A plan to deliver cheaper diesel to coalmines has ended up in the courts, writes Gareth Hutchens.
Two Australian engineers have won a crucial court battle against a Wall Street giant over a multimillion-dollar oil storage venture that went sour.
For months, Charlie di Francesco and Prakash Seth have been locked in a bitter legal dispute with the global investment bank Morgan Stanley over ownership of a joint venture to build a large diesel-loading and storage facility in north Queensland's Mackay Port.
The venture was supposed to help deliver cheaper diesel to miners in Queensland's Bowen Basin, home to Australia's largest coal reserves. Miners showed interest in their project because it would have loosened the grip of three oil companies - Caltex, Shell and Mobil - on the supply of diesel to the region.
After a dispute between the men and Morgan Stanley over an alleged breach of contract, the bank tried to force the men to hand over their share in the joint venture, worth about $13 million, for $1.
But in the NSW Supreme Court last month, Chief Justice Patricia Bergin ruled a financial penalty of that sort for a breach of contract was "out of all proportion to the breach" and dismissed the claim.
It was a huge win for the two engineers, but they say their battle with the bank isn't over. "These guys are out to break us. They're doing whatever they can to break us, and we intend to win more rounds," Di Francesco said after the court's decision.
The men are now pursuing the bank for more than $100 million in damages after their contract was terminated. Morgan Stanley has signed a new contract with a company based in the United Arab Emirates to complete the project.
According to court documents, part of the men's dispute has to do with the nature of progress payments meant to keep the project financially viable and ticking over.
In 2010, Seth approached Morgan Stanley Commodities Group - an operating unit of Morgan Stanley that carries on business as a commodities trader in energy and metals markets worldwide - and proposed they form a joint venture to build and operate the diesel terminal in Mackay. MSCG became the majority shareholder (75 per cent) in the venture, while Seth and di Francesco held 25 per cent.
One of Seth's companies, Blue Diamond, was contracted to build the facility with di Francesco as its project manager.
But the men allege Blue Diamond found it impossible to continue with the project after the joint venture - with most of the directors working for Morgan Stanley - failed to make "milestone payments" necessary to keep it going. They also allege the joint venture's board made a multimillion-dollar "funding call" in breach of its contract and that, when they failed to come up with the money, it used the compulsory acquisition provisions in their agreement to try to acquire their $13 million share of the joint venture for $1.
Chief Justice Bergin's decision to dismiss the attempt by Morgan Stanley to acquire the men's shares for $1 means they have the financial ability to pursue the bank for more than $100 million in damages. Morgan Stanley will be filing its defence in court later this month and does not want to say why the project was terminated.
But a spokesman says the investment bank will "vigorously" defend any action by Seth and di Francesco to sue for damages.
"Morgan Stanley is confident it has acted properly at all times in the operation, management and financing of the [joint venture]," the spokesman said. "The legal matters relating to the [joint venture] are complex, ongoing and multi-faceted. We will vigorously defend, with confidence, any action by [the men] to sue for damages."
Di Francesco said he had long thought of ways to improve Australia's mining industry infrastructure. He met Seth more than 20 years ago when they were working for a Japanese trading house in Sydney and one day they decided to try to reduce the cost of mining in the Bowen Basin by changing the way diesel was transported to the region.
"Mackay is close to the Bowen Basin, and the Bowen Basin is where most of the coalmining is actually occurring," di Francesco said. "Mackay Port cannot handle the actual volume of diesel that's required for the basin, and a lot of the diesel was being transferred from Townsville or Gladstone."
Instead of carting the diesel over long distances, the two determined it would be cheaper and faster to import the diesel to Mackay Port directly from Singapore then cart it on to the coalmines.
"If you were carting diesel from Townsville to the Bowen Basin, it would cost you ... between 5¢ to 6¢ per litre," di Francesco said. "But because of the proximity of Mackay to the Bowen Basin, the costs would be more or less in the order of 1¢ per litre. That would save not only the cost of diesel, but also the cost of the use of the roads."
The two men started working on the project in 2003 and spent more than $5 million trying to get it off the ground. They eventually formed the joint venture with Morgan Stanley, with the bank as the major investor.