Alliance Petroleum Australia N/L v Australian Gas Light Company [1978] HCA 6 (22 March 1978)

HIGH COURT OF AUSTRALIA

ALLIANCE PETROLEUM AUSTRALIA N/L and ORS v. AUSTRALIAN GAS LIGHT COMPANY

High Court of Australia
Gibbs(1), Mason(1), Jacobs(1), Stephen(2) and Murphy(2) JJ.

CATCHWORDS

HEARING

Canberra
22:3:1978

DECISION

GIBBS, MASON AND JACOBS JJ. This is an appeal brought by special leave from a judgment of the Supreme Court of South Australia (Jacobs J.). In general this Court is reluctant to grant special leave to appeal from the decision of a single judge, but the present case is exceptional. The matter is one of very great urgency. Moreover, the question arising is one of construction, and no marshalling of facts, or examination of principle or authority, is involved; in those circumstances the assistance which the Full Court would have provided may more readily be forgone.

2. The proceedings were brought to determine certain questions arising under an agreement made between the appellant and the respondents for the supply by the respondents to the appellant of large quantities of natural gas for a period of thirty years commencing on 20th September 1976. The agreement comprises a letter of agreement dated 26th May 1971 as amended from time to time by later documents. The questions that now fall for decision depend on the proper construction of cl. 24 of the contract, which, as amended, reads as follows:
"(24) (a) The price for sales gas delivered and taken or
which should have been taken under this Agreement
shall as from and including the first contract year be
thirty cents (30 ) per MMBtu and that price shall
(subject to the provisions of sub-clauses (b), (c) or
(d) of this clause (24)) prevail during the first four
contract years. As from the commencement of the fifth
contract year the price for all sales gas delivered
and taken or which should have been taken shall be
increased during that fifth contract year by one-quarter
cent (0.25 ) per MMBtu and a further one-quarter
cent (0.25 ) per MMBtu shall be added to the
price in each subsequent contract year until and
including the twenty-fifth contract year. Payments
shall be made on a monthly basis.
(b) Both the Producers and AGL may at any time and
from time to time (but not more than once in any
period of three consecutive calendar years) require a
review to be made for the purpose of adjusting the
prices (which for the time being would be payable
thereafter under this Agreement) either upwards or
downwards but so that in no case shall any resulting
price be less than the price of sixteen cents (16 )
per MMBtu plus the increases referred to in sub-clause
(a) of this Clause (24). In carrying out such review
regard shall be had to all economic and other relevant
factors existing at the time and in particular but
without in any way limiting the scope of the review to
the effects of inflation and any increases in capital
and operating costs.
Notwithstanding the foregoing it is hereby agreed that
both AGL and the Producers may in any one or more of
the first three contract years (but not more than once
in any such contract year) require a review of price
to be made for the purpose of adjusting the prices and
in carrying out any such review regard shall be had to
the matters referred to in the preceding sentence of
this Clause (24)(b) provided however that in respect
to any review held during the first contract year any
adjustment to the price by reason thereof shall not
take effect until the commencement of the second
contract year, and provided further that any review
held in the third contract year shall be considered
as a review pursuant to the provisions of the two
sentences of this Clause (24)(b) immediately preceding
this sentence.
(c) In the event of either the Producers or AGL
requiring an adjustment of price in accordance with
the foregoing provisions of this Clause they shall
consult together in good faith and use their best
endeavours to reach agreement on an adjustment or on a
formula to be applied in establishing such an adjustment.
(d) If the parties fail to agree upon a price or upon
a formula for fixing a price within three calendar
months from the date of the requirement of the
Producers or AGL the matter shall be referred to
arbitration by two arbitrators one of whom shall be
appointed by AGL and one by the Producers. Such
appointments shall be made within one month after
expiry of the three calendar month period
hereinbefore referred to."
to mean "the period commencing at 6:00 a.m. on the Commencement Date as defined in this Schedule and ending at 6:00 a.m. on the first anniversary of the Commencement Date" and it is provided that "each subsequent 'Contract Year' shall commence and end at 6:00 a.m. on an anniversary of the Commencement Date". "Commencement Date" is defined to mean "the day on which delivery of gas in accordance with this Agreement is first made and accepted".

