Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd

1. [1]

   These proceedings arise out of a commercial dispute concerning an oil re-refining venture at an industrial site at Bomen. Bomen is a suburb of Wagga Wagga in country New South Wales.

2. [2]

   As its name suggests, re-refining is a process which takes waste oil and by refining it again removes the contaminants so that it can be reused. The process can be used for various different grades and types of oil. The venture in the present case concerned the re-refining of transformer oil. That is a type of oil used in electrical transformers, particularly in electricity substations.

3. [3]

   The second defendant, Hydrodec Group Plc (“HG”) is the holding company for a corporate group which specialises in the re-refining of waste transformer oil. HG’s shares are listed on the London Stock Exchange. Except where it is necessary to refer to specific company, I will refer to the corporate group collectively as “Hydrodec”.

4. [4]

   Hydrodec’s transformer oil re-refining business uses proprietary technology which it has commercialised and for which it holds patents in various countries around the world. The re-refined product which results from the process is called “SUPERFINE”.

5. [5]

   The first defendant, Hydrodec Australia Pty Ltd (“HA”) is an indirectly wholly owned subsidiary of HG. Until 2018 HA carried on a transformer oil re-refining operation in New South Wales, first at Young (also in country New South Wales) and then at Bomen. This was one of Hydrodec’s two transformer oil re-refining operations. The other was (and is) at Canton, Ohio, in the United States of America.

6. [6]

   Hydrodec’s site at Young was (and still is) owned by it. The Bomen site is not. It belongs to the plaintiff, Southern Oil Refining Pty Ltd (“SOR”). The site is mainly occupied by SOR’s own oil re-refining plant. That plant handles a different type of waste oil, namely lubrication oil from cars and other machinery. The process it uses is different from Hydrodec’s.

7. [7]

   The core of Hydrodec’s process is a collection of refining plant and equipment known as the “Hydrotreater”. The Hydrotreater for the New South Wales operation was installed at the Young site in 2007.

8. [8]

   In November 2013 HA and HG entered into a written contract with SOR, styled “Transformer Oil Plant Co-location and Tolling Agreement” (the “Co-location Agreement”). That Agreement provided for the Hydrotreater and some related plant and equipment to be moved from the Young site to the Bomen site, where it was to be maintained and operated by SOR. Once the Hydrotreater was operating at Bomen, HA was to pay fees to SOR, referred to in the Agreement as “tolling fees”, for a ten year term (subject to earlier termination of the Agreement).

9. [9]

   Installation of the Hydrotreater at the Bomen site required the development of supporting infrastructure. Under the Agreement most of this was to be provided by SOR at its cost, and HA was to make regular payments, referred to in the Agreement as “capital charges”, to SOR by way of reimbursement of SOR’s capital expenditure. In certain circumstances a capital payment was also required on termination. HA’s obligations to pay the tolling fees and the capital charges were effectively guaranteed by HG, which undertook to procure that HA made those payments.

10. [10]

    The Co-location Agreement was put into effect and the Hydrotreater began operation at the Bomen site in April 2015. It did not prove as profitable as Hydrodec had hoped. In the first half of 2018, Hydrodec decided to sell its Australian operation so as to concentrate on its larger and more prospective re-refining operations in the United States. There were some negotiations between SOR and Hydrodec for SOR to buy Hydrodec out but the parties could not agree on terms. In July 2018, in accordance with a discretionary power conferred on it by the Co-location Agreement, Hydrodec gave SOR 360 days’ notice of termination of the Agreement.

11. [11]

    Following the giving of the notice, the Hydrotreater continued to operate, albeit at a limited capacity owing to shortage of feedstock. But a few weeks later, in August 2018, the Hydrotreater was shut down by SOR. The reason for the shutdown was that some of the components of the Hydrotreater required, or at least were said to require, certification or replacement so as to ensure safety. As events transpired, the Hydrotreater remained shut down until the expiry of the 360 day notice period in July 2019.

12. [12]

    Hydrodec was unsuccessful in finding a buyer for its Australian operations. Apart from some components which had been removed for repair, the Hydrotreater and its associated plant and equipment remained at Bomen when the Agreement expired. The Hydrotreater itself remained HA’s property upon termination of the Agreement. So too did a group of receiving tanks erected at the Bomen site. The remaining infrastructure which had been installed to accommodate the Hydrotreater belonged to SOR.

13. [13]

    At the time that the Agreement expired, the receiving tanks contained approximately 430,000 litres of unprocessed transformer oil feedstock belonging to HA. Most of that oil (approximately 390,000 litres) exceeded the applicable regulatory limit for PCBs (polychlorinated biphenyls). PCBs are carcinogenic and are subject to strict environmental controls. It was a feature of Hydrodec’s re-refining process that it would remove PCBs, along with other contaminants in the oil, when processing the feedstock into SUPERFINE. But if not processed through the Hydrotreater the contaminated oil required removal and the affected facilities required decontamination.

14. [14]

    At the termination of the contract the Hydrotreater remained a valuable piece of plant. HA has entered into a contract with Greenbottle Re-Refining (UK) Limited (“Greenbottle”) to sell the Hydrotreater to it. Greenbottle is a company controlled by Mr Andrew Black. He is a wealthy British investor who is a director of, and a major investor in, HG.

15. [15]

    Under the contract, HA is to deliver the Hydrotreater to Melbourne, from where Greenbottle will ship it to the United Kingdom to operate it. Property in the Hydrotreater will not pass to Greenbottle until the Hydrotreater reaches Melbourne. The contract price is $2 million.

16. [16]

    Hydrodec has been saying since before the Co-location Agreement expired in July 2019 that it proposed to remove the Hydrotreater from the Bomen site. But Hydrodec did not wish to remove the receiving tanks and the PCB-contaminated oil in them, no doubt because the cost of removal and decontamination would exceed the residual value (if any) of the tanks and the oil. In October 2019 Hydrodec purported to disclaim ownership of the tanks and the oil in favour of SOR.

Issues for determination

1. [17]

   As already mentioned, SOR is the plaintiff in these proceedings and HA and HG are the first and second defendants. HA has cross-claimed against SOR. Greenbottle is named as the third defendant but has played no active role in the proceedings.

2. [18]

   The claims and counter-claims in the proceedings, as pleaded, fall into five areas of dispute. They can be summarised as follows.

3. [19]

   First, there is a dispute about the tolling fees. HA failed to pay the fees for the period from June 2019 onwards. SOR claims from HA (and from HG as surety) the outstanding balance up to the end of the Agreement in July 2019. The amount is approximately $400,000.

4. [20]

   For its part, HA contends that it has overpaid, because it was not obliged to pay during periods when the Hydrotreater was not operating. HA alleges that the shutdown resulted from breaches by SOR of its maintenance obligations under the Agreement. HA by its cross-claim seeks repayment of $2.4 million.

5. [21]

   The second area of dispute concerns the capital charges. SOR claims from HA (and HG as surety) payment of approximately $1.177 million. This claim consists of unpaid monthly charges from June 2019 onwards ($65,000) and the balance payable on termination of the Agreement ($1.112 million).

6. [22]

   One of the items of capital expenditure which underlies SOR’s capital charge claims is a sum of approximately $340,000 spent by SOR on the construction of a driveway at the Bomen site in 2016-2017. The driveway provided access to the area of the site occupied by Hydrodec’s plant. SOR claims that this sum is properly included in the calculation of the capital charges due, but if it fails in its contractual claim it asserts a claim to payment both from HA and HG, by way of estoppel.

7. [23]

   These claims are denied by HA. HA contends that SOR’s capital cost figure (putting aside the cost of the driveway, for which it completely denies responsibility) is incorrect and the actual amount of SOR’s qualifying capital expenditure has never been properly determined in accordance with the Agreement. By its cross-claim HA seeks orders in the nature of an account to determine the amount properly due. HA also contends that a valuation obtained by SOR which forms an integer of the termination balance component of the claim was not properly done.

8. [24]

   The third area of dispute concerns HA’s remaining plant and equipment on the site, principally the Hydrotreater and the receiving tanks. SOR contends that upon termination of the Co-location Agreement, HA had a contractual obligation to remove its plant and equipment. Alternatively, even if there was no contractual obligation, by leaving its property on the site, HA is committing a trespass.

9. [25]

   As will be seen, there appears to be no dispute now that HA will remove the Hydrotreater. SOR earlier sought a mandatory injunction requiring HA to remove all of the plant, including the receiving tanks. But SOR is now, so far as the tanks are concerned, claiming damages for the cost of removing them.

10. [26]

    HA contends for the opposite interpretation of the relevant provisions of the Agreement. Its argument is that, on the proper construction of the Agreement, it was entitled to leave any of the plant and equipment which it owned on the site when the Agreement expired. On this argument, decontamination and removal of the receiving tanks, which HA has purportedly disclaimed, is SOR’s responsibility.

11. [27]

    HA alleges that, although SOR formally consented to the Hydrotreater’s removal, in fact SOR frustrated HA’s attempts to arrange for contractors to remove it. HA contends that by doing so SOR breached its obligations under the Agreement. HA also contends that SOR converted the Hydrotreater, and it is entitled to damages from SOR representing the value of the Hydrotreater.

12. [28]

    Despite its conversion claim it became clear at the trial that HA would still prefer, if it can, to remove the Hydrotreater and have it delivered to Melbourne in accordance with the contract is has with Greenbottle. HA sought a mandatory injunction of its own requiring SOR to permit removal of the Hydrotreater (but not the receiving tanks). As I understood HA’s case, damages for conversion were only pursued if for some reason this order proved ineffective.

13. [29]

    Given that by the end of the hearing the parties had apparently agreed on the removal of the Hydrotreater, I invited them to agree on orders being made to get the process underway before I reserved my decision. The parties were unable to agree at that time. They may have been able to do so since; if that has not happened by the time this judgment is delivered, it can be addressed in the course of making orders to give effect to the judgment.

14. [30]

    The fourth area of dispute concerns the PCB-contaminated oil in the receiving tanks. Initially SOR sought orders that this oil be removed along with the Hydrotreater and the receiving tanks. The claim was resisted by HA on the ground that responsibility had passed to SOR. But shortly before the trial took place, SOR found a buyer for the oil, who has removed it at no cost to SOR. SOR’s claim has thus fallen away.

15. [31]

    There remains however a claim by HA associated with the oil. It was originally delivered to the Bomen site in more than one batch. Only about 80,000 litres were, when delivered, contaminated with PCBs. But those deliveries became mixed in the receiving tanks with other feedstock deliveries which were not PCB-contaminated. The result was a mixture which exceeded the relevant environmental limit for PCB contamination.

16. [32]

    HA alleges that the effect of this mixing was to “damage” the feedstock not contaminated with PCBs by depriving that feedstock of the market value it would otherwise have had if removed from the plant and sold. HA alleges that, although the mixing of the oil would have been irrelevant had it been processed by the Hydrotreater, that mixing nevertheless represented a breach of SOR’s obligations under the Agreement. The damages claimed were said in opening to be about $150,000. The claim is disputed by SOR both on liability and quantum grounds.

17. [33]

    The final area of dispute concerns SOR’s claims against HG. HG propounds various defences to the claim against it which mean that, so it contends, it is not liable for the tolling fees and capital charges even if SOR’s claims against HA succeed.

18. [34]

    HG contends in particular that the arrangements with respect to the driveway amounted to a variation of the Agreement without its consent which discharged it as surety. For the same reason HG contends that SOR has no entitlement to payment from it for the cost of the driveway by way of estoppel outside the Agreement, even if SOR does have such an entitlement as against HA.

19. [35]

    HG propounds a further defence to the termination balance component of SOR’s capital charge claim. HG purported to terminate the Agreement between itself and SOR, and thus to terminate its obligations as surety, in September 2019 and again in November 2019. At the time, the quantum of the capital payment due on termination of the Agreement had not been finally determined, because the necessary valuation had not been completed. HG contends that its termination was valid and that this means that it cannot be liable for the capital payment even if HA is liable.

20. [36]

    HG seeks to justify its termination by alleging that SOR had committed repudiatory breaches of the Agreement. For the first termination, HG relies upon alleged breaches of SOR’s record-keeping obligations. For the second, HG relies upon alleged failure to co-operate in the removal of the Hydrotreater. SOR denies these breaches and also contends that if established they were not repudiatory.

Summary and analysis of evidence

1. [37]

   The negotiations between the parties for the relocation of the Hydrotreater from Young to Bomen began early in 2013. The parties referred to the proposal as “Project Cricket”. The negotiations followed an offer by Hydrodec to sell the Australian business to SOR; the sale did not proceed because the price and terms proposed by SOR were insufficiently attractive from Hydrodec’s point of view.

2. [38]

   As part of the negotiations, the parties prepared a budget for the cost of relocation. That budget included figures for the capital costs to be incurred in constructing the infrastructure at Bomen which would be required to accommodate the Hydrotreater.

3. [39]

   Hydrodec’s senior management was based in the United Kingdom. Its most senior executive was the CEO, Ian Smale. The CFO, Christopher John Ellis, was also based in the United Kingdom.

4. [40]

   Within Hydrodec, immediate responsibility for the Australian operations was held by Mark Dominic McNamara. His job title was Head of Technology and International Projects (he had previously been CEO until replaced by Mr Smale in early 2012). Mr McNamara worked out of an Australian office maintained by Hydrodec at Chatswood in Sydney.

5. [41]

   On SOR’s side, the negotiations were led by Timothy Ross Rose, SOR’s managing director. He was assisted by David Bruce Onions. Mr Onions’ job title was Refinery and Plans Manager.

6. [42]

   The Co-location Agreement was dated 13 November 2013. The parties were HA, SOR and HG. The Agreement’s principal features were as follows:

   1. (1)

      Clause 3 dealt with the co-location of the Hydrotreater at SOR’s Bomen site. HA was responsible for transporting the Hydrotreater to Bomen and SOR was responsible for the works required to allow the Hydrotreater to be installed at the site.

   2. (2)

      Under clause 2, the parties’ obligations under clause 3 were conditional on SOR obtaining the necessary local government and environmental consents. But in anticipation of obtaining consent, HA and SOR were to prepare a detailed plan, including a budget, for the co-location and commissioning of the Hydrotreater at Bomen.

   3. (3)

      Clause 9 dealt with default and termination. Clause 9.1 allowed for termination on 90 business days’ in the event of breach, insolvency or force majeure subsisting for more than six months. Clause 9.2 gave HA a discretionary right to terminate on 360 days’ notice if in HA’s opinion the Hydrotreater’s operation would not be, or was not, commercially satisfactory from Hydrodec’s point of view.

   4. (4)

      Clause 10 dealt with force majeure. It specified various force majeure events and provided a procedure for suspension of a party’s obligations if that party was unable because of such an event to comply with those obligations.

   5. (5)

      Clause 3.10 provided that SOR was responsible for the capital costs of constructing the facilities and improvements required to accommodate the Hydrotreater. The resulting plant, equipment and improvements were to be SOR’s property. In the rest of judgment, I will refer to this as the “Hydrotreater Infrastucture”. In return, HA was to repay that expenditure by annual instalments (referred to as the “Capital Charge”) over a period of seven years after the Hydrotreater began operating (the “Capital Term”). The Capital Charge payments were also to include interest.

   6. (6)

      If HA exercised its right to terminate under clause 9.2 before the expiry of the Capital Term, HA was obliged on termination to pay the Net Realisable Value of the Hydrotreater Infrastructure. The Net Realisable Value was the “written down” value of the assets, less their residual value, as determined by sale or valuation.

   7. (7)

      Clause 4 dealt with the Hydrotreater itself and other plant and equipment (which included laboratory facilities and the receiving tanks) belonging to Hydrodec which were to be set up at Bomen. This plant and equipment was defined in the Agreement as the “Transformer Oil Processing Facilities” (which included both the Hydrotreater and the receiving tanks) and the “Laboratory Facilities”. In the rest of this judgment, I will use the term “Hydrodec Plant” to cover both.

   8. (8)

      Under clause 4.1 the items of Hydrodec Plant were chattels not fixtures. Title remained with HA, which had the right to remove them during the Agreement and on termination or expiry, subject to compliance with SOR’s reasonable safety and environmental requirements. HA also had the right under clause 4.3 to make capital improvements to its plant and equipment, including by installing new plant and equipment at the site.

   9. (9)

      It was SOR’s obligation to carry out all maintenance and repairs to the Hydrodec Plant. The Agreement allocated the risk, cost and expense of “routine operational maintenance” to SOR, but not for “major periodical maintenance” or “major repairs”. Replacement of “major components”, unless attributable to SOR’s conduct, were to be treated as capital improvements by HA under clause 4.3.

   10. (10)

       For the purpose of maintenance and repair, HA was obliged to transport its store of critical spares (the “Critical Spares Inventory”) from Young to Bomen where it was to be housed by SOR. HA was to be responsible for replacing, re-stocking and supplementing the Critical Spares Inventory.

   11. (11)

       Clause 5 dealt with Tolling. SOR was required to operate and maintain the Hydrotreater for the processing of feedstock into SUPERFINE (“Tolling Services”) for a period of ten years after it began operating (the “Tolling Term”). In return, HA would pay SOR an annual fee (the “Tolling Fee”) of $2.25 million. There was provision for the Tolling Fee to be reviewed and increased annually.

   12. (12)

       HA was to pay both the Tolling Fee and the Capital Charge by monthly instalments. SOR was to issue invoices for each monthly instalment by the fifth business day of the following month, with payment to be made by the fifteenth day of that month. HG was to procure payment by HA of the Tolling Fees and Capital Charges, as well as the Net Realisable Value of SOR’s plant equipment and improvements in the event of termination under clause 9.2.

   13. (13)

       Clause 5.10 obliged SOR to prepare and maintain records of matters “relating to” the Agreement and SOR’s performance of its obligations thereunder. HA was entitled (at its own cost) to inspect the records and have them audited.

   14. (14)

       Clause 6 provided for the establishment of a committee consisting of two representatives of HA and two from SOR (the “Operating Committee”). The Operating Committee was to be responsible for technical and engineering supervision of the co-location and commissioning, and later of the maintenance improvement and operation, of the Hydrotreater. It was also to be responsible for supervising the provision of Tolling Services more generally, and “related matters”. In particular, the Operating Committee had power to determine the “detail” of SOR’s record-keeping obligations under clause 5.10, and the format of those records.

7. [43]

   Following the parties’ entry into the Agreement, SOR made application in December 2013 for development approval for the necessary works. Approval was obtained from Wagga Wagga City Council in June 2014. SOR also required a variation of its licence from the Environmental Protection Authority of New South Wales (“EPA”) to cover the new processing activities to be undertaken at Bomen. The varied EPA licence was issued in August 2014.

8. [44]

   In late August or early September 2014 Mr Rose travelled to the United Kingdom to discuss the project with Hydrodec’s UK management. During the course of the visit a further agreement, referred to at the hearing as the “Sanction Agreement”, was prepared and signed.

9. [45]

   The Sanction Agreement was dated 3 September 2014. It acknowledged that the parties’ obligations under the Co-location Agreement were now unconditional, and authorised various specific steps for the next phase of the project. Among other things, SOR agreed to cap the recoverable capital expenditure under the Capital Charge at $2.22 million.

10. [46]

    Following the execution of the Sanction Agreement, Hydrodec proceeded with the removal of the Hydrodec Plant from Young and its delivery to Bomen where it was installed on the Hydrotreater Infrastructure which had been constructed by SOR. The executives of the two parties principally responsible for this were Mr Onions for SOR and Brian Davies for Hydrodec. Mr Davies had extensive experience of commissioning oil and gas plants. He had previously been a Hydrodec executive and at the time was a consultant. The Hydrotreater went into service and production began on 28 April 2015.

11. [47]

    The Hydrotreater was built on a container skid to facilitate transport. A second skid contained control and ancillary equipment. A photograph of the Hydrotreater is reproduced below.

12. [48]

    Reproduced below is a plan showing the facilities the of the Bomen site.

13. [49]

    In the plan, the facilities used by SOR for its operations are shown in black, with street access from the front (western) end of the site. The Hydrotreater and its associated plant and infrastructure are shown in red. Access to those facilities for trucks and tankers came via the rear (eastern) end of the site. The concrete driveway across the rear of the site which is shown in the plan was not built until later (see below); at the time production began in April 2015, the rear access route was unsealed. The plan shows the Hydrotreater itself in the centre of the site. To the north of the Hydrotreater there are two bunded areas containing oil tanks. A larger-scale plan of those areas is reproduced below.

14. [50]

    On the eastern side of the plan are the tanks which were used for feedstock. They include four large vertical tanks (capacity 100,000 litres) numbered F1, F2, F3 and F4. These are the receiving tanks which belonged to HA and are the subject of SOR’s trespass claim. Next to them are two smaller-capacity horizontally mounted tanks numbered R1 and R2. They were used as feeder, or “guard”, tanks for the large storage tanks.

15. [51]

    In the bunded area immediately to the west of the receiving tanks are the production tanks which were used for the SUPERFINE produced by the Hydrotreater. Again the tank farm consisted of four vertically mounted 100,000 litre tanks (they had a greater diameter, and therefore a lower height, than the receiving tanks). These are numbered P1, P2, P3 and SOCOA and were used for storage. They are not contaminated with PCBs and belong to SOR. Again there are two smaller horizontally mounted feeder/guard tanks (numbered Q1 and Q2).

16. [52]

    With the transfer of the Hydrotreater from Young to Bomen, Hydrodec no longer needed to employ staff to operate it. The Young site was retained in a moth-balled state. Hydrodec retained its Sydney office with some local staff to conduct the Australian business (buying the feedstock, selling the finished product, and administering the contractual relationship with SOR).

17. [53]

    Hydrodec had two Australian companies, HA and another company called Hydrodec Development Corporation Pty Ltd which does not come into this judgment. Hydrodec’s Australian staff included employees and contractors engaged in performing operational tasks for those companies, but the companies appear not to have had their own management independent of Hydrodec’s. The board of directors of HA, at least, was made up of Hydrodec executives. As at April 2015, these were Mr Smale, Mr McNamara, and Mr Ellis.

18. [54]

    Apart from Mr McNamara, Hydrodec’s Australian management included Paul Evans, whose job title was Asia-Pacific Business Development Manager. From April 2015 Mr McNamara and Mr Evans were HA’s representatives on the Operating Committee.

19. [55]

    SOR’s representatives on the Committee from April 2015 were Terry Luce and Daniel Czubala. Mr Luce’s job title was Commercial Manager. As that job title suggests, he appears to have worked on the commercial and financial side of SOR’s business. Mr Czubala’s job title was Refinery Manager. He appears to have had immediate operational responsibility for the plant.

20. [56]

    Once production was running, the monthly tolling fee and capital charge payments began from HA to SOR. In order to calculate the amount of the capital charge, it was necessary to fix the amount of the total capital expenditure by SOR on the Hydrotreater Infrastructure. SOR produced a spreadsheet recording the capital expenditure. This was audited by Hydrodec.

21. [57]

    The audit was carried out by Dympna Baker. She was an accountant with Hydrodec, based in Sydney. The audit was handled for SOR by Mr Luce.

22. [58]

    The audit began in August 2015 and involved visits by Ms Baker to Bomen as well as discussions between her and Mr Luce. Ms Baker produced three reports, the last of which was completed at the end of December 2015. There is a dispute about whether the audit was actually completed. But there is no dispute that as from January 2016 HA made monthly capital charge payments to SOR based on a total capital cost figure of $2.2 million ($20,000 less than the maximum fixed by the Sanction Agreement).

23. [59]

    Towards the end of the audit process, Mr Smale had left Hydrodec and been replaced as CEO by Mr Ellis. This happened in early December 2015. Mr Ellis was replaced as CFO by David Dinwoodie. This left Mr McNamara and Mr Ellis as the directors of HA.

24. [60]

    The Agreement appears to have operated smoothly for about two years after January 2016. During this time (in late 2016 and early 2017) the rear access driveway the cost of which is now the subject of dispute, was built. I describe this in detail below. Costs totalling about $340,000 were borne by SOR. From May 2017 onwards, the monthly capital charge was increased to reflect this.

25. [61]

    Ms Baker left Hydrodec in July 2017. Soon afterwards Mr McNamara resigned as well. From September William Hand took over Mr McNamara’s position on the Operating Committee. Mr Hand had an engineering background. His job title at the time was Quality Control and Quality Assurance (QA/QC) Manager. Later evidence shows him as a director of HA, and I assume he was appointed when Mr McNamara left so as to maintain a board of two (the other director at the time being Mr Ellis).

26. [62]

    In November 2017 both the SOR members of the Committee were also replaced. Mr Luce left SOR and his place was taken by Murray Baker, whose job title was Business Development Manager. Mr Czubala’s place was taken by Christopher David Clarke. Mr Clarke is a chemical engineer. He replaced Mr Czubala as Refinery Manager for SOR. From this point, day-to-day dealings between the parties on a technical level took place between Mr Clarke and Mr Hand.

27. [63]

    By February 2018, Hydrodec’s Australian operations were faltering. Among the problems was a lack of available feedstock which meant that the plant was not capable of being operated at full capacity.

28. [64]

    At this point, the then chairman of the board of HG, Lord Moynihan, comes into the picture. In the late 1980s and early 1990s he was a minister in the British government, and later a shadow minister. He continues to describe himself as a politician as well as a businessman.

29. [65]

    In mid-February Lord Moynihan wrote a memorandum for the board of HG on Hydrodec’s future. In that memorandum he stated that he and Mr Ellis recommended the sale of Hydrodec’s Australian operations, hopefully to SOR.

30. [66]

    The board accepted that the recommendation should be taken further. Hydrodec was already being advised on other transactions by Mr Nick Dalgarno of Simmons & Company, an international investment bank. On 10 April Mr Dalgarno sent a memorandum to Mr Rose asking whether SOR was interested.

31. [67]

    Meanwhile, on 4 April Mr Ellis resigned as the CEO of Hydrodec and as a director of HG. He was replaced as interim CEO of Hydrodec by Lord Moynihan and as a director of HG by Mr Dinwoodie. Later, in May, Mr Dinwoodie replaced him as a director of HA.

32. [68]

    Mr Dalgarno’s memorandum resulted in an indicative offer from SOR which was sent on 13 April. For SOR the resulting negotiations were handled by Mr Rose. On Hydrodec’s side they were handled by Lord Moynihan and Mr Dalgarno with assistance from Mr Dinwoodie.

33. [69]

    Meanwhile payment disputes had arisen under the Co-location Agreement. HA failed to pay the monthly tolling fee and capital charge invoices for March, which had been due on 15 April. Mr Rose and Lord Moynihan exchanged correspondence about this, which I set out in more detail below. As a result of the dispute, SOR retained its current lawyers, Cooper Grace Ward (“CGW”). Their first correspondence to Hydrodec was dated 30 April.

