Bay of Plenty Ltd v Vector Gas Ltd HC Wellington CIV-2004-485-2287

[2007] NZHC 1963

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2004-485-2287

BETWEEN  BAY OF PLENTY ELECTRICITY LTD Plaintiff

AND  VECTOR GAS LTD Defendant

Hearing:         5, 6, 7 and 8 June 2007

Appearances: Hamish McIntosh and Tim Smith for Plaintiff

Jack Hodder and Kate Hadfield for Defendant

Judgment:      3 August 2007

JUDGMENT OF HARRISON J

In accordance with R540(4) I direct that the Registrar endorse this judgment with the delivery time of

10 am on 3 August 2007

SOLICITORS

Russell McVeagh (Wellington) for Plaintiff

Chapman Tripp (Wellington) for Defendant

BAY OF PLENTY ELECTRICITY LTD V VECTOR GAS LTD HC WN CIV-2004-485-2287  3 August 2007

Table of Contents

Para No.

Introduction  [1] Background  [9] BoPE Agreement  [19]

(1)     Redetermination  [29] (2)       Result of Redetermination  [38] (a)       NGC Contract  [47]

(b)     Ability to Supply  [49]

(c)     Substitute Gas  [51] Causation  [63] (1)  Force Majeure     [64]

(2)     Duty to Mitigate  [69]

(3)     Alternative Duty to Mitigate  [82] Strawman Agreements  [96] Interim Agreement  [112] Result  [134] Costs  [137]

Introduction

[1]      This case raises a dispute about rights of termination under a commercial agreement to supply gas.

[2]      The chain of supply started in 1973 when a group of mining  companies agreed to supply gas from the Maui Gas Field to the Crown for a term of 30 years. Their contract, known as the Maui Gas Contract (the MGC), provided for two yearly redeterminations of the Economic Recoverable Reserves (ERR) in the field and for consequential effects on rights of supply.  The Crown later entered into an agreement to supply some of its Maui gas to NGC New Zealand Ltd (now Vector Gas Ltd but throughout this judgment referred to as NGC).   That contract and its amendments (collectively the  NGC  contract)  also  provided  for  consequential  adjustments  on rights of supply in the event of a redetermination of the ERR.

[3]      In 1995 NGC contracted to supply fixed quantities of gas to Bay of Plenty Electricity Ltd (BoPE) at agreed prices for a term expiring on 30 June 2006 (the BoPE agreement).   BoPE  is an electricity retailer  to  industrial,  commercial and residential consumers in the Eastern Bay of Plenty.   The company required gas to meet its contractual commitment to supply electricity and steam to a co-generation plant operated by Fonterra at a dairy factory in Edgecumbe.

[4]      The BoPE agreement provided that:

In cases where there is a redetermination under the Maui Gas Contract and as a result the ability of NGC to supply or deliver Maui Gas is reduced to any  extent  …  NGC  may  terminate  this  Agreement  by  giving  notice  in writing to any other Party.

[5]     An independent expert nominated by the parties to the MGC made a redetermination of the ERR in the Maui Gas Field in early 2003.  In reliance on it, NGC gave written notice of termination of the BoPE agreement in August 2004. BoPE  immediately  challenged  the  validity  of  NGC’s  notice  on  the  alternative grounds that (1) there was no redetermination under the MGC for the purposes of the BoPE agreement; (2) NGC never suffered any reduction in its physical ability to

supply or deliver Maui gas to BoPE; and (3) any reduction suffered by NGC was the result of the terms of new contractual arrangements beyond the scope of the MGC.

[6]      Protracted correspondence between the parties and their solicitors followed these events, culminating in an interim agreement designed to preserve supply until a decision on BoPE’s challenge to NGC’s termination notice.

[7]      Two principal issues arose for decision at trial of BoPE’s application for a declaration of invalidity and an order for specific performance of the BoPE agreement.  The first is whether NGC’s notice of termination was valid.  Within it are a number of sub-issues of construction and causation.   The second is to settle NGC’s rights of recovery under the interim agreement.

[8]      At first blush the meaning and effect of clause 9.1.6 appear clear.  However, four days of trial and evidence from five witnesses, provision of a common bundle comprising eight ring binders of documents, and comprehensive submissions from counsel show that things are often not what they appear to be where large amounts of money are at stake.

Background

[9]      The factual matrix as at 10 October 1995, the date of the BoPE agreement, is relevant.   In order to identify it, I have drawn principally upon the evidence of Messrs James Seymour and Stephen Bullock of NGC, both of whom were working in the energy sector in the  1990s,  and  of Messrs Christopher  Hall and  Hamish Tweedie from BoPE, even though they are relative newcomers to the industry.

[10]     The chronological starting point is the discovery of the Maui Gas Field in

1969.  Domestic consumers were the only significant gas users in New Zealand at that time.  The field contained very large recoverable reserves, likely to produce a much greater volume of gas than could be consumed by the existing market.   The Government of the day concluded that the field’s best use was to provide fuel for a number of thermal power stations, to be built to satisfy expected increases in electricity demand.

[11]     Negotiations followed between representatives of the Crown and the Maui Mining Companies (MMCs), a joint venture comprising Off-Shore Mining Co Ltd, Shell, BP and Todd, leading to the MGC entered into in October 1973.  The MMCs agreed  to  sell gas  to  the  Crown  for  use  for  its  own  purposes  and  sale  of  the remainder.  NGC was one of the Crown’s prospective on-buyers.  The company had gradually expanded  its gas use  for  domestic  and  industrial purposes  throughout New Zealand and extended the gas transmission network.

[12]     The MGC did not take effect until the first delivery of gas on 28 June 1979. Its term was for 30 years from that date.   The contract included a mechanism for settling the initial quantity and then progressively reviewing the ERR from the field: Article 6.1.   The exercise was to be carried out by an independent expert if the parties were unable to agree: Article 6.2.  The determined or redetermined figure was an estimate of the quantity of gas which was economically recoverable and available to the Crown under the terms of the MGC and the rates at which it could be taken. The figure did not itself represent the quantity of gas in or physically recoverable from the field.

[13]   The MGC also provided detailed mechanisms for the MMCs delivery requirements to the Crown and its volumetric entitlements, broken down into Annual Quantities (AQ); Daily Quantities (DQ); Maximum Daily Quantities (MDQ) which was about 150% of the DQ; and Maximum Hourly Quantities (MHQ).

[14]     The Crown and NGC entered into the NGC contract on 21 December 1977. It incorporated some of the MGC definitions.   Its terms were also comprehensive, providing for NGC to take a predetermined share of the Crown’s entitlement under the MGC.   The price payable was linked to the Crown’s purchase price under the MGC (although this was varied in 1985 to allow the Crown a right to determine the base price payable).

[15]     NGC and the Crown agreed in 1990 to vary the NGC contract.  That was a consequence of the Crown’s decision to on-sell all its entitlements to Maui gas to three wholesalers.  NGC and Generate Developments Ltd (now part of NGC) agreed to buy 27.4725%.   ECNZ (43%) and Methanex (30%) were the other commercial

buyers.  In October 1989 the Crown estimated the remaining ERR in the Maui field for the purpose of the 1990 variation agreement at 3,003 PJ (petajoules); NGC’s share was 825 PJ.  I will return to the relevant provisions later; for these purposes it is sufficient to note that, in the event of a downwards redetermination of ERR, NGC would be treated as having always been entitled – that is, throughout the relevant term – to 27.4725% (later reduced to 26.64%) of the redetermined quantity, and not to any specific volume.

[16]     By 1995 Maui and, to a lesser extent, Kapuni were the principal gas fields in New Zealand.  I accept Mr Bullock’s evidence that at that time industry participants knew the contract price of Maui gas was low by contemporary (or new) production cost standards; the Maui field would eventually be depleted; and of the risk of a redetermination of ERR, resulting in a reduction in the entitlements of buyers such as NGC to Maui gas (although industry insiders viewed this prospect as relatively low).

[17]     Mr Bullock said this:

Around the time that [the BoPE] Agreement was entered, NGC’s portfolio included a mixture of agreements.  Some contained no reference to any field, but most were Maui-based and contained the Maui Redetermination clause. At the time, the industrial gas market was continuing to grow, with new generation plants and conversions from diesel and coal to gas being commonplace.  This was encouraged by the existence of a long-term supply of relatively cheap Maui Gas.   As  there was  a perceived  low risk of a redetermination cutting back the flow of low-priced gas prior to 2009, it was common for parties to enter into long-term agreements…

I have referred … to contracts being ‘Maui-based’ rather than being for the supply of Maui gas.   This distinction is important.   In my experience it is unusual for an industrial [gas supply agreement] to specify which particular field the gas will come from.   Usually, they will simply specify the gas specification that is required (NZS5442).   Gas is largely interchangeable, and each molecule will not be separately accounted for.   Many of NGC’s industrial contracts (including [the BoPE] Agreement) anticipated the supply of Maui gas at Maui prices, even where (like [the BoPE] Agreement) they did not expressly require Maui gas to be supplied.

[18]     In March 1994 NGC was buying  gas  from the  Crown for  $2.64  per GJ (gigajoules) (1,000,000 GJ equal 1 PJ), made up of the Crown’s Maui producer price of $1.46, a Crown margin of $0.73 and a Crown energy resources levy of $0.25.

BoPE Agreement

[19]     The BoPE agreement was for a term of 11 years from 1 July 1995.   The maximum daily quantity of gas available was 3,500 GJ at $4.70 per GJ (including transmission costs) with specific minimum and maximum annual quantities.   Price variations were to be based on an agreed formula.

[20]     The  BoPE  agreement  incorporated  NGC’s  general  terms  and  conditions. Among them were force majeure provisions, a regime governing property and risk, and default.  The general terms also covered issues such as quantities, price of gas, accounts and measurements, quality, measuring equipment, and liability for interest at the prevailing bank bill rate plus 5% on late payments.  The agreement was non specific as to the origin of the gas to be supplied.

[21]     Clause 9.1.6, one of a number of default provisions, provided:

In cases where there is a redetermination under the Maui Gas Contract and as a result the ability of NGC to supply or deliver Maui Gas is reduced to any  extent  …  NGC  may  terminate  this  Agreement  by  giving  notice  in writing to any other Party.

