Novus Australia Energy Company v Gulf Petroluem (Australia)

[2001] NSWSC 579

CITATION:	Novus Australia Energy Company v Gulf Petroluem (Australia) [2001] NSWSC 579
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50109/00
HEARING DATE(S):	21 June 2001
JUDGMENT DATE:	12 July 2001
PARTIES :	Novus Australia Energy Company Pty Limited -v- Gulf Petroleum (Australia) Pty Ltd & Gulf Canada Resources Limited
JUDGMENT OF:	Hunter J

COUNSEL :	Applicant/Plaintiff: P R Whitford Respondent/ Defendants: T D Castle
SOLICITORS:	Applicant/Plaintiff: Corrs Chambers Westgarth Respondent/ Defendants: Mallesons Stephen Jaques
CATCHWORDS:	Practice & Procedure - order for production of legal advice referred to in discovered documents in pre-trial procedure - claim of privilege - waiver - application of Pt 3.10 Division 1 Evidence Act 1995.
LEGISLATION CITED:	Evidence Act 1995
CASES CITED:	Mann v Carnell (1999) 168 ALR 86 Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 168 ALR 123 Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 40 NSWLR 12
DECISION:	Application dismissed with costs.

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

COMMERCIAL LIST

HUNTER J

THURSDAY 12 JULY 2001

50109/00 NOVUS AUSTRALIA ENERGY COMPANY PTY LTD -v- GULF PETROLEUM (AUSTRALIA) PTY LTD & GULF CANADA RESOURCES LIMITED

REASONS FOR JUDGMENT

1    These proceedings centre upon the proper construction of the terms of a share purchase agreement (the agreement), involving the parties, under which the plaintiff agreed to purchase all of the issued share capital in a corporation known as Gulf (Aust) Resources NL (the corporation). Under the terms of the agreement provision was made for an adjustment of the purchase price, inter alia, dependent upon the hydrocarbon inventory of the corporation at a stipulated date.

2    A dispute exists between the parties as to the operation of the agreement in relation to that adjustment. In the course of correspondence over this issue, prior to the institution of these proceedings, on 27 March 2000, the corporate counsel for the second defendant (Gulf) wrote to the plaintiff’s parent company (Novus) in terms as follows:

“ Re: Share Purchase Agreement dated 18 August 1999 between Gulf Canada Resources Limited and Gulf Petroleum (Australia) Pty Ltd and Novus Petroleum Limited and Novus Australia Energy Company Pty. Ltd.
(“SPA”)
Gulf Canada Resources Limited has received a detailed legal analysis from Australian counsel which confirms the advice of Bennett Jones, who assisted in completion of the transaction, and our internal view on the ownership of hydrocarbons which are stored in underground, naturally occurring reservoirs.
In reaching our conclusion, we have reviewed the Cooper Basin Unit Agreement, the Petroleum Act (SA) 1940-1971 (the “Petroleum Act”) and Petroleum Regulations (SA) 1989 SR No. 182, the Cooper Basin Ratification Act (SA) 1975, the Indenture and Consolidation Indenture as annexed to the Cooper Basin (Ratification) Act (SA) 1975 and the Natural Gas (Interim Supply) Act (SA) 1985.
Your position is that the gas in question was re-injected into natural reservoirs and thus, pursuant to section 4(2) of the Petroleum Act, ownership reverts to the Crown. It is our opinion that title to the hydrocarbons in question does not revert to the Crown, for several reasons.
1. Subordination of rights:
The Crown’s title to petroleum, established under the Petroleum Act, may be displaced by an “express grant of any right or title to petroleum made by the Crown after commencement of [the] Act”. Section 9 of the Cooper Basin Ratification Act, which is subsequent legislation, states that the application of the Petroleum Act shall be subject to the Cooper Basin Ratification Act and gives authority to the Minister to grant licenses and to allow sublicenses to producers “in order to implement or otherwise give effect to .. the provisions of the Unit Agreement” ‘notwithstanding anything in the Petroleum Act 1940’.
The form of the sublicence attached to the Cooper Basin Ratification Act gives the sub-licencee, subject to the provisions of the Unit Agreement, the right to own all petroleum extracted or released from the Unitized Zone.
The hydrocarbons in question have been released from the Unitized Zone and reinjecting them underground does not return them to their original state.
2. Ownership Rights under Unit Agreement:

Ownership of petroleum is expressed under clause 5.3 of the Unit Agreement as a share in petroleum in or recovered from a Unitized Zone, such share being determined in accordance with the party’s Unit Participation, having regard to the hydrocarbon or mixture of hydrocarbons in which ownership is claimed. In relation to ethane, the relevant unit is the Ethane Participation Unit. This is an express grant of an interest in hydrocarbons, subsequent to the Petroleum Act, which displaces the Crown’s ownership rights since it grants a participant an ownership interest to petroleum in the Unitized Zone, even prior to production.

