Oil Basins Limited v BHP Petroleum Pty Limited & Ors; BHP Petroleum Pty Ltd & Ors v Oil Basins Limited

[1988] HCATrans 165

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M35 of 1988

B e t w e e n -

OIL BASINS LIMITED

Applicant

and

BHP PETROLEUM PTY. LIMITED, THE
BROKEN HILL PROPRIETARY COMPANY

LIMITED and ESSO EXPLORATION AND

PRODUCTION AUSTRALIA INC.

Respondent

Office of the Registry

Melbourne No M36 of 1988

B e t w e e n -

BHP PETROLEUM PTY. LTD, THE BROKEN

HILL PROPRIETARY COMPANY LIMITED

and ESSO EXPLORATION AND PRODUCTION

AUSTRALIA INC.

Applicant

and

Oil

OIL BASINS LIMITED

Respondent

Applications for special

leave to appeal

WILSON J
DAWSON J

GAUDRON J

MlTl/1/RB 1 12/8/88

TRANSCRIPT OF PROCEEDINGS

AT :MELBOURNE ON FRIDAY, 12 AUGUST 1988, AT 9.30 AM

Copyright in the High Court of Australia

MR R. MERKEL, QC: If the Court pleases, I appear with

my learned friend, MR N.J. YOUNG on behalf of the

applicant,Oil Basins Limited, and also as the

respondent to the motion of my learned friends.

(instructed by Arthur Robinson & Hedderwicks)

MR A.M. GLEESON, QC: If it please the Court, I appear

with my learned friends, MR K.M. HAYNE, ~C and

MR N. MUKHTAR for the respondent to the irst

motion, arid for the applicants in the second motion.

(instructed by Middletons Oswald Burt)

WILSON J:  I take it it is convenient really for these

applications to remain distinct and to follow

each other?

MR MERKEL:  Yes, Your Honour. We have just had some

brief talks about how the matter may appropriately

proceed. The situation is that BHP and Esso would

not be wishing to proceed with their motion if

Oil Basins' motion is refused. So that in effect

the determination of Oil Basins' motion will

determine whether they wish to proceed with their

motion and it may be more convenient for the Court

in those circumstances to deal with our application

first. If it is refused, then it will follow that

both applications will be dismissed.

WILSON J: That is convenient to the Court.

MR MERKEL:  The submission of Oil Basins falls into

two parts. The first part of our submission addresses

the judgment of the Full Court and in upholding the
arbitrators in the award on the basis that the
Full Court has fallen into fundamental error in
construing the royalty agreement which operates to
bind the parties from the cotmnencement of Bass Strait
production in 1970 through the life of the oil fields
and the life of the oil fields at the present time
is expected to operate well into - certainly well
past the year 2000. So that the practical effect

of the ruling as to the principles that govern

calculation of royalty will have an operation at least

of the order of some 30 to 40 years, and possibly longer.

MITl/ 2/JM	2	12/8/88
Oil

The second part of our submission, after dealing

with the royalty agreement addresses why it is

in all the circumstances appropriate_that special leave to appeal

be granted in this case. ·rhe fundamental contention
of the applicant is that the royalty agreement
operates to prohibit the producers from directly
or indirectly passing on any part of the burden of

the excise taxes that have been imposed since 1975

on crude oil and liquified petroleum gases produced

from the Bass Strait oil fields and that that

direct or indirect passing on of the burden operates

in two ways. It cannot be passed on directly by

reducing the payment of the royalty that is otherwise

payable and it cannot be passed on indirectly by

deducting the excise payments from the value of the
hydrocarbons produced, which forms the basis of

calculating the 2% per cent royalty payable under the

agreement.

Since the imposition of the excise in 1975 the

producers have been deducting from the sales values,

or tteprice received, all excise paid by them and that excise as at the date of the arbitration had

exceeded some $23,000 million and as a consequence

have reduced the royalty payments that would otherwise
have been payable to the applicant by some $577 million.

As it is expected that the life of the fieldswill operate for at least another 20 years or more, it is clear that the deductions over the passage of time

in the future which will be governed by the award

and the decision of the Full Court will be well

in excess of $1,000 million.

If one goes to the royalty agreement - and we

wish to go directly to it, which is at our

application book page 26 - it becomes apparent

that the appeal involves the construction of three

clauses, clauses 1, 3 and 7 of the agreement. The

first impression one gets by reading those clauses

is the obvious concern demonstrated by the parties

in the proviso to clause 3,and also in the operation

of clause 7, to protect the royalty holder from

having the value of the royalty diminished by the

burden of taxes that were obviously expected by

the parties to fall on any oil production.

The clauses fall into a pattern. Clause 1

constitutes the grant of the royalty. Clause 3

provides for its method of determination and

clauses 3 and 7 provide protection - and we say

burden of taxes being passed on to the royalty holder.	jointly, they work in conjunction - against the are ultimately determinative of this case and have
been before the arbitrators and before the Full Court
are the quite different ways in which the producers -
and they have been upheld by the arbitrators in
the Full Court - approached the construction of these clauses compared to that put forward by the applicant.

MITl/3/JM	3	12/8/88
Oil

In effect, and in the result, the Full Court

has erected barriers between the operation cf' the three

clauses so that they operate quite independently of

each other and in doing so has read down their operation

very substantially. In contrast, it is the applicant's

submission that the clauses interact and as such do have

the effect of the protection that we contend for in

this case.

If I could go more particularly to the clauses

themselves, and if I could go first to clause 1 at page 26.

A great deal of evidence was given, and much of it

not disputed as to the meaning of the different words in

the contract. The grant is of an overriding royalty

and the Full Court, at appeal book page 85, stated

that to be an actual interest in what is reduced into

possession by the producers so that the royalty is not

just a right to receive a payment, it is a fractional

interest in the production of the company as defined,
which in the events that have occurred constitutes

the two producers, BHP and Esso.

The other aspect of importance to the overriding

royalty is that it is a term of defined meaning and

its meaning and operation has always been accepted to

have been an interest in production which is free of

all costs of exploration, development and production.

If I can just give the reference to where that appears

in the award, that is at paragraph 90. So that

one finds the very nature of what is granted is an

interest in the product, free of the expenses of

its production.

WILSON J:  Was that a finding of the arbitrator, or a

reference to its meaning in other contexts?

MR MERKEL : No, Your Honour, that is a finding of the

arbitrators. Because of the applicability of

United States law and the notion of an overriding

royalty being a term that is well defined in that

law, the arbitrators at paragraph 90 refer to

MARTIN V GLASS and in doir.gso, adopted the meaning

in that case. Possibly to make the references

easier, the award is set out in the producer's application

book and it starts at page 94.

WILSON J: Para 90 is at 171.

MR MERKEL Yes, that is so, Your Honour, and over at

page 172 one finds the meaning adopted by the

arbitrators from MARTIN V GLASS that the:

overriding royalty is a royalty, except that

it is earned out of the lessee's or operator's

interest, and is in addition to the lessor's

royalty. Usually it is free from all costs

incident to development, production and
operation .... An overriding royalty is an interest

running thoughout the life of the lease.

MITl/4/JM	4	12/8/88
Oil

And the arbitrators went on to state that they accepted

that meaning to those words.

WILSON J:	I was wondering, where does that - I see,
Usually it is free from all costs -

yes, "usually".

MR MERKEL At paragraph 89 it is referred to as:

"Generally ..... free of all costs.

WILSON J: Yes, thank you.

MR MERKEL The second aspect of clause 1 which we

draw attention to is the use of the words "gross value".

The award, at paragraph 193 - if I could ask the Court

to go to the page references at the top of the appeal

book, which are the award page references, it is

page 149 of the award itself , page 243 of the appeal book -

found that the word "value" in this agreement, again a
matter of evidence, meant exchange value which was
interchangeable in the way it was described with what

was a well-defined term, namely, "market value".

The addition of the word "gross" to describe

the value is a matter that is more clearly delineated

in clause 3, but I will return to that in clause 3

itself.

The third point of importance to note from

clause 1 in the grant is that it is a grant of a

royalty in respect of the hydrocarbrons produced and

recovered within the area. Now the arbitrators in

the Full Court set out in some detail the process

by which the hydrocarbons are produced in Bass Strait

and ultimately find their way to the point of

custody transfer where they are sold to the refiners.

For present purposes it is sufficient to state that

the product itself varies considerably and changes

both in state and as to the pressure it is under

depending upon the varying temperature and pressure

conditions to which it is subjected from the moment

it arrives at the well-head until it is finally

reduced to atmospheric pressures at the point of

custody transfer. The process by which termperature

and pressure changes are brought to bear on the

product changes its essential nature and makes it more

valuable as these processes occur from the moment the

product is derived at the well. The important point

as far as that is concerned for present purposes is

that when the product arrives at the well-head, it

arrives as the well effluent, or the reservoir

effluent and has a large amount of water, sediment

and other impurities. On the production platforms

the water is substantially removed and much of the

sediment is removed after separation into oil and

gas streams which may then be sent either as

oil and gas streams to shore by appropriate pipelines

MITl/5/JM	5	12/8/88
Oil

or co-mingled and then sent to shore in a liquid

or an oil pipeline.

The relevance of that is that the product

itself, as defined and found by the arbitrators,

is a quite different product at the various stages

of production. The well effluent is a very different

and less valuable product than that which emerges

after separation and removal of impurities at the last valve off the platform. The product that is finally processed and stabilized onshore is, again,

a different product to that which exists at the

last valve off. The importance of all that is that

when valuing a product, of course, the value must

be of the product in the form and condition it is

in at the place of valuation. So that, in identifying

the product the subject of the royalty, one is

necessarily identifying the location at which that

product is to be valued when one is dealing with

hydrocarbons and we say that is a very important

finding of the arbitrators which was not adverted

to by the Full Court and we say when we come to it

quite fundamentally undermines the reasoning of the

Full Court in analysing the operation to be given to the proviso but I will return to that in the context

of clause 3, if I might.

The importance, we say, of clause 1 is that it

does govern all that follows it. It is the grant

and all that follows ought to be subservient to it.

It ought not to be subservient to what follows.

