Delhi Petroleum Pty Ltd v Santos Limited & Ors No. Scciv-98-1315

[2001] SASC 255

DELHI PETROLEUM PTY LTD v SANTOS LIMITED

[2001] SASC 255

1. PRIOR J:         In December 1976 the parties to these proceedings entered into a joint venture agreement known as the “Unit Agreement” with respect to the cooperative pursuit of exploration and exploitation of natural gas and associated allied liquids in the Cooper Basin.  The Agreement was expressed to take effect from January 1975.

2. Since 1979 the defendant Santos has been the sole Unit Operator, managing all the day-to-day operations of the Unit.  Its responsibilities include the collection of all the Unit’s receipts and the payment of all capital and operating expenses of the Unit, together with their allocation amongst the various participants.  The receipts and outgoings are determined by a complicated formula within the Unit Agreement by reference to “Block Participations” and “Unit Participations”.  “Block Participations” relate to the interests held by the Unit parties in four particular geographic areas or “Blocks” within the Cooper Basin. (A fifth Block was incorporated in 1981.)   “Unit Participations” reflect the percentage interests of the Unit parties in the commercial activities carried on under the Unit Agreement and the products of that activity.  Within the Unit Agreement, cl 4.02 provides a mechanism for review and adjustment of the Block Participations and Unit Participations.

3. The parties to the Unit Agreement subsequently agreed to join in a project known as the Liquids Project.  This related to the production of petroleum products, other than natural gas and involved the construction of facilities at Moomba in the Cooper Basin and Stony Point, as well as a pipeline from Moomba to Stony Point. 

4. A further joint venture Agreement, dated 31 December 1981 and known as the “Downstream Agreement”, dealt with these arrangements. As with the Unit Agreement, Santos assumed the role of administering receipts and outgoings.  The Stony Point (Liquids Project) Ratification Act 1981 ratified an indenture entered into by the Government and the participants for the construction and operation of marine facilities at Port Bonython. Within the Indenture, provision was also made for the construction of roads and water facilities.

5. The Producers built the marine facilities, at their cost.  When the facilities were completed, the State reimbursed that cost.   Certain facilities, essentially those relating to the loading jetty, the “Jetty Facilities”, were then transferred to the State[1].  The monies paid by the State to the Producers were immediately repaid to the State as a security deposit, “the Jetty Security Deposit”, the Producers contributing to the cost of the Jetty Facilities and sharing in the repayments in accordance with their respective Jetty Participation Factors[2].  The State agreed to repay to the Producers the Jetty Security Deposit together with interest at 20 per cent per annum over a period of 20 years, the Producers agreeing that for the 20 years from the transfer of the facilities to the State, the Producers would pay wharfage dues, “the State Wharfage Dues”, to the State[3]. 

   [1]        Stony Point Indenture cl 63

   [2]        Downstream Agreement cl 8.02(a)(x)

   [3]        Stony Point Indenture cl 72

6. As for the provision of roads and water, by the Indenture, the Producers agreed to deposit the “Roads and Water Security Deposit” with the State.  This was a sum equal to the capital costs and interest incurred by the State in providing roads and water to the jetty site.  The State agreed to repay the Roads and Water Security Deposit together with 18 per cent interest per annum over a period of 10 years.  The Producers also agreed to pay rates for water supplied by the State and a tariff for the use of the roads constructed[4].

   [4]        Stony Point Indenture Part XI cl 46, cl 49, cl 51; Part X cl 37, cl 39, cl 43; Schedule 4

7. When the Operations began at Stony Point, Santos, as Operator of the Downstream joint venture operated the Jetty Facilities for the Government.  It also proceeded to allocate costs, expenses and receipts relating to the State’s repayment of the Jetty Security Deposit and interest, the parties’ contribution to the capital component of the State Wharfage Dues, the parties’ share of the State’s repayment of the Roads and Water Security Deposit and interest and the parties’ contribution to the capital component of the roads, tariffs and water rates, according to what it then believed were the appropriate Participations under the Downstream Agreement and in accordance with the Accounting Procedure.

8. The parties to the Downstream Agreement shared the revenues of Downstream Operations and also expenditure on capital account and operating account according to proportions known as “Downstream Participations”.  These Participations were in the nature of percentages and bore some similarity to the Unit Participations under the Unit Agreement.  The Downstream Agreement set up an account, “the Downstream Account”, on behalf of the parties for costs, expenses and liabilities incurred and monies received relating to the operation of that Agreement. 

9. The parties agreed that Santos would pay all costs and expenses incurred in Downstream Facilities and Downstream Operations when due and payable and that each of the parties would reimburse Santos for its respective share and receive credit for monies received in accordance with the appropriate Participations or procedure stated in cl 8.02 of the Downstream Agreement.  Under that clause, all charges and credits in respect of the Downstream Account were subject to a particular procedure.  Clause 1.5 of that procedure stated that all statements of charges and all separate bills rendered to the parties by Santos would be presumed to be true and correct after 24 months.  That clause was similar to a corresponding clause in the Accounting Procedure attached to the Unit Agreement.

10. The review and adjustment of Downstream Facilities was to be at the same time as each review and adjustment of the Unit Participations and the Block Participations under the Unit Agreement[5].  However, the Downstream Operations were to be reviewed and adjusted annually according to a formula set out in the Third Schedule to the Indenture.

    [5]        cl 4.02

11. A number of disputes arose between the parties.  The review and adjustment process particularised in both the Unit Agreement and the Downstream Agreement fell behind.  That of 1 January 1985 was incomplete.  The review and adjustment of 1 January 1987 was not done.  In the years that followed, the Block Participations, the Unit Participations and the Downstream Participations in force as of 1 January 1983 were applied in relation to allocations to the Unit Account and Downstream Account pending some later review and adjustment.

