Santos v Delhi Petroleum Pty Ltd

SANTOS & ORS V DELHI PETROLEUM PTY LTD
[2002] SASC 272
Full Court: Lander, Williams and Besanko JJ

LANDER J. This is an appeal and a cross appeal from a decision of a judge of this Court in which he made declarations at the behest of the plaintiff/respondent (Delhi) affecting the first defendant/appellant (Santos) and orders requiring the defendants (appellants) to pay to Delhi the sum of $8,000,000 which includes interest.
History
The Cooper Basin lies below ground in the North Eastern area of South Australia and the South Western area of Queensland. It is approximately 640 kilometres long and 240 kilometres wide at its widest point. The Cooper Basin is a sedimentary basin which is covered by a much larger basin known as the Eromanga or Great Artesian Basin.
The Cooper and Eromanga Basins represent Australia’s largest onshore oil and gas reserves. More than 1200 wells have been drilled and 123 gas fills and 58 oil fills have been discovered in the Cooper Basin region since 1963.
The Cooper Basin operations are centred at Moomba which is located in the Central Australian Desert approximately 800 kilometres North of Adelaide. A plant at Moomba, which commenced operating in 1969, was constructed in phases. The plant was built for the recovery and processing of natural gas and oil in the Cooper and Eromanga Basins. Natural gas commenced flowing into Adelaide from Moomba in 1969. Moomba which also processes gas from the Queensland part of the Cooper and Eromanga Basins now produces about 13.2 million cubic metres of gas per day.
The gas is distributed by underground pipelines to South Australia, New South Wales and the Australian Capital Territory and is used for both domestic and industrial purposes. In the State of South Australia gas is the major fuel for the generation of electricity.
Apart from gas the Cooper and Eromanga Basins fields produce crude oil and gas liquids.
Each of the parties to these proceedings, including Santos, are explorers and producers of natural gas and oil. They are collectively referred to as the “Producers”.
Santos is the “Operator”.
In the 1950s Santos obtained exploration licenses to explore for oil and gas in South Australia and Queensland.
On 6 May 1958 Santos entered into an agreement with the respondent for the joint exploration by them for petroleum in the permit areas then held by Santos.
Between 1958 and 1963 a series of agreements were entered into between Santos, the remaining appellants and Delhi under which Santos farmed out certain areas which were within and subject to the exploration licences. Each farm out resulted in a sub-division of the licence area into a smaller area known as a “Block”. Santos also entered into Joint Operating Agreements with other Producers.
Natural gas was discovered in 1963.
In 1966 Santos and Delhi entered into a contract to supply gas to the South Australian Gas Company Limited. Further contracts were entered into by the Producers with other South Australian enterprises. In 1968 the Producers entered into a contract for the transportation of gas from Moomba by the Natural Gas Pipelines Authority, which was a statutory authority (later renamed Pipelines Authority of South Australia) constituted under the Pipelines Authority Act 1967 (SA) (now called the Natural Gas Authority Act 1967 (SA)).
A number of discoveries were made on different Blocks. Those Blocks became subject to operating agreements between the Producers who had an interest in the Blocks.
In 1971 the Producers entered into a contract to supply gas to the Australian Gaslight Company (the AGL Agreement) for distribution in the Sydney market over a 30 year period.
By 1976 there were at least 16 separate fields which were capable of producing gas. Each were owned by varying combinations of different Producers and there were two purchasers to be satisfied.
The AGL Agreement was conditional on the establishment of a minimum quantity of specified reserves. It also required the Producers to enter into a form of joint venture agreement to be known as a Unit Agreement. The AGL Agreement provided that the terms of the Unit Agreement should bind the producers to perform the terms of the AGL Agreement.
It was recognised by all parties, including the Producers and the purchasers, that it was necessary to avoid fragmented and expensive separate developments to rationalise the production of hydrocarbons from the Cooper Basin.
On 16 October 1975 the Producers and the South Australian Government executed the Cooper Basin Indenture, which is a schedule to the Cooper Basin (Ratification) Act 1975 (SA). Section 16 of that Act authorised the Producers to enter into a Unit Agreement for the rationalization of field production, gathering and treatment of Unitized Substances.
The Unit Agreement
On 21 December 1976 Santos and Delhi together with other parties, including some of the appellants, entered into the Unit Agreement the purpose of which was:
“… to provide for the co-operative appraisal, development, operation and working of the Unitized Zones and of other operations for or in respect to the Unitized Substances and for the sharing of costs of all such operations and for the apportionment of Unitized Substances as herein provided, and accordingly, the Parties hereby associate themselves in a joint venture to carry out such purpose subject to and in accordance with the provisions of this Agreement.” (clause 2.02)
The Unit Agreement is a production joint venture agreement.
The agreement was made retroactive until 1 January 1975. The agreement was in substitution for all other agreements between the parties. Subsequent to the execution of the Unit Agreement all of the parties to these proceedings have become parties to that agreement.
The Unit is the joint venture constituted by the Agreement. The subject area is the Cooper Basin. The Unit area comprises the Blocks which are listed in the first schedule to the agreement and are those Blocks formed out of previous farm out agreements. The Unitized Zones are the sub-surface portions beneath each Unit Area which include petroleum reserves. The Unit Operations include the development and operation of the Unitized Zones and the Unitized Substances. The Unitized Substances mean the petroleum in or recovered from a Unitized Zone and the hydrocarbon and other products obtained therefrom.
The Unit Agreement provided for a Unit Operator to conduct Unit Operations. Initially by the terms of the Unit Agreement the first appellant and the respondent were appointed Joint Unit Operator. The Unit Agreement assigned particular Unit operations to the first appellant and the respondent. However, since 1979 Santos has been the sole Unit Operator and its rights and obligations as unit operator are governed by the terms of the Unit Agreement.
The Unit Agreement provided a mechanism by which the economically producable, proved and probable reserves of natural gas within the Blocks in the Cooper Basin region could be developed and produced by the parties to the Unit Agreement. Each of the parties held different percentage interests in different Blocks and not all parties held an interest in every Block.
It did this by creating Block Participations and Unit Participations. Block Participations are the percentages applied from time to time in respect of expenditure on Unit Facilities and on Unit Operations and to the production of Unitized Substances. There are numerous subsets of Block Participations. For example the Agreement provides for a Gas Block Participation which means the percentage of gas from time to time apportioned to a Block. A Drilling Investment Block Participation means the percentage apportioned from time to time to a Block in respect to all capital costs involved in the drilling and completion of wells. The Block Participations recognise production, capital costs and operating costs in relation to the particular Block.
The Unit Agreement provided for the sharing of costs of operations through the issue of Unit Participations. The Unit Participations are calculated for each Producer by multiplying the undivided interest of that party, from time to time in each Block, by the relevant Block Participation applicable to such Block from time to time. The Unit Participations correspond with the Block Participations, for example a Gas Unit Participation and a Drilling Investment Unit Participation.
The Unit Agreement contemplates that each Producer would ultimately receive a quantity of contract gas that the Producer had contributed to the Unit as a whole. By the same token each Producer would pay costs of the production proportionate to the operating and capital costs of delivering those hydrocarbons.
The Unit Agreement contemplates that all of the Blocks form the Unit and the Unit Participations recognise the Producers’ shares in the whole which reflect the individual shares in the individual Blocks.
The Unit Agreement contemplates that there will be an orderly extraction of hydrocarbons so that a Producer will receive revenue recognising the Producer’s Unit Participations even though that Producer might not have any interest in the Block presently being exploited.
The Unit Agreement also recognises capital costs. For example, it provides for Drilling Investment Unit Participations which reflect the percentage which a particular Producer would contribute to the capital costs of drilling.
The Unit Participations are provided for in the second schedule to the Unit Agreement. The Unit Agreement contemplates that Block Participations and Unit Participations may change other than for reasons associated with any Liquids Project. I shall refer to the Liquids Project shortly. Article IV of the Unit Agreement therefore provided for a review over time and for a procedure for review and adjustment.
It is not necessary to examine in detail the circumstances which might give rise to a need for review and adjustment or the procedure by which that review and adjustment was to be carried out.
The purpose of the review and adjustment process was to adjust each Producer’s Block Participations and Unit Participations from time to time to reflect the changing level of estimated recoverable reserves in the Blocks and the capital and operating costs of production of those reserves.
In particular it was contemplated that three aspects of the broad types of Participations would need to be adjusted, Product Participations (the Unit Parties’ shares of the various products of the Unit), Investment Participations (the Unit Parties’ shares of capital expenses) and Operating Participations (the Unit Parties shares of operating expenses).
The Unit Agreement gives the Unit Operator the exclusive right to conduct Unit Operations. The Unit Operator is entitled to charge to the Unit Account the cost of its services as Unit Operator.
The Unit Operator must keep detailed records of Unit Operations and furnish a statement of account each month to each Producer.
The Unit Operator was obliged to set up a Unit Account on behalf of the Producers for all costs, expenses and liabilities incurred by it and all moneys received by it for the credit of the Producers. It had the responsibility of paying all costs and expenses incurred in the Unit Operations. The Producers were obliged to reimburse the Unit Operator for their respective share of costs and expenses in accordance with the formula provided for in clause 8.2 of the Unit Agreement. The Unit Operator is also obliged to apportion expenses, income, revenue and products between the Producers.
The Unit Operator was given the obligation of carrying out reviews and adjustments.
The Unit Agreement can only be varied by a written agreement between each of the Producers. In particular clause 25.06 provides:
“No waiver by or on behalf of a Party of any breach of a provision of this Agreement shall be binding upon that Party unless it is expressed in writing and duly executed by such Party and such waiver shall not operate as a waiver of any future breach whether of a like or different character.”
Article III of the Unit Agreement contemplated the Producers entering into a further agreement to implement a proposed Liquids Project.
It was agreed that a further market study would be undertaken by the Producers to determine the feasibility of recovery and production of a Liquids Project. The Unit Agreement provided for the further agreement of all or some of the parties.
The Producers did in fact resolve to implement the Liquids Project and to construct facilities at Moomba and Stony Point and for pipelines between those points. The facilities in the pipelines were completed in 1983.
The Liquids Project is a project for the extraction of ethane, propane, butane and pentane products obtained or derived from petroleum.
The Unit Agreement is not the subject matter of these proceedings. Its only relevance to these proceedings is to provide an understanding of the relationship between the Producers.
