Shell (Petroleum Mining) Company Limited v Todd Petroleum Mining Company Limited HC Wellington CIV 2009-485-2024
[2010] NZHC 214
•5 March 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
SHELL (PETROLEUM MINING) COMPANY LIMITED V TODD PETROLEUM MINING COMPANY LIMITED HC WN CIV-2009-485-2024 5 March 2010
CIV-2009-485-2422
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: 15 December 2009
Counsel: J E Hodder SC and T D Smith for Shell
H McIntosh and N Leslie for Todd
Recalled& Reissued: 8 June 2010 as per Minute of even date. This reissued judgment replaces that issued on 5 March 2010, by adding paragraphs A-D after [140].
Effective date of
Judgment: 5 March 2010
REISSUED JUDGMENT OF DOBSON J (Subseqent to Recall Application)
Table of Contents
Introduction – the underlying dispute............................................................................................................... [1] Scope of the arbitration ...................................................................................................................................... [9] Principles for granting leave, and initial statutory threshold........................................................................ [17] Shell’s application ............................................................................................................................................. [25] Question A: Does clause 5 grant STOS broader powers? ............................................................................ [25] Question B: Must a tariff set by STOS be reasonable?.................................................................................. [31] Question C: Should STOS initiate a meeting of the KMCs? .......................................................................... [39] Question D: Did the arbitrator apply the wrong reasonableness test? ......................................................... [45] Other criteria................................................................................................................................................. [54] Todd’s first application .................................................................................................................................... [62] Question One: STOS ownership of KJV assets “by virtue of” clause 5(1) of JV55....................................... [62] Question Two: Authorities misapplied on status of pipelines ........................................................................ [73] Question Three: Application of clause 16.2 of the Core Terms .................................................................... [85] Question Four: Scope of “main field storage”.............................................................................................. [97] Question Five: “Main field storage” interpreted wrongly as to Whareroa pipeline ................................... [106] Other criteria............................................................................................................................................... [110] Todd’s second application – Brought out of time?....................................................................................... [111] Todd’s second application .............................................................................................................................. [131] Question One: STOS ownership of “PTF Assets” ....................................................................................... [131] Question Two: Arbitrator’s misinterpretation of clause 11(1) of JV55 ....................................................... [137] Question Three: Arbitrator’s refusal to declare a breach of good faith by Shell ........................................ [143] Standing back.................................................................................................................................................. [151]
Introduction – the underlying dispute
[1] These proceedings reflect applications by both parties to an arbitration, for leave to appeal various findings in the arbitrator’s award. The plaintiff and defendant companies in each proceeding are the parties to certain joint venture arrangements for the exploitation of oil and gas production from the Kapuni Field in Taranaki. I can refer to the parties simply as “Shell” and “Todd”. When acting together for the purposes of the Kapuni joint venture, they are referred to as the Kapuni Mining Companies (KMCs).
[2] As long ago as 1955, Shell and Todd concluded a joint venture (JV55) for the purposes of exploring, prospecting, mining and producing petroleum in Taranaki. JV55 provided for the incorporation of a services company intended to facilitate a more efficient and economic operation of the joint venture. The terms on which Todd and Shell, as the JV55 joint venturers, would employ the services company were set out in a contract of employment that was detailed in the third schedule to JV55. For a period that is not relevant to the present proceedings, BP joined the original joint venture, so that the services company throughout that period was appropriately called Shell BP and Todd Oil Services Limited (SBPTOS). On withdrawal of BP from the venture in 1991, Shell and Todd became 50 percent joint venture partners and the services company was appropriately renamed Shell Todd Oil Services Limited (STOS).
[3] In March 2002, the parties concluded a further heads of agreement (HoA) which provided for termination of JV55. The HoA contemplated that a new joint venture agreement would be entered into in respect of Kapuni and, pending completion of that new agreement, provided that specified terms of JV55 were to continue to apply. In the meantime, the HoA provided for certain “Core Terms” in schedule 3 to that document.
[4] Production of gas from Kapuni started in about 1996. The KMCs jointly supplied gas from Kapuni to a cogeneration (cogen) plant at Whareroa. The
purchaser of that gas was a separate joint venture which was operating the cogen plant, originally between Todd and a predecessor of Fonterra, with Fonterra more recently being substituted (the Kiwi JV). For the purposes of supplying gas to the Kiwi JV, the KMCs had a pipeline of some 22 kilometres built to deliver gas to the site of the Kiwi JV cogen plant in Whareroa (the Whareroa pipeline). When the initial gas supply contract expired in July 2006, Todd accepted an offer from the Kiwi JV to be the sole supplier of gas to the Kiwi JV for a further 10 years.
[5] In anticipation of the termination of the KMCs’ joint supply contract with the Kiwi JV and commencement of Todd’s separate sale arrangements, Todd advised Shell by letter dated 23 June 2006 that:
• it had completed a new contract with the Kiwi JV for supply of gas via the Whareroa pipeline for 10 years from 1 August 2006;
• it had issued an instruction to STOS to deliver the gas;
• it considered a rate of 23.5 cents per gigajoule a reasonable and appropriate “transport charge” under clause 11(1) of JV55, which provision Todd relied on as empowering it to direct the use of the Whareroa pipeline in such circumstances; and
• Todd intended to recover transport charges at that rate from the Kiwi JV
and remit one half of those payments to Shell.
[6] Shell promptly contested Todd’s entitlement unilaterally to arrange use of the Whareroa pipeline. At that time, Shell insisted that future use of the Whareroa pipeline had first to be discussed and agreed by the KMCs. Shell treated the Whareroa pipeline as a KMC “joint asset”.
[7] In what Todd describes as a change of tack on the part of Shell, from about September 2006 Shell pursued initiatives for STOS to deal with any use of the Whareroa pipeline, without any meeting of the KMCs convened to debate Todd’s proposed use of the Whareroa pipeline. Shell initiated proposals to be pursued by
STOS as to the tariff that STOS would charge Todd for use of the Whareroa pipeline. This led to a resolution put to the STOS board by Shell on 20 September
2006, that Todd was to be charged a tariff at a rate of 50 cents per gigajoule for use of the Whareroa pipeline. Todd abstained from voting on that resolution and it was passed by Shell nominees.
[8] Todd refused to pay invoices subsequently issued by STOS in accordance with the 20 September 2006 resolution. Todd contended that:
• arrangements for its sole use of the Whareroa pipeline were a matter for
KMCs in meeting and not for STOS;
• the purported tariff was wholly unreasonable; and
• the tariff had been engineered by Shell in order to inflate the sale price of its half share of the Whareroa pipeline.
Scope of the arbitration
[9] The dispute was then referred to arbitration. Shell assumed the position as claimant. Shell contended that the contractual arrangements meant that it was for STOS to hold, use and apply assets (such as the Whareroa pipeline) for the joint venture, including allocating the use of assets to the KMCs or to third parties. Shell denied that STOS was constrained to any “reasonable” level in the charges it might propose for the use of assets. Todd denied that STOS had such powers, and also pursued counterclaims. Todd’s primary case was that the KMCs own all of the Kapuni joint venture assets, both legally and beneficially, so that they can use those assets without charge. Alternatively, if STOS enjoys legal ownership of the assets on behalf of the KMCs as beneficial owners, then STOS does so only as a bare trustee so that the KMCs still have the rights to use their assets without charge. Todd also argued that the powers of STOS to hold, use, apply or sell assets do not extend to leasing or letting them to one of the KMCs.
[10] The arguments raised matters of interpretation of clauses of JV55 that continue to apply. These include clauses 2(12), 5(1), 11(1) and 14. They provide as follows:
2. (12) All orders, instructions and directions to be given to the Services Company in accordance with the provisions of the Agreement referred to in subclause (3) of this Cause shall be given by the petroleum mining companies jointly. In the event of any disagreement on any proposal to give any such orders, instructions or directions, the matter shall be referred to a meeting of the petroleum mining companies to be held in New Zealand and the decision of such meeting shall be conclusive and shall be given effect to accordingly. At such meeting the representative or representatives of each petroleum mining company shall either alone or together have the same number of votes as the number of Directors of the Services Company which that petroleum mining company is entitled for the time being to appoint in accordance with the provisions of subclause (4) of Clause 3, and the provisions of the Articles of Association of the Services Company as to procedure and voting at a meeting of the Board of Directors of the Services Company shall apply, mutatis mutandis, to such meeting. Such meeting shall be convened by any of the petroleum mining companies, or by the Services Company at the request of any of the petroleum mining companies, by notice to the other petroleum mining companies in the same manner, mutatis mutandis, as a meeting of the Board of Directors aforesaid. 5.
(1)
All lands, buildings, plant, equipment, petroleum licences, moneys and other rights, interests and assets of whatsoever nature (other than petroleum produced in the course of the joint venture) from time to time acquired by or vested in the Services Company for the purpose of the joint venture (hereinafter together called “the Joint Assets”) shall be held, used or applied by the Services Company for the purposes of the joint venture and subject as aforesaid and, in the case of the said licences, to Clause 17 shall be held by the Services Company on behalf of the contributory companies with authority to the Services Company (subject to any limitation from time to time prescribed by the contributory companies) to sell or otherwise dispose of any such assets (other than petroleum licences) and to hold the proceeds of such sale or other disposition in the like manner. The beneficial interest therein of each contributory company –
(a) shall during the period specified in subclause (3) of this Clause be proportional to its percentage interest for the time being; and (b) from and after the end of the said period shall
(subject to the provisions of subclause (2) of this
Cause) be proportional to its percentage interest at the end of the said period.
11. (1) All petroleum shall be delivered by the Services Company at main field storage or (subject to the payment of transport charges by the recipient) at such other place reasonably required by the recipient at which the Services Company can conveniently deliver the same.
14.Each of the petroleum mining companies shall be entitled to use for the purpose of transport of the petroleum which it receives under the Agreement, on payment of reasonable charges, all pipelines and associated equipment (including loading and discharging facilities) in New Zealand constructed for the purpose of transporting petroleum produced in the course of the joint venture and owned by any one or more of the other petroleum mining companies or their respective affiliates insofar as such pipelines and associated equipment are not needed by such companies or their said affiliates for their own requirements.
