Shell (Petroleum Mining) Company Limited v Todd Petroleum Mining Company Limited HC Wellington CIV 2009-485-2024
[2010] NZHC 946
•8 June 2010
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2009-485-2024
UNDER the Arbitration Act 1996
IN THE MATTER OF an arbitration before the Hon B J Paterson
QC
BETWEEN SHELL (PETROLEUM MINING) COMPANY LIMITED
Plaintiff
ANDTODD PETROLEUM MINING COMPANY LIMITED Defendant
CIV-2009-485-2059
UNDER the Arbitration Act 1996
IN THE MATTER OF an arbitration
BETWEEN TODD PETROLEUM MINING COMPANY LIMITED
Plaintiff
ANDSHELL (PETROLEUM MINING) COMPANY LIMITED
Defendant
Hearing: 25 May 2010
Counsel: J Hodder SC and T D Smith for Shell
H McIntosh and A A O'Rourke for Todd
Judgment: 8 June 2010
SHELL (PETROLEUM MINING) COMPANY LIMITED V TODD PETROLEUM MINING COMPANY LIMITED HC WN CIV-2009-485-2024 8 June 2010
RESERVED JUDGMENT (NO 2) OF DOBSON J
Contents
Recall................................................................................................................................................... [3] Applications for leave to appeal...................................................................................................... [22] Todd’s application for leave............................................................................................................ [28] Question 1 ..................................................................................................................................... [28] Question 2 ..................................................................................................................................... [30] Question 3 ..................................................................................................................................... [34] Second application, first question (“Question 6”)........................................................................ [37] Second application, second question (“Question 7”) ................................................................... [40] Second application, third question (“Question 8”) ...................................................................... [42] Shell’s application for leave ............................................................................................................ [47] Shell’s question B.......................................................................................................................... [48] Question D .................................................................................................................................... [62] Summary and Costs......................................................................................................................... [70]
[1] This judgment deals first with an application on behalf of Todd for recall of two findings in my judgment of 5 March 2010. That dealt with opposed applications by both parties for leave to appeal points of law claimed to arise from an award of the Hon B J Paterson QC relating to assets involved in the Kapuni Joint Venture which is operating between the parties. The issues relate predominantly to the interpretation of provisions in a joint venture agreement entered into between the original parties to it in 1955 (JV55). This judgment then addresses applications pursued by both Shell and Todd for leave to appeal from those parts of my first decision that declined each of them leave to appeal from the arbitrator on certain of the questions of law they have each formulated. Accordingly, the leave sought is for the parties to challenge in the Court of Appeal my refusal to grant leave to argue points of law on appeal to this Court.
[2] The context of the dispute and scope of the questions sought to be argued on appeal are described in my first judgment. Because I have accepted one point raised by Todd on its request for recall, it is appropriate to reissue my 5 March 2010 judgment addressing that point. Having done so, it is efficient not to attempt summaries of the relevant parts of it, but simply to cross-refer to it.
Recall
[3] The Courts are periodically moved to comment adversely on the inappropriately wide circumstances in which parties seek to revisit aspects of judgments adverse to them by means of requests for recall of the judgment.[1] Most recently, the Court of Appeal has made observations on the point in Erwood.[2]
[1] eg Ngahuia Reihana Whanae Trust v Flight CA23/03, 26 July 2004 at [3].
[2] Erwood v Maxted [2010] NZCA 93, 25 March 2010.
[4] The classic authority on the scope of recall remains Horowhenua County v Nash (No 2).[3] It postulated three possible situations in which recall might be considered. The third category was where, for some other very special reason, justice requires that the judgment be recalled. That is the only circumstance that could apply here, and Todd cited Cynotech Securities Ltd v People Ltd (No 2) as an example where recall is appropriate if the Judge did not properly understand the submissions as to the matters in issue.[4] That was an uncontested application to recall in relation to discovery orders and is a very different context to the present.
[3] Horowhenua County v Nash (No 2) [1968] NZLR 632.
[4] Cynotech Securities Ltd v People Ltd (No 2) HC Auckland CIV-2008-404-1559, 4 March 2009.
[5] The first point in relation to which Todd sought recall of my judgment arose in consideration of question 3 in its original application. I dealt with this at [85] to [96] of my first judgment. The question related to the application of clause 16.2 of certain “core terms” annexed to a heads of agreement (HoA) concluded by the parties in 2002. Clause 16.2 provided for the assets of the venture to be transferred to the respective beneficial owners of the individual assets. However, clause 2.3 of the HoA provided that it was not to become operative in respect of Kapuni whilst JV55 continued to operate (the relevant provisions are set out at [86] and [89] of my first judgment). The arbitrator found that clause 2.3 of the HoA deprived clause 16.2 of operative effect.
