Fitzroy River Corporation Ltd v Buru Energy Ltd
[2015] WASC 143
•23 APRIL 2015
| JURISDICTION | : | SUPREME COURT OF WESTERN AUSTRALIA IN CIVIL |
| CITATION | : | FITZROY RIVER CORPORATION LTD -v- BURU ENERGY LTD [2015] WASC 143 |
| CORAM | : MITCHELL J | ||
| HEARD |
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| DELIVERED |
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| PUBLISHED |
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| FILE NO/S |
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| BETWEEN |
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AND
BURU ENERGY LTD
First Defendant
DIAMOND RESOURCES (CANNING) PTY LTD
Second Defendant
DIAMOND RESOURCES (FITZROY) PTY LTD
Third Defendant
MITSUBISHI CORPORATION
Fourth Defendant
Catchwords:
Contract - Royalty deed - Construction of term defining value against which royalty calculated
Words and phrases - Well head value - Gross value
[2015] WASC 143
Legislation:
Petroleum and Geothermal Energy Resources Act 1967 (WA), s 144A
Result:
Plaintiff's claim dismissed
Declaration adopting defendant's construction of the contract
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr P C Doherty & Mr S Meacock |
| First Defendant | : | Mr B Dharmananda SC & Mr M Darian-Smith |
| Second Defendant | : | Mr B Dharmananda SC & Mr M Darian-Smith |
| Third Defendant | : | Mr B Dharmananda SC & Mr M Darian-Smith |
| Fourth Defendant | : | Mr B Dharmananda SC & Mr M Darian-Smith |
Solicitors:
| Plaintiff | : | Squire Patton Boggs |
| First Defendant | : | King & Wood Mallesons |
| Second Defendant | : | King & Wood Mallesons |
| Third Defendant | : | King & Wood Mallesons |
| Fourth Defendant | : | King & Wood Mallesons |
Case(s) referred to in judgment(s):
Australian Broadcasting Commission v Australasian Performing Right
Association Ltd (1973) 129 CLR 99
CHU Underwriting Agencies Pty Ltd v Wise [2012] WASCA 123; (2012) 43
WAR 487
EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78;
(2010) 41 WAR 23
Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd
[2014] HCA 7; (2014) 251 CLR 640
Franke v CIC General Insurance Ltd (The Coral) (1994) 33 NSWLR 373
[2015] WASC 143
Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012]
WASCA 216; (2012) 45 WAR 29
Nannup Timber Processing Pty Ltd v Minister for Commerce [2014]
WASC 438
Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002]
HCA 5; (2002) 240 CLR 45
Vincent Nominees Pty Ltd v Western Australian Planning Commission [2012]
WASC 28; (2012) 187 LGERA 303
[2015] WASC 143
MITCHELL J
MITCHELL J:
Background facts
The plaintiff
1 The plaintiff is a public company incorporated under the laws of
Australia. The plaintiff was called Kimberly Oil NL between 26 September 1996 and 12 January 2006, and European Gas Ltd between 13 January 2006 and 28 November 2012.
The 2006 Sale Agreement
2 On 25 July 2006, the plaintiff, Otto Oil Pty Ltd (Otto Oil) and ARC
Energy Ltd (ARC) entered into an agreement entitled 'Canning Basin Assets Sale and Purchase Agreement' (2006 Sale Agreement). In general terms, the 2006 Sale Agreement provided for the plaintiff and Otto Oil to sell to ARC certain interests in tenements granted or applied for under the Petroleum Act 1967 (WA) (Act), as it was then called. The tenements were located in the Canning Basin in the Kimberley region of Western Australia, about 70 km due east of Broome.
3 Part of the purchase price for the interests was the 'EGL Royalty',
being 'a net well head royalty payable by [ARC] to [the plaintiff] on and in accordance with the terms of the Royalty Deed'. For these purposes 'Royalty Deed' was defined to be 'a deed between [the plaintiff] and ARC under which ARC reserves and grants to [the plaintiff] the EGL Royalty'.
