GXL Royalties Limited v Greymouth Gas Kaimiro Limited
[2015] NZHC 1076
•20 May 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-001717 [2015] NZHC 1076
BETWEEN GXL ROYALTIES LIMITED Plaintiff AND
GREYMOUTH GAS KAIMIRO LIMITED
First Defendant
GREYMOUTH GAS PARAHAKI LIMITED
Second Defendant
GREYMOUTH GAS TURANGI LIMITED
Third Defendant
GREYMOUTH PETROLEUM TURANGI LIMITED
Fourth Defendant
Hearing: 18 May 2015 Appearances:
T G H Smith for the Plaintiff
J B M Smith QC and G M Richards for the DefendacntsJudgment:
20 May 2015
JUDGMENT OF GILBERT J [Challenge to confidentiality claim]
This judgment is delivered by me on 20 May 2015 at 2.30 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
GXL ROYALTIES LTD v GREYMOUTH GAS KAIMIRO LTD & ORS [2015] NZHC 1076 [20 May 2015]
Introduction
[1] This judgment deals with a challenge by the plaintiff (GXL) to the confidentiality claims made by the defendants (the Greymouth Companies) in relation to a large number of discovered documents they produced for the purposes of an audit agreed to by the parties. The documents have central relevance to GXL’s second cause of action alleging that the Greymouth Companies breached their obligation to provide appropriate information to the auditor and misled the auditor. The Greymouth Companies do not contend that any of these documents are commercially sensitive or otherwise intrinsically confidential. Rather, they argue that it was an implied term of their agreement allowing for an audit that all documents produced for the purposes of the audit would be kept confidential between them and the auditor.
The facts
[2] GXL and the Greymouth Companies are competitors in the oil and gas industry. They are parties to a Royalty Deed entitling GXL, as Grantee, to five per cent of the “Output Value” of all petroleum recovered from a particular permit area in Taranaki. No royalty is payable until the Greymouth Companies, as Grantor, have recovered the “Initial Investment” plus a specified return on it.
[3] The parties are in dispute as to the quantum of the third component of the
Initial Investment which is defined in cl 1.1(a) of the Royalty Deed as:
all other third party costs and expenses (excluding any amounts on account of taxation, levies or royalties) incurred by the Grantor to prepare the Prospect for the long term recovery of Petroleum (such as drilling, evaluating and equipping a discovery well and associated production facilities) and which are, if requested by the Grantee, verified, at the cost of the Grantee, by an independent auditor acceptable to the Grantee and the Grantor.
[4] The Greymouth Companies calculate the Initial Investment as being approximately $45.6 million. The most significant items are some $14.6 million for costs incurred by Swift Energy New Zealand Ltd and $29.8 million for costs incurred by the Greymouth Companies.
[5] There is also a dispute about the royalties payable. GXL is entitled to audit all records relating to the calculation of the royalties pursuant to cl 6.2 of the Royalty Deed which provides:
The Grantee may, at its cost, upon 30 days advance written notice to the Grantee, audit all of the Grantor’s accounts and records relating to the calculation of the royalty due to the Grantee.
[6] In a Settlement Agreement entered into in July 2011, the parties agreed that GXL would appoint Ernst & Young to audit the Initial Investment in terms of the Royalty Deed. The Greymouth Companies agreed to provide such information as was required for this purpose. The parties also agreed that any audit of the royalties payable pursuant to cl 6.2 of the Royalty Deed would be carried out by the same auditor.
[7] GXL engaged Ernst & Young on 4 October 2011 to audit the Initial Investment and the royalties payable. However, it was not able to complete this work until two years later because of difficulties it encountered when attempting to verify the costs. In its audit report to GXL dated 9 October 2013, Ernst & Young expressed the following qualifications regarding the major cost components of the Initial Investment:
The Statement of Initial Investment includes $14.6m of costs incurred by Swift Energy New Zealand Limited (“Swift”) as majority partner and operator of the permit... To our knowledge Greymouth has not provided any information supporting the Initial Investment costs incurred by Swift in response to the enquiries made by Greymouth Royalties Limited. We have been unable to reach a conclusion regarding the appropriateness (or otherwise) of the inclusion of these costs in the Statement of Initial Investment.