3. The respondents are "the Producers" and the appellant is "AGL" within the meaning of cl. 24. The "Commencement Date" within the meaning of the agreement was the 20th September 1976. On the 1st June 1977 the respondents required a review to be made for the purpose of adjusting the price. No agreement was reached between the parties and arbitrators were appointed pursuant to the agreement. Arrangements were made for the arbitration to commence on the 15th December 1977, but a dispute arose as to the construction of cl. 24 and it was thought that the arbitrators could not proceed to make a final determination until this dispute was resolved. Accordingly the respondents commenced these proceedings by a summons seeking the determination of the following questions:

"1. Whether any price increase awarded by the Arbitrators
in the current arbitration proceedings pursuant to Clause 24
of the said agreement will take effect and is payable
from :-
(a) the date of the request by the plaintiffs for a review
pursuant to that Clause - namely 1st June, 1977;
(b) the date of the commencement of the second year in
which gas is supplied on a continuous basis under the
contract - namely 20th September, 1977;
(c) the date of completion of the current review under the
Clause 24 of the said agreement, whether such
completion be as a result of mutual agreement between
the parties or final award arising out of such
arbitration; or
(d) any other and if so what other date?
2. Whether in making their determination pursuant to Clause
24 of the said agreement the arbitrators are entitled to
stipulate such date as they in their discretion may select
as the date on which the increased price takes effect and
becomes payable.
3. If the answer to both questions 1(a) and 1(b) is in the
negative and the answer to question 1(c) or alternatively to
question 2 is in the affirmative, whether the arbitrators
are entitled to award interest to the plaintiffs in respect
of either :-
(a) the period between the 1st June, 1977 and the date
upon which the price increase takes effect;
(b) the period between the 20th September, 1977 and the
date upon which the price increase takes effect; or
(c) any other and if so what other dates?
4. If the arbitrators are not entitled to award interest in
respect of any of the periods as aforesaid, whether the
arbitrators, in arriving at the increased price to be
awarded, are entitled to take into account the fact that a
period of time will have elapsed between the 1st June, 1977
or alternatively the 20th September, 1977 and the date upon
which the price increase takes effect."

The learned primary judge answered question 1(b), yes, and did not find it necessary to answer the other questions. Before us it was submitted that the form of question 4 was unsatisfactory and that we should, if necessary, treat that question as if it read as follows:

"4. If the arbitrators are not entitled to award interest
in respect of any of the periods as aforesaid, whether the
arbitrators, in arriving at any increased price to be
awarded, are entitled to compensate the plaintiffs for not
receiving any increase in price in respect of the gas
supplied pursuant to the agreement between 1st June, 1977,
or alternatively 20th September, 1977, and the date any such
price increase takes effect."

The crucial question for decision is when the adjustment of price that will be made when the arbitrators have made their determination is to take effect. Does it take effect retrospectively from the date when the respondents required the review, or, as the learned primary judge held, from the date of commencement of the second contract year? Or does it take effect only when the determination is made?

4. Clause 24 is obviously obscure and defective and it does not provide a clear answer to these and other questions. However for reasons which we are about to give we conclude that on the proper construction of the clause an adjustment of price takes effect only when a review is completed, whether as a result of agreement by the parties on a price or by the determination of the arbitrators if the parties fail to agree.

5. Paragraph (a) of cl. 24 commences by stating that the price shall as from and including the first contract year be 30 per MMBtu, and that price shall, subject to certain exceptions, prevail during the first four contract years. The clear effect of these words is that the price is to continue to be 30 per MMBtu until it is altered in accordance with one of the provisions of the agreement that create the exceptions. One mode of alteration is provided by the second sentence of para. (a), which provides for fixed automatic increases of the price of gas which was or should have been taken during the years of the contract commencing with the 5th and ending with the 25th. Paragraph (a) concludes by stating that "payments shall be made on a monthly basis". These words naturally suggest that payment in full is to be made each month for gas which was or should have been taken during the previous month. There is no provision for the retrospective adjustment of payments. Such a provision would be expected if an increase in price were intended to take effect at a considerable time after delivery had been taken and payment had been made at the prices prevailing at the time of delivery.

