Todd Petroleum Mining Company Limted v Vector Gas Trading Limited
[2017] NZHC 1166
•31 May 2017
ORDER PROHIBITING PUBLICATION OF REDACTED TEXT AS INDICATED AT [31], [43], [75], [96] AND [100] OF THIS JUDGMENT.
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2015-485-1016 [2017] NZHC 1166
BETWEEN TODD PETROLEUM MINING
COMPANY LIMITED First Applicant
SHELL (PETROLEUM MINING) COMPANY LIMITED
Second Applicant
AND
VECTOR GAS TRADING LIMITED First Respondent
VECTOR GAS LIMITED Second Respondent
Hearing: 13 July 2016 Counsel:
M Colson and K Dobbs for First Applicant
L J Taylor QC and A van Ammers for Second Applicant
D Goddard QC, B Scott and A Kraack for RespondentsJudgment:
31 May 2017
JUDGMENT OF WILLIAMS J
Table of Contents
Background [2] The decision of the Arbitral Tribunal [28] Priority [32] Liquids [41]
Grounds of appeal [44] The threshold – leave to appeal on a question of law [45] The KMCs’ claims to priority [61] Appellant’s submissions [61] Analysis [70] Liquids [89] Background [89]
TODD PETROLEUM MINING COMPANY LIMITED v VECTOR GAS TRADING LIMITED [2017] NZHC
1166 [31 May 2017]
Submissions [92]
Analysis [98]
Additional applicable matters of discretion [111] Conclusion and disposition [116] Confidentiality [118]
[1] The applicants mine petroleum products from the Kāpuni gas field and sell them to the respondents. The parties agreed that there was more product available to be mined from within the field than they had initially estimated. Failing agreement, they arbitrated the terms and conditions for its sale and purchase. The applicants are unhappy with the result of the interim award of the Arbitral Tribunal to which the
issue was referred for resolution and they seek leave to appeal.1 There is a separate
application to set aside the interim award. That is not before me but, if leave to appeal is granted, the two matters will be heard together.
Background
[2] In addition to a great deal of commercial gas and other petroleum products, the Kāpuni gas field seems also to have produced a proliferation of legal proceedings and, within them, an alphabet soup of acronyms and abbreviations. I will use these where necessary as, while they can be confusing to the uninitiated outsider, they seem to be part of the ordinary language of the parties to this dispute.
[3] The Kāpuni Gas Contract (KGC) was entered into in 1967. It was then between Todd, Shell and BP (combined in a mining joint venture), and the Crown. Todd, Shell and BP mined gas from the Kāpuni field and sold it to the Crown as a monopsony. The mining joint venturers were collectively called the Kāpuni Mining Companies or KMCs. BP pulled out in 1991 and the KMCs are now a 50/50 joint
venture between Todd and Shell, who are the applicants in this matter.
1 Vector Gas Contracts Limited v Shell (Petroleum Mining) Company Limited (Interim Award)
M McHugh, J Sheahan and L Evans, 3 September 2015.
[4] There has since 1967 been a series of assignments of the buyer’s side of the bargain with the result that the respondents whom I will refer to simply as Vector, are now the buyer of the Kāpuni product.
[5] In its original form the KGC provided that the KMCs were required to sell all product from the field to the Crown. The original term of the KGC was 25 years. But in 1994 (by which time the original tranche of expected product from the field was almost exhausted, but it was clear much more product still remained in situ), the KMCs brought proceedings against the buyer (then the Crown-owned Natural Gas Corporation or NGC). These proceedings challenged some of the structural underpinning of the KGC, in particular the buyer’s monopsony.
[6] In a watershed judgment in 1997, Barker J (sitting with R G Blunt as a lay member) found that the KGC was anti-competitive in the wholesale and retail gas markets and so breached s 27 of the Commerce Act 1986. The Court varied the KGC in a fundamental way. It reduced the buyer’s entitlement in the remaining product from 100 per cent to 50 per cent. The other 50 per cent could be taken by the KMCs, processed and/or sold into markets they might be able to generate over time. In this way, true competition would be introduced. The judgment was given effect in extensive sealed orders dated 10 October 1997. The orders directed that the buyer must make its treatment facilities available to the KMCs at a reasonable price.
[7] In one respect the sealed orders attempted to strike a balance between competing considerations reflected in the High Court’s judgment. The KMCs would need time to develop markets into which they could profitably deliver Kāpuni gas and other products, while there was a need also to discourage the KMCs from simply banking their gas to await better market conditions (and perhaps a later monopoly once the buyer had exhausted its share). This would have defeated the purpose of the judgment which was to introduce a competitor into the New Zealand gas supply market.
[8] So the sealed orders required that both sides take their half share in agreed annual quantities called Adjusted Annual Contract Quantities or AACQ. The failure to do so would leave open any leftover field deliverability to the other party up to a
maximum of their overall half share of the product in this field. Meanwhile the KMCs were given a three year “break-in period” at the start of the new arrangements to allow time to develop new markets for the purchase of their share. Any entitlement not taken in that period could be recovered during the life of the field.
[9] Order 22 thus provided as follows:
(a) Subject to paragraph 22(b) below, each party must utilise its share of such annual quantities as are agreed or arbitrated. It would not be right to allow one party to store gas in the ground against the day when Maui gas became scarce and no acceptable alternative, such as Kupe, had come on stream;
(b) Plaintiffs are entitled to a period of three years from 1 April 1997, during which the plaintiffs will not be required to use all of their share of the annual quantities of gas;
(c) Plaintiffs are entitled to recover any of their entitlement not taken in accordance with paragraph 22(b) above during the life of the field.
[10] Following the sealing of the court orders, the parties negotiated a further settlement of their dispute in order to avoid an appeal. What is now called the Settlement Agreement was executed on 7 November 1997.
[11] Three clauses of the settlement agreement are of particular relevance to this application. Clause 3.7 entitles either side to take more than its share of AACQ as long as the absolutely agreed half share ceiling is not exceeded.
3.7Subject to clause 3.10, either Sellers or Buyer may take Gas in any Year in excess of their shares of AACQ, provided that neither party may take in aggregate more than that party’s share of the Shared Gas provided for in clause 3.6.2 (adjusted to take account of any Gas to which clause 3.8.3 applies).
3.8If either Sellers or Buyer take less than their share of AACQ in any Year commencing on or after 1 June 1997 during which Shared Gas is supplied the following terms shall apply:
3.8.1 in the Years beginning 1 June 1997, 1 June 1998 and 1 June
1999 Sellers shall not be required to use all of their share of the AACQ. Sellers shall be entitled to take such Gas in any
subsequent Year. Such Gas shall not be counted towards
Sellers’ share of AACQ in the Year in which it is taken, butshall be counted towards Sellers’ share of the Shared Gas;
[12] Clause 3.8 provided for the three year break-in period for the KMCs among other things:
3.8.2if Buyer has paid for but not taken such Gas in accordance with clause 3.5.3, Buyer shall be entitled to take such Gas without further payment in any subsequent Year. Such make up Gas shall not be counted towards Buyer’s share of Gas in the Year in which it is taken, or towards any take or pay obligation of Buyer in that Year, but shall be counted towards Buyer’s share of the Shared Gas;
3.8.3if neither clause 3.8.1 nor clause 3.8.2 applies, the quantity of Gas not taken shall be shared equally between Sellers and Buyer on the terms applicable to Shared Gas set out in this agreement, with all necessary modifications.
