Methanex New Zealand Limited v Nova Energy Limited

[2024] NZHC 1604

ORDER PROHIBITING PUBLICATION OF UNREDACTED VERSION OF THIS JUDGMENT.

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2024-485-263

[2024] NZHC 1604

UNDER

the Arbitration Act 1996

AND

Parts 7 and 19 of the High Court Rules 2016

BETWEEN

METHANEX NEW ZEALAND LIMITED

Applicant

AND

NOVA ENERGY LIMITED

Respondent

Hearing:

6 June 2024

Appearances:

TC Weston KC, SS Cook and E Lee for the Applicant

MG Colson KC, KJ Dobbs and MRM Gale for the Respondent

Judgment:

19 June 2024

Reissued: (Redacted)

27 June 2024

JUDGMENT OF FITZGERALD J

This judgment was delivered by me on 19 June 2024 at 4.00pm, pursuant to r 11.5 of the High Court Rules 2016. Registrar/Deputy Registrar  ………………….………….

Solicitors:        Buddle Findlay, Auckland

Bell Gully, Wellington

To:T Weston KC, Auckland M Colson KC, Auckland

METHANEX NEW ZEALAND LTD v NOVA ENERGY LTD [2024] NZHC 1604 [19 June 2024]

Introduction  [1]

Factual background  [12]
The gas industry in New Zealand –— overview  [12]
Methanex’s operations in New Zealand  [18]
Nova’s operations  [24]
Prevailing gas market conditions  [31]
Priority waterfall as between Nova’s customers  [38]

Interim measures — legal principles  [47]

The Agreement  [59]

Is there a reasonable possibility that Methanex will succeed on the merits

of its claim?  [96]

Will Methanex suffer harm not adequately reparable by an award of

damages if the interim measures are not granted?  [140]

Does the harm substantially outweigh the harm that is likely to result to the respondent if the measure is granted/what is the appropriate

exercise of the Court’s discretion?  [151]

Result and costs  [160]

Introduction

[1]    Nova Energy Limited (Nova) supplies natural gas to Methanex New Zealand Limited (Methanex) pursuant to a Gas Supply Agreement dated 20 December 2021 (the Agreement). Methanex predominantly uses the gas to produce methanol (a clear liquid commodity chemical), the majority of which it exports overseas. In 2023, petrochemical product was the largest single category of gas demand in New Zealand, accounting for approximately 40 per cent of gas usage. Methanex’s consumption of gas dominates this sector.

[2]    The gas supplied to Methanex by Nova accounts for approximately [Redacted] of Methanex’s gas supply. The remaining approximately [Redacted] is supplied to Methanex by OMV New Zealand Ltd (OMV).

[3]    In recent months, and no doubt in response to forecast gas supply shortfalls, Nova says that it carried out an assessment of its contractual obligations, its customer base, the wider market, and the impact of various gas supply scenarios on the New Zealand economy, and on 15 April 2024, advised Methanex that it would cease to supply any further gas to Methanex as of the following day.

[4]    Following discussions between the parties, Nova stopped supplying Methanex with gas as of 19 April 2024. It did so pursuant to what it says is a “deliver or pay mechanism” available to it under cl 9.9 of the Agreement, which, Nova says, gives it the option of fulfilling its contractual obligation to supply gas to Methanex by either supplying the gas or paying Methanex [Redacted] of the contract price for the gas. Nova says that, in applying this contractual mechanism, it is not in breach of the Agreement.

[5]    It appears that the gas which would have otherwise been supplied to Methanex (under a “waterfall” priority regime that applies to Nova’s customers) will instead be allocated, in part, to Fonterra Co-operative Group Limited (Fonterra) and Oji Fibre Solutions (NZ) Limited (Oji), who would have otherwise received no gas under the waterfall arrangements. Some of the gas will also be allocated to what are known as Nova’s “peakers”. These are gas “peaking facilities”, the purpose of which is to enable the production of electricity at short notice, and which can then be used to support the

national  grid of electricity.    Nova’s two gas peaker facilities  contribute  at  least 40 per cent of the “fast start” peaking capacity in New Zealand.

[6]    Methanex firmly disputes that Nova can choose not to supply it gas, and instead pay it money and allocate the gas to other Nova customers (including Nova’s own peakers). Methanex says that in doing so, Nova is in breach of the Agreement. Methanex argues that cl 9.9 is a conventional liquidated damages clause responding to Nova’s breach.

[7]    The Agreement contains an arbitration clause, and the substantive dispute will therefore need to be determined by arbitration. Methanex will apply in that arbitration for specific performance of Nova’s gas supply obligations. The parties are in the process of appointing an  arbitrator,  and  both  commit  to  a  speedy  arbitration.  Mr Colson KC, for Nova, said he expects the arbitration to be held in either the last quarter of this year or the first quarter of 2025.

[8]    Pending determination of the dispute by arbitration, Methanex seeks interim measures from the Court. Its application, filed on 15 May 2024, is brought pursuant to art 17A of sch 1 to the Arbitration Act 1996 (the Act). This confers on the Court the same power as an arbitrator to grant an “interim measure” in support of an arbitral proceeding. An “interim measure” is defined in the Act as including a temporary measure by which a party is required to maintain or “restore” the status quo pending determination of the dispute by arbitration.

[9]    Methanex seeks orders that, pending further orders of the Court or the arbitral tribunal:

(a)Nova is prevented from relying on cl 9.9 of the Agreement to fail to supply gas to Methanex; and

(b)Nova is required to deliver the gas to Methanex that it is contractually obliged to deliver under the Agreement.

[10]   It will be appreciated that these two orders are effectively the “flipside” of each other, and Methanex accepts that in substance, it seeks mandatory injunctive relief.

[11]   Methanex’s application was brought on for an urgent hearing. I acknowledge at the outset the comprehensive and helpful submissions made by both parties, which have greatly assisted me in determining the application.

Factual background

The gas industry in New Zealand –— overview1

[12]   New Zealand’s natural gas is supplied from more than 18 offshore and onshore fields in the Taranaki region (Fields). A small number of these Fields account for most of the gas production in New Zealand. Mr Hunt estimates that in 2023, the largest producers of gas were OMV (40 per cent), followed by the Todd Group (34 per cent), with the remainder spread across several other producers.

[13]   There are approximately 312,000 gas users in New Zealand. The vast majority are residential and commercial consumers who use gas for cooking, hot water, space heating, and so on. These consumers accounted for 11 per cent of total gas usage in 2023.

[14]   The next largest category of gas users (by number) is industrial consumers, which consists of entities who use gas in facilities such as boilers and high temperature furnaces. In 2023, industrial demand accounted for 18 per cent of national gas usage.

[15]   Gas fired power stations and co-generation plants (which make electricity and steam) accounted for approximately 20 per cent of total gas usage in 2023. Mr Hunt explains that this usage is concentrated at around 10 sites where gas-fired stations or co-generation are located.

[16]   Finally, petrochemical production was the largest single category of gas demand in 2023, accounting for 42 per cent of total gas usage. Mr Hunt says that consumption in this sector is dominated by Methanex.

1      Much of the following section of my judgment is taken from the affidavit of David Hunt, filed by Nova in support of its opposition to the application. Mr Hunt provides expert evidence about the gas industry in New Zealand.

[17]   Mr Hunt says that while New Zealand’s gas industry is not insubstantial, it is nonetheless very small by world standards. He also explains that it is isolated from other markets, with the absence of physical interconnection between other markets undermining the ability to import or export gas, which would otherwise act as a “shock absorber” when gas supply conditions change unexpectedly and materially. In this context, Mr Hunt explains that gas supply is not 100 per cent guaranteed and is subject to a range of uncertainties, including the performance of wells, gas processing equipment, and pipelines. Mr Hunt says that the isolation and small scale of the New Zealand gas industry means that there is heightened exposure to supply shortfalls.

Methanex’s operations in New Zealand

[18]   Methanex is ultimately owned by Methanex Corporation, a Canadian corporation. Methanex Corporation is the world’s largest producer and supplier of methanol. It currently operates production sites in Canada, Chile, Egypt, New Zealand, Trinidad and Tobago, and the United States of America.

[19]   As noted,  Methanex  uses  natural  gas  to  manufacture  methanol.  It  is New Zealand’s only methanol manufacturer and most of the methanol it produces is exported to various countries in the Asia-Pacific region.

[20]   Methanex currently operates two methanol production facilities located in Motunui, northern Taranaki, called the “Motunui 1 Train” and the “Motunui 2 Train”. It also owns a third methanol production plant (called the Waitara Valley Train, also in northern Taranaki), which is currently idled indefinitely. Each Motunui Train consumes about [Redacted] of gas per day when operated at its maximum output. [Redacted] of gas is equivalent to about [Redacted] of the daily natural gas production in Taranaki.

[21]   The continued operation of the Trains requires significant capital expenditure. For example, every five years, a Train must be shut down for an extended period in order to carry out significant maintenance and recertification (referred to as a “Turnaround”). Methanex’s Motunui 2 Train had been undergoing a Turnaround in 2023/2024, and Mr McCall (Methanex’s Managing Director) estimates that the Turnaround involved approximately [Redacted] in capital expenditure, the last

[Redacted] of which was incurred in March 2024. As discussed later in this judgment, the Motunui 2 Train was just about to come back into production at the time Nova advised that it was to cease supplying gas.

[22]   Each of Methanex’s Trains can be idled for no more than 90 days before it loses its certification pursuant to applicable regulations and standards. Accordingly, unless the two Trains are operated at the same time, Methanex is required to “idle” one Train and switch production to the other Train before the end of the 90-day period, and then vice versa 90 days later. Mr McCall says that switching between the Trains in this manner incurs significant additional costs, as well as wasted gas and lost profits on methanol production, and creates additional operational and health and safety risks. He also says that it exposes the Trains to significant stress and damage, and cannot be sustained in the medium to long-term.

[23]   Methanex will sometimes on-sell the gas provided to it, including to electricity generators over the winter months to meet demand, as part of gas swap arrangements. Mr McCall notes that while on-selling gas is not Methanex’s primary business, there is no prohibition under the Agreement to it doing so, [Redacted].

Nova’s operations

[24]   Nova is part of the Todd Group (Todd). As noted, Todd is New Zealand’s largest producer of natural gas, after OMV. The Todd production assets are the Kapuni, McKee and Mangahewa Fields, together with a 26 per cent interest in the Pohokura Field (the remaining 74 per cent is owned by OMV). The Agreement between Nova and Methanex is what is known as a “portfolio supply agreement”, which means that Nova can source gas from any or all of Todd’s Fields when supplying Methanex.

