Enron Australia Finance Pty Limited (in Liquidation) v Integral Energy Australia

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Tuesday 20 August 2002 ex tempore Revised 4 September 2002

50042/02 Enron Australia Finance Pty Limited (in liquidation) & Anor v Integral Energy Australia JUDGMENT

The applications for leave in respect of further or amended pleadings 1 These proceedings were fixed for hearing to commence on 19 August 2002. An immediate issue has arisen concerning the pleadings. Both parties have live applications before the Court in this regard. The plaintiffs' application for leave to amend the amended summons 2 The amended summons representing the present state of the pleading was filed on 24 July 2002. The summons identifies the issues likely to arise as: · The proper meaning of "quotations" as that term is used in the definition of "Market Quotation" in clause 14 of the ISDA Master Agreement dated 10 September 1999 between Enron and Integral. · Whether the quotations given to Integral by Macquarie Risk Advisory Services, Ernst & Young (Vic), Accenture Australia Ltd and Deloitte Touche Tohmatsu are "quotations" within the proper meaning of that term. 3 The summons identifies the nature of the dispute as follows: · The plaintiff (Enron) and the defendant (Integral) entered into a series of electricity swap contracts under an umbrella agreement known as the ISDA Master Agreement. · In December 2001 Enron was placed in administration. · Integral then purported to "close out" all outstanding electricity swap contracts by appointing certain experts to determine the value of the outstanding electricity swap contracts under the ISDA Master Agreement. · Three of the four experts: (a) valued the outstanding contracts in which Integral was the "seller" at the prevailing "bid" or "buy" price

(b) valued the outstanding contracts in which Integral was the "buyer" at the prevailing "ask" or "sell" price. · Enron contends that under the ISDA Master Agreement the experts were required to value the outstanding contracts at the prevailing market price, being a price at which a willing but not anxious buyer and seller would replace the outstanding contracts. · The consequence of the valuation methodology adopted by those three experts, rather than the methodology contended for by Enron and adopted by the remaining expert, was to arrive at "close out" values which favoured Integral. 4 Outside of paragraphs which it is not presently necessary to repeat, the plaintiffs' Contentions: · identified the parties as having been relevantly engaged in the business of entering into electricity swap contracts; · explained what electricity swap contracts were and defined relevant terms used in negotiations to enter into such contracts between potential fixed-price buyers and potential fixed-price sellers; · referred to the particular ISDA Master Agreement entered into between the parties to govern electricity swap contracts to be entered into between them and identified relevant terms; · pleaded that on its true construction each "quotation" by a Reference Market-maker used as the basis for determining the Market Quotation must be for the amount that, in the opinion of the Reference Market-maker, would be paid to the Non Defaulting Party by the Reference Market-maker (expressed as a negative number) or would be paid by the Non Defaulting Party to the Reference Market-maker (expressed as a positive number) to enter into a Replacement Transaction between them, being an amount at which the Replacement Transaction would be done by both. · Covered various matters of factual background and then importantly pleaded: · that the quotations provided by three of the four Reference Market makers ["the relevant quotations"] for the purposes of determining Market Quotation for the outstanding transactions, were the amounts which, in the opinion of those Reference Market Makers, were the bid price as at 5 December 2001 for each of the outstanding sell transactions and the ask price as at 5 December 2001 for each of the outstanding buy transactions; · that in the premises the relevant quotations were not "quotations" in accordance with the definition of Market Quotation in clause 14 of the agreement and are liable to be set aside; · that the quotation provided by one of the four Reference Market-makers [Accenture Australia Ltd] was a "quotation" in accordance with the relevant definition and is not liable to be set aside; · that Integral used the four quotations including the relevant quotations as the basis for determining $2,180, 703.66 as the amount payable by Enron to Integral under section 6 (e) of the agreement; · that in the premises that amount is not payable by Enron to Integral under section 6 (e) of the agreement. 5 The relief sought in the amended summons was · A declaration that under the ISDA Master Agreement ("Agreement") between Enron Australia Finance Pty Ltd ("Enron") and Integral Energy Australia ("Integral"), on its true construction, each quotation from a Reference Market-maker used as the basis for determining the Market Quotation must be for the amount that, in the opinion of the Reference Market-maker, would be paid to Integral by the Reference Market-maker (expressed as a negative number) or would be paid by Integral to the Reference Market-maker (expressed as a positive number) to enter into a Replacement Transaction between them, being an amount at which the Replacement Transaction would be done by both of them. · A declaration that the quotations ("relevant quotations") provided to Integral by the following Reference Market-makers are not "quotations" in accordance with the definition of Market Quotation in clause 14 of the Agreement: (a) William Dolan of Macquarie Risk Advisory Services (b) David Robinson of Ernst & Young (Vic)

