Rouge Rock Pty Ltd v Santos Offshore Pty Ltd - [2022] WASC 409

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   ROUGE ROCK PTY LTD -v- SANTOS OFFSHORE PTY LTD [2022] WASC 409
CORAM:   SOLOMON J
HEARD:   8 NOVEMBER 2022
DELIVERED          :   8 NOVEMBER 2022
PUBLISHED           :   29 NOVEMBER 2022
FILE NO/S:   CIV 2133 of 2022
BETWEEN:   ROUGE ROCK PTY LTD
First Plaintiff
VULCAN EXPLORATION PTY LTD
Second Plaintiff
AND
SANTOS OFFSHORE PTY LTD
First Defendant
SAPURAOMV UPSTREAM (WESTERN AUSTRALIA) PTY LTD
Second Defendant

Catchwords:

Application for interlocutory injunction - Mandatory injunction - Whether the plaintiff has established a serious question to be tried - Whether the plaintiff needs to demonstrate a good or strong case - Balance of convenience - hardship as a defence to specific performance

Legislation:

Corporations Act 2001 (Cth)

Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth), s 99, s 127, s 264, s 265, s 270

Result:

Interlocutory injunction granted

Category: B

Representation:

Counsel:

First Plaintiff	:	B Dharmananda SC & SP Tomasich
Second Plaintiff	:	B Dharmananda SC & SP Tomasich
First Defendant	:	S Penglis SC & P Congdon
Second Defendant	:	S Penglis SC & P Congdon

Solicitors:

First Plaintiff	:	MinterEllison
Second Plaintiff	:	MinterEllison
First Defendant	:	Ashurst Australia
Second Defendant	:	Ashurst Australia

Cases referred to in decision:

ABC v O'Neill [2006] HCA 46; (2006) 227 CLR 57
Longtom Pty Ltd v Oberon Shire Council (1996) 7 BPR 14, 799
Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105
Samsung Electronic Company Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238

SOLOMON J:

(This judgment was delivered extemporaneously on 8 November 2022 and has been edited from the transcript).

Background

This is an application for an interlocutory injunction brought necessarily upon an urgent basis by the plaintiffs, Rouge Rock Pty Ltd (Rouge Rock) and Vulcan Exploration Pty Ltd (Vulcan). Relevantly, Rouge Rock and Vulcan are both oil and gas exploration companies.[1]
[1] Statement of Claim (27 October 2022) [1] - [2].
In May 2012, Vulcan acquired Petroleum Exploration Permit AC/P50 (P50) and Petroleum Exploration Permit AC/P51 (P51), granted pursuant to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (the Act), from MEO Australia Limited.[2] P50 and P51 are adjacent permit areas located off the coast of North-West Australia in a region known as the 'Vulcan Sub-basin'. The Vulcan Sub-basin sits within the 'Bonaparte Basin' and has an area of 583km².[3] P50 is now held by the defendants who have expressed an intention to surrender it by 18 November 2022 in accordance with the statutory regime described below, and in the circumstances which I shall explain. The plaintiffs seek urgent interlocutory relief to restrain the defendants from surrendering P50. As will be explained, although the injunctive relief is sought in terms of a restraint, its effect is likely to create positive mandatory obligations because the lack of surrender will trigger very significant obligations on the defendants.
[2] Statement of Claim [5]. MEO Australia later became, and is now known as Melbana Energy Ltd.
[3] Affidavit of Charles Richard Theodore Ramsden (sworn 25 October 2022) [12].

Statutory regime

Petroleum exploration permits are regulated by a comprehensive legislative regime set out in the Act. Under s 99, the relevant statutory authority may grant a petroleum exploration permit subject to whatever conditions the authority thinks appropriate, including conditions requiring the permittee to carry out work in relation to the permit area and conditions relating to the amounts that the permittee must spend in carrying out such work.
Under item 2 of the table in s 102, a petroleum exploration permit remains in force for a period of five years. Under s 269, the permittee may apply for consent to surrender parts or all of a petroleum exploration permit. Section 270 provides that the relevant authority may consent to a surrender only if the permittee has paid all amounts required by the legislative scheme and has complied with the conditions of the permit. In those circumstances, s 270(3) provides that the authority must not unreasonably refuse consent to a surrender. Section 270(6) provides that the permittee is taken not to have complied with a condition of the permit if the condition requires work to be done during a specified period and the permittee applies for a surrender during that period without having completed that work. Under s 270(5), if the permittee has not complied with the conditions of the permit, the authority may nevertheless consent to a surrender if it is satisfied that there are 'sufficient grounds' to warrant the giving of consent to the surrender.
Under ss 274 and 275, a failure to comply with a condition of a permit is a ground for the cancelling of the permit.

