SANTOS LTD & ORS v DELHI PETROLEUM PTY LTD No. SCGRG-98-1315 Judgment No. S485 [1999] SASC 485

Santos Limited ("Santos") has debited certain monies to the account of Delhi Petroleum Pty Ltd ("Delhi"), the respondent, in the books of the petroleum production joint ventures established by agreements known respectively as the Unit Agreement and the Downstream Agreement. Delhi disputes the right of Santos to debit such monies and has commenced legal proceedings against Santos and the other participants in the joint ventures for declarations as to Santos' obligations and for consequential relief. The appellants contend that the dispute falls within the scope of an agreement between the appellants and the respondent known as the Fixed Factor Settlement Agreement. This agreement contains a submission to arbitration and the appellants contend that the present dispute falls within that submission and should be dealt with by an arbitrator. The appellants further contend that the present legal proceedings should be stayed pursuant to s 53 of the Commercial Arbitration Act 1986. Delhi disputes the appellants' contentions.

In the Cooper Basin there are situate a number of fields (referred to in the applicable documents as "Blocks") producing natural gas which is gathered (sometimes over long distances), co-mingled, treated at a central plant at Moomba in the far north of South Australia and discharged into pipelines used for the supply of the Adelaide and Sydney gas markets. A similar process occurs in respect of crude oil except that it is pumped from the central treatment plant down a pipeline owned by Santos, Delhi and other producers to Port Bonython where it is stored and pumped on to tankers for the supply of national and international markets. The producers do not own the natural gas pipelines from Moomba to Adelaide and Sydney. These are owned by independent carriers involved in the transmission of petroleum.

Santos and Delhi each has a percentage interest in most if not all of the fields for the production of crude oil and natural gas. There are a number of other participants who have an interest in one or more of those fields.

Crude oil and natural gas may be produced from several fields at any one time. There was a need, however, to devise a scheme which would enable all Participants to share in the gross revenue and to contribute to costs and expenses even though particular fields may not be in use at the time concerned but reserved for future use. In fact it does not matter which fields are in use at a particular time. The scheme is such that it ensures that each of the producers participates fairly in the gross revenue and in the sharing of expenses both on capital and operating account.

The regime under which gross revenue and costs and expenses were shared is complex. Until recently there was not a single percentage share in respect of each participant but several, depending on the nature of the item of gross revenue or item of cost or expense. For example, a percentage share to which a party was entitled in respect of crude oil varied depending on the quality of the crude oil in the wells to which the party concerned had an interest, proven and probable reserves of petroleum and possibly other factors as well. Also a percentage share to which a party was obliged to contribute in respect of the drilling and completion of wells in which the party concerned had an interest varied depending on a number of factors including the depth of the wells drilled and the hardness of the rock through which they were drilled.

The scheme to which I have just referred was implemented by the parties to this litigation by a joint venture known as "the Unit" for the production of oil and natural gas. The joint venture is regulated by an agreement to which the parties are bound, known as "the Unit Agreement". One of the purposes of this agreement is to regulate the manner in which production of oil and natural gas and expenses on capital account and on operating account are to be apportioned as between the parties. For the purposes of this appeal, I will sometimes refer to the parties to the Unit Agreement as "the Producers" or "Participants".

The areas from which crude oil and natural gas are produced are known as Blocks and are held by a number of parties in common, each holding a designated percentage share. Various Blocks contribute to the production of crude oil and natural gas for the purpose of the Unit. Blocks are geographic areas in which one or more petroleum wells are situated. Some parties hold percentage interests in more than one Block. Not all parties hold an interest in every Block. The percentages apportioned to a Block in respect of expenditure on certain wells, equipment and facilities, on operations and on the production of oil and natural gas are known as "Block Participations". A single Block Participation does not apply in relation to each Block. There are many kinds of Block Participation, each being applicable to each Block. For example the "Crude Oil Block Participation" means the percentage, in relation to the whole of the Unit, of crude oil from time to time apportioned to a Block and "Drilling Investment Block Participation" means the percentage, in relation to the whole of the Unit, from time to time apportioned to a Block in respect of all capital costs involved in the drilling and completion of wells. A Block Participation is expressed in terms of a percentage.

Activities within a Block, and in particular, the drilling of wells and the production of petroleum therefrom, are regulated by an agreement between the parties concerned in the Block in question known as a "Joint Operating Agreement". There is one such agreement for each Block. A Joint Operating Agreement is also concerned with future exploration for petroleum.

As well as Block Participations, there are "Unit Participations". These are applicable to each party to the Unit Agreement and in relation to that party, represent the sum of the percentages obtained by multiplying the undivided interest of that party expressed as a percentage in each Block in which it participates by the relevant Block Participation also expressed as a percentage. Again, there are many kinds of Unit Participation. For example, there is a "Crude Oil Unit Participation" which in respect of a party means the sum of the percentages obtained by multiplying the undivided interest of that party in each Block in which it participates by the Crude Oil Block Participation applicable to each such Block. Also, there is a "Drilling Investment Unit Participation" which in respect of a party means the sum of the percentages obtained by multiplying the undivided interest of that party in each Block in which it participates by the Drilling Investment Block Participation applicable to such Block. A Unit Participation is also expressed in terms of a percentage. Participations are colloquially known as "Participation Factors".

The following is an example of how Block Participations and Unit Participations work in relation to the Unit Agreement. The numbers are hypothetical only and are merely by way of illustration:

In respect of investment in the drilling of wells, each Block makes up a percentage of the Unit. This percentage is fixed taking into account relevant considerations such as in the case of the Drilling Investment Participations, the depth of the wells and the relative cost of drilling per unit of distance. The percentage derived is known as the Drilling Investment Block Participation. In this example, the Drilling Investment Block Participation is taken as 50% in the case of Block X, 30% in the case of Block Y and 20% in the case of Block Z. Block X, Block Y and Block Z together make up the Unit, which is, of course, 100%. The percentages attributable to the three Blocks will depend on the extent to which they each contribute to the Unit as a production joint venture.

Let us assume that the undivided interests of the participants concerned (A, B, C and D) in the Blocks are as follows:

The Unit Participation of Participant A would be as follows:

50% (Block X Participation) x 50% (undivided interest of A in Block X) = 25%

Plus 30% (Block Y Participation) x 25% (undivided interest of A in Block Y) = 7.5%

Plus 20% (Block Z Participation) x 60% (undivided interest of A in Block Z) = 12%

Total Unit Participation of Participant A = 25% + 7.5% + 12% = 44.5%

The Unit Participation of Participant B would be as follows:

The Unit Participation of Participant C would be as follows:

The Unit Participation of Participant D would be as follows:

Total Unit Participation of all participants = 44.5% + 11.5% + 41% + 3% = 100%.

When an amount in respect of an item of gross revenue was received or an amount in respect of an item of expenditure on capital or operating account was paid on account of the Unit joint venture the amount in question was apportioned amongst the Participants involved according to their Unit Participations. In the example given above, if an account in respect of drilling expenditure is received it would be divided amongst the Participants in the Unit Joint Venture according to their respective Unit Participations.

