Todd Petroleum Mining Company Limited v Shell (Petroleum Mining) Company Limited CA125/05

[2006] NZCA 377

IN THE COURT OF APPEAL OF NEW ZEALAND

CA125/05

BETWEEN  TODD PETROLEUM MINING COMPANY LIMITED Appellant

ANDSHELL (PETROLEUM MINING) COMPANY LIMITED

First Respondent

ANDSHELL EXPLORATION NZ LIMITED Second Respondent

ANDENERGY PETROLEUM INVESTMENTS LIMITED

Third Respondent

ANDTARANAKI OFFSHORE PETROLEUM COMPANY OF NEW ZEALAND LIMITED

Fourth Respondent

ANDOMV NEW ZEALAND LIMITED Fifth Respondent

Hearing:         9 February 2006

Court:            Anderson  P, William Young and Robertson JJ Counsel:        J G Goodall and A P Cottrell for Appellant

L J Taylor and J A Maslin for First, Second, Third and Fourth
Respondents
T C Stephens and P C Hunt for Fifth Respondent

Judgment:      22 February 2006

JUDGMENT OF THE COURT

A.       The appeal is allowed.  The question of open access is moot, but we make

a  declaration  that,  in  determining  whether  a  proposed  activity  is

TODD PETROLEUM MINING V SHELL (PETROLEUM MINING) COMPANY LIMITED AND ORS CA CA125/05  22 February 2006

reasonably incidental to a purpose in clause 2 of the Maui Joint Venture, the provisions of clause 5 do not apply.

B.       No order as to costs.

REASONS

(Given by Robertson J

Introduction

[1]      This  appeal  arises  out  of  a  decision  delivered  by  MacKenzie J  in  the High Court at Wellington on 3 June 2005.  He made declarations under s 3 of the Declaratory Judgements Act 1908 as follows:

(a)      open access is within the purposes specified in clause 2.1 of the Maui

Joint Venture Agreement (JVA).

(b)decisions concerning open access in respect of matters within the Initial Phase as defined in the Decision dated 1 June 2004 are required to be made in accordance with clause 8 of that Decision; and

(c)      decisions concerning open access in respect of matters after the Initial Phase are decisions to which clauses 5.3 or 5.4 (as appropriate) of the JVA apply.

[2]      The initial proceeding filed in the High Court, inasmuch as it is still relevant, sought declarations that the adoption of open access:

(a)      is not one of the purposes specified in clause 2.1 of the JVA; (b)           constitutes, in terms of that clause, an “other purpose”; and

(c)      may only be unanimously agreed upon by the petroleum mining companies (PMCs).

[3]      As the case developed, the primary issue became whether third party use of the Maui pipeline was within the  purposes  specified  in  clause  2.1  of  the  JVA. MacKenzie J determined that it was.  He ruled that decisions regarding open access to the pipeline were to be decided under the decision making process set out in clause  5  of  the  JVA.    He  was,  however,  of  the  view  that  if  open  access  was considered to be outside the purposes of the JVA then in terms of clause 2.1 a unanimous decision of the parties to the JVA would have been required.

The background

[4]      The JVA was entered into in 1973 as part of a package of arrangements for the development of the Maui gas field.   In the ensuing decades there have been various assignments of interests in the JVA, but the current participants are the parties to this proceeding in the following proportions:

(a)      The appellant Todd holds 6.25%.

(b)      The first to fourth respondents, all of which are members of the Shell

Group (Shell), hold 83.75%; and

(c)       The fifth respondent OMV holds 10%. OMV and Todd are unrelated to Shell or to each other.

[5]      The Purpose of the Joint Venture (JV) was set out in clause 2 of the JVA as follows:

2.1Offshore Mining, Shell Mining, BP Exploration and Todd Mining hereby establish a Joint Venture in accordance with the provisions of this Agreement for the purposes of developing the Maui Field for the production of Petroleum in accordance with good oil and gas field practice, processing the Petroleum into saleable products, transmitting the  products  by  pipeline  or  other  means  to  points  of  sale  and marketing those  products and  for  such  other  purposes  as may  be unanimously agreed between the Petroleum Mining Companies.

2.2The Petroleum Mining Companies shall consult together before they their Affiliates or any of them proceed to develop any commercial resources of the Maui Field other than Petroleum.

2.3      The activities of the Joint Venture shall be carried on in accordance with the laws of New Zealand but subject thereto all activities of the Joint Venture shall be directed to secure the maximum commercial advantage for the Joint Venture.

