COMMONWEALTH OF AUSTRALIA v HOOPER SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL SAMUELS AP, PRIESTLEY and HANDLEY JJA 18 February 1992, 28 February 1992 [1992] NSWCA 44 CONTRACT — Pipeline Authority makes written agreement with Australian Gas Light Company ("AGL") in which subCL7.8 says AGL shall have first refusal right to acquire pipeline — Commonwealth proposes to transfer pipeline disregarding first refusal right whether Commonwealth was a party to the agreement — if so, whether Commonwealth was bound by subCL7.8 — Held: interpreting agreement against background of commercial practicalities requires interpretation that in subCL7.8 Commonwealth joined Authority in binding promise to AGL. Samuels JA I agree with Priestley JA. Priestley JA This appeal deals with one issue in a dispute between the Commonwealth of Australia and the Australian Gas Light Company ("AGL"). The proceedings began in late 1990. They were commenced by Mr Hooper the Secretary and statutory agent of AGL as plaintiff against the Commonwealth and the Pipeline Authority ("the Authority") when it appeared to AGL that the Commonwealth was proposing to act in breach of what, in AGL's view, were contractual obligations it had to AGL. The matter was regarded as urgent and the issues were ordered to be tried separately. The separate trial was before Gleeson CJ, who made a declaration, in regard to one of the issues, that AGL had a contractual entitlement against the Commonwealth which the Commonwealth had denied. Before the Chief Justice, the Commonwealth argued a number of grounds in support of its contention that it was not subject to contractual obligations asserted by AGL. In dealing with those grounds, the Chief Justice set out in some detail the circumstances surrounding two agreements made in 1974 between the Authority, AGL and other parties, and Heads of Agreement dated 21 August 1985. The issue fought before Gleeson CJ was whether under subCL7.8 of the 1985 Agreement AGL had a binding contractual right against the Commonwealth. That sub-clause reads: "Subject to rights under existing agreements, AGL shall have first right of refusal to acquire on terms no less favourable than those offered to any third party, the pipeline, or any interest therein should the Authority decide to dispose thereof." (I will refer to the right claimed by AGL under this sub-clause as the first refusal right.) Before Gleeson CJ the Commonwealth submitted that the 1985 Agreement did not create legal relations, that the Commonwealth was not a party to it, and that in any event subCL7.8 did not refer to the Commonwealth, and for this and other reasons could not be binding on it. Gleeson CJ found against the Commonwealth on all these points. 2 UNREPORTED JUDGMENTS In this court, the Commonwealth did not pursue the contentions that the 1985 Agreement was of no contractual effect or that the Commonwealth was not a party to it. The question argued was whether the Commonwealth was bound by subCL7.8. The two 1974 agreements and the 1985 Agreement marked steps in the history of a gas pipeline from Moomba in central Australia to Wilton in New South Wales. Construction of this pipeline was begun by a wholly owned subsidiary of AGL. In 1973 the Pipeline Authority Act (Commonwealth) was passed, which established the Authority and gave it functions including the acquiring and operating of pipeline systems. In 1974 the Commonwealth decided to take over AGL's Moomba project. The Authority acquired the pipeline, entering into the two 1974 agreements with AGL and also with the producers of the gas. Amongst other things, by these agreements the Authority undertook to honour promises which AGL had made to the producers before the Authority acquired the pipeline and agreed to receive gas from, and transmit it through the pipeline for AGL. The agreements also set out in detail the basis for calculating the payments to be made by AGL for use of the pipeline. The agreements had a term of thirty years. To protect AGL's position as a user of the pipeline and its position in regard to the producers, the Authority in one of the agreements covenanted with AGL that the ownership or control of the pipeline would not be transferred from the Authority other than with the prior written consent of AGL unless the transferee first covenanted with AGL in similar terms to the covenant then given, and in the other agreement there was a provision that neither AGL nor the Authority could assign its rights or obligations under the agreement without the consent in writing of the other. Due performance of these agreements was guaranteed in writing by the Commonwealth Minister for Minerals and Energy. The guarantees were expressed to be for the benefit of AGL and the producers. The charges to be paid by AGL under the 1974 agreements for the transporting of the gas had been intended to be sufficient to recoup to the Authority, during the term of the agreements, the cost of acquiring, completing and operating the pipeline. By 1981 to Authority had come to the opinion that the charges fixed by the agreements would not be sufficient for that recoupment. The Authority negotiated with AGL for an alteration in the basis of the charges. These negotiations continued from 1981 to 1985. There was room for negotiation because, amongst other reasons, AGL wanted the Authority to make certain improvements to the pipeline. Another thing that AGL wanted was the opportunity to acquire the pipeline in the event that Government policy should at some stage lead to its being privatised. There were indications that Government policy of public ownership of the pipeline might be changed. The pipeline was important to AGL which wanted to ensure that if it ceased to be publicly owned AGL would have the opportunity of getting back into the position that it had planned to be in in the first place, before