These proceedings concern a Joint Venture and Operating Agreement dated 16 September 2011 (the JVOA) between the plaintiff, Sweetpea Petroleum Pty Ltd, and the defendant, Paltar Petroleum Limited, relating to the exploration for gas in the Northern Territory.
By a notice of motion filed on 22 October 2018, Paltar seeks an order under Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 13.4(1) or the inherent power of the Court dismissing the proceedings on the ground that Sweetpea has not complied with the dispute resolution procedure set out in the JVOA.
[2]
Background
Paltar was appointed as the initial operator of the joint venture under cl 4.1 of the JVOA and agreed at its own expense to carry on an Initial Work Program (as defined in the JVOA) for the Initial Work Period (defined to be the five years from 28 August 2012 to 28 August 2017) in exchange for a 50 per cent interest in two exploration permits (EP 136 and EP 143) that had been issued to Sweetpea under the Petroleum Act (NT).
In addition to its rights of free carriage under cl 4.1, Sweetpea was also entitled under cl 9.1 of the JVOA to seek reimbursement of certain expenses incurred by it before the JVOA was entered into from the Initial Work Program Expenses for year one that Paltar was obliged under the JVOA to pay into an Escrow Account established for the purposes of the joint venture.
Clause 2.10 of the JVOA provides that "each Participant agrees to act in good faith towards the other Participant" which includes "being just and faithful in all activities and dealings with the other Participant". Clause 4.2(c) provides that the Operator must carry out its duties in good faith and "efficiently, reasonably and diligently in accordance with Good Oilfield Practice".
Clause 7.1 of the JVOA provides that "[s]ubject to cl 7.2 [which deals with the Initial Work Program to be funded by Paltar], during the term of this Agreement the Operator will submit to each Participant by no later than 90 days before the commencement of each Contract Year a recommended Work Program for such Contract Year and an indicative Work Program for the following Contract Year".
Clause 7.5 states:
Work Program Expenses
Work Program Expenses of the Joint Venture will be borne by the Participants in proportion to their respective Participating Interests; provided that:
(a) where a Work Program for a Permit is submitted and approved by the Management Committee which is in excess of $10,000,000; and
(b) where a Participant voted against such Work Program,
the Work Program will be treated as though it was a Sole Risk Exploration pursuant to clause 8, and the Participant who voted against such Work Program was a Sole Risk Non-Participant.
"Work Program Expenses" is defined to mean "the costs and expenses incurred, paid or payable by the Operator in accordance with the provisions of this Agreement or otherwise authorised by the Management Committee in connection with conducting the Work Program during the Work Period, but does not include the Initial Work Program Expenses".
Under cl 7.6 of the JVOA, "Work Program Expenses will be called by the Operator in accordance with clause 10".
Clause 10.1 relevantly states that "all liabilities, costs and expenses incurred in relation to the Joint Venture (including Work Program Expenses) will be borne by the Participants in proportion to their respective Participating Interests …".
Clause 10.2 provides:
Called Sums
The Participants must pay all Called Sums to the Operator on the respective Due Dates as specified by the Operator in accordance with a notice given in accordance with this Agreement. If payment is not made, the Operator must promptly notify the other Participant of that fact.
"Called Sum" is defined to mean "an amount to be contributed by a Participant in respect of Work Program Expenses or other payments required by this Agreement".
Clause 15 of the JVOA deals with default. In substance, it permits a Participant not in default to serve on a Participant who has been in default for more than 30 days a notice (referred to as a "Remedy Notice") requiring that Participant to remedy the default within 10 days, failing which the Participant not in default has an option to purchase the whole of the Defaulting Participant's Participating Interest on the terms set out in the clause.
Clause 23 deals with dispute resolution. In broad terms, it provides in cl 23.1 for good faith negotiations between the Chief Executive Officers of each Participant and, failing that, expert determination in accordance with cl 24.
Clause 23.1 relevantly states:
If a dispute between the Participants arises out of, relates to or is in connection with any aspect of the Joint venture or this Agreement or the validity of this Agreement, then:
(a) …
(b) …
(c) a Participant must comply with the process set out in clauses 23.2 and 24 before commencing court or other proceedings except where that Participant is seeking urgent interlocutory relief or if any Participant has unreasonably failed to comply with its obligations under this clause 23 or clause 24.
Clause 24(a) states:
If a dispute arises which is to be dealt with under this clause 24, then a Participant may serve a notice on the other Participant requiring the dispute to be determined by an Expert.
Clause 24(d) provides:
The Participants agree to instruct the Expert that the Expert:
(i) acts as an expert and not an arbitrator;
(ii) may decide on rules of conduct in its absolute discretion and enquire into the matter to be determined as the Expert thinks fit, including receiving submissions and taking advice from any persons that the Expert considers appropriate and requiring the Participants to provide any material in their possession or control which is reasonably relevant to the issues in dispute;
(iii) must give a written decision (including reasons); and
(iv) must endeavour to give that decision as soon as practicable.