6. By para. (b) the parties are given the right to "require a review to be made for the purpose of adjusting the prices (which for the time being would be payable thereafter under this Agreement) either upwards or downwards". The third sentence of para. (b) gives the parties the right, of which the respondents have now availed themselves, to "require a review of price to be made for the purpose of adjusting the prices". It is to be observed that the producers, when requiring a review under these provisions, are not obliged to claim a particular price, or to put forward a formula to be applied in reaching a price. The fact that they need do no more than require a review to be made is itself an indication, albeit slight, that it was not intended that the price when determined should operate retrospectively to the date of the requirement. The statement, twice repeated, that the review is to be made "for the purpose of adjusting the prices" quite strongly suggests that the adjustment of the prices cannot be effected until the review is completed. Only when the adjustment is made does a price different from that fixed by para. (a) become payable.

7. In argument the parties attached some importance to the words in parenthesis in para. (b) :

"which for the time being would be payable thereafter under
this Agreement."

It seems to us that the word "thereafter" means "after the date on which the adjustment is effected" and that the clause taken as a whole means "which would from time to time have been payable after the adjustment if the adjustment had not been made", and that the words "from time to time" are intended to refer to the increases that automatically take effect under (a), the intention no doubt being to ensure that the making of an adjustment did not prevent the operation of subsequent automatic increases.

8. The respondents relied upon the provisions of the second sentence of para. (b), which, in their submission, indicated that in carrying out the review regard was to be had to factors existing at the date of the requirement. Accordingly, they submitted, the adjustment should take effect at the date of the requirement, because that was the time at which the factors warranting the adjustment existed. However in our opinion the words "at the time" naturally and grammatically refer back to the phrase "in carrying out such review". In other words the factors to be regarded are those existing when the review was made. It was said that this might present practical difficulties, particularly if a change in relevant circumstances occurred during the course of a review. It is true that if such a change did occur the parties conducting the review, or the arbitrators, would be bound to have regard to the altered circumstances, but if this might possibly occasion difficulties in some cases, the difficulties would be no greater than might arise in other legal proceedings and would certainly not be insuperable.

9. The two provisos in para. (b) do not assist the respondents' argument. The learned primary judge took the view that "held" in these provisos meant "commenced", and that if it were given the meaning of "completed" the two provisos would or might be deprived of sensible operation. The meaning of "held" of course must depend on the context in which it appears, and the words of the first proviso in particular indicate that "held" there means "completed". Adjustment to price is made "by reason of" a review only if it has been completed. The first proviso indicates that a review might, but not necessarily would, be begun and completed in the first contract year. In relation to all these provisions it must be remembered that not every review need end in arbitration; a review might be concluded speedily, and by mutual agreement. The effect of the first proviso is that if a review had been completed during the first contract year, the adjustment to the price would not have taken effect until the commencement of the second contract year. The concluding sentence of para. (b) was added by amendment on the 22nd September 1975; at the same time, the price fixed by para. (a) was increased from the original figure of 16 per MMBtu to 30 , and other amendments were made to cl. 24. The insertion of the first proviso may have reflected an intention that since the producers were given a considerable increase in the initial price, they should not obtain a further price increase during the first contract year. The letter of the 22nd September 1975 contained a recital in the following terms:

"The Producers understand that as a result of recent
discussions following representations by the Producers The
Australian Gas Light Company is prepared to accept the
following amendments to the Letter of Agreement:-
(i) that the price of sales gas for the first contract
year be thirty cents (30 ) per MMBtu;
(ii) that during each of the first three contract years an
annual review of the price may be requested and if so
requested will be made in terms of Clause (24)(b) of
the Letter of Agreement, provided that the first such
review will not take effect until the end of the
first contract year."

The respondents submitted that this recital reveals an intention that if a review is required in each of the three years, it will be made during the year during which it is required. The recital is ambiguous, and does not in any case use the word "held" and it does not throw any clear light on the meaning of cl. 24. As to the second proviso, that is not deprived of sensible operation if "held" means "completed".

