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Decision on Liability

1. Introduction to Discussion of Factual Material and Answers to Questions Posed on Liability

It is common ground between the parties that consequent upon the format adopted at the hearing, and the postponement of any evidence or submission on the quantum of loss alleged to have been sustained by Mobil, the first determination by the Tribunal should be the answering of Questions posed as to liability, if any, of the Other Party (the Crown) in respect of the allegations made against it by the Requesting Party(ies) (Mobil and Associated Companies).
This procedure is recorded in the consents by counsel for the respective parties at Washington DC on 2 and 3 November 1988 and confirmed by the Tribunal's pronouncements when it adjourned at Auckland on 16 December 1988 as recorded at p. 253 of the transcript on that day.
1.1.
The material now delivered therefore contains the Tribunal's findings as to liability and can most conveniently be expressed by a listing of the questions asked as to liability, the Tribunal's findings of fact and its determination of those questions.

2. Factual Background and Some Initial Findings

The following summary of agreed facts and the Tribunal’s findings on some disputed matters is intended as a broad outline. It would be prolix and unhelpful to the parties to include in this outline detailed findings of fact which are best enumerated in conjunction with the analysis of the particular questions that we have to answer. Il will be convenient to refer to the Requesting Parties jointly as Mobil—sometimes as MONZ—and the other Party as the Crown or the New Zealand Government.

2.1 The Dispute

2.1.1.
The arbitration arises from a Participation Agreement entered into between the parties on 12 February 1982 for the erection of a synthetic gasoline manufacturing plant at Motunui near New Plymouth in New Zealand and the side of the product.
2.1.2.
The plant is owned by the New Zealand Synthetic Fuel Co Ltd in which the New Zealand Government is the major shareholder (as to 75%) and Mobil Oil New Zealand Limited (MONZ) is the other shareholder (as to 25%'). Technologically it is unique in the world oil fuel industry. It was erected as a result of a Joint Venture operation between the New Zealand Government and the Mobil Company between 1982 and 1985. It utilises an existing process whereby natural gas is converted to methanol and thence by a unique process patented by Mobil the methanol gas is converted to synthetic gasoline. Prior to the construction of this plant, the process of converting methanol to gasoline had been developed on an experimental basis only in the laboratories of Mobil in the USA.

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.

2.1.3.
In accordance with the Agreement, the gasoline produced is the property of the New Zealand Government and Mobil is a designated purchaser of certain quantities at prices and on conditions stipulated.

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.

2.1.4.
The Participation Agreement of 12 February 1982 provided a pricing structure in Article XI for sale of certain percentages of the synfuel to Mobil, with a provision for review of past sales and possible retrospective price adjustments quarterly. Put briefly this provides that in the event that sales made to other purchasers have been at prices lower than those paid by Mobil, as fixed under its purchase obligation and/or entitlement a refund may be payable to Mobil. This provision has been sometimes referred to as the price adjustment clause, but more commonly the MFP (most favoured purchaser). The circumstances under which such entitlement will arise and its amount are in dispute.

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.

2.1.5.
The difference arises from the parties’ respective interpretations of the subclauses in Article XI which provide for calculating refunds. That problem however was overtaken by a much more fundamental dispute between the parties concerning the legal validity of the refund provisions.
2.1.6.
The New Zealand Parliament had, on 28 April 1986, enacted the Commerce Act 1986—a comprehensive statute enacted to promote competition in markets within New Zealand, and in particular setting up regulatory controls in the hands of a Commerce Commission Analogous legislation existed in Australia in the Trade Practices Act 1974 on which the New Zealand Act is modelled
2.1.7.

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)

2.1.8.
The Crown view was conveyed to Mobil tentatively in correspondence in 1986 and became the subject of an exchange of letters from Mobil, which expressed the contrary view. Contemporaneously the parties were also in disagreement, as mentioned, as to the mode of calculation of the refund (if due) but the major issue was the question of total unenforceability of the refunding provision in Article XI subsequent to the coming into effect of the Commerce Act, which as far as the Mobil contract was concerned was 1 March 1987.
2.1.9.
On 10 February 1987, the Crown advised Mobil that it had received a legal opinion advising that the refund provision in Article XI contravened the Commerce Act, and consequently it would not be given effect to after the relevant date.
2.1.10.
Article VII of the Agreement provides for disputes between the parties to be referred to arbitration under the aegis of the International Centre for Settlement of Investment Disputes. On 10 April 1987 the Requesting Party, Mobil, claiming the Crown’s refusal amounted to breach of contract, filed a Request for Arbitration with the Secretary-General and this was registered on 15 April. A Tribunal was appointed in accordance with the rules of the Centre, comprising the members previously described. The Tribunal sat in Auckland in April 1988, in Washington DC in October/November 1988 and again in Auckland in November/Deccmber 1988. It then adjourned to consider questions of liability and postponed questions of damages along with a liability assessment and/or oilier relief to a later silling if necessary.

2.2 Liquid Fuel prior to 1964

2.2.1.
Until recent years. New Zealand has had no indigenous source of liquid fuels apart from trivial quantities from small bores in Taranaki. As a consequence, all such fuel was imported as finished product by the individual wholesale companies —of whom there were five licensed as importers under the Motor Spirits Distribution Act 1935—Mobil, Shell, Caltex, BP and Europa. BP acquired Europa in part in 1972 and in whole in 1977. Wholesalers were not permitted to own retail outlets, other than those acquired prior to 1952, and that situation continued until May 1988.
2.2.2.
Under Regulations issued from time to time under the Motor Spirits (Regulation of Prices) Act 1933, the prices at wholesale and retail levels were the subject of price control—initially fixed by the Price Tribunal under the Control of Prices Act 1947—and on its abolition by the Commerce Act 1975 —by Regulations issued periodically under the Economic Stabilisation Act 1948.
2.2.3.
These statutes have now been repealed by the Petroleum Sector Reform Act 1988, but during the currency of price control there were two successive systems. Initially, when New Zealand was reliant on imported products, prices were fixed at a uniform level at main ports with increments allowed for distribution to more distance country areas. This was superceded in 1973 by a system whereby a Pool Account was kept recording costs and incomes of the various traders over a period and the differentials involved were absorbed into and allowed for in the fixing of wholesalers’ margins at the periodic reviews of prices.
2.2.4.
Even in the earlier period of finished product import, prices paid for wholesalers' stocks fluctuated and it was not practicable to adjust controlled prices other than at longer intervals. It was inevitable, as in other fields, that there had to be a system of reporting by the industry to the price controlling agency of government, which investigation and subsequent adjustments taking into account proved costs on the one hand, and Government policy on the other. Initially, this may have been reasonably straight forward but with the development of a refinery industry in New Zealand and more recently the production of fuels from indigenous sources, some more complicated factors needed consideration.

2.3 The Marsden Point Refinery

2.3.1.
In the early 1960s, the New Zealand Government, acting in concert with the licensed wholesalers, promoted the construction of an oil refinery near Whangarci and this was commissioned in 1964. It is owned and operated by the New Zealand Refinery Company Limited (NZRC) in which the main shareholders were the five (now four) oil wholesalers (as to 80% approximately) and the public (as to 20%)—although, according to the evidence of Mr B. M. Dineen (Managing Director of Shell), Petrocorp—initially owned by the New Zealand Government but now privately owned—today holds some 11%. Doubtless he is correct. The majority shareholding has given and still gives the oil companies control of day to day policy, but the Government, quite properly, has always had reserve powers by way of Regulatory control of the industry to prevent abuse.
2.3.2.
As initially built, the Refinery was somewhat restricted as to the range of raw imported feedstocks it could process and the variety of its finished product. In the late 1960s and early 1970s, discussions took place between the shareholders and the Government aimed at modernising the refinery to give it greater versatility. This plan was given additional impetus by the ‘oil shocks’ of 1973 and 1977/78 whereby the cost of oil supplies from overseas became difficult and costly. Over those years, the New Zealand oil bill increased 6-fold.
2.3.3.
The intention was to achieve greater fuel security by enlarging the plant and diversifying its technical facility to enable a wider variety of feedstocks to be processed, thus lessening risks of isolation from restricted supply sources.

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.

2.3.4.
The expansion would be financed from overseas borrowings to a sum of approximately NZ$2 billion, charged over the refinery. The Government undertook that it would allow the nzrc to charge its customers—the wholesalers—a fee which would cover refining costs, interest and capital repayments on the loans and a profit of 12.5%, after lax, on shareholders’ funds. The Government undertook to the oil companies—the major shareholders—that, in its exercise of its price control powers, it would allow the refining fee to be recovered in market prices.
2.3.5.
The oil companies undertook for their part that they would utilise the refinery to the maximum extent possible and importation of finished product would be avoided unless absolutely necessary; with more than a hint that the Government could take steps to restrict such importation if it thought necessary. But there was still considerable imported product, particularly at limes when, for various reasons, the refinery was not operating at capacity. In 1985, consequent upon a change of Government and Government policy, steps were taken towards deregulating various sectors of the economy, including the oil industry. This was a change from the more protected situation under the Support Letters. The Government and nzrc negotiated without finality on this matter for three years until the Government absorbed the debt obligations of the Refinery Company ($800m) and provided the Company with a subsidy of $85m over a 3 year period.

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.

2.3.6.
For present purposes it is sufficient to note that this prospect impinged on the refinery redevelopment. In 1979, the prospect of synthetic fuel from local natural gas sources appeared to be a real one and the need for such material to be compatible with the refinery led to reconsideration of the technical overhaul at Marsden Point.
2.3.7.
The possibility of natural gas utilisation had been vaguely hinted at since 1975. In June 1979, Mobil had put certain proposals to the Government concerning its Gas to Gasoline technique. There was also a Fisher-Tropsch process being used in South Africa. On 31 August 1979, the Liquid Fuels Trust Board had made favourable comments on these possibilities and on 23 October 1979 had recommended detailed investigation and, if acceptable, adoption of the Mobil process. The Government decided to pursue this course.
2.3.8.
As a consequence, on 27 November 1979, the Minister of Energy confirmed to nzrc that the development plan discussed in the Support Letters would proceed but with the refinery being required to use a hydrocracker configuration to accommodate synthetic gasoline—rather than a catalytic process previously considered—prior to the emergence of the synthetic fuel prospect.
2.3.9.
The modernisation and expansion was put in hand, but due to a variety of causes, did not come into full production until 1986. It now has capacity to produce all New' Zealand gasoline requirements (with one or two minor exceptions). We anticipate later changes by noting that the eventual deregulation of the industry in 1988 gave freedom to import finished product without restriction. As a concomitant of the 1988 legislation—to be discussed subsequently—the Government found itself obliged to repay the nzrc’s loans from overseas banks so that the wholesalers waived their rights under the Support Letters. The refinery is now' operating under new' Heads of Agreement, the details of which need not be recorded here (Vol 21/186 to 202).
2.3.10.

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.

Table 1
Refinery production, Product Imports and Total New Zealand Supply
Petroleum Products
('000 tonnes)

 19801981198219831984198519861987
Refinery Output        
Avtur/kero------21486
Mogas plus1,2101,2421,1531,2551,2907061,0501,133
syngas      487220
Gasoil6546715546116163286141,002
Fuel oils785558396350365300208320
Bitumen104806911311390107130
Product Imports
Avtur/kero34030129426533337932965
Mogas4323764384854651,016109431
Gasoil41425245040746961837949
Fuel Oils210--497680-
Total Supply         
Avtur/kero340301294265333.379350552
Mogas1,6421,6181,5911,7401,7551,7221,6461,784
Gasoline1,0689231,0041,0181,0859469931,051
Fuel oils787568465350414376288320
Bitumen104806911311390107130

2.4 Pricing of Refinery Products

2.4.1.
The mechanism whereby prices ex Refinery were determined became a crucial factor in calculation of the price to be paid by Mobil for its synfuel purchases. Price control on the imported refined product had existed since 1933. We are only concerned with the period from 1964.
2.4.2.
Up to 1982—which is a crucial date for considering the price fixing debate at present before the Tribunal—the price of gasoline was fixed at wholesale and retail levels by Government Regulations administered and applied by the Minister of Energy alter a consultative process which had developed since 1964. The procedure endured until 1988.
2.4.3.
The scheme was aimed at enabling the oil companies to recover the cost of feedstock imported from overseas, the costs paid to the refinery, the cost to distribution points and a profit. But as feedstock in bulk to the refinery at known cost produced differing products of differing values, a price analysis scheme was needed.
2.4.4.
A great deal of co-operation existed between the companies, the refinery and the Government in collecting cost figures, but with appropriate supervisory provisions.

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.

2.4.5.
In such calculations, transport costs from the refinery to main ports, and wholesalers’ profit were allowed for, and the rrp related to a notional but allowable cost of finished product at main ports as an ingredient in the price adjustment procedure.
2.4.6.
It was said by Mobil that such a cost estimation mechanism is used widely elsewhere under similar nomenclature, and this was not challenged. It is simple in concept. The purpose was to enable a notional correct price ex refinery to be estimated in circumstances where a volume of crude oil of known or assumed unit cost is the input, but the resulting products vary widely in nature— gasoline, diesel, fuel oil and so on, not all having equal value, but each needing an assigned value for price fixing purposes at Government level, and for accounting and taxation purposes within the different companies' accounts.
2.4.7.
The calculation, put simply, compares the total assumed cost of importing equivalent volumes of the finished products had they in fact been imported against the total known cost of all the crude feedstock actually used in the refinery during a given period, together with refinery and coastal distribution charges in relation thereto. This comparison produces a percentage (which will incidentally show whether, in the period, it had been cheaper or dearer to refine locally) and that percentage is applied to what would have been the import parity cost per barrel of each variety to obtain a price which it is believed approximates as closely as mathematics will allow the cost per barrel to the oil companies of each variety of product they have had refined.
2.4.8.
It is not claimed that the procedure reflected actual cost to each company of, for example, the gasoline it received. There was no real challenge to the evidence on this aspect of Mr Milkop of Ministry of Energy, whose function it was to check the figures supplied as part of his price fixing role. He demonstrated, as Mr Makeig of Mobil had also said, that certain averaging assumptions had to be made.
2.4.9.
First, the figures were supplied over a period initially 12 monthly and later quarterly. During such a period, substantial quantities of feedstock would be procured from a variety of overseas sources. There was delay between purchase utilisation and output, so that figures were not always up to date. It was a global calculation so that individual companies may have purchased their input feedstock at higher or lower than average. The freight ingredient was based on a formula fixed in the shipping world and not on actual costs. Shipping losses were an estimated percentage. Overseas exchange fluctuations occur rapidly but could not be equaled to individual purchases because of lags in bringing charges to account. We accept the evidence of Mr Hill that the procedure involved "some degree of estimates and allocations".
2.4.10.
Despite these variables, however, it served its pecuniary purpose of a basis of cost of production for price control. The ingredient figures were supplied to an independent Auditor (now Mr Hill) on a confidential basis by the importing wholesalers and the refinery and a provisional rrp was calculated quarterly. At the end of the year, there was a recalculation by the Ministry officials who might challenge or disallow some ingredient items, and subject to certain rights of objection and discussion, this became the final figure—with the Minister being the arbiter in cases of dispute.
2.4.11.

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.

2.4.12.
Deregulation came on 9 May 1988—the Petroleum Sector Reform Act 1988—which removed the price control system by repealing the 1933 Act and other regulating statutes. Thereafter, as no price control procedure was required, the companies ceased to supply to the Auditor the information previously given and the whole procedure lapsed, although the refinery has continued in operation, and supplies the larger proportion (65%) of the country’s gasoline.
2.4.13.
We return to consideration of price calculation vis-a-vis the rrp under deregulation. Ascertainment of a current rrp price for gasoline is crucial to a calculation prescribed in Article XI of the Participation Agreement whereby a claim can be made for price adjustment. Under the terms negotiated between Mobil and the Crown, Mobil is obliged in each year to take a minimum. equivalent to its market share (currently 28%) of the synthetic fuel output at a price equivalent to the rrp. Other companies have no such obligation and may purchase at tendered prices—perhaps higher, perhaps lower than the rrp. There is a provision in Article 11(1)(e) of the Participation Agreement—to be discussed in detail later—whereby calculations can be made giving Mobil a claim to price adjustment downwards in the event that other customers have, in any given quarter purchased more cheaply than the RRP. This provision has been referred to as the Most Favoured Purchaser clause—the MFP. The Crown submitted that now the rrp is no longer officially calculated, there is no price adjustment mechanism from which a refund can be ascertained.
2.4.14.
It is agreed by Crown witnesses that up-to-date figures, equivalent to those previously disclosed from various sources, still exist in records of the various companies, the refinery and elsewhere, as before. The Tribunal accepts the evidence of Mr Milkop. who was the responsible Ministry of Energy officer for the relevant period, that ascertainment of costs for the purpose of an rrp calculation would be more difficult in the deregulated regime for several reasons. It is believed that the companies now buy from a wider variety of sources, perhaps being more adventurous than was felt necessary under price control with its element of cost plus pricing. Greater use may be now made of the more flexible spot market. The exchange rate seems to be more volatile than previously and there is a view that the insurance cost ingredient is now more obscure.

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.

2.4.15.

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.

