BHP Billiton Ltd v Oil Basins Ltd - [2006] VSC 402

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

F5891
No. 2102 of 2005

BHP BILLITON LIMITED (ACN 004 028 077) AND OTHERS	Plaintiffs
v
OIL BASINS LIMITED (ACN 091 829 819)	Defendant

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATES OF HEARING:	18 and 19 September 2006
DATE OF JUDGMENT:	1 November 2006
CASE MAY BE CITED AS:	BHP Billiton Ltd v Oil Basins Ltd
MEDIUM NEUTRAL CITATION:	[2006] VSC 402

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Arbitration – adequacy of reasons for making award – relevant principles discussed – whether inadequacy of reasons an error of law – “technical” misconduct – relevant principles discussed – whether failure to deal with substantial and serious submissions and evidence constitutes technical misconduct - Commercial Arbitration Act 1984 (Vic) ss. 38, 42.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr B Walker SC and Mr D O’Callaghan SC	Middletons
For the Defendant	Mr R Macaw QC and Ms M Sloss SC	Arnold Bloch Leibler

TABLE OF CONTENTS

Introduction.................................................................................................................................... 1

Applicable Law.................................................................................................................................. 2

Duty of arbitrators to give reasons................................................................................... 2
Appeals against arbitral awards....................................................................................... 8
Setting aside arbitral awards for misconduct............................................................... 10
Evidence of foreign law.................................................................................................... 13

Facts................................................................................................................................................... 15

The Royalty Agreement................................................................................................... 15
The Statutory Regime....................................................................................................... 17
Post-agreement events...................................................................................................... 20

Contract Interpretation under New York Law.................................................................. 25

Issues in the arbitration............................................................................................................. 27

Decision of the Arbitrators...................................................................................................... 33

Error of Law on the Face of the Interim Award................................................................. 35

Question 1: Is there a technical meaning?.................................................................... 37
Question 2: Is a different meaning indicated?............................................................. 40

Technical Misconduct................................................................................................................. 45

Question 1: Is there a technical meaning?.................................................................... 46
Question 2: Is a different meaning indicated?............................................................. 46

Conclusion...................................................................................................................................... 49

HIS HONOUR:

Introduction

The plaintiffs comprise BHP Billiton Ltd and related companies and Esso Resources Pty Ltd. Together, they produce and recover hydrocarbons from the “Blackback” field, which is located in Bass Strait off the coast of Victoria. For convenience, unless the context otherwise requires, I will refer to the plaintiffs collectively and individually as “BHP”.

The proceeding concerns a major arbitration between the parties, involving a claim by the defendant, Oil Basins Ltd, for royalties which it alleges are due to it under a royalty agreement in respect of oil produced and recovered by BHP from certain blocks in the Blackback field.

The arbitration was conducted before an eminent arbitral panel comprising a retired judge of this Court, a retired judge of the Federal Court of Australia and a lawyer from the United States of America. There were substantial interlocutory steps, culminating in a 15 day hearing in 2005. The final day of hearing was 22 April 2005.

On 6 September 2005, the arbitrators published an interim award consisting of the majority decision of the two retired judges and a dissenting opinion of the third arbitrator. For convenience, I will refer to the majority arbitrators as “the arbitrators”.

The effect of the interim award is that BHP is obliged to pay Oil Basins the royalties which it claims. The royalties are in the order of $19 million.

BHP seeks to challenge the interim award on two grounds. First, on the ground that the reasons given by the arbitrators for making the interim award (“the reasons”) are manifestly inadequate. On this basis, BHP contends that there is an error of law on the face of the interim award. Second, on the ground that the arbitrators did not consider and adjudicate upon substantial and serious submissions and evidence relied upon by BHP. On this basis, BHP contends that there has been misconduct by the arbitrators. If either of these allegations is established, BHP seeks an order setting aside the interim award and, as one of the arbitrators has since died, an order remitting the matter for arbitration afresh before a differently constituted panel of arbitrators.

It is appropriate to state at this stage that no allegation of immoral, improper or unethical conduct is implied by the allegation of misconduct which BHP makes against the arbitrators. Their integrity is not in question. As will appear, that term is used in a technical sense.

Applicable Law
(1) Duty of arbitrators to give reasons

The arbitration was conducted under the Commercial Arbitration Act1984 (Vic). Accordingly, there being no agreement to the contrary, the arbitrators were required under s. 29(1)(c) of that Act to include in any award a statement of the reasons for making the award.

There are many cases which consider the content of the duty of a judge to provide reasons for decision. Recently, in Waterways Authority v Fitzgibbon[1] Hayne J said that, in considering the adequacy of a judge’s reasons, “the reasons actually stated are to be understood as recording the steps that were in fact taken in arriving at [the] result.”[2]
[1][2005] HCA 57.
[2]Ibid [130].

In Hunter v Transport Accident Commission[3] the Court of Appeal in Victoria considered an application for leave to appeal against a decision of a judge of the County Court, on the ground that inadequate reasons had been given for dismissing an application for leave to bring a proceeding for the recovery of damages in respect of a “serious injury”.[4] Nettle JA, with whom Batt and Vincent JJA agreed, decided that the reasons of the County Court judge were inadequate.
[3][2005] VSCA 1.
[4]Transport Accident Act 1986 (Vic) s. 93(4)(d).

The case involved a substantial body of medical opinion, about which there was much evidence. The County Court judge, in her reasons, set out large tracts of the medical evidence but, “despite the depth and sophistication of that evidence”[5], the judge’s only findings on the relevant issue were to characterise one doctor’s evidence as that which “most accurately described the appellant’s status” and was the “most insightful and balanced in the circumstances.”[6] However, as Nettle JA pointed out, it was not apparent from the judge’s reasons whether she accepted or rejected the evidence of other medical experts and, if so, why.
[5]Hunter v Transport Accident Commission [2005] VSCA 1, [23].
[6]Ibid [23]-[27].

Nettle JA criticised the approach of the County Court judge in the following manner:

The judge may have thought that it was enough simply to set out the evidence and other material upon which her findings were based and then to state her conclusions. But for the reasons already explained that was not enough. The requirement to refer to the evidence upon which findings are based is a requirement to analyse the evidence and to explain why some parts of it do and others do not lead to the ultimate conclusion. And that analysis must be recorded in the reasons. In general, and in this case in particular, the mere recitation of evidence followed by a statement of findings, without any commentary as to why the evidence is said to lead to the findings, is about as good as useless. [7]

[7]Ibid [28] (citations omitted).

As to the content of the duty to provide reasons for a decision on an application such as was in issue in Hunter, Nettle JA stated:

When a judge decides an application under s. 93(4)(d) of the Act the judge is under a duty to provide reasons for his or her decision. Furthermore, while the extent of the reasons will depend upon the circumstances of the case, the reasons should deal with the substantial points which have been raised; include findings on material questions of fact; refer to the evidence or other material upon which those findings are based; and provide an intelligible explanation of the process of reasoning that has led the judge from the evidence to the findings and from the findings to the ultimate conclusion. It should also be understood that the requirement to refer to the evidence is not limited to the evidence that has been accepted and acted upon. If a party has relied on evidence or material which the judge has rejected, the judge should refer to that evidence or material and, in giving reasons which deal with the substantial points that have been raised, explain why that evidence or material has been rejected. There may be exceptions. But, ordinarily, where a judge rejects or excludes from consideration evidence or other material which is relevant and cogent, it is simply not possible to give fair and sensible reasons for the decision without adverting to and assigning reasons for the rejection or exclusion of that material. Similarly, while it is not incumbent upon the judge to deal with every argument and issue that might arise in the course of a case, where an argument is substantial or an issue is significant, it is necessary to refer to and assign reasons for the rejection of the argument or the resolution of the issue. Above all the judge should bear steadily in mind that reasons are not intelligible if they leave the reader to wonder which of a number of possible routes has been taken to the conclusion expressed. Failure to expose the path of reasoning is an error of law.[8]

[8]Ibid [21] (citations omitted).

In my view, this statement by Nettle JA should be regarded as a general statement of principle, applicable to any case where a judge is under a duty to provide reasons for his or her decision. The statement should not be limited to applications under s. 93(4)(d) of the Transport Accident Act. However, it is important to emphasise, as did Nettle JA, that the extent of the reasons which are required will always depend upon the circumstances of the case.

In Flannery v Halifax Estate Agencies Ltd[9] Henry LJ, delivering the judgment of the Court of Appeal in England, stated:

We make the following general comments on the duty to give reasons.
(1)The duty is a function of due process, and therefore of justice. Its rationale has two principal aspects. The first is that fairness surely requires that the parties especially the losing party should be left in no doubt why they have won or lost. This is especially so since without reasons the losing party will not know... whether the court has misdirected itself, and thus whether he may have an available appeal on the substance of the case. The second is that a requirement to give reasons concentrates the mind; if it is fulfilled, the resulting decision is much more likely to be soundly based on the evidence than if it is not.
(2)The first of these aspects implies that want of reasons may be a good self-standing ground of appeal. Where because no reasons are given it is impossible to tell whether the judge has gone wrong on the law or the facts, the losing party would be altogether deprived of his chance of an appeal unless the court entertains an appeal based on the lack of reasons itself.
(3)The extent of the duty, or rather the reach of what is required to fulfil it, depends on the subject matter. Where there is a straightforward factual dispute whose resolution depends simply on which witness is telling the truth about events which he claims to recall, it is likely to be enough for the judge (having, no doubt, summarised the evidence) to indicate simply that he believes X rather than Y; indeed there may be nothing else to say. But where the dispute involves something in the nature of an intellectual exchange, with reasons and analysis advanced on either side, the judge must enter into the issues canvassed before him and explain why he prefers one case over the other. This is likely to apply particularly in litigation where as here there is disputed expert evidence; but it is not necessarily limited to such cases.
(4)This is not to suggest that there is one rule for cases concerning the witnesses truthfulness or recall of events, and another for cases where the issue depends on reasoning or analysis (with experts or otherwise). The rule is the same: the judge must explain why he has reached his decision. The question is always, what is required of the judge to do so; and that will differ from case to case. Transparency should be the watchword.[10]

[9][2000] 1 WLR 377, 381.

[10]Ibid 381-2 (emphasis in original).

The question remains as to whether the duty of an arbitrator to give reasons is to be equated to the duty of a judge, or whether some lesser duty is involved.

In Re Poyser and Mills’ Arbitration[11] Megaw J considered the adequacy of an arbitrator’s reasons for making an award and, in doing so, made the following statement as to the nature of an arbitrator’s duty to give reasons:

Parliament provided that reasons shall be given, and in my view that must be read as meaning that proper, adequate reasons must be given. The reasons that are set out must be reasons which will not only be intelligible, but which deal with the substantial points that have been raised… If those reasons do not fairly comply with that which Parliament intended, then that is an error on the face of the award… I do not say that any minor or trivial error, or failure to give reasons in relation to every particular point that has been raised at the hearing, would be sufficient ground for invoking the jurisdiction of this court. I think there must be something substantially wrong or inadequate in the reasons that are given in order to enable the jurisdiction of this court to be invoked.[12]

[11][1964] 2 QB 467.

