Qenos Pty Ltd v Mobil Oil Australia Pty Ltd
[2002] VSC 379
•29 November 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 2055 of 2002
F5452
IN THE MATTER of the Commercial Arbitration Act 1984 (Vic)
and
IN THE MATTER of an application for leave to appeal an Interim Award
of Mr Frank Costigan QC by Qenos Pty Ltd
| QENOS PTY LTD (ACN 054 196 771) | Plaintiff |
| v | |
| MOBIL OIL AUSTRALIA PTY LTD (ACN 004 052 984) | Defendant |
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JUDGE: | Byrne J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 2, 3, 4 September 2002 | |
DATE OF JUDGMENT: | 29 November 2002 | |
CASE MAY BE CITED AS: | Qenos Pty Ltd v Mobil Oil Australia Pty Ltd (No. 1) | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 379 | |
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Arbitration – leave to appeal – whether manifest error of law.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr E.N. Magee QC and Mr D.M. Austin | Cornwall Stodart |
| For the Defendant | Mr J.L. Sher QC with Mr Tim North | Blake Dawson Waldron |
HIS HONOUR:
The plaintiff, Qenos Pty Ltd (“Qenos”), applies by originating motion filed on 10 July 2002 seeking leave pursuant to s. 38(4) of the Commercial Arbitration Act 1984 to appeal against the interim award of Mr FX Costigan QC made on 12 June 2002. The arbitration arose out of a controversy or claim which had arisen between Qenos and the defendant, Mobil Oil Australia Pty Ltd (“Mobil”), with respect to the purchase by Mobil’s Altona oil refinery of certain chemical coproducts produced by Qenos at its petrochemical manufacturing plant, also in Altona.
This application was heard at the same time as Qenos’ application to set aside the award on the ground of misconduct pursuant to s. 42. I am delivering a separate judgment because the material relied upon in this application is very much more restricted than that available for a s. 42 application.
Since 1962, the two companies had had an agreement under which Qenos, or its predecessor, purchased from Mobil feedstock for use in its petrochemical plant and, in turn, sold to Mobil by-products derived from its manufacture of petrochemical products, which by-products Mobil used in its refining processes. On 5 February 1999, the parties entered into a petrochemical supply agreement (“supply agreement”) which replaced pre‑existing arrangements. Broadly speaking, under this agreement Mobil sold feedstocks to Qenos and purchased by-products as before, but the terminology changed: the by-products purchased by Mobil were now called “coproducts”, an expression which was defined as follows:
“’Coproduct’ shall mean those products manufactured from Feedstocks in the Petrochemical Plant which are neither Petrochemical Products, consumed in the operations of the Petrochemical Plant, or disposed of as waste. For the purpose of this Agreement, such Coproducts shall be referred to as ‘Kemcor Naphtha Returns’, ‘Spent Quench Oil’, and ‘Gasoil Tar’ and shall conform to the specifications as contained in Schedules 1(c), 1(d), and 1(e) respectively.”[1]
[1] Supply agreement s. 1.09.
Article 4 of the supply agreement made provision for the quality and quantity of the coproducts to be sold by Qenos to Mobil. For present purposes the following parts of this article are relevant:
“Section 4.01
[Qenos] agrees to sell to Mobil, and Mobil agrees to purchase from [Qenos], those Coproducts derived from the manufacture of Petrochemical Products in [Qenos]'s Petrochemical Plant from Feedstocks supplied by Mobil providing that such Coproducts conform to the applicable quality specifications as contained in Schedules 1(c), 1(d), and 1(e).
In the case of Naphtha Returns and Spent Quench Oil, [Qenos] shall supply and Mobil shall purchase the full quantity of such streams produced by [Qenos]. In the case of Gasoil Tar, [Qenos] shall endeavour to maximise sales of this material to other parties with Mobil purchasing any excess material that is surplus to [Qenos]’s third party sales.