34. [70]

    The payment disputes did not prevent the negotiations from continuing. A meeting took place in Sydney on 30 May between Mr Rose and Lord Moynihan (accompanied by Mr Dinwoodie). There is a dispute between the parties about what was said during that meeting, which I deal with in more detail below. In the end Hydrodec did not consider the terms offered by SOR were satisfactory. The Hydrodec representatives thought Mr Rose was trying to buy the Hydrotreater effectively for nothing.

35. [71]

    By June 2018 HA had lost its major customer, a company called Hanwha. The HG board made a formal decision to sell the Australian operation.

36. [72]

    Meanwhile, the dispute about SOR’s charges under the Co-location Agreement had not been resolved. In late June, CGW issued a statutory demand on behalf of SOR against HA.

37. [73]

    It is not clear from the evidence exactly when Hydrodec’s current solicitors, Carroll & O’Dea (“COD”), were first retained. But it seems to have happened in late June or early July 2018. The lead solicitor at COD was (and is) Mr Selwyn Black. The first letter from COD to CGW in what was to become a lengthy and acrimonious correspondence was sent on 11 July. Without formally making any concessions, Hydrodec agreed to pay SOR’s outstanding invoices without deduction, and regular payments resumed.

38. [74]

    On 30 July 2018 COD sent a long letter to CGW. The letter set out a raft of complaints about the way in which SOR was conducting itself under the Agreement. Less than an hour later, COD forwarded a notice of termination under clause 9.2 of the Co-location Agreement (see [42(3)10] above). The effect was that the Agreement would expire after 360 days, on 26 July in the following year.

39. [75]

    In the letter, COD accused SOR of breaching the Agreement by:

    1. (1)

       misusing HA’s confidential information to appropriate HA’s customers (including HA’s largest customer Hanwha) and to enhance SOR’s own operations;

    2. (2)

       sabotaging HA’s business further by imposing unnecessary plant shutdowns and going slow on tests required for the production process;

    3. (3)

       telling HA’s customers and suppliers it was insolvent;

    4. (4)

       failing to provide HA with SOR’s internal safety committee minutes; and

    5. (5)

       failing to provide information required for the tolling fee review process.

40. [76]

    The letter claimed that the damages from these breaches exceeded $2 million, and gave formal notice requiring rectification of breaches (4) and (5) within 30 days in accordance with the Agreement’s procedure for termination for breach. The letter went on to revive the allegation that HA was entitled to a refund of tolling fees for periods when the plant was not operating.

41. [77]

    Soon afterwards the Hydrotreater was shut down by SOR because of a safety issue. The issue was notified to Mr Hand by Mr Clarke in an email on 7 August. By 6.00 am on 9 August the shutdown had begun.

42. [78]

    I deal in more detail below with the reasons for the shutdown. For present purposes, it is enough to say that the chemical processes used in the Hydrotreater required hydrogen gas. A number of issues eventually emerged with the safety of various hydrogen-related components of the Hydrotreater, and which required, or allegedly required, parts to be replaced.

43. [79]

    In the letter of 30 July, COD had sought SOR’s formal consent in principle to HA exercising its power under clause 4.1 of the Agreement to remove the Hydrotreater (see [42(8)] above). In September, Hydrodec retained Mr Davies (see [46] above) to manage the removal project. Mr Davies did some initial budgeting work but the project was not for the moment taken any further.

44. [80]

    Meanwhile, it had become accepted between the parties that getting the Hydrotreater back into service would be Hydrodec’s financial responsibility under the Agreement (see [42(9)] above). The shutdown dragged on into November, by which time the receiving tanks were virtually full. Meetings of the Operating Committee had now ceased and SOR was waiting for Hydrodec to get two of the Hydrotreater components fixed.

45. [81]

    In order to help get the Hydrotreater back into service, Hydrodec had retained Cornelis Johannes (known as “Keith”) Koomen. Mr Koomen is an engineer who formerly worked for Hydrodec on a contract basis. He was familiar with the plant as a result of previous work with Hydrodec.

46. [82]

    Mr Hand and Mr Koomen considered a number of options and eventually Mr Koomen fabricated some spare parts for one of the components himself. SOR raised objections. Eventually the two components were removed from the Hydrotreater and sent to Mr Koomen for him to get them fixed. This happened just before Christmas 2018.

47. [83]

    The shutdown continued into 2019. By March Hydrodec had organised for replacement parts to be shipped to Mr Koomen from its Canton plant. On 22 March, COD wrote a letter to CGW giving formal notice to SOR to prepare to resume production once the parts arrived.

48. [84]

    The parts were shipped from Canton but it became clear that there were other problems with the components which had been removed from the Hydrotreater. By the beginning of April, Mr Koomen was concerned that there would not be enough time to get the Hydrotreater back into service before the Agreement expired in July. At Mr Hand’s request, Mr Davies drew up a removal plan for the Hydrodec Plant, which was sent to CGW by COD.

49. [85]

    SOR (by CGW) provided its consent to the removal plan on 24 April, but the debate between the solicitors about the removal of the Hydrodec Plant (and the PCB-contaminated oil) continued. By this stage Hydrodec had accepted that it would not be practicable to get the Hydrotreater working before the Agreement expired. Mr Koomen dropped out of the picture.

50. [86]

    Meanwhile, HA had requested an audit of the records maintained under clause 5.10 of the Co-location Agreement. This audit was carried out by a firm of accountants, Crowe Horwath, in February 2019. It was followed by correspondence between COD and CGW about the adequacy of SOR’s capital expenditure records. That correspondence ended in stalemate in September 2019, as I describe in more detail below.

51. [87]

    Although the sale of the Hydrotreater to Greenbottle was not documented until August, the terms of the sale reflected a bid lodged by Greenbottle at the end of May, apparently as part of a competitive bidding process instigated by Hydrodec. Mr Ellis recommended Greenbottle’s bid to the Hydrodec board on 18 June. The tolling fee and capital charge for May were paid (late) at the end of June but no further payments were made, and this too became grist for the lawyers’ mill.

52. [88]

    On 18 July, a revised plan for removal of the Hydrodec Plant, originally drafted by Mr Davies, was sent by COD to CGW. But the plan was a preliminary one, and beyond lining up (but not formally engaging) the necessary contractors, nothing had been done to get it ready to be put into effect. This remained the position when the Co-location Agreement expired on 26 July 2019.

53. [89]

    Under the terms of the Agreement, it was necessary to determine the residual value of the Hydrotreater Infrastructure for the purpose of determining the final capital payment to be made to SOR (see [42(6)] above). On the day the Agreement expired, CGW wrote to COD proposing that an auction firm, Pickles, be appointed to sell the assets. In response, COD argued that nothing could be done until the alleged deficiencies in the capital expenditure records were rectified. SOR then tried to convene a meeting of the Operating Committee to take the next step. Hydrodec resisted this for similar reasons. Eventually, in early October, Hydrodec agreed to a meeting, but subject to conditions, and SOR abandoned the idea.

54. [90]

    Meanwhile, the sparring between CGW and COD about the removal of the Hydrodec Plant and the feedstock oil continued. On 21 August, COD wrote to CGW articulating for the first time a further claim against SOR for damages for mixing PCB-contaminated deliveries with the other feedstock oil while the plant had been shut down between August and November the previous year. This led to a further debate between the solicitors.

55. [91]

    COD also separately drew attention to a feature of the revised plan sent to CGW on 18 July. Unlike the earlier plan, the revised plan called for removal to take place in two distinct stages. The Hydrotreater was to be removed first. The receiving tanks were to be removed later, after the PCB-contaminated oil was removed (which was now of course the subject of a further dispute).

56. [92]

    Mr Rose was suspicious. He thought that all of the Hydrodec Plant (and the contaminated oil) should be removed at once. His concern was that if Hydrodec removed the Hydrotreater first, it might not come back for the receiving tanks and the contaminated oil.

57. [93]

    Mr Davies had been overseas, but returned on 10 September and began the steps required to formally engage the necessary contractors. He also spoke to Mr Onions about what would be needed to comply with SOR’s OHS requirements. But no action resulted on the ground. Meanwhile the flow of solicitors’ correspondence continued. On 16 September, COD issued a letter on behalf of HG, purporting to terminate its surety obligations under the Co-location Agreement. The ground for the purported termination was an alleged failure by SOR to keep proper records.

58. [94]

    On 4 October 2019 SOR began these proceedings, opening another front in the battle between COD and CGW. SOR sought expedition, which was granted on 1 November.

59. [95]

    In the meantime, on 9 October, SOR set in motion the mechanism to appoint a valuer. This was a protracted process. Eventually, SOR obtained a valuation report in June 2020. The report was prepared by Ross Henderson. He had been appointed through the Australian Property Institute under one of the clauses of the Co-location Agreement.

60. [96]

    On 31 October 2019 COD wrote to CGW purporting to disclaim ownership of the receiving tanks and the contaminated oil. The validity of this disclaimer was, naturally, disputed by CGW.

61. [97]

    Meanwhile, earlier in October Mr Ellis had been reappointed as CEO of Hydrodec (he had returned to the HG board as a non-executive director in March). At the very end of October, internal Hydrodec approval was obtained to proceed with stage one (removal of the Hydrotreater only). Mr Davies set out to confirm the contractors’ availability and have them re-quote.

62. [98]

    On 7 November, there was a volte-face from one of the contractors, Riverina Cranes (“RC”). RC sent an email stating that it would not be quoting “at this time”. Hydrodec’s UK executives and COD seem to have believed that Mr Rose was behind RC’s decision and might block attempts by Hydrodec to retain other contractors. They apparently thought this was part of a strategy to obtain the Hydrotreater without having to pay for it. COD took the issue up with CGW, demanding that SOR provide letters to the contractors signed by Mr Rose asking them to help Hydrodec to remove the Hydrotreater.

63. [99]

    On 13 November, SOR filed a notice of motion in these proceedings. The motion sought orders preventing HA from further encumbering the Hydrotreater or dissipating the proceeds of its sale. Orders were made to this effect, initially on an interim basis on 28 November and then until further order.

64. [100]

    Meanwhile, on 22 November, COD issued a further second purported notice of termination of its guarantee obligations. The grounds for this purported termination included the failure to deal with the contractor issue to COD’s satisfaction.

65. [101]

    By this stage, Hydrodec’s Australian presence had wound down to almost nothing. Mr Evans was made redundant in August, with effect from 13 September. Mr Dinwoodie resigned as a director of HG and HA on 30 September. This apparently left Mr Hand as the sole director of HA. Mr Hand then gave notice of his resignation on 25 October.

66. [102]

    It was proposed that the consultants who would be removing the Hydrotreater would be formally retained and paid through Mr Black of COD, reporting to Mr Ellis in the United Kingdom. Mr Hand left on 25 November, to be replaced by Mr Ellis as sole HA director. Then on 27 November Mr Davis terminated his consultancy. In the following month, Lord Moynihan resigned as Hydrodec chairman.

67. [103]

    Early in January 2020 Mr Ellis lined up another consultant, Garry Armand, to take over from Mr Davies. But no progress appears to have been made with the removal of the Hydrotreater and Mr Armand dropped out of the picture in March. At some point the Hydrotreater appears to have been removed from its shed and placed under a tarpaulin. The receiving tanks and the contaminated oil remained in situ.

68. [104]

    In July 2020 Mr Black obtained a written offer from a company called Benzoil Pty Ltd (“Benzoil”) to take the contaminated feedstock away. This resulted in a further exchange of correspondence between COD and CGW in which CGW raised various technical difficulties with the proposal. These were addressed by COD in letters dated 11 and 19 August, but CGW failed to respond and Hydrodec let the proposal drop. Shortly before the trial began, Hydrodec made its own arrangements (which the evidence does not describe in any detail) to dispose of the oil.

69. [105]

    The contract between HA and Greenbottle remains on foot. In the absence of anyone with any technical knowledge in Australia, Greenbottle has over the last few months itself been trying to organise the removal of the Hydrotreater (apparently on the basis that it will charge the cost back to HA). This is being undertaken on Greenbottle’s behalf by Kieran Walter Channon. Mr Channon is an employee of Slicker Recycling Limited, a subsidiary of Greenbottle.

70. [106]

    SOR’s main witness was Mr Rose. His evidence was supported with evidence from Mr Onions and from Hydrodec’s former Australian executive, Mr McNamara.

71. [107]

    SOR also led evidence from Mr Clarke and from Mr Czubala. Mr Clarke’s evidence concerned the shutdown. Mr Czubala’s evidence was a response to evidence which had been foreshadowed from Hydrodec about the abortive offer from Benzoil in July 2020 (see [120] below).

72. [108]

    A report was obtained for SOR from Mr Henderson concerning his valuation of the Hydrotreater Infrastructure (see [95] above). The report was prepared in the conventional form for a report by an expert witness. It was included along with the other witness evidence in the relevant part of the Court Book and Mr Henderson was required for cross-examination.

73. [109]

    At the hearing, counsel for SOR contended that the report was admissible without the need to produce Mr Henderson to verify it. Counsel’s contention was that the report was simply a document having contractual force which could be tendered, presumably as a business record.

74. [110]

    Whatever the theoretical merits of this position, it did not reflect the way in which the case had been prepared for hearing. I accordingly required Mr Henderson to attend and be available for cross-examination, on the basis that the relevance of any evidence that he might give in cross-examination could be the subject of submission in due course.

75. [111]

    All of SOR’s lay witnesses were also cross-examined. There was no challenge to the credibility of Mr Onions. But in the course of cross-examination, counsel for Hydrodec accused Mr Rose, Mr Clarke and Mr Czubala of lying in their affidavits about various points. Each of these allegations was denied.

76. [112]

    I think it was regrettable that counsel went so far. Counsel may have thought that he needed to do so to comply with the rule in Browne v Dunn. But the rule requires only that the cross-examiner squarely put to the witness the factual case which the cross-examiner intends to put by way of final submission. Once that has been done, and the witness has responded with a negative answer, the rule does not require the cross-examiner to go on and put to the witness that the negative answer is a lie. To do so can be needlessly offensive: Thomas v Van Den Yssel (1976) 14 SASR 205 at 207.

77. [113]

    The allegations put to Mr Rose, Mr Clarke and Mr Czubala were unnecessary for another reason. The main issues in the case were contractual ones which turned on the objective effect of what the parties had done, and were largely matters of record. As will be seen, the points on which the witnesses were accused of lying were of little, if any, significance in the resolution of the case.

78. [114]

    On one point I have preferred Lord Moynihan’s evidence to that of Mr Rose. But it is only fair to Mr Rose to say that I was not at all persuaded that his evidence on this point was consciously and deliberately false. I also thought that the evidence went nowhere near sustaining the allegations against Mr Clarke that he was lying. I see no reason not to accept his evidence, so far as it goes.

79. [115]

    For Hydrodec, evidence was called from Mr Ellis, Ms Baker and Lord Moynihan. Evidence was also called from Hydrodec’s contractors Mr Davies and Mr Koomen.

80. [116]

    It is notable that the only Hydrodec employees which it called had an accounting, rather than an engineering, background. As already mentioned, Mr McNamara gave evidence for SOR. Hydrodec called no evidence from Mr Evans or Mr Hand or anyone else from the Australian operational management. The result was that SOR’s evidentiary case, so far as it concerned operational dealings with Hydrodec, was largely uncontradicted.

81. [117]

    Each of the Hydrodec witnesses was called and cross-examined. There was some challenge to the affidavit evidence of Mr Ellis and Ms Baker which I address in more detail below. But as I have already explained, the issues in the proceedings (at least to the extent that they were within the knowledge of the witnesses called by Hydrodec) largely turn on matters of record.

82. [118]

    Hydrodec called Mr Channon of Greenbottle as a witness. His affidavit dealt with matters of opinion and was largely ruled inadmissible. He was, however, briefly cross-examined about his involvement in trying to get the Hydrotreater for Greenbottle (see [105] above).

83. [119]

    Hydrodec also called Steven Mullins who is the managing director of RC. Mr Mullins was not co-operative and an affidavit could not be obtained. Mr Mullins gave evidence (by video link) on subpoena. After counsel had questioned him for some time about the refusal to quote in November 2019, I acceded to counsel’s application to treat him as an adverse witness for the remainder of his examination in chief. He was not cross-examined by counsel for SOR. I refer to his credibility in somewhat more detail below.

84. [120]

    In advance of the hearing, Hydrodec had indicated that it wished to call evidence from three further witnesses about their dealings with SOR in connection with the abortive Benzoil offer. The proposed witnesses were also apparently unco-operative, and outlines of proposed evidence were served. As I explain in more detail below, I decided in the end that this proposed evidence was inadmissible.

85. [121]

    Finally, there was expert evidence on some of the technical issues relating to the shutdown. Hydrodec qualified Mr Wolfgang Mika and in response SOR qualified Dr Peter McGowan. Both of them are mechanical engineers. They gave evidence (by video link) concurrently and I deal with their evidence below when discussing the detailed factual evidence concerning the shutdown.

86. [122]

    The Co-location Agreement provided (in terms which are set out in full at [460] below) for the Operating Committee to prepare a budget for, among other things, the capital expenditure by SOR at the Bomen site required to co-locate the Hydrotreater there. That budget was also to provide for the repayment of that expenditure by HA under the capital charge mechanism in clause 3.10 of the Agreement (see [42(5)] above). It was to include a summary which was defined in the Agreement as the “Capex and Capital Charge Budget”. That document was to be in the “indicative” form of an “indicative summary” document annexed to the Agreement.

87. [123]

    Clause 3.10 also required the parties to maintain a schedule of the resulting plant, equipment and improvements. This was defined in the Agreement as the “Plant and Equipment Schedule”. The Agreement made no further provision as to the form of this document.

88. [124]

    The document annexed to the Agreement to specify the “indicative” form of the Capex and Capital Charge Budget was a spreadsheet page (extending over two printed pages) which had presumably been prepared by the parties as part of their negotiations which preceded entry into the Agreement. The spreadsheet was headed “Project Cricket – Relocation Budget” and was dated 30 September 2013. I will refer to the spreadsheet page as the Project Cricket capital budget.

89. [125]

    The Project Cricket capital budget specified various items of “equipment” with specified “tasks”, suppliers, and costs (for instance, the “process shed” was one item, with associated “tasks” of “footings”, “frames”, “cladding” and “roller doors”). As well as the “equipment” items, there were items for “commissioning”, “demolition costs”, “on-site labour” and “project management”. The total cost was $1,824,251.

90. [126]

    In the September 2014 Sanction Agreement, the parties agreed a budget for the purposes of the Co-location Agreement, as set out in a document referred to as the “Consolidated Budget”. A copy of this document, so far as it related to capital expenditure, is in evidence. It was a spreadsheet page (extending over four printed pages) dated August 2014.

91. [127]

    It is apparent that the Consolidated Budget spreadsheet, although a separate document, was a development of the Project Cricket spreadsheet. It had been updated as time went on to reflect actual expenditure. It also contained a column showing what the corresponding Project Cricket budget figure had been.

92. [128]

    The capital expenditure page of the Consolidated Budget had the same basic structure as the relocation budget summary attached to the Co-location Agreement. The “item” and “task” columns in the relocation summary were consolidated into a single column which grouped the expenditure into a list of items, grouped under an “activity”, and each specifying a “task”.

93. [129]

    There were also columns allocating expenditure between SOR and Hydrodec. This reflected the fact that only some of the capital expenditure involved in relocating the plant was covered by clause 3.10. What appears to have been the relevant column for clause 3.10 was headed “SOR capital – infrastructure (capital charge)”.

94. [130]

    The first “activity” on the page was “permitting, consents & approvals”. The costs were about $127,000. These were not included in the allocation column for clause 3.10 expenditure. Instead they were allocated between two columns representing 50/50 shared costs of SOR and Hydrodec.

95. [131]

    Following the Sanction Agreement, the Consolidated Budget capital expenditure page continued to be revised as the expenditure was incurred (or as the budget changed). It was also altered slightly. The column showing the comparison with the Project Cricket budget was removed and replaced with a column showing variation to the Sanction Agreement budget. Columns were added for each “task” showing a date and an indication of whether the relevant cost was a budgeted or actual one.

96. [132]

    The latest revision of the capital expenditure page of the Consolidated Budget in evidence is dated 26 May 2015. This was produced about four weeks after operations began at Bomen. Most of the costs were shown as actual, but some were shown as “invoice” (presumably to denote a cost for which the cost had been invoiced but not paid) and a few were shown as “quote” or “estimate”.

97. [133]

    The Consolidated Budget capital expenditure for May 2015 still showed the costs for “permitting, approvals and expenditure” as split equally between SOR and HA, and not as clause 3.10 expenditure. But in one of his affidavits, Mr Rose stated that SOR paid these costs, “never received” payment from HA of its share, and “accordingly treated” those costs as expenditure under clause 3.10. This would presumably have involved negotiations with Hydrodec, but Mr Rose did not give any more detail about when and how those negotiations proceeded. He was not asked about the subject in cross-examination.

98. [134]

    In order to invoice the capital charge, it was necessary to calculate the total capital expenditure on the Hydrotreater Infrastructure, and to determine the method for calculating interest. There were also other issues about capital expenditure. Some capital expenditure (for instance on the Hydrotreater itself) was for Hydrodec’s account alone. There were also questions about the allocation of labour costs.

99. [135]

    The evidence does not explain how these issues were resolved, but I suspect that the change in the treatment of the commissioning costs described by Mr Rose may have been part of it. At one stage it seems that Mr Rose was trying to get Hydrodec just to accept a round figure of $2.2 million for the Hydrotreater Infrastructure under clause 3.10, but in the end it was accepted that SOR would produce calculations and supporting records for verification by Hydrodec, which the parties described as an “audit”.

100. [136]

     The audit became an agenda item for the Operating Committee. Invoicing of the capital charge began on the basis of the $2.2 million figure, but subject to the audit’s outcome. On 15 June 2015, which was the due date for payment of the May charges, Ms Baker wrote to Mr Luce advising that a payment had been made, but “noting all charges relating to capital/interest are yet to be confirmed pending audit of the asset register as discussed”.

101. [137]

     In order to calculate the amount of the monthly charge and interest a spreadsheet was prepared by SOR to calculate, and record, the interest on the monthly capital payments. I will refer to this as the “interest schedule”. Although Mr Rose stated in his affidavit that he instructed Mr Onions to prepare it, I assume it was in fact prepared by Mr Luce.

102. [138]

     The interest schedule was used throughout the period up to July 2019, and a copy of the final version is in evidence. It recorded the opening capital balance and, for each month thereafter, the monthly capital payment, the resulting capital balance, and the monthly interest payment.

103. [139]

     As already noted, the May 2015 capital summary in the Consolidated Budget was not final. It appears that, rather than continue to update the Consolidated Budget, Mr Luce created a separate list of capital expenditure items to which he added further expenses as they came in. The list was inserted at the top of the interest schedule.

104. [140]

     On 14 August, Mr Luce emailed Ms Baker a copy of the interest schedule in this form, in advance of her first visit to Bomen for the audit. The schedule contained expenses up to 31 July, which covered three and a half pages and totalled $2,212,111. Below that was the $2.2 million figure and the capital charge and interest payments for May, June and July, based on that figure.

105. [141]

     For the purpose of the audit, Mr Luce later prepared a further spreadsheet with the filename “summarising costs by supplier (capital summary)”. I will refer to this as the “asset cost schedule”. SOR’s own copy of the schedule does not appear to be in evidence, but a reproduction of it in its then form appears in Ms Baker’s last audit report.

106. [142]

     The asset cost schedule took the form of a table. Each row had an asset number; acquisition date; “vendor” (supplier); asset description; and cost. I assume that it was a summary of the expenditure items listed in the interest schedule. Those items were then supported by three lever arch folders of invoices and supplier documents.

107. [143]

     The audit itself was an iterative process. Ms Baker’s initial approach was to review a selection of expenditure items or categories. She found errors and omissions among the supporting documents. The audit was then expanded so as to cover all of the items of expenditure. In the course of the process, further expenditure items were added to the schedule by Mr Luce and further supporting documents were produced at Ms Baker’s request.

108. [144]

     Ms Baker was very critical of the state of SOR’s records and the length of time which it took to conduct the audit. It seems that Hydrodec withheld payment of the November capital charge, perhaps to focus SOR’s attention on the process.

109. [145]

     Ms Baker’s first audit report was produced in August 2015 and her second in October 2015. By that point the amount claimed by SOR and recorded in the capital summary schedule was $2,204,936.

110. [146]

     Ms Baker’s third audit report was dated 31 December 2015. It took the form of an update which incorporated her earlier reports. The report identified disallowances totalling $14,727. This yielded a revised capital summary figure of $2,190,209. The report identified further expenditure items of $28,377 which required clarification with SOR and which were described as “potential further reductions”. The report stated that there were further errors or omissions, but these were not material and overall were in Hydrodec’s favour. They had “not been highlighted at this point in time” but would be “reviewed with management” (it is unclear whether this was a reference to the management of SOR or Hydrodec).

111. [147]

     On 4 January 2016 Ms Baker sent to Mr McNamara and Mr Ellis an email attaching her report. The email also contained a “management report” concerning the audit and summarising its conclusions. Ms Baker stated that the audit was “expected to be completed in January 2016 with agreement on the final capital charge with SOR”.

112. [148]

     Ms Baker followed up with an email to Mr McNamara, copied to Mr Ellis, on 14 January. The email was prepared in advance of a meeting to take place between Ms Baker and Mr McNamara that afternoon. It attached a copy of Ms Baker’s reconciliation from the audit, SOR’s capital summary schedule and SOR’s interest schedule together with rival interest schedules prepared by Ms Baker.

113. [149]

     The email was surprisingly vehement considering that on any view Hydrodec appears to have been conceding more than 98 per cent of SOR’s claimed expenditure. It contained a list of complaints about the manner in which SOR had conducted its side of the audit. Ms Baker stated that “none are significant in isolation but combined it is concerning let alone time-consuming and frustrating”. Apparently anticipating Mr McNamara’s reaction, Ms Baker acknowledged that the list of complaints was “probably way too detailed”.

114. [150]

     The matter was considered by the Operating Committee on 21 January. The practice was for the minutes of the Committee’s meetings to be prepared in the form of a table of items, with columns for each item headed “Notes” and “Actions”. The minutes for the meeting of 21 January, which were circulated by Mr McNamara following the meeting (with a copy to Mr Ellis), include in the “financials” item:

115. [151]

     Ms Baker agreed in cross-examination that the interest issue was later sorted out. Payments of the monthly capital charge were thereafter made based on an initial capital cost figure of $2,200,000. The Capital Term under the Agreement was seven years; as production had started in April 2015, the Term was to expire in April 2022. The monthly capital charge was fixed at $26,190.48 (plus GST). This represented one eighty-fourth of $2,200,000, and reflected a “straight line” repayment of the capital cost over the seven years of the Capital Term.