Can I go next to clause 3 because when one goes

to clause 3 that makes the point. Clause 3 provides

the method of valuing the royalty that is to be

payable under the agreement, whether in cash or in

kind. It refers to the royalty which must necessarily

be a reference to the royalty payable by reason of

clause 1 being the grant. It refers throughout to

the "value" which we say is necessarily a reference

back to the "value" referred to in clause 1, namely,

the gross value and it define.s the gross value as

being a value that can be obtained, as the Full Court

said, by reason of one of three methods but then

concludes with a proviso which, we say, is all
important, namely, that that value shall be the

gross value without deduction of taxes and the

other matters referred to.

Now, we say that the value is that of the

product. The product is that which emerges at the

point defined as the place of production and we

say that, in the final analysis, the contest between

the two parties is whether upon the proper construction
of clause 3 that value is merely exchange value with
the proviso adding little or nothing to that, indeed

nothing to it,or whether the proviso has some work

to do, namely, to draw a distinction between "market

MlTl/6/SH	6	12/8/88
Oil

value", a well-known and often used term in 1960 and since in oil and gas law, and the value that

is to be applicable for the purposes of this royalty

agreement.

The third clause of importance is clause 7 and we say that the first point that one comes

to in analysing clause 7 is the ready recognition

that the protection sought by the proviso in

respect of taxes was not just a matter of concern
in the same way as other costs or royalty or rental

but a matter of particular concern and a concern

which was such that the parties imposed a general

obligation under clause 7 that:

Any taxes payable in Australia incident to the royalty -

and we say, payable either by the royaltyholder or

the producers -

other than income tax applicable to the

Royaltyholder shall be borne and paid

by the Company.

And we say the words "borne and paid" are quite

fundamental because it is through the word "borne"

that the real protection is given. It would be of

no assistance or benefit to the royaltyholder if

the producers paid the tax and then deducted it from either the royalty payable or deducted the

whole of the tax from the value of the hydrocarbons

prior to ascertaining the value upon which royalty

was to be paid.

So we say that those three clauses very obviously

interact. The royalty referred to in clause 7 is the

fractional interest in production granted by clause 1

and we say it would be an extremely odd result, given

the clear linkage between the clauses, that a construction

could ever prevail which separates them so completely

and absolutely in their operation.

The fundamental point about clause 7 is, we say,

that it operates in conjunction with clause 3 to
complete the protection given by the parties against
the burden of taxes.

The arbitrators' approach to the construction of clause 3 and 7 was fairly simple. What the

arbitrators did is, having determined that "value"

meant "exchange value", they concluded that the

proviso added nothing to that concept but merely

emphasized that that was so and we say that that

was an odd result given the accepted meaning of

an overriding royalty and the conclusion that the

word "value" alone meant "exchange value".

MlTl/7/SH	7	12/8/88
Oil

WILSON J: There is no challenge to the finding that "value"

means "exchange value", is there?

MR MERKEL: 

No, Your Honour. There has never been a challenge

to it and, indeed, as is set out at paragraph 191
through to 193, particularly the 193, the arbitrators

said - that is at page 149 of the award:

Both parties agreed that the relevant concept of value was that of exchange

value.

The contest was and is not as to whether the value is exchange value but whether the proviso really

has any work to do, is merely redundant or should

be given some effective meaning in operation. That

is in respect of clause 3. May I say that when one

travels to the judgment of the Full Court, it is

clear that the Full Court was not only troubled by
that approach of the arbitrators but, we say, on a

proper analysis rejected it and, really, parted

ways very substantially with the approach of the

arbitrators. I should say that the arbitrators

in their reasoning, we submit, took an impermissible

slide. They defined "value" and then concluded that,

"Well, 'v-alue'·means 'exchange value', therefore,

'gross value' means 'exchange value'", without

really coming to grips with the problem that the

Full Court saw it had to grapple with and it is for

that reason that we saythat the Full Court rejected

the arbitrators' approach to the question of "value"

and set about their own and quite different approach

to determining "value", and could I go straight to

that.

That problem is recognized by the Full Court at the

application book at pages 93 to 94. Could I go to

the last paragraph at page 93 of the application

book. Their Honours said:

It was persistently contended before

this Court on behalf of the producers -

that should be Oil Basins -

. that the conclusions of the arbitrators

on the construction of clause 3 gave no

effect at all to the proviso. We are unable

to agree. It is true that, once the arbitrators

adopted market or exchange value at the place
of production by applying the test of the
hypothetical purchaser, the proviso had no

work to do. But if the proviso be viewed

as requiring, compelling, that exchange

or market value must be adopted by the

arbitrators (whatever else might be adopted under the second leg or the first leg) then

MlTl/8/SH	8	12/8/88
Oil

the proviso cannot be viewed as an

otiose provision or as one to which

there has been assigned no effect.

The Full Court then	turned to its own analysis
of the operation of	the proviso in coming to grips
with that problem.	When they said, at pages 93 to
4 - - -

WILSON J: Before you go on, Mr Merkel, can I just make sure

that I follow what you are saying. Is not the

finding that "value" means "exchange value" a

consequence of applying the proviso because all

the proviso says is that the value, namely, at
the place of production, that is, at the last

valve off the platform, shall be gross value

without deduction and does that not arrive at

"exchange value" at the last valve off the

platform?

MR MERKEL:  We say, Your Honour, that that really is a

circle. "Exchange value" by definition means the

market value, exchange value at the last valve off

and that "exchange value", by definition, will

never have costs that were incurred in getting

the product there deducted in arriving at it.

WILSON J: Yes, but it is the use in the proviso of the words

"gross value" that requires the deduction.

MR MERKEL:  The prohibition against deduction.

WILSON J: The prohibition against deduction.

MR MERKEL:	But, Your Honour, the point that the Full Court recognized and, indeed, our starting point on the analysis of the proviso is that there are two
competing views. One is that, having determined
"value", the proviso does not say anything more,
emphasizes that it is to be "gross value". That is an extraordinary result if one goes to the award and, in particular, the recurrence throughout it of
the accepted and recognized and common usage in royalty agreements of "market value" as a well-known concept. The parties chose not to use that,
notwithstanding the wide experience of the US
lawyers involved in drafting this agreement and chose another concept, a quite different concept
and the question that the Full Court raised is,
"Well, it's clear that the proviso is given work
to do and either we can find work for it or we
must concede in effect that the operation of the
proviso is a requirement for a value other than
exchange value". That is why we attach great
importance to the finding of the arbitrators at paragraph 193 that I took the Court to. That:

The relevant concept of value was that

of exchange value.

MlTl/9/SH	9	12/8/88
Oil

To merely say in arriving at exchange value you

cannot deduct costs of getting the product to the

point where it is exchanged is really superfluous;

it does not add anything.

Now the arbitrator said that merely emphasizes

that it is exchange value but the Full Court really

did not accept that and possibly, if I can take

Your Honour to the passage where that is dealt with,

it is at appeal book page 90 and 91. At page 91,

just below half-way down the page the court said:

It cannot be pretended that the construction

of clauses 1 and 3 is other than difficult and

complex, but we have concluded in the end that

the prohibition of deductions is merely

emphatic of the adjective "gross".

The reference there to the difficulty is that

addressed at page 90, and really it is the argument
that we did put to the Full Court, starting at the
top paragraph, where Their Honours said:

We appreciate the force of the argument that, by the law of England as by the law of Scotland and

Victoria -

and we would add "by the award itself" -

the word "value" in a contract means, unless there is something special in the context to require a different meaning, the exchange value,

that is to say "the price which the subject
will bring when exposed to competition", .....

The argument not unreasonably holds that the

addition of the adjective "gross", as well as

the prohibition of the deductions, must both
singly and in combination change the value
intended to something other than mere exchange

value. According to this argument the

arbitrators have patently given no effect at

all either to the word "gross" in clause 1 or

to the proviso at the end of clause 3.

Now we, with respect, say the Full Court treated

that argument as the one that was required to be met

and dealt with and indeed, at pages 85 to 97 of the

appeal book, over some 12 pages, laboured through the

three legs of clause 3 on the premise that the dilerrnna

identified, namely,whether the clause required something

other than exchange value, the OBL argument, or was

merely limited to exchange value, required a

construction of clause 3 which the arbitrators found

unnecessary to carry out.

MlTl/10/RB 10 12/8/88

Oil
MR MERKEL (continuing): And, indeed, it is of the essence

of the judgment of the Full Court that this dilerrnna

is only resolvable by determining whether the proviso

had any work to do other than that contended for by

Oil Basins and we say that is very clear at appeal

book page 87.	I go to the top paragraph at that
page:

The arbitrators felt that it was not

necessary for them to decide whether the proviso to clause 3 applies to the first leg of the clause, but after hearing the closely reasoned arguments that were put to

us in great detail, it is impossible for us

to avoid making the decision. The preceding discussion has been necessitated by the need

to construe the agreement as a whole, and

the able arguments presented to us have in
the end made a decision on the ambit of the

proviso inevitable and important. In our

opinion the proviso applies only to the

third leg of clause 3.

If I can just stop there, the reason why the court

said it was inevitable and important and embarked

upon that which the arbitrators had decided was

unnecessary to embark upon, was because they concluded

that some work had to be given to the proviso in order

to meet the argument of OBL that it meant something

other than exchange value and it is for that reason

that the arbitrators then descended into the arena

in clause 3 and really arrived at a conclusion which

is set out at page 92. It divided the clause into

three separate legs, if I can call them state value

being the first leg, ... agreed value being the second

leg and arbitrated value being the third leg.

Now, it is our submission and it always has been

that all three values are governed by the proviso which, in turn, stems from the grant in clause 1.

The arbitrators, in seeking to find what work the

proviso had to do, took a quite different approach

and one can see the conclusion,about half-way down

the page,of the Full Court saying:

A better way of representing our view of
clauses 1 and 3 may be to say that "gross

value of all the hydrocarbons produced and

recovered" is given three separate and

alternative definitions in clause 3, in

descending order of preference, the last

of them being the arbitrators' calculation of "actual" or "true-in-fact" gross value,

whereas each of the first two alternatives

provides a deemed gross value irrespective
of whether or not it happens by coincidence
to be, or to be the result of conscientiously

calculating, the actua~ gross value.

