Jemena Gas Networks (NSW) Ltd v AGL Energy Limited [2017] NSWCA 266 (18 October 2017)

COURT OF APPEAL
SUPREME COURT
NEW SOUTH WALES

JEMENA GAS NETWORKS (NSW) LTD
(Applicant)

V

AGL ENERGY LIMITED
(Respondent)

 

BEFORE: Basten JA, Payne JA
FILE NO: 2017/212192
HEARING DATE: 18 October 2017
DATE OF DECISION: 18 October 2017
DECISION: (1) Refuse leave to appeal.
(2) Order that the applicant pay the respondent’s costs.
CATCHWORDS: APPEAL – application for leave to appeal – construction of commercial contract – whether agreement is an arbitration agreement – whether judgment below attended by sufficient doubt to warrant leave to appeal
ARBITRATION – “arbitration agreement” – Commercial Arbitration Act 2010 (NSW), s7

 

JUDGMENT

  1. THE COURT: This is an application for leave to appeal from a judgment of Hammerschlag J delivered on 14 June 2017. The primary judge refused to stay proceedings for a breach of contract brought by the respondent, AGL Energy Ltd, against the applicant, Jemena Gas Networks (NSW) Ltd. The stay had been sought to allow an arbitration commenced by the applicant to proceed.
  2. The applicant is the principal gas distributor in New South Wales and is responsible for reading and maintaining natural gas meters. The respondent is a gas retailer. Together they are the parties to two “Reference Services” agreements which set out the terms and conditions on which the applicant agreed to provide services to the respondent. Both agreements are relevantly in the same terms, although one applies for the period from 1 July 2010 to 30 June 2015 and the other for the period from 1 July 2015 to 30 June 2020. (The agreements will be referred to as “the Agreement.”)
  3. The respondent contends that since January 2015 the applicant has failed to provide the respondent with details of meter readings within the prescribed timeframes of the Agreement. It claims total damages of approximately $3.5 million from the applicant. The applicant claims that the Agreement contains an “arbitration agreement” within the meaning of s 7 of the Commercial Arbitration Act 2010  (NSW). The applicant seeks to enforce that arbitration agreement pursuant to s 8 by an order staying the court proceedings pending arbitration.
  4. The applicant’s claim depends on the effect of cl 30 of the Agreement and in particular the language of subcl 30.5(a). Clause 30 is entitled Dispute Resolution and, so far as relevant, reads (with the key words italicised):

30.1 Application
(a) The Parties acknowledge and agree that this clause 30 does not, and is not intended to, limit or exclude in any way the provisions in the National Gas Law in relation to dispute resolution.
(b) The Parties agree that where a Party refers any matter in connection with this Agreement or its performance to be dealt with in accordance with the dispute resolution provisions set out in the National Gas Law:
(i) if an access determination is made by the dispute resolution body in respect of the access dispute, the Parties must comply with that access determination;
(ii) neither Party can subsequently utilise this clause 30 in respect of the same dispute.
30.2 Notification of Dispute
If a Party claims that there exists:
(a) any dispute or difference of opinion between the Parties; or
(b) the absence of agreement by the Parties,
about a matter which arises out of or relates to this Agreement, or the breach, termination, validity or subject matter thereof, or as to any related claim in restitution or at law, in equity or pursuant to any statute (Dispute), then that Party must notify the other Party of the Dispute.
30.3 Nomination of Representative
As soon as practicable after a notice is given under clause 30.2, each Party must nominate in writing a representative authorised to settle the Dispute on its behalf.
30.4 Good Faith Discussions 
Each Party must enter into discussions in good faith, to resolve the Dispute or to agree on a process to resolve all or part of the Dispute. Unless the parties otherwise agree, discussions between the Parties’ representatives under this clause 30.4 must continue for 7 Business Days after notice of the Dispute was given under clause 30.2.
30.5 Mediation
(a) In the event that discussions under clause 30.4 fail to resolve the Dispute, each Party expressly agrees to endeavour to settle the Dispute by mediation administered by the Australian Commercial Disputes Centre (ACDC) before having recourse to arbitration or litigation.
(b) The mediation shall be conducted in accordance with the ACDC Guidelines for Commercial Mediation (Guidelines) which are operating at the time the matter is referred to ACDC.
(c) The Guidelines set out the procedures to be adopted, the process of selection of the mediator and the costs involved.
(d) The terms of the Guidelines are hereby deemed incorporated into this Agreement.
(e) Clause 30 shall survive termination of this Agreement.
30.6 Urgent relief
Nothing in this clause 30 will prevent a Party from seeking urgent declaratory or injunctive relief.

