Australian Gasfields Ltd [1998] QSC 206

5C 98/cl()6 IN THE SUPREME COURT OF QUEENSLAND Brisbane No. 8179 of 1998 IN THE MATTER OF THE COMMERCIAL ARBITRATION ACT 1990 -and- IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 38 THEREOF BY AUSTRALIAN GASFIELDS LTD ACN 009 330 134 AGAINST PHILLIPS OIL COMPANY AUSTRALIA ARBN 061 917 459 AND SUN OIL EXPORT COMPANY REASONS FOR JUDGMENT - ATKINSON J Judgment delivered 1 October 1998 CATCHWORDS: ARBITRATION - whether leave should be granted to appeal against an award made by arbitrators - whether manifest error of law on face of award - meaning of the term "expenses" - construction of Deed. Counsel: Solicitors: Hearing Date: Mr SSW Couper QC for the applicant Mr E J P F Lennon QC for the respondent Lees Marshall Warnick for the applicant Clayton Utz for the respondent 21 September 1998 -- 1 of 6 -- IN THE SUPREME COURT OF QUEENSLAND No. 8179 of 1998 Brisbane IN THE MATTER OF THE COMMERCIAL ARBITRATION ACT 1990 -and- IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 38 THEREOF BY AUSTRALIAN GAS FIELDS LTD ACN 009 330 134 AGAINST PHILLIPS OIL COMPANY AUSTRALIA ARBN 061 917 459 AND SUN OIL EXPORT COMPANY REASONS FOR JUDGMENT - ATKINSON J Judgment delivered 1 October 1998 This is an application for leave to appeal against an award by arbitrators made on 14 August 1998. The application for leave is made under s. 38(4)(b) of the Commercial Arbitration Act 1990 ("the Act") which provides that an appeal on a question of law arising out of an award may only be brought with the leave of the Supreme Court. Section 38(5) sets out the circumstances in which the Supreme Court may grant leave. It provides: "(5) The Supreme Court shall not grant leave under subsection (4)(b) unless it considers that - (a) having regard to all the circumstances, the determination of the question oflaw concerned could substantially affect the rights of 1 or more parties to the arbitration agreement; and (b) there is - (i) a manifest error of law on the face of the award; or (ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law." 2 The respondent has conceded that the determination of the question of law concerned -- 2 of 6 -- 2 could substantially affect the rights of the parties to the arbitration agreement. The question to be determined in this case is whether or not there is a manifest error of law on the face of the award. This is an objective rather than a subjective test. The requirement of a manifest error of law is to give effect to a policy of finality of arbitral awards, which is reflected in the Act which is a uniform Act passed by all the States of Australia. The policy of the Act is that ordinarily it is best to hold parties to their arbitral awards. 3 The leading decision in Australia on the interpretation of this subsection is Promenade Investments Pty Ltd v. State ofNew South Wales (1992) 26 NSWLR 203 and in particular the judgment of Sheller JA. At pages 225-226 his Honour held: "The expression 'error oflaw on the face of the award' is one ofa type well- known to courts. The award having been examined the question is whether there is apparent (and such is the denotation of the word 'manifest') an error oflaw. 'Manifest error' is an expression ... used to indicate something evident or obvious rather than arguable: see generally per McHugh JA in Larkin v. Parole Board (1987) 10 NSWLR 57 at 70-71 . ... However, as McHugh JA pointed out 'manifest', in the context of the subsection, which contemplates the grant of leave before an appeal can be pursued, connotes an error of law that is more than arguable. There should, in my opinion, before leave is granted be powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument that there is on the face of the award an error oflaw." 4 The reasoning of Sheller JA was adopted by the New South Wales Court of Appeal in Natoli v. Walker (CA 40351 of 1993,26 May 1994, unreported) where Kirby JA said at P 13 of his judgment: "The precondition to curial intervention is the easy demonstration that the primary decision maker was 'clearly wrong'. " 5 In Re Tiki Village International Limited [1994] 2 Qd R 674, Byrne J considered the test to be applied when there were competing constructions of a phrase. His Honour held at P 677 that if the construction relied upon by the arbitrators was "fairly arguable" there would -- 3 of 6 -- 3 be no manifest error of law. The position in Queensland was summarised by Williams J in Kleerstyle Homes v. Dickson (CLS 1997 QSC 63,24 September 1997, unreported) where his Honour said at p 2: "The authorities make it clear that for there to be a manifest error of law the error must be 'obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator' (re CAF - Grains [1994] 2 Qd R 252) and a conclusion which is 'fairly arguable' will not evidence such an error (re Tiki Village International Limited [1994] 2 Qd R 674)." Accordingly the test to be applied is whether the construction favoured by the arbitrators is a construction which was fairly arguable. It is only when the construction is not fairly arguable that leave to appeal may be granted. 