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[2003] VSC 443
mixed. Byrne J indicated that, on the primary conclusions, each claim and counterclaim should be dismissed; further submissions to be heard as to the precise terms of orders and as to costs (see [48]).
Byrne J held that ADM's 16 April 2003 letter validly exercised its contractual option to take an Additional Commitment. Clause 21.4 (which prescribes the price range 50%–65% and identifies matters to be reflected in any chosen percentage) was not void for uncertainty. Where the parties cannot agree the percentage, the dispute about the "terms applicable" to the Additional Commitment, including price, can be referred to an expert under clause 13.4(e) and Part 35. ADM's later offer to pay the maximum 65% did not cure any asserted uncertainty nor create a separately enforceable obligation. As an alternative answer, Byrne J held that even if clause 21.4 were void, the contract would survive and any post-Initial Minimum Contract Take supply would be on the spot price. The Court indicated that both claim and counterclaim should be dismissed, with further submissions on final orders and costs.
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Parties and contract: Pacific Hydro (plaintiffs) and Argyle Diamond Mines Pty Ltd (ADM) (defendants, acting for a joint venture) entered a 1994 Power Purchase Agreement (PPA) for Pacific Hydro to supply electricity to ADM. The PPA fixed an Initial Minimum Contract Take (IMCT) and set out procedures for ADM to seek an Additional Commitment (cl. 13.4) and to fix the price for any Additional Commitment (cl. 21.4) (see [1]–[5], [18]).
The triggering events: By 19 March 2003 the IMCT had been delivered (all of the IMCT had been supplied) (see [8]). ADM served a notice on 16 April 2003 under cl. 13.4(b) requesting an increase of 144.4 GWh for one year. That notice was accompanied by a Terms Sheet proposing terms, including pricing-related proposals (see [9]–[10]).
The dispute: The parties could not agree the terms, principally the price for the Additional Commitment. Pacific Hydro contended cl. 21.4 was void for uncertainty or amounted to an unenforceable agreement to agree; ADM contended that cl. 13.4(e) allowed disputes about the “terms applicable” (which ADM said included price) to be referred to an expert and that ADM’s subsequent offer to pay the maximum permitted by cl. 21.4 (65%) removed problems of uncertainty (see [15]–[16], [21]–[23], [37]–[41]).
Proceedings and judgment: Byrne J held the 16 April notice valid, concluded cl. 21.4 was not void for uncertainty, and further held that price is a 'term' referable to expert determination under cl. 13.4(e) and Part 35 (see [12]–[15], [20]–[21], [30]–[36]). He also dealt with alternative arguments: that ADM's 3 October 2003 offer did not make cl. 21.4 certain, and that an implied duty to negotiate in good faith could not rescue an unenforceable pricing mechanism (see [39]–[43]). If cl. 21.4 were void, Byrne J said the contract would nevertheless continue with post-IMCT supply on the spot basis (see [45]–[47]). The proposed final course was dismissal of both claim and counterclaim, with further submissions as to orders and costs (see [48]).
Commercial context and interpretive approach: Byrne J emphasised interpreting a carefully drafted commercial agreement in a commercially sensible way and not being astute or subtle in finding defects (see [24]–[26]). The judge applied established authority that a clause is void for uncertainty only if it is incapable of any definite meaning (see [20] citing Upper Hunter).
Validity of the ADM notice: The April 16 letter contained the particulars required by cl. 13.4(b) (the proposed increase in Minimum Annual Take and in IMCT) and requested the meeting mandated by cl. 13.4(c). The contemporaneous Terms Sheet was a proposal for the negotiations, not a demand invalidating the notice (see [12]–[15]).
Clause 21.4 not void: Clause 21.4 establishes a bounded range (50%–65%) and identifies two considerations that the selected percentage must 'reflect' (proportion of the 1015 GWh and water royalty payments to WAWA). Byrne J found these words, in the specialist commercial and technical context, were not so uncertain as to be incapable of meaning; the parties contemplated industry expertise and provided a mechanism (expert determination) to resolve disputes (see [18]–[21], [29]).
Price referable to expert: Byrne J analysed cl. 13.4(d) and (e). Clause 13.4(d) lists matters to be agreed “including” six specific items but that wording does not limit 'terms' to those items. In ordinary usage, terms of supply include price, and cl. 13.4(e)'s reference to disputes “as to the terms applicable to those increases” therefore covers price disputes. There was no clear contractual indication to exclude price from the scope of disputes referable to an expert (see [30]–[36]).
Alternatives and commercial consequences: Byrne J emphasised the commercial consequences of holding that the price mechanism was unenforceable, including allowing Pacific Hydro to force ADM to take electricity at the higher spot price by refusing to agree a 21.4 price. That practical consequence informed a purposive construction that gave work to the expert-determination mechanism rather than striking down the clause (see [26]–[28], [30]–[36]).
Before this decision: The principles applied are well established in Australian contract law: the court will not enforce agreements to agree (Booker Industries) and will declare clauses void for uncertainty only where they are incapable of any meaning (Upper Hunter; Scammell). The parties' allocation of expert determination as the dispute-resolution mechanism is also a standard contractual device recognised by courts.