Section 4.02
Mobil shall apply all reasonable endeavours to encourage the retention of Government legislation or industry quality standards which enable the Altona Refinery to accept Coproducts from [Qenos] for use in finished product blending without adverse impact to Mobil. Notwithstanding such endeavors, if changes to Government legislation or industry quality standards are introduced which adversely affect the Refinery’s acceptance of such streams, then Mobil shall have the option to nominate revised Coproduct quality specifications to [Qenos].”
The controversy between the parties arose as a consequence of an increase in the incidence in late 1999 of a deleterious condition in the motors of certain motor cars, which condition was referred to as sludging. After some investigation, the applicant was on 14 February 2000 informed that the source of this condition was petrol produced at the Mobil refinery at Altona. Furthermore, the component of this petrol which was fixed with the responsibility for the sludging was a di‑olefin contained in significant quantities in untreated steam cracked naphtha (“untreated SCN”). Untreated SCN was one of the coproducts purchased by Mobil from Qenos under the petrochemical supply agreement.
As soon as this link between untreated SCN and the sludging was established, Mobil withdrew from the market and recalled all premium unleaded petrol, which included significant quantities of this coproduct. On 14 February 2000, it ceased blending untreated SCN in its premium unleaded petrol product. Notwithstanding this, Qenos continued to supply untreated SCN as a coproduct under the supply agreement and to insist upon payment for it. Mobil, for its part, was faced with the difficulty of storing and, in due course, disposing of the unwanted, untreated SCN.
On 23 June 2000, Mobil wrote to Qenos a letter in which it nominated revised coproduct quality specifications pursuant to s. 4.02 of the agreement. These new specifications stipulated that coproducts should contain virtually none of the offending untreated SCN. Qenos disputed the validity of this nomination which was a central issue in the arbitration, an issue which was determined by the arbitrator in favour of Mobil.
In its proposed notice of appeal, Qenos identifies the questions of law which it says amount to manifest error. For the most part they represent the arbitrator’s suggested errors in construction of s. 4.02 of the agreement.
“1.The Arbitrator erred in the proper construction of Section 4.02 of the Petrochemical Supply Agreement dated 5 February 1999 (‘the Supply Agreement’):
(a)in finding that on the proper construction of Section 4.02 of the Supply Agreement the phrase ‘industry quality standards’ encompassed the practice of Mobil supplying to, and BP, Shell and Caltex accepting, petrol blended with untreated SCN;
(b)[This ground was not pursued];
(c)in finding that Mobil had made an effective nomination under Section 4.02 when he did not determine what the standard for blending untreated SCN into petrol was at the date of the Supply Agreement;
(d)in finding that a change to industry quality standards for blending untreated SCN into petrol was introduced in February and certainly by March 2000 by the recognition that the blending of untreated SCN into petrol was no longer acceptable;
(e)[This ground was not pursued];
(f)having found that in February 1999 through 2000 there was no relevant industry quality standard imposed by some outside authority the Arbitrator erred in not finding that there was no relevant industry quality standard in relation to the use of untreated SCN in finished product blending and that therefore Mobil was not entitled to nominate a revised Coproduct specification under Section 4.02;
(g)determining that under Section 4.02 Mobil was not obliged to apply all reasonable endeavours to encourage the retention of industry quality standards prior to it having the option to nominate a revised Coproduct quality specification; and
(h)in determining that, on the proper construction of Section 4.02, once there was in fact a change to industry quality standards introduced, Mobil was entitled to nominate a revised Coproduct quality specification regardless of the obligation under Section 4.02 to apply reasonable endeavours to retain industry quality standards.”
The remaining ground relied on by Qenos was that contained in paragraph 4 of the proposed notice of appeal.
“4.The Arbitrator erred in disregarding the primary meaning of the word ‘standard’ as determined by the High Court in R. v. Galvin ex parte Metal Traders Employers Association (1949) 77 CLR 432 at 447.”
