Ampol Limited v Caltex Oil (Australia) Pty Ltd

[1986] HCA 2

HIGH COURT OF AUSTRALIA

Gibbs C.J., Mason, Wilson, Brennan, Dawson JJ.

AMPOL LIMITED v. CALTEX OIL (AUSTRALIA) PTY. LIMITED

20 February 1986

Decisions

GIBBS C.J.: This appeal raises for consideration a short but difficult question of construction arising under an agreement made in 1965 between the appellant, Ampol Limited ("Ampol") and Australian Oil Refining Pty. Limited, a company associated with the respondent, Caltex Oil (Australia) Pty. Limited ("Caltex"). In 1967, as the result of a novation, Caltex became a party to the agreement in lieu of Australian Oil Refining Pty. Limited. The facts of the matter have been fully stated by Wilson J. in his judgment, which I have had the advantage of reading, and I shall repeat only such as are necessary to make my narrative intelligible. For ease of expression I shall speak as though Caltex had been a party to the agreement from its inception and as though acts done by subsidiaries of either party were done by the party itself.

2. Ampol operated a petrol refinery at Lytton in Queensland but had no refinery in New South Wales. Caltex had a refinery at Kurnell in New South Wales but none in Queensland. The parties entered into the agreement for the exchange of the products of their respective refineries so that each could obtain from the other petroleum products in the State in which it had no refinery but in which it nevertheless wished to market the products. The marketing of petroleum products in Australia is commonly carried on under agreements for the exchange of refinery products. The critical terms of the agreement, which were contained in a letter dated 15 June 1965, were the following:

"2. Products will be exchanged barrel for barrel or ton for ton, as shall be mutually agreed.

...

14. It is the intent of the agreement that the exchange quantities shall be kept reasonably in balance grade for grade on a come and go basis.

15. In any event the exchanges shall not become unbalanced to a product value exceeding 250,000 pounds at any time without the further concurrence of both companies.

...

18. Exchange of non-like products if any shall be separately negotiated.

...

20. The agreement shall be based upon each company offering to the other products meeting the agreed upon product specifications and being in all other respects of similar quality."

3. The refineries produced a number of products besides petrol, e.g., power kerosene, lighting kerosene, distillate and fuel oil. Each produced petrol in two grades, distinguished by their octane number or rating and known as "super" (or "premium") and "standard" (or "regular") grades.

4. Legislative control of the quantity of lead (in the form of lead tetra-ethyl or lead tetra-methyl) in petrol was introduced in New South Wales as from 1 January 1975 by a regulation under the Clean Air Act 1961 (N.S.W.), as amended. The regulation made it an offence (inter alia), in the part of the State throughout which the regulation applied, to sell or distribute for sale or have in possession for sale or for distribution for sale petrol which had a greater lead concentration than that prescribed. The regulation applied to a number of cities, municipalities and shires, including Sydney, Newcastle and Wollongong. It was a defence to a prosecution for that offence if the defendant proved that he believed on reasonable grounds that all the petrol was to be used outside the part of the State throughout which the regulation applied or, if within that part, other than in the operation of a motor vehicle propelled by a petrol engine. The maximum lead concentration prescribed by the regulation progressively reduced over specified periods. No similar provisions had the force of law in Queensland. To produce super grade petrol which contained a lower concentration of lead, but which at the same time met the specification which fixed the required octane rating, it was necessary to make increased use of the products of secondary refining and this significantly increased the cost of production. Thereafter, Ampol continued to supply Caltex in Queensland with petrol which contained the same concentration of lead as before ("high lead petrol") but in New South Wales Ampol needed to be supplied with petrol which contained no greater lead concentration than that prescribed ("low lead petrol"). Indeed, Caltex could not have lawfully supplied, nor could Ampol lawfully have had in its possession for sale or for distribution for sale high lead petrol, except for use outside the part of the State throughout which the regulation applied - a part which included the major cities of the State. Eventually, in 1979, Caltex refused to supply Ampol with low lead petrol of super grade except on terms that Ampol pay a "surcharge" for such supplies. The first question that falls for decision (and in the view that I have formed the decisive question in the case) is whether Caltex was bound to supply the low lead petrol without requiring any payment.

5. The answer to this question depends on whether low lead petrol and high lead petrol were "non-like products" within the meaning of cl.18 of the agreement.

6. The intention of the agreement was that the parties should exchange like products, without any payment, so that the delivery of a ton of one product by Ampol at Lytton would create an obligation on Caltex to deliver a ton of a like product at Kurnell. No time was fixed for the delivery that would discharge the obligation, but it was intended that the quantities exchanged should be "kept reasonably in balance grade for grade" and that in any event the value of products delivered by one party to another and not repaid by exchange should not exceed 250,000 pounds without the concurrence of both parties.

7. The reduction in the quantity of the lead in the petrol produced at Kurnell did not mean that the low lead petrol was of a different grade from other super grade petrol. It still met the existing product specification. The question whether it was a "non-like product" requires a comparison to be made between the characteristics of the two products. The low lead petrol and the high lead petrol were similar in some respects - they fulfilled the same function and, because they were of the same grade, fulfilled it with the same effectiveness from a mechanical point of view. On the other hand, apart from the difference in lead content, they differed in two respects - first, the low lead petrol cost significantly more to produce than the high lead petrol and the high lead petrol could not be used commercially throughout the most populous areas of New South Wales.

