Park v Murray Irrigation Limited

BATHURST CJ: I agree with Sackville AJA and with his Honour’s reasoning.

LEEMING JA: I agree with Sackville AJA.

SACKVILLE AJA: This is an appeal from a judgment of a Judge of the Common Law Division (Button J). [1] The primary Judge rejected a claim by the appellant against the respondent, Murray Irrigation Ltd (Murray), for damages and other relief.

At the material times, the appellant was a farmer working properties located in south-western New South Wales growing (so the Court was informed) rice, wheat and fodder. He was a shareholder and member of Murray, a not-for-profit irrigation corporation. The appellant’s primary contention was that he suffered losses because Murray, in breach of its contractual obligations, changed its rules in April 2008 to require members to pay “termination fees” to Murray when they transferred water entitlements to a third party. The appellant sold his water entitlements in October 2008 for $3.5 million to a State instrumentality. His principal contention was that Murray unlawfully required him to surrender an equivalent number of “delivery entitlements” and to pay $931,139.60 in termination fees, thereby reducing the net sale price he received on the sale of the water entitlements.

Between February 2002 and April 2005, the appellant acquired 2,845 Water Entitlements (WEs) as the result of purchasing three properties in the irrigation area managed by Murray. [2] Prior to 2007, WEs could not be transferred separately from an entitlement to delivery of water.

In mid-2007, Murray’s rules were amended to “unbundle” WEs and Delivery Entitlements (DEs). This was achieved, in part, by creating an entitlement on each member to receive one DE for each WE held by that member as at 4 May 2007. [3] Thereafter, until the rules were again changed in April 2008, the appellant (like other members of Murray) held two separate sets of entitlements under the contractual arrangements with Murray:

The “unbundling” of WEs and DEs came about in consequence of recommendations made by the Australian Competition and Consumer Commission (ACCC) in a report presented in 2006. [4] Murray implemented the substance of the recommended unbundling arrangements in mid-2007 by amending the contractual arrangements with its members.

As from the implementation of the new arrangements, WEs and DEs were regulated by a number of documents having contractual force between Murray and the appellant. These documents were:

Clause 3A.4.1 of the WE Contract is critical to the appellant’s argument. It provided at all material times as follows:

Under the arrangements in force from mid-2007 to April 2008 a member of Murray was required to pay an annual access fee in respect of each DE. The member was not required to surrender his or her DEs but if the DEs were surrendered the member had to pay termination fees to Murray. The fee structure recognised that Murray incurred costs in maintaining the infrastructure for the delivery of water to members’ properties and that the removal of a property from the network had cost implications for Murray.

These contractual arrangements entitled members to transfer WEs to third parties (whether or not members of Murray) without transferring or surrendering an equivalent number of DEs. Accordingly, a member of Murray could sell WEs but retain his or her holding of DEs and thus avoid incurring any liability to pay termination fees to Murray. However, the member would have to continue paying access fees in respect of the retained DEs.

The transferability of WEs assumed particular importance in late 2007 because the newly elected Federal Labor Government announced the “Water in the Future Plan” which implemented a policy of actively buying back WEs from willing sellers. At the same time, the Commonwealth indicated that it planned to provide several billion dollars of funding over ten years in order to address the over-allocation of water to users in the Murray-Darling Basin.

On 7 April 2008 the Board of Directors of Murray, without notice to members, changed the then current arrangements by passing a resolution purportedly pursuant to the Constitution. The effect of the resolution was that a member who transferred a particular number of WEs was required to terminate an equivalent number of DEs and to pay Murray the appropriate termination fees in respect of the terminated DEs. The Board implemented the resolution by amending the Policies on 15 May 2008. The amendments were expressed to apply in respect of all applications for transfer received by Murray on and after 8 April 2008. No amendments were made to the WE Contract as in force immediately before 8 April 2008.

In or about October 2008, the appellant entered into three “Contracts for the sale of water entitlements in [Murray]”. [6] The purchaser under each contract was the Water Administration Ministerial Corporation (WAMC), a body established by State legislation. [7] The appellant sold a total of 2,800 WEs to WAMC for $1,250 per WE.

Each contract contained a clause stating that the price of $1,250 per WE was calculated on the basis that “it presently includes a sum of $382.00 which is the current [DE] termination fee”. The contracts required the appellant’s solicitors to pay the termination fees to Murray out of the purchase price. A total of $931,139.60 was paid to Murray in respect of the termination fees.

On 1 September 2009, the Water Charges (Termination Fees) Rules 2009 (Cth) (Rules), made pursuant to s 92 of the Water Act 2007 (Cth), came into force. The effect of r 5 of the Rules was to prohibit an irrigation infrastructure operator from imposing, demanding or receiving a fee or charge for or in respect of the surrender of the whole or part of a right of access to the operator’s network. The making of the Rules effectively prevented Murray from continuing with its policy of charging termination fees on the transfer of WEs.

On 23 September 2014, nearly six years after the sale of the WEs settled, the appellant commenced proceedings against Murray. (A limitation defence had been pleaded, but this appears to have been abandoned no later than the hearing; it formed no part of the appeal.) He claimed damages for breach of contract or, alternatively, restitution of moneys unlawfully demanded by Murray. The appellant alleged that the contractual arrangements with Murray did not permit Murray to amend the Policies so as to impose compulsory termination fees on a transferor of WEs. The appellant claimed, in the alternative, that Murray’s actions amounted to unconscionable conduct in contravention of s 51AC of the Trade Practices Act 1974 (Cth) (Trade Practices Act). [8] The appellant sought damages equivalent to the termination fees it had paid to Murray, less an amount of $318,208.10 which Murray later refunded to the appellant. [9]

The critical holdings by the primary Judge for the purposes of the appeal were as follows:

Mr Pritchard SC, who appeared with Mr Macauley for the appellant, identified four issues on the appeal. The issues were whether the primary Judge had erred:

In the course of argument in this Court Mr Pritchard pointed out that Murray had not filed a notice of contention challenging the primary Judge’s contingent finding that the appellant would be entitled to claim damages for loss of water efficiency dividends had his Honour found that Murray breached its contract. Mr Pike SC, who appeared with Ms Granger for Murray, was given leave to file a notice of contention in the following terms:

For the most part the parties, particularly the appellant, approached the appeal as though the construction of the contractual arrangements between Murray and the appellant could be dealt with independently of the statutory and regulatory context. It is true that the appellant’s argument requires close consideration of the terms of the WE Contract and the other documents having contractual force between the parties. But they must be construed having regard to the powers and functions conferred on Murray by legislation and the extent to which the exercise of those powers and the discharge of those functions were susceptible to changes in the regulatory environment.