[25]   Nova owns two “co-generation” facilities (which involve gas turbines which burn natural gas to produce electricity) at Edgecumbe and Kapuni. It also co-owns, with Fonterra, a co-generation plant at Whareroa. As noted earlier, Nova also owns two gas “peaking facilities”.2

2      The McKee Power Plant and the Junction Road Power Plant.

[26]Nova’s customer base can be split into the following four main categories:

(a)first,    Nova    Retail,    which    supplies     Nova’s    residential    and industrial/commercial customers;

(b)second, its co-generation assets at Edgecumbe (dairy factory), Whareroa (diary factory), and Kapuni (gas production);

(c)third, Nova’s two peaking facilities; and

(d)finally, Nova’s wholesale customers, being Methanex, Fonterra, and Oji.

[27]   It is not in dispute that the average price Methanex pays to Nova for delivered gas is lower than other categories of gas users. Methanex is, however, a large quantity gas off-take buyer, with “take or pay” commitments. Nova has previously stated that that Methanex’s presence in the market “creates the stimulus for, and the appraisal and development of, natural gas prices that are economic for both the producer and Methanex”.3

[28]   I mentioned earlier a priority “waterfall” between Nova’s customers. This is described in more detail later in this judgment but, in short, [Redacted].

[29]   Returning to Nova’s peakers, Nova emphasises their importance at times of high energy demand. It refers to the example of 9 August 2021, when demand for power spiked considerably that evening and Nova utilised its peakers to help ensure that electricity production continued (although 35,000 people were disconnected). Nova estimates that, in order to prevent the risk of a complete nationwide black out, approximately 100,000 additional customers would have needed to have been disconnected if it had not been able to operate its peaking plants. Nova also refers to a more recent example on 9 May 2024, when Transpower issued a warning notice, which forecasted that there would be “insufficient generation … to meet demand” for

3      Todd and Nova “Submission to the Gas Industry Council’s Gas Market Settings Investigation 2021”.

electricity during what was forecasted to be the coldest morning of the year to that date. Nova operated the majority of its peakers to contribute to the injection of electricity into the national grid to meet demand.

[30]   It is also the case, however, that Methanex can act as a type of “shock absorber” in the New Zealand gas market. Mr Hunt explains that Methanex’s export volumes have declined when New Zealand gas supply has been tight, which has in turn reduced other New Zealand consumers’ exposure to gas supply risk. Conversely, its export volumes have ramped up when there has been adequate local gas supply. While acknowledging that Methanex “flexing” its gas usage in this way carries with it costs and operational implications, Mr Hunt says that the historical evidence clearly shows that Methanex has altered its local gas usage very substantially in line with changes in the availability and price of gas, in both the long and short terms.

Prevailing gas market conditions

[31]   Mr Hunt addresses what he describes as a “sharp contraction” in New Zealand’s near-term gas supply. He refers to a recent announcement, on 8 May 2024, made by the Minister of Energy, the Hon Simeon Brown, who referred to an assessment from the industry coregulator, the Gas Industry Company (GIC), of the current situation as being “dire”, and that there is insufficient gas available to meet all contracted demand. Mr Hunt also refers to projections of gas supply produced by GIC, which shows what he describes as a “decaying production profile over time”.

[32]   Mr Hunt says that, by itself, that is not especially unusual for mature fields that require ongoing investment to extend production. He notes that in this way, there has been a widespread expectation of declining gas production over time. Mr Hunt states, however, that the much more significant issue is the sharp cut in predicted near-term supply with each successive new updated projection. Mr Hunt’s understanding is that the cuts in the production forecasts reflect unexpectedly bad results at almost all of New Zealand’s major gas fields  from  development  work  undertaken  in  the last 18 months. He also points to the consequent rise in wholesale gas prices, which, he says, should stimulate increased development activity by gas producers and, in turn, lift supply more in line with the expected projections. However, Mr Hunt states:

… a supply-side response will not be immediate because it takes time for gas producers to plan and execute development activity. For example, arranging an offshore rig could take more than 12 months. There is also no certainty that such efforts will be successful. For these reasons, I consider it likely that the very tight supply conditions will persist for some time.

[33]   Mr Bahirathan, the Chief Executive Officer of the Downstream Energy Division of Todd, and Chief Executive Officer of Nova, also gives evidence of what he considers to be a significant  gas  supply  shortfall.4  He  states  that,  in  2021, New Zealand’s gas producers forecast producing around 210 petajoules (PJs) of gas in 2024.5 As recently as October 2023, it was forecast that 170 PJs would be produced in 2024. Mr Bahirathan states that the current expectation is that only 120 PJs of gas will be produced this year, being 90 PJs below the 2021 forecast.

[34]   Mr Bahirathan also refers to the Minister of Energy’s recent interest in what is occurring in the gas industry, and explains that the Minister urgently convened a working group, the “Gas Security Response Group”, which both he and Mr McCall are involved in. Mr Bahirathan says that it is clear from the material gathered by the working  group  that  there  is  a   [Redacted]   shortfall   in   supply   [Redacted].   Mr Bahirathan states that, at the same time as there is a [Redacted] gas shortage, Transpower, as the national electricity grid owner and operator responsible for monitoring and managing security of supply in the electricity system, has been calling on all thermal generation to be available to maintain electricity supply during cold winter mornings and evenings, as well as to provide make up electricity given the current low levels of hydro lakes.

[35]   Those giving affidavits on behalf of Methanex acknowledge the difficult time the New Zealand gas industry is currently experiencing. For example, Mr Reid, Gas Supply Manager at Methanex, says that the gas market has had “a tough year”. He says, however, to assume the decline will be sustained and is irrevocable is an

4      Much of both parties’ executives’ affidavits are in the form of opinion evidence. There was no challenge to the admissibility of any of this evidence, but none of the executives are independent or qualified themselves as experts for the purposes of the High Court code of conduct for expert evidence (High Court Rules 2016, sch 4). I take these matters into account when determining what weight I ascribe to the evidence.

5      One PJ, in terms of volume measured in cubic metres, would fill around 10 million Olympic sized swimming pools, assuming each pool has about 2,500 cubic metres of water. 1000 TJs make up one PJ, and 1000 gigajoules make up one TJs.

unwarranted extrapolation of current circumstances, given the history of the market. Mr Reid states that, due to the risk and uncertainties in gas production development, there is often a time lag between a shortage, gas prices increasing, and market players coming in to benefit from the increased prices with further development and exploration. This, together with other factors, contributes to why in his view there is almost always a declining projection of gas supply. The central thrust of his evidence is that when there is a shortage, market forces ensure that additional supply is introduced, i.e. through gas production expansion attracted by increased prices, which ultimately “shifts the supply curve to the right”.

[36]   Similarly, Mr McCall states that New Zealand’s long term gas forecasts almost always show a sharp decline after three to five years and “this has been true for as long as [he] can remember”. Again, his view is that the medium to long term decline predicated in the materials filed on behalf of Nova will only transpire if there is insufficient upstream investment in gas field development and exploration initiatives, which, Mr McCall states, has not been the case for the past 10 years. Mr McCall says that while 2024 has so far been shown to be a “relatively tough year for gas supplies”, there are new supplies on the horizon from around late 2024 onwards.

[37]   As all parties accepted at the hearing, it is neither possible nor necessary for me to reach any concluded views on the future state of the New Zealand gas supply market, and whether the somewhat pessimistic predictions in the materials filed on behalf of Nova are correct, or whether the slightly more optimistic picture painted by Methanex is correct. This would of course be impossible. What I do not think is in doubt, however, is that there is currently a reasonably tight gas market, with the result that entities, such as Nova, are looking carefully at their gas supply obligations. Nova’s resort to what it says is the “option” given to it under cl 9.9 of the Agreement is clearly a response to the present situation.

Priority waterfall as between Nova’s customers

[38]   Mr Viviers, General Manager of Wholesale and Trading at Nova, provides an explanation of the contracted amounts of gas to be supplied to Nova’s customers, and

the contractual priorities as between those customers. This “waterfall” is largely not in dispute and any minor differences are not relevant to the current application.

[39]   Mr Viviers explains that the total contracted demand from Nova for the current contractual year is [Redacted] PJs, broken down as below:

Contracted Demand
[Redacted]
Total	[Redacted]

[40]   Due to the current gas shortfall, [Redacted]. As a result, available supply is now [Redacted] PJs, a (contractually permitted) shortfall of [Redacted] PJs from the [Redacted] PJs shown above.

[41]   Mr Viviers explains that pursuant to the contractual priority waterfall, the [Redacted] PJs as available supply are allocated across Nova’s customers as follows:

Outcome of Contract Allocation		Methanex Contract Allocation
Kapuni	[Redacted]	[Redacted]
[Redacted]
M&M	[Redacted]
[Redacted]
Poho	[Redacted]
[Redacted]

[42]   The allocations on the left-hand side above show the priority allocations by way of Field. As noted earlier, [Redacted]. However, as also noted, [Redacted], reflected in the [Redacted] PJs allocated to [Redacted] in the left-hand column.

[43]   The right-hand column is the aggregate gas to be supplied by Nova to its customers, in the absence of its adoption of cl 9.9. [Redacted].

[44]Mr Viviers then says the following:

However, Nova does not simply stop at clause 7.1 [the priority waterfall provision]. It has made a considered assessment of its contractual obligations, its customer base, the wider market and the impact of this on the New Zealand economy. Nova has determined to apply clause 9.9 and made a choice to pay for volumes not delivered to Methanex rather than deliver them.

[45]   By “applying” cl 9.9, Nova proposes to allocate the available gas supply as follows:

[Redacted]

[46]   It is relevant to note at this stage that Fonterra has a call option in its gas supply agreement with Nova by which it can call on gas that is otherwise allocated to [Redacted]. Mr Colson confirmed in response to a question from me that it is a fair inference that the proposed allocation of [Redacted] PJs to Fonterra as shown above is Nova’s best assessment of what will be sufficient to either mean Fonterra does not need to call on gas that would otherwise be allocated to [Redacted] or, if it did so, this would not significantly or adversely affect [Redacted]. I mention this matter now as it is relevant to the suggested irreparable harm to Fonterra were Methanex’s application to be successful.

Interim measures — legal principles

[47]   The statutory basis for the High Court to grant interim measures where the substantive dispute is to be referred to arbitration is contained in art 9 of sch 1 to the Act:

9       Arbitration agreement and interim measures by court

(1)It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure and for a court to grant such measure.

(2)For the purposes of paragraph (1), the High Court or the District Court has the same powers as an arbitral tribunal to grant an interim measure under article 17A for the purposes of proceedings before that court, and that article and article 17B apply accordingly subject to all necessary modifications.