12. In late 1996, the Producers reached an agreement with respect to the outstanding dispute over Participations.  This meant that no review or adjustment, under either the Unit Agreement or the Downstream Agreement was required.  Participations in respect of the period to 31 December 1986 remained as they had been.  However, different Participations were agreed for the period from 1 January 1987 to 1 January 1991.  As for the periods after 1 January 1991, individual Participations were abandoned and replaced by “Fixed Factors”.  Delhi’s Fixed Factor was 20.21 per cent.  The Settlement Agreement provided that these Fixed Factors remained fixed unless varied by unanimous agreement between the parties.  Thus the need for parties to pursue the review and adjustment process set out in the two preceding agreements was avoided.

13. Given that gross revenue and expenditure on capital account and operating account continued to be apportioned among the participants to the two Agreements according to the Participations in force as of 1 January 1983, the 1996 Fixed Factor Settlement Agreement had to provide for an adjustment process given the change in Participations and the introduction of Fixed Factors on and after 1 January 1991.  Santos, as the Unit Operator had to adjust the accounts it maintained, with participants being required either to contribute additional monies to the two accounts or receive payment by way of adjustment from them[6].

    [6]        See Fixed Factor Settlement Agreement recital D and cl 5

14. Clause 5 of the Settlement Agreement required the Unit Operator to calculate two Accounting Adjustments.  The first was for the period from 1 January 1987 to 1 January 1996, the second for the period subsequent thereto.  These adjustments were required to determine the amount necessary to be paid by or received by each party to ensure that gross revenue, costs and expenses in respect of various agreements, including the Unit Agreement and the Downstream Agreement, would be allocated between the parties on the basis of the applicable Participations and Fixed Factors.

15. The first Accounting Adjustment for the nine year period from 1 January 1987 to 1 January 1996 was first prepared by Santos on a similar basis to that previously applied by the parties.  So too was an estimated second Accounting Adjustment, forwarded to Delhi on the same day as the first[7].  Santos calculated Delhi’s share of the State’s repayment of Jetty Security Deposit and Delhi’s contribution to the component of the State Wharfage Dues by applying the same percentage as the Jetty Participation Factor, 15.8743 per cent.  It also calculated Delhi’s share of the State’s repayment of the roads and water security deposit and Delhi’s contribution to the capital component of the water and roads tariffs by applying the initial Common Facilities Investment Participation Factor of 16.8863 per cent. 

    [7]        Fixed Factor Settlement Agreement cl 5(f)

16. In January 1997, Santos completed the second Accounting Adjustment aware of what it saw as a mistake, which called for adjustment of both the first and second Adjustments.  That which Delhi claimed was Santos’ invariable practice for over 12 years did not prevail.  Delhi’s contribution to the capital component of the State Wharfage Dues was then fixed by reference to the Wharfage Participation Factor.  As for the contribution to the capital component of the water and roads tariffs, Santos applied the Downstream Common Facilities Operating Participation Factor and not the initial Common Facilities Investment Participation Factor.

17. Santos claims that it was then of the opinion that, as Operator, it had made a mistake by apportioning the fixed component of wharfage dues in the same percentage as the Jetty Participation[8], when in fact it should have apportioned that liability in accordance with the Wharfage Participation.  Santos says it then thought that the apportionments should have been treated in the same way as apportionments of the variable component of wharfage dues.  By apportioning the fixed component of wharfage dues in the same percentage as the Jetty Participation for each of the years from 1987 until 1991, Santos had apportioned to Delhi less than the apportion which would result from the use of Delhi’s Wharfage Participation as the basis of apportionment.  Delhi were not paying wharfage dues with respect to some of its product going across the jetty.  Santos saw Delhi as having paid less than it was required to pay under the Downstream Agreement and other Producers as having paid more than they were actually required to pay.  It therefore proceeded to correct that mistake in the second Accounting Adjustment.

    [8]        Downstream Agreement cl 8.02(a)(x)

18. Santos also claimed to have identified a similar mistake.  That related to the  apportioning of the road tariff and the fixed component of water rates.  Santos was then of the opinion that those payments should have been apportioned in accordance with the Downstream Common Facilities Operating Participation and not the initial Common Facilities Investment Participation.  It proceeded to correct those so-called mistakes in a similar manner to the correction made in apportioning and adjusting the fixed component of the Wharfage Dues.  This did not require changes to the second Accounting Adjustment because those expenses ceased before 1 January 1996.

19. The Unit Operator engaged KPMG to provide an audit opinion on the correctness of its Accounting Adjustments[9].  Separate opinions were provided in respect of both the first and second Accounting Adjustments.  The opinions expressed were that the Adjustments had been carried out in accordance with the requirements of the Settlement Agreement.

    [9]        Settlement Agreement cl 5(i)

20. Delhi asserts that the Accounting Adjustments made with the second Accounting Adjustment were not authorised by the Settlement Agreement and that it is not possible for Santos lawfully to apply the Participations which it did in the Accounting Adjustment particularised in cl 5 of the Settlement Agreement.  Delhi claims the adjustment is contrary to the Downstream Agreement and the Settlement Agreement and that Santos has acted contrary to its uniform practice since 1984.  It claims that Santos is estopped from doing what it has done.  It also says that the auditors have erred in giving a certificate and condoning the approach of Santos that Delhi says is erroneous.  Delhi says that the audit opinion is null and void.  It seeks orders calling for repayment of sums it paid under protest in 1997.

21. The primary submission advanced by Delhi is that the allocations made by Santos for over 12 years were lawful and in accordance with the agreement between the parties.  Alternatively, it claims that if the historical practice of Santos is not in accordance with the proper agreement between the parties, Santos is precluded by cl 1.5 of the Downstream Accounting Procedure or an estoppel from changing or departing from the historical practice.  Delhi says that there is nothing in the Fixed Factor Settlement Agreement or otherwise to authorise departure from the well established practice.

22. Delhi claims that the agreement of the parties with respect to the Downstream Operations is “primarily contained in three documents”, the Downstream Agreement, the Stony Point Indenture and a letter, dated 24 November 1981, sent to the Minister of Mines and Energy by Santos for and on behalf of the Cooper Basin Producers and agreed to by the Minister endorsing that letter.  The letter spoke of recording “the broad principles on which agreement between the State and the Producers ... (had) been reached” on matters relating to security deposits being equivalent to the capital cost of road, water supply and marine facilities.  The Downstream transaction being contained in more than one document, Delhi says all documents are to be construed together with one being read to explain the others.