116. [152]

     In her affidavit Ms Baker referred to her dealings with Mr Luce up until December 2015 and said (this evidence was admitted as her belief only):

117. [153]

     The last document referred to in Ms Baker’s affidavit was dated 16 December 2015. She stated that thereafter she “did not receive any documents from SOR to substantiate the charges and did not continue with the audit”.

118. [154]

     In cross-examination, Ms Baker was taken through the audit reports that she had prepared, her January emails and the 21 January Operating Committee minutes. She conceded that she had been incorrect in saying that the audit process was left unfinished in December 2015. That concession was clearly correct. Ms Baker explained her mistake on the basis that she had not been shown all the relevant documents by Hydrodec’s solicitors.

119. [155]

     The documentary evidence expressly records that at the Operating Committee meeting on 21 January 2016 the representatives of Hydrodec and SOR reached an agreed resolution of the capital expenditure issues which had been raised by the audit. Clearly this involved splitting the difference between the parties’ positions and fixing the total repayable capital expenditure at $2.2 million. It also clearly carried through to fixing the capital charge repayment schedule on the “straight-line” basis described above.

120. [156]

     It is also quite clear that this agreed resolution was sanctioned by Mr Ellis. Ms Baker may have nursed a residual concern about SOR’s claims and supporting documents, but that was not important because she was not the decision-maker.

121. [157]

     When the Hydrotreater was at Young, Hydrodec produced its own supplies of hydrogen gas using generation equipment known as the “HOGEN” units. That equipment was not put into use at Bomen. Instead hydrogen gas was brought in by truck from a commercial supplier (referred to in the evidence as “regional” gas). This was at Hydrodec’s cost.

122. [158]

     Mr McNamara was asked to look into this. On 24 August 2015 he presented his findings in an email to Mr Ellis, Mr Rose and Mr Smale. Mr McNamara reported:

123. [159]

     The issue was taken up at the Operating Committee meeting on 14 October 2015. The minutes record:

124. [160]

     Following this meeting, Mr Czubala obtained a quote for the construction of a concrete driveway to link the Hydrotreater facilities to the road at the rear of the site. He sent the quote, together with costings for some other expenditure by Hydrodec, to Mr McNamara. On 15 December Mr McNamara wrote:

125. [161]

     There were regular meetings of Hydrodec’s Australian management, minutes of which were circulated after the meetings by Mr McNamara (with copies to Hydrodec’s UK management, including Mr Ellis). The minutes of the management meeting on 21 December 2015 record:

126. [162]

     On 21 January 2016 there was a further mention of the matter in the Operating Committee. The minutes noted:

127. [163]

     Following the meeting SOR proceeded with the necessary planning steps. On 9 February 2016, Mr Onions wrote to Wagga Wagga City Council, the consent authority, to prepare the way for the lodgement of the development application, which also involved a small land swap with the council. SOR lodged the development application on 28 April.

128. [164]

     On 26 May there was an incident in which a hydrogen trailer became bogged at the rear entrance to the plant. At first it appeared that the Hydrotreater would have to be shut down. But SOR organised a crane to clear the access and the possible shutdown was averted.

129. [165]

     The minutes of the Operating Committee meeting on 1 June record:

130. [166]

     There is evidence which casts further light on what was discussed. Mr McNamara reported to Mr Ellis in a separate email on 3 June:

131. [167]

     On 6 June the development approval was granted. Then on 17 June there was an exchange of emails between Mr Rose and Mr Ellis prompted by delays in Hydrodec paying its monthly bills under the Agreement:

132. [168]

     Mr Rose undertook to send the costings and proceeded to let the contract for building the driveway. Starting on 10 August there was a further email exchange between Mr Ellis and Mr Rose:

133. [169]

     The Operating Committee minutes for its meeting on 24 August 2016 recorded, in connection with the driveway:

134. [170]

     In the event the contractors’ costs were paid by SOR and re-invoiced to Hydrodec. But by March 2017 at least some of SOR’s invoices remained unpaid. This was the context for a further email exchange between Mr Ellis and Mr Rose:

135. [171]

     There is no evidence of any further discussion over the following days. But about six weeks later the issue came up again in emails between Mr Rose and Mr Ellis:

136. [172]

     As from the end of April 2017, the interest schedule was adjusted. The principal amount shown as owing was increased by the sum of $151,298. This sum was made up of seven specified invoices, evidently representing some of the costs of the construction of the driveway. The monthly charge was increased to $28,712.10 per month. This represented slightly less than one sixty-first of the adjusted capital amount outstanding. That compares with the sixty months which then remained before the expiry of the Capital Term in April 2022. The discrepancy is not explained in the evidence.

137. [173]

     On 5 May Mr Luce emailed Mr McNamara, with copies to Mr Ellis and Mr Rose. He wrote:

138. [174]

     There is no evidence that Hydrodec asked any questions. The invoices for April and for ensuing months were paid without any objection.

139. [175]

     Then as from 31 January 2018 there was a further adjustment to the outstanding capital amount. This was described in the interest schedule as the “driveway balance payment” and the schedule set out a list of the relevant invoices, which totalled $190,986. Again the monthly capital charge was increased, this time to $33,055.64. This represented one-fiftieth of the adjusted balance. A fifty-month term would have expired on 31 March 2022, one month less than the original Capital Term.

140. [176]

     The evidence does not explain why this adjustment was not made until 2018. The expenses in question were presumably paid in 2016 or early 2017. It also seems that, despite the impression created by what Mr Ellis and Mr Rose said in their 2017 emails, little if any of the expenditure on the driveway was ultimately booked by Hydrodec as capital expenditure of its own. But what is clear is that the cost of the driveway (or nearly all of it) was included in the repayment/write-off regime which applied under the Agreement to the previously constructed infrastructure. Hydrodec must also have been well aware of what was going on, and accepting of it.

141. [177]

     In his affidavit, Mr Rose referred to what seems to have been the agreement between the CEOs referred to in the email from Mr McNamara to Mr Ellis of 3 June 2016. Mr Rose’s account (which referred to “a number of conversations”) was:

142. [178]

     In his affidavit, Mr Ellis stated that it never made sense to him for Hydrodec to own a driveway on SOR’s land. He continued:

143. [179]

     By way of specific response to Mr Rose’s affidavit account of the conversation quoted above, Mr Ellis stated:

144. [180]

     It is notable that Mr Ellis’ version of the conversation does not deny that agreement was reached in the terms stated by Mr Rose. Although on Mr Ellis’ version of events it was Mr Rose who was pushing for the driveway to be built and for Hydrodec to undertake to pay for it, Mr Ellis did not say that he refused to do so. Nor did he suggest that the issue was held over for further discussion. His affidavit simply omitted to record what his response was.

145. [181]

     In cross-examination, Mr Ellis was taken through the documentary evidence starting in 2015. He initially tried to maintain the position that he wanted a less expensive solution and had never agreed to Hydrodec bearing the cost of constructing the driveway, but I did not find his evidence on this credible.

146. [182]

     Ultimately Mr Ellis conceded that by the time of the Operating Committee meeting in January 2016 he accepted that the cost of the driveway would be added to the capital charge. He also accepted that the subsequent treatment of the driveway costs in the interest schedule was consistent with what he had agreed with Mr Rose.

147. [183]

     Hydrodec’s published accounts for 2016 and 2017 tell the same story. The 2016 accounts (published in June 2017) recorded the capital charge as a “lease financing arrangement” of USD1.2 million. They also recorded a separate “contractual commitment” concerning the driveway of USD100,000. This is consistent with the initial arrangements referred to in the documentary evidence, under which Hydrodec would be paying for at least part of the driveway itself.

148. [184]

     Then in the accounts for the 2017 year (published in June 2018) the “lease financing arrangement” was again shown at USD1.2 million even though a capital charge for approximately $300,000 had been paid during the year. This is consistent with the ultimate arrangement, under which the capital payment liability was increased by the cost of the driveway, which was roughly similar in amount to the capital charge repayment for the year.

149. [185]

     In his evidence, Mr Ellis emphasised Hydrodec’s vulnerability towards SOR. He said that from his perspective he was constrained in his dealings with Mr Rose, who had showed himself willing and able to shut down the Hydrotreater operations virtually at will. But while Mr Ellis may have found Mr Rose a difficult customer, the fact is that he did withhold payment on occasions (the money for Hydrodec’s Australian operations always seems to have been tight and that may also have had something to do with it). In any event, Hydrodec did not advance any case of duress, whether in connection with the construction of the driveway or any other aspect of its relationship with SOR.

150. [186]

     Mr Rose’s version of the conversation between himself and Mr Rose linked the need for the driveway to the trailer-bogging incident on 26 May. But it seems that in fact the place where the trailer bogged was just outside the site and a paved driveway would therefore not have prevented the particular incident. In cross-examination, Mr McNamara said that he was unaware that the trailer bogged outside the SOR site.

151. [187]

     Counsel for Hydrodec emphasised this evidence in final submissions. Counsel also pointed out that the driveway plan lodged in connection with the development application for the road was dated September 2014, which was well before the quotes obtained by Mr Czubala which were the subject of approval from Mr McNamara in December 2015. Counsel submitted that this evidence showed that the construction of the driveway was driven by SOR’s commercial objectives, not Hydrodec’s.

152. [188]

     In my view, the evidence makes no difference. It may be that SOR thought that the driveway was advantageous and had earlier considered building it. The fact remains that it was not actually built until after Mr McNamara, and then Mr Ellis, had accepted that it would be built at Hydrodec’s expense.

153. [189]

     The process was well underway before the bogging incident in May 2016. Furthermore, the important aspect of what Mr Rose said (quoted at [177] above) was that SOR would not be responsible for any difficulties in running the Hydrotreater which were attributable to the unsealed state of the driveway. This point did not depend on whether the driveway would have avoided the particular incident. In any event, Hydrodec made no case of misrepresentation or mistake.

154. [190]

     It was not clear to me whether in final submissions counsel for Hydrodec maintained that Mr Ellis had not in fact agreed to the construction of the driveway at Hydrodec’s expense. For completeness, if any such point is maintained, I reject it. In my view the documentary evidence is quite clear. I see no reason not to accept Mr Rose’s version of the conversation with Mr Ellis before the meeting of the Operating Committee on 1 June 2016. To the extent that Mr Ellis’ evidence is to the contrary, I reject it.

155. [191]

     I have already observed that Hydrodec’s Australian subsidiaries do not appear to have any separate management. Instead all executive functions were carried out at a group level.

156. [192]

     This was reflected in the email correspondence which was the usual method of communication between Hydrodec and SOR under the Agreement. From the evidence, it seems that all the senior Hydrodec executives used an email address at the international domain name “www.hydrodec.com” and a telephone number in international format (that is, preceded by the country code where the executive in question was based). This was the case for both Mr McNamara and Ms Baker, who were based in Australia.

157. [193]

     Mr Ellis’ email footer gave his title (Chief Executive Officer) followed by “Hydrodec Plc” and then the street address of Hydrodec’s corporate office in England. This was followed by Mr Ellis’ hydrodec.com email address and his phone number in international format.

158. [194]

     In the course of his cross-examination, Mr Ellis stated at one point that he would not have had the internal authority within Hydrodec to approve the driveway as a single item of expenditure. When I asked him what his internal delegation limit was he said it was £100,000.

159. [195]

     Counsel for SOR challenged Mr Ellis on this. Ultimately he put to Mr Ellis that he had made up this evidence. In riposte, at the end of the hearing, a written instrument of delegation containing a limit was tendered by counsel for Hydrodec.

160. [196]

     In the end, I do not think that any substantive issue turns on this. Mr Ellis did speak in his emails as if he had authority to authorise the driveway expenditure. In the end, however, most if not all of the expenditure seems to have been met by SOR and charged back to Hydrodec through the capital charge mechanism. There is no issue about corporate authority in the proceedings (there is an issue about the provision of the Agreement that no variation was effective unless in writing, with which I deal below, but that is not relevant for present purposes).

161. [197]

     The written delegation was, with agreement between the parties, admitted as evidence only going to Mr Ellis’ credit. For the record, while I have doubts about some of the other evidence which Mr Ellis gave, I am satisfied that he did have an internal delegation limit and counsel for SOR went too far in suggesting that he was making this particular evidence up.

162. [198]

     I have already referred to the memorandum from Mr Delgarno to Mr Rose of 10 April advising that Hydrodec’s Australian operations were for sale, and Mr Rose’s indicative offer of 13 April by way of response. I have also referred to the dispute which arose with the payment of SOR’s invoices.

163. [199]

     Those invoices represented the tolling fee and capital charge for the month of March 2018 and were due for payment on 15 April. A part-payment was made, leaving about $160,000 outstanding. On 23 April Mr Rose wrote to Mr Hand. The last two paragraphs of his email stated:

164. [200]

     On the following day, Lord Moynihan responded:

165. [201]

     Lord Moynihan’s response provoked a reply from SOR’s lawyers, CGW. On 30 April they sent four letters to Hydrodec. The first was addressed to HA and asserted breach of HA’s obligation to pay the tolling fees and capital charges. The second was to HG in its capacity as surety for HA’s obligations. The third was to HA and agreed to an audit (to which HA was entitled under the Agreement), asking for details.

166. [202]

     CGW’s fourth letter was addressed to HA and repudiated two of the points made by Lord Moynihan in his email. CGW pointed out that the mechanism for adjustment of the tolling fee under the Agreement did not permit any reduction. CGW also stated that payment of the tolling fee was not dependent upon the Hydrotreater producing SUPERFINE. The letter was strongly worded, asserting in effect that Hydrodec’s position, as communicated by Lord Moynihan, was not genuine.

167. [203]

     The outstanding amount was paid by Hydrodec on 9 May. But Hydrodec then issued an invoice claiming payment of approximately $350,000 by way of refund of tolling fees. The invoice itself (which appears to have been dated 16 May) is not in evidence. On 28 May CGW wrote a further letter repudiating any obligation to pay.

168. [204]

     Against this background, Mr Rose stated in his affidavit that at the meeting with Lord Moynihan on 30 May in Sydney, Lord Moynihan asked SOR to make a further offer improving the indicative offer of 13 April. Mr Rose was only prepared to “reopen” that indicative offer. According to Mr Rose, Lord Moynihan then said:

169. [205]

     In his affidavit, Lord Moynihan denied making this threat. Both Mr Rose and Lord Moynihan maintained their positions under cross-examination.

170. [206]

     It is not clear to me why the resolution of this dispute matters. As I have already indicated, the issues in the case would appear to depend upon the objective effect of what the parties did, rather than their motivations for doing it. In his final submissions, counsel for SOR did not press for any finding that Lord Moynihan had made the threat alleged by Mr Rose. But the issue was emphasised in counsel for Hydrodec’s submissions and for completeness I propose to deal with it.

171. [207]

     As counsel for Hydrodec pointed out, at the time the meeting took place SOR had not received any solicitor’s correspondence at all from Hydrodec. It would therefore have been inapposite for Lord Moynihan to have spoken of Hydrodec’s “legal” actions escalating. But Mr Rose’s account spoke of “legal and nuisance” actions. Mr Rose may well have seen the issue of the invoice dated 16 May as a nuisance action. He may also have inferred that before issuing the invoice Hydrodec had enlisted legal assistance.

172. [208]

     Nevertheless, I am not satisfied that Lord Moynihan made a threat in the terms alleged by Mr Rose. This is because it seems to me that the making of such a threat would have been out of character and out of place for Lord Moynihan.

173. [209]

     What Lord Moynihan was seeking to do at the meeting was to solicit an increased offer from SOR. He was seeking Mr Rose’s co-operation. Mr Rose would have been well aware from the previous correspondence of the possibility that if agreement were not reached, Hydrodec might raise disputes about the operation of the Agreement. That had been part of the sub-text of Lord Moynihan’s 24 April email. It was unnecessary for Lord Moynihan to refer to it expressly when he met Mr Rose. Indeed it would probably have been counter-productive. I do not believe that Lord Moynihan would have been so crude as to do so.

174. [210]

     As already noted, the Agreement imposed a general obligation on SOR to maintain the Hydrotreater, but the cost of replacing any “major component” had to be met by HA (see [42(9)] above). HA also had to bear the cost of providing the critical spares (see [42(10)] above).

175. [211]

     As the Agreement contemplated, maintenance issues were routinely dealt with by the Operating Committee. For the purposes of determining whose responsibility it was to pay, the Committee adopted a rule that a replacement part was a “major component” if it cost more than $500.

176. [212]

     The Hydrodec members of the Committee took the position that expenditure of capital nature, and also expenditure on critical spares, should be kept to a minimum. The SOR members went along with this, on the basis that HA accepted responsibility for any delays in production which might result from parts not being available or repairs not being made.

177. [213]

     While the Hydrotreater was operating at Young, HA had accumulated several boxes of hard copy purchase and maintenance records for the Hydrotreater and its components. Hydrodec also had a computerised system for recording and diarising maintenance dates and certificate expiries. SOR had its own system for its own plant at Bomen. When the Hydrotreater was moved SOR requested that HA provide its computerised system as well as the hard copy records. But this did not happen, despite follow-up requests.

178. [214]

     Documentary evidence: The earliest documentary evidence to which I was taken about the Hydrotreater components which were later involved in the shutdown was the minutes of the Operating Committee on 29 March 2017. The minutes recorded:

179. [215]

     The “H2 compressor” was the main hydrogen compressor (also known as the PPI compressor). The “Haskel” (so named because that was the name of its manufacturer) was another hydrogen compressor or booster.

180. [216]

     It seems that following the March 2017 meeting no action was taken about the leak in the hydrogen compressor. The evidence does not indicate one way or another whether anything was done about the Haskel pump.

181. [217]

     On 21 May 2018 Mr Clarke emailed Mr Hand concerning issues for the impending end of the financial year. One of these was a list of outstanding capital and critical spare items which had previously been identified. The list included:

182. [218]

     The minutes of the meeting of the Operating Committee on 21 June 2018 record:

183. [219]

     Meanwhile there had been a regular maintenance shutdown between 2 and 17 June 2018. There was a further shutdown between 5 and 7 August 2018 to deal with two leaks which were rectified by SOR. There seems to have been no complaint at the time from Mr Hand.

184. [220]

     Following the rectification of the leak on 7 August the operation of the plant was ready to resume. But only 2,400 litres of feedstock oil were present. The daily report showing the status of the plant recorded that there was no feedstock on hand and the plant was starting up in anticipation of a delivery on the following day.

185. [221]

     At 4.00 pm that day Mr Clarke emailed Mr Hand. His email concerned some banks of hydrogen cylinders (referred to in the evidence as “bottles”) forming part of the Hydrotreater assembly:

186. [222]

     At 7:43 am the next day Mr Hand replied:

187. [223]

     At 2:10 pm Mr Clarke responded. He said that SOR considered that it would have no choice but to shut down the plant by 5.00 pm on safety grounds unless Hydrodec could provide a convincing justification for why that was not necessary. He continued:

188. [224]

     At 4:40 pm Mr Hand replied. He argued that it had been SOR’s responsibility to identify the expiry date on the hydrogen bottles and continued:

189. [225]

     Implicitly Mr Hand accepted that safety requirements made it necessary to shut the plant down (it was of course idle anyway). The daily report for the plant as at 6 am on 9 August recorded that it had been shut down. The reason recorded was “safety shutdown relating to hydrogen bottles”. The bottles were subsequently sent offsite for servicing, with an expected return date of 22 August.

190. [226]

     While the bottles were still offsite, Mr Clarke identified a new issue with the Haskel compressor. This apparently was as a result of discussion with Haskel’s Australian representative, High Pressure Plus Australia Pty Ltd (“HP Plus”).

191. [227]

     The issue concerned two metal cylinders (referred to in the evidence as “barrels”) in the compressor. Prolonged exposure to pressurised hydrogen can cause metal to become brittle. SOR was told by HP Plus that the service life of the barrels when used with hydrogen was seven years.

192. [228]

     The advice from HP Plus was apparently based on a Haskel service bulletin dated 2007 for a range of similar compressors. The bulletin stated that in hydrogen service the barrels had to be replaced every seven years. However the service bulletin did not actually list Hydrodec’s Haskel as one of the affected models. There was nothing stamped onto the barrels themselves to indicate how old they were or what their service life was.

193. [229]

     On 21 August Mr Clarke wrote to Mr Hand:

194. [230]

     At Mr Hand’s request, Mr Clarke obtained a quote for replacement barrels from HP Plus. The figure was $25,000 (the total quoted cost of obtaining approved parts later rose to about $40,000). Mr Hand also checked the purchase and maintenance records. On 27 August he wrote reporting on the quote he had obtained and continued:

195. [231]

     The hydrogen bottles were returned to the site on 29 August. But production did not resume. Mr Hand noted that the reason for shutdown shown in the daily report was no longer accurate. As a result of his intervention the reason was changed to “awaiting confirmation that Haskel gas boost barrels are within service life”.

196. [232]

     Not having heard from Mr Hand about replacing the Haskel barrels, Mr Clarke followed up further on 5 September:

197. [233]

     There was no response to this email, or to the further follow-up emails Mr Clarke continued to send. By early September Mr Hand was in contact with Mr Koomen and was also dealing directly with HP Plus. He evidently decided not to involve Mr Clarke in the process.

198. [234]

     Mr Hand considered a number of options. Mr Koomen was confident of being able to manufacture replacement barrels himself. Another possibility was to get the barrels tested in the hope of demonstrating that they were not suffering from hydrogen embrittlement. Mr Hand also continued to pursue the possibility of purchasing a whole replacement unit or replacement barrels from Haskel. While he was pursuing these ideas, Mr Hand had SOR remove the barrels and ship them to Mr Koomen early in October.

199. [235]

     Meanwhile, on 27 September Mr Clarke emailed Mr Hand again to follow up. He also reported that in conducting a safety audit of its own, SOR had detected the source of the leak in the main hydrogen compressor. This was an open valve which was venting hydrogen into the atmosphere. The compressor had in fact been operating with the valve open since it had been at Young, but SOR considered the venting of hydrogen was a safety risk. SOR had therefore closed the valve, but the compressor would not operate if the plant were restarted, because the valve was part of the leak detection system and the safety switch would detect pressure and prevent the unit from operating.

200. [236]

     Eventually, Mr Koomen completed the fabrication of some replacement barrels for the Haskel unit himself. These were delivered to Bomen on 12 November. They were not accompanied by any quality assurance documentation. At 10:14 pm that night Mr Hand emailed Mr Evans (in Mr Hand’s absence) asking whether the barrels had been certified by Haskel as safe to reinstall. He also asked for a response on other outstanding issues to do with re-starting the plant. One of these was a proposed meeting of the Operating Committee to plan the re-start. Another was a response on “the bypass to the leak detection on the hydrogen compressor”.

201. [237]

     On 21 November Mr Hand replied. He advised that the barrels were “newly manufactured units” and that the consultant responsible for manufacturing them (Mr Koomen) “proposed pressure testing the unit before recommissioning it to ensure the integrity of seals”. Mr Hand asked Mr Clarke to ensure that this was done as soon as possible. Mr Hand confirmed that Hydrodec’s wish was to restart operations “at the earliest opportunity that it can be completed safely”. On the bypass issue he stated:

202. [238]

     Seeing that the barrels were not OEM-made, SOR asked HP Plus what precautions would normally be taken on replacing the Haskel barrels and re-commissioning to ensure that the unit was safe, and whether HP Plus would inspect and certify them as fit for service. HP Plus declined to become involved. On 23 November Mr Clarke replied to Mr Hand:

203. [239]

     Mr Hand forwarded Mr Clarke’s response to Mr Koomen. By this stage Mr Hand had formed the view that SOR was playing a tactical game in order to prevent the Hydrotreater restarting, but he sought Mr Koomen’s technical advice to make sure that he was not missing something.

204. [240]

     Mr Koomen responded on 3 December. In response to Mr Clarke’s point about pressure test certificates, Mr Koomen commented:

205. [241]

     In response to Mr Clarke’s question about QA/QC Mr Koomen commented:

206. [242]

     Mr Koomen also commented on Mr Clarke’s point that the compressor no longer worked. He wrote:

207. [243]

     In his covering email, Mr Koomen concurred with Mr Hand’s assessment about Mr Clarke’s queries. He said that all he could see was a “barrier wall” that SOR was putting up to avoid a restart.

208. [244]

     Following receipt of Mr Koomen’s advice, Mr Hand sought authority from Lord Moynihan and Mr Dinwoodie to get SOR to send the Haskel and the hydrogen compressor to Mr Koomen. His rationale was that SOR was being obstructive. Giving Mr Koomen free rein represented the best chance of getting the units working again. In any event, rectification was required for a sale to a third party. Permission was granted to proceed in this way and Mr Hand did not respond to Mr Clarke’s queries. Instead he asked Mr Clarke to have SOR send the Haskel unit and the hydrogen compressor to Mr Koomen. This was done on 21 December.

209. [245]

     Mr Koomen and Mr Hand continued to work on repairing or replacing the Haskel booster and the main compressor. Mr Clarke continued to wait for Hydrodec’s next step. Mr Hand and Mr Koomen decided to get parts for the Haskel from the Canton plant. On 22 March 2019, COD wrote to CGW giving formal notice that the parts had been shipped and SOR should stand ready to resume production.

210. [246]

     But on 1 April, Mr Koomen emailed Mr Hand to report that a further problem had been identified with another part of the Haskel unit which had been sent out for repair. He also pointed to the amount of work which would be required to fix the main hydrogen compressor, and expressed concern that there would not be enough time to fix and return the Haskel unit and the compressor before the end of the Agreement in July. Mr Hand responded that he was seeking instructions from within Hydrodec. On 16 April Mr Koomen followed up, advising Mr Hand that the parts had arrived from Canton. Mr Hand replied that he was still seeking clarification.

211. [247]

     I was not referred to evidence of any further communication from Mr Hand to Mr Koomen. The Haskel and the compressor were never actually reinstalled at Bomen and it is unclear whether they were ever restored to working order. It appears that both units were later scrapped.

212. [248]

     Lay witness evidence: In cross-examination, counsel for Hydrodec attacked Mr Clarke’s good faith. Counsel put to Mr Clarke that he only raised the Haskel barrel issue on 21 August 2018 because he thought the gas bottles were being returned the next day and he needed an excuse not to restart the plant. Similarly, counsel put that Mr Clarke only raised the issue about the Hydrogen compressor on 27 September because he understood that Mr Hand was speaking directly to HP Plus and was concerned that this would result in the problem with the Haskel barrels being overcome. To the same effect counsel put to Mr Clarke that he only asked in his email of 23 November for a structural integrity pressure test on the barrels fabricated by Mr Koomen because he wished to have a further excuse not to restart the plant.

213. [249]

     Mr Clarke denied all these imputations. He maintained his denials when counsel put to him that they were lies.