[48]   Relevantly for present purposes, an “interim measure” is defined in art 17 of sch 1 of the Act as meaning “a temporary measure … by which a party is required … to … maintain or restore the status quo pending their determination of the dispute”.6 Methanex seeks orders that “restore” the status quo, in terms of the restoration of the supply of gas to it under the Agreement pending the dispute being determined by arbitration.

[49]   Articles 17A and 17B of sch 1 of the Act set out the test for granting interim measures:

17A Power of arbitral tribunal to grant interim measure

Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant an interim measure.

17B   Conditions for granting interim measure

(1)     If an interim measure of a kind described in subparagraph (a), (b), or

(c) of the definition of that term in article 17 is requested, the applicant must satisfy the arbitral tribunal that—

(a)      harm not adequately reparable by an award of damages is likely to result if the measure is not granted; and

(b)      the harm substantially outweighs the harm that is likely to result to the respondent if the measure is granted; and

6      Arbitration Act 1996, sch 1, art 17.

(c)      there is a reasonable possibility that the applicant will succeed on the merits of the claim.

…

(4) A determination by the arbitral tribunal on the matter specified in paragraph (1)(c) does not affect its discretion to make any subsequent determination.

[50]   Asher J considered arts 17A and 17B in some detail in Safe Kids in Daily Supervision Ltd v McNeill.7 The authors of Williams & Kawharu on Arbitration suggest that the following principles can be drawn from Asher J’s analysis:8

(1)Under art 17A, the power of an arbitral tribunal or court is discretionary.

(2)Article 17B(1) specifies three preconditions that the applicant must establish, but those three matters are not exclusive considerations. The general discretion set out in art 17A is expressed without fetter so that the tribunal or court is not precluded from considering other matters.

(3)Since the court’s powers to grant interim relief are expressed to be identical to those of an arbitral tribunal, the full range of considerations that would apply in the High Court on an application for an interim injunction do not apply. Thus, matters such as the public interest and the consequences to innocent third parties are not matters that naturally fall within the ambit of a tribunal.

(4)While an arbitral tribunal has the remedial powers of the High Court under s 12 of the NZ Act, it does not follow that a tribunal has the inherent jurisdiction of that court. At the very least, a court or tribunal will exercise considerable caution before going beyond the considerations specifically set out in art 17B(1). In particular, Asher J considered that a tribunal would hesitate to consider the “overall justice” in such circumstances, and limit its considerations to those in art 17B(1).

(5)As to the matters listed in art 17B(1)(a) and (b), they cover much of the essential traditional balance of convenience considerations considered by the courts in interim injunction applications. A fundamental consideration in such applications is whether the harm in question is adequately reparable by an award of damages. Another fundamental issue in such applications is whether the harm complained of by the applicant for interim measures will substantially outweigh the harm the opposing party is likely to suffer if relief is granted and that party ultimately succeeds. The consideration of these issues involves an analysis of the practical effects of the granting of an injunction. It also involves an assessment of the financial situation of both parties. An applicant’s delay in seeking interim relief is a further relevant consideration.

7      Safe Kids in Daily Supervision Ltd v McNeill [2012] 1 NZLR 714 (HC).

8      David Williams and Amokura Kawharu (eds) Williams & Kawharu on Arbitration (2nd ed, LexisNexis, Wellington, 2017) at [9.3.4] (footnotes omitted).

…

(7)When considering the granting of interim orders, it may be convenient to reverse the order of considerations specified in art 17B(1). It may be better to follow the usual process in High Court interim injunctions of first considering whether there is a serious question to be tried (or a reasonable possibility that the applicant will succeed) and then going on to assess the balance  of  convenience  considerations  set  out  in art 17B(1)(a) and (b).

(8)The provisions of art 17B(1)(a) and (b) require the consideration of whether the harm caused by the respondent is adequately reparable by an award of damages to the applicant, and whether that harm substantially outweighs the harm that the respondent is likely to suffer if the interim relief is granted. This is essentially a balance of convenience assessment in any event.

(9)The High Court has interpreted the “real possibility of success” threshold, contained in art 17B(1)(c), as the equivalent of the usual interim injunction test of “serious question to be tried”.

[51]   A particular issue arising in this case is whether harm to third parties (namely Fonterra and Oji) can be taken into account when considering whether to grant interim measures.

[52]   Mr Weston KC, for Methanex, notes that art 17B(1)(b) refers only to the harm likely to result to “the respondent”, which, he submits, necessarily precludes the Court from taking into account suggested harm to other parties. Despite this primary submission, however, Mr Weston accepts it is a somewhat unattractive argument. Consistent with the discussion in Safe Kids, however, he nevertheless submits that the Court should exercise considerable caution in going beyond the considerations specifically set out in art 17B(1).

[53]   Unsurprisingly, Nova submits that it is appropriate to take into account the suggested harm to third parties were the interim measures to be granted. Mr Colson refers to Venning J’s observations in Rau Paenga Ltd v CPB Contractors Pty Ltd9 to the effect that neither Safe Kids nor Prestige Motors10 (a further decision of this Court,

9      Rau Paenga Ltd v CPB Contractors Pty Ltd [2023] NZHC 2974 at [80].

10 Prestige Motors Ltd v My Trustee Co (Nikolas and Petra) Ltd [2021] NZHC 237. In that case, Gordon J was not called upon to consider the issue in any detail, and simply observed (at [26]) that “in the arbitration context, it is less likely that public interest, third party considerations or overall justice factors will be considered”.

which briefly discussed this issue) held that harm to third parties could never be taken into account when considering an interim measures application. Venning J stated:11

Each case must be considered in its own context. The harm to the interests of the third parties in the present case relied on by RPL is harm to parties closely aligned with RPL. I consider it open to the Court to consider such harm, noting that harm under art 17B is not qualified by reference to harm to the applicant.

[54]   Mr Colson also refers to Wylie J’s approach in New Zealand Association of Credit Unions v Finzsoft Solutions (New Zealand) Ltd, in which the Judge expressly took into account the potential impact on third party “Mum and Dad” Credit Union customers when considering whether to grant relief.12 In that case, the Court acknowledged that although the third parties would “not be parties to any arbitration”, the Court should nevertheless “not be shy when exercising the power conferred on it under … the Act”.13

[55]   While it is correct that art 17B(1)(b) refers only to the harm to the respondent, this does not, in my view, preclude the Court from taking into account suggested harm to third parties. As noted, Mr Weston did not seek to (strongly) argue to the contrary and, in my view, he was right not to do so. Certainly, the threshold for granting interim measures will not be made out unless the harm likely to result if the measures are not granted substantially outweighs the harm to the respondent that is likely to result if the measures are granted. But that does not mean that harm to other parties is irrelevant. Ultimately, the granting or otherwise of interim measures involves the exercise of a discretion under art 17A and, in my view, there is nothing in the statutory scheme that precludes the Court (or an arbitral tribunal) from taking into account third party interests.

[56]   This approach is consistent with the proposition set out in principle (2) in the above extract from Williams & Kawharu on Arbitration.14 It also seems unlikely, in my view, that Parliament intended that interim measures might be granted by a Court or arbitral tribunal even where there was clear and compelling evidence before the

11     Rau Paenga Ltd v CPB Contractors Pty Ltd, above n 9, at [83].

12     New Zealand Association of Credit Unions v Finzsoft Solutions (New Zealand) Ltd [2019] NZHC 3198.

13 At [27]. See also [41]–[42].

14     At [50] above.

Court or arbitrator of serious irreparable harm to third parties were the interim measures to be granted, and which significantly outweighed any irreparable harm to the applicant were the interim measures not to be granted.

[57]   In this context, I note that Asher J’s observation in Safe Kids that consequences to innocent third parties are not a matter that would naturally fall within the ambit of an arbitral tribunal was tied to the proposition that the arbitral tribunal derives its jurisdiction from the contract between the parties, and that in exercising a discretion, an arbitral tribunal would not usually regard itself as being equipped to consider wider public and third party interest considerations. It is of course correct that an arbitral tribunal derives its jurisdiction from the parties’ agreement. However, in cases such as this, where evidence addressing harm to third parties has been put before the Court, I can see no reason why the Court (or the arbitrator, as the case may be) would not be equipped to consider and take into account that evidence in the same way as all the other evidence before it.

[58]   I will therefore approach the application by taking into account the suggested harm to Fonterra and Oji were the interim measures to be granted.

The Agreement

[59]   As the nature and content of the Agreement is central to several of the issues arising on the application, it is helpful to address it now, prior to turning to the thresholds I must be satisfied of before exercising my discretion to grant interim measures.

[60]   The Agreement is a bespoke, detailed, and at times complex contract between two sophisticated commercial parties. It also follows on from a history of prior contractual dealings between them.

[61]   The Agreement is, self-evidently, an agreement governing the supply of gas by Nova to Methanex. The Agreement is clearly not a contract for the supply of a specified quantity of gas, at a specified price. Reflecting that there may be constraints on the amount of gas available at any given time, and that the gas and methanol prices will fluctuate, the Agreement contains a detailed and carefully calibrated set of

contractual rights and obligations concerning Nova’s supply of gas to Methanex, and Methanex’s taking of gas from Nova.

[62]   I now address some of the key provisions of the Agreement that bear on the key issues arising on Methanex’s application.

[63]   Clause 2.1 of the Agreement provides that “Nova will supply gas to Methanex, and Methanex will purchase and pay for gas from Nova, upon the terms set out in this agreement”. That is all very straightforward.

[64]   Clause 2.3 provides that Nova has no obligation to supply gas from any source other than gas from the Fields (as defined in the Agreement). Again, this is straightforward.

[65]   Clause 2.4 governs Methanex’s ability to on-sell gas supplied to it under the Agreement. [Redacted].

[66]   Clause 3 contains a series of warranties requiring Nova to use its commercially reasonable endeavours to procure from related parties sufficient gas to supply in accordance with the Agreement.

[67]   Clause 6 is of some importance to the current application. Pursuant to cl 6.1, there is a “Target AQ” (Annual Quantity) for each contract year, subject to Methanex’s right to reduce the Target AQ in accordance with the Agreement. Clause 6 permits Nova to increase the Target AQ for any contract year from 2024 onwards, up to a specified maximum for the relevant contract year, by giving at least 20 days’ notice, but Methanex must confirm in writing its agreement to any such increase within a further 15 days.

[68]   Clause 6.2 provides that [Redacted] months prior to the contract year, Nova must nominate the quantity of gas available for delivery to Methanex during the upcoming contract year. The quantity nominated by Nova under cl 6.2 — referred to as the “Notified AQ” — must be the Target AQ for that contract year, unless certain

specified circumstances arise and reduce it (such as a force majeure event). The Notified AQ must not be greater than the Target AQ for the relevant contract year.

