In brief

  • The lack of stability in government policy applying rates and charges on resource extraction requires nimble drafting in sale contracts to allocate responsibility for those charges between the buyer and seller.
  • The use of broad language to anticipate different tax structures may be necessary, but can create uncertainty in application, and lead to disputes.
  • The NSW Court of Appeal determined that the buyer was responsible to pay a pro-rated amount of a levy charged on methane emissions 'attributable to' the supply of coal.

Background

This dispute arose in relation to charges levied on methane emissions produced in the process of mining, extracting and stockpiling coal.

Under a coal supply agreement (the Coal Supply Agreement), Delta Electricity (Delta) was obliged to purchase, and Centennial Mandalong (Centennial) was obliged to supply coal extracted from the Mandalong Mine. Clause 12 of the Coal Supply Agreement provided for the price payable by Delta for the coal supplied to it. The price payable included a component named ‘Government Charges Component Per Tonne’ (the Government Charges Component). In particular, clause 12.3(c)(3) was critical in the dispute between the parties. Clause 12  provided:

  1. Either party may, by notice, advise the other party that it requires the amount of the Government Charges Component Per Tonne to be reviewed. 
  2. Upon receipt of such notice, the parties must negotiate in good faith and use all reasonable endeavours to reach agreement on the amount of the Government Charges Component Per Tonne.
  3. […] the Government Charges Component Per Tonne is to be calculated (on a per tonne basis) as all charges, taxes (excluding income tax, payroll tax and any fines or levies imposed by any Government Agency for failure to comply with any statute or regulation), royalties and other levies imposed on or payable by [Centennial] under any statute of the State of New South Wales or the Commonwealth to the extent attributable to coal sold by the Supplier and purchased by the Purchaser under this agreement. (our emphasis)

The issues in dispute

Following the introduction and establishment of a Commonwealth carbon pricing scheme in 2011, a dispute arose between Delta and Centennial as to whether Delta was liable to pay an adjusted amount for coal supplied to it under the Coal Supply Agreement, taking into account charges imposed on Centennial in respect of methane emissions produced during the mining process.

The principal issue was as to the meaning of ‘attributable to’ in clause 12.3(c)(3) of the Coal Supply Agreement. Centennial (Seller) argued that the phrase required a sufficient connection between the carbon charges and the coal supplied to Delta, and that there was a sufficient connection in this case because the charges imposed on methane emissions were a necessary incident of the process of extraction of coal. Delta (Buyer) argued a narrow construction of the clause, in that any adjustment to the price payable could only relate to government charges ‘imposed’ on or charges that ‘seize upon’ the particular coal supplied to it.

If Centennial’s construction of clause 12.3(c)(3) was accepted, there was a further issue on the proper method of quantification of the attributable charges, and whether the adjustment should include charges referable to methane emissions produced from certain disputed mining activities, such as pre-draining, road construction, ‘goafs’ and stockpiles.

Primary judgment

McDougall J found that the supply of coal to Delta did not occur from an existing stockpile. It was necessary for the coal to be mined before it could be sold and delivered to Delta. Since the carbon charges were imposed on the emission of methane which was an inevitable consequence of mining, the charges were a necessary or integral part of the cost of production of coal. Therefore, there was a sufficient connection between the charges relating to methane emission and the sale and delivery of coal under the Coal Supply Agreement so as to render the former attributable to the latter.

As to the quantification of the attributable charges, his Honour considered that it was appropriate to pro-rate the emissions caused by the process of mining as between the total quantity of coal produced in that period and the quantity sold and delivered to Delta. Further, his Honour held that emissions (and therefore charges relating to those emissions) from the disputed mining activities (namely pre-draining, road construction, ‘goafs’ and stockpiles) should be included in the pro-rating exercise.

On appeal

Delta appealed on a number of grounds. The NSW Court of Appeal rejected Delta’s challenge and adopted the construction outlined by McDougall J. Therefore, the charges imposed on methane emissions were attributable to the coal supplied to Delta. The Court of Appeal placed reliance on the following factors:

  • The fact that clause 12.3(c)(2) obliges the parties to ‘negotiate’ the Government Charges Component suggests that the parties contemplated a need to negotiate or assess whether, and how much of, a particular government charge is attributable to coal supplied to Delta. The Court of Appeal concluded this was a factor favouring a broader construction of clause 12.3(c)(3) than the narrow ‘imposition’ construction put forward by Delta (although the Court of Appeal stressed that this factor alone is not determinative),
  • the words ‘attributable to’ should be given their ordinary meaning, i.e. as requiring a sufficient (and rational) connection between the charges from methane emissions and the coal supplied to Delta. The Court of Appeal held that the ordinary meaning of ‘attributable to’ is broader than the precise connection contemplated by the phrase ‘imposed on’ or ‘seized upon’ as Delta contends, and
  • the mere fact that it is difficult to attribute particular charges (or the amount of those charges) to the coal supplied to Delta does not preclude a construction of the clause that only required a sufficient and rational connection between the charges and the coal supplied.

In respect of the quantification of the attributable charges, the Court of Appeal agreed with McDougall J’s approach of pro-rating the charges attributable to the coal supplied to Delta. Their Honours considered that the words ‘to the extent attributable’ in clause 12.3(c)(3) suggests some flexibility and therefore pro-rating the charges was logical. Further, the Court of Appeal held that the emissions relating to the disputed mining activities should be included in the pro-rating exercise. This is significant as it places a construction of ‘attributable to’ in clause 12.3(c)(3) as including charges for methane emissions from post-mining activities such as stockpiling of the coal.