MlT2/l/SH	11	12/8/88
Oil

Their Honours then referred to modern statutory

problems and then said, at the bottom of the page:

Clause 3 defines gross value as being

(a) whatever value (sum of money however
arrived at) operates by law as the criterion
of State royalty, or (failing that) (b)

whatever value (sum of money however arrived

at) is agreed by the parties as the value at

the place of production or (failing that)

(c) the value fixed by arbitrators as being

the gross value at the place of production,
that is to say, as being the exchange value,

that is to sav, without deduction (from

actual or hypothetical market price) of any

of the things which would be deducted (e.g.)

if one were seeking net value or value to the

creator-possessor of the goods.

Now, of course, that reasoning was essential for the proviso to have work to do because the Full Court

then concluded that the proviso not applying to

the first two legs. :had to be re-instated for the

third leg and, therefore, had work to do but that

reasoning we say is the only answer to the submissions
put by OBL that the proviso clearly referred to a
value other than exchange value for any other

conclusion would make those words highly redundant

and absent and devoid of any meaning.

TOOHEY J:  Mr Merkel, I can see the force of much of what you

have been saying if we were hearing an appeal but

what is it about the construction of these three

clauses that should attract a grant of special leave?

MR MERKEL:  Your Honour, I appreciate what Your Honour puts to

me and what I was wishing to address first was the

reasons why we say there is fundamental error in

the approach taken by the arbitrators in the

Full Court.	The reason for that, we submit, is
that the extent to which error can be demonstrated

or the extent to which the issues we seek to

raise are substantial, we will submit are very

important matters to be taken into account in

whether or not this Court will grant special leave.

If an injustice appears to have been suffered

as a result of the decision and it is an injustice

in respect of a contract that has a term of operation

of some 40 or 50 years binding the parties in the

past as well as into the future and affects the

calculation of what are very large amounts of money involving important public companies and affecting the interests and rights of a lot of people, we

say that injustice is a factor to be taken into

account amongst other factors which we will address

separately. There are important issues of valuation

MlT2/2/SH	12	12/8/88
Oil

and this very issue of the valuation of what is

produced in Bass Strait is an issue currently

being contested by the State in respect of its

royalty. Excise has been deducted from the State

royalty which is payable in a sum very much larger

than the royalty to Oil Basins and the State is

contending in the Federal Court in a matter now

removed to this Court that it was in breach of

duty for the designated authority to allow excise
to be deducted in arriving at value so that when
one comes to it in its context these issues of

valuation raised in this litigation are important

and the extent to which error can be demonstrated

in the judgment, we say, is a matter very relevant

to whether this Court ought to or ought not to

grant special leave. It is for that reason that

I am endeavouring to identify the problems that

we are confronting, bearing in mind that, of course,
the construction of the proviso and the requirement

that this contract have effect for the life of the

oil fields governs all deductions, not just that of

excise. So that this is not just a one-off situation

looking at a one-off occurrence in the past.

WILSON J:  If you were to accept for the moment that the

Full Court was right in confining the proviso to the third criterion of value in clause 3, would

you have any objection to the Full Court's

consequent conclusion that the proviso in that

context compels the adoption of the exchange or

market value? In other words, that is the work

it has to do.

MR MERKEL:  No, Your Honour. We would not accept that because

one still has to confront the problem in any event

with why such a cumbersome method was chosen

for what really was a simple and well-established

concept, namely, market value. So that if one

reads the proviso as attaching only to the third

against us rather than the argument that it had no	clause, we say the same problem arises but there is an argument that it still had work to do put
work to do but that does not avoid the fundamental
problem. Why should the words "gross value without
deduction of all these items'mean no more than value
so that the court, we say, in a reasoning which was
quite divorced, with respect, from what the parties
would have intended in the real world, went out of its way to give this construction to the operation of the clause, to justify giving no other meaning
than 'exchange value'to so many words. But we say
the problem is not avoided by finding that reasoning.

WILSON J: Well, the fact is the agreement does not use the

words "exchange value". It says that:

MlT2/3/SH	13	12/8/88
Oil

Royalty shall be payable -

et cetera -

and the value for purposes of calculating

royalty -

will be -

as determined by arbitration ..... provided

that the value shall be the gross value

without deduction of any costs amortisation

royalty rental or taxes.

Having determined that the point at which gross

value is to be determined is the last well off

the platform, what is implausible about those

words to describe the arrival at 'exchange value

at the last well off the platform" as the - - -?

MR MERKEL:  What we say, Your Honour, is erroneous about

those words is that that is what the word "value"

means. All the other words are quite redundant

and unnecessary.

WILSON J: And that is what the clause ensures, that the word

"value" will mean when the arbitrators come to

determine it.

MR MERKEL: Well, Your Honour, I understand that that is the

conclusion and that is what is put against us, but we say that the finding, without any challenge, and

accepted by all parties, that "value" means

"exchange value" does not really permit it to mean

anything else. Therefore, one asks why all these

words? Why the, in effect, renunciation of market

value or the use of words "value at the well" or

"value" in terms so commonly employed in royalty

agreements and this formula and we say the reason

is probably best identified when one comes to

taxes because this is not a clause that should be

looked at in a vacuum and we say needs to be looked

at in conjunction with clause 7. The concern with

taxes and the concern for protection from taxes

in clause 3 does not stop there. It is carried

over elsewhere and we say that those two clauses

viewed together show that the parties were seeking

some protection greater than just market value or value. But the problem really is one that we say with respect the Full Court recognized and sought

to come to grips with but we say that in coming

to grips with it, really, had to say that the State

value was one that was binding on the parties,

however arrived at, it could be any value - that

is at appeal book page 92 - it could be a value

that was merely fortuitious, that was at page 85;
was a value that was described by the Full Court
as a fictional gross value, at page 91 and at page 97

a value that could be arrived at by some hybrid proces.s

MlT2/4/SH	14	12/8/88
Oil

Now we say-,- just dealing with how the Full Court

approached it because it seemed to recognize the

force of our argument and, in dealing with it by
finding values that could be so fortuitous· and

so unrelated to the grant, namely, of fractional

interest in production, we say was embarking upon

a course that does not really find favour in the
minds of either the producers or Oil Basins as
parties to this agreement putting such a basic

right at the whim of others for rio more than

convenience. It is obvious and no one disputes

that convenience dictated the first limb. If
there is a State value of the product, it should

be one that could be used but convenience was not

to override the fundamental rights conferred by

the grant to take any value, however arrived at,

and we say that, for reasons that we would submit

are fairly obvious, clause 3 ought never to be

subservient to the grant in such a fortuitous

and what could be a really capricious way and it

could be capricious both ways, not just to Oil Basins.

WILSON J:	The overriding force that you give to the proviso, Mr Merkel, really, seems to make everything else in
the clause redundant. You would not need to say
any more than that royalty shall be payable on
the value, the gross value, without deduction of
any costs, et cetera.

MR MERKEL:  We say no, Your Honour. The Full Court, as a

threshold, in effect, said that the proviso should

not attach to the first limb because it would be

odd for the first limb to be so easily disqualified.

They said that the proviso ought not to attach

because any time it operated it disqualified the

first limb from having any affect at all. We

submit that that is, with respect, erroneous.

We say that it is consistent with the intent of

the parties and a proper construction of this, not

that the proviso disqualifies the operation of the

first one but qualifies it.

So that the first limb, a State value, would

be made conformable to the proviso. If, for

example, as happened here, the place of production
was coincident - in fact it is not, but assume it

is - and the State value was arrived at by deducting

taxes, we would say you do not ignore the benefit of

the State value, you take it, but you say that the

proviso qualifies it so that it must be made

conformable to it and the deduction in taxes is not

permissible.

WILSON J:  But you could only take it by concluding that the

value on which the State royalty was based was gross
value because the proviso overrides or qualifies it

to that extent as well?

MlT2/5/SH	15	12/8/88
Oil

MR MERKEL: 

Yes, Your Honour, and that means that the

deductions, taking the example of taxes, could
not be made but the proviso - the State value

would be conformable with it. The reason why

the Full Court divorced the proviso from the
value was the obvious administrative convenience
in an outside party being able to ride the
auditing and administrative processes of the State
but not to the extent of overriding its interest

constituted by the grant.  But -

GAUDRON J: 

Mr Merkel, assuming everything you said to the

moment were correct, why would the reference to

taxes in clause 3, have anything at all to do with

excise imposed at a later stage?

MR MERKEL:  Because, Your Honour, the taxes imposed at a later

stage being an excise on the findings of the
arbitrators and, again, this is picked up in the
Full Court, both directly and immediately operate

to reduce the value at the earlier stage. In other

words, a tax on the completion of production is a

tax upon the production itself. The very nature

of an excise burdens that whole process.

GAUDRON J: It seems to me that that is a different exercise.

If you assume that everything you have said to the moment is correct, the question is how do you, then,

determine the value? What is the factual value and that question is answered, it seems to be accepted,

by doing a sum and what you have put into that sum

seems to me to have very little to do with the proviso of clause 3. It is a simple reasoning process that is not dictated by the proviso.	I
can see that you might . .-...	- leave aside for

the moment any argument you might wish to put about

clause 7.

MR MERKEL: Well, Your Honour, we say that we do not want to

be falling into the very vice that we are so critical

of, namely, divorcing clause 3 from clause 7. What

we do say is that they operate in conjunction to

prevent this result and I will come to clause 7 very

shortly if I may but we say that the nature of taxes

makes it quite fortuitous where they fall. An

excise tax could have been imposed at many points;

could have been imposed at the well head; it could

have been imposed at the last valve off;

it could have been imposed on the completion of

production onshore but wherever it is imposed its
burden falls upon th:process because the quantam

of it immediately and directly reduces value elsewhere.

If I can give the example of the royalty itself,

at the time this agreement was entered into there was

a State PETROLEUM ACT. The State-PETROLEUM ACT

imposed a royalty on production. The parties were

MlT2/6/SH	16	12/8/88.
Oil

cognizant of the fact that the legislative scheme

over this time span may change quite dramatically

but they sought protection against deduction of

the State royalty. Now, the State royalty could

have been imposed at the well head, at the last

valve off or on the perimeter.

Now, we would submit it would be an extraordinary

result if, by reason of administrative convenience for

the State, they said, "We'll impose this royalty on

the perimeter." It was then put against us, ''Y)u can't

deduct the royalty because it's imposed downstream

of the last valve off." We would say that it is

when one comes to these kinds of problems, the

concern of State imposition which are mandatory and

unavoidable can so dramatically reduce the value

as far as the royalty holder is concerned. Now,

we say royalty in this instance is no different

from taxes and, indeed, the debate raging between
the State and the Connnonwealth about excise and

the case removed to this Court demonstrates that.

