_Queensland Power Company Limited & Others v Downer Edi Mining Pty Ltd_ [2009] QSC 6

Supreme Court of Queensland|2009-01-14|Before: Chesterman J

[1] The applicant (which I shall call 'Millmerran' because that was the name used by the parties and because the applicant was originally known as 'Millmerran Power Partners') owns a coal fired power generating station situated near the town of Millmerran on the Darling Downs. It also owns an adjacent coalmine known as 'the Commodore Mine'. In 1999, before the power station was built and before the mine was developed, Millmerran invited tenders for a contract for the mining and supply of coal from the Commodore Mine. In general terms the tender was to establish the mine and to extract coal and supply it to the power station for seven years.

[2] The tender process resulted in the respondent ('Downer'), then known as

Roche Pty Ltd, winning the contract to mine and supply coal.

[3] Millmerran and Downer executed a Contract Mining Agreement ('Agreement') on

7 April 2000. By clause 1.1 Downer agreed to develop an open cut coal mine at the Commodore Mine and deliver coal from it in amounts and of a quality described in the Agreement and Millmerran agreed to pay $6.995 per tonne for the coal delivered. This amount was defined as the 'seven year contract price'.

[4] The Agreement was to commence on the 'commencement date' and end on the 'expiry date' unless terminated earlier according to its terms. That did not happen. The contract in fact commenced on 1 September 2001 and was to expire on

[5] By clause 4 Downer had to prepare and give to Millmerran a 'contractor seven year mine plan', annual mine plans, and monthly mine plans. The detail of what the plans were to contain need not be described now. It is enough to note that they set out Downer's long term, medium term and immediate plans for extracting coal and delivering it to Millmerran. From the latter's point of view the plans demonstrated that Downer had organised its mining operations so as to produce sufficient coal of the appropriate quality to satisfy the contractual obligations and the demands of the power station. If Millmerran were not satisfied that the plan would produce sufficient coal, or coal of the appropriate quality, it could, by clause 4.7(b) of the Agreement give Downer its own mine plan which drew attention to the difference between the plans 'in sufficient detail to enable (Downer) to make a proper assessment ... .' If the parties could not agree upon an appropriate mine plan the dispute was to be referred to expert determination.

[6] Clause 4.9 set out the minimum volumes of overburden which Downer had to remove in each of the seven years of the term of the agreement.

[7] The Agreement contained a 'take or pay' term, the essence of which was that Millmerran agreed to accept and pay for minimum tonnages of coal per year. In the event that it did not accept the minimum tonnage it would pay the contract price for each tonne of the shortfall.

[8] Clause 10 of the Agreement set out the specifications of the coal to be delivered by reference to such things as moisture content, ash content, volatility, sulphur content, specific energy and particle size.

[9] Clause 13 provided that the contract price was an inclusive one (except for royalties) but could be adjusted annually, from years two to seven by the application of a 'rise and fall formula' set out in clause 13.3. The detail is immaterial. The formula was to take account of increases in the price of labour, fuel, and parts of rubber-tyred earthmoving equipment. There was no mechanism by which the price might be adjusted for changes in mining conditions.

[10] By 2003 the parties had become involved in a dispute about Millmerran's obligation to take a minimum tonnage of coal. The construction and commencement of operations of the power station had taken longer than expected. Consequently Millmerran took less coal than Downer considered it was obliged to take and pay for. Millmerran declined to pay for the coal it had not actually accepted. The dispute was referred to arbitration in accordance with the terms of the agreement.

[11] Shortly before the arbitration was to commence, on 26 April 2006, Mr Logan, on behalf of Downer, wrote to Mr Nelson, on behalf of Millmerran, to propose a compromise. Relevantly he wrote:

We propose that (Millmerran) pay to (Downer) an amount of $9m in full and final settlement of all claims ... .

Alternatively, (Millmerran) may see some merit in a payment structure that embodies a lower lump sum initially combined with an extension to the current contract that allows (Downer) to recover the balance. On this basis we propose the following ...;

that (Millmerran) pay to Roche $5m in full and final settlement of all claims ...;

the contract be extended by a further three years (the unit rate for coal will need to be adjusted to reflect changes in the strip ratio, extra haul lengths for coal and ash and an option of a rise and fall formula ... . We propose that these rates could be agreed by negotiation.