The Royalty Deed
4 On or about 26 August 2006, ARC and the plaintiff entered into a
deed entitled 'Royalty Deed' (Royalty Deed). It is common ground that this is the 'Royalty Deed' contemplated by the 2006 Sale Agreement. The central clause of the Royalty Deed in issue in these proceedings is cl 3, which it is convenient to set out in full:
3. ROYALTY
3.1 Royalty
(a)
The Payer agrees to pay to the Payee throughout the term of this deed a royalty at the rate of 2% of the Well Head Value of Petroleum recovered from the Royalty Area ('Royalty').
(b)
In the event that the State Royalty is calculated being equal to or below 2.5% of the Well Head Value of
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Petroleum recovered from the Royalty Area, the Royalty payable under clause 3.1(a) will be calculated at a rate of 1% of the Well Head Value of Petroleum recovered from the Royalty Area.
3.2 Payment of Royalty
(a) The Royalty must be paid on the Well Head Value of Petroleum recovered from the Royalty Area during each Quarter. (b) The Payer must pay the Royalty for a Quarter to the Payee not later than four weeks after the end of the Quarter. (c) Unless payment is received by the due date, it will attract interest from the due date at the Interest Rate. 3.3 Royalty Return The Payer must, within four weeks after the end of each Quarter, send to the Payee a return for that Quarter setting out full details of production and Well Head Value in a form approved by the Payee (which may or may not be in the form required to be lodged for the purposes of the State Royalty). 3.4 Well Head Value
(a) Subject to clause 3.4(b), the Well Head Value will be the gross value in Australian currency of the Petroleum at the well head, as may be agreed or determined from time to time for the purpose of calculation of the State Royalty. (b) If the Payee is of the opinion that the Well Head Value, as agreed or determined for the purposes of clause 3.4(a), does not reflect the price that an arm's length buyer would pay for Petroleum at the well head: (i) on the date the Petroleum was first sold, transferred or otherwise disposed of; or
(ii) because the first sale, transfer or other disposal of the Petroleum was to a Related Entity or Associate of the Payer and the Payer has not shown to the satisfaction of the Payee that the sale, transfer or other disposal represented the price that an arm's length buyer would pay for Petroleum at the well head on the date the Petroleum was first sold, transferred or otherwise disposed of; or
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(iii) because the first sale, transfer or other disposal of the Petroleum was made otherwise than on arm's length commercial terms,
then the Payee may determine the value that the Payee considers represented the Well Head Value of the Petroleum on the date the Petroleum was first sold, transferred or otherwise disposed of and notify the Payer of its determination ('Payee's Determination') as soon as practicable after it has made such determination. If the Payer disputes the Payee's Determination it may by notice to the Payee, to be given not later than 30 days of receipt of notice of the Payee's Determination, refer the dispute to the Expert.
The Royalty Deed identified ARC as 'Payer' and the plaintiff as
'Payee'.
There are a number of definitions in cl 1.1 of the Royalty Deed which inform the meaning of cl 3 of the Deed.
7 One important definition for the purposes of the present proceedings
is the definition of 'Well Head Value', which is defined in cl 1.1 to mean 'the price that an arm's length buyer would pay for Petroleum at the well head'.
8 The term 'Royalty Area' is defined in cl 1.1 to essentially mean the
area covered by the 'Permits'. The 'Permits' are defined to be the interests in the tenements and tenement application which were transferred by the 2006 Sale Agreement. The tenement application was for a production licence, which was granted by the Minister for Mines and Petroleum on 1 April 2010.
9 Clause 1.1 of the Royalty Deed also defines 'State Royalty' to mean
any royalty payable under the Act in relation to any Petroleum recovered
from the Royalty Area.
The term 'Petroleum' is given the same meaning as in the Act.
11 Clause 10 of the Royalty Deed provides for a process for referral of
disputes to an expert for determination. It sets up a procedure for the appointment of an expert who may be appointed by the President of the Law Society of Western Australia if the parties cannot agree upon a single expert. By cl 10.3, the expert is to 'determine the dispute within the shortest practicable time' and 'deliver a report stating his opinion with respect to the matters in dispute setting out the reasons for decision'.