8. In deciding whether one thing is like another, it is necessary to keep in mind the purpose of the comparison. In the present case, the characteristics that make one product unlike another for the purposes of the agreement are those characteristics whose presence or absence will commercially affect the rights and obligations of the parties under the agreement. Since the agreement speaks not of different products, but of "non-like products", the fact that two products have some similar characteristics does not necessarily mean that they are not "non-like". I cannot agree that because two products belong to the same genus, are of the same grade and perform the same function in the same way they cannot be said to be "non-like"; to accept that view would be to look only at similarities and to ignore points of difference which might be important from a commercial point of view. There can be no doubt that products do not become "non-like" within the meaning of the agreement simply because their chemical composition is not the same, or because the cost of production is higher in one case than in another. The evidence shows that the materials and the methods used in the production of petrol may have the result that the chemical composition of the product may vary from refinery to refinery and even from batch to batch manufactured at one refinery. Moreover, the circumstances under which one refinery operates may have the result that the costs of production may differ from one refinery to another. Different or changing circumstances may increase the costs of one refinery but not of another; for example, Ampol may be obliged to incur freight costs heavier than those borne by Caltex in transporting crude from Bass Strait to its refinery or Caltex may suffer losses because of an industrial dispute. Certainly the fact that the product becomes more expensive to produce at one refinery than at another does not in itself make it a "non-like product" to that of the other refinery.

9. This does not mean that differences in chemical composition and cost of production are irrelevant to the question whether products are "non-like". If, for example, an additive introduced by one refinery made the petrol unsaleable by reason of the law of the State in which it was intended to be sold, petrol which contained the additive and petrol which did not would be "non-like products" from a commercial point of view. In the present case it is true to say that the agreement did not provide for an exchange in New South Wales - petrol was delivered in one State in exchange for that delivered in another - and the high lead petrol delivered by Ampol at Lytton was legally and commercially saleable in Queensland. However, if high lead petrol had been delivered in exchange by Caltex at Kurnell, Ampol would have received a product which legally it could not have sold in the main centres of population in New South Wales. The low lead petrol was saleable anywhere; the high lead petrol was saleable only in some of the areas in which the parties marketed their products. That difference, vital from a commercial point of view, seems in itself enough to indicate that the products are "non-like" for the purposes of the agreement. That conclusion is supported by the fact that it cost significantly more for Caltex to produce the low lead petrol which Ampol needed at Kurnell. Cost, although not in itself decisive, must be relevant, because underlying the agreement is the assumption (reinforced by cl.15 of the agreement) that there will be at least a similarity between the cost of production of the like products which are to be exchanged without the making of any financial adjustment - not an exact correspondence, but a rough approximation which takes into account possible variations due to vicissitudes of commercial affairs. A product which can be sold anywhere in the markets with which the agreement is concerned because it complies with a legal requirement as to the maximum content of lead, and which for that reason is significantly more costly to produce, is, in my opinion, commercially speaking, unlike a product which contains more lead than the specified maximum and which therefore can be sold only in some of those markets and which costs significantly less to produce. It is true that the question whether the products are "non-like" is one of degree, but having regard to the vague and informal provisions of the agreement it is not altogether surprising that the parties failed to give a more precise definition of "non-like products".

10. In Shell Company of Australia Ltd. v. Ampol Refineries Ltd. (17 July 1981, unreported) the Court of Appeal held that under a refinery exchange agreement different in form from that in the present case the test of dissimilarity was essentially a functional one. In the present case, for the reasons I have given, although a functional difference would no doubt suffice to render products "non-like", there is nothing in the agreement that supports the view that difference of function is the sole test. Other differences may have such commercial significance as to render it unlikely that the parties would have agreed to exchange the products without making a financial adjustment.

11. For these reasons I have reached the conclusion that the Court of Appeal in the present case rightly held that the high lead petrol and the low lead petrol were "non-like products", and that Caltex was accordingly entitled to negotiate for payment of a charge before it agreed to deliver the low lead petrol at Kurnell. This conclusion makes it unnecessary to consider the other issues in the case, because it means that Ampol must fail to obtain the declaration which it sought that Caltex was obliged to supply it with low lead petrol without payment of any surcharge, and that Ampol cannot succeed in recovering from Caltex the amount which it paid by way of surcharge.

12. I would dismiss the appeal.

MASON, BRENNAN, DAWSON JJ.: As the provisions of the refinery exchange agreement and the facts have been related by Wilson J., there is no occasion for us to repeat them.

2. Because the agreement reflected an understanding which was described as an "agreement in principle", it is couched in vague and general terms. Indeed, the nature of the obligation cast on each party to supply is by no means clearly spelled out. However, as we read the provisions they impose an obligation on each refiner to supply refinery products, by way of exchange of like products which are surplus to its own requirements, to the other party at its request. The contrary view, advanced by Caltex, that the agreement does not impose an obligation on a refiner to supply and that its operation is conditioned on a specific agreement or promise to supply refinery products to the other party must be rejected. The agreement was plainly intended to be more than a charter of the parties' rights and obligations in the event that they otherwise agreed to supply. It would make nonsense of the purpose of the agreement, which was to secure to the party without refining capacity in one State a source of supply in that State from the party with refining capacity there, to hold that it created no obligation on the refiner to supply once it was requested so to do.

3. The obligation to supply like products is by way of exchange so that a party to which a product is supplied at its request in State A is bound to supply the same quantity of the like product in State B when called upon to do so. Because the agreement provides for supply by way of exchange and not for the sale of goods at an agreed price, the agreement makes no provision relating to the price or value of the goods supplied and delivery of the goods does not create a debt.