…
We note that the Greymouth Companies cost element of the initial investment includes a significant level of transactions between the Greymouth Companies and other entities with the same shareholders and directors as the Greymouth Companies. Specifically we bring the following items to your attention:
► Tiger Drilling Company (NZ) Limited has directors in common with the Greymouth Companies. An invoice dated 30 June 2010 in the amount of
$11.25m for the use of the Tiger Drilling rig is included in this cost pool. We
have reviewed the AFE detailing the makeup of the $11.25m. The daily rig hire component ($3.965m) is $65,000 per day. This compares to a daily cost of $62,000 per day for the Parker rig provided to us by John Palmer. The balance of the costs relate to site works, wellhead construction and other fixed costs.
► Bonus Drilling Limited has directors in common with the
Greymouth Companies. Two invoices dated 27 August 2008 and 30 May
2009 totalling $5.262m for the use of the Bonus Drilling rigs are included in this cost pool. We have been unable to verify whether or not the rate
charged is an arms length rate for the services provided.
...
[8] GXL’s second amended statement of claim contains the following
allegations:
19. Further, the Greymouth Companies provided misleading information to the Auditor in connection with the Audit Report, which information misled the Auditor.
...
30. Despite requests, and in breach of clause 1.6(a) of the Settlement Agreement, the Greymouth Companies have not provided supporting details and/or particulars of the Swift Costs or the Related Party Transaction Costs to the Auditor.
[9] The relief sought in relation to this cause of action is an order requiring the Greymouth companies to perform their obligations under the Settlement Agreement, including by providing supporting details and particulars of the Swift costs and related party transaction costs to the auditor.
Are the documents confidential?
[10] GXL abandoned its application in relation to documents that it accepts are commercially sensitive. These documents have been discovered on the basis that they may only be inspected by GXL’s solicitors, external counsel and independent witnesses.
[11] As noted, the Greymouth Companies accept that the remaining documents that are subject to the application are not commercially sensitive or otherwise intrinsically confidential. However, they argue that, by necessary implication, any documents prepared for the purposes of the audit, including communications with the auditor, are confidential. They maintain that GXL is not prejudiced in the preparation of its case by the restrictions imposed on access to these documents.
[12] I have reached the conclusion that the documents are not confidential for the reasons which follow.
[13] There is no express term in the Royalty Deed or the Settlement Agreement providing that such documents would be confidential. The Royalty Deed was negotiated at arm’s length by sophisticated commercial parties with the benefit of legal advice. So too was the Settlement Agreement which was negotiated as part of a settlement of earlier proceedings in this court. If the parties had intended that the documents created for the purpose of the audit were to be confidential and not disclosed by the auditor to its client, GXL, one would have expected them to provide for this. The absence of such a provision is significant given that the parties turned their minds to the topic of confidentiality in both agreements and specifically provided for confidentiality where they considered this to be appropriate.
[14] The auditor was engaged by GXL. The auditor would normally owe confidentiality obligations to GXL. The purpose of the audit was to enable GXL to obtain independent assurance of the quantum of the Initial Investment calculated by the Greymouth Companies and the quantum of royalties payable. The auditor was obliged to report to its client, GXL, as to whether the Initial Investment and the royalties payable were in all material respects in accordance with the requirements of the Royalty Deed. The ability of the auditor to meet this reporting obligation could be seriously compromised if it was not able to disclose to its client any documents it received for the purpose of the audit from the Greymouth Companies or any communications with them, whether or not these documents were commercially sensitive or otherwise intrinsically confidential.
[15] I reject the submission advanced on behalf of the Greymouth Companies that confidentiality in relation to such documents, which are not commercially sensitive, arises by necessary implication as part of the agreement for an audit. I do not consider that any such term can be implied in the Royalty Deed or the Settlement Agreement. No such term is required to give business efficacy to these agreements. They are able to operate effectively without it. The term is not so obvious that it goes without saying. On the contrary, for the reasons given, it could create real difficulty for the auditor in carrying out its task. The tests for the implication of the proposed term are not satisfied.
[16] It follows that GXL’s application must be granted.
Result
[17] The application, as amended, challenging the confidentiality claim made by the defendants in respect of the specified documents, is granted.
[18] The plaintiff is entitled to costs on the application on a 2B basis.
M A Gilbert J
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