Qenos Pty Ltd v Mobil Oil Australia Pty Ltd

"(a) deciding what industry quality standards were, on a basis that was never put by Mobil nor raised by the arbitrator, and on which Qenos had the opportunity to lead evidence or address argument; and (b) deciding that there had been a change to industry quality standards on a basis that was never put by Mobil nor raised by the arbitrator in argument and in respect of which Qenos had no opportunity to lead evidence or address argument; and (c) stating that Mobil's position was not that industry quality standards were the product exchange specifications, when in fact it was the position that Mobil had argued and maintained throughout the arbitration proceedings."

6. On 9 August 2002, in compliance with a direction of the judge in charge of the Commercial List given on 2 August 2002, Qenos filed points of claim setting out in a little detail the nature of its allegations. Many of these allegations were not pressed before me so that the remaining were the following:

"22. The Arbitrator breached his obligation to accord procedural fairness to Qenos in that he made a finding that a change to industry quality standards under Section 4.02 of the Agreement had occurred not in June 2000 but `earlier in the year, probably in February, certainly by March' 2000 but without: (a) drawing to either party's attention at the arbitration hearing that the change to industry quality standards - Mobil's case and Qenos' response thereto notwithstanding, may be earlier than that as alleged by Mobil; (b) affording to Qenos an opportunity at the arbitration hearing of dealing with this possible finding or point either by way of addressing argument on the facts or the law, calling evidence, recalling Mobil's witnesses for cross-examination or alternatively further cross-examination. ... 25. Further, in finding that Mobil had made on 23 June 2000 an `effective' nomination under Section 4.02 of the Agreement, the Arbitrator mishandled the arbitration in that he did not decide all the issues addressed by the parties - (a) in their pleadings; (b) in Final Submissions which were worthy of serious consideration and seriously advanced.

Particulars

The Arbitrator failed to address in the Award and the Reasons therein: (i) whether there were any and if so what industry quality standards dealing with the blending of untreated SCN in petrol at the date of the Agreement notwithstanding it was addressed by Qenos in its Points of Defence (para. 26) and its Outline Submissions 1 March 2002 and noted by the Arbitrator at the hearing as a critical issue for determination (Transcript 749, 759, 761, 773 and 781); (ii) what were the industry quality standards dealing with the blending of untreated SCN in petrol immediately prior to the date of the change to same in June 2000 as alleged by Mobil notwithstanding the issue was addressed by Qenos in its Points of Defence (para. 26), its Outline Submissions dated 1 March 2002 and noted by the Arbitrator at the hearing as an issue for his determination (Transcript 761, 809-810);"

10. In accordance with usual practice, the arbitrator has been served with notice of this application and has advised the court that he would take no part in the proceeding and would abide the result.

13. A quantity of material has been filed in support of or in opposition to the application. It comprises the following affidavits and voluminous exhibits:

I have had regard only to those parts of these affidavits and exhibits to which my attention has been drawn.

19. This application was heard at the same time as Qenos' application for leave to appeal against the award pursuant to s. 38. I am delivering a separate judgment because the material relied on in this application is necessarily different from that receivable under the s. 38 application. I should mention, too, that the role of the court under s. 42 is very different from that under s. 38. I will not entertain as a basis of misconduct any suggested error of law arising out of the award, even if this might otherwise amount to misconduct. An agreed disputant cannot be permitted to attack an award under s. 42 in circumstances where this attack, if brought under s. 38, must overcome the difficulties placed in its way by Parliament in s. 38(4).

22. Misconduct in arbitration law covers a wide range of procedural and other irregularities. It cannot be disputed that a breach of the rules of natural justice constitutes misconduct[1]. Nevertheless what amounts to such a breach might be a matter of some debate and will certainly take its colour from the nature of the proceeding. In the present case we are concerned with an arbitration, albeit one which was conducted before a legally qualified arbitrator with the parties legally represented to a high level of sophistication. It is apparent, too, that the proceeding was conducted before the arbitrator with a degree of legal formality: pleadings and particulars were given, counsel opened their cases, were permitted to call and cross-examine witnesses and to make extensive final addresses.