[13] Finally clause 3.10, to which the over extraction clause (3.7) is subject prevents either party from taking more than half of the field’s deliverability on any day:
3.10The rate at which Gas is taken by either Sellers or Buyer shall not exceed 50% of MDQ in any Day, or 50% of the Maximum Hourly Quantity in any Hour, provided that if either party is taking Gas at a lesser rate, the other may use such surplus deliverability.
[14] MDQ is defined this way:
3.5.2 the Maximum Daily Quantity (“MDQ”) shall be equal to the
field’s deliverability from time to time;
[15] The AACQ is defined in clause 3.51 to be 16 PJ.
[16] I turn now to discuss such of the technical aspects of the Kāpuni field as are
necessary to make sense of this dispute.
[17] The Kāpuni field is currently mined by way of 16 wells on 9 well sites.2 The KMCs draw what is called reservoir fluid from the wells. They then remove “condensate”, partly at the well sites, and the rest at the Kāpuni Production Station – a facility owned by the KMCs. The resulting product, post-removal of the condensate, is referred to as “raw gas”. This raw gas has an unusually high CO2
content of up to 45 per cent, and as a result, it cannot be transported in the reticulated
2 Shell Todd Oil Services Limited “Kapuni” < transmission network in this form. However, it has some applications: the KMCs take some of the raw gas to operate the Kāpuni field itself, and in the past at least, some raw gas has been sold to customers whose infrastructure can utilise it.
[18] The balance of the raw gas is then piped by the KMCs “across the fence” (as the parties say) to Vector’s facility next door. This facility is called the Kāpuni Gas Treatment Plant or KGTP. That plant removes both the CO2 and the high energy liquids (LPG and natural gasoline) from the raw gas. The liquids are commercially valuable and are onsold. At least some of the CO2 is also onsold for industrial and commercial applications. The gas that remains after extraction of the CO2 and liquids is specification gas, or spec gas. This gas meets relevant applicable standards and is able to be sold in that form to industrial and commercial customers. Fifty per cent of that gas belongs to the KMCs who sell it to their customers.
[19] It is important to note that the extraction of the higher density and higher energy liquids from the raw gas reduces the energy in the spec gas ultimately returned to the KMCs for sale to their customers. That is, the energy content of the raw gas pumped over the fence to Vector is greater than the energy content of the
50 per cent of spec gas pumped back to the KMCs for onsale by them. This phenomenon is known as “energy shrinkage”. The energy value lost through extraction of the liquids is, I understand, on average about 15 per cent. It is necessary to mention this because the value of the extracted liquids that causes this shrinkage is one of the two issues in dispute.
[20] The energy within the Kāpuni field reservoir is measured in petajoules (PJ). The agreement between the parties begins with their overall estimate of energy content within the reservoir. This is a figure called Original Recoverable Gas Reserves or ORGR. ORGR is redetermined as time goes on in accordance with the terms of the KGC, the sealed orders and the Settlement Agreement. It seems that the original ORGR was in the order of 515 PJ and, as part of the 1997 litigation, this was upgraded to 1010 PJ adding around 495 PJ to the estimated reserves. In order to
give a tangible comparison, New Zealand’s total energy consumption from all sources in 2015 was 572 PJ: just under 57% of Kāpuni’s ORGR.3
[21] The KGC utilises the concept of gas tranches. The 495 PJ identified as newly available in 1997 is called Current Tranche Gas or CTG under the Settlement Agreement. It is this tranche that the sealed orders and Settlement Agreement provided for the KMCs and Vector to share equally. The Settlement Agreement also recognised that there could be even more gas over and above the 1010 PJ. It provided that new terms again could be set for such additional product either by agreement, or failing agreement, by arbitration.
[22] Between 1997 and 2010, an imbalance developed between the parties’ use of the Kāpuni reservoir product. Vector took more than the KMCs. As the Arbitral Tribunal noted, the asymmetry was of the order of 37.5 PJ in Vector’s favour. By
27 July 2013, Vector had taken 247.5 PJ (its share of the CTG) while the KMCs had only taken 210 PJ.
[23] The reason for this asymmetry is one aspect of the current dispute. Vector and the Tribunal say the asymmetry was predicted by the sealed orders and the Settlement Agreement because the KMCs took advantage of the three year market development break-in period provided for in order 22(6). The KMCs say that it is not so. They say the asymmetry arose primarily because the reservoir produced more than the predicted AACQ and the KMCs could not take their full share of that excess production. This was, in turn because, even after the break-in period, their markets had not been developed sufficiently to fully take that excess production up.
[24] Notwithstanding this disagreement over the CTG, in December 2010 the parties commenced negotiations for the settling terms for gas extraction over and above the 1010 PJ then considered to be the ORGR. This the parties called Next Tranche Gas or NTG. Following appropriate scientific assessments, the KMCs came to the view that the ORGR could now be set at 1097 PJ, that is an additional 87 PJ
above the prior ORGR estimate. In the event, ORGR was never formally reset but in
3 Ministry of Business, Innovation and Employment Energy in New Zealand 2016
(September 2016) at 5.
a letter of 29 September 2011 to Vector, the KMCs acknowledged that terms should now be agreed in accordance with cl 3.11 of the Settlement Agreement (providing for redetermination and subsequent negotiation or arbitration) on the basis that there was sufficient NTG for Vector to purchase up to a further 36 PJ over five years. This meant, in effect, the KMCs were confident that there was at least 72 PJ available in the Kāpuni reservoir for extraction and Vector would be entitled to purchase half of it.
[25] No comprehensive agreement was reached over terms and conditions for extraction of the NTG, but a more sparse Letter Agreement was entered into a month later on 28 October 2011. By its terms the parties agreed to negotiate and if necessary arbitrate for the supply to Vector of up to 36 PJ of gas over five years. It was agreed that a formal redetermination of ORGR would not be necessary before terms could be agreed or arbitrated in relation to the 36 PJ in question. Thus, the parties agreed to shortcut the formal contractual process.
[26] Relevant provisions of the Letter Agreement were as follows:
1.The KMCs agree that ORGR is more than 1010PJ, and expect that ORGR would be sufficient to accommodate supply to Vector of a further 36 PJs over a 5 year term.
2.Given the agreement in paragraph 1, any party is now able to instigate an arbitration pursuant to clause 3.11 of the 1997
Settlement Agreement to determine the applicable terms for the sale
and purchase of the 36 PJs for a 5 year term, without the need for a redetermination.
3. Nothing in this letter:
a.limits the rights of either party to instigate a redetermination in accordance with the Kapuni Gas Contract; or
b.commits the KMCs to supply more gas than is commercially recoverable from the Kapuni Field.
[27] On 20 August 2012, Vector initiated an arbitration having failed to agree terms for supply with the KMCs in the ensuing period.
The decision of the Arbitral Tribunal
[28] The Tribunal was a three person panel comprising a former Judge of the High Court of Australia, the Hon Michael McHugh QC; a Sydney commercial silk, John Sheahan QC; and emeritus professor of economics from Victoria University, Prof Lewis Evans.