[6] In declining leave to a question challenging that interpretation of the respective provisions, I attributed relevance to the lack of utility for Todd, were it to successfully argue for a different interpretation of clause 16.2 of the core terms, whilst clause 2.3 of the HoA continued to apply. My reasoning overlooked Todd’s
4
additional motive for wishing to challenge the contractual interpretation, namely the prospect of future proceedings seeking specific performance of the claimed legal entitlement to have the joint venture’s assets transferred into separate ownership. Todd now argues that my failure to have regard to that additional reason for seeking to overturn the contractual interpretation constitutes a ground for recall of my decision declining leave to appeal that question.
[7] Todd argued that a statutory criterion in clause 5(2) of the Second Schedule to Arbitration Act 1996 (the Act) recognises a broader consideration of the effect of an adverse finding on a question of law than simply the impact on relief in the arbitration because it contemplates leave being granted where the question of law:
…concerned could substantially affect the rights of one or more of the parties.
[8] In addition, reference was made to the decision of Carter Holt Harvey Forests Ltd v Attorney-General where the Court was influenced in granting leave by the on-going effect of the mode of valuation of licence rental not just in the existing case, but in numerous others. [5]
[5] Carter Holt Harvey Forests Ltd v Attorney-General [1999] 1 NZLR 70 at 73-73.
[9] Responding to this point, Mr Hodder SC for Shell submitted that some interest beyond the alteration to the relief in the immediate arbitral proceeding could add weight to the grounds for a grant of leave, but could not completely substitute for the need for there to be some utility in answering the question of law sought to be argued, within the context of the existing proceedings.
[10] I do not consider my omission to recognise the possible implications for later, discrete, proceedings in which Todd might seek specific performance is a type of omission or failure to acknowledge counsel’s argument that warrants recall. Had I appreciated the wider scope of the possible benefits to Todd from a reversal of the finding it sought to challenge, I would have evaluated the relative strength of the argument that Todd sought to pursue. The argument could hardly be described as a strong one. It would be unjust to Shell if the point now raised in support of a recall
affected the ultimate outcome by favouring Todd in a way that the full analysis of the prospects of leave could not sustain.
[11] The core terms were an adjunct to the HoA. They reflected the position that would pertain when a prospective set of circumstances ensued. Clause 2.3 of the HoA itself negatived their application to Kapuni until there was a new employment agreement for STOS. I am not persuaded that Todd made out on the original argument before me a clearly arguable rationalisation of these two provisions that would supplant the common sense way in which the arbitrator anticipated they were to apply. I accordingly reject Todd’s first request that I recall my first judgment.
[12] The second aspect of my judgment on which Todd sought recall arose in the analysis of the second question for which leave Todd sought leave in its second application (as this question was considered after the five questions raised in the initial application, it was conveniently called “question seven”). This questions relates to the failure by the arbitrator to address the definition of “transport charges” in clause 11(1) of JV55.
[13] Todd’s initial application for leave to appeal points of law in the award foreshadowed the prospect of expanding the questions of law on which it might seek leave to appeal, depending on the outcome of further initiatives it was taking to have the arbitrator address additional matters in the award. The initial application was made within the statutory time limit. Todd’s second application was made after time had expired from the delivery of the award, so that it could only have been brought within time if initiatives pursued by Todd post the delivery of the award extended that time limit under Articles 33 and 34(3) of the Second Schedule to the Act.
[14] I dealt with the matter at [137] to [142] of my first judgment. I found that Todd had not pursued a proper application under Article 33 on a matter sufficiently connected to this “seventh” question for the purposes of extending time. My judgment recorded (at [142]) that Todd had invoked Article 33(3) on this question, as well as purporting to exercise leave that had been reserved in terms of the award itself. However, my reasoning did not deal with the issue of whether reliance on Article 33(3) constituted Todd’s request to the arbitrator a proper application under
that provision, so as to extend time on the question of law sought to be argued on appeal, until after Todd’s post-award application had been resolved.
[15] That omission is material to the outcome and, although matters of omission will always involve questions of fact and degree in each particular case, I am satisfied that the matter is more appropriately addressed here, than being left as a criticism of the reasoning for Todd to attempt to pursue on appeal. This course is appropriate where leave is required for any appeal.
[16] On the test I adopted in my first judgment, the question is whether, at the time Todd made its request of the arbitrator to deliver a further award addressing the scope of “transport charges” in clause 11(1) of JV55, Todd could reasonably treat it as a proper application in the sense of being within the arbitrator’s jurisdiction to consider, and tenable on the evidence and outcomes to that point.
