The actions of oil producing countries in the late 1970s had led to a worldwide shortage of oil fuels and New Zealand had been particularly disadvantaged because of its total lack of indigenous liquid fuel. As a result of negotiations between Mobil and the New Zealand Government, details of which will be explained hereunder, the two parties contributed finance and expertise and the synthetic fuel plant was successfully completed in mid-1985. Technically, the project has been a success, reflecting great credit on the skills, energy and cooperation contributed by the parties.
Today, using a substantial output of natural gas which it purchases from the Maui Natural Gas Field in the Tasman Sea and supplied to the plant, the New Zealand Government has processed synthetic fuel which is a gasoline product of high quality. At full production, the plant can produce 570,000 tonnes of synthetic fuel ("syngas" or "synfuel") per annum.
The first cargo of product left the plant in 1985 and substantial quantities of the product have been sold to Mobil, to other oil companies trading in New Zealand, and elsewhere.
Fuller details will be set out later in this document, but the scale of such potential refunds can be gauged from calculations which were made for the quarter July-September 1986.
Mobil claimed that its entitlement for that quarter was NZ$6,028,603 plus interest. The Crown figure was NZ $5,482,216.
The view advanced by the Crown related to a provision of the Act Section 27—which prohibits and makes unenforceable contracts or arrangements that have the purpose or effect or likely effect of substantially lessening competition in a market. The Crown’s attitude as conveyed to Mobil was, and is, that the provisions of Article XI of the Agreement, which deal with reduction of prices paid for synfuel by Mobil to levels paid by other purchasers are in breach of Section 27 and cannot be enforced. That section reads as follows:
27. Contracts, arrangements, or understandings substantially lessening competition prohibited—
(1) No person shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
(2) No personal [sic] shall give effect to a provision of a contract, arrangement, or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
(3) Subsection (2) of this section applies in respect of a contract or arrangement entered into, or an understanding arrived al, whether before or after the commencement of this Act.
(4) No provision of a contract, whether made before or after the commencement of this Act, that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market is enforceable.
Cf. Trade Practices Act 1974 (Aust) s. 45(1),(2)
Discussion, however, went on for some years—turning on financing problems and differences as to technical specifications.
General agreement was reached between the parties in 1977 and was expressed in an exchange of correspondence referred to as the Support Letters. These may be found in the Agreed Documents at Volume 9 pp. 206 et seq.
Although the Support Letters were exchanged in October 1977, the rebuilding of the refinery did not commence until 1981/82. During 1977-79, as will be discussed under a later head, intensive investigations were undertaken as to alternative liquid fuel sources. A Liquid Fuels Trust Board had been set up by the Government, and scientists and engineers of prominence were studying a wide variety of alternative fuel sources. One of these was the utilisation of natural gas and/or methanol for conversion to synthetic gasoline by one or other of two processes which were believed to be capable of producing feedstock to be utilised in the refinery, or even marketed as a stand alone product.
The relative importance of Refinery production and product imports in the New Zealand supply of petroleum products in the 1980s is shown in Table 1, provided by the Ministry of Energy. The data collected by the Ministry relates to supply in New Zealand from Refinery production and refined product imports. The figures as collected therefore include some exports and sales to international transport. However for gasoline, local consumption does correspond closely to this supply (apart from stock changes). Syngas exports are not included in the Table, because of the manner in which the data are collected. The Ministry of Energy states that syngas exports (presumably on a comparable basis) amounted to 80,000 tonnes in 1986 and 252,000 tonnes in 1987.
Refinery production, Product Imports and Total New Zealand Supply
The basis of the scheme was the calculating of a ‘Refinery Release Price’ (RPP)—an artificial but nevertheless reasonably accurate assumption of what it had cost for individual fuels to be produced. It will be noted that the imported crude feedstock remained the property of the importing wholesaler—and the process of price ascertainment was aimed at demonstrating to the authorities the fair costs which had been incurred and the profit which should be allowed in the subsequent price fixation exercise undertaken by the Government’s agency— particularly in respect of gasoline which eventually became the only fuel so costed. It was a retrospective operation to adjust prices upwards to compensate for losses sustained through low past prices or vice versa.
The figures from the companies were in fact supplied voluntarily to the Auditor, for under the price control system it was in their interests for the calculations to be done to enable representations to be made and decisions taken as to price increases. In fact, however, until the time of deregulation, the Government had the power to compel disclosure of all required information by virtue of Sections 10 and 11 of the Motor Spirits (Regulation of Prices) Act 1933. These read:
10. Minister may require production of books or documents by dealers in motor spirits—
(1) The Minister may from time to time, by writing under his hand, require any person who is engaged in the business of importing, distributing, or selling motor spirits to produce for his inspection or for the inspection of the [Ministry of Energy] any books or documents in the possession or control of such person in relation to such business, and to allow copies of or extracts from such books or documents to be made by the person so inspecting them.
(2) If default is made by the person in obedience to any order of the Minister under this section, such person and every other person who counsels, procures, or is otherwise knowingly concerned in such default shall be liable on summary conviction to a fine of [$200].
11. Minister may require information to be supplied as to importation, distribution, or sale of motor spirits—
(1) Every person engaged in or in connection with the business of the important [sic]. sale, or distribution of motor spirits shall, as and when required by the Minister, furnish to the Minister in writing such information as the Minister may require in relation to the price of motor spirits, either in New Zealand or elsewhere, or particulars with respect to the importation, sale, or distribution of motor spirits.
(2) All information supplied in accordance with this section shall be furnished in such form as the Minister may require and, if the Minister so requires, shall be certified by the person supplying the same as being correct to the best of his knowledge and belief
That power was not exercised as the industry could not function without approved prices and accordingly information was supplied voluntarily.
Nevertheless, the information still exists in some form, for all the same items of cost are incurred—indeed with greater competition it seems likely that closer rather than looser accounting practices will be observed.
Mr Milkop’s main contention, however, as to the unavailability of rrp figures is that there is no compulsion on companies to reveal information and Mr Dineen’s statement is that his company would be reluctant to disclose unless compelled. The Board of nzrc might be similarly minded. Nevertheless, it must be the case that the figures are in fact calculated with accuracy for taxation returns and, as we learned, are called for from the companies by the Statistics Department under the powers in its Act. These last two procedures are of course confidential but the same material would have been obtainable today had Sections 10 and 11 of the 1933 Motor Spirits Act been excluded horn the 1988 repeal. It is in this later context that one notes that the Ministry of Energy, which was closely associated with legislative changes, took the view that:
the law should be universal in its application and that exceptions could not be made for particular sectors. Contracts in which the Crown was a party were seen as no different in principle—H.M. Donaldson Para 37.
Although this observation was made in respect of the Commerce Act, it would undoubtedly have been the case in respect of the 1988 Reform Act which was especially a Ministry of Energy measure.
The Government contracted that it would take or pay for the output of the field until 2008. After 2008. reserves of gas, paid or not, revert to the owner of the field.
In the second half of the decade, the Government began extensive enquiries as to alternate sources of liquid fuel, and in 1978 the Liquid Fuels Trust Board was appointed to investigate, as already detailed, and eventually reported in favour of the as yet untried Mobil process of gas to gasoline on a commercial scale.
Much detailed planning would be required and that would take several years: finance too would have to be secured and it was decided that preliminary steps would be taken in all areas contemporaneously, even though a firm decision as to viability could not yet be made.
The synthetic fuel would be owned by the Government, and the plant would function as a tolling operation. There would be a tolling company with a majority New Zealand shareholding. All oil companies would be able to participate with Mobil having the largest share amongst them. Mobil would have first call on the product at commercial terms to enable it to meet its in land market requirements— net of its uplifting from Marsden Point refinery. Other oil companies holding shares in the tolling company would have the option to purchase on the same commercial terms, as would any other purchaser "in the territory".
"Commercial terms" was defined as the price which at the time was competitive with other gasoline refined or produced in the territory.
Funds for investigation by the JEC were contributed—initially at US $2,500,000 each—but eventually as to US $25 million by Mobil and US $57 million by the Crown. The thinking was that, had the project not proceeded, this expenditure would have been largely wasted.
The subsidiary agreements were with: Mobil Technical Project Services (motaps) for design, engineering and construction; Mobil Management Services for management personnel including a Mobil Managing Director; Mobil Technical Project Services for technical service; Mobil Chemical International Ltd for leasing of Mobil’s catalytic material by nzsfc, together with a licence authorising use of the same; A Guarantee by Mobil to nzsfc of plant performance (with a limit of NZ$75 million); Agreement between the Crown and NZSFC to deliver gas from the Maui Field and uplift and pay for the processing of 570,000 tonnes of gasoline per year.
The changing background doubtless resulted in the relationships created in the Participation Agreement—differing from the situation anticipated at the time of the Memorandum of Understanding. There are difficult questions as to the interpretation of the offtake rights and obligations particularly under Article XI already referred to:
11.1 MONZ. and the Crown shall enter into an offtake agreement which shall provide, inter alia, as follows:
(a) On or before 30 April in each year, MONZ (which for the purposes of this Article XI shall include any Affiliate of MONZ) shall notify the percentage of the total quantity of Gasoline to be produced in the following year it intends to purchase and shall purchase the percentage of Gasoline production so notified in such following year.
(b) The percentage so notified shall:
(i) Be not less than the percentage sold by MONZ of the total quantity of gasoline sold in New Zealand in the calendar year previous to that in which the notification is made; and
(ii) Be no greater than 60% of the total quantity of Gasoline produced in the year in respect of which such notification is made.
Provided however, that if the total quantity of Gasoline sold in New Zealand in the calendar year previous to that in which the notification is made exceeds 1,700,000 tonnes, then the maximum percentage of 60% specified in Section 11.1 (b)(ii) shall be multiplied by the ratio that such total quantity bears to 1,700,000 tonnes, and the product thereof shall be the maximum percentage for the following year.
(c) MONZ shall not in exercising its rights under this Section 11.1, in any year notify a percentage which varies by more than 30% of the percentage notified in the previous year.
(d) The price to be paid for any Gasoline purchased by MONZ shall be equal to the price for gasoline which shall be fixed at the time of such purchase in accordance with the mechanism known as the ‘refinery release price’ (after adjustment of the ‘refinery release price’ for transportation, in transit losses, quality differentials, blending and additive charges and blending losses).
(e) Subject to the aforesaid notification rights in favour of MONZ, the Crown shall be free to sell in New Zealand all the Gasoline in such quantities and to whomsoever it deems appropriate, provided that if in any calendar quarter the Crown sells Gasoline to persons other than MONZ at a price and/or on terms which are more favourable than the price and/or terms of any Gasoline sales to MONZ in the same calendar quarter, then the price and/or terms of any sales to MONZ in that calendar quarter shall be adjusted to provide MONZ with a comparable price and/or terms.
(f) The Crown shall make available to an independent auditor appointed by MONZ and approved by the Crown (which approval shall not be unreasonably withheld) access to such documentation of the Crown as shall enable such auditor to advise MONZ of his conclusions as to the price and/or terms of sales of Gasoline by the Crown in any particular quarter to persons other than MONZ, provided however, the Crown shall be entitled to require such auditor and MONZ to undertake secrecy obligations with respect to such documentation and such auditor’s conclusions in a form satisfactory to the Crown prior to making the documentation available to such auditor.
Until such offtake agreement shall come into effect the provisions of this Section 11.1 shall take full effect as an agreement between the Crown and MONZ. The termination of any offtake agreement between the Crown and MONZ. providing for the notification rights contained in this Section 11.1 shall thereby terminate the rights of MONZ under this Section 11.1
There is strong conflict between Crown witnesses and Mobil witnesses as to how the offtake arrangement was reached. In particular whether, as Mobil contends and the Crown denies, the obligation to take the market share was coupled with and accepted in exchange for the MFP clause whereby Mobil would not be disadvantaged as to price if, having been compelled to take a substantial quantity at an rrp at the higher end of the market—other purchasers who had taken no risk and made no contributions could buy at lower prices. It is true, as counsel for the Crown demonstrated, that differing drafts of the MFP clause were being exchanged in November 1981, but the Tribunal accepts that the propositions put forward by Mr Pryor in this area make much sense:
(a) As at 12 February 1982 Mobil was committing itself to a long term obligation for a substantial proportion of output and no other company was similarly committed;
(b) The overseas supply market situation had improved substantially;
(c) It would have been highly unlikely that Mobil would by that date have accepted without recourse an obligation to purchase at a relatively fixed price, with its competitors left free to pick and choose according to more favourable terms.
Although the other oil companies did not join in a purchasing contract at the time of the Participation Agreement, the Government was still anxious to ensure that il had customers for the balance of production above Mobil's purchases.
