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Phillipa MacDonald (pictured) at Kensington Swan takes a detailed look at Justice Dobson’s substantive findings regarding the claims brought by Todd against Shell and OMV in what is one of the country’s more significant industry court cases.
This article examines Justice Dobson’s substantive findings regarding the claims brought by Todd against Shell and OMV. The basis of the case was an allegation by Todd of an unlawful constraint on the level of production from the Pohokura field by Shell and OMV. Todd claimed that this constraint was effected by way of ‘collusion’ between Shell and OMV whereby they entered into secret agreements, excluding Todd, to set gas off-take rules. Todd claimed that this restraint led to loss being suffered by Todd and New Zealand gas consumers being detrimentally affected by the pushing up of gas prices. Todd’s causes of action were based on breach of contract, breach of obligations of good faith and fiduciary duties (owned by Shell as Operator), and breach of the Commerce Act 1986. Further, Todd sought substantive confirmation of its entitlement to connect separate pipelines to the Pohokura production station for the export of gas and condensate. Todd sought quantified damages of up to $320 million for alleged breaches of contract, and exemplary damages of approximately $600 million. Todd claimed that Shell and OMV breached the JV Operating Agreement (JVOA) in regards to setting the off-take rules by way of a side agreement (which included keeping the producing capacity of Pohokura at 70 petajouls per year) and nomination protocols which were circulated and resolved by Shell and OMV, but without the agreement of Todd. Todd argued that Shell and OMV breached the JVOA by issuing off-take rules which kept the producing capacity of the field at 70 petajous per year, instead of the higher ‘nameplate’ capacity of 86 petajouls per year. The JVOA provides: ‘…each party shall have the right and obligation to own, take in kind and separately dispose of the share of total production available to it under this Agreement in such quantities and in accordance with such procedures as may be set for the offtake agreement refereed to in Article 10.2.’ Todd claimed that the off-take rules breached the JVOA by not giving a constant right to each party to take at all times its share of the gas that the Pohokura field was reasonably capable of producing, which was the higher nameplate capacity of 86 petajouls per year. However, Justice Dobson found that keeping the producing level at 70 petajouls made commercial sense as this level of production underpinned all commercial forecasts by all parties since the inception of the venture. According to Justice Dobson, ‘all parties had concluded gas sales for a number of years, relative to production at this rate’. Shell and OMV argued that the JVOA should not be interpreted so as to mean that all parties had the right to take their share of the total existing capacity of the actual field’s reserves at all times (i.e. 86 petajouls), rather, the JVOA provided that each party is to take its share of total production (i.e. what is actually produced under the JVOA) as ‘…available to it under this Agreement’. In other words, the parties had a right to their share in gas that is actually produced, that is, the physical volume of gas that actually arrives at the delivery point. Justice Dobson agreed with this interpretation of the JVOA and ultimately found that Shell and OMV were in no way breaching the JVOA. The JOA also provides: ‘The Parties may enter into ‘special arrangements’ for the disposal of Natural Gas which are consistent with the development Plan and subject to the terms of the Permit. These arrangements may provide for joint marketing and sales of Natural Gas as may be agreed between the Parties from time to time. (Emphasis added).’ Therefore, Justice Dobson found that the off-take rules were ‘special arrangements’ under the JVOA that Shell and OMV could legally issue, and were ‘promulgated in accordance with the provisions of the JVOA by majority vote of the operating committee’. Todd then claimed that the conduct of Shell and OMV in voting for the resolution that introduced the off-take rules. Todd claimed that these obligations were breached by Shell and OMV because they voted for an off-take agreement which was kept secret from Todd, withheld the full benefit of the JV from Todd (access to 86 petajouls) and exercised their voting power for commercial interests outside Pohokura (namely, giving priority to Maui interests). Both Shell and OMV argued that obligations of good faith could not be implied into the JV, as the test for imposing implied terms (to give business efficacy to the contract et cetera) had not been satisfied, and because the JVOA expressly excludes any implied terms. In this instance, Justice Dobson agreed with Todd, saying that implied good faith obligations existed in law, ‘…I am satisfied that the rationale for the law implying a core obligation of good faith extends equally into intra joint venture decisions made by a majority of the venturers pursuant to the terms of