Campbelltown City Council & Ors v WSN Environmental Solutions Pty Ltd

1. [1]

   These proceedings concern the interaction between two dispute resolution clauses in the contract (Contract) that subsists between the plaintiffs (Councils) and the defendant (WSN Solutions). The Councils seek a declaration that WSN Solutions had no entitlement to refer to an expert, purportedly pursuant to cl 25 of the Contract, a dispute concerning whether WSN Solutions should be compensated for a demonstrable material increase in costs incurred due to what is alleged to be a reasonably unforeseeable and unforseen event beyond the control of WSN Solutions.

Background facts

1. [2]

   The plaintiffs are four councils operating in and around south west Sydney and the defendant is a waste management services company. They are parties to a contract entitled “Contract for Processing Waste, Recyclables and Garden Organics” dated 14 August 2006. The contract provides for a fifteen year term. WSN Solutions receives and processes waste materials including mixed solid waste, recyclables, organics and non-putrescible waste.

2. [3]

   WSN Solutions is subject to performance criteria and must undergo performance reviews at the instigation of the Councils (cl 13). Clause 5 provides for the payment of a periodic processing fee by the Councils to WSN Solutions. The Councils have the right to an annual review of the processing fee, but WSN does not have a similar right. Clause 2.4 incorporates into the Contract the Tender Questions and Responses, the Terms of the Tender and the terms of the Request for Tender Document (RFT) issued by the Councils. To the extent of any inconsistency between the terms of those documents and the Contract, the Contract prevails. The Councils are represented by a Contract Manager appointed pursuant to cl 3.2.

3. [4]

   The Contract provided for the construction of an “Ecolibrium Mixed Waste Facility” at the Macarthur Resource Recovery Park (Facility). This facility utilised processing technology referred to as ArrowBio Techonology. ArrowBio Technology was adopted following due diligence conducted by WSN Solutions. Following the commencement of operation of the Facility it became evident that the ArrowBio Technology produced an “odour footprint” that was wider and stronger than anticipated. It is WSN Solutions’ position that this problem was not capable of being foreseen despite the due diligence undertaken. The Facility was decommissioned in February 2011 and converted to a dry mechanical sorting plant. Organic waste fraction was transported to an alternative facility at Kemp Creek (Kemp Creek Facility). WSN Solutions claims that the change in site and technology resulted in a demonstrable material increase in cost.

4. [5]

   On 12 September 2013 WSN Solutions provided notice of a variation circumstance pursuant to cl 24 (CB 193). Clause 24 is one of two dispute resolution mechanisms existing in the Contract. The other is cl 19:

5. [6]

   Clause 19, on the other hand, is in the following terms:

6. [7]

   On 10 October 2013 the Councils responded, disputing that any such cl 24.4 variation circumstance existed and agreeing to meet without admission and without prejudice to consider any further material WSN Solutions wished to provide.

7. [8]

   On 11 April 2014 the Councils informed WSN Solutions that it should make a formal claim under the Contract in order to proceed with its allegation that a cl 24.4 variation circumstance existed. Further correspondence between the parties ensued from 7 July 2014 to 21 November 2014, on which date the Councils proposed an informal mediation of the dispute outside the dispute resolution mechanisms provided for within the Contract.

8. [9]

   On 5 December 2014 WSN Solutions purported to refer the dispute between the parties to expert determination pursuant to cl 25. On 17 December 2014 each of the Councils issued a Notice of Dispute under cl 19.1 of the Contract. These requested an undertaking from WSN Solutions that an expert would not be appointed. The Councils made an application for injunctive relief to this Court on 18 December 2014. On 19 December 2014 an undertaking was provided by WSN Solutions and orders were made by consent.

9. [10]

   The issue that arises between the parties in these proceedings can be characterised as a “threshold entitlement dispute” (whether or not a variation circumstance exists) should be referred to expert determination as provided by cl 25, or whether the dispute resolution machinery of cl 19 should be engaged.