[12] Mr Logan and Mr Nelson met on 10 May 2006 and agreed to the essential terms of a compromise.

[13] On 30 June 2005 the parties executed a Settlement Agreement by clause 2 of which Millmerran agreed to pay Downer $6,500,000 on or before 30 June 2005 in full and final settlement of the dispute referred to arbitration. By clause 6 the Agreement was extended for a further term of three years.

[14] Clause 8 of the Settlement Agreement is contentious. It has given rise to the present litigation. It provided:

(a) The contract price for the extended term is the operating year 7 contract price, plus any variation pursuant to this clause and clause 9 ...

(b) The parties agree to negotiate in good faith a variation (if any) to the contract price for operator year 7 as calculated pursuant to the contract mining agreement for operating year 8 due to any:

(1) material increase in haul road length during the extended term;

(2) material variations in strip ratio during the extended term ...

(3) material variations in coal quality (by comparing coal to be mined with coal delivered during operating years 1 to 7), during the extended term ...

(c) In any event, any variation pursuant to 8(b) would not reduce the contract price for operating year 8 below the contract price for operating year 7.

(d) Any variation of the contract price for operating year 8 will be negotiated and agreed prior to the application of any rise and fall adjustment ...

(e) If the parties cannot reach agreement on any variation to the contract price under clause 8(b) by 30 June 2008, the contract price for operating year 8 is to be determined in accordance with (the expert determination provisions) of the ... agreement. The expert appointed shall determine any variation to the contract price in accordance with the principles set out in clause 8(b).'

[15] Clause 9 dealt with the rise and fall adjustment for the extended term. The parties were to negotiate in good faith for a new formula.

[16] Some other terms of the Settlement Agreement should be noticed. By clause 4 of Schedule A Downer had to prepare and give to Millmerran:

A draft of the three year mine plan was to be delivered before 30 November 2005 and Downer was to deliver the 'three year mine plan' by 30 November 2006.

[17] The present dispute concerns the meaning of clause 8(b)(1) and (2) of the Settlement Agreement. By it the parties were to negotiate, in good faith, a variation to the contract price in force in the seventh year of the Agreement with regard to material increase in haul road length during the extended term, and/or material variations in strip ratio during the extended term. The negotiations might not result in a variation to the price. That result would occur if there were no material increase in haul road length or material variations in strip ratio. The contract price could not be decreased in any event.

[18] It is immediately apparent that the two subclauses do not identify the length of haul road any increase over which might justify a variation to the price; or the value of the strip ratio, a variation to which might also justify a variation to the price. The clause is silent as to what was called the comparators: the dimensions or values by comparison to which one can see that there has (or has not) been a material increase in haul road length or material variation in strip ratio.

[19] The parties have not agreed a new contract price for the extended term. They wish to have an expert determine the new contract price but cannot agree upon what basis the expert should make the determination. The particular dispute is as to the identity of the appropriate comparators.

[20] By its application Millmerran sought declarations that:

'(1) "Any material increase in haul road length during the extended term" refers to any material increase in haul road length during the extended term of the settlement agreement in comparison with the haul road length in operating year 7.

(2) "Any material variation in strip ratio during the extended term" ... refers to any material variations ... during the extended term of the settlement agreement compared with the strip ratios in operating year 7.'

[21] By its amended cross-application Downer sought declarations that the material increase in haul road length was to be:

(a) the anticipated haul road length during the extended term as anticipated prior to the commencement of the extended term with

(b) the anticipated haul road length during the original term as anticipated prior to the commencement of the original term';

and that any material variation in strip ratio was to be:

(a) the anticipated strip ratio during the extended term as anticipated prior to the commencement of the extended term; with

(b) the anticipated strip ratio during the original term as anticipated prior to the commencement of the original term.'

[22] Before considering the respective submissions it will be helpful to explain some of the terms which appear in the agreements. Most of them are familiar. Overburden is the material, earth, rock and gravel, which lies above a coal seam and which must be removed to expose the seam for extraction. A seam is, of course, a layer of coal, the location of which may change vertically and horizontally. A parting is a segment of material, earth or gravel, within or between coal seams. It contains waste material which is material that cannot be delivered as coal. A parting greater than one metre thick is referred to as interburden. A bank cubic metre ('bcm') is a cubic metre of material in situ, in its natural compacted state.