2.4.16.
The Tribunal is of the view that the Ministry was fully aware of the ramifications of the rrp, its removal, and the effect that would have on Mobil’s entitlements in the price adjustment situation between Mobil and the Government. We take the view that every aspect of dismantling the previous system was fully appreciated by the Government. Mr Milkop had given thought to these matters as early as November 1983 (A. H. Milkop Para 95).
2.4.17.
The obligations which might rest on the Crown in this respect and the legal consequences of repeal will be discussed elsewhere on the questions relating to the ‘mechanism known as refiner release price’ in Article 11(1)(d).

2.5 The Development of the Maui Natural Gas Field

2.5.1.
In 1969, a consortium of oil interests—Shell, BP and the Todd company, discovered a very large offshore natural gas field—approximately 20 miles off the West Coast—in the Tasman Sea. The cost of development was high and the Government supported development; funds were supplied by Government and by the discoverers, and a company—Offshore Mining Company Limited was set up—with divided ownership including Government participation, to build a platform (Maui 1)—and pipe the gas ashore.

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.

2.5.2.
The volume of gas available is very great. It is a large field by world standards. Plans were made and given effect to for large scale reticulation and sale of gas for domestic and industrial purposes, it was also planned that the gas would be used to fuel electricity generating plants.
2.5.3.
However, the plans were revised after the so-called oil shocks of the 1970 decade. Without indigenous supplies New Zealand was critically vulnerable to escalating overseas prices; the threat to the economy was grave, and it was realised that the natural gas was too valuable to be used for electricity generation if it had liquid fuel potential.

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.

2.5.4.
The Government accepted this report in November 1979. Negotiations took place between Government officials and Mobil representatives as to the planning and construction of such a plant, and the other oil companies were appraised and invited to join discussions.

2.6 Initial Contractual Negotiations and Arrangements for the Synfuel Project

2.6.1.
On 26 and 27 November 1979, the Minister of Energy and Government officials met with Mobil executives and representatives of the other oil companies at Burma Lodge, Wellington, to consider forwarding the Liquid Fuels Trust Board’s recommendations. The Companies were Shell Oil NZ Ltd, Europa (NZ) Ltd, BP New Zealand Ltd and Caltex Oil (NZ) Ltd.
2.6.2.
The prices worldwide of finished petroleum or of crude oil had been rising and it appears to have been assumed that the situation would probably not improve. Restrictions in the retailing of petrol were being introduced; petrol rationing did not seem unlikely. The evidence shows that at that time the Government and the companies would have had no thought that New Zealand could get beyond self sufficiency—even if that condition could be achieved. The subsequent success of the syngas programme has led to a situation where New Zealand presently exports gasoline in some quantity. The Tribunal believes that this was not in contemplation in 1979/80. The first written mention we have seen of such a possibility is in a Ministry memorandum of 7 February 1984 (ABD 18/37 et seq) although Mr Milkop said he had recognised the possibility as early as November 1983.
2.6.3.
There had been a variety of possibilities discussed as to who would finance and run the syngas plant—if and when it was built; who would own the input; and who would have access to the product.
2.6.4.
The Government of course owned the natural gas it purchased from the Maui field, it insisted that it own the synthetic fuel produced and would sell the same to various purchasers. There would be a fixed return to the plant on the risk capital raised to finance the project and it is clear that Government officials expected an increasing return on sale of the gas processed, given an anticipated upward movement of oil prices. It was recognised that Mobil, which would provide the secret process, the patented catalyst and the engineering and chemical skills for designing and building, together with substantial development capital was entitled to priority claim for the product, but the claims of the other companies to be entitled to purchase should also be met.

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.

2.6.5.
Agreement was reached in a Memorandum of Understanding between the Government and Mobil on 1 April 1980 that a Joint Executive Committee (JEC) be set up, with representatives of each party to draw' up plans and prepare estimates of cost for erection of the plant. The substantial technical input for this anticipated report would largely come from the Mobil organisations, using jec funds supplied jointly by the Government and Mobil.
2.6.6.
It was agreed in principle that if the JEC recommendations were that the project proceed, the following situation would apply:

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.

2.6.7.
Mr Falconer, who led the Ministry of Energy team, says that it was always the intention of the Crown that sales of syngas should always be at the same price for every customer. He says that this was the basis of the later provisions in other agreements that sales to one party at a lower price entitled other purchasers, particularly Mobil, to a price adjustment.
2.6.8.
The Memorandum of Understanding was not a binding agreement but a statement of intention and the means of setting up a properly funded investigation and plan for adoption by the parties, if thought fit. It may be noted in passing that under the Memorandum of Understanding all companies were to be given rights to purchase the product but there was at that stage no obligation to take. As already mentioned, the Marsden Point Refinery enlargement and modernisation programme was to be adapted to cope with the new material.

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.

2.6.9.
On 21 July 1981, the JEC reported that the project was commercially attractive and recommended it be proceeded with. In September 1981, the Government and Mobil agreed conditionally to proceed, but commitment was deferred pending the General Election due in November 1981. The Opposition Party had expressed reservations about the scheme and Mobil was not prepared to commit itself without the right to withdraw in the event of change of Government policy. In the event, there was no change of Government in 1981.

2.7 The Participation Agreement

2.7.1.
Contemporaneously, means of funding had been investigated. Eventually Citibank in the USA, with the support of many other banks, arranged for longterm project financing up to a limit of US $ 1,700,000,000, on a non-recourse basis. The banks sought and were given guarantees from Mobil as to the plant’s technical viability and a guarantee from the New Zealand Government of full utilisation of the plant.
2.7.2.
A Participation Agreement was entered into between the Government and Mobil on 12 February 1982, but many months of negotiation had taken place prior to final agreement. There has been conflicting evidence from the parties concerning the negotiating stances taken, and the conflict is not easy to resolve. One witness describes the negotiations as ‘hard-nosed’. The Ministry of Energy created a branch of its operations designated as the Gas and Geothermal Trading Group (GGTG) and many of the Crown’s witnesses were officers of that group.
2.7.3.
The Memorandum of Understanding had contemplated oil companies other than Mobil being shareholders in the tolling company as a condition of the right to purchase and these companies participated in discussions right up to February 1982. In the end they elected not to take shares in the new company. New Zealand Synthetic Fuel Company Limited (NZSFC), which was formed to take over from the jec. Its capital was subscribed as to NZ $225 million by the New Zealand Government and as to NZ $75 million by Mobil.
2.7.4.
Subsidiary agreements were entered into, as was necessary, in relation to the services to be provided by various subsidiary Mobil companies. These related to the supply of technical and management services, supplies of catalyst, a licence to use the secret process and a guarantee by Mobil of plant performance.
2.7.5.
An agreement was also made between the Government and the nzsfc for delivery of Maui gas to the plant and for the uplifting of the 570,000 tonnes of synthetic fuel which would be produced each year. As with the refinery, the Government was to pay a tolling fee to NZSFC.
2.7.6.
The parties to the Participation Agreement were the Crown, the Mobil Corporation and various subsidiaries and the NZSFC. It dealt with the capital structure, the construction by NZSFC of the plant and its operation, and the normal provisions as to Board of Directors, shareholding and the like. As already mentioned, it provided, in the event of dispute, for referral to ICSID arbitration (Article VII).

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.

2.7.7.
It is noted that by February 1982, the international oil scene had changed substantially since the time of the Burma Lodge meeting (November 1979) and the Memorandum of Understanding (April 1980). In the Memorandum of Understanding, it had been provided that there would be agreements between the Government and the companies providing for offtake rights, prices and the like. Each company would be entitled to negotiate for appropriate percentages, but at that stage no obligation to take was spoken of. In the shortage situation then pertaining, that was probably irrelevant. Right to participate would be dependent upon contribution.
2.7.8.
By February 1982, prices of overseas crude oil had dropped by approximately a third. Projections were that increased volumes would be available to the point of oversupply. The overseas finance for the project had been negotiated Mobil and the Government had spent large sums of money in the preliminary work and the Government was politically committed to the scheme. But the other oil companies refrained, at the last moment, from participating.
2.7.9.

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

2.7.10.

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.

2.7.11.
It will be recalled that Mr Falconer’s evidence is that it was always the Crown's view that equal prices for all purchasers was fundamental to the Crown’s obligations in the matter. It has also been shown that the change from Mobil option to Mobil obligation was due to Government pressure exercised up to the lime of the Participation Agreement—in November 1981. Mr Falconer had minuted the need to achieve commitments rather than options (ABD 17/54) and a Treasury official minuted that "strong arm tactics may have to be used" (ABD 17/84). In January 1982, Mr Milkop wrote that he intended to force minimum offtake on Mobil (ABD 17/155) and on 10 February the Government threatened that failing agreement on offtake commitment, it would act by regulation (ABD 17/220). So the very substantial benefit received under the price adjustment concept had been earned by Mobil’s input and undertakings and these were very important parts of the bargain.

2.8 Developments subsequent to Participation Agreement

2.8.1.
The Participation Agreement was signed on 12 February 1982. Work commenced immediately the various ancillary agreements were reached and formalised and all parties seem to have co-operated well. As a result, the building programme was completed within time and below budget. The plant produced its first shipment for Mobil in November 1985 and was fully productive in mid-1986. The Ministry of Energy had set up the Gas and Geothermal Trading Group (GGTG) and that organisation assumed responsibility for sale of the new fuel.

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.

2.8.2.
Negotiations look place over the period of mid-1982 to mid-1986 between all the companies (including Mobil). Volume 18 of the Agreed Documents contains notes of monthly meetings between the parties when supply and price matters were debated.
2.8.3.
Matters canvassed included the desire of the Crown to have the companies contract for all the syngas on a ‘take or pay’ basis; modes of costing alternative to the rrp; the availability of MFP conditions for all purchasers—with expressions by the Crown that such provision should apply only to sales within New Zealand.
2.8.4.

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.

2.8.5.
Consequently, "Interim Procedural Arrangements", frequently referred to as the Interim Agreement, were entered into (ABD 2/291) where by all companies agreed to the combined purchase of 100% of the output, in given proportions. Prices were fixed for all companies except Mobil by a formula related to Singapore posted prices plus additives but with a price adjustment (MFP) clause. Mobil's purchases were governed by Article 11(1).
2.8.6.
The Agreement was signed on 10 December 1985 to run only to 30 June 1986—this being the anticipated date for the coming into force of the then proposed enactment of a new Commerce Act. Government officials held the view that the provisions of the Interim Arrangements would contravene that Act—a view subsequently confirmed by the Commerce Commission. The Ministry operated under the Arrangements until it was allowed to lapse on 30 June 1986 in compliance with the Commission's ruling.
2.8.7.
In late 1984 there had been a change of Government and it is impossible to resist the conclusion that the industrial development policies of the previous administration now found little favour. It is clear that from 1985 onwards the Government was becoming disenchanted with its contract with Mobil—principally, it appears, in respect of the MFP provisions of Article 11(1)(e). The inter-office correspondence and Departmental minutes now available show that officials had for some time been apprehensive that the Crown’s bargain was not a good one and it would be desirable to escape from the price adjustment obligation.

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.

2.8.8.
It may be worth noting for later reference, that at that time, the Commerce Bill was receiving consideration from a select Committee, and Mobil, along with others, appeared before that Committee. This step was doubtless prompted by knowledge of the Ministry’s view of Clause 27 and the MFP clause. Mobil submitted that the Bill, when enacted, should not be retrospective, or alternatively the Synfuel operation should be exempted from its provisions in accordance with dispensations made in respect of some other transport contracts. These submissions were not accepted, but the fact that they were made has some relevance on the question of notice. There appears to be force in submissions from Mobil that documents indicate that the New' Zealand Government in 1985-86 was irked by Mobil's contractual rights and was receiving continuing pressure from the other companies to continue to give effect to the equal price concept in the Memorandum of Understanding (ABD 18/251).
2.8.9.
That situation prevailed only so long as the Interim Arrangements remained in force. With the expiry of that situation approaching, the Ministry of Energy was hopeful of continuing with a similar arrangement (ABD 18/232 & 253) to ensure that all its product could be sold.
2.8.10.
However, aselsewhere described, the Commerce Commission advised Ms Trewavas of GGTG on 29 May 1986 that the Interim Offtake Arrangements contravened the Commerce Act. The various companies were so advised on,3 June. Ms Trewavas did not, however, advise Mobil that on 26 June a Commission official had written that Article 11 (1)(e) standing alone was not of concern in terms of the Act—more of this elsewhere.
2.8.11.
Because the Interim Procedural Arrangements lapsed, Mobil pressed for implementation of Article 11(1) for it needed confirmation of its purchase price entitlement. The GGTG expressed resistance and raised questions of illegality.
2.8.12.
Mobil did not agree, and on 12 June 1986 asked for (ABD 2/305) an assurance that the subclause would be applied The matter of great concern to Mobil would of course have been the MFP clause and the price adjustments which it claimed were due.

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.

2.8.13.
On 28 August GGTG replied saying, inter alia, that "we believe this article may not be enforceable after 1 March 1987 under the provisions of the Commerce Act" (The operation of the Act did not affect antedated arrangements until that date—Section 111(1)). It did acknowledge that until that date it was bound by the price adjustment clause and said it would honour it. There were, however, differences of opinion on how the adjustment would be calculated. Mobil replied disagreeing with GGTG both on the question of calculation and, as before, on enforceability and breach.
2.8.14.

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.

2.8.15.
There was a meeting, at Mobil’s request, between that company’s officers and Ministry of Energy personnel when Mobil asked for discussion as to the reasons for the Crown’s view as to unenforceability, and requested some solution of future pricing policy. The Government officials remained evasive.
2.8.16.
In December 1986 and January 1987, there was partial respite. Mobil had quantified its price adjustment claims for the third quarter of 1986 at $6,028,603. The Crown responded by denying liability but by agreeing to pay and did pay the sum of $5,482,216 without prejudice. The same procedure of a ‘without prejudice’ payment of $8,965,051 occurred in respect of the fourth quarter of 1986.
2.8.17.
On February 1987, the Government representative stated at a meeting with Mobil that it was now firm that it would not give effect to Article 11(1)(e) alter 1 March 1987 and this was confirmed by letter on 13 February 1987 (ABD 2/335).
2.8.18.
On 19 March 1987, Mobil wrote to the Minister of Energy contesting the decision and advising that it proposed to refer the dispute to ICSID arbitration pursuant to Article VII and this was done on 10 April 1987.
2.8.19.
Despite its stand that the price adjustment clause was totally unen forceable as from 18 March 1987, the Crown, as was proper, did agree to make without prejudice payments thereafter on an interim price basis to avoid a "difficult commercial position" (ABD 2/335 & 19/99) and we understand that situation still applies.

2.9 Jurisdiction of the Tribunal

Following the referral to ICSID described in para 2.8.18 above, the Crown on 6 May 1987 commenced proceedings in the High Court of New Zealand, seeking an order by way of injunction against Mobil from proceeding by way of ICSID arbitration. Mobil moved to stay such Court proceedings.

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.

3. The Questions

Because the Tribunal finds it convenient to deal with the Questions posed for its determination in a sequence other than observed in the Requesting Party's Memorial and Opening, we propose to set them out before discussing them individually and recording our findings on them.
3.1.
The Questions requiring answer by the Tribunal were originally posed in the Requesting Party's (Mobil's) Request to the Secretary General dated at Washington DC on 10th April 1987, and appear at pp. 28-30 of that document enumerated as 8.1.1 to 8.1.8
3.2.
These questions were amended and reframed by counsel for the Requesting Party at the commencement of hearing at Washington on 31st Octoter 1988 and appear in the typed copy of that opening at pp. 15-18 as Questions (a) to (1) with one further minor amendment on page 6 of a Supplement dated 2nd November 1988. This amendment was consented to by the Other Party and approved by the Tribunal, consequent upon the Pre-Hearing Conference on 28.10.88.
3.3.
The Other Party (The Crown) pleaded to these questions by way of denials and affirmative defences to be found in its Counter Memorial dated 14th June 1988, its Rejoinder dated 8th July 1988 and its Response to Mobil’s Opening & Supplement dated 3rd November 1988.
3.4.

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.

Question (a)
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:
Request 8.1.1.
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

Question (b)
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.
Request: 8.1.3
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)
Request: 8.1.4
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.
Request: 8.1.5
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.
Request: 8.1.6
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.
Request: 8.1.7
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.
Request: 8.1.8
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.

3.5.
It will be observed that Question (h) was abandoned and the answers to questions (d) and (e) can more conveniently be incorporated in the answers to the separate issues posed in the other questions and declaration as to remedy if any.

4. Fiduciary Duty Question

4.1.
The issue that there was a breach of fiduciary duly by the Crown was first raised in Mobil’s Memorial of 4 May 1988 which was the first formal pleading in the case. The allegation in paragraph 7 is in somewhat general terms to the effect that the relationship between the parties, consequent upon the Memorandum of Understanding and the Participation Agreement, was that of the Joint Ventureship and that each owed to the other fiduciary obligations of "loyalty and good faith". It was alleged that the Government was in breach of that duty by failing, from August 1986 and thereafter, to explain or elaborate to Mobil its reasons for considering that the MFP clause was in breach of the Commerce Act, and in particular Section 27.

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.

4.2.
The Crown reacted firmly in its Counter-Memorial of 14 June 1988, pleading that the relationship between the parties was a purely contractual one spelled out in the Participation Agreement and noting that, by virtue of that document, the Memorandum of Understanding had come to an end. In addition, other supporting contracts ancillary to the Participation Agreement which also defined responsibilities, risks and profits of the parties, and definitions of their respective duties and entitlement, comprehensively spelled out the obligations owed by each to the other, and the limits of the same.