After this decision: Byrne J's approach reinforces that, in a commercial framework where a price formula sets a range and identifies matters to be considered, the court will give clauses meaning if a sensible commercial reading exists and where the parties have supplied an expert dispute-resolution mechanism. The decision is a practical application of interpretive principles: give effect to commercial purpose, use contextual factors, and use expert-determination clauses to remedy potential deadlocks. It confirms that price disputes can be treated as terms of supply referable to experts where the contract so envisages.
Paragraph [12]: "The first letter of 16 April stands alone. It contains the information required by cl. 13.4(b) and is a proper notice pursuant to that paragraph."
Paragraph [20]: "It must be shown that the words of cl. 21.4 are incapable of being given any meaning."
Paragraphs [30]–[36] (esp. [31] and [36]): "In normal usage, the terms of supply of electricity would include the price to be paid for it... the parties have provided a mechanism for the resolution of their failure to agree: reference to an expert assessor under Part 35."
Paragraph [47]: "I would conclude that the failure of cl. 21.4 ... is not a failure of an essential term. The contract can have sensible operation without them."
Contracts with staged quantities and a separate procedure for 'additional' volumes: where an agreement fixes an initial base quantity and provides for later voluntary increases and specifies a separate price mechanism for those increases.
Clause establishes a price range and identifies factors to be 'reflected' but leaves the final percentage to agreement: where a clause prescribes a bounded range (e.g. 50%–65%) and refers to industry-specific considerations but does not set a detailed algorithm.
Presence of a dispute-resolution mechanism specifically authorising reference to an expert for disputes about the 'terms' of the increase: where the contract contains an expert-determination clause tied to the relevant clause that contemplates expert resolution of terms applicable to an increase in supply.
Commercial agreements in complex technical fields where industry expertise is likely to be required to resolve pricing disputes: the decision assumes a degree of technical understanding and that an expert will be better placed than a court to fix practical commercial percentages.
If your contract combines those elements, (a) a defined initial take, (b) a mechanism to increase quantities, (c) a price clause stating a range and relevant considerations, and (d) an expert-determination mechanism, Pacific Hydro v Argyle indicates that courts will prefer to give such clauses work and to use expert determination to resolve deadlocks rather than strike the clause down for uncertainty.
This deep dive is limited to the reasoning presented in Byrne J’s judgment. The judgment relies on established authorities (Booker, Upper Hunter, Hillas, Scammell) rather than novel principle. Byrne J’s posture reinforces a commercial, purposive approach to interpretation, and his conclusion that a price can be a 'term' referable to an expert will be persuasive in subsequent Victorian or commercial court cases that involve similar architectures, particularly where parties provided their own expert-determination procedure.
Practitioners should note the emphasis placed on (i) the carefully drafted nature of agreements, (ii) commercial consequences of reading clauses down, and (iii) availability of an expert mechanism. Subsequent courts confronting identical factual matrices are likely to apply the same reasoning: give the clause meaning where possible and use the contractual expert route.
Scope of 'terms' referable to an expert: Byrne J treated price as a term, but parties drafting similar clauses can still attempt to exclude price from the scope of 'terms' to be referred. The decision underscores that clear drafting is decisive. Absent clear exclusion, courts will likely follow Byrne J’s reasoning. However, where a price formula is detailed elsewhere and the clause references a different mechanism, there remains room for argument about whether the expert can set price in every context.
Degree of specificity required to avoid uncertainty: Byrne J accepted that a range plus specified considerations sufficed. But how sparse can the drafting be before the clause becomes void? The decision does not draw a bright line. Contracts with less structure or where the listed 'considerations' are themselves vague may still fall foul of uncertainty.
Role and limits of implied obligations to negotiate in good faith: Byrne J rejected implying a duty to negotiate that could breathe life into an otherwise unenforceable clause. Yet the area of implied duties in long-term commercial contracts is a developing one, and other fact patterns (especially where the parties have expressly committed to a process of negotiation) might attract different treatment.
Interaction of expert determination with judicial supervision: Byrne J assumes the expert mechanism will operate effectively to resolve price; courts will, however, continue to consider the scope of judicial intervention where the expert's remit, process, or outcome conflicts with broader legal principles. The limits of judicial review of expert determinations remain an area for careful drafting and litigation strategy.
Practical takeaway for practitioners: if you intend experts to decide price disputes, draft (a) an express and unambiguous power to refer price to the expert, (b) clear guidance on factors the expert must consider, and (c) procedural safeguards for the expert process. Pacific Hydro v Argyle demonstrates that, in a commercial contract, the court will prefer to give effect to the parties’ chosen mechanism rather than invalidate an important commercial clause for uncertainty where a reasonable interpretive reading and an expert process are available (see [24], [29]–[36]).
[2003] VSC 443
Contract - interpretation - uncertainty - agreement to agree price - whether price referable for expert determination - implied term to negotiate in good faith.
1 In 1994 the plaintiffs, Pacific Hydro Group Two Pty Ltd, Pacific Hydro Group Three Pty Ltd and Ord Energy Pty Ltd (collectively referred to as "Pacific Hydro"), proposed to develop a hydro-electric power station having a 30 MW generating capacity at the Ord River Dam in the Kimberley region of Western Australia. Pacific Hydro had in mind to provide the electricity which it would so generate to the Argyle Diamond Mine Joint Venture for the operation of its mine and also to the State Energy Commission of Western Australia ("SECWA"). In their dealings with Pacific Hydro, the firstnamed defendant, Argyle Diamond Mines Pty Ltd, was acting as manager and agent for the other defendants who were the joint venturers. I shall refer to this joint venture as ADM.
