FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2017] FCAFC 159

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The cross-appeal be dismissed.

3.    Paragraphs 6 to 13 and 15 to 17 of the orders of the primary judge made 16 May 2016 be set aside and in lieu thereof it be ordered that:

Original Millmerran Contract

(a)    As to the contravention described to in paragraph 6 of the declarations made on 28 February 2014 (the Declarations), Pozzolanic Enterprises Pty Ltd (Pozzolanic) pay a pecuniary penalty to the Commonwealth of Australia (the Commonwealth) pursuant to s 76(1) of the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)) (the Act) in the amount of $500,000.

(b)    As to the contravention described in paragraph 7 of the Declarations, Cement Australia (Queensland) Pty Ltd (formerly known as Queensland Cement Ltd) (QCL) pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $3,000,000.

(c)    As to the contravention described in paragraph 8 of the Declarations, Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $100,000.

(d)    As to the contravention described in paragraph 9 of the Declarations, QCL pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $600,000.

(e)    As to the contravention described in paragraph 10 of the Declarations, Pozzolanic Industries Pty Ltd pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $100,000.

Tarong Contract

(f)    As to the contravention described in paragraph 16 of the Declarations, Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $1,000,000.

(g)    As to the contravention described in paragraph 17 of the Declarations, QCL pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $6,000,000.

(h)    As to the contravention described in paragraph 18 of the Declarations, Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $1,000,000.

(i)    As to the contraventions described in paragraph 19 of the Declarations, QCL pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $500,000.

(j)    As to the contraventions described in paragraph 20 of the Declarations, Cement Australia Pty Ltd (Cement Australia) pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $5,500,000.

Amended Millmerran Contract

(k)    As to the contravention described in paragraph 12 of the Declarations, Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $100,000.

(l)    As to the contravention described in paragraph 13 of the Declarations, Cement Australia pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $600,000.

(m)    As to the contravention described in paragraph 14 of the Declarations, Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $30,000.

(n)    As to the contravention described in paragraph 15 of the Declarations, Cement Australia pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $170,000.

Swanbank Contract

(o)    As to the contravention described in paragraph 21 of the Declarations (as varied by paragraph 3 of the orders made on 16 May 2016 (the 16 May 2016 Orders)), there be no penalty.

(p)    As to the contravention described in paragraph 22 of the Declarations (as varied by paragraph 4 of the 16 May 2016 Orders), Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $50,000.

(q)    As to the contravention described in paragraph 23 of the Declarations, Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $120,000.

(r)    As to the contravention described in paragraph 24 of the Declarations, Pozzolanic pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $30,000.

(s)    As to the contravention described in paragraph 25 of the Declarations, QCL pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $180,000.

(t)    As to the contravention described in paragraph 26 of the Declarations, Cement Australia pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $720,000.

(u)    As to the contravention described in paragraph 1 of the 16 May 2016 Orders, Cement Australia pay a pecuniary penalty to the Commonwealth pursuant to s 76(1) of the Act in the amount of $300,000.

4.    The above penalties, to the extent not already paid, are payable within 30 days.

5.    Within 14 days each party file and serve a submission (of no more than three pages) on costs.

6.    Pursuant to s 37AF(1) of the Federal Court of Australia Act 1976 (Cth), the confidential schedule to the reasons for judgment of the Full Court (the Confidential Schedule) shall be the subject of restrictions as to publication as set out in these orders.

7.    The Confidential Schedule shall be marked as confidential on the Court file and not be made available for public inspection in the Registry.

8.    The information in the Confidential Schedule may be disclosed to the persons who are permitted to have access to confidential information under the confidentiality orders in the principal proceeding (if and to the extent that such persons are permitted to have access to the information in the Confidential Schedule), and shall not be further disseminated by those persons.

9.    Pursuant to s 37AJ(3) of the Federal Court of Australia Act, paragraphs 6 to 8 of these orders will operate until such time as the confidential information under the confidentiality orders in the principal proceeding is no longer the subject of those confidentiality orders.

10.    Pursuant to s 37AG(2) of the Federal Court of Australia Act, the ground for making paragraphs 6 to 8 of these orders is that it is necessary to prevent prejudice to the proper administration of justice.

11.    There be liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

A.    INTRODUCTION

1    This appeal concerns the correctness of the primary judge’s decision to impose, or not impose, various penalties against the respondents. These penalties were imposed after the primary judge determined that the respondents had contravened provisions of the now Competition and Consumer Act 2010 (Cth) (the Act) (at the relevant time, the Trade Practices Act 1974 (Cth) (the TPA)) that prohibit conduct in respect of contracts, arrangements or understandings that restrict dealings or affect competition.

2    In the course of our reasons, the liability judgment of the primary judge dated 10 September 2013 (Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2013] FCA 909) will be referred to as the Reasons, and the penalty judgment of the primary judge dated 29 April 2016 (Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2016] FCA 453) will be referred to as the Penalty Reasons.

3    Where it is necessary to refer to confidential material in these reasons, that material has been set out in a confidential schedule to these reasons (the Confidential Schedule) rather than in the body of the reasons, to facilitate publication of these reasons. The Confidential Schedule forms part of our reasons.

4    Unless otherwise indicated, references to the “relevant period” in these reasons mean the period from 1 January 2002 to 31 December 2006.

5    It is useful by way of introduction to set out briefly the context of this appeal. The respondents were related corporate entities involved in the manufacture and distribution of cement and concrete materials in Queensland. In conducting this commercial enterprise, the respondents sought to position themselves as purchasers and suppliers of the substance flyash. Flyash is produced by power stations as a by-product of the burning of fossil fuels. It can be used as a partial substitute for cement in the production of concrete if it is of sufficient quality.

6    The proceedings at first instance concerned decisions of the third respondent to this appeal, Pozzolanic Enterprises Pty Ltd (Pozzolanic), to enter into or amend contracts with the operators of power stations to acquire their supply of flyash. The primary judge determined that the relevant markets in assessing this conduct were the upstream market for the supply and acquisition of unprocessed flyash from power stations located in South East Queensland (SEQ) (being Tarong, Tarong North, Swanbank and Millmerran), and the downstream market for the supply and distribution of concrete grade flyash in the SEQ region, which probably included some parts of Northern NSW immediately adjacent to the SEQ region.

7    The primary judge determined that these contracts between Pozzolanic and the relevant power stations contained provisions that had the purpose, or had or were likely to have had the effect, of substantially lessening competition in the relevant markets.

8    Consequently, the primary judge determined that, by making each of those contracts, Pozzolanic had committed separate contraventions of s 45(2)(a)(ii). Furthermore, the primary judge determined that, by giving effect to those provisions in certain instances, Pozzolanic and other respondents had contravened s 45(2)(b)(ii). Certain of the respondents were also found to have been knowingly concerned in the contraventions. None of these findings were disputed in this appeal.

9    The primary judge proceeded to impose various pecuniary penalties against the respondents in respect of these contraventions. Some pecuniary penalties were imposed separately, whilst others were imposed jointly and severally. No pecuniary penalties were imposed on the fourth respondent to this appeal, Pozzolanic Industries Pty Ltd (Pozzolanic Industries or PIPL). A detailed table of the contraventions and pecuniary penalties is set out at [331] below.

10    This appeal is brought in respect of the penalties imposed by the primary judge. In summary, this appeal concerns the following issues:

(a)    whether the primary judge erred in law in assessing and imposing a single joint and several penalty on two respondents;

(b)    whether the making of and giving effect to the provisions of each of the contravening contracts ought to be separately penalised or treated as a single course of conduct;

(c)    whether the primary judge erred in his treatment of issues of market harm and financial benefits; and

(d)    whether the penalties imposed by the primary judge were manifestly inadequate as they were not of appropriate deterrent value.

11    We now turn to an analysis of the background facts relevant to this appeal.

B.    BACKGROUND FACTS

12    The following statement of the background facts is substantially based on a document titled “Statement of Facts and Findings from Judgments Below” prepared by the parties for the purposes of the appeal, pursuant to an order of the Court. The background facts set out in the document prepared by the parties are drawn from the findings of the primary judge in the Reasons and the Penalty Reasons. Although the parties’ document contains footnotes referring to the relevant paragraphs of the Reasons or Penalty Reasons supporting each factual proposition, for the sake of readability we have not included those references in this section on background facts.

The respondents, industry participants and markets

The respondents

13    So far as the identity and corporate structure of the respondents are concerned, there are two relevant time periods: the period up to 31 May 2003 (when the Cement Australia merger took place) and the period after that date.

The period up to 31 May 2003: QCL and its subsidiaries

14    For the first period, three corporate respondents were found to have contravened the TPA:

(a)    Cement Australia (Queensland) Pty Ltd (formerly known as Queensland Cement Ltd) (QCL), which was the third respondent in the proceeding below and is the second respondent in this appeal;

(b)    Pozzolanic, which was the fourth respondent in the proceeding below and is the third respondent in this appeal; and

(c)    Pozzolanic Industries, which was the fifth respondent in the proceeding below and is the fourth respondent in this appeal.

15    The ownership structure of these entities (together, the QCL Group) was as follows:

16    The QCL Group was Queensland’s largest manufacturer and distributor of cement and one of Australia’s major marketers of concrete materials. The products offered by QCL included clinker produced from QCL’s 1.6 million tonnes per annum clinker plant at Gladstone, ‘Portland’ and blended cement products, flyash, slag, high grade quicklime and hydrated lime, distribution services, quarry materials used in concrete production, and the provision of technical services in cement and concrete technology. Until the Cement Australia merger in 2003, Pozzolanic and QCL were the dominant or single supplier of virtually all concrete grade flyash supplied in Queensland and, relevantly for these proceedings, in South East Queensland.

17    Pozzolanic was fully managed in an integrated way within the QCL Group. Its responsibility within the group was to conduct the flyash business and provide bulk materials transport through the operation of a bulk carrier fleet.

18    QCL was ultimately owned and controlled by Holcim Ltd (Holcim), a multinational cement company.

19    QCL was the ‘treasury company’ for the entities in the QCL Group (including Pozzolanic and Pozzolanic Industries). This meant that QCL:

(a)    was responsible for making payments to third parties on behalf of the entities within the QCL Group (and a corresponding entry was made in the inter-company loan account to reflect that the entity which incurred the payment owes the amount so paid on its behalf to QCL); and

(b)    received all payments for goods and services supplied by entities within the QCL Group (and a corresponding entry was made in the inter-company loan account to reflect the relevant company’s entitlement to the payment that was received by QCL).

20    Prior to the Cement Australia merger, QCL was not an integrated cement and concrete business, whether by direct shareholding in subsidiaries or through joint venture arrangements, and did not necessarily have guaranteed access to large downstream concrete customers.

21    Prior to the Cement Australia merger, the supply of concrete in SEQ was highly concentrated, with three major customers (CSR, Pioneer and Boral) accounting for approximately 60% of QCL’s cement sales and 70% of its flyash sales.

After 31 May 2003: Cement Australia

22    Prior to 31 May 2003, Australian Cement Holdings Pty Ltd (as it was then known) (ACH) was a joint venture between two concrete producer shareholders: CSR and Hanson (commonly known in Australia as ‘Pioneer’). In the year ending 31 March 2003, ACH supplied approximately 78.2% of its cementitious products (cement, flyash and blended cement) to CSR and Hanson. ACH did not operate any cement or flyash production facilities in Queensland.

23    On 31 May 2003, Hanson and Rinker (formerly part of CSR) agreed with Holcim to merge their respective interests in ACH and the QCL Group. ACH was re-named Cement Australia Holdings Pty Ltd (CA Holdings), the second respondent below. As part of this merger:

(a)    100% of the shares in QCL were transferred to CA Holdings; and

(b)    the shares in CA Holdings were held indirectly by Holcim, Rinker and Hanson (their holdings being 50%, 25% and 25% respectively) and CA Holdings became the holding company for the group of companies formerly controlled by QCL and ultimately Holcim.

24    Following the merger, the corporate structure of the QCL Group took the following form:

25    A partnership (the CA Partnership) was also established between Holcim (through its entities Holbris Pty Ltd and Holglad Pty Ltd), Rinker (through its entity Readymix Cement Pty Ltd) and Hanson (through its entity Hanson Australia Cement Pty Ltd). The CA Partnership was invested with the objective of conducting a business consisting of logistics, distribution, sales, marketing and the operation of certain storage facilities for cementitious products.

26    As part of this merger, the first respondent in the proceeding below and in this appeal, Cement Australia Pty Ltd (Cement Australia), was incorporated and appointed agent for the CA Partnership. Cement Australia (as agent for the CA Partnership) was also engaged by 24 companies in the CA Holdings Group (including QCL, Pozzolanic and Pozzolanic Industries) (the Corporate Group) under a Management Agreement to provide management and consultancy services to those entities.

27    Although Holcim, Rinker and Hanson held shares in Cement Australia in the same proportion as they held in the Corporate Group, Cement Australia was not a related body corporate of any of the other corporate respondents (within the meaning of s 4A of the TPA) at any relevant time.

28    The relationships between the Corporate Group, the CA Partnership and Cement Australia are illustrated in the following diagram:

29    After the merger:

(a)    QCL continued to act as the ‘treasury company’ for both the CA Partnership and the Corporate Group, making and receiving all payments to and from third parties on behalf of these entities.

(b)    The Corporate Group and Cement Australia each had a board of directors. Although it was not required, in practice the directors on each board of the Corporate Group and Cement Australia, as well as the management committee for the CA Partnership (the Partnership Management Committee) were the same.

(c)    Board meetings for the Corporate Group, Cement Australia and the Partnership Management Committee were held simultaneously and were each attended by the directors and alternate directors of Cement Australia, the Chief Executive Officer, Chief Financial Officer, Company Secretary and other members of the Executive as and when required. The Company Secretary would later prepare minutes and notionally allocate them between the different companies.

30    The merger was implemented by way of a suite of agreements entered into between Holcim (and the entities in the QCL ownership chain), Rinker and Hanson called the Framework Agreement; the Partnership Agreement; the Cementitious Products Acquisition Agreement; the Licence Agreement; the Agency Agreement; the Management Agreement; and the Secondment Agreement.

31    In practice, the Corporate Group manufactured cementitious products and undertook all steps required (and therefore bore the costs) up until the point at which the cementitious products left the manufacturing site. At this point, the Corporate Group sold the cementitious products to the CA Partnership at cost plus a mark-up, and the CA Partnership then distributed and sold the cementitious products to customers. Cement Australia, as agent for the CA Partnership, was responsible for undertaking, establishing, conducting, managing and operating the business of the CA Partnership, which included negotiating and entering into contracts with suppliers and customers on behalf of the CA Partnership.

Flyash and its use by concrete companies

32    Flyash is a by-product of the burning of fossil fuels for power generation. Provided it is of suitable quality, flyash can be used as a partial substitute for cement in the production of concrete.

33    The structure, composition and properties of flyash particles depend upon the structure and composition of the coal and the combustion process by which the flyash is formed. One of the natural advantages or properties of flyash as a raw material is that it has consistent composition when derived from any given or particular coal source because the chemical properties of the flyash are largely influenced by the chemical content of the coal burned.

34    In order to be used as a supplementary cementitious material, flyash needs to meet certain grading requirements. One requirement is the ‘fineness’ of the flyash.

