Novacoal Australia Pty Limited v Macquarie Generation [1999] NSWSC 929 (14 September 1999)

Last Updated: 17 September 1999

NEW SOUTH WALES SUPREME COURT

CITATION: Novacoal Australia Pty Limited v Macquarie Generation [1999] NSWSC 929 revised - 16/09/99

CURRENT JURISDICTION: Equity Division

Commercial List

FILE NUMBER(S): 50103/1999

HEARING DATE{S): 3 September 1999;

9 September 1999.

JUDGMENT DATE: 14/09/1999

PARTIES:

Novacoal Australia Pty Limited (Plaintiff)

Macquarie Generation (Defendant)

JUDGMENT OF: Bergin J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:

T Bathurst QC/ PW Collinson (Plaintiff)

B Walker SC/ I Jackman/ M Leeming (Defendant)

SOLICITORS:

Dunhill Madden Butler

Agents for:

Arthur Robinson & Hedderwicks (Melbourne) (Plaintiff)

Speed & Stracey (Defendant)

CATCHWORDS:

Application for injunction in long term contract for coal supply - Alleged invalid suspension of deliveries - implication of reasonableness - estoppel.

ACTS CITED:

DECISION:

Injunction refused.

JUDGMENT:

THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

COMMERCIAL LIST

BERGIN J

DATE: 14 SEPTEMBER 1999

50103//1999 - NOVACOAL AUSTRALIA PTY LIMITED v MACQUARIE GENERATION

JUDGMENT

1 The plaintiff (or its predecessor) and the defendant (or its predecessor) have been in a contractual relationship for the last 13 years for the supply of coal from the plaintiff's Howick mine in the Hunter Valley to the defendant's Liddell and Bayswater Power Stations, also in the Hunter Valley and in close proximity to the Howick mine. The term of the current contract between the parties is until 2010.

2 This is an application by the plaintiff for injunctive relief in respect of the defendant's conduct on 24 August 1999 when it suspended delivery of coal from the plaintiff because it was claimed to be outside certain specifications contained in the contract. The injunction the plaintiff seeks is in the following terms:

That until further order Macquarie Generation cease the suspension of deliveries of coal by Novacoal which it commenced on 24 August, 1999.

3 The matter was heard on 3 and 9 September 1999 when Mr T.F. Bathurst QC, leading Mr P.W. Collinson of counsel, appeared for the plaintiff and Mr B.W. Walker SC (3.9.99 only), leading Mr I.M. Jackman of counsel and Mr M.J. Leeming of counsel, appeared for the defendant.

Contractual History

4 BP Coal Development Australia Pty Limited, since renamed Novacoal Australia Pty Limited, originally agreed to supply coal to the defendant's predecessor, the Electricity Commission of New South Wales, pursuant to a contract apparently numbered 3726 from 1 July 1986 and from July 1987 to December 1990 under Contract 3806B.

5 In March 1989 the Electricity Commission issued tender 4007 which was subsequently won by the plaintiff. The contract 3806B was then combined with tender 4007 to create the current contract referred to as the 3806B variation (3806BV). 3806BV was signed on 20 July 1990 and took effect from 1 January 1991 for the term which expires on 31 December 2010. It provides for the delivery of 2.5 million tonnes of coal per annum plus or minus 20%. The price paid for the coal by the defendant, subject to contractual adjustments, is approximately $1.48 per gigajoule.

6 Between August 1997 and December 1997 an interim agreement operated between the parties for the supply of coal at an increased ash level with supply based upon an energy (or gigajoule) basis rather than a volume basis at a price of $1.38 per gigajoule.

7 A second interim agreement operated during 1998 for the supply of coal with an energy content of 56 million gigajoules comprising 46 million gigajoules at $1.38 per gigajoule and 10 million gigajoules at $1 per gigajoule. This resulted in the delivery of 2.6 million tonnes during 1998.

8 The defendant sought a further interim agreement for 1999 to enable it to purchase coal at $1.20 per gigajoule. The plaintiff did not agree to that price and in those circumstances the parties reverted to 3806BV from 1 January 1999 pursuant to which the defendant is required to pay the higher price for the coal than that paid pursuant to the interim agreements.

Characteristics of Coal

9 One of the characteristics of coal is what is known as grindability. Grindability is a measure of the difficulty of grinding coal for use as pulverised fuel. Various techniques have been used to measure the work required to crush coal one of which was developed by a person named Hardgrove. This became known as the Hardgrove Grindability Index or HGI.

10 High HGI values indicate that less work is required to crush the coal. Thus coal with low HGI values will require more work and more wear and tear on the mill to crush the coal.

11 Other relevant attributes of coal in this case are what have been referred to as gross specific energy, total moisture content and ash content. These qualities are determined daily and the price is based upon these daily results.

12 The original contract 3806B and the tender document 4007 both referred to a lower limit for HGI at 44 with no upper limit. 3806BV refers to an HGI range of 54 - 44 or alternatively 48 - 60. The ranges for gross specific energy are 21.0 - 27.0 or alternatively 23 - 26. The ranges for the percentage of total moisture content are 10 maximum or alternatively 8 - 10 and the ranges for the percentage of ash content are 18 - 25 or alternatively 16 - 23. (cl 3.1.1/Schedule M1). There is controversy between the parties as to whether the ranges referred to in the alternative (those in Schedule M1) are applicable.

13 These ranges are referred to as the Standard Coal Quality (cl 7.16.1) and if the plaintiff delivers coal outside any of the ranges the defendant has a discretion to accept it and apply penalty provisions to the price it pays for the coal. Those penalty provisions contain formulae for adjustments known as the Specific Energy Adjustment, the Ash Content Adjustment and the Excess Moisture Adjustment.

14 The intention of the Specific Energy Adjustment "is to pay for coal on an energy basis".(cl7.16.2) The intention of the Ash Content Adjustment is to reflect the cost to the defendant due to the effect of "ash on its boilers and associated equipment"(cl 7.16.3). The intention of the Excess Moisture Adjustment is to reflect the cost to the defendant "for loss of pulverising mill capacity and other inefficiencies in power station performance due to excess moisture content" (cl 7.16.4).