These proceedings relate to the application and construction of four subsequent documents; the Stony Point Indenture; (an Indenture between the State of South Australia and the Producers) (“the Indenture”); a letter from Santos Ltd to the then Minister of Mines and Energy dated 24 November 1981 (“the letter of 24 November 1981”), the Downstream Agreement (“Downstream Agreement”) and the Fixed Factor Settlement Agreement (“Settlement Agreement”). The last two documents are agreements entered into by the Producers to further regulate their relationships. The Producers are joint venturers.
It is necessary to have regard to a number of provisions in each of the Indenture, the Downstream Agreement and the Settlement Agreement and to the entire contents of the letter of 24 November 1981.
Before turning to those documents I will identify the issues which the trial judge was called upon to consider.
The Issues
There are two items of revenue (or two items of repayment) and two items of expenditure which are the subject matter of these proceedings and this appeal.
Santos, as Operator, has had the responsibility of apportioning both the items of repayment and expenditure between the Producers. Delhi complains that Santos has more recently wrongly apportioned those items.
The items of repayment are the Jetty Security Deposit (clause 67 of the Indenture) and the Water and Roads Security Deposit (Schedule 4 of the Indenture).
The items of expenditure are the fixed Wharfage Dues (clause 72 of the Indenture) and the Water Rates and Road Tariff (clauses 43 and 49 of the Indenture).
It is necessary therefore to consider the Operator’s apportionment of both expenditure and income.
The Operator has the responsibility of apportioning the costs and expenses incurred between the Producers in accordance with Producer’s share of such costs and expenses. That obligation arises under Article VIII of the Downstream Agreement.
Between 1 January 1987 and until the end of 1996 Santos apportioned the items of repayment and the items of expenditure amongst the Producers.
Santos apportioned the Wharfage Dues and the Water Rates and Road Tariff between the Producers such that their liability to pay those expenses (except for some part of the Wharfage Dues) was met by the Security Deposit Repayments.
By clause 5(d) of the Settlement Agreement the Operator was obliged to provide the Producers with a First Accounting Adjustment to enable the Producers to respond in accordance with their obligations under clause 5(e) of that agreement.
Santos claimed that during the course of preparing the First Accounting Adjustment it realised that it had mistakenly apportioned the Wharfage Dues and the Water Rates and Road Tariff and as a result Delhi had paid $1,923,307 less than it should towards those expenses. In the Operator’s view that meant that the other Producers collectively had paid an equivalent amount in excess of their obligations. It called upon Delhi to pay the amount, which it did under protest. Delhi claimed that Santos had not made a mistake and the apportionment was in accordance with the Producers’ obligations to each other. In the alternative Delhi claimed that Santos was precluded by clause 1.5 of exhibit B of the Downstream Agreement, the Downstream Accounting Procedure and/or an estoppel, either by convention or representation, from changing or departing from the historical practice. It also claimed that nothing in the Settlement Agreement authorised departure from the practice adopted by Santos between 1987 and 1996.
On 10 January 1997 Santos changed the method of apportionment for crediting the Producers with the State’s repayment of the Security Deposit Repayments.
Delhi claimed that after 1996 Santos should apportion the items of revenue and items of repayment by reference to the Settlement Agreement.
In the alternative Delhi claimed that Santos should continue to apportion the Security Deposit payments as it had until 1996 by reference to the historical accounting practice.
Delhi asserts that the apportionment of the repayment by the State of those Security Deposits was, and in the case of the Jetty Security Deposit still is, governed by the Indenture. Consequently those repayments which have been made subsequent to 1991 should be distributed in accordance with the Fixed Factors operating under the Settlement Agreement. On the other hand Santos argues that the Security Deposits are not the subject matter of the Settlement Agreement but are governed by the Downstream Agreement and the repayments of the Security Deposits must be in accordance with the terms of that Agreement.
The following questions were raised for consideration by the trial judge:
a)Whether Santos had correctly apportioned the Security Deposits and the Wharfage Dues and Water Rates and Road Tariff between the Producers in the relevant period.
b)If the answer to a) is no what is the correct apportionment.
c)If the answer to a) is no whether Santos is precluded by:
1)Clause 1.5 of the Accounting Procedure in Exhibit B of the Downstream Agreement; and/or
2)By an estoppel either by convention or representation;
from changing or departing from the historical practice.
The Indenture Dated 26 November 1981
On 26 November 1981 the Producers entered into an Indenture with the State of South Australia in relation to the Liquids Project which was ratified by the Stony Point (Liquids Project) Ratification Act 1981 (SA), which was assented to on 17 December 1981. The Indenture provided that the State and the Producers would co-operate in building a pipeline from Moomba to Stony Point (now called Port Bonython) and a jetty at that Port for the purpose of shipping petroleum liquids.
On 24 November 1981 the Operator wrote a letter to the Minister in relation to the Indenture. Although the letter predated the execution of the Indenture there is no doubt that the letter addressed the document which was signed two days later. I shall refer to that letter after referring to the relevant terms of the Indenture.
It is clear from the Unit Agreement and the documents to which I am about to refer that the Producers’ relationship with each other was as joint venturers. The Producers have at all times eschewed any notion that they are in partnership or that any of them are responsible for any liabilities of the others except in accordance with their various agreements. The Indenture makes it clear that each of the Producers only had a several liability to the State: clause 88.
Mr Karkar QC, senior counsel for Delhi, argued that the Indenture not only provided for contractual obligations between the State and the Producers but also provided for contractual obligations between the Producers.
Recital J to the Indenture provides:
“The parties hereto now desire to enter into this Indenture in order to define their respective rights, duties and obligations with regard to the above mentioned matters;”

Clause 88 makes the Producers’ position clear. It determines the liability of the Producers to the State and to each other. It provides:
“ 88. The liability of each Producer under this Indenture shall be several and not joint nor joint and several and the liability of each Producer shall be determined in accordance with the extent of its ownership of any interest from time to time in any asset or activity contemplated under this Indenture.
In the event that the State or PASA shall have a claim against a Producer or Producers the Producers will inform the State as soon as practicable of the extent of ownership of the Producer or Producers in any asset or activity contemplated under this Indenture relating to the subject matter of the claim.”
I agree with the submission made by Mr Karkar, that the Indenture does create a several liability on the part of each of the Producers to the State and that there is no joint liability of those Producers to the State. I also agree that the Indenture creates contractual relationships between the Producers.
Clause 88 provides a procedure for the determination of each Producers’ several liability to the State. That several liability “… shall be determined in accordance with the extent of its ownership of any interest from time to time in any asset or activity contemplated by this Indenture.”
Whilst the Producers’ obligations are several the State protected itself against any one Producers’ default. Clause 99 applies to circumstances of default by a Producer and provides that if there be default, and the necessary arbitration has occurred, and the default continues, the Minister can consult with the non defaulting Producers, and if those Producers agree to assume the defaulting Producer’s obligations, the State can cancel the Indenture insofar as it applies to the defaulting Producer only. However, if the non defaulting Producers do not agree to assume the defaulting Producers’ obligations the Minister can cancel the Indenture.
In clause 88 the Producers have recognised as between themselves how their respective several liabilities shall be determined. They have agreed in clause 88 that their liability to the State will be several. They have also agreed that any several liability they have to the State will be determined by their ownership of any interest in any asset or activity contemplated in the Indenture.
Because Clause 88 determines each Producer’s liability to the State it must define the Producers’ liabilities inter se. Although their liability to the State is several the component parts of their liability must match the whole liability to the State.
The Indenture provides for the State to grant certain land (“the Proposed Development Site”) to the Producers at Port Bonython at a cost not exceeding $480,000: clause 16. The State also reserved for the Producers, an area described as Contiguous Land: clause 10, and a Services Corridor between the Proposed Development Site and the Contiguous Land: clause 11.
The State undertook to supply water to the Proposed Development Site by laying a water pipeline from the Morgan to Whyalla pipeline to that site: Part X. The cost of laying the waterline was provided for in Schedule 4 of the Indenture: clause 39.
The State also agreed to build roads, including a road from the Lincoln Highway to the end of a Jetty which was to be built at Port Bonython: Part XI. The cost of construction was also provided for in Schedule 4 to the Indenture: clause 51.
Schedule 4 provides:
“ SECURITY DEPOSIT
1. The Producers shall deposit with the State as and when required by the State a sum equal to the capital cost including interest incurred or to be incurred by the State as notified in writing by the State to the Producers in the provision of water in accordance with Part X of this Indenture and the roads within the Road Reserve in accordance with Part XI of this Indenture. Such deposit shall secure the due observance by the Producers of the terms respectively of Parts X and XI of this Indenture on their part to be observed. To the extent of any shortfall in payment of amounts owing pursuant to Parts X and XI or to any agreements referred to therein in any year the Producers shall to that extent forfeit the moneys which would otherwise have been payable to the Producers pursuant to this Schedule.
2. The aforesaid deposit together with interest at a rate of 18 per cent per annum shall, subject to the foregoing provision of this Schedule, be repaid to the Producers annually on a credit foncier system in ten equal instalments in a manner to be agreed between the parties to this Indenture.”
Schedule 4 (like the other schedules) is deemed to form part of the Indenture: clause 107.
The Indenture provided that the Producers would pay Water Rates: clause 43 of Part X (“Rates”) and a Road Tariff: clause 49 of Part XI (“Tariff”). The Tariff was for the cost of maintenance of the Roads. The Rates and the Tariff were called by the Producers a Secondary Water Rate Charge and a Secondary Road Tariff.
The Producers were granted a Pipeline Licence to construct, install, own and operate a Pipeline for the conveyance of the liquids from Moomba to Port Bonython for a term of 21 years with a right of renewal for a further 21 years: Part XII. The Producers were obliged to pay an annual indexed fee of $500,000 for that licence.
The Producers undertook to construct “Marine Facilities”, being all submarine loading lines and pipelines, harbour and port facilities, the Jetty, landing place and shipping berths and all related and ancillary facilities. The Jetty was to start at the Services Corridor and proceed for two thousand four hundred meters into the Spencer Gulf.
The Indenture required the Producers to transfer the Marine Facilities to the State at the date of practical completion: clause 63. The facilities to be transferred were the Jetty and other facilities for the berthing of vessels at Port Bonython. It is enough to describe the transferred Marine Facilities as the Jetty. Not all of the Marine Facilities were required to be transferred. Those not transferred “… shall be owned by the Producers or such of them as have an ownership interest therein from time to time”: clause 64. Like clause 88 this clause refers to ownership interests.
