Reported Decision : (2006) Aust Contract Reports 90-229 New South Wales Court of Appeal CITATION: Yallourn v Enron Australia (in liq) [2005] NSWCA 326 HEARING DATE(S): 26 August 2005 JUDGMENT DATE: 20 September 2005 JUDGMENT OF: Giles JA at 1; Basten JA at 2; Campbell AJA at 55 DECISION: (1) Appeal allowed in part and declarations 1-3 made in the Equity Division be varied to read as follows; "THE COURT DECLARES that -; On the proper construction of the contract entitled ISDA Master Agreement between Enron Australia Finance Pty Limited ("Enron") and Yallourn Electricity Ltd ("Yallourn") dated 10 August 2001 ("the Contract"), and in the events which have happened:; (1) the amount required to be paid by Enron for the purposes of Part 1(g) of the Schedule to the Contract, in order to satisfy all its payment obligations under section 2(a)(i) with respect to all transactions and to have no future payment obligations to Yallourn whether absolute or contingent under section 2(a)(i), is:; (a) each payment specified in each confirmation to be made by Enron which has not been paid,; and does not include:; (b) interest, if any, payable or which would in any circumstances be payable by Enron under section 2(e);; (2) the amount required to be paid by Yallourn to avoid the occurrence of an Additional Termination Event, after Enron has satisfied all of its payment and delivery obligations under Part 1(g) of the Schedule to the Contract, is; (a) each amount that would have become payable by Yallourn under section 2(a)(i), but for the operation of section 2(a)(iii), and which remains unpaid;; and does not include:; (b) interest which would have been payable under section 2(e) but for the operation of section 2(a)(iii);; (3) If:; (a) an Additional Termination Event, as described in Part 1(g) of the Schedule to the Contract, occurs in respect of which Enron is Party X and Yallourn is Party Y, and; (b) Enron gives a notice to Yallourn designating an Early Termination Date in accordance with section 6(b)(iv),; the Unpaid Amounts owing to Enron (the Defaulting Party), as referred to in section 6(e)(i)(3), comprise the aggregate of:; (a) each amount that would have become payable by Yallourn under section 2(a)(i), but for the operation of section 2(a)(iii), and which remains unpaid,; together with; (b) interest from (and including) the date such amounts were or would have been required to have been paid (but for the operation of section 2(a)(iii)) to (but excluding) such Early Termination Date at a rate per annum equal to the cost to Yallourn if it were to fund such amounts."; (2) Set aside order 4 (as to costs) made in the Equity Division; (3) Order that each party bear its own costs of the proceeding below and of the appeal; (4) Grant liberty to the parties to apply within 14 days in relation to the form of the Declarations. CATCHWORDS: CONTRACT - interpretation of ISDA Master Agreement - administrator and liquidator appointed - occurrence of event of default - whether party in default must pay outstanding amounts and interest on those amounts to trigger additional termination event - whether amounts other party required to pay to avoid the occurrence of an additional termination event include outstanding amounts and interest on those amounts - determination of period over which interest should be calculated upon occurrence of an early termination date LEGISLATION CITED: Industrial Relations Act 1988 (Cth) Enron Australia Finance Pty Ltd v Yallourn Energy Pty Ltd [2005] NSWSC 56 March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 CASES CITED: Cosco Holdings Pty Ltd v Do (1997) 150 ALR 127 Purvis v New South Wales (2003) 217 CLR 92 Jahazi v Minister for Immigration and Ethnic Affairs (1995) 61 FCR 293 Yallourn Electricity Ltd (Appellant) PARTIES: Enron Australia Finance Pty Limited (in liquidation) (Respondent) FILE NUMBER(S): CA 40163/05 A.C. Archibald QC/S.R. Horgan (Appellant) COUNSEL: D.J. Hammerschlag SC/V.F. Kerr (Respondent) Baker & McKenzie (Appellant) SOLICITORS: Blake Dawson Waldron (Respondent) LOWER COURT JURISDICTION: Supreme Court LOWER COURT FILE NUMBER(S): SC 5942/04 LOWER COURT JUDICIAL OFFICER: Campbell J IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40163/05 SC 5942/04 GILES JA BASTEN JA M W CAMPBELL AJA 20 September 2005 YALLOURN ELECTRICITY LTD v ENRON AUSTRALIA FINANCE PTY LIMITED (in liquidation) Judgment 1 GILES JA: I agree with Basten JA. 2 BASTEN JA: On 10 August 2001 the parties to the appeal entered into an agreement under which they entered into numerous transactions involving purchases and sales of electricity. Each transaction identified a quantity of electricity, a date of purchase or sale and a price. The price could be fixed by the contract, or could be "floating", which meant that it was the market price on the day the transaction was to be completed. 3 Depending on movements in the price between the date on which the transaction was confirmed and the date on which it was to be completed, one party or the other would incur a debt on the completion date. The amounts payable under the contract fell broadly into two categories, namely first the price or "transaction payment", and secondly interest on a payment due and payable but unpaid. In certain circumstances, including the default of one party, the other party was relieved of the usual obligation to make payments of the price of transactions as they were completed. Certain events, including default, would allow the other party to designate an "early termination date" or ETD. The occurrence of an ETD changed the payment obligations under the agreement. 