Documents show that both sides favoured a short term agreement rather than long term commitment—because of the volatile state of the world market, and according to a Memorandum from the Ministry of Energy on 7 August 1985 (ABD 19/02) because:
The Current Situation
8 Introduction of the Commerce Bill, plus the Government directive to deregulate the oil industry, together make it extremely difficult for the Crown to (a) finalise an agreement that effectively lies the price of all syngas sold to four competing customers (several aspects of the proposed agreement would seem to be forbidden by the Bill), and (b) persuade the oil industry that it is in its interests to commit to take the lull plant output when new entrants may be allowed into the market, and when dumped products from OPEC or elsewhere may undercut any contractual pricing commitments.
9 In these circumstances, the four oil companies have collectively advised the Ministry (31 July) that they are prepared to continue to negotiate a short-term agreement but do not want to go any further with the long-term agreement until the environment becomes more stable.
The Crown's Position
10 This development appears to suit the Crown very well. A recent legal opinion suggests that the Commerce Bill—if enacted—will generally over-ride Mobil’s MFP right without any necessity to provide compensation. Also, the Ministry does not consider it desirable to enter into a long term contract with the four oil companies at a time when the government is considering changes to the onshore marketing environment for petroleum products.
The memorandum of August 1985 from the Secretary of Energy to the Minister (ABD 19/1), already recited referring to the legal opinion that the MFP clause might breach the Commerce Act, appears to have been greeted favourably.
On 11 August it again sought agreement on the method of administering the clause. It suggested that at the beginning of each quarter, Mobil’s price would be set at rrp and that if, during the quarter, GGTG sold to another buyer at a lower price, Mobil should forthwith receive a credit calculated on the difference, and that price would prevail for the balance of the quarter unless there was a further sale at a lower price.
There were further discussions between representatives of the parties and letters exchanged with particular reference to the method of calculation. They included such questions as:
(a) Whether sales by GGTG offshore at lower than rrp prices would trigger the MFP clause;
(b) Whether calculations should be made at the end of the quarter or progressively;
(c) Whether interest should be paid if price adjustments were made;
(d) Whether averages would be calculated of all purchases, whoever the customer, or of individual deliveries; and
(e) Refusal of access of certain documents by the Independent Auditor.
After a defended hearing, Mr Justice Heron, in a lengthy reserved decision delivered on 1 July 1987, stayed Court proceedings until the Tribunal had determined its own jurisdiction.
At the First Session of the Tribunal on 12 13 April 1988, the Tribunal directed the Crown to advise whether it abided by the High Court’s decision or intended to appeal against the same.
On 29 April 1988, the Crown wrote to the Tribunal that il no longer wished to challenge the jurisdiction of the Tribunal and this was confirmed in its Counter Memorial of 14 June 1988—Clause 9.20 and 9.21.
From the foregoing the following questions emerge. It is convenient to use the amended (a) to (1) classification adopted in the Requesting Party’s opening and also to summarise the Other Party's response to each question.
Whether in not giving effect to Article 11(1)(e) of the Participation Agreement with effect from 1st March 1987 the Crown is in breach of contract:
Opening p. 15
(Note: The Participation Agreement ante-dated the Commerce Act 1986 and by virtue of Section 111 of the Act the Agreement did not become subject to the provisions of the Act until that date.)
The Crown in response submitted that Article 11 (1)(e) is unenforceable by virtue of Section 27 of the Commerce Act in that it has the purpose or has or is likely to have the effect of substantially lessening competition in a market.
This is the Commerce Act question
Whether, in not giving effect to Article 11(1)(e) of the Participation Agreement with effect from 9th May 1988, the Crown is in breach of contract.
Opening: pp. 15-16
(Note: 9th May 1988 was the date of coming into effect of the Petroleum Sector Reform Act 1988.)
The Crown submitted that the whole of Article 11(1) is unenforceable by virtue of the abolition by the Reform Act of the price-fixing procedures pertaining prior to the 1988 enactment—as a consequence of which it was submitted that the sub-clause as a whole is no longer binding because of the disappearance of the said procedures.
The basis of the Crown’s argument is that the cost ingredients necessary for calculation of price adjustments in Mobil's favour are no longer capable of ascertainment, as with the abolition of price control these costs are no longer revealed.
This became know'll as: The Uncertainty Question
Question (c) (as later amended) reads:
Whether such breaches (if established) or any other conduct of the Crown in relation to this dispute amount to breaches of contract or breaches of fiduciary duties which the Crown owed to Mobil arising out of the joint venture relationship of the parties.
Opening: p. 16
Supplement: p. 6
Leave to amend by the addition of the allegation of breach of fiduciary relationship was granted by the Tribunal at the Pre-hearing Conference on 28th October 1988.
The Tribunal notes that the allegation of breach of fiduciary duty is somewhat wider than the allegations in Questions (a) and (b) and derives from para. 7.1.1. of the Memorial as amended in the Supplement to Opening at pp. 5 6.
That allegation has been expressed by Mobil as a question.
Whether the Crown has breached its implied contractual duties of reasonable co-operation, discussion and fair dealing and its duties of loyalty and good faith to Mobil as a joint venture partner and if so, for a declaration of how such breaches should be remedied and for a calculation of any unjust profit or gains which the Crown has made arising from the breaches of contract and of its fiduciary duty and asks for an assessment of damage.
The allegations were where particularised as failure:
(a) to disclose to Mobil in timely fashion a letter to the Gas & Geothermal Trading Group from the Commerce Commission dated 26th June 1986; and
(b) to discuss the basis of its claim that Article 11(1)(e) was unenforceable.
Supplement: pp. 5 & 6
The Crown denied the existence of an fiduciary relationship or consequent breach: Counter Memorial: 18.10/18.11
This is the Fiduciary Duty Question
Question (d) reads:
If the Crown is in breach of contract, is Mobil entitled to a declaratory order to that effect and to an order enforcing compliance with the contract and to damages for the breach.
Question (e) reads:
Whether, if the answer to (a) and (b) is "no", so that Mobil is not entitled to such orders, there is any consequential effect (and if so what effect) on Mobil’s obligations under the Participation Agreement.
Opening: p. 16
These two questions (d) and (e) relate generally to remedy and are comprehended by relief sought in the other questions.
Questions (f) seeks an alternatively remedy. It reads:
If the answer to questions (a) or (b) (or presumably (c)) is "no", then Mobil is nevertheless entitled under the principles of customary international law to appropriate compensation because the rights or benefits it derives from Article 11.1
have been legislated away by the enactment of the Commerce Act and/or the Petroleum Sector Reform Act:
Opening: pp. 16-17
The Crown denies that international law has an application to the contract between the Government and Mobil, which it submits is governed solely by the domestic law of New Zealand.
Memorial: 19.1 & 19.8
This is the International Law Question
Questions (g), (h), (i), (j), (k) all relate to disputes between Mobil and the Crown as to the method of calculating price adjustments to be used in the event that Mobil is entitled to such payments.
The tribunal notes that different considerations may apply in different periods:
(i) from 1/7/86 when the Interim Agreement had expired to 1/3/87 (applicability of the Commerce Act). It appears that Mobil has an entitlement, but the mode of calculation is in dispute;
(ii) From 1.3.87 to 9.5.88. Mobil’s entitlement depends on the interpretation of Section 27 of the Commerce Act, and similarly thereafter;
(iii) After 9.5.88 Mobil’s entitlement, even if it succeeds on the Commerce Act question, is further challenged by the Uncertainty Question pursuant to the Petroleum Sector Reform Act.
The Questions as to calculations within these periods are:
(g) Whether export sales are required to be taken into account in calculating any adjustment to which Mobil is entitled under Article 11.1(e)
Opening: p. 17
The Crown claims: that only sales "intented for consumption in NZ" are to be taken into account. An answer under this question also has relevance to the Commerce Act Question.
(h) Whether, if not, the Crown in fact made any export sales and, if such sales have been made, whether the Crown is in breach of contract in making them, thereby entitling Mobil to damages.
Opening: p. 17
This is no longer an issue between the parties.
(i) Whether the Crown failed property to apply the MFP clause in Article 11.1(e) to sales of syngas made between / July 1986 and / March 1987.
Opening: p. 17
This question is merely a reformulation and extension of questions (g) (supra), (j), (k) & (l) infra. The Crown claims calculations made by it and the consequential without prejudice payments made to Mobil in respect of this period are correct.
(j) Whether the Crown is entitled to refuse the independent auditor, in carrying out his duties under Article 11.1(f) of the Participation Agreement, access to documentation relating to export sales.
Opening: p. 17
This question is supplementary to question (g) (supra) and the Crown’s response is the same that there is no account to be taken of export sales.
(k) Whether, in calculating any adjustment to which Mobil is entitled under Section 11.1(e), the Crown should average all sales to all third parties or whether, to the extent that average is required, Mobil is entitled to the price paid by the particular third party purchaser who had the lowest average.
Opening: p. 17
The Crown’s attitude is as stated in the question—that all sales to [domestic] purchasers other than Mobil should be averaged in a price adjustment calculation.
These clauses, (g) to (k) (but excluding (h)), together with the question of interest in (1) are the Interpretation Questions.
(l) Whether Mobil is entitled to damages, interest (and at what rate) and costs for any failure by the Crown to carry out any of its contractual or fiduciary obligations.
This is the overall question as to damage entitlement and by consent of the parties was postponed to a second sitting of the Tribunal at a date to be fixed, if necessary. (See Supplement to Opening—Mobil 2nd November 1988 (p. 1) and Crown’s consent—3 November 1988 (p. 1)).
Accordingly, submissions at the hearings of October, November, December 1988 did not relate to quantification of damages nor to costs. In respect of interest, it is anticipated that an application will be made in relation to the overall question of damages—but one aspect of interest can conveniently be answered in conjunction with the Interpretation Questions viz. whether, in calculating price adjustment entitlement (if any) under Article 11.1(1)(e), interest should run thereon from the date(s) at which Mobil paid for its Article 11 uplifting or from the end of a quarter or from some other date.
Although not specified in that document, it emerges that initially the damage allegedly sustained by Mobil arising from breach of fiduciary duty was that, by such lack of communication, Mobil had been deprived of an opportunity of discussing reasons for the view which the Crown held and hence had lost the chance of persuading the Crown to take a different view and to accept liability for price adjustments on all sales to Mobil in accordance with Article 11(1)(e) of the Participation Agreement.
This pleading was followed in the Counter Memorial by a succinct and helpful review of modern authorities on Joint Venture Relationship. In particular, we have derived assistance from articles in Dr Finn’s collection "Equity and Commercial Relationships" (1987) with helpful material in an article by Mr Justice BH MacPherson at p. 19 entitled "Joint Ventures as a Separate Concept" and by a commentary on that article by Mr R. A. Ladbury at p. 37. We accept the validity of Mr Ladbury’s discussions wherein he distinguished the applicability of the American authorities based on certain provisions of partnership law in that country. Of much greater assistance are the Australian and New Zealand cases in this area referred to in the Counter Memorial.
Greater expansion of Mobil's submissions in this field has been made possible subsequent to the filing of pleadings, because on discovery (in mid-1988) it emerged that the Crown had received a letter from the Commerce Commission in June 1986; but its contents were not revealed to Mobil. This letter reads as follows:
153 The Terrace, PO Box 10273, WELLINGTON.
26 June 1986
Ms D. II. Trewavas,
Gas and Geothermal Trading Group,
Ministry of Energy,
Private Bag, WELLINGTON.
Dear Ms Trewavas,
I am writing regarding our meeting of 23 June 1986 in which we discussed the agreement for the sale of synthetic petrol which exists between the New Zealand Oil Companies and the Ministry of Energy.
We discussed Clause II of the Mobil contract. This clause, standing alone, is not of concern to us in terms of the Commerce Act 1986. However, we would advise you that to provide a similar clause in contracts drawn up with other oil companies would, in our view, amount to price fixing which, in terms of Section 30 of the Commerce Act 1986, is deemed to substantially lessen competition.
J. A. Hawes for Commerce Commission
This letter was taken by Mobil to be of considerable significance and it increased the material available in support of its submissions that there had been breach of fiduciary duty—a failure by the Crown to communicate to its material as to the supposedly official view by the Commerce Commission of Mobil’s position vis-a-vis the Commerce Act, and the protection presumably available to the MFP clause.
It will be noted that this was a continuing scheme in which the two contracting parties had mutual obligations to advance the joint venture and it was frustrated prior to completion; that is to say, at a time when the mutual relationship of joint venturers was still continuing.
The case was decided at first instance and on appeal in favour of Robbins on the basis that, by entering into the deed, the Council had fettered its discretion and that of its successors in relation to town planning matters. The decision, favourable to the developer, to the effect that the Council had acted in breach was held in both Courts to be based upon implied contractual conditions.