[12]Ibid 478.

In Peter Schwarz (Overseas) Pty Ltd v Moreton[13] Byrne J considered applications (as in this case) for leave to appeal against an arbitral award and seeking to set the award aside for misconduct. The grounds relied upon by the applicant included an allegation that the arbitrator had failed to give sufficient reasons for the award.
[13][2003] VSC 144.

Byrne J summarised the duty of an arbitrator to provide reasons for making an award in the following terms:

It is the duty of an Arbitrator to consider and deal with all matters the subject of the reference. Commonly, the arbitrating parties will present contentions of fact and law in support of their own case in opposition to that of the opponent. Often there will be multiple contentions put forward, sometimes in the alternative to those which have preceded them. The Arbitrators must have regard to them all. When it comes to preparing the award pursuant to s. 29(1), and to ‘a statement of reasons for making the award’, the obligation is not identical. The statutory requirement that the reasons be ‘reasons for making the award’, means that the Arbitrators are not required to provide reasons which did not lead to the determination of the disputes referred to arbitration. Accordingly, it is not necessary for them to deal with an alternative basis of claim or defence when the primary claim or defence has been accepted.
The requirement for reasons in s. 29 means that the Arbitrators must set out the facts which they have found and the legal principles which they have relied upon as the foundation for the award and that this should be in terms sufficient for the parties to understand why they have won and lost and for them to decide whether to make and for the Court to determine an application for leave to appeal or enforcement.
I have mentioned the purposes which the statement of reasons is to serve. The statement of reasons, at a minimum, must be sufficient to achieve these purposes. I say ‘at a minimum’, because I am concerned with the point at which the Court will take an active interest in the insufficiency of reasons; the prudent Arbitrator will not be tempted to stray close to this cliff edge. The question may arise whether a particular contention must be dealt with in the statement of reasons. Judges, mindful of their own judgment-writing experience, have been careful not to impose upon Arbitrators a burden greater than their own. And so, there is no need to deal with contentions which are frivolous, irrelevant or even peripheral to the matters in issue.
This has led the Court to stipulate that Arbitrators must deal with every ‘submission worthy of serious consideration’. In Fletcher Construction Australia Ltd v Lines MacFarlane and Marshall Pty Ltd the Court of Appeal in this State said that a reasoned judgment of a court must "deal with the central contentions advanced by the parties". However the test is expressed, the minimum requirement is not that the Arbitrators deal with every contention. Precisely where the line is to be drawn in a given case will depend upon the circumstances, including the relevance of the contention to the Arbitrators' conclusions. The decision to deal in the reasons with a particular rejected submission may also depend upon an assessment of its weight, particularly in a case where the arbitrating parties are not legally represented. Putting it bluntly, some points are so obviously bad that no good purpose is served by dealing with them in any detail. I need hardly add that the prudent Arbitrator will prefer to err on the side of comprehensiveness in order that the award should be of benefit to the parties.
A further matter bearing upon the application of this principle is that the Arbitrators will commonly not have had the benefit of legal training. Accordingly, Smart J in a much quoted passage has said this:
Elaborate reasons finely expressed are not to be expected of an arbitrator. Further, the court should not construe his reasons in an overly critical way.

In what are often called trade arbitrations, the parties and the Arbitrators are all engaged in a particular trade. In such an arbitration the reasons may be expressed in the jargon of the trade or they may ignore matters which will be well known to the participants. Such an award which may appear deficient to an outsider, may nonetheless satisfy the fundamental purpose of the statement of reasons. It cannot be the case that an award should be drafted only with an eye to informing an appeal court which may be unfamiliar with the trade and its practices.[14]

[14]Ibid [31]-[35] (citations omitted).

It was submitted on behalf of Oil Basins that, in considering the majority arbitrators’ reasons for making the interim award, the Court should not construe the reasons in an overly critical way, because arbitrators should not be subjected to the same exacting standards of performance as apply to judges. Reliance was placed upon the statement by Smart J in Menna v HD Building Pty Ltd[15] which was quoted with approval by Byrne J in Peter Schwarz[16] and also by Rogers CJ Comm Div in Imperial Leatherware Co Pty v Macri & Marcellino Pty Ltd.[17]
[15]Unreported, Supreme Court of New South Wales, 1 December 1986.
[16][2003] VSC 144, [35]. See above fn 14.
[17](1991) 22 NSWLR 653, 657.

In my view, the standard to be applied in considering the sufficiency of an arbitrator’s reasons depends upon the circumstances of the case including the facts of the arbitration, the procedures adopted in the arbitration, the conduct of the parties to the arbitration and the qualifications and experience of the arbitrator or arbitrators. For example, in a straightforward trade arbitration before a trade expert, a less exacting standard than would be expected of a judge’s reasons should be applied in considering the adequacy of the reasons for the making of an award. On the other hand, in a large-scale commercial arbitration, where the parties engage in the exchange of detailed pleadings and witness statements prior to a formal hearing before a legally qualified arbitrator, a higher standard of reasons is to be expected. This is especially so where the arbitrator is a retired judicial officer.

I adopt with approval the statement by McPherson and Davies JJA in Cypressvale Pty Ltd v Retail Shop Lease Tribunal[18] on this issue:

The calibre, legal training and experience of members of the judiciary raise expectations that reasons they give for their decisions will attain a high level of sophistication. The same would not always be true of decisions of persons whose primary qualification for decision-making consists of specialist knowledge or experience rather than ability to produce reasons conforming to accepted judicial tradition. Reasons that would not be considered adequate if given by a judge may nevertheless suffice for some other decision-makers not chosen for their task because of their resemblance to the judiciary. In the end, the question whether reasons are ‘adequate’ falls to be considered in the context afforded by the nature of the question which has to be decided and other factors, including the functions, talents and attributes of the tribunal member or the individual in whom the duty of deciding questions of that kind has been vested. Considerations of the cost to litigants and the general public in requiring reasons to be given is another factor which must be weighed.[19]

[18][1996] 2 Qd R 462.

[19]Ibid 485 (citations omitted).

My review of the authorities and the facts of this case leads me to conclude that the arbitrators were under a duty to give reasons of a standard which was equivalent to the reasons to be expected from a judge deciding a commercial case. The arbitration is a large commercial arbitration involving many millions of dollars. It was attended with many of the formalities of a legal proceeding, including the exchange of points of claim and defence and of substantial witness statements. The hearing occupied 15 sitting days. In addition to oral argument, substantial written submissions were made by the parties. The arbitrators were obviously chosen for their legal experience and were retired judges of superior courts. Both sides were represented by large commercial firms of solicitors and very experienced Queens Counsel.

(2) Appeals against arbitral awards

An appeal may be brought to the Supreme Court on any question of law arising out of an arbitral award if the parties to the arbitration agreement consent or if this Court grants leave to appeal.[20] Relevantly, leave to appeal is not to be granted unless there is a manifest error of law on the face of the award.[21]
[20]Commercial Arbitration Act1984 (Vic) s. 38(4).
[21]Commercial Arbitration Act 1984 (Vic) s. 38(5)(b)(i).

The application for leave to appeal against the majority interim award is based upon the submission that there is a manifest error of law on the face of the interim award, constituted by the failure to give adequate reasons for the making of the interim award. It was not in issue that the failure to give adequate reasons for the making of an award may constitute an error of law on the face of the award.[22]
[22]See, eg, Re Poyser and Mills’ Arbitration [1964] 2 QB 467, 478.

There was no dispute between the parties as to the applicable legal principles to be applied in considering whether there is a manifest error of law on the face of an arbitral award. “Manifest” in this context means an error of law which is “evident and obvious rather than merely arguable.”[23] In Promenade Investments Pty Ltd v New South Wales[24] Sheller JA observed:

“[M]anifest”, in the context of the sub-section, which contemplates the grant of leave before an appeal can be pursued, connotes an error of law which is more than arguable. There should,... before leave is granted be powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law.[25]

[23]Leung v Hungry Jacks Pty Ltd [1999] VSC 477, [15] (Hedigan J).

[24](1992) 26 NSWLR 203.

[25]Ibid 226.

There are many authorities to like effect. They were collected and reviewed by Dodds-Streeton J in Anaconda Operations Pty Ltd v Fluor Australia Pty Ltd.[26]
[26][2003] VSC 275, [31]-[43].

In Anaconda Operations, Dodds-Streeton J also considered the materials available to the Court for the purpose of determining whether there is a manifest error of law on the face of an award.[27] After reviewing the authorities, Dodds-Streeton J concluded:

It follows that in assessing whether there is a manifest error on the face of the Interim Award, I am entitled to, and should, consider the documents which are, on applicable principles, incorporated into it, or referred to in the Interim Award in so far as, without reading them, it is not possible to understand what has been decided or directed.[28]

[27]Ibid [44]-[50].

[28]Ibid [49].

BHP adduced evidence of much of the materials that were placed before the arbitrators during the hearing, and the transcript of the proceedings before the arbitrators. Insofar as this evidence was relevant to BHP’s technical misconduct case, there was no objection to it. However, it was submitted on behalf of Oil Basins that this evidence was irrelevant to the Court’s consideration of the application for leave to appeal. I accept this submission on behalf of Oil Basins. Indeed, the argument before me proceeded on the basis that, in considering the application for leave to appeal, I should only look at the majority interim award. That is what I propose to do. I will only look at the evidence and submissions before the arbitrators, and then only at that which was referred to in argument, when considering BHP’s technical misconduct case.

(3) Setting aside arbitral awards for misconduct

Section 42 of the Commercial Arbitration Act 1984 (Vic) provides that, where there has been misconduct by an arbitrator, the Court may set the arbitrator’s award aside either wholly or in part.

Section 44 of the Commercial Arbitration Act provides that, where the Court is satisfied that there has been misconduct by an arbitrator, the Court may remove the arbitrator.

“Misconduct” is defined in s. 4(1) of the Commercial Arbitration Act in an inclusive manner:

“Misconduct” includes corruption, fraud, partiality, bias and a breach of the rules of natural justice.

With the possible exception of a breach of the rules of natural justice, each of the categories of conduct referred to in the definition involves, or may involve, impropriety on the part of an arbitrator. However, as will appear, the cases establish that misconduct by an arbitrator does not necessarily involve any impropriety. Where no impropriety is involved, the courts have conveniently referred to the misconduct as “technical” misconduct. As I have said, the allegation of misconduct in this case is of a technical character.

A failure by an arbitrator to deal with a substantial and serious submission, or to consider evidence which is vital to the determination of the issues raised for decision, will constitute technical misconduct within the meaning of ss. 42 and 44 of the Commercial Arbitration Act 1984 (Vic). In Williams v Wallis & Cox[29] Lush J said:

Misconduct is not necessarily personal misconduct. If an arbitrator for some reason which he thinks good declines to adjudicate upon the real issue before him, or rejects evidence which, if he had rightly appreciated it, would have been seen by him to be vital, that is, within the meaning of the expression, ‘misconduct’ in the hearing of the matter which he has to decide, and misconduct which entitles the person against whom the award is made to have it set aside.[30]

[29][1914] 2 KB 478.

[30]Ibid 484.