4 One party, Enron Australia Finance Pty Ltd ("Enron") entered voluntary administration on 3 December 2001, which event was followed by the appointment of liquidators on 29 January 2002. Each of those events constituted a default on the part of Enron. This had two consequences. One was to remove the obligation of the other party, Yallourn Energy Pty Ltd ("Yallourn") to make further payments of the price payable by it under particular transactions. The second effect was to allow Yallourn to designate an ETD. Yallourn did not (and has not to the present time) exercise its right to designate an ETD. Accordingly, it has maintained the status quo. The result for Enron (and its liquidators) is that they are unable to recover the price of completed transactions from Yallourn. However, the agreement provides Enron with a mechanism to escape this impasse. Despite Enron being in default, it can itself trigger a right to designate an early termination date. To do that it must pay money owing to Yallourn under the agreement. Yallourn then has an option: if it pays Enron money which it owes under the agreement, no termination event arises. If it does not pay that amount, Enron is entitled to designate an ETD. Issues 5 Enron and Yallourn are in dispute in relation to three critical questions in relation to the operation of the agreement. The first concerns the amount which Enron must pay to trigger the process by which it may acquire a right to designate an ETD. The second concerns the amount which Yallourn must pay in order to prevent a termination event arising. The third concerns the basis on which respective liabilities will be calculated, if an ETD were to be designated. 6 The proper law of the contract is the law of New South Wales. Enron commenced proceedings in the Equity Division of the Supreme Court of New South Wales, seeking declaratory relief in terms which would provide answers to the three questions identified in the preceding paragraph. The primary judge made declarations in the terms sought by Enron: Enron Australia Finance Pty Ltd v Yallourn Energy Pty Ltd [2005] NSWSC 56. Yallourn did not seek alternative declarations in the Court below, and in its notice of appeal merely sought to set aside the declarations made by Campbell J in the Court below. However, shortly prior to the hearing of the appeal, Yallourn tendered a form of alternative declarations which would give effect to its view of the correct answers to the issues raised by Enron. Enron accepted that, if Yallourn was successful, declarations in an appropriate form should be made. 7 Neither party sought to argue that declarations should not be made because the questions were hypothetical. At the hearing of the appeal, doubts were expressed by members of the Court, particularly in relation to the third issue, as to the desirability of making a declaration with respect to a matter which would not arise unless Enron acquired a right to designate an early termination date and in fact did so. Key terms of agreement 8 The agreement is known as a "Master Agreement" in a form approved by the International Swap Dealers Association Inc (ISDA). The agreement anticipates that its terms will apply to specific transactions which will each be identified in a confirming document known as a "Confirmation". The clauses of the agreement are known as "sections". The schedule is divided into "parts", but for ease of reference, the particular provisions in the schedule will be referred to below by the term "clause". 9 The primary payment obligations under the contract are identified in s 2(a) in the following terms: " (a) General Conditions (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to other provisions of this Agreement. … (iii) Each obligation of each part under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event or Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement." Throughout the agreement, there is reference to both payment and delivery because the transactions may involve delivery of products, although they do not in the present case. Accordingly, subsequent references to "delivery" will generally be omitted from this summary. 10 Payment of default interest is provided in s 2(e) in the following terms: " (e) Default Interest; Other Amounts . Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. …." 11 Various events of default and termination events are identified in s 5, including forms of bankruptcy, winding-up and liquidation. Relevantly for present purposes, the termination events identified in s 5(b) include any "Additional Termination Event" specified in the schedule. Part 1 of the schedule contains an additional termination event identified in cl 1(g), in the following terms: " (g) Additional Termination Event will apply. The following shall constitute an Additional Termination Event: An Event of Default occurs with respect to a party ('Party X'), Party X has satisfied all its payment and delivery obligations under Section 2(a)(i) with respect to all Transactions and has no future payment or delivery obligations to the other party ('Party Y') whether absolute or contingent under Section 2(a)(i), and Party Y refuses to make a payment to Party X based upon the conditions precedent in Section 2(a)(iii). For the purpose of the foregoing Termination Event, the Affected Party shall be Party X. However, despite Section 6(b)(iv), Party X is the party entitled to give the notice under Section 6(b)(iv) designating the Early Termination Date for the foregoing Termination Event." The substance of the debate in the present case concerns the operation of that clause. 