[23] The strip ratio is the ratio between the overburden and interburden measured in bank cubic metres compared to the amount of coal measured in tonnes extracted after the removal of the overburden. The ratio is the volume of overburden etc. required to expose one tonne of coal.

[24] The haul road is, obviously, the road along which trucks carry coal from the pit to the stockpile at the conveyer belt head (called in the contract 'run of mill'.) There were two haul roads, one to deliver coal to the stockpile from the pit, and one to take ash from the power station to a dump. The length of the haul road determines the time required to transport coal from the pit to the stockpile and return to be reloaded. The longer the road the more fuel the trucks will consume and the greater the wear and tear on moving parts and the greater will be the need for maintenance. As the length of the road increases and the time of travel increases, more trucks may be needed to maintain the required tonnages to be delivered to the stockpile.

[25] When Downer commenced mining pursuant to the Agreement it removed overburden and extracted coal from the seams closest to the power station and the stockpile. This is orthodox mining practice and was what Millmerran expected it to do. At that location the depth of overburden was less than elsewhere over the Commodore Mine site and, obviously, the distance to transport the coal was short. As the Agreement was performed over its seven year term coal was mined from blocks within seams at greater distances from the stockpile. The length of haul road increased and the depth of overburden also increased. The result was that the cost of mining increased.

[26] The contract price was fixed for the seven year term. The 'rise and fall' adjustment took account only of increases in the prices of labour, fuel and parts. Accordingly, the agreement was most profitable for Downer in the earlier years of the term and became progressively less profitable. At the expiration of year 7 the haul road was at its maximum length. There was no linear progression in the strip ratio such that it could be said that it was at its maximum (overburden to coal) in the seventh year of the term but there was, overall, an increase in the ratio over time.

[27] Although the parties seek the Court's construction of clause 8(b)(1) and (2) it is apparent that there is nothing in the text of the Settlement Agreement itself which allows one to discern what the parties intended to be the respective comparators. The parties agree that there were comparators, but the subclauses in questions are incomplete. They do not identify them. It is necessary, in order to ascertain the comparators, to have regard to the context of the agreements, the surrounding circumstances known to the parties at the time they made the Settlement Agreement, and its commercial purpose, as the appropriate means of understanding what words should be added to the subclause to give effect to the parties' intention. The process is one of construction, not one of implying terms. The process of completion is not to imply a term (or part of a term) but to ascertain the parties' intention by reference to the commercial objective of the settlement agreement, and the background facts in the shared knowledge of Millmerran and Downer.

[28] Neither the length of the haul road nor the strip ratio for the extended term was known when the Settlement Agreement was made. For the purposes of making the comparison they have to be estimated or calculated from data known prior to the commencement of year 8, i.e. 1 September 2008.

[29] In each case the estimation or calculation can be made from the extensive geological investigation of the mine site undertaken by consultants on behalf of Millmerran. The location of coal seams, their depth, the existence and dimension of partings and interburden and the depth of overburden was investigated by drilling. The more bores that are drilled the greater will be the amount of available knowledge and the more precise the calculations that can be performed to obtain the strip ratio. The information necessary to calculate the strip ratio was supplied to Downer by Millmerran during the preparation of the three year mine plan and, for that matter, for the preparation of the seven year mine plan needed for the Agreement.

[30] Plans of the Commodore Mine depicted the coal seams schematically and spatially. They were divided into blocks, each one of which was numbered sequentially. The seven and three year mine plans indicated which blocks were to be mined in which sequence. Generally speaking the sequence begins closer to the stockpile and extends further from the stockpile. The route and length of the haul road can be calculated by reference to detailed maps of the Commodore Mine site showing the location of the blocks,

[31] According to Mr Desha, who was employed by Downer as an estimator:

'Calculating haul road lengths is a laborious process, which involves tracing paths on scale maps of the mine area, measuring their lengths, and performing calculations based on them.'

He deposed that he calculated the weighted average haul road length over the term of the Agreement to be 1,892 metres. The calculation took up to a week using sophisticated 'mine visualisation software'. The figure does not appear anywhere in the Agreement or the schedules to it. It can be, and was, calculated utilising the laborious process described by Mr Desha from the maps and mine plan which were part of the Agreement.