23. On Delhi’s argument, there was an express agreement between the participants embodied in the Stony Point Indenture and confirmed by the Minister’s letter, to the effect that each participant was severally liable to pay to the State, each year, a proportion of the State Wharfage Dues equal to that participant’s several share of the State’s repayment for that year of the Jetty Security Deposit plus interest.  A similar liability is said to have arisen with respect to the road tariff and the fixed component of water rates equal to the participants’ several share of the State’s repayment in that year of the Roads and Water Security Deposit.  The share of the tariff and rates would be calculated by reference to the same Factor as that for the Roads and Water Security Deposit so that it would equal the participants’ share of the Security Deposit plus interest.

24. In the alternative, Delhi submits that such an agreement is implied from the Stony Point Indenture, the Minister’s letter, the Accounting Procedures of July 1984 and March 1986 and the historical conduct of the parties as evidenced in writing by the Expenditure Statements.  On this approach, it is said that the implied Agreement satisfies the demand made in cl 2.02.03 of the Downstream Agreement for a “written agreement of each Party ... for any amendment, variation, modification or cancellation of (the Downstream) Agreement”.

25. The submission from Santos is that whilst the entitlement of the Producers to be paid construction costs by the State arises from the terms of the Indenture, the Indenture does not specify the proportion of the payment to which each Producer is entitled.  Santos disputed the assertion by Delhi that any inconsistency between the Indenture and Downstream Agreement required rights and obligations arising out of the Indenture to prevail over any inconsistent provisions in the Downstream Agreement.  Santos said that the Indenture, when viewed objectively, did not record an agreement between the Producers but rather that between the Producers and the State. 

26. Santos said that despite the heading and opening words of cl 8.02(a) of the Downstream Agreement par (x)(aa) of that clause governs the proportions in which the Producers share in the payment from the State for the Jetty.  The payment was not a cost or expense even though the opening words of cl 8.02 spoke of it governing the proportion in which each party was to contribute to costs and expenses incurred with respect to Downstream Facilities and Downstream Operations. 

27. Santos submitted that it was not open to the parties to apportion repayments of the Security Deposits and interest using a Downstream Facilities Investment Participation because the revenue represented by those repayments did not fall within the definition of Downstream Facilities Investment Participation.  The entitlement to share in the refund was expressed by reference to the contribution a Producer made to costs associated with the construction of the Jetty.

28. There is no reference in the Downstream Agreement to repayment of the Roads and Water Security Deposit nor for its apportionment.  Santos speaks of a term or agreement being implied that repayment be shared in the same proportion of initial contributions to payment of the sum of money being repaid.  Santos says that such an implication is not prohibited by the Downstream Agreement because it does not vary or modify the express terms of the Downstream Agreement.  In apportioning repayments in accordance with original contributions, Santos did what was required by either an implied term of the Downstream Agreement or by an implied agreement arising between the Producers when they contributed to the payment of the Security Deposit in the knowledge that they became entitled to its repayment.

29. Santos submits that the share that Delhi was required to contribute to the fixed component of Wharfage Dues was and is a Downstream Participation within the meaning of cl 1.16 of the Downstream Agreement[10]. 

    [10]      See 1.16.03 and cl 1.14

30. With respect to roads and water operating expenses, Santos says that it correctly apportioned the variable component of water rates in accordance with each party’s Downstream General Operating Costs Participation but incorrectly apportioned the road tariff and the fixed component of water rates by using the initial Common Facilities Investment Participation when it should have used the Downstream General Operating Costs Participation.  It says that it did not realise the apportionment was wrong until 1996 and 1997 when performing the calculation required by cl 5 of the Settlement Agreement.  It says that the share Delhi was required to contribute to the road tariff and the fixed component of water rates was, and is a Downstream Participation within the meaning of cl 1.16 of the Downstream Agreement.  The road tariff and water rates relate to Downstream Facilities, so that the road tariff and water rates are costs and expenses relating to Downstream Facilities.  Clause 8.02 of the Downstream Agreement therefore governs their apportionment.  Apportioning the road tariff and fixed component of water rates in accordance with the Common Facilities Investment Participation is not authorised by the Downstream Agreement.  The road tariff and water rates are not capital costs.  Nor are they costs and expenses incurred before the commissioning for use of any Downstream Facility.  They therefore do not attract apportionment by the Common Facilities Investment Participation[11].  Santos says that the road tariff and the fixed component of water rates were required to be apportioned in accordance with the Downstream General Operating Costs Participation.  It says there is no contractual authority to apportion in accordance with the Common Facilities Investment Participation.

    [11]      Downstream Agreement cl 8.02(a)(i) and cl 8.02(b)

1. The Downstream Agreement was executed after the Indenture and the letter to the Minister of 24 November.  However, it was agreed between the parties to the Downstream Agreement that it would take effect from 1 January 1981.  The terms of the Downstream Agreement were therefore of greater significance as between the Producers than the Indenture.  I reject Delhi’s submission that the Agreement of the Producers with respect to Downstream Operations is primarily contained in the Downstream Agreement, the Indenture and the Minister’s letter and that the Indenture, in particular, when read with the letter, qualifies anything contained in the Downstream Agreement itself. 

2. Whilst some rights and obligations may be acknowledged as between the Producers in the Indenture, the detailed arrangements between the Producers are primarily contained in the Downstream Agreement.  If, reading the various agreements with respect to Downstream Operations together any qualification is required that qualification as between the Downstream Agreement, the Indenture and the Minister’s letter is of the Indenture and the letter.  If the letter constitutes an Additional Downstream Agreement between the parties within cl 2.02.02 of the Downstream Agreement, the reference in it to broad principles acknowledges that the particularity of the relationship between the Producers is to be spelt out.  This occurred in the Downstream Agreement.  The letter is qualified by that Agreement, not the reverse.  Nothing in cl 2.02.01 and cl 2.02.02 of the Downstream Agreement properly demands the construction claimed by Delhi.  In my view, the Downstream Agreement is the Agreement that prevails in the event of any apparent inconsistency between the documentation executed at the end of 1981. 

