Donaldson Coal Pty Limited v Pacific National

Donaldson Coal Pty Limited v Pacific National - [2007] NSWSC 1446 - NSWSC 2007 case summary — Zoe

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2 The defendant denies that the parties entered in the agreement as alleged and claims that in any event, the agreement as alleged is incapable of performance. Infrastructure and capacity 3 The plaintiff's coal is marketed and sold to coal traders, who then on-sell the coal to users worldwide. Coal trucks haul the coal won from the plaintiff's mines to facilities at the adjacent mine operated by Bloomfield Collieries Limited (Bloomfield). Bloomfield processes the plaintiff's coal at its facilities before it is loaded onto trains operated by the defendant and transported by rail to the Port at Newcastle for loading onto ships. The ship loading terminal at Newcastle Port is operated by Port Waratah Coal Services Limited (PWCS). 4 As a result of the expanding coal output in the Hunter Valley to meet demand for coal from offshore buyers, Newcastle Port has reached its capacity limit. In about 2004 PWCS sought to address capacity issues through a proposed Capacity Balancing System (CBS), for which it sought interim authorisation from the Australian Competition & Consumer Commission (ACCC) under s 88 of the Trade Practices Act 1974 (Cth) (TPA). The authorisation process took about seven months and the CBS was approved for a one year period which expired on 31 December 2004. Although the CBS included a common user provision that allowed all coal producers access to the terminal, it was initially quite controversial and was not supported by the plaintiff, nor by approximately half of the Hunter Valley coal producers. This was due to a concern that the CBS did not address the need to expand the existing port loading facilities which the plaintiff and others, regarded as the only solution to the capacity problems, especially as coal production in the Hunter Valley was projected to increase. 5 In late 2004 the Newcastle Coal Infrastructure Group (NCIG) was set up as a lobby group on broad infrastructure issues seeking to address the growing need for expanded loading facilities at Newcastle Port and for the purpose of making submissions to the ACCC on the CBS. NCIG subsequently became a proprietary company with a view to becoming the developer and owner of a third coal loader in Newcastle Port, in addition to the existing facilities operated by PWCS. NCIG's facility will not be operational until 2010. 6 The CBS was subsequently improved during 2005 by a series of checks and balances introduced to protect the interests of the smaller coal producers such as the plaintiff, resulting in general support for the revised CBS, for which authorisation was obtained from the ACCC for a three year period due to expire on 31 December 2007. As part of that process, in about August 2005 PWCS sought binding nominations of anticipated coal tonnage from the coal producers that were to be applied under the CBS. The CBS was temporarily suspended at the end of 2006 but was reinstated by broad industry agreement when in March 2007 the queue of ships at Newcastle Port had reached about 70 ships. 7 The infrastructure to deliver coal from the coal mines in the Hunter Valley, and adjacent loading points, to the export coal terminals and onto vessels for export is referred to as the Hunter Valley Coal Chain (HVCC). The Hunter Valley Coal Chain Logistics Team (HVCCLT) was set up in about 2004 pursuant to a memorandum of understanding between all the participants in the Coal Chain to co-ordinate all logistics in the Hunter Valley. 2004 Agreement to Haul Coal 8 On 1 October 2004 the plaintiff and the defendant executed an "Agreement to Haul Coal". The commencement date of that agreement was 1 January 2004 with a termination date of 31 December 2006 (cl 1.1 and 2). The agreement provided that if the defendant was given a direction by PWCS: it would notify the plaintiff immediately of the details of the direction; the plaintiff was required to do such things necessary to enable the defendant to comply with the direction; and the defendant was not liable to the plaintiff for anything done in compliance with the direction from PWCS (cl 6.2). Clause 12 provided for termination of the agreement for breach or the affects of Force Majeure, or by seven days notice if the other party was in Financial Default. 9 "Haulage Rate" was defined as "the sum of the 'capacity component', the 'fuel component' and 'variable component', exclusive of GST, set out, and described as such, in paragraph 1 of schedule 1, as varied in accordance with paragraph 1 of schedule 2". Paragraph 1 of Schedule 1 provided as follows:

