Apache Oil Australia Pty Ltd v Santos Offshore Pty Ltd - [2015] WASC 318

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: APACHE OIL AUSTRALIA PTY LTD -v- SANTOS OFFSHORE PTY LTD [2015] WASC 318

CORAM: CHANEY J

HEARD: 9 MARCH 2015

DELIVERED : 27 AUGUST 2015

FILE NO/S: CIV 2787 of 2013

BETWEEN: APACHE OIL AUSTRALIA PTY LTD
First Plaintiff
APACHE EAST SPAR PTY LTD
APACHE KERSAIL PTY LTD
Second Plaintiffs
AND
SANTOS OFFSHORE PTY LTD
Defendant

Catchwords:

Contract - Joint venture - Construction - Material breach - Right to remove an operator - Unauthorised development steps - Whether election to accept breach - Turns on own facts

Legislation:

Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth)
Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011 (Cth)

Result:

Declaration of material breach

Category: B

Representation:

Counsel:

First Plaintiff                :     Mr P J Brereton SC & Mr N J Landis
Second Plaintiffs           :     Mr P J Brereton SC & Mr N J Landis
Defendant:     Mr B Dharmananda SC, Mr D Jackson & Dr E M Heenan

Solicitors:

First Plaintiff                :     Clifford Chance
Second Plaintiffs           :     Clifford Chance
Defendant:     Herbert Smith Freehills

Case(s) referred to in judgment(s):

Androvitsaneas v Members First Broker Network Pty Ltd [2013] VSCA 212
Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Australian Casualty Co Ltd v Federico [1986] HCA 32; (1986) 160 CLR 513
Celtech International Ltd v Dalkia Utility Services Plc [2004] EWHC 193 (Ch)
EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23
Elders Ltd v E J Knight & Co Pty Ltd [2009] NSWSC 1462
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420
Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443
Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455
McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Re Golden Key Ltd [2009] EWCA Civ 636
Re Media Entertainment and Arts Alliance; ex parte The Hoyts Corporation Pty Ltd [1993] HCA 40; (1993) 178 CLR 379
Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522
CHANEY J:

Introduction

The plaintiffs, Apache Oil Australia Pty Ltd (AOA), Apache East Spar Pty Ltd and Apache Kersail Pty Ltd (together the Apache Parties), are participants in a joint venture (Spar JV) with the defendant, Santos Offshore Pty Ltd (Santos Offshore). The Apache Parties are all wholly owned subsidiaries of Apache Energy Limited (Apache Energy). Santos Offshore is a wholly owned subsidiary of Santos Ltd (Santos).
The joint venture was formed by a Joint Operating Agreement dated 27 August 2010 (Spar JOA), in respect of retention lease WA‑4‑R, which subsequently became production licence WA‑45‑L (Title). That Title includes a well, known as the Spar‑2 well. The area covered by the Title (Title Area) has within it a gas field referred to as the Spar gas field and part of a nearby gas field known as the Halyard gas field. Santos Offshore's percentage interest in the Spar JV is 45% and the Apache Parties' collective percentage interest is 55%.
On the same day that the Spar JOA was executed, the parties executed a Sale and Purchase Agreement (SPA) and a letter entitled 'Capacity Access Agreement', the relevant substance of each of which is explained below.
One purpose of the Spar JOA was to appoint an Operator of the Spar JV. AOA was appointed to, and continues to occupy, that role. Another purpose was to define the respective rights, interests and obligations of the parties in respect of the exploration for Petroleum (which included gas) and the development and production of any discoveries of Petroleum in the Title Area.
Under the Spar JOA, the Operator may be removed if the Operator has committed a 'material breach' of the Spar JOA. By letter dated 4 October 2013, Santos Offshore gave notice to AOA of what were alleged to be two material breaches of the Spar JOA.[1] Santos Offshore demanded that AOA remedy the breaches within 30 days.
[1] Trial Bundle, vol 7, page 5542.
By a letter dated 7 November 2013, AOA rejected the allegations of material breaches.[2] It continues to reject them. AOA triggered the dispute resolution provisions in the Spar JOA. The effect of triggering the dispute resolution provisions of the Spar JOA is that AOA is entitled to remain as the Operator until the dispute is resolved. These proceedings were commenced under those provisions. As senior counsel for the Apache Parties acknowledged in opening, the proceedings are an attempt by AOA to pre-empt its removal as the Operator by seeking a declaration that Santos Offshore cannot remove AOA as the Operator of the Spar JV.
[2] Trial Bundle, vol 8, page 5972.
By its counterclaim, Santos Offshore seeks declarations that AOA has committed material breaches of the Spar JOA and that it is entitled to remove AOA as the Operator of the Spar JV.
The breaches alleged by Santos Offshore in these proceedings were, until shortly before trial, grouped into four categories which the defence and counterclaim termed as 'unauthorised development breaches', 'unauthorised work and expenditure breaches', 'inclusion of past work and expenditure breach', and 'inadequate detail breach'. By amendments to the pleadings made by consent at the commencement of the trial, reference to unauthorised work and expenditure breaches and to the inadequate detail breach were removed from the pleading. The allegation of the alleged breach by inclusion of past work and expenditure in a proposed Development Work Program and Budget, is no longer pursued as a material breach. Accordingly, the question as to whether AOA is liable to be removed as the Operator now turns on the question of whether it breached the Spar JOA by carrying out unauthorised development (or authorising others to carry out unauthorised development), and, if so, whether that amounts to a material breach. The answer to that question turns largely on the proper construction of the relevant provisions of the Spar JOA.

The Spar gas field

Exploration for and mining of petroleum and gas is regulated by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) and the Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011 (Cth). That legislation provides for requirements for licences in relation to activities carried on, and infrastructure developed, for offshore petroleum and gas exploration and exploitation. Examples of such licences relevant to the present proceedings are retention licences, production licences and pipeline licences.
From about 19 September 2008 until the commencement of the Spar JOA and the SPA, Santos Offshore was the sole holder of retention lease WA‑4‑R.[3]
[3] Trial Bundle, vol 1, page 289.
Santos Offshore applied for a petroleum production licence in respect of that area. As part of the application process, in September 2009 Santos Offshore submitted a Field Development Plan (2009 FDP) to the Western Australian Department of Mines and Petroleum (DMP).[4]
[4] Trial Bundle, vol 1, page 313.
By letter dated 25 August 2010, DMP advised Santos Offshore that it was prepared to grant a petroleum production licence in respect of the area. Production licence WA‑45‑L was then granted for the Spar gas field.
As noted above, the Spar gas field lies adjacent to the Halyard gas field. Nearby lies the East Spar gas field. The East Spar gas field and part of the Halyard gas field lie within the WA‑13‑L production licence area. The East Spar gas field was in production from the 1990s but is no longer in production. Within the WA‑13‑L production licence area, there is a well on the Halyard gas field known as the Halyard‑1 well. There is ongoing production from the Halyard‑1 well. This production, which is the only current production from the WA‑13‑L production licence area, is conducted under a joint venture between AOA (25%), Apache Kersail (5%), Apache East Spar (25%) and another Santos subsidiary, Santos (BOL) Pty Ltd (Santos (BOL)) (45%) (often called the East Spar JV). That is, the respective Apache and Santos interests (at a group level) in the Spar JV and the East Spar JV are the same. AOA is also the Operator of the East Spar JV.
The gas produced from the Halyard‑1 well is transported to and processed on Varanus Island. The East Spar JV owns pipelines and subsea infrastructure between the Halyard‑1 well and Varanus Island, and gas processing facilities located on Varanus Island. A pipeline licence WA‑21‑PL was issued by DMP to the participants in the East Spar JV in January 2011.[5]
[5] Trial Bundle, vol 2, page 802.
In the latter part of 2010, the Spar‑2 well was drilled, tested and completed at a cost of approximately $67 million. This was exploration work undertaken as Joint Operations pursuant to the Spar JOA.[6] The target reservoir demonstrated very high productivity. At that stage, the plan (announced publicly by Santos) was to tie the Spar‑2 well back to the Halyard development, which was then under construction, to transport the gas to Varanus Island. Work and expenditure directed to the tie back of the Spar‑2 well is at the heart of the dispute in these proceedings.
[6] Trial Bundle, vol 1, page 517 [556], [567].