Nevertheless, the case has relevance here for it demonstrated plainly the situation of joint venturers owing obligations of good faith and co-operation to each other for the advancement of the project.
in a subsequent case considered by the Court of Appeal, a similarly constituted Court presided over, as before by, Cooke P, treated such a situation as analagous to a fiducary relationship. This was Offshore Mining Co Ltd & Ors v The Attorney-General (C/A 28 April 1988, CA. 116/86). In the Offshore Mining Co case, the Courts were dealing with contracts between the New Zealand Government as buyer and a consortium, comprising the Government itself and various oil companies, which had erected and commissioned the Maui gas platform off the Taranaki Coast as sellers. That contract had been completed, as to the first platform, and there were certain responsibilities between the parties relating to the designing and possible building of a second platform at a later stage. Should such results follow, there were to be reviews of pricing arrangements in respect of the original gas supply. During the supply of gas in accordance with the terms of the contract, the Crown gave notice purporting to alter or defer the operation of the planning and designing of the second platform with consequences upon the price of arrangements in respect of the first platform. The question was whether this was in breach of the obligations of the Crown to the consortium.
In dealing with the issue, counsel on behalf of the consortium had raised three defences to the Crown's contention in respect of the notice. It was said first, that the notice had been given in breach of an implied term of the gas contract; secondly, that the Government was seeking inadmissibly to take advantage of its own wrongdoing; and thirdly, that it was acting in breach of a fiduciary duty which it owed to the consortium. The matter was dealt with on the basis of breach of contractual duty, but Cooke P at p. 23 of the unreported judgment said this:
I would accept that in a joint venture of this kind there is a duly of reasonable cooperation and discussion as in the Devonport Borough Council v Robbins case. In that sense, it may be said that there is a duty of fair dealing. Even the expression ‘fiduciary’ is perhaps not inapt although it does not take one very far, for it is well recognised that the duties of fiduciaries vary with the nature of the particular relationship. As the Devonport case illustrates, the content of any general duties to the other contracting party has to be determined in the light of the scheme and express provisions of the contract.
The question here is, as it was in Devonport and in Offshore Mining, whatever the extent of the obligation, has it any greater impact in a case of this sort than between armslength contractors such as Mobil and the Government were? And in any event, whether arising out of fiduciary relationship or contract, the final question must always be—What are the alleged breaches? and What harmful consequences are said to have flowed from them?
As has already been said, the two New Zealand authorities in this area have dealt with such questions on the basis of an implied duty of co-operation and discussion—whether based on contract or on so-called "fiduciary duly".
Having given these references, we think that probably little more need be added except to note similar phraseology from two authoritative Australian decisions. In United Dominions Corporation v Brian Pty Ltd (1984-85) 157 CLR 1, Mason J, delivering the joint judgment of himself and Brennan and Deane JJ, was discussing a venture which had collapsed before fruition. In relation to persons whom he considered to be associated for the purpose of the particular undertaking with a view to mutual profit, and hence constituting a joint venture, he said at p. 10:
Such a joint venture will often be a partnership but.) it may be carried out through a medium other than a partnership such as a company. The borderline between joint venture and simple contractual relationship may be blurred... Whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken.
Of more relevance perhaps for present purposes is the decision of the High Court a year before in Hospital Products Ltd v US Surgical Corporalion (1984) 156 CLR 41,70 dealing with a principal and agent or dealership arrangement It was said in respect of a plea of fiduciary duty (at p 70):
The fact that arrangements between parties was of a purely commercial kind and that they had dealt at arms length and on equal footing has consistently been regarded by this Court as important, if not decisive, as indicating that no fiduciary relationship exists.
These questions having been pleaded, il is necessary to deal with them and il may be immaterial whether they are separately regarded as breaches of a duly called fiduciary or merely as obligations ensuing from the post-completion contractual relationship.
In that regard, the first relevant material in the evidence is a letter dated 7 August 1985 purportedly from the Secretary of Energy Mr Walker but written by Mr Jenkins addressed to the Minister of Energy (ABD Vol 19 p. 1). In that letter, the Minister was advised that the Commerce Bill, then under consideration, together with the Government’s intention of deregulating the oil industry, would make it difficult for the Crown to fix prices of syngas for sale to the various oil companies; that the world gasoline market was becoming depressed; that there were many uncertainties facing the Crown; and it was recommended that only a short term agreement for the sale of synfuel be contemplated at that stage. Some stress was placed in this letter on the very privileged position that MFP had given Mobil and that this would greatly disadvantage the profitability of the project to the Ministry of Energy. There was discussion of the possibility that the Commerce Bill, if enacted, would override Mobil’s MFP rights and that this would be greatly in favour of the Crown's trading position. The contents of that memorandum are at this stage mostly historical but they are indicative of the realisation which had come to the Crown of the disadvantageous position that it was now in, and it evidenced at an early stage the eagerness of the Crown to avoid the effects of the obligations previously undertaken in the Participation Agreement. In the words of another officer in a subsequent communication, the Commerce Bill would give the Crown the chance to "break the pricing agreement wide open".
At this time, Mr David Marriott had just joined the Government’s service and had taken over duties as General Manager of GGTG. His evidence was that he had just become aware of the implications of the Commerce Act in the course of acquainting himself with the overall position, and he wrote a letter on 28 August 1986 to Mobil concerning its Article 11(1)(e) request in which he said:
We believe that this Article may not be enforceable after 1 March 1987 under the provisions of the Commerce Act.
He said in his evidence to the Tribunal that in August or September at about the lime when this letter had been written he had asked for a legal opinion confirming the suggestions which had apparently already been informally communicated to the GGTG officers. He says that he regarded this as newly introduced legislation of some complexity and that he was taking his time to consider his position. In fact, the solicitors also took a considerable time to finalise their views. Mr Marriott had hoped that he would have the opinion byDecember 1986 but did not arrive until late January 1987. In the meantime, he avoided any resolution of the issue. Indeed, on 16 October 1986, there was a meeting apparently at the request of Mobil, between officers of that company and the GGTG pressing for information and discussions as to what the future would hold on this question. The need for certainly on pricing was becoming a very pressing issue. We cannot refrain from commenting that the attitude by Mr Marriott to these requests for information was evasive, perhaps understandably so, in view of his uncertainty as to the Goverment’s position. He certainly frustrated the Mobil enquiries by deliberately refraining from attending that meeting and sending along his deputy Mr Matthes who gave little response to enquiries. We think there is some justification for the indignation expressed in evidence by Mr Makeig of Mobil, who says that at the meeting, he met with nothing but opposition and evasion. In view of the instruction which Mr Matthes had received from Mr Marriott, one can only say that he discharged his duties of non-commitment in a manner fully in accordance with his brief.
In our view, it seems in the highest degree unlikely that Mr Marriott would have been moved to a more favourable view of Mobil’s suggestions had there been discussions, no matter how full, before he (Mr Marriott) received the opinion from the solicitors in January 1987, which opinion confirmed the tentative views which had been expressed within GGTG since Mr Jenkins’ report to the Minister of August 1985. Once that opinion was to hand, it is beyond belief to suggest that Mr Marriott or any of the other officers of the Crown would have acted contrary to that opinion or indeed at any stage, given full mutual disclosure of views, that Mobil could have "demonstrated the inadequacies of the Crown’s reasons" as Mobil pleads in its closing submission (at 6.37).
Nothing which has transpired before the Tribunal by way of evidence or demeanour of the Crown witnesses could persuade us that tractability was in their nature during those times. It is perhaps of the nature of Government Service that conservatism will usually mark the procedures adopted by Departmental officers. Initiative and bold decisions are not always regarded as credit-earning qualities by political masters. Lack of co-operation and communication prevailed during this period. Whether indeed such an attitude was in breach of a contractual or fiduciary duty is in our view irrelevant. In all those circumstances, the submission that freedom of discussion would have led to a relenting of the Crown’s stance is quite untenable.
If, as is now submitted, Mobil might then have entertained as a real possibility the thought of applying, an approach to the Commission would, we believe, soon have revealed that this letter was not the product of any detailed consideration by any person in authority. It would have been recognised, as Mr Collinge has described it, as a preliminary expression of opinion by a junior officer and assessed by all in that way. It seems likely that whatever dissuaded Mobil from pursuing its comfort letter procedure in 1987. would have been equally weighty in 1986, even given that the letter signed by Miss Hawes had been available.
A number of difficult questions, which are referred to hereafter, arise in relation to the interpretation of Article XI. In approaching these issues, the Tribunal has had regard to the approach to construction of contracts which is found in Prenn v Simmonds  1 WLR 1381 and Reardon Smith Line Limited v Hansen-Tangen and Others  1 WLR 989. In Prenn, Lord Wilberforce stated (at 1383) that:
In order for the agreement of July 6th, I960 to be understood, it must be placed in its context. The lime has long past when agreement, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, anti-liberal, tendencies, for Lord Blackburn's well-known judgment in River Wear Commissioners v Adamson  2 App. Cas 743, 763 provides ample warrant for a liberal approach. We must, as he said, enquire beyond the language and see what the circumstances were with reference to which the words were used and the object, appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 (Macdonald v Longhottom 1 E. & E. 977) it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term.
In Reardon Smith, Lord Wilberforce stated (at 995 and 996) that:
In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn pre-supposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.
In the same speech Lord Wilberforce also made reference (at 997) to what Lord Dunedin said in Charrington & Co. Limited v Wooder  AC 71 at 82, namely:
... in order to construe a contract the court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it—or, as it is sometimes phrased, to be informed as to the surrounding circumstances.
The Tribunal also refers to and places reliance on the words used by Lord Reid in Schuler A.G. v Wickman Machine Tools Sales  AC 235 at 251:
l he fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.
Each of the principles set out above is regularly applied in New Zealand courts.
We conclude that the proper interpretation of sub-clause (e) is that the MFP adjustment is to be obtained by taking all sales of syngas to any one purchaser other than Mobil in any quarter and calculating a weighted average price for such sales, to enable a comparable price then to be given to Mobil. Particular emphasis is placed on the word "comparable" in arriving at this interpretation and on the commercially irrational consequences that would flow from the constructions contended for by both parties. That Mobil should be entitled to obtain the benefit, for all its obligatory portion of the syngas offtake, of the lowest price paid by a competitor in a quarter in which the competitor bought at several differing prices, in circumstances where the weighted average price might have been higher than the rrp would not only be highly surprising, but would also give Mobil an advantage wholly at variance with the purposes which Mobil’s witnesses contended the clause was to achieve. Indeed the evidence given by Mr P. W. Marriott was as follows:
The important component of the deal was that Mobil's purchase price would be adjusted to the individual most favourable price or comparable terms if, say, that other deal did not involve a cash consideration paid by any other purchaser in the same period.
"It would be nonsensical if the other oil companies who did not participate were able to obtain access to hydrocarbons at a more favourable price than Mobil, which did participate. On the other hand, it was commercially realistic for Mobil to negotiate a favourable pricing clause that ensures that it is always one of the two most favoured purchasers, given its obligated offtake over the period of a long-term contract. (P. W. Marriott WT, 182)
Furthermore, the construction contended for by Mobil would also have produced irrational consequences in a highly volatile market and a degree of fortuitous benefit to Mobil which it is difficult to believe the parties intended Mobil to achieve. We cannot believe the MFP clause was intended by the parties to give Mobil so significantly preferred a position.
In paragraph 16.67 of the Counter-Memorial the Crown referred to the fact that Article 11.1(d) incorporated in its reference to the rrp a specified objective standard or means for determination of the price. The Crown submitted that important surrounding circumstances at the time Article 11.1 was entered into were (i) the existence of the rrp mechanism as an essential part of the regulated market and (ii) the common expectation that the mechanism of the rrp would stand for the reasonably foreseeable future. The Counter-Memorial continued:
16.68 However, upon de-regulation of the oil industry in New Zealand (including the removal of price control) after full and extensive consultation the:—
"... mechanism known as the ‘Refinery Release Price’..." within the meaning of Section 11.1(d) will be no longer be utilised and practised by all the oil companies and the Crown. The relevant statements of fact are contained in paragraph 2.5 of the Memorial and paragraph 4.12.3 of the Counter-Memorial.
16.69 If a specified objective standard in an agreement for determination of the price of goods fails or becomes unworkable or otherwise becomes irrelevant as a means for determination of the price intended by the parties, the Agreement is unenforceable: sec Re. Nudgee Bakery Ply Ltd's Agreement  Qd. R. 24. The rationale is, of course, that where the parties to an agreement stipulate a precise means or "mechanism" for determination of the price and it fails or becomes unworkable, it is not open to the Court to substitute a different method of assessment should the stipulated precise means fail in some manner.
16.70 It is particularly important to note that in this case, the parties have not as from de-regulation (and therefore the cessation of the RRP mechanism) acted in accordance with Section 11.1 nor adopted a different price in lieu of the now reduntant RRP mechanism. The parties’ conduct has been governed by the Without Prejudice Agreement which terminales upon determination of these proceedings.
16.71 Consequently, pending the entry into any new Offtake Agreement between the Crown and the Requesting Parties, the provisions of Section 11.1 as an agreement between the Crown and the Requesting Parties are unenforceable. Il follows, therefore, that the Price Adjustment Clause contained in the proviso to Section 11.1(e) is also unenforceable as against the Crown.