Petroleum Exploration Permit AC/P50

As this matter is primarily concerned with P50, I shall direct this summary to the history and content of that exploration permit.
On 19 May 2015, P50 was renewed to Vulcan pursuant to s 127 of the Act for a period of five years. Pursuant to s 99 of the Act, conditions of the permit were stipulated as to the work to be done in respect of each of the five years with a specified estimated expenditure. Relevantly, the conditions required the creation of one exploration well at an estimated expenditure of $20 million in year 4 of the permit, which at that stage was the year beginning 19 May 2018. Importantly, para 4 of the conditions provided that once a year has commenced, the permittee must complete all the work specified for that year.
On or about 27 July 2017, Rouge Rock acquired 45% of Vulcan's interest in P50, with Vulcan retaining 55%.[4] On or about 22 August 2018, Vulcan became a wholly owned subsidiary of Rouge Rock.[5] On 18 October 2017, Rouge Rock was registered alongside Vulcan as a co-holder of P50.[6]
[4] Affidavit of Charles Richard Theodore Ramsden [8].
[5] Affidavit of Charles Richard Theodore Ramsden [7]; [9].
[6] Statement of Claim [12].
On 14 December 2020, the plaintiffs entered into a Sale and Purchase Agreement (SPA) for the sale of P50 and P51 to the defendants Santos Offshore Pty Ltd (Santos) and SapuraOMV Upstream (Western Australia) Pty Ltd (SapuraOMV). The SPA was accompanied also by two royalty agreements (one for each of the defendants), however, only the first plaintiff entered into the royalty agreements with the defendants. Under the SPA, the purchase price constituted an amount of money that was a proportion (but less than the whole) of the amount that had then been expended by the plaintiffs to meet their obligations under the permits.
The first plaintiff, through the royalty agreement, thus also enjoys the benefit of a prospective royalty, should the defendants choose to commercialise the resource or assign the tenement, which would then carry the royalty rights with it.
On 21 August 2020, pursuant to ss 264 and 265 of the Act, the relevant authority granted a 12-month suspension from compliance with the permit conditions and an extension of term for P50.[7] Under the amended conditions the exploration well (at an estimated cost of $20 million) was to be undertaken in permit year 5, which at that stage was the year from 19 November 2021 to 18 November 2022
[7] Statement of Claim [14] - [15].
Subsequently, by notice dated 16 December 2021, the defendants procured an extension of their obligations in respect of the final two years of the permit, such that the obligation in respect of year 5, namely the exploration well, was now required to be undertaken in the year commencing 19 November 2022. This appears to have occurred at the initiative of the defendants and without the knowledge of the plaintiffs.
From about September 2021, the defendants appear to have reached a view that the resource would not support further investment or commercialisation. The defendants from that point commenced various means by which they sought to relinquish the permits, in the first instance by seeking to sell the permits, however such endeavours were not successful.
The permits were, as I have said, a further iteration of the original permits but, in particular, I refer to the renewal of the permits that occurred on 19 May 2015 whereby the permit was originally granted to the second plaintiff. That permit contained the original conditions upon renewal which have now been extended in the way I have already outlined above. Importantly, however, para 4 of the conditions provides, as noted at [7] above, that once a year has commenced the permittee must complete all the works specified for that year. The consequence of that is that once the clock ticks over to 19 November 2022, the defendants will bear the obligation imposed by the permit in respect of year 5, which is the creation of the exploration well at an estimated value of $20 million (and the production of some ancillary data to the estimated value of $250,000). Put simply, if the defendants do not surrender P50 by 18 November 2022, they will be required to comply with the condition of creating an exploration well. That is really the cause for the urgency of the matter, as I will explain further below.
It is appropriate to mention at this point that the defendant has given an undertaking not to surrender P50 before 14 November 2022. However, the matter requires urgent determination and my other court commitments do not, unfortunately, permit the court to delay the determination of the plaintiffs' application for an interlocutory injunction.
As I have observed, once 19 November 2022 ticks over, the defendants are then obliged to meet a whole year's expenditure requirement. Therefore, under s 270 of the Act, they will not, at least in the first instance, be permitted to surrender the permit without first undertaking that expenditure. As it presently stands, prior to 19 November 2022, the process of surrender would appear to be if not certain, then at least fairly straightforward for the defendant because they have otherwise met the requirements of the permit up until 18 November 2022. In those circumstances, as outlined above, the relevant authority must not unreasonably refuse consent to a surrender.
However, under s 270 of the Act, once it clicks over to 19 November 2022, the defendant will need to provide 'sufficient grounds' to procure consent to surrender in circumstances where it will, effectively, be in default of its obligations.