214. [250]

     In cross-examination Mr Rose was asked about the statement in Mr Clarke’s email of 8 August purporting to require Hydrodec to purchase all of the capital items which SOR considered to be outstanding. Mr Rose agreed that this represented a change of approach. He characterised SOR as having become “more defensive” and “more black-letter”. He explained this as a response to what he perceived as increasingly aggressive behaviour on the part of Hydrodec. Counsel suggested to both Mr Rose and Mr Clarke that they thought that Hydrodec might struggle to be able to pay for those costs.

215. [251]

     Counsel’s cross-examination reflected the beliefs which Mr Hand and Mr Koomen had at the time that Mr Clarke was deliberately putting obstacles in the way of restarting the plant. But there was no independent evidence to support his allegation. Hydrodec’s expert, Mr Mika, was not asked about it. Nor was it ever put in these terms to Mr Rose, who presumably would have been the source of any such instructions to Mr Clarke.

216. [252]

     Counsel for Hydrodec contended in his closing submissions that Mr Clarke was a generally unsatisfactory witness. But he did not, as I understood him, pursue the allegation that Mr Clarke was deliberately trying to prevent the Hydrotreater from being restarted. At most I think Mr Rose may have asked Mr Clarke to tighten up his approach in the expectation that this would put some commercial pressure on Hydrodec. Whether Mr Rose or Mr Clarke thought that Hydrodec would be able to pay for the list of outstanding capital items I cannot say but I do not think it matters.

217. [253]

     There may have been an element of opportunism in SOR’s approach. But I accept that in raising the issues which he raised, Mr Clarke was acting in good faith. The evidence goes nowhere justifying the allegations made by counsel in cross-examination that the issues were bogus or contrived. I think it is regrettable that those allegations were ever made.

218. [254]

     Expert evidence: To the extent now relevant, the expert evidence addressed maintenance and repair issues concerning three components, namely the hydrogen bottles, the Haskel compressor (in particular, the barrels) and the main hydrogen compressor. For the purposes of the issues concerning the Haskel compressor, I will for simplicity refer to “Haskel” as encompassing HP Plus, its local agent.

219. [255]

     Mr Mika was relevantly asked four questions about each of the components:

     1. (1)

        whether SOR’s failure to act earlier than it did was “attributable to” a failure to maintain the component “in accordance with good engineering practice and in a competent and workmanlike manner” (that being language used in the relevant clause of the Agreement);

     2. (2)

        if so, what relevantly should have been done instead;

     3. (3)

        whether this would have avoided a shutdown;

     4. (4)

        whether the answer to question (1) was affected by any failure on Hydrodec’s part to provide the records sought by SOR.

220. [256]

     As to the hydrogen bottles, Mr Mika answered question (1) in the affirmative. The bottles could only be operated for a fixed period after being bought or serviced. That period was readily identifiable from the labels on the bottles. Mr Mika considered that good engineering practice required SOR to adopt a system under which the expiry date was diarised and the bottles were re-certified before their authorised period of operation expired. Had this been done the shutdown on 9 August would have been unnecessary. Mr Mika did not consider that the failure to produce records affected his conclusions. SOR could readily have identified the issue for itself.

221. [257]

     As to the compressor, Mr Mika again answered question (1) in the affirmative. He considered that having identified the leak as early as March 2017, SOR should have rectified it long before the source of the leak was identified in September 2018. This would have obviated any need for a shutdown at that time. Again, Mr Mika did not consider that any failure by Hydrodec to provide records to SOR was relevant.

222. [258]

     As to the Haskel barrels, Mr Mika noted that SOR had not been in possession of the relevant service bulletin before being told about it by Haskel in August 2018. The seven year life was not something which SOR could be expected to have worked out from its own resources and was not stamped on the barrel (in fact, as we now know, the barrels were not even manufactured by Haskel). But Mr Mika considered that SOR could, and should, have obtained the information from HP Plus (or Haskel) at an earlier point. He considered that had SOR made the appropriate enquires it would have found out about the limited service life of the barrels. SOR could, and should, then have advised Hydrodec to schedule the acquisition of replacement barrels.

223. [259]

     Mr Mika was also asked supplementary questions about Hydrodec’s attempt to replace the Haskel barrels with barrels fabricated by Mr Koomen. Most of his responses were expressed at a level of generality. He considered that proper engineering practice required the operator in the position of SOR to follow any installation requirements specified by the original equipment manufacturer (“OEM”), in this case Haskel. But in a case where a replacement part is obtained from a non-OEM supplier such as Mr Koomen, Mr Mika said that the level of certification required is a matter between the purchaser (in this case, Hydrodec) and the supplier. Because the purchaser ultimately must accept responsibility for the safety and suitability of non-OEM parts, it is up to the purchaser to specify what it requires.

224. [260]

     Finally, Mr Mika noted that on receiving instructions on this issue he asked Haskel for its opinion (or failing that, the technical criteria which would be used to form an opinion) on the suitability of Mr Koomen’s replacement barrels. But at the time he wrote his report he had received no response, and it appears that Haskel never did reply.

225. [261]

     SOR’s expert, Dr McGowan, made no response on the hydrogen bottles. On the compressor, he generally agreed with Mr Mika’s conclusions, but contended that SOR had been unable to address the problem because of a lack of agreement from Hydrodec. He referred in particular to the March 2017 and June 2018 minutes of the Operating Committee to which I have referred above.

226. [262]

     On the Haskel barrels, Dr McGowan again began by agreeing that SOR could, and should, have obtained information about the service life of the barrels from Haskel. But he said that this was subject to two qualifications. The first was that Haskel would have needed to have been properly and formally advised in advance by Hydrodec that SOR was the operator. The second condition was that Hydrodec would have needed to provide run-time records so as to fix the beginning (and thus the end) of the service life period.

227. [263]

     Dr McGowan also expressed the view that the Haskel barrels, or perhaps the whole Haskel unit, should have been on the critical spares list.

228. [264]

     On the issue of installation of the replacement value barrels fabricated by Mr Koomen, Dr McGowan noted that Mr Koomen’s barrels were made out of a grade of stainless steel (referred to in the evidence as “Duplex”) which was different from that used by Haskel. It would be necessary to be sure that this different grade of steel was suitable. There were various other quality assurance requirements with which Mr Koomen would have to comply. The most important was that Mr Koomen should pressure-test the barrels for their mechanical integrity (this is what Mr Clarke had asked for in his 23 November email; it is a different test from the pressure test on the seals, which is done by the operator, as Mr Clarke’s email makes clear).

229. [265]

     In reply, Mr Mika disagreed that the failure to correct the valve problem in the hydrogen compressor was the result of lack of agreement from Hydrodec. He pointed out that the minutes of the 29 March 2017 Operating Committee meeting required SOR to consider programming the necessary maintenance.

230. [266]

     Mr Mika also disagreed with the qualifications Dr McGowan imposed on SOR’s obligation to find out the service life of the Haskel barrels from Haskel. In particular, he said it would have been obvious to Haskel that SOR was the operator and was authorised to make the relevant enquiry.

231. [267]

     As to the suggestion that the Haskel barrels (or the whole Haskel unit) should have been on the critical spares list, Mr Mika pointed out that if a part or component needed to be replaced when it reached the end of a fixed service life, then that could be dealt with as part of programmed maintenance without the need to carry spare parts at all times. Only if the part or component was being managed on a “run to fail” basis, or there was an unacceptable risk of failure without warning, should it be treated as a critical spare. As I understood it, Mr Mika did not accept that the Haskel barrels (or the Haskel unit) satisfied these conditions.

232. [268]

     On the installation of Mr Koomen’s replacement barrels, Mr Mika agreed that the Duplex from which they were made was different from the steel used by Haskel, but said it was clearly stronger. He also played down the need for a mechanical integrity pressure test.

233. [269]

     According to Mr Mika, the aim of such a pressure test is primarily to check for defects resulting from welding or forming operations. As each barrel had been machined from a single piece of steel, the need for the test was “greatly diminished”. Also the design of the barrel was such that the operating pressure load was much less than it would have otherwise have been. Mr Mika added that if SOR wanted a test it would not have been difficult or expensive to conduct one itself.

234. [270]

     In their concurrent evidence, the main issue of disagreement between the experts emerged as being whether Mr Koomen needed to conduct a mechanical integrity pressure test on his barrels before delivering them for installation. Mr Mika initially maintained the position in his report that the need for a test was “markedly diminished”. But when I asked him what he would have advised SOR to do when faced with the delivery of non-OEM barrels without any quality assurance documentation, he said that a pressure test would deal with the “primary uncertainty”.

235. [271]

     Dr McGowan answered my question by saying that he would have required a mechanical integrity pressure test as well as assurance on the steel, the forging process and the like. He said that he could have performed those tests himself, but it would have been much preferable to have some formal, documented, assurance, if not from the manufacturer, then from the person who had actually fabricated the barrels.

236. [272]

     There was also some cross-examination on the use of the Duplex material. As I understood his evidence, Dr McGowan did not accept that in all respects it was a superior material to that used by Haskel. It was also pointed out by counsel for SOR, and acknowledged by Mr Mika, that the 2007 service manual stated that engineering approval was required from Haskel before using any other material for the barrels, including Duplex. No such approval appears to have been obtained by Mr Koomen.

237. [273]

     Conclusions on proper engineering practice: Mr Mika’s opinions about SOR’s failure to identify the expiry date on the gas bottles before 2016 were not challenged by Dr McGowan. I accept that it was a failure of good engineering practice. It would have been helpful to SOR for Hydrodec to have handed over its computerised records, but once it was clear that they were not being provided SOR should have devised its own system.

238. [274]

     I also accept that the issue should have been dealt with by way of programmed maintenance. Had this been done, a shutdown on 9 August would have been averted. But once the Haskel barrel issue arose, the gas bottle issue was no longer causative of the shutdown. And the problem was solved by 29 August.

239. [275]

     Mr Mika’s conclusions about the failure to identify the cause of the leak in the hydrogen compressor were not directly disputed either. I do not accept Dr McGowan contention that this was Hydrodec’s fault so far as the specific issue of the leaking valve is concerned. As Mr Mika pointed out, the upshot of the Operating Committee meeting on 31 March 2017 was that SOR was to take action. There is no evidence that it ever did so. It is true that SOR later sought replacement, and Hydrodec declined to act, but that was replacement of the entire unit. It did not excuse SOR’s obligation to keep the unit in good repair to the extent possible. The fact is that SOR was able in September 2018 to identify the source of the leak. I see no reason why it should not have been able to do so earlier.

240. [276]

     But whether this failing was causative of a shutdown is a much more clouded question. Of course the source of the leak was only identified, and the valve shut, after the Haskel barrel issue had been discovered, and that issue alone would have been enough to keep the plant closed. There is also substantial evidence that the compressor was failing by mid-2018, and this was a risk that Hydrodec decided to accept.

241. [277]

     In his evidence, Mr Mika explained that in maintaining an item of equipment good engineering practice recognises that there may be a choice between preventative maintenance, where a part is checked and replaced before it fails, and “run to fail” approach, where repair or replacement occurs after the part has failed. There can be no objection to SOR allowing Hydrodec to make that choice based on an acceptance of the risk of shutdown involved in a “run to fail” approach.

242. [278]

     The references in the November 2018 email correspondence to bypassing are confusing. Mr Clarke’s 12 November email seems to have been talking about bypassing the switch. Mr Hand’s 21 November response talked about bypassing the whole unit and this was taken up in Mr Clarke’s reply on 23 November. That email asserted that the whole unit was inoperative at that time.

243. [279]

     The expert evidence did not address this, nor was any clarification sought from Mr Clarke in cross-examination. The idea that the unit had failed derives some support from the warnings which had been given the previous June. Also, in the following year, Mr Hand and Mr Koomen seem to have proceeded on the basis that at least a major overhaul of the unit was required. In these circumstances I am not prepared to find that the hydrogen compressor would have been operable from November 2018 even if the problem with the valve had been solved.

244. [280]

     Dr McGowan effectively accepted Mr Mika’s conclusions that SOR should have found out about the seven year service life of the Haskel barrels before August 2018, but then sought to impose qualifications. But I do not find those qualifications convincing. The fact is that SOR did find out about the limited service life from HP Plus in August 2018, and did so without any help or prompting from Hydrodec. Again it would have been helpful if Hydodec had shared the information it had in its possession. But I think that I must accept that both experts considered that SOR as operator had a duty to investigate the service life question for itself. On that footing I see no reason why SOR could not have done what it in fact did in August 2018 at a much earlier time.

245. [281]

     I appreciate that there is a potential question about whether replacement of the barrels was actually required. But I think that had the issue been identified earlier, the likelihood is that the parties would have perceived replacement as necessary and would have acted accordingly. That is what in fact happened when the issue actually did arise. And once the need to replace the barrels was perceived, the critical nature of the unit would have given Hydrodec every incentive to act quickly.

246. [282]

     SOR’s obligations of course only began on 28 April 2015. There was no evidence as to how quickly SOR should, in accordance with good engineering practice, have identified the issue. Nor was there evidence which directly addressed what Hydrodec would have done to solve the problem, or how long that would have taken. But I think that I can assume that one way or another the problem should have been identified, and would then have been solved, well within the forty month period between April 2015 and August 2018.

247. [283]

     Had the issue been identified earlier, there is no reason to think that events would then have unfolded in the way in which they actually unfolded after 21 August 2018. In particular, there is no reason to think that Hydrodec would have proceeded by having Mr Koomen make replacement barrels at all. But for completeness, I will consider whether, in the events which actually happened, there was any failure in proper practice engineering practice by SOR in this regard.

248. [284]

     I accept that Mr Mika is probably right in saying that in general, the only quality assurance obligations on the maker of a non-OEM part are those which are agreed by the maker with the owner of the machine in question. But the application of that principle must take account of the unusual nature of this case where Hydrodec was the owner of the Haskel unit but not the operator. SOR’s OHS obligations could not be overridden by a private arrangement between Hydrodec and Mr Koomen. Particularly was this so in circumstances where Hydrodec very deliberately dealt with Mr Koomen to the exclusion of SOR.

249. [285]

     In my view it is telling that when first instructed, Mr Mika sought quality assurance from Haskel in essentially the same way as Mr Clarke did in November 2018. This suggests that such assurance was necessary, and the manufacturer was the natural person to supply it.

250. [286]

     Mr Mika’s point that the pressure test was readily arranged cuts both ways. It applies just as much to Mr Koomen (and Hydrodec) as it does to SOR. And it is not clear to me that that test, on its own, would have provided the necessary assurances (which may have included formal engineering approval from Haskel) about the suitability of the Duplex and other aspects of Mr Koomen’s manufacturing process. There is no evidence that Mr Koomen (or Hydrodec) ever obtained or produced any formal quality assurance about the barrels. In fact, on the evidence it is not clear that they were ever installed in the Haskel unit.

251. [287]

     Mechanical engineering was not SOR’s business. In my view SOR was entitled to insist on proper, and documented, quality assurance (including a pressure test) before installing the barrels. At the least, it was a matter of judgment, and such an approach was reasonably open as a matter of proper engineering practice.

252. [288]

     In any event, I do not think that Mr Clarke’s email of 23 November should be interpreted as an absolute refusal to install the barrels. It is true that SOR asked for the pressure test to be done. It may be that its position was not negotiable but on the other hand there may have been ways that its concerns could have been met. But SOR was never put to the test. Hydrodec never replied to the 23 November email and simply took the equipment away from SOR.

253. [289]

     By April 2015 the seven year service life (or presumed seven year service life) of the barrels would already have expired. It seems that inevitably there would have been a significant shutdown, perhaps lasting weeks or months, at Hydrodec’s expense. But that is no answer to the complaint made against SOR, which is a failure to have identified the problem in time to avoid the August 2018 shutdown. It does however point up an issue about damages, which I deal with below.

254. [290]

     Under the relevant environmental legislation (Polychlorinated Biphenyl (PCB) Chemical Control Order 1997, ord 4.17) the threshold for PCB contamination is 2 mg/kg, or parts per million (PPM). Oil containing more than 2 PPM PCB is “PCB waste”. If the concentration exceeds 100 PPM it is “scheduled PCB waste” which is subject to even more stringent restrictions.

255. [291]

     The licence held by SOR during the Agreement was relevantly in the same terms as the licence under which HA operated at Young. It permitted the “processing” of PCB waste, provided that the conditions of the licence were complied with. One of the conditions required SOR to adopt formal written procedures for the operation of the plant and comply with those procedures.

256. [292]

     Another condition of the licence was that SOR could not feed oil containing more than 100 PPM PCB directly into the Hydrotreater (apparently this would in any event have had an adverse effect on the chemical catalyst). This condition was reflected in some of the procedures adopted by SOR (they had originally been drafted by Mr Hand and adopted for the operation of the Young plant).

257. [293]

     The procedures distinguished between “on-spec” and “off-spec” feedstock (the latter exceeding 100 PPM PCB). Off-spec feedstock was to be blended with on-spec feedstock so as to result in a feedstock with a PCB concentration below 100 PPM. Specifically, off-spec feedstock was to be set aside in one of the large storage tanks (to which I will refer as the F-tanks: see the plan at [50] above) and fed into the other tanks so as to ensure that the F-tank which fed the Hydrotreater (which was to be kept at 80 per cent capacity or greater wherever possible) remained on spec at all times.

258. [294]

     It is thus apparent that the procedures that SOR was required to follow under its licence permitted, and in some situations required, the blending of PCB-contaminated feedstock with other feedstock. Correspondence in 2017 with the EPA which is in evidence shows that the EPA was aware of this and apparently accepted it. Arguably, it was implicit in the terms of the licence itself, by virtue of the restriction on putting feedstock exceeding 100 PPM PCB directly into the Hydrotreater.

259. [295]

     As already noted, on 7 August 2018 the receiving tanks contained only 2,400 litres of feedstock, but deliveries continued after the Hydrotreater was shut down on the following day. The quantity of oil on hand in the receiving tanks was recorded in the daily status reports for the Hydrotreater. Mr Hand apparently had access to these reports (as is seen by his requested correction to one of them: see [230] above). Also, in his emails to Mr Hand about the shutdown, Mr Clarke referred from time to time to the increasing volume of oil on hand. By 29 October he was warning that the receiving tanks were virtually full.

260. [296]

     In evidence is a summary of the purchases of feedstock by Hydrodec and delivered to Bomen from 1 August 2018 to 22 November 2018 (apparently the last date on which oil was purchased). The total amount purchased over this period was 445,060 litres. Of this, 82,350 litres had a PCB concentration exceeding 2 PPM (none of it exceeded 100 PPM). The remaining 362,710 litres were PCB-free.

261. [297]

     Also in evidence are figures for the quantities of oil held in the various receiving tanks once deliveries had ceased. These are summarised in the following table, with the PCB-contaminated oil shaded:

262. [298]

     Some of the entries in this table require some further explanation. The tank heel is the part of a tank below the lowest suction point. Apparently the tank heel volumes on the F-tanks was 3,000 litres per tank, and did not count towards the 100,000 litre rated capacity of the tank. R1 and R2 are the two horizontally mounted feeder tanks shown in the plan at [50] above. From its description, F5 may have been located between the feed tank and the Hydrotreater itself; it is not shown on the plan.

263. [299]

     Counsel for Hydrodec accepted that there could be no complaint about SOR blending PCB-contaminated oil with other feedstock in order to comply with the conditions of the licence. But he argued that the blending should have taken place only at the latest point where that could be done (in the storage tank used to directly feed the Hydrotreater) and when the Hydrotreater was operating. Otherwise, counsel submitted, PCB-contaminated feedstock (even if on-spec) should have been segregated in one of the storage tanks.

264. [300]

     It is immediately apparent that this would have required alteration to the written procedures adopted by SOR. The practical issues which result are illustrated by what actually happened during the shutdown.

265. [301]

     By November, all of the F-tanks were virtually full. If it had been necessary to segregate the PCB-contaminated feedstock in one of the tanks it is not clear whether it would have been possible to accommodate as much feedstock as Hydrodec actually sent. To determine that would require a complicated analysis based on the sequence and volume of deliveries, having regard to what connections existed between the different tanks. This was not addressed in Hydrodec’s evidence or counsel’s submissions.

266. [302]

     There is also a problem with calculating damages. In opening counsel presented a damages figure which was based on expected evidence from Mr Bamford of Benzoil. As will be seen below, Mr Bamford’s evidence was mainly concerned with the abortive offer from Benzoil to buy the oil in July 2020, which I rejected. Despite that ruling, it would have been possible to lead evidence from Mr Bamford on the market value of the oil, but Hydrodec did not do so.

267. [303]

     Instead counsel for Hydrodec referred me to the purchase summary from August to November 2018. That summary contains cost and volume details for each shipment. The prices per litre range from 22 cents per litre to 97 cents per litre. This is a wide fluctuation. No doubt it is partly affected by market factors. But I suspect that other factors associated with the grade or type of oil in each shipment may also play a part. However, the summary provides no details on this.

268. [304]

     Some of the PCB-contaminated feedstock purchased by Hydrodec cost up to 90 cents per litre. But counsel for Hydrodec pointed out that SOR had admitted in its defence that PCB-contaminated feedstock had no value.

269. [305]

     As I understood counsel’s argument, he invited me to quantify Hydrodec’s damages on the basis that the mixing of the non-PCB feedstock with PCB-contaminated feedstock had reduced its value to nothing. The non-PCB feedstock in question amounted to 306,935 litres (389,000 litres of mixed feedstock left at the end less the 82,065 litres of PCB-contaminated feedstock purchased). On counsel’s analysis, it was simply a matter of valuing that volume of feedstock in its uncontaminated form.

270. [306]

     Counsel however did not present a figure, let alone any calculations, for working out this value. When I asked him, he submitted that I could use the purchase summary and apply “an average or some other statistical measure”.

271. [307]

     On any view that would be a gross over-simplification. On Hydrodec’s case, a breach occurred on each occasion on which a batch of PCB-contaminated feedstock was mixed into non-PCB feedstock (provided that the resulting mixture exceeded 2 PPM PCB). There would have been numerous separate breaches extending over the period from August until November. In order to assess damages properly, I would need to identify when each relevant mixing took place and the market value of non-PCB contaminated feedstock at that point. Even putting aside the wide price fluctuations in the purchase summary, there would simply have been insufficient information for me to do the calculation.

272. [308]

     I have already quoted the email from Lord Moynihan to Mr Rose of 24 April 2018 which foreshadowed the records audit pursuant to clause 5.10 of the Agreement. Nothing appears to have happened for six months, until a formal notice to this effect was given on 1 November 2018. SOR agreed to the audit on 7 November.

273. [309]

     Lengthy correspondence then ensued between COD and CGW in preparation for the audit, which eventually took place in February 2019. Auditors from the firm retained by Hydrodec, Crowe Horwath, visited Bomen on 18, 19 and 20 February. They were provided with access to documents, the facilities and SOR’s staff. During and after the audit there was extensive correspondence between the Crowe Horwath auditors and Mr Rose on behalf of SOR.

274. [310]

     One of the subjects of the audit was the capital expenditure on the Hydrotreater Infrastructure for the purposes of clause 3.10 of the Agreement, and the related Plant and Equipment Schedule. The auditors were made aware by SOR of the previous audit by Ms Baker, but said that they had been engaged to provide information sought by Hydrodec and not to review that audit.

275. [311]

     SOR provided the Crowe Horwath auditors with a copy of the “latest version” of the Consolidated Budget (not specifically identified in the evidence but presumably the one from May 2015: see [133] above). SOR’s position was that this document was the Plant and Equipment Schedule. The auditors were also provided with the interest schedule ([137] above) and given access to the three volumes which had been provided by Mr Luce to Ms Baker during her audit in the second half of 2015 ([142] above).

276. [312]

     In his emails, Mr Rose provided information about the function of various items of the Hydrotreater Infrastructure, specifically in terms of their connection with the supply of Tolling Services. The auditors were also told that additional detail and reporting could be requested by the Hydrodec members of the Operating Committee.

277. [313]

     Five days after the Crowe Horwath auditors left Bomen, on 25 February, Mr Clarke sent another request to Mr Hand to schedule a meeting of the Operating Committee. Previous requests had been limited to the proposal that the Committee would develop a plan for restarting the plant. The 25 February request added an additional agenda item, namely “detailing requirements and format for maintaining books and records under clause 3.10 of the Tolling Agreement”. The reference to clause 3.10 of the Agreement, rather than clause 5.10, emphasised the connection with the capital expenditure records.

278. [314]

     Mr Hand did not respond and Mr Clarke followed up with a further request in the same terms on 12 March. There had evidently been internal discussion within Hydrodec about Mr Dinwoodie going onto the Operating Committee (apparently as a replacement for Mr Evans), although this appears not to have been formalised. Mr Hand forwarded Mr Clarke’s request to Lord Moynihan. He responded to Mr Hand on 18 March saying that any response would be handled by Mr Dinwoodie.

279. [315]

     Mr Dinwoodie appears to have taken no action and on 27 March CGW wrote to COD to follow up the request. Still there was no response.

280. [316]

     On 29 March the Crowe Horwath audit report was completed. On 3 April COD sent a copy of the report to CGW together with a long covering letter. The letter stated that the record keeping with respect to capital expenditure, as disclosed by the audit, was inadequate and that SOR was in breach of its obligations under the Agreement.

281. [317]

     The letter focussed in particular on the Plant and Equipment Schedule. It stated:

282. [318]

     The letter stated (at [14]) that there appeared to be no Plant and Equipment Schedule and one would need to be prepared. To facilitate this, SOR was asked to produce a list of the assets which it contended should be included in the Schedule. It acknowledged that SOR had provided some of the information which Crowe Horwath had been seeking but stated that the information needed to be provided fully and as part of a “more structured” approach. The requirements for the list were that it:

283. [319]

     The letter, however, acknowledged that on 22 March Hydrodec had required SOR to be ready to resume production as soon as the Hydrotreater could be restarted. The last paragraph stated that the letter was being provided as a form of “advance notice”, and the priority remained the resumption of Tolling Services.

284. [320]

     CGW replied on 29 April. CGW’s letter noted that there had been no response to SOR’s requests for the Operating Committee to meet. It rejected the allegation that SOR was in breach of its obligations and stated that if Hydrodec were genuine in its concerns it would have “engaged with” the Committee.

285. [321]

     The letter denied that there was no Plant and Equipment Schedule but continued:

286. [322]

     SOR declined to provide a list with the supporting details requested by Hydrodec. It took the position that this had been made available during the audit process, and if Hydrodec wished, it could put the information together itself.

287. [323]

     There was no reply from COD. For the next three months the solicitors’ correspondence focused on the removal of the plant and other issues arising out of the impending expiry of the Agreement.

