Hiscox Dedicated Corporate Member Ltd Syndicate 33 At Lloyd’s Starr Managing Agents Ltd (t/a Syndicate CVS 1919) v Weyerhaeuser Company [2019] EWHC 2671 (Comm) (11 October 2019)

Neutral Citation Number: [2019] EWHC 2671 (Comm)
Claim No: CL-2019-000516

IN THE HIGH COURT OF JUSTICE
THE BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
COMMERCIAL COURT (QBD)
(Hearing in Private)
IN THE MATTER OF THE ARBITRATION ACT 1996
AND IN THE MATTER OF AN ARBITRATION APPLICATION

Royal Courts of Justice
Strand, London, WC2A 2LL
11/10/2019

B e f o r e :

MR JUSTICE ROBIN KNOWLES CBE
____________________

Between:

HISCOX DEDICATED CORPORATE MEMBER LIMITED AS REPRESENTATIVE OF SYNDICATE 33 AT LLOYD’S
STARR MANAGING AGENTS LIMITED (trading as Syndicate CVS 1919)

Claimants/ Applicants

– and –

 
WEYERHAEUSER COMPANY
(A company incorporated in Washington State, USA)

Defendants/ Respondents

   

____________________

Richard Lord QC and Harry Matovu QC (instructed by Browne Jacobson LLP) for the Claimants
John Lockey QC and Jeremy Brier (instructed by Addleshaw Goddard LLP) for the Defendants
Hearing dates: 16-17 September 2019

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

Mr Justice Robin Knowles:

Introduction

    1. Weyerhaeuser is a wood products manufacturer based in Seattle. Its products include joists manufactured for use in residential homes. Weyerhaeuser maintains liability insurance. This includes an excess liability programme, placed in the London Market and taking the form of a tower of excess liability cover. The Claimants (“the Insurers”) are liability insurers within that programme.
    2. On 12 July 2017, Weyerhaeuser gave notice to its liability insurers of claims made against it in the USA in respect of allegedly faulty joists installed in newly-built residential homes.

The Lead Underlying Policy

    1. The Lead Underlying Policy on Weyerhaeuser’s excess liability programme for the 2016/17 year was issued by AIG Lex-London (“the Lead Underlying Policy”). This contains three material endorsements.
    2. The first, Endorsement 7, provides for all disputes arising out of or relating to the Lead Underlying Policy to be determined in London under the Arbitration Act 1996.
    3. The second, Endorsement 8, is in these terms:

“It is hereby agreed that notwithstanding anything to the contrary in the followed policy, this Policy and any dispute, controversy, or claim arising out of or relating to this Policy, shall be governed by and construed in accordance with the substantive internal law (i.e. excluding procedural and choice-of-law rules) of the State of Washington, except insofar as such law (1) may prohibit payment in respect of punitive damages hereunder: (2) pertain to regulation under Washington Insurance Law, or regulations issued by the Insurance Department of the State of Washington pursuant thereto, applying to insurers doing insurance business, or issuance, delivery or procurement of policies of insurance, within the State of Washington or as respect risks or insured entities situated in the State of Washington; or (3) are inconsistent with any provision of this Policy; provided, however, that the provisions, stipulations, exclusions and conditions of this Policy are to be construed in an even handed fashion as between the Insured and The Company; where the language of this Policy is deemed to be ambiguous or otherwise unclear, the issue shall be resolved in the manner most consistent with the relevant provisions, stipulations, exclusions and conditions (without regard to authorship of the language, without any presumption or arbitrary interpretation or construction in favour of either the Insured or The Company or reference to parol or other extrinsic evidence). Insofar as the substantive internal law of Washington is inapplicable as provided herein or otherwise, and as respects arbitration procedure, the internal laws of England and Wales apply.”

    1. The third, Endorsement 9, is a Service of Suit endorsement, providing as follows:

“Solely for the purpose of effectuating arbitration, in the event of the failure of the Company to pay any amount claimed to be due hereunder, the Company, at the request of the Insured, will submit to the jurisdiction of any court of competent jurisdiction within the United States ….”

The Policy

    1. Weyerhaeuser’s policy with the Insurers (“the Policy”) provides:

“This Following Form Excess Liability Policy has been issued on the basis that it is following the same terms, definitions, exclusions and conditions (except to the extent inconsistent with this Policy) as are, at inception hereof, contained in the Lead Underlying Policy…”

“CHOICE OF LAW

AND JURISDICTION: NMA 1998 Service of Suit Clause (USA) (amended), as attached.

As per Lead Underlying Policy”.

    1. An “Insuring Agreements” clause of the Policy provides as follows:

“The [Insurers] agrees that, except as may otherwise be endorsed to this Policy, this Policy will follow:

1. the same terms, definitions, exclusions and conditions as are, at inception hereof, contained in the Lead Underlying Policy …”.

    1. The NMA 1998 Service of Suit clause (USA) as amended is set out in the Policy. It is not in the same terms as Endorsement 9 to the Lead Underlying Policy. It does not include the words “solely for the purposes of effectuating arbitration” which appear in Endorsement 9 to the Lead Underlying Policy. It provides as follows:

“It is agreed that in the event of the failure of the Underwriters hereon to pay any amount claimed to be due hereunder, the Underwriters hereon, at the request of the Insured (or Reinsured), will submit to the jurisdiction of a Court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of Underwriters’ rights to commence an action in any Court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any State in the United States.

It is further agreed … that in any suit instituted against any one of them upon this contract, Underwriters will abide by the final decision of such Court or of any Appellate Court in the event of an appeal …”.

Proceedings in the US and in England & Wales

    1. On 20 April 2018, Weyerhaeuser filed proceedings (“the First US Proceedings”) in the US District Court (Western District of Washington at Seattle) (“the US District Court”) for a declaratory judgment in respect of certain of its insurance excess policies in the tower of excess liability, including the Policy. Weyerhaeuser sought, among other things, a declaration that there is no valid arbitration agreement applicable to any coverage disputes between itself and various defendant insurers (including the Insurers) and that the US District Court is the appropriate forum for any such disputes.
    2. On 30 April 2018, XL Catlin, another insurer participating in the tower, applied to the English Commercial Court for an anti-suit injunction restraining Weyerhaeuser from pursuing litigation before the US District Court rather than arbitration. An interim anti-suit injunction was made against Weyerhaeuser on 3 May 2018.
    3. On 7 May 2018, Weyerhaeuser sought and obtained a temporary restraining order (a “TRO”) from the US District Court in the First US Proceedings restraining certain insurers (including the Insurers, but not including XL Catlin) from seeking to obtain an anti-suit injunction from the English Commercial Court.
    4. On 21 May 2018, the TRO obtained from the US District Court on 7 May 2018 in the First US Proceedings became a Preliminary Injunction. The Preliminary Injunction prevented the Insurers “from instituting or joining in any action, in any other forum, aimed at securing a determination on the issue whether Weyerhaeuser is required [under the Policy], to arbitrate disputes regarding coverage under those policies.”
    5. On 30 August 2018, Weyerhaeuser filed a motion for summary judgment against the defendants in the First US Proceedings (other than XL Catlin). On 19 November 2018, the defendants other than XL Catlin filed briefs in opposition to Weyerhaeuser’s motion. The Insurers filed their own brief, supporting the case made in the other defendants’ brief. On 30 November 2018 Weyerhaeuser filed a reply brief.
    6. On 21 December 2018, I handed down judgment in the Commercial Court in England & Wales Catlin Syndicate (underwriting as XL Catlin Syndicate 2003) v Weyerhaeuser Co [2018] EWHC 3609 (Comm) and granted XL Catlin’s application for a permanent anti-suit injunction against Weyerhaeuser (“the XL Judgment”).
    7. In January 2019, the defendants in the First US Proceedings (including the Insurers) applied for permission to file further briefs, in order to argue that the XL Judgment created a collateral estoppel against Weyerhaeuser in the First US Proceedings. Additional briefs followed.
    8. In the event, the US District Court did not reach a decision on Weyerhaeuser’s motion for summary judgment in the First US Proceedings. Instead, on 22 July 2019, the Honourable James L. Robart, US District Judge, ordered the parties to file written submissions within 7 days to show cause why Weyerhaeuser’s claim should not be dismissed as “non-justiciable” on the ground that an “actual controversy” was required for a declaratory judgment. Weyerhaeuser and the defendants filed their responses on 29 July 2019. A hearing was fixed for 13 August 2019.
    9. The day before, on 12 August 2019, Weyerhaeuser filed a substantive coverage claim against the Insurers in the King County Superior Court, a state court (“the Second US Proceedings”). Later on the same day, Weyerhaeuser filed a motion for a TRO against the Insurers in relation to this claim.
    10. On 13 August 2019, Judge Robart heard argument on the issue of whether the First US Proceedings should be dismissed as non-justiciable. Judgment was reserved.
    11. On the same day, the Insurers filed a motion to remove the Second US Proceedings from the state court to the US District Court. The next day, the Insurers filed a motion with the US District Court in the Second US Proceedings to stay those proceedings until after the US District Court had ruled on whether the First US Proceedings were non-justiciable.
    12. On Friday 16 August 2019, the US District Court (Judge Robart) dismissed Weyerhaeuser’s claim in the First US Proceedings, on the basis that the claims in those proceedings were non-justiciable.
    13. Weyerhaeuser’s US counsel applied for a TRO in the Second US Proceedings. Freed from the First US Proceedings, and the Preliminary Injunction in those proceedings, the Insurers applied the same day to the English court for an interim anti-suit injunction against Weyerhaeuser. The Insurers appeared on a “without notice” basis before the English Court that evening, 16 August 2019.
    14. An interim anti-suit injunction was granted by the English Court (Snowden J) against Weyerhaeuser that evening (London time). A TRO was made a few hours later by the US District Court (the Honourable Robert S. Lasnik, US District Judge) in the Second US Proceedings. This ordered that the Insurers were “prohibited from seeking, obtaining, pursuing, or enforcing an injunction against the proceedings in the matter during the term of this Order”.
    15. The TRO ordered that the parties appear on 28 August 2019 before the US District Court to address whether the TRO should become a Preliminary Injunction. On 27 August 2019, the Insurers filed a motion dated 26 August 2019 requesting the US District Court to lift the TRO, to decline to convert the TRO into a Preliminary Injunction and to dismiss the Second US Proceedings “based on jurisdiction and collateral estoppel grounds”. In the motion the Insurers requested in the alternative that the US Court stay the Second US Proceedings pending resolution of the dispute in the English Court.
    16. Later on 29 August 2019, the US District Court (Judge Lasnik) converted the TRO into a Preliminary Injunction. Judge Lasnik adjourned the balance of the Insurers’ Motion of 27 August 2019 to a hearing which was listed for 20 September 2019.

The present hearing

    1. After an initial hearing before Phillips J, the question whether the interim anti-suit injunction against Weyerhaeuser should continue came before me on Monday 16 September 2019.
    2. Before argument was complete it was established that Judge Lasnik had issued an order on Friday 13 September 2019 that all deadlines in the Second US Proceedings were “stayed … pending the resolution of the matter of the English Injunction”.
    3. I wish to record that I value and respect this course taken by Judge Lasnik. It is an example of a decision that helps the courts of the UK and the US ensure the orderly progress of matters that, as here, have come before them both.

Should the English Court reach a decision on the issue?

    1. The interim anti-suit injunction, and its continuation, rests on a basis of holding the parties to their agreement to arbitrate rather than litigate, if that is what they agreed. It makes requirements of one of the parties, and not of any court.
    2. Weyerhaeuser submits that it is for the US District Court to decide the issue of whether its claim against the Insurers should be resolved by litigation (in the US courts) or by arbitration.
    3. First, Weyerhaeuser argues that the issue is already before the US District Court and has been since the commencement of the First US Proceedings in May 2018. It adds that both parties have spent considerable time and money developing their arguments in the First and Second US Proceedings.
    4. The chapter that was the First US Proceedings ended with dismissal without a decision on the issue. The issue is now before the English Court as well as the US Court. The important thing is that it needs to be decided and has not yet been decided.
    5. Both the US Court and the English Court will have experience of deciding this type of issue in a context such as the present. It is to be hoped that both courts would reach the same conclusion. In all the circumstances I do not find Weyerhaeuser’s first argument persuasive.
    6. Weyerhaeuser argues secondly that the Insurers have acknowledged, and submitted to, the jurisdiction of the US District Court to decide the issue. Weyerhaeuser highlights in particular the Insurers’ actions in filing the Motion on 27 August 2019 in the Second US Proceedings, along with substantial evidence, and attending at the hearing before Judge Lasnik on 28 August 2019 to argue the issue. Other examples are given, and I have considered each of them.
    7. Weyerhaeuser develops this theme by pointing out that the Insurers have advanced argument to the US District Court, and by reference to Washington State law, on why the US District Court should find that the Lead Underlying Policy is not in conflict with the Policy, that the XL Judgment gives rise to a collateral estoppel binding Weyerhaeuser on the issue, that Weyerhaeuser’s claim should be stayed in favour of arbitration, and that extrinsic evidence of the Insurers’ alleged subjective intention when agreeing the Policy should be considered and should lead to an order for “reformation” (or rectification) of the Policy.
    8. However, it has in my judgment been clear to all parties at all times that the Insurers were not departing from their primary position that the issue should be decided by the English Court. It is true that the Insurers could have chosen to argue only that the English Court, not the US Court, should decide the issue and have left it at that before the US District Court, as Weyerhaeuser points out. But that would have left the Insurers exposed on the issue.
    9. As a further overall argument Weyerhaeuser argues that comity, as well as fairness, now demands that the US District Proceedings be allowed to run their course.
    10. I respectfully disagree. The parties have between them ended up involving the Courts of two jurisdictions. In my judgment in the present case nothing has happened that prevents the Insurers from asking this Court to reach a decision on the issue. As I have said a decision on the issue is needed. To reach a decision here neither offends comity nor principles of fairness.
    11. Weyerhaeuser added the argument that the terms of the Service of Suit clause in the Policy showed that it was for the US court to determine the issue. In my judgment this argument depends on the role and meaning of the Service of Suit clause in the Policy. As will be apparent from the next section I do not consider the Service of Suit clause is to the effect contended.

Interpretation and incorporation

    1. It is common ground that the central question is one of interpretation: whether, on a true interpretation of the Policy, the Service of Suit clause entitles Weyerhaeuser to pursue its substantive claim against the Insurers in the US District Court or whether Weyerhaeuser is compelled to arbitrate. This requires consideration of whether the arbitration agreement in Endorsement 7 to the Lead Underlying Policy is incorporated into the Policy.
    2. The first thing to say is that the parties each urged that their (different) answer to the issue would be the same under both English law and Washington State law.
    3. This was unsurprising given the relevant principles of interpretation under Washington State law advanced by Weyerhaeuser. These were summarised as follows by Weyerhaeuser’s leading counsel, Mr John Lockey QC (appearing with Mr Jeremy Brier): (a) Washington State law begins with the “plain language” of the policy and enforces the contract as written; (b) insurance contracts are interpreted as they would be understood by the average person purchasing insurance; (c) this is an “objective” approach and evidence as to subjective intent is inadmissible unless such intent was communicated; and (d) ambiguity in an insurance policy is resolved in favour of the insured having regard to whether alternative or more precise language was available. For present purposes it is possible to accept that these or similar principles are recognisable or arguably recognisable in English law too.
    4. Mr Lockey QC relies on the fact that there are no words of express incorporation of the arbitration clause. He submits that express reference to the arbitration clause is required before it will be taken to have been incorporated.
    5. In my judgment the words “As per Lead Underlying Policy” alongside the reference to Jurisdiction are amply sufficient.
    6. Mr Lockey QC argues that the reference to the Lead Underlying Policy concerns only choice of law and not jurisdiction. Thus, he argues, “Jurisdiction” is governed by the Service of Suit clause which the parties have chosen to incorporate, whilst “Choice of Law” is governed by the Lead Underlying Policy. He points out that the Service of Suit clause says nothing about choice of law but does provide that “Underwriters . . . will submit to the jurisdiction of a Court of competent jurisdiction within the United States”, whilst the “Lead Underlying Policy” does contain a choice of law clause.
    7. In my judgment the Policy refers to “Choice of Law and Jurisdiction” compendiously not separately. It may be noted that if compartmentalised in the order appearing in the Policy, “As per Lead Underlying Policy” would attach to “Jurisdiction” rather than “Choice of Law”.
    8. Mr Lockey QC argues that the incorporation of the arbitration agreement in Endorsement 7 of the Lead Underlying Policy would contradict the express terms of the Policy, namely the Service of Suit clause.
    9. In my judgment Mr Lockey QC’s argument would not give effect to the words “As per Lead Underlying Policy”. By contrast all the wording used by the parties is given effect if it is recognised that the Service of Suit clause in the Policy is concerned with enforcement. Each case has to be considered by reference to its own particular wording and context, but it is not unusual for the role of a Service of Suit clause to centre on enforcement.
    10. This is shown by the review of the subject area by Christopher Clarke J. in Ace Capital Limited v CMS Energy Corp [2009] 1 Lloyd’s Rep. IR 414, and also by the XL Judgment (above). The present case is not one where the relevant wording has to be seen as in conflict. The decision in Oakley, Inc. v Executive Risk Specialty Ins. Co. 2011 WL 13137931 (C.D. Cal. Feb. 24 2011), relied on by Mr Parris (an expert whose report was submitted by Weyerhaeuser), where the policy wording and the circumstances were not identical to the present case, does not provide the answer to the present case.
    11. Mr Lockey QC attaches significance to the fact that (in contrast to Endorsement 9 of the Lead Underlying Policy) the Service of Suit clause in the Policy does not contain the introductory words: “Solely for the purpose of effectuating arbitration…”.
    12. This point of difference requires the Service of Suit clause in the Policy to be interpreted on its own terms, and as part of the wording of the Policy as a whole including the wording “As per Lead Underlying Policy”. The conclusion that Endorsement 7 of the Lead Underlying Policy (dealing with jurisdiction) is applied to the Policy is not disturbed by the presence or absence of the introductory words to the Service of Suit clause in the Policy.
    13. Mr Lockey QC argues that the use of a different Service of Suit clause in the Policy from that used in the Lead Underlying Policy is a plain indication that the parties did not intend to incorporate the arbitration agreement in Endorsement 7 in the Lead Underlying Policy.
    14. In my judgment it does not follow at all that by using a different Service of Suit clause (Endorsement 9 in the Lead Underlying Policy) the parties did not intend to incorporate Endorsement 7 from the Lead Underlying Policy when providing “As per Lead Underlying Policy”.
    15. Mr Lockey QC also developed an argument to the effect that the Service of Suit clause attached to the Policy had been used to effect service and that as a result its provisions have engaged so as to give jurisdiction to the US Courts. I cannot accept that that follows, where (as I have held) there has been no submission to the jurisdiction and the Service of Suit clause attached to the Policy is concerned with enforcement.
    16. Mr Lockey QC argued that, as a starting point, any Court should have in mind that as a matter of policy, Washington State law does not favour arbitration in insurance coverage disputes. I note that Mr Harry Matovu QC, joint leading counsel for the Insurers, highlighted expert evidence to the effect that there was also a strong pro arbitration policy as regards international arbitration. But even if I take Mr Lockey’s point into account, and leave Mr Matovu’s to one side, it does not reveal a different answer to the question, which is a question about what the parties agreed and one that in my judgment admits of a clear answer.

Other matters

    1. At the hearing before the US District Court on 28 August, counsel for the Insurers (Mr Scheer) told the US District Court that if the Preliminary Injunction was made or the TRO was continued pending a decision on the Preliminary Injunction, the Insurers would abide by the terms of the relevant order and their English counsel would not participate when the UK Court was next due to consider the anti-suit injunction. The morning after the hearing, but prior to the judgment, the Insurers’ US counsel wrote a corrective letter to Judge Lasnik.
    2. I have, as requested by Weyerhaeuser, considered this episode but reached the view that it does not affect my conclusions. As Mr Richard Lord QC, joint leading counsel for the Insurers with Mr Matovu QC, contended, the episode had no material effect and there was no bad faith involved.
    3. I should add that Weyerhaeuser also contended that it had not been validly served with the current proceedings before the English Court. As I understood it, it was not suggested that this contention produced a different answer on the substance of the issue. I will address any consequences when this decision is handed down.

Conclusion

  1. I am satisfied to a high degree of probability that the parties have agreed to submit their dispute to arbitration. In my judgment an interim anti suit injunction should continue, unless Weyerhaeuser is ready to provide suitable undertakings to this Court to equivalent effect. This holds Weyerhaeuser to its apparent agreement to arbitrate rather than litigate.
  2. Although fully argued, this was an interim hearing. This is not the trial of the litigation and it is open to the parties to take the issue to trial and to a final decision.
  3. However, the parties are significant and experienced businesses. It is a matter for them but in light of this decision they may be able to agree that a trial of the issue is not useful and that it is instead sensible to proceed to arbitration.

XPL Engineering ltd. v K & J Townmore Construction ltd. [2019] IEHC 665 (11 October 2019)

[2019] IEHC 665
HIGH COURT
[ 2018 No. 541 S.]
BETWEEN
XPL ENGINEERING LIMITED
APPLICANT
AND
K & J TOWNMORE CONSTRUCTION LIMITED
RESPONDENT
JUDGMENT of Mr. Justice David Barniville delivered on the 11th day of October, 2019
Introduction
1.       This is my judgment on an application by the defendant, K & J Townmore Construction Ltd,
for an order under Article 8 (1) of the UNCITRAL Model Law on International Commercial
Arbitration (the “Model Law”) as incorporated into Irish law by s. 6 of the Arbitration Act,
2010 (the “2010 Act”) referring the parties to arbitration in respect of the issues the
subject of the proceedings. The defendant contends that there are two arbitration
agreements between the parties which apply to the issues raised in the proceedings.
While certain concessions have been made by the plaintiff, XPL Engineering Ltd, in respect
of parts of the claims made by it in the proceedings, it has opposed the defendant’s
application to refer the parties to arbitration in respect of a substantial part of its claim and
does so on a number of grounds.

2.       For reasons set out in greater detail in this judgment, I have concluded that, in respect of
that part of its claim which the plaintiff has sought to pursue in the proceedings, there is a
dispute between the parties which is the subject of an arbitration agreement to which the
plaintiff and the defendant are parties and, as a consequence, I am required to accede to
the defendant’s application and to make an order under Article 8 (1) of the Model Law
referring the parties to arbitration in respect of that part of the plaintiff’s claim.

3.       As regards the balance of the claims which the plaintiff initially sought to maintain in the
proceedings, it seems to me that Article 8 (1) of the Model Law also requires that they
should be referred to arbitration having regard to the terms of the relevant arbitration
agreements. While the plaintiff has not formally consented to those claims being referred
to arbitration under the relevant agreements, and has raised the possibility of the parties
mediating in respect of those claims, it seems to me that Article 8 (1) of the Model Law
requires the parties to be referred to arbitration in respect of them. However, I will
discuss with counsel the terms of any order which might be made in that regard. I wish to
make clear, however, that I am in no way precluding the parties from seeking to mediate
those claims or indeed any of the plaintiff’s claims. On the contrary, I would positively
encourage mediation.

Factual background
4.       The plaintiff is an engineering company. The defendant is a construction company. In
2014, the defendant engaged the plaintiff as a subcontractor to provide mechanical works
on two contracts under which the defendant was the main contractor. The first
subcontract was entered into between the parties on 8th May, 2014 and was in respect of a
construction project which the defendant was carrying out, as main contractor, at
Stanhope Green in Smithfield, Dublin 7. That subcontract was in the RIAI form of
subcontract issued by the Construction Industry Federation in 1989 (the “Stanhope
subcontract”). The second subcontract was in respect of a construction project which the
defendant was carrying out, as main contractor, at St. Etchen’s National School in
Kinnegad, County Westmeath. The plaintiff was appointed as the subcontractor
responsible for mechanical works on the project on 23rd May, 2014. The parties entered
into subcontract in respect of those mechanical works (in the form issued by the CIF in
2008 for use in conjunction with the forms of main contract for public works issued by the
Department of Finance in 2007) on 5th June, 2014 (the “St. Etchen’s subcontract” or the
“subcontract”, where appropriate). The Stanhope subcontract and the St. Etchen’s
subcontract each contains an arbitration clause.

Differences between the parties: commencement and progress of proceedings

5.       Differences arose between the plaintiff and the defendant in the course of both of the
subcontracts shortly after they commenced. The plaintiff claims that monies are due to it
under both subcontracts which the defendant has not paid. The plaintiff issued plenary
proceedings against the defendant in 2014 seeking payment of the sums which it claimed
were due and owing to it by the defendant under the two subcontracts (the “plenary
proceedings”). Having entered an appearance to those proceedings in September 2014,
the defendant’s then solicitors, Nash McDermott & Co., wrote to the plaintiff’s then
solicitors, Dore & Co., on 9th September, 2014 asserting that the plenary proceedings
arose out of a dispute or disputes between the parties in relation to the two subcontracts
and that those subcontracts required such disputes to be dealt with by way of conciliation
or arbitration under the relevant subcontracts. They further stated that the defendant was
now invoking the process as set out in the contractual documentation requiring the
matters in dispute to be referred to conciliation/arbitration”. They warned that if the
plaintiff sought to continue the plenary proceedings, an application would be made to the
High Court to prevent the plaintiff from doing so having regard to the terms of the two
subcontracts. Around the same time, further correspondence was sent to the plaintiff’s
then solicitors by a firm of dispute resolution professionals, Quigg Golden, acting on behalf
of the defendant disputing the plaintiff’s claims and referring to the dispute resolution
provisions contained in the two subcontracts. I refer later in this judgment to contents of
some of those letters.

6.       It appears that, for whatever reason (and none has been offered by the plaintiff in any of
the affidavits on which it has sought to rely for the purposes of the defendant’s
application), the plaintiff did not pursue the plenary proceedings. Rather, the plaintiff
issued a summary summons almost four years later, on 2nd May, 2018, seeking to recover
from the defendant the sum of €187,194.91 allegedly due and owing to the plaintiff under
the two subcontracts (the “summary proceedings”). The plaintiff claimed the sum of
€108,083.87 under the St. Etchen’s subcontract and the sum of €79,111.04 under the
Stanhope subcontract.

7.       The plaintiff brought a motion for liberty to enter final judgment in the total sum of
€187,194.91 in the summary proceedings on 20th September, 2018. That motion was
returnable before the Master on 4th December, 2018. The plaintiff’s motion was grounded
on an affidavit sworn by David McEnroe, a director of the plaintiff company, on 18th
September, 2018. Mr. McEnroe has also sworn an affidavit for the purpose of opposing the
defendant’s application under Article 8 (1) of the Model Law.

8.       With respect to the sum of €108,083.87 which the plaintiff was claiming in respect of the
St. Etchen’s subcontract, Mr. McEnroe referred to certain payments which were made to
the plaintiff by the defendant under that subcontract in June and July 2014 and referred to
one payment certificate (in the sum of €47,856.36) dated 14th July, 2014 in respect of
which payment had not been made by the defendant. Mr. McEnroe also referred to the
minutes of a site meeting held on 18th July, 2014 (the “site minutes”) which he contended
recorded Keith Screeney, the defendant’s managing director, confirming the percentage of
work completed on the site by the plaintiff. He maintained that the total sum due by the
defendant to the plaintiff under the St. Etchen’s subcontract was €108,083.87.

9.       In a subsequent replying affidavit sworn by Mr. McEnroe on 5th March, 2019, a calculation
prepared by Mr. McEnroe was exhibited showing the total value of the works completed by
the plaintiff in accordance with the defendant’s alleged acknowledgment in the site minutes
as being €92,011.02. Mr. McEnroe extrapolated from the site minutes an
acknowledgement by the defendant that of the required works 72% had been completed
by the plaintiff for which it had only been paid 17% of the total value due to it. Mr.
McEnroe accepted in that affidavit (and accepted in response to the defendant’s application
under Article 8 (1) of the Model Law) that there is a dispute between the parties in relation
to €16,072.75 of the total sum claimed by the plaintiff under the St. Etchen’s subcontract.
With respect to the Stanhope subcontract, Mr. McEnroe explained the basis on which the
plaintiff was claiming the sum of €79,111.04 from the defendant. It is unnecessary to
consider the basis on which that figure was arrived at as, in his replying affidavit, Mr.
McEnroe accepted that there is a dispute between the parties in relation to that sum.

10.       Ultimately, the plaintiff sought liberty to enter final judgment against the defendant in the
total sum of €92,011.12 which represented a substantial part of its claim against the
defendant under the St. Etchen’s subcontract. The plaintiff accepted that there was a
dispute in respect of part of its claim under that contract and the entirety of its claim under
the Stanhope subcontract. The basis on which the plaintiff sought liberty to enter final
judgment against the defendant in the sum of €92,011.12 was that it was contended by
the plaintiff that that sum represented the value of the works which the defendant had
acknowledged had been completed by the plaintiff under the St. Etchen’s subcontract.

11.       The plaintiff’s motion for liberty to enter final judgment was adjourned on consent on the
return date (4th December, 2018) to 29th January, 2019 to enable the defendant to provide
its replying affidavit. A replying affidavit was sworn by Denis Lahart, a director of the
defendant, on the adjourned date, 29th January, 2019. That affidavit contained a
preliminary objection to the proceedings by reference to the arbitration agreements
contained in the two subcontracts under which it was contended that any dispute between
the parties had to be referred to arbitration. Mr. Lahart stated that it was the defendant’s
intention to bring an application seeking to refer the proceedings to arbitration under
Article 8 (1) of the Model Law having regard to the terms of those arbitration agreements.
Mr. Lahart asserted that it was not appropriate for any statement to be made on the
substance of the defendant’s defence to the proceedings at that point in time having
regard to the provisions of Article 8 (1) of the Model Law. Therefore, while Mr. Lahart
explained that it was the defendant’s intention to bring an application under Article 8 (1) of
the Model Law in respect of the dispute or disputes between the parties he did not provide
any detail on the substance of the defendant’s defence to the proceedings at that point in
time. Mr. Lahart made a further preliminary objection alleging an abuse process by the
plaintiff in bringing the summary proceedings in circumstances where the plenary
proceedings had previously been issued but not pursued. He purported to do so without
prejudice to the defendant’s preliminary objection based on the arbitration agreements
between the parties.

12.       The plaintiff’s motion for liberty to enter final judgment was again adjourned on consent to
enable the plaintiff to provide a replying affidavit. A replying affidavit was sworn by Mr.
McEnroe on 5th March, 2019. It was in that affidavit that the plaintiff indicated that it was
pursuing summary judgment in the sum of €92,011.12 on the basis of the alleged
acknowledgment by the defendant of the works completed by the plaintiff and the
plaintiff’s valuation of those works. The plaintiff sought summary judgment in that amount
and suggested that the balance of its claims under the two subcontracts (approximately
€95,000), which it is accepted were in dispute between the parties and subject to the
arbitration agreements contained in the two subcontracts, be referred to arbitration or
mediation.

13.       The plaintiff’s motion for liberty to enter final judgment was adjourned on consent by the
parties to the common law motion list and has been adjourned from time to time pending
the determination of the application which the defendant subsequently brought under
Article 8 (1) of the Model Law.
Defendant’s application to refer to arbitration under Article 8(1) of the Model Law
14.       The defendant brought its application for an order under Article 8(1) of the Model Law
referring the parties to arbitration in respect of the matters the subject of the summary
proceedings by a motion issued on 26th March, 2019. The defendant’s application was
grounded on an affidavit sworn by Mr. Lahart on the same date. The defendant’s motion
seeks a referral to arbitration under the provisions of both subcontracts although, as noted
earlier, it is now accepted by the plaintiff that part of the claim made by it in the summary
proceedings in respect of the St Etchen’s subcontract falls under the arbitration provisions
contained in clause 13 of that subcontract and that all of its claim in respect of the
Stanhope subcontract falls within the arbitration provisions contained in clause 26 of that
subcontract,

15.       Having referred to and exhibited the two subcontracts and having highlighted the
arbitration provisions in those subcontracts, Mr. Lahart then asserted at paras. 9 and 10 of
his affidavit as follows:
“9. As is apparent from the summary summons and affidavits herein, a dispute has
arisen between the parties concerning payments claimed to be owing to the plaintiff
by the defendant under the St. Etchen’s Sub-Contract.
10.       The plaintiff’s entitlement to payment under both Sub-Contracts is denied by the
defendant, and further the defendant’s suffered loss, damage, inconvenience and
expense as a result of the plaintiff’s actions, and inaction, on the said projects and
has a counterclaim in that regard”.

16.       Mr. Lahart referred to the replying affidavit which he swore on behalf of the defendant in
response to the plaintiff’s application in the summary proceedings and made the point that
that affidavit did not address the substance of the dispute between the parties and merely
referred to the existence of the arbitration agreements in the subcontracts (as well as the
previous plenary proceedings issued by the plaintiff). Mr. Lahart further asserted that his
grounding affidavit did not purport to be a “statement on the substance of the dispute”
between the parties for the purposes of Article 8(1) of the Model Law. Mr. Lahart sought to
rely on the arbitration provisions contained in the two subcontracts and referred to and
exhibited some of the correspondence between the party’s respective advisors in August
and September, 2014 which I referred to earlier.

17.       In one of the letters exhibited, Quigg Golden, on behalf of the defendant, wrote to the
plaintiff’s then solicitors on 1st August, 2014 reiterating the defendant’s stance on the
plaintiff’s claim as set out in an earlier letter from Quigg Golden dated 31st July, 2014
(which was not exhibited) and asserted that the amounts claimed by the plaintiff were
“both unsubstantiated and, more importantly, in dispute.” Reference was made to the
dispute resolution provisions contained in the two subcontracts.
18.       In their subsequent letter of 11th September, 2014, Quigg Golden stated:
It appears that your client failed to comply with the terms of its contract with K&J
Townmore, despite been afforded every opportunity to do so. It now appears that
your client is trying to attribute its failure to perform its obligations under this
contract, giving rise to their termination (sic)”.

19.       While the second sentence just quoted is not entirely clear, the quotation does suggest
that the defendant was asserting a failure by the plaintiff to comply with its contractual
obligations and an attempt by the plaintiff to attribute responsibility for that failure to the
defendant. The same letter went on to remind the plaintiff that the defendant was
reserving its right “to recover the damages this termination [of the contracts] has cost
them …”.

20.       Mr. McEnroe swore a replying affidavit on behalf of the plaintiff on 2nd May, 2019. He
referred back to the affidavits which he swore in the summary proceedings and contended
that no dispute had arisen between the parties in relation to the sum of €92,011.12 which
the plaintiff was seeking by way of summary judgment. In the absence of a dispute, it
was contended, the arbitration agreements contained in the two subcontracts were not
engaged. In support of his contention that no dispute existed between the parties in
relation to the sum claimed by the plaintiff, Mr. McEnroe referred again to and exhibited
the site minutes. He contended that the defendant had expressly acknowledged in those
minutes that a very substantial amount of works had been completed by the plaintiff under
the St. Etchen’s subcontract. He also referred to and exhibited again the calculation made
by the plaintiff of the value of the percentage of works which the defendant acknowledged
was completed by the plaintiff. On that basis, Mr. McEnroe contended that the defendant
had acknowledged that it was indebted to the plaintiff in the sum of €92,011.12. He
asserted that both the extent of and the value of the agreed completed works was not in
dispute under the two subcontracts. Mr. McEnroe asserted that the defendant’s contention
that the sum claimed was in dispute was unsustainable and did not bear any objective
scrutiny. He sought to criticise the manner in which the defendant suggested that a
dispute arose and asserted that this was done by way of a bald assertion and in a manner
artificially to create a dispute under the subcontracts. Mr. McEnroe also pointed out that
the defendant had not taken issue with the replying affidavit which he had sworn on 5th
March, 2019 in the summary proceedings. Consequently, he contended that the defendant
had not disputed what was said in that affidavit. Mr. McEnroe further asserted that the
defendant had not itself complied the provisions of Article 8(1) of the Model Law in light of
the delay by the defendant in bringing its application following the defendant’s replying
affidavit in the summary proceedings.

21.       Mr. Lahart contended, therefore, that the parties were not in dispute in respect of the
€92,011.12 claimed by the plaintiff in the summary proceedings and that the plaintiff was
entitled to proceed to seek summary judgment in respect of that amount, while accepting
that the balance of the sums claimed by the plaintiff in the summary proceedings could be
referred to arbitration or mediation.

22.       There was no replying affidavit from the defendant to Mr. McEnroe’s replying affidavit.

Apparent to determination of the issues

23.       The parties exchanged detailed written submissions in advance of the hearing of the
defendant’s application and made very helpful oral submissions at the hearing. As we shall
see, there are a couple of significant issues between the parties which require
determination. Those issues concern the extent of the court’s mandatory obligation under
Article 8 (1) of the Model Law to refer parties to arbitration when the requirements of that
provision are satisfied.

24.       The plaintiff contends that for various reasons the requirements of Article 8 (1) have not
been complied with by the defendant and that, therefore, the court does not have a
mandatory obligation to refer the parties to arbitration in respect of the claim which it has
sought to maintain in the summary proceedings. It will be necessary, therefore, for me to
consider the terms of Article 8 (1) of the Model Law and the extent of the court’s obligation
under that provision. In the event that the plaintiff is correct in its contention that the
requirements of Article 8 (1) have not been complied with by the defendant, it may be
necessary for me to consider whether there remains, as the plaintiff contends, a residual
discretionary jurisdiction to stay the summary proceedings having regard to the arbitration
agreements in the two subcontracts but, particularly, in the St. Etchen’s subcontract.

25.       While those are issues which I will have to address, the main issue between the parties is
whether, as the defendant contends, there is a “dispute between the parties” for the
purposes of the arbitration agreement contained in Clause 13(a) of the St. Etchen’s
subcontract and Article 8 (1) of the Model Law or whether, as the plaintiff contends, there
is no dispute between the parties with respect to the sum for which the plaintiff now seeks
summary judgment under the St. Etchen’s subcontract in light of the alleged
acknowledgement by the defendant of the extent of the works completed by the plaintiff
under that subcontract. The consideration of that issue will require a review and analysis
of the legal issue as to whether, and in what circumstances, a dispute exists as well as an
analysis of the factual material put forward by the parties in support of their respective
contentions on that issue.

26.       Before considering those various issues, I will set out the relevant provisions of Clause 13
of the St. Etchen’s subcontract (which contains the relevant arbitration agreement between
the parties insofar as that subcontract is concerned). I will then look at the provisions of
Article 8 (1) of the Model Law and summarise the approach which the court is required to
take in considering an application for an order under that provision. Having done so, I will
turn to consider the respective contentions of the parties on the issues which I have to
consider before setting out my decision on those contentions and my conclusions on the
application.

St. Etchen’s subcontract

27.       In light of the plaintiff’s acceptance that there is a dispute between the parties in relation
to the entirety of its claim against the defendant under the Stanhope subcontract and that
such dispute falls under the arbitration agreement between the parties under that
subcontract which is contained in Clause 26 of the Stanhope subcontract, it is unnecessary
for me to consider further the terms of that arbitration agreement. While the plaintiff has
conceded that part of its claim against the defendant under the St. Etchen’s subcontract is
the subject of a dispute between the parties which falls within the terms of the arbitration
agreement between the parties under that subcontract, which is contained in Clause 13 (a)
of the subcontract, it contends that there is no such dispute in respect of most of its claim
under that subcontract. Before considering the basis on which the plaintiff seeks to
advance that contention, it is appropriate to set out the terms of the arbitration agreement
between the parties contained in Clause 13 (a) of the St. Etchen’s subcontract.

28.       Clause 13 of the St. Etchen’s subcontract is headed “Disputes”. Clause 13 contains various
dispute resolution procedures including arbitration, mediation and conciliation. This case is
concerned only with the arbitration provisions contained in Clause 13 (a).

29.       Clause 13 (a) is headed “Notice to Refer” and provides as follows:
“(1) If a dispute arises between the parties in connection with or arising out of the Sub-
Contract, either party may, by notice to the other, refer the dispute for arbitration
by serving on the other a Notice to Refer. The Notice to Refer shall state the issues
in dispute. The service of the Notice to Refer will be deemed to be the
commencement of arbitration proceedings. Either party may within a period of 21
days of the Notice to Refer give notice to the other of further disputes and, if such
notice is given, those further disputes will be deemed to be included in the reference
to arbitration.
(2) …
(3) …”

30.       Clause 13 (e) provides for the procedure for the appointment of the arbitrator and the
procedure applicable to any arbitration under the provisions of the subcontract. No issues
arises between the parties in relation to this sub-clause.
31.       What is relevant for present purposes is the requirement in clause 13(a) for there to be a
“dispute” between the parties “in connection with or arising out of the Sub-Contract”. The
plaintiff contends that there is no such “dispute” between the parties in relation to that
part of its claim under the St. Etchen’s subcontract for which it continues to seek judgment
in the summary proceedings. As we shall see Article 8 (1) of the Model Law also requires
there to be a “dispute” between the parties before the parties can be referred to arbitration
under that provision. I consider later in this judgment the approach to be adopted in
determining whether a “dispute” can properly be held to exist between the parties for the
purposes of Clause 13 (a) of the St. Etchen’s subcontract and Article 8 (1) of the Model
Law. Before doing so, however, I consider Article 8 (1) and the approach which the court
is required to take in considering an application for an order under that provision.

Article 8 (1) of Model Law: required approach

32.       Article 8 (1) of the Model Law provides as follows:
“A court before which an action is brought in a matter which is the subject of an
arbitration agreement shall, if a party so requests not later than when submitting his
first statement on the substance of the dispute, refer the parties to arbitration
unless it finds that the agreement is null and void, inoperative or incapable of being
performed.”

33.       The Model Law has force of law in the State and applies to both international commercial
arbitrations and domestic arbitrations where the seat of the arbitration is Ireland by virtue
of s. 6 of the 2010 Act. I have had cause to consider the provisions of Article 8 (1) in a
number of previous judgments including K & J Townmore Construction Ltd v. Kildare and
Wicklow Education and Training Board [2018] IEHC 770 (“Townmore (No.1), Ocean Point
Development Company Ltd (In Receivership) v. Patterson Bannon Architects Ltd & Ors
[2019] IEHC 311 (“Ocean Point”) and K & J Townmore Construction Ltd v. Kildare and
Wicklow Education and Training Board (judgment delivered on 11th October, 2019)
(“Townmore (No. 2)”).

34.       In Ocean Point, I stated as follows:
“In order for the provisions of Article 8 (1) of the Model Law to be engaged, various
requirements must be satisfied. First, an action must have been brought before the
court in respect of a dispute between the parties. Second, the action must concern
a ‘matter which is the subject of an arbitration agreement’. Third, one of the parties
must request the reference to arbitration ‘not later than when submitting his first
statement on the substance of the dispute’. If those requirements are satisfied, the
court must refer the parties to arbitration (the word ‘shall’ is used). The only
circumstances in which the court’s obligation to refer the parties to arbitration does
not arise is where the court finds that the arbitration agreement is (i) ‘null and void
or (ii) ‘inoperative’ or (iii) ‘incapable of being performed’. The onus of establishing
the existence of one or more of these disapplying factors rests on the party who
seeks to rely on them (see Sterimed Technologies International v Schivo Precision
Ltd [2017] IEHC 35 (per McGovern J at para. 12, pp 4-5)).”
(Ocean Point, para. 26, p. 12)

35.       As has been consistently held by the Irish courts that where the requirements of Article 8
(1) are satisfied the court is under a mandatory obligation to make the reference to
arbitration and does not have a discretion whether to refer or not. In Townmore (No. 1)
and in Ocean Point, I approved the following statement made by the High Court (McGovern
J.) in BAM Building Ltd v. UCD Property Development Co. Ltd [2016] IEHC 582 (BAM”):
“The courts in this jurisdiction have long been supportive of the arbitral process and
there is a line of recent authority which clearly establishes that Article 8 of the Model
Law does not create a discretion to refer or not to refer matters to arbitration. If
there is an arbitration clause and the dispute is within the scope of the arbitration
agreement and there is no finding that the agreement is null and void, inoperative or
incapable of being performed, then a stay must be granted. See P. Elliott and
Company Limited (In Receivership and In Liquidation) v. F.C.C. Elliott Construction
Limited [2012] IEHC 361; and, Go Code Limited v. Capita Business Services Limited
[2015] IEHC 673.” (BAM, at para. 6, p. 3 per McGovern J.)

36.       There is no issue between the parties as to the mandatory nature of the obligation on the
court to refer the parties to arbitration once the requirements of Article 8(1) are satisfied.
As we shall see, the defendant contends that those requirements are satisfied and that the
mandatory obligation to refer to arbitration arises. The plaintiff, however, contends that,
for various reasons, the requirements of Article 8 (1) have not been satisfied and that,
therefore, there is no mandatory obligation to refer the parties to arbitration. It should be
noted however that the plaintiff does not contend that the arbitration agreement contained
in Clause 13 (a) of the St. Etchen’s subcontract is “null and void” or “inoperative” or
“incapable of being performed”. It contends that the defendant has not complied with
the requirements of Article 8 (1) and also that there is no “dispute” between the parties so
as to engage the provisions of the Article.

Respective contentions of the parties
The defendant

37.       The defendant’s position is that there is an arbitration agreement between the parties in
clause 13(e) of the St. Etchen’s subcontract. The defendant contends that all of the
requirements in Article 8(1) of the Model Law have been satisfied: it says that the
plaintiff’s claim in the summary proceedings which is disputed, is the subject of an
arbitration agreement between the parties contained in clause 13(e) of the St. Etchen’s
subcontract. It contends it has requested the court to refer the parties to arbitration under
Article 8(1) “not later than when submitting [its] first statement on the substance of the
dispute”. The defendant’s position is that it did not submit its “first statement on the
substance of the dispute” in the affidavit sworn by Mr. Lahart on 29th January, 2019 in
response to the plaintiff’s application for liberty to enter final judgment. It asserts in the
summary proceedings that it has at all times made clear its intention to seek a reference
to arbitration.

38.       On the question as to whether there is a dispute between the parties in relation to the
plaintiff’s claimed entitlement to judgment for the monies allegedly outstanding under the
St. Etchen’s subcontract, the defendant submits that as a matter of fact it has disputed the
plaintiff’s entitlement to judgment in the sum claimed on affidavit and in correspondence
and that, as a matter of law, there is a dispute between the parties. The defendant has
relied on a substantial body of case law from England and Wales and one Irish case in
support of its contention that a dispute does exist between the parties.

39.       In the circumstances the defendant submits that where all of the requirements in Article
8(1) have been satisfied, where a dispute does exist between the parties and where the
plaintiff is not claiming that the arbitration agreement contained in clause 13(a) of the St.
Etchen’s subcontract is “null and void, inoperative or incapable of being performed”, the
court is obliged to refer the parties to arbitration in respect of the matters the subject of
the summary proceedings.

The Plaintiff

40.       It is the plaintiff’s contention that the court is not subject to a mandatory obligation to
make a reference to arbitration in this case as the defendant has not complied with the
requirements in Article 8(1) of the Model Law. The plaintiff puts forward the following
reasons for that contention.

41.       First, the plaintiff asserts that the defendant failed to comply with the requirement to
request the reference to arbitration “not later than when submitting [its] first statement on
the substance of the dispute” as required under Article 8(1). The plaintiff asserts that the
defendant submitted its “first statement on the substance of the dispute” when Mr. Lahart
swore his replying affidavit on 29th January, 2019 in response to the plaintiff’s application
for liberty to enter final judgment in the summary proceedings. The defendant did not
request the reference to arbitration at that stage but merely indicated an intention to do so
at a later stage. The plaintiff contends that this requirement must be strictly complied with
in order to engage the mandatory obligation on the court under Article 8(1) and that, as a
consequence of the defendant’s failure to comply with the requirement, the court is no
longer subject to a mandatory obligation to refer. The plaintiff relies in this regard on
cases including Townmore (1) and Ocean Point.
42.       The plaintiff also advances an additional, but related, argument based on the alleged delay
on the part of the defendant in bringing its application for a reference to arbitration almost
three months after its replying affidavit was delivered in the summary proceedings.

43.       The plaintiff argues that in the absence of a mandatory requirement to refer under Article
8(1) of the Model Law, the court has a discretion as to whether to stay the proceedings to
enable an arbitration to take place under the relevant subcontract. It submits that the
court should exercise its discretion by refusing to grant the stay in circumstances where it
says that is no dispute between the parties as to the plaintiff’s entitlement to recover the
sum of just over €92,000 in the summary proceedings.

44.       Second, the plaintiff contends that there is in fact and in law no dispute between the
parties in relation to its entitlement to recover the sum it claims in the summary
proceedings. While accepting that it does not contend that the arbitration agreement
contained in Clause 13(a) of the St. Etchen’s sub-contract is “null and void, inoperative or
incapable of being performed”, it does contend that the provisions of Article 8(1) are not
engaged at all in circumstances where there is no dispute between the parties on its
entitlement to recover the sum claimed in the summary proceedings as a matter of fact
and law. It argues that in order to engage the provisions of Article 8(1) of the Model Law
there must be a dispute between the parties. It further argues that on the proper
interpretation of the term “dispute” as used in Clause 13(a) of the subcontract the court
must conclude that no dispute exists between the parties. The basis for this contention is
the alleged acceptance by the defendant of the percentage of the works completed by the
plaintiff in the site minutes and the plaintiff’s calculation of the value of those completed
works. The plaintiff relies on the site minutes to demonstrate the defendant’s acceptance
of the percentage of works completed on the project (to which the plaintiff has ascribed a
value) as well as the defendant’s failure to dispute, in its replying affidavit in the summary
proceedings, and in its affidavit grounding the application to refer to arbitration under
Article 8(1) of the Model Law, the percentage of works completed by the plaintiff under the
subcontract and the value of those works, as calculated by the plaintiff. The plaintiff
contends that the defendant has sought artificially to create a dispute by making bald
assertions of a dispute and a counterclaim with no supporting evidence.

45.       The plaintiff suggests that the approach which the court should adopt in determining
whether a dispute exists between the parties is the same as the approach which the court
adopts in determining whether an application for summary judgment should be adjourned
to plenary hearing. On that basis, the plaintiff contends, the defendant has failed to put
forward a stateable or credible basis for defending the plaintiff’s claim and its application
for summary judgment. It says, therefore, that the court should determine that, as a
matter of fact and as a matter of law, no dispute exists between the parties under Clause
13(a) the St. Etchen’s sub-contract or under Article 8(1) of the Model Law.
46.       Third, the plaintiff advances an additional point arising from the provisions of Clause 13(a)
of the subcontract. It says that the defendant has not complied with the terms of Clause
13(a) in that the defendant has not served a “notice to refer” as required under Clause
13(a) stating the issues in dispute. The plaintiff contends that the defendant cannot do so
at this stage in light of the requirement in Article 8(1) that a request for arbitration must
be made no later than when the defendant submitted its “first statement on the substance
of the dispute”.

Issues requiring consideration

47.       It seems to me that there are really two main and related issues requiring to be
determined. The first is whether the defendant complied with the requirements in Article
8(1) of the Model Law in its request for the reference to arbitration. The second, and
related, issue is whether there is a dispute between the parties in relation to the plaintiff’s
entitlement to payment of the sum of just over €92,000 claimed by it in the summary
proceedings. There are some subsidiary issues which need also to be considered, such as
the alleged delay on the part of the defendant in bringing its application and its alleged
failure to comply with the provisions of Clause 13(a) of the sub-contract. Those subsidiary
issues can be dealt with as part of my consideration of the two main issues.

(1) Whether Article 8 requirements complied with

48.       As pointed out earlier, if the requirements contained in Article 8(1) are satisfied, the court
is obliged to refer the parties to arbitration. Leaving aside for the moment the plaintiff’s
contention that no dispute exists between the parties so that Article 8(1) is not engaged at
all, the only requirement in Article 8(1) which the plaintiff claims has not been complied
with is the requirement to request the reference to arbitration “not later than when
submitting [its] first statement on the substance of the dispute”. The plaintiff asserts that
the defendant submitted its “first statement on the substance of the dispute” when Mr.
Lahart swore his replying affidavit on 29th January, 2019 in response to the plaintiff’s
application for liberty to enter final judgment in the summary proceedings. The plaintiff
contends that the defendant was required to request the reference to arbitration, by
making an application to court, no later than when that replying affidavit was provided. I
do not agree.

49.       Article 8(1) is clear in its terms. A request for a reference to arbitration under that
provision must be made “not later” than when the requesting party submits its “first
statement” on the “substance of the dispute”. As observed in Mansfield Arbitration in
Ireland: Arbitration Act, 2010 and Model Law: A Commentary ((2nd Ed.) (2018))
(“Mansfield”), the international case law under the Model Law has strictly enforced the
requirement that the request for arbitration must be no later than when the “first
statement on the substance of the dispute” is submitted and that where such a statement
is submitted without a request for arbitration, the right to obtain the reference to
arbitration will be lost (see: Mansfield at p. 129 and the cases quoted there, namely,
CLOUT Case 181 – Canada/British Columbia Supreme Court: Queensland Sugar Corp v.
The Hanjin Jedda (24th March, 1995) and CLOUT Case 621 – Canada/British Columbia
Supreme Court: Robert Wall & ors v. Scott’s Hospitality (BC) Inc (6th March, 1990)). I
agree with Mansfield that in plenary proceedings, if a party serves its defence without that
defence containing a request for arbitration, that party will lose its right to the reference to
arbitration under Article 8. I also agree with Mansfield that in summary proceedings, if a
party files an affidavit in response to an application for summary judgment which deals
with the substance of the dispute between the parties and does not make clear that the
affidavit is being filed without prejudice to that party’s entitlement to refer the dispute to
arbitration, that party will lose its entitlement to do so. Indeed, in such a situation, Article
8 probably requires the requesting party to request the reference to arbitration, by issuing
its application for the reference, either before or at the same time as it delivers its replying
affidavit in the summary proceedings where that affidavit addresses the “substance of the
dispute” between the parties.

50.       I note that the authors of Dowling-Hussey and Dunne: Arbitration Law ((3rd Ed.) (2010))
express the view at para 7.63 (p.408), based on two Canadian cases, that it may be open
to a party to reserve its right to seek a reference to arbitration or to indicate that it intends
to seek such a reference, when submitting its “first statement on the substance of the
dispute” and that such will be sufficient to preserve its entitlement to seek an order of
reference to arbitration under Article 8(1). The cases mentioned by the authors are Seine
River Resources Inc v. Pensa Inc [1999] Can LII 6579 (Supreme Court of British Columbia,
15th June, 1999) and Canada (Attorney General) v. Marineserve MG Inc [2002] NSSC 147
(Supreme Court of Nova Scotia, 24th May, 2002). While I have not heard any submissions
based on those cases and am, therefore, reluctant to offer a concluded view on the point,
it does seem to me that it could well be inconsistent with the requirement in Article 8(1)
for the request for the reference to arbitration to be made “not later than” when the “first
statement on the substance of the dispute” is submitted, to permit such a request for
reference to be made subsequent to the submission of that first statement, even where a
party has expressly reserved its right to make such a request in the future or has indicated
its intention to do so. However, I will leave that issue open for consideration in a case in
which the point actually arises.

51.       The question which does arise, however, on this application is whether the defendant’s
replying affidavit in the summary proceedings amounted to its “first statement on the
substance of the dispute”. If it did, the next question is whether the defendant, in the
course of that replying affidavit, did request the reference to arbitration no later than at
that time.

52.       To answer these questions, it is necessary to refer again to the replying affidavit sworn by
Mr. Lahart on behalf of the defendant on 29th January, 2019 in response to the plaintiff’s
application for liberty to enter final judgement. As I noted earlier, the replying affidavit
made two preliminary objections. The first was made on the basis of the arbitration
agreements contained in the two subcontracts between the parties. The second concerned
an alleged abuse of process arising from the commencement of the plenary proceedings in
2014 and is not relevant here.

53.       Paragraph 6 of Mr. Lahart’s replying affidavit makes very clear that it was not his intention
to make any statement on the substance of the defence which the defendant may have to
the summary proceedings. Indeed, Mr. Lahart expressly so states in that paragraph of his
affidavit. The affidavit does not set out what the plaintiff’s claim is and what the
defendant’s defence is to that claim. It does not contain any discussion at all on the merits
or otherwise of the plaintiff’s claim or of the defendant’s defence to that claim.

54.       Can it be said, therefore, that Mr. Lahart’s replying affidavit amounts to the defendant’s
“first statement on the substance of the dispute” between the parties? I do not believe that
it can. In order to constitute a statement on the “substance of the dispute”, the particular
document relied upon, in this case a replying affidavit, would have to at least refer to the
nature of the claim being made and the nature of the defence to that claim, with some
discussion as to the claim and defence. A mere reference to the fact of a dispute could not,
in my view, amount to a “statement” on the “substance” of that dispute. The defendant’s
replying affidavit in the summary proceedings does not refer at all to or engage with the
“substance” of the dispute between the parties. It refers in a rather indirect way to the
existence of a dispute by referring to the existence of an arbitration agreement in each of
the two subcontracts and to the alleged attempt by the plaintiff to circumvent those
provisions by commencing the summary proceedings. The affidavit further refers to the
defendant’s intention, without prejudice to its abuse of process preliminary objection, to
bring an application seeking a reference to arbitration under Article 8(1) of the Model law
having regard to the arbitration agreements contained in the two subcontracts.

55.       It seems to me that in contending that the defendant’s replying affidavit amounted to a
“statement on the substance of the dispute”, the plaintiff is ignoring the fact that the
particular statement must address the “substance” of the dispute and not merely refer to
the fact of a dispute. I am satisfied that the defendant’s replying affidavit in the summary
proceedings does not amount to its “first statement on the substance of the dispute”
between the parties. Nor did that affidavit contain a request for a reference to arbitration.
Rather, it signposted the defendant’s intention to bring an application seeking a reference
to arbitration under Article 8(1).

56.       The actual request for the reference to arbitration was made by the defendant when it
issued its motion seeking an order under Article 8(1) on 26th March, 2019. Mr. Lahart
swore the grounding affidavit for that application on the same date. As noted earlier, in
that grounding affidavit, Mr. Lahart asserted that the replying affidavit which he had sworn
in the summary proceedings did not address the substance of the dispute and did not
purport to be a statement on the substance of that dispute having regard to the provisions
of Article 8(1) of the Model Law. As I understand it, para. 11 of the grounding affidavit is
referring in its entirety to the replying affidavit sworn in the summary proceedings and not
to the grounding affidavit itself. As I have already determined, the replying affidavit did
not amount to a “statement on the substance of the dispute” between the parties.
However, in my view, the grounding affidavit does amount to such a statement and is the
“first statement on the substance of the dispute” provided by the defendant.

57.       The grounding affidavit goes much further than the replying affidavit in the summary
proceedings. I have referred earlier to the terms at paras. 9 and 10 of the grounding
affidavit in which reference is made to the dispute between the parties concerning the
alleged entitlement of the plaintiff to the paid monies under the St. Etchen’s subcontract,
to the defendant’s denial of that alleged entitlement on the part of the plaintiff and to the
counterclaim which the defendant claims to have in respect of the loss and damage
allegedly sustained by it as a result of the plaintiff’s alleged actions and inaction. In
addition to those averments, the grounding affidavit also exhibits some of the
correspondence exchanged between the parties’ respective advisors and representatives in
2014 in which some further detail was provided in relation to the nature of the dispute
between the parties. In my view, the grounding affidavit does amount to a “statement” by
the defendant on the “substance of the dispute” between the parties and is the first such
statement submitted by the plaintiff in the summary proceedings. That statement was
submitted as part of, and at the same time as, the plaintiff’s request for the reference to
arbitration under Article 8(1) of the Model Law. A request for the reference to arbitration
was, therefore, made “not later than” when the defendant submitted its “first statement on
the substance of the dispute” as required under Article 8(1). The defendant, therefore,
complied with the timing requirement for a request for a reference to arbitration under
Article 8(1).

