Yarraman Pine P/L v Forestry Plantations Queensland

[1] On or about 29 October 2004, the Chief Executive of the Department of Primary Industries and the applicant entered into a contract "for the getting of Araucaria final crop log timber". Over a ten year period from 1 July 2004, the applicant gained the right to purchase the timber, and was in fact obliged to purchase a minimum annual quantity. Under cl 4.1, the applicant agreed to pay the Chief Executive "the agreed values for Araucaria set out in Schedule 3 of this agreement and as varied from time to time in accordance with clauses 6 and 7 of this agreement".

[2] This proceeding concerns a variation to the price which emerged from a "general value review" under cl 7. The original price, described in cl 4.1(a) as "agreed", was $69.71 per cubic metre.

[3] Clause 7 provides as follows (the reference to "You" is to the applicant):

7.1 On and from the Commencement Date the Chief Executive will, in accordance with Schedule 5, conduct a General Value Review of the value payable by You for each Cubic Metre of Araucaria (the "General Value Review").

7.2 Irrespective of when the General Value Review is carried out, the reviewed value is payable by You from the date the review is due."

[4] On 9 February 2007, the respondent (the statutory successor under the contract to the Chief Executive) notified its intention to conduct a General Value Review.

[5] Schedule 5 to the agreement sets out the applicable provisions:

1.1 A general review of the value payable by You for each Cubic Metre of Araucaria shall be carried out by the Chief Executive to take effect on 1 July 2007 and 1 July 2012 ("General Value Review").

1.2 In carrying out such General Value Review, the Chief Executive shall take into account insofar as the Chief Executive considers these would affect the value of Araucaria, factors including but not limited to the following:

(b) the general price of competitive forest (competitive sale values for Araucaria are to be adjusted for marginal cost pricing effects) and timber products, both domestic and overseas, and

(c) any change in the relativity between these prices and the movements in the Consumer Price Index or other agreed Index including the causes thereof.

1.3 The Chief Executive will advise you on or about the 1st January preceding the date of the General Value Review, how the General Value Review will be conducted, the projected basket of wood available from the Supply Zone for the period relevant to the General Value Review and provide you with the opportunity to provide relevant information.

1.4 You will be invited to a pre-GVR briefing hosted by the Chief Executive to discuss the matters raised in Clause 1.3.

1.5 The Chief Executive will consider any relevant information provided by You in relation to these aspects provided that such information is received by the Chief Executive within the time frame specified in the advice provided under this clause.

1.6 The due date for You to provide relevant information will not be less than 30 days from the date of the letter of advice."

[6] There is no issue as to the respondent's compliance with the procedure set up by Schedule 5.

[7] On 7 November 2007, the respondent notified the applicant of its determination of a value of $74.11 per cubic metre, to apply as from 1 July 2007. That notification identified the factors taken into account in the determination, supplied an overview of the "key elements of the determination", and included the following statement:

You attention is drawn to section 30 of your sale agreements, which sets out the dispute resolution process, should you wish to dispute the determination. Please note especially clause 30.9 which provides for the determined value to be payable from the determined date until the resolution of the dispute."

30.1 Without affecting any other right or entitlement under this Agreement, if a dispute arises between the Chief Executive and You about this Agreement (including the validity, breach, suspension or ending of it), any party ("first party") may give notice (the "Notice of Dispute") to the other party (the "other party") by:

(a) inviting the other party to participate in any alternative dispute resolution procedure, and

(b) designating as the first party's representative in negotiations about the dispute, a person with authority to settle the dispute.

30.2 The Notice of Dispute must contain full details of the nature of the dispute.

30.3 On receipt of the Notice of Dispute, the other party must give notice to the first party within seven (7) days, designating its representative in negotiations about the dispute who will have authority similar to that of the first party's representative to settle the dispute.

30.4 The person designated by the other party must, within 10 days of the designation, seek to resolve the dispute.

30.5 If the dispute is not resolved within ten (10) days, the parties must seek during the next seven (7) days to agree on a process for resolving the whole or part of the dispute through means other than litigation or arbitration. The means may include further negotiations, mediation, conciliation or independent expert determination.

30.6 If the parties fail to agree on a process the parties will by Agreement apply for the appointment of a mediator to either the:

• (c) another body/organisation as agreed between the parties.

30.7 Any exchange of information or documents or the making of any offer of settlement under this clause is an attempt to settle the dispute between the parties. No party may use any information or documents obtained through the dispute resolution process established by this clause for any purpose other than in an attempt to settle the dispute between the parties.

30.8 If the dispute is not resolved by Agreement within forty-five (45) days of the date on which the first party gave notice, either party may refer the dispute to arbitration or commence court proceedings.

