Ampol Ltd v Caltex Oil

Ampol Ltd v Caltex Oil - [1986] HCA 2 - HCA 1986 case summary — Zoe

[12]

4. Legislative control of the quantity of lead (in the form of lead tetra-ethyl or lead tetra-methyl) in petrol was introduced in New South Wales as from 1 January 1975 by a regulation under the Clean Air Act 1961 (N.S.W.), as amended. The regulation made it an offence (inter alia), in the part of the State throughout which the regulation applied, to sell or distribute for sale or have in possession for sale or for distribution for sale petrol which had a greater lead concentration than that prescribed. The regulation applied to a number of cities, municipalities and shires, including Sydney, Newcastle and Wollongong. It was a defence to a prosecution for that offence if the defendant proved that he believed on reasonable grounds that all the petrol was to be used outside the part of the State throughout which the regulation applied or, if within that part, other than in the operation of a motor vehicle propelled by a petrol engine. The maximum lead concentration prescribed by the regulation progressively reduced over specified periods. No similar provisions had the force of law in Queensland. To produce super grade petrol which contained a lower concentration of lead, but which at the same time met the specification which fixed the required octane rating, it was necessary to make increased use of the products of secondary refining and this significantly increased the cost of production. Thereafter, Ampol continued to supply Caltex in Queensland with petrol which contained the same concentration of lead as before ("high lead petrol") but in New South Wales Ampol needed to be supplied with petrol which contained no greater lead concentration than that prescribed ("low lead petrol"). Indeed, Caltex could not have lawfully supplied, nor could Ampol lawfully have had in its possession for sale or for distribution for sale high lead petrol, except for use outside the part of the State throughout which the regulation applied - a part which included the major cities of the State. Eventually, in 1979, Caltex refused to supply Ampol with low lead petrol of super grade except on terms that Ampol pay a "surcharge" for such supplies. The first question that falls for decision (and in the view that I have formed the decisive question in the case) is whether Caltex was bound to supply the low lead petrol without requiring any payment.

[16]

8. In deciding whether one thing is like another, it is necessary to keep in mind the purpose of the comparison. In the present case, the characteristics that make one product unlike another for the purposes of the agreement are those characteristics whose presence or absence will commercially affect the rights and obligations of the parties under the agreement. Since the agreement speaks not of different products, but of "non-like products", the fact that two products have some similar characteristics does not necessarily mean that they are not "non-like". I cannot agree that because two products belong to the same genus, are of the same grade and perform the same function in the same way they cannot be said to be "non-like"; to accept that view would be to look only at similarities and to ignore points of difference which might be important from a commercial point of view. There can be no doubt that products do not become "non-like" within the meaning of the agreement simply because their chemical composition is not the same, or because the cost of production is higher in one case than in another. The evidence shows that the materials and the methods used in the production of petrol may have the result that the chemical composition of the product may vary from refinery to refinery and even from batch to batch manufactured at one refinery. Moreover, the circumstances under which one refinery operates may have the result that the costs of production may differ from one refinery to another. Different or changing circumstances may increase the costs of one refinery but not of another; for example, Ampol may be obliged to incur freight costs heavier than those borne by Caltex in transporting crude from Bass Strait to its refinery or Caltex may suffer losses because of an industrial dispute. Certainly the fact that the product becomes more expensive to produce at one refinery than at another does not in itself make it a "non-like product" to that of the other refinery.

[17]

9. This does not mean that differences in chemical composition and cost of production are irrelevant to the question whether products are "non-like". If, for example, an additive introduced by one refinery made the petrol unsaleable by reason of the law of the State in which it was intended to be sold, petrol which contained the additive and petrol which did not would be "non-like products" from a commercial point of view. In the present case it is true to say that the agreement did not provide for an exchange in New South Wales - petrol was delivered in one State in exchange for that delivered in another - and the high lead petrol delivered by Ampol at Lytton was legally and commercially saleable in Queensland. However, if high lead petrol had been delivered in exchange by Caltex at Kurnell, Ampol would have received a product which legally it could not have sold in the main centres of population in New South Wales. The low lead petrol was saleable anywhere; the high lead petrol was saleable only in some of the areas in which the parties marketed their products. That difference, vital from a commercial point of view, seems in itself enough to indicate that the products are "non-like" for the purposes of the agreement. That conclusion is supported by the fact that it cost significantly more for Caltex to produce the low lead petrol which Ampol needed at Kurnell. Cost, although not in itself decisive, must be relevant, because underlying the agreement is the assumption (reinforced by cl.15 of the agreement) that there will be at least a similarity between the cost of production of the like products which are to be exchanged without the making of any financial adjustment - not an exact correspondence, but a rough approximation which takes into account possible variations due to vicissitudes of commercial affairs. A product which can be sold anywhere in the markets with which the agreement is concerned because it complies with a legal requirement as to the maximum content of lead, and which for that reason is significantly more costly to produce, is, in my opinion, commercially speaking, unlike a product which contains more lead than the specified maximum and which therefore can be sold only in some of those markets and which costs significantly less to produce. It is true that the question whether the products are "non-like" is one of degree, but having regard to the vague and informal provisions of the agreement it is not altogether surprising that the parties failed to give a more precise definition of "non-like products".