[32] The strip ratio for the term of the Agreement, was 2.57 bcm/t. Although that ratio does not itself appear in the Agreement the volumes of overburden and tonnages of coal which are all that are required to calculate the ratio as a matter of simple arithmetic appear in Table 1 to Schedule 6 of the Agreement.

[33] It is apparent from this discussion that prior to the Agreement the parties, or at least Downer, had calculated the route of the haul road for the seven year term of the Agreement and its average length. Similarly the strip ratio for the whole of the term, an average figure, had been calculated. The same calculations can be performed for the haul road length and strip ratio for the extended term of three years. The parties' submissions accept this fact.

'Clause 8 anticipates a possible rise in price from that which was obtained in year 7. The rise will result from "any ... material increase ... during the extended term" in haul road length or strip ratio. ... These factors can be objectively determined from the mine plan for the extended term (when that mine plan is finally agreed or determined) ... . The haul road length which now exists, and the strip ratio, can be easily measured. Thus, the change expected over the new term from that which has actually been encountered, and which gave rise to the respondent's grievance about payment, can be objectively determined.'

[35] Millmerran therefore argues that the comparison contemplated by clause 8(b)(1) is between the actual length of the haul road at the end of year 7, the expiration of the original term of the Agreement, and its length 'during the extended term'. Likewise the comparison called for by clause 8(b)(2) in strip ratio is between the ratio as measured by mining operations in year 7 to the strip ratio 'during the extended term'. In both cases the length of road and strip ratio for ('during') the extended term must be calculated from the information contained in the mine plan as

Mr Desha explained. Once performed the results of the calculations are to be compared with the actual conditions as measured during the mining process at the end of the seven year term.

[36] This construction has the attraction of certainty. The haul road at that point in time can be precisely measured. The strip ratio cannot be so easily determined at a particular point in time because the depth of overburden encountered on one day may differ from that encountered the previous day or the following day. Also, the depth of coal seam revealed by the removal of overburden may vary from day to day. Accordingly Millmerran submits that one takes the average strip ratio for the seventh year as the appropriate comparator. The data to calculate the average is readily available from mining records.

[37] Millmerran chooses the measurements for the seventh year of the mining operation because clause 8(b) requires that any variation to the contract price be 'to the contract price for operating year 7'.

'It is illogical to vary a price by reference to actual conditions in a particular year when the price is not based on those conditions. It is equally illogical to vary a price by reference to actual conditions in a particular year when the price being varied is based on an average of conditions over seven years. ... On the other hand, varying a price by comparing the anticipated conditions on which that price was actually based, and the anticipated conditions for the extended term, produces a result which is logical, fair and reasonable.'

[39] The point which Downer stresses is that the contract price only varied throughout the term of the Agreement by reference to increases in the costs of labour, fuel and parts. The price of $6.995 per tonne was the fixed price for the entire term of the Agreement. Over that term Downer had to 'haul the coal further and dig out more overburden to get at the coal'. The price, 'which was going to stay the same for seven years ... had to take account of the fact that at the start of the contract (Downer) wouldn't have to travel very far but by the end of year seven ... would be travelling ... some distance ...'. The point is that the contract price had to be fixed by reference to the average length of the haul road and the average strip ratio. The price reflected the average conditions, road length and strip ratio, to be expected over the full seven year term.

[40] The point is, in my opinion, compelling. The contract price for the original seven year term was fixed at the beginning (increases due to the rise and fall formula can be ignored because they do not touch increases in cost occasioned by changes in mining condition and location with which clause 8 of the settlement agreement is concerned.) Likewise the contract price for the extended term of three years will be fixed at the beginning of that term and remain unchanged. The contract price for both agreements therefore struck and will strike an average, a balance, between cost and profit over the terms of the agreements.

[41] The road length and strip ratio 'during the extended term' will not be a fixed measurement. The road will increase in length over the three year term and the strip ratio will vary, probably increasing, over the term. The price to be fixed for the extended term will therefore have to reflect an average length of road and strip ratio. The price must be sufficient to allow Downer to pay the costs of mining and to make a profit.

[42] The solution which Downer submits is appropriate is to take the average haul road length and average strip ratio for the original term of seven years and use those as the comparators with which the haul road length during the extended term and strip ratio during the extended term can be compared.

[43] Downer submits that it is more logical in approach to compare average with average rather than the average for the extended term with a particular measurement at one point in time of the original term especially one when the point of time chosen is particularly disadvantageous to one party.