The State was required to pay the Producers a sum equal to the cost incurred by the Producers in the design and construction of those and facilities: clause 63.
The effect of this Part of the Indenture was that the Jetty was built by the Producers for the State at the Producers’ cost. However, on transfer to the State, the State had to pay the Producers for the costs associated with the building of the Jetty and interest on those moneys over a period of twenty years. The State thus retained ownership and control of that infrastructure.
The Producers undertook to deposit with the State a sum equal to the amount paid by the State pursuant to clause 63 as security for their observance of their obligations under Part XV of the Indenture and also to secure payment of the amount due to be paid to the State by the Producers under that part: clause 66.
The Security Deposit in this clause could only have been security for the Producers’ obligations and payments after paying the Security Deposit. It did not operate to secure the Producers’ obligations to construct the Marine Facilities or transfer those parts of the Marine Facilities contemplated in clause 63.
Obligations were imposed by Part XV upon the Producers in clause 70 (Stevedoring and Loading), clause 71 (Preparation of Terminal Rules) and clause 74 (Repair, Maintenance and Installation of the Jetty) but it cannot be thought that the Security Deposit contemplated in clause 66 was to secure those obligations.
In my opinion, the Security Deposit was to secure the Purchaser’s obligations and payments under clause 72 of Part XV.
Clause 66 further provides:
“To the extent of any shortfall in payment of amounts owing to the State pursuant to this Part in any year the Producers shall to that extent forfeit the moneys which would otherwise have been payable to the Producers pursuant to Clause 67 of this Indenture.”
That further provision makes it clear that the Security Deposit only refers to the Producers obligations and payments under clause 72 in Part XV. Clause 66 has a similar effect to Schedule 4.
The Indenture obliged the State to repay that Security Deposit. Clause 67 provides:
“67. The security deposit referred to in clause 66 of this Indenture together with interest thereon at the rate of 20 per centum per annum shall, subject to clause 66 be repaid by the State to the Producers annually calculated on a credit foncier system by twenty equal instalments in the manner to be provided for by agreement between the Producers and the State.”
The Producers were given a priority in the use of the facilities: clause 68. The State could permit use by other parties of those facilities: clause 69.
The Indenture provides that the Producers will pay Wharfage Dues: clause 72. The Wharfage Dues are payable annually in each of the first twenty years after the transfer of the facilities to the State and are to be calculated by reference to the weight of product shipped from the Jetty in accordance with a formula in clause 72 of the Indenture.
Clause 72 of the Indenture provides for payment by the Producers of Wharfage Dues:
“72. (1)    In respect of each of the first twenty years from and including the year in which the transfer date occurs there shall be paid by the Producers to the State, wharfage dues (to the exclusion of all other wharfage dues that would otherwise be payable by the Producers for the port at Stony Point) being an amount per tonne of Product shipped determined by the following formula:-
Where
a=      the annual amount required to amortise in 20 annual payments under a credit foncier system the sum specified in the second paragraph of clause 63 of this Indenture at an interest rate of 20 per centum per annum.
b=     the amount determined for any third party user of the transferred facilities under sub-clause 72 (2) or 72 (3) of this clause for that year.
c and
e=      amounts of $1.50 and 70 cents respectively as adjusted each year by the percentage change in the Consumer Price Index between the December quarter 1981 and the December quarter in the year preceding the year in which the amounts are to apply.
d=      the amount of throughput in tonnes across or through the transferred facilities by the Producers up to and including the first one million tonnes for each year.
f=      the amount of throughput in tonnes, if any, across or through the transferred facilities by the Producers after and in excess of the first one million tonnes for each year.
g=      the total amount of throughput in tonnes across or through the transferred facilities by the Producers during each year.
…
(4)After the first twenty years from and including the transfer date the Producers shall pay the normal wharfage dues on commodities similar to those shipped by the Producers applicable in the State for use of the transferred facilities.”
“a” relates to the State’s liability to pay the Producers for the cost incurred by the Producers in the design and construction of the “Marine Facilities”. “a” will in each year be the same figure as the State is obliged to pay to the Producers under clause 67. “a” could be calculated for the Wharfage Dues for each of the twenty years clause 72 operated. It is a constant or fixed figure which is the same as the State is notionally called upon to pay the Producers under clause 63. I have used the term notionally in speaking of the State’s payment under clause 63. That is because clause 66 requires the Producers to deposit with the State the exact same sum they ‘notionally’ received under clause 63. In fact there was no exchange of monies after completion and transfer of the Jetty. Nothing turns on that.
Whilst “a” is a known and constant factor the other integers vary from year to year. We were told that “b” had no application because no third party used the Jetty. Therefore the formula (a-b) has always resulted in “a”. The other integers vary from year to year. For reasons that are not apparent Santos kept two ledgers for the recording and calculation of Wharfage Dues. In one ledger it included the constant factor “a”, which it described as the Fixed Wharfage Due. In the other ledger it included the variable factors d, f and g. That part of the Wharfage Dues represented by ‘a’ was called by the Producers a Secondary Wharfage Charge.
The Indenture therefore provided for four payments over different periods of time.
First, the State had to repay to the Producers the Security Deposit for the Water and Roads, (the Water and Roads Security Deposit) referred to in Schedule 4 over a period of ten years. The capital sum carried interest at 18 per cent.
Secondly, the State had to repay to the Producers the Security Deposit, which matched the cost of the construction of the Jetty and those parts of the Marine Facilities which were transferred to the State, (the Jetty Security Deposit). That sum was repayable over 20 years. It carried interest at the rate of 20 per cent.
Both of those payments were on a credit foncier system.
Thirdly, the Producers had to pay the State Wharfage Dues, fixed by the Indenture, over a 20 year period.
Fourthly, the Producers had to pay Water Rates and a Road Tariff.
The Security Deposits were assets of the Producers whilst the Wharfage Dues and the Rates and Tariff were liabilities of the Producers.
The question before the trial judge and on this appeal is how those assets and liabilities should be apportioned between the Producers.
The Indenture provided for the construction of infrastructure at the cost to the Producers but to be owned by the State. The Indenture contemplated that the State would either purchase the infrastructure from the Producers (the Jetty) or construct the infrastructure itself (Water and Roads). In both cases, however, the Producers had to provide the cost of construction. In the first case by actually incurring the expenses and in the second by “advance funding” a sum of money which could be used for the cost of that construction.
The Producers, however, would have to pay Dues, Rates and a Tariff for the use of the infrastructure at a rate which would relieve the State from the burden of payment for that infrastructure.
No doubt there were both political and commercial reasons for the way in which the transaction was documented. The State owned the infrastructure at no cost to itself. On the other hand the Producers were able to offset the cost of construction of the infrastructure against expenses by payment of Dues, Rates and a Tariff.
The Indenture creates other liabilities apart from the Wharfage Dues and the Water Rates and Road Tariff. As I have already noted clause 16 of the Indenture requires the Producers to pay the sum of $480,000 to the State for the proposed development site. Clause 17 requires the Producers to bear the costs of surveying, fencing and other costs associated with the transfer of Contiguous Land to the Producers. Clause 20 obliges the Producers, as soon as practicable after the transfer of title of the Proposed Development Site to the Producers, to remove any improvements remaining on the Proposed Development Site at the Producer’s cost. Clause 22 requires the Producers to repay to the State an amount of money for compensation in respect of any former lessee of the Crown on the Proposed Development Site. Under clause 24 the Producers undertook a liability in relation to the removal of shacks. The Proposed Development Site was a former military site and the Producers undertook the costs of removal of unexploded military ordnances and the cost of rehabilitation of the Service Corridor to the Proposed Development Site after removal of unexploded military ordnances.
Clause 59 of the Indenture required the Producers to pay to the State an annual licence fee for the utilisation of the gas pipeline of $500,000.
The Producers undertook a number of liabilities (the other liabilities) apart from the liabilities the subject matter of these proceedings. Apart from the liability under clause 59 those other liabilities are not otherwise dealt with in any other agreements between the Producers. Specifically, apart from the clause 59 liability which is directly referred to in clause 8.02(b) of the Downstream Agreement, the other liabilities are not dealt with in the Downstream Agreement.
Mr Karkar argued that the Indenture contemplated that the assets and liabilities of the Producers would be dealt with in accordance with the terms of the Indenture. He pointed to the absence of other agreements in relation to the other liabilities as support for his premise. He relied on Santos’ letter to the Minister of 24 November 1981 which I am about to address as further support for that proposition. In particular it was Mr Karkar’s argument that the apportionment between the Producers of the assets and liabilities created by the Indenture had to be in accordance with clause 88 of the Indenture. He argued that clause 88 provided the regime by which the Producers’ rights and obligations inter se were regulated.
He submitted that clause 88 specifically provided for each Producers’ liability to be several not only to the State but to each other. I do not think there can be any doubt that that submission is right.
He further argued that clause 88 provided the manner in which each Producers’ several liability was determined. Any liability was determined, on Mr Karkar’s argument, “in accordance with the extent of its ownership of any interest from time to time and any asset or activity contemplated under this Indenture.”
It was Delhi’s argument that, in those circumstances, the Producers’ liability under the Indenture was determined by identifying the asset to which the liability attached and then identifying the extent of each Producers’ ownership or interest in that asset. If there were no asset to which the liability attached then it was necessary to identify the activity and then identify the Producers’ interest in that activity.
It was Delhi’s argument that the Producers’ liability between themselves for integer “a” of the Wharfage Dues, which was the fixed component of those dues, has to be determined by reference to the ownership of the asset namely the Security Deposit lodged in accordance with clause 66. The Producers therefore have to contribute to the liability in integer “a” by reference to their respective shares in the ownership of the Jetty. It was argued, that the same applied to the fixed part of the Water Rates and Road Tariff. The Producers’ liability for those expenses were to be determined by reference to their interest in the ownership of the Water and Rates Security Deposit.
Mr Karkar did not argue that the Indenture stood alone. It was fundamental to his argument that the Producers’ contractual relationship with each other and with the State and any other third party, had to be ascertained by reference not only to the Indenture but also to Santos’ letter to the Minister of 24 November 1981 and also by reference to the Downstream Agreement.
However, if there was any inconsistency between any of those documents, Delhi argued that the Indenture prevailed.