the Authority had acquired the pipeline from it. The negotiations at length resulted in agreement on a changed basis of charging for transporting the gas, improvement of the pipeline facilities, and the giving to AGL of the first refusal right to acquire the pipeline should it be disposed of. This agreement was embodied in the 1985 Agreement earlier referred to. There was detailed evidence before Gleeson CJ of the negotiating history preceding the making of the 1985 Agreement; the parties without objection laid before him the various drafts that preceded the final form. His summary of this URJ COMMONWEALTH OF AUSTRALIA v HOOPER (Priestley JA) 3 was: "Both the negotiating history of the document, and some of its terms, indicate that it was intended that the parties to the Heads of Agreement would be AGL, the Commonwealth, and the Authority. As between the Commonwealth and the Authority, it was the Commonwealth that took the major role in the negotiations for the Heads of Agreement. Certain of the terms of the Heads of Agreement were matters that directly concerned the Commonwealth rather than the Authority. CL1 provided that AGL would have a representative on the Authority. That was something that could only be brought about by decision of the Commonwealth. Furthermore, CL7.4 was in the following terms: '7.4 The acceptance by the Commonwealth of this proposal shall be taken as full settlement of the present dispute and the Commonwealth will not initiate any further action to recover its costs over the life of the Agreement."" Gleeson CJ then described how it was, that in his view, the 1985 Agreement became binding on the parties. As I have indicated, it is now agreed by the Commonwealth that it was a party to that Agreement and that it became legally binding. In 1988 it became clear that the Commonwealth Government was intending to dispose of various public assets including the pipeline. It also became known that the Commonwealth Government took the view that the Authority did not have power under the Pipeline Authority Act to dispose of the pipeline system as a going concern. At this point attention focused on the form of AGL's first refusal right. (The text is at 2 above.) The Commonwealth Government adopted the position that AGL's only right under subCL7.8 was against the Authority and that since the Authority could not dispose of the pipeline system as a going concern the promise was of no practical effect. The Commonwealth Government embodied this view in a document it published on 22 August 1990 requesting proposals to purchase the pipeline system. The document referred to the 1985 Agreement saying that it would be the Government and not the Authority which would be arranging the sale of the pipeline system on behalf of the Commonwealth and that that would be done by legislation. The document also referred to the covenant in the 1974 agreements. The relevant part of the text of that covenant was: "5. The Pipeline Authority covenants with AGL... that the ownership or control of the pipeline will not be transferred from the Pipeline Authority other than with the prior written consent of AGL... and unless the transferee first covenants with AGL... in similar terms to... this clause..." (italics added) The document of 22 August 1990 paraphrased the relevant words of this covenant as: "Covenant by TPA not to transfer ownership or control of the pipeline without the prior written consent of AGL..." (italics added) The difference between the words and the paraphrase of the covenant serves to highlight the fact that in 1974 the Authority was making a wider promise than that it itself would not transfer ownership of the pipeline without AGL's consent, namely it was promising that neither it nor anybody else would do so. If it be right that the Authority had no power to dispose of the pipeline system as a going concern (a matter not raised for decision either before Gleeson CJ or in this court) the promise nevertheless had a real practical point because it was in an agreement guaranteed in writing by the Commonwealth, which, in a practical sense, would have the ultimate say on any question of the disposal of the pipeline. 4 UNREPORTED JUDGMENTS When the separate trial began before Gleeson CJ, the substance of AGL's case was that there should be a declaration of its rights under the 1974 covenant and guarantee and under subCL7.8 of the 1985 Agreement and ancillary relief by way of injunction. However, late in those proceedings a new point was raised about the 1974 covenant and guarantee. The Chief Justice took the view that this point could not be properly litigated without a number of procedural steps being taken; to enable matters to be put in proper form, he ordered that the part of the matter dealing with the 1974 covenant and guarantee should be made the subject of a separate trial. What then remained for him to decide was the argument about the first refusal right in the 1985 Agreement. In considering whether this sub-clause bound the Commonwealth, it is of some importance to have in mind not only that in the appeal in this court the Commonwealth conceded that it was a party to the 1985 Agreement but that that concession was made for what in my opinion was very good reason. It is sufficient to mention three matters. The first is that federal Cabinet agreed to the 1985 Agreement; the second is that the text of the agreement itself showed in different places that the Commonwealth must be party to it: see for example subCL7.4 (pp 4-5 above); third, the Commonwealth proceeded to carry out a number of things that the agreement required. Against this background, Gleeson CJ considered two methods of interpretation of subCL7.8. The first involved observing that, granted the Commonwealth was a party to the 1985 Agreement, and reading it literally, the Commonwealth began by agreeing that AGL should