Electricity Generation Corporation v Woodside Energy Ltd

• Jurisdiction: Australia Federal only
• Judge: French CJ,Hayne,Crennan,Kiefel JJ.,Gageler J.
• Judgment Date: 05 March 2014
• Neutral Citation: [2014] HCA 7
• Docket Number: Matter No P47/2013
• Court: High Court
• Date: 05 March 2014

[2014] HCA 7

HIGH COURT OF AUSTRALIA

French CJ, Hayne, Crennan, Kiefel and Gageler JJ

Matter No P47/2013

Matter No P48/2013

Electricity Generation Corporation T/as Verve Energy

Appellant

and

Woodside Energy Ltd &Ors

Respondent

Woodside Energy Ltd &Ors

Appellant

and

Electricity Generation Corporation T/as Verve Energy

Respondent

Representation

N C Hutley SC with J C Giles and D A Hughes for the appellant in P47/2013 and the respondent in P48/2013 (instructed by Jackson McDonald)

D F Jackson QC with B Dharmananda SC, J K Taylor and E M Heenan for the appellants in P48/2013 and the respondents in P47/2013 (instructed by Lavan Legal)

Electricity Generation Corporation v Woodside Energy Ltd

Woodside Energy Ltd v Electricity Generation Corporation

Contract — Construction — Long term gas supply agreement — Sellers obliged to use ‘reasonable endeavours’ to supply supplemental gas — Agreement allowed sellers to take into account all ‘relevant commercial, economic and operational matters’ in determining whether able to supply supplemental gas — Gas explosion at plant operated by third party temporarily reduced supply of gas to market — Sellers refused to supply supplemental gas at price stipulated in agreement during period of reduced supply — Sellers offered to supply equivalent quantities of gas at higher price under separate short term agreements — Whether sellers breached obligation to use ‘reasonable endeavours’ to supply supplemental gas.

Words and phrases — ‘able’, ‘reasonable endeavours’, ‘relevant commercial, economic and operational matters’.

ORDER

Matter No P47/2013

Appeal dismissed with costs.

Matter No P48/2013

• 1. Appeal allowed with costs.

• 2. Set aside paragraphs 1 to 4 of the orders of the Court of Appeal of the Supreme Court of Western Australia made on 20 February 2013 and, in their place, order that the appeal to that Court be dismissed with costs.

1 French CJ, Hayne, Crennan and Kiefel JJ. The first issue in these appeals is the construction and application of a long term gas supply agreement (‘the GSA’) between Electricity Generation Corporation trading as Verve Energy (‘Verve’) and various gas suppliers in Western Australia including Woodside Energy Ltd (‘the Sellers’). The Sellers are the respondents to the first appeal and the appellants in the second.

2 Verve, a statutory corporation, is the major generator and supplier of electricity to a large area in the southwest of Western Australia, including Perth. Verve purchases natural gas under the GSA for use in its power stations. Separate contracts between Verve and each of the Sellers are contained in the GSA 1, which obliges each Seller to make available for delivery to Verve a proportionate share of a maximum daily quantity of gas (‘MDQ’), delivered in a common and commingled stream 2, and to use ‘reasonable endeavours’ 3 to make available to Verve a supplemental maximum daily quantity of gas (‘SMDQ’). In these reasons, the acronyms MDQ and SMDQ are used in the same way as they are used in the GSA, to refer to specified quantities of gas.

3 Both appeals concern the supply of gas to the Western Australian market, which was temporarily disrupted by an explosion at a gas plant operated by Apache Energy Limited (‘Apache’). The first appeal, brought by Verve, challenges the conclusion that a contract induced by economic duress must be rescinded in order for restitution to be available. The Sellers' appeal concerns whether or not the Sellers breached the abovementioned ‘reasonable endeavours’ obligation, which turns on the proper construction of cl 3.of the GSA.

4 If the Sellers' construction of cl 3.3 is accepted, with the consequence that the Sellers did not breach the GSA, the second issue (arising on the Sellers' notice of contention), namely whether Verve has a right to restitution of moneys paid under short term gas supply agreements (for alleged economic duress), does not arise. Nor do other issues in Verve's appeal concerning whether rescission of those agreements is necessary before obtaining restitution, and the quantum of any restitution.

Background facts

5 The Sellers and Apache, the principal gas suppliers in Western Australia, operated gas plants located in the northwest of Western Australia. Gas was transported from both plants to the southwest of Western Australia by the Dampier to Bunbury Natural Gas Pipeline. On 3 June 2008, an explosion occurred at Apache's gas plant on Varanus Island. The explosion caused the cessation of gas production at the plant and effected a temporary reduction in the supply of natural gas to the Western Australian market by 30 to 3per cent, which led to demand exceeding supply.