[11] Todd’s fallback position was that if these assets came within clause 5(1) of JV55 (Todd’s primary argument depending on them being excluded from that category), then, under clause 11(1) of JV55, the pipeline was either “within main field storage” or was outside “main field storage” but in a location to which STOS can still conveniently deliver on payment to STOS of the transport charges it incurs. Further, that any charges imposed by STOS had to be reasonable. Todd also challenged the way in which STOS, at Shell’s instigation, was dealing with other assets on terms which Todd claims revealed discriminatory treatment by STOS, in favour of Shell and against Todd. These assets included a pipeline known as the KGTP pipeline, a loading arm, tanks T702 and T703 at a tank farm at Paritutu (PTF) and the PTF Kapuni pipeline.
[12] The arbitration was heard over a period of some 18 days and the arbitrator’s award was delivered on 10 July 2009.
[13] The outcome of the arbitration was reflected in the following orders:
198.In view of the findings, the following declarations and orders are made:
(a)Pursuant to clause 5(1) of JV55, and subject to any relevant joint instructions by the KMCs under clause 2(12) of JV55, STOS is exclusively entitled to:
(i) determine the use and application of KJV* assets;
(ii) determine terms of use for KJV* assets;
(iii) determine the imposition and recovery of charges on and from any person (including either of the KMCs) for use of KJV* assets;
(iv) subject to any relevant agreement, terminate the use of KJV assets by any person if the terms of use, including the payment of any charge, determined by STOS, are not complied with.
(b)The KGTP pipeline, the loading arm, tanks T702 and T703 at the PTF and the PTF Kapuni pipeline are KJV* assets. The Whareroa pipeline is either a KJV* asset or is an asset vested in STOS on the same terms and conditions as those contained in clause 5(1) of JV55.
(c) The resolution of the STOS Board of Governance on
20 September 2006 in relation to the Whareroa pipeline, and all purported invoices issued pursuant to that, are invalid.
(d) The tariff fixed by STOS for one party’s use of a KJV* asset must be a reasonable charge.
(* KJV = Kapuni Joint Venture)
[14] Todd applied by Memorandum dated 12 August 2009 for the arbitrator to make certain corrections to the award under art 33(1)(a) of sch 1 to the Arbitration Act 1996 (the Act), for interpretations under art 33(1)(b), and for further specific orders under art 33(3). There was a measure of agreement between the parties on the corrections required and, to the extent they were consented to, the arbitrator accepted it was appropriate to do so. He treated his jurisdiction to correct the award as a narrow one, treating it as “a slip rule”. In all other respects, he declined to respond to Todd’s further application.
[15] Shell seeks leave on what it characterises as questions of law arising out of alleged errors in (c) and (d) of paragraph 198 of the award.
[16] For its part, Todd pursued an application for leave to appeal on questions of law arising out of paragraphs (a) and (b), but on terms acknowledging that it intended to seek corrections and further interpretations from the arbitrator, so that it contemplated the prospect of an amended or further application. Todd subsequently elected not to amend its original application for leave, and instead commenced its
second set of proceedings that sought leave on additional questions. Shell challenges the timing of Todd’s second application, arguing that it is out of time and that the Court has no jurisdiction to extend time.
Principles for granting leave, and initial statutory threshold
[17] The legal principles applying to such applications for leave are well settled. Parties may appeal to the High Court on any question of law arising out of an award with the leave of the High Court. Leave is not to be granted, in terms of cl 5(2) of the sch 2 to the Act, unless the Court considers that:
…having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties.
[18] Once that threshold is satisfied, the Court has a more general discretion as to whether to grant leave. The parties were content to rely on the summary in the headnote of Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd[1] as a commonly accepted formula of non-exhaustive factors that the Court appropriately has regard to in considering its discretion. Those are:[2]
[1] Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA).
[2] At [54].
(1)Where the question was a one-off point and of little precedent value the Court would not grant leave unless there were very strong indications of an error. Where the question was of precedent value the lower standard of a strongly arguable case that an error existed would be sufficient. Where conflicting decisions existed on the point in question this would weigh in favour of granting leave. This first consideration was the most important.
(2)If the question of law under consideration was the very reason for the arbitration this would weigh against exercising the discretion. Conversely where the question of law emerged incidentally during the arbitral process leave would be more readily granted.
(3)Where the arbitrators were legally qualified it would be more difficult to obtain leave to appeal the arbitral decision on a question of law.
(4) Where the dispute was of great significance to the parties this would weigh in favour of exercising the discretion.
(5)Where a very substantial amount of money was involved it might be somewhat easier for the parties to obtain leave.
(6)Where the likely amount of delay consequent on granting leave was disproportionate to the significance of the dispute, or if the issue was urgent, the discretion was less likely to be exercised.
(7) If the parties had agreed that the arbitral award was final this, while not determinative, would weigh against the exercise of the discretion.
(8)If the dispute was of an international nature and the parties had expressly opted in to cl 5 (the appeal provisions of the Arbitration Act 1996, Second Schedule) this would weigh in favour of exercising the discretion.
[19] Both applicants effectively conceded that in addition to the questions they sought to appeal constituting ones that substantially affected the rights of one or more of the parties, so also did the questions sought to be appealed by the other party. Those mutual concessions are appropriate. The difference thus far between the tariff payable for use of the Whareroa pipeline at the rate Todd proposed as appropriate, and that which STOS sought to charge at Shell’s instigation is approximately $3.3 million, when interest is added to the extent of non-payment. For Shell, its legal manager, Mr Christopher Street, deposes to a calculation that the difference between the two tariffs for the remaining seven years of Todd’s current contract for sale of gas to the Kiwi JV would be approximately $8.4 million in today’s dollar terms.
[20] Perhaps more importantly, this arbitration and the arbitration of a parallel dispute in relation to STOS’s powers to nominate operating expenses that has been determined by the same arbitrator, raise a series of issues about the on-going governance and control of the Kapuni joint venture. Given the scale and likely lifetime of the venture, the initial statutory threshold requiring a substantial effect on the rights of one or more of the parties is easily made out on the questions sought to be appealed.
[21] Further, because the issues affect the on-going joint venture, it is also appropriate to assess the prospects for success by the standard of a strongly arguable case, in respect of all of them, as contemplated in the first of the considerations in Doug Hood.
[22] Applications for leave to appeal arbitrators’ awards on questions of law are intended to be dealt with in a relatively summary way, with presumptive time limits on presentation of argument of 30 minutes for the party seeking leave, and the absence of any requirement for written outlines of arguments opposing such applications.[3]
[3] High Court Rules, Part 26, subpart 3; Doug Hood at [56]-[60].
[23] The argument on these applications relates to an award running to some
52 pages, in respect of which the initial applications sought leave on nine questions of law. Todd’s second application raised a further three questions of law. Oral argument reasonably took a very full day, without hearing submissions in reply, which were the subject of written submissions subsequently received by the Court on
22 December 2009.
[24] In these circumstances, it is not possible to deal adequately with the scale and extent of arguments in anything like a summary way. It has been necessary to consider each question on which leave is sought separately. Having done that, it is also appropriate to reflect on the outcome of the decisions reached individually, as they impact on the mosaic of issues on which I am satisfied leave should be granted, relative to each party’s overall concerns at the adverse aspects of the arbitrator’s award. Any expanded reasoning on the prospects of successful arguments is inappropriate given the substantive arguments that would follow on permitted questions of law. To the extent that I traverse any issues going to the substantive merits, it is only to reflect the inter-relationship between the competing challenges. In the usual way, none of this reasoning can have any relevance when the permitted questions are argued substantively.
Shell’s application
Question A: Does clause 5 grant STOS broader powers?
[25] The arbitrator made factual findings that the Whareroa pipeline is legally owned by the Kapuni joint venture, and that it is beneficially owned by the KMCs.
He found it to be a joint asset that was, in terms of clause 5(1) of JV55, “acquired by or vested in [STOS] for the purposes of the joint venture”. He found that the parties had acquired the pipeline to be used as an extension of their joint venture activities, but that the pipeline was no longer being used by the joint venture.
[26] In those circumstances, the scope of STOS’s powers was not being analysed by the arbitrator in the context of whether Todd’s current utilisation constituted a “use” for the joint venture, but rather whether a long-term lease of the pipeline by STOS is a “disposition”, for the purposes of clause 5(1) of JV55. The arbitrator reasoned that STOS was not entitled to lease the pipeline for a period of 10 years without the agreement of the KMCs. Hence, the terms of the first question of law Shell seeks to argue, as a challenge to the approach adopted by the arbitrator to the limits on the powers of STOS.
[27] Shell framed the first question of law on which it seeks leave in the following terms:
(A)Is clause 5 of JV 55 essentially declaratory of STOS’ powers to acquire, hold, use, apply and dispose of assets (“joint assets”) as agent, trustee and operator for the Kapuni joint venture, with such powers being limited only by (i) the express limits within clause 5, and (ii) the matters referred to in paragraph 100 of the Assets Award, and with such powers (subject to such limits) including the power to set a tariff for use of the Whareroa pipeline by any person (including one of the participants in the joint venture) for any period? (Assets Award, paragraphs 81 – 93, 110)
[28] Shell seeks to argue that clause 5 bears a wider interpretation of the powers of STOS than that interpreted by the arbitrator. In effect, Shell seeks an interpretation to the effect that STOS can do anything incidental to legal ownership so long as STOS is not doing so for purposes other than of the Kapuni joint venture.
[29] Todd opposes leave on the grounds that:
• the arbitrator’s interpretation does not give rise to any strongly arguable case of error;
• Shell’s first question reflects the “very issue” referred to arbitration so that relative centrality to the total outcome weighs against the exercise of the discretion; and
• the form of Shell’s first question is in any event only a selective and partial reflection of the relevant point.
The last objection on Todd’s behalf reflects a concern that the form of Shell’s first question might invite an answer more favourable to Shell, but in a form that ignored countervailing constraints on the powers of STOS that ought to be addressed at the same time, but were not reflected in the terms of the question.
[30] I consider that the relevant contractual provisions are capable of a different interpretation as to the scope and constraints on the powers of STOS than were found by the arbitrator and that it is strongly arguable that another interpretation ought to prevail. However, mindful of Todd’s concern that the form of question posed by Shell risks unfairly confining the constraints on STOS’s powers, I am minded to grant leave on Shell’s first question, in a somewhat amended form. Leave is granted on this first question in the following terms:
Is clause 5 of JV55 declaratory of STOS’s powers to acquire, hold, use, apply and dispose of assets (“joint assets”) as agent, trustee and operator for the Kapuni joint venture?