3. I agree with Santos’ submission that the Indenture does not specify the proportion to be paid to Producers with respect to the construction costs.  I also agree that within cl 8.02 of the Downstream Agreement, provision is made for the proportions in which Producers share in the payment from the State for the Jetty.  I agree also that, on a proper construction of the Downstream Agreement, it was not open to apportion repayments of Security Deposits and interest using a Downstream Facilities Investment Participation.  Revenue represented by those payments is not within the definition of Downstream Facilities Investment Participation in the Downstream Agreement.  The entitlement to share in the refund was expressed by reference to the contribution a Producer made to costs associated with the construction of the Jetty. 

4. As for the repayment of the Roads and Water Security Deposit and its apportionment, I accept the submissions made by Santos that an implied term or agreement to that effect arises and that such an implication is not prohibited by cl 2.02.03 of the Downstream Agreement because no “amendment, variation, modification or cancellation” of that Agreement is involved. 

5. I also think that Santos is correct in its submission that the share Delhi had to contribute to the fixed component of Wharfage Dues was, and is a Downstream Participation within the meaning of cl 1.16 of the Downstream Agreement. 

6. I also agree that, properly construed, the agreement between the Producers specified that the share Delhi was required to contribute to the road tariff and the fixed component of water rates was and is a Downstream Participation within the meaning of clause 1.16 of the Downstream Agreement.  Thus, the apportionment of the road tariff and fixed component of water rates, in accordance with the Common Facilities Investment Participation was not authorised by the Downstream Agreement or any other agreement between the parties.  The road tariff and the fixed component of water rates had to be apportioned in accordance with the Downstream General Operating Costs Participation.

7. Clause 1.5 of the Accounting Procedures was referred to by the Full Court when it ruled that these proceedings were not subject to a requirement to submit to arbitration.  The clause provided that all statements of charges and all separate bills rendered to Non-Operators by the Operator were presumed to be true and correct after 24 months and that no adjustment favourable to the Operator was to be made unless made within the same prescribed period of 24 months.  In the Full Court, Wicks J said that when read in its context, the presumption of correctness contained in cl 1.5 of the Downstream Accounting Procedure was not a rebuttable one[12].  His Honour said that it was only rebuttable if, within the 24 month period, a Non-Operator challenged it and requested an adjustment.  If the challenge was not agreed, it could be referred to arbitration.  If no challenge were made, the relevant statement became binding on the parties.  His Honour said that the clause was obviously intended to give some certainty to the ongoing accounting process. 

   [12]      Santos Limited  v Delhi Petroleum Pty Ltd [1999] SASC 485 at [75] and [76]

8. Delhi submitted that this conclusion was a necessary step in the reasoning of the Full Court and that therefore, in this case, it follows that cl 1.5 precludes Santos from reopening the accounts.  Santos submits that the observation made by Wicks J is not correct and that I am not bound by that view.  I agree with Santos that the terms of the Downstream Agreement prevail over the Accounting Procedure[13].  As Operator, Santos was required to apportion in accordance with the requirements of the Downstream Agreement.  That obligation does not come to an end after 24 months, or at any time.  Until a mistake is corrected the Operator has failed to apportion relevant operating expenses in accordance with the terms of the Downstream Agreement.  However, properly construed, the clause in the Accounting Procedure does not impose a time bar on the Operator.  The presumption of truth and correctness is expressed as a qualification on the right of Non-Operators to question the correctness of an item associated with a payment.  Thus, it casts an onus on Non-Operators to justify any complaints made after 24 months.  It does not require the Operator to justify the accounts.  That apart, in this case, the previous apportionments were acknowledged by all parties as provisional.  Apportionments required under the Downstream Agreement could not be made until the outstanding reviews and adjustments were complete.  The Settlement Agreement intervened to provide what was to occur with respect to outstanding reviews and adjustments.  I agree that cl 1.5 only operates with respect to final apportionments, not those occurring here.  The clause does not preclude Santos from reopening the accounts.

   [13]      cl 8.2 proviso and cl 1.2 Accounting Procedures

9. The observations made by Wicks J with respect to cl 1.5 were not indispensable or fundamental to the ultimate decision of the Full Court[14].  The only issue before the Full Court was whether an arbitration clause in the Settlement Agreement applied.  I therefore uphold Santos’ answers to Delhi’s reliance upon the clause and the observations of Wicks J.

   [14]      Blair v Curran (1939) 62 CLR 464 at 531 - 532

10. That leaves for consideration the question whether Santos is estopped from correcting the mistakes.

11. On the evidence before me I am satisfied that employees of Santos made innocent mistakes when apportionments were first made of Operating expenses in accordance with the Downstream Agreement and that those mistakes perpetuated until early 1997.  I reject any suggestion that any officer of Santos pursued a course of conduct conscious of the errors then identified. 

12. The material before me establishes that a memorandum and attachments, dated July 1984, are a significant source of the perpetuated error.  The memorandum bears the initials of a responsible officer within Santos.  The memorandum spoke of accounting treatment for payments and receipts of State owned facilities.  The attached documents were disclosed to the Producers.  They acted upon them over the years. 

13. I agree with the submission that there is no evidence that the author of the memorandum purported to consider the particular terms of the Downstream Agreement in implementing the practice Delhi now seeks to have enforced against Santos.  On the evidence before me I am satisfied that the author of the memorandum, other responsible officers of Santos and the other Producers, including Delhi, overlooked particular provisions and requirements of the Downstream Agreement. 

14. However, the reality is that the course of conduct pursued at the accounting levels was consistent with the documentation circulated to the Producers by Santos and acted upon by them just as it was with “broad principles” referred to in the Minister’s letter of 24 November 1981.  The mistakes made were innocent.  I reject any suggestion of bad faith in anyone. 