12 Section 6 provides for a right to terminate following an event of default or a "termination event or additional termination event". The present case is concerned with an additional termination event (at least hypothetically) which is identified in s 6(b)(iv)(2). That provision confers a right to terminate in the following terms: "(iv) Right to Terminate. If:- … (2) … an Additional Termination Event occurs … … the party which is not the Affected Party in the case of … an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day no earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions." "Affected Transactions" relevantly means all transactions, whether or not they had been completed, but the effect of designation next mentioned can only be in relation to transactions for which payment had not been made. The effect of designation is then provided in s 6(c): "(c) Effect of Designation. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e)." 13 Section 6(e) then makes provision for payments on early termination. For present purposes, the "second method" specified therein was applied, so that s 6(e)(i)(3) relevantly provided: "… an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party." As will be apparent, the effect of this provision will turn upon the definition of "unpaid amounts" in s 14, which provides as follows: "' Unpaid Amounts' owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that become payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and … in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date at the Applicable Rate." 14 It is convenient to note the following further definitions in s 14: "Applicable Rate" means:- (a) in respect of obligations payable … (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iv). First issue: what must Enron pay? 15 The first issue raised on this appeal is what amount Enron must pay in order to engage the alternative termination event defined in cl 1(g) of the schedule. It is not in dispute that the amount will include the total outstanding transaction payment due under s 2(a)(i) of the agreement. The dispute turns upon whether Enron must also pay interest which has accrued pursuant to s 2(e). 16 Before the primary judge, Yallourn asserted that Enron must pay interest on the basis that cl 1(g) of the schedule gave rise to such an obligation. That argument was put in various ways. Those arguments failed before the primary judge and were not actively pursued by Yallourn in the appeal. To the extent that they were not abandoned, I would adopt the reasoning of the trial judge at [42]-[47] in rejecting them. 17 Rather, on the appeal, Yallourn emphasised the terms of s 2(e) which, it was said, rendered payment of outstanding interest a precondition to the effective designation of an ETD. For reasons set out below, in my view that submission does not succeed. However, it should be noted that it would have a somewhat different consequence to the argument based on cl 1(g). It would mean that the payment of interest, rather than being a precondition to the establishment of an alternative termination event, only arises upon the satisfaction of the first two steps required under cl 1(g), namely the making of the transaction payments by Enron and the failure of Yallourn to make whatever payment is required of it. A further payment of interest would then be required from Enron before it could designate an ETD. In practical terms, the stage at which a particular payment is required may be of some significance to the parties. Accordingly, the precise basis upon which Yallourn presents its argument that Enron must pay interest is important. 18 It is clear that one function of s 2(e) is to impose an obligation to pay interest on a party in default, such interest being calculated in a particular manner and payable on demand. It is also common ground that the calculation for which s 2(e) provides will cease upon the designation of an ETD, the consequences of which are separately identified in s 6(c). However, Yallourn says that s 2(e) has an additional function, namely the imposition of a precondition on the occurrence of an "effective designation" of an ETD. Whilst acknowledging that the opening words of the clause, "prior to", could merely set the temporal frame in which the clause operates, namely before an effective designation, Yallourn says they can also be understood as imposing a precondition to the occurrence of an effective designation. Whether they have this second function is the issue in dispute. 19 Yallourn says that it makes sense to construe s 2(e) as having the second function for two primary reasons. First, as a matter of terminology adopted by the drafter, the temporal effect is achieved by making s 2(e) "subject to" s 6(c). That being so, the words "prior to" would be entirely superfluous, unless they have a different function, namely that of setting a condition to an effective designation. Secondly, Yallourn submits, it makes sense that a party in default should not merely be required to pay amounts outstanding in relation to the transactions, but also the interest which has already accrued on those amounts, if it is to enjoy the power to designate conferred by cl 1(g) of the schedule. 