If so:
a)Do such powers include the power to set a tariff for use of the Whareroa pipeline by any person (including one of the participants in the joint venture) for any period?
b)Are STOS’s powers under clause 5 of JV55 limited by: (i) the express limits within clause 5;
(ii) the matters referred to in paragraph 100 of the Assets
Award;
(iii) any other matters derived from contractual provisions affecting the operation of clause 5 of JV55.
Question B: Must a tariff set by STOS be reasonable?
[31] The second question sought to be argued by Shell is as follows:
(B) Does any tariff set by STOS for use of a joint asset by one KMC simply have to be determined as a matter of good faith business judgement, or must it also be objectively reasonable, with that reasonableness able to be challenged by a KMC in arbitration? (Assets Award paragraphs 104 – 106, 113)
[32] Shell had accepted that STOS could not make decisions in bad faith, or out of self-interest, relying on the English Court of Appeal decision in Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd.[4] Nevertheless, the arbitrator went on to find that when STOS was leasing a redundant asset to a KMC, it had to do so at “a reasonable charge”. This was in part by reference to an obligation imposed on STOS under the terms of its contract of employment by the joint venture to act as a reasonable and prudent operator, but seemingly with greater reliance on the provisions of clause 14 of JV55.[5] Clause 14 was interpreted by the arbitrator as permitting one of the KMCs to use the other party’s pipeline to transport its gas on payment of “reasonable charges”. Paragraph 104 of the award continued:
[4] Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd [2008] EWCA CIV116.
[5] The text of that clause is set out in [10] above.
…STOS’s powers must be interpreted within context. If Todd is entitled to use a pipeline owned by Shell on payment of reasonable charges, then it is difficult to see that a charge for a pipeline in which Shell has a half interest in equity can attract more than reasonable charges. Although a party to a joint venture can act in its own interests, STOS’s duty to act with reasonable care as a prudent operator and the limitation that a party can only charge “reasonable charges” for the use of its own pipelines suggest that STOS has no power to charge a party more than reasonable charges for the sole use of the Whareroa pipeline. Further, another view of the matter is that “all pipelines” in clause 14 also includes all interests in pipelines. Shell has a beneficial interest in the Whareroa pipeline.
105.My view, therefore, is that, while the Socimer principle applies in general, STOS, in setting a tariff for Todd’s use of the pipeline, can only impose reasonable charges. The reasonableness of those charges can be challenged in an arbitration.
[33] Shell argues that the arbitrator has erred as a matter of law because clause 14 does not apply to jointly owned assets. Rather, Shell argues that clause 14 applies
only to those pipelines owned separately by one joint venturer, and further that clause 14 only contemplates “second class access” to a pipeline, where such access is liable to be denied if the owner of the pipeline needs it for its own requirements. Shell argues that if STOS was constrained in the level of charges it could impose for use of STOS assets (as distinct from the charges able to be imposed by one joint venturer in respect of its own assets), then the terms would have expressly addressed that. Shell submits that the absence of such a provision negatives any implied term confining charges for separate use of joint venture assets to what is reasonable. Shell further argues that the implication of an obligation of reasonableness was not necessary to give JV55 business efficacy because the STOS Governance Body/Board represented a contractual mechanism on which both KMCs were represented which could appropriately determine charges payable for use by one of the KMCs of a joint asset. This was said to render arbitral determination of “reasonableness” otiose. Shell suggests that this is particularly so as STOS’s conduct is governed by obligations of good faith, proper purpose and rationality.
[34] I am not persuaded that any of these arguments, or all of them in combination, give rise to a strongly arguable case that the arbitrator was wrong in imposing an obligation on STOS to set charges for use of a joint venture asset only on terms that are reasonable. I consider his approach to, and reliance on, the provisions in clause 14 to be entirely appropriate. At its inception, these joint venturers recognised that each would be able to call on the other, for access to the other’s pipeline assets to the extent that the owner did not require them. This would be on terms that would not be available to any third parties outside the joint venture. It is illogical not to extend that approach to assets that are within the joint venture, but not for the time being required for the purposes of the joint venture.
[35] I do not accept that clause 14 contemplates only “second class rights” to access a pipeline, whereas Todd is now able to enjoy “first class” access to the Whareroa pipeline. The quality of access is a question of degree and Todd asks only for access during the period in which, because of its contractual arrangements with the Kiwi JV, the KMCs can be satisfied that their joint venture will not require use of the pipeline. There was no suggestion that if the Kapuni Field continued after the
expiry of Todd’s current contract with the Kiwi JV, and either the joint venture or Shell in its separate capacity contracted to sell gas that gave it a use for the pipeline, that Todd could obstruct that access. The reality that Todd’s use of the pipeline is not able to be contested by Shell does not arise from Todd exercising a “first class” rather than “second class” right, but simply because the current commercial context eliminates the prospect that Shell or the joint venture might have a use for it.
[36] Nor am I persuaded that the existence of a decision-making mechanism between the KMCs within the STOS Governance Body adds anything against the implication of an obligation of reasonableness. KMC decision-making is structured on the basis that Shell has a casting vote, so that in the circumstances of a difference between the joint venture partners, if the extent of a charge imposed on Todd is not amicably resolved, then the absence of an obligation for charges to be reasonable would create the prospect for Shell using its casting vote to impose charges that are unreasonable. I am not persuaded that the structure of this contractual arrangement was intended to leave Todd vulnerable to that outcome, subject only to its being able to insist that charges had to be imposed in good faith, for proper purpose and rationally.
[37] Although it was not argued, I would have additional reservations about the utility of granting Shell leave to challenge a requirement for reasonableness. In doing so, Shell would predictably rely on a fallback position that imposition of charges by STOS are sufficiently constrained by obligations of good faith, proper purpose and rationality. However, factual findings by the arbitrator, which obviously cannot be re-opened, appear consistent with a finding that Shell procured STOS to impose the tariff for purposes going beyond those that were “proper” obligations. The imposition of a constraint of reasonableness could not be re-opened in a way fair to both sides, without Todd having the capacity to argue for extension of the factual findings that were not necessary, given the imputed obligation of reasonableness, but could well be relevant and necessary without it.
[38] The arbitrator found that the tariff which Shell proposed STOS should impose for use of the pipeline of 50 cents per gigajoule included 13 cents per gigajoule that could not be justified on any valuation. He also found that this
premium was included by Shell to render transport of the gas to Whareroa sufficiently expensive for the Kiwi JV that those joint venturers (currently Fonterra and Todd) would be incentivised to buy out Shell’s interest in the pipeline. An interpretation of the joint venture that permitted such conduct would need to be scrutinised very carefully. It is a classic context in which to imply a constraint of reasonableness of charges.
[39] Accordingly, I decline Shell’s application for leave to argue question B.
Question C: Should STOS initiate a meeting of the KMCs?
(C)Is STOS required to refer an issue concerning the use, application, or disposal of a joint asset to a meeting of the KMCs if it is known to the KMCs’ representatives on the STOS Governance Body/Board that there is a disagreement on that use, application or disposal between the KMCs? (Assets Award, paragraph 109, 110)
[40] The arbitrator found that STOS knew, at the time of the 20 September 2006 resolutions purporting to impose a tariff on Todd’s carriage of gas through the Whareroa pipeline, of a disagreement on the use and disposal of that asset. It followed on his reasoning that STOS should not in those circumstances have acted without instructions from a meeting of the KMCs. Consistently with that, the arbitrator found that the matter should have been referred to a meeting of the KMCs for decision. Shell’s question C is intended to challenge that finding.
[41] Shell contends that any such anticipatory constraint on what STOS can do is not justified on the terms of JV55. Certainly, STOS must act consistently with any instruction from the KMCs that it is given under clause 2(12) of JV55.[6] However, STOS is not constrained merely by virtue of an awareness of difference of views between the KMCs.
[6] See [10] above.
[42] Shell would wish to argue that an appreciation of some controversy, irrespective of the subject matter, cannot be read into the provisions of JV55. STOS was to be an operating company and JV55 is to be interpreted so as to give it
jurisdiction within operational matters. If that is to be constrained then the initiative should come from the KMCs and not in any anticipatory way from STOS.
[43] Todd argues that Shell’s criticism of this finding attempts to cast the finding as one of wide general application, whereas the arbitrator’s findings were intended only to be specific to the particular issue. Within the factual context as found by the arbitrator, a particular constraint on STOS when dealing with this particular issue was indeed justified on the terms of JV55.
[44] However, I find that it is seriously arguable that the arbitrator’s findings are of general application, and further that it is strongly arguable that such a constraint does not reasonably arise on the terms of JV55. I accordingly grant leave for question C to be argued on appeal.
Question D: Did the arbitrator apply the wrong reasonableness test?
(D) If the answer to (B) is that a tariff must be objectively reasonable, did the arbitrator apply the wrong principles as to the appropriate approach to determine that tariff by essentially adopting, in the context of a commercial tariff setting, the regulatory approach used by the Commerce Commission for setting the controlled prices for certain pipelines and power transmission lines? (Assets Award, paragraphs 119 – 122)
[45] Having found that a challenge to the contractual interpretation requiring a tariff to be objectively reasonable was not seriously arguable, the contingency on which this question depends is confirmed. In those circumstances, Shell seeks to argue that the test applied by the arbitrator, namely by reference to the regulatory approach to pricing under Part 4 of the Commerce Act 1986, is not the appropriate way of assessing the reasonableness of the tariff sought to be charged by STOS.
[46] The arbitrator approached the mode of measurement of reasonableness of the tariff at paragraph 120 in the following way:
In the absence of comparable market tariffs and because of my view that the tariff must be reasonable, the appropriate approach is similar to the regulatory approach which has been used by the Commerce Commission for setting tariffs for other pipelines and power transmission lines. There is no other model available.
[47] Once the arbitrator had determined that the contractual context required a commercial rate setting, Shell argues that the approach as to the analysis of the reasonableness of the tariff ought to have reflected a willing buyer/willing seller test in which neither party is so anxious to trade that they would overlook any ordinary business considerations. On this approach, it might well be that the buyer of a transportation service would pay up to the cost of the next most expensive alternative, which here could involve the cost of constructing a replacement pipeline. Shell adduced evidence contending for an analysis along these lines.
