Australian Contract Law: A recent case study – Chevron (Tapl) Pty Ltd v Pilbara Iron Company (Services) Pty Ltd  WASCA 193
This appeal concerned the construction of a price review clause in a long-term gas supply contract. It considered whether failure to comply with a time stipulation, in giving notice to initiate a price review, meant that the subsequent attempt to invoke the price review clause was ineffectual, and found that it was so. It also, again, shows the importance of clear and unambiguous drafting of terms, including the consequences of failure to comply with terms of the contract.
The appellants are joint venture participants in the Gorgon Gas Project, a multi-decade natural gas project in Western Australia involving the development of the Greater Gorgon gas fields. The respondents are entities in the Rio Tinto Iron Ore Group and required gas to generate power for iron ore mines in the north west of Western Australia.
Under a contract between the parties:
- the appellants (Sellers) agreed to supply gas to the first respondent (Buyer) over a number of years
- every few years, either party is entitled to initiate a review of the price of the gas by issuing a notice within a stipulated timeframe; being not more than 120 days nor less than 90 days prior to a ‘price review date'. When such a notice is issued, a revised price is required to be determined by negotiation or, failing agreement, by arbitration.
In 2020, the Buyer issued a notice some three weeks late, i.e. outside the stipulated timeframe. In the primary proceedings, the Buyer claimed that the notice was effective to initiate a Price Review, notwithstanding that it was issued outside the timeframe, and sought a declaration to that effect.
The primary judge found in favour of the Buyer and made declarations accordingly. The critical issue, as her Honour framed it, was whether the parties objectively intended the time stipulation in the contract to be essential. The primary judge concluded that the time stipulation was not essential and that a Price Review Notice could be issued at any time before the Price Review Date but not after that date, and not before the start of the stipulated timeframe. On appeal, the court found that the timing of a Price Review Notice was indeed essential and made declarations in favour of the Seller.
The parties entered into an agreement, entitled Agreement for Sale and Purchase of Gas (GSA), on a ‘take or pay’ basis. That means, the Buyer was obliged to pay for regular deliveries of natural gas, even if the gas was not taken by Buyer. However, the GSA did not prevent the Buyer from on-selling any gas supplied to it.
Clause 14 of the GSA relevantly stated:
14.3 Initiation of Price Review
The Buyer or the Sellers may initiate a Price Review by issuing, in the case of the Buyer, to the Sellers and the Sellers' Representative and in the case of the Sellers, to the Buyer, a notice which complies with Clause 14.4 ('Price Review Notice') not more than 120 days nor less than 90 days prior to a Price Review Date.
Clause 14.4 set out various matters that had to be stated in a Price Review Notice (such as the proposed new price and reasons for that proposal), and referred to clause 28 of the GSA, which required notices to be in writing, signed and served. However, the contract did not address the consequences of a failure to issue a notice within the stipulated time.
Further, clause 14.5 stated:
'Upon receipt of the Price Review Notice by the Buyer or the Sellers, the Buyer and the Sellers ('Reviewing Parties') shall meet and, in good faith, discuss the proposed new [price] and seek to agree on a new [price] prior to the Price Review Date.'
Text of the clause
The primary judge considered that the definition of 'Price Review Notice' in cl 14.3, when read with cl 14.5, was a particularly significant indicator that the time stipulation was not essential, because the definition appears before reference to the time stipulation. Accordingly, the time stipulation was not part of the definition of this term.
When the definition of Price Review Notice is inserted into clause 14.5 (as is required by the principles set out in Black Box Control Pty Ltd v TerraVision Pty Ltd  WASCA 219) that clause provides that the parties must engage in good faith negotiations about price upon receipt of a notice that complies with clause 14.4 – which only contains requirements about the content of a notice and makes no reference to timing.
However, the Court of Appeal held that the primary judge’s construction was contrary to the text of clause 14.3 which conferred a power on the parties to initiate a price review and prescribed the means by which a party must exercise that power; namely, by issuing a notice within the stipulated timeframe. Accordingly, in the appellate court’s judgment, a notice issued outside of the stipulated timeframe would be in breach of the express provisions of clause 14.3, and a construction that allowed a party to do so would give the temporal element of clause 14.3 no work to do.