Santos’ Letter To The Minister Of 24 November 1981
The letter of 24 November 1981 was in the following terms:
“Dear Minister,
Capital Costs to be Financed by Security Deposits
and Associated State Charges - Agreed Principles
The Stony Point Indenture provides for the Producers to pay the State amounts by way of security deposits equivalent to the capital cost of certain facilities (road, water supply and marine facilities), for charges to be levied by the State in respect of those facilities and for the security deposits to be repaid to the Producers subject to, inter alia, payment of those charges.
This letter records below the broad principles on which agreement between the State and the Producers, on these matters, has been reached:-
Water Supply
1.That portion of the tariff referred to in clause 43 which relates to the additional costs incurred by the State shall cease after 10 years.
2.That portion of the tariff referred to in clause 43 which relates to the additional costs incurred by the State in supplying water to the Producers together with the Third Party contribution referred to in clause 44 shall be such so as to exactly match the appropriate portion of the security deposit referred to in Schedule 4.
3.Tariff payments and the repayments of the security deposit shall be at the same time unless otherwise agreed.
4.Payments to be by cheque.
5.With respect to Third Party use the contribution referred to in clause 44 shall relate to the water used in each calendar year.
Road
1.The tariff referred to in clause 49 shall cease after 10 years.
2.The tariff referred to in clause 49 shall exactly match the appropriate portion of the security deposit referred to in Schedule 4.
3.Tariff payments and the repayments of the security deposit shall be at the same time unless otherwise agreed.
4.Payments to be by cheque.
5.The basis of tariff apportionment between the Producers and the Third Parties referred to in clause 50 shall be related to the proportionate use of the road by the Third Parties and the Producers. No apportionment shall occur until commencement of use by the Third Party.
Marine Facilities
1.That portion of the wharfage dues referred to in clause 72(1) as “a” shall be such as to exactly equal the security deposit repayment referred to in clause 67.
2.The above payments and repayments shall be at the same time unless otherwise agreed.
3.Payments to be by cheque.”

The letter of 24 November 1981 has to be read in conjunction with the Indenture, because it refers to the Indenture and contains further terms of agreement between the State and the Producers. The letter refers to clauses 43, 49 and 67 of the Indenture. Each of those clauses do provide for a separate agreement to be reached between the State and the Producers. There is no doubt that the letter of 24 November 1981 is that separate agreement.
Mr Karkar relied on the letter of 24 November 1981 in support of his argument. He said that that letter supported his contention that the relevant liabilities, on this appeal, were to be determined by reference to the Indenture and the further terms agreed in that letter.
He argued that that letter supported his argument that the Wharfage Dues and Water Rates and Road Tariff were determined by reference to the Producers’ interest in the ownership of the corresponding asset. Of course it was only that part of the Wharfage Dues which was represented by integer ‘a’ that was relevant. The rest of the Wharfage Dues, at least for the first twenty years, were variable factors: clause 72(1) and 72(4). When therefore I speak of Wharfage dues I am referring to integer ‘a’.
The purpose of the letter of 24 November 1981 was to ensure that the Producers’ interest in the Security Deposits, which the State had to repay, being the Jetty Security Deposit, which had to be repaid over 20 years and the Water and Roads Security Deposit, which had to be repaid over 10 years, did not impose any financial burden upon the State. The Wharfage Dues and Water Rates and Road Tariff attaching to those assets were fixed so that whilst the State had to repay those Security Deposits the State was not called upon to disgorge any money. The State was able to offset the repayment of the Security Deposits by reference to the Wharfage Dues and the Water Rates and Road Tariff.
That is supported by the terms of clause 2 under “Water Supply”, clause 2 under “Road” and clause 1 under “Marine Facilities” in the letter of 24 November 1981.
The Water Rates and the Road Tariff had to “exactly match” the State’s repayment of the Water and Roads Security Deposit. They had to be paid at the “same time” as the State repaid that Security Deposit.
The Wharfage Dues in integer “a” has to be “exactly equal” to the State’s repayment of the Jetty Security Deposit and again the payment and repayments had to be “at the same time”.
The parties intended that whilst the Security Deposits would be repaid no money would change hands because the Wharfage Dues and the Water Rates and the Road Tariff would offset the repayment of the relevant Security Deposit. Not only would those imposts offset the repayment of the capital sum comprised in the Security Deposits but also the interest which was payable under the Indenture.
To put it shortly the intention of the parties was that the State’s liability to repay and the Producers’ liability to pay would be cancelled out and there would be no net cost to either the State or the Producers.
Mr Karkar argued that that intention, which he said was objectively established by reference to the Indenture and the letter of 24 November 1981, was also the intention of the Producers inter se. They also intended that none of the Producers would have any net liability to each other in respect of their several obligations to pay Wharfage Dues and Water Rates and Road Tariff.
There is considerable force in that argument. If the Dues, Rates and the Tariff were calculated to exactly match the State’s liability to repay the Security Deposits it might be expected that the Producers would share in those obligations in the same proportions as they shared in the Security Deposits.
That is the intention of clause 88. If it were otherwise and the Producers were called upon to pay these expenses in different proportions to their interests in the assets, the protection which clause 88 affords to the State and the Producers would be lost. For example the State may be obliged to repay the Security Deposits to Producers A, B and C but at the same time seek the offsetting expenses from Producers D, E and F. If Producers D, E and F did not pay the offsetting expenses the State would be out of pocket. If between them one of the Producers did not pay the State would be unprotected to the extent of the underpayment.
The regime which clause 88 has put in place is to protect the State and the Producers inter se. The parties will only be protected if the offsetting expense is paid by the same Producers and in the same proportion as those Producers are entitled to share in the corresponding assets.
Thus far I have only dealt with Mr Karkar’s argument. That is because Santos’ case placed little or no reliance on either the Indenture or the letter of 24 November 1981. Those documents, on Santos’ argument, were historically relevant but they did not create any regime whereby the Producers’ assets or liabilities were apportioned. The Indenture was relevant only for the purpose of identifying the assets and liabilities the subject matter of the proceedings. Santos’ senior counsel, Mr Oslington QC, argued that it was the Downstream Agreement which provided for the manner in which the Producers’ assets and liabilities would be apportioned. The Indenture was simply not relevant to that exercise.
The Downstream Agreement
On 31 December 1981 the Producers entered into the Downstream Agreement. The Downstream Agreement is the third agreement made by the Producers following upon the Indenture and the letter of 24 November 1981.
The Indenture and the letter of 24 November 1981 have to be read with each other. However in my opinion, the Indenture and the letter of 24 November 1981 cannot be understood without reference to the Downstream Agreement. In my opinion, the proper construction of the Downstream Agreement requires reference to the Indenture and the letter of 24 November 1981.
The Indenture created contractual obligations between the State and the Producers. Those contractual obligations were, on the Producers’ part, several. The Indenture also created contractual obligations between the Producers. The letter of 24 November 1981 was written, as was contemplated by the Indenture, for the purpose of creating further terms of agreement between the State and Producers. The Indenture also contemplated the Downstream Agreement, if for no other reason, than to establish the Producer’s interests in the ownership of assets and activities inter se. Unless those interests were identified the Producers’ proportion of liabilities to the State under the Indenture could not be identified.
In those circumstances the documents must, in my opinion, be read together for a proper understanding of those documents. Each of the agreements contemplated the other agreements.
The Indenture contemplated not only the agreement contained in the letter of 24 November 1981 but also the Downstream Agreement. The letter of 24 November 1981 was a consequence of the Indenture but also assumed, in my opinion, the Downstream Agreement.
The Downstream Agreement expressly recognised the other agreements. clause 2.02.02 of the Downstream Agreement provides:
“Each Party hereby severally covenants and agrees with each of the other Parties:-
(i)to observe and perform the obligations on its part contained in the Additional Downstream Agreements and the Liquids Sales Contracts;
… ”
‘Additional Downstream Agreements’ are defined in clause 1.02 of that Agreement:
“Additional Downstream Agreements - means any and all agreements or instruments common to the Parties relevant to Downstream Operations and whether or not there are other parties to the agreement or instrument and includes the Downstream Upstream Co-ordination Agreement, the Sellers’ Representative Agreement, the PASA Pipeline Maintenance Agreement, the Default Certificate Agreements, Pipeline Licence No. 2, PASA and Producers (Right of Way) Agreement, the Stony Point Land Trust Deed and the Stony Point Indenture as any thereof may be amended from time to time.”
By clause 2.02.02 the parties undertook to observe and perform the obligations owed by the Producers’ to the State and to each other in accordance with the Indenture.
The Downstream Agreement established a joint venture for the construction of a pipeline from Moomba to Port Bonython together with fractionation storage and terminal facilities to transport, separate and ship petroleum liquids at Port Bonython. The Downstream Agreement also established the Downstream Parties’ respective contributions to the capital and operating expenses of the pipeline and those facilities.
The purpose of the Downstream Agreement is to regulate the apportionment of capital and operating expenses incurred by the Producers in processing and transporting liquids and to apportion between them the liquids to which each is entitled.
The Producers agreed to construct, install and commission the Downstream Facilities: clause 3.01. Each Producer has the right to use the Downstream Facilities for the purpose just mentioned. Downstream Facilities include “… all the plant, equipment, machinery and facilities held, constructed or acquired…” by the Producers for the Downstream Account including any real or personal property required or used by the Producers for Downstream Operations “… and includes all additions, expansions and enlargements thereof”: clause 1.13. The Downstream Facilities are extensive and include pipelines, special facilities to extract the various substances the subject of the agreement, facilities for storage of those substances, general facilities including offices, buildings, workshops, roads, utilities etc and the Jetty to be constructed at Port Bonython pursuant to clause 63 of the Indenture, which was to be transferred to the State. The Downstream Facilities include Common and General Facilities.
Like the Unit Agreement the Downstream Agreement provides for Participations to be applied in apportioning the capital and operating expenses and the various liquids and other receipts. In the Downstream Agreement they are referred to as Downstream Participations.
The Downstream Participations include Downstream Facilities Operating Costs (Capital Costs) Downstream Facilities Operating Participations (Operating Costs), a Wharfage Participation and Downstream Products Participations (the Producers’ entitlements to the products).
Two participations need to be mentioned at this point. The Wharfage Participation is a Downstream Participation. It is defined in clause 1.16.03 of the Downstream Agreement:
“Wharfage Participation - means the percentage apportioned to a Party from time to time in respect of the wharfage fees payable under the Stony Point Indenture being the percentage as determined pursuant to the Third Schedule.”