The initial Block and Unit Participations are set out in Schedule 3 to the Unit Agreement.

The Unit Agreement contains a mechanism in Article IV for the adjustment of Unit and Block Participations, an adjustment being triggered on the happening of one or more of certain events. This matter will be referred to in more detail later in these reasons.

The management of the joint venture established by the Unit Agreement is entrusted to one or other of the parties. The manager is known as the "Operator" or "Unit Operator". At all material times, this function has been entrusted to Santos. As part of its responsibility in managing joint operations, it is the function of the Unit Operator to collect all revenue on the account of joint operations and to pay all expenses properly payable on capital and operating account. It is the responsibility of the Unit Operator to allocate revenue and expenses on capital and operating account in relation to particular Block Participations and Unit Participations.

In the Unit Agreement, it was agreed that Santos as Unit Operator would set up a Unit Account on behalf of the parties for all costs, expenses and liabilities incurred by it and all monies received by it for the credit of the parties under the Unit Agreement, such costs, expenses and liabilities to be borne by the parties and all of the monies received for the credit of the parties to be credited to the parties as provided in cl 8.02 of the Unit Agreement. Costs and expenses incurred with respect to Unit Facilities and Unit Operations were to be reimbursed to the Unit Operator in accordance with the respective Unit Participations. Under cl 8.02 of the Unit Agreement all charges and credits in respect of the Unit Agreement were subject to the Accounting Procedure attached as Exhibit "B" to the agreement.

The purpose of the Accounting Procedure is stated to be "to establish equitable methods of determining charges and credits to the unit account applicable to unit operations under the agreement".

Clause 1.5 of the Accounting Procedure provides that payments can be made by a party to the Unit Account (being the account in respect of which unit operations are conducted) and that any payment so made would not prejudice the right of that party to protest or question the correctness of any item associated with such payment. The clause continues:

"... provided however all statements of charges and all separate bills rendered to Non-Operators by Unit Operator shall be presumed to be true and correct after twenty four (24) months following the date of the statement of charges or other bill unless within the said twenty four (24) month period a Non-Operator takes exception thereto and presents a written request for adjustment to the Unit Operator."

If the Unit Operator does not agree to the request, a dispute exists and is referred to arbitration under Article XXIII of the Unit Agreement.

Clause 1.6 of the Accounting Procedure provides for the conduct of audits. So far as is material, the clause provides that a party to the agreement has the right to perform one comprehensive audit not more than once during each calendar year of the Unit Operator's accounts. A comprehensive audit is defined as being an audit encompassing all facets of unit operations that occur during a continuous period of time.

The Unit Agreement contains an arbitration clause. Clause 23.02 deals with the submission to arbitration and is in the following terms:

If any question, difference, dispute or disagreement whatsoever ... arises between the parties hereto upon or in relation to or in connection with:-

(a) any matter or course of action in respect of which it is provided in this Agreement that such disagreement shall be referred to arbitration;

(b) any matter which the parties to the dispute agree to submit to arbitration;

(c) any matter substantially of a technical nature;

(d) any estimate made by Unit Operator under Clause 3.04(b)(i) hereof; or

(e) any matter not agreed upon in this Agreement or depending upon further agreement of the parties;

then such question, difference, dispute or disagreement shall be referred to arbitration as hereunder provided and for such purpose each party to such question, difference, dispute or disagreement shall as soon as reasonably practicable by notice in writing to each other party involved in such question, difference, dispute or disagreement clearly specify the nature of such question, difference, dispute or disagreement and call for the point or points of issue to be submitted for settlement by arbitration which notice is hereinafter called a 'Notice of Arbitration.'"

Clause 23.05 contains a Scott v Avery clause in the following terms:

"No party shall in respect to any matter referred to in Clauses 23 02(a)-(e) inclusive hereof take any dispute to any Court until after an arbitration award has been made. The arbitration award or decision shall be a condition precedent to any legal proceedings which shall be limited to enforcement of an arbitration award or decision."

The remainder of the clause deals with procedural matters relating to an arbitration and need not be repeated here.

In about 1980 a joint venture was established between the Producers for the production of crude oil and condensate and its transportation from Moomba to Port Bonython on Spencer Gulf in what came to be known as "the Liquids Project" or "Downstream Operations". A further agreement was entered into between the parties in relation to this joint venture and the agreement concerned was known as the "Downstream Agreement". This agreement was entered into on 31 December 1981 with retrospective effect from 1 January of that year.

The parties to the Downstream Agreement shared the revenues of Downstream Operations and also expenditure on capital account and operating account according to proportions known as "Downstream Participations". These Participations were in the nature of percentages and bore some similarity to the Unit Participations under the Unit Agreement. The Downstream Agreement set up an account ("the Downstream Account") on behalf of the parties for costs, expenses and liabilities incurred and monies received relating to the operation of the Downstream Agreement. The parties to the Downstream Agreement are the same as those who participate in the Unit Agreement.

In the Downstream Agreement, it was also agreed that Santos would pay all costs and expenses incurred in Downstream Facilities and Downstream Operations when due and payable and that each of the parties would reimburse Santos for its respective share and receive credit for monies received in accordance with the appropriate Participations stated in cl 8.02(b). Under cl 8.02 of the Downstream Agreement all charges and credits in respect of the Downstream Account were subject to the Accounting Procedure attached as Exhibit "B" to the agreement. Clause 1.5 of the Accounting Procedure stated that all statements of charges and all separate bills rendered to the parties by Santos would be presumed to be true and correct after 24 months. The applicable clause was in all practical respects identical to the corresponding clause in the Accounting Procedure attached to the Unit Agreement and provided for the arbitration of disputes in accordance with Article XX of the Downstream Agreement.

Santos was appointed Operator under the Downstream Agreement and remains Operator at the present time.

In order to undertake the Liquids Project, the Producers entered into an indenture ("the Stony Point Indenture") with the State of South Australia dated 26 November 1981. The Stony Point Indenture was ratified by the Stony Point (Liquids Project) Ratification Act 1981.

Under the Stony Point Indenture, the State undertook obligations in relation to the provision of certain infrastructure such as an agreement to grant land required in connection with the installation of plant and facilities, to lay pipelines, to procure supplies of water and electricity, and to secure roadways and to provide for other infrastructure.

For their part, the Producers agreed to construct a jetty and other maritime facilities for the berthing of vessels at Stony Point. On completion, the parties agreed to transfer the jetty and other facilities to the State on payment of the cost of their construction. The monies paid by the State to the Producers in connection with the construction of the jetty and other marine facilities were to be immediately repaid by the Producers to the State as a security deposit ("the Jetty Security Deposit") in order to secure due observance of certain provisions of the Stony Point Indenture. The State agreed to repay to the Producers the Jetty Security Deposit together with interest at 20% per annum over a period of 20 years. Also, the Producers agreed that for the 20 years from the transfer of the facilities to the State the Producers would pay wharfage dues ("the State Wharfage Dues") to the State.