58.       Accordingly, I reject the plaintiff’s contention that the defendant failed to comply with this
requirement and that, as a consequence, the mandatory obligation on the court under
Article 8(1) to make a reference to arbitration does not arise. The mandatory obligation to
refer under Article 8(1) has not been disapplied by reason of any failure by the defendant
to comply with the requirement to request the reference to arbitration “no later than”
when submitting its “first statement on the substance of the dispute”.

59.       In addition to arguing that the defendant failed to comply with the requirement in Article
8(1) in terms of the making of a request for a reference to arbitration no later than when
the first statement on the substance of the dispute is submitted, the plaintiff also contends
that the defendant has unreasonably delayed in bringing this application for a reference to
arbitration. The plaintiff relies on the chronology summarised earlier and, in particular, on
the fact that having obtained an adjournment of the plaintiff’s application for liberty to
enter final judgment on 4th December, 2018 to 29th January, 2019, the defendant’s
replying affidavit was only provided that day. While indicating the defendant’s intention to
bring an application for an order referring the parties to arbitration under Article 8(1), the
defendant’s replying affidavit did not contain such a reference. The plaintiff submits that it
ought to have done so but instead of that the defendant waited a further period of almost
three months before bringing this application.

60.       The defendant rejects any suggestion of delay and I agree with the defendant on that
issue. I am not satisfied that the defendant did unreasonably delay in bringing this
application. It is true that the defendant obtained an adjournment of the plaintiff’s
application for liberty to enter final judgment and only furnished its replying affidavit on
the adjourned date and even then did not request a reference to arbitration but waited a
further period of three months before doing so. However, I do not believe that it was
unreasonable for the defendant to have awaited receipt of the plaintiff’s replying affidavit
in the summary proceedings before bringing its application. The defendant received the
plaintiff’s replying affidavit in the summary proceedings on 5th March, 2019 and brought its
application for an order referring the parties to arbitration under Article 8(1) three weeks
later. That does not seem to me to be an unreasonable delay on the part of the defendant.

61.       However, more importantly, Article 8(1) of the Model Law does not impose any particular
time limit within which an application for an order under that provision must be made. It
does, of course, require that the request for the reference to arbitration be made no later
than when submitting the “first statement on the substance of the dispute”. However, it
does not go further than that by specifying that the application for the reference to
arbitration must be made within any particular time period or without any particular delay.
It seems to me that that is a matter which must be governed by the procedural law and
rules of the jurisdiction in which the application for the order under Article 8(1) is made. If
the applicant for an order under Article 8(1) has unreasonably delayed in bringing its
application (while nonetheless complying with the timing requirement in Article 8(1)) and if
that delay has caused prejudice to the other party or amounted in effect to an abuse of the
process of the court, it may be open to an Irish court to refuse to make the order referring
the parties to arbitration under Article 8(1). That is so notwithstanding the fact that Article
8(1) imposes a mandatory obligation on the court to refer. It may at least be implicit in
that article that an unreasonable delay of that nature, and particularly one which causes
prejudice, could preclude an applicant from obtaining the order of reference to arbitration
sought just as a party may be estopped from relying on the provisions of an arbitration
agreement and obtaining an order under Article 8(1) in certain very limited circumstances
(see: Furey v. Lurgan-ville Construction Company Ltd [2012] 4 IR 655; Go Code Ltd v.
Capita Business Services Ltd [2015] IEHC 673; Townmore (No. 1) (at para. 72, p. 31) and
Ocean Point (paras. 30 and 31, p. 14)). However, again that is not an issue that I have
definitively to decide in this case as I am satisfied that not only did the defendant comply
with the requirement in Article 8(1) by making its request for the reference to arbitration
no later than when submitting its first statement on the “substance of the dispute”
between the parties but it also did not unreasonably delay in bringing its application for the
order under Article 8(1).

62.       This is an appropriate time to deal briefly with a point which has raised by the plaintiff in
the course of its oral submissions at the hearing but not addressed in its written
submissions, concerning the alleged failure by the defendant to comply with the provisions
of Clause 13(a) of the St. Etchen’s subcontract in seeking this reference to arbitration. As
noted earlier, Clause 13(a) of the subcontract entitles either party to refer a dispute which
has arisen between them “in connection with or arising out of the sub-contract” for
arbitration by serving a “Notice to Refer”. Clause 13(a) further provides that such a notice
“shall state the issues in dispute” and that the service of the notice is “deemed to be the
commencement of arbitration proceedings”. Various steps must be taken within certain
time periods following the service of the “Notice to Refer”. In the course of its oral
submissions at the hearing, the plaintiff’s counsel submitted that the defendant did not
serve such a “Notice to Refer” on the plaintiff as required by Clause 13(a). However, I
think it is fair to say that this point was not strenuously pursued by the plaintiff and, quite
properly so. I do not believe that there is anything in the point. The defendant has brought
this application for an order referring the parties to arbitration under Article 8(1) of the
Model Law on the basis that the matters in issue in the proceedings are the subject of an
arbitration agreement, namely, Clause 13(a). The plaintiff does not accept that such an
order should be made on the basis that there is no dispute between the parties in respect
of the sum now claimed by it in the summary proceedings. Until the plaintiff’s counsel’s
submissions at the hearing, it was never part of the plaintiff’s objection to the order being
sought by the defendant that the defendant did not comply with the provisions of Clause
13(a) of the relevant subcontract by reason of its failure to serve a “Notice to Refer” under
the clause.

63.       In any event, Clause 13(a) does not impose any time limit for the service of a “Notice to
Refer” on a party who wishes to serve such a document. While time limits are provided for
in Clause 13(a) and elsewhere in Clause 13, those time limits all commence running after
the service of the “Notice to Refer”. Clause 13(a) imposes no time limit for the service of
that notice. In those circumstances, it seems to me that if the court were otherwise
disposed to making the order under Article 8(1) of the Model Law referring the parties to
arbitration, it would be open to the defendant at that stage to serve the “Notice to Refer”
and to state in that notice the “issues in dispute” as required under Clause 13(a). The
failure to serve such a notice at this stage, would not, in my view, preclude the court from
making an order under Article 8(1), assuming that it was otherwise appropriate to do so.

64.       I am satisfied that, subject to there being a dispute between the parties which falls within
the scope of the arbitration agreement contained in Clause 13(a) of the subcontract,
Article 8(1) imposes a mandatory obligation on the court to make an order referring the
parties to arbitration in respect of the matters the subject of the summary proceedings.
65.       Before considering the issue as to whether there is dispute between the parties, I should
address briefly the point made by the plaintiff that if the defendant had not complied with
the requirements in Article 8(1) and if, therefore, there was no mandatory obligation on
the court to make the order referring the parties to arbitration, the court nonetheless has a
discretion whether or not to grant a stay of the proceedings to enable an arbitration to
take place under the terms of the arbitration agreement between the parties.

66.       Having regard to my conclusion that the defendant did comply with the requirements in
Article 8(1) and that, therefore, the court is subject to a mandatory obligation under Article
8(1) to make an order referring the parties to arbitration, provided that a dispute exists
between the parties, it is unnecessary for me to reach a concluded view on whether, in the
circumstances outlined by the plaintiff, a discretionary jurisdiction to grant a stay or not
exists. I would observe, however, that in a number of judgments following the enactment
of the 2010 Act, the High Court has confirmed that the court has an inherent jurisdiction to
stay proceedings, including cases where an arbitration agreement exists. Mac Eochaidh J.
accepted in P Elliott & Company Ltd (In Receivership and in Liquidation) v. FCC Elliott
Construction Ltd [2002] IEHC 361 that the court did have an inherent jurisdiction to stay
proceedings where there was an arbitration agreement between the parties. He reached
that conclusion in reliance upon a judgement of Clarke J. in the High Court in Kalix Fund
Ltd v. HSBC Institutional Trust Services (Ireland) Ltd [2010] 2 IR 581 (“Kalix”). A similar
conclusion was reached by Cregan J. in The Lisheen Mine v. Mullock & Sons (Shipbrokers)
Ltd [2015] IEHC 50, again in reliance upon the judgment of Clarke J. in Kalix. However, in
both cases the court found that there was no arbitration agreement between the parties
and that, therefore, there was no basis on which the court’s inherent jurisdiction could be
exercised to stay the proceedings.

67.       It may well be the case, therefore, that in circumstances where the mandatory obligation
to refer under Article 8(1) does not arise (whether by reason of a failure to comply with
one of the requirements in Article 8(1) or otherwise), the court may nonetheless have an
inherent jurisdiction to grant a stay where an arbitration agreement is in existence
between the parties. However, the question does not require to be decided on this
application in light of my conclusion on the application of the mandatory obligation to refer
under Article 8(1) of the Model Law.

(2) Whether a dispute exists between the parties

68.       It is the plaintiff’s contention that there is no dispute in existence between the parties in
relation to its entitlement to be paid the sum of €92,011.12 by the defendant in respect of
works done by the plaintiff under the St. Etchen’s subcontract. That is the sum which the
plaintiff is now seeking to recover from the defendant in the summary proceedings. As, on
its case, there is no dispute between the parties in relation to the plaintiff’s entitlement to
be paid that sum by the defendant, the plaintiff contends that there is no dispute which
could be referred to arbitration under Clause 13(a) of the St. Etchen’s subcontract and
Article 8 of the Model Law. The plaintiff accepts that there is a dispute between the parties
in relation to its entitlement to be paid a further amount under the St. Etchen’s
subcontract and in relation to the entire amount which it is claiming under the Stanhope
subcontract. The plaintiff accepts that the disputes in relation to those sums are subject to
the arbitration provisions contained in the two subcontracts and has offered to have those
disputes resolved by arbitration or by mediation.

69.       The defendant maintains that there is a dispute between the parties in relation to the
€92,011.12 which the plaintiff seeks to recover in the summary proceedings as being due
under the St. Etchen’s subcontract.

70.       It is necessary to determine the question as to whether a dispute exists between the
parties in relation to that part of the plaintiff’s claim under the St. Etchen’s subcontract
which the plaintiff seeks to pursue in the summary proceedings as a matter of fact and a
matter of law. It is first necessary to determine the approach which the court should take
as a matter of law in determining whether a dispute exists between the parties.

Dispute as a matter of law

71.       The starting point for the exercise is Clause 13(a) of the St. Etchen’s contract itself. As
noted earlier, the entitlement of a party to that subcontract to invoke the arbitration
provisions contained in Clause 13(a) arises where a “dispute arises between the parties in
connection with or arising out of the Sub-Contract”. As a matter of contract, therefore,
there must be a “dispute” between the parties before either party can seek to invoke the
arbitration provisions contained in Clause 13(a).

72.       The existence of a dispute is also necessary before a court is obliged to make a reference
to arbitration under Article 8(1) of the Model Law. That is clear from the reference to
dispute” in Article 8 where reference is made to the obligation on the party requesting the
reference to arbitration to do so “not later than when submitting his first statement on the
substance of the dispute”.

73.       Article 8(1) of the Model Law replaced s. 5 of the 1980 Act. Under s. 5(1) of the 1980 Act,
the court’s power to stay proceedings where there is an arbitration agreement could be
exercised “unless it is satisfied that the arbitration agreement is null and void, inoperative
or incapable of being performed or that there is not in fact any dispute between the parties
with regard to the matter agreed to be referred”. The words underlined are not to be found
in Article 8(1) of the Model Law. That said, as observed by Mansfield, “it is… axiomatic that
there must be some dispute to resolve before there can be an arbitration over a matter”
(Mansfield, p. 135).

74.       The approach taken by the courts under s. 5 of the 1980 Act in determining whether
dispute existed between the parties which provided a basis for staying proceedings on foot
of an arbitration agreement can be seen in the decision of the High Court (Kelly J.) in
Campus and Stadium Ireland Development Ltd v. Dublin Waterworld Ltd [2006] 2 IR 181
(“CSID”). In that case, the court found that in respect of certain of the matters alleged to
be in issue between the parties, there was in fact no dispute between the parties which
would entitle the court to make an order under s. 5 of the 1980 Act staying the
proceedings. In respect of other issues, the court was satisfied that there was a dispute
between the parties and did stay the proceedings in relation to those issues.

75.       Under the pre-2010 Act regime, the mere denial of an obligation by a party was not
sufficient in itself to give rise to a dispute permitting the court to exercise its discretion to
stay proceedings on foot of an arbitration agreement. It is the case that prior to the
enactment of the 2010 Act and the application of Article 8(1) of the Model Law, the test
applied by the courts in determining whether a dispute existed between the parties so as
to engage the court’s power to stay proceedings on foot of an arbitration agreement was
similar to that which the courts applied in determining whether leave to defend should be
granted to a defendant in summary proceedings.

76.       The courts of England and Wales had to consider whether that remained the test to be
applied following the enactment of s. 9 of the Arbitration Act, 1996 (the “English 1996
Act”). Under s. 9(4) of the English 1996 Act, the court was required to stay proceedings in
the case of an applicable arbitration agreement unless the court was satisfied that the
“arbitration agreement is null and void, inoperative, or incapable of being performed”. Prior
to the enactment of s. 9 of the English 1996 Act, the applicable law was contained in s. 1
of the Arbitration Act, 1975 (the “English 1975 Act”) which contained a similar qualification
to that contained in s. 5 of the 1980 Act, namely, that the court had jurisdiction to stay
proceedings “unless satisfied… that is not in fact any dispute between the parties with
regard to the matter agreed to be referred”. Just as with Article 8(1) of the Model Law,
those words were dropped from the relevant section when s. 9(4) of the English 1996 Act
was enacted.

77.       The significance of that amendment was considered by the Court of Appeal of England and
Wales in Halki Shipping Corporation v. Sopex Oils Ltd [1998] 1 WLR 726 (“The Halki”). In
The Halki, a majority of the Court of Appeal held that the English 1996 Act had altered the
law in that jurisdiction which had previously been that a stay would not be granted under
s. 1(1) of the English 1975 Act if the defendant would not have obtained leave to defend
summary proceedings. The Court of Appeal held that there was a crucial distinction
between s. 1(1) of the English 1975 Act and s. 9(4) of the English 1996 Act in light of the
fact that the words “that there is not in fact any dispute between the parties with regard to
the matter agreed to be referred” no longer appeared in s. 9(4) of the English 1996 Act. In
The Halki, the Court of Appeal held that it was those words which meant that a stay would
be refused if a defendant had no arguable defence to a claim for summary judgment and
that the consequence of the removal of those words was that a stay would be granted
whenever there was a dispute between the parties irrespective of whether the defendant
had an arguable defence to the plaintiff’s claim.

78.       In the subsequent decision of the English Court of Appeal in Collins (Contractors) Limited
v. Baltic Quay management (1994) Ltd [2004] 99 Con LR 1 (“Collins”), the Court of
Appeal, in commenting on the decision in The Halki, stated:-
“It thus follows from The Halki that it is no answer to an application for a stay under
s. 9 of the [English 1996 Act] that the defendant has no arguable defence to the
claimant’s claim. If there would otherwise be a ‘dispute’ within s. 9(1), it is no
answer to an application for a stay to say that it is not a real dispute because the
defendant has no defence to the claim. That was the very point decided in The Halki”
(Collins, per Clarke L.J. at para. 37).

79.       In Collins, in response to an argument advanced on behalf of the contractor who was
resisting the stay application to the effect that the employer had no arguable defence to
the claim having regard to the terms of another piece of English legislation, s. 111 of the
Housing Grants, Construction and Regeneration Act, 1996, the English Court of Appeal
stated that that section was concerned only with the substantive rights of the parties and
not with the question as to whether the claim for the monies allegedly wrongfully withheld
should be determined by the court or by an arbitrator. The Court of Appeal (Clarke L.J.)
continued:-
“It is in my judgment, plain from The Halki, first, that that depends upon whether
there was a ‘dispute’ within the meaning of the arbitration clause and is thus a
matter which is agreed to be referred to arbitration within s. 9(1) of the [English
1996 Act], and, second, that whether there is a dispute does not depend upon the
strength or weakness of the defendant’s case on the merits of the ‘dispute’”.
(Collins, per Clarke L.J. at para. 38).

80.       That position was endorsed by the English Court of Appeal in AMEC Civil Engineering Ltd v.
Secretary of State for Transport [2005] EWCA Civ 291 (“AMEC”). In referring to The Halki,
Rix L.J. noted that the English Court of Appeal in that case held “that an unadmitted claim
gave rise to a dispute, however unanswerable such a claim might be” (AMEC, per Rix L.J.
at para. 66).

81.       I am persuaded by the reasoning contained in these cases and am satisfied that the
enactment of the 2010 Act and the introduction into Irish law of Article 8(1) of the Model
Law had the same effect as the changes effected by s. 9(4) of the English 1996 Act to the
law which predated that legislation. In other words, while it may have been the case prior
to the enactment of the 2010 Act and Article 8(1) of the Model Law coming into force that
the court would have applied a test similar to that applied in determining whether a
defendant had established an arguable case and so could obtain leave to defend summary
proceedings, that is not the position which now applies under Article 8(1) of the Model
Law. In considering whether there is a dispute such as to engage the court’s jurisdiction to
refer parties to arbitration under Article 8(1) of the Model Law, the court is not concerned
with the merits of that dispute in the sense of whether or not the party seeking the
reference to arbitration has or has not established an arguable or credible defence such as
would entitle that party successfully to resist an application for summary judgment in
respect of that claim. The High Court (McGovern J.) reached a similar conclusion in BAM
where he stated, in the context of a dispute which one of the parties sought to have
referred to arbitration under an arbitration agreement pursuant to Article 8(1) of the Model
Law:-
“It is not for the courts to inquire whether one party’s position under the dispute is
tenable or not, or whether there is a “real and genuine dispute” to be referred to
arbitration. A decision on the merits of the parties’ disputes is one for the arbitrator
to make.” (BAM, per McGovern J. at para. 24, p. 12).

82.       I completely agree with these observations. To the extent, therefore, that it is part of the
plaintiff’s case that the approach which the court should adopt in determining whether
there is a dispute between the parties under Clause 13 of the subcontract such as to
engage the jurisdiction of the court to refer the parties to arbitration under Article 8(1) is
that which the court applies in determining whether to give leave to a defendant to defend
summary proceedings, I do not agree. I accept that the position set out in the decisions of
the English Court of Appeal in Collins and AMEC is correct and is consistent with the
approach taken by the High Court (McGovern J.) in BAM. In my view, once a dispute has
arisen between the parties, which is the subject of an arbitration agreement, it is not the
role of the court to assess the merits of the parties’ respective positions in that dispute.
That is the role of the arbitrator. To adopt the position for which the plaintiff contends and
to confer upon the court a role in determining the merits or otherwise of the parties’
respective positions in the dispute would, in my view, impermissibly usurp the proper role
of the arbitrator and fundamentally undermine the arbitral process which the parties
signed up to when entering into the relevant subcontract.

83.       It follows, therefore, that insofar as the plaintiff seeks to rely on decisions such as IBRC v.
McCaughey [2014] I.R. 749 (“McCaughey”), in which the Supreme Court reviewed and
reiterated the test to be applied in determining whether summary judgment or leave to
defend should be granted in summary proceedings, I do not accept that that case is
relevant or of assistance in the context of the present application. McCaughey was
concerned with a summary judgment application. However, I have concluded the test to
be applied in such cases is not the appropriate test to be applied in considering whether a
dispute has been raised by the parties such as to engage the jurisdiction to refer parties to
an arbitration agreement to arbitration under Article 8(1) of the Model Law.
84.       How then does the court go about ascertaining whether a dispute exists between the
parties for the purposes of Clause 13(a) of the arbitration agreement and Article 8(1) of
the Model Law? Once again considerable assistance can be derived from some of the
English cases. I will refer only to small number of those cases which seem to me to best
represent the approach which a court should adopt in determining whether a dispute exists
in this context.

85.       The first of the cases is the judgment of Jackson J. in the English High Court in AMEC
(AMEC Civil Engineering Ltd v. Secretary of State for Transport [2004] EWHC 2339 (TCC)).
That case involved a challenge to the jurisdiction of an arbitrator under s. 67 of the English
1996 Act. One of the grounds on which the appointment of the arbitrator was challenged
was that, as of the relevant date, no dispute existed between the parties. The court,
therefore, had to consider whether there was a dispute as of that date.

86.       Jackson J. observed that there was at that point “a rapidly growing jungle of decisions” on
this issue and he sought to “distil the effect of the principal authorities”. Having referred
to several cases (including The Halki), Jackson J. was able to derive the following seven
propositions from those authorities as to how the court should assess whether a dispute
existed in any particular case:
“1. The word ‘dispute’ which occurs in many arbitration clauses and also in section 108
of the Housing Grants Act should be given its normal meaning. It does not have
some special or unusual meaning conferred upon it by lawyers.
2.       Despite the simple meaning of the word ‘dispute’, there has been much litigation
over the years as to whether or not disputes existed in particular situations. This
litigation has not generated any hard-edged legal rules as to what is or is not a
dispute. However, the accumulating judicial decisions have produced helpful
guidance.
3.       The mere fact that one party (whom I shall call ‘the claimant’) notifies the other
party (whom I shall call ‘the respondent’) of a claim does not automatically and
immediately give rise to a dispute. It is clear, both as a matter of language and from
judicial decisions, that a dispute does not arise unless and until it emerges that the
claim is not admitted.
4.       The circumstances from which it may emerge that a claim is not admitted are
Protean. For example, there may be an express rejection of the claim. There may be
discussions between the parties from which objectively it is to be inferred that the
claim is not admitted. The respondent may prevaricate, thus giving rise to the
inference that he does not admit the claim. The respondent may simply remain
silent for a period of time, thus giving rise to the same inference.
5.       The period of time for which a respondent may remain silent before a dispute is to
be inferred depends heavily upon the facts of the case and the contractual structure.
Where the gist of the claim is well known and it is obviously controversial,
a very short period of silence may suffice to give rise to this inference. Where the
claim is notified to some agent of the respondent who has a legal duty to consider
the claim independently and then give a considered response, a longer period of
time may be required before it can be inferred that mere silence gives rise to a
dispute.
6.       If the claimant imposes upon the respondent a deadline for responding to the claim,
that deadline does not have the automatic effect of curtailing what would otherwise
be a reasonable time for responding. On the other hand, a stated deadline and the
reasons for its imposition may be relevant factors when the court comes to consider
what is a reasonable time for responding.
7.       If the claim as presented by the claimant is so nebulous and ill-defined that the
respondent cannot sensibly respond to it, neither silence by the respondent nor even
an express non-admission is likely to give rise to a dispute for the purposes of
arbitration or adjudication.” (AMEC, per Jackson J. at para. 68).

87.       The decision of Jackson J. in AMEC was appealed to the English Court of Appeal. Prior to
the hearing of that appeal, the English Court of Appeal gave judgment in Collins. The
English Court of Appeal in that case endorsed the propositions set out by Jackson J. In his
judgment, Clarke L.J. stated:
“63. For my part I would accept those propositions as broadly correct. I entirely accept
that all depends on the circumstances of the particular case. I would, in particular,
endorse the general approach that while the mere making of a claim does not
amount to a dispute, a dispute will be held to exist once it can reasonably be
inferred that a claim is not admitted. I note that Jackson J. does not endorse the
suggestion in some of the cases, either that a dispute may not arise until negotiation
or discussion have been concluded, or that dispute should not be likely (sic) inferred.
In my opinion he was right not to do so.
64.       It appears to me that negotiation and discussion are likely to be more consistent
with the existence of a dispute, albeit an as yet unresolved dispute, than with an
absence of a dispute. It also appears to me that the court is likely to be willing
readily to infer that a claim is not admitted and that a dispute exists so that it can be
referred to arbitration or adjudication….” (Collins, per Clarke L.J. at paras. 63 and
64)
88.       In its judgment on the appeal from the decision of Jackson J. in AMEC, the English Court of
Appeal was broadly in agreement with the propositions set out by Jackson J. and with the
additional observations made by Clarke L.J. in Collins. In his judgment, May L.J., having
referred to the seven propositions set out by Jackson J. and to the approval of those
propositions by Clarke L.J. in Collins, stated that he was “broadly content” to accept those
propositions but added certain further observations of his own. Most of those observations
were directed to the particular circumstances of the case. However, in one, May L.J. also
referred to “commercial good sense” and indicated that such “does not suggest that the
clause should be construed with legalistic rigidity so as to impede the parties from starting
timely arbitration proceedings” (AMEC, per May L.J. at para. 31). May L.J. observed that
the whole of the arbitration clause at issue should be read in that light and that:
“This leads me to lean in favour of an inclusive interpretation of what amounts to a
dispute or difference.” (AMEC, per May L.J. at para. 31)

89.       In his judgment, having indicated that he was “broadly content to accept the propositions
set out by Jackson J.” and having agreed with the further observations of Clarke L.J. in
Collins and of May L.J. in AMEC, Rix L.J. added some further remarks of his own. Some of
what he said is relevant to the issue I have to determine on this application. Rix L.J.
made the following further observations:
65.       The words ‘dispute’ and ‘difference’ are ordinary words of the English language. They
are not terms of art. It may be useful in many circumstances to determine the
existence of a dispute by reference to a claim which has not been admitted within a
reasonable time to respond; but it would be a mistake in my judgment to gloss the
word ‘dispute’ in such a way. I would be very cautious about accepting that either a
‘claim’ or a “’reasonable time to respond’ was in either case a condition precedent to
the establishment of a dispute.
66.       Secondly, however, like most words, ‘dispute’ takes its flavour from its context.
Where arbitration clauses are concerned, the word has on the whole caused little
trouble. If arbitration has been claimed and it emerges that there is after all no
dispute because the claim is admitted, there is unlikely to be any dispute about the
question of whether there had been any dispute to take to arbitration. And if the
claim is disputed, any argument that the arbitration had not been justified because
at the time it was invoked there had not been any dispute is, it seems to me,
unlikely to find a receptive audience …. So it is that in this arbitration context the
real challenge to the existence of a ‘dispute’ has arisen where a party seeking
summary judgment in the courts has been met by a request for a stay to arbitration
and the claimant has wanted to argue that an unanswerable claim cannot be a real
dispute….” [Rix L.J. then referred to a number of cases including The Halki]
67.       It follows that in the arbitration context it is possible and sensible to give to the word
‘dispute’ a broad meaning in the sense that a dispute may readily be found or
inferred in the absence of an acceptance of liability, a fortiori because the arbitration
process itself is the best place to determine whether or not the claim is admitted or
not.”
(AMEC, per Rix L.J. at para. 65 – 67).

90.       These further observations made by Rix L.J. in the Court of Appeal in AMEC were quoted
with approval by the High Court (Hedigan J.) in Arnold v. Duffy Mitchell O’Donoghue (A
Firm) [2012] IEHC 368 (“Arnold”)

91.       I am satisfied that propositions set out by Jackson J. in AMEC, as approved by the English
Court of Appeal in that case and in Collins, and the further observations of Rix L.J. in the
English Court of Appeal in AMEC (as approved by the High Court in Arnold) reflect the
position in Irish law as to whether a dispute can be said to exist between parties in the
context of an arbitration agreement and Article 8(1) of the Model Law.

92.       I would, however, add to the analysis the fact that as the term “dispute” is used in an
arbitration agreement, the principles applicable to the interpretation of contracts may also
be relevant in interpreting the meaning to be given to that term in the relevant agreement.
Those principles are as set out by Lord Hoffman in the House of Lords in Investor
Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896 (at pp.
912-93) (“ICS”) as approved by the Supreme Court in Analog Devices BV v. Zurich
Insurance Company [2005] 1 IR 274, ICDL v. European Computer Driving Licence
[2012] 3 I.R. 327 and The Law Society of Ireland v. The Motor Insurers’ Bureau of Ireland
[2017] IESC 31. Those principles are well known and it is unnecessary to set them out in this
judgment.

93.       Added to those principles, however, must also be the further principles specifically
applicable to the interpretation of arbitration agreements derived from the decision of the
House of Lords in Fiona Trust & Holding Corporation & ors v. Privalov & ors [2007] 4 All ER
951 (“Fiona Trust”) and the Irish decisions which have cited that case with approval (which
were referred to and discussed by me in Townmore (No. 1)). I summarised those
principles in my judgment in Townmore (No. 1) (and repeated them in Townmore (No. 2)).
It seems to me that they are relevant in the present case on the question of the
interpretation of the term “dispute” in Clause 13(a) of the relevant subcontract and so I
repeat them here:-
“(1)In construing an arbitration agreement, the court must give effect, so far as the
language used by the parties will permit, to the commercial purpose of the
arbitration agreement.
(2) The construction of an arbitration agreement should start from an assumption or
presumption that the parties are likely to have intended any dispute arising out of
the relationship which they entered into to be decided by the same body or tribunal.
In other words, there is a presumption that they intended a “one-stop” method of
adjudication for their disputes.
(3)The arbitration agreement should be construed in accordance with that assumption
or presumption unless the terms of the agreement make clear that certain questions
or issues were intended by the parties to be excluded from the jurisdiction of the
arbitrator.
(4) A liberal or broad construction of an arbitration agreement promotes legal certainty
and gives effect to the presumption that the parties intended a “one-stop” method of
adjudication for the determination of all disputes.
(5) The court should construe the words “arising under” a contract and the words
“arising out of” a contract when used in an arbitration agreement broadly or liberally
so as to give effect to the presumption of a “one-stop” adjudication and the former
words should not be given a narrower meaning than the latter words. Fine or “fussy”
distinctions between the two phrases are generally not appropriate.”

94.       These latter principles are of some relevance in the present context in circumstances
where the plaintiff accepts that at least part of its claim under the St. Etchen’s subcontract
is caught by the provisions of Clause 13(a) of that subcontract and so, unless the parties
agree otherwise, that part of the claim will be referred to arbitration under Clause 13(a).
While a different arbitration procedure may apply under Clause 26 of the Stanhope
subcontract, it is clear that, unless the parties otherwise agree, the entirety of the
plaintiff’s claim under that subcontract will also be referred to arbitration. It may well be
that an agreement can be reached between the parties that the same arbitration
procedure will be applied to both arbitrations and that a single arbitration can be
conducted in respect of those disputes. After all, the appointing person in each case (in the
absence of an agreement on the arbitrator) is the President for the time being of the
Construction Industry Federation.

95.       It seems to me that consistent with the principles specifically applicable to the
interpretation of arbitration agreements, and with the principles identified in the English
case law discussed earlier, a liberal or broad imterpretation should be given to the term
dispute” in an arbitration agreement particularly where such an interpretation gives effect
to or respects the assumption or presumption that the parties intended a “one-stop” shop
for determining their disputes. It would make little sense for part of the plaintiff’s claim
under the St. Etchen’s subcontract to be dealt with by the court in the context of the
summary proceedings with another part being dealt with by arbitration under Clause 13 of
that subcontract (as well as the entirety of its claim under the Stanhope subcontract also
being dealt with perhaps by a different arbitration). However, if the term “dispute
properly interpreted has that effect then so be it. As it happens, I do not believe that the
term “dispute” properly interpreted in accordance with the principles referred to above
does have that somewhat anomalous effect.

96.       It seems to me that in light of the principles discussed above, the court should approach
the interpretation of the term “dispute” in an arbitration agreement in accordance with the
following principles and propositions:-
(1) It is necessary first to look at the provision of the arbitration agreement in which the
term “dispute” is to be found and to construe that term in the context of the
agreement as a whole.
(2) A broad meaning should be given to the term “dispute” having regard to the fact
that the parties have chosen to use that term in the context of a dispute resolution
provision in their agreement.
(3) The court should interpret the term “dispute” in accordance with the principles
governing the interpretation of contracts as set out in ICS as approved by the
Supreme Court and in accordance with the further principles applicable to the
interpretation of arbitration agreements as set out in Fiona Trust as approved in
several Irish judgments and summarised by me in Townmore (No. 1).
(4) The burden rests on the party seeking the reference to arbitration to provide some
basis for the court to hold that a “dispute” is in existence between the parties. If that
party does so, then the burden shifts to the party opposing the reference on the
grounds of the alleged absence of a dispute to persuade the court that no dispute
exists.
(5) In the context of an arbitration agreement, the court should be willing readily to
infer that a dispute exists and should readily find or infer that such a dispute exists
in the absence of an acceptance of liability in respect of the relevant claim. A dispute
should readily be found to exist where it is reasonable to infer that the claim is not
admitted.
(6) The court should lean in favour of finding that a “dispute” exists in circumstances
where the parties disagree as to whether a dispute exists at all. As Rix L.J. observed
in the English Court of Appeal in AMEC, the arbitrator is best placed to determine
whether or not a claim is admitted or not.

(5) In determining whether a dispute exists for the purposes of an arbitration agreement
and a reference to arbitration under Article 8(1) of the Model law, the court is not
carrying out the same sort of exercise which it carries out in determining whether
summary judgement or leave to defend should be granted in summary proceedings.
The court should not, therefore, get involved in the exercise of deciding whether the
position of one party is stateable, credible or tenable.

97.       In my view, those are the principles by reference to which the court should ascertain
whether a dispute exists between parties to an arbitration agreement in the context of an
application to refer the parties to arbitration under Article 8(1) of the Model Law. It is
necessary now to consider the relevant facts to determine whether, in accordance with
those legal principles, the facts are consistent with a finding that a dispute between the
parties exists or not.

Dispute as a matter of fact

98.       Turning now to the facts on which the plaintiff relies in support of its contention that there
is no dispute between the parties, the plaintiff relies on the site minutes and on the alleged
failure by the defendant to contest the averments in the plaintiff’s affidavits in relation to
the sum allegedly due to the plaintiff under the St. Etchen’s subcontract. However, my
assessment of the position is that the defendant has put forward sufficient material to
establish that there is a dispute between the parties in relation to the sum claimed by the
plaintiff in the proceedings. The plaintiff has not persuaded me on the material relied upon
that there is no dispute between the parties in relation to its entitlement to the sum
claimed. It is true that the replying affidavit sworn by Mr. Lahart in response to the
plaintiff’s application for liberty to enter final judgment merely identifies, indirectly, the
fact of the dispute but does not engage on the detail or substance of the dispute.
Somewhat more information is provided in the affidavit Mr. Lahart swore for the purpose of
grounding the defendant’s application for the reference to arbitration under Article 8(1) of
the Model Law. Paragraphs 9 and 10 of that affidavit identify the fact of the dispute and
contain a clear statement that the defendant is denying the plaintiff’s entitlement to
payment under the subcontracts, that it has suffered loss and damage as a result of the
alleged actions and inaction on the part of the plaintiff under the two subcontracts and that
it has a counterclaim. In addition to that, Mr. Lahart exhibited some of the correspondence
from 2014 between the parties’ respective representatives which discloses the existence of
a dispute in relation to the monies claimed by the plaintiff as well as an assertion on behalf
of the defendant that the plaintiff failed to comply with its contractual obligations to the
defendant.

99.       I am satisfied that this material is sufficient to establish the existence of a dispute between
the parties in relation to the sum claimed by the plaintiff in the summary proceedings in
light of the legal principles discussed earlier. I fear that, if more were to be required of the
defendant, it would conflict with the undoubtedly correct observation of McGovern J.in BAM
that is not for the courts to inquire into whether the position of one party to a dispute is
“tenable or not” and that that is ultimately a matter for the arbitrator.

100.      As noted earlier, the plaintiff relies on the site minutes in order to demonstrate that there
is no dispute between the parties. It also relies on calculations made by it of the values to
be attributed to the works which it says the defendant accepts were completed as of the
time of the site minutes in July, 2014. However, I am not persuaded by this. Indeed, I
should observe that the plaintiff’s affidavits are very short on detail as to the manner in
which claims for payment under the St. Etchen’s subcontract were made by the plaintiff.
There is a procedure provided for in Clause 11 of that subcontract concerning payment and
the circumstances in which sums become due and owing under the subcontract to the
plaintiff. The plaintiff’s affidavits are very short on detail as to how the plaintiff’s alleged
entitlement to payment arose. However, this will be a matter for the arbitrator to deal with
and I make no comment whatsoever on the actual merit of the plaintiff’s claim.

101.      Mr. McEnroe, on behalf of the plaintiff, made reference to two certificates at para. 5 of his
grounding affidavit sworn on 18th September, 2018. The first of the certificates referred to
appears to have been honoured by the defendant. The plaintiff claims that the second
certificate was not so honoured. However, that certificate was in the sum of €47,856.36
which is considerably less than the sum for which the plaintiff now seeks judgment in the
summary proceedings. The explanation advanced by the plaintiff to support its entitlement
for the larger sum claimed is the admission by the defendant of the percentage of works
completed by the plaintiff on the St. Etchen’s subcontract. It is true that the site minutes
record percentages in respect of works done on the subcontract and that those minutes
were prepared and circulated by the defendant. However, they do not contain any
admission as to the value of the completed works. The value of the works has been
calculated by the plaintiff and has not been admitted by the defendant. While the
defendant has not engaged in detail in the affidavits which it has sworn both in response to
the plaintiff’s motion for liberty to enter final judgment and in respect of the defendant’s
application to refer the parties to arbitration under Article 8(1) of the Model Law, the
defendant has made clear in its affidavits that there is a dispute between the parties in
relation to the sum claimed by the plaintiff in the proceedings. As I have indicated earlier,
the test to be applied by the court is not the same as the test which the court applies in
dealing with a summary judgment application where it considers whether a bona fide or
credible defence has been put forward and where mere assertions of such a defence will
not be regarded as sufficient. Once it is clear that a dispute exists between the parties, it
would, in my view, be inappropriate for the court to get involved in the substance or merits
of the dispute or to consider whether the position of one party to the dispute is tenable or
not.

102.       Both parties have referred to Townmore (No. 1). The plaintiff points to the more extensive
material put before the court in that case in order to demonstrate that a dispute existed
between the parties. The grounds on which the defendant was disputing the claim were
summarised in the defendant’s affidavits in that case (and were set out by me at para. 14
of my judgment). However, the fact that more detail was provided as to the nature of the
dispute in that case does not mean that such detail is necessarily required in every case. I
am satisfied that on the evidence in the present case, there is a dispute between the
parties as to the defendant’s liability for the sum claimed by the plaintiff under the St.
Etchen’s subcontract. Having regard to the terms of the arbitration agreement between the
parties as contained in Clause 13(a) of that subcontract, the appropriate forum in which
that dispute should be resolved is arbitration. I have concluded, therefore, that it is
appropriate to make an order under Article 8(1) of the Model Law referring the parties to
arbitration in respect of that dispute.

Other disputes

103.       The plaintiff has accepted that there is a dispute in respect of the entirety of its claim
under the Stanhope subcontract and in respect of part of its claim under the St. Etchen’s
subcontract and that those disputes are caught by the arbitration agreements between the
parties comprised in those subcontracts although it has suggested that the parties might
go to mediation in respect of those disputes. As I have indicated earlier, I would certainly
encourage mediation but it seems to me that, in the first place, subject to anything further
which counsel may have to say, an order should be made referring the disputes under the
two subcontracts to arbitration under Article 8(1) of the Model Law having regard to the
terms of the arbitration agreements between the parties comprised in those subcontracts.

Conclusions

104.       In conclusion, I am satisfied that the defendant has demonstrated that the requirements of
Article 8(1) of the Model Law have been satisfied and that a dispute exists between the
parties in respect of the plaintiff’s entitlement to judgment in the sum now claimed in the
summary proceedings. I will, therefore, make an order under Article 8(1) referring the
parties to arbitration in respect of that dispute.

105.      As regards the other disputes between the parties under the two relevant subcontracts,
while encouraging the parties to mediate in respect of all of the disputes between the
parties, and subject to hearing further from counsel, it seems to me that I should, in the
first place, make an order referring the parties to arbitration in respect of those disputes.
In the event that it is not possible for the parties to resolve the disputes by mediation, I
would strongly encourage that an effort be made to have all of their disputes dealt with in
one arbitration rather than in separate arbitrations under each of the two subcontracts.

106.       I will hear counsel further in relation to the terms of the order to be made and on any
other related issues.Result:     The defendants application was granted.

Maco Group Pty Ltd v Johns Lyng Commercial Builders Pty Ltd (Civil Claims) [2019] VCAT 1815 (22 November 2019)

VICTORIAN CIVIL AND ADMINISTRATIVE TRIBUNAL

CIVIL DIVISION
CIVIL CLAIMS LIST VCAT REFERENCE NO. C4998/2019

CATCHWORDS
Commercial Arbitration Act 2011 sections 1AC(1) and 1AC(3), interpretation of the Act to achieve its paramount object, section 7 meaning of “arbitration agreement”, section 8(1) – Subway Systems Australia Pty Ltd v Ireland [2014] VSCA 142 – Thiess v Collector of Customs and Others [2014] HCA 12; (2014) 88 ALJR 514 – PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service [1995] HCA 36; (1995) 184 CLR 301.
.
APPLICANT
Maco Group Pty Ltd ACN: 613 930 957
RESPONDENT
Johns Lyng Commercial Builders Pty Ltd ACN: 088 343 453
WHERE HELD
Melbourne
BEFORE
Deputy President I. Lulham
HEARING TYPE
Hearing
DATE OF HEARING
15 November 2019
DATE OF ORDER
22 November 2019
DATE OF REASONS
22 November 2019
CITATION
Maco Group Pty Ltd v Johns Lyng Commercial Builders Pty Ltd (Civil Claims) [2019] VCAT 1815

ORDER

  1. The Respondent’s costs of its application for summary dismissal, or alternatively a stay, of this proceeding are reserved.
  1. Any application for costs shall be made in writing by 16 December 2019, but shall not be accompanied by an assessment of the costs or an itemised bill of costs.
  1. The proceeding is otherwise stayed.
  1. The parties are referred to arbitration.

I. Lulham
Deputy President

REASONS

  1. This proceeding arises from excavation works performed by the Applicant for the Respondent, as a sub-contractor at a site called the Yarra Ranges Civic Centre. The Respondent is a commercial builder.
  1. In its Application filed 8 July 2019 the Applicant sued for payment of $127,857.00. The Applicant does not seek an injunction or a declaration. The Applicant has not engaged a legal practitioner and it has filed documents in a fairly ad hoc fashion. Mr Malik Ahmad, director, prepared the Applicant’s documents and represented it at the hearing on 15 November 2019.
  1. In the Application form filed to initiate this proceeding the Applicant wrote that it was relying on the Australian Consumer Law and Fair Trading Act 2012 (page 1), and that it was claiming payment for goods and services including rock breaking and the digging of footings (page 3). It wrote that the Respondent had rejected the Applicant’s invoices, and disclosed that there are disputes over the calculation of rock volume, whether material excavated from the site was rock at all, and whether rock was rippable or non-rippable (the significance of which would lie in the rates for payment). The Applicant wrote that it was entitled to be paid for rock breaking at the rate of $300.00 per hour, as agreed at a tender meeting (page 4).
  1. Even though the Applicant emailed to the Tribunal copies of several documents, when issuing the Application, it is clear that the Tribunal would need some form of pleadings to clarify the issues and the basis of the claim. Clearly the Applicant was alluding to a subcontract in some form, by referring to an agreement made at a tender meeting, but its express reliance on the Australian Consumer Law and Fair Trading Act 2012 potentially raises many issues under the Australian Consumer Law which might include misleading and deceptive conduct, unconscionable conduct, and unfair terms.
  1. At the first directions hearing on 23 September 2019 the Respondent foreshadowed an application for summary dismissal of the proceeding under section 75 of the Victorian Civil and Administrative Tribunal Act 1998 or an application for a stay. Orders were made for the Respondent to file and serve any affidavits in support by 15 October 2019, for the Applicant to file and serve affidavits in opposition by 5 November 2019, and for the hearing of the Respondent’s applications on 15 November 2019.
  1. The basis of the Respondent’s applications is that the subcontract between the parties includes a dispute resolution clause which compels the parties to engage in private mediation or arbitration and which thus prevents either party from suing the other in a Court or in this Tribunal.
  1. Clearly then the first question is whether the parties executed a contract containing such a clause. Only if they did, do questions of enforceability and relevant legislation arise.

Is the subcontract recorded in the “Subcontract Services Agreement”?

  1. The Respondent has been represented by legal practitioners from the outset. It filed and served affidavits of Messrs Luke Edwards, Ahmad Pour and James Turnbull all sworn 15 October 2019. Mr Edwards is the Respondent’s Senior Site Manager, Mr Pour is the Respondent’s Contracts Administrator, and Mr Turnbull is a legal practitioner.
  1. The three short affidavits exhibit a Subcontract Services Agreement dated 1 May 2019, and other documents.
  1. Mr Edwards deposed that two copies of the Subcontract were delivered to the site on 8 April 2019, for Mr Ahmad to sign when he came to the site. On 9 April 2019 Mr Ahmad attended the site and went through an induction process, signing a document entitled “Safe Work Method’s Statement” (which is given the acronym SWMS which the parties call the “swims”) and Mr Edwards gave Mr Ahmad both copies of the Subcontract. Mr Ahmad sat down on the desk adjacent to Mr Edwards and commenced reading it and filling it out. On 11 April 2019 Mr Pour realised that the Subcontract had not been signed and asked Mr Malik to come to the site office. In the presence of Mr Edwards and Mr Pour on 11 April 2019, Mr Ahmad signed the two copies of the Subcontract, and Mr Edwards witnessed him writing his signature on the Subcontract.
  1. Mr Pour deposed that on 11 April 2019 he went to the site to collect the Subcontract, and on his arrival realised that it had not been signed. He asked Mr Malik Ahmad of the Applicant to meet him at the site office, and at that meeting Mr Ahmad signed the Subcontract in the presence of Mr Pour and Mr Edwards. Mr Pour deposed that he had witnessed Mr Ahmad writing his signature on the subcontract.
  1. Mr Turnbull deposed to other matters.
  1. The Applicant filed an affidavit by Malik Ahmad on 14 November 2019. However, because the Applicant did not engage a legal practitioner, Mr Ahmad’s affidavit is, objectively, disorganised and in parts is in the form of a submission or argument rather than a deposition as to facts. It did not properly exhibit documents, and in the hearing on 15 November 2019 Mr Ahmad referred to documents which were not referred to in the affidavit. I will come to these irregularities below.
  1. Mr Ahmad denied that the Applicant executed the Subcontract Services Agreement. In substance the Applicant contends that the subcontract was made in a meeting on 5 April 2019, and that to the extent that it was recorded in writing, it is evidenced by a document headed “Vetting Notes” which contains a list of 38 items or subjects and which has been signed by Mr Ahmad.
  1. This document is in 3 columns, the third of which was blank and was designed to be filled in with a tick or a cross. The first 2 columns are printed. The first column lists each item number 1 – 38; the second column sets out the topic [for example, item 9 “Control measures for noise and dust generated from works under this subcontract”]; and the third has the heading “In contract” followed by an explanation that a tick means ‘yes’ and a cross means ‘no’.
  1. As the Vetting Notes do not mention dispute resolution, the Applicant’s point is that there is no dispute resolution clause or “arbitration agreement” within the meaning of the Commercial Arbitration Act 2011  in the parties’ contract.
  1. On the issue of whether the Applicant executed the Subcontract Services Agreement, Mr Ahmad’s affidavit was vague and contradictory. I do not mean this in a pedantic sense, but instead as a matter of substance. Relevantly it said that Mr Ahmad signed the Vetting Notes at around 4:00pm on 5 April 2019 at the Respondent’s office, and the “SWMS Contract Agreement” at around 7:00am on 11 April 2019. At paragraph 3V the affidavit says:

“The Respondent is claiming my signature on the subcontract agreement which I am not aware if I ever signed. This signature is no way closer to my signature, we can use the services of signature expert to verify this”. (emphasis added)

  1. Mr Ahmad used an equivocal expression – even given that English is apparently his second language – “which I am not aware if I ever signed” being vastly different from, for example, “I did not sign the Subcontract Services Agreement”.
  1. The Tribunal must be fair to both parties, and this can present some practical difficulties when dealing with self-represented parties. Legal practitioners prepare documents carefully, and ambiguities or omissions in a document prepared by legal practitioner can be far more significant than one prepared by a self-represented litigant. In making submissions for the Applicant Mr Ahmad positively said from the Bar table that he had not signed the Subcontract Services Agreement.
  1. The fact that he made that assertion when not on oath raised a number of possibilities: I could disregard the submission on the basis that it was inconsistent with his affidavit; I could hear an application by the Applicant for an adjournment to enable time for a supplementary affidavit to be filed and served and, if I granted the adjournment over the Respondent’s objection, then deal with the inevitable application for costs by the Respondent; or I could permit Mr Ahmad to give supplementary evidence orally, which would avoid the need to adjourn. If Mr Ahmad was to give further evidence, the Respondent should have the opportunity to cross examine him, even though the parties would not be cross-examined on their affidavits. There was a discussion about these matters in the hearing and the parties consented to Mr Ahmad giving supplementary evidence orally, and being subject to cross-examination. This was an imperfect solution but seemed better than any alternative. I could not envisage permitting Mr Ahmad to give supplementary evidence orally without being cross examined, as it was plain that his supplementary evidence would be inconsistent with the equivocal statement in his affidavit.
  1. Mr Ahmad gave evidence on affirmation. He stated briefly in chief that he positively had not signed the Subcontract Services Agreement.
  1. When he was cross-examined, Mr Ahmad’s attention was drawn to a wide array of documents that he had signed, and it was put to him that the signatures on those documents were identical to what purported to be his signature on the Subcontract Services Agreement and that it followed that he had executed that document. Mr Ahmad denied that he had signed the Subcontract Services Agreement.
  1. I found Mr Ahmad’s evidence in cross examination to be quite unedifying, evasive, unrealistic and unbelievable, and I reject his evidence that he did not sign the Subcontract Services Agreement. I am satisfied that Mr Ahmad was motivated to give that evidence as a means of taking the dispute resolution clause and “arbitration agreement” out of the picture. I find that he signed the Subcontract Services Agreement, for these reasons:

(a) the signatures on the documents that Mr Ahmad said he had signed, and his disputed signature on the Subcontract Services Agreement, are essentially identical. I do not purport to be a “handwriting expert”, but one does not have to be an expert to recognise a person’s signature. Of course there are slight differences in the various signatures, but it would be all the more remarkable if the signatures were entirely identical. Additionally, in addition to there being a signature, several of the documents have Mr Ahmad’s name written near the signature in capital letters, and those versions of his name in capital letters are essentially identical. The name in capitals and the signature are written in the same pen (and the signatures of others are in different pens) which leads me to conclude that Mr Ahmad wrote both.

(b) Mr Ahmad admitted that he had received the Subcontract Services Agreement, but said he did not sign it. He did not volunteer any reason for this, plausible or otherwise. A person might say, for example, that having received a draft subcontract they declined to sign it because it was inconsistent with previous negotiations. Mr Ahmad gave no explanation.

(c) If Mr Ahmad did not sign the Subcontract Services Agreement, then someone in the Respondent’s camp must have forged his signature. Why would an officer of the Respondent do that? It makes no sense to suggest that this would have occurred.

(d) If Mr Ahmad did not sign the Subcontract Services Agreement, then the witness Ahmad Pour not only signed a false document when inserting his signature as witness, but he lied on oath in his affidavit. Similarly, Mr Edwards would have lied on oath in his affidavit. I reject this as a possibility.

(e) In the hearing, Mr Ahmad described the Respondent’s head contract as having a contract value of around $24 million. The Respondent did not seek to deny or contradict that description. It would be highly unusual in my view for a commercial builder to not execute proper subcontracts in a project of that size. Put another way, it would be highly unusual for a commercial builder to only record its subcontract in a document headed “Vetting Notes” where that document identifies topics, says (where ticked) that the topics are in the subcontract, but then contains no contractual provisions about them itself.

  1. Mr Ahmad made other statements in his affidavit, which tie in with the Applicant’s reliance on the Australian Consumer Law and Fair Trading Act 2012. In paragraphs 3 and 7 he says that the Respondent misled and deceived the Applicant, to induce it to enter a subcontract at a low price, by misrepresenting the site of the works as not being a “union site” when it was, in the knowledge that union requirements would increase the costs incurred by the Applicant to perform its works; and in representing by conduct and silence that the “Vetting Notes” recorded the terms of the subcontract.
  1. Somewhat contradicting that last point, at paragraph 9 Mr Ahmad deposed that the Respondent had accepted the Applicant’s tender letter, which not only stated the Applicant’s price but also incorporated the Applicant’s ‘terms and conditions’, which do not contain an arbitration agreement.
  1. As I conclude that the Applicant executed the Subcontract Services Agreement, I reject the Applicant’s submission that the subcontract was created by the Respondent’s acceptance of the Applicant’s tender letter.

Is the dispute resolution clause enforceable?

  1. Clause 32 of the Subcontract Services Agreement is as follows:

32.1 Notwithstanding the existence of a dispute, the Subcontractor shall at all times continue to fulfil all obligations under the Subcontract and comply with all directions given by the Builder.

32.2 A party claiming that a dispute has arisen under this Subcontract shall within 7 calendar days of the dispute arising, give written notice to the other party providing particulars of the dispute and designating as its representative a person with authority to settle disputes and the other party shall promptly give notice in writing to the first party of its representative with authority to settle the dispute.

32.3 The designated persons shall within 7 calendar days of the giving of the notice of dispute, meet and in good faith and without prejudice, seek to resolve the dispute.

32.4 If the dispute is not resolved within 28 calendar days of the giving of the notice of dispute, either party may, by giving written notice to the other, submit the dispute to mediation in accordance with, and subject to The Resolution Institute Australian Rules for Mediation of Commercial Disputes. The costs of the mediation will be borne in equal portions by the builder and the Subcontractor.

32.5 If the dispute is not resolved at the mediation, either party may, by giving written notice to the other, refer the dispute to arbitration. Such arbitration shall be affected by a single arbitrator who shall be agreed by the parties, or failing agreement within 7 calendar days after receipt by the other party of the notice in writing given under this clause, then by the Chairperson for the time being of The Victorian Chapter of The Resolution Institute. The arbitration shall be conducted in Melbourne. To give valid notice under this clause, the Subcontractor must first provide security for costs for the benefit of the Builder in the amount of 10 per centum of the amount claimed to the Master Builders Australia Inc and provide evidence of such payment to the Builder at the same time as giving the notice.

32.6 The exhaustion of the above dispute resolution process is a condition precedent to the right of the Subcontractor to commence court proceedings in relation to the dispute, but nothing here in shall prejudice the right of either party to seek injunctive or urgent declaratory relief in respect of any matter arising under the subcontract.

  1. The Respondent’s submission was that clause 32 was an “arbitration agreement” within section 7 of the Commercial Arbitration Act 2011. It satisfied sub-section 7(1) which says:

An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

  1. This is strengthened by sub-sections 1AC(1) and 1AC(3) which say:

(1) The paramount object of this Act is to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense.

(3) This Act must be interpreted … so that (as far as practicable) the paramount object of this Act is achieved.

  1. It is further strengthened by clause 34 of the Subcontract Services Agreement which states that the document constitutes the entire agreement between the parties.
  1. Section 8(1) of the Commercial Arbitration Act 2011 says:

A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

  1. In his affidavit Mr Turnbull, legal practitioner for the Respondent, deposes that a dispute has arisen between the parties; that having regard to clause 32.6 the Applicant issued this VCAT proceeding in August 2019 in breach of the Subcontract, and that on 17 September 2019 he had sought the Applicant’s consent to the VCAT proceeding being stayed pending the exhaustion of the dispute resolution process under the Subcontract.
  1. Additionally, Mr Turnbull deposes that at the first directions hearing on 23 September 2019 he had submitted that the VCAT proceeding should be stayed in compliance with the dispute resolution clause.
  1. Paragraphs 2 and 3 of the Order made at the directions hearing on 23 September 2019 are consistent with this statement. I am satisfied that the Respondent has sought to have the dispute dealt with in arbitration before “submitting the (Respondent’s) first statement on the substance of the dispute” within the meaning of sub-section 8(1).
  1. The Respondent submitted that VCAT is a “court” for the purposes of sub-section 8(1), relying on the decision of the Court of Appeal in Subway Systems Australia Pty Ltd v Ireland. That case arose from a dispute under a franchise agreement which contained an arbitration clause, where the franchisees issued a proceeding in VCAT alleging that Subway had breached the franchise agreement. VCAT had held that because it was not a “court” it was not obliged to refer the dispute to arbitration under sub-section 8(1). An appeal by Subway to a single judge was dismissed, but Subway succeeded in its appeal to the Court of Appeal. The three appeal Justices reached the same conclusion, for different reasons, reflecting the complexity which can bedevil the task of statutory interpretation.
  1. Maxwell P emphasised the national characteristic of the Commercial Arbitration Act 2011, which Act had enacted as domestic law of Victoria a Model Law adopted by the United Nations Commission on International Trade Law. Maxwell P said at paragraph 7 that, for the purposes of that Act, VCAT “was indistinguishable from those other adjudicative bodies of the State which bear the title ‘court’ ”, and that for the purposes of that Act it is a court.
  1. Beach JA analysed the matter from paragraphs 73 to 89 by noting the different meanings of the word ‘court’ in different contexts; the absence of a definition of ‘court’ in the Commercial Arbitration Act 2011 but that Act’s occasional use of the expression ‘the Court’; that the word ‘court’ in section 41 does not and could not mean VCAT; and the High Court’s approach to statutory construction in Thiess v Collector of Customs and Others which was to begin with the consideration of the statutory context and not to make a fortress out of the dictionary when seeking the meaning of legislation. He concluded at paragraph 90 that he was “driven towards a conclusion that the underlying purpose of the [Commercial Arbitration Act 2011] was not merely to express a preference for low cost speedy arbitrations over longer more expensive court trials – but rather, and partly in the interests of uniformity, to express a preference for holding parties to their bargains that in terms involve preferring arbitration of whatever kind has been agreed between the parties over State sponsored dispute resolution (no matter how cost efficient or time effective the relevant state body or arm might prove to be)”. In a footnote His Honour said, “(I)t does not seem to me to be relevant to examine the efficiency or otherwise of a particular tribunal when determining the proper construct of …s8 of the Act”. At paragraph 91 His Honour concluded that the word ‘court’ in section 8 includes VCAT.
  1. Kyrou JA also held that the word ‘court’ in section 8 includes VCAT. His Honour said this arose from the ordinary rules of statutory construction.
  1. The Respondent also submitted that nothing turned on the different meanings of “shall” and “may” in clauses 32.2 and 32.5. In particular, that the latter clause provided that a party “may, by giving written notice to the other, refer the dispute to arbitration” did not make the clause any less of an “arbitration agreement” or a clause which merely allowed parties the option of using arbitration.
  1. The Respondent relied, in support of this submission, on the High Court’s decision in PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service. That case arose under a building contract, in which PMT was the builder and Parks and Wildlife was the principal. PMT had issued a notice of dispute for an arbitration, but had done so out of time, and had applied for an extension of time under the arbitration statute applicable in the Northern Territory at the relevant time. Similarly to clause 32.6 of the Subcontract in this VCAT case, the building contract in PMT provided that “no proceedings in respect of a matter at issue (in arbitration) shall be instituted in any court unless and until the arbitrator has made (an) award in respect of that matter at issue”.
  1. At first instance PMT succeeded in obtaining an extension of time. In the appeal by Parks and Wildlife to the Northern Territory’s Court of Appeal, that Court held that there was no power to extend time and did not examine other issues. PMT appealed to the High Court. The five judges in the High Court ruled that PMT’s appeal be allowed, but divided 3-2 as to the reasons.
  1. Relevantly to the Respondent’s submission, Brennan CJ, Gaudron and McHugh JJ set out the relevant clause in the contract relating to arbitration, clause 45.
  1. It used the words “shall” and “may”, saying :

(a) The Contractor shall, not later than 14 days after the dispute or difference arises, submit the matter at issue in writing to the Superintendent for decision and the Superintendent shall give his decision …

(b) If the Contractor is dissatisfied … he may, not later than 14 days after the decision by the Superintendent is given to him, submit the matter at issue, in writing to the Principal for decision …

If the Contractor is dissatisfied with the decision given by the Principal … he may not later than 28 days after the decision … is given to him, give notice in writing to the Principal requiring that the matter at issue be referred to arbitration … If, however, the Contractor does not, within the said period of 28 days, give such a notice to the Principal requiring that the matter at issue be referred to arbitration, the decision given by the Principal pursuant to the last preceding paragraph shall not be subject to arbitration.

