GXL ROYALTIES LIMITED V SWIFT ENERGY NEW ZEALAND LIMITED AND ANOR HC WN CIV-2008-485-1776 [2009] NZHC 28 (30 January 2009)

IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY
                                                              CIV-2008-485-1776



              BETWEEN                  GXL ROYALTIES LIMITED
                                       Plaintiff

              AND
                     SWIFT ENERGY NEW ZEALAND
                                       LIMITED
                                   
   First Defendant

              AND                      GREYMOUTH GAS KAIMIRO
                                       LIMITED,
GREYMOUTH GAS
                                       PARAHAKI LIMITED, GREYMOUTH
                                       GAS TURANGI
LIMITED AND
                                       GREYMOUTH PETROLEUM TURANGI
                                       LIMITED
  
                                    Second Defendants


Hearing:      27 January 2009

Counsel:      M Corlett for plaintiff
   
          L Donnellan for first defendant
              M D O'Brien and P Sutherland for second defendants

Judgment:     30 January
2009



                   RESERVED JUDGMENT OF DOBSON J



[1]    These proceedings relate to a dispute over the circumstances in
which
ownership interests in a petroleum exploration permit ("the permit"), issued under
the Crown Minerals Act 1991, have purportedly
been sold and assigned by the first
defendant ("Swift") to the second defendant companies ("Greymouth"). The permit
had originally
been owned by the plaintiff ("GXL") which retained a contingent
royalty interest, and GXL's consent was required to the sale or assignment.
The
present application is brought by Greymouth seeking a more explicit pleading from


GXL ROYALTIES LIMITED V SWIFT ENERGY NEW
ZEALAND LIMITED AND ANOR HC WN CIV-
2008-485-1776 30 January 2009

GXL in response to allegations in Greymouth's Statement of Defence
and
Counterclaim that GXL has refused consent for collateral purposes.


[2]       Under the terms of a 2004 royalty deed between
GXL and an unrelated entity
that then held an interest in the permit, GXL sold subject to retention of a five
percent royalty entitlement
on any petroleum products extracted pursuant to the
permit. That deed provided for subsequent dealings with the interests in the
permit
to occur in most circumstances only after the transferor had obtained GXL's written
consent to the transfer. GXL's pleading
is to the effect that in or about May 2008
Swift sold, assigned or transferred an 80 percent interest in the permit to Greymouth.
A further entity not involved in the present proceedings, but connected with
Greymouth, had also acquired the remaining 20 percent
interest from its previous
owner. I was informed from the Bar that GXL's royalty interest in that 20 percent
interest had been bought
out by the latest acquirer of that stake, so that GXL's
current interest is in a five percent royalty on Greymouth's 80 percent stake
in the
permit.


[3]       The consent of the Minister of Energy is required for the transfer or creation
of any interest in such
a permit. In circumstances not presently relevant, that consent
was at first held up by GXL's protest that its consent to the transfer
was required and
had not been granted, but then the Minister did purport to consent to the transfer to
Greymouth after receiving
a second application, notwithstanding GXL's protest and
lack of consent. The Minister's conduct has been the subject of separate
judicial
review proceedings brought by GXL, with a decision from this Court pending.


[4]       The relevant provision in the royalty
deed ("clause 7.2") provided that the
grantor (Swift) could sell, assign or transfer its interest if, inter alia:

          the
Grantor (Swift) obtains the prior consent of the Grantee (GXL), which
          consent shall not be unreasonably withheld, where
it is established that the
          purchaser, assignee or transferee (Greymouth) has sufficient financial
          capability
to meet the obligations under the Permit and this Deed;

[5]       Accordingly, the reason for requiring GXL's consent is to afford it the
opportunity of satisfying itself that
the transferee of the permit interest has sufficient

financial capability to meet the obligations under the permit and the 2004
royalty
deed.