These submissions were elaborated in the Crown’s closing argument as follows:
(a) The pricing provisions of the Offtake Agreement comprised two necessary elements, namely, the continued existence, first of a price control regime fixing the price for other NZ refined gasoline and, secondly, of the rrp mechanism according to which that price was fixed.
(b) Since deregulation the price determination clause has become unworkable, first, because price control has ceased to exist and, secondly, the rrp mechanism had either ceased to exist or can no longer be calculated.
(c) The Crown is under no duly to compel oil companies using the Refinery to provide industry pricing information so as to enable the continued calculation of the rrp.
(d) Mobil’s proposals for an alternative means of calculating certain components of the rrp would produce a different mechanism to that agreed on by the parties at the time they entered the Participation Agreement and should therefore not be imposed on the Crown.
(e) It is not in law open to the Tribunal to substitute an alternative pricing mechanism for that which has failed.
In Hillas & Co Ltd. v. Arcos Ltd.  All E.R. 494 at 503-4, Lord Wright said:
Businessmen often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects; but. on the contrary, the court should seek to apply the old maxim of English law, verba ita sunt intelligenda ut res magis valeat quant pereat. That maxim, however, does not mean that the court is to make a contract for the parties, or to go outside the words they have used, except insofar as there are appropriate implications of law, as for instance, the implication of what is just and reasonable to be ascertained by the court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail.
Where commercial contracts are concerned, courts strive especially hard to give effect to bargains made between parties. In Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd. (1968) 118 CLR 429 at 116 7 Barwick CJ. said:
But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decide is its proper construction and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it.... In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning as distinct from absence of meaning or of intention, be resolved.
Lord Denning said in Fawcett Properties Ltd. v. Buckingham County Council [1 961] AC 636 at 678:
In cases of contract, as of wills, the courts do not hold the terms void for uncertainty unless it is utterly impossible to put a meaning upon them. The duly of the court is to put a fair meaning on the terms used, and not. as was said in one case, to repose on the easy pillow of saying that the whole is void for uncertainly.
Secondly we have already referred to the judgments of the New Zealand Court of Appeal in Devonport Borough Council v. Robbins [I979] 1 NZLR 1. Cooke and Quilliam.JJ. said at 23:
In our opinion a term must have been applied in this contract that there would be reasonable co-operation and discussion between the parties. The object of the contract being to achieve a common goal, it is inconceivable that they could rightly keep each other at arm's length. This may be treated, as Mr Wallace would treat it, as an application of the principle stated in the well-known words of Lord Blackburn in MacKay v. Dick (1881) 6 App. Cas. 251,263:
I think I may safely say, as a general rule that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances.’
Equally it may be treated as implicit in this particular contract. All the conditions listed in the majority judgment delivered by Lord Simon of Glaisdale in BP Refinery (Westernport) Ply. Ltd. v. Shire of Hastings (1977) 16 ALR 363, 376, are satisfied by an implied term of reasonable co-operation and discussion. It is reasonable and equitable; necessary to the business efficacy of the contract, so that the contract would not be effective without it: so obvious that it goes without saying; capable of clear expression; and does not contradict any express term of the contract.
Richardson.1. said, in the same case, (at 29) that—
Again, in the case of building contracts the employer’s duty to co-operate in the performance of the contract will ordinarily apply to a number of matters (see. generally, Keating, Building Contracts (4th ed, 1978) 37), the only one that is directly relevant for present purposes being to supply such plans and other particulars as are required (Roberts v. Bury Commissioners (1870) LR 5 CP 310,325). Indeed, in a variety of situations the nature of the contract may readily lead to the implication of a term that one party will co-operate with the other by supplying information required by the other (for example Kyprianou v. Cyprus Textiles Ltd  2 Lloyd's Rep 60, AV Pound & Co Ltd v. MW Hardy & Co Inc  AC 588, 608, 611;  1 All ER 639, 648, 650). In the end it must be a question of construction of the particular contract whether, and if so in what respects and to what extent, one party is under an implied obligation to co-operate with the other."
The judgment of Cooke P. in Offshore Mining Co. & Ors. v. Attorney-General of New Zealand (unreported judgment delivered 28 April 1988 at p. 23) is to the same effect. We conclude that there would be implied in the Participation Agreement a duty of reasonable co-operation and discussion of the same general nature as referred to in the preceding cases. The content of any general duties to the other contracting party will have to be determined in the light of the scheme and express provisions of the contract.
Thirdly, in New Zealand Shipping Company Limited v. Sacíete des Ateliers el Chantiers de France  1 at 6 Lord Finlay LC said that "no one can... take advantage of the existence of a state of things which he himself produced." This basic principle was adopted both by McCarthy and Hardie Boys JJ. in Scott v. Rania  NZLR 527 at 534 and 540. McCarthy J. put it in these terms, namely:
A party through whose default that non-fulfilment has occurred, if that is the case, may not assert non-fulfilment, for it is a settled principle of law of great antiquity and authority that in these matters no one can take advantage of the existence of a state of things which his default has produced, (at 534)
A recent statement of high authority in these matters is contained in the judgment of Griffiths L.J. in Hannah Blumenthal (Paal Wilson & Co. Partenreederei) 11983] 1 AC 854 at 881-2 as follows:
Throughout all the cases on frustration it is constantly asserted by the judges that it can only be invoked when it occurs without default of the parties. To cite but a few examples, in Bank Line Ltd. v. Arthur Capel and Co.  A.C. 435. 452. Lord Sumner said:
I think it is now well settled that the principle of frustration of an adventure assumes that the frustration arises without blame or fault on either side.
In Denny. Mott & Dickson Ltd v. James B. Fraser & Co. Ltd.  A.C. 265, 272, Lord MacMillan adopted the following statement from Bell's Principles of the Law of Scotland:
When by the nature of the contract its performance depends on the existence of a particular thing or state of things, the failure or destruction of that thing or state of things, without default on either side, liberates both parties.
In Davis Contractors Ltd. v. Fareham Urban District Council  A.C. 696, 729 Lord Radcliffe said:
... frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being, pet formed because the circumstances in which performance is called for would render il a thing radically different from that which was undertaken by the contract.
In Denmark Productions Ltd. v. Boscobel Productions Ltd.  1 Q.B. 699, 725 Salmon L. J. said:
This [frustration] was a doctrine evolved by the courts to meet the case in which a contract became impossible of performance through some supervening event, not reasonably foreseeable when the contract was made and for which neither contracting party was in any way responsible.
Harman L. J. said, at p. 736:
The frustrating event is something altogether outside the control of the parties— a war, a famine, a flood or some event of that sort—so that if the parties had thought to provide for it they would at once have agreed that on its happening the contract must come to an end. I have never heard the doctrine applied to an event such as this which depends on the action of one of the parties in connection with the contractual duty of the other of them to a third party.
This last case best illustrates what is meant by default in the context of frustration. The essence of frustration is that it is caused by some unforeseen supervening event over which the parties to the contract have no control, and for which they are therefore not responsible. To say that the supervening event occurs without the default or blame or responsibility of the parties is, in the context of the doctrine of frustration, but another way of saying it is a supervening event over which they had no control. The doctrine has no application and cannot be invoked by a contracting party when the frustrating event was at all times within his control: still less can it apply in a situation in which the parties owed a contractual duly to one another to prevent the frustrating event occurring.
Griffiths LJ. dissented in the Court of Appeal, but when the Hannah Blumenthal case went to the House of Lords, the decision of the Court of Appeal was reserved and the judgment of Griffiths LJ. vindicated. The main speech in the House of Lords was given by Lord Brandon of Oakbrook, who said, at 909:
So far as the second issue is concerned there can be no doubt that an agreement to refer to arbitration can in theory, like any other contract, be discharged by frustration. Lord Diplock expressly recognized this in his speech in Bremer Vulkan  AC 909, 980. Before this can happen, however, the usual requirements necessary to give rise to frustration of a contract must be present. What those requirements are appears clearly from the various pronouncements of high authority on the doctrine of frustration of contract conveniently gathered together by Griffiths I J. in his dissenting judgment in this case.
In the same case Lord Diplock said, at 919:
As regards the second decisive reason why in the instance case frustration cannot be relied upon by the sellers as having put an end to the arbitration agreement. I have little to add to what is said upon this matter in the speech by my noble and learned friend, Lord Brandon of Oakbrook, and also in the dissenting judgment of Griffiths LJ. where there can be found a judicious selection of the most pertinent citations from the numerous authorities in this well-ploughed field of law. Of these citations, that which applies most aptly to the circumstances of the instant case is the statement of Lord Wright in Maritime National Fish Ltd. v. Ocean Trawlers Ltd. (1935) AC 524, 530: " The essence of ‘frustration’ is that it should not be due to the act or election of the party." In the instant case the continuing deterioration, during the period of delay, in the amount and quality of evidence which could be made available to the arbitral tribunal when the hearing eventually takes place, constitute the events of which the cumulative effect by August 1980 is relied upon as amounting to frustration of the arbitration agreement. The delay, so far as il was not justified to enable proper preparation for the hearing to be made by both parties, could have been put an end to by the sellers taking steps available to them in the arbitration proceedings. That they elected not to do so would, in my view, be sufficient in itself to debar them from relying on frustration; a fortiori when their election not to do so was a breach of a primary obligation on their part under the arbitration agreement.
In this context, it is a matter of some consequence that the Participation Agreement includes an arbitration clause which provides the means of resolution of any dispute arising under the agreement. 'The parties are of course expressly directed by Article 7.1 to resolve any such dispute arising under the agreement "as quickly and as far as possible... amicably" and in the absence of settlement, the parties submit themselves to the jurisdiction of ICSID). Authority is not lacking for the view that the very existence of an arbitration clause is relevant to questions of uncertainty. As Barwick CJ. pointed out in the Upper Hunter District County Council decision, previously referred to, at 437-8:
In this case the contract itself provided the means of the resolution of any question as to what items constituted supplier’s costs, namely, by the decision of an arbitrator whose judgment as to whether or not there had been a variation in items of expenditure which were embraced in what he found to be the supplier's costs was agreed to be final and binding, subject of course to the terms of the Arbitration Act, and thus to the possibility of a case stated for the opinion of the Court. Of course, if the words ‘supplier’s costs’ were meaningless, the presence of the arbitration clause would not save the clause. But, as I have said, clause 5 provides a certain criterion by reference to which the differences of the parties as to the propriety of an increase in charges could be resolved.
Although, therefore, we do not embark on any discussion in these rulings, we should record our appreciation of the extensive research carried out by the parties and the quality and helpfulness of the submissions made—in particular the written material prepared by Professor R. Higgins QC in the form of a deposition and the absorbing oral argument of Mr Lauterpacht QC which we heard in Auckland.
Whether in not giving effect to Section 11(1)(e) of the Participation Agreement with effect from 1st March 1987 the Crown is in breach of contract.
The Crown in response submits that Section 11(1)(e) is unenforceable by virtue of Section 27 of the Commerce Act in that it has the purpose or has or is likely to have the effect of substantially lessening competition in a market.
Section 27 of the Commerce Act provides:
27. Contracts, arrangements, or understandings substantially lessening competition prohibited—
(1) No person shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
(2) No person shall give effect to a provision of a contract, arrangement, or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
(3) Subsection (2) of this section applies in respect to a contract or arrangement entered into, or an understanding arrived at, whether before or after the commencement of this Act.
(4) No provision of a contract, whether made before or after the commencement of this Act, that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market is enforceable.
Cf. Trade Practices Act 1974 (Aust.), Section 45(1), (2)
Section 111(1) provides:
Nothing in sections 27 and 29 of this Act and sections 80 to 82 of this Act shall have any application before the 1st day of March 1987 to the giving effect to a provision of a contract entered into on or before the 11 th day of June 1985.
Both parties agreed that as the Participation Agreement was entered into on 12 February 1982, Section 111(1) had the effect of delaying any application of Section 27 to Section 11 (1)(e) until 1 March 1987.
Attention was focused upon Section 27(2). The initial allegation of the Crown (Counter-Memorial 16.18) was that the MFP clause offended all three limbs of Section 27, namely that the clause:
(1) has the purpose of substantially lessening competition in a market;
(2) has the effect of substantially lessening competition in a market; and
(3) is likely to have the effect of substantially lessening competition in a market.
The third allegation was said to refer to the future, the second to the very recent past (Counter-Memorial 16.47-16.49; Opening 1.1, 3.0, 4.0). Initially the latter was specified as running from the ending of the Interim Agreement and the commencement of the Without Prejudice Agreement, ie. from 1 July 1986 to 30 June 1987; but later the period was extended to permit consideration of trading patterns up to and including the third quarter 1988.