Clause 1.16.03 refers to Wharfage Fees whilst the Indenture, and in particular clause 72 of the Indenture, refers to Wharfage Dues. The distinction on Delhi’s argument is important.
“Downstream Facilities Investment Participations” is defined in clause 1.16.01:
“Downstream Facilities Investment Participations - means the percentages apportioned to a Party from time to time in respect to the capital costs referred to in Clause 8.02(a) of this Agreement separately for each of the Downstream Facilities being the percentages as determined pursuant to the Second and Third Schedules. The initial Downstream Facilities Investment Participations (including Jetty Participation) are set out in the Second Schedule …”
The definition singles out a Jetty Participation which is not otherwise defined. Jetty Participation, however, is included in the Second Schedule which is headed:
“ SECOND SCHEDULE
DOWNSTREAM FACILITIES INVESTMENT PARTICIPATIONS”
Jetty Participation is included as item 10.
The only other reference in the Downstream Agreement to a Jetty Participation is in clause 8.02(a)(x).
However, it is important to note that the Downstream Agreement refers to both a Wharfage Participation and a Jetty Participation. Three matters are important to note. First, as I have already observed the Wharfage Participation refers to Wharfage Fees not Wharfage Dues. Secondly, again as I have already observed, the Jetty Participation is singled out in the definition of Downstream Facilities Investment Participation. One question which will arise is whether the special treatment of Jetty Participation means that a Jetty Participation is not a Downstream Facilities Investment Participation. Thirdly, the Jetty Participation is a fixed participation: clause 8.02(a)(x).
The Downstream Agreement contemplates fixed Participations and Participations which are subject to review and adjustment.
The Downstream Agreement provides for an initial Operator to conduct the Downstream Operations and clause 7.01 appoints Santos to be that initial Operator.
The Downstream Agreement obliges the Operator to conduct the Downstream Operations in much the same fashion as the Unit Operator is obliged to conduct the Unit Operations under the Unit Agreement.
Again the Operator is obliged to set up an account (the Downstream Account) and pay all costs and expenses incurred with respect to Downstream Facilities and Operations and to seek reimbursement from each of the Producers for their respective share of such costs and expenses.
The operation of the Downstream Account by the Operator is important for any determination of this matter. For that reason I set out that part of Article VIII which is relevant to that matter.
“ ARTICLE VIII
COSTS, ACCOUNTING, PROGRAMS AND BUDGETS
8.01 Downstream Account
The Operator shall set up a Downstream Account on behalf of the Parties for all costs, expenses and liabilities incurred by it and all moneys received by it for the credit of the Parties under this Agreement and except as otherwise expressly provided herein all costs, expenses and liabilities hereunder shall be borne by the Parties and all of the said moneys shall be credited to the Parties as provided in Clause 8.02 hereof.
8.02Basis of Charges to Downstream Account
Subject to the other provisions hereof, Operator initially shall promptly pay all costs and expenses incurred with respect to Downstream Facilities and Downstream Operations when such costs and expenses become properly due and payable. Each of the Parties shall reimburse Operator for such Party’s share of such costs and expenses. The share of such costs and expenses including issues from inventories of each Party shall:
(a)in respect to all capital costs involved in the design, engineering, construction, purchase, installation, commissioning and, where applicable, the replacement and enlargement of:-
(i)the Common Facilities, be in accordance with that Party’s Common Facilities Investment Participation;
(ii)…
(iii)…
(iv)…
(v)...
(vi)…
(vii)…
(viii)…
(ix)…
(x)the Jetty, be in accordance with a fixed participation for each Party as set out in the Second Schedule. The Parties shall each be:-
(aa)entitled to share the sum to be paid by the State to the Producers under Clause 63 of the Stony Point Indenture;
(bb)obliged to contribute to the Security Deposit to be made by the Producers with the State under Clause 66 of the Stony Point Indenture; and
(cc)entitled to share the payments to be made by the State to the Producers under Clause 67 of the Stony Point Indenture,
all in the proportions corresponding to their respective contributions to the costs associated with the design, engineering, construction and installation of the Jetty.
(b)in respect to all other costs and expenses (including but not limited to maintenance and operating inventories, maintenance, repair and operating costs and Pipeline Licence Fees payable under Clause 59 of the Stony Point Indenture but excluding Wharfage Fees) relating to the Downstream Facilities shall be in accordance with that Party’s relevant Downstream Facilities Operating Participations (except in respect of any such costs and expenses as are incurred prior to the commissioning for use of any particular Downstream Facility, which costs and expenses shall be in accordance with that Party’s relevant Downstream Facilities Investment Participation).
The costs and expenses to which this Clause 8.02(b) shall apply shall, so far as is reasonably practicable, be allocated by the Operator to the operation of one or more of the elements of the Downstream Facilities.
(c)In respect of all Wharfage Fees payable under Clause 72 of the Stony Point Indenture, be in accordance with that Party’s Wharfage Participation.
(d)…
All charges, credits, allocations, billing, payment and accounting with respect to such costs and expenses shall be in accordance with and be subject to the establishment of procedures for recording and reporting, as set forth in Clause 6.02(h) hereof and subject to the Accounting Procedure attached hereto as Exhibit “B”, PROVIDED THAT to the extent that any provisions of the body of this Agreement are in conflict with such Accounting Procedure, the provisions of the body of this Agreement shall control. Operator shall maintain accounting and operating records in such manner as will facilitate preparation of budgets, Notice of Proposed Expenditure (N.O.P.E.) forms, costs statements, cash advance requests, inventories and other reports as may be required, in accordance with procedures established by the Parties as set forth in Clause 6.02(h) hereof. The payment of the costs and expenses set out in any statement rendered by Operator shall not prejudice the right of any Party to protest or question the correctness thereof, PROVIDED THAT Operator shall not be required to adjust any charge or credit unless notice of a claim with respect thereto has been received by Operator within twenty four (24) months of the date of the statement involved. Within sixty (60) days after the end of every calendar year Operator shall cause an itemised statement showing moneys received, costs incurred and expenditures made for the relevant calendar year summarised by appropriate classifications indicative of the nature thereof to be prepared and to be audited by the Operator’s external auditor registered in Australia. The cost of such statement and audit shall be for the Downstream Account. A copy of each such statement and the auditor’s report thereon shall be promptly supplied to each Party.”
Clause 8.01 requires the Operator to set up the Downstream Account “… for all costs, expenses and liabilities incurred by it and all monies received by it for the credit of the Parties under this Agreement …”
On the face of it, the Downstream Account is to be used only for liabilities incurred by the Operator under the Agreement and for monies received by the Operator for the Producers under the Agreement.
Mr Karkar argued that clause 8.01 had no application to liabilities arising under the Indenture because they were not liabilities incurred by the Operator under the Agreement. He further argued that the Downstream Account was not to be used for the purpose of crediting the Purchasers with the receipt of the Security Deposits because again those were not receipts under the Agreement.
Clause 8.01 is an enabling clause. It authorises the Operator to set up the Downstream Account for the purpose of carrying out the Downstream Operations. Because the clause refers to the costs, expenses and liabilities being incurred by the Operator and the monies are received by the Operator under that Agreement it cannot be said that the Downstream Agreement does not allow the Downstream Account to be used for the payment of the Wharfage Dues, Water Rates and Road Tariff or the receipt of the Security Deposits. Indeed clause 8.02(a)(x)(cc) specifically provides for the Producers to share in the repayment of the Jetty Security Deposit. That would have to be accounted for in the Downstream Account. The obligation on the Producers to pay Wharfage Dues and the Water Rates and Road Tariff was offset by the receipt by them from the State of the repayment of the relevant Security Deposit. In that regard the payment and repayment were notional. However, there was an obligation on the Producers to pay variable Wharfage Dues which are calculated, for reasons I will explain, by reference to the use of the Jetty by the Producers. The variable Wharfage Dues are apportioned between the Producers by reference to the Producers’ Wharfage Participations. The liability to pay that part of the Wharfage Dues arises under the Indenture. If Mr Karkar’s argument were right the Operator could not pay that part of the Wharfage Dues out of the Downstream Account. I reject that part of his argument.

Clause 8.02 refers to an Accounting Procedure. The Accounting Procedure is Exhibit B to the Downstream Agreement. It provides:
“The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits to the Downstream Account applicable to Downstream Operations under the Downstream Agreement. The Parties acknowledge that at any time, or from time to time, any of such methods may be revised, altered, clarified or cancelled by the parties hereto as provided in the Downstream Agreement.”
Clause 1.2 of the Accounting Procedure provides:
“1.2 Conflict with Downstream Agreement
In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Downstream Agreement, the provisions of the Downstream Agreement shall control.”
The other clause which is relevant to a consideration of the issues in this case is clause 1.5 which reads:
“1.5 Adjustments
Payment of requests for advances or other payments to the Operator shall not prejudice the right of any Non Operator to protest or question the correctness of any item associated with such payment; provided however, all statements of charges and all separate bills rendered to Non-Operators by Operator shall be presumed to be true and correct after twenty-four (24) months following the date of the statement of charges or other bill unless within the said twenty-four (24) month period a Non-Operator takes exception thereto and presents a written request for adjustment to the Operator. If Operator does not agree to the request for adjustment within sixty (60) days and a dispute thereby exists then the provisions of Article XX of the Downstream Agreement shall become applicable. If the matter is submitted to arbitration according to the provisions of Article XX of the Downstream Agreement then the Parties agree that such submission will make reference to any interest or liquidated damages claimed by Parties to the dispute. No adjustment favourable to Operator shall be made unless it is made within the same prescribed period. The provisions of this paragraph shall apply to adjustments resulting from a physical inventory of Downstream Facilities as provided for in section 7 hereof.”
Clause 1.5 of the Accounting Procedure was relied upon by Delhi as preventing the Operator from making any adjustment to any item, which had previously been allocated, unless within the period of 24 months any Non-Operator Producer had protested. If the adjustment sought to be made is favourable to the Operator then the adjustment itself must be made within 24 months.
The purpose of the Downstream Agreement is to record the basis upon which the Producers are to contribute to the capital costs of establishing the Downstream Facilities and the basis upon which they are to contribute to the cost of the operation of those facilities under the Downstream Operations. One object of the Agreement is to share the costs of operating the Downstream Facilities amongst the Producers in proportion to each Producer’s use of the Downstream Facilities. Each Producer’s use of the Downstream Facilities depends upon its share of the various liquids apportioned to it under the Downstream Agreement. The Producers contemplated in the Downstream Agreement that the Block Products would be processed through Port Bonython and over the Jetty.