[90]

7. The first question to be considered, then, is whether the high lead premium motor spirit produced by Ampol at Lytton is "non-like" the low lead premium motor spirit produced by Caltex at Kurnell. Both products have the same octane rating, a rating which meets the requisite specification for premium grade motor spirit. They are therefore of the same grade. They both perform an identical function. Mr Gleeson Q.C., counsel for Ampol, argues that being of the same grade they must therefore fall within the same category of product, the exchange of which is secured by pars. 2 and 14 of the agreement. He relies on the Australian Standard Specification for Petrol (Gasoline) for Motor Vehicles published by the Standards Association of Australia in 1976. This specification sets out requirements for two grades of petrol based on their octane number as covering "the current range of quality retailed in Australia for use in spark-ignition engines". The general components common to petrol of both grades are set out in relation to each of the following properties: Copper corrosion, Sulphur content, Existent gum, Oxidation and Lead content. The last-mentioned item carries the notation "As permitted by Government legislation". Mr Gleeson argues that the emphasis on "grade" in the Australian Standard merely confirms the industry understanding described in the evidence to the effect that "grade" is a term used to distinguish between different kinds of the same product, the products being motor spirits, kerosenes, distillates and fuels. On the other hand, Mr Bennett Q.C., counsel for Caltex, argues that there are three factors which make the high lead and low lead products "non-like": their chemical composition, the cost of production and the legislation. It is said that it is a question of degree. I think the fact that Mr Bennett is driven to the submission that it is a question of degree tends to expose the fallacy of his argument because it is highly unlikely that commercial operators would adopt a distinction that would expose them to constant disputation as to where in any particular case the line was to be drawn. The evidence is undisputed that, leaving aside its lead content, the chemical composition of the finished product may vary from refinery to refinery and even from batch to batch. Varying climatic conditions will require a different level of volatility, resulting in different chemical components in Queensland as compared with New South Wales and necessitating adjustments in order to cater for summer and winter use respectively. The place of origin of the crude oil may be a factor determining the sulphur content. Perhaps of greatest significance are the different refining processes that are adopted at different refineries. Each refinery has its own component blend stocks each of which has a particular chemical composition which itself may vary from time to time depending on the crude oil being used and the particular operating conditions of the various processes. The combination of these factors will result in a varying chemical composition of the finished product notwithstanding that its overall performance characteristic still meets the required specification. The fact is that these parties regularly exchanged their product specifications in accordance with par. 20 of the agreement without any suggestion that their differing chemical composition might take them out of the category of like products. It is important to note that the only contribution that lead makes to the finished product is that it assists in achieving the specified octane rating. If less lead is used, then other blending processes must be employed in order to achieve the same result. It is the octane rating and not the lead content that determines whether the grade of motor spirit is premium grade or regular grade.

[91]

8. The cost of production cannot be a relevant factor in determining whether products are "non-like". The agreement is basically an agreement for the exchange of finished petroleum products, grade for grade. Neither price nor value enters into the arrangement, save with respect to delivery charges in respect of the finished product. It is clear that the parties, while recognizing that many factors - the cost of getting the crude oil to the refinery, the efficiency and economy of the refining processes, the impact of government charges, etcetera - could enter into the costs of production so as to render the simple exchange of a litre of motor spirit in one State for a litre of motor spirit in another State more financially advantageous to one party than to the other, nevertheless determined that any such consideration was outweighed by the administrative simplicity of the arrangement coupled with the confidentiality it secured to the operating costs of each refinery. The total irrelevance of actual costs of production is illustrated by reference to the variations to the agreement that were negotiated during 1977 and 1978 in order to deal with the situation when an unacceptable imbalance developed in the course of the operation of the exchange agreement. It is unnecessary to detail the ground rules that were agreed in order to deal with such a situation, save to notice that it became necessary to provide a formula for valuing the extent of the imbalance. The formula did not focus on the actual costs of production of the party which had supplied more of the product than it had drawn. It took the landed cost of the crude oil at Kurnell or Lytton as the case may be "plus 75% of gross refiners margin at Bahrain for individual product balance concerned". The adoption of a purely notional refining cost, namely, one based on actual costs at Bahrain in preference to reliance upon actual operating costs, tends to confirm that a variation in the costs of production was not intended to affect, for the purposes of the exchange agreement, the characterization of the product.