At the connnencement of production the State were

getting the lion's share of 10 per cent of the

value.	In 19 7 5, the Coom:mwealth imposed an excise ranging
from 50 to 87 per cent.	As a result, the State's

lion's share on royalty has diminished and the point

we make is that that kind of regime was recognized

by the parties in clauses 3 and 7 and they sought

protection from it but, to answer Your Honour's

question directly, to merely protect against upstream

taxes is inherent in the notion of exchange value

itself. It comes back to the same point. If the

Court accepts our argument, it means either the

proviso has no work to do or means something other

than exchange value but it is that point that we

say that we rely upon the Full Court because they

recognize the dilemma and sought to come to grips

with it.

The reasons why we say the Full Court's decision

is wrong is that by giving so much work to the first

limb, fortuitous as it might be, it failed to

recognize that the first limb would only operate
in any event if it was upon the same product. So,

you had to have the same point of plumbing where

the product was produced otherwise you are not

valuing that product. The arbitrators found that

as a fact. Secondly, we say that the only "if"

point, namely, that the proviso only worked if the

State value is fully conformable to it,ignors the ability to use all the administrative convenience offered by a State value but then make the value

conformable to the proviso and we say that is a

complete answer to the administrative problem which,

we concede,is a very big problem in valuing

hydrocarbons but why not get the benefit of auditing

MlT2/6/SH	17	12/8/88
Oil

inspection and measurement but then get a value

that is protective of what is conferred -that

which is conferred by the grant rather than a

value that can be so capriciously devoid of

any relevance to what is conferred by the grant

and we say it operates both ways. The State

could work out a value that was highly

disadvantageous to the producers and give us a

windfall. Clearly, that is not what we would

submit is the real world.

The third point of departure that we would

say is the fact that that construction makes clause 3 subservient to clause 1 which is an

extremely odd result, particularly when clause 3

founds itself on valuing the royalty granted by

clause 1, the value of the product defined in

clause 1 and a value itself defined in clause 1.

The fourth point of departure that we would,

with respect, take from the Full Court is that the
proviso is, in any event, naturally referable to
all that falls before it. It qualifies the value.
Looked at in terms,it qualifies the agreed value
and the arbitrated value because the value referred

to can only be a reference back to the value

throughout the clause or an agreed or arbitrated

value. That is in words. Now, to qualify the

agreed value is clearly absurd. Therefore, we

say that the court has done some violence to the

language used by saying it is a value only

referable to the arbitrated value and that the

proviso only attaches to that third leg because,

in words and in terms, it does not do so and,

of course, finally, one must broach the point - - -

WILSON J: Well, to just dwell on the second means of

determining value, that is, by agreement, what part

does the p~oviso play there? It puts the parties

in the	strait-jacket in terms of what they are
permitted to agree?

MR MERKEL:  Your Honour, can I take you to page 26 because,

I think if I can answer that by reference to the words used - the answer to Your Honour's question

is, it clearly cannot, but the reasoning of the

Full Court, unless it does violence to the language used, would have to attach the proviso to the agreed value because, if one goes to the bottom of page 26

or to clause 3 itself, the ''value" is used three

times:

Royalty shall be payable in cash

unless the Royaltyholder by written

notice elects to receive the same in

kind in the form of hydrocarbons and -

MlT2/7/SH	18	12/8/88
Oil

now, this is the qualification of "value" for

the first limb -

the value for purposes of calculating royalty whether payable in cash or in

kind shall be the same as that on which

royalty to the State is based -

and we would say that is a reference back to the

value in clause 1 -

or if no royalty be payable to the State - and this is the second reference to "value" -

the value at the place of production

as determined by mutual agreement or

failing mutual agreement as determined

by arbitration as hereinafter provided

PROVIDED that the value -

et cetera. Now, the "value" there referred to

has to be a reference back either to the value

arrived at by what the parties had always referred

to as a two limb clause, either the first limb

being the State value or the second limb being

agreed or arbitrated value. The court appeared

to ignorewhat we say is the clear reference back

and deemed the proviso as only attaching to

arbitrated value. Now, we say as a matter of

just simple English, they have to go back to the

value referred to, as agreed value and, clearly,
the proviso cannot qualify an agreed value.

Therefore, if it does not refer to that value,

it should be taken as naturally referring to the

value wherever used being the value identified in clause 1. So that just reading the clause,

one finds the result is untenable and it is a

reading, we say, that the court itself said, the

only safe course to follow in this agreement is

to give the words their natural meaning.

WILSON J:  I am sorry to be so obtuse but in that context

I do not understand your concurrence in the notion of exchange value as being the object of the search

as I understood was to discover the exchange value

of the product at the last well off the platform.

MR MERKEL:  Your Honour, because we say the value there is

a reference back to the gross value in clause 1,

being the grant. The word, the "value" - - -

WILSON J:  But the gross value is not the exchange value, is

it?

MR MERKEL:  No, not on our submission, Your Honour. The gross

value without deduction, et cetera, is something

different but the value there is merely the value

M1T2/8/SH	19	12/8/88
Oil

that has to be arrived at for the purpose of

calculating royalty. That is subservient to the

grant which is defined in the proviso. In other

words, the different methods of value - - -

WILSON J:	Both parties agreedi:that the relevant
concept of value was that of exchange value.

That is paragraph 193. That is what misled me in

MR MERKEL: Sorry, that is the word "value", Your Honour.

WILSON J: Yes.

MR MERKEL: Just the word "value".

WILSON J:	I see.
MR MERKEL:	But the contest has always been whether the word

"gross" and et cetera in the proviso adds something

else to it or have no meaning, and no other operative
effect.

The only other passage I want to go to on this

point is at paragraph 144 of the Award which is at

page 118, at the bottom of the page, the last three

lines, the arbitrators referred to 'standard' leases:

Calculated at the current market .value at the well.

So that there is a clear and intended departure from

standard usage in this clause and we say it would be

an odd and cumbersome departure if it were to mean

market value or what was generally accepted as the

meaning of value.

Now, the conclusion we bring to the operation

of clause 3 is that the net back method which the

arbitrators found was one that was clearly applicable

and not disputed as being applicable in valuing
offshore petroleum, there being no market at the

platform, in fact, had taxes, the exise tax,

deducted. It was a deduction which pro tanto

reduced the value for royalty calculations by the

amount of excise. There is nothing indirect about

its effect and and we say that offended the proviso.

Even if the product was sold at the last valve off, the gross value, if we are right in our submission, is not exchange value, then we say the gross value

is that before it was immediately depressed and

diminished pro tanto by the value of the excise

and, indeed, that much appears to be accepted from

Professor Jacoby's evidence quoted by the arbitrators

at paragraph 199, where he accepts and the arbitrators

quote that paragraph with approval at page 153 of the

award where they refer to Professor Jacoby's evidence

and say:

MlT2/9/SH	20	12/8/88
Oil

The relevant value is the exchange

value as defined earlier but agreed

that a tax is an appropriation of value.

He further agreed that the imposition of

the excise does not add value to the well

head fluids between the platform and the

point of sale. If imposed at the point

of sale the exchange value would include

an amount equal to the excise appropriation

but it does create a difference in the

exchange value between the point of sale and the platform. The imposition of the

excise tax depresses the exchange value at the platform below what it otherwise

would have been.

And that finds its way into the judgment of the

Full Court where they accept, at many passages,

that there is an immediate and direct reduction

in the value by reason of the excise.

Now, we do not wish to leave clause 3 without

emphasizing that it needs to be read in conjunction

with clause 7 because, not only did the arbitrators

in the Full Court effectively erect a barrier, we

would submit, between the construction of clauses 1

and 3 and their operation by, in effect, divorcing

State value from the grant but they went further

and erected a barrier between clauses 3 and 7 which

we say is an odd result given the clear and expressed

concern of the parties to protect against the burden

of taxes.

(Continued on page 22 )

MlT2/10/SH	21	12/8/88
Oil

MR MERKEL· (continuing): If I could go to clause 7 because

in clause 7 the parties appeared to recognize

that that the protection they sought from clause 3

may not work - and may not work for the reason

Your Honour Justice Gaudron put to me. The tax

may fortuitously be at a point downstream because

its incidence was a matter of the whim of the

relevant government and could be chosen for a
variety of reasons, none of which are relevant

to the value.

So what the parties did is impose a general

obligation in very wide terms on all taxes, whether
Victorian, State or federal, payable in Australia,
incident to the royalty, and that is incident
to the grant - not incident to the royalty payments

but to the grant of the royalty referred to in

clause 1 - other than income tax applicable to

the royalty holder and then, importantly, provided

that they shall be borne and paid by the company. The word "incident" is a qualitative word.

We say it obviously imports questions of degree

and we say has a meaning of affecting, falling

upon or cutting into the royalty. The question

is the sufficiency of connection between the

excise and the fractional interest in production

the subject of the grant in clause 1.

Not only does the clause demonstrate the party's concern to achieve protection against the incidence of taxes, but it also demonstrates

the concern that that operate in an extremely

wide way and that the protection sought is not

just an obligation that they be paid but a prohibition

that the burden cannot be directly or indirectly

passed back to the royalty holder. It is our

submission that the Full Court's judgment at

a number of passages recognized the sufficiency

of the connection. The Full Court recognized

the direct and immediate effect on the royalty

by its fall in value and that appears at the

appeal book at page 95 and page 104 in particular.

But could I go to page 95, in the middle of the

page the arbitrator said:

An argument put for the producers and

accepted by the arbitrators was that

excise tax was a downstream expense, downstream

of the place of production, and that the

hypothetical purchaser of SPENCER's case

would know that he must pay the excise downstream

and therefore deduct the amount of the duty

from the price which he would otherwise

be prepared to pay at the point of production.

Then, at page 104, in more colourful language,

the Court said, about 8 lines down:

MIT3/1 /SDL	22	12/8/88
Oil

regard to the whole scheme of the federal

In the circumstances of the present case -

that is to say, on the wording of the relevant

government with regard to crude oil pricing -

it seems to us quite clear that no person,

possessing the hydrocarbons at the last
valve off the platform at sea, whether he

were the producer or a purchaser, could

in any way utilise the goods for any purpose

whatever (other than as part of some fantastic
petroleum museum on the high seas) unless
he first paid the excise duty. Until the

excise duty was paid the hydrocarbons really

had no existence as articles of commerce,

in the sense that they could not enter commerce

at all.