4. One very powerful reason why the parties confined their obligation to exchange to like products was that such products were or would be of approximately equal value. If the obligation were extended to unlike products, having distinctly different values, then the agreement would need to provide for some pricing and accounting mechanism. Moreover, this consideration suggests that the parties proceeded according to a narrow conception of like products. The fact is that any product can be defined exhaustively only by specifying an array of attributes which may include, in addition to physical and chemical properties, economic attributes such as cost and price. Whether two products may be said to be like or unlike depends on which attributes in that array are taken into consideration, and that depends on the purpose for which the inquiry is being made. By way of illustration, premium and regular grades of petrol, which differ in value, might in some contexts be regarded as different grades of one general product, motor spirit. Is this enough to stamp them as like products for the purposes of the present agreement? We do not think so. There is nothing in the agreement, as there was in the contract in The Shell Company of Australia Limited v. Ampol Refineries Limited (judgment of the Court of Appeal of the Supreme Court of New South Wales, unreported, delivered on 17 July 1981), which indicates that all grades of motor spirit are a like product. Clause 14, which requires that "the exchange quantities shall be kept reasonably in balance grade for grade on a come and go basis", does not have this effect. And, subject to a further examination of cll.14 and 20, it would be irrational to suppose that the parties agreed to exchange a product known to be more costly and valuable for another product known to be less costly and valuable.

5. This conclusion does not answer the critical question presented by this appeal. But it seems to illustrate two matters of importance. The first is that likeness or similarity of function or use and membership of the genus motor spirit are not the sole criteria of likeness. The second is that difference in value or cost of the product is a consideration relevant to likeness.

6. The appellant strongly contests the correctness of the second proposition which we have just stated. Mr Gleeson Q.C. pointed out, forcefully and accurately, that the costs of production of the same grade of motor spirit vary from batch to batch and from refinery to refinery. Costs of production depend upon a number of variables - the cost and source of raw materials, the production or blending process, efficiency of the production process, and government charges, for example. The parties, conscious of such variations in the costs of production, nonetheless agreed to exchange petrols of the same grade, so long at any rate as they were not "non-like". However, we cannot deduce from this that all variations in the costs of production are irrelevant to the concept of likeness of product giving rise to an obligation to exchange. It is one thing to say that variations in costs arising from the known or ordinary vagaries of refinery production do not prevent products from being like. It is quite another thing to say that variations in costs due to the introduction of new legislative requirements regulating the composition of the product by restricting the use in one State of the constituent previously used to achieve economically the desired grade are irrelevant to the notion of likeness.

7. The effect of the relevant regulation made in 1974 under the Clean Air Act 1961 (N.S.W.), which took effect from 1 January 1975, was to require the use of more expensive additives in the production at Kurnell of low lead content premium grade petrol, in order to achieve the high octane rating appropriate to that grade of petrol. This petrol, though having the same grade and performing the same function as the high level lead content petrol produced by Ampol at Lytton, was different petrol. The nature and significance of that difference is such that the two petrols must be classified as "non-like products" for the purposes of the agreement. The difference is not merely one of chemical composition. The difference consists in a variation in chemical composition occasioned by a change in the law in one State, the effect of which was to compel the use of more expensive additives in place of the basic and less costly constituent contemplated by the parties, with a resulting increase in the cost of the product, an additional cost which was not imposed on Ampol's production at Lytton.

8. For this reason the low lead content premium grade motor spirit produced at Kurnell and the high lead content premium grade motor spirit produced at Lytton are not like products. The essential difference between them was not something which the refinery exchange agreement contemplated. It was a difference brought about by a change in the law which affected the fundamental understanding underlying the obligation to exchange motor spirit of premium grade, namely that petrol having the requisite high octane rating would be produced in both States with a high lead content or, alternatively, that any restrictions on high lead content would apply equally in both States.

9. The appellant submits that this view fails to take account of cl.14 which, according to the appellant, imposes an obligation to exchange products of the same grade, it being common ground that Ampol's Lytton and Caltex's Kurnell premium grade motor spirit are of the same grade. We do not read cl.14 as imposing such an unqualified obligation. Clause 14, read together with cll.2 and 18, requires exchange of like products of the same grade, barrel for barrel, whereas non-like products, even if of the same grade, must be separately negotiated. For reasons previously elaborated, the condition of likeness underlies the obligation to exchange products of the same grade. This feature of the agreement is not affected by cl.20 which requires each party to offer to the other party products meeting the agreed-upon product specifications. The clause operates within the framework of like products.

10. The Australian Standard Specification for Petrol (Gasoline) for Motor Vehicles published by the Standards Association of Australia in 1976 sets out requirements for the two grades of petrol based on their octane rating. It seems to proceed on the footing that a "grade" is a particular species of a generic product, e.g. motor spirit. However, although it is appropriate to have regard to the specification in understanding what the agreement meant by its reference to "grade", it should be noted that the specification does not purport to be an exhaustive statement of all properties of the product, but is primarily intended for consumer interests and not as a manufacturing specification. More importantly, the reference to "grade" in the agreement must be read in the light of the agreement's limitation of the obligation to exchange to like products. As we have seen, there are strong reasons for concluding that different grades of motor spirit are not like products and that in this case the two petrols, though of the same grade, are not like products for the purposes of the agreement.

11. We would dismiss the appeal.

WILSON J.: There are two basic issues that form the subject of these proceedings. The first is the construction and effect of a refinery exchange agreement ("the agreement") made in 1965 between Ampol Petroleum Limited and Australian Oil Refining Pty. Limited, and continued at all material times between the appellant ("Ampol") and the respondent ("Caltex") respectively. The second is whether, if Ampol succeeds in its contention on the first issue, it is entitled to a refund of moneys paid by it to Caltex between January 1979 and June 1982 in the form of a surcharge on every litre of premium motor spirit having a low lead content supplied to it by Caltex. At first instance, Ampol succeeded on both issues but the decision of Foster J. was set aside by the Court of Appeal which found in favour of Caltex on the construction issue.