2 By a Power Purchase Agreement in writing dated 8 November 1994, these parties agreed that Pacific Hydro would sell to ADM electricity during the Supply Period[1] which commenced on the Commencement Date[2], which was expected to be 1 April 1996[3], and ran until the commercial mining operations at the Argyle Mine site ceased[4]. The period of the supply is therefore uncertain but there are indications in the agreement which suggest that the parties contemplated supply continuing until 2010[5]. The agreement is an exclusive supply agreement in the sense that ADM bound itself to purchase all of its electricity from Pacific Hydro[6] and Pacific Hydro bound itself to supply electricity to meet the requirements of ADM, subject only to its obligation to provide a certain quantity of electricity to SECWA[7]. The agreement was also conditional upon Pacific Hydro entering into an agreement with the Water Authority of Western Australia ("WAWA") for the provision of water from Lake Argyle for electricity generation purposes[8].
3 The agreement provides for the delivery of a baseload quantity of electricity totalling 1015 GWh at a stipulated rate for each year from 1 April 1996 to 31 March 2003. This quantity of electricity is called in the agreement "the Initial Minimum Contract Take"[9]. The agreement contains in cl. 13.4 a procedure for ADM to increase this Initial Minimum Contract Take by way of Additional Commitment[10]. Where the Initial Minimum Contract Take is so increased, the baseload quantity[11] and the Initial Minimum Contract Take[12] are to be increased accordingly. If Pacific Hydro should fail to deliver electricity in any contract year, it is obliged to pay compensation to ADM in the form of liquidated damages[13]. If ADM should fail to take electricity to the amount of the Initial Minimum Contract Take, it is, nevertheless, obliged to pay for the shortfall at the contract price[14].
4 The price to be paid by ADM for electricity supplied by Pacific Hydro is fixed in the agreement at three rates: a contract price for the Initial Minimum Contract Take which is calculated in accordance with a formula set out in cl. 21.3; the price for Additional Commitment which increased the Initial Minimum Contract Take is calculated in accordance with cl. 21.4; and the price for other electricity taken by ADM is to be at a spot price. As will appear, the price for Additional Commitment was not to exceed 65% of the contract price[15] and the spot price was 80% of the contract price[16].
5 In this proceeding ADM alleges that it has activated the Additional Commitment procedure of cl. 13.4 and that it is to pay for the Additional Commitment at the rate to be fixed under cl. 21.4. This is disputed by Pacific Hydro which contends that electricity supplied after the Initial Contract Take is chargeable at the spot price.
6 The provisions of the agreement which are for construction are those parts of cl. 13.4 which provide for the exercise of ADM's right to an Additional Commitment:
"13.4 (a) In this Agreement, `Additional Commitments' means increases in the Initial Minimum Contract Take implemented under this clause.
(b) ADM may at any time during the Supply Period, either before, during or after delivery of the Initial Minimum Contract Take, give notice to Seller that it wishes to commit to taking further quantities of Electricity by increasing the Initial Minimum Contract Take. The notice will include the proposed increase in Minimum Annual Take and the proposed increase in Initial Minimum Contract Take. (c) Upon receipt of the notice, the parties will meet and discuss the ability of Seller to meet the proposed increase in Minimum Annual Take and Initial Minimum Contract Take. (d) If Seller is able to meet the proposed increase in Minimum Annual Take and Initial Minimum Contract Take (or such lesser increase as the parties may agree), then the Minimum Annual Take and Minimum Contract Take shall be increased accordingly on terms (including Baseload Quantities commensurate with the increase in Initial Minimum Contract Take and term of that increase, an appropriate allowance for Unplanned Interruptions, a proportion for liquidated damages under clause 17.2 and a new date for clause 19.2(b)) and a discount rate for clause 19.4(b) to be agreed between ADM and Seller. (e) Any dispute between the parties as to whether Seller is able to meet the proposed increase in Minimum Annual Take and Initial Minimum Contract Take or as to the terms applicable to those increases may be referred to an Expert."
7 Clause 21.4 which provides for the price to be paid for Additional Commitment is in these terms:
"21.4 After the Initial Minimum Contract Take, the Contract Price for any Additional Commitment shall be a percentage as may be agreed between Seller and ADM which is between 50% and 65% of the Contract Price which would apply from time to time if the Initial Minimum Contract Take still existed. The percentage will reflect the proportion of 1015 GWh for which the Seller received payment as part of the Initial Minimum Contract Take and will also reflect the water royalty payments to WAWA applicable at that time."
I have omitted the headings to these clauses because it is provided in the agreement that they shall not effect the interpretation or construction of it[17].
8 The facts were not in dispute. The Initial Minimum Take, which had been slightly reduced from 1015 GWh in accordance with the agreement, had been supplied by 19 March 2003. ADM gave notice under cl. 13.4(b) in February 2003 but this was challenged and withdrawn. It gave a further notice by letter dated 16 April 2003. It was argued on behalf of Pacific Hydro that this notice, too, did not comply with cl. 13.4(b).