3. Legislative Confirmation:
The Indenture, ratified by the Cooper Basin Ratification Act, prohibits the State “by legislation, regulation or administrative action” restricting or preventing the producers giving effect to their respective rights under, amongst other agreements, the Unit Agreement.
4. Legislative Interpretation:
Consistent with the general legal maxim that the courts will not interpret elements of a statute to be extraneous or meaningless, we conclude that the legal framework created by the Cooper Basin Ratification Act, the Indenture and the sub-licenses was not intended to remain subject to the continued operation of section 4(2) of the Petroleum Act, especially since the Petroleum Act contemplated that the Crown’s rights may be supplanted by any subsequent express grant by the Crown.
5. Technical Perspective:
Hydrocarbons which are produced from the Unitized Zone and subsequently re-injected into an underground storage facility do not regain the nature of hydrocarbons in situ in the Unitized Zone, merely because it is sub-surface. The use of depleted, naturally occurring gas reservoirs in lieu of above-ground tankage is a practice used around the world. A material distinction between hydrocarbons in situ and hydrocarbons stored in underground facilities is the risk of production. Virtually 100% of gas injected into an underground facility, especially if it is a depleted, naturally occurring gas reservoir, is recoverable. A reservoir engineer’s model of such a facility is known and understood, thus reducing the risk of production.
For those reasons, the hydrocarbons re-injected for storage should be treated as inventory, not Crown owned interests. The calculation of inventory as per the Statement of Adjustments delivered at closing is correct…”

3    The advice of “Australian counsel and that of Bennett Jones” is referred to in these reasons as “the legal advice” and the letter itself is referred to as “the 27 March letter”.

4    In the course of discovery in these proceedings, a copy of the 27 March letter was discovered by the defendants and made available for inspection by the plaintiff. That drew the following response in the facsimile of the plaintiff’s solicitors to the defendants’ solicitors of 5 March 2001:

“In the meantime, we wish to raise another discovery issue. One of the documents that your client produced on discovery was a facsimile from Joanne Alexander of Gulf Canada Resources Limited to Michael Sandy of Novus Petroleum Limited dated 27 March 2000 (“ Facsimile ”) (copy attached for ease of reference).
In that Facsimile, Ms Alexander responded to correspondence from Novus in which it had been alleged that Gulf Petroleum Australia Pty Limited (“ Gulf ”) was obliged to pay $A2,671,279.82 (plus interest) back to Novus because the Purchase Price had been incorrectly adjusted by that amount in Gulf’s favour. That allegation was based on, inter alia, arguments made in light of section 4(2) of the Petroleum Act (SA).
In the Facsimile, Ms Alexander stated:
“Gulf Canada Resources Limited has received a detailed legal analysis from Australian counsel which confirms the advice of Bennett Jones, who assisted in the completion of the transaction, and our internal view on the ownership of hydrocarbons which are stored underground, [sic] naturally occurring reservoirs.
…
Your position is that the gas in question was re-injected into natural reservoirs and thus, pursuant to section 4(2) of the Petroleum Act, ownership reverts to the Crown. It is our opinion that the title to the hydrocarbons in question does not revert to the Crown, for several reasons”.
The “reasons” alluded to are then set out.
As the Facsimile was copied to Nick Pappas of Mallesons Stephen Jaques, we assume that the “detailed legal analysis from Australian counsel” refers to advice from Mallesons Stephen Jaques.
In sending the Facsimile to Novus, Gulf clearly disclosed the substance of that advice, as well as the substance of the advice it had received from Bennett Jones, to a third party - namely, Novus. In doing so, it waived any privilege it may have had over that advice. Notwithstanding the waiver, we note that Gulf has not listed any documents which record the substance of the advice it received from Mallesons Stephen Jaques or Bennett Jones in its List of Documents or made any such documents available for inspection.
Our client requires Gulf to list, and make available for inspection, any documents that record:

· the “detailed legal analysis from Australian counsel”; or

· the “advice of Bennett Jones”

referred to in the Facsimile.
We would appreciate it if your client could include those documents in your client’s Amended List, which is currently being prepared….”

5    The contentions in that facsimile were not accepted by the defendants’ solicitors as advised by them in their letter to the plaintiff’s solicitors of 13 March 2001, as follows:

“We do not agree with your contention that the statements contained in our clients’ facsimile to your client of 27 March 2000 amounted to a waiver of privilege.
Under section 122 of the Evidence Act, you will note that the party must knowingly and voluntarily disclose the substance of the evidence.
The legal authorities suggest that waiver is tied to the question of fairness and the conduct of the proceedings generally. There must be an election to waive privilege in clear and unequivocal terms.
This facsimile sets out Gulf Canada’s understanding of the legal issues in this dispute taking into account the views of its external legal advisers. You will note on the second paragraph the reference to “our conclusion” and in the third paragraph, the statement “it is our opinion”.
This facsimile clearly does not amount to an election by Gulf Canada to waive its entitlement to legal privilege.
The advice referred to in the facsimile has been included in the privileged documents section of our clients’ Supplementary List of Documents….”