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.

4.3.
Mobil returned to its claim under this heading in Part III of its Reply (28 June 1988). It is not without significance that the heading to that section is The Risks Of The Project—Contractual and Fiduciary Duties. Part III describes at length the interaction and co-operation between the parties throughout the most complex project and there is no doubt that this occurred in great measure during the planning and construction. However, as will be seen from the Question asked in this area, the breaches of duty alleged relate to matters arising after completion of the plant and its commissioning, and turn on the operation of the pricing subclauses 11(1)(d) and (e) between buyer and seller at a time when the main venture had been achieved; that is to say, the questions concerned sale conditions in respect of the finished output of the plant, which sales were the subject of contractual definitions. We shall return to this later.
4.4.

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:

Commerce Commission,
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.
Yours sincerely,
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.

4.5.
We have therefore to approach two questions: First, what was the nature of the obligations owed by each party to the other, and does the additional allegation of the existence of a fiduciary duty impose any higher or wider burden than would exist under the many contractual documents in existence governing the parties’ relationship? Secondly, if there is a wider set of duties or obligations, have these been breached by (a) failure on the part of the Crown to discuss the reasons for its interpretation of the Commerce Act in the second half of 1986 and (b) did the failure by Ms Trewavas and/or other officers of GGTG to communicate the contents of this letter of 26 June 1986 adversely affect the position of Mobil in relation to the matters presently in issue.
4.6.
The case most relevant to the New Zealand jurisdiction is one extensively canvassed by counsel on both sides; viz Devonport borough Council v Robbins (1979) 1 NZLR 1. The Devonport Borough Council anil Robbins had entered into a deed for reclamation by Robbins of an area of mudflats in the Auckland Harbour for a multitude of uses including the provision of housing land, parks and reserves, marinas and other water sport facilities. The reclaimed land would be within Devonport Borough and financial benefit would accrue to both parties. The developer was obliged to proceed in stages and, as to the work progressed, various alterations to local body planning restrictions would be required. For this purpose applications for dispensations would have to be made to the Borough as the relevant Planning Authority. The proposal met with opposition from a number of local residents; the scheme became a political issue; the opponents stood for and won control of the local body and thereafter determinedly set about refusing to co-operate with the developer in advancing the scheme and particularly refused the needed planning changes. As a result the entire scheme was aborted.

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.

4.7.

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.

4.8.
If one returns to the Devonport case, it will be found that the approach by counsel for each party almost overlapped. Mr Temm for the developer based his submissions on the concept of duty between joint venture contractors engaged in a step by step co-operative operation, claiming that there was a duty to act "fairly and reasonably". Mr Wallace for Devonport accepted that a degree of cooperation was required, including discussions as the project progressed; but he based this on general obligations resting on contractual liability. In discussing these respective submissions, the learned President said: "There is no practical difference for the purpose of this case."—a sentiment which, with respect, we think is equally applicable to the present case.
4.9.

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.

4.10.
If the existence of a fiduciary relationship was a necessary prerequisite for the Tribunal’s consideration of breach of obligations by the Crown in the two ways alleged, we would tend to the view' that, given the fact that they arose post completion, this had become a contractual relationship between buyer and seller.
4.11.
However, in view of the way in which this matter has been put and the headings under which the particular submissions have been made, il is perhaps convenient and courteous to deal with the two matters alleged. In discussing these, it should be remembered that the allegations of breach of contractual duly, express or implied, in relationship to the calculation of rrp as the basis for pricing are dealt with elsewhere under the Uncertainty Question.

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.

4.12.
As has already been said, at the dale when the Mobil Memorial was filed, the letter of 26 June 1986 from the Commerce Commission to GGTG had not been discovered, so that non-disclosure of that item was not pleaded at that stage. The allegation at that lime was (Memorial 7.1.1) that the Crown "had not discussed with Mobil the basis of the alleged unenforceability of the MFP clause".

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".

4.13.
Of more direct relevance to the issue at present under consideration, however, is correspondence which passed between GGTG and Mobil in mid and late 1986. On 29 May 1986, Ms Trewavas of GGTG had been advised by the Commerce Commission that the interim industry agreement under which syngas had been sold to all oil companies at comparable prices since December 1985. was a price fixing arrangement and accordingly was in breach of the now legislated Commerce Act (Section 30). However, as the interim agreement was due to expire on 30 June 1986, the Commission proposed to take no action but advised that such price fixing could not continue thereafter. Ms Trewavas notified Mobil of this situation on 3 June. On 12 June. Mobil acknowledged that advice which related to the equal standing which all four oil companies had had under the interim agreement prior to that time, but more particularly Mobil sought confirmation of the application of Article 11(1)(e) to sales which would be made to it thereafter and suggested a formula. No response was forthcoming from the GGTG and on 11 August, Mr Makeig of Mobil again wrote pressing for an answer as to the pricing arrangements and he put forward a specific basis of calculation. This document is ABD Vol 19/4.
4.14.

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.

4.15.
We turn to the allegation of failure to discuss the impact of the Commerce Act and in particular to disclose to Mobil the reasoning behind the Crown attitude. We consider in particular the submission made by Mobil that had full and frank discussions taken place, its officers would have been able to persuade the Government’s representatives to change their stance and accept liabilty for payments in accordance with Mobil's claims concerning the operation of the MFP clause.

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.

4.16.
The other allegation later developed because of documentary discovery, is that Ms Trewavas, having received the letter dated 26 June on (she says) 30 June, was aware that an opinion was held by an officer of the Commerce Commission that the MFP clause did not breach the Commerce Act and that she deliberately withheld this information from Mobil. The letter has been quoted already. Ms Trcwavas gave evidence. She said that now that she looks back at the circumstances prevailing at the time, she believes that she understood that letter as merely incidental to discussions she had held and decisions which had been given by an officer of the Commerce Commission as to the illegality of the Interim Arrangement which was due to expire on 30 June. She says that she was at that lime concentrating her attention on sales for the third quarter of 1986, about to commence. She was influenced by the advice already received that the Commerce Commission regarded the interim agreement as being in breach of Section 30 and not to be available after 30 June. She says that she took the reference to the Mobil clause as relating only to the same quarter—for Mobil’s entitlement under the interim agreement had been expressed as derived from Artice 11(1) though co-extensive with the other three oil companies’ entitlement to equal rights (ABID Vol 2 pp. 298 & 299). By 30 June, the dale of receipt of that letter, she had, so she says, negotiated sales contracts for the ensuing quarter. Consequently, she thought the letter of no greater relevance from then on and she filed same and forgot it.
4.17.
She was cross-examined vigorously about the wording of the letter. It was pointed out that the reference to Mobil's position was contained in a separate paragraph of the letter and referred to a different contract. Much play was made of the ready acceptance by GGTG of the Commission's advice concerning the invalidity of the interim agreement and yet ignoring the supposed validity of the Mobil contract. It was put to her that she had deliberately filed that letter and did not advise others of it because it was unhelpful to the course she was hoping would be followed, namely the frustration of the Article 11 provisions by virtue of the enactment of the Commerce Act. We do not find il necessary to pronounce upon this challenge to Ms Trewavas’ credibility. The simple fact is that the contents of the letter were not made known to Mobil. What, if anything, was the effect of that?
4.18.
In the Tribunal’s view, the non-availability of the information in this letter until mid-1988 would not have effected the course of events. At one stage, it was submitted that this was a "comfort letter". Plainly it was not and that submission has been abandoned. It was an expression of opinion by a junior officer of the Commerce Commission. At the highest, it is now submitted that, given knowledge of this favourable indication, Mobil might have been moved to have applied officially in July or August 1986 for a comfort letter or for an authorisation under Section 48 of the Act. Mobil may well in any event have given consideration to those possibilities, but we accept the evidence of Mr Collinge, Chairman of the Commerce Commission who appeared as a witness, that the letter would have borne no weight with the Commission had a comfort letter or a Section 48 application been made. The considerations which presumably persuaded Mobil to withdraw its comfort letter application in 1987 would doubtless have been equally valid in 1986 at a time when Mobil were considering their position and acting under legal advice.

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.

4.19.
In our view, lack of knowledge in 1986 was of minimal significance given the course of subsequent steps. Consequently, we are of the view that, on whatever basis the duly or obligation of the Government towards Mobil arising from their relationship may be spelled out, no loss has been demonstrated by Mobil to have been suffered as a consequence of these two items of Crown behaviour designated as being breaches of fiduciary and/or contractual duty.
4.20.
On this question, therefore, we find against the Requesting Party.

5. The Interpretation Questions

5.1.

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 [1971] 1 WLR 1381 and Reardon Smith Line Limited v Hansen-Tangen and Others [1976] 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 [1877] 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.

5.2.

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.

5.3.

In the same speech Lord Wilberforce also made reference (at 997) to what Lord Dunedin said in Charrington & Co. Limited v Wooder [1914] 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.

5.4.

The Tribunal also refers to and places reliance on the words used by Lord Reid in Schuler A.G. v Wickman Machine Tools Sales [1974] 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.

Export Sales and Article 11.1(d)

5.5.
The first issue to be addressed is whether export sales are required to be taken into account in calculating any adjustment to which Mobil is entitled under Article 11.1(e). Mobil contends that all sales (including export sales) are required to be taken into account in this calculation, whereas the Crown submits that it is entitled to sell syngas to overseas companies for distribution overseas without causing any adjustment to be made to the price payable by Mobil.
5.6.
The Crown submits that it is important to consider the grammatical structure of the price adjustment provision in Article 11.1(e), and that it is expressed as a proviso. The argument runs that in structural terms the opening words of the sub-clause outline the substantive broad circumstances within which the clause is to operate; the precise terms in which it applies are then stated in the form of a proviso which stipulates the specific circumstances of application.
5.7.
Al the time the contract was made. New Zealand petroleum wholesalers were importing a substantial quantity of crude oil. The market fopcrude oil was then and had for a considerable time been an international market. International crude prices were a major factor at the time of the contract in the cost of New Zealand petroleum. Those prices were expected to increase, although it was recognized as a possibility that they might decrease (Falconder, AT, 17). Those who negotiated the contract were well aware that if the international crude prices decreased, it might become cheaper to import crude than to purchase the potentially costly syngas.
5.8.
The parties’ common expectation clearly was that all of the synfuel not purchased by Mobil would be sold to the other oil companies in New Zealand (Faclonder, AT, 17). Indeed, until very shortly before the Participation Agreement was signed, the Crown had been negotiating with those other oil companies with a view' to entering into agreements with each of them to sell them a share of the synfuel (equal to their then market share, and on a basis similar to the Mobil entitlement, ie. with an MFP clause in relation to price). Various earlier drafts of the Participation Agreement contained the expression "the Crown shall be free to sell in New Zealand". It may be that the inclusion of these words "in New' Zealand" was simply a reflection of the parties’ common expectations, that other domestic wholesalers would purchase whatever synfuel Mobil did not take. Alternatively it is possible that the opening words of sub-clause (c), down to the proviso, were declaratory of the fact that no party in New Zealand, other than Mobil, had an entitlement to any percentage portion of the synfuel. Be that as it may, the Crown was plainly the owner of all the synfuel produced at the plant, and had a natural entitlement to sell all the synfuel not purchased by Mobil and to do so anywhere in the world. Thus the opening words of sub-clause (c) did not confer any contractual right on the Crown and it is improbable in the extreme that they were intended to confine the Crown's existing natural entitlement to a right to sell synfuel only in New Zealand, To that extent therefore the opening words of sub-clause (e) may be treated as no more than a statement of the obvious. On the other hand the main contractual purpose of sub clause (c) is the grant to Mobil of the "most favoured purchaser" light. As such, the logical position for the mi p proviso would have been within sub-clause (d), and as the concluding half of that sub-clause. The inclusion of the MFP proviso in a separate clause may be explained by the importance which Mobil evidently attached to its existence. Given that the proviso was to appear in a separate sub-clause, il became necessary to frame some appropriate introductory wording, since one would not have expected the sub-clause to have commenced with the word "provided".
5.9.
Furthermore, the proviso does not operate as a limitation upon anything contractually granted or dictated by the opening words of sub-clause (c). As we have said, the proviso operates, properly speaking, upon the pricing provision, the rrp clause, which is contained in sub-clause (d). We are, of course, conscious of the cases which say that in a statutory instrument a proviso will frequently, if not usually, be expected to be limited by the main clause on which il is dependent and which it qualifies. These cases, however, also demonstrate that a proviso may show, from the context in which it appears that it is intended to add to and not qualify that which precedes it. Here the proviso appears to us to be dependent upon and to qualify the pricing provision in sub-clause (d).
5.10.
The opening words of such-clause (e) did not in our view provide a limiting geographic context in which the proviso was to operate, nor, for the reasons we have set out, did they provide any geographic context. The words "in New Zealand" were descriptive of the parties’ common assumptions, and not productive of contractual effect. Why then should their inclusion have the effect that the mi p clause was not to operate in relation to any sale at a relevant price occurring "outside New Zealand"?
5.11.
The known intentions of Mobil were to ensure that in purchasing its obligatory percentage under Article 11.1(a), Mobil obtained the most favourable price for that offtake, ensuring that none of its competitors bought for less. Mobil was not to be disadvantaged by purchasing its obligatory portion at a comparatively high rrp whilst its competitors were able to buy syngas for less. It was possible that its competitors might purchase refined petroleum as an imported product, or from the Refinery, as well as from the Synfuel plant. If the agreement was in this respect to operate in a commercially rational manner, it was necessary for the proviso to operate in relation to all sales of syngas wherever made. If the Crown’s contention as to the interpretation of sub-clause (e) were correct, the Crown would have been able to avoid the operation of sub-clause (c) completely (had it been minded to do so) by selling all the remaining syngas overseas in any quarter in which sales were difficult, thus leaving Mobil to pay for its obligatory portion at the rrp, a price which would then be undisciplined by any market considerations, and might be much higher than the prices achieved by Mobil’s competitors. Alternatively the Crown could avoid the effect of domestic prices falling below the rrp by selling only to domestic purchasers who tendered at or above the rrp, selling what was left of the syngas overseas in that quarter. If the parties had turned their minds to these possibilities, they would, we think, have said that this was not their intention. Unless the parties make il quite explicit that they intended to bring about a result so apparently unreasonable (see per Lord Ried in Schuler A, G. v. Wickman, supra), a court would not adopt such an interpretation if any other (and more rational) view were open.
5.12.
If the Crown’s contention were correct, it would become necessary to determine which sales of syngas were properly to be classified as export sales. If the proviso were to be construed as limited to sales of gasoline "in New Zealand", that expression might mean, inter alia, (i) a sale pursuant to a contract made in New Zealand, (ii) a sale where the property in the syngas passed to the purchaser in New' Zealand, (iii) a sale where the syngas was sold to one of Mobil’s New' Zealand’s competitors, for the purpose of distribution and consumption in New Zealand, (iv) a sale pursuant to which syngas was actually delivered to one of Mobil’s New Zealand competitors, and (v) a sale pursuant to which syngas was in fact consumed within New' Zealand. No doubt there are other possibilities. The wording of sub-clause (e) would lend itself readily, on the Crown’s interpretation, to alternatives (i) and (ii), but not at all happily to the remaining three situations. Mobil would however have legitimately been concerned by any of the other types of sale referred to and the Crown could offer no rational explanation as to how sub-clause (c) was intended to operate in a situation where an "export sale" of syngas was originally made, but in which the intention of the parties, or the purchaser, changed after the sale was made and the syngas was thereafter delivered or consumed within New' Zealand.
5.13.
If the place of contract or of delivery had the contractual significance contended for by the Crown, absurd consequences would, in our view, follow. A variety of devices would have been available to a party wishing to avoid the operation of sub-clause (e), such as the making of CIF sales, or an insistence upon the making of contracts outside the physical boundaries of New Zealand. During argument counsel for the Crown conceded that in the case of a sale made to an export destination where the foreign purchaser changed its mind after purchase and the syngas was then resold into and consumed within New Zealand, such a situation would necessarily have to be covered by the proviso as a sale available to be used in calculating any adjustments to be made to the price paid by Mobil. In the absence of such a concession, the operation of the proviso would have consequences which were commercially pointless and cannot have been intended. But no logical basis for the concession can be derived from the wording of sub-clause (c). Nor was it possible for Crown counsel to advance any good commercial purpose for excluding export sales from the operation of subclause (c) or for limiting its operation to sales in some way made within New' Zealand. Had the parties wished to achieve the result for which the Crown contends, it would have been a simple matter to insert the limiting words "in New Zealand" in the proviso itself, either before or after the words "other than MONZ". The words used in the proviso itself are in fact general, the market for crude was international, and Mobil would potentially have been much disadvantaged by being left with syngas purchased at an expensive rrp, while the Crow'll had the ability to sell down the remainder to export markets (including to Mobil’s competitors, whomever they might be, in those markets), while Mobil’s competitors purchased less expensive gasoline either from the Refinery or by imports or on the spot market. In our view, the proper and commercially sensible interpretation of sub clause (e) requires that all sales of syngas, whether made locally or for export or to overseas companies for distribution overseas, should be available for inclusion within the calculations made under subclause (e). Such an interpretation accords with the general words used, avoids the absurd and illogical consequences which we think the interpretation contended for by the Crown would produce and is consistent with the known intention of the parties.
5.14.
We add that the interpretation we prefer not only gives a commercially rational meaning to the clause but also is consistent with economic logic. We deal later with the Commerce Act issues and there conclude that there is no separate New Zealand market for syngas—rather syngas is part of the international market for gasoline and gasoline inputs. Thus, by economic reality, GGTE competes with overseas suppliers of gasoline in its disposal of syngas, and Mobil and the other three New Zealand wholesalers compete with overseas companies in their purchases of syngas. Export sales of syngas are therefore plain a part of the relevant international market. We do not base our conclusions primarily on these considerations but it follows that to interpret the clause in the way we prefer would accord with economic and commercial reality.