15 If the defendant does not exercise its discretion to accept the coal that is outside the specified ranges, it may reject it by suspending deliveries which it is entitled to continue until it is satisfied with the plaintiff's proposal that the coal to be delivered in the future will be within the specified ranges (cl 3.4).

Terms of the contract

16 Although the terms of the contract relevant to this application are somewhat lengthy I am of the view that it is appropriate to extract them hereunder:

3.1 COAL QUALITY REQUIREMENTS

3.1.1. All coal shall be delivered to the nominated Delivery Point and shall possess characteristics within the following ranges:

Gross Specific Energy (MJ/kg)

(at 8% T.M.) 21.0 - 27.0

Total Moisture (%) 10 maximum

Ash Content (%) (at 8% T.M,) 18 - 25

Volatile Matter Content (%)

(at 8% T.M.) 23 - 34

Total Sulphur Content (%)

(at 8% T.M.) 1.0 maximum

Chlorine Content (%) 0.02 - 0.08

Ash Fusion Temperature (C)

(reducing) 1250 minimum

(hemisphere)

Hardgrove Grindability Index 54 - 44

Sizing (in accordance with AS1152

test sieve) 100% > 40 mm

95% > 32 mm

Fines (minus 1.0 mm) 15% maximum

Ash Resistivity - ohm. Cm at 120C 5 x 10 13 maximum

Ash Analysis

Si02 45 - 75

A1203 15 - 35

Fe203 1 - 12

Ti02 0.4 - 2.2

Mn 304 0.1 - 0.7

Ca0 0.1 - 2.3

Mg0 0.2 - 1.4

Na20 0.1 - 0.9

K20 0.8 - 2.6

P205 0.1 - 1.6

S03 0.1 - 1.5

The Contractor is required to give, in Schedule M1, the values of the above characteristics that would be considered representative of the coal supply he is offering.

3.1.2 The Standard Coal Quality requirement on which the Tenderer is deemed to have tendered will be:

Total Moisture (as received) 8.0%

Ash (as received) 22.0 %

Specific Energy (as received) 23.0%

(i.e. it will be assumed in tender assessment that Tenderers have converted the "price" for the quality of coal to be supplied - see Schedule M1 - to an equivalent price for standard quality coal).

3.1.3 The Contractor shall nominate the specific quality characteristics for the coal to be supplied in Schedule M1. All costs associated with the mining, washing, blending, handling and transport of the coal to the Delivery Point shall be met by the Contractor.

3.1.4 The quality parameters set down in Clause 3.1.1. are based upon the design limitations of the power station boilers. The Contract imposes price adjustments based on the average monthly quality of the coal supplied.

3.2 COAL QUALITY DETERMINATION

3.2.1 The daily results of coal quality obtained by automatic mechanical sampling will be used for the purposes of calculating adjustments to the Contract Price per Tonne for variations in ash content, specific energy and moisture content.

Either party to the Contract will be entitled to any reasonable inspection or check of all weighing, on-line monitoring, sampling and testing facilities, and shall have or provide reasonable access for witnessing weighing, on-line monitoring, sampling and analysis of the coal.

3.2.2 For the purpose of coal quality determination, it is proposed that the coal as received at Bayswater Power Station, shall be sampled on each Delivery Day by the Principal or an independent authority engaged by the Principal at the sampler located on the H1 conveyor, generally in accordance with the following standards:

AS1038 Parts 1, 3, 5, 14, 16 - "Methods for Analysis and Testing of Coal and Coke"

AS2646 - 1984 - "Sampling of Solid Mineral Fuels" including "Draft Amendment to Part 2, 1988"

BS1016 Part 17:1979 - "Method for the Analysis and Testing of Coal and Coke - Size Analysis of Coal".

AS1152-1973 - "Test Sieves".

The Lot as referred to in Clause 3.9 of AS2646 Part 2 is deemed to consist of the quantity of coal delivered by the Contractor in one month. The daily samples will be treated as sampling units as defined on AS2646 Part 2 - 1984.

3.2.3 The Contractor has no objection to an automatic mechanical sampler being established on the mine site by an independent authority which will operate and maintain it in accordance with the Australian Standard for coal sampling from moving belts, all at the Principal's cost.

It is acknowledged that the location of the sampler at Howick in lieu of the H1 conveyor will cause the Contractor to incur coal quality penalties not envisaged by the Contract. In the event that the sampler is placed at Howick and the belt weigher remains at Bayswater, the parties shall analyse the effect of that arrangement on the coal quality formulae and make alterations to the formulae to ensure that the payments to the Contractor remain as envisaged by the Contract.

3.2.4 During the life of the Contract, sampler maintenance and sample collection and analysis will be carried out by the Principal or an independent Authority engaged by the Principal. All costs for performing the services of sample maintenance and sample collection and analysis, and preparation and distribution of analysis reports, will be borne by the Principal.

3.2.5 Three portions of each sample will be prepared. One portion will be used by the Principal for routine analysis, one delivered to the Contractor as a check sample and one will be held in reserve for Umpire Analysis. The Umpire Analysis sample will be disposed of after three months unless subject to claim. The Principal will promptly notify the Contractor of the results of the analysis in respect of each sample. Notification of results of sample analysis for moisture, ash and specific energy to the Contractor shall be not later than the third Contract Working Day after the relevant day upon the Principal to provide the analysis shall result in no penalties being borne by the Contractor on that day's coal deliveries. However, where quality results are forwarded late by the Power Station, and a net bonus is due, the results shall apply and the appropriate bonus shall be paid.

3.2.6 The coal characteristics to be determined shall include total moisture, ash content and specific energy and other properties as appropriate.

3.2.7 The Contractor shall have the right to cause his representative to attend and observe the determination of coal quality.

3.2.8 In the event of a disagreement by the Contractor regarding the determination of coal quality properties, excepting as received total moisture content, he shall advise the Principal in writing within three working days of the date of notification of the sample analysis result. If deemed necessary the Umpire Sample shall then be made available to an independent laboratory for a check analysis, with the costs incurred to be borne by the Contractor. In the event that this further quality determination differs by more than the normal limits of repeatability from the original analysis, the umpire analysis results shall be substituted as the deemed coal quality for the purposes of the Contract, and the Principal shall reimburse the Contractor the costs of the testing and of the coal at the deemed coal quality.