The Spar JOA

Recital B to the Spar JOA records:
The Parties desire to enter into this Agreement for the purpose inter alia of appointing the Operator, and to define as from the Effective Date hereof their respective rights, interests and obligations in respect of the exploration for Petroleum and the development and production of any Discoveries of Petroleum in the Title Area.
Clause 1 contains definitions. The term 'Operator' is defined in cl 1.61 as meaning:
a Party to this Agreement designated as such in accordance with Clauses 4 or 7.10(F) acting in that capacity and not as the owner of a Participating Interest or other Party for the time being designated and acting as such under this Agreement.
Clause 2.1 specifies that the term of the Spar JOA is from the date of commencement until:
•the Title terminates;
•all joint property, materials, equipment and personal property used in connection with the operations under the agreement have been disposed of or removed; and
•final settlement has been made.
Clause 3 identified the scope of the Spar JOA. It provides:
3.1 Scope
(A)The purpose of this Agreement is to establish the respective rights and obligations of the Parties with regard to operations under the Title, including:
(1)the joint exploration for, appraisal, development, treatment, production, storage, transportation, handling and disposition of Petroleum from the Title Area;
(2)the design, engineering, construction, commissioning and operation of facilities for Joint Operations in accordance with Development Plans and development Work Programs and Budgets, including facilities located outside of the Title Area;
(3)subject to there being available capacity in the Joint Property, processing Petroleum owned by persons other than the Parties jointly;
(4)entering into capacity access arrangements for the processing, compression, transportation and liquid storage and loading of Petroleum upstream of the Delivery Point;
(5)subject to clause 3.1(B), any related activities the Operating Committee decides to pursue which are necessarily incidental to the above.
(B)For greater certainty, the Parties confirm that the following activities are outside of the scope of this Agreement and are not addressed herein:
(1)construction, operation, ownership, maintenance, repair and removal of facilities downstream from the Delivery Point of the Parties' Entitlements;
(2)the transportation and processing of the Parties' Entitlements downstream from the Delivery Point;
(3)marketing and sales of Petroleum, except as expressly provided in clause 8.4 and clause 9;
(4)acquisition of rights to explore for, appraise, develop or produce Petroleum outside the Title Area (other than as a consequence of unitization with an adjoining project area); and
(5)exploration, appraisal, development or production of minerals other than Petroleum.
(C)Each Party undertakes not to partition or to seek to partition or deal with its Participating Interest share of Joint Property or any part thereof otherwise than in accordance with this Agreement.
By cl 4.1 AOA was appointed the Operator.
The Title is defined as retention lease WA‑4‑R and includes any successor or replacement leases or licences, including any production licence. The Title Area is the area covered by the Title.
Clause 3.3(A) provided that all rights and interests in and under the Title, all joint property, and any production from the Title Area is to be owned by the parties in accordance with their respective participating interests. Clause 3.3(B) provided that all obligations of the parties under the Title, and all liabilities, expenses and credits incurred or received by the Operator in connection with Joint Operations, is to be charged to the Joint Account and shared by the parties in accordance with their respective participating interests.
Clause 4.2(A) provides that, subject to the terms and conditions of the Spar JOA, the Operator shall have all the rights, functions and duties of the Operator under the Title and shall have exclusive charge of, and shall conduct, all Joint Operations as agent on behalf of the parties under the overall supervision and control of the Operating Committee. The Operator may employ independent contractors and agents in such Joint Operations.
Joint Operations are defined as meaning 'those operations and activities carried out by the Operator pursuant to [the Spar JOA] including Abandonment activities …' (cl 1.45).
The words 'operations' and 'activities' are not defined by the Spar JOA. Reliance is placed by the plaintiffs on what they contend is a distinction in the concepts embodied in the two words. To that end, they identify other definitions which refer to those words. 'Exploration' is defined to mean 'operations and activities directed towards discovering a Discovery including Exploration Well operations'. 'Appraisal' means 'activities and operations directed at appraising and evaluating a Discovery, including Appraised Well operations'. I will deal with the question of construction of the Spar JOA later in these reasons.
Clause 4.2(B) sets out the functions and duties of the Operator. Clause 4.2(B)(11) deals with representation of the joint venture in dealings with government. It provides that the Operator shall:
have, in accordance with any decisions of the Operating Committee, the exclusive right and obligation to represent the Parties in all dealings with the Government with respect to matters arising under the Title and Joint Operations. Operator shall notify the other parties as soon as reasonably possible of such meetings. Subject to the Title and any necessary Government approvals, Non-Operators shall have the right to attend any meetings with the Government with respect to such matters, but only in the capacity of observers. Nothing contained in this Agreement shall restrict any Party from holding discussions with the Government with respect to any issue peculiar to its particular business interests arising under the Title or this Agreement, but in such event such Party shall promptly advise the Parties, if possible, before and in any event promptly after such discussions, provided that such Party shall not be required to divulge to the Parties any matters discussed to the extent the same involve proprietary information or matters affecting the Parties;
Clause 4.10(B) is central to these proceedings. It provides:
(B)Subject to Clause 4.11, Operator may be removed by the unanimous decision of the Non-Operators (excluding any Affiliate of the Operator) if Operator, in its capacity as Operator, has committed a material breach of this Agreement and has either failed to commence to cure that breach within thirty (30) Days of receipt of a notice from such Non-Operators detailing the alleged breach or failed to diligently pursue the cure to completion. However, if Operator disputes such alleged commission of or failure to cure a material breach and dispute resolution proceedings are initiated pursuant to Clause 18.2 in relation to such breach, then Operator shall not be removed under this Clause 4.10(B) and no successor Operator may be appointed pending the conclusion or abandonment of such proceedings, subject to the terms of Clause 8.3 with respect to Operator's breach of its payment obligations.
The Operating Committee is established by cl 5.1. Its purpose is to 'provide for the overall supervision and direction of Joint Operations'. The Operating Committee is composed of representatives of each party holding a Participating Interest. Clause 5.2 provides that the Operating Committee shall have the power and the duty to authorise, supervise and review Joint Operations including matters related to Joint Property and operations that are necessary or desirable to fulfil the obligations under the Title and properly explore for, appraise and develop petroleum in the Title Area in accordance with the Spar JOA and in a manner appropriate in the circumstances.
Clauses 5.9, 5.10, 5.11 and 5.12 deal with voting procedures and the recording of votes of the Operating Committee.
Clause 5.13 provides that all decisions taken by the Operating Committee pursuant to cl 5 are conclusive and binding on all of the parties, with some specified exceptions. One exception is where a Joint Operation has been properly proposed to the Operating Committee and the Operating Committee has not approved the proposal and the proposal is of the nature that may be proposed as an Exclusive Operation, then any party that had voted in favour of the proposal shall have the right, in accordance with cl 7, to propose an Exclusive Operation involving operations essentially the same as those proposed.
Clause 6.2 of the Spar JOA deals with Work Programs and Budgets. Clause 6.2(A) provides that if the Operating Committee determines that a Development Plan and a development Work Program and Budget should be prepared for a particular discovery, the Operator is required, soon as practicable, to deliver to the parties a Development Plan together with the first annual development Work Program and Budget and provisional Work Programs and Budgets for the remainder of the development of the discovery, or a multi‑year Work Program and Budget. Those documents are required to contain:
(1)details of the proposed work to be undertaken, personnel required and expenditures to be incurred;
(2)details of the proposed capacity access arrangements for processing, compression transportation and liquid storage and loading of petroleum upstream of the delivery point;
(3)an estimated date for the commencement of production; and
(4)any other information requested by the Operating Committee.
By cl 6.2(B), the Operating Committee is required, after receipt of the Development Plan and the first annual Work Program and Budget, to meet to consider, modify and then either approve or reject the Development Plan and the relevant Work Program and Budget.
Clause 6.6 deals with the awarding of contracts in relation to Joint Operations. It provides different procedures to be followed by the Operator depending upon the amount involved in each contract and the phase of the project to which the contract relates. Clause 6.6 provides:
Operator shall award each contract for Joint Operations on the following basis (the amounts stated are in Dollars):

Procedure A

Procedure B

Procedure C

Exploration

0 to 1,000,000

1,000,000 to 10,000,000

>10,000,000

Appraisal

0 to 1,000,000

1,000,000 to 10,000,000

>10,000,000

Development

0 to 1,000,000

1,000,000 to 20,000,000

>20,000,000

Procedure A
(A)Operator shall award the contract to the best qualified contractor having regard to cost and ability to perform the contract without the obligation to tender and without informing or seeking the approval of the Operating Committee, except that before entering into contracts with Affiliates of Operator exceeding 100,000 Dollars, Operator shall obtain the approval of the Operating Committee. Parties must reply within 7 Days failing which they shall be deemed to have given their consent.
Procedure B
(B)Operator shall:
(1)provide the Parties with a list of the entities whom Operator proposes to invite to tender for the said contract;
(2)add to such list any entity whom a Party reasonably requests to be added within fourteen (14) Days of receipt of such list;
(3)complete the tendering process within a reasonable period of time;
(4)inform the Parties of the entities to whom the contract has been awarded, provided that before awarding a contract to Affiliates of Operator which exceed 100,000 Dollars, Operator shall obtain the approval of the Operating Committee (the Operating Committee must reply within 7 Days failing which they shall be deemed to have given their consent);
(5)circulate to the Parties the results of a competitive bid analysis stating the reasons for the choice made; and
(6)upon the request of a Party, provide such Party with a copy of the final version of the contract following execution.

Procedure C
(C)Operator shall:
(1)provide the Parties with a list of the entities whom Operator proposes to invite to tender for the said contract;
(2)add to such list any entity whom a Party reasonably requests to be added within fourteen (14) Days of receipt of such list;
(3)prepare and dispatch the tender documents to the entities on the list as aforesaid and to Non‑Operators;
(4)after the expiration of the period allowed for tendering, consider and analyse the details of all bids received;
(5)prepare and circulate to the Parties the results of a competitive bid analysis, stating Operator's recommendation as to the entity to whom the contract should be awarded, the reasons therefor, and the technical, commercial and contractual terms to be agreed upon;
(6)obtain the approval of the Operating Committee to the recommended bid, which approval shall nor be unreasonably withheld nor delayed; and
(7)upon the request of a Party, provide such Party with a copy of the final version of the contract following execution.

Clause 6.7 deals with the procedure for authorisation for expenditure (AFE). It provides that, prior to incurring any commitment in excess of $1 million, the Operator is required to send to each Non‑Operator (being a party to the Spar JOA other than the Operator) an AFE. An AFE is required to identify and describe the work the subject of the proposed expenditure, estimate the funds required, set out the schedule for the proposed work and provide a timetable of expenditures (cl 6.7(C)). Prior to making expenditures, the Operator is required to obtain the approval of the Operating Committee to an AFE. A party's representative may only vote to disapprove an AFE in three specified circumstances. The Operator is authorised to conduct the operation the subject of the AFE once approved by the Operating Committee. If an AFE is not approved by the Operating Committee, the operation to which it refers is 'deemed rejected' (cl 6.7(B)).
Clause 7 deals with operations by fewer than all parties, which are referred to as Exclusive Operations. Clause 7.1(A) provides:
No operations may be conducted under this Agreement except as Joint Operations under Clause 5 or as Exclusive Operations under this Clause 7. No Exclusive Operation shall be proposed or conducted which conflicts with a previously approved Joint Operation or with a previously approved Exclusive Operation.
Clause 7.1(C) provides that no party may propose or conduct an Exclusive Operation unless and until that party has properly exercised its right to propose an Exclusive Operation pursuant to cl 5.13 or is entitled to conduct an Exclusive Operation pursuant to cl 10, which deals with abandonment of wells. Clause 10 is not relevant for present purposes.
Clause 7.1(D) limits the types of operations that may be conducted as Exclusive Operations. They include drilling, testing, completion, 'deepening, sidetracking, plugging back or recompletion' of exploration wells or appraisal wells, development of a Discovery, acquisition of geological, geophysical and geochemical data and any operations specifically authorised to be undertaken under cl 10. No other type of operation may be proposed or conducted as an Exclusive Operation.
The consequences of a properly constituted Exclusive Operation are addressed in cl 7.4 to cl 7.9. These include that, subject to certain reinstatement rights, nonparticipating parties relinquish their rights to participate in the operation and the right to take petroleum produced as a result.
Clause 20.5 deals with waiver of defaults. It provides:
No waiver by any Party of any one or more defaults by another Party in the performance of any provision of this Agreement shall operate or be construed as a waiver of any future default or defaults by the same Party, whether of a like or of a different character. Except as expressly provided in this Agreement no Party shall be deemed to have waived, released or modified any of its rights under this Agreement unless such Party has expressly stated, in writing, that it does waive, release or modify such right.

The Sale and Purchase Agreement (SPA)

By the SPA, Santos Offshore sold to the Apache Parties a 55% legal and beneficial interest in the Title, certain 'materials' listed in a schedule to the SPA, and all wells, facilities, equipment and other like property items held by Santos Offshore for use in Joint Operations under the Spar JOA. The 55% interest was divided as to 25% to Apache Oil, 5% to Apache Kersail, and 25% to Apache East Spar.
By cl 2.4(a)(iv) of the SPA, the Apache Parties and Santos Offshore were also required to execute a document setting out principles for access to processing capacity on Varanus Island with Santos BOL and Apache Northwest Pty Ltd. That was done via a letter agreement entitled 'Capacity Access Agreement' dated 27 August 2010.
By cl 7.3(a) of the SPA the parties approved a Work Program and Budget and an AFE, which were attached as attachment 1A for the expenditure of $67,516,500 for drilling works.
Clause 17(b) of the SPA is of significance to the issue in this case in relation to the materiality of the alleged breaches of the Spar JOA. By cl 17(b), the Apache Parties agreed not to submit an 'Exclusive Operation Notice' under cl 7.2(A) of the Spar JOA for a period of three years from the date of execution of the SPA, that is, not before 27 August 2013.

The Capacity Access Agreement

The Capacity Access Agreement was directed to encourage cooperation between the parties in relation to access to facilities to process gas produced through the Spar JOA and other projects in which the parties had an interest.
By [8] of the Capacity Access Agreement, the parties expressed an intention that if 'capacity to evacuate, process, compress or ship gas and liquids is required for Spar, then Santos and Apache shall work together to agree the steps to be taken to obtain that capacity'. In [13] of the Capacity Access Agreement, the parties agreed to negotiate in good faith to enter into a 'fully termed Access Agreement … consistent with these terms on or before 1 November 2010'. No 'fully termed Access Agreement' was ever made.
Santos Offshore contends that it is evident from reading the Spar JOA, the SPA and the Capacity Access Agreement together, that the objective of the three year moratorium contained in cl 17(b) of SPA was to give Santos Offshore a period within which to negotiate access to processing facilities at Varanus Island, so as to enable it to exploit the gas produced from the Spar‑2 well, once the Spar JV development was complete.