In the same case, Atkin J said:

With regard to the main question it appears to me that the deputy county court judge formed a misconception as to the meaning of “misconduct.” That expression does not necessarily involve personal turpitude on the part of the arbitrator, and any such suggestion has been expressly disclaimed in this case. The term does not really amount to much more than such a mishandling of the arbitration as is likely to amount to some substantial miscarriage of justice, and one instance that may be given is where the arbitrator refuses to hear evidence upon a material issue.[31]

[31]Ibid 485.

I was not referred to any authority establishing that inadequacy of reasons constitutes misconduct within the meaning of the Commercial Arbitration Act 1984 (Vic). However, as pointed out in argument, inadequate reasons will often be the result of a failure to deal with a substantial and serious submission. Where there is a challenge to the adequacy of an arbitrator’s reasons, arguments as to whether the arbitrator failed to deal with a substantial and serious submission, or with important evidence, will often arise. In such a case, there may be real difficulty in distinguishing between the two grounds of attack upon the arbitrator’s award. In Re Poyser and Mills’ Arbitration, Megaw J said in respect of such a dichotomy that “[i]t may be almost impossible... to divide the two.”[32] There is potential for this difficulty to arise in this case. BHP’s grounds of appeal include the overlapping submissions that the arbitrators’ reasons are inadequate and that they failed to deal with substantial and serious submissions, and evidence, put before them for decision. In giving my reasons, I have endeavoured to maintain the division between the two submissions.
[32][1964] 2 QB 467, 477.

It was submitted on behalf of Oil Basins that “technical” misconduct should not form the basis of an order setting aside an award, or the removal of an arbitrator, unless there is, in the words of Miles CJ in Holland Stolte Pty Ltd v Murbay Pty Ltd[33] “some real dereliction of duty on the part of the arbitrator.”[34]
[33][1991] ACTSC 89.
[34]Ibid [18].

In my view, “technical misconduct” by an arbitrator may occur in the absence of a real dereliction of duty. A dereliction of duty is a serious thing involving, according to The Macquarie Dictionary, a culpable (ie, blameworthy) neglect or abandonment of duty. There is no mention of any such requirement in any other case concerning technical misconduct. To the contrary, the cases concerning technical misconduct are replete with statements to the effect that misconduct may arise in the absence of any moral turpitude or reflection upon the integrity of the arbitrator. For example:

(1)In Williams v Wallis & Cox, Atkin J said that misconduct “does not necessarily involve personal turpitude on the part of the arbitrator.”[35]
(2)In The Melbourne Harbour Trust Commissioners v Hancock[36] Isaacs J observed that misconduct in this context was used
only in its technical and often misleading sense. No one suggests, or could suggest, the smallest deviation from the path of honour. But the word “misconduct” as employed in this connection includes even a mistake in procedure which has or may have unjustly prejudiced a party.[37]

(3)In Van Dongen v Cooper[38] Virtue J said that misconduct “clearly covers cases where there is no reflection on the integrity of the arbitrator”.[39]

[35][1914] 2 KB 478, 485.

[36](1927) 39 CLR 570.

[37]Ibid 588 (citations omitted).

[38][1967] WAR 143.

[39]Ibid 146.

In my view, it would be inconsistent with these consistent statements concerning the nature of technical misconduct to add a requirement that misconduct by an arbitrator must necessarily involve some real dereliction of duty.

The existence of misconduct by an arbitrator will not, in every case, lead to the award being set aside or the arbitrator being removed. This is a matter for the discretion of the Court. In exercising that discretion, the Court will evaluate the nature and extent of the arbitrator’s departure from his or her duty. That “departure” (a word I prefer to “dereliction”) must of course be “real” in the sense that it has, or may have, substantially affected the rights of one or more parties to the arbitration.[40]

(4) Evidence of foreign law

[40]Cf. Van Dongen v Cooper [1967] WAR 143, 145.

Clause 12 of the royalty agreement provides that it “shall be interpreted and applied in accordance with the law of the State of New York, United States of America.” It was accordingly necessary for the arbitrators to make findings of fact as to the content of relevant New York law. It is well established that, in making such findings, the arbitrators were engaged upon a process of making findings of fact based upon evidence.[41] As the central issue in the arbitration involved the interpretation of the royalty agreement, it was necessary for the arbitrators to make findings of fact as to the relevant principles of contract interpretation under New York law. No issue arises in this regard.
[41]Commonwealth v Yarmirr (2001) 208 CLR 1, [203].

However, there is an issue between the parties as to the role of the arbitrators in respect of expert opinion evidence concerning the way in which the royalty agreement would be construed by the Court of Appeals of the State of New York. It was submitted on behalf of BHP that the arbitrators admitted into evidence opinions of this kind expressed by witnesses for both BHP and Oil Basins. Accordingly, on the central issues for determination, the arbitrators were required to resolve any conflict between those opinions.

It was submitted on behalf of Oil Basins that the arbitrators were not entitled to take account of opinion evidence of this kind. They were required to make findings, as a matter of fact, as to the relevant principles of contractual interpretation under New York law, and also as to other relevant aspects of New York law. However, the task of interpreting the royalty agreement by the application of these principles was a matter of law for the arbitrators to decide.

The issue is complicated by a statement in the majority reasons that

matters of interpretation were to be determined by asking the question how the Court of Appeals of the State of New York, as the highest Court in that State, would resolve the question. The parties agree that this is the correct approach for us to adopt. We agree and shall adopt that approach.[42]

[42]Interim Award [156].

This statement by the arbitrators appears to be in conflict with objections taken by Oil Basins at the hearing to the admissibility of opinion evidence by BHP’s expert witnesses as to the way in which the royalty agreement should be construed. The arbitrators accepted the opinion evidence tendered by BHP subject to this objection, and indicated that they would deal with the objection in final submissions and when deciding the issues. However, Oil Basins did not pursue its objection in final submissions and the objection was not considered by the arbitrators in the interim award.

In my view, the applicable law is correctly stated in Dicey & Morris on The Conflict of Laws in the following terms:

The function of the expert witness in relation to the interpretation of foreign statutes must be contrasted with his function in relation to the construction of foreign documents. In the former case, the expert tells the court what the statute means, explaining his opinion, if necessary, by reference to foreign rules of construction. In the latter case, the expert merely proves the foreign rules of construction, and the court itself, in the light of these rules, determines the meaning of the documents.[43]

[43]Lawrence Collins (ed), Dicey & Morris on The Conflict of Laws (13^th ed, 2000) [9-019].

Dicey and Morris cite a number of authorities for these propositions, including Rouyer Guillet & Cie v Rouyer Guillet & Co Ltd.[44] In that case, Lord Greene MR said:

As I understand the law of England, evidence as to the meaning of the statute is to be obtained from the evidence of expert French witnesses and the decisions of the French courts. On a matter of French law the decision of a French court would be most persuasive. On the other hand, evidence on the construction of a private document, such as articles of association, is admissible so far as it deals with French rules of construction or French rules of law or the explanation of French technical terms, but evidence as to its meaning after those aids have been taken into account is not admissible. It is for the court to construe the document, having fortified itself with the permissible evidence.[45]
[44][1949] 1 All ER 244.
[45]Ibid 244.

Facts
(1) The Royalty Agreement

The late Dr Lewis Weeks, a citizen and resident of the United States of America, was a renowned geologist with particular skill and experience in petroleum exploration. BHP is and was at all relevant times engaged in, amongst other things, the business of recovery and production of oil.

In March 1960, BHP engaged Dr Weeks as a consultant. As a result, Dr Weeks travelled to Australia for two weeks. Whilst in Australia, Dr Weeks advised BHP against pursuing exploration in the Sydney Basin in New South Wales. In discussions with BHP’s technical staff concerning oil exploration prospects generally, Dr Weeks advised BHP to pursue oil exploration in certain areas along the southern coastline of Victoria and South Australia, and along the northern coastline of Tasmania. As a result, BHP applied for and became the holder of three exploration permits issued under the Petroleum Act1958 (Vic) (the “1958 Act”), known as PEP 38, PEP 39 and PEP 40 respectively. It is PEP 38 which is of particular relevance to this case. Further, BHP became the holder of an exploration licence issued under the Mining Act 1929 (Tas) known as EL 1/60.[46]
[46]Interim Award [36]-[44].

Dr Weeks continued to act as an advisor to BHP in respect of the permits and exploration licence.

On 28 December 1960, Dr Weeks and BHP entered into two agreements – a consultancy agreement and a royalty agreement.

The consultancy agreement recites that BHP applied for the Victorian exploration permits and the Tasmanian exploration licence on the advice of Dr Weeks and that BHP had requested Dr Weeks to act as its geological advisor in the future. Under the consultancy agreement, BHP agreed to pay Dr Weeks an annual retainer and certain consultancy fees together with:

1.(c)An over-riding royalty of 2½% of the gross value of all hydrocarbons produced and recovered by [BHP] and its successors and assigns directly or by a joint venture or any other joint interest arrangement in which [BHP] hereafter participates in the areas hereinbefore recited or other areas as have been or may be recommended in writing by [Dr Weeks] for exploration and in respect of which [BHP] shall have obtained or shall hereafter obtain an Exploration Permit or Licence or other relevant title...

The reference to “the areas hereinbefore recited” was a reference to the area covered by the Victorian exploration permits and the Tasmanian exploration licence.

The consultancy agreement also provided for the payment of an “over-riding royalty” in respect of other areas recommended in writing by Dr Weeks, such royalty agreements to be in the form or to the effect of the annexed schedule. The form of royalty agreement contained in the schedule to the consultancy agreement is in identical terms to the royalty agreement in fact executed on 28 December 1960 in respect of PEP 38.[47]
[47]On 28 December 1960, BHP and Oil Basins also executed separate royalty agreements in respect of each of the areas covered by PEP 39, PEP 40 and EL1/60: Interim Award [50].

Clause 3 of the consultancy agreement provided:

On termination of this agreement by either party [BHP] shall not after a period of five years from the date of such termination be obliged to make any new royalty agreement or agreements in respect of hydrocarbons produced and recovered from areas acquired in addition to those herein recited but royalty agreements executed before or during such period of five years shall remain in force during the terms or extended terms of the relevant permits, licences or other titles authorising the production of such hydrocarbons.

The royalty agreement is between BHP and Oil Basins Incorporated, a company nominated by Dr Weeks to receive the royalty and the predecessor in title to Oil Basins Ltd.

The royalty agreement recites that:

[BHP] holds the exclusive Petroleum Exploration Permit No 38 issued under the Petroleum Act 1958 of the State of Victoria to explore for hydrocarbons within an area comprising 4450 square miles as shown on the attached plan (hereinafter referred to as “the area”) and specifically described in the schedule hereto.

Clause 1 of the royalty agreement provides:

[BHP] doth hereby bargain sell grant and assign to [Oil Basins] and its successors and assigns an overriding royalty of two and one half percentum (2½%) of the gross value of all hydrocarbons produced and recovered by [BHP] its successors and assigns within the area.

Clause 12 of the royalty agreement provides that the royalty agreement “shall be interpreted and applied in accordance with the law of the State of New York United States of America.”