An appeal to the court in respect of an arbitral award is permissible only upon a question of law arising out of the award[2] and where the parties consent or the court grants leave[3]. No consent has been forthcoming and so Qenos seeks leave to appeal. The court has a discretion in these circumstances to grant such leave but it is prohibited from doing so unless it considered that, in all the circumstances, the determination of the question of law could substantially affect the rights of one or more of the parties and, further, that there is a manifest error on the face of the award[4]. In this case the argument of counsel focussed on the existence of suggested manifest errors of law. I approach these matters adopting the approach of the New South Wales Court of Appeal in Promenade Investments Pty Ltd v State of New South Wales[5] and that of the Court of Appeal in this State in Energy Brix Australia Corporation Pty Ltd v National Logistics Coordinators (Morwell) Pty Ltd[6]. This means that I should first identify whether the finding or reasoning attributed to the arbitrator was in fact made or adopted by him and then to determine whether it contains a manifest error of law.
[2]Commercial Arbitration Act 1984 s. 38(2).
[3]Section 38(4).
[4]Section 38(5)(a), (b)(i). Sub-paragraph (ii) is not here relevant.
[5](1992) 26 NSWLR 203.
[6][2002] VSCA 113.
Industry Quality Standards
The grounds of appeal relied upon in this context are the following:
“1.The Arbitrator erred in the proper construction of Section 4.02 of the Petrochemical Supply Agreement dated 5 February 1999 (‘the Supply Agreement’):
(a)in finding that on the proper construction of Section 4.02 of the Supply Agreement the phrase ‘industry quality standards’ encompassed the practice of Mobil supplying to, and BP, Shell and Caltex accepting, petrol blended with untreated SCN;
(c)in finding that Mobil had made an effective nomination under Section 4.02 when he did not determine what the standard for blending untreated SCN into petrol was at the date of the Supply Agreement;
(f)having found that in February 1999 through 2000 there was no relevant industry quality standard imposed by some outside authority the Arbitrator erred in not finding that there was no relevant industry quality standard in relation to the use of untreated SCN in finished product blending and that therefore Mobil was not entitled to nominate a revised Coproduct specification under Section 4.02;
4.The Arbitrator erred in disregarding the primary meaning of the word ‘standard’ as determined by the High Court in R. v. Galvin ex parte Metal Traders Employers Association (1949) 77 CLR 432 at 447.”
Any consideration of the expression “industry quality standard” in s. 4.02 must acknowledge that Article 4 is concerned with two different products or groups of products each of which has a standard. There are first the applicable quality specifications for the coproducts which Qenos sells to Mobil. These specifications are found in Schedules 1(c), 1(d) and (e) to the supply agreement of which Schedule 1(c) deals with SCN. These are the specifications which may be revised by Mobil’s nomination pursuant to s. 4.02. The second standards are those with which this arbitration was concerned; they are the industry quality standards for petrol and petroleum products. It is a change in these standards which may trigger the right of Mobil to revise the coproducts quality specifications. This analysis was conceded by counsel for Qenos at the arbitration and was accepted by the arbitrator; it was not challenged before me.
In order to understand the grounds presently under consideration it is necessary to know that there exists an Australian Standard with respect to petrol, namely AS 1876 - 1990. The evidence before the arbitrator, which he accepted, was that this was a standard which dealt with a limited number of characteristics of petrol. Standing alone, it would not provide a satisfactory standard to meet modern motoring requirements.
For commercial reasons, each of the four major suppliers of petrol, Mobil, BP, Caltex and Shell, which collectively make up approximately 95% of the supply of petroleum products in Australia, have been accustomed to buy from each other’s refinery quantities of petrol for sale to the public under its own name. This means that in an area where one only of these suppliers has a refinery, the others will take petrol from that supplier in exchange for it taking petrol from one or other of the other suppliers in an area where that supplier is the company which has the refinery. The implementation of this product exchange arrangement necessitated the establishment of a specification or specifications which the petrol should meet in order to be acceptable to the company taking delivery. These specifications were prepared by the refining supplier, presumably following discussions with the purchasing oil companies. They were called “Product Exchange Specifications” (“PES”).