25. Like a judge, an arbitrator is entitled to determine an issue, particularly a legal issue, on the facts as they are presented and found to exist, notwithstanding that this may not have been pleaded. Nevertheless, I accept that it would be misconduct for an arbitrator to have decided the issue on the basis of a scenario which was not presented by either party or where the arbitrator gave no indication to the parties that he or she might be minded to adopt that scenario[2]. This is but a manifestation of the ordinary rule of procedural fairness that a party should know what finding might be made against it and should have a reasonable opportunity of answering it. But this rule must be applied, particularly in an arbitration, in a forensically realistic way. Furthermore, it is not every want of procedural fairness which will cause the court to act under s. 42; it must appear that the want of fairness may have caused a substantial miscarriage of justice[3]. In many, if not most, cases the want of fairness itself creates the prejudice[4] and the court in such an event will not engage in any fine analysis to show that a substantial miscarriage of justice could not have occurred.

29. Since 1962, the two companies had had an agreement under which Qenos, or its predecessor, purchased from Mobil feedstock for use in its petrochemical plant and, in turn, sold to Mobil by-products derived from its manufacture of petrochemical products, which by-products Mobil used in its refining processes. On 5 February 1999, the parties entered into a petrochemical supply agreement ("supply agreement") which replaced pre-existing arrangements[5]. Broadly speaking, under this agreement Mobil sold feedstocks to Qenos and purchased by-products as before. But the terminology changed: the by-products purchased by Mobil were now called "coproducts", an expression which was defined in the agreement as follows:

"'Coproduct' shall mean those products manufactured from Feedstocks in the Petrochemical Plant which are neither Petrochemical Products, consumed in the operations of the Petrochemical Plant, or disposed of as waste. For the purpose of this Agreement, such Coproducts shall be referred to as `Kemcor Naphtha Returns', `Spent Quench Oil', and `Gasoil Tar' and shall conform to the specifications as contained in Schedules 1(c), 1(d), and 1(e) respectively."[6]

33. Article 4 of the agreement provided for the quality and quantity of the coproducts to be sold by Qenos to Mobil. For present purposes the following provisions of this article are relevant:

"Section 4.01 [Qenos] agrees to sell to Mobil, and Mobil agrees to purchase from [Qenos], those Coproducts derived from the manufacture of Petrochemical Products in [Qenos]'s Petrochemical Plant from Feedstocks supplied by Mobil providing that such Coproducts conform to the applicable quality specifications as contained in Schedules 1(c), 1(d), and 1(e). In the case of Naphtha Returns and Spent Quench Oil, [Qenos] shall supply and Mobil shall purchase the full quantity of such streams produced by [Qenos]. In the case of Gasoil Tar, [Qenos] shall endeavour to maximise sales of this material to other parties with Mobil purchasing any excess material that is surplus to [Qenos]'s third party sales. Section 4.02 Mobil shall apply all reasonable endeavours to encourage the retention of Government legislation or industry quality standards which enable the Altona Refinery to accept Coproducts from [Qenos] for use in finished product blending without adverse impact to Mobil. Notwithstanding such endeavours, if changes to Government legislation or industry quality standards are introduced which adversely affect the Refinery's acceptance of such streams, then Mobil shall have the option to nominate revised Coproduct quality specifications to [Qenos]."

37. The controversy between the parties arose as a consequence of the appearance in late 1999 of a deleterious condition in the motors of certain motor cars, which condition was referred to as sludging. After some investigation, the source of this condition was identified as petrol produced at the Mobil refinery at Altona. Furthermore, the component of this petrol which was fixed with the responsibility for the sludging was a di-olefin contained in untreated steam cracked naphtha ("untreated SCN"). Untreated SCN was one of the coproducts purchased by Mobil from Qenos under the petrochemical supply agreement.

40. As soon as this link between untreated SCN and the sludging was established, Mobil withdrew from the market and recalled all premium unleaded petrol, which included significant quantities of this coproduct. On 14 February 2000, it ceased blending untreated SCN in its premium unleaded petrol product. Notwithstanding this, Qenos continued to supply untreated SCN as a coproduct under the supply agreement and to insist upon payment for it. Mobil, for its part, was faced with the difficulty of storing and, in due course, disposing of the unwanted, untreated SCN.

43. On 23 June 2000, Mobil wrote to Qenos a letter in which it nominated revised coproduct specifications pursuant to s. 4.02 of the agreement. These new specifications stipulated that coproducts should contain virtually none of the offending untreated SCN. Qenos disputed the validity of this nomination which was a central issue in the arbitration, an issue which was determined by the arbitrator in favour of Mobil.

