Queensland Power Trading Corp v Xstrata & Ors [2005] QCA 477

ARBITRATION - THE SUBMISSION AND REFERENCE - WHAT MATTER MAY BE REFERRED - whether the referral of the dispute between the parties to the contract was an 'arbitration' within the meaning of s 4 of the Commercial Arbitration Act so as to give the court power to issue subpoenas under s 47

ARBITRATION - CONDUCT OF THE ARBITRATION PROCEEDINGS - PROCEDURE AND EVIDENCE - SUBPOENAS - whether the subpoenaed documents were apparently relevant to the subject matter of the arbitration -whether the court ought to exercise its discretion to set aside the subpoenas when considering the commercially sensitive and confidential nature against the relevance of the documents required to be produced under the subpoenas

Apache Northwest Pty Ltd v Western Power Corporation

[1998] WASCA 127; (1998) 19 WAR 350, considered

National Employers' Mutual General Insurance Association Ltd v Waind and Hill [1978] 1 NSWLR 372, discussed

Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739, cited

Re Carus-Wilson and Greene (1886) 18 QBD 7, discussed

Re Fenwick v Port Jackson Co-operative Steamship Co (1898) 14 WN(NSW) 85, cited

Santos Ltd v Pipelines Authority of SA [1996] SASC 5578; (1996) 66 SASR 38, considered

H B Fraser QC, with A M Pomerenke, for the appellant

G A Thompson SC, with S R R Cooper, for the respondent

[1] de JERSEY CJ: I have had the advantage of reading the reasons for judgment of Williams JA. I agree with the orders proposed by His Honour, and with his reasons.

[2] WILLIAMS JA: Pursuant to an agreement ("the Agreement") dated 29 July 1996 Xstrata Queensland Ltd ("Xstrata") acquires gas from a consortium of producers (hereinafter referred to as "the Producers") for use in its mining operations at Mt Isa. That Agreement provides for a review of the price to be paid for natural gas provided as and from 1 April 2006. If the parties cannot agree upon the new price it is to be fixed by what is described in the Agreement as an arbitration; there is specific reference therein to the Commercial Arbitration Act 1990 (Qld) ("the Act"). The stage has been reached where, consequent upon the failure of the parties to reach an agreement as to a new price, the matter has been referred to arbitration by two named arbitrators.

[3] On 9 September 2005 both Xstrata and the Producers applied for leave to issue subpoenas for the production of documents before the arbitrators pursuant to s 17 of the Act. Leave was then granted on the basis that any recipient of a subpoena could apply to have it set aside, and on such an application the applicant for the subpoena would have to make out its case de novo. Consequent upon that order a large number of subpoenas were issued and applications were then brought to have most set aside.

[4] One such subpoena was served on Queensland Power Trading Corporation, the appellant, and it applied to have that subpoena set aside. That application was heard along with the numerous other applications seeking to have subpoenas set aside. Broadly the grounds were that the enquiry by the "arbitrators" was not an arbitration within the Act so as to call in aid the power of the Supreme Court to grant leave to issue subpoenas. The learned judge at first instance delivered one judgment dealing with the numerous applications then before him.

[5] In the reasons for judgment his Honour concluded that there was an arbitration to which s 17 of the Act applied, that the general rule was that the documents the subject of a subpoena must be "apparently relevant", that (in the instant case) Xstrata had demonstrated the relevance of the documents specified in paragraphs [1] to [3] of the subpoena, and that concerns as to confidentiality could be addressed by the form of order.

[6] In consequence his Honour declined to set aside the subpoena served on the appellant, but did order that paragraphs [4] and [5] be deleted therefrom. From that order the appellant has appealed to this Court. By the Notice of Appeal the appellant sought an order that the subpoena directed to it be set aside. By the time the appeal came on for hearing only paragraph [1] of the subpoena remained in issue; it has been agreed between the parties that the documents referred to in paragraphs [2] and [3] are no longer to be treated as subject to the subpoena. Paragraph [1] of the subpoena is in these terms:

"All contracts for the sale of natural gas between CH4 Pty Ltd . . . BHP Coal Pty Limited... and Queensland Power Trading Corporation..., which concern natural gas used or to be used by Queensland Power Trading Corporation... at any time since 1 July 1996."

Hereinafter what is encompassed by that paragraph of the subpoena will be referred to as "the Document".

[7] On the hearing of the appeal two main points were argued. Firstly, that the procedure referred to in the Agreement as an arbitration is not an arbitration for purposes of the Act, and secondly, that Xstrata had not demonstrated that the Document was apparently relevant to the matter before the arbitrators.

