North Queensland Pipeline No 1 Pty Ltd & Anor v QNI Resources Pty Ltd & Anor [2020] QSC 158

PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - PLEADINGS - STRIKING OUT - DISCLOSING NO REASONABLE CAUSE OF ACTION OR DEFENCE - where each plaintiff sues each defendant for sums alleged to be amounts due and owing under a gas transportation agreement - where damages for breach of contract are not claimed - where the defendants plead that "the plaintiffs had an obligation to take all reasonable steps to mitigate or minimise any loss and damage consequent upon the alleged breach" - where the defendants accept that a failure to mitigate is not a defence to an action to recover a debt - where the defendants contend that notwithstanding the form of the action as one in debt, in substance, it is an action for damages - where the defendants contend that to the extent they are liable, their only liability is for damages for breach of contract - where that contention is not presently pleaded in the defence - where the defendants accept that the plaintiffs' claims in debt are at least arguable - whether the mitigation allegations made by the defendants should be struck out for failure to disclose a reasonable defence

Callide Power Management P/L & Ors v Callide Coalfields (Sales) P/L & Ors; CS Energy Ltd v Callide Coalfields (Sales) P/L & Ors [2014] QSC 205, cited

Mann v Paterson Constructions Pty Ltd (2019) 373 ALR 1; [2019] HCA 32, cited

Plaimar Ltd v Waters Trading Company Limited (1945)

72 CLR 304; [1945] HCA 34, cited

QNI Resources Pty Ltd v North Queensland Pipeline No 1 Pty Ltd & North Queensland Pipeline No 2 Pty Ltd; QNI Metals Pty Ltd v North Queensland Pipeline No 1 Pty Ltd & North Queensland Pipeline No 2 Pty Ltd [2017] QCA 297, cited

Rothenberger Australia Pty Ltd v Poulsen (2003) 58 NSWLR 288; [2003] NSWSC 788, cited

Sunbird Plaza Proprietary Limited v Maloney (1988) 166 CLR 245; [1988] HCA 11, cited

G D Beacham QC and B O'Brien for the applicant/plaintiffs

M A Karam and P F Santucci for the respondent/defendants

[1] Each plaintiff sues each defendant for a sum alleged to be the amount due and owing to it under a gas transportation agreement ("GTA").

[2] The defendants plead that the plaintiffs failed to mitigate their loss. The plaintiffs apply to strike out the mitigation allegations on the ground that they are legally misconceived and do not disclose a reasonable defence. They say, and the defendants accept, that failure to mitigate is not a defence to a claim for monies due and owing.

[3] In response, the defendants say that, notwithstanding its form as a claim in debt for money due under a contract, the plaintiffs' claim in substance is one for damages. On that basis, they submit that it is open to them to plead that the obligation is what they describe as a "secondary liability", and the only liability to which they are exposed is a claim for damages for breach of contract. A failure to mitigate is a defence to such a claim.

[4] The plaintiffs operate a natural gas pipeline in North Queensland. On 12 May 2005 the plaintiffs entered into the GTA with Queensland Nickel Pty Ltd. Queensland Nickel entered into the GTA in its capacity as manager of the "Queensland Nickel Joint Venture" and as agent for and on behalf of the joint venture participants, who are the first defendant and the second defendant.

[5] The GTA provides for payment to the plaintiffs of certain daily and monthly service charges calculated in accordance with specified tariffs and formulas.

[6] Queensland Nickel entered into voluntary administration on 18 January 2016, and went into liquidation on 22 April 2016. The plaintiffs issued monthly invoices under the GTA and, after Queensland Nickel entered external administration, looked to the defendants to pay the 2016 invoices. The defendants eventually did so after an unsuccessful application to set aside statutory demands issued by the plaintiffs in respect of the 2016 invoices.

[7] Between January 2017 and January 2020 the plaintiffs issued further invoices. They remain unpaid.

[8] The plaintiffs' claim in this proceeding is about the defendants' alleged liability to pay the outstanding invoices. A counterclaim is made in relation to the 2016 invoices. The pleadings have recently closed and disclosure is proceeding, save in respect of the "mitigation allegations" which are the subject of this application.

[9] The claim by each plaintiff is for a stated sum "as an amount due and owing" to it.