  1. Section 48 of the relevant legislation empowered the Court to extend a time limit “in or in relation to an arbitration”. Brennan CJ, Gaudron and McHugh JJ said that the Court of Appeal approached clause 45 as meaning that it was only when the Contractor had given notice to the Principal requiring the dispute to be referred to arbitration that it had taken a step “in or in relation to an arbitration”. Until the Contractor took that first step of giving that 14 day notice to the Superintendent, it was open to the Contractor to elect to pursue the claim in the Courts or by arbitration.
  1. Their Honours said that the Court of Appeal doubted that the second part of clause 45 was an “arbitration agreement” within the meaning of the Act, because that definition required both parties to be bound, then and there, to refer their disputes to arbitration. An agreement that gave one party an option to submit a dispute to arbitration did not fall within the definition.
  1. At pages 307 – 310 their Honours discussed a line of authorities commencing in 1975 under arbitration legislation which has since been repealed, and which was not made to adopt the Model Law that is now reflected in the Commercial Arbitration Act 2011. That line of authority had distinguished between agreements that referred disputes to arbitration and those which gave the parties a right of election. Their Honours said that in the authorities there had been “a focus on the textual consideration that ‘arbitration agreement’ (in the statute) was defined as an “agreement to refer present or future disputes to arbitration” not as “an agreement referring disputes to arbitration”.
  1. At page 310 their Honours said that statutory definitions had to be construed according to their natural and ordinary meaning unless some other course was clearly required, and that it was of fundamental importance that limitations and qualifications are not read into a statutory definition unless clearly required by its terms or its context. It should be noted here that their Honours were speaking in 1995, and that the arbitration legislation to which they were referring did not include an equivalent of sub-section 1AC(3) of the Commercial Arbitration Act 2011. Their Honours said:

The words “agreement … to refer all present or future disputes to arbitration” in section 4 of the Act are, in their natural and ordinary meaning, quite wide enough to encompass agreements by which the parties are bound to have their dispute arbitrated if an election is made or some event occurs or some condition is satisfied, even if only one party has the right to elect or is in a position to control the event or satisfy the condition … (W)hen it is given its natural and ordinary meaning, the definition [of ‘arbitration agreement’] is clearly satisfied by clause 45 even if, as was held by the Court of Appeal, clause 45 does not preclude the Contractor from pursuing its claim in the courts”. (emphasis added)

  1. In conclusion, then, the Respondent submitted that VCAT was bound by section 8 of the Commercial Arbitration Act 2011 because it was a ‘court’ for the purposes of that section; that clause 32 of the Subcontract was an “arbitration agreement”; and that by its use of the word “must” section 8 obliged VCAT to refer the dispute to arbitration.
  1. The Applicant did not make submissions in reply in relation to the construction of the Subcontract, the legislation or any authorities. This was probably unsurprising as it had not engaged a legal practitioner. The Applicant repeated its allegations that the Respondent had misled it in relation to the execution of the contract documents. To the extent that these allegations would support claims for damages for misleading and deceptive conduct and/or unconscionable conduct, they are matters which could be brought in an arbitration.
  1. The Applicant did not submit that the Subcontract, and clause 32 in particular, contained unfair terms. Again this is unsurprising as the Applicant had not engaged a legal practitioner, and further because making submissions of that nature would be inconsistent with the Applicant’s primary and unsuccessful argument that it had not executed the Subcontract. It goes without saying that because the Applicant did not raise it, the Respondent was not on notice of any such argument and did not lead any evidence or put any submissions on the topic.
  1. In view of the Tribunal’s obligation to afford the parties natural justice, I can do no more than point out that section 23 of the Australian Consumer Law provides that a term of a small business contract is void if it is unfair and the contract is a standard form contract. It appears that the Subcontract is a “small business contract” as defined. It is arguable that the Subcontract is a “standard form contract”: on the one hand, its design is such that similar forms appear to have been used by the Respondent in its dealings with other subcontractors, but on the other hand, the presence of the Vetting Notes which allow the parties to agree on whether topics are ‘in’ or ‘not in’ their subcontract may be relevant under section 27(2). Whilst there are statements in Subway Systems Australia Pty Ltd v Ireland  to the effect that the cost of a dispute resolution mechanism is irrelevant to the construction of section 8 of the Commercial Arbitration Act 2011, the rather extraordinary obligation of the Applicant, imposed by 32.5 of the Subcontract, to “first provide security for costs for the benefit of the (Respondent) in the amount of 10 per centum of the amount claimed” seems to fall squarely within the example of an unfair term given in section 25(k) of the Australian Consumer Law.
  1. If section 23 applied, there would be a question of whether it rendered the whole of clause 32 void, or only parts of it.
  1. I note that in PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service clause 45 set time limits within which the parties were to serve documents on each other, but that the clause as quoted lacked some of the detail of clause 32 of the parties’ Subcontract in this case. Whilst these matters were not raised by the Applicant, and again the Tribunal’s obligation to afford the parties natural justice means that it is not its role to find arguments on behalf of parties, I note in passing that Mr Turnbull did not depose to:

(a) whether any demand for payment sent by the Applicant to the Respondent constituted a written notice of dispute within clause 32.2;

(b) the existence of Rules for Mediation of Commercial Disputes, of the Resolution Institute, referred to in clause 32.4;

(c) as to the existence of the office of Chairperson or the existence of The Victorian Chapter of The Resolution Institute; or

(d) as to the ability of The Master Builders Australia Inc (which I gather is distinct from Master Builders Victoria, though possibly affiliated on some level) to accept payments by way of security for costs.

  1. At paragraph 10 of his affidavit Mr Turnbull deposed that the Applicant had failed and refused to comply with the dispute resolution process, but if that process expressly imposed procedures which were in effect non-existent, it would be an open question as to whether clause 32 could be “construed” to make it operative, or whether the arbitration agreement was rendered “null and void, inoperative or incapable of being performed” as set out in section 8(1), even leaving aside section 23 of the Australian Consumer Law.
  1. The matters referred to in paragraphs 50-54 were not raised in the Respondent’s application and I say no more about them.
  1. In view of the manner in which the application for summary dismissal or a stay was made and argued, and sub-sections 1AC(1) and 1AC(3) of the Commercial Arbitration Act 2011, I am compelled to find in favour of the Respondent. The Respondent submitted that the appropriate form of the Order was that the proceeding be stayed and the parties be referred to arbitration. This form of words does not amount to a mandatory injunction, but is instead the form of words required by section 8(1) of the Commercial Arbitration Act 2011.

I. Lulham

Deputy President

22 November 2019

K & J Townmore Construction ltd. v Kildare and Wicklow Education and Training Board [2019] IEHC 666 (11 October 2019)

[2019] IEHC 666
THE HIGH COURT
[2018 No. 1096 S]
BETWEEN
K&J TOWNMORE CONSTRUCTION LIMITED
PLAINTIFF
AND
KILDARE AND WICKLOW EDUCATION AND TRAINING BOARD
DEFENDANT
JUDGMENT of Mr. Justice David Barniville delivered on the 11th day of October, 2019
Introduction
1.       This is my judgment on an application by the defendant, Kildare and Wicklow Education
and Training Board, for an order pursuant to Article 8(1) of the UNCITRAL Model Law on
International Commercial Arbitration 1985 (as amended, 2006) (the “Model Law”)
referring the parties to arbitration in respect of the disputes the subject of these
proceedings under the terms of an arbitration agreement which the defendant contends is

in existence and binds the parties. The plaintiff resists the application.

 

2.       This judgment is not to be confused with the judgment I delivered in proceedings
between the same parties on 21st December, 2018, (K&J Townmore Construction Ltd v.
Kildare and Wicklow Education and Training Board [2018] IEHC 770 (unreported, High
Court, 21st December, 2018); “Townmore No. 1”), which concerned a different dispute in

respect of a different agreement.

 

Overview

 

3.       The plaintiff, a building contractor, and the defendant, a statutory board, are parties to a
building contract dated 28th October, 2015, under which the defendant engaged the
plaintiff to carry out construction works at St. Conleth’s Community College in Newbridge,
Co. Kildare (the “contract”). The contract is in the form of the “Public Works Contract for

Building Works Designed by the Employer” (the “PWC form”).

 

4.       The parties have been in dispute in relation to a whole range of issues concerning the
contract since 2016. Various dispute resolution procedures and processes have been put
in place and pursued by the parties since then. They include an expert determination
procedure and an unsuccessful conciliation. The expert determination procedure led to a
number of determinations being issued in favour of the plaintiff who has relied on those
determinations in these proceedings, which the plaintiff is seeking to have entered in the
commercial list and in which the plaintiff seeks summary judgment for just under €3
million. The defendant has opposed the plaintiff’s application for entry of the proceedings
in the commercial list and, in the present application, has sought an order under Article
8(1) of the Model Law referring the dispute between the parties which is the subject of
these proceedings to arbitration in reliance on a provision of the contract (Clause 13.2).

The plaintiff opposes that application.

 

5.       There is a dispute between the parties as to the impact and effect of the expert
determination procedure on the dispute resolution procedures provided for in the
contract. A further complicating factor which arises in this case is that during the course
of the proceedings, and while the defendant’s application for an order under Article 8(1)
of the Model Law was awaiting a hearing, the parties engaged in a conciliation procedure
on certain agreed terms. That conciliation procedure encompassed the disputes between
the parties which were the subject of the expert determination procedure and are the

subject of these proceedings as well as other disputes between the parties which are not.

 

6.       In summary, the defendant contends that the court should make an order under Article
8(1) of the Model Law referring the disputes the subject of the proceedings to arbitration
under Clause 13.2 of the contract. The defendant argues that the expert determination
procedure initially agreed between the parties in August 2016, and expanded in January
2017, disapplied, supplanted or replaced the conciliation provisions in Clause 13.1 of the
contract with respect to the issues the subject of the proceedings but left intact and
enforceable the arbitration provisions contained in Clause 13.2. The defendant contends,
therefore, that there is an “arbitration agreement” between the parties for the purposes
of Article 8(1) of the Model Law which covers the disputes the subject of the expert

determination procedure and these proceedings, which should be enforced by the Court.

 

7.       The plaintiff resists the defendant’s application on a number of grounds. Essentially, it
contends that the arbitration agreement contained in Clause 13.2 is “inoperative” under
Article 8(1) of the Model Law as the expert determination procedure was intended to, and
did, replace not only the conciliation provisions in Clause 13.1 of the contract but also the
arbitration provisions contained in Clause 13.2. The plaintiff says, therefore, that there is
no operative arbitration agreement in respect of the disputes the subject of the
proceedings. The plaintiff also relies on the terms of the parties’ agreement in August
2018 to engage in the conciliation procedure encompassing the issues in the proceedings
as precluding the defendant from relying on the arbitration agreement in Clause 13.2 of
the contract. The defendant contends that the conciliation agreement does not preclude
it from relying on the arbitration agreement but rather expressly preserved the parties’
respective positions including the defendant’s entitlement to seek recourse to arbitration

under Clause 13.2.

 

8.       I have concluded, for the reasons set out in detail in this judgment, that the defendant
has failed to establish that the arbitration agreement in Clause 13.2 of the contract
applies to the disputes the subject of these proceedings. Therefore, the requirements of
Article 8(1) of the Model Law have not been satisfied by the defendant. Furthermore,
insofar as any burden rests on the plaintiff, I have concluded that the plaintiff has
demonstrated that the arbitration agreement in Clause 13.2 of the contract is
“inoperative” with respect to the disputes the subject of the proceedings by reason of the
agreement for expert determination entered into between the parties in August 2016, and
expanded in January 2017. In my view, the effect of that agreement was to disapply or
supplant both the conciliation provisions contained in Clause 13.1 and the arbitration
provisions in Clause 13.2 with respect to the disputes the subject of the proceedings
(leaving those provisions applicable to disputes not covered by the proceedings). That, in
my view, is the correct interpretation of the agreement for expert determination and its
impact and effect on the provisions of Clause 13.1 and Clause 13.2 of the contract.
9.       In light of that conclusion, it is strictly speaking unnecessary for me to consider the
proper interpretation of the conciliation agreement and its impact on the defendant’s
entitlement to have recourse to the arbitration provisions in Clause 13.2 of the contract.
However, in my view, there is nothing in that conciliation agreement which undermines
the conclusion I have reached in relation to the interpretation and impact of the
agreement for expert determination. On the contrary, the terms of the conciliation
agreement are inconsistent with the defendant’s entitlement to rely on Clause 13.2 of the
contract in relation to the issues which are the subject of these proceedings. In those

circumstances, I must refuse the defendant’s application.

 

Factual background

 

10.       I set out in this section of my judgment the relevant factual background which is taken
from the affidavits sworn in connection with the defendant’s application. I have also had
regard to the affidavits sworn in connection with the plaintiff’s application for summary
judgment and its application to enter the proceedings in the commercial list. There is no

real dispute between the parties on the relevant facts.

 

11.       The plaintiff and the defendant entered into the contract on 28th October, 2015, under
which the plaintiff, as contractor, agreed to carry out construction works at St. Conleth’s
Community College for the defendant, as employer. The contract was in the PWC form
and contained certain dispute resolution procedures in Clause 13. Clause 13.1 provided
for conciliation. Clause 13.2 provided for arbitration. While the plaintiff and the
defendant agreed in their submissions to the Court that the conciliation provisions in
Clause 13.1 are optional whereas the arbitration provisions in Clause 13.2 are mandatory,
I do not wish to be taken as agreeing with or endorsing that consensus, as I explain

below.

 

12.       Disputes arose between the plaintiff and the defendant during the course of 2016. The
plaintiff sought to invoke the conciliation provisions in Clause 13.1 of the contract.
However, the plaintiff claims that its attempts to do so were ignored by the employer’s
representative (the “ER”) under the contract. Ultimately, however, agreement was
reached between the parties in August 2016 to enter into an expert determination
process under which LEA Consulting Limited was appointed as what was termed a
mediator/expert” (the “expert”) on certain agreed terms. The initial terms of
engagement of the expert were set out in a letter dated 12th August, 2016, and were
agreed by the parties. A draft determination was issued by the expert in December 2016,
following which it was agreed between the plaintiff and the defendant that the terms of
engagement of the expert would be revised and expanded. Revised terms of engagement
were issued by the expert and signed by the parties on 23rd January, 2017, (the
“agreement for expert determination”). Both the initial terms of engagement and the

revised terms of engagement were set out in the agreement for expert determination.

 

Revised Terms of Engagement

 

13.       Under that agreement, the parties agreed to refer certain disputes and differences to the
expert for expert determination. Initially, it was agreed that the expert would seek to
arrive at a determination of the “contractual position of the parties”. In the revised terms
of engagement, however, it was agreed to confer an expanded jurisdiction and powers on
the expert. Under Clause 2, the plaintiff and the defendant agreed to “take up and
consider Binding any Determination, or series of Determinations, within [10] working
days of receipt by the Parties of a Notice of Publication of such Determination or series of
Determinations” (underlining in original). The revised terms of engagement then
repeated the contents of paras. A, B and C of the original terms and added a series of

new provisions in relation to the jurisdiction and powers of the expert at para. D.

 

14.       At para. A, it was agreed between the parties that by submitting to expert determination
on the terms agreed, the parties were taken to have conferred on the expert the
jurisdiction and powers set out “to be exercised insofar as the Law allows and in [the
expert’s] discretion as they may judge expedient for the purpose of ensuring the just and

expeditious economical and final determination of the dispute referred to [the expert]”.

 

15.       Paragraph B provided that the expert should have jurisdiction to:-
“1. Determine any matter pertaining to the Agreement [including any matter of
Quantum] or any question of Law pertaining to the Agreement. Determine any
question as to their jurisdiction, or any question of good faith or dishonesty arising
from the dispute and order any party to furnish such further details of its case, in

fact or in Law, as the [expert] may require….”

 

16.       Paragraph D provided as follows:-
“For the avoidance of doubt, and without limiting in any way the Jurisdiction and
powers of the [expert] as noted above, [the expert] will have the jurisdiction and
power to:
1.       Direct the parties as to how the process of the Determination of Quantum is
to be administered, including the timetabling of submission of information,
responses, periods for issuing of Determinations and any other matter
necessary to allow Determinations to be Notified and become Binding on the
Parties.
2.       Direct the Parties, so as to ensure that the process of the Determination of
Quantum is administered in an economical and efficient manner.
3.       Expand their jurisdiction to incorporate new items raised by the Parties,
should either party desire to have such items determined under these
Revised Terms of Engagement.
4.       Direct the Parties as to the payment of/or deduction of monies accruing to
either of the Parties on foot of any Notice of a Determination, or series of
Determinations.
5.       Decide matters which are the subject matter of ‘stale’ referrals to Conciliation
by the Parties under Clause 13 of the [contract].
6.       Decide any matter necessary to regularize the Agreement, in order to allow
for all matters falling within the jurisdiction of [the expert] to be Determined.
7.       Assume the powers (but not the obligations or liabilities) [of] the ER for the
purposes of administering the Agreement and/or to regularize any matter
which is as a result of a failure of the ER on behalf of the [defendant] to

administer the Agreement.”

 

17.       The revised terms of engagement evidencing the agreement for expert determination
recorded the parties’ agreement to be bound by the terms and conditions set out in the
revised terms and by any determination or series of determinations issued by the expert
in accordance with the jurisdiction and powers given to it by the parties as set out in
those revised terms. It was also agreed by the parties that such determinations would be
documents which are in the contemplation of the Agreement formed between the Parties

on the 28th October, 2015” (i.e. the contract).

 

Defendant’s dissatisfaction with expert

 

18.       In the period following his appointment in early 2017, the expert issued a number of
determinations. The defendant was not satisfied with the manner in which the expert
determination process was proceeding and sought unilaterally to withdraw from the
process in a letter sent to the expert on 15th September, 2017. In that letter it was
indicated that the defendant wished to withdraw from the process and to terminate the
engagement of the expert. The letter indicated that as a result of the purported
termination, the defendant did not accept the expert’s jurisdiction to make any further

determinations from the date of the letter.

 

19.       The plaintiff informed the expert, by letter dated 29th September, 2017, that it wished
the expert determination process to continue in accordance with the agreement between
the parties. The expert took the view that it was not open to one party to terminate the
expert determination process on a unilateral basis and so informed the defendant in a

letter dated 2nd October, 2017.

 

20.       The defendant sent a more detailed letter to the expert on 21st November, 2017, setting
out various issues which it had with the revised terms of engagement of the expert and
with the manner in which the expert had conducted the process. The defendant
contended that the expert determination process had extended beyond what was
intended or what the defendant expected and that the expert had no jurisdiction to
proceed with the process. In the same letter, the defendant contended that the
agreement for expert determination could not have given rise to any amendment to the
contract (a point not now pursued by the defendant which contends that the expert
determination agreement did amend Clause 13.1 of the contract, but only that provision,
with respect to the issues which were the subject of the expert determination process).

Determinations in relation to payment

 

21.       Notwithstanding that exchange of correspondence, the expert did not cease acting and
issued a number of further determinations in the course of 2017 and 2018, some of which
determined sums in respect of “fair valuation” of claims made by the plaintiff and directed
that sums contained in the determinations be included in the next interim payment
certificate in respect of the works carried out under the contract. The plaintiff included
the sums so determined by the expert in its applications for payment by the defendant.
However, the ER did not certify the sums as a result of which the plaintiff was unable to

issue invoices to the defendant for payment of those sums.

 

22.       In a letter dated 18th May, 2018, the plaintiff requested the expert to exercise the power
contained in para. D.7 of the agreement for expert determination (as set out in the
revised terms of engagement) to assume the power of the ER to certify the payments
referred to in the determinations or, alternatively, to direct the defendant to pay the sums
allegedly due. The expert issued a further determination on 22nd May, 2018, to the
effect that the relevant determinations could be considered as a “certificate” within the
meaning of the relevant provisions of the contract. On 24th May, 2018, the plaintiff sent
a series of invoices to the defendant seeking payment of the sums referred to in the
determinations. The invoices totalled €2,954,147.22. They were not paid by the

defendant.

 

23.       The plaintiff’s solicitors wrote to the defendant on 25th June, 2018, seeking payment and,
in default of payment, threatening proceedings. In the absence of a response from the
defendant, the plaintiff’s solicitors wrote again on 12th July, 2018, seeking payment and

threatening proceedings.

 

24.       The defendant’s solicitors replied on 13th July, 2018. In that letter, the defendant’s
solicitors made express reference to the dispute resolution provisions in Clause 13 of the
contract under which, they contended, the parties were required to refer disputed matters
to conciliation and, if the issues were not resolved at conciliation, the parties were obliged
to refer them to arbitration. It was contended that the terms of the contract were
compulsory and could not be amended. It was indicated, therefore, that the defendant
would seek to rely on the arbitration provisions contained in Clause 13 (Clause 13.2) and,
in the event that the plaintiff issued proceedings, the defendant would bring an
application seeking an order referring the parties to arbitration under Article 8(1) of the
Model Law. The defendant’s solicitors referred to the expert determination process as
being an alternative to the conciliation process under the contract which was entered into
by the parties in the hope of resolving the disputed issues. They stated that the
defendant was not satisfied with how the expert process was conducted and withdrew
from that process in September 2017, in the hope that matters could be settled directly
between the parties. The defendant’s solicitors then referred to the fact that a number of
determinations were issued by the expert following the defendant’s withdrawal from the
process and without its input. They described the process as being “flawed” and asserted
that the determinations were not valid. Finally, the defendant’s solicitors contended that
although the agreement for expert determination provided that the determinations issued
by the expert would be “binding” on the parties, they were not stated to be “final”. They
asserted that the expert determination procedure was designed to replace the conciliation
process under the contract and not the arbitration agreement.
25.       The plaintiff’s solicitors replied on 13th July, 2018, rejecting those various contentions
and asserting that the agreement for expert determination did constitute an amendment
of the contract (as permitted under Clause 1.9.3 of the contract) and disapplied the
conciliation and arbitration provisions in Clause 13.1 and Clause 13.2 of the contract. In
those circumstances, it was contended that there was no arbitration agreement in
existence in respect of the issues between the parties which were the subject of the
expert determination procedure and that the defendant, therefore, had no entitlement to

seek to have those issues referred to arbitration.

 

Conciliation Agreement

 

26.       Prior to the issue of proceedings by the plaintiff, the plaintiff and the defendant, who were
already engaged in a conciliation process in respect of different disputes and in which
Ciaran Fahy had been appointed conciliator in March 2018, agreed to expand that
conciliation process to include the disputes between the parties which were the subject of
the expert determination procedure. I should note, however, that it is not entirely clear
whether the conciliation process was taking place under provisions of Clause 13.1 of the
contract or on some other basis. In any event, the parties agreed to expand that process
and did so on certain terms which were set out in a letter sent by Mr. Fahy to the parties

on 16th August, 2018, which was signed by both parties (the “conciliation agreement”).

 

27.       The plaintiff relies on the terms of the conciliation agreement in support of its contention
that the defendant has no entitlement to rely on the arbitration agreement contained in
Clause 13.2 of the contract with respect to the disputes the subject of these proceedings.

I should, therefore, refer to the relevant provisions of the conciliation agreement.

 

28.       It was agreed between the parties in the conciliation agreement that the conciliation was
intended to encompass “all claims arising under the contract in an effort to achieve

agreement on a final account figure” (para. 1).

 

29.       At para. 2, the conciliation agreement provided as follows:-
“This increase in the scope of the conciliation is without prejudice to the expert
determination process engaged in by the 2 parties and which has resulted in [the
plaintiff’s] claim for payment of the sum of €2,954,147.22 on foot of invoices
submitted to the [defendant] under cover of letter dated 24th May 2018 (the
‘Determination Claim’). The Parties agree to reserve their rights in respect of the
Determination Claim which shall remain, in all respects, unaffected by the

Conciliation save to the extent provided in this agreement.”

 

30.       It was envisaged under para. 3 of the conciliation agreement that the plaintiff would issue
and serve High Court proceedings in respect of the sums claimed by it which were the
subject of the determination claim (i.e. which were the subject of the expert
determination process). It was agreed that those proceedings would be discontinued if

agreement was reached on all matters in dispute (para. 4).

 

31.       Paragraph 5 provided as follows:-
“If a recommendation is made and either party issues a notice of dissatisfaction
under subclause 13.1.9, the following shall then apply:
a. [The plaintiff] may choose to refer all matters to arbitration under subclause
13.2 or
b. [The plaintiff] may, alternatively, continue with the Proceedings, in respect of
the expert determinations, while referring the balance of claims to
arbitration.
c. If any Court refuses to enforce the expert determinations, [the plaintiff] at
that stage may refer the claims in question to arbitration under subclause
13.2 and
d. For purpose of subclause 13.1.11, [the conciliator] will determine the sum of

money payable under 13.1.11 (1).”

 

32.       A timetable was then set out. The conciliation agreement was signed by both parties.

Commencement of proceedings and application for entry into the Commercial List

 

33.       As envisaged in the conciliation agreement, the plaintiff issued these proceedings on 29th
August, 2018, seeking payment of the sum of €2,954,147.22 on foot of the invoices
submitted following the determination by the expert. The plaintiff then sought to enter

the proceedings in the commercial list and sought summary judgment in that amount.

 

34.       The defendant opposed the application to enter the proceedings in the commercial list on
various grounds, including on the ground that the agreement for expert determination
amended the conciliation provisions of the contract and not the arbitration provisions and
that, therefore, the defendant was entitled to have the matter referred to arbitration. Dr.
Deirdre Keyes, who swore the affidavit on behalf of the defendant for the purpose of
opposing the plaintiff’s application for entry into the commercial list, made it clear that
she was not commenting on the substance of the dispute between the parties. For that
reason, she did not outline the reasons for the defendant’s view that the expert

determination process had been conducted in an unsatisfactory manner.

 

35.       The plaintiff’s application for summary judgment and to enter the proceedings in the
commercial list was adjourned from time to time to enable the defendant to bring the
present application for an order under Article 8(1) of the Model Law referring the parties

to arbitration in respect of the issues the subject of the proceedings.

 

Application for order under Article 8(1) of the Model Law

 

36.       The defendant brought the present application on 5th October, 2018. The application was
grounded upon another affidavit of Dr. Keyes sworn on 4th October, 2018. In very brief
summary, Dr. Keyes asserted that the agreement for expert determination amended
Clause 13.1 and replaced conciliation with the expert determination procedure agreed.
She asserted that the agreement for expert determination did not amend or replace the
arbitration provisions contained in Clause 13.1, which subsisted. In short, however, Dr.
Keyes contended that the arbitration agreement between the parties contained in Clause
13.      2 of the contract continued to exist notwithstanding the agreement for expert
determination and that the court should, therefore, make an order referring the parties to

arbitration in respect of the disputes the subject of the proceedings.

 

37.       A replying affidavit was sworn by Denis Lahart on behalf of the plaintiff on 21st
November, 2018, for the purpose of resisting the defendant’s application. Mr. Lahart
asserted that the agreement for expert determination replaced both the conciliation
provisions in Clause 13.1 and the arbitration provisions contained in Clause 13.2 for
various reasons. Mr. Lahart also sought to rely on the conciliation agreement and
contended that the terms of that agreement precluded the defendant from seeking to
refer the dispute the subject of the proceedings to arbitration. He explained that the
conciliation process conducted under the terms of the conciliation agreement was

unsuccessful and did not lead to a resolution of the issues between the parties.

 

The Issues

 

38.       The parties agree that the agreement for expert determination (the terms of which were
recorded in the revised terms of engagement) did amend, replace or supplant part of
Clause 13 of the contract insofar as the disputes which were the subject the expert
determination procedure were concerned. The difference between the parties is the
extent to which it did. The defendant contends that the agreement for expert
determination amended, supplanted or replaced only the conciliation provisions contained
in Clause 13.1 in respect of those disputes but left intact the arbitration provisions

contained in Clause 13.2.

 

39.       The plaintiff, however, contends that the agreement for expert determination amended,
supplanted or replaced both the conciliation provisions in Clause 13.1 and the arbitration
provisions in Clause 13.2 with respect to those disputes. The essential issue which I have

to decide on this application is which of those respective contentions is correct.

 

40.       A further issue which requires consideration is whether the conciliation agreement made
between the parties in August 2018, in any way affects the defendant’s entitlement to

seek to rely on the arbitration provisions contained in Clause 13.2

 

41.       In addressing those issues, I will first refer briefly to the approach which the court is
required to take in considering an application for an order under Article 8(1) of the Model
law. I will then proceed to consider the provisions of Clauses 13.1 and 13.2 of the
contract and the extent to which either or both of those provisions may have been
affected by the agreement for expert determination. That will involve a consideration of
the proper interpretation of the expert determination agreement and of Clause 13.2 of the
contract in accordance with established principles of Irish law governing contractual
interpretation. Having set out my conclusions on the proper interpretation of the expert
determination agreement and its effect on the provisions of Clause 13 of the contract, I
will then turn to consider the conciliation agreement and whether it has any relevance to
the defendant’s application.

Article 8(1) of Model Law

 

42.       The defendant seeks an order under Article 8(1) of the Model Law referring the parties to
arbitration in respect of the dispute the subject of the proceedings. Article 8(1) provides
as follows:-
“A court before which an action is brought in a matter which is the subject of an
arbitration agreement shall, if a party so requests not later than when submitting
his first statement on the substance of the dispute, refer the parties to arbitration
unless it finds that the agreement is null and void, inoperative or incapable of being

performed.”

 

43.       The Model Law has force of law in the State and applies to both international commercial
arbitrations and domestic arbitrations where the seat of the arbitration is Ireland (s. 6 of
the Arbitration Act 2010) (the “2010 Act”). As I observed in Ocean Point Development
Company Ltd (In Receivership) v. Patterson Bannon Architects Ltd & ors [2019] IEHC 311
(unreported, High Court, 10th May, 2019) (“Ocean Point”), a judgment delivered after the
present application was heard,:-
“In order for the provisions of Article 8(1) of the Model Law to be engaged, various
requirements must be satisfied. First, an action must have been brought before the
court in respect of a dispute between the parties. Second, the action must concern
a ‘matter which is the subject of an arbitration agreement’. Third, one of the parties
must request the reference to arbitration ‘not later than when submitting his first
statement on the substance of the dispute’. If those requirements are satisfied, the
court must refer the parties to arbitration (the word ‘shall’ is used). The only
circumstances in which the court’s obligation to refer the parties to arbitration does
not arise is where the court finds that the arbitration agreement is (i) ‘null and void’
or (ii) ‘inoperative’ or (iii) ‘incapable of being performed’. The onus of establishing
the existence of one or more of these disapplying factors rests on the party who
seeks to rely on them (see Sterimed Technologies International v. Schivo Precision
Ltd [2017] IEHC 35 (per McGovern J at para. 12, pp.4-5)).” (Ocean Point, para. 26,

p. 12).

 

44.       As I further observed in Ocean Point (at para. 27, p. 13), the Irish Courts have
consistently held that where the requirements of Article 8(1) of the Model Law are met,
the court is subject to a mandatory obligation to refer. That principle and the
complementary approach taken by the Irish courts to support the arbitral process was
previously stressed and applied by me in Townmore No. 1. In that case, I endorsed the
observations previously made by the High Court (McGovern J.) in BAM Building Ltd v.
UCD Property Development Company Ltd [2016] IEHC 582 (unreported, High Court, 20th
October, 2016) (“BAM”), Go Code Ltd v. Capita Business Services Ltd [2015] IEHC 673
(unreported, High Court, 27th October, 2015) and Kellys of Fantane (Concrete) Ltd (In
Receivership) v. Bowen Construction Ltd (In Receivership) & anor [2017] IEHC 357
(unreported, High Court, 1st June, 2017) (“Kellys of Fantane”).
45.       There is no dispute between the parties as to the mandatory obligation imposed on the
court under Article 8(1) of the Model Law. The question which arises, however, on this
application is whether the matters the subject of the proceedings are the subject of an
arbitration agreement, being one of the requirements which must be met before Article
8(1) of the Model Law is engaged. The defendant’s case is that Article 8(1) applies in that
the proceedings do concern a “matter which is the subject of an arbitration agreement
namely, Clause 13.2 of the contract. The plaintiff disputes the application of Clause 13.2
as it contends that that clause was disapplied by the agreement for expert determination
and that, therefore, there is no applicable arbitration agreement. Thus, it asserts that
one of the essential requirements for the application of Article 8(1) has not been satisfied.
In the alternative. the plaintiff argues that the arbitration agreement (in Clause 13.2 of
the contract) is “inoperative” within the meaning of that term in Article 8(1) and that,
therefore, the mandatory obligation contained in Article 8(1) to refer the parties to

arbitration does not apply.

 

46.       As the party seeking to invoke the court’s jurisdiction under Article 8(1) of the Model Law,
the defendant bears the initial burden of establishing that the various requirements for
the application of Article 8(1) are satisfied. In particular, it bears the burden of
establishing that the proceedings concern a matter or matters which is or are the subject
of an arbitration agreement. If the defendant discharges that initial burden, the burden
then shifts to the plaintiff to establish that the arbitration agreement is “inoperative

under Article 8(1).

 

47.       The parties are in agreement that the approach which the court is required to take in
determining whether an arbitration agreement exists is to give full judicial consideration
to the issue rather than approaching the question on a prima facie basis. It is now well
established that that is the correct approach for the court to adopt in determining whether
an arbitration agreement exists: Lisheen Mine v. Mullock & Sons (Shipbrokers) Ltd
[2015] IEHC 50 (unreported, High Court Cregan J., 12th January, 2015) and Sterimed
Technologies International Ltd v. Schivo Precision Ltd [2017] IEHC 35 (unreported, High
Court McGovern J., 27th January, 2017). Therefore, that is the approach which I will
adopt in determining whether an arbitration agreement exists between the parties for the

purposes of Article 8(1) of the Model Law.

 

48.       The exercise which the court is required to undertake in considering the present
application is somewhat different to that which often arises in applications to refer parties
to arbitration under Article 8(1) of the Model Law or in applications to stay proceedings
under the pre-existing legislative regime, where the dispute concerns the scope of an
admitted arbitration agreement. In such cases, the issue is often whether the dispute
between the parties which is the subject of the litigation falls within the scope of the
arbitration agreement and the court is required to interpret the arbitration agreement in
order to resolve that dispute. In undertaking that exercise, the courts have developed
principles for the interpretation of an arbitration agreement. Those principles are derived
from the decision of the House of Lords in Fiona Trust & Holding Corporation & ors v.
Privalov & ors [2007] 4 All ER 951; [2007] UKHL 40 (“Fiona Trust”) which has been
followed and applied in several Irish decisions (including O’Meara v. The Commissioners of
Public Works in Ireland and Ors [2012] IEHC 317 (unreported, High Court Charleton J.,
25th July, 2012); BAM; Kellys of Fantane; and Achill Sheltered Housing Association CLG
v. Dooniver Plant Hire Ltd [2018] IEHC 6 (unreported, High Court McGovern J., 12th
January, 2018). I endeavoured to summarise those principles in my judgment in
Townmore No. 1 as follows:-
“(1) In construing an arbitration agreement, the court must give effect, so far as the
language used by the parties will permit, to the commercial purpose of the
arbitration agreement.
(2) The construction of an arbitration agreement should start from an assumption or
presumption that the parties are likely to have intended any dispute arising out of
the relationship which they entered into to be decided by the same body or
tribunal. In other words, there is a presumption that they intended a ‘one-stop’
method of adjudication for their disputes.
(3) The arbitration agreement should be construed in accordance with that assumption
or presumption unless the terms of the agreement make clear that certain
questions or issues were intended by the parties to be excluded from the
jurisdiction of the arbitrator.
(4) A liberal or broad construction of an arbitration agreement promotes legal certainty
and gives effect to the presumption that the parties intended a ‘one-stop’ method
of adjudication for the determination of all disputes.
(5) The court should construe the words ‘arising under’ a contract and the words
‘arising out of’ a contract when used in an arbitration agreement broadly or liberally
so as to give effect to the presumption of a ‘one-stop’ adjudication and the former
words should not be given a narrower meaning than the latter words. Fine or ‘fussy’
distinctions between the two phrases are generally not appropriate.” (para. 53, pp.

22-23).

 

49.       However, these principles are of limited assistance in the context of the present
application as the parties accept that the presumption of a “one-stop” method of
adjudication of disputes which underlies those principles has been displaced on the facts.
Both parties accept that the dispute resolution provisions in Clause 13 of the contract
have been amended, supplanted or replaced as regards the disputes which were the
subject of the expert determination procedure. On the defendant’s case there are two
stops. The first is expert determination in accordance with the agreement for such
determination. The second is arbitration under Clause 13.2 of the contract. On the
plaintiff’s case, there is a “one-stop” place for the adjudication and resolution of the
relevant disputes but it is not by arbitration in accordance with the arbitration agreement
contained in Clause 13.2 of the contract. Rather, it is under the expert determination
procedure agreed between the parties with the parties then being free to litigate to
enforce their claims.
50.       The crux of the issue between the parties is the impact and effect of the agreement for
expert determination on the provisions of Clauses 13.1 and 13.2 of the contract. The
resolution of that issue turns on the proper interpretation of the agreement for expert
determination. Whether or not the court approaches the interpretation of that agreement
by reference to the burden on the defendant to establish that there is in existence an
arbitration agreement between the parties covering the dispute the subject of the
proceedings or by reference to the burden on the plaintiff of establishing that an
otherwise applicable arbitration agreement is “inoperative” under Article 8(1) of the Model

Law makes little practical difference in the context of the present application.

 

Interpretation of expert determination agreement

 

51.       Before looking again at the terms of the agreement for expert determination and the
respective contentions of the parties as to the effect of that agreement on the provisions
of Clauses 13.1 and 13.2 of the contract, I should draw attention to some of the relevant

parts of those provisions.

 

Clauses 13.1 and 13.2 of the contract

 

52.       Clause 13.1 of the contract contains detailed provisions providing for the conciliation of
disputes between the parties to the contract. I do not propose to set out the provisions of
Clause 13.1 in full, not least because the parties agree that the provisions of Clause 13.1
have been disapplied by the agreement for expert determination with respect to the
disputes the subject of the expert determination procedure. However, the scheme
provided for under Clause 13.1 is relevant as it bears upon the interrelationship between
Clause 13.1 and Clause 13.2 and on the question of whether Clause 13.2 can survive in
circumstances where Clause 13.1 has been disapplied by the agreement for expert

determination with respect to the disputes encompassed by that procedure.

 

53.       Under Clause 13.1.1, if a dispute arises under the contract, either party “may, by notice
to the other, refer the dispute for conciliation under this sub-clause 13.1…”. Clause 13.1
then provides for a structure and timetable for the conduct of the conciliation. There is a
time limit for the appointment of a conciliator and provision for the appointment of such a
conciliator in default of agreement within that period. There is then provision for the
furnishing of information and material to the conciliator and for the conciliator to consult
with the parties in an attempt to resolve the dispute by agreement. It is expressly
provided that the conciliator is not an arbitrator and that the 2010 Act and the law
relating to arbitration does not apply to the conciliation. There is then provision for what
is to happen if the dispute is not resolved by agreement within the specified period (42
days or longer, if agreed). In such a situation, the conciliator is required to give both
parties a written recommendation. If either party is dissatisfied with the
recommendation, it may (within 42 days of receipt of the recommendation) notify the
other party, setting out various matters. If the conciliator has not given a
recommendation within 42 days following appointment, either party may give notice of
dissatisfaction. In either case either party “may” refer the dispute to arbitration under
Clause 13.2 (Clause 13.1.9).
54.       There is then provision for what happens if the conciliator gives a written
recommendation and neither party gives notice of dissatisfaction within 42 days of receipt
of the recommendation. In such circumstances, the recommendation is stated to be
conclusive and binding on the parties, and the parties agree to comply with it”. In such
a situation, if a party fails to comply with the recommendation, the other party “may…
refer the failure itself to arbitration under sub-clause 13.2” (Clause 13.1.10). It is
expressly provided that this may be done without limiting that party’s “other rights” and it
is also provided that it is not necessary to go through the conciliation procedure again

before the party is permitted to refer the matter to arbitration.

 

55.       There are then detailed provisions for what is to happen in circumstances where the
conciliator has recommended the payment of money and a notice of dissatisfaction is
given. The party must make the payment recommended by the conciliator provided
certain conditions are satisfied: the other party must refer the dispute to arbitration and
provide a bond for payment (Clause 13.1.11). There is then provision for what is to occur

when the dispute is “finally resolved” if it is found that an overpayment has been made.

 

56.       It can seen, therefore, that Clause 13.1 contains quite a detailed and prescribed structure
for the conduct of conciliation under its provisions and provides for the entitlement of one
or more of the parties to refer the dispute to arbitration under Clause 13.2 at various
stages of the process. It is agreed between the parties that the agreement for expert
determination disapplied the conciliation provisions in Clause 13.1 with respect to the

matters referred to the expert for determination.

 

57.       Clause 13.2 provides as follows:-
“Arbitration
Any dispute that, under sub-clause 13.1, may be referred to conciliation shall,
subject to sub-clause 13.1 be finally settled by arbitration in accordance with the
arbitration rules identified in the Schedule part 1N. For purposes of those rules, the
person or body to appoint the arbitrator, if not agreed by the parties, is named in

the Schedule, part 1N.”

 

Key question and legal principles

 

58.       In considering the respective contentions of the parties as to the interpretation and scope
of application of the agreement for expert determination, one of the questions to consider
is whether, notwithstanding the various references in Clause 13.2 to Clause 13.1, which
the parties agree has been disapplied in respect of the relevant disputes, Clause 13.2
continues to subsist and to have effect in respect of the disputes the subject of the

proceedings.

 

59.       As noted earlier, while the parties are in agreement that where Clause 13.1 and Clause
13.      2 subsist, recourse to conciliation is optional and it is open to a party to decide to skip
conciliation and to proceed straight to arbitration if it wishes. While this is not an issue
which arises directly in this application, I should indicate that I do not wish to be taken as
endorsing this agreed position. It seems to me that it is much more likely having regard
to the language used in Clauses 13.1 and 13.2 and to other provisions of the contract
(such as Clause 10.5.4) that, in the absence of agreement between the parties, it is
mandatory to invoke the conciliation procedure in Clause 13.1 before being in a position
to proceed to arbitration under Clause 13.2. I note that is the view taken by Tom Wren in
Public Works in Ireland: Procurement and Contracting (Clarus Press, 2014 at paras. 17–

10 and 17–41, pp. 716 and 729).

 

60.       The parties are in agreement as to the legal principles to be applied to the interpretation
of the agreement for expert determination. They both agree that the applicable principles
are those set out by Lord Hoffman in Investors Compensation Scheme Ltd v. West
Bromwich Building Society [1998] 1 WLR 896 (“ICS”) and in the many judgments of the
Superior Courts in Ireland which have approved and applied those principles. There is,
however, a dispute between the parties as to the application of those principles in the

interpretation of the agreement for expert determination.

 

Defendant’s submissions

 

61.       In summary, the defendant contends that on its proper interpretation, the agreement for
expert determination does not provide for a “final” and “binding” determination of the
issues by the expert. Rather, the agreement describes the determinations of the expert
as merely being “binding”, which the defendant contends is analogous to a decision of an
adjudicator on a dispute relating to payment under a construction contract as provided by
the Construction Contracts Act 2013 (the “2013 Act”). Under s. 6(10) of the 2013 Act,
the decision of the adjudicator is “binding” until the payment dispute is “finally settled” by
the parties or a different decision is reached on the reference of the payment dispute to
arbitration or in court proceedings. The defendant contends that the absence in the
agreement of a provision that the expert’s determinations are to be “final and binding” is
significant as that term is commonplace in the construction industry where the parties
intend that a determination be definitive. The defendant submits that a determination
which is stated to be “binding” (Clause 2 of the agreement) is less definitive than one

which is stated to be “final and binding”.

 

62.       The defendant points to the provisions of Clause 13.1.10 of the contract where it is stated
that a recommendation of a conciliator is “conclusive and binding” on the parties if no
notice of disatisfaction is given within the requisite period. The defendant also draws
attention to the terms of Clause 13.2 where reference is made to a dispute which may be
referred to conciliation under Clause 13.1 being “finally settled” by arbitration in
accordance with Clause 13.2. The defendant argues that if a conciliator’s
recommendation is “conclusive and binding” and yet can only be “finally settled” by
arbitration under Clause 13.2, it would not make sense for the parties to agree that an
expert’s determination, which is merely stated to be “binding”, could have more definitive
consequences. It argues that under the scheme of Clause 13.1 and Clause 13.2,
arbitration is always intended to be the ultimate dispute resolution process under the
contract, including where it is sought to enforce a “conclusive and binding
recommendation by a conciliator (under Clause 13.1.10). The defendant, therefore,
submits that on its terms the agreement for expert determination did not provide for the
expert’s determination to be final and binding and to preclude the parties’ entitlement to

have recourse to the arbitration provisions in Clause 13.2.

 

63.       In support of its interpretation of the scope of application of the agreement for expert
determination, the defendant seeks to rely on a letter from the plaintiff to the defendant
dated 11th September, 2017, in which it was asserted by the plaintiff that the defendant
had suggested that the parties “should waive their rights to conciliation…” and that this
indicates that it was only the conciliation provisions in Clause 13.1 which were being
disapplied by the agreement for expert determination and not the arbitration provisions in

Clause 13.2.

 

64.       In support of its contention that Clause 13.2 subsists notwithstanding the agreement for
expert determination, the defendant submits that Clause 13.2 survived that agreement
and continues to subsist notwithstanding the disapplication of Clause 13.1. It contends
that Clause 13.2 does not require the continued existence of Clause 13.1. The defendant
submits that the references to Clause 13.1 in Clause 13.2 mean only that there must
have been a dispute which could at one stage have been referred to conciliation. It says
that the disputes which the parties agreed would be dealt with by expert determination
were disputes which could have been referred to conciliation under Clause 13.1 and a
conciliation could have taken place (had the parties not agreed to disapply the provisions
of Clause 13.1 in respect of those disputes). The defendant submits that at the time the
contract was entered into, Clause 13.1 was in the contract and the disputes which
subsequently arose between the parties could have been referred to conciliation under
that provision. It asserts that notwithstanding the disapplication of Clause 13.1, the
disputes which were agreed to be dealt with by expert determination were disputes which
could have been referred to conciliation. As part of this aspect of its submission, the
defendant places some stress on its contention that the referral of disputes to conciliation
under Clause 13.1 is in any event optional whereas the referral to arbitration under
Clause 13.2 is mandatory. As I have indicated earlier, while I do not believe that it is
necessary conclusively to determine that issue on this application, I do not believe that a

proper interpretation of Clauses 13.1 and 13.2 supports such a contention.

 

65.       Finally, the defendant rejects the contention that the conciliation agreement precludes it
from seeking to refer the relevant disputes to arbitration under Clause 13.2. It submits
that a proper interpretation of the conciliation agreement is that the parties’ respective
positions were reserved under the conciliation agreement and that nothing in that

agreement precludes it from seeking to refer the disputes to arbitration.

 

Plaintiff’s submissions

 

66.       The plaintiff contends that on the proper application of the principles set out in ICS and
approved by the Irish courts, the correct interpretation of the agreement for expert
determination is that the agreement had the effect of disapplying the conciliation
provisions in Clause 13.1 and the arbitration provisions in Clause 13.2 with respect to the
disputes which were dealt with by the expert. It submits that, contrary to the defendant’s
contention, the agreement for expert determination does expressly provide for the
determinations of the expert to be both “final” and “binding”. However, even if the
agreement only expressly provided that the determinations of the expert were “binding
rather than “final and binding”, that would not undermine its case. This is due to the
status of a determination of an expert under Irish law, where the default position is that
such a determination is final and binding and only open to challenge on certain very
limited grounds. The plaintiff accepts that the default position can be altered by
agreement between the parties but contends that there was no such agreement in the
present case. The plaintiff relies on a series of cases in support of its contention as to the
status of a determination of an expert. The plaintiff says, therefore, that on its proper
interpretation the agreement for expert determination encompasses the entirety of the
dispute resolution procedures agreed between the parties in place of those contained in

Clauses 13.1 and 13.2 of the contract.

 

67.       The plaintiff objects to the admissibility in evidence of its letter to the defendant of 11th
September, 2017, as an aid to the interpretation of the agreement for expert
determination. It contends that the letter is inadmissible by virtue of the third principle
set out by Lord Hoffman in ICS, as amounting in effect to a declaration of subjective

intent which is inadmissible as an aid to interpretation of a contract.

 

68.       The plaintiff further submits that once Clause 13.1 of the contract is disapplied (as the
defendant accepts is the case), Clause 13.2 cannot survive on a standalone basis. In
particular, the plaintiff submits that Clause 13.2 cannot survive in circumstances where
none of the disputes between the parties which were the subject of the expert
determination could be referred to conciliation under Clause 13.1 as the effect of the
agreement for expert determination was to disapply the application of that sub-Clause.
Once Clause 13.1 was disapplied then there was no dispute which could be referred to
conciliation and, therefore, no dispute to be “finally settled” by arbitration under Clause
13.2. The plaintiff disagrees with the defendant’s contention that all that is necessary is
that it was at one point open to the parties to refer the relevant disputes to conciliation
under Clause 13.1. The plaintiff’s position is that once the parties agreed to expert
determination in respect of the relevant disputes, those disputes could not be referred to
conciliation under Clause 13.1. Once the relevant disputes could not be referred to
conciliation under Clause 13.1, the plaintiff contends that it is not possible for them to be
referred to arbitration under Clause 13.2. The plaintiff goes further and suggests that if
the defendant wished to rely on Clause 13.2 in respect of those disputes, it ought to have
sought rectification of Clause 13.2 in order to substitute references to the agreement for

expert determination in place of the references to Clause 13.1 in Clause 13.2.

 

69.       Finally, the plaintiff seeks to rely on the conciliation agreement as precluding the
defendant from seeking to invoke the arbitration provisions contained in Clause 13.2 in
respect of the disputes which were the subject of the expert determination process. It
argues that a proper interpretation of the conciliation agreement is that the parties’
respective positions with regard to the disputes the subject of the expert determination
process were reserved or preserved save to the extent provided for in the conciliation
agreement and that the conciliation agreement does in fact make express provision for an
alteration of the parties’ rights in that regard. In particular, the plaintiff contends that the
conciliation agreement entitles it, in certain circumstances, to refer matters to arbitration

or to continue its proceedings but does not entitle the defendant to do so.

 

Substance and defendant’s complaint about the expert determination process

 

70.       Before setting out my conclusions on the proper interpretation and application of the
agreement for expert determination, I must deal with an incidental point made by the
plaintiff. The plaintiff has taken issue with the failure by the defendant to set out in any
detail the basis on which the defendant claims to be entitled to impugn the relevant
expert determinations. It points to the fact that the defendant has referred in only very
general terms to its dissatisfaction with the expert determination process and merely

states that it regarded that process as being “unsatisfactory”.

 

71.       While the plaintiff did not press the point, it was obviously advanced in an attempt to
undermine the defendant’s application. I am not satisfied that the point has any merit. It
is clear from the affidavit evidence and from all of the correspondence that there is a
dispute between the parties in relation to expert determination process. The essential
issue in this application is whether that dispute or those disputes will be resolved by an
arbitrator under Clause 13.2 or by a court in the course of these proceedings. It is not for
the court to get into or comment upon the detail or merits of that dispute or those
disputes. I completely agree with the following observations of McGovern J. in BAM:-
“It is not for the courts to inquire whether one party’s position under the dispute is
tenable or not, or whether there is a ‘real and genuine dispute’ to be referred to
arbitration. A decision on the merits of the parties’ disputes is one for the arbitrator

to make.” (BAM, para. 24, p. 12).

 

72.       In the context of the present case, the decision on the merits of the parties’ disputes in
relation to the expert determination process will be for an arbitrator under Clause 13.2 of
the contract (if the defendant is correct) or the court in the context of these proceedings
(if the plaintiff is correct). I should add that the correspondence sent by the defendant to
the expert following its purported unilateral withdrawal from the expert determination
process does set out in a little more detail the nature of the defendant’s dissatisfaction
with the expert determination process. It is evident from that correspondence and, in
particular, the defendant’s letter to the expert of 21st November, 2017, that the
defendant will seek to make the case, for example, that the expert exceeded his
jurisdiction in performing his role under the expert determination procedure.
Decision on interpretation of expert determination agreement 

Legal Principles

 

73.       It is well established, and the parties are in agreement on this, that the principles to be
applied in the interpretation of a contract are those set out by Lord Hoffman in ICS which
have been endorsed and applied in several decisions of the Supreme Court such as
Analog Devices B.V. v. Zurich Insurance Company [2005] 1 IR 274; [2005] IESC 12
(“Analog Devices”), ICDL v. European Computer Driving Licence Foundation Ltd [2012] 3
I.R. 327; [2012] IESC 55 (“ICDL”) and Law Society of Ireland v. Motor Insurers’ Bureau
of Ireland [2017] IESC 31 (unreported, Supreme Court, 25th May, 2017) (“MIBI”). It is
unnecessary to set out the ICS principles in this judgment. However, I have applied them
in interpreting the agreement for expert determination and in considering the extent of
the impact of that agreement on Clauses 13.1 and 13.2 of the contract. The parties are
in dispute about the application of one of the ICS principles, namely, the third principle.
That principle, as set out by Lord Hoffman in ICS, is as follows:-
“(3) The law excludes from the admissible background the previous negotiations of the
parties and their declarations of subjective intent. They are admissible only in an
action for rectification. The law makes this distinction for reasons of practical policy
and, in this respect only, legal interpretation differs from the way we would
interpret utterances in ordinary life. The boundaries of this exception are in some

respects unclear. But this is not the occasion on which to explore them.” (p. 913)

 

74.       The dispute between the parties concerning the application of this principle is relevant to
the defendant’s reliance on the terms of the plaintiff’s letter of 11th September, 2017,

and I consider it in that context below.

 

75.       In addition to the ICS principles, I should also make reference to two further statements
of the approach which the court should take in interpreting a contract. The first
statement is to be found in the judgment of Griffin J. in the Supreme Court in Rohan
Construction Ltd v. Insurance Corporation of Ireland Plc [1988] I.L.R.M. 373 (quoted with
approval by the Supreme Court in several subsequent decisions such as Analog Devices
and ICDL), a case concerning an insurance policy, where he said:-
“It is well settled that in construing the terms of a policy the cardinal rule is that
the intention of the parties must prevail, but the intention is to be looked for on the
face of the policy, including any documents incorporated therewith, in the words in
which the parties have themselves chosen to express their meaning. The Court
must not speculate as to their intention, apart from their words, but may, if
necessary, interpret the words by reference to the surrounding circumstances. The
whole of the policy must be looked at, and not merely a particular clause.” (p. 377)
(emphasis added).
The observations made by Griffin J. in relation to the interpretation of an insurance policy

apply equally to the interpretation of a non-insurance contract.

 

76.       The second statement is that made by Keane J. in the Supreme Court in Kramer v. Arnold
[1997] 3 I.R. 43, where he said:-
“… in any case where the parties are in disagreement as to what a particular
provision of a contract means, the task of the court is to decide what the intention
of the parties was, having regard to the language used in the contract itself and the
surrounding circumstances.” (p. 55).
77.       I will apply those principles in interpreting the agreement for expert determination in
order to determine the extent of the effect of that agreement on the provisions of Clauses

13.1 and 13.2 of the contract.

 

78.       As I noted earlier, there are a number of other principles which apply to the interpretation
of an arbitration agreement and which are derived from the decision of the House of Lords
in Fiona Trust and several Irish cases which apply those principles. The gist of those
principles is that where the parties have agreed that disputes be referred to arbitration,
there is an assumption or presumption, unless the contrary is clear in the agreement, that
the parties intended that arbitration would be a “one-stop” procedure to resolve or
determine their disputes. As I indicated earlier, those principles are of limited application
or assistance to the defendant in the present case in circumstances where the defendant
accepts that there is no “one-stop” procedure to resolve or determine the relevant
disputes between the parties under the contract. On its case, there will be two stops,
namely, expert determination and then arbitration. In those circumstances, when it
comes to interpreting Clause 13.2 of the contract, those principles for interpreting an
arbitration agreement (which were summarised by me in Townmore No. 1) are of limited,

if any, application in the present case.

 

Terms of Expert Determination Agreement

 

79.       Turning to the agreement for expert determination itself, it will be recalled that the terms
of the agreement are set out in the revised terms of engagement. I identified earlier
what appear to me to be the relevant provisions of that agreement. The agreement for
expert determination does not expressly state the effect that it is intended to have on the
contract and, in particular, on the dispute resolution provisions of the contract contained
in Clause 13. The only express references in the agreement for expert determination to
the contract between the parties are:-
(i) in the introduction (where the contract is referred to);
(ii) in the operative part of the agreement (under the heading “It is hereby agreed
where reference is made to the plaintiff and the defendant as being parties to the
contract);
(iii) in para. D of the schedule setting out the jurisdiction and powers of the expert (as
expanded in January 2017) where it is provided, at D5, that the expert was to have
power to decide matters which were the subject of “stale” referrals to conciliation
by the parties under Clause 13 of the contract;
(iv) at D6, where the expert was given the jurisdiction and power to decide any matter
necessary to “regularise” the contract;
(v) at D7, where the expert was given the jurisdiction and power to “assume the
powers (but not the obligations or liabilities) [of] the ER for the purpose of
administering the [contract] and/or to regularize any matter which is as a result of
a failure of the ER on behalf of the [defendant] to administer the [contract]”); and
(vi) in the attestation paragraph at the end of the agreement for expert determination,
where the parties agreed that determinations made by the expert would be

documents … in the contemplation of the [contract]”.

 

80.       However, given that the defendant accepts that the agreement was intended to disapply
the conciliation provisions contained in Clause 13.1 with respect to the disputes referred
for expert determination, it is necessary to proceed on the basis that, at the very least,
the parties intended the agreement for expert determination to have that effect. The
critical issue in the case is whether it had the more extensive effect of also disapplying
the arbitration provisions contained in Clause 13.2 of the contract with respect to the
relevant disputes, as the plaintiff contends. Whichever version is correct, it is
unfortunate, to say the least, that neither the parties nor the expert, when preparing and
signing the agreement, made express reference to the intended effect of the agreement

on Clauses 13.1 and 13.2 of the contract.

 

81.       The defendant has advanced various reasons in support of its contention that the
agreement for expert determination merely disapplied the conciliation provisions
contained in Clause 13.1 of the contract. The plaintiff, in turn, has advanced various
reasons in support of its contention that the agreement was intended also to disapply the
arbitration provisions contained in Clause 13.2. I am satisfied, for the various reasons set
out below, that the case advanced by the plaintiff is to be preferred than that advanced
by the defendant and that, on its proper interpretation, the agreement for expert
determination did have the effect of disapplying the Clause 13.2 as well as Clause 13.1

with respect to the disputes referred by the parties for expert determination.