[44] The contract price did not represent a profit over the cost of mining one tonne of coal in any particular year, or month, of mining. As I have mentioned the conditions and therefore costs of mining vary over years. Generally, as was the case here, mining became more expensive because the better and/or more accessible coal was mined at the beginning of the term. Later the coal seam mined was further from the delivery point and on average required the removal of more overburden. The price was therefore one which reflected the average mining conditions which Downer expected to encounter over the seven year term.

[45] The price to be varied, the price for operating year 7, was not a price based on actual or even estimated costs or mining conditions for that year. The price for year 7 reflects the average costs and conditions over the whole of the original term.

[46] I accept Downer's submissions that the comparator is the average haul road length and strip ratio in the first term, not those of the seventh year of the term. The starting point for the comparisons required by clause 8 of the Settlement Agreement is the average length of the haul road and the average strip ratio over the three years of the extended term. That must be so because those conditions will vary over that term. Those conditions will have to be estimated: they cannot be measured because the extended haul road has not been built and the strip ratios have not been ascertained by excavation. One subject matter of comparison is the average length of the haul road over the three years, and the average strip ratio over the three years.

[47] It makes little sense to compare that with particular conditions at a particular point in time when the original contract price was not fixed by reference to any such particular conditions.

[48] A question remains. It is whether the average haul road length and strip ratio for the first seven year term to form the comparators should be the actual length and ratio as measured over the mining operation or whether it should be those averages estimated by Downer before mining commenced, when the contract price was agreed.

[49] Millmerran was almost scornful in its criticism of Downer's choice of the latter, the estimated averages of haul road length and strip ratio. It submitted:

'The contractual and commercial justification for implying such a subjectively fraught term is unclear. ... While (Downer) no doubt formed its own expectation about haul road lengths and many other matters relevant to price, (Millmerran) surely did the same. The degree to which the parties arrived at the same answer is unknown. It would be remarkable if they did. There is no reason to be drawn from the contractual text to choose (Downer's) subjective estimation of the future rather than that of (Millmerran) ... . They are both equal contracting parties with reciprocal interests. There appears to be no rational reason why the parties should implicitly have picked (Downer's) subjective opinion as the comparator. (Millmerran was) ... bargaining for a result and its employees undoubtedly held corresponding expectations ... which affected their attitude to the bargaining process. One can take it that (Downer's) expectations have proven to be disadvantageous to itself given its desire to engage in a price change calculation. ... The more incompetent was (Downer's) work in forming its expectation, the greater the price increase which it will now receive.'

[50] There would be considerable force in this criticism if the basis for Downer's suggested comparator was in fact its own subjective assessment of the average haul road length and strip ratio. Quite apart from the difficulty of proving a matter personal to one party which it contends should bind the other, it is an unlikely construction of an agreement that one party would agree to a variation to a contract price by reference to criteria unknown to it.

[51] Millmerran's fears in this regard are groundless. The estimated road lengths and strip ratios were in fact known to both parties at the time the Agreement was made. To be more precise the information from which the road lengths and strip ratios could be calculated were known to both parties. In fact they formed part of the Agreement, being contained in schedules to the contract documentation. The strip ratios, as I mentioned, could be calculated as a matter of simple arithmetic from the volume of overburden and tonnage of coal which were given in precise quantities in one of the schedules. The average length of haul road was not so easily ascertained but the information from which it could be calculated was contained also in the contract documentation, in the mine maps and the mine plans showing the locations of the seams which were to be mined in a specified sequence in years one to seven.

[52] It is significant that the information from which the quantities necessary to calculate the strip ratio came were supplied by Millmerran to Downer during the tender process for the agreement. Similarly the mine maps showing the location of the coal seams were supplied by Millmerran. The mine plan which show the sequence of extraction by reference to the maps was part of the Agreement.

[53] There are other reasons to prefer Downer's submissions. It is, I think, unlikely that the parties intended the actual conditions found during and at the end of the seventh year to be the comparators. The reason is that the Settlement Agreement was made in June 2005, more than three years before the end of the seventh year on

31 August 2008. The draft three year mine plan was to be delivered before

30 November 2005 and the final plan by 30 November 2006. By clause 8(e) of the Settlement Agreement any variation to the contract price had to occur by

30 June 2008. If it did not an expert was to be appointed to determine whether there should be any variation.

[54] The Settlement Agreement clearly contemplated that the question of variation to the contract price would be determined before, perhaps well before, the expiration of the original term. That determination involved the comparison between the haul road length and strip ratio for the extended period with some other criteria. Millmerran's submission is that the criteria should be the measured length of the haul road, and the measured strip ratio, at a time after the comparison was to be made, so that the comparators would not have been in existence when the comparison came to be required.