[8] Section 4 of the Act defines "arbitration agreement" as meaning "an agreement in writing to refer present or future disputes to arbitration."

[9] As long ago as 1886 Lord Esher MR provided a definition of an arbitration and it has stood the test of time. He said in Re Carus-Wilson and Greene (1886) 18 QBD 7 at 9:

"If it appears from the terms of the agreement by which a matter is submitted to a person's decision, that the intention of the parties was that he should hold an inquiry in the nature of a judicial inquiry, and hear the respective cases of the parties, and decide upon evidence laid before him, then the case is one of an arbitration."

[10] That definition has been applied in New South Wales: Re Fenwick v Port Jackson Co-operative Steamship Co (1898) 14 WN(NSW) 85 at 87 and Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739 at 747-8. To similar effect was the approach of Debelle J, with whom Cox and Prior JJ agreed, in Santos Ltd v Pipelines Authority SA [1996] SASC 5578; (1996) 66 SASR 38 at 48 where he said: ". . .the question is not whether the parties intended arbitration but whether there is a subject matter of arbitration, that is, a subject matter in the nature of judicial inquiry." In his view that factor was satisfied where the contract "provides the criteria by which the price will be determined." That was also the approach of the Full Court of Western Australia in Apache Northwest Pty Ltd v Western Power Corporation [1998] WASCA 127; (1998) 19 WAR 350. There the court (Kennedy, Pidgeon and Franklyn JJ) after saying that the term arbitration should not be "narrowly defined" concluded at 368 that in that case "the inquiry upon which the arbitrator is required to embark is, in our view, in the nature of a judicial inquiry." In arriving at that conclusion their Honours took into account the process of determination provided for in the agreement, including the fact that there was therein reference to the Commercial Arbitration Act of that State. Here there was no dispute between the parties to the appeal about the indicia of an arbitration; the question was whether the procedure contemplated in the Agreement could be so categorised.

[11] Only a relatively small portion of the Agreement was put in evidence; the court can only assume that all relevant clauses are before it.

[12] Clause 10.5 deals with the price review, and in particular with that review which may occur to become effective on 1 April 2006. Paragraph (c) thereof provides that the parties will "promptly consult and negotiate in good faith and with all reasonable accommodation to reach agreement" on the new price. If agreement is not reached they will immediately proceed to have the new price "determined by arbitration in accordance with clause 10.5 through 10.12." Clause 10.6 then deals with the appointment of the price review arbitrators. An arbitrator so appointed "will in no way represent any Party", and "shall not accept instructions nor any expression of interest from any Party except where the arbitrators jointly determine to do so or where the Parties join in an expression of instruction or wishes." The powers of the arbitrators are then dealt with in cl 10.7, a clause which is important for present purposes. The following extracts the critical elements of that clause:

"(a) The price review will be determined on an expeditious and fair

commercial basis with neither Party being regarded as a claimant with a burden of proof. The proceedings will be conducted in the manner which the arbitrators believe is best calculated to achieve the intentions of the Parties as expressed in this agreement. In particular, the arbitrators will have the power at all times to make orders to fix times and conditions which they believe will achieve those intentions.

(b) The arbitrators may require both Parties to put their basic

case in writing and may require that those cases be

exchanged . . .

(c) The arbitrators may require the Parties to deliver responses to the basic cases . . .

(d) The arbitrators may at any time make such orders as they see fit for:

(e) The arbitrators will not be bound by the strict rules of evidence but shall be conscious of the general policies underlying those rules.

(f) The arbitrators may determine from time to time upon which issues they wish to hear sworn oral evidence . . .

(k) The arbitrators may make such orders as they see fit

regarding the time allowed for oral argument and oral evidence . . ."

[13] Clause 10.8 deals with the confidentiality of proceedings, and then cl 10.9 provides that the Act "will apply to any arbitration carried out for the purposes of a price review under this clause 10." It is then expressly provided by cl 10.10 that the decision of the arbitrators must be in writing and paragraph (e) thereof provides that a determination "will be final and binding on the Parties for the purposes of the price review." Such determination, by virtue of cl 10.11, has effect immediately from the relevant date.

[14] Finally, cl 10.12 is of critical importance; it is headed "Factors to be considered" and is in the following terms:

"The arbitrators and the umpire, in carrying out the review, shall have regard only to:

(a) any reimbursements or credits being in made in respect of any Varied Impost or any New Impost imposed prior to the date twelve (12) Months prior to the Price Review Date; and

(b) the following prices paid by large industrial customers of Natural Gas in the states of Queensland, New South Wales, Victoria and South Australia ("the customers"):

(i) for those customers who pay an Ex-Plant Price separate from a Natural Gas transmission tariff, those Ex-Plant Prices; and

(ii) for those customers who pay a delivered price for Natural Gas, the Ex-Plant Prices attributable to those delivered prices,

which Ex-Plant Prices have materially changed from those applying since the later of:

(B) the date when the Unadjusted New Unit Charge was last adjusted by agreement or arbitration under this agreement.