 

Final and Binding

 

82.       The first reason advanced by the defendant was that the agreement for expert
determination provided that the determinations issued by the expert would be “binding
but did not provide that they would be “final and binding”. The defendant contends that
this indicates that the agreement was intended to replace only the conciliation provisions
of the contract. The plaintiff disagrees and submits that the parties did agree that
determinations issued by the expert under the agreement would be “final” and “binding”.
I agree with that submission. When construing the agreement, it is necessary to construe
the agreement as a whole and not to focus unduly on particular terms in isolation. As
observed earlier, that point was made clear by Griffin J. in the Supreme Court in Rohan
Construction and expressly endorsed by the Supreme Court in Analog Devices and ICDL.
The construction put forward by the defendant, in my view, fails to recognise the
importance of construing the contract as a whole. The defendant has unduly focused on
one provision of the agreement for expert determination, namely, Clause 2, and has, in
my view, failed properly to take into account other provisions of the agreement. It is true
that Clause 2 of the agreement when setting out the initial terms of reference for the
expert determination stated that the parties considered that the determination to be
issued by the expert would be “binding”. Clause 2 of the agreement, incorporating the
revised terms of engagement of the expert, again recorded the parties’ agreement that
any determination or series of determinations to be issued by the expert would be
binding”. However, it is wrong in principle merely to focus on the provisions of Clause 2.
Paragraph A of the schedule setting out the jurisdiction and powers of the expert (in both
the original terms of engagement of the expert and in the revised terms of arrangement)
is in the following terms:-
“By submitting to Expert Determination under the foregoing rules, the Parties shall
be taken to have conferred on [the expert] the following jurisdiction and powers to
be exercised insofar as the Law allows and in [the expert’s] discretion as they may
judge expedient for the purpose of ensuring the just and expeditious, economical

and final determination of the dispute referred to [the expert].” (emphasis added).

 

83.       It is necessary to read Clause 2 of the agreement for expert determination with para. A of
the schedule to that agreement. When read together, and construing the agreement as a
whole, it is clear that the parties intended that determinations issued by the expert would

be both “final” and “binding”.

 

84.       The defendant seeks to argue that the reference in para. A of the schedule setting out the
jurisdiction and powers of the expert must be read subject to the earlier reference to the
determination being “binding” in Clause 2 of the agreement. The defendant argues this
by reference to the words “under the foregoing rules” in para. A. However, I do not agree
with that argument. There is nothing at all inconsistent, in my view, between the
reference in para. A of the schedule to the determination being “final” and what is stated
earlier in Clause 2 to the effect that the determination is “binding”. This is not a case,
therefore, of construing what is said in para. A by reference to what is said earlier in
Clause 2 where there is an inconsistency between the two provisions. There is no such
inconsistency. In my view, therefore, the reference to “final” in para. A of the schedule is
not qualified, restricted or limited by the earlier reference in Clause 2 to the
determinations of the expert being “binding”. The two provisions must be read together

in light of the court’s obligation to construe the agreement as a whole.

 

85.       While the defendant submits (in its written submissions and in oral submissions to the
court) that the phrase “final and binding” is commonplace in the construction industry
(and elsewhere) and is used where parties intend to provide for a definitive determination
(in contrast to the use merely of the term “final”), no evidence to that effect was put
before the court. This argument is not dealt with in the affidavit sworn by Dr. Keyes for
the purpose of grounding the defendant’s application to refer the parties to arbitration.
Nor is it dealt with in any of the other affidavits sworn on behalf of the defendant in
resisting the plaintiff’s application to enter the proceedings in the commercial list. If it
had been, it would have been open to the plaintiff to deal with the issue by way of
responding evidence. However, the plaintiff did not have the opportunity of doing so. In
those circumstances, I cannot accept that there is any evidence before the court of a
particular practice in the construction industry or elsewhere under which participants in
that industry use a particular form of words when they intend the outcome of a process to
be more definitive than merely “binding”.
86.       However, even if there were admissible evidence before the court on which to make such
a finding of fact nonetheless I would not have regarded such evidence as being sufficient
to displace the intention of the parties as appears from the words used by them in the
agreement for expert determination. The agreement uses the words “final” and
binding”, albeit not in the same paragraph. Despite that, however, it seems to me that
having regard to the requirement to construe the agreement as a whole, the fact that the
parties have used both words indicates quite clearly to me that it was their intention that
determinations to be issued by the expert under the procedure set up by the agreement
for expert determination would be both “final” and “binding”. The failure to use those
words in the same paragraph or as part of the same phrase does not, in my view, afford
any support for the defendant’s contention that the parties did not intend such

determinations to have a “final” and “binding” consequence for the parties.

 

87.       However, even if the parties had not used the words “final” and “binding” in the
agreement for expert determination, that would not, in itself, undermine the finality or
conclusiveness of the determinations issued by the expert under the agreement. Both
parties accept that the default position, in the case of any expert determination, is that
the determination will be final and binding (subject, as we will see, to the very limited
potential for challenge). Indeed, that point was quite properly accepted by the defendant
having regard to the observations of Hogan J. in the Court of Appeal in Dunnes Stores v.
McCann [2018] IECA 238 (unreported, Court of Appeal, 23rd July, 2018) (“Dunnes

Stores”).

 

88.       Having referred to a short description of the process of expert determination in a leading
text in that area (John Kendall’s Expert Determination (London, 1996)), Hogan J. stated
that:-
“Determination by expert can thus be regarded as a ‘simple, informal, cost-
effective, confidential and final form of dispute resolution’: see Brown and Marriott,
ADR Principles and Practice (London, 3rd ed.) at 141…” (para. 3, p. 2) (emphasis

added).

 

89.       Hogan J. continued:-
“While adjudication by expert is quite common in the context of commercial
adjudication in this jurisdiction – and, indeed, has been common for some time –
what is, perhaps, surprising is that this would appear to be the first occasion in
which the scope of this jurisdiction has been explored in any reserved judgment by
any Irish appellate court. It is perhaps idle to consider why this is so, but it possibly
reflects a traditional understanding as to the finality of the slightly rough and ready
character of the adjudication by expert jurisdiction and the general futility of any
legal challenge to the outcome of any such adjudication.” (para. 4, p. 2) (emphasis

added).

 

90.       Hogan J. was even more explicit on the point later in his judgment where he stated:-
“As I have already hinted elsewhere in this judgment, the entire object of
adjudication by expert is to achieve a speedy and final resolution of the dispute,
even if the ultimate conclusions and the reasoning contained in the expert’s
adjudication is not always perfect or completely justified on the evidence…” (para.

44, p. 16) (emphasis added).

 

91.       These observations are particularly relevant to the present case. Even if the parties had
not made express provision in the agreement for the determinations of the expert to be
final” and “binding”, the default position would, in any event, have been that they were
final and binding. It would have been open to the parties to agree in their agreement
that the determinations of the expert did not have such final and binding effect.
However, it seems to me that the agreement would have to make that clear in light of the
default position that expert determinations have such effect. I do not believe that the
agreement for expert determination at issue in this case can properly be construed as
displacing or altering the default position, as I have described it. On the contrary, I am
satisfied that on its express terms, the agreement does provide for the determinations

issued by the expert to be both “final” and “binding”.

 

92.       In any event, I do not see any real or substantial distinction, at least on the facts of this
case, between a term in an agreement which provides that an expert determination is to
be “binding” and one which provides that it is to be “final and binding”. I am not saying
that there may never be distinction between those two terms, in different circumstances.
However, I do not see that any such distinction exists in the context of the present case.
Some examples can be given where there is no real or substantial difference between the
two terms. Prior to the enactment of the 2010 Act, the law on arbitration in Ireland was
governed by the Arbitration Acts 1954-1998. Under s. 27 of the Arbitration Act 1954 (the
“1954 Act”) it was provided that, unless a contrary contention was expressed in the
arbitration agreement, the agreement was deemed to contain a provision that the award
would be “final and binding” on the parties and persons claiming under them.
Notwithstanding this, it was open to the parties to challenge an award on the particular

grounds set out in the 1954 Act.

 

93.       Under s. 7 of the Arbitration Act 1980 (the “1980 Act”), a New York Convention award (an
award made in pursuance of an arbitration agreement in the territory of a state which is a
party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards
1958), which was enforceable under the 1980 Act, was required by s. 7 to be treated as
binding” for all purposes on the persons between whom it was made. The section did

not state that the award was to be “final and binding” and yet it had that effect.

 

94.       Under s. 23 of the 2010 Act, an award made by an arbitral tribunal under an arbitration
agreement is, unless otherwise agreed by the parties, to be treated as “binding” for all
purposes on the parties between whom it was made. Section 23 does not refer to such
awards as being “final and binding” and yet they are (subject to the very limited grounds
on which such awards can be disturbed under the 2010 Act and the Model Law). Article
35 of the Model Law also expressly provides for (foreign) awards to be recognised as
binding” (see s. 23(4) of the 2010 Act and Article 35 of the Model Law). Article 35 does
not provide that such awards are “final and binding”. However, they have that effect

(subject to the limited grounds on which recognition or enforcement may be refused).

 

95.       In passing, I note that under s. 58 of the Arbitration Act 1996 (which governs the position
in England and Wales), unless otherwise agreed by the parties, an award made by a
tribunal pursuant to an arbitration agreement is stated to be “final and binding” on the
parties and on any persons claiming through or under them (similar to s. 27 of the 1954

Act in Ireland).

 

96.       These statutory provisions, in my view, demonstrate that there is no difference in
substance between an award which is stated to be “final” and one which is stated to be
final and binding” under the relevant legislation. In each case, the effect of the award is
that it is final and binding, subject to whatever provisions in the relevant legislation allow
for challenges to be brought to such awards. A similar conclusion can, in my view, be
drawn between an expert determination which is stated to be “final” and one which is
stated to be “final and binding”. In either case, the determination may be open to

challenge on very limited grounds (as we shall see shortly).

 

97.       That leads me to a further point made by the defendant in support of its position as to the
effect of the expert determination agreement. The defendant argues that the status of a
determination made by the expert under the agreement for expert determination is
analogous to the decision of an adjudicator in the case of construction contracts under s.
6 of the 2013 Act. Under s. 6(10) of the 2013 Act, the decision of an adjudicator is stated
to be “binding until the payment dispute is finally settled by the parties” or a different
decision is reached at arbitration or in proceedings in relation to the adjudicator’s
decision. The defendant contends that the expert’s determination under the agreement
has a similar status. I do not agree. Section 6(10) of the 2013 Act provides expressly for
the status of a decision of an adjudicator under that statutory regime. The binding nature
of the adjudicator’s decision is expressly qualified or conditioned by the words used in the
subsection. The decision is “binding” but only binding “until” the payment dispute is
finally settled” by the party or a different decision is reached either at an arbitration or in
court proceedings. There is no such qualification in the agreement for expert
determination in relation to the “binding” nature of the expert’s determination. I do not
agree, therefore, that the status of the expert’s determination under the agreement is

analogous to the status of an adjudicator’s decision under the 2013 Act.

 

Status in Law of Expert Determinations

 

98.       Whether or not an agreement which provides for expert determination expressly provides
that the determination made by the expert under that agreement is “final and binding” or
simply “binding”, the determination will still be open to challenge, albeit on very limited
terms (unless those grounds have been expressly excluded by the agreement of the
parties). This is clear from the authorities on expert determination which were drawn to
my attention by the parties. The position was helpfully summarised in G. Brian
Hutchinson’s Arbitration and ADR in Construction Disputes (Roundhall, Dublin, 2010) as
follows:-
“It is decidedly difficult, however, to challenge a determination made by an expert
acting fairly and within the scope of his or her jurisdiction. … Only in cases where
the expert has acted manifestly unfairly – e.g. where there has been fraud or
collusion – or where the expert has exceeded the terms of reference, will the court
intervene: see: O’Mahony v Patrick O’Connor Builders (Waterford) Ltd & ors
[2005] IEHC 248; Jones v Sherwood Computer Services plc [1992] 1 W.L.R. 277.”

(para. 18–14, p. 136)

 

99.       In one of the cases cited by Hutchinson, O’Mahony v. O’Connor [2005] 3 IR 167;
[2005] IEHC 248 (“O’Mahony”), Clarke J. in the High Court stated:-
“10.2 There is no doubt that there is ample authority for the proposition that where
parties agree to be bound by the report of an expert, such report cannot be
challenged in the courts on the ground that mistakes have been made in its
preparation unless it can be shown that the expert had departed from the
instructions given to him in a material respect or had in some way acted in bad
faith, see Jones v. Sherwood Services Plc [1992] 1 W.L.R. 277.…” (para. 51, p.

184; para. 10.2)

 

100.       Later in his judgment, Clarke J. stated:-
“I agree that that passage [from John Kendall: Expert Determination (3rd ed., London,
2001)] represents the law in this jurisdiction. Ultimately the process which the
expert is to engage in is the one specified in the agreement between the parties.
However the default position is that the expert is free to initiate his own lines of
enquiry and use his own expertise. He is only limited in that regard by express
terms in the contract between the parties which conferred jurisdiction upon him and

which may limit the extent of that freedom.…” (para. 53, p. 185; para. 10.3).

 

101.       As it happened, in that case, the court held that the valuation of the expert was not
binding on the parties as the expert had failed to give the plaintiff any notice of his
intention to make his report final in the absence of representations from the plaintiff. The
court held that an expert, before proceeding to give a final determination, had to give a
defaulting party notice of this intention to do so. O’Mahony does, however, indicate the
limited circumstances in which an expert’s determination can be challenged. This is
similarly demonstrated by the decision of the Court of Appeal in Dunnes Stores where
Hogan J. expressly endorsed what was said in Brown and Marriott ADR Principles and
Practice (London, 3rd ed.) that the circumstances in which an adjudication by an expert
can be challenged are “very limited” and that in practice “only fraud or excess of
jurisdiction will cause the expert’s decision to be set aside” (Brown and Marriott at 144,

quoted by Hogan J. in Dunnes Stores at para. 3, p. 2).

 

102.       Similar statements on the limited extent to which an expert’s determination is reviewable
by a court can be seen in the decision of the Court of Appeal of New South Wales in
Australian Vintage Ltd v. Belvino Investments (No. 2) pty Ltd [2015] NSWCA 275 (24th
June, 2015). In that case, the court held that the question of whether an expert’s
determination was reviewable depended on whether the determination was made in
accordance with the contract, i.e., whether or not the expert carried out the task which he
or she was contractually required to undertake. If the expert in fact carried out that task,
the fact that he or she made errors or took irrelevant matters into account would not
render the determination open to challenge. However, if the expert did not perform that
task, but rather performed some different task, or carried out the task in a way which was
not within the contemplation of the parties to the contract, objectively ascertained, then
the determination would be liable to be set aside. That was so notwithstanding that the
relevant contract contained a provision to the effect that the expert’s decision was to be
final and binding”. The court accepted that such a clause made very little difference to
the question. Bathurst CJ. stated:-
“To the extent that the decision was made in accordance with the terms of the
contract, it will be final and binding. To the extent that it is not, it will be subject to

review.” (at para. 85).

 

103.       In Re Benfield Greig Group plc [2000] 2 BCLC 488, one of the issues concerned whether a
valuation carried out under the terms of a company’s articles of association which
provided that the valuer’s decision was to be “final and binding” was open to challenge.
The articles also expressly provided that the valuer would be acting as expert and not as
arbitrator. In her judgment in the High Court of England and Wales, Arden J. held that
the effect of the articles was that the determination of the expert was final and binding.
Those words were actually used in the articles of association at issue in that case.
However, Arden J. referred to an earlier decision of the Court of Appeal in Baber v.
Kenwood Manufacturing Co Ltd [1978] 1 Lloyd’s Rep 175 where there was no express
provision that the valuation was to be final and binding but the Court of Appeal treated it
as such on the basis that the valuers were expressly stated to be acting as experts and

not as arbitrators.

 

104.       It can be seen, therefore, that even where a determination of an expert is not stated to
be “final” and “binding” it will be treated as such by virtue of the expert’s status as expert
rather than arbitrator and the decision of the expert will only be open to challenge on the
very limited circumstances demonstrated by the case law to which I have referred.
Ultimately, therefore, once the expert is acting as expert and not in some other capacity
such as an arbitrator, unless the relevant agreement provides otherwise, the decision or
determination of the expert will be treated as final and binding and will only be subject to
challenge on the very limited grounds referred to in the cases. That is so irrespective of
whether the decision or determination of the expert is expressly stated to be “final” or

final and binding”.

 

105.       Consequently, even if the agreement for expert determination did not make express
provision for the expert’s determinations to be both “final” and “binding” they would be
treated as such by law (unless the agreement otherwise made clear, which it does not in
the present case). In my view, therefore, even if the agreement had merely provided
that the determinations of the expert were to be “binding” and not “final” and “binding
(contrary to my earlier conclusion), that would be of no assistance to the defendant and
would not support its contention that the determinations were not intended to be both

final and binding.

 

Defendant’s reliance on Clause 13.1.10

 

106.       Another argument advanced by the defendant is to compare what is said in Clause
13.1.10 of the contract in relation to a conciliator’s recommendation with what the
agreement for expert determination says in relation to the determinations of the expert.
Clause 13.1.10 of the contract provides that in the circumstances addressed in that sub-
clause the conciliator’s recommendation will be “conclusive and binding” and yet, the
defendant submits, a dispute in relation to such recommendation may be referred to
arbitration under Clause 13.2. The defendant argues that a recommendation which is
stated to be “conclusive and binding” but which can still be referred to arbitration under
the contract, must be more robust than a determination of an expert which is merely
stated to be “binding” in the agreement for expert determination. However, that does not
follow. First of all, I have already concluded that, construed as a whole, the agreement
for expert determination provides that the determinations of the expert are both “final
and “binding”. Second, the circumstances in which the conciliator’s recommendation is
conclusive and binding” under Clause 13.1.0 of the contract is where the conciliator
issues a recommendation and neither party gives notice of dissatisfaction within the
required time period. In those circumstances the recommendation will be “conclusive and
binding” on the parties and a failure to comply with it may be referred by the other party
to arbitration under Clause 13.2. That provision is of no application in the present case
where, on the defendant’s own case, Clause 13.1 has been dis-applied in respect of the
disputes referred for expert determination. Third, this argument ignores the status in law

of an expert’s determination as discussed in the cases referred to earlier.

 

Plaintiff’s Letter of 11th September, 2017

 

107.       In further support of its contention that the agreement for expert determination should be
construed as applying only to the conciliation provisions contained in Clause 13.1 of the
contract and not to the arbitration provisions in Clause 13.2, the defendant has sought to
rely on the terms of a letter from the plaintiff’s managing director, Keith Screeney, to the
defendant’s then chief executive officer, Sean Ashe, dated 11th September, 2017. The
defendant contends that this letter amounts to a piece of contemporaneous
correspondence between the parties in which it is said that the plaintiff conceded that the
agreement for expert determination was intended to replace only the conciliation
provisions of the contract. The defendant relies on a portion of that letter in which Mr.
Screeney, on behalf of the plaintiff, stated as follows:-
“As the Employer, and conscious of the potential exposure of your offices under the
Contract, you suggested that the Parties should waive their rights to Conciliation
with a view to engaging in alternative process which would be more cost efficient
and definitive.” (emphasis added).
108.       The defendant relies on this letter and, in particular, on this portion of the letter as
demonstrating that the parties agreed in the agreement for expert determination to

displace only the conciliation provisions of the contract and not the arbitration provisions.

 

109.       The plaintiff disputes the admissibility in evidence of this letter as an aid to interpretation
of the agreement for expert determination. It says that the agreement should be
interpreted by reference to the words used in the agreement and not by reference to what
one of the parties (in this case, the plaintiff itself) may have said in subsequent
correspondence. The plaintiff’s objection to the admissibility of the letter is stated to be
based on the parol evidence rule, under which verbal evidence may not be admitted in
order to add to, subtract from or vary or qualify the terms of a contract which has been
reduced to writing. The plaintiff’s objection appears also to be based on the third of Lord
Hoffman’s principles in ICS, which precludes the admissibility in evidence of declarations
of the subjective intent of one of the parties (except in an action for rectification). By
way of an alternative submission, the plaintiff argues that if the letter is admissible in
evidence, then the entirety of the letter must be looked at and construed as a whole

rather than one selective part of it.

 

110.       To counter the plaintiff’s objection to admissibility, the defendant argues that the part of
the letter on which it seeks to rely amounts to an admission against interest which, the

defendant contends, renders the letter admissible in evidence.

 

111.       I have had some difficulty in understanding the precise basis on which the defendant
argues for the admissibility of the letter and the precise basis on which the plaintiff argues
against its admissibility. It seems to me that the parties may have confused different
legal concepts in addressing this issue. It is well established, and is apparent from the
third of Lord Hoffman’s principles, that previous negotiations of the parties and
declarations of subjective intent (made prior to the conclusion of the contract) are
inadmissible in the interpretation of the contract. That is so whether the prior declaration
of intent amounts to an admission against interest in order to defeat a hearsay objection
or not. However, the plaintiff’s does not make a hearsay objection. The plaintiff’s
objection appears to be based on the parol evidence rule and on the third of Lord

Hoffman’s principles in ICS.

 

112.       However, I do not think that the parol evidence rule is engaged. Under that rule,
extrinsic evidence, such as correspondence predating the conclusion of a contract, would
not be admissible provided that the contract was reduced to writing (as the agreement for
expert determination was here) (see, for example, Ulster Bank v. Deane [2012] IEHC 248
(unreported, High Court McGovern J., 20th June, 2012) (at p. 6); Promontoria (Arrow)
Ltd v. Mallon [2018] IEHC 145 (unreported, High Court McGovern J., 22nd March, 2018)
(at p. 16)). Further, the parol evidence rule does not apply where what is sought by the
admission of the extrinsic evidence is to assist in the interpretation of the written

agreement as opposed to an amendment or variation of the agreement.

 

113.       Nor, in my view, does the third of Lord Hoffman’s principles in ICS, necessarily preclude
the admissibility in evidence of the plaintiff’s letter of 11th September, 2017. Prior
declarations of subjective intent would be inadmissible under that principle. However,
subsequent declarations of intent would not necessarily be inadmissible, although the
weight to be attached to any such subsequent declaration of subjective intent is another
question altogether. There is recent support for the admissibility in evidence of a
subsequent declaration of subjective intent. The issue arose in the MIBI case. In that
case, the Supreme Court considered relevant to the interpretation of the agreement at
issue in that case (the 2009 MIBI agreement) a letter from September 2014, sent on
behalf of the Minister for Transport (one of the parties to the relevant agreement) to the
MIBI (the other party to the agreement) which set out the Minister’s position as to the
interpretation and application of the relevant MIBI agreement. In the course of his
judgment for the majority of the Supreme Court, O’Donnell J. held that the court had to
take the letter as a representation of the position of the Minister, with the qualification
that it had not been tested in court. Taking the letter in that way, O’Donnell J. stated
that the letter offered “further important support for the interpretation advanced by the
MIBI” (para. 48). Having done so, O’Donnell J. stated that it was difficult to see how it
could be said that the agreement could interpreted “more broadly than the parties to the

Agreement itself [contended]”.

 

114.       It seems to me, therefore, that it is open to me to consider the terms of the plaintiff’s
letter of 11th September, 2017. However, the weight to be attached to the letter must
necessarily be of a significantly lower order than the letter in the MIBI case. In that case,
the relevant letter set out the views of one of the parties to the relevant MIBI agreement
which was precisely the same as the view held by the other party to that agreement. The
views of both parties to the letter were, therefore, identical. That is not the case with the
plaintiff’s letter of 11th September, 2017 as there is a dispute between the parties as to
the scope of application of the agreement for expert determination. Nonetheless, I have

had regard to the letter.

 

115.       It is true, as the defendant contends, that in the part of the letter relied upon by the
defendant, Mr. Screeney, on behalf of the plaintiff, refers to the defendant having
suggested that the parties “should waive their rights to Conciliation with a view to
engaging in alternative process which would be more cost efficient and definitive”.
However, that statement itself is equivocal and not determinative of the issue as to the
scope of application of the agreement for expert determination. The letter did not
expressly state that the parties agreed only to waive their rights to conciliation. Indeed,
the rest of the sentence on which the defendant mainly relies suggests that a wider form
of waiver was being referred to. The waiver referred to in the letter, while referring to
conciliation, was “with a view to engaging in alternative process which would be more
cost efficient and definitive”. I agree with the plaintiff that this suggests a wider form of
waiver than merely conciliation and is at least consistent with a waiver also of the
arbitration provisions in the contract. The next paragraph of the letter is also consistent
with such a conclusion in that reference is made to the process of expert determination
being suggested which “would allow both parties to put forward their respective cases in a
non-adversarial manner, with the findings of the Expert being accepted as Binding on the
Parties” (emphasis added). The next paragraph refers to the plaintiff consulting with its
legal advisers to confirm that the parties “with due regard to the contract in place, could
engage in, and be bound by the process proposed” (emphasis added). This is also
consistent with the process of expert determination being binding on the parties. So too
is a paragraph later in the letter where, referring to the expansion of the expert’s role in
the January 2017, it is said that the plaintiff was prepared to agree to that expansion on
the understanding that the parties “would formally attest to [the] Agreement and their
intention to [be] bound by the findings of the Expert”. There are several further
references in the letter to the “binding nature” of the process of expert determination
under the agreement between the parties. These references are all consistent at least
with the position adopted by the plaintiff concerning the effect of the agreement for

expert determination on the dispute resolution provisions of the contract.

 

116.       However, ultimately, it seems to me that the plaintiff’s letter of 11th September, 2017, is
pretty equivocal on the issue I have to decide. While there is a reference to a
conciliation, the other references appear to support the binding nature of the expert
determination process. All of those references are in correspondence which post-dated
the agreement and, while the letter is probably admissible for the reasons I have
mentioned earlier, little enough weight should, I believe, be given to it. To my mind, the
better way of approaching the interpretation of the agreement for expert determination is
to interpret that agreement by reference to its actual terms. I place little weight,
therefore, on the terms of the plaintiff’s letter of 11th September, 2017, one way or the

other.

 

Whether Clause 13.2 can survive disapplication of Clause 13.1

 

117.       Another issue between the parties is if the defendant is correct in its case as to the
application of the agreement for expert determination to the conciliation provisions in
Clause 13.1 of the contract only and not to the arbitration provisions in Clause 13.2,
whether Clause 13.2 can survive. The defendant says that it can, in that the references
in Clause 13.2 to Clause 13.1 must be treated as being disapplied in respect of the
disputes the subject of the expert determination process and the court must read in a

rider which in turn incorporates by reference the agreement for expert determination.

 

118.       The plaintiff argues that Clause 13.2 cannot survive the removal or disapplication of
Clause 13.1 in respect of the relevant disputes. The plaintiff advances two grounds for
that contention. First, it says that Clause 13.2 applies to disputes which, under Clause
13.      1, “may be referred to conciliation”. Such disputes can go to arbitration under Clause
13.      2. However, the plaintiff contends that the particular disputes which were the subject
of the agreement for expert determination do not fall within the category of disputes
which “may be referred to conciliation” as it was agreed that they would be dealt with by
expert determination. The plaintiff does not accept the defendant’s argument that all that
is required is that there was a dispute which could have been referred to conciliation and
all that was required, at the time the contract was entered into, was that there was a
possibility of the particular dispute being referred to conciliation. Second, the plaintiff
argues that if it is the defendant’s case that Clause 13.2 should be read, in the case of the
disputes referred for expert determination under the agreement between the parties, as
removing from Clause 13.2 the references to conciliation under Clause 13.1 and replacing
them with references to the agreement for expert determination, then the defendant

ought to have sought rectification of Clause 13.2.

 

119.       I cannot see how Clause 13.2 can be read in the manner suggested by the defendant.
The operation of Clause 13.2 depends on there being a dispute which could be referred to
conciliation under Clause 13.1. It will be recalled that Clause 13.2 says:-
“Any dispute that, under sub-clause 13.1, may be referred to conciliation shall,

subject to sub-clause 13.1 be finally settled by arbitration…”

 

120.       Clause 13.1.1 refers to a dispute arising under the contract which either party may refer
for conciliation under Clause 13.1. However, if the parties have agreed that certain
disputes will be dealt with by a different process, namely, expert determination, in place
of conciliation, those disputes may not be referred for conciliation under Clause 13.1.1.
They may not be referred for conciliation under that provision because the parties have
agreed that they will be dealt with in a different way, namely, by expert determination.
The defendant’s case is that the parties agreed that these particular disputes would be
dealt with by expert determination and not by conciliation. In my view, therefore, those
particular disputes are not disputes which “may be referred” to conciliation under Clause
13.      1. If they are not disputes which “may be referred” to conciliation under Clause 13.1,

then Clause 13.2 does not apply in respect of those disputes.

 

121.       To put it another way, a dispute which is the subject of the agreement for determination
is not a “dispute that, under sub-clause 13.1, may be referred to conciliation” under
Clause 13.2. If such a dispute is not a dispute which “may be referred” to conciliation
under Clause 13.1, then it is not a dispute which is required to be “finally settled by
arbitration” under Clause 13.2. Clause 13.2, therefore, has no application to a dispute
which the parties have agreed should be referred to expert determination in lieu of
conciliation. If it were intended by the parties that a dispute referred to expert
determination in place of conciliation was nonetheless one which the parties could refer to
arbitration under Clause 13.2, where it is dissatisfied with the expert’s determination, one
would have expected the parties to have made express provision for this, having regard
to the terms of Clause 13.2. They did not do so. They could have expressly agreed in
the agreement for expert determination that a party dissatisfied with the expert’s
determination of an issue could nonetheless refer that issue to arbitration under Clause
13.2. They did not do that. They could have agreed by some other means that disputes
referred to expert determination could nonetheless be subject to the arbitration provisions

in Clause 13.2. They did not do that either.

 

122.       It should be recalled that Clause 13.2 does continue to apply in respect of disputes which
were not referred for expert determination but which were dealt with in accordance with
the conciliation provisions of Clause 13.1. In respect of those disputes, the arbitration
provisions in Clause 13.2 continue to subsist and so rectification of Clause 13.2 would not
have been appropriate. However, in respect of the disputes which were referred to expert
determination, I cannot see how the provisions of Clause 13.2 can apply for the reasons

just mentioned.

 

123.       I have endeavoured to work out how Clause 13.2 might operate if it continued to apply in
respect of disputes referred to expert determination under the agreement between the
parties. Leaving aside the express references in Clause 13.2 to Clause 13.1 and disputes
which could be referred to conciliation under that latter clause, I cannot see how Clause
13.2 would operate. In the case of the conciliation provisions in Clause 13.1, there are
detailed procedural rules with time periods for the conciliator to give a written
recommendation, procedures for what is to happen if a party is dissatisfied with the
recommendation, provisions as to what happens where a recommendation is issued but
neither party expresses its dissatisfaction with the recommendation and provisions under
which one or other of the parties may be entitled or obliged to refer a dispute to
arbitration under Clause 13.2. Clause 13.1 contains a well-worked-out scheme or
structure for the conciliation and provides for how the process may move from conciliation
to arbitration. None of that is apparent from the agreement of expert determination. I
have referred earlier to the references in the agreement for expert determination to
Clause 13 of the contract. There is one reference (para. D5) which does not advance
matters. So far as I can see, there is nothing in the agreement for expert determination
providing for the circumstances in which a party dissatisfied with the expert’s
determination can seek to proceed to arbitration under Clause 13.2 of the contract. To
the extent that the defendant relies, as part of its argument for the co-existence of the
agreement for expert determination with Clause 13.2 of the contract, on an assertion that
recourse to conciliation under Clause 13.1 is optional whereas recourse to arbitration
under Clause 13.2 is mandatory, I have indicated earlier that I do not agree with that
argument. However, even if it were correct, it could hardly avail the defendant in
circumstances where it is accepted by both parties that the agreement for expert
determination did impose an obligation on the parties to refer the disputes the subject of
the agreement for expert determination. That is the route which the parties agreed to
take in respect of those disputes. That route was not an optional one once the parties
entered into the agreement for expert determination. I cannot agree with the defendant
that Clause 13.2 can continue to apply to disputes which the parties agreed would be

referred for expert determination in lieu of conciliation under Clause 13.1.

 

Conclusions on interpretation of Expert Determination Agreement

 

124.       Finally, in this context, I am satisfied that the terms of the agreement for expert
determination (providing for the revised terms of engagement dated 23rd January, 2017)
are wide enough to provide for the final and binding determination by an expert of the
disputes the subject of that agreement. I have referred earlier to the provisions of Clause
2 and paras. A, B, C and D of the schedule setting out the jurisdiction and powers of the
expert. They do confer on the expert the jurisdiction and power to make binding and final
determinations. While this is, of course, subject to a potential challenge on the limited
grounds discussed in the case law and authorities to which I have referred, they are not
amenable to arbitration under Clause 13.2. The effect of the agreement for expert
determination is, in my view, to disapply by necessary implication the arbitration
provisions in Clause 13.2. Further, as indicated earlier, the terms of Clause 13.2
themselves do not appear to me to be capable of accommodating a situation where
disputes which the parties agreed were being referred to expert determination could or
must nonetheless be referred to arbitration under Clause 13.2. All of these considerations
combined have persuaded me that the defendant has failed to discharge its burden of
establishing that the disputes which the parties agreed to refer to expert determination

are nonetheless the subject of the arbitration agreement contained in Clause 13.2.

 

125.       Alternatively, I am satisfied that the plaintiff has discharged the burden on it (if
applicable) of demonstrating that the arbitration agreement contained in Clause 13.2 is
inoperative” in the sense of not being capable of being operated or applied to the

disputes the subject of the agreement for expert determination.

 

126.       In those circumstances, I must refuse the defendant’s application for an order referring
the parties to arbitration under Article 8(1) of the Model Law in respect of the particular
disputes the subject of the application. In reaching this conclusion, I am giving effect to
the parties’ agreement and am not in any way undermining or diminishing the supportive
approach which the Irish courts take to arbitration and the arbitral process. That
approach stems from the respect and support given to the parties’ autonomy and their
agreement to arbitration as the means of resolving their dispute. Here, the effect of the
parties’ agreement to expert determination is to disapply the arbitration agreement. In
refusing the defendant’s application, I am merely giving effect to that agreement. My
decision does not mean that Clause 13.2 is not applicable in respect of disputes which

were not the subject of the agreement for expert determination.

 

127.       That is sufficient to dispose of the defendant’s application. However, since some reliance
was also placed by the plaintiff on the provisions of the conciliation agreement in order to
preclude the defendant from seeking to refer the disputes to arbitration under Clause
13.      2, I should briefly address what the parties have said about that agreement. Strictly
speaking, it is unnecessary for me to do so having regard to my conclusions in relation to

the interpretation and application of the agreement for expert determination.

 

Conciliation agreement

 

128.       I have referred earlier to the circumstances in which the parties entered into the
conciliation agreement as recorded in the letter from Ciaran Fahy, the conciliator, to the
parties dated 16th August, 2018. The conciliation agreement was yet a further effort by
the parties to resolve their disputes, this time by way of conciliation. It is common case
that the conciliation agreement encompassed not only the disputes which were the
subject of the agreement for expert determination but also other disputes between the
parties under the contract. The plaintiff contends that the conciliation agreement
provides another insurmountable obstacle for the defendant seeking to refer the disputes
which were the subject of the expert determination agreement to arbitration under Clause
13.2 of the contract. It argues that the express reservation of rights contained in Clause
2 of the conciliation agreement is qualified by the final sentence of Clause 2 which, it
contends, makes clear that the rights of the parties in respect of the claims which were
the subject of the agreement for expert determination were being reserved and would be
unaffected by the conciliation agreement “save to the extent provided in this agreement”.
The plaintiff says that the conciliation agreement does in fact affect those rights in the
manner envisaged by Clause 2. It contends that this was done by Clause 5 of the
conciliation agreement which confers on the plaintiff only the entitlement in the particular
circumstances provided for in that clause to refer matters to arbitration under Clause 13.2

of the contract.

 

129.       The defendant, however, submits that the conciliation agreement makes clear that the
rights of both parties were being reserved in the event that the conciliation did not
successfully resolve their disputes. It contends that among the rights reserved or
preserved by the conciliation agreement were the plaintiff’s right to maintain the
proceedings and the defendant’s right to seek to refer the relevant disputes to arbitration.
It contends that Clause 5 does not affect that reservation of rights and is permissive only
in terms, entitling the plaintiff to pursue claims or to seek to refer them to arbitration
under Clause 13.2 in the particular circumstances provided for in Clause 5. It submits
that the plaintiff only is mentioned in Clause 5 as it was the party which had a claim to
ventilate. The defendant does not accept that Clause 5 gave the plaintiff a unilateral right
to decide whether or not the claims the subject of the current proceedings should be

litigated or dealt with by arbitration.

 

130.       As I have indicated earlier, having regard to the conclusions I have reached in relation to
the interpretation and application of the agreement for expert determination, it is not,
strictly speaking, necessary for me to deal with the arguments made by the plaintiff in
reliance on the conciliation agreement. However, it is perhaps appropriate that I set out

in brief terms my conclusions on this issue.

 

131.       The conciliation agreement covers the disputes which were dealt with in accordance with
the agreement for expert determination as well as other disputes between the parties.
Insofar as the disputes which were the subject of the expert determination procedure is
concerned, I have concluded that the agreement for expert determination disapplies the
conciliation provisions in Clause 13.1 and the arbitration provisions in Clause 13.2 with
respect to those disputes. The position, therefore, which existed at the time the parties
entered into the conciliation agreement in August 2018, was that the parties had already
agreed to disapply Clause 13.1 and Clause 13.2 in respect of the disputes which were the
subject of the agreement for expert determination. Therefore, when it came to the
parties seeking to reserve or preserve their rights in respect of those particular disputes,
they were doing so in circumstances where Clause 13.1 and Clause 13.2 were disapplied
in respect of those disputes. That being the case, the effect of Clause 2 was not to
preserve any right which the defendant had to seek to refer those disputes to arbitration
under Clause 13.2 as that provision was already disapplied in respect of those disputes by
virtue of the agreement for expert determination. There is nothing in Clause 5 of the
conciliation agreement which reinstates or reapplies the provisions of Clause 13.2 so as to
confer on the defendant an entitlement to refer those particular disputes to arbitration.
132.       The defendant is not mentioned in Clause 5 of the conciliation agreement. It is the
plaintiff that is given the various options or entitlements in Clause 5 including the option
to refer the claims to arbitration in the event that the court refuses to enforce the expert
determinations (Clause 5(c)). Clause 2 of the conciliation agreement provided that the
parties’ rights were reserved and would remain unaffected “save to the extent provided in
[the conciliation] agreement”. Clause 5 did make provision to affect the rights of the
plaintiff but not of the defendant. It would have been open to the parties to make
express provision in Clause 5 to reapply or reinstate Clause 13.2 and to confer on the
defendant an entitlement to refer the disputes which were the subject of the expert
determination procedure to arbitration, if that is what the parties intended. However,
they did not include such provision in the conciliation agreement. Therefore, the
defendant’s position, which was reserved or preserved under Clause 2 of the conciliation
agreement and under which the defendant did not have the entitlement to refer the
disputes which were the subject of the expert determination procedure to arbitration
having regard to the terms of the agreement for expert determination, was not affected
or otherwise provided for in subsequent provisions of the conciliation agreement, such as
Clause 5. I am satisfied, therefore, that based on my interpretation of the agreement for
expert determination, the conciliation agreement does not confer on the defendant an
entitlement to refer the disputes the subject of that expert determination procedure to
arbitration under Clause 13.2 of the contract. The plaintiff is given the option of making a
reference to arbitration in respect of those disputes in the circumstances provided for in
Clause 5. Clause 5 does not confer on the defendant the option or entitlement of

referring those disputes to arbitration.

 

133.       If I am wrong in my interpretation of the agreement for expert determination, and if, at
the time the conciliation agreement was entered into, the defendant did have a right to
seek a reference to arbitration under Clause 13.2 of the contract, I would interpret Clause
5 as clearly affecting that right by conferring on the plaintiff only the right to refer
matters to arbitration in certain circumstances but not conferring such a right on the
defendant. The defendant’s position would, therefore, have been altered by Clause 5 of
the conciliation agreement as expressly permitted by Clause 2 of that agreement. In
either case, therefore, the defendant would not have the right to refer the disputes which

were the subject of the expert determination procedure to arbitration.

 

Summary of conclusions

 

134.       In summary, I have considered in this judgment the various arguments advanced by the
parties in support of and against the defendant’s contention that it is entitled to refer the
disputes the subject of the proceedings to arbitration in accordance with Clause 13.2 of
the contract between the parties. I have concluded that the agreement between the
parties to refer the disputes which are now the subject of these proceedings for expert
determination under an agreement made between the parties (as recorded in revised
terms of engagement dated 23rd January, 2017), on its proper construction, had the
effect of disapplying not only the conciliation provisions contained in Clause 13.1 of the
contract but also the arbitration provisions contained in Clause 13.2 with respect to those
disputes.
135.       In those circumstances, there is no arbitration agreement between the parties in respect
of those disputes. I have concluded, therefore, that the defendant has failed to discharge
the burden of establishing the existence of an arbitration agreement in respect of the
disputes at issue for the purpose of Article 8(1) of the Model Law. Alternatively, if the
burden is on the plaintiff to establish that the arbitration agreement is “inoperative
within the meaning of that term in Article 8(1) of the Model Law, I am satisfied that the
plaintiff has discharged that burden by demonstrating that by virtue of the agreement for
expert determination, the arbitration agreement contained in Clause 13.2 has been

disapplied with respect to the disputes which are now the subject of these proceedings.

 

136.       While, strictly speaking, not necessary to do so, I have also set out my views in relation
to the subsequent conciliation agreement reached between the parties. My views in
respect of that agreement do not affect the conclusions which I have reached in relation
to the defendant’s entitlement to seek a reference to arbitration in respect of the relevant
disputes under Article 8(1) of the Model Law. Rather, they are consistent with those

conclusions.

 

137.       In those circumstances, I must refuse the defendant’s application for the order sought
under Article 8(1) of the Model Law. I will hear the parties in relation to the terms of the

order to be made and on any other consequential issues.Result:     The defendants application was refused

Pluto Shipowning Inc v Able Glory Maritime Co Ltd [2019] FCA 1836 (10 October 2019)

FEDERAL COURT OF AUSTRALIA

Pluto Shipowning Inc v Able Glory Maritime Co Ltd [2019] FCA 1836

File number:
NSD 2023 of 2018
Judge:
RARES J
Date of judgment:
10 October 2019
Legislation:
International Arbitration Act 1974 (Cth) s 8
United Nations Conference on International Commercial Arbitration Convention, on the Recognition and Enforcement of Foreign Arbitral Awards done at New York on 10 June 1958 ([1975] ATS 25)
Cases cited:
The Ship “Sam Hawk” v Reiter Petroleum Inc [2016] FCAFC 26; (2016) 246 FCR 337
Date of hearing:
10 October 2019
Registry:
New South Wales
Division:
General Division
National Practice Area:
Admiralty and Maritime
Category:
No Catchwords
Number of paragraphs:
9
Counsel for the Plaintiff:
M Scott QC with E Levine
Counsel for the Defendant
The Defendant did not appear

ORDERS

NSD 2023 of 2018
BETWEEN:
PLUTO SHIPOWNING INC
Plaintiff
AND:
ABLE GLORY MARITIME CO LTD
Defendant
JUDGE:
RARES J
DATE OF ORDER:
10 OCTOBER 2019

THE COURT ORDERS THAT:

  1. The first partial final arbitration award dated 3 January 2018 in the matter of the arbitration between Pluto Shipowning Inc and Able Glory Maritime Co Limited be enforceable pursuant to s 8(3) of the International Arbitration Act 1974 (Cth).
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT
(REVISED FROM THE TRANSCRIPT)

RARES J:

  1. This is an application to enforce a partial final award made on 3 January 2018 in London by the three arbitrators appointed pursuant to an arbitration agreement between the plaintiff, Pluto Shipowning Incorporated, as owners of Sea Pluto, and Able Glory Maritime Company Limited, as charterers of the ship under a charterparty made in Shanghai on 8 October 2014.
  2. The United Kingdom is a party to the United Nations Conference on International Commercial Arbitration Convention, on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958, known as the New York Convention. Pursuant to s8(3) of the International Arbitration Act 1974 (Cth), a foreign award being an arbitral award made in a country other than Australia in relation to which the Convention applies may be enforced by this Court, as if it were a judgment of this Court.
  3. I am satisfied that in October 2018 the arbitrators certified a true copy of the arbitration agreement embodied in the charterparty. Clauses 17 and 83 of the charterparty provided for London arbitration by three arbitrators in the event of a dispute.
  4. Following delivery of Sea Pluto to Able Glory under the charter party, Able Glory arranged with OW Bunkers, or one of its subsidiaries, for bunkers to be provided to the vessel. OW Bunkers invoiced both Able Glory and Pluto on 15 October 2014 for the supply of bunkers, in the sum of USD598,675.58. Payment was due 30 days from the date of supply, but as found in the partial final award, payment has never been made and the debt remains outstanding
  5. On about 18 March 2016, ING Bank NV, as assignee of OW Bunkers following its collapse, caused Sea Pluto to be arrested in Geelong, Victoria, in proceedings commenced in this Court, seeking to recover the debt. As a result of an undertaking providing security in the sum of USD1,234,000 by Skuld P&I Club on behalf of Pluto, the ship was released from arrest on 22 March 2016. Skuld required Pluto to counter-secure its letter of undertaking giving that security by placing USD1,357,400 with Skuld.
  6. On about 26 May 2016, Pluto began the arbitration proceedings in London against Able Glory. Able Glory appointed its own arbitrator, in accordance with the arbitration agreement, and both arbitrators then appointed a third. The arbitrators made the partial final award after a two-day hearing, at which each of Pluto and Able Glory appeared and was represented. The arbitrators concluded that Able Glory was liable to Pluto in respect of the claims by ING or OW Bunkers, by way of indemnity or damages for any liability that might be imposed on Pluto in Australia or in other countries, assuming that any such proceedings were reasonably defended and determined.
  7. They found that, notwithstanding the decision of the Full Court in The Ship “Sam Hawk” v Reiter Petroleum Inc [2016] FCAFC 26; (2016) 246 FCR 337, because ING and its assignor, OW Bunkers, had claimed against Pluto and arrested Sea Pluto in Australia, there was a real risk that in other countries, that recognise maritime liens that charterers can create on ships for the supply of necessaries, Sea Pluto could be arrested even though such liens are not likely to be recognised in Australia. Accordingly, notwithstanding that ING’s and OW Bunkers’ claim in Australia against the ship was objectively unsound under Australian law, Sea Pluto was still at risk of being arrested in other jurisdictions.
  8. The partial final award ordered Able Glory to put up counter-security in a form reasonably acceptable to Pluto and Skuld, to replace the security in the sum of USD1,357,400 provided in respect of the proceeding of this Court in March 2016 on behalf of Pluto. The arbitrators also awarded Pluto costs, which have not yet been assessed.

Conclusion

  1. I am satisfied that the subject matter of the partial final award was capable of settlement by arbitration under the laws in force in the United Kingdom, and that there is no apparent basis under s 8(5) or (7) of the International Arbitration Act at the present time not to enforce the award Accordingly, I will order that the partial final award be enforceable as an order of the Court.
I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Application by Port of Newcastle Operations Pty Ltd [2019] ACompT 1 (30 October 2019)

AUSTRALIAN COMPETITION TRIBUNAL

Application by Port of Newcastle Operations Pty Ltd [2019] ACompT 1

Review from:
The arbitration determination by the Australian Competition and Consumer Commission under section 44ZP of the Competition and Consumer Act 2010 (Cth) in relation to an access dispute between Glencore Coal Assets Australia Pty Ltd and Port of Newcastle Operations Pty Ltd
Catchwords:
COMPETITION – applications for review of the arbitration determination made by the Australian Competition and Consumer Commission in respect of access dispute between provider and user of a declared service – review to be conducted by way of ‘re-arbitration’ pursuant to s 44ZP of the Competition and Consumer Act 2010 (Cth) – where declared service is the right to access and use monopoly infrastructure assets at Port of Newcastle – where access dispute concerns quantum of charges levied for access and use of declared service and proper scope of application of such charges – how declared service to be interpreted and appropriate scope of application of arbitration determination – whether and how to account for contributions of service users in calculating regulated asset base – determination of projects that were the subject of contributions of service users – whether such projects would be undertaken by a hypothetical new entrant – determination of appropriate costs of such projects – determination of appropriate timeframe for such projects – consideration of impact of timeframe on interest – whether service provider able to recover costs of non-coal assets through arbitrated charges – whether to apply true-up for return on actual capital expenditure compared to return on forecast capital expenditure

IN THE AUSTRALIAN COMPETITION TRIBUNAL

ACT 2 of 2018
RE:
APPLICATION FOR REVIEW OF THE ARBITRATION DETERMINATION BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION UNDER SECTION 44ZP OF THE COMPETITION AND CONSUMER ACT 2010 (CTH) IN RELATION TO AN ACCESS DISPUTE BETWEEN GLENCORE COAL ASSETS AUSTRALIA PTY LTD AND PORT OF NEWCASTLE OPERATIONS PTY LTD
BY:
PORT OF NEWCASTLE OPERATIONS PTY LTD

Applicant

TRIBUNAL:
MIDDLETON J (PRESIDENT)

MR R F SHOGREN (MEMBER)

DR D R ABRAHAM (MEMBER)

DATE OF DETERMINATION:

30 OCTOBER 2019

THE TRIBUNAL DETERMINES THAT:

The ACCC’s Final Determination made under s 44V of the Competition and Consumer Act 2010 (Cth) dated 18 September 2018, be varied by deleting Clauses 2.1, 2.2 and 6.1 and replacing them as follows:

2.1 The scope of the determination is confined to the terms and conditions of access where Glencore owns or, either directly or by agent, charters a vessel that enters the Port precinct and loads Glencore coal.

2.2 For the avoidance of doubt, the determination does not apply to:

(a) the terms and conditions of access to apply in respect of vessels carrying coal that are not owned, or have not been chartered, by Glencore;

(b) the terms and conditions of access for vessels other than those calling at the coal terminals at the Port; and

(c) any charges imposed by PNO other than the Navigation Service Charge and the Wharfage Charge.

6.1 The Navigation Service Charge payable by Glencore to PNO in accordance with this determination will be $1.0058 as at 1 January 2018.

IN THE AUSTRALIAN COMPETITION TRIBUNAL

ACT 3 of 2018
RE:
APPLICATION FOR REVIEW OF THE ARBITRATION DETERMINATION BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION UNDER SECTION 44ZP OF THE COMPETITION AND CONSUMER ACT 2010 (CTH) IN RELATION TO AN ACCESS DISPUTE BETWEEN GLENCORE COAL ASSETS AUSTRALIA PTY LTD AND PORT OF NEWCASTLE OPERATIONS PTY LTD
BY:
GLENCORE COAL ASSETS AUSTRALIA PTY LTD

Applicant

TRIBUNAL:
MIDDLETON J (PRESIDENT)

MR R F SHOGREN (MEMBER)

DR D R ABRAHAM (MEMBER)

DATE OF DETERMINATION:

30 OCTOBER 2019

THE TRIBUNAL DETERMINES THAT:

The ACCC’s Final Determination made under s 44V of the Competition and Consumer Act 2010 (Cth) dated 18 September 2018, be varied by deleting Clauses 2.1, 2.2 and 6.1 and replacing them as follows:

2.1 The scope of the determination is confined to the terms and conditions of access where Glencore owns or, either directly or by agent, charters a vessel that enters the Port precinct and loads Glencore coal.

2.2 For the avoidance of doubt, the determination does not apply to:

(a) the terms and conditions of access to apply in respect of vessels carrying coal that are not owned, or have not been chartered, by Glencore;

(b) the terms and conditions of access for vessels other than those calling at the coal terminals at the Port; and

(c) any charges imposed by PNO other than the Navigation Service Charge and the Wharfage Charge.

6.1 The Navigation Service Charge payable by Glencore to PNO in accordance with this determination will be $1.0058 as at 1 January 2018.

REASONS FOR DETERMINATION

INTRODUCTION

  1. The two applications before the Tribunal concern a dispute between Port of Newcastle Operations Pty Ltd (‘PNO’) and Glencore Coal Assets Australia Pty Ltd (‘Glencore’) regarding the terms and conditions of access to the Port of Newcastle (the ‘Port’).
  2. PNO is the operator of the Port and Glencore is a user of the Port. PNO filed its application on 8 October 2018 (ACT 2 of 2018) and Glencore filed its application a day later on 9 October 2018 (ACT 3 of 2018).
  3. The Port is subject to the access regime contained in Part IIIA of the Competition and Consumer Act 2010 (Cth) (the ‘CCA’). Pursuant to that regime, and by Glencore’s notification dated 4 November 2016, the dispute between it and PNO was referred to the Australian Competition and Consumer Commission (the ‘ACCC’) for arbitration. As a result of that arbitration the ACCC determined the value of certain charges that PNO could levy on Glencore for access to the Port and the circumstances in which such arbitrated charges could be levied. The ACCC’s determination as to these matters was published in its Final Determination on 18 September 2018.
  4. Each application calls on the Tribunal to review the Final Determination by conducting a ‘re-arbitration’ pursuant to s 44ZP. The Tribunal’s function in applications of this kind is not to identify error in the relevant arbitration determination but to re-arbitrate the dispute between access seeker and access provider based on the information, reports and things referred to in s 44ZZOAAA.
  5. Whilst there was some disputation as to the material the Tribunal should consider in this re-arbitration, nothing turned upon this disputation in the Tribunal’s deliberations and its ultimate determination. Putting aside the report which Glencore asked the Tribunal to consider (to which we will return) there were a number of documents that were not taken into account by the ACCC, which are set out in an annexure to the ACCC’s submissions in each application, dated 5 April 2019. The Tribunal has not taken these documents into account, but as mentioned nothing turns on this for the purposes of the Tribunal’s deliberations and determination.
  6. The Tribunal will be referring to the ACCC’s Draft and Final Determinations as a convenient way to address the issues raised in the re-arbitration. In doing so the Tribunal follows the approach of the parties, although the relevant materials and arguments were strictly set out in the Statements of Reasons provided with each Determination, not in the Determinations themselves. The Tribunal is still undertaking a re-arbitration and not a review or appeal of the ACCC’s Final Determination. However, just as the applications were presented to the Tribunal by the parties, the task of the Tribunal does not require it to ignore the reasoning of the ACCC. In fact a great deal of the reasoning and the Final Determination itself remained non-contentious.
  7. For convenience’s sake, the ACCC’s Final Determination is annexed to these reasons as Annexure “A”. A document which identifies aspects of the Final Determination not in dispute, jointly prepared by the parties and the ACCC (at the request of the Tribunal), is annexed to these reasons in summary form as Annexure “B”.

BACKGROUND

  1. The Port is a major commercial shipping port and one of the largest coal export ports in the world. It is considered to be the only port from which it is commercially viable to export coal from the Hunter Valley coal fields in New South Wales (‘NSW’). The Hunter Valley coal industry and its associated supply chain is responsible for around 90% of NSW’s coal production and 40% of Australia’s total black coal production.
  2. Glencore is the largest exporter by volume of coal from the Port. Approximately 85% of the coal mined by Glencore is exported to global markets including Japan, South Korea, Taiwan, China and Europe. Thermal coal exported from the Port to these destinations competes with coal exported from other countries such as Indonesia.
  3. PNO has operated the Port since May 2014. Prior to this, the Port was operated by the State of NSW. In May 2014, the joint venture parents of PNO (Hastings Fund Management and China Merchants Group) acquired a 98 year lease from the NSW Government effectively privatising the Port’s assets. PNO is now jointly owned by The Infrastructure Fund (a wholesale investment fund under the trusteeship of Gardior Pty Ltd) and China Merchants Group. Under the terms of the lease, PNO has the power and authority to, amongst other things, fix and collect port charges pursuant to Pt 5 of the Ports and Maritime Administration Act 1995 (NSW) (the ‘PMAA’). Two such charges are relevant to this access dispute: the Navigation Service Charge (the ‘NSC’) (which is payable in respect of general use by a vessel of the Port and its infrastructure) and the Wharfage Charge (which is payable in respect of the availability of a site at which stevedoring operations may be carried out). After it assumed the role of Port operator, PNO implemented a restructure of its charges with the effect that the price for coal ships using the Port increased by between 40% and 60% for some vessel types. The charges applied by PNO to Glencore (and other users of the Port) were as follows:
    • Navigation Service Charge: $0.7286 per gross tonne in its 2015 port pricing schedule, and increased to $0.7553 per gross tonne in its 2018 port pricing schedule; and
    • Wharfage Charge: $0.0746 per revenue tonne.
  4. We observe that the NSC is applied by PNO at different rates to coal vessels, cruise vessels, and non-coal vessels (other than cruise vessels).

Declaration of services at the Port

  1. In the wake of PNO’s restructure of Port charges, Glencore made an application to the National Competition Council (‘NCC’) on 13 May 2015 for certain services at the Port to be ‘declared’ for the purposes of Part IIIA. The NCC issued its recommendation to the relevant Minister on 2 November 2015 which recommended the service not be declared on the grounds that it did not meet the requirement that declaration would promote a material increase in competition in at least one market other than the market for the service. The NCC was otherwise satisfied that all other criteria were met. On 8 January 2016, the Minister published his decision under s 44H(1) in which he decided not to declare the nominated service on the same basis as that recommended by the NCC.
  2. On 29 January 2016, Glencore applied to the Tribunal under s 44K for review of the Minister’s decision. The Tribunal set aside the Minister’s decision in Re Application by Glencore Coal Pty Ltd [2016] ACompT 6, and on 16 June 2016 declared the following service:

the provision of the right to access and use the shipping channels (including berths next to the wharves as part of the channels) at the Port of Newcastle (Port), by virtue of which vessels may enter the Port precinct and load and unload at relevant terminals located within the Port precinct and then depart the Port precinct.

(the ‘Service’)

  1. The precise drafting of the description of the Service is important. It is a matter to which we will return later in these reasons.

Notification and arbitration of the dispute

  1. Following the declaration of the Service, Glencore made a series of attempts to negotiate with PNO in respect of the terms and conditions upon which Glencore could access the Port. No agreement was reached and on 4 November 2016, Glencore notified the ACCC under s 44S(1) of the existence of an access dispute in relation to the Service. In its notification to the ACCC, Glencore described the dispute as follows:

Although PNO is currently providing access (and maintaining that it will always do so) the terms of access, in particular the navigation service charges for coal vessels, are unreasonable and Glencore is seeking to negotiate with PNO on reducing these charges to approximately their pre-privatisation levels (or pre-2015 levels as 2015 was the point at which PNO increased the charges, shortly after the Service was privatised and assets re-valued from $1.75 billion to $2.4 billion). Glencore submits that, at the very least, an economically efficient charge is likely to be significantly lower than the rates which are currently being applied by PNO.

  1. On 22 December 2016, the ACCC advised Glencore and PNO that:

(1) the pre-conditions for notification of an access dispute under s 44S had been met;

(2) an access dispute relating to the Service existed between Glencore and PNO; and

(3) the access dispute had been validly notified by Glencore.

  1. The ACCC also established a ‘Commission’ for the purposes of the access dispute arbitration pursuant to ss 44U to 44ZNA of the CCA.
  2. Between 22 December 2016 and 20 July 2018, the parties provided the ACCC with a considerable volume of information pertaining to the arbitration, and more specifically information to be used to determine appropriate regulated access prices for the Service.

Judicial review of the notification of the dispute

  1. On 9 October 2017, during the course of the arbitration, PNO filed proceedings against the ACCC and others in the Federal Court of Australia seeking judicial review in relation to the conduct of the ACCC’s arbitration. PNO and Glencore agreed to stay the arbitration while PNO’s challenge to the conduct of the arbitration was reviewed by the Court.
  2. PNO claimed that the arbitration had not been validly commenced by the ACCC and that pre-conditions for notification of the access dispute had not been satisfied. On 9 November 2017, the Federal Court dismissed PNO’s application and found that the ACCC should be permitted to complete the arbitration process without interference from the Court: Port of Newcastle Operations Pty Ltd v Australian Competition and Consumer Commission [2017] FCA 1330; (2017) 350 ALR 552.
  3. The arbitration resumed shortly after the Court’s judgment was handed down.

The ACCC’s Draft Determination

  1. On 20 July 2018, the ACCC published its draft determination (‘Draft Determination’) as required by s 44V(4), accompanied by a draft statement of reasons. PNO and Glencore were invited to make further submissions in light of the Draft Determination and did so. In its Draft Determination, the charges payable by Glencore as at 1 January 2018 on access to the Service within the scope of the determination were as follows:
    • Navigation Service Charge: $0.4685 per gross tonne; and
    • Wharfage Charge: $0.0746 per revenue tonne.