2. It is well known that oil companies in Australia have accommodated their mutual need for convenient access to petroleum products for marketing purposes anywhere in Australia regardless of the location of their own refineries by means of bilateral exchange agreements. In simple terms, an oil company which has a refinery in State A will enter into an arrangement with a company which has a refinery in State B whereby it will supply in State A its products to the latter company in consideration of its being able to draw by way of exchange a roughly equivalent amount of like products from the refinery in State B.

3. The agreement with which the Court is now concerned deals with petroleum products from Caltex's refinery at Kurnell in New South Wales and from Ampol's refinery at Lytton in Queensland. It is embodied in a letter of 15 June 1965 from Australian Oil Refining Pty. Limited to Ampol Petroleum Limited which reads as follows:

"June 15, 1965

The Managing Director, Ampol Petroleum Limited, Box 5342, G.P.O., SYDNEY.

Dear Sir,

REFINERY EXCHANGES

Reference is made to your letter dated 19th May, 1965 and to the discussions held on June 2, 1965 in your offices at Balmain between Mr. J. Patterson of Ampol and Mr. H. Catlow of this Company.

It is our understanding that agreement in principle was reached regarding the bases upon which refinery products would be exchanged and AOR undertook to draw up a suitable document for review and execution. For various reasons, including pressure of other work, some time may elapse before a formal document can be prepared. Accordingly, it is requested that you kindly review the following statement of broad principles and, if in agreement, sign and return a copy of this letter which will then become the basis for drafting of the final document. If there is any disagreement with the wording or intent of any clause, please advise your suggested rewording.

1. It is proposed that Ampol and AOR enter into a product exchange agreement.

In consideration of the mutual agreement between the two companies to assist one another in the matter of product exchanges to the maximum extent possible, each giving the other favoured consideration before extending similar assistance to third parties it is agreed.

2. Products will be exchanged barrel for barrel or ton for ton, as shall be mutually agreed.

3. At Botany Bay, AOR will deliver to Ampol ex its Banksmeadow Terminal, filled into Ampol's tank waggons, rail cars, drums or cans. A storage/filling charge, to be agreed upon separately, will be the sole charge by AOR to Ampol for this service.

At Brisbane, Ampol will deliver products into the terminals of Caltex and Sleigh or other nominated tankage at no cost to other companies nor to AOR.

4. At Ampol's request AOR agrees to deliver on behalf of Ampol to Ampol's or other nominated tankage at:

Trial Bay, Newcastle, Port Jackson and Port Kembla,

at a standard freight charge to Ampol equal to ASCRA for General Purpose Vessels for a voyage from Botany Bay to Port Jackson and Newcastle. (At current rates this is approximately 20/6d. Australian per ton and this would be the charge for deliveries at Trial Bay, Newcastle, Port Jackson, Port Kembla, irrespective of the itinerary of the vessel or actual port or ports of discharge).

5. At AOR's request Ampol agrees to deliver on behalf of AOR to tankage nominated by AOR at Cairns, Townsville and Mackay at a standard freight charge to AOR equal to ASCRA for General Purpose Vessels for a voyage from Brisbane to Mackay, Townsville and Cairns. (At current rates this is approximately 35/6d. Australian per ton and this would be the charge for deliveries at Mackay, Townsville and Cairns irrespective of the itinerary of the vessel or actual port or ports of discharge).

At AOR's request Ampol agrees also to deliver on behalf of AOR to tankage nominated by AOR at:

Port Alma, Gladstone, Bundabert (sic) and Urangan,

at a standard freight charge to AOR equal to ASCRA for General Purpose Vessels for a voyage from Brisbane to Bundaberg, Gladstone and Port Alma. (At current rates this is approximately 26/9d. Australian per ton and this would be the charge for deliveries at Urangan, Bundaberg, Gladstone and Port Alma irrespective of the itinerary of the vessel or actual port or ports of discharge).

6. It is agreed that Clauses 4 and 5 shall be reviewed upon request of either party upon two months' notice to be given not sooner than ten months after this agreement becomes effective.

7. In respect of coastal tanker shipments each agrees to reimburse the other for any outward or inward wharfage paid by the one in respect of cargo carried and delivered on behalf of the other.

8. Neither shall charge the other for any demurrage incurred but each shall take every practical and reasonable measure to avoid the other incurring demurrage.

9. It is agreed that Clause 8 shall be reviewed upon the request of either party upon two months' notice given not sooner than ten months after this agreement becomes effective.

10. Quantities supplied by each Company shall be as measured at the receiving tankage or other receptacle, either by gauges of the receiving facility or by meters, provided that either party may request certified tank gauge tables from the other and shall have the right to witness gaugings of the receiving tankage or other facilities.

11. In transit losses for any one parcel shall be the same percentage as the overall intransit loss for the entire cargo carried by that vessel on that trip except that if one vessel shall carry both white oil and black oil cargoes then separate intransit losses shall be calculated for the white oil portion and black oil portion.

12. The agreement will become affective (sic) upon a date still to be mutually agreed upon but in any case identical with the date that Ampol makes effective product exchanges with other oil companies.

13. The agreement will be for a minimum period of three years to be terminated thereafter upon either company giving written advice to the other any time after two years of its intention to terminate in twelve months from giving such notice. Failing such notice the agreement shall remain in effect.

14. It is the intent of the agreement that the exchange quantities shall be kept reasonably in balance grade for grade on a come and go basis.

15. In any event the exchanges shall not become unbalanced to a product value exceeding 250,000 pounds at any time without the further concurrence of both companies.

16. If a product imbalance in favour of one company persists to an extent considered unreasonable by the other then upon notification prompt steps will be taken to correct the situation to the satisfaction of the company requesting correction.