[55] There is a third reason for accepting Downer's construction. The comparison which Millmerran submits should be made is between the costs associated with haul road length and strip ratio at their most unprofitable for Downer. Those costs will be highest at the end of the seventh year.

[56] That result is beneficial to Millmerran but deleterious to Downer. When construing a contract one is endeavouring to ascertain the common intention of the parties. It is not likely that both parties would intend that one of them should do badly in the bargain. One party might intend that: but not, I think, both.

[57] The commercial purpose of an agreement can be taken into account when construing the agreement in order to determine the meaning of the words chosen by the parties to record their bargain. See Toll (FGCT) Pty Ltd v Alphapharm Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179. It is, I think, apparent from the terms of Mr Logan's letter of 26 April 2006 and the terms of the Settlement Agreement made by the parties that a commercial purpose of the Settlement Agreement was to confer a financial benefit on Downer, or at least to allow it to make a reasonable profit. This consideration operates against Millmerran's submission.

[58] Another point to mention is the slightly different wording of clause 8(b)(3) of the Settlement Agreement. This requires any variation to be calculated due to any:

'Material variations in coal quality (by comparing coal to be mined with coal delivered during operating years 1 to 7), during the extended term (including ... where such variations result in changes to (Downer's) rehandling costs).'

[59] In my opinion the inclusion in clause 8(b)(3) of a comparator (coal delivered during operating years 1 to 7) has no relevance to the construction of clauses 8(b)(1) and (2). There are reasons why the parties would treat variations to coal quality differently to increases in road length and variations in strip ratio. The reasons appear in Mr Parmenter's affidavit and are summarised in Downer's written submissions. It is not necessary to mention them in any detail.

[60] The real point is that there is no significance in the inclusion in clause 8(b)(3) of a defined comparator with the omission of any such comparators in the preceding subclauses. It is obvious that those clauses require a comparator to be effective. The only question is the choice of comparator. That included in subclause (3), which is relevant only to coal quality, says nothing about the choice of comparator in the other subclauses. What may be relevant is that the comparator chosen for subclause (3) was the average of coal delivered over seven years, not the quality of coal delivered in the seventh year, or any other fixed time during the original term.

[61] To the extent that clause 8(b)(3) throws any light on the construction of clauses 8(b)(1) and/or (2) it assists Downer's submissions.

[62] Millmerran submitted that Downer's preferred construction, the choice of comparator being the average haul road length and strip ratio over the original term, should be rejected because the parties had agreed, and manifested that agreement, to reject such a comparator in the course of the negotiations for the Settlement Agreement.

[63] The agreement, to reject the averages for the original term as the comparator, was said to be evidenced by drafts of the Settlement Agreement exchanged between the parties.

[64] On 2 June 2005 Millmerran's then solicitors wrote with respect to clause 8 that the most recent draft:

'... may have the unintended effect of making the clause uncertain, particularly in circumstances where there is no formula for the expert to apply. As a result, we have amended clauses 8(a) and (b) to provide the expert with a base for use in determining any increase to the contract price.'

'8(a) The parties agree to negotiate in good faith ... to increase the contract price calculated pursuant to the Contract Mining Agreement for operating years 8, 9 and 10 if and to the extent (Downer) will incur any additional direct costs (as compared to operating years 1-7) due to any:

(1) material increase in haul road length during the extended term;

(2) material increase in strip ratio during the extended term ...'

[66] Millmerran's solicitors replied by letter of 7 June 2005. They wrote:

'... Our client accepts that the conditions of mining, applying for the extended term may vary from the present conditions. In those circumstances, there may be a variation to the contract price (other than ... rise and fall).

Our client accepts that it would be useful to set out some criteria that an expert could have recourse to, should the matter be referred to expert determination.

We have amended clause 8 to provide for the criteria, but to incorporate neutral language as it is not inevitable that there will be an increase in the contract price.'

