue arises because it is not apparent how the reference of the quantification question to an expert would interact with a threshold determination under cl 19. As mentioned above, the Councils concede that a cl 24.4 quantum issue would go to an expert in the event of a dispute between the parties. It is clear that cl 19 contemplates the resolution of both the substantive issues and the question of quantum within the one procedure; the parties' rights to litigate a matter further are dependent upon the amount of the settlement. Bifurcation of the threshold and valuation issues would make the dispute resolution process extremely cumbersome and commercially inconvenient.

Specific and general propositions

In Belvino Investments No. 2 Pty Ltd v Australian Vintage Ltd [2014] NSWSC 978 at [39]-[40] White J observed that general provisions will give way to specific provisions where a conflict arises. The Councils accept the proposition that a specific clause will overcome one expressed at a greater level of generality, but argue that this is not applicable to the instant case in the way it was to Belvino. The Councils argue that cl 24 has a more limited operation than that being considered in Belvino, which clearly extended to consideration of substantive matters (in that case, whether a reduction in the production capacity of a vineyard had occurred and whether that reduction was due to a natural disaster). They submit that the general principle cannot, in this case, give the expert jurisdiction to determine every fact and circumstance to do with a variation.
In Belvino, the plaintiff submitted that a clause which allowed either of the parties to institute proceedings regarding a dispute after attempting mediation conferred upon it the right to bring such proceedings, notwithstanding the fact that the defendants had invoked a clause of the contract dealing specifically with natural disasters and providing for the appointment of an expert to determine various matters (with the results to be binding on the parties).
This case differs from Belvino in that there was no suggestion in Belvino that the dispute could be dissected and distributed between the two different dispute resolution mechanisms. The key issue for the parties here is not really one of the specific overcoming the general. Given the clearly evinced intention of the parties to construct two separate regimes, dealing with different material, the question is whether a threshold entitlement dispute can be characterised as referable to expert determination. I consider that it can.

Commercial convenience in the context of the Contract

To a large extent, I have already dealt with the issues surrounding commercial convenience. The Councils submit that as a matter of commercial common sense an expert should not be determining the jurisdictional question of whether variation circumstances exist. They say that there is, potentially, a large amount of money in issue and raise the concern that the parties will not have the benefit of full appeal rights. As discussed at [48] above, this argument fails to take account of the admission by the Councils that a cl 24.4 quantum dispute would be referred to an expert, and does not grapple with the other practical complexities created by engaging a hybrid of cls 25 and 19.
The Councils submit that to view cls 24 and 25 as enabling efficient compensation of WSN Solutions in circumstances where 24.3 variations apply is to rewrite the Contract. I do not accept this. As I have already outlined, these clauses obviously operate to provide a truncated dispute resolution process where a foreseen variation occurs. The fact that there is no time limit imposed on the negotiations that must take place pursuant to cl 24.4 is a mark of the uncertain nature of the deemed variations referred to. The isolation of the deemed variation circumstances within cl 24 is not sufficient to undermine the conclusion that the parties intended a separate dispute resolution process to apply.

Conclusion

In my view, for the reasons outlined above, the language chosen by the parties indicates clearly that each dispute resolution regime was to be self-contained. The language does not betray any intention of the parties to bifurcate the process. The construction of cl 24 proposed by WSN Solutions is clearly to be preferred in my view. It follows that the Councils have been unsuccessful and I would therefore refuse the relief sought. On the other hand I consider it entirely appropriate to grant the relief sought by WSN Solutions.
I would invite the parties to bring in short minutes to give effect to these reasons. If no agreement can be reached I would also invite the parties to return the matter for costs to be determined.

Amendments 06 March 2015 - added table to quote in paragraph 6 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 March 2015

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