17. Movements by one company on behalf of the other to ports not covered by this agreement shall be separagely (sic) negotiated.

18. Exchange of non-like products if any shall be separately negotiated.

19. Any supplies required by either company for the purpose of effecting refinery exchanges with a third or more parties shall be separately negotiated.

20. The agreement will be based upon each company offering to the other products meeting the agreed upon product specifications and being in all other respects of similar quality.

Very truly yours,

AUSTRALIAN OIL REFINING PTY. LIMITED Signed by H. Catlow Managing Director

HH.c AMPOL PETROLEUM LIMITED Signed:

....................... A.E. Harris".

Although the letter contemplated that a more formal document would be prepared this was not done.

4. The problem has arisen because of the introduction, into some but not all of the States, of legislative controls over the maximum amount of lead tetra-ethyl or lead tetra-methyl which might be added to motor spirit in order to enable the finished product to meet the required anti-knock specification. When the agreement was concluded in 1965 there were no such controls in Australia, although the standard practice of producers was to limit the quantity of lead to a maximum of 0.84 grams per litre. Legislative controls were introduced in New South Wales by regulations made under the Clean Air Act 1961 (N.S.W.). Regulation 29, which took effect from 1 January 1975, provides, inter alia, as follows:

" ...

(2) For the purposes of this Regulation, the

maximum lead concentration -

(a) at any time occurring after the commencement of this Regulation, but before 1st January, 1977, is a lead concentration of 0.64 gram per litre of petrol;

(b) at any time occurring after 31st December, 1976, but before 1st January, 1980, is a lead concentration of 0.45 gram per litre of petrol; and

(c) at any time occurring after 31st December, 1979, is a lead concentration of 0.40 gram per litre of petrol.

...

(4) A person shall not, in the part of the

State throughout which this Regulation applies, operate a motor vehicle propelled by a petrol engine knowing that there is present in any petrol in the fuel tank of the vehicle, at the time he operates the vehicle, a greater lead concentration than the maximum lead concentration.

(5) It is a defence to a prosecution for an

offence arising under clause (4) if the defendant proves that the petrol to which the information relates was not obtained in the part of the State throughout which this Regulation applies.

(6) A person shall not, in the part of the

State throughout which this Regulation applies, on his own behalf or on behalf of another person -

(a) sell or distribute for sale;

(b) offer or exhibit for sale; or

(c) have in his possession for sale or for distribution for sale,

any petrol that is to be used or is capable of being used in the operation of a motor vehicle if there is present in the petrol, at the time he -

(d) sells or distributes the petrol for sale;

(e) offers or exhibits the petrol for sale; or

(f) has the petrol in his possession for sale, or for distribution for sale,

as the case may be, a greater lead concentration than the maximum lead concentration.

(7) It is a defence to a prosecution for an

offence arising under clause (6) if the defendant proves that he had reasonable grounds to believe, and did in fact believe, at the time the offence is alleged to have occurred, that all the petrol to which the information relates -

(a) was to be used outside the part of the State throughout which this Regulation applies; or

(b) was to be used within the part of the State throughout which this Regulation applies other than in the operation of a motor vehicle propelled by a petrol engine.

(8) A person who contravenes any of the

provisions of this Regulation is guilty of an offence against this Regulation and is liable -

(a) if a corporation, to a penalty not exceeding $5,000; and

(b) if any other person, to a penalty not exceeding $500".

The regulation was made to apply to the part of the State comprised of the cities, shires and municipalities set out in sub-reg. (3). They constitute the three major population centres in the State, being Sydney, Newcastle and Wollongong. In terms of the volume of sales of motor spirit, these areas represent in excess of one-half, and perhaps as much as two-thirds, of the market for motor spirit in the State. It is agreed that the obligation to reduce the lead content had a significant effect on the refinery operations of producers in the State. This is because, in order to maintain the octane rating required by the product specification, it was necessary to change the blending formulae in order to make greater use than hitherto of the products of secondary refining. In consequence of this, there has been a significant increase in the cost of production.

5. Legislative controls of this kind were not introduced in Queensland, with the result that Ampol was not obliged to lower the lead content of the motor spirit produced by it at Lytton. Meanwhile, although the Prices Justification Tribunal had allowed to producers of low lead motor spirit an increase in price of about 0.2 cents per litre, the relevant authority in New South Wales would not allow this increase to be passed on to the ultimate consumer.

6. On 5 January 1978 Caltex sent a telex to Ampol in which it referred to the decision of the Prices Justification Tribunal as an acknowledgement that motor spirit with a lower lead content had a greater value than grades with a higher lead content. It proposed that from 1 January 1978 all its refinery exchange transactions involving such motor spirit should bear a "low lead surcharge" of an amount to be notified. Ampol disputed Caltex's right to impose such a charge and the disputation continued without resolution throughout 1978. During this period the dispute centered on whether high lead and low lead motor spirit were "non-like products" within the meaning of that expression in par. 18 of the agreement. Failing agreement on that subject, Caltex advised Ampol by telex on 7 February 1979 that henceforth it would supply only high lead motor spirit. Ampol replied to the effect that this would be regarded as a repudiation of the agreement. Further discussions then ensued, the legal effect of which forms the second issue that arises in the proceedings. It is sufficient to conclude this brief review of the history to record that Ampol continued to draw low lead motor spirit from Kurnell and paid, without prejudice, a surcharge to Caltex in respect thereof.