6    The plaintiff has moved by notice of motion filed 21 March 2001 for the following order:

“1. An order that the Defendants, or either of them, produce for inspection by the Plaintiff forthwith all documents within their possession, custody or power recording the:
(a) “detailed legal analysis from Australian Counsel”; or
(b) “the advice of Bennett Jones”
referred to in facsimile from Joanne Alexander of the Gulf Canada Resources Limited to Michael Sandy of Novus Petroleum Limited dated 27 March 2000.”

7    In support of the application the plaintiff has evidenced the correspondence earlier referred to in these reasons, as providing the context in which the 27 March letter was sent.

8    The correspondence began with a letter from Gulf to Novus of 19 November 1999, as follows :

“ Share Purchase Agreement dated 18 August 1999 (“SPA”) - Petroleum Substances in Storage
You will recall that in the days leading up to Closing, Novus and Gulf exchanged differing views regarding the treatment to be accorded to gas in storage. In order to facilitate the schedule for an orderly completion both parties agreed to differ on the subject, reserving our respective positions for later determination by the mechanism envisaged in Section 2.5 of the SPA. The purpose of this letter is to revisit that issue, in order that we can arrive at a satisfactory outcome and move on.
On receipt of Gulf’s draft Closing Statement on 17 September 1999, Novus’ initial concern focussed on Gulf’s representation that gas in storage was a current inventory item. Novus argued about whether it was “inventory” or “reserves”, and Gulf maintained that it did not matter what Novus called it, because essentially it was “a Petroleum Substance owned by the Company…. in tanks or storage at the Adjustment Date” (Section 2.3(b) of the SPA). Novus did not, and still does not, concede that gas in storage was properly classified as inventory.
It transpires that the Company was, and is, not the owner of that portion of the Petroleum Substances in storage that had been returned to a natural reservoir. This is because Section 4(2) of the South Australian Petroleum Act provides that:
“Upon the extraction of effluxion of petroleum from a natural reservoir in which it has been contained, the petroleum shall become the property of the person by whom it has been extracted or released but the property in any petroleum that is returned or reverts to a natural reservoir, shall revert to the Crown.”
Clearly, having regard to this provision, Petroleum Substances that have been returned to a natural reservoir are not owned by the Company and should be excluded from Petroleum Substances used for the purposes of escalating the Purchase Price by the Inventory Price Adjustment contemplated in Section 2.3(b) of the SPA.
Further, the Petroleum Substances returned to a natural reservoir and not owned by the Company do not form part of the Miscellaneous Interests as defined in Section 1.1(ee) of the SPA. To the extent that these Petroleum Substances are an Asset they form part of the Petroleum and Natural Gas Rights as defined in Section 1.1 (ii) of the SPA.
Accordingly, the value of Petroleum Substances returned to a natural reservoir is covered by the Purchase Price as defined in Section 2.2 and no additional payment can be claimed in respect of these Petroleum Substances under Section 2.3. On the understanding that sales gas to the value of A$309,130.47 and ethane to the value of
A$ 2,362,149.35 represent Petroleum Substances that have been returned to a natural reservoir, Novus requests that the amount of $2,671,279.82 paid at Closing be refunded plus interest.
Novus does however confirm its acceptance of the Inventory Price Adjustment in respect of Petroleum Substances that have not been returned to a natural reservoir.
In view of the above, Novus does not consider that this is a matter that should be referred to Deloitte & Touche in accordance with Section 2.5 of the SPA. Although the amount paid for gas in storage was paid as an Adjustment to the Purchase Price, it is Novus’ contention that gas that has been returned to a natural reservoir should have been excluded from the Adjustment to the Purchase Price.
Novus expects that Gulf will reconsider its previous position on this adjustment and agree to refund to Novus the total value of all Petroleum Substances that have been returned to a natural reservoir as at the Adjustment Date.…”

9    Gulf’s reply of 21 December 1999 was in the following terms:

“We are in receipt of your letter dated 19 November 1999 setting out Novus’ position on the value of the Petroleum Substances in storage as per Section 2.3(b) of the SPA.
We have carefully considered Novus’ position. We have also reviewed the SPA, the South Australian Petroleum Act and the Petroleum Regulations. Based upon our review, Gulf maintains its position that the Inventory Price Adjustment was properly calculated and reflected on the Closing Statement.
Please be advised that:
1. The question of whether or not gas in storage constitutes a current inventory item has no bearing on the interpretation of Section 2.3(b) of the SPA.

2. The Adjustments to Purchase Price, established in section 2.3 of the SPA, included Working Capital and an “Inventory Price Adjustment”. Both adjustment items were set out in Schedule “A” to the SPA. The methodology for the calculation was in accordance with Section 2.3 of the SPA.

