Court upholds validity of fixed capacity charges in gas transportation agreement

Review your force majeure notice requirements 5 min read

The recent Queensland Supreme Court decision North Queensland Pipeline No 1 Pty Ltd v QNI Resources Pty Ltd¹ has confirmed the validity and enforceability of terms commonly found in gas transportation agreements (and many other types of infrastructure services agreements). In particular, this decision:

• upheld requiring customers to pay capacity and other service charges during periods of non-utilisation as being a valid contractual risk allocation mechanism and not a penalty;
• upheld imbalance charges as not being a penalty; and
• rejected a claim that payment of service and imbalance charges during periods of non-utilisation resulted in unjust enrichment of service providers.

The decision also confirmed that, under Queensland law, there is no binding authority requiring a term of good faith to be implied into all commercial contracts.

Who in your organisation needs to know about this?

Those involved in negotiating, drafting and administering gas transportation agreements and other infrastructure agreements (including fixed charges) and investors in infrastructure assets providing services of that nature.

Background

The decision concerned a long-term gas transportation agreement (the GTA) which was utilised for a significant part of its term prior to Queensland Nickel (as the joint venture manager, which was the customer under it) entering voluntary administration.

As is typical for gas transportation agreements (and many rail, port, pipeline and electricity services agreements), the GTA involved a firm commitment by the pipeline owners to provide the capacity and, in return, certain charges that were payable irrespective of usage.

The proceedings concerned the pipeline owners seeking to recover the fixed charges from the joint venture participants for whom Queensland Nickel was acting as agent (the Customers).

The Customers claimed that:

• Queensland Nickel's inability to secure the necessary licences to operate its refinery (as a result of matters arising from its administration) constituted a force majeure event under the GTA;
• the provision of the GTA requiring continued payment of charges during a force majeure event was a penalty and therefore unenforceable;
• the pipeline owners had been unjustly enriched by receiving charges during the period of force majeure;
• charges payable under the GTA where there was an ongoing imbalance between the amount of gas received into the pipeline from Queensland Nickel and the amount delivered to Queensland Nickel from the pipeline were a penalty and therefore unenforceable; and
• a term of good faith should be implied into the GTA, requiring the pipeline owners to act reasonably and with fair dealing to take all reasonable steps available to eliminate or correct the imbalance before seeking to charge the 'Imbalance Charge'.

The decision

Each of the Customers' claims was rejected, with the court holding:

• Force Majeure - there was no force majeure event under the GTA because (1) it was not shown that the failure to secure the necessary licences occurred without the fault or negligence of the Customers, and (2) in any event, the Customers did not strictly comply with the requirements in the GTA to provide notice of a force majeure event. It was not sufficient to meet the notice requirements where inferences about circumstances that might have constituted a force majeure event could have been drawn from other notices provided by Queensland Nickel.
• Penalties – obligation to pay charges - at least in this instance, the obligation to pay charges during a force majeure event was not a penalty in any case because firstly, the force majeure clause was not collateral or accessory to the payment obligations and did not impose any additional detriment nor provide any additional benefit to the pipeline owners, and secondly it did not have a predominantly punitive purpose because:
  • the continuing charges were reasonable and in proportion to the interests the pipeline owners sought to protect under the GTA, namely achieving a return on the significant capital cost incurred in constructing the pipeline and meeting costs like financing, insurance and maintenance that would continue irrespective of the force majeure event;
  • the services provided by the pipeline owners were not just the transportation services, but also the reserved capacity (which continued when not being utilised); and
  • the force majeure clause was an effective contractual risk allocation mechanism between two sophisticated commercial parties.
• Penalties – Imbalance Charges - while the imbalance charge:
  • was collateral to a primary obligation, being the obligation to keep imbalances within a specified tolerance; and
  • applied in favour of the pipeline owners, imposing an additional detriment on Queensland Nickel,

    it was not a penalty because its predominant purpose was not punitive, but rather was commercially justified as:

  • a positive imbalance is effectively storage of Queensland Nickel's gas on the pipeline;
  • a negative imbalance is effectively the taking or borrowing the pipeline owners' gas; and
  • Queensland Nickel had control over the quantity of gas it extracts from the pipeline and it was its responsibility to take reasonable steps to control the imbalance.
• Unjust Enrichment - the pipeline owners had not been unjustly enriched at the expense of Queensland Nickel due to the payment of charges when gas was not being transported, on the basis that:
  • Queensland Nickel received a substantial part of the benefit bargained for under the GTA (ie 11 years of the full 15-year term); and
  • the GTA did not simply provide a gas transportation service but also required the pipeline owners to reserve capacity, and Queensland Nickel continued to have that benefit of the ongoing reservation of capacity in the pipeline.
• Good Faith - there is presently no binding decision of a superior Queensland court or the High Court that establishes that a term of good faith is implied under Queensland law.² Whether a duty of good faith can be implied into all commercial contracts remains an open question. However, the high threshold to imply a term into a contract (ie that the term is required to uphold the rights conferred under a contract 'which would otherwise be rendered nugatory or worthless') was not satisfied because Queensland Nickel was able to deal with the imbalance itself, including by trading imbalances with another user or by selling the gas.

Actions you can take now

• Parties seeking to claim force majeure relief should ensure they take appropriate steps to prevent the force majeure event occurring, and ensure that force majeure notices strictly comply with the requirements of the relevant agreement and include sufficient detail of the steps that have been taken to avoid the force majeure event.
• Infrastructure service providers can take a high degree of comfort that agreements which include a component of fixed service charges during periods of non-utilisation are likely to be defensible.
• Customers should ensure they are cognisant of when payment relief is, and is not, available under their agreements.