[22]     The MGC was expressly defined as:

… the contract for the supply of gas between the Crown, Offshore Mining Company   Ltd,   Shell   (Petroleum   Mining)   Company   Ltd,   BP   (Oil Exploration) Company of New Zealand Ltd and Todd Petroleum Mining Company Ltd dated 1 October 1973 as amended from time to time.

[23]     Counsel are agreed on the relevant principles of construction to be applied. The intention of the parties is to be ascertained from the language they have used, considered  in  the  light  of  the  surrounding  circumstances  and  the  object  of  the contract.  The Court is to adopt an objective approach in determining the presumed intention of the parties.  In this context the commercial purpose of the contract is a

relevant  consideration:  Lewison,  The  Interpretation  of  Contracts  (3rd   Ed)  2004,

Chapter 2; Potter v Potter [2003] 3 NZLR 145 (CA) at [33]-[37].

[24]     The  principle  of  particular  relevance  to  this  case  is  Lord  Hoffmann’s statement:  Investors  Compensation  Scheme  v  West  Bromwich  Building  Society [1998] 1 WLR 896 at 912:

Interpretation  is  the  ascertainment  of  the  meaning  which  the  document would   convey   to   a   reasonable   person   having   all   the   background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

[Emphasis added]

[25]     A threshold point of contest lay in identifying the nature and extent of the background knowledge which would have been available to NGC and BoPE in 1995. Clause 9.1.6 of the BoPE agreement is predicated upon the occurrence of an event under the MGC.  Neither of the parties to the BoPE agreement were parties to the MGC.

[26]     Mr Hamish McIntosh for BoPE accepts that the company could be taken to have known about the MGC; the words of clause 9.1.6 and the definition of the MGC do not permit otherwise.  He also accepts that BoPE must have known of the risk of a redetermination of ERR, although the extent of its knowledge cannot be determined.    He  does  not  concede  that  BoPE  would  have  known  of  the  NGC contract, other than that NGC had a back-to-back agreement  with the Crown to supply Maui gas.

[27]     To the extent that this point is relevant, I am prepared to accept that BoPE would not have known in detail the relevant provisions of the MGC.  But the BoPE agreement is evidence of BoPE’s express knowledge that (1) there may be a redetermination under the MGC during the currency of the BoPE agreement; (2) that event may reduce NGC’s ability to supply or deliver Maui gas; and (3) NGC was not a party to the MGC.  From these facts it must be inferred that BoPE, as a participant in the energy market in 1995, knew that (1) a redetermination would be of economically recoverable gas from the Maui field; (2) a redetermination would be meaningless by itself; (3) the MGC must include a mechanism for adjusting the gas supply rights and obligations of the parties to it consequent upon a redetermination; and, critically, (4) the means of regulating the nature, manner and extent of the adverse effect of a redetermination upon NGC’s derivative rights of supply from the

Crown would be found within a separate contractual instrument between those two parties,  although  not  necessarily  in  similar  or  identical terms  to  the  companion mechanism under the MGC.

[28]     Otherwise, without the existence of an intervening contractual mechanism, there would be no agreed means, or what Mr Jack Hodder for NGC called a causal chain or link, for transmitting the effect of a redetermination through to the BoPE agreement in circumstances where the inclusion of clause 9.1.6 is evidence of the parties’ foresight of such an event.  It is unnecessary to establish BoPE’s knowledge of the  actual terms  and  conditions  of the  NGC  contract;  it  is  enough  to  show knowledge that there would have been an adjustment mechanism under that instrument  also.    This  finding,  contrary to  Mr McIntosh’s  submission,  does  not require implication of a term or incorporation of the provisions of the NGC contract into the BoPE agreement.  It is instead the necessary result of identifying the relevant background circumstances which were or would have been known to these parties when reaching a commercial agreement on the terms of gas supply.

(1)      Redetermination

[29]     NGC’s discretionary right to terminate under clause 9.1.6 was subject to two conditions.   The first condition was the existence of a redetermination under the MGC.  Article 6.1 of the MGC provided:

6.1.1    Within 3 Months of the completion of the drilling of the production wells on the first offshore platform which Seller [the MMCs] proposes to erect to supply Gas under this Contract and thereafter at intervals of not less than 2 Years the parties hereto shall meet to make a determination or a redetermination (as the case may be) of the Economic Recoverable Reserves…

….

6.1.4    Any  redetermination  of  Economic  Recoverable Reserves  will  be fixed by aggregating the quantity of Gas taken from the Maui Field to the date of redetermination with the estimated quantity of Gas then remaining in the Maui Field.

[30]     Article 6.2 provided:

In the event of Buyer and Seller being unable to agree upon the quantity of Economic Recoverable Reserves, within a period of 60 Days from the date of the meeting convened pursuant to Article 6.1.1 hereof, such redetermination shall be made by an Independent Expert in accordance with Article 16 hereof.

[31]     Economic Recoverable Reserves were defined as meaning:

… the quantities of Gas that are estimated to be economically recoverable from the Maui Field as determined or redetermined from time to time under the provisions of Article 6 hereof.

[32]   Article 8 of the MGC governs the Crown’s entitlement and delivery requirements, dealing with such issues as the AQ, DQ and MDQ  in setting out minimum and maximum rates of entitlement, and materially provides:

8.8       Shortfall in Economic Recoverable Reserves

If the Economic Recoverable Reserves are at any time (hereinafter in this Article referred to as ‘the Appropriate Date’) found to be exceeded by the sum of the following quantities namely:

(a) the quantity of Gas produced from the Maui Field up to the

Appropriate Date:

(b) the  quantity  of  Gas  required  from  the  Appropriate  Date  to enable Seller to meet its obligations in accordance with Article

8.1.1 hereof:

(c)  the  quantity  of  Gas  required  from  the  Appropriate  Date  to enable Seller to meet its obligations under any other contract for the sale of gas to any other party or parties;

the following provisions of this Article 8.8 shall apply.

[33]     The  balance  of the  Article,  from 8.8.1 to  8.8.7, constitutes a regime  for adjusting rights and obligations if the MGCs are unable to  satisfy their delivery obligations to the Crown under Article 8.1.1 consequent upon a redetermination.  In particular:

8.8.2    If  Seller  is  unable  to  meet  its  delivery  obligations  under  the provisions   of   Article   8.1.1   hereof   …   the   appropriate   Daily Quantities shall be reduced to such a level … as can be maintained [at prescribed levels] …

8.8.3    If,  notwithstanding  the  reductions  provided  for  in  Article  8.8.2 hereof, Seller remains unable to meet the Daily Quantities as so reduced, then the Daily Quantities for each remaining Year of this Contract shall be reduced to such a level as will deplete below the

level of economic recovery the Gas available from the Maui Field over the remaining term of this Contract, or to such higher level as may be mutually agreed for a correspondingly shorter period …

[34]     The parties to the MGC were unable to agree in 2002 on a redetermination of the ERR.  Mr James Spellman of Netherland, Sewell & Associates from Texas, USA was appointed as the independent expert.  His redetermination decision was made on

6 February 2003.  He found that the ERR under the MGC was 3.561 PJ; that was his estimate of the total gas reserves deliverable to the Crown under the 30 year term of the contract.  His assessment effectively halved previous estimates of the remaining Maui gas.

[35]     Mr McIntosh accepts that Mr Spellman’s decision was a redetermination for the purposes of Article 6 of the MGC, but not for the purposes of clause 9.1.6 of the BoPE agreement.   That  is  because the redetermination process under  the  MGC required the concurrent or consequent operation of both Articles 6 and 8.8 of the MGC.  He submits that the MGC parties never invoked Article 8.8.  (It is common ground that those parties agreed to adjust their rights and obligations consequential upon the redetermination pursuant  to what  were known as the Strawman set  of agreements entered into by all interested parties, including NGC, on 1 June 2004.  I shall discuss the Strawman agreements later when addressing a discrete causation argument advanced by Mr McIntosh.)

[36]     I reject Mr McIntosh’s submission.  His argument requires the plain words of clause 9.1.6 to be read subject to an unnecessary gloss, and confuses the trigger event with its consequences.  In this context it is irrelevant whether the parties to the MGC invoked Article 8.  The sole threshold question under clause 9.1.6 is whether or not there was a ‘redetermination under the Maui Gas Contract’.  If so, the inquiry shifts to the contractual consequences.

[37]     There can be no doubt that Mr Spellman’s decision on 6 February 2003 was a redetermination within the meaning of Article 6 of the MGC and thus of clause 9.1.6 of the BoPE agreement.

(2)      Result of Redetermination

[38]     The second pre-condition to NGC’s right to cancel under clause 9.1.6 is that its ability to supply or deliver Maui gas is reduced as a result of the redetermination.

[39]     The  phrase  ‘as  a  result  of  the  redetermination’  introduces  a  causative element.  A redetermination on its own has no effect under the BoPE agreement; it is insufficient to allow NGC to exercise its rights to cancel.   The company must go further and show a causative effect on its ability to supply or deliver Maui gas.  This requirement set the scene for the primary point of contest between the parties.