Access of Auditor to Export Sales Documentation

5.15.
The Crown has consistently refused access to the independent auditor appointed by Mobil to export sales information, on the basis that the price adjustment clause relates only to sales within New Zealand. The answer given by us to the previous question dictates our answer to this question also Mobil must, through its independent auditor, have access to all sales documentation, including export sales. However, even if our answer to the first question had been different and if export sales were to be excluded from the operation of the proviso, the terms of Article 11.1(f) require that the Crown should make available to the auditor "such documentation of the Crown as shall enable such auditor to advise Mobil 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 Mobil." Having regard to the difficulties of interpretation and application which would in any etent be inherent in the construction contended for by the Crown, it would seem accessary for the auditor to have access to information concerning all sales, since only thus could the auditor determine whether a sale had been made genuinely for the domestic market, or to some foreign destination. For all these reasons we conclude that the independent auditor should have access to all sales and documentation including export sales.

Payment of Interest Following Adjustments to Price

5.16.
The Crown submits that Article 11.1(c) on its terms imposes no requirement that interest be paid. Only in a case where the Crown is late in making payments under the provision, it is argued, can an obligation to pay interest be imputed. The Crown further contends that the point at which interest might run on that basis must allow for the quarter concerned to conclude together with a reasonable further period in order to calculate the adjustment if required and to make payment of it to Mobil. The Crown argues that only after that point Mean it be said that the (town is late in payment to an extent that interest should run. If a date is to be fixed the Crown contends that interest should run from the end of the calendar month following the expiry of the quarter concerned.
5.17.
The Crown submission depends upon the assertion that Article 11.1(e) imposes no requirement that interest be paid. That is however not the point of the sub-clause. If the price adjustment clause is triggered, it requires that the price of syngas to Mobil be adjusted to provide Mobil with a comparable price. If Mobil paid too much it is not put into a comparable position unless the difference is refunded, with interest at the prevailing rate. The Crown’s obligation flows, not from an obligation to make payments, but from an obligation to adjust the price, to provide Mobil with comparability.
5.18.
The matter can be tested another way. The parties might have given effect to the agreement on the basis that Mobil was not to pay for its obligatory portion of syngas until the correct price had actually been ascertained. Interest might then have been payable, notionally, by Mobil from an appropriate time after the syngas had been delivered (say seven days or whatever other period might have been treated as commercially reasonable). On this basis, it would have been clear that Mobil was not paying more than its adjusted obligation, nor was the Crown receiving any unintended windfall by holding some of Mobil’s money for an indefinite period without paying interest on il. As a matter of interpretation it should make no difference that the correct adjustment may not be made until the end of the quarter, or even after the quarter’s end. The correct position could be achieved by the Crown accepting delayed payment with interest; or negotiating with Mobil (under Article 7.1) for immediate part-payment, on delivery, and payment at quarter’s end of the balance with interest at an agreed rate. A further alternative might be for the Crown to make an adjusting payment, at quarter’s end, with interest payable should that payment be delayed.
5.19.
Mobil contends that the words "shall be adjusted" make sense only if Article 11.1(e) is read so as to require that either (i) the price charged to Mobil be reduced immediately upon the conclusion of a sale to a third party at a lower price, with an immediate credit to adjust for prior sales to Mobil in that same quarter, or (ii) the parties employ the equivalent of such a procedure, such as payment at the end of the quarter with interest to reflect the delay in adjustment.
5.20.
In our view the substance of Mobil’s contention is correct. If Mobil must wait four months to receive a payment under Article 11.1(e) without receiving interest as the Crown contends, then a significant penalty would be worked on Mobil by way of cashflow disadvantage. The Crown’s contention would also be utterly inconsistent with the apparent aim of Article 11.1(e) which is clearly to ensure that Mobil pays no more than its competitors for syngas it is obligated to purchase. If the price (the rrp) paid by Mobil was too high, then Mobil’s price and terms have not been adjusted to a state of comparability unless Mobil is put in the same position vis a vis its most favoured competitor, as if it had paid the correctly calculated price. On the assumption that the MFP clause has been triggered, Mobil has overpaid for its syngas and the Crown has been holding money to which it can now been seen to have had no entitlement. Accordingly the proper construction of the clause requires that the Crown should pay interest to Mobil in relation to amounts overpaid calculated from the time the overpayment was in fact made.

Averaging of Sales. The Manner by which the MFP Price is to be Obtained

5.21.
The question raised by this issue is whether, in calculating any adjustment to which Mobil is entitled under Article 11.1(e) an average shall be taken of all sales to third parties made at a price lower than that paid by Mobil or whether Mobil is entitled to the price paid by the particular third party purchaser who achieved the lowest price below the rrp. Mobil contends that if the clause is triggered, Mobil becomes entitled to the lowest price paid by any other purchaser in any quarter, regardless of the quantity bought and regardless of whether that customer paid higher prices for other quantities of syngas in the same quarter. The Crown’s contention is that if the clause is triggered Mobil becomes entitled to a price achieved by calculating the weighted average of all sales of syngas to all persons in that quarter at prices more favourable (lower) than the rrp.
5.22.
Both contentions made by the parties obtain some support from the wording of the proviso. Neither of these contentions, however, appears commercially rational, nor do they accord with the parties’ presumed intentions, nor do they provide a price and/or terms which would seem "comparable" with the position of the most favoured competing purchaser.
5.23.
Article 11.1(e) must be construed in the light of its operation in a variety of different situations. If in any one quarter sales of syngas were made to, say, three of Mobil's competitors, but which involved one purchaser paying substantially more than the other two, a process by which all three prices were averaged as a means of obtaining the MFP price for Mobil would inevitably leave Mobil paying less than the highest price but more than the price paid by one or both of the other competitors. On the other hand a competitor of Mobil might well pay a price at or above the rrp for a very large quantity of syngas and then purchase a much smaller amount perhaps near the end of the quarter at a price well below the rrp. Mobil contends in that situation that the operation of sub-clause (c) entitles Mobil to pay for its obligatory portion of syngas at the much lower price paid for the small portion purchased by that competitor near the end of the quarter. It is impossible to offer any commercial justification for an interpretation which would have such consequences, nor does it seem likely that this was the intention of the parties. Furthermore, any such contention would produce a price lor Mobil which could not be described as comparable with the price paid by Mobil's most favoured competitor for its gasoline for that quarter. The contention made by the Crown seeks to convert the clause from a most favoured purchaser clause to a most average purchaser clause. On the other hand the Mobil contention would entitle Mobil to pay the minimum price paid by any purchaser, even for one litre of syngas used in a lawnmower (as was put in the course of argument) notwithstanding that the same competitor had purchased a large additional quantity at or above the rrp.
5.24.
The proviso in sub-clause (e) requires first that if in any quarter the Crown "sells gasoline to persons other than Mobil and at a price and/or on terms which are more favourable" than the rrp, then the clause is triggered. The plural noun "persons" does not in our view carry with it the consequence that sales to all persons at a price more favourable than the rrp must be averaged. Such an operation for the sub-clause could have no logical basis, and would result in Mobil invariably paying more than at least one other competitor in any case where averaging of more than one purchaser’s sales was necessary. The interpretation contended for by Mobil requires particular emphasis to be given to the words "at a price" and ignores the notion of adjustment for the purposes of comparability. That interpretation would also involve the notional insertion of the word "any" before "Gasoline" where that word first appears in the proviso.
5.25.
In the case of both interpretations contended for by the parties, sales at or above the rrp made to the same purchaser in the same quarter are to be ignored. There is some justification in the actual wording of the proviso for such this assumption, but such a construction appears quite commercially irrational and most unfair to the Crown in its inevitable consequences. It is difficult to believe that the parties intended to ignore that a competing purchaser may have bought 95% of its syngas for any one quarter at a price equivalent to or even above the rrp, whereas the fact that the remaining 5% was purchased below the rrp should then entitle Mobil to purchase at that lower price. Any such result would inevitably give Mobil an enormous overriding competitive advantage and would result in the terms on which syngas was sold to Mobil remaining better than "comparable", in our view the critical word in sub-clause (e) is the adjective "comparable" which is to govern the price and/or terms which Mobil is to be given, once the operation of that clause has been triggered.
5.26.

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.

6. THE Uncertainty Question

Deregulation of the oil industry in New Zealand raises the issues whether the contract is uncertain or now impossible to perform. In the course of the proceedings these issues were referred to for convenience as the "Uncertainly" question.
6.1.

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 [1971] 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.

6.2.
This argument was expanded in the Crown’s opening submissions, where it was submitted that the same mechanism (the rrp) negotiated and agreed upon by the parties could no longer be utilised following deregulation because of a variety of factors. Il was suggested that the oil companies no longer supply nor have any incentive to supply the input cost information to the independent auditors, Coopers & Lybrand, or to the Ministry of Energy. Further, it was said that the APPI Index and other indices of international prices of petroleum feedstocks or for imported leaded gasoline (which had been suggested by Mobil as alternative costing modes for replicating the rrp mechanism) do not and cannot in fact replicate the actual costs incurred by the oil companies. The Crown conceded that from such indices it is "possible to average the prices being sought" but argued that that exercise differs from ascertaining the actual feedstock prices paid by oil companies. The Crown argued that the use of the APPI Index would not take into account a variety of matters such as special types of pricing arrangements due to periodic access to cheaper sources, any premium that may have been paid for the security of supply or reduction for a long term purchase agreement, price differentials, foreign exchange fluctuations, and matters such as discounting for volume. The Crown also argued that any/ substitute rrp mechanism used in a deregulated market is inherently different from the rrp mechanism the parties agreed to apply in the regulated market.
6.3.
The Crown then submitted that it was not open to the Tribunal to substitute a different method of price determination to one that is essential to the operation of the agreement. The Crown submilted that the parties' intention was to choose a method familiar to them in the operation of establishing a price, the rrp which was based on actual costs but subject to adjustment. The Crown argued that it was not an agreement to sell at a fair and reasonable price of which the mechanism was secondary, but that the calculation of the rrp itself depended entirely upon each oil company providing the prescribed actual information and data. It was said to be important that the rrp is a subjective mechanism for determining contract price rather than one stating general objective criteria. The characteristics of the rrp were said to be well known and understood at the time the contract was made and that this mechanism will no longer be able to be used. It was argued that the subjective elements of the term tell in favour of its essentiality and against substitutability.
6.4.

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.

6.5.
Before dealing with these arguments, we shall deal with certain matters of general principle, relating to the approach which should be taken to matters of interpretation of the contract, and circumstances in which parties may rely on frustration or impossibility as a basis for excusing a party from further performance of his contract.
6.6.
In the first place, the rule of primary significance where questions of uncertainty of a contract are concerned is that a contract is to be construed ut res magis valeat quant pereat. It has been repeatedly pointed out that "arguments invoking alleged uncertainty, or alleged inadequacy in the machinery available to the Courts for making contractual rights effective, exert minimal attraction": Queensland Electricity Generating Board v. New Hope Collieries Pty. Ltd. (Privy Council Appeal No. 10 of 1984, Judgment 20 October 1984 at 9). A Court "is always slow to repose on the easy pillow of uncertainty..." per Megarry J. in Hampstead & Suburban Properties Ltd v. Diomedous 11969] 1 Ch 248, 257.
6.7.

In Hillas & Co Ltd. v. Arcos Ltd. [1932] 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.

6.8.

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.

6.9.

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 [1958] 2 Lloyd's Rep 60, AV Pound & Co Ltd v. MW Hardy & Co Inc [1956] AC 588, 608, 611; [1956] 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.

6.10.

Thirdly, in New Zealand Shipping Company Limited v. Sacíete des Ateliers el Chantiers de France [1919] 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 [1966] 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)

6.11.

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. [1919] 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. [1944] 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 [1956] 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. [1969] 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.

6.12.

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 [1981] 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.

6.13.
We now turn to the relevant facts. Deregulation which occurred in May 1988, removed the price control system by repealing the 1933 legislation and other regulating statutes. As we have pointed out, thereafter no price control procedure was required and the oil companies ceased to supply to the Auditor the information previously given. Mobil has argued that the Crown is not permitted to take advantage of the deregulated environment it created. If the matter rested there, a difficult question would have arisen whether the actions of the Crown in putting an end to the system under which information was supplied for the calculation of the rrp could have been described as a "default" on the part of the Crown which disentitled it to rely on any notion of frustration. It is clear on the evidence before this Tribunal that the Crown’s decision to embark on deregulation was not motivated by any intention to alter Mobil's entitlement under the Participation Agreement, but was rather an exercise of what was described in the argument of Mr Lauterpacht QC for the Crown as the police power of the State. The mechanism known as rrp had never been enshrined in a written contract or statute. As a mechanism it was widely understood and its Introduction (and evolution) resulted from negotiation between the oil industry and the government. The information relied on for the calculation of the rrp emanating from the oil companies was in fact submitted voluntarily by those companies, even though the New Zealand Government had power under Sections 10 and 11 of the Motor Spirits (Regulation of Prices) Act 193.3 to compel production of such information. As it happened, it was never necessary to use this power to enable production of that information.
6.14.
The Crown submitted that since deregulation the price determination clause has become unworkable because price control has ceased to exist, and that the substratum of the pricing provisions of the Offtake Agreement had been removed. It was argued that thereafter it was not possible for the price of syngas to be equaled to the price fixed for other gasoline produced at the refinery. We do not accept these submissions. It is doubtless true that the calculation of the rrp, if still possible, will take place in a different environment after deregulation has had its full impact. But the only circumstance relevant to the rrp calculation which is likely to have changed in consequence of deregulation is that there may not then be a Crown official appointed to carry out any monitoring exercise in relation to the oil companies’ costs. Mr Milkop was one who had performed that function in the past, and in doing so scrutinised and verified the provisional figures submitted by the oil companies, made suggestions for increases in efficiency and reductions in costs, and sometimes varied those figures downwards. One relevant change in circumstances is that in a deregulated environment the oil companies would no longer have any incentive to boost the RRP—if any party might wish to do so, it would be the Crown (Milkop AT, 48). Be that as it may, if the Crown now wished to replicate Mr Milkop's monitoring function it would be possible for it to appoint an official to perform that function anew; although one view of it might well be that since Mr Milkop and the price fixers were attempting during regulation to replicate a competitive environment, the creation of that very environment had inevitably rendered the task otiose.
6.15.
The evidence otherwise clearly established that all the information which was previously necessary to enable the calculation of the rrp remains extant within each oil company. Counsel for the Crown expressly conceded (Mr McGrath QC, WT, 1692) that all cost components would remain available if the companies were still prepared voluntarily to supply their input costs. The evidence also was that the oil companies were likely to have for their own internal purposes the data necessary for the rrp, if that material were requested, and the information continues to be collected by each oil company for lax and statistical purposes. Mr Milkop in his evidence also conceded that the information to enable the rrp to be calculated would still be available and that the calculation of the rrp was still possible (Milkop at 3405, 50). Mr Dineen also gave evidence (Dineen, AT, 55, 59) that if the Government by regulation compelled the oil companies to provide the information in the same way as it had been provided in the past, the calculation could be done in exactly the same way as it has been before deregulation. Neither Mr Milkop nor Mr Dineen suggested there would be any relevant change in the rrp so calculated brought about by the fact that the calculation was being made in a deregulated environment.
6.16.
For these reasons the Tribunal is satisfied that it plainly remains within the power of the Crown to determine whether or not an rrp shall continue to be calculated for the purposes of Article 11.1(d). In these circumstances counsel for the Crown also conceded (Mr McGrath QC, WT, 1693) that the Crown has not since deregulation asked the oil companies voluntarily to supply these costs on a continuing basis to an independent auditor, nor taken any step at all to compel the provision of such information.
6.17.
It follows therefore that it remains possible to calculate an rrp and that all the information previously used for the purposes of that calculation could be obtained cither by the oil companies voluntarily submitting that information or by the Crown compelling the companies to supply that information if they were unwilling to do so voluntarily. If it be said that the Crown has no present legislative or regulatory power of compelling the supply of that information, the first answer which can be made is that the Crown had an express power to compel production of that information until deregulation and elected to relinquish that power as part of deregulation, a step which was unnecessary to enable deregulation to be carried out. It clearly was not necessary to relinquish these powers for purposes of deregulation. Furthermore, il is obvious that the Crown if it so wished to do so, could resume these powers either by legislation or by an appropriate regulation. We are not to be taken as suggesting that there is any positive obligation upon the Crown to pass the necessary legislation. But since the Crown has elected to relinquish the necessary powers and could by regulation or legislation resume them we conclude that the Crown cannot take advantage of its own decision to relinquish the power or its reluctance to resume them, for the purposes of asserting by way of defence that it is now impossible to calculate an rrp.
6.18.
The Crown cannot argue that the Crown as represented in the Participation Agreement is not to be responsible for the actions or inaction of other Crown agencies; sec Hogg, Liability of the Crown in Australia, New Zealand and United Kingdom (1971) at 9-10. The Crown is the personification of the State in all its aspects, and in the Tribunal’s view, is a convenient symbol for the State including a legislative Government.
6.19.
We add that there is no reason necessarily to suppose that the other oil companies would not continue to co-operate if requested by the Crown to do so. Mr Dineen, managing director of the Shell group of companies, stated in his evidence (Dineen AT, 54) that "unless there is good reason not to co-operate then I would normally expect to do so." The Crown could still appoint an auditor and would retain as much ability to monitor the calculations as it previously held. In fact, the Crown may already have access to the appropriate information obtained compulsorily under different legislation, such as taxation or statistical legislation.
6.20.
We therefore conclude that insofar as no rrp is now calculated, that omission follows entirely from the election of the Crown, and could if necessary be rectified by the Crown making a decision to recommence the calculation of the rrp. In these circumstances the words we have already quoted from the judgment of Griffiths LJ in the Hannah Blumenthal case apply directly to the Crown's attempt to rely on impossibility and frustration. "The doctrine has no application and cannot be invoked by a contracting party when the frustrating event was at all limes within his control" ([1983] 1 AC at 882). That is the case here.
6.21.
The same conclusion may be arrived at by a different route. We have stated our view that a duty of reasonable co-operation and discussion between the parties existed. The rrp was historically never a definitive set of rules but was rather a practical application of a cost allocation exercise which evolved over time to meet the needs of its users. Since 1968 when the mechanism was first suggested as a means to value the products produced from the Marsden Point Refinery, the rrp went through two major changes in its method of computation and other variations in its calculations. Mr Milkop’s evidence (Milkop AT, 41) was that he agreed with Mr Hill that "the precise approach to the calculation of rrp developed and changed in various ways over the years." At the lime of the contract, therefore, the parties must be taken to have been aware that the rrp was an evolving mechanism which had changed in the past and which might change in ways made necessary to meet the demands of the industry in the future. It plainly was not static. Inevitably the implied duty of co-operation and discussion between the parties would extend to encompass such steps as would be necessary to make the calculation of an rrp under Article 11 effective.
6.22.
Mobil has contended that it is possible to replicate the rrp now. by taking available market intelligence, and in particular with the assistance of the APPI Index and thus estimating costs of imported crude, foreign exchange and other elements. The Mobil evidence satisfied the Tribunal that it was possible by this procedure to achieve a close approximation of the rrp which would have been calculated by the method in operation at the time the Participation Agreement was made. Mr Milkop disputed the reliability of the APPI index and the calculations achieved by Mobil based upon its use. On all the evidence, we accept the argument of the Crown that the calculations made by Mobil under the replicated rrp (based as that would be, upon assumed figures) would produce a result inherently different from the actual verified figures of the companies in the industry on which the rrp was calculated at the time of the contract. The results achieved by Mobil with its replicated rrp differed in small but nonetheless significant percentages from those which would correctly have been achieved by the method in existence at the time the contract was made. As Mr Dineen pointed out (Dineen AT, 62) a small percentage difference would inevitably be translated into huge money sums having regard to the enormous volumes of synfuel which are involved.
6.23.
Since the time syngas was first produced by the Synfuel plant and Mobil has been purchasing its obligatory percentage, the price to be paid by Mobil under the agreement would (on the Tribunal’s preferred interpretation of the mi p clause, and the available evidence) invariably have been determined by reference to the mi p clause, rather than the RRP. That is not to downplay the significance of the rrp as a factor in the calculation of price under Article 11; it simply demonstrates that the insistence upon compliance with the obligation on the Crown to engage in co-operation and discussion in relation to the calculation of the rrp would be unlikely to impose excessive demands upon any party. Had the Crown been prepared to co-operate and discuss with Mobil in relation to the calculation of an rrp after deregulation, what might well have happened would have been the provision to the Crown by Mobil of a calculation made under its replicated mechanism. It would then have been open to the Crown to accept that calculation, to suggest an alternative method (as in fact happened with the "without prejudice" agreement which the parties chose to place in evidence before the 'Tribunal), or to insist upon the calculation being carried out afresh on the basis of the same information and method as were used before deregulation; which would, if the Crown had chosen to follow this course, have required the obtaining of information from the oil companies, possibly under compulsion.
6.24.