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Clause 10.4(b) deals with the effect of the expert's determination in the following terms:
Any process or determination of the dispute by the Expert will be made as an expert and not as an arbitrator and the determination of the Expert will be final and binding on the parties without appeal so far as the law allows and except in the case of manifest error or where either party has not been provided with a fair opportunity to make submissions in relation to the matter in issue.
Assignment of right to, and assumption of obligations by, the defendants
13 In 2008 and 2012, documents were executed which had the ultimate
effect that the first, second and third defendants were assigned the rights and assumed the responsibilities and obligations of the 'Payer' under the Royalty Deed. Those arrangements, and other agreed facts, are set out in some detail in the statement of agreed facts and facts in issue, which I accept as accurate. For the purposes of resolving the present proceedings it is not necessary for me to descend into the detail of all those matters.
Statutory background
14 The Royalty Deed refers to the provisions of the Act and the 'State
Royalty' payable under the Act. Given the express reference to the provisions of the Act, it is permissible to have regard to those provisions in construing the Royalty Deed.[1]
[1] Vincent Nominees Pty Ltd v Western Australian Planning Commission [2012] WASC 28; (2012) 187
15 While the Act is a complicated piece of legislation, it is necessary to
specifically refer to only a few of its provisions in any detail in these
reasons.16 In construing the Royalty Deed the provisions of the Act which seem
to me to be of relevance are those in force when the Royalty Deed was entered into by the parties. Since that time, the Act has been amended and renamed. It is currently called the Petroleum and Geothermal Energy Resources Act 1967 (WA). I shall refer in these reasons to the provisions of the Act as it stood on 26 August 2006. I note that, for the purposes of the issues requiring determination in these proceedings, the critical
[2015] WASC 143
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provisions in relation to royalties have not materially changed since that
time.217 Part III of the Act provides for the grant by the Minister of various
different kinds of authorities, to which it is convenient to refer collectively as 'tenements', relating to the mining of petroleum. These include exploration permits, retention leases and production licences, all of which are tenements of the kind referred to in the definition of 'Permits' in the Royalty Deed.
18 Section 142(1) of the Act provides that the conditions subject to
which tenements, including exploration permits, retention leases and production licences, are granted shall include a condition that the tenement holder pay to the Minister 'a royalty at the prescribed rate in respect of all petroleum' recovered by the tenement holder from the tenement area. By s 142(2) the prescribed rate in respect of petroleum recovered under an exploration permit or retention lease is 10% of the 'royalty value' of the petroleum. By s 142(3) read with s 52(1) of the Act, the prescribed rate in respect of petroleum recovered under a production licence is generally the rate determined by the Minister when the application for the licence is made, being not less than 5% nor more than 10% of the 'royalty value' of the petroleum.
19 Section 143 of the Act provides for the reduction in the rate of
royalty fixed by s 142 where the Minister is satisfied that the rate of recovery of petroleum from a well 'has become so reduced that, having regard to the rate of royalty fixed by section 142, further recovery of petroleum from that well would be uneconomic'.
20 Section 144A of the Act defines the 'royalty value' of petroleum for
the purposes of the Act. Subject to a presently immaterial qualification concerning federal duties, the 'royalty value of any petroleum is its value at the well-head as agreed or determined under section 145'.
21 Section 145 of the Act provides that, for the purposes of the Act, the
value at the well head of any petroleum is such amount as is agreed between the tenement holder and the Minister, or in default of agreement within such period as the Minister allows, is such amount as is determined by the Minister as being that value.
[2015] WASC 143
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22 Section 146 of the Act provides that, for the purposes of the Act, the
well head, in relation to any petroleum, is such valve station as is agreed between the tenement holder and the Minister, or, in default of agreement within such period as the Minister allows, is such valve station as is determined by the Minister as being that well head.
Section 147 of the Act provides for the quantity of petroleum taken by a tenement holder during a period to be:
(a)
the quantity measured during that period by a measuring device approved by the Minister and installed at the well-head or at such other place as the Minister approves; or
(b)
where no such measuring device is so installed, or the Minister is not satisfied that the quantity of petroleum recovered by the [tenement holder] has been properly or accurately measured by such a measuring device, the quantity determined by the Minister as being the quantity recovered by the [tenement holder] during that period.