(2) The Statutory Regime

The description of the statutory regime which follows is taken from the interim award. The description includes only those elements of the statutory regime necessary to understand the submissions made to the arbitrator and the Court.

Under the statutory regime for petroleum exploration and production in Victoria in 1960, BHP could not have produced and recovered hydrocarbons in commercial quantities under PEP 38, which was an exploration permit only. BHP would have needed to obtain a petroleum mineral lease for that purpose. Nor did PEP 38 confer on BHP any right or preferential claim to obtain such a lease.[48]
[48]Interim Award [46].

In 1960, when the royalty agreement was entered into, the Commonwealth Parliament had not enacted any legislation asserting title to offshore mineral resources. The only relevant legislation in force at that time concerning the Bass Strait area was the 1958 Act, and it was pursuant to that Act that PEP 38 was granted.[49]
[49]Ibid [133].

Under the 1958 Act the effective ownership of, and right to exploit mineral resources in the ground was vested in the Crown in right of the State of Victoria. Three types of statutory interest were prescribed for exploring, prospecting and mining for petroleum:

(1)exploration for petroleum was to be conducted pursuant to a petroleum exploration permit;
(2)prospecting for petroleum was to be conducted pursuant to a petroleum prospecting licence; and
(3)mining for petroleum, that is, drilling for, mining, extracting, recovering, removing and disposing of petroleum in or under the land demised, was to be conducted pursuant to a petroleum mineral lease.[50]

[50]Ibid [134].

An exploration permit under the 1958 Act was granted for a period of two years. An exploration permit could be extended for a further period of 12 months, and for subsequent periods of 12 months, at the discretion of the Minister.[51]
[51]Ibid [44], [135].

The 1958 Act did not impose any limit on the number of permits, licences or leases that may be applied for or held by an applicant. Nor did it impose any obligations upon the holder of the permit to relinquish any of the blocks comprised therein upon its renewal.[52]
[52]Ibid [136].

Petroleum could only be produced in commercial quantities under a mineral lease. The decision to refuse or approve an application for a lease was a matter for the Governor in Council “in his absolute discretion”. Accordingly, the holder of a an exploration permit or a prospecting licence did not have any right or preferential claim to obtain a lease in the event of a discovery of petroleum. Once granted, a lease conferred upon the lessee “the exclusive right to drill for, mine, extract, recover, remove and dispose of all petroleum in or under the land demised.”[53]
[53]Ibid [138].

Section 39 of the 1958 Act provided that no prospecting licence or lease (and by reason of s. 75, no exploration permit) or any interest therein could be “directly or indirectly assigned, transferred, sub-let, or be made the subject of any trust except with the consent of the Minister first had and obtained” and that any dealing made without such consent shall be void. Whilst application could be made to the Minister for consent, the Minister was expressly “not bound to consent to any such assignment, transfer, or sub-letting”: s. 39(3). If any permit, licence or lease was assigned, transferred or sub-let, or made the subject of a trust without the consent of the Minister first had and obtained, then s. 40(2) provided that the permit, licence or lease “shall be forfeited to the Crown.”[54]
[54]Ibid [139].

Accordingly, under the 1958 Act as in force at the date of execution of the royalty agreement:

(1)All rights to petroleum belonged to the Crown and no private person or company could validly assert any proprietary interest in petroleum in the ground.
(2)At the discretion of the Minister, the term of a petroleum exploration permit, such as PEP 38, could be extended for a further period not exceeding 12 months, and successive 12 month extensions could be applied for.
(3)A petroleum exploration permit could be extended without any reduction in the area covered. (There was no statutory requirement of the kind that was introduced seven years later requiring one half of the permit area to be relinquished when making application for renewal.)
(4)A petroleum exploration permit did not confer on the holder the right to produce and recover hydrocarbons in commercial quantities. The holder of an exploration permit was required to obtain a petroleum mineral lease for that purpose.
(5)No interest in the permit could be assigned or transferred without the Minister’s consent first had and obtained. Any attempt to do so would render the permit liable to forfeiture to the Crown.[55]

(3) Post-agreement events

[55]Ibid [141].

Following the making of the royalty agreement, there were a number of relevant events. The description which follows is taken from the interim award. Once again, I have set out only those events which are necessary to understand the submissions made to the arbitrators and the Court.

There was an exchange of correspondence between BHP and Dr Weeks (on behalf of Oil Basins) in 1963. The arbitrators set out substantial portions of this correspondence.[56] It is sufficient to state that Dr Weeks expressed a concern that Oil Basins’ right to an overriding royalty would continue in circumstances where a relevant exploration permit or other “title” expired and BHP subsequently acquired a new permit or title over the same area. BHP responded that if, for any reason, the existing permits or titles held by it expired and were re-issued to BHP under some other reference number, this would in no way alter BHP’s obligations to Oil Basins under the royalty agreement. BHP concluded, however, with the statement that

There is nothing, however, to prevent [BHP] deciding at any time to relinquish its title to any or all of the areas, and [BHP] is free to do this entirely of its own discretion.

[56]Ibid [53], [54], [55].

In 1964, Esso “farmed-in” to BHP’s interests in the Gippsland Basin area, including the area subject to PEP 38.[57] In an agreement entered into between BHP and Esso for this purpose, called the “Basic Agreement”, it was recited that BHP’s interests were subject to a two-and-a-half per cent overriding royalty in favour of Oil Basins.[58]
[57]Ibid [56].
[58]Ibid [57], [58], [59].

In 1965, Dr Weeks consulted with the Secretary for Mines in Victoria in order to clarify that the overriding royalty payable to Oil Basins was not an “interest” within the meaning of s. 39 of the 1958 Act, which applied to an exploration permit by virtue of s. 75 of that Act.

These consultations arose in response to a request from the Victorian Mines Department that Oil Basins be registered as a foreign company in Victoria. In response, BHP wrote to the Secretary for Mines to confirm its submission that the royalty agreement did not constitute a transfer or assignment of an “interest” within the meaning of s. 39 of the 1958 Act. In this letter, BHP stated that the status of the overriding royalty was as “purely a contractual” right.[59]
[59]Ibid [65], [66], [67].

Oil Basins did not become registered as a foreign company in Victoria. No action by way of forfeiture or otherwise was taken pursuant to s. 39 of the 1958 Act.

In correspondence with Dr Weeks in November 1969 concerning a contemplated new venture, BHP acknowledged “that had it not been for [Dr Weeks’] recommendation [BHP] would never have become involved in the areas concerned and in such circumstances as these it is only too happy that [he] should benefit, by way of [his] override royalty, from any success it may have”. Dr Weeks replied in writing in December 1969 stating “your letter quite clarifies your understanding of our agreement and relation to it, and it is [in] accord with my understanding.”[60]
[60]Ibid [70].

The first discovery of hydrocarbons within the area covered by PEP 38 occurred in 1965.[61]
[61]Ibid [69].

In 1967, because of rival claims from the State and Commonwealth governments to sovereignty in waters beyond the three nautical mile territorial limit, a co-operative statutory regime featuring “mirror” State and Commonwealth permits and licences was introduced.[62] The Commonwealth and the State of Victoria enacted substantially identical legislation called the Petroleum (Submerged Lands) Act1967 (“PSLA”). The PSLA introduced a new exploration permit scheme. Exploration permits were to be issued for a term of six years. Under s. 31 of the PSLA, an application could be made to renew an exploration permit for a term of five years from the date of expiry of the previous permit. However, the renewed permit would only be issued in respect of 50 per cent of the blocks covered by the previous permit. A permittee had a right to obtain a renewal if it had complied with the provisions of the previous permit and the provisions of the legislation.[63]
[62]Ibid [143].
[63]Ibid [145].

Under the PSLA regime, the position remained that no private person or company had any proprietary right in respect of petroleum in the ground. Section 127 of each PSLA provided that subject to that Act and any rights of other persons, “upon recovery of any petroleum by a permittee or licensee in the permit area of the licensed area, the petroleum becomes the property of the permittee or the licensee.”[64]
[64]Ibid [146].

Under this regime, on 8 July 1968, the Minister for Mines for the State of Victoria as the “Designated Authority”, granted BHP an exploration permit, VIC/P1, covering an area that was substantially, but not precisely, identical to the area covered by PEP 38.[65]
[65]Ibid [148].

The Blackback field is within the area covered by VIC/P1. The Blackback field comprises blocks 2143, 2215 and 2216 (the “Blackback blocks”). It is from these blocks that the hydrocarbons which are the subject of this dispute are produced and recovered. These blocks are within the area comprised in PEP 38 and are accordingly within “the area” referred to in cl. 1 of the royalty agreement.[66]
[66]Ibid [29].

In 1974, BHP renewed exploration permit VIC/P1. Exploration permit VIC/P1 authorised BHP to drill a well on block 2215, known as the Hapuka–1 Well. This well was drilled in 1975 and revealed the presence of hydrocarbons. This led to the discovery of the entire Blackback field. However, at the time of drilling, the oil column was deemed to be uneconomic due to water depth and the well was plugged and abandoned. It was at later times that BHP renewed its interest in the well.[67]
[67]Ibid [74], [75].

In 1979, following consultation with Esso, BHP relinquished or surrendered one half of the blocks then comprising exploration permit VIC/P1. The blocks which were relinquished included the Blackback blocks 2143, 2215 and 2216.[68]
[68]Ibid [79], [80].

In 1987, BHP applied for an exploration permit for the area including the Blackback blocks. This application was successful. On 30 July 1987, exploration permit VIC/P24 was issued to BHP for a period of six years in respect of 21 blocks including the Blackback blocks 2143, 2215 and 2216.[69] By obtaining exploration permit VIC/P24 in 1987, BHP re-acquired an interest in the Blackback blocks of the same kind as it had in 1979 when those blocks in VIC/P1 were relinquished or surrendered.
[69]Ibid [90], [91].

In 1989, Esso farmed-in to exploration permit VIC/P24 and became a 50 per cent joint venturer with BHP in that permit. Under these arrangements, Esso was to be responsible for the cost and drilling of “commitment wells”.[70] Between 1989 and 1994, Esso drilled a number of wells in the Blackback blocks.
[70]Ibid [96], [98], [99].

In 1993, exploration permit VIC/P24 was renewed.[71]
[71]Ibid [117].

In 1994 the parties entered into a settlement agreement in respect of a dispute which they had referred to arbitration (the “1994 settlement agreement”). By the 1994 settlement agreement, as amended by an amending deed in 1997, the parties agreed upon a manner of calculating the gross value of hydrocarbons produced and recovered in accordance with cl. 3 of the royalty agreement and the manner of calculation of overriding royalty. Although the factual findings of the arbitrators in this regard are expressed by reference to the royalty agreement, it is apparent that the 1994 settlement agreement concerned a number of royalty agreements including, at least, the other royalty agreements entered into on 28 December 1960 in respect of the areas covered by PEP 39, PEP 40 and EL/60.[72]
[72]Ibid [109]-[112].

In 1998, the Designated Authority granted production licence VIC/L20 to BHP in respect of the Blackback blocks for a period of 21 years. Thereafter, exploration permit VIC/P24 was surrendered.[73]
[73]Ibid [119].

