Gas buyers price review claim runs out of gas Time is of the essence

What you need to know

1. The Western Australian Supreme Court of Appeal has ruled that a buyer to a gas supply agreement could not issue a price review notice outside the "window" stipulated in the agreement.
2. The decision reinforces that contracting parties will be held strictly to the to the requirements set out in the agreement in order to instigate a price review .
3. More broadly, any failure to meet time stipulations in agreements that create "intractable disharmony" with an agreed regime may result in a party being ultimately shut out.  

Background

• Chevron and others (Sellers) and Pilbara Iron Company (Buyer) are parties to a long-term gas supply agreement.  
• As is typical in such agreements, the GSA set out a regime for reviewing the gas price at regular intervals.  Under the GSA's price review regime, either party could initiate a gas price review by issuing a price review notice within a "window" – being not more than 120 days and not less than 90 days prior to a stipulated "Price Review Date".  
• In 2020, the Buyer issued a price review notice three weeks outside of the window contemplated by the GSA.  At first instance, the Buyer claimed that the notice was still effective to initiate a price review, and sought a declaration from the Supreme Court of Western Australia to this effect.  The Sellers counterclaimed, and sought a declaration that the notice was invalid. 
• The question for the Court was whether complying with the time stipulation in the price review notice provision was essential to a price review being initiated.

First instance decision 

• The trial judge found in favour of the Buyer and held that the time stipulation in the price review notice provision was not essential.  That being the case, a price review notice could be validly issued at any time from the beginning of the notice period up until the Price Review Date.  
• The trial judge reached her conclusion based on the following key factors: 
  • the definition of "Price Review Notice" did not reference timing; 
  • the whole purpose of the price review notice provision was to enable the parties to adjust the gas price to reflect the market; 
  • the rights of parties to terminate the gas supply agreement were limited; 
  • there was no deeming provision which set out the consequences of a party's non-compliance with the time stipulation price review notice provision; and 
  • constructing the clause so that right to price review is lost by failure to issue a timely notice produces a harsh or uncommercial result.

Court of appeal's decision

• The Sellers appealed on grounds which amounted to a single proposition – the trial judge erred on the question of whether the time stipulation in the notice provisions of the price review clause was essential.
• The Court of Appeal overturned the trial judge's findings and held that the price review under the gas supply agreement could only be initiated by issuing a relevant notice within the time period stipulated in that clause.  
• The Court of Appeal commenced its analysis by repeating the well accepted principles applicable to the construction of written contracts – in essence, those principles are to determine the meaning of a contract by reference to its text, context and commercial purpose and by giving clauses a businesslike and harmonious interpretation.  
• In relation to the question of the commerciality of the price review provisions, the Court of Appeal noted that the parties were sophisticated and well resourced.  Further, the parties elected a window of 31 days for the notice to be issued – not a single day – which reduced the risk of any oversight of a party which intended to initiate a review.
• The Court of Appeal set out six key reasons for holding in favour of the Seller's construction: 
  • The price review notice provisions were the sole source of the parties' power to initiate a price review.  It follows that if a party does not issue a notice within the stipulated period, the party will not have done what the clause requires, so no price review is initiated.
  • Nothing in the ordinary meaning of the language used in the price review notice provision conveyed that the price review may be initiated in any manner other than that provided 
  • The construction advanced by the Buyer and the trial judge give the temporal element of the price review notice provision no work to do.  A construction which gives each part of an instrument some operation is to be preferred to a construction that gives part of the instrument no operative effect.  The price review notice provision stipulated the period for giving a notice – this is the entire purpose and effect of the provision.  The reasonable reader would have no reason to contemplate any occasion for the giving of a notice stipulating some other time.
  • The price review notice provision is but one part of the price review regime of the GSA.  After notice is received, a timetabled price review process begins involving negotiation, submissions, and arbitration.  In its entirety, the price review regime required numerous sequential steps and compliance with the time stipulation was, in the context of those steps, necessary.  The Court of Appeal noted that while the parties have no control over the time within which an arbitral award would be issued, the parties had agreed "limited, precise and interrelated" times for the steps in the price review clause – and each of these steps was expressed with "unambiguous finality".  As a consequence, there was no room for the interpretation that a "reasonable period of time" could apply for the parties to negotiate a reviewed gas price (which negotiation necessarily had to take into account the pricing principles set out in the agreement).  A reasonable period of time simply could not take the place of the express timing provisions of the price review clause. 
  • Allowing a party to initiate price review outside of the stipulated time period was "incoherent" with the other gas price review provisions (in particular -  those clauses which relate to a period of good faith negotiations to seek to agree on a new price and the obligation for the parties to submit a "final price" within 3 days of an agreed price review date).  
  • The Buyer's contention that there is a general principle that time stipulations in machinery provisions for determining price adjustments under a contract are presumed not to be essential, was rejected.  On evaluating the authorities, the Court of Appeal held that no such general principle exists and, even if it did, the price review notice provision is not properly characterised as a machinery provision.  The cases relied on by the Buyer were about rent review clauses in leases, and were not analogous to price review under a gas supply agreement.   The purpose of the price review notice provision is not to enable the parties to have the price adjusted, but rather to enable the parties to request a price review.

Key takeaway

• The decision of the Court of Appeal reinforces that parties to long term gas supply agreements will be held strictly to the timing provisions of their price review clauses.
• Time stipulations for invoking a price review under a gas supply agreement should be strictly followed as there is little scope for a party to depart from the timeframe chosen, and delays will not be excused.  Any delay, even a "small departure" from the notice period, could result in a party losing its right to initiate a price review.

More broadly, parties to long term agreements need to be careful when observing time stipulations in their agreements.  Any reliance on earlier authorities to the effect that time stipulations are merely part of machinery provisions is risky and may lead to a party seeking to enforce their rights being shut out.  

Authors: Adrian Chai, Partner and Edwina Jones, Senior Associate.