[29] The Tribunal sat for approximately five weeks between late May and early
June 2015 and released to the parties its interim award on the merits of the case on
4 September 2015. It is that interim award which is now the subject of this application for leave to appeal.
[30] In its decision, the Tribunal rejected the KMCs’ argument that until they had caught up on Vector’s 37.5 PJ overreach, the KMCs should be accorded a priority right to take gas from the Kāpuni field either to the exclusion of Vector or, alternatively, in a manner that reduced Vector’s overall entitlement to 25 per cent of daily field deliverability. The Tribunal found that the matrix of the sealed orders, Settlement Agreement and Letter Agreement meant that Vector had an absolute entitlement to take 50 per cent of daily field deliverability up to a terminal maximum of 36 PJ.
[31] The Tribunal also rejected the KMCs’ submission that the value of the liquids component of the raw gas extracted from that gas by Vector at the KGTP should be set on the basis of the wholesale market price of those liquids net of the cost of its production. The Tribunal found that those liquids were of value only to Vector since only it owned the infrastructure capable of extracting it. The price payable was therefore to be token only – [redacted] per GigaJoule (GJ).
Priority
[32] The KMCs argued this point in two ways. The first option was that it was inherent in the KGC, sealed orders and Settlement Agreement (and in fact the parties subsequently behaved as if it was), that once Vector exhausted its CTG entitlements, it would be required to stop until the KMCs had caught up. To take any other approach, the KMCs argued, would shift to the KMCs the risk of falsely optimistic
assessments of the size of NTG in a kind of “first up best dressed” scenario. It would also, the KMCs argued, allow Vector to gouge the KMCs in a subsequent economic “rent play” when, inevitably, Vector had exhausted its entitlements, and only the KMCs’ gas was going over the fence into Vector’s KGTP for processing. In addition, the KMCs argued that the last commercially extractable gas from the Kāpuni field was inherently likely to be more expensive to extract and this unfairly shifted the whole of that extra expense to the KMCs.
[33] The Tribunal accepted that Vector had in fact extracted approximately 37 PJ more than the KMCs in the period since division of the field in 1997. The Tribunal considered that this occurred because the KMCs availed themselves of the three year break-in period in sealed order 22(b).
[34] The Tribunal found that the Settlement Agreement struck in the month after the 1997 judgment “created the contractual structure which permitted the present imbalance to come about”.4 That said, the Tribunal found that the Settlement Agreement nonetheless made no express provision for management of that imbalance. But, the Tribunal found, the suggestion that when such imbalance occurred, one party could be denied access to the field for the period necessary to achieve catch-up was “inconsistent with the principal object of the 1997 Orders”,5 namely to promote competition in that very supply. Nor, the Tribunal found, did the interpretation suggested by the KMCs produce “a commercially sensible result”.6
[35] The Tribunal considered the KMCs were in any event authors of their own misfortune:7
It is significant that production levels from the field were under [the KMCs’] control, that each party was entitled to take up any production that the other party did not, and that it was in [the KMCs’] interests that [Vector] exercise that right to the maximum extent possible.
4 Interim Award, above n 1, at [167].
5 At [167].
6 At [167].
[36] In essence the Tribunal concluded that the asymmetry occurred because the KMCs allowed it to, and they should not now be allowed to avoid the predictable consequences of choices they made long ago.
[37] In addition, the Tribunal considered the KMCs’ absolute priority argument was not within the jurisdiction afforded the Tribunal in the Letter Agreement. According to that agreement, the Tribunal found, the focus of the arbitration was exclusively NTG. The KMCs’ argument was not about NTG, but about CTG where the asymmetry had occurred. The Tribunal considered that the Letter Agreement did not give it jurisdiction to interfere in arrangements in relation to the CTG that had
been settled in the sealed orders and the Settlement Agreement 18 years earlier.8
[38] The KMCs argued in the alternative that they were entitled to 75 per cent of MDQ until they finished taking their share of the CTG. Fifty per cent of the MDQ represented their CTG entitlement, and the other 50 per cent represented the NTG, split equally between the KMCs and Vector – hence a total of 75 per cent of MDQ for the KMCs.
[39] The Tribunal found that this preferential priority argument was also flawed. There was no room to imply such a right into the Settlement Agreement. Rather, order 21.2 of the 1997 Orders provided that each party was “entitled to an equal share of agreed or arbitrated contract quantities”. Without a clear mechanism for doing so in the pre-existing arrangements, the Tribunal found that it could not go behind the terms of the Letter Agreement by which the parties:
… expect that ORGR would be sufficient to accommodate supply to Vector
of a further 36 PJ over a five year term.
[40] The effect of the Letter Agreement was that Vector’s equal share of the NTG must be taken to be set (for present purposes) at 36 PJ over five years. This meant it was beyond the competence of the Tribunal to consider the applicability of any scenario that produced an outcome other than 36 PJ to Vector over five years. Any reassessment of that outcome therefore had to be by means of a formal redetermination of overall ORGR in accordance with the Settlement Agreement, and
as required by the parties in due course. The shortcut process in the Letter
Agreement did not permit that.
Liquids
[41] In the matter of liquids, the KMCs argued that in the absence of an applicable market price for this product, the value to be set for the liquids component of raw gas should be the wholesale price for LPG and liquid gasoline net of Vector’s production costs.
[42] The Tribunal considered that an orthodox market approach to setting value in the case of liquids was artificial because Vector was the only market participant with the infrastructure capable of extracting that by-product from raw gas. Vector was thus, the Tribunal considered, the only actual or potential buyer in the market that placed any value on those products. Nor could it be considered fair and reasonable
(the standard the parties agreed ought to be applied here)9 to simply net back costs
from actual wholesale prices. That was because Vector (and its predecessor) had taken all the risk in establishing the infrastructure necessary to extract and reticulate liquids from raw gas when no market in those liquids then existed. The KMCs had taken none.
[43] The Tribunal reasoned that in fact all Vector was purchasing was an option to extract liquids from the gas delivered by the KMCs in circumstances where Vector was the only possible buyer. A small margin was fair and reasonable in the circumstances acknowledging that, notwithstanding there was a single buyer which took all of the early risks, the option nonetheless had real value to Vector and this value was recognised in the KGC. The Tribunal therefore accepted Vector’s
suggestion of [redacted] per GJ.10
Grounds of appeal
[44] The KMCs seek leave to appeal on both the priority and liquid issues. As we shall see, the KMCs argue that the Tribunal fundamentally misconstrued the KGC,
9 See for example Interim Award, above n 1, at [3].
sealed orders and Settlement Agreement while, in breach of New Zealand contract law, excluding from consideration relevant pre- and post-contract conduct. In relation to the liquids question, the KMCs make arguments akin to breach of natural justice while also arguing that the Tribunal’s reasoning is internally inconsistent and therefore illogical. All of these points, the KMCs argue, raise questions of law.
The threshold – leave to appeal on a question of law
[45] Clause 5 of Sch 2 of the Arbitration Act 1996 provides the gateway for the KMCs’ application. By the terms of cl 5(1) only questions of law may be the subject of an appeal. By the terms of cl 5(1)(c) the leave of this Court is required, while cl 5(2) provides that not every question of law will qualify:
The High Court shall not grant leave under subcl (1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of 1 or more of the parties.