35    Power stations employ collection devices to remove flyash from the flue gasses. In Australia, there are principally two types of flyash collection devices: an electrostatic precipitator and a fabric filter. When flyash is collected in electrostatic precipitators, it is captured within a series of ‘zones’ with the average fineness decreasing in each zone. This form of ‘natural classification’ does not occur when flyash is collected in fabric filters.

36    Unclassified or unprocessed flyash is known as ‘run-of-station flyash’. It is possible (but not always the case) that run-of-station flyash may meet the fineness requirements to be sold as concrete grade flyash without further classification.

37    Pre-mix concrete is typically manufactured using a mix of cement, slag, flyash, sand, gravel and water. The precise composition of a concrete mix varies according to the purpose for which the concrete is prepared, the cost of the ingredients and the strength required to be achieved.

38    Most concrete companies have a proprietary mix design for pre-mix concrete. Concrete producers seek to optimise their mix designs so as to achieve the lowest cost possible and tend to keep their mix designs a closely guarded secret. Most buyers of concrete generally seek consistent colour in the concrete.

39    Cement is the most expensive raw material component per tonne in pre-mix concrete production and represents a commodity where significant savings can be made through the use of lower cost supplementary cementitious materials (flyash or slag).

40    Flyash is used by concrete producers as a partial substitute for cement so as to reduce the overall or total cost of a concrete mix and to improve other characteristics of the concrete (such as workability, durability and pumpability).

41    In a practical sense, flyash can only replace a maximum of 25% to 30% of the cement in a concrete mix. Above this range a loss of reactivity occurs, which means, among other things, that the cementitious property of the flyash mix diminishes and the cost of adding more flyash to the mix outweighs the benefit of using flyash as a partial replacement for cement.

42    Customer sites for concrete producers generally operate on a ‘just in time’ delivery system for cementitious ingredients including flyash, which minimises the size of the storage silos needed at those sites.

43    Although there is a cost saving in the purchase price of flyash as compared with cement, using flyash adds to the concrete producer’s costs in other ways. Flyash needs to be stored in a separate silo and although it is a substitute for cement, it is not necessarily a ‘one for one’ replacement. Further, switching supply sources of flyash on a temporary basis is unattractive to concrete producers as customers of the producer usually expect the same (component) mix to be supplied during a project.

44    Concrete is typically produced at ‘batching plants’ where the components making up the specification for a particular concrete mix or batch required by customers of the concrete supplier are aggregated into the production mix.

45    Operators of larger batching plants tend to buy flyash and cement separately; store each component on site; and blend the components when batching to the concrete specification to be met. Smaller batching plants tend to purchase flyash blends due to limitations in their capacity to separately store flyash and cement.

Power stations that produced flyash in the relevant region

46    During the relevant period, there were a total of ten power stations on the eastern seaboard which produced flyash. Four of those power stations (Tarong, Tarong North, Swanbank and Millmerran) were within the South East Queensland region. Of the remaining power stations, three (Stanwell, Gladstone and Callide) were located in Central Queensland, while the remainder (Bayswater, Eraring and Mount Piper) were located in NSW.

47    The distance from Brisbane of each power station is shown in the table below:

Power station locations

48    As at the beginning of 2002, Pozzolanic had existing agreements in place with the operators of the Tarong and Swanbank Power Stations for the purchase and removal by Pozzolanic of flyash from those power stations. Pozzolanic also had flyash purchase arrangements in place with the operators of Gladstone and Callide Power Stations.

The relevant markets and industry participants

49    The primary judge found that at all relevant times, there existed two markets relevant to these proceedings:

(a)    an upstream market for the supply and acquisition of unprocessed flyash from power stations located in SEQ (being Tarong, Tarong North, Swanbank and Millmerran); and

(b)    a downstream market for the supply and distribution of concrete grade flyash in the SEQ region, which probably included some parts of Northern NSW immediately adjacent to the SEQ region.

50    During the relevant period, Pozzolanic was the entity which participated directly in the upstream market in the sense that it was the company which entered into the contracts with the SEQ power stations at Tarong, Tarong North, Swanbank and Millmerran. QCL and subsequently Cement Australia were the entities that participated directly in the downstream market in the sense that they were the entities that sold concrete grade flyash into the SEQ concrete grade flyash market.

51    Pozzolanic was, in essence, the sole supplier of concrete grade flyash in SEQ. Some sales of flyash sourced in NSW (at the Bayswater or Eraring Power Stations) occurred into Queensland but the evidence before the primary judge overwhelmingly established that virtually all of the concrete grade flyash sold in SEQ for use in concrete production was sourced by Pozzolanic and sold by QCL. QCL enjoyed approximately 85% of the sales of concrete grade flyash in the SEQ area.

52    Pozzolanic and QCL supplied flyash only on a ‘delivered basis’, based on their assessment of ‘next best alternative’ pricing (ie, the cost that a buyer would incur to acquire flyash from a source outside SEQ and transport that flyash to a particular concrete batching plant).

53    Some independent concrete producers in SEQ elected to purchase concrete grade flyash from New South Wales power stations and incur the additional costs of transporting it to SEQ. The primary judge found that this election arose as a result of the lack of rivalry within SEQ and the respondents’ ‘next best alternative’ pricing policy. Imports of NSW flyash did not constrain the ability of the corporate respondents to ‘give less and charge more’.

54    Two factors suggest that, if it were not for Pozzolanic’s position as virtually the sole supplier of concrete grade flyash in SEQ, the principal source of competitive constraint would have come from other suppliers of concrete grade flyash sourced from SEQ, rather than NSW:

(a)    The first is that when the Tarong and Millmerran expression of interest and tender processes commenced, Flyash Australia Pty Ltd (FAA), Transpacific Industries Pty Ltd (Transpacific) and others sought to secure a source of supply of SEQ flyash in order to compete with Pozzolanic and introduce rivalry into the supply of concrete grade flyash in South East Queensland. Until that opportunity, those companies had not secured, or had not been able to secure, access to a reliable source of flyash in SEQ and had not engaged in transactional rivalry with Pozzolanic. The correspondence from Transpacific and FAA to the power stations put that view to the power stations in unmistakeable terms. So too did the representatives of Wagner Investments Pty Ltd (Wagner), Nucon Pty Ltd (Nucon) and Independent Flyash Brokers Pty Ltd (IFB).

(b)    The second is that Pozzolanic itself took the view in its budget documentation for 2002 that the price of concrete grade flyash would fall by $10.00 per tonne in the event that a competitor secured a contract for the removal of flyash at Millmerran Power Station (ie, an SEQ source). Plainly enough, entry by a rival would be likely to result in the rivalrous supply of concrete grade flyash with an impact on price, volume or both. Moreover, the documents comprising the two critical briefing documents provided to the Board of QCL leading up to the decision to enter into the Millmerran Contract contemplated that should a rival secure one or other of the SEQ contracts under tender, there would be a significant impact upon the EBIT of QCL and the volume of sales (a loss of 250,000 tonnes and $6 million of EBIT).

55    QCL did not generally substitute its flyash from Gladstone and Callide for its Tarong and Swanbank flyash when supplying to customers in SEQ. There was no evidence before the primary judge that flyash produced at Stanwell had ever been sold in SEQ. The evidence demonstrated that it was not practical or feasible on any sustained basis (other than for the purposes of interim holding over supply of flyash in urgent circumstances) to transport Gladstone ash or Central Queensland ash into SEQ for sale to Pozzolanic’s SEQ concrete customers.

56    Concrete companies that needed to purchase concrete grade flyash in SEQ during the relevant period included:

(a)    Boral;

(b)    CSR (also known at various times as Readymix and Rinker);

(c)    Pioneer (also known as Hanson); and

(d)    Nucon (a large independent concrete producer which operates eight concrete batching plants together with quarry operations on the Gold Coast and in Northern NSW).

57    Between them, Boral, Pioneer and CSR were responsible for over 70% of concrete grade flyash purchases in the SEQ region.

Sales to shareholders

58    In the period following 31 May 2003 (being after the Cement Australia merger), Cement Australia supplied Hanson and Rinker (formerly Pioneer and CSR respectively) as two of its shareholders. Sales to Boral, Hanson and Rinker amounted to approximately 73.8% of all flyash sales in the SEQ concrete grade flyash market in 2003 and 2004. Further details are contained in the Confidential Schedule.

Timeline of contracts, arrangements or understandings

59    The primary judge’s findings on liability against the corporate respondents related to their conduct in entering into and/or giving effect to various contracts, arrangements or understandings in relation to the supply and acquisition of flyash on terms from the Swanbank, Tarong, Tarong North and Millmerran Power Stations. The timeline for the entry into those contracts, arrangements or understandings is summarised in the table below:

The period before the First Swanbank Contract Extension

Events leading up to the Tarong and Millmerran tender processes (1999 to August 2001)

60    In 2000, Mr Paul O’Callaghan (who was at that time QCL’s General Manager Sales and Distribution) prepared a Sales and Distribution Business Plan for QCL (the Sales Plan). The Sales Plan was not presented to the Board, but the primary judge held that Mr O’Callaghan accepted that it was highly likely that it was presented to QCL’s then CEO, Mr Townsend, and that Mr Townsend was content with it.

61    Mr O’Callaghan observed in the Sales Plan that the flyash market in Queensland was characterised by a “large oversupply” and that customers and competitors of QCL (including FAA and Transpacific) were looking for opportunities to gain direct access to flyash sources. In this context, Mr O’Callaghan considered that QCL’s aim in contracting with power stations was to “control supply [of flyash] into the cementitious market”. In that document, Mr O’Callaghan noted that both FAA and Transpacific were looking for opportunities to enter the concrete grade flyash market in Queensland, and that FAA was “aiming to break Pozzolanic’s exclusive position in Queensland to drive down prices”.

62    Mr O’Callaghan also perceived that Transpacific was a likely new entrant because that company was “looking for opportunities to break into the ash market in Queensland”. Mr O’Callaghan accepted that one of the possible outcomes, at least, of Transpacific breaking into the ash market in Queensland was a reduction in flyash prices and that if either FAA or Transpacific so entered, their entry could lead to a reduction in the volume of flyash sold by QCL.

63    In the Sales Plan, Mr O’Callaghan identified other factors he thought would have an influence on actual and potential rivalry affecting “ash supply” in Queensland. First, that QCL had a long term contractual position with NRG Gladstone, but that contracts with other power stations needed to be extended. In particular, a one year extension (to 2002) of the Tarong Contract would need to be negotiated, the rationale being that “further sources i.e. Millmerran, Tarong North, will only come on line in 2002 and should not become a real threat until 2003”. Secondly, QCL’s strength in Central Queensland was said to be its relationship with NRG, the superior performance of Gladstone flyash and QCL’s ability to export ash by sea. Thirdly, the existing contract with Swanbank would need to be extended to 2004 by ensuring an off-take of greater than 48,000 tonnes over a 12 month period before the end of 2002. Fourthly, QCL would maintain pricing on a delivered price basis.

64    Mr O’Callaghan considered that, with the Swanbank and Gladstone contracts secure to 2004 and 2005 respectively, QCL could then focus on Tarong Energy and consider methods of managing surplus ash entering into the market from the new entrant suppliers, Millmerran, Tarong North, Callide and Stanwell, and the “threat of new entrants” in the form of parties who would seek to deal with those power stations. The major long term threat, in that context, was seen to be power stations selling ash directly to end-users so as to maximise revenue, and power stations “aligning with FAA” to “guarantee sale of their ash to FAA’s customers as the supply/demand balance worsens”.

65    FAA’s direct and indirect shareholder relationship with the three principal concrete producers in Queensland was a concern to QCL regardless of whether FAA secured a contract with Tarong Power Station or Millmerran Power Station as, whichever power station FAA might secure as a source of flyash, the problem reflected in Mr O’Callaghan’s Sales Plan (of FAA delivering what might be regarded as the tied volume required by the three companies in South East Queensland) would likely arise.

66    As to Tarong, Mr O’Callaghan considered Tarong Power Station was the source of most of the flyash supplied in South East Queensland by QCL at the time and was a “key element” in its maintenance of a source of supply.

The Tarong and Millmerran tender processes (August 2001 - June 2002)

August 2001: The tender processes commence

67    In August 2001, the entity responsible for the management and operation of the Millmerran Power Station, Millmerran Operating Company Pty Ltd (MOC), commenced a tender process for the procurement of a Materials Handling Agreement comprising coal handling services, ash handling services (“Separable Portions A and B” of the tender) and the sale and removal of flyash (“Separable Portion C” of the tender). There were three tenderers for the purchase of flyash: Pozzolanic, FAA and Transpacific.

68    In August 2001, TEC also advertised a call for expressions of interest for the sale and removal of bulk flyash at Tarong and Tarong North Power Stations. Six companies submitted Expressions of Interest (EOI) in response to TEC’s call: Pozzolanic, FAA, Adelaide Brighton, Transpacific and three smaller participants (Clean Energy Products, Envirospheres and Bowquip).

September 2001: Millmerran tenders submitted

69    On 14 September 2001, Transpacific submitted a conforming tender to MOC.

70    Transpacific’s Executive Director, Mr Keating, gave the following evidence about Transpacific’s tender, which the primary judge generally accepted. As part of the preparation for its tender for Millmerran, Transpacific staff undertook a “detailed cost analysis” and explored a “potential customer base” of independent concrete producers in South East Queensland. Mr Keating was of the view that entry by Transpacific into the supply of flyash to independent concrete producers in South East Queensland would lead to a lowering of prices by QCL in response. This hypothesis was based on discussions with potential customers and Mr Keating’s experience of Transpacific’s purchases of flyash, and simply informed Mr Keating’s thinking.

71    Mr Keating also said that in his experience in dealing with power stations, a power station operator prefers to have only one off-taker of flyash. He also said that Transpacific was only interested in obtaining supply from a power station if it was the primary or exclusive taker of flyash so as to assure the volume and availability of supply; enable control of the quality and selection of flyash; and avoid responsibility for the conduct of other parties seeking off-take of flyash from plant operated by Transpacific on-site at the power station.

72    On 18 September 2001, Pozzolanic submitted a conforming tender and a non-conforming tender to MOC.

73    Pozzolanic’s non-conforming tender was submitted on the basis that Pozzolanic would be granted an “exclusive agreement for sale of ash into the cementitious market”. In both its conforming and non-conforming tender, Pozzolanic proposed to install plant at Millmerran comprising a beneficiation plant, a storage silo, transfer lines, a weighbridge and driver facilities and amenities. Both tenders submitted by Pozzolanic were also conditional upon favourable results of ash testing.

74    Pozzolanic Industries guaranteed Pozzolanic’s obligations under both tenders. Pozzolanic’s tender was submitted jointly with a tender from MPA Energy Services Pty Ltd (MPA Energy) which tendered for the ash handling and coal handling portions (Separable Portions A and B).

75    The primary judge extracted the following passage from Pozzolanic’s tender documents (in both the non-conforming and conforming tenders), in which Pozzolanic said this by way of background to its proposal:

This tender … has been based on the sale of concrete grade fly ash, which only represents about 10% of the total fly ash produced throughout Australia.

Further to this, this tender is being used to create strategic benefit for some organisations. This may not result in long term ash sales for Millmerran. An example of this is Flyash Australia’s failed attempt at realising any market from the Stanwell Power Station. Pozzolanic continues to develop ash markets for Stanwell.

The concrete market in south east Queensland is currently saturated with fly ash. Given Millmerran’s location, the unknown quality of the fly ash and competitive pressures, there is a limit to the amount of fly ash that can be sold into the concrete market. This volume will only ever represent a small proportion of the total ash produced at the station.