10. [11]

    On 20 January 2015 WSN Solutions filed a cross-claim seeking a declaration that they are entitled to refer the dispute to an expert in accordance with cl 25 and a declaration that:

    1. (1)

       The dispute resolution mechanism provided for in cls 24.2(2) and 25 of the contract applies to the parties’ dispute as to whether and how WSN Solutions should be compensated for a material increase in costs pursuant to cl 24.4 of the Contract;

    2. (2)

       This dispute resolution mechanism is an exception to, and applies exclusively of, the dispute resolution provided for in cl 19 of the Contract; and

    3. (3)

       The Dispute Notices purportedly issued by the Councils on 17 December 2014 are invalid and of no effect.

11. [12]

    Further or in the alternative, the Councils seek a declaration that, on the proper construction of cl 24, WSN Solutions is entitled to payment of compensation for additional costs:

    1. (1)

       If the parties agree, following notice of a variation circumstance pursuant to cl 24.3 of the Contract, whether and how WSN Solutions is to be compensated;

    2. (2)

       If the parties agree that a variation circumstance applies pursuant to cl 24.4 of the Contract and agree as to how WSN Solutions is to be compensated; or

    3. (3)

       In the event of a dispute in relation to whether and how WSN Solutions is to be compensated for additional costs pursuant to cl 23.4 or cl 24.4 of the Contract, in accordance with a final and binding expert determination made pursuant to cl 25 of the Contract.

12. [13]

    Neither party relies on any surrounding circumstances as an aid to the construction exercise, although both parties draw upon the Contract as a whole in contextualising the operation of cls 24 and 25. WSN Solutions points to the operation of cl 5, which deals with the processing fee. The fee is fixed, though it is to be adjusted in line with CPI (cl 5.10). It is reviewable at the instigation of the Councils, but not WSN Solutions (cl 5.9). For their part, the Councils draw attention to Annexure 2, which stipulates the services to be provided by WSN Solutions, and Annexure 3, which deals with warranties given by WSN Solutions in relation to the Contract. Clause 7 puts in place mechanisms for delivery and processing of input streams, including provisions imposing costs on WSN Solutions if larger amounts of landfill than anticipated are produced.

13. [14]

    Clause 8 sets out the particulars for the construction of the Facility and cls 9-12 deal further with the equipment and operation of the Facility. Importantly, in the view of the Councils, cl 13 imposes performance obligations upon WSN Solutions. A failure to meet the cl 13 benchmarks gives rise to an entitlement to terminate (in addition to potential liability in damages). Annexure 3 gives content to the cl 13 specifications. The Councils submit that cl 24 must be construed having regard to this risk profile, with the cl 24.3 variation circumstances relating to factors outside the Facility.

Preliminary issue

1. [15]

   A submission was made by the Councils that the cross-claim should be struck out and that the Court had no power to give WSN Developments the declaratory relief sought: see [8]-[13] of the Councils’ submissions. This submission is put on two bases. The first is that the relief sought is a “hypothetical declaration” because the cross-claim does not seek an injunction, the restraint of the implementation of the cl 19 processes, or an order setting aside the notices. The second is that the provisions of the Commercial Arbitration Act 2010 (NSW) prohibit the court from intervening in the arbitral process initiated by the Councils.

2. [16]

   To deal first with the latter, s 5 of the Commercial Arbitration Act provides:

3. [17]

   Section 8 goes on:

4. [18]

   WSN Solutions makes two submissions in response to this point. The first is that this issue was not raised by the pleadings; it was first referenced in the Councils’ submissions a short time before the hearing. In response, the Councils say that the time at which the issue was raised is of no note because the question is whether or not the Court has power to grant the relief sought.

5. [19]

   Second, WSN Solutions points to s 8 and submits that the “action” referred to is the cross-claim. It says that the Councils joined issue without raising the issue of jurisdiction, and thus the Court is empowered to grant the relief sought in the cross-claim. WSN Solutions says that it was incumbent upon the Councils to request the court refer the matter to arbitration when they filed their Technology and Construction List Cross-Claim Response (Cross-Claim Response) on 28 January 2015 and that, as they did not, they have no entitlement now to assert that this Court does not have jurisdiction to make the orders sought.