[48] Shell also wished to argue that because the arbitrator accepted that the appropriate rate-setting context was commercial, it was wrong to rely on an analogy with the regulatory approach under Part 4 of the Commerce Act 1986. The assets in question here are not regulated by that statute, and the considerations underpinning price control methodology used by regulators should therefore not apply.
[49] In opposing leave on this question, Todd criticised the framing of the question by Shell in that it wrongly characterised what the arbitrator had done. The terms of paragraph 120 of the award, quoted above, do not represent that the arbitrator “essentially adopt[ed]” the Commerce Commission’s approach. Rather, he settled upon an approach that was similar to that used in the regulatory approach, and thereafter conducted a thorough analysis which adopted a range of relevant variables. For instance, the arbitrator:
• rejected historic cost;
• chose straight line depreciation rather than economic depreciation;
• applied a 30 year life of the assets rather than 50 years; and
• made a “judgement call” on the appropriate discount rates which differed from those used by the Commerce Commission.
[50] The point is that the arbitrator has crafted his own comparator found by him to be appropriate for measuring the reasonableness of the particular tariff. However,
that model did depend on an approach similar to that used in the regulatory context. The reasoning has elements of both fact and law in it.
[51] Todd did argue that the choice of valuation methodology was solely a question of fact. Todd relied on the final sentence in paragraph 120 of the award, which is a finding on the evidence heard to the effect that there was no other valuation model available.
[52] Todd relied on the approach of the Court of Appeal in Doug Hood, where it had been argued that the application by the arbitrators of the wrong principles to the valuation constituted an error of law, and that was implicitly rejected:[7]
…It is far from a strong argument for the appellant to say that the arbitrators erred in assuming that scheduled rates agreed between two commercially knowledgeable contracting parties would have been reasonable rates. This was a perfectly reasonable assumption for the arbitrators to make. The method chosen by the arbitrators for the valuation (that is, having reference to the scheduled rates, the contractor's costs and a reasonable margin for profit) is one that makes commercial sense.
[7] Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) at [66].
[53] These are both valid points. At the core of the finding Shell seeks to challenge on its question D is a proposition of law as to how the arbitrator should have chosen an appropriate method for assessing the objective reasonableness of a tariff. It may well be that it is the specificity of the proposed terms of this question that raises the prospect of argument straying into matters of fact, and the findings that the arbitrator made on the evidence put to him. If there was a right of general appeal, then it may well be seriously arguable that the arbitrator ought to have adopted a different methodology for assessing whether the tariff sought to be imposed by STOS was objectively reasonable. However, if confined to a question of law, Todd would also be able to argue that the methodology chosen by the arbitrator was among those open to him, in the sense that even if Shell makes out on appeal that a different methodology would have been preferable, that should not lead to a different outcome unless the arbitrator’s choice was clearly wrong. That leads in turn to the factual finding in paragraph 120 of the award. Once properly confined to what is genuinely a question of law, I am not persuaded that Shell’s proposition is seriously arguable.
Other criteria
[54] Having found in respect of two of the four questions on which Shell seeks leave that they are seriously arguable, it is also appropriate to reflect on whether there are other discretionary factors that count against a grant of leave.
[55] In respect of each of the questions posed, Todd submits that the point sought to be argued on appeal is the “very issue” that the parties submitted to arbitration. Because it was the essence of what the parties put to their chosen forum, the second of the discretionary factors identified in Doug Hood[8] suggests that the importance of the point from the outset should weigh against exercising the discretion to grant leave. In evaluating the relative importance to the parties both for the immediate outcome, and as a matter impacting on the on-going operation of their joint venture, I do not see the relative closeness of these questions to the essence of the dispute
referred to the arbitrator as entitled to any significant weight against the exercise of the discretion.
[8] At [54].
[56] The third discretionary factor is the qualifications of the arbitrator. Both Shell and Todd in their capacity as applicants for leave acknowledged that the qualifications and experience of Mr Paterson QC as a retired High Court Judge constitutes a factor against granting leave to appeal on questions of law. However, neither suggested it should be decisive, and the arbitrator’s undoubted experience and expertise is to be considered in light of the complexity of the legal issues involved, and the relative importance of the dispute overall to the parties.
[57] The fourth and fifth discretionary factors from Doug Hood reflect the relative significance of the dispute to the parties, and the amounts of money involved. Those both weigh in favour of granting leave.
[58] The next discretionary consideration is that of delay. In a previous judgment delivered on 17 July 2009 (CIV-2008-485-2816) I granted applications for both
parties to re-argue before the arbitrator certain findings in their parallel arbitration dealing with operating expenses, consequent on setting aside certain findings in that arbitration. I was advised that a hearing for the re-argument in that arbitration is likely between March and May 2010. There is a measure of complementarity between the final outcome in both arbitrations and relative to the time taken since this dispute originally arose in September 2006, the delay involved in determining an appeal on the present arbitration is certainly not disproportionate to the significance of the dispute.
[59] The parties were keen to have these present applications argued promptly. However, that was not because either party claimed any urgency in reaching a final determination. Rather, if not heard when it was, other commitments of counsel would have precluded the argument occurring until well into this year.
[60] Finally, a factor which would otherwise arise against granting leave to appeal is whether the parties agreed that the arbitrator’s decision would be determinative. This is not one of those cases.
[61] For all of those reasons, I am satisfied that, in the form directed above, leave should be granted to Shell on the two questions where I have recognised that there is a strongly arguable case.
Todd’s first application
Question One: STOS ownership of KJV assets “by virtue of” clause 5(1) of JV55
[62] Todd’s first application for leave to appeal proposed five questions of law. The first is whether STOS owns the Kapuni joint venture assets that are the subject of the arbitration “by virtue of” clause 5(1) of JV55. The arbitrator’s ruling on this point is reflected in the following passages:
34.I accept that the provisions of JV55, the other relevant contractual documents and the physical evidence establishes a prima facie case that on the balance of probabilities the assets of the KJV are vested in STOS as a joint asset in accordance with the terms of clause 5(1)
of JV55. This is clearly what was contemplated for all joint assets by the provisions of JV55.
35.…When considered in context the objective intent of the parties is clear. STOS is to have vested in it the legal ownership of the assets, and although the beneficial ownership in such assets remains with the KMCs, it is STOS that has the power to use and dispose of such assets…
36.The evidence, which will be considered later, establishes that the Whareroa pipeline was vested in STOS as a joint asset. This merely confirms, in my view, the correct interpretation of JV55. Todd’s submissions that the assets are not so vested, or alternatively, that Shell has not discharged the onus on it will be more particularly considered later when dealing with the Whareroa pipeline. The position in respect of the KJV assets, is that, subject to any particular requirement in respect of a particular asset, the KJV assets are joint assets of the KJV and may be dealt with by STOS in accordance with clause 5(1) of JV55.
[63] Todd characterises this reasoning as interpreting clause 5(1) as if its terms transferred to, or created ownership of, the relevant assets for STOS. Todd argues that clause 5(1) is only declaratory of the position that will pertain, and that in respect of any particular asset there is still a need to evidence a transfer of the asset to STOS. Todd seeks to argue that clause 5(1) requires independent conduct in relation to any particular asset to demonstrate that the asset had been “…acquired by or vested in STOS for the purpose of the joint venture…”.
[64] Further, Todd is concerned that the arbitrator’s reasoning does not demonstrate an interpretive analysis establishing legal ownership in STOS solely on the relevant provisions in JV55. Rather, Todd characterises the arbitrator’s outcome of that analysis as equivocal because the arbitrator’s reasoning relies on his views of his interpretation of JV55 combined with the evidence presented to the arbitration. The arbitrator treated the views that he had expressed in relation to interpretation of the JV55 provisions as being “confirmed” by the evidence. I see this as a very refined criticism that may well not be justified if a somewhat more robust approach is taken to the interpretation of the terms of the award.
[65] In any event, legal ownership of assets associated with the joint venture is of real significance to the parties, and this issue readily passes the initial statutory
threshold of one that could substantially affect the rights of either or both of the parties.
[66] As to whether Todd can mount a strongly arguable case of error in respect of the arbitrator’s determination on legal ownership, Shell submits that it cannot, for a range of reasons.
[67] First, Shell makes the point that Todd’s points of defence up to a third amended set of points of defence in February 2008, and Todd’s briefs of evidence, accepted that STOS enjoyed legal ownership of the relevant KJV assets. It was only thereafter that Todd denied that legal ownership was vested in STOS, and claimed that it remained with the KMCs. In doing so, Shell characterised Todd as simply putting Shell to the proof of legal ownership in circumstances where Shell had assumed the role as nominal claimant for the assets dispute, and Todd was acting as nominal claimant in the separate dispute about operating expenses.
[68] Shell also argued that Todd’s criticism of the award that it seeks to pursue in this question misconstrues the arbitrator’s finding on the manner in which ownership vests in STOS. Todd treats the arbitrator’s analysis of clause 5(1) of JV55 as if the terms of that provision grant ownership, in the sense of vesting ownership of joint assets in STOS. However, Shell argues that the arbitrator’s reasoning does not go as far as that. Rather, it treats the arbitrator’s interpreting clause 5(1) of JV55 as presumptively treating joint assets as being held by STOS, subject to evidence establishing that any particular asset had been treated in a different way.
[69] If Shell’s interpretation of these passages of the arbitration is correct, it would mean that the arbitrator and Shell both agree with Todd’s submission in the argument before me, in the following terms:
Todd’s position is that clause 5(1) of itself does not transfer or create ownership. On a plain reading of the clause itself, there are no words of transfer of ownership or of obligation to do so. (para 4.7 of 12 November
2009 submissions for Todd)
[70] I am inclined to agree with Shell on this preliminary point, and therefore do not accept Todd’s submission that there is a strongly arguable case for asserting that
the arbitrator has erred in law because he misinterpreted clause 5(1) as granting
STOS ownership of joint assets.
[71] It follows that I agree with Shell’s comment on the finding in paragraph 34 of the award which was in the following terms:
…on the balance of probabilities the assets of the KJV are vested in STOS as a joint asset in accordance with the terms of clause 5(1) of JV55…
as meaning that where any asset is established as being vested in STOS then it will be held by STOS on the terms set out in clause 5(1) of JV55.
[72] That finding does not mean that an asset is held by STOS because of, or by virtue of the terms of clause 5(1). Accordingly, it is not appropriate to grant leave to argue a question of law as to whether STOS owns the KJV assets “by virtue of” clause 5(1) of JV55 when that is not a proposition of law I find to have been determined by the arbitrator.