Pozzolanic is the only fly ash marketing company with an active research and development program for non-concrete grade applications.

76    On 19 September 2001, FAA submitted its conforming tender to MOC.

77    As at the closing date (19 September 2001) Transpacific’s tender was worth (to MOC) $7,393,200 over seven years; Pozzolanic’s conforming tender was worth $4,436,300 and Pozzolanic’s non-conforming tender was worth $7,150,000 over seven years; and FAA’s tender was worth $4,879,776 over seven years.

October 2001: Tarong Expressions of Interest submitted

78    On 1 October 2001, Pozzolanic lodged an EOI in respect of the Tarong and Tarong North Power Stations. The primary judge extracted the following passage relating to ash marketing from Pozzolanic’s EOI:

The focus of our current and previous contract with Tarong Energy is concrete grade fly ash, which only represents about 20% of the total flyash produced by the station. … The concrete market in south east Queensland is currently saturated with fly ash, which limits the amount of fly ash that can be sold into this market. Without access to Tarong ash, Pozzolanic would supply the south east Queensland market from other stations, including central Queensland, thereby decreasing the available volume of concrete grade ash for Tarong. We would utilise our existing customer base to maintain this market for Tarong.

79    On 13, 16 and 17 October 2001, Adelaide Brighton, Transpacific and FAA respectively submitted their EOIs. At some point prior to 19 October 2001, companies known as Clean Energy Products, Envirospheres and Bowquip also made submissions.

October - November 2001: Pozzolanic revises its offer at Millmerran / TEC announces its shortlist

80    The primary judge extracted the following passage from a document Pozzolanic submitted to Millmerran on or about 18 October 2001:

As outlined in our offer, the concrete market in South East Queensland is currently saturated with fly ash. With Millmerran there will be three power stations supplying concrete grade ash in the region, not including the ash that comes up from NSW power stations. Due to current environmental restrictions, the use of other grades of fly ash is limited. Figure 1 shows an estimate of the quantity of ash used and produced in South East Queensland in the year 2000. This indicates a utilisation factor of under 20%. This figure will drop to just over 10% with Millmerran, given that the amount of concrete grade ash used will not change (other than in cyclic fluctuations).

81    On 30 October 2001, Mr Hunt (Fuel and Ash Manager of Millmerran) presented a report to Mr Gamble (Plant Manager of Millmerran) summarising the tenders submitted by Transpacific, Pozzolanic, and FAA. He concluded that, subject to some supporting documents being provided, the FAA tender was the most attractive proposal.

82    On 1 November 2001, Pozzolanic increased its offer to MOC from $5.50 per tonne to $8.80 per tonne (in addition to its original guaranteed payment of $1,100,000 per annum, which Pozzolanic offered to now apply to year 1, as well as each subsequent year of the seven year term).

83    On 2 November 2001, TEC informed Pozzolanic, FAA and Adelaide Brighton that they had been short-listed for the tender process.

84    The primary judge extracted the following passage from a letter that Mr Simon of FAA sent Mr Hunt of MOC on 7 November 2001:

We would like to reiterate that the competitive forces with regard to fly ash supply in South East Queensland are about to change dramatically as both your ash collection tender and Tarong Energy’s are being tendered simultaneously.

[FAA] is the only company that can guarantee access to the cementitious materials market for fly ash through our Stakeholder Companies. But due to both ash supplies being tendered simultaneously, legally binding tender offers had to be submitted to both parties. This required us to halve our guarantee equally between the parties to ensure our commitments made in our tender offers could be sustained if we were to win both contracts.

We believe our existing offer of 92,500 tonnes … per annum is balanced and fair and allows significant development for our partnership to grow as the following underdeveloped market opportunities present themselves [and a range of possibilities were then set out].

…

Due to the current market variables we believe that if the total South East Queensland premix concrete market for fly ash, as used by our Stakeholders, were committed to Millmerran, Tarong Energy’s fly ash sales would significantly reduce. Their most likely reaction to this situation would be to offer their fly ash equally to all users resulting in fly ash having zero value in the market.

November 2001: QCL’s Business Plan and Budget

85    The primary judge summarised aspects of QCL’s Business Plan for the years 2002 to 2005, which it formulated on 9 November 2001. That document identified that although QCL “currently enjoy[s] single supplier status for Ash in Queensland”, a weakness confronting QCL was the perceived difficulty that QCL would face in retaining this single supplier status in the future. In this context, the Business Plan noted that there was a “large” and “growing oversupply” of flyash, and that “new power stations are encouraging new entrants to compete with Pozzolanic”. The Business Plan stated that “any loss of [QCL’s] single supplier status will adversely impact QCL’s annual EBIT by $1m to $6m p.a.”.

86    On 14 November 2001, the directors of QCL and its subsidiary companies met. During the course of that meeting, the Board considered a document called the “2002 QCL Group Consolidated Budget”. That document included the following observations in relation to flyash sales:

Sales

Queensland

The increase in fly ash sales follows the general market improvement on 2001. The total market is expected to increase by 13% following a flat 2001. No allowance has been made for the loss of market confidence following the recent world events. Pozzolanic’s increase is reduced to 5.7% because of the potential loss of market share from ash sourced by others from the new power station at Millmerran in SEQ as from July 02.

…

Market Share

The budget reflects reduced sales from Tarong of 5k per month as from July 02 as Millmerran ash enters the market.

Although the Tarong contract expires in Aug 02 the budget assumes that this is renewed.

Prices

A price increase of $3 per tonne was implemented in September 2001 though for CSR and PNI [Pioneer] this increase was reduced to $2.64. No increases were made for inter company sales to QCL for blending and there were no increases in Victoria as a $4.00 per tonne increase was implemented in September 2000.

As from July 2002, the budget allows for prices ex Tarong to drop by $10 per tonne because of competition from ash sourced ex Millmerran.

…

EBIT

The effect on EBIT of competition from ash sourced ex Millmerran in the 2nd half of 2002 is -$2.8m…

November 2001 to January 2002: Tarong moves to a tender process

87    In November 2001, TEC advised Pozzolanic, FAA and Adelaide Brighton that they had each been shortlisted to proceed further with a procurement process.

88    The primary judge noted that TEC’s assessed impression of Pozzolanic, FAA and Adelaide Brighton at that time was as follows. According to the 12 assessed deliverables and the five categories of grading, FAA attracted a score of 41. Pozzolanic attracted a score of 48. Adelaide Brighton achieved an assessment of 37 and the assessed impression was that, although Adelaide Brighton might be a possible “player in other uses” for ash, it had limited experience in “ash removal in power stations”.

89    The primary judge also extracted a letter that Adelaide Brighton sent TEC on 23 November 2001, which stated that:

As a consequence of research that we have conducted into the Queensland market for fly ash we advise that we have decided not to participate in “the final selection process” as presented by Tarong Energy ...

Since our initial response to the EOI dated 13 October 2001, [Adelaide Brighton] has completed detailed market research into the power generation, ash production and market opportunities in Queensland. Our research highlights an oversupply of ash with 3.55 million tonnes produced in 2000 and in excess of 1 million tonnes coming on line during 2002 with the completion of Millmerran and Tarong North stations.

The traditional Queensland market consumes approximately 495,000 tonnes of ash products with the majority of this product being sold into the Cement & Concrete industries.

With the InterGen-Millmerran Station commissioning early 2002 and a new ash marketer in Queensland, we anticipate heavy discounting of ash prices to allow market penetration for this new entrant. When combined with the defensive tactics that we would expect from the existing marketer of Tarong ash, it will make a third entrant’s position untenable.

As a consequence of the anticipated market competition in the “traditional sectors”, it is our belief that the primary activity for the successful tenderer for Tarong North ash and the surplus Tarong ash will be to manage the ash disposal.

Concurrent to this activity, market, product and process research would confirm the viability of ash beneficiation such as lightweight aggregate production, floater harvesting and magnetite removal which could potentially generate future revenue streams.

We confirm that we are interested in continuing to progress our expression of interest along these lines, but have responded in this way to ensure that you are under no misconceptions regarding the potential utilisation of the ash from the outset.

90    The primary judge summarised aspects of a presentation that Pozzolanic gave to TEC in support of its EOI on 27 November 2001. In this presentation, Pozzolanic noted that the market for concrete grade flyash is “Saturated … & supplied by Pozzolanic throughout Queensland”. Pozzolanic displayed the following map of South East Queensland and Northern New South Wales which purported to illustrate the natural market catchment for flyash supply from the Tarong, Tarong North, Millmerran and Swanbank Power Stations. The total volume of ash sales in 2001 by reference to those power stations in those natural and overlapping geographic catchments was said to be 270,000 tonnes.

91    Under the heading “SE Qld Cement and Ash Market”, the presentation observes that “QCL supplies cement & ash into the SE Qld market”; “Most customers are under contract for the purchase of cementitious materials (cement & ash)”; the contracts include “volume-related discounts to encourage loyalty – these are under threat if alternative products are purchased”; and the “Majority of flyash is sold into the concrete market, which is controlled primarily by three majors (CSR, Pioneer & Boral)”.

92    On 28 November 2001, TEC invited Pozzolanic and FAA to submit formal tenders for the sale and removal of flyash at Tarong and Tarong North Power Stations.

93    On 9 January 2002, FAA submitted its tender to TEC. The proposal stated that the minimum guaranteed quantity could be increased to 185,000 tonnes/annum and the consideration per tonne could be increased if Tarong was the sole source of flyash for FAA.

94    On 17 January 2002, Pozzolanic submitted its tender for the sale and removal of flyash at Tarong and Tarong North. The tender specified that “Pozzolanic would have rights to all types of ash, excluding cenospheres, with exclusivity for concrete grade ash”.

95    As at the closing date for tenders (18 January 2002), FAA’s proposal was worth (to TEC) $735,625 per annum. Alternatively, in the case of exclusivity being granted to FAA, its bid was $989,978 per annum. Pozzolanic’s tender was worth (to TEC) $2,000,000 per annum.

February 2002: Pozzolanic is selected as preferred tenderer at Millmerran

96    On 17 December 2001, Mr Hunt prepared a report for Mr Gamble in which he recommended, based on Pozzolanic having increased its price, that “Millmerran Power negotiate an agreement with [Pozzolanic] since Pozzolanic offer the highest revenue”. Nevertheless, as at December 2001, Mr Hunt (Fuel and Ash Manager for Millmerran) considered that FAA and Transpacific were both also “credible alternative purchasers”.

97    In February 2002, Mr Hunt told FAA that it was unlikely to be considered for a shortlist of candidates for the purchase and sale of Millmerran ash. On 11 February 2002, FAA withdrew its Millmerran tender. That same day, FAA wrote to TEC advising that it was willing to consider a non-exclusive agreement, and that it would be “pleased to consider and explore, if directed by [TEC], joint arrangements with others in order to maximise the potential for the sale of Tarong Ash”.

98    On 13 February 2002, TEC requested that Pozzolanic “limit [its] proposal to concrete grade ash only” and submit a separate proposal in relation to non-concrete grade ash. Pozzolanic responded by letter on 18 February 2002 and increased the consideration to a fixed lump sum of $2,500,000 per annum (for a grand total of $17,500,000 over seven years).

99    On 26 February 2002, in response to a request from TEC for its final submission, FAA revised its offer in relation to Tarong and Tarong North to:

(a)    a take or pay commitment of 120,000 tonnes per year at $8.80 per tonne on a non-exclusive basis; and

(b)    on an exclusive basis, a guarantee of 220,000 tonnes per year at $8.80 per tonne.

February/March 2002: Mr Arto commences as QCL’s Managing Director

100    On 22 February 2002, Mr Phillipe Arto commenced as the Managing Director of QCL reporting to the Chairman of QCL, Mr Jerry Maycock. Mr Arto had a three week handover from Mr Townsend during which he was briefed on the context of the flyash market and the competition. Mr Maycock also briefed Mr Arto on the need to develop a strategy within QCL to address the problem that QCL was “very vulnerable and exposed to a very high level of concentration of customers, being also competitors”.

101    From at least November 2001, Mr Maycock had regarded FAA as a potential competitor because market intelligence had made it plain to him that FAA was looking at opportunities that came up in South East Queensland to secure flyash sources of supply.

102    The primary judge extracted the following evidence that Mr Arto gave in relation to his discussions with Mr Townsend:

… we covered the whole situation, and certainly we covered the relationships with CSR, Pioneer, Boral, ACH, and obviously in the context of this relationship, we covered cement and flyash, and we could see − I could see immediately from the numbers that [they] were critical customers for QCL in defence of [their] share of the volume we were selling, and in the sense that − compared to other customers, they had much more capability to supply their own operations or they have options to supply these operations.

… dealing with customer competitors is much more difficult than dealing just with big customers. Usually big customers have a buying power, and they can leverage this buying power to extract price concessions [from] their suppliers. This is already something which was existing with CSR, Pioneer or Boral as customers, but on top of that, they had the ability to leverage [Australian Cement Holdings] as a cement company, to potentially import cement in – or in our market for their own needs, or to develop their relations in the market, or to bring in fly ash or develop fly ash operations. So they were, in a sense, much more difficult for us to [manage].

103    Mr Arto gave evidence that the only way QCL could keep customers “like this” was, first, to have flyash to supply (or a cement plant, in the case of cement); second, to provide an excellent service (logistics); and third, supply at a price that discouraged those customers from setting up their own operations. Thus, QCL’s supply price had to be lower than the “alternative” supply price should they seek to “buy elsewhere” or to “import” the product. Mr Maycock also described negotiating with CSR, Pioneer and Boral, which are “very substantial multinational companies”, as an “arm wrestle”.

104    As at March 2002:

(a)    There was no actual rivalry in the supply of concrete grade flyash obtained by a supplier from a power station in Queensland for supply to buyers located in SEQ. QCL controlled the supply of such flyash in every practical sense.

(b)    Tarong (and the new Tarong North Power Station in effect “stapled” to the Tarong tender) represented the major source of Pozzolanic’s flyash for supply to customers in SEQ. Millmerran represented a new substantial volume of flyash, although unknown and untested.

(c)    Both sources of flyash were under competitive challenge by tender. Although QCL periodically engaged in an “arm wrestle” with Boral, CSR and Pioneer over prices, rebates and other supply terms, QCL perceived the strength of its position in that process (and, in consequence, the profitability of its flyash enterprise) would be affected should it not secure a contract for the familiar and well known Tarong flyash (in particular) and the Millmerran Contract.

February/March 2002: Negotiations continue

105    On 28 February 2002, Mr Wilson (Manager of Pozzolanic) and Mr Cameron (of MPA Energy Services) met with Mr Hunt and Ms Knox (both from Millmerran). During that meeting, they were told that Transpacific’s bid was “more aggressive”, that it “addressed realistic market potential”, and that “Millmerran was looking for a guarantee of 135t at $10-10”, that is, a guarantee of 135Kt per annum at $10.10 per tonne.

106    Mr Wilson’s notes reveal that there were four areas of “consideration” for the meeting. They were exclusivity, operational risk, commercial terms and market risk. As to exclusivity, the note suggests that Millmerran wanted to “keep doors open to other users”. The meeting notes record “looking at tonnages (as a way to lock out exclusivity)”.