6. [20]

   I consider the submission of WSN Solutions to be correct. The opportunity to pursue this point was foreclosed by s 8 of the Commercial Arbitration Act when the Councils filed their Cross-Claim Response without raising the issue.

7. [21]

   In relation to the question of whether the declaratory relief is “hypothetical” in nature, the Councils say that because WSN Solutions does not seek to enjoin the arbitral process the relief sought is effectively an advisory opinion. The Councils submit that these declarations should not be made absent utility. I accept the submission of WSN Solutions that the declarations sought are effective in that they will create an estoppel between the parties such that if the Councils sought to appoint an arbitrator WSN Solutions would be able to inform that arbitrator that they were purporting to act under an instrument the Court has determined is invalid.

Legal principles

1. [22]

   The principles applicable to the construction of the Contract are not in dispute between the parties and may be shortly stated. The starting point for construction is the plain and ordinary meaning of the words used: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 348 per Mason J. The construction given to particular language may vary depending on the context and circumstances: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]. A court will construe the contract as a whole in order to determine the effect and meaning of a particular term: Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588.

2. [23]

   The following summary was given by Bathurst CJ, with whom Macfarlan and Meagher JJA agreed, in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52]:

3. [24]

   In 2014, the High Court considered the applicable principles in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 (Woodside Energy). The majority observed (citations omitted):

4. [25]

   The relevant portion of Re Golden Key Ltd (in rec) [2009] EWCA Civ 636 is as follows:

5. [26]

   The New South Wales Court of Appeal recently considered Woodside Energy in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184: see Leeming JA (with whom Ward and Emmett JJA agreed) at [69]-[86]. More recently, Gleeson JA (Basten and Meagher JJA agreeing) made the following observations in Newey v Westpac Banking Corporation [2014] NSWCA 319:

6. [27]

   A contract should be construed in a way that avoids commercially nonsensical outcomes or commercial inconvenience: Zhu v Treasurer (NSW) (2004) 218 CLR 530 at [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. In Dance With Mr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332 at [52] Hammerschlag J commented:

Consideration

1. [28]

   In my view it is clear that the parties intended to create two quite distinct dispute resolution regimes; one to deal with the two different types of variation circumstance (cl 24.3(1) and (2)) and the one deemed variation circumstance (cl 24.4), and the other concerning all other disputes (cl 19). The differences between the parties arises as to whether the latitude of an expert appointed under cl 25 is restricted to questions of quantum, and the extent to which the two regimes are mutually exclusive.

2. [29]

   The Councils characterise cl 24.3 variation circumstances as objective and closely prescribed, being potential risks identified by the parties and factored into the contract. The Councils contrast this with the cl 24.4 variation circumstances, which they say may include normative considerations and are, potentially, unlimited in character. The Councils submit that this difference in character between cl 24.3 variation circumstances and cl 24.4 variation circumstances supports the construction that cl 24.2 provides each party with a right of recourse to an expert who will act as a valuer to determine a quantum dispute where a cl 24.3 variation circumstance exists, while cl 24.4 imposes upon the parties an obligation only to negotiate to resolve a disagreement.

3. [30]

   The Councils say that if the parties do not reach an agreement that a cl 24.4 variation circumstance applies – that is, the threshold entitlement dispute – either party can then invoke cl 19. They similarly submit that a dispute about the existence of a cl 24.3 variation circumstance would be determined by the cl 19 dispute resolution processes rather than an expert, though the question of quantum could then be referred to expert determination pursuant to cl 25.