[69]   Clause 6.3 governs Methanex’s response to the Notified AQ. Not later than [Redacted] months prior to the commencement of the relevant contact year, Methanex is required to accept in writing (or be deemed to accept), or reject, the Notified AQ:

(a)Methanex must accept the Notified AQ if it is equal to the Target AQ. This then becomes the “Confirmed AQ”.

(b)If the Notified AQ is between [Redacted] and 100 per cent of the Target AQ, Methanex must [Redacted].

(c)If the Notified AQ is less than [Redacted] per cent of the Target AQ, Methanex can [Redacted].

[70]   These provisions no doubt enable Methanex to manage the supply against its operations and any potential other supplies it can secure. As Nova submits, it also provides Methanex with a reasonably broad discretion to decline to take some, or potentially any, gas, though I observe that is only if the Notified AQ is less than [Redacted] per cent of the Target AQ.

[71]   Clause 6 also requires various types of information to be provided by Nova to Methanex, such as (closely defined) Field information. Clause 6 further requires Nova to promptly notify Methanex of any “CRE Shortfall”. A “CRE Shortfall” is the subject of a reasonably extensive definition, but essentially reflects a position where the continued operation of a Field may become uneconomic. Clause 6 also provides for meetings to be held following the provision of certain information by Nova to Methanex.

[72]   Clause 7 contains the priority waterfall of gas supply between Nova’s customers that has been discussed earlier in this judgment. Clause 7.1(a) provides:

Nova may commit available Gas to other buyers however Nova shall fulfil Methanex’s Nominated Quantity for a Day (up to and including Max DQ for that Day) subject to the operation of clause 7.1(b) and clause 10.1 …

(emphasis added)

[73]   The reference to “Max DQ” is, for the contract years 2024 and beyond, the confirmed AQ for the relevant year, divided by 365. Methanex’s “Nominated Quantity” is discussed below in relation to cl 8. As can be seen from cl 7.1(a), Nova’s obligations under that clause are subject only to the operation of cls 7.1(b) (the priority waterfall) and 10.1.

[74]   It is helpful to jump forward and say a little more about cl 10 (“Continuity of Supply”). The chapeau to cl 10.1 provides that:

Subject to the provisions of this Agreement, Nova will maintain a continuous supply of gas to the Delivery Point, provided that … Nova is not obliged to sell or deliver (or make available for sale or delivery) gas to the extent that such gas is not delivered to the delivery point for [various reasons] …

[75]   The clause goes on to set out a number of defined exceptions to Nova’s obligation to supply gas. These include:

(a)where the operators of the Fields reasonably considering there to be a risk to plant (cl 10.1(c)), or life or property (cl 10.1(d)) from continued supply;

(b)when repairs are being carried out (by reference to a “Repair Volume” set out in cl 11) (cl 10.1(e));

(c)force majeure events (as defined in the Agreement) (cl 10.1(f));

(d)where “Nova has exercised its rights under cl 10.3 or sections 18, 19 or 20” (as to which, see below) (cl 10.1(h)); and

(e)circumstances where Nova has allocated gas to other parties as permitted by the waterfall arrangements in cl 7.1 (cl 10.1(j)).

[76]   As can be seen, cl 10.1(h) does not expressly refer to Nova exercising any rights it might have pursuant to cl 9.9 of the Agreement.

[77]   Turning back to the nomination and approval process, cl 8 deals with a process by which Methanex is to nominate how much gas it wishes to take daily over the course of the following week. This is referred to as the “Nominated Quantity”. Methanex’s nomination is to be made not later than [Redacted] on the Friday of the week prior.

[78]Clause 8.1 goes on to provide:

In providing its weekly nominations under the clause 8.1, Methanex shall be entitled to nominate Nominated Quantities without regard to any information or notifications that Nova may have provided to Methanex prior to making such nomination, it being acknowledged and agreed that clause 10.1 should only be applied in relation to Nominated Quantities as and when Nova is accepting or not accepting any Nominated Quantities in accordance with clause 8.2.

[79]Clause 8.2 in turn provides that:

Not later than [Redacted] on the last business day in each week during the supply period, Nova will give written notice to Methanex of … acceptance of any Nominated Quantities or, if not accepted, the quantity of gas that Nova will deliver to Methanex on each day of the following week …

[80]   The clause also requires Nova to give written notice to Methanex of certain matters, including any expected relief to be claimed by Nova for force majeure, notification of any forecast “supply interruption” pursuant to cl 18 of the Agreement (see below), and certain forward-looking information about Nova’s forecasts for supply over the three weeks following the relevant week in question.

[81]   The final paragraph in cl 8.2 is of some relevance to the present application. It provides:

Subject to clause 10.1, Nova shall be required to accept any Nominated Quantity up to and including the Max DQ for the relevant day and may in its absolute and unfettered discretion accept a Nominated Quantity in excess of the Max DQ.

(emphasis added)

[82] This requirement ties back into the last paragraph of clause 8.1, set out at [78] above. It also makes clear that Nova is contractually obliged to accept a Methanex Nominated Quantity (up to and including the Max DQ), subject only to cl 10.1. Again, there is no reference to cl 9.9.

[83]   The quantity of gas to be delivered by Nova as determined in accordance with cl 8.2 is defined as an “Approved Nomination”.

[84]   Clause 9 turns from the allocation and notification process, utilised in order to arrive at the amount of gas Nova is to supply to Methanex, to the actual delivery of gas.

[85]   Clause 9.3 is effectively Methanex’s take or pay obligation under the Agreement. It provides:

9.3     Methanex to pay for Gas up to Approved Nomination

Subject to the provisions of this agreement:

(a)on each Day, Nova shall make available for sale and delivery at the Delivery Point a quantity of Gas equal to the Approved Nomination for that Day; and

(b)Methanex may, on any Day, purchase and take delivery of a quantity of Gas equal to (but not exceeding) the Approved Nomination for that Day; and

(c)Methanex shall in any event make the payments specified in clauses

14.1 and 14.2 irrespective of whether or not it purchases, or takes delivery of, any Gas.

[86]   Clause 9.9 is of course of central relevance to Methanex’s application and it is appropriate to set it out in full:

9.9     Deliver or Pay — Approved Nomination and Make Up Gas

If:

(a)on any Day Nova declines to accept any part of a Nominated Quantity (equal to or less than Max DQ), or fails to make Gas available for delivery in accordance with an Approved Nomination, for any reason for which Nova is not relieved from its obligation to accept such Nominated Quantity or to deliver such Approved Nomination pursuant to clause 10.1, then Nova will pay Methanex an amount equal to [Redacted] of the applicable Gas Price multiplied by the quantity of the unaccepted Nominated Quantity or the Approved Nomination (in GJ) not made available for delivery (as the case may be);

(b)as at the last Day of CY 2023, Nova has failed to make available for delivery the Make Up Gas Quantity for any reason for which Nova is not relieved from its obligation to deliver the relevant Make Up Gas Quantity pursuant to clause 10.1, then Nova will pay Methanex an amount equal to [Redacted] of the applicable Gas Price multiplied by the shortfall quantity.

Notwithstanding clause 17.7(a) and subject to any election by Nova pursuant to clause 22.4, Nova’s maximum liability under this clause is not limited where its liability resulted from Nova’s Wilful Default but otherwise is limited for each Contract Year to the greater of US$[Redacted] and NZ$[Redacted] (reduced pro-rata for each Contract Year less than 365 Days). This calculation shall be undertaken using the USB/NZD exchange rate listed on the Exchange Rate as at the date the payment to be made by Nova under this clause 9.12 is due under this agreement.

Provided Nova meets its obligation to pay the amounts to Methanex under this clause 9.9 by the applicable due date (such amounts to be invoiced and paid monthly in accordance with clause 15.12), Nova’s failure to make Gas available for delivery in accordance with an Approved Nomination of declining to accept any part of a Nominated Quantity (equal to or less than Max DQ) or failure to deliver the Make Up Gas Quantity shall not be a breach of this agreement for the purposes of clause 22.1(a)(i)(B).

[87]   As can be seen, Nova is required to make the payments to Methanex required by cl 9.9 “notwithstanding cl 17.7(a)”. Clause 17.7(a) is a reasonably detailed limitation of liability provision.

[88]   Clause 9.9 also provides that the cap on Nova’s liability under that clause does not apply in the case of Nova’s “Wilful Default”. Wilful Default is defined as “a breach of this agreement by a party in circumstances in which that party acts with an

intentional, deliberate or conscious disregard of any of its obligations under this agreement.”

[89]   Clause 9.9 also refers to cl 22.1(a)(i)(B). Clause 22.1 deals with termination rights, and sets out several grounds pursuant to which a party (referred to as the “Non- defaulting Party”) may give notice of termination of the Agreement.   Pursuant to    cl 22.1(a)(i)(B), one of those grounds is where a party (referred to as the “Breaching Party”) has failed to:

… comply with, observe or perform any other material provision of this agreement (other than as a result of a failure arising from force majeure or in respect of which the breaching party otherwise is entitled to relief pursuant to this Agreement).

[90]   The effect of cl 9.9 is accordingly to suspend Methanex’s right of termination based on Nova’s failure to supply gas, so long as Nova continues to pay Methanex those amounts required by cl 9.9.

[91]   Methanex’s right to terminate is, however, resurrected under cl 22.4, in circumstances where Nova’s failure to supply gas reaches certain threshold levels (referred to as “Rejected Gas”). However, upon Methanex giving notice of termination pursuant to cl 22.4, Nova may in turn give notice to Methanex that it will continue to pay the required amounts under cl 9.9 and, in such circumstances, Nova’s liability cap in cl 9.9 will not apply to any further “Rejected Gas” exceeding the thresholds specified in cl 22.4. Again, therefore, Methanex’s termination rights are suspended for so long as Nova continues to pay Methanex in accordance with cl 9.9. The position is then effectively “reset” upon the relevant contract year elapsing, at which time Nova is permitted to cease paying amounts provided for under cl 22.4, and Methanex’s termination notice is deemed to be of no further effect, subject to Methanex being permitted to give further termination notices if and when the thresholds for Rejected Gas are subsequently met.

[92]   Also of some relevance to the present application (and relied on by Methanex in particular) is cl 17.6, which provides:

17.6 Equitable relief

Each of the parties agrees that damages may not be an adequate remedy and that, in addition to all other remedies expressly provided for under this agreement (including this section 17), a party shall be entitled to seek equitable relief, including injunction and specific performance, in the event of any breach, or anticipated breach, of this agreement.