the agreement governing their JV’. Justice Dobson found that the entering into of the covert agreement did amount to an absence of good faith by Shell and OMV, and the separate marketing of Pohokura gas also showed a lack of good faith. However, Justice Dobson concluded that Shell’s conduct in the governance of the Pohokura JV was not motivated by a desire or intention to harm Todd’s interests, and did not see that the degree to which there was an absence of good faith should result in the otherwise valid decisions being struck down. He also found that the failures on behalf of Shell and OMV to act in good faith did not fall within the forms of good faith obligations pleaded by Todd, nor were these failures sufficiently related to the harm Todd alleged in the contractual context to give rise to any liability. This was supported by the fact that Todd chose to absent itself from operating committee meetings when it knew that the off-take agreements were being debated. Therefore, the lawfulness of procedures adopted by Shell and OMV were upheld. Todd also claimed that Shell, as operator of the JV, breached fiduciary duties owed by it to Todd. Todd claimed that Shell failed to act in the best interests of all the JV partners, preferred the interests of one or more JV partners (itself and OMV) over another JV partner (Todd), and exercised a power conferred on it by the JVOA for an extraneous purpose, namely to serve commercial interests of Shell and OMV outside the Pohokura JV. In response, Justice Dobson found that Shell’s obligations to the JV partners were not subject to fiduciary obligations, and even if they were, Shell’s behaviour would not have constituted a material breach of such fiduciary duties. Finally, Todd also pleaded that Shell and OMV breached sections 27, 29 and 30 of the Commerce Act by giving effect to an arrangement or understanding between them (in the off-take rules) that had the purpose, effect, or likely effect of substantially lessening competition, controlling or maintaining of prices, or constituting exclusionary provisions. However, Todd struck serious obstacles in proving Shell and OMV had breached the Commerce Act. First, Justice Dobson found that remedying the complaint (of not having access to higher levels of Pohokura gas) lay entirely within Todd’s hands as it had the opportunity to enter into a ‘gas balancing agreement’ (GBA) which would allow access to higher level of gas. In fact, the Judge found that the only reason a GBA, which would provide detailed rules around unequal levels of take-off, had not been agreed was due to Todd’s opposition and refusal to sign the same. If such an agreement had been entered into, then the JVOA allowed for higher levels production capacity to be leveraged (for example, up to 86 petajouls), but higher levels were precluded until these necessary rules were in place. Secondly, Justice Dobson found that Todd failed to make out the dimensions of the market in which it claimed the anti-competitive conduct occurred. However, Todd was not able to satisfy the court that the dimensions of the market in which the anti-competitive behaviour was said to have occurred actually existed. It followed that the allegations of breach of the Commerce Act must also fail. Finally, the Judge found that during the relevant time (roughly 2006 to 2009), the New Zealand gas market was reasonably well balanced, and indeed there was at times an oversupply of natural gas in New Zealand. This means that Todd would not have been in a position to sell increased volumes of gas even if it had access to it, and thus could not have suffered any loss by virtue of not having access to higher volumes of gas. In fact, Todd itself had an excess amount of gas during this period which it chose to defer (i.e. not sell) until later years. Ultimately, Shell and OMV were found not to have ‘substantially lessened competition’ by way of showing priority to the Maui partners (as suggested by Todd), protecting reserves, price fixing, or by enlisting exclusionary clauses. This is almost entirely due to the fact that Todd could have had access to higher levels of gas if it so wished, so long as it entered into the relevant GBAs (which it chose not to), and even if it did, there would not have been a market to take the gas to anyway. The only element of this case on which Justice Dobson sided with Todd, was that he agreed that Todd was entitled to connect its own independent pipes to the Pohokura Production Station, and that Shell and OMV were estopped from preventing Todd from doing so. Other than this lone victory, Todd ultimately failed to satisfy the Court that Shell and OMV had breached the JVOA, obligations of good fail, fiduciary duties, or the Commerce Act.
Energy NZ Vol.4 No.5 September-October 2010 |
The case of Todd Pohokura Limited v Shell Exploration NZ Limited v Anor (31 July 2010) has already been the subject of many articles, commentaries and opinion pieces; mostly with a focus on the toxic relationship between the Pohokura joint venture (‘the JV’) parties, and Justice Dobson’s unusual plea to the partners to abandon their bitter and seemingly endless procession of litigation.