Clause 24(g) provides that the Expert's determination "is conclusive and binding on the Participants in the absence of manifest error".
In August 2012 and then again on 30 January 2017, Paltar served a Called Sum notice on Sweetpea purportedly under cl 10 of the JVOA claiming a sum of $90,367.81 said to have been overpaid by it in respect of Prior Expenditure payable under cl 9.1. On 3 March 2017, it served on Sweetpea a notice purporting to be a Remedy Notice under cl 15.4 of the JVOA requiring that the amount claimed be paid by 13 March 2017. On 3 April 2017, Paltar served on Sweetpea a notice purporting to be a notice under cl 15 of the JVOA electing to acquire the whole of Sweetpea's Participating Interest.
In addition, on 30 January 2017, Paltar served on Sweetpea a Called Sum notice requiring Sweetpea to pay or to contribute by 23 February 2017 to Paltar (in its capacity as Operator) $69,735,604, which was said to be Sweetpea's 50 per cent share of Work Program Expenses for 2017-2018.
Sweetpea disputes the validity of each of those notices.
In relation to the notices in respect of the $90,367.81, it contends that the amount claimed is not properly characterised as an amount payable in accordance with the JVOA. Rather, it is a claim for money said to have been overpaid.
In relation to the claim of $69,735,604, Sweetpea contends that the Work Program had not been approved by a Management Committee established under the JVOA, did not represent costs or expenses "incurred, paid or payable by Paltar as Operator" and was not issued in good faith.
By its Commercial List Summons, Sweetpea seeks various declarations concerning the validity of the notices on which Paltar relies and injunctions restraining Paltar from taking any action based on those notices.
[3]
Relevant legal principles
UCPR r 13.4(1) gives the Court power to dismiss proceedings that are frivolous or vexatious, or where no reasonable cause of action is disclosed or where the proceedings are an abuse of the process of the Court.
It would not be appropriate for the Court to dismiss proceedings in the exercise of that power where the proceedings are brought in breach of a contractual obligation. Proceedings which are properly brought but which are brought in breach of contract are not an abuse of process or are in some other way so defective that they should be dismissed. Rather, the Court has a discretion to give effect to the contractual obligation by staying proceedings brought in breach of it. Circumstances in which the Court may refuse a stay include the following:
(1) the agreed process would deal with only part of the dispute;
(2) there would be duplication of effort if the agreed process was to be followed in the particular case;
(3) the refusal of a stay would result in a multiplicity of proceedings;
(4) in the case of an expert determination, the dispute is inapt for determination by an expert because it does not involve the application of specialist knowledge to matters to be observed or investigated by the expert or is outside the expert's field of expertise; and
(5) the agreed procedures are inappropriate or inadequate for the nature of the dispute.
See Onslow Salt Pty Ltd v Buurabalayji Thalanyji Aboriginal Corporation [2018] FCAFC 118 at [16] per Besanko, Barker and Colvin JJ. See also Dance with Mr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332 at [54] per Hammerschlag J.
[4]
Does cl 24 of the JVOA apply?
Sweetpea contends that the dispute resolution mechanism set out in the JVOA does not apply to the disputes the subject of these proceedings. Alternatively, it submits that the Court should not grant the relief sought. The appropriate relief would be a stay and not dismissal of the proceedings as sought by Paltar. In any event, Sweetpea contends that the Court should not, in the exercise of its discretion, grant a stay in this case.
Sweetpea submits that the dispute resolution mechanism of the JVOA does not apply to the current dispute for two reasons.
First, it submits that the mechanism only applies to disputes between the parties to the JVOA as Participants. It does not apply to disputes between a Participant and the Operator. The current disputes have that character. Second, Sweetpea contends that the mechanism only operates where one party or the other has made an election under cl 24(a) to serve a notice requiring the dispute to be determined by an Expert. In the absence of such a notice from either party, Sweetpea was free to commence court proceedings.
I do not accept either of those submissions.
As to the first, there is no doubt that both Sweetpea and Paltar are "Participants". Clause 23.1 is drafted very broadly. It applies to any dispute between Participants "which arises out of, relates to or is in connection with any aspect of the Joint Venture or this Agreement or the validity of this Agreement". The rights and obligations of the Operator are an aspect of the Joint Venture and the Agreement. Consequently, a dispute between Sweetpea and Paltar in relation to those matters is a dispute between Participants that falls within the scope of cl 23.1.