[40]     Two provisions of the 1990 NGC contract are relevant.  Clause 1.1 described the basis of the contract and its object as follows:

The basis of this Contract is that the quantity of Gas available to NGC (together with GDL) under this Contract (and the GDL Gas Contract) is

27.4725 percent [later amended downwards to 26.64%] of the Gas and Non-

Quality  Gas  recoverable  from  the  Maui  Field  and  which  the  Crown  is entitled to purchase under the Maui Gas Sale and Purchase Contract.  The quantity of Gas estimated by the Crown to be available to NGC (together with GDL) under this Contract and the GDL Gas Contract) is 825 PJ, being

27.4725 percent  of the Crown’s estimate (as  at 1 October 1989) of the Economic Recoverable Reserves of the Maui Field (less the quantity of Gas previously taken from the Maui Field) of 3,003 PJ.  The remaining quantity of Gas and Non-Quality Gas recoverable from the Maui Field and which the Crown  is  entitled  to  purchase  under  the  Maui  Gas  Sale  and  Purchase Contract is available to the following purchasers of Gas as follows…

[Emphasis added]

[41]     Clause 4.8 provided:

Alteration Due to Redetermination of Economic Recoverable Reserves

If, upon a determination under Article 6 [of the MGC], the Economic Recoverable Reserves less the total quantity of Gas taken from the Maui Field up to the date of such determination are determined to differ from

3,003 PJ less the total quantity of Gas taken from the Maui Field from

1 October  1989  up  to  the  date  of  the  determination,  then  the following provisions shall apply:-

4.8.1    the Economic Recoverable Reserves less the total quantity of Gas taken from the Maui Field up to 1 October 1989 shall be treated as the estimate of the Economic Recoverable Reserves  upon  which NGC’s rights under this Contract were based rather than 3,003 PJ;

4.8.2    NGC (together with GDL) will be treated as having always been entitled to take a quantity of Gas and Non-Quality Gas equal to

[26.64%] of such estimate and each Other User’s right to take Gas will be adjusted accordingly pro rata;

4.8.3    the Crown will calculate the quantity of Gas accepted and taken by NGC (together with GDL) and each Other User from the Maui Field since 1 October 1989, notify each of them of that quantity and shall deduct such quantity of Gas from the quantities of Gas allocated to them respectively under clause 4.8.2;

4.8.4    the difference calculated under Clause 4.8.3 will be allocated to NGC (together with GDL) and to each Other User and, subject to a further determination under Article 6 [of the MGC], will constitute their remaining rights respectively to notify and take delivery of Gas (and the corresponding obligation to pay for Gas not taken) from the Maui Field …;

4.8.5   the rights of NGC (together with GDL) and each Other User respectively shall be adjusted:-

(a) so that after such adjustment each person’s rights to notify and take Gas and Non-Quality Gas over the remaining term of this Contract reflects, to the extent possible, their respective rights to notify and take Gas and Non-Quality Gas over that period as they were prior to such adjustment having effect; and

(b) so far as possible consistently with the adjustment provided for in paragraph (a), their respective Maximum Hourly Quantities and Maximum Daily Quantities after such an adjustment bear the same relationship, one with the other, as they did prior to such adjustment having effect…

[Emphasis added]

[42]     These  two  clauses  in  combination  provide  the  contractual  context  for assessing the effect of Mr Spellman’s redetermination.   As the Crown had taken

980 PJ of the redetermined ERR of 3,561 PJ as at 1 October 1989, the remaining reserves as at that date were revised downwards to 2,581 PJ.  The Crown’s estimate under the NGC contract at that date was 3,003 PJ: clause 1.1.   Consequently, in accordance with the agreed adjustment formula, the quantity of gas estimated by the Crown to be available to NGC under the NGC contract was automatically reduced by 421 PJ, from 829.9 PJ to 408.9 PJ: clause 4.8.  NGC’s remaining allocation was reduced by 138 PJ from 250 PJ to 112 PJ.

[43]     Mr Hodder’s case is that once the redetermination engaged the adjustment mechanism and affected NGC’s entitlement pursuant to clause 4.8, the company’s inability to supply in terms of clause 9.1.6 followed as a matter of course; and that

the BoPE agreement did not require NGC to prove either that (1) subsequent to and as a result of the redetermination there had been or would be physical reductions in the daily quantities of Maui gas which it was obtaining or was entitled to obtain; or (2) at the date of termination it had an anticipated gas supply/demand deficit for the balance of the term of the BoPE agreement.

[44]     Mr McIntosh’s  causation  arguments  in  answer  are  extensive  and  often overlap, but are effectively layered into three stages.  The first relate to the terms of the BoPE  agreement.   The second  rely upon general principles of construction, principally by analogy with force majeure provisions.   The third assert what was effectively a novus actus interveniens or a voluntary abandonment of contractual rights by virtue of NGC’s entry into the Strawman agreements.  I shall deal with the first in this part of the judgment, and discuss the second and third separately.

[45]     At   this   first   or  primary  causation  stage   Mr McIntosh   says   that   the redetermination had no effect on the Crown’s entitlement under the MGC because it did not trigger Article 8 of that contract, and thus had no effect on NGC because it was not a party to the MGC; that the terms of the NGC contract should not be imported into clause 9.1.6; and that, even if the redetermination had an effect under clause 4.8 of the NGC contract, it had no causative effect under clause 9.1.6 because it could only have gone to NGC’s entitlement to Maui gas, not its deliverability.

[46]     Mr McIntosh submits further that the plain meaning of the word ‘ability’ where used in clause 9.1.6 is not to  be conflated with ‘capacity’ or ‘volume of supply’.  He says that NGC may still have ‘the ability … to supply gas’ even if it has to procure it from other sources or pay more for it.  He seeks contextual support from other clauses in the BoPE agreement, and emphasises that clause 9.1.6 is expressed in  the  present  tense  –  thus  the  relevant  reduction  must  exist  at  the  date  of termination.  Taking all these factors into account, Mr McIntosh says clause 9.1.6 is clearly intended to refer to a reduction in NGC’s physical ability to supply or deliver Maui gas, and not to its legal entitlement.  I disagree with Mr McIntosh for a number of reasons.

(a)      NGC Contract

[47]     First, the operation of clause 4.8 of the NGC contract is not conditional upon the Crown’s participation in the separate contractual process mandated by Article 8.8 of the MGC: the MGC and NGC contract are not mirror instruments.   There is no commonality of parties.  Each provides for different contingencies in the event of a redetermination.  The Crown is entitled to fixed volumes of AQs, DQs and MDQs under the MGC: Article 8.1.  Its DQ volumes will be reduced according to an agreed formula  if  a  reduced  redetermination  leaves  the  MMCs  unable  to  satisfy  their delivery obligations: Article 8.8.

[48]     By contrast, the gas available to NGC under the NGC contract is a fixed share of the Crown’s total rights to Maui gas which is automatically adjusted by reference to a redetermination; the adjustment mechanism ‘shall apply’ once there is a downward redetermination of ERR: clause 4.8.  Mr McIntosh does not suggest that clause 4.8 did not bind NGC at the relevant time.  I accept that its implementation was  suspended  by  consent  while  the  parties  affected  by  the  redetermination attempted to negotiate a settlement of their differences, and was ultimately replaced by the Strawman agreements.  But until then, clause 4.8 remained in full contractual force and effect, and applied to reduce NGC’s rights to Maui gas.

(b)      Ability to Supply

[49]     Second,  a reduction  in  NGC’s  contractual entitlement  to  Maui gas  must necessarily reduce  its ability to  supply others with that  fuel.    The  New  Shorter Oxford  English Dictionary,  4th  Ed., 1993,  defines  ‘ability’  as  ‘sufficient  power, capacity [or] … legal competency’.   Ability is a relative concept, governed by the circumstances; what a gas supplier is able to do is subject to the contractual restraints under which it operates.

[50]     NGC’s ability to supply gas to BoPE and others was subject to two legal limitations: the MGC, which provided for periodical redeterminations of the ERR, and the NGC contract, which automatically and consequentially adjusted the company’s rights to gas if the redetermination is downward.   The redetermination and its agreed consequence governed or regulated NGC’s power, capacity or ability to supply Maui gas.  If the redetermination reduced NGC’s right to Maui gas by, say,

50%, its ability to supply that fuel was reduced commensurately.   NGC was only able to supply to BoPE and other customers the total volume of gas to which it was entitled from the Crown from time to time; that is, the gas which was within NGC’s power, competency or capacity to deliver.

(c)      Substitute Gas

[51]     Third, the references in clause 9.1.6 to the MGC and to Maui gas reflect the parties’ contemplation that the Maui field would be the source of gas supplied by NGC.  The company was not obliged, though, to supply Maui gas; it was free to use gas from another source or sources providing the fuel satisfied the relevant quality, purity and suitability specifications.  However, this right does not justify reading the word ‘ability’ in clause 9.1.6 as subject to a gloss, as Mr McIntosh submits, imported by the word ‘physical’ or a condition that NGC was not entitled to exercise its right to cancel unless it was unable to find gas pursuant to another contractual instrument.

[52]     In this respect the phrase the ‘ability of NGC to supply’ where used in clause

9.1.6 is not referenced to or limited by the BoPE agreement.  The provision does not have a definite object.   Instead, it is concerned with NGC’s ability to supply gas generally.   It is common ground that NGC was managing a substantial gas supply portfolio when the BoPE agreement was entered into in October 1995.  The words of clause 9.1.6 imply a recognition that, when deciding whether or not to exercise its right, NGC was entitled to take account of all of its existing supply obligations – that is, to supply each buyer with a minimum daily volume over the term of its contract.

[53]     While accepting that NGC’s right to cancel was not limited to consideration of BoPE’s position, Mr McIntosh emphasises the use of the present tense in clause

9.1.6 – ‘… the ability of NGC to supply … Maui gas is reduced …’.   He says it requires the company to prove that, on the day of giving notice, it was then unable to meet its commitments to supply Maui gas.

[54]     In my judgment this requirement would impose an artificial, even impossible, burden on NGC and rob clause 9.1.6 of its commercial efficacy.  A redetermination having the effect of halving its entitlement to Maui gas would necessarily affect

NGC’s outstanding commitments to all buyers.   Once there was a downward redetermination, clause 9.1.6 allowed the company to undertake a re-allocation exercise.  As Mr Hodder says, the provision is a demand management tool, enabling NGC to take all necessary steps to balance its remaining supply and demand profile. NGC’s right was not limited to a snapshot in time but  necessarily embraced all contingencies.

[55]     It is common ground that NGC had secured rights to replacement gas when it gave  notice  to  BoPE  some  18 months  after  the  redetermination.     Mr Bullock accepted that NGC had by then sufficient physical supplies of gas to meet all its contractual obligations until 2009 including daily deliverability of fuel to BoPE.  The company was able to source the gas from other suppliers under different contractual instruments.   For example, it negotiated a facility to purchase what was known as indemnity  gas  from  Shell  from  the  Pohokura  field,  and  a  right  to  gather  or accumulate gas from smaller fields and to invest $14 million in reinstating another facility.  And as a result of the Strawman settlement, NGC obtained ROFR (right of first refusal) gas from the Maui field.

[56]     But this replacement gas came at a much higher price than under the MGC. Mr Seymour confirmed that what NGC lost as a result of the redetermination was a right to about 138 PJ of relatively low priced Maui gas on which it had priced many of its downstream sales contracts.   He said NGC would have exhausted this right well before the terms of its contracts came to an end if it had carried on supplying without immediately purchasing replacement gas.  NGC therefore had to attempt to rectify that problem.