The arbitrators and the umpire will utilise their analysis of the Ex-Plant Prices to adjust the Ex-Plant Price attributable to the unadjusted Unit Charge and will award a New Unadjusted Unit Charge in the light of any such adjustment, the Gas transmission tariffs at the relevant Price Review Date and the matters referred to in clause 10.12(a).

The Parties acknowledge that the Unadjusted Unit Charge is a delivered price.

For the purposes of this clause 10.12, "Ex-Plant Price" shall mean the price paid or effectively paid to a seller of Natural Gas which meets the sales quality specification specified in the contract for the sale of that Natural Gas at the point at which that Natural Gas exits the plant at which it was processed to meet that sales quality specification."

[15] The court at first instance was told, and this was also stated in argument in this Court, that the matters referred to in cl 10.12(a) are "irrelevant". I assume that means irrelevant for purposes of the present application relating to the validity of the subpoena.

[16] A consideration of the contents of clauses 10.5 to 10.12 of the Agreement clearly establishes that the inquiry which the arbitrators are obliged to undertake is in the nature of a judicial inquiry. There was clearly a dispute between the parties as to the "New Unadjusted Unit Charge" and it was that dispute which the arbitrators had to resolve applying the criteria set out in the Agreement. His Honour was clearly correct in holding that the exercise to be carried out pursuant to the provisions of the Agreement was an Arbitration, and that the Act applied to it.

[17] There was no challenge on the hearing of the appeal to the conclusion reached by his Honour as to what was meant in this context by "apparently relevant". He referred to authority indicating that ultimately the relevance of material is for the arbitrator, but given s 17 of the Act such relevance must prima facie be established in order to obtain the leave of the court to issue a subpoena. Referring to the decision of Moffitt P in National Employers' Mutual General Association Ltd v Waind & Hill [1978] 1 NSWLR 372 at 378-386 his Honour observed that a "relatively undemanding" test such as the document must "relate to the subject matter of the proceedings" was all that was required. In Santos v Pipelines Authority it was said at 52 that it was sufficient if the document would "throw some light on the issue in the arbitration". Then his Honour in this case went onto say at [56]: "The relative likelihood that the document will be shown to be relevant is another consideration in the court's decision as to whether to require the document to be produced, or to admit to be inspected and on what conditions."

[18] The onus is clearly on the applicant for the subpoena and the question in this case is whether or not Xstrata has demonstrated on the application for leave to issue the subpoena that the document in question has apparent relevance to the issues for determination by the arbitrators.

[19] In the arbitration proceeding Xstrata lodged with the arbitrators a document entitled "Statement of Facts and Contentions of Xstrata Queensland Limited" ("the Statement"); a copy of part of that document was included in the material filed by Xstrata on the application to have the subpoena in question set aside. Undoubtedly that Statement was relied on by Xstrata in attempting to discharge the onus on it of establishing that the Document was apparently relevant. In consequence it is necessary to quote from that Statement in order to provide the necessary background in which the question whether or not the Document is materially relevant must be assessed (see Apache Northwest Pty Ltd at 374.). The whole of the Statement should really be considered, but the following extracts sufficiently identify the critical matters (the Agreement is therein referred to as the GSA):

"8. Natural Gas was a product, comprising mostly methane, the specifications for which were relevantly regulated by statute (Gas Act 1965(Qld)).

9. Natural Gas was a product derived from raw gas . . . which had naturally accumulated in underground reservoirs including

10. Natural Gas was derived by extracting the Raw Gas from its natural reservoirs and treating it at a processing plant to remove higher order hydrocarbons . . . and impurities so as to meet the statutory specifications.

. . .

20. The Natural Gas was purchased by End-Users either:

(a) directly from one or more of the Natural Gas Producers; or

(b) directly from intermediaries . . . who directly or indirectly purchased the Natural Gas from the Natural Gas Producers,

and either:

(c) for a price on an ex-plant basis ("the Ex-Plant Price"), which specified the amount payable to the Natural Gas Producer for the delivery of Natural Gas at the point of exit from the plant at which the Raw Gas was processed; or

(d) for a price on a delivered basis ("the Delivered Price"), which specified the amount payable to the Natural Gas Producers for the delivery of Natural Gas to the End-User at the point required by the End-User (which includes Ex-Plant Price).

