Supreme Court of NSW considers exclusion of the prevention principle

The recent decision of MP Water Pty Ltd v Veolia Water Australia Pty Ltd (No 3) [2021] NSWSC 1023 confirmed that the prevention principle can be excluded by the terms of a contract.

In November 2017, MP Water (MP) entered into a Design and Construct Contract (D&C Contract) and a Services Provider Agreement (SPA) with Veolia Water (Veolia) for the design, construction, maintenance and operation of a water treatment facility (the Facility). Pursuant to the SPA, Veolia was to provide services in relation to the treatment of water emanating from underground coal mines. Further, Veolia was to operate the system so as to meet its “Guaranteed Flow and Process Capacity” obligations (Guaranteed Capacity). This included the continuous and uninterrupted acceptance of Mine Water at an agreed rate, with capacity for occasional acceptance of Mine Water at a higher rate. Failure to meet the Guaranteed Capacity requirements for a certain period could give rise to a ‘Major Service Failure’.

On 7 May 2021, the Facility failed to accept and process water emanating from the mines for processing and treatment for over 48 hours. MP Water contended that this Major Service Failure amounted to a Services Provider Default and issued a Services Provider Default Notice (Default Notice) on 11 May 2021. The Default Notice required Veolia to remedy the alleged Services Provider Default by restoring the Facility’s ability to accept Mine Water at a rate of at least the Guaranteed Capacity by 12pm on 12 May 2021.  MP Water also issued a direction on 11 May 2021 (11 May Direction) requiring Veolia to, among other things, comply with its water treatment and receipt obligations as set out in the SPA.

Veolia disputed the validity of the Default Notice on the basis that it had been issued in bad faith. MP Water wrote to Veolia alleging that Veolia’s failure to comply with the 11 May Direction amounted to a failure to diligently pursue a remedy to the Services Provider Default and subsequently issued a Step-in Notice. Veolia rejected the Step-in Notice as unlawful.

MP Water commenced proceedings against Veolia seeking an order requiring Veolia to comply with the Step-In Notice. One issue for determination was whether a ‘Services Provider Default’ had occurred. MP Water argued that the Facility’s failure to accept Mine Water at the specified capacity gave rise to a Major Service Failure and, on the plain meaning of the language in the SPA, this constituted a ‘Services Provider Default’. In its defence, Veolia argued that the prevention principle operated to preclude MP Water from relying on the Major Service Failure to issue the Default Notice and the Step-in Notice. Veolia submitted that the prevention principle was enlivened on the basis that MP Water had failed to hand over one of the required mine water storage ponds in the condition required in accordance with the D&C Contract, and consequently, Veolia was unable to treat the water in that pond under the SPA. Therefore, water was allowed to build up in the pond, and was at risk of overflowing which prevented the Facility from accepting and processing any further water emanating from the mines on 7 May 2021.

In considering the application of the prevention principle, Williams J in the Supreme Court of New South Wales found in favour of MP Water. Her Honour confirmed that ‘the “prevention principle” precludes a party from insisting on the performance of a contractual obligation by the other party if the first party’s wrongful conduct is the cause of the other party’s non-performance’ and further that the principle has two elements:

•   wrongful conduct, which is to be assessed by reference to the terms of the contract; and
•   the consequences of that wrongful conduct.

Williams J acknowledged that even if the above two elements are satisfied, the operation of the prevention principle may be modified or excluded by contract, concluding that, in the circumstances, the express provisions of the SPA excluded the operation of the prevention principle. Among other things, clause 44 of the SPA created a step-in right where a Services Provider Default occurred and Veolia failed to diligently pursue the Default Notice, irrespective of the cause of the Services Provider Default.  In other words, Veolia was contractually obliged to remedy the Default, irrespective of whether a breach by MP Water caused the Default.  Therefore, the prevention principle did not preclude MP Water from relying on the Services Provider Default or relieve Veolia of its obligation to diligently pursue a remedy for the Default.

In any event, Williams J held that even if the prevention principle had not been excluded, Veolia either failed to establish the alleged breaches of contract or identify how the alleged breaches would enliven the prevention principle so as to preclude MP Water from issuing the Default Notice.

In this decision, the specific drafting and operation of the default regime meant that the prevention principle could not be enlivened.

The full decision can be found here.