Summary of the parties' cases

In its opening submissions, Santos Offshore summarised its claim as follows:
[U]nder the Spar JOA, there are only two ways in which a development of a Discovery can be progressed, namely as a Joint Operation, which is conducted by the Operator with the approval of the Operating Committee, or an Exclusive Operation which can only be pursued in limited circumstances, after the Operating Committee has rejected a proposal for a Joint Operation, and which is conducted by less than all of the participants; and
AOA, in material breach of the Spar JOA, took material steps or permitted material steps to be taken for the development of a Discovery relating to the Title without the prior approval of the Operating Committee (as if the Spar JOA permitted pre-approval development as if it were an Exclusive Operations – which it does not). Then, in August 2013, AOA presented a Development Plan and a development Work Program and Budget for the further development of that Discovery, including within it a claim for the development work that had already been undertaken. (emphasis removed)
It is common ground that much work was done without the prior approval of the Operating Committee and at the expense and risk of the Apache Parties or their parent company, Apache Energy. AOA asserts that the Spar JOA does not expressly prohibit such conduct and, in any event, alleges that Santos Offshore has waived its entitlement to remove AOA for any material breach, by approving a Development Plan and a development Work Program and Budget that incorporated the work and expenditure that Apache Energy had undertaken at its own risk.
Santos Offshore's response to these assertions is that:
[T]he Spar JOA, on its proper construction, does not permit AOA to conduct, or permit AOA to allow any participant to conduct, what is effectively pre-approval development as if it were an Exclusive Operation. If that were permissible, then AOA or the Apache parties could then present such development in a subsequent Development Plan and development Work Program and Budget as a fait accompli on a take‑it‑or‑leave‑it‑basis, under threat that if not accepted, AOA or the Apache Parties can then proceed with the development as an Exclusive Operation;
[T]he exercise of Santos Offshore's right to proceed with the Development Plan and development Work Program and Budget (when presented as a fait accompli) was not the exercise of a right that was inconsistent with Santos Offshore's maintenance of its position that AOA, as Operator, ought to be removed for material breach of its obligations owed to not only the Apache Parties but also to Santos Offshore - i.e. to all participants under the Spar JOA. The exercise of the right to accept a fait accompli Development Plan and development Work Program and Budget is not the foregoing of the right to remove the Operator for its material breaches - the two are not inconsistent. (emphasis removed)
The case turns on the proper construction of the Spar JOA and the application of its terms to facts that are relatively uncontroversial. It is necessary to trace through those facts.

The Facts

The evidence at trial consisted of the documents contained in the trial bundle, two schematic plans (exhibits 2 and 3), and the evidence of two witnesses. The plaintiffs called Mr Robert Cowan, an employee of Apache Energy whose role in relation to the Spar JV included managing the commercial aspects of the petroleum activities in the area covered by the Spar JOA on behalf of Apache. Mr Cowan was cross‑examined. The plaintiffs also called Mr Nicholas Cooper whose witness statement was tendered, but who was not required for cross-examination. Mr Cooper is employed as a supervisor of the accounting for all joint ventures to which the Apache Parties are party, including the Spar JV and the East Spar JV.

Events of 2009 - 2010

As mentioned above, as part of its application for a production licence, Santos Offshore submitted the 2009 FDP to the DMP. The 2009 FDP referred to the proximity of the title area to the Halyard-1 well, and reference was made to 'an integrated, cooperative' development of the Spar gas field with the existing East Spar infrastructure.
After the entry into the Spar JOA, Santos issued a media release announcing the sale of 55% of its interest in Spar to Apache. The media release said:
The two companies will complete and tie back the Halyard well in WA‑13‑L (Halyard) and subject to the outcome of the Spar 2 appraisal well in WA-4-R (Spar) will quickly complete and tie back Spar as part of this development. This development is a significant new addition to the Western Australian supply portfolio, with gas from this area expected to supply around 10% of Western Australia's domestic gas needs from 2012.
As noted above, by cl 7.3(a) of the SPA, Santos Offshore and the Apache Parties approved a first Work Program and Budget for the purposes of the Spar JOA with effect from 31 March 2010 for the period 31 March 2010 to 31 December 2010 (the 2010 Work Program and Budget). The 2010 Work Program and Budget provided for expenditure of $67,516,500, which was predominantly to be spent on drilling the Spar-2 well.

Events of 2011

On 19 January 2011, Kevin Rollo (Project Controls Manager at Apache Energy) emailed to Wade Bard (of Santos) an AFE for front end engineering design (FEED) studies for what was described as 'Greater East Spar Phase 2' (the AFE FEED).[7] The description Greater East Spar Phase 2, or simply Greater East Spar, is used in correspondence between the Santos group and the Apache group from time to time as a reference to the Spar project operated pursuant to the Spar JOA, and in particular the development of the Spar-2 well.
[7] Cowan [33]; Trial Bundle, vol 1, page 800; Trial Bundle, vol 1, page 798.
Mr Cowan explained that FEED involves preliminary engineering design and concept work designed to reduce the level of technical uncertainty in a project prior to a final investment decision being taken, and in order to allow the awarding of contracts at a later point in time.[8]
[8] ts 186.
The AFE FEED requested the approval of Santos (not Santos Offshore, but its parent) of $AUD1,581,500 'to cover FEED Activities on Phase 2 of the Greater East Spar Projects'. It described the justification for expenditure as being studies 'to progress the development of Spar to execution concept for [final investment decision]'. The AFE FEED was never approved by Santos, and subsequent FEED activities that were undertaken by Apache at its own expense comprise part of the allegedly unauthorised development which Santos contends breached the Spar JOA.
On 8 February 2011, Aidan Joy (Commercial and Business Development Manager for Apache Energy) sent an email to Michael Hackett (of Santos Offshore) attaching a document entitled 'Greater East Spar Project ‑ Phase 2, Development Work Plan and Budget Preliminary for FEED Phase'. In the email, Mr Joy described the attached document as the 'technical justification' for the AFE FEED.[9]
[9] Trial Bundle, vol 2, page 830.
On 8 March 2011, Fred Wehr (Exploration & Development Manager of Apache Energy) sent a memorandum to Santos to which was attached a Work Program and Budget for the period 1 January 2011 to 31 December 2011 (the 2011 Work Program and Budget); and a draft Operating Committee Resolution, signed by Mr Wehr on behalf of the Apache Parties and dated 8 March 2011, proposing approval of the 2011 Work Program and Budget.[10] The 2011 Work Program and Budget proposed expenditure of $196,000, which consisted of $181,000 in salaries for 'manpower allocation' and $15,000 in external costs, and did not include any expenditure for FEED or any expenditure proposed in the AFE FEED.
[10] Trial Bundle, vol 2, page 874.
Although noting that 'Apache is technically not yet the operator of WA‑4‑R', and was therefore not able to deliver a proposed Work Program and Budget for the Spar JOA, on 9 March 2011, Santos Offshore approved the 2011 Work Program and Budget.[11]
[11] Trial Bundle, vol 2, page 881.
Thus, by March 2011, Apache Energy had requested Santos to execute the AFE FEED. The AFE FEED had not been the subject of Operating Committee approval in any Work Program and Budget and neither Santos Offshore nor the Operating Committee had approved the AFE FEED. The 2011 Work Program and Budget only allowed for a 'limited amount of geological, geophysical and reservoir engineering studies'. The Operating Committee had approved the 2011 Work Program and Budget.
On 2 June 2011, Santos announced that gas production had commenced from the Halyard-1 well.[12]
[12] Trial Bundle, vol 2, page 940.
On 1 July 2011, DMP wrote to Santos Offshore concerning an application for a petroleum production licence affecting the Spar gas field within the Title Area. By then AOA was the Operator. Accordingly, it made the necessary application, and on 25 July 2011, DMP wrote to AOA advising that petroleum production licence WA-45-L had been granted. The letter concluded by requesting AOA to note that an amended FDP was required to be submitted.[13]
[13] Trial Bundle, vol 2, page 1049.
On 9 August 2011, Mr Joy sent an e-mail to a number of Apache employees setting out an action list emerging from a meeting the previous day.[14] The email referred to the Greater East Spar project. It commenced:
Project is OK-ed by Steve. Apache is now on title on WA-4-L (was WA‑4‑R) as Operator, so we can propose the project under the JOAs, with the risk to Santos that we can sole risk them if they do not approve.
[14] Trial Bundle, vol 2, page 1105.
One of the items on the action list was for 'Nick [Cooper] to generate JV AFE for Greatships survey scope and to reissue JV AFE for FEED (no need to split these between WA-13-L and WA-45-L)'.
Mr Cowan, referring to this email, said that in August 2011, the Apache Parties internally approved the Spar project proceeding to final investment decision.
It appears from the email that the Apache Parties may initially have intended to formally propose development to Santos Offshore via the Operating Committee in accordance with the Spar JOA, but, as will be seen, that course did not ultimately eventuate. The exchanges of emails with the Apache group show that the Apache Parties were intent on progressing the development of the Spar-2 well without delay.
On 26 September 2011, Keith McGahren (Contract Engineer ‑ Projects for Apache Energy) sent to various employees of Santos an email attaching an AFE for geophysical, environmental and geotechnical surveys for the 'Greater East Spar Development'.[15] This AFE requested approval of expenditure of $AUD2,134,025 for geophysical, environmental and geotechnical surveys.
[15] Cowan [54]; Trial Bundle, vol 2, page 1172; Trial Bundle, vol 2, page 1167.
On 19 October 2011, Santos Offshore, through Mr Hackett, advised the Apache Parties by email that Santos Offshore did not approve the 26 September 2011 AFE.[16] He advised that Santos did not 'see the benefit of further preliminary work when we do not understand, and have not been convinced by the Operator, of the business case for any new proposals'.
[16] Cowan [55]; Trial Bundle, vol 2, page 1174.
One of the recipients of Mr Hackett's email, Nicholas Cooper forwarded Mr Hackett's email to other employees of the Apache Parties, stating: 'If we decide that we want to go ahead with this work as a sole-risk activity, we need to raise an Apache 100% liability AFE to cover the relevant costs':[17]
[17] Trial Bundle, vol 2, page 1174.