. . .

59. However, the clause [10.12] seeks to avoid the complications which could arise if all factors which were potentially relevant to such a negotiation were ventilated before the Arbitrators.

60. This is apparent from the choice not to adopt the single language of a review to "market" prices and also from the requirement that the Arbitrators "have regard only to" the prices specified in clause 10.12(b).

61. Accordingly, the purpose of the clause is to determine the Unadjusted Unit Charge:

. . .

(c) where the only relevant issue in the negotiations was whether there was a material change in the level of post-GSA Ex-Plant Price for Natural Gas (revealed by prices of the kind referred to in cl 10.12(b)) which rationally justified a change in the Ex-Plant Price component of the Unadjusted Unit Charge . . .

62. In short, the purpose of the clause is to permit the Arbitrators to weigh specified market evidence, having regard to its compatibility to the GSA, to determine whether that evidence justifies the adoption of a new Unadjusted Unit Charge.

63. The first question to be considered by the Arbitrators is the precise methodology to be applied to derive a new Unadjusted Unit Charge.

64. The principal source of guidance in this regard is provided by clause 10.12 of the GSA.

75. The second step in the methodology involves the identification of those potentially comparable transactions which are specified in cl 10.12(b).

76. Clause 10.12(b) narrows the range of potentially comparable transactions by reference to five specified conditions.

95. Thirdly, the relevant transactions must involve the price being paid by customers of "Natural Gas".

98. It is understood from the Producers' Statement of Facts and Contentions that the Producers . . . seek to contend that it extends to products such as ethane.

99. This meaning cannot have been intended by the Parties to be applicable to the present context, for the following reasons:

(a) ethane concentrate is not a "natural" product but is rather a refined concentrate of a minor constituent of either Raw Gas or Natural Gas.

. . .

100. For these reasons, a purchase of ethane is not a comparable transaction and so unlikely to have been intended to be included in a limited range of data made available for comparison by clause 10.12(b).

101. Alternatively, . . . any transaction for the supply of "Natural Gas" which does not meet the specifications for "Gas" must be carefully scrutinised to ensure that the transaction is comparable to the GSA.

121. A feature of particular significance for the price review is the "Ex-Plant Price attributable to the Unadjusted Unit Charge" under the GSA.

. . .

139. The Relevant Australian Gas Market has undergone extensive structural and functional changes since 1996. Those changes . . . include:

. . .

(i) development of coal seam methane (CSM) as a reliable Natural Gas resource, particularly by Origin Energy and Santos . . .. Estimated Queensland sales of Natural Gas reserves of CSM in 2005 were 3000PJ, more than double the reserves in 2003 and approximately 10 times the reserves in 2000 for CSM in Queensland."

[20] It is immediately obvious that Xstrata contends that cl 10.12 should operate to limit the scope of the inquiry to be undertaken by the arbitrators. As asserted in paragraph [100] of the Statement only a "limited range of data" is relevant for comparison purposes when performing the exercise required by cl 10.12. Given the use of the strongly limiting words "shall have regard only to" in cl 10.12, those assertions in the Statement must be correct. Prima facie the arbitrators are only concerned with prices for the supply of Natural Gas strictly defined. Further, the repeated reference in cl 10.12(b) to "Ex-Plant Price" clearly indicates that the focus is intended to be on the price paid after raw gas has been processed into Natural Gas strictly defined. That is confirmed by the assertion in paragraph [61(c)] of the Statement.

[21] The appellant relied on an affidavit by Gordon Buck, its Commercial Manager Gas, in order to establish that the Document was not materially relevant to the exercise to be carried out by the arbitrators. That affidavit establishes that the appellant is "the purchaser of raw gas from a joint venture" comprising CH4 Pty Ltd and BHP Coal Pty Ltd. The raw gas is supplied from the Moranbah gasfield, where it is sourced from coal seams. Subsidiaries of the appellant then process the raw gas at Moranbah to meet the various specifications prescribed by legislation. The critical point is that the appellant buys the raw gas at the inlet to the processing facility; it pays for raw gas and that is what the Document is concerned with. That raw gas is not "in a state in which it could be sold or transported to an end-user. It requires processing before either of those things can occur." It follows that the appellant pays a "delivered price" for raw gas because it is purchased at a point prior to its transportation into the gas system. Further, it is clear that the appellant does not pay an "Ex-Plant Price" for raw gas, because it is purchased at a point prior to it being processed so as to be fit for further transportation.

