Australia: NSW Court of Appeal makes ruling on suppliers’ ability to pass through effects of Carbon Pricing Scheme

Introduction

The decision in Delta Electricity v Centennial Mandalong Pty Ltd [2014] NSWCA 178 (Delta) shows that contractors and suppliers may have been able to pass on the costs of the Carbon Pricing and Trading Scheme (the Scheme), even if the additional liability did not directly attach to the goods or services supplied, but rather to the means by which those goods or services were produced. Importantly, with the Scheme now having been repealed, any claim for such increased costs must be limited to those costs incurred between the period of 1 July 2012 and 1 July 2014. Principals should also consider the change in law provisions of their existing contracts to determine whether savings from the repeal of the Scheme can now be recouped from their contractors or suppliers.

Facts

The case of Delta was in connection with a long term coal supply agreement (the Contract) between Centennial Mandalong (Centennial) who operated a coal mine in the Lake Macquarie district of New South Wales and Delta Electricity (Delta), a nearby power station owner. The Contract was dated 12 April 2002.

The Clean Energy Act 2011 (Cth) came into force on 2 April 2012. Together with its cognate legislation, the Clean Energy (Unit Shortfall Charge – General) Act 2011 (Cth) and the National Greenhouse and Energy Reporting Act 2011 (Cth) it established a carbon pricing and trading scheme. The Scheme commenced on 1 July 2012.

Centennial sought to pass on to Delta the additional costs it incurred by reason of the Scheme. Delta resisted Centennial's entitlement under the Contract to do so. Centennial went to the New South Wales Supreme Court for a ruling.

The principal issue to be determined was whether Centennial was entitled to adjust its price of coal supplied to Delta by reason of the Scheme. This required the court to consider whether the source of emissions liability arose only from the operation of the mine itself, or whether it was also attributable to the sale of coal to Delta.

The determinative clause of the Contract that decided the parties' rights in respect of adjustments to the price to be paid for coal was clause 12. Relevantly it permitted the contract price to be adjusted during the term for "government charges component per tonne." Government charges were defined to comprise all "charges, taxes...to the extent attributable to coal sold by the Supplier and purchased by the Purchaser under this agreement."

Primary decision

At first instance Justice McDougall held that the term "attributable" required there to be a sufficient connection between the carbon charges and the coal supplied to Delta and that no direct or immediate connection was required, but rather that there must be some form of causation. Further, it was held as to the source of methane emissions which could be said to be part of the production of coal, that charges imposed on methane emissions were a necessary incident of the process of extraction of that coal from the mine.

Justice McDougall gave weight in reaching his decision to the fact that Delta was able to pass increases in government charges in its price for electricity, whereas Centennial had no way, apart from the Contract, of passing on increases by reason of government charges. Further consideration was given to the objective reasoning of the parties when drafting clause 12.3(c) into the Contract (extracted above). His Honour inferred, by having regard to the commercial reasoning of the clause, that the parties had agreed that Centennial was not prepared to accept all the risk of additional government charges and that Delta had agreed to bear some of that risk. Accordingly, Centennial was able to pass on its increased costs due to the Scheme to Delta, on a pro rata basis.

Appelate decision

Delta appealed the decision by the Supreme Court to the Court of Appeal on the basis that the cost increases by reason of the Scheme were not attributable to the supply of coal but to the emissions of methane in the operation of the coal mine. The Court of Appeal dismissed the appeal and upheld that there is a distinction between a charge that is attributal to the supply of coal to Delta in the sense of being referable to the coal or connected therewith, and a charge that is imposed on the coal that is supplied to Delta. In reaching this decision, the Court of Appeal found that attributability included notions of "referable to" and "ascribed to", being connoations of lesser causative requirements.

Repeal of the Scheme

Just as contractors and suppliers, such as Centennial, may have submitted claims for increases in the cost of carrying out their obligations due to the Scheme, now that the Scheme has been repealed, parties should consider whether their change in law provisions also operate to allow principals to recoup savings. Many change in law provisions allow for an adjustment to the agreed price regardless of whether there is an increase or a decrease in the cost of performing the contractor or supplier's obligations due to a change in law. As a result, under some existing contracts, there is the strong possibility that a principal will seek to reduce the contract price to the extent of any saving directly attributable to the repeal of the Scheme. This may however be difficult for a principal to prove, especially where the cost components due to the Scheme were not separately quoted for by the contractor or supplier.

It is also important that both contractors and principals alike have evidence to support any claim made for costs incurred or saved by reason of the Scheme, as the ACCC monitors claims for misleading and deceptive conduct in respect of price movements.