3.3 COAL HANDLEABILITY DETERMINATION

3.3.1 The coal delivered by the Contractor on any day shall have handleability characteristics within the limits set out in this Clause.

3.3.2 It is the Principal's intention to establish a relationship between coal which causes handleability problems in the coal handling plant at the power stations and a suitable control test(s).

3.3.3 The Contractor shall co-operate fully in the development of these test(s) and calibration procedures to enable appropriate standards to be established at the earliest practicable time.

3.3.4 Until such time as the control test/handleability relationship has been established, the Principal will measure handleability by means of the flow factor as determined by the Jenike Shear Test with minimum acceptable values as noted in Clause 3.3.5.

3.3.5 The coal handling plant in the power stations has been designed to accept coal with minimum flow factors, as determined by the Jenike Shear Test as follows:

At a consolidation pressure of 7.5 kPa flow factor = 3.2

(SAMPLE ONLY)

At a consolidation pressure of 15.0 kPa flow factor = 3.9

(SAMPLE ONLY)

3.3.6 Accordingly, the most stringent handleability criterion that would be established is one which refers to a control test value corresponding to the above minimum flow factors.

3.3.7 Whilst the above set out the proposed technical criterion for rejecting coal on a handleability basis, it is emphasised that no coal will be rejected on this basis unless, in addition to failing the handleability criterion, it also causes the Principal handleability problems in the coal handling plant.

3.4 COAL REJECTION

3.4.1 The Principal shall have the right to reject (by suspending deliveries) coal with characteristics outside the ranges set down in Clause 3.1.1 averaged over one full day.

3.4.2 The Principal shall also have the right to immediately reject coal (by suspending deliveries and/or non-payment for coal delivered) contaminated with foreign material including but not limited to such items as wood, metal, rubber, brattice, rock and glass; or coal containing oversize material; or coal which demonstratably blocks the Principal's conveyor system due to excessive moisture or fines.

3.4.3 In the event that the Principal suspends deliveries, pursuant to Clause 3.4.1 above, the Contractor will be required to promptly demonstrate to the satisfaction of the Principal the steps to be taken within the mining and coal preparation operation to restore the quality of coal delivered to comply with the abovementioned requirements. The Principal will not initiate the delivery of coal onto its conveyor system until it is fully satisfied with the Contractor's proposal. Any reduction in the monthly Transfer Capacity provided by the Principal, as a result of exercising its rights under this Clause, shall be considered as being due to a failure to deliver coal on the part of the Contractor.

4.3 FAILURE OF CONTRACTOR TO SUPPLY COAL

The Contractor's attention is particularly drawn to the General Conditions (Default by Contractor) in regard to the rights of the Principal to obtain from alternative sources any shortfall below 90% of the relevant Coal Quota.

7.16 PRICE ADJUSTMENT FOR COAL QUALITY

7.16.1.2 If the coal quality on any Delivery Days in the month is outside the ranges specified in Clause 3.1, the Principal reserves its rights to deal with the coal delivered on such days in accordance with Clause 3.4. At the Principal's discretion, however, it will have the option of accepting such coal but the penalty provisions set down hereunder shall apply.

The Contract Price per tonne of coal for any month shall be varied to reflect variations in specific energy, ash and moisture content from the standard Coal Quality (refer Clause 3.1).

CLAUSE 8.41 - DEFAULT BY CONTRACTOR

8.41.1 Procedure on Default by Contractor

If the Contractor defaults in the performance or observance of any covenant, condition or stipulation contained in the Contract or refuses or neglects to comply with any direction given in writing by the Principal under the Contract to the Contractor, the Principal may call upon the Contractor, by notice in writing, to show cause why the powers hereinafter contained in the Clause should not be exercised. Such notice shall not be unreasonably given and must state that it is a notice under the provisions of this clause and must specify the default, refusal or neglect on the part of the Contractor upon which it is based, and shall specify the period (which shall be not less than fourteen days after service of notice) by which the Contractor is required to show cause as aforesaid. If the Contractor fails within the period specified in the notice in writing to show cause to the satisfaction of the Principal why the power hereinafter contained should not be exercised, the Principal, without prejudice to any other rights that it may have under the Contract against the Contractor, may:

(a) take the Work under the Contract wholly or partly out of the hands of the Contractor or of any other person in whose hands or possession any part of it may be; or

(b) purchase and have delivered coal from alternative sources to make-up any shortfall below 80% or Coal Quota and the Contractor will be liable for any additional cost incurred by the Principal in obtaining suitable make-up coal; or

(c) terminate the Contract.

8.41.2 Preservation of Rights of Principal

No action taken by the Principal under Clause 8.41.1 shall vitiate the Contract or operate to the prejudice of any other right of the Principal under the Contract or otherwise.

8.41.3 Termination of Contract

If the Principal decides to terminate the Contract under Clause 8.41.1(c) it may do so by giving notice in writing to the Contractor. If such notice is posted to the Contractor it shall be sent by certified mail or recorded delivery. The termination shall be without prejudice to any right that may have accrued to the Principal or to the Contractor under the contract.

SCHEDULE M1

After setting out the alternative ranges including those to which reference has been made in paragraph 12 of this judgment the Schedule states:

Note Coal quality is to comply with quality requirements of Clause 3 and be derived from Schedules.

H1 Sampler

17 The Sampler located on the HI conveyor, referred to in cl 3.2.2, is the subject of controversy between the parties. Since the failure of the parties to reach agreement in respect of a lower price for coal the defendant has suspended coal deliveries on a number of occasions during 1999 and is a topic to which I shall return. One of the stated reasons for the suspensions and importantly the suspension the subject of this application, has been the HGI results from testing at the H1 Sampler. The plaintiff challenges the reliability and accuracy of the test results from the H1 Sampler.