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.

6.25.
Had the Crown and Mobil differed as to the appropriate means of calculation of an rrp after deregulation, or indeed as to what the appropriate means of calculation of an rrp should be at any particular time, a process of consultation would immediately have demonstrated that difference and dispute, and the contract would itself have provided a means of resolving that difference. Any arbitration that might have followed the creation of such a dispute would have permitted the tribunal in question to call evidence from the oil companies and the refinery and to have obtained all the information which was in the past required for calculations of the rrp before deregulation.
6.26.
In these circumstances also we conclude that the Crown cannot now complain of uncertainty, or of the impossibility of calculating the rrp in accordance with the method originally contemplated, since it is its own default in failure to co-operate and discuss with Mobil which is responsible for preventing the rrp now being calculated in accordance with the original method.
6.27.
Having regard to the conclusions at which we have already arrived, it is strictly unnecessary to consider the further submission made on behalf of Mobil that if there were any present uncertainty having regard to the destruction of the rrp, the price for syngas should now be determined as a reasonable price. In deference to the arguments placed before us we state that we had been of the view that the rrp as calculated before deregulation was now impossible to achieve, we should have concluded that the scheme of Article 11.1(d) and (e) contemplated the establishment of a reasonable price. For this purpose we note that the rrp as calculated before deregulation was an artificial, but reasonably accurate assumption of what it had cost for individual fuels to be produced in New Zealand. As Mr Dineen put it (Mr Dineen’s brief, par. 22) the "calculation produced a rrp for each product which was essentially an average landed main port cost and as an average did not reflect the exact cost to any one particular company." Mr Dineen explained in his oral evidence that the price of syngas, if priced in accordance with rrp would under deregulation, with the enhanced efficiency of the Refinery, approximate import parity based on term prices (Dineen AT, 61). The operation was a retrospective one involving an averaging of the actual costs of oil companies participating in the industry, the purpose of the calculation being to enable a notionally correct price ex refinery to be estimated in circumstances where a volume of crude oil of known or assumed unit cost was the input but in circumstances where the resulting products varied widely in nature. Each of these products however, as we have found needed an assigned value for price fixing purposes at government level and for accounting and taxation purposes. The calculation compared the total assumed cost of importing equivalent volumes of the finished products against the total known cost of all the crude feedstock used in the refinery during a given period together with refinery and coastal distribution charges. The percentages then produced were applied to what would have been the import parity cost per barrel of each variety to obtain a price approximating as closely as mathematics would allow the cost per barrel to the oil companies of each variety of product which had been refined.
6.28.
We have no difficulty in these circumstances in concluding that the purpose of providing in Article 11.1(d) that the price originally should be "fixed... in accordance with the mechanism known as the refinery release price, after adjustment", was to establish what the parties agreed was a reasonable price in the first instance for syngas, the MFP clause being introduced by Article 11.1(e) to protect Mobil in the event that any of its competitors were able to persuade the Crow'll to sell syngas to il at a price below the RRP. Had il been necessary to make this implication, we should have relied upon the cases first referred to under this heading, such as Hillas v. Arcos, Fawcett Properties, The Queensland Electricity Generating Board case, and the Upper Hunter County District Council case. We should also have relied for that purpose on the arbitration clause as supporting the implication that the price was to be a reasonable price, or one achieved by reasonable co-operation between the parties. Further support for the view that "the price" in Article 11.1(d) meant "a reasonable price" or that the price should be what is reasonable in the circumstances, would be obtained from Foley v. Classique Coaches Ltd [1934] 2 KB 1, and Section 10 of the Sale of Goods Act 1908 (NZ).
6.29.
For all the foregoing reasons our conclusions arc, first, that the Participation Agreement is not uncertain, nor is il impossible to give il full effect as a consequence of the process of deregulation. Secondly, even if uncertainty or impossibility leading to frustration relevantly existed, the Crown would not in the light of its responsibility for that situation be entitled to rely upon uncertainly or impossibility of performance. Thirdly, had it now been impossible to calculate an rrp in accordance with the method prescribed by Article 11.1(d), there would have been implied into the contract a provision requiring that the price in Article 11.1(d) be interpreted as meaning "a reasonable price" and in the event of dispute between the parties, that dispute would have been referred to and resolved by an appropriate arbitration tribunal.

7. International Law Question

The answers to the previous questions and in particular to the Interpretation and Uncertainty Questions make it unnecessary for us to deal with the difficult questions of International Law since they depend for their existence on the other questions being answered adversely to Mobil.

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.

8. The Commerce Act Question

8.2 Formulation of the Claim

8.1.1.
The Commerce Act question was formulated by the parties as follows:

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.

8.1.2.
From the initial exchange of pleadings it was agreed by the parties that the Crown carries the burden of proof (Memorial 9.10; Counter-Memorial 16.64). The 'Tribunal concurs. Hence il was for the Crown to formulate the Commerce Act claim.
8.1.3.
The pleadings by the Crown in the Counter-Memorial and Rejoinder in effect constituted a rather large ambit claim that the mi p clause infringed all elements of Section 27. However in the course of the proceedings the initial comprehensively and generally expressed claim was both narrowed and refined in respouse to the counter-contentions of the Requesting Party, the unfolding evidence (especially as revealed in the extensive documentary material obtained during discovery) and questioning by the Tribunal itself. It is understandable that there should have been some difficulty in formulating the Commerce Act claim. The Act was enacted only on 28 April 1986 with effect from 1 May 1986; the law coinstitutes a new approach to regulating competition in New Zealand and has mixed legal/economic content; and finally the evidentiary requirements for a Section 27 claim of this character were considerable, entailing extensive discovery, long and detailed briefs of evidence, and a large role for the expert testimony of economists.
8.1.4.
It is necessary to state (i) the essentials of the claim as expressed in the pleadings (the Counter-Memorial and Rejoinder as amended at the Pre-Hearing Conference on 28 October 1988) and (ii) the claim as finally relied upon in closing submissions. I he final formulation was substantially that set down in counsel for the Crown’s Opening Statement, subject to two important amendments... (as will be explained below). However in our assessment of the evidence and argument of the parties we will pay primary regard to the ultimate version of the Crown's contentions.
8.1.5.

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.

8.1.6.

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.

8.1.7.

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.

8.1.8.
Mobil submitted in its Reply (2.4.2, 2.5, 2.6) that, while the Crown has enumerated four "real possibilities", there were "in substance" only two: "Crown Avoidance" involving "the Crown refusing to lower the price to a willing buyer for fear of triggering the MFP clause ((1) and (4)) (supra) and collusion ((2) and (3)). This terminology of "Crown Avoidance" and "collusion" became standard usage in the hearing.
8.1.9.
As to Crown Avoidance, the Crown contended (Rejoinder 3.3-3.5) that the issue of anti-competitive effect would turn not just upon the direct impact upon prices in the New Zealand market (including prices for ultimate consumers of syngas) but also upon the possible impact upon a potential new entrant to the wholesale market who would thereby be denied lower priced supplies of syngas. The submission was that the clause ruled out what would otherwise be a real possibility of the Crown acting as a discriminating monopolist, disposing of the syngas at a range of prices in the market.
8.1.10.
As to collusion between the oil companies, the Crown contended (Rejoinder 3.12) that "there is every incentive for them to collude expressly or tacitly so as to ensure that any one of them does not allow Mobil Oil New Zealand to derive the benefit of too low a price as between themselves. The incentive is exactly the same if the Crown instead of selling syngas by lender enters into separate sale negotiations with the competitors of Mobil Oil New Zealand individually". The contention was given a far-reaching formulation (Rejoinder 3.16, 3.22): the "essential features" of the clause "are such that even in a de-regulated market, the competitors of Mobil Oil New Zealand will, through their knowledge and understanding of the impact of the clause, alter their pricing behaviour in such a way as to substantially hinder competition." This is because "the structure of the wholesale market in New Zealand, ie. the purchasing side, is such that il is conducive to express or tacit collusion."
8.1.11.
The Crown’s primary contention related to likely future anti-competitive effect. But there was a parallelism of treatment of both "purpose" and "effect". This was because the Crown (unlike Mobil) contended for an "objective", as distinct from "subjective", interpretation of purpose as referring to forseable consequences—what came to be referred to as the "day follows night" effect.
8.1.12.
The final claim advanced in the Counter-Memorial, albeit faintly and indeed obscurely, was that Section 30 of the Commerce Act also applied. This Section deems certain price fixing, and price maintaining agreements (provisions of contracts, arrangements or understandings) to be anti-competitive within the meaning of Section 27. The price adjustment clause, it was contended, had the purpose, effect and likely effect of maintaining the price of gasoline inputs supplied by the Crown and the Requesting Parties in competition with each other (Counter-Memorial 16.57-16.63). That contention, while not formally abandoned, slipped away in the course of the hearing. In any event, the Tribunal accepts Mobil's submission that Section 30 can have no applicability in that its terms expressly refer to a provision of a contract that has the purpose or effect of fixing, maintaining etc. the price for goods supplied by parties to the contract in competition with each other: whereas Section 30 requires a horizontal relationship between the parties, the MFP provision regulates the vertical relationship between the Crown as supplier and Mobil as customer.
8.1.13.

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.

8.1.14.

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.

8.1.15.
However, in closing (D2.2, 3.1), the Crown elected formally to abandon two claims which must be regarded as constituting a major part of its competition case: first, that Mobil had the purpose of substantially lessening competition in its initial espousal of the MFP clause; and second, that there is evidence that the clause has in the past had the effect of substantially lessening competition. Thus no longer was any reliance placed on the first and second limbs of Section 27, it was said, but only upon the third limb, namely that in the future the MFP provision is likely to have the effect of substantially lessening competition. While there were grounds for concluding that such an anti-competitive effect could include the promotion of an "arrangement or understanding", the Crown did not "rely on the existence at this point of time of any "arrangement or understanding" whether caused or exacerbated by the mi p provision." (Emphasis of counsel)
8.1.16.

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.

8.2 the Statutory Provisions

8.2.1.
It would be a daunting task if the Tribunal were required to interpret the generally expressed terms of Section 27(2) standing alone. However the Act supplies some important definitions, and those rounded phrases are illumined by the language and scheme of the Act as a whole. This is a very recent statute, yet already there is a body of pertinent New Zealand authorities: Auckland Regional Authority v. Mutual Rental Cars (Barker.1) (1987) 2 NZLR 647; (1988) 2 NZBLC 103. 041 (the Budget case); Tru Tone Ltd v. Festival Records (Smellie J. and Lang Esq) (1988) 2 NZBLC 103, 081 (Festival Records): Tru Tone Ltd. v. Festival Records (Court of Appeal per Richardson J. (1988 unreported); as well as the Air New Zealand case still considered germaine (Air New Zealand v. Commerce Commission (Davison CJ.) (1985) 2 NZLR 338. In addition there is a considerable number of Australian decisions on which we can draw in light of the close relation that exists between the New Zealand Commerce Act and the Australian Trade Practices Act.
8.2.2.

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.

8.2.3.

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.

8.2.4.

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.

8.2.5.
There was a very considerable measure of agreement between the parties on the interpretation of the New Zealand statute. Indeed, there was very considerable agreement on the primary facts established by the evidence. The dispute arises, rather, fundamentally as to the inferences to be drawn from those lads. Yet, once the relevance of "purpose" and Section 30 were abandoned (supra pata. 8.1.12), it can be said that such differences on interpretation as existed did serve to bolster what we term the dispute as to inference, for the differences in interpretation relate to the meaning attaching to the phrase "likely effect".
8.2.6.
The standard of proof in civil proceedings brought under the Act was considered by the Court of Appeal in Festival Records (p. 1.3). The ordinary civil standard applies. The Court could see no support "either in principle or specifically lindel ibis legislative scheme for requiring "a high degree of probability" contrary to Barker J. in Budget (al 2 NZLR 660).

We turn to the elements of Section 27(2).

"competition in a market"

8.2.7.
As was said by Barker J. in Budget (669, 103, 060): "Competition must always be understood as existing within the context of a market. Australian cases show' that the breadth at which a market is defined has a major and often decisive effect on issues of dominance and control’' and, we may add, on issues of lessening of competition. The importance of market definition, as the first step in analyzing the evidence bearing on competition, was accepted by both parties.
8.2.8.
Both parties also adopted a similar approach to principles of market definition and to the meaning of "competition ", and referred to much the same authorities. However there was a fundamental dispute between them as to the delineation of the key relevant market in fact—specifically its geographic width. And this difference in conception of the market setting accounted in large measure for the difference in appraisal of the impact of the MFP clause upon competition. For Mobil, essentially, the MFP practice is just an incident in the "international petroleum commodity market" in which GGTG, albeit with control over the disposal of syngas, can have no market power and thus no anticompetitive impact. Accordingly, we will briefly review' the relevant law' on "market" but in doing so pay special attention to geographic market definition.
8.2.9.
A market is an area of close competition within an economy. A relevant market is one within which competition may be lessened by reason of the disputed conduct. There may be more than one relevant market. The market is specified by reference to the actual and potential transactions between buyers and sellers dealing in the same "product", at one or more "functional" levels of production and distribution, over some geographic area. Market definition serves to identify the constraints upon the production and selling decisions of the individual firms of interest, whether buyers or sellers in the particular case. As Mobil submitted, the terms "market" and "competition" are definitionally interdependent.
8.2.10.