15. I accept the substance of the evidence given by Mr McArdle.  He was the Executive General Manager of Santos at the time of the hearing.  He had worked for Delhi until 1981, joining Santos in the following year.  He held the position of Finance Director, or Executive General Manager with that company during 1984.  He held other senior positions with that company from 1988 until his recent retirement.  In particular, I find that it was not until late December 1996 that Mr McArdle became aware of the fact that the fixed component of Wharfage Dues had not been allocated in accordance with each party’s use of the wharf.  I also find that it was early in January 1997 when he directed officers within Santos to change the Unit and Downstream budget for capital and operating expenditure so that the fixed component of Wharfage Dues was apportioned in accordance with the Wharfage Participation or each party’s usage.  McArdle’s direction was given effect to by Mr Noble’s memorandum, dated 14 January 1997. 

16. I also accept McArdle’s evidence as establishing that he intervened early in 1997 to correct what he then believed was an error with respect to the road tariff and the fixed component of water rates.  I find that it was then that McArdle believed that apportionment should have been made on the basis of the Common Facilities Operating Participation, so that apportionment of the road tariff and the fixed component of water rates would be in accordance with each party’s Downstream throughput.  Again, the mistakes were made by responsible officers in Santos, innocently and without any bad faith.  They were acquiesced in by the other Producers. 

17. Santos says that the practice does not give rise to an estoppel.  Delhi seeks a finding that there is an estoppel either by convention or representation, particularly because of the execution of the Fixed Factor Settlement Agreement and the circumstances surrounding it.

18. Upon consideration of the whole of the evidence and the authorities cited to me, I am persuaded that I should find that there is an estoppel by convention resulting from the common assumption acted upon by the parties to the Downstream Agreement.  I think this is a case where the parties to the Fixed Factor Settlement Agreement assumed the mistaken practice to be a basis of the transaction into which they ultimately entered.  In my view, an estoppel by convention arose because the parties established, by their apprehension of the legal effect of the Downstream Agreement, a conventional basis upon which they regulated subsequent dealings so that it would be unjust or unconscionable for Santos to resile from that convention[15]. 

    [15]      The Vistafjord (1988) 2 Lloyds Rep 343 at 351

19. In Australian Consolidated Investments Ltd & Anor v England[16], the Chief Justice referred to relevant authorities and concluded that an estoppel by convention may refer to a common assumption relating to rights notwithstanding statements of principle in High Court authority suggesting that an estoppel by convention could only apply to a mistake of fact.  I agree with Hodgson CJ in Eq, as he then was, in Hilton Hotels (Australia) Pty Ltd v Sunrise Resources (Australia) Pty Ltd[17] that the statement in Con-Stan Industries v Norwich Winterthur Insurance (Australia) Ltd[18] that estoppel by convention required the assumed state of affairs to be an assumed state of fact:

    [16] (1995) 183 LSJS 408 at 435 - 438

    [17] [2000] NSWSC 46

    [18] (1986) 160 CLR 226

    “was obiter, and in any event should not ... be taken as applying to assumptions as to private rights or the legal effect of particular agreements, as distinct from assumptions as to the general law.”[19]

    I also agree with the Doyle CJ that the proper approach now to be taken is that found in the judgment of Mason CJ in Commonwealth v Verwayen[20].  This Court is entitled to and must prevent:

    “a person who has relied upon an assumption as to a present, past or future state of affairs (including a legal stage of affairs), which assumption the party estopped has induced him to hold, from suffering detriment in reliance upon the assumption as a result of the denial of its correctness ...

    The assumption may be one as to a legal as well as to a factual state of affairs ... (there being) no reason to restrict the assumption to a factual matter as there was at the time when the rules of estoppel by conduct were evidentiary.”[21]

    Mason CJ then said:-

    “It has already been recognized that an equitable estoppel may relate at least to a matter of mixed fact and law[22].  Moreover, the distinction between assumptions as to fact and assumptions as to law is artificial and elusive; see the discussion of Oliver J in Taylors Fashions Ltd v Liverpool Trustees Co[23].  So it would be productive only of confusion and arid technicality to restrict the operation of the doctrine so as to exclude from its scope an assumption as to a purely legal state of affairs.  It is therefore not surprising that long ago the Judicial Committee recognized that a representation as to the legal effect of an agreement can give rise to an estoppel[24].”

    This further passage from Mason CJ’s judgment was cited by Gillard J in Powercor Australia Limited v Pacific Power[25].  His Honour agreed with Mason CJ that the important element was the assumed state of affairs which formed the conventional basis for the mutual dealings of the parties.  To compartmentalise the assumed basis into fact or law defeated the purpose of the rule, “not to mention the effort and time spent in litigation seeking to establish the distinction”.  The truth was that “many representations made and many assumed states involve questions of fact and law and an assumed state of legal rights (is) in many cases inextricably bound up with the facts.”[26]

    [19]Hilton Hotels (Australia) Pty Ltd v Sunrise Resources (Australia) Pty Ltd [2000] NSWSC 46 at [71]

    [20] (1990) 170 CLR 394 at 413

    [21]      See Mason J in Commonwealth v Verwayen (1990) 170 CLR 394 at 413

    [22]see Waltons Stores(Interstate) Ltd v Maher(1988) 164 CLR 387 at 415 – 416, 420 – 421, 452; Foran v Wight (1989) 168 CLR 385 at 433 - 435

    [23] [1982] QB 133 at 150 - 151

    [24](1990) 170 CLR 394 at 413; See Sarat Chunder Dey v Gopal Chunder Laha (1892) LR 19 Ind App 203; Calgary Milling Co Ltd v American Surety Co of New York [1919] 3 WWR 98; see also Amalgamated Investment & Property Company Limited (in Liq) v Texas Commerce International Bank Limited [1982] 1 QB 84 at 106 - 107

    [25] (1999) VSC 110 at [447]

    [26]      Powercor Australia Limited v Pacific Power (1999) VSC 110 (18 November 1999) at [446]

20. After the reference to Verwayen, Gillard J quoted from a decision of the Court of Appeal of the Supreme Court of Victoria[27], in which Callaway JA referred to assumptions of fact in the context of conventional estoppel, including “the existence of at least some private legal rights.”.  This approach seems consistent with that identified by Hodgson CJ in Eq, in Hilton Hotels.

