Julie Whitehead | Sarah Cahill | Tia Shadford
A force majeure event must be outside a party’s control and not the direct result of a party’s fault or negligence. In addition, all notice requirements specified in a force majeure clause must be complied with.
There is no binding authority obliging a court to imply a duty of good faith into a commercial contract. A court will not imply a duty of good faith in circumstances where the contract:
- is between commercially sophisticated parties
- is capable of sensible operation without the implication of that term
- contains terms which contradict the implication of a duty of good faith.
In 2005, the plaintiffs, 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. 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 and QNI Metals Pty Ltd (QNI Resources & Metals).
Between January and April 2016, Queensland Nickel entered voluntary administration and was ultimately placed into liquidation. NQ Pipelines looked to QNI Resources & Metals to recover the outstanding amounts owed under invoices issued between January 2017 to May 2021. Of the significant amount owned, QNI Resources & Metals reluctantly paid only $9,134,187. NQ Pipelines commenced proceedings against QNI Resources & Metals to recover the outstanding amount, following which QNI Resources & Metals issued a counterclaim to recover the $9,134,187 paid to NQ Pipelines on the basis that the outstanding amount was not recoverable due to:
- a force majeure event having occurred under the GT Agreement, specifically Queensland Nickel’s failure to obtain the licences required to operate its refinery; and
- the implication of an obligation of good faith into the GT Agreement.
A portion of the outstanding amounts included imbalance charges payable under the GT Agreement, as well as ongoing charges which the contract required continued payment of during a force majeure event. QNI Resources & Metals argued that both of these were a ‘penalty’ and therefore unenforceable.
Freeburn J found in favour of NQ Pipelines and dismissed QNI Resources & Metals’ counterclaims.
Force Majeure Event
The court held that QNI Resources & Metals’ failure to secure the necessary licences did not constitute a force majeure event under the GT Agreement. To be a force majeure event, the event must have occurred without the QNI Resources & Metals’ fault or negligence. Freeburn J was not satisfied that this was the case given that there was no evidence to indicate that there had been a reasonable attempt by QNI Resources & Metals to secure the necessary licences.
QNI Resources & Metals were also prevented from relying on the force majeure clause as the relevant notice requirements under that clause had not been followed. Freeburn J found that the force majeure clause expressed the notice period in mandatory terms. As a result, lawful suspension under the force majeure clause could only occur where there was a force majeure event and notice, with the particulars as required under the GT Agreement, had been given. Neither of the notices put forward by QNI Resources & Metals were held to be sufficient for the purpose of force majeure under the GT Agreement, as neither specified the ‘Affected Obligation’ as required. In coming to this decision, his Honour rejected the contention that the notices were sufficient because the circumstances which may have given rise to a force majeure event could be inferred from the other notices provided.
Was there a penalty?
Freeburn J concluded that the requirement to pay ongoing service charges was not a penalty, as the sole or predominant purpose of the force majeure clause was not to punish. This was because:
- the arrangement was an agreement between two commercially sophisticated parties;
- the charges were reasonable as the apparent intention of the payment structure under the GT Agreement was to recover the significant costs that would be incurred irrespective of the occurrence of a force majeure event; and
- the GT Agreement made allowances for the reserved capacity in the pipeline which continued for Queensland Nickel.
The imbalance charges were also held not to have a predominantly punitive purpose and therefore were not a penalty. The charges (and the relative responsibility allocations) were commercially sensible and effectively provided for the effects of positive and negative imbalances.
Duty of good faith
Freeburn J rejected QNI Resources & Metals’ contentions that a duty of good faith could be implied into the GT Agreement and took the cautious approach, previously taken by other courts. His Honour confirmed that the law is unsettled when it comes to implying a term of good faith, however, reiterated the high threshold that must be met for a term to be implied into a contract.
Freeburn J was not prepared to take the ‘large step’ of implying an obligation of good faith, given the parties were relatively sophisticated and the GT Agreement contained terms which contradicted the implication of a general or more specific implied term of good faith. The court also confirmed that implying a term of good faith as a matter of fact is a difficult hurdle to overcome and was not warranted in this case.. The GT Agreement was capable of sensible operation without implication of the term, and would be inconsistent with the GT Agreement’s express terms.