[6]     GXL has not provided its consent, pleading as the reason for doing so that it
had not been provided with
information to establish that the Greymouth companies
have sufficient financial capability to meet the relevant obligations.    
    GXL's
proceedings seek:


        a)     a declaration that the purported transfer to Greymouth is unlawful;


        b)   
 a direction that the permit be transferred back to Swift from
               Greymouth;


        c)     an order prohibiting Swift
from selling its interest in the permit
               without first complying with clause 7.2; and


        d)     as against Greymouth,
a declaration that the Greymouth companies
               have induced Swift to breach the contract with GXL that is reflected
 
             in the royalty deed and an order requiring Greymouth to transfer the
               permit back to Swift.


[7]    
An Amended Statement of Defence and Counterclaim on behalf of the
Greymouth companies denies that the conduct of Swift and Greymouth
is in breach
of clause 7.2. It avers that sufficient information as to the financial capability of
Greymouth had been provided so
that GXL's withholding of consent is an
unreasonable breach of the provisions of the royalty deed.


[8]     At the time Greymouth
was negotiating to acquire interests in the permit
from Swift, a competing bidder for Swift's permit interests was an entity or entities
representing Todd Exploration Limited or Todd Energy Limited ("Todd"). After
Greymouth had successfully contracted with Swift to
purchase its interest in the
permit, Todd acquired GXL. In these circumstances, Greymouth has supported its
allegation of breach
by GXL of its obligations under the royalty deed to not

unreasonably withhold its consent with a pleading in its Amended Statement
of
Defence and Counterclaim in the following terms:

       30(e)   GXL's refusal to consent has been made for or motivated by
 
             collateral purposes unconnected with the financial capability of the
               Greymouth Companies.

         
     Particulars

               (i)     The Greymouth Companies directly compete with
                       companies affiliated
to the GXL parent company group
                       ("Todd").

               (ii)    Todd was a bidder in respect of Swift's
Permit interests, but
                       was unsuccessful.

               (iii)   Subsequent to losing the bid, but at a time
and by a means to
                       which the Greymouth Companies are not privy, Todd
                       acquired GXL.

               (iv)    The Permit is located in immediate proximity to Todd's
                       PMP 38150 (Mangahewa) permit.

               (v)     There are wells within the area of the Permit (the Kowhai
                       A-1 well) and Todd's PMP
38150 which were at the
                       relevant time (May/June 2008) in relative proximity to each
                     
 other.

               (vi)    GXL, under the direction of Todd, has sought:

                       ·     to impede and, if possible,
prevent the sale of the Permit
                             interests to the Greymouth Companies and thereby
                   
         prevent or delay drilling and other operations in the
                             Permit;

                       ·   
 to impede and hinder the Greymouth Companies in their
                             legitimate operations;

                    
  ·     to obtain confidential and commercially sensitive
                             financial information to which it would not
otherwise
                             have had access.

[9]    Consistently with that allegation, Greymouth's counterclaim also pleads, in
paragraph 54, that GXL's refusal of consent was made or motivated
by collateral
purposes unconnected with the financial capability of the Greymouth Companies,
cross-referring to the particulars in
paragraph 30(e) that are quoted above.


[10]   GXL has declined to plead to these allegations on the ground that it contends
motive
is irrelevant to the rights and obligations under clause 7(2). That refusal to

plead provoked a notice on behalf of Greymouth,
served in early November 2008,
requiring GXL's reply and defence to particularise its response to paragraph 30(e) by
stating whether
GXL admits or denies that its refusal to consent was motivated by
collateral purposes unconnected with the financial capability of
Greymouth.           In
addition, to the extent, if any, it denied such collateral purposes, the notice required
GXL to state whether
it admitted or denied each of the particulars in paragraph
30(e). There was a similar request to respond to paragraph 54 of the counterclaim.


[11]   The present application follows GXL's refusal to comply with that notice.


[12]   The narrow issue therefore is whether
Greymouth can raise any tenable
argument that motives unconnected with concerns as to Greymouth's financial
capability may be relevant
to the Court's determination on whether GXL's refusal of
consent is unreasonable. The parties agreed that the present issue is the
same as if
GXL had sought to strike out the allegations about collateral purpose which it has
declined to respond to. In that context,
the test for strike out would proceed on the
assumption that Greymouth could make out the factual allegations, so that the Court
would have to be satisfied that such collateral purposes could not, in any
circumstances, become relevant to the issues of whether
consent had been
unreasonably withheld.