Under the Stony Point Indenture, the Producers agreed to deposit ("the Roads and Water Security Deposit") with the State a sum equal to the capital cost and interest incurred by the State to provide roads and water. The State agreed to repay the Roads and Water Security Deposit together with 18% interest per annum over a period of ten years. Under the same indenture the Producers agreed to pay rates for water supplied by the State and a tariff for the use of the bitumen sealed roads constructed by the State.

When operations under the Stony Point Indenture began, the Operator allocated costs, expenses and receipts relating to the State's repayment of the Jetty Security Deposit and interest, the parties' contribution to the capital component of the State Wharfage Dues, the parties' share of the State's repayment of the Roads and Water Security Deposit and interest and the parties' contribution to the capital component of the road tariffs and water rates according to what it then believed were the appropriate Participations under the Downstream Agreement and in accordance with the Accounting Procedure. No-one took exception to the procedure or the results.

Each of the Unit Agreement and the Downstream Agreement contained a mechanism for the review and adjustment of Participations over time, reflecting a change in circumstances in relation to capital costs, Unit Operations or Downstream Operations as the case may be. In each agreement, the adjustment mechanism is to be found in Article IV. A review and adjustment would generally result in an alteration to the Participations allocated to a particular party. Such a review and adjustment would normally be required every two years.

The process of review and adjustment required a review and possible adjustment of the percentages applicable in respect of Unit Participations and Downstream Participations. In an affidavit of Mr J W McArdle filed in this action he said:

"The percentage interests (or Block Participations) in the Blocks between the respective parties are fixed. The purpose of the Review and Adjustment process was to adjust each Unit Parties' Unit Participation Factors from time to time to reflect inter alia the changing level of estimated recoverable reserves in their respective Blocks and the costs of production of those reserves."

This is not altogether borne out by the Unit Agreement which contemplates in Article IV that there will be a review and adjustment from time to time of both Block and Unit Participations.

Participations are percentages and any review and adjustment of them requires consideration of a change in percentage in each case.

As a result of various disputes between the parties, the review and adjustment process fell behind. The review and adjustment of 1 January 1985 was incomplete and the review and adjustment of 1 January 1987 had not been done. Over the years that followed, the Block Participations, the Unit Participations and the Downstream Participations in force as of 1 January 1983 were applied in relation to allocations to the Unit Account and Downstream Account. This was done pending some later review and adjustment.

Under normal circumstances, if a review and adjustment is carried out on time and not made to operate retrospectively, the changed percentages operate from the operative date of the review and adjustment and no further agreement is required. If, however, the review and adjustment process is delayed, it is necessary for the Unit Operator to apportion gross revenue and expenditure on capital and operating account in the meantime according to the percentages in force in respect of the last available review and adjustment. When a later review and adjustment is completed, there will need to be a retrospective adjustment in the amounts credited to the parties in respect of gross revenue and amounts debited in respect of expenditure on capital and operating account in consequence of the new percentages brought about by the later review and adjustment. Some parties will benefit by the later review and adjustment and some will suffer detriment.

In late 1996 the Producers managed to come to agreement in respect of the outstanding dispute over Participations. As a result of such agreement there was no longer any need to carry out a review and adjustment under either the Unit Agreement or the Downstream Agreement. Participations in respect of the period up to 31 December 1986 were to remain as they had been. Different Participations in respect of the period from 1 January 1987 to 1 January 1991 were agreed. In respect of the periods occurring on and after 1 January 1991, individual Participations were abandoned and replaced by "Fixed Factors". For example, instead of Delhi having a particular percentage attributable to Crude Oil Unit Participation and another percentage attributable to Drilling Investment Unit Participation as explained earlier in these reasons, a percentage overall was fixed under the Settlement Agreement. In the case of Delhi, the Fixed Factor was 20.21%. By the Settlement Agreement, Fixed Factors were intended to be fixed until varied by unanimous agreement between the parties. The need for the parties to pursue the review and adjustment process set out in the Unit Agreement and the Downstream Agreement was obviated.

Gross revenue and expenditure on capital account and operating account had continued until December 1996 to be apportioned amongst the Participants in the Unit Agreement and the Participants in the Downstream Agreement according to the Participations which were in force as of 1 January 1983. In 1996, as the Participations in the period from 1 January 1987 were being adjusted retrospectively, it was necessary to include in any agreement resolving the outstanding differences at that time a mechanism whereby the monies apportioned to particular Participations or to Fixed Factors (which applied on and after 1 January 1991), could be adjusted in consequence of the change in Participations and the introduction of Fixed Factors. This would require an adjustment in the accounts maintained by the Unit Operator. In respect of each period a Participant would either be required to contribute additional monies to the Unit and Downstream Accounts or would be entitled to receive payment by way of adjustment from those accounts.

On 5 December 1996, the parties to the Unit Agreement and the Downstream Agreement entered into an agreement in writing described as the Fixed Factor Settlement Agreement ("the Settlement Agreement") in order to give effect to the arrangements to which I have just referred.

Recital D to the Settlement Agreement provides, so far as is material, as follows:

"The parties have now agreed the results of the reviews and adjustments effective as of the first day of January in each of the years 1987, 1989 and 1991 and ... have agreed to enter into this Agreement for the purpose of fixing participation factors under the Unit Agreement [and] the Downstream Agreement ... in the manner and at the times hereinafter respectively provided and to amend the Unit Agreement and the Downstream Agreement so as to remove the requirement for any further or other review and adjustment thereunder unless otherwise unanimously agreed by the parties thereto."

The review and adjustment referred to in Recital D was intended to refer to a review and adjustment of certain Unit Participations under Article IV of the Unit Agreement and Downstream Participations under Article IV of the Downstream Agreement.

Clause 5 of the Settlement Agreement, so far as is material, is in the following terms:

(a) The Unit Operator will calculate in respect of each party the accounting adjustments ('Accounting Adjustments') to determine the amount necessary to be paid or received by each party to ensure that all costs and expenses (including operating, capital and exploration costs) paid in respect of the Unit Agreement, the Downstream Agreement and the JOAs and all receipts for the sale of Unitized Substances and production under the JOAs ('Block Production') are allocated between the parties on the basis of the Unit Participations, Downstream Participations, Undivided Interests and Fixed Factors applying from time to time in accordance with the provisions of this Agreement.

(b) There shall be two Accounting Adjustments: the First Accounting Adjustment being for the period 6.00 a.m. 1 January 1987 through 6.00 a.m. 1 January 1996, and the Second Accounting Adjustment being for the period subsequent thereto.

(d) By 1 December 1996, the Unit Operator will in respect of the First Accounting Adjustment provide the parties with a schedule showing the net amounts payable/receivable by each party which schedule shall be supported by sufficient information to disclose the calculation of the amount payable/receivable by a party pursuant to such Accounting Adjustment. By 9 December 1996, the Unit Operator will in respect of the schedule provided pursuant to this clause provide the parties with a revised schedule ...