Agreement as to State Royalty
24 From the quarter beginning 1 April 2012 the first and third
defendants have recovered petroleum from the area subject to one of the exploration permits to which the Royalty Deed applies, namely EP391. Those parties have made an agreement with the Minister, under s 145 of the Act, that, during the relevant period, the value at the well head of petroleum recovered from the area to which EP391 applies shall be 50% of the sale value of the petroleum. Under that agreement, the 50% reduction in the sale value is made 'in respect of costs incurred between the well head and the point of sale'.3 The petroleum recovered from EP391 was sold at Wyndham and to the Kwinana Oil refinery at Perth.
Contentions of the parties
25 The parties are in dispute as to the method for determining the
royalty which is payable by the defendants to the plaintiff under the Royalty Deed. The following are the parties' competing contentions as to the proper construction of the Royalty Deed in a case where cl 3.1(b) of the Royalty Deed is not applicable.
26 The defendants contend that the effect of the Royalty Deed is to
require them to pay the plaintiff 2% of the amount agreed or determined
under s 145 of the Act, unless the provisions of cl 3.4(b) are engaged.
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The plaintiff contends that the effect of the Royalty Deed is to require the defendants to pay 2% of the:
gross value in Australian currency of Petroleum at the well head (as may be agreed or determined from time to time for the purpose of calculating the royalty payable to the State of Western Australia under the Act) which is recovered by [the relevant defendants] from the Royalty Area without deductions for any costs or expenses.
28 The meaning conveyed by the plaintiff's formulation is somewhat
unclear when the words of the pleading are considered in isolation. The intended effect of the construction advocated by the plaintiff appears from the following example, based on the return for EP391 for the month ending 30 June 2012.4 In that month the price received by the first and third defendants for petroleum recovered from the permit area of EP391 was $279,835.53 (converted to Australian currency). The 'value at the well-head' for that petroleum agreed between the Minister, the first defendant and the third defendant under s 145 of the Act was $139,917.77, being 50% of the sale value of that petroleum.
29 On the defendants' construction of the Royalty Deed, the royalty
payable to the plaintiff, in the absence of cl 3.4(b) being engaged, is 2% of the 'value at the well-head' agreed between the Minister and the relevant defendants or 2% of $139,917.77. On the plaintiff's construction the royalty payable in those circumstances is 2% of $279,835.53 or 2% of the sale price without any deductions being made from that sum. That is, the plaintiff contends that the 'gross value' of the petroleum, in cl 3.4(a) of the Royalty Deed, is the price for which the petroleum is sold by the relevant defendants without deduction for the cost of bringing the petroleum from the well head to the location at which it is sold.
30 The first and third defendants have paid their proportion of royalties
in respect of petroleum recovered from the area of EP391 to the plaintiff at the rate of 2% of the amount agreed under s 145 of the Act. The plaintiff seeks declarations which would mean that the royalty payable was 2% of the sale value of the petroleum (in effect double the amount paid) and orders for the taking of an account in respect of royalties properly payable.
[2015] WASC 143
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Principles of construction
31 An appropriate starting point in considering the proper construction
of the Royalties Deed is to recall the observations of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd:5
It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust.
32 That passage emphasises the importance of the objective meaning of
the words used to express contractual intention in the construction of the resulting contract. Gibbs J went on to deal with the approach to be taken when the language is open to more than one construction, either on its own terms or in light of other potentially inconsistent parts of the same instrument. However, that discussion did not detract from the imperative to give effect to language which is, having regard to the context in which it appears, relevantly unambiguous.
More recently, the plurality in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd observed:6
The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that
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the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'. (footnotes omitted)
34 In the present case, the approach avoiding 'commercial nonsense' or
'commercial inconvenience' does not significantly assist in the choice between the competing constructions of the Royalty Deed advanced by the parties. Neither of those competing constructions would, in my view, create a commercial nonsense or commercial inconvenience. The parties simply advance differing methods for the calculation of the amount which is payable by the defendants to the plaintiff under the terms of the Royalty Deed.