[17] On the view the arbitrator took of clause 11(1), he considered it unnecessary to determine the meaning of “transport charges” and he made an explicit finding to that effect in paragraph 95. Todd had pleaded in the arbitration that if delivery to Whareroa was outside “main field storage”, then it was nonetheless a location to which STOS could conveniently deliver gas. It would follow that Todd could accordingly request such deliveries on payment of “transport charges”. Todd’s argument characterises the arbitrator not dealing with the point as an omission, rather than an error.
[18] Shell argued that if anything could be made of the omission, then it would be an error arising from the arbitrator’s approach to interpretation of clause 11(1). After setting out in paragraph 198 of the award all the declarations and orders he made in reliance on his reasoning, in paragraph 199 the arbitrator said, with one defined exception, that “all other claims for relief are dismissed”. Because Todd had sought a declaration as to the meaning of “transport charges”, that request for a determination had been dealt with. Accordingly, Todd’s post-award application to the arbitrator to revisit the dismissal of the request could not be a proper one in terms of Article 33(3).
[19] I uphold Shell’s analysis. The effect of paragraph 199 of the award must be to dismiss Todd’s application for a declaratory order determining the scope of “transport charges”. From Todd’s perspective, the finding in paragraph 95 that it was not necessary to determine the meaning of transport charges derives from an error (on Todd’s view) in the interpretation of clause 11(1), rather than an omission to address the point. It was a point on which leave should have been sought to appeal, if at all, in the original application.
[20] Although it cannot have any bearing as part of the situation confronting Todd when it elected to request a further award, the above analysis is borne out by the terms on which the arbitrator responded to it in his 18 November 2009 ruling:
I did not rule on the meaning of “transport charges” as I did not accept Todd’s submission on the meaning of “mainfield storage”. Consequently, it was not necessary to determine the meaning of “transport charges”. Todd’s claim based on the meaning of clause 11 was dismissed under the provisions of paragraph 199 of the Award. It can not now seek a ruling on an issue in a positive defence when that defence has been dismissed.
[21] Todd has made out a case for me to reconsider my reasoning on this point. Although in many situations a recall would not be warranted where the point does not affect the substantive outcome, I intend to adopt that course in this case. The outcome is that the four paragraphs immediately above ([17]-[20]) ought to be inserted after paragraph [140] of my judgment to address the point.
Applications for leave to appeal
[22] The statutory basis for the present applications is found in clause 5(5) of the
Second Schedule to the Act which provides:
With the leave of the High Court, any party may appeal to the Court of Appeal from any refusal of the High Court to grant leave or from any determination of the High Court under this clause.
[23] Counsel for the parties sought to distil substantially similar tests for leave to appeal from the decision in Cooper v Symes (No 2),[6] approved by the Court of
[6] Cooper v Symes (No 2) (2001) 15 PRNZ 166.
Appeal in Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd.[7]
[7] Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2008] 2 NZLR 591 (CA).
Both of those decisions arose where substantive appeals on questions of law arising out of arbitral awards had been decided by the High Court, and parties sought leave to further appeal from the substantive High Court determinations. The rationale for a relatively narrow approach in the present context rests on the same foundation. However, I prefer to follow the sequence of considerations set out for applications for leave to appeal from refusals to grant leave to appeal an arbitrator’s award, taken
from the decision of Glazebrook J in Patcroft Properties Ltd v Ingram,[8] which
[8] Patcroft Properties Ltd v Ingram (2000) 14 PRNZ 524 (HC), subsequently adopted in Argon Construction Ltd v Spratt (2004) 17 PRNZ 133 (HC).
proposed the following four steps:
(a)Assess the likelihood of success on the appeal against the refusal (which must reach a threshold of at least being capable of bona fide and serious argument);
(b) Assess the importance to the parties of the appeal against the refusal; (c) Assess the public interest involved;
(d)Balance these factors against the costs and delays involved in an appeal.
[24] That judgment continued:[9]
As indicated above, all the above is in turn partially dependent on the prospects of success, the importance to the parties and the public interest of the appeal against the arbitrator’s decision.
[9] At [24].
[25] Mr Hodder invited a gloss on the way that these considerations should apply, to reflect a higher onus for leave when the assessment relates to placing the issues before a second appellate tier above the arbitral tribunal in which the dispute began. That elevated onus was suggested as particularly appropriate when the arbitration was formally conducted as “full blown” private litigation before a highly experienced commercial arbitrator and former High Court Judge. Mr Hodder cited the observations at [31] of Downer Construction, acknowledging the primary function of the Court of Appeal as being to clarify the law and determine whether it has been properly construed, rather than engaging in general correction of error.