We say that, together with other passages at

pages 106 and 111, which I will not take the

Court to, show the recognition of the Court and, as is the fact, of the sufficiency of connection

between the excise and the value of the royalty.

Of course, that is quite consistent with the analysis of this Court of the nature of an

excise, namely, when imposed as it is in the Commonwealth statute in the present case as

a tax on goods when produced, that operates as a direct and immediate burden as a tax on

the production of those goods itself.

Given the meaning of the word "incident"

and given the qualitative aspect of it, the Full

Court dealt with what we say is a very severe

reading down of the clause at appeal book pages 97

and 98 and, really, there were only two steps

in the reasoning of the court and we would submit

both result in error. At the middle of the page,

the Court said:

The next clause which was subjected

to close analysis in the arguments is
clause 7 -

it sets out the provision of the clause.	And
then the court says:

These words make it clear, as the

arbitrators said, that the words of the

clause occurring before "other than" would,

if not expressly restrained, include some

part of the income tax of the Royaltyholder.

It is therefore clear, we think, that the

taxes which are required to be borne by

the company are taxes which are imposed

on either of the parties by reason of and

by reference to the payment (or obligation

to pay) or the receipt (or right to receive)
the overriding royalty.

MIT3/2/SDL	23	12/8/88
Oil

I will just stop there. The Court seemed to

say or conclude that the reference to income

tax was definitive of the taxes to be embraced

by clause 7 rather than, as we say, the correct

view that it is merely an example of such taxes.

They seem to say that because of the exception of income tax that has set the outer limit of

what the clause was to mean and we say that

clearly, standing alone, is an unacceptable step

but we say that the judgment should not be so

read. It should be, really, read in the context

of what follows because it seems that that conclusion
is supported not only by reference to income

tax but also to the second conclusion, which

is fundamental to the reading down of this clause,
namely that clause 7 has nothing to do with valuation.

But if, as a finding, it sought to stand alone we say it is clearly incorrect but we do say

that the width of income - - -

GAUDRON J:  what do you say is incorrect? That

clause 7 has nothing to do with valuation, you say

is incorrect?

MR MERKEL:  Yes, Your Honour. We say that clause 7 is bound

up with the process of valuation by reason of

the use of the word "borne".	I will demonstrate
that in a moment.	But we say that it is clear

that the exception cannot dictate what goes before

it; what is clear is that income tax is clearly

embraced by clause 7 but we say is not definitive

of its operation.	One has to look to the clause
as a whole to ascertain that.	The Court goes
on·to say:

A special Australian tax on foreign

Royaltyholders because they were such, or

a tax on Australian residents, if imposed

by reference to royalty paid or payable

by them to foreign residents, are examples

of taxes covered by the clause. clause 7 has nothing to do with valuation. But We agree with the view of the arbitrators

who said:

"One only gets to clause 7 on the hypothesis

that hydrocarbons have been properly valued

under clause 3; clause 7 deals with a different

subject of 'impost on the royalty'. Clause 7

is concerned with taxes which are imposed

on.either the producers or the Royaltyholder

by virtue of the payment or receipt of the

royalty ... That this is so is ... made

abundantly clear by the express exception

tax applicable to the Royaltyholder. 11 from the application of clause 7 of income

MIT3/3/SDL	24	12/8/88
Oil

Again, one does not quarrel with the proposition that income tax is a tax incident to the royalty but to form a conclusion based upon it as being

exhaustive of the definition, we say is clearly

wrong. To define it as a tax by virtue of the

payment or receipt of the royalty is to substitute

the word "tax upon the royalty" for the word

"tax incident to the royalty". Further, the

justification for that reading down can only·
be based upon the conclusion that clause 7 has

nothing to do with valuation; it is to do with

protection of the payment once arrived at.	We
say that is demonstrably wrong and, if I can
give this example to make good our point:

if there was imposed upon the excise a surcharge

or premium upon any producers paying a royalty

on production to an overseas royalty holder -

so that the rate, instead of being 80 per cent,

moved to 85 per cent as a production cost for

such a person.

The Full Court would recognize that that

would be a tax incident to the royalty because

the added 5 per. cent arose because of the

obligation to pay the royalty. So, in going beyond

the meaning given by the arbitrators, namely,
a tax upon the royalty, the arbitrators accept

that a tax by reason of the obligation to pay

the royalty would probably be embraced by the

clause.

They stopped there but we would go one step

further. If such a tax was imposed, the producers
would, as they now do, pay it as an excise tax.

They can do one of three things: they can pay

it and bear it; that is they can pay it but

not reduce that 5 per cent tax by deducting

it - or two and a half per cent of it - from

the royalty that it pays to Oil Basins; or,

it can pay it and bear it by only bringing to

account as a deduction of an upstream cost, namely

an upsteam tax, the 80 per cent of excise, not

the 85 per cent of excise. But, if they do what
one might expect them to do - if the reasoning

of clause 7 was correct, that clause 7 does not

prohibit valuation, has nothing to do with valuation -

what they would simply do is say, "It is an upstream

production cost for us to pay" - it shown be

a downstream - a point down.

WILSON J:	I thought you were bringing in a new interpretation
of upstream.
MR MERKEL:	I certainly do not want to do that, Your Honour.

A downstream expense - being the downstream tax

it would say that it is an 85 per cent excise

tax and deduct it from the value arrived at at the well-head. Then it would be paying it but not bearing the butden of it. It would be

MIT3/4/SDL	25	12/8/88
Oil

apportioning the burden as to two and a half

per cent to the royalty holder and 97½ per cent

to it. We say that that demonstrates clearly

that the parties had in mind that when stating

that taxes were to be paid and borne by the
producers that they were not to be paid, but

the burden shifted and it could only be shifted

in one of two ways:  by deduction from the royalty,

for which there can be no warrant, or the more

likely route as deduction from the value arrived

at at the well-head.

We say that that demonstrates quite clearly that inserting the words "borne" the parties

were obviously concerned with the burden being

passed down through the valuation process because

that is how it would normally be passed down.

If one accepts that, one removes the very foundation upon which the Full Court and the

arbitrators relied upon in reading down the

operation of clause 7.

GAUDRON J:  Can I interrupt you there? I follow what you

say. If the sentence read, "But clause 7 has

nothing to do with value", would it be correct?

MR MERKEL:  We would say no, Your Honour, because clause 7

has to do with how the burden of taxes are to

be borne and in dealing with it that way it

necessarily imports a prohibition in general terms

of the producers passing on the burden ofi the

tax by reducing the value by the amount of the

tax. So that we say that the point that - - -

GAUDRON J:  I am wondering if it is true to talk about

reducing value on account of the tax rather

than ask the question whether it is right or

wrong to put the tax into the sum that is done

when you work out what is the value when there

is no market?

MR MERKEL: We would say, Your Honour, that the clause

prohibits the burden of the tax paid by the

producers from being directly or indirectly

passed on to the royalty holder. We say that

the reason why the Full Court imposed or stated
that clause 7 has nothing to do with valuation is to support its conclusion that all clause 7

was concerned with was the payment of royalty

and therefore they then narrowed its operation down

to imposts upon the royalty or arising out of

the obligation to pay it.

But we say that that gives too narrow an

operation and the basis for it, which really

is that clause 7 cannot prohibit a deduction

of excise for the purpose of arriving at the

MIT3/5/SDL	26	12/8/88
Oil

value for the calculation of royalty is really an
untenable conclusion and I give the excise example
as the very example that we say the clause operates

in respect of.

Clearly, by reference to income tax, it

is not concerned any longer with geography.

Income tax has nothing to do with upstream or

downstream taxes; it is a tax due on a calculation

of assessable income after allowance of deductible

outgoing. So that we have escaped the protection

that clause 3 may or may not have given, depending

on whether our argument succeeds or not, and

we go to a very general obligation imposed upon
the producers in respect of an overriding commitment

not to directly or indirectly pass the burden

of taxes on to the royalty holder. We say that,

given the example we have just given, it is

clear that it can prohibit the burden being

passed on by deduction in the course of arriving

at valuation and therefore the amount of the

royalty being reduced indirectly rather than

directly.

WILSON J: ·what does your construction of clause 7 add to

the proviso in clause 3?

MR MERKEL:  Your Honour, what it adds to the proviso is

it removes the geography point; namely, whether

the tax is upstream or downstream. It says:

Any taxes ..... incident to the royalty -

namely, a tax which reduces the value of it

which operates in a direct and immediate way

to reduce its value or to reduce the amount

that would be paid as royalty	is a tax that
must be borne by the producers.	The proviso

to clause 3, if we are wrong, merely says that
taxes upstream are to be prohibited from deduction

but downstream taxes may be deducted. Therefore

you go to clause 7 to see how that is dealt

with and we say the importance of our submission

is that the demonstrable concern of the parties

with taxes needs to be examined by reference

to the concern as expressed in two places in

this agreement, not just as part of an overall

protection in clause 3 but in clause 7.

Of course, the end result of treating each

clause as, in effect, having a barrier between

them is to push the royalty holder between the

two stools it was bargaining for protection

from and the parties were giving it protection

from is the very kind of tax that operates

to reduce the royalty, on the view of the Full

Court and of the arbitrators, is not a tax that

really the royalty holder receives any protection

from at all. ·

27

MIT3/6/SDL	12/8/88
Oil
WILSON J:	The Full Court and the arbitrators were agreed on the construction of clause 7, were they not?
MR MERKEL:	Yes, Your Honour.
WILSON J:	In arriving at their conclusion in the arbitration, the arbitrators had received and considered
a lot of evidence as to American law in construction of a phrase in clause 7 about taxes incident
to the royalty, did they not?
MR MERKEL:	I do not think that would be correct, Your

Honour. The arbitrators did receive evidence

about numerous matters in oil and gas law including

cases that dealt with the incidents of taxes

in royalty agreements, but when it came to their

reasoning I think it is fair to say that the

conclusions arrived at on the construction of

clause 7 was really not dependent upon any of

that evidence. Their reasoning was really

very much as expressed and reiterated by the

Full Court. It was not dependent upon other matters. The parties ranged far and wide at

the hearing but that needs to be understood

in the context that the contest at that stage

had never really defined where the place of

production was to be. It was contended for

that it was onshore by Oil Basins and offshore

at the well-head by the producers and the contest
was geared to the numerous possibilities that
could flow from the royalty agreement and also

the imposition of taxes having regard to the

finding on the place of production.