3. Gulf does not believe that Section 4(2) of the South Australian Petroleum Act is applicable because the gas in question was processed prior to re-injection into a gas storage reservoir which is not a natural reservoir, and therefore does not revert to the Crown.
4. The rights conferred by petroleum production licenses under the South Australian Petroleum Act are broad enough to permit storage in an underground reservoir of processed gas.
In view of the above, Gulf does not think this matter should be referred to Deloitte & Touche in accordance with Section 2.5 of the SPA.
Gulf regrets the disagreement between Novus and Gulf with respect to this matter, however, the provisions of the SPA are clear and unequivocal. Gulf looks forward to a positive business relationship with Novus in the future…”

10    A reasoned response by Novus of 2 February 2000 was in the following terms:

“I refer to your letter of 21 December 1999.
The position put by Gulf, as stated in that letter, is unacceptable to Novus.
The gas storage reservoirs into which the gas in question was re-injected are natural reservoirs and accordingly, pursuant to Section 4(2) of the Petroleum Act 1940 (South Australia) (the “Act”), ownership thereof reverts to the Crown.
We have concluded that the storage reservoirs are “natural reservoirs”, for the purpose of the Act, on the following basis.

· “natural reservoir” is not defined in the Act;

· however, the term “reservoir” is defined in the Regulations under the Act, as being “any porous and permeable rock that is capable of storing fluids and yielding them to a well”;

· from this we deduce that a “natural reservoir” is a “reservoir” (so defined) occurring naturally, as opposed to created artificially;

· the storage reservoirs in question relate to naturally occurring structures from which fluids (ie “petroleum”) were previously yielded to walls.

Accordingly, for the purposes of Section 4(2) of the Act, the re-injected gas in question has been returned to “natural reservoirs” and, therefore, the ownership therein reverts to the Crown.
Gulf has no right or title in or to such re-injected gas and so has no entitlement to receive value for the same from Novus.
Furthermore, we note that pursuant to Section 35(2) of the Act, no “royalty” (as defined in the Act) is payable in respect of petroleum “that is returned to the pool…” “Pool” is defined in the Act as “a subterranean geological structure within which petroleum has or might have accumulated”. (It seems to us that, in the usual parlance of international petroleum industry, this definition would apply equally to a “natural reservoir”). It is clear that the gas in question has been/is returned to the “pool” (as defined) and, to this end, Santos Ltd has confirmed to us that no royalty has been, nor is, paid in respect of the said gas.
It is implicit in the Act that the reason for gas so returned to the pool being exempt from any royalty liability is because the producer does not own that gas. Section 4(2) of the Act states clearly that the Crown owns such gas.
In light of this, Novus looks forward to Gulf’s reconsideration of its position in relation to this matter, and agreement to refund to Novus the total value of all Petroleum Substances which were not owned by Gulf at the time of completion of the sale transaction nor at the Adjustment Date.

Finally, in relation to the remaining points set out in your letter of 21 December 1999, please note that we have no dispute with your points 1 and 2. Nor do we disagree with your point 4, although we are of the view that this point is irrelevant to the debate contained in your point 3 and responded to in this letter.
We look forward to this matter being progressed expeditiously to a resolution between Novus and Gulf… ”

11    The debate continued with a facsimile from Gulf to Novus of 10 March 2000 as follows:

“Further to our facsimile of 2 February 2000 regarding amounts paid by Novus to Gulf in respect of gas in storage, a further Purchase Price adjustment issue has now come to our attention.
At Closing, Novus paid to Gulf the Purchase Price (as defined in the SPA) increased by the Inventory Adjustment Price (in accordance with clause 2.3(b) SPA) to account for Petroleum Substances (as defined in the SPA) in tanks or storage owned by Gulf as at the Adjustment Date. That is, at Closing Novus acquired from Gulf additional Petroleum Substances which comprised pre-Adjustment Date Petroleum Substances (“Inventory”).
Under Section 25 of the Petroleum Act 1940 (South Australia), the Inventory attracted a liability to pay a royalty to the South Australian Government on the well-head value thereof (the “Government Royalty”) at the time the inventory was recovered. The Inventory also attracted an overriding royalty liability to Santos pursuant to Article XIII of the Unit Agreement dated 1 January 1975 (the “Overriding Royalty”). According to the provisions of the Unit Agreement this liability also arose at the time the Inventory was recovered.
So, the liability for the payment of the royalty in respect of the Inventory arose at the time of recovery, that is, prior to the Adjustment Date. If follows from this that the liability for the Government Royalty and the Overriding Royalty in respect of the Inventory clearly rests with Gulf and therefore comprised liabilities which should have been included as such in the Closing Statement. However, no such liabilities were included in the Closing Statement.
The total value of the royalty liabilities (i.e Government and Overriding Royalties) is $212,406.57. I attach a copy of our calculations of these liabilities for your information. This amount does not include the value of the royalty liabilities which should attach to that part of the Inventory which comprises gas in storage, for which Gulf charged Novus in the “Inventory Price Adjustment” (as defined in the SPA). The value of that liability is $333,963.40, bringing the total claim value to $546,369.97. However, Novus remains of the view that gas in storage is owned by the Crown and therefore is not subject to any royalty liability - as set out in our facsimile of 2 February 2000.
Novus is currently in the process of preparing revised statements of adjustments which will be sent to Gulf for reconciliation, and payment as post-Closing adjustments , in accordance with Clause 2.5(a) of the SPA. These revised statements will include an adjustment for the Government Royalty and Overriding Royalty liability, which shall be promptly paid by Gulf to Novus, together with interest at the Prime Rate (as defined in the SPA) from the date of Closing until the date the adjustment is so paid. These revised statements of adjustment shall be delivered to you within the time frame specified in clause 2.5 of the SPA...”