[6]      The JV constructed a pipeline to deliver the gas produced from the Maui field to the Crown as buyer under the Maui Gas Contract, another of the contracts entered into as part of the establishment of the JV.   That pipeline runs from Oaonui in Taranaki to Huntly in the Waikato.   Until 2004, the Maui pipeline had been used solely for transporting Maui gas to the various delivery points used by the buyer under the gas contract.

[7]      Depletion of the reserves in the Maui gas field has reached a stage where there is capacity on the Maui pipeline for the transport of other gas.  The nub of the litigation has been whether the use of the Maui pipeline for the transmission of non- Maui gas by parties other than the PMCs is an activity outside the purposes of the JVA.  Todd argued that open access to the pipeline did not fall within the purposes of the JV as outlined in clause 2.1.  It maintained that open access was a whole new purpose for the JV and was therefore unable to be undertaken without the unanimous agreement of the parties to the JV.

[8]      Shell and OMV contended that open access was an activity which fell within the scope of the JV and accordingly was able to be undertaken upon the making of a decision to that effect in accordance with the decision-making procedures in clause 5 of the JVA and did not require unanimity.

Judgment under appeal

[9]      MacKenzie J determined that open access fell within the purposes specified in clause 2.1 of the JVA.  He concluded that an activity was within the purpose of the JVA if it was “reasonably incidental” to those purposes.  He took a purposive approach drawing an analogy to the law relating to the interpretation of an object clause of an incorporated body.   If an asset is under-utilised and an  activity is reasonably incidental to the purposes of the JV then, the Judge held, that this would fall within the scope of clause 2.1.  The Judge stated that even if he was wrong about

the applicability of the objects clause analogy, he would reach the same conclusion using traditional principles of contract construction.

[10]     MacKenzie  J  decided  that  the  parties  to  the  JVA  could  determine  for themselves whether an activity was reasonably incidental to the purposes using the decision making procedure set out in clause 5 of the JVA.   He concluded that, as joint  venture  contracts  were normally entered  into  directly by the  joint  venture partners, no third party issues arose and there was no reason why the PMCs should not adopt their own decision-making processes to resolve disputes.

[11]     The Judge also determined that there was a link between clauses 2.3 and 5.1 in that they both referred to securing the “maximum commercial advantage”.  The Judge concluded that the parties did not intend that every activity should be assessed by an independent adjudicator as to whether it was reasonably incidental to the specified purposes.  He considered this approach was justified as there were curbs on the unreasonable exercise of this decision-making power, including the contractual commitment to securing the maximum commercial advantage to the JV as a whole and the obligation of good faith implied into the JV.

[12]     He also found that open access was reasonably incidental to the purposes in clause  2.1.     MacKenzie  J  found  that,  in  any  event,  open  access  had  been unanimously agreed.

Preliminary issue

[13]     Mr Taylor for Shell, in his written submissions, argued that the appeal was moot  as  it  did  not  involve  any  live  issues.    The  appellant  had  not  appealed MacKenzie J’s finding that open access was in fact unanimously agreed to.  Counsel further argued that open access had now been implemented.  Mr Stephens for OMV adopted the submission made by Mr Taylor and was, without opposition granted leave to adduce new evidence to confirm the current implementation of open access.

[14]     The respondents submitted that the appeal only involved abstract questions that had no immediate or practical effect on the parties.  Regardless of the outcome

of the appeal, the respondents’ position in relation to open access would not be affected.    Whether  it  was  a  matter  requiring  unanimity or  whether  it  could  be determined under the clause 5 formula mattered not.

[15]     Mr Goodall in response argued that the Court should express a view as to whether open access was one of the purposes specified in clause 2.1 of the JVA because  the  underlying  issue  was  an  important  interpretative  precedent  for  the parties.  He suggested the Court also needed to consider the reasoning of the Judge in the Court below.

Interpretation of the JVA

[16]     Clause 5.1 of the JVA provides:

Subject to the provisions of this Agreement the Establishment Deed and Gas Contract, all matters arising for decision in the course of the business of the Joint Venture shall be decided by the Petroleum Mining Companies.   The decision of each Petroleum Mining Company shall be directed to secure the maximum commercial advantage for the Joint Venture.

[17]     In clause 5.4, there is a specific regime which is to apply where there is not unanimity to:

…  any  matter  which  does  not  concern  the  marketing  of  the  products produced from the Principal Works and which is not provided for in this Agreement the Establishment Deed or the Gas Contract, …

[18]     Mr Goodall challenged the High Court Judge’s finding that clause 5 could be employed to decide what was reasonably incidental to the purposes stated in clause

2.1.   He argued that the effect of this would be to impose a decision making mechanism which was inconsistent with that originally chosen by the parties to the JV under clause 2.1.  Counsel argued that clause 5.1 could only cover matters arising from the JV’s course of business that were not otherwise provided for in the JVA. What constituted a new purpose was covered by clause 2.1.   Counsel argued that clause 5.1 could only come into play once the parties had agreed that the relevant activity was a new purpose.