[93]   Clause 18.1 (upon which Nova places some reliance) permits Nova to interrupt supply to Methanex on any given day, without payment, pursuant to a formula which is based on whether one or more Trains are operating across the Methanex facilities on that day. The formula is calculated by reference to quantities of gas (if any) that Nova is relieved from supplying pursuant to cl 10.1, as well as a further quantity of gas (not exceeding a specified amount on any given day) that, on giving not less than 10 business days’ notice to Methanex, Nova may elect not to supply during planned maintenance periods at one or more of the Fields. However, Nova is only permitted to make such an election in relation to no more than 10 days in any contractual year, and the total amount of gas that may be “interrupted” is subject to an aggregate cap. Nova’s rights under cl 18.1 are also subject to a reasonably long list of “supply interruption conditions”, for example: that there are to be no such interruptions in 2022 or 2023; from 2024, any such interruption must be on four months’ notice to Methanex (and on three months’ notice from 2025); that no interruptions can occur in a contract year with a Confirmed AQ of a specified amount or less; and that no supply interruption can be undertaken on any day that would require Methanex to take a Train offline.

[94]   Clause 19 is a similarly detailed exception to the supply of gas, pursuant to which a party may suspend the supply of gas in response to regulatory events. The provision is again highly prescriptive, and includes provisions for notice periods and negotiations.

[95]   Finally, cl 20 provides Nova with a right to suspend its supply obligations if the gas price meets certain thresholds set out in that clause. Nova is required to give Methanex at least 10 business days’ notice of a proposed suspension, in response to

which Methanex can elect to pay a certain gas price to Nova for a specified period (effectively to “top up” the price), upon which Nova’s suspension notice will be of no effect. Methanex has a similar right of suspension pursuant to cl 21 if methanol prices meet certain thresholds. Again, Nova may “trump” Methanex’s proposed suspension with an election to “top up” the methanol price. Any period of suspension under these clauses will only give rise to a right of termination by the non-suspending party when the suspension lasts for more than [Redacted] consecutive days, or [Redacted] days in aggregate.

Is there a reasonable possibility that Methanex will succeed on the merits of its claim?

[96]   I am conscious that the parties have chosen that any dispute arising out of the Agreement is to be determined by an arbitral tribunal, and that the Court is accordingly dealing with this matter on an interim basis only, and in light of incomplete evidence. In the equivalent setting of determining an application for an interim injunction, it is well established that it is not the Court’s role to determine difficult questions of law.15 And as Gault J recently said in Hawkins Ltd v Elizabeth Properties Ltd:16

[49] In some cases the proper interpretation of a contract may amount to such a difficult question. It is not the Court’s function on an interim injunction application – or always feasible under urgency – to determine such a question of interpretation in what may be in effect a final ruling.

It is therefore important that I do not go further than is necessary to determine whether Methanex has a reasonable possibility of success at the arbitration.

[97]   For the reasons which follow, I am satisfied that there is a reasonable possibility that Methanex’s suggested interpretation of cl 9.9 will prevail at the substantive hearing.

[98]   First, I acknowledge Nova’s submission that cl 9.9 is but one provision in a suite of provisions that permit either Nova or Methanex not to supply or take gas, potentially over reasonably lengthy periods of time. I also accept Nova’s submission

15     American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 407.

16     Hawkins Ltd v Elizabeth Properties Ltd [2024] NZHC 561.

that certainty of supply, which Methanex says is so important to it, is not reflected in the Agreement by way of any minimum amount of gas which Nova must supply.

[99]   Nevertheless, the process for engagement between the parties on the expected amounts of gas to be supplied by Nova and taken by Methanex is detailed and highly prescriptive, starting with the broader Target AQ and gradually narrowing over time, through a range of communications and notices, to an Accepted Nomination, and culminating in gas actually being delivered. While the contractual provisions relieving Nova of its obligation to supply gas to Methanex (such as cl 10.1, and its suspension rights under cls 18 and 20) can have a significant impact on the amount of gas to be supplied, those provisions are carefully crafted, with similarly detailed notice and other processes surrounding them. It seems tolerably clear that the intention of such notice periods and processes is to afford each party the opportunity to forward plan and to respond to ongoing changes in the availability and price of gas (and the price of methanol), depending on the operational and/or economic feasibility of doing so.

[100]  In this context, and assuming Nova’s interpretation of cl 9.9 is right, it sits alone in its simplicity, despite its potentially profound consequences across the contract term. On Nova’s interpretation, cl 9.9 essentially permits it to “turn off the tap” whenever it so chooses, with no required notice to or other contractual process of engagement with Methanex. The bluntness of the suggested right under cl 9.9 is evident from Nova’s communication to Methanex in the present case, where a telephone call was made, notifying Methanex that no further gas would be supplied to it as of the following day, for an unspecified period of time. It seems somewhat unlikely that in the context of the detailed and carefully crafted gas supply and take regime set out in the Agreement, the parties would have negotiated such a provision, which in theory could be deployed by Nova with a degree of randomness — both in terms of turning the gas off and turning it back on.

[101]  In correspondence between the parties, Nova has offered to agree some additional operating parameters regarding cl 9.9. However, I accept Mr Weston’s submission that the fact that such additional terms now need to be offered undermines the proposition that cl 9.9 was intended to be a provision enabling Nova to turn off the

gas and turn it back on again as and when it chooses, without being in breach of the Agreement.

[102]  Second, in the summary of the contractual provisions of the Agreement relevant to the present dispute, I observed that a number of those provisions addressing Nova’s obligations in relation to the nomination and acceptance process were subject to cl 7.1 and/or cl 10.1, but not cl 9.9. Mr Colson responds that those provisions are directed to the “approvals” or “allocations” arrangements, by which the volume of gas that Nova is obliged to supply is determined. Mr Colson says that cl 9.9 then provides that that supply obligation can be met by either supplying gas or by payment of those amounts required under cl 9.9 and for this reason, it is not surprising that the provisions are not said to be subject to cl 9.9. I consider there is some merit in this argument, other than in relation to the absence of any reference to cl 9.9 in cl 10.1(h) of the Agreement. Clause 10 concerns the actual supply of gas by Nova to Methanex. It seems a little odd that such a provision is not subject to Nova’s suggested right under cl 9.9, namely to fulfil its obligation to supply gas by either physically supplying gas or paying Methanex money. This is particularly so when the clause expressly refers to other contractual rights that relieve Nova from delivering gas to Methanex. The point is not determinative, but it adds to the overall contractual context in which cl 9.9 is to be construed.

[103]  Third, it is also arguable that the language of cl 9.9 is inconsistent with the clause providing Nova with an option as to how it fulfils its contractual obligation to supply — with the result being that exercising that option does not put Nova in breach of the Agreement. For example, the obligation on Nova to make payments under cl 9.9 is expressly said to be “notwithstanding cl 17.7(a)”. Clause 17.7 is a liability cap, in relation to any “compensation for any loss or damage” that may be payable. It seems a little odd to refer to a cap on liability for “compensation for any loss or damage” if cl 9.9 is merely a permitted (alternative) way in which Nova may perform its obligation to supply.

[104]  Similarly, cl 9.9 provides that Nova’s maximum “liability” under the clause is not limited where its “liability” results from Nova’s “Wilful Default”. Again, this terminology has the hallmarks of cl 9.9 being a response to Nova’s breach of a

contractual obligation, including in circumstances where that breach rises to the threshold of Wilful Default. Further, cl 9.9 provides that, so long as Nova makes the required payments to Methanex, Nova’s “failure to make gas available for delivery in accordance with an Approved Nomination” or “declining to accept any part of a Nominated Quantity” are not to be considered a breach of the Agreement “for the purposes of cl 22.1(a)(i)(B)” — i.e. a breach giving rise to a right of termination. If Nova’s argument were right, the clause might be expected to say that such actions were not a breach of the Agreement at all, so long, of course, as the amounts payable under cl 9.9 were paid.

[105]  Accordingly, it is quite arguable, in my view, that Nova’s actions in either declining to accept any part of a Nominated Quantity, or failing to make gas available for delivery in accordance with an Approved Nomination (other than when cl 10.1 provides relief), put Nova in breach of the Agreement, even when it pays those amounts required under cl 9.9. This is supported by:

(a)the language of cl 8.2,17 which states that “subject to clause 10.1, Nova shall be required to accept any Nominated Quantity up to and including the Max DQ …” (emphasis added);

(b)the language of cl 9.3(a),18 which provides that “subject to the provisions of this agreement … on each Day, Nova shall make available for sale and delivery at the Delivery Point a quantity of Gas equal to the Approved Nomination for that Day …” (emphasis added); and

(c)the language of cl 9.9 itself,19 which provides that if “on any Day Nova declines to accept any part of a Nominated Quantity … or fails to make Gas available for delivery in accordance with an Approved Nomination, for any reason for which Nova is not relieved from its obligation to accept such Nominated Quantity or to deliver such

17 See [79] above.

18 See [85] above.

19 See [86] above.

Approved Nomination pursuant to cl 10.1, then Nova will pay to Methanex [the amounts required by cl 9.9]” (emphasis added).

[106]  In short, I am satisfied that there is a reasonable possibility that Methanex will succeed in its argument that cl 9.9 is a conventional liquidated damages provision that responds to Nova’s breach of either cl 8.2 (declining to accept a Nominated Quantity) or cl 9.3(a) (failing to make gas available for delivery in accordance with an Approved Nomination).

[107] In reaching this view, I have not considered it necessary to traverse the contractual history between the parties and the drafting of the Agreement. Matters such as this may well be the subject of further evidence at the substantive hearing. It is sufficient to record that there is nothing in the evidence before me of the contractual history which causes me to take a different view to that reached at [106] above.

[108]  This accordingly brings me to whether there is a reasonable possibility that, despite the presence of cl 9.9, Methanex will succeed at the substantive hearing in obtaining an order for specific performance.

[109]  Nova submits that the amounts payable under cl 9.9 are a genuine pre-estimate of Methanex’s loss in the event of non-delivery of gas. It also emphasises that the parties must have anticipated that any such non-delivery might extend over a lengthy period of time, evidenced by the quantum of the cap in cl 9.9 and the threshold for non-delivery giving rise to a right of termination under cl 22.4.20 Mr Colson submits that such matters weigh heavily against the granting of specific performance. In his oral submissions, Mr Colson also suggested that Methanex might have a reasonable argument that Wilful Default has arisen, such that the cap in cl 9.9 would not apply.21

[110]   Specific performance is an equitable remedy, and whether it will be granted will be informed by a broad range of factors. As the authors of Civil Remedies in New

20     For example, on the current gas price, the cl 9.9 cap would equate to between [Redacted] of the targeted supply under the Agreement.