[57]     By way of illustration, Mr Seymour said that in September 2005 NGC was paying the Crown a sum not much above the energy resources levy of 45 cents/GJ for Maui gas (by then almost all its gas entitlements were either pre-paid or advance- paid, leaving only payment of the levy when taking delivery).  The actual price was, as earlier noted, $2.64 per GJ.  By contrast, the price of the first delivery of ROFR gas in September 2005 was around $5.25 per GJ.  Additionally NGC had to pay a transmission fee of 45 cents, being the transportation cost to a delivery point  at Huntly.  So the total cost of ROFR gas for NGC was over $6 per GJ.

[58]     I accept the evidence of Messrs Seymour and Bullock, which is consistent with the company’s internal documents, that as a result of the redetermination, which crystallised following entry into the Strawman agreements, NGC was satisfied when giving notice of termination of the BoPE agreement on 2 August 2004 that it would be unable to supply all existing customers with Maui gas – that is, gas supplied under the MGC – for the duration of the terms of existing contracts.

[59]     In my judgment NGC’s right to terminate was not conditional upon proving that at the time of giving notice either that it had insufficient supplies of Maui gas under the MGC to satisfy those commitments or that it was unable to meet them after taking  into  account  the  availability  of  gas  from  all  other  available  contractual sources; I repeat that the plain words of clause 9.1.6 do not have to be read subject to a gloss or limitation of the type contended by Mr McIntosh.

[60]     Mr McIntosh condemns this construction as leading to an absurd result.  He gives the example of an automatic and significant contractual reduction in NGC’s gas entitlement of, say, 100 PJs following an ERR revision that did not engage DQ volumes and bore no relation to NGC’s actual demand profile.  In that case, he says, the reduction would have no  practical effect  whatsoever  but  would  nevertheless allow NGC to terminate its long-term contracts at will.  By virtue of exercising its cancellation right NGC would be entitled to offer the same gas at a higher price.  He says this could not have been the parties’ intention.

[61]     Caution is necessary when considering arguments of absurdity of outcome from a particular contractual interpretation.  Mr McIntosh’s hypothesis appears to be at odds with commercial reality.  A gas supplier in the situation which he postulates would be unlikely to survive.  An unallocated surplus of 100 PJs would manifest a fundamental failure to balance a company’s supply and demand profile, meaning that it already had rights to much more Maui gas, including gas subject to take or pay obligations, than  it  had sold.    The company’s position would only worsen  if  it elected to exercise its rights of cancellation.   I am unable to see how the supplier would obtain any financial benefit from following that course.

[62]     I add that the construction I prefer has the benefit of certainty.  I agree with Mr Hodder that the terms of clause 9.1.6 are designed to avoid the very dispute that has arisen here.  A good deal of the evidence was devoted to a retrospective analysis of whether or not, on the day of giving notice, NGC could have satisfied all its existing supply obligations for Maui gas; that is, gas supplied under the MGC.  NGC tendered a comprehensive brief from Mr Sanjay Kansara, a modelling analyst in its wholesale energy business unit, to  establish the negative.   Detailed graphs were presented.   There was analysis and counter-analysis from both sides.   The whole exercise was most unproductive.  It cannot have been the parties’ intention under the BoPE agreement that NGC would have to discharge an evidential burden of showing an inability to meet all its supply obligations over the duration of that contract before it could cancel following a redetermination under the MGC.

Causation

[63]     Mr McIntosh’s second stage of causation arguments draws on principles of construction of force majeure provisions and postulates a duty to mitigate.

(1)      Force Majeure

[64]     First, Mr McIntosh says that clause 9.1.6 is not in nature an event of default, despite its description.  He says that conceptually NGC seeks to be excused on the ground of a specified event, in the form of a redetermination, which is beyond its control and that accordingly clause 9.1.6 is more akin to a supervening event or force majeure provision.   The purpose of this submission is to place a high legal and evidential burden on the party seeking to rely upon a cancellation provision: Chitty

on Contracts, 29th Ed., Vol 1, at para 14-140.

[65]     I do not consider that the rules of construction applying to force majeure clauses are applicable.  The BoPE agreement contained a force majeure clause which relevantly provided:

7.2       Notwithstanding the other provisions of this Agreement, [BoPE] and NGC shall each be relieved from liability under this Agreement in the following cases:

7.2.1    In the case of NGC to the extent that on account of Force Majeure NGC has not delivered or is unable to deliver Gas in the quantity requested by [BoPE] pursuant to this Agreement …

7.3      The Party affected by any such cause shall endeavour to remove or remedy the same with all due diligence and shall resume supply or acceptance of Gas immediately such cause is removed or remedied.

[66]     Clause 22 defined a force majeure as:

… an event or circumstance beyond the control of NGC or [BoPE], as the case may be,  which  results  in  or  causes  a  failure by  such  party  in  the performance of any obligations imposed on it by this Agreement notwithstanding the exercise by such party  of  reasonable  care and  shall include but not be limited to Acts of God, strikes … any sudden partial or entire failure of the gas supply to NGC …

[67]     This  definition  affirms  the  nature  of  a  force  majeure  as  a  sudden  and unexpected event beyond the control of either party.  It must cause an interference, normally  of  a  physical  nature,  with  the  affected  party’s  performance  of  its obligations.   Its effects are usually temporary in duration.    For that  reason, the affected party is obliged to exercise due diligence to remove the cause and resume supply as soon as possible.

[68]     Clause 9.1.6 is conceptually different.  It expresses the parties’ foresight of a particular event – the redetermination – and of the prospect that it may entitle NGC to  bring the contract to  an end as a consequence once the right  to  cancel was exercised, its effect was permanent.    The contractual process of biannual determinations and redeterminations was an agreed certainty.  While the outcome of the redetermination was beyond the control of either NGC or BoPE, the event itself was the antithesis of something sudden or unexpected in the nature of an emergency. And the result did not lead to a failure by NGC to perform its obligations but to a discretionary right to cancel.

(2)      Duty to Mitigate

[69]     Second,  in  apparent  contradiction  to  his  previous  submission  and  in  a variation on an argument which I have already rejected, Mr McIntosh relies on the reference in clause 9.1.6 to NGC’s ability to supply or deliver being ‘reduced to any extent’  as  opposed  to  being  prevented  or  delayed.     He  says  that  it  can  be characterised as a ‘hindered’ clause.   He relies on the scarcity of supply line of authority, seeking support from this statement by Lord Loreburn in Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495 at 510:

What had the sellers to show in the actual circumstances of this case?

They had to show that the war caused a short supply of magnesium chloride which hindered delivery.  By short supply is meant, I think, that the quantity available to the seller  was  substantially  less  than  his  requirements.    By

‘hindering’ delivery is meant interposing obstacles which it would be really

difficult to overcome.   I do not consider that even a  great  rise of price hinders delivery.   If that had been intended different language would have been used, and I cannot regard shortage of cash or inability to buy at a remunerative price as a contingency beyond the sellers’ control.   The argument that a man can be excused from performance of his contract when it  becomes  ‘commercially’  impossible,  which  is  forcibly  criticised  by Pickford LJ, seems to me a dangerous contention, which ought not to be admitted unless the parties have plainly contracted to that effect.

[70]     In a variation of his primary argument, Mr McIntosh submits that  before invoking clause 9.1.6 NGC had to show its ability to supply gas was reduced by pointing to the imposition of obstacles which had made it difficult to deliver gas to its customers.  He says the fact that such gas may be more expensive to procure from sources other than the MGC does not allow NGC to say that it has been hindered in its  delivery.    He  argues  NGC  was  under  a  duty  to  mitigate  by  obtaining  and supplying gas to BoPE from elsewhere.

[71]     I do not accept that NGC was under a general duty, based upon dicta in Tennants case, to mitigate.  In conceptual terms, I cannot understand how principles of mitigation might apply here.  The obligation to mitigate arises in a very different context – where one party is adversely affected by the other’s breach of contract the law requires the innocent party to take all reasonable and available steps to reduce his loss: Sullivan v Darkin [1986] 1 NZLR 214 (CA) at 222 per Somers J. So, for example, where a vendor breaches an obligation to supply in a contract for the sale of goods, the purchaser must do all things reasonably necessary to obtain an alternative source of supply.

[72]     I  agree  with  Mr Hodder.    The  principle  of  mitigation  cannot  operate  to impose a duty on a party to disentitle itself of a contractual right.  An obligation on NGC to take reasonable and available steps to avoid its entitlement to cancel would run counter to the plain words of the contract.

[73]     In any event, the decision in Tennants cannot be abstracted into a general principle of ‘hindered supply’ which governs the operation of clause 9.1.6.   The subject contract in that case entitled the seller to suspend delivery of magnesium chloride where an event ‘caus[ed] a short supply of labour, fuel, raw material or manufactured produce, or otherwise prevent[ed] or hinder[ed] the … delivery …’. At the time the contract was signed in December 1913 the goods were available to the seller, which was an agent and not a manufacturer, from two sources.  One, from a nominated company, was for a limited period and quantity; the other was unlimited supply from Germany.

[74]     While  the  seller  was  able  to  obtain  magnesium  chloride  directly  from Germany for the first seven months of 1914 sufficient to meet all its supply commitments, the outbreak of war brought supplies to a halt.  The seller, which had a large number of supply contracts to perform, then gave notice suspending delivery to all buyers.  Some 240 tons of magnesium chloride remained undelivered by the seller to the buyer.  Because it was in urgent need of the goods, the buyer purchased the outstanding quantity directly from the alternative source.  Its claim against the seller was for damages, representing the increase in the price it had to pay for the substitute goods.

[75]     While the speeches in Tennants are lengthy, the issues were of a limited compass: what was the proper construction of the particular contractual provision allowing for suspension where supply was ‘hindered’ and did it apply to its distinct facts: see Lord Dunedin at 513; Lord Wrenbury at 523; and Lord Atkinson at 548. In allowing the seller’s appeal, the House was satisfied that it had proven that the shortage of supply of the goods caused by the outbreak of war hindered or prevented delivery. The buyer’s principal argument was that, when suspending the contract, the seller still had sufficient quantities of the magnesium chloride from Germany to meet its commitments to supply the remaining 240 tons. The House rejected that

proposition on the ground that  the seller  was entitled to take account  of all  its obligations in the ordinary course of its business.