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2004 Coal Handling Services Agreement with PWCS 14 On 22 December 2004 the plaintiff entered into a Coal Handling Services Agreement with PWCS. The plaintiff was obliged to make an application to PWCS for the loading of its coal onto a particular vessel at the Coal Handling facility. On receipt of the application PWCS would determine the suitability of the vessel identified to load the coal at its facility with the discretion to refuse to provide coal handling services to load a vessel which did not comply with certain criteria, or to impose conditions on the way in which the vessel would be permitted to be loaded with the plaintiff's coal (Section 3; clause 3.1). The plaintiff was obliged to ensure that the coal required under a shipment contract to load a vessel would be available to be transported to the facility not later than seven days prior to the estimated time of commencement of loading of the particular vessel (cl 3.5.1). The only basis upon which direct loading of coal from trains onto vessels would occur was in accordance with the "Five Point Plan" (cl 3.6.2). The Five Point Plan was a set of protocols endorsed by the Coal Chain Transport Planning Group from time to time and developed by customers, transport providers and PWC to provide a framework for continuous improvements to the coal delivery system to the Port of Newcastle. 15 Annexure 4D to the Agreement included Part A - General Conditions of Capacity Distribution System which provided, inter alia: 2.3 The objectives of the Scheme are to: (a) secure a reduction in the vessel queues at the Port of Newcastle as soon as is reasonably practicable; (b) achieve maximum export coal throughput consistent with minimum vessel demurrage; (c) be fair and equitable; (d) comply with all relevant legal requirements. 16 Schedule 2 to the Agreement provided that PWCS would calculate the Coal Chain Capacity and that it would also determine the Forecast Requirement for each producer and the Forecast System demand for the particular year. It also provided a formula in respect of each producer's loading allocation to manage the scheme in a fair and equitable manner. 17 On 27 September 2005 the defendant wrote to PWCS complaining that it had unilaterally proposed certain amendments to the Coal Handling Services Agreement purporting to require the plaintiff to submit five year forecasts of its loading requirements at Newcastle. It noted that the forecasts for the first three years were said to be binding and subject to "take or pay" penalties. That meant that the plaintiff was obliged to pay PWCS an amount equivalent to that which was nominated irrespective of whether such amount had actually been handled. The plaintiff also complained about the assertion by PWCS of a right to deny the plaintiff all coal loading services, irrespective of available capacity, if the forecasts were not provided. The plaintiff alleged that PWCS held a monopoly in the market for coal receiving, storage and loading facilities at Newcastle and that it was exercising its monopoly power to impose what the plaintiff regarded as penalties. The plaintiff claimed that PWCS was threatening the viability of the plaintiff's business and alleged that the scheme proposed was obviously discriminatory and designed to induce shippers not to consider shifting any tonnage to a rival loader. 18 The tension that developed between the plaintiff and PWCS seems to have been caused by the inadequate port capacity to handle the volume of export coal. It is apparent that the rail operators were able to handle the capacity but that they and the coal producers were frustrated by the inadequate capacity at Newcastle Port. Notwithstanding the number of committees and organisations that have been established over the last five years to attempt to co-ordinate this very difficult situation, the structure between PWCS and the coal producers on the one hand and the coal producers and the rail operators on the other is clearly less than optimal by reason of the lack of commercial certainty from year to year in relation to the export tonnages that will be allocated by PWCS. Notwithstanding this lack of commercial certainty it appears that all parties have attempted to accommodate this very uncomfortable commercial situation, which will apparently not ease until 2010 when the next coal loader will become operational.

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Thanks for your phone call last week. As agreed in this discussion, I confirm that Pacific National will extend the term of our existing agreement until 31st March 2007 to allow suitable time for discussion regarding Donaldson's future rail haulage requirements and to negotiate appropriate commercial terms and conditions. 20 March 2007 Haulage Proposal 23 It is apparent that there were discussions between the plaintiff, the defendant and Bloomfield in early 2007 and on 20 March 2007 the defendant wrote a joint letter to Bloomfield and the plaintiff (the Haulage Proposal) in the following terms: RAIL HAULAGE PROPOSAL: BLOOMFIELD DONALDSON Following discussions with regards to the development of a rail haulage proposal incorporating Bloomfield and Donaldson. · Nominated Annual Tonnes for 2007 and onwards (subject to annual confirmation) of o Bloomfield 500,000 t o Donaldson 2,000,000 t · An extension of the term of the existing agreement by 6 years to 30th June 2013. · Reduced haulage rate if 75% of trains each quarter achieve set levels of loading performance. · Volume Rebate - $0.02 pt for all tonnes over 2.5m to 3.5m - $0.04 pt for all tonnes over 3.5m to 4.5m - $0.06 pt for all tonnes over 4.5m to 7.0m · Capacity charges calculated as per the existing agreement to apply if the coal hauled under this agreement in a Quarter is less than 85% (or 75% under alternate proposal) of the Nominated Annual Tonnes divided by four. · An obligation on Pacific National to provide rolling stock to haul 100% of Bloomfield & Donaldson Collieries export coal haulage requirements. · An annual CPI adjustment will be applicable from the 1st January 2008. The CPI adjustment is based upon the movements in the September CPI for Sydney as published by the Australian Bureau of Statistics, as 75% of the 'variable component' & 'capacity component' of the haulage rate escalated by a percentage which is equal to the nominal percentage increase in the CPI. · 25% of the 'capacity component' and the 'variable component' of the Haulage Rates applicable during the year immediately preceding the relevant 1 January will be escalated by a percentage which is equal to the increases (if any) in wage rates granted to Coal Train Drivers under any applicable Enterprise Agreement to which Pacific National is a party. · The inclusion of a fuel component rise and fall mechanism calculated and applied quarterly based upon the movements in the Shell Terminal Gate Price for Bulk Distillate. · Rail Access charges are passed through. · If Pacific National is unable to provide a Scheduled Train or a Scheduled Train does not discharge coal at the Port substantially in accordance with the Live Rail Plan and that results in a delay to the planned ship loading of a Donaldson or Bloomfield cargo, even if reasonable endeavours are used, then Pacific National must pay a delay charge of $3,000.00 (exclusive of GST) for each 24 hour period in which a Scheduled Train is not provided or a Scheduled Train does not discharge coal at the Port.