4. [31]

   The Councils submit that cl 24.2 reflects the expectations of the parties that the only real dispute that could emerge about the subject matter of a cl 24.3 variation was one of quantum – that is the amount (“whether”) and the mode (“how”) of compensation. The position, they say, is different with regard to cl 24.4, which contemplates agreement between the parties as to the existence of a deemed variation circumstance before a dispute about quantum can be referred to an expert. The Councils suggest that this is attributable to the parties’ awareness that an assertion by WSN Solutions made under cl 24.4 would likely give rise to controversy. The Councils accept that where there is no threshold entitlement dispute concerning a deemed cl 24.4 variation, the question of quantum is referrable to expert determination pursuant to cl 25.

5. [32]

   A question arises as to how a dispute concerning the existence of a cl 24.4 variation could engage the dispute resolution machinery of 24.2(2). The Councils submit that cl 24.2(4) stands separately from the preceding sub-clauses, which deal with cl 24.3 variation circumstances. They argue that 24.2(4) merely identifies the existence of another type of variation circumstance, but emphasise the last portion of cl 24.4; that “the Parties agree to negotiate reasonably and in good faith as to whether a variation circumstance should apply.”

6. [33]

   The Councils say that the obligation to negotiate concerning the existence of a cl 24.4 variation does not give the expert the right to determine quantum in the absence of agreement between the parties, nor the right to determine the threshold entitlement of whether a variation circumstance exists. In that sense, they argue that without consensus no cl 24.4 variation circumstance can be said to exist. To the contrary, WSN Solutions submits that compliance with the cl 24.4 process of negotiation, whether or not an agreement is reached, is a variation circumstance to which cl 24.2 attaches. In this way, they submit that the reference in cl 24.2(1) to cl 24.3 does not qualify cl 24.2(2).

7. [34]

   I consider that cl 24.2(4) is, in effect, a deeming provision. The situation described in cl 24.4 does not fall within the ordinary meaning of the word “variation” and thus it is the operation of cl 24.2(4) that brings an unforeseen event that has led to a demonstrable material increase in cost within the definition of a variation circumstance.

8. [35]

   As mentioned at [14], the Councils submit that cl 24.4 must be construed having regard to the risk profile in the rest of the Contract. They point out that the variation circumstances identified in cl 24.3 are matters outside of the operation of the Facility, which WSN Solutions warranted to construct with certain performance characteristics. The Councils submit that, following the negotiations to be undertaken reasonably and in good faith in compliance with cl 24.4, their agreement is a precondition to the deemed existence of a variation circumstance.

9. [36]

   The Councils initially submitted that this is a residual discretion that operates in their favour and that is susceptible to review only if there is evidence that negotiations have not been undertaken in good faith. They said further that, even were it objectively demonstrated that a demonstrable material increase in costs beyond the control of WSN Solutions had taken place, they nonetheless had latitude to refuse to agree that a variation circumstance existed. Counsel for the Councils eventually conceded that, should there be a demonstrable material increase in costs, which was reasonably unforeseeable at the time the Contract was entered into, it would be impossible for the Councils, in good faith, to refuse to accept that a variation circumstance existed.

10. [37]

    It must be the case that a failure to reach agreement as to whether a variation circumstance should apply under cl 24.4 does not lead to an abyss; there must be a mechanism through which such a disagreement can be resolved. That being the case, the question becomes whether the dispute should be dealt with through cl 25, cl 19, or a combination of the two. The Councils maintain that the threshold dispute would need to be resolved under cl 19 before a cl 24.4 quantum issue could be referred to an expert. The hybrid approach to dispute resolution urged by the Councils encounters a number of practical difficulties, which will be dealt with further below. Before reaching that point, however, some characteristics of cl 24 should be noted.

11. [38]

    Regard should be had to the choice by the parties to separate the cl 24.4 variation circumstances from those listed in cl 24.3. On one view, this might indicate a desire by the parties to isolate cl 24.4 from the dispute resolution mechanisms identified in cl 24.2. It is also true that the use of the phrase “additional costs” in cl 24.2(2) appears to be a reference to cl 24.3, rather than to the “demonstrable material increase in costs” specified by cl 24.4.