[76]     The Court of Appeal had found, by a majority, that the seller was not entitled to the protection of the suspension provision because the words ‘preventing’ or

‘hindering’ referred to a physical or legal interference, and that the seller’s actions were taken to avoid the adverse effects of a price rise: Wilson v Tennants [1917] 1

KB 208.  On appeal, Earl Loreburn at 510 observed that ‘even a great rise in price’ does not hinder delivery; and that an inability to buy at a remunerative price was not a contingency beyond the seller’s control.  But, in company with the majority in the House, he was satisfied that, as a matter of causation, the clause was engaged by the actual shortfall.  Lord Dunedin put the argument in perspective in this way at 516:

… Where I think, with deference to the learned Judges, the majority of the Court below have gone wrong is that they have seemingly assumed that price was the only drawback.  I do not think that price as price has anything to do with it.   Price may be evidence, but it is only one of many kinds of evidence as to shortage.   If the [buyer] had alleged nothing but advanced price [it] would have failed.  But [it has] shown much more.  [It has] shown a  total  failure  of  what  after  all  was  the  main  source  of  supply  to  [its] business, namely, the German article …

[77]     Similarly, in this case, price is irrelevant.   NGC did not cancel the BoPE agreement because of an increase in the price of Maui gas.   That price remained constant despite the redetermination.  What is decisive is that NGC was entitled to cancel following an adverse redetermination,  just  as the  seller  in  Tennants  was entitled to suspend delivery following proof of a shortage of supply.

[78]     Furthermore, it is irrelevant to the existence of the right to cancel, as it was in Tennants, that NGC could have supplied gas by buying from alternative sources at higher prices for the duration of the BoPE agreement.   That is because the focus must be on the circumstances in existence at the time of the termination.  This point, both of contractual construction and general principle,  is emphasised  throughout Tennants: see Lord Atkinson at 520, and 522-523.

[79]     It is true that some of NGC’s internal correspondence, to which I shall come shortly, referred to a saving of $8 million on termination of some contracts including the BoPE agreement.  But this was plainly a reference to the amount of the increased

cost which NGC would incur in supplying those buyers with more expensive non- Maui gas for the duration of their contract.  The saving of that possible increase was simply a consequence of exercising the right to cancel, and not the event which itself gave rise to that right.

[80]     Mr McIntosh   independently   relies   upon   another   passage   from   Lord

Loreburn’s speech in Tennants at 510 that:

To place a merchant in the position of being unable to deliver unless he dislocates his business and breaks his other contracts in order to fulfil one surely hinders delivery.

Mr McIntosh submits that NGC would not have been in a lawful position to exercise its discretion to terminate on the ground of a reduced ability to deliver gas to BoPE at the date of termination unless it could show that it would have to dislocate its business and break other contracts.

[81]     Again, Lord Loreburn’s dicta, in the context of discussing the meaning of the word ‘hindering’, cannot be elevated into a statement of general principle which qualifies the plain words of clause 9.1.6.  Without doubt, the redetermination and the subsequent process leading to the Strawman agreements also dislocated NGC’s business.   But that dislocation was not a precondition to NGC exercising its contractual right.   The company is not required to prove that it had to cancel the BoPE agreement in order to avoid breaking other contracts, and that is not what Lord Loreburn said in any event.

(3)      Alternative Duty to Mitigate

[82]     Third,  Mr  McIntosh  submits  that  NGC  sought  to  terminate  the  BoPE agreement in order to take advantage of a resultant rise in price of gas following the redetermination.  He says NGC entered into new supply contracts between the dates of  the  redetermination  and  of  its  notice  of  cancellation  by  renewing  existing contracts   with   Fletcher   Challenge   and   Carter   Holt   Harvey   and   assuming commitments to new customers.  In circumstances where it has suffered no physical

reduction in its ability to supply or deliver gas from any source, Mr McIntosh says

NGC should not be entitled to rely on clause 9.1.6 to justify its termination.

[83]     In support Mr McIntosh relies on this passage from Chitty at 14-151:

A supplier of goods  may as a result of an event of force majeure have insufficient  goods  of  the  contract  description  to  meet  all  his  existing contracts, but nevertheless have at his disposal enough goods to satisfy one or more of those contracts.  In such a case he may be entitled to rely upon an appropriately worded force majeure clause …  If he has a number of existing contracts to fulfil,  but  cannot  fulfil all of them,  he can rely upon force majeure as to the others.   He may allocate the available goods in any way which the trade would consider proper and reasonable, whether this is pro rata, or in chronological order, or on some other basis.  But he cannot make any allocation to those of his customers to whom he has  a non-legal moral commitment; nor would it be reasonable to allocate supplies to new contracts in order to take advantage of a resultant rise in price.

[Emphasis added]

[84]     Mr McIntosh seeks a factual foundation for his submission in NGC’s internal communications in the 18 month period between the redetermination and the notice to cancel.   He characterises the exchanges as showing ‘a pattern of opportunistic decision-making’ based upon NGC’s assumption that clause 9.1.6 went to deliverability, not entitlement.  While accepting that NGC’s views of the meaning of the provision are  irrelevant,  Mr McIntosh points  to  the  company’s  selection  for termination of six of its 26 supply contracts including the BoPE agreement which contained the clause 9.1.6 provision.  The volume of gas saved would be less than

2.5 PJ annually.

[85]     The short answer to this submission is that the concluding sentence in the passage  from Chitty,  based  on  an  unreported  decision  of  Robert  Goff J  (which counsel were unable to locate), does not stand for a statement of principle that might prevail over the terms of the BoPE contract.  The authors of Chitty were discussing force  majeure provisions and their consequences; I have already found  that  this clause was different in its nature and scope.  However, if I am wrong on that point, it is necessary to consider the relevant circumstances.

[86]     A discussion paper circulated for NGC’s board  meeting on 25 September

2003, which was produced by consent, stated as follows:

NGC  currently  sells  around  17  PJ  of  gas  to  industrial  customers  in New Zealand.  In addition to its wholesale margins, NGC derives significant value from its related gas transportation business for which industrial customers are key.   This is principally due to the high proportion of transportation service sold to power generators at fixed prices.

Some 10 PJ (59%) of NGC’s industrial load is covered by contracts with Carter Holt Harvey, Fletcher Forests and Fletcher Building that are all about to expire.

The renewal of these contracts brings into sharp focus the issues surrounding the transition from Maui supply and NGC’s gas market position, including the potential trade-off in short-term value opportunities against the longer- term exposure of the transportation businesses in a post-Maui market.

…

The  New Zealand  gas  market  has   historically  been  characterised  by abundant supply, high productivity and low prices.  As the end of the Maui era looms, the market has quickly moved to a point where supplies to industrial customers are limited, production is constrained and prices have moved sharply higher.    Industrial customers, accustomed to intense competition, gas prices under $3/GJ and 100% deliverability, now face a lack  of  competition,  prices  moving  to  over  $5/GJ  and  deliverability becoming a key value focus.

…

It is paradoxical that, to date, physical gas supply has not been constrained during the market’s transition although contractual constraints and prioritisation of gas for generation and petrochemicals have provided significant market pressure…

NGC sources the bulk of its gas from Maui and Kapuni entitlements and is critically dependent on the successful resolution of outstanding contractual issues with both fields.   As outlined in previous papers, should the Maui issues not be resolved by the current negotiations  it is expected that the parties  would  move swiftly to litigation to resolve the matters  of MDQ profile and IHI development.

…

… As previously identified, at current demand a supply shortfall of  gas arises.

Previous   forecasts   provided   to   the   Board   identified   this   shortfall, commencing immediately and growing significantly from December 2005. The current forecast shows little near-term shortfall because Maui settlement (while it remains on track) and gas-gathering can address  it.    However, conservative forecasts reveal a scenario in which NGC’s Maui entitlements could be utilised as early as August 2005, thus accentuating the 2005/06 shortfall.

NGC’s gas supply/demand balance is more delicately poised than at any time in the recent past.  A number of supply issues must be resolved as NGC

transitions to the new market model, if these issues are not resolved NGC will  be forced  to  purchase  gas  from  competitors  or  terminate  customer contracts.

[87]     The paper then outlined that NGC was pursuing a strategy on three fronts – securing new gas supplies, maximising existing supplies, and managing the demand balance.  On the latter point the paper noted:

The impact of any gas shortfall can be mitigated by terminating sales contracts.

Terminating contracts without offering an alternative, and in the knowledge that they may have no other supply available, is a serious step and must be considered  a  worst-case scenario.    A table is  provided  in  Appendix  III outlining supply obligations and termination options.

…

While it may be necessary to terminate some contracts in the future, NGC’s strategy is to first aggressively manage demand through DQ management.

[88]     Later internal documents set out steps taken to pursue all three management options arising from the redetermination.  NGC was adopting a commercial approach towards its allocation options.  An internal memorandum dated 18 June 2004 stated

There are still 23 contracts in force that contain [clause 9.1.6 clauses], with expiry dates ranging from July 2004 to October 2009.

Although a redetermination was called over 18 months ago, NGC needed to wait until Strawman was settled and there was certainty around the redetermination to be able to prove that deliverability or supply had been reduced.

NGC has a one-off opportunity to implement this termination right on customers.  Out of concern for customer relationships and potential adverse publicity, the proposal is to only invoke the clause for those 6 customers with contracts extending past 1 January 2006 [BoPE was one].  Based on a conservative value of saved Maui gas ($5.50/GJ), the estimated financial gain to NGC is $8M.

…

A challenge from the largest affected site (BoPE, a Todd owned company) is inevitable.

There is a possibility of re-contracting the customer at the same time as terminating the existing contract on the basis of NGC supplying non-Maui gas (Kapuni, Pohokura or Kahili) …

[89]     In discussing BoPE, the memorandum noted that:

BoPE have made it frequently clear that they would rather be purchasing gas from the Todd-owned Nova Gas than NGC.   In addition, they regularly exceed  their  MDQ  and  refuse to  pay  overruns.    There  is  no  long-term customer relationship issues that requires preserving and due to their size, an alternative offer for non-Maui gas is not appropriate.   They will challenge vigorously our ability to invoke the clause.

[90]     The paper also noted:

The main benefit to NGC is the 3.6 PJ reduction in the take of Maui gas. This allows NGC to conserve Maui gas for higher value purposes such as swing capacity.   If the gas is conservatively valued at $5.50 per GJ, this results in an NPV gain to NGC of $8 million.