Consistently with that, authorities such as Downer Construction acknowledge the constraint on judicial intervention intended by Parliament in the terms of the 1996
Act, and as reflected in Gold and Resource Developments (NZ) Ltd v Doug Hood
Ltd,[10] on the grant of leave more generally.
[10] Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318
[26] I accept that those influences do add somewhat to the onus reasonably expected in assessing the likelihood of success on an appeal on the questions of law where I have thus far declined leave to appeal. In particular, the relative importance of questions of law is more appropriately focused on their general importance in the development of the law, rather than the specific rating of importance to the parties and the issues in their dispute.
[27] My first judgment acknowledged that the issues in the arbitration had a requisite level of importance to the parties, and that the consequences of delay and expense were relatively insignificant in weighing against the grant of leave. The latter point is now more insignificant because I did grant leave on some questions, so a final resolution is delayed pending their determination in this Court. In bringing a fresh mind to the present applications for leave, I consider the relative importance of the questions of law in a general sense is deserving of more weight when the consequence would be to put before the Court of Appeal the issue of leave to appeal questions of law. The prospects of success are to be seen through two lenses rather than one, the first being the prospect of substantive legal error by the arbitrator, and the second the prospects of error in my analysis of the arguability of the points sought to be pursued.
Todd’s application for leave
Question 1
[28] I dealt with question 1 of those Todd sought leave to argue in [62] to [72] of my first judgment. It relates to whether ownership of joint venture assets by STOS is made out “by virtue of” the terms of clause 5(1) of JV55. Mr McIntosh essentially
repeated the arguments reflected in my first judgment. He gave particular emphasis to the extent to which the arbitrator had built on his assumption about clause 5.1 of JV55 intending that ownership of assets would vest in STOS, suggesting that the arbitrator was unduly disposed in favour of that assumption when considering otherwise equivocal evidence on the status of ownership. Todd criticised the arbitrator for using his interpretation of clause 5(1) to justify treating the evidence as if it established ownership of assets by STOS when in fact it was insufficient to do so. The conclusion Todd urges is that it has not overstated the effect of the passages in paragraphs 34 to 36 of the award, when read in light of subsequent parts of the award, in effect because they depend on the arbitrator’s interpretation of clause 5(1) as the means by which assets are vested in STOS. Todd submits my reasoning understated the impact of the arbitrator’s interpretation as doing no more than presumptively declaring that the intention of the venturers was that assets would be held by STOS, subject to evidence establishing that any particular asset had been treated in a different way.
[29] I am not persuaded that the repackaging of the arguments on question 1 increased the likelihood of success on appeal before the Court of Appeal. Todd’s attribution to the arbitrator of reasoning that clause 5.1 of itself vests assets in STOS is not capable of serious argument. It follows that argument that the arbitrator was wrong to do so, which was the essence of the issue Todd seeks to argue, is irrelevant. The contested interpretation is specific to this dispute and could not raise a matter of more general importance.
Question 2
[30] I dealt with Todd’s question 2 in [73] to [84] of my first judgment. It seeks to challenge alleged misapplication of authorities going to the legal consequences of having assets connected to land. The cases involved a dwelling house permitted to be placed on land in the context of rights under protected tenancies legislation, and liability for rates in relation to telephone utilities and harbour facilities located pursuant to statutory rights.
[31] In urging that the arbitrator’s reliance on the three decisions cited was misplaced, Todd emphasised the points previously argued by characterising all those decisions as regulating relationships between the underlying landowner, and the party enjoying some form of easement rights. In contrast, the relationship in issue here is between the party legally entitled to the benefit of easements (STOS), and beneficial owners on whose behalf it holds the easements. Further, Todd argued that a majority of the decisions relied upon involved rights to easements created by statute rather than negotiated as a matter of contract.
[32] Neither of these points add materially to what has previously been articulated for Todd as sufficient to raise a challenge to the terms on which the arbitrator treated the cases as analogies. The nature of the analogy drawn by the arbitrator in paragraph 72 of the award (cited in [75] of my first judgment) is to support his conclusion that the pipes, buried for the 22 kilometre length from Kapuni to Whareroa, are “part of the land”. Whilst the analogy arises in consideration of the first relationship (ie registered owner of the land versus holder of the easement), that is an appropriate step in the reasoning of establishing legal ownership. The following proposition that they are “owned” by STOS as the transferee under the easements is a very short step in the reasoning process from the first proposition and is, with respect, virtually inarguable in the absence of a contrary documented arrangement.