10. We consider that cl. 24, notwithstanding its obscurities, reveals an intention that the price fixed by para. (a) should prevail until adjusted, and that the adjustment should take effect at the conclusion of the review by agreement or by the arbitrators' award. A consideration of the possible economic consequences to the parties does not assist us in our conclusion. If the construction that we have adopted may cause hardship to the producers, any other construction might cause hardship to AGL; it was for the parties to consider what terms as to payment they regarded as just or expedient, and we must give effect to the intention which their words reveal.

11. It is clear that the arbitrators are not entitled to stipulate the date from which an adjusted price shall take effect, or to award interest to the respondents. The function of the arbitrators is limited to fixing a price or a formula by which the price is to be fixed. For the same reason they cannot award compensation to the respondents for not receiving any increase in price in respect of gas supplied between the 1st June 1977, or the 20th September 1977, and the date on which the price increase takes effect.

12. We would allow the appeal. The questions in the originating summons should be answered as follows:

Question 1(c) : Yes;
Question 2 : No;
Question 3 : No;
Question 4 : No.

STEPHEN AND MURPHY JJ. We would, for our part, dismiss this appeal. Since we are in the minority and since the case turns exclusively upon the interpretation of a contract, involving nothing in the way of general principles of law, it will be enough if we state, as shortly as may be, what has led us to our conclusion.

2. The contract is one for the supply of natural gas. The suppliers are a consortium of companies from whose gasfields the buyer, a gas supply company, obtains natural gas for reticulation to consumers in the Sydney metropolitan area. Clause 24 of the contract is a singularly ill-drafted provision dealing with the price to be paid to the suppliers over the many years during which gas is to be supplied under the contract. The present form of that clause is the result of some consensual amendment by the parties, a process which has added to the initial obscurities of its language.

3. The clause provides for review, at the instance of either party, of the predetermined prices of gas. A party may require such a "review to be made for the purpose of adjusting the prices". In 1977, during the first year of supply, the suppliers required such a review and under cl. 24 this involved, first, consultation together in good faith, the parties using their best endeavours to reach agreement on an adjustment of price or on a formula to be applied in establishing such an adjustment. Failing agreement upon price or formula within three months the matter must then go to arbitration, a further month being allowed for appointment of arbitrators. There was in fact, in 1977, both consultation and failure to agree and arbitrators have been appointed. However, before they enter upon the arbitration the parties wish to have resolved a dispute as to the meaning of cl. 24. Hence the proceedings in the Supreme Court of South Australia, from which this appeal is now brought.

4. The dispute is about the date from which any price adjustment should take effect; is it, subject to a qualification to be mentioned below, the already long past date on which the suppliers notified their requirement of a price adjustment or is it the date of ultimate completion of the review, a date which still lies somewhere in the future? The suppliers contend for the former, the buyer for the latter. Other ancillary questions are also raised but this, in principle, is the matter in dispute. The qualification to which we have referred is this: the present review was initiated in the first year of supply of gas and a specific proviso governs such a review, any consequent adjustment is not to take effect "until the commencement of the second contract year". While this necessarily modifies the actual answer to be given to the main question asked, it does not radically alter the nature of the enquiry as to meaning which the question calls for.

5. The general concept to be found in cl. 24 is one appropriate enough for a long-term supply contract entered into in a time of price instability: there is an initial agreement upon prices, but provision has also been made for the parties to seek price adjustments in the light of future "economic and other relevant factors": in the event of disagreement as to adjustment there is to be resort to arbitration. However such a procedure is inherently time consuming and it is in dealing with the several consequences of this that the clause is manifestly inadequate. The passage of time in the interim between request for price adjustment and ultimate agreement or award necessarily involves deferral of payment of any increase and payment deferred is equivalent to loss incurred. More importantly, unless the price adjustment is made to operate retrospectively the gas supplied in the interim will earn only the old price, regardless of changes already affecting the producers' cost structures involved in its supply. Again, just as it is the passage of time, in a period of inflation, which occasions the need for a review of prices, so too the months involved in the review procedure will allow still further changes in cost structure to occur: if the ultimate adjustment is not to take effect retrospectively should it reflect "economic and other relevant factors" not merely as they were when the review was requested but as they are at the conclusion of the consultation or arbitration?