“Downstream Facilities” is defined in clause 1.13 of the Downstream Agreement:
“… means all the plant, equipment, machinery and facilities held, constructed or acquired on behalf of the Parties for the Downstream Account (including any real or personal property acquired or used by the Parties for Downstream Operations) and includes all additions, expansions and enlargements thereof)…”
The Downstream Facilities are the Joint Venturers’ assets. The assets include, within the wider definition, ballast water treatment facilities, spill control equipment, butane specific facilities, common facilities, crude and condensate facilities, ethane specific facilities, general facilities, interim load out facilities, the Jetty, propane specific facilities, refrigeration facilities and shared product specific facilities.
“Downstream Operations” is defined in clause 1.14:
“… means any operations authorised or provided for in accordance with this Agreement.”
“Downstream Participation” is defined in clause 1.16:
“… means in respect of a Party the share that it shall contribute to or own in the obligations or rights arising from the Downstream Operations...”
Clause 1.16 then defines a number of Downstream Participations being, Downstream Facilities Investment Participations, Downstream Facilities Operating Participations which includes Downstream General Operating Costs, Wharfage Participations and Downstream Products Participations.
Three of those participants are important for an understanding of the parties’ arguments.
“1.16.01Downstream Facilities Investment Participations - means the percentages apportioned to a Party from time to time in respect to the capital costs referred to in Clause 8.02(a) of this Agreement separately for each of the Downstream Facilities being the percentages as determined pursuant to the Second and Third Schedules. The initial Downstream Facilities Investment Participations (including Jetty Participation) are set out in the Second Schedule. There shall be Common Facilities Investment Participations, Ethane Investment Participations, Propane Investment Participations, Butane Investment Participations, Crude and Condensate Investment Participations, Refrigeration Facilities Investment Participations, Interim Load Out Facilities Investment Participations and Shared Product Specific Investment Participations all determined pursuant to the provisions of the Third Schedule.
1.16.02Downstream Facilities Operating Participations - there shall be Downstream Facilities Operating participations of the costs and expenses referred to in Clause 8.02 (b) in respect of:
(a)the operation of Ethane Specific Facilities;
(b)the operation of Butane Specific Facilities;
(c)the operation of Propane Specific Facilities;
(d)the operation of Crude and Condensate Facilities;
(e)the operation of Interim Load-Out Facilities;
(f)the operation of Shared Product Specific Facilities;
(g)Downstream General Operating Costs being such costs and expenses as are not capable of being reasonably allocated to the operation of one or more of the facilities referred to in paragraphs (a) to (f) inclusive.
1.16.03Wharfage Participation - means the percentage apportioned to a Party from time to time in respect of the wharfage fees payable under the Stony Point Indenture being the percentage as determined pursuant to the Third Schedule.
… ”
The Downstream Operations refers to the ongoing operations which are conducted in and on the Downstream Facilities.
Clause 8 requires the Operator to pay all costs and expenses of a capital nature (Downstream Facilities) and all costs and expenses of an operating nature (Downstream Operations) as and when those costs and expenses become due.
Clause 8.02(a) refers to the capital costs whilst clause 8.02(b) refers to operating expenses except ‘Wharfage Fees’. Clause 8.02(c) specifically provides for ‘Wharfage Fees’ payable under clause 72 of the Stony Point Indenture.
The construction of the Jetty is a capital cost provided for in clause 8.02. So much is evident by reference to clause 8.02(a)(x).
The parties intended that the cost of the construction of the Jetty would be in accordance with the Producers’ fixed Jetty Participations. I use the word ‘fixed’ because that is how the participation in clause 8.02(a)(x) is described. When the Producers entered into the Downstream Agreement they intended that the Jetty Participations would remain fixed in accordance with the participations in Schedule 2 of the Downstream Agreement.
The opening sentence of clause 8.02(a)(x) was contemplated by the Indenture. It provides the further agreement of the Producers between themselves as to how they will share in the cost of the construction of the Jetty, a liability imposed upon the Producers under clause 63 of the Indenture. It was contemplated because there was nothing in the Indenture as to how the Producers would share that cost between themselves. The apportionment of the cost had to be known so that clause 88 of the Indenture could operate to the several liabilities of the Producers.
There had to be a separate agreement between the Producers as to their shares. The Indenture provided for their several but unstated liabilities to the State. The Producers agreed that the cost of construction would be borne in proportion to each of the Producers’ fixed Jetty Participations. The Producers did not agree that the Jetty Participation would have any other use.
In my opinion, the fixing of the Jetty Participations in Clause 8.02(a)(x) shows that the Producers agreed that their respective contributions to the cost of design, engineering, construction and installation of the Jetty would be fixed for all times. Those capital costs would never be readjusted between the Producers.
Clause 8.02(a) demonstrates the necessity, for the proper construction of the three agreements, to read the agreements together. As I have already observed each of the documents contemplated the creation or existence of the other documents.
Clause 8.02(a)(x) is also consistent with clause 88 of the Indenture. Clause 88 of the Indenture contemplates that the parties will apportion their several liabilities to the State in accordance with their interest in the ownership of the assets.
Clause 8.02(a)(x) is, however, unique. Not only does it provide, in the first sentence of placitum (x), for the apportionment of the cost of the construction of the Jetty, it also provides for the Producers’ shares in the State’s liability to pay the Producers for the cost of construction of the Jetty and the State’s further liability to repay the Producers the Jetty Security Deposit.
There are no like terms otherwise in clause 8.02(a). Clause 8.02(a) on the face of it only applies to an apportionment of capital costs between the Producers. It does not otherwise provide for the apportionment of any revenue or any repayment by any third party.
Clause 8.02(a)(x)(aa) provides for the apportionment between the Producers of the monies owing by the State to the Producers for the cost of construction of the Jetty and it provides the Producers shall each be:
“entitled to share the sum to be paid by the State to the Producers under Clause 63 of the Stony Point Indenture;
…
in the proportions corresponding to their respective contributions to the costs associated with … the design, engineering, construction and installation of the Jetty.”
That sum must be the same as the Producers’ Jetty Participation because the Producer’s Jetty Participations were fixed in accordance with the respective contributions to the costs associated with the design, engineering, construction and installation of the Jetty.
Mr Oslington submitted that subclauses 8.02(a)(x)(aa), (bb) and (cc) did not refer to the party sharing in accordance with the Jetty Participations but rather “in the proportions corresponding to their respective contributions to the costs associated with the design, engineering, construction and installation of the Jetty”. He argued that the parties contemplated therefore that the Jetty Participations were not to be used for the purpose of apportioning any of the payment, the liability or the repayment under subclauses 8.02(x)(aa), (bb) or (cc). He argued that the obligation therefore to contribute to the Security Deposit was not in accordance with any Participation but in accordance with the proportions corresponding to their respective contributions to the costs associated with the design etc of the Jetty.
Thus, he argued the various Participations under the Downstream Agreement had no part to play in the fixing of the Jetty Security Deposit. It was fixed by the reference to the amount of the contributions to the costs associated with the design, engineering, construction and installation of the Jetty.
He submitted that the Producers were also entitled to share in the repayments of the Security Deposit in the same manner i.e. by reference to the proportions corresponding to their respective contributions to the costs associated with the design and such of the Jetty.
Mr Oslington argued that the Operator was obliged to apportion in accordance with those contributions but without reference to any Participations. Whilst he accepted the Producers would share in the repayment of the Jetty Security Deposit in the same proportions as their Jetty Participations the repayment was to be apportioned, not by reference to those Jetty Participations, but by reference to their initial contribution to the cost of construction.
I accept, as Mr Oslington has submitted, that the author of the Downstream Agreement has not made reference to the Jetty Participations in placita (aa), (bb) or (cc). In my opinion that is because Jetty Participations are not an appropriate description for the apportionment of receipts or for the payment of a Security Deposit or indeed for the repayment of the Jetty Security Deposit. Jetty Participations were created solely for the purpose of recording the apportionment of the costs and expenses between the Producers in the cost of the construction of the Jetty. Jetty Participations have no relevance otherwise. The term ‘Jetty Participation’ was not used to describe the Producers shares in the further transactions. The State’s liability under clause 63 of the Indenture is to pay the “… sum equal to the cost incurred by the Producers in the design and construction …”. The Producers’ liability under clause 66 is to pay “ … a sum equal to the amount paid by the State …”.
The author of the Downstream Agreement used a similar description in clause 8.02(a)(x) to that used in the Indenture.
It was enough to describe their shares by reference to the equivalent of Jetty Participations. A Jetty Participation was, for reasons which I will give, a fixed Participation and the party’s intended it to be used only for the purpose of the allocation of the costs and associated expenses in the construction of the Jetty.
Placitum (bb) of clause 8.02(a)(x) provides that the Producers shall each be obliged to contribute to the Security Deposit under clause 66 of the Indenture, and placitum (cc) of clause 8.02(a)(x) provides that the Producers shall be entitled to share in the repayment of that Security Deposit under clause 67 of the Indenture in the proportions corresponding to their respective contributions to the costs associated with the design, engineering, construction and installation of the Jetty.
The Indenture contemplated that the Producers would pay the cost of the construction of the Jetty; the State would pay the Producers for that cost; the Producers would deposit the equivalent of the State’s payment for the cost of construction with the State; and the State would repay that amount together with interest over 20 years by credit foncier payments. Those credit foncier payments would “exactly match” integer “a” which forms part of the formula under clause 72 for the payment of Wharfage Dues.
Subclauses 8.02(a)(x), (aa), (bb) and (cc) are intended to ensure that the Producers will share the two liabilities created by that transaction in the same proportions and will share in the payment and repayment by the State in the same proportion as those liabilities. In the end result it was intended that the Producers would pay for the cost of the construction of the Jetty in the proportions identified in the Jetty Participations and notionally receive payment from the State for the cost of that construction, notionally deposit that same sum with the State, and notionally receive the repayment of the Security Deposit in the same proportions.
For reasons to which I shall come, the Indenture and the letter of 24 November 1981 contemplated (and the Downstream Agreement is not inconsistent with that intention) that the non variable integer of the Wharfage Dues (integer “a”) would be a liability of each of the Producers in the same proportions as each of them had contributed to the cost of construction of the Jetty. None of the Producers would incur any further liabilities in relation to the Jetty apart from the initial liability to the cost of construction of it. That is to say the parties intended the transaction involving the Jetty, including that part of the transaction which involved payment of the fixed factor of the Wharfage Dues, to be revenue neutral as between the State and Producers and as between the Producers.