The ACCC’s report was presented to the Governments of the Commonwealth, New South Wales, Victoria and South Australia in November 2006. The report bore the formidable title of “A regime for the calculation and implementation of exit, access and termination fees charged by irrigation water delivery businesses in the Southern Murray-Darling Basin” (ACCC Report). As has been noted, the ACCC Report led directly to the “unbundling” in 2007 of WEs and DEs held by members of Murray, including the appellant. Murray’s amendments to the Policies in April 2008 – in effect an attempt to rebundle WEs and DEs, at least for certain purposes – generated the present dispute.

The ACCC Report explained the historical context of the regime it was proposing as follows:

Murray was incorporated on 17 February 1995 as part of what the ACCC Report described as the “water reform framework” and what was described in evidence as the “privatisation process” for water in the Murray-Darling Basin. As from 3 March 1995, Murray became a “class 2 irrigation corporation” for the purposes of the Irrigation Corporations Act 1994 (NSW) (Irrigation Corporations Act). [11] A class 2 irrigation corporation (unlike a class 1 irrigation corporation) did not represent the State. [12] However, it was granted an operating licence authorising it to carry on the business of supplying water provided to it under an irrigation corporation licence and to exercise its functions under the Irrigation Corporations Act. [13] Murray also received an irrigation corporation works management licence authorising it to take water from rivers and other sources in accordance with the terms of the licence. [14] The legislation created certain rights and immunities for a class 2 irrigation corporation when carrying out its functions. [15]

Irrigators within the region for which Murray became responsible received shares in the corporation and a commensurate number of WEs in exchange for their previous entitlements.

The licensing scheme established by the Irrigation Corporations Act and Murray’s role within that scheme continued until the Act was repealed in 2000 by the Water Management Act 2000 (NSW) (Water Management Act). [16] The Water Management Act provides that Murray’s operating licence under the Irrigation Corporations Act continues under the new legislation. [17] However, Mr Watts, a former officer of Murray, gave evidence that Murray holds (and presumably held at the relevant times) an operating licence issued under the Water Management Act.

Part 1 of Chapter 4 of the Water Management Act applies to all irrigation corporations under the former Irrigation Corporations Act, [18] including Murray. Part 1 provides (as did the Irrigation Corporations Act) that an irrigation corporation owns all water management works it has installed on land, whether or not it owns the land. [19] An irrigation corporation has power to enter land within its area of operations for specified purposes, including constructing, installing and maintaining water management works. [20] Part 3 of the Water Management Act authorises the preparation of management plans which may include provisions with respect to water conservation, the conditions to which licences are to be subject and water sharing arrangements. “Management plan” is defined to mean a plan dealing with any aspect of water management, including but not limited to such matters as water sharing and water source protection. [21]

An irrigation corporation’s operating licence authorises it to carry on the business of supplying water provided to it by the WAMC and to exercise the functions conferred on it by Part 1. [22] The operating licence held by Murray was not in evidence, but s 123(2) of the Water Management Act provides examples of terms and conditions that may be (and presumably are) imposed. The examples include:

Murray also holds a number of access licences [23] which entitle it to a share of water in the Murray River on terms specified in the licences. Murray has been issued with water use approvals and water management work approvals entitling it to use water it extracts from the Murray River and to undertake water supply works. [24]

It can be seen that the contractual arrangements between an irrigation corporation and its members operate within a legislative framework that identifies the functions of the corporation and subjects it to a regulatory regime designed to allocate and preserve a vital but scarce resource.

The ACCC Report argued that the imposition of exit fees on the sale of WEs reduced economic efficiency. It explained the emergence of exit fees as follows:

Exit fees were said to reduce economic efficiency for these reasons:

The solution proposed was to “unbundle” WEs and the entitlement to delivery of water. According to the ACCC, the separation of the two entitlements would provide the trading of water to more highly valued uses:

The ACCC Report summarised the proposed regime as incorporating the following elements:

The ACCC Report recognised that there was likely to be a need for a “review of the efficacy or the proposed regime”.

In 2007, the Murray-Darling Basin Agreement (Basin Agreement) then in force was an agreement signed in 1992 by the Governments of the Commonwealth, New South Wales, Victoria and South Australia. All participating jurisdictions (including Queensland which joined in 1996) enacted legislation satisfying the Basin Agreement. Schedule E of the Basin Agreement dealt with “Transferring Water Entitlements and Allocations”.

In late 2006 or early 2007, the parties to the Basin Agreement agreed on a Protocol made under Schedule E to the Basin Agreement. The Protocol stated that its purposes were, relevantly, to specify principles about access, exit and termination fees and to adopt certain recommendation of the ACCC Report. The clauses of the Protocol provided, among other things, that:

The Protocol also expressly provided that:

It is not clear from the evidence whether Murray was given a formal direction to implement the unbundling arrangements and, if so, what form such a direction took. In any event, as the public statements by Murray indicate, it apparently regarded itself compelled to implement the unbundling proposals endorsed by the Protocol made under Schedule E to the Basin Agreement. It did so by amending the WE Contract and the terms of the Policies.

In a publication entitled “Talking Water”, Murray advised its members on 7 May 2007 that it would issue a DE for each WE on a landholding on 4 May 2007. The DE would be the basis of a fixed charge to replace a fixed charge per WE. The publication stated as follows:

On 21 May 2007, Murray issued a “Q&A” document to members. The document explained the new system. It advised that the new DEs only related to operations within Murray Irrigation. Thus:

The Q&A document informed members that Murray intended to impose two charges for water usage:

The Q&A document explained the reasons for the changes:

In a press release dated 5 July 2007 Murray announced that it had met the “deadline” of 1 July 2007 to comply with the ACCC’s water trading and pricing recommendations.

On a date not precisely identified in the submissions, the Board varied the terms of the WE Contract to incorporate changes intended to give effect to the new arrangements. The variations were made pursuant to cl 6(b) of the Constitution. [25] It is common ground that the WE Contract in this form bound Murray and the appellant. The Policies approved by the Board also were consistent with the new unbundling arrangements.