Question Two: Authorities misapplied on status of pipelines
[73] The second question on which Todd seeks leave is whether dicta contained in Elitestone Ltd v Morris,[9] Auckland City Council v Ports of Auckland Ltd[10] and Telecom Auckland Ltd v Auckland City Council[11] are applicable to and/or determinative of the status of the pipeline assets in this dispute.
[9] Elitestone Ltd v Morris [1997] 1 WLR 687.
[10] Auckland City Council v Ports of Auckland Ltd [2000] 3 NZLR 614 (CA).
[11] Telecom Auckland Ltd v Auckland City Council [1999] 1 NZLR 426 (CA).
[74] Todd interprets the award as ruling, in reliance on these authorities, that relevant pipes, and in particular the Whareroa pipeline, are first, part of the land under which they run (ie are fixtures) and secondly are owned by STOS because of its status as the transferee under the easements over that land.
[75] The point was dealt with by the arbitrator in the following terms at paragraph 72:
Shell relies on several authorities for the proposition that the pipeline is a fixture which is to be treated as part of the land even though the fixture may be a tenant’s fixture which may be removed at the end of the grant. Important indicators are the degree of physical attachment and the object of the attachment. I accept on the basis of authorities such as [the three cases cited above] that the pipes are part of the land. They are owned by STOS as the transferee under the easements.
[76] This issue is important to Todd because the arbitrator applied the decisions in finding that the pipes, and in particular the Whareroa pipeline, are to be treated as part of the land where they run. Therefore, they are owned by STOS, which is the transferee under the easements granted for the pipes to be placed there.
[77] Todd seeks to argue that the approach in the cases applied by the arbitrator should be confined to situations where statutory rights to lay utilities are exercised on or under a third party’s land, whereas this ownership dispute arises in the contractual context of privately owned pipeline assets.
[78] Shell disputes that there could be any such basis for distinction. In Elitestone, the House of Lords moved away from previous reliance on an analysis as to whether items constituted “fixtures” to determine proprietary entitlements to them, and instead applied an analysis as to whether a chattel could properly be said to form part of the land. Shell argued that this approach is of wider, general application. Elitestone involved a claim by occupants of a bungalow to protection under the UK Rent Act 1977, where the freehold owners had granted them a licence to enter onto part of the owners’ land and “to keep thereon a bungalow and to reside” in it. The bungalow could only be removed by being demolished and when the owners of the land took proceedings seeking possession from the occupiers, the protection of the occupiers under the Rent Act depended on whether the bungalow was a chattel, or formed part of the land. Eschewing the test of whether the bungalow was a “fixture”, the House of Lords held that whether the structure had become part and parcel of the land itself depended on the degree and object of annexation to the land. Where it could only be removed by destruction, it could not have been intended to remain a chattel and must have been intended to form part of the land.
[79] In Auckland City Council v Ports of Auckland, the Court of Appeal adopted the move away from a technical analysis and application of the term “fixture” in
favour of what was seen as a return to the original principles of this part of the law, as to whether a chattel could properly be said to have become part and parcel of the land. The issue in that case was whether floating facilities at Westhaven Marina, which were secured to piles allowing them to float up and down with the tide but not to move horizontally, should be treated in terms of the extent of annexation and the object of it, as “land” in terms of the definition in the Rating Powers Act 1988.
[80] The decision in Telecom Auckland Ltd v Auckland City Council also related to the rateability, in that case of underground telephone cables, those above Council streets and in respect of telephone booths erected on the streets. Statutory provisions for the siting of such items gave the network operator an exclusive right of occupation for the limited purpose of conveying these services. It was held by the Court of Appeal to be more than an easement because the owner of the rest of the soil was ousted. The Court confirmed the High Court decision that the lines and booths constituted an interest in land for the purposes of the Rating Powers Act
1988. The decision made no reference to the House of Lords’ decision in Elitestone, and was decided before the Ports of Auckland decision.
[81] It was submitted for Todd that the context of the present enquiry as to legal ownership of the pipeline is so different from the situations in the three cases relied upon that it was inappropriate for the arbitrator to treat them as a relevant analogy. The relevance of the reasoning is the analytical approach that is taken to the extent of, and reason for, a physical connection with the land. Here, that had occurred by negotiated easement. Todd suggests there is a distinction between STOS assuming responsibility as agent for the joint venturers, in negotiating appropriate easements with third party land owners to run pipes over (or under) their land, and any necessary coincidence of identity between the entity entitled to the benefit of such easements, and the owner of the pipes that utilise them.
[82] In the analogies identified by the arbitrator, the extent of physical connection with the land, and the context in which it occurred, were sufficient to have the bungalow run with the land for Rent Act protection, and to have the assets in issue in the rating cases be sufficiently connected with the land to justify including the value of the assets in the relevant rating assessments. It is not seriously arguable in the
context of easements to run pipes negotiated and concluded in the name of STOS, that the subsequent laying of pipes in enjoyment of those easements did not reflect an extent of physical connection and context in which it occurred, that suggested an identity of interest between the company entitled to the legal benefit of the easements and the legal owner of the assets physically embedded in that land.
[83] Moreover, reliance on the analogy was only part of the arbitrator’s reasoning on determination of legal ownership of the pipelines. In addition, the arbitrator reasoned:
Todd’s position is that the easements are only evidence of ownership between STOS and the owners of the land and are not evidence of ownership between the KMCs and STOS. Further, the STOS asset register is not evidence that the assets have vested in STOS. While I accept the basic premises underlying these submissions, there is, in my view, no evidence rebutting the prima facie findings drawn from the contractual documents. In fact, the evidence is consistent with the parties’ agreed position under clause 5.1 of JV55. Thus, the contractual context and the evidence that exists allows me to determine on a balance of probabilities that the legal title to the Whareroa pipeline is vested in STOS.
[84] Accordingly, because of this factually-based finding, and the remote prospects of discounting all relevance of the analogy (even if a difference in context was not acknowledged) I am not persuaded that there is a seriously arguable question, with any realistic prospect of altering the outcome on the finding as to legal ownership of the pipelines.
Question Three: Application of clause 16.2 of the Core Terms
[85] The third question on which Todd sought leave to appeal in its first application is whether clause 2.3 of the HoA precluded the transfer, under clause
16.2 of the Core Terms (ie those in schedule 3 to that document), of Kapuni joint venture assets.
[86] Todd argued at the arbitration that the terms of clause 16.2 of the Core Terms meant that Kapuni assets, including the Whareroa pipeline, should have been transferred from STOS back to the KMCs in 2002. That clause provided as follows:
The material assets held by the Venture on trust for the parties at the date of this Agreement (including any and all Petroleum prospecting, exploration and mining permits and licences of any kind whatever) will be transferred by the Venture to the respective beneficial owners of those assets (subject to any statutory consents required for those transfers) within 60 days of the date of this Agreement.
[87] Todd’s argument was that all assets that were supposed to have been transferred back in accordance with that clause 16.2 should be treated, as a matter of equity, as having reverted to the KMCs as legal owners.
[88] The arbitrator rejected this line of reasoning, first finding as a matter of fact that a transfer of the assets had never eventuated, and nor had it been pursued at any relevant time by Todd. Secondly, as a matter of law, clause 16.2 was inconsistent with the Kapuni joint venture continuing to operate under JV55, which was the position by virtue of clause 2.3 of the HoA.
[89] Todd’s question three is intended to challenge this second proposition. In addition to providing that JV55 would continue to apply in respect of the Kapuni field until a new joint venture agreement in relation to that field was concluded, clause 2.3 also provided:
Likewise, the parties confirm that the STOS employment agreement dated
5 December 1955 will remain in full force and effect insofar as it is currently applicable to the operations of the Kapuni field until superseded by a new employment agreement.
[90] The HoA also provided for the on-going position of STOS in the following terms:
5. STOS
Documentation
5.1On or before 31 July 2002, the parties will enter into an agreement governing the relationship of Shell and Todd concerning, and the role and operations of, STOS. The agreement will contain and expand on the core terms set out in, or agreed under, schedule 3. Until such agreement is entered into, those core terms will govern that relationship, that role and those operations.
[91] Todd seeks to argue that clause 16.2 of the Core Terms should be given effect to, and does not conflict with the continued operation of JV55. Todd would argue
that clause 2.4 of the HoA specifically envisages a new Kapuni joint venture operating agreement, which would be based on a template set out in schedule 2 to the HoA, and that those proposed arrangements were silent as to STOS owning any of the relevant assets. This leads to the proposition that clause 16.2 does apply to Kapuni assets as well as non-Kapuni assets, on Todd’s contention leading to a strongly arguable case that the arbitrator has erred in his interpretation that the operation of clause 16.2 is curtailed or postponed by the provisions of clause 2.3 of the HoA.
[92] I apprehend that Todd treated its case for making out a strongly arguable case on this third question as stronger, if it had obtained leave in respect of the first question. I have found against granting leave on that question, in part because I consider that Todd has overstated the effect of the arbitrator’s reasoning in respect of clause 5(1) of JV55. Nevertheless, it is necessary to consider the standing of question three, independently of question one.
[93] The first rejoinder from Shell is that altering the inter-relationship between clause 16.2 of the Core Terms and clause 2.3 of the HoA would not resolve this aspect of the outcome adverse to Todd that Todd seeks to reverse. The arbitrator found as a fact that the KMCs have agreed to maintain the status quo in terms of status and governance of STOS, including ownership of assets by STOS. Shell’s submission is that Mr Bewley, the legal manager for Shell at the relevant time, has given essentially uncontested evidence in the arbitration to that effect.
[94] If Todd was to successfully argue that clause 2.3 of the HoA did not preclude the transfer of Kapuni joint venture assets under clause 16.2 of the core terms, then such an answer could not of itself advance Todd’s claim to enjoy legal ownership of the Whareroa pipeline. All that would be achieved is that clause 16.2 should have applied, or possibly only that it could apply; it does not necessarily follow that it had been applied by the parties. Such proposition certainly does not follow when there is an unreviewable finding of fact that the parties had not attended to the mechanics needed to effect the transfer of legal ownership.