Proper construction of cl 3 of the Royalty Deed
35 In my view the plain words of the Royalty Deed, considered as a
whole and in light of the provisions of the Act, make it clear that the
defendant's construction of cl 3 of the Royalty Deed is correct.
Clause 3.1(a)
36 In my view, the central operative provision is cl 3.1(a) of the Royalty
Deed. By that clause, royalty is payable at the rate of 2% of the 'Well Head Value', a term which is defined in cl 1.1 to mean the price that an arm's length buyer would pay for Petroleum at the well head. The location of the petroleum for which this price is to be determined is clearly the 'well head'. It does not seem to me to be possible to read the definition of 'Well Head Value' in cl 1.1 of the Deed as referring to anything other than the value of the petroleum at the well head. This definition refers to a price which an arm's length buyer would pay for petroleum at a location - namely the well head - and not the volume of petroleum to which that price is being applied. I do not accept the rather faint suggestion by counsel for the plaintiff that the words 'at the well head' in the definition of 'Well Head Value' in cl 1.1 are concerned with the location where the volume of petroleum is to be measured.
37 The location at which a sale of petroleum takes place is important for
the determination of the price which an arm's length buyer would pay for the petroleum. This point was made by Gleeson CJ in Franke v CIC General Insurance Ltd (The Coral):7
Although the value of an item of property is commonly expressed more elliptically, at least implied in a statement of value there must be an assumption as to time, location, and the conditions of the hypothetical sale
[2015] WASC 143
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by reference to which the exchange value is measured. Thus, for example, a statement about the value of a barrel of oil, if divorced from any context, is meaningless. On the other hand, a statement that the current market value of oil is X dollars per barrel fob Rotterdam conveys a precise meaning. A given quantity of hydrocarbons would obviously have one value when brought to a wellhead in a remote location, and a different value following transportation to a refinery, refining, and further transportation to a capital city where they were to be consumed. Transportation costs may be an important element in determining the market value of a commodity at a given time and place, because they affect the price that a purchaser of the commodity at that place would have to pay in order to use the commodity or dispose of it most advantageously. Indeed, activities such as transportation or processing are often referred to as adding value.
38 The Act relevantly defines 'well' to mean a hole in the Earth's crust
made by drilling, boring or any other means in connection with exploration for petroleum or operations for the recovery of petroleum. The well head is clearly the head of the well, or hole in the Earth's crust, which will be located within the relevant tenement area at the valve station agreed or determined under s 146 of the Act.
39 In the context where the Royalty Deed refers to the Act, counsel for
the plaintiff properly accept that the term 'well head' is used in the Royalty Deed in the same sense as it is used in the Act. In the present case it is unnecessary to define the location of the well head more precisely.
40 The definition of 'Well Head Value' in cl 1.1 of the Royalty Deed
requires that the relevant hypothetical price is determined at the location of the well head. The defendant's construction provides for that outcome. The plaintiff's construction does not. Rather, the plaintiff's construction focuses on the hypothetical price which would be paid by an arm's length buyer for the petroleum at its location when it is first sold by the relevant defendants. That point of sale need not be and, in light of the common industry practice of selling petroleum downstream from the well head,8 is unlikely to be located at the well head. Given the location of the relevant tenements in the remote Kimberley region, there is likely to be a significant difference between the price which an arm's length buyer would pay for petroleum at the well head and the amount that such a buyer would pay for the petroleum at a distant downstream location.
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Clause 3.4
41 In my view cl 3.4 is a mechanical provision which sets out the
methods by which the price that an arm's length buyer would pay for petroleum at the well head will be determined. In summary, the price will be the value agreed or determined for the purpose of calculation of the State Royalty, determined by the plaintiff or determined by an expert.