9 The April Notice is contained in a letter from ADM to Pacific Hydro dated 16 April 2003. It commences by withdrawing the February notice. It continues as follows:
"This letter also comprises notice, pursuant to clause 13.4(b) of the PPA, that ADM wishes to commit to taking further quantities of Electricity under the PPA by increasing the Initial Minimum Contract Take by an amount of 144.4 GWh for a 1 year period. No increase in Minimum Annual Take is proposed. ADM requests, pursuant to clause 13.4(c) of the PPA, that the parties meet to discuss the ability of Pac Hydro to meet the above proposed increase in Initial Minimum Contract Take. In light of the discussions and correspondence between the parties in relation to previous Additional Commitment proposals by ADM during the period since 10 June 2002, ADM regards a period of 12 days after the date of this notice to be more than a reasonable period within which such meeting is to occur. ADM will meet either at Rio Tinto Procurement's offices at Level 22 Central Park, 152-158 St Georges Terrace, Perth, or (subject to availability of flights) at Seller's offices in Melbourne. Please urgently liaise with the writer to finalise a date and place for the meeting. The meeting in relation to this notice must be an `on the record' meeting (as required by clause 13.4(c) of the PPA). A meeting in relation to this notice will not be necessary if Seller confirms, in writing, that it is able to meet the above proposed increase in Initial Minimum Contract Take. In this regard, ADM takes the position that there is a clear evidence that Seller is able to meet the above proposed increase in Initial Minimum Contract Take. In the absence of written advice from Seller that it can meet the proposed increase in Initial Minimum Contract Take or a meeting to discuss the same within 12 days after the date of this notice, ADM will take the position that a dispute has arisen in relation to this notice, and will refer the dispute to an Expert under clause 13.4(e) of the PPA. All correspondence in relation to this notice should be addressed to Mr Terry Appleby at ADM. Yours faithfully"
10 On the same day, 16 April 2003, ADM sent to Pacific Hydro a second letter in which, in a Terms Sheet, it set out its proposals under cl. 13.4(d) for the terms upon which the Initial Minimum Contract Take was to be increased. The letter sought a response as to whether the proposed terms were acceptable and, if not, it requested a meeting be convened to discuss them. The letter went on to say that, in the absence of advice in writing that Pacific Hydro agreed to the terms proposed or a meeting had been held, ADM would take the position that a dispute had arisen which would be referred to expert determination pursuant to cl. 13.4(e). Pacific Hydro did not agree to the terms proposed nor was a meeting held. A third letter was sent on the same day by ADM to Pacific Hydro with respect to disputes about Pacific Hydro's March statement for payments due.
11 It was submitted on behalf of Pacific Hydro that the letter comprised a notice and a requirement that Pacific Hydro agree to the proposed terms which amounted to variations of the agreement which were not contemplated by cl. 13.4(b) or (d). Accordingly, it was not a proper notice under cl. 13.4(b).
12 There is no substance in this submission. The first letter of 16 April stands alone. It contains the information required by cl. 13.4(b) and is a proper notice pursuant to that paragraph.
13 Clause 13.4(c) requires the parties to meet and discuss the ability of Pacific Hydro to meet the proposed increase. If Pacific Hydro is able to meet the proposed increase, cl. 13.4(d) contemplates that the parties will agree the terms of its supply. The second letter sets out its proposal for discussion with a view to achieving such an agreement. It cannot be correct that the contemporaneous making of such a proposal is either inappropriate or in some way invalidates the notice contained in the first letter.
14 In the particulars given under paragraph 8 of Pacific Hydro's further amended statement of claim, reference is made to sub-paragraphs (b), (c) and (g) of the Terms Sheet. These are said to be requirements that Pacific Hydro agree to matters which it was not under the agreement obliged to agree to. It is, of course, correct that, as part of the process of reaching agreement, an offeree is not obliged to accept an offer made. The letter of ADM makes no such demand. It is no more than a proposal which Pacific Hydro might accept or reject. Even if the two letters were to be read as one, this proposal would not vitiate the notice under cl. 13.4(b).
15 The consequence of this is that, by its notice of 16 April, ADM validly exercised its option to take an Additional Commitment. There was, I think, no suggestion on the part of Pacific Hydro that it was unable to meet the proposed increase. All that remained to be determined was the terms of supply of this Additional Commitment including, or and, the price to be paid for it under cl. 21.4. It follows that ADM had an entitlement to an Additional Commitment and that this was to be provided on terms, including price, to be agreed[18].
16 The substantial submission advanced on behalf of Pacific Hydro was that the price fixing provisions of cl. 21.4 were void for uncertainty or that they are unenforceable as only an agreement to agree, so that they should be ignored or severed from the remainder of the agreement.
17 As to uncertainty, it was put that clause 21.4 provides no firm basis for determining the price. Counsel for Pacific Hydro pointed to three matters of uncertainty which they identified by the following colourful captions; the Starting Price dilemma; the IMCT uncertainty; and the WAWA conundrum. They also submitted that the clause contemplates that other considerations which are unknown might be had regard to.
