BP Refinery (Westernport) Pty Ltd v Shire of Hastings

Factual Background

In 1963 BP Refinery (Westernport) Pty Ltd reached an agreement with Henry Bolte, the then Premier of Victoria for the establishment of an oil refinery and construction of port facilities at Crib Point, in Western Port, Victoria ("the Refinery Agreement"). The Parliament of Victoria, on the same day it ratified the Refinery Agreement, amended the Local Government Act 1958 to allow local councils to agree on the rates payable for industrial land. In 1964 the Shire of Hastings and BP Refinery entered into a Rating Agreement, which set out the rates payable for the following 40 years, and was approved by the Governor ("the Rating Agreement").

BP decided to restructure its Australian operations and on 15 December 1969 wrote to the Shire of Hastings stating "I hope I may assume that there will be no difficulty over transferring" the rights and privileges including the Rating Agreement to BP Australia Ltd. That the Rating Agreement would transfer was apparently so obvious to BP that it did not wait to hear the position of the Shire of Hastings before transferring the assets to BP Australia Ltd. Under the Rating Agreement the rates would have been $50,000 however the Shire of Hastings said the Rating Agreement no longer applied and assessed the rates in excess of $150,000.

The first set of appeals

An appeal against the assessment by BP Australia to the County Court was dismissed, as was an appeal to the Supreme Court of Victoria. The Supreme Court held that under the Local Government Act the Shire of Hastings could only validly make an agreement with a particular ratepayer for specified land, and not any person who might subsequently become the ratepayer. While the Rating Agreement applied, if at all, by statutory force, it was regarded by the parties and the court as simply a contract between the parties.

BP could have sought leave to appeal the decision to the High Court of Australia or to the Privy Council, but did not do so. Instead it took steps for BP Refinery to resume its occupation of the refinery site in September 1973. The Shire of Hastings again assessed the rates as in excess of $150,000.

The decision of the County Court

BP refinery was unsuccessful in its appeal to the County Court, where the judge held:

"In the end I have come to the conclusion that not only is this a personal contract, as the Supreme Court has already decided, but that there was a fundamental condition of continuing occupancy by the appellant. A reading of the whole of the agreement leads, in my opinion, to the finding that it contemplates that [BP Refinery] will continuously occupy the site and therefore be liable for rates. I am further of the view that the actions of the parties and the correspondence amounted to an agreement that the agreement was at an end or, if it did not, [BP Refinery] was in fundamental breach and the [Shire of Hastings][ rescinded the contract by its letter of 9 February 1970, inelegantly expressed though it may have been."

The decision of the Supreme Court of Victoria

BP Refinery appealed to the Supreme Court of Victoria. On 5 May 1976, the Full Court dismissed the appeal, holding that

1. it was an implied condition of the rating agreement that it should continue in operation only so long as BP Refinery should be the occupier of the refinery site and rateable as such; so that on BP Refinery going out of occupation on the 1 January 1970, the rating agreement came to an end.
2. if the agreement had not come to an end by the operation of such an implied term, the letter from BP Refinery and the Shire of Hastings amounted to "a mutual acquiescence between the appellant and the Shire that (the rating agreement) was to be treated as discharged."; and
3. it was unnecessary to determine the third - "wider and more difficult" - point argued on behalf of the Shire of Hastings - namely, that there had been a repudiation or fundamental breach of the rating agreement by BP Refinery, the rating agreement having allegedly imposed on BP Refinery an obligation to remain in occupation of the site and to maintain, operate and use the refinery for the purpose, inter alia, of enabling the rates to be calculated.

The majority decision

The majority of the Privy Council, Viscount Dilhorne, Lord Simon and Lord Keith, cited with approval a passage from the judgement in Prenn v Simmonds in which Lord Wilberforce said "In order for the agreement ... to be understood, it must be placed in its context. The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations."

Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied:

1. it must be reasonable and equitable;
2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
3. it must be so obvious that "it goes without saying";
4. it must be capable of clear expression;
5. it must not contradict any express term of the contract.

The test for the implications of terms was not controversial, citing three well known cases for its authority

In applying these principles, the majority took into account the surrounding circumstances, including that:

The majority held that the term found by the Supreme Court of Victoria, that the agreement would end once BP Refinery ceased to be liable to pay rates on the property, was not necessary to give business efficacy to the Rating Agreement and that it was wholly unreasonable and inequitable to limit the ability of the BP group to make changes in its corporate structure. The identity of the particular member of the BP group could not have been of the least importance to the Shire of Hastings.

Instead they found that an entirely different term, said to make the Rating Agreement accord with the Refinery Agreement to permit the assignment of the rights within the BP group.

That the majority found that what was obvious to the County Court, the judges of the Supreme Court and indeed two of their colleagues, was wrong and that those judges had missed what should have been obvious.

The dissenting judgement

Lord Wilberforce and Lord Morris dissented. The difference of opinion was not on the question of principle, but rather on the application of those principles. Their Lordships noted that:

Significance

The decision has been adopted and applied in numerous decisions, both in Australia and England.

In Australia

In England

"The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. [He then quoted the observations of Scrutton LJ in Reigate, and continued] [I]t is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred ..."

22. ... “[I]t is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.

...

Criticism of the test

The criterion of “necessity” has been described as “elusive” and "somewhat protean". It has been suggested that “there is much to be said for abandoning” the concept of necessity. As for the projected 40 year life of the refinery, it closed in 1985.