    [27]Riseda Nominees Pty Ltd v St Vincent’s Hospital (Melbourne) Limited (12 September 1997, unreported)

21. Gillard J concluded that parties to a contract, who by their conduct establish a state of affairs which forms the conventional basis of their dealing and which may be factual or legal or a mixture of both, may be estopped from denying the conventional basis by the application of the doctrine of conventional estoppel.  His Honour then sought to apply principles expounded by Dixon J in Grundt v The Great Boulder Proprietary Gold Mines Ltd[28], concluding that in order to establish estoppel by convention the party relying upon the doctrine had to establish that the parties had assumed a state of affairs, whether it be factual, legal or both, and that the assumed state of affairs was the basis for action or inaction in dealings between the parties with departure by one from the assumption resulting in a detriment being suffered by another.  Applying that conclusion, Delhi is entitled to some of the relief it seeks.

    [28] (1938) 59 CLR 641

22. As for the claim based upon estoppel by representation, it must be acknowledged that proof of a representation made by Santos is challenging.  I am not satisfied that a clear representation has been established.  If, of course, Mason CJ is correct in his assertion in Verwayen that there is now but one doctrine of estoppel, the finding I have made with reference to estoppel by convention is sufficient to conclude the issue of estoppel.  However, the concept of a “single overarching doctrine” now prevailing in the field of estoppel has not been adopted by the High Court as yet[29].  I must therefore consider the separate claim of estoppel by representation.

    [29]      See Giumelli v Giumelli (1998) 196 CLR 101 at 112 [7]

23. I am not satisfied that any claim based upon estoppel by representation has been made out.  I distinguish a mistaken assumption from a representation.  Santos carried on the mistaken assumption with the documentation it circulated and the system it adopted that others accepted or did not question.  That may constitute an inducement of the kind referred to by Mason CJ in Verwayen[30] given Mason CJ’s view of a single law of estoppel.  However, whilst the distinction between estoppel by convention and estoppel by representation remains, I am not satisfied that Santos made any relevant representation, certainly not that of the kind called for by Brennan J in Walton Stores (Interstate) Ltd v Maher[31].  In the context of promissory estoppel or estoppel by representation the evidence does not establish that Santos induced Delhi to adopt any assumption as to a particular state of affairs.  Rather, all parties proceeded upon a common assumption in circumstances that give rise to estoppel by convention.

    [30] (1991) 170 CLR 394 at 413

    [31] (1988) 164 CLR 387 at 428 - 429

24. The part Santos played in the adoption of and persistence in the assumptions made was such that it would be unjust and oppressive to depart from it now[32].  However, Santos did not directly make representations upon which other parties founded the assumption as much as it exercised rights that existed only if assumptions it made were correct[33]. 

    [32]      Deane J in Commonwealth v Verwayen (1990) 170 CLR 394 at 444

    [33]      Dixon J in Grundt v Great Boulder (Goldmines) Ltd (1937) 59 CLR 641 at 676

25. As for the indispensable condition to making out of any estoppel claim that Delhi has suffered detriment[34], I agree with the submission that Delhi was induced to act to its detriment by accepting a Fixed Factor of 20.21 per cent and agreeing to the other provisions of the Fixed Factor Settlement Agreement on the faith of its assumption that Santos would continue to apportion expenditure and receipts as it had always done.  Had Santos adhered to its previous practice, Delhi would have achieved a particular financial outcome and would, by 1992, have acquired a 20.21 per cent share of the joint venture resulting from the arrangements constituted as a result of the Fixed Factor Settlement Agreement.  If Santos were permitted to depart from its conventional accounting treatment the financial benefit to Delhi in entering into the Fixed Factor Settlement Agreement on the terms it did would be substantially less than anticipated on the basis of the historical practice, with Delhi’s share of the venture significantly less than its Fixed Factor of 20.21 per cent.

    [34]      Grundt v Great Boulder (Goldmines) Ltd (1937) 59 CLR 641 at 674

1. The uniform accounting treatment of the State owned facilities established a conventional basis of dealing at the time that the Fixed Factor Settlement Agreement was entered into.  The consistent application of the accounting practice over a period in excess of a decade was said to have constituted a representation by Santos, acquiesced in by the other Producers, that it would continue to apportion expenditure and receipts pertaining to the State owned facilities in this manner.  I reject that contention. 

2. Much time was taken in the course of the hearing pursuing issues with respect to models used by Delhi to check the benefits that might result from entering into the Fixed Factor Settlement Agreement.  I find that evidence of no real significance.  It does nothing to reject the continuing common assumption that the so called historical practice was a component in the negotiations, calculations and decisions arrived at by all parties.  Relevant detriment by reference to agreeing to the Heads of Agreement and the Fixed Factor Settlement Agreement has been established.

3. I indicate that I find the substance of the evidence of Mr Woodbury and Mr Taylor credible.  In particular, notwithstanding the need for caution when considering assertions of such a kind after the event, Woodbury would not have recommended and committed Delhi to the Fixed Factor Settlement Agreement actually executed had he, Taylor or any other officer of Delhi been aware of the situation as identified by McArdle and an intention to enforce the obligations resulting from the interpretation McArdle belatedly applied to the pre-existing agreements between the parties.

4. Delhi was aware that it was owed a substantial amount of money by the other Producers in respect of the outstanding reviews and adjustments.  I accept the evidence from Woodbury that in agreeing to a Fixed Factor Delhi was giving away any upside to be gained through the 1987 review and adjustment arbitration and the review adjustment process generally. 