18 It is convenient at this point that I set out again cl. 21.4:
"21.4 After the Initial Minimum Contract Take, the Contract Price for any Additional Commitment shall be a percentage as may be agreed between Seller and ADM which is between 50% and 65% of the Contract Price which would apply from time to time if the Initial Minimum Contract Take still existed. The percentage will reflect the proportion of 1015 GWh for which the Seller received payment as part of the Initial Minimum Contract Take and will also reflect the water royalty payments to WAWA applicable at that time."
19 In their written submissions and in oral argument, counsel for Pacific Hydro described how each of these two considerations might operate in different ways to produce different results. Further uncertainty is produced by the requirement that the selected percentage of the contract price is to "reflect" these considerations.
20 Counsel for ADM did not enter into any detailed analysis of these considerations or how they might be reflected in the price. They submitted, rightly in my view, that this is not the sort of uncertainty which would render a contractual provision ineffective. It must be shown that the words of cl. 21.4 are incapable of being given any meaning[19].
21 This agreement does not operate in a vacuum. It involves complex and technical concepts which the parties may be taken to understand. What precisely is or may be the impact on the proper price for Additional Commitment of the two considerations specified in cl. 21.4, I do not know. The parties may disagree upon matters such as this, but this does not mean that the words do not have meaning. Clause 21.4 may have work to do many years after the contract was negotiated. It is not surprising, therefore, that the drafters did not adopt the course of legislating the price for Additional Commitment in great detail. They were content to leave the matter to the good sense of the parties, stipulating only the range within which the price was to fall and also two considerations to which they must have regard to. And, in the event that agreement was not achieved, the matter was to be determined, as will be seen, not by a lawyer or by any referee, but by a person with "appropriate experience" in the industry[20]. I am not persuaded that cl. 21.4 is "so obscure and so incapable of any definite or precise meaning that the court is unable attribute to the parties any particular contractual intention"[21].
22 There was no challenge before me to the proposition that the Court will not enforce an agreement to agree. Accordingly, it was accepted by counsel on behalf of ADM that, if cl. 21.4 stood alone, then, subject to the effect of the ADM offer of 3 October 2003[22], the clause would fail for this reason. What was put was that the agreement itself provided in cl. 13.4(e) a mechanism to fix the price for an Additional Commitment where the parties were unable to agree[23]. It should be noted that in this agreement there are dispute resolution procedures, culminating in the referral of disputes to an expert for determination[24]. But cl. 35.1 stipulates that these procedures apply only where the dispute is "in respect of any matter which, under the terms of this Agreement, is to be or may be referred to an Expert for determination". This submission of ADM, therefore, must identify such a term if an expert determination is to break the deadlock. Counsel for ADM pointed, for this purpose, to cl. 13.4(e) under which "the terms applicable to" the increased supply as a consequence of an Additional Commitment are to be referred for determination by an expert.
23 Attention then moves to the question whether the terms of this increased supply as mentioned in cl. 13.4(e) include the price. On behalf of Pacific Hydro it was argued that these terms were those specified in cl. 13.4(d) and that these did not include the price.
24 I approach the task of construing this agreement on the basis that it is a commercial agreement and that the Court should not be astute or subtle in finding defects or inadequacies in it[25]. I am mindful, too, that the document bears all the hallmarks of a carefully prepared and professionally drawn document rather than one which was prepared by non-lawyers and expressed in a less formal manner. This is an agreement which, on its face, appears to be designed to govern the commercial relationships of the parties in a very substantial venture over many years. I will therefore not lightly construe it in a way which appears to defeat that purpose, but will attempt, if this be possible given its terms, to give its every provision a meaning so that it operates and that it does so sensibly[26].
25 It is clearly the intention of the parties that there might be an Additional Commitment beyond the Initial Minimum Contract Take. It was also in their contemplation that this Additional Commitment will have an important role to play in determining the Initial Minimum Contract Take and the Contract Take Shortfall and in the operation of the contractual procedures which depend upon these concepts. It is also contemplated that the price for this Additional Commitment should be less than the contract price for the Initial Minimum Contract Take, and less than the spot price.
26 It is convenient that I mention at this point the contractual consequences of there being no procedure for fixing the price for the Additional Commitment, absent agreement. Fundamentally, it would mean that there could be no Additional Commitment which itself would have further consequences. First, it would mean that Pacific Hydro, by declining to negotiate or agree the price, could oblige ADM to take all of its electricity requirements for the life of the mine at the spot price. It was pointed out by counsel for ADM that, in this way, Pacific Hydro could unilaterally compel ADM to pay for this at 80% of the contract price, the spot price, rather than at a percentage figure of between 50% and 65% of the contract price, the Additional Commitment price.
27 Under the agreement, the effect or possible effect of an Additional Commitment is to revise the Baseload Quantity[27]; to increase the Initial Minimum Contract Take[28]; to increase the Minimum Annual Take[29]; to revise Pacific Hydro's allowance for unplanned interruptions[30]; to vary the liquidated damages payable by Pacific Hydro[31]; and to vary the Adjustment Date[32]. These concepts all have a role to play in this complex agreement. I mention, by way of example, that the Adjustment Date effects the calculation of liquidated damages payable by ADM where it fails to take the Initial Minimum Contract Take[33] and the calculation of the Recovery Period under cl. 20.1.