(e) Each party in respect of which there is a First Accounting Adjustment payable under this Clause 5 will pay that amount to the Unit Operator on 20 December 1996, and on that date the Unit Operator will pay therefrom each party in respect of which there is a First Accounting Adjustment receivable under this Clause 5.

(f) By 9 December 1996, the Unit Operator will in respect of the Second Accounting Adjustment provide the parties with a schedule showing the estimated net amounts payable/receivable by each party which schedule shall be supported by sufficient information to disclose the calculation of such Accounting Adjustments.

(g) By 10 January 1997 the Unit Operator will in respect of the Second Accounting Adjustment provide the parties with a schedule showing the net amounts payable/receivable by each party which schedule shall be supported by sufficient information to disclose the calculation of such Accounting Adjustments.

(h) Each party in respect of which there is a Second Accounting Adjustment payable under this Clause 5 will pay that amount to the Unit Operator on 15 January 1997 and on that date the Unit Operator will pay therefrom each party in respect of which there is a Second Accounting Adjustment receivable under this Clause 5(g).

(i) The Unit Operator will provide an Audit Opinion on the correctness of the Accounting Adjustments by 30 June 1997 but neither the auditor nor any party is entitled to put in issue:

(i) the correctness of the Unit Participations and Downstream Participations referred to in Clauses 3(a) and (b) with the exception of the Downstream Facilities Operating Participations and Wharfage Participations;

(j) Any adjustment to the Accounting Adjustments as a result of the audit referred to in Clause 5(i) requiring payment by or to any party will be made thirty (30) days after the date of the Audit Opinion.

(k) Each party has the right to perform four comprehensive audits of the Accounting Adjustments at any time prior to 31 December 1998. Clause 1.6 of Exhibit B to the Unit Agreement (treating the audit referred to in Clause 1.6 as the audit referred to in this Clause 5(k)) will apply mutatis mutandis to those audits.

(l) If any party receives an Audit Opinion consequent upon an audit pursuant to Clause 5(k) in which an opinion is expressed that a further adjustment to the Accounting Adjustments is required:

(i) if the parties unanimously agree that the further adjustment should be made, then payment of that adjustment will be made within thirty (30) days of agreement; or

(ii) if within sixty (60) days of 31 December 1998 the parties do not unanimously agree that any further adjustment identified in an Audit Opinion obtained pursuant to Clause 5(k) should be made, the disagreement about the adjustment will be referred to Arbitration in accordance with the provisions of Article 23 of the Unit Agreement and if the Arbitrator decides that the further adjustment is warranted, payment of the adjustment will be made within thirty (30) days of the arbitral award. The reference to Arbitration under this clause may be made at any time earlier than 60 days of 31 December 1998 provided all parties affected by the amount in dispute agree that no further audits will be carried out by those parties under Clause 5(k) and no further adjustments will be sought by those parties under Clause 5(l). No party which is not a party to any such Arbitration shall be liable for any costs directly related thereto.

(m) Neither an auditor nor any party auditing the Accounting Adjustments pursuant to Clauses 5(i) or 5(k) will put in issue or dispute the correctness of the matters referred to in Clause 5(i).

(n) Subject to the provisions in Clauses 5(i) to (m), the Accounting Adjustments are conclusive and will not be challenged by any party.

(s) To the extent that any amounts are due from or payable to Crusader as a result of the Accounting Adjustments under this Agreement for the period 6.00 a.m. 1 January 1987 to 6.00 a.m. 1 January 1997, such amounts will be paid or received by Santos on its own behalf without right of reimbursement from Crusader or obligation to repay to Crusader any monies received.

Clause 5(a) of the Settlement Agreement provided that the Unit Operator would calculate in respect of each party the Accounting Adjustments to determine the amount necessary to be paid by or received by each party to ensure that gross revenue, costs and expenses in respect of various agreements, including the Unit Agreement and the Downstream Agreement, would be allocated between the parties on the basis of the applicable Participations and Fixed Factors.

The learned Judge at first instance found, and it was not challenged by the appellants, that the first Accounting Adjustment for the nine year period from 1 January 1987 to 1 January 1996 was prepared by Santos on a similar basis to that previously applied by the parties. An estimated second Accounting Adjustment was also prepared by Santos and furnished to Delhi in November 1996 as required by cl 5(f) of the Settlement Agreement. This Accounting Adjustment was prepared on the same basis as the first Accounting Adjustment.

However, in January 1997, Santos completed the second Accounting Adjustment as required by the Settlement Agreement. Delhi asserts that this was compiled on a different basis to the estimated second Accounting Adjustment prepared in the previous November and complains about the way in which the Accounting Adjustment was made, claiming that as a result of Santos' action, Delhi suffered a net disadvantage of over $4.5 million. Such complaint is at the root of the present litigation.

In relation to Delhi's contribution to the capital component of State Wharfage Dues, Santos on this occasion applied the Wharfage Participation instead of the Jetty Participation, the latter having been applied consistently since the commence of the Stony Point Indenture. In relation to Delhi's contribution to the capital component of the water and roads tariffs, Santos applied the Downstream Facilities Operating Participation, instead of the Common Facilities Investment Participation, which had also been applied consistently since the beginning of the Stony Point Indenture. In addition, for the period 1 January 1991 to 31 December 1996, Santos applied the former Jetty Participation to calculate Delhi's share of the State repayment of the Jetty Security Deposit, rather than the Fixed Factor stipulated by the Settlement Agreement.

The Unit Operator was required to provide an audit opinion on the correctness of the Accounting Adjustments by 30 June 1997: cl 5(i). However, the Participations agreed in the Settlement Agreement were to be taken as given and their correctness was not to be put in issue by the auditor or any party. The only exceptions were in respect of the Downstream Facilities Operating Participations and Wharfage Participations: cl 5(i). These exceptions are not material to the question which the Court has to decide on this occasion.

KPMG was engaged to provide the audit opinion. Separate opinions dated 30 June 1997 were provided in respect of both the first Accounting Adjustment and the second Accounting Adjustment. They expressed the opinion that the adjustments had been carried out in accordance with the requirements of the Settlement Agreement.

Delhi complains that the Accounting Adjustments were not authorised by the Settlement Agreement, and that it was not possible for Santos lawfully to apply the Participations which it did in the Accounting Adjustment under cl 5 of the Settlement Agreement. In its pleading, Delhi alleges that such adjustment was contrary to the Downstream Agreement and the Settlement Agreement, and that Santos acted contrary to its uniform practice since 1984. It seeks to raise an estoppel against Santos. It also alleges that KPMG erred in giving the certificate that it did, and in condoning the erroneous approach of Santos. It claims that the audit opinion is null and void.

The dispute between the parties is therefore as to the appropriate Participations to be applied, having regard to the Downstream Agreement and the Settlement Agreement, and as to questions of estoppel. It is the Statement of Claim in that action which Santos sought to have struck out. In the alternative, Santos sought an order staying the action and referring the dispute to arbitration.