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We trust that this meets with your approval and that the contract can be redrafted and executed in a timely manner. 28 The reference in paragraph 10 of that letter to "Clause 20.2 Insurance" is clearly a reference to that clause in the 2004 Rail Haulage agreement. Meeting 23 April 2007 29 On 23 April 2007 Mr Gordon met with Mr McGregor in relation to the defendant's Haulage Proposal and the plaintiff's conditional acceptance date in 3 April 2007. At that meeting the following conversation occurred: Gordon: I just have to make sure you know how important it is to Donaldson to keep the delay charges in the agreement. This charge has to work incrementally. Otherwise they wouldn't be much of an incentive to run the trains on time. McGregor: Well I don't think that PN would wear that. We cannot agree to the cumulative charge. We also think the charge is too high. I mean, I think the $3,000 would be enough. Gordon: I don't think that Donaldson is going to accept anything less than five. As to the marriage payments and the make up train, you need to discuss those items further with J. Hughes of Coallink, our rail service/shipping coordinator. 14 May 2007 amended proposal 30 After a further meeting between Mr McGregor and Mr Gordon on Friday 11 May 2007 the defendant sent an amended proposal to the defendant on 14 May 2007. Mr McGregor advised in his e-mail to Mr Gordon that he had "made the changes as needed" to the proposal and asked Mr Gordon to review the changes and "if agreed" the defendant would "prepare the documents formally". That document attached to the e-mail was in the following terms: Following discussions with regards to the development of a rail haulage proposal incorporating Bloomfield and Donaldson. · Nominated Annual Tonnes for 2007 and onwards (subject to annual confirmation) of o Bloomfield 500,000 t o Donaldson 2, 000,000 t · An extension of the term of the existing agreement by 3 years with an option for a further 3 years to 30th June 2013. · Reduced haulage rate if 75% of trains each quarter achieve set levels of loading performance. · Volume Rebate on all tonnes adjusted annually when volume reaches trigger levels. - $0.02 pt for all tonnes over 2.5m to 3.5m - $0.04 pt for all tonnes over 3.5m to 4.5m - $0.06 pt for all tonnes over 4.5m to 7.0m · Capacity charges calculated as per the existing agreement to apply if the coal hauled under this agreement on a half yearly basis less than 75% of the Nominated Annual Tonnes divided by four.An obligation on Pacific National to provide rolling stock to haul 100% of Bloomfield % Donaldson Collieries export coal haulage requirements. · An annual CPI adjustment will be applicable from the 1st January 2008.The CPI adjustment is based upon the movements in the September CPI for Sydney as published by the Australian Bureau of Statistics, as 75% of the 'variable component' & 'capacity component' of the haulage rate escalated by a percentage which is equal to the nominal percentage increase in the CPI. The basis of CPI adjustments will be made available as justification of the increase. · 25% of the 'capacity component' and the 'variable component' of the Haulage Rates applicable during the year immediately preceding the relevant 1 January will be escalated by a percentage which is equal to the increases (if any) in wage rates granted to Coal Train Drivers under any applicable Enterprise Agreement to which Pacific National is a party.Details of the EA will be included within the agreement for verification. · The inclusion of a fuel component rise and fall mechanism calculated and applied quarterly based upon the movements in the Shell Terminal Gate Price for Bulk Distillate. Access to the Shell Terminal Gate price to be included for verification within the agreement. · Rail Access charges are passed through. · If Pacific National is unable to provide a Scheduled Train or a Scheduled Train does not discharge coal at the Port substantially in accordance with the Live Rail Plan(72hr plan) without agreement and that results in a delay to the planned ship loading of a Donaldson or Bloomfield cargo, even if reasonable endeavours are used, then Pacific National must pay a delay charge of $5,000.00 (exclusive of GST) for the first train and increases by $5000 increments for each subsequent train. · Any demmurage caused by PN rail operations to supply trains in a timely manner will be discussed to agree an outcome. · All cargoes railed have an expected single unit make up train at the end of the railing campaign, failure to supply a planned train that has been scheduled will result in a delay charge of $5000 per train as stipulated above. · Insurance to be modified to reduce public liability to $50 mill .