The central allegation of the Crown applicable it was said to all three limbs, was that the MFP clause gives rise to four anti-competitive effects (Counter-Memorial 16.42, 16.51):
(1) the Crown will not sell syngas to non-competitors of Mobil if the price in the market is a price below the price fixed for Mobil; the competitors of Mobil being the other oil companies in New Zealand will expressly or implicitly collude to ensure that competition between them for syngas does not result in one of them purchasing at a price which ensures Mobil a lower price for a greater quantity of syngas:
(2) while there is no real possibility that the Crown, given its statutory duly and public interest responsibilities, will expressly collude with the other three oil companies, there is a real possibility that the price at which the Crown will sell syngas to them will become evident to them individually or collectively so that a position is obtained whereby the price of all sales of syngas to them are the same; and
(3) the Crown will (subject to the necessity of disposing of syngas under its "take or pay" agreement) first eliminate selective discounting of syngas in the New Zealand market and secondly remove syngas to overseas markets (where the Crown asserts the MFP clause has no effect) from the New Zealand market to the extent that prices offered are too low.
Paragraphs 8.1.6 to 8.1.12 (supra) summarise the Crown’s basic claims as they appeared in the Counter-Memorial and in the Rejoinder to the Reply of the Requesting Parties. There was, however, an important amendment made at the Pre-Hearing Conference, held on 28 October 1988. In response to Mobil’s request of 18 October for further evidentiary particulars relating to allegations of express collusion, counsel for the Crown advised that the Crown would not pursue any allegation that the companies had colluded by express written or oral agreement to adjust their bid in a way which would avoid triggering the price adjustment mechanism, The Crown there tendered its allegations of collusion in a more precise form as follows:
2.3.1 the Crown does not allege there has been express collusion; that is, there is no allegation of price fixing;
2.3.2 the Crown alleges the market is predisposed to tacit collusion; that is, unilateral action by a party aware of how other oil companies than Mobil being interdependent with each other are likely to react;
2.3.3 indications that tacit collusion such has occurred [sic] consist of a general practice, albeit not universal, of common bidding for market share and of inter-company discussions on the effect of bids for Syngas, as stated in 3.1 1.3 and.3.11.5 of the Rejoinder.
As to the remaining factors in.3.11.1 to 3.1 1.6 of the Rejoinder it is accepted they are neutral on the question of whether tacit collusion actually has taken place;
2.3.4 the Crown’s primary contention is that there is a likely substantial effect on competition in the future of tacit collusion by the other companies in their bidding for Syngas in terms of s. 27 and 30. Commerce Act 1986.
Following the conclusion of the presentation of Mobil’s case, the Crown still maintained its claim as outlined above. In Opening Submissions there was simply a clarification of the way in which the Crown sought to relate its allegation of tacit collusion to the terms of Section 27:
4.8... The Crown’s case is based on a provision of a "contract" within the meaning of Section 27, namely the MFP clause in the Participation Agreement between Mobil and the Crown and alleges that it exacerbates characteristics of the market so as to make tacit collusion (or "arrangements or understandings which have the effect of substantially reducing competition"), a more likely result than if it were absent. In that manner, the MFP clause is likely substantially to lessen competition.
There was one important feature of the Crown's claim that emerged only with clarity towards the end of the proceedings, partly in the evidence of its economist experts and partly in closing submissions, namely that the phrase "tacit collusion" was used in a number of (related) senses:
(1) to refer to tacit collusive bidding for syngas by Mobil’s three competitions (cf. para. 8.1.7. supra)',
(2) more broadly, to refer to the overall likely effect of the contractual provision in lessening competition—specifically through such an enhancement of market power held by the small number of competitors, both individually and as a group, as to facilitate the achievement of noncompetitive market conduct by co-operative strategics (cf. para. 8.1.13 supra).
Grown Avoidance and collusive bidding were thus both aspects of "collusion" in the broad sense. There was also the third sense in which the term "collusion" was used, especially in the oral proceedings, viz.
(3) to refer to an "arrangment or understanding", ie. the type of non-contractual agreement considered by Australian authorities on competition law (albeit, in this arbitration, it would refer to an "effect").
The Crown’s case was largely directed to likelihood of collusion in the first two enumerated senses. Its immediate focus was upon allegations of Crown Avoidance and collusive bidding in response to the presence of the MFP clause; for it was through Crown Avoidance and collusive bidding, the Crown contended, that there would come about a broadly collusive outcome in breach of Section 27.
Section 5(j) of the Acts Interpretation Act 1924 (a long standing provision originally enacted in 1888) provides:
Every Act, and every provision or enactment thereof, shall be deemed remedial, whether its immediate purport is to direct the doing of anything Parliament deems to be for the public good, or to prevent or punish the doing of anything it deems contrary to the public good, and shall accordingly receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Act and of such provision or enactment according to its true intent, meaning, and spirit.
The long title of the Commerce Act reads: "An Act to promote competition in markets within New Zealand and to repeal the Commerce Act 1975" Section 3 states (in part):
(1) In this Act -
"Competition", means workable or effective competition;
"Market", means a market for goods or services within New Zealand that may be distinguished as a matter of fact and commercial common sense.
(2) In this Act, unless the context otherwise requires, references to the lessening of competition include references to the hindering or preventing of competition.
(3) For the purposes of this Act, the effect on competition in a market shall be determined by reference to all factors that affect competition in that market including competition from goods or services supplied or likely to be supplied by persons not resident or not carrying on business in New Zealand.
We are clearly required to view the law as a comprehensive regulatory instrument: it is applicable to all enterprises, incorporated and unincorporated; "trade includes professions: Section 2(1); and, significantly for this dispute, the Act applies to the Crown "insofar as the Crown engages in trade" (Section 5) and to Crown corporations engaged in trade (Section 6). The core provisions are three in number and in parallel: Section 27 prohibits contracts, arrangements, or understandings substantially lessening competition (subject to the possibility of authorisation on public benefit grounds); Section 36 prohibits the use of a dominant position in a market: and Sections 50 and 66 mandate the clearance or authorization of designated mergers and takeovers, will) market dominance an ingredient of the statutory tests.
As to the relevance of Australian authorities, the C.E.R. Agreement (Australia-New Zealand Closer Economic Relations Trade Agreement 1983) quite generally is inspiring not only a harmonization of commercial statutes but also an increasingly shared interpretation of commercial law in both statutory and common law areas. In Dominion Rent A Car Ltd. v. Budget Rent A Car Systems (1987) 2 NZLR 395, it was observed by Cooke P. (at 407) that in the development of the law the courts of the two countries "should be prepared as far as reasonably possible to recognize the progress that has been made towards a common market", (as noted and approved by Barker.J. in the Budget case (670; 103, 061)).
In the Festival Records case the High Court observed (at 103, 088):
As is generally known the impetus for this piece of reforming legislation with its dramatic shift away from a controlled economy is in part a necessary response by New Zealand pursuant to our trading obligations owed to our trans-Tasman neighbour. Australia has had such legislation since 1974 and our Act is based upon it.
The Court went on to quote Barker J’s words in confirming the relevance of Australian decisions to market definition (at 669-70; 103, 061):
I should have been sorry to have reached an opposite conclusion and to have held the cases on the Australian definition inappropriate; the impetus for the legislative change in New Zealand in the trade practices area came from the Australia/New Zealand Closer Economic Relations trade agreement (the CER agreement) which substituted for the enforcement machinery of earlier New Zealand Trade practices legislation, the Australian court-centred legislation. In these early days of the operation of the Act in this country, il will be helpful to be able to draw on the Australian experience which, in turn, takes into account decisions of the United States Courts on the anti-competition laws of that country (notably the Sherman Act); those laws provided much of the foundation for the Australian legislation.
While the language and structure of the Australian and New Zealand Acts are very similar, though certainly not identical, there is a less close relationship between New Zealand and United States law. Nevertheless we recognise that American antitrust cases may suggest lines of analysis of the facts that may well be pertinent in application of the New Zealand provisions.
We turn to the elements of Section 27(2).
The New' Zealand decisions bearing on Section 27 to dale (Budget at 669; 103, 060 1); Festival Records at first instance 103, 088; Court of Appeal p. 15) have recognized that the statutory formulation in Section 3(1) is derived from a formulation that had earlier been given by the New Zealand Commerce Commission in Edmonds Food Industries Ltd. v. WF Tucker and Co. Ltd. (Decision 84,21 June 1984):
A market has been defined as a field of actual or potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. In delineating the relevant market in any particular case there is a value judgment which must be made which involves, for example, an assessment of petinent market realities such as technology, distance, cost anil price incentives; an assessment of the degree of substitutability of products; an appreciation of the fact that a market is dynamic and that potential competition is relevant; and an evaluation of industry viewpoints and public tastes and attitudes. Particularly important in this process is industry recognition [both by supplier and purchaser] and recognition by the consumer. Ultimately the judgment as to the appropriate market and its delineation by function, product and area - is a question of fact which must be made on the basis of commercial common sense in the circumstances of each case.
The decisions (Budget 670-71; 103, 061-2) Festival Records at first instance (103, 088)) have also affirmed the relevance of Australian authorities such as QCMA and Tooth on this question (Re Queensland Co-Operative Milling Association Ltd., Defiance Holdings Ltd. (1976) ATPR 17, 223; In re Tooth & Co. Ltd.', In re Tooheys Ltd (1979) ATPR 18, 174) with Barker J. quoting Tooth (at 670-71; 103,061):
The Tooth case makes it clear that one must take the goods or services relevant to the inquiry and identify the area of close rivalry or competition, seeking the boundaries by examination of the ready availability or interchangeability of substitute services in response to economic incentives or demand or supply; in other words, to use "economists’ speak", one must identify cross-elasticity of demand and cross-elasticity of supply.
As to the geographic or spatial dimension of the market, a superficial view would be that the terms of Section 3(1) do not allow a court or tribunal such discretion: "‘Market’ means a market for goods or services within New Zealand ... On a literal reading, the market may be no wider than the bounds of New Zealand itself (though of course it could be narrower, ie. regional or local). But such a specification would be purely formal. The Act immediately goes on to say in sub-section (3):
For the purposes of this Act, the effect on competition in a market shall be determined by reference to all factors that affect competition in that market including competition from goods or services supplied or likely to be supplied by persons not resident or not carrying on business in New Zealand.
It follows that the task of market delineation in a particular case cannot be satisfied by the bare statement that the geographic market is "New Zealand". For that statement is not possessed of sufficient content, standing alone. Plainly one also must identify the source and extent of any international competitive pressures upon New Zealand enterprises, whether arising from import substitution or exsport opportunity. As is often said, the market is an instrumental concept whose role essentially is to fix attention upon that fraction of the factual record that bars upon the issue at hand. Yet the statutory phrase must do some work, and we accept Mobil's submission that il serves to focus the competitive analysis upon effects in New Zealand.
Barker J., writing the first decision on this very new' area of the law, has the fullest analysis of "competition" (670-71; 103, 061-2). We summarise his discussion in view' of the importance of the term for this case. He begins his analysis by quoting the "classic statement about market structure made by the Australian Trade Practices Tribunal" in QCMA at 17, 246:
Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate. The elements of market structure which we Would stress as needing to be scanned in any case are these:—
(1) the number and size distribution of independent sellers, especially the degree of market concentration;
(2) the height of barriers to entry, that is the case with which new firms may enter and secure a viable market;
(3) the extent to which the products of the industry are characterized by extreme product differentiation and sales promotion;
(4) the character of ‘vertical relationships’ with customers and with suppliers and the extent of vertical integration; and
(5) the nature of any formal, stable and fundamental arrangements between firms which restrict the ability to function as independent entities.
Of all these elements of market structure, no doubt the most important is (2), the condition of entry. For it is the ease with which firms may enter which establishes the possibilities of market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitive conduct. (Emphasis added.)
His Honour states: "The test of competition is not concerned with the economic fate of individual competitors but with the level of rivalrous behaviour in the market. He adopts the formulation of "workable or effective competition" of Donald and Heydon, Trade Practices Law (1978) vol. 1, p. 90:
We suggest that workable competition means a market framework in which the presence of other participants (or the existence of potential new entrants) is sufficient to ensure that each participant is constrained to act efficiently and in its planning to take account of those other participants or like entrants as unknown quantities. To that end there must be an opportunity for each participant or new entrant to achieve an equal fooling with the efficient participants in the market by having equivalent access to the means of entry, sources of supply, outlets for product, information, expertise and finance... Workable competition exists when there is an opportunity for sufficient influences to exist in any market, which must be taken into account by each participant and which constrain its behaviour.
In short, to encapsulate Barker J.’s view, within the relevant market there should be independent rivalry between participants, a rivalry that is not discretionary but has been constrained by market forces. This is an approach which, in the American tradition, regards competition as the antithesis of market power. One is reminded of the oil-quoted formulation of the U.S. Attorney-General’s National Committee to Study the Antitrust Laws in its Report of 1955 (at p. 320 quoted in QCMA at 17, 245-6):
The basic characteristic of effective competition in the economic sense is that no one seller, and no group of sellers acting in concert, has the power to choose its level of profits by giving less and charging more. Where there is workable competition, rival sellers, whether existing competitiors or new potential entrants into the field, would keep this power in check by offering or threatening to offer effective inducements...