46. It will be seen that, central to the issue before the arbitrator was the existence of an industry quality standard and the change to that standard by the removal of untreated SCN as a permitted component of petrol. The want of procedural fairness was said to effect each of these matters.

50. Any consideration of the expression "industry quality standard" in s. 4.02 must acknowledge that Article 4 is concerned with two different products or groups of products, each of which has a standard. There are, first, the applicable quality specifications for the coproducts which Qenos sells to Mobil. These specifications are found in Schedules 1(c), 1(d) and (e) to the supply agreement of which Schedule 1(c) deals with SCN. These are the specifications which may be revised by Mobil's nomination pursuant to s. 4.02. The second standards are those with which this arbitration was concerned; they are the industry quality standards for petrol and petroleum products. It is a change in these standards which may trigger the right of Mobil to revise the coproducts quality specifications. This analysis was conceded by counsel for Qenos at the arbitration and was accepted by the arbitrator; it was not challenged before me.

53. There exists an Australian Standard with respect to petrol, namely AS 1876 - 1990. The evidence before the arbitrator, which he accepted, was that this was a standard which dealt with a limited number of characteristics of petrol. Standing alone, it would not provide a satisfactory standard to meet modern motoring requirements.

56. For commercial reasons, each of the four major suppliers of petrol, Mobil, BP, Caltex and Shell, which collectively make up approximately 95% of the supply of petroleum products in Australia, have been accustomed to buy from each other's refinery petrol for sale to the public under its own name. This means that in an area where one only of these suppliers has a refinery, the others will take petrol from that supplier in exchange for it taking petrol from one or other of the other suppliers in an area where that supplier is the company which has the refinery. The implementation of this product exchange arrangement necessitated the establishment of a specification or specifications which the petrol should meet in order to be acceptable to the company taking delivery. These specifications were prepared by the refining supplier, presumably following discussions with the purchasing oil companies. They were called "Product Exchange Specifications" ("PES").

59. A number of contentions were put on this topic as to the existence of the industry quality standard in question. First, it was submitted under paragraph 25 of the points of claim that the arbitrator failed to make any finding as to two matters addressed by the parties:

(i) whether there were any and if so what industry quality standards dealing with the blending of untreated SCN in petrol at the date of the [supply agreement] notwithstanding it was addressed by Qenos in its Points of Defence (para. 26) and its Outline Submissions 1 March 2002 and noted by the Arbitrator at the hearing as a critical issue for determination (Transcript 749, 759, 761, 773 and 781); (ii) what were the industry quality standards dealing with the blending of untreated SCN in petrol immediately prior to the date of the change to same in June 2000 as alleged by Mobil notwithstanding the issue was addressed by Qenos in its Points of Defence (para. 26), its Outline Submissions dated 1 March 2002 and noted by the Arbitrator at the hearing as an issue for his determination (Transcript 761, 809-810);"

63. The first of these matters was said to have been raised in paragraph 26 of the amended arbitrator points of defence of Qenos. The suggested matter concerns events at the date of the supply agreement. Two answers immediately suggest themselves. First, this point was not raised in that plea. Second, the point was not relevant to the dispute. The arbitration was concerned with the industry quality standards existing prior to the suggested change, not at the time of the contract some 12 months previously.

66. Matter (ii) was in fact determined by the arbitrator in his award. He concluded that there was, prior to the change, industry quality standards and that they contained no provision dealing with untreated SCN. As a component of petrol its presence was not prohibited, limited, or otherwise affected by such a standard. Petrol producers were, therefore, entitled to blend it in their product if they saw fit. The submission with respect to this matter likewise has not been made good.

69. Next, it was contended before me that the case presented to the arbitrator by Mobil was that the industry quality standard for petrol was to be found in the PESs or perhaps Mobil's PESs. Qenos attributes this contention of Mobil as its only contention on this point and then argues that it was not correct. The arbitrator in his award said that the contention of Mobil was otherwise and the arbitration pleadings and the transcript show that he was correct.

72. In its particulars given under paragraph 29 of the arbitration points of claim delivered on 5 July 2001, Mobil says this:

"Industry quality standards include the [PESs] which are set and maintained by the Major Oil Companies to establish minimum quality standards for the purchase, sale and exchange of petrol between one another in the Australian market."