42 The default mechanism is that the price will be the 'value at the
well-head' agreed or determined for the purpose of the Act under s 145 of the Act. However, the plaintiff, who is not a party to the process provided for in s 145 of the Act, is not bound by the outcome of that process. If the plaintiff is of the opinion that the value agreed or determined under cl 3.4(a) does not reflect the price that an arm's length buyer would pay for petroleum at the well head on the date the petroleum was first sold, then the plaintiff may determine the value that it considers represents the 'Well Head Value' of the petroleum on that date. The relevant defendants may either accept or dispute the plaintiff's determination under cl 3.4(b). If they dispute the determination then the expert will be required to make a determination. In such a case the expert will be required to determine the Well Head Value, ie the price that an arm's length buyer would pay for the petroleum at the well head.
43 For example, if the plaintiff formed the opinion that the costs of
bringing petroleum recovered from EP391 from the well head to the point of sale were in fact only 25% of the sale value, it might determine that the 'Well Head Value' was 75% of the sale value. If the defendants disputed the plaintiff's determination then the expert would need to determine the 'Well Head Value'. It might be expected that the expert would do this by making his or her own determination of costs downstream from the well head and then deducting those costs from the sale value.
44 In my view, there is no inconsistency between the definition of 'Well
Head Value' in cl 1.1 of the Royalty Deed and cl 3.4 of the Royalty Deed. Clause 3.4 merely defines the method for determining the price that an arm's length buyer would pay for petroleum at the well head (being either the agreement or determination under the Act, determination by the plaintiff or determination by the expert).
Use of the phrase 'at the well head' in cl 3.4(a)
45 The plaintiff's argument depends on reading the words 'at the well
head' in cl 3.4(a) as referring to the location where the volume of petroleum subject to royalty is determined. That submission is
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inconsistent with the manner in which 'Well Head Value' is defined in cl 1.1 of the Deed, in which the words 'at the well head' clearly identify the location at which the value of the petroleum is to be determined. It is also inconsistent with the way in which the words 'at the well head' are used in cl 3.4(b) of the Royalty Deed, which is also to denote the location where value is to be determined. It seems unlikely that the words 'at the well head' in cl 3.4(a) would be used in a different sense in that paragraph.
46 Further, the quantity of petroleum to which royalty is applied is the
amount 'recovered from the Royalty Area' referred to in cl 3.1(a) and cl 3.1(b). Clause 3.4(a) is evidently concerned with the determination of the value of petroleum, not its quantity. So much is confirmed by the reference in cl 3.4(b) to the 'Well Head Value, as agreed or determined for the purposes of clause 3.4(a)' of the Royalty Deed.
47 In any event, even if the plaintiff's submission as to the meaning of
the words 'at the well head' in cl 3.4(a) were to be accepted, it would not assist the plaintiff. The 'value' which is agreed or determined for the purposes of cl 3.4(a) is a value agreed or determined under the Act for the purposes of calculation of the State Royalty. The value agreed or determined under s 144A and s 145 of the Act for the purposes of calculating the State Royalty is expressed to be a 'value at the well-head'. The calculation required by the Act is the application of a percentage (the prescribed rate) to a royalty value which is a value at the well head agreed or determined under s 144A and s 145 of the Act. What is determined or agreed for the purposes of calculating the State Royalty is the value of petroleum located at the well head, regardless of the operation of the words 'at the well head' in cl 3.4(a) of the Royalty Deed.
Use of the term 'gross' in cl 3.4(a)
48 The plaintiff relies on the use of the term 'gross' in cl 3.4(a) of the
Royalty Deed. The term 'gross' does not appear in the relevant provisions of the Act. The usual meaning of 'gross' is, as the plaintiff observes and the defendant accepts, 'without deductions'. However, the question remains what amount is to be applied without deductions. In the case of cl 3.4(a) that amount is the value agreed or determined for the purpose of the calculation of the State Royalty. The value which is agreed or determined under the Act for the purposes of calculating the State Royalty is the value of the petroleum at the well head. It is that value at the well head, and not the price for which petroleum may be sold at some downstream location, which must be applied without deductions. Put another way, the 'gross value' to which cl 3.4(a) refers is the gross value of
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the petroleum at the well head and not its gross value at the point at which
the petroleum is first sold.49 The plaintiff relied on the practice which had been adopted by the
relevant State Department in calculating the royalty payable to the State at the time of entry into the Royalty Deed. It is agreed between the parties that the practice was, at all material times, as follows:
For the purpose of calculating the royalty payable to the State, the royalty value is derived by taking the gross value of petroleum recovered and deducting all costs incurred between a defined valve on the christmas tree and the point of sale. Deductible costs are normally confined to the processing, storage and transport of the petroleum recovered by the producer to the point of sale. These allowable deductions are capped at 50% of the gross value of the petroleum. All other costs, including costs associated with exploration, drilling, recovery and abandonment are not deductible.