So that the fact that evidence ranged far

and wide was really not the relevant point.

The question is whether they, in relying on

this conclusion and reaching it, relied upon

matters of fact which are not able to be identified

or dealt with properly by a court on appeal.

Certainly the Full Court, after full argument,

did not feel constrained in any way in interpreting

clauses 3 and 7, based on the award itself.

Clearly the law is that is the court is constrained,

because the evidence is not complete in respect

of any matter of importance, then error of law

cannot be demonstrated on the face. But the Full Court accepted the case after very full argument that the questions sought to be determined

by us were questions of construction and that

if error of law appeared on the face in respect

of those questions, it was under a duty to set

aside the award. So we say that clause 7 really

does not range outside the ambit of what is,

in this Court, if leave be granted, in the Full

Court or before the arbitrators, ultimately

a question of construction.

MIT3/7/SDL	28	12/8/88
Oil

WILSON J: How far, Mr Merkel, did the arbitrators' consideration

of American law, which would, of course - its

findings in that regard would be questions of

fact?

MR MERKEL:	Yes, Your Honour.
WILSON J:	How far does that infiltrate and effect their
construction of the agreement?

MR MERKEL:  We say not at all, Your Honour, because what

the arbitrators found as	questions of fact were
the meaning attaching to	particular words such
as place of productionr	vast body of case law
was relied upon.

WILSON J:  And incident?

MR MERKEL:  No, not incident, Your Honour. And, having

determined the place of production as the last

valve off, they found the meaning to be given

to the words in clause 3. Also the word "value"

was the subject of evidence, having found what

the word means they then turned to the question

of law, namely, the proper construction. But,

we say the proper construction of the agreement

is not at all effected by any questions of American

law. They go only to the meaning to be given

to terms and, of course, if it were otherwise

we could not succeed in demonstrating error

of law on the face. The Full Court, with respect - - -

WILSON J: That is not necessarily an answer, is it?

MR MERKEL:  No, Your Honour, but what we would say is maybe a

better answer is that the Full Court appeared

to accept that that is so and it concluded,

after dealing with the question of whether a

question of law was specifically referred, found

that if they found error of construction they

were under a duty to set aside the award and	then embarked upon what we say is a pure exercise
in construction.

GAUDRON J: Mr Merkel, would I be right if, in taking you

"any taxes which have the effect of reducing

to say that the phrase, "any taxes payable in to

the value of the royalty"?

MR MERKEL:  We would put it a little more narrowly,

Your Honour, because we accept that there must be a sufficiency of connection between the tax and its reduction on value and we say that is

imported, qualitatively, in the word "incident". immediately reduces the value of the royalty

by the amount of the tax has that sufficient

connection.

MIT3/8/SDL	12/8/88
Oil	29

GAUDRON J:  Thank you. Can I ask then, is there not some

circularity in relying on clause 7 as indicative
of a matter to be taken into account in the

sum? The question is the value of the royalty -

one necessarily has to ascertain the value of the

royalty before you can find out if your test

of whether or not it is a tax under clause 7

is met?

MR MERKEL: We would say not, Your Honour. If we can

take the example of the present case: the excise

tax is deducted by the producers in arr1v1ng

at the value for the purpose of calculating

the royalty. In doing so it is indisputable

that they are passing on two and a half per

cent of the burden.

GAUDRON J: No, that is where I am concerned. It does

not seem to me that it is indisputable that

they are passing on two and a half per cent

of the burden. The question is what is the

value and whether or not they are passing on

two and a half per cent of the burden can only

be ansered once the value is arrived at, surely?

MR MERKEL:  Your Honour, we say that to approach it in

that way erects the barrier that we have described

between the two clauses.

GAUDRON J:	Between clauses 3 and 7?
MR MERKEL:	Yes.
GAUDRON J:	And I am wondering if it is not really there

inevitably?

MR MERKEL:  We say the reason why it is not inevitably

there, and we would go further, Your Honour,

and say that it would be quite inconsistent

with clause 7 itself to put it there, is that

clauses 3 and 7 are merely part of a bundle

of rights given by this agreement to the royalty

holder. The rights cannot be looked at in isolation

from each other. Clause 3 provides for how

the value for the purpose of royalty is to be

ascertained; clause 7 imposes a general obligation

in respect of taxes; we say that if, in the

process of arriving at a value under clause 3,

you are offending clause 7 it is impermissible

to do so because you cannot look at the clauses
as if they have separate operation unless clause 7

is read down to merely apply to imposts on the

royalty when arrived at. We say there is no

reason for doing it because that is not what

the clause said. The royalty referred to in

clause 7 is the grant, it is the interest given

in the production from Bass Strait by clause 1.

MIT3/9/SDL	30	12/8/88
Oil

We say why should a method of valuation in

clause 3 effectively operate to deny a right

in clause 7 which prohibits the burden of the
tax being passed on in the way I have identified?
We say what operation can the word "borne" mean
other than that which we give it? There is

not any. They can pay any tax but not bear

it.

The easiest example, Your Honour, would payment? They said, in my 85 per cent excise

be:  what if they deducted it from our royalty

example, we are paying your tax, the tax being

imposed upon us by reason of the obligation

to pay a higher excise because we are paying

you a royalty, but we are going to deduct that

from the payment of royalty that we are going

to send you? They could do that but, likewise,

they could just take the easier course and deduct
it from value and get to the same result because
the royalty will be reduced by two and a half
per cent of the additional· excise either way.

Otherwise the word "borne" has no meaning and

no operative effect at all.

We say, of course, that it is important to recall that this was an agreement looked

at through a crystal-ball gazing process. They

knew not what, where, when and how the Bass Strait

would yield and they were trying to protect

themselves against eventualities which were

unpredictable; they therefore sought to do

so, necessarily, in a very wide way. We say

the upshot of it all, going back to where we started,

is that the clear evidence adduced from clauses 3

and 7 of the parties' joint agreement to protect

from the burden of taxes, has been demonstrably

rendered nugatory in the present case by a tax

that could have been imposed anywhere and which,

wherever imposed, had the direct and immediate

effect of reducing value.

We say that there is a third point in addition to clause 7 and we will be brief upon it. We

say that if it is contended by the producers

that the result somewhat harshly burdens them

in that they cannot share any portion of the
tax imposed downstream of the place of production
because, clearly, on our own submissions, the

tax is a burden upon the whole process part

of which is upstream and downstream, the answer

that we give to that is that the burden may

be apportioned to the extent to which it is

referable to upstream production as against

downstream production.

MIT3/10/SDL	31	12/8/88
Oil

MR MERKEL (continuing):  So that we say, having regard to the

nature of an excise as a tax on production, it is
open to both parties to say, well, if it is not
all or nothing because the agreement was meant to

operate by reference to a geographic point which,

we can say for present purposes, is midway between

the reservoir and the point of sale, having regard

to the kind of activities conducted upstream and

downstream and, as the tax is essentially a burden

well recognized in excise law upon the production

itself, then it follows from our submission that

the result is an apportionment of that burden by

reason of the combined operation of clauses 3 and 7.

Mr Justice Fullagar in the DENNIS HOTELS case

said that he took a tax upon goods when produced

as being a tax upon their production.

Mr Justice Deane in the HEMATITE case said that

an excise tax is a tax upon production. These

goods are produced from the moment they are brought

to the well-head until they are then sold downstream

onshore and it is a continuous process.

WILSON J:  Mr Merkel, I wonder if it is necessary to take time

on this aspect. If you have made out a ground

for special leave already, then, of course, it can

be comprehended within it. If, ultimately, you

have not, on the major, the central points that you

argued, will this advance the matter, the application?

MR MERKEL:  We do say - I certainly will not be spending time

on it, Your Honour, because it is a point that can

be shortly stated, but we do say it is an independent

point, because we say that if we are wrong on the
proviso, we say that it still has work to do in

apportionment. If the excise tax is properly regarded

as a matter of substance rather than fall as a tax

burden - - -

WILSON J: You prefer the upstream downstream dichotomy, do you?
MR MERKEL:	Yes.

WILSON J: Excise straddles both streams.

MR MERKEL:  Yes, Your Honour, and it arises in that way

independently of the question of construction, and

we say that is the notion of an excise well recognized

on many occasions in this Court. So that if you

approach it purely as a matter of form and say, well,

the tax is imposed at the point when production of

the crude oil is complete, namely onshore, therefore
that is the only relevant matter, then the point

stops there. But we say that when you come to

apportionment and the operation of theproviso it is

to be approached as a matter of substance, because

then one gets back to it having no operation effect.

M1T4/l/VH	32	12/8/88
Oil

We say that if it is properly a tax upon athe process

of production, then it ought to be apportioned

between the upstream and downstream stages of it, and

we say that that follows from the excise cases.

It is a further reason why the proviso itself should

be given meaning and operation. They are the three

issues that we say are issues of law that do arise on

the construction of the agreement and which, with

respect, we say the Full Court and the arbitrators

have fallen into error upon.

The second aspect of our submissions which we can

deal with briefly are the reasons why special leave

should be granted. They have been set out in our

instructor's affidavit, Mr Hobday's affidavit, at

paragraphs 22 to 29 of the application book. That

appears at page 13 to 15 of the appeal book. We do

not wish to repeat them; we just say that there are

four substantive grounds why we say special leave

ought to be granted. The first stems from the

errors of law that we submit that can be identified

as very basic errors in the reasoning of the Full Court

and we attach great importance to the large amounts

involved and the very long-term nature of the contract

and the effect, therefore, of the judgments found on

the operation of critical clauses and say that that

would result in an injustice as between the parties

if left there. That deals with just the question of

excise.