The version of Murray’s Constitution in evidence was that in force as at 15 December 2007. The Constitution states that Murray is a non-profit making organisation the objects of which include:

The following provisions of the Constitution are relevant for present purposes:

The definition clause of the Constitution (cl 1.2) contains definitions that apply unless “there is something in the subject matter or context inconsistent”. The definitions include the following definitions:

Headings in the Constitution are said to be for ease of reference only and must be ignored in construing the Constitution (cl 1.3).

The WE Contract in the form it took after the 2007 amendments included the following provisions: [26]

The WE Contract permitted Murray to take security from a member in certain circumstances where the member applied to sell WEs permanently and was in arrears with access fees (cl 3A.5). The member agreed that Murray’s right to take security and other specified rights constituted caveatable interests over the member’s Landholding (cl 3A.7). In the event of default by a member, Murray could suspend water supply to that member’s Landholding and charge the member for all expenses or losses incurred as a result of the default (cll 11.2, 11.5).

The definition clause in the WE Contract generally mirrored the definitions in the Constitution. However some definitions were different. For example “Charge” was defined to mean and include:

Prior to April 2008, consistently with the terms of the WE Contract, the Policies permitted a member of Murray to transfer DEs independently of WEs. WEs could be transferred without the member having to surrender any DEs or being required to pay termination fees. DEs could be transferred, but only between members of Murray, reflecting the fact that a DE was an entitlement of a member to the delivery of one WE to the member’s Landholding (that is, a parcel of land within Murray’s “Area of Operation”).

In an information document published on 9 April 2008 Murray explained to members the changes that were said to have been made to the Policies (although the amendments were not in fact made until 4 May 2008). The information document included the following:

Clause 3 of the Transfer Policy dealt with “Transfers and Restrictions Generally”. As amended in 2008, cll 3.1 and 3.2 provided as follows:

The key amendment to the Transfer Policy in 2008 was the introduction of cl 3.11, which provided as follows:

“Termination Fee” was defined to mean:

A corresponding amendment was made to the Charges Policy by the introduction of a new provision (cl 6.1) substantially in the same terms as cl 3.11 of the Transfer Policy.

Since it was part of the appellant’s case that the Board of Murray had acted in bad faith, the Primary Judge first considered whether Mr Ellis’ evidence was to be accepted. Mr Ellis gave evidence that the Board’s decision in April 2008 was motivated by the fear that the continued transfer of WEs by members would create a significant risk of serious harm to Murray’s viability and was not motivated by a desire to harm members. The appellant invited his Honour to reject Mr Ellis’ evidence.

The primary Judge found that although Mr Ellis had reconstructed some of the events, he had not given dishonest evidence. [29] His Honour accepted that the motivation of Mr Ellis and of other directors who spoke to Mr Ellis for implementing the changes of April 2008 was to protect Murray’s financial position. [30] The primary Judge acknowledged that Murray had “some weapons in its armoury with regard to farmers who defaulted on their access fees for DEs”, but inferred that as farmers were experiencing drought and financial stress these remedies “were not of the greatest efficacy”. [31]

The primary Judge made additional findings of fact as follows: [32]

The primary Judge rejected the appellant’s submission that the WE Contract had “primacy” over the Policies and thus it was not open to Murray to change the Policies so that they were inconsistent with the appellant’s rights under the WE Contract. The primary Judge gave four reasons for construing the contractual relationship between Murray and the appellant so as to permit the changes effected in April 2008: [33]

The primary Judge stated that although he had rejected the appellant’s claim founded on breach of contract he would deal briefly with the question of damages. [34] His Honour noted that the appellant’s submissions concentrated on mitigation of loss whereas in his Honour’s view the only question was whether the appellant had suffered a compensable loss by reason of Murray’s (assumed) breach.

The primary Judge considered that the appellant was not “out of pocket” as a result of the amendments to the Policies and Murray’s implementation of the changes. [35] While his Honour did not explain why he reached that conclusion, it appears that he found that termination fees had not been borne by the appellant but by WAMC pursuant to the terms of the contracts for the sale of the WEs. Accordingly, his Honour would not have awarded damages by reason of the requirement imposed on the appellant that he pay termination fees.

The primary Judge reached a different conclusion on the appellant’s claim for the “efficiency dividends” that he would have received had he retained 2,800 DEs after disposing of 2,800 WEs. His Honour did not say why he would have allowed the claim, but he did say that he was not prepared (as Murray submitted) to set off the access fee that the appellant would have had to pay had he retained the DEs. His Honour considered that a set off should not be allowed because there had been insufficient compliance with the rule in Browne v Dunn [36] , in that the issue of access fees had not been put to the appellant in cross-examination.

The appellant’s pleaded case alleged that Murray engaged in unconscionable conduct in contravention of both ss 51AA and 51AC of the Trade Practices Act. However, his submissions to the primary Judge relied only on s 51AC. [37] The primary Judge accepted that the concept of unconscionability in s 51AC of the Trade Practices Act is broader than the equitable doctrine incorporated in the “unwritten law” referred to in s 51AA. [38] His Honour also accepted that while unconscionability is often co-extensive with a high level of “moral obloquy”, it is not limited to such cases. [39] The issue to be determined was whether the appellant had established that, having regard to all the circumstances, Murray acted towards the appellant in a way that was against conscience.

The primary Judge observed that although the appellant relied on a number of matters his principal contention was that Murray was motivated by an “ulterior purpose” rather than a genuine concern about the financial consequences of the unbundling arrangements then in place. Murray’s ulterior motive, so the appellant argued, was to engineer change in government policy by “exact[ing] millions of dollars from the members of [Murray] and compell[ing] them to complain to the Government”. [40]

The primary Judge recognised that “unconscionability” for the purposes of s 51AC of the Trade Practices Act is not necessarily co-extensive with “moral obloquy” and that all of the circumstances have to be considered. In short, the question that his Honour asked was whether the appellant had established that Murray, having regard to all the circumstances, acted in a way that was against conscience. [41]

His Honour gave twelve reasons for not being satisfied that Murray had acted against conscience. The first reason was his Honour’s finding, based on acceptance of Mr Ellis’ evidence, that the changes to the Policies were “implemented out of a sincere concern for the financial position of Murray”. [42] Among the other matters his Honour took into account were the following: [43]

The primary Judge gave additional reasons as follows: [44]

The appellant’s written submissions on the appeal contended that although Murray had power under its Constitution to vary the Policies, that power was not unfettered. According to Mr Pritchard, it was not open to Murray to amend the Policies to alter all facets of the contractual relationship between Murray and the appellant. In particular, Murray could not amend the Policies so as to detract from cl 3A.4.1 of the WE Contract, which gave the holder of a DE an election to surrender and pay a termination fee or to continue to hold the DE and pay the annual access fee levied on the entitlement.