Mr Joy responded:
Let me get back to you on this but the likely outcome will be that we do this 100%.[18]
[18] Trial Bundle, vol 2, page 1174.
The next day, 20 October 2011, Mr Joy confirmed:
Tom [Maher] has approved for Apache to carry out the proportion of this work attributable to Greater East Spar at its 100% cost. I will be letting Santos know that we will be doing this next week.[19]
[19] Trial Bundle, vol 2, page 1174.
There is no evidence that around that time Mr Joy, or anyone else from any of the Apache Parties, informed anyone at Santos Offshore that the Apache Parties had internally approved the carrying out of the work the subject of the AFE for geophysical, environmental and geotechnical surveys.
On 2 November 2011, a memorandum from Mr Wehr was sent to Mr Hackett enclosing a proposed '2012 Production Geoscience and Reservoir Engineering Work Program and Budget for Production Licence WA‑45‑L (Spar)'. The memorandum recited that the budget allocates funds for operations 'which fall outside the scope of the 2012 Operations Budget'.[20] The attached budget proposed expenditure of $AUD459,180.
[20] Trial Bundle, vol 2, page 1194.
By email dated 9 November 2011 from Mr Hackett, Santos Offshore queried the reference to a '2012 Operations Budget' in the proposed 2012 Production Geoscience and Reservoir Engineering Work Program and Budget.[21] He said:
I assume there will be no Operations spend in WA–45–L in 2012 however for completeness it would be good to receive a nil budget WP&B in particular showing the 4 year Capital Plan so we can see Operator's expectations at this stage.
[21] Trial Bundle, vol 2, page 1200.
On 10 November 2011, Lennard Pereira (Budget/Contracts Co-ordinator of Apache Energy) replied to Mr Hackett stating:[22]
The '2012 Operations budget' reference made in the attachment that you refer to is an error. I can confirm that there is no operating budget planned for 2012 and no capital work has been factored into our four year capital plan. As such we do not see a need to submit a WP&B for WA-45-L.
[22] Trial Bundle, vol 2, page 1200.
Mr Pereira's email was forwarded to Mr Joy, who then wrote to Mr Hackett by email on 11 November 2011,[23] stating:
As I mentioned to you yesterday, Apache is putting together plans to develop Spar and as soon as the development plan and budget is ready we will present it to the JV in accordance with the JOA. We may seek to amend the 2012 WA-45-L budget at that stage by means of an Operating Committee Resolution, having regard to 6.2 and 6.5 of the JOA.
[23] Trial Bundle, vol 2, page 1199.
Mr Joy made no reference to the Apache Parties having decided to carry out the work the subject of the AFE for geophysical, environmental and geotechnical surveys.
On 25 November 2011, representatives of the Apache Parties made a presentation to Santos Offshore representatives. A representative of the Apache Parties presented a paper outlining the proposed joint development of WA-45-L and a proposed exploration well, known as the Beam well on WA-13-L (WA‑13‑L being the title the subject of the East Spar JV, to which Santos Offshore was not party).[24] The site of the Beam well had apparently been identified as a potential new source of gas within the East Spar JV area.
[24] Trial Bundle, vol 2, page 1301.
The paper referred to 'WA-45-L Greater East Spar Development Work Program' and said:[25]
The development will consist of the sub‑sea tie in of the Spar‑2 well to existing infrastructure and pre-investment to allow for connection of future wells.
[25] Trial Bundle, vol 2, page 1296.
Particulars of the development were given as follows:[26]
•The development will consist of a new 2-slot Halyard Pipeline End Manifold (PLEM) which will be installed adjacent to the Halyard-1 well.
•The existing 16km x 10" flexible flow line to the East Spar PLEM will be disconnected from the Halyard-1 tree and reconnected to the new PLEM.
•The Halyard PLEM will include a new connection to the Halyard-1 tree via a rigid tie-in spool and an additional flow line connection to the new Spar‑2 well via a new 1.7km x 8" flexible flow line.
•A new 1.7km long EHU [electro hydraulic umbilicals] will be installed back to the Halyard PLEM to provide control of the Spar XT.
•If the Beam-1, is successful Apache will install an XT [Christmas tree], Cooling Coil Skid and a new Beam PLEM which will tie back directly to the East Spar PLEM via a new 6.4km x 8" flexible flow line.
•A new 16km long EHU will be installed back to the Halyard PLEM to provide control of the Beam XT.
•There will also be provision for a flow line connection to a future PLEM for development of the East Spar‑9 wall.
[26] Trial Bundle, vol 2, page 1297.
The paper represented that the joint development of WA-45-L and WA‑13‑L would cost $58.4 million less in capital expenditure than would their development independently. The proposed critical path schedule showed the early ordering of 'long lead items' by the end of 2011 with the subsea equipment manufacture and delivery before the end of 2012.[27]
[27] Trial Bundle, vol 2, page 1300 ‑ 1301.
On 29 November 2011, AOA delivered to Santos Offshore a memorandum dated 28 November 2011 addressed to Mr Hackett of Santos Offshore from Mr Joy with the subject 'WA-45-L'.[28] Attached to the memorandum was a proposed resolution for the Operating Committee dated 28 November 2011 proposing approval of an attached Work Program and Budget for the Spar JOA for 2012 for WA‑45‑L. The proposed resolution had already been signed on behalf of AOA, Apache East Spar, and Apache Kersail.
[28] Trial Bundle, vol 2, page 1258.
The attached Work Program and Budget dated 28 November 2011 was entitled 'Greater East Spar Development Work Program; Firm WP&B for WA‑45-L; Information for WA-13-L'.[29] The Work Program and Budget proposed the development of the WA-45-L Title concurrently with the drilling of the Beam exploration well on WA-13-L. As the paper presented on 25 November had foreshadowed, the Apache Parties proposed undertaking these works simultaneously in the same program so as to save some $58.4 million. It should be remembered that Santos Offshore was not a participant in the East Spar JV concerned with development of WA‑13‑L. Rather, another Santos entity, Santos (BOL), was.
[29] Trial Bundle, vol 2, page 1260.
The proposed budget for WA-45-L was AUD$79 million, of which $AUD1.8 million was for 'FEED and Geotechnical Survey', and $AUD14 million was for subsea equipment. The 'Project Schedule' in section 5.1 suggested that the FEED work had already commenced in the fourth quarter of 2010 and had continued throughout 2011.
On 14 December 2011, AOA delivered to Santos Offshore a memorandum addressed to Mr Hackett from Mr Thibodeaux of Apache Energy. The memorandum identified its subject matter as 'WA-13-L'.[30] Attached to the memorandum was a proposed resolution for the Operating Committee for approval of an attached Work Program and Budget for 2012. The attached Work Program and Budget was entitled 'Greater East Spar Development Work Program; Firm WP&B for WA-13-L; Information for WA‑45‑L'. The executive summary stated that 'Apache plans to execute both the Beam-1 and Spar-2 tie‑in's [sic] in the same program, saving $58.4 million'.[31] The Operating Committee resolution, which had already been signed on behalf of the Apache Parties, proposed expenditure of $AUD72 million, being the amount of the expenditure identified in relation to the Beam well.[32]
[30] Trial Bundle, vol 2, page 1309.
[31] Trial Bundle, vol 2, pages 1311, 1315.
[32] Trial Bundle, vol 2, page 1310.
On 15 December 2011, the Apache Parties circulated among themselves an internal memorandum written by an Apache employee, Simon Bingham, identifying the subject matter as 'Greater East Spar Phase 2; Long Lead Items ‑ AFE split between WA-45-L & WA-13‑L'. The memorandum proposed that they commence development of WA-45-L and WA-13-L wells in accordance with the Work Programs and Budgets for WA‑45‑L and WA-13-L respectively dated 28 November 2011 and 14 December 2011 and that internal AFEs be executed to enable that to occur.[33]
[33] Cowan [62]; Trial Bundle, vol 2, page 1343.
The memorandum recorded that, at the JV meeting on 25 November 2011, Santos had indicated that they may not approve the Work Program and Budget for WA-45-L because of concerns related to, among other things, the accessibility of Varanus Island. The memorandum continued:[34]
In order for Apache to preserve the opportunity to tie back both Spar-2 and the potential future Beam well to the recently installed Halyard / East Spar infrastructure in early 2013, this Recommendation for Apache Procurement of LLIs [long lead items] has been prepared. The current base case plan is to carry out the offshore construction activities in early 2013 coincident with the Coniston campaign. Savings of over AUD 50 M have been identified if the work is executed in this time frame. Competitive pricing has been obtained for all the LLIs.
It is recommended that a 100% Apache AFE be prepared for the LLIs, in order to allow procurement to commence before the end of 2011. When Santos approve the DP&B for WA-45-L, a JV AFE will be raised for the development of Spar-2.
[34] Trial Bundle, vol 2, page 1343.
The memorandum proposed approval by the Apache Parties of expenditure of $AUD11.554 million on long lead items (LLIs) for WA-45-L and $AUD19.573 million for LLIs for WA-13-L. The LLIs the subject of the memorandum were costs associated with the engineering, design, procurement, manufacture and testing of long lead subsea infrastructure, in particular subsea production equipment (including a PLEM adjacent to the Halyward-1 well) and electro-hydraulic umbilicals.[35]
[35] Trial Bundle, vol 2, pages 1343 ‑ 1345.
The memorandum further described the reason for the combined development of WA-45-L and WA-13-L in the following terms:[36]
Procurement of the LLIs associated with the combined development of the Spar-2 and Beam wells (Option C) would allow for an estimated cost saving of AUD 0.7 M for WA-13-L' [bold emphasis in the original]
…
It has been estimated that development of Spar-2 and Beam in the same program would lead to savings of AUD 58.4 M, predominantly from savings from a single installation mobilisation [bold emphasis in the original].
…
Significant cost savings have been identified for the combined development of the Spar-2 and Beam wells, versus standalone execution and consequently the combined development option is considered the best financial solution.
[36] Trial Bundle, vol 2, pages 1345 - 1346.
It is clear that the Apache Parties were aware that Santos Offshore had not approved the proposed Work Program and Budget for WA‑45‑L. They were nonetheless motivated to undertake development of WA‑45‑L at their own initial expense and without Operating Committee approval in order to achieve the perceived cost advantages of combining the developments.
After receipt of the 15 December 2011 memorandum, Mr Cooper emailed the other recipients of the memorandum stating:[37]
As discussed within, Santos are unlikely to approve in the short term and so I will create the 100% Apache AFE (1011CP2) to facilitate the procurement of the LLI's with a view to reallocate these costs once agreement for the development is reached with the JV's and respective AFEs are approved.
[37] Trial Bundle, vol 2, page 1347.
In mid‑December 2011 an internal AFE was signed by officers of the Apache Parties committing to expenditure of $AUD31,128,177 by AOA, Apache Kersail, and Apache East Spar on the electro-hydraulic umbilicals and subsea production equipment proposed in the 15 December 2011 memorandum.[38] The internal AFE received final approval from Apache Energy's Chief Operating Officer on 1 September 2012. The effect of that step was that the Apache Parties bore all of the costs of those items. In his evidence, Mr Cowan identified the contracts covered by the AFE as being with Cameron Australasia Pty Ltd and Oceaneering International Services Ltd.[39]
[38] Trial Bundle, vol 2, page 1338; Cowan [79].
[39] Trial Bundle, vol 2, page 1338; Cowan [79].