The ACCC’s Final Determination

  1. On 18 September 2018, the ACCC issued its Final Determination of the access dispute pursuant to s 44V(1)(b) along with a statement of reasons as required by s 44V(5), and an arbitration report. In its Final Determination, the charges payable by Glencore as at 1 January 2018 on access to the Service within the scope of the determination were as follows:
    • Navigation Service Charge: $0.6075 per gross tonne (ie an increase of $0.1390 as compared to the Draft Determination); and
    • Wharfage Charge: $0.0746 per revenue tonne (unchanged from the Draft Determination).
  2. Relevantly, the scope of the Final Determination was limited to access to the Service:

(1) where Glencore, either directly or by agent, charters a vessel to enter the Port precinct and load Glencore coal; and

(2) where Glencore makes a representation to PNO of the kind referred to in s 48(4)(b) of the PMAA that it has the functions of the owner of a vessel, or accepts the obligation to exercise those functions, in order to enter the Port precinct and load Glencore coal.

  1. The ACCC determined that the Final Determination did not apply to:

(1) the terms and conditions of access in respect of vessels carrying coal which have not been chartered by Glencore or in respect of which Glencore has not made a representation of the kind referred to in s 48(4)(b) of the PMAA;

(2) the terms and conditions of access for vessels other than those calling at the coal terminals at the Port, and

(3) any charges imposed by PNO other than the NSC and the Wharfage Charge.

  1. We will return to this defined scope and to the meaning of a representation of the kind referred to in s 48(4)(b) of the PMAA later in these reasons.
  2. The Final Determination also provided for:

(1) ‘backdating’ provisions to the effect that the charges apply from the period starting 8 July 2016, being the date of declaration of the Service by the Tribunal as contemplated by s 44ZO(4)(b); and

(2) ‘five-year review’ provisions which contemplate a five-year review of the NSC involving a roll forward of the regulated asset base (the ‘RAB’) including actual capital expenditure which is incurred in the five-year period not funded by users (‘Five-Year Review’).

LEGISLATIVE CONTEXT

Competition and Consumer Act 2010 (Cth)

  1. Part IIIA of the CCA is concerned with third party access to certain ‘declared’ services such as the Port. In circumstances where the provider of a service and a user of a service cannot reach a commercial agreement on the terms and conditions upon which the user can access the service, either the user or the provider may notify the ACCC of an access dispute and request that the ACCC arbitrate. To this end, s 44S relevantly provides as follows:

(1) If a third party is unable to agree with the provider on one or more aspects of access to a declared service, either the provider or the third party may notify the Commission in writing that an access dispute exists, but only to the extent that those aspects of access are not the subject of an access undertaking that is in operation in relation to the service.

(2) On receiving the notification, the Commission must give notice in writing of the access dispute to:

(a) the provider, if the third party notified the access dispute;

(b) the third party, if the provider notified the access dispute;

(c) any other person whom the Commission thinks might want to become a party to the arbitration.

  1. Section 44B contains the definition of ‘third party’ among other terms:

“third party”, in relation to a service, means a person who wants access to the service or wants a change to some aspect of the person’s existing access to the service.

  1. Once a dispute has been notified to the ACCC, an arbitration is commenced. Relevantly, s 44U provides:

The parties to the arbitration of an access dispute are:

(a) the provider;

(b) the third party;

(c) any other person who applies in writing to be made a party and is accepted by the Commission as having a sufficient interest.

  1. And further, s 44V relevantly provides:

(1) Unless it terminates the arbitration under section 44Y, 44YA, 44ZZCB or 44ZZCBA, the Commission:

(a) must make a written final determination; …

on access by the third party to the service.

(2) A determination may deal with any matter relating to access by the third party to the service, including matters that were not the basis for notification of the dispute. By way of example, the determination may:

(a) require the provider to provide access to the service by the third party;

(b) require the third party to accept, and pay for, access to the service;

(c) specify the terms and conditions of the third party’s access to the service;

(d) require the provider to extend the facility;

(2A) Without limiting paragraph (2)(d), a requirement referred to in that paragraph may do either or both of the following:

(a) require the provider to expand the capacity of the facility;

(b) require the provider to expand the geographical reach of the facility.

(3) A determination does not have to require the provider to provide access to the service by the third party.

  1. We should at this juncture comment on the operation of s 44V(2), which was relied upon by Glencore in support of its contention on the scope of the arbitration. In short, Glencore contended that the terms of s 44V(2) were such to permit a determination making Glencore’s terms of access available to persons who access facilities at a berth to load coal onto a vessel, regardless of whether that person is the owner or charterer of the vessel. The Tribunal does not accept the expansive operation of s 44V(2) as contended for by Glencore.
  2. Access disputes within the context of Part IIIA are bilateral in nature. The consequence of the declaration of the Service was that a party (ie the person seeking access to the Service) had a right to negotiate with the provider of the Service. If they were unable to agree, then the party seeking access could notify the dispute to the ACCC. Access disputes are not intended to address rights of access by all users of a declared service. Further, the Final Determination under scrutiny in these applications does not deal with the general right of access by Glencore to the Port, but with the terms of access pertaining to that right of access already available. Glencore here is wanting a change to aspects of the existing access to the Service. The contest is thus as to the terms of the access already made available to Glencore, and relating to Glencore’s access as defined in the Service. Subsection 44V(2) allows the ACCC, in making a determination, some flexibility to deal with related matters to the access sought in Glencore’s notification. The inclusory matter mentioned in s 44V(2) suggests this by indicating matters, that were not the basis of notification of the dispute, which must nevertheless be related to the actual dispute between the parties as notified to the ACCC.
  3. The provision in s 44V(2)(d), which deals with the provider extending the facility (including expanding its capacity), is within the scope of determining ‘access by a third party’. This is because it deals with the provider needing to act in connection with the circumstances relating to the particular third party, who notifies or who has been notified of the access dispute, which currently existed and which gave rise to the request for the ACCC to arbitrate.
  4. In the present case, the Service consists of the provision of the right to access and use the shipping channel at the Port, by virtue of which vessels may enter the Port precinct, and load and unload at terminals within the Port precinct. The only circumstance in which Glencore could be said to be using the Service so defined is where it owns or, whether directly or by agent, charters a vessel to enter the Port precinct and load Glencore coal. We will return to this issue later in these reasons. However, it is important to appreciate that s 44V(2), whilst allowing for certain related matters to be dealt with by the ACCC that were not the basis for notification of the dispute, would not permit a change to the Service as defined and declared by the Tribunal on 16 June 2016.
  5. As we have already observed, the applications before us call on the Tribunal to conduct a ‘re-arbitration’ of the access dispute. In this sense, the Tribunal is not required to identify any form of error in the Final Determination having regard to, for instance, the mandatory considerations the ACCC is required to take into account. That said, it is nevertheless helpful to outline the ACCC’s obligations when arbitrating disputes under Division 3 of Part IIIA, particularly as these are also relevant to our determination.
  6. Section 44X sets out the matters that the ACCC must take into account in making final determinations in notified access disputes. At the time of the dispute being notified to the ACCC, it provided:

(1) The Commission must take the following matters into account in making a final determination:

(aa) the objects of this Part;

(a) the legitimate business interests of the provider, and the provider’s investment in the facility;

(b) the public interest, including the public interest in having competition in markets (whether or not in Australia);

(c) the interests of all persons who have rights to use the service;

(d) the direct costs of providing access to the service;

(e) the value to the provider of extensions whose cost is borne by someone else;

(ea) the value to the provider of interconnections to the facility whose cost is borne by someone else;

(f) the operational and technical requirements necessary for the safe and reliable operation of the facility;

(g) the economically efficient operation of the facility;

(h) the pricing principles specified in section 44ZZCA.

(2) The Commission may take into account any other matters that it thinks are relevant.

  1. We should observe that amendments have been made to the CCA since the time of notification to the ACCC, but the parties agreed that the amendments were of no significance to the dispute before the Tribunal.
  2. Relevant to subsection (aa), the objects of Part IIIA are set out in s 44AA:

(a) promote the economically efficient operation of, use of and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets; and

(b) provide a framework and guiding principles to encourage a consistent approach to access regulation in each industry.

  1. Relevant to subsection (h), s 44ZZCA sets out three pricing principles:

The pricing principles relating to the price of access to a service are:

(a) that regulated access prices should:

(i) be set so as to generate expected revenue for a regulated service or services that is at least sufficient to meet the efficient costs of providing access to the regulated service or services; and

(ii) include a return on investment commensurate with the regulatory and commercial risks involved; and

(b) that the access price structures should:

(i) allow multi-part pricing and price discrimination when it aids efficiency; and

(ii) not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except to the extent that the cost of providing access to other operators is higher; and

(c) that access pricing regimes should provide incentives to reduce costs or otherwise improve productivity.

  1. Also relevant to the ACCC’s role in arbitrations of access disputes are the statutory restrictions on final determinations. Section 44W provides that a determination of the ACCC has no effect if it would have any of the following effects:

(a) preventing an existing user obtaining a sufficient amount of the service to be able to meet the user’s reasonably anticipated requirements, measured at the time when the dispute was notified;

(b) preventing a person from obtaining, by the exercise of a pre-notification right, a sufficient amount of the service to be able to meet the person’s actual requirements;

(c) depriving any person of a protected contractual right;

(d) resulting in the third party becoming the owner (or one of the owners) of any part of the facility, or of extensions of the facility (including expansions of the capacity of the facility and expansions of the geographical reach of the facility), without the consent of the provider;

(e) requiring the provider to bear some or all of the costs of extending the facility (including expanding the capacity of the facility and expanding the geographical reach of the facility);

(ea) requiring the provider to bear some or all of the costs of maintaining extensions of the facility (including expansions of the capacity of the facility and expansions of the geographical reach of the facility);

(f) requiring the provider to bear some or all of the costs of interconnections to the facility or maintaining interconnections to the facility.

  1. Separately, the Tribunal’s role in re-arbitrations of access disputes is set out in s 44ZP. Relevantly, that section provides:

(3) A review by the Tribunal is a re-arbitration of the access dispute based on the information, reports and things referred to in section 44ZZOAA.

(4) For the purposes of the review, the Tribunal has the same powers as the Commission.

(5) The member of the Tribunal presiding at the review may require the Commission to give assistance for the purposes of the review.

(6) The Tribunal may either affirm or vary the Commission’s determination.

  1. Pursuant to s 44ZZOA, the Tribunal is required to make a decision within the ‘consideration period’. The consideration period is ordinarily a period of 180 days from the date of the application for review, but may be extended by written notice to the relevant Minister (see s 44ZZOA(7)), or extended in effect by agreement between the relevant parties (see s 44ZZOA(5)). The consideration period for the Tribunal’s determination of these applications is further addressed below.
  2. Pursuant to s 44ZZOAA, the Tribunal must have regard to all of the information that the ACCC took into account in connection with the making of its Final Determination, as well as any information that the Tribunal has requested under the powers set out in s 44ZZOAAA(4) or anything done as mentioned in s 44ZP(5) or any information or report given to the Tribunal under s 44ZP(5A). We address s 44ZZOAAA(4) below in the context of an application made by Glencore for the Tribunal to request and consider additional information that was not taken into account by the ACCC in connection with the making of its Final Determination.
  3. At the outset the Tribunal makes the following observations relating to these statutory provisions and their operation in these proceedings, particularly in relation to the important issue of ‘user contributions’ (to which we will return in more detail).
  4. It is clear from the mandatory considerations that the Tribunal can and must have regard to a range of matters in a determination. The weight to be given to each matter is a question for the Tribunal depending on the circumstances before the Tribunal. To the extent mandatory considerations pull in different directions, again this is a matter the Tribunal needs to consider and undertake a balancing exercise. It is essentially an evaluative exercise.
  5. Legitimate business interests of the provider are a factor to consider, and these need to be carefully considered and evaluated. This consideration is referred to expressly in s 44X(1)(a), the objects of Part IIIA (s 44AA) and the pricing principles (s 44ZZCA).
  6. It is important (as one aspect to consider) that the price and terms of access should provide an incentive to a service provider to efficiently (and in a timely fashion) invest in maintaining and improving infrastructure necessary to provide facilities at the Port. Prices that are too low can lead to non-investment or delayed investment, or the non-provision of some infrastructure services.
  7. The significance of this consideration is confirmed by the extrinsic materials to the Trade Practices Amendment (National Access Regime) Bill 2005 (Cth), which introduced the pricing principles. The Revised Explanatory Memorandum to that Bill notes (at [22.2]) that the pricing principles were introduced to address concerns that the potential for access regulation would deter investment in essential infrastructure, and that the pricing principles are intended to ensure that ‘the objects clause has more than just symbolic value, by providing effective market signals for the efficient use of existing resources and for future investment in infrastructure’. The Explanatory Memorandum goes on to explain (at [22.7]) that the pricing principle in s 44ZZCA(a)(ii) requires the ACCC to specifically factor in regulatory and commercial risks faced by service providers, to counter the perception that regulation favours service users:

The reference to regulatory risk in Pricing Principle (a)(ii) is intended to refer to the perception that the exercise of regulatory discretion will be undertaken in a heavy-handed, arbitrary or uneven fashion. While such perceptions may deter investment in any dysfunctional market subject to regulation, regulatory risk takes on greater importance for infrastructure investors, due to the length of time and expense required for service providers to respond to changes in a market, perceptions that regulatory decisions tend to be biased in favour of service users rather than service providers/investors, the scale of investment in infrastructure and the sunk nature of the assets. Pricing Principle (a)(ii) requires regulators specifically to factor in regulatory and commercial risks in setting access prices. This may assist to address perceptions that regulatory bias favours service users.

  1. The other matter to recall is that regulation under Part IIIA is not an end in itself, but rather, the means of promoting effective competition in upstream and downstream markets. In BHP v National Competition Council [2008] HCA 45; (2008) 236 CLR 145, the High Court reviewed the background against which the Competition Policy Reform Act 1995 (Cth) (the ‘1995 Act’) introduced Part IIIA to the Trade Practices Act 1976 (Cth) (the ‘TPA’). The Court quoted (at [13]) from the Second Reading Speech in the Senate on the Bill for the 1995 Act, where the Minister said:

The bill inserts a new Part into the [TPA], to establish a legal regime to facilitate third parties obtaining access to the services of certain essential facilities of national significance. The notion underlying the regime is that access to certain facilities with natural monopoly characteristics, such as electricity grids or gas pipelines, is needed to encourage competition in related markets, such as electricity generation or gas production. Access to such facilities can be achieved if a person seeking access is successful in having the service ‘declared’ and then negotiates access with the service provider.

  1. Glencore already has access to the Port, and this Tribunal has previously reached the view that it was not satisfied that increased access would promote a material increase in competition in the coal export market, or any other dependent market (see Application by Glencore Coal Pty Ltd [2016] ACompT 6 at [157]). These findings were made in the context of whether the service should be declared but are relevant to pricing and terms of access. For instance, there can be no competition-related justification to deduct $912.0 million from the optimised replacement cost (‘ORC’) for “user contributions” on the basis that the deduction will promote competition in related markets.
  2. A number of other matters should be mentioned relating to the statutory provisions under consideration, particularly in respect of ‘user contributions’. As initial observations we make the following comments.
  3. We do not see a deduction being made to the RAB for user contributions as consistent with allowing the Port to recover its efficient costs. Undoubtedly, the concepts of efficient costs and efficient operation appear in several provisions: ss 44X(1)(g), 44AA(a) and 44ZZCA(a)(i). However the efficient costs, pursuant to the methodology adopted by the ACCC, are those which a new entrant would incur, the depreciated ORC (‘DORC’) value. The concept of “efficiency” does not explain or justify any deduction of particular assets for historical reasons.
  4. Subsection 44X(1)(e) provides that in making a determination the ACCC must take into account the value to the service provider of extensions whose cost is borne by someone else. The Tribunal takes the view this factor is directed at situations where the determination requires the provider to extend the facility (for example by extending a train line to a third party’s mine) and is not applicable here.
  5. Then the question arises whether the deduction is justified as being in the interests of those who have a right to use the Service (s 44X(1)(c)) because it will ensure that users do not pay for the same assets twice: once through their initial investment and again through PNO’s charges. This presupposes, however, that the user has made an initial contribution with the expectation of receiving a future price benefit. In the present case, that assumption is not valid. However, we will return later to this issue in more detail.

Ports and Maritime Administration Act 1995 (NSW)

  1. Part 5 of the PMAA governs the imposition of various port charges on either the owner of the vessel in which cargo is loaded or the owner of the cargo being loaded. Ordinarily, such charges are payable to the relevant port authority (see s 68), but by virtue of the 98 year lease arrangement, these charges are payable to PNO in the case of the Port.
  2. As noted above, two charges are relevant to this access dispute: the NSC and the Wharfage Charge.
  3. Section 50 of the PMAA relevantly provides for the imposition of the NSC in respect of the general use by a vessel of the Port and its infrastructure as follows:

(1) A navigation service charge is payable in respect of the general use by a vessel of a designated port and its infrastructure…

(2) Unless the regulations otherwise provide, the charge:

(a) is payable on each entry by the vessel into any designated port, and

(b) is to be calculated by reference to the gross tonnage of the vessel

(4) A navigation service charge is payable by the owner of the vessel concerned.

  1. Section 61 of the PMAA also relevantly provides for the imposition of the Wharfage Charge in respect of the loading and unloading of cargo at the Port as follows:

(1) A wharfage charge is payable in respect of the availability of a site at which stevedoring operations may be carried out.

(3) The charge is payable:

(a) in the case of cargo that is unloaded at the site—by the person who, immediately after it is unloaded, is the owner of the cargo, and

(b) in the case of cargo that is loaded at the site—by the person who, immediately before it is loaded, is the owner of the cargo.

(4) To the extent, however, that the charge is not paid by the person indicated in subsection (3) as liable for its payment, the charge is payable by the person who, at the time payment is demanded by the relevant port authority, is the owner of the cargo.

  1. Relevantly, s 67 of the PMAA provides as follows:

(1) The relevant port authority may enter into an agreement with a person liable to pay any kind of charge under this Part.

(2) Such an agreement may make provision for or with respect to:

(a) fixing the amount of any charge payable by the person to the relevant port authority, and

(b) any other matter which the relevant port authority is permitted by or under this Part to determine in respect of the charge, and

(c) any right or privilege which by or under this Part accrues to the person liable to pay the charge, or which the relevant port authority may confer on the person.

(3) To the extent that provision is so made, the agreement displaces any determinations of the relevant port authority in relation to the charge or to the matter, right or privilege concerned.

  1. Importantly, the PMAA defines for the purposes of that Act the term ‘owner’ when used in the context of a vessel or cargo. In this respect, s 48 of the PMAA relevantly provides:

(1) In this Act, owner of a vessel or cargo means (subject to this section) the person who owns the vessel or cargo.

(2) A reference in this Act to the owner of a vessel includes a reference to:

(a) a person registered as the vessel’s owner in the relevant authority under the marine legislation or the National law or other certificate of registry for the vessel, or

(b) a person who has chartered the vessel.

(4) A reference in this Act to the owner of a vessel or cargo includes a reference to any person who, whether on the person’s own behalf or on behalf of another:

(a) exercises any of the functions of the owner of the vessel or cargo, or

(b) represents to the relevant port authority that the person has those functions or accepts the obligation to exercise those functions.

  1. This section, and more specifically s 48(4)(b), formed part of the basis for the scope of the determination defined by the ACCC in its Final Determination, and is a topic of contention between PNO and Glencore in this access dispute.
  2. Separately, Division 6A of the PMAA was introduced by amendments made on 26 November 2012. It allows the relevant port authority (PNO in the case of the Port) to levy on port users ‘infrastructure charges’ to fund investment in infrastructure projects such as the acquisition or development of land to be used as part of the port precinct, or the provision of services and facilities by the operator of the Port. As will be seen, this Division is relevant to one of the topics of contention raised in Glencore’s application regarding user contributions.
  3. Finally, we mention cl 11 of the Ports and Maritime Administration Regulation 2012 (NSW), which provides as follows relating to the responsibility of an ‘owner’ of a vessel to provide certain particulars to PNO relevant to the NSC:

The owner of a vessel in respect of which a navigation service charge is payable must, at such time as the relevant port authority requires, furnish the relevant port authority with the following particulars:

(a) the owner’s name and address,

(b) the name, identifying particulars and relevant voyage number of the vessel,

(c) the gross tonnage of the vessel,

(d) the port in respect of which the navigation service charge is payable,

(e) the date on which, the time at which, and the purpose for which, the vessel entered the port,

(f) such other information with respect to payment of the navigation service charge as the relevant port authority reasonably requests.

Maximum penalty: 20 penalty units.

PRELIMINARY ISSUES

  1. Before embarking on the parties’ submissions regarding the substantive aspects of the access dispute, it is appropriate to briefly address the two preliminary issues that arose as part of the case management of the applications before the Tribunal.

Extension of the statutory timeframe for the Tribunal’s determination

  1. As noted above, the Tribunal is statutorily required to make its determination on applications brought before it under Part IIIA within the ‘consideration period’, ordinarily a period of 180 days from the date of the applications save for the effect of any extensions of time or an agreement to disregard certain periods of time (see s 44ZZOA).
  2. PNO’s application was made on 8 October 2018 and Glencore’s application was made a day later on 9 October 2018. In the absence of any extension of time or an agreement to disregard certain periods of time, the ordinary application of the consideration period would require the Tribunal to make its determination as early as 6 April 2019.
  3. At the initial case management hearing of the applications, it became apparent that the hearing timetable agreed between the parties and the ACCC was such the applications would not – or rather could not, for a want of sufficient time for the parties and the ACCC to prepare – be heard by the Tribunal, much less decided by the Tribunal, prior to the date on which the Tribunal would be required to make and publish its determination. The parties and the ACCC subsequently gave further consideration to the most appropriate means by which to effectively extend the timeframe for the Tribunal’s determination on the applications to a date that afforded time for the applications to be heard and for the Tribunal to make its determination. Ultimately, it was considered that an agreement to ‘stop the clock’ pursuant to s 44ZZOA(5) was the most appropriate means.
  4. On 2 April 2019, the Tribunal issued a direction to memorialise its agreement pursuant to that subsection with each of the parties and the ACCC. By that direction, it was agreed that the period between 2 April 2019 and 15 July 2019 would be disregarded for the purposes of calculating the consideration period. The effect of this agreement was that the Tribunal would be required to make its determination on the applications before it by as early as 20 July 2019.
  5. Due to a number of factors, including the nature of the disputation between the parties and the complex issues that arose for determination, the Tribunal concluded that it would not be in a position to make its determination on the applications before it by that date. Accordingly, by notice dated 13 June 2019, the Tribunal advised the Treasurer, pursuant to s 44ZZOA(8) of the Act, that it would make its decision by 29 November 2019. In keeping with the requirements of that section, the Tribunal provided a copy of the notice to each of the parties and the ACCC and published a short form notice in The Australian newspaper. A copy of the notice to the Treasurer was also uploaded to the Tribunal’s website.

Glencore’s application for the Tribunal to request further information

  1. On 12 February 2019, Glencore made an application seeking that the Tribunal request additional information in the form of an expert report from Baggerman Associates, Marine Dredging Consultants, dated 12 February 2019 (the ‘Baggerman Report’).
  2. Pursuant to s 44ZZOAAA(4) the Tribunal may request such information that the Tribunal considers reasonable and appropriate for the purposes of making its decision on a review under Part IIIA.
  3. If so requested, that information must be considered by the Tribunal in addition to the information that the ACCC took into account (see s 44ZZOAA(a)(ii)), as noted above.
  4. Glencore contended that the Baggerman Report should be requested (and included in the materials considered by the Tribunal) because it would assist the Tribunal to make a fully informed determination in relation to the costs of dredging. Specifically, it was claimed that the Baggerman Report would shed light on whether, as contended by Glencore, dredging of the entrance channel to the Port could be undertaken with modern dredging equipment alone, or whether, as contended by PNO, additional and expensive steps (specifically drilling and blasting pre-treatment) would need to be undertaken before dredging could occur.
  5. On 27 February 2019, the Tribunal issued a memorandum to the parties and the ACCC which stated that it would refuse Glencore’s application, but that its reasons for doing so would be provided upon the publication of these reasons.
  6. Before proceeding further on this topic, we should mention the way in which Glencore put its request, recalling this is a request for Glencore effectively to rely upon another expert report commissioned by it in respect of issues that were before the ACCC.
  7. In support of its application, Glencore submitted:

Access disputes under Part IIIA are difficult matters for access seekers as they face an asymmetry in obtaining data as to the relevant cost structures that the access provider enjoys. The Baggerman Report addresses a critical gap in the material before the ACCC. In Glencore’s submission, its consideration is essential to permit the Tribunal to make a fully informed determination of an important issue in this proceeding, namely whether, as contended by Glencore, dredging of the Entrance Channel to the Port could be undertaken with modern dredging equipment alone (as was done, for example, at Walker Shoal near Darwin) or, as argued by PNO, whether substantial additional costs for pre-treating hard rock with drilling and blasting should be included.

  1. At the outset, we do not accept that the Baggerman Report “addresses a critical gap” in the material before the ACCC. It supplements that material, but there is no critical gap. Further, the consideration of the Baggerman Report is not “essential” to permit the Tribunal to make the informed decision of the issue identified by Glencore. The Tribunal already has material on this topic on which it can make an informed decision.
  2. In addition, the context in which it is sought to introduce the Baggerman Report is a factor to take into account.
  3. In the lead up to the Draft Determination, Glencore, through its consultant engineers, Arup, contended that modern ‘Cutter Suction Dredgers’ (‘CSDs’) are capable of dredging of the entire Port, including the hardest rock located at the Entrance Channel (referred to as ‘dredging direct’). To support its opinion, Arup referred to the dredging of Walker Shoal in Darwin in 2014 where ‘rock with a greater strength to the Entrance of Newcastle was dredged direct by the CSD, Athena’.
  4. PNO rejected this approach and, via its experts, AECOM, argued that the very hard rock at the Entrance Channel could not be dredged by CSDs and ‘would require the mobilisation of additional plant at significant cost’. AECOM also proffered the view that ‘[d]rilling and blasting then double handling with a TSHD [Trailer Suction Hopper Dredger] is also a much slower process than using a CSD’.
  5. Glencore and PNO were also unable to agree on the volumes and types of material that were required to be dredged, particularly from the Entrance Channel.
  6. In its Draft Determination, the ACCC accepted the position proposed by Arup:

… [B]ased on the evidence before it, the Commission has concluded that Arup’s modelling provides a more robust approach to estimating the volume and type of material to be dredged. This extends to the UCS and RQD figures. The Commission also notes that Arup’s proposed methodology to dredging is based on what it submits has occurred in practice on at least one occasion such that it goes beyond a theoretical exercise. The Commission considers that these two factors suggest that the use of more advanced technology as proposed in Arup’s report is an appropriate assumption for the purposes of a DORC valuation for this arbitration. This also informs the Commission’s consideration of dredging costs below.

  1. In response to this finding, on 17 August 2018, PNO provided the ACCC with new expert material to explain why Arup’s proposed dredging methodology was impractical. This included material claiming that the sea conditions at the Port restricted the use of a CSD for much of the year and that the rock type and strengths at the Port were incomparable with those at Walker Shoal. The ACCC was critical of PNO, noting that it could have provided this information earlier in the arbitration as it was aware of Glencore’s position well before the Draft Determination. Nevertheless, the ACCC had regard to the further material.
  2. Having received PNO’s additional material, on 17 August 2018, Glencore was required to provide any reply to the additional material from PNO within 10 days.
  3. On 3 September 2018, Glencore provided the ACCC with a further report by Arup, responding to PNO’s additional material with as much information as it could obtain in the time available to it. That report included revised geological modelling for the Port but noted that the geotechnical data for Walker Shoal was the subject of confidentiality to a third party and thus could not be disclosed at that time. Arup also sought to address the claim that sea conditions at the Port were not suitable for the economic use of a CSD. Arup pointed out that smaller dredgers had been employed at the Port throughout its history and assessed the ‘operating envelope’ of newer, significantly larger CSDs.
  4. In its Final Determination, the ACCC departed from the view it had expressed in its Draft Reasons and instead adopted the position argued by PNO: that pre-treatment of the rock with drilling and blasting was necessary. The ACCC took this view “specifically having had regard to the additional material submitted by the parties following the Draft Determination.”
  5. In our determination of whether to receive and consider the Baggerman Report, a number of matters needed to be considered.
  6. It is significant that the issues the Baggerman Report addressed were before the ACCC and well-known by the parties at least upon the delivery of the Draft Determination.
  7. The Baggerman Report addressed the following questions:

(1) the extent to which the Entrance Channel at the Port could, as a practical matter and had it not already been dredged, be dredged today using a modern CSD, without a requirement for drilling and blasting pre-treatment; and

(2) to the extent that a significant portion of the Entrance Channel could be dredged by use of a CSD, the approximate total cost of dredging (including any necessary drilling and blasting pre-treatment).

  1. In addressing these questions, Baggerman Associates:

(1) introduced background information regarding dredging technology, including CSDs and other methods such as drilling and blasting;

(2) considered the sea (wave) conditions in which modern CSDs can operate and considered independently collected data relating to the actual conditions experienced at the Entrance Channel over many years;

(3) considered the rock types and strengths that can be dredged by modern CSDs, analysed the geotechnical aspects of the rock at the Entrance Channel by reference to bore hole data, and compared them with rock conditions found at Walker Shoal – a project in which Baggerman Associates was intimately involved; and

(4) determined an economically appropriate work method for dredging the Entrance Channel and calculated the estimated costs of doing so. Reference was made to the volumes and geotechnical characteristics of the various materials to be removed, along with the specific production rates expected of modern dredging equipment operating at the Entrance Channel; and the real costs likely to be incurred in a commercial project.

  1. It cannot be said that any of these questions or issues were only raised by the Draft Determination.
  2. When on 17 August 2018, PNO lodged material in response to the Draft Determination, it included reports from Evers Consult on dredging and Akuna Dredging Solutions on dredging methodology and the assessment of hard rock at the Entrance Channel to the Port.
  3. Then on 3 September 2018, when Glencore lodged its submissions in reply to PNO’s submission on 17 August 2018, that submission noted as follows:
    1. The PNO Submission repeats a number of arguments already addressed by Glencore in previous submissions made to the ACCC in this arbitration and, in particular, many of these arguments have been addressed in Glencore’s submission dated 17 August 2018. As such, Glencore does not seek to address each argument in the PNO Submission and instead maintains and refers to Glencore’s previous submissions in this matter, and in particular, its submissions to the ACCC dated 17 August 2018…
    2. Enclosed with this submission is a report from Synergies Economic Consulting (Synergies Report) and a confidential report from Arup (Arup Report) which also respond to Direction 2 of the ACCC’s Direction.
  4. The Synergies report dated 3 September 2018 (referred to by Glencore) noted:

After considering the suite of reports that PNO has submitted, they, while lengthy, introduce only limited new information. In many instances, PNO’s submission restates material from previous submissions, to which we have previously responded.

  1. We accept that it may have been difficult for Glencore to respond to the Draft Determination and material put forward by PNO on 17 August 2018. However, Glencore acted by 3 September 2018 in providing the ACCC with a further report from Arup on the material then obtained and available, and significantly did not request an extension of time to put further material before the ACCC. Presumably, Glencore considered it did not need to put further material before ACCC: after all, the Draft Determination on this issue was in its favour.
  2. It was only upon its review of the Final Determination that Glencore wanted to rely on further material, as attested to in the affidavit of its solicitor (Mr Poddar) sworn 12 February 2019:
    1. Upon review of the Final Determination, I formed a view that the ACCC had relied on the Further PNO Material lodged on 17 August 2018 in response to the Draft Determination, and that Glencore had not had an adequate opportunity to address the matters which had impacted on the decisions reached by the ACCC in the Final Determination.
    2. As such, the need for Glencore to seek to engage an expert to provide an expert report in response to the Evers Report and Akuna Report did not become apparent until after publication of the Final Determination on 15 September 2018.
  3. As Mr Poddar also attested, to address the PNO material (once the decision had been made to obtain more information after the Final Determination was published) would require time and resources to access information and obtain inputs from wave specialists.
  4. Even accepting that Glencore could not reasonably have made available to the ACCC the Baggerman Report in the time limit it proposed, Glencore did not request an extension of time (presumably because it did not think it necessary) and, as we have indicated, the Baggerman Report covered issues well identified during the course of the arbitration before the Draft Determination was published.
  5. Then it is important to recall the statutory context.
  6. In a review of a final determination under s 44ZP, the Tribunal must only consider specified information. This primarily comprises the information the ACCC took into account in connection with the making of the determination to which the review relates, subject to the application of s 44ZZOAA.
  7. There are a limited number of other categories of information or material that the Tribunal must have regard to that provide a potential avenue for “new” material (that is, material the ACCC did not take into account in making the Final Determination) to be considered as part of the review process. Each of these exceptions is only enlivened essentially by the request of the Tribunal.
  8. In light of the above, the text and context make clear that s 44ZZOAA operates to limit the material that the Tribunal may consider in a review under s 44ZP. As such, to the extent “new” information is allowed into the review process it may only come via:

(1) a request from the presiding member of the Tribunal for the ACCC to give assistance to the Tribunal pursuant to s 44ZP(5);

(2) a request from the presiding member of the Tribunal by written notice requiring the ACCC to give information and to make reports for the purposes of the review pursuant to s 44ZP(5A);

(3) a request from the Tribunal for ‘such information that the Tribunal considers reasonable and appropriate for the purposes of making its decision on a review’ pursuant to s 44ZZOAAA(4).

  1. In connection with s 44ZZOAAA(4), the Tribunal must positively form a view that any information it requests is ‘reasonable and appropriate’ for the purposes of making its decision.
  2. As a starting proposition, where a party before the Tribunal urges it to request information that could reasonably have been made available to the ACCC before it made a final determination, it would not be reasonable for the Tribunal to request such information. This is because in order for the arbitration before the ACCC to have meaning, it is critical that the parties place before the ACCC all of the material that they consider to be relevant to the determination of the access dispute.
  3. In considering making any request for information, the Tribunal should also keep firmly in mind that the CCA provides for the Tribunal to make a decision within 180 days from when the application for review is made: s 44ZZOA. Although this period can be lengthened, either by agreement of relevant persons or by the Tribunal extending the time in which it has to make a decision, it is an indication that the Tribunal should be able, and should endeavour, to make decisions within that period unless there are exceptional circumstances. In this way, the time period in which it is intended that a decision will be made (referred to as the ‘expected period’ or the ‘consideration period’) should inform whether any request for ‘new’ information is reasonable and appropriate.
  4. Therefore, whether it is ‘reasonable and appropriate’ to request information will be necessarily informed by a consideration of the text and context of the ss 44ZZOAAA(4) and 44ZZOAA, including:
    • that the primary material on which the review is to be based is that which was before the ACCC when it made the determination, which indicates that the review process before the ACCC is to be a meaningful one, and one in which the parties have every incentive to place the material that they consider to be relevant to the resolution of the dispute before the ACCC; and
    • the limited timeframes in which the Tribunal has to make a decision, which indicates that it is not intended that there be any material broadening of the information that was before the ACCC when it made its final determination.
  5. Finally, we observe that Glencore submitted that it is in the public interest for the Baggerman Report to be received and considered by the Tribunal because of its ‘broader relevance to future access issues’. Undoubtedly this may be so in that any determination by the Tribunal with the Baggerman Report before it will be made public and so will have some ‘precedent’ value in that regard; but this is but one consideration to be taken into account.
  6. We accept that the Baggerman Report does contain information that is of general relevance to the declared services the subject of the arbitration.
  7. At a high level, it goes to the optimised replacement cost of the assets required to provide the Service, which as will be seen, represents a significant battleground in this access dispute. However, relevance is not the only focus of the inquiry invited by s 44ZZOAAA(4). Indeed, we consider that requesting the Baggerman Report pursuant to that subsection, and at the behest of Glencore, would not be in keeping with the purpose of the statutory power, keeping in mind the Tribunal’s role as re-arbitrator in applications of this kind is constrained in the material it may consider in this role.
  8. In respect of the specific subsection, the purpose of s 44ZZOAAA(4) is for the Tribunal to request information which it has identified as a means to fill a gap in its knowledge. It is not to be used to introduce new information – much less information which is the product of a commission of the party seeking to have it requested – that was not available at the time of the Final Determination. In this respect, the absence of any mechanism designed to be used by a party seeking to adduce new information for the Tribunal’s consideration is telling.
  9. The ACCC recognised in its Final Determination that although the arbitration was between Glencore and PNO and conducted on the basis of the issues and materials put forward by the parties, the Final Determination and the supporting statement of reasons may be relevant to other users in their future negotiations with PNO. Similar observations could be made about this review process undertaken by the Tribunal. Nonetheless, the benefit of the Tribunal’s consideration of the information for any future negotiations or arbitrations needs to be balanced against the intent of the regime: that the parties to an arbitration put all relevant information before the ACCC as the original decision-maker.
  10. Nevertheless, as we have already mentioned, this access dispute is bilateral in nature. It is open to the ACCC (and the Tribunal) to determine different terms and conditions of access to the Service for different users of the Service. We also mention that the Tribunal is not aware that any other user of the Service has notified any access dispute to the ACCC in relation to the Service.
  11. Further, any pricing methodology adopted in one arbitration may change in a later arbitration, particularly if changes in future events suggest different assumptions may be appropriate to adopt in any pricing approach.
  12. Therefore, whilst many considerations needed to be evaluated in determining whether it was reasonable and appropriate to request the Baggerman Report, in the end the proper approach was not to make any such request.
  13. Finally, it bears noting that the Tribunal was aware of the contents of the Baggerman Report and its relevance to the issues between the parties in this re-arbitration at the time it made its decision on the issue. The Tribunal did not consider it was reasonable and appropriate to request the Baggerman Report in view of the ACCC process, the information already before the Tribunal and the statutory context of the Tribunal’s task. We also observe that assuming the Tribunal has the power to request the Baggerman Report now it has had a hearing and considered the submissions of the parties, the Tribunal would still not consider it reasonable and appropriate to request (on its own motion) the Baggerman Report for the same reasons. The Tribunal still considers that it does not require the Baggerman Report to assist it in the re-arbitration and does not consider that any request for such information is reasonable and appropriate for the purpose of making its determination in this re-arbitration.

TOPICS OF CONTENTION

  1. PNO and Glencore identified seven topics of contention for the Tribunal’s consideration. In support of their positions, each made a series of written submissions (received between 1 March 2019 and 15 April 2019), presented oral argument before the Tribunal over six days between 6 and 13 May 2019, and provided subsequent documentation to the Tribunal.
  2. The ACCC also made submissions regarding each of the applications in accordance with the Tribunal’s directions dated 6 December 2018 and subsequent requests, which in effect required the ACCC to give assistance for the purposes of the Tribunal’s review pursuant to s 44ZP(5).
  3. The seven topics of contention are summarised below:

(1) the scope of the Final Determination;

(2) the ACCC’s deduction of user contributions from the RAB;

(3) the costs of channel dredging;

(4) the inclusion in the RAB of $145 million for the importation of reclamation bunding material, and the associated issue of user-funded reclamation bunding works;

(5) the length of the construction period and the associated issue of the amount of interest during that construction period;

(6) whether prices should be permitted to be set at a higher level than what represents an appropriate return on coal-related assets; and

(7) the true-up in respect of forecasted capital expenditure, and any difference between forecast capex and actual capex within each five-year period.

SCOPE OF THE FINAL DETERMINATION

  1. As noted above, the ACCC concluded that the regulated prices set out in its Final Determination would only cover access to the Service:

(1) where Glencore, either directly or by agent, charters a vessel to enter the Port precinct and load Glencore coal; and

(2) where Glencore makes a representation to PNO of the kind referred to in s 48(4)(b) of the PMAA that it has the functions of the owner of a vessel, or accepts the obligation to exercise those functions, in order to enter the Port precinct and load Glencore coal.

  1. For ease of reference, we will refer to the above as the first and second inclusive limbs, as appropriate, of the determination scope adopted by the ACCC.
  2. The ACCC also expressly excluded certain matters from the scope of its Final Determination. As noted above, these matters were:

(1) the terms and conditions of access in respect of vessels carrying coal which have not been chartered by Glencore or in respect of which Glencore has not made a representation of the kind referred to in s 48(4)(b) of the PMAA;

(2) the terms and conditions of access for vessels other than those calling at the coal terminals at the Port, and

(3) any charges imposed by PNO other than the NSC and the Wharfage Charge.

  1. Again, for ease of reference, we will refer to the above as the first, second and third exclusive limbs, as appropriate, of the scope adopted by the ACCC.
  2. PNO and Glencore both challenged this scope of the Final Determination. PNO contended it was too broad, while Glencore contended it was too narrow. Further, and as we will indicate later, the ACCC suggested a revised scope different from that in the Final Determination.

PNO’s submissions

  1. PNO’s primary contention was that, having regard to the provisions of Part IIIA, the ACCC had no statutory power to extend the scope of its Final Determination to the circumstances described in the second inclusive limb. In the alternative, PNO contended that even if it was within the ACCC’s statutory power (which PNO denied), the inclusion of the second inclusive limb would reveal a failure by the ACCC to have had proper regard to the mandatory considerations set out in Part IIIA.
  2. PNO first turned to the description of the Service. It argued the focus of that description was access to and use of the Port’s shipping channels, including its berths. On PNO’s submission, that meant from both a practical perspective, and from the perspective of a proper construction of the description of the Service, that the only persons who could conceivably access or use the Service are persons that control a vessel (whether through direct ownership or a charter arrangement) for the purposes of loading or unloading at a terminal. This formed the foundation of PNO’s arguments against the ACCC’s adoption of the second inclusive limb in its determination scope.
  3. PNO then referred to a number of provisions of Part IIIA including ss 44S, 44U, 44V, 44W, 44ZO(4), 44ZV, 44ZY and the definition of ‘third party’ in s 44B. PNO also referred the Tribunal to a decision of the Full Court of the Federal Court of Australia, which held that in the context of Part IIIA the word ‘access’ should be given its ordinary meaning, being ‘a right or ability to use a service’: Port of Newcastle Operations Pty Ltd v Australian Competition Tribunal [2017] FCAFC 124; (2017) 253 FCR 115. The net effect of the provisions and the authority referred to was said to be that the ACCC (and indeed the Tribunal) has statutory authority to make access dispute determinations only in respect of the ‘third party’ who sought to access the Service and who had notified the access dispute to the ACCC in accordance with the provisions of the CCA. In other words, the ACCC and the Tribunal only have the power to arbitrate a bilateral dispute between the relevant access provider and a (single) access seeker, not the power to arbitrate general terms of access between an access provider and all other persons.
  4. PNO then referred to s 48 of the PMAA which among other things, deems for the purposes of that Act a person to be an ‘owner’ of a vessel, where that person makes a representation that it has the functions of the owner or accepts the obligations of the owner through its conduct. On PNO’s submission, the purpose of this deeming provision was to assist the relevant port authority in recovering charges for use of port infrastructure.
  5. PNO submitted that the provisions of the PMAA (a State Act) were not intended to, and in any event could not for constitutional reasons, broaden the powers of the ACCC or the Tribunal to make access dispute determinations under the CCA (a Commonwealth Act). In other words, representations made pursuant to a section of the PMAA could not change who is in fact the owner of a vessel (when the word ‘owner’ is used in its ordinary sense) or alter the identity of the person who is in fact accessing or using the Service. It was on this basis that PNO contended that the second inclusive limb exceeded the ACCC’s power under Part IIIA to make a determination dealing only with the terms and conditions of access by the ‘third party’ that originally notified the dispute to the ACCC.
  6. PNO also identified certain unintended and undesirable consequences of the second inclusive limb. First, by allowing Glencore to take advantage of the ACCC’s arbitrated prices whenever a s 48(4)(b) declaration was made, Glencore could engage in a form of arbitrage. For example, Glencore could represent to PNO that it had undertaken to pay another user’s fee for accessing the Service thereby permitting that user, who was not a party to the ACCC’s arbitration, to take advantage of the regulated prices PNO must provide to Glencore. Second, and relatedly, if the second inclusive limb of the ACCC’s determination scope were allowed to stand without intervention from the Tribunal, PNO would have no certainty as to whom it is required to provide Glencore’s arbitrated terms of access which, on PNO’s submissions, would, contrary to s 44X(1)(a) of Part IIIA, fail to take account of the service provider’s legitimate business interests. This consequence, as it was described by PNO, was also argued as illustrative that – in the alternative world where the ACCC had statutory power to extend the scope of its determination in the manner identified in the second inclusive limb (which PNO denies) – the ACCC had, in any case, made its determination beyond power because it had plainly not taken into account PNO’s legitimate business interests by extending the scope to the second inclusive limb.

Glencore’s submissions

  1. Glencore contended that the scope for the ACCC’s determination was unduly restrictive on account of the first exclusive limb which expressly excluded the arbitrated NSC from applying in respect of vessels carrying coal which have not been chartered by Glencore or in respect of which Glencore has not made a representation of the kind referred to in s 48(4)(b) of the PMAA. Glencore sought for the first exclusive limb to be excised from the scope.
  2. Glencore advanced this contention from two fronts. On one front, Glencore argued that in order to fulfil the purpose of declared services regime in Part IIIA, the Tribunal needed to approach the matter from a practical and commercial point of view. This meant taking a ‘substance over form’ approach by ensuring that no matter the precise manner in which Glencore and its customers choose to contract with one another, the arbitrated terms and conditions of access to the Port should apply when Glencore is exporting its coal from the Port. On the other front, Glencore urged the Tribunal not to take an overly restrictive view of what the Service actually is. It argued that whenever Glencore uses the Port and its associated facilities and infrastructure to load coal onto a vessel for export, it was ‘using’ or ‘accessing’ part of the Service within the meaning of Part IIIA, and therefore should be able to enjoy its arbitrated prices.
  3. Taking each of the fronts advanced by Glencore in turn, its primary submission in respect of the first was that because Glencore bears the ultimate economic cost of port charges in circumstances where vessels that are using the Service are chartered by Glencore’s customers and carrying Glencore’s coal, in order to effect the Final Determination, this practical and commercial reality should be recognised by excising the first exclusive limb, thereby extending the scope accordingly.
  4. In support of this, Glencore submitted that its coal is sold to export customers under a number of different contract types, but that no matter the type, Glencore seeks to sell coal at the most competitive price on a delivered basis. In some cases, Glencore will arrange for the transporting vessel, and in other cases, the customer will make those arrangements. Glencore submitted that in either case, market structure and dynamics are such that Glencore bears the ultimate economic burden of the NSC imposed by PNO for use of the Service in the form of lower delivered coal prices. It claimed that for the Final Determination to only to apply to circumstances where Glencore arranges for the delivery of coal to its customers – and to ignore instances where Glencore’s customers make such arrangements – risks undermining the utility of the application of the Part IIIA regime to the Port.
  5. On the second of Glencore’s two fronts, Glencore sought to emphasise that in circumstances where vessels using the Service are chartered by Glencore’s customers and carrying Glencore’s coal, Glencore is still a third party accessing or seeking access to the Service for the purposes of Part IIIA. It was said that by using or accessing the berthing boxes and the revetments associated with the berthing boxes for the purposes of loading coal into vessels, Glencore is accessing the Port’s infrastructure facilities which are a critical component of the Service as declared. Conversely, using the berthing boxes was not simply a matter of using an area of water otherwise unconnected with the Port infrastructure. In other words, once Glencore is using part of the Service (by loading coal onto vessels), the rest of the Service is incidental and likewise being used as a necessary incident of the loading of coal. Glencore willingly conceded that the relevant service is defined by the declaration of the Service, but pressed that it should be understood as including, consistent with the provisions of Part IIIA and in the context of the Tribunal’s determination in which it declared the Service, the facility and associated infrastructure by means of which the Service is provided.
  6. Glencore also pointed to the fact that it was subject to and liable to pay the Wharfage Charge no matter whether Glencore or its customers were responsible for chartering the relevant vessel. It effectively inferred from this that Glencore was using, or PNO was providing access to, the Service. On this basis, Glencore contended that it should have the benefit of its arbitrated prices in both the circumstances outlined in the ACCC’s determination scope, as well as in respect of vessels carrying coal which have not been chartered by Glencore or in respect of which Glencore has not made a representation of the kind referred to in s 48(4)(b) of the PMAA.
  7. Glencore then proceeded to advance its first alternative submission, which we briefly canvassed above: that even if Glencore is not a user or access seeker of the Service when it loads its coal onto vessels at the terminal by virtue of s 44V(2), Glencore is still utilising the Service by using facilities which depend on the berthing box infrastructure. Glencore argued that the effect of this subsection was to open up any other matters relating to access such that, once it is accepted that Glencore is using certain facilities to load its coal onto vessels, and those facilities are supported by the berthing box facilities (which are, on Glencore’s submissions, expressly included within the Service), it follows that Glencore is a user of the Service whenever it is loading its coal onto vessels at the Port.
  8. Glencore then proceeded to advance its second alternative submission. Glencore began by observing that under the ACCC’s scope, PNO must charge the NSC at the regulated price when Glencore is the owner or charterer of the vessel transporting Glencore’s coal but may charge a higher unregulated NSC when someone else is the owner or charterer of the vessel transporting Glencore’s coal. Glencore then referred to the pricing principle found in s 44ZZCA(b)(i), which must be taken into account by the ACCC by virtue of s 44X(1)(h):

that the access price structures should … allow multi-part pricing and price discrimination when it aids efficiency …

  1. Glencore then submitted that the sort of price discrimination brought about by the ACCC’s scope, and more specifically the first exclusive limb of that scope, was not the sort that aided ‘efficiency’ as required under the pricing principle in s 44ZZCA(b)(i).
  2. Finally, Glencore made a submission directly in respect of s 48(4) of the PMAA. It contended that s 48(4) of the PMAA served as a useful mechanism to determine in what circumstances a person is accessing the Service. It was submitted that both when a formal representation is made pursuant to that section, and even when no such representation is made but Glencore is loading its coal onto another person’s vessel (with the implicit authority to do so, lest the tort of trespass be committed by Glencore against the ship owner), it is apparent that Glencore is using or accessing (within the meaning of Part IIIA) the Service. On that basis, Glencore contended that the ACCC was right to include the second inclusive limb as part of its defined scope.

ACCC’s submissions

  1. In its written submissions, the ACCC responded to the PNO and Glencore challenges to the scope of the Final Determination.
  2. In respect of PNO’s submissions, the ACCC contended that the imposition of legal liability to pay for a service is a strong indicator that the service is or will be supplied to that person, or is at least for their benefit. On this account, when Glencore makes a representation of the kind referred to in s 48(4)(b) – thereby making itself liable to pay the NSC – this suggests that Glencore is a user of the Service. The ACCC also dismissed PNO’s concerns about the implications of preserving the second inclusive limb of the determination scope. On the risk of creating an arbitrage opportunity, the ACCC submitted that the concern was overstated because it only applies where the representation is made in order for a vessel to enter the Port to load Glencore coal, meaning it only applies where Glencore coal is loaded. The ACCC considered it was unlikely that Glencore would deploy its potential arbitrage opportunity to grant its coal export competitors what would be, in essence, a reduction to those exporters’ cost base. On the spectre of there being uncertainty as to whom PNO would be required to offer Glencore’s arbitrated prices, the ACCC dismissed this on the basis that PNO would presumably be in a position to know when another person makes a representation of the kind referred to in s 48(4)(b) and therefore the circumstances in which Glencore will be considered to have made such a representation.
  3. However, the ACCC did at the hearing endorse PNO’s characterisation of the Service. Counsel for the ACCC said that the Service did not itself directly involve the loading and unloading of coal – it involved the accessing of the shipping channels and berths, a purpose of which was the loading and unloading of coal. Counsel for the ACCC also expressed support for PNO’s view that the Service, being relevantly described as ‘the right to access and use the shipping channels (including berths next to the wharves as part of the channels)’ did not strictly include use of or access to the wharves.
  4. In respect of Glencore’s submissions, the ACCC took issue with Glencore’s assessment that the determination scope would permit PNO to engage in price discrimination between economically identical transactions, that is, transactions for the sale of coal that are identical save for who of either the vendor or customer arranges for the transportation of the coal. The ACCC denied that the scope permitted such price discrimination and that such transactions are in any case economically identical. The ACCC contended that s 44ZZCA, which contains the pricing principle referred to by Glencore, only ever prevents price discrimination where a price falls within a determination. So to that extent, alleging price discrimination between a regulated price (which, as is apparent, falls within a determination) and an unregulated price (which falls outside of a determination) is circular.
  5. The ACCC also dismissed Glencore’s reliance on its liability to pay the Wharfage Charge as demonstrative of it using the Service. Counsel for the ACCC clarified that the question of whether or not the Wharfage Charge (and thereby the use of ‘sites’ for which it is levied) falls within the Service was not a live issue before the ACCC. Rather, before the ACCC, the parties had provided an agreed model of charges and the Wharfage Charge was fixed (that is to say, agreed).
  6. Separately, at the hearing before the Tribunal, the ACCC stated that, on further reflection, certain amendments should be made to clarify, but not substantively change, the meaning of the first inclusive limb of the determination scope. In response to this indication the Tribunal invited the ACCC to set out its proposed amendments to the scope, and it did so by a separate written document provided to the Tribunal following the hearing. That document explained that the ACCC considered the following amendments to clause 2 of its Final Determination were appropriate:

2.1 The scope of the determination includesis confined to the terms and conditions of access:

a. where Glencore owns or, either directly or by agent, charters a vessel tothat enters the Port precinct and loads Glencore coal, and / or

b. where Glencore falls within the extended definition of “owner of a vessel”makes a representation to PNO of the kind referred to in section 48(4)(b) of the Ports and Maritime Administration Act 1995 (the PMAAthat is has the functions of the owner of a vessel, or accepts the obligation to exercise those functions, in order toin respect of a vessel entering and using the Port precinct andin order to load Glencore Coal., as a consequence of which Glencore:

(i) is liable to pay the navigation service charge under section 50(4) of the PMAA; and

(ii) as a person liable to pay that charge, has the authority under section 67 of the PMAA to negotiate with the relevant port authority with respect to: fixing the amount of any charge payable by the person to the relevant port authority, and any other matter which the relevant port authority is permitted by or under Part 5 of the PMAA to determine in respect of the charge, and any right or privilege which by or under Part 5 of the PMAA accrues to the person liable to pay the charge, or which the relevant port authority may confer on the person.

2.2 For the avoidance of doubt, the determination does not apply to:

a. the terms and conditions of access to apply in respect of vessels carrying coal that have not been chartered by Glencore or in respect of which Glencore has not made a representation of the kind referred to in section 48(4)(b) of the PMAA,

ba. terms and conditions of access for vessels other than those calling at the coal terminals at the Port, and

cb any charges imposed by PNO other than the Navigation Service Charge and the Wharfage Charge.

  1. Counsel for the ACCC claimed that redrafting the scope in this manner would assist in making clear that whenever a person falls into the definition of ‘owner’ under the PMAA, then the determination applies.

Consideration

  1. Each of PNO, Glencore and the ACCC were in agreement that in determining the appropriate scope for the application of the determination, the starting point is the description of the Service, as declared by the Tribunal on 16 June 2016. We agree. To repeat it, the Service declared by the Tribunal on that date was:

the provision of the right to access and use the shipping channels (including berths next to the wharves as part of the channels) at the Port of Newcastle (Port), by virtue of which vessels may enter the Port precinct and load and unload at relevant terminals located within the Port precinct and then depart the Port precinct.

  1. Put simply, the debate between the parties and the ACCC regarding the scope of the determination is resolved by answering the question what it means to access or use the Service. No one suggested the phrase ‘right to’ altered or impacted on the proper construction of the Service. PNO says that to use or access the Service means to navigate the shipping channels of the Port. Because of this, only a person controlling or in charge of a vessel is able to use or access the Service, which means that Glencore is only using or accessing the Service when it owns or charters a vessel to transport its coal. On the contrary, Glencore says that to use or access the Service means using any part of facilities or infrastructure of the Port, including loading of Glencore coal onto a ship. In reaching this view, Glencore relies on the language which follows ‘by virtue of which’ and say that the activity of loading and unloading at relevant terminals is so central to the economic exercise that is the subject of the Service declaration, that to construct the Service in any other way would be unduly narrow. On the back of this approach, Glencore says that it is accessing or using the Service whenever it loads its coal on vessels (regardless of who controls them) because it uses or accesses part of the Port infrastructure to do so.
  2. Looking first to the terms of the Service, the primary focus of the declaration is on ‘the provision of the right to access and use the shipping channels’. The parenthetical language that follows is inclusive: ‘(including berths next to the wharves as part of the channels)’. It helps to clarify, almost in a ‘for the avoidance of doubt’ fashion, that the ‘right to access and use the shipping channels’ is not limited to the thoroughfares of those shipping channels which are used by vessels to navigate the Port. In other words, when reference is made to the shipping channels, it extends to the areas of those shipping channels that lie adjacent to the wharves.
  3. However, the crux of debate between PNO and Glencore as to the scope of the Service lies in the meaning given to the connecting phrase ‘by virtue of which’. In the Tribunal’s view, this connecting phrase describes the function of the shipping channels (as was contended by PNO), not the purpose of the Service (as was contended by Glencore). When one, as an exercise in interpretive analysis, substitutes ‘by virtue of which’ with other synonymous connecting phrases in the context of the description of the Service, such as ‘as a result of which’ or ‘through which’ or ‘by reason of which’, the language that follows (‘vessels may enter the Port precinct and load and unload at relevant terminals…’) strikes the reader as secondary to the primary thrust of the description of the Service, being access and use of the shipping channels. On our view, it describes the function of such access and use of the shipping channels. Glencore’s construction requires a reading which substitutes ‘by virtue of which’ with ‘in order for’ and replaces the modal verb ‘may’ with the preposition ‘to’. The effect of Glencore’s construction is to qualify access and use of the shipping channels by reference to the apparent purpose of such access and use, being to load and unload at relevant terminals. In this sense, Glencore calls for a construction whereby the words which follow ‘by virtue of which’ work to expand the meaning of the words which precede it. We do not consider this to be the correct manner in which to interpret the Service from a textual perspective, and favour PNO’s construction as a result.
  4. Looking second to the context of the declaration of the Service, PNO submitted in reply that notwithstanding the clear textual support for its interpretation in the definition of the Service, further support could be found in considering the original application made by Glencore for the Service to be declared. That document, dated 13 May 2015, made a series of references to the NSC (which, as already mentioned, is levied on the ‘owner’ within the meaning of the PMAA) and that otherwise placed the shipping channels as the physical infrastructure that is being used and accessed at the centre of Glencore’s application:

The Council has previously found that Australian shipping channels are natural monopolies in the certification of the Victorian Access Regime for Commercial Shipping Channels…

Access to the shipping channels at the Port of Newcastle is a natural “bottleneck” monopoly that it is submitted should be subject to Pt IIIA.

The uncertainty of future pricing for accessing the shipping channels also affects the competitive dynamics in operations in shipping and cargo.