[95] Nor can the question as proposed by Todd extend to the proposition that the transfer of such assets should now be treated as having occurred because of the equitable proposition that what is supposed to have happened is treated by equity as having happened. It seems unlikely that Todd could successfully invoke that notion without re-opening factual matters. If the evidence does reflect some mutual acknowledgement that the Core Terms would not operate, or more specifically that clause 16.2 would not be actioned, or even if it was simply not attended to, then matters of competing equities would be likely to arise. This is particularly relevant when the point has been raised for Todd only in the course of the arbitration after Todd had abandoned its stance that legal ownership of the assets remained with STOS. To achieve an outcome of utility to Todd would require a substantially wider re-argument than is contemplated by the question, or could be encompassed within it as a question of law.
[96] Accordingly, I am not satisfied that Todd’s question three is one on which leave may be granted.
Question Four: Scope of “main field storage”
[97] Todd’s fourth question relates to the accuracy of the arbitrator’s interpretation of the expression “main field storage” where that is used in clause 11(1) of JV55. Clause 11(1) provides:
All petroleum shall be delivered by [STOS] at main field storage or (subject to the payment of transport charges by the recipient) at such other place reasonably required by the recipient at which [STOS] can conveniently deliver the same.
[98] Todd complained of inconsistency of treatment when comparing the terms imposed for its use of the Whareroa pipeline, with the unequal use made by the joint venture partners of a much shorter Kapuni gas treatment plant (KGTP) pipeline. The KGTP pipeline carries gas from the Kapuni production station (KPS) to an adjoining site for treatment. Because half of Todd’s production from Kapuni does not go through the KGTP, but directly from the KPS into the pipeline to Whareroa, the remainder of Kapuni’s production which does go through the KGTP is owned twice as much by Shell, as by Todd. Shell’s submissions describe the KGTP pipeline as
running less than 100 metres between the adjoining sites, whereas the Whareroa pipeline is some 22 kilometres long.
[99] Todd had sought an order that Shell be required to pay for its disproportionate use of the KGTP pipeline and in reply Shell argued that the KGTP pipeline was used to deliver its gas “at main field storage”.
[100] The arbitrator found that the term “main field storage” should be interpreted so as to exclude areas where gas is not owned equally by the parties. It followed that both the KGTP system and the Whareroa pipeline were outside “main field storage”. The arbitrator directed that it was for STOS to determine whether there should be a tariff charged to each of the joint venturers for their unequal use of the KGTP system. In the course of the arbitrator’s reasoning, he held that:
Main field storage terminates at the meters. They, the KPS and the piping to the meters, are all part of the infrastructure required to deliver gas to main field storage and are, therefore, a cost to be met by the KMCs.
[101] Todd seeks to challenge the arbitrator’s finding that “main field storage” excludes areas where the gas is not owned equally by the joint venturers. Todd contends that this aspect of the interpretation of “main field storage” constitutes an error of law. Todd would argue that gas owned by the joint venturers in different proportions passes from the KPS in the piping up to and including the KGTP meters, which must be within main field storage when applying the other element of the interpretation that “main field storage” terminates at such meters. Instead, Todd argues that main field storage should be interpreted to include, in some circumstances, areas where the gas is not owned equally by the joint venturers and that primacy should be given to “main field storage” being bounded by the points at which fiscal metering of the gas occurs.
[102] Todd wishes to argue for this single test of location of fiscal meters as defining the boundaries of main field storage to enable it to claim that STOS should be obliged to deliver gas to Whareroa. However, there is an element of unreality about the notion. In its context, “main field storage” appears only to contemplate storage within, or closely proximate to, a “main field”. “Storage” is also likely to connote that transport of gas to that point is for purposes including the storing of it.
Transporting gas more than 20 kilometres from the production point within the field, for the purposes not of storage but of delivery to a purchaser, does not instinctively appeal as a delivery of the type contemplated by clause 11(1) of JV55.
[103] In opposing leave to argue this question, Shell argued first the practical context in which the issue arises, as reflected in the preceding paragraph. Secondly, Shell argued that Todd’s interpretation of the breadth intended by the arbitrator’s ruling on this point is a misconstruction of it. Instead of the finding that “main field storage” terminates “at the meters” purporting to be generally applicable to the extent of “main field storage” in all contexts, Shell treats it as an observation specific to the point between the KPS and KGTP, at which a line must be drawn for the purposes of the delivery obligation as far as “main field storage” goes.
[104] I am not satisfied that this distinction which Shell invites can be made out from the terms of the arbitrator’s ruling. The part of his finding quoted at [100] above purports to be of general effect. It was not clear on the argument before me whether property to gas passes when the gas is measured at the “fiscal” meters, but that is a fair implication. The arbitrator was conscious of the fact that fiscal meters are located at the Whareroa end of that pipeline. That circumstance introduces an inconsistency between the factual situation on the ground, and the two criteria identified by the arbitrator as defining the scope of “main field storage”. As Todd points out, gas going between the KPS and the KGTP meters is owned disproportionately by Shell. Accordingly, the criterion of confining main field storage to the areas where the gas is owned equally would produce a different cut-off point on gas being transported in that way, than is identified by the point of fiscal meters at the KGTP. Similarly, with Todd’s production going to Whareroa, there is unequal ownership of that gas but it is not metered until it gets to Whareroa.
[105] It may well be that Todd’s preference for the dominant criterion to be the point of fiscal metering may not ultimately prevail. However, if the point is not considered afresh, then the arbitral award could lead to unhelpful confusion. In that sense, Todd can readily make out a strongly arguable case for a different interpretation of “main field storage”. I am satisfied that leave should be granted on this question.
Question Five: “Main field storage” interpreted wrongly as to Whareroa pipeline
[106] The final question in Todd’s first application was whether the arbitrator failed to apply the correct interpretation of “main field storage” to the Whareroa pipeline. I have already ventured a tentative view about the relative unreality as a matter of semantics in treating a 22 kilometre pipeline as coming within “main field storage”, but Todd makes the point that the arbitrator was conscious that the fiscal meters are located at the Whareroa end of the pipeline, made a finding that main field storage terminates at such meters, but had earlier (at [95]) found that delivery down the Whareroa pipeline is not delivery at “main field storage”. That paragraph had made an explicit finding that the meters at the Whareroa end of the pipeline did not constitute a boundary of the main field storage.
[107] The terms of the later analysis in the award on the scope of main field storage in the context of KGTP pipelines (as discussed in relation to question four above) do not confine the criteria for determining the scope of main field storage as terminating “at the meters” so as to exclude the situation at Whareroa.
[108] Shell’s opposition to the arguability of this last question relies substantially on a contrary contention, namely that the arbitrator’s finding that the main field storage terminates at the meters is a finding only in relation to KGTP. Whilst I concede that Shell could argue for that interpretation given the sequence in which the issues are addressed in the award, it is by no means clear on the terms of the award. Consistently with my finding in relation to the fourth question I am persuaded that Todd’s challenge to this aspect is seriously arguable.
[109] Accordingly, given the importance to Todd, the relative efficiency in bracketing the fifth question with the fourth, and the apparent inconsistency in the reasoning within the award, I accept that this is a question on which leave should be granted.
Other criteria
[110] Having reached these conclusions, I am similarly satisfied that consideration of the other criteria, as analysed for Shell’s applications in [54] to [61] above, produces the same result. Leave is accordingly granted on the fourth and fifth questions posed in Todd’s first application.
Todd’s second application – Brought out of time?
[111] Todd’s second application for leave to appeal questions of law was filed on
27 November 2009, more than three months after delivery of the award. Todd claims that it is entitled to make this further application because it relates to matters raised by Todd’s post-award application under art 33 of sch 1 to the Act, seeking various corrections to the award, plus interpretation of specific points in it, and further orders. Such requests are post-award prospects contemplated by art 33(1)(a), (b) and (3) of sch 1 to the Act. Those provide:
(1)Within 30 days of receipt of the award, unless another period of time has been agreed upon by the parties,—
(a)A party, with notice to the other party, may request the arbitral tribunal to correct in the award any errors in computation, any clerical or typographical errors, or any errors of similar nature:
(b)If so agreed by the parties, a party, with notice to the other party, may request the arbitral tribunal to give an interpretation of a specific point or part of the award.
If the arbitral tribunal considers the request to be justified, it shall make the correction or give the interpretation within 30 days of receipt of the request. The interpretation shall form part of the award.
…
(3) Unless otherwise agreed by the parties, a party, with notice to the other party, may request, within 30 days of receipt of the award, the arbitral tribunal to make an additional award as to claims presented in the arbitral proceedings but omitted from the award. If the arbitral tribunal considers the request to be justified, it shall make the additional award within 60 days.
[112] Todd also relies on art 34(3) of sch 1 which provides:
(3)An application for setting aside may not be made after 3 months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal. This paragraph does not apply to an application for setting aside on the ground that the award was induced or affected by fraud or corruption.
[113] The three questions which Todd sought leave to appeal on its second application are:
(a) The Arbitrator’s misinterpretation of two historical deeds, as a result of which he has ruled that the current operator of the Kapuni field, Shell Todd Oil Services Ltd (“STOS”), is the legal owner of the “PTF Assets”, rather than Shell and Todd.
(PTF is a reference to the Paritutu tank farm.)
(b)His misinterpretation of clause 11(1) of JV55, which has denied Todd the right to delivery of its product through the Whareroa Pipeline on payment of transport charges only.
(c)His refusal to declare a breach of good faith by Shell as regards Todd, despite clear factual findings that Shell used the STOS Board to procure commercial leverage for Shell against Todd when promulgating and passing the 20 September 2006 STOS Board Resolution (ie the resolution purporting to impose a charge on Todd for use of the Whareroa pipeline).
[114] As with the issues raised by both parties on the earlier applications, if Todd was in time in pursuing leave I am satisfied that it would meet the initial statutory threshold such that these questions are ones that would substantially affect the rights of Todd and/or Shell. Further, each question has precedential impact, so that the relative tenability of the arguments is to be assessed on the basis of a strongly arguable case, rather than a higher standard.
[115] Because it had made applications under art 33, Todd treated the lack of resolution of those applications as extending the time for seeking leave to appeal until the requests had been dealt with. After a hearing on their applications before the arbitrator on 20 October 2009, his determinations on those applications were delivered on 18 November 2009 so that the second application filed on 27 November was well within time on Todd’s analysis.