The appellants argue that Santos had a contractual obligation under cl 5(a) of the Settlement Agreement, in making the Accounting Adjustments under cl 5(a), to review and if necessary alter the appropriate allocation of income and expenditure to their proper Participations for the periods in question before making the necessary adjustment calculations. They further argue that any Audit Opinion obtained under cl 5(i) must likewise interpret the agreements and allocate costs and expenses to their proper Participations. They further argue that the dispute can only be dealt with in accordance with the requirements of cl 5(i) - (m), and that if there is a dispute it should be referred to arbitration under cl 5(l)(ii) of the Settlement Agreement.

The Accounting Adjustments referred to in cl 5 of the Settlement Agreement are those which arise in consequence of the adjustment of Participations and the creation of Fixed Factors brought into effect by the Settlement Agreement itself. The clause refers to amounts of revenue or expenditure which are "allocated between the parties on the basis of Unit Participations, Downstream Participations, ... and Fixed Factors applying from time to time in accordance with the provisions of this Agreement". It is clear from that passage that cl 5 does not authorise accounting adjustments which arise in any other manner. In particular, it does not authorise an adjustment which arises where a particular item of revenue or expenditure, for example, is reallocated from one Participation to another; nor does it deal with a dispute between the parties or some of them as to the Participation in respect of which a particular item of expenditure should be allocated.

Delhi contends that the character of the process envisaged by cl 5 of the Settlement Agreement was apparent from cl 5(a). It required the Unit Operator to calculate the Accounting Adjustments in respect of each party. It submitted that the process outlined in cl 5(a) did not involve any element of characterisation. I agree. The Accounting Adjustments provided for in cl 5 are a natural consequence of the variation of the Participations and the creation of the Fixed Factors.

The appellants contend that on the proper construction of cl 5(a) of the Settlement Agreement, the Accounting adjustments referred to have both what they describe as an interpretive and an arithmetic component. They say that in effecting Accounting Adjustments under cl 5(a) of the Settlement Agreement, the Operator is required first to ensure that receipts for the sale of natural gas and other kinds of petroleum and costs and expenses of production are allocated amongst the parties on the basis of Unit Participations, Downstream Participations or Fixed Factors applying from time to time. This requires, in effect, making a selection of the appropriate Participation having regard to the meaning attributed to the various Participations in the Unit Agreement and the Downstream Agreement. The appellants contend that an allocation under cl 5(a) requires the operator to interpret the appropriate definitions of Participations contained in the Unit Agreement and Downstream Agreement. Once the allocation has been made, so the appellants maintain, the Operator is required to determine by calculation the amount necessary to be paid or received by each party to reflect the allocation made.

The appellants contend that the subject of the present dispute between the parties involves the question of whether there has been a correct allocation by the Operator of the Jetty Security Deposit, the State Wharfage Dues, the Roads and Water Security Deposit, rates for water supplied and a tariff for the use of bitumen roads. These items and the dispute affecting them have been referred to earlier in these reasons. In my opinion, cl 5 of the Settlement Agreement was not intended to resolve such an issue. It had a more limited purpose of the kind which I have already described.

If the appellants' contention is correct, it would appear that cl 5 of the Settlement Agreement would be utilised not just to deal with the Jetty Security Deposit and related matters but rather to permit or even to require a re-opening of accounts and possible re-allocation of every item of income and expenditure back to 1 January 1987, notwithstanding that cl 1.5 of the Accounting Procedure annexed to the Unit Agreement and the Downstream Agreement both declare accounts to be presumed correct if not objected to within 24 months. Such indeed was the argument of the appellants. It is difficult to imagine that anything as wholesale as the re-opening of accounts back to 1987 was in the contemplation of the parties when the Settlement Agreement was executed.

If, between 1983 and 1996, when apportioning income and expenditure to Participations, Santos considered that any items of income or expenditure had previously been wrongly allocated to particular Participations, it was then open to Santos to make the alteration in accordance with what it believed to be the correct interpretation of cl 8.02 of the Downstream Agreement. In accordance with the Accounting Procedure under that Agreement, a party could then have questioned the correctness of the statement or bill which reflected the allocation, and if Santos did not agree, the matter could have been referred to arbitration in accordance with cl 1.5 of the Accounting Procedure. However, allocations once made and reflected in a statement or bill to a non-operator, and not questioned, would be presumed correct after 24 months, as provided for in that clause. On the appellants' argument, all such matters would be re-opened under the Settlement Agreement.

It must be remembered that the dispute for many years, and some earlier litigation, had been about Participations and their adjustment. The Settlement Agreement was designed to resolve that dispute. There is nothing to indicate there had been any dispute about past attributions. There was nothing to suggest that, at the same time, it was intended to resolve any differences that might arise over attributions. Indeed, some attributions may have been the result of agreement or arbitration under cl 1.5 of the Accounting Procedure. It can hardly have been intended that the Settlement Agreement could disturb such attributions. If not those, then it would be equally surprising if it was intended to disturb other attributions made by Santos and not objected to by a non-operator.

Santos relies on the wording of cl 5(a) to say that it was required to do more than a mathematical calculation. It was obliged to calculate the adjustments "to determine the amount necessary to be paid or received by each party to ensure that all costs and expenses ... are allocated between the parties ...". However, the wording does not support the argument.

Clause 5(a) itself contemplates that all the unit operator will do is "calculate" the Accounting Adjustments. There are many of them and for different periods. That is for a stated purpose, namely "to determine" an amount to be paid or received (ie a single sum). The use of the word "determine" does not necessarily incorporate a matter of judgment. The determination of the amount is for the further stated purpose of ensuring that the costs and expenses and receipts are allocated not in accordance with the provisions of the earlier agreements, but "on the basis of the Unit Participations, Downstream Participations, Undivided Interests and Fixed Factors applying from time to time and in accordance with the provisions of this agreement" (my emphasis). All that follows is a means of ensuring that the Accounting Adjustments and determination of the amounts to be paid or received are calculated in accordance with "this agreement". One cannot read into that sub-clause an intention to review allocations of amounts to Participations.

Of greater significance, however, in determining the scope of cl 5(a) of the Settlement Agreement is the conclusive effect of all past statements of charges and bills rendered to non-operators after a period of 24 months (cl 1.5, Accounting Procedure). The effect of that provision was to render conclusive any allocation made to a participation for the purpose of that statement of charges or bill.

Clause 15 of the Settlement Agreement provides:

"Except to the extent otherwise expressly provided in this Agreement, the rights and obligations of each of the parties under the Unit Agreement, the Downstream Agreement and the JOAs shall remain in full force and effect."

Clause 1.5 of the Accounting Procedure contained in the Downstream Agreement is one of the clauses preserved by that clause.

In general circumstances, if in the past an item of income or expenditure had been incorrectly allocated by Santos under the Unit Agreement or Downstream Agreement to a particular Participation, one would expect that it would be identified within the 24 month period and a correction made to the Unit Account or the Downstream Account as the case requires. Statements of charges rendered continue to be presumed to be correct by the operation of cl 1.5 of the applicable Accounting Procedure. That clause in each case refers to a 24 month period within which objection may be taken to statements of account. If no such objection is taken, the statement is presumed to be true and correct.