Mr Pritchard invoked two principles. First, where a contract empowers one party to impose further contractual terms, as with Murray’s power to amend the Policies and the WE Contract, the power is to be understood as constrained by the express terms of the contract. In this case any amendments to the Policies had to be consistent with the express agreement embodied in cl 3A.4.1 of the WE Contract.

Secondly, a power to amend a contract must be confined to amendments reasonably within the contemplation of the parties at the time the contract was made, having regard to the nature and circumstances of the contract. [45] It could not be supposed that the parties had in mind that the express contractual entitlement conferred by cl 3A.4.1 of the WE Act could be curtailed by amending the Policies. It was necessary, so Mr Pritchard argued, to read in the contractual documents in a “hierarchical fashion”, with the Policies subordinate to the terms of the WE Contract. Contrary to the reasoning of the primary Judge, cl 3.11 of the Transfer Rules and cl 6.1 of the Charges Policy could not be regarded as “carve-outs” to the terms of the WE Contract. It if were otherwise, the Board could alter its Policies so as to change a member’s entitlements under the WE Contract.

Mr Pritchard acknowledged that cl 20.1 of the WE Contract [46] entitled Murray to vary the terms of the WE Contract or to amend it from time to time. He pointed out, however, that Murray had not attempted to amend the WE Contract. Instead it had amended the Policies and left intact the appellant’s rights under the WE Contract.

Murray submitted that the primary Judge correctly applied orthodox principles of contractual construction. His Honour took into account the terms of Murray’s Constitution which provided for dealings with WEs and DEs to be in accordance with the Policies. The WE Contract itself recognised that the transfer of WEs could only be undertaken in accordance with the requirements and procedures of the Transfer Policy. There was nothing in the language of the various instruments that gave the WE Contract “primacy” over the Policies. Clause 3A.4.1 of the WE Contract could operate harmoniously with cl 3.11 of the Transfer Policy and cl 6.1 of the Charges Policy by reading cl 3A.4.1 as a general provision and cll 3.11 and 6.1 as provisions intended to operate in specific circumstances.

Mr Pike submitted that there was no issue of inconsistency between the contractual provisions. The intention of the parties, determined from the contractual provisions read as a whole was that Murray had power to regulate the circumstances in which members could transfer WEs and DEs and the conditions under which any transfer could take place. It had exercised that power.

There was no dispute between the parties that the principles to be applied in construing the contractual arrangements between Murray and the appellant are those stated by the plurality in Electricity Generation Corporation v Woodside Energy Ltd: [47]

Although Murray and the appellant were content to adopt this statement of principle the present case, unlike Woodside, does not involve a written agreement negotiated between the parties to a contract. The arrangements between Murray and the appellant had contractual force, in part, because of the operation of statute. The contractual arrangements related to tradeable entitlements vested in members on identical terms. Moreover, Murray had potentially had powers to amend the contractual arrangements unilaterally. There would therefore seem to be little scope for contending that the surrounding circumstances known to a particular member but not to others are relevant to construction of the contractual arrangements. [49] The statutory and regulatory context would, however, would be known or capable of being known by all members.

What is particularly important for present purposes is the principle that a contract must be construed as a whole. One aspect of reading an instrument as a whole is that a conflict between apparently inconsistent provisions is to be resolved on the basis that one provision qualifies the other and, hence, both have meaning and effect. [50] The same principle applies to an inter-related set of contractual instruments.

It was pointed out to Mr Pritchard during oral argument that the appellant’s amended statement of claim (ASOC) did not allege that Murray’s 2008 amendments to the Policies were invalid or inconsistent with the terms of the Constitution or the WE Contract. Mr Pritchard confirmed that the appellant did not allege that the amendments to the Policies were invalid. He accepted that Murray had the power to alter the contractual arrangements between the parties, but contended that its conduct in doing so constituted a breach of its contractual obligations to the appellant. Mr Pritchard also maintained that the appellant’s case was not confined to Murray’s actions in amending the Policies, but included its actions in imposing a requirement on the appellant to surrender 2,800 DEs and pay termination fees as a condition of approving the sale of its 2,800 WEs.

It is by no means clear that the ASOC pleaded the broader case identified and relied on by Mr Pritchard. However, Mr Pritchard demonstrated that arguments to this effect had been put to the primary Judge on the appellant’s behalf. Accordingly, the arguments are open to the appellant in this Court.

The starting point for the contractual argument must be the terms of Murray’s Constitution. Clause 2.11 states that WEs and DEs may only be held subject to the terms and conditions of a WE Contract between the Holder and Murray. Clause 2.11 also states that the Holder is responsible for such charges and fees in relation to the WEs and DEs as are determined by the Board from time to time pursuant to the terms of the WE Contract.

Two points should be noted about cl 2.11. The first is that the parties assumed that the reference in cl 2.11 to “a Water Entitlements Contract between the Holder and the Company” is a reference to the document expressly designated “Water Entitlements Contract”. That assumption is not necessarily correct. On one view, the definition of “Water Entitlements Contract” is broad enough to include the Policies, since each is a contract which contains terms and conditions pursuant to which the Holder may deal with WEs and DEs. However, it is convenient to proceed on the basis of the parties’ common assumption.

The second point is that cl 2.11 does not appear to be directed to the terms and conditions that apply when a member transfers WEs to a third party. Rather, it seems to be directed to the terms and conditions on which the “Holder” is entitled to the supply of a quantity of water (the WE) and the delivery of an allocation of water to the Holder’s land (the DE). That cl 2.11 is limited in this way is suggested by cl 3.1(d) of the Constitution which deals specifically with transfers of WEs and DEs.