12. [39]

    The preferable view, however, is that the parties chose to create a separate category of cl 24.4 variations because they were aware that unforeseeable events beyond the control of WSN Solutions would likely require a longer period for resolution than the 28 days referred to in cl 24.2(1). Nonetheless, cl 24.4 variations still exist under the rubric of cl 24 variations and cl 24 must be read alongside cl 25. The word “[w]here” in cl 25 should be read as referring to a situation where the parties cannot reach agreement.

13. [40]

    Further, it is clear in my view that cl 24 and cl 25 are self-contained provisions designed to operate in favour of WSN Solutions, as discussed at [36] above. WSN Solutions submits, and I accept, that the purpose of these clauses was to deal with unforeseen events arising in a long-term, fixed-price contract based on the commercial reality that it would avail the Councils little if WSN Solutions were driven into insolvency or operating on an uneconomic basis because a cl 24.4 variation circumstance had arisen. Variation of the Contract for the benefit of WSN Solutions is possible only in the limited circumstances specified in cl 24.

14. [41]

    As mentioned at [31], the Councils submit that “whether” should be understood as a reference to the question of whether there were additional costs, and “how” to the mode of compensation. WSN Solutions submits that the construction pressed by the Councils “proves too much”, in the sense that if there cannot be a dispute about whether a variation circumstance exists, and there is a need to demonstrate a material increase in cost as a predicate fact, there is no “whether” or “how” to dispute.

15. [42]

    I do not accept the Councils’ submission that the word “whether” should be understood to mean the quantum of the compensation. The ordinary meaning of the word “whether”, according to the Macquarie Dictionary, is as follows:

16. [43]

    The Oxford English Dictionary definition is to similar effect:

17. [44]

    I consider that “whether” encompasses “whether (or not)” the threshold question is answerable in the affirmative. As WSN Solutions submits, “whether” can be taken to include the question of the amount of the costs and the causation of those costs.

18. [45]

    The Macquarie Dictionary contains the following definition of “variation”:

19. [46]

    The Oxford English Dictionary provides as follows:

20. [47]

    As discussed at [34], cl 24.2(4) operates as a deeming provision because the circumstances outlined in cl 24.4 do not fit naturally within the definition of the word “variation”.

21. [48]

    There are two primary issues in relation to the intentions of the parties. The first deals with the Councils’ argument that a reasonable person could not understand the parties to have intended that the expert’s decision would be final and binding (cl 25.3) if the jurisdiction of the expert included the determination as to whether a variation circumstance existed. The second deals with the selection of the expert and the appropriateness of that expert determining the threshold question.

22. [49]

    Clause 19.4(4) for example provides that a decision of an arbitrator pursuant to the cl 19 dispute resolution process is binding (in the absence of an error of law) on the parties if the dispute is settled to a value of less than $500,000. The parties may litigate if the settlement sum is more than this amount. The Councils argue that the parties cannot be understood to have intended that an expert’s final determination about the existence of a unlimited set of circumstances, not only unforeseen but reasonably unforeseeable, would bind the parties in a manner that would severely circumscribe the circumstances in which they could appeal such a decision, particularly where the compensation awarded might greatly exceed $500,000.

23. [50]

    This argument is not consonant with the Councils’ concession that a quantum question arising from a cl 24.4 variation circumstance should be referred to an expert. The cost of a cl 24.4 variation circumstance, given the length of the contract term and the potentially significant cost impact of unforeseen circumstances, may well (and perhaps is even likely to) exceed $500,000. There is no reason in principle, therefore, to assume that the entirety of a cl 24.4 dispute that might see compensation of over $500,000 awarded should engage the cl 19 process rather than cl 24.

24. [51]

    It is also telling that in circumstances where the parties are unable to agree on an expert, that person is to be selected by the President of the NSW chapter of the Institute of Mediators and Arbitrators Australia. There is no reason that this person, or a person agreed upon by the parties, could not be legally qualified and quite able to determine the threshold dispute. Clause 25 does not provide for the appointment of a valuer; an arbitrator or mediator is likely to be amply qualified to determine the full ambit of disputes that might arise under cl 24.4.