Read in its context, the presumption of correctness is not a rebuttable one. It is only rebuttable if, within the 24 month period, a non-operator challenges it and requests an adjustment. If the challenge is not agreed, it can be referred to arbitration. If no challenge is made, the relevant statement becomes binding on the parties. It was obviously intended to give some certainty to the ongoing accounting process. It would seem odd if, by a side wind, cl 5 of the Settlement Agreement suddenly removed that certainty.

However, reading cl 1.5 of the applicable Accounting Procedure in its correct context, that provision never contemplated the challenge, by that procedure, to the allocation of income and expenditure to various Participations. The procedure for resolving those disputes was found in Article IV of each of the Unit Agreement and the Downstream Agreement. Therefore, had the review and adjustment procedures under the two agreements been implemented, they would only have been implemented in respect of changes to the Participation Factors. Such review and adjustment would then have operated to amend the statements of account, but only in that respect, and not in respect of any challenges that might independently be made to other aspects of the relevant Accounting Procedure.

As cl 5 of the Settlement Agreement purports only to replace the previous Review and Adjustment procedures, the applicable Accounting Procedures, their operation and their conclusiveness otherwise, are preserved by cl 15 of the Settlement Agreement.

I reject the appellants' argument on the scope of cl 5(a) of the Settlement Agreement.

The scope of cl 5(i) of the Settlement Agreement (relating to the auditor and the audit opinion) was governed by cl 5(a) of that agreement. Clause 5(i) was concerned only with Accounting Adjustments as defined in cl 5(a). It was not concerned with Accounting Adjustments arising in consequence of the allocation of items of revenue or expenditure to or from the Unit Account or the Downstream Account for purposes unconnected with the variation in Participations or the creation of Fixed Factors. In so far as KPMG might have dealt with Accounting Adjustments arising other than from the variation in the Participations and the creation of the Fixed Factors, KPMG's action was outside the scope of its terms of reference. To the extent that the audit opinion was outside the scope of cl 5(i) of the Settlement Agreement, it was invalid and of no effect.

I am fortified in that view by the fact that if a non-operator disagrees with an Audit Opinion supplied under cl 5(i) of the Settlement Agreement, it could perform up to four "comprehensive audits" of the Accounting Adjustments at any time prior to 31 December 1998: cl 5(k). It is only where a difference arises between such a comprehensive audit and the operator's cl 5(i) Audit Opinion that the arbitration provisions may be invoked under cl 5(l)(ii). A "comprehensive audit", by virtue of cl 1(b) of the Settlement Agreement, has the same meaning as in the Downstream Agreement, and that is the audit referred to in the Accounting Procedure which a non-operator may require under cl 1.6 of that procedure. The Accounting Procedure specifies quite clearly in cl 1.5 how a challenge in respect of an allocation to a particular participation can be made. That has already been described. The "comprehensive audit" provisions follow in the next clause in the procedure. The comprehensive audit under the Accounting Procedure, is plainly not the method of challenging an allocation and of dealing with a disputed allocation under the Accounting Procedure. Because it is the same audit referred to in cl 5(k) of the Settlement Agreement, it is plain that such matters were not intended to be the subject of a non-operator's audit under cl 5(k), and could therefore not become the subject of a difference with a cl 5(i) audit opinion. As pointed out above, it is only such a difference that can be submitted to arbitration. That leads to the strongest possible inference that the cl 5(i) Audit Opinion was never intended to deal with questions of allocation.

The question was argued, however, as to whether the requirement for the audit in cl 5(i) can be used to interpret the true meaning of cl 5(a). Santos contends, for example, that the "Audit Opinion" on the "correctness" of the Accounting Adjustments necessarily imports an opinion as to the correctness of the allocations.

The concept of correctness, it was argued, goes further than merely verifying the computational aspects of the accounting adjustment. It was argued that the requirement for an "audit opinion on the correctness of the adjustments" could only be met by the auditor considering the whole of the process required by cl 5(a) to effect the accounting adjustments. That process, it was argued, involved both an interpretive element and a computational or arithmetic element and that in consequence, the auditor must audit both elements to be able to express an opinion on the correctness of the Accounting Adjustments; ie the auditor must consider the relevant agreements to verify that the interpretation by the Operator of the Unit and Downstream Agreements to allocate items of cost and receipt to particular ledgers is correct. I cannot accept the appellants' argument on this point. I have already given some reasons why.

The role of an auditor can be more than merely to verify matters of arithmetic. It depends on the circumstances of the case. Having regard to the scope of cl 5(a) and to the purpose of cl 5 of the Settlement Agreement, I am of the view that the role of the auditor in this case is much more limited than as the appellants have described it. It is concerned only with Accounting Adjustments arising from the variation in Participations and the creation of the Fixed Factors. While the scope of the audit is limited to these matters it may nevertheless be necessary for the auditor to consider and interpret the relevant agreements.

However, the plaintiff's Statement of Claim calls in question some possibly complex issues of fact which may have to be resolved as to the proper characterisation of an activity, and therefore as to whether a breach of contract has occurred by the allocation of that activity to a particular participation. Delhi also relies on facts said to give rise to an estoppel. The resolution of those matters does not lend itself to being properly the subject of an Audit Opinion. That would suggest, contrary to the respondent's argument, that the extent of cl 5(a) and therefore of the auditor's role under cl 5(i), is one limited to a re-calculation based on existing allocations.

A document prepared by KPMG and headed "Fixed Factor Settlement 1996 - Audit Approach" was referred to in the course of argument. It is a document in which KPMG outlined the manner in which they would conduct the audit. In my view such a document cannot be used to shed any light on the correct interpretation and application of cl 5 of the Settlement Agreement. If KPMG were a party, the document concerned may be used to assist in resolving an ambiguity, but in the present case, a document prepared by KPMG could not be used for such a purpose. As a matter of evidence it was inadmissible to assist in the interpretation of cl 5 of the Settlement Agreement. In any event the meaning of cl 5 is clear and free of ambiguity.

A party to the Settlement Agreement had the right to perform four comprehensive audits of the Accounting Adjustments before 31 December 1998: cl 5(k). Clause 1.6 of Exhibit B to the Unit Agreement was to apply mutatis mutandis to each of the four audits concerned. In this matter there are nine periods of one year each which are capable of audit. Under cl 5(k) parties other than the Operator had the option of separately arranging an audit in not more than four of the years concerned. The audit so undertaken is separate from an audit under cl 5(i). In the case of that clause, the Unit Operator was obliged to have carried out an audit in respect of each year.

It is not known whether Delhi has obtained one or more of the comprehensive audits referred to in cl 5(k). As we have seen, the obtaining of at least one such audit is a necessary trigger to the operation of cl 5(l), an essential ingredient in the arbitration agreement comprising that paragraph and Article XXIII of the Unit Agreement.