The facilities used to provide the Service are the shipping channels and vessel berth areas (as described above) identified in the plan attached…

A navigation service charge is payable by the owner of a vessel or cargo in respect of the Service…

The Applicant appreciates that the current increase in navigation service charges may appear marginal in terms of initial percentages given the significant costs involved in large scale coal exports…

  1. Whilst certainly not decisive, we agree with PNO’s submission that these passages illustrate that the focus of Glencore’s initial application was on the shipping channels and the need to access those shipping channels by vessels. If, on the contrary, the focus of Glencore’s application and the Service as declared was not on the shipping channels and their use by vessels, a peculiar situation could arise whereby both the loader of the coal and the person in control of the transporting vessel could each amount to a ‘third party’ under Part IIIA. If that were so, both could claim to be using or accessing the same Service, which could give rise to circumstances where there is confusion as to which arbitrated terms of access to apply. An example was given by PNO to illustrate the point: assume that one of Glencore’s customers, which has chartered its own vessel to pick up Glencore’s coal from the Port, and assume further that that customer wants to negotiate terms and conditions of access with PNO that permit the customer to obtain preferential berth treatment. In that scenario, Glencore would advise its customer that Glencore has already arbitrated terms of access with PNO, and the customer would have no independent right to negotiate (and arbitrate, if need be) with PNO directly. The effect of this would be that Glencore’s arbitrated terms of access would bind other potential users of the Port so long as Glencore’s coal was being shipped.
  2. We should also indicate that for the reasons identified by PNO in its submissions and set out above, even if there was the power to determine the scope as defined by the ACCC or Glencore, the Tribunal considers it inappropriate and not consistent with the purpose of a declaration of a service under Part IIIA.
  3. We should also mention that the revised scope put forward by the ACCC during the hearing before the Tribunal and referred to above does not address the submissions raised by PNO. It also introduces a further uncertainty as to how PNO would determine whether Glencore exercises any of the functions of the owner of the vessel within the meaning of s 48(4)(a) of the PMAA. Therefore, even if the ACCC could have so defined the scope as it did, the Tribunal would now vary the scope in line with the reasons advanced by PNO.
  4. Finally, as to Glencore’s argument that its responsibility for paying various charges (including the Wharfage Charge) indicated that Glencore was an access seeker, no matter the precise circumstances of who chartered the vessel upon which coal was loaded, the Tribunal considers this to amount to ‘letting the tail wag the dog’. It is of little significance who is liable to pay, for instance, the Wharfage Charge. That is merely the product of the terms of the PMAA and the pricing schedule issued by PNO from time to time. The Wharfage Charge relates to different services and facilities, and reflects the level of facilities and services provided at a particular berth – such as berthing boxes, site offices, wharf sheets, pavements and worker amenities. On their own, the requirement to pay says nothing about whether or not the payee of a charge has access to and is the user of the Service. This must be determined in the context of the Part IIIA and the actual service declared thereunder. The only thing that matters in this respect is whether the use of certain infrastructure at the Port – whether it be the shipping channels, the berths, the wharves, or ‘sites’ within the meaning of the PMAA – equates to access and use of the Service.
  5. With this is mind it becomes apparent that there is no significance at all to be drawn from the fact that the Wharfage Charge (for instance) is levied on Glencore when it occupies sites at the Port under the provisions of the PMAA.
  6. In light of the above reasoning, we consider the scope of the application of the determination should be confined to where Glencore is the actual owner of the vessel, or either directly or by its agent charters a vessel that enters the Port precinct and loads Glencore coal. This is the access and use of the shipping channels that is properly the subject matter of the access dispute between PNO and Glencore, and the physical infrastructure that is being accessed and used.

USER CONTRIBUTIONS

  1. We have already touched upon this important area of the dispute before the Tribunal. Before setting out each of the parties’ submissions on the topic of user contributions, it is first necessary to explain the approach used by the ACCC in calculating the value of the assets required to provide the Service.

Overview of the calculation of the DORC

  1. Part IIIA does not mandate a particular pricing model to be applied when calculating charges that a service provider can charge users for accessing a declared service.
  2. In the present case, the ACCC calculated the appropriate charges for the Service using a Building Block Model (‘BBM’) produced by the parties to the arbitration with contents substantially agreed between them. Specifically, the parties agreed to use a modified version of the Australian Energy Regulator’s publicly available Post-Tax Revenue Model (‘PTRM’). As described by the ACCC in its Final Determination, the BBM is a ‘widely-recognised and relatively standard regulatory pricing model’. It is used to assess the maximum allowed revenue (the ‘MAR’) of a provider of a declared service as being equal to the sum of underlying components (or building blocks) consisting of:

(1) the return on capital (based on the value of the regulated asset base (‘RAB’) and the weighted average cost of capital (‘WACC’));

(2) the return of capital (or depreciation);

(3) the operating expenditure; and

(4) tax and various other components.

  1. In order to determine the RAB, the parties agreed for the ACCC to use the DORC methodology to value the assets required to provide the Service. A DORC valuation uses optimised replacement cost as its starting point. In essence, in assessing ORC one asks: what would be the cost of replacing the asset using the latest technology and methods of construction, and a design which is optimised to construct the asset and provide the required service in the most efficient way possible? To calculate the DORC, the ORC is adjusted to reflect the remaining useful life of the asset (in this case, the Port).
  2. The rationale for using the DORC methodology is that it is thought to mimic the pricing of a competitive market for the purposes of promoting competition in a related market. In a competitive market, incumbent firms are constrained by the threat of new entry to charge no more than the minimum efficient cost of their production. If any incumbent firm charges excessive prices, a new efficient operator can enter the market and replace the higher priced incumbent. Although the provider of a declared service is unlikely to face actual entry, its costs should not exceed the costs that would be incurred by an efficient hypothetical entrant. It is assumed that the hypothetical new entrant would build a competing facility in the most cost-efficient and optimised manner possible (or else itself be replaced by a more efficient rival), and seek to recover its costs and return on investment on that basis.
  3. In the case of the Port, and indeed in all cases, the application of the DORC methodology is a hypothetical exercise. A new entrant would not be able to build a competing facility to the Port, and in any case, the Port was not built with the latest technology and was not optimised in the manner conceived of by the DORC methodology. The methodology serves as a mere tool to calculate the RAB which is used as part of the BBM to arrive at the appropriate access charges for the Service.
  4. Using the DORC methodology, the ACCC calculated the optimised cost of replacing the Port, as at 1 January 2018, to be $2,169.5 million.
  5. Having calculated the optimised costs of replacing the Port, the ACCC then adjusted that figure downwards to take account of five instances in which improvements to the Port (specifically various dredging projects) had been funded or undertaken by third parties. The rationale for excluding the value of these projects from the asset base of the Port (or any other declared service) is that the relevant service provider should not be permitted to generate revenue from parts of an asset for which it was not responsible or did not pay. As a result of this exercise, the ACCC deducted $912.0 million from ORC. This reduced figure was used, together with an assessment of the remaining useful life of the port assets, to calculate the DORC. That, together with the other inputs, was then used to calculate the MAR, from which the access charges for the Service were derived. As a result of the deduction of the identified user contributions, PNO could not obtain any revenue in respect of approximately 42% of the value of assets of the Port.
  6. Before canvassing the submissions put to the Tribunal, it is useful to go into greater detail as to what the ACCC decided in respect of the deduction of user contributions and the approach that it adopted.

What the ACCC decided and its approach

  1. As explained earlier in these reasons, the ACCC set the NSC so as to recover the maximum allowed revenue, and it set the MAR by using an agreed modified version of the Australian Energy Regulator’s PTRM. A key building block in the PTRM is the RAB, valued at DORC.
  2. In its Final Determination, the ACCC wrote:

The parties have agreed to the use of a DORC methodology for the initial valuation of assets required to provide the Service, with depreciation to be assessed on a straight line over the useful life of the asset.

The asset value is an important input to the BBM as it informs the calculation for return on capital and depreciation. As such, the asset value will directly affect the MAR and, ultimately, prices.

The DORC methodology involves valuing an asset at the cost of replacing it with a technologically modern equivalent asset (MEA) that is:

  • optimised’ to provide the required service in the most efficient way possible
  • adjusted to reflect the remaining useful life of the asset.

Given the agreement between the parties, the Commission adopts the DORC methodology for the purposes of this arbitration. The Commission notes that there are several approaches that can be taken for the valuation of assets, and the DORC methodology is among the methods used by various regulators.

As discussed below, the DORC methodology values assets at the costs of a hypothetical efficient entrant to the market who will optimise the use of, operation of and investment in the asset. That is, it corresponds to the efficient costs of replacing the existing infrastructure with their modern equivalent to supply a given quantity and quality of output as would be expected in a perfectly contestable market.

The Commission therefore considers the use of the DORC methodology for valuing assets that then form the initial asset base contributes to ensuring that prices reflect efficient costs (sections 44X(1)(h) and 44ZZCA(a)(i)) while also ensuring that PNO is able to earn an appropriate return on its investment (sections 44X(1)(h) and 44ZZCA(a)(ii)). This is in the legitimate business interests of PNO (section 44X(1)(a)) and is also in the interests of those who have a right to use the Service (section 44X(1)(c)). This is also consistent with promoting the economically efficient operation of, use of and investment in in the facility (the objectives of Part IIIA and also having regard to section 44X(1)(g)).

  1. In the arbitration before the ACCC, PNO and Glencore each submitted estimates of DORC prepared by their respective consultants, AECOM and Arup.
  2. Glencore argued that the value of user funded or user contributed assets should be deducted from the DORC value to establish PNO’s initial RAB. PNO opposed this deduction. The ACCC ultimately made the deductions sought by Glencore and that is the decision in dispute in this re-arbitration.
  3. The amount that the ACCC deducted was $912.0 million, reducing the ORC by 42 per cent from $2,169.5 million to $1,257.6 million. Although other costs are recovered through the MAR, the relatively large share of capital costs meant that this had the effect of reducing arbitrated NSC by almost 40 per cent from the level that would otherwise have arisen.
  4. Before the ACCC, the parties identified the projects undertaken by State and non-State entities at the Port. These were set out by the ACCC in Table 22 of its Final Determination:

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  1. In its Final Determination the ACCC stated relevantly:
    • User funded capital contributions should be recognised and deducted from the DORC value that is used to establish PNO’s initial RAB and to calculate prices to ensure that PNO is able to reasonably recover its efficient costs.
    • PNO’s efficient costs for the provision of the Service do not include capital costs that have been funded by users. Additionally, including user contributions in PNO’s initial RAB would result in users paying for the same assets twice: once through their initial investment and again through PNO’s charges: see Final Determination, page 130.
    • In order for any adjustment for user funded contributions to be considered, there needs to be information showing a commercial agreement between the service provider and the contributor of funds.
    • Alternatively, there needs to be sufficient information demonstrating the nature of user funded works undertaken, including any identifiable value of the user funded capital contributions. It was the latter that was predominantly presented to the ACCC as evidence of the nature of user funded contributions in the course of the arbitration: see Final Determination, page 130.
    • In order for any adjustment to be considered, user funded contributions must be identified in the form of capital assets included in the asset base that are the subject of the DORC valuation (ie they are PNO’s owned and leased assets).
    • The ACCC accepts Glencore’s submission that user funded or combined user and State funded contributions to assets have increased port capacity. The port assets Glencore claims are subject to user funded contributions (channels and berth boxes, riverwalls and revetments) continue to provide value to users in perpetuity.
    • The ACCC disagrees with one of the principles identified by PNO that ‘bygones should be bygones’ in relation to the history of the construction of the assets. The ACCC is of the view that asset costs that have already been funded by users cannot reasonably be said to form part of the costs to PNO for providing the Service, and users should not bear those costs again for using the Service.
    • Therefore, the ACCC considers that the DORC value used to establish PNO’s initial RAB should be adjusted to reflect user funded contributions to assets. This is in the interests of those who have a right to use the Service (s 44X(1)(c)) and also takes into account the value to PNO of extensions where the cost has been borne by users (s 44X(1)(e)). However, the size of the adjustment is also informed by consideration of the other issues raised by PNO and Glencore in relation to any mitigating factors and also estimation approaches.
  2. We make an initial observation about the ACCC’s statements in the Final Determination. Nowhere in its reasoning with respect to user contributions did the ACCC use the term “monopoly profits”. The ACCC repeatedly stated that deducting user contributions is necessary to prevent users paying twice. The Final Determination only refers to monopoly profits once, when the ACCC discusses Section 44X(1)(a), which provides that in making a final determination the ACCC must take into account the legitimate business interests of the service provider. It commented that “[t]his includes allowing PNO ‘…to recover the costs of efficient investment in the facility, including having regard to its binding contractual obligations and relevant commercial risk’. This approach does not extend to PNO receiving compensation for loss of any ‘monopoly profits’.”
  3. However, the ACCC did consider certain ‘mitigating factors’ raised by PNO.
  4. First, PNO had argued that in the past the State made major contributions to each user funded project, such as environmental planning approvals. PNO also argued that numerous benefits accrued to users, such as not paying the State for the material dredged from the State’s landholdings that was subsequently used in their own works.
  5. On this point, the ACCC agreed with Glencore that any costs incurred by the State in planning, facilitating and accommodating user funded capital would be captured in the ‘pre-adjusted’ DORC value. This is because both users and the service provider would incur the same overhead costs in the construction of assets they have funded, and such overhead costs are included in the DORC value. The ACCC did not accept that there is a direct connection between benefits accruing to users as a result of not having to pay the State for dredged material and the user funded amounts.
  6. Second, PNO had argued that historical user funded contributions that are excluded from the DORC value should be balanced against the Port’s past economic losses, and when balanced against such losses no adjustment is required. PNO had also claimed that the value of the contributions had already been returned in the form of past low prices and no further adjustments are justified.
  7. In response to this point, while the ACCC acknowledged that PNO had presented information showing that there had been historical losses, the ACCC did not accept that there was a direct connection between past losses of the Port operators and owners with the user funded amounts. In particular, the ACCC concluded that it had not been presented with evidence that the State intended to recover any past losses through future prices. The ACCC did not consider it appropriate to form a judgment in relation to the past decisions of the Port operators and owners, including about their pricing policy. The ACCC considered that governments have many competing objectives, which may mean that profit maximisation or cost recovery are not always the priority, and that, by contrast, there is a clear case that users would expect a future pricing benefit in instances where they have contributed to the cost of the asset, and would most certainly not expect to pay for the same assets twice.
  8. Third, PNO argued before the ACCC that it is only Glencore’s contributions that are relevant for the consideration of any adjustment to the DORC to determine the prices charged to Glencore, and that Glencore had not made any such contributions.
  9. In response to this point, the ACCC considered it to be an incorrect approach: the existence per se of user funded assets in the DORC valuation, not the source of the user funding, informs the adjustment. PNO’s initial RAB needed to reflect its efficient costs for providing the Service. This necessarily excluded any capital costs funded by users, regardless of the identity of the contributor and the amount of their contribution.

Submissions to the Tribunal

PNO

  1. We give a brief overview of the approach taken by PNO before detailing some specific matters by reference to the Final Determination.
  2. PNO contended that the ACCC miscarried its statutory task in making any deductions of the value of user contributions from the asset base of the Port.
  3. Relying on the decision in Re East Australian Pipeline Ltd [2004] ACompT 8; [2004] ATPR 42-006 at [18], cited with approval in East Australian Pipeline Pty Ltd v ACCC [2007] HCA 44; (2007) 233 CLR 229, [27], PNO described the DORC methodology as a forward-looking methodology in the sense that it considers the replacement cost of the asset using modern technology under modern conditions.
  4. PNO then referred to the ACCC’s justification of its approach. In its Draft Determination (no equivalent section in the Final Determination was referred to, but this approach has been argued before the Tribunal), the ACCC stated that:

an efficient entrant as assumed under the DORC framework would seek to avoid any capital cost it need not incur for the provision of the service, which would include any capital costs that were funded by users – regardless of the identity of the contributor and the amount of their contribution.

  1. PNO claimed that, in fact, there was no basis to conclude that a hypothetical entrant seeking to replace the Port (as is assumed under the DORC methodology) could reasonably avoid the costs the ACCC had excluded. The only basis on which the user contributions could be deducted from the asset base is by having regard to historical considerations which are irrelevant to the forward-looking quantification exercise required by the DORC valuation. Moreover, the ACCC also did not explain why user contributions are relevant to the DORC assessment but other historical matters, such as historical losses incurred by the Port, were not.
  2. PNO submitted that to apply a DORC methodology, but to adjust it by reference to historical considerations such as actual user contributions in the past, would amount to applying a ‘blended’ approach of the sort denounced by the High Court in East Australian Pipeline Pty Ltd v ACCC [2007] HCA 44; (2007) 233 CLR 229. PNO went on to submit that there was no legislative support for the ‘blended’ approach adopted by the ACCC. Specifically, if the ACCC’s determination meant that PNO would not be permitted to generate revenue from 42% of the assets over which it acquired a 98 year lease, that determination would not have properly taken into account PNO’s legitimate business interests. PNO also rejected the ACCC’s stated bases for finding that the deduction of the value of user contributions from the DORC would enhance competition in upstream and downstream markets.
  3. Consistent with the approach taken in other regulatory pricing decisions, PNO accepted that the value of user contributions should be deducted in circumstances where those users made capital contributions with the express intent of obtaining future price benefits. However, on its submission, none of the evidence supported a finding that users’ capital contributions were made with the promise or expectation that their contributions would be reflected in future prices, and that meant that the contributions ought not to be deducted from the RAB upon which PNO may generate revenues.
  4. In the alternative, PNO submitted that even if the evidence was sufficient to establish an expectation that user contributions would be recognised in future prices, those contributions were not made by Glencore and so it has no legitimate expectation that the value of the contributions would be reflected in its access prices.
  5. We now look to specific matters that require our attention.
  6. PNO submitted that the ACCC calculated the DORC in an orthodox manner, but that having done so, it proceeded to adjust the DORC by reference to historical considerations which PNO regarded as improper. PNO couched some of its criticism of the ACCC’s decision, to adjust the DORC value, in terms of what costs a hypothetical new entrant would incur in building an optimised replacement port. It said that the ACCC had not explained why it made such an adjustment.
  7. The ACCC’s Draft Determination had said that an efficient entrant, as assumed under the DORC framework, would seek to avoid any capital cost it need not incur in the provision of the Service, which would include any capital costs that were funded by others. On this, PNO argued that the whole purpose is to calculate what it would cost to replace a facility and that such an exercise would be defeated if it were assumed that a hypothetical new entrant could avoid certain costs.
  8. As we have alluded to already, PNO submitted that both the ACCC and Glencore were incorrect to assert, as a general proposition, that in a competitive market a service provider could not charge a user for assets that the user (or any user) had funded, without the threat of being displaced by an efficient entrant. Instead, PNO submitted that, in actual fact, if a person were to provide a competitive service, that person would need to build the whole of the facility, equivalent to the facility used by PNO to provide the Service. In other words, in order to constrain PNO, the rival facility would have to be of the same quality as the PNO facility, and a rival could not constrain PNO by building just some parts of the facility (ie those parts which were not the subject of some user funding or contribution).
  9. In its submissions, PNO pointed out that the present case was not one where the provider of the Service does not own or control the whole facility, or is not entitled (either pursuant to statute or contract) to charge for the use of some part of the facility. On the contrary, in this case PNO leases the whole facility, and is not subject to any constraint (other than the application of Part IIIA itself) in charging Glencore for access to the entire facility, and each part thereof. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXXXXXXXXXX XX XXX XXXXX XXXX.
  10. PNO contended that the large deduction made by the ACCC for user contributions would deprive it of its ability to make a proper return on the investment it has made in the Port. That investment included paying for the long-term lease of the assets that were the subject of the ACCC’s deduction and were leased without adjustment for any obligation not to seek a return on these assets (because there is no such obligation). To make such a deduction would be, on PNO’s view, inconsistent with having regard to its legitimate business interests. It would mean that Glencore, which has no interest in the assets in question and made no contribution to them, would be free to obtain access to 42% of the assets free of charge (and well below the competitive price), whilst PNO which acquired these assets for value and with no notice of any prior entitlement to them, is forced to make them available without charge. That result, it was said, would not promote competition in any market: it would lead to fewer coal shipments and would have a chilling effect on investment and the incentive to acquire such assets. That, it was contended, was not an outcome that would be in keeping with the objects of Part IIIA.
  11. In response to the ACCC’s justification (that the deduction is consistent with allowing the Port to recover its efficient costs), PNO contended that the efficient costs, pursuant to the methodology adopted by the ACCC, are those which a new entrant would incur; in other words, the DORC value.
  12. To recap, PNO submitted that the approach of the ACCC and Glencore confuses historical costs and forward-looking costs. Unless it is a new asset, an asset such as a port would usually represent the work of different construction activities with different technologies over time, in a way that would not be replicated if the Port was constructed afresh. The DORC methodology, it was said, involves a hypothetical exercise rather than a modelling of steps in fact taken: steps funded by a user might not be taken at all, or in the same way, if the Port was reconstructed again as the DORC methodology assumes. PNO contended that the efficient replacement cost is likely to involve a hypothetical construction of the Port, as a whole, in a way that departs in significant respects from the way in which the Port was originally constructed. Though it is possible to undertake a historical analysis, or a forward-looking hypothetical analysis, it is not appropriate to mix the two PNO says.
  13. The ACCC also sought to justify its approach by reference to s 44X(1)(e), which provides that in making a final determination the ACCC must take into account the value to the service provider of extensions whose cost is borne by someone else. However, PNO contended that the ACCC’s reliance on this factor was misplaced. This factor, it was said, was directed at situations where the determination requires the provider to extend the facility (for example by extending a train line to a third party’s mine): s 44V(2).
  14. The ACCC also justified the deduction as being in the interests of those who have a right to use the Service (s 44X(1)(c)) because it will ensure that users do not pay for the same assets twice: once through their initial investment and again through PNO’s charges. PNO submitted, however, that this presupposes that the user has made an initial contribution with the expectation of receiving a future price benefit and in the present case, in respect of Glencore, that assumption is not made out.
  15. In relation to this last point, PNO referred to decisions by the Queensland Competition Authority (‘QCA’). The gravamen of PNO’s argument is that the QCA set out principles for the treatment of user contributions, and that the ACCC should have followed the QCA’s approach but did not.
  16. The QCA, responding to a direction by the Premier and Treasurer, assessed certain matters relating to gazetted prices for channel and river irrigators receiving water infrastructure services, provided by SunWater within the Burdekin River Irrigation Area. Part of that investigation involved user contributions. The QCA:

(1) noted that there is no legal requirement for the Queensland Government to recognise any payments as capital contributions;

(2) concluded that the Scheme should be viewed as an integrated development with payments from many sources contributing towards its overall capital cost;

(3) found that available evidence indicates that there was an understanding within the Queensland Government, and an expectation on behalf of irrigators, that irrigators’ payments for land, water and cane assignments were intended as an offset against the capital costs of the Scheme, and that this would be taken into account in future price setting;

(4) accordingly, considered that payments for the land, water and cane assignments should be recognised as capital contributions; and

(5) considered that prices should not include a return on these capital contributions, as this would represent an unwarranted impost on growers.

  1. Summarising its conclusions, the QCA considered that a capital payment should be regarded as a capital contribution if it was the intention and expectation, of the relevant parties at the time, that the capital payment would be recognized for pricing purposes. Furthermore, a capital contribution should be recognized for pricing purposes unless past price reductions have fully compensated the contributor for the contribution, or the asset towards which the contribution was made has been consumed.
  2. The QCA also recommended that, once recognised, users’ capital contributions should be included in the capital base for the purpose of determining prices, with rebates incorporated in the prices for relevant users, equivalent to the return on capital. This pricing methodology was preferred to the alternative of excluding the capital contribution from the regulated asset base of the entity, for the purposes of calculating prices.
  3. In arguing that the ACCC had failed to apply these or any similar principles, PNO stated that the ACCC had instead proceeded on the erroneous basis that it is sufficient to show:

a commercial agreement between the service provider and the contributor of the funds [or] [a]lternatively there needs to be sufficient information demonstrating that nature of user funded works undertaken, including any identifiable value of the user funded capital contributions.

  1. PNO then made the following propositions by reference to principles applied by the QCA.
  2. First, that it was common ground that there is no record of any agreement that capital contributions would be recognised in future price reductions.
  3. Second, consistent with the absence of any agreement, the historical records did not support a finding that any of the dredging works were undertaken in the expectation that the parties’ contributions would be recognised in future price setting.
  4. Third, the parties who contributed to the dredging projects received benefits at the time. These benefits included the ability to use larger, more efficient vessels, access to clean dredging spoil used in land reclamation to construct terminals, connection between the shipping channel and the terminals, and assistance in the form of pre-construction activities and coordination (including the State obtaining the necessary development approvals). The ACCC considered that any costs incurred by the State in planning, facilitating and accommodating user funded capital would be captured in the ‘pre-adjusted’ DORC value. In response, PNO argued that the deduction made by the ACCC already included these costs and, more fundamentally, the ACCC had failed to grapple with the significance of these contributions – the fact that contributors received an immediate quid pro quo benefit is a reason not to infer that the works were completed with the expectation of a future pricing benefit.
  5. Fourth, PNO contended that during the period in which the dredging works were undertaken, the Port did not earn normal commercial returns from access fees. To demonstrate this, PNO analysed the annual accounts for the Newcastle Port Corporation and the Maritime Services Board (‘MSB’) over the 25 year period from 1990 to 2015. This showed, PNO explained, that even if the value of the ‘South Arm’ and ‘Harbour Deepening’ dredging works are deducted from the DORC, the historical port charges imposed by the State of NSW did not recover the economic cost of providing the declared service.
  6. The ACCC accepted that the material before it showed there had been historical losses, but then dismissed this material on the basis that PNO had not established that the Port intended to recover those losses.
  7. However PNO argued that the question is not whether the State intended to recapture any past losses, through future prices, but whether it can be inferred that there was a contemporaneous agreement or clear expectation that the cost of dredging works would be recognised in future prices, notwithstanding that users were receiving the benefit of less than cost recovery otherwise. PNO then said that no such inference can be drawn, and such an inference would be entirely illogical.
  8. PNO observed that the only evidence identified by Glencore in respect of expectations is an exchange of correspondence between Port Waratah Coal Services (‘PWCS’) and the MSB in relation to a dredging agreement in relation to Kooragong No 5 berth. PWCS’s letter of 18 November 1993 noted that the agreement of the same date “set out the terms on which MSB has consented to PWCS undertaking certain dredging operations”. The letter then sought the MSB’s acceptance of the “commercial basis on which PWCS [was] creating the New Channel”, including that the MSB and Hunter Port Authority (‘HPA’) would not levy any charge in relation to the use of the New Channel by PWCS, any coal exporter exporting coal through PWCS’s coal terminal, or any vessel transporting coal, except insofar as any such charge was directly related to activities or expenses incurred by the HPA.
  9. MSB’s letter in response stated that the MSB was unable to accept the specific points in PWCS’s letter. This was because, relevantly, “there is no change to each party’s right to charge a fee for the use of the assets legally under the control of each party”. That, contended PNO, was destructive of any basis for a “user pays” adjustment. The letter further noted that:

… MSB’s current policy is to exclude from its asset valuations any contribution or investment in port facilities by other parties. The effective result of this policy is that asset value based pricing will not give rise to any additional change [sic] for use of the extension of the port’s channel other than or [sic] cover actual services supplied (eg maintenance dredging, navigation aids, etc).

PNO observed that no commitment was made in relation to future policy or charges.

  1. In the absence of evidence to the contrary, it was contended by PNO that it was more likely that contributions made by users were made on terms that were commercially satisfactory, to that user, at that time. There was no evidence that those terms included any ongoing enforceable right, applicable in 2019, to obtain use of the contributed asset free of charge. The Port was leased to PNO on the basis that there were no such obligations.
  2. It was then contended by PNO that nowhere in the submissions of either Glencore or the ACCC was there a satisfactory explanation of why the Tribunal should have regard to one type of historical fact – namely contributions by users – but disregard all others, including the basis on which the Port was operated prior to privatisation.
  3. PNO further contended that the Final Determination did not seek to establish that Glencore had made any contribution, reasoning that the existence per se of user funded assets in the DORC valuation, not the source of the user funding, informs the adjustment.
  4. PNO says that the correct analysis is not to seek to strip out assets from the DORC valuation, the value of which were quantified by a hypothetical exercise. Rather, the correct approach is to make any necessary adjustment at the point of dealing with the price payable by a particular user. It is at that point, it was said, that one can properly address the relevant questions: “did this user make a contribution on a basis whereby this user can obtain access to the service at a discounted price?” Or alternatively, “was a user contribution made of a type, and on terms, that would benefit all users, including in 2019?” That, PNO said, will require evidence of an agreement or some other proper basis for making an adjustment for the particular user.
  5. Ultimately, PNO’s point on this topic was that in the absence of evidence of any extant obligation to continue to take into account some historical contribution by a user there is no basis for making any adjustment. PNO said that it operates under a statutory scheme, by which it has a right to recover certain charges, and where there is no evidence of any impediment to title or any contractual obligations relating to user contributions, it should be free to enjoy its right to charge for its assets in an unqualified manner.
  6. PNO emphasised that the DORC is a forward-looking concept and involves a consideration of replacing the Port now, using modern technology. That would preclude excavating to one depth, and then later deepening the channel. The ACCC’s approach (following Glencore) of examining the historical records of projects that deepened the channels involves the very things that would not be done if the Port were to be replaced today.

Glencore

  1. In its written submissions, quoting from the Final Determination, Glencore submitted that the ACCC did not deduct the user funded capital contributions for the purposes of determining or calculating DORC. Rather, the ACCC deducted the user funded capital contributions from DORC in order to determine the initial RAB.
  2. Glencore argued that the ACCC’s approach is consistent with previous regulatory decisions in which Australian regulators have taken account of past user funding of assets when setting regulated prices.
  3. It also argued that the approach is no different in principle from the ACCC’s unchallenged decision to exclude from the asset base assets that are neither owned nor leased by PNO, but which play a part in the delivery of the service.
  4. Specifically, Glencore argued in its submissions:

In a competitive market, users of the Service … would not rationally agree to contribute or fund the development of assets and also pay (or see their customers pay or otherwise bear the cost of) prices that generate a return to the new entrant from access to those assets. Rather, in a competitive market, all such contributors would stay with (or switch to) a competing service. In other words, competitive tension would ensure that the service provider cannot seek to earn a return from users on assets in which, or to the extent to which, the provider has not invested in those assets.

  1. In oral submissions on behalf of Glencore, Mr Young QC adopted a somewhat different line of argument in respect of a new entrant. He pointed to ss 66A to 66C of the PMAA, which he said provided the hypothetical entrant with a statutory right to impose a requirement for user funding on all port users, in respect of any investment and any return on investment funding, the acquisition or development of land, or the provision of services and facilities.
  2. Despite thus putting the argument in terms of the calculation of the DORC, Mr Young QC contended that, as a “post-DORC adjustment” it did not pollute the DORC methodology: see Transcript page 132.
  3. Glencore then addressed PNO’s argument that, because it has a leasehold interest in the Port that is free from any obligations to third parties it is entitled to charge for access to the whole of the Port. Glencore’s response to that argument was that while the Tribunal (and the ACCC before it) is required to consider, amongst many other things, PNO’s business interests, those interests must be legitimate. Glencore submitted that an exercise of market power that seeks to charge a capital return on assets that were funded by other parties, and thereby extract monopoly rents, is not a legitimate interest.
  4. Further, PNO’s proposed approach, which Glencore described as giving no recognition to substantial capital contributions by users in the past, is likely to discourage users from making similar investments in channel extensions in the future. Glencore argued that in the sale of any major asset it is reasonable to expect that all bidders will undertake an appropriate level of due diligence on the commercial and regulatory risks associated with that asset. In particular, in the case of the Port, it is reasonable to expect that bidders would have factored in the risk of the service being declared under Part IIIA and that price regulation of its charges would follow. In this regard, Glencore submitted that it would be reasonable to factor in to any bid the significant risk that the regulator or individual users would object to being required to pay for assets that users had already funded. It was said that under Part IIIA, PNO does not have an entitlement to recover the price it paid for the leasehold interest in the Port.
  5. Glencore argued that, contrary to PNO’s submissions, there is nothing in the decision by the QCA that suggests that assets which the provider has not funded should be included in the regulated asset base, unless there is documentary evidence that a relevant user agreed, or otherwise expected, future price reductions. Indeed Glencore considered that the ACCC was correct in finding that, provided the nature of user contributed assets (including their value) is reasonably identifiable, those assets can and should be recognised in determining the regulated prices. In this case, Glencore considered that the contributed assets (and the value of those assets) were reasonably identifiable: it is on Glencore’s view enough that there has been a user contribution (regardless of the circumstances in which it was made).
  6. Glencore submitted that the ACCC was correct to exclude all of the cost of the contributed asset from the regulated asset base and, as per the ACCC, considered that such an adjustment was in the interests of those who have a right to use the Service for the purposes of s 44X(1)(c). It was also something said to be consistent with the objects of Part IIIA, the pricing principles specified in s 44ZZCA and the public interest.
  7. Further, Glencore submitted that the ACCC’s decision to deduct user contributions aligns with the way in which extensions are to be treated under s 44X(1)(e), namely that the value to the provider of extensions where the cost has been borne by users is to be taken into account. While PNO asserts that the provision is directed at situations where the determination under s 44V(2)(d), requires the provider to extend the facility (eg by extending a train line to a third party mine), this narrow construction is contrary to the natural and ordinary meaning of the words. The focus of the section, Glencore submitted, is to avoid the mischief of service providers charging users for a return on extensions to the facility providing the service, which have already been paid for by users. The dredging of the Port, paid for by user contributions, falls within this category.
  8. Glencore further submitted that, in any event, even if s 44X(1)(e) is directed at future extensions, it is based on a principle that has relevance to past investments and that informs the proper application of other factors in s 44X in accordance with the objectives of Part IIIA.
  9. Glencore stated that it is axiomatic that users have received a benefit from the deepening of the Port channels: that is why the projects were undertaken and how the Port was able to have users fund them. As the ACCC found, the Port has also benefitted considerably from these user contributed assets. The fact that the users who have paid for the asset have benefitted from them does not support PNO being able charge users for use of the asset in which, or to the extent to which, the investment was funded by others.

ACCC

  1. The ACCC began its written submissions by observing that in regulatory regimes with objectives similar to the objects of Part IIIA, the overall objective of regulation is to promote outcomes that would be consistent with those that would result from an effectively competitive market. There was no dispute between the parties that the regime under Part IIIA is, in the words of the High Court in East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission [2007] HCA 44; (2007) 233 CLR 229, at [18], in the context of the access regime for gas pipelines, to operate as “a surrogate for the rewards and disciplines normally provided by competitive market”.
  2. The ACCC continued by contending that excluding user funded assets from a regulated asset base was consistent with the outcomes that would be expected in an effectively competitive market. In such a market, a service provider would not charge a user for assets that the user had funded without the threat of being entirely displaced by an efficient entrant. Charging the user for assets it has funded would result in a price above the service provider’s efficient costs. A service provider could only charge the user a price that, in expectation, is just sufficient to recover the assets it has funded for the provision of the service, and it is this price that deters entry into the market.
  3. The ACCC then observed that it was commonplace in regulatory regimes for user contributions to be excluded from valuations of the asset base. The ACCC gave examples from the National Gas Rules (‘NGR’) and the National Electricity Rules.
  4. It said that in these regulatory regimes, user contributions are either excluded from the asset base or prices are adjusted in respect of such contributions. The principle, as expressed clearly in the NGR, is that a service provider is not to benefit through increased revenue from a user’s contribution.
  5. The principle that a service provider is not to benefit through increased revenue from user contributions is consistent with the principle that underpins these types of regulatory regimes – that expected revenues over the remaining life of the assets ensure the net present value of the provider’s investment is zero (“NPV=0”). If a service provider receives a revenue stream from assets that it has not paid for, this will violate the NPV=0 principle, as the service provider will receive revenues that exceed its investment.
  6. The ACCC contended that excluding user funded assets from the asset base is consistent with the statutory criteria. Specifically, excluding these assets ensures that:

(1) prices reflect efficient costs (ss 44X(1)(h) and 44ZZCA(a)(i));

(2) PNO is able to earn an appropriate return on its investment (ss 44X(1)(h) and 44ZZCA(a)(ii));

and is consistent with:

(3) PNO’s legitimate business interests (s 44X(1)(a));

(4) the interests of those who have a right to use the Service (s 44X(1)(c));

(5) the value to the provider of extensions whose cost is borne by someone else (s44X(1)(e)); and

(6) promoting the economically efficient operation of, use of and investment in the facility (the objectives of Part IIIA and also having regard to s 44X(1)(g)).

  1. The ACCC considered that DORC was a methodology that could be used in order to determine an access price that would be consistent with the relevant statutory criteria. The DORC methodology is directed at measuring the economic cost of assets in service – that is, the net present value of expected revenues over the remaining life of the assets where monopoly profits are assumed to be zero.
  2. The ACCC pointed out that DORC valuations are based on a competitive concept: a return on replacement cost is the maximum return that the monopoly firm could earn in a perfectly contestable market. The contestability standard assumes the market is “as if” the firm were operating in a perfectly contestable market. Regulatory regimes with objectives akin to those set out in Part IIIA seek to mimic the outcome of contestable markets as this is considered to promote efficiency.
  3. The ACCC disagreed with PNO’s contention that, as the purpose of the DORC methodology is to derive the cost of replacement of the facility, there is no justification for the removal of the costs of assets that were user-funded in the past from the initial capital base.
  4. The ACCC said that PNO was disregarding the premise underlying the DORC methodology, being to derive the net present value of expected revenues over the remaining life of the assets where monopoly profits are assumed to be constrained to zero by the threat of new entry.
  5. The ACCC contended that the hypothetical exercise involved in the DORC methodology can be reconciled with this underlying premise by conceiving of that exercise as involving not only the replacement today of the existing asset but also the user funding, in the presence of the competitive constraints imposed by potential entry. These competitive constraints would operate to exclude the replacement cost of the future required productive capacity attributable to user funding from the replacement cost of the existing asset for the reasons it had explained.
  6. The key element is that in an effectively competitive market, a service provider would not charge a user for assets that the user had funded without the threat of being entirely displaced by an efficient entrant.
  7. It was contended by the ACCC that there was nothing improper about recognising past user contributions when determining the initial capital base using a DORC methodology. Indeed, in the decisions of the QCA referred to by PNO, the QCA recognises past user contributions when determining the initial capital base using a DORC methodology.
  8. To the extent the ACCC’s reasons may be read as the ACCC adjusting ORC for user contributions as an interim step to calculating DORC, as there was no basis to assume that user and State funded assets should be assigned different depreciation rates, and the relevant assets had been assigned a perpetual life, no difference arises in making the adjustment at the ORC stage versus the DORC stage. The ACCC said it made an adjustment to the value of the asset base that resulted from the application of the ORC/DORC methodology. It did so in light of the matters it was required to take into account in s 44X.
  9. The ACCC’s submissions asserted that the decisions of the QCA neither establish any economic or regulatory principle of general applicability, nor conclude that clear evidence is required for recognition of a user contribution when setting prices.
  10. Nevertheless, the ACCC later stated that the QCA decisions set out a principle for the purpose of distinguishing between capital contributions which should be reflected in future pricing and payments made for some other purpose, being that capital payments should be recognised as capital contributions if it was the intention and expectation of the relevant parties at the time that the capital payment would be recognised for pricing purposes.
  11. Notwithstanding this characterisation, the ACCC was at pains to downplay the general applicability of any conclusions reached by the QCA.
  12. Summing up its reasoning, the ACCC said that in the present case, the capital payments for the ACCC’s consideration were user contributions. The parties had agreed that State contributions were not to be excluded for pricing purposes. The evidence before the ACCC did not establish one way or another whether there was an intention or expectation at the time of the user-funded dredging works that a capital contribution would be recognised when setting prices.
  13. Consistent with the views expressed by the QCA, the ACCC exercised judgment on the basis of all available evidence. Having done so, the ACCC concluded that the statutory criteria were best served by not requiring users to pay a price that includes a return on capital for assets that they have already funded, and a service provider should not earn a stream of revenue from assets that it has not funded.
  14. According to the ACCC, there was nothing in this approach which was inconsistent with the QCA decisions.
  15. The ACCC then addressed PNO’s submission that past port charges did not recover the economic cost of providing the Service.
  16. PNO had contended that no inference can be drawn as to an intention or expectation that user contributions would be recognised in future pricing having regard to the past losses sustained by the State. The ACCC said that the past losses evidenced by the material relied on by PNO were not specific to the Port; to the contrary, that material discloses that the Port did not itself sustain historical losses. In any event, any incurring of historical losses by the State is potentially (even likely) explicable by policy objectives unconnected to user contributions. In circumstances where there is neither evidence of historical losses at the Port nor any evidence that such losses were not informed by policy considerations unrelated to user contributions, it is not appropriate to offset the capital contributions by the benefit of past State pricing concessions as to do so would negate the intended benefit of those pricing concessions. Again, the ACCC’s views in this regard are consistent with the principles applied by the QCA in considering historically low prices in making its decisions.
  17. PNO had contended that, as no contribution was made by Glencore and there is no evidence to establish an expectation that a contribution would be recognised in Glencore’s access prices, there is no basis for recognising user contributions in setting the charges Glencore should pay.
  18. The ACCC said that its reasoning – the existence per se of user funded assets in the DORC valuation, not the source of the user funding, informs the adjustment – engages with the statutory criteria.
  19. Mr Lloyd SC, on behalf of the ACCC, summed up its argument by saying that “[u]ser capital payments must be taken into account where this is required to avoid the provider earning monopoly rents and users paying twice for assets that they have funded.” This was in the context of, among other things, denying that the ACCC considered the surrounding factual context irrelevant, see Transcript page 306.
  20. When asked in what sense Glencore could be considered to have paid twice, it not having made user contributions, Mr Lloyd SC said that “the point is, I suppose, in some sense, at a level of principle. If … Glencore had have been around for the entire time, we would certainly say then they would have paid twice” and further that “the paying twice is just a simple way of expressing the ideal. The ideal is that the provider, which doesn’t require you to look at the user at all, the provider not be able to have monopoly rents. They will have monopoly rents if they can get a return on capital that they didn’t – didn’t invest”, see Transcript page 308.
  21. Mr Lloyd SC said that the ACCC did not change the DORC but took an amount off the DORC to adjust the RAB. However, he went on to say that while the ACCC certainly did not do it [the Glencore] way, “…that would be a way of conceptualising it. [Y]ou could say that the potential entrant is competing not just to reconstruct the Port but to do it with the same assistance. We, as I say, didn’t do it that way but the result is the same…”, see Transcript page 310. He explicitly did not adopt Mr Young QC’s reasoning with respect to recovery of user contributions under ss 66A to 66C of the PMAA.
  22. Mr Lloyd SC responded to questions about the fact that PNO had not been the Port operator at the time of the user contributions: it had never built channels. He said that “what investment PNO actually made … is entirely a distraction and is the wrong question because the DORC value of the [Port], … with or without a user contribution deduction adjustment should be the same … whether the state still owned it, whether PNO owns it. The efficient value of the port doesn’t change according to who owns it”, see Transcript page 309.
  23. Ultimately, Mr Lloyd SC summed up the ACCC’s reasoning in five propositions, see Transcript pages 335-336:

(1) Part IIIA is designed with the objective that regulated access prices specified in determinations following an arbitrated access dispute will generate revenues for access providers sufficient to meet the economically efficient costs of providing access to the declared service.

(2) The economically efficient costs of providing access to a declared service do not extend to giving an access provider a stream of revenue by way of a return of capital in respect of valuable assets that were contributed by access users.

(3) The exception to proposition 2 is where an access provider has subsequently repaid the capital value of the asset.

(4) In the circumstances of the present case, access users contributed capital to create perpetual capital assets held and legally owned or leased by an access provider.

(5) In the circumstances of the present case, neither of the access providers -that is the state or PNO – has repaid or paid for the capital value of those user created assets.

The Tribunal’s analysis

  1. As referred to earlier, there were two major tranches of channel upgrades involving user contributions:

(1) the Harbour Deepening dredging works from 1977 to 1983; and

(2) the South Arm and berth pocket dredging primarily from 1989 to 2010.

  1. The ORC of the whole Port as estimated by the ACCC was $2,169.5 million.
  2. The ACCC deducted a proportion of this amounting to $912.0 million, arriving at a pre-depreciation replacement cost of the Port of $1,257.6 million (the small discrepancy presumably due to rounding). The deductions were based on “the percentage of user funding” and concerned channel assets and riverwalls and revetments, which are two of the eleven categories of assets in the DORC. After depreciation, the final DORC value of the RAB on 1 January 2018 for the purposes of calculating the MAR was $1,163.8 million.
  3. The size and method for making the deductions (by a proportion of the total DORC) were as proposed by Glencore.
  4. The starting point for considering the appropriate value of the RAB is the DORC. Use of a DORC methodology was agreed between the parties. The ACCC decided that the DORC methodology would meet the requirements of s 44X.
  5. The Tribunal does not disagree with the ACCC’s reasoning that use of the DORC methodology is appropriate. However, the Tribunal also notes that use of the DORC methodology is by no means mandatory. Other approaches could have been adopted, such as starting from the existing port charges and determining how they might need adjustment.
  6. Furthermore, the Tribunal considers that use of the DORC methodology may lead to higher charges than other approaches. In accepting it as the starting point in this re-arbitration, the Tribunal is not only accepting the ACCC’s reasons for doing so, but acknowledging that any other approach is effectively precluded by the parties’ having agreed to use a DORC methodology.
  7. In this re-arbitration there was some confusion as to whether the user contribution amounts were deducted from the estimated DORC to arrive at the RAB, or whether the adjustment was made within the DORC as part of its estimation.
  8. The Final Determination is perfectly clear that, as stated above, the DORC was estimated on the basis of all the assets and that user contributions were then deducted. However, as set out above, the ACCC’s submissions adopted a different approach. The argument for the deduction was put in terms of what an efficient entrant would charge, and recovery of assets it has funded for provision of the service, this price deterring entry to the market. That is equivalent to treating the deduction as a step in calculating the DORC, not as adjusting it after it has been calculated. This manner of framing the argument hearkened back to a passage in the ACCC’s Draft Determination that was omitted from the Final Determination.
  9. On oral Submissions for the ACCC Mr Lloyd SC stated accurately what the ACCC said it did in the Final Determination, but made his argument for the deduction at times in terms of an adjustment within the DORC and at times in terms of a deduction from the DORC. He said the two approaches were different ways of conceptualising the issue, the result being the same.
  10. Similarly, Glencore noted what the ACCC had done in its Final Determination but couched its argument for the adjustment in terms of a hypothetical new entrant, ie as part of the estimation of the DORC.
  11. PNO attacked the adjustment within the DORC as defeating the purpose of the DORC estimation.
  12. It is accepted that, as the ACCC said, the two approaches lead to the same result, which is to generate the same lower RAB (and lower NSC) than if no deductions were made. However, the proper estimation of the DORC needs to be considered, and the thinking behind what is actually adjusted goes to the reasoning for making an adjustment.
  13. The vital questions when using a DORC approach are: what assets are being considered, and what are the assets that are to be hypothetically replaced?
  14. As the submissions show, all parties ostensibly agreed that the relevant facility is the whole port, meaning all the channels and berths. Both Glencore and the ACCC stated clearly at various points that this included user contributed assets. Deductions for user contributed assets were to be made after the DORC was calculated to arrive at the RAB. We say “ostensibly” because the Tribunal considers that the submissions just referred to – placing the adjustment within the context of calculating the DORC in the first place – are inconsistent with the facility comprising all of the assets, including those contributed by users.
  15. Excluding them from the DORC is, in the Tribunal’s view, equivalent to deciding that not all the assets are required to provide the Service. Since the Tribunal is of the view that all the assets, including the user contributed assets, are required to provide the Service, the Tribunal considers that excluding them from the DORC could not generate efficient charges and would be inconsistent with Part IIIA, given that a DORC approach has been agreed and adopted.
  16. The Tribunal will now explain that thinking in more detail. It will then go on to examine whether, nevertheless, there is a justification for adjusting the DORC, calculated for all assets including user contributed assets, by subsequently deducting the user contributed assets to arrive at the RAB.
  17. A range of arguments were mounted for adjusting the DORC, or at least the argument was set out in a number of different ways. First, the ACCC said that in an effectively competitive market, a service provider would not charge a user for assets that the user had funded without the threat of being entirely displaced by an efficient entrant. A service provider could only charge the user a price that, in expectation, is just sufficient to recover the assets it has funded for the provision of the service, and it is this price that deters entry into the market.
  18. Secondly, the principle (as expressed clearly in the NGR) is that a service provider is not to benefit through increased revenue from a user’s contribution. This principle is consistent with the “NPV=0” principle that underpins these types of regulatory regimes. If a service provider receives a revenue stream from assets that it has not paid for, this will violate the NPV=0 principle, as the service provider will receive revenues that exceed its investment.
  19. Thirdly, the premise underlying the DORC methodology is to derive the net present value of expected revenues over the remaining life of the assets, where monopoly profits are assumed to be constrained to zero by the threat of new entry.
  20. The hypothetical exercise involved in the DORC methodology can be reconciled with this underlying premise by conceiving of that exercise as involving the replacement today of not only the existing asset but also of the user funding, in the presence of the competitive constraints imposed by potential entry. These competitive constraints would operate to exclude the replacement cost of the future required productive capacity attributable to user funding from the replacement cost of the existing asset.
  21. The Tribunal finds none of that reasoning convincing.
  22. First, there is no explanation of how an efficient entrant could avoid paying the costs that had been incurred by users in contributing assets. The Tribunal does not consider that the scenario propounded by Mr Young QC for Glencore, but not part of the ACCC’s reasoning – the hypothetical new entrant using provisions of the PMAA to require users to provide funds equivalent to historical user funding – plausible.
  23. Secondly, appeal to the NPV=0 criterion adds nothing to the argument. The unanswered question is how the hypothetical new entrant could provide the service by investing in an asset that excluded prior user contributions.
  24. Thirdly, formulating the issue as a replacement of not only the existing asset but also of the user funding begs the question how this could be achieved. It is mere assertion that (hypothetical) competitive constraints would operate to separate and remove the replacement cost of capacity attributable to user funding from the total replacement cost of the facility. The Tribunal sees no mechanism for that to occur in the hypothetical situation envisaged by calculation of the DORC.
  25. As PNO asked: How could the hypothetical new entrant avoid those costs? If those costs, why not other costs? At this point it might be asked: What if all the assets (assumed to be perpetual) had been contributed by users? The proposition is that the access provider would be able to charge only for operating expenses; it would receive no return on capital (because it would have invested no capital). What hypothetical new entrant would accept such a dubious privilege?
  26. We agree with PNO that there is a conceptual difficulty in looking backward to adjust the DORC. The user contributions consist of channel-deepening projects. The assets created were the lower parts of the channels, giving the channels capacity to handle bigger ships. In the DORC hypothetical, the whole port would be constructed as a single, integrated project using modern technology. Channels would be excavated to the ultimate intended depth. The costs of deepening, taken from historical information concerning projects that were undertaken with old technologies and that would never be part of the DORC construction process, cannot be reconciled with estimation of the DORC.
  27. This in-principle difficulty is exacerbated by the manner in which the deduction was made. In the DORC estimation, there were costs of specific assets – channels, reclaimed land, breakwaters, riverwalls and rivetments, etc, which the ACCC calls direct replacement costs – and common or indirect replacement costs, viz. pre-construction costs and interest during construction (which is capitalised). These common costs are clearly intrinsic to the notion of replacing the whole port in a single integrated project.
  28. But having identified costs incurred years ago (eg dredging) associated with user contributions to specific assets – channels and riverwalls and rivetments – the ACCC then allocated a proportion of the DORC common costs to the direct user contributions. That is, the estimates of direct costs associated with specific historical projects were adjusted upwards to include a share of notional pre-construction costs and interest during construction associated with the creation of a replacement asset using modern technology and sequencing of construction. This inconsistency highlights the artificiality of the deduction of user contributed assets.
  29. It is true that as presented in the Final Determination, the deduction – and sharing of common costs – takes place after the DORC has been calculated to arrive at the RAB. But it will be remembered that the argument is that making the adjustment within the DORC or after it has been calculated are simply two different ways of looking at the issue. The Tribunal considers that, if the deduction considered as part of the DORC calculation has fatal flaws, then the deduction cannot be accepted.
  30. Nevertheless we turn now to the arguments for deducting user contributions that were not related to calculation of the DORC. The first is that the access provider would make monopoly profits if the deductions were not made.
  31. At this point it is appropriate to deal with the question: how should the access provider be characterised? PNO, which is undeniably the access provider, said that it leases the whole facility and is not constrained, except by Part IIIA, in charging Glencore for access to the entire facility. Of course, exactly how Part IIIA constrains PNO is the issue at hand in the arbitration. We shall return to this issue later.
  32. PNO said that making the deduction would deprive it of its ability to make a return on the lease in which it invested, which came with no obligation not to seek a return on user contributed assets. It acquired the user contributed assets along with the rest, but would be required to make them available free of charge.
  33. The ACCC said that the DORC value of the Port is the same no matter who owns it. In particular, it would be no different if the State still owned and operated the Port. That is the nature of the DORC calculation exercise. PNO acquired a right to charge what the State would have been constrained by Part IIIA to charge, were it still the operator.
  34. The Tribunal accepts the ACCC’s reasoning. Part IIIA cannot guarantee PNO a return on its investment. Indeed, it is useful for some purposes to abstract from the fact of privatisation. Part IIIA must be conceived of as leading to the same results for access prices with or without privatisation.
  35. However, as discussed in what follows, the Tribunal considers it useful to examine the economic policy thinking that led to Part IIIA and to changes in how the services provided by government enterprises such as ports were charged for.
  36. The ACCC argues that PNO would obtain monopoly profits over the remaining life of the assets if the user contributions were not deducted. Deduction would be consistent with Part IIIA on a number of grounds:
    • It promotes the economically efficient operation of, use of and investment in the Service (ss 44X(1)(aa) and (g));
    • It takes into account the value to PNO of extensions where the cost has already been borne by users (ss 44X(1)(e));
    • It ensures that PNO is able to earn sufficient revenue to recover its efficient costs (ss 44X(1)(h) and 44ZZCA(a)(i));
    • It is in the legitimate business interests of PNO and its investment in the facility (s 44X(1)(a)); and
    • Furthermore, making the deductions would be in the interests of those who have a right to use the Service (s 44X(1)(c)) because it will ensure that users do not pay for the same assets twice: once through their initial investment and again through PNO’s charges.
  37. We also observe s 44X(1)(e). The Tribunal considers that sub-clause (e) does not of itself require the deduction of user contributions; but at the very least, the circumstances of the contribution need to be examined.
  38. The ACCC accepts that deciding whether user contributions could lead to the access provider making monopoly profits, and should therefore be deducted, falls to the factual circumstances of the contribution.
  39. The ACCC saw two alternatives in order for any adjustment for user funded contributions to be considered:
    • there needs to be information showing a commercial agreement between the service provider and the contributor of funds; or
    • there needs to be sufficient information demonstrating the nature of user funded works undertaken, including any identifiable value of the user funded capital contributions. It was the latter that was predominantly presented to the ACCC as evidence of the nature of user funded contributions in the course of the arbitration.
  40. It can be seen that the second alternative is different in nature from the first, to the degree where it is hardly a real alternative. That is, it sets a far lower hurdle and is vague as to what the “nature” of the capital contributions needs to be, and hence what information would be sufficient. Even in its written submissions, the ACCC’s statement of the criterion to be met became no more detailed than “[T]he Commission exercised judgment on the basis of all available evidence. Having done so, the Commission concluded that the statutory criteria were best served by not requiring users to pay a price that includes a return on capital for assets that they have already funded, and a service provider should not earn a stream of revenue from assets that it has not funded.”
  41. It is hard to read this as more than a statement of the conclusion, as opposed to reasoning towards that conclusion.
  42. Admittedly, in this part of its written submissions the ACCC was dealing with the QCA’s approach, which it rejected. But similar restatements in a broader context were also made, such as: “[u]ser capital payments must be taken into account where this is required to avoid the provider earning monopoly rents and users paying twice for assets that they have funded.”
  43. In the hearing, the ACCC did set out reasons for considering that user contributions needed to be deducted to avoid monopoly profits:
    • It can be inferred that the contributors would have expected a commensurate economic benefit.
    • The assets funded by the user contribution are perpetual in nature. Users would have had an expectation at the time of making capital contributions that they would receive economic benefits from the user-funded assets in perpetuity.
    • There is no cogent evidence before the Tribunal of pricing by the State below economic costs at any time prior to privatisation.
    • Even if there were evidence before the Tribunal of pricing by the State below economic costs prior to privatisation, it would not follow that this was intended to offset the capital payments. There was no explicit or implicit agreement of the State to vary charges as compensation for user contributions.
  44. It is not clear why, if those propositions are accepted, they lead to a conclusion that monopoly profits would be made, but it is worth considering them to throw light on the circumstances in which the contributions were made.
  45. Several examples were proposed during the hearing to elucidate the monopoly profits question, but they did not lead to clear conclusions, perhaps because they could not capture the complexities involved in the user contributions with which the arbitration is concerned.
  46. Consideration of other possibilities – gifting of assets to the owner of the facility; and provision of funding by the Commonwealth – likewise do not help to resolve the issues. On the one hand, some of these arguments introduced moral considerations. Is it right and fair that PNO should be able to charge for assets contributed by others? On the other hand, speculation about government policies was introduced. The Tribunal considered that, if anything, these other possible sources of assets only reinforced the conclusion that the asset provider is entitled under Part IIIA to base charges on all assets it owns, subject to considerations about understandings and expectations that we now explore.
  47. It is common ground that the users would have expected a return on their investments in improving the channels. It appears that they would have expected that return through the ability to transport more goods than they otherwise could have done. There is no evidence that they received a reduction in charges at the time, dependent on their making the investment, nor that they had an expectation of reductions later.
  48. The Tribunal considers that a user who made an investment in deepening a channel would have accepted that it would not have exclusive use of the deepened channel and, of course, by its nature could not have exclusive use of the greater depth, with other users being confined to the original depth.
  49. It seems unlikely that the user making the investment would have had any detailed expectation about the course of future pricing for access over the longer term, but it may well have expected that there at least be no significant increase – or no increase based on the increased value of the channel it had deepened – in the period until it had recovered its investment (via greater throughput).
  50. Letters that were adduced as evidence indicated that in the case of one user dredging project in 1993:
    • XXX XXXX XXXXX XXXX XXXXX XX XXX XXX XXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
    • XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
    • XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
    • XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
  51. These letters, which are the only relevant evidence available, confirm what the Tribunal considers would be likely to be the strongest degree of certainty regarding expectations about the treatment of charging in respect of user contributions.
  52. There is little likelihood of a user seeking, much less expecting to obtain, assurances about pricing in perpetuity, or even beyond the relatively short term.
  53. It seems far more likely that a user would only make a contribution of the type at issue here if it was confident that the impact of changes in charges was not a risk that caused it to doubt its prospective investment. If it assessed that there was some potential for its investment to lead to higher prices in the future, it would need to be confident that the investment would still make a sufficient return. It would have taken into account its experience of dealing with the Port operator and its knowledge of the history of port access pricing.
  54. If the risk were considered material to the investment decision, the user would surely have sought to deal with it by contractual means. This is also an answer to Glencore’s submission that not excluding user contributions would deter any future such contributions.
  55. In the general case, it seems likely also that a user making an investment that would provide benefits to other users, and in particular competitors (if any), would not object to higher charges being levied by the access provider on those other users.
  56. Also in the general case, a user acknowledging that title for an investment that it made would belong to the Port operator might be likely to expect that the owner of the asset would at some stage charge for services provided by it. This would depend on the economic policy environment relating to government business enterprise charging at the time.
  57. The QCA addressed the issue of expectations head-on. Differences between the circumstances that the QCA was inquiring into and those at the Port were not explored in submissions or the hearing. The QCA set out the circumstances relating to the Burdekin River Irrigation Area. However, the Tribunal does not know whether some features of the Port, such as inability to exclude other users from access to an asset contributed by a particular user, apply to the irrigation system.
  58. One aspect is certainly different. The QCA found that there was an understanding within the Queensland Government and an expectation on behalf of irrigators that irrigators’ payments for land, water and cane assignments were intended as an offset against the capital costs of the Scheme and that this would be taken into account in future price setting. No such clear finding is available in this arbitration.
  59. The QCA’s conclusions were:
    • A capital payment should be regarded as a capital contribution if it was the intention and expectation of the relevant parties at the time that the capital payment would be recognized for pricing purposes.
    • Furthermore, a capital contribution should be recognized for pricing purposes unless past price reductions have fully compensated the contributor for the contribution or the asset towards which the contribution was made has been consumed.
  60. It is difficult to see why these criteria should not be relevant to the Port. Indeed, they seem to be intermediate between what the ACCC described as two alternatives that would enable it determine the matter:

(1) information showing a commercial agreement between the service provider and the contributor of funds, or alternatively;

(2) sufficient information demonstrating the nature of user funded works undertaken, including any identifiable value of the user funded capital contributions.