288. [324]

     The issue was revived following the expiry of the Agreement on 26 July 2019. The occasion for its revival was a letter from COD to CGW responding to CGW’s request to have Pickles sell the SOR infrastructure (see [89] above). COD’s letter was sent on 31 July.

289. [325]

     COD’s letter referred back to the letter of 3 April, stating that there was no Plant and Equipment Schedule in existence. It continued:

290. [326]

     The letter argued that it was unreasonable for Hydrodec to be asked to comment on the proposed sale by Pickles when there had been no agreement on the content of the Plant and Equipment Schedule. Only when “that has been done and reviewed” could questions of sale or valuation be considered.

291. [327]

     The letter marked a change of position by Hydrodec, albeit that the change was not acknowledged. In the letter of 3 April Hydrodec had accepted that the obligation to prepare the Plant and Equipment Schedule was a joint one. Now Hydrodec was saying it was SOR’s obligation alone to maintain the relevant records. Hydrodec was also effectively saying that it would not be doing anything towards “reviewing” the Schedule unless SOR followed the procedure identified in the 3 April letter. That procedure required SOR to provide a list of proposed assets (the “schedule” referred to in the passage quoted above) and detailed, cross-referenced, supporting information for all items of expenditure.

292. [328]

     CGW responded on 6 August. CGW stated that each item of clause 3.10 expenditure had been agreed with Hydrodec before being incurred and recorded in the Consolidated Budget, which the letter identified with the Capex and Capital Charge Budget as that term was defined in the Agreement. It recounted the audit by Ms Baker and the agreement about the driveway costs and stated that the Capex and Capital Charge Budget had been updated to record the expenditure actually incurred.

293. [329]

     It followed, according to the letter, that Hydrodec’s assertion that the Plant and Equipment Schedule had not been prepared was “simply not correct”. The assertion was not genuine, and Hydrodec was in breach of its obligation to act reasonably for the purpose of determining the realisable value of the infrastructure. The letter proposed a meeting of the Operating Committee on 11 September; if at that point Hydrodec remained in default SOR’s representatives on the Committee intended to propose the appointment of an independent valuer.

294. [330]

     COD replied more than a month later, on 9 September. COD’s letter accepted that the Operating Committee had a role in appointing a valuer, but argued that the proposed meeting was futile in the absence of an agreed Plant and Equipment Schedule. The letter repeated the request for SOR to follow the “more structured” procedure laid down in the letter of 3 April.

295. [331]

     SOR’s response was to press on with obtaining a valuation. SOR prepared a list of assets for the valuer, to which I will refer as the “valuer’s asset schedule”. The schedule took the form of a list of items grouped under different parts or areas of the Hydrotreater Infrastructure. Each item was given a number and a physical description. No cost information was provided.

296. [332]

     There were 126 items on the schedule. The items up to number 118 covered the infrastructure constructed up to 2015. These appear to have been taken from items in the Consolidated Budget; at the hearing a cross-reference was provided to line items in that document but it does not appear that this was produced at the time. The last eight items covered the rear driveway constructed in 2016-2017. These, of course, had not appeared in the Consolidated Budget.

297. [333]

     On 11 September CGW replied to COD. CGW’s letter enclosed the valuer’s asset schedule. It explained that the Consolidated Budget had included expenditure for permitting and approvals, and for the construction of irremovable concrete structures, but these had been excluded from the schedule on the basis that they did not give rise to any saleable asset. The letter asked Hydrodec to propose any amendments and suggested any such amendments could be discussed at a meeting of the Operating Committee scheduled for 13 September.

298. [334]

     The scheduled meeting of the Committee did not take place. COD’s response came in a letter dated 16 September. The letter stated that Hydrodec was unable to respond meaningfully to the valuer’s asset list and had “no alternative but to wait for commencement of the inevitable proceedings”. SOR was said to be in breach of its obligations of co-operation. On that basis HG purported to terminate the Agreement between itself and SOR.

299. [335]

     The letter continued:

300. [336]

     CGW replied that there was no point in the Committee meeting on these terms. This appears to have been the last communication of substance on the issue before SOR began proceedings on 4 October.

301. [337]

     Documentary evidence: Removal of the Hydrodec Plant was first formally broached in COD’s letter to CGW sent immediately before notice of termination of the Agreement on 360 days’ notice given on 30 July 2018. The letter referred to Hydrodec’s rights under clause 4.1(b), noting that the right was not limited to termination or expiry of the Agreement. It sought “approval” to remove the Plant “to the USA or elsewhere as Hydrodec thinks fit”. SOR was asked to provide a formal consent to such removal within a reasonable period.

302. [338]

     Initially CGW took the position that removal could not take place before termination, but COD responded to pointing out that under the terms of the Agreement, the right of removal could be exercised at any time. On 6 September, CGW wrote to COD, providing SOR’s consent for the immediate severance and removal of the Hydrodec Plant, “subject to Hydrodec’s ongoing compliance with the terms of the Agreement”.

303. [339]

     The next correspondence between the parties came seven months later, on 10 April 2019. COD wrote to CGW enclosing a copy of the first version of the removal plan prepared by Mr Davies.

304. [340]

     COD’s letter referred to the previous year’s correspondence, which it characterised as a refusal by SOR to consent to a request for removal of the Hydrodec Plant in accordance with the Agreement. The letter sought SOR’s “unconditional consent” to the removal of the Plant “in accordance with” the plan (this was despite the plan describing itself as a “draft plan” for removal, and preparation for transport, of the Plant “to an as yet undisclosed location”; and despite CGW’s letter itself describing it as a “proposed” plan). Alternatively, if consent was to be subject to safety and environmental matters in accordance with the Agreement, SOR was invited to specify what its reasonable requirements were.

305. [341]

     The letter stated that if unconditional consent was not provided within 14 days, Hydrodec might require SOR to remove the Plant itself under clause 4.1 of the Agreement. But it continued that “the timing of the removal is not intended to affect the immediate priority and requirement to restart processing and ensure that the plant is fully operating before being moved”. This was a reference to Hydrodec’s request of 22 March that SOR stand ready to resume production.

306. [342]

     CGW responded by letter dated 24 April. The letter disputed COD’s interpretation of the correspondence from the previous year, protesting that SOR had always consented, and continued to consent, to the removal of the Hydrodec Plant.

307. [343]

     The letter went on to say that good engineering practice required a specific “maintenance task plan” should be prepared for each component of the Plant, identifying how it was to be isolated, the procedures to be used to disconnect it, and the procedures to be used to decontaminate it. The letter proposed a review of the facilities to assist Hydrodec in preparing the necessary plan and offered to make Mr Onions available for this purpose.

308. [344]

     The letter went on to seek:

     1. (1)

        a list of Hydrodec staff and external contractors who would be involved in the disconnection process and would require licensing or special training;

     2. (2)

        confirmation that Hydrodec would provide for the removal of all surplus feedstock waste material and liquids; and

     3. (3)

        a timetable for the removal operations.

309. [345]

     COD replied on 30 May, about five weeks later, in the form of a memorandum. The memorandum stated that Hydrodec would provide for the removal of oil only. Other wastes at the site would have been generated by the ordinary operation of the plant and their removal was SOR’s responsibility under the Agreement. Responses to the other questions would depend on the outcome of the review.

310. [346]

     The review took place on 7, 8 and 9 June. Mr Davies and Mr Onions went around the plant and tagged all the proposed disconnection points. On 17 June, Mr Onions provided Mr Davies with a marked-up set of revisions to his plan. On 19 June CGW wrote to COD asking when SOR should expect to receive a “workable” plan, the maintenance task plan, and the other information listed in the letter of 24 April.

311. [347]

     On 21 June, Mr Davies prepared a GANTT chart for the removal operation. For programming purposes, Mr Davies divided the removal tasks into stages 1 and 2. Stage 1 covered the removal of the Hydrotreater and associated control equipment. Stage 2 covered the receiving tanks and associated pumps, together with some other equipment, such as the mothballed Hogen units. The two stages were to overlap; stage 1 was to begin on 1 July and end on 12 July (2 weeks); stage 2 was to begin on 8 July and end 26 July (3 weeks). The operation would thus end on the day the Agreement expired.

312. [348]

     As well as completing the revision of his removal plan and preparing a budget, it was necessary for Mr Davies to produce a list of contractors. He identified four, including RC for the cranage, and contacted each of them to ensure that they would be able to undertake the necessary work. While this was going on, the proposed start date of 1 July went past.

313. [349]

     On 18 July COD sent a memorandum to CGW formally responding to CGW’s letter of 19 June. The memorandum attached what it described as the latest draft of Mr Davies’ removal plan and sought confirmation that the plan was acceptable to SOR. The memorandum also identified the four contractors lined up by Mr Davies, but stated that Hydrodec was unable to engage them and get specific timing until approval had been received.

314. [350]

     The removal plan attached to the memorandum contained a series of amendments that later emerged as significant. The report included Mr Davies’ GANTT chart of 21 June in unchanged form (even though the commencement dates were past). But the text of the plan in its amended form recommended that the project be split between Mr Davies’ two stages. It stated that the stage 2 assets were “lower priority” and “much more difficult to prepare for disconnection and removal”. In particular most of the receival tanks were still full of contaminated oil. Removal of the oil and decontamination which would be very time-consuming.

315. [351]

     There is no evidence as to who instigated these changes, or exactly when they were made to the report. It is clear from other evidence (referred to below) that Mr Davies never favoured deferring stage 2 until after stage 1 had been completed, and there is some doubt around which parts of the version of the report sent to CGW Mr Davies actually wrote. It seems likely that the deferral idea came from someone else at Hydrodec.

316. [352]

     CGW replied to COD’s memorandum on 26 July. CGW’s letter referred to CGW’s previous requests in the letters of 24 April and 17 June. It specifically complained about the failure to provide the information sought at the end of the 24 April letter. Noting that the removal would likely take several weeks, the letter called on Hydrodec to provide the requested information so that disconnection could begin without further delay.

317. [353]

     COD responded aggressively on 29 July. The letter asserted that SOR had put “barrier after barrier in the way of” the removal of the Hydrodec Plant. SOR had failed to consent for the purpose of clause 4.1, and Hydrodec now directed under that clause that SOR remove the Plant itself.

318. [354]

     The letter boldly went on to assert that SOR’s obligation was to deliver the Plant to Greenbottle in the United Kingdom, but stated that if this was incorrect SOR was obliged to deliver the plant to Melbourne for export. Although the letter in terms referred to the Hydrodec Plant (thereby including the receiving tanks), the reference to delivery to Greenbottle shows that it was the Hydrotreater that the author had in mind.

319. [355]

     The letter was promptly rejected by CGW on 2 August. But at about the same time, Mr Onions set out to obtain quotes for SOR for the cost of removing the Hydrodec Plant. A quote was obtained from a company called Ladex Construction Group Pty Ltd for the full cost of removing everything. This quote was approximately $1.6 million.

320. [356]

     Mr Onions also obtained quotes for some specified tasks (perhaps for Ladex’s benefit) from specialist contractors. These included two of the contractors on Hydrodec’s list (but not RC). Mr Onions also obtained a quote from decontamination firm called Rangedale for the cost of decontaminating the Hydrotreater; this was approximately $650,000.

321. [357]

     In cross-examination, Mr Onions was asked about the Rangedale quote. He said that he obtained the quote at Mr Rose’s request. He was not asked whether Mr Rose gave any reason, nor was Mr Rose asked about this in cross-examination. Nor were either of them asked about the other quotes.

322. [358]

     On 19 August, Mr Davies went overseas on holiday. He was due to return on 10 September. In his absence, on 21 August, COD wrote two further relevant letters to CGW.

323. [359]

     The first letter of 21 August concerned the removal of the Hydrodec Plant. The letter stated that “on further review” of the correspondence, it appeared that none of the information or other steps requested by SOR had been imposed as conditions of consent to removal. Unconditional consent had therefore been granted, and Hydrodec would book contractors to perform works commencing on the first available date after 11 September.

324. [360]

     The letter went on to state that Hydrodec was not proposing to remove any of the tanks or their contents when it removed the Hydrotreater. This was the first occasion on which this was expressly stated as Hydrodec’s position.

325. [361]

     The second letter of 21 August concerned the remaining feedstock. In the letter COD argued for the first time that the mixing of the PCB-contaminated feedstock with other feedstock between August and November 2018 had been wrongful. COD claimed damages of $150,000.

326. [362]

     CGW responded by letter dated 29 August. The letter rejected the claim concerning the mixing of the feedstock. The letter reiterated SOR’s consent to removal of the Hydrodec Plant and urged Hydrodec to remove it. Hydrodec was invited to have its contractors contact Mr Onions about safety and environmental issues. Hydrodec was also asked when it would remove the tanks and feedstock.

327. [363]

     There was no immediate response to this letter. Following his return to Australia Mr Davies was instructed by Mr Hand to start the process of engaging consultants to carry out stage 1. He spoke to Mr Onions on the morning of 12 September. The file note by Mr Onions of the conversation is in evidence. Mr Davies evidently had some reservations about his instructions, going so far as to pass them on to Mr Onions. The note also records:

328. [364]

     In an email to Mr Onions later that day, Mr Davies raised a further problem with undertaking the two stages at different times:

329. [365]

     As instructed, Mr Davies took steps to line up the contractors for the stage 1 works. He sought confirmation that each contractor had the equipment and other resources required for the task and details of payment terms, and put them in touch with Mr Onions to confirm that OHS permits would be issued in due course. This was successfully done for RC, and, it seems, the other contractors.

330. [366]

     Meanwhile, COD finally responded to CGW’s letter of 29 August. COD’s letter was sent on 13 September. It advised that the removal would take place between 16 September (the following Monday) and 30 September but added, with heroic understatement, there might be delays.

331. [367]

     On 17 September, Mr Davies spoke with Mr Onions again. Mr Onions’ file note records that Mr Davies told him that he (Mr Davies) did not believe the removal would actually happen. Nevertheless, Mr Davies proceeded in accordance with his instructions.

332. [368]

     Mr Onions identified two more contractors who would be required, and undertook to put Mr Davies in touch with them. Mr Onions and Mr Davies agreed that much more preliminary work had to be done: the site set-up and detailed task procedures had first to be specified. They also agreed that even when that was done, no permit could be issued until it was safe for the contractor in question (for instance, no work could be undertaken by mechanical or electrical contractors until PCB decontamination had first taken place).

333. [369]

     Little appears to have happened over the next four weeks or so. Then on 14 October, Mr Hand emailed Mr Davies instructing him to “pursue” alternate contractors for the job. Mr Hand said that the contractors might need to be from out of town to avoid “conflict of interest”.

334. [370]

     The evidence does not reveal why this instruction was given. Mr Davies was incredulous. He forwarded the instruction to Mr Onions and arranged for him to write an email, by way of reminder to Hydrodec, that any other contractors would need to comply with SOR’s safety requirements and induction procedures.

335. [371]

     Nevertheless, it seems that Mr Davies tried to obtain further contractors in accordance with his instructions. On 18 October he sent Mr Hand a list of alternative contractors. For cranage he nominated a firm based in Wagga Wagga (at least that is what its email address suggests).

336. [372]

     On the same day, Mr Davies emailed a memorandum to Mr Black of COD and Mr Hand which he had prepared following discussions with them earlier that week. Mr Davies was clearly frustrated. He still had not received any formal sign-off of his removal plan, and he was working from a marked-up version which apparently contained mark-ups from other people. The payment terms nominated by some of the contractors had not been acceptable to Hydrodec and he had been asked to approach others, but obtaining site induction for them would cost time and it was difficult to find people. It had never been part of the scope of the plan to deal with the contaminated oil stock; a contractor (Rangedale, one of the two suggested by Mr Onions) would be needed but this had not been approved nor budgeted for. Furthermore, the waste catalyst and oil in the Hydrotreater would have to be removed even if the Hydrotreater only was taken away.

337. [373]

     Mr Davies finished with the following flourish:

338. [374]

     A further clue about the discussions which Mr Davies had with Mr Black and Mr Hand is found in Mr Onions’ note of a conversation with Mr Davies the following week. Mr Onions recorded Mr Davies as saying that he told Mr Black at least seven times, and maybe as many as seventeen times, that the removal process was not being held up at all by SOR.

339. [375]

     Perhaps galvanised as a result of Mr Davies’ email, on 23 October Hydrodec gave formal approval to stage 1 with a partial budget. On 24 October COD wrote to CGW asking whether SOR accepted the plan submitted on 19 July.

340. [376]

     CGW responded to COD on 31 October. CGW recounted the history and said that SOR was not responsible for the disconnection plan. SOR’s only responsibility was for safety of the site. The information which had been sought had been sought for that reason only. The letter bluntly stated that if Hydrodec wished to remove the plant, Hydrodec should get on with it.

341. [377]

     Mr Black forwarded the letter to Mr Hand and Mr Davies repeating the invitation to get on with the removal of the Hydrotreater. In the meantime, on 25 October, Mr Hand had given notice of his resignation, which was to be effective on 25 November.

342. [378]

     At this stage the contractors had still not been formally engaged, and they had quoted on the basis of undertaking stages 1 and 2 together. On 6 November Mr Davies requested a further quote from RC covering stage 1 on its own. But on the next day he received the following response:

343. [379]

     Later that day COD took the issue up with CGW by letter. The letter referred to SOR’s obligation under the Agreement to cooperate and asked for a letter from SOR, signed by Mr Rose, to Mr Mullins requesting him to assist Hydrodec. COD’s letter also asked for further such letters, signed with the addressee left blank, for other contractors if needed.

344. [380]

     Mr Davies and Mr Onions continued to make progress despite (and, apparently, without being in any way affected by) RC’s refusal to quote. At Mr Davies’ request, Mr Onions arranged a site visit for the marine cargo surveyor who had been retained by Greenbottle to identify how the Hydrotreater should be packaged and shipped to the United Kingdom. Mr Onions also agreed to make a member of SOR’s staff available to act as a work health supervisor to assist Mr Davies. The location of temporary accommodation and fencing was agreed. Mr Davies and Mr Onions also discussed the need to identify the specific procedures for the removal of each item of equipment. They agreed a procedure to do so over the next few weeks.

345. [381]

     By 19 November CGW had not responded to COD’s letter of 7 November requesting letters for Mr Mullins and other contractors. COD sent a letter by way of follow-up. The letter demanded a response by 6 pm on 21 November failing which, the letter asserted, SOR would be in default.

346. [382]

     This provoked a letter from CGW dated 20 November. The letter stated that SOR had no objection to Hydrodec engaging RC to undertake the removal and no objection to the letter being shown to RC.

347. [383]

     COD’s response was that this was unsatisfactory because it was a “lawyer’s letter” and because it also canvassed some other points in the dispute. COD repeated the request for a letter on SOR’s letterhead signed by Mr Rose and asserted that the failure to provide it would amount to a refusal to assist, contrary to the terms of the Agreement.

348. [384]

     CGW responded on 21 November at about 4.00 pm by sending COD a letter addressed directly to RC stating that SOR had “no issue” with RC being engaged by Hydrodec to remove the Hydrotreater. This produced a further angry response from COD stating that a “lawyer’s letter” was not enough and that the problem was not confined to RC.

349. [385]

     Following the expiry of the deadline, on 22 November, COD wrote on behalf of HG purporting to terminate its surety obligations under the Agreement. But on Monday 25 November COD wrote again concerning the letters for the contractors. This letter made a further request for a letter on SOR letterhead signed by Mr Rose.

350. [386]

     SOR now complied with COD’s request. On 26 November a letter stating that SOR had no objections to RC being retained to remove the Hydrotreater was prepared on SOR letterhead and signed on Mr Rose’s behalf.

351. [387]

     At 11:57 am on the following day (27 November), CGW emailed the letter to COD. Mr Black forwarded SOR’s letter to Mr Davies for him to send it to RC. Although Mr Davies was somewhat mystified by the whole process, at 3:30 pm he emailed Mr Black to say that he would forward the letter to RC and ask RC to requote.

352. [388]

     But later that evening Mr Davies had further thoughts. On 22 November (the previous Friday) he had sent a letter containing a list of questions to Mr Hand about what would happen with the management of the project after Mr Hand left. Mr Davies also asked what was to happen with the clean-up work at the Young site. Mr Hand’s last day of work had been Monday 25 November and Mr Davies was now dealing with Mr Ellis and Mr Black.

353. [389]

     At 10:25 pm on 27 November Mr Davies sent an email to Mr Ellis with a copy to Mr Black. He stated that he was uncomfortable acting as the sole representative of HA in Australia. He was also uncomfortable about payment being made to him upfront, but even more uncomfortable about “expecting payment on time” (I take this to be a reference to Mr Davies’ previous difficulties in obtaining timely payment for his services). He said that it was stressful being in the middle of a legal battle.

354. [390]

     Mr Davies also referred to other commitments he had. He would not have time when the “real work” got underway. In this context Mr Davies referred to the upcoming Christmas and New Year break. It is clear from these references that Mr Davies knew that the removal of the Hydrotreater could not take place until the following year. Based on his earlier plans with Mr Onions the preparation of the maintenance task plan for each of the individual components of the Hydrotreater would alone have taken weeks.

355. [391]

     Mr Davies ended:

356. [392]

     Mr Davies’ resignation left Hydrodec with no one to take the removal plan forward. It is unclear whether Mr Davies, or anyone else, sent the letter obtained from SOR to RC; clearly that was the least of Hydrodec’s problems. As already noted, an attempt was made the following year to replace Mr Davies but likewise fizzled out. Nothing further appears to be done about removal of the Hydrotreater until it was taken up by Mr Channon in the second half of 2020.

357. [393]

     Witness evidence: Mr Davies’ affidavit was sworn in August 2020. The picture presented in the affidavit was of Mr Davies attempting from July 2019 onwards to contact the contractors needed to remove the Hydrotreater, but being met with unaccountable evasion. The picture was embroidered with supporting details. These included repeated conversations between Mr Davies and Mr Hand, starting in July 2019, in which Mr Davies reported the contractors’ failure to respond and Mr Hand urged him to keep trying.

358. [394]

     The documentary evidence which I have just summarised gives the lie to this account. Clearly there was no issue with any contractor (including with RC) in July 2019 or in the months following. Mr Davies was quite successful in lining them up in July and September. The difficulty only arose (and with RC only) with the volte-face by Mr Mullins on 7 November. The reversal of Mr Mullins’ position does legitimately give rise to suspicion, but ironically the affidavit did not mention that it was a reversal at all.

359. [395]

     Furthermore, Mr Davies’ affidavit contained no reference to the other obstacles to proceeding with removal which appear in the documentary evidence. The whole affidavit was drafted to present an inferential case of sabotage against SOR, without mentioning that Mr Davies himself considered at the time that SOR was in no way responsible for the difficulties which he was encountering, and repeatedly told Hydrodec’s solicitors so.

360. [396]

     In cross-examination Mr Davies confirmed some of those obstacles. He said that it was a “serious turnoff” for some of the contractors to be retained through lawyers. Mr Davies also said that the offer of partial payment created problems (presumably because it conveyed there could be difficulties in recovering the balance).

361. [397]

     The cross-examination was brief, and in light of the documentary evidence that is no criticism. Mr Davies was not asked how he came to swear an affidavit that so misstated the position. Presumably he simply signed what was put in front of him without proper consideration, as Ms Baker appears to have done. On any view the affidavit is unreliable and I have given it no weight on any disputed issue.

362. [398]

     In his affidavit, Mr Rose said that upon reviewing the revised plan sent on 18 July he became concerned that Hydrodec would complete stage 1 but would never come back for stage 2. He said that his concern was heightened by the fact that clean up works had also been required by Hydrodec at the Young site.

363. [399]

     Mr Rose did not expressly say when he reviewed the revised plan and developed his concern. The immediate context in the affidavit suggests that it was soon after it was received on 18 July, but there is no sign of this concern in CGW’s correspondence or any other contemporaneous documents, and Hydrodec’s position only became explicit in COD’s letter of 21 August. But it is safe to assume that by then, if not before, the concern was in Mr Rose’s mind and may have influenced his actions.

364. [400]

     With that context I turn to the evidence given by Mr Mullins about the decision recorded in Mr Barclay’s email to Mr Davies of 7 November 2019. Mr Mullins said that it followed a visit to the Bomen site. Mr Mullins learnt somehow that there was legal dispute about the Hydrotreater. In his car on his way back from the site visit, he decided he did not want RC to become involved.

365. [401]

     Mr Mullins was studiously vague. He said that he spoke with someone at SOR but could not say who and when I asked him how many people he spoke to he said he “wouldn’t have a clue”. He said he could not recall whether it was Mr Davies or the person at SOR who told him about the legal proceedings. He was keen to say that work from SOR represented only a tiny fraction of his business, but of itself that did not explain why he would knock back a paying job. Ultimately he seemed to say that if he took the job he would somehow be involving himself in the dispute between Hydrodec and SOR.

366. [402]

     Making all allowance for the difficulty in giving evidence over video link, I was unimpressed both by this evidence and by Mr Mullins’ demeanour. It seemed to me that he was not making a genuine attempt to tell all that he knew. For this reason that I allowed counsel for Hydrodec to treat him as adverse: Evidence Act 1995 (NSW), s 38(1)(b).

367. [403]

     But there was no other direct evidence about the incident. Mr Onions was asked about a visit from RC on 7 November and said that he could not recall one “on that occasion”. In cross-examination Mr Rose said he did not meet with Mr Mullins before the 7 November letter. Nor was any evidence called by Mr Davies about his conversation with Mr Mullins.

368. [404]

     The “tendency evidence”: This brings me to the dispute about the admissibility of Hydrodec’s foreshadowed evidence of events surrounding the abortive proposal by Benzoil in July 2020 to take the contaminated oil feedstock off SOR’s hands. The foreshadowed evidence was recorded in outlines of evidence prepared by COD and served prior to the hearing.

369. [405]

     The first two outlines were of evidence from Ben Bamford, the founder and director of Benzoil, and Daniel Soper of Bulk Liquid Carriers Pty Ltd, which as its name suggests is a tanker business. The outlines described conversations with Mr Czubala. At the time the conversations took place, Mr Czubala was the manager of Northern Oil Refineries Pty Ltd (NOR). NOR is a subsidiary of SOR and operates a refinery at Gladstone in Queensland. In his capacity as the manager of NOR, Mr Czubala had dealings both with Mr Bamford and Mr Soper.

370. [406]

     According to the outlines both Mr Bamford and Mr Soper received telephone calls from Mr Czubala (in each case identified in the outline as working for SOR). Mr Bamford’s outline described being told by Mr Czubala that SOR was expecting to get the Hydrotreater itself. In a call after the offer was made by Benzoil, Mr Czubala warned Mr Bamford that Mr Rose would be very displeased if Mr Bamford pursued it. Mr Soper’s outline described a similar conversation in which Mr Czubala warned him against transporting the oil for Benzoil.