The production of hydrocarbons from the Blackback field commenced during the quarter ending 30 June 1999.[74] The Blackback hydrocarbons are being produced and recovered by BHP within the area previously comprised in PEP 38 and, accordingly, within the area contemplated by cl. 1 of the royalty agreement. Notwithstanding this, BHP asserts that no royalty is payable to Oil Basins in respect of the Blackback hydrocarbons. In correspondence during 1999, BHP’s position was put succinctly:

BHP’s view, supported by legal advice, is that OBL is not entitled to royalty on production from Blackback. With respect to VIC/L20, OBL’s overriding royalty interest was extinguished when the relevant portions of VIC/P1 were relinquished as required by the Petroleum (Submerged Lands) Act.[75]

[74]Ibid [124].

[75]Ibid [131].

In 2002, Oil Basins gave notice of dispute to BHP. As a result, the parties entered into a deed of submission to arbitration in May 2004 whereby they agreed that the arbitration would be conducted under the Commercial Arbitration Act1984 (Vic).[76]
[76]Ibid [17].

Contract Interpretation under New York Law

The central issue in the arbitration was the meaning of the words “overriding royalty” in cl. 1 of the royalty agreement. As this meaning was to be ascertained in accordance with the law of New York, it was necessary for the arbitrators to make findings as to the content of relevant New York law. As I have said, it is well established that, in making such findings, the arbitrators were engaged upon a process of making findings of fact based upon evidence.[77]
[77]Commonwealth v Yarmirr (2001) 208 CLR 1, [203].

The arbitrators made a number of findings of fact as to the content of the relevant principles of contractual interpretation under New York law. These findings were based upon expert evidence, including from retired judges of the New York Court of Appeals. Judge Simons gave evidence on behalf of Oil Basins. Judge Levine gave evidence on behalf of BHP. In addition, Oil Basins relied upon expert evidence from professors of law and BHP relied upon expert evidence from practising American lawyers.

The principles of contract interpretation which were found by the arbitrators to exist under the law of New York were not challenged in any way in the hearing before the Court. As the arbitrators stated in their reasons for decision, the parties were in basic agreement about the relevant principles of contract interpretation under New York law. [78]
[78]Interim Award [154].

The arbitrators found that the following relevant principles of contract interpretation form part of the law of New York:

(1)The starting point is the law of the State of New York that a contract is to be interpreted so as to give effect to the intention of the parties as expressed in the unequivocal language employed. To ascertain this a New York court would apply a number of general principles, including the following.
(2)Where a written agreement is clear and unambiguous on its face, the contract will be interpreted according to the plain meaning of its terms. A contract is clear and unambiguous on its face if the words used have a definite and precise meaning, unattended by danger of misconception in the purport of the policy itself, and concerning which there is no reasonable basis for a difference of opinion.
(3)Parol evidence is inadmissible where the terms of a contract are complete, clear and unambiguous on their face.
(4)Where ambiguity exists in a contract, the Court may consider parol evidence to determine the intention of the parties, although such evidence cannot be used to add to or vary the terms of the agreement. Also, only communicated intent is relevant, namely, communication between the parties themselves.
(5)In order to ascertain the meaning of words used in a contract the Court reads the contract as a whole, and considers the meaning of particular words in the light of the contract as a whole and shall not isolate those words from their context.

(6)In determining the intention of the parties and the meaning of the language they employ, the Court will consider the basic purpose or object of the contract.
(7)In interpreting the contract, the Court will consider the law in effect when it was made.
(8)Agreements executed at or at substantially the same time and involving substantially the same subject matter will be interpreted together by the Courts. This does not involve the concept that the contracts are to be integrated.
(9)Courts will interpret business contracts in a commercially sensible or reasonable manner.
(10)Where the Court is faced with two reasonable interpretations of an agreement, one making the instrument legal and the other rendering it illegal, the Court will incline to adopt the former.
(11)Technical words are to be given their technical meaning unless the context indicates otherwise. Such words are to be interpreted as usually understood by persons in the relevant profession or business to which they relate, unless the context of the agreement or an applicable usage or the surrounding circumstances clearly indicates a different meaning.[79]
(12)In the case of oil and gas law, when New York did not in 1960 have an established or recognised body of oil and gas law, a contract will be interpreted according to general principles of interpretation of contracts under New York law. Definitions or terminology adopted in some oil and gas producing States of the USA may be looked at by the Court as a guide to the interpretation of the relevant language.
(13)When interpreting a contract that is unclear or ambiguous, Courts may consider the conduct and practice of the parties in carrying out the terms of the contract. Generally, the doctrine of practical construction is applied by Courts where the parties to the contract have performed it in a particular manner over time and where they express their interpretation of the contract through communications to one another.
(14)Parties to a contract may modify or amend its terms by entering into an agreement to do so, provided that agreement itself meets the requirements necessary for the formation of a contract, but an amendment or modification in writing to a contract need not be supported by consideration. Forbearance from exercising certain rights constitutes consideration to enforce a promise.[80]
[79]The arbitrators cited the decision of the Appellate Division of the Supreme Court of New York in Estate of Hatch v NYCO Minerals Inc 666 NYS 2^nd 296 at 297 (NW App. Div. 1997) as authority for this proposition. As will become apparent, the decision in Hatch was of central importance to the submissions made by BHP at the arbitration.
[80]Interim Award [158] (citations omitted).

Issues in the arbitration

In considering the issues in the arbitration, it is first necessary to state that it was common ground between the parties at the arbitration that, by producing and recovering hydrocarbons from the Blackback field, BHP has produced and recovered hydrocarbons within the area specified in cl. 1 of the royalty agreement.

As I have said, the central issue in the arbitration was the meaning of the expression “overriding royalty” in cl. 1 of the royalty agreement.

In summary, Oil Basins submitted to the arbitrators that it was both necessary and sufficient for it to establish that BHP had produced and recovered hydrocarbons from the Blackback field in order to establish an entitlement to be paid the overriding royalty. This is because cl. 1 of the royalty agreement gives rise to a purely contractual right to be paid the overriding royalty whenever there is production and recovery by BHP of hydrocarbons within the area previously covered by PEP 38. So understood, the overriding royalty is “area based” or “contract based”. Accordingly, the relinquishment or surrender by BHP in 1979 of that part of exploration permit VIC/P1 comprising the Blackback blocks did not extinguish its obligation to pay the overriding royalty.[81]
[81]Ibid [161].

In response, BHP submitted to the arbitrators that the term “overriding royalty” is usually understood by persons in the oil and gas industry as having a technical meaning. That meaning entails that an overriding royalty is “title based” and is constituted by rights in property. Accordingly, the right to be paid the overriding royalty provided for in cl. 1 of the royalty agreement was extinguished by the relinquishment or surrender by BHP in 1979 of that part of exploration permit VIC/P1 comprising the Blackback blocks.

These rival submissions were based upon a number of arguments.

The arbitrators summarised the submissions of Oil Basins which are relevant to the meaning of “overriding royalty” in cl. 1 of the royalty agreement, in the following way:

(1)“The obligation of BHP to pay royalties to [Oil Basins] is expressed in terms of 2½% of gross value, which bespeaks a monetary payment consideration.”
(2)“So understood, the royalty is ‘an area based “royalty”’ in the sense that it requires payment to be made to [Oil Basins] whenever hydrocarbons are produced and recovered by BHP its successors or assigns from within the geographical area that Dr Weeks recommended to BHP in 1960 and which was the subject of the royalty agreement identified by the plan forming part of PEP 38.”
(3)“The Blackback hydrocarbons are subject to [Oil Basins’] overriding royalty because:
(a)the Blackback field is within the geographic area which in 1960 was covered by PEP 38; and
(b)the Blackback hydrocarbons are being ‘produced and recovered within the area’ referred to in cl. 1 of the royalty agreement by successors and/or assigns of BHP.”

(4)“In the context of the royalty agreement, the adjective ‘overriding’ connotes that the royalty is additional to the State royalty. Clauses 2 and 3 confirm that the royalty is additional to any royalty accruing to the State or its relevant authority. This is consistent with the natural meaning of the word ‘overriding’ namely, prevailing over or overlapping. Reference to the consultancy agreement confirms that the obligation to pay royalty is ‘area based’. Clause 1(c) of the consultancy agreement does not affect the obligation to pay royalty imposed by cl. 1 of the royalty agreement. The two are harmonious. Reference to the consultancy agreement cannot oust or obscure the primary task, which is to construe the royalty agreement itself so as to give effect to its plain and natural meaning.”
(5)“Insofar as cl. 1(c) of the consultancy agreement sheds light on the meaning of the language in the royalty agreement, it simply confirms that royalty is payable whenever hydrocarbons are produced and recovered by BHP its successors and assigns from ‘within the area’ recommended by Dr Weeks, and that the obligation applies whether the hydrocarbons are produced directly by BHP its successors or assigns or indirectly by them under a joint venture or other joint interest arrangement. There is no limitation on the kind of joint interest arrangement referred to in cl. 1(c).”
(6)“The relevant clauses of the royalty agreement are clear and unambiguous. But even in the absence of ambiguity, under New York law, the relevant principles of interpretation permits regard is to be had to the context in which the royalty agreement was made and the surrounding circumstances that existed at the time, to assist in discerning the intention of the parties.”
(7)“Reference to the context in which the royalty agreement was made, confirms [Oil Basins’] construction and demonstrates the unsoundness of [BHP’s] argument for [reasons including]:
(a)In 1960 there were sound reasons for the parties to agree upon an ‘area based’ royalty. The legislative regime under the 1958 Act was relatively unsophisticated: the legislation did not expressly contemplate off-shore petroleum developments, nor did it expressly assert sovereignty in petroleum and minerals located in the seabed underlying the offshore areas. In these circumstances, the parties probably expected that the legislative regime governing Bass Strait would undergo changes in future years. In these circumstances, the proper construction of the royalty agreement is that royalty is payable in respect of any production within the area by BHP or its successors or assigns. It does not matter by what means production occurs. All that matters is that there is production and recovery within the ‘area’ by BHP its successors and assigns.”

(8)“The parties’ ‘practical construction’ of the payment obligation under the royalty agreement confirms that it was ‘area based’. If we were to conclude that the language of clause 1 of the royalty agreement is unclear or ambiguous about the conditions that will trigger a royalty payment, then as a matter of New York law, regard may be had to the 1963 and 1969 exchanges of correspondence between Dr Weeks and BHP and also to the 1964 Basic Agreement as a matter of ‘practical construction’.”
(9)“The royalty agreement concerns purely contractual rights, and not interests in property... [Oil Basins] contends that, if the royalty agreement and the consultancy agreement are read together, this confirms that an essential purpose of the royalty agreement was to compensate Dr Weeks or his nominee for Dr Weeks’ expert geological advice and recommendations in identifying prospective ‘areas’ and in continuing to provide advice and services with respect to such areas.”
(10)“Before any obligation to pay royalty could arise, cl. 1 of the royalty agreement required that there be actual production and recovery from ‘within the area’. Clause 1 implicitly assumes that any production and recovery of hydrocarbons will be undertaken lawfully, pursuant to a valid licence or other legal entitlement. The parties knew that PEP 38 did not provide any such entitlement.”
(11)“The parties’ ‘practical construction’ of the overriding royalty interest is that it is ‘purely a contractual “right”’, and thus its creation did not constitute a transfer or assignment of an ‘interest’ within the meaning of s. 39 of the 1958 Act. The 1994 settlement agreement confirms this ‘practical construction’ of the royalty agreement as being one that confers purely contractual rights, and not property rights.” [82]

[82]Ibid.