  1. The Tribunal considers that evidence as to understandings and expectations could reasonably substitute for evidence as to a commercial agreement, but that information demonstrating the nature of user funded works could not.
  2. The ACCC submitted that evidence did not establish one way or another whether there was an intention or expectation at the time of the user-funded dredging works that a capital contribution would be recognised when setting prices. The ACCC had accepted that such an inquiry was relevant. The Tribunal does not consider it acceptable to dismiss the relevance of – even the necessity for – such evidence simply because there was none.
  3. The QCA’s second principle requires a check that the contributor of the assets has not been fully compensated by past price reductions. (The asset being fully consumed is not relevant in the case of channels in a port.) This involves an investigation of the pricing by the State prior to privatisation. Such an investigation was undertaken on behalf of PNO by Castalia in its report dated 17 August 2018.
  4. According to that report (at page 4), for the period before 1990:

While charges for Port services have been levied since the middle of the 19th century, it is unlikely that charges prior to 1990 had any commercial or economic basis. In 1990, the MSB, which was responsible for all ports in NSW at the time, including Newcastle, restructured prices.

At the time, the MSB described statutory port charges prior to 1990 as:

…. nothing more than a tax on people who sent goods by sea. There were differing rates for different goods with no relationship as to the costs the Port incurred in handling them.

They were inefficient, inappropriate and extremely difficult to justify or explain.

The different rates for each commodity for harbour dues and wharfage, presumably reflected the value of the product to the State so there was a “royalty” aspect to the charges. The rates were also uniform across all four major ports (Newcastle, Sydney, Port Botany and Port Kembla) and thus did not reflect costs at each port, even in total.

  1. The ACCC submitted that, since there was no separate information regarding charges at the Port before 1990, the report prepared by Castalia did not provide support for the proposition that the Port, considered in isolation, was not operating on a commercial basis. However, it did not challenge any of the material quoted above.
  2. The important points as far as the Tribunal is concerned are that until 1990, charges were:
    • levied on goods or commodities rather than vessels (while the current NSC, the subject of this arbitration, is levied on vessels); and
    • not based on costs, at least not capital costs.
  3. It follows that, contrary to the ACCC’s submissions, it is beyond belief that the charges could have delivered a normal rate of return for the Port over the period. But the real point is that the State Government and the Port operator were not thinking in terms of rates of return on investment in assets. These were the days before corporatisation, privatisation and opening government business enterprises to competition, or emulating competitive forces where competition was impossible, eg for natural monopolies.
  4. In other words, it is no coincidence that the pricing practices of the period up to 1990 predate Part IIIA.
  5. Dealing with the period since 1990, the Castalia report noted (at pages 4 to 5) that:

In 1990 the MSB announced a major restructure of prices with the objective of shifting port charges from third parties, such as cargo owners, to the actual port users such as stevedores and ship owners and to achieve a measure of cost reflectivity. Under the new price structure, most prices now differed by port and port charges were related to the vessel and not the commodity being shipped.

While the restructured prices had some aspects of cost reflectivity, there was no attempt to revalue or recognise assets in any systematic way or to relate port charges overall to the costs of providing the service, including return on and return of capital. Total MSB revenue before and after the restructure was broadly similar so the restructure focussed largely on the distribution of charges and not the overall level. The MSB report showed that after the restructure, NSC revenue would only recover 51 percent of the cost of providing the service-based on the MSB’s understated asset values.

The low level of recognition and valuation of assets was highlighted by the Curran Report in 1987 which found the economic return on equity of the MSB was 1.0 percent compared to the return based on historical costs of 4.9 percent. Since inflation at that time was 8.5 percent and the Commonwealth Government ten-year bond rate was 13 percent, this shows that the MSB did not make commercial or economic returns even on its undervalued asset base and was providing services at below cost.

In the period after the 1990 restructure until 2014, NSC at Newcastle were largely unchanged with charges in 2014 only 7 percent higher than in 1990 in nominal terms. In the same period, the CPI rose by over 80 percent, so prices fell substantially in real terms …

Prices remained unchanged from 1990 until 1996. In June 1996 the Premier announced a 10 percent reduction over two years commencing 1 July 1996. This was to assist trade and improve competitiveness to support the coal industry and employment in the Hunter. There was no commercial or financial basis for this reduction.

After that date, charges remained essentially unchanged until 2012 when a series of small CPI-type annual increases of 3 percent to 4 percent were applied.

We conclude that prior to a price restructure in 1990, Port charges were little more than a tax on different commodities with no attempt to reflect the costs of the services provided and that financial accounts were non-commercial and asset values understated or simply not recorded.

  1. Castalia undertook an analysis of charges at the Port from 1990 to 2014. 1990 was chosen because it was then that the Port’s charges were restructured with the NSC being introduced, and from then that stand-alone data for the Port (separate from other NSW ports) are available. Castalia estimated the value of the asset base in 1990 by deflating a DORC estimate for 2014. For the purposes of the analysis it deducted the costs of user contributions although it did not consider that there was a case for doing so.
  2. It found that economic costs over the period exceeded revenue by around $8 billion, “an order of magnitude greater than the … claimed ‘contribution’ for the Harbour Deepening dredging works and South Arm Dredging works …”. This analysis is said by PNO to show that the Port effectively paid for those projects.
  3. ACCC mounted an attack on that analysis, the thrust of which was that the asset base estimate could not be trusted. There was some quibbling with terminology (economic depreciation) but the only substantive issue was the methodology of deflating the 2014 DORC to estimate the value of the asset base in 1990. Castalia had claimed that this was likely to overstate the value of assets as at 1990 because the DORC assumed newer, more efficient technology.
  4. The Tribunal has considered the opposing arguments and decided that the Castalia analysis is if anything conservative and should not be discounted. Moreover, the ACCC did not challenge Castalia’s account of the history of the Port’s charging from 1990 to 2014.
  5. The Tribunal does not go so far, however, as to agree with PNO that the user contributions were effectively paid back by the Port. To reach such a conclusion it would require information about understandings and expectations along the lines of the QCA principles. Rather, it sees the Castalia analysis as indicating that the Port operated in an environment where full cost recovery – ie charging for services on the basis of the economic costs of providing them – was still not being practised in the period after 1990.
  6. There is nothing surprising about that, but it is useful to consider different economic perspectives. We have become used, in a regulatory context, to the notion that efficiency requires that prices be based on costs, and that this requirement implies that efficiency requires a normal return on assets (more accurately, an expectation at the time of an investment of receiving at least a normal return).
  7. Those requirements are what one sees being met in competitive markets. But natural monopolies do not operate in competitive markets, where the usual case is that after some point marginal costs of production rise with increased volume. In such markets, competition between, and the long-run entry and exit of, similar firms leads to prices equal to both average and marginal costs. Prices are both efficient, in the sense of maximising the difference between the costs of production and consumers’ value of consumption, and sufficient to recover each firm’s costs, including a “normal” return on its invested capital.
  8. Consequently, such prices have the happy property of representing the cost to the community of using resources to produce the firm’s output efficiently.
  9. As soon as we step away from workable competition, things become more complicated. Prices based on a natural monopoly’s marginal costs of supply are not sufficient to recover its total costs. If the natural monopoly is to have a private financial incentive to invest in the first place, it must find a way – and be allowed – to charge at more than marginal cost. Alternatively, the firm must have some other ongoing means of financing its losses from marginal cost pricing. As the history of pricing at the Port prior to 1990 demonstrates, one solution to the problem is public ownership, where the losses on capital investments can be offset against economy-wide benefits from pricing below average cost. However, in practice, public ownership can cause other problems that outweigh any gains from more efficient pricing.
  10. Where the assets producing the services provided by the natural monopoly are sunk – as they typically are – prices that recover the cost of those assets will be higher than the opportunity cost to the community of providing the services. Users will be paying more than the efficient price, and will correspondingly tend to use less of the service than would be optimal from the community’s point of view.
  11. That is to say, the economic interests of the community and the private natural monopoly supplier are not in sympathy in the same way as those of the community and the supplier in a competitive market.
  12. When most natural monopolies in Australia were State-owned, the State did not face the financial imperatives of a private supplier. It could choose not to price so as to recover fixed costs, or not to base prices on costs at all, or – as we have seen in the case of a port – to charge those supplying commodities through the Port rather than those directly imposing costs on the Port’s channels and berths, viz. owners of vessels.
  13. Such pricing and operational behaviour of individual facilities was economically inefficient, especially in the structure of charges. But there was not necessarily much intrinsically wrong with the notion that the State could stand back and contemplate the whole supply chain, decide where it wished to levy charges and raise revenues, and make charging an instrument of various policy objectives. (Parties to the arbitration emphasised at times the range of government policies that may have been reflected in port charging.)
  14. The basic point is that the State owner of a port did not see a virtue in emulating competitive conduct. In particular, even in recent times it did not occur to State owners of service providers that they ought to base charges on, among other things, the hypothetical replacement cost of their assets. The assets were sunk. Many assets – not channels in ports – were fully depreciated. Not providing a return on assets did not pose the problem of abjuring an incentive to invest in such assets. Government investment decisions were driven by considerations other than private financial returns.
  15. Even if consideration turned to providing a return on new investment, there was no need for prices to generate a return on sunk investments.
  16. This economic approach and policy framework were, and are, at odds with the economic thinking that led, along parallel lines, to Part IIIA and to the thrust for corporatisation and privatisation of government-owned enterprises. They were twin aspects of the search for greater economic efficiency, to the benefit of the wider community.
  17. One consequence of this is that the focus on returns on assets compelled by Part IIIA applies to service providers regardless of their ownership. Even if the State still operated the Port, the effect of Part IIIA would be to require consideration of returns on assets, if Part IIIA applied to it. That would have required declaration of the service provided by the Port.
  18. But while the State still owned and operated the Port, and the service was not declared, the principles required by Part IIIA remained in the background. The State was free to pursue whatever pricing practices it chose, and as we have seen, they did not, apparently, seek to emulate what would occur in a hypothetical competitive market.
  19. The imperative to make a return on assets only arises in a manner not to be gainsaid when privatisation is contemplated. As we have attempted to explain, the pricing impact has pluses and minuses, whether the facility providing the service is State-owned or in private hands.
  20. Even a private facility owner would still, if it were precluded from charging to obtain a return on sunk assets, have an inventive to continue to provide access, contrary to PNO’s claims. And it would not lose the inventive to invest in new assets and improvements to the facility, so long as the new assets were appropriately brought into the asset base on which charges provided a return.
  21. What return it would make on its investment in the business would depend on what it paid for the business, which is not in evidence before the Tribunal and is not relevant to the determination of DORC-based pricing anyway.
  22. But precluding a return on all the assets that are part of the facility (sunk or not) would send a signal to future investors in other natural monopoly assets that they risked having their investment, once made, treated as sunk, with future returns confiscated. That unfortunate investor would still have an incentive to operate its asset as long as the returns exceeded the scrap value, but the investment climate for such assets would be fatally damaged. In effect, price regulation would have created a new sovereign risk.
  23. To sum up, Part IIIA – and the economic thinking about the discipline imposed by competition and the resulting efficiency benefits – leads to pricing of the services of a natural monopoly that attempts to prevent the achievement of the monopoly profits that would be available to an unconstrained private owner. But it also leads to pricing that provides a return on sunk capital as part of efficient costs. That means prices that, in the case of a natural monopoly, are higher than the opportunity cost to the community of using sunk assets. This is especially highlighted when a DORC methodology is applied, and the value of assets is based on the costs of a hypothetical new entrant.
  24. This carries an inefficiency: users will, at the margin, use less of the service than they would if it were charged for at marginal cost, and that reduction in usage has an economic cost to the community. This economic cost might be very small if the cost of the accessing the service is nevertheless a small proportion of the economic surplus associated with the production process, in this case coal mining, that gives rise to demand for the service.
  25. Now the situation in this arbitration is not the one contemplated in the excursion we have just taken through alternative ways of pricing the output of natural monopolies, viz. of providing no return at all on assets. The Tribunal refers to the change in policy approach to make the following point. The enactment of Part IIIA was a regulatory watershed. It effectively consigned to the past the old ways of thinking about pricing of essential services. It drew a line under questions about what returns had been made in the past, and focussed entirely on the future.
  26. If a service provided by an essential facility was declared, then its pricing became subject to the requirements of Part IIIA, whether or not the facility was privately or publicly owned. One element of those requirements is that the legitimate business interests of the access provider be taken into account. That involves being able to achieve a reasonable return on its assets.
  27. The Tribunal considers that Part IIIA shines the light of regulation onto what assets are required to provide a declared service. Prices should reflect the cost of those assets, whether through the DORC or some other approach. In this case, that means all the components of the DORC, regardless of their origins. A hypothetical entrant would need all the assets to provide the declared service, and would require a return on all the assets. Disputation over the treatment of user contributed assets cannot be resolved by examinations of past pricing. And nor can it be resolved by simplistic claims that users should not have to pay twice, or assertions that the access provider would be making monopoly profits, or that the NPV=0 criterion would be contravened.
  28. Only clear indications of an understanding by the access provider and an expectation by the access user that future pricing would be adjusted in some way for the value of those assets could justify excluding them from the RAB. Even then, the better approach may be to maintain the full value of the RAB and make adjustment to the MAR for the effect of the understanding and expectation. We note the QCA’s approach in this regard.
  29. Whether there would also be a need for some mechanism for the passing-on to the current access provider and access seeker of past understandings and expectations is not a question that needs to be addressed by the Tribunal. There is no evidence of any such understandings or expectations.
  30. We finish by considering Mr Lloyd’s final proposal of five propositions which he said lead to the ACCC’s conclusion that user contributed assets must be deducted. They are set out above.
  31. The problem is with the second proposition: “The economically efficient costs of providing access to a declared service do not extend to giving an access provider a stream of revenue by way of a return of capital in respect of valuable assets that were contributed by access users.” This proposition implicitly appeals to a notion of fairness, or perhaps common sense. It seems to demand acceptance as being self-evident. However, the ACCC has acknowledged that other considerations apply. By way of economic analysis of the facts, this proposition is not self-evident.
  32. For the above reasons and analysis, the Tribunal considers that no deduction should be made to the RAB for user contributions. The RAB should be restored to its ORC value of $2,169.5 million, with the associated 1 January 2018 DORC value of $2,075.8 million.
  33. We indicate that even if some regard was had to the financing of particular dredging projects (for instance), this would need to be done as part of a comprehensive examination of historical matters. This would include the benefits provided by the State in return for contributions, the history of under-recovery by the State, the question of which users would be entitled to the benefit of any contributions and the users’ expectations. Such matters should not be included in the calculation of a DORC value, but may influence the MAR and associated prices. None of these matters were considered properly by the ACCC nor could they be on the material before it. Similarly, the Tribunal could not undertake this task if we were of a different view to the one we have already reached, namely, no deduction at all should be made to the RAB for user contributions.

USER FUNDING OF RECLAMATION BUNDING

  1. This issue addresses Glencore’s concern that the DORC valuation includes estimated costs for reclamation bunding that have not been adjusted for the value of user contributions. As we have taken the view that no deduction should be made to the RAB for user contributions, it follows no deduction should be made for reclamation bunding.
  2. Nevertheless, we make the following observations.

Submissions to the Tribunal

Glencore

  1. In its submissions to the Tribunal, Glencore contended that, although the ACCC had adopted Glencore’s preferred approach to the value of user funded works for channels and berths in its Final Determination, the ACCC’s estimated costs for reclamation bunding inconsistently, and possibly inadvertently, excluded user contributions. Therefore it was contended that the Tribunal should apply the same user funding deduction to reclamation bunding as it did to channels and berth boxes, which would reduce the DORC value by $108.4 million (as at 1 January 2018); and the value of the NSC (as determined by the ACCC) by 7.7%.
  2. It was contended that, contrary to an assertion by PNO that this matter was not raised in the arbitration Synergies had, in its 22 June 2018 report, highlighted that its estimate of user funded works was based on its approach of including bunding costs as part of the dredged channel value. This report also pointed out that it was insufficient to only recognise user contributions to the dredging cost component and that the related user contributions to the land reclamation cost category must also be recognised. Glencore further asserted that, contrary to PNO’s submissions, it was appropriate to apply the same percentage adjustment to reclamation bunding costs. While PNO had identified separate cost items for channel dredging and land reclamation, as identified by Synergies, these are simply separate cost items within a dredging project. Glencore’s estimation of the percentage adjustment to dredging costs for user funding was derived from information on users’ contribution to the Harbour Deepening dredging works and the South Arm channel and berth pocket projects. Both of these projects included dredging and land reclamation. Consistently, Glencore applied this percentage to the combined value of dredging and reclamation bunding. If these items are to be ascribed separate values, then Glencore contends that the same percentage reduction should be applied to both items.
  3. While the ACCC pointed out that, in response to the Draft Determination, Glencore did not seek a proportional downward adjustment for user funding of reclamation costs, Glencore submitted in response that, given that in the Draft Determination the ACCC had adopted Glencore’s position (which incorporated bunding costs into its dredging cost estimates and applied the downward adjustment to the bundled cost) there was no need for Glencore to seek a proportional downward adjustment to reclamation costs.
  4. Glencore also responded to the ACCC’s claims that there was no investigation in the arbitration process as to whether, or to what extent, the user funded dredging works contributed to the creation of bunding assets. Whether or not that is the case, Glencore considered that there was sufficient material before the Tribunal to support the conclusion that user funded dredging programs also involved funding of related reclamation programs. Glencore contended that this could be seen from:
    • Synergies’ submissions that the dredging programs were not limited to channel dredging but also necessarily included the associated costs of disposing of the spoil, including the construction of any necessary bunding;
    • the 1976 contract specification for the Harbour Deepening dredging works, which showed that the necessary bunding works were included in the dredging contract; and
    • in relation to South Arm channel development works, in each case the terminals undertook both the dredging and land reclamation works, including any required bunding, as an integrated project.
  5. Glencore submitted that, in light of this material, the Tribunal should conclude that dredging and land reclamation form part of a single project and, to the extent that users are found to have contributed to that project, that contribution should be applied to both the dredging costs and land reclamation costs.

PNO

  1. PNO’s primary position was that no user contributions deductions of any kind should be made.
  2. PNO contended that even if the Tribunal affirmed the ACCC’s decision to reduce the ORC values to account for user contribution of assets, there was no basis for making a simple percentage adjustment to reclamation bunding in the same proportions. PNO claimed that land reclamation was a separate and distinct step to Harbour Deepening dredging works (even though it uses the dredge material from the Harbour Deepening dredging works). PNO alleged that there had been no examination, and Glencore adduced no evidence, identifying any particular reclamation bunding or the costs of such bunding which were allegedly paid for by users.
  3. Counsel for PNO argued that in relation to the Harbour Deepening dredging works there was no user contribution to the costs of the reclaimed land, since the disposal of dredging spoils in reclamation bunds was an incidental part of the dredging. It was argued that the Port made areas available where the spoil could be placed, as an alternative to the contractual requirement to otherwise dump it at sea, and that there was no evidence that any user wanted the land.
  4. More generally, PNO contended that there was no proper calculation or assessment of what reclaimed land was produced by which project, how such land relates to land which is reclaimed under the DORC calculation or whether it is properly or separately identified as a user contribution.

ACCC

  1. In its submissions, the ACCC contended that there was sufficient information demonstrating the nature of the user funded works undertaken. This included the identifiable value of the user funded capital contributions and identifiable capital assets included in the asset base. Because of this, the ACCC made a proportional downward adjustment of the ORC values to account for the user funded contributions to assets including channel and berth boxes. Counsel for the ACCC otherwise adopted the submissions of counsel for PNO at the Tribunal hearing, insofar as even if there was user funding, no adjustment was required.
  2. Separately, and in response to Glencore’s submissions, the ACCC sought to explain how its position in this issue had changed between the Draft Determination and the Final Determination. In its Draft Determination, the ACCC had initially adopted Glencore’s position, which incorporated bunding costs into its dredging cost estimates. In its submissions in response to the ACCC’s Draft Determination, Glencore did not seek, and the ACCC did not apply, a proportional downward adjustment to reclamation costs on the basis that a proportion of the assets created by reclamation may have come from dredged material in the formation of channel and berth box assets to which users had contributed. In the absence of this, and having regard to PNO’s submission made in response to the Draft Determination, the ACCC ultimately accepted PNO’s position that the importation of reclamation bunding materials was required, and accepted the costs of reclamation bunding as set out in AECOM’s DORC valuation. The ACCC also endorsed PNO’s submission to the Tribunal that there was no investigation in the arbitration process as to whether, or to what extent, the user funded works undertaken contributed to the creation of capital assets in the form of reclamation bunding.

The Tribunal’s analysis

  1. The Tribunal’s decision that no adjustment should be made to the RAB for user funding (as earlier explained) determines the question of user funding of reclamation bunding. It is, we think, a subset of user funding and no adjustment should be made for it.
  2. In any case, the Tribunal accepts PNO’s position that, even if it were accepted in principle that an adjustment should be made for user funding, in the case of user funding of reclamation bunding, insufficient evidence exists that users actually made a contribution, and there is no basis for applying the across-the-board percentage adjustment used by the ACCC in respect of other user contributions.

COSTS OF CHANNEL DREDGING

  1. The Tribunal is confronted by two different approaches to determining the appropriate costs of channel dredging. We will seek to describe and evaluate the material before us, without examining the expert material other that through the documentation provided. No party suggested we should do otherwise, nor did we consider it necessary to adopt any other course having regard to the constitution and function of the Tribunal.
  2. On this issue we do not separately detail each submission of the parties, other than in the course of our own analysis.
  3. In support of its claimed reduction to the DORC, Glencore primarily contended that a ‘jumbo’ CSD could be used at the Entrance Channel, which would avoid the need for drilling and blasting prior to dredging. Glencore submitted that the dredging estimate should be reduced by approximately $122 million (to approximately $847 million), or alternatively that the $970 million estimate should be substantially discounted to reflect the “very real probability” that the hard rock at the Entrance Channel could be removed using a CSD without drilling and blasting.
  4. In response, PNO submitted that to accept Glencore’s submission would be to invite to error. The Tribunal agrees. On Glencore’s own submissions, there is at least a possibility that a CSD will not be able to remove the hard rock, in which case Glencore’s discounted DORC valuation would fail to capture the full replacement cost of the assets used to provide the declared service: any price calculated on this basis would contravene the pricing principle in s 44ZZCA(a)(i) by failing to generate expected revenue for a regulated service or services that are at least sufficient to meet the efficient costs of providing access to the regulated service.
  5. The Tribunal has been faced with a choice between a proven construction technique that both parties agree will work (drilling and blasting), and an unproven one, about which there is no agreement and no clarity (the jumbo CSD). The Tribunal considers it most prudent and correct to base the DORC valuation on techniques that are proven. The Tribunal cannot be satisfied that the cost of drilling and blasting produces an inefficient price, and cannot (and should not) speculate as to what any discount would be, as suggested by Glencore.
  6. We understand that Glencore submitted there would be no error if the Tribunal were to substantially discount PNO’s estimate of the dredging costs that the ACCC accepted (approximately $970 million) in comparison to Glencore’s estimate (approximately $847 million). It was contended that the recognition of such a discount would accord with common sense in circumstances where the competing figures rise no higher than hypothetical forward-looking estimates.
  7. In this context, the Tribunal accepts that when making an administrative decision, neither party faces an onus or burden of proof. While the Tribunal’s acceptance of a party’s claims and the inferences to be drawn from them obviously requires a proper basis, so too should the rejection of any material. In these proceedings, the decision to be made relates to an estimate of a hypothetical current replacement cost. We accept the Tribunal is able to consider the two competing views, and if appropriate undertake a discounting task in determining costs.
  8. The Tribunal is particularly aware that it is seeking to look into a hypothetical alternative to historical costs. There is an element of uncertainty in assessing what may occur. The Tribunal needs to take into account commercial realities, but still must look to probable outcomes rather than just speculative outcomes.
  9. Even adapting this approach, having regard to the material before us, we are not satisfied that a jumbo CSD would be effective to dredge the hard rock at the Entrance Channel, nor are we persuaded of the other matters raised by Glencore stand as a proper informed basis for discounting cost estimates.
  10. The reports prepared by Akuna and Evers Consult, each of which were commissioned by PNO, are based on commonly accepted or traditional views of the industry. While we appreciate the position of Glencore put by Arup – that the newer class of jumbo CSDs have demonstrated an operational capacity beyond that previously understood to be the case, we accept and adopt the approach taken by Akuna and Evers Consult.
  11. To explain our conclusion, it is helpful to set out and address in turn the arguments put by Glencore in support of its preferred approach, which as noted, we have not accepted. We also set out PNO’s arguments in response.
  12. Glencore drew the ACCC’s attention to the shortcomings of the Akuna and Evers Consult material in Synergies’ report dated 3 September 2018. Arup also pointed out how, in its view, Akuna and Evers Consult had erred in their interpretation of the data and Arup’s analysis.
  13. Glencore argued that in the Final Determination, the ACCC accepted the views of PNO’s expert without properly grappling with the contrary evidence of Glencore. In particular:

(1) in finding that drilling and blasting was required, the ACCC cited Evers Consult’s opinion that a ‘Rock Quality Descriptor’ (‘RQD’) of less than 75% was required before any appreciable reduction in rock strength would be observed, and that Arup’s own analysis indicated the lowest RQD at the Entrance Channel was 86%. However, this ignored Arup’s contrary opinion that observed RQDs of between 79% and 97% would lower the effective strength of the rock to within the capabilities of a modern CSD and, importantly, that the hardest rock found in the vicinity “is unlikely to be observed consistently and for significant thicknesses within the maintained channel area.”

(2) the ACCC found that sea conditions at the Port would prevent the efficient use of very large CSDs (again on the basis of Evers Consult’s opinion) despite Arup pointing out that much smaller (and therefore more susceptible to wave conditions) floating dredging equipment had actually been used successfully at the Port throughout its history; and

(3) the ACCC considered there was “insufficient information” on the comparability between Walker Shoal and the Port to support the use of CSDs because the underlying data was unavailable. However, the ACCC failed to grapple with Arup’s evidence, which was based on actual involvement in the Walker Shoal project, and rather adopted without any apparent scrutiny the assertions of Evers Consult and Akuna that the two locations were in fact not comparable.

  1. Glencore submitted that in doing so the ACCC disregarded Arup’s evidence about the extent of the hardest rock and the volumes and types of material in the channel more generally. It was submitted that the requirement for drilling and blasting of some of the channel says nothing about the extent of that work, or the work methods to be employed with material that does not require such pre-treatment in the channel generally.
  2. It was further submitted that the Tribunal’s assessment of the material before it should include consideration of the probative value of the expert material adduced by each of the parties on the question of the estimated costs of dredging. Glencore contended that little weight should be attributed to the Akuna and Evers Consult reports and that Arup’s evidence in this regard should be preferred. As already noted, Arup were of the view the most appropriate and efficient method of dredging the channels and berth boxes (including the hard rock found at the entrance channel) would be the use of a jumbo CSD. Arup explained (in its 12 June 2018 report at page 10) that recent experience with this type of equipment established that it was capable of cutting through the hardest rock likely to have been situated in the operational areas of the Port:

In their report Declared Assets DORC Report, AECOM note that very large Cutter Suction Dredgers can dredge rock up to UCS 50MPa. Arup’s assumption, based on prior experience from comparable projects in Australia, is that hard rock with a UCS 50-70MPa (depending on RQD) can be removed by CSD, without the need to revert to drilling and blasting. This approach has been proven across a number of projects over the past 5-10 years. Since the agreed approach to DORC valuations is to use Modern Engineering Approaches to value asset replacement cost, Arup believes it is appropriate to estimate the entrance channel replacement cost using CSD dredging techniques, and not drilling and blasting.

  1. Arup provided geotechnical modelling of the Port, based on the information available to it, to estimate the volume and strength of the material to be dredged. It estimated there to be approximately 1,260,038 m3 of high strength rock (that is, with a Uniaxial Compression Strength (‘UCS’) between 20 MPa and 60 MPa) and 51,378 m3 of very high strength rock (that is, with a UCS greater than 60 MPa). The considerable majority of this hard rock was said to be located at the Entrance Channel.
  2. It was uncontroversial, however, that the UCS is only one factor by which the effective strength of rock (and therefore its dredgability) is to be determined and that specific fragmenting or fracturing of the rock needs also to be considered.
  3. The extent of such fragmentation is described in terms of its RQD. In general terms, the lower the RQD, the weaker the effective strength of the rock. As stated in the Arup 12 June 2018 report at page 9:

The assessment indicates that approximately 288,000 m3 of bedrock in the entrance channel has a UCS greater than 50MPa. However, analysing the RQD of the highest strength rock (>55MPa) indicates that it is likely to have some fracturing, having an RQD between 79 to 97%. The presence of fractures will lower the effective UCS of this material toward 50MPa.

  1. According to Arup, rock strengths of at least 60 MPa can be reliably fragmented with modern jumbo CSD. In response to the ACCC’s Draft Determination, Arup in the 3 September 2018 report at page 17 went onto to advise:

Based on the results of UCS testing . . . the percentage of very high strength rock (<60MPa) encountered in the Maintained Entrance Channel is expected to be around 3.5%, with approximately 15% having a strength in excess of 50MPa. The average UCS value . . . is around 37MPa.

  1. Arup also cited (in its 12 June 2018 report at page 10) the recent example of the dredging of Walker Shoal in Darwin, where rock stronger than that at the Entrance Channel of the Port was successfully dredged by a jumbo CSD named ‘Athena’. This dredging at Walker Shoal took place without requiring drilling and blasting, despite provision having been made for such work:

As further evidence that modern CSD dredging techniques can accommodate high strength rock, we highlight the dredging of rock at Walker Shoal, Darwin. In 2014, rock with a greater strength to the Entrance of Newcastle was successfully dredged direct by the CSD, Athena. Provision was also made for drilling and blasting but was not required. INPEX noted that the dredging was technically challenging, and involved the removal of a ‘very hard lump of rock’ that represented a safety risk to shipping. (Arup can provide specific confidential information relating to the CSD dredging undertaken at Walker Shoal under privilege should this be required. This includes details of the UCS and RQD of rock removed by CSD).

  1. Further to this, Arup stated (in its 3 September 2018 report at page 32):

AECOM state that “the rock properties and wave climate at the Walker Shoal are significantly different to the conditions at Newcastle and that Arup’s suggestion that this is a comparable project is invalid”. They arrive at this conclusion having briefly reviewed information from an earlier ACER Vaughan geotechnical report dated August 1996.

Arup can confirm that the dredging associated with this report is on the edge of the Walker Shoal, and is not representative of the strength of the rock dredged by the Athena as part of the major works undertaken for INPEX in 2014. The reference used by AECOM to draw their conclusion is therefore invalid.

Baggerman has been involved in numerous rock fragmentation projects with material stronger than that at the Entrance to Newcastle Harbour, including the Walker Shoal project undertaken in 2014. The geotechnical data relating to the Walker Shoal project remains confidential at the time of writing. As noted in Section 2.2.1 of Arup’s 12th June report, rock at Walker Shoal was successfully dredged with the Athena, a modern Self Propelled JCSD. We therefore maintain the view that if the Entrance Channel was to be dredged today, the relatively weaker Newcastle Harbour material could be dredged with a modern Self Propelled JCSD.

  1. In its Draft Determination, the ACCC accepted (at page 51) Arup’s assessment of rock strengths and proposed work methodology:

… [B]ased on the evidence before it, the Commission has concluded that Arup’s modelling provides a more robust approach to estimating the volume and type of material to be dredged. This extends to the UCS and RQD figures.

The Commission also notes that Arup’s proposed methodology to dredging is based on what it submits has occurred in practice on at least one occasion such that it does [sic, goes] beyond a theoretical exercise. The Commission considers that these two factors suggest that the use of more advanced technology as proposed in Arup’s report is an appropriate assumption for the purposes of a DORC valuation for this arbitration. This also informs the Commission’s consideration of dredging costs below.

  1. PNO responded to this part of the Draft Determination with reports from Akuna and Evers Consult explaining why Arup’s proposed dredging methodology was impractical. This included material referring to the sea conditions at the Port which restricted the use of a CSD for the majority of the year and that the rock type and strengths at the Port were incomparable with Walker Shoal.
  2. As already indicated, Glencore’s response to this new material included Arup’s report dated 3 September 2018, which provided data and other material contradicting Evers Consult and Akuna.
  3. The ACCC had regard to the further material and in its Final Determination adopted PNO’s dredging costs estimate.
  4. In so deciding, the ACCC said that:
    • the rock at the Entrance Channel was unlikely to be of a type that would allow the use of a CSD;
    • sea conditions at the Port would limit the ability to use a CSD to dredge hard rock at the Entrance Channel; and
    • there was “insufficient information” provided to establish with confidence the comparability between Walker Shoal and the Port to support the use of a CSD.
  5. Glencore submitted that expert material submitted by PNO did not justify the ACCC’s decision to reverse its position from the Draft Determination so as to adopt PNO’s estimated dredging costs in preference to Glencore’s estimate without discount.
  6. It was submitted that properly analysed, PNO’s expert material contained a number of unsubstantiated conclusions about important matters, and contained information that pointed to the very real probability that the hard rock at the Entrance Channel to the Port could be removed using a CSD without drilling and blasting.
  7. The ACCC considered that PNO’s DORC valuation was more appropriate as it better reflected what would be required in practice to construct the channel and berth at the Port. However, the ACCC considered that PNO’s allowances for maintenance dredging and acid sulphate management were not appropriate and should not be included. In the case of maintenance dredging, the ACCC accepted the position put by Arup on Glencore’s behalf that maintenance dredging would ordinarily form part of the capital expenditure dredging project. In the case of acid sulphate management, the ACCC considered insufficient information had been provided by PNO (and its expert AECOM) to justify its inclusion. The ACCC therefore accepted PNO’s submitted total construction costs excluding the allowance for maintenance dredging and acid sulphate management. The result is total construction costs of $1,038.7 million (in 2014 dollars), which was then adjusted to reflect the valuation date adopted by the ACCC.
  8. The Tribunal is in a difficult position with conflicting expert views, but nevertheless must make a determination based upon an assessment of the material before it. We have already indicated that the Baggerman Report sought to be relied upon by Glencore would not advance our consideration of the issue we need to determine, even if we were to allow it to be relied upon in this re-arbitration.
  9. It is important to recall that the Port was not constructed using a jumbo CSD. However, the economic theory behind the DORC methodology is that users should not have to pay for the cost of access to the asset if, in a competitive market, an efficient competitor would be able to supply equivalent services more cheaply using the latest technology and an optimised (ie efficient) approach to construction. The decision must have proper regard to the legitimate business interests of the provider and the provider’s investment in the facility. The Tribunal is not looking for certainty. The Tribunal looks to see whether there is some degree of probability an event will occur. However, the Tribunal needs to reach a level of satisfaction that the construction method is as a matter of fact going to be feasible and appropriate.
  10. Glencore referred to estimates by its expert, Arup, of the volume and strength of material to be dredged at the Port. In Arup’s 3 September 2018 report it estimated that there were 1.05 million m3 of total bedrock with a UCS of between 20 and 50 MPa and 209,000 m3 of total bedrock with strength of more than 50 MPa.
  11. Arup advised that only around 3.5% of the rock at the Entrance Channel had a UCS greater than 60MPa. In Glencore’s submission, even if this very small proportion of rock cannot be reliably fragmented with a jumbo CSD, this should have no bearing on the method adopted for weaker rock at that location. The low average UCS value of rock in the Entrance Channel (around 37MPa), combined with the very low relative volume of very hard rock, provided a useful indicator it was submitted that extensive drilling and blasting was not required.
  12. In the Tribunal’s view, the most reliable estimates of the hardness of rock at the Entrance Channel are those relied on by PNO’s expert AECOM, which are based on historical records showing the quantity of rock actually removed (through drilling and blasting) during the construction of the Entrance Channel, and core samples taken from that material, which show the strength and hardness of the rock material. Based on this material, AECOM’s assessment is that there are 953,731 m3 of total bedrock with UCS of between 20 and 50 MPa and a further 587,379 m3 of total bedrock that would require pre-treatment (by drilling and blasting) before it could be dredged.
  13. Although the rock strength data from the core samples taken during the Harbour Deepening dredging works was relied upon by both AECOM and Arup, only AECOM has relied on the firm MDA which undertook the relevant Newcastle Harbour Navigation Channels Replacement Cost Valuation in 2014 to assess rock composition and strength. Whilst details of MDA’s methodology and workings have not been provided we see no reason not to accept AECOM’s assessment.
  14. As previously stated, PNO obtained expert reports from AECOM, Akuna and Evers Consult, each of which expressed the opinion that CSDs were unsuitable for dredging very hard rock (ie rock with an UCS of more than 50 MPa). Glencore appears to accept that these opinions reflect the “commonly accepted” views within the dredging industry , but says:

(1) UCS is only one factor by which the effective strength of rock (and therefore its dredgability) can be measured, and that the fragmenting or fracturing of the rock also needs to be considered; and

(2) a newer class of jumbo CSDs have demonstrated an operational capacity beyond that previously understood to be the case.

  1. The Tribunal is mindful of Glencore’s criticism of the approach we are taking in agreeing with the submissions of PNO.
  2. As already stated, Glencore submitted that AECOM’s estimates of the rock hardness at the Entrance Channel were not reliable. PNO relied upon the fact that AECOM’s estimates are based on historical records showing the quantity of rock actually removed (through drilling and blasting) and core samples taken from that material. However, Glencore submitted such historical material is an unreliable source when assessing the need for and extent of any drilling and blasting using current technology. It was submitted that there has been a considerable evolution in the capacity and effectiveness of dredging technology since the various campaigns were undertaken at the Port. For example, the maximum rock strength capable of being directly dredged at the time of the Harbour Deepening dredging works was approximately 25MPa. AECOM seemed to agree that a modern jumbo CSD is now capable of dredging up to 70MPa in appropriate conditions.
  3. It followed then, in Glencore’s submission, that the historical data on the volumes of rock that were unable to be directly dredged (and thus required drilling and blasting) in the Harbour Deepening dredging works would indicate much higher volumes than would be the case if the work was carried out today with modern equipment. It was submitted that it was inevitable that AECOM’s reliance on these historical records would produce an overestimation of the volume of rock requiring drilling and blasting today.
  4. This claim appears to depend on Arup’s experience with a jumbo CSD at Walker Shoal in Darwin. However, the information which is available does not lead the Tribunal to any degree of satisfaction that the rock (and sea state) conditions at the Port and at Walker Shoal are comparable.
  5. The data which was before the ACCC and now the Tribunal does not support the claim that the rock at Walker Shoal is of greater strength than at the Port. A geotechnical report by ACER Vaughan dated August 1996 showed that the RQD values for Walker Shoal were generally much lower than at the Entrance Channel to the Port. Further, sea conditions at Walker Shoal, unlike at the Entrance Channel at the Port, are calm and sheltered.
  6. Evers Consult relevantly stated (in its August 2018 report at page 11) that:

EC is of the opinion that observations and comparison in respect of the materials strengths between Walker Shoal and the Entrance to Newcastle are dissimilar and indicate differences in dredgeability of the two sites.

As demonstrated in Figure 3 (as provided by AECOM to EC and as included in AECOM’s report dated 17 August 2018), the RQD values for Walker Shoal are generally much lower than the RQD values for the PoN Entrance Channel, indicating that the Walker Shoal material is generally much more fractured and can consequently be expected to be much easier to dredge because of this material difference in the RQD values present at the two sites.

EC has worked on a few occasions in the general Darwin area and is familiar with the location and general seastate conditions at Walker Shoal. Walker Shoal is located in a completely sheltered part of Darwin Harbour and with the exception of a cyclone event the waters in that area are always very calm.

Overall with much more fractured rock and a very benign seastate environment, dredging at Walker Shoal with a jumbo CSD is entirely possible but can certainly not be quoted as similar to dredging at the Entrance of the Port of Newcastle.

  1. Similarly Akuna (in its 16 August 2018 report at page 6) stated the following:

The fourth element to be reviewed was the statement whether the conditions present in the Walker Shoal project (which Arup seeks to rely on) are comparable to those at the Port of Newcastle with respect to dredging, or otherwise distinguish such conditions from the conditions present at the Port of Newcastle. As detailed in the rock strength assessments in this advice paper, the Conglomerate found at Walker Shoal is considerably weaker than the Conglomerate and Sandstone at the entrance channel of the Port of Newcastle. The Port of Newcastle entrance channel has a consistently hard rock stratum, while Walker Shoal has very weak rock in boreholes at 25 to 50 meter from the harder rock boreholes. Walker Shoal has an irregular rock stratum with distinctly to extremely weathered rock in a 200 by 200 meter area. The wave climate at Walker Shoal is at sheltered waters and favorable to dredge harder rock with a fairly stable very large modern self-propelled Cutter Suction Dredger and is not comparable to the wave climate at the entrance channel of the Port of Newcastle.

  1. Finally, AECOM (in its 16 August 2018 report at page 6) stated:

Arup proposes the use of the CSD Athena to dredge the rock at Newcastle citing ‘comparable’ projects in Australia and specifically at Walker Shoal29, to demonstrate that rock up to 70MPa (depending on RQD) can be removed with a modern cutter suction dredger. AECOM’s view is that the rock properties and wave climate at the Walker Shoal are significantly different to the conditions at Newcastle and that Arup’s suggestion that this is a ‘comparable’ project is invalid.

This is clear from a comparison of the rock parameters for the Port of Newcastle Entrance Channel (sourced from the data provided under the 1976 Harbour Deepening Contract) with rock parameters at Walker Shoal (sourced from Acer Vaughan TR 29/96 East Arm Port Walker Shoal Geotechnical Drilling Investigation, August 1996).

… In our view the rock at Walker Shoal is not comparable to that at Newcastle and Arup’s attempted comparison of dredging methods at these two sites is therefore invalid.

  1. Glencore submitted that PNO’s insistence that a jumbo CSD could not effectively dredge the hard rock in the Entrance Channel is underpinned by AECOM’s premise that a window of at least 12 hours is needed to set up a jumbo CSD, conduct dredging operations and demobilise. This premise was said to be factually incorrect. As explained by Arup (in its September 2018 report), in arriving at such a conclusion, AECOM was said not to have given any consideration to the operational configuration of the jumbo CSD, the use of pre-installed quick-release anchors, and modern operational techniques to fragment the rock. Such factors allow for the rapid and efficient movement of dredging vessels from weather exposed areas to more protected areas when necessary. This was said to allow the jumbo CSD to work efficiently in weather-exposed areas on an intermittent basis as conditions allow.
  2. As expressed by Arup (in its 3 September 2018 report at page 33):

In their report dated 17th August, AECOM state that “12 hours is a realistic practical minimum period for a cutter suction dredger of this size to account for mobilisation time prior to operation”. In our opinion this is factually incorrect, and in arriving at such a conclusion, AECOM has not had any regard to the operational configuration of the JCSD, the use of preinstalled quick release anchors to support efficient movement, and the operational techniques to fragment the rock.

  1. In dealing with the operational assessment of JCSD, Arup went into considerable detail of the operational configuration, use of anchors, operational techniques, and the operational limitations of self-elevating platforms (‘SEPs’) in the Entrance Channel.
  2. Glencore submitted that Arup’s 3 September 2018 report considered the issue in some detail and noted:

(1) The majority of the historic rock removal in the weather-exposed areas of Entrance Channel occurred as part of the Harbour Deepening dredging works and the equipment used during this campaign was largely floated, not elevated on spuds (due to construction delays with the SEPs).

(2) The historic drilling and blasting (which would have occurred in the harder rock areas that PNO says need to be pre-treated by drilling and blasting) was carried out by the ‘WH Gemini’ (a four-boom catamaran drilling and blasting barge) which operated mainly in the Entrance Channel for a period of 88 weeks during the Harbour Deepening dredging works.

(3) The drilling work undertaken by the Gemini was constrained by the vertical movement caused by the swell, typically limited by vertical movement of 0.3 to 0.5 metres. This movement is significantly less than the operating conditions of a jumbo CSD.

(4) During its working period of 88 weeks, the Gemini’s delays due to swell was less than 5%.

  1. It was submitted by Glencore that contrary to the Final Determination and PNO’s submission, much smaller floating dredging equipment has been used successfully at the Port. Even accepting the wave data information relied on by PNO, Arup has demonstrated that a jumbo CSD could work within the expected operational windows in the most swell-exposed areas, moving to more protected areas as required with limited, if any, delays due to swell.
  2. The ACCC found that the sea conditions at the Port would limit the ability of CSDs to dredge hard rock at the Entrance Channel. As AECOM explained, CSDs have tight limitations on the wave climate in which they can operate efficiently without damage to the cutter head, particularly when dredging in hard rock. As noted, AECOM expressed the opinion that at least 12 hours is needed to set up a CSD on site and undertake dredging and demobilise, and concluded based on sea condition data that there would be less than 4% of the year when there was a window of at least 12 hours with conditions suitable for dredging in >50 MPa rock and no opportunities to dredge in >70 MPa rock. Further, the figure of 4% was said to be based on historical reviews of sea conditions – in practice, dredging operators would be unlikely to be able to predict these windows with perfect accuracy, meaning the actual window is likely to be even smaller.
  3. In our view, Glencore’s challenge to the ACCC’s findings, and the ACCC’s reliance on the opinions of PNO’s experts, are without substance for the following reasons:

(1) the opinions were based on the actual wave conditions at the Port. The analysis of the sea conditions is found in AECOM’s 16 August 2018 report (at pages 12-18 and at Appendix A, which contains a review of wave data recorded at the Port from 1989 to 2001 by Tremarfon Pty Ltd). Evers Consult refers to AECOM’s analysis of the sea conditions, including the ‘comprehensive wave analysis of data by Tremarfon’; and

(2) the dredging campaigns at the Port that used smaller, allegedly more susceptible floating equipment, involved dredging in less exposed areas, and even in those less exposed areas, the campaigns were constrained by wave activity. None, to any level of satisfaction, showed that it is viable to use a CSD to dredge the Entrance Channel in more exposed locations and for 12 hour periods.

  1. It is to be also to be recalled that Akuna has been asked to provide its opinion as to whether:
    • based on the interpretation by Arup of relevant conditions and data, the removal of rock by CSD, as proposed by Arup, is a feasible method for dredging at the entrance of the channel at the Port;
    • based on the interpretation by AECOM of relevant conditions and data, the drilling and blasting method proposed by AECOM is a feasible and preferred approach to dredging at the entrance of the channel at the Port;
    • the interpretation of the conditions and data at the Port by Arup is correct;
    • the conditions present in the Walker Shoal project (which Arup seeks to rely on) are comparable to those at the Port with respect to dredging, or otherwise distinguish such conditions from the conditions present at the Port; and
    • drilling and blasting remains a modern day equivalent method for dredging, and provide any recent/modern examples of where drilling and blasting remains relevant.
  2. The 16 August 2018 Akuna report is, in part, expressly stated to be a review of the reports and submissions already prepared by AECOM (on behalf of PNO) and Arup (on behalf of Glencore) in relation to dredging methodology, with a view to providing a report on the most effective and efficient method for removal of rock at the Entrance Channel. Akuna provided its own opinion about the feasibility of direct dredging as opposed to drilling and blasting. This “CSD direct assessment” is said to be “dependent upon the holistic assessment of the local circumstances.”
  3. That Akuna report accepted that there is no uniform division range, expressed in UCS, between direct dredging with a CSD and drilling and blasting. Many rock characteristic parameters play a role therein. However, the commonly accepted limits for very large modern CSDs is that they have an economic direct dredgability limit of between 40 and 50 MPa.
  4. The Akuna report also noted that the data available to it relating to Walker Shoal was inadequate for it to assess the degree to which “the ductility of the [Walker Shoal] Conglomerate differs from the rock found at the entrance channel of the Port of Newcastle and the energy required to break the rock.” However, Akuna nevertheless proffered an opinion on the basis that “an informed assessment can still be made as to the similarity or otherwise of the conditions at the Port of Newcastle and Walker Shoal based on the data available.”
  5. Nevertheless, Akuna (at page 5) came to some definite views:

The first element to be reviewed was the statement whether, based on the interpretation by Arup of relevant conditions and data, the removal of rock by CSD as proposed by Arup is a feasible method for dredging at the entrance of the channel at the Port of Newcastle. Based on the reviewed and studied information, it can be clearly stated that the conglomerate and sandstone rock at the entrance channel of the Port of Newcastle is outside the operational and economic limits of a modern very large self-propelled Cutter Suction Dredger. Moreover, the wave conditions at the entrance channel will further limit the rock dredging capabilities of the CSD.

Then at page 5 the Akuna report continued:

The rock with a medium hardness at the entrance channel of the Port of Newcastle can partly been dredged by a modern very large self-propelled Cutter Suction Dredger of which the rock strength limit at the wave exposed outer part of the entrance channel will be lower than the rock strength which could be directly dredged at the moderately sheltered inner entrance channel area and the Horse Shoe area.

The remaining area, of which the footprint will be reduced to the harder rock, will require drilling & blasting after which the removal of the blasted rock would preferably be executed by a large modern Backhoe Dredger supported by self-propelled Split Hopper Barges.

Then at page 6 of the Akuna report it was said:

The interpretation by Arup of the working environment at the entrance channel does not take into consideration that the wave climate is very unfavorable to operate a Cutter Suction Dredger while dredging hard rock. The interpretation by Arup of the rock strength by combining the strength and the degree of weathering is unconventional and does not take into consideration the amount of energy and forces required to break the rock into hydraulically transportable sizes.

The fourth element to be reviewed was the statement whether the conditions present in the Walker Shoal project (which Arup seeks to rely on) are comparable to those at the Port of Newcastle with respect to dredging, or otherwise distinguish such conditions from the conditions present at the Port of Newcastle.

As detailed in the rock strength assessments in this advice paper, the Conglomerate found at Walker Shoal is considerably weaker than the Conglomerate and Sandstone at the entrance channel of the Port of Newcastle.

The Port of Newcastle entrance channel has a consistently hard rock stratum, while Walker Shoal has very weak rock in boreholes at 25 to 50 meter from the harder rock boreholes. Walker Shoal has an irregular rock stratum with distinctly to extremely weathered rock in a 200 by 200 meter area.

The wave climate at Walker Shoal is at sheltered waters and favorable to dredge harder rock with a fairly stable very large modern self-propelled Cutter Suction Dredger and is not comparable to the wave climate at the entrance channel of the Port of Newcastle.

In the Akuna report, at page 6-7, it was stated:

The statement by Arup that dredging rock with a very large Cutter Suction Dredger is a modern and more economic methodology to dredge the hard rock at the entrance channel of the Port of Newcastle shows little understanding of the rock dredging processes in general.

Rock, till certain strength, can be dredged direct by a CSD depending on the local circumstances and the detailed characteristics of the rock.

The harder the rock the lower the production the higher the operational costs, driven by the pick-point consumption, and hence the higher the unit rate for the removal of the rock.

At certain hardness the unit rate of the drilling & blasting operations will be more economical than the direct dredging by the CSD. At that stage, depending on the environmental permit conditions, drilling & blasting would and could be the dredging methodology to remove the rock.

  1. We make one further observation. We cannot be involved in speculation as to the future events that may unfold or as to the veracity of claims about the capacities of the most recently developed dredging equipment. Even accepting a modern jumbo CSD could operate at up to 70 MPa, we are not satisfied to the level required that the CSD will be able to operate in the manner contended for by Glencore. To the suggestion that if say the volume of hard rock was halved so that theoretically drilling and blasting could be supplemented with other dredging techniques, the Tribunal cannot base its decision on this degree of speculation. The Tribunal is satisfied that the correct view of the current and likely future state of the operational configurations and techniques for using the jumbo CSD in the construction of the Port is as put forward by PNO and the ACCC, and the analysis of Arup is sound.
  2. For the foregoing reasons, the Final Determination was correct and is our own view.

IMPORTATION OF RECLAMATION BUNDING MATERIAL

  1. The Tribunal can conveniently deal with this issue in the same manner it dealt with the previous issue.
  2. Glencore challenges the ACCC’s acceptance of PNO’s contention that an additional allowance of $145 million should be included in DORC valuation for imported reclamation bunding materials. We do not need to deal with the issue of user contributions as the Tribunal has already accepted PNO’s primary argument that user contributions are not to be taken into account.
  3. It was submitted that such an additional allowance was not required as sufficient material was available from dredging without the need to import reclamation bunding materials.
  4. Glencore relied upon the 12 June 2018 Arup report which (at page 4) stated:

Properly analysed, no such additional allowance is required as sufficient material is available from dredging without the need to import reclamation bunding materials. Arup considers that our dredging and reclamation methodologies provide for the initial bunds to be developed as part of the dredging of the channel, and there is no need for imported material, or for bunds to be constructed in a 200mx200m grid.

  1. Further, in reliance on the earlier 28 May 2018 Arup report it was contended that the only cost allowance should be for the placement of dredged material:

Costs for material placement and bunding are included in the dredging rates. Refer to the methodology assumed for material placement and bunding in Section 2.2.6.

  1. A significant factor in determining whether bunding materials were required to be imported is the suitability of the materials dredged from the Port. However, Glencore submitted that the ACCC failed to properly examine the issue and merely accepted PNO’s dredging costs without question in this regard, with the Final Determination stating (at page 81):

The Commission notes the difficulties identified in relation to assessing the parties’ estimates of the volumes of materials to be dredged. However, the Commission has accepted PNO’s submitted position in relation to the type of material to be dredged (i.e. hardness of rock), dredging methodology and therefore costs on the basis that AECOM’s DORC valuation (upon which it relied) is likely to be more appropriate. Given this, the Commission considers that PNO’s submitted position that an additional allowance of $145 million ($2014) should be included in the DORC valuation for reclamation bunding materials.

  1. Glencore submitted that the answer to the question of dredging methodology says nothing about the suitability of dredged material for reclamation bunding. It was submitted that bunding is generally constructed from sand and cut conglomerate rock. The question, therefore, was whether dredging would produce sufficient quantities of this material.
  2. Arup took the view that there would be sufficient material. In its 3 September 2018 report it stated (at page 52):

The approach and Entrance Channel contains approximately 2 million cubic metres of fine, medium to gravelly clean sand which can be used in lieu of importing external materials for bund construction (sufficient to construct up to 60 kms of peripheral bunding – it is anticipated that a maximum of 10km of bunding from this source would be required).

  1. Assuming this was accepted by the Tribunal, Glencore argued that this should subsequently lead to the reduction of the DORC valuation used in the Final Determination by the amount included for imported reclamation bunding materials. This equated to approximately $145 million.
  2. As we have said, the ACCC’s DORC valuation included $145 million for reclamation bunding materials. This involved the importation of materials to construct an initial bunded area below the river water level (formed with perimeter bunds or internal bunds) into which dredged material would be placed to form the reclaimed area. The ACCC’s estimate consisted of $65 million to source and place 700,000 m3 of material for the initial perimeter, and $80 million to form the bunds from material subsequently obtained from dredging.
  3. Glencore submitted that no allowance for importing material was necessary, as sufficient material would be available from dredging at the Port to obviate the need to import reclamation bunding materials. However, the fine material which would be available from the early dredging at the Port would be unsuitable to form underwater perimeter bunds, which must be constructed from coarse or hard gravel or rock to be stable.
  4. Glencore’s proposed methodology was explained in detail in Arup’s 3 September 2018 report. In summary, it required bunds (including perimeter bunds but only limited internal bunds) formed from washed sand won from dredging. Bunds would be formed to contain this work and the dispersion of sediment during reclamation. Following this, reclamation would proceed using a “pancake” method, by which layers of dredged material are laid, with preference given to coarser dredged material. This was detailed in Arup’s 3 September 2018 report (at pages 51-52):

Arup is proposing that limited bunds are required and can be formed from clean ocean washed sand won from dredging. Bunds would be formed to contain the work and sediment dispersion during reclamation. Following this, reclamation would proceed using a pancake method, whereby layers of dredge material are laid, with preference given to coarser dredge material such as sand and cut conglomerate.

In Arup’s method, the washing and sorting of sediment can be effectively achieved using hopper barge compartments. Claimed material is washed through compartments in the hopper barge. It is then allowed to settle where the coarse material settles at the bottom of the barge and the fine fraction is left in suspension. The settled coarse sediment is then placed as reclamation material, allowing the remaining waters to be transferred offshore for disposal. Overtopping (i.e. whereby sediments are washed off the barge back into the water column) can be effectively controlled by employing suspended sediment monitoring, and restricting spill rates or halting works if exceedances of suspended sediment levels are detected.

  1. At page 54, Arup further stated:

Arup is proposing to use coarser sediment, such as sand and cut conglomerate for reclamation purposes, while disposing of the finer sediment fraction (mud, clay, siltstone, claystone and shales) offshore due to its propensity to break down into finely dispersed materials. Initial perimeter bunds would be established prior to reclamation commencing.

  1. In the opinion of the Tribunal, Glencore’s method, which involved “pancaking” the sand material directly onto the areas to be reclaimed, without the need for perimeter or internal bunds, will suffer from two problems as identified by PNO.
  2. First, without perimeter bunds to contain the dredged material, it is highly likely that soft marine sediment in the dredged material (such as mud, clay, siltstone, claystone and shales) would escape from the bunding, leaving residual deposits on the riverbed.
  3. Citing the ‘AECOM Response to Section 5 of ACCC Draft Determination 20 July 2018 – Planning Opinion’, the Final Determination stated (at page 79):

This would not comply with prevailing development consents in relation to the maintenance of water quality in the Hunter River.

Comparatively, the Bund Method would pose a lower potential risk of impact to water quality, ecology and biodiversity relative to the Pancake Method due to:

  • The smaller area of excavated material exposed to the water column and connected to areas outside the port development footprint at any one time; and
  • The shorter duration of excavated material placement activities exposed to the water column and connected to areas outside the port development footprint.

On this basis, and notwithstanding its additional expense, I believe that regulatory authorities would prefer the Bund Method over the Pancake Method, as the Bund Method would avoid or minimise potential impacts on water quality, ecology and biodiversity, consistent with the objects of the Environmental Planning and Assessment Act 1979 (NSW) and Environment Protection and Biodiversity Conservation Act 1999 (Cth). The regulatory authorities would likely seek to give effect to this preference through appropriate conditions of approval.

In my opinion, the Pancake Method is unlikely to be approved because it does not effectively avoid or minimise impacts on water quality, ecology and biodiversity and there is a feasible alternative (the Bund Method) which does.

  1. Whilst Glencore submitted that this risk could be avoided through the use of a trailer suction hopper dredge (which would remove the overlying soft material, which would then be disposed of offshore), we consider it is not possible in practice to remove all of this material and there are likely to be pockets of fine material remaining. By contrast, the use of perimeter and internal bunding, as provided for in the Final Determination, allows the containment and management of this material.
  2. Secondly, Glencore’s pancake method assumes that there is no fine material in the remainder of the dredged material that would be placed in the reclamation. Inevitably, there would be pockets of fine material or localised variability in the material which is unsuitable for use in bunding and reclamation.
  3. Citing the 28 May 2018 Arup report at page 16, the Final Determination stated (at pages 79-80):

It is standard practice to construct internal bunding to create several reclamation cells which then allow the management of unsuitable material and discharge water. Glencore’s expert, Arup, refers to examples in Sydney and Brisbane where the pancake method has been used, but in neither of these cases was the dredged material pancaked into uncontained areas (i.e. areas without perimeter bunds) in the manner Glencore proposes.

the sand, cut conglomerate and the like are unlikely to break down into quantities significant quantities of sub 100 micron material requiring containment by bunds. As such Arup have adopted the pancake reclamation method previously used by PWCS in Newcastle, Sydney Ports in Botany Bay and at Brisbane Airport.