371. [407]

     The third outline was of evidence expected from Richard Cooper. Mr Cooper is the managing director of a waste recycling company who was apparently going to be asked to dispose of the oil for Benzoil. The outline foreshadowed evidence of a call from Mr Rose making threats similar to those made by Mr Czubala.

372. [408]

     In his affidavit Mr Czubala stated that he did speak to Mr Bamford and Mr Soper, but the conversations were somewhat different to those presented in their outlines of evidence. The first relevant conversation with Mr Bamford took place around the end of 2019 or the beginning of 2020. Mr Bamford asked Mr Czubala about how the Hydrodec case was going and Mr Czubala replied that it was continuing and that he did not know what would happen, but one of the possible outcomes was that SOR would end up with Hydrodec’s plant. In that event case SOR might be looking for transformer oil to buy. Mr Czubala said this because he thought that Hydrodec might abandon the plant.

373. [409]

     The second conversation with Mr Bamford took place after COD wrote on 17 July 2020 advising Benzoil’s offer. According to Mr Czubala, he said to Mr Bamford that it was not usual to make such an offer without practical details about operations and volumes and sampling results, and that SOR had not been approached for any of that. He asked in those circumstances if Mr Czubala was “happy with the quote” and said that SOR thought that Mr Black of COD was using him. Mr Bamford agreed the situation was a strange one and said that he would think about it on the weekend.

374. [410]

     The following week Mr Czubala spoke with Mr Bamford again. According to Mr Czubala, Mr Bamford said that he would leave the quote “out there”, and Mr Czubala replied that he thought this was pretty “poor form” and Mr Rose would be unhappy about it as well.

375. [411]

     Mr Czubala’s version of the conversation with Mr Soper was that it happened in around August, in the context of discussion about deliveries to NOR. Mr Czubala was told by Mr Soper that he had been asked by Mr Bamford to quote on transport of the oil from Bomen. Mr Czubala told him that the job was contentious, involving potential legal issues, financial issues, compliance issues and operations issues and this was not something he would want to be involved in.

376. [412]

     Mr Rose also gave an affidavit response to Mr Cooper’s outline of evidence. He stated that the conversation took place on 24 July, a week after the COD letter. Mr Rose contacted Mr Cooper and told him that SOR had figured out that he would be taking the oil. He told Mr Cooper that the oil would not be easy to get and removing it would involve a lot of costs and “mucking around”. He also told Mr Cooper that SOR was in dispute with Hydrodec about decontaminating the tanks. Mr Cooper responded that he had only become involved because of a commercial decision by Mr Bamford and he (Mr Cooper) would call Mr Bamford about it.

377. [413]

     The affidavit evidence from Mr Czubala and Mr Rose was read as part of SOR’s case in chief, before I had decided whether to permit the foreshadowed tendency evidence to which it responded. Mr Czubala was cross-examined on his account. He maintained his version of events despite it being put to him that he was telling lies. Similarly Mr Rose maintained his account under cross-examination.

378. [414]

     Counsel for Hydrodec contended that the evidence was admissible as “tendency evidence” under the Evidence Act 1995, s 97. Counsel did not try to support the admission of the evidence on any other basis. In particular, counsel did not contend that the evidence established a business practice of SOR, which would be directly admissible without recourse to Part 3.6 of the Evidence Act: Jacara Pty Ltd v Perpetual Trustees WA Ltd (2000) 106 FCR 51 at [67]. Nor did counsel contend that the evidence was admissible as “coincidence evidence” under s 98.

379. [415]

     Section 97 relevantly provides:

380. [416]

     Counsel for Hydrodec relied on the foreshadowed evidence as demonstrating both “conduct” and a “tendency” on the part of SOR. The putative tendency was a tendency to take action to persuade suppliers not to deal with other parties when there was a perceived commercial benefit to SOR from that course, and to do so by means of threats.

381. [417]

     Counsel for SOR questioned whether SOR, as a corporate entity, was a “person” for the purpose of s 97. In response, counsel for Hydrodec relied on the decision of Perram J in Combined Insurance Company of America v Trifunovski (No 4) [2011] FCA 271. In that case it was argued that “character”, “reputation”, “conduct” and “tendency” as referred to in s 97 could not apply to companies. His Honour noted that there had been no decision on the point but said (at [9], citations omitted):

382. [418]

     The later decision of Charlesworth J in Okwume v Commonwealth of Australia [2016] FCA 1252 may raise a question about this reasoning, or at least about whether it applies to all companies. In that case Mr Okwume made claims of false imprisonment and misfeasance in public office against the Commonwealth as a result of his detention by officers of the Department of Immigration. In support of this claim he tendered under s 97 of the Commonwealth version of the Evidence Act previous reports by public bodies about controversies involving the Department. The purpose of the evidence was to establish a tendency to act unreasonably in connection with immigrants of particular types.

383. [419]

     Charlesworth J said (at [235]):

384. [420]

     Her Honour’s reasoning can be further developed in the following way. The Departmental officials who allegedly manifested the relevant tendency were officers or employees of the Commonwealth. It was the Commonwealth’s tendency which would have been relevant under s 97. While the Commonwealth may have been a juristic “person”, it had many other officers and employees engaged in different fields of activity. A tendency on the part of the Commonwealth could not be established by proving that some (or, perhaps, even all) of the officials of the Department had that tendency.

385. [421]

     Such reasoning would apply equally to companies. It might still be possible to prove that a small company with only a few employees had a particular business tendency by proving that the relevant individuals exhibited that tendency. But it would be for practical purposes impossible to do this for a large company with numerous employees especially if the company operated multiple businesses.

386. [422]

     On this reasoning s 97 would be applicable to all companies in theory but only a very limited subset of companies in practice. This might itself be a reason to reconsider the idea that s 97 applies to a corporate “person”. On the other hand, it must be conceded that while the reasoning would apply to a business “tendency” for the purpose of s 97, it would not so clearly apply to “conduct”.

387. [423]

     There is a second difficulty with the application of s 97 in the present case. The mode of proof authorised by the section starts from the proof that a person has a certain tendency to behave in a particular way. The court is then asked to infer that in other similar circumstances that later arose, the person acted on that tendency: Elomar v R [2014] NSWCCA 303 at [359]-[360].

388. [424]

     In the present case, the chronology presents a difficulty for such reasoning. Hydrodec wishes the Court to infer that SOR acted in accordance with the supposed tendency in November 2019. But the evidence by which Hydrodec seeks to prove that tendency relates to events which happened eight months later, in July 2020.

389. [425]

     Where the tendency is that of an individual and may be supposed to be something innate, such as a particular type of sexual fixation, reasoning backwards may be permissible: Hughes v The Queen (2017) 263 CLR 338 at [70]. But it is more difficult when dealing with a business tendency, especially in a corporate context (if that is permissible under s 97). Even if evidence were accepted that in July 2020 SOR acted in accordance with the putative tendency, that would not necessarily prove that SOR had such a tendency in the previous year.

390. [426]

     Both of these difficulties would not exist under s 98. In the view I take they are not dispositive. I propose to pass over them and consider the question posed by s 97(1)(b) about the probative value of the evidence.

391. [427]

     In my view Hydrodec’s contention faced two major obstacles. The first concerned the identity of the natural persons involved, or supposedly involved, in the two incidents. Even if s 97 applies to a company, it must be remembered that a company can only have a state of mind, and act, through one or more individuals. It must be possible to reason from the corporate tendency to the particular corporate action in question. Where the tendency has been manifested on the company’s behalf by one individual employee and the relevant action was taken on the company’s behalf by another individual employee, there is a gap which must be filled. The mere fact that the two individuals are employed by the same company does not allow the inference based on tendency to be drawn.

392. [428]

     In the present case, SOR’s tendency was said to be proved by conduct on its behalf by Mr Czubala and Mr Rose. But there was no evidence that either of them was the employee of SOR who was involved in the supposed conversation with Mr Mullins on or before 7 November 2019. In fact, the identity of that supposed employee of SOR was never specified at all. It seemed to me that in these circumstances it was pure conjecture to reason, by means of corporate “tendency”, from the conduct of Mr Rose and Mr Czubala to the conduct of the unknown person who supposedly dealt with Mr Mullins.

393. [429]

     The second difficulty concerned the nature of the factual issue to which the evidence, if admissible, would have been relevant. If it had been established that a senior executive of SOR spoke to Mr Mullins during his visit to Bomen, it might have been possible to infer from Mr Mullins’ subsequent action that he was warned off. But the real difficulty for Hydrodec in the present case was that it first needed to prove that someone spoke to Mr Mullins on behalf of SOR at all. Evidence that Mr Czubala and Mr Rose spoke to contractors in the following year was of no assistance in drawing that inference.

394. [430]

     For these reasons, I considered that the proposed evidence did not have significant probative value for the purposes of s 97. Furthermore, admission of the evidence would have had important practical consequences for the conduct of the trial.

395. [431]

     Admission of the evidence would obviously have required the Court to resolve factual contests about what was said in the conversations. Those factual contests would have involved going into the credibility of the witnesses. Furthermore, counsel for SOR informed me that there was a dispute as to the authenticity of one of the documents to be relied upon by one of the proposed Hydrodec witnesses. He also said that if the evidence was admitted a further application would ensue to lead hearsay evidence, because one of the witnesses was not available to be cross-examined.

396. [432]

     On any view, it was clear that admitting the evidence would require the Court to lengthen an already protracted trial by introducing a further factual contest on what was in the end a collateral factual issue. And all of this when the principal obstacle facing Hydrodec’s case was a lack of evidence that someone from SOR ever said anything at all to Mr Mullins.

397. [433]

     In these circumstances, had I considered that the evidence had significant probative value, I nevertheless would have exercised my discretionary power not to receive it, on the basis that to do so would have caused or resulted in undue waste of time: Evidence Act, s 135(c).

398. [434]

     Conclusions: This leaves me to consider whether, on the evidence which has been admitted, I should draw the inference for which counsel for Hydrodec contends.

399. [435]

     There is nothing in the documentary evidence which makes this inference a likely one. Mr Davies does not appear to have been concerned about Mr Mullins’ volte face. He did not mention it in any of the correspondence leading up to his resignation on 27 November. Probably that was because he assumed it would be sorted out in due course once Hydrodec had got itself ready to proceed (if it ever did). Furthermore, an alternative cranage contractor is identified in the evidence.

400. [436]

     In propounding Hydrodec’s case, counsel did not specify who it was on behalf of SOR who supposedly “nobbled” Mr Mullins. The obvious person, based on his responsibilities, would have been Mr Onions. But all the evidence shows that he and Mr Davies had a good working relationship. Mr Onions went out of his way to help Mr Davies with his task. It is hardly likely that, had Mr Onions been given some sort of instruction to sabotage Mr Davies, he would have done things like volunteering details of other contractors for his benefit. In any event, the idea was never put to Mr Onions in cross-examination and counsel made no attack on the reliability of his evidence.

401. [437]

     I suppose that in theory Mr Rose could have sidelined Mr Onions and dealt with Mr Mullins himself, or asked Mr Czubala to do it for him. But that was not suggested to either of them in cross-examination.

402. [438]

     Mr Mullins’ volte-face does indeed raise suspicions. But it is not completely implausible that he would have wanted to become involved in a litigious dispute involving a major customer, whatever the merits. In any event there is simply no evidence that Mr Mullins’ action resulted from some sort of threat from someone at SOR. On the evidence it is just as likely that Mr Mullins acted as he did because he assumed that that would be what Mr Rose wanted.

403. [439]

     Furthermore, Mr Mullins’ action had no causative effect. Hydrodec’s plan to remove the Hydrotreater in November 2019 collapsed for other reasons. On the face of it, had Hydrodec proceeded with the removal of the Hydrotreater at a later date, any concerns of Mr Mullins would have allayed by the letter obtained from SOR at Hydrodec’s request. The contrary was not put to Mr Mullins.

404. [440]

     For these reasons I declined to draw the inference sought by counsel for Hydrodec. I am not satisfied that SOR prevented Hydrodec from removing the Hydrotreater by interfering with its contractors.

405. [441]

     As already noted, Mr Henderson was appointed as the valuer for the purpose of clause 3.10 through the Australian Property Institute. This was on 14 April 2020. He was provided with a brief prepared by CGW.

406. [442]

     Mr Henderson’s brief referred to the contractual obligation to value the items identified in the Plant and Equipment Schedule. He was instructed that that Schedule was represented by the Consolidated Budget capital expenditure spreadsheet page from May 2015 (see [133] above), and briefed with that document (as item 2 of the brief).

407. [443]

     Mr Henderson was also briefed with the valuer’s asset schedule prepared by SOR (see [331] above). The instructions explained:

408. [444]

     The instructions in the brief concluded:

409. [445]

     Following receipt of the brief, Mr Henderson made a request for clarification to CGW. He wrote:

410. [446]

     CGW’s response was:

411. [447]

     Mr Henderson then sent to CGW his formal engagement letter:

412. [448]

     Mr Henderson then requested a site visit and was put in touch with Mr Onions at Bomen. He sent to Mr Onions an information list in advance of his visit. During the visit he was shown around by Mr Onions, in the course of which some of the information which he had sought was provided orally by Mr Onions. Following the visit he made a request for supplementary information. Mr Onions collated the material and sent it back under a covering email. The attachments included various PDF documents including plans.

413. [449]

     Mr Henderson them completed his report. As an appendix he set out an itemised list of the assets valued. This was based on the valuer’s asset schedule with which he had been provided and included comments and values for each of the items. Of the 126 items on the list which he had been provided, Mr Onions attributed a value to only 34. Most of these were less than $1,000 and some were only $100 or $200. The total valuation of all items was $58,500.

414. [450]

     In cross-examination, Mr Henderson said that he used a depreciated replacement cost valuation. As its name suggests, under this method the valuer first determines the current replacement cost of the item in question, and then depreciates it, presumably to reflect its current state of repair. Mr Henderson confirmed that he valued the assets on an ex-situ basis. He acknowledged that this would yield a lesser value than an in-situ valuation. Also, improvements which could not be removed from the site, such as concrete emplacements and pavements, necessarily had a zero value.

415. [451]

     In cross-examination, Mr Henderson was also asked about his valuation of the four storage tanks used for the finished product (see the plan at [50] above). He attributed a value of $19,000 to these tanks, making the following notation:

416. [452]

     In suggesting that the tanks were contaminated with PCB, Mr Henderson was in error. He said that he thought he had received that information from Mr Onions during the site visit but it is unlikely that Mr Onions would have made that mistake. It probably results from some misunderstanding on Mr Henderson’s part. Mr Henderson said that if the tanks had not been contaminated with PCBs, the value would have been $2,000 to $3,000 higher per tank.

Capital payments

1. [453]

   In this and the following sections of the judgment, I set out the relevant terms of the Co-location Agreement (and, where relevant, the Sanction Agreement) before considering the parties’ contentions. The Agreement defined HA as “Hydrodec” and HG as “HGP”. As already noted, the plant and equipment belonging to HA, to which I have collectively referred in the judgment as the “Hydrodec Plant”, was referred to using the defined terms “Transformer Oil Processing Facilities” (which included the Hydrotreater and the receiving tanks) and “Laboratory Facilities”.

2. [454]

   The Co-location Agreement referred to the construction and installation of the “New Tanks”. It is not clear to me which tanks these were, or whether they were even installed as had been contemplated. The parties did not refer to this in their submissions. I have assumed that there is no need to go into the New Tanks for the purposes of this judgment. Similarly, it is unnecessary say anything about the Laboratory Facilities.

3. [455]

   The Co-location Agreement defined the term “Annual Capital Charge” as:

4. [456]

   The term “Capex and Capital Charge Budget” was defined in the course of describing the preparation of the Co-location and Commissioning Plan in sub-clause 2.2(a)(v):

5. [457]

   Clauses 3.1(a) and (b) dealt with the HA’s liability to pay the Annual Capital Charge:

6. [458]

   The provisions dealing with the capital payment on termination were clauses 3.10(e)-(h):

7. [459]

   The general provisions concerning the Operating Committee appeared in clause 6:

8. [460]

   Also relevant to the role of the Operating Committee for present purposes were some provisions which appeared elsewhere in the Agreement. Clause 2.2(a) required the parties to procure the Operating Committee to prepare the Capex and Capital Expenditure Budget as part of the Co-location and Commissioning Plan. Clause 2.2(b) provided:

9. [461]

   The terms of the Sanction Agreement bearing on the parties’ capital charge obligations referred to the “Consolidated Budget” (see [126] above):

10. [462]

    SOR has issued invoices for the monthly capital charge for June and July 2019. The amount claimed (inclusive of GST) is $64,685. SOR has not issued an invoice for the termination payment under clause 3.10(e). SOR calculates the amount due as follows.

11. [463]

    SOR contends that the “written down value” of the Hydrotreater Infrastructure is the principal amount shown as outstanding on the interest schedule after payment of the charges for June and July. This amounts to $1,170,596. Against that is to be credited the amount of Mr Henderson’s valuation ($58,500). The resulting Net Present Value is $1,112,096. Apart from the issues raised below, there is no dispute about SOR’s calculations.

12. [464]

    The obligation to make capital charge payments arose under clause 3.10(b) of the Agreement. By virtue of sub-clause 2.2(a)(v)(C), the Annual Capital Charges were repayments, as “documented” in the Capex and Capital Charge Budget of SOR’s “expenditure paid pursuant to clause 3.10”. HA contends that SOR’s figure for that capital expenditure (initially $2.2 million, as shown in the interest schedule) was not correct. HA’s argument, as I understand it, is that there was no document which answered the description of the Capex and Capital Charge Budget recording the $2.2 million figure (or indeed any figure for the clause 3.10 expenditure). By cross-claim, HA seeks an account to determine what the proper figure was.

13. [465]

    The first submission from counsel for HA was that, as a matter of construction of the Agreement, the Capex and Capital Charge Budget was a forward-looking document, rather than a document listing actual expenditure. Counsel contended that what was contemplated was for the clause 3.10 expenditure figure to be determined as an estimate at the time the approval condition was satisfied (that being the time by which the Budget had to be prepared). That figure would then apply for the purpose of determining the amount of capital charge payments irrespective of whether the actual expenditure in commissioning the plant was higher or lower.

14. [466]

    I am against this submission. The annual capital charges operated by way of “repayment” of “expenditure paid”. The natural meaning of those terms seems to me to connote actual, not estimated, payments. Also, as a matter of sensible business practice, it seems to me an unlikely construction of the Agreement that the capital charge payments (and associated interest) would have been calculated by reference to an estimate made well before the project was actually built.

15. [467]

    Furthermore the Capex and Capital Charge Budget was to include provision for repayment of the clause 3.10 expenditure. Yet there was no sign of any such provision for repayment in the indicative form of the Budget annexed to the Agreement (this was the Project Cricket capital budget: see [125] above). The more likely interpretation of the Agreement is that what was contemplated was that when the works were completed and the total capital expenditure pursuant to clause 3.10 was known, the parties would sit down together and agree the repayment schedule (along with such questions as the interest rate).

16. [468]

    The modifications effected by the Sanction Agreement made this even clearer. Clause 4 provided that the “final cost for the Capital Charge” would be the “actual cost” (subject to the $2.22 million cap). The Consolidated Budget capital expenditure page was adopted by the parties under clause 3(iii) for the purposes of the Agreement. It also did not contain any repayment provisions.

17. [469]

    What this means is that once the works had been completed an all expenses had come in, the Capex and Capital Expenditure Budget was to become a list of capital expenditure and a schedule for the repayment of that expenditure. By that point the term “budget” would be a misnomer. But any implication which might otherwise follow from the use of the term, as a matter of ordinary English, must give way to the express contractual definition.

18. [470]

    The evidence which I have summarised makes it quite clear that the parties went through the process contemplated in the Agreement. Under the auspices of the Operating Committee (which effectively delegated the detail to Mr Luce and Ms Baker) the parties reviewed the actual expenditure and determined the repayment schedule. They agreed the clause 3.10 expenditure at $2.2 million adopted a “straight-line” repayment method yielding monthly instalments of $26,190.48. Although those elements are not expressly set out in the minutes of the meeting of the Committee on 21 January 2016, they were clearly part of the agreed resolution which was reached or confirmed on that occasion.

19. [471]

    But while the fact of the agreement is clear, the recording of its constituent elements in the manner contemplated by the Agreement is not. As we have seen, the position taken by CGW in correspondence was that the Capex and Capital Expenditure Budget was to be identified with the Consolidated Budget capital expenditure spreadsheet page. Counsel for SOR took the same approach in his submissions. But I do not think this is correct, or, at least, wholly correct.

20. [472]

    Certainly after the co-location works were completed the Consolidated Budget capital expenditure page continued to be updated to reflect actual expenditure. But on the evidence this process was not finished. The latest version of the capital expenditure page in evidence dated from May 2015. At that time the actual expenditure was still incomplete. The spreadsheet also still contained different categories of capital expenditure which did not reflect the allocations to clause 3.10 expenditure ultimately agreed. Nor did it deal with repayment.

21. [473]

    What seems to have happened instead was that Mr Luce transferred the payment information from the Consolidated Budget capital expenditure to create the list of payments he included at the top of his “interest schedule” (see [140]-[141] above). Presumably the list would ultimately have reflected the $2,204,936 figure which represented SOR’s final claim for the purposes of Ms Baker’s audit ([146] above), but I was not taken to any such version of the list in the evidence.

22. [474]

    I did not understand HA to contend that this invalidated the process. It is clear from the evidence that Mr Luce provided the interest schedule to Ms Baker. The total of the individual capital expenditure entries in the list may not have completely reconciled with the $2.2 million ultimately agreed between the parties. But the difference was so minuscule ($4,936, or less than 0.25 per cent) as to have been insignificant.

23. [475]

    Mr Luce’s schedule also dealt with repayments. It recorded repayments as they were made, rather than setting out all the repayments in advance. But the timetable for future repayments was implicit in the calculations which appeared in it.

24. [476]

    Mr Luce’s interest schedule, as it stood at the end of the audit in 2015, would therefore seem to have satisfied all of the substantial requirements of the Capex and Capital Expenditure Schedule under the Agreement. Neither party however appears to have noticed this (as already noted, I did not understand counsel for HA to contend that any absence of documentation to this point was fatal to SOR’s claim).

25. [477]

    SOR pleaded its case in three ways. In its statement of claim it pleaded the agreement concerning the driveway as a separate stand-alone agreement enforceable as such. In SOR’s reply to HA’s defence the agreement was pleaded in the alternative as a variation to the Co-location Agreement or an amendment thereof. In the further alternative SOR relied on estoppel.

26. [478]

    I will start with the pleaded defences to SOR’s principal claim. There were three.

27. [479]

    First, HA denied that any such agreement was made. In the particulars, it was asserted that no concluded agreement had been reached. On my findings, this defence fails on a factual level.

28. [480]

    The second defence was based on clause 17.7 of the Agreement, which provided:

29. [481]

    HA put this argument in two ways. First, HA relied on the clause itself.

30. [482]

    The principles concerning the operation of clauses of this type were reviewed by McDougall J in Cenric Group v TWT Property Group [2018] NSWSC 1570 at [101]-[103]. His Honour concluded that such a clause does not of its own force prevent the parties from making an effective oral variation. The clause’s relevance is as a factor going to whether in their later oral dealings the parties intended to create legal creations without a signed document.

31. [483]

    Counsel for Hydrodec accepted his Honour’s conclusions. But counsel added a submission that in this case clause 17.7 was relevant in another way. The submission was that the clause was an indication that neither HA nor HG authorised their directors or employees to make agreements on their behalf informally, and that SOR must be taken to have known this.

32. [484]

    Counsel for SOR submitted that the driveway agreement was not a variation, but rather was expressly contemplated by the terms of the Agreement itself. I have already rejected HA’s contention that the clause 3.10 capital expenditure figure was fixed as an estimate in the Capex and Capital Charge Budget. Instead I consider that the figure covers actual expenditure. In final submissions, counsel for SOR tried to take this further. Counsel submitted that the wording of clauses 2 and 3 was such that clause 3.10 expenditure covered the capital cost of alterations and extensions to the Hydrotreater Infrastructure after commissioning.

33. [485]

    In my view, the possibility was an obvious one that after the plant had been commissioned a need would emerge for further capital expenditure on infrastructure for the Hydrotreater. It would be surprising if this had not been accommodated by the Agreement. But in the end it is not necessary for me to decide whether counsel’s submission is right. In my view the expenditure on the driveway was accommodated under another mechanism of the Agreement.

34. [486]

    Clause 3.10 included payment obligations which lasted at least until the end of the Capital Term. In my view the arrangement in this case, under which the driveway was constructed and added to the total capital expenditure for the purpose of the capital charge, fitted squarely within the “practical implementation of the obligation in clause 3” for the purposes of the introductory words of clause 2.2(b).

35. [487]

    It is clear that the arrangement was sanctioned by the Operating Committee. It thus satisfied the requirements of sub-clause 2.2(b)(ii). It was also agreed between the CEOs of SOR (Mr Rose) and HG (Mr Ellis). The words “or otherwise” in sub-clause 2.2(b)(iii) make it clear that the power of the Chief Executives to agree to “practical implementation” is not limited to cases where the members of the Operating Committee do not agree. The arrangement thus satisfied the requirements of that sub-clause as well.

36. [488]

    The agreement concerning the driveway did not result in any variation to the text of the Co-location Agreement itself. In my view it was simply an ad hoc agreement made pursuant to a mechanism laid down in the Agreement. In my view it was not a “variation” at all for the purposes of clause 17.7.

37. [489]

    It is therefore unnecessary to consider whether the driveway agreement satisfied the requirement for writing in clause 17.7 (although on the face of it, the correspondence between Mr Ellis and Mr Rose in March and April 2017 do appear to have satisfied that requirement). Nor is it necessary to consider whether, if clause 17.7 had been engaged, that would have been sufficient to prevent the agreement from being recognised as binding.

38. [490]

    The final pleaded defence was that construction of the driveway had already begun (and perhaps had been completed) by the time of the pleaded agreement. Counsel submitted that by that stage there was no further consideration to move from SOR which would support an obligation to pay the cost back by means of the capital charge.

39. [491]

    The statement of claim actually pleaded that the agreement in question was made “in or about” April 2017, and the particulars included correspondence between Mr Ellis and Mr Rose in March. The particulars did not refer to the earlier dealings between Mr Czubala and Mr McNamara in December 2015 or between Mr Rose and Mr Ellis in 2016.

40. [492]

    I would hesitate for a long period of time to uphold an argument of this sort when the evidence showing that there was an earlier agreement was admitted without objection. But in any event I do not need to decide the pleading point.

41. [493]

    It is probably true that by March 2017, SOR had committed itself to pay, if it had not actually paid, for the driveway. But on my findings it only made those commitments after receiving promises from Hydrodec to cover the cost. Those promises would have provided an arguable basis (at least) for a claim against Hydrodec. In agreeing to be reimbursed by HA under the clause 3.10 mechanism, SOR effectively compromised that claim and provided the necessary consideration.