18 Although coal has been supplied for 8 years under 3806BV the plaintiff has not had cause to question the HGI readings as there has not been any complaint by the defendant to the plaintiff about them. Indeed the evidence is that the monthly tests of HGI during the period January 1991 to January 1999 showed readings consistently at the top of or above the HGI range in cl 3.1.1 or Schedule M1 of 3806BV. The first time the HGI readings were the subject of complaint was May 1999.

19 In 1995 ACIRL, a firm of consultants specialising in coal research, was employed by the defendant to carry out an audit and bias test of the H1 Sampler. An initial audit was completed in May 1995 when several non-conformities with the Australian Standard 4264.1 - 1995 "Higher Rank coal - sampling procedures" were identified. Those non -conformities were:

· the primary cutter bucket was overloaded;

· the primary cutter aperture was undersized;

· the primary cutter lips were not defined;

· the smoothing conveyor was losing coal off the sides prior to the crusher; and

· the slotted belt cutter lips were not defined.

20 Although these non-conformities were identified in the May audit they had not been addressed at the time the bias sampling was conducted which commenced in June 1995 and continued over several visits.

21 In its final report delivered to the defendant in 1995 ACIRL noted the fact that the non-conformities had not been addressed and in referring to the fact that there had been an insufficient sample population stated:

There is a degree of probability that larger particles are not representatively sampled; that is they do not have as much chance of entering the cutter due to the narrowness of the opening.

22 The evidence from Mr Hall, the expert for the plaintiff who was cross examined but not on this aspect, indicates that the deficiency in respect of the size of the aperture may cause the H1 sampler to produce unreliable or inaccurate results by reason of a preferential sampling of the finer size fractions which are known to have higher moisture and HG1 results.

23 Mr McMahon, an expert whose affidavit was read by the defendant, proffered the opinion that the actual HGI results may be higher than those sampled by the H1 Sampler. Whatever be the final conclusion reached on the effect of the H1 Sampler's identified non-conformities the irresistible conclusion I have reached is that both experts recognise that the HGI readings obtained from the H1 Sampler lack reliability.

24 The date of receipt of the ACIRL report by the plaintiff is also the subject of some controversy. It assumes some importance in this matter because it is relevant to the approach that has been adopted by the plaintiff in the proceedings and in particular in relation to an interim agreement that was reached between the parties on 16 June 1999 after the proceedings were commenced.

25 The defendant claims it provided a copy of the report to the plaintiff soon after it received it in November 1995. The plaintiff claims that it only received a copy of the report in about June 1999. The defendant was not in a position to provide any firm detail as to the specific date upon which it was said to have been delivered, nor was there any written record of its delivery, nor was there any identification of the person to whom it is claimed it was delivered in late 1995.

26 Mr H.R Scott, the solicitor for the defendant, was cross examined about this matter because it was his hearsay evidence that was the basis of the suggestion that the plaintiff had received the report in late 1995. Paragraph 33 of his affidavit is in the following terms:

I am informed by Ray Durie, the fuel supply officer at Macquarie's Bayswater Power Station located in the Upper Hunter Valley (the responsible Macquarie employee administering the coal supply to the Power Station), and verily believe that the ACIRL Report was provided by Mr Durie to Novacoal shortly after the meeting of 9 November 1995.

27 In cross examination the following evidence was given;

Q. Did Mr Durie tell you to whom he provided that report?

A. No

Q. Did he tell you whether it was provided under cover of a letter or not?

A. He told me he was uncertain as to whether it was provided under cover of a letter or whether it was handed direct to a person.

Q. Did he tell you whether he handed it direct to a person or whether somebody else handed it direct to a person?

A. He said he could not himself recall personally handing it to a person, but it was forwarded to Novacoal.

Q. Did you ask him to search to see if there was any such letter?

A. As a result of your question this morning - your intention expressed to counsel this morning, that you were gong to cross examine me on paragraph 33, I did ask him at lunch time, and he said he would search his records and he has not got back.

...

Q. And he certainly has not got back to you when you asked him at lunch time?

A. No he hasn't.

Q. Did you ask him to think a bit harder about who he might have given the document to?

A. Yes I did.

Q. Did that produce any result?

A. Only the response that he was certain that he handed it to someone , or sent it by mail, to Novacoal, but he could not recall the specific person.

28 A call was then made upon the defendant to produce any letter to Novacoal providing the ACIRL Report to it. No letter has been produced.

29 The plaintiff's evidence that it had only received the report in June is in my view supported by the stance it adopted on 27 May 1999. Had the report been to hand at that time one would have expected the 27 May letter to be couched in different terms to that in which it is couched. The plaintiff merely indicated that it was going to investigate the technique used for the determination of HGI. If it had the report and had digested its contents one would have expected the response that was certainly made thereafter that the H1 sampler did not confirm to the Australian Standard and therefore the readings could not be relied upon. In all the circumstances I accept the plaintiff's evidence that it did not receive the report until June of 1999.

30 During the course of this litigation the plaintiff has requested the defendant to advise it whether any modifications have been made to the H1 Sampler since the date of the report and advised that it wished to commission an independent expert to provide a report on the H1 sampler. It also requested that no changes should be made to the Sampler at least before it had been reviewed by the plaintiff's expert.

31 The defendant declined to provide the information sought by the plaintiff and informed it that the matter would be determined in the course of the current litigation.

16 June 1999 interim agreement

32 As will be seen from the summary the parties entered into an interim agreement on 16 June 1999. The circumstances surrounding that agreement have been the subject of evidence. The defendant submits that it was the intention of the parties in that agreement that the plaintiff would supply coal with HGI readings between 44 and 54. The conversations deposed to by Mr Scott with the plaintiff's former counsel relied upon in support of that submission were not the subject of any challenge.

33 Mr Bathurst QC submitted that such an agreement did not include an agreement that such range would be determined by the H1 sampler. He submitted that the parties expressly agreed that it was without prejudice to any rights accrued which included a right to challenge the reliability of the H1 Sampler.