[10] The defence filed on 9 April 2020 to the amended statement of claim advances various defences. The final defence, contained in paragraphs 59 - 62, is headed "Failure to Mitigate". It reads:

"59. In further answer to the whole of the Amended Statement of Claim, the defendants say that if any damage was suffered by the plaintiffs in consequence of a breach of the GTA by the defendants (which is denied), the plaintiffs had an obligation to take all reasonable steps to mitigate or minimise any loss and damage consequent upon the alleged breach.

1. In breach of the obligation described in paragraph 59, the plaintiffs have failed to take all such reasonable steps to mitigate their loss and are thereby barred from claiming loss and damage to the extent that such loss and damage ought to have been mitigated.

(i) The plaintiffs provide gas transportation services by providing 'capacity' in gas pipelines. Such services are capable of being re-sold or traded in order to minimise any loss flowing from a breach of the GTA.

1. Alternatively, to the extent that the plaintiffs have taken reasonable steps to mitigate their loss, they have failed to account for the same in the Amended Statement of Claim.
2. In the premises pleaded in paragraphs 59-61 herein, the defendants are entitled to:

(a) a return of all sums paid pursuant the 2016 Invoices for which the plaintiffs failed to mitigate their loss;

(b) relief from payment for the Outstanding Invoices; and/or

(c) reduction in the amount payable to the plaintiffs to the extent the plaintiffs have received other monies in mitigation of any loss arising from the matters pleaded in the Amended Statement of Claim."

The plaintiffs' arguments about the mitigation allegations

[11] As noted, the plaintiffs apply to strike out the mitigation allegations on the basis that they disclose no reasonable defence. They submit that their claim is for money due under a contract by way of a claim in debt; not a claim for damages for breach of contract. Accordingly, there is no obligation to mitigate and the mitigation allegations should be struck out because they create a false issue.

The defendants' arguments about the mitigation allegations

[12] The defendants contend that the mitigation allegations plead a reasonable defence to a claim for damages. Notwithstanding the form of the plaintiffs' claim as one for money due and owing and the plaintiffs' confirmation that they make no claim for damages, the defendants submit that the form of the plaintiffs' pleading does not determine whether it is a claim for damages or debt. They submit that the Court looks to the substance of the claim, not how the plaintiff has elected to plead its case. The substance of the plaintiffs' claim is said to be one for damages.

[13] The defendants accept the plaintiffs' submission that a failure to mitigate is not a defence to an action to recover a debt. Therefore, it is unnecessary for me to address the authorities cited by the plaintiffs that a contractual right to payment is enforceable by way of an action in debt,[1] or the authorities that an obligation to mitigate arises only where damages are claimed, and that a failure to mitigate is not a defence in an action for debt.[2]

[14] The defendants do not dispute that the plaintiffs' contention that their claim in debt is at least arguable.

[15] Based on the foregoing accepted legal principles, the plaintiffs apply to strike out the mitigation allegations on the basis that their claim is in debt. A plea of failure to mitigate is said to be irrelevant and a pleading that pleads irrelevant matter, or that raises false issues, can be struck out as being prejudicial, embarrassing or delaying.[3] At the very least, the mitigation allegations are said to be an unnecessary plea in answer to their claim in debt.

[16] The plaintiffs note that the mitigation allegations purport to be a defence to the whole of their claim. They are pleaded as a defence to their claim in debt. The mitigation allegations are not advanced in answer to an alternative claim in damages, or on the contingency that the Court finds at trial that the only claim available to the plaintiffs is one for damages.

[17] The plaintiffs add that neither the mitigation allegations, paragraph 58 of the defence nor any other part of the defence alleges that, to the extent the defendants are liable, they are only liable in respect of damages for breach of what the defendants describe in paragraph 58 of their defence as a "secondary obligation" imposed on them. This contention is argued by the defendants in their submissions, but not pleaded in their defence.

[18] The defendants submit that the mitigation allegations should not be read as a purported defence to a claim in debt, but depend on their establishing their case that the obligation in cl 41.6.3 of the GTA is in the nature of a secondary obligation, an essential precondition of which is the failure of performance by Queensland Nickel. This is said to have been clarified in correspondence, and also to be pleaded in paragraph 2(c) of their reply to the plaintiffs' answer to counterclaim which reads:

"(c) even if, which is denied, the defendants are liable to pay any amount to the plaintiffs, such amount is by way of damages for breach of the GTA, in respect of which the plaintiffs had an obligation to mitigate any loss suffered and will be barred from claiming any damage to the extent that such loss ought to have been mitigated."

