David Pearce | Sam Rafter | Eva Squire
A party to a joint venture or agency arrangement should give careful consideration to its liability exposure in the event of another party entering liquidation.
Courts will seek to enforce the allocation of contractual risk regardless of the insolvent party’s inability to contribute to payable claims and will not lightly construe a clause as a penalty or subject to an implied obligation of good faith. Parties should carefully consider whether charges or invoices remain payable in relation to a latent asset.
In 2005 North Queensland Pipeline No 1 Pty Ltd and North Queensland Pipeline No 2 Pty Ltd (NQ Pipelines) entered into a gas transportation agreement (GT Agreement) with Queensland Nickel for the transportation of gas along a high-pressure natural gas pipeline from the gas fields near Moranbah to Yabula (pipeline). Queensland Nickel entered into the GT Agreement as manager of the Queensland Nickel joint venture and agent for the joint venture participants, QNI Resources Pty Ltd (QNR) and QNI Metals Pty Ltd (QNM).
The GT Agreement was entered into for an initial term of 15 years. Between January and April 2016, Queensland Nickel entered voluntary administration and was ultimately placed into liquidation. From March 2016, the nickel refinery was shut down and no gas was transported in the pipelines, however the GT Agreement was not terminated and remained binding on the parties. NQ Pipelines looked to QNR and QNM to recover charges imposed and invoices issued, under the GT Agreement from March 2016 to April 2021.
At trial, NQ Pipelines successfully obtained orders requiring QNR and QNM to pay the outstanding charges and invoices. On appeal, QNR and QNM disputed any liability in respect of the charges and invoices owing on the grounds that:
- according to the proper construction of the GT Agreement, no liability on their part arises (first ground of appeal); or
- a portion of the charges comprising approximately $22.8 million was unenforceable as a penalty (second ground of appeal); or
- in levying the above charges, the NQ Pipelines breached an implied obligation of good faith (third ground of appeal).
As to the first ground of appeal, QNR and QNM argued that the primary judge had erred by concluding that clause 41.6.3 of the GT Agreement, which dealt with several liability, directly attributed liability to QNR and QNM to pay amounts claimed as owing under the GT Agreement.
As to the second ground of appeal, QNR and QNM argued that the primary judge had erred in concluding that clause 14.7 of the GT Agreement was not a penalty, stating that the charges were ‘grossly disproportionate‘.
As to the third ground of appeal, QNR and QNM argued that the GT Agreement contained an implied obligation on NQ Pipelines to act in good faith by acting reasonably and with fair dealing, including by taking all reasonable steps to eliminate or correct any imbalance before seeking to recoup the charges.
The court found in favour of NQ Pipelines and dismissed QNR and QNM’s appeal on all grounds.
First ground of appeal
Two key questions were raised:
- Did clause 41.6.3(b) impose a direct obligation on QNR and QNM to pay the amounts payable under the GT Agreement?
- Did the expression ‘QNI’ in the GT Agreement mean Queensland Nickel alone, or did it encompass the entire Queensland Nickel joint venture?
In answering the first question, the court referred to two previous decisions regarding the parties, in which it was found that the GT Agreement did impose direct liability on QNR and QNM.
In answering the second question, the court considered the commercial intent of the GT Agreement and the language of the payment clauses, noting that the QT Agreement referred to Queensland Nickel, QNM and QNR jointly as ‘QNI’. In particular, the QT Agreement contained a provision that allowed NQ Pipelines to terminate the GT Agreement if QNR and QNM failed to pay, indicating that the payment obligations on those entities were in no way ‘indirect’ or ‘contingent’ upon Queensland Nickel. Accordingly, the commercial intent of the GT Agreement was that Queensland Nickel would not incur any financial obligation in isolation from the other participants in the joint venture.
Second ground of appeal
QNR and QNM argued that the primary judge erred in concluding that clause 14.7 of the GT Agreement, under which the charges were incurred, was unenforceable as a penalty. They argued that the charges imposed under this clause were ‘grossly disproportionate’ in circumstances where the pipeline was not being utilised and that the charges were not seeking to protect any legitimate financial interest but were punitive in character.
The court rejected this argument, emphasising that the analysis required to determine whether the clause was penal was a prospective analysis to be undertaken at the time of signing the GT Agreement. Evidence as to how the pipeline had in fact operated was not relevant to this assessment. The court concluded that the charges under clause 14.7 were not distinctly punitive but reflected the contractual allocation of burdens and benefits the parties had taken under the GT Agreement. The costs and losses that might arise under the clause were diverse and there were no readily ascertainable limits to the damage that may be sustained. Accordingly, the charges imposed were not out of all proportion to the protection of the interest and clause 14.7 was held not to be a penalty clause.
Third ground of appeal
QNR and QNM contended that the GT Agreement contained an implied term to act in good faith and obliged NQ Pipelines to take all reasonable steps available to eliminate or correct the QNI imbalance before seeking to charge the imbalance charge. An ‘imbalance’ occurred when either QNR’s or QNM’s gas was being stored in the pipeline (a positive imbalance) or QNR and QNM were taking on the NQ Pipelines’ gas (a negative imbalance). QNR and QNM argued that in circumstances where it was not possible for QNR and QNM to reduce an imbalance where the nickel refinery had ceased operation, NQ Pipelines was subject to an implied obligation to correct the imbalance by decreasing the imbalance charge payable under the GT Agreement.
The court rejected this argument. Firstly, the weight of case authority did not support the implication of an implied term to act in good faith as a general legal incidence of commercial contracts. Until the High Court recognises a generally implied term of good faith, the Supreme Court should proceed on the basis that such a term is not to be generally or universally implied into all commercial contracts.
Turning to the particular circumstances of the GT Agreement, the court found there could be no implied term as a matter of law as it would ‘disturb the proper functioning‘ of the GT Agreement. This was because such an implied term would seek to subordinate NQ Pipelines’ interest in being able to charge for imbalances to QNM and QNR’s interest in not being liable to pay those charges. Further, there could be no implied term in fact because it contradicted the express language of the clauses by placing a constraint upon NQ Pipelines’ ability to charge for an imbalance. While some clauses had expressly considered the obligation to act in good faith, there was no mention of this obligation in the relevant clauses relating the imbalance charge.