[33] The extent of the analogy relied on is not sufficient to suggest the arbitrator overlooked the consequences of the differences between the first and second types of relationship analysed by Mr McIntosh. Further, the use of the analogy could not raise any question of law of general importance.
Question 3
[34] This question, relating to the application of clause 16.2 of the core terms, was dealt with in [85] to [96] of my first judgment. I have determined Todd’s application for recall in respect of my reasoning on it in [5] to [11] above.
[35] In the context of the application for leave to appeal, I put to one side the concern at a lack of utility in the outcome sought on this issue by Todd. Assuming the interrelationship between clause 16.2 of the core terms and clause 2.3 of the HoA did have a material impact within the present dispute, the proposed question would still not pass muster as one that is seriously arguable. Clause 2.3 is a relatively core provision of the HoA, in that it confirmed the terms of employment of STOS until a new employment agreement with STOS was concluded. Clause 16.2 of the core terms addresses the situation that is to pertain once the new employment agreement is concluded. It is not seriously arguable that clause 16.2 of the core terms can be accelerated so as to have contractual effect in relation to Kapuni, prior to the event contemplated in clause 2.3 as introducing that change.
[36] My first judgment granted leave on Todd’s fourth and fifth questions in its first application and they are not revisited.
Second application, first question (“Question 6”)
[37] The first question in Todd’s second application was found to be brought in time and was therefore considered on its merits. It is dealt with in [131] to [136] of my first judgment, and related to claimed misinterpretation by the arbitrator of two deeds, completed in 1964 and 1991, as they related to legal ownership of certain assets at a Paritutu tank farm.
[38] Considering the arbitrator’s interpretation of those deeds so far as they related to the Paritutu assets, and bringing a fresh mind to the prospect that the arbitrator may have been wrong on the effect of those documents, I am nonetheless not persuaded that there is a seriously arguable question of law raised by this question 6. The reasoning in paragraph 172 of the award suggests that the terms of those documents is a matter of context, but that the arbitrator reached his view on ownership of the Paritutu assets predominantly on what he inferred from the conduct of the parties. This had involved a direction that ownership be transferred to STOS from the previous service company charged with managing the Paritutu assets.
[39] The issue is sufficiently dominated by factual matters to relegate any question of law arising out of the interpretation of the two deeds. Certainly, the interpretation of the deeds is entirely confined to this contractual relationship, and could not claim any form of general importance.
Second application, second question (“Question 7”)
[40] This has been dealt with in the recall context at [12] to [21] above. In my first judgment, I found that Todd could make out a seriously arguable case of error by the arbitrator because he declined to deal with the meaning of “transport charges” as that is used in clause 11(1) of JV55.[11] This was on the basis that the Whareroa pipeline did not come within main field storage, with the reasoning suggesting that the need to address the meaning of “transport charges” would follow from a finding
that the Whareroa pipeline was within main field storage. However, the expression is used in the part of clause 11(1) dealing with deliveries outside of main field storage.
[11] At [137]
[41] However, notwithstanding the omissions from my earlier ruling, I remain satisfied that no proper application on this question was brought in time. There is no seriously arguable point against that conclusion. It may well be that there is some scope for further appellate consideration of the scope of “proper” applications under Article 33(3), but I do not accept that the present circumstances present an appropriate context for the Court of Appeal to analyse the point. If there were, I would have serious reservations that any declinature on the substantive point sought to be argued could claim any form of general importance.
Second application, third question (“Question 8”)
[42] The last of Todd’s questions raised the arbitrator’s refusal to declare a breach of good faith by Shell. It was dealt with in [143] to [150] of my first judgment. I found that the post-award requests made of the arbitrator by Todd were effective to extend time in relation to this question. The points raised afresh on behalf of Todd
included references to the decisions in Burger King Corporation v Hungry Jacks Pty Ltd[12] and Vero Insurance New Zealand Ltd v Fleet Insurance and Risk Management Ltd[13] as extending the scope of implied duties of good faith.
[12] Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187.
[13] Vero Insurance New Zealand Ltd v Fleet Insurance and Risk Management Ltd HC Auckland CIV-2007-404-1438, 21 May 2007.
[43] As to the first of these cases, I am not persuaded that Australian and New Zealand law is developing completely in parallel on the implication of obligations of good faith in commercial contractual contexts such as joint ventures. (In Burger King, the issue was a franchisor’s withholding of consent to the appointment of additional franchisees for reasons unrelated to the wellbeing of the franchise business.) In any event, the reasoning did not arise in a context sufficiently similar to the present, for it to be persuasive that the arbitrator erred in declining to determine a breach of good faith.