7. The first question to be considered, then, is whether the high lead premium motor spirit produced by Ampol at Lytton is "non-like" the low lead premium motor spirit produced by Caltex at Kurnell. Both products have the same octane rating, a rating which meets the requisite specification for premium grade motor spirit. They are therefore of the same grade. They both perform an identical function. Mr Gleeson Q.C., counsel for Ampol, argues that being of the same grade they must therefore fall within the same category of product, the exchange of which is secured by pars. 2 and 14 of the agreement. He relies on the Australian Standard Specification for Petrol (Gasoline) for Motor Vehicles published by the Standards Association of Australia in 1976. This specification sets out requirements for two grades of petrol based on their octane number as covering "the current range of quality retailed in Australia for use in spark-ignition engines". The general components common to petrol of both grades are set out in relation to each of the following properties: Copper corrosion, Sulphur content, Existent gum, Oxidation and Lead content. The last-mentioned item carries the notation "As permitted by Government legislation". Mr Gleeson argues that the emphasis on "grade" in the Australian Standard merely confirms the industry understanding described in the evidence to the effect that "grade" is a term used to distinguish between different kinds of the same product, the products being motor spirits, kerosenes, distillates and fuels. On the other hand, Mr Bennett Q.C., counsel for Caltex, argues that there are three factors which make the high lead and low lead products "non-like": their chemical composition, the cost of production and the legislation. It is said that it is a question of degree. I think the fact that Mr Bennett is driven to the submission that it is a question of degree tends to expose the fallacy of his argument because it is highly unlikely that commercial operators would adopt a distinction that would expose them to constant disputation as to where in any particular case the line was to be drawn. The evidence is undisputed that, leaving aside its lead content, the chemical composition of the finished product may vary from refinery to refinery and even from batch to batch. Varying climatic conditions will require a different level of volatility, resulting in different chemical components in Queensland as compared with New South Wales and necessitating adjustments in order to cater for summer and winter use respectively. The place of origin of the crude oil may be a factor determining the sulphur content. Perhaps of greatest significance are the different refining processes that are adopted at different refineries. Each refinery has its own component blend stocks each of which has a particular chemical composition which itself may vary from time to time depending on the crude oil being used and the particular operating conditions of the various processes. The combination of these factors will result in a varying chemical composition of the finished product notwithstanding that its overall performance characteristic still meets the required specification. The fact is that these parties regularly exchanged their product specifications in accordance with par. 20 of the agreement without any suggestion that their differing chemical composition might take them out of the category of like products. It is important to note that the only contribution that lead makes to the finished product is that it assists in achieving the specified octane rating. If less lead is used, then other blending processes must be employed in order to achieve the same result. It is the octane rating and not the lead content that determines whether the grade of motor spirit is premium grade or regular grade.

8. The cost of production cannot be a relevant factor in determining whether products are "non-like". The agreement is basically an agreement for the exchange of finished petroleum products, grade for grade. Neither price nor value enters into the arrangement, save with respect to delivery charges in respect of the finished product. It is clear that the parties, while recognizing that many factors - the cost of getting the crude oil to the refinery, the efficiency and economy of the refining processes, the impact of government charges, etcetera - could enter into the costs of production so as to render the simple exchange of a litre of motor spirit in one State for a litre of motor spirit in another State more financially advantageous to one party than to the other, nevertheless determined that any such consideration was outweighed by the administrative simplicity of the arrangement coupled with the confidentiality it secured to the operating costs of each refinery. The total irrelevance of actual costs of production is illustrated by reference to the variations to the agreement that were negotiated during 1977 and 1978 in order to deal with the situation when an unacceptable imbalance developed in the course of the operation of the exchange agreement. It is unnecessary to detail the ground rules that were agreed in order to deal with such a situation, save to notice that it became necessary to provide a formula for valuing the extent of the imbalance. The formula did not focus on the actual costs of production of the party which had supplied more of the product than it had drawn. It took the landed cost of the crude oil at Kurnell or Lytton as the case may be "plus 75% of gross refiners margin at Bahrain for individual product balance concerned". The adoption of a purely notional refining cost, namely, one based on actual costs at Bahrain in preference to reliance upon actual operating costs, tends to confirm that a variation in the costs of production was not intended to affect, for the purposes of the exchange agreement, the characterization of the product.

9. The third factor relied upon by Mr Bennett is the New South Wales regulation requiring the use of low lead motor spirit. But the only practical consequence of the regulation was to require a change in the chemical composition of the product, and thus affect the costs of production. Since, as I have endeavoured to show, a variation of either of those factors is immaterial to the characterization of the finished product so long as its basic functional character remains unchanged the regulation itself cannot be said to render the products "non-like". The fact that high lead motor spirit may not be sold in New South Wales for use in certain parts of that State may provide a point of distinction between the high lead motor spirit produced at Kurnell and the high lead motor spirit produced at Lytton which may be sold in Queensland for use anywhere in that State. But we are not concerned with comparing two high lead products. The question is whether high lead motor spirit supplied in Queensland is a product "non-like" low lead motor spirit supplied in New South Wales. There is no relevant legal restraint on the sale for use of either of those products in the State where each is supplied. Low lead motor spirit is as freely saleable in New South Wales as high lead motor spirit is saleable in Queensland.

10. For these reasons I am of the opinion that the agreement uses the word "products" in the broad sense, consistently with the industry understanding to which I have referred, as identifying the different kinds of refined petroleum oils distinguished by reference to their basic functions. The word "grade" serves to distinguish, within certain of these broad categories of product, oils which exhibit more precise performance characteristics. It follows that low lead premium motor spirit supplied by Caltex from Kurnell and high lead premium motor spirit supplied by Ampol from Lytton are "like" products for the purposes of the agreement with the intent that they are to be exchanged reasonably in balance on a grade for grade basis.