[91]     A redrafted version of the same internal memorandum stated:

Although the Maui redetermination was completed in February 2003, NGC’s offtake profiles on a daily and yearly basis were never formally adjusted under its contracts for Maui gas with the Crown, meaning that NGC’s ability to deliver or supply was not formally reduced as a result of the redetermination.   NGC needed to wait until Strawman was settled, which gave the redetermination practical effect and formally reduced NGC’s Maui entitlements and offtake profile, to be able to prove that ability to deliver or supply Maui gas had been reduced.

NGC has a one-off opportunity to implement this termination right on customers.   In order to match NGC’s  Maui entitlements  with its  supply obligations to its customers, and having regard to customer relationships and potential adverse publicity, the proposal is to only invoke the clause for those 3 customers whose gas contracts have the greatest effect on NGC’s ability to supply Maui gas (contracts extending past 1 January 2006).   If NGC does not terminate these customers, it will have to supply them with more expensive non-Maui gas which would have an estimated financial impact of $8M.

[Emphasis added]

[92]     Mr Bullock,  who  was  responsible  for  these  decisions  within  NGC,  gave evidence about the circumstances.  He confirmed that NGC’s decision to cancel the BoPE agreement was based upon legal and commercial considerations.  He viewed termination as ‘a worst case scenario’.  His evidence, which I accept, was that:

However, it was necessary to determine where NGC had flexibility in its supply obligations in the event that it was necessary to make changes. Continuing to supply customers whose agreements included Maui Redetermination clauses jeopardised our ability to supply all customers, including those whose contracts had no termination clause.    It  was also preferable from a risk management perspective to terminate a small number of agreements (all of which included termination clauses) than to reduce

supply across a larger number which did not  generally provide for  such reductions.

We decided which of the agreements to terminate by considering the effect that each contract would have on NGC’s ability to supply Maui gas, and terminating those with the most impact.  The BoPE Agreement was selected for termination both because of the length of its remaining term (it was not due to expire until 30 June 2006) and because of the high annual load (1,040

TJ/year).  All of the contracts selected for termination by NGC had at least

500 TJ outstanding.

…

Once we had identified the agreements that had the greatest effect on NGC’s ability to supply Maui gas, we considered whether there were commercial, or other, reasons not to terminate…

[93]     Even if Chitty’s principles on insufficiency of goods arising from a force majeure  are  applicable  here,  either  directly  or  by  analogy,  NGC’s  allocation decisions  including  termination  of  the  BoPE  agreement  were  not  unreasonable. BoPE does not suggest that the company acted in bad faith.  Provided that it acted lawfully, NGC could act according to its own commercial interests by a selective evaluation of its future commitments and allocate gas accordingly.  And, even if it was relevant to this argument, BoPE has not pointed to any evidence that NGC entered into new contractual commitments between the dates of redetermination and of cancellation (a supplementary memorandum, filed by Mr McIntosh at my request, did not identify any new contracts but simply referred to internal NGC documents discussing prospective contractual arrangements).

[94]     Moreover, I am not satisfied that NGC’s contractual decisions were designed to take advantage of price increases resulting from the redetermination.   As noted, there was no rise in price of Maui gas supplied under the MGC.  The redetermination had no effect on the price of fuel from that source at all.  Its financial significance was in its effect upon the price at which NGC might secure gas from other sources to meet its supply commitments if it did not exercise its right of cancellation.

[95]     In a sense, what happened provides the commercial rationale for clause 9.1.6. The references in NGC’s internal memoranda to ‘an NPV gain’ of $7.5 million to

$8 million from cancellation are the net cost to the company of supplying gas to

BoPE from more expensive contractual sources than the MGC.  I am satisfied that

NGC’s  decision  to  terminate  the  BoPE  agreement  was  not  designed  to  take advantage of price increases resulting from the redetermination.   Its decision was designed to minimise its own financial risk, which cannot be characterised as an unlawful or improper use of its contractual right.

Strawman Agreements

[96]     Mr McIntosh’s third stage of causation arguments was that any reduction in NGC’s ability to supply or deliver Maui gas to BoPE was the result of the Strawman agreements entered into on 1 June 2004, and not of the redetermination.

[97]     Mr Spellman’s decision in February 2003 generated intense debate between the affected parties.   The extent of his downward redetermination of the ERR surprised the gas industry.   Methanex, a downstream purchaser from the Crown, issued proceedings in this Court challenging the redetermination’s validity.   Other parties attempted to resolve their differences by negotiation.   A prolonged state of uncertainty followed.

[98]     The Minister of Energy intervened.   He called the chief executives of the interested parties to a meeting for the purpose of settling their differences.  He set in train a process of intense negotiations, leading to the Strawman agreements.

[99]     Against   this   background,   Mr McIntosh   submits   that   the   Strawman agreements were voluntary and no party including NGC was obliged to enter into them; that Strawman was not a resolution of the dispute between the various parties as to the meaning and effect of Article 8 of the MGC – they deliberately put those issues to one side in favour of a wholly new approach; and that, while Strawman crystallised some entitlements with direct reference to Mr Spellman’s findings, it also provided benefits to affected parties which were unavailable to them under the MGC or the NGC contract and also removed some key rights.

[100]   Mr McIntosh says that  by entering  into  Strawman,  and  in  return  for  the certainty of its entitlements gained from that step, NGC forewent its rights to challenge the amount of any reduced entitlement and/or off-take profile; to call for a

further determination; and to pursue Methanex for 26 PJ of NGC’s gas which it had overtaken or over-consumed.  While conceding that NGC did not act unreasonably in  entering  into  Strawman,  Mr McIntosh  says  that  any  actual  change  to  its entitlements to Maui gas under the MGC was a result of its free decision to change its contractual arrangements; and that its physical ability to take, supply and deliver Maui gas did not change in circumstances where the overall field status never varied, deliverability was maintained at all previous levels, far above off-take levels, and NGC never suffered any physical off-take or deliverability constraint at a material time.  Accordingly, he says, any reduction in NGC’s ability to supply Maui gas was a result of Strawman, not of the redetermination.

[101]   Mr McIntosh’s submission is answered by a brief review of the Strawman agreements  coupled  with his  concession  that  NGC  did  not  act  unreasonably  in entering into them.  The instruments are detailed and do not require full recital.  It is sufficient  to  record  that  three  inter-linking  instruments  were  relevant  to  NGC’s rights.    The  first  is  what  is  described  as  ‘Settlement  and  Umbrella  Agreement relating to Maui Gas Contracts’.  There were 13 parties; even allowing for the fact that  some were related,  there  were  at  least  six  distinct  corporate  entities.    The MMCs, the Crown and the wholesalers (Methanex, NGC and Contact) participated. Plainly the  consensus  of all  was  required  to  what  were  complex  and  carefully structured provisions.

[102]   The recitals to the umbrella agreement record the existence of the MGC, the NGC contract and other downstream contracts between Methanex, Contact and the Crown,  the  parties’  ‘wish  to  settle  all  claims  and  potential  claims  arising  in connection with the [MGC] and [the NGC contract and other downstream contacts]’; and their entry into ‘various modified or new arrangements relating to the supply of gas’.

[103]   The inter-linking complexity of the umbrella agreement is reflected by the fact that it was conditional upon entry into 11 related contracts: clause 2.1; one was the agreement whereby the Crown agreed to offer ROFR gas to Contact and NGC: clause 2.1(h).  In the event of a failure to satisfy that condition by 1 June 2004 (the date of execution), the agreement would lapse: clause 2.4.  The settlement provisions

were also complex.  In essence, though, they constituted a full and final compromise of any rights of action ‘arising out of or in connection with the [MGC] and/or [the NGC and other downstream contracts] …’: clause 3.1.  Each party agreed to release the other from any claims (necessarily including those arising from the redetermination): clause 3.2.   Essentially, the umbrella agreement guaranteed the Crown’s absolute certainty of supply of the 367 PJ of gas remaining in the Maui field according to Mr Spellman’s determination.

[104]   The second  instrument  was the agreement  between the Crown and NGC which was conditional upon execution of the umbrella agreement: clause 2.1.  The parties confirmed termination of the NGC contract: clause 5.1.  A third and related agreement between the Crown and NGC provided for the sale and purchase of gas. Of particular relevance to this claim, it guaranteed NGC’s entitlement to 118 PJ of gas from the Crown, the adjusted amount to which it was already entitled under clause 4.8 of the NGC contract: clause 4.1.

[105]   These agreements essentially reflected the existing contractual position.  The MMCs and the Crown were the parties to the MGC.  NGC was not a party to that instrument  and  had  no  direct  rights  to  challenge  Mr Spellman’s  decision.    Its participation, while of course important, was contractually derivative, and dependent upon the actions of others.

[106]   In  these  circumstances  NGC’s  options  were  legally  and  commercially limited, if not non-existent.  While Mr McIntosh is correct that the company was not obliged  to  take  the  decision  to  enter  into  Strawman  and  was  to  that  extent  a volunteer, a failure to participate would have meant either that it remained bound by clause 4.8 of the NGC contract or that it alone challenged the redetermination by litigation or arbitration.   Mr McIntosh does not  suggest that  by exercising  these rights NGC would probably have acquired a significantly increased share of the Crown’s remaining ERR entitlement to the Maui field.   A theoretical right of challenge is meaningless in a vacuum.

[107]   Mr McIntosh also  says NGC could  have called  for  a new  determination, which NGC was entitled to do in April 2004.   He points to an industry view that

there were significantly more ERR than estimated by Mr Spellman.   With respect, that is beside the point without evidence that such a right of challenge would have remained available to NGC where others had entered into Strawman and that  it would probably have succeeded.

[108]   What  is  decisive  is  Mr McIntosh’s  concession  that  NGC  did  not  act unreasonably in entering into Strawman, carrying with it an acknowledgement that NGC’s contractual right to Maui gas was unlikely to be improved by refusing to participate in an industry-wide compromise.

[109]   In  any  event,  NGC’s  contractual position  remained  unchanged  following Strawman.   Mr Hall’s evidence was that ‘the primary consequence of [Strawman] was that all contractual entitlements to Maui gas were completely revised’.  Not only was this commentary overstated, it also, I regret to say, strayed into advocacy or submission.  The Strawman agreements essentially validated Mr Spellman’s adjusted estimate of 367 PJ of ERR available to the Crown from the Maui Field and guaranteed supply of that amount without the risk of further redetermination.