[13]   Authorities cited on behalf of Greymouth include recognition of propositions,
variously
expressed, to the effect that withholding of consent for a collateral purpose
is treated as unreasonably withholding such consent.
The more vexed issue is
whether the existence of a "bad" (irrelevant) reason for withholding consent can ever
vitiate the existence
of a "good" (relevant) reason for withholding consent.


[14]   The effect of certain United Kingdom decisions in the area of disputed
withholding of consent by a landlord is adequately summarised in Woodfall's Law of
Landlord and Tenant (Sweet & Maxwell Stevens &
Sons, 2007):

       If the landlord has a good and a bad reason for withholding consent, consent
       may nevertheless have been
reasonably withheld if the good reason is a
       sufficient reason and is not otherwise vitiated by the bad reason. However,
 
     there may be cases where the real reason for refusal is a bad one, and the
       good reasons are no more than makeweights,
or where the bad reason

       vitiates the good one. In the absence of such factors, the landlord is entitled
       to rely on
his good reason. (para 11.139)

[15]   It was argued for Greymouth that this approach to consideration of the
reasonableness of withholding
of consent should be treated as applying generally in
commercial contexts, and that it introduces the prospect that collateral or
bad reasons
for withholding consent might result in the consent having been unreasonably
withheld, even if there were other, relevant,
grounds for consent being refused.


[16]   GXL's stance that subjective reasons for withholding consent are irrelevant
involves
rejection of the prospect recognised in the above quote from Woodfall. As
to cases dealing with landlord/tenant requests for consent,
GXL relied on the
decision of Winkelmann J in Louis Vuitton New Zealand Ltd v Prince's Wharf
Property Fund Ltd  (2005) 5 NZConvC 194,073 which rejected the notion that a
good reason for withholding consent could be "tainted by a bad reason" ([67]).
Mr O'Brien acknowledged
the decision, but argued that the Judge did not have the
benefit of the United Kingdom decisions reflected in the summary in Woodfall.
Certainly, the notion of depriving a party of rights afforded it under a contract
because of ulterior purposes smacks of a punitive
approach which is seldom
attractive to the Court in determining contractual rights and obligations. Ex post
facto views by the Court
on motive are hardly conducive of contractual certainty.


[17]   Mr Corlett also argued for GXL that the decisions arising in the
disputed
withholding of consent in the landlord/tenant context should not be applied, beyond
that context, to cases where in more
general commercial contexts consent by one
party to steps taken by another is required. Mr Corlett suggested that landlord/tenant
law has been heavily influenced by statutory intervention, instancing covenants
implied into leases in New Zealand by property law
statutes (eg ss 226 and 227 of
the Property Law Act 2007), and that the law in this area may be more protective of
tenants because
of perceived inequality of bargaining power between them and
landlords.


[18]   One particular feature of the enquiry in landlord/tenant
cases involving
disputed refusal of consent is a requirement for the Court to conduct a two-stage
enquiry.     First, to ascertain
what reason the landlord actually had for refusing

consent, this constituting a subjective enquiry to ascertain what was in the
mind of
the landlord at the time of refusing consent. Secondly, determining whether that
reason relied on was reasonable or unreasonable,
involving an objective enquiry.
This approach was adopted in Louis Vuitton (see [30]), reflecting a practice in United
Kingdom decisions.
Mr O'Brien for Greymouth indicated that it will argue for the
same two-stage process to apply in the present case, so that reasons
for GXL's
refusal to consent are relevant at the first stage.


[19]   GXL's pleading alleges at different points both that it had
attempted to obtain
the financial information it required (implying that insufficient information was
supplied), and that Swift/Greymouth
had failed to establish that Greymouth had
sufficient financial capability. Both allegations are denied by Greymouth, which
says
that sufficient information has been provided, but that GXL had collateral
purposes for seeking further information, and for refusing
consent.


[20]   The approach to the issues which Mr Corlett urged would avoid the need to
enquire into GXL's actual, subjective