6 The arbitrators were required to construe a clause in a deed of assignment (the "Deed") which obliges Australian Gasfields Ltd ("Australian Gasfields") to pay royalties to Phillips Oil Company Australia ("Phillips") and Sun Oil Export Company ("Sun Oil"). The royalty is struck at 3.5 per cent "of the value at the wellhead as hereinafter determined of all petroleum recovered and produced from the royalty area". The "value at the wellhead" apparently has a usual meaning in the industry however in this case, the Deed defmed the term for the purpose of the calculation of the royalty in clause 9.2.1 of the Deed as follows: "The selling price of the Petroleum less all expenses incurred in transporting the Petroleum from the wellhead to the point of delivery of the buyer". It was this clause that the arbitrators were required to construe pursuant to a reference made to them under clause 13 of the Deed. Three experienced commercial barristers were appointed as arbitrators. 7 The essential question for determination by the arbitrators was whether the cost of construction of the pipeline used by Australian Gasfields to transport the petroleum from the -- 4 of 6 -- 4 wellhead to the point of delivery of the buyer came within the phrase "all expenses incurred in transporting". 8 In favour of that construction, Australian Gasfields argued that the words admitted of no other meaning. They pointed to the use of the word "all"; that "expenses" may refer to an outgoing of a capital nature as well as an outgoing on account of revenue (see e.g. Racecourse Betting Control Boardv. Young [1958] 2 All ER 385 at 391); that "incurred" may mean "have been incurred" as well as "are incurred"; and "in" may refer to the means or place of doing something (see Macquarie Dictionary (3rd edition)). It is arguable that the meaning of the phrase "all expenses incurred in transporting" is every outgoing whether of a capital or revenue nature that has been incurred for the means of transporting the petroleum from the wellhead to the point of delivery. As such, it would be apt to include the cost of construction of the pipeline used in transporting the petroleum. However in order to succeed the applicants for leave to appeal must show that the construction favoured by the arbitrators was not fairly arguable. It is not sufficient for the applicant to show an arguable case of error of law. 9 The arbitrators decided that the phrase did not in fact include the cost of construction of the pipeline. In construing the clause, they considered the established meaning of the phrase "value at the wellhead" in the industry; the meaning of the words in the phrase and the context in which the phrase was used in the Deed. This is an entirely appropriate approach to use. 10 The established or industry meaning ofthe phrase "value at the wellhead" was found by the arbitrators to be the market or selling price of the petroleum less the costs of transporting it to the point of sale. The definition in the Deed of "value of the wellhead" uses the word "expenses" in place of the word "costs" and the arbitrators regarded that as being a significant distinction with "expenses" having a more limited meaning than "costs". 11 The term "expenses" has been held to mean "actual disbursements" (Chandris v. Union -- 5 of 6 -- 5 ofIndia [1956] 1 All ER 358 at 363 per Hodson LJ). Accordingly the arbitrators found that it did not include the amortised cost of the pipeline or depreciation on the capital account. As the cost of building the pipeline has created a capital asset it is not "money out of pocket". Further the word "in" can be read in a temporal sense and therefore can be construed in the phrase "in transporting" to mean "in the course of transporting" (cf First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 128 ALR 118 at 129). 12 The "contextual clues" which the arbitrators say make it more appropriate to construe the word "expenses" in the Deed to mean money paid out of pocket on a recurrent, monthly basis are found in clauses 9.3.1 and 9.3.2 of the Deed. Clause 9.3.1 requires Australian Gasfields to furnish monthly statements showing the quantity and selling price of the petroleum produced during the preceding month and full particulars relevant to ascertaining the value at the wellhead of that petroleum. Clause 9.3.2 mandates the payment of royalties on a monthly basis commencing one month after the date of the 'first sale of petroleum recovered from the royalty area. This suggests a calculation based on a recurrent activity and that the parties expected royalties to be payable before the significant gross capital costs of construction of a pipeline had been discharged. 13 The arbitrators consequently came to the conclusion that "the most logical interpretation of the phrase in its context in the original deed leads to the conclusion that clause 9.2.1 should be construed so that the expenses to be deducted do not include the gross capital cost of construction of the pipeline and associated infrastructure or its amortised cost". 14 This construction, for the reasons set out by the arbitrators, is fairly arguable and therefore the application for leave to appeal must be unsuccessful. -- 6 of 6 --