[46] Clause 5(10) narrows the gateway further. It provides:
For the purposes of this clause, question of law—
(a) includes an error of law that involves an incorrect interpretation of the applicable law (whether or not the error appears on the record of the decision); but
(b) does not include any question as to whether—
(i) the award or any part of the award was supported by any evidence or any sufficient or substantial evidence; and
(ii) the arbitral tribunal drew the correct factual inferences from the relevant primary facts.
[47] The relevant discussion of Blanchard J writing for the full court of the Court of Appeal in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd is often cited at this juncture in applications under cl 5 to underscore the point that the gateway through which applicants must pass in seeking leave to appeal on a question
of law is very narrow indeed:11
11 Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) (emphasis in original).
[51] There are of course arguments which can be made in favour of a wider scope for judicial review of arbitral awards for error of law. Arbitrators do not always have legal knowledge, and may apply the law incorrectly. The parties will expect a fair and reasonable result, and may consider that they should have a right of recourse if such a result is not forthcoming because the law has been incorrectly stated or applied. And there is a public interest in ensuring that appropriate standards are met in arbitrations.
[52] Bur our Parliament, like those in the United Kingdom and Australia, has chosen to favour finality, certainty and party autonomy over these considerations. It intended to encourage arbitration as a dispute resolution mechanism. By enacting a statute with the express purpose of redefining and clarifying the limits of judicial review of arbitral awards, Parliament has made clear its intention that parties should be made to accept the arbitral decision where they have chosen to submit their dispute to resolution in such manner. It plainly intended a strict limitation on the involvement of the Courts where this choice has been made. This makes inappropriate a broad approach to the discretion, such as that proposed by counsel for the appellant in this case. (Of course, where both parties repent of their decision to choose arbitration over litigation and wish to submit their dispute over a question of law to the Courts, the 1996 Act makes provision for them to do so without leave: see cl 5(1)(b).)
[48] The effect of cl 5(10)(b) is that it excludes from consideration arguments that in other circumstances are likely to be accepted as raising questions of law. In arbitration, the Arbitrator is absolute “master of the facts”. In assessing this application, I am thus bound by any findings of fact made by the Tribunal, whether or not those findings underpin what may be considered questions of law. I may not fill in any factual gaps left by the Tribunal. And I may not reconsider any relevant conclusion on the basis of the sufficiency of its evidential underpinning or the correctness of any inferences the Tribunal drew from the facts.
[49] In Finelvet AG v Vinava Shipping Co Limited,12 Mustill J (as he then was) articulated questions of law as including the identification and interpretation of relevant parts of a contract. The Judge added that in some circumstances the application of law to the facts can also raise a question of law. That is where if the correct legal test had been applied the only possible or reasonable outcome was A, but the Tribunal found B. This reasoning is akin to the rule in Edwards (Inspector of
Taxes) v Bairstow,13 reflected in the New Zealand Supreme Court decision in Bryson
12 Finelvet AG v Vinava Shipping Co Limited [1983] 2 All ER 658 (QB).
13 Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 (HL).
v Threefoot Six.14 Further Mustill J accepted that in some cases a range of acceptable answers will be available when the law is applied to the facts, and it is only when the result is outside that acceptable range of outcomes that a question of law will arise.
[50] The reasonable range approach has been accepted in this Court in a different iteration of the ongoing commercial disputes between these parties in relation to the Kāpuni field. In Shell (Petroleum Mining) Company Limited v Vector Gas Contracts Limited, Venning J accepted the proposition that this Court should only interfere in questions of mixed law and fact where the challenged outcome is beyond what might be called the range of reasonable alternatives.15
[51] In New Zealand in light of cl 5(10)(b), the correct articulation of the position may well be that where the application of the appropriate principle to the facts would admit of only one possible result or a number of possible results within a reasonable range, it can only be inferred that the wrong test was applied when the Tribunal comes to a different result or a result outside the reasonably available range, even if the principle was, in the words of the award, correctly articulated.
[52] Setting the foregoing to one side for the moment, the orthodox New Zealand position is that contractual interpretation is essentially a question of law. See for example Busby v Sargent:16
The interpretation of the contract in light of that factual matrix is a question of law. Since an appeal under clause 5 of the Second Schedule to the Arbitration Act is limited to an appeal on a question of law, an appeal may relate to the way in which the arbitrator has applied his factual findings in interpreting the contract but an appeal will not lie against the factual findings themselves.
[53] But as the Supreme Court has made clear in Vector Gas Ltd v Bay of Plenty Energy Ltd, assessing the meaning of a contract requires careful attention to the objectively ascertainable factual context.17 And that will be so even if the context
displaces the plain wording of the contract text. As Tipping J opined, context may
14 Bryson v Threefoot Six Ltd [2005] NZSC 34, [2005] 3 NZLR 721.
15 Shell (Petroleum Mining) Company Limited v Vector Gas Contracts Limited [2014] NZHC 31 at [47].
16 Busby v Sargent HC Wellington CIV-2009-435-215, 4 March 2010 at [10].
17 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
include both pre-contract and post-contract conduct if that conduct is objectively relevant to the meaning of the contract.
[54] That means the interpretation of the contract, while generally seen in New Zealand as an exercise in legal interpretation, can quickly become about finding facts. Just how the division between fact and law should be drawn given the terms of cl 5(10) of Sch 2 is a matter of some controversy.
[55] The Canadian Supreme Court in Sattva Capital Corporation v Creston Moly Corporation addressed this issue using reasoning that amounted to a sharp departure from the orthodoxy I have outlined.18 In the context of this application, it is worth spending a little time on this decision. Rothstein J, writing for a unanimous Court, accepted that contractual interpretation has traditionally been treated as a question of law but said that this was because such questions were historically resolved in England by civil juries who were routinely illiterate. Contract interpretation was, in those times, a question of law because only the Judge could read. This rationale, he said, no longer applies, and the historical approach should be abandoned.19 A modern approach to contractual interpretation, Rothstein J considered, was to approach it as a mixed question of fact and law and as almost always fact specific.20
A legal question for the purpose of arbitration legislation in Canada, could only arise,
he said, if the question could be extracted from that mix:21
The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means the circumstances in which a question of law can be extracted from the interpretation process will be rare.
[56] In that case (involving the interpretation of a clause providing for a finder’s fee on the defendants’ acquisition of a molybdenum mine), Rothstein J concluded that no severable question of law arose in the construction exercise. This was, in part at least, because there was nothing in the interpretive task confronting the Court that could apply beyond the immediate interests of Sattva and Creston. There was
therefore no issue of principle requiring correction. All hinged, in short, on the facts.
18 Sattva Capital Corporation v Creston Moly Corporation [2014] SCC 53, [2014] 2 SCR 633.
19 At [43]-[44] and [50].
20 At [55].
21 At [55].
[57] While New Zealand law on this point has perhaps not gone this far, it has, in the Vector Gas v Bay of Plenty Energy decision, made the factual matrix in its widest sense potentially relevant. And that in turn necessarily now makes contractual interpretation a mix of fact finding and word interpretation. Findings of fact, one might expect, will routinely underpin the court’s perspective on the meaning of contractual terms. This then will require courts hearing applications for leave to appeal from arbitral awards, to give careful consideration to whether the real matter in issue is the meaning of the contract, or the facts upon which that meaning is wholly or partly based. The former may raise a question of law. The latter will not. So, a debate about whether a fact said to affect meaning is proved, will not raise a question of law. Nor, to my mind, will a debate about whether a proved fact is capable of supporting an inference going to contractual intention. Such issues are, in the first place, really factual, and in the second place, excluded by the terms of cl 5(10)(b)(ii).