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.

8.2.11.
The parties were in agreement that the thrust of the distinctive New-Zealand phrase "a market... that may be distinguished as a matter of fact and commercial common sense" is to direct attention to the realities of the marketplace rather than to theoretical substitutes. The parties were also in agreement that market delineation requires attention to the dimensions of products, functional level (eg. wholesale and/or retail transactions), and geographic area.
8.2.12.

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.

8.2.13.
Whereas in the Australian Act "competition" is left undefined, "competition" in the New' Zealand Act "means workable or effective competition": Section 3(1). The early judgments interpret this requirement in effect, not as differentiating the Australian law from the New Zealand but as reinforcing its relevance, an approach with which we must respectfully agree.
8.2.14.

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.

8.2.15.

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.

8.2.16.

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.

And also

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.

"substantial lessening of competition"

8.2.17.
As previously noted, by virtue of Section 3(2) of the Act, "references to the lessening of competition include references to the hindering or preventing of competition." Consistently throughout, the Crown relied upon lessening of competition as meaning hindering competition in the defined market.
8.2.18.

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.

8.2.19.

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).

8.2.20.
Plainly in the end, it is a matter of judgment as to whether the hindering of competition is of sufficient importance in the context of the policy of the legislation for remedial action to be taken.
8.2.21.

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.

8.2.22.
We draw three points in particular from this passage: the first is the desirability of interpreting the phrase "substantial lessening of competition" as a whole; the second is the manner in which relativity is to be approached; and the third, and most important for this arbitration, is the manner in which causality is to be assessed. As to this last, we are required to assess the competitive functioning of a relevant market, with and without the disputed practice, in this case the operation of the MFP clause.
8.2.23.

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).

8.2.24.
"Market outcome", the phrase used by Mobil, when taken out of the context of their submissions, is ambiguous. It could refer to the impact on prices, quantities, transactions dial are concluded in the marketplace. It could also refer to the impact upon competition. It is plain that the statute requires us to take the second approach, ie. to assess the likely difference that the MFP clause makes to the market power of the oil companies, considered either individually or as a group. No doubt the very introduction of an MFP clause into a market—an additional datum the parties take into account—might make a difference to the observed pattern of transactions. But what would not be enough in itself. We require the operation of the clause to have the likely potential to hinder competitive processes within the market.

"likely to have the effect"

8.2.25.
The interpretation of "likely" was vigorously contested by the parties. Mobil pressed what it referred to as the "more probable than not" test set out in the decision of the Chief Justice in the Air New Zealand case. While this case pre-dates the coming into effect of the Act, it was in the field of competition law and is the only New Zealand judgment in this field on point. The Crown, however, preferred to rely on the more recent Determinations of the Commerce Commission in Brierley Investments Ltd./Petrocorp (Decision 215, 1988) and Weddel Crown Corporation (Whakatu) (Decision 205 (1987 1 NZBLC 104, 200 at 104, 213) and the view of Deane J. expressed in 1979 in Tillmann's Butcheries at 18,499-500 (in the context of Section 45D of the Australian Act) that the test is one of "real chance or possibility." Reference was also made to the view of the Australian Trade Practices Tribunal in Re Howard Smith Industries Pty. Ltd. and Adelaide Steamship Industries Pty. Ltd (1977) ATPR 17,324 at 77,343 that, in the context of the test for authorization, "likely" means a "tendency or real possibility" and not "more probable than not." The Crown pressed for a test of "tendency or real possibility."
8.2.26.
The Tribunal is obliged to apply New Zealand law and consequently the opinion of the learned Chief Justice in the Air New Zealand case must be given great weight.
8.2.27.
That case was an appeal against a decision of the Commerce Commission refusing consent to a merger of Air New Zealand with Mt. Cook Airlines on the ground that the proposal "is or is likely to be contrary to the public interest." The appeal was allowed by the Chief Justice, Sir Ronald Davison, who found, on the competition issue, that the two airlines operated different services in different markets and the merger was approved subject to certain conditions. In the course of argument and in the judgment of the learned Chief Justice, there was discussion of the meaning of the word "likely" in Section 76 ("is or is likely to be contrary to public interest") and in Section 80 ("the occurrence or likely occurrence of one or more of the effects described in Sections 21...").
8.2.28.

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 [1966] 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 [1985] 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.

8.2.29.
As the Chief Judge of the Australian Federal Court said in Tillmann’s Butcheries (at 18,495), "The word ‘likely’ is one which has various shades of meaning." Upon a close reading of the Air New Zealand passage we are now not convinced that the shade of meaning expressed by Davison CJ. is captured by the phrase "more probable than not." All that is required is to eliminate from the graduated scale of expressions "possible or speculative effects" so that one is left with all the others or, expressed differently, a "stale of mind where one has some degree of assurance that the contemplated result will eventuate." Nor are we convinced that the Australian Tribunal in QCMA is to be read as requiring effects that are more probable than not. The emphasis in the quoted passage, as Davison CJ. says, is upon the elimination of "possible or speculative effects" to give "commercial or economic likelihoods which may not be susceptible of formal proof."
8.2.30.

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...

8.2.31.

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.

8.2.32.

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.

8.2.33.
It is commonly accepted that the legal context is of significance. We ourselves are also troubled by an approach that would isolate the word "likely" too sharply from the immediately surrounding words of Section 27. It may be that a lower degree of probability or possibility could apply if the envisaged consequences for competition in the market were "very" substantial. We notice that the Australian Trade Practices Tribunal in recent years (ie. since the time of QCMA and Howard Smith) has not found it necessary to isolate this element when applying its statutory authorization test.
8.2.34.
The conflict and ambiguity in the authorities creates a situation of some difficulty. In the circumstances the convenient course is to approach the evidence provisionally and with some flexibility, as did Bowen CJ. in Tillmann’s, requiring in the first instance that whichever meaning is adopted some "likelihood" of substantial anticompetitive effect be established. Clearly we should consider first the less stringent meaning of likely as "tendency or real possibility" espoused by the Crown which carries the onus of proof.
8.2.35.
In this situation, it requires a decision of some nicety when applying the civil standard of proof to this lower standard of likelihood. We interpret the former requirement as governing the degree of conviction with which we might hold our conclusion regarding likelihood.
8.2.36.
One final observation should be made. While the hearing proceeded on the basis that "likely to have the effect" referred to the future, we do not read the application of this phrase as necessarily restricted to the future. The more compendious reference could well be to the likelihood of effect—past, present and future. The causal connection between trade practice and effect need not be 100% but merely "likely", it is not only the future for which causality is less than 100% certain. We mention this point for completeness; it does not, in itself, damage the Crown's case, in that the Crown has elected to rely on its predictions as to future anti-competitive effect.

8.3 The Relevant Markets

8.3.1.
The Crown’s initial position, as set down in its Counter-Memorial, was that the relevant market was "the New Zealand market for syngas as it affects wholesalers." However, the single product market that was originally envisaged was abandoned on the fifth day of the oral proceedings, and henceforth the parties proceeded on the basis that there was no difference between them on the delineation of the relevant product market. Mobil’s formulation of the product market, which we accept, was finished gasoline and gasoline inputs (including feedstocks and blendstocks). In Mr Makeig’s words, "There is nothing unique about syngas other than its method of manufacture. Chemically, it is indistinguishable from similar material derived from crude oil, or other hydrocarbon feedstock".
8.3.2.

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.

8.3.3.

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".

8.3.4.
The parties’ treatment of the functional market or markets was not altogether clear or consistent. Dr Bollard, one of the Crown’s experts, certainly made a clear distinction between the wholesale input market and the wholesale output market, and regarded both as of relevance. But both the Crown and Mobil, in closing submissions, stated that the relevant functional market was the wholesale market for inputs—and then proceeded to discuss the allegations regarding anti-competitive effect in terms of wholesalers’ activities in both purchasing and marketing.
8.3.5.
In our view, the functioning of both wholesale markets the market for inputs and the market for outputs is of clear relevance for resolving the parties dispute. The decisive consideration is the scope of the Crown’s contentions. The Crown presented a number of theories of how the MFP clause would lead to a lessening of competition, shifting and evolving in response to the unfolding evidence and the positions taken by its economist experts. While the theories are to be viewed, to some extent, as alternative possibilities, they have a family likeness. All theories involve the supposed behaviour of GGTG in its quarterly disposal of syngas, and the use of strategics designed to avoid triggering the MFP clause ("Crown Avoidance"); all theories involve non-rivalrous behaviour of Mobil's three New Zealand competitors in bidding for syngas; all theories involve a consequential impact upon prospects for successful entry and competitive conduct in the wholesale marketing of gasoline in New Zealand.
8.3.6.
No doubt, as counsel for Mobil submitted, the primary focus must be upon the network of actual and potential dealings between buyers and sellers of gasoline inputs; that is where GGTG’s alleged "avoidance" would take place; that is where the alleged "collusive" bidding activities of Mobil's three New Zealand competitors would take place. But plainly the Crown is predicting a hindering of competition in two markets, the wholesale market for gasoline inputs and the wholesale market for gasoline outputs, each of which would be subject to the terms of Section 27 of the Act.
8.3.7.
This is to express the relevance in law of the two functional markets. There is a further consideration that serves to elevate the significance of the output market. The evidence relating to market structure and behaviour in the marketing of gasoline in New Zealand is clearly relevant to our assessment of prospects for "collusion" in syngas bidding: a finding by the Tribunal that there is not much independent rivalry in selling, cither currently or in prospect, would serve to buttress the allegations regarding "collusion" in purchasing; per contra, it is scarcely conceivable that the wholesalers could simultaneously be strongly rivalrous in selling and engage in co-operateive strategies in purchasing. Certainly the relevance of the two markets we have distinguished was recognized in practice in the proceedings, with much evidence presented on the structure and conduct of the New Zealand wholescale petroleum industry—both as buyers and sellers.
8.3.8.
On the question of geographic scope of the relevant market the parties were in profound disagreement. There is no issue where the reference is to the wholesale marketing of gasoline. There the practice of both Mobil and the Crown, and of their witnesses, with variable degrees of explicitness, was to take the market as New Zealand simpliciter; and with this we concur. The issue arises in specifying the geographic scope of the market for gasoline inputs.
8.3.9.
For the Crown, not only formally but in reality, that market is New Zealand. While the availability of imported gasoline is "a factor", and there is a question of "degree", the fundamental contention that was required to sustain the whole of the Crown’s case on competition was that there exists a New Zealand market for gasoline inputs significantly insulated by reason of transportation costs from the forces of international competition. In particular, the Crown's case required that GGTG have a "degree" of market power in disposal of syngas, and that the three New Zealand wholesalers, likewise, can indulge in "collusive" purchasing strategies for syngas, to a "degree" unconstrained by the rivalry of overseas buyers.
8.3.10.
The Crown conceded, as we have said, that there is nothing special about syngas as a product: it can be used as a blendstock, and with or without additives. What is special is said to be its location—or putting the point slightly differently, the product in its location. Returning to Mr Allan’s formulation of the relation between feedstocks and blendstocks on the one hand, and final product on the other, the question is seen to be whether there is some discretion permitted in the transformation function arising from a degree of natural protection for syngas. The Crown, we observe, has conceded nothing of importance, merely varied the formulation of the question.
8.3.11.

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.

8.3.12.

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.

Table 2
Petroleum Imports
(’000 tonnes)

Calendar YearCrude OilPetrolDieselFuel OilAviation
1983152653342136286
1984157546044340337
198588488268781373
19861070HO40380382
1987226350049082
8.3.13.

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.

Table 3
Breakdown of Input and Demand
1987

 

COMPANYB.P.CALTEXMOBILSHELL
NEW ZEALAND DEMAND100.0%100.0%100.0%100.0%
(Gasoline54.4%52.3%53.1 %44.1 %
Jet Fuels13.3%0.0%12.4%22.4%
Diesel Fuels24.1 %39.2%24.0%23.2%
Residuals6.0%4.9%9.2%6.4%
Asphalt2.2%3.5%1.3%4.0%
INPUT100.0%100.0%100.0%100.0%
Crude oil:    
Imported37.6%49.5%43.0%46.5%
Local6.7%23.7%7.4%4.6%
Condensates: Imported Local0.0% 35.7%4.1 % 0.0%23.1% 0.0%1.9% 30.5%'
Feedstocks:    
Imported0.0%0.0%1.8%0.0%
Blendstocks:    
Imported2.5%0.0%0.0%0.0%
Local4.0%3.8%13.9%1.1 %
Product Imports:    
Gasoline12.3%14.3%7.7%13.4%
Jet Fuel0.6%0.0%2.0%2.0%
Diesel0.6%4.6%1.1%0.0%
Residuals0.0%0.0%0.0%0.0%
Asphalt0.0%0.0%0.0%;0.0%

Table 4
Imported Gasoline to Total Gasoline Sales
(’000 tonnes)

YearGasoline ImportsTotal Gasoline SalesImports % Sales
1971257115522.2%
1972253131819.2%
1973503142635.3%
1974384148925.8%
1975503157931.9%
1976256153116.7%
1977416162825.5%
1978428160526.6%
1979404162824.8%
1980431156327.6%
1981375161123.3%
1982427156927.2%
1983490166429.5%
1984432156527.6%
1985804157151.2%
198610916236.7%
1987458196423.3%
1988*156120713.0%

* incomplete year

8.3.14.

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.

Table 5
Sales of Syngas by GGTG
After Expiration of Interim Agreement
('000 tonnes)

QuarterMobilB.P.CaltexShellExportTotal
1986      
3rd Q.345333.5 19.5140
4th Q.502522 56153
1987      
1st Q.334520 40138
2nd Q.43   124167
3rd Q.32.5  2073.5126
4th Q.18   44.562.5
1988      
1st Q.3130223046.5159.5
2ndQ.44.5508.5307140
3rd Q.43 283070171
Total      
Sales3292031341104811257
Percent26.2%16.1%10.7%8.7%38.3%100.0%
8.3.15.
However il is early days for the syngas plant. The first cargo of synfuel was loaded in November 1985. The plant is now running to its designed capacity of some 570,000 tonnes, but there was an output of only 487,000 tonnes achieved in calendar 1986 by reason of plant failure in the second half of the year.
8.3.16.

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.

8.3.17.

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.

8.3.18.

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).

8.3.19.
Mr Smith said (Brief p. 189) that for the fourth quarter 1986 onwards we tendered not only in new Zealand and Australia but throughout the Asia/Pacific region including the West Coast of the United States."
8.3.20.

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).

8.3.21.
Price comparisons between syngas and gasoline available and spot terms internationally are fraught with difficulty (as will become apparent). Nevertheless we think it not irrelevant that there is a degree of correspondence between the value of successful bids for syngas (f.o.b.) New Plymouth at time of lifting, whether made by domestic or overseas companies and the monthly average spot prices for unleaded 91 RON and leaded 96 RON gasoline ex Singapore, to this extent: the successful companies bid higher prices for syngas in 1987 than they did in cither 1986 or 1988. In fact, the Singapore spot prices were higher in 1987 than they were in 1986 or 1988, as is shown by a comparison based on the facts contained in Mr Smith’s Brief and the Further Supplementary Evidence of Mr Makeig.
8.3.22.
Nevertheless this kind of evidence, bearing on actual trade and trading attitudes, is not sufficient to dispose of the Crown’s case. This is because it does not meet the economic arguments of the Crown’s case, as developed. The Crown has not sought to deny that the syngas trade is affected by international market conditions. The contention was, rather, that there is "sufficient" natural protection to generate a "significant degree" of market power for GGTG as seller and the wholesalers as buyers. Further il was said, in effect, that while a significant fraction of syngas has been exported, that was an aberration, a non-competitive result that has been caused by the very same "collusive" and "avoidance" conduct it was sought to prove. Thus the Crown's case calls for a study of the evidence on the factors governing the trade in syngas in some detail.
8.3.23.

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.