Sweetpea submits that the conclusion of the previous paragraph must be rejected because the JVOA draws a clear distinction between the Operator and the Participants, and the current dispute is between Sweetpea as Participant and Paltar as Operator. That submission is reinforced by cl 4.5 of the JVOA which gives "the Operator" the right to assign its rights and obligations under the agreement to a "Related Body Corporate" at any time if the Related Body Corporate "agrees in writing to be bound by this Agreement and has the capacity and resources to carry out the obligations of the Operator …". Such an Operator would not be a Participant and consequently would not be bound by the dispute resolution provisions of the JVOA. The parties could not have intended the operation of the dispute resolution provisions to depend on who was the Operator. Rather, what they must have intended was that the dispute resolution provisions only applied to disputes between the parties as Participants.
I do not accept that submission. It cannot overcome the clear words of cl 23. Moreover, there is no clear dividing line between disputes between Operator and Participant on the one hand and disputes between Participants on the other. Under cl 15.1, a Participant becomes a Defaulting Participant if it fails to pay a Called Sum within 14 days of its Due Date, or it commits a material breach of any other term of the JVOA or it becomes insolvent. If a Defaulting Participant fails to remedy a default within 30 days (if the failure is a failure to pay a Called Sum) or within 30 days of being given a notice either by the Operator or any other Participant to do so (in the other cases), the other Participant (but not the Operator) may give a Remedy Notice. Consequently, whether there has been a default and whether a Remedy Notice can be given necessarily involves a dispute between Participants. The fact that one of those Participants is also the Operator and has engaged in conduct as Operator that has given rise to the dispute does not alter the fact that the ultimate dispute to be resolved is also properly characterised as a dispute between Participants.
As to Sweetpea's second submission, there can be no question that each party has a discretion under cl 24 to refer the dispute to an Expert. The question is what happens under the JVOA if neither does so. In my opinion, that question is answered by cl 23.1(c), which says that a Participant must comply relevantly with the process set out in cl 24 before commencing court or other proceedings (except in certain irrelevant circumstances). The process set out in cl 24 involves the referral of the dispute to an Expert. Consequently, before commencing court proceedings, a Participant must exercise its rights under cl 24. Sweetpea did not do so. Consequently, it is prevented by cl 23 from commencing court proceedings.
[5]
Should the Court grant a stay?
As Sweetpea points out, the real question is whether the proceedings should be stayed, not whether they should be dismissed. In my opinion, the Court should refuse to grant a stay because the case is not a suitable one for resolution by an expert.
The dispute in relation to the $90,367.81 turns on the character of the claim for that money and whether the claim falls within the description of a "Called Sum" within the meaning of cl 10.2 of the JVOA. That is a dispute concerning the interpretation of the JVOA and the correct characterisation of the payment. Those issues are matters peculiarly appropriate for a Court to decide. Neither of them involves the specialist knowledge of an expert.
The dispute in relation to the $69,735,604 raises a number of issues. Most significantly, it raises the question whether Paltar has acted in good faith in serving a Called Sum notice. Sweetpea points to the following matters as evidence that it has not:
1. As at 30 January 2017, no Management Committee for the purposes of the JVOA had been formed;
2. There continued to be a Government moratorium on hydraulic fracking in the Northern Territory which precluded certain drilling activities in the permits;
3. Paltar did not serve any corresponding Called Sum notice on itself as a Participant; and
4. In its dealings with the Northern Territory Department of Primary Industry and Resources in relation to the permits, Paltar described actual and estimated expenditure in relation to those permits in amounts that are much less than the amounts described in the Called Sum notice.
Some of these matters may require factual investigation through discovery and the issue of subpoenas. A proper investigation of the issues is also likely to involve cross-examination of witnesses. The expert determination process does not provide suitable mechanisms by which those factual investigations could occur. Moreover, the determination of whether Paltar has breached its duties of good faith is one properly made by a Court, not by an expert.
Paltar submitted that Sweetpea had embarked on the dispute resolution process contemplated by the JVOA by referring the dispute to a meeting of the parties' respective Chief Executive Officers and it should not be permitted to depart from that process now. It is not entirely clear how that point is put. The suggestion appears to be that Sweetpea is somehow or another estopped from commencing court proceedings by its conduct. However, in my opinion, no estoppel can operate in this case. Apart from any other consideration, Paltar does not point to any prejudice it has suffered as a consequence of Sweetpea's conduct. Sweetpea cannot be criticised for attempting to resolve the dispute before commencing court proceedings; and the fact that it chose to use the procedures set out in the JVOA in an attempt to resolve the dispute rather than some other dispute resolution mechanism and Paltar agreed to follow those procedures cannot itself give rise to an estoppel. Moreover, as early as 4 April 2017, Sweetpea, in a letter responding to Paltar's notices dated 3 March 2017 and 3 April 2017, made it clear that it reserved all its rights, including the right to commence court proceedings. There was therefore no conduct on the part of Sweetpea that could have caused Paltar to believe that Sweetpea intended to follow the dispute resolution procedure set out in the JVOA if the dispute could not be resolved.
[6]
Orders
It follows that the defendant's motion filed on 22 October 2018 must be dismissed with costs.
[7]
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Decision last updated: 02 November 2018