Suspension of deliveries

34 The contractual relationship between the parties in 1999 has become somewhat brittle and the defendant has exercised its rights to suspend deliveries of coal on a number of occasions during the year. The reasons for such suspensions have varied but the following summarises the history of those suspensions and/or notifications by the defendant that it has reserved its rights in respect of deliveries of coal said to be outside the ranges required by 3806BV or alternatively the 16 June 1999 agreement:

26 February 1999 Deliveries were suspended under cl 3.4 "due to the quality of coal currently being provided". Total moisture was above the maximum of 10% and there were chute blockages. The defendant notified the plaintiff that before it would resume deliveries it needed to be "satisfied that the handleability of your coal has improved, and that the total moisture is below 10%".

1 March 1999 The plaintiff notified the defendant that the handleability problems stemmed from a combination of wet weather and poor quality coal resulting from difficulties in mining a particular coal type. The plaintiff advised the defendant that it had "put in place measures (which it described) to ensure that further deliveries will be within specification" and requested the defendant to resume receiving coal.

2 March 1999 Deliveries resumed.

3 March 1999 The defendant suspended deliveries because "total moisture was 10.3%". It advised the plaintiff that deliveries would be suspended until it was satisfied the plaintiff had "taken steps to prevent further deliveries of greater than 10%". The plaintiff advised the defendant that the coal was within contract limits.

4 March 1999 The plaintiff advised the defendant that it was in a position to provide coal within contract specifications. And that it had put strategies in place, including operational modifications to ensure ongoing compliance. The plaintiff noted `with some frustration the results of "yesterday's deliveries" ' and that "the total moisture was within contract limits, as we indicated yesterday".

4 March 1999 Deliveries resumed.

30 March 1999 The defendant suspended deliveries because the total sulphur content delivered on 29 March was greater than the 1% maximum. The defendant notified the plaintiff that the suspension was until it was satisfied that the plaintiff had "taken steps to prevent further deliveries with a sulphur content in excess of 1%".

30 March 1999 The plaintiff advised the defendant that the reading above 1% was an anomaly "as the shift analysis" did not reflect such a reading but advised that it had nevertheless refined its quality control strategy which it described and requested resumption of deliveries.

30 March 1999 Deliveries resumed.

7 April 1999 The defendant suspended deliveries because a chute was blocked and advised the plaintiff that the total moisture content was 10.3%. It advised that it would not resume deliveries until it was satisfied that "the coal will not cause further chute blockages, and the moisture level will not be greater than 10%".

8 April 1999 The plaintiff advised the defendant that the moisture levels of the coal were due to the "torrential rain over the Easter period" and that "when stacked the coal was around 9%". After giving assurances that the coal would have good handleability and 9.5% moisture content the plaintiff requested the resumption of deliveries.

8 April 1999 Deliveries resumed

20 May 1999 The defendant advised the plaintiff that it was suspending deliveries because the coal delivered "in May 1999, up to and including 14 May" had a "Hardgrove Index in the range 64 to 71" and it was "outside the range of 44 to 54 allowed under the Contract". It advised that the suspension was until it was satisfied with the steps the plaintiff intended to take within its mining and coal preparation operations "to ensure future deliveries are within specification".

27 May 1999 The plaintiff advised the defendant that it was going to investigate the technique used for the determination of HGI to assess what had given rise to the "changes in the HGI results". It advised that as an "immediate measure to resolve this issue, and to ensure continuity of delivery we propose to wash our coal sufficiently to stay above the rejection limit of 16% ash and below the HGI requirement of 60".

28 May 1999 The defendant advised the plaintiff it did not understand the reference to the HGI limit of 60 and the ash content of 16% referring to the range of 44 to 54 for HGI and 18% to 25% for ash in cl 3.1.1.

28 May 1999 The plaintiff advised that the references were to Schedule M1, that it proposed to deliver coal within specification and requested resumption of deliveries.

1 June 1999 The defendant advised the plaintiff that it had "always had considerable trouble with" the plaintiff's coal and that the plaintiff knew that to be the case. It stated that it was "disappointed that you can demand a resumption of deliveries of coal outside the specified requirements". The defendant then purported to issue a show cause notice calling upon the plaintiff to show cause within 14 days why the defendant should not exercise "the powers set out in" cl 8.41.1. The default relied upon was a "refusal expressed" in the plaintiff's letters of 27 & 28 May to deliver coal as directed by the defendant in its letter of 20 May 1999.

8 June 1999 The plaintiff advised the defendant of its denial of the alleged "considerable trouble" with the coal and that it had demanded to deliver coal outside specified requirements. It claimed the defendant's Notice was invalid and that there was an absence of any reasonable grounds upon which it could have been issued. It raised concerns about the H1 automatic sampler. It referred to testing that it had carried out and to samples submitted to laboratories other than those used by the defendant. It claimed that according to the defendant's own commissioned report the H1 sampler was not operating in accordance with Australian Standards and that there were fundamental questions about the accuracy of the sampling results particularly those relied upon as a basis for the suspension of deliveries. After reserving its position the plaintiff advised it would take a number of steps to ensure continued compliance with the specifications in cl 3.1.1 and Schedule M1 and requested resumption of deliveries.

10 June 1999 The defendant advised the plaintiff, inter alia, that it was surprised at the manner in which the plaintiff had raised these questions about the samples rather than in the manner required by cl 3.2.8. It advised the plaintiff that "the technical issues you raise do not show cause to our satisfaction" but thought that it owed the plaintiff the opportunity to provide it with the reports from other laboratories and the details of the tests the plaintiff had commissioned and requested the plaintiff to agree to the defendant's expert reviewing such material. The defendant further advised that as a matter of courtesy it would give the plaintiff two contract working days of its intention to exercise the powers it believed it had under cl 8.41.1.

11 June 1999 The plaintiff was granted leave to file in Court a Summons (and affidavits) commencing proceedings in the Equity Division challenging the validity of defendant's show cause notice. The matter was returnable before the Duty Judge on 15 June 1999 and was by consent adjourned to 16 June 1999.

16 June 1999 By consent and without admissions the parties agreed to adjourn the matter to 23 June 1999 with the undertaking that the defendant would not exercise any purported powers under cl 8.41.1and that the plaintiff would "supply coal to the Defendant which complies with the ash and HGI specifications set out in clause 3.1.1 of the Contract". It was further agreed that subject to that agreement to supply the "parties rights will be governed by the Contract". Deliveries resumed.