[67] Millmerran's solicitors returned the draft having deleted the word 'increase' where it appeared and the words '9 and 10 if and to the extent (Downer) will incur any additional direct costs (as compared to operating years 1 - 7) ...'.

'The parties agree to negotiate in good faith a variation (if any) to the contract price for operating year 7 as calculated pursuant to the Contract Mining Agreement for operating year 8 due to any:

(1) material increase in haul road length during the extended term;

(2) material variations in strip ratio during the extended term ... .'

[69] This is the form in which clause 8 of the Settlement Agreement was executed. It is therefore submitted that by deleting reference to 'additional direct costs (as compared to operating years 1 - 7)' the parties manifested their agreement that any variation to the contract price was not to occur as a result of a comparison with the direct costs of mining in operating years 1 to 7.

[70] Drafts of agreements ultimately executed in a different form are inadmissible as an aid in the construction of the final agreement: National Bank of Australasia Ltd

v J. Forkingham & Sons [1902] AC 585 at 591. Nor can evidence be given of negotiations leading up to the making of a contract: Prenn v Simmonds (1971)

1 WLR 1381 at 1384-5. Similarly evidence of negotiations cannot be introduced as part of the 'matrix of facts' or surrounding circumstances: Secured Income Real Estate Australia (Ltd) v St Martin's Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 606. Of course the parties cannot give evidence of their subjective intention as to what their agreement meant.

[71] There is, perhaps, an exception to the prohibition. In Arrale v Costain Civil Engineering Ltd 1975 1 Lloyd's Report 98 Stephenson LJ suggested that evidence of negotiations could be admitted to clarify an ambiguity. The suggestion was followed by Kerr J in The Karen Oltmann (1976) 2 Lloyd's Report 708. He said at 712:

'If a contract contains words ... capable of ... more than one meaning, and if it is alleged that the parties have ... negotiated on an agreed basis that the words bore only one of two possible meanings, then it is permissible for the Court to examine the extrinsic evidence ... to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the word as a result of their common intention.'

Lewison, in his work 'Interpretation of Contracts' para 2.05 suggests that the principle is akin to an estoppel by convention and is consistent with the general rule of construction enunciated in Prenn and since followed.

[72] Mr Sofranoff QC who appeared with Mr Telford for Millmerran submitted that the draft was admissible as an exception to the rule requiring rejection of evidence of negotiations identified by Mason J in Codelfa Construction Pty Ltd

v State Rail Authority of NSW (1982) 149 CLR 337 at 353. His Honour wrote:

'There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. ... The Court is interpreting the contract which the parties have made and in that exercise the Court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.'

[73] The exception described by Mason J is, I think, conceptually the same as that described by Kerr J. One can look at a document which contains a pre-existing agreement as to the meaning the parties ascribed to a particular word or phrase in their final contract.

[74] The difficulty with the exception is to determine when in fact parties can be seen to have 'united in rejecting' a particular meaning or construction. The prohibition on admitting negotiations and drafts of documents into evidence should not lightly be circumvented. It is only if one has an unambiguous expression of agreement as to the meaning of a particular word or phrase, assented to by the parties in the course of the negotiations, that the exception is applicable.

[75] This is not such a clear case. It appears from the correspondence that the alterations made to Downer's draft was to address the concern that it had made a variation inevitable rather than possible. It appears likely therefore that the deletion of the reference to 'additional direct costs as compared to operating years 1-7' occurred to address that concern rather than to address a choice of comparator. Neither the terms of the drafts nor the correspondence between solicitors unequivocally reveal an agreement on the choice of comparator or the rejection of a possible comparator. In my opinion the correspondence and drafts relied upon by Millmerran do not fall within the exception identified by Mason J and I uphold the objection to their admissibility.

[76] Accordingly I declare that 'any material increase in haul road length during the extended term' in clause 8(b)(1) of the Settlement Agreement dated 30 June 2005 means any material increase in haul road length calculated by comparing the estimated length during the extended term with the estimated length for the original term as revealed in the mine site maps and mine plans forming part of the Contract Mining Agreement dated 7 April 2000. I also declare that 'any material variations in strip ratio during the extended term' in clause 8(b)(2) of the Settlement Agreement means any material variation in strip ratio calculated by comparing the estimated strip ratio during the extended term with the estimated strip ratio to be calculated from Table 1 in Schedule 6 to the Contract Mining Agreement.

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