This formulation of Section 27 is complementary to the "dominance" tests of Sections 36 and 66, the three sections constituting what was earlier referred to as the core provisions of the Act. And il directs us to focus upon useful competition, realistically achievable through the constraints imposed by alternative sources of demand and supply.
It is compatible with the important statement of Bowen CJ. and Fisher.J. with the Full Federal Court of Australia in Outboard Marine v. Hecar (1982) ATPR 43, 980 at 43, 983 when they decided that the Australian Act requires the adoption of "an economic concept of competition":
It would seem that "competition" for the purposes of sec. 47(1) must be read as referring to a process or state of affairs in the market. In considering the state of competition a detailed evaluation of the market structure seems to be required. In the Dandy case Smithers J. regarded as necessary an assessment of the nature and extent of the market, the probable nature and extent of competition which would exist therein but for the conduct in question, the operation of the market and the extent of the contemplated lessening.
The economic meaning must be applied in a practical way to accommodate the concern of the Act with business and commerce.
A similar approach is expressed by the Australian Trade Practices Tribunal in the recent decision in Re Media Council of Australia (No. 2) (1987) ATPR 48, 406 at 48. 436:
In thus characterizing the Codes as anti-competitive, we adopt as our general concept of anti-competitive conduct any system (contract, arrangement or understanding) which gives its participants power to achieve market conduct and performance different from that which a competitive market would enforce, or which results in the achievement of such different market conduct and performance.
where from the context the reference to power is a reference to market power.
The Act defines "substantial" as "real or of substance", perhaps not very informative in itself but probably to be construed as a helpful reference, as counsel for the Crown agreed in discussion with the Tribunal, to a well-known passage in the judgment of Deane J. in Tillmanns Butcheries (Tillmanns Butcheries Pty. Ltd. v. The Australasian Meat Industry Employees’ Union (1979) ATPR 18, 489 at 19,500):
In the context of sec. 45D(I) of the Act, the word "substantial" is used in a relative sense in that, regardless of whether it means large or weighty on the one hand or real or of substance as distinct from ephemeral or nominal on the other, it would be necessary to know something of the nature and scope of the relevant business before one could say that particular actual or potential loss or damage was substantial. As at present advised, I incline to the view that the phrase, substantial loss or damage, in sec. 45D(1) includes loss or damage that is, in the circumstances, real or of substance and not insubstantial or nominal.
Thus we take the term to mean not nominal or ephemeral, but not large or weighty either. In accordance with universal competition law practice (New Zealand as well as Australian) we regard the term as importing relativity, here assessed by reference to the impact of the practice upon the functioning of the relevant market. Compare, for instance, Lockhart J. in the Australian case Radio 2UE v. [sic] Sydney v. Stereo EM (1982) ATPR 43, 912 at 43, 918:
In the context of sec. 45, the word "substantial" is used in a relative sense. The very notion of competition imports relativity. One needs to know something of the businesses carried on in the relevant market and the nature and extent of the market before one can say that any particular lessening of competition is substantial.
Further, we accept the Crown’s submission on this point, that substantiality is "to be judged in competition terms, and therefore, some matters have more importance than others. The height of barriers to entry is the most important element of market structure" (Closing Submissions, D. 2.5).
The formulation of Smithers J. in Dandy Power v. Mercury Marine (1982) ATPR 43,872 at 43,887-8 has been found apt in all three New Zealand cases to date, and both the Crown and Mobil relied upon it:
To apply the concept of substantially lessening competition in a market, it is necessary to assess the nature and extent of the market, the probable nature and extent of competition which would exist therein but lor the conduct in question, the way the market operates and the nature and extent of the contemplated lessening. To my mind one must look at the relevant significant portion of the market, ask oneself how and to what extent there would have been competition therein but for the conduct, assess what is left and determine whether what has been lost in relation to what would have been, is seen to be a substantial lessening of competition. I prefer not to substitute other adverbs for "substantially". "Substantially" is a word the meaning of which in the circumstances in which it is applied must, to some extent, be of uncertain incidence and a matter of judgment. There is no precise scale by which to measure what is substantial. I think... the word is used in a sense importing a greater rather than a less degree of lessening. Accordingly in my opinion competition in a market is substantially lessened if the extent of competition in the market which has been lost, is seen by those competent to judge to be a substantial lessening of competition. Has competitive trading in the market been substantially interfered with? It is then that the public as such will suffer... Although the words "substantially lessened in a market" refer generally to a market, it is the degree to which competition has been lessened which is critical, not the proportion of that lessening to the whole of the competition which exists in the total market. Thus a lessening in a significant section of the market, if a substantial lessening of otherwise active competition may, according to circumstances, be a substantial lessening of competition in a market.
We will return to this point. For the moment we note one important element of Mobil's closing submission: "the market outcome with the clause is not materially different from that which would prevail if the clause did not exist.’ In opening, counsel for Mobil said (Outline p. 19):
We submit that it is of paramount importance to remember that the Crown has to demonstrate that the MFP clause itself has the purpose or effect of substantially lessening competition, or is likely to do so in the future. The Crown must show dial, if there are any competitive imperfections in the New Zealand market, they are caused by the mi p clause and not any historical, structural or other factors. We icily in this respect on the observation of Smithers J. in Dandy Power cited with approval in the Counter-Memorial at 98-99. The passage has been aproved by the Court of Appeal in Trutone case at p. 24.
On the other hand, it was counsel for the Crown's closing submission that because of the structure of the market, we should pay particular attention to any facilitating practices that might emerge because the structure is such as to exacerbate their effect (AT, Submissions 230-1).
The relevant passage in the judgment reads as follows:
The public interest test—‘likely’
Before leaving the statutory criteria at this stage I should refer to the manner in which the public interest test should be applied. Sections 76(1) and 80 require the Commission to determine whether the proposal "is or is likely to be contrary to the public interest." What is meant by "likely" in those contexts?
Mr Keesing submitted that "likely" means a distinct significant possibility that the result might occur, ie. not as high as on a "balance of probabilities" but above an "expectation".
Mr Williams and Mr Gault both accepted that "likely" was to be equated with "probably". That, loo, was the approach adopted by the Australian Trade Practices Tribunal in Re Queensland Co-operative Milling Association Ltd. and Defiance Holdings (1976) 1 ATPR para. 40-012, p. 17, 223 at p. 17,243. When referring to the "likely result of the acquisition" of shares the Tribunal said:
We are to be concerned with probable effects rather than with possible or speculative effects. Yet we accept the view that the probabilities with which we are concerned are commercial or economic likelihoods which may not be susceptible of formal proof. We are required to look into the future but we can be concerned only with the foreseeable future as il appears on the basis of evidence and argument relating to the particular application.
Other meanings of the word "likely" are found in Dowling v. South Canterbury Electric Power Hoard  NZLR 676, 678 per Henry.J:
A tree is likely to cause damage when the reasonable probabilities are that it will cause damage...
And in Commissioner of Police v. Ombudsman  1 NZLR 578, 589 Jeffries J. said:
The words "would be likely"... mean that there is a distinct, or significant, possibility the result might occur, but no higher than that.
In my view, in the context of s. 76(1) and of s. 80 of the Act a proposal is likely to be contrary to the public interest in a case where the Commission, even though il is unable to form the view that a proposal is in fact contrary to the public interest, is yet left in a state of mind where there is a probability that it is so. I prefer to adopt the dicta of the Australian 'Trade Practices Tribunal in the Queensland Co-operative Milling Association case. In some dictionaries "likely" is regarded as synonomous with "probably". It is difficult to differentiate clearly between them in any sensible degree. On a graduated scale one might place expressions of likelihood in the following order of certainty—possible; distinct or significant possibility; reasonably probable; probable; highly probable.
However, when one eliminates from the expression "likely", possible or speculative effects as did the Australian Trade Practices Tribunal, then the additional certainty required to eliminate those effects takes one into the realm of probability or, expressed differently, to a state of mind where one has some degree of assurance that the contemplated result will eventuate.
The Commission then in determining whether a proposal "is or is likely to be contrary to the public interest" must find at least that il probably is so using the word "probably" in the manner in which I have just endeavoured to explain it.
Research into other fields of the law produces a variety of interpretations, not all coinciding with a test of "more probable than not." These illustrate a remark of Jeffries. J. in the Ombudsman case (supra) when he said (p. 588):
... even an only mildly active lexicographer could use much space and many words on the various shades of meaning and possible interpretations of the phrase.
In the criminal jurisdiction, the Court of Appeal has interpreted "probable consequences" as meaning "an event that could well happen" in preference to "more probable than not." R. v. Gush (1980) 2 NZLR 92—quoted with approval by the Privy Council in Chang Wing-Siu v. R. (1984) 3 All ER 877. And in the field of tort. Lord Reid in Overseas Tankship (UK) Ltd. v. Miller Steamship Coy Pty. Ltd. (9167) AC 617—(Wagon Mound No. 2) said -
Another word frequently used is "probable." It is used with various shades of meaning. Sometimes it appears to mean more probable than not, sometimes il appears to include events likely but not very likely to occur, sometimes it has a still wider meaning as it refers to events the chance of which is anything more than a bare possibility...
The Australian Trade Practices decisions are made in varying contexts, requiring assessment of the "likely effect" of relevant conduct upon "benefit to the public," upon competition, upon "loss or damage to business." Varying approaches have been adopted, ranging from the ambiguity of QCMA through the "tendency or real possibility" of Howard Smith and the "real chance or possibility of loss or damage" of Deane J. in the Tillmann’s Butcheries secondary boycott case, to the flexible approach expressed by Bowen CJ., also in Tillmann's at 18,495:
The circumstances to which sec. 45D may apply are so various, that I hesitate to place a gloss on the section by preferring one meaning of "likely" rather than another for the determination of this particular case. It is unnecessary to do so, because I have formed the view, that whichever meaning is adopted the evidence leads me to the conclusion that the likelihood of substantial loss or damage has been established.
Compare Lockhart J. in Radio 2UE at 43,919:
The word "likely" is susceptible of various meanings. It may mean "probable" in the sense of more likely than not or more than a 50% chance. It may mean a real or not remote possibility. There are other possible meanings.
In Tillmanns, Bowen CJ. did not find it necessary to decide which of the various alternative meanings he preferred. Deane J. said that in the context of subsec. 45D(1) it would suffice if the relevant conduct was, in all the circumstances, such that there was a real chance or possibility that it would, if pursued, cause loss or damage (at ATPR pp. 18,499-18,500; F.L.R. p. 347).
I do not find it necessary to determine this question for myself. The conclusion I have reached would be the same whichever construction of the word "likely" is adopted, but I reject the view that in the context of subsec. 45(2), il means a mere possibility, whether real or not.
Lockhart J.'s approach is of particular interest in that he was considering a question under Section 45(2) of the Trade Practices Act, the provision that is comparable to Section 27 of the Act.
The Crown, initially, was impressed by the two-fold character of syngas, viz. that it can be used both as a finished product and as a blendstock. In the Counter-Memorial it made the point that syngas can be used—
(1) as a blendstock at the Marsden Point Refinery in the production of finished gasoline;
(2) with the addition of lead at cither Marsden Point or elsewhere to produce finished premium gasoline; and
(3) currently off-shore, and potentially in New Zealand, directly as an unleaded 92 RON gasoline.
This, it was contended, gave syngas distinctive qualities.
There was no dispute as to the facts. Indeed, Mr Makeig made the point that syngas is a particularly attractive blendstock since, by reason of its lower volatility, it can improve refinery yield of gasoline. However Mr Allan’s oral evidence (WT, 1202-3) expresses vividly the reason why a blendstock can be regarded as fully competitive with other blendstocks and the final gasoline:
I think the syngas product from New Zealand is a blendstock which seems to me fully competitive with and substitutable for other blendstocks that are used in the production of finished gasoline. Blendstock comes in some varieties. Sometimes they're of lower quality than the finished product, and sometimes of higher quality.
I guess the point I wish to make here is that nothing can be assumed to be finished material until it meets the buyer's specifications, which is based on the buyer's market. And prior to that, it’s a blendstock material which might technically be able to be consumed in a reciprocating engine, but is not necessarily motor fuel for the particular market until it meets the specification of that market.
Such an approach serves to collapse down in appropriate fashion the various inputs and production stages that may obtain through a conception of a transformation function whereby the various inputs are transformed into the product demanded by the buyer. It is the one "product".
Mobil, by contrast, adopted a straightforward, robust position. From the Memorial to closing, the market has characterized as "international’'. As expressed in their Reply (2.3.2):
Whether overseas goods are included in the formal market definition or not is of no fundamental importance. The important point is that the New Zealand market, defined, is not isolated from world markets for petroleum feedstocks and refined or partially refined products, and that the price of syngas in New Zealand is determined by the prices of actual and potential substitutes from abroad.