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Agreement Term 3 Years from July 2007, with an option for a further 3 year to July 2013. Agreement Volume 2.5mta for the first year rising to 4.15mta by 2010 subject to annual confirmation. PN Capacity Obligations Commitment to provide required capacity to haul 100% of nominated annual volumes. Capacity Charges If the actual tonnage of coal hauled in a half year is less than one half of 75%of the applicable Nominated Annual Tonnage, a capacity charge will be payable equivalent to the tonnage difference multiplied by the applicable 'capacity component' of the applicable Haulage rate. Load Point Performance Reduced haulage rate if 75% of trains in each quarter achieve set levels of loading performance as stipulated in agreed rates table. A rebate on all tonnes adjusted annually when the volume trigger is reached in any 12 month period. Volume Rebate 0.02 cent pert (sic) tonne over 2.5m to 3.5m 0.04 cents per tonne over 3.5 m to 4.5m 0.06 cents per tonne over 4.5 to 7.0m Adjustment of Haulage Rates The 'capacity component' and the variable component of the haulage rates will be adjusted on the 1st January each year of the agreement based upon 75% of the 'capacity component for CPI adjustments and 25% of the variable component for Labour adjustments. The basis of each will be made available prior to any change of the haulage rate. Fuel Adjustment The inclusion of a fuel component rise and fall mechanism calculated and applied quarterly based upon the movements in the Shell Terminal Gate Price for Bulk Distilate. Changes to fuel and the calculation will be made available prior to any change. Access Charges The parties acknowledge that all access charges are pass through. Scheduled Train Delay Charge If Pacific National is unable to provide a scheduled train, or a scheduled train does not discharge coal at the port in accordance with the confirmed status with the live run plan, without agreement from Donaldson/Bloomfield, then PN will pay a delay charge of $5000 (ex GST) for the first train and a further $5000 for each subsequent train of that cargo. Make up Train All cargoes railed have an expected single unit make up train at the end of the railing campaign, failure to supply a planned train that has been scheduled will result in a delay charge of $5000 per train as stipulated above. Vessel Demurrage Any demurrage caused by PN rail operations to supply trains in a timely manner will be discussed to agree an outcome to satisfy Donaldson or Bloomfield dependent on the party that has been affected.

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Agreement Term 3 Years from July 2007, with an option for a further 3 year to July 2013. Agreement Volume 2.5mta for the first year rising to 4.15mta by 2010 subject to annual confirmation. PN Capacity Obligations Commitment to provide required capacity to haul 100% of nominated annual volumes. Capacity Charges If the actual tonnage of coal hauled in a half year is less than one half of 75%of the applicable Nominated Annual Tonnage, a capacity charge will be payable equivalent to the tonnage difference multiplied by the applicable 'capacity component' of the applicable Haulage rate. Load Point Performance Reduced haulage rate if 75% of trains in each quarter achieve set levels of loading performance as stipulated in agreed rates table. A rebate on all tonnes adjusted when the volume trigger is reached in any 12 month period. Volume Rebate 0.02 cent pert (sic) tonne over 2.5m to 3.5m 0.04 cents per tonne over 3.5 m to 4.5m 0.06 cents per tonne over 4.5 to 7.0m Adjustment of Haulage Rates The 'capacity component' and the variable component of the haulage rates will be adjusted on the 1st January each year of the agreement based upon 75% of the 'capacity component for CPI adjustments and 25% of the variable component for Labour adjustments. The basis of each will be made available prior to any change of the haulage rate. Fuel Adjustment The inclusion of a fuel component rise and fall mechanism calculated and applied quarterly based upon the movements in the Shell Terminal Gate Price for Bulk Distilate. Changes to fuel and the calculation will be made available prior to any change. Access Charges The parties acknowledge that all access charges are pass through. Scheduled Train Delay Charge If Pacific National is unable to provide a scheduled train, or a scheduled train does not discharge coal at the port in accordance with the confirmed status with the live run plan, without agreement from Donaldson/Bloomfield, then PN will pay a delay charge of $7000 (ex GST) for the first train and a further $7000 for each subsequent train of that cargo. Make up Train All cargoes railed have an expected single unit make up train at the end of the railing campaign, failure to supply a planned train that has been scheduled will result in a delay charge of $7000 per train as stipulated above. Vessel Demurrage Any demurrage caused by PN rail operations to supply trains in a timely manner will be discussed to agree an outcome to satisfy Donaldson or Bloomfield dependant (sic) on the party that has been affected.

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Our corporate view was that the 2.5M t was to specifically refer to 2008, so I have amended the words and tonnages to suit, as our production here is calendar and not as per the document. Par 1 August changed to July Our legal advice is that the second paragraph is that the default position is the PWCS allocation so the second paragraph is not required and also the first line in the third paragraph up to "if". 65 On 10 September 2007 Mr Gordon wrote to Mr McGregor by e-mail asking whether the "final document" was "ready for signatures?". Mr McGregor advised that it was "with our internal lawyers" and he would "chase it up again today". On 10 September 2007 Mr McPherson telephoned Mr McGregor to follow up Mr Gordon's e-mail in relation to the contract. Mr McGregor advised Mr McPherson that the lawyer looking at it had been away on sick leave but that he would follow it up immediately. Capacity Imbalance for 2008 66 The Hunter Valley Coal Producers' Working Group (PWG) was set up in January 2007 to provide an informal discussion forum between coal producers, the rail operators and PWCS to discuss ways to address the issue of capacity imbalance for 2008. The Working Group could not reach agreement about how the vessel queue at Newcastle Port could be reduced and how Coal Chain capacity could be allocated. There were four allocation options proposed by the Working Group: Scenario 1 - allocation based on pro-rata of revised demand nominations for 2008; Scenario 2 - allocation based on a pro-rata of revised demand nominations for 2007; Scenario 3 - allocation based on past actual usage or demand nomination for new mines and the balance pro rated; and Scenario 4 - allocation based on pro-rata of less or revised demand nomination for 2008 or aggregate rail contract for 2008. 67 In about August 2007, as a result of legal advice regarding potential TPA issues arising from PWG's activities, PWG agreed that an independent organisation should be engaged to assist in reaching a compromise solution in relation to the 2008 allocations. PricewaterhouseCoopers (PwC) was appointed to review the proposed allocation methods. PwC entered into a Confidentiality Deed Poll with PWCS, Queensland Rail and the defendant under which it was required to review each coal producer's contracted coal loading requirements for 2008 with PWCS and contracted rail haulage requirements for 2008 with Queensland Rail and the defendant, known as the "Contracted Volume". It was also required to calculate for each coal producer, the lesser of the sum of that producer's contracted volumes with Queensland Rail and or the defendant or the producer's contracted volume with PWCS, known as the "Minimum Contracted Volume". It was also required to calculate the amount, known as the "Reduction", by which the producer's contracted volume with PWCS, Queensland Rail or the defendant would need to be reduced to ensure that each producer's contracted volume with PWCS and the sum of each producer's contracted volume with the defendant and Queensland Rail was equal to the amount of the Minimum Contracted Volume. 68 The Deed Poll defined "Contracted Volume" as follows:

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74 On 12 September 2007 Mr McGregor telephoned Mr McPherson to advise him that he was extremely upset that the plaintiff had provided PWCS "with a copy of the letter of offer signed by Donaldson on 22 June 2007". Mr McPherson explained to Mr McGregor that he believed that the only way he could substantiate that the plaintiff had an agreed tonnage position for 2008 was to provide that letter. Mr McGregor said that the zero allocation for the plaintiff was not relevant as option 4 would not "get up" and that the defendant was taking legal advice to argue against the strict interpretation of the definition of contract adopted by PwC. 75 After further e-mails asking for the production of the final document Mr Gordon wrote to Mr McGregor on 2 October 2007 in the following terms: We returned the final document to you on about the 3rd September for processing. For the last three weeks you have been indicating it would be ready "next week". As the final changes were minimal and agreed to, I don't understand what the hold-up is in getting the signed copies to us. Please advise! 76 On 2 October 2007 Mr Irwin wrote by e-mail to Mr Gordon in the following terms: In the context of where we are regarding capacity allocation in 2008 and the discussions which have been ongoing during over the last 6-8 weeks, we are in a position to be signing any agreements until these issues are resolved. I understand discussions have been had between PN and Donaldson and documents exchange, but we need to continue the current process before finalising any new agreements. We will be in touch to discuss further with Donaldson shortly. 77 Also on 2 October 2007 Mr McPherson responded to Mr Irwin's e-mail in the following terms: I am overseas at present, but will be back at the end of the week. I do not see the relationship between current industry discussions and the execution of our contract. Donaldson and PN have agreed a position and I expect a document to be executed as agreed. Donaldson will not accept being discriminated against because of issues outside of its control. 78 On 3 October 2007 Mr McGregor wrote to Mr Gordon in the following terms: Pacific National (PN) has been a participant in discussions with the Hunter Valley Coal producers Working Group (PWG) assessing cold chain capacity and demand imbalances for 2008. To further inform discussions at the next PWG meeting I would appreciate if you can advise your Nominated Annual Tonnes within the context of rail haulage agreement, for 2008 calendar year by Friday 5th October 2007. (I recognize that the period for nomination in agreement is different to calendar years, but request your nomination for this period to simplify discussions). This nomination should not exceed your binding 2008 Port nomination tonnage. After receiving this information from all customers, PN will contact you to discuss your nomination prior to the next PWG meeting scheduled for October 10th 2007. 79 On 4 October 2007 Mr Gordon advised Mr McGregor that the plaintiff's 2008 calendar year tonnage for the rail contract was 2.5 million tonnes. 8 October 2007 meeting 80 On 8 October 2007 there was a meeting between the plaintiff and the defendant. Present at the meeting for the plaintiff were Mr McPherson and Mr Gordon and for the defendant Mr McGregor and Mr Irwin. Mr Gordon's recollection of what was said at the meeting included the following: McPherson: Are you telling is that you are not going to honour our agreement? Irwin: We are not trying to get out of the agreement. I am just trying to explore if a compromise solution for scenario four is possible. We could offer you 1.3 million tonnes for 2008. McPherson: That is a 'go broke' number for us. What's the basis for that number? Irwin: I can't say. The problem is the capacity of the port, not the railway. The rail providers could carry up to 120 million tonnes. McPherson: your compromise solution is not acceptable to Donaldson. We want you to sign the formal contract that has been agreed. McGregor: I'll follow up the contract. 81 Mr McPherson's recollection of the conversation was as follows: Irwin: We are trying to broker a compromise solution for the coal producers who have been adversely affected by scenario 4. Donaldson will be offered 1.39 million tonnes, but that's going to be scaled back to 1.1 million tonnes by PWCS. McPherson: Is this mean that you are not going to honour what you agreed to in the letter of offer that we accepted in June? Are you saying that you are now not going to execute the contract? Irwin: No, that's not the case at all. What I am saying is that the additional industry knowledge that came out of the PWG process means that we need to review our position in the Hunter Valley. McPherson: I am not aware of any new information coming out of that process which materially changes anyone's understanding of the industry and the capacity issues. Irwin: Well, how much do you need then for next year? McPherson: We need 2.5 million tonnes. This has been our position all along. It has not changed. We cannot support a position that would give substantially less. So, when will we get our contract? McGregor: I will follow it up straight away. 82 Mr Irwin gave affidavit evidence of his recall of the conversation at that meeting as follows: Irwin: What is your position on true tonnages for 2008? McPherson: We need 2.5. Irwin: The system capacity is only 95, we are not able to give the 2.5. McPherson: 2.5 is like a drop dead, otherwise we have a shut the mine. Irwin: We want to haul Donaldson, but we have to come up with a solution and a compromise. Everybody is being scaled back. Everybody wants more than the system can provide. McPherson: We will take this further. Where is the contract? Irwin: It's been held up as some people have been away. It is difficult for us to finalise any contract given that we don't know what the allocations are going to be for 2008. I will find out where it is at. Proceedings commenced 83 After these discussions and further communications the parties were unable to move forward consensually and the plaintiff commenced the litigation on 28 November 2007 by the filing of a Summons and Commercial List Statement. Having regard to the urgency of the matter and the commercial importance for the parties to have a speedy resolution of their differences the matter was heard on a final urgent basis on 10 December 2007 when Mr FM Douglas QC leading Mr DB Studdy SC appeared for the plaintiff and WG Muddle SC leading Mr IJ Stanley appeared for the defendant. Consideration 84 The applicable legal principles in determining whether or not the parties entered into a binding contract are not in issue. The meaning of the terms of a contractual document are to be determined by what a reasonable person would have understood them to mean and requires consideration of the text, the surrounding circumstances known to the parties and the purpose and object of the transaction: Toll (FGCR) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 per Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ at 179, par [40]. This is a commercial transaction of some significance and although the test identified in Toll refers to a "reasonable person" it is appropriate in this case to apply the test of the reasonable "businesslike" person: McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 per Gleeson CJ at 589, par [22]. 85 The plaintiff submitted that the evidence establishes that the parties intended to be immediately bound to perform the Haul Agreement when the letter of 22 June 2007 was signed on 27 June 2007. It was also submitted that the evidence establishes that at the same time the parties intended to have the terms restated in a form that would be fuller and more precise but not different in effect. In this regard it was submitted that this agreement was within the first class referred to in Masters v Cameron (1954) 91 CLR 353. Dixon CJ, McTiernan & Kitto JJ said at 360:

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I do not consider that any implication of an intention not to be legally bound which might otherwise be suggested by the words "agreement in principle" can prevail over the clear import of the words "legally binding". The intention of the parties to be legally bound by their consensus is sufficiently clearly expressed to take the case out of the third class of cases referred to in Masters v Cameron (1954) 91 CLR 353 at 360-362, that is, "…cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own" (at 361). This is in reality a fourth class of case additional to the three mentioned in Masters v Cameron as recognised by Knox CJ, Rich J and Dixon J, in Sinclair, Scott & Co v Naughton (1929) 43 CLR 310 at 317, namely, "…one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms". 87 The plaintiff submitted that the second paragraph of the letter of 22 June 2007 acknowledged the "key agreement terms, principles and rates" which were to be included in the detail of a contractual agreement. It submitted that this sentence is particularly significant as all essential terms have been agreed including the term of the agreement, the haulage volume, the capacity obligations, the capacity charges, the volume rebates, haulage rates and delay charges. The plaintiff submitted that this statement in the second paragraph must be read with the expression "(subject to resolution of the detailed contractual terms)" on the last page of the letter. It was submitted that in other words, there would be an agreement which would contain more detail but it would not be different in effect from the key terms. It was also submitted that the fact that the defendant required the letter to be signed by an authorised officer of the plaintiff was to confirm the terms of the agreement. 88 The defendant submitted that the following passage of Mahoney JA's judgment in Air Great Lakes Pty Limited v KS Easter (Holdings) Pty Limited (1985) 2 NSWLR 309 at 326 should guide the determination of the question before the Court:

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92 Mr Muddle submitted that one relevant circumstance for consideration is that the plaintiff was being charged the rates applicable in the 2004 Rail Haul Agreement and not the rates identified in the letter of 22 June 2007. Mr Douglas submitted that the history between these parties demonstrates that when new agreements are negotiated and indeed reached between them, they have previously allowed the rates applicable in former contracts to apply during the negotiation phase and even after the new agreement is reached. When the new agreement is signed later than the commencement date the parties have conducted a form of reconciliation so as to apply the new rates from the commencement date of the new agreement rather than from the date the agreement was signed. This approach is supported by the conversation in which Mr McGregor suggested that the terms of the 2004 Agreement would apply until a new agreement was reached, as opposed to when it was signed. This history between the parties seems to me to render the circumstance of the 2004 rates being applied as a neutral factor in the determination of whether the parties reached a binding agreement. 93 The defendant also relied heavily on the fact that the letter of 22 June 2007 referred to both Bloomfield and the plaintiff. Mr Muddle submitted that this was not a document setting out an agreement, if that is what it is, between two parties but between three parties. He submitted that there was no authority for anyone from the plaintiff to sign the letter on behalf of Bloomfield. In those circumstances it was submitted that it is not possible that any binding agreement could have been reached in the absence of one of the proposed contracting parties. 94 There is no doubt that the original plan put forward by the defendant was to combine the volume of coal for export produced by both Bloomfield and the plaintiff. That much appears from the contents of the correspondence prior to June 2007 and the fact that the Haulage Proposal of 20 March 2007 was addressed to both Bloomfield and the plaintiff. The amended proposal in May 2007 was addressed to the plaintiff alone, but it is clear that the content of the letter of 22 June 2007 included Bloomfield. When the plaintiff signed the letter on 27 June 2007 it signed it on its own behalf and not on behalf of Bloomfield. It agreed to the terms, rates and principles set out in that letter which included 500,000 tonnes of Bloomfield's coal to be transported by the defendant and 2 million tonnes of the plaintiff's coal to be transported by the defendant for the first year rising to a combined 4.15 Mt by 2010 "subject to annual confirmation". It is clear that the parties agreed that both the plaintiff and Bloomfield would be parties to the agreement with the defendant, in particular having regard to the amendment made to the section on "Vessel Demurrage" to include the words "dependant (sic) on the party that has been affected". 95 Although there is no separate letter signed by Bloomfield in evidence the correspondence between Mr McGregor and Mr Taylor of Bloomfield on 9 August 2007 leads to the irresistible conclusion that Bloomfield agreed to the terms of the 22 June 2007 letter. In his e-mail to Mr McGregor dated 9 August 2007 Mr Taylor thanked Mr McGregor for the draft contract and noted that "some of the commercial terms contained in the original letters of offer" were not reflected in the draft contract. That e-mail included the following: It was my intention that all terms agreed between DC/BC and PN would be reflected in the RC contract, as we are being viewed as one group from PN's viewpoint. 96 The reference to "RC" is to "Rix Creek" referred to in earlier correspondence, however the significance of Mr Taylor's statement is that he wished to have the draft contract reflect what had been "agreed" between "DC", meaning the plaintiff, "BC" meaning Bloomfield and "PN" meaning the defendant. Mr Taylor also requested Mr McGregor to remove references to the defendant evidencing Bloomfield's agreement that it was to contract with the defendant individually and separately from the plaintiff. Mr Taylor's subjective feelings are not relevant. It is the fact that Mr Taylor referred what had been "agreed" that is to be weighed in the balance when considering whether an agreement was entered into in June 2007. That is the limit of the use to which this evidence can be put in applying the principle referred to in Brambles in relation to the utilisation of post-contractual conduct. 97 Mr McGregor's evidence was that in "early July 2007" he said to Mr Gordon: "We are going to have to separate agreements between Pacific National and Donaldson, and Pacific National and Bloomfield". The affidavit evidence used the words "to separate agreements" and not "two separate agreements". Mr McGregor was cross-examined about this statement and Mr Douglas did not use either the word "to" or "two" in his question, to which there was no objection. That cross-examination was as follows (tr 32): Q. I just want to deal with one aspect of your evidence. In par 42 of your affidavit you depose to a conversation you had with Mr Gordon in or about early July 2007 in which you recount that you said words to the following effect "We are going to have separate agreements between Pacific National and Donaldson and Pacific National and Bloomfield" and he's said to have responded "That's fine with me but the rates have to stay the same as in the in principle agreement" and you have yourself responding "no problems". Do you recall that? A. Yes, I do.

[142]