  1. On 29 July 2016, the respondent gave the applicant written notification of a “dispute” within the meaning of cl 30.2 by reason of alleged breaches of the Agreement. The parties underwent mediation. The dispute remained unresolved.
  2. On 28 March 2017, the applicant wrote to the respondent stating, inter alia, that it had referred the dispute to arbitration, and that a notice had been served on the respondent under the Commercial Arbitration Act 2010 (NSW).
  3. On 12 May 2017, the respondent commenced proceedings in the Supreme Court seeking damages. The applicant filed a motion in those proceedings seeking a stay and a referral of the dispute to arbitration.
  4. On 14 June 2017, the primary judge dismissed the applicant’s motion for a stay and referral to arbitration: AGL Energy Limited v Jemena Gas Networks (NSW) Ltd [2017] NSWSC 765.

Relevant legal principles

  1. The applicant submitted that cl 30.5(a) of the Agreement constitutes an arbitration agreement within s 7 of the Commercial Arbitration Act. That section relevantly provides:

7 Definition and form of arbitration agreement 
(1) 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.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) The arbitration agreement must be in writing.

  1. The applicant further submitted that s 8 of the Commercial Arbitration Act affords primacy to arbitration whether arbitration is commenced before or after litigation, so long as the request for arbitration is made by the defendant to the Court proceedings prior to their first substantive statement in the dispute. Section 8 provides:

8 Arbitration agreement and substantive claim before court 
(1) 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.
(2) Where an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.

  1. In PMT Partners Pty Ltd (In Liquidation) v Australian National Parks and Wildlife Service the High Court noted that an arbitration agreement under s 7(1) must make binding provision for compulsory arbitration whether as a consequence of an election by a party or otherwise.
  2. The primary judge considered two cases where it was held that the agreements were “arbitration agreements” and an election for arbitration by one party would prevail over an election for litigation by the other, namely Manningham City Council v Dura (Australia) Constructions Pty Ltd and Mulgrave Central Mill Co Ltd v Hagglunds Drives Pty Ltd.
  3. In Manningham the Victorian Court of Appeal found that there was an arbitration agreement within the meaning of s 4(1) of the Commercial Arbitration Act 1984 (Vic) in a building contract which the parties intended would be adopted if either party elected to do so. The primary judge noted that this section was “materially indistinguishable” from s 7(1) of the New South Wales Act: [33]. In that case cl 13 stipulated that if a dispute arose, the parties were to give written notice identifying the dispute and that the provision of such notice was a condition precedent to commencement of proceedings (by way of litigation or arbitration).
  4. In Mulgrave the Queensland Court of Appeal considered a contract with terms which were “almost identical” to two of the three terms relied on in Manningham. The Court followed Manningham. Summarising the analysis of McPherson JA in Mulgrave, the primary judge said at [38]:

“His Honour considered that when compared with each other, the effect of the two provisions was the same in that both provided for the giving of an initial notice of dispute, followed by a negotiation phase, and then by a second notice by either party referring the dispute to arbitration or to litigation. He observed that in both cases it is a function of that second notice to signify to the other party that the negotiation phase is at an end and in both the consequence of including in it a notice of election to arbitrate is to refer the dispute to arbitration.”

  1. The primary judge concluded that unlike the contracts under consideration in Manningham and Mulgrave, the agreement does not contain any provision outlining how either party is to refer to the dispute to arbitration or litigation, “let alone any indication that arbitration has primacy”: [40]. Contrary to the applicant’s submissions, this conclusion did not rely on the reasoning in either case. As neither party sought to rely on either decision on this application, it is unnecessary to set out the terms of the agreements or the relevant statutory provisions. The application of the reasoning in those cases would not arise on any appeal.
  2. The primary judge held that the words in cl 30.5(a) are words of “limitation, not of expansion” and create the precondition that mediation occur before any arbitration or litigation but do not disclose any agreement for compulsory arbitration. There is “no justification in language or logic” to read them as creating a contractual right: [29] His Honour held that cl 30.5(a) finds content and utility in this construction as, following a contractually mandated mediation, an arbitration agreement may result. However, that does not transform this clause into an arbitration agreement: [30].
  3. The primary judge concluded at [45]:

“It would be surprising if a reasonable person in the position of the parties, who had in cl 30 agreed to a Dispute Resolution process, including mediation, for which they comprehensively legislated, would have understood from the bare language of limitation in cl 30.5(a) that it was committing itself to compulsory arbitration at the instance of its counterparty.

