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The recent High Court judgment in Methanex New Zealand Ltd v Nova Energy Limited provides useful guidance on when the courts will require parties to perform their obligations in an energy contract rather than simply letting the breach occur and ordering damages. The issue is of particular interest in the current energy market context, where supply is under pressure and the risk of non-performance is elevated.
Context
The dispute arose when Nova advised Methanex in April 2024 that it was experiencing gas shortages and was going to suspend supply to Methanex.
Nova claimed the deliver or pay clause in their contract (cl 9.9) allowed it to elect whether to supply gas or pay Methanex a fixed price in compensation.
Methanex denied Nova was entitled to elect not to supply gas. It maintained that Nova’s primary obligation was to perform and Methanex was entitled to orders requiring Nova to perform (known as ‘specific performance’). The deliver or pay clause simply specified the consequences if Nova failed to perform (known as ‘liquidated damages’). Methanex took two actions in response:
- Commenced an arbitration seeking specific performance of the contract; and
- Applied to the High Court under article 17A of schedule 1 to the Arbitration Act 1996 for urgent interim orders requiring the supply continue pending the outcome of the arbitration.
In assessing the interim order application, Fitzgerald J considered the criteria for interim orders under art 17 whether:1
- There is a reasonable possibility that Methanex will succeed on the merits of its claim; and
- That Methanex will suffer harm not adequately reparable by an award of damages if the interim measures are not granted; and
- The harm substantially outweighs the harm that is likely to result to Nova if the measure is granted.
Ultimately, Fitzgerald J found in favour of Nova, deciding that although Methanex had a reasonable case for specific performance, Nova and its customers would suffer more harm if interim measures were granted.
A reasonable possibility Methanex will prevail at substantive hearing
Fitzgerald J found there was a reasonable possibility Methanex would succeed in obtaining orders for specific performance in the arbitration.2
Her Honour noted that specific performance is an equitable remedy and whether it will be granted will be informed by a broad range of factors. The approach to be adopted is “to determine whether it is just, in all the circumstances, that a plaintiff should be confined to a remedy in damages”. If not, specific performance is available.
Nova maintained that properly interpreted clause 9.9 entitled it to elect whether to perform. However, even if Methanex’s interpretation of clause 9.9 was preferred, Nova maintained that Methanex should be confined to a remedy in damages, because the parties had negotiated a liquidated damages regime which was an exclusive remedy in the event of breach.
Her Honour found that there was a reasonable possibility of Methanex establishing that clause 9.9 did not bar an order for specific performance. Her Honour held that the following factors would be relevant to the arbitrator’s assessment of this issue:
- The state of the New Zealand gas market at the time of arbitration, which may reflect on the potential harm to Nova and other market participants were specific performance to be ordered;
- The safety or operational implications for the customer from the non-supply;
- Whether the suggested harm to the customer if specific performance were not granted was reasonably likely to eventuate in any event;
- The likely non-supply period;
- How the amounts payable under the liquidated damages provision were calculated and whether these represented a genuine pre-estimate of the likely loss arising from the failure to supply;
- Whether the customer could be compensated for its full losses in the event of a failure to supply or whether a liability cap would apply;
- Whether the supplier was willing to waive the liability cap beyond determination of the dispute at arbitration.3
Methanex will not suffer a harm that cannot be repaired by damages alone
Methanex argued if the court did not grant interim measures, Methanex would suffer financial loss by (amongst other things):
- Having to indefinitely shut down one of the methanol production trains;
- Writing off capital expenditure;
- Incurring extra cost;
- Loss of margin on sale of methanol (or alternatively lost margin on the potential on-sale of gas).4
Nova argued given the constrained gas supply, Methanex would struggle to operate two trains on an ongoing basis anyway.5
Fitzgerald J emphasised that the party pleading specific performance must produce sufficient evidence demonstrating the likelihood and extent of the suggested harm.6 Methanex had not done enough in this case.
Her Honour was not persuaded by Methanex’s argument that the temporary shutdown of its production facilities would cause irreparable harm, pointing out that it could switch between its methanol production trains to avoid a full shutdown in the short term.7 Her Honour also noted that Methanex would receive sufficient gas from an alternative source in early 2025 and that it would continue to receive payments from Nova under cl 9.9.
Harm does not outweigh what Nova would suffer if measure is granted
Fitzgerald J found that, were Nova made to continue to supply Methanex, the harm to Nova and its other customers (like Fonterra and Oji), would be greater than the harm of non-supply to Methanex.
For example, if Oji did not receive gas, its Kinleith Mill would be paused, which could have consequences for customers producing food for export markets.8 And Nova’s ability to provide security of supply over winter to New Zealand businesses and households could be compromised.9
Our comment
The Methanex decision highlights that parties wanting to enforce performance of a contract can, alongside private dispute resolution processes like arbitration, seek urgent interim orders from the Court as a stop-gap measure pending the arbitration decision.
This will require the Court to consider the balance of convenience and harm, provided the applicant party can demonstrate the harm suffered and that such harm cannot be repaired by damages alone.
Our thanks to Jerry Yelich-O'Connor for her assistance in preparing this article.
1. At [49].
2. At [97].
3. At [137]
4. At [140].
5. At [143].
6. At [145].
7. At [145].
8. At [155].
9. At [158].