50 The above description is a description of a method for calculating
'royalty value' for the purposes of s 144A and s 145 of the Act. The plaintiff contends that the reference to 'gross value' in cl 3.4(a) of the Royalty Deed should be taken to refer to the 'gross value of petroleum recovered' in the Department's calculation.
51 I do not accept that submission. It is, in my view, inconsistent with
the use of the phrase 'at the well head' in the Royalty Deed. Further, the value which is referred to in cl 3.4(a) is a value 'agreed or determined from time to time for the purpose of calculation of the State Royalty'. The practice referred to in the passage I have just quoted is a method of calculation, but is not a process of agreement or determination. The only relevant process of agreement and determination is that provided for in s 144A and s 145 of the Act in relation to the 'value at the well-head' of petroleum. The affinity between the language used in s 144A and s 145 of the Act and that used in cl 3.4(a) of the Royalty Deed is, in my view, clear, and indicates that the agreement or determination referred to in cl 3.4(a) is the agreement or determination of the value of petroleum at the well head under s 144A and s 145 of the Act.
Clause 3.1(b)
52 The defendants' construction is also confirmed by cl 3.1(b) of the
Royalty Deed. By cl 3.1(b), if the State Royalty is equal to or less than 2.5% of the 'Well head Value of Petroleum recovered from the Royalty Area, the Royalty payable under clause 3.1(a) will be calculated at a rate of 1% of the Well Head Value of Petroleum recovered from the Royalty
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Area'. State Royalty is, as I have noted, calculated by reference to the value of petroleum at the well head. The Act requires that a prescribed rate be applied to the royalty value, or value at the well head, and does not authorise the application of the prescribed rate to some other value. When cl 3.1(b) refers to the calculation of State Royalty as a percentage of Well Head Value, it can only be referring to the royalty value of petroleum, or the value of petroleum at the well head.
53 Clause 3.1(b) uses the term 'Well Head Value' both in relation to the
calculation of State royalty (which is the value at the well head) and the value by which the Royalty provided for in the Royalty Deed is calculated. It is clear that the term 'Well Head Value' is used in both cases in its defined sense, and that the defined sense is a price payable for petroleum located at the well head and not some other location.
54 The plaintiff claimed that the defendants' construction produced an
anomaly in the operation of cl 3.1(b) of the Royalty Deed. The plaintiff contended that if a 10% State Royalty is calculated as being equal to or below 2.5% of the Well Head Value (ie a 75% reduction from 10%) the royalty payable to the plaintiff will be reduced from 2% to 1% of Well Head Value (a 50% reduction). The plaintiff says that this disparity in the percentage reduction is anomalous.
55 The plaintiff further contends that, on its construction, the State
Royalty is already being calculated as being equal to 5% of the Well Head Value (ie, gross value less the 50% deduction), therefore the reduction in State Royalty from 5% to 2.5% of the Well Head Value (50%) would result in an identical reduction in the plaintiff's royalty from 2% to 1% (50%).
56 I do not accept the plaintiff's submission in relation to cl 3.1(b) of the
Royalty Deed. In the first place I do not regard the fact that the extent of royalty reduction, expressed as a percentage, is different for the State Royalty to be anomalous. In the second place, the plaintiff's construction achieves the same percentage reduction only if the prescribed rate of State Royalty is reduced to exactly 2.5% and the applicable prescribed rate would otherwise be 10%. The plaintiff's construction also produces different percentage reductions if the prescribed rate for State Royalty is reduced to below 2.5% or, in the case of a production licence, if the initial prescribed rate determined under s 52 of the Act is less than 10%.