The dispute under the SPA and royalty agreements

Having set out that statutory background and the history and conditions of P50, I turn now to the dispute that arises from the SPA and the royalty agreements. There is insufficient time for me to consider all the arguments in relation to the agreements, namely the SPA and two royalty agreements as fulsomely as I would have ordinarily wished to do, and I will have to confine my observations to brief reference to the relevant provisions.
The central provisions that are in dispute are cl 7.2(b) of the SPA and cl 6 of the royalty agreements. Clause 7.2(b) provides:
Following the Transfer Approval Date, each of the Buyers must ensure that all of the obligations required to be fulfilled by Law and the obligations required to be fulfilled pursuant to the Authorisations, in connection with the Permit are fulfilled and the minimum work requirements for Permit Year 4 (ending 18 May 2021) and Permit Year 5 (ending 18 May 2022), as set out in the Permit Amendment, are performed.[8]
[8] Affidavit of Charles Richard Theodore Ramsden, 48.
Clause 6 of the royalty agreements (RA) provides:
(a)If the Payor proposes to surrender, relinquish, withdraw from or not renew or extend the whole or any part of the Permit for any reason (including being compelled or required by Law), the Payor shall give the Payee at least thirty (30) days prior written notice of that proposal.
(b)Nothing in this Deed shall prevent or hinder the Payor from surrendering or relinquishing all or any part of the Permit. If the Payor surrenders or relinquishes all of the Permit without applying for a substitute title then, this Deed shall cease to have effect in respect of the Permit on and from the date the Permit is surrendered or relinquished.[9]
[9] Affidavit of Charles Richard Theodore Ramsden, 163.
The dispute arises because SPA cl 7.2(b) on its face imposes an obligation on the defendants to undertake the work in respect of, permit year 5. Relevantly, RA cl 6(a) deals with circumstances where the permit holder proposes to surrender the permit for any reason. RA cl 6(b) provides that nothing in that royalty agreement shall prevent or hinder the defendants from surrendering the permit.
A conflict arises because those clauses cannot both be read in an unconstrained fashion; one must yield to the other. That is, a constructional choice must be made as to whether there is an unbridled obligation on the defendants to undertake the permit year 5 work, which would mean that the operation of RA cl 6 of the royalty agreement does not take effect unless and until that obligation is met. RA cl 6 would thus yield to SPA cl 7.2(b). Under the alternative construction, cl 7.2 of the SPA would be read subject to the right of the permit holder, in this case the defendants, to surrender the permit in the ordinary course for any reason provided for by the Act.
Arguments as to which constructional choice the court ought to make were advanced, very capably, by senior counsel from each side. Senior counsel for the defendants accepted that there was a serious question to be tried, and therefore, at least on its face, the first element of the test for an interlocutory injunction was made out.
However, in this matter, at least to some extent, the effect of the injunction would be to provide, in substance, a mandatory order requiring the defendants to perform at least for some time, or to some extent, if not entirely, the obligations which they say they ought not to be required to undertake in accordance with the proper construction of the instruments.
As there is some force in the proposition, to one extent or another, that the nature, or effect, of this interlocutory relief would be akin, at least in part, to final relief, it seemed to be common cause that it was not sufficient to find that there is a serious question to be tried. Senior counsel for the plaintiffs referred me to various authorities on the matter, particularly the decision of the Court of Appeal in Mineralogy Pty Ltd v Sino Iron Pty Ltd[10] and the Federal Court Samsung Electronic Company Ltd v Apple Inc.[11] It is not sufficient for me to find that the case for the plaintiffs is arguable. I need to assess the strength of the plaintiffs' case and find that there is a sufficient likelihood of success. Senior counsel for the defendant did not cavil with those propositions of law put by the plaintiffs.[12] There are various ways that the cases have described the prospective measure of success, — whether that be a good case, a reasonable case, or a strong case — the point is that it is not sufficient for me simply to find that it is arguable.
[10] Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105 [102].
[11] Samsung Electronic Company Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238 [51].
[12] See ABC v O'Neill [2006] HCA 46; (2006) 227 CLR 57, 81 - 84 [65] - [71] (Gummow and Hayne JJ); Twinside v Venetian Nominees [2008] WASC 110 [7] - [13] (Beech J).
Senior counsel for the plaintiffs went further and suggested that I ought conclusively to determine the matter of construction on this interlocutory application. Given that it appears, at least at the moment, to be only a matter of construction and that there are no contested mutually known facts (or any drawn to my attention that impact upon construction), I accept that that is a course available to me and in certain circumstances, would be the appropriate course. However, in this instance, I do not think it is a prudent course because I simply have not had sufficient time to examine and digest all the parts of the documents and the various arguments that have been advanced. The assessment I make is necessarily preliminary, given the time.