Clause 8.02(b) provides that all other costs and expenses relating to Downstream Facilities shall be in accordance with the party’s relevant Downstream Facilities Operating Participations. Clause 8.02(b) specifically excludes Wharfage Fees. That is consistent with clause 1.16. A Wharfage Participation is not described in clause 1.16.02 as being a Downstream Facility Operating Participation. As has already been shown it is separately defined in clause 1.16.03.
It is consistent with the definition in clause 1.16.03 that Wharfage Fees should be dealt with separately to those costs and expenses which are regulated by the relevant Downstream Facilities Operating Participations.
The Downstream Agreement refers, in the definition of “Wharfage Participation” and in subclauses 8.02(b) and 8.02(c), to Wharfage Fees. Clause 72 of the Indenture refers to Wharfage Dues.
In my opinion, the author of the Downstream Agreement has deliberately used the expression “Wharfage Fees” rather than “Wharfage Dues”. I think, as Mr Karkar argued, the parties intended Wharfage Fees to be only those fees which are not part of integer “a” of the Wharfage Dues.
If the parties had made Wharfage Dues part of the ordinary costs and expenses of the Producers the Producers would no longer be contributing to integer “a” in the same proportions as the Producers had contributed to the cost of the construction of the Jetty under the Jetty Participation.
At the time of the execution of the Downstream Agreement, the clear intention of the parties was that the repayment by the State and that part of the Wharfage Dues contemplated within integer “a” would cancel each other out so that the State and the Producers had no further liability to each other in monetary terms in connection with the cost of construction of the Jetty. That is clear from clauses 1 and 2 of that part of the letter of 24 November 1981 which refers to “Marine Facilities”.
I therefore agree with Mr Karkar’s argument that the “Wharfage Fees” referred to in the definition of Wharfage Participation and subclause 8.02(b) and (c) only refers to that part of the Wharfage Dues not comprised in integer ‘a’ of the formula in clause 72.
Clause 8.02(c) deals only with the question of Wharfage Fees. It provides that the share of the costs and expenses of Wharfage Fees payable under clause 72 of the Indenture be in accordance with that party’s Wharfage Participation.
I have already found that this clause is intended only to operate to that part of the formula which does not include integer “a”. That is to say this clause operates in relation to the formula:
.
That construction is consistent with the intention of the Parties. That part of the formula relates to the use of the Jetty.
In my opinion, the Producers contemplated in the Indenture and also in the Downstream Agreement that each of the Producers would share their contributions in relation to the use of the Jetty in accordance with that part of the product, owned by each Producer, passing over the Jetty.
The Producers therefore intended that aspect of Wharfage Dues to be calculated by reference to the use of the Jetty.
The formula has been carefully expressed to ensure that the Producers’ initial contribution to the cost of construction of the Jetty would never change. It would never change because the repayment of the Jetty Security Deposit was linked to integer “a” of the formula and therefore the Producers’ asset comprised in the Jetty Security Deposit would be extinguished by reference to the Producers’ initial contribution to the cost of the construction of the Jetty. At the same time the parties intended that part of the Wharfage Dues which comprise Wharfage Fees would be calculated by reference to the party’s use of the Jetty and by application of the Wharfage Participations. The formula, in my opinion, clearly demonstrates the parties’ intention.

Santos challenged the Judge’s finding that Delhi had established detriment.
The circumstances of this case raise a not uncommon difficulty in cases of this nature, namely what must be shown to establish the type of detriment referred to by Dixon J in Thomson in the following terms (at 547):
“But, in each case, he is not bound to adhere to the assumption unless, as a result of adopting it as the basis of action or inaction, the other party will have placed himself in a position of material disadvantage if departure from the assumption be permitted.”
I have already summarised the way in which Delhi put its case on detriment to the Judge. The Judge accepted the evidence of Mr Woodbury and Mr Taylor. The disadvantage that Delhi will suffer if the Producers are allowed to depart from the historical accounting practice is the loss of the opportunity to have been in a better position either by not entering into the Settlement Agreement or by entering into a Settlement Agreement on more favourable terms. In Mortgage Acceptance Nominees Ltd v Australian Thoroughbred Finance Pty Ltd (1996) 69 SASR 302, Doyle CJ said (at 308):
“I realise that, to do justice, the court at times will act upon evidence which may be somewhat inconclusive or sparse, but the court must act with justice to both parties, and there is a limit to speculation. In relation to detriment I consider that in the present case the detriment is almost entirely dependent upon speculation, as distinct from being supported by insubstantial evidence which might nevertheless support the finding made by the trial judge...”
The case to my mind is similar to Australian Consolidated Investments Limited v England where the party seeking the benefit of an estoppel believed a deed would have the effect of discharging a debt. On the requirement that that party show detriment, Doyle CJ said (at 438):
“In my opinion SECL acted to its detriment in reliance upon the assumption that senior debt would be discharged and that ACIL intended to discharge it by the DDR. The detriment lay in ACIL giving its approval to the DDR. It is not to the point that ultimately SECL might have been driven by ACIL to agree to the DDR even though it did not discharge the senior debt. What would have happened if that had come to light is quite unclear. But in fact SECL gave its assent to the DDR without creating further difficulties for ACIL, and surrendered the blocking or bargaining position which it had in relation to the PICL settlement.”
I think the Judge was entitled to act on the basis of the evidence of Mr Woodbury and Mr Taylor and to find that detriment was established. This case and Australian Consolidated Investments Limited v England may be contrasted with the decision of this Court in Mortgage Acceptance Nominees Ltd v Australian Thoroughbred Finance Pty Ltd. In the latter case there was simply no acceptable evidence in view of the debtor’s financial position that he was in any worse position as a result of the creditor’s representation that the debt would not be pursued, or put another way, that he would be in any better position had the representation not been made.
Would a Departure from the Common Assumption be Unjust?
Santos referred to the Judges’ findings in the context of estoppel by representation to the effect that Santos did not induce Delhi to adopt any assumption as to a particular state of affairs and that the consistent application of the historical accounting practice over many years did not constitute a representation by Santos acquiesced in by the other Producers that it would continue to adopt the historical accounting practice. It followed, argued Santos, that an essential element of estoppel by convention, namely, that the party against whom the estoppel is raised, caused or contributed to the other party adopting the mistake, was not made out.
Whilst it is true that there are factual situations where it is possible to find either an estoppel by representation or an estoppel by convention (Australian Consolidated Investments Ltd & Anor v England (1995) 183 LSJS 408) and there is sometimes a fine line between the two forms of estoppel, it does not follow that there is no distinction between the two estoppels. It does not follow from the Judge’s finding that there was no representation that there cannot be an estoppel by convention.
I have given the question whether this element is made out anxious consideration. I remind myself of the statements of Samuels JA and McHugh JA in Coghlan. Has Delhi established “mutually manifest conduct” to use the words of Samuels JA or has Delhi established that by their conduct the Producers mutually agreed or would be seen as agreeing that the historical accounting practice should be followed?
I have considered the matter first in relation to Santos and its conduct. I think the element is made out in relation to Santos when regard is had to a number of matters. First, the historical accounting practice is described in the 1984 memorandum and attachments which was probably the source of the practice. It should be inferred that Santos (and for that matter the other Producers) were aware of the memorandum and attachment and of the practice described therein. Secondly, the historical accounting practice is reflected in the Santos accounting procedure, the expenditure statements and numerous other documents generated by Santos and distributed amongst the Producers from time to time. Thirdly, Santos as operator adopted the historical accounting practice. On no occasion over a period of approximately 12 years did it seek to change the practice. Fourthly, Downstream Expenditures were audited every year by Santos’ external auditors. No query was ever raised. Fifthly, it may be inferred that, for approximately 12 years, Santos believed the historical accounting practice was in accordance with, and required by, the Downstream Agreement. I think the position in relation to the other Producers is more difficult.
Santos submitted that even if it had caused or contributed to the mistake, there was no evidence that the other Producers (ie other than Santos and Delhi) had caused or contributed to the mistake in the relevant sense. Santos submitted that a number of the other Producers were not members of the Santos Group. There could be no question of agency both because of the provisions of the Downstream Agreement (clause 15.01) and because no authority was given to Santos to agree to a departure from the provisions of the Downstream Agreement.
In my opinion, the declarations relating to estoppel made by the Judge and which are set in the reasons for judgment of Lander J do operate against all Producers because they relate generally to the items of outgoings and receipts and, more importantly because they require Santos to apportion those items in a particular way. I do not think the claim can be refashioned as a claim for estoppel only against Santos.
There is force in Santos’ submission because in one sense the Producers (other than Santos and Delhi) did very little other than accept the historical accounting practice and that fact is to be inferred from their failure to complain. However, I think (not without some hesitation) that when one comes back to the nature of the requirement – the parties by their conduct had mutually agreed or would be seen as mutually agreeing (Coghlan per McHugh JA 176 – 177) - there is sufficient evidence to satisfy the requirement as against all the Producers. The likely origin of the historical accounting practice, the knowledge of the practice by the Producers through the 1984 memorandum and attachments, expenditure statements and other documents distributed by Santos, and the failure to complain over a very long period, are to my mind sufficient in this case. There was a ready mechanism for challenging the accounts under the Accounting Procedure.
Clause 11 of the Fixed Factor Settlement Agreement and Clauses 2.02.03 and 23.06 of the Downstream Agreement
Santos submitted that various clauses in the agreements between the Producers prevented an estoppel by convention from arising.
Clause 11 of the Settlement Agreement relevantly provides:
“11. Miscellaneous
(a) Entire Agreement
(i)This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and contains all of the representations, warranties, covenants and agreement of such parties. This agreement supersedes all prior negotiations, contracts, arrangements, understandings and agreements with respect to such subject matter …
(ii)Each party acknowledges and agrees that in entering into this Agreement it has not relied on any representations or warranties about its subject matter and that in its interpretation the contra proferentum rule of construction shall not apply.”
Both (i) and (ii) of clause 11(a) operate and only operate in relation to the subject matter of the Settlement Agreement. I have already discussed the subject matter of the Settlement Agreement. The function of the Settlement Agreement is not to specify what items of revenue and expenses are governed by what factors. That is the function of the Downstream Agreement.