[19]     Mr Goodall submitted that the effect of MacKenzie J’s construction of the relationship between clauses 2 and 5 was that future scope of the course of the JV’s business could be determined by a majority.   Mr Goodall argued that this was contrary to what the parties specifically agreed to.  He contended that MacKenzie J’s construction allowed the parties to the JVA to take on any other activity for the JV by majority as long as it somehow derived from the stated purposes and would maximise their commercial advantage.

[20]     The respondents’ submitted that the Judge’s comments on this point were obiter.  They contended that decisions as to what was reasonably incidental as to the maximum commercial advantage of the JV should be left to the parties and not be questioned by a Court or arbitrator.

Discussion

[21]     We have no doubt that the initiating concern in this case, namely open access, is now moot.  The finding by MacKenzie J that the parties had unanimously agreed to open access is not challenged.  The new evidence confirms that open access is in the process of being implemented.

[22]     There is no purpose in us visiting the issue of whether open access is within the terms of clause 2.1 because the parties have unanimously agreed that it is.  The issue is accordingly moot and only of academic interest.   The Court will not deal with such an issue: Sun Life Assurance Company of Canada v Jervis [1944] AC 111 (HL), Finnigan v New Zealand Rugby Football Union Inc (No 3) [1985] 2 NZLR

190 (CA).

[23]     The only issue which remains problematic is whether the Judge below was correct in concluding that the clause 5 decision making process is applicable in determining whether a matter is reasonably incidental to the purposes of the JV. Clause 5 allows for a majority decision.  If clause 5 does not apply, then the matter of contention is covered only by clause 14 which provides that any dispute shall be settled by arbitration.

[24]     Mr Taylor and Mr Stephens were of the view that the Judge’s reasoning in respect of this aspect of the judgment is only obiter dicta.  We are not necessarily persuaded that this is the case for it appears that this formulation is part of the Judge’s overall reasoning.

[25]     MacKenzie J said this:

[16]      I consider that it is clear from the terms of the JVA as a whole that a decision as to whether a particular activity is reasonably incidental to the furtherance of the stated purposes is intended to be taken by the parties in accordance  with  the  decision-making  procedures  specified  in  the  joint venture.

[17]      The expression “all matters arising for a decision in the course of the business of the Joint Venture” is an apt one to include a decision as to whether a particular activity is reasonably incidental to the furtherance of the stated purposes.   Such a decision falls within the natural meaning of that expression.  There are also other indications in the JVA that this is what was intended.   There is a clear link between clause 2.3 and clause 5.1, in that both refer to the maximum commercial advantage of the JV.  Under clause

5.1, all decisions are to be similarly directed.  That suggests that it was not intended to exclude from the matters to be decided under clause 5 a question whether a particular proposed activity was within the scope of the purposes of the JV, leaving such a question to be decided in a different way, and by the application of some different test than that of the maximum commercial advantage of the JV (which the JV parties are best able to assess).

[26]     We do not accept this approach.  The clause 5 argument was not relied on by the respondents in the High Court, nor was it to the forefront of their position in this Court.

[27]     Clause 2.1 sets out the venture upon which the parties had joined forces.  In its plain words it requires unanimity for any further purposes.

[28]     If one were to conclude that the clause 5 procedure which does not require unanimity could be employed to determine whether a purpose was reasonably incidental to an existing purpose, it would have the effect of removing the unanimity provision in clause 2.   Whether a proposed activity is reasonably incidental to a stipulated and agreed purpose could have significant repercussions.   Having a majority make that classification assessment would effectively remove the unanimity protection in respect of altered purposes.

[29]     We are accordingly of the view that the document makes no special provision for determining issues as to the scope and extent of the purposes in clause 2.  Any dispute with regard thereto is accordingly governed by clause 14 and not by clause 5.

Conclusion

[30]     Accordingly the appeal must be allowed, although we find the open access question is moot.  It is declared that in determining whether a proposed purpose is reasonably incidental to a purpose in clause 2, the provisions of clause 5 do not apply.

[31]     We make no order as to costs.  This case has, in its litigation, developed and altered substantially in its move through the Court.  The declaration now made is to the benefit of all parties.  Before us each side has had a degree of success and costs should fall where they lie.

Solicitors:

Russell McVeagh, Wellington, for Appellant

Simpson Grierson, Wellington, for First, Second, Third, Fourth Respondent

Minter Ellison Rudd Watts, Wellington, for Fifth Respondent