30.9 If the dispute concerns the determination of the value payable for Araucaria the value to be applied between the date of the determination by the Chief Executive and the resolution of the dispute will be the value determined by the Chief Executive.

30.10 If the dispute concerns the determination of the value payable for Araucaria the information or documents which may be taken into account in resolving the dispute, whether through alternative dispute resolution, arbitration or court, will be limited to the information which was provided by the parties to each other for the purpose of the value review."

[9] On 11 December 2007, the applicant notified the existence of a dispute as to the quantum of the value determined in the "General Value Review" process. During 2008, the parties engaged in the cl 30 dispute resolution process, but that did not resolve the matter. Then on 21 August 2008, the applicant referred the dispute to arbitration under cl 30.8.

[10] That crystallized the point of difference between the parties.

[11] The applicant contended, and contends, that the arbitrator has broad power to review the respondent's determination of value, constrained only by the Schedule 5 framework (and obligations to act fairly, reasonably and honestly), including the power to substitute, for the respondent's determination, any contrary determination made by the arbitrator.

[12] On the other hand, the respondent contends that the arbitrator may only determine whether or not the respondent's determination should be regarded as a determination within the meaning of the contract. If the arbitrator were to reach the conclusion that it was not, then the arbitrator would remit the matter to the respondent for further determination.

[13] On 28 August 2008 the applicant filed an originating application seeking this primary relief:

"Declarations that, upon the proper construction of clause 30 of the Sale Agreement 20040614 ('Sale Agreement') taken to have been entered into between the applicant and the respondent on or about 29 October 2004, the arbitration of the dispute as to the quantum of the values to apply to Hoop pine final crop sawlogs got under the Sale Agreement as determined by the Chief Forestry Plantations Officer in a General Value Review and notified by the respondent by letter dated 7 November 2007, referred to arbitration by the applicant on 21 August 2008 pursuant to clause 30.8 of the Sale Agreement:

(a) is an arbitration to which the Commercial Arbitration Act 1990 applies;

(b) is to be resolved by a determination of values payable for the Hoop pine final crop sawlogs by the arbitrator in accordance with the information provided by each of the parties to each other for the purpose of the General Value Review and by reference to the matters referred to in clause 1.2 of schedule 5 of the Sale Agreement."

[14] Mr Gotterson QC, who appeared with Mr Jackson for the applicant, pointed to the contractual mechanism for the adjustment of the originally "agreed" (cl 4.1(a)) values. As well as the provision for the "General Value Review", the contract provides for a "periodic value review", under cl 6. That is conducted in accordance with Schedule 4, which provides:

1.1 A Periodic Value Review of the value payable by you for each Cubic Metre of Araucaria shall be carried out by the Chief Executive in each six (6) month period during the continuance of this Agreement ('Periodic Value review').

1.2 The Periodic Value Review will apply from the first day of January and July of each Year.

1.3 Each Periodic Value Review will be conducted in line with this Schedule.

1.4 The first such review will be carried out to take effect on 1 July 2004.

1.5 In undertaking each Periodic Value Review the Chief Executive will index the value payable for each Cubic Metre of Araucaria as set out in Schedule 3 in accordance with:

(i) movements in the Consumer Price Index - All Groups - Brisbane during the preceding six (6) months to 30 September and 31 March in each year, as published by the Australian Bureau of Statistics or any other index agreed to by the Chief Executive, and

• (ii) any other relevant economic indicators as determined by the Chief Executive.

1.6 The Chief Executive may consider any relevant information provided by you, provided that such information is:

(i) received by the Chief Executive one month before the due date of the Periodic Value Review, and

• (ii) supported by any relevant economic market information."

[15] As may be noted, that review involves the adjustment of the originally agreed values in accordance with movements in the CPI and "other relevant economic indicators". Mr Gotterson acknowledged that the process under Schedule 5 is somewhat broader, but nevertheless submitted that the determination of value under that schedule remained susceptible of arbitral determination, essentially because of the specification of objective criteria in cl 1.2 of that Schedule. He referred to the analysis of P McMurdo J in Xstrata Queensland Ltd v Santos Limited and Ors [2005] QSC 323. Additionally, he relied on the decision of the Judicial Committee of the Privy Council in The Queensland Electricity Generating Board v New Hope Collieries Pty Ltd (1989) 1 Lloyd's Law Reports 205, 209, for the submission that the arbitrator would be obliged to set a "fair" price. Should the arbitrator disagree with the respondent's determination, then, he submitted, the arbitrator should substitute his or her own assessment. He pointed to the absence from the contract of any power in the arbitrator to remit the matter to the respondent for further determination.

[16] Mr McKenna SC, who appeared with Ms Payne for the respondent, emphasized the discretionary character of the exercise committed to the respondent, to be gathered particularly from the opening words of cl 1.2 of Schedule 5:

"In carrying out such General Value Review, the Chief Executive shall take into account insofar as the Chief Executive considers these would affect the value of Araucaria, factors including but not limited to the following..."