Assumptions made in favour of the defendants for the purpose of the application

[19] The mitigation allegations are pleaded, as the plaintiffs say, to be a complete defence in the event the plaintiffs otherwise establish that they have a claim in debt. The mitigation allegations are not made contingent on an assertion in the defence that the only claim available to the plaintiffs by virtue of cl 41.6.3 is one for damages.

[20] The defence does not elsewhere allege that, to the extent that the defendants are liable, they are only liable in respect of damages for breach of a "secondary obligation". Paragraph 58 of the defence, which is headed "No liability until performance by Queensland Nickel determined", pleads that:

• (a) to the extent cl 41.6.3 imposes obligations on the defendants, it does so only as a secondary obligation, an essential precondition of which is the failure of performance by Queensland Nickel;
• (b) to trigger the obligation in cl 41.6.3, there must be a failure to perform by Queensland Nickel, requiring the plaintiffs to first pursue Queensland Nickel;
• (c) the plaintiffs have pursued Queensland Nickel by proving in its liquidation;
• (d) if (which is denied) the defendants "have a liability to guarantee the obligations of Queensland Nickel", it is not possible to ascertain the extent of any failure until the liquidators have adjudicated on the proof of debt and made a payment to creditors;
• (e) there is no failure to perform on the part of Queensland Nickel until the above steps have been completed, with the effect that the defendants have no liability until such failure to perform has occurred.

[21] The plaintiffs respond to paragraph 58 by:

• (a) denying the defendants' construction of the GTA and saying that the clause imposes a primary liability, or a liability to pay that is not contingent on failure of performance by Queensland Nickel;
• (b) admitting that they have lodged proofs of debt with the liquidators of Queensland Nickel without prejudice to their rights to recover those sums from the defendants;
• (c) denying the conclusion in (d) because, upon the premise that the defendants have a liability only as guarantors (which is denied) Queensland Nickel has not made any payment in respect of the invoices, has therefore failed to perform the payment obligation and this triggers the liability of the defendants to pay.

The plaintiffs' claim and the defendant's argument about its form

[25] The plaintiffs' claim is pleaded as one for an amount due and owing under a contract.

[26] That the plaintiffs' pleaded claim is in debt, not damages, could not be clearer. It is apparent from the contents of their pleading, the prayers for relief and the plaintiffs' submissions in which they state:

[27] The plaintiffs do not plead an alternative claim for damages for breach of contract, let alone a claim for damages for breach of what the defendants describe as a secondary obligation akin to the obligation of a guarantor.

[28] The plaintiffs' assertion that they have a claim in debt does not necessarily make it so. Whether or not they are owed money by the defendants under the GTA is to be adjudicated at trial.

[29] I accept that a plaintiff is not permitted to mischaracterise the true nature of its claim. For instance, if a plaintiff's claim for breach of contract can only be one for unliquidated damages, it is not entitled to a judgment for the price.[4] The proper characterisation of a claim as one for "liquidated damages" or not may arise in certain contexts, such as an indemnity under a liability policy which excludes "liquidated damages".[5] The choice of a claimant to bring a particular form of claim does not determine that it has an entitlement to a judgment for the form of relief that has been claimed.[6] That a plaintiff asserts that it has a claim in debt rather than damages (or vice versa) does not determine that matter. A party is, however, entitled to advance its claim in the form it chooses (unless the claim is liable to be struck out as not disclosing a reasonable cause of action or on some other basis). As a consequence, claimants make strategic choices to pursue one cause of action rather than another, such as a claim in contract rather than in negligence (or vice versa).

[30] In this case, the plaintiffs made a choice to pursue a claim for the amount alleged to be due and owing to them under the GTA. The defendants wish to argue that, upon the proper interpretation of cl 41.6.3 and the application of a controversial view of the law,[7] the plaintiffs' only claim is one in damages. However, they do not apply, for reasons which should be obvious, to strike out the plaintiffs' debt claim. They do not assert that the plaintiffs do not have at least an argument that the defendants' obligation is to pay an amount due under the contract.