[44] As to the second case, on an interim injunction application, Asher J was prepared to entertain the notion that the defendant may have withheld a consent sought from it in an arbitrary and unreasonable manner (in the sense of irrationality), as an element of finding a serious issue to be tried.[14] That goes no further than the Socimer[15] notion of implied good faith, discussed next.
[14] At [47] to [49].
[15] Socimer International Bank Ltd v Standard Bank London Ltd [2008] 1 Lloyds Law Reports 558, adopted in respect of STOS in paragraph 100 of the award.
[45] In exercising contractual discretions, parties are obliged not to act irrationally or perversely, as articulated in the decision in Socimer. In light of that standard, the arbitrator was not prepared to make a finding that Shell had acted in absence of good faith. The relative importance of that factual finding weighs against Todd’s ability to separately identify a question of law on which it could be argued that the arbitrator had erred. Importantly, within the question of law Todd seeks to argue, there is no general importance attributable to obligations of good faith owed by Shell to Todd.
[46] Accordingly, I find that Todd has not made out grounds for leave on any of these questions, to pursue leave from the Court of Appeal to argue them in an appeal against the arbitral award.
Shell’s application for leave
[47] My judgment declined Shell leave on two of the four questions of law it sought to argue on appeal from the arbitrator. They were listed in Shell’s original application as questions B and D and have since been referred to in those terms.
Shell’s question B
[48] I dealt with this in [31] to [39] of my first judgment. Shell submitted that there was a strongly arguable case that the arbitrator had erred in implying into clause 5(1) of JV55 a constraint on STOS’s authority to deal with a joint venture pipeline which requires the operator to only impose a reasonable charge for it when being used by one party for its own purposes. Mr Hodder’s arguments progressed from those heard on the original leave application, by challenging the grounds on which I have rejected the arguability of his points on the arbitrator’s claimed errors.
[49] On the construction of the terms of JV55, Mr Hodder emphasised that STOS’s consistent obligation to the joint venturers was to get the best return when dealing with joint venture assets. In that relationship, each company in its separate capacity is “an outsider” to the joint venture, and STOS’s position when dealing with either of them as an outsider is no different from its obligations when dealing with an unrelated third party. It follows on Shell’s analysis of clause 5(1) that STOS cannot be fettered in attempts to maximise returns on assets it is charged to administer. That obligation is characterised as clear and complete, with no apparent need or justification to imply any qualifications to it.
[50] In contrast, clause 14 of JV55[16] provided for an extension of the obligations as between the KMCs, but not directly involving STOS. Shell suggests clause 14 extends the scope of the joint venture by recognising preferential treatment for co-joint venturers where one or more of them owns pipelines for carrying oil or gas received under the agreement, to give non-owners an entitlement to use the pipeline to the extent that capacity is available in it, provided the non-owner pays reasonable
charges. Shell argues that there is no basis for cross-referencing the effect of that arrangement as between joint venturers, to impose a constraint on how the operator discharges its obligations to the joint venture in respect of assets for which it is responsible.
[16] Cited in [10] of my first judgment.
[51] It is consistent with the arbitrator’s reasoning that clause 5(1) did not need to expressly identify the different nature of STOS’s responsibility when dealing with a joint venture asset being used by one of the KMCs. The arbitrator was persuaded by the lack of logic in the joint venturers expressly providing for concessionary terms on which one of them might use a pipeline owned by the other, but then anticipating that one of them would be able to abandon that co-operative approach when the other sought to use joint property. On the facts, if Shell had originally constructed the Whareroa pipeline, then it would be constrained to reasonable charges in permitting Todd to use it, but when both of them had constructed and paid for it, Todd would be required to pay a full market rental. Shell argued that a full rental could be calculated at a dollar less than the cost of replicating the joint asset with an identical new pipeline (bypass costing).
[52] Mr Hodder placed particular emphasis on Lord Hoffman’s observation from
Belize:[17]
The Court has no power to improve upon the instrument which it is called upon to construe…It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means.
[17] Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10 at [16].
[53] Clause 14 reflects an intra-joint venture co-operative approach to transporting oil and gas. Each party is obliged not to treat the others as if they were external third parties, but rather to facilitate deliveries from Kapuni not undertaken jointly, on a basis that recovered the costs of doing so but did not seek to profit from it. The limit on that co-operative commitment was if the owner of the pipeline needed it for its own purposes. The essence of the arbitrator’s reasoning was that the drafters of JV55 cannot have intended to capture that commitment to co-operation regarding separately owned pipelines, but permit Shell to exploit its voting control over STOS to institute a level of charge for Todd’s use of a pipeline, half of which was
beneficially owned by Todd, on a full bypass basis. The way the construction argument was reformulated did not persuade me that Shell’s contrary interpretation was seriously arguable.