6 On June 2008, Apache entered into a written agreement with the Sellers and Japan Australia LNG (MIMI) Pty Ltd (‘MIMI’) under which the Sellers agreed to supply Apache with certain daily quantities of natural gas (‘the Apache agreement’). Many other customers in Western Australia sought to purchase gas from the Sellers during this time, at prices far exceeding those contained in the GSA.

7 On 4 June 2008, before the Apache agreement was executed, the Sellers informed Verve that they would not supply SMDQ under the GSA to Verve for an indefinite period. On the same day, the Sellers offered to supply Verve with an equivalent quantity of gas for the month of June 2008, at a price which exceeded the price in the GSA applicable to SMDQ. Under protest, and without prejudice to its rights under cl 3.3(b), Verve entered into a ‘fully interruptible’ short term gas supply agreement with the Sellers and MIMI for the supply of daily quantities of gas between 8am on 4 June and 8am on 30 June 2008. It was common ground that the effect of the agreement was that the Sellers were under no obligation to supply any particular quantities of gas to Verve, and that the price for gas delivered under the agreement was the prevailing market price.

8 On 20 June 2008, when it was clear that the shortage of supply referable to the Apache incident would continue until the end of September, the Sellers invited tenders for the purchase of gas from them under short term supply agreements for the period from 8am on 30 June to 8am on 30 September 2008.

9 The Sellers' agent informed Verve that Verve would not receive the nominated SMDQ during that time, and would be required to enter the tender process to receive any additional gas from the Sellers. Again under protest, Verve submitted a successful tender and entered into another fully interruptible gas supply agreement with the Sellers and MIMI, until the end of September 2008. The price for gas delivered under the agreement was also the prevailing market price. From 30 September 2008, the Sellers supplied SMDQ to Verve pursuant to the GSA. It was common ground that the Sellers had the capacity to supply SMDQ nominated by Verve during the relevant period.

10 These facts gave rise to a dispute over whether the Sellers breached their obligation under the GSA to use reasonable endeavours to supply SMDQ to Verve between 4 June and the end of September 2008.

The GSA and the issues

11 Clause 3 of the GSA provides for variously described quantities of gas which the Sellers are required to make available for delivery to Verve. At the heart of the dispute is the correct construction of cl 3.3 and, more particularly, the relationship between two parts of that clause, cl 3.3(a) and cl 3.3(b).

12 The GSA replaces a prior contract between the Sellers and Verve and ‘reflects and facilitates a long-term’ 4 commercial relationship for the sale and purchase of natural gas 5. This is part of the background and context in which cl 3.3 falls to be construed. Before going further, it is necessary to explain how the construction issue arises by reference to relevant provisions of the GSA.

13 The GSA consists of Recitals, a Contract Overview (which does not qualify any substantive provisions), Part A — Key Commercial Provisions 6, Part B — General Conditions 7, Part C — Definitions and Interpretation 8, and four Schedules. The GSA contains a number of provisions indicating that the Sellers supply gas to buyers other than Verve 9, and it was not in contest that the demand for gas could fluctuate in the context of a large domestic and commercial electricity market. A number of provisions also indicate that Verve may

purchase its gas requirements, above the minimum quantities set out in the GSA, from suppliers other than the Sellers 10.

14 Under the ‘Key Commercial Provisions’ of the GSA, governing ‘quantities’ and ‘ price’ 11, the Sellers agree to make available for delivery to ‘the Buyer’ (ie Verve), and Verve agrees to receive and pay for — or pay for if not taken — gas, in quantities and at the price and in the manner specified in the GSA 12. Clause 3 sets out the Sellers' delivery obligations by reference to maximum quantities and cl 4 provides for Verve's payment obligations by reference to minimum quantities.

15 Clause 3.1 provides for a Total Contract Quantity of gas (‘TCQ’), which the Sellers are required to make available for delivery under the GSA. This provides the context for the following provisions dealing with daily quantities of gas (maximum and supplemental). Clause 3.2 provides for MDQ and cl 3.3 provides for SMDQ. By cl 3.2(a), the Sellers are required to make available for delivery on any day gas up to MDQ 13, subject to cl 9. It is convenient to turn briefly to cl 9 before considering cl 3.3.

16 Clause 9 of the ‘General Conditions’ in the GSA 14 contains a complex scheme for ‘nominating’ the quantities of gas required in the next seven day period 15. By cl 9.1(a), Verve must nominate the quantity of gas which it requires for the next period. Within a few hours of that nomination, the Sellers are required to notify Verve of the quantity to...