An alternative formulation offered by Mobil, which is attractive in view of the requirements of Section 3(1) is to refer to the input market as that for "wholesale gasoline and gasoline inputs in New Zealand," and then proceed to identify the actual and potential suppliers of wholesale gasoline to New Zealand, and the actual and potential buyers of wholesale gasoline from New Zealand. Within this market so specified, there were then said by Mobil to be "many" suppliers, directly (gasoline) and indirectly (feedstocks and blendstocks, including syngas and local condensate). There are also "many" purchasers, the four New Zealand wholesalers vying against the world.
There was much evidence and argument directed to resolving this issue. On the level of first impressions and primary facts, most if not all the evidence favoured the Mobil position—put crudely, that this is an international market. Mr Allan said in his brief (145-146):
The petroleum market is international, and each product is bought and sold at prices determined by a vast number of buyers and sellers. It would be very difficult for any particular participant to ignore those prices for any significant period of time. The only result of doing so would be to inflict expenses on itself... In my view, syngas has a value at its source which is determined by reference to other gasolines and gasoline blendstocks which are widely available in the international markets... If syngas were that cheapest source and a New Zealand marketer were not to buy the syngas, then he would put himself at a disadvantage compared with his gasoline competitor. Similarly if syngas were not the cheapest product but he still bought syngas then he would be equally disadvantaged against his competitor.
|Calendar Year||Crude Oil||Petrol||Diesel||Fuel Oil||Aviation|
The evidence on actual international trade showed first that roughly half the products used in New Zealand are derived from imports (feedstocks, blendstocks and final products) and half from local sources (condensate, crude and syngas). Table 2, reproduced from Dr Bollard's evidence, gives the figures for imports of crude oil and refined products. Table 3, supplied by Professor Klein from Mobil figures, gives the breakdown for 1987 of domestic and imported sources of inputs for the four wholesalers in relation to New Zealand demand. Table 1 (supra para. 2.3.9) shows the importance of imports of final petroleum products in relation to total New Zealand supply in the 1980s. Table 4 was tabled by Mobil to show the relative importance of imported gasoline as a percentage of gasoline sales. The very high import figure in 1985 is explained by the shut-down of the old Refinery that occurred as nzrc constructed the expanded Refinery.
Breakdown of Input and Demand
|NEW ZEALAND DEMAND||100.0%||100.0%||100.0%||100.0%|
|(Gasoline||54.4%||52.3%||53.1 %||44.1 %|
|Diesel Fuels||24.1 %||39.2%||24.0%||23.2%|
|Condensates: Imported Local||0.0% 35.7%||4.1 % 0.0%||23.1% 0.0%||1.9% 30.5%'|
Imported Gasoline to Total Gasoline Sales
|Year||Gasoline Imports||Total Gasoline Sales||Imports % Sales|
* incomplete year
Mr Smith presented detailed evidence on the quarterly disposal of syngas since the ending of the Interim Agreement, ie. the period in which sales to parties other than Mobil were made by market bids (initially by tender and more recently by negotiation). Table 5 is drawn from this evidence. We note that over these nine recent quarters, 38% of sales have been by way of export, 26% to Mobil, and 36% to the other three domestic users. Or expressing the situation differently, once Mobil’s figures, which relate solely to obligated takings are removed, in excess of 50% of the "free" syngas has been exported. The export sales in that period have been confined to six overseas companies (although unsuccessful bids have been received from wider sources), with almost half going to Australian marketers and a half to international traders.
Sales of Syngas by GGTG
After Expiration of Interim Agreement
the evidence on actual international trade may be summarised as billows;
(1) International trade, while certainly important—indeed, indispensable has been concentrated on imports, rather than exports.
(2) It has been concentrated largely upon imports of feedstocks and blendstocks on the one hand and, on the other hand, upon making up the shortfall in Refinery production or finished products.
(3) Exports of gasoline, other than synfuel, have been negligible.
(4) Imports of gasoline have been, and continue to be, substantial. The only period in which this has not been the case were the few months in which offtake and sales of syngas were governed by the Interim Agreement.
(5) For the nine quarters since 1 July 1986, some 38% of synfuel sales have been by way of export.
(6) There is not a great deal to be read from a comparison of figures relating to gasoline imports as against the domestic usage and export of syngas. This is for a number of reasons: the syngas plant has been so recently commissioned; there was the plant failure in the second half of 1987; and the Marsden Point Refinery itself was shut down for conversion and expansion in 1985. All four New Zealand wholesalers continue to import some refined gasoline; and all four have made purchases of syngas. While the syngas plant has the capacity to supplant imported gasoline, that has not happened so far. For the nine recent quarters, exports of syngas have averaged 53,400 tonnes per quarter, ie. have been running at the rate of 213,600 tonnes per annum.
A second category of evidence relates to the altitudes of participants in the marketplace. Mr D. V. Marriott in a Briefing Note to the Minister of Energy dated 11 May 1987 wrote regarding the disposal of syngas:
In the second half of 19X6 it became necessary to sell internationally as Shell New Zealand chose not to lift synthetic gasoline, having ample gasoline relative to their market share. Shell have not lilted since. Some of the production from the refinery or the synfuels plant has to be exported as the combined production is greater than the gasoline market at present. GGTG has exported 1.2 million barrels of synthetic gasoline, mostly to Australia, but with some sales to Singapore and Japan also. The bulk of these sales have been to international majors with the remainder to traders.
GGTG’s mandate is to sell on the best terms and conditions obtainable, in what is a very difficult market. The export market for GGTG is emerging as offering consistently higher prices than the local market.
Miss Trewavas' oral evidence is particularly interesting in this regard. She was the officer responsible for negotiating and managing the sales of syngas quarter by quarter from April 1986 to April 1988. She conveyed vividly the atmosphere of crisis in which GGTG began to handle the disposal of syngas as the Interim Agreement ran out. She was asked a number of questions by the Tribunal
Just by way of background, would you give us a summary of the way in which the supply position appeared, first of all prior to the third quarter of that year and then prior to the fourth quarter? Prior to the third quarter it appeared we had no contracts other than with Mobil to sell gas. We did not conclude contracts until right in the last week of June and we were very pleased to do that I must say.
They were solely with New Zealand purchasers? Yes, largely. I believe we made one export to Mobil Australia and I try to remember; that may have been all. I can’t remember exactly. In the fourth quarter we still had some syngas left from the third quarter, quite a small amount I think, but we tendered to New Zealand and overseas customers with a view to expanding our market and the group of people we could sell to, its always good to have more buyers, and we did that and we included in that what we had left over from the third quarter and bas [sic] got more buyers than we could handle.
Was your earlier concern largely a result of the fact that you were dealing with this very new material and had not established a network of contacts including overseas purchasers? Yes.
Was it also partly because of the way in which you viewed the world demand and supply balance in gas generally? I think it look us quite a while to think in terms of exporting and if you go right back into history it was intended that syngas was to be used in New Zealand and that the system was set up to do that and to change that took a big change in our way of thinking and we just did not know anything about the world market of gas at the time.
As you started to take into account the existence of a world market did you give consideration to ways of selling other than by tender? Yes, we have considered term contracts. At the moment we are actually selling on a reasonably ad hoc basis in terms of the network. You find out who wants gasoline and sell it that way. It’s more a spot arrangement. None of our contracts are more than for a quarter and I would find it hard to say it was a term arrangement.
Did you ever give consideration simply to establishing a posted price quarter by quarter? Yes we did. I think in the end we decided that the buyers just would not wear it.
Why was that? Because bas. [sic] its a big market.
People would be looking for discounts? Yes. Posted prices do not tend to follow the market as closely as say a price linked with a normal index or something like that. Arc you saying that these days people are not prepared to read a posted price even one which is changed quarterly as a genuine price? It’s not flexible enough; the market will go like this in a quarter. Its just not flexible enough for most people. (AT, 98-99).
Mr Pryor commented in his Supplementary Brief (p. 3) after reading the confidential documents relating to syngas trading:
GGTG seems to have well understood that syngas is part of a broad international market for both leaded and unleaded gasoline and blendstocks. This is apparent from the formulae under which syngas was bid for by MONZ’s competitors as well as by GGTG’s export customers. GGTG understood that if MONZ’s competitors did not buy syngas they would import premium gasoline, a fact of life noted in a bid from Caltex Oil (N.Z.) to GGTG on 25 June 1986:... we are rapidly approaching the time when we must either commit to syngas or to an import cargo..."
This indeed was the Tribunal's impression of the confidential documents, reinforced by Miss Trewavas’ evidence quoted above. The formulae referred to by Mr Pryor relate to various and varying international price indices of the type that we quote below (par. 8.3.37).
Professor Comanor emphasized that the market must be defined by reference to the competitive level of prices. "A market can be defined as a set of products over which market power can be exercised." (brief p. 4) And in oral testimony (AT. 228):
Let me suggest that markets [are] defined in terms of cross elasticities of demand and supply at the competitive level. At some level of prices cross elasticities will be high as imports may be attracted into New Zealand...
I don’t mean to suggest that [the] New Zealand market is not affected by international conditions. Of course it is. But I do mean to suggest there is [a] level of prices or bracket of prices within which external constraints seem to be fairly weak and this weakness is sufficient in my judgment to define the New Zealand market.
The Tribunal accepts Professor Comanor’s conceptual framework on this. The question is whether the evidence supports the inference regarding geographic insulation at a competitive level of prices.
We take a highly simplified model.
Stage one: most highly simplified
If Singapore were the only source of imported gasoline and the only overseas market for syngas, and if both products were equally attractive and had no difference in handling costs, the price of syngas in New Zealand could diverge from the cost of imported gasoline by an amount equal to double the transport cost.
Gas supplied at Singapore 20.3 (Us/Bbl)
Freight etc: Singapore to New Zealand 2.5
Import parity, New Zealand 22.8
Syngas demanded at Singapore 20.3
Freight etc.: New Zealand to Singapore 2.5
Export net-back 17.8
Import parity is the maximum a New Zealand purchaser would be prepared to bid. Export net-back is the minimum that GGTG would be prepared to accept.
Stage two: less highly simplified
However when the New Zealand wholesalers purchase syngas from GGTG at New Plymouth, they face special handling costs, in that the material has to be finished at the Refinery to meet local premium (leaded) specifications. These handling costs consist of three elements:
freight. New Plymouth to Whangarai
blending costs at the refinery
coastal distribution charges.
Consequently a New Zealand wholesaler would be prepared to bid somethin;’ less than import parity for syngas, to take account of the handling penalty. This is the import parity for syngas.
Provided that the handling penalty is less than the transport cost disability as the Crown contended is the case—import parity for syngas will be greater than export net-back. Hence New Zealand wholesalers will always prefer syngas to imported gasoline, and in a competitive market there will normally be no export of syngas or import of refined gasoline.
The points at issue here are thrown into sharp relief by certain evidence presented by Mr Makeig (Further Supplementary Evidence). He tabulated export net-backs for syngas and import parities of equivalent gasoline for each month from July 1986 to October 1988. Mr Makeig look monthly averages of f.o.b. spot prices quoted in Singapore for two grades of gasoline, 91 RON, OPb (unleaded) and 96 RON, 0.4Pb (leaded). The export net-backs were then calculated for both Australia and Japan. We have made an extract from this tabulation as it relates to the export alternative to Australia. For the month displayed in Table 6, there is a calculated advantage in export of syngas to Australia by comparison with domestic usage. In fact, for the 28 months for which Mr Makeig did this exercise, in all but three months there was an export advantage to Australia (based on spot prices). By contrast, there was an export advantage to Japan for only one month. We reproduce only a small element of Mr Makeig’s table, since notwithstanding its relevance the table does not present the definitive picture. The element reproduced does, nevertheless, enable us to pin-point the sources of controversy between the parties and identify, also, some considerations that are not readily displayed by it.
Export Net-back for Syngas and Import Parity of Equivalent Gasoline
Spot Prices August 1987
|Freight etc. Singapore—New Zealand||2.4|
|Gasoline: f.o.b. 96 RON, 0.4P, Singapore||22.2|
|Less New Zealand Handling Cost||3.2|
|Import parity at New Plymouth||= 21.4|
|Freight etc. Singapore—Australia||2.0|
|Gasoline: f.o.b. 91 RON, Opb, Singapore||22.4|
|Less Freight, New Plymouth to Australia||1.4|
|Export Net-back, Australia||= 23.0|
|Export Advantage, Australia||1.6|
It is assumed that the Australian purchasers prefer the lead-free gasoline (91 RON, Opb), while New Zealand requires leaded gasoline (96 RON, 0.4Pb).
We give two examples of actual bids made by different companies.
"To the average of (a) plus (b) plus (c) on a daily basis averaged over the calendar quarter where,
(a) is the mean of price range for "prem. 0.4" cargoes fob Med basis Italy Platts quotations divided 8.6
(b) is the mean of price rance for "unl" USGC waterborne Platts quotations multiplied by.42
(c) is the mean of price range for "Naphtha" Singapore Platts quotations plus $ US 3 per barrel."