[58] As I have said, cl 5(2) also requires any relevant question of law to have the potential to substantially affect the rights of one or more of the parties. The word is
‘could’. Thus, the substantial effect must not need be inevitable, but it must be substantial and it must affect rights. There is a live issue in this case as to whether the claimed effect is too contingent.
[59] The Gold and Resource Developments case then sets out a number of further relevant factors for the Court’s consideration going to this Court’s leave discretion under cl 5(1)(c) if a question of law is identified that could substantively affect rights. These include:22
(a) The strength of the challenge and the nature of the point of law: This is the most important of the discretionary factors. The applicant must show that it has at least a “very strongly arguable” case or, if the matter gives rise to some important question of principle with precedent value, then a “strongly arguable” case will be sufficient. A
one-off arbitration that resolves all issues between the protagonists
22 Gold and Resource Developments, above n 11, at [54].
will count against the grant of leave, while if the parties are in a continuing relationship, this will count in favour of leave.
(b)How the question arose before the arbitrators: A question of law that was at the centrepiece of the arbitration is likely to succumb to the finality intention of the parties and the Arbitration Act, while a matter that was not fully confronted by the arbitral tribunal will be more likely to obtain leave.
(c) The qualifications of the arbitrators: Where the arbitrators are legally qualified, leave is less likely.
(d)The importance of the dispute to the parties: The greater the importance, the greater the likelihood of leave.
(e) The amount involved: The more that is stake, the more likely a grant of leave.
(f) Delay: Where engaging in the appeal process is likely to occasion prejudicial delay that will count against leave.
(g)Whether the contract provides for the arbitral award to be final and binding: Where there is such a clause, it counts against leave.
(h)Whether the dispute is international or domestic: If the dispute is international, then the parties’ choice as to whether or not cl 5 applies is relevant.
[60] As the Court noted in Gold and Resource Developments, the list is not closed and other considerations may also be relevant on the facts of any given case. I turn now to address the arguments of the parties with respect to each of the two issues in the application.
The KMCs’ claims to priority
Appellant’s submissions
[61] The KMCs argued that the Tribunal’s conclusion was in effect reliant entirely on the terms of the Letter Agreement, specifically, the apparent acceptance that Vector would be entitled to 36 PJ over five years. This, the KMCs argued, divorced that document from its underpinnings in the KGC, the 1997 sealed orders (and accompanying judgment), and the Settlement Agreement. Read in this isolated way, the decision effectively deprived the KMCs of their remaining CTG entitlements. The correct interpretation of the Letter Agreement in its context was, it is submitted, that any NTG entitlements “had to accommodate and fit around” the KMCs’ CTG entitlements. This, the KMCs argued, was a straightforward question of contractual interpretation and therefore of law.
[62] The KMCs submitted that the approach taken by the Tribunal ignored pre and post contractual conduct, where such consideration is a requirement of New Zealand law. In particular, the KMCs argued that discussions leading up to the Letter Agreement proceeded on the basis that some kind of rebalancing would be required before Vector would be allowed to take CTG. At footnote 80 of the KMCs’ submissions the documents referred to in support of this proposition are listed as follows:
Terms Sheets exchanged between the parties that provided for rebalancing dated 19 March 2010, 24 December 2010 and 20 April 2011; evidence from the parties’ witnesses regarding the negotiations through to September 2011 (Hall brief; Kelly brief; Seymour brief); the concession of Vector’s witness, Mr Seymour, that (in respect of Vector’s 28 October 2011 letter) there was no intention to change the discussions that had been held to date (cross- examination of Mr Seymour at [T358-359]; refer also to the cross- examination at [T340, T352, T353]); Mr Seymour’s second sworn reply affidavit dated 21 September 2004 and filed in NGC New Zealand Ltd v Todd Petroleum Mining Company Limited & Ors CIV-2004-1753 and cross- examination of Mr Seymour on the same at [T347-351]; the way in which a conversation between Mr Seymour and Shell’s Mr Kelly was reported back by Shell to Todd before the KMCs amended, by hand, and then returned Vector’s letter (Kelly brief at [41] and email from Mr Kelly to Mr Palmer and Mr Burns dated 7 November 2011; internal Vector email dated
25 November 2011 and Shell’s proposal to commence negotiations for the
sale of up to 36 PJ of gas to Vector over five years (Exhibit C in the arbitration).
[63] The KMCs made the point that the arbitral award does not even mention the Vector Gas v Bay of Plenty Energy decision and that this indicated the Tribunal took the more textual and traditional Australian approach to contractual interpretation.
[64] The letter of 29 September 2011 from the KMCs made it clear that the offer to negotiate Vector’s access to up to 36 PJ was, it was submitted, “subject to the terms of the KGC”. The negotiators, it was argued, proceeded on that basis. The subsequent Letter Agreement did not:
(a) alter the position in relation to priority;
(b) prejudice or override the KMCs’ entitlement under the Settlement
Agreement; or
(c) commit the KMCs to supply more than is commercially recoverable from the field.
[65] The KMCs argued the Letter Agreement, seen in its proper context, must be taken to have proceeded on the basis that the KMCs’ entitlements to the CTG would not be put at risk. As the KMCs argued “priority lifting to cure the imbalance was part of the context in which the Letter Agreement was agreed”.
[66] Clause 3.7 of the Settlement Agreement provided that while the KMCs or Vector could take more than their share of AACQ (if the other party does not take its share), neither party could take more than its share of the overall CTG. This must have meant, the KMCs argued, that the Settlement Agreement prevented any side taking more than its share of the CTG. Inherent in that must have been, it was submitted, a right to catch up whether exclusively or in accordance with the 75 per cent formula advanced as an alternative before the parties moved to take NTG.
[67] The KMCs submitted that cl 3.10 accommodated this by acknowledging that where one party takes less than 50 per cent of MDQ, that shortfall may be taken up by the other party. This, the KMCs argued, shifted MDQ to a more central role in the arrangement than had been the case under the KGC. I infer the argument to be
that once one side had exhausted its entitlement to CTG, cl 3.10 would kick in reducing its take right until the other side had caught up, effectively forcing Vector to take less than its share.
[68] The KMCs submitted that the award substantially affected their rights. It fundamentally shifted the risk with respect to whether reservoir estimates were correct to them. If the assessments were too optimistic, the KMCs risked never being able to retrieve their half share from the reservoir. Further downstream risks included higher fixed costs as a result of greater difficulty in retrieving residual gas at the end of the field’s life. Further, the KMCs argued that they would become hostage to Vector’s “economic rent play” once Vector had taken its 50 per cent of the resource leaving the KGTP to be processing only the KMCs’ product.