76. Elsewhere in the same document Mobil had referred to industry quality standards without further definition in paragraphs 26 and 32. In response to a request for further and better particulars of the expression used in these paragraphs, Mobil responded:

"The industry quality standards in existence immediately prior to the change are in writing and are constituted by [PESs]."[7]

80. In its arbitration points of reply dated 14 September 2001 Mobil says that these industry quality standards included the Australian Standard, Petrol (Gasoline) for Motor Vehicles: AS1876-1990[8]. This paragraph was not relevantly changed in the amended reply dated 28 September 2001.

83. The pleaded response of Qenos to this is to be found in its arbitration points of defence. In response to paragraph 26 of Mobil's arbitration points of claim, Qenos denied the allegations and then asserted that there were "no industry quality standards existing in relation to Naphtha Returns (treated or untreated) on or before June 2000". This assertion was repeated elsewhere in the arbitration points of defence and in the subsequent amended versions of that document. On one reading this is a non-responsive plea to the Mobil allegation. There were here two points in issue for the purposes of s. 4.02 of the Supply Agreement: were there in existence "industry quality standards which enabled Altona Refinery to accept coproducts from [Qenos]..."; not whether there were in existence industry quality standards in relation to untreated SCN? If yes to this question, then there arose the second question whether the standards had been changed with a particular consequence. In any event, it is clear that Mobil was not limiting these standards as Qenos suggests and that, however they be defined, Qenos denied their existence.

86. Qenos then puts an alternative allegation in paragraph 26(b) of its arbitration points of defence: if there were an applicable standard prior to the suggested change, then this standard was not in fact changed in June 2000 or at all by the major oil companies. It was, of course, common ground that, after June 2000, untreated SCN was for practical purposes a prohibited component of petrol. Counsel for Qenos explained to me that the contention in paragraph 26(b) was intended to mean that this component was always a prohibited component as it was not used by the industry generally. I pass over the non-sequitur in this proposition.

89. The Qenos plea in paragraph 29 of its arbitration points of defence, likewise, slides away from the points of claim to which it responds. The response of Qenos to the allegation of Mobil that the industry quality standards include the PESs is that the PESs "do not represent industry quality standards".

92. This brief analysis of the arbitration pleadings shows that Mobil was advancing a case that industry quality standards included, rather than comprised, the PESs. It also shows that Qenos was or should have been aware of this distinction.

95. I was taken to passages in the written submissions and transcript of argument where it appeared that counsel appearing before the arbitrator on behalf of Mobil made the same point. It is abundantly clear that Mobil's case was not that industry quality standards were constituted by PESs. It consistently asserts that these standards are to be found also in AS1876-1990 and in voluntary restrictions imposed by the industry itself[9].

98. Finally, on this general topic, it was submitted that the arbitrator was guilty of misconduct in making findings, without any supporting evidence, that the major oil suppliers other than Mobil knew and approved Mobil's practice of blending untreated SCN in the petrol it sold to them. The significance of this, it was put, is that the arbitrator found that the industry quality standard in question was established by the practice of these suppliers accepting Mobil petrol which contained this component and that the change to that standard occurred when this component ceased to be acceptable to them. Implicit in this submission is the contention that one cannot accept something unless one knows of it.

101. There is, in my view, no substance in this criticism. At a factual level, the fact that Mobil petrol was accepted by the other major petrol suppliers does not necessarily involve a finding that these suppliers knew and approved of each and every ingredient of the acceptable product. It is sufficient that they were content to receive the product which was apparently suitable for their requirements. When it later emerged that this product ceased to be so suitable by reason of the fact that it included a component which caused sludging in certain modern motors, they no longer accepted the Mobil product so long as that component remained. Their requirements changed relevantly from Mobil petrol to Mobil petrol without the offending component.

104. I do not find that the arbitrator was guilty of misconduct in his treatment of this matter.

108. In paragraph 20 of its points of claim filed in this application, Qenos contends that Mobil conducted its case at all material times prior to and at the hearing on the basis that the change to industry quality standards, which operated as a trigger to Mobil's right to nominate a change in the Coproduct quality specification, occurred in June 2000 and at the very latest on 5 June 2000. Qenos' position was that it denied that any change occurred at that time or, it would seem, at any time. The arbitrator found that a change in the industry quality standard occurred and that it occurred earlier in 2000 "probably in February, certainly by March [2000]".