23 June 1999 The parties agreed to a timetable for the litigation to proceed upon pleadings.

23 June 1999 The defendant advised the plaintiff that the HGI reading for coal delivered on 21-22 June 1999 was 56 which "breaches the agreement referred to in the minutes of order of 16 June 1999". The defendant reserved its rights in respect of that delivery and required that future deliveries conform to that agreement. (The plaintiff responded by phone on 24 June and by letter of 29 June advising the defendant that because of the problems with the Sampler the results could not be accepted for the purposes of determining compliance with 3806BV or the 16 June agreement.)

25 June 1999 The defendant advised the plaintiff that the coal delivered on 22-23 June 1999 had an HGI reading of 56 in breach of the 16 June 1999 agreement and reserved its rights in respect of that delivery.

30 June 1999 The defendant advised the plaintiff that its deliveries of 28-29 June had an HGI reading of 55 in breach of the 16 June 1999 agreement and reserved its rights.

1 July 1999 The defendant suspended deliveries of coal because the total moisture of the coal was above 10%. It advised the plaintiff that such suspension was until it was satisfied that the plaintiff had "taken steps to prevent further deliveries with greater than 10% moisture".

2 July 1999 The plaintiff advised that its production data indicated that it had supplied coal with a moisture content of "around 9.1%" and that it was satisfied it would comply with the specification. Deliveries were resumed.

5 July 1999 The defendant suspended deliveries because the coal had a total moisture content of 10.5%. It advised the plaintiff that such suspension was until it was "satisfied that the specification can be achieved". The parties had an inspection of the coal stockpile at Howick and the defendant arranged for sampling of coal from the inspected site.

5 July 1999 The defendant notified the plaintiff that the coal delivered on 29-30 June had an HGI reading of 56; that the coal delivered on 30 June - 1 July had an HGI reading of 58; and that the coal delivered on 1-2 July had an HGI reading of 57 in breach of the 16 June 1999 agreement, reserved its rights and requested that future deliveries "conform with the agreement".

6 July 1999 The defendant notified the plaintiff that the results of the tested sample indicated that the coal was within the total moisture content specification. Deliveries were resumed on the plaintiff's confirmation that the delivered coal would be from that site the subject of the tests.

9 July 1999 The defendant notified the plaintiff that the coal delivered during the period 6 - 8 July had an HGI reading of 59 in breach of the agreement, reserved its rights and requested future deliveries to conform to the agreement.

12 July 1999 The defendant notified the plaintiff that the coal delivered on 8-9 July had an HGI reading of 58 with the usual reservation and request.

14 July 1999 The defendant suspended deliveries because the total moisture content was 10.2% and advised the plaintiff that the suspension was until it could be satisfied that the deliveries would meet the required specifications. The date of the resumption of deliveries is not clear.

15 July 1999 The defendant notified the plaintiff that the coal delivered on 12 July had an HGI reading of 58 and that ash was 17.3% with the usual reservation and request.

22 July 1999 The defendant notified the plaintiff that the coal delivered on 21 July had an HGI reading of 56 with the usual reservation and request.

23 July 1999 The defendant notified the plaintiff that the coal delivered on 22 July had an HGI reading of 56 with the usual reservation and request.

28 July 1999 The defendant suspended deliveries because the coal had a total moisture content of 10.2% and "furthermore HGI is shown as 57". The suspension was until it was satisfied that "future deliveries will meet the required specifications". Following an inspection by the defendant of the plaintiff's coal and the corresponding production records the defendant advised that the suspension would be lifted at 3 pm.

13 August 1999 The matter was transferred to the Commercial List.

23 August 1999 The defendant notified the plaintiff that the coal delivered on 20 and 22 August had HGI readings of 68 and 67 respectively with the usual reservation and request.

24 August 1999 The defendant notified the plaintiff that it was suspending deliveries because the coal delivered for 20, 22 and 23 August had HGI readings of 68, 67 and 70 respectively. It noted that these readings were above the specifications in both cl 3.1.1 and in Schedule M1. It advised the plaintiff that it required it to satisfy it of the steps taken to restore the quality of coal delivered to comply with "requirements set out in clause 3.1.1".

35 On 25 August 1999 the defendant requested the plaintiff to submit to it in accordance with clause 3.1.1 of 3806BV details of the proposed daily coal quantity, source and quality to be delivered during the following week. It also requested further information (purportedly pursuant to cl 3.4.3) including identification of seams, bore-core and other analytical data relating to the coal that had been delivered from 1 to 23 August 1999 together with proposed washing and/or blending information in respect of coal to be delivered "upon any resumption of coal deliveries".

36 The plaintiff responded to that request on 26 August 1999 setting out the quantity, source and quality of coal to be delivered between 29 August and 4 September 1999. The additional information was not supplied. The plaintiff resisted that supply on the basis that the defendant was not entitled to it as the suspension was invalid because the readings upon which it based its decision to suspend were unreliable and inaccurate.

37 These are the circumstances in which the plaintiff makes the application for the injunction.

38 The defendant has noted critically that what the plaintiff is seeking in substance is a mandatory interlocutory injunction forcing the defendant to accept and pay for product which does not fall within a specification which was agreed to by the defendant on 16 June 1999. The plaintiff in response relied upon the statement of the learned authors Justices Meagher, Gummow & Lehane in Equity Doctrines and Remedies (3rd Edition) in which the following appears at par 2178:

"In truth, a judge hearing an application for an interlocutory mandatory injunction must apply exactly the same tests as he would in the case of an application for an interlocutory prohibitory injunction, not some different or more exacting test; nor is the fact that the relief sought is mandatory a ground for refusing relief; but in the application of the normal tests, often, but not always, the fact that the relief sought is mandatory will tilt the balance of convenience in the defendant's favour".

39 The reference to the "same tests" is a reference to the tests which have been applied in so many cases. There is no need to repeat them here except to respectfully acknowledge that they are authoritatively stated by the High Court in Castlemaine Tooheys Ltd v South Australia [1986] HCA 58; (1986) 161 CLR 148.

Serious question to be tried

40 The plaintiff submits that I will be satisfied that there is a serious question to be tried in respect of the validity of the suspension of 24 August 1999.