The second point is we say that the findings on

the operation of the proviso and clause 7 operate

into the future in a general way in respect of all

items and that means that this is a contract having

some 40 to 50 years of operation. It is not a one-off

situation. The third point we make is that there

are other royalty agreements between the same parties

operative in identical terms in other areas of the

Bass Strait where exploration has not yielded results

to date, but there is no reason to believe that they

may not in the future because exploration is ongoing	so therefore even the length of the contract which
we are looking at is not necessarily complete.

The fourth reason is one that I adverted to

briefly in opening, namely that the. issue arises very

fnndamentally in how excise of the kind that arises

in the present case is to be treated in the valuation

process and we do indicate that it is wrong to see

this as an isolated case because the very issue of

valuation is the subject of the dispute between the

State and the Commonwealth in respect of the statutory

royalty and that clearly involves important questions.

We say there is the possibility of inconsistent

outcomes if leave is refused to us. We say that,

having regard to those matters, it is appropriate that

special leave be granted. I just indicate one matter

MlT4/2/VH	33	12/8/88
Oil

I omitted to mention; when one looks at the

operation of clause 7 - I think, in particular,

of Your Honour Justice Gaudron's conrrnent to me about

the way in which clause 7 operates. Of course,

we look at the question of value in this case because

there was monetary payment, but the fractional

interest conferred by clause 1 does result in a right

to take in kind under clause 3. One can test the

effect in operation of clause 7 by the taking in

kind by Oil Basins; the moment it took in kind it

would have the value of what it took reduced and

it would hit the excise barrier. It would have to

pay the excise, the tax on its royalty and we would

say that would again demonstrate - not just in the

valuation process, but by the taking in kind - the

inrrnediate reduction that excise brings about to

what it receives.

GAUDRON J:  But you could it the other way, could you not?

You could assume for the moment that it took

two and a half per cent in kind and ESSO BHP treated

it exactly as it treated its products thereafter

and charged two and a half per cent of its total

costs thereafter to Oil Basins for the subsequent

processing and gave it back at the end of the day

two and a half per cent of its net receipts.

Your client would then bearing part of the excise.

MR MERKEL: That is so, Your Honour. Either way, whether

taken in kind - but that is a graphic way of

demonstrating it - it would be paying out of its

royalty the tax which clause 7 says the producer

is required to pay.

GAUDRON J~ And you then come back to clause 7 as the mainstay

of your argument on that analysis.

MR MERKEL:  Yes, Your Honour. If the Court pleases.

WILSON J: Thank you, Mr Merkel. Yes, Mr Gleeson.
MR GLEESON:	Your Honours, may I first of all state in a sunrrnary

way the factual background to the disputes that arise, then sunrrnarize the reasons why we submit special leave should not be granted, and then

elaborate some of those reasons. Some aspects of

the factual background have been mentioned in passing

by my learned friend, but perhaps they should be

drawn together for Your Honours and illustrated by

reference to some sums of money that Mr Merkel

mentioned in argument to the Full Court of Victoria.

What occurs relevantly is that hydrocarbons are

produced and recovered within the area referred to in

the royalty agreement. That area is, for present

purposes, entirely offshore. The hydrocarbons are

then transported out of the area a distance of some

approximately 100 kilometres to Longford where they

MlT4/3/VH	34	12/8/88
Oil

are subjected to elaborate processing and treatment.

At that stage there comes into existence what are

called some "commercial products" of the original

raw hydrocarbons. Some of those commercial products

of the hydrocarbons are then transported a further

distance of about 200 miles to Long Island Point where

there is what my learned friend has called "the

point of custody transfer." The primary argument

that the royalty holder sought to urge upon the

arbitrators was that the place of production and

the point of valuation for the purpose of this

agreement was either Longford or Long Island Point

and that the subject-matter to which the figure

of two and a half per cent of value refers was the

commercial products of the hydrocarbons at Longford

or Long Island Point.

The significance of that contention, if it had

been accepted, for purposes of the arguments about

clause 3 and clause 7 is immeidately apparent. But

that argument was rejected by the arbitrators who

said the subject-matter of the royalty is the raw

hydrocarbons offshore; the point of valuation is

the platform or, to be precise, the last valve off
the platform, and the object of the valuation exercise

which gives rise to a question of fact is to work out

what a hypothetical purchaser would pay if it

acquired the raw hydrocarbons in an arm's length

contract at the platform ..

Now that problem itself is very easy to envisage

if one makes the tiniest alteration to the facts as

they in fact exist in Bass Strait. As it so happens

in Bass Strait, title to the hydrocarbons as they

come up through the well-head is shared 50/50,

between ESSO and BHP. But it would have been very

simple and, according to some of the evidence that

is referred to in the award, it would have been not
out of accord with offshore oilfield practice in

the United States at the time this agreement was

drafted, for BHP to produce the hydrocarbons at the

well-head and to sell them to ESSO at the last valve

off the platform.

If that happened, it would raise starkly the question of fact which the arbitrators said they

then had to decide as a matter of valuation. What

price would ESSO be prepared to pay to BHP for the

hydrocarbons if it bought them at the last valve

off the platform? And what was the meaning of the

words "value" and "gross value" in relation to

that exercise? And on the matter of the meaning of
the words "value" and "gross value" the arbitrators

received, without objection, evidence of economists,

only some of which is referred to in their award.

Now, to illustrate the financial significance of
this issue then, could I refer to my learned friend's

figures? At page 42 of the transcript before the

M1T4/4/VH	35	12/2/88
Oil

Full Court, whch is not in the documents before

Your Honours, he informed the Full Court, just to

illustrate what the argument was about that on
1 May 1985 the price at which crude oil was

purchased ·uy local refineries, sometimes called import parity price, was $44.97 a barrel, and the

excise payable was $39.12, and the return to the

producers was $5.85.	Now, let me round those figures
off.	The sale price of that commercial product at

Long Island Point is $50 a barrel; the excise is

$40 a barrel; the return to the producers net of

everything except excise is$ 6 a barrel.

Let us suppose that all the other costs of

transportation and processing are $3 a barrel. The

net return to the producers is $3 a barrel and the
gross value of the hydrocarbons on which the royalty
is based, according to the argument of the royaly
holder, is $42 a barrel. That is the practical

consequence of the argument that was put to the

arbitrators and rejected by them.

Now, in our respectful submission, special leave

ought to be refused for the following reasons. First,

the issues involve only questions of the construction

and application to the relevant facts of a contract

being a contract which was represented by the

applicant to the arbitrators as being unique and

tailor-made. There is no issue as to any principles of

law such as the proper approach to the task of

of construction or any other matter whose importance

extends beyond; this particular case. The second

reason is that the six - if I may use this neutral

expression - adjudicators who have so far considered
the questions have been unanimous in their
conclusions and there is no sufficient reason to doubt

the correctness of those conclusions.

The third is that the arbitrators whose decision

is sought to be overturned had before them a

substantial body of evidence tendered by both sides

and without objection which went to the heart of the

issues,now sought to be raised before the Court and

only a very small body of that evidence is set out

on the face of the award. The fourth reason which

has not been mentioned at all thus far is that the

arbitrators in their award said that, if contrary

to their view that the meaning of the relevant

provisions of the contract was plain, the contract

was ambiguous, they would have come to the same

conclusion on the basis of extrinsic evidence as to

pre-cnntract and post-contract communications applying

principles of New York law. Practically none of that

evidence appears on the face of the award. It is
evidence that was also tendered by both parties

before the arbitrators. And finally, we submit

that it would be out of line with current legal

policy in relation to the review of arbitrators' s

MlT4/5/VH	36	12/8/88
Oil

awards to produce a result that means that all

that the parties have achieved by assembling an international panel of distinguished lawyers to

construe their contract is that they have added

an extra tier to the hierarchy of tribunals

which will resolve their dispute.

Now, Your Honours, may I come back to develop

one or two of those particular points? First of

all, as to the proposition of what is raised as

the question of construction of a unique and
tailor-made contract, in paragraph 10 of the

award, which is set out at page 104, using the

numbers at the bottom of the pages of the producer's

appeal book, the aribtrators say:

Though we have stated the critical issue

in this dispute in a single phrase at the

beginning of our Award, in truth its

determination involves the consideration

and determination of a number of highly

complex and controversial matters. Most of

them relate~toand in the ultimate analysis
all depend upon the true construction of

the Royalty Agreement.

And in paragraph 94 of the award at page 173

of the producer's appeal book, the following is said:

The Claimant contents that a careful

examination must be made of each of the

clauses in the Royalty Agreement and argues

that they were written having in mind the

commercial and business realities of the

day (1960) and that they were tailor-made

with a kind of precision which makes this

Royalty Agreement unique and unlike any

other royalty of overriding agreements

which have been litigated in the United States.

May I next go to the submissions that are made concerning

the alleged errors on the part of the arbitrators
and the Full Court.	The affidavit of Mr Worrall,

which appears pages 124 to 126 of the OBL appeal

papers, in paragraph 10 points out that:

The primary matter in dispute before the

Arbitrators -

related to the -

questions of identification of the subject
matter of the royalty and the place of
production of the hydrocarbons whose value

at the place of production was the critical

issue.

And then the rival contentions are set out. Now,

MlT4/6/VH	37	12/8/88
Oil

the significance of those rival contentions is

perhaps obscured when one concentrates only on the

issue of excise. Could I remind Your Honours that

the proviso prohibits deduction, whatever exactly

that means in this present context, of all costs

and taxes. Let me give Your Honours examples

of some taxes that are taken off in the net back

calculation without any protest at all on the part

of the royalty holders: land tax on the land at

Longford and Long Island Point; payroll tax on

the wages paid to employees who process the

hydrocarbons on their way to market; costs of

transportation; costs of processing. Nobody doubts

that once it is established that the place of

production and the point of valuation is the
platoform, it is appropriate in doing the sum
required by the factual issue as to valuation to
take those costs and taxes off the proceeds which

are received for the sale of the commercial products

of the hydrocarbons when they are sold at Longford

or Long Island Point.

The question arises then: what is different, so

far as that calculation is concerned, about the

duties of excise? Well, it is said the duties of

excise have an impact on the value of the hydrocarbons

at the point of valuation because a purchaser at

the point of valuation would know that either he or

someone to whom he onsold the hydrocarbons would

have to bear that before they entered market. But,

Your Honours, there are duties of excise downstream

further still.	There is a duty of excise on petrol and no doubt
the duty_ of excise· on	petrol has an important

bearing on the price that an arm's length purchaser

of the raw hydrocarbons would be prepared to pay on

the platform at Bass Strait. There is all manner of

costs and:t.axes and imposts in between the point of

valuation and the point of ultimate sale of

commercial products.