6. No clear answer to these problems emerges from a first reading of the language of cl. 24. Each party can point to one or more indications tending to favour the conclusion which it urges. In the Supreme Court of South Australia Jacobs J. described his task as that of divining "the intention of the parties from the language of a document shrouded in obscurity". His Honour went about that task by first describing what he discerned to be certain general features of the clause. He noted that, quite apart from price reviews sought by the parties, it provided for small but automatic price increases each contract year after the first four years, the contract year being in that sense the time span between price increases and prices being prices enduring for a contract year. He also noted the practical difficulties which would arise if the "economic and other relevant factors" to which regard was to be had in reviewing prices were to include matters occurring during the currency of the review process, thus involving "a review ambulatory in time up to the very point at which a decision or a determination is made". His Honour thought that the relevant factors upon which a party might rely in a review would be those the occurrence of which was the occasion for seeking the review.

7. We would, with respect, adopt this analysis of underlying features of cl. 24 and would add one further matter. A fundamental feature of cl. 24 is agreement of the parties upon prices, which are to be subject to a modest but automatic escalation, for all gas to be delivered in the future. Superimposed upon this basis of agreed future prices is the opportunity which is afforded to the parties to request reviews so as to secure some adjustment of such agreed prices. The question whether there should be any such adjustment is then to be resolved in the light of economic and other relevant factors, which are to include "the effects of inflation and any increases in capital and operating costs". The parties are to consult together "in good faith" following a request for a review, using their best endeavours to reach agreement. All this points, we think, to a contemplation that a party requesting a review or, as it is said, "requiring an adjustment of price", and, in consequence, a departure from the agreed pricing pattern will, in doing so, rely upon specific factors as justifying some present adjustment of price which it seeks. The contemplation is not, we think, that these will consist of speculations concerning a necessarily uncertain future but rather that they will be existing factors susceptible of proof as presently justifying a particular price adjustment presently sought. That they are to be the subject of consultation together in good faith reinforces this view, as does the specific reference to "the effects of inflation" and to "increases in capital and operation costs", all matters notoriously incapable of instantaneous ascertainment but which instead may be ascertained, in retrospect, with the aid of statistical analyses and by the application of detailed accounting techniques.

8. What it is which goes to arbitration, in the event of disagreement after consultation, is "the matter", that is the adjustment required by one party and denied by the other. Just as the adjustment which one party has required is an adjustment which it then and there requires and which it seeks to justify by reference to existing factors, so, when the other party denies it that adjustment, what is to be arbitrated upon is the requiring party's entitlement to the adjustment which it has required.

9. Viewing the clause, as we do, in this light it would require clear indications to the contrary in the language of the clause to persuade us that the adjustment to be granted or denied by the arbitrators, whether expressed as a simple price or as "a formula for fixing a price", is not to be of the same quality as that originally required by the party seeking the review and about which the parties have consulted together, namely an adjustment to take effect at the date of the requirement and sought to be justified by the then prevailing "economic and other relevant factors". This is, of course, to be qualified, in the case of an adjustment sought in the first contract year, by the express agreement that it shall not take effect until the commencement of the second contract year.

10. The clause contains no such indications. Many of the suggested indicia said to support one view or the other are equivocal. The learned trial judge has pointed to a number which he regards as favouring the conclusion to which we too have come and we have heard nothing in argument which satisfies us that he was wrong in doing so. There is, perhaps, one matter urged by the appellant which calls for particular mention; it turns upon the sentence "Payments shall be made on a monthly basis" appearing in par. (a) of the clause. This is said to provide strong support for the appellant's argument, for if the arbitrators were to make an award in terms of an adjusted price which was retrospective in effect how, it is asked, could this take effect consistently with payments on a monthly basis. The answer lies in the power given to the parties, and which must extend also to the arbitrators, either to reach agreement on an adjustment or to arrive at "a formula to be applied in establishing such an adjustment" (using the words of par. (c)). The flexibility afforded to the arbitrators' award by this reference to a formula (repeated, in different terms but with surely no different meaning, in par. (d)) needs no emphasis; it provides ample scope for awarding, either as a lump sum in the first month after the award or spread over a number of months, such an amount as will effectively adjust the price retrospectively to the date of the requirement.

11. These, then, including the general agreement which we expressed with the views of the learned trial judge, represent our reasons for concluding, in dissent, that this appeal should be dismissed.