11. In order to determine whether Ampol is entitled to recover the moneys it has paid to Caltex by way of surcharge, it is necessary to consider a number of submissions advanced by Mr Bennett on behalf of Caltex. The first is that the agreement did not impose an obligation on either party to supply any product. It did no more than set out the basis upon which exchanges would take place if and when the parties chose to supply products to each other. Mr Bennett observes, correctly, that a difficulty with holding the agreement to impose any obligations on the parties is that the precise extent of those obligations cannot be measured. Nevertheless, it seems to me that the agreement contains several indications of an intention that it should impose obligations on the parties, notwithstanding that a more formal document was foreshadowed but never eventuated. Paragraph 2 states categorically that products will be exchanged. The addition of the words "as shall be mutually agreed" anticipates some reasonable form of consultation based on prior notification of its needs by one party to the other so that the arrangement may be administered in an orderly manner. Paragraphs 4 and 5 are expressed in terms of an obligation on one party, at the request of the other, to deliver products to a nominated tankage. The inclusion of par.13, limiting the minimum term of the agreement, would be surprising if the agreement was not intended to secure rights to the parties and impose obligations upon them. It is true that the agreement is not specific in terms of the quantities that are to be exchanged but the reason for that is obvious. It would have been impossible to anticipate the precise needs of either party far into the future. Bearing in mind that the agreement is a commercial document drawn up by businessmen (cf. Hillas and Co. Limited v. Arcos Limited (1932) 147 LT 503, at pp 511-512; Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd. (1968) 118 CLR 429, at pp 436-437), its intended operation is reasonably plain. The agreement secured to each party an assured supply of the petroleum products it required for distribution in the State in which it did not operate its own refinery and in consideration of that supply it undertook to supply to the other on request roughly equivalent quantities, grade for grade (par.14). If that is not what the agreement means, then it is hardly efficacious in any commercial sense, particularly when regard is had to the evidence that, in the wider perspective, the orderly marketing of petroleum products throughout Australia is entirely dependent upon oil companies operating refineries honouring their obligations under these agreements. Reference may also be made to pars. 17 and 18, both of which identify particular topics which are reserved for separate negotiation, thereby implying that the other provisions in the agreement are intended to be binding. As Foster J. observed, there would no doubt be terms implied limiting the obligation of a party to supply in particular circumstances which deprived it of the capacity to comply. Finally, if it matters, there can be no doubt that the parties regarded the agreement as imposing obligations. When the disputation over the proposed surcharge reached flashpoint in February 1979, the telex of 7 February 1979 from Caltex informing Ampol that henceforth it would supply only high lead motor spirit from Kurnell concluded with the following sentence:

"We accordingly look to you to comply with the refinery exchange agreement consistently with your interpretation thereof and meet our requirements for premium gasoline in Queensland for the first half of 1979 as set out in our telex of January 3".

12. The next submission of Caltex is that, if it be accepted that each company's premium and regular grades of motor spirit respectively are not non-like products by reason of their varying lead content, then it follows that Caltex is entitled to satisfy Ampol's total requirement for each grade with high lead motor spirit. It is a sufficient answer to this contention to recall the practice, followed consistently with the agreement, whereby Ampol notified Caltex at periodic intervals of its requirements for motor spirit during the ensuing period. Since the coming into operation of the regulation under the Clean Air Act, that requisition has distinguished between metropolitan premium (or regular) motor spirit and country premium (or regular) motor spirit, thereby calling for the supply of low lead motor spirit to satisfy the former requirement and the supply of high lead motor spirit to satisfy the latter. If Caltex were to insist, with Ampol's knowledge, on supplying high lead motor spirit to meet the former requirement then both companies would probably be guilty of a breach of the regulation, as would any customer in the metropolitan area who knowingly used the motor spirit in his vehicle. If there are two ways of complying with a contractual obligation, one of which is legal and the other illegal, there is no occasion to invoke the doctrine of frustration. The agreement must be construed to refer only to like products which may be distributed, sold and used lawfully. In any event, the effect of the regulation is to render high lead motor spirit supplied from Kurnell for use in the prescribed areas of New South Wales a product "non-like" high lead motor spirit supplied from Lytton for use in Queensland.

13. The next question is whether the parties entered into a binding agreement concerning the refund by Caltex, in the event that Ampol succeeded in its argument on the construction of the refinery exchange agreement, of the moneys paid by Ampol in the form of a surcharge on low lead motor spirit supplied to it from Kurnell. The answer depends on the view taken of a number of telexes that were exchanged between the parties in the period between 13 February 1979 and 18 April 1979. The learned trial judge accepted Caltex's submission that a close reading of the telexes indicates that the parties never reached the point of consensus. With respect, I take a different view so far as the essential issue is concerned. A number of distinct issues were being canvassed in the telexes and it may be true that with respect to some of them the negotiations reached a stalemate. Before I refer to particular passages in the telexes it is necessary to explain that at the time of these negotiations proceedings had been instituted in the Supreme Court of New South Wales between Ampol and the Shell company with a view to resolving a similar problem of construction of the refinery exchange agreement between those companies to that which had arisen with Caltex. It is necessary to set out the material parts of the relevant telexes.

1. Telex 154/2 Ampol to Caltex 13 February 1979:

"Further to our telex No. 102/2 of February 8 and subsequent agreement by telephone, it is confirmed that, notwithstanding the absence of obligation upon Ampol but solely in order to ensure recommencement of supply by Caltex of metropolitan premium motor spirit in the Sydney metropolitan area, Ampol agrees, without prejudice:

(1) To pay a low lead surcharge in accordance with

the Shell formula, effective February 12, for all deliveries of metropolitan premium motor spirit from that date.