Clause 3.1(d) states that “transfers of [WEs] and [DEs] shall be regulated by the terms of the [WE Contract] and the Policies of the Company”. Given the definition of “Policies of the Company”, [51] cl 3.1(d) explicitly recognises that transfers of both WEs and DEs can be regulated by the Transfer Policy and the Charges Policy. This conclusion is reinforced by cl 3.7 of the Constitution, which provides that dealings (an undefined term) shall be in accordance with the Policies of the Company and pursuant to the terms of the WE Contract.

Clauses 2.11 and 3.1(d) of the Constitution must be read together. When that is done it would seem that they deal with two different, albeit related subjects. Clause 2.11 provides the mechanism for determining the terms and conditions on which WEs and DEs are “held” – that is, the terms and condition governing the entitlement of a Holder to the supply of a quantity of water through infrastructure installed and maintained by Murray. Clause 3.1(d) provides the mechanism for determining the regulations which govern the transfer of WEs and DEs.

Whether or not this interpretation of cll 2.11 and 3.1(d) is correct, the Constitution clearly contemplates that Members’ entitlements may be governed by terms and conditions imposed both by the WE Contract and the Policies. This creates the possibility that the terms of the WE Contract and of the Policies may be in conflict. Any such conflict would have to be resolved by a process of construction. But it cannot be said that under the Constitution the Board of Murray lacks the power to change the rules governing the transfer of WEs and DEs by amending the Policies. The Constitution explicitly recognises that the Board has such a power.

The WE Contract, as amended in 2007, also explicitly recognises that a Holder’s entitlement to transfer WEs is subject to the requirements of the Transfer Policy. Clause 3.1 of the WE Contract states that the Holder cannot sell, transfer or otherwise deal with the WEs or the “Annual Allocation” (the amount of water determined by the Board to be available for distribution through the System in a season applicable to the relevant WE) “except in accordance with the requirements and procedures of the [Transfer Policy]”. Clause 3.1 clearly contemplates that the Transfer Policy may be changed from time to time as the Board determines and that the Board may alter the requirements governing a Holder’s entitlement to transfer WEs. Moreover, the WE Contract expressly confers on the Board the right to amend the terms of the Contract from time to time and provides that the Holder is bound by any amendment (cl 20.1).

The appellant’s argument hinges upon the contention that cl 3A.4.1 of the WE Contract not only confers a right upon a member of Murray to retain DEs notwithstanding the transfer of WEs to a third party, but confers a right that cannot be removed by changes to Murray’s Policies. Clause 3A.4.1 says only that the Holder of a DE may:

It can be accepted that cl 3A.4.1 was inserted into the WE Contract in order to give effect to the policy of “unbundling” recommended by the ACCC. As has been pointed out, [52] the language of cl 3A.4.1 closely mirrors that used in the Schedule E Protocol, which adopted the proposals in the ACCC Report. It is, however, one thing to accept that cl 3A.4.1 was intended to prevent Murray requiring a member seeking to transfer WEs to surrender an equivalent number of DEs and to pay termination fees. It is quite another to construe cl 3A.4.1 as conferring, in Mr Pritchard’s words, an “immutable” entitlement, such that Murray lacked the power to change its Policies so as to allow it to impose such a condition on members wishing to transfer WEs.

Not only is there nothing in the language of cl 3A.4.1 to prevent such a change in Murray’s rules, the Constitution and the WE Contract expressly contemplate that transfers of water entitlements are to be regulated by the terms of the WE Contract and the Policies. [53] The Constitution also expressly states that the terms and conditions applicable to DEs shall be as determined by the Board from time to time. [54]

In view of Murray’s powers to alter its contractual arrangements with members it is hardly surprising that cl 3A.4.1 of the WE Contract does not attempt to entrench the entitlement of members to deal with WEs separately from DEs. Clause 3A.4.1 is simply not directed to curtailing Murray’s power to amend either the WE Contract or the Policies to implement changes on policy.

This construction of the contractual arrangements between Murray and its members, including the appellant, is reinforced when the regulatory context is taken into account. The primary Judge did not expressly consider the significance of the regulatory framework but approached the task of construction on the basis that the ongoing relationship between Murray and its members, having regard to the vagaries of climate and water flows in the region, indicated an objective intention to provide “flexibility”. In my opinion, his Honour’s approach was broadly correct, but for a different reason.

Murray was not simply a private corporation, albeit one conducted on a non-profit basis. At all times from shortly after its incorporation Murray played an integral part in a highly regulated scheme for the allocation of scarce water resources and the efficient distribution of those resources to irrigators. Murray exercised powers and discharged responsibilities conferred or imposed by or under statute. Its contractual arrangements operated and were intended to operate within this legislative and regulatory framework.

The statutory and regulatory regime recognised that changes would have to be made from time to time to the arrangements governing, for example, access to water and conservation strategies. Murray’s operating licence, like those of other irrigation corporations, incorporated terms requiring it to act in accordance with any applicable management plan. The adoption of the policy of “unbundling” was a product of inter-Governmental endorsement of the proposals in the ACCC Report. As the ACCC itself acknowledged, a review would be needed to assess whether the unbundling of WEs and DEs achieved the stated objectives. Plainly, the regulatory structure within which Murray’s contractual arrangements operated contemplated that changes would have to be made to irrigators’ entitlements from time to time. The terms of the Constitution, the WE Contract and the Policies reflect that reality.

As the argument in this Court progressed, Mr Pritchard seemed to recognise the force of this construction of the contractual arrangements between Murray and the appellant. He accepted that “theoretically” the Board of Murray had the power to take away the appellant’s right to transfer WEs independently of his holding of DEs. To accommodate the difficulty, Mr Pritchard submitted that while Murray may have been able to “rebundle” WEs and DEs by exercising its power to amend the WE Contract, it could not do so simply by amending the Policies.

It will be recalled that it is no part of the appellant’s case that the amendments to the Policies were invalid. It is therefore necessary to construe the contractual arrangements as a whole. On any view, the (valid) amendments to the Policies were intended to prevent a member transferring WEs without surrendering DEs and paying termination fees. Clause 3.11 of the Transfer Policy clearly qualifies cl 3A.4.1 of the WE Contract. The latter can be given meaning and effect by construing it to apply so long as the Holder of DEs also holds WEs and does not seek to transfer WEs independently of the DEs. In that situation, cl 3A.4.1 continues to give the Holder the choice of surrendering the DEs or continuing to hold them and paying the annual access fee.