Events of 2012

On 25 January 2012, Mr Hackett on behalf of Santos Offshore, wrote to the Apache Parties. He advised that Santos Offshore rejected the Work Program and Budget dated 28 November 2011 and attached the Operating Committee's resolution proposing its approval with a 'no' vote from Santos Offshore.[40]
[40] Trial Bundle, vol 2, page 1393; Cowan [66].
On 1 February 2012, before AOA had received Santos Offshore's letter dated 25 January 2012, Mr Warren Ford of Apache asked Mr Joy if he had started preparing a 'Sole Risk letter', namely a notice under cl 7.2 of the Spar JOA of a proposed Exclusive Operation for WA-45-L. Mr Joy confirmed that he had begun work on the notice and would have a draft ready for Mr Ford to review the next day. On 2 February 2012 Mr Joy received the letter from Santos Offshore rejecting the Work Program and Budget.[41]
[41] Trial Bundle, vol 2, pages 1396 - 1397.
By letter dated 7 February 2012, signed by Mr Joy on behalf of the Apache Parties, a notice issued under cl 7.2 of the Spar JOA for a proposal to conduct the works set out in the Work Program and Budget dated 28 November 2011 as an Exclusive Operation.[42]
[42] Trial Bundle, vol 2, page 1468; Cowan [68].
Mr Hackett of Santos Offshore wrote to the Apache Parties on 10 February 2012, bringing their attention to cl 17(b) of the SPA, the moratorium on Exclusive Operations.[43] Mr Joy wrote to Santos Offshore withdrawing the Exclusive Operation notice.[44]
[43] Trial Bundle, vol 9, page 6804.
[44] Trial Bundle, vol 9, page 6803.
The Apache Parties continued, however, to progress the proposals to secure the LLIs for the development of the Spar JOA.
On 6 February 2012, AOA prepared and submitted a revised version of the 2009 FDP to the DMP (the 2012 FDP).[45] It is admitted on the pleadings that the 2012 FDP was sent in response to a request from the DMP made on 25 July 2011 for an updated FDP, and that the operations proposed by the 2012 FDP were consistent with operations proposed in the 2009 FDP.[46]
[45] Cowan [69]; Trial Bundle, vol 2, page 1400.
[46] Reply [10(j)]; Rejoinder [4(t)].
Santos Offshore contends however that the request in the DMP's letter dated 25 July 2011 to AOA to submit an amended FDP, did not alter AOA's obligations under the Spar JOA which required the Operating Committee to determine whether an FDP should be prepared, and to approve any proposed FDP. It contends that the submission of the FDP without Operating Committee approval amounts to a breach of the Spar JOA. The Apache Parties contend that the FDP was submitted by AOA in its capacity as the Operator and not in breach of the Spar JOA.
By email on 20 February 2012, Mr Bard, on behalf of Santos Offshore, asked AOA to withdraw the 2012 FDP and to prepare a revised FDP for Santos Offshore's review before submission to the DMP.[47] Mr Keith Dowling of Apache wrote an email to Mr Maher later that day. The email said that Mr Joy had suggested that the parties simply ignore that request.[48]
[47] Trial Bundle, vol 2, page 1492.
[48] Trial Bundle, vol 2, page 1493.
AOA ultimately withdrew the 2012 FDP on 23 May 2013,[49] after much correspondence between the Parties and the regulators.
[49] Trial Bundle, vol 6, page 4741.
On 8 May 2012, Santos Offshore wrote to the DMP advising that the 2012 FDP had not been approved by the joint venture participants in accordance with the Spar JOA, and asked the DMP to return the 2012 FDP, unapproved, to AOA. A copy of the letter was also sent to the National Offshore Petroleum Titles Administrator (NOPTA). The letter stated:[50]
Santos generally agrees with the facilities proposed by Apache in the Revised Development Plan (which has changed since the Initial Development Plan mainly due to the recent development of the Halyard-1 well in WA‑13‑L). However, the joint venture is still discussing the timing of the further development and this will likely impact on the project schedule put forward by Apache under Chapter 5: Project Execution.
Santos remains committed to the further development of the Spar field through the tie-back of the Spar-2 well to existing infrastructure. We wish to see this happen in the near future. However, in order for this to happen, Santos and Apache need to conclude ongoing discussions as to the appropriate processing arrangements for the gas and condensate that would eventuate from this development.
[50] Trial Bundle, vol 3, page 1509 ‑ 1510.
Between 18 and 21 May 2012, the Apache Parties approved the expenditure of $1,581,500 for the work the subject of the AFE FEED which AOA had sent to Santos in February 2011, but which had not been proposed to, or approved by, the Operating Committee.[51]
[51] Cooper [6]; Trial Bundle, vol 3, page 1515.
Mr Cooper explained that, within its accounting system, Apache Energy utilises codes to identify the various joint ventures in which Apache entities are involved. The internal code used for expenditure to be charged to the Apache Parties involved in the East Spar JV (WA-13-L) is JV 88. The internal code used to refer to the expenditure by Apache Parties in relation to the Spar JV (WA‑45‑L) is JV 109.[52]
[52] Cooper [4].
The AFE for the FEED expenditure signed in May 2012 identified the project name as 'Greater East Spar: Phase 2 FEED' and the permit name as 'WA‑13‑L ESJV Sole Risk'.[53]
[53] Trial Bundle, vol 3, page 1515.
An email from Vely Wati (Apache Energy's 'Joint Venture Accountant') to Mr Bingham dated 9 May 2012 reveals that, until that date, the FEED work had been carried on and the costs accounted to JV109.[54] The AFE FEED work had commenced as early as 24 February 2011.[55]
[54] Trial Bundle, vol 3, page 1519.
[55] Trial Bundle, vol 2, page 1256; Trial Bundle, vol 2, page 890; Trial Bundle, vol 2, page 992.
On 18 July 2012, NOPTA wrote to Apache Energy, referring to AOA's submission on 6 February 2012 seeking approval of the 2012 FDP. NOPTA asked AOA to resubmit an FDP signed by all Title holders.[56] On 6 August 2012, Craig Marshall (Reservoir Engineering Manager, Apache Energy) responded to NOPTA's letter dated 18 July 2012, stating that AOA intended to seek Santos Offshore's approval of the 2012 FDP.[57]
[56] Cowan [72]; Trial Bundle, vol 3, page 1524.
[57] Cowan [74]; Trial Bundle, vol 3, page 1820.
As mentioned above, on 1 September 2012, Apache Energy's Chief Operating Officer gave final approval to the internal AFE by which the Apache Parties committed to expenditure on LLIs, being subsea production equipment and electro-hydraulic umbilicals, for the concurrent development of the Title and WA-13-L.
Thereafter, on 3 October 2012 Apache Energy entered into a contract with Cameron Australasia Pty Ltd for the supply of subsea production equipment for a price of $AUD14,909,460 (the Subsea Production Equipment contract).[58]
[58] Cowan [76]; Trial Bundle, vol 3, page 1918.
On 16 November 2012, Apache Energy entered into a further contract to progress development of the Spar-2 well, being a GBP£1,515,402.84 contract with Oceaneering International Services Ltd for the supply of electro-hydraulic umbilicals (the EHU contract).[59]
[59] Cowan [78]; Trial Bundle, vol 4, page 2928.
The Scope of Work and Technical Documentation at Annexure B of the EHU contract identifies that the purpose of the contract was to provide equipment to be used in the development of WA-45-L, specifically to supply electro-hydraulic umbilicals for connection of the Halyard PLEM to the Spar‑2 XT.[60] Documents in the trial bundle show that tendering and negotiations for the EHU contract continued from about October 2011 to March 2012.[61]
[60] Trial Bundle, vol 4, page 3002.
[61] Trial Bundle, vol 2, page 1190; Trial Bundle, vol 2, page 1380; Trial Bundle, vol 2, page 1389; Trial Bundle, vol 2, page 1470; Trial Bundle, vol 2, page 1491; Trial Bundle, vol 3, page 1505; Trial Bundle, vol 3, page 1834.

On 18 October 2012, Mr Cowan attended a technical committee meeting of the Spar JV, at which Chris Galway of Apache (Project Manager, Greater East Spar Project) gave a presentation to representatives of Santos Offshore, including Mr Hackett, on the status of the project. Mr Galway's presentation utilised a PowerPoint slide. The slides:[62]
•noted that a final investment decision was targeted for November 2012;
•referred to negotiating and finalising 'long-lead item delivery contracts', and to ongoing engineering involving flow assurance, flow line flushing and on‑bottom stability;
•contained a target schedule which specified the date for award of contracts for LLIs as October 2012 and contemplated the award of installation contracts in February 2013; and
•provided a budget estimate which showed costs representing approximately 12.5% of the budget of $USD75-85 million had already been incurred for 2012.
[62] Trial Bundle, vol 4, pages 2773 - 2786.
Cameron Australasia Pty Ltd was mentioned by way of the name 'Cameron' being shown in a table as a 'Key Contractor' for subsea production on page 4 of the slide presentation.
In late November or early December 2012, the Apache Parties internally circulated a memorandum dated 28 November 2012 which proposed approval of an attached Apache AFE of $USD81,730,000 to develop the 'Greater East Spar Project'.[63] The AFE attached to the memorandum identified that the 'Permit Name' for the AFE was 'WA‑13‑L ESJV Sole Risk'. However, Mr Cowan in his witness statement referred to the memorandum and attached AFE as showing that, on that date, the Apache Parties confirmed the final investment decision, having in August 2011 internally approved the Spar project proceeding to final investment decision.[64]
[63] Trial Bundle, vol 5, page 3730.
[64] Cowan [50].
The first paragraph of the memorandum recites that the Apache Parties had approved expenditure of $AUD31,128,177 in January 2012 for 'long lead items and engineering on GES'. This is a reference to the internal AFE by which the Apache Parties had committed to expenditure on electro-hydraulic umbilicals and subsea production equipment that had received final internal approval by the Apache Parties in September 2012.
The memorandum continued:[65]
The revised AFE now covers the full project execution, inclusive of all PM&E, long lead items, transportation, installation, and commission/start‑up.
[65] Trial Bundle, vol 5, page 3730.
Under the heading 'Joint Venture Partner Strategy' the memorandum stated:[66]
GES [Greater East Spar] is a joint venture with Santos (Apache 55% / Santos 45%), however Santos is yet to approve the project and commit funding of their 45% share. Apache is currently in negotiation with Santos … Current expectation is that an agreement will be reached early in Q1 2013. An overview and update on GES was part of a broader presentation to Santos in October 2012, and additional information will be provided to Santos to facilitate their approval in Q1 2013.
The GES AFE as previously approved for long-lead items is 100% sole risk to Apache, as is this request to supplement the AFE. The continuation of 100% Apache is required in the absence of Santos' approval, and also in order to award the transportation and installation contract early in 2013 to remain on schedule for a Q1 2014 offshore installation campaign.
Upon reaching agreement with Santos, the AFE would be amended to reduce the Apache share to 55%. In the case where no agreement is reached, Apache has the option in August 2013 under the JOA to sole risk the project, which would allow offshore installation to commence in Q1 2014, thus maintaining the committed RFSU and first sales gas dates outlined above.
[66] Trial Bundle, vol 5, pages 3732 ‑ 3733.