[116] However, invoking the strict application of time limits for seeking to challenge an award, and the lack of any discretion in the Court to extend such time, Shell argued that pursuit of an unrelated request under art 33 could not be used to extend time. It was submitted for Shell that art 34(3) of sch 1 only operates to extend time in relation to requests made under art 33 that are relevant to the questions of law subsequently sought to be re-argued on appeal. Given the whole statutory structure intended to encourage finality in the outcome of disputes, such a requirement for relevance of the request under art 33 is arguably necessary to prevent requests under art 33 merely being used as a pretext for extending time. In support of this narrowing of the apparent scope of art 34(3), Shell relied on the decisions in Opotiki Packing & Coolstorage Ltd v Opotiki Fruitgrowers Co-op Ltd
(in rec)[12] and Rosser v Global Construction Services Ltd.[13]
[12] Opotiki Packing & Coolstorage Ltd v Opotiki Fruitgrowers Co-op Ltd (in rec) [2003] 1 NZLR 205 (CA)
[13] Rosser v Global Construction Services Ltd HC Auckland CIV-2004-404-2564, 10 August 2004.
[117] In Opotiki Packing there had been relatively protracted post-award communications between those acting for the parties and the arbitrator. An award issued on 10 December 1997, incorporating calculations that had been provided by an adviser who sat with the arbitrator. The party challenging the outcome wrote to the arbitrator shortly thereafter, drawing attention to errors in the adviser’s memorandum. This resulted in a revised calculation which was produced on
21 February 1998, and shortly thereafter conveyed to the parties. The party, still unhappy with the outcome, sought to revisit various issues over several months and then in October 1998 sought leave to appeal. The party defending the award successfully argued in the High Court and the Court of Appeal that those proceedings were out of time.
[118] The request for corrections was treated as being pursued under art 33(1)(a). Accordingly, the operative date would have been no later than 26 February 1998 when the arbitrator’s letter dealing with the error-correction application was conveyed. Later communications by the party unhappy with the outcome were characterised as falling outside the scope of art 33. This was determined by looking at the substance of the request conveyed, not the form or label given to it. The Court
of Appeal recognised that where issues in dispute are resolved iteratively in a succession of awards that may be labelled as “interim”, then the issue of a subsequent award dealing with other claims cannot revive or extend grounds for challenge to matters determined in earlier awards.[14]
[14] Opotiki Packing at [19].
[119] The approach adopted in Opotiki Packing does not necessarily prevent Todd extending time in the present circumstances, where Todd’s 12 August Memorandum contained at least elements which are properly within requests for further consideration by the arbitrator covered by art 33. However, Shell argued that the emphasis in the Act on restricting Court review of arbitration awards with respect both to time and grounds, as recognised by the Court of Appeal in Opotiki Packing
and in Doug Hood,[15] means that initiatives under art 33 will only extend time in
relation to questions of law that are put in issue and therefore potentially changed by the terms of such subsequent requests under art 33. This requires a comparison of parts of an award which might subsequently be changed as a result of a post-award application under art 33, and the questions of law for which leave is subsequently sought to be argued on appeal. Shell’s argument invited analogy with the decision in Rosser. There, the prospect of discrete issues being left at large after an arbitrator had issued a second partial award in a building dispute did not extend time until the issue of a final award which dealt with them, in respect of discrete issues that had been completely resolved in the earlier, partial awards. Once the arbitrator had finally determined an issue, he or she was functus officio in respect of that issue. Therefore, time ran in relation to any questions of law arising on the issues that had been determined.
[15] Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) per
Blanchard J at [52].
[120] I am satisfied that that approach is appropriately applied to test Todd’s entitlement to bring a second application for leave to appeal questions of law. The time limits that are intended to be strictly enforced could readily be abused if a request under art 33 on one discrete, but entirely unrelated, point was resorted to as a pretext for extending time on an application for leave to appeal a question of law that is unrelated to the matters raised by an art 33 request.
[121] However, the sufficiency of the connection between questions of law subsequently sought to be re-argued on appeal, and the relevance to such questions of matters that the challenging party has asked the arbitrator to re-consider under an art 33 request is to be judged prospectively, at the time the request is made. If it was reasonable for the challenging party at that time to anticipate that the outcome of the art 33 request is likely to impact on the question of law subsequently sought to be argued on appeal, then the extension of time contemplated in art 34(3) appropriately applies. On the other hand, if there is no reasonable basis for an apprehension that the arbitrator’s response to an art 33 request could materially impact on the question of law sought to be argued, then a challenging party pursuing an art 33 request should know at the time that its request does not constitute a ground for extending the time in which an unrelated question of law should be pursued by application for leave. To assess whether a question of law for which leave is sought has been relevantly influenced by a request under art 33 for the arbitrator to reconsider by analysing the outcome of that request would, I consider, risk unfairly measuring the challenging party’s conduct with the benefit of hindsight.
[122] Shell also argued that any art 33 request has to be “proper”, in the sense that it must relate to matters that the terms of art 33 contemplate are open to a party seeking to vary the outcome of an award. Here, Shell argued that aspects of Todd’s requests to the arbitrator went beyond the permitted scope for such requests, such that the requests lacked status as proper requests and could not be the basis for an extension of time under art 34(3). Conceptually this point is also valid because some limit on the resort to art 33 is necessary to prevent such applications being used improperly as a pretext for extending time in which to seek leave to appeal. Consistently with the previous point, the validity of a challenging party’s resort to art 33 should be measured prospectively. Accordingly, the question for determination is: at the time when the request was pursued, was there a reasonable basis for the challenging party to pursue such request as coming within the defined categories of request in art 33?
[123] The first aspect of Todd’s application to the arbitrator was to correct the identity of a company that had previously been the legal owner of certain of the assets involved in the joint venture. At paragraph 158 of the original award, the
arbitrator identified the legal interest in certain assets as originally being held by Shell BP Todd Oil Services Limited (a predecessor to STOS, employed as a service company during the period when BP was a member of the joint venture). In three further paragraphs thereafter the award had used the acronym SBPTS to refer to that company. In fact, the relevant company was called Shell BP Pipeline Services Limited (SBPPS), and Shell consented to the award being corrected by substituting references to this latter company. Paragraph 160 of the award was substantively correct but described the wrongly labelled company when it said:
SBPTS was a service company employed by a joint venture comprising Shell and BP (Oil Exploration) Company of New Zealand Limited (BP) and known as the “Pipeline JV”. (The correction substituted “SBPPS” at the start of the sentence.)
[124] Paragraph 160 demonstrates that the arbitrator correctly understood the relevant company as representing a separate joint venture between Shell and BP (ie an entity in which Todd originally had no interest). The relevant reasoning after paragraph 160 is consistent with the arbitrator appreciating the real identity of the company, even although the wrong company is the one referred to.
[125] In these circumstances, Shell is correct in characterising this mistake as a “slip of the pen”, so that the need for the correction did not reflect on the reasoning in any way.
[126] In requesting correction of these references to SBPPS, the Memorandum to the arbitrator on behalf of Todd submitted that the lack of reference in the award to SBPPS suggested that the arbitrator had not fully appreciated the difference between the services company for the separate pipelines JV, and the services company of JV55 (SBPTS/STOS). The Memorandum suggested that difference was critical to the inference drawn by the arbitrator as to the circumstances in which such assets came to be held by STOS for the joint venture. Todd sought a “correction” to the finding in paragraph 172 of the award to the extent that the assets had, after being held by SBPPS, been vested in STOS for the purposes of the joint venture.
[127] Shell contended at the hearing before me that Todd had not pursued this additional request for a “correction” to the finding in paragraph 172 of the award.
Shell submitted that there was no basis for the request because the incorrect reference as to which services company was involved did not affect the basis for the arbitrator’s reasoning.
[128] Todd’s concerns at the arbitrator’s ruling that legal ownership of the relevant assets is vested in STOS is in part because Todd treats the terms of the award as confirming that “Todd’s full legal ownership” of the relevant assets has been transferred to STOS. If that reflects a concern that anything in the nature of beneficial ownership is vested in STOS, then the terms of the award do not justify such concern. Consistently with the analysis of the division between legal and beneficial ownership in respect of other assets, the effect of the award is that whilst legal ownership of these assets was vested in STOS, ultimate beneficial ownership was enjoyed by the joint venture partners.
[129] As a matter of form, it is understandable that Todd would wish to have the references to the company previously enjoying legal ownership of the particular assets corrected, before it formulated the terms of any challenge to the finding as to the circumstances of legal ownership of the relevant assets in the period since ownership was held by the misdescribed company. The point for Shell is that whilst the form had to be corrected, the substance was nonetheless perfectly clear, so that the grounds for any challenge to the finding could be advanced in relation to the original award, irrespective of whether the transposing of company names was subsequently corrected or not. That point is more effectively made with the benefit of hindsight. In practical terms, Todd could well have proposed the terms of its challenge to this finding on the basis of the original award, articulating it in terms that would apply whether the arbitrator acceded to a request to make the corrections that have subsequently been made or not.
[130] However, assessing the issue from Todd’s perspective, when uncertainty as to the extent to which a request for correction would be acknowledged and dealt with, it was reasonable for Todd to defer formulating the question of law until the request for correction was resolved. This aspect of the request was properly pursued under art 33, and Todd could reasonably have anticipated that it would be positively dealt with in some way, as indeed it was. Accordingly, I find that the art 33 request
for corrections to the references in the original award to the company that had enjoyed legal ownership of the relevant assets was effective to extend time under art 34 in respect of any question of law reasonably apprehended as being affected by the outcome. This extension was until the request for correction had been resolved by the arbitrator.
Todd’s second application
Question One: STOS ownership of “PTF Assets”
[131] The first question on which leave is sought in Todd’s second application (as set out in [113] above) is sufficiently connected to the request for corrections, and is therefore brought within time.
[132] If brought within time, Shell opposed leave being granted, on grounds including the absence of a seriously arguable case that the arbitrator was wrong, and secondly that the finding Todd seeks to challenge is not a question of law, but depends on factual findings as to what had occurred with the assets, so that the arbitrator’s finding is not capable of re-argument on appeal.
[133] The first ground of opposition is compelling. To the extent that Todd’s challenge relies upon the arbitrator’s error in identifying the company formally holding the relevant assets, that was an error of form, not of substance.