[94]

11. In order to determine whether Ampol is entitled to recover the moneys it has paid to Caltex by way of surcharge, it is necessary to consider a number of submissions advanced by Mr Bennett on behalf of Caltex. The first is that the agreement did not impose an obligation on either party to supply any product. It did no more than set out the basis upon which exchanges would take place if and when the parties chose to supply products to each other. Mr Bennett observes, correctly, that a difficulty with holding the agreement to impose any obligations on the parties is that the precise extent of those obligations cannot be measured. Nevertheless, it seems to me that the agreement contains several indications of an intention that it should impose obligations on the parties, notwithstanding that a more formal document was foreshadowed but never eventuated. Paragraph 2 states categorically that products will be exchanged. The addition of the words "as shall be mutually agreed" anticipates some reasonable form of consultation based on prior notification of its needs by one party to the other so that the arrangement may be administered in an orderly manner. Paragraphs 4 and 5 are expressed in terms of an obligation on one party, at the request of the other, to deliver products to a nominated tankage. The inclusion of par.13, limiting the minimum term of the agreement, would be surprising if the agreement was not intended to secure rights to the parties and impose obligations upon them. It is true that the agreement is not specific in terms of the quantities that are to be exchanged but the reason for that is obvious. It would have been impossible to anticipate the precise needs of either party far into the future. Bearing in mind that the agreement is a commercial document drawn up by businessmen (cf. Hillas and Co. Limited v. Arcos Limited [1932] UKHL 2; (1932) 147 LT 503, at pp 511-512; Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd. [1968] HCA 8; (1968) 118 CLR 429, at pp 436-437), its intended operation is reasonably plain. The agreement secured to each party an assured supply of the petroleum products it required for distribution in the State in which it did not operate its own refinery and in consideration of that supply it undertook to supply to the other on request roughly equivalent quantities, grade for grade (par.14). If that is not what the agreement means, then it is hardly efficacious in any commercial sense, particularly when regard is had to the evidence that, in the wider perspective, the orderly marketing of petroleum products throughout Australia is entirely dependent upon oil companies operating refineries honouring their obligations under these agreements. Reference may also be made to pars. 17 and 18, both of which identify particular topics which are reserved for separate negotiation, thereby implying that the other provisions in the agreement are intended to be binding. As Foster J. observed, there would no doubt be terms implied limiting the obligation of a party to supply in particular circumstances which deprived it of the capacity to comply. Finally, if it matters, there can be no doubt that the parties regarded the agreement as imposing obligations. When the disputation over the proposed surcharge reached flashpoint in February 1979, the telex of 7 February 1979 from Caltex informing Ampol that henceforth it would supply only high lead motor spirit from Kurnell concluded with the following sentence:

[106]

" ... Reference your telex No. 154/2 dated and

received February 13, we advise that effective a.m.

Monday February 12 deliveries of low lead level

premium gasoline recommenced upon your agreement to

pay a charge calculated in accordance with the

Shell formula being as at February 12, 0.159 cents

per litre (stop) Whereas we have contended that

this charge should be effective January 1, 1979 and

you have contended that it should be effective from

recommencement of deliveries i.e. February 12, in

order to maintain our normally amicable

relationships we are prepared, without prejudice,

to accept payment of the charge as from and

including Monday, January 22 (stop) With regard to

item 3 of your telex, we are unable to accept that

the decision in your case with Shell should be

binding upon us, firstly, because the contract and

contractual relationships are different and

secondly, we are not a party to the proceedings

(stop) However, we suggest that when the final

decision in the Shell proceedings becomes known, we

should confer with a view to ascertaining whether

that decision throws sufficient light upon the

matter to enable us to arrive at an agreement in

relation to our dispute (para) With reference to

item 2 of your telex, we cannot accept that your

payment of the abovementioned charge should be

made upon the conditions stated therein (stop) If,

after the Shell proceedings are settled you should

feel that any refund of the charges should be made

to you we would earnestly hope that agreement could

be reached by means of friendly negotiation (stop)

However, should such fail, we would certainly

agree at your request to seek a declaratory

judgment in the Supreme Court with all due

expedition as to what are our respective

contractual obligations (if any) as to the supply

of low lead premium gasoline and as to whether the

proper interpretation of those obligations

requires us to make such supply without additional

charge (stop) Whether there would be a refund of

payments made by your Company of the charge would

depend upon the ultimate judgment (stop) We

sincerely hope that such proceedings will not be

necessary (para) ... " (my emphasis).

At a glance

Court

Decision date

Before

Source

Judgment (117 paragraphs)

Ampol Ltd v Caltex Oil (Australia) Pty Ltd [1986] HCA 2; (1986) 63 ALR 540; (1986) 60 ALJR 225 (20 February 1986)

Parties

Legislation Cited (1)

Cases Cited (3)