Preferred construction

Nevertheless, in that context, I have come to the view that the constructional arguments weigh in favour of the construction preferred by the plaintiffs. And to that extent, or in that sense, my assessment is that the plaintiffs have good prospects of success on the constructional argument. I say that at this stage for a number of reasons.
First, in making a constructional choice as to which provision should yield to the other, it seems to me that the language of SPA cl 7.2(b) is more in the nature of an unconstrained obligation because it plainly imposes an obligation in unqualified terms to undertake the work of the permit year 5. In contrast, the terms of RA cl 6 do not in terms confer a right of surrender. Rather, RA cl 6 deals with circumstances that operate if the defendants propose to surrender. Nor does RA cl 6(b) confer a right. It simply says that nothing in the royalty deed prevents the exercise of a right that might otherwise be available. And so, when comparing the language of the two provisions, it seems to me, just on the face of the language and the text, that SPA cl 7.2(b) ought to prevail and RA cl 6 should be read as subject to, or yielding to, cl 7.2(b).
In addition, it seems to me that the royalty agreement only begins to operate, or only has applicability, in circumstances where production is on foot and the royalty is payable. Therefore, there seems to be nothing particularly uncommercial about a construction that in effect, has RA cl 6 operate after the obligations in cl 7.2(b) have been completed.
I observe also that RA cl 6(b) refers to 'nothing in the royalty deed preventing or hindering a surrender', and in circumstances where the documents were signed together, there seems to be some significance in the fact that only the royalty deed is referred to. There is nothing on the face of the provision that suggests it seeks to limit the operation of cl 7.2(b) of the SPA.
In addition, in making a constructional choice about which of the provisions ought to prevail over the other, I think it is significant that all the parties to the royalty agreement were parties to the SPA, but that the second plaintiff was a party only to the SPA, and not the royalty agreement. Senior counsel for the defendants made the observations, I think not unfairly and with some force, that this might be due to commercial reasons which all make perfect sense and do not lend themselves to the constructional conclusion which the plaintiffs seek to draw from it.
Nevertheless, I do think it is not an insignificant factor that, when making a choice as to whether one deed should yield to the other, one of the parties to the SPA is not subject to any of the obligations or rights contained in the royalty agreement.
I also think there is some force in the plaintiffs' argument that to read cl 7.2(b) as yielding to cl (6) in a way that would permit the defendants to surrender the deed without complying with the obligations under cl 7.2(b), has the tendency to permit the defendants to undermine the bargain that lies at the heart of the transaction. Therefore, presented with a constructional choice, I think the preferred construction is that which gives the plaintiffs the full benefit of the bargain in accordance with the plain terms that are contained in cl 7.2(b).

Relief

In those circumstances, I am persuaded that the plaintiffs have good prospects of success in the construction argument. It follows that if that is so, the defendants have an obligation to complete the work for permit year 5. The defendants point out that this is not the end of the matter because there are reasons why the defendants ought not, in any event, to be required to undertake the work even if the construction urged by the plaintiffs is upheld.