The application for leave to appeal

    1. In its draft notice of appeal, the applicant submitted that the primary judge erroneously:
    1. found that cl 30.5(a) did not constitute an arbitration agreement under s 7 of the Commercial Arbitration Act in circumstances where s 7 does not impose those requirements;
    2. failed to consider the surrounding circumstances that s 8 of the Commercial Arbitration Act gave primacy to arbitration. The National Gas (NSW) Law provided for arbitration in rules disputes under Chapter 8, Part 5A of the Law and arbitration‑like procedures and access disputes under Chapter 6 of the Law, and the Act provides the jurisdiction and procedural requirements for the conduct of an arbitration;
    3. found that there was no critical provision for either party to refer the dispute to arbitration or litigation when each party had a right to have recourse to arbitration by cl 30.5(a);
    4. found the reference to “arbitration or litigation” in cl 30.5(a) was given content and utility by reason of the possibility that the parties may agree to arbitration pursuant to cl 30.4 where there was no evidence for that finding and it was speculative and not more likely than not when considered in light of the text of the clause;
    5. failed to consider the following in construing cl 30:
    1. use of the word “recourse” when prefaced with “each party agrees” indicates a right to turn or resort or refer to arbitration vesting in each party; and
    2. it provides procedural requirements for a mediation recognising that no law mandates such requirements.
  1. Proposed grounds 3, 4 and 5 address the language of cl 30.5(a); ground 2 identifies a contextual element, and ground 1 is generic.
  2. Ordinarily, leave to appeal is granted only in matters which involve issues of principle, questions of general public importance or an injustice which is reasonably clear: see Carolan v AMF Bowling Pty Ltd. Where legal error is alleged, it is necessary to demonstrate more than arguable error.
  3. It is by no means clear that any issue of principle or matter of general public importance is involved. The key issue in the proposed appeal is whether cl 30.5(a) constitutes an “arbitration agreement” within s 7 of the Act. There is no suggestion that the Agreement is in the standard form or that the terms of s 7 require explication.
  4. The principles of contractual construction relevant to the present case are not controversial. The legal meaning of the critical clause is discovered by reference to the contractual text construed in the light of its context and purpose: see Electricity Generation Corporation v Woodside Energy LtdMount Bruce Mining Pty Ltd v Wright Prospecting Pty LtdVictoria v Tatts Group Ltd.
  5. The applicant’s argument in this Court is basically that arbitration being consensual, any reference to arbitration in an agreement will result in an “arbitration agreement” and thus satisfy the definition in s 7(1). However, that is not so unless the reference constitutes a written agreement to arbitrate pursuant to s 7(3). The applicant said that the absence of machinery provisions is understandable given the provision in s 21 of the Act as to the effect of a reference to arbitration being received by the respondent. However, s 21 provides for no more than the effect of a request. The absence of a provision of referral in the agreement is relevant to construing a contract which contains no express agreement to arbitrate. Further, the reference to arbitration in cl 30.5(a) may, as the trial judge said, be read as an acknowledgement of the possible result of a mediation, or one might add, of good faith discussions referred to in cl 30.4 which might create an agreement to arbitrate. The reference to arbitration has work to do if the applicant’s argument is not accepted. Thus the clause may assume a right but not create one.
  6. The applicant submitted that a construction that the parties might agree to engage in arbitration after the mandatory mediation is incongruous with the wording of the clause which refers to “each Party”, not the parties jointly. The applicant also submitted that the word “recourse” in that clause is the “embodiment of a right”. The applicant submitted that Manningham and Mulgrave involved different statutory contexts and should not have been applied by the primary judge. As the respondent submitted, it was the applicant which brought Manningham and Mulgrave to the attention of the primary judge, so nothing turns on the last point raised by the applicant. In any event, Manningham and Mulgrave do not assist the applicant here for reasons already noted. In those cases it was tolerably clear that the parties had agreed upon arbitration in the event of a dispute; here, there is no such clear agreement.
  7. The effect of cl 30.5(a) is merely to recognise that arbitration and litigation are options available once mediation has failed. The provision for arbitration under the National Gas (NSW) Law (in relation to disputes which do not include the present dispute) takes the matter no further, although it may possibly provide a reason why there was a reference to arbitration in cl 30.5(a). Those provisions do not pick up and apply to the Agreement principles relating to arbitration of “access disputes” under that law so as to incorporate it into the dispute resolution scheme provided by cl 30 generally, as argued by the applicant below. Nor does the provision under the National Gas (NSW) Law for arbitration of access disputes (which does not include the present dispute) provide assistance in construing cl 30, except to the limited extent just noted.
  8. The use of the term “recourse” in cl 30.5(a) does not lead to any different conclusion. In context that term refers to the availability of arbitration or litigation once mediation has failed; it does not create an obligation to arbitrate, nor a right to require arbitration.
  9. While there may be some doubt as to what is meant by the reference in s 7(1) of the Commercial Arbitration Act to an agreement to submit “certain disputes” to arbitration, that phrase should not be read to refer to an agreement which merely identifies the possibility of arbitration without any express or implicit agreement to submit all disputes or any class of disputes to arbitration, as opposed to litigating. The purpose of s 8 of the Act is to provide a mechanism to ensure that an agreement to arbitrate is enforceable and excludes the power of the court to permit litigation to proceed in the face of such an agreement. It would not assist that purpose to accept that any contractual arrangement which contemplated the possibility of arbitration, without any express agreement in writing to submit a particular category of disputes to arbitration, should result in the unilateral power to enforce arbitration in relation to all disputes.

Conclusion and orders

  1. There is insufficient doubt attending the decision of the primary judge to warrant a grant of leave to appeal.
  2. The Court orders:
    (1) Refuse leave to appeal.
  3. (2) Order that the applicant pay the respondent’s costs of the application.