Contrary to Mr Pritchard’s submission, no question of a hierarchy of contractual documents arises. For the reasons already given, both the Constitution and the WE Contract recognise that transfer of WEs and DEs are to be regulated by the terms of the Policies. Murray could have implemented the changes by amending the WE Contract. But it could achieve the same result by amending the Policies.

Nor is this a case of a party to a contract exercising a power of amendment in a manner that exceeds the constraints imposed by the terms of the contract. The amendments to the Policies were made in conformity with the terms of the Constitution and the other contractual arrangements between Murray and its members.

In summary, Murray’s amendments to the Policies were not only valid but its actions in amending the Policies did not breach its contractual obligations to the appellant. Murray was contractually entitled to require the appellant to pay termination fees in respect of DEs as a condition of granting consent to the transfer of WEs. It follows that the appellant’s challenge to the primary Judge’s holding that Murray did not breach its contractual obligations must be rejected.

The primary Judge’s assessment of damages was made on the assumption, contrary to his Honour’s finding, that Murray breached its contract with the appellant. Since that finding has been upheld there is no need to consider whether his Honour was correct in concluding that the appellant suffered no compensable loss by being forced to pay termination fees as a condition of transferring 2,800 WEs. Nonetheless the issue should be addressed both for the sake of completeness and because it is relevant to the appellant’s unconscionability claim. For the same reasons, Murray’s notice of contention should be addressed.

In order to assess the competing contentions, it is necessary to record some additional facts relating to the appellant’s sale of the 2,800 WEs.

On 7 August 2008 an agent acting on the appellant’s behalf submitted an expression of interest to the New South Wales Department of Environment and Climate Change (DECC) proposing the sale of 2,800 WEs at a price of $1,250 per WE. The expression of interest was not in evidence.

On 18 September 2008 the DECC wrote to the agent stating that it wished to accept the appellant’s offer to sell 2,800 WEs from three landholdings

In October 2008 (the precise date is not clear) the appellant as vendor entered into three contracts for the sale to WAMC of WEs in Murray. The first contract was for the sale of 533 WEs attached to LRN W005 for a price of $666,250. The second was for the sale of 659 WEs attached to LRN D127 for a price of $823,750. The third was for the sale of 1,608 WEs attached to LRN D125 for a price of $1,809,000.

Each contract contained a clause in the following terms (adapted to record the relevant number of WEs and the price):

The contracts for the sale of the WEs settled on 17 December 2008. On or shortly after that day Murray received a cheque from the settlement proceeds for $975,183.29, of which $931,139.60 represented the termination fees payable in respect of the 2,800 DEs previously held by the appellant. The appellant’s solicitor paid the termination fees to Murray out of the gross proceeds of sale. The appellant received a total of $2,469,660.42 after payment of the termination fees, agent’s commission ($48,066.48) and costs ($4,766.58). The termination fees actually paid by the appellant amounted to $332.55 per WE rather than the amount of $382.00 identified in the sales contracts. The reason for the reduced figure was not explained in the evidence.

In his written submissions the appellant contended that he had discharged the onus of proving that he had sustained a loss of $612,931.90, being the unrefunded portion of the termination fee, as a consequence of Murray’s breach of contract. On the appellant’s case, Murray breached cl 3A.4.1 of the WE Contract by amending the Policies and requiring the appellant to surrender 2,800 DEs and pay termination fees as a condition of granting approval to the sale of 2,800 WEs. The appellant would not have had to pay termination fees of $931,140 but for Murray’s breach of contract. It followed that the appellant’s loss was equivalent to the termination fees exacted from him by Murray in breach of its contractual obligation, subject to adjustment to take account of the amount refunded by Murray.

In anticipation of an argument that Murray might advance, Mr Pritchard submitted that the so-called avoided loss principle did not apply in this case. That principle has been described as follows: [55]

Murray submitted that the primary Judge’s approach reflected orthodox principles governing the award of damages. According to Mr Pike, the appellant is entitled to be put in the same position as he would have been had Murray performed its contractual obligations. In circumstances where the purchaser of the WEs expressly agreed to pay a specific amount in respect of termination fees, it could readily be inferred that if the appellant had not been required to pay the termination fees the purchase price would have been reduced accordingly.

Mr Pike submitted that this analysis has nothing to do with the avoided loss principle, which applies only once the loss attributable to the breach of contract has been assessed in accordance with ordinary principles. The principle, so Mr Pike argued, is only relevant to whether the quantum of damages that otherwise would be assessed should be diminished by reason of events occurring after the date of the breach.

In the alternative, Mr Pike submitted that if the appellant’s negotiation of a price for the WEs so as to include a component for the termination fees is not relevant to the assessment of damages on ordinary principles, the appellant’s conduct should be taken into account in assessing damages by applying the avoided loss principle. That principle allows the court to balance losses and gains by considering all the circumstances including actions arising out of transactions which comprise the subject matter of the contract. On that approach the appellant had not sustained a loss.

There is no dispute between the parties that the principle governing the assessment of damages is that: [56]

The application of this principle is not always straightforward. But in this case the relevant question to ask is what the appellant would have received for the sale of 2,800 WEs if Murray had performed the contract in accordance with its obligations. On that basis, it is necessary to determine the price the appellant would have received for the sale of 2,800 WEs in October 2008 had Murray not amended and enforced the Policies (since the amendments, on the appellant’s case, were in breach of contract). The answer to the question requires consideration of the net price the appellant would have received under the contractual regime in force prior to April 2008, under which the appellant could have transferred WEs to a third party without being required to surrender any DEs or to pay any termination fees to Murray. More specifically the question is what price the appellant would have received for each WE, had he agreed to transfer 2,800 WEs to WAMC or to another willing but not anxious purchaser, under the pre-existing contractual regime.

Mr Pike submitted that the terms of the sales contracts between the appellant and WAMC demonstrated that the appellant succeeded in shifting the burden of paying the termination fees onto WAMC and thus avoided any loss as a result of the changes to Murray’s policies. The terms of the sales contracts were sufficient to establish, so he argued, that the market price for WEs in October 2008 was in the order of $900 per WE rather than the contract price of $1,250. [57] At the very least, the fact that the parties had appropriated a specific portion of the purchase price to the payment of termination fees prevented the appellant claiming that it had suffered a loss equivalent to the moneys so appropriated.