8.3.24.
The relevant evidence centres upon the relationship between import parity and export net-back for syngas. Professor Comanor himself was inclined to place much emphasis upon the four firm concentration ratio in New Zealand wholesaling, the condition of entry to wholesaling, and the wide gross profit margins that currently exist for New Zealand wholesalers. We do not find such evidence of assistance on this point, for the reason that it could he perfectly conceivable for the four wholesalers to enjoy market power in selling but face competitive pressures in buying. Rather, we turn to the evidence on relative costs and prices in trading syngas and imported gasoline; and, indeed, both Professor Comanor and Dr Bollard (the two economists retained by the Crown) emphasized the relevance of this kind of evidence.
8.3.25.
The starting point for the analysis is the role of the Refinery. It was common ground that the wholesalers regard gasoline refined at Marsden Point horn imported and local crudes and condensates as their first source. It is agreed that within the foreseeable future the Refinery will source two thirds of New Zealand’s supply of gasoline. That means that the remaining one-third can come from syngas or imported gasoline.
8.3.26.
There is a number of considerations that support such a role for the Refinery. There is the companies’ shared equity in the Refinery (69% in all); the Refinery’s long-term strategic value, both the companies and to the economy; the fact that the Refinery’s costs now allow delivery of product at prices that are competitive with those for imported gasoline on a term basis; and the system of charging for immediate processing on the basis of incremental costs. We accept that the Refinery is likely to be cost-competitive in the foreseeable future. Certainly that was the objective of the Government’s subsidy package negotiated on the eve of deregulation. The Government has absorbed the outstanding debt obligations of nzrc (approximately US $800m) and provided the company with a subsidy of NZ $85m over three years as a contribution to fixed costs. The Refinery is said to be "technologically excellent." (Mr Falconer’s phrase, AT. 21). As part of the new order, the wholesalers are no longer legally obligated to support the Refinery. There is now to be a rolling annual contractual arrangement, whereby the companies will meet the Refnery’s fixed costs on the basis of market share and be charged incremental costs for their individual refinery programmes. It is perhaps something of an exaggeration to say, as did Mr Pryor (AT, 929), that now the Refinery has a "one year lease on life." But certainly there are much monger market pressures at work than prior to deregulation, as evidenced by the recent improvement in refinery yields and reduction in manning levels.
8.3.27.
Syngas will normally be available in steady, predictable, largely invariant quantities. The plant is designed to be run at capacity. Only limited storage capacity is said to be economic and currently amounts to one month’s supply. GGTG therefore needs to arrange contracts for the disposal of syngas in advance. In view of the off-take and pricing provisions of the Participation Agreement, GGTG groups its disposal operations into quarterly periods, with bids received and evaluated in one quarter to be applied to shipments in the succeeding quarter. The bids are made in terms of contingent formulae, based upon a variety of international indices of movements in spot gasoline prices world wide. From 1 July 1986 there was initially a tendering system, with potentially interested buyers being given quarterly notification of the amounts of syngas available (plant production less Mobil’s obligatory off-take). More recently, direct negotiation has been used, and GGTG has elected not to make available information regarding the total amount of syngas it wishes to sell each quarter.
8.3.28.
There is no dispute that the international spot market is generally the most relevant alternative source of supply to syngas, and that prices in this market are formed by impersonal market forces and fluctuate daily.
8.3.29.
The core of the Crown’s argument was essentially that transportation costs for the import of gasoline and for the export of syngas are sufficiently high, in relation to any special costs of handling the syngas used in New Zealand, to make syngas the clearly preferred supplement to Refinery product for the New Zealand wholesalers.
8.3.30.

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.

Example:

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.

8.3.31.
Neither party doubled the relevance of such import patily/export net back comparisons. What was at issue was, fust, whether a simple model of the kind just presented effectively captures the essence of the real-world forces at work and, second, what might be the real world prices and costs to feed into such a model. A great deal of the competition evidence centred on these two questions.
8.3.32.

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.

Table 6
Export Net-back for Syngas and Import Parity of Equivalent Gasoline
Spot Prices August 1987
(US $/Bbl)

Freight etc. Singapore—New Zealand2.4
Gasoline: f.o.b. 96 RON, 0.4P, Singapore22.2
 = 24.6
Less New Zealand Handling Cost3.2
Import parity at New Plymouth= 21.4
Freight etc. Singapore—Australia2.0
Gasoline: f.o.b. 91 RON, Opb, Singapore22.4
 = 24.4
Less Freight, New Plymouth to Australia1.4
Export Net-back, Australia= 23.0
Export Advantage, Australia1.6

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).

8.3.33.
We note, first, that multiple origins and destinations for gasoline and syngas can complicate the transport cost calculation.
8.3.34.
Second, the size of the New Zealand handling cost is a significant consideration. Mr Makeig said that US $3 was a fair figure. Mr Smith and Dr Moy believe it to be closer to $1.50. Mr Smith and Dr Moy said that the $3 figure was not a "true incremental cost", in that the cost of coastal transport was reckoned at the invoice charge to the companies which includes an element of fixed costs. Mr Makeig said that irrespective of whether these were true incremental costs, these were the costs that were, in fact, charged the companies—but that the charging scheme was going to change in the future, anyway. For the moment all we draw from this controversy is that if the size of the handling costs required in New Zealand exceeds the net influence of transportation costs, and if it is these costs that are determinative, the material will be exported.
8.3.35.
But syngas, as a product, may be particularly attractive in some markets. Whereas in New Zealand the unleaded character of syngas is a defect, and the material must be transported to the Refinery for leading, in Australia, Mr Makeig suggested, companies could be prepared to pay a premium for quality unleaded material. Dr Moy, on the other hand, produced figures relating to lower actual export net-backs received by GGTG from Australia which, he argued showed that this factor was of less importance than might first be thought.
8.3.36.
We do not find it necessary to resolve these fine disputes. They point to relevant considerations, but in the view that we have formed they lose their determinative significance when account is taken of the dynamic and uncertain quality of the international gasoline trade. This is the factor that is not captured in calculations such as those to which we have referred. What is left out is the role of expectations and skill in monitoring the volatile spot market in gasoline, as well as sheer bidding skill in structuring an attractive bid in advance of lifting. As we have said, the bids made or negotiated in the quarter preceding lifting may be of a complex character, expressed in terms of a variety of international indexes. The actual values, at time of lifting, are contingent upon future movements in spot prices, the manner in which the favoured index captures these movements, and adjustments incorporated in the quotation. The bids are sometimes multi-part, envisaging a contract that would embody two or three different price components, evidently a form of hedging.
8.3.37.

We give two examples of actual bids made by different companies.

Company A
Bid price

"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

Company B
Bid price

"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.

8.3.38.

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.

8.1.39.
We have said above that we have observed some degree of correspondence between monthly average spot prices for gasoline ex Singapore and the values of successful bids for syngas. Such a crude overall relationship would support Mr Smith's position. But a detailed examination of the individual prices paid shows that within a particular quarter, there is a dispersion in the value of the bids. And over the nine quarters since 1 July 1986, there are shifts in price relativities as between domestic and export buyers: they fall about in no particular pattern; for example, in any one quarter the highest price paid may come from a domestic purchaser or from an overseas company. The individual buyers, also, have a varying presence over the nine quarters.
8.3.40.
For all these reasons, we reject the Crown’s submission that the trade in syngas is significantly insulated from international market forces. We reject the Crown’s submission that GGTG possesses significant market power in the disposal of syngas. We accept Mobil’s submission on the geographic extent of the market.
8.3.41.

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.

8.4 Competition, "Crown Avoidance" and "Collusion"

8.4.1 The MFP Clause and the Crown's Allegations

The MFP Clause

8.4.1.1.
Three different interpretations or versions of the MFP clause were suggested in argument by the parties. First, there was the interpretation contended for by the Crown—the weighted average of all more favourable domestic sales to other purchasers. Second, there was the interpretation espoused by Mobil—the price paid by the single most favoured purchaser, whether domestic or export. Third, there was the working interpretation of the Crown’s expert economists. This was something that became clear only in the oral proceedings when, in discussion with the Tribunal, it emerged that both Dr Bollard and Professor Comanor had worked with an interpretation—the same interpretation —contended for by neither the Crown nor Mobil. This we refer to as the "mixed" interpretation for it embodied elements drawn from both the Crown and Mobil's preferred interpretations; they assumed, first that export sales would not trigger the MFP clause and second, that Mobil would be entitled to the single best domestic price, ie. the lowest company’s bid, without averaging.
8.4.1.2.
We shall deal first with the mixed interpretation for two reasons: primarily because it is the interpretation that puts the Crown’s case at its highest; and secondly, because the Crown’s case depended largely, if not solely, upon the economic analysis of its two experts in developing and stating this part of their case. The interpretation of the MFP clause at which we have arrived (see para. ? above) of course differs from each of these interpretations. But for reasons we shall shortly set out, if the Crown’s case fails on the mixed interpretation, a portion of il must fail on the interpretation which we prefer.

Crown avoidance

8.4.1.3.
The contention can be expressed succinctly. Both Dr Bollard and Professor Comanor argued that the effect of the MFP clause would be to raise GGTG’s reservation price on domestic sales. This would provide strategic incentives for the export of syngas and the substitution of more highly priced imported gasoline for New Zealand consumers. More importantly, in the economists’ view, the MFP clause would make il less profitable for GGTG to offer price discounts to new entrants, thus increasing barriers to entry to new wholesalers.

"Collusive" bidding

8.4.1.4.
This contention was subject to some reformulation in the course of the proceedings. In the Counter-Memorial it appeared that the allegation was that Mobil's three competitors would collude to increase the price paid for syngas, with the intent of imposing a similar high price upon Mobil. Both Dr Bollard and Professor Comanor espoused a different theory, viz that the three wholesalers would likely collude to decrease the price they would pay for syngas, and this theory was adopted by the Crown in Final Submissions. There were two variants. One, favoured by Dr Bollard, was that the mi p supplied "an incentive to equalize their bids close to their best estimate of the export parity value". That incentive was additional to any that might already exist for the three wholesalers to adopt co-operative bidding strategies. "By equalizing their bids (eg. Caltex and BP in Q3’87) and having Mobil’s price come into line by virtue of the MFP, the companies can preserve the uniformity of their costs and stabilise their pricing strategy at wholesale level". (Brief, p. 88)
8.4.1.5.
One difficulty with this theory was that the strategy, if it exists, has not been characterized by much success. For exports in significant quantity (see previously) have been taking place. Professor Comanor’s alternative version of the theory accommodated this fact. This was that the mi p clause promotes a unity of purpose on the part of Mobil’s competitors to exercise mutual restraint in purchasing syngas, substitute the more expensive gasoline import, and so raise industry costs as to achieve a wholesale price and profits above the competitive level. Professor Comanor and Dr Bollard both said also that the mi p clause would facilitate the exchange of information between New Zealand wholesalers with anti-competitive effect.

Hindering of competition

8.4.1.6.
When the Crown's experts spoke of’collusion", they meant "tacit collusion" in the language of economics (and not necessarily of the law). Dr Bollard said in his brief (p. 70) that by collusion he meant "tacit collusion where there is some element of reciprocity". Professor Comanor said (AT. 229) he used the term "tacit collusion" to refer to "interdependence in motivation". Thus both the Crown's experts were working with a similar concept of collusion, what economists sometimes call "spontaneous coordination" or the use of co-operative strategies to achieve a "joint-monopoly" outcome. Both economists were including in their prediction of collusion not only an enhanced mutuality of interest but also enhanced market power. The MFP was thought to inhibit entry; to facilitate communication, both of market transía lions and of rivals' likely response; and to increase the community of interest, the co-operative stance, of Mobil’s competitors or perhaps even of the whole industry, The allegation of "collusion" was thus a broader category than the predicted "collusive'’ bidding for syngas, although the latter was a large element of their story.
8.4.1.7.

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.)

8.4.1.8.
The term "collusion" was thus an omnibus term, used to cover a prediction that market power, and non-rivalrous conduct, would be enhanced. Counsel for the Crown said in closing (AT, submissions 227) that the term did not necessarily refer to "arrangements and understandings" of the type considered by Australian competition law but that possibility was something that the Tribunal should consider. That expression as it appears in Section 45 of the Australian Act (the provision corresponding to Section 27), has been considered by Australian authorities to require "communication", "expectation" and "obligation". (TPC v. Nicholas Enterprises Ply. Ltd. (1979) ATPR 18,333 at 18,342 per Fisher J.; Morphett Arms Hotel Ply. Ltd. v. TPC(1980) ATPR 42,231 at 42,234 per Bowen CJ.)
8.4.1.9.
There is one legal novelty in the way that the Crown puts its case. This is the scope given to anti-competitive cause and effect, in that what is predicted is a "lessening of competition" that is caused by a trade practice that has been initiated by parties other than the alleged beneficiaries. The usual "collusion" or anti-competitive scenario is one in which the parties themselves invent and implement a "facilitating practice". There is nothing in Australian or New Zealand law that meets the case. Nor can we think of a comparable fact-situation in American antitrust law.
8.4.1.10.
One element of the unusual scenario is that insofar as the clause might give rise to an "arrangement or understanding" in the sense of Fisher J., that arrangement or understanding would be an ingredient of the effect of a practice initiated by others. In terms of the statute it would thus be an element but only one element—of the likely substantial lessening of competition. The Australian authorities, to date, have only considered arrangements and under standings as a cause, not effect, in accordance with the literal terms of Section 45 of the Australian Act.
8.4.1.11.
The Ethyl case (E. I. Du Pont de Nemours & Co. v. FTC, 729 E 2d (1984) 128) is the only MFP case to reach a conclusion in the U.S. courts, and that under Section 5 of the Federal Trade Commission Act dealing with "indan competition." But in that case an MFP clause was used by three out of loin manufacturers of lead anti-knock gasoline additives, along with certain other contested practices, in their own selling of the product. And it was these manufacturers who were alleged to be reaping the benefits of an "unfair practice" liven so, the Court of Appeal was unable to find a "clear nexus", a "causil connection between the alleged practice and market prices’ at 141. It was also relevant that the practice had initially been introduced by Ethyl 50 years ago, when it was the sole supplier of the additive, as a guarantee to its customers against price discrimination. The Court said that il was concerned to enunciate "workable rules of law" that would enable a firm to know if its practices were likely to be found "unfair" (at p. 139). In the result, the Court rejected the Commission’s finding of unfair competition.

8.4.2 The Structure and Functioning of the Wholesale Output Market

8.4.2.1.
The New Zealand wholesalers compete against each other in their sales activities, and against each other and overseas firms in their purchasing activities. The four wholesalers’ strategies in purchasing syngas are formed both by the pressures of the international market place and by the structure and competitive behaviour of the industry in marketing its products in New Zealand. We begin our assessment of the Crown’s contentions by outlining our findings on the market structure and conduct of the wholesale output market. Professor Klein for Mobil said (WT, 463) that it is characterized by an "enormous amount of competition". Professor Comanor for the Crown said (AT, 275) he inferred a "considerable degree of market power". In our judgment, the evidence points to a situation lying somewhere between.
8.4.2.2.
There are two features of market structure on which there can be no controversy. First, the industry until recently was highly regulated. The regulation of the industry was initiated in the pre-War period as an element in the economywide regulatory stance of the New Zealand Government. It encompassed licensing of wholesalers and retailers, a prohibition on vertical integration (whether by equity or contract), support for the Refinery (including restrictions on the importation of refined petroleum products), and price and profit control. The main avenue for competition was in purchase of feedstocks and blendstocks but even here, with the rrp system, the competition was against the average performance of the industry as a whole. Profit was held to 13% (nominal, pretax) on the average assets of the industry used in refining and marketing.
8.4.2.3.

Secondly, the industry is characterized by a high degree of market concentration. The four wholesalers' market shares are as follows:

BP/Europa 32%
Mobil 28%
Shell 24%
Caltex 16%

these market shares were very stable in the regulated environment. The four wholesalers trade with some 2700 retailers.

8.4.2.4.

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.

8.4.2.5 .
The evidence is that deregulation of the petroleum industry was a somewhat gradual process. Mr Makeig, for example, said that he was initially "sceptical" (WT, 589).

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.

8.4.2.6.
Three periods, therefore, can be distinguished in the deregulation process. There is first what we shall call the "provisional environment", extending from the election of the new Government until mid 1986. While deregulatory plans had been announced, neither the Commerce Act nor the Petroleum Sector Reform Act had been enacted, and the Interim Agreement for the sale of synfuel was operative. Second, there was the "mixed environment", running from mid 1986 to May 1988. The Commerce Act was being implemented, in stages, but oil industry regulation was still in place. Finally, from 9 May 1988, there is the "completely deregulated environment".
8.4.2.7.
The companies began adapting their behaviour and drawing up their plans before the final phase in this process. As we have related, the Interim Agreement, by its terms, expired on 30 June 1986 (supra para 2.8.6). Mobil, for example, had drawn up a "Deregulation—Retail Outlet Plan" by August 1985. Mr Pryor was appointed Chairman and Managing Director of Mobil Oil New Zealand Ltd in August 1987, as he put it (Brief 150) to "position our company to compete in a deregulated market". It is clear, in short, that deregulatory pressures have been gradually intensifying over the three periods we have distinguished.
8.4.2.8.
These pressures were and are in a state of some tension vis-a-vis the various sharing arrangements that were built up in the regulated period—the shared equity in the Refinery (and with it the pipeline to Auckland); the shared port storage facilities; the shared coastal distribution system; and the participation of Shell and BP in Kapuni and Maui, and use of the condensate. Such sharing, arrangements, as Dr Bollard emphasized (Brief, passim), do give rise to uniformity in some cost elements, even with deregulation; to some sharing of market intelligence; and to some fostering of community of interest.
8.4.2.9.
One would doubt that there is very much growth to be experienced in the domestic market for gasoline (unlike perhaps some of the other petroleum products). Professor Klein speculated that income elasticity of demand must be high. But Mr Makeig referred to the "insatiable appetite' that New Zealander have had over the years for gasoline, implying that consumption is already high, an observation that is consistent, too. with the low measured price elasticity of demand (-.26) quoted by Dr Bollard (Brief 67). The low price elasticity of demand would have a dampening effect on price competition which, in any event, tends to be swamped by the large tax component of final price. However, gasoline is a homogeneous product, with customers very ready to switch their purchases from one brand to another, which can make il very difficult to "hold" a price line for any length of time.
8.4.2.10.

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".