The arbitrators summarised BHP’s submissions which are relevant to the meaning of “overriding royalty” in cl. 1 of the royalty agreement, in the following way:

(1)“The central contention of [BHP] is that they have no obligation to pay an overriding royalty of 2½% of the gross value of all the hydrocarbons produced and recovered from the Blackback field pursuant to production licence VIC/L20 as the royalty agreement, by use of the expression ‘overriding royalty’ has an unambiguous meaning under New York law and its duration is limited to the duration of the ‘lease’ under which it was granted. It was contended that the overriding royalty provided by the royalty agreement was limited by and at all times dependent for its existence upon PEP 38 or VIC/P1, both of which had expired at a time when no production licence had been issued concerning the production and recovery of hydrocarbons from the Blackback field which is able to be done pursuant to VIC/L20, that is said to be separate and independent and in no way derived from PEP 38 or VIC/P1. This contention has been consistently maintained by [BHP] throughout this proceeding.”
(2)“The expression ‘overriding royalty’ has a plain meaning, namely, the technical meaning ascribed to it in the oil and gas industry. Reliance is placed upon Estate of Hatch. That meaning entails that the overriding royalty is title based and is constituted by rights in property. Accordingly, it does not survive relinquishment of the title and is not revived by a discrete later title.”
(3)“[Oil Basins’] interpretation of cl. 1 of the royalty agreement must be rejected. It contradicts the denotation of overriding royalty. It misconceives the reference to ‘the area’ in the royalty agreement.”
(4)“Whilst it is possible that a plain and unambiguous meaning can be displaced if the context clearly necessitates that outcome, there is no such context here. Indeed, the context strongly confirms and dictates adherence to or adoption of the title based meaning of an overriding royalty.“
(5)“The relevant context is afforded by the whole of the royalty agreement itself, and reliance is placed upon a number of specific features that include the:
(a)use of the expressions ‘royalty’ and ‘royalty holder’ throughout the royalty agreement;
(b)language of the royalty agreement which is in the classic language of conveyance;
(c)focus on titles within the royalty agreement;
(d)provision for in specie satisfaction of the yield from the royalty, necessarily reflecting a title basis of a grant;
(e)provision in cl. 3 of the royalty agreement for calculation of a value;
(f)recognition in cl. 8 of the royalty agreement that the overriding royalty runs with title; and
(g)last sentence of the definition of ‘hydrocarbon’ in cl. 8 which explains the essential notion of an interest in property.”

(6)“No contrary indication is provided, let alone one that would prevail over the foregoing, by the circumstance that ‘in kind’ satisfaction of the overriding royalty is elective.”
(7)“Further context is provided by the consultancy agreement, with which the royalty agreement is to be read. That context includes:
(a)the title and criteria employed throughout the consultancy agreement;
(b)the explicit provision in cl. 3 of the consultancy agreement that royalty agreements, after termination, continue until the end of the life of the relevant permits, licences or other titles;
(c)the circumstance that cl. 1(c) imposes a contractual obligation to enter into royalty agreements that grant overriding royalties upon acquisition of title; and
(d)the perversity and irrationality of any arrangement between the parties that required ‘the non-28 December 1960’ royalty agreements to determine upon expiry of title, yet required the 28 December 1960 royalty agreements to terminate upon termination of the consultancy agreement, or to continue indefinitely (irrespective of cessation of title).”

(8)“In the event that reference to extrinsic materials is permissible, as in the case of a true ambiguity, the pre-contract materials confirm the meaning of overriding royalty for which the respondents contend.”
(9)“To apply the principle of practical construction does not reverse the meaning ascertained by interpretation of the royalty agreement in its context. Also, the 1963 correspondence confirms the meaning ascertained upon interpretation of the royalty agreement.” [83]
[83]Ibid [162], [163].

Decision of the Arbitrators

The arbitrators decided that BHP had been and remained liable to pay Oil Basins the overriding royalties, which had accrued and remained unpaid since the production and recovery of hydrocarbons from the Blackback field commenced. The amount of such royalties was left for further determination failing agreement being reached between the parties.[84]
[84]Ibid [215].

As I have said, BHP contends that the arbitrators did not give adequate reasons for reaching their decision, and did not deal with serious and substantial submissions and evidence relied upon by BHP. The arbitrators’ reasons for decision on the central issue are contained in paragraphs 164–188 of the interim award. Those reasons may be summarised as follows:

(1)The words used in cl. 1 of the royalty agreement are plain and unambiguous.[85]
(2)Clause 1 of the royalty agreement unambiguously provides for an “area based” royalty, in that it requires BHP to pay royalties to Oil Basins whenever hydrocarbons are produced and recovered by BHP “within the area” previously covered by PEP 38. That area includes the Blackback field.[86]
(3)Although the unambiguous meaning of the expression “overriding royalty” is apparent from the face of the royalty agreement, reference to the terms of the consultancy agreement confirms that meaning.[87]
(4)Although the unambiguous meaning of the expression “overriding royalty” is apparent from the face of the royalty agreement, the “practical construction” of the intention of the parties confirms this unambiguous meaning.[88]
(5)BHP’s central argument that an “overriding royalty” is title based, with the effect that the duration of the entitlement to the royalty must be limited by the duration of the underlying proprietary interest from which it is carved, was based upon the decision in Hatch.[89]
(6)Insofar as the decision in Hatch contains a definition of the accepted technical meaning of the expression “overriding royalty”, that technical meaning should not be attributed to the parties to the royalty agreement as the meaning they intended, because “the facts of [this] case are entirely different”. As a result, “the definition of overriding royalty found in the Hatch case will not work here.”[90]
(7)“The expression [overriding royalty] is and has always been used in the general sense of a royalty that is payable over and above whatever royalty may be customarily due to the owner of the underlying mineral interest.”[91]
(8)“The term ‘overriding royalty’ was commonly used in the oil and gas industry in the United States with a range of meanings. We are satisfied that the expression ‘overriding royalty’ does not have the special limited meaning for which [BHP] contend[s].”[92]
[85]Ibid [166], [172], [176], [186].
[86]Ibid [166], [186].
[87]Ibid [173], [174], [175].
[88]Ibid [176].
[89]Ibid [178].
[90]Ibid [180].
[91]Ibid [182].
[92]Ibid [185].

Error of Law on the Face of the Interim Award

As appears above, the central issue in the arbitration was the conflict between the ordinary meaning of the expression “overriding royalty” advanced by Oil Basins, which the arbitrators conveniently characterised as providing for an “area based” royalty, and the technical meaning of the expression “overriding royalty” advanced by BHP, which was conveniently characterised as a “title based” royalty.

The arbitrators first considered the ordinary meaning, and made findings in that regard. These findings were made without any consideration of the technical meaning advanced by BHP. BHP’s counsel criticised this approach on a number of grounds, but it is not necessary to consider these arguments further. This is because the arbitrators clearly understood the essential nature of the “title based” meaning put forward by BHP and the consequence that, if this meaning was accepted, it would mean that Oil Basins’ right to be paid the overriding royalty was extinguished when BHP relinquished or surrendered any rights which it had in respect of the Blackback blocks in 1979.[93] Accordingly, it cannot be said that this argument was ignored or was not understood by the arbitrators. However, the question remains as to whether they gave adequate reasons for rejecting it.
[93]Ibid [162], [177].

In order to reject the “title based” meaning of “overriding royalty” which was essential to BHP’s case, it was necessary for the arbitrators to decide, and give reasons for deciding, the following questions:

(1)Is the expression “overriding royalty” a technical term with a meaning which is usually understood by persons in the relevant business to which it relates; in this case the oil and gas industry?
(2)If the answer to question (1) is yes, does the context of the royalty agreement or any applicable usage of the term “overriding royalty”, or do the surrounding circumstances of the agreement, clearly indicate that the parties intended a different meaning from the technical meaning?

The arbitrators’ reasons on these two questions are contained in paragraphs 179 to 185 of the majority interim award. It is necessary to set out these paragraphs in full:

179.It is to be noted that Hatch was concerned with a “lease” from which the royalty right was said to be carved.
180.In our view, Hatch is not authority for the proposition that the expression “overriding royalty” has a single fixed meaning in oil and gas custom and usage. Nor did the Supreme Court of New York decide that an overriding royalty must be “carved out” of a property interest in hydrocarbons which existed at the time of the making of the agreement that created that interest (“the Royalty Agreement”), or that the duration of the royalty was limited to the duration of the grantor’s real property interest. What was said by the Supreme Court in Hatch was that an overriding royalty must relate to minerals located on specific property that the royalty holder does not own. Under cross-examination, Judge Simons said that “there isn’t any law in New York State that addresses the question of overriding royalty. There wasn’t any such law before Hatch’. He said also that ‘Hatch is not a decision that the Court of Appeals would look at and say, they have defined overriding royalty and that’s the only law in New York State on overriding royalty, we would give it very serious consideration, because they wouldn’t. They would look at it and say, the facts of the BHP case are entirely different and the definition of overriding royalty found in the Hatch case will not work here. It is a recognised canon of construction that, if the technical definitions or words do not fit the facts and circumstances before you, then they need not be interpreted in that way”. We accept that evidence as an accurate statement of the relevant law of New York. The Supreme Court in Hatch clearly acknowledged that the term “overriding royalty” does not have a single invariable meaning under New York law. The Court said that the technical meaning of a word is not followed when “the context of the instrument or an applicable usage or the surrounding circumstances clearly indicate a different meaning”. (See 666 NYS 2^nd at 298).
181.We also accept the evidence of Judge Simons to similar effect with respect to other decisions of courts of the USA, including the decision of the Supreme Court of Montana in Aronow v Bishop (86 P. 2d 644).
182.In our view the submission made on behalf of [Oil Basins], is correct that the term “overriding royalty” never has had and does not now have, a single definite meaning in the United States oil and gas and usage. The expression is and has always been used in the general sense of a royalty that is payable over and above whatever royalty may be customarily due to the owner of the underlying mineral interest. We reject [BHP’s] contention that the term overriding royalty necessarily means in all contexts an interest “carved out” of an underlying leasehold or other working interest and limited in duration to the duration of that interest. The evidence before us demonstrates that the term does not and never has had one fixed meaning even in the context of private mineral holdings in the United States, and, a fortiori, in the context of the Royalty Agreement with which this case is concerned.
183.We agree with the following statement of Professor Kuntz in his work, Law of Oil and Gas (2003 ed.) Chapter 16.1 in these terms: “Under the ‘four corners’ rule, the court makes every effort to reconcile all provisions of the entire instrument. Stated another way, arbitrary and technical rules of construction are not invoked if the intention of the parties can be determined from the four corners of the instrument without aid. Technical word(s) may not be construed in their technical sense, and strict or literal meaning of the language used will not be applied if it would frustrate the apparent intention of the parties as deducted from the entire instrument”.
184.We note also that this analysis is consistent with the approach taken by the arbitrators in Asamera (South Sumatra) Limited v Tesoro Petroleum Corporation (supra).
185.The term “overriding royalty” was commonly used in the oil and gas industry in the United States with a range of meanings. We are satisfied that the expression “overriding royalty” does not have the special limited meaning for which [BHP] contend[s].