[54] Shell also criticised the arbitrator’s approach to interpretation as improperly influenced by current circumstances, when the interpretation of the contract and test for implication of terms is to be applied at the time the contract was entered into. There is apparently some doubt as to whether Shell’s extent of control over the joint venture by enjoying a casting vote within STOS was a feature of the joint venture relationship from the outset. However, I took Mr Hodder as being prepared to accept, for the purposes of the present contractual interpretation analysis, that indeed Shell’s effective control of STOS decisions was a feature of the context in which JV55 was concluded.
[55] In that context, I am not persuaded that it is seriously arguable that the arbitrator had any improper regard to the current consequences of Shell’s arguments on the scope of STOS’s powers under clause 5(1) of JV55. Its terms are not being interpreted in a vacuum, but rather in the context of the current dispute. There would always be the prospect of the sort of tactical considerations found by the arbitrator to exist in the present circumstances, where use of a joint venture asset by one party was to be settled by STOS. There can be no seriously arguable concern that the arbitrator’s interpretation is improperly influenced by circumstances arising post the contract: they are merely one manifestation of a range of contingencies that could arise.
[56] If one posed the classic hypothetical[18] of whether, if asked at the time of concluding the contract, the parties would agree that the term now implied “went without saying”, their inclusion of clause 14 leads to the objective inference that their answers would have been “of course”. I accept that, given the highly confrontational relationship between Shell and Todd in recent years, it would be unrealistic not to acknowledge, on any attempted reconstruction of their subjective reactions, that they would not agree on anything that had not been reduced to writing
after exhaustive negotiations. However, that is not a reservation appropriately attributed to any objective reconstruction of the position in 1955.
[18] Originally in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227, adopted in
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.
[57] Shell also criticised my characterisation of the arbitrator’s findings on STOS’s proposed tariff at 50 cents per gigajoule including “13 cents per gigajoule that could not be justified on any valuation”[19] as going beyond the findings in the award. The relevant findings in paragraph 107 of the award included that:
[19] At [38] of my first judgment.
•at the time STOS passed the resolution on the level of tariff it was to impose, Shell’s own valuation showed a tariff of 35 cents per gigajoule;
•that Shell used its voting power in STOS to impose a tariff above its own then current valuation; and
•that Shell added 13 cents per gigajoule to its valuation in an attempt to exert pressure on either Fonterra or the Whareroa joint venture to buy its interest in the pipeline.
[58] Those findings led to the comment in the following paragraph of the award that Shell had sought to justify the 50 cents per gigajoule as being within reasonable limits, but that at the time of the meeting on 20 September 2006, it had no such justification and had increased its paper valuation by 13 cents per gigajoule to endeavour to force a sale.
[59] Mr Hodder’s point was that expert evidence on behalf of Shell at the arbitration did in fact justify a charge of 50 cents per gigajoule, that being arrived at by different methodologies, including the bypass price calculated by reference to the cost Todd would incur if it had to replicate the Whareroa pipeline with one of its own. On Shell’s approach, that is a valid mode of valuation, and indeed one that STOS was authorised by clause 5(1) to adopt.
[60] I accept the criticism that my summary overstated the effect of the arbitral findings to the extent that I suggested the last 13 cents could not be justified at all,
rather than at the time when Shell voted for STOS to impose it. However, the subsequent existence of other valuations does not impact on the analysis I undertook and nor do I see this point as adding any weight to the arguability of error by the arbitrator. Again, it does not raise a point of any general importance.
[61] Accordingly, I am not persuaded that it is seriously arguable that the Court of
Appeal would grant leave on Shell’s question B.
Question D
[62] This is dealt with in [45] to [53] of my first judgment. Shell’s question contends that the arbitrator had “essentially” adopted a regulatory approach to setting the appropriate tariff, and on that premise wishes to argue that the arbitrator, in doing so, erred as a matter of law.
[63] The terms of Shell’s question accept (unless it succeeds in pursing and establishing the contrary on question B) that the tariff must be objectively reasonable, and that the tariff is to be determined in the context of a commercial tariff setting. Given those parameters, Shell wishes to argue that the arbitrator erred in the extent to which he drew analogies with the regulatory approach to tariffs used by the Commerce Commission. Shell submits that use of that analogy involved the arbitrator applying the wrong legal standard under the contract.