21     No doubt this is a strategic position, taken to bolster the argument that damages will be an adequate remedy.

Zealand state, the approach adopted is to determine whether it is just, in all the circumstances, that a plaintiff should be confined to a remedy in damages.22

[111]In a passage relied on by Nova, the commentary goes on to state that:23

Where the parties to the contract have agreed that in the event of breach a sum of money is to be paid, for example if the contract contains a liquidated damages clause, then specific performance will not be available.

[112]  Two cases are cited as authority for this proposition: Nicholl v ANZ Banking Group NZ Ltd24 and Kettelwell v Mobil NZ Ltd.25

[113]  In Nicholl, the plaintiff sought an order for specific performance requiring the defendant to continue operating a store that it leased in the plaintiff’s shopping centre. The lease contained a clause requiring the defendant lessee to keep its store open for trade during the term of the lease provided that, in the event of a breach of that covenant, the lessor was entitled to recover from the lessee liquidated damages for each day, or part thereof, equal to twice the daily annual rental paid by the plaintiff during the twelve months prior to the breach.

[114]  While counsel for the defendant accepted that the liquidated damages provision was not determinative of whether specific performance would be granted,26 Doogue J considered the liquidated damages clause as one of several factors that militated against an order for specific performance. The Judge said it was difficult to say that damages could not be an adequate remedy when the parties had provided for “reasonable liquidated damages” in the event that the defendant breached its lease by no longer continuing within its leased premises.27

[115]  In Kettelwell, the plaintiffs sought specific performance of the defendant’s obligation to redevelop a commercial property it was leasing. Included in the

22 Andrew McIntyre “Specific Performance” in Peter Blanchard (ed) Civil Remedies in New Zealand (2nd ed, Thomson Reuters, Wellington 2011) at [8.5.4], with reference to Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444, [1982] 3 OLR 1 (HL) at 478 per Lord Diplock.

23     McIntyre, above n 22, at [8.5.4].

24     Nicholl v ANZ Banking Group New Zealand Ltd (1995) 3 NZConvC 192,197 (HC).

25     Kettelwell v Mobil Oil New Zealand Ltd HC Auckland CP529-im00, 16 August 2001.

26     At 7.

27     At 17–18.

defendant’s lease was a provision that if such redevelopment work was not completed by a certain date, the defendant (as lessee) would pay as compensation to the plaintiff (as lessor) “an amount equal to the market rent plus outgoings” for certain units for a certain period. The defendant argued that an order for specific performance should be declined, in part, because the lease’s provision for liquidated damages was inconsistent with a claim for specific performance (referring to Nicholl as authority for that proposition).

[116]  Master Kennedy-Grant considered it appropriate to order specific performance in that case.28 Agreeing with the plaintiffs’ submissions,29 the Judge considered that the liquidated damages clause was directed to delay the completion of the redevelopment work and that it did not operate, and was not intended to operate, as a means of compensating the plaintiffs for an outright default in the performance of its redevelopment obligation.30

[117]  It is plain from the reasoning in those two cases that they do not stand as authority for the bald proposition that specific performance will not be available where a contract contains a liquidated damages clause. Rather, they stand for the proposition that a liquidated damages clause will be relevant to the overall assessment of whether damages would be an adequate remedy for a defendant’s breach of contract, which is one factor, among others, for the Court to take into account when deciding whether to exercise its discretion to grant an order for specific performance or an injunction.31

[118]  Certainly, that seems to be the position in other jurisdictions such as the United Kingdom. Andrew Burrows (now Lord Burrows) explained that while a liquidated damages clause might indicate that monetary remedies are adequate and specific performance is thus unwarranted:32

… the courts lean against a construction that would oust a judicial remedy and they have consistently taken the view that the money clause is added as security for performance and/or as clarifying the amount of damages the

28 At [39].

29 At [39].

30     At [38(e)].

31     Butler v Countrywide Finance Ltd [1993] 3 NZLR 623 (HC) at 632–633.

32     Andrew Burrows Remedies for Torts, Breach of Contract, and Equitable Wrongs (4th ed, Oxford University Press, Oxford, 2019) at 436–437.

claimant will receive if suing for damages. Specific performance is therefore not ousted.

[119]  Consistent with this, in AB v CD, the Court of Appeal of England and Wales expressly rejected the proposition that an agreement to restrict the recoverability of damages amounted to an agreement to excuse a party of their primary obligation to perform their contract.33 The implication of the Court’s decision is that specific performance is not, therefore, “unavailable” or “ousted” where a liquidated damages clause is included in a contract.

[120]  A similar view is expressed by Ian Spry QC in his leading text The Principles of Equitable Remedies.34 Spry explains that where a contract contains a provision stipulating that damages are payable if a particular event occurs (such as a liquidated damages clause), it will be necessary to determine, as a matter of contractual interpretation, which of two positions the parties intended. The first is that the parties may have intended that the party in default should have an option either to perform the terms in question or pay an amount of money. In that case, Spry explains that specific performance will be declined, not because damages are a sufficient remedy, but because “there is no absolute obligation at law to perform”. Spry explains, however, that “[an] intention of this kind is not often found”.35 (This is, of course, related to the contractual interpretation issue addressed earlier in this section of my judgment.) The second position, more consistent with the approach taken in Nicholl and Kettelwell, is where:36

… on the other hand, it may appear that the material provision for damages has been inserted for the benefit of the injured party, so as to add to or render more definite the remedies that are open to him; and in such cases the plaintiff is not compelled to accept damages under the special provision, but an order for specific performance or an injunction may be granted if, as a matter of discretion, it is held otherwise appropriate.

[121]  In that being said, the commentary in The Principles of Equitable Remedies is correct insofar as it suggests that specific performance is unavailable where the parties to a contract have agreed, or where it may be inferred that they have agreed, to restrict

33     AB v CD [2014] EWCA Civ 229 at [27], relying on the judgment of Mance LJ in Bath and North East Somerset DC v Mowlem plc [2004] EWCA Civ 115, [2015] 1 WLR 785 at [27].

34     ICF Spry The Principles of Equitable Remedies (9th ed, Lawbook Co, Sydney, 2014).

35     At 77–78.

36     At 78.

their available remedies to damages alone, or where they have otherwise agreed that specific performance is not available. However, this must be clear. As the majority  of the Supreme Court said in Property Ventures Investments Ltd v Regalwood Holdings Ltd, “[e]xpress words or a very clear implication are needed to remove a remedy for breach of contract arising by operation of law.”37

[122]  In this case, the parties have of course agreed in cl 17.6 that in addition to all other remedies expressly provided for under the Agreement, a party will be entitled to seek equitable relief, including specific performance. While Mr Colson characterises cl 17.6 as a “boiler-plate” clause that should not operate to override the carefully crafted monetary payments required by cl 9.9, its language is clear, namely that the parties did not intend to “oust” the Court’s (or an arbitrator’s) jurisdiction to grant specific performance. However, cl 17.6 only goes so far as preserving a party’s ability to seek specific performance, which does not necessarily mean it will be granted. The presence of the liquidated damages clause will plainly be relevant, as one of several factors, to the exercise of the Court’s or arbitrator’s discretion.

[123]  Nova’s liability under cl 9.9 is also subject to a financial cap. If Methanex were to demonstrate financial harm exceeding that cap, does that mean damages will be an inadequate remedy such that specific performance ought to be granted?

[124]  In AB v CD, the Court of Appeal of England and Wales considered whether it was appropriate to grant an interim injunction in circumstances where damages would be an adequate remedy for breach of contract, but the contract concerned had limited the recoverable damages to below that amount that would otherwise be available for any breach.38

[125]  The Court considered that an interim injunction could be awarded, as the expectations of the parties as to what damages would be recoverable in the event of a breach were different to the parties’ primary commercial expectations that they would

37 Property Ventures Investments Ltd v Regalwood Holdings Ltd [2010] NZSC 47, [2010] 3 NZLR 231 at [71] per Blanchard J, citing Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 (HL) at 717 and 723 and Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13.

38 AB v CD, above n 33.

perform their obligations.39 The Court said that an interim injunction could thus be awarded, however:40

A claimant will still have to show that if the threatened breach occurs there is (at least) a substantial risk that he will suffer loss that would otherwise be recoverable but for which he will (or at least may) be prevented from recovering in full, or at all, by the provision in question. If he does, then certainly it will not be sufficient for the defendant to say that the restriction in question was agreed; and to that extent the claimant will indeed have established that his remedy in damages may not be adequate. But that only opens the door to the exercise of the court’s discretion; and in the exercise of that discretion the fact that the restriction in question was agreed may, depending on the circumstances of the case, be a relevant consideration – as may the scale of any shortfall and the degree of risk of it occurring.

[126]  Since its release, there does not appear to have been any subsequent appellate consideration (whether by the Court of Appeal or United Kingdom Supreme Court) of that decision.

[127]Four decisions, starting with my own in Finewood Upholstery Ltd v Vaughan,41

have considered whether to follow AB v CD in New Zealand.

[128]  In Finewood, and without deciding whether AB v CD should be explicitly followed,42 I assessed the adequacy of damages for breach of contract under the framework of whether the plaintiff had demonstrated a substantial risk that damages in excess of any limitation on damages clause would be incurred.43 I concluded, however, that this merely “opened the door” to the exercise of the Court’s discretion to grant interim injunctive relief.44

[129]  In Prominent Investments Ltd v Quest Apartment Hotels (NZ) Ltd, the plaintiff franchisee sought an interim injunction restraining the defendant franchisor from taking steps to terminate the parties’ franchise agreement.45 On the balance of convenience, the franchisee argued that damages would be an inadequate remedy, in part because the franchise agreement limited the damages the franchisor was liable to

39     At [27]–[28].

40 At [30].

41     Finewood Upholstery Ltd v Vaughan [2017] NZHC 1195, [2017] NZAR 994.

42 At [58].

43 At [65].

44 At [58].

45     Prominent Investments Ltd v Quest Apartment Hotels (NZ) Ltd [2021] NZHC 862.

pay to one month’s gross revenue, totalling $11,200. The franchisor, by contrast, submitted that interim relief should be refused because all of the franchisee’s causes of action were amenable to an award of damages. On the relevance of the limitation of damages clause, Duffy J said:46

I do not consider a limitation clause on the award of damages to be determinative of whether to grant the injunction or not. But I consider it to be a relevant factor for consideration.