28 Again, if the submission of Pacific Hydro be correct, the consequence of the decision of either party to refuse to agree the price for Additional Commitment would mean that for the balance of the period of supply after March 2003, when all of the Initial Minimum Contract Take had been supplied, these provisions of the agreement and those dependent upon them would operate and have effect as if these concepts were not varied. It cannot be denied that the agreement contemplated this, for it is for ADM to choose whether to invoke the Additional Commitment procedures under cl. 13.4(b), or not to do so. But, equally, it is clear that, if the choice is made, there are considerable ramifications for the parties if the procedures of cl. 21.4 cannot operate to fix the price. Counsel for ADM observed that it would be remarkable if the agreement operated in such a way that Pacific Hydro could by capriciously refusing to agree the price under cl. 21.4, deny to ADM the right conferred by cl. 13.4(b) to elect to take further electricity on an Additional Commitment basis.
29 How then is this price for Additional Commitment to be determined? First, it is to be fixed within a specified range of percentages of the contract price - between 50% and 65%. The percentage is to be fixed by agreement, having regard to two considerations mentioned in cl. 21.4. The significance or role of these considerations was not explained to me but I assume that it would be apparent to one experienced in the industry. The price is to be fixed by agreement between the parties, but no provision is made in cl. 21.4 for the case where no agreement is achieved. What is, then, to happen in such an event?
30 The choice offered by the competing submissions before me was that either cl. 21.4 fails, bringing down with it cl. 13.4 and all that depends upon it, or that the deadlock is broken by an expert determination which is available under cl. 13.4(e). This alternative depends upon the expression in that paragraph "the terms applicable to those increases", including price.
31 In normal usage, the terms of supply of electricity would include the price to be paid for it. What was put was that the word "terms" in cl. 13.4(d) should be read down so as to exclude price because of the particular matters set out in paragraph (d) and also because price was dealt with in another Part of the agreement. It was pointed out that there is no provision in cl. 21.4 for expert determination in case the parties fail to agree the price. This absence was contrasted with other provisions in the agreement where specific reference is made to an expert determination[34]. It was pointed out that there is no provision in cl. 21.4 for determining price by invoking cl.13.4. Again, this is contrasted with provisions where revisions or adjustments are to be made and specific reference is made to the cl. 13.4 procedures[35]. All of these omissions in cl. 21.4 were said to be indicative of the intention of the parties that expert determination and the cl. 13.4 procedures generally, had no role to play in fixing the price for Additional Commitment.
32 The answer to this, offered on behalf of ADM was that, where cl. 13.4 operates so that the Initial Minimum Contract Take is increased, this has or might have an effect upon the operation of other clauses and concepts which depend directly or indirectly upon the Initial Minimum Contract Take. Where it is necessary to consider the effect on these clauses and concepts, the agreement calls up cl. 13.4 as the mechanism for this.
33 The case of the price for the Additional Commitment is altogether different. The structure of Part 21 is not to provide for a contract price which may be revised or varied consequent upon an Additional Commitment. I put to one side the post-2010 general price review provided for in cl. 21.6, which does not depend upon Additional Commitment and, in any event, contains its own provision for reference to an expert. As I have mentioned, there are three prices, each of which operates for a different type of supply. The price to be fixed under cl. 21.4 applies, by definition, only where the Initial Minimum Contract Take is to be increased by an Additional Commitment under cl. 13.4. Accordingly, it was not necessary to refer to cl.13.4(d) in terms. As will be seen, this provides a good reason, equally, why it was not necessary to refer in cl. 13.4(d) to price.
34 There are six matters which are affected by an Additional Commitment which I have listed in [27] above. All of these are specifically mentioned in cl. 13.4(d). But this does not represent the totality of matters which are terms to be agreed under that paragraph. First, these six matters are referred to in cl.13.4(d) as matters included in the terms to be agreed. The use of the word "including" invites an inference that other terms may be involved. Second, there is to be found in the list of specific matters included in the terms to be agreed pursuant to cl.13.4(d) another matter which is not picked up elsewhere. This is the term of the Additional Commitment which must be at least 12 months[36] but which is not given an outer limit. Where agreement is not achieved on these terms, they may be referred to an expert under cl. 13.4(e). There is, therefore, nothing in the list of specific inclusions which causes me to treat them as the only terms to be agreed under clause 13.4(d) and referable to an expert under cl. 13.4(e). Nor is there anything in this list which causes me to conclude that the list, not being exhaustive of these terms, shows a contractual intention that the price should be excluded from them.
35 I mention in this regard one matter which might, at first blush, be thought to point in that direction. Clause 13.4(d) provides for the parties to agree the terms of the increased supply. Since cl. 21.4 provides for the parties to agree the price for the increased supply, it might be thought that the drafting would not duplicate the obligation to agree the price. It would follow, then, that the terms to be agreed under cl. 13.4(d) do not include price. Assuming the word "terms" in cl. 13.4(e) bears the same meaning, the argument concludes that matters which may be referred to an expert under cl.13.4(e) do not include price. This argument depends upon the improbability that the drafters of this agreement would duplicate the requirement for an agreement as to price. Accepting this improbability, it is nonetheless explicable because there is more in cl. 21.4 than a mere provision for the parties to agree the price. This clause, appropriately in the structure of the agreement, describes the price for Additional Commitment as a price "as may be agreed". It then sets out the perimeters and the parameters of the matters for agreement; it provides for the specifics of the agreement as to price. Clause 13.4(d), then, speaks generally of the terms of the increased supply as the "terms... to be agreed". The provision for reference to an expert in cl. 13.4(e) makes no mention of the want of any particular agreement, whether under cl. 13.4(d) or cl. 21.4 or otherwise. Disputes to be referred are any disputes "as to the terms applicable to those increases". It would, to my mind, require a clear indication to read down this expression so that any dispute as to the price applicable to those increases should be excluded. This is particularly the case, given the contractual consequence of such a conclusion to which I have referred. I find in this contract no such indication.