have the first refusal right, but that the sub-clause then concluded with a condition which made illusory the opening grant of the first refusal right. The Chief Justice regarded the opening part of the sub-clause as undoubtedly furnishing its primary subject matter. The appropriate way of resolving the repugnancy therefore was by disregarding the concluding words of the sub-clause. The alternative method of interpretation was to read the concluding words of subCL7.8 as dealing with the commercial practicalities of the matter rather than being directed to legal or conveyancing technicality. On this basis, the Chief Justice said the words might be read: was referring to, and being satisfied by, a plan of the Commonwealth, in which the Authority acquiesces or participates, that the pipeline will be sold. The evidence makes it plain that the Authority has been involved in, and has cooperated with the task force concerning, the proposals to 'privatise' the pipeline." He then mentioned some other factual matters showing the close cooperation of the Commonwealth and the Authority, under the Commonwealth's supervision, in the efforts to sell the assets of the Authority. On this latter approach, the Commonwealth, as a party to the 1985 Agreement, was joining in a promise to AGL that in the event of disposal of the pipeline, AGL should have the first refusal right. The Chief Justice said that whichever of the alternative constructions was adopted the Commonwealth's view of the sub-clause must fail. Before this court counsel for the Commonwealth vigorously assailed both methods of interpretation. It is not necessary to discuss whether his criticism of the first method has any validity, because it seems plain to me that the Chief Justice's commercial practicality interpretation should carry the day irrespective of the fate of the repugnancy approach. The surrounding circumstances point strongly towards that view and the language itself, understood in the overall context of its coming into existence, seems to me to support it. URJ COMMONWEALTH OF AUSTRALIA v HOOPER (Handley JA) 5 If it is right that the Authority does not have the power to dispose of the pipeline as a going concern as the Commonwealth contends, then the commercial practicality interpretation is strengthened. The Commonwealth was participating in the making of the 1985 Agreement in the most active way, it was pressing AGL to confirm that it assented to it (as AGL eventually did), so that if the Authority did not have the appropriate power it must follow that the Commonwealth was promising that should the Authority decide, in a commercial way, to dispose of the pipeline, not being in law empowered to do so, the Commonwealth would see to it that by some appropriate method AGL's first refusal right would be available to In my opinion the Commonwealth's attack upon the Chief Justice's construction of subCL7.8 fails. The final argument relied on by the Commonwealth in challenging the Chief Justice's conclusions was one that, so far as I can see from the transcript of the argument before him, he was not asked to consider. This argument was to the effect that if subCL7.8 was interpreted in the way found by the Chief Justice, it imposed a fetter on the Commonwealth, discouraging it from considering legislation of a certain kind (that is, which would enable the contractual obligation to be avoided) at pain of being liable in damages or possibly having to comply with s51(xxxi) of the Constitution if it did not. It was said that there is an established principle that the Crown cannot make such fettering contracts. For this proposition counsel relied upon "The Amphitrite" (1921) 3 KB 500; Commissioners of Crown Lands v Page (1960) 2 QB 274 and West Lakes Ltd v South Australia (1980) 25 SASR 389. Neither of the first two decisions has attracted much approval: see the discussion in Aronson and Whitmore; Public Torts and Contracts at 194-7, and Ansett Transport Industries(Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 74-8 (Mason J) and 113 (Aickin J). The criticism is that the proposition for which the two English cases stand is much too widely expressed. In the WestLakes case, the second paragraph in the reasons of King CJ would seem to negate the possibility of the doctrine, if it has any effect in Australia, being of any help to the Commonwealth in the present case. However, there is no need in the present appeal to consider whether the doctrine exists in Australia and if so what its content is, because, assuming its existence here in favour of the Commonwealth, I do not see that it can be said to have any application to the instant facts. In the circumstances of the present case the Commonwealth's submission can only mean that the "fetter" would discourage either the Commonwealth executive from considering the introduction of the particular legislation to Parliament, or Parliament from considering its passage. I cannot see how it can be said that the existence of the contractual obligation which in my opinion the Commonwealth undertook when the 1985 Agreement was made, could, as a matter of fact, have any such effect. I do not think it is accurate to say that the contractual obligation is in any real sense a fetter, or exerts any pressure, upon either the Commonwealth executive or the Commonwealth Parliament or any of their members in regard to legislation which may be proposed to Parliament. In my opinion this appeal fails, and should be dismissed with costs. Handley JA I agree with Priestley JA. Appeal dismissed with costs. Counsel for the Appellant: D Jackson QC/Mrs M Beazley/ M Rudge 6 UNREPORTED JUDGMENTS Counsel for the Respondent: (1) AR Emmett QC/AA Bell (2) G. Curtis (Sol) (Submitting appearance) Solicitors for the Appellant: Australian Government Solicitors for the Respondent: (1) Minter Ellison (2) Australian Government Solicitor