20 Each of these submissions has force, but they cannot, in my view, prevail for three reasons. First, the entitlement to designate an ETD arises under s 6(a) and (b)(iv). In their terms, those provisions appear to be self-contained and not subject to preconditions established in other unidentified parts of the agreement. By contrast, s 2(a)(iii) expressly acknowledges the possibility that there may be other preconditions to payment of the transaction amounts. 21 Secondly, s 2(e) does not clearly purport to be a precondition to effective designation. It would have been a simple matter for the drafter to open s 2(e) with the words "Before effective designation can occur …". That would have explicitly made payment of interest a precondition to effective designation: but that was not done. 22 Thirdly, although it does not arise as a matter of fact, because the parties excluded its operation, s 6(a) provides for automatic designation of an ETD in certain circumstances. If the drafter had sought to cope with that situation, it would have been appropriate to express s 2(e) in the terms "before a designation can take effect …". Again, that was not done. Whilst it may be suggested that the effect of s 2(e) was intended only to operate as imposing a requirement on a party giving notice of designation, and not as conditioning an automatic designation, again one might have expected the drafter to make that point clear, if it had been intended. 23 In my view these reasons militate against the view that s 2(e) imposed a precondition to designation of an ETD by Enron. As noted above, even were it to have that effect, it would not impose an obligation on Enron to pay interest in order to fulfil the first step in triggering an alternative termination event. Accordingly I agree with the conclusion reached by the primary judge in relation to this question. The terms of an appropriate declaration will be addressed below. Second issue: what must Yallourn pay? 24 The third limb of cl 1(g) of the schedule provides that, to constitute an additional termination event, "party Y" (in this case Yallourn) "refuses to make a payment to party X" (Enron) "based upon the conditions precedent in Section 2(a)(iii)". 25 Section 2(a)(iii) renders the obligation of each party under s 2(a)(i) "subject to" three categories of condition precedent. Thus, there is no enforceable obligation to make a transaction payment until the relevant conditions precedent are fulfilled. In the present circumstances, there being an event of default with respect to Enron which has both occurred and is continuing, Yallourn has no present obligation to make transaction payments. Clause 1(g) to the schedule does not vary this situation: rather, it provides that an additional termination event will arise where Yallourn refuses to make such payments "based upon" the conditions precedent or, it may be inferred, any one of them. 26 The payments to be made pursuant to s 2(a)(i) are "each payment … specified in each confirmation". The term "confirmation" is used because the document confirms "the terms and conditions of the transaction". It is said to supplement and form part of, and be subject to, the agreement. It identifies the commodity, the relevant dates and the price. 27 Whether interest is payable under the agreement will, as already noted, depend on s 2(e). The obligation to pay interest arises where a party "defaults in the performance of any payment obligation". The amount of the payment obligation is then referred to as "the overdue amount". The period over which interest is payable runs from "the original due date for payment" to the date of actual payment. However, where an obligation to make a payment has not crystallized, because an event of default has occurred, the terms of s 2(e) will not be engaged. 28 As already noted, cl 1(g) of the schedule does not change that position. Enron does not prevent an event of default continuing by making the payment envisaged under the second limb of cl 1(g). Accordingly, the precondition continues to operate. As the third limb expressly envisages, Yallourn may refuse to make a payment under s 2(a)(iii). However, if it does make such a payment, its obligation will be limited to the transaction payment, because there will be no interest payable on that amount. 29 An alternative way of reaching the same result is that the third limb of cl 1(g) is only triggered where Yallourn's refusal is "based on" a condition precedent in s 2(a)(iii), which only provides a condition precedent to the obligation incurred under s 2(a)(i). Thus, even if interest were payable, the obligation to pay interest having arisen under s 2(e), would not be subject to the identified conditions precedent. 30 The primary judge reached a different conclusion with respect to this question. In reaching a different view, his Honour noted Enron's concession that Yallourn was not obliged, under s 2(e) to pay interest. However, his Honour accepted Enron's submission that it was the same precondition which Yallourn might rely upon to resist a payment of principal which formed the basis for not paying interest. Accordingly, his Honour reasoned, the refusal to pay interest is "based upon" the condition precedent and the third limb of cl 1(g) "presupposes a request that a payment be made" and a refusal of that request for reasons which can be said to be based upon the condition precedent: [2005] NSWSC 56 at [34]. 