The terms of the sales contracts, of themselves, do not necessarily contradict the appellant’s case on damages. The contractual provisions indicate that the WAMC, as the purchaser, was concerned to ensure that the purchase price included the termination fees and that the appellant discharged his obligation to pay the termination fees to Murray. It is a possible but not necessarily compelling inference that WAMC agreed to a higher purchase price in order to relieve the appellant from the economic burden of paying the termination fees. In the absence of further evidence, the terms of the sales contracts are not necessarily inconsistent with the appellant’s contention that, but for Murray’s breach of contract, he would have received $1,250 per WE on the sale of 2,800 WEs free from any obligation to pay termination fees to Murray.

Mr Pike relied on other evidence to bolster the inference that a sale of WEs in October 2008, assuming the previous contractual regime to be in force, would not have realised anything like $1,250 per WE. Mr Pike submitted that the additional evidence showed that WAMC was prepared, in effect, to increase the price it paid for WEs so as to relieve sellers of the burden of paying the termination fees levied by Murray. He relied on three matters.

First, at some time shortly after 12 June 2008, Murray published a document entitled “Permanent Water Sale History”. The document recorded the price per WE of 25 transfers of WEs by Murray’s members between 7 April 2008 and 12 June 2008. However, the document warned that:

Four of the recorded transactions involved the transfer of fewer than 100 WEs and in each of these cases, the price did not exceed $625 per WE. The price per WE in the remaining transactions varied from $600 to a maximum of $1,000 per WE. The maximum price was received by the sellers in two transactions, both of which were apparently completed on 16 April 2008. One involved the transfer of 1,662 WEs and the other the transfer of 1,456 WEs. The evidence does not establish whether the transferors had to pay termination fees out of the price paid by the purchaser. The amendments to Murray’s Policies applied to applications for approval received on and after 8 April 2008, but it is not clear when approval was sought for these two transfers.

Secondly, the primary Judge found that the Bouchers, whose case was heard with those of the appellant and the Pratts, [58] agreed to sell 670 WEs to DECC at an “original price” of $950. DECC agreed to increase the price to $1,225 when it became clear that the Bouchers would have to pay termination fees on the transfer of the 670 WEs. [59] Documentary evidence indicates that DECC agreed to the increased price per WE after the Bouchers unsuccessfully appealed to Murray to exempt them from the termination fees. The sale of WEs by the Bouchers settled in February 2009.

Thirdly, the primary Judge found that the Pratts transferred a total of 470 WEs in two separate transactions at an “original price” of $1,000 per WE. [60] The Pratts were required to pay termination fees of $180,121.50 out of the proceeds of sale ($383.24 per WE), but it is not clear whether the price of $1,000 per WE was adjusted (or had been adjusted) to take account of the termination fees. The Pratts’ sales settled, respectively, in June 2008 and November 2008.

When the totality of the evidence is taken into account, in my view there was no error in the primary Judge finding that the appellant had not established that he had sustained a loss by reason of any contractual breach by Murray. It is true, as Mr Pritchard submitted, that the price list published by Murray in mid-2008 has to be treated with caution because of the warning contained in the document. Nonetheless it is striking that the highest price recorded in the document is $1,000 per WE, substantially below the price agreed between the appellant and WAMC. The list provides no support for any contention that the price for WEs in October 2008 would have been in the order of $1,250 per WE free from any obligation to pay termination fees. The list provides some evidence, albeit far from conclusive, that the price was likely to have been considerably less.

The most significant evidence on this issue is the arrangement between the Bouchers and DECC (or WAMC). It is clear that in this case DECC was prepared to increase the price it would pay for WEs in order to ensure that it would meet the cost of the termination fees the Bouchers would have to pay to Murray. The evidence does not establish whether the increase in price ($275 per WE) represented the entirety of the termination fees payable by the Bouchers, but it is likely to have been a very high percentage of the amount payable.

The arrangement with the Bouchers sheds light on the purpose of the contractual arrangements between the appellant and WAMC. The appropriation of a portion of the purchase price to the termination fees, coupled with the requirement that the fees be paid out of the purchase price, suggests that WAMC was prepared to increase the price payable to the appellant for the WEs above the price that would otherwise be payable with the intent that WAMC should ultimately bear the termination fees payable to Murray. This conclusion is consistent with a finding made by the primary Judge when considering the appellant’s contention that Murray had engaged in unconscionable conduct. His Honour found that:

For these reasons the primary Judge was correct to find that the appellant had not established that the termination fees paid to Murray out of the proceeds of sale of the 2,800 WEs constituted a loss in respect of which he would have recovered damages had he established that Murray breached its contractual obligations.

The primary Judge allowed in full the appellant’s claim to be compensated for the “efficiency dividends” that would have been paid by Murray had the appellant retained 2,800 DEs should be allowed in full. His Honour declined to set off against the efficiency dividends the annual access fees the appellant would have had to pay to Murray in respect of the DEs. His Honour declined to do so because the appellant had not been cross-examined about the quantum of fees that would have been payable to Murray.

The Primary Judgment does not identify any particular issue on which the appellant could and should have been cross-examined. In the course of argument before the primary Judge, however, Mr Pritchard suggested that the appellant might have said that he was not bound to pay the access fees. This seems to be what his Honour had in mind.

In his written submissions in this Court Mr Pritchard contended that the appellant should have been given notice that Murray intended to claim that the access fees should be offset against any award of damages to compensate for the loss of efficiency dividends. Mr Pritchard also submitted that Murray had not sufficiently identified that this was an issue in the proceedings.

Contrary to Mr Pritchard’s submissions, whether the access fees should be taken into account in assessing damages was always in issue in the proceedings. The defence expressly pleaded that the appellant was contractually obliged to pay the termination fees and that:

Moreover, the appellant bore the burden of proving his loss. If there was some basis on which he might have been relieved from his contractual liability to pay access fees in respect of the DEs he should have adduced evidence to that effect. At that point the failure to cross-examine the appellant on the issue of access fees might have had some significance. But in the absence of any such evidence, Murray was entitled to rely on documentary evidence establishing the amount the appellant would have to pay by way of access fees during the period he would have benefited from efficiency dividends.