5. I agree with the submission that those responsible for the management of Delhi’s interests determined an acceptable Fixed Factor for it by reference to a range of review and adjustment outcomes.  The Fixed Factor agreed to of 20.21 per cent was itself the product of a discounting process, which took into account the risks and disadvantages associated with the arbitration process and the review and adjustment procedures. 

6. Having agreed to an equity level of 20.21 per cent, Woodbury made further financial concessions for Delhi during the course of the negotiations for the Heads of Agreement and the Settlement Agreement.  I accept Woodbury’s evidence that those concessions “represented the limit (or nearly so) of the financial compromises (he) was prepared to make to close an agreement”.  I accept that any further concession of substance of the kind involved by the corrections and adjustments initiated by Mr McArdle could well have resulted in Delhi not departing from the existing arrangements, notwithstanding the ongoing confusion.  Detriment is established.

7. Consideration has already been given to the significance of clauses with respect to the accounting procedures, amendment, variation, modification and waiver of the Downstream Agreement[35].  Within the Fixed Factor Settlement Agreement, cl 11 provided that that Agreement was an entire Agreement, containing all of the representations, warranties, covenants and agreements of the parties, superseding “all prior negotiations, contracts, arrangements, understandings and agreements with respect to the subject matter of the Fixed Factor Settlement Agreement”.  It also provided that the parties to the Settlement Agreement acknowledged and agreed that in entering into it there was no reliance on any representation or warranties about its subject matter and that in its interpretation the contra proferentem rule of construction would not apply. 

   [35]      Downstream Agreement, cl 2.02.03, 23.06

8. The assumptions made by the parties were created by a conventional basis of dealing.  I have not found any relevant representation.  The allocation of items of expenditure or receipt to particular participations is not the province of the Settlement Agreement but that of other agreements between the Producers.  Clause 11 has no application to the conventional basis of dealing which gives rise to any estoppel. 

9. With respect to any clause in any of the agreements said to oust the estoppel claim, I agree with the submission put by Delhi that the effect of the application of an estoppel is frequently to overcome provisions in a contract stipulating formalities for its variation.  The very nature of the doctrine of estoppel is to bind parties to a course or arrangement different to that which has been agreed[36].

   [36]Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 399; Amalgamated Investment & Property Company Limited (in Liq) v Texas Commerce International Bank Limited [1982] 1 QB 84 at 121 - 122

10. Santos has debited the joint operating account for Unit and Downstream Operations for the cost of these proceedings.  Delhi claims that this is not authorised by any agreement between the parties.  It protests at the absurdity of Delhi having to bear 20.21 per cent of the defendant’s costs.  Delhi’s submission is that the conduct of Santos in so debiting the accounts is not authorised by the Unit Agreement or the Downstream Agreement.  Santos claims that as the dispute concerns apportionment of Downstream operating expenses and revenue, the Downstream Agreement is probably the appropriate source of any entitlement to charge the costs of these proceedings to the Joint Operating Account. 

11. In the alternative, Santos says the Unit Agreement applies.  Both agreements have common clauses, which Santos says justifies the action it is taking with respect to costs.  Santos claims that the decision of Lander J in Basin Oil NL v Santos Limited[37] supports the Operator’s entitlement to charge its legal costs to the joint operating account.  Lander J was concerned with the question whether Santos, as Unit Operator, was entitled to seek reimbursement of its costs associated with an arbitration from the Unit Account.  His Honour concluded that it was. 

    [37]      (30 August 1996, S 5793, Unreported)

12. Santos invokes cl 8.02 of the Downstream Agreement which requires the Operator to properly pay all costs and expenses incurred with respect to Downstream Operations, with each of the parties to the Downstream Agreement reimbursing the Operator for that party’s share of such costs and expenses.  Santos submits that the phrase “with respect to” is one of wide import.  Some connection or relation between the subject matters to which the words refer suffices[38]. 

    [38]      Trustees Executors and Agencies Co Ltd v Reilly (1941) VLR 110 at 111

13. Whilst submitting that cl 8.02 makes the debit lawful, Santos also refers to cl 7.05 of the Downstream Agreement.  By that clause the parties agreed to indemnify and hold harmless the Operator against any portion of any loss, damage, claim or liability resulting from acts or omissions of the Operator with respect to Downstream Operations.  Santos says that the Operator’s liability for costs to its own solicitors and any liability for costs awarded against it by this Court is a liability for which the Operator is entitled to indemnity under this clause.

14. Delhi refers to cl 3.8(b) of the Accounting Procedure.  That clause, of course, is subject to an express clause providing that, if there is any conflict between the provisions of the Accounting Procedure and those of the Downstream Agreement, the provisions of the Downstream Agreement control[39].  Delhi says that cl 3.8 identified all costs and expenses of handling, investigating and settling litigation or claims arising by reason of the Downstream Operations or necessary to protect or recover the Downstream Facilities including ... attorney’s fees and court costs as justifiable charges to the Downstream Account to the extent that such charges are incurred by the Operator for the benefit of Downstream Operations.  A proviso to cl 3.8 is that no charge is to be made for fees and expenses of the Operator’s outside attorneys unless the employment of those attorneys is agreed to by the parties, as required in the Downstream Agreement.  A similar provision exists in the Unit Agreement.

    [39]      cl 1.2 Accounting Procedure

15. I agree with the submission put by Delhi that the indemnity clauses in both the Downstream Agreement and the Unit Agreement do not assist Santos.  Properly construed the indemnity relates to losses arising from claims made by third parties, not between the parties to the relevant agreement.  However, the Accounting Procedure cannot prevail over the clear language contained in cl 8.02 of the Unit and Downstream Agreements.  Whichever provision properly applies, the answer is the same.  The approach taken by Justice Lander should be followed.  Santos is entitled to debit the joint operating account for the costs of defending these proceedings.  That situation results even if the present dispute is identified as arising out of the Accounting Adjustments under the Settlement Agreement because a Unit Operation is involved, thus attracting cl 8.02 of the Unit Agreement[40].