Under cl 5(1) of the Settlement Agreement, where an independent audit of Accounting Adjustments is undertaken and a report is submitted to the party requesting it containing an opinion that a further adjustment to the Accounting Adjustments is required, the dispute can be resolved by agreement if the parties are so minded; otherwise it is referred to arbitration.

Clause 5(1) operates in conjunction with Article XXIII of the Unit Agreement to provide an arbitration agreement. The paragraph provides that on certain conditions there set out, disagreement about any adjustment "will be referred to arbitration in accordance with the provisions of Article XXIII of the Unit Agreement". The text of cl 5(l) of the Settlement Agreement is set out earlier in these reasons.

The operation of cl 5(l)(ii) containing part of the arbitration agreement is conditioned on a failure to agree that a further adjustment identified in an audit opinion obtained pursuant to cl 5(k) should be made. If no audit opinion has been obtained under cl 5(k) there can be no arbitration under cl 5(l)(ii) and Article XXIII of the Unit Agreement. Such an arbitration would be concerned only with a further adjustment identified under the audit report referred to. The clause does not contain a general submission to arbitration. It follows that any dispute outside the strict confines of cl 5(l)(ii) would be required to be dealt with by a court of appropriate jurisdiction.

In the present case, the fact that the operation of an arbitration agreement is subject to a pre-condition in relation to an audit under cl 5(k) does not make it any less an arbitration agreement: PMT Partners Pty Ltd v Australian National Parks and Wildlife Service [1995] HCA 36; (1995) 184 CLR 301 per Brennan CJ, Gaudron and McHugh JJ at p310.

In my view, the dispute in the present case is not within the scope of cl 5(1)(ii). Clause 5 of the Settlement Agreement is not concerned with a dispute which arises between the parties or some of them as to the Participation in respect of which a particular item of expenditure should be allocated. That is the case here. The matter falls outside the scope of the arbitration agreement arising from cl 5(1)(ii) and Article XXIII of the Unit Agreement.

By its Statement of Claim Delhi seeks the following relief:

(a) for the period 1987 to 1 January 1991, Delhi's share of the State's repayment of the Jetty Security Deposit and interest and its contribution to the capital component of State Wharfage Dues was calculable by reference to the Jetty Participation of 15.8743%;

(b) for the period 1 January 1991 onwards, Delhi's share of the State's repayment of the Jetty Security Deposit and interest and its contribution to the capital component of State Wharfage Dues was calculated by reference to a Fixed Factor of 20.21%;

(c) for the period 1 January 1987 to 1 January 1991, Delhi's share of the State's repayment of the Roads and Water Security Deposit and interest and its contribution to the capital component of the Water Rates and roads tariff was calculable by reference to the initial Common Facilities Investment Participation of 16.8863%;

(d) for the period 1 January 1991 onwards, Delhi's share of the State's repayment of the Roads and Water Security Deposit and interest and its contribution to the capital component of the water rates and roads tariff was calculable by reference to a Fixed Factor of 20.21%.

(a) for the period 1 January 1987 to 1 January 1991, Delhi's share of the State's repayment of the Jetty Security Deposit and interest was calculable by reference to the Jetty Participation of 15.8743%, and for the period 1 January 1991 onwards was calculable by reference to a Fixed Factor of 20.21%;

(b) for each of the years commencing 1 January 1987, 1 January 1988, 1 January 1989, 1 January 1990 and 1 January 1991, Delhi's contribution to the capital component of State Wharfage Dues was calculable by reference to percentages set out in the first and second schedules of the Settlement Agreement namely, 19.8850%, 20.0950%, 21.1631%, 20.7851% and 22.8867% respectively, and for the period 1 January 1992 onwards Delhi's contribution to the capital component of State Wharfage Dues was calculable by reference to a fixed factor of 20.21%;

(c) for the period 1 January 1987 to 1 January 1991, Delhi's share of the Roads and Water Security Deposit was calculable by reference to the initial Common Facilities Investment Participation of 16.8863%; and

(d) for each of the years commencing 1 January 1987, 1 January 1988, 1 January 1989, 1 January 1990 and 1 January 1991, Delhi's contribution to the capital component of the water rates and roads tariff was calculable by reference to percentages set out in the first and second schedules of the Settlement Agreement namely, 19.5761%, 19.7473%, 20.6099%, 20.3729% and 22.4427% respectively, and for the period 1 January 1992 onwards Delhi's contribution to the capital component of the water rates and roads tariff was calculable by reference to a Fixed Factor of 20.21%.

C. A declaration that the auditor [KPMG] was bound to audit the first and second accounting adjustments in accordance with the declaration in A, or alternatively in accordance with the declaration in B.

D A declaration that the audit opinion of KPMG dated 30 June 1997 in respect of the first and second accounting adjustments is invalid, null and void.

E. A declaration that all statements of charges and bills rendered by Santos to Delhi after 1 January 1987 in respect of Delhi's share of the capital component of State Wharfage Dues and the Water Rates and Roads Tariff are presumed to be true and correct after 24 months following the date of the statement or bill, and to that extent Santos is barred from questioning the correctness of those statements and bills.

F. A declaration that Santos is estopped from contending that the capital component of the State Wharfage Dues should be apportioned by reference to any factor other than the Jetty Participation factor, and that Santos is bound to apportion that payment by reference to that factor alone.

G. A declaration that Santos is estopped from contending that the capital component of the water rates and roads tariff should be apportioned by reference to any factor other than the initial Common Facilities Investment Participation Factor, and that Santos is bound to apportion such payments by reference to that factor alone.

H. An injunction to restrain Santos from seeking to re-open the statements of charges and bills rendered by Santos to Delhi since 1 January 1987 or to recover from Delhi any amounts in respect of Delhi's proportion of State Wharfage Dues and the water rates and roads tariff based on such re-opening of the statements of charges and bills.

I. A declaration that pursuant to the first accounting adjustment an amount of $33,074,321 is receivable by Delhi from Santos.

J. A declaration that Delhi is required to pay only $543,464 in relation to the audit adjustments to the first accounting adjustment instead of $4,699,953 which has been paid by Delhi.

K. An order that Santos pay Delhi $4,156,489 in respect of the first accounting adjustment.

L. A declaration that pursuant to the second accounting adjustment an amount of $449,935 is receivable by Delhi from Santos instead of $20,736 which has been paid to Delhi.

M. An order that Santos pay Delhi $429,199 in respect of the second accounting adjustment.

In addition, the respondent made claims for damages, interest, any necessary accounts and enquiries and costs.

The declarations sought in paragraphs A and B do not raise matters which fall within cl 5(a) of the Settlement Agreement and do not therefore raise matters which are caught by the arbitration clause in cl 5(1). The declarations are not sought as a result of a variation in Participations or the creation of Fixed Factors arising under the Settlement Agreement; rather they arise from the change in the characterisation or allocation of certain monies debited or credited to the Downstream Account. The monies concerned are outside the scope of the arbitration agreement ("the Arbitration Agreement") arising from the combination of cl 5(l) of the Settlement Agreement and Article XXIII of the Unit Agreement. The relief sought does not invoke the process of Accounting Adjustments under cl 5(a).