Mr Pike handed up a schedule which set out the access fees that would have been payable by the appellant in respect of the DEs from 2008/2009 to 2015/2016 (omitting the 2014/2015 years). The schedule is based on documents annexed to Mr Watts’ affidavit itemising the charges payable in each of the years. Mr Watts’ affidavit also directed attention to cl 5 of the Charges Policy which obliged each member to pay the access fee in respect of DEs held by that member. The chart indicates that the access fees payable by the appellant for the seven financial years would have totalled about $195,000, or some $58,000 more than the total of the efficiency dividends.

The appellant’s written submissions offered some criticisms of the calculations in the chart, but none of the criticisms demonstrate that the total of the access fees payable by the appellant would have been less than the efficiency dividends claimed as a head of contractual damages.

Mr Pritchard made it clear that the appellant’s claim in restitution depended entirely on establishing that Murray’s amendments to the Policies breached its contractual obligations. As the contractual argument has not succeeded, it is not necessary to consider the restitution claims further.

Section 51AC of the Trade Practices Act relevantly provided as follows:

Section 82(1) of the Trade Practices Act provided that a person who suffers loss or damage by conduct of another person in contravention of a provision of Part IVA (including s 51AC) may recover the amount of the loss or damage by an action against that other person.

The appellant’s contention both at trial and in this Court was that he was entitled to recover damages pursuant to s 82(1) of the Trade Practices Act for the loss or damage he sustained by Murray’s unconscionable conduct. The loss or damage was said to be the same as that which formed the basis of his claim for damages for breach of contract. Since I have concluded that the appellant did not suffer any relevant loss or damage, there is no need to determine his unconscionability claim. Nonetheless, as the issue was addressed in argument, I propose to address it briefly. In doing so I bear in mind two matters. First, Mr Pritchard did not submit that the primary Judge misstated or misunderstood the relevant principles governing the construction of s 51AC of the Trade Practices Act.

Secondly, although there was some ambivalence about Mr Pritchard’s approach to the evidence of Mr Ellis, it is fair to say that there was no serious challenge to his Honour’s credit-based acceptance of Mr Ellis as an honest witness. If such a challenge was intended it cannot succeed. On established principles of appellate review of credit-based findings, [62] there is no justification for overturning his Honour’s finding as to Mr Ellis’ credibility. Indeed, a reading of the transcript of Mr Ellis’ cross-examination suggests, if anything, that Mr Ellis was surprisingly willing to accede to propositions apparently adverse to Murray’s interests. The documentary evidence indicates that Mr Ellis may have been justified in resisting some of the propositions.

Although there was no dispute between the parties as to the relevant principles, it is convenient to refer to the recent restatement by this Court in Ipstar Australia Pty Ltd v APS Satellite Pty Ltd (Ipstar). [63] Bathurst CJ pointed out that despite criticism in some authorities of using the concept of “moral obloquy” in determining whether the statutory standard of “unconscionable” conduct has been breached, [64] the use of the concept has some support. [65] The support includes the observation of Gageler J in Paciocco (HCA) [66] that the ordinary meaning of “unconscionable” requires a “high level of moral obloquy”.

In Ipstar, Bathurst CJ summarised the position as follows: [67]

Mr Pritchard challenged three findings made by the primary Judge. He submitted that his Honour erred:

Mr Ellis gave a detailed explanation for the decision he and his co-directors made to change Murray’s Policies so as to effectively reverse the unbundling of WEs and DEs. He referred in his affidavit to the particular difficulties Murray had experienced by reason of the reductions in water allocations during the 2006-2007 and 2007-2008 “water years”. He stated that he had:

Mr Ellis gave the following evidence in re-examination:

Mr Pritchard’s contention that Murray was adequately protected by the enforcement rights conferred on it by the WE Contract overlooks that the directors had to consider not merely Murray’s legal entitlements but the predictability and desirability of invoking legal mechanisms against members, particularly during times of drought or economic adversity. The primary Judge found that the “weapons” available to Murray were “not of the greatest efficacy” since they aimed at the assets of farmers suffering drought and financial stress. [68] It was hardly unconscionable for the Board to elect not to rely upon potentially draconian powers, which might have inflicted further hardship on members and created conflict within the membership.

Nor was it “irrational” for Board members to rely, in part, on their own experience as farmers and irrigators to assess whether the responses of members to the unbundling arrangements instituted in 2007 were likely to create financial difficulties for the non-profit corporation. Mr Pritchard’s submissions seemed to assume that the Board was not entitled to make decisions perceived to be in the interests of the corporation and most members without undertaking detailed analyses of the available data. On Mr Ellis’ evidence, the Board was faced with a difficult and deteriorating situation. The question before the primary Judge was not whether the Board’s decision was necessarily the best that could have been made or whether the decision-making process could have been conducted differently. The question was whether the Board’s conduct could be characterised as unconscionable in all the circumstances.

The primary Judge considered the significance of Mr Ellis’ evidence that one factor motivating him and other Board members was a desire to influence government policy. His Honour accepted that a desire to change government policy which was thought to be harmful to Murray’s financial interests or even its survival did not demonstrate a want of good faith on the part of the Board. There are many circumstances in which directors consider that it is in the interests of the corporation to attempt to influence government policies considered to be harmful to the activities or financial stability of the corporation.

The primary Judge correctly took into account that the changes to the Policies were not directed against particular members and that no member was forced to sell WEs against his or her will. His Honour also found that although the changes were instituted abruptly, a period of notice would have made the exercise largely futile. Moreover, his Honour accepted that while the changes were not the subject of specific consultation with members, there had been discussions between the Board and members about the measures needed to protect Murray’s financial position. [69]

No submissions were made that the changes were “illegal” and it is not clear what Mr Ellis meant when he said he thought they were. It may be he thought that proposals by the ACCC have the force of law but if he did he was mistaken. The concession that the changes would harm some members was made in the context of a decision intended (as Mr Ellis said) to protect Murray’s interests and those of the members as a whole. The members who were harmed were those who wished to transfer WEs without surrendering DEs. But as has been noted, no member was forced to transfer WEs and prompt action was required if the changes were not to be rendered futile.

The appeal must be dismissed. The appellant must pay the respondent’s costs of the appeal.