The clause in context
The timeframe stipulated in clause 14.3 was only one of many timeframes set out in clause 14 as a whole, in respect of numerous steps in an elaborate process for the conduct of a price review, which included specified timeframes for several rounds of negotiations to occur between the parties, as well as the appointment of a panel of arbitrators and the steps leading up to their determination of the matter.
The primary judge discounted the significance of the end-to-end timeline for the conduct of a price review, and the curtailing effect that a delay in issuing a Price Review Notice would have on the timeframe allowed for the negotiation phase of that process. Her Honour reasoned that the parties may continue to negotiate after the Price Review Date had passed and there was no fixed date for the start of any arbitration; merely a date from which either party may refer the matter to arbitration.
However, the Court of Appeal found that the whole tenor of clause 14 was that, if there is to be a price review, the parties need to ‘get on with it’ within the appointed timeframes. The parties stipulated the period that they considered sufficient to reach a negotiated agreement prior to the Review Date, which, in the appellate court’s view, was an important step for the parties to potentially avoid arbitration. In this context, the Court of Appeal suggested that a ‘reasonable’ start date for arbitration (which would be implied, in the absence of an express timeframe) would be relatively soon after a party elected to refer the matter to arbitration.
The Court of Appeal emphasised that the obligation to commence negotiations arose pursuant to clause 14.5 on receipt of 'the' Price Review Notice, not 'a' notice. In the appellate court’s view, that must be a reference to a Price Review Notice issued in accordance with clause 14.3, as no other part of clause 14 provides for the issuing of such a notice. Accordingly, the Court of Appeal found that the obligation to negotiate in good faith arose only if a party issued a Price Review Notice within the timeframe stipulated in clause 14.3.
Commercial objectives of the clause
The primary judge considered that it would be ‘uncommercial’, in a long-term gas supply agreement with limited termination rights, for a party to lose the opportunity to initiate a Price Review for a number of years until the next Price Review Date, merely by failing to issue a notice within the stipulated timeframe. Accordingly, her Honour held that the parties were objectively unlikely to have intended such an uncommercial consequence.
The Court of Appeal disagreed, noting that the parties are sophisticated and well resourced, and chose to stipulate a period of 31 days for a Price Review Notice to be issued, which reduced the prospects of a mere oversight by a party. In the appellate court’s view, it would be uncommercial for a party to be free to initiate a Price Review outside of the stipulated timeframe, as this could undermine the certainty that the Buyer would otherwise have in the current price of the gas, enabling the Buyer to secure a price with those to whom it may wish to resell the gas.
This case illustrates the importance of clear and comprehensible contracts. Ambiguous expressions and incomplete provisions will inevitably lead to difficulties in applying a contract in practice, and potentially give rise to protracted disputes. In such cases, the courts will search for a construction that best fits the commercial purpose of the contract. However, there is no guarantee that it will be the interpretation that best matches your own intention. As the court explained in this case:
'Because a question of construction is one of law, there is only one true construction, and the task of this court in an appeal on a question of construction is to determine for itself the proper construction of the instrument.'
Further, the court provided a neat summary of the principles applicable to the construction of written contracts:
(1) The construction of a contract involves a determination of the meaning of the words of the contract by reference to its text, context and purpose. The starting point for the proper construction of a clause is the language used in the clause. In particular, one starts by identifying the possible meanings that the words chosen by the parties can bear.
(2) Ascertaining the meaning of terms in an instrument requires a determination of what a reasonable person would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract, and the commercial purpose or objects to be secured by the contract.
(3) The instrument must be read as a whole. A construction that makes the various parts of an instrument harmonious is preferable. If possible, each part of an instrument should be construed to have some operation.
(4) The general principle applicable to the construction of commercial contracts is that they should be given a businesslike interpretation. Absent a contrary intention, the court approaches such contracts on the basis that the parties intended to produce a result which makes commercial sense. This requires that the construction placed on the term or terms in question is consistent with the commercial object of the agreement. However, it must also be borne in mind that business common sense may be a topic on which minds may differ.
You should always take the opportunity to ensure that your contracts are drafted in clear and express terms that accurately and comprehensively communicate the intended meaning of each provision. This should be done not only in pre-contractual negotiations, but also whenever the term of a contract is extended or when there is another cause to review the contract (such as frequent or significant disagreements between the parties over the intended meaning). If there are stipulations such as time frames, it is optimal to specify what will be the consequence of a failure to meet the stipulation. If you do so, there can be no ambiguity and no dispute.
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