(c) Hayden Llewellyn of Deloitte Touche Tohmatsu in that they are not for the amount, or the Reference Market-maker's opinion of the amount, at which the Replacement Transaction would have been done as required by the Agreement. · An order setting aside the relevant quotations.

6 The terms of the amendments now sought to be made to the summons fall into two categories. The first category 7 The first category, if permitted, will include a pleading of two implied terms and a further pleading covering the same subject matter. 8 The alleged implied terms of the agreement [see paragraph 7A] are that: · a Market Quotation by a reference Market-maker acting under the agreement must be given independently and without partiality to either of the parties; · a Market Quotation which is not so given does not constitute a quotation within the terms of the agreement. 9 The particulars assert that the term is implied by law and from the other terms of the agreement. 10 The further pleading covering the same subject matter, if allowed, will plead [see paragraph 17A] that the quotations provided by two of the four Reference Market makers [Deloitte Touche Tohmatsu and Macquarie Risk Services] were given: · other than independently and without partiality; · in collaboration with the defendant but not the plaintiff.

The particulars repeat particulars already pleaded in the existing paragraph 18 and further include allegations that go to communications between the Reference Market Makers and Integral including allegations that representatives of the Reference Market Makers: · sought and received from a representative of integral the valuation number which Integral was expecting overall but made no such inquiry from Enron [the allegation is made respect of Macquarie] · were parties to a retainer letter that provided for the methodology to be used by the Reference Market Maker without any input from the plaintiff with respect to that matter followed by the provision by the Reference Market-Maker to Integral, but not to the plaintiff, of drafts of its "quotations" for discussion, the allegation extending to allege that the Reference Market Maker had Integral, and not Enron, review its calculations [the allegation is made in respect of Deloitte]. The second category 11 The second category, if permitted, will include a pleading that the quotations provided by two of the four Reference Market Makers namely Deloitte and Macquarie are not and are not expressed to be a determination of the amount that would be paid to or by the Reference Market-maker respectively, so that in dealing with the applications for leave to amend there can be no doubt but that the first category amendments fall outside the issues telegraphed to be litigated both before the List Judge when the proceedings were fixed to be heard on the basis that the construction issue would precede the hearing of quantum issues and also fall outside the communications which passed from the plaintiff's solicitors Blake Dawson Waldron and the defendant's solicitors Corrs Chambers Westgarth. The communications of particular significance are the facsimile from Corrs of 29 July 2002 when Blake's were asked to confirm: · that the only reason why the plaintiff stated that the amount in question was not payable under section 6 (e) of the agreement was that the Reference Market makers from Macquarie, Ernst and Young and Deloitte did not provide a quoted in accordance with what the plaintiff contended was the true construction of the definition of Market Quotation in the agreement · the defendant's understanding that other than the quantum of the three disputed quotations, the plaintiff was not challenging the Statement itself (ie the defendant's letter to the plaintiff dated 17 January 2002), the service of the Statement, or the calculations or methodologies used to determine the amount payable under section 6 (e) of the agreement and was not challenging the treatment of interest, out-of-pocket expenses or settlement cash flows. 12 The response to this communication from Blakes of 30 July 2002 included a statement to the following effect:

"This proceeding does not deal with matters beyond the meaning of Market Quotation and the validity of the quotations provided by Macquarie, Ernst and Young and Deloitte. Enron seeks in the proceeding only declaratory and consequential relief". Reference was also made in the letter to the possibility that separate proceedings may require to be pursued in relation to particular other matters in respect of which the plaintiff remained silent, should those matters not be able to be settled following " this proceeding ". 13 This is not an occasion for a very close examination of the principles which govern applications for leave to amend. Idoport Pty Ltd & Anor v National Australia Bank & Ors [2000] NSWSC 1141, paragraphs 42, 43, 44 and 45, broadly treated with State of Queensland v J L Holdings Pty Ltd (1997) 189 CLR 146 and the just, quick and cheap overriding purpose Supreme Court Rule as follows:

In State of Queensland v J L Holdings Pty Ltd (1996) 189 CLR 146 the High Court carefully analysed the development up to January 14 1997, of approaches taken to the exercise of the discretion to permit amendments to pleadings. Generally that judgment of the High Court, without purporting to be exhaustive, serves to set out the types of consideration which ought to direct the mind of the decision maker on such applications. However, the court accepted that the trial judge is afforded a large discretion in relation to the exercise and that it would be unwise and contrary to principle to seek to fetter that discretion with rigid rules. The special significance of the decision is to direct the mind of the decision maker to many of the considerations which may be taken into account in exercising the discretion and to emphasise, if it needed to be emphasised, that justice is the paramount consideration in determining such an application.

J L Holdings dealt, of course, with the particular circumstances before the court and whilst the general statements to be found in the joint judgment of Dawson, Gaudron and McHugh JJ and in the judgment of Kirby J. assist a decision maker considerably, the obvious fact is that each and every case in which an application for leave to amend is pursued requires the court to deal with the special and peculiar matrix of circumstances which obtain at the material point in time in the litigation in respect of which such application is pursued.

To my mind the following statements of principle affirmed in JL Holdings are fundamental and clearly and succinctly express the general approach to be taken:

(a) "Now, I think it is a well established principle that the object of Courts is to decide the right of the parties, and not to punish them for mistakes they make in the conduct of their cases by deciding otherwise than in accordance with their rights. Speaking for myself, and in conformity with what I have heard laid down by the under division of the Court of Appeal and by myself as a member of it, I know of no kind of error or mistake which, if not fraudulent or intended to overreach, the Court ought not to correct, if it can be done without injustice to the other party. Court's do not exist for the sake of discipline, but for the sake of deciding matters in controversy, and I do not regard such amendment has a matter of favour or of grace" [Cropper v Smith (1884) 26 Ch D 700 per Bowen LJ at 710]

(b) "As the defence, if established, would be a complete answer in the either action, the amendments sought should have been an amount unless it appeared that injustice would thereby have been an occasion to the respondent, there being nothing to suggest fraud or improper concealment of the defence on the part of the appellants. With the exception of the suggestion of prejudice arising in respect of the loss of the possible claim against the nominal defendant, the matters relied upon by the respondent in opposition to the amendments sought go at the most to delay and irregularity only, matters which are relevant to costs by do not constitute injustice to the respondent in the sense in which that expression is used" [ Clough & Rogers v Frog (1974) 48 ALJR 481 at 482]