42. [494]

    These conclusions make it unnecessary to consider SOR’s alternative argument based on proprietary estoppel. I am satisfied that the parties agreed for clause 3.10 to apply to the driveway expenditure.

43. [495]

    The driveway expenditure was never recorded in the Consolidated Budget capital expenditure, reinforcing the conclusion that this document, on its own, was to be identified with the Capex and Capital Expenditure Budget. But again HA did not contend that this invalidated the parties’ agreement.

44. [496]

    In any event, the driveway expenditure items were listed in the interest schedule (see [172] and [175] above: by this stage the earlier full list of expenditure items had been removed from the schedule, but would still have existed in the earlier version used for Ms Baker’s audit). And as before, the revised repayment timetable was implicit in the revised monthly payment figure of $33,055.64 which appeared in the schedule from January 2018 ([175] above). The interest schedule (taken together with the earlier list of co-location expenditure items) thus continued to record the information required in the Capex and Capital Expenditure Summary.

45. [497]

    It follows that SOR has established its entitlement to the unpaid capital charge payments from June and July 2019. I now turn to the clause 9.2 termination payment.

46. [498]

    The obligation to make the clause 9.2 termination payment arose under clause 3.10(b) of the Agreement. The first integer in calculating the amount of the payment was, by virtue of clause 3.10(f), the “written down value” of the plant, equipment and improvements set out in the Plant and Equipment Schedule prepared by the parties under clause 3.10(a). HA’s contention is that, even if the amount of the monthly capital charge can be ascertained, the amount of the “written down value” cannot (at least without some form of account).

47. [499]

    There are two limbs to HA’s contention. First, HA contends that no Plant and Equipment Schedule, as the term was defined in the Agreement, existed. It is therefore said to have been impossible to identify the “written down value” of the relevant assets. Secondly, HA alleges that SOR failed to comply with its obligations under the Agreement with respect to preparation and maintenance of the Schedule. Accordingly, so HA contends, the non-existence of the Schedule is SOR’s responsibility and it cannot take advantage of its own wrong.

48. [500]

    HA’s first contention involves two propositions. I will deal with them in turn.

49. [501]

    No Plant and Equipment Schedule: As we have seen, when challenged to identify the Plant and Equipment Schedule, CGW referred to the Consolidated Budget. Counsel for SOR took the same approach in his submissions. Ultimately he contended that the Schedule was “included” in the May 2015 capital expenditure page of that Budget. This was the document which Mr Henderson had been instructed was the Schedule.

50. [502]

    The immediate problem with this contention is that counsel was arguing that the very same document was the Capex and Capital Expenditure Budget. And although that document may incidentally have referred to all of the assets to be constructed, that was incidental to its true purpose as a comprehensive record of proposed, and then actual, expenditure.

51. [503]

    Ironically, counsel did not refer in this connection to the asset cost schedule used for the audit in 2015 ([142] above). That schedule was organised by reference to “asset numbers” and contained a description for each “asset” identified. The Operating Committee was apparently referring to this document when it referred to the “asset register audit” having been completed in its minutes of 21 January 2016. On the face of it, this was the most likely candidate for identification as the Plant and Equipment Schedule.

52. [504]

    It is however unnecessary to pursue this further. Even if something answering the description of the Schedule was produced at the time of the audit, it was never updated to include the assets resulting from the driveway expenditure. After Mr Luce and Ms Baker both left their respective employments in the second half of 2017, the parties’ corporate memories of the documents seems to have disappeared with them.

53. [505]

    This is confirmed by the course of events when in September 2019 the time came to begin the processing of getting a valuation. No stand-alone list setting out the assets resulting from the clause 3.10 expenditure (including the driveway expenditure) existed. So SOR had to prepare one in the form of its valuer’s asset schedule ([332] above).

54. [506]

    When later briefing Mr Henderson, SOR coyly described that schedule as an “aid for identification purposes” ([444] above). But in reality it performed the function of the Plant and Equipment Schedule for the purposes of his valuation (in fact, Mr Henderson valued the driveway assets even though they did not appear in the Consolidated Budget document he was told was the Plan and Equipment Schedule itself, presumably because he worked from the valuer’s asset schedule; no point has however been taken about this by HA)

55. [507]

    Impossible to determine “written down value”: Superficially the term “written down value” connoted some sort of depreciation process, with the Plant and Equipment Schedule fulfilling the role of the accompanying depreciation schedule. But on analysis I do not think such an interpretation works.

56. [508]

    The clause 3.10 expenditure was expenditure by SOR. How that was to be recorded (and depreciated, if depreciable) in SOR’s accounts was a matter for SOR alone. The co-location project was not a separate accounting entity like a joint venture. It had no balance sheet to hold any assets to be depreciated. In this context depreciation for the purposes of the Agreement did not make sense.

57. [509]

    The scheme of the Agreement was for SOR to incur the clause 3.10 expenditure and for HA to pay the expenditure back over the Capital Term. This was reflected in the language of sub-clause 2.2(a)(v)(C) which spoke of “repayment” of the expenditure and of the expenditure being “repaid” by means of the capital charge. Similarly, sub-clause 2.2(a)(v)(D) spoke of the Net Realisable Value as a “repayment on termination”.

58. [510]

    These considerations lead inevitably to the conclusion that the “written down value” of the assets on termination was the then outstanding capital balance, made up of the initial capital expenditure less the accumulated capital charge repayments. If it had been otherwise, then, depending on the rate of depreciation selected, one of the parties would have faced the prospect of being worse off, and the other of being better off, under a clause 9.2 termination than they would be if the Agreement ran for the full seven years of the Capital Term. In the construction of the commercial contract such as this one, a capricious outcome of such a type is particularly to be avoided: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 129.

59. [511]

    The definition of Net Realisable Value depended on the “written down value” of the assets in the Schedule. But clause 3.10(a) did not require that “written down value” to be recorded in the Schedule. All it required was a list of assets. The Agreement may have contemplated that the Schedule would be provided to the valuer, but the “written down value” of the assets would not have been relevant to the valuer’s task.

60. [512]

    Once it is accepted that the “written down value” of the assets was the outstanding clause 3.10 capital expenditure, that figure could be identified whether the Plant and Equipment Schedule existed or not. HA’s first contention fails.

61. [513]

    Breach of obligations concerning preparation of the Plant and Equipment Schedule: This brings me to HA’s second contention. Given the conclusions I have reached, it may not be necessary to address it for present purposes. But the issues which it raises are relevant elsewhere and I shall deal with it anyway.

62. [514]

    Counsel for Hydrodec developed two main lines of argument in support of the proposition that SOR breached its obligations under the Agreement with respect to the Plant and Equipment Schedule. The first was based on SOR’s record keeping obligations under clause 5.10. The second strand of argument was based on the duty of co-operation.

63. [515]

    Clause 5.10 provided:

64. [516]

    For present purposes counsel’s argument focused in particular on the Crowe Horwath audit in February 2019. Counsel submitted that the audit both identified a failure to keep records in accordance with clause 5.10 and represented a failure to make such records available to HA.

65. [517]

    HA’s reliance on clause 5.10 presupposes that SOR’s obligation under sub-clause 3.10(a) to create and maintain the Plant and Equipment Schedule was one of the record keeping obligations covered by clause 5.10. That is an available reading as a matter of language, and it seems to have been the assumption CGW made for the purposes of the correspondence with COD in 2019. But it is not the only available reading.

66. [518]

    Clause 5.10 operated against SOR (by imposing the obligation to keep records on it alone) and in favour of HA (by giving it alone the right to audit the records). This was structurally different from sub-clause 3.10(a), which imposed an obligation to prepare the Schedule on both parties equally. That of itself carried with it an obligation on the parties to co-operate, and in particular to agree on the content and form of the document. It seems strange to think of HA hiring an auditor under clause 5.10 to audit a document which HA had itself agreed upon.

67. [519]

    The language of clause 5.10 was broad, but it was one of a number of clauses all of which were grouped under a heading relating to the provision of Tolling Services. I think the better view is that the clause did not apply to the Schedule. Its apparently wide language must be read down to produce a harmonious construction of the Agreement as a whole. It follows that the whole idea of using Crowe Howarth to “audit” SOR’s obligation to prepare the Schedule was misconceived.

68. [520]

    This does not mean that HA had no means of challenging SOR’s calculations or investigating the supporting documents. As I have just said, sub-clause 3.10(a) required co-operation and agreement. This would, in a proper case, include requesting and obtaining information. But that was simply implicit in sub-clause 3.10(a) itself and did not involve invoking clause 5.10 procedures.

69. [521]

    On my findings, the parties never did prepare the Plant and Equipment Schedule. But, for reasons I have given, that had no financial consequence. The Schedule’s only function was to act as a list of assets to be valued if that became necessary. Even if the scope of HA’s audit entitlement extended to the preparation of the Plant and Equipment Schedule, it did not allow HA to require SOR to “prove” its clause 3.10 expenditure all over again, this time to the satisfaction of HA’s auditors.

70. [522]

    This brings me to the duty of co-operation. HA relied on the general implication of an obligation of good faith and reasonableness in all commercial contracts: Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 at [159]. There was also a further assurances clause (clause 17.14). It is unnecessary to say more about this, because there was no dispute about the existence and scope of the implied obligation.

71. [523]

    HA relied on the requests and responses passing between COD and CGW which I have summarised earlier in this judgment. HA’s requests began with COD’s letter of 3 April 2019 (see [317] above). Initially the request was more in the form of a suggestion. However from 31 July onwards (see [325] above) HA’s position in the correspondence was that SOR had an obligation to provide that information, and to provide it in the form sought.

72. [524]

    The critical element of HA’s requests was that SOR was to “supplement” the Schedule by providing, for each asset, a full set of supporting documents evidencing the cost of the asset and justifying the expenditure on it under clause 3.10. In my view, this illustrates the misconception behind HA’s approach.

73. [525]

    What HA was purporting to require was in effect for SOR to provide a full account of its claimed expenditure. Even if the Agreement required the Schedule to specify the cost of the assets (which I do not accept), there was nothing in the Agreement which required the Schedule to be cross-referenced to a set of supporting documents. More broadly, the purported requirement was foreign to the co-operative joint process envisaged by sub-clause 3.10(a).

74. [526]

    Furthermore, for reasons I have already given, once the Operating Committee had approved the expenditure following Ms Baker’s “audit”, HA had no entitlement to impose some sort of obligation on SOR to provide another account. In my view, SOR was right, through CGW, to point to the Committee as the solution to the problem, if there was one. The commercial absurdity of HA’s position is shown by its instructions to its auditors to ignore the earlier audit.

75. [527]

    Of course, putting the issue in the Operating Committee’s hands was the last thing which HA wanted. At the time when HA demanded the audit on 1 November 2018, HA was resisting SOR’s requests to have the Committee meet, and continued to do so. From 25 February 2019 HA maintained that refusal in the face of attempts by SOR to put the Plant and Equipment Schedule issue on the Committee’s agenda. Arguably this was a breach of HA’s own obligations under clause 6.2.

76. [528]

    One could be forgiven for thinking that HA took this approach because it did not want the Committee to find a solution, and that the purpose of the audit (which would have been far more expensive to HA than participating in meetings of the Committee) was to shore up HA’s legal position rather than satisfy a genuine desire to obtain information. At all events, the approach in COD’s correspondence on behalf of HA was completely uncommercial.

77. [529]

    On my findings, SOR was wrong to contend, through CGW, that there was a Plant and Equipment Schedule in existence. But at the same time SOR tried repeatedly to have the issue referred to the Committee. By September 2019 SOR was trying to have the Committee settle the form of the valuer’s asset schedule which in fact satisfied the requirements of the Plant and Equipment Schedule. HA would not co-operate. In my view this was a breach by HA of its own obligations under the Agreement, which would have disqualified it from relying on the non-existence of the Schedule had that non-existence otherwise been a bar to SOR’s claim.

78. [530]

    For these reasons, I am not satisfied that there was any relevant breach by SOR of its duty of co-operation. To the contrary, it was HA which was in breach of its duty. I reject HA’s contention.

79. [531]

    In his written submissions, counsel for HA identified three arguments in support of the proposition that Mr Henderson’s valuation was invalid. These arguments must be evaluated by reference to the principles which govern a challenge to a valuation made under a contract. Those principles were stated by Brereton J (as his Honour then was) in TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 (at [18], citations omitted):

80. [532]

    Counsel’s first argument focused on paragraphs 14 to 18 of the brief provided to Mr Henderson, quoted at [444] above. Counsel submitted that the paragraphs amounted to a “submission” to Mr Henderson, contrary to the contractual prohibition in sub-clause 3.10(h)(C). The alleged submission was that expenditure which did not result in “tangible items” could not have a value for the purposes of Mr Henderson’s valuation. The paragraphs were nonetheless a “submission” because paragraph 18 reminded Mr Henderson that ultimately the decision was up to him. Although counsel did not say so, the same was presumably so even if the “submission” was correct (as it may well have been).

81. [533]

    But even if this argument is sound, it only establishes a breach of the Agreement. There remains a further question, namely whether the breach in question had the result of invalidating Mr Henderson’s valuation.

82. [534]

    When I raised this question with counsel for Hydrodec, he responded by submitting that HA had contracted for a valuation without any submissions. With respect, I think that begs the question. As Brereton J stated, the ultimate issue is whether the valuation answers the contractual description. A valuation which results from a breach of contract may still recognisably be the valuation for which the contract provides.

83. [535]

    I was not referred to any further authority on this question. As a matter of principle, it seems to me that one must ask whether, as a matter of construction of the contract, it would have been intended that the breach in question should have the result that the resulting valuation would be of no effect: compare in a statutory context Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [91]-[93]. In a commercial contract such as the present, the answer to that question is influenced by the general desirability of a construction which will advance commercial workability.

84. [536]

    It was not suggested in cross-examination to Mr Henderson that he was influenced by the paragraphs in question. Indeed it was not suggested if the paragraphs in question were a “submission” for the purposes of sub-clause 3.10(h)(C), they had any impact whatever on the valuation. Any breach was insubstantial. There is no good commercial reason to treat such a breach as invalidating the valuation. In my view counsel’s argument fails.

85. [537]

    Counsel’s second argument was that the valuation had been “tainted” by Mr Henderson’s erroneous assumption that the production tanks were contaminated with PCBs. It is notable that counsel did not argue that this mistaken belief was in some way the result of a “submission”. I am not satisfied that Mr Henderson was told something mistaken by Mr Onions. To the contrary, the apparent likelihood is that the error resulted from some sort of mistake or misunderstanding by Mr Henderson.

86. [538]

    On the principles stated by Brereton J, this is the sort of error which leaves the efficacy of a valuation contractually unaffected as between the parties. That conclusion is reinforced in the present case by the provisions of the Agreement which prohibited submissions and gave the valuer complete control over the valuation process (sub-clause 3.10(h)(D)).

87. [539]

    In my view sub-clause 3.10(h)(E), which gave the valuer the power to make a non-speaking valuation if he chose, gives further support to the conclusion. Although Mr Henderson did not in fact exercise that power, its presence in the Agreement is a further sign that the parties’ rights to scrutinise the valuation, and thus to challenge it, were to be minimised.

88. [540]

    Counsel for Hydrodec also submitted that Mr Henderson may have used an incorrect valuation method. Counsel suggested that Mr Henderson had adopted an approach under which the value of certain items was necessarily zero. I am not sure that Mr Henderson did make any such mistake, but if he did, that again would have been an error which would not have affected the contractual validity of the valuation (sub-clause 3.10(h)(D)).

89. [541]

    In oral submissions, counsel made reference to the fact that the report stated that it was prepared for the purpose of these proceedings. I have already referred to the confusion which this engendered. Under the Agreement, Mr Henderson did not have to provide a report at all, let alone a report in which he undertook to comply with the Expert Witness Code of Conduct. But I do not see how this has any effect on the validity of his valuation. There is nothing to suggest that it caused Mr Henderson to misunderstand the task that he was to perform.

90. [542]

    Counsel for SOR made it clear that SOR would accept a reduction to take account of the erroneous undervaluation of the production tanks. But in the light of the principles governing the law of valuation, I do not think this would be appropriate. If the error had resulted from a misstatement by Mr Onions, then HA might have sued SOR for breach of the terms of the contract, or for misrepresentation. Alternatively, if it resulted from confusion on Mr Henderson’s part, HA could have cross-claimed against him. But HA has made no claim and I think the application of the principles to which I have referred require me to adopt the figure in the valuation despite the error which has been exposed.

Tolling fees

1. [543]

   The relevant provisions of the Agreement concerning tolling fees were:

2. [544]

   The maintenance provisions on which HA relied for its defence and cross-claim were found in clause 4:

3. [545]

   SOR’s invoices for the tolling fee payments for June and July 2019 (including GST) total $417,652. There was no challenge from HA to the calculation.

4. [546]

   HA’s defence is that, under the terms of the Agreement, it was not obliged to pay tolling fees during periods when Tolling Services were not provided. In June and July 2019 the Hydrotreater remained shut down, as it had been since August 2018. HA contends that this state of affairs excused it from paying tolling fees for the period.

5. [547]

   The first question is the nature of SOR’s obligation under the contract to provide Tolling Services. The definition of that term in clause 5.1 required SOR to “operate and maintain” the Hydrotreater “to process tolling feedstock into SUPERFINE”.

6. [548]

   It is clear that these words did not impose an absolute obligation to keep the Hydrotreater working at all times. The parties cannot have intended that SOR would be in breach if through no fault of SOR’s the Hydrotreater could not process feedstock. On the true construction of clause 5.1 the provision of Tolling Services must have meant maintaining the Hydrotreater in compliance with SOR’s obligations under the Agreement and, to the extent reasonably possible, operating the plant to process SUPERFINE.

7. [549]

   Furthermore, SOR’s performance of its obligations, including its obligation under clause 5.2 to provide Tolling Services, was dependent upon co-operation from HA, so that HA was not entitled to rely upon a breach caused by its own failure to afford reasonable co-operation to SOR: Mackay v Dick (1881) 6 App Cas 251; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607. Financial responsibility for maintenance under the Agreement was divided between SOR and HA. Once a maintenance issue had come to require repair to, or replacement of, a “major component”, HA had to pay for the repair or replacement before SOR was obliged to do anything more. If HA’s refusal to pay for a “major component” meant that the Hydrotreater could not be operated, I think that could not be a failure to provide Tolling Services by SOR.

8. [550]

   As I explain in more detail below, the shutdown of the Hydrotreater in August 2018 was initially attributable to a failure by SOR to comply with its maintenance obligations. But by June and July the following year, the cause of the Hydrotreater’s inability to function was HA’s failure to get the Haskel unit and the hydrogen compressor working again. HA had in fact given up on this in about April. It follows, in my view, that at the relevant time SOR was not in breach of its obligation to provide Tolling Services.

9. [551]

   If I had been of a different view, it would have been necessary to consider whether HA’s obligation to pay tolling fees was conditional on the provision of Tolling Services by SOR. In Hillam v Iacullo (2015) 90 NSWLR 422 at [93], the Court of Appeal made it clear that the question is one of construction. Leeming JA, speaking for the Court, quoted with approval the following statement from Megarry V-C in Tito v Waddell (No 2) [1977] Ch 106 at 297:

10. [552]

    At [107], Leeming JA Honour stated that the modern view favours dependent constructions. Moreover, and unlike the facts in Hillam v Iacullo, in the present case clause 5.2(a) specifically provided that the obligation to pay tolling services was “in consideration of”, among other things, SOR providing the Tolling Services.

11. [553]

    If that were all, there would be much to be said for the view that as a matter of construction the obligation was dependent. But there is more.

12. [554]

    Clause 5.2(c) provided that the obligation to pay the tolling fee was to cease on termination of the Agreement, which included termination for breach under clause 9.1. It was also to be suspended for so long as an event of force majeure caused the suspension of the provision of Tolling Services. Also, clause 5.2(a) provided that the obligation to pay the tolling fees was in consideration of SOR undertaking and performing its obligations under clauses 3 and 4 as well as in consideration of providing Tolling Services.

13. [555]

    In my view to accept HA’s argument would result in a construction which would have cut across clause 5.2(c) and led to uncommercial outcomes. Especially would this have been so if, as counsel for HA submitted, the effect of clause 5.2(a) was to make the payment of tolling fees conditional upon SOR complying strictly with all of its obligations under clauses 3 and 4. If accepted, that would have meant that a breach of an obligation under clause 3 or clause 4 which could have had no effect on the ability of the Hydrotreater to operate would nevertheless have deprived SOR of the tolling fee.

14. [556]

    In my view the better construction is that clause 5.2(a) did not make SOR’s entitlement to tolling fees for a period conditional on its compliance with its obligation to provide Tolling Services during that period. Instead the clause left breaches of SOR’s obligations to be dealt with under clause 9.1 or by a claim for damages.

15. [557]

    For these reasons, I do not accept HA’s defence. SOR’s claim for the tolling fees for June and July 2019 succeeds.

16. [558]

    HA pleaded a cross-claim based on three separate shutdown periods:

    1. (1)

       the regular maintenance shutdown from 2 to 17 June 2018;

    2. (2)

       the shutdown from 5 to 7 August 2018 to deal with a leak in the Haskel unit; and

    3. (3)

       the shutdown which began with the discovery of the problem with the gas bottles on 7 August and lasted right up to the expiry of the agreement on 26 July 2019.

17. [559]

    No submissions were addressed to me about the first two periods. I assume they are not pursued.

18. [560]

    As I have already mentioned, the experts gave evidence by reference to a standard based on “proper engineering practice”. The Agreement itself only called up that standard in circumstances where there were no instructions given by Hydrodec. The parties appear to have agreed that no formal instructions of that type were given.

19. [561]

    I have set out my findings on the causes for the third shutdown at [274]-[290] above. I concluded that the first period of the shutdown, associated with the hydrogen bottles was attributable to a failure by SOR to identify the expiry of the gas bottle certifications, and that had SOR done so in accordance with ordinary standards of good engineering practice, the shutdown would have been avoided. With more hesitation, I have concluded that SOR should have identified the problem with the service life of the Haskel barrels and that had this been done when it should have been, the barrels could have been replaced at an earlier point. In that event the need to continue the shutdown after the problem was in fact identified on 21 July would have been avoided.

20. [562]

    It should be emphasised that these findings establish a breach causative of the initial shutdown, but do not by any means establish the length of time for which the continued shutdown was attributable to the breaches. This is of most significance for the Haskel barrels.

21. [563]

    The breach I have found was a failure by SOR to identify the limited service life of the barrels and the fact that that service life had expired in 2014. But once the problem was identified, SOR’s obligation was discharged and it became HA’s responsibility to obtain suitable replacement parts.

22. [564]

    HA is entitled to complain that had SOR identified the problem, a year or so earlier, it would have been solved by August 2018. But it is hard to see how HA could complain about a shutdown extending any longer than the ten to eleven weeks maximum quoted by HP Plus for the supply of replacement barrels. I was not satisfied that the barrels fabricated by Mr Koomen were a satisfactory substitute. Furthermore it appears that by November 2018 the compressor had failed, and, on my findings, this was not SOR’s responsibility.

23. [565]

    HA did not, by expert evidence or otherwise, establish the length of time that, acting reasonably, it would have needed to replace the Haskel barrels once the problem had been drawn to its attention by SOR. Given the state of HA’s business at the time, there were obvious difficulties in quantifying the loss of sales flowing from the shutdown.

24. [566]

    HA tried to avoid this problem by running a case which did not depend upon proving loss of that type. The alternative case was put in two ways.

25. [567]

    First, HA contended that the breaches by SOR had the result that HA had no obligation to pay tolling fees during the period when the Plant was shut down. To the extent that this contention involved asserting that HA was entitled to recover fees already paid by HA, the basis for doing so was not clear. HA’s claim was not based on any term of the contract. Instead, it was presumably based on some form of restitutionary claim. Neither party addressed any argument to me on these questions. But I do not need to go into them. I have already explained why in my view SOR’s entitlement to tolling fees is not dependent upon the provision of tolling services.

26. [568]

    HA’s alternative way of presenting its claim was to contend that the tolling fees in effect represented the damages to which it was entitled during the period of the shutdown. But I do not think that this claim can be sustained either.

27. [569]

    A clause providing for a party who breaches a contract to pay liquidated damages will be enforced, provided that the liquidated figure represents a genuine pre-estimate of loss and the clause is not penal: Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at [11]-[12]. But clause 5.2(a) is not a liquidated damages clause.

28. [570]

    Nor in my view would the quantum of the tolling fee represent a genuine or appropriate pre-estimate of HA’s loss. HA’s damage is the loss of profit from the sales of SUPERFINE which HA was unable to make. The measure of damages is the difference between the value and the cost of the lost sales. There is simply no relationship between the tolling fee and the level of profit. HA’s cross-claim fails.

Removal of Hydrotreater and receiving tanks

1. [571]

   Hydrodec’s right to remove the Hydrodec Plant was relevantly dealt with in clause 4.1(a) and (b):

2. [572]

   There is no dispute between the parties as to HA’s entitlement to remove the Hydrotreater. The parties agree that as a result of the express language of sub-clause 4.1(b)(i), HA has a contractual entitlement to do so which survived expiry of the Agreement. Nor did counsel for SOR contend that the clause required all of the Hydrodec assets to be removed, or none of them.

3. [573]

   HA’s claim for conversion of the Hydrotreater raised two issues. Even though it now appears to be agreed that HA will remove the Hydrotreater, I will deal with those issues as they are relevant to other aspects of the proceedings.

4. [574]

   Essentially, HA’s case was that SOR converted the Hydrotreater by frustrating its removal from the Bomen site. Counsel for Hydrodec put this in two ways.

5. [575]

   First, counsel contended that SOR directly caused HA’s contractors to decline to become involved. I have set out my factual conclusions on this at [435]-[441] above. I am not satisfied that SOR caused RC’s withdrawal from the project (or interfered with any other contractor). Nor am I satisfied that any such interference prevented the removal project from going ahead. This contention fails on the facts.

6. [576]

   Counsel’s second contention was based on the correspondence between COD and CGW about removal of the Hydrotreater. I have summarised that correspondence in the section of my judgment dealing with the removal of the Hydrodec assets. The contention was that SOR’s response to the requests from HA amounted to a failure by SOR to comply with its obligation of co-operation (see [522] above).

7. [577]

   I think the correspondence from HA to SOR through COD now wears a most unfortunate appearance. The tone of the correspondence was antagonistic and peremptory. It stood in stark contrast to the friendly and business-like dealings between Mr Davies and Mr Onions, who were the people who were actually responsible for making the removal of the Hydrotreater happen, if it was going to happen.