98 It was suggested to Mr McGregor in cross-examination that the conversation may have occurred earlier than July 2007 but he resisted that suggestion (tr 32). Once the plaintiff agreed to the defendant separating Bloomfield and the plaintiff into separate agreements with it, or put another way, the defendant having two separate agreements, one between it and the plaintiff and one between it and Bloomfield, the plaintiff and the defendant moved forward in drawing up what was referred to in the letter of 22 June 2007 as the "contractual agreement". 99 The evidence establishes that this conversation occurred prior to 13 July 2007. It was on 13 July 2007 that Mr McGregor wrote to Mr Gordon enclosing the draft contract between the plaintiff and the defendant advising that he had sent a "separate agreement" to Bloomfield based upon the agreement between the plaintiff and the defendant. 100 The text or language used by the parties in the alleged agreement is of significance. The first paragraph of the letter is a clear indication that the parties have concluded their discussions and negotiations. The second paragraph of the letter makes it abundantly clear that the parties have agreed on the "key" terms and I am satisfied that they intended that these were the essential terms of their agreement. That same paragraph makes it very clear that those essential or "key" terms would not be changed. That much is clear from the use of the words "which will be included in the detail of the contractual agreement being developed". In its context, the word "developed" simply means that the parties will prepare the document. It would defy common sense, commercial or otherwise, to suggest that these parties having spent three months concluding their discussions and negotiations, would then agree to recommence their discussions and negotiations to develop some other form of agreement. Negotiations had concluded and agreement had been reached. All that was being developed or prepared was the "contract agreement" (as referred to in the letter) or the form of formal contract referred to in the letter as the "detailed contractual terms" of the agreement as reached. The reliance the defendant placed on the use of the word "developed" to submit that it demonstrates a lack of agreement is in my view without foundation. 101 In the final paragraph of the letter the plaintiff was asked to confirm the "in principle" agreement to the terms and the rates "(subject to resolution of the detailed contractual terms)" by having an "authorised person" sign, date and return the letter. Mr Muddle submitted that this language demonstrates that the parties did not intend to be bound by the terms of this letter and that the terms of the letter were effectively "subject to contract" or put another way, the parties would not be bound by the terms of this letter until the contract was signed. I disagree. I am of the view that the language used both in the first paragraph of the letter referring to the "in principle agreement" and this language in the final paragraph support a finding that the parties intended to be immediately bound by the terms of the in principle agreement whilst they prepared a more "detailed" document reflecting their agreement. The formality of having an "authorised person" within the plaintiff sign this document, date it and return it to the defendant, supports the conclusion that the parties wished to have the agreement documented so that they knew the applicable "key" terms then and there whilst the more "detailed" document was being "developed" or prepared. 102 The post-22 June 2007 conduct and the surrounding circumstances are also of significance. The parties utilised the defendant's pro forma agreement that had been used for the 2004 Rail Haul Agreement. As appears from the above history the defendant forwarded both a clean copy and a marked up copy to the plaintiff suggesting that amendments had been made to the pro forma document to reflect what had been agreed. On 20 July 2007 Mr Gordon complained about the difficulty in identifying the amendments that had been made to the document and suggested to Mr McGregor that to avoid wasting time and money he should simply amend the document "to reflect our agreed items". On the same day Mr McGregor agreed that there should be no changes "to what we have agreed". On 23 July 2007 Mr Gordon agreed that there "should be no changes" although acknowledging that in reality some had been made in the document that had been prepared or developed. His e-mail went on to press Mr McGregor to return the language to that which had been "previously agreed". This language is in my view supportive of a finding that the parties decided that they would be bound by the terms of the agreement they reached on 27 June 2007 by the plaintiff signing the defendant's letter. 103 The language used in the conversation in early July 2007 supports a finding that the parties agreed that as from that date they would be bound by the terms in the letter of 22 June 2007 as it applied to the plaintiff and the defendant to the exclusion of Bloomfield. The defendant agreed with the plaintiff that the "rates" as they appeared in the agreement were not to change notwithstanding the exclusion of Bloomfield. The term was "from July 2007", that is commencing in July 2007 for three years. The volume the defendant agreed to was not 2.5mta for the plaintiff, but only 2mta. That is because the 500mta was applicable to Bloomfield. 104 Mr Muddle submitted that the heading to the table in the letter "85% Capacity Commitment (If nominated)" demonstrates that the parties had not reached agreement because no nomination had been made. I disagree with this submission. The parties agreed to proceed with the 75% capacity commitment, however at some stage in the future there may be a nomination to 85%. This was a contract formed in very difficult commercial circumstances where the intervention of PWCS with its annual allocations of tonnages required flexibility in the parties' contractual relationship. It is apparent from the correspondence, as I have alluded to earlier, that it is not the Coal producers or the rail operators who lack capacity, but rather the Port authority. These parties were aware that whatever they decided by way of volume might have to be adjusted by reason the intervention of the PWCS allocation of tonnages. That is reflected in the section on Volume wherein they agreed that the amounts were "subject to annual confirmation". In the circumstances, the fact that those tonnages may be vulnerable to the intervention of PWCS does not mean that the parties did not agree to be bound by the terms of the agreement made on 27 June 2007 as varied in early July 2007. 105 Mr Muddle made a further submission that because the parties had not identified the Maximum Loading Time within the 75% table in the letter they had not agreed on all the terms of their bargain. Once again I disagree with that submission. The essential and key term in this regard was the agreement as to the "75%" capacity and that these rates would apply. The key term on these rates provided that the "adjustments" would be made on 1 January each year with the basis of any change being made available prior to the change occurring. The section of the letter dealing with "Load Point Performance" refers to the "set levels" (as opposed to "level") of loading performance as stipulated in agreed rates table". Although Mr Muddle suggested that "a" level had to be agreed, this wording does not to my mind require such a stipulation or agreement. The machinery provisions in this agreement mean that in the first quarter performance will dictate the haulage rate. The time it takes for loading will dictate the rate and thereafter the adjustments will be made pursuant to the key terms. Alternatively the parties may adjust or choose the rates dependent upon the actions taken by PWCS. 106 The plaintiff also relied upon the statement made by Mr McGregor on 12 September 2007 in his rebuke of Mr Gordon for sending PWCS "an agreement between PN and Donaldson" because it was "confidential information". I am satisfied that the plaintiff is entitled to use this statement in support of its submission that the parties had reached an agreement, however the earlier references to their communications in which they were striving to ensure that the more "detailed contractual terms" reflected what had "been agreed" seems to me to be more powerful.

At a glance

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Before

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Judgment (145 paragraphs)

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Legislation Cited (1)

Cases Cited (12)

Cited By (1)