12    Then came the 27 March letter which is the subject of this application.

13    The exchange of views on the operation of the agreement concluded with the facsimile of Novus to Gulf of 13 April in the following terms:

“I refer to your letter of 27 March 2000 to Michael Sandy in relation to the above-referred matter, which has been passed to me for consideration and response.
We have now considered your letter. However, notwithstanding your comment that you have obtained detailed legal analysis from Australian counsel supporting your position, we remain of the view that the petroleum stored underground can only belong to the Crown and, accordingly, Gulf did not and could not own the Petroleum Substances the subject of this dispute, at the time of completion of the sale transaction nor at the Adjustment Date.

We have also considered the Cooper Basin Unit Agreement (the “Unit Agreement”) and all the relevant legislation, including annexed indentures. The maintenance of our position is based on the following analysis.

1 . SUBORDINATION OF RIGHTS
In Australia, the primary position at law is that the Crown owns all minerals (including hydrocarbons) below the surface. In South Australia this principle is firmly entrenched in statute, in the Petroleum Act 1940 (South Australia) ( the “Petroleum Act”), section 4(1).
We acknowledge that section 4(1)(b) provides that such rights and title of the Crown are subject to any “express grant of [a] right or title to petroleum… by the Crown after the commencement of [the Petroleum Act]”. However, such subsequent grant of title can only be a grant which overrides the rights of the Crown if it is in respect of petroleum which has been extracted from under the ground.
All rights granted to the Unit participants, pursuant to the Petroleum Act, the Cooper Basin Ratification Act (SA) 1975 (the “CBRA”) and all annexures thereto, relate to rights embodied in petroleum production licences and sub-licences. These are licences only ; that is, they are rights granted by the Crown State, which enable the holders thereof to appraise the subject area and to produce petroleum and have title to petroleum so produced therefrom. The licences give no right of ownership in respect of their subject area nor in respect of petroleum located beneath that area. In consideration of the Crown giving up its right to the petroleum once it has been extracted (ie. under the licences), the Crown collects economic rent from the licensees, in the form of royalties etc.
In Australia, unlike Canada and America, there is no presumption that the owner (or licensee) of the land is entitled to all that lies below the surface of his land. Rather, as stated above, in Australia, the Crown owns all the minerals (including hydrocarbons) below the surface. Therefore, the licenses granted by the Crown can only provide for the licensee to own the petroleum once it is extracted from below the surface.
So, the rights under the licences and sub-licences relate to petroleum extracted. There is nothing in any of the relevant legislation (including, in particular but without limitation, in section 9 of the CBRA) or the licences or sub-licences, which overrides the Crown’s title to petroleum in the ground. This principle is clearly embodied in section 4(2) of the Petroleum Act.
2. ROLE OF THE COOPER BASIN UNIT AGREEMENT
The Unit Agreement constitutes a contractual arrangement only between the Unit participants - for the purposes of governing their inter- relationships, the manner in which they will bear / share obligations under the licenses and sub-licences and how they will share in petroleum extracted from the areas the subject of such licences.
The Unit Agreement does not have the force of law and cannot and does not change the rights of the Crown. The provisions of this agreement are predicated on the provisions of the Petroleum Act, except to the extent those provisions are modified by the CBRA and the indentures annexed to the CBRA. As noted above, neither the CBRA nor the indentures purport to override the Crown’s title in and to petroleum beneath the surface.
Accordingly, Novus rejects absolutely Gulf’s assertion that the arrangements provided for in clause 5.3 of the Unit Agreement constitute an “express grant of an interest in hydrocarbons, subsequent to the Petroleum Act, which displaces the Crown’s ownership rights”.
There is, and can be, no displacement, under the Unit Agreement or any statute, of the rights of ownership of petroleum in the ground which are vested in the Crown. The rights of the Unit participants may well be in existence before the petroleum is produced but those rights can only ever pertain to petroleum. They do not pertain to petroleum in its natural condition below the surface, even if that petroleum has been extracted or released and then subsequently returned to a natural reservoir.
This principle is acknowledged in the Unit Agreement and the applicable legislation insofar as the Unit participants have certain contractual rights only in respect of petroleum extracted from the areas the subject of the licences. These rights are known as “Petroleum Rights” and are clearly defined as the rights of the participants under the licences. That is, their rights to conduct operations to appraise and develop petroleum and to own petroleum extracted from the Unitised Zone. These rights can be clearly distinguished from the rights of ownership of the Crown in respect of petroleum in the ground.
3. COOPER BASIN RATIFICATION ACT (SA) 1975
We refer to point two on page five of your above-referred letter. Namely, the statement that the form of sub-licence attached to the CBRA gives the sub-licensee the “right to own all petroleum extracted or released from the Unitised Zone”. We concur with this statement and point out that this in no way conflicts with the Crown’s title in and to petroleum under the surface nor with the provisions of the Petroleum Act (in particular, section 4 (1)).
However, this statement ignores the fact that section 4(2) of the Petroleum Act then goes on to provide that if the petroleum so extracted or released is re-injected below the surface then ownership therein reverts to the Crown.
In this regard we also draw your attention to clause 3 of the form of sub-licence attached to the CBRA. This clause requires the sub-licensees to comply with the provisions of the Petroleum Act, to the extent there is no conflict between those provisions and those of the CBRA. As there is nothing in the CBRA which conflicts with section 4(2) of the Petroleum Act, this further entrenches the overriding rights of ownership by the Crown in respect of all petroleum beneath the surface prior to extraction or effluxion and upon return to the sub-surface if previously extracted.
4. TECHNICAL PERSPECTIVE
We have no wish to enter into a debate regarding the difference between hydrocarbons in situ versus hydrocarbons stored in underground facilities (ie. as per point 5 of your above-referred letter), as we are of the view that, for these purposes, this distinction is irrelevant. The fact remains that section 4(2)of the Petroleum Act clearly provides that if petroleum is extracted and then returned to a natural reservoir, the ownership thereof reverts to the Crown.
As noted in our letter of 2 February 2000, the gas in question was re-injected, was “returned to a natural reservoir” and therefore the ownership had clearly reverted to the Crown.
Accordingly Novus remains of the view that Gulf must refund to Novus the total value of all such “Petroleum Substances” which were not owned (and could not be owned) by Gulf at the time of completion of the sale transaction, nor at the Adjustment Date, in respect of which Novus had paid Gulf the full value calculated in accordance with the SPA.
________________
In light of the foregoing, we are of the view that the positions of Novus and Gulf have now each been stated with sufficient clarity. Nonetheless it is apparent that we are no closer to resolving the issue. In the event that we are unable to agree on this issue, the SPA provides for referral to Deloitte and Touche as the method of resolving disputes relating to working capital adjustments - although we query whether this is appropriate in this case. Novus is reluctant to refer this matter to Deloitte and Touche (or to refer the matter to the Courts if that is more appropriate), and so we now propose that Dr Bob Williams will contact Henry Sykes in a few days time (ie. after you have had an opportunity to digest this response), with a view to resolving the matter as between the parties.
In the meantime, if you wish to discuss the legal arguments expressed in this letter further please don’t hesitate to call me on phone [phone].
Finally, we would be most interested to review your Australian legal advice on this issue, if you are in a position to share this with us.”