There is nothing different or special or unique about this particular duty of excise in that regard.

Is it suggested that the costs of transportation

are costs incident to the royalty? Is it suggested

that the cost of processing at Longford is a cost

incident to the royalty? No doubt an explosion of

the wages costs at Longford or of the costs of

pipeline transportation would have a direct and

immediate effect upon the price that a purchaser at

the platform would be prepared to pay for the

hydrocarbons. To use my earlier example, if BHP

sold to ESSO at the last valve off the platform,

no doubt they would have a direct and immediate

impact. At the bottom of page 126 there is some

important evidence on the part of Mr Worrall that

goes to a point made by my learned friend, Mr Merkel.

He says:

MlT4/7/VH	38	12/8/88
Oil

Further, there was expert evidence before the

Arbitrators as to whether or not in the
view of an economist a value thus deduced -

that is by the net back method -

would be regarded by an economist as a "gross

value".

The alleged slide, to use my learned friend's word, in the reasoning process of the arbitrators,, was one on a matter that was the subject of evidence before

them:

There was also expert evidence as to whether

in that regard there was any relevant

difference between duties of excise and, say,

a customs duty imposed at the shore upon the
raw hydrocarbons, or taxes such as land tax

on the Longford and Long Island Point facilities,

or payroll tax on wages. All that evidence,

only a very small part of which is set out in

the Award, was adduced without objection.

My learned friend has said that a similar issue has

arisen between the State of Victoria and the

Commonwealth in relation to this excise. What he is

referring to is the fact that in 1980 the producers

agreed with the State of Victoria and with the

Commonwealth that excise would be deducted in the

calculation of the value of the hydrocarbons at

the well-head for the purpose of the statutory

royalty and, as the Court will have inferred from

the arguemnt that we placed before the arbitrators based on the first sentence, or the first limb, of clause 3, we have been paying royalty to the

overriding royalty holder on the basis of the same

value as is the value for purposes of the statutory

royalty.

About two years ago, 18 months to two years ago,

and before the hearing of this aribtration commenced,

a dispute arose between the State of Victoria and

the Commonwealth about that in relation to the context

of the statutory royalty, the Commonwealth insisting that exicse be deducted and Victoria resisting that.

There is, of course, in that case no question of

words like, "clause 7 of this contract, 111 and	words like"a proviso to clause 3," no question of
perhaps what is most important of all, as Mr Worrall's affidavit demonstrates, this matter was fought out
before the arbitrators as being to a large extent a matter of fact, and there was extensive expert
evidence called by both sides on these precise
questions as to the meaning of "value," the meaning of "gross value," and how taxes fitted into that exercise in a contract being interpreted and applied
according to United States law.

M1T4/8/VH	39	12/8/88
Oil

Then Mr Worrall, in his affidavit, refers to

other matters upon which there was extensive evidence

be£ore the arbitrators. For example, in paragraph 7

he refers to the fact that the producers called a

lot of evidence of United States oil and gas law

and practice, and, at the top of 124 he refers to:

the

The meaning established in -

United States -

oil and gas law and practice, with which

Mr Paul Temple

one of the draftsmen of this contract -

would have been familiar ..... of terms such as

"production" and "place of production"

and in paragraph (v) on page 124:

United States fiscal laws relating to taxes

on royalty-holders and payments of royalties

being taxes of a kind that might have been

within the purview of Clause 7 of the

Royalty Agreement.

That was all matter that was in evidence before the

arbitrators. What precise bearing it had on their

process of reasoning and their decision, we do not

know. We know that they adopted our construction

of clause 7 but how important to them that evidence

was, it is impossible to tell. But it is certainly

not proper to infer that it was regarded by them as

being insignificant. As they say, this was a contract

that was largely drafted by a person helping

Dr Weeks, a Mr Temple, a United States lawyer. My

corrrrnent on the failure to call Mr Temple to give
evidence in these proceedings was not made in the

context of a straight question of production, but

it was made in the context of the other issue of

pre-contract and post-contract conduct, and practical

construction, and that is the next point I made in my

summary of submissions, and I should refer

Your Honours to it.

At paragraph 113 of the award of the arbitrators

which appears in the producer's appeal book at

pages 194 and 195,,they say:

We thus have -

placed -

before us as a matter of construction, the duty

to determine the meaning of the phrase, "Value

at the place of production". It is our duty

to construe those words in accordance with

their usual and accepted meaning having in mind

MlT4/9/VH	40	12/8/88
Oil

the context in which they were used and

their relationship to the entire agreement

and all the while being cognisant of how

those words are used in relationship to
the practices and usages in the trade or

business.

Pausing there, only a fraction of which is available

to this Court on the face of the award:

Perhaps we shall never know whether the

parties in fact focused on the precise

point in issue which we are called upon to

decide. Whether or not they did it is

our duty to construe the words which they

used and give effect to their meaning

if that can be done in accordance with

their "plain meaning." We are of the

opinion that the Royalty Agreement clauses

which we are asked to construe are

unambiguous.

Now, may I pause there and say I realize it does

not follow as a matter of logical necessity that

if the unambiguous meaning which was found by

the six adjudicators who have looked at the contract
thus far was a meaning that did not commend itself

to this Court, one might be pardoned for suggesting

that the contract is ambiguous. They then go on to

say:

However, even had we been of the contrary view and had therefore found it necessary

to consider the pre-contractual and post

contractual documents and the principles of

practical construction, our conclusions would
not have been different.

Now, can I give you one small instance of the evidence they had before them about practical

construction and Mr Temple? If you go to paragraph 97

of the award which is at page 182 of this larger

book, could I invite Your Honours to recall

Mr Merkel's vigorous protests that our construction of this agreement means that value or gross value are the same thing as market value, and his

protestations about the terrible injustice that that

results in. Now, I invite Your Honours to look at

pages 182 and 183.

(Continued on page 42)

MlT4/10/VH	41	12/8/88
Oil

MR GLEESON (continuing):

In a letter dated 27th July 1960 BHP expressed uncertainty concerning the nature of a "carried interest" and requested

clarification.

There is another reference to that back on

page 113 - I am sorry, on page - I will just

read on at the moment.

GAUDRON J:	Are you reading from 182?
MR GLEESON:	Yes, 182:

Dr Weeks responded and stated that "the

principal"(sic)" -

that is the subject-matter -

to which the 2\% applies is the market value

at the well of the marketable hydrocarbons

produced."

If you substitute for the expression "at the

well", the expression "at the platform", that

is the construction that the arbitrators ultimately

put on this agreement and that is the construction

that is protested against. At the top of page 113,

the fact that BHP had asked for the interpretation

of this contract before they signed it is referred

to by the arbitrators. BHP, as the arbitrators

say, was not experienced itself in relation to

matters such as those referred to in this contract.

And they called for the interpretation of the

contract before they signed it and that is what

they were told. And that is included, no doubt,

amongst the matters of pre-contract and post-

contract conduct referred to by the arbitrators

any event, have come to the same conclusion if	in relation to which they said they would, in
they had thought this contract was ambiguous.

In our respectful submission, the arbitrators

were right in the construction that they placed

upon the contract but they gave that additional

ground of decision which is of great importance.

Could I then, Your Honours, go to the question

of the approach that the Court ought to take
to reviewing a decision of arbitrators or permitting

or encouraging a further review of the decision

of arbitrators. Could I hand to Your Honours

some references that we have put together.

WILSON J: Mr Gleeson, I do not think you need develop

that aspect of the matter.	I do not think we
need to hear you further.	Yes, Mr Merkel.

MlTS/1/ND	42	12/8/88
Oi 1

MR MERKEL: All we would wish to say, if the Court pleases,

is that my learned friend's gloom about other

taxes, payroll tax and other taxes of the kind,

is really removed by our submission that it is

only those taxes such as the excise that have

the sufficiency of connection; those other taxes,

on any view, do not. He referred to other evidence

before the arbitrators and the relevance that

may have. The Full Court determined that it was not troubled by any of those matters and

was able to determine the construction of this contract as a matter of law and that point has

been determined against him.

He referred to passages in pre-contractual

correspondence using the words "market value".

We say that makes our point. That was not the

term used in the contract drafted after negotiation

by the parties some four or five months later.

That was correspondence in August 1960. The

contract was entered into in December 1960,

carried interest and market value were abandoned.

They, with respect, make the points that we have

made to the Court in our submissions. If the

Court pleases.

WILSON J:  Thank you, Mr Merkel. The Court is appreciative

of the submissions advanced for the applicant

and in the light of its study of the materials

prior to the hearing it is in a position to proceed

immediately to rule on the application.

The first point is that this action involves

a large sum of money but that fact does not,

of itself, confer a right of appeal, although

it is a factor to be considered on an application

for special leave to appeal. The outcome of

the case depends on the construction of an agreement

made between the parties. It is a carefully

drawn document to meet a particular set of

circumstances.

The questions of law sought to be further

litigated do not, in our view, involve any principles

of law of general importance requiring elucidation
by this Court. Indeed, the arguments of counsel

for the applicant have only served to point up

that the issues between the parties arise from

this particular agreement that they have made

and not otherwise.

In any event, in our view, the result at

which the Full Court arrived is not attended
with sufficient doubt to warrant further review

and we bear in mind that the three arbitrators

MlTS/2/ND	12/8/88
Oi 1

and the members of the Full Court have all found

against the applicant. It follows that

notwithstanding the amount of money involved

the application for special leave to appeal should

be refused. The application is refused.

MR GLEESON:	We would ask for costs, Your Honour.
WILSON J:	Can you contest that, Mr Merkel?
MR MERKEL:	No, Your Honour, we would submit the same order should be made on both applications.
WILSON J:	Yes, I was going to proceed to the producer's

application in a moment. Very well, the order

in Oil Basins will be that the application for

special leave is refused with costs and there

will be a similar order - unless you wish to be

heard, Mr Gleeson -

MR GLEESON:  No, Your Honour.

WILSON J: - - - on the other application, the application

of BHP.

AT 11.36 AM THE MATTER WAS ADJOURNED SINE DIE

44

MlTS/3/ND	12/8/88
Oil