Absence of pre-condition to the decision to suspend

41 The plaintiff submits that the basis upon which the defendant is entitled to suspend deliveries pursuant to cl 3.4.1 is if the coal is outside the required ranges specified in the contract. The plaintiff submits that there is a necessary pre-condition of correct measurement of the characteristic said to be outside the ranges before a valid suspension can be made. It is submitted that the measurement is flawed because the H1 sampler does not conform to the Australian Standards and suffers from the problems identified in the ACIRL Report.

42 In those circumstances the plaintiff submits that the flawed measurement technique is not a proper basis for a decision to suspend.

43 The defendant points to cl 3.2.2 and submits that as a matter of construction the sampling required is by a sampler which was in existence at the time the contract was entered into. It is then submitted that because the plaintiff has failed to adduce evidence that the sampler has been in any material way altered since the time of entry into the contract it follows that there has been no breach.

44 I am not sure that I understand the force of this submission but I am of the view that the plaintiff has established both in reliance upon its own evidence and that of the defendant that it is probable that the tests from the sampler lack precision and/or reliability.

45 The defendant submits that in any event the only condition precedent to the right to suspend by reference to HGI is that as a matter of fact HGI falls outside the specified range of between 54 and 44.

46 The defendant makes the further submission that prior to entering into the 16 June 1999 interim agreement the plaintiff had already become aware of the contents of the report and had already made a complaint to the defendant that the sampler was non-compliant. It points to the fact that the plaintiff is "perfectly happy to accept the use of the sampler as an accurate means of calculating the purchase price" but apparently not so happy to accept the sampler as an indicator of HGI readings.

47 I am not of the view that there was any implicit acceptance of the validity of the sampling process by reason of the parties entering into the 16 June 1999 agreement. There was certainly no express term to such an effect.

48 However it is beyond doubt that by the 16 June 1999 agreement the parties agreed that the coal to be supplied was to be within the range 44 - 54. The evidence is clear that notwithstanding the non-compliance of the H1 Sampler and the unreliability of the readings it is "highly unlikely that" the delivered coal would have "been within the range of 44-54". The plaintiff's expert agreed with this evidence. I am of the view that this evidence defeats the plaintiff's otherwise cogent case in respect of this aspect of the matter.

49 In those circumstances I am of the view that there is not a serious question to be tried.

Reasonableness

50 The plaintiff submits that the authorities support the existence of an obligation upon the defendant to exercise its rights to suspend under cl 3.4.1 reasonably and in good faith and not capriciously or arbitrarily. (Amann Aviation Pty Ltd v Commonwealth (1988- 1990) 22 FCR 527) and on appeal [1991] HCA 54; (1991-1992) 174 CLR 64; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Bros Pty Ltd v Trustees of The Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; and Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1.)

51 The plaintiff submits that the defendant is acting unreasonably and in bad faith in the 24 August suspension of coal deliveries. It is submitted that the defendant's real purpose is to raise technical objections to the supply of coal under the contract in order to bring about a renegotiation of the coal price. In support of this submission the plaintiff relied upon the following statement of Sheller JA in Alcatel Australlia v Scarcella (1998) 44 NSWLR 349 at 368:

"If a contract confers powers on a contracting party in terms wider than necessary for the protection of the legitimate interests of that party, the courts may interpret the power as not extending to the action proposed by the party in whom the power is vested or, alternatively, conclude that the powers are being exercised in a capricious or arbitrary manner or for an extraneous purpose which is another way of saying the same thing".

52 Additionally the plaintiff relied on Priestley JA's judgment in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 where His Honour said at 258:

"It seems clear that the words of the clause empower the principal to give them notice to show cause upon any default in carrying out any requirement in the contract. Thus for a completely trivial default the principal can give a notice to show cause. It is possible to imagine many situations in which, if a notice for some trivial breach were given the contractor might fail, as a matter of fact, to show cause within the specified period to the satisfaction of the principal why the power should not be exercised against them.

For the principal, in such circumstances, to be able then to exclude the contractor from the site and/or cancel the contract would be, in my opinion, to make the contract, as a matter of business, quite unworkable".

53 This is a long term contract for the supply of coal over a twenty year period. The present contract has been in place for the last eight and half years.

54 The contract sets up a regime (cl 1.3.1) of a day to day liaison with direct communications between the defendant's operations and the plaintiff's operations by direct phone link or radio communication. The capacity to adjust the price of the coal delivered to the advantage of the defendant is established by the formulae in cl 7.16. The parties have agreed to co-operate for the installation of an automatic system to record the conveyer transfer capacity (cl 4.2.2). The defendant is required to provide a minimum of six months notice to the plaintiff of any proposed change to the coal quota (cl 2.1).

55 The defendant points to cl 3.4.1 which refers to breaches of coal specifications irrespective of consequences and contrasts it to the breaches referred to in cl 3.4.2 which block the conveyer system. It submits that the power in cl 3.4.1 is not expressed to be subject to a requirement that it be exercised reasonably in contrast with the language used in cl 8.41.1 by which the power to issue a show cause notice is expressly required to be exercised reasonably.

56 The defendant submits that there is no analogy between the suspension from time to time of goods which do not comply with the contract and the right of termination for failure to show cause. In this regard the defendant distinguishes this case from the contracts and circumstances the court was considering in Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) NSWLR 234 and Hughes Aircraft System International v Airservices Australia (1997) 146 ALR 1 and submits that such a term or obligation would not be implied in this case. It is submitted that to do so would be to take an inappropriate leap of faith to which Gummow J referred in Service Station Association Limited v Berg Bennett & Associates Pty Limited [1993] FCA 445; (1993) 45 FCR 84 at 96.

57 The right in cl 3.4.1 has to be read in the light of the provisions in cl 7.16.1.2 and cl 3.4.3. The system set up by the contract to require the plaintiff to submit to the defendant the proposal to convince it to exercise its discretion to lift the suspension is further evidence which could be relied upon to submit that an obligation to act reasonably would be implied into this contract. If that were not so the contract would become unworkable.