111. I am not concerned with the question whether the arbitrator was correct in so holding; my present concern is whether he denied Qenos procedural fairness in reaching this conclusion by not giving it a reasonable opportunity to meet it.

114. As the arbitrator pointed out, the precise date of the change was of no consequence; it is sufficient that the change did or did not occur prior to the nomination on 23 June 2000. His conclusion appears to have been based on a finding that there was a change at some time from an industry quality standard which did not prohibit the blending of untreated SCN in petrol, to one which did. This must have been after the sludging problem arose because there was no reason to prohibit its use before that date. It was apparent that in February 2000 Mobil changed its practice of blending this component. In paragraph 92 of his award the arbitrator says this:

"I am satisfied that a change had occurred subsequent to the identification of the causes of the engine sludging problem. Once it was recognised that the blending of untreated SCN into petrol was no longer acceptable, there was a change to the industry quality standard so far as that matter was concerned. I am satisfied that a change had occurred by the time Mobil ceased blending untreated SCN. That change had occurred well before it was incorporated into the various PESs."

The reference to the incorporation of the change in the PESs means that the industry quality standards had changed before the draft PESs were being passed between the major oil companies in June 2000. Formal changes to the PESs occurred some months later.

119. It is true, as counsel for Qenos contended, that the allegation of Mobil in paragraph 26 of its arbitration points of claim was that by "reason of the above a change to industry quality standards was introduced in June 2000". The reference to the preceding paragraphs includes a reference to the events of mid-February 2000 when the involvement of untreated SCN was identified as causing sludging and when Mobil ceased blending it into its petrol as well as events after that date. In paragraph 26(a) and (b) of its arbitration defence, Qenos denied that any industry standard existed and said that, if it did exist, "there was no change to same in June 2000 or at all".

122. Given the finding that the change occurred when the blending was no longer acceptable, it was inevitable that the change occurred in mid-February or thereabouts. Indeed at the first directions hearing on 14 September 2001, Mobil included in its questions for determination in the arbitration a question seeking an affirmative answer to the effect that the change occurred in "early 2000".

125. Moreover, it appears from the transcript of the arbitration proceeding that there was no issue that the use by Mobil of untreated SCN in its petrol became impossible when the involvement of that component in the sludge phenomenon became apparent. Counsel for Qenos before the arbitrator accepted this fact as having occurred by May 2000 at the very latest and possibly by March 2000. The factual basis for a finding fixing the changes occurring prior to June 2000 was accepted by Qenos.

128. This point was acknowledged, too, by the arbitrator, certainly in exchanges with counsel during the final addresses and without any complaint by counsel for Qenos. The arbitrator postulated as a possible change in the industry standard the case where the absence of a veto on the use of untreated SCN in petrol was replaced by a veto. There was evidence of such a change in February 2000.

131. I conclude, therefore, that in a case involving such issues it has not been shown that the arbitrator was guilty of the misconduct alleged.

135. I conclude, therefore, that the misconduct alleged against the arbitrator has not been made out. Accordingly, this application should be refused.

[1] Commercial Arbitration Act 1984 s. 4(1) definition of misconduct.

[2] Interbulk Ltd v Aiden Shipping Co Ltd, The "Vimeira" [1984] 2 Lloyd's Rep 66; Parol Ltd v Joint Stock Co Rossakhar [2000] 1 Lloyd's Rep 109 at 114, per Colman J.

[3] The Melbourne Harbour Trust Commissioners v Hancock [1927] HCA 26; (1927) 39 CLR 570 at 588, per Issacs J, "unjustly prejudiced a party"; Gas and Fuel Corporation of Victoria v Wood Hall Ltd [1978] VicRp 41; [1978] VR 385 at 392, per Marks J; Doran Constructions Pty Ltd v Health Administration Corporation of New South Wales (1994) 12 BCL 59 (CA-NSW).

[4] Interbulk Ltd v Aiden Shipping Co Ltd, "The Vimeira" [1984] 2 Lloyd's Rep 66 at 75, per Robert Goff J.

[7] Further and better particulars paragraphs 2, 3 and 7.

[9] See, for example, submission para 2.1.