An estoppel that, in relation to the Secondary Jetty Tariff, Santos is precluded from applying any factor to apportion such expense other than an apportionment corresponding to the Producers’ respective contributions to the costs associated with the design, engineering, construction and installation of the Jetty does not add to, vary or qualify the Settlement Agreement. On the assumption made for the purposes of considering the estoppel argument that Santos’ arguments on construction are correct, it does have the effect of varying or qualifying the Downstream Agreement. The same may be said with respect to an estoppel that in relation to the Roads and Water Tariff, Santos is precluded from applying any factor to apportion such expense other than an apportionment corresponding to the Producers’ respective contributions to the Roads and Water Security Deposit.
For these reasons, I do not think clause 11 of the Settlement Agreement prevents an estoppel by convention of the nature claimed from arising.
Clause 2.02.03 and 23.06 of the Downstream Agreement provide:
“2.02.03The written agreement of each Party shall be required for any amendment, variation, modification or cancellation of this Agreement.
23.06 Waiver
No waiver by or on behalf of a Party of any breach of a provision of this Agreement shall be binding upon that Party unless it is expressed in writing and duly executed by such Party and such waiver shall not operate as a waiver of any future breach whether of a like or different character.”
I do not think either clause of the Downstream Agreement precludes an estoppel by convention from arising. I agree with Delhi’s submission that the effect of the doctrine of estoppel is often to overcome provisions in a contract stipulating the formalities for its variation. Estoppel will bind parties to a course or arrangement different from that agreed (Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 per Mason CJ and Wilson J at 399; Amalgamated Investment and Property Company Limited (In Liquidation) v Texas Commerce International Bank Limited [1982] QB 84 at 121 – 122; Australian Consolidated Investments Ltd v England (1995) 183 LSJS 408; Farrow Mortgage Services Pty Ltd v Hogg and Anor (1995) 64 SASR 450; Kenneth Allison Ltd (in Liquidation) v A E Limehouse & Co (a Firm) [1992] 2 AC 105). I agree with Delhi’s submission that contractual provisions requiring writing to effect a variation are no different from any other contractual term in this respect.
Santos’ Costs
The Judge made the following declaration:
“The first defendant is entitled to debit the joint operating account for costs and expenses incurred by it in relation to these proceedings.”
Delhi in its Notice of Cross Appeal challenges this declaration. The effect of the declaration is that even though Delhi has been successful in the proceedings it will contribute 20.21% towards costs incurred by Santos.
There is one joint venture operating account for Unit and Downstream Operations. Santos has been debiting that account for the cost of these proceedings.
The Judge found that Santos was entitled to debit the joint operating account for its costs either by reason of clause 8.02 of the Downstream Agreement or by reason of clause 8.02 of the Unit Agreement. It seems that the Judge reasoned that Santos’ costs of the proceedings was an expense with respect to Downstream Operations or with respect to Unit Operations within clause 8.02 of the respective agreements.
The Judge rejected an argument by Delhi that Santos’ costs could only be recovered from the joint operating account if they fell within clause 3.8 of the Accounting Procedure which is Exhibit B to the Downstream Agreement. That clause provides as follows:
“3. DESCRIPTION OF DOWNSTREAM ACCOUNT CHARGES
Basic general description of Downstream Account charges are set forth below for the benefit of the Parties in establishing expenditure classifications, cost allocation procedures and such other related actions as are required of the parties by the Downstream Agreement. Each of the charges enumerated below is regarded as a justifiable direct or indirect charge to the Downstream Account to the extent that such charges are incurred by the Operator for the benefit of Downstream Operations.
…
3.8 Legal Expenses
All costs and expenses of handling, investigating and settling litigation or claims arising by reason of the Downstream Operations or necessary to protect or recover the Downstream Facilities including but not limited to, attorneys’ fees, court costs, cost of investigation or procuring evidence and amounts paid in settlement or satisfaction of any such litigation or claims, provided:-
(a)No charge other than those covered by Section 3.3.1 above shall be made for the services of Operator’s legal staff or other regularly employed personnel unless agreed to by the Parties; and
(b)no charge shall be made for the fees and expenses of Operator’s outside attorneys unless the employment of such attorneys is agreed to by the Parties as required in the Downstream Agreement.”
There is an equivalent provision in the Unit Agreement. Delhi argued that this provision in effect covered the field as far as Santos’ costs were concerned and that Santos could not recover its costs under it because Santos had not sought and Delhi had not given its consent under clause 3.8(b).
The Judge rejected this argument saying the Accounting Procedure could not prevail over the clear words of clause 8.2 in both the Unit and Downstream Agreements. In reaching his decision the Judge relied on a decision of Lander J in Basin Oil N L v Santos Limited (30 August 1996, S 5793 unreported).
On appeal, Delhi argued that Santos could only rely on clause 8.02 of the Unit Agreement and clause 8.02 of the Downstream Agreement if it could establish that the costs in defending proceedings between a Producer and the Operator or between Producers was either with respect to a Unit Facility or Unit Operation or with respect to a Downstream Facility or Downstream Operation. Such costs did not fall with the relevant definitions.
In my opinion, it is appropriate to look to the Downstream Agreement rather than the Unit Agreement. Clause 1.13 defines Downstream Facilities (relevantly) as follows:
“1.13Downstream Facilities – means all the plant, equipment machinery and facilities held, constructed or acquired on behalf of the Parties for the Downstream Account (including any real or personal property acquired or used by the Parties for Downstream Operations) and includes all additions, expansions and enlargements thereof…”
I do not think the costs of these proceedings is an expense with respect to any of the physical items identified in clause 1.13.
Clause 1.14 defines Downstream Operations as follows:
“means any operations authorised or provided for in accordance with this Agreement”.
Clause 8.02 relevantly provides:
“Subject to the other provisions hereof, operator initially shall promptly pay all costs and expenses incurred with respect to Downstream Facilities and Downstream Operations when such costs and expenses become properly due and payable.”
In my opinion, clause 1.14 and clause 8.02 should be construed broadly.
Clearly, it is envisaged that the Operator will prepare documents showing the apportionment of receipts and expenses between the Producers. There may be a need from time to time to correct the documents because of mistakes. I think this process is part of the Downstream Operations and that should legal proceedings be brought challenging the corrections then the defence of those proceedings is “with respect to” a Downstream Operation. It need hardly be said that that phrase is one of the widest import. I think my conclusion is supported by the fact that had there been a challenge to the accounts under clause 1.5 of the Accounting Procedure and Clause XX of the Downstream Agreement then whether successful or not the Operator’s costs of the arbitration would be paid from the Downstream Account.
That is sufficient to dispose of Delhi’s argument. Subject to a point I will mention shortly, I would not interfere with the Judge’s declaration. It is unnecessary for me to consider the nature of any limits on Santos’ ability to debit the joint operating account for its legal costs. There would almost certainly be a requirement that Santos act in good faith. For the sake of completeness, I will deal briefly with some of the other arguments advanced by Delhi and Santos respectively.
Delhi submitted that the Judge erred in relying on the decision of Lander J in Basin Oil N L v Santos Ltd because that decision dealt with quite a different point. I think that Delhi is right.
Lander J was considering (among other matters) whether the operator (Santos) could participate as operator in the arbitration relating to the Adjustment and Review Procedure and could recover its costs of such participation from the Unit Account. Lander J answered both questions in the affirmative. The case involved a very different factual situation from that before the Court in this case. In my respectful opinion the Judge did place more reliance on the decision than was justified. Having said that, there is one passage in the reasons for judgment of Lander J which, by broad analogy, provides support for the conclusion reached by the Judge. Lander J said:
“There can be no doubt, in my opinion, that the preparation of the input data, the preparation of the GIAPS, and a review and adjustment of the Unit Participations and Block Participations are all functions of the Unit Operations. So also, to revise the input data or the GIAPS would also be a function of the Unit Operations. It follows in my opinion that the defence of the input data or the GIAPS prepared by the Unit Operator is a function of the Unit Operations.
In those circumstances Santos would be entitled to look to the Unit Account in order to conduct the arbitration in which it presents itself as Unit Operator.
I believe Article 23.07 supports that conclusion. As I have already noticed, Article 23.07 will always lead to the result that the Unit Operator does not have a liability itself for costs. If the Unit Operator is successful in the arbitration the opposing Party will meet its costs because it must meet the entire costs. If the Unit Operator is unsuccessful, it is still entitled to look to the Unit Account for its costs. The end result is that it will never have to meet its costs from its own resources. For those reasons it follows that the Unit Operator is entitled to seek to have its costs of the conduct of the arbitration met from the Unit Account.”
Santos submitted there were two other grounds upon which it was entitled to debit the joint operating account with the costs of these proceedings, namely,
“The Settlement Agreement and the Unit Agreement authorised the carrying out of the accounting adjustment and the obtaining of the Audit Opinion, which are challenged, as unit operations;
The challenge relates to the conduct of unit operations as defined in the Unit Agreement.”

I reject both of these grounds for the reasons given by Lander J in this case.
Following the hearing of the appeal, the parties sent to the Court further written submissions. Delhi in its submission argued that because the Operator’s solicitors were also representing all the Producers other than Delhi, this led to the result that Delhi was paying 20.21% of the costs of all the Producers. I reject that submission. Whilst as a matter of fact the Producers other than Delhi obtain the benefit of Santos’ defence of these proceedings, the declaration made by the Judge is correctly limited to the costs and expenses incurred by Santos in these proceedings.
Conclusion
In the result, I agree with Lander J that on the proper construction of the agreements between the parties:
Delhi is entitled to share with the other Producers in the repayment of the Jetty Security Deposit in accordance with their respective contributions to the costs associated with the design, engineering, construction and installation of the Jetty. The Secondary Jetty Tariff should be apportioned in the same way.
Delhi is entitled to share with the other Producers in the repayment of the Roads and Water Security Deposit in accordance with their respective contributions to the Roads and Water Security Deposit. The Roads and Water Tariff should be apportioned in the same way.
I uphold the Judge’s declaration that Santos is entitled to debit the joint operating account for costs and expenses incurred by it in relation to these proceedings.
In the event that I am wrong on the construction issues, I agree with the conclusions of Lander J on the other issues except for estoppel. I find that no estoppel arises.
I would hear from the parties as to the declarations, and orders, including orders as to the payment of interest, which should be made in view of these conclusions.

[2002] SASC 272

23 December 2002