31 There are a number of difficulties with this approach, quite apart from the construction proposed at [27-[28] above. First, the presupposition of a request is apt to mislead. Its purpose is to allow a dialogue between the parties, so as to identify the reason for Yallourn's refusal. How one formulates the request and refusal may colour the analysis which, more properly, should be confined to the construction of the contract. 32 Secondly, and more importantly, this exercise distracts attention from the nature of the "payment" which Yallourn must decide whether or not to make. Section 2(a)(iii) provides a basis upon which Yallourn can refuse to make a payment under s 2(a)(i): the reason for not making a payment under s 2(e) is quite different, namely that there has been no default. 33 The next step in the logic is said to be that, because it was reliance upon the existence of the precondition which had prevented there being default, it is that precondition which has prevented an obligation to pay interest arising. However, it does not follow that reliance upon any particular link in a causal chain necessarily means that conduct is "based on" the existence of that link. 34 The idea that the legal concept of causation is not co-extensive with scientific or philosophical notions of causation, but is "tempered by the making of value judgments and the infusion of policy considerations" is well established in tort law, but need not be restricted to that area of discourse: see March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 at 516-517 (Mason CJ). 35 In Cosco Holdings Pty Ltd v Do (1997) 150 ALR 127 at 136-137, Northrop J explained the phrase "based on" in s 170DE of the Industrial Relations Act 1988 (Cth), as being " used as describing a connection between a subject matter, the reason for termination, and an object, the operation or requirements of the employer". The latter must "constitute the foundation upon which" the step of terminating employment is based. 36 Similar explanations may be found in relation to equivalent phrases such as "because of", "by reason of" and "on the ground of": see, eg, Purvis v New South Wales (2003) 217 CLR 92, at [7]-[8] (Gleeson CJ), [139]-[163] (McHugh and Kirby JJ) and [225], [231] and [234]-[236] (Gummow, Hayne and Heydon JJ). Further, as noted by French J in Jahazi v Minister for Immigration and Ethnic Affairs (1995) 61 FCR 293 at 299G, in relation to the connection between persecution and a relevant ground in the Refugees Convention: "The question whether a particular causal connection between persecution and membership of a group attracts Convention protection will be resolved not merely by the logic of causality but as a matter of evaluation which has regard to the policy of the Convention." 37 In the present case, there is a factor, beyond the logic of causality, which should be taken into account, namely the fact that had Yallourn indeed been in default, it might have opted to make a payment of principal to avoid incurring interest. Further, had it been intended that party Y pay not only the amount due under s 2(a)(i) "but also an amount equivalent to interest which would have been payable, absent the condition precedent", it would have been easy for the drafter to make express provision to that effect. As will be noted below, such language is used in relation to post-termination date calculations. Absent such clear terminology, the extended causal argument should not prevail. 38 It follows that, in my view, the primary judge was wrong in the approach he took to this question and a declaration substantially to the effect of that proposed by Yallourn should be made. Third issue: liabilities following designation 39 The Court was advised that, if either of the first two questions should be answered adversely to the position adopted by Enron, it was at least unlikely that Enron would take steps to designate an early termination date. That event being hypothetical, the request for declaratory relief, in the event that designation occurred, would appear to be premature. The appropriate course would therefore be to set aside the declaration made by the primary judge, not on the grounds that it was wrong in its terms, but on the ground that it should not have been made at all. 40 However, both parties to the appeal eschewed that conclusion and each invited the Court to address the third issue. Because it remains possible that designation of an early termination date will occur and because the answer to the third question may affect that occurrence, the Court may reasonably take a course which in other circumstances might not be appropriate. 41 The effect of designation of an early termination date is that no further payments are required to be made under ss 2(a)(i) or 2(e) in respect of the terminated transactions. Rather, the amount payable in respect of an early termination date "shall be determined pursuant to s 6(e)": s 6(c). Section 6(e) makes provision for an internal set off as between the non-defaulting party and the defaulting party. The calculation which may in some circumstances be of some complexity, is simplified in the present case because designation, if it occurs, will occur pursuant to the occurrence of an additional termination event under cl 1(g) of the schedule. That will only happen where Enron has made all relevant transaction payments to Yallourn, but Yallourn has failed to make its transaction payments to Enron. On any view, the amount payable by Enron will include interest on the transaction payments, from the date at which the obligation to make those payments accrued, until the termination date. The real issue in dispute is the period over which interest should be calculated on the transaction payments payable by Yallourn. The issue is analogous to that discussed by reference to issue 2. 