[31] If at trial the plaintiffs fail to establish their pleaded claim for monies due and owing under the contract, then that will be the end of their claim. They make no alternative claim for damages. supports the proposition that a claim that is litigated as a claim for an amount due and owing, and which is not litigated as an action for damages, cannot support a judgment for damages.

The defendants' unpleaded defence that the plaintiffs' only claim must be one in damages

[35] In my view, the defendants should be permitted to plead in an amended defence that, to the extent they are liable under cl 41.6.3, it is only in respect of damages for breach of what they allege is a secondary liability.

[36] The problem is that the current defence does not plead that their only possible liability is in respect of damages. Paragraph 2(c) of the reply to the plaintiffs' answer to counterclaim filed on 10 December 2018 comes closer to doing so.

[37] In expressing the view that the defendants should be permitted to plead the defence rehearsed in their submissions that any liability which they may have is only in respect of damages, I do not wish to be taken as suggesting that such a defence has any substantial merit. My provisional view is that it lacks merit. Briefly stated, and for reasons more fully developed in the plaintiffs' submissions in reply:

• Clause 41.6.3 is cast in terms of "all liability to pay, or cause to pay, an amount of money";

• Clause 41.6.3(b) has been construed as imposing a liability to pay on the defendants for charges due under the GTA;[9]
• The language of cl 41.6.3 is suggestive of a primary liability upon the defendants for the payment of money, rather than a secondary liability;
• If, however, the clause is construed as giving rise to a secondary liability akin to a guarantee, based upon the authority of Sunbird, the subject of the guarantee is payment of a debt or a sum of money which has accrued due.

[38] Notwithstanding my reservations about the merit of the argument advanced by the defendants in their submissions, being an argument which is not clearly or sufficiently raised in their current defence, I presently see no prejudice to the plaintiffs in permitting the defendants to plead what they assert is an arguable defence.

[39] It is important to recall the subject of the application. The application is to strike out mitigation allegations in answer to a claim for an amount which is alleged to be due and owing to each plaintiff by each defendant under the GTA, being a claim which is at least arguable.

[40] This is not an application by either party to determine the presently unpleaded argument that, contrary to the plaintiffs' arguments about the liability imposed on the defendants by virtue of cl 41.6.3 and the application of the leading authority of Sunbird, the defendants' only liability under cl 41.6.3 is one in damages.

[41] The application is not apt to determine that question, which is not properly raised by the defendants' pleadings, but which is advanced in submissions. The plaintiffs would have it that such a defence is without merit and foreclosed by the binding authority of Sunbird and other authorities which did not embrace the approach of Lord Diplock in Moschi v Lep Air Services Ltd. The rehearsed, but unpleaded, contention of the defendants is not the target of the plaintiffs' application, even though the plaintiffs have addressed its substance for completeness in their submissions in reply. The parties' positions are that it is not necessary in order to determine the strike out application to resolve the issue of whether cl 41.6.3 of the GTA creates an obligation to pay a debt or a sum of money which has accrued due. I agree.

[42] In my view, the defendants' argument raises a question of law which is best decided at trial rather than on this application, particularly in circumstances in which the issue is not raised in the defence. I would, in effect, be entertaining an application to amend the defence so as to raise the argument which the defendants have advanced in their submissions. In my view, there are a number of reasons why I should not determine the question of the proper construction of cl 41.6.3 or the application of Sunbird in order to decide the plaintiffs' application to strike out the mitigation allegations.

[43] First, if I disallowed the suggested amendment on the basis that the defendants' characterisation of their obligation as one in which they could be liable only in damages was not arguable, there would be the prospect of an interlocutory appeal. That would not advantage the parties in terms of costs and delay.

Resolution of the application to strike out the mitigation allegations

[47] The application to strike out the mitigation allegations falls to be decided on a fairly simple basis.

1. The plaintiffs' claims are clearly ones for money owing under a contract.

2. It is more than arguable that the plaintiffs have such a claim.

3. No breach of contract claim is pleaded, even in the alternative.

1. The plaintiffs have nailed their colours to the debt mast. If they fail to establish an entitlement to be paid an amount due and owing under the contract by the defendants, then that will be the end of their claim.