14    I think it is common ground that there was no subjective intention of the defendants in discovering and permitting inspection of the 27 March letter to waive any claim to client legal privilege nor any intender waiver of client legal privilege by Gulf in referring to the legal advice in the 27 March letter. The application has been argued on the basis that nothing turns on whether the client privilege is that of Gulf or of the first defendant.

15    It is assumed that the orders are sought by the plaintiff as part of the discovery process. Whether that be so, or whether the motion should be treated as one seeking an order to produce the legal advice pursuant to notice, the reasoning, I think, is the same.

16 Part 23 r 3 (6)(d) requires a party claiming client legal privilege to specify:

“(i) any provision of Part 3.10 of the Evidence Act 1995 under which the privilege is claimed to arise;...”

17 A privileged document within the meaning of Pt 23 r 3(6)(d) is defined by Pt 23 r 1 to include:

“a document of which evidence could not be adduced in the proceedings over the objection of any person by virtue of the operation of Part 3.10 Division 1 of the Evidence Act”.

18 Part 36 rule 13 provides as follows:

“Privilege
13. (1) This rule applies where:

(a) the Court, by subpoena or otherwise, orders any person to produce any document to;

(b) a party is required by a notice served under rule 16 (1) to produce any document to…

the Court or a Judge or any officer of the Court, or any examiner, referee, arbitrator or other person authorised to receive evidence and … Part 3.10 of the Evidence Act 1995 is …. [not] applicable.

(2) The Court shall not compel, and rule 16 shall not require, production of a document or an answer to a question, unless and until the Court directs that the production or answer shall not be prevented by this subrule:
(a) over the objection of a person if evidence of the document, or of an answer to the question, could not be adduced in the proceedings over the objection of the person, by virtue of the operation of 3.10 Division 1 of the Evidence Act;...”