[130]  While Duffy J did not refer to the need for the plaintiff franchisee to show a substantial risk that the damages it might recover would be less than actually suffered because of a limitation on damages clause, the Judge’s reasoning is consistent with that approach, as the following passage shows:

[23] Prominent [the franchisee] has raised a valid point in noting that if the interim injunction is not granted then Quest [the franchisor] will proceed to terminate the franchise agreement and replace Prominent with another franchisee. This would essentially limit Prominent’s remedy, if successful, to one of damages. Because the franchise agreement potentially limits damages to $11,200, absent a successful challenge to that contractual limitation, Prominent would then find itself in the position where even if the Court found Quest was wrong to refuse to renew the franchise agreement for a further five years and the Deed of Variation could not deprive Prominent of this benefit, (because Quest had wrongly induced Prominent to enter into this Deed by misrepresenting there was no right to renew for five years), all Prominent would receive in compensation for the loss of a further five-year term (with expiry in September 2022) may be around $11,200. This potential limitation on the quantum of damages means that damages may be an inadequate remedy in this case. Prominent has provided a valuation which has valued its business at over $1,000,000. The valuation excludes shareholder liabilities and is based on information provided by Raj Chopra, shareholder-director. It appears to be overly optimistic. A large part of the value is attributed to goodwill. However, even when regarded conservatively, the valuation shows how pointless an award of around $11,200 damages would be for Prominent.

[131]  The third case to consider AB v CD was a decision of Mander J in Multimedia Communications Ltd v Enable Services Ltd.47 There, the plaintiff sought an interim injunction restraining the defendant from giving effect to its decision not to renew its contract with the plaintiff until such time as the validity of the defendant’s non-renewal notice was determined by arbitration. The contract between the parties provided for the plaintiff’s engagement on a project-by-project basis. The contract also contained

46     At [24] (footnote omitted).

47     Multimedia Communications Ltd v Enable Services Ltd [2021] NZHC 568.

a liquidated damages clause, limiting their respective liability to each other to

$500,000 “in respect of all claims, proceedings, actions, liabilities, damages, costs, expenses and losses”. The contract further included provisions preserving the “rights and remedies available to the parties which had accrued up to and including the date of termination or expiry” and which provided that, where any dispute arose, each party had to continue to perform its obligations insofar as possible as if no dispute had arisen pending the dispute’s final resolution.

[132]  Ultimately, Mander J considered the obligation for the parties to continue performing, even where a dispute between them had arisen, not to weigh in favour of granting the interim injunction sought because there could be no expectation of the plaintiff receiving service orders from the defendant, and so in that sense, the utility of the interim relief sought had not been demonstrated.48 In going on to consider the adequacy of damages, the Judge acknowledged that the contract appeared to cap the defendant’s liability and said:49

However, before such a limitation can support the argument for interim performance, it is necessary for the claimant to establish a substantial risk as to loss, and even then the granting of an injunction remains an exercise of the court’s discretion.

In the exercise of that discretion, the fact that such a restriction on liability was one that was agreed to by the parties may, depending on the circumstances of the case, be a relevant consideration — as may be the scale of any shortfall and the degree of risk of it occurring. Presently, Multimedia’s potential losses are assessed in only general terms and there is a lack of detailed evidence upon which any accurate assessment can be made of Enable’s possible liability. While figures relating to Multimedia’s revenue at the height of its commercial relationship with Enable exceed the contractual cap, there is no financial evidence of the impact of the Agreement on the profitability of the business or its solvency. Its current estimate is that it derives some 58 per cent of its work from Enable. However, in the absence of any guaranteed work from Enable over the interim period it is not clear what effect, if any, the lack of interim relief would have on any calculation of damages, even if it was found that Enable was obliged to provide some level of work to Multimedia under the Agreement. In the circumstances, I do not consider Multimedia has demonstrated why damages cannot provide a suitable remedy.

48 At [72].

49     At [75]–[76] (footnotes omitted).

[133]  In Multimedia, the question of the limitation of liability clause was then put before an arbitrator who confirmed that the clause did indeed limit liability to

$500,000. The matter then returned to the High Court, and Eaton J observed that:50

[69]      Clause 15 records the parties’ agreed allocation of risk. The parties sought to achieve certainty as to both source of liability and as to the quantum of liability. In my view cl 15 was deliberately drafted in broad terms by two sophisticated commercial parties with the intention of limiting the quantum of liability for any claim arising in connection with the UFB Agreement, no matter how liability arises, to $500,000. It made commercial sense to achieve certainty at the outset of the relationship.

[70]      It is notable that the parties turned their minds to possible exclusions to the agreed limitation on the quantum of liability, as reflected in cl 15.4 …

[134]  The most recent case to consider AB v CD is Venning J’s decision in Reed Roading Ltd v Higgins Contractors Ltd.51 In that case, the plaintiff sought an interim injunction requiring the defendant to perform its obligations under a confidentiality and exclusivity agreement (in essence, for a mandatory injunction). The contract in question contained a limitation on liability clause. On the adequacy of damages, the Judge said:

[74]      In Finewood Fitzgerald J considered the impact of a limitation on liability clause on the consideration of the adequacy of damages. Fitzgerald J held that, even if as a result of the limitation clause the threshold is passed, namely that damages would not be an adequate remedy or there is a risk that damages in excess of the contractual limitation would be incurred, it merely opened the door to the exercise of the Court’s discretion and consideration of the balance of convenience. That approach is consistent with the approach of Lord Diplock in American Cyanamid Co v Ethicon Ltd and the Court of Appeal of England and Wales in AB v CD. Applying it to this case, I accept that damages will not be an adequate remedy to Reed, but the Court must then go on to consider the balance of convenience generally.

[75]      However, before leaving that issue, I observe that, while liability is limited by cl 5(b) to $100,000 “whether under contract, statute tort or otherwise” it may be arguable that that clause would not apply if Reed ultimately succeeded in its claim that Higgins had acted in bad faith. If Higgins is found to have acted in bad faith by terminating (repudiating) the Exclusivity Agreement then the Court may take the view that, properly interpreted, the limitation clause does not exclude losses incurred following actions in bad faith.

(footnotes omitted)

50     Multimedia Communications Ltd v Enable Services Ltd [2022] NZHC 3452.

51     Reed Roading Ltd v Higgins Contractor Ltd [2023] NZHC 3463.

[135]On the balance of convenience, the Judge concluded by saying:

[90] The balance of convenience does not favour granting a mandatory injunction as sought. Without the limitation clause, damages would be an adequate remedy and there would be no prospect of the Court granting an injunction. This is not a case where the balance plainly favours the grant of relief. Even with the limitation clause, I consider the balance of convenience favours Higgins’ position.

[136]In light of the above authorities, the following propositions may be stated:

(a)damages may not be an adequate remedy for breach of contract where they otherwise would be, because the contract in question caps what is recoverable;

(b)such limitation of liability clauses are relevant to, though not controlling of, whether injunctive relief/specific performance ought to be granted; and

(c)at the very least, a party seeking specific performance will need to demonstrate that what is recoverable in damages under the liability cap falls below that which would otherwise be available in damages, and if (at an interim stage) the party can demonstrate a risk of such an outcome, that merely “opens the door” for the court to exercise its discretion.

[137]  It is difficult to assess the prospects of specific performance being granted to Methanex at the substantive hearing, given the range of factors relevant to that question, and that the present application was brought on an urgent basis with incomplete evidence. Whether specific performance will be granted will no doubt turn on matters such as:

(a)the state of the New Zealand gas market at the time of the arbitration, and its likely prospects, which may reflect on the potential harm to Nova and other market participants were specific performance to be ordered;

(b)any safety or operational implications for Methanex from Nova’s failure to supply gas;

(c)whether the suggested harm to Methanex if specific performance were not to be ordered was reasonably likely to come about in any event;

(d)the likely period over which Nova was expected to fail to supply gas;

(e)how the amounts payable pursuant to cl 9.9 were calculated, and the extent to which they represented a genuine pre-estimate of Methanex’s loss arising from Nova’s failure to supply gas;

(f)the extent of any shortfall between demonstrated financial harm to Methanex and the liability cap in cl 9.9;

(g)the extent to which Nova was willing to waive cl 9.9’s cap on liability beyond the determination of the dispute at arbitration; and

(h)whether the arbitrator found Nova to be in “Wilful Default” of the Agreement when declining to accept any Nominated Quantity or failing to deliver gas in accordance with an Approved Nomination (which would be relevant to both the applicability of the cl 9.9 cap, as well as to the overriding discretion as to whether to order specific performance).

[138]  The most that can be said at the present time is that the prospects of Methanex obtaining specific performance at the substantive hearing are not so low as to be determinative of the application.

[139]  I am therefore satisfied that there is a reasonable possibility that Methanex will succeed on the merits of its claim at the substantive hearing.

Will Methanex suffer harm not adequately reparable by an award of damages if the interim measures are not granted?

[140]  Methanex says the following categories of harm will result to it if the interim measures are not granted:

(a)Shutting down one of the Motunui Trains indefinitely, costing approximately [Redacted] and over 18 months to recertify the train in the future if, for example, it was successful in the substantive hearing.

(b)Writing off the capital expenditure incurred in restarting the Motunui 2 Train (said to be [Redacted], [Redacted] of which was incurred about a month before Nova decided to cease the supply of gas).

(c)Incurring costs in laying up the Motunui Train for preservation [Redacted].

(d)[Redacted].

(e)Lost margin on the sale of methanol.

(f)As an alternative to the lost margin on the sale of methanol, lost margin on the potential on-sale of gas.

[141]  In the context of the suggested financial harm to Methanex were the interim measures not to be granted, Nova’s offer to waive the cl 9.9 cap is said to equate to payments to Methanex of approximately [Redacted] per month.

[142]  I am satisfied that, but for Nova ceasing to supply gas in April 2024, Methanex would have been able to run its second Train. Methanex’s senior executives have given evidence that the Motunui 2 Train was due to restart alongside the operation of the Motunui 1 Train during the week of 15 April 2024. This is also supported by contemporaneous emails.

[143]  Nova argues that given the presently constrained gas supply, it would be difficult for Methanex to have two Trains in operation — at least on an ongoing basis.

However, as Mr Weston submits, the fact that Methanex, a sophisticated entity with a clear and close view of its own operational requirements, was in the process of restarting the Motunui 2 Train in mid-April, suggests that Methanex was confident that there would be sufficient gas to continue a two Train operation, at least for a period which made it operationally and economically sensible to restart the second Train. Further, I do not need to determine whether this two Train operation will be able to continue into the medium to long term. Indeed, it is impossible for the Court to make any real predictions about that. The short point is that I am satisfied that it is reasonably arguable that, at least between now and the likely determination of the arbitration, Methanex would have been able to operate on a two Train basis if Nova had continued to supply it with gas.

[144] What then are the consequences of Methanex having to reduce to a one Train operation at this time? An alternative to idling one of the Trains indefinitely is to idle one Train and then switch to the other Train at three monthly intervals, to ensure each Train does not lose its certification. This would avoid the suggested harm at [140](a) above. Methanex’s evidence is that switching between the Trains exposes them to significant mechanical stress and damage, and creates significant health and safety concerns for Methanex’s operations, which “cannot be sustained in the medium to long term.” Nova is critical of Methanex’s evidence on this topic, which, it submits, is limited to two sentences, without any further elaboration or quantification.