Events of 2013

On 1 February 2013, Mr Cowan emailed[67] to Mr Hackett a copy of the 'Greater East Spar Development Project ‑ Scope of Work'[68] and the 'Greater East Spar ‑ Basis of Design.[69] Those documents had each been included in Annexure B to the Subsea Production contract and the EHU contract.
[67] Cowan [80]; Trial Bundle, vol 8, page 5853.
[68] Trial Bundle, vol 5, page 3798.
[69] Trial Bundle, vol 5, page 3819.
The 'Scope of Work' outlined proposed development of Greater East Spar using a subsea tie-back to link the Spar-2 well into the existing Halyard subsea facility and the Varanus Island onshore processing facility, with hydraulic and electrical power and chemical injection to be provided from the John Brookes Wellhead Platform. The revision history of the Scope of Work records that drafts of it were first issued for internal review by the Apache Parties on 12 April 2011 and 25 January 2012, and it was first 'issued for use' on 16 February 2012. It is not in issue that no approval from the Operating Committee, or otherwise by Santos Offshore, for the proposed development had been obtained by that time.
The 'Basis for Design' dealt with the design for the development described in the Scope of Work document. Similarly, the revision history of the 'Basis of Design' records that a draft was issued for internal review on 14 April 2011, and the final version was 'issued for use' on 27 September 2012.
On 8 March 2013, Mr Cowan provided Mr Hackett, in response to a request from Mr Hackett, with a copy of the 'Project Execution Plan'.[70] In his email exchanges with Mr Cowan, Mr Hackett noted that, at the presentation in October, it had been suggested that Apache would go to final investment decision in November. At page 23 of the Project Execution Plan, a schedule of milestones referred to 'Final Investment Decision', 'All Major Equipment Packages Awarded', and 'Commitment to Long Lead Subsea Equipment' as having target dates in the fourth quarter of 2012.
[70] Trial Bundle, vol 5, page 4017.
In the introduction, the purpose of the Project Execution Plan was described as follows:
This Project Execution Plan (PEP) describes how the Greater East Spar (GES) Project will be managed by Apache Energy Limited (AEL). The PEP provides an overview of the execution strategy, planning, safety, environment, quality, technical, and commercial framework by which the project will be managed. The GES project management team (PMT) will manage the project through its various stages of design, fabrication, installation, commissioning and final handover to Operations.
The project will be carried out by AEL on behalf of the joint venture partners (JVP). The equity holders for GES are Apache Energy (55%, Operator) and Santos Ltd (45%).
In s 3.3 of the 'Scope of Work', it states: 'The Project execution comprises two phases ‑ an initial Front End Engineering Design (FEED) phase (completed Q3 2012) and a subsequent execution phase'.[71] The project schedule in figure 7.1 suggests that FEED had been scheduled for the first and second quarters of 2012.[72]
[71] Trial Bundle, vol 5, page 4030.
[72] Trial Bundle, vol 5, page 4041.
The 'Contracting Strategy' in s 4 does not reflect the contract award procedure prescribed by cl 6.6 of the Spar JOA.
By an agreement dated 12 March 2013, AOA and Apache Energy executed a document for the purpose of confirming that a Services and Management Agreement dated 1 May 1997 at all times was, and continues to be, binding on the two parties.[73] The document recited that all original and original copies of the 1997 agreement had been lost.
[73] Trial Bundle, vol 5, page 4063.
The 1997 agreement recites that:
[Apache Energy] possesses certain expertise, employees, personnel and knowledge in the operation of facilities in the nature of those required of a participant and of an Operator under the JOAs [Recital B];
and that
AOA desires to contract for such services and expertise from AEL and AEL desires to provide such services and expertise to AOA [Recital C].
By cl 2.1 of the 1997 agreement, Apache Energy agreed to provide, or cause to be provided as required by AOA, pursuant to obligations required of a participant or an Operator under each of the JOAs, and where AOA has been appointed as the Operator, certain specified services and support, as well as any other services and support as required to perform AOA's obligations under each of the JOAs. Those services include various administrative services and the provision of any personnel required to fulfil the duties and obligations required of the Operator by the JOAs, the provision of joint accounts as required by the JOAs and any other services, staff, personnel, equipment as needed or requested by AOA in its capacity as the Operator of each relevant JOA.
On 3 April 2013, the Apache Parties or Apache Energy made a presentation to NOPTA regarding the development of the Spar-2 well on WA‑45-L.[74]
[74] Cowan [82]; Trial Bundle, vol 5, page 4138.
Santos Offshore alleges that this presentation was part of a course of conduct by AOA of engagement with regulators, purportedly on behalf of the Spar participants, as if it was conducting a Joint Operation approved by the Operating Committee (defence [26(b)(v)(D)]), which was part of the development operations conducted by AOA in breach of the Spar JOA (defence [26(c)]). The Apache Parties contend that this presentation fell within their 'express freedom of communicating with Government' under cl 4.2(B)(11) of the Spar JOA (reply [10(j)(vi)(3)]).
On 18 April 2013, Mr Hackett wrote to Mr Jack Goodacre of AOA noting that the Operating Committee had not approved the project or expenditure described in the Project Execution Plan.[75] Mr Hackett asked AOA to advise whether any expenditure on the project had been incurred to the Joint Account.
[75] Trial Bundle, vol 5, page 4157.
By letter dated 2 May 2013, Mr Cowan replied to the letter to Mr Goodacre, advising that no expenditure had been incurred to the Joint Account for the project described in the Project Execution Plan, and that Apache had incurred 100% of the expenditure. He said that no expenditure is planned for the Joint Account until the matter of the Greater East Spar Project is brought to the Operating Committee of the 'East Spar Joint Venture'.[76] In his witness statement, Mr Cowan said that his reference to the East Spar JV was incorrect. He meant to refer to the Spar JV.[77]
[76] Cowan [85]; Trial Bundle, vol 6, page 4245.
[77] Cowan [85].
On 8 May 2013, Apache Energy entered into a contract with Kongsberg Nemo Pty Ltd for $AUD3,071,178 for the supply of a subsea cooling skid (the Subsea Cooling Skid contract).[78]
[78] Cowan [86]; Trial Bundle, vol 6, page 4247.
On 22 May 2013, Mr Hackett wrote to AOA on behalf of Santos Offshore referring to the correspondence on 18 April 2013 and 2 May 2013, stating that there was no capacity for the Apache Parties to take any steps to develop joint venture assets on their own account. He suggested that AOA was acting outside its rights and obligations under the Spar JOA, and that it had no authority to pre-empt the approach which the Operating Committee may ultimately take in respect of a development of the Spar-2 well. He requested certain information as to expenditures that had been or would be incurred and requested that AOA undertake that it would not, and it would not permit any of the other Apache Parties to, incur any further expense or commit to any further contracts without Operating Committee approval. The letter also requested that the matter of the Great East Spar Project be brought before the next Operating Committee meeting.[79]
[79] Cowan [90]; Trial Bundle, vol 6, page 4739.
On 23 May 2013, AOA wrote to NOPTA advising that it wished to withdraw the 2012 FDP, admitting that it had not obtained Santos Offshore's approval for its variation.[80]
[80] Cowan [89]; Trial Bundle, vol 6, page 4741.
On 5 June 2013, AOA responded to Santos Offshore's letter dated 22 May 2013, saying that Santos had no right to require such an undertaking and Apache had no obligation to provide it.[81]
[81] Trial Bundle, vol 6, page 4778.
By letter dated 14 August 2013, AOA, as the Operator, proposed a motion to the Operating Committee that it determine that a Development Plan and a development Work Plan and Budget should be prepared.[82] Attached to the letter was the proposed resolution pre-signed in the affirmative on behalf of each of the Apache Parties.
[82] Trial Bundle, vol 6, page 4998.
On 27 August 2013, Santos Offshore voted in favour of the motion that the Operating Committee determine that a Development Plan and a development Work Plan and Budget should be prepared.[83]
[83] Trial Bundle, vol 7, page 5006; Cowan [93].
On the same day, the moratorium on issuing an Exclusive Operation notice imposed by cl 17(b) of the SPA expired.
On 4 September AOA wrote to Santos Offshore, giving notice of an Operating Committee meeting to be held on 29 October 2013,[84] and providing copies of a revised WA‑45‑Spar Field Development Plan (2013 FDP), a Development Work Program and Budget 2013 (Spar Operator documents), a meeting agenda and a proposed Operating Committee resolution. The notice was incorrectly addressed to Santos (BOL), and for that reason was reissued to Santos Offshore on 25 September 2013.[85]
[84] Trial Bundle, vol 7, page 5094.
[85] Cowan [95].
Mr Cowan identified work included in the Spar Development Work Plan and Budget 2013 that had already been done, being:[86]
•completion of FEED;
•completion of detail design and procurement engineering;
•tendering and award of major contracts relating to subsea production system, umbilical and cooling skid; and
•engagement with regulatory bodies and preparation of documentation for regulatory approvals.
[86] Cowan [108].
He also identified work which had yet to be done which included:
•finalising regulatory approvals;
•complete award of contracts for the procurement of materials and components, including contracts, transportation, installation, testing and commissioning of the project; and
•installation, commissioning and start-up of the project.
The Spar Development Work Plan and Budget identified that the project was already approximately 19% complete.[87]
[87] Trial Bundle, vol 7, page 5483.
The 'Major Milestones' in section 3.2 recorded that the Apache Parties had approved development on 12 December 2012, and identified the award of the Subsea Production Equipment contract, EHU contract, and Subsea Cooling Skid contract.
Section 4.1 detailed that $AUD4.796 million had been spent in 2012, and $AUD25.101 million had already been incurred for 2013.
On 13 September 2013, Apache Energy entered into an agreement with National Oilwell Varco Denmark I/S for the supply of flexible flow line for a lump sum price of DKK12,770,000 (the Flexible Flow line contract).[88]
[88] Cowan [99]; Trial Bundle, vol 7, page 5138.
Mr Cooper's evidence is that Apache Energy issued cash calls to the participants in JV 88, being the East Spar JV, in relation to expenditure in relation to the Flexible Flow line.
On 4 October 2013, Mr Hackett sent two letters to Mr Cowan.
The first letter stated that Santos Offshore agreed to the Operating Committee meeting proposed for 29 October 2013 being deferred to 11 November 2013. The letter referred to the Spar Operator documents, and suggested that by reason of the failure of those documents to address proposed capacity access arrangements, and by reason of the inclusion of prior work and expenditure in the Work Program and Budget, the documents had not been validly issued pursuant to the Spar JOA.[89]
[89] Trial Bundle, vol 7, page 5548.
The second letter (Material Breach Notice) commenced by setting out the history of interactions between the Spar JV participants and AOA as Spar Operator. It then referred to various provisions of the Spar JOA. It identified what it said were two material breaches of the Spar JOA.[90]
[90] Trial Bundle, vol 7, page 5542.
The first was carrying out operations without authorisation. In that respect, it complained that the contents of the Spar Operator documents showed that AOA had advanced the project ignoring the provisions of the Spar JOA and executed a significant portion of the project as if it was authorised to do so pursuant to an exclusive operation notice.[91]
[91] Trial Bundle, vol 7, page 5542.
The second breach was said to be the submission of, and reliance upon, the Spar Operator documents. In that respect, it was said that AOA was in material breach of the Spar JOA by:[92]
•failing to comply with the resolution of the Operating Committee on 27 August 2013, in that it failed to prepare a Development Plan and first annual Development Work Program and Budget either at all, or which was compliant with the Spar JOA, in contravention of cl 6.2(A);
•failing to include within the Spar Operator documents any or adequate detail of the proposed capacity access arrangements for the processing and transportation of petroleum upstream of the delivery point, in contravention of cl 6.2(A); and
•including within the Spar Operator documents expenditure for the Joint Account which the Spar Operator had expressly incurred on its own account, without having submitted any of the expenditure to the Operating Committee for approval and without having submitted any of the contracts pursuant to which those liabilities arise to Operating Committee scrutiny, in contravention of cl 4.2(A), cl 6.4, 6.6 and cl 6.7.
[92] Trial Bundle, vol 7, page 5542.
The letter concluded by requiring AOA to remedy those breaches.
By letter dated 1 November 2013, AOA denied that it had committed the breaches of the Spar JOA alleged in the Material Breach Notice, and issued a notice of dispute under cl 18.2(A) of the Spar JOA.[93] On the same day, Mr Hackett wrote to Mr Cowan seeking to add various items to the agenda for the Operating Committee meeting due on 11 November 2013, and requested certain information in relation to expenses incurred and contracts awarded in relation to the Spar JV.[94] By a letter in response dated 7 November 2013, AOA refused to provide the full details Santos had requested.[95] More specifically, AOA refused to provide details or copies of contracts already entered into in anticipation of the development outlined in the Spar Operator documents, on the basis that no Joint Operation or Exclusive Operation had been conducted. In response to a question as to the authority which AOA considered justified incurring the expenses and committing to contracts in relation to the Spar JV, AOA said 'The Spar Development is not yet a Joint Operation'.
[93] Cowan [103]; Trial Bundle, vol 8, page 5897.
[94] Trial Bundle, vol 8, pages 5893 ‑ 5894.
[95] Trial Bundle, vol 8, pages 5992 ‑ 5993.
By further letter dated 7 November 2013, AOA further responded to the Material Breach Notice.[96] AOA denied that it had breached the Spar JOA by including in the Spar Operator documents past expenditure by the Apache Parties because nothing in the Spar JOA prevented it seeking approval of the past expenditure for work which may benefit the joint venture. It continued:[97]
Apache Oil's activities in working on proposals to develop the Spar 2 Discovery have been for the benefit of the Spar Joint Venture. Apache Oil has also kept the participants informed about the proposals to develop the Spar 2 well. The fact that Apache Oil has brought the work it has performed to the Operating Committee to enable the Operating Committee to properly assess the proposed Development Plan and Development Work Program and Budget refutes the allegation that the work was to advance only Apache Oil's interests. The development of the Spar 2 Discovery is clearly proposed to be undertaken as Joint Operations and the work Apache Oil has undertaken has been directed to the Operating Committee assessing and approving the Development Plan and Development Work Program and Budget to enable this to occur. If the Operating Committee adopts the work that Apache Oil has performed by approving the Development Plan and the Development Work Program and Budget, Apache Oil will be able to be reimbursed for its work from the Joint Account. If the Operating Committee does not approve the Development Plan and Development Work Program and Budget, Apache must then consider whether it is prepared to develop the Spar 2 discovery as an Exclusive Operation.
[96] Trial Bundle, vol 8, page 5972.
[97] Trial Bundle, vol 8, page 5974.