[64] The contrary view is that the parameters identified in the preceding paragraph are themselves the “legal standards” applicable to the contract. The resort to an analogy with the regulatory approach used by the Commerce Commission is a matter of choice within those parameters. The analogy was one among options that were open to the arbitrator, depending on his findings on the evidence heard by him, so that the relevance of the Commission’s valuation approach is at best a mixed question of fact and law.
[65] In the end, the arbitrator did not set a specific tariff, but rather reached a conclusion that any tariff above 42.3 cents per gigajoule would not be a reasonable tariff. The award traverses a number of options for each of the major components
that would contribute to the setting of a tariff. The analysis in the award extends from paragraph 116 to paragraph 152. In [49] of my first judgment, I summarise some of the major differences between the regulatory approach to valuation and that preferred by the arbitrator. Re-reading the relevant part of the award reinforces my view that it is an overstatement to suggest that the arbitrator “essentially adopted” the Commerce Commission’s approach. To permit argument on question D as posed would inevitably involve argument, not only about the appropriateness of choosing some elements of a regulatory approach to tariff setting in the context of the “reasonable charges” that are to apply, but extending into the justification for the numerous and significant differences between the so-called regulatory approach, and the respective components of the valuation model settled upon by the arbitrator as appropriate to the present contractual situation. That exercise requires a review of the competing opinions of the various experts called, and answers could therefore not be provided without traversing issues of fact. In one of the authorities cited for
Shell, the Court of Appeal observed: [20]
…the method of approach must not be elevated to become the test itself; it is only an aid to ascertain the market value. Each method of approach, and whether more than one should be employed, depends in each case on the circumstances.
[20] GUS Properties Ltd v Tower Corporation [1992] 2 NZLR 678.
[66] Shell argues that adoption of the “quasi regulatory methodology” must be in error because it does not determine a willing buyer/willing seller price. Shell argued that because it is a commercial rate setting, it must inevitably reflect a willing buyer/willing seller price. Authorities relied on for that proposition included the GUS Properties Ltd decision, where the Court of Appeal observed: [21]
…market value calls for an inquiry as to the value at which a willing but not anxious vendor would sell the property and a willing but not anxious purchaser would buy.
[21] At 690.
[67] The effect of Shell’s argument is that there could not be a commercial rate setting which was other than market value. The arbitrator’s approach, influenced by the terms and effect of clause 14, is to the effect that there can be a commercial rate
setting other than one reflecting market value. As submitted for Todd, a willing buyer/willing seller test is a fair market value that does not take into account issues of reasonableness peculiar to the contractual context in issue. Todd cited, as recognition of the prospect of a test other than willing buyer/willing seller applying, the Court of Appeal’s decision in Sextant Holdings Ltd v New Zealand Railways
Corporation.[22] That decision considered the valuation approach that might be
appropriate under the lease in question. After acknowledging the first of two general categories being the familiar willing buyer/willing seller test, the Court of Appeal acknowledged:
The other looks at what the particular lessor and lessee would consider a reasonable rent in their circumstances. Although requiring an objective assessment, it may call for consideration of circumstances not relevant to a pure market test such as who paid for the improvements and the profitability of the business carried on by the lessee. In all cases it is a matter of identifying the intentions of the parties as expressed in their lease.
[22] Sextant Holdings Ltd v New Zealand Railways Corporation (1993) 2 NZConvC 191,556 at 191,560.
[68] Rejection of question B requires the acceptance of the arbitrator’s implication of a reasonableness constraint. Any insistence that “reasonable charges” must nonetheless be measured on a willing buyer/willing seller basis is inconsistent with the obligation to make separately owned assets available under clause 14. The application of the same reasonableness constraint applying to the sole use by one venturer of jointly owned pipelines, is a strong argument against the way in which Shell has reformulated this argument.
[69] Accordingly, I am not satisfied that Shell can establish the arguability of question D to a level sufficient to warrant leave to pursue the issue of leave to appeal further in the Court of Appeal.
Summary and Costs
[70] Todd has made out one ground on which my first judgment omitted to deal
with a relevant matter. That constitutes a sufficiently special reason to reissue my first judgment. However, the point is not one affecting the outcome on the relevant question sought to be argued on appeal. In all respects, both parties’ applications for leave to appeal the extent to which I declined them leave, are declined.
[71] There will be no order as to costs.
Dobson J
Solicitors:
Chapman Tripp, Wellington for Shell
Russell McVeagh, Wellington for Todd
0
4
0