(2) Such payment is made on the basis that our

disagreement in relation to the interpretation of the expression 'non-like products' under our refinery exchange agreement will be referred to the NSW Supreme Court. If this interpretation confirms that adopted by Caltex, Ampol will continue to pay the surcharge, but if not, Caltex will refund all such payments.

(3) As advised, proceedings have been instituted

in the NSW Supreme Court for a ruling on this matter with the Shell Company and, if both companies agree, the decision in that case will apply to clause (2) above. If there is a failure to agree, the matter will become the cause for separate reference to and decision by the above Court as soon as possible.

It is acknowledge (sic) that Caltex wish to have the surcharge paid effective January 1, 1979, but in Ampol's view, the effective date should be that on which supply is recommenced following cessation of supply and our agreement to pay this amount, pending a decision by the Court".

2. Telex Caltex to Ampol 22 February 1979:

" ... Reference your telex No. 154/2 dated and received February 13, we advise that effective a.m. Monday February 12 deliveries of low lead level premium gasoline recommenced upon your agreement to pay a charge calculated in accordance with the Shell formula being as at February 12, 0.159 cents per litre (stop) Whereas we have contended that this charge should be effective January 1, 1979 and you have contended that it should be effective from recommencement of deliveries i.e. February 12, in order to maintain our normally amicable relationships we are prepared, without prejudice, to accept payment of the charge as from and including Monday, January 22 (stop) With regard to item 3 of your telex, we are unable to accept that the decision in your case with Shell should be binding upon us, firstly, because the contract and contractual relationships are different and secondly, we are not a party to the proceedings (stop) However, we suggest that when the final decision in the Shell proceedings becomes known, we should confer with a view to ascertaining whether that decision throws sufficient light upon the matter to enable us to arrive at an agreement in relation to our dispute (para) With reference to item 2 of your telex, we cannot accept that your payment of the abovementioned charge should be made upon the conditions stated therein (stop) If, after the Shell proceedings are settled you should feel that any refund of the charges should be made to you we would earnestly hope that agreement could be reached by means of friendly negotiation (stop) However, should such fail, we would certainly agree at your request to seek a declaratory judgment in the Supreme Court with all due expedition as to what are our respective contractual obligations (if any) as to the supply of low lead premium gasoline and as to whether the proper interpretation of those obligations requires us to make such supply without additional charge (stop) Whether there would be a refund of payments made by your Company of the charge would depend upon the ultimate judgment (stop) We sincerely hope that such proceedings will not be necessary (para) ... " (my emphasis).

3. Telex 181/3 Ampol to Caltex 14 March 1979:

"1. In reply to your telex of February 22 on

surcharge payments for payments for supply of low lead premium gasoline we agree to your compromise proposal on the effective date of such payment, namely from, and including Monday January 22.

2. We note your comments on conferring after the

decision in the current Shell proceedings becomes known, and your agreement to abide by a declaratory order in the Supreme Court if negotiation fails to achieve a satisfactory solution.

... ".

4. Telex Caltex to Ampol 22 March 1979:

"Reference your telex 181/3 (stop) We concur with item 1 of your telex (stop)

In respect of the declatory (sic) order referred to in item 2 of your telex we confirm our position is as stated in lines 33 to 40 of the text of our telex of 22 February 1979 (stop)

... ".

The passage to which reference is made, namely, lines 33 to 40 in the telex of 22 February 1979, is included in the portion underlined in the extract quoted above.

5. Telex 156/4 Ampol to Caltex 11 April 1979:

"Reply your telex of 22.3.79 on surcharge payments for supply of low lead premium gasoline in respect of item 2 we consider that court action should properly be instituted by Ampol and so our position is as advised in item 2 of our telexes Nos. 181/3 and 154/2.

... ".

6. Telex Caltex to Ampol 18 April 1979:

"Your tx 156/4 (stop)

Our position is unchanged to that advised in our telex of February 22 last".

14. The critical passage is that underlined in Caltex's telex of 22 February 1979 and reiterated in its telexes of 22 March 1979 and 18 April 1979. Caltex rejected the procedure proposed by Ampol in item 2 of its telex of 13 February 1979. This had called for a reference of the dispute to the Supreme Court, with the refund of payments by Caltex depending on the outcome. Caltex then made a counter proposal that if, after the conclusion of the proceedings involving Shell, Ampol persisted in its claim for a refund there should be friendly negotiations between Caltex and Ampol. Should those negotiations fail, Caltex would certainly agree at Ampol's request to seek a declaratory judgment in the Supreme Court with all due expedition. Whether there should be a refund would depend upon the ultimate judgment. I interpret Ampol's response to this proposal, contained in par.2 of its telex 181/3 of 14 March 1979, as an acceptance. The later telexes may reflect a lack of understanding by Ampol of the fact that in its proposal of 22 February 1979 Caltex had indicated that it would institute the Supreme Court proceedings should they become necessary. Ampol's acceptance of the Caltex proposal sealed that proposal and it was too late for it afterwards to assert that it should itself institute the proceedings.

15. In my opinion, therefore, the proper construction of these negotiations is that the parties agreed to confer after the result of the proceedings between Ampol and Shell became known and, failing agreement, any refund of moneys paid by Ampol by way of surcharge would depend on the outcome of Supreme Court proceedings to be instituted by Caltex on Ampol's request. It is immaterial that those proceedings were in fact instituted by Ampol. The imposition of the surcharge having been found to be unwarranted, Ampol is entitled to judgment in the terms of the orders made by Foster J. It is unnecessary for me to consider the further argument advanced by Ampol, which found favour with Foster J., namely that the payments made by Ampol were refundable because they were made involuntarily under economic duress.

16. I would allow the appeal and restore the orders of Foster J.

Orders

Appeal dismissed with costs.