(1) Question 1: Is there a technical meaning?

The reasons of the arbitrators on the first question are inadequate. The reader is left to wonder whether the arbitrators decided that the expression “overriding royalty” is a technical term with a meaning which is usually understood in the oil and gas industry, which meaning was displaced by context, usage or surrounding circumstances; or whether they decided that the expression “overriding royalty” was not a technical term with a meaning which is usually understood by persons in the oil and gas industry. This is because the arbitrators’ reasons in this regard are inconsistent, ambiguous and do not contain an intelligible process of reasoning.

First, paragraph 180 of the reasons implies that the decision in Hatch contains a technical definition of “overriding royalty” under New York law, and that this definition has been displaced by context, usage or surrounding circumstances. This is evident from:

(1) The third sentence of paragraph 180, which states:
What was said by the Supreme Court in Hatch was that an overriding royalty must relate to minerals located on specific property that the royalty holder does not own.

(2)The evidence of Judge Simons, which was accepted by the arbitrators as an accurate statement of New York law, that the Court of Appeals of New York:
would look at [Hatch] and say, the facts of the BHP case are entirely different and the definition of overriding royalty found in the Hatch case will not work here. It is a recognised canon of construction that, if the technical definitions or words do not fit the facts and circumstances before you, then they need not be interpreted in that way.[94]

(3)The last two sentences of paragraph 180, which indicate that the arbitrators were considering whether the facts of the case clearly indicated a different meaning to the defined technical meaning of “overriding royalty” stated in the Hatch decision.

[94]Ibid [180].

Second, in contrast to paragraph 180, the arbitrators conclude in paragraph 182 that there is no accepted technical meaning of the expression “overriding royalty” in the oil and gas industry. This conclusion is expressed in the following terms:

The expression is and has always been used in the general sense of a royalty that is payable over and above whatever royalty may be customarily due to the owner of the underlying mineral interest.

No reasons are given for reaching this conclusion, other than a reference to “[t]he evidence before us”. That evidence is not identified in any way.

Third, in paragraph 185 of the reasons, the arbitrators conclude that “[t]he term ‘overriding royalty’ was commonly used in the oil and gas industry in the United States with a range of meanings.” However, no reasons are given for this conclusion and the range of meanings is not identified in any way. This paragraph is also inconsistent with the apparent finding in paragraph 180 that Hatch contains a definition of “overriding royalty”.

Further uncertainty as to what conclusion was reached by the arbitrators on the first question arises from their repeated statement of the negative proposition that the expression “overriding royalty” does not have “a single fixed meaning in oil and gas custom and usage”.[95] This negative proposition was variously stated as “no single fixed”[96], “no single invariable”[97], “no single definite”[98], “no one fixed”[99] and, perhaps, “no special limited”[100] meaning.
[95]Ibid.
[96]Ibid.
[97]Ibid.
[98]Ibid [182].
[99]Ibid.
[100]Ibid [185].

The sense in which these various statements of the negative proposition has been used is not clear from the reasons. On one hand it appears that the arbitrators had in mind the proviso in Hatch: that an accepted meaning of a technical term will not be attributed to the parties where context, usage or surrounding circumstances clearly indicate a different meaning. This is evident from paragraph 180 of the reasons. On the other hand, the use of the negative proposition in paragraphs 182 and 185 of the reasons appears to be in a different sense. Those paragraphs conclude that the expression “overriding royalty” does not have an accepted technical meaning in the oil and gas industry in the United States.

It was submitted on behalf of Oil Basins that the arbitrators at no stage concluded that the expression “overriding royalty” had a technical meaning which was usually understood in the oil and gas industry. This submission was based on paragraphs 182 and 185 of the reasons, where the arbitrators rejected the technical meaning contended for by BHP. For the reasons given above, I do not accept this submission. However, even if this submission is correct, the arbitrators did not give adequate reasons for the conclusions stated in paragraphs 182 and 185 of the interim award.

(2) Question 2: Is a different meaning indicated?

Although it is not clear what, if any, technical meaning of the term “overriding royalty” was accepted by the arbitrators, they nevertheless considered whether the context, usage or surrounding circumstances clearly indicated a different meaning to any technical meaning which they had in mind. This consideration was extremely brief, and was limited to a statement of the following conclusions, without any supporting reasons:

(1)In paragraph 180 of the reasons, the arbitrators accepted the evidence of Judge Simons that the Court of Appeals of New York
would look at [Hatch] and say, the facts of the BHP case are entirely different and the definition of overriding royalty found in the Hatch case will not work here. It is a recognised canon of construction that, if the technical definitions or words to not fit the facts and circumstances before you, then they need not be interpreted in that way.

(2)In paragraph 181 of the reasons, the arbitrators said:
We also accept the evidence of Judge Simons to similar effect with respect to other decisions of courts of the USA, including the decision of the Supreme Court of Montana in Aronow v Bishop (86 P. 2d 644).

Nowhere in these conclusions is any reference made to the submissions made on behalf of BHP in support of its contention that usage, context and surrounding circumstances did not indicate a different meaning to the technical meaning of “overriding royalty” but, rather, strongly confirmed the “title based” technical meaning for which BHP contended. These submissions were summarised by the arbitrators in the interim award, as set out in sub-paragraphs 98(4) to 98(7) above.

These submissions made on behalf of BHP were not at the periphery of its case; nor were they so obviously untenable that they could safely be ignored by the arbitrators. The submissions were at the heart of the matter, as demonstrated by the fact that the arbitrators had set them out in some detail in the reasons. This is also demonstrated by the content of paragraph 180 of the reasons, in which the arbitrators express a conclusion on the very issue to which these submissions were directed. The arbitrators were required to do more than merely refer to these submissions. They were required to give intelligible reasons for their rejection. They did not do so; and their reasons on this issue are manifestly inadequate as a result.

It was submitted on behalf of Oil Basins that “the facts of the BHP case” referred to by Judge Simons, in the passage of his evidence which is quoted in paragraph 180 of the reasons, must be understood as a reference to the facts recited in the reasons. Reliance was placed upon the findings of the arbitrators concerning the statutory regime in Victoria which, amongst other things, did not confer on BHP any proprietary rights of the kind which the definition of “overriding royalty” in Hatch contemplated.

In this regard, Oil Basins relied upon the factual findings by the arbitrators that, at the time of entry into the royalty agreement, PEP 38 was an exploration permit only; that under the applicable statutory regimes BHP could not have produced and recovered hydrocarbons in commercial quantities without first obtaining a petroleum mineral lease for that purpose; and that neither PEP 38 nor its successor exploration permit VIC/P1 conferred on BHP a right to obtain a petroleum mineral lease. It was submitted that these facts were to be contrasted with the facts in Hatch, where the royalty was “carved out” of a mineral lease held by the royalty holder. Accordingly, it was submitted on behalf of Oil Basins that “the facts” referred to by Judge Simons, and accepted by the arbitrators, must necessarily be a reference to these facts.

Although I accept that, by accepting the evidence of Judge Simons, the arbitrators probably intended to refer to the factual findings made by them which are set out in the reasons, I reject the submission that the factual findings referred to by counsel for Oil Basins are necessarily those which the arbitrators had in mind. I am of this view for the following reasons.

First, the arbitrators did not say so. They did no more than accept the otherwise unexplained reference by Judge Simons to “the facts of the BHP case”.

Second, this is not a case where it can be said that the facts clearly indicate, by simply stating them and without any consideration of BHP’s submissions as summarised by the arbitrators,[101] why the parties did not intend to adopt the technical meaning of “overriding royalty” accepted in Hatch. The reader is left to wonder what path of reasoning has caused the arbitrators to arrive at this result. Was it only because exploration permit PEP 38 did not constitute a proprietary interest, like the lease in the Hatch case? Or was it because an assignment of any interest in the exploration permit was prohibited by s. 39 of the 1958 Act, thus calling into play the principle of contract interpretation under New York law that, where the Court is faced with two reasonable interpretations of an agreement, one making the instrument legal and the other rendering it illegal, the Court will incline to adopt the former?[102] This is not known, because the arbitrators have not exposed their path of reasoning by identifying the facts upon which they reached their conclusion on this issue, except to note that Hatch was concerned with a “lease”.[103]
[101]As quoted at sub-paras. 98(4) to (7) above.
[102]See para (10) of the principles of contract interpretation under New York law found by the arbitrators, quoted at [92] above.
[103]Interim Award [179].

It was submitted on behalf of Oil Basins that the express reference by the arbitrators to the fact that Hatch was concerned with a lease[104] demonstrates that the arbitrators had in mind the fact that exploration permit PEP 38 was not a proprietary interest like the lease in Hatch. However, if this is the case, it would have been simple for the arbitrators to say so. Further, if this is the case, the findings of the arbitrators concerning s. 39 of the 1958 Act and the principle of contract interpretation referred to above would appear to have no relevance to the arbitrators’ reasons.
[104]Ibid.

The conclusion reached in paragraph 180 of the reasons may be open to criticism on another ground. The acceptance by the arbitrators of the evidence of Judge Simons, that the Court of Appeals of the State of New York would conclude that “the facts of the BHP case are entirely different and the definition of overriding royalty found in the Hatch case will not work here”, involves the arbitrators deciding the case before them on the basis of inadmissible evidence. In the field of interpretation of a contract governed by foreign law, expert evidence as to the meaning of the contract is not admissible. That is a question of law for the tribunal to decide on the basis of expert evidence as to the foreign principles of contract interpretation.[105] However, BHP did not seek to criticise the interim award on this basis. Indeed, as noted above, BHP submitted that evidence was admissible before the arbitrators as to the way in which the Court of Appeals of the State of New York would construe the royalty agreement.
[105]Rouyer Guillet & Cie v Rouyer Guillet & Co Ltd [1944] 1 All ER 244.

Finally, on the issue of the arbitrators’ acceptance of this aspect of Judge Simons’ evidence, it is my view that this was a most unsatisfactory way for the arbitrators to decide a principal issue in the arbitration. Reasons of such extreme brevity are insufficiently transparent to give the losing party, in this case BHP, confidence that all of its important submissions have been considered. The reasons lack the degree of comprehensiveness which BHP, as the losing party, was entitled to expect from the arbitrators in all the circumstances of the case.

In paragraph 182 of the reasons, the arbitrators state another reason for concluding that a different meaning from the technical meaning of “overriding royalty” was clearly indicated. The reason involves the acceptance by the arbitrators of unspecified evidence of Judge Simons, which was said to be “to similar effect with respect to other decisions of courts of the USA, including the decision of the Supreme Court of Montana in Aronow.”[106] This reason is plainly inadequate. Apart from the brief reference in paragraph 180 to the evidence of Judge Simons concerning the decision in Hatch, the reasons contain no description of any evidence of Judge Simons relevant to the essential questions for determination; whether with respect to Aronow, concerning any other decision of a United States court, or at all.
[106]Interim Award [181].