[2015] WASC 143
MITCHELL J
Clause 7.1
57 Support for the defendant's construction can also be found in the
requirement in cl 7.1 of the Royalty Deed that the defendants keep true and accurate 'Books and Records'. The phrase 'Books and Records' is defined in cl 1.1 to mean books, accounts and records showing reasonable detail in relation to:
(a) the production of Petroleum from the Royalty Area; (b) the sales value of Petroleum from the Royalty Area; (c) expenses incurred downstream of the well head and deducted from the Sales value of petroleum from the Royalty Area; and (d) the calculation and payment of the Royalty.
58 The components of the definition of 'Books and Records' are those
required for the royalty calculation contended for by the defendants, in which the expenses incurred downstream of the well head are deducted from the sales value to form the base to which the relevant rate of royalty is applied. On the plaintiff's construction there would be no point in keeping the records referred to at par (c) of the definition, as there can be no deduction of expenses from the sales value.
Extrinsic material
59 The defendants also rely on the terms of the 2006 Sale Agreement
and a precursor letter agreement as supporting their construction of the Royalty Deed. I accept that it is appropriate to have regard to at least the 2006 Sale Agreement in construing the Royalty Deed.9 In my view, it is unnecessary to resort to this extrinsic material as the effect of the Royalty Deed is clear on its terms. The plaintiff does not relevantly rely on any extrinsic material to support its construction, other than the practice of the Department in calculating the value of the royalty to which I have already referred. The fact that a component of the sale price provided for in the 2006 Sale Agreement was a 'net well head royalty ... payable in accordance with the terms of the Royalty Deed' takes one to the terms of the Royalty Deed but does not materially assist me in resolving the dispute as to the proper construction of that Deed.
[2015] WASC 143
MITCHELL J
60 The report of Professor Robert Officer, on which the defendants rely,
notes that a value of an otherwise identical product will often change over time and space. He says that in the oil and gas industry it is common for the rate of royalty to be charged at the well head but the marketing of oil and gas to be at a point downstream of the well head. He notes that the value at the well head is determined by subtracting from the market value at actual sale the costs of getting the product from its location and condition at the well head to its location and condition at the point of sale. I would have been prepared to draw these inferences in the absence of an expert report, but the expert report confirms that position. I infer that these basic facts concerning the common conditions of the petroleum market in which all parties operated were known to all parties to the Royalty Deed at all material times.
Conclusion
61 When the language of the Royalty Deed is considered as a whole, in
light of the provisions of the Act and the common industry practice referred to in Professor Officer's evidence, a reasonable businessperson could only have understood the references to 'Well Head Value' in the Deed to mean the value of petroleum at the well head, and not the sale value of the petroleum at some other location.
62 In my opinion, the words used in the Royalty Deed are unambiguous
and the court must give effect to them. The clear meaning of the Royalty Deed is to require royalty to be paid on the price that an arm's length buyer would pay for petroleum at the well head, and to provide for various mechanisms in cl 3.4 by which that price is to be determined. However, all of those mechanisms involve assessing the value of petroleum located at the well head. The plaintiff's contrary construction, which effectively requires petroleum to be valued at the point of sale, is untenable.
Orders
63 My conclusion as to the proper construction of the Royalty Deed
means that the plaintiff's claim, which is based on its proposed
construction of the Royalty Deed, must be dismissed.
| Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 | LGERA 303 [59]; CHU Underwriting Agencies Pty Ltd v Wise [2012] WASCA 123; (2012) 43 WAR 487 [11]; exercise. |
| 2 I note that s 11A of the Act, on which some reliance was placed by the plaintiff, was not enacted at the time the | |
| 3 Exhibits 1.95 and 1.96. | |
| 4 Attachment to exhibit 1.79. | |
| 5 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, | |
| 109 - 10; Nannup Timber [57]. 6 Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 | |
| CLR 640 [35]. | |
| 7 Franke v CIC General Insurance Ltd (The Coral) (1994) 33 NSWLR 373, 376 - 377. | |
| 8 Report of Professor Robert Officer [12]. | |
| 9 See EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 [104]; | |
| Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216; (2012) 45 WAR 29; Royal Botanic Gardens [30]. |
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