19 Part 36 r 16 (1) is in the following terms:

“Production on notice
16. (1) Subject to rule 13, where a party to any proceedings serves on another party notice requiring the party served to produce at any trial or hearing in the proceedings or, with the leave of the Court, on any day, or before any judge, officer, examiner or other person having authority to take evidence in the proceedings any document or thing for the purpose of evidence and the document or thing is in the possession, custody or power of the party served, the party served shall, unless the Court otherwise orders, produce the document or thing in accordance with the notice, without the need for any subpoena for production.”

20 It is not in dispute that the legal advice was confidential information falling within the ambit of s118 of the Evidence Act 1995 (the Act), which is in the following terms:

“Legal advice
118. Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of:
(a) a confidential communication made between the client and a lawyer; or
(b) a confidential communication made between 2 or more lawyers acting for the client; or
(c) the contents of a confidential document (whether delivered or not) prepared by the client or a lawyer; for the dominant purpose of the lawyer, or one or more of the lawyers, providing legal advice to the client.”

21    A confidential communication is defined as follows:

“…a communication made in such circumstances that, when it was made:
(a) the person who made it, or
(b) the person to whom it was made,
was under an express or implied obligation not to disclose its contents, whether or not the obligation arises under law.”

22 It is further provided by s 131(1) of the Act as follows:

“Exclusion of evidence of settlement negotiations

131. (1) Evidence is not to be adduced of:
(a) a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or
(b) a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.”

23 Loss of the protection afforded by ss 118 and 131, so far as may be relevant, applies in the following circumstances:

“Loss of client legal privilege: consent and related matters
122. (1) This Division does not prevent the adducing of evidence given with the consent of the client or party concerned.
(2) Subject to subsection (5), this Division does not prevent the adducing of evidence if a client or party has knowingly and voluntarily disclosed to another person the substance of the evidence and the disclosure was not made:

(a) in the course of making a confidential communication or preparing a confidential document; or
(b) as a result of duress or deception; or
(c) under compulsion of law; or
(d) if the client or party is a body established by, or a person holding office under, an Australian law-to the Minister, or the Minister of the State or Territory, administering the law, or the part of the law, under which the body is established or the office is held.

…
(4) Subject to subsection (5), this Division does not prevent the adducing of evidence if the substance of the evidence has been disclosed with the express or implied consent of the client or party to another person other than:

(a) a lawyer acting for the client or party; or

(b) if the client or party is a body established by, or a person holding an office under, an Australian law-the Minister, or the Minister of the State or Territory, administering the law, or the part of the law, under which the body is established or the office is held.

(5) Subsections (2) and (4) do not apply to:

(a) a disclosure by a client to another person if the disclosure concerns a matter in relation to which the lawyer is providing, or is to provide, professional legal services to both the client and the other person; or

(b) a disclosure to a person with whom the client or party had, at the time of the disclosure, a common interest relating to a proceeding or an anticipated or pending proceeding in an Australian court or a foreign court.

…

131 Exclusion of evidence of settlement negotiations

(2) Subsection (1) does not apply if:
…
(b) the substance of the evidence has been disclosed with the express or implied consent of all the persons in dispute; or
(c) the substance of the evidence has been partly disclosed with the express or implied consent of the persons in dispute, and full disclosure of the evidence is reasonably necessary to enable a proper understanding of the other evidence that has already been adduced; or
(d) the communication or document included a statement to the effect that it was not to be treated as confidential; or
…
(g) evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence; or

…

(5) In this section:

(a) a reference to a dispute is a reference to a dispute of a kind in respect of which relief may be given in an Australian or overseas proceeding…”

24    The plaintiff has argued this application on the basis that the question of privilege is to be governed by the doctrine of waiver of legal professional privilege as explained in Mann v Carnell (1999) 168 ALR 86, relying upon the decision of the High Court in Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 168 ALR 123.

25    Esso Australia Resources was concerned with putting to rest the question, which had been the subject of conflicting decisions within the Supreme Court of New South Wales and the Federal Court of Australia, whether client legal privilege and its waiver, as conceived in Pt 3.10 of the Act, applied to pre-trial processes. In Esso Australia Resources the High Court said that it did not.

26 However, there, the High Court was concerned with an appeal from the Federal Court of Australia, the Rules of which had no counterpart for Pt 23 r 1 and 3, or Pt 36 r16 of the Supreme Court Rules, as quoted earlier in these reasons.

27 The clear intention of those provisions and the definition within each of those parts of a privileged document, as being one of which evidence could not be adduced over an objection based upon Part 3.10 Division 1 of the Act, is to bring the concept of privilege and its waiver in pre-trial processes in this Court within the concept of client legal privilege and its waiver as espoused in the Act.

28 It was argued on behalf of the defendants that the exchange of views between the parties which involved the 27th March letter fell within s 131 of the Act. In so submitting, counsel for the defendants placed emphasis on the theme running through the exchanges between Gulf and Novus in which each party put forward their competing views of the agreement and of the governing legislation and expressed the hope that their difference of opinion could be resolved.