It is possible that the arbitrators intended paragraph 184 of the reasons to form part of their reasons for concluding that a different meaning from the technical meaning of “overriding royalty” was clearly indicated. If that is so, this paragraph is also inadequate. The arbitrators have not said why the approach taken by the arbitrators in the arbitration to which they refer has assisted them to reach a conclusion on this issue.

It was submitted on behalf of Oil Basins that the arbitrators clearly decided that the Court of Appeals of the State of New York would not adopt the technical meaning of the expression “overriding royalty” put forward by BHP. Accordingly, the arbitrators were entitled to construe cl. 1 of the royalty agreement in accordance with its unambiguous ordinary meaning. I accept that the arbitrators were entitled to proceed in this way. However, this approach required the arbitrators to give adequate reasons for rejecting the technical meaning put forward by BHP. For the reasons I have stated, they did not do so.

For the reasons which I have stated, I conclude that there is an evident and obvious error of law on the face of the interim award, constituted by a failure to give adequate reasons. Further, in all the circumstances of the case, including the amount of money in issue, I am satisfied that the failure to give adequate reasons could substantially affect BHP’s rights.[107] Accordingly, leave to appeal should be given and the appeal allowed. Although this would normally result in the interim award being set aside, and the matter being remitted to the arbitrators to provide adequate reasons[108], the death of one of the arbitrators makes this course inappropriate. As a result, the appropriate order is to set aside the interim award and to remit the arbitration for reconsideration afresh before a differently constituted arbitral panel.
[107]Commercial Arbitration Act 1984 (Vic) s. 38(5)(a).
[108]Cf. Peter Schwarz (Overseas) Pty Ltd v Morton [2003] VSC 144, [23].

Technical Misconduct

As stated above, in considering whether there has been technical misconduct by the arbitrators, the Court is entitled to look beyond the face of the interim award. This was not in dispute. In support of its misconduct case, BHP placed in evidence all of the pleadings and submissions, and much of the evidence, which was before the arbitrators. However, although there was substantial reference to this material in BHP’s written submissions, the oral submissions proceeded on the basis that it was only necessary to look at a small amount of this material in order to demonstrate technical misconduct by the arbitrators.

In my view, reference to this material demonstrates that the arbitrators failed to deal with substantial and serious submissions and evidence relied upon by BHP on the essential questions for decision in the arbitration.

Before turning to these essential questions, it is appropriate to refer to the extent of the expert evidence which was placed before the arbitrators concerning those questions. In this regard, BHP relied upon substantial expert evidence given by Judge Levine and two practising American lawyers – Professor Patrick Martin, a Louisiana attorney and a Professor of Mineral Law, and John McCollam. Their witness statements were lengthy and expressed opinions based upon American decisions, treatises and other legal writings to which they referred. In response, Oil Basins relied upon substantial expert evidence to contrary effect, given by Judge Simons and a number of professors of law.

There were substantial differences of opinion between the rival experts. However, the arbitrators did not enter into the issues between the experts and explain why they preferred the opinions of those experts who gave evidence on behalf of Oil Basins over the opinions expressed by BHP’s experts. Indeed, on the essential questions for determination, the only reference to the expert evidence is contained in paragraphs 180 and 181 of the reasons. In paragraph 180, the arbitrators accepted some evidence given by Judge Simons under cross-examination. They did not say why this evidence was accepted in preference to contrary evidence given by BHP’s experts. In paragraph 181, the arbitrators accepted unspecified evidence of Judge Simons. The reasons do not contain any analysis of the contrary expert evidence relied upon by BHP or reasons for rejecting that evidence.[109]

(1) Question 1: Is there a technical meaning?

[109]There is a reference in paragraph 175 of the reasons to evidence of Judge Levine concerning the relationship between cl. 1 of the royalty agreement and cl. 3 of the consultancy agreement. However, the only reason given for rejecting Judge Levine’s evidence is that it “is based on a misconception”. It was submitted on behalf of BHP that the arbitrators misunderstood the evidence given by Judge Levine on this issue. It is unnecessary for me to determine this issue.

BHP’s submissions to the arbitrator on the first question were based upon substantial expert evidence given by Judge Levine, Professor Martin and Mr McCollam. In BHP’s submissions to the arbitrators, there was substantial reference to this expert evidence and to the American decisions, treatises and other legal writings referred to in that evidence.[110]
[110]For example, see transcript of oral submissions to the arbitrators, 883-90; written submissions of BHP to the arbitrators, [1]-[18].

This evidence supported BHP’s submissions on the first question. However, the arbitrators made no reference to it in their reasons rejecting BHP’s submissions. The arbitrators ought not to have rejected BHP’s submissions without referring to that evidence, and giving intelligible reasons for rejecting it. Their failure to do so constituted technical misconduct.

(2) Question 2: Is a different meaning indicated?

As stated above, I am of the view that the reasons are inadequate on their face because, amongst other things, they do not set out why the arbitrators rejected BHP’s submissions concerning the second question. I have quoted the arbitrators’ summary of these submissions in sub-paragraphs 98(4) to 98(7)above. In my view, the failure by the arbitrators to deal with these submissions in their reasons also constitutes technical misconduct.

BHP’s submissions on the second question were also based upon substantial expert evidence given by Judge Levine, Professor Martin and Mr McCollam, and upon the American decisions, treatises and other legal writings referred to in that evidence.[111] This evidence supported BHP’s submissions on the second question. However, the arbitrators made no reference to it in their reasons for concluding that the second question should be answered adversely to BHP. Their failure to deal with that evidence, and give reasons for its rejection, also constitutes technical misconduct.
[111]See, eg, BHP’s written submissions to the arbitrators, [19]-[41].

I have referred to the submission made on behalf of Oil Basins that the arbitrators’ reasons on this question were adequate because the reference in paragraph 180 of the reasons to “the facts of the BHP case” was an unambiguous reference to the facts that BHP’s exploration permits did not give it any proprietary interest or a right to obtain a petroleum mineral lease. For the reasons already stated, I reject this submission. However, even if it is assumed that the majority reasons are, on their face, adequate for this reason, BHP placed evidence and submissions before the arbitrators to meet an argument that these facts displaced the technical meaning of the expression “overriding royalty”. The arbitrators did not refer to this evidence or submissions in their reasons.

In BHP’s written submissions to the arbitrators, BHP submitted:

It is readily discernable, therefore, that [Oil Basins] and BHP in entering into the [royalty agreement] contemplated that the overriding royalty would be attracted by whatever title (permit, licence or lease) that first existed and therefore captured whatever derived title would permit that production. The US Mineral Leasing Act similarly allowed permit holders to move to another stage. That is precisely why the cases dealing with the Act involving overriding royalty hold that the royalty persists through the change in title. Those US cases are also relevant because they too are grounded on the availability of being able to move from permit to lease and the commercial imperatives that cause, in appropriate circumstances, an explorer to become a commercial producer, rather than upon the existence of a legal right.[112]

[112]Written submission of BHP to the arbitrators, [68] (citations omitted).

BHP cited the decision in Aronow v Bishop[113] as authority for this submission. That case concerned a royalty granted by the holder of a government-issued prospecting permit. The grantor of the royalty assigned the prospecting permit to a third party, who took the permit with notice of the royalty. The permit ceased to exist when the assignee successfully applied for a lease. The assignee argued that, as a result, any right to obtain a royalty was extinguished. The assignee was unsuccessful. The court held that the lease “sprang from the permit and the discovery thereunder”[114] and that, under the applicable statutory regime, the permit was “the foundation for the leases and when granted to the permittee or his assignee, they merely constitute, in substance and effect, a continuation of the rights granted by the permit”.[115] It was for this reason that the cessation of the permit, based upon the issuance of the lease, was not an extinguishment of the royalty right granted by the assignor of the permit.
[113]86 P 2d 644 (Mont, 1938).
[114]Ibid 647.
[115]Ibid 646-7.

Mr McCollam, on behalf of BHP, gave evidence concerning Aronow which supported BHP’s submissions on this issue. He also referred to other cases to like effect.[116]
[116]Witness statement of John McCollam [31]-[2].

Judge Levine also gave evidence on this issue.[117] Judge Levine referred to American decisions concerning the duration of royalties which were “carved out” of a government-issued prospecting permit similar to PEP 38 and VIC/P1. Judge Levine referred, in particular, to the decision in Crothers v General Petroleum Corp[118] which he described as “strikingly similar to the instant case”. Crothers concerned the grant of a royalty on the oil and gas produced on a property over which the grantor had a government prospecting permit. After the royalty was granted, the grantor concluded that the property would not yield commercial quantities of oil and relinquished the permit. It was held that the right to the royalty ceased with the relinquishment of the permit. Accordingly, the royalty was not payable in circumstances where a third party obtained a permit over the land and struck oil.
[117]Witness statement of Judge Levine, [42]-[45].
[118]280 P 2d 182 (Cal CA, 1955).

The issue before me is not whether the arbitrators ought to have accepted BHP’s submission, or the evidence of Mr McCollam and Judge Levine, in this regard. It is enough if I conclude that the submission and evidence was an important part of BHP’s case which the arbitrators were required to deal with in rejecting BHP’s arguments. In my view, the arbitrators were required to deal with this submission and evidence. Their failure to do so constitutes technical misconduct.

Furthermore, as I have said above, it is possible that the shorthand reference by Judge Simons to “the facts of the BHP case” was or included a reference to the fact that an assignment of any interest in exploration permit PEP 38 was prohibited by s. 39 of the 1958 Act, thus calling into play the principle of contract interpretation under New York law that an interpretation of a contract which leads to an illegal result will be rejected in favour of an interpretation which does not lead to such a result.[119] BHP made submissions to the arbitrators on this issue also.[120] These were serious and substantial submissions. If the arbitrators had this issue in mind when accepting the evidence of Judge Simons, then they ought to have dealt with BHP’s submissions on this issue. In the circumstances postulated, their failure to do so would constitute technical misconduct.
[119]See interpretation principle (10) found by the arbitrators, above at [92].
[120]BHP’s written submissions to the arbitrators, [67].

Conclusion

I conclude that there is an error of law on the face of the interim award, constituted by the failure of the majority arbitrators to give adequate reasons. For this reason, leave to appeal is granted and the appeal allowed. The interim award will be set aside and the arbitration remitted for determination by a differently constituted arbitral panel. I am also of the opinion that this result should follow because of technical misconduct on the part of the arbitrators, constituted by their failure to deal with substantial and serious submissions and evidence relied upon by BHP in the arbitration.

I will hear the parties as to the precise form of orders and as to costs.

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CERTIFICATE

I certify that this and the 49 preceding pages are a true copy of the reasons for Judgment of Hargrave J of the Supreme Court of Victoria delivered on 1 November 2006.
DATED this 1st day of November 2006.
Associate to Justice Hargrave