[69] The KMCs submitted its appeal was strongly arguable since:
(a) the pre Letter Agreement conduct plainly supported the KMCs position;
(b)the terms of cls 3.7 and 3.10 of the Settlement Agreement were consistent with it;
(c) the logic of the arbitral award was that Vector could continue to take product from the reservoir indefinitely; and
(d)the dispute is of the greatest importance to the parties and the impact on the KMCs is potentially very significant indeed, in fact sufficiently to undermine the very efficacy of the KGC and Settlement Agreement.
Analysis
[70] For reasons generally consistent with the arguments advanced by Vector, I do not consider that leave should be granted on the question of priority.
[71] In my view, the KMCs’ priority argument (whether exclusive or 75 per cent preferential) either does not raise a question of law at all, or, does not raise one that is strongly arguable. Nor, in my view, is it an argument capable of substantially affecting the KMCs’ rights.
[72] The KMCs’ first argument was that the Tribunal erred in excluding from consideration, the parties’ conduct prior to the Letter Agreement. Evidence of this conduct, it will be recalled, was listed in the KMCs’ substantial footnote 80. The KMCs argued that the Tribunal’s failure to even refer to Vector Gas v Bay of Plenty Energy proved the error and indeed the Australian–centricity of the lawyers on the panel.
[73] I accept that the point does raise a question of principle. The law in New Zealand is that such conduct, if it can be shown to be relevant to objectively discernible intention, will be admissible and must be taken into account in interpreting the contract. But the alleged error is not strongly arguable, let alone very strongly so. The Tribunal cited the Investors Compensation Scheme Ltd v West
Bromwich Building Society23 case (which is one of the authorities referred to in
Vector Gas v Bay of Plenty Energy by Blanchard J,24 Tipping J,25 and McGrath J)26 in support of the proposition that the factual matrix or background (widely conceived) of a case can be relevant to determining how the words of a contract would be understood by a reasonable person. Thus, the Tribunal found:27
The common law of New Zealand therefore requires the common intention of the parties in the present case to be objectively ascertained from the terms of the letter agreement and the amended KGC when read in the light of the surrounding circumstances. Accordingly, to determine the meaning of the parties agreement to hold this arbitration, the background and purpose of the agreement must be examined.
[74] The lack of a reference to Vector Gas v Bay of Plenty Energy is beside the point. The principle is what counts, and it was clearly applied. Consistently with
that conclusion, the relevant surrounding circumstances of this case were
23 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1WLR 896 (HL)
at 912-913.
24 Vector Gas v Bay of Plenty Energy, above n 17, at footnote 1.
25 At footnote 15.
26 At [78] and elsewhere.
27 Interim Award, above n 1, at [58].
comprehensively recorded by the Tribunal. As to pre-contract conduct the Tribunal recorded as follows:28
The most important of the facts and matters leading up to the
September/October letters were:
(a) the Kapuni Judgment and Sealed Orders amended the KGC by splitting the future output of the field equally between Vector and the KMCs;
(b) the Settlement Agreement set out the terms on which the parties had agreed to access their share of Shared Gas/Current Tranche Gas and neither party was entitled to access more than 50% of MDQ unless the other party did not take its share;
(c) no party could take more than its share of Shared Gas/CTG; (d) ORGR had been established in 1010 PJ;
(e) Sir Ian Barker had held in the 1999 price arbitration that the applicable legal test required the setting of a fair and reasonable price with fairness and reasonableness considered objectively;
(f) Sir Ian had held that the relevant date for the assessment of a new price was the date from which the price was to become effective or a date close to it;
(g) he also held that in comparing other contracts with the KGC, a net back exercise had to be performed which took into account the costs of removing CO2 and liquids and the benefit to Vector of keeping the liquids;
(h) by July 2009, Vector was 60 PJ ahead of the KMCs in taking Shared
Gas;
(i) from August 2009 and KMCs and Vector had been taking 50% of daily deliverability of approximately 15 PJ per annum from the Kapuni field, leaving no surplus deliverability but the KMCs advised Vector that if development work was successful, deliverability could be up to 25 PJ;
(j) in September 2009, the KMCs issued a notice of redetermination of the ORGR;
(k) throughout 2010 and 2011, the KMCs developed existing wells and drilled new wells;
(l) between February 2010 and March 2011 the parties discussed the terms of a further supply of gas;
(m) by March 2011, the estimate of the ORGR had increased to 1097.5
PJ;
28 At [63].
(n) on 20 April 2011, the KMCs presented a term sheet which included a split of daily deliverability of 75:25 to allow the KMCs to redress the imbalance in the shares of Shared Gas;
(o) during August and September 2011, the parties met on four occasions to try to agree the amount of excess gas available for supply to Vector above 1010 PJ and the terms of such supply;
(p) by term sheets given on 22 August and 6 and 28 September, 2011 (C:2/558, 563 and 570), the KMCs offered to sell 30 PJ to Vector;
(q) the Kapuni field was delivering approximately 15 PJ annually in
October 2011.
We also note that:
(r) by 27 July 2013, Vector had exhausted its share of Shared
Gas/Current Gas Tranche;
(s) after 27 July 2013, Vector continued to take 50% of MDQ and by
31 May 2015 has taken approximately 12.82 PJ of raw gas.
[75] Post-contract conduct was also identified by the Tribunal. The Tribunal cited the Gibbons Holdings Ltd v Wholesale Distributors Ltd case (on which again the Supreme Court in Vector Gas relied) in support of the relevance of post-Letter Agreement conduct,29 before recording as follows:30
… The KMCs’ proffered two Term Sheets in November:
[redacted]
However, these documents do not assist in constructing the Letter of Agreement although no doubt they throw light on what is feasible given the uncertainty concerning the quantum of reserves.
[76] Plainly then, the Tribunal did take full account of the parties’ positions both pre and post the Letter Agreement. The Tribunal found evidence of the parties’ positions as reflected in term sheets to be unhelpful as indicators of objective intention.
[77] Thus though the argument does raise a question of principle, it is in substance a weak argument.
[78] In addition, the Tribunal’s finding that the priority inference was not available to be drawn from that surrounding material is not able to be appealed. It was both a factual finding and a finding excluded from the category of permissible legal questions by the terms of cl 5(10)(b)(ii) of Sch 2.
[79] The next argument was that the Tribunal erroneously focused entirely on the Letter Agreement to the exclusion of the KGC, judgment, sealed orders and Settlement Agreement. This too, at the highest level of abstraction, raises a question of legal principle. To the extent that those instruments form part of what might be called the complex contractual matrix in this case, they will be relevant if they cast light on what was intended with respect to Vector’s right to the 36 PJ of NTG. To exclude this wide swathe of material from consideration would, on that basis, at least potentially be an error of law. For two reasons however, I consider this argument is
also weak.
29 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2006] 2 NZLR 27 (CA).
30 Interim Award, above n 1, at [66].
[80] The first point is that the Tribunal plainly did take account of those instruments. It said so. The Tribunal found that the current shortfall was in fact contemplated by the terms of the sealed orders and the Settlement Agreement. Indeed the Tribunal found that the imbalance had been caused by the three year market development break-in period post-1997 in accordance with the terms of order 22(b). The KMCs contested this as factually incorrect. But factual findings may not be appealed and I am bound by them. The Tribunal concluded that these instruments did not change the result dictated by the Letter Agreement. That agreement specifically proceeded on the basis that the result of the current arbitration would be the setting of appropriate terms and conditions to allow Vector to take
36 PJ over five years. Excluding Vector from access to the field over some or all of that period was, the Tribunal found, contrary to the whole point of the Letter Agreement.