58 Although the defendant submits that this suspension is not analogous to the right to terminate the contract for failure to show cause, it is important to note that if the defendant exercises its right to suspend and the monthly transfer capacity is reduced such a reduction is "considered as being due to a failure to deliver coal on the part of the" plaintiff (cl 3.4.3). In those circumstances the combination of cl 4.3 and 8.41 leads me to the view that the exercise of the right is more analogous to the termination for failure to show cause than the defendant accepts.

59 Clause 7.16.1.2 provides the defendant with a discretion to either accept or to reject coal outside the specified ranges. So far as HGI readings are concerned the defendant has not rejected coal because of high HGI readings until May of this year. Mr Jackman, in final address, submitted that there were two reasons why the discretion to suspend deliveries has been exercised where in the past such discretion was not exercised.

60 The first is that there is a real risk of handleability problems in accepting coal with high HGI readings. The second is that if the defendant has to pay what it regards as a high price for its coal it is entitled to reject it if it does not fit within specification.

61 As to the handleability problems it is clear that the defendant puts its case only on the basis of risk. Handleability had not occurred because of high HGI readings although there have been handleability problems which on the evidence seem to have been attributed to moisture content. The high HGI readings between 1991 and 1999 were apparently not a sufficient "risk" to handleability to warrant the exercise of a discretion to suspend during that period and it is submitted that the court would receive such a submission with circumspection. It is submitted that such a history supports the submission that the real reason the defendant has suspended the deliveries is because it wishes to extract itself from this contract with the plaintiff and/or force the plaintiff to agree to a cheaper price for the coal.

62 As to the second matter in relation to having to pay a high price for its coal it is appropriate to refer back to the penalty provisions contained in cl. 7.16. 3806BV makes specific provision for adjustment of the price when the plaintiff exercises its discretion to accept coal outside the specified ranges. Although there is no specific provision for the adjustment of the price when coal has a high HGI reading there is an adjustment available when the coal has caused a loss of pulverising capacity and other inefficiencies (cl 7.16.4).

63 It seems to me that these clauses recognise that the defendant has agreed to pay a specific price for the coal and sets out the circumstances in which it can act to adjust the price it has to pay.

64 The defendant has been very candid in admitting that it is motivated by pecuniary interests and has posed the question - why should it have to accept coal which it did not contract to buy? This is a very good question and it becomes a very powerful one in the light of the 16 June 1999 agreement and the evidence (not in issue) that it is "highly unlikely" that this particular coal would have been within the range contracted for on 16 June - that is 44-54.

65 I am conscious of the submission made by the plaintiff that reasonableness is not to be judged by the criterion that two experts may agree, ex post facto, on the likelihood of the range of readings of the particular coal. However I am of the view that the evidence of the experts weighs heavily against the plaintiff in the light of its voluntary agreement on 16 June 1999.

66 I am of the view that there is a strong case that the defendant has an obligation to exercise the power in cl 3.4.1 reasonably. But I fail to see how there can be a serious question to be tried that the defendant failed to act reasonably or acted in bad faith in the circumstances where:

· on 16 June 1999 the plaintiff agreed to deliver coal with HGI within the range 44 -54;

· had received notification from the defendant that on 12 occasions the coal delivered between 21 June and 23 August was outside the agreed range and the defendant was reserving its position in respect of those readings; and

· no suspension occurred until the HGI readings were at least 68.

67 I am not satisfied that there is a serious question to be tried in respect of this aspect of matter.

Estoppel

68 The plaintiff submits that the defendant is estopped from suspending deliveries for non-compliance because of its acceptance of coal with such characteristic in the past in reliance upon which the plaintiff has organised its affairs, in particular the very large expenditure on its Coal Preparation Plant and equipment.

69 The defendant submits that the Coal Preparation Plant was set up to meet contract specifications which included an upper limit to the HGI Index. It also submits that the defendant has made it very clear since at least March of this year that it would only accept coal which was within specification.

70 The defendant submits that no estoppel could conceivably have survived the agreement reached on 16 June 1999 which by mutual consent requires strict adherence to contractual specifications. It submits that reasonable notice has been given to the plaintiff in respect of any assumed state of affairs upon which it was proceeding (Central Land Property Trust Limited v Hightrees House Limited (1947) 1 KB 130; Commonwealth v Verwayen (1991) 70 CLR 394 per Deane J at 442.3).

71 The summary of the contractual history extracted earlier in this judgment satisfies me that the defendant both expressly and by implication made it abundantly clear that it was going to require strict compliance with the terms of 3806BV and with the 16 June 1999 agreement.

72 I agree with the defendant's submission that any estoppel that may have been extant as at June 1999 was jettisoned by the agreement of the parties on 16 June 1999. Accordingly I am not satisfied that there is a serious question to be tried in respect of this aspect of the matter.

Balance of Convenience/Damages

73 Because of the above findings I do not need to address this question. However if I had been required so to do I would have agreed with the defendant's submission that the plaintiff had not established that an award of damages was not an appropriate remedy.

74 In my view, although the plaintiff made detailed submissions on this topic, the most persuasive submission advanced was the inadequacy of such a remedy as the plaintiff could not pursue other contracts because it had to effectively stand at the ready to deliver to the plaintiff if and when the suspension was lifted. In those circumstances it was submitted that it would not be possible to quantify what the plaintiff had lost in that period of standing at the ready.

75 Although attractive at first blush the commercial realities of the capacity of the plaintiff tempered its attractiveness. It is the case that the plaintiff is a corporation with a capacity to explore other ventures notwithstanding its contractual obligations to the defendant. The plaintiff's evidence included references to such ventures and indeed the cross examination of Mr Devlin exposed the plaintiff's publicly stated capacity to enter the export market in a fairly convincing fashion.

76 This is a suspension which is not challenged on the basis that the defendant has unreasonably refused to lift it after proper compliance by the plaintiff with the request for a proposal under clause 3.4.3. It was challenged as a suspension which was invalid for the reasons outlined earlier. Assuming I am wrong in respect of the serious question to be tried, I am of the view that damages would be an adequate remedy.

Order

77 The application for the injunctive relief in paragraph 1 of the Notice of Motion is refused.

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LAST UPDATED: 16/09/1999