[48] The plaintiffs are entitled to choose to pursue a claim in debt, rather than damages for breach of contract. That choice does not determine whether they in fact have a claim in debt.

[49] It is accepted by the parties that a failure to mitigate is not a defence to an action to be paid a debt. This is because an obligation to mitigate arises only in respect of a claim for damages.

[50] The mitigation allegations should therefore be struck out as not disclosing a reasonable defence to the plaintiffs' claim. They are irrelevant to it. They are unnecessary and their presence raises a false issue in the context of a claim for debt. The continuing presence of the mitigation allegations are prejudicial because the pleading of the false issue will increase costs and delay, including costs and delay associated with disclosure of documents which would be relevant only to the mitigation allegations.

[51] One aspect of the strike out application in respect of deemed admissions was resolved by the parties on the basis of proposed amendments to paragraphs 17 and 27 of a proposed amended defence.

[52] The parties have agreed that the defendants be granted leave to file an amended defence and counterclaim to the amended statement of claim in a form which includes those amendments to paragraphs 17 and 27, and that the costs of that part of the application be costs in the cause.

[53] As to the application to strike out the mitigation allegations, I order pursuant to r 171 of the Uniform Civil Procedure Rules 1999 (Qld) that paragraphs 59 - 62 of the amended defence and paragraph 2(c) of the reply to the answer to the counterclaim be struck out.

[54] I will grant leave to the defendants to file an amended defence and counterclaim and an amended reply to the answer to the counterclaim to raise, if so advised, the contention raised in their argument that, to the extent they are liable under cl 41.6.3 of the GTA, their only liability is one for damages for breach of contract in respect of an alleged secondary obligation.

[55] I direct the parties to agree, if possible, a timetable for the filing of the defendants' amended pleadings and any responsive pleadings by the plaintiffs and to incorporate them in the order. If they cannot agree the dates I will review the matter.

[56] The plaintiffs have enjoyed substantial success in their application to strike out the mitigation allegations. There seems no reason as to why costs should not follow the event. Subject to any submissions as to costs, the order will be that the defendants pay the plaintiffs' costs of and incidental to the application dated 7 May 2020 insofar as it related to the application to strike out paragraphs 59 - 62 of the amended defence and paragraph 2(c) of the reply to the answer to the counterclaim. As noted, the costs of the balance of the application will be costs in the cause.

[57] I direct the parties to bring in draft orders within two days.

[1] See, for example, Mann v Paterson Constructions Pty Ltd [2019] HCA 32; (2019) 373 ALR 1 at 6 [10], 18 [62]-[63].

[2] The authorities which support these propositions may be found in the contract texts including Carter on Contract at [41-380] LexisNexis and Cheshire & Fifoot's Law of Contract (11th Aus ed, 2017) at [26.9] as well as the following authorities: Upton v Westpac Banking Corporation [2016] QCA 220 at [14] - [16]; Re Castleplex Pty Ltd (in liq) [2010] QCA 59 at [64] - [65] and Bartlett v Contrast Constructions Pty Ltd [2016] QCA 119 at [35] - [36].

[3] Callide Power Management P/L & Ors v Callide Coalfields (Sales) P/L & Ors; CS Energy Ltd v Callide Coalfields (Sales) P/L & Ors [2014] QSC 205 at [30].

[4] Plaimar Ltd v Waters Trading Company Limited [1945] HCA 34; (1945) 72 CLR 304 at 318.

[5] Rothenberger Australia Pty Ltd v Poulsen [2003] NSWSC 788; (2003) 58 NSWLR 288 at 297 [26], [27].

[7] The general view stated by Lord Diplock in Moschi v Lep Air Services Ltd [1973] AC 331 at 347-349 which was rejected by the High Court in Sunbird Plaza Proprietary Limited v Maloney (1988) 166 CLR 245 at 256 ("Sunbird").

[9] QNI Resources Pty Ltd v North Queensland Pipeline No 1 Pty Ltd & North Queensland Pipeline No 2 Pty Ltd; QNI Metals Pty Ltd v North Queensland Pipeline No 1 Pty Ltd & North Queensland Pipeline No 2 Pty Ltd [2017] QCA 297 at [33] - [35].