[81] In their argument, the Tribunal concluded, the KMCs were trying to make negotiable what the Letter Agreement plainly said was non-negotiable. This in turn meant the Tribunal had no jurisdiction to consider any matter relating to CTG, the terms and conditions for the extraction of which had long ago been settled.
[82] That logic cannot be faulted. What is more, in my view (and in that of the Tribunal) to the extent that the sealed orders are relevant, they are consistent with the conclusion reached. Order 22(c) provides that recovery of any shortfall under the order 22(b) three year holiday would occur “during the life of the field”, not during the currency of the CTG. Thus, the surrounding instruments simply do not have the effect the KMCs contended for. The KMCs’ best insurance policy is not priority, but, through the formal redetermination process (a process not excluded by the Letter Agreement), ensuring that the ORGR value, by which NTG is calculated, is set accurately and conservatively.
[83] The Tribunal also considered that the 29 September letter from the KMCs to Vector was not relevant as it had been “superseded in a number of respects” by the Letter Agreement which “went beyond the statements of the KMCs contained in the
29 September letter”.31 But two further items were important the Tribunal considered:32
They were that nothing in the letter limited the rights of either party to instigate a redetermination in accordance with the KGC or committed the KMCs to supply more gas than was commercially recoverable from the Kapuni field.
[84] Thus, I am bound to conclude that even if contrary to the Tribunal’s finding, the 29 September letter was relevant, it would not have changed anything. It was not inconsistent with the fundamental point of the Letter Agreement as described above.
[85] Finally, on the strength of the KMCs’ case, there is the underlying justice point the Tribunal made. The KMCs cannot be heard to complain about a shortfall when they:33
(a) controlled production levels from the field throughout the period when the shortfall developed; and
(b) knew Vector would take what they could not.
[86] These factors, all taken together, mean that even if a question of law is raised in the proposed appeal, the argument over priority is, in my view, weak.
[87] There is an additional factor in relation to the requirement of substantial effect on the KMCs’ rights which for completion I will now briefly summarise. The KMCs’ description of the prejudice they face if they do not obtain the priority argued for makes it clear that the prejudice is contingent. It only arises if their own estimates of ORGR prove overly optimistic. I acknowledge that cl 5(2) uses the word “could” rather than “would”. But it is common ground that the underlying objective of cl 5 is to hold the parties to their choice of extra-judicial dispute resolution and therefore to privilege finality except in narrow circumstances. It would, in my view, be inconsistent with that objective to allow the KMCs to claim
the benefit of a prejudice that really depends on their own scientists making a
31 At [65].
32 At [65].
33 At [167].
mistake. As I have noted, the best protection for KMCs is to ensure that their scientists do not.
[88] I do not, in the foregoing, disregard the claimed risk of an economic ‘rent play’ once Vector has extracted its entitlement. But there are two obvious answers to this point. First, the KMCs’ absolute priority argument by definition also involves only KMC raw gas going over the fence at some point in the next five years. The only question is when. The second point is that if the KMCs feel they are at risk of being subjected to such oppression, they can factor that into any arguments they might bring to bear in a further arbitration over their share of NTG. Their interests are therefore well protected and neither party has shown any reluctance to utilise that mechanism where necessary.
Liquids
Background
[89] The KGC and Settlement Agreement give Vector the right to extract and retain all liquids from raw gas received subject only to the KMCs’ preferential marketing right for LPG and first right of refusal in relation to natural gasoline. But Vector must pay the difference between the energy content of raw gas delivered to it and the spec gas returned to the KMCs.
[90] Although the liquids component of raw gas which is extracted by Vector at the KGTP is relatively small by volume it is high in energy and far more valuable than spec gas. It represents, as I have said, around 15 per cent of the energy of raw gas. The Tribunal’s task was to determine a “fair and reasonable price” for raw gas. This included factoring in the value of liquids. The KMCs argued for a “net back” approach for valuing that component of the raw gas price. In closings before the Tribunal, Vector argued that only a nominal payment should be made for that component.
[91] For the reasons I have discussed, the Tribunal opted for the nominal price.
Submissions
[92] The proposed question of law is:
… whether the Tribunal was correct in its interpretation and application of the test for establishing a fair and reasonable price for raw Kapuni gas, particularly insofar as the value of the liquids component of the raw gas stream is concerned.
[93] The KMCs advance the following propositions:
(a) There was a consensus of approach between the parties’ experts as to the net back approach to be adopted to derive a fair and reasonable price for raw Kāpuni gas since no raw gas market could be identified.
(b)The Tribunal held that a market price is a relevant consideration in determining what a fair and reasonable price should be between the parties.
(c) The most persuasive evidence of market price is the evidence of the prices obtained in comparable sales.
(d)The Tribunal identified there was no justification for distinguishing between the component parts of the raw gas stream (that is liquids as against spec gas).
(e) The Tribunal’s logic was therefore internally inconsistent when it set a fair and reasonable price for raw Kāpuni gas in that in relation to spec gas component it adopted a net back approach beginning with a point of sale wholesale price and without reference to Vector’s ownership of the processing plant; but in relation to liquids the Tribunal:
(i) ignored any evidence of point of sale wholesale price for LPG
and natural gasoline; and
(ii)instead adopted an entirely different hypothetical auction formula in which Vector’s ownership of the processing plant was decisive.
[94] The long and short of this argument is that the KMCs complain the Tribunal’s reasoning was illogical, inconsistent and therefore wrong in law. The KMCs argue that the correct test for establishing fair and reasonable price for raw gas is as follows:
(a) estimate a market price for spec gas based on evidence of contracts for the sale and purchase of spec gas;
(b)estimate and add a market price for LPG and natural gasoline based on contracts for the sale and purchase of those products; and
(c) subtract the reasonable cost of processing the raw gas to produce spec gas and liquids and subtract the cost of shrinkage.
[95] The KMCs also raise a procedural argument. They argue they were taken by surprise by Vector’s shift in stance in its closing submissions and lost an opportunity thereby to call evidence as to why the Tribunal’s hypothetical auction approach to price setting was flawed.
[96] The KMCs say that throughout the Tribunal hearings Vector had adopted a two-pronged attack: either the CTG prices should continue to apply without change, or a variation on the KMCs net back formula should be adopted both to the overall raw gas price and, necessarily within that, to its liquids component. It was not until closing submissions, the KMCs submitted, that Vector made the suggestion of a [redacted] per GJ option fee. No evidence was called in support of that price and the KMCs had no opportunity to call their own rebuttal evidence.
[97] This, the KMCs argued was procedurally unfair.
Analysis
[98] I agree with Vector that the formula adopted by the Tribunal for setting the price for raw gas is not a legal formula. Just what is a “fair and reasonable” price in any given circumstance (the legal test required to be applied) is capable of producing a number of credible price formulae. Within the bounds of fairness and reasonableness, the actual formula must thus be the result of economic and commercial experience applied to the facts as found. It is an expert judgement exercised by reference to the evidence. This then is quintessentially a matter within the reasonable range principle espoused in the Finelvet case to which I have already
made reference and adopted by Venning J in Shell v Vector.34
[99] It must follow that the question proposed by the KMCs does not, on its terms, raise a question of law. There are only two possible questions of law arising from the argument as I heard it:
(a) Was the manner in which the proposed nominal price for liquids entered the arbitration so irregular as to deny the KMCs a fair opportunity to respond to the proposal?