107    On 4 March 2002, Mr Wilson provided an email briefing note to Mr Arto which included the following commentary:

As background to our meeting on Wednesday, here is some information regarding ash contracts, particularly in South East Queensland.

Here is a summary of all of the contracts Pozzolanic Enterprises has with power stations:

There are two contracts with power stations in SEQ:

Tarong Power Station

–    owned & operated by Tarong Energy

–    current contract expires 31 August 2002

–    fixed royalty of $2,200,000 per year

–    247kt sold from Tarong in 2001

–    fly ash is not as good as ash from Gladstone Power Station

–    about 1.5 million tpa of ash produced by the station

Swanbank Power Station

–    owned and operated by CS Energy (also operate Callide Power Station)

–    current contract expires 31 December 2002

–    contract extended by 2 years if sales target achieved (good possibility)

–    41kt sold from Swanbank in 2001 (only 33kt is concrete grade fly ash)

–    ash is not good quality

–    $449,000 royalty paid in 2001

–    CS Energy looking for a life of station agreement to replace current (approx 10 years)

–    about 200,000 tpa of ash produced by the station

There are two contracts currently being tendered − Tarong Power Station & Millmerran Power Station

Tarong Power Station

Current profitability of Tarong is as follows:

Tarong’s total EBIT [that is, the EBIT contribution derived from selling Tarong sourced flyash] for 2001 was $7.3 million for 247kt.

Tarong is installing another unit at Tarong North (currently under construction − should be completed by early 2003). The new ash contract will cover fly ash from both stations. Tarong North will produce a further 500 ktpa of fly ash (total of 2 million tpa for the station).

[The] other tenderer is [FAA]. They were not preferred at Millmerran and have subsequently increased their offer to Tarong. To secure contract we need to offer the following:

Fixed royalty of $2,600,000 per annum, indexed with CPI (excluding GST) for 10 year term.

Installation of plant at Tarong North (capital of $1-$1.5 million) during 2003.

Millmerran Power Station

This is a new power station with similar cartage distances to Brisbane (except via the north of Brisbane). It will be operated by InterGen … It will produce about 1 million tpa of fly ash.

MPA has an agreement with Millmerran for coal and ash handling. The other tenderer for the ash sales is Transpacific (Terry Peabody). To secure contract we need to offer the following:

Guaranteed royalty of 135ktpa @ $9.20 per tonne (excluding GST) − total of $1,242,000 per annum for 7 year term ... Installation of plant (capital of $1.5 million) during latter part of 2002.

Millmerran would also like us to look at early payment options − ie pay cash for a year (or some other term) upfront. This is to help with their cash flows.

March/April 2002: Pozzolanic becomes preferred bidder at Tarong and Millmerran

108    On 13 March 2002, MOC wrote to Pozzolanic to inform it that Pozzolanic had been selected as “first place bidders” for the tender, but that “final award” was subject to ongoing negotiations. Transpacific was informed of this by another letter on 14 March 2002. From this date, MOC and Pozzolanic were engaged in contractual negotiations regarding a wide spectrum of issues including ash pricing, payment, ash testing, the accepted standard of concrete grade flyash, permissions with regard to the construction of plant and the parties’ respective rights of termination. These discussions appear to have been quite tense at times, so much so that some MOC personnel, including Mr Gamble and Ms Knox, suggested that tender negotiations should be commenced with Transpacific or FAA.

109    At some point prior to April 2002, TEC also notified Pozzolanic that it was the preferred tenderer at Tarong and Tarong North.

110    The primary judge extracted part of a memorandum that Mr Peter Klose (who was then QCL’s Business Development Manager) sent to QCL’s Executive Management Group on 2 April 2002, in which he said on the topic of “Control of SCM’s [supplementary cementitious materials]”:

Flyash

The threat of a second flyash supplier in the Queensland market remains current. Both Trans-pacific and FAA have submitted tenders for Millmerran and Tarong power stations.

The ability to secure these contracts is vital in retaining value to the Pozzolanic business. Current estimates to secure the contract [sic] are for an additional cost of [$3 million per annum] but this will be offset by increased ash prices.

11 April 2002: The QCL Board approves the entry into contracts with TEC and MOC

111    On 11 April 2002, the QCL Board considered a report entitled “Ash Market in SEQ March 2002”. The report was presented to the Board by Mr Ridoutt.

112    The primary judge extracted the following observations in relation to “New Ash Contracts in SEQ” from the report:

We are currently in contract negotiations for 2 new ash contracts in SEQ – Millmerran Power Station; and Tarong and Tarong North Power Stations.

Pozzolanic’s objective is to be the preferred ash manager for Queensland power stations. Our strategy was therefore to secure both contracts and therefore maintain the supply of fly ash to our existing customer base.

Millmerran is a new power station that will be operated by InterGen … MPA has entered an agreement for coal and ash handling. Pozzolanic is the preferred tenderer for the ash sales. Millmerran is hoping to finalise the ash sales contract by early May.

The new contract at Tarong replacing our existing contract, which expires at the end of August, and includes ash from the new Tarong North Power Station. We have been told unofficially that Pozzolanic is the preferred tenderer. A contract is currently being prepared.

113    As to the risks, the report said this:

Loss of either contract (Tarong or Millmerran) may result in a loss of up to 250,000t of fly ash and an EBIT of $6 million. However, there are some risks associated with securing both of the new contracts for 7+ years. These risks and the appropriate actions are outlined below:

Risks associated with securing both contracts

114    In relation to the risk identified above, Mr Arto gave evidence that, although he could not recall the specific analysis that was conducted concerning that matter, he could recall that part of the logic supporting the decision to approve Pozzolanic’s entry into both contracts was the fact that Pozzolanic faced the risk that, if FAA was successful in obtaining either the Tarong Contract or the Millmerran Contract, Pozzolanic would lose not only a source of supply but also potentially its three major customers (as FAA was owned by Pozzolanic’s three major customers).

115    In his oral evidence, Mr Arto described the position confronting QCL, if either one of the two contracts was lost, in these terms:

If we lost Tarong to [FAA], for example, that would be probably the most dramatic scenario, so this is why we were really trying to do our best in terms of the offer to Tarong. If we had lost Millmerran [to FAA], maybe the consequences would have been less. If we lost either contract to another competitor or a new entrant in the business, we could make scenarios regarding the potential impact on volume or price. At the end of the day, in the worst case scenario, we were talking of $6 million of EBIT versus [$100 million], so it was a significant part of QCL and we wanted to keep it ...

(Emphasis in Reasons.)

116    As to the primary judge’s findings in relation to Mr Arto’s evidence generally, see [156] to [173] below.

117    The proposal put to the Board (as set out in the report) was in these terms:

Proposal

We seek the approval of the following items:

(a)    Enter into long term contracts at Millmerran and Tarong to secure fly ash supply at both power stations;

(b)    Increase our minimum yearly take or pay payments for ash by $1.6 million per annum to $4.2 million; and

(c)    Allocate $3.5 million to build new plants at Millmerran and Tarong North.

118    The report then set out an analysis of the “economics” of the proposal as put. The analysis was set out in a table which compared “key indicators” between the 2001 actual results, the 2002 Budget and the 2003 projection or estimate (which assumed that Pozzolanic would win the Millmerran and Tarong Contracts and the capital, as proposed, would be expended and deployed) for SEQ. The comparison was this:

*    Lower average selling price reflected a lower selling price due to loss of Millmerran ash contract

119    The 2002 Budget figures in the table above were the figures that had been formulated and put to the directors of QCL and its subsidiary companies during the November 2001 Board meeting (referred to in [86] above). These figures had been prepared on the assumption that a lower average selling price would be obtained due to a loss of the Millmerran Contract.

120    In the commentary in the Board report, an observation was made that FAA was particularly keen to win the Tarong Contract, having withdrawn its tender for Millmerran, while Transpacific was said to be “particularly aggressive” in relation to Millmerran.

121    A capital expenditure request was also submitted to the QCL Board with this report. That request sought approval for the expenditure of $3,500,000 on plant and equipment at the Millmerran and Tarong sites in the event that both contracts were secured. The “significant strategic benefit” of the capital investment was put this way:

Securing the contracts at Tarong and Millmerran will maintain our ash sales to our existing customers. Loss of either contract may result in a loss of up to 250,000t of fly ash and an EBIT of $6 million.

122    On 11 April 2002, the directors of Pozzolanic, Mr Maycock and Mr Arto, resolved to proceed with the requested capital expenditure in the event that both contracts could be secured on acceptable terms.

April – September 2002: Discussions regarding the proposed contracts with Tarong and Millmerran

123    In April and May 2002, draft agreements were exchanged between TEC and Pozzolanic.

124    On 9 May 2002, Mr Ridoutt, on behalf of Pozzolanic, telephoned Mr Gamble of MOC to discuss the draft contract. Mr Gamble’s file note of the conversation records, among other things, that “his [Mr Ridoutt’s] legal advisors are concerned about the lack of an exclusive arrangement”. This observation reflects Mr Ridoutt’s apparent continuing desire for Pozzolanic to secure “an exclusive arrangement”. Mr Gamble’s file note also records that: “I [Gamble] suggested that we should include an escape clause in case we decide to sell ash to a third party (for the cementitious flyash market). We agreed that this might be a good idea and that we should arrange a meeting next week to discuss this”.

125    On 15 May 2002, Mr Wilson, for Pozzolanic, sent correspondence to both MOC and TEC discussing, in both instances, the draft terms of the proposed contracts with each power station.

126    In the letter to MOC (sent to Ms Knox), Mr Wilson observed that Pozzolanic’s major concern centred upon managing its “risk profile” in relation to the possibility that MOC would attempt to sell concrete grade flyash to any third party at a price and on terms more favourable than those agreed between Pozzolanic and MOC in circumstances where the parties were negotiating “a 7 year agreement that will be worth close to $10 million”. Mr Wilson therefore proposed that the parties include a price re-negotiation provision to the following effect:

Pozzolanic … be able to seek a price re-negotiation in the event that Millmerran sells concrete grade fly ash to any third party at a price and on terms more favourable than those agreed between Pozzolanic and Millmerran. In this event, the parties would be required to meet and negotiate for a set period (say one month). If the parties did not agree on price adjustment within that time then Pozzolanic would have the ability to elect to terminate the agreement without penalty and at its sole discretion.

127    In the letter to Mr Collingwood of TEC, Mr Wilson said that the negotiations were for an agreement in which Pozzolanic “guarantees to take the title and remove a [minimum] of two hundred thousand (200,000) tonnes per annum of Power Station Ash”. At the time this letter was sent, the consideration being offered was, at minimum, $2,500,000 per annum for seven years ($17.5 million).

20 May – 20 June 2002: Discussions with Millmerran

128    On 22 May 2002, a meeting was held between Mr Wilson (Manager of Pozzolanic), Mr Ridoutt (General Manager Sales and Marketing at QCL), Mr Howard (Clayton Utz), Mr Hunt (Fuel and Ash Manager for Millmerran), Ms Knox (MOC) and Mr Ryan (Freehills). Among other things, the notes from that meeting record that “Millmerran has US partners who are subject to tough examination of competition issues”.

129    On 30 May 2002, Ms Knox sent an email to Mr Wilson and Mr Ridoutt, copied to Mr Hunt and Mr Jardine (a Freehills lawyer) in which Ms Knox said:

One week has now passed since our last meeting and considering we are close to producing first ash at the project we are keen to finalise direction of tender process as soon as possible. As I understand Clayton Utz was going to prepare an opinion on the concept of restriction of further sale of concrete grade fly ash in terms of it having no Trade Practices issues and you were going to discuss all with your Directors to see if Pozzolanic was in the position to proceed in negotiations.

Appreciate update on status of Pozzolanic’s position and on timing of Clayton Utz’s opinion as soon as possible.

130    Mr Ridoutt sent an email to Ms Knox that day copied to Mr Wilson saying:

Sorry for the delay, I attach the advice. My discussion with our Directors was not very productive and managing risk to an acceptable level may still be an issue. I expect that this advice should help with our negotiations.

131    The letter of advice from Clayton Utz is dated 29 May 2002 and is addressed to Mr Wilson. The letter refers to “our recent discussions regarding a price renegotiation arrangement in respect of the proposed contract between [Pozzolanic] and [MPP] for the acquisition of fly ash”. The letter recites the elements of the price renegotiation clause as drawn by Clayton Utz previously and records this observation:

It is our understanding that the reason for such a clause is that:

1.    the term of the proposed contract is for a period of seven years;

2.    Pozzolanic wishes to avoid the risk of the market value of fly ash falling during that period;

3.    Pozzolanic does not wish to pay above the market price for fly ash.

132    The letter notes that Freehills had suggested that the proposed price renegotiation clause “may breach the provisions of the Trade Practices Act” because in their view “such a clause would result in a substantial lessening of competition in the market”. Clayton Utz said that in their view, it was not possible to conclude on the material then available that such a clause “would result in a substantial lessening of competition in the market”. Other things would need to be known, in their view, such as how the market might be defined; the volume of ash Millmerran would produce; the volume of ash produced by Millmerran over and above the contract minimum Pozzolanic would be likely to take; the market demand for flyash; and possible fluctuations in the price.

133    Clayton Utz regarded the price renegotiation clause as arguably pro-competitive based on their perception of the end Pozzolanic was seeking to achieve, which was put in this way in the letter:

… Pozzolanic is endeavouring to ensure that the price at which it purchases fly ash today, next year and in seven years’ time is a fair market value for fly ash. This will enable it to remain competitive in the relevant market in which it operates.

134    On 31 May 2002, Ms Knox circulated an email within the MOC Management Group in which she said this:

Have received something from Clayton Utz on the ash purchase. We have discussed with [Mr Jardine at Freehills] and in general are very disappointed with the synopsis and do not consider [it] a legal opinion. Clayton Utz has not gone into the issues and has given no comfort on the substance of the problem and hasn’t concentrated on the effect that their proposed clause could have. Therefore I will respond to Pozzolanic accordingly. Will advise that they need to confirm by [close of business] Monday if our proposed clause is acceptable. If they do not positively respond by COB Monday will exclude them for tender process. We do expect [FAA] to approach us on this business.

135    That day, Mr Gamble responded to Ms Knox’s email, copied to Mr Jardine and Mr Hunt in which he said this:

I generally agree with your proposed course of action. We should make the point to Pozzolanic that they were given preferred tenderer status on the understanding that they had agreed to a non-exclusive arrangement. It is disappointing that they have since backed away from this position (although, it was surprising that they were originally prepared to make this offer). We should keep in mind, however, that we are running out of options. With Transpacific out of the picture, we are left with Fly Ash Australia as the only remaining viable tenderer. If they have done a deal with Tarong in the meantime, they will not be very interested in offering us a good price. Perhaps we should leave the door slightly open for Pozzolanic if they are prepared to accept suitable terms.

136    On 1 June 2002, Mr Wilson and Mr Hunt had a telephone discussion. Mr Wilson’s handwritten notes record Mr Hunt’s view in this way:

Concerned about how it has gone from site’s point of view. Doesn’t look like we will get an agreement. Clayton Utz info not helpful .. didn’t address the issue of Pozzolanic’s position in the market. [Seeking out] legal opinion – [Millmerran] are digging in – US based – very nervous about risk.