25. [52]

    Another issue arises because it is not apparent how the reference of the quantification question to an expert would interact with a threshold determination under cl 19. As mentioned above, the Councils concede that a cl 24.4 quantum issue would go to an expert in the event of a dispute between the parties. It is clear that cl 19 contemplates the resolution of both the substantive issues and the question of quantum within the one procedure; the parties’ rights to litigate a matter further are dependent upon the amount of the settlement. Bifurcation of the threshold and valuation issues would make the dispute resolution process extremely cumbersome and commercially inconvenient.

26. [53]

    In Belvino Investments No. 2 Pty Ltd v Australian Vintage Ltd [2014] NSWSC 978 at [39]-[40] White J observed that general provisions will give way to specific provisions where a conflict arises. The Councils accept the proposition that a specific clause will overcome one expressed at a greater level of generality, but argue that this is not applicable to the instant case in the way it was to Belvino. The Councils argue that cl 24 has a more limited operation than that being considered in Belvino, which clearly extended to consideration of substantive matters (in that case, whether a reduction in the production capacity of a vineyard had occurred and whether that reduction was due to a natural disaster). They submit that the general principle cannot, in this case, give the expert jurisdiction to determine every fact and circumstance to do with a variation.

27. [54]

    In Belvino, the plaintiff submitted that a clause which allowed either of the parties to institute proceedings regarding a dispute after attempting mediation conferred upon it the right to bring such proceedings, notwithstanding the fact that the defendants had invoked a clause of the contract dealing specifically with natural disasters and providing for the appointment of an expert to determine various matters (with the results to be binding on the parties).

28. [55]

    This case differs from Belvino in that there was no suggestion in Belvino that the dispute could be dissected and distributed between the two different dispute resolution mechanisms. The key issue for the parties here is not really one of the specific overcoming the general. Given the clearly evinced intention of the parties to construct two separate regimes, dealing with different material, the question is whether a threshold entitlement dispute can be characterised as referable to expert determination. I consider that it can.

29. [56]

    To a large extent, I have already dealt with the issues surrounding commercial convenience. The Councils submit that as a matter of commercial common sense an expert should not be determining the jurisdictional question of whether variation circumstances exist. They say that there is, potentially, a large amount of money in issue and raise the concern that the parties will not have the benefit of full appeal rights. As discussed at [48] above, this argument fails to take account of the admission by the Councils that a cl 24.4 quantum dispute would be referred to an expert, and does not grapple with the other practical complexities created by engaging a hybrid of cls 25 and 19.

30. [57]

    The Councils submit that to view cls 24 and 25 as enabling efficient compensation of WSN Solutions in circumstances where 24.3 variations apply is to rewrite the Contract. I do not accept this. As I have already outlined, these clauses obviously operate to provide a truncated dispute resolution process where a foreseen variation occurs. The fact that there is no time limit imposed on the negotiations that must take place pursuant to cl 24.4 is a mark of the uncertain nature of the deemed variations referred to. The isolation of the deemed variation circumstances within cl 24 is not sufficient to undermine the conclusion that the parties intended a separate dispute resolution process to apply.

Conclusion

1. [58]

   In my view, for the reasons outlined above, the language chosen by the parties indicates clearly that each dispute resolution regime was to be self-contained. The language does not betray any intention of the parties to bifurcate the process. The construction of cl 24 proposed by WSN Solutions is clearly to be preferred in my view. It follows that the Councils have been unsuccessful and I would therefore refuse the relief sought. On the other hand I consider it entirely appropriate to grant the relief sought by WSN Solutions.

2. [59]

   I would invite the parties to bring in short minutes to give effect to these reasons. If no agreement can be reached I would also invite the parties to return the matter for costs to be determined.