29    For example, the letter from Novus to Gulf of 19 November 1999 concluded with an expectation of a response from Gulf. In Gulf’s letter of 21 December 1999, it concluded with an expression of regret over the disagreement and looked “forward to a positive business relationship with Novus in the future”. Similarly, in the letter of Novus to Gulf of 2 February 2000, it expressed similar sentiment in looking “forward to this matter being progressed expeditiously to a resolution between Novus and Gulf” and invited contact “to discuss any aspects” of the views put forward by Novus in that letter.

30 One can find other similar expressions of anticipation by each party in their exchange of correspondence, that the matter could be resolved without resort to litigation. However, those expressions fall well short of the concept of settlement negotiations, as contemplated in s 131 of the Act.

31    Indeed, far from being settlement negotiations the parties steadfastly adhered to their opposing views of the construction of the agreement and the effect of the governing legislation upon that construction.

32 However, I think there is a fundamental difficulty in Gulf’s contention namely, the fact that s 131 of the Act is to be found in Division 2 of Pt 3.10, whereas Pts 23 and 36 of the Supreme Court Rules are directed to the concept of privilege and waiver as expressed in Pt 3.10 Division 1.

33 In my view there is no warrant for bringing the concept of protection of settlement negotiations as expressed in Pt 3.10 Division 2 into the operation of discovery or the compulsory production of documents to the Court (see Esso Australia Resources supra). Further, there is nothing in the subject correspondence which, in my view would attract common law principles of protection of ‘without prejudice’ communications between parties.

34 In considering the operation of Pt 3.10 Division 1 of the Act in relation to the legal advice, the only question is whether the 27 March letter constitutes a knowing and voluntary disclosure of the substance of the legal advice within the meaning of s 122.

35    In my view there has been no such disclosure. Both parties on that issue, have placed reliance upon the views expressed by Rolfe J in Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 40 NSWLR 12 and the observations of Kirby J on appeal ((1996) 137 ALR 28). I think the operation of s 122 will always turn on the particular facts of a case and, to a certain extent, that exercise may involve a matter of impression.

36    In this case it is clear, I think, exchanges between the parties of which the 27 March letter formed part, were nothing more than an expression of the parties’ respective views of the legal effect of the agreement and of the governing legislation. I think the overwhelming tenor of the 27 March letter was the expression of Gulf’s view and not the disclosure of the substance of any legal advice it had received.

37    Dissecting that letter: in the first paragraph, Gulf noted the receipt of the advice, asserted its own view of the ownership of the subject hydrocarbons and, in the second paragraph, stated that its conclusion had been arrived at following a review of the governing legislation. The following paragraph makes it clear that the interpretation of the agreement is the opinion of Gulf. I think that the reference to the Australian lawyers’ advice as confirming the advice of Gulf’s lawyers and as confirming Gulf’s internal view of the ownership of the hydrocarbons is itself an expression of opinion of the effect of that advice and not a disclosure of the substance of the legal advice.

38    I think the issue may be tested by pondering the situation of having the advice produced only to find that the legal advice in no way confirmed, or supported Gulf’s opinion of the effect of the agreement as expressed by Gulf in the 27 March letter. Such an approach underscores the true nature of the contents of the 27 March letter as an expression of a claimed opinion about the nature and effect of the advice as distinct from a disclosure of the substance of the advice.

39    In that context I note that Gulf did not respond to the last paragraph of the letter of Novus to Gulf of 13 April 2000 by satisfying Novus’ interest in ‘reviewing’ the legal advice. For convenience of reference, that paragraph is as follows:

“Finally we would be most interested to review your Australian legal advice on this issue, if you are in a position to share this with us.”

40    Although not determinative of the issue, it appears that Novus did not regard the substance of the advice as having been disclosed at that stage.

41    Accordingly, in my view, the client legal privilege attaching to the legal advice was not lost by reason of the reference to it in the 27 March letter. The plaintiff has argued that the question of waiver is governed by Manns case. Although it is not necessary to decide that question, I am satisfied that, if common law principles of waiver were to be applied, there has been no waiver of legal professional privilege by the 27 March letter. It is not suggested that there has been an express waiver, rather the argument has taken the line that there was an imputed or implied waiver.

42    However, for such a waiver of privilege to have occurred, the conduct of Gulf must have been such that it is inconsistent with the retention of legal professional privilege, having regard to any questions of fairness that might arise. All that has occurred, in my view, has been a fruitless exchange of opinion by each of Gulf and Novus on legal questions of construction of the agreement, and no question of unfairness arises in Gulf’s retention of its claim for client professional privilege in the face of its reference to the legal advice in that exchange.

43    Rather than the 27 March letter being inconsistent with the retention of legal professional privilege, I think Gulf’s conduct was entirely consistent with the maintaining of privilege as noted earlier, and although not necessarily relevant, Novus appears to have shared that view. I see no concept of fairness as dictating a contrary conclusion and none has been identified by Novus.

44    Accordingly, the application is dismissed and the applicants are to pay the respondents’ costs of the application.

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Last Modified: 07/18/2001