8.4.2.12.
While Professor Klein (AT, 262-3) thought the need to have lank storage for finished gasoline could raise a significant barrier to entry, he did point to two important favourable considerations: one is the availability of excess service stations in zoned locations as retail rationalization occurs, and the second is the possibility of limited entry into populous markets such as Auckland and Christchurch, thus adopting a cream-skimming strategy.
8.4.2.13.
The Tribunal has concluded that while barriers to entry are not trivial they are sufficiently surmountable to impose real pressures upon the incumbent wholesalers to operate, at least much more competitively than hitherto, if not necessarily to reach a state of workable competition We have been cautious in reaching that conclusion since deregulation is a new phenomenon for this industry, and there is the legacy of the past. Professor Comanor was very impressed by the wide gross profit margins that exist in this industry, and believed they must point to considerable excess profits and market power (AT. 228-9). We ourselves feel quite unable to disentangle profit from costs, or to judge to what extent the margins are a reflection of high-cost structures imposed by geographic disabilities and the former regulatory environment.
8.4.2.14.
But there is one conclusion we have reached which is of considerable significance for the resolution of this dispute. This is that processes of competition in the New Zealand wholesaler gasoline output market in the deregulated environment do not support the Crown’s "collusive" bidding theory. Both the Crown’s economists, as we have said, were working with a similar concept of "tacit collusion",one which requires firms to have such a unity of interest that their individual interests are furthered by co-operative non-rivalrous strategies. The concept requires firms to be in a somewhat symmetrical market relationship, one with another. It also requires high barriers to entry. A further pre-condition would be that there be few threats arising from prospects for growth and change.
8.4.2.15.
In the view we have formed, this is an industry in which co-operative and rivalrous forces are in some tension. As against the co-operative, sharing features emphasized by Dr Bollard, there are the asymmetries and the dynamic factors emphasized by Mr Pryor—indeed the uncertainties and pressures induced by deregulation itself. Mr Pryor (Brief 150-2; WT, 928-53) cited the exposure of the Refinery to overseas competition; the "race" between companies (especially Mobil and BP) to purchase "key service stations in order to secure their retail base"; the pursuit of supply contracts with their own and each other’s dealers; the beginnings of self-servicing retailing; the "battle for market share in the industrial and transport sectors" with some significant shifts in market shares in particular products; and the small movement that was occurring in market shares for gasoline. He agreed that gross profit margins in New Zealand were high, both in wholesaling and retailing, but said that, with deregulation, "dealers were beginning to compete with one another on price", initiated by the introduction of self service. While gross profit margins at wholesale were higher in November 1988 than in the first half of the year, Mobil had reduced price since deregulation "on three separate occasions", and the widening of the wholesale margin was a reflection of the customary world-wide lag in response of refinery prices to falling, crude prices.
8.4.2.16.
For the purposes of this arbitration we do not need to try to make a definitive assessment of the state of competition in the wholesale output market of whether, for example, the securing by the four wholesalers of approximately 20% of retail sites in the space of a few months (Pryor, WT, 1016) is to be interpreted as aiding or hindering competition; or what inferences are to be drawm from the continuing high gross profit margins. Indeed, with deregulation only a few' months old that would scarcely be possible. What we do observe is sufficient entry prospects, asymmetry and uncertainly in the market place as to make the Crown’s "collusive" bidding theory scarcely tenable.
8.4.2.17.
We should add one final point to this summary. This is that the companies are pursuing somewhat different strategies—"assymmetries"—in a range of their activities. They use differing feedstocks, with Shell and BP for example using both ownership and contractual arrangements to obtain secure access to local feedstocks. Mr Falconer pointed out that, with deregulation, firms can benefit directly from good sourcing rather than having to compete against the industry average. The Refinery charges different amounts to the different companies, using systems costing to reflect variations in feed and product. Over the last year, BP and Mobil have been the leaders in site acquisition. Mobil has a "large lead" in self-service though the others will need to follow (Pryor. WT, 1017).
8.4.2.18.
We place considerable reliance upon our conclusion that market conduct in this industry has been responding to the prospect of much easier entry. If barriers to entry were "formidable" we might not have been prepared to infer from these company initiatives anything more than an immediate response to deregulatory shock. But, for the reasons we have given, barriers to entry cannot be so described. Moreover it is clear enough that, even in the period that we have characterized as the "mixed environment", before final deregulation, the companies were being forced to adapt their business planning and market behaviour to the deregulatory challenge.

8.4.3 The Structure and Functioning of the Wholesale Input Market

8.4.3.1.
The analysis of the previous section on market definition points to the conclusion that the input market is a competitive market, geographically wide, l he four New Zealand wholesalers compete for their feedstocks, blendstocks and finished gasoline against numerous participants in the international marketplace, both on a term and a spot basis. GGTG is in effective competition with numerous sources for the finished gasoline alternative.
8.4.3.2.
When Professor Klein says (WT, 1454) that the four wholesalers "have to compete against thousands" of other buyers for syngas, he exaggerates most if taken literally. But the four wholesalers do have to compete against hundreds if not thousands of other buyers for (syngas plus syngas substitutes). Another way to put this is to say that we have not found a significant gap in substitution possibilities, generated by a stable and significant gap between export net-back and import parity.
8.4.3.3.
We note further that this is a market united by an extensive information network. While the market can exhibit volatility, all participants are sophisticated knowledgeable operators. All four New Zealand wholesalers have large multinational parents.
8.4.3.4.
Mr Pryor said (Brief 154) that this was "essentially a commodity business". His evidence was that the cost of refined product represents some 2/3 of a wholesaler's controllable costs, and gasoline generates most of the industry’s profit (Brief 150). We think il would be a lazy monopolist indeed who could afford to neglect such an important cost element and choose to purchase (on one of the Crown’s theories) from other than least cost sources, Even in the regulated era, the price and profit control system (being based on industry averages of costs and assets) was structured so as to place some discipline upon the companies, of a relative kind. Now, in the deregulated era, we have found not inconsiderable competitive pressure upon the companies, to reinforce whatever might be the demands of parent companies and natural profit-seeking inclinations.
8.4.3.5.
There is much to be said for the view that the injection of this clause into a market structure such as we have described will have consequences which are pro-competitive rather than anti-competitive. Certainly the clause means on the most favourable interpretation, in Mr Pryor’s phrase (WT, 966), that Mobil will always be "top competitor", that Mobil will always get the "best price". But these phrases must be heavily qualified by the fact that the "best price" refers only to syngas, which can amount in total to only one third of gasoline supplies; by the fact that Mobil’s privileged off-take under the contract can amount to no more than 60%; and by the fact that (where Mobil’s price is governed by the MFP as distinct from the rrp) this best price will always be shared by one other competitor.
8.4.3.6.
Indeed the very existence of the MFP clause injects an asymmetry into the marketplace that is not compatible with the symmetrical joint-maximization thesis of the Crown’s economists. It points to independent motivation on the part of Mobil, just as resistance to it by the other wholesalers points to its differential effect.
8.4.3.7.
Finally the intepretation of the MFP clause which we prefer, will itself reduce or blunt the impact the clause might relevantly have, since il requires the averaging of all sales of syngas to a particular purchaser in any one quarter, before il can be seen that the MFP clause has been triggered.

8.4.4 Crown Avoidance

8.4.4.1.

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.

8.4.4.2.

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.

8.4.4.3.
Nevertheless, in the Tribunal’s view, this does not dispose of the matter. For we can certainly envisage circumstances in which what might be termed the logic of the "Crown Avoidance arithmetic" would come into play. The only circumstance in which we can rule out the possibility of Crown Avoidance categorically is if there were to exist a single, uniform price in the market (as in some economics textbook models). But in this market there does exist a range of prices at which actual transactions take place, reflecting the uncertainty and shifting bargaining environment. This is clearly reflected in the evidence surveyed in Section 6.3 on market definition. Moreover the very existence of the MFP clause points to the realistic possibility that prices at which transactions take place may differ, one from another. So a revenue-maximising GGTG should consider whether the form of the mi p clause (its interpretation), and the alternative avenues for disposal of any material withheld, make it rational to withhold syngas from small low-priced bidders.
8.4.4.4.
Nevertheless the Crown experts’ theory faces a number of formidable obstacles, both of logic and fact, and fails to surmount any of them.
8.4.4.5.

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.

8.4.4.6.
A second requirement for the theory is that the import parity/export-netback hierarchy must always or nearly always hold. There must be a systematic array of available prices for syngas, with a stable and significant gap between the import parity for syngas and export net-back. The Crown must enjoy a "monopoly" in disposal of a material which has special value on the New Zealand domestic market. We have rejected this contention. Nor is the Crown’s terminology of "discriminating monopolist" apt.
8.4.4.7.
Third, even were we to assume the favourable interpretation of the MFP clause and the Crown’s "monopoly" position, the theory requires that the lowest domestic price that is accepted by GGTG must invariably be that of the (same) small new entrant with an assumed high elasticity of demand. The problem here is that there is no guarantee that the price bid by the small new entrant will fall at the desired place in the array, given the uncertain bargaining environment. Further, as Professor Klein pointed out, this does not accord well with commercial reality in that the best prices will often go to the largest buyers or to those that enter the spot market from time to time or, we may add, those with the best market intelligence—or perhaps sheer luck. Furthermore, the theory requires the incumbent wholesalers to adopt passively accommodating behaviour, making no attempt to bid away the low-priced syngas. We find this inconceivable.
8.4.4.8.
Fourth, it must be commercially sensible for the fifth wholesaler to base its entry upon the continuing availability of spot syngas at attractive prices. But even if the newcomer were to pay the lowest price for syngas, syngas is not always cheaper than imported gasoline. And as Mr Dineen said (supra para. 8.4.2.10), a continuing presence in the New Zealand market could well require some sourcing on a reliable term basis.
8.4.4.9.
Finally, the theory must surmount this hurdle: the extension of a price discount on syngas must make a significant difference to the competitive functioning of the wholesale gasoline industry in New Zealand. That is. barriers to the New Zealand market must be so high that some differential advantage needs to be accorded the new entrant that becomes the vehicle for the "de-stabilising shock". As to this, we have rejected the Crown’s analysis of market structure and market conduct in the wholesale gasoline industry (supra Section 8.4.2). We have found that the entry of a fifth wholesaler is a sufficiently likely possibility to stimulate incumbent wholesalers to a useful quantum of independent rivalry with or without the mi p clause. For this purpose we have not gone so far as to predict that a fifth wholesaler will enter the New' Zealand market, only that it is a sufficiently likely prospect.
8.4.4.10.
The foregoing all assumes that GGTG is adopting a "commercial' policy and aiming to maximise the revenue it receives from syngas. This was the analysis the experts preferred. However another possibility was raised, namely that GGTG would or could regard it as part of its mandate to assist a small new entrant, even if that meant some sacrifice of revenue. This variant of the theory, also, faces telling objections. If GGTG were to take it upon itself to succour a small new entrant to the industry it could do so anyway, without using the MFP clause as the uncertain vehicle for its discriminatory policies. Again, if GGTG is alternatively assumed to be acting as the instrument of Government policy, there would be simpler, more direct, more reliable and more transparent ways of supporting a new entrant, eg. through a financial grant or the leasing of storage facilities on attractive terms. Such a policy would no doubt be contrary to the Government’s deregulatory, free market stance but so, too, would any scheme that required GGTG to favour an entrant at the expense of its revenues.
8.4.4.11.
Our conclusion therefore is that we find nothing in evidence or logic to support the "Crown Avoidance" thesis beyond what we have labelled the "simple arithmetic". On the view we have formed, it is contradicted by the export-import price relativities, the market structure and conduct of the New Zealand wholesaling industry, the inflexible character of syngas supply, and by the very nature of the mi p clause that we have to consider. Indeed, on some interpretations of the MFP clause, no detailed investigation of the facts is required.

8.4.5 "Collusive" Ridding

8.4.5.1.
We here address one element of the Crown’s general "collusion" thesis. As earlier explained, the Crown’s economists used the phrase "a collusive outcome" to refer to their predictions of a lessening of competition generally as a result of the implementation of the MFP clause. For example, they reasoned that this could occur through enhancement of barriers to entry, which would increase market power, and thus enable the wholesale industry to pursue co-operative strategies in their market conduct. They identified, however, only two routes by which the "collusive" outcome, or lessening of competition, would be reached Crown Avoidance and "collusive" bidding. It follows therefore that when we have considered the submissions concerning "collusive" bidding, we have considered the totality of the Crown’s case.
8.4.5.2.

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. 8.4.3.4).

(3) The Crown Avoidance theory is untenable.

As we earlier noted (para. 8.4.1.4), 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,

8.4.5.3.
The first problem is that the theses requires implicit or tacit co-operative behaviour on the part of the three wholesalers. However our assessment of the degree to which competitive forces play on the industry makes this unlikely.
8.4.5.4.
Secondly, the Comanor version requires that the three wholesalers deliberately refrain from purchasing the domestic syngas in order to force symmetrical high costs all round with a view to achieving higher prices and higher profits. Such a high-cost strategy is basically implausible. Moreover, even if higher costs and higher prices were to be achieved, the strategy might not result in higher profits. In any event, it is not clear why an MFP clause is required to achieve such a high-cost strategy.
8.4.5.5.
Third, both the Bollard and Comanor theories require Mobil to play a passive role, taking no advantage of Bollard-low bids or the Comanor-purchase boycotts to purchase syngas that would be cheaper (it is assumed) than the imported gasoline alternative. Alternatively, Mobil is required to be party to the implicit conspiracy. We find either possibility inconceivable.
8.4.5.6.
Four, the theses presuppose the stable import parity/export net-back relationship that we have rejected on the evidence.
8.4.5.7.
Five, the Bollard version of the theory, viz. that the three wholesalers equalize their bids close to their best estimate of export parity value, requires that the MFP clause act as an additional incentive to any that might already exist for the three wholesalers to engage in joint-monopsony low-bid conduct. Dr Bollard pointed to two possible ways in which this additional incentive might come about: in the first place, successful independent behaviour could anticipate less prospect of reward, if Mobil can always rely upon the MFP clause to match; and again, each of the wholesalers would know that this was a factor playing upon the other two, with symmetrical effect. There is thus some induced commonality of interest, the Three against Mobil. This prediction at least might have been satisfied if the market structure had been in other respects conducive to cooperative behaviour. But we have found otherwise.
8.4.5.8.
Six, both economists said that the MFP clause would remove some price uncertainty from the market. All would know that Mobil was getting the best price—whatever that was—for its syngas. We attach little weight to this factor, given the other forces playing upon the market’s functioning.
8.4.5.9.

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.

8.4.5.10.
Finally, the Crown's predictions receive no support from the structure of the bidding market, as we have analysed it, nor from the actual pattern of bidding—or rather, more accurately, lack of pattern in the bidding—by the domestic companies to date.
8.4.5.11.

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.

8.4.5.12.
Both Dr Bollard and Professor Comanor, however, were concerned to predict what might happen in the future. The Crown's formal submission is that 'collusive" bidding contract in response to the MFP clause is a "real possibility" in the future. We find it difficult to accord any weight at all to this possibility. Our conclusion, on all the evidence and argument, is that this "collusive" bidding, behaviour is such a remote possibility as in no way to qualify for the characterization required by the Act, namely that it is "likely".

8.5 Conclusion

8.5.1.
The Crown has failed to satisfy the Tribunal that the mi p provision is likely to have the effect of substantially lessening competition in any relevant market in breach of Section 27 of the Commerce Act.
8.5.2.
We have accepted the Crown’s submissions on most points of interpretation of Section 27, principally that we are required to assess the likely competitive functioning of relevant markets with and without the operation of the mi p clause; that ‘substantially lessening" may mean "hindering" competition in a way that is "real or of substance" but not "large or weighty"; that competition is lessened if there is an increase in market power, especially through heightened barriers to entry, ie. a diminution of competitive processes in the market as a whole. We have reserved our position on the interpretation of "likely", being content to approach the evidence and argument on the basis that the likelihood required is at a minimum one of "tendency or real possibility", as the Crown submitted.
8.5.3.
We have concluded that the Crown's case fails on grounds both of evidence and logic. Ultimately we find that there is no foundation for the Crown's central contentious that GGTG has a domestic "monopoly" in disposal of syngas by virtue of a stable and significant gap between import parity and export net-back; or that the relevant input and output markets are prone to tacit collusion.
8.5.4.
Our conclusions regarding breach of the Commerce Act are not dependent upon some particular interpretation of the mi p clause. However il is the case that the logic of the Crown’s thesis would require, amongst other things, an interpretation of the MFP clause for which neither party contended.
8.5.5.
Counsel for the Crown conceded that there was no evidence of any past effect demonstrating a lessening of competition. Our conclusion has been arrived at in response to submissions made by Crown counsel with prospective operation. But our conclusion applies to the whole period over which the Commerce Act has had effect. We should add that we were not invited by Crown counsel to consider any differentiation between past and future, or between different periods in the past, for the Commerce Act claim.
8.5.6.
In the course of our Findings on this question we have noted two difficult problems of interpretation of Section 27 of the Commerce Act, namely the meaning of "likely" (supra 8.2.25 IT) and the causal relevance of a practice initiated by parties other than the alleged beneficiaries (supra 8.4.1.9 IT). In the event, we have not needed to resolve these questions in order to come to our conclusion. We find that there is no "tendency or real possibility" that the MFP clause lessens or will lessen competition within the meaning of Section 27 of the Commerce Act.

9. Answers to Questions

(a) Yes

(b) Yes

(c) No

(d) & (e) Deferred

(f) Unnecessary to answer

(g) Yes

(h) No longer in issue

(i) Yes

(J) No

(k) No:
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.

10. Tribunal Findings

For the reasons set out in Parts 2, 4, 5, 6 and 8 above, the Tribunal’s answers to the questions of liability as posed in the pleadings and categorised in Part 3 are as set out in Part 9 hereof.
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