36 So understood, the difficulties which attend cl. 21.4 disappear. The parties have provided a mechanism for the resolution of their failure to agree: reference to an expert assessor under Part 35 of the agreement[37].
37 Following the giving of the cl. 13.4(b) notice and the terms of ADM's proposal on 16 April 2003, Pacific Hydro failed to agree the terms of the increased supply. Accordingly, ADM took steps to set in train the procedures for referring the dispute to an expert.
38 Later, by letter dated 3 October 2003, ADM made an open offer. This offer, which was in respect of the current Additional Commitment only, was to pay for this at the maximum rate or price permitted by cl. 21.4, that is, 65% of the contract price. This offer was rejected by Pacific Hydro on the basis that cl. 21.4 was unenforceable unless the parties agreed on the price, and Pacific Hydro did not agree. This ADM offer was relied on by ADM as removing the difficulties which might arise if I should find the cl. 21.4 otherwise too uncertain to be unenforceable; by ADM as amounting to a breach of an implied term that the parties would negotiate towards an agreement under cl. 21.4 in good faith; and by Pacific Hydro as amounting to a withdrawal of the April Notice. I should observe that it is not necessary for me to consider the first two contentions, having regard to the conclusions I have reached as to uncertainty. I shall, however, in deference to the submissions of counsel and in case the matter may go further, venture my views.
39 Counsel for ADM relied upon a dictum of Einfeld J in SVI Systems Pty Ltd v Best & Less Pty Ltd[39] in support of the proposition that, where a provision in a contract is void for uncertainty, the parties may by their subsequent conduct make it certain in its operation. What his Honour said is this:
"[62] Where a contract is said to be uncertain, but the parties have shown by their conduct that they understand and can apply its terms without difficulty, such conduct should not be ignored by holding that the terms of the contract are unintelligible by reason of uncertainty[40]. In such situations the agreement may be upheld as a contract on the basis that by their actions in performance the parties have made certain the elements which were previously uncertain[41].
40 In the present case, the ADM offer does not amount to conduct on the part of ADM, let alone of Pacific Hydro, that shows that it understands and can apply the terms of cl. 21.4. By its offer it attempted to bypass the uncertainties in cl. 21.4. If the offer had been accepted, then this attempt would have been successful. In either event, the uncertainties are not addressed or resolved. I reject the ADM submission presently under consideration.
41 The term which counsel for ADM sought to imply in the agreement was one that the parties, in attempting to agree the price for Additional Commitment under cl. 21.4 or cl. 13.4(d), must negotiate in good faith by reference to the provisions of those clauses[42]. In Booker Industries[43], Gibbs CJ, Murphy and Wilson JJ stated that the Court would not lend its aid to enforce an agreement to agree. On the assumption which I make for present purposes, that there is no mechanism for fixing the price where no agreement is reached, it follows that this difficulty cannot be overcome by the implication of an obligation to negotiate in good faith. Such an obligation cannot require an unwilling party to accept an offer, however attractive it might appear. Moreover, there is an inherent difficulty in imposing an obligation to negotiate in good faith with a view to achieving an agreement under a term which is itself unenforceable.
42 In Coal Cliff Collieries Pty Ltd v Sijehama[44], there was an express term that the parties would consult in good faith to agree the terms of a mining venture. In his consideration of the breach of such a term, Kirby P observed[45] that the process of negotiation, even in good faith, carries with it the possibility that no agreement might be achieved. In that case, it was a matter of speculation what agreement might have been reached had no breach of the implied term been committed. This means that the relief available might be nominal damages only[46]. In the present case, it was put, there is no room for such speculation. The matter to be agreed was only the price and this could not exceed 65%. ADM offered to pay this maximum. The failure of Pacific Hydro to accept the offer demonstrated, at the same time, its want of good faith and provided the basis for a remedy for this.
43 To this, Pacific Hydro offered a number of answers of which I mention only two. The legal analysis underlying the contention of ADM presently under consideration, is that the provisions of cl. 21.4 which may operate to reduce the price for Additional Commitment below the 65% maximum were inserted for the sole benefit of ADM. Accordingly, this party might waive them and pay the maximum price. On behalf of Pacific Hydro it was contended that waiver can operate in this way only where the provision to be waived is not itself too uncertain to have operation and is valid[47] and, second, that it is not correct to say that the term was included for the benefit only of ADM as purchaser of the electricity. Relying on the analysis of the majority in George v Roach[48], it was said that agreement arrived at in the manner specified in cl. 21.4 was the stipulated method by which price was to be fixed and that this was as much for the benefit of Pacific Hydro as it was for ADM. Accordingly, it was not open to ADM, without the concurrence of Pacific Hydro, to substitute some other method. I must confess some sympathy with the dissenting judgment of the Chief Justice on this point. Moreover, when pressed, counsel for Pacific Hydro were unable to articulate the benefit to their client. Nevertheless, I see myself as bound to approach this case in the manner prescribed by the majority of the High Court. It follows that, upon the two assumptions which I must make for present purposes, that cl. 21.4 is uncertain and that there is no power to refer the matter to an expert for resolution of the uncertainty, the ADM offer does not overcome this uncertainty.