Paragraph C seeks a declaration that the auditor was bound to audit the first and second Accounting Adjustments in accordance with the declaration in paragraph A or alternatively, paragraph B. Paragraphs A and B do not raise matters which fall within the scope of cl 5 of the Settlement Agreement. That clause is limited in its scope to variations in Participations or the creation of Fixed Factors arising under the Settlement Agreement. Likewise the monies concerned are outside the scope of the Arbitration Agreement.

Paragraph D seeks a declaration that the audit opinion of KPMG dated 30 June 1997 in respect of the first and second Accounting Adjustments is invalid. The audit opinions (as there are in fact two) may well be in respect of monies arising from variations in Participations or the creation of Fixed Factors. However, they appear to include principally monies of the kind referred to in paragraphs A and B. If they do, the audit opinions will be outside the scope of cl 5 of the Settlement Agreement and in particular, outside the scope of the Arbitration Agreement. They would not be in accordance with the contract out of which they arise and cannot therefore be the subject of the Arbitration Agreement.

The situation is analogous to a contract which calls for a valuation of property. In Legal and General Life of Australia v A Hudson Pty Ltd (1985) 1 NSWLR 314 McHugh JA at pp335-336 observed:

" In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied ... While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with terms of the contract."

Paragraphs E, F and G raise issues that do not arise under cl 5 of the Settlement Agreement properly interpreted.

The injunction referred to in paragraph H could be applicable to monies within the scope of Cl 5 of the Settlement Agreement and within the scope of the Arbitration Agreement in particular but, clearly, the paragraph goes beyond that and includes monies which have nothing to do with cl 5 or the Arbitration Agreement.

The monies in paragraphs I, J, K, L and M, are in part monies included in an Accounting Adjustment properly within the scope of cl 5 of the Settlement Agreement and within the scope of the Arbitration Agreement but also include monies which are outside the scope of the Settlement Agreement and also outside of the Arbitration Agreement.

I now turn to the consequences of the monies referred to in the prayer for relief in the action being outside the scope of cl 5 of the Settlement Agreement and outside the scope of the Arbitration Agreement.

Clause 5(n) of the Settlement Agreement provides that subject to cl 5(i) to 5(m) the Accounting Adjustments which have arisen under cl 5(a) are to be regarded as conclusive and are not to be challenged by any party with certain exceptions which are not relevant here. Clause 5(n) can only arise in respect of Accounting Adjustments which are properly within the scope of cl 5. As I have said earlier, such Accounting Adjustments arise from variations in Participations and the creation of Fixed Factors brought about by the Settlement Agreement. They do not arise in respect of other monies as such other monies are outside the scope of cl 5(a) of the Settlement Agreement. In particular, they do not arise from the monies in respect of which declarations are sought under paragraphs A and B of the prayer for relief contained in the respondent's Statement of Claim. These monies have nothing to do with the Settlement Agreement and the Accounting Adjustments.

I conclude that cl 5(n) of the Settlement Agreement cannot operate as a bar in respect of the monies the subject matter of paragraphs A and B of the prayer relief in the Statement of Claim.

After entering an appearance in the action and before filing a defence, the appellants as defendants applied to the Court for an order that the Statement of Claim be struck out or alternatively that the proceedings be stayed pursuant to s 53 of the Commercial Arbitration Act 1986. The application to strike out was grounded on r 3.04 and r 46.18 of the Supreme Court Rules. The only basis on which the Statement of Claim in this action could be struck out would be that the plaintiff could not succeed in the action on any view of the facts or law, assuming all the facts averred in the Statement of Claim could be proved. The plaintiff has initiated this action with a comprehensive Statement of Claim in which there are a number of serious questions to be tried. The plaintiffs' claims are not caught by the arbitration agreement found in the Settlement Agreement. In the circumstances, I can see no basis upon which an application to strike out the Statement of Claim under the rules in question could succeed.

Application for a stay under s 53 of the Arbitration Act 1986

I now turn to s 53 of the Commercial Arbitration Act 1986. So far as is material, s 53 of the Act is as follows:

(a) a party to an arbitration agreement commences proceedings in a court against another party to the agreement in respect of a matter agreed to be referred to arbitration;

(b) an application for a stay of the proceedings is made by another party to the arbitration agreement;

(i) before the applicant has delivered pleadings or taken any other step in the proceedings other than the entry of an appearance;

(ii) by leave of the court - at some later stage in the proceedings;

(i) that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement;

(ii) that the applicant was at the commencement of the proceedings and still remains ready and willing to do all things necessary for the proper conduct of the arbitration,

the court may make an order staying the proceedings and may give such directions with respect to the future conduct of the arbitration as it thinks fit.

In the Act an arbitration agreement is defined to mean "an agreement in writing to refer present or future disputes to arbitration".

In considering an application for a stay of proceedings, the Court must be satisfied that the dispute between the parties is covered by the arbitration agreement. In Mustill and Boyd, The Law and Practice of Commercial Arbitration in England, 2nd Ed at p 470, the learned authors said:

"The burden is on the applicant to show that the matters in respect of which a stay is sought fall within the scope of the arbitration agreement."

In Crusader Resources NL v Santos Ltd (1990) 156 LSJS 420 at p 443, Olsson J said:

"In bringing the applications for a stay, the defendants necessarily accept the onus of unequivocally demonstrating their entitlement to pursue the relief sought. That right is dependent upon them being able to establish that the dispute between the parties is of a nature which falls within an arbitration agreement entered into by the parties, as being a matter specifically agreed to be referred to arbitration."

A stay may be refused where part of the relief claimed is beyond the scope of the arbitrator's jurisdiction: Jacobs' Commercial Arbitration Law and Practice, para 50.690. Where only some of the matters before the court are covered by an arbitration agreement, these may be the subject of a stay, leaving the balance of the matters to proceed in court: Halsbury's Laws of Australia, Volume 1, para 25-185 and Standard Insurance Co Ltd v Scandrett [1923] NSWStRp 11; (1923) 23 SR (NSW) 254.

The operative words of s 53 of the Arbitration Act 1986 are that the court may make an order staying the proceedings. The word "may" imports a discretion.

Also, it is a condition to the granting of a stay that the court must be satisfied "that there is no sufficient reason why the matter should not be referred to an arbitration in accordance with the agreement". Once a valid arbitration agreement has been found to exist, the onus shifts to the party which is the plaintiff in the litigation to satisfy the court that there is no sufficient reason why the stay should not be granted.

In the present case, the whole or almost the whole of the Delhi's claim is outside the scope of the Arbitration Agreement. Probably the only parts of the claim which fall within the ambit of the Arbitration Agreement are those dealing with the audit and the injunction. At best these matters are ancillary to the principal causes of action and should be dealt with along with them. It would clearly be a matter of convenience for the whole case to be heard as one.

The learned Judge at first instance was right to refuse to strike out the Statement of Claim in the action and to refuse to grant a stay under s 53 of the Arbitration Act, 1986.

For these reasons I would dismiss the appeal.