Value at the time of the offer = US $18.35
Value at the lime of lilting US $20,02
"Price : Tier 1 22.60 USD/Barrel FOB
: Tier 2 22.45 USD/Barrel FOB
Price to escalate/de-escalate from a reference date of 28 May 1987 in Platts European Market Sean. Applicable quote is mean PMS 0.4 cargoes FOB basis Italy which on 28/5/87 was 190 USD/MT. The escalation/de-escalalion factor would be the difference between the quote on 28 May and the average of the mean quotation on B/L date +/-2 quotations. (8.5 BBL PMT to be used)."
Value at the time of the offer = $ 22.49
Bid not accepted.
Mr Smith said in his brief of evidence (p. 214), "all things being equal, one would expect that the price New' Zealand Oil Companies would be willing to pay for syngas would be of its intrinsic value plus freight to New Zealand and that intrinsic value minus freight to overseas interests. In other words, the overseas freight penalty should always mean that syngas stays onshore." The elaborate excursus we have just made has convinced us that all things are not equal. There are more considerations involved than relative transport costs and New Zealand handling charges. Mr Smith was asked by the Tribunal (AT 189(1)):
If spot prices overseas go lower the local oil companies will import and you’ll have syngas which you must export?
A. That means syngas will be worth less to that person overseas as well... because relativity is involved here, for those overseas people, they won’t be offering us spot prices here, their prices have moved down accordingly as well.
No doubt what Mr Smith said would be true were the market in text book "equilibrium" but the evidence demonstrates that in a complex and volatile commodity market such as this, and with such fine margins at work, there are trading opportunities to be gained from taking advantage of day to day price improvements; which, in turn, reflect shifts in supply positions and differing knowledge of the present and expectations with respect to the future. No doubt if the transport cost penalty were very considerable, the New Zealand syngas trade would be insulated from forces such as these, but on the figures put before us we do In not find this to be the case. As against that, there was reason to believe that Mr Makeig’s figure for handling cost was somewhat high, which would make Australia’s export advantage less than his calculations suggested (or at times negative), and give added point to these dynamic considerations. No doubt, also, transport costs, handling charges and the relative attractiveness of syngas as a material will be subject to changing influences over the life of the contract.
We find two markets of relevance for this arbitration:
I. the wholesale input market for gasoline, blendstocks and feedstocks in New Zealand consisting of actual and potential transactions between overseas and domestic suppliers and purchasers of gasoline, blendstocks and feedstocks; and
II. the wholesale output market for gasoline in New Zealand consisting of actual and potential transactions between New Zealand wholesalers and retailers go gasoline.
The economists predictions were then translated by Counsel into claims in law as follows: there is a "real possibility" that the MFP clause will "hinder" competition to an exlent that is "real or of substance".
The phrase "lessening competition" contemplates a change to the market structure so as to produce anti-competitive effect, eg. barriers to entry have been raised or price competition has been reduced (per Bowen CJ and Fisher J. in Outboard Marine Australia Pty. Ltd. v. Hecar Investments Ltd.... at p. 43, 984) or there is an increase in market power, ie. power to achieve market conduct and performance different from that which a competitive market would allow (per the Tribunal in Re. Media Council of Australia No. 2... at 48, 436). (Closing Submissions D5-6.)
Secondly, the industry is characterized by a high degree of market concentration. The four wholesalers' market shares are as follows:
these market shares were very stable in the regulated environment. The four wholesalers trade with some 2700 retailers.
The election of the Labour Government in July 1984 marked the end of economy-wide comprehensive regulation. The Government announced plans for both general deregulation and, in particular, for deregulation of the petroleum Industry. It endorsed a "set of objectives with a view to achieving an efficient market for petroleum products", noting in correspondence with the oil companies In mid June 1985 (ABD 21/107) that these were:
(a) the removal of government restrictions on the importation of refined petroleum products;
(b) the removal of maximun and minimum price controls on petroleum products;
(c) the removal of existing regulatory barriers to entry into the distribution of petroleum products;
(d) a refining operation that can stand on its own in the competitive market thus created.
The viability of the Refinery in a free market/free trade environment was questioned. Discussions were initiated between nzrc, the companies and Government officials in mid 1985 and were not concluded for three years. But concluded they were, and the Petroleum Sector Reform Act came into force on 9 May 1988. Mobil sought exemption of the Participation Agreement from the Commerce Act, as earlier related (supra para 2.8.8). But this was unsuccessful: the Commerce Act applied generally from 1 May 1986 and to prior contracts from 1 March 1987.
The condition of entry is changing. Prior to deregulation, the barriers to entry were, if not impregnable, certainly "formidable", to use Mr Dineen's term. He pointed to the Government licensing of wholesalers, the "complexities of supply to a small remote island country", the "need for a national distribution network to meet Government requirements" and the requirement to use the Marsden Point Refinery (Brief 47). But. to quote Mr Dineen (Brief 51-52):
Now that the licensing requirement is no longer a barrier to entry there have already been signs of the development of independent chains of retail outlets. There is no restriction on the import of finished products and il is possible for cither an existing producer or a new wholesaler to obtain access to processing at the Marsden Point Refinery. However, the provision of the storage and supply infrastructure to meet a continuing market effectively is a complex business and, while Government would probably welcome new entrants, it must be recognized that the New Zealand market is small by international standards and not easy to supply.
In discussion with the Tribunal (AT, 60-61) Mr Dineen identified various practical modes by which entry could conceivably take place. He saw the "import of final product" as "the most likely way of competition arriving". But "il is not easy to maintain a longer term operation on the basis of spot supplies and spot supplies only". Possibly such an operator might be assisted by already having some overseas base, eg. Australia. However he identified three possible categories of New Zealand operator that might suit: an airline, or a "major and commercial user of fuel" who might consider importing for itself and a chain of service stations, or "someone already involved in the oil industry in some way but not in the marketing of it". He agreed it was possible that a "newcomer could assume the role partly of a jobber and partly of a supplier of its own chain of retail outlets".
The Crown Avoidance theory is succinctly stated in Dr Bollard’s Briol of Evidence (85-87):
The existence of the mi p provision has established an effective reserve price above export parity for the bids by the oil companies (other than Mobil). Where the initial price to Mobil has been set at a margin above the export value, GGTG can sell 28% of the syngas at export parity plus the margin and the rest at export parity. Thus the other companies’ bids must exceed export parity by enough to compensate GGTG for the fact that the price of the 28% for Mobil will drop to the lowest bid. As a simple example, if the other oil companies all bid the same, then the amount they must offer above export parity is 28% of the original margin.
Stated more generally, the effect of the MFP clause on GGTG is to reduce its scope for discounting relative to the initial price established for Mobil...
Without the mi p clause GGTG would maximise its returns by price discriminating-charging what each customer could afford to pay—right down to the export value.. In economic terms, different buyers have different demand curves, and if the seller (GGTG) can distinguish between these he will rationally charge different prices. For example, the MFP clause would inhibit GGTG from supplying an oil company that had a need for a small volume of cheap petroleum because the low price would have to be passed on to Mobil.
The MFP provision has a more far reaching indirect effect on competition and consumer welfare to the extent that the removal of (GGTG’s incentive to discount to new entrants to the wholesale market makes less likely a break up of the four oil companies' oligopoly position and a reduction of wholesale prices to competitive levels.
It is of some relevance that the Crown's own witnesses from GGTG in effect dismissed this possibility. Mr Smith did say (AT, 175) that the Group "would hold back syngas for strategic sales". However: "Bids from New Zealand oil companies that were assessed to be higher than bids from an overseas company made at a similar time were always accepted." (Brief 136) Mr David Marriott was asked by the Tribunal (AT. 171-2) whether it had ever been GGTG’s policy to
take the overseas bid if il was lower than the New Zealand one?
A. No reason to do that.
Q.At one stage they floated that you would avoid any argument about MFP by taking [a] lower overseas price rather than [a] higher New Zealand price: you say that does not happen?
A. To take a lower price would mean that we were accepting up front a loss on what we could potentially expect to get in [the] New Zealand market. Therefore there was no incentive for us to follow that.
There is first, and most obviously, the requirement that the MFP clause be interpreted in a special way. It must receive the "mixed" interpretation. an interpretation which is espoused by neither the Crown nor Mobil, and fails to commend itself to the Tribunal. For if the MFP clause embraces all sales including export, as with the Mobil interpretation, then as Dr Bollard conceded (AT, 218) this would remove that disincentive simply because GGTG had no other alternative but to dispose of it" (the syngas). The syngas comes forward for disposal, in hugely inflexible quantity, quarter by quarter, and with only limited economic storage. As Dr Bollard added, "this is given that we are talking about the investment in the synfuels plant being sunk already there, and nothing much there can be done about it". On the other hand, if the mi p look the weighted form, as espoused by the Crown, a small scale at a discount to the new entrant would not greatly affect the weighted average. In any event, any effect would be muled. If the MFP is interpreted as we prefer, including export sales, and taking a weighted average of all sales to the most favoured other purchaser, the effect of the clause is blunted by any averaging and, further, any incentive to "Crown Avoidance" is removed.
This theory also faces a number of significant obstacles. We have already concluded:
(1) The market structure and functioning of the wholesale output market do not support the Crown’s "collusive" bidding theory. There are sufficient entry prospects, asymmetry and uncertainty in the marketplace as to make the Crown’s "collusive" bidding theory scarcely tenable, (supra Section 8.4.2).
(2) There will be real pressures upon the wholesalers to minimise the costs of their inputs, (supra para. 188.8.131.52).
(3) The Crown Avoidance theory is untenable.
As we earlier noted (para. 184.108.40.206), as the case developed the Crown elected to rely upon the "low bid" theses of their two economists—that is, that the three wholesalers would likely collude not to increase the price they would bid for syngas but to decrease that price. We confine our attention largely to the "low bid" theses,
Seven, senior executives called by both parties, Mr Pryor by Mobil and Mr Dineen by the Crown, explicitly rejected the suggestion that they had engaged in collusive activity of any kind. Mr Dineen (Chairman and Managing Director of the Shell Group of Companies in New Zealand) replied to a question from counsel for Mobil as to his reaction to the general collusion thesis of Ilk-Crown’s economists (AT, 58):
Whereas I found the allegation of explicit collusion absolutely offensive, I find the rather more esoteric concept of tacit collusion if its applicable to any situation theoretically. I find that it is totally inappropriate to the particular situation we are in here. The reasoning that’s been developed here I do not find convincing at all. Apart from the fact that factually as I see il is not appropriate.
Mr Pryor assessed the confidential evidence on company bids for syngas in his Supplementary Brief as follows (para. 6):
In reviewing the bids for syngas of MONZ’s competitors, I have found absolutely nothing to suggest collusion among the oil companies. Lach oil company bid on the basis of very different, often complex, formulae. For example, a sale to (Company A] on 17 March 1988 (page 14, Volume 7, ABD) was based on the average of Mediterranean gasoline. U.S. Gulf Coast gasoline and Singapore naphtha prices. A [Company B] bid on the same day (page 19, Volume 7, ABD) was based simply on Singapore naphtha prices. A [Company C] sale shortly afterwards (28 March 1988: page 21, Volume 7, ABD) was based on Mediterranean gasoline prices. In general, correspondence related to bidding suggests each company was striving to achieve the best possible terms based on their differing perepetions of the best international indices to lie their bids to. The documents make a mockery of GGTG’s assertion that there has been or could be collusion by competitors to pay higher than market prices for syngas in order to inflict that same high price on Mobil. I find it hard to believe that GGTG’s own personnel involved in gasoline tendering could honestly believe such an assertion: il is interesting to note that none of GGTG’s quarterly reports raises this issue. In fact in document C2147 (page 137, Volume 6, ABD) GGTG in describing the first quarter 1987 bids states that "all successful bids are market related".
Mr Pryor stated further in oral evidence (WT 984-6), that
I emphasize that all the formulae that were chosen by the competitors are very different, and beyond that were for delivery at future dates, and presumably differing future dales. When somebody bids based on naphtha and someone else bids on a basket of gasoline prices from differing enclaves of the world, it’s inconceivable to me that you could ever possibly dovetail the two...
The second point to make here is that the prices that MONZ’s competitors have actually paid for the syngas varied greatly...
And if you go back to what I said earlier about the pattern of liftings, half the time they buy, half they don’t, in a very erratic pattern.
You put all of those things together and it’s just absolutely impossible to conceive of any coordination, tacit, explicit, or otherwise; it’s just not what the evidence suggests.
We have studied the confidential evidence carefully and conclude that it is fairly summarized in Mr Pryor’s evidence.
(d) & (e) Deferred
(f) Unnecessary to answer
(h) No longer in issue
In calculating any adjustment to what Mobil is entitled, a weighted average should be taken of all sales to the third party most favourably treated in any quarter, and Mobil’s price and/or terms adjusted if necessary so as to ensure the price paid by Mobil is comparable.
(l) Interest is payable but consideration of the rate, along with other items in this question, is deferred.