There is no basis for a declaration in terms of [12(e)(xi)(B)]. Apart from explaining the reason that Santos Offshore did not want immediately to progress production from the Spar‑2 well, the question of sourcing of capacity from third parties and their commercial terms was not a matter explored at trial. Nor am I inclined to make a declaration as to the construction pleaded in [12(e)(xi)(A)]. The construction simply recites the provisions of cl 6.2(A)(1) of the Spar JOA and then adds a conclusion that a Development Plan and a development Work Program and Budget cannot include work that has been already undertaken. That construction seeks, in substance, simply to reinforce the proposition emerging from the construction of the Spar JOA pleaded in [10(d)(i)] of the defence and counterclaim, and is unnecessary. Furthermore, it may have the potential to apply to facts or circumstances differing from those considered in this case. It is unnecessary, and I do not propose to make that declaration.
Paragraphs 12(f)(i) and 12(f)(ii), of the defence and counterclaim plead that on the proper construction of the Spar JOA:
(i)the Operator must not permit any other person, whether a Party or not, to take any step, alternatively any material step, with respect to the development or production of gas from the Title Area (Development Step) unless that other person is acting as an independent contractor or agent appointed by the Operator pursuant to an authority to so appoint that is granted to the Operator under the Spar JOA; and
(ii)AOA is obliged, in its capacity as the Operator, not to take or purport to take any Development Step unless it is doing so in its capacity as the Operator. [emphasis in the original]
The declaration in those terms adds nothing to the declaration as to the construction pleaded in [10(d)(i)]. The terms of the declaration sought to raise questions as to the basis upon which the Operator might prevent 'any other person' taking some step with respect to development where that person is not acting with the Operator's concurrence, or by reason of some relationship with the Operator. I would decline to make that declaration.
For the reasons which I have given, I consider that Santos Offshore is entitled to the declarations enumerated 2a, 2b, 2c and 2d above, save that, in relation to declaration 2a, the declaration should refer to the breaches pleaded in [26(b)(ii)], [26(b)(iii)], and [26(b)(iv)] of the defence and counterclaim, and the declaration in relation to [26(f)] falls away as does the alternative reference to [26(n)]. Declaration 3A falls away since it is sought in the alternative to the earlier declarations.

Conclusion

For the reasons set out above, the plaintiffs' claims for declarations should be dismissed. On the defendant's counterclaim there should be declarations that:
1.On the proper construction of the SPA and the JOA, neither a Spar participant nor the Operator can take any material step with respect to the development or production of gas from the Title unless:
a.that step is taken in accordance with a Development Plan and development Work Program and Budget approved by the Operating Committee under cl 6.2 of the Spar JOA; or
b.that step is taken pursuant to an Exclusive Operation notice properly proposed under cl 7.2 of the Spar JOA.
2.AOA, as the Operator, has committed material breaches of the Spar JOA in terms of [26(b)(ii)], [26(b)(iii)] and [26(b)(iv)] of the defence and counterclaim; and
3.Santos Offshore validly notified AOA, as the Operator, of its material breaches on 4 October 2013 under the Spar JOA; and
4.AOA, as the Operator, failed to commence to cure its breaches within the 30 day period set out under cl 4.10(B) of the Spar JOA; and
5.Santos Offshore is entitled to remove AOA as the Operator under the Spar JOA.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: APACHE OIL AUSTRALIA PTY LTD -v- SANTOS OFFSHORE PTY LTD [2015] WASC 318 (S)

CORAM: CHANEY J

HEARD: ON THE PAPERS

DELIVERED : 15 JANUARY 2016

FILE NO/S: CIV 2787 of 2013

BETWEEN: APACHE OIL AUSTRALIA PTY LTD
First Plaintiff
APACHE EAST SPAR PTY LTD
APACHE KERSAIL PTY LTD
Second Plaintiffs
AND
SANTOS OFFSHORE PTY LTD
Defendant

Catchwords:

Costs - Special costs orders - Complexity - Importance - Whether limits under costs determinations should be removed

Legislation:

Legal Profession Act 2008 (WA), s 280(1), s 280(2), s 280(2)(c)
Rules of the Supreme Court 1971 (WA), O 66 r 3

Result:

Limits on some items removed

Category: B

Representation:

Counsel:

First Plaintiff                :     No appearance
Second Plaintiffs           :     No appearance
Defendant:     No appearance

Solicitors:

First Plaintiff                :     Clifford Chance
Second Plaintiffs           :     Clifford Chance
Defendant:     Herbert Smith Freehills

Case(s) referred to in judgment(s):

Apache Oil Australia Pty Ltd v Santos Offshore Pty Ltd [2015] WASC 318
Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 (S)
Electricity Generation and Retail Corporation Trading as Synergy v Woodside Energy Ltd [2014] WASC 469 (S)
Electricity Generation Corporation T/As Verve Energy v Woodside Energy Ltd [2011] WASC 268 (S2)
Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122 (S); (2003) 28 WAR 95
Re Graham Anstee‑Brook; Ex Parte Karara Mining Ltd [2012] WASC 129 (S)

CHANEY J: On 27 August 2015, I delivered reasons for my decision dismissing the plaintiffs' claim and making declarations on the defendant's counterclaim: see Apache Oil Australia Pty Ltd v Santos Offshore Pty Ltd [2015] WASC 318. Orders to give effect to those reasons were subsequently made on 26 October 2015. Those orders provided that any application for special orders in relation to costs be made by 6 November 2015, and provided for the filing of submissions and affidavits in relation to any application for special orders for costs, and for any such application to be dealt with on the papers. Pursuant to those orders, the defendant filed an application for special costs orders in the following terms:
1.the defendant's costs of the action be taxed without limitations imposed:
(a)in respect of the Legal Practitioners (Supreme Court) Contentious Business Determination 2012 (WA):
1.by the maximum allowable hourly rates fixed under Table A; and
2.by the maximum allowances for time, number and experience of fee earners or total costs under items 3(b), 3(c), 4, 8, 10(a), 10(c) and 24 of Table B; and
(b)in respect of the Legal Profession (Supreme Court) Contentious Business Determination 2014 (WA):
1.by the maximum allowable hourly rates fixed under Table A; and
2by the maximum allowances for time, number and experience of fee earners or total costs under items 3(b), 3(c), 4, 6(a), 6(b), 8, 10(a), 10(c), 17, 20(a), 20(b), 20(c), 20(d), 20(e), 20(h) and 24 of Table B.
The defendant also sought an order that the plaintiffs pay the costs of the application for special costs orders.
The plaintiffs did not oppose the removal of scale items as to the number of hours only in relation to scale items 4, 17, 20(a) and 20(b). The plaintiffs also submitted that, apart from the question of hourly rates, there was no cause to lift any limit in relation to items 8, 20(e) and 24 since each of those items simply specifies an hourly rate without providing any maximum number of hours. The issue in relation to those items is, therefore, simply whether the maximum hourly rate should be removed, an issue which falls to be considered in relation to the more general question of an increase of the maximum allowable hourly rates fixed under Table A.
In its submissions in reply, the defendant stated that it did not press the application for special costs orders with respect to scale items 6(a), 6(b) and 10(c).
It follows that the issues for determination are whether the limit on the maximum hourly rates fixed under Table A, and the maximum allowances under items 3(b), 3(c), 10(a), 20(c), 20(d) and 20(h) of Table B, should be removed.
Section 280(1) of the Legal Profession Act 2008 (WA) (LP Act) provides that any aspect of costs charged by law practices is regulated by the applicable costs determination. Section 280(2) provides:
(2)Despite subsection (1), if a court or judicial officer is of the opinion that the amount of costs allowable in respect of a matter under a costs determination is inadequate because of the unusual difficulty, complexity or importance of the matter, the court or officer may do all or any of the following ‑
(a)order the payment of costs above those fixed by the determination;
(b)fix higher limits of costs than those fixed in the determination;
(c)remove limits on costs fixed in the determination;
(d)make any order or give any direction for the purposes of enabling costs above those in the determination to be ordered or assessed.
The requirements of s 280(2)(c) of the LP Act were explained by the court in Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 (S) at [3] where the court said:
The application is made pursuant to s 280(2)(c) of the Legal Profession Act 2008 (WA) (the Act). That section provides that a court may make an order of the kind sought by the respondents if it is of the opinion that the amount of costs allowable in respect of a matter under a costs determination is inadequate because of the unusual difficulty, complexity or importance of the matter. The section requires that before making an order pursuant to its terms the court must form an opinion which has two components. First, the court must determine that the amount of costs allowable in respect of a matter under a legal costs determination is inadequate. Second, the court must conclude that the inadequacy arises because of the 'unusual difficulty, complexity or importance of the matter' (Heartlink Ltd v Jones as Liquidator of HL Diagnostics Pty Ltd (in liq) [2007] WASC 254 (S) [11]). Having heard the matter and being familiar with the way in which the case was conducted and the issues which were litigated, the court is in a position to form the opinions required under the section as matters of impression rather than science or mathematics: EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2008] WASC 275 (S) [7]; Verdell Pty Ltd v F & G Nominees Pty Ltd [2002] WASC 58 (S2) [14].
The court in Cape Lambert Resources also observed that the customary way of establishing that the costs allowable under the applicable determination is inadequate is by establishing that there is a fairly arguable case that the bill to be presented to the taxing officer may tax at an amount which is greater than the limit imposed by the determination [4].
The reference to 'matter' in s 280(2) is a reference to the whole of the matter in respect of which legal services were provided and which comes within the scope of a legal costs determination: Electricity Generation and Retail Corporation Trading as Synergy v Woodside Energy Ltd [2014] WASC 469 (S) [5] (Martin CJ). The requirements of unusual difficulty, complexity or importance are not to be applied in respect of each and every item within an applicable costs determination, although there must be a causal connection between the unusual difficulty, complexity or importance of the matter and the inadequacy of the costs allowable under the relevant determination. The question is whether the costs allowable in respect to the work done are inadequate because of the particular characteristics of the matter: Electricity Generation and Retail Corporation Trading as Synergy [12].
The word 'unusual' in s 280(2) qualifies 'difficulty', not 'complexity' or 'importance': Cape Lambert Resources [5].

Was the matter unusually difficult, complex or important?

The concession by the plaintiffs that the limits imposed by at least some items of the costs determination should be removed is, in effect, an acknowledgement that the prerequisites to the exercise of discretion under s 280(2) have been met. That concession is appropriately made. This action was of particular importance to the parties, involving as it did a question of the removal of an operator of a very substantial commercial joint venture involving expenditures of many millions of dollars. It was undoubtedly a matter of significant importance to the parties.
I also consider that the matter was one involving complexity. It involved an examination of conduct spanning a four year period reflected in a trial book comprising nine lever arch files and many thousands of pages. Examination of the conduct upon which the respective parties relied involved careful consideration of voluminous documents.
I am satisfied that the requirements of complexity and importance are established so as to enliven the discretion under s 280(2) of the LP Act.
It is necessary to turn to the individual items in respect of which the limits are sought to be removed to examine whether there is a causal connection between that complexity and importance and the work done in relation to those items.