8. [578]

   The tone of the correspondence was particularly misplaced in the light of the evidence about the limitations in the way in which Hydrodec resourced and directed the removal project. It is clear that, because of those limitations, HA never had any realistic prospect of removing the Hydrotreater within the time limits identified by COD. Although SOR was probably aware of this from Mr Onions’ dealings with Mr Davies, genuine and businesslike attempts by HA to secure co-operation would have entailed some candour on HA’s part.

9. [579]

   The correspondence which followed RC’s volte-face on 7 November was particularly unfortunate. Mr Davies had not even got the internal go-ahead until the beginning of November and by that stage none of the detailed work required to comply with SOR’s OHS procedures had even begun. Mr Davies himself had told HA, through COD, in unmistakeable terms, that SOR was not the problem.

10. [580]

    Yet HA still purported on 19 November to impose a peremptory deadline of 22 November for the provision of the letters it was demanding from SOR. HA continued to insist up to that deadline that partial compliance, in the form of a solicitor’s letter to RC, was not enough. In fact the deadline bore no relationship to what was happening (or more accurately, what was not happening) with the project in the real world. HA’s demands did not result from any complaint or request for help from Mr Davies. Indeed it seems Mr Davies was not consulted about them at all.

11. [581]

    It may have been discourteous for CGW not to reply to COD’s original letter before COD wrote on 19 November (although COD’s letter appeared to accept that due to other factors the delay had made no difference). But HA’s conduct seems to have had more to do with setting up SOR for the purported termination by HG on 22 November than with any real concern with advancing the removal project. To add insult to injury, it seems that once the letter which HA had wanted was obtained, it was never even sent to RC.

12. [582]

    In my view it would be commercially unreal to see the correspondence as evincing a refusal by SOR to comply with its obligation of co-operation. The need to interpret obligations in business contracts in a commercially practicable way must surely apply with the greatest force to obligations of co-operation. While some of CGW’s correspondence also contained an unnecessary degree of asperity, as a matter of substance CGW was right in saying to COD that the solution to the problem lay in their client’s hands and their client should get on with solving it. I reject HA’s contention.

13. [583]

    If I had been of a different view, I would still have doubted that it was correct to characterise SOR’s conduct as conversion. While it is true the conversion may take different forms, the essential element of the action is conduct by the defendant which denies the plaintiff’s title to the asset in question: see Sappideen and Vines, Fleming’s The Law of Torts (Thomson Reuters, 10th ed, 2011) at [4.110]. It seems to me that conduct which has the indirect effect of impeding the exercise of the plaintiff’s rights could rarely, if ever, amount to conversion.

14. [584]

    At no time did SOR make any claim for ownership of the Hydrotreater; its position was always that the Hydrotreater belonged to HA but it was up to HA to remove it. Even if I had been satisfied that SOR interfered with HA’s contractors, the appropriate tort would seem to be interference with contractual relations, or perhaps conspiracy. But HA never put its case that way. The case it did put fails.

15. [585]

    Leaving the Agreement to one side, the position is quite clear. It was stated by Slattery J in Petkovski v Huang [2018] NSWSC 1667 (at [447], citations omitted):

16. [586]

    HA did not dispute that prima facie it was liable for trespass in leaving the receiving tanks behind after the expiry of the Agreement. HA advanced two affirmative defences.

17. [587]

    HA’s first defence involved reliance on its disclaimer. I am not sure how strongly this was ultimately pressed by counsel for HA. In any event, I think it is clearly unsustainable.

18. [588]

    In Vincent v State Bank of NSW Ltd (Supreme Court of New South Wales, Young J, 30 July 1993) Young J said (at 12):

19. [589]

    What this means is that the effect of the disclaimer was to allow SOR to assume ownership of the tanks; or to arrange for someone else to come in and take the tanks away, at which point that person would become the owner. It was not to confer ownership on SOR against its will. As Young J said in Vincent at 11:

20. [590]

    HA’s second defence was that the effect of the Agreement was to confer ownership on the tanks on SOR if HA chose not to remove them. This does not reflect the express language of clause 2.1; an implication would be required. For multiple reasons, I do not think that any such implication arises.

21. [591]

    First, there is no need for any such implication. The Agreement expressly preserved the parties’ non-contractual rights, which would include rights incident to ownership: clause 17.9.

22. [592]

    Secondly, an implied term conferring a discretion on HA to renounce property following the termination of the contract would presumably require some sort of period during which it would have to be exercised, and an associated notice procedure. It is far from clear what these would have been (and consequently whether HA validly would have exercised the putative contractual right). Such an implied term would also have had to provide that in the event of the exercise of the right, the property in the item in question would pass to SOR. Otherwise there would be potential for conflict between the contractual right and HA’s tortious liability in trespass as continuing owner. But that seems a most unlikely implication from SOR’s point of view.

23. [593]

    Thus even if there was a need for some sort of implied term to address the contingency that HA wished to leave property behind, it is quite unclear what particular term would necessarily or reasonably have been implied. For these reasons, the proposed term fails multiple elements of the test for implication.

24. [594]

    For its part, SOR also sought the implication of a contractual term. Counsel for SOR submitted that alongside its rights in trespass (and nuisance), SOR had a contractual right to require removal which could be enforced by mandatory injunction.

25. [595]

    I do not agree with this. The same objections to the implication of the term for which HA contended apply equally to this proposed implied term. In my view, so far as the receiving tanks are concerned there are no contractual rights either way and SOR’s rights lie in trespass.

26. [596]

    As I have mentioned, SOR sought an order for removal in aid of its rights of trespass. But in his closing submissions, counsel for SOR stated that SOR elected in favour of pursuing a claim for damages. Counsel made it clear, however, that SOR continued to seek an order for removal if for some reason a damages award was not available.

27. [597]

    Certainly a litigant who chooses to enforce a claim for damages for trespass cannot thereafter make a claim for an order for removal. But the contrary does not apply. An example of what can happen is furnished by my decision in Reliance Financial Services Pty Ltd v Allyma Express Holdings Pty Ltd (No 2) [2018] NSWSC 1776.

28. [598]

    In that case, the plaintiff financier exercised a right of repossession over some vehicles. The vehicles had been in the borrower’s possession and the plaintiff obtained a mandatory injunction requiring them to be delivered up. The order was not fully complied with. Some of the vehicles were not delivered up because they were no longer in the borrower’s possession.

29. [599]

    As I noted at [107] there seemed no reason in principle why the plaintiff, having been unable to enforce an order for delivery up of the missing vehicles, could not revert to a claim for damages. The reason for making an order for specific delivery is that damages are an inadequate remedy, but that should not mean that if the order cannot be enforced damages cannot be obtained at all. However, in that case no further claim for damages was actually made.

30. [600]

    The difficulty with the “election” in this case is that the evidence of damages was not satisfactory. Counsel for SOR sought to construct a rough calculation by reference to various quotes found in the evidence. The calculation yielded $232,610. But it was not clear to me whether any of the quotes contained an identifiable figure for decontaminating the tanks, and there were other expenses such as transport which I thought could not reasonably be extrapolated from the information to which I was referred. In my view, the amount claimed was nothing more than guesswork.

31. [601]

    In his submissions, counsel for Hydrodec noted that on the evidence there may be a question about HA’s solvency should it fail in these proceedings. Counsel submitted however that this was not a reason for the Court to make an order requiring HA to remove the property. That, it was said, would be an “end run” around insolvency.

32. [602]

    Given the principles I have just stated, the prospect of insolvency cannot of itself be a reason to refuse to make an order for removal of a trespassing chattel if that is otherwise justified. Just because the Court makes an order does not mean it will necessarily be enforceable. HA cannot be required to remove anything from SOR’s land if it lacks the means to do so. If HA were to become insolvent and the order could not be enforced, SOR would be remitted to a claim for damages for which it would prove as an unsecured creditor.

33. [603]

    But HA might not go into liquidation. Its parent, HG, might choose for reputational or other reasons not to let it collapse. In that event there is no reason why the order should not be complied with.

34. [604]

    The real question is therefore whether an order for specific removal of the tanks is appropriate. SOR’s cause of action is in trespass, but the Court has power to order specific removal if damages are not an adequate remedy or there is some other reason for equity to intervene: Heydon, Leeming and Turner, Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) at [21-120].

35. [605]

    Counsel for Hydrodec referred me to the decision of Slattery J in Gilgandra Marketing Co-operative Ltd v Australian Commodities & Merchandise Pty Ltd [2011] NSWSC 16 at [111]-[112]. His Honour acknowledged that there is a “diversity of views” on whether an award of damages, if otherwise adequate, becomes inadequate because of the defendant’s insolvency so as to justify an order for specific performance (see now Meagher, Gummow & Lehane [20-030]). On the other hand, the Court’s power to order specific removal in the present case is analogous to its power to order specific delivery of a chattel (see generally Meagher, Gummow & Lehane chapter 22). In such cases an award of damages has been seen as inadequate because of the possibility that the award might be defeated by insolvency: Orr v Lane (1951) 52 SR (NSW) 37 at 41; Re Gillie (1996) 70 FCR 254 at 259A.

36. [606]

    In the Gilgandra case the defendant was already in administration and was found to be insolvent. His Honour was satisfied that an order for specific performance would prejudice other creditors. In my view the present situation is different. It is not certain that HA will fail. If it does, then for reasons I have given prejudice to other creditors is unlikely. I see nothing wrong in principle with the Court making an order on a “wait and see” basis.

37. [607]

    There is I think a further distinguishing factor in the present case. The removal of the receiving tanks is a delicate and specialised task. The cost of removal is likely to be difficult to estimate in advance of doing the work. The assessment of damages is far removed from the simple exercise of determining the market price of a shipment of commodities, as in Gilgandra.

38. [608]

    Finally, there is the fact that HA itself wishes to obtain the assistance of the Court in removing the Hydrotreater. Although HA has a contractual right to remove the Hydrotreater only, the grant of specific performance can be made on terms. It is also relevant that the Hydrotreater is still connected to the receiving tanks and the most efficient and least disruptive course may well be to remove all of the plant at once, rather than have it done by two successive contractors.

39. [609]

    Accordingly, I propose to make an order requiring HA to remove the receiving tanks. I do not however propose to go so far as to make the order for removal of the Hydrotreater conditional on the removal of the tanks at the same time. If it emerges that the order for removal of the tanks cannot be enforced against HA, then SOR will need to remove the tanks itself, and at that point will be able to make a claim for damages based on the actual cost of removal, rather than have the Court speculate.

PCB-contaminated feedstock

1. [610]

   The Agreement defined the “Delivery Point” as the flexible hose connection through which feedstock was discharged from tankers, for holding in the feedstock tanks. Similarly, it defined the Transfer Point as the flexible hose connection through which SUPERFINE stored in the production tanks was made available. Handling and storage of feedstock once received were relevantly dealt with in clauses 5.5 and 5.7:

2. [611]

   For its claim, HA first relies on clause 5.5(b), arguing that the contamination resulting from the blending of the non-PCB contaminated oil is “damage” the risk of which is allocated to SOR pursuant to that clause. Alternatively, HA contends that the blending resulted in damage which is actionable in trespass, it being the owner of the oil.

3. [612]

   Clause 5.7 obliged SOR to store the oil. At all relevant times HA was asserting that it would restart the Hydrotreater. In that context, and having regard to the applicable operating procedures (see [294] above), I find that the blending was authorised. Its effect on the value of the non-PCB feedstock was not part of the “risk” allocated to SOR by clause 5.5(b). Nor was it a trespass.

4. [613]

   Secondly, HA relies on breach of clause 3.9 which provided:

5. [614]

   This clause is part of a group of clauses dealing with the commissioning of the Hydrotreater. In my view that is what it is concerned with. It does not apply to later conduct associated with processing the oil under clause 5. In any event, for the reasons given at [295] above, blending was authorised under the terms of the SOR licence. There was no relevant breach by SOR.

6. [615]

   If I had taken a different view, it would have been necessary to consider the quantum of HA’s damages. For the reasons I discussed in summarising the evidence on receipt and mixing of the feedstock, that is problematical. I am quite unable to assess the damages on the material which I have.

7. [616]

   Counsel for Hydrodec urged me that if that was my view I should not let it defeat HA’s claim. Counsel drew an analogy with the problematical evidence about damages on SOR’s claim for removal of the receiving tanks. Counsel submitted that I should adjourn to allow a proper analysis to be done.

8. [617]

   Had it been necessary to rule on this argument, I would not have accepted it. The analogy is not exact.

9. [618]

   In the first place, the uncertainty with respect to HA’s claim is more than an uncertainty about the quantum of damages. It goes to the underlying question of breach. I simply do not know which batches were mixed when so as to give rise to the supposed breaches.

10. [619]

    Secondly, SOR’s claim for damages was always made alongside an alternative claim for specific relief in the form of an order to remove the receiving tanks. HA’s claim is, and always has been, just a claim for damages. Ordinarily, unless an order for separate issues has been made beforehand, the Court expects a party to put forward its case on damages at the hearing. In the present case there is even less reason for allowing even HA a further opportunity because HA has attempted to lead evidence on the question but failed to prove its case. On any view, the claim must be dismissed.

Liability of HG

1. [620]

   SOR’s claims against HG as surety were made under clauses 3.10(b) (monthly capital charge for June and July 2019); 3.10(e) (clause 9.2 termination capital payment); and 4.2(a) (monthly tolling fee for June and July 2019). In each case HG was obliged to “procure” the making of the relevant payment by HA. The obligation was not expressed in the language of guarantee or indemnity, but the parties agreed that the contractual rules applicable to a surety applied.

2. [621]

   In closing submissions, counsel for SOR clarified how he put the claim. His contention was that in each case the payment obligation has accrued and HA has failed to pay. From the moment of default, therefore, HG has been in breach by failing to procure the payment.

3. [622]

   SOR thus claims damages on the footing that it is entitled to be put in the position it would have been in had HG complied with its obligations. Had HG procured the payments when they fell due, SOR would now have the money. Accordingly, SOR is entitled to judgment against HG now, without waiting to see whether, following the entry of judgment against HA, HA satisfies that judgment. Counsel for HG did not dispute this analysis.

4. [623]

   In its defence, HG pleads three answers to SOR’s claim. The first is that its surety obligations were discharged by variation as a result of the agreement concerning the driveway, to which HG contended it was not party. Second, HG pleads that it validly terminated its surety obligations on account of breach by SOR on 16 September 2019. Third, if the September 2019 termination was not effective, then HG pleads that its November 2019 termination brought its obligations to an end.

5. [624]

   In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 the High Court discussed the principle of discharge by variation and concluded (at 559):

6. [625]

   What the Court said was qualified by reference to “the English cases”. Ankar was a case about discharge by breach rather than discharge by variation. The Court did not definitively adopt the principle in the terms stated. But both parties in the present case were content to apply it in those terms.

7. [626]

   The driveway agreement increased the amount repayable under clause 3.10. The question therefore is whether the variation was consented to by HG.

8. [627]

   At the time the Agreement was made, Mr Ellis was CEO of HG. I have already explained why clause 17.7 of the Agreement, which required variations to be in writing, was no obstacle to the efficacy of the driveway agreement as against HA. The same logic would apply to HG.

9. [628]

   HG’s liability thus depends on whether, when Mr Ellis made the agreement with Mr Rose to add the cost of the driveway to the capital expenditure for the purposes of the Agreement, his actions were actions of HG. The question is one attribution to a company of the activities of an individual who is an officer or employee of it. The test depends upon the objective circumstances, having regard to the rationale of the rule under which the question of attribution arises: Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506-507.

10. [629]

    In my view, there are two objective circumstances of great importance. The first is the context for the communications. At [194] above I have set out the details of the email footer which Mr Ellis used in communicating with Mr Rose. The footer described Mr Ellis as the CEO of HG. It did not mention HA at all. It quoted the hydrodec.com email address which likewise was identified with HG rather than with Hydrodec’s Australian companies.

11. [630]

    I accept that some of the communications between Mr Ellis and Mr Rose took place on iPhone or iPad which would not have included that footer. But objectively such communications represented a continuation of the communications sent by Mr Ellis using the HG email footer. The same logic applies to oral communications.

12. [631]

    Counsel for Hydrodec suggested that the force of this point was reduced by the circumstance that the email footer would have been added automatically to the email by the computer application responsible for sending it. But I do not see why that is so. Counsel accepted that I could take judicial notice that Mr Ellis or someone else at HG would have been responsible for setting the email footer up in the form in which it appears. In my view it is no different from Mr Ellis writing to Mr Rose on a paper letterhead supplied by his employer with HG’s name and the other details printed on it.

13. [632]

    The second relevant factor is that in offering his explanation to Mr Rose for what he wanted, Mr Ellis said that it was because it would suit him in his dealings with “his” shareholders and “his” auditors (see [168] above). In the context, that could only have meant HG’s shareholders and HG’s auditors.

14. [633]

    In these circumstances, I consider that the proper objective interpretation of Mr Ellis’ communications with Mr Rose is that they were communications on behalf of HG. Whether the communications about the driveway are properly regarded as a stand-alone agreement between HA and SOR to which HG was also party, or as giving rise to a separate consent by HG, does not matter. On either view HG is bound.

15. [634]

    This defence is based on breach, rather than variation, of the principal agreement. In Ankar the High Court stated the applicable principle as follows (at 561):

16. [635]

    On the interpretation question, the Court referred to the general rule that the law will lean against interpreting a term as a condition and will instead lean towards interpreting it as a warranty or an intermediate (or “innominate”) term. But the Court went on (at 561):

17. [636]

    The breaches identified as justifying the termination were those associated with alleged failures of record keeping concerning the Plant and Equipment Schedule. Counsel for HG submitted that this prejudiced HG because it was “deprived of necessary information” in understanding the nature and scope of the liability for which it was surety.

18. [637]

    I am not sure that HG had any entitlement to rely upon these alleged breaches. The audit was carried out for HA purportedly pursuant to HA’s rights under clause 5.10. The obligation to co-operate in the preparation of the Plant and Equipment Schedule under clause 3.10(a) was an obligation owed by SOR to HA. In any event, for reasons I have already given, I am not satisfied that there was any relevant breach.

19. [638]

    Even if I had taken a different view, I would not have gone so far as to conclude that the relevant terms should be interpreted as conditions. At most they might be interpreted as intermediate terms. But even if so, I would not have been satisfied that HG was prejudiced by any breach on the part of SOR.

20. [639]

    The question of substance was how much was owing. Had I accepted Hydrodec’s arguments, I might have ordered an account, but there would have been no reason for HG to escape liability for the amount determined through that account. There is no evidence, and no reason to think, that HG made any commercial decision based on the existence or otherwise of records concerning the quantum of its liability under clause 3.10(e).

21. [640]

    In fact the opposite was the case. Mr Ellis was informed of the outcome of Ms Baker’s audit in 2015 and I am satisfied that he approved the actions of the Hydrodec representatives at the Operating Committee meeting on 21 January 2016 which in effect accepted the documentation put forward by SOR as adequate subject to a minor financial adjustment. I think the objective context makes it clear that this participation and approval was in Mr Ellis’ capacity as Hydrodec CFO, and thus on behalf of HG. I have already concluded that Mr Ellis also approved the driveway expenditure on behalf of HG; indeed he requested it.

22. [641]

    Counsel for SOR argued that it was not necessary even to consider the merits of HG’s contention concerning this purported termination. Counsel pointed out (and counsel for Hydrodec agreed) that the liability to pay the monthly capital charges and monthly tolling fees had already accrued. Later termination could not affect HG’s liability as surety.

23. [642]

    Counsel for SOR submitted that the same was so for the liability to make the termination payment under clause 3.10(e). Counsel submitted that that liability accrued on the date of termination, namely 26 July 2019. But I am not sure that this is correct.

24. [643]

    Under clause 3.10(f), the Net Realisable Value of the relevant assets could not be determined unless the assets were either sold or valued. If the assets had been sold under sub-clause (i), the credit against Net Realisable Value would have represented the actual amount received at the actual date of sale. It is not easy to see why valuation of the assets under sub-clause (ii) should have followed a different approach.

25. [644]

    Furthermore, even if the Agreement had required the valuation to be conducted as at the termination date, for practical purposes the amount of the credit would not have been quantified until the valuation had taken place. It seems to me that the scheme of the valuation provisions, which imposed a series of short deadlines, favours the view that the parties intended that payment would not fall due until the valuation had taken place. It was only at that point that the GST could have been calculated and the necessary tax invoice issued.

26. [645]

    It is not necessary to resolve this question finally for the purposes of the present judgment. It will however be relevant to determining how much interest should be carried by the judgment that I will give. Should SOR wish to contest the preliminary view which I have expressed, there can be further submissions at that stage.

27. [646]

    The basis for this purported termination was SOR’s alleged breaches of the Agreement in connection with the removal of the Hydrotreater. Counsel for Hydrodec submitted that by obstructing the removal of the Hydrotreater, SOR deprived HA of the opportunity to apply the proceeds to the discharge of its obligations, and thereby prejudiced HG.

28. [647]

    I have already concluded that there was no relevant breach and that the real reason for the removal of the Hydrotreater had nothing to do with any conduct of SOR. For these reasons the defence fails.

29. [648]

    This defence was also based on the allegedly wrongful conduct of SOR in connection with the removal of the Hydrotreater, but extended beyond breach of the Agreement. It also covered wrongful conduct in the form of the alleged conversion of the Hydrotreater by SOR. The contention was that in depriving HA of the Hydrotreater (and thus of funds to meet SOR’s claim) and then pursuing a claim against HG as surety, SOR was taking advantage of its own wrong.

30. [649]

    Had I concluded that there was some wrongful conduct by SOR in connection with the removal of the Hydrotreater, it would have been necessary to consider carefully just when the conduct took place, so as to see whether it took place before the liability to make the termination payment accrued. As it is, on my findings this defence also fails.

31. [650]

    On the last day of the evidence (15 December), HG applied for leave to amend its defence to raise a further answer to SOR’s claims. After hearing the application, I refused it and said I would give my reasons when I published my judgment. Those reasons now follow.

32. [651]

    The debate before me focused on the insertion of proposed paragraphs 54A-54D in the defence. The paragraphs referred to the arrangement described in Mr Rose’s affidavit evidence whereby the “permitting, approvals and expenditure” costs which had been allocated by the sanction agreement to be borne equally by SOR and HA were reallocated to expenditure under clause 3.10 (see [133] above). The proposed amendment alleged that this was a variation to the terms of the Co-location Agreement and the Sanction Agreement, which was adverse to HG’s interests, and had not been consented to by HG.

33. [652]

    Counsel for SOR protested that allowing the amendment after the evidence had been completed would be prejudicial. It was too late for SOR to lead evidence, or cross-examine Hydrodec’s witnesses, about the issue of consent.

34. [653]

    In this I think counsel was clearly correct. There was some debate about whether the onus lay on HG to plead a lack of consent, or SOR to plead consent by way of reply. I do not think this matters. Even if the onus lay on SOR, the pleading of the issue by way of amendment to HG’s defence was necessary to avoid surprise.

35. [654]

    Given the stage of the hearing when the amendment was proposed, an adjournment was unthinkable, and was not suggested by counsel for Hydrodec. In these circumstances, I considered that the application had to be refused. I should note in passing that no explanation was given as to why the point had only been brought forward when it was. It would have been available from the outset, and Hydrodec’s pleadings went through multiple iterations.

36. [655]

    I should note that in preparing the judgment I have noticed that there were two other proposed paragraphs, 56E and 56F, which sought to supplement the grounds for termination by relying to other alleged breaches by SOR. In the course of argument these were briefly referred to by counsel for Hydrodec, and counsel for SOR said he would need to think about them. They were not referred to again in the leave argument.

37. [656]

    At the same time as I considered the proposed amendments to HG’s defence, counsel for Hydrodec applied for leave to amend HA’s statement of cross-claim. That amendment was not opposed by counsel for SOR. The amended pleading was subsequently filed. But although it was unclear whether SOR actually opposed the proposed amendment to HG’s defence by way of paragraphs 56E and 56F, no further defence was filed. Nor was the issue referred to in closing submissions.

38. [657]

    I do not know what, if any, further discussion took place between the parties’ legal representatives about proposed paragraphs 56E and 56F. However at the time I said that I would refuse the amendments, I only had proposed paragraphs 56A-56D in mind.

39. [658]

    I am not making final orders on the delivery of this judgment. Therefore, should counsel for Hydrodec wish, I will entertain the rest of the application to amend so as to add paragraphs 56E and 56F. I will then direct supplementary submissions if those amendments are consented to or, after argument, permitted.

Conclusions and orders

1. [659]

   I have concluded that:

   1. (1)

      SOR is entitled to judgment against HA in the sums of $64,685 (representing monthly capital charge payments for June and July 2019) and $1,112,096 (representing the capital payment due on termination), and HA’s cross-claim for an account to determine the amount of the clause 3.10 capital expenditure fails;

   2. (2)

      SOR is entitled to judgment against HA in the further sum of $417,652 (representing monthly tolling fee payments for June and July 2019) and HA’s cross-claim for repayment of previously paid tolling fees fails;

   3. (3)

      SOR is entitled to orders requiring HA to remove the Hydrotreater Plant (including the PCB-contaminated receiving tanks) from the Bomen site, with liberty to apply for an award of damages instead should some or all of those assets not be removed in accordance with the order, and HA’s cross-claim for damages for conversion (to the extent pressed) fails;

   4. (4)

      so too HA’s cross-claim for damages against SOR for mixing PCB-contaminated deliveries of oil feedstock with other feedstock fails;

   5. (5)

      SOR is entitled to judgment against HG, jointly and severally with HA, for the sums in (1) and (2).

2. [660]

   It will be necessary to calculate interest down to the entry of judgment, and to settle the form of the order for removal of the Hydrodec plant. HA’s cross-claim will be dismissed.

3. [661]

   The asset preservation orders made in December 2019 remain in force until further order. SOR should consider whether, once final orders are made, it wishes to have any asset preservation orders continue, and if so in what form, until the judgments against HA are satisfied.

4. [662]

   I shall stand the proceedings over for a short period of time to allow the parties to formulate orders giving effect to my judgment. The proposed orders should also deal with costs, and the form of any asset preservation orders which are to apply until the judgments against HA have been satisfied.

5. [663]

   Conclusion (5) is subject to the possibility of HG pursuing its application to amend its defence by adding proposed paragraphs 56E and 56F. If any such application is to be pursued, the Court should be notified as quickly as possible.

6. [664]

   The orders of the Court are:

   1. (1)

      Adjourn the proceedings until 9.30am on 5 February 2021 or such other time as may be arranged with my Associate.

   2. (2)

      Direct that, no later than 48 hours before the time fixed by order 1, the parties confer and lodge with the Court proposed orders to give effect to this judgment and also dealing with costs and any continuation beyond the making of final orders of asset preservation orders against the first defendant.