A recent development in this State, which the Court is also entitled and indeed required to take closely into account, relates to Part 1 of the Supreme Court Rules as modified by Amendment No 337, which elucidates the overall objectives of practices and procedures as specified in the Rules. The overriding purpose of the Rules is to facilitate the "just, quick and cheap resolution of the real issues" in civil proceedings. The overriding purpose clause imposes an obligation on the Court to give effect to the overriding purpose when it exercises any of its powers." 14 Mr Ellicott appearing for the defendant has submitted that: · the first category amendments and in particular any allegation that the implied terms formed part of the agreement or that the quotations can be impugned as having been given other than independently and without partiality and/or in collaboration with the defendant but not the plaintiff is demurrable in the absence of an allegation of fraud, collusion, actual dishonesty or bad faith; · the amendments, even if they disclose a cause of action as presently pleaded, should be disallowed, because the case management of the proceedings and the procedures of the commercial list simply makes it presently quite out of order for these late issues to be pleaded and litigated in these proceedings. That being the defendant's stance as it seems to me if the amendments were disallowed on this ground then were the plaintiff to commence fresh proceedings in the future following the determination of these proceedings and in those fresh proceedings to plead the first category issues which had not been permitted to go forward as part of these proceedings, an Anshun question must arise in the fresh proceedings. Arguably the plaintiff could assert that it was not unreasonable for it not to have pursued the first category issues in these proceedings because it sought albeit at the last minute to do that and the application to inject the first category amendments into these proceedings being opposed and not allowed, the plaintiff should succeed in overcoming any Anshun estoppel defence in any fresh proceedings. Of course the fate of any such estoppel defence in any fresh proceedings must abide by the decision of the judge at that time in any such fresh proceedings; · in fairness to the defendant, if the first category amendments be permitted it would be necessary for the defendant to be given a proper opportunity to obtain detailed instructions and to adduce evidence. The submission in this regard is that it would be quite inappropriate for the court to permit leave to plead the first category amendments during this tranche of the final hearing and that if any leave is to be granted, it must be conditional upon an accommodation being given so that the issue would be essentially litigated on a future occasion. 15 In my view the proper exercise of the Court's discretion requires the Court to balance several considerations each of which is material and plays a part in the balancing exercise. Those considerations include: · the just quick and cheap overriding purpose rule in the Supreme Court rules; · the policy of having all disputes between parties relating to a particular subject matter, where ever possible and practicable determined in the same set of proceedings or in proceedings which, separate proceedings having been commenced, are consolidated or heard together [section 63 Supreme Court Act]; · the quite arguable regrettable circumstance and significant loose end should the first category amendments be left for determination in fresh proceedings on an Anshun estoppel argument; · the general factors to be taken into account in permitting leave to amend where this can be permitted without real prejudice to the party opposing the application for leave, which importantly here include a method, which it seems to me can be achieved, of accommodating prejudice, by permitting the first category issues unless struck out as demurrable, to be treated with as part of these proceedings, but heard on a later occasion. 16 Senior counsel for the plaintiff, Mr Hammerschlag SC, has frankly conceded that there can be no issue but that the first category issues are new and that the defendant could not be expected to properly litigate these issues in this first tranche of the final hearing. The submission, which I accept as of substance, is that these issues can be quarantined from the matters which previously were intended to be litigated during this tranche and can be properly dealt with on a future occasion but as part of these same proceedings. 17 Before leaving the first category proposed amendments, both parties have accepted that they are in a position to argue the demurrer, which is a matter of principle and which it seems to me can be properly dealt with during this first tranche of the final hearing. The second category amendments 18 Early in the opening submissions of the plaintiff it seemed that the plaintiff would seek to mobilise in relation to this category of the amendments, as well as in relation to the first category, a number of documents passing between the Reference Market Makers and Integral including handwritten notes and communications by way of the giving of instructions and the like. During argument senior counsel for the plaintiff ultimately made plain that the only evidence which the plaintiff would seek to tender in relation to the second category amendments was the actual quotations. No more and no less. That being the case it seems to me that there is no material prejudice at all to which the defendant could be said to be subject if the second category amendments are allowed in full and are allowed to be pursued as part and parcel of the first tranche of the final hearing. That amendment will be allowed [cf the reach, in any event, of the existing particulars to paragraph 18] The defendant's application 19 The defendant's application is for leave to file a cross claim. The cross-claim goes to quantum. 20 There is no question but that this cross-claim is to be heard as part of these present proceedings but on a future occasion. The Court was so informed at a directions hearing. There is no other opposition by the plaintiff to leave being granted to the defendant to file the cross-claim but only on that basis. In those circumstances that leave will be granted in an appropriate form. Orders

21 The court orders are as follows:

1. I grant leave to the plaintiff to amend the amended summons by including the allegation presently propounded in paragraph 17A of the plaintiffs proposed further amended summons, which for the purpose of the identification of it will be marked identification P2.
2. I direct that the question of whether or not the proposed further amendments seeking to plead the allegations in paragraphs 7A and 17A (a) and (b) of the proposed further amended summons MFI P2 are demurrable as not disclosing any cause of action be heard during this present tranche of the final hearing.
3. Order pursuant to the Supreme Court rules Part 31 that the following matters be heard and determined separately from all other questions for determination in these proceedings: · the questions raised by the plaintiffs Amended Summons filed on 24 July 2002 as amended by the addition of paragraph 17A (c); · the demurrer question earlier referred to as arising in terms of the defendant's opposition to leave being granted to raise the first category amendments.

4. Leave is granted to the defendant to file its cross-claim.

5. Order that this cross-claim be heard during the second tranche of the hearings of these proceedings which is to follow the handing down of judgment on the separate questions which will now proceed as part of this first tranche of the final hearing and which second tranche of the hearings, should the demurrer the unsuccessful, will include a hearing of the first category issues. 22 Costs are reserved.

I certify that paragraphs 1 - 22 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 20 August 2002 ex tempore and revised on 4 September 2002

      Susan Piggott
      Associate
      4 September 2002

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