[145]  While I accept Mr Weston’s submission that, when collating its application and supporting evidence, Methanex addressed the issues that it understood to be in dispute, Methanex nevertheless bears the onus of putting sufficient evidence before the Court to demonstrate the likelihood and extent of the suggested harm coming to pass — as a result of three or four switches between the Trains — before the arbitration is determined. Methanex has not elaborated in its evidence in any substantive way on the nature of the suggested harm arising from switching between its two Trains in this way. Further, the evidence that switching between the Trains is not sustainable in the medium to long-term suggests that it is sustainable in the short term.

[146]  The prospect of switching between the two Trains, at least in the short term, also addresses the suggested harm of writing off the capital expenditure incurred in restarting the Motunui 2 Train ([140](b) above). That capital expenditure is a sunk capital cost in the context of a five yearly Train Turnaround being a necessary cost of producing methanol. I accept Nova’s submission that, if the application is granted, the capital expenditure will be paid down by the margin on gas actually supplied and converted to methanol or, if the application is declined, the capital expenditure will be paid down, at least in part, by the payments that Methanex will receive from Nova under cl 9.9 (plus profit from the on-sale of any gas supplied to Methanex beyond what is needed to use to operate one Train). I also consider there is some merit in Nova’s submission that the fact that Methanex did not seek to continue into the Agreement the 2013 gas supply arrangements, by which Nova underwrote Methanex’s capital investment, is also relevant to this issue, no doubt reflecting that Nova is not the primary supplier of gas to Methanex.

[147] Other aspects of the harm summarised at [140] above include a suggested [Redacted] and the incurring of costs in laying up the Motunui Train (for preservation). I do not consider either of these matters to be material for determining the present application. For example, no details are given around the [Redacted], which is framed as being a possibility only. I also take into account various materials put before the Court which show that Methanex has been flexible in its operations over time, at times operating two (or three) Trains, and sometimes only one Train, and often taking significantly more gas than it does at other times. In a similar vein, correspondence between the parties in February 2024, when discussing a potential arrangement pursuant to which Nova would buy back [Redacted] per cent of the daily volume of gas supplied to Methanex at [Redacted] per cent of the contract price (for a [Redacted] period starting 1 April 2024), Methanex responded that the concept raised questions around Methanex’s remaining gas availability and where that sat relative to “two plant minimum operating rates”. Methanex went on to state that it would give the matter some further thought but that the arrangement gave rise to “more complications relative to the concept of us dropping to one plant rates for a winter period and then running two plants for other months”. Methanex reverted to Nova once the matter had been discussed further internally, noting that it did not wish to pursue Nova’s buyback proposal and stating:

It would drop us close to two plant minimum operating rates and the likelihood is that the two plant operation would be unsustainable and we would need to drop to one plant to manage the position. While the proposal raises a number of issues, some value related and some contract related, the key is that we don’t believe that voluntarily dropping to a one plant operation for an extended period is in our best interest at this time. We are open to discussing arrangements on gas availability for this winter, which could involve us shutting a plant for a period, but would need this to be a temporary closure and getting back to a two plant operation.

[148]  Notably, there is no indication in the email exchanges of the quite dire consequences now suggested as flowing from Methanex dropping to a one Train operation, at least over a relatively short period of time.

[149]  I have also taken into account that it seems there is a realistic prospect of Methanex receiving sufficient gas from OMV by around March 2025 to operate two Trains. In his reply evidence, Mr McCall produced an “aggregate gas supply forecast (all suppliers) as at 1 March 2024”. This contains projections of gas from both Nova and OMV over the period 1 April 2024 to 1 December 2025. By January 2025, it is predicted that gas from OMV will (just) approach the minimum level required to operate two Trains (albeit not at optimal level). By April 2025, the projected gas from OMV is predicted to exceed the “two plant minimum” levels, albeit with not a lot of margin. This would nevertheless avoid any long-term switching, or the indefinite idling of one of the Trains, at least until the outcome of the arbitration. Methanex would also continue to receive payments from Nova under cl 9.9.

[150]  Drawing these threads together, I am not satisfied that the very significant levels of harm suggested by Methanex will come to pass should the interim measures application not be granted. The suggested harm is largely confined to:

(a)the costs and risks associated with idling one Train indefinitely, which can be avoided in the short term by switching between the Trains;

(b)the costs and risks of such switching, about which there is no detailed evidence; and

(c)lost margin on methanol sales (or alternative, lost margin from on- selling gas).

The implications of switching between two Trains, at least until the earlier of the arbitration being determined or Methanex receiving sufficient gas from OMV to run two Trains, appear sustainable (albeit not ideal), particularly in conjunction with Nova making those payments required by cl 9.9.

Does the harm substantially outweigh the harm that is likely to result to the respondent if the measure is granted/what is the appropriate exercise of the Court’s discretion?

[151]  The harm to Nova itself is largely confined to financial implications flowing from lost margin on the sale of gas to other industry participants (at higher prices), and lost margin from the production of electricity. Nova accepts that quantifiable harm to it is likely to be remedial by damages, and may be met by the undertaking as to damages provided by Methanex.

[152]  Nova nevertheless points to what it says are other implications of granting the application, which, it submits, are self-evidently not remedial by an award of damages, namely:

(a)the implications for Fonterra and Oji; and

(b)the impact on Nova’s ability to provide security of electricity supply over winter via its peaking facilities, and the resulting impact on New Zealand businesses and households.

[153]  I do not consider it necessary to address in any detail the suggested harm to Fonterra. As noted, Fonterra has a call option in its gas supply agreement with Nova, which allows it to access gas otherwise allocated to [Redacted]. Were the application to be granted, I consider it reasonable to infer that Fonterra would exercise its call right, at least to the extent necessary to ensure continued production at its North Island processing sites.

[154]  The position for Oji is a little more nuanced. Mr Gilchrist gives evidence of Oji’s Kinleith Mill’s dependency on a consistent supply of natural gas. Mr Gilchrist explains that Oji is not able to move away from natural gas use and expresses some

scepticism about obtaining the required volumes of gas to sustain its operations via the spot market — a suggestion raised in Methanex’s evidence.

[155] Were Oji to receive no gas from Nova (which is the outcome posed in the allocations table at [41] above), I consider there is a reasonable possibility of the Kinleith Mill operations having to be paused, which would inevitably lead to operations halting at some of Oji’s packaging sites. This in turn could have quite significant consequences for customers producing food for the export markets, with no alternative supply of packaging readily available. Mr Weston is right that if Methanex is correct in its interpretation of cl 9.9, then the prospect of Oji not receiving any gas from Nova is simply a consequence of its own contractual arrangements and the (lower) priority position it occupies. I accept, however, Mr Colson’s point that, at this stage of the analysis, I am simply assessing the respective harm flowing from the interim measures being granted or not granted, rather than the contractual waterfall outcomes.

[156]  Turning to electricity generation, the evidence is again a little thin, as well as being somewhat speculative. However, [Redacted].

[157]  As noted, Nova’s peakers are “fast start” facilities that quickly convert gas to power, and make up 40 per cent of the fast start peaking capacity in New Zealand. They can generate enough power to support the peak usage of approximately 100,000 households. I am satisfied that they provide an important facility where demand for electricity outstrips baseload supply, such as during winter peaks.

[158]  It does not appear to be in dispute that if Nova is required to supply Methanex pending the arbitration being determined, then less gas will be available for electricity generation over the course of the winter. I note Methanex’s response that in the context of an electricity shortage, electricity market participants “will respond to market conditions and incentives”. Standing back, however, and assessing the present position as best I can, I cannot dismiss the risk that if the interim measures were to be granted, there would be a substantially smaller amount of gas available to supply Nova’s peakers, which, in turn, could have implications when demand for electricity outstrips baseload supply.

[159]  Ultimately, exercising my broad discretion under art 17A, I am clear that the interim measures application ought to be declined. I am satisfied that there is more likelihood of irreparable harm were the interim measures to be granted than if they are not granted. At least on the evidence before me, while the operational position Methanex finds itself in is far from ideal, it appears manageable in the short term, and at least until around March 2025, when its supply of gas from OMV look set to improve. Much of Methanex’s suggested harm sounds in damages, and the very substantial harm from idling one Train indefinitely is likely avoidable in the short term. Further, Methanex is entitled to not insubstantial (and un-capped) payments from Nova under cl 9.9, until the earlier of the arbitration being determined and October 2025. Methanex’s ability to seek specific performance at the substantive hearing is preserved. The arbitrator will be able to consider the proper interpretation of cl 9.9, the implications of that contractual provision on the availability of specific performance, and the forward-looking gas supply position, with the benefit of the full evidential position.

Result and costs

[160]I have reached the following conclusions:

(a)There is a reasonable possibility that Methanex’s interpretation of cl 9.9 of the Agreement will prevail at the substantive hearing.

(b)The prospects of Methanex obtaining an order for specific performance at the substantive hearing are not so low as to be determinative of the application.

(c)The harm to Methanex if the interim measures are not granted does not substantially outweigh the harm to other parties were the interim measures to be granted — at least on the basis that the arbitration is held in or around the last quarter of this year or the first quarter of next year, and Nova pays, or offers to pay, all (uncapped) amounts payable under cl 9.9.

(d)The residual discretion in art 17A is appropriately exercised by not granting interim measures.

[161]The application for interim measures is accordingly dismissed.

[162]  The parties may wish to address me on costs. To assist with any discussions between the parties on costs, as matters currently stand, there would seem to be no reason why costs ought not to follow the event in the ordinary way, with a costs award in Nova’s favour. The costs award might require reduction however, to reflect that I have accepted that Methanex’s interpretation of cl 9.9 has a reasonable possibility of success. It would be appropriate to classify this proceeding as a category 3 proceeding for cost purposes, and for costs to be awarded on a band C basis. I would certify for second counsel.

[163]  If, despite these observations, the parties are unable to agree on costs, Nova may file a costs memorandum within 10 working days of the date of this judgment. Methanex may file a costs memorandum within a further five working days. No memorandum is to be longer than five pages in length (excluding any schedules of cost calculations). I will thereafter determine costs on the papers.

[164]  Finally, aspects of this judgment may require redacting, to preserve commercially sensitive and other confidential information. For that reason, and pending further order of the Court, publication of this judgment, other than to the parties/their advisers, is prohibited. Publication of the result is, however, permitted.

Fitzgerald J

Addendum:

Some parts of this judgment have been redacted to protect confidential/commercially sensitive information. Publication of the unredacted version of this judgment, other than to the parties and their advisers, is prohibited.