[134] Todd seeks to argue that the arbitrator misinterpreted two deeds, completed in 1964 and 1991. The earlier deed had provided that SBPPS would “deliver” the relevant assets to the employers (ie the KMCs), or dispose of them as directed by the employers. Arguing that there was a presumption of delivery to the employers in the absence of evidence that they directed the assets to be held in a different form, Todd seeks to argue that the absence of evidence of an appropriate direction should have driven the arbitrator to interpret the 1964 deed as having been applied by way of transfer of the relevant assets to the employers. In addition, Todd criticised the arbitrator for having regard to the terms of the later, 1991, deed as sufficient to direct
transfer of the relevant assets to STOS, when to do so on the terms of the 1991 deed, the assets would need to have been listed in a schedule to it, and they were not.
[135] I accept Shell’s argument that this was not the line of reasoning reflected by the arbitrator. Rather, as with the assessment of legal ownership of other assets, the arbitrator reflected on the evidence of what had occurred, which led him to make the finding that the way the parties have dealt with the assets constituted transfer of legal ownership of the relevant assets to STOS.
[136] Accordingly, on the first question, I am not satisfied that there is a seriously arguable case. In dealing with the second and third questions on which Todd seeks leave in its second application, it is convenient to consider whether time was extended by the post-award initiatives, relative to each of the proposed questions.
Question Two: Arbitrator’s misinterpretation of clause 11(1) of JV55
[137] Todd’s second question relates to a claimed misinterpretation by the arbitrator of the scope of clause 11(1) of JV55, going to the terms on which Todd is entitled to have delivery of product through the Whareroa pipeline. Todd could make out a seriously arguable case that the arbitrator wrongly declined to deal with
the meaning of “transport charges” as used in clause 11(1)[16] as a consequence of his
finding that the Whareroa pipeline did not come within “main field storage” when the expression “transport charges” was in fact used in relation to delivery of product outside main field storage.
[16] See [10] above.
[138] However, when raised in Todd’s second application, this question could only be within time if a matter relevant to it was the subject of a proper application under art 33. Todd’s second request of the arbitrator was for interpretation of several points in the award under art 33(1)(b).
[139] Todd sought “clarification” in terms implicitly relying on art 33(1)(b) which
provides for an interpretation of a specific point or part of the award. The opening words of art 33(1)(b) confine the prospect of such a request to arbitrations in which an entitlement to pursue such requests has been agreed by the parties. Here, Shell did not so agree. In those circumstances, it was not competent for either party to the arbitration to request an interpretation of part of the award under art 33(1)(b). Todd relied on the fact that Shell had itself made contingent requests for a clarification or additional orders. However, that is not the same thing as an agreement by the parties to extend the arbitrator’s jurisdiction to requests under art 33(1)(b).
[140] In dealing with Todd’s request, the arbitrator treated himself as functus officio, subject to narrow exceptions, namely the capacity to make corrections under art 33(1)(a), to make further orders coming within the leave reserved in paragraph 200 of the award, and on any application for costs under art 33(3). That is consistent with the absence of any agreement between the parties that would bestow jurisdiction on the arbitrator to give a further interpretation of a point or part of the award, in terms of art 33(1)(b). It follows that, to the extent that Todd’s 12 August
2009 requests sought interpretations, the arbitrator was correct in denying jurisdiction to entertain them. Further, that Todd cannot invoke art 34(3) to extend time in relation to questions that depended upon the arbitrator addressing the requests for an interpretation of the award.
A. 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 his characterises the arbitrator not dealing with the point as an omission, rather than an error.
B. 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).
C. 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.
D. Although it cannot have any bearing as part of the situation confronting Todd when it elected to request a further award, the sense of 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.
[141] The arbitrator had reserved leave in paragraph 200 of his award in the following terms:
Leave is reserved to both parties to seek additional orders to those set out in paragraph 198 if a party is of the view that the findings made support further orders.
[142] Todd invoked this leave as well as art 33(3). However, in the jurisdictional sense, any application pursuant to that leave reserved cannot avail Todd in extending time. It is only requests made under art 33 that qualify to postpone the commencement of the three month period under art 34(3). That outcome is consistent with the structure of the Act. If an arbitrator sees fit to reserve such leave,
it is then exercised and results in an additional outcome, then that subsequent determination will generally have standing as a separate award, giving rise to its own time limits on any attempted appeal. A party to an arbitration wishing to challenge a finding on a question of law by pursing an alteration to the relevant outcome in reliance on leave reserved is on notice from the terms of arts 33 and 34 that such an initiative does not operate to extend time for seeking leave to appeal the point.
Question Three: Arbitrator’s refusal to declare a breach of good faith by Shell
[143] The third question Todd wishes to argue on appeal in its second application is with regard to the refusal of the arbitrator to declare certain factual findings adverse to Shell as constituting a breach of good faith obligations on its part. Todd requested the arbitrator to make an additional award on the point, both under the leave reserved by paragraph 200 of the award and under art 33(3), contending that it was a claim presented in the arbitral proceedings but not determined in the award.
[144] In challenging the extent of charges STOS had purported to impose on Todd for use of the Whareroa pipeline, Todd had argued that Shell breached its contractual duty of good faith to Todd by procuring STOS to act other than impartially in imposing an allegedly unreasonable level of charge. Because the arbitrator had found that the charges were not imposed on a reasonable basis, Todd requested the arbitrator to go on and reflect that finding against Shell, by a finding of breach of good faith. The arbitrator declined to deal with the request at paragraph 16, in the following terms:
I did not make a finding that Shell, by voting in the manner it did, breached a duty of good faith. Therefore, on the face of the Award, the claim was dismissed under the provisions of paragraph 199 and leave can not be sought under paragraph 200 because there is no finding upon which the order can be made. To make such an order, it would have been necessary to make further findings which were not made. They can not now be made because I am functus officio.
[145] Prospectively, at the time of the request under art 33(3), I am satisfied that there was a reasonable basis for it. Todd had an argument that additional legal consequences flowed from the finding of fact made against Shell. Todd’s pleading had sought such a finding, and it is tenable to read the award as simply not
addressing the issue. That does not suggest that there was necessarily any error in the arbitrator’s refusal to deal with the point as he did.
[146] Therefore the art 33(3) request was properly invoked, and that enables Todd to rely on art 34(3) as extending time in respect of this question.
[147] The next issue is whether the question sought to be argued is seriously arguable. A predictable objection on behalf of Shell is that Todd’s question is not one that could be formulated as a question of law for the purposes of appeal. I was referred to a good deal of judicial analysis of the boundaries of questions of law for the purposes of appeal in this context, but it is unnecessary to traverse that analysis
in detail.[17]
[17] Nixon v Walker HC Auckland CIV-2007-404-1372, 13 July 2007; Nixon v Walker HC Auckland CIV-2007-404-1372, 12 December 2008; Auckland City Council v Wotherspoon [1990] 1 NZLR 76.
[148] On the view I take, there is a form in which this question could be argued as a question of law, namely accepting the factual findings in the arbitrator’s award without embellishment or pleas for inferences as to the additional matters of fact that are justified as a matter of consistency. It would question whether the existing factual findings entitle Todd to an additional finding at law, that the conduct found in respect of Shell also amounted to a breach of a contractual obligation of good faith.
[149] Cast in those terms, the argument would be whether the arbitrator applied the wrong standard in assessing the conduct about which he made factual findings. Todd is bound to accept the findings that:
• Shell had purposes of its own for seeking a high level of charge;
• such charges were not reasonable;
• the requisite conduct did not constitute bad faith on Shell’s part.
[150] Conceptually, there is an argument that if a different standard for good faith dealings was required as a matter of law, then this conduct would have to breach
such a standard. However, in the context of all the findings in the award, and the terms on which the arbitrator declined to consider the point further, I am not satisfied that such a proposition is seriously arguable. Accordingly, leave to argue the issue identified in Todd’s third question is declined.
Standing back
[151] The number and complexity of the competing sets of questions sought to be further argued on appeal justify a review to reflect on the parts of the award that are now unassailable, relative to the potential impact of the changes that could result from successful appeals on one or more of the questions of law on which I have found leave to be justified.
[152] The combined effect of the outcome of this arbitration, and the parallel arbitration about the definition of operating expenses at Kapuni, will have a very material impact on the continued operation of this significant joint venture.
[153] From Todd’s perspective, I have declined leave on questions intended to challenge the way in which the arbitrator relied on the terms of clause 5(1) of JV55 as providing for STOS to hold legal ownership of joint venture assets, and for Todd to challenge the reliance placed by the arbitrator on certain analogies reflecting the extent and context of connection between assets and the land as a reflection of legal ownership. I have also denied an argument that a provision in Core Terms attached to the 2002 HoA does not apply to render the assets the subject of separate ownership by the KMCs. In addition, I have declined leave for Todd to criticise, what Todd treats as misinterpretation of two deeds concluded in 1964 and 1991, where Todd would wish to argue that the effect properly to be taken from those documents is a transfer of Paritutu tank farm assets to the KMCs.
[154] On the charges for which Todd may be liable for use of the Whareroa pipeline, I have declined Todd leave to re-argue the definition of “transport charges”. Separately, I have declined Todd the opportunity to re-argue that Shell’s conduct, as found by the arbitrator, constituted a breach of an obligation of good faith.
[155] In granting Todd leave on the fourth and fifth questions on which it sought leave in its first application, the prospect arises for a different outcome on the correctness of the elements of the definition of “main field storage” as that expression is used in clause 11(1) of JV55, and how the definition of “main field storage” ought to apply in relation particularly to the Whareroa pipeline.
[156] On those aspects sought to be challenged by Shell, I have granted leave on two questions in relation to the scope of powers for STOS to deal with joint venture assets, including whether Shell must acknowledge a constraint on STOS’s powers to proceed with the administration of the assets as it ordinarily would, in circumstances where it is aware of a disagreement on the issue between the KMCs.
[157] This leaves Shell having to accept the arbitrator’s finding that where STOS imposes charges, they have to be on a basis that is reasonable, and the method chosen by the arbitrator for assessing that reasonableness in respect of a tariff for use of the Whareroa pipeline.
[158] The parties will most likely have contradictory views on the relative on-going importance of a reversal on any of the issues on which leave is granted. None of them can be relegated to an extent that questions their utility, in a way that would affect the decision to grant leave.
[159] Accordingly, I grant leave in respect of:
a) The first and third questions sought to be pursued by Shell.
b)The fourth and fifth questions sought to be pursued by Todd in its first application.
[160] In all other respects, the respective applications for leave are declined on the grounds set out in this judgment.
[161] There will be no order as to costs.
Dobson J
Solicitors:
Chapman Tripp, Wellington for Shell
Russell McVeagh, Wellington for Todd
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