[110]   There was no significant change in NGC’s entitlement to Maui gas available under the NGC contract as a result of Strawman.  Most significantly, it obtained a right to purchase ROFR gas but, as noted, at a significantly higher price and pursuant to a new contractual instrument.  In legal terms, Strawman did not change the nature or effect of the redetermination under the MGC.  Its consequence of a reduction in NGC’s ability to supply ‘Maui Gas’ operated through the mechanism of Strawman instead of clause 4.8.   Whatever contractual path was followed, the result of the redetermination remained the same in terms of clause 9.1.6; NGC’s right to Maui gas under the MGC was reduced by 138 PJ.

[111]   In my judgment this argument is also unsustainable, and as a consequence

BoPE’s challenge to the validity of NGC’s notice of termination must fail.

Interim Agreement

[112]   NGC’s notice of termination to BoPE dated 2 August 2004 stated:

As you are aware, in February 2003 the gas reserves in the Maui gas field were redetermined downwards.  As a result, there was a significant reduction in the entitlements  to Maui gas  under  the agreement  between  the Maui Mining Companies and the Crown.  This in turn led to reduction in NGC’s entitlements to Maui gas under its Maui Gas Contract with the Crown.  Over the last eighteen months the Crown and affected parties, have been negotiating the final details of this redetermination and an agreement on all outstanding issues was reached on 1 June 2004.

As a result of the redetermination, we confirm that NGC’s ability to supply Maui Gas has been reduced.   Accordingly we wish to notify you that, in accordance with clause 9 of your Gas Supply Agreement, that agreement will be terminated with effect from 31st October 2004.

[113]  BoPE challenged the validity of NGC’s notice.   Protracted negotiations followed.  BoPE threatened to seek injunctive relief having the mandatory effect of forcing NGC to meet its supply obligations if the parties were unable to agree on terms pending a decision on BoPE’s substantive challenge in this Court.  The parties struck an interim agreement in October 2004.  However, its terms and conditions are now in dispute.  The result is of significant financial importance to both sides.

[114]   The issue arises on NGC’s counterclaim.  I granted the company leave to file an amended statement of defence and counterclaim when the trial opened on 5 June. NGC pleads that it validly terminated the BoPE agreement on 31 October 2004 and has continued to supply gas since then, with BoPE paying the price fixed according to the BoPE agreement.

[115]   NGC alleges that on or about 15 October 2004 BoPE agreed to pay it for each GJ of gas supplied after 30 October the price for delivered gas payable under the terms of the BoPE agreement and, in the event that NGC’s termination was held to be valid, and on demand, (1) a gas only price of $6.50 per GJ supplied; plus (2) NGC’s  posted  charges  for  transmission  and  network  costs  associated  with  the delivery of such gas; less (3) the price paid for delivered gas payable under the terms of the BoPE agreement; together with (4) interest on the balance at the contractual rate of interest.

[116]   The interim agreement is found in this exchange of correspondence:

(1)      BoPE’s  letter  to  NGC  dated  24 September  2004  discussed  the competing arguments on termination and concluded:

As to NGC’s apparent willingness to supply non-Maui gas to BoPE, you say that NGC cannot give BoPE a definite price for gas until it knows the quantities and length of term for which BoPE requires gas. In response, to the extent that this is not already obvious:

(a)       BoPE  requires  the  same  amount  of  gas  that  it contracted   with   NGC   for   under   the   Supply Agreement  and  has  been taking  ever  since,  ie an annual quantity of up to 1,250 TJ.

(b)       BoPE requires that amount of gas for the remainder of  the  term  of  the  Supply  Agreement,  ie  until

30 June 2006.

Without prejudice to BoPE’s position in respect of NGC’s purported   termination   of   the   Supply   Agreement,   and assuming for the moment that BoPE would accept NGC’s standard terms for  industrial customers,  please advise the price upon which NGC would supply gas to BoPE as above.

(2)       NGC’s letter in response dated 28 September stated:

However, in response to your request, we can advise that NGC Energy is pleased to offer [BoPE] a non-Maui specific supply of gas to its Edgecumbe facility.   The offer, under NGC Energy current Standard Terms and Conditions, provides  two  term/pricing  options  with  transportation and metering passed through at cost.  Basic details of the offer are outlined below.

Option 1 (Original term)

1 November 2004 to 30 June 2006, Gas Energy at $6.50 per

Gigajoule

Option 2 (Extended term offer [which was not pursued])

…

Gas Price

The gas price for both options will be adjusted for PPI in accordance with clause 38 of our Standard Terms of Supply.

Transportation and Metering

Due to timing constraints (namely, your need for a response

by  5 pm  today)  and  the  variation  between  the  original contract MDQ and your actual requirements, we have not included transportation and metering rates in this proposal.   Appropriate transmission capacity levels and the provision of metering equipment would need to be agreed   at   the   same   time   as   the   new   gas   supply

agreement.    If the above offer  is  acceptable to  you,  we should meet [to] discuss what the transmission and metering arrangements will be.  These are likely to take into account historic use and transmission posted pricing.

(3)      Russell McVeagh’s letter to NGC dated 5 October 2004 advised that the firm represented BoPE and of its intention to issue legal proceedings in the High Court, and summarised each party’s position including NGC’s confirmation of its sale price of non-Maui gas at

$6.50 per GJ.  It concluded as follows:

5In those circumstances, it would seem that the best course for the parties, in lieu of [BoPE] having to apply for interim injunctive relief, would be for:

(a)       NGC to undertake, without prejudice to its position, to simply continue to supply gas on the basis of the Agreement pending determination of BoPE’s proceeding as above.

(b)      BoPE to undertake to:

(i)       file  that  proceeding  on  or  before

31 October 2004; and

(ii)     in  the  event  that  BoPE  is unsuccessful on its proceeding or withdraws it:

(aa)      pay  NGC  on  demand,  for each GJ supplied, the difference between the Agreement  price and $6.50 (or the current market price, whichever is the lower), plus interest; or

(bb)     at BoPE’S election, provide NGC with an equivalent amount  of gas  as taken  by BoPE    from    1 November

2004  (if:  (i)  such  gas  is

available from other gas fields; and (ii) Maui open access allows that gas to be transmitted to market).

[Emphasis added]

(4)      Chapman  Tripp  on  NGC’s  behalf  wrote  to  Russell  McVeagh  in response on 8 October 2004, and stated:

2Without prejudice to its position, NGC is prepared to agree to continue to supply gas based on the terms of the [BoPE agreement] pending determination of BoPE’s proceeding, or 30 June 2006, whichever is the earlier, provided that BoPE undertakes to:

2.1      file that proceeding on or before 31 October

2004; and

2.2      in the event that BoPE is unsuccessful in, or withdraws, that proceeding, pay NGC on demand, for each GJ supplied, the difference between the price set out in the Agreement and $6.50 per GJ, plus interest at the Interest Rate set out in the Agreement.

(5)      Russell McVeagh’s letter to Chapman Tripp dated 15 October advised BoPE’s acceptance of the proposal made in para 2.2 of Chapman Tripp’s  letter,  and  proposed  two  additional  terms  which  are  not directly relevant;

(6)      Chapman Tripp’s letter to Russell McVeagh dated 15 October advised NGC’s acceptance of Russell McVeagh’s proposed amendments, and then stated ‘for the avoidance of doubt’ the terms proposed in its letter dated 8 October subject to minor amendments and incorporation of Russell McVeagh’s two proposals;

(7)       Russell  McVeagh’s  letter  to  Chapman  Tripp  dated  15 October

‘confirm[ed] BoPE’s agreement to the interim gas supply terms’ as set out in its letter.

[117]   However, matters did not rest there.   It  will be apparent  from this  brief narration  that  the  correspondence  after  28 September  did  not  refer  to  NGC’s requirement for payment of transmission and metering rates in addition to its base rate of $6.50 per GJ.   Chapman Tripp drew this omission to Russell McVeagh’s attention in a letter dated 20 October in these terms:

2It has been brought to our attention by NGC that the terms of that proposal might be slightly misleading.  We understand that the $6.50 only applies to the price for Gas Energy, and that separate charges for transportation apply.  This is a slight change from the charging methodology under the current Agreement where the prices for the individual components are bundled, but is consistent with the terms of NGC’s  offer  of 27 September  2004  on  which the proposal  is based.

3For  the  avoidance  of  doubt,  can  you  please  confirm  BoPE’s agreement to the following amended undertaking.

4Without prejudice to its position, NGC will continue to supply gas based on the terms of [the BoPE agreement] pending determination of BoPE’s proceeding, or 30 June 2006, whichever is the earlier [the following terms were identical to those earlier agreed with the addition of an obligation on BoPE to payment of the gas price of

$6.50 per GJ of ‘transportation charges at the then current Posted

Prices on the basis of contracted MDQ of 3,500’].

[118]   Russell McVeagh replied on 21 October 2004 that

2Your  letter  does  unfortunately  cause  some  difficulty,  as  BoPE considers that a binding deal was concluded on 15 October 2004, with $6.50 per GJ delivered as the potential top-up limit.

3BoPE believed this, and did not appreciate that NGC’s interim offer contained any error as to price, because, among other things:

(a)       The  comparison  with  the  pricing  approach  under   the Agreement (i.e. a delivered price) was stated several times in the  correspondence  between  us  leading  to  the  deal  on

15 October.

(b)       As the terms being negotiated were for the interim period only,  BoPE  did  not  understand  that  the terms  previously offered by NGC for a wholly new contract were to apply.

(c)       You advised that you had to obtain instructions from NGC in relation to amendments of particular terms along the way, so  it   was   assumed  that   NGC   had   full   view   of   the negotiations and terms in question.

4In any event, however, we do not see that the issue you had raised should be allowed to upset the interim supply agreement.   If NGC does wish to take the point as to what amount of top-up was actually agreed, we suggest that the parties simply agree to defer that debate to the substantive hearing.

5If NGC does not agree to that deferral, however, please would you confirm by return that gas will still continue to be supplied as from

31 October 2004 in any event, as BoPE will otherwise obviously need to move quickly to obtain orders to enforce the 15 October deal in the interim.