(b)Were the different methodologies adopted by the Tribunal to the price of spec gas and liquids so inconsistent as to render the liquids price irrational?
[100] I do not think there is anything in the procedural unfairness question. It is true that the [redacted] per GJ option was introduced in Vector’s closing, but in fact Vector’s stance in opening submissions was consistent with that proposal. Vector accepted that an overall net back approach might well be appropriate for raw gas pricing (if the opening gambit of no change in price did not succeed), but did not concede that this inexorably applied to the liquids component. One of the issues identified by Vector was whether the net back approach for the overall raw gas price
required adjustments including:35
34 Shell v Vector, above n 15, at [47].
35 Vector opening submissions at [69(iv)(b)(ii)] (emphasis in original).
… whether the resulting price should then be increased to incorporate into the price the additional value that Vector obtains from extracting by-products (liquids and CO2) from the raw gas.
[101] And further, Vector noted:36
In the event that the Panel determines that some or all of the value of the by- products should be allocated to the KMCs, sub-issues arise as to:
(a) the fair market value (at the relevant date of assessment) of the by- products, namely LPG, natural gasoline and CO2.
[102] It is plain on my reading of the submissions that Vector was not necessarily proceeding on the basis that net back was the only available formula.
[103] Further on in the submissions, Vector posed the following questions:37
What is being valued?
The first issue to be determined is what is being valued – is it LPG that has already been produced at an unspecified location that is sold at a single price, at a single point in time (Mr Poole’s approach)? Or is it the opportunity of extracting LPG from raw Kapuni gas at the KGTP, taking account of the uncertainties and risks associated with this opportunity, and recognising that the raw gas is to be sold (and therefore the opportunity to extract LPG is available) for a five year term (Mr Johnson’s approach).
…
Vector’s position is that in valuing LPG account must be taken of the fact that what is being “sold” to Vector is not LPG, rather it is the opportunity to extract LPG from raw gas.
[104] I acknowledge that at a subsequent point Vector accepts that one issue is what account should be taken of the costs Vector incurs in extraction of the liquids. 38 But that concession was made in the context of a discussion about the price of an option, not the price of the product.
[105] In any event, if the KMCs were taken by surprise by the 10 cent option raised in closing, they did not say so. They could have taken the point at the time, suggesting that this submission was new and demanding a right to call evidence on
it. The Tribunal would then have been required to rule on whether the new element
36 At [69(vi)(a)].
37 At [258] and [259] (emphasis added).
38 At [260].
was truly a departure from the way Vector’s case was structured or more in the nature of a refinement of an existing position. I have no doubt the Tribunal would have concluded that this was a refinement, but it is nonetheless significant that the matter does not appear to have been raised and the Tribunal does not appear to have been called upon to resolve the issue.
[106] I conclude therefore that while, in theory, procedural unfairness does qualify as a question of law, the argument in this case is not at all strong.
[107] As to question (b), I cannot see how, by concluding that there is only one real willing buyer for a by-product (that Vector could choose to extract or not), the Tribunal can be said to have moved outside the range of reasonably available options in Finelvet terms. The Tribunal’s approach has its own internal logic given only Vector had the necessary plant, and the price to be set was for a single product – not liquids alone, but raw gas. Whoever was the buyer would be required to take it all, and Vector was the only buyer with the facility to extract that extra value. No-one else would see that liquids components as adding additional value.
[108] To succeed on this point, the KMCs would have to establish that the “fair and reasonable” test required the Tribunal to adopt the same formula for setting the value of by-products, as that utilised for establishing overall price. That, to my mind, is too simplistic. The Tribunal could well have decided to adopt that approach, but it did not have to.
[109] And finally, there is the fairness point emphasised by the Tribunal – Vector had taken all the risks with respect to infrastructure capable of extracting that by- product.
[110] I conclude therefore that no qualifying question of law is raised in question (b).
Additional applicable matters of discretion
[111] It is necessary to give consideration also to the additional discretionary matters referred to in Gold and Resource Developments. These apply to both the priority and liquids challenges.
[112] Two matters count strongly against the grant of leave. The first is that the Tribunal included two eminently qualified lawyers. There was no risk that a mistake of law could have been made by a Tribunal lacking sufficient legal expertise. The second point is that both arguments were central to the Tribunal’s deliberations. The priority argument was essential to the KMCs’ case, and the manner by which liquids should be valued was subject to considerable argument. These were not matters that were ancillary to deliberations. I accept the KMCs argument that the issue of nominal payment came before the arbitrators at a late stage (at least in the form in which it was ultimately adopted), but that is a separate question and I have already addressed it.
[113] I accept that the dispute is of great importance to both parties and that the amount of money involved, at least in relation to the liquids question, is definable and considerable.
[114] As to whether the parties agreed that the award would be final and binding, the KMCs argue that because there was no finalised arbitration agreement, the parties could not have agreed that the arbitration would be final and finding. Vector on the other hand submits that the only reason the agreement was not finalised was that the parties disagreed on the wording of the scope of the dispute: such a description was accordingly left out of the Agreement provided to the Tribunal. But, Vector submits, the parties did agree on almost all of the terms, including that the arbitration would be final and binding. I do not need to resolve this dispute, in light of the clear view I have reached that neither of the questions posed are strongly arguable questions of law.
[115] Finally, pursuing this matter through the courts will inevitably lead to delay including the possibility of remission back to the Tribunal with downstream effects on price and certainty. It may be that Vector bears the ultimate burden of this in that
the take or pay provisions in the KGC prevent Vector from deciding to stop extraction until the uncertainty is resolved.
Conclusion and disposition
[116] For the reasons discussed, I consider that the questions posed either do not raise questions of law, or if they do, they lack sufficient merit to warrant the grant of leave under cl 5. The application is dismissed.
[117] Vector will be entitled to costs in the usual way. Brief memoranda may be filed if agreement cannot be reached.
Confidentiality
[118] Finally, in accordance with the joint memorandum of counsel regarding confidentiality, I note that the parties agree that they continue to be bound by the confidentiality orders of Kós J (as he then was) set out in the sealed orders of
22 December 2014. I make orders under s 14F of the Arbitration Act that:
(i) no person (including any party to the proceeding) be permitted to search, inspect, or copy any file or the case on appeal bundle on a file in any office of the court relating to these proceedings, except with the leave of the Court; and
(ii) the Registrar is directed that this judgment is to be released to counsel for the parties in the first instance in order to allow them sufficient time to review the judgment for confidential information and to liaise with counsel for the non-parties in order to determine if restrictions on the publication of the judgment are necessary.
[120] Leave is reserved to apply for further directions if necessary in relation to this matter.
Williams J
Solicitors:
Bell Gully Solicitors, Wellington for First ApplicantMinter Ellison Rudd Watts, Wellington for Second Applicant
Chapman Tripp, Wellington for First and Second Respondents
5