It should be noted, as the arbitrator observed, that there was no uniformity in these PESs. It is not, therefore, possible to conclude that these alone or together with AS 1876 - 1990, represented an industry quality standard. Moreover, it was not said that the PESs provided a recipe for petrol sold for public consumption in the sense that acceptable petrol must contain all of the ingredients in all of the PESs and no other ingredient; they represented minimum acceptable requirements. In particular, the Australian Standard and the PESs contained no mention, whether by way of prohibition or maximum or minimum permitted quantity, or otherwise, of untreated SCN. It follows that, unless its inclusion affected some performance requirement of the Australian Standard or the PESs, the inclusion of untreated SCN was not a breach of these acceptable requirements.
The arbitrator also accepted that no refinery other than Mobil’s Altona refinery blended untreated SCN in its petrol. He was therefore unable to conclude that this limited usage itself amount to a quality standard affecting the industry. As he observed, it would be absurd for Mobil to contend for this because it would mean that Mobil could change industry quality standards simply by modifying the composition of its own product.
Having said this, it is necessary to underline that the arbitrator's findings as to the content of the industry quality standards, if incorrect, do not amount to an error of law. The question of law here under consideration is the proper construction of s. 4.02 of the supply agreement and, in particular, the meaning of the expression “industry quality standards” which is used in that section.
The arbitrator rejected the submission put on behalf of Qenos that an industry quality standard must be a standard imposed by some independent, impartial and authoritative body. He concluded that, absent such an imposed standard, a standard might be established by agreement between the major suppliers in the industry or by industry practice or both.
Ground 1(a) is not easy to understand. If it is a criticism of the arbitrator’s conclusion that an industry quality standard might be established in whole or in part by industry practice, it is unsustainable. If it is said that the industry quality standard was established by the act of one oil company, Mobil, blending untreated SCN in its product, this is not what the arbitrator found. He rejected the contention that the mere fact that oil refineries in Australia and worldwide other than Mobil’s Altona refinery did not blend untreated SCN in their product led to the conclusion that there was an industry standard which prohibited this practice. He concluded that this practice was irrelevant to the content of any industry quality standard. This is probably a conclusion of fact but, in any event, it is not manifestly wrong.
Ground 1(c) criticises the arbitrator for failing to determine what was the standard for blending untreated SCN into petrol at the date of the supply agreement. It became apparent in the course of argument before me that this criticism was misconceived. The content of the industry quality standard on 5 February 1999, the date of the supply agreement, is irrelevant. The relevant time for such an enquiry was immediately prior to the suggested change in the standard. I should add that, in any event, the content of the standard is a matter of fact.
The error put in ground 1(f) is associated with this and must meet the same fate. It is true that the arbitrator found that there was no relevant industry quality standard imposed by an outside authority. It is, however, incorrect to say, as does ground 1(f), that the arbitrator did not find that “there was no relevant industry quality standard in relation to the use of untreated SCN in finished product blending”. It is true that the arbitrator found that there was no prohibition upon or limitation to this use in any such standard or, indeed, any mention of it, but this meant only that its use did not amount to a breach of, or a dilution of, industry quality standards. A petrol refiner might therefore blend untreated SCN and, even so, conform with the industry quality standard.
The next step in the argument put in ground 1(f) is that it follows from this that Mobil was not entitled to nominate a revised coproduct specification under s. 4.02. This must be because there was no change in the industry quality standard; if there was no previous relevant standard then the introduction of a prohibition against the use of untreated SCN cannot amount to a change in that standard. This step contains a logical flaw, which did not escape the arbitrator. The silence of the industry quality standard with respect to untreated SCN was replaced by an express prohibition upon its use. What was permitted before is afterwards forbidden. This is a change. This ground must therefore fail.
I will not dwell long on ground 4. The observations of the High Court in Galvin’s case[7] as to the meaning of “standard” were concerned with its use in the expression “standard hours of work” in a context where the hours were stipulated by an industrial award. The arbitrator did not fall into manifest error in concluding that these observations were of no assistance in the environment in which the present parties were operating.
[7]R v Galvin, Ex parte Metal Trades Employers’ Association (1949) 77 CLR 432.
Change to Industry Quality Standards
“1.The Arbitrator erred in the proper construction of Section 4.02 of the Petrochemical Supply Agreement dated 5 February 1999 (‘the Supply Agreement’):
(d)in finding that a change to industry quality standards for blending untreated SCN into petrol was introduced in February and certainly by March 2000 by the recognition that the blending of untreated SCN into petrol was no longer acceptable;”
The arbitrator found that the change to industry quality standards that excluded the use of untreated SCN was made in February and certainly by March 2000. This is essentially a finding of fact. In any event, I find no manifest error of law in this conclusion.
Reasonable Endeavours
“1.The Arbitrator erred in the proper construction of Section 4.02 of the Petrochemical Supply Agreement dated 5 February 1999 (‘the Supply Agreement’):
(g)determining that under Section 4.02 Mobil was not obliged to apply all reasonable endeavours to encourage the retention of industry quality standards prior to it having the option to nominate a revised Coproduct quality specification; and
(h)in determining that, on the proper construction of Section 4.02, once there was in fact a change to industry quality standards introduced, Mobil was entitled to nominate a revised Coproduct quality specification regardless of the obligation under Section 4.02 to apply reasonable endeavours to retain industry quality standards.”
The circumstances in which untreated SCN became outlawed were unusual. Section 4.02 appears to have contemplated that, over the life of the supply agreement, there may be changes in government regulation or industry standard. Since Mobil had the right unilaterally to change the quality specification for the coproducts which Qenos was to supply, it is not surprising that Qenos wanted, as far as possible, to have Mobil maintain the status quo. In the present case the change in the practice of Mobil of blending untreated SCN in its petrol was thrust upon it by the unexpected adverse effect of its petrol on certain motor cars. This, the arbitrator found, was the change in industry quality standard which gave rise to the right in Mobil to nominate a revised coproduct specification. It was commercially impossible for it to seek to maintain a standard which would cause it to sell to the public a product which would be likely to cause damage to motor cars and damage to its own reputation. The arbitrator concluded that the obligation to make best endeavours was imposed on Mobil only where the maintenance of existing industry quality standards in the face of change would have no adverse impact upon its acceptance of the coproducts.
Counsel for Mobil made the preliminary point about this aspect of the award that the want of best endeavours was not pleaded in the points of defence. I am loath to dispose of the ground on this basis. It is clear that the point was argued before the arbitrator so that Qenos should not suffer for a want of pleading.
The two grounds presently under consideration concern the construction of s. 4.02 and therefore raise true questions of law.
It is true that the arbitrator concluded that Mobil might nominate a revised coproduct specification notwithstanding that it had not applied “all reasonable endeavours to encourage the retention of… industry quality standards” which permitted it to blend untreated SCN in its petrol. He reached this conclusion for two reasons: first, upon a construction of s. 4.02 which meant that the requirement for reasonable endeavours was not applicable where the retention of the standard had an adverse impact on Mobil. The second basis for his conclusion was that the requirement did not apply after the change in industry quality standard had occurred.
To my mind, the arbitrator did not fall into manifest error in qualifying the obligation to apply all reasonable endeavours where the retention of the standard had an adverse impact upon Mobil. The first sentence of s. 4.02 makes reference to this. The existence of adverse impact is a matter of fact and, in any event, can scarcely be denied in the circumstances set out on the face of the award.
Ground 1(h) appears to be directed to the arbitrator’s second basis for absolving Mobil from the requirement for reasonable endeavours. The ground accepts that a change in the industry quality standard has occurred. It then says that Mobil might not then nominate a revised coproduct specification regardless of its obligation to apply reasonable endeavours to prevent the change occurring. So expressed, the ground is plainly doomed. Indeed, as the arbitrator observed, counsel for Qenos in argument conceded this. Before me counsel sought to explain this concession. I do not treat it as a formal admission; it is rather an acknowledgment of what then seemed to the arbitrator, and now to me, to be obvious.
It follows from this that I am not satisfied that any of the suggested grounds of appeal discloses a manifest error of law on the face of the award. Leave to appeal will therefore be refused.
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