    [40]      Fixed Factor Settlement Agreement cl 5(a)

16. The plaintiff claimed a multiplicity of declarations in its prayer for relief.  I propose to make declarations in substantially the following terms:

    1.Santos is estopped from contending that the capital component of the State Whargage Dues should be apportioned by reference to any factor other than the Jetty Participation Factor.  Santos is bound to apportion that payment by reference to that factor alone.

    2.Santos is estopped from contending that the capital component of the water rates and roads tariff should be apportioned by reference to any factor other than the initial Common Facilities Investment Participation Factor.  Santos is bound to apportion such payments by reference to that factor alone.

    3.Santos is estopped from contending that Delhi’s share of the capital component of the State Whargage Dues should be apportioned by reference to any factor other than that which applies to Delhi’s share of the State’s repayment of the Jetty Security Deposit plus interest.

    4.Santos is estopped from contending that Delhi’s share of the capital component of the water rates and roads tariff should be apportioned by reference to any factor other than that which applies to Delhi’s share of the State’s repayment of the Roads and Water Security Deposit plus interest.

    5.Santos is entitled to debit the joint operating account for costs and expenses incurred by it in relation to these proceedings.

17. There should also be orders that the defendants pay Delhi $3,821,423 in respect of the first Accounting Adjustment and $364,802 in respect of the second.  I further order that, with respect to the period from the end of 1996 to 2003, the defendants pay to the plaintiff a further sum of $2,553,612.

18. With respect to the sum of $3,821,423, Delhi claims interest from 31 July 1997.  This was the date when Delhi made a payment under protest with respect to the first Accounting Adjustment.  Delhi also seeks interest on $364,802 from 15 January 1997, being the date Delhi made a payment under protest with respect to the second Accounting Adjustment.  Delhi also seeks interest on the sum of $364,802 from 9 November 1997, 9 November 1998, 9 November 1999 and 9 November 2000, being the dates upon which the fixed components of wharfage, water and roads tariffs are paid and the security deposit principal and interest received.  The total amount that the plaintiff is entitled to, apart from any interest, is $6,739,837.

19. Santos submitted that no award for interest was appropriate given the practice of the parties not to charge interest.  I am not satisfied that good cause has been shown to warrant the refusal of an award of interest.  In the exercise of my discretion, I propose awarding a lump sum in lieu of interest.  That sum is $1,260,163.

    I therefore order that the defendants pay the plaintiff the total sum of $8m.

20. I will hear the parties as to the precise form of the declarations and any other orders that seem appropriate, together with any other consequential order that ought to be made.

    JUDGMENT CITATIONS
    LISTED IN ORDER OF APPEARANCE IN JUDGMENT

    1.     Stony Point Indenture cl 63

    2.     Downstream Agreement cl 8.02(a)(x)

    3.     Stony Point Indenture cl 72

    4.Stony Point Indenture Part XI cl 46, cl 49, cl 51; Part X cl 37, cl 39, cl 43; Schedule 4

    cl 4.02

    5.     See Fixed Factor Settlement Agreement recital D and cl 5

    6.     Fixed Factor Settlement Agreement cl 5(f)

    7.     Downstream Agreement cl 8.02(a)(x)

    8.     Settlement Agreement cl 5(i)

    9.     See 1.16.03 and cl 1.14

    10.    Downstream Agreement cl 8.02(a)(i) and cl 8.02(b)

    11.Santos Limited  v Delhi Petroleum Pty Ltd [1999] SASC 485 at [75] and [76]

    12.    cl 8.2 proviso and cl 1.2 Accounting Procedures

    13.    Blair v Curran (1939) 62 CLR 464 at 531 - 532

    14.    The Vistafjord (1988) 2 Lloyds Rep 343 at 351

    15. (1995) 183 LSJS 408 at 435 - 438

    16. [2000] NSWSC 46

    17. (1986) 160 CLR 226

    18.Hilton Hotels (Australia) Pty Ltd v Sunrise Resources (Australia) Pty Ltd [2000] NSWSC 46 at [71]

    19. (1990) 170 CLR 394 at 413

    20.    See Mason J in Commonwealth v Verwayen (1990) 170 CLR 394 at 413

    21.see Waltons Stores(Interstate) Ltd v Maher(1988) 164 CLR 387 at 415 – 416, 420 – 421, 452; Foran v Wight (1989) 168 CLR 385 at 433 - 435

    22. [1982]QB 133 at 150 - 151

    23.(1990) 170 CLR 394 at 413; See Sarat Chunder Dey v Gopal Chunder Laha (1892) LR 19 Ind App 203; Calgary Milling Co Ltd v American Surety Co of New York [1919] 3 WWR 98; see also Amalgamated Investment & Property Company Limited (in Liq) v Texas Commerce International Bank Limited [1982] 1 QB 84 at 106 - 107

    24. (1999) VSC 110 at [447]

    25.Powercor Australia Limited v Pacific Power (1999) VSC 110 (18 November 1999) at [446]

    26.Riseda Nominees Pty Ltd v St Vincent’s Hospital (Melbourne) Limited (12 September 1997, unreported)

    27. (1938) 59 CLR 641

    28.    See Giumelli v Giumelli (1998) 196 CLR 101 at 112 [7]

    29. (1991) 170 CLR 394 at 413

    30. (1988) 164 CLR 387 at 428 - 429

    31.    Deane J in Commonwealth v Verwayen (1990) 170 CLR 394 at 444

    32.    Dixon J in Grundt v Great Boulder (Goldmines) Ltd (1937) 59 CLR 641 at 676

    33.    Grundt v Great Boulder (Goldmines) Ltd (1937) 59 CLR 641 at 674

    34.    Downstream Agreement, cl 2.02.03, 23.06

    35.Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 399; Amalgamated Investment & Property Company Limited (in Liq) v Texas Commerce International Bank Limited [1982] 1 QB 84 at 121 - 122

    36.    (30 August 1996, S 5793, Unreported)

    37.    Trustees Executors and Agencies Co Ltd v Reilly (1941) VLR 110 at 111

    38.    cl 1.2 Accounting Procedure

    38.    Fixed Factor Settlement Agreement cl 5(a)