44 I can deal shortly with the final submission based on the ADM offer. This was an argument put on behalf of Pacific Hydro that the making of this offer in October 2003 had the consequence of withdrawing the notice of 16 April. The short answer is that an examination of the first 16 April letter containing the notice shows that the October offer does not derogate from it. It may have the consequence that the terms of supply proposed in the Terms Sheet in the second letter of 16 April were varied in part by the subsequent proposal, but this confirms rather than detracts from the stated intention of ADM contained in its 16 April notice that it "wishes to commit to taking further quantities of Electricity under the PPA by increasing the Initial Minimum Contract Take".
45 Again, I assume, contrary to my conclusion, that cl.21.4 is void for uncertainty so that Additional Commitment pursuant to cl. 13.4 is not available. The question which then falls for determination is the consequence of this upon the agreement. Two possibilities suggest themselves. First, that the supply of electricity, after delivery of the Initial Minimum Contract Take, should be on a spot basis in accordance with cl.21.5. Second, that the whole contract falls with cl. 21.4 so that the parties are relieved from all further obligations. This latter consequence would arise if and only if the agreement without cll. 13.4 and 21.4 was so different from that bargained for that it would not be just to hold the parties to it.
46 I have already made mention of the consequences throughout the contract of the effective exercise of the Additional Commitment provisions of 13.4. Again, it must be noted that this is entirely a matter for the choice of ADM, in the sense that Additional Commitment arises only when and if it gives notice under cl. 13.4(b). If no such notice is given, presumably the contract would continue to operate with electricity being purchased at the spot price. Given this, it becomes impossible to conclude, as ADM would have it, that the bargain contained in the agreement, but without the possibility of Additional Commitment, is a bargain the parties never intended to make[49].
47 In the assumed circumstances, therefore, I would conclude that the failure of cl. 21.4, carrying with it the loss of the rights conferred by cl. 13.4, is not a failure of an essential term. The contract can have sensible operation without them. Accordingly, supply after 19 March 2003 would be on a spot basis.
48 I return now to my primary conclusion. In terms of the relief sought in the claim and the counterclaim, the appropriate order would appear to be that each should be dismissed. I will hear counsel further as to the precise terms of the orders to be made, and as to costs.
[18] Booker Industries Pty Ltd v Wilson Parking (Qld) P/L [1982] HCA 53; (1982) 149 CLR 600 at 609, per Brennan J.
[19] The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 436-7, per Barwick CJ.
[21] Scammell & Nephew Ltd v Ouston [1941] AC 251 at 268, per Lord Wright.
[23] Booker Industries Pty Ltd v Wilson Parking (Qld) P/L [1982] HCA 53; (1982) 149 CLR 600 at 609, per Brennan J; Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 19, per Kirby P.
[25] Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; (1932) 147 LT 503, [1932] All ER Rep 494; per Lord Wright.
[26] Hely v Sterling [1982] VicRp 20; [1982] VR 246 at 249, per Lush J.
[34] See cll. 19.4(b), 21.6(b)(i), 22.3(b), 30.2(b).
[35] See cll. 15.2(d), 17.2(b), 19.2(b), 19.4(b); compare cl. 27.5(d).
[37] See Booker Industries Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53; (1982) 149 CLR 600 at 605, per Gibbs CJ, Murphy and Wilson JJ.
[39] (2001) 187 ALR 302 at 317.
[40] York Air Conditioning & Refrigeration (A'asia) Pty Ltd v Commonwealth [1949] HCA 23; (1949) 80 CLR 11; Hempel v Robinson [1924] SASR 288; Sinclair v Schildt (1914) 16 WALR 100.
[41] Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; (1932) 147 LT 503, [1932] All ER Rep 494; Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110.
[43] Booker Industries Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53; (1982) 149 CLR 600 at 604.
[45] (1991) 24 NSWLR 1 at 31.
[46] (1991) 24 NSWLR 1 at 32.
[47] Grime v Bartholomew [1972] 2 NSWLR 827 at 838, per Holland J.
[49] See Mercantile Credits Ltd v Comblas (1982) 40 ALR 75 at 84-5 (PC).
Pacific Hydro Group Two Pty Ltd
Argyle Diamond Mines Pty Ltd [2003] VSC 443
(1982) 149 CLR 600
(1968) 118 CLR 429
(1991) 24 NSWLR 1
(2001) 187 ALR 302
(1949) 80 CLR 11
(1942) 67 CLR 253
(1982) 40 ALR 75
Byrne J indicated that, on the primary conclusions, each claim and counterclaim should be dismissed; further submissions to be heard as to the precise terms of orders and as to costs (see [48]).