[22] The assertions in that affidavit were not factually challenged before his Honour, though in submissions in this Court, counsel for Xstrata said: "Our learned friend's client acquires coal seam methane in what is described as a raw gas form. We don't accept that proposition." Having heard submissions on the point his Honour made brief findings with respect to the subpoena served on the appellant. All his Honour said was as follows:

"[89] This is a purchaser from CH4 Pty Ltd, BHP Coal Pty Ltd and other suppliers.

[90] Paragraphs 4 and 5 of this subpoena are in terms to the users' paragraphs, and will be struck out.

[91] Another submission refers to the definition of "end-user" in this subpoena, although that expression is not within any of its paragraphs in which the required documents are described. It may be ignored. Paragraphs 1 to 3 are clear enough.

[92] This applicant submits that it pays a price for "raw gas" which is neither a "delivered price" nor an "ex-plant price". This is one example of the difficulty of assessing the likely relevance of documents without seeing them and with the court being relatively uninformed about relevant matters. In my view the apparent relevance of documents within paragraphs 1 to 3 is demonstrated."

[23] Senior counsel for Xstrata submitted that, notwithstanding the wording of

cl 10.12(b), the arbitrators could look, for example, to prices paid for other forms of fuel than natural gas. He submitted that that clause "does not circumscribe the evidence which the arbitrators may receive and how they may utilise that evidence in carrying out their analysis of prices falling within that limited defined category of prices." He specifically submitted that the arbitrators could have reference to "external evidence such as the state of the market at the time". In his submission

cl 10.12 only had the effect of "circumscribing the category of contracts, or the category of prices which are relevant for the purposes of the arbitration". He then went on to make a submission in these terms:

"But one might use the fact that the price of coal seam methane as evidenced by our learned friend's client's contract, has reduced, or become lower and consequentially impacted upon the prices payable for natural gas, and that is the basis on which we say there is apparent relevance . . ."

[24] Those submissions appear to be in conflict with the contentions quoted above from the Statement. Neither his Honour nor this Court has been called upon to determine the jurisdiction conferred on the arbitrators by the Agreement. No specific submissions, for example, were made in support of the contention, also found in the Statement, that the jurisdiction of the arbitrators was to determine the charge "which would be reached in a hypothetical negotiation between a willing but not anxious buyer in the position of the Buyer and willing but not anxious sellers in the position of the Producers" (paragraph [61(a)]). All of those issues remain to be determined in the future. It may well be that when all questions relating to the jurisdiction of the arbitrators, and the methodology by which they are to determine the new charge have been resolved, further consideration will be necessary regarding the relevance of the Document.

[25] But for now the question of apparent relevance must be determined in the light of the material placed by either side before the Court. Given what is contained in the Statement, and in the light of the submissions which were made at first instance and to this Court, it is not immediately obvious that the Document, dealing as it does for the price paid for raw gas and not natural gas, is relevant to the determination of the issues before the arbitrator in the light of the terms of the Agreement, particularly cl 10.12(b).

[26] The learned judge at first instance obviously had serious concerns about the apparent relevance of the Document. He was not able to articulate a clear basis for concluding that it was apparently relevant. Essentially all he did was say that the relevance of the document would ultimately be a matter for the arbitrators. He did expressly acknowledge that the court had not seen the document and was "relatively uninformed about relevant matters".

[27] Xstrata ultimately fell back on the proposition that apparent relevance could be established where the document might give rise to a line of enquiry relevant to the issues before the arbitrator (see Apache Northwest Pty Ltd at 374.) But if the issue before the arbitrator is narrowly defined then the line of enquiry must be relevant to that issue. Xstrata has not demonstrated how a document relating to the price paid for raw gas may give rise to a line of enquiry about the price which should be paid for natural gas strictly defined.

[28] The onus was on Xstrata to satisfy the Court that the Document was apparently relevant to the issues to be determined in the arbitration and it has failed to do so. It follows that the subpoena should be set aside.

[29] The orders of the Court should therefore be:

2. Order that paragraphs [3] and [19] of the order of the Supreme Court of 7 November 2005 be set aside insofar as they relate to the subpoena directed to the appellant and in lieu thereof it be ordered that:

(a) the order of the Supreme Court made on 9 September 2005 be set aside insofar as it relates to the subpoena directed to the appellant;

(b) the subpoena directed to the appellant be set aside;

(c) the respondent pay the appellant's costs of and incidental to the application filed by the appellant on 4 October 2005.

3. The respondent pay the appellant's costs of and incidental to the appeal.

[30] WHITE J: I have read the reasons for judgment of Williams JA and agree with his Honour for the reasons he gives that the appeal should be allowed and the subpoena set aside.