42 One side of the calculation required by s 6(e) set out above at [13], is an assessment of "the unpaid amounts" owing to Enron, by Yallourn. The definition of that term includes two limbs. The first covers all transaction payments "that became payable (or that would have become payable but for s 2(a)(iii)) to [Enron] under s 2(a)(i) on or prior to such early termination date and which remain unpaid as at such early termination date". That element is uncontroversial and is, on the reasoning set out above, the amount which Yallourn would need to pay to avoid triggering an additional termination event. 43 The second limb of the definition of "unpaid amounts" deals with obligations required to be settled by delivery: that does not apply in this case. The clause continues: "… in each case together with … interest, … from (and including) the date such amounts … were or would have been required to have been paid … to (but excluding) such early termination date at the Applicable Rate." (Emphasis added.) The primary judge concluded that the words in the subjunctive mood, "or would have been", constituted a reference back to the hypothetical situation in relation to the first limb, namely payments that "would have become payable but for s 2(a)(iii)". 44 The declaration proposed by both parties appears to assume that "the non-default rate" was the appropriate rate, although that question was not addressed in argument. Nevertheless, paragraph (c) of the definition of applicable rate (set out at [14] above) confirms that interest may be payable in some circumstances by a party not in default under the contract. This is at least consistent with the conclusion that a payment made following the effective designation of an early termination date will include an amount of interest by a party which had not been in default on the early termination date. 45 Yallourn argues that the effect of designation of an early termination date is that the obligation to make transaction payments under s 2(a)(i), and, where applicable, payment of interest under s 2(e), is terminated and replaced with a payment obligation determined pursuant to s 6(e): see s 6(c). The payment obligation under s 6(e), created through the definition of "unpaid amounts" in s 14, is an obligation to pay transaction payments, despite the fact that the condition precedents in s 2(a)(iii) had not been satisfied. The further obligation to pay interest cannot, it is said, sensibly be back-dated to the event of default (or other precondition in s 2(a)(iii)). However, if that were so, it is then necessary to find a period which ran "from … the date such amounts would have been required to have been paid" up to the early termination date, in order to give the hypothetical situation operation. The effect of s 6(c) is that the early termination date "will occur on the date so designated" by a notice. It is that occurrence which gives effect to the consequences prescribed by s 6(c)(ii). Similarly, if there is an automatic early termination, the occurrence of the early termination date is the occurrence of an event of default. Such an "occurrence" must be the early termination date. 46 The section also uses the term "effective designation". The meaning of that term, as it appears in the phrase "occurrence or effective designation", of an early termination date, is unclear. It appears to be a reference to the deemed effectiveness of a notice as provided by s 12. Section 6(b)(iv) envisages that the notice may designate a day after the day on which the notice is effective. Accordingly, it may be argued, the reference to "effective designation" is to be understood as the day on which the notice is effective, which may be earlier than the day which constitutes the early termination date. As the effect of s 6(e) may operate from the date of "effective designation", there may be a period of days between effective designation (so understood) and the early termination date so designated, during which interest may run for the purposes of the definition of "unpaid amounts". 47 This, in my view, is an artificial reading of the phrase "occurrence or effective designation". A simpler and more natural reading is that the occurrence of an early termination date (whether designated or not) and its "effective designation" amount to the same thing. Two terms are used because an early termination date may arise automatically and not by designation. There is thus no possible period between two different dates. To the same effect, the natural reading of the hypothetical clause "would have been required to have been paid", is a reference back to the retrospective removal of the effect of the conditions precedent. Accordingly, in my view, the primary judge was correct in his construction of this aspect of the agreement and therefore in his answer to the third question, as identified above. 