  1. There is also a timing problem with Glencore’s suggested approach. Relying only on material dredged from the Port would require alteration to the proposed construction program to ensure that suitable coarse dredged material is available when it is needed for bunding. Given the current program has been designed on a least cost basis, any significant alteration will necessarily lead to increased costs, which have not been factored into Glencore’s alternative approach. In addition, even if the bunds were constructed solely from onsite material, there would still be a significant cost associated with this task, which has not been considered.
  2. For the foregoing reasons, the Final Determination was correct and is our own view.

LENGTH OF CONSTRUCTION PERIOD AND INTEREST COSTS

  1. The Tribunal proceeds to address these issues in a similar manner to the last two issues.
  2. The Draft Determination proposed to adopt a 12 year whole-of-port construction program, as submitted by PNO. In its response to the Draft Determination, Glencore reiterated its previous submissions for adopting a shorter construction program for a sub-set of port assets, whilst also providing an alternative to PNO’s whole-of-port construction program. In contrast, PNO supported the Draft Determination and provided additional reasons for why Glencore’s alternative whole-of-port construction program should not be adopted.
  3. PNO submitted that a 12 year construction program would be appropriate. This is based on AECOM’s DORC valuation, which assumes that the works would be completed by a selected contractor undertaking a single package of works for the Port as a whole. AECOM allows 5.5 years for planning and approvals, and 6.5 years for asset construction. This was detailed in the AECOM report dated 4 September 2017, at page ii:

To evaluate the interest during construction costs, a detailed port construction schedule has been developed, built up typically from asset level. This indicates about 5.5 years of planning and approvals, followed by 6.5 years of construction.

  1. AECOM considered that, if the channel were to be constructed as a separate construction campaign, the remainder of the Port would also then need to proceed as a separate construction campaign. AECOM noted that, in this case, the benefit of using the dredged material for reclamation and surcharge would be lost, and AECOM estimated an additional $700 million in materials would be incurred (although dredging costs would be reduced by around $268 million). AECOM, as stated in their report dated 28 May 2018 at page 32, was of the view that the dredging cost savings are not sufficient to offset the additional material costs, such that the least cost method for developing the Port is as a single campaign:

…if the channel were to be constructed as a separate construction campaign, with the dredged material disposed offshore, the remainder of the port development would also then proceed as a separate construction campaign. The benefit of using the dredged material for reclamation and surcharge would be lost and alternative land based sources would be identified.

Our assessment indicates that about 26. 5 million cubic metres of suitable fill material would be required to complete the reclamation of the port lands from their state at European First Settlement to their present levels of service. To be most efficient, it is assumed that this material would also be used as a rolling surcharge, before finally being incorporated into the works. Based on a 17m3 typical road truck capacity,· this volume of material would require 1.6 million truck movements into Newcastle.

If it’s assumed that the material was sourced from 35km away in the Hunter Valley, and each truck was able to complete three trips per day over a two year period, a fleet of about 1,000 trucks would be required to complete a total of 110 million truck kilometres.

We estimate the cost of sourcing 26.5million cubic metres of fill material onshore would be in excess of $700m. In addition, given the truck movements involved, it’s probable that a haul road would need to be constructed at significant additional cost, and there are likely to be further additional costs to rectify the damage caused to the existing road network.

We estimate that placing dredged material offshore, even though this may not be permitted, would offer dredging cost reductions in the order of $268m (including savings for bunding). This is not sufficient to off-set the additional costs of sourcing the material from land.

  1. This was also addressed by PNO in its submission to the ACCC in response to the Draft Determination:

…the timeframe for construction of the channel is inextricably linked to the construction of the landside facilities. The channel and associated assets used to provide the declared service will not be operational and therefore able to generate revenue without the terminals and the terminals cannot be constructed prior to completion of the channel dredging without additional costs for obtaining suitable construction materials. Further, the dredged spoil cannot be dumped alongside the channel if the terminals are already under construction (or already constructed).

  1. PNO contended that Glencore’s construction program created a timing and cost issue in that the dredged spoil will need to be disposed of other than to be used in constructing the landslide facilities. PNO also stated that it had reviewed regulatory decisions cited by Glencore and submitted that it did not consider them to be relevant or apt to the circumstances in the case.
  2. PNO argued that Glencore’s construction program was not practically feasible because it failed to take into account spoil disposal requirements in accordance with applicable environmental approvals and ignored the fact that landside facilities must be completed in order for the Port and the Service to be operationally functional at the end of the construction period.
  3. As set out in the Final Determination at pages 101-102, in its response to the Draft Determination, PNO submitted that the ACCC should not accept Glencore’s revised whole-of-port construction program of 9.6 years for the following key reasons:
  • [t]he revised proposal by Arup does not conform with DORC methodology … as it does not result in the least cost overall for the construction of the entire Port and does not replicate the current level of service
  • their program will result in artificially and inefficiently shifting costs from the channel to the landside works and ‘increasing the total overall cost of the port development’
  • [Certain] construction program matters raised by Arup … contain material flaws
  • [Regarding Arup’s] potential saving of 3 months on AECOM’s overall construction program … Arup have adopted “techniques and durations … without proper consideration of DORC principles which include that the project must not be unduly rushed (nor unduly delayed) and the development cost should be the most efficient and lower cost overall”
  • Arup’s reclamation program has a critical timing flaw [which] … does not align with the yield of its dredging strategy and shows the reclamation and all surcharging being in place mid-way through year six, but the dredging … not being complet[ed] until the last quarter of year 8 … Dredging of material needs to occur prior to the material being required for surcharging reclamation” … AECOM estimate the construction program … would need to be extended by 2.5 years
    • AECOM submit that in contrast, its ‘mass balance assessment of the proposed dredging strategy … allows for optimal and efficient use of the material as it becomes available from the dredging … so, at any point during the surcharge task … a shortfall of material that would require sour[c]ing alternative fill’ is avoided ‘and complies with DORC principles’
  • Arup submit there is a saving to the volume of surcharge material [having] referenced the techniques and processes in the … NCIG CET development … However in relying on [this] … as an indicator for more efficient techniques. Arup have not considered “that these techniques are significantly more costly than those used in AECOM’s DORC and the project specific drivers are non-existent in the context of our DORC assessment” … further, Arup have incorrectly assumed certain land is vacant
    • Specifically, ‘NCIG was constructed in a period of high coal demand and prices where there was a … commercial imperative for early completion. The DORC methodology implicitly assumes long run conditions representative of the middle of the economic cycle’
    • ‘NCIG work took place in an area where previous land reclamation and stabilisation work had occurred … [which was] not in a pre-European settlement state … [t]hus the construction periods are not directly comparable’
    • ‘[r]eclamation and stabilisation of Mayfield 2, 3 and Dockyard areas has not been included’ by Glencore but PNO submit that they are not decommissioned assets, rather ‘the site has been remediated and a large area … is currently used for cargo storage’
    • However ‘even if the site was vacant’, because the ‘Mayfield site is not in its pre-European settlement state … [a] proper DORC valuation would seek to replicate that service potential by including works to bring the area to its current load baring level’
  • [Arup’s proposed] .. . alternative surcharging techniques .. . [do] not properly evaluate the impact of construction costs … Without such assessment, Arup are unable to demonstrate that such techniques are more efficient or more appropriately conform to DORC principles.
  • [T]here are … critical engineering flaws in Arup’s proposed construction program … [such that] the program does not represent a … program that is capable of producing an asset able to deliver the Service in the time proposed including:
    • ‘Arup’ s… total period of 29 weeks to complete the tender process, award the contract and for the contractor to mobilise … is an .. . inadequate duration for these activities’ and ‘correcting this would extend Arup’s program by at least 12 week’
    • ‘AECOM’s assessment is based on modern methods that provide the development at the least cost overall, not necessarily in the least time. The techniques proposed (but not evaluated or demonstrated to be more efficient)’ by Arup ‘may lead to an accelerated program but come at a significantly greater cost, or otherwise shift costs to other users (for example through increased terminal development costs) and … would not be the most efficient overall.’
    • Arup have proposed that shipment of coal is to occur before navaids are operational and also before the dredging of the Entrance Channel is complete. This is a critical operational issue as vessels will be unable to access or navigate the channel prior to these components being completed.
    • ‘Arup’s program does not adequately demonstrate the complex interface relationship between reclamation, wharf construction, revetment construction and berth box dredging’.
  1. PNO submitted that the ACCC should accept that the 12 year construction program complies with DORC principles and represents a more cost-efficient duration to construct the assets required to provide the Service.
  2. Glencore put forth two alternative construction programs – one on a stand-alone basis (which Glencore stated was without delays associated with the construction of assets not required for the provision of the Service), and a whole-of-port construction program.
  3. Glencore sought a further reduction to the DORC on the basis that it challenges the ACCC’s finding that the cost of interest during construction (‘IDC’) should be assessed on a construction period of 12 years. Glencore submitted that it would be possible to devise a shorter construction program to construct only those assets required for delivery of the Service. It contended that these assets could be constructed in 8.25 years which would reduce the IDC by approximately $322 million, which in turn would reduce the NSC by approximately 13%.

Consideration

  1. The Tribunal does not agree with Glencore’s approach. The DORC valuation is intended to reflect the hypothetical optimised replacement costs of the Port. This valuation is calculated using the most efficient construction program. The most efficient construction program is a single, integrated project. In theory, it may be possible to re-arrange the construction schedule to open the Port to business to some customers while it is still under construction. But this would not represent the most efficient method of construction, and would inevitably lead to the incurring of additional construction costs.
  2. The Tribunal observes that Glencore has not sought to model the additional costs of a staged opening. For example, Glencore has not modelled the increase in construction costs for an earlier than scheduled construction of landside facilities or even the practical possibility of constructing such facilities. The 12 year whole-of-port construction period is optimised around the time required for the settling of soil under the terminals. Hence, there is strong possibility that even if the channel were completed after 8.25 years there would no terminals for the channel to serve. Glencore has also not sought to model the losses which would be incurred by the Port by operating on a partial basis with uncompleted terminals, which would need to be capitalised and added to the DORC. Instead, Glencore’s construction estimate assumes (unrealistically) that all other construction costs would be held constant.
  3. Also Glencore’s calculations assume that if the Port was able to start operating while still under construction, all IDC would cease to be charged. But this would only be true in respect of those parts of the Port which have been completed. Glencore also assumes in its calculation of IDC that there is no further expenditure on assets necessary to provide the Service after the 8.25 year period. However, the fact is that the remaining port infrastructure, including the completion of land reclamation, and the construction of remaining wharves, revetments and land based infrastructure, including for other products, would then be completed during the Port’s operational phase. At least some of these works, such as revetments, would be necessary to provide the full Service. Further construction costs and interest would continue to be incurred in respect of those parts of the Service yet to be completed, while Glencore’s revised DORC fails to reflect this fact.
  4. In reaching its Final Determination, the ACCC assessed the cost of IDC in accordance with a construction period of 12 years, as proposed by PNO. This was PNO’s estimate of the time required to construct the entire Port. Glencore challenged this finding.
  5. It is necessary to consider Glencore’s position in more detail.
  6. It was submitted by Glencore that the construction period should reflect the time required for efficient construction of only those assets required for delivery of the Service. Contrary to PNO’s “whole-of-port” argument (which was accepted by the ACCC), the time required to construct assets extrinsic to the Service (such as rail facilities, roads, and surcharging (ie improvement) of reclaimed land) ought not to be included for the purposes of the DORC valuation. Glencore’s evidence indicated a construction time of 8.25 years on this basis.
  7. Synergies’ May 2019 report stated (at page 46):

Recognising that, in practice, the port has been developed over a long period of time, largely through expansion of an operating-and therefore income generating-facility, Synergies considers that the construction period and cost profile should be assessed based on a pragmatic assessment of the time that would be required for the efficient construction of only those assets required to provide the declared service. Our view is supported by regulatory precedent, as outlined below.

  1. Glencore refers then to the position of PNO. PNO sought to justify its longer construction period on the basis that no revenue could be generated from the underlying assets of the Service unless and until reclaimed land was surcharged and all of the other assets were constructed; and that, therefore, interest should be capitalised until these other works (and, accordingly, the whole Port) are completed. This, it is said, is because efficient construction ought to be undertaken in a single campaign and the interrelationship of assets means that generation of revenue from declared Service-related assets (such as the channel) is dependent upon the completion of extrinsic of assets (such as reclaimed land). Glencore accepted that there are significant interrelationships between the construction of various assets required for the Port. However, Glencore says that it does not follow that this means the Port must be constructed in its entirety before substantial revenue can be generated from the assets that provide the Service. Glencore pointed out what PNO has publicly asserted to the NCC, in its application for revocation of the declaration of the Service, where PNO discusses the development of a container terminal at the Port.
  2. Glencore pointed out that export of coal is responsible for over 90% of the Port’s revenue. Accordingly, it was submitted that the generation of revenue can be substantially commenced at the time that the coal terminals and related infrastructure are developed. This would include the reclamation and surcharging of the land required for those assets but would exclude certain assets contended for by PNO.
  3. Arup, on behalf of Glencore, reported on how the sequencing of construction of the whole-of-port could be structured to allow completion of coal terminal infrastructure as a priority. Arup concluded that it would still require 8.25 years to construct the Service assets on a stand-alone basis, in which time construction of coal wharf and land-based infrastructure at Carrington and Kooragang Island could be sufficiently completed to commence revenue generating operations (albeit not necessarily at the full extent of current capacity). The remaining port infrastructure could then be completed whilst the Port is in operation.
  4. It was then submitted that capitalising interest only to this point is consistent with standard regulatory practice that provides for IDC to be capitalised until assets are commissioned. Allowance for increasing volumes after this time may be addressed in pricing.
  5. The Tribunal also notes that in response to the ACCC indicating in its Draft Determination its preference for the whole-of-port approach taken by PNO, Glencore proffered an alternative whole-of-port construction program that sees completion in 9.6 years.
  6. If the Tribunal accepts Glencore’s principal position of an 8.25 year construction period, the IDC determined by the ACCC ought to be reduced by around $322 million, which will, in turn, reduce the NSC by around 13%. If the Tribunal accepted Glencore’s alternative construction period of 9.6 years, it will reduce the IDC by around $170 million, resulting in a reduction of the NSC by about 7%.
  7. Glencore then said that PNO’s claim that the whole-of-port construction period of 9.6 years was unrealistic, and the ACCC’s acceptance of PNO’s claim, ignored the evidence provided by Glencore that there was no requirement for the “two stage” surcharging program. In the absence of a “two stage” surcharging program, AECOM’s own analysis shows that the whole-of-port construction can be completed within nine years. Glencore submitted that as identified by Arup:
    • AECOM has substantially over-estimated the volume of required surcharge material, with the result that AECOM concluded that there was insufficient dredged material to undertake all required surcharging as a single stage. AECOM also concluded that this meant that either a two stage process was required (where surcharge material was moved to a second site once surcharging of the first site was complete) or additional material needed to be imported.
    • This over-estimation was evident from the actual expected volume of surcharge material for the NCIG site (ie 4 million m3 as compared to AECOM’s estimated 10.6 million m3), and from the inclusion of surcharge material for vacant land (AECOM required 1.8 million m3 of surcharge material for vacant land at Mayfield).
    • Correcting for this over-estimation of surcharge material requirements alone would allow surcharging to be completed in a single stage without the need to import surcharge material, enabling AECOM’s “accelerated” 9 year construction period to be achieved without any material increase in cost.
    • Further, while Glencore’s “stand-alone” construction program did not seek to develop an integrated whole-of-port construction program aligning dredging with land reclamation for wharf development, its 9.6 year whole-of-port construction program did so.
  8. Glencore then submitted that it followed that there is no reasonable basis for PNO to now claim that a 9.6 year construction period is unrealistic.
  9. Glencore went on to explain its position further as follows. Within this 9.6 year whole-of-port construction period, it would be expected that an efficient infrastructure developer would prioritise the construction of the highest revenue generating assets – this means prioritising the development of the coal terminal infrastructure. As Arup explained, this approach does not mean staging of the Port construction in such a way as to add to the total cost and duration of construction, rather it means that the sequencing of construction activities would be prioritised to enable the coal sites to become operational in the most efficient way. It does not require material changes to the assumed construction methodology for components of the Port, and therefore would not add to the total cost and results in the most efficient construction of the Port, once account is taken of the opportunity cost of invested capital.
  10. Finally, Glencore submitted that PNO has incorrectly claimed that the approach of capitalising interest costs, until revenue generation commences, does not give regard to the remaining works that will require completion. For construction works occurring beyond this period, there is no need to capitalise interest, as the Service assets will be generating revenue and are therefore able to cover their financing costs. This was addressed in Synergies’ 17 August 2018 report. As that report also points out, accepting assets into a RAB at their commissioning date, notwithstanding that there may be some further post commissioning expenditure, is also standard regulatory practice for infrastructure serving the mining sector.
  11. In relation to a whole-of-port construction period, the ACCC noted that Arup’s arguments that all sites could be surcharged within 4 years were instructive in terms of where time efficiencies could be achieved. However, the ACCC claimed that Arup did not elaborate on the implications of surcharging for overall construction costs and that Glencore did not evaluate or demonstrate that Arup’s proposed approach would result in the lowest overall cost.
  12. Glencore submitted that the following information allows the Tribunal to make this assessment:

(1) In AECOM’ s original analysis of the 4 year versus 7 year construction period, the only additional cost that AECOM attributed to the 4 year program was the cost of imported fill for surcharging (estimated to be $360 million) and this was compared to the additional interest costs associated with a 7 year reclamation program compared to a 4 year program (estimated additional IDC in DORC value of $211.4 million), leading to AECOM estimating a higher cost of the 4 year program of $148.6 million.

(2) However, Arup’s report shows that AECOM had substantially overestimated the amount of fill required for reclamation and surcharging, and showed that the 4 year reclamation program could occur without needing to import fill (and without needing to incur the additional $360 million cost).

(3) It followed that the 4 year reclamation program would then be cheaper than the 7 year program, as it would allow the avoidance of the additional $211.4 million interest costs resulting from the 7 year program.

(4) The ACCC’s submission that there was no total construction cost for Glencore’s whole-of-port construction program is incorrect. Arup’s estimated replacement cost is fully aligned with its proposed 9.6 year whole-of-port construction program.

  1. At this stage, it is convenient to refer to the submissions of the ACCC.
  2. In the ACCC’s view, separate construction campaigns as submitted by PNO would be necessary to accommodate the staged commissioning of assets. The ACCC considered that, on balance, PNO’s construction program therefore better reflected the considerations of an efficient entrant under the DORC framework. In particular, the ACCC considers that an efficient entrant would not undertake a staged commissioning of assets because the higher overall costs incurred would more than offset any cash flows earned from an earlier revenue stream.
  3. The ACCC considered PNO’s proposed 12 year construction program as appropriate. The ACCC considered that this construction program provides for an IDC that contributes to ensuring PNO is able to earn a return on investment commensurate with the regulatory and commercial risks involved (ss 44X(l)(h) and 44ZZCA(a)(ii)) which is in the legitimate business interests of PNO (s 44X(l)(a)). This also ensures that prices reflect efficient costs, which is in the interests of those who have rights to use the Service (s 44X(l)(c)).
  4. The IDC estimate adopted by the ACCC – which the ACCC has determined using a 12 year construction period and calculated as at the valuation date of 1 January 2018 – was $463.3 million. IDC together with the total construction cost estimate of $1616.1 million form the commissioning costs estimate of $2,169.5 million (at 1 January 2018).
  5. The ACCC considered, and concluded in making the Final Determination, that the assumed construction program should allow for the construction of all assets required to provide the Service while minimising PNO’s overall construction costs. An efficient entrant, as assumed under the DORC framework, would need to consider a construction program that allowed for the construction of all assets necessary to provide the Service and would seek to minimise its total costs. This would include weighing the potentially higher construction costs that would be incurred in the earlier commissioning of assets against the receipt of earlier cash flows. Contrary to Glencore’s contention, however, an efficient entrant would adopt a construction program that provides for the generation of revenue as early as possible only to the extent that this minimises overall construction costs (net of cash flows).
  6. In respect of Glencore’s 8.25 year stand-alone construction program, the ACCC considered, and concluded in making the Final Determination, that:

(1) the construction period should include all assets that are necessary to provide the Service to the point that revenue can be generated from the Service, which would necessarily include the time taken to construct assets that are neither owned nor leased by PNO. For example, whereas Arup’s stand-alone construction program excludes Macquarie Pier, the time taken to construct Macquarie Pier should be included in the construction program because it is necessary for the construction of the southern breakwater;

(2) Arup’s analysis does not consider the potentially higher overall construction costs that are likely to result from a staged commissioning of assets notwithstanding the importance of this given the strong complementarities in the construction sequence;

(3) while AECOM’s DORC valuation for PNO did not explicitly consider the cost impact of a staged commissioning, AECOM did estimate the costs of breaking the construction sequence in the form of separate construction campaigns;

(4) this demonstrated that separate campaigns for the channel dredging and landside facilities enable a shorter construction period but result in considerably greater total construction costs;

(5) separate construction campaigns would be necessary to accommodate the staged commissioning of assets proposed by Glencore; and

(6) the staged commissioning of assets proposed by Glencore would involve higher overall costs that more than offset any cash flows earned from an earlier revenue stream and, accordingly, would not be undertaken by an efficient entrant.

  1. In respect of Glencore’s whole-of-port construction program of 9.6 years, the ACCC considered that Glencore had not fully considered the total cost of that program, and the ACCC could not be satisfied it would minimise total costs as an efficient entrant would under the DORC framework. More specifically, the ACCC considered that:

(1) Glencore’s construction period is shorter than that of PNO primarily because of differing views on the appropriate land surcharging program as assessed by Arup and AECOM respectively;

(2) Arup’s arguments to the effect that all sites could be surcharged within 4 years with no need to import fill material are instructive in relation to the issue of where time efficiencies and therefore financing cost efficiencies could be gained;

(3) however, while surcharging is the cheapest and most direct method of ground improvement, Arup did not elaborate on the implications of surcharging for overall construction costs and Glencore did not evaluate or demonstrate that Arup’s proposed approach would result in the lowest overall cost.

  1. While Glencore correctly observed that AECOM (on behalf of PNO) did not consider the cost impact of a staged commissioning of assets, it does not follow that the imposition on Glencore of an evidential onus and a burden to establish its case to a standard that PNO does not face should lead to a rejection of Glencore’s whole-of-port construction program of 9.6 years. The Tribunal considers that PNO’s construction program better reflects the considerations of an efficient entrant under the DORC framework than Glencore’s because there was insufficient evidence of the total construction cost of Glencore’s program for use in the DORC valuation. In circumstances where Arup and Glencore failed to consider the implications of surcharging for total construction costs, there was no total construction cost for Glencore’s whole-of-port construction program that could be applied for the purposes of determining a DORC valuation.
  2. We note that if a shorter period of construction were to be adopted, an allowance for capital expenditure and IDC for assets still to be constructed would be required.
  3. The Tribunal considers that the submissions of the ACCC and PNO are in accordance with the practical and efficient realities of a construction program that is applicable in the determination of a DORC valuation.

NON-COAL ASSETS

  1. This issue addresses Glencore’s contention that the arbitrated charges applied to coal carrying vessels should not exceed the stand-alone costs of their provision. The proposition was initially raised by Glencore in its submissions to the ACCC’s arbitration.
  2. The submissions of both parties to the ACCC in the original arbitration of this issue, summarised in Section 6.5 of the Final Determination, addressed the in-principle reasons a stand-alone pricing test should be applied; the nature of the assets associated with the provision of navigation and berthing services and the notional division of those assets between services to coal and non-coal vessels.
  3. The submissions of the parties to the Tribunal on this issue covered the same arguments or materials that had previously been part of the original arbitration and included no new grounds. The ACCC’s submissions similarly reflected, without changes, its consideration of and responses to submissions in its Draft Determination and Final Determination.

What the ACCC decided

  1. The arbitrated charge applied to coal carrying vessels was an output of a spreadsheet pricing model based on the PTRM. This was jointly derived by the parties and their advisors.
  2. The PTRM distributes an estimate of the total cost of the Service across two categories of Wharfage Charges and four categories of NSC, both of which charge types are explicitly divided between coal and non-coal vessels. The ACCC adopted the PTRM and varied inputs such as asset values to reflect its arbitration, but it did not alter the embedded process for setting the charges that distributed the final MAR
  3. The ACCC rejected the need for the stand-alone test on the two grounds argued by PNO in its initial submissions in the arbitration:
    • the Service does not distinguish between coal and non-coal users; and
    • the assets Glencore seeks to exclude from the MAR provide value for both coal and non-coal users, and therefore should be included in the MAR.
  4. It consequently determined the NSC for coal vessels using the method set out in the PTRM for distributing the MAR arising from the inputs decided in other parts of its Final Reasons.

Submissions to the Tribunal

Glencore

  1. Glencore raised the issue of the treatment of non-coal assets in the context of the method used in the PTRM to distribute the calculated MAR between users of the Service. It’s acceptance of the model was contingent on application of a stand-alone revenue test.
  2. Glencore submitted that coal users should not pay more than the stand-alone cost of providing the Service to them, as this test is consistent with the Part IIIA pricing principles (s 44ZZCA) and with earlier ACCC regulatory decisions in relation to the Hunter Valley coal network.
  3. Glencore’s position was originally set out in detail in Section 8.2 of Synergies’ 28 May 2018 report to the ACCC, citing the decision of the Essential Services Commission of South Australia in the context of the South Australian rail access regime and the QCA’s consideration of this issue in the context of Queensland Rail’s Rail Access Undertaking. The consistency of the stand-alone test with the pricing principles relies on the logic summarised by the ACCC in their submission to the Tribunal:

Pricing between stand-alone and incremental cost is considered to be efficient as it avoids cross-subsidies. Pricing above stand-alone cost is economically inefficient, and gives rise to the threat of an efficient entrant displacing the Port for the service.

  1. This argument was presented in more detail by the ACCC in its Draft Determination, although it did not appear in, and was not relied upon, in the Final Determination.
  2. Glencore submitted that the stand-alone test is consistent with the economically efficient operation of the facilities required for the Service as prescribed by s 44X(1)(g). The pricing principles in s 44ZZCA (required to be considered by s 44X(1)(h)) specify that access price structures should allow multi-part pricing and price discrimination where it aids efficiency.
  3. Synergies’ 17 August 2018 response to the Draft Determination argued that a requirement that coal users (including Glencore) pay charges for their particular use of the Service that exceed the stand-alone cost of providing the Service to those users (and therefore effectively cross-subsidise the use of non-coal assets by other parties), is inherently inefficient. That inefficiency arises because of the potential for entry by an alternative supplier of the services being charged above stand-alone cost, which would inefficiently raise the total costs of supply. Synergies also referred to what it described as “well established regulatory precedent” in concluding that a price above stand-alone cost implies inefficient cross-subsidy of other services.
  4. As outlined by Synergies, the application of the stand-alone test to services to coal vessels would limit the revenue from coal vessel Wharfage Charge and NSC to the MAR assessed for the whole of the Service, minus only the capital costs associated with groups of assets identified by Arup as not required for channel and berthage services to coal vessels (termed the ‘non-coal assets’). In addition, Synergies claimed, without explanation, that it would be:

… reasonable to assume that all of PNO’s operating costs will continue to be incurred in providing the declared service to coal vessels on a stand-alone basis.

  1. The groups of excluded assets and their relevant valuations were set out in Table 2 of Synergies’ response, reproduced below:

2019_101.jpg

  1. In submissions to the Tribunal following hearings Glencore subsequently described the non-coal assets to be excluded as:

11.8% of dredging costs, $60.0m of revetments and seawalls and $54.0m of wharves and jetties in 2014$

  1. We note that no value was attributed to wharves and jetties assets in the Final Determination DORC calculations in the PTRM, although the category ‘revetments under wharves’ was valued at $54.0 million (in 2014 dollars). The Tribunal has proceeded on the basis these are the last item in the list of assets meant to be excluded (with nothing in this decision relying on the assumption).
  2. Glencore also specified that the whole of user contributions to channel dredging should be applied only to coal-related assets. The final DORC calculations deducted a value for user contributions that was determined by applying a percentage of the original replacement cost to each of the channel assets and riverwalls and revetments asset categories.
  3. The Tribunal has interpreted the effect of Glencore’s approach to mean that the original dollar value of user contributions (the user contribution percentage in the final PTRM, times the whole of the replacement cost of each asset class) would be deducted from the smaller, coal-only asset base (with, again, nothing in this decision relying on the assumption).
  4. As demand forecasts and the Wharfage Charge are agreed by the parties, the application of the stand-alone test sets a specific limit on the coal vessel NSC. Glencore submitted that the effect of its adjustments, taking into account deductions for both user-contributed assets and non-coal assets, is to limit PNO’s initial NSC for coal vessels to $0.4938 per gross revenue tonne (‘GRT’) in 2018. This is $0.1137 per GRT below the ACCC’s determination of $0.6075 per GRT. Glencore concluded that because the NSC determined by the ACCC was more than Glencore’s calculated stand-alone NSC, the Final Determination was inefficient and inconsistent with the pricing principles in Part IIIA.
  5. Based on media reports of a proposal by PNO to invest $1.8 billion in a container terminal at the Port, Glencore raised one new argument in submissions to the Tribunal that was not previously put to the ACCC. It submitted that the whole-of-port approach in the Final Determination would result in Glencore being forced to contribute to this capital expenditure through its NSC, notwithstanding the fact that the facility would not be used by coal vessels. Glencore did not argue that this was necessarily inefficient, only that it illustrated the “unfairness” of the Final Determination.

PNO

  1. PNO submissions to the Tribunal reflected the case previously made to the ACCC in arbitration, arguing that stand-alone pricing is not appropriate for several related reasons.
  2. First, PNO submitted that the Port is a single integrated facility, offering one service. Consequently, unlike other instances where stand-alone pricing has sometimes been used to test the pricing of infrastructure, it is not possible to identify physically discrete and separate parts of the infrastructure related to the Service.
  3. Second, PNO argued the Service does not distinguish between coal and non-coal users. This is the first of the two points accepted by the ACCC as the basis of its determination. PNO argued the Service includes the use of shipping channels at the Port for both coal and non-coal user access, reflecting the integrated nature of the facility. Prices should therefore be set at a level which would deter hypothetical entry by a competitor supplying the whole of the declared service (that is, services to both coal and non-coal users).
  4. Third, PNO argued the evidence shows that the assets identified by Glencore, as not being used regularly by coal vessels, were in fact used to provide value to both coal and non-coal users. This is the second of the two points accepted by the ACCC as the basis of its Final Determination. PNO’s evidence on the use of Port assets was summarised in the Final Determination.
  5. PNO submitted that there were more berths capable of accommodating coal vessels than claimed by Glencore. It also identified examples where coal vessels have in fact used the parts of the main channel or have been moved to berths within the Basin, which Glencore seeks to exclude. PNO provided evidence of the utilisation of notionally “non-coal” berths by coal vessels for necessary purposes other than coal loading, such as mooring during repairs and sheltering from adverse sea conditions.
  6. PNO also argued that the Basin was used to provide a number of services associated with operation of the Port (such as tug and maintenance dredging and navigational aids) that are essential to the provision of the Service to coal vessels. PNO submitted that these examples, despite Glencore’s dismissal of some of them as “isolated”, mean the Port cannot be divided between coal and non-coal assets.
  7. PNO further argued that the issue of the proposed container terminal at the Port raised by Glencore was a “red herring”. As a landside facility at the Port, the project would be excluded from the regulated asset base used to deliver the declared service, just as the coal terminals at the Port are also excluded from the asset base.
  8. Contrary to Glencore’s claim that the project would disadvantage it, PNO argued that the container terminal would allow the costs of the Port to be shared across more users and would allow longer vessels to use the channel, both of which would potentially provide benefits to Glencore.
  9. Further disagreeing with Glencore’s submissions, PNO argued that stand-alone pricing is not consistent with the relevant statutory criteria in s 44X(1), including the pricing principles in s 44ZZCA. Pursuant to s 44X(1)(d), the ACCC (and the Tribunal) must take into account the direct costs of providing access to the Service, which PNO submitted, in this case is a service provided to both coal and non-coal users. Stand-alone pricing was not consistent with s 44X(1)(g) which requires consideration of the “economically efficient operation of the facility”, because the facility here is the Port as a whole, not a stand-alone subset of users.

ACCC

  1. The ACCC’s submissions reaffirmed the approach taken in its Draft Determination and Final Determination. It accepted the two points made by PNO, that there are no separate coal and non-coal services and that all service-related costs are required to serve all users. Those points together effectively mean that the stand-alone test has no effect.
  2. In submissions to the Tribunal, the ACCC argued Glencore was not correct to say that it had rejected Glencore’s proposed application of a stand-alone test. Rather, as outlined in its Final Determination, the ACCC concluded that there is no defined and estimated service increment of “coal access”, and the smallest defined and estimated service increment included both coal and non-coal access to the Service. On the facts before it, the ACCC therefore concluded that assets comprising the Basin and channels provided value to coal users and, on that basis, the entirety of the assets used to provide the Service were appropriately included in the asset base. Consequently, the stand-alone cost of providing access to coal vessels was not less than, but corresponded to, the stand-alone cost of providing the Service.
  3. The ACCC submitted that it found that the non-coal assets, that Glencore sought to exclude, provide value for both coal and non-coal users and therefore should be included in the asset base for the purposes of calculating MAR. It also submitted that this conclusion was appropriate having regard to the statutory criteria.
  4. The ACCC submitted that, contrary to Glencore’s claims, the frequency with which ‘non-coal berths’ have historically been used to accommodate coal vessels was not to the point. It argued access to the Service encompasses a right, or an option, to use those ‘non-coal berths’ for non-loading purposes. The ACCC considered this option to have economic value to coal users, whether or not they in fact ultimately use those non-coal berths, and it was therefore appropriate for the costs of those non-coal berths to be included in the MAR used in the stand-alone test.
  5. The ACCC also agreed with PNO’s arguments, in response to Glencore’s characterisation of the Final Determination as ‘unfair’, on the basis of its claims about the impact of PNO’s proposed $1.8 billion expenditure for a container terminal at the Port. In addition, it observed that, because Glencore’s example relied on a newspaper article which post-dates the Final Determination, and was not information the ACCC took into account in connection with the making that Determination, it does not fall within s 44ZZOAAA(3)(c).
  6. While the ACCC was not aware of a reference to the $1.8 billion figure within the materials the ACCC did take into account, it acknowledges that PNO’s long term plan for a staged container terminal development is referred to in general terms in those materials.
  7. The ACCC submissions disagreed with PNO’s submissions that stand-alone pricing is inconsistent with the relevant statutory criteria in s 44X(1). It stated that pricing between stand-alone and incremental cost is considered to be efficient, as it avoids cross-subsidies. Pricing above stand-alone cost is economically inefficient, and gives rise to the threat of an efficient entrant displacing the Port for the Service. However, as the ACCC found that both coal and non-coal assets should be included in the asset base, the issue of whether stand-alone pricing is consistent with the statutory criteria did not arise.

The Tribunal’s analysis

  1. This ground of review concerns how the MAR is recovered from different classes of users of the Service. It is useful to review the approach agreed by the parties.
  2. The MAR is calculated using a BBM and relates to the entirety of the Service. The MAR is based on, among other things, the RAB, which consists of all the assets required to provide the declared service, regardless of user. The PTRM, agreed to by the parties, provides for the MAR to be recovered from all Port users through two charges – the NSC and the Wharfage Charge – applying to three categories of users: coal vessels, non-coal vessels other than cruise ships, and cruise ships. This is despite the fact that the whole of the Wharfage Charge does not relate only to the declared Service (see section above on Scope of the Determination) and that the Determination applies only to coal users.
  3. The parties have agreed that an initial portion ($0.0746 per Revenue Tonne) of the Wharfage Charge paid by vessels using the Port constitutes an efficient charge for the services associated with berths and berthing boxes.
  4. The charges for non-coal vessels and cruise ships are an output of the model in exactly the same way that the charges for coal vessels are an output. But they do not appear in the Final Determination because the arbitration relates only to Glencore’s application for the determination of charges.
  5. PNO is required by the Final Determination to levy the charges that were the output of the model for 2018, with annual reviews in light of forecast demand for services. PNO is not limited by the Final Determination as to what charges it levies on non-coal vessels or coal vessels other than those covered by the scope of the Final Determination.
  6. In this way, the MAR is a notional figure. It is not actually the maximum revenue that PNO can earn, but is a regulatory parameter estimated as part of the derivation of charges for coal vessels. It notionally applies to all users because of the way that the model has been constructed, such as the fact that the RAB is estimated by reference to all the facilities that are required to provide the declared Service to all users. As mentioned, the construction of the model in this way was agreed to by the parties.
  7. The means by which the MAR is shared between categories of users – and the resulting charges calculated – is set in the model. The model adopted the existing relativities between charges and simply applies them without change into the future. Thus:
    • The Wharfage Charge is set at its agreed current level (prior to the taking effect of the arbitration) and maintained in real terms.
    • Similarly, the levels of expected demand for Port access were provided by the parties’ expert advisors and were also agreed. These were set out in Table 30 of the Final Determination and comprise the number and average size of vessels in each of four categories, all assumed constant each year for the five years in the PTRM.
    • The NSC for the categories of users are initially set at their current levels and then varied by the same proportion so as to achieve the recovery – along with the Wharfage Charge – of the MAR. In the Final Determination this meant that all the NSC were decreased by 19.57% from their pre-existing levels.
    • The relativities between the NSCs for different categories of vessels consequently remained constant at their pre-existing levels, which happened to be that for non-coal vessels the charge for the first 50,000 GRT is 64.4% of the coal vessel rate, and the charge for any GRT above 50,000 is 145.4% of the coal vessel rate; and the charge for cruise vessels is 75% of the first 50,000 GRT coal vessel rate.
  8. This charging structure was agreed between the parties, but with the important caveat that Glencore sought a checking mechanism: the stand-alone test. It argued that if the stand-alone charge for coal vessels was less than the charge resulting from unmodified use of the model, then that lower rate should apply to it. We shall explain this in more detail shortly.
  9. It is accepted by all that, should the Tribunal vary the MAR associated with the Final Determination in light of other grounds of review, the same charging structure, ie the same relativities between charges, should apply, subject again to the caveat that Glencore seeks to apply a stand-alone test.
  10. The stand-alone test sought by Glencore involves modifying the inputs to the model. So-called non-coal assets are removed from the asset base, reducing the MAR accordingly, and that lower MAR is recovered from coal vessels alone. When that modification is made in the manner proposed by Glencore, the model output for the NSC for coal vessels is less than the rate without the modification.
  11. Glencore argues that, accordingly, the stand-alone test failed and it should pay the reduced charge. Effectively, Glencore argues that it should pay a lower share of the MAR than set out in the Final Determination. It says that PNO could forego the revenue involved or recover it from non-coal vessels.
  12. The stand-alone test is well entrenched in economic theory. The ACCC addressed the test in its Draft Determination, noting:

…while there is no stand-alone cost test in the pricing principles, the efficiency implications of levying charges above the stand-alone cost of a service are unambiguous. Charging above the stand-alone cost results in economic inefficiency and is counter to the objects of Part IIIA, which is to ‘promote the economically efficient operation of, use of and investment in the infrastructure by which services are provided’ (section 44X(1)(aa)). In particular, if charges for coal access are above the stand-alone cost of the declared service, and charges for non-coal access are below the incremental cost, coal customers are a source of a cross-subsidy and non-coal customers are a recipient of a cross-subsidy, which results in allocative and productive inefficiency.

  1. In the Final Determination, the ACCC endorsed (as a matter of principle) use of the stand-alone test. However, it agreed with PNO that the smallest defined and estimated service increment includes both coal and non-coal vessels. The stand-alone cost of supplying access to coal vessels is therefore not less than, but corresponds to, the cost of providing the declared service to all vessels. It could be said that applying the test therefore has no effect.
  2. We first sketch the thinking behind the test.
  3. The relevance of the stand-alone test for the efficiency of prices arises from two propositions.
  4. The first proposition relates to the efficiency of production. If prices for a group of services yield revenue in excess of stand-alone cost, there is potential for an entrant to produce only those services at lower prices, inefficiently causing the total costs of production of all services to rise. This follows because the original firm is assumed to have a natural monopoly cost structure that ensures joint production of multiple services always has the lowest cost, an assumption that is also usually part of the rationale for regulatory oversight.
  5. The second proposition hinges on two statements that are logically identical in certain conditions:
    • no group of services pays more than its stand-alone cost; and
    • each group of services pays at least its incremental cost.
  6. Incremental cost is the extra cost associated with producing the whole of a group of services, over the cost of producing the remainder of the firm’s total outputs. This is a concept distinct from the marginal costs of the last units of production that normally define efficient prices for a group of services.
  7. The link between the statements means that if prices for a group of services does yield revenue in excess of stand-alone cost, there must be at least one other group that pays less than incremental cost. Pricing a group of services to yield revenue below their incremental cost (“cross-subsidising” those services) results in allocative and productive inefficiency.
  8. Based on these propositions, pricing above stand-alone cost is not only “unfair”, but inefficient and therefore inconsistent with the pricing principles in Part IIIA.
  9. The Tribunal agrees broadly with the ACCC and Glencore that efficiency considerations, the application of which is embedded in Part IIIA, suggest that the analysis said to justify a stand-alone test is relevant. However, efficient prices for natural monopoly cost firms (recalling that these need to include an element above marginal costs to recover common costs) will, in general, encompass elements of both cost and demand conditions, whilst the stand-alone test focuses solely on costs. Prices that pass a stand-alone test are therefore not necessarily efficient.
  10. Moreover, the link between failure of the stand-alone test and inefficient pricing, which is usually cited as the basis for its use, relies on assumptions about demand and cost conditions that will rarely apply in practice.
  11. Further, in checking whether a pricing structure for multiple products or services is inefficient, it would be necessary to perform the test on each product and set of products, and to examine the incremental costs of provision in a similar way.
  12. The economic literature notes that, in practice, this is likely to be exceptionally difficult. For example, in a multi-product production process, the whole process may need to be re-engineered to produce a single product, if that could be done at all. Sometimes, a production process unavoidably produces by-products.
  13. For these reasons, the Tribunal is unable to have confidence that a stand-alone test, as applied by Glencore, could definitively discriminate between efficient and inefficient prices. However, the results of the test, as submitted by Glencore, are stark: they purport to show that the arbitrated prices are far higher than could possibly be efficient. In the light of those model results, the Tribunal has considered the test further, as follows.
  14. As noted above, the ACCC disagreed with PNO that the stand-alone test should not be applied, but concluded it was of no effect, because the stand-alone costs of supplying the declared service to coal vessels are no less than the stand-alone costs of supplying access to all-comers. It reached that conclusion on the basis that:
    • the Service does not distinguish between coal and non-coal users; and
    • the assets Glencore seeks to exclude from the MAR provide value for both coal and non-coal users, and therefore should be included in the MAR.
  15. There is an immediate difficulty with this conclusion. It would follow that there would be no inefficiency in charging the full costs of providing the service to coal vessels while providing the service free of charge to other vessels. According the ACCC’s view of stand-alone costs, the fact that non-coal vessels are in fact charged is not required to achieve economic efficiency. This could only be true if the incremental cost of providing the service to non-coal vessels is zero. It is perhaps not immediately obvious that the incremental cost is not zero, but it seems likely.
  16. The question can usefully be turned around. Presumably, on the thinking of the ACCC, the stand-alone costs of providing the service to non-coal vessels is, likewise, the same as the stand-alone cost of providing the service to all users. In that case it would not be inefficient to recover all the costs of providing the service from non-coal vessels and supply the service to coal vessels free of charge.
  17. Moreover, the Tribunal does not agree with the ACCC that the Service not distinguishing between users is determinative. The fact that there are different users itself raises the question whether the pricing of the service to different users causes inefficiency.
  18. Further, the Tribunal does not agree with the ACCC that – even if the assets sought to be excluded by Glencore in carrying out the stand-alone test provide value for both coal and non-coal users – that circumstance alone would rule out the exclusion of some part of the costs of those assets.
  19. It is clear that some assets, though able to be used or sometimes used by coal vessels, would not be fully incorporated in a port providing stand-alone services to coal vessels. A stand-alone service for coal vessels would not require the use of all the assets in their existing configuration.
  20. Put another way, the Tribunal believes the evidence shows that, while the assets Glencore has sought to exclude in applying the stand-alone test may provide value to coal vessels, they do not provide a value commensurate with their costs. It is not necessary to have all the non-coal berths available for occasional emergency use by a coal vessel. Some non-coal berths are not large enough to accommodate most coal vessels.
  21. However, the exclusion of all the assets proposed by Glencore also raises problems at both a conceptual and a practical level. Even if it were the case that the assets Glencore seeks to exclude are entirely irrelevant to provision of the Service to coal vessels, self-evidently a new entrant seeking to provide services only to coal vessels would not build the whole Port, as it currently exists, and then exclude those assets. They could not be excluded from the Port and leave a working port. One cannot have gaps along a channel as if the berths not used by coal vessels were non-existent. It might be said that what is being excluded is not the assets, but the value of the assets. But that raises the question: which assets, and how are they valued? As the test is applied by Glencore, there is no relevant distinction to be made by the assets excluded and the values excluded.
  22. The Tribunal is consequently of the view that no confidence can be had that the test, as applied in this instance, is sufficiently robust to be of use.
  23. In addition, at the practical level, the Tribunal does not accept that the assets sought to be excluded by Glencore in fact provide no value to coal vessels at all; that is, that the Service could be provided to coal vessels if it were somehow possible to have those assets cease to exist, or contribute nothing to the provision of services in the Port.
  24. Like the ACCC, the Tribunal accepts that there are non-coal berths that can potentially be used by some coal vessels for non-routine berthing, though some such berths could not be used by larger coal vessels. It also accepts that the Basin, sought to be excluded in full by Glencore, is used in the provision of a number of services that are essential to provision of the declared service to coal vessels.
  25. Setting aside the conceptual difficulties mentioned above, excluding completely the Basin and parts of the main channel not used by coal vessels could not be justified. In fact, Glencore proposed an alternative test where the Basin assets were not excluded.
  26. The Tribunal has found that if the test is run excluding only half of the dredging costs proposed by Glencore, and not excluding the Basin, the resulting NSC for coal vessels alone is not significantly different from that obtained from the model when no non-coal assets are excluded and the MAR is recovered from all vessels, coal and non-coal.
  27. Given the large uncertainties involved, the Tribunal considers that there is insufficient evidence to conclude that the stand-alone test is failed. The Tribunal does not consider that the NSC should be reduced on the grounds that it is necessary to ensure that inefficiency is precluded.
  28. That said, the Tribunal has reservations about the efficiency of the arbitrated price structure, and of the price structure as amended by the effect of our decision. We have felt impelled to accept the structure because it was agreed by the parties, subject only to Glencore’s ground of review relating to the stand-alone test, which we have considered and rejected.

CAPEX TRUE-UP

What the ACCC decided

  1. The ACCC decided not to include a true-up for the return on actual capital expenditure compared to the return on forecast capex.
  2. At the end of each five-year period, the RAB is rolled forward. Actual capital expenditure during the period is rolled into the RAB to form the starting RAB for the next period.

Submissions by the parties to the ACCC

  1. Glencore submitted to the ACCC in the arbitration that there should be a true-up. If actual capex during the period exceeded capex as forecast at the beginning of the period, an amount for the difference in the return (at the WACC) on the actual capex and the return on the forecast capex would be added to the RAB. If the actual capex was less than the forecast, a corresponding amount would be deducted from the RAB.
  2. PNO submitted that there should not be a true-up, as it would not align with an incentive-based regulation scheme.

The ACCC’s reasoning

  1. The ACCC considered that a true-up of this nature would introduce unnecessary complexity to the five-yearly review process (s 44X(2)). Further, access pricing regimes should provide incentives to reduce costs or otherwise improve productivity (s 44X(1)(h)). In this regard, the ACCC considered the proposed true-up mechanism as inappropriate.

Submissions by the parties to the Tribunal

Glencore

  1. Glencore submitted that any over (or under) recovery of the return on capital expenditure over the previous period should be rolled forward (at the WACC) and included as an adjustment to the asset values at the commencement of the next period. Omission of a capex true-up creates a significant incentive for PNO to overstate its capital expenditure forecasts to maximise its revenue. This is particularly the case in circumstances where, over the period of the Final Determination to 2031, PNO may incur significant expenditure in relation to non-coal-related matters such as the development of the proposed $1.8 billion container terminal.
  2. It was then submitted that absent an appropriate true-up mechanism, Glencore will first have to detect any overestimated forecasts, once actual expenditure is known, and then have arbitration by the ACCC as its only recourse.
  3. In oral submissions on behalf of Glencore, Mr Young QC denied that there is any complexity in having a true-up. He asked why ‘gaming of the system’ should be permitted to enable a projection that exceeds capex to earn a return. He submitted that the absence of a true-up provides no incentive to make a more efficient investment; it does the opposite. He further argued that the absence of a true-up allows PNO the opportunity to recover a return on a notional projection that they don’t live up to. It was argued that it was positively counter to concepts of efficiency.

PNO

  1. PNO submitted that this issue is of a much smaller magnitude than the other grounds of review raised by the parties. Forecast annual capital expenditure for the first five-year period (ie from 1 January 2018 to 2022) is approximately $800,000 to $900,000. The true-up mechanism would compare the return on the actual capital expenditure with the return on these forecast figures. Any discrepancy between the two is likely to be immaterial in the context of an asset base in excess of $1 billion.
  2. PNO submitted that the ACCC’s approach conforms to standard regulatory practice. If PNO spends less than the forecast, it can keep the benefit until the end of the five-year period. At the end of the period the benefit is then passed on to consumers, as the RAB is updated on the basis of actual expenditure. Glencore’s true-up, it was said, would eliminate any incentive to deliver any capital savings.
  3. Glencore’s reference to the possible new container terminal was described as a ‘red herring’: the terminal (or at least that portion which relates to the channel) is not included in the current forecast capital expenditure, as it is uncertain whether the project will proceed. Among other matters, PNO contended that the project would be contingent on the success of current Federal Court proceedings brought by the ACCC seeking removal of the existing restraint on competition for container trade between NSW ports. It was further suggested that if the project does ultimately proceed within the current five-year period, PNO’s forecast capital expenditure will have been significantly understated, and PNO will have failed to maximise its revenue – that is, the reverse of the risk that Glencore submits may arise without a true-up mechanism.
  4. In oral submissions for PNO, Mr Moore SC gave two examples.
    • If forecast capex for years 1 to 5 was $1 million but PNO spent only $600,000, it would get to keep the return on the $1 million. That would give it an incentive to make the saving on capex. $600,000 of capex would be rolled forward and customers would get the benefit in subsequent years of prices based on the capital base increased by only $600,000 instead of by $1 million. But under Glencore’s proposal, it would not receive any benefit from spending less than $1 million. It might as well spend the whole $1 million. That promotes gold-plating.
    • On the other hand, without a true-up there is an incentive not to overspend, because if PNO ended up spending $1.5 million, it would not get any additional return: no return on the additional $500,000. With a true-up it would have no disincentive to spending the $1.5 million. The $1.5 million will then be rolled over and customers will have to pay prices based on that additional $1.5 million going forward instead of on an additional $1 million. So without the true-up PNO will get a return from years 6 to 15, but won’t get a return from years one to five.
  5. In an oral response submission for PNO, Mr Moore SC said that it did not matter whether there was a true-up or not, but continued to maintain that it was good regulatory practice not to have one.

ACCC

  1. The ACCC submitted that cl 8 of the Final Determination provides for a five-yearly review of the NSC. Clause 8.1 provides that the NSC is to be reviewed in 2021, for the reviewed price to take effect on and from 1 January 2022, and in 2026, for the reviewed price to take effect on and from 1 January 2027.
  2. In the Final Determination the ACCC concluded that a true-up would introduce unnecessary complexity to the five-yearly review process and did not provide incentives to reduce costs or otherwise improve productivity. The ACCC submitted that its conclusion was appropriate having regard to the statutory criteria and the Tribunal should form the same conclusion on review.
  3. The ACCC observed that regulatory regimes typically provide incentives for service providers to incur efficient costs. In connection with capital expenditure, an incentive to incur efficient costs is provided where a service provider keeps the benefit (wears the cost) of under-spending (over-spending) against a capital expenditure forecast for the relevant pricing period. That is, the provider retains the return on capital and return of capital for a pricing period attributable to the amount of any under-spend of forecast capital expenditure for the period. This is reflected in regulated pricing for that period, and forgoes any return on capital and return of capital for the pricing period attributable to any over-spend of the capital expenditure forecast for that period. At the end of the period, actual expenditure is rolled into the asset base, and the service provider will then earn a return on, and return of, that actual expenditure amount.
  4. The ACCC explained that there is a true-up for the difference between the return on and return of forecast capital expenditure and the return on and return of actual capital expenditure for the period, and where (as in the present case) there is an absence of any other capital expenditure incentive mechanisms, a service provider will not be subject to an incentive to incur only efficient costs – the incentive may in fact be to inefficiently overspend.
  5. The ACCC also recognised that not providing for such a true-up may provide a service provider with an incentive to overstate capital expenditure forecasts. However, under a true-up mechanism a provider does not receive any benefit from out-performing (or incur any uncompensated cost for overspending) the capex forecast and is therefore not constrained to incur only efficient capex. In contrast, in circumstances where there is no true-up mechanism, the provider is encouraged to reduce capex to the efficient level because out-performing the capex forecast (or minimising any over-spend) delivers a financial benefit for the provider relative to incurring inefficient capex. As a consequence, where actual capex is rolled into the RAB at the end of the period, the increase in the RAB at the end of the period is constrained to efficient spend and is not inflated by inefficient spend. This operates to ensure that users only pay for efficient capex. That is, they only fund, through future depreciation allowances, efficient spend, and they only provide the provider with a return on efficient spend through future return on capital allowances.
  6. The Final Determination does not provide for the ACCC to review forecast capital expenditure for the forthcoming five-year period (or perform any other function) in the five-yearly review. This reflects the ACCC’s view that the five-yearly review should be self-executing and capable of mechanistic implementation, and that the ACCC should not be conferred with any function in the review or by the Final Determination more generally. In the event there is a dispute between Glencore and PNO as to forecast capital expenditure, this would be dealt with pursuant to cl 14 of the Final Determination, which provides for:

(1) first, negotiation in good faith between senior executives of the parties in an attempt to resolve the dispute;

(2) secondly, if the dispute is not resolved within 15 days after notice was given of the dispute or within a period otherwise agreed by the parties, the dispute is submitted to a mediator;

(3) finally, if the dispute is not resolved within 45 days after notice was given of the dispute or within a period otherwise agreed by the parties, the dispute may be submitted to arbitration by the ACCC pursuant to s 44S.

  1. In his oral submissions on behalf of the ACCC, Mr Lloyd SC pointed out that forecast capex for the initial period of the Final Determination is very small. If PNO were to spend a great deal more on capex in the period, then with no true-up they would not get a return on that additional capex during the period.
  2. Putting that possibility aside, the only time the issue bites is in the second period. If PNO asked for an outrageously high level of capex, then Glencore would benefit from a true-up by PNO only receiving a return on its actual capex, if that were less than the forecast.

The Tribunal’s analysis

  1. The Tribunal notes that, in the end, PNO indicated that it did not care whether there was a true-up or not. Even if PNO embraced having a true-up – thus agreeing with Glencore’s position – the matter would require consideration against the relevant provisions of Part IIIA.
  2. There was some confusion in the submissions as to what incentives are brought into play by having, or not having, a true-up mechanism. Is spending more on capex than is efficient the issue, ie more than is required to provide services efficiently into the future? Or is the issue making an overstated forecast of the efficient level of capex?
  3. In the Tribunal’s view, the more important issue is the actual level of capex. Under this form of price regulation, the intention is that $1 million of capex will generate a return of $1 million over the life of the asset. That would accord with the NPV=0 principle. Of course, such an expected outcome – the actual outcome can never be assured – is subject to assumptions about the how the regulatory framework operates, eg that the WACC accurately reflects the firm’s cost of capital. It also depends on the regulatory framework – and indeed the specific pricing methodology – applying over the life of the asset, which may not be the case here.
  4. Even with those qualifications there is a largely unavoidable incentive for “gold-plating”, ie spending more than the efficient level of capex, because once the capex is rolled into the asset base, a return is guaranteed. One method of dealing with that incentive is to subject the proposed capex to prior scrutiny. No such process was provided for during the course of the Final Determination, and there was apparently no call for one.
  5. Whether there is a true-up or not has little bearing on this incentive to overspend on capex. The true-up – if there is one – comes into play only in relation to the difference between forecast and actual capex. It looks backward at the end of each five-year period to the return on capital during that period. Certainly, the absence of a true-up, as explained by the ACCC and PNO, does provide an incentive to underspend against the forecast. It seems to be assumed that any underspend is likely to be efficient. It might be achieved, for example, by postponing capex by extending the life of an asset and better maintenance. That would be a good thing. But it is hard to see why PNO would go out of its way to spend less than its forecast, given that this would reduce the return to it for the following period.
  6. The incentive for efficiency said to be induced by not having a true-up mechanism depends, the Tribunal considers, on the capex forecast being accurate in the sense of being the best forecast, at the time it is made, of prudent, efficient capex. If the forecast is not the best possible, having no true-up still provides an incentive to underspend against the forecast.
  7. On the other hand, with a true-up, PNO could more easily conceal intended overspending on capex by understating the intention in its forecast. It would pay no penalty for that understatement, as the true-up would provide it with a return, in the period in which it was made, of the full amount of capex.
  8. In the light of these considerations, the Tribunal considers that the absence of a true-up mechanism better accords with the statutory provisions referred to by the ACCC in the Final Determination.

CONCLUSION

  1. The final view of the Tribunal is that the Final Determination is only to be varied as a result of the Tribunal’s disagreement with the result of the ACCC on the scope of the Final Determination and the NSC (and here only because of the contention relating to user contributions).
  2. The Tribunal provided to the parties a draft of the Tribunal’s Determinations and the reasons for the sole purpose of checking confidentiality and the exact wording of the Determinations so as to properly reflect these reasons. In this regard, of particular focus was the scope of the Tribunal’s Determinations and the appropriate NSC.
  3. The Tribunal has decided that no allowance should be made for user contributions in the calculation of the RAB. This was implemented in the agreed access pricing building block model by changing the percentage allowances for user contributions to zero. No other changes to the model are required to implement the Tribunal’s reasons.
  4. The new NPV=0 pricing solution in the model requires an initial 2018 Coal Vessel NSC of $1.0058 per GRT. This replaces the previous value ($0.6075) in paragraph 6.1 of the Final Determination.
  5. In each Application, the Tribunal varies the Final Determination made under s 44V of the Competition and Consumer Act 2010 (Cth) dated 18 September 2018, by deleting Clauses 2.1, 2.2 and 6.1 and replacing them as follows:

2.1 The scope of the determination is confined to the terms and conditions of access where Glencore owns or, either directly or by agent, charters a vessel that enters the Port precinct and loads Glencore coal.

2.2 For the avoidance of doubt, the determination does not apply to:

(a) the terms and conditions of access to apply in respect of vessels carrying coal that are not owned, or have not been chartered, by Glencore;

(b) the terms and conditions of access for vessels other than those calling at the coal terminals of the Port; and

(c) any charges imposed by PNO other than the Navigation Service Charge and the Wharfage Charge.

6.1 The Navigation Service Charge payable by Glencore to PNO in accordance with this determination will be $1.0058 as at 1 January 2018.

I certify that the preceding six hundred and ten (610) numbered paragraphs are a true copy of the Reasons for Determination herein of the Honourable Justice Middleton, Mr RF Shogren and Dr D Abraham.

Associate:

Dated: 30 October 2019