[119]   Chapman Tripp wrote again to Russell McVeagh on 22 October, disputing the latter’s construction of events and justifying its view that the supply agreement for $6.50 per GJ was exclusive of transportation and transmission charges.  The firm concluded with a statement of expectation of receiving BoPE’s confirmation that it would agree to the terms set out in its letter dated 20 October 2004.

[120]   The final piece of correspondence in this exchange was Russell McVeagh’s letter  to  Chapman  Tripp  dated  29 October  2004,  declining  to  divide  BoPE’s confirmation of the terms and stating:

3         … what is not in dispute is that:

(a)       There is an agreement in place between NGC and BoPE for interim gas supply, and BoPE has acted in reliance upon that.

(b)       If NGC is shown at trial to have been entitled to rely on clause 9.1.6 of the Supply Agreement, then BoPE will pay NGC the price differential under the interim agreement.

(c)       BoPE is prepared to have the issue as to what price was agreed under the interim agreement determined at a convenient time.

[121]   Mr Bullock’s evidence for NGC was unchallenged that:

This ‘unbundling’ of the price was consistent with the way NGC priced virtually all of its contracts from 2001 onwards.  The industrial business unit purchases transmission and network services provided by other companies (including companies owned by NGC) for use by its customers…

The prices offered in the letter of 28 September 2004 reflected a discount to

‘market prices’ at that time.   The lack of Maui legacy gas or guaranteed

ROFR gas meant that prices had increased to around $6.00-7.50 per GJ, exclusive of transportation costs (which varied according to distance and other factors).

For the last 3 months of 2004, NGC had successfully negotiated 15 new customer contracts with a weighted average gas energy price (i.e. excluding transmission) at $6.68 per GJ.   The total volume was 1.17 PJ per annum, similar to BoPE’s usage at Edgecumbe.   It is important to note that this average price was simply the starting price.  NGC included significant step increases  in these contracts, similar  to  the alternative offer  to  BoPE  on

28 September 2004.  The future selling price of Pohokura gas was expected

to be in the range of $7.50-9.00 per GJ.

[122]   Later Mr Bullock said this:

A bundled price of $6.50 equates to a gas energy price of $4.64 (with a transmission component – to Edgecumbe – of $1.86 per GJ).  NGC discloses transmission and network charges to BoPE.  Current transmission prices are public and have at all times been posted on NGC’s website.

Under the original Agreement, at the time of termination, BoPE paid a total of $5.55 per GJ (equating to roughly $3.69 per GJ of gas energy).   This increased to $5.80 per GJ by the end of the contract, with the average paid by BoPE between 1 November 2004 and 30 June 2006 being $5.71 per GJ ($3.85 per GJ of gas energy).

A bundled price of $6.50 per GJ ($4.64 gas energy) would have led to gas energy being supplied at well under market price at that time…

[123]   Mr   Bullock   put   the   financial   consequences   of   these   differences   in perspective.  He calculated that: (1) the amount owed by BoPE for gas supplied at prices according to the BoPE agreement from 1 November 2004 to 30 June 2006 was

$10.084m; (2) the amount owed for gas charged at $6.50 per GJ plus transmission costs for the same period was $14.767m; and (3) the amount owed for gas charged at a bundled price was $11.503m.  The difference, on this assessment, in NGC’s right of  recovery  under  a  valid  notice  of  cancellation  is  about  $3.26m  ($14.767m  -

$11.503m).

[124]   Mr Hall   was   cross-examined   carefully   by   Mr Hodder   about   industry knowledge of prices.  Significantly, he accepted that NGC’s original offer of $6.50 per GJ plus transmission costs equated to a market  price  in October 2004.   He accepted also  that  the industry then drew a distinction between gas energy and delivered gas prices.  Sometimes, as under the BoPE agreement entered into in 1995, both are bundled in the delivered price.  In other contracts energy and transmission costs are charged separately.  He acknowledged that BoPE would normally pay for the cost of transmitting gas to Edgecumbe.

[125]   Again the factual matrix is relevant to determining the meaning of the interim agreement.    In  August  2004  NGC  had  given  lawful  notice  of  its  intention  to terminate the BoPE agreement.    BoPE  sought  an indulgence  in the  form of an interim agreement which would secure its supply until the dispute was resolved. NGC offered two options on 28 September.  The first was for Gas Energy at $6.50 per GJ ‘with transportation and metering passed through at cost’.   NGC did not include the actual rates for those items in its proposal given the timing constraints

imposed by BoPE.   What  was left  for  agreement  was ‘appropriate transmission capacity levels and the provision of metering equipment’.

[126]   In all subsequent correspondence, including the letters which constituted the interim agreement, the parties by their solicitors referred throughout to a gas price of

‘$6.50 per GJ’.   Both counsel directed detailed arguments to  support competing meanings to be attributed to this phrase.   Was it a price for gas energy alone, as Mr Hodder  says?    Or  was  it  a  bundled  price  including  transmission  costs,  as Mr McIntosh contends?

[127]   At the time of termination of the BoPE agreement, BoPE was paying NGC

$5.55 per GJ (a bundled price).  The gas energy component was $3.69.  Supply of gas at a bundled cost of $6.50 per GJ would equate to $4.64 as the gas energy component.    In  confirmation  of  Mr Bullock’s  evidence,  Mr Hall  knew  that  the market or gas energy price of non-Maui gas was then $6.50 per GJ plus transmission costs.

[128]   Mr Hodder is on fertile ground in submitting that it is inherently unlikely NGC would have agreed to an interim arrangement whereby BoPE was placed in a better position than it would have been if it  lost its challenge to the validity of NGC’s notice.   Mr Bullock’s calculation illustrates that, in circumstances where it maintained the correctness of its right to cancel, NGC must nevertheless be treated on Mr McIntosh’s submission as agreeing to forego what would otherwise be its right to payment at non-MGC prices in the magnitude of $3.26m (out of a total savings of about $4.683m ($14.767m - $10.084m)).   BoPE would,  by virtue  of NGC’s agreement  to  accommodate its specific request  for  ongoing  supply  until determination of the substantive issue, secure a substantial improvement in the terms of supply to which it would not have been entitled if NGC’s notice was valid.  An experienced commercial entity,  to  which Mr Hall’s  state of knowledge  must  be attributed, could hardly expect that NGC would supply it with gas at a delivered or bundled figure below market price for non-MGC gas.

[129]   The  result  contended  for  by  BoPE  cannot  be  logically  treated  as  an expression  of  the  parties’  common  intention  unless  no  other  interpretation  is

reasonably open.  The law does not require that an agreement be construed in a way contrary to business common sense: Antaios Cia Naviera SA v Salen Rederierna AB [1985] AC 191 at 205 per Lord Diplock.

[130]   I  am satisfied  that  at  all relevant  times  the  parties  were  referring  to  an unbundled or gas energy price of $6.50 excluding transmission costs.  BoPE initially requested the price upon which NGC would supply gas.  NGC’s response identified a ‘pricing option’ of ‘gas energy at $6.50 per GJ’, excluding ‘transportation and metering rates’.  From the outset, the supplier drew a clear distinction between the components of its proposed price.  In all subsequent correspondence BoPE did not address the breakdown, but  adopted without  debate or  challenge NGC’s precise figure of $6.50 per GJ.   In the absence of an express rejection of the two pricing components identified by NGC, I infer that BoPE was accepting $6.50 per GJ as the gas energy price, leaving transmission costs to be charged additionally according to a fixed formula.

[131]   Furthermore, the proposal made in para 5(b)(ii)(aa) of Russell McVeagh’s letter dated 5 October refers to BoPE paying ‘$6.50 (or the current market price, whichever is the lower)’.   The touchstone of current market price must mean an industry figure.  That figure could only be determined in isolation, without allowing for  transmission  charges  which  must  always  vary  according  to  location.     As Mr Hodder says, the parties treated the phrase ‘$6.50 per GJ’ as shorthand for the gas energy price, as that was the whole premise for the exchange which followed.

[132]   This construction does not cause any difficulties in implementation.   It can only be assumed that a meeting on appropriate transmission capacity levels was unnecessary in view of the fact that NGC actually supplied all BoPE’s gas requirements;  and  that  NGC  provided  metering  equipment  given  its  ability  to identify the  quantities delivered.    And  fixing  NGC’s  transmission  costs  will  be simply a mechanical exercise.

[133]   In my judgment the parties agreed on or about 15 October 2004 that BoPE

would pay NGC a gas only price of $6.50 per GJ supplied after 30 October 2004

together with the company’s posted charges for transmission and network costs if its challenge to NGC’s notice of termination was invalid.

Result

[134]   BoPE’s applications for —

(1)       A declaration of invalidity of NGC’s notice of termination of the

BoPE agreement given by letter dated 2 August 2004; and

(2)       An order for specific performance of the BoPE agreement —

are dismissed.

[135]   NGC is entitled to judgment on its amended counterclaim dated 5 June 2007 in a sum constituted by —

(1)       A gas only price of $6.50 per GJ supplied after 30 October 2004; plus

(2)       NGC’s posted charges for transmission and network costs associated with the delivery of such gas; less

(3)       The price paid by BoPE for delivered gas under the terms of the

BoPE agreement after 30 October 2004; together with

(4)       Interest on the judgment sum (being (a)+(b)-(c)) at the rate prescribed by the BoPE agreement, being the bank bill rate plus 3%.

[136]   Leave is reserved to apply for supplementary orders in the event that the parties are unable to settle the amounts owing on NGC’s counterclaim.

Costs

[137]   While leave is reserved to either party to apply for orders as to costs, I record my provisional  views.  Costs should  follow  the event  in NGC’s  favour.    I  am

satisfied that, because of its complexity and significance, this proceeding required counsel to have special skill and experience in the High Court.  The quality of the argument presented by both counsel bears out that judgment.  Accordingly, category

3B should apply.  I certify for the costs of two counsel and disbursements.

[138]   Nevertheless, if a party wishes to apply for orders for costs on a different basis, it is to file its memorandum on or before 24 August 2007 and the respondent is to file its memorandum in opposition on or before 7 September 2007.  Memoranda are to be restricted to a maximum of five pages.   If necessary, I will hear oral argument.   However, I stress that the circumstances will have to be exceptional if

costs are to be awarded other than in accordance with my provisional views.

Rhys Harrison J