He pointed to the generality of the consideration in cl 1.2(b) especially. Mr McKenna likened this situation to that of a discretionary valuation decision by a third party, and relied substantially in that regard on the decision of the West Australian Court of Appeal in WMC Resources Ltd v Leighton Contractors Pty Ltd (1999) 20 WAR 489.

[17] Because of that broadly discretionary character, the issue committed to the respondent by Schedule 5 of this agreement would not be readily susceptible of judicial or arbitral determination. That being so, this case resembles that considered in WMC Resources Ltd v Leighton Contractors Pty Ltd. While it is true that the contractual provision in that case was even more generally cast than Schedule 5, in providing that "the company shall...determine such value in its sole discretion", the West Australian court expressly confirmed that those precise terms did not contribute materially to the outcome.

[18] Ipp J (with whom Kennedy and White JJ agreed) contrasted contractual valuations in the context of "detailed fixed and objective criteria" (para 16), where the court or arbitrator may set aside an incorrect determination and substitute another (para 18), with "valuations (which) involve making decisions where no fixed or readily available standard criteria exist" (para 23). As he observed, "the courts have consistently emphasized the discretionary nature of these kinds of valuations" (para 25). Referring to principles applicable to the review of discretionary valuations by third parties, he confirmed that "a court will not set aside a valuer's determination merely on the ground that it is 'incorrect' or that it reveals errors. The determination will only be interfered with if it is not made in terms of the contract; a mere mistake in the valuation will ordinarily not be a departure from the terms of the contract." (para 37)

[19] Ipp J referred to the leading authority of Commissioner of Taxation (Cth) v St Helen's Farm (ACT) Pty Ltd [1981] HCA 4; (1981) 146 CLR 336 where Mason J said (p 381):

"This court has consistently applied the rule that on a question of valuation an appellate tribunal is not justified in substituting its own opinion for that of the court below unless it is satisfied that the court below acted on a wrong principle of law or that its valuation was entirely erroneous."

See also Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, where McHugh JA said (pp 335-6):

"A valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of the contract?...The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract."

[20] In this contract, as with the case before the court in WMC Resources, the arbitrator is accorded no particular express power. In that regard, Ipp J said (para 51):

"Hence the relevance of an express provision in a contract, of a power granted to an arbitrator to open up, review and revise decisions of an engineer, superintendent (or a party in the position of the appellant). Without a term to that effect, the arbitrator may only interfere with the discretionary valuation in accordance with the principles laid down in cases such as Commissioner of Taxation (Cth) v St Helen's Farm (ACT) Pty Ltd and Legal and General Life of Australia Ltd v A Hudson Pty Ltd."

[21] I conclude that the jurisdiction of the arbitrator in this case is similarly constrained. The arbitrator may not conduct a general, or merits type, review of the respondent's determination. The arbitrator is limited to the consideration whether, in light of the process undertaken, the respondent's determination is properly to be regarded as a determination within cl 4 and Schedule 5 of the contract. In the event that the arbitrator were to determine that it should not be so regarded, the arbitrator would ordinarily remit the issue for re-determination by the respondent. See South Sydney Council v Royal Botanic Gardens (1999) NSWCA 478, para 127 and Kendall's Expert Determination (4th, 2008) at p 246.

[22] This result flows from the parties' not having specified objective criteria which must inform the valuation process. Consequently, their presumed intent would exclude any independent review, or re-valuation, by a court or arbitrator. In short, they have agreed upon a valuation process which neither a court nor arbitrator could appropriately follow.

[23] I should mention that Mr Gotterson relied on cl 30.9, which provides that "If the dispute concerns the determination of the value payable...the value to be applied between the date of the determination...and the resolution of the dispute will be the value determined by the Chief Executive." He relied on that for the submission that the parties acknowledged the power in an arbitrator to determine the value payable, independently as it were. I would however prefer the view that the point of cl 30.9 is simply to confirm that notwithstanding the reference of a dispute to arbitration, the applicant would remain liable to make payment in accordance with the extant determination pending the finalization of the arbitration.

[24] I should also record that Mr McKenna referred to a number of other considerations, including for example the less than purely commercial character of the agreement, the wide-ranging public responsibilities of the respondent, and the highly regulated nature of the subject matter - the last consideration going to explain, he submitted, why "the contract was granted on the express basis that the Chief Executive retain discretionary powers affecting virtually every aspect of the agreement - including the right to vary its central terms to reflect changes in government policy (cl 19.2(b))". That I have not in terms canvassed those considerations should not be taken as my rejection of their relevance. It has simply not been necessary for me to do so.

[25] The application should, accordingly, be dismissed.