48 Before leaving this issue, it is appropriate to note the difference between the language adopted in relation to payment obligations after early termination (with its express reference to interest payable on a hypothetical basis) and the terminology of cl 1(g) of the schedule, which makes no express reference to the payment of interest: see [11] above. Form of declarations 49 The issues have been identified and addressed above in the chronological order in which they would arise in administering the contract. The declaration in relation to the first issue, as recorded in the minute of order made by the primary judge and entered on 20 April 2005 is declaration 2. The declaration affirms that Enron can satisfy the first limb of the requirements to trigger an additional termination event, pursuant to cl 1(g) of schedule 1, by paying outstanding transaction amounts, and without paying interest on those amounts. That declaration is, in my view, to appropriate effect and I would dismiss so much of the appeal as relates to that declaration. 50 The second issue identified above, namely the payment which must be made by Yallourn to avoid an additional termination event occurring, is declaration 1 in the minute of order entered on 20 April 2005. I would uphold Yallourn's appeal with respect to this declaration and would delete the words preceding par (a), namely - "the aggregate of: (a)". I would also delete all words following par (a) so that the amount identified as payable by Yallourn is: "each amount that would have become payable by Yallourn Energy Pty Ltd under s 2(a)(i), but for s 2(a)(iii), and which remains unpaid." The remainder of the chapeau of the declaration is appropriate, but, in identifying the contract in issue, should properly apply to each of the declarations. The attached order makes appropriate variations to give effect to that mechanical change. 51 The effect of the first two orders is that no payments of interest are required to be made by either party for the purposes of cl 1(g) of the schedule. The Court was told that if Enron pays outstanding transaction payments owing to Yallourn, Yallourn will pay the total of the transaction payments owing to Enron. Whether, in that circumstance, Enron will take the first step required of it is not known. However, because the third issue was addressed by the primary judge and was, in my view, correctly determined by his Honour, it is sufficient to dismiss the appeal with respect to that aspect of his Honour's judgment. The accompanying orders include minor variations to the form of the declaration made by his Honour to clarify its effect. 52 Putting to one side the third issue, which was treated as of limited significance by both parties and which is likely to be of no practical significance, each party has been successful in relation to one of the declarations sought with respect to the operation of cl 1(g) of the schedule. That result should, on the views set out above, have obtained before the primary judge. In these circumstances, the appropriate order with respect to costs is to set aside his Honour's order that Yallourn pay Enron's costs and order that each party bear its own costs both of the appeal and in the Court below. 53 I would propose the following orders: (1) Appeal allowed in part and declarations 1-3 made in the Equity Division be varied to the effect of the Declarations set out below; (2) Set aside order 4 (as to costs) made in the Equity Division; (3) Order that each party bear its own costs of the proceeding below and of the appeal; (4) Grant liberty to the parties to apply within 14 days in relation to the form of the Declarations. 54 The form of declaration is as follows: THE COURT DECLARES that – On the proper construction of the contract entitled ISDA Master Agreement between Enron Australia Finance Pty Limited ("Enron") and Yallourn Electricity Ltd ("Yallourn") dated 10 August 2001 ("the Contract"), and in the events which have happened: (1) the amount required to be paid by Enron for the purposes of Part 1(g) of the Schedule to the Contract, in order to satisfy all its payment obligations under section 2(a)(i) with respect to all transactions and to have no future payment obligations to Yallourn whether absolute or contingent under section 2(a)(i), is: (a) each payment specified in each confirmation to be made by Enron which has not been paid, and does not include: (b) interest, if any, payable or which would in any circumstances be payable by Enron under section 2(e); (2) the amount required to be paid by Yallourn to avoid the occurrence of an Additional Termination Event, after Enron has satisfied all of its payment and delivery obligations under Part 1(g) of the Schedule to the Contract, is (a) each amount that would have become payable by Yallourn under section 2(a)(i), but for the operation of section 2(a)(iii), and which remains unpaid; and does not include: (b) interest which would have been payable under section 2(e) but for the operation of section 2(a)(iii); (3) If: (a) an Additional Termination Event, as described in Part 1(g) of the Schedule to the Contract, occurs in respect of which Enron is Party X and Yallourn is Party Y, and (b) Enron gives a notice to Yallourn designating an Early Termination Date in accordance with section 6(b)(iv), the Unpaid Amounts owing to Enron (the Defaulting Party), as referred to in section 6(e)(i)(3), comprise the aggregate of: (a) each amount that would have become payable by Yallourn under section 2(a)(i), but for the operation of section 2(a)(iii), and which remains unpaid, together with (b) interest from (and including) the date such amounts were or would have been required to have been paid (but for the operation of section 2(a)(iii)) to (but excluding) such Early Termination Date at a rate per annum equal to the cost to Yallourn if it were to fund such amounts. 55 CAMPBELL AJA: I agree with Basten JA. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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