Hourly rates in Table A

The application for special costs orders was supported by an affidavit of Shane Michael Murphy affirmed 5 November 2015. Mr Murphy is a solicitor employed as a senior associate with the defendant's solicitors. His affidavit deposes essentially to the costs actually charged to, and incurred by, the defendant for work carried out by the defendant's solicitors and counsel, insofar as those costs fall under the items of the relevant costs determination.
In relation to hourly rates, Mr Murphy's affidavit identified the following rates incurred by the defendant:

2012 Determination (for costs incurred in the period to 30 June 2014)

Item

Determination provides for

Costs actually charged or to be charged to (and actually incurred by Santos)

Maximum rate: Senior Practitioner (SP)

$451 per hour

Ranging from $504.90 ‑ $693 per hour (average: $592.58 per hour)

Maximum rate: Junior Practitioner (JP)

$319 per hour

Ranging from $316.80 ‑ $415.80 per hour (average: $341.55 per hour)

Maximum rates: Counsel (C)

$363 per hour /

$3,630 per day

$522.50 per hour

Maximum rates: Senior Counsel (SC)

$638 per hour /

$6,380 per day

$924 per hour

2014 Determination (for costs incurred in the period from 1 July 2014)

Item

Determination provides for

Costs actually charged or to be charged to (and actually incurred by Santos)

Maximum rate: Senior Practitioner (SP)

$473 per hour

Ranging from $504.90 ‑ $693 per hour (average: $592.58 per hour)

Maximum rate: Junior Practitioner (JP)

$330 per hour

Ranging from $316.80 ‑ $415.80 per hour (average: $341.55 per hour)

Maximum rates: Counsel (C)

$385 per hour /

$3,850 per day

Ranging from $418 - $522.50 per hour (average: $450.51 per hour)

Maximum rates: Senior Counsel (SC)

$671 per hour /

$6,710 per day

Ranging from $990 ‑ $1,100 per hour (average: $996.36 per hour)

Beyond identifying the charges made, nothing in Mr Murphy's affidavit addresses the basis upon which the charges were made or any further justification for charges beyond the determination limits.
The plaintiffs contend that the court should not order that the hourly rates to apply in assessing costs should be in excess of the hourly rates allowed in the scale merely because a party's solicitor or counsel have charged at a higher rate. The decisions in Re Graham Anstee‑Brook; Ex Parte Karara Mining Ltd [2012] WASC 129 (S) at [16] and Electricity Generation Corporation T/As Verve Energy v Woodside Energy Ltd [2011] WASC 268 (S2) at [7] and [8] are cited as authority for that proposition. In the latter case, Le Miere J referred to the observation of Pullin J in Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122 (S); (2003) 28 WAR 95 where his Honour said:
The whole point of the existing scale is that the rates are struck by reference to what is being charged within the profession. It is true that the hourly rates can only be an average or mean of the upper rates determined in the survey, and there will be some cases where the unusual complexity or importance of the case warrants the special expertise of the practitioner involved and warrants an increase in the hourly rate. In some cases not involving unusual complexity or importance, the higher rates paid will not be recoverable. A party is always entitled to the luxury of retaining the highest paid practitioners in the conduct of their case, but they cannot always expect to recover these costs from the other party [22].
It is important to note Pullin J's comment that higher rates will not be recoverable 'in some cases not involving unusual complexity or importance'. Justice Le Miere concluded in Electricity Generation Corporation T/As Verve Energy that the case was one of unusual difficulty and complexity and importance and that it was 'reasonable and proper for the defendants to retain a large legal team and to retain very senior practitioners and counsel'. He concluded that it was appropriate for the limits on the hourly rates to be raised. In Re Graham Anstee‑Brook, Le Miere J declined to make a special order removing the limits on the hourly rates, but his Honour declined to do so on the basis that the requirements of s 280(2) of the LP Act, that there be unusual difficulty, complexity or importance in the matter, had not been met. He said that 'a court should not order that the hourly rates to apply in assessing costs should be in excess of the hourly rates allowed in the scale merely because a party's solicitor or counsel have charged at a higher rate' [16]. After then noting the basis upon which the items in the determination are established, his Honour continued:
In cases not involving unusual difficulty or complexity or importance, those rates are sufficient for assessing party and party costs [16].
The approach taken by Le Miere J in Electricity Generation Corporation T/As Verve Energy was also taken by Martin CJ in Electricity Generation and Retail Corporation Trading As Synergy where, having found that the prerequisites to the exercise of discretion under s 280 were met, his Honour removed the limitations on the maximum allowable hourly rates. At [18] Martin CJ recited the evidence before him as to hourly rates, which would appear to have been no more extensive than a statement as to the amount actually charged by the practitioners concerned.
The proposition advanced by the plaintiffs, that removing the limit on hourly rates should not be permitted simply by reason that charges have been made in excess of the maximum, is clearly applicable in a case not involving unusual difficulty, complexity or importance. It is, however, still a relevant consideration where one or more of those threshold factors are present.
Having regard to the complexity and importance of this matter, I consider that it was reasonable for the defendant to engage counsel and solicitors at a rate in excess of the maxima provided by Table A of the relevant determinations, and the limitations on those rates should be removed.

Scale items 3(b) and 3(c) (defence and counterclaim respectively)

The relevant scale items for each of the defence and counterclaim provide for a maximum of 10 hours work at the maximum hourly rate provided for a senior practitioner. Mr Murphy deposed to the fact that in the period covered by the 2012 Determination, the actual charges incurred by the defendant involved 138.6 hours work for a total amount of $71,521.56. After the 2014 Determination came into effect, a further 33.2 hours work was done giving rise to charges of $21,232.27. Mr Murphy's affidavit reveals that, during the course of the action, the defendant's solicitors filed and served a defence and counterclaim on 31 January 2014, an amended defence and counterclaim on 24 December 2014, a re‑amended defence and counterclaim on 6 February 2015 and a third amended defence and counterclaim on 9 March 2015.

The plaintiffs submit that reference to the three amending pleadings is irrelevant, since the defendant is obliged to pay the costs of those amendments by reason of O 66 r 3 of the Rules of the Supreme Court 1971 (WA) and pursuant to an order to that effect in relation to the amended pleading dated 9 March 2015. There is force in that submission, but it is not a complete answer to the question as to whether the limits in items 3(b) and 3(c) should be removed in so far as the defendant is entitled to recover costs of its defence and counterclaim. The case substantially turned upon the defence and counterclaim, given that the proceedings were initiated by the plaintiffs in an attempt to pre‑empt its removal as operator of the Spar Joint Venture. The defendant was thus required to pursue a positive case on questions of construction, breach and materiality. While it may well be that work involved in the various amendments to the pleadings by the defendant do not constitute recoverable costs, that is a matter which can be dealt with by the taxing officer. Having regard to the complexity and importance of the matter, the limits imposed by scale items 3(b) and 3(c) should be removed.

Scale item 8: inspection and giving inspection of discovered documents

As already noted, item 8 simply prescribes an hourly rate in respect to this category of work but does not prescribe a maximum. The limit on the hourly rate should be removed for reasons which I have already explained above. The parties' submissions did, however, extend to questions of whether or not the large volume of documents provided by the plaintiffs at the defendant's request were in fact relevant and whether it was necessary for them to be provided. That is a matter for the taxing officer and it is unnecessary for me to deal with those submissions further.

Scale item 10(a): proceedings in chambers

Mr Murphy's affidavit identifies one application to which this item applies. That is the defendant's application for further and better discovery which was filed and served on 22 October 2014.
On 21 November 2014, by consent, the court ordered that the hearing of that application be vacated, the application be dismissed, and that the costs of the application be costs in the cause. Mr Murphy deposes to the fact that four senior practitioners and three junior practitioners, with the assistance of junior counsel, were engaged in the preparation of the application for hearing. That preparation included the preparation of submissions and conferral with the solicitors for the plaintiffs towards narrowing and compromising the application. He says that 194.3 hours were spent under item 10(a) and total charges of $91,849.33 were incurred. Item 10(a) of the relevant determinations provides an allowance for two days' preparation and one day of hearing, being a total amount of $11,550 (under the 2014 Determination).
The plaintiffs contend that the documentation sought by the defendant was not relevant to the proceedings and that none, or at least a negligible amount, of the documents produced as a result of conferral in relation to the application were included in the final tender bundle at trial. The plaintiffs submit that, after provision of the documentation by the plaintiffs, the defendant acknowledged the application would have failed. That submission is not supported by the document upon which it relies, being an email of 20 November 2014 from Mr John of the defendant's solicitors to Mr Luscombe of the plaintiffs' solicitors. That email contained a recognition that to the extent that relevant documents were already in the discovered documents, the application would have failed, but otherwise maintained the assertion that the application for further and better discovery was justified. The email proposed that costs be in the cause. That proposal was accepted by the plaintiffs and orders were made in those terms.
The plaintiffs contend that, notwithstanding that it is liable for the costs of the application, the amount claimed is neither reasonable 'nor even arguably recoverable on a party/party basis'.
It is not appropriate in the context of the application for a special costs order for the court to embark upon a detailed analysis of the extent to which the work done in relation to this application was reasonable. Questions of the reasonableness of the costs claimed are matters which are for the consideration of the taxing officer.
Given the evidence as to the amount of work done in relation to the application, the defendant has established an arguable case that the bill to be presented to the taxing officer may tax at an amount greater than the limit imposed by the determination. The limit provided in item 10(a) should be removed.

Scale items 20(c) and 20(d) (counsel fees for second and successive days)

On the same basis that I have concluded that the limits on the hourly rates in Table A should be removed, the limits on counsel fees for second and successive days of hearings should also be removed.

Scale item 20(h) (attending on reserved judgment)

As with items 8, 20(e) and 24, item 20(h) specifies charges at the senior practitioner rate per hour, but does not impose a maximum number of hours. As I have accepted that limits on the hourly rates in Table A should be removed, it follows that the limit on the hourly rates prescribed in each of these items should also be removed.

Conclusion

For these reasons, there will be an order that:
1.The defendant's costs of the action be taxed without the limitations imposed:
a.in respect of the Legal Practitioners (Supreme Court) Contentious Business Determination 2012 (WA):
(1)by the maximum allowable hourly rates fixed under Table A; and
(2)by the maximum allowances under items 3(b), 3(c), 4, 8, 10(a) and 24 of Table B; and
b.in respect of the Legal Profession (Supreme Court) Contentious Business Determination 2014 (WA):
(1)by the maximum allowable hourly rates fixed under Table A; and
(2)by the maximum allowances under items 3(b), 3(c), 4, 8, 10(a), 17, 20(a), 20(b), 20(c), 20(d), 20(e), 20(h) and 24 of Table B.
2.The plaintiffs pay the defendant's costs of this application for special costs orders, to be taxed if not agreed.

Procedure A	Procedure B	Procedure C
Exploration	0 to 1,000,000	1,000,000 to 10,000,000	>10,000,000
Appraisal	0 to 1,000,000	1,000,000 to 10,000,000	>10,000,000
Development	0 to 1,000,000	1,000,000 to 20,000,000	>20,000,000

Item	Determination provides for	Costs actually charged or to be charged to (and actually incurred by Santos)
Maximum rate: Senior Practitioner (SP)	$451 per hour	Ranging from $504.90 ‑ $693 per hour (average: $592.58 per hour)
Maximum rate: Junior Practitioner (JP)	$319 per hour	Ranging from $316.80 ‑ $415.80 per hour (average: $341.55 per hour)
Maximum rates: Counsel (C)	$363 per hour / $3,630 per day	$522.50 per hour
Maximum rates: Senior Counsel (SC)	$638 per hour / $6,380 per day	$924 per hour