In a broad sense, those arguments relate to the difficulty associated with undertaking the work which the available evidence adduced by the defendants indicates will be extremely expensive. That is particularly the case in circumstances where the defendants have already resolved that there is no commercial benefit to be had from additional work or, at least, such an outcome is most unlikely. The defendants say on the basis of the work they have done to date, there will be little benefit to them or, indeed, to the plaintiffs, from the proposed work.
In circumstances where the contractual obligation is onerous, expensive and provides no benefit or provides little prospect of benefit and in circumstances where there is a debate about the contractual construction, the defendants contend that they ought not to be subjected to what is effectively, a mandatory order to undertake that work.
It may be accepted that the relief sought, which could be regarded as relief analogous to specific performance, raises complex considerations. However, the defendants do not argue, for example, as one might in other types of cases, that this is some sort of relational contract or that the relief would require the parties to cooperate in some way that would preclude the court from sensibly requiring performance. The defendants point only to the burden and evident lack of utility.
The plaintiffs say that they ought to get the benefit of the bargain and that the defendants' burden and assessment of the ultimate benefit is neither here nor there. The defendants are contractually obliged to undertake that work and that was the essence of the bargain.
Senior counsel for the plaintiffs took me to a number of cases which I will not summarise, but the effect of them is that the difficulty associated with performance of the bargain that may unfold is not a reason to resist an order for specific performance. Reference was made in particular to the decision of Young J in Longtom Pty Ltd v Oberon Shire Council.[13]
[13] Longtom Pty Ltd v Oberon Shire Council (1996) 7 BPR 14, 799.
Overall, I must assess the balance of convenience and, although I have reached the preliminary view that the plaintiffs enjoy good prospects of success in their constructional argument, I still need to turn my mind to whether the fairness of the situation requires or warrants the orders sought by the plaintiffs.
That assessment includes the issue of the adequacy of damages as a remedy for the plaintiffs in the event that an injunction is not granted, the permit is surrendered, and the plaintiffs' construction is upheld at trial. The plaintiffs contend that in those circumstances the absence of the exploration well will undermine the capacity to assess and quantify the loss. The defendants say that on their assessment, in all likelihood the exploration well will only confirm the lack of economic viability. Plainly, that is not a matter I can determine. In the circumstances I think there is justification for the plaintiffs' concern.
Senior counsel for the plaintiffs submitted that the adequacy of damages may not be determinative in any given case. Reference was made to the helpful summary in Samsung Electronic Company Ltd v Apple Inc.[14]
[14] Samsung Electronic Company Ltd v Apple Inc [62] - [63].
In weighing the various factors, a difficulty emerges because as of 19 November this year, the defendants will be required to undertake the whole year's work unless they can satisfy the relevant authority that there are sufficient grounds for surrender in the event that they are ultimately successful, contrary to the preliminary view that I have taken. That is an important consideration in the balance of convenience.
The defendants say I can make no assessment at all of their prospects of being able to satisfy the requirement of 'sufficient grounds' to surrender the permit if they are ultimately successful. All I can conclude is that their ability to be able to surrender the permit is uncertain. The plaintiffs on the other hand referred me to the Act and Offshore Petroleum Exploration Work-bid Guidelines. Although they are not promulgated under the Act and have no statutory force, the Guidelines are nevertheless issued by the Commonwealth Department of Industry, Science and Resources to be read in conjunction with the Act.[15] The plaintiffs contended that the defendants should be in a position to satisfy those guidelines so as to be permitted to surrender P50.
[15] Australian Government, Department of Industry, Science and Resources, Guideline: Offshore petroleum exploration - work-bid in relation to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (2 March 2022).
Of course, I cannot ultimately determine whether sufficient grounds will be found to have existed, but it does seem to me on the material before the court that if the defendants are successful at trial and then apply for a surrender, given all that has happened within this proceeding and, indeed, my comments, which emanate from the Supreme Court and can be drawn to the attention of a relevant authority, it would be in my view, somewhat surprising if sufficient grounds were not held to have existed so as to justify a surrender of the permit.
I also take account of the fact that the orders I make will not necessarily be forever and that there will be liberty to apply and if the circumstances, as they unfold, are such that that delicate balance changes, then the defendants, or the plaintiffs, will be at liberty to come back before the court to explain the change in such balance.
I also observe that on the information provided to me, there is some force in the submission that following the unilateral extension undertaken by the defendants and the history of their decision-making in relation to this permit, the urgency is, to some extent, a product of the defendants' own conduct. I understand the commercial pressures and realities, and do not mean any criticism by that, but it nevertheless seems at this stage that the course of conduct by the defendants has created or materially contributed to this level of urgency and the prejudice of which the defendants complain.
In all those circumstances, I am persuaded that the orders sought by the plaintiffs should be made.
That does leave one issue though. The defendants have argued with some force that they do face significant financial risk in the event that their construction is upheld, and that the injunction ought not to be granted without an undertaking. An undertaking has been given but it has been the subject of some critical observations by senior counsel for the defendants and I have to say, I share some concern about the value of the undertaking. Before we rose for lunch, I invited senior counsel for the plaintiffs, to seek instructions about that, but he was not able to do so in the time available.
In light of the defendants' undertaking referred to in [15] above, the matter was relisted for 9.30 am on Friday, 11 November to deal with the issue of the plaintiffs' undertaking as to damages.
At the hearing of 11 November 2022, a limited undertaking was given by Mr Ramsden (the sole director and majority shareholder of Rouge Rock) personally, and the injunctive orders sought by the plaintiffs were granted.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
NW
Associate to Justice Solomon
29 NOVEMBER 2022