137    On 20 June 2002, Ms Knox sent an email to senior managers at MOC in which she expressed very frank views about her assessment of the position, in these terms:

From discussions held with Pozzolanic over the past few months I believe it is unlikely that we will be able to reach agreement on the restriction on sale of fly ash, otherwise known as ‘clause 40’. Think that Pozzolanic does not have the appetite for our clause as it is not meeting their aim of protecting their commercial investment in this deal. We are clearly not in any position to accept their clause and therefore we are at an impasse in negotiations and not sure if we are able to close the 7 year deal.

Pozzolanic is again angling at reducing the term to one year in order to alleviate TPA issues and of course this gives them a lot more commercial benefit however we lose 6 years of value from this and is against what we tendered for and what Pozzolanic put in a bid for. Essentially we feel that Pozzolanic has negotiated in extremely bad faith and in hindsight we should have asked for a bid bond at the start of the tender process to cover our costs in legal fees with them wasting our time in negotiations.

Although Pozzolanic have now offered a bid bond, I will respond to them today and say that we think its [sic] is too late for a bid bond as we do not want to be seen to be locking in only negotiating with them and we are currently considering opening up discussions with other bidders. By getting a bid bond from QCL and negotiating with someone else it would be seen as being cute.

I recommend that you phone the CEO of QCL to give a similar message. Can say that we are extremely disappointed with the way that they have put a bid in and we accepted in good faith and yet they have tried to negotiate around one of the most crucial issues in the contract – being exclusivity. We specifically addressed the issue of exclusivity during the tender evaluation process and Pozzolanic said they would not need an exclusive deal. Think we should make a last attempt at trying to get as much value out of Pozzolanic as we can by saying that we will re-open discussions with others particularly given that they want to go to a one year contract.

Important to note that Tarong has now awarded their fly ash contract to Pozzolanic and this on an exclusive basis for 8 years”. Given that information Fly Ash Australia may be more hungry for our ash and we may want to begin discussions with them given that Pozzolanic negotiations are not going anywhere.

6 June - 25 June 2002: Discussions with Tarong

138    On 6 June 2002, TEC and Pozzolanic met to discuss the draft agreement. TEC expressed “concern about ACCC issues”. The meeting note also records that there would be “no exclusive agreement”. The minimum tonnages were “not negotiable”. As to the term, the note records that Pozzolanic had tendered on the basis of an initial 10 year term and contended that there should be a review period after seven years. TEC seemed to be concerned about the notion of “rolling” three year periods.

The 28 June 2002 briefing note

139    The primary judge summarised an information paper that Mr Wilson and Mr Chalmers prepared on about 28 June 2002 for the purpose of briefing Mr Arto on the dynamics operating within the “Ash Market”. His Honour found that the briefing note “contains an important assessment of their thoughtful views about that matter.”

140    The briefing note observed that in 2001, concrete production in Queensland amounted to 4.2 million cubic metres of concrete. It also observed that if an assumption was made that the average flyash usage is 90 kilograms per cubic metre, flyash usage would be 378,000 tonnes. The report noted, in that context, that QCL’s actual flyash sales for 2001 were 390,000 tonnes.

141    By these words, the primary judge found that Mr Wilson and Mr Chalmers were telling Mr Arto that QCL, in effect, had the entire market in Queensland. They put that conclusion, based on those statistics, in this way:

The fly ash market is truly saturated in Queensland, thanks to the efforts of Pozzolanic over a number of years.

(Emphasis in Reasons.)

142    The briefing note then went on to provide a segmentation of the position in South East Queensland in this way:

In South East Qld, a rough split of the concrete grade ash sales in 2001 is as follows:

143    The 2001 sales to CSR, Pioneer and Boral therefore amounted to 190,000 tonnes.

QCL’s price increase (28 June 2002)

144    On 28 June 2002, QCL wrote to CSR and Pioneer notifying them that:

(a)    from 1 October 2002, QCL’s delivered price for flyash was to increase by $4.00/tonne for “South Queensland and Northern New South Wales”;

(b)    until 31 December 2002, all rebates payable to customers would increase by the amount of the price increase so as to offset the price increase until then;

(c)    from 1 January 2003, the rebate previously applied for Tarong flyash would be reduced to $0.48 per tonne (excluding GST), and there would be no rebate for Swanbank flyash;

(d)    from 1 January 2003, in relation to Tarong flyash supplied to Gold Coast batching plants, a rebate would be paid in an amount equal to 100% of the price increase, with the effect that there was no net increase in prices for those particular batching plants; and

(e)    a further review of pricing would occur at the end of the first quarter of 2003.

145    From 1 January 2003, net delivered prices for CSR and Pioneer therefore increased by $3.52/tonne for Tarong flyash, and $4.00/tonne for Swanbank flyash.

146    On 28 June 2002, QCL also wrote to Boral notifying it of the price increase, rebate arrangements, and future pricing review described in [144] and [145] above. In the case of Boral, however, from 1 January 2003, QCL’s delivered price for flyash would be maintained at the 1 October 2002 delivered price but the rebate would be reduced to a level that had the effect of increasing the net delivered price of Tarong flyash to Boral by $3.00/tonne.

147    By the time Mr Ridoutt wrote his letters of 28 June 2002 advising customers of the price increases, Mr Ridoutt, Mr Wilson and others within QCL were proceeding on the basis that a contract for the purchase and supply of flyash from Millmerran Power Station was very likely to occur.

First Swanbank Contract Extension

148    On 11 July 2002, Pozzolanic, by its manager Mr Wilson, notified CS Energy that it exercised the option granted to it to extend the Swanbank Contract by two calendar years until 31 December 2004. “For all practical purposes” the Swanbank Contract was an exclusive supply agreement until 31 December 2004.

149    Pozzolanic’s exercise of its right to extend the contract occurred against a background where, from at least 2000, CS Energy had formed the view that the ash sales arrangements with Pozzolanic needed to be reviewed having regard to (amongst other things) the requirements of the TPA. CS Energy was “unequivocal” about the need to adopt an express term conferring upon CS Energy the right to sell flyash to parties other than Pozzolanic in any revised contract.

Board Paper: “The Ash Market in SEQ September 2002” (September 2002)

150    On 3 September 2002, Clayton Utz (Mr Howard) sent a letter to Mr Wilson commenting upon aspects of the negotiations with MOC. Mr Howard said this:

The proposed Ash Purchase Agreement effectively provides for a 7 year agreement with take or pay payments (of approximately $1.3M each) to be made annually in advance over the term. In return, Millmerran must make available to Pozzolanic and allow it to take a minimum quantity of 135,000 tonnes per Operating Year of Concrete Grade Fly Ash.

Security of Supply

There has been significant discussions with Millmerran in relation to securing the supply of ash (particularly concrete grade [fly] ash) in favour of Pozzolanic but still enabling Pozzolanic to compete with lower priced ash should that occur in the future. Pozzolanic was assisted in these negotiations by Clayton Utz.

Millmerran stated during these negotiations that it was extremely sensitive to any provisions that may be seen to have any trade practices implications. As a result, Millmerran would not contemplate an exclusive arrangement over the 7 year term in relation to concrete grade fly ash.

A number of options were considered and canvassed with Millmerran including:

•    the inclusion of a price renegotiation clause in the event that Millmerran sold concrete grade fly ash to any third party at a price on terms more favourable than those agreed between Pozzolanic and Millmerran;

•    A right of first refusal to purchase additional concrete grade fly ash; and

•    Market confirmation and termination (which would involve Millmerran calling tenders for the balance of the term in the market place at set intervals) and Pozzolanic having the ability to exit the contract if it was unsuccessful or the outcome of those tenders were not acceptable to it.

The parties were unable to reach a consensus in respect of any of these possible options, primarily due to Millmerran rejecting them.

… As a result of a one day intensive negotiation [between Millmerran and Pozzolanic involving Clayton Utz], the parties renegotiated the following position:

•    Pozzolanic could terminate the ash agreement at any time after 31 December 2006 and upon 60 days’ notice to Millmerran, or Pozzolanic could reduce its minimum quantity of concrete grade fly ash that it is required to take, also on 60 days’ notice; and

•    If Pozzolanic were to terminate in this matter, it would be required to pay $50,000 per month for the balance of the term less a pro rata of any lump sum payment made for the relevant operating year. If Pozzolanic reduces its minimum quantity, then it is to make a payment to Millmerran that is pro rated in accordance with the amount by which the minimum quantity is reduced.

(Emphasis in Reasons.)

151    Clayton Utz described the arrangement as effectively providing “Pozzolanic with a fixed contract for 4 years with the ability to exit the contract at any time during the remaining three years, provided it makes the requisite payment which is an amount less than the take or pay payments that would have applied for the balance term”.

152    The primary judge summarised a briefing paper in support of entry into the Original Millmerran Contract that was presented to the Pozzolanic and QCL Boards by Mr Ridoutt in September 2002. The Board paper observed that “Negotiation for the Millmerran Ash Purchase Agreement is complete and is being prepared for signing”. As to the position confronting QCL, the paper observed:

If we do not sign the agreement, Millmerran will negotiate an agreement with TransPacific (Peabody) who are particularly keen to re-enter the ash market in Queensland, and will with all probability match our offer.

153    As to the Tarong draft agreement, the Board was told this in the report:

Tarong’s lawyers are holding up the contract. Their concerns centre around the trade practice implications of the contract. This delay necessitated a 3-month extension of our current contract with Tarong, which now expires at the end of November. While we have not been officially offered a new contract, we are confident that a new contract will be secured for the following reasons:

•    We have been involved with reviewing the draft contract which has been written around our offer and our capabilities;

•    We have just been verbally awarded a minor 6-month contract to manage the furnace ash at Tarong North which starts on 3 October 2002 and is conditional on having a current ash sales agreement with Tarong. We are now awaiting formal contract documents for review and execution.

154    The report then identified the market dynamics for QCL in not securing a contract with TEC in these terms:

If we do not secure the Tarong ash contract it will go to [FAA], a joint venture between Blue Circle (Boral) and Australian Cement (CSR and Pioneer). CSR, Pioneer and Boral account for 72% of the South East Queensland fly ash market. Therefore the available market left would be 85kt, 40kt of which would most probably be supplied from the Swanbank Power Station. Securing a contract at Millmerran at a volume of 45kt per annum would be marginally profitable, as follows:

Profitability of Stand Alone Millmerran Operation

155    The ultimate conclusion of the Board paper was that “Based on year-end forecasts, the loss of the Tarong supply would result in an EBIT loss of about $6.3M”. The recommendation put to the Board was: “Subject to a final review and approval of the Millmerran Ash Purchase Agreement by Mr P Arto that the Board approve the execution of the Millmerran Ash Purchase Agreement”.

Findings as to the purposes of Messrs Arto, Maycock, Wilson and Ridoutt

Mr Arto

156    The primary judge made the following general findings in relation to Mr Arto’s evidence (at [2249] of the Reasons):

I have extensively examined Mr Arto’s affidavit and oral evidence in considerable detail. I have done so because my abiding impression of Mr Arto’s evidence in the course of the trial was that, put anecdotally, he was “over-egging the pudding”. By that, however, I do not mean to suggest that Mr Arto was being untruthful. I am sure that he genuinely believed many of the explanations he gave for decision-making in entering into the Millmerran contract for Pozzolanic when giving his primary evidence.

157    The primary judge found that Mr Arto’s central position could be put quite simply.

158    First, Mr Arto had before him the March and September 2002 Board papers and these documents, in effect, defined the limits of his understanding of the matters material to his decision-making, apart from some features of his own experience which, as to the flyash business in Queensland, was limited.

159    Second, Mr Arto was new to the role and “had senior executives reporting to him upon whom he relied, very much”. Mr Arto was quite emphatic in his reliance upon Mr Ridoutt and Mr Wilson in undertaking (or causing to be undertaken) whatever analyses may have been necessary to determine a financial analysis that resulted in the propositions ultimately put to the Board. Mr Arto said that he assumed there must have been some assessment of future demand undertaken by these executives although he had no recollection of seeing a future long-term demand forecast analysis.

160    Mr Arto understood that Mr Ridoutt and Mr Wilson were actually responsible for the negotiating positions about the pricing and other terms of the bid to Millmerran (and Tarong) although ultimately the terms and conditions of any proposed contract (including capital expenditure) would need to be approved by the Board, and any contract approved and signed by Mr Arto. Mr Arto was the chief executive, of the executive management group. He therefore represented the bridge between management and the Board.

161    The primary judge nonetheless found that it was “absolutely plain” from Mr Arto’s evidence that the deliberative decision-making about negotiating strategies and the positions Pozzolanic and QCL might take in relation to each contract during the negotiations were, if not determined by Messrs Ridoutt and Wilson, fundamentally influenced and informed by their thinking.

162    Mr Arto had very little recollection of the discussion at the two critical Board meetings in relation to the matters raised by the March and September 2002 Board papers, and had no real recollection of the briefing note of 25 June 2002 or the memorandum of 28 June 2002. The primary judge found that the documents, and particularly the two Board papers (of March and September 2002) put before Mr Arto, were a much safer guide to the content of his decision-making than his oral evidence.

163    Mr Arto made the point that he did not necessarily accept the force of Mr Wilson and Mr Ridoutt’s thinking as reflected in the two Board papers. The primary judge found that it is clear that Mr Ridoutt and Mr Wilson were expressly authorised by Mr Arto to be fully engaged in formulating the negotiating positions for Pozzolanic. Mr Arto described these matters as being “delegated” to Mr Ridoutt and Mr Wilson although, of course, positions taken by them would need to be brought to the Board. However, Mr Arto’s position seems to be that decision-making in relation to critical negotiation steps and positions did not need to be brought to him for prior approval. Ultimately, only the final proposition would be put to the Board. In this respect, the primary judge observed that “[u]nfortunately, there was no evidence from Mr Ridoutt or Mr Wilson or Mr Chalmers”.

164    Third, as to Millmerran, Mr Arto knew that Holcim sought to achieve margins in the flyash business in the order of between 30% and 33%. Mr Arto described this as “a big margin”. Mr Arto saw, from the Board papers, that QCL’s profitability of entering into both the Millmerran and Tarong Contracts satisfied the necessary margin and, for Mr Arto, that was “good enough”. That is why Mr Arto was not particularly concerned about looking for a long-term profitability analysis or any long-term demand forecast or any document analysing the physical capacity to produce concrete grade flyash (at Tarong, in particular), or Swanbank. Mr Arto was not looking for such a capacity analysis or an analysis of capacity constraints at Tarong. The primary judge’s impression of Mr Arto in the course of his evidence was that he was struggling to support his view that there was a long-term need for Millmerran ash (over a seven year horizon) based upon projected demand for flyash in SEQ or elsewhere. In fact, Mr Arto made it plain that he was focussed upon the 2002 Budget figures, the 2001 actual sales (and margin) and the projection for 2003.

165    Mr Arto could see from the two Board papers that entering into the Millmerran and Tarong Contracts was necessary to preserve QCL/Pozzolanic’s margin in the flyash business and preserve its market share. In truth, for Mr Arto that was, in essence, the beginning and the end of the matter subject to the fundamental matter mentioned shortly, as to the Millmerran Contract. The imperative was to preserve the Holcim EBIT margin in the flyash business and the market share. Mr Arto was not seeking out any financial analysis or demand forecast meeting the rigour and orthodoxy of the Holcim five year FINPLAN requirements. Mr Arto did not recall seeing any future demand forecast over five or seven years. He felt that there would be general long-term growth. His evidence was that one important aspect of demand, informing his decision-making about Millmerran, was the need to deal with daily fluctuations in the production of flyash at a power station and that securing access to an additional source would, in effect, smooth out the management of daily fluctuations in the course of a 12 month period, year to year.

166    Fourth, the much more fundamental matter for Mr Arto as to Millmerran was this. QCL did not have a long-term contract with Tarong. Plainly enough, it had a short-term contract in the sense that the prevailing contractual arrangement with Tarong had been extended pending the determination of the tender process at Tarong. Mr Ridoutt had informed the Board in the September 2002 Board paper that the negotiating team was confident that a new contract would be secured.

167    Mr Arto said that he “heard this view” in September 2002 and the Board resolved on that basis to approve the Millmerran Contract. Mr Arto put the negotiating team’s view about the probability of securing the Tarong Contract as telling the Board that Pozzolanic was “still in the process with Tarong”; that negotiations were “optimistic” or “positive”; but that without having an assurance that the Tarong Contract could be closed, the Board elected to pursue an objective of reducing risk by closing the Millmerran Contract. Mr Arto’s position was that until a contract was actually signed with Tarong, the deal was not closed and the Board could not take it for granted that Pozzolanic would complete it.

168    The primary judge found that it was true, of course, that the contract with Tarong was not in place or in Pozzolanic’s “back pocket” until the contract was signed. However, Pozzolanic had a high threshold of confidence that it would likely secure a contract with TEC. The Board papers also make it plain that Pozzolanic’s objective was to secure a contract with both Millmerran and Tarong. The reason for that could not be more plain as the Board papers from the briefing team having the carriage of the matter were telling the Board that unless Pozzolanic secured both contracts, a loss of either contract would result in a substantial loss of volume of 250,000 tonnes and an erosion in the EBIT margin of the flyash business in South East Queensland of something in the order of $6 million. Mr Arto said that this view was a worst-case scenario but, whatever the margin of error or exaggeration that might be thought to be encapsulated in that view from Mr Ridoutt, there is no doubt that the Board was being told, in the plainest way possible, by the principal experienced managers in whom they trusted and to whom they had entrusted the negotiations, that risk-managing QCL/Pozzolanic’s market share (of volume) and profitability measured by the EBIT margin in the flyash business required QCL/Pozzolanic to enter into both the Millmerran and Tarong Contracts.

169    That was the message that Mr Arto understood from the Board papers, and for him, the merits of the matter were all in the margin numbers, lining up with Holcim’s benchmark expectations.

170    In this context, the primary judge observed that Professor Hay expressed the opinion (rather than a fact he was instructed to assume) that if Pozzolanic lost either contract its market share would collapse virtually immediately. The primary judge had no doubt that Mr Arto, as an experienced Holcim engaged businessman, had already formed precisely that view at the time of these events. The primary judge found that while there seemed to be a degree of reluctance or perhaps obfuscation in Mr Arto’s evidence around the likely market share/volume/price impact arising out of a rival securing a major source of flyash and entering the market in which Pozzolanic enjoyed a high market share, high profitability and a resultant high EBIT margin in the flyash business in SEQ, Mr Arto accepted that a new entrant at either Millmerran or Tarong would give rise to competition; there would be counter-responses; one likely possibility was price tension and another was a volume solution which may or may not have involved significant price contestability.

171    Overall, the primary judge was satisfied that, so far as Mr Arto was concerned, his position was that in order to secure the margin in the flyash business which Holcim required as its benchmark margin for flyash and slag, it was necessary for Pozzolanic to secure both the Tarong and Millmerran Contracts. The reason for securing both contracts was to prevent a rival from obtaining a contract with either power station so as to ensure that Pozzolanic preserved its market share, thus avoiding the kind of market share collapse Professor Hay perceived, and to prevent an erosion in the EBIT margin in the SEQ flyash business consequent upon contestability within the new field of rivalry defined by the new entrant.

172    There is no doubt, so far as Mr Arto’s thinking was concerned, that Pozzolanic entered into the Millmerran Contract for a substantial purpose of preventing a rival (including Transpacific) from securing the contract and placing Pozzolanic’s volume and margin metrics under substantial contestable pressure.

173    A substantial purpose of Mr Arto in entering into the contract was to prevent a rival securing access to unprocessed flyash from Millmerran and to prevent the entry of a potential competitor into the market for the supply of concrete grade flyash in the SEQ concrete grade flyash market, because Mr Arto was very concerned to ensure that QCL preserved its market share, its volume, its revenues and its EBIT margin which were seriously at risk should QCL/Pozzolanic lose either the contract at Millmerran or the contract at Tarong to a rival and particularly a serious rival such as FAA or Transpacific.

Mr Maycock

174    The primary judge found Mr Maycock to be an impressive, experienced director with a long history in dealing with the business imperatives confronting commercial activity in the cementitious industry and generally accepted his evidence subject to specific observations, including the matters described below.

175    The primary judge found that Mr Maycock had no real recollection of the Board discussion on 11 April 2002 of the Expenditure Request Summary prepared 28 March 2002 or the March Board paper supporting it.

176    Mr Maycock could not recall any discussion of the risk of losing 250Kt of volume and $6 million of EBIT earnings, should either contract be lost to a rival. Mr Maycock could not recall any discussion of the other identified risks set out in the Board paper. As to the potential problem of trying to find something to do with the combined volume capacity, at least over the first five years, created by having both contracts, Mr Maycock said he was “very fuzzy” about that matter and would hesitate to be “more specific” than that. Mr Maycock could not recall any discussion about management’s remarks in the Board paper that if Pozzolanic did not sign with Millmerran on the terms negotiated by management, Millmerran would enter into a contract with Transpacific and Transpacific would likely match Pozzolanic’s terms and conditions.

177    Mr Maycock regarded management’s assessment of a potential loss of $6.3 million in EBIT as “somewhat exaggerated” and as “somewhat extreme”.

178    Although Mr Maycock did not accept as inevitable the notion that prices for flyash would fall in the face of contestability by a rival supplying Millmerran concrete grade flyash into the SEQ concrete grade flyash market, Mr Maycock accepted that one scenario, at least, was a likelihood that prices would fall, and whatever the combination of volume or price strategies that might emerge or be adopted by a rival, Mr Maycock doubted whether QCL could maintain its EBIT margin in the business in the face of that conduct. Mr Maycock accepted that one outcome could be that Pozzolanic would lose market share.

179    More fundamentally however, Mr Maycock said that, confronted with the choice of having no source of supply at all should Tarong be lost (and Swanbank could be discounted for this purpose), on the one hand, and having Millmerran ash although unknown at the time, on the other hand, it was not surprising for Pozzolanic to pursue the Millmerran Contract. At the time of signing the Millmerran Contract, the Tarong Contract could only be regarded as secure when and if “finally done”. At September 2002, the Tarong Contract was not in that position. Mr Maycock said that he assumed that if Pozzolanic did not sign with Millmerran, a competitor would sign. As to the features of the September 2002 Board paper that influenced Mr Maycock in reaching his decision about entry into the Millmerran Contract, he could not say or recall the mix of considerations, together with other information, taken into account by him in reaching his decision to support Pozzolanic’s entry into the Millmerran Contract. As to the profitability of the Millmerran Contract as a standalone contract, Mr Maycock did not accept the “extremely pessimistic” assessment in the September Board paper. Mr Maycock thought that Pozzolanic would have found a way to compete.

180    In responding to many of the questions about the Board meetings at which the March and September papers were discussed, other Board meetings, papers and presentations to the Board and discussions with management, Mr Maycock said he had no real recollection of these discussions. In those circumstances, the primary judge found that the documents are likely to be a surer guide to Mr Maycock’s decision-making aided, of course, by the extent to which Mr Maycock had an actual recollection of particular matters and other influences brought to bear in his thinking. The primary judge generally accepted his evidence as to those recollections. The primary judge accepted and found that the central feature of the thinking and business reasons adopted by Mr Maycock in deciding that Pozzolanic should enter into the Millmerran Contract, and that QCL should make that happen by its capital expenditure approvals, was a concern that Pozzolanic could not be left in the position that it not pursue the Millmerran Contract, and then later find that for whatever highly unlikely reason might emerge, Pozzolanic had not secured the contract at Tarong, as it believed at 30 September 2002 it would be very likely to secure, once the negotiations were finally done, confined as they were, by then, to the non-commercial terms.

181    In the absence of any detailed recollection of the actual discussion of the Board papers, and particularly the September 2002 paper, the primary judge was satisfied that the burden of the analysis undertaken by senior managers Mr Ridoutt and Mr Wilson under the supervision of Mr Arto of the commercial risks confronting Pozzolanic should a rival secure a source of supply of ash at either Millmerran or Tarong, together with the analysis of the consequences for QCL and Pozzolanic should that risk emerge, measured by a postulated loss of market share, loss of volume, contestable supply pressure on price, earnings and margins, all formed a substantial reason in Mr Maycock’s thinking in deciding that Pozzolanic should enter into the Millmerran Contract.

182    Mr Maycock recognised, in his evidence, the field of potential threats to market share should Pozzolanic not secure a contract at both Millmerran and Tarong. Mr Maycock also recognised the dynamic tension in the market which would arise from either Transpacific or FAA securing one or other of the contracts, although Mr Maycock had reservations about how that tension would necessarily express itself in terms of impacts upon volume, or price, or margins, or all of these things. The primary judge observed that it should also be remembered that at September 2002, the Millmerran Contract, absent Pozzolanic’s decision to enter into it, would likely go to Transpacific and the Board had been told that Transpacific would likely match the terms and conditions of the Millmerran value proposition. Mr Peabody (from Transpacific), who had founded Pozzolanic, was aggressively seeking to re-enter the flyash market. Transpacific, unlike FAA, had no shareholder customer guaranteed sales. It would have to compete with Pozzolanic on price, service offering and other features to win contestable sales to the major concrete producers and the independents (assuming Pozzolanic secured Tarong).

183    Although Mr Maycock was not able to recall the mix of considerations discussed in the September 2002 Board paper or the scope and content, precisely, of the other matters, based on his own experience and judgment, that he took into account in reaching his decision that Pozzolanic enter into the Millmerran Contract, the primary judge found that it seemed inevitable that Mr Maycock must have looked closely at the Board papers containing the best, most informed view of QCL and Pozzolanic’s experienced senior managers, of the economic or commercial consequences for QCL and Pozzolanic should either contract be lost and that Mr Maycock no doubt took those assessments into account. In making this observation, the primary judge recognised Mr Maycock’s evidence about the range of other influences he took into account, as earlier described.

184    The primary judge found that it was very likely that Mr Maycock, having regard to his experience, undertook at least some form of relatively rudimentary financial sensitivity analysis by asking himself what position would the group be in if Pozzolanic won Tarong but not Millmerran; won Millmerran but not Tarong; won both contracts; or won neither contract. The primary judge had no doubt whatsoever that these sorts of questions were examined by Mr Maycock and the ultimate objective was to win both contracts.

185    Mr Maycock was, like Mr Arto, very concerned to ensure that QCL preserved its prevailing market position, its market share, its volume, its revenues and its EBIT margin which were seriously at risk, on the advice of management, should QCL/Pozzolanic lose either the contract at Millmerran or the contract at Tarong.

Mr Wilson and Mr Ridoutt

186    Mr Wilson and Mr Ridoutt were not called to give evidence in the proceeding. No explanation was given by the respondents for their failure to call Mr Wilson and Mr Ridoutt to give evidence. The primary judge was satisfied that Mr Ridoutt’s evidence on the question of the purpose informing the decision-making of Pozzolanic would not have been helpful to QCL, Pozzolanic, Mr Arto and Mr Maycock. In this respect, the primary judge found that Mr Arto’s evidence placed both Mr Ridoutt and Mr Wilson, as senior and experienced executives, at the centre of the discussions and formulation of the bidding strategy and the purposes informing the decision to try to secure both the Millmerran and Tarong Contracts. Mr Arto gave evidence of his substantial reliance upon Mr Ridoutt, in particular, although Mr Wilson was also pivotal to these matters.

The Original Millmerran Contract

Key terms

187    The Original Millmerran Contract was entered into on 30 September 2002. The key terms of the Original Millmerran Contract were:

(a)    The contract was to operate for a period of seven years, from 30 September 2002 to 31 December 2009, unless terminated earlier (cl 10).

(b)    Subject to the quality of the flyash falling within the “Acceptable Range” for concrete grade flyash (as defined), MPP was obliged to make available to Pozzolanic and allow Pozzolanic to take a minimum quantity of 135,000 tonnes of concrete grade flyash in each operating year (cl 5.1).

(c)    Pozzolanic was obliged to pay MPP the contract price for the flyash, which was made up of the aggregate of all of the lump sum payments for all operating years and any additional sum payable for each operating year. The lump sum payment was $1,323,500 for the first operating year, escalated for each subsequent operating year according to CPI (subject to a discount of $40,000 for up-front payment). The lump sum payment was payable annually in advance on 1 December in the year prior to the relevant operating year (cl 6.1, 6.2 and 7).

(d)    Any additional sum payable in respect of concrete grade flyash was represented by the number of tonnes taken in excess of 135,000 tonnes multiplied by a royalty rate of $10.10 per tonne (with another rate applying for other grades of flyash regardless of the quantity of concrete grade flyash taken) (cl 6.3).

(e)    Pozzolanic agreed to complete construction of the Buyer’s Facilities (plant, equipment and related items) necessary to enable Pozzolanic to take delivery of flyash so as to be ready for operation by 1 May 2004. Pozzolanic would retain ownership of the Buyer’s Facilities, and MPP agreed not to allow other persons to use the Buyer’s Facilities (cl 3.3, 3.5 and 3.6).

(f)    Pozzolanic was required to test the Millmerran flyash to determine whether it met the Acceptable Range criteria. MPP gave no warranty or representation as to the quality of the flyash, or in relation to any of its characteristics (cl 2.1).

(g)    Within three months of “Substantial Completion of Unit 1” (that is, by 21 December 2002), Pozzolanic was to provide Millmerran with “an initial non-binding report setting out the status of its investigations to that point”. The report was to contain a non-binding indication of the buyer’s opinion of the likelihood that Millmerran flyash would fall within the Acceptable Range for concrete grade flyash (cl 2.2(a)).

(h)    Within nine months of “Substantial Completion of Unit 1” (that is, by 22 June 2003), Pozzolanic was to issue a final report notifying MPP whether the flyash fell within the Acceptable Range, and whether it could be “practically and economically converted” into “Concrete grade Fly Ash” (as defined) (cl 2.2(b)).

(i)    If the flyash failed to meet the Acceptable Range criteria, and MPP accepted that position (or it was verified by an independent test), either Pozzolanic or MPP could terminate the agreement, in which case Millmerran would be required to refund the lump sum payment made by Pozzolanic for the first operating year (if it had been paid prior to the date of termination) (cl 2.3 and 2.6).

(j)    Apart from the mechanism described above (relating to a failure to meet the Acceptable Range criteria), or by reason of breach, Pozzolanic could terminate the agreement at any time after 31 December 2006 on 60 days’ notice. If it did so, Pozzolanic was required to pay a Termination Payment to MPP in the amount equal to $50,000 multiplied by the number of remaining months to 31 December 2009 minus the proportionate remainder of the lump sum payment (which had been pre-paid) for the operating year in which termination occurred (cl 26.4).

(k)    If Pozzolanic had not notified MPP whether or not the flyash fell within the Acceptable Range criteria within nine months of “Substantial Completion of Unit 1” of the power station (which occurred on 21 September 2002), MPP could terminate the agreement without liability to Pozzolanic (cl 4).

188    The total minimum cost of the lump sum payments over seven years was $9,264,500. As at 30 September 2002, the expected cost of the Buyer’s Facilities was in the order of $2 million. In addition, as part of its efforts to secure the Original Millmerran Contract, Pozzolanic had agreed to pay a total of $900,000 over seven years to MPA Energy Services (a joint venture in which QCL had a stake) in order to cross-subsidise a discount given to Millmerran by MPA for coal handling services on the condition that the Original Millmerran Contract be awarded to Pozzolanic.

189    The appellant (the ACCC) says that, given the findings set out in [188] above, as at 30 September 2002, the total anticipated cost of the Original Millmerran Contract (including royalties, the payment to MPA Energy Services and the anticipated cost of the Buyer’s Facilities) was slightly over $12 million ($9,264,500 + $2,000,000 + $900,000 = $12,164,500).

The Tarong negotiations continue (September - October 2002)

190    On 30 September 2002, Mr Wilson sent a letter to Mr Collingwood copied to Mr Rice and Mr Taylor setting out Pozzolanic’s comments in relation to the draft Tarong agreement dated 25 June 2002. In this letter, Mr Wilson made the following comments:

(a)    As to the supply of run-of-station flyash to TEC or third parties nominated by TEC, Mr Wilson suggested that Pozzolanic be obliged to “use best endeavours to” facilitate such supply.

(b)    As to the term, Mr Wilson said that Pozzolanic would like to see an initial four year term with a four year extension at Pozzolanic’s option. Moreover, Mr Wilson suggested that after the second four year term, the contract could be extended in increments of three years upon agreement by both parties.

(c)    Mr Wilson said that Pozzolanic would like to see a “Price Renegotiation clause” that would enable Pozzolanic to seek renegotiation “in the event that Tarong sells Power Station Ash which is used as a cementitious material in concrete or mortar to any third party for an amount on terms more favourable than those agreed between Pozzolanic and Tarong”. If the parties could not agree new terms, then Pozzolanic would have the right to elect to terminate without penalty.

191    On 1 October 2002, Mr Ridoutt sent an email to Mr Chalmers, Mr Wilson, Mr White and others advising that a revised contract had been received from TEC. Mr Wilson also observed: “no longer have exclusivity so we will have to be more creative with the contract to cover our risk”.

Mr Wilson’s memorandum of 16 October 2002

192    On 16 October 2002, Mr Wilson sent a memorandum to Mr Arto. In his memorandum, Mr Wilson observed that in the budget presentation the preceding day, Mr Arto had questioned data presented to the Board in relation to securing the Millmerran and Tarong Contracts. Mr Wilson added the 2003 Budget figures (in the final column) to the table from the April 2002 Board paper extracted at [118] above to produce a table in these terms:

(Emphasis in Reasons.)

The Tarong Contract

193    On 13 December 2002, Mr Collingwood (of TEC) sent an email to Mr Wilson (of Pozzolanic) attaching a further draft version of the agreement. This draft contained (at clause 17.1) Mr Wilson’s proposed termination clause with an important difference: “At any time after 1 September 2004, a party [any party] may give written notice to the other terminating this agreement, and this agreement will terminate on the date that is 18 months after the notice is given” (emphasis in Reasons).

194    On 13 December 2002, Mr Wilson responded to Mr Collingwood observing that proposed clause 17.1 had been changed to give TEC the right to terminate the agreement after 1 September 2004 which, in Mr Wilson’s view, effectively made “the term of the Agreement only 3 years”. Mr Wilson said that Pozzolanic’s offer had always been tied to at least a seven year term and changing the term to three years fundamentally altered the value of Pozzolanic’s offer, and thought that the monetary value of Pozzolanic’s proposal would decrease by 25% – 50%. Mr Wilson also said: “There is no exclusivity in the contract and therefore there should be no concern about an 8 year agreement. This is obviously a major issue for us and we would like to discuss it further”.

195    On 13 December 2002, Mr Collingwood responded to Mr Wilson asking whether Pozzolanic would support a submission to the ACCC for approval of the version of the flyash agreement “mooted in your letter dated 13 December (ie 8 year term with limited termination by TEC)”.

196    On 18 December 2002, Mr Wilson sent Mr Collingwood a copy of a letter Pozzolanic had received from Clayton Utz dated 17 December 2002 dealing with the trade practices implications of the proposed agreement with Tarong. The letter set out the author’s understanding of the position as instructed by Pozzolanic in the following terms:

As we understand it, broadly speaking, the agreement provides as follows:

1.    [TEC] agrees to sell to [Pozzolanic] all concrete grade fly ash that Pozzolanic obtains from certain ash transfer points and processes in a plant provided by Pozzolanic.

2.    Subject to the adjustment referred to in clause 12 of the Agreement, Pozzolanic is to pay TEC for the right to take fly ash (whether or not Pozzolanic takes any fly ash) a base amount of $650,000 per quarter escalated at CPI.

3.    Under clause 12 of the Agreement, the amount payable in the fourth quarter of each year of the Agreement is to be adjusted depending on the quantity of power station ash taken by Pozzolanic.

4.    There is no exclusivity clause in the Agreement.

5.    The term of the Agreement is 8 years.

We understand that Pozzolanic wishes to protect itself against being tied to an 8 year contract in the event the market value of fly ash falls. Therefore, Pozzolanic wishes to include in the Agreement a term whereby it can at any time after the date which is 18 months from the commencement of the Agreement, terminate the Agreement on giving 18 months notice.

TEC has stated that if Pozzolanic has a right of termination, it should have a similar right.

197    The author of the letter states that it seems to Clayton Utz that there is a strong argument against TEC having such a right, as Pozzolanic would be investing substantial capital in plant and equipment and would need the opportunity to amortise the capital costs over an eight year horizon. Any earlier termination of the agreement by TEC “could result in losses to Pozzolanic”, in the author’s view. The author also noted Pozzolanic’s instructions that TEC believed an eight year agreement could breach the provisions of the TPA because “it could result in a substantial lessening of competition in the market”. The author observed that such a conclusion would depend upon how the market was defined; the demand for flyash; the amount of flyash likely to be produced by TEC, the amount taken by Pozzolanic and the residual volume of ash available for others; and whether other parties who wished to produce ash from TEC would be able to physically access flyash by adequate off-take points.

198    Ultimately, the author concluded that it was not possible to say whether an agreement, in the terms reflecting the elements of points 1 to 5 in the letter would breach the TPA although the fact that TEC would produce 1.3 million tonnes of flyash each year of which Pozzolanic would take about 250Kt per annum, coupled with no clause in the agreement restricting TEC from selling flyash to anyone else, weighed heavily against the possibility of the agreement resulting in a substantial lessening of competition.

199    On 30 January 2003, Mr Wilson sent a letter to Mr Burton copied to Mr Collingwood and Mr Ridoutt arising out of a flyash meeting between the parties. In that letter, Mr Wilson referred to his meeting with Mr Burton, Mr Collingwood and Mr Ridoutt from QCL. Mr Wilson said, in the letter, that Pozzolanic and QCL agreed with TEC about the three outstanding issues:

(a)    First, the agreement would commence on 1 March 2003 and would remain in force for five years unless ended earlier under the agreement. Either party would be entitled to terminate the agreement by giving the other party 12 months’ notice at that time (the expiration time).

(b)    Second, the final form of the incentive table would be this:

(c)    Third, cl 17 would be changed to provide that Pozzolanic could at any time after 1 September 2004 give written notice to TEC terminating the agreement, and the agreement would terminate on the expiration of the 12 months.

200    Following further negotiations between the parties, the Tarong Contract was executed on 26 February 2003.

Key terms

201    The relevant provisions of the Tarong Contract included the following:

(a)    The contract was for a period of five years, from 1 March 2003 (cl 2).

(b)    During the term, TEC agreed to sell and Pozzolanic agreed to buy “any and all Concrete Grade Fly Ash” (as defined) obtained from the Ash Transfer Points (as defined) at the Tarong and Tarong North Power Stations (cl 3.1).

(c)    Pozzolanic was to pay a base amount of $2.4 million per annum (escalated by CPI), subject to the adjustment mechanism set out below, pursuant to which payments reduced as the total volume of flyash removed increased (cl 12.2 and 12.3):

(d)    Pozzolanic was required to determine whether Tarong North flyash was suitable for use with Portland cement, and if so suitable, Tarong was required to “request” Pozzolanic to “establish” a plant to extract Concrete Grade Fly Ash (as defined) from the Tarong North site (cl 4.4).

(e)    If the quality of the six monthly average of Tarong North flyash, after processing, did not conform to Australian Standard 3582.1-1998 (AS 3582.1), or if the quantity of concrete grade flyash was not sufficient to support “commercially viable operations”, the parties agreed to undertake good faith negotiations to “achieve an adjustment to the contract conditions”. However, if the Tarong North flyash was not suitable for use in Portland cement or if Pozzolanic did not establish a plant at Tarong North, Pozzolanic was not entitled to any reduction in the amounts payable under the agreement (cl 8.3).

(f)    Pozzolanic may terminate the agreement at any time after 1 September 2004 by giving TEC 12 months’ written notice (cl 17.1).

202    Pozzolanic and QCL certainly wanted an exclusive agreement that would deny Tarong concrete grade flyash to others. That proposition was pressed with TEC but not accommodated by TEC. There was no provision for express “exclusivity” although the measure of Pozzolanic’s rights granted under the contract was a right to “any and all” solid material extracted from Tarong and Tarong North flue gases.

The Amended Millmerran Contract

Background to amendment

203    On 19 June 2003, Pozzolanic reported to Millmerran that test results for the Millmerran flyash had indicated a relative strength which fell short of the contractual relative strength requirement. Pozzolanic suggested that additional tests would assist in determining whether higher relative strengths would be obtainable. Pozzolanic sought an extension of the cl 2.2(b) period under the Original Millmerran Contract, from 22 June 2003 to 3 October 2003.

204    In August 2003, Pozzolanic provided a further Ash Quality Report to Millmerran. That report noted that “a distinct colour variation” had been observed between two samples collected on 19 and 20 August 2003, and that the extent of the possible colour variation in Millmerran flyash would be investigated.

205    On 24 September 2003, LEK Consulting (LEK) presented a “Strategy Review” to the Cement Australia Board. As to flyash, LEK postulated “several potential scenarios involving increased competition for Pozzolanic”. LEK took the view that lower flyash prices in Queensland would almost certainly be reflected in lower concrete prices. The potential scenarios were these:

Increased competition for Pozzolanic in Queensland in the medium term could arise from either of two scenarios

–    An entry by Sunstate (or Boral) could result in a loss of Pozzolanic volumes equal to ~50% of the independent concrete market and 100% of Boral’s concrete market (~160Kt)

–    A collaboration by independent concreters to source flyash directly from power stations could reduce Pozzolanic volumes by about 75% of the independent concrete market (~90Kt)

While an entry by Sunstate or Boral (probably through FAA) is not expected to have much effect on flyash prices, an independent entry could bring market prices down toward cost levels (loss of up to ~$30/t). This would almost certainly be leaked to concrete customers.

206    On 26 September 2003, Mr Ridoutt sent an email to Mr Leon (CEO of Cement Australia) in which he said:

Please find attached a Board paper from April 02 requesting approval for capital expenditure that supported our strategy to win the new contracts at Tarong and Millmerran and maintain our single supplier status position in the QLD Flyash market.

I thought this paper was more detailed but it was condensed for the Board meeting and although [condensed] it provides some interesting info [but it] does not have the depth and detail to cover all the issues you are now facing.

It is very pleasing that this strategy has worked extremely well and performance has been much better than forecast, however like any matter it will need to be managed and tweaked a bit where necessary in the south Brisbane and Gold Coast to ensure that things are kept under control.

207    In October 2003, Pozzolanic produced another Ash Quality Report in relation to Millmerran flyash which concluded that:

(a)    the ash did not fall within the Acceptable Range criteria under the Original Millmerran Contract due to the failure to reach the relative strength limit;

(b)    the flyash could be used to produce a concrete suitable for some markets; and

(c)    variations in the colour could have an impact on the ability to “practically and economically convert the flyash into concrete grade flyash”.

208    On 9 October 2003, Pozzolanic sought an extension of the time required by cl 2.2(b) for the completion of the necessary investigations into the quality of the Millmerran flyash.

209    On 4 November 2003, Mr Klose (Manager of Pozzolanic) sent an email to Mr Clarke, Ms Collins, Mr Chalmers and Mr Blackburn in relation to Millmerran ash quality, saying:

1.    Clause 2.2(b) of the contract states that Pozzo must advise (by 31st of October) whether or not the fly ash from Millmerran is

(a)    within the Acceptable Range (as defined in the contract,) and

(b)    can be practically and economically converted into concrete grade fly ash

2.    If the ash doesn’t fall within the acceptable range then either party has the right to terminate the contract.

3.    Results for testing indicate the following

(a)    The ash fails to meet the relative strength criteria set out in schedule 2 of the contract and therefore the ash fails to be within the Acceptable Range of the contract

(b)    Colour variations are of some concern in using the ash, as the ash is very dark and the colour variable (note we believe that a Wagner would not worry about this: but our large customers would!)

(c)    If the colour and usage within the market can be managed/solved then in other respects the ash will make concrete grade fly ash.

4.    Since the ash fails to meet the acceptable range we have no choice but [to] inform Millmerran of this.

5.    I have spoken to David Hunt at Millmerran and indicated the outcome of these results together with our belief that subject to satisfactory resolution of variability and colour issues that the ash can probably be used. I have also indicated Pozzolanic’s desire to meet and discuss these issues so as to move forward with the contract. David Hunt also expressed a desire to meet and further these discussions.

(update: David Hunt has contacted me again and is concerned with Pozzo’s intention. As such I have suggested that we do not send an official reply until after our meeting. This gives us the maximum flexibility and leaves open options that will not trigger termination).

6.    The significance of the above results are obvious.

(a)    The “Acceptable Range” criteria were placed in the contract to protect Pozzo. (We may now terminate the contract within 14 days of notification if we so desire)

(b)    The mutual right to terminate the contract means that Millmerran, upon notification, has a period of 14 days to terminate the contract.

210    Mr Klose set out his perception of the three scenarios open under the contract conditions. He described them in these terms:

(i)    Both Millmerran and Pozzo fail to terminate i.e. the current contract remains in place. This implies Pozzo must install a plant by May 2004 and we must pay our next royalty payment ($1.235m. Note this is placed in the balance sheet and expended monthly to the P & L).

(ii)    Millmerran terminates. This implies that they have another equally favourable option. We must determine their NBA in order to determine at what point they would do this. (This was [less than] $1.235m when FAA were included in the bidding process). This would include what Wagner’s ABL and Peabody [Transpacific] would now offer.

(iii)    Pozzo terminates: This implies that we get back last year’s payment of $1.2m and avoid the $2m capex. This now opens up Millmerran to others. (I can’t see why we would do this).

211    In a subsequent email, dated 8 February 2005, Mr Klose explained the thinking underlying this email in the following way:

[I]n essence I was trying to delay committing to capital equipment whilst still maintaining the contract since CA did not have any new markets for the ash and there was a question of how to handle the colour variation.

212    On 28 November 2003, Mr Klose sent an email to Mr Clarke (who by that stage had taken over from Mr Ridoutt as General Manager, Sales and Marketing) advising that further to “our desire to keep the contract I have arranged payment of the annual Millmerran royalty payment which is due on the 30th November (>$1.2m)”. The payment required the authorisation of Mr Clarke and others.

213    On 8 December 2003, Ms Collins (who had by that time taken over from Mr Klose as Pozzolanic’s Manager) prepared a note of the preliminary issues confronting Pozzolanic including the need to retain the Millmerran Contract with a justification for the proposed capital expenditure. Ms Collins also noted that a commitment existed to take Tarong North flyash on request and a request had occurred.

214    On 22 December 2003, Ms Collins prepared a note of the proposed changes to the Original Millmerran Contract reflecting the intention of both parties, arising out of a meeting between Millmerran representatives and Pozzolanic representatives in November 2003. The material proposed changes were these: the revised testing programme would be carried out and a report on the investigations would be provided in May 2004 (cl 2.2(a)); a final report on the investigations would be completed in July 2004 (cl 2.2(b)); the repayment of the first year’s lump sum payment would be replaced with repayment of the second year’s lump sum payment (cl 2.6(c)); the Buyer’s Facilities would be installed before May 2005 (cl 3.3); and cl 4 (which entitled Millmerran to terminate if Pozzolanic did not notify Millmerran as to the outcome of the “Acceptable Range” testing within nine months of “Substantial Completion of Unit 1”) would be deleted in view of the termination provisions in cl 2.6, 6.8, 16.5, 17.8, 26 and 28.1.

215    Further investigations into the cause of colour variation at Millmerran continued in the period from January to May 2004.

216    On 2 June 2004, Ms Collins sent an email to Mr Chalmers (Sales Manager for QCL) attaching the first draft of a document called “Queensland Ash Development Plans, Board Briefing Paper 28 June 2004”. This document was the first draft of the development of a paper which was to be put to the directors in support of a proposal to continue the Millmerran Contract. Ms Collins asked Mr Chalmers to develop some content in relation to each of the four bullet points under the heading “Market Growth”.

217    Ms Collins’ “outline paper” noted that:

(a)    By 31 July 2004, Pozzolanic would be contractually obliged to commit to building ash facilities at Millmerran by 1 May 2005 or to terminate the contract.

(b)    “[P]rotracted and difficult negotiations” conducted with Millmerran resulted in an agreement to investigate the properties of the ash and make a decision about ash quality by July 2003. The decision point was extended to July 2004 to facilitate further testing. Ms Collins said that a “further extension is unlikely”.

(c)    A decision taken in July 2004 to proceed would require a facility to be installed and operating by 1 May 2005.

(d)    The contract term continues until 2010.

(e)    As to Tarong North, in April 2004, notice was given that the quality of the ash was suitable, and ash from Tarong North was being trucked to supplement volumes from Tarong. Ash extraction facilities must be installed at Tarong within 12 months of notice.

218    On 8 June 2004, Mr Chalmers prepared a document entitled “Market Issues – Millmerran Fly Ash”, which seems to be a response to the email from Ms Collins requesting development of a contribution to the paper on the topic of “Market Growth”. The document contained these observations:

Millmerran fly ash adds significant volume to an already over-supplied fly ash market in Southern Qld. While the market for fly ash is growing to a moderate extent in this area, several factors affect the opportunities available for Millmerran fly ash. These factors are:

•    The addition of Millmerran is not a small increment in the supply side for the region, increasing the availability of fly ash by about 40%

•    Millmerran is not a significantly better fly ash than the others available

•    Millmerran fly ash has no significant locational advantage

•    There are potential colour problems with Millmerran fly ash, and it is not yet clear that the underlying cause of this colour variation has no other detriment to its use in concrete

•    Bayswater fly ash is being “imported” from NSW – this stems from [next best alternative] pricing rules being ignored in the last round of fly ash price increases. This is a superior fly ash and it is cost competitive with local product

•    Because of the colour issue, Millmerran fly ash is not readily interchangeable with the other local ashes (Tarong and Swanbank).

219    The document also noted that Millmerran flyash was yet to be used commercially, and that it appeared to have similar reactivity to Tarong flyash but there was uncertainty as to quality, in particular the colour and the nature of the ‘loss on ignition’ (which is the unburned carbon characteristic).

220    On 14 June 2004, Ms Collins sent an email to Mr Chalmers on the subject of “market impact” and asked him how much of the 500,000 tonnes per annum of the Millmerran flyash production Wagner or others would be likely to take if Pozzolanic “walked away”. Ms Collins also asked for Mr Chalmers’ view of the likely “price impact” on SEQ sales, and the likely “number of tonnes” to be affected, should Pozzolanic walk away from Millmerran.

221    Ms Collins accepted that if Pozzolanic pulled out of Millmerran there was a likelihood a competitor would enter and sell Millmerran ash, if the ash was of a marketable quality. Ms Collins accepted that she had an expectation at the time that any competitor from Millmerran would be able to undercut Pozzolanic’s prices to some extent if Pozzolanic was not at Millmerran.

222    On 16 June 2004, Ms Collins sent an email to Mr Clarke, attaching a further edited version of the Board Briefing Paper. That document included the following discussion under the heading “Financial Considerations”:

Pozzolanic has traditionally been operated with low capital investment given the impermanence of the contracts with power stations (see the attached Financial Summary). The capital investments proposed are for installation of refurbished silos, structures, pumping vessels, classifiers and buildings.

If a competitor lowers the price by $10/t about $3M per annum in SEQ … will be reduced from the Pozzolanic EBIT.

223    The last sentence of those observations under the heading “Financial Considerations” was deleted from the version of the paper that went to the Executive Committee meeting with the papers for that meeting on 21 June 2004.

224    On 17 June 2004, Ms Collins sent an email to Mr Clarke copied to the personal assistants to Mr Clarke and Mr Leon taking up some “urgent amendments” to the paper. The following observations were adopted under the heading “Contractual Arrangements”:

To relinquish the contract would see Millmerran seek an alternative partner. FAA could be blocked, a likely contender could be Boral, a customer of [Cement Australia] who would establish an owner supply and competitor facility with significant impact on fly ash market dynamics in Queensland.

225    Ms Collins in her email to Mr Clarke observed that she had compiled some figures for the market forecast spreadsheet which Mr Clarke had suggested, although without the increased Victorian demand, the forecast spreadsheet of demand “did not stack up to much”. Ms Collins also asked this question:

Is a sentence like this warranted somewhere in the document or is this what we are avoiding completely?:

“If a competitor lowers the price by $10/t, about $3M per annum in SEQ alone will be reduced from the Pozzolanic EBIT”?

226    In his evidence, Mr Clarke characterised the statement by Ms Collins referred to above as a ‘sensitivity analysis’. Mr Clarke denied that any part of the justification for proceeding with the Millmerran Contract was the consideration that if Pozzolanic did not continue in the Millmerran arrangements, a competitor probably would take the ash and prices might fall by $10 a tonne, resulting in about $3 million per annum being reduced from Pozzolanic’s EBIT in SEQ. Nevertheless, Mr Clarke accepted that it was relevant to the question of whether Pozzolanic ought to continue with the Millmerran Contract that a competitor might take the Millmerran ash source and compete with Pozzolanic resulting in a reduction in flyash prices.

227    The primary judge made the following findings about that proposition (at [2673]-[2674] of the Reasons):

2673    I do not accept that the remarks of Ms Collins about a $10 price reduction for flyash and the consequences for Cement Australia’s EBIT margin in the flyash business in SEQ were simply a constructed “sensitivity” calculation of the effect upon Cement Australia’s EBIT margin if one assumed a price reduction of $10 per tonne for one of a hundred possible reasons. Ms Collins was saying in plain and unmistakeable terms to Mr Clarke that should a competitor enter (upon Pozzolanic walking away from Millmerran) the price would likely drop by $10 per tonne and the effect upon the EBIT margin in the flyash business would be significant. Ms Collins had asked Mr Chalmers for his view on the likely volumes lost at Millmerran should a competitor secure access to the ash.

2674    Mr Clarke was also astute to Boral’s potential entry at Millmerran… Mr Clarke and Ms Collins expressly deny that competitor entry and the possible consequences for price and margins formed a consideration in the reasoning for deciding to amend and extend the Millmerran Contract. I do not accept their evidence on this issue as it cannot stand in the face of the documents but I do accept that each of them looking back to the events believed that to be so. However, it cannot be so when all of the evidence is considered, and in this sense Mr Clarke and Ms Collins although seeking to assist the Court’s analysis of the events, are simply confused.

(Emphasis in Reasons.)

228    Shortly after the email of 17 June 2004, the Board Briefing Paper was put into final form by Ms Collins. The briefing paper observed that:

By 31 July 2004, Pozzolanic is contractually obliged to commit to building ash facilities at Millmerran ... by 1 May 2005 or to terminate the contract. It is recommended that the Board endorse confirmation of the contract and in-principle commitment of the necessary Capex subject to full engineering and financial analysis.

229    The paper also noted that, whilst Pozzolanic had coped with “local supply” in a “period of very high demand” in Queensland, “some further growth is expected in the next 12-18 months”, although a downturn was “expected” and when it occurred, the demand for flyash from concrete producers would generally parallel demand for cement, in which event, it would be necessary to find supplementary uses for flyash so as to consolidate the supply/demand balance.

230    The paper also reflected the statement mentioned above to the effect that should Pozzolanic relinquish the Millmerran Contract, the power station would seek an alternative partner and although FAA could be blocked, a likely contender for an arrangement with Millmerran could be Boral. Boral would likely establish a facility to supply itself and also compete with Pozzolanic “with significant impact on fly ash market dynamics in Queensland”.

231    Ms Collins’ paper was considered by Cement Australia’s Executive Committee on 21 June 2004.

232    On 28 June 2004, Mr Murray Adams, a Cement Australia analyst, sent an email to Ms Collins attaching what he described as a “re-write” of the “Queensland Fly Ash Development Plans” paper. Mr Adams held the position of Strategy and Business Development Manager for Cement Australia. He was new to the company having been appointed on 7 June 2004. The propositions he advanced for comment by the senior managers were these:

Pozzolanic Enterprises, highly profitable monopoly of the Qld fly ash market is under threat from new entrants in Global Cement and potentially Boral. PE propose to minimise the damage to their margins and volumes that will result through increased competition by locking out, where possible, their competitors from access to available supplies. This will be achieved by taking up contracts with Millmerran and Callide B and agreeing to invest in these facilities. This move is seen as the most beneficial for all shareholders.

233    Ms Collins responded to Mr Adams with the following observation:

I am not sure what guidance Colin has provided [Colin Bailey], but I was under firm instructions from Shaun not to say anything that may have TPC implications wrt competition. Rather the additional facilities needed to be justified on securing enough supply to meet the future demands from our customers and to provide the quality they require. My aim was to provide enough information so that the analysis/discussion can be done on the spot without needing to be spelled out.

234    The primary judge said in relation to this exchange that Mr Clarke was asked whether he had told Ms Collins about the things she should avoid saying in a Board Briefing Paper and whether he told Ms Collins that she should not say anything that may have trade practices implications with respect to competition. He said, “absolutely”. Mr Clarke said that he wanted Ms Collins not to make statements that were inappropriate, rather than trying to avoid things being recorded in writing which might reflect reasoning underlying a decision which suggested contraventions of the TPA.

235    On 28 June 2004, the Cement Australia Board met. The following observations were contained in the Board report for directors:

Meeting demand for fly ash across the Eastern States has become increasingly problematic in the past year. Demand in Melbourne has far exceeded our capability to supply this year resulting in extraordinary costs for both shipping and trucking. We are currently experiencing tight supplies in NSW and anticipate potential shortages in the fourth quarter as a result of peak demand from projects and reduced availability with power station shoulder demand and maintenance outages.

There has been little investment in fly ash capability in all locations in recent years, which finds us close to capacity at present. The investment required to assure us of meeting market demand will need to be made in supply chain and in ash production. Analysis is under way in supply chain … in FAA … and in Pozzolanic.

In Queensland our imperatives are two fold:

To ensure we can meet short-term demand from existing sources and;

To ensue [sic] we secure additional sources of fly ash from power stations not currently being utilised.

Meeting short-term demand spikes in Melbourne can be achieved through investment at Callide C. Increasing capability there will allow us to supply North Queensland from Callide and redirect Gladstone (currently fully committed) ash to Melbourne. Investment in incremental improvements at Gladstone will also be required in time.

Of more immediate concern is the need to secure Millmerran power station as a source of ash for South Eastern Queensland and Northern NSW. Millmerran has had in place with CAPL a contract (take or pay) for some time. During the initial period CAPL has undertaken extensive testing of the ash to determine its marketability. Initial concerns, principally around colour variability resulted in an extension of the proving-up period, which is due to expire in July. We are confident that, properly treated Millmerran ash will be acceptable to the market. To secure this source we will need to exercise our option in July. Exercise will commit us to install collection equipment by mid-2005. Capex is earmarked in 2005 for this purpose. Board approval of the capex will be sought at the next meeting.

Key terms

236    On 28 July 2004, the parties executed the Amended Millmerran Contract by variation of the Original Millmerran Contract. The agreement to the amendments was signed for Pozzolanic by Ms Collins. Relevantly, pursuant to the Amended Millmerran Contract:

(a)    the time by which Pozzolanic was to complete investigations and notify Millmerran whether the flyash fell within the Acceptable Range criteria and could be practically and economically converted into concrete grade flyash was extended to 31 July 2004 (cl 2.2(a) and cl 2.2(b));

(b)    if the flyash did not meet the Acceptable Range criteria and either party terminated under cl 2.6(a) after Pozzolanic had made the lump sum contract payment for the second operating year (2004), Millmerran was to refund that payment to Pozzolanic within 30 days of the notice of termination being received (cl 2.6(b));

(c)    if termination under cl 2.6(a) occurred after Pozzolanic had made the lump sum contract payment for the third operating year (2005), the payment for the second operating year would not be repayable by the seller (cl 2.6(b)(ii));

(d)    Pozzolanic would have no right to terminate the agreement under cl 2.6(a) after the date for construction of the Buyer’s Facilities under cl 3.3 (cl 2.6(c));

(e)    Pozzolanic would be required to construct the Buyer’s Facilities for the purposes of cl 3.3 by 1 May 2005 (cl 3.3); and

(f)    the term of the contract was extended to eight years.

237    Apart from these changes, cl 4 was deleted entirely and replaced with a provision entitled “Termination by buyer” that operated in this way:

(a)    if at any time after the construction of the Buyer’s Facilities and before 1 January 2007 Pozzolanic determined that the Millmerran flyash did not fall within the Acceptable Range criteria for concrete grade flyash, and could not be practically and economically converted into concrete grade flyash, then Pozzolanic would be entitled to give notice to Millmerran of those two circumstances (a cl 4(a) notice);

(b)    if following a cl 4(a) notice, Millmerran notified Pozzolanic that it accepted Pozzolanic’s determination, or independent verification determined that the flyash did not fall within the Acceptable Range criteria or could not be practically economically converted into concrete grade flyash, then either party could terminate the contract by notice given within 14 days, in which event, the termination date would be six months after the notice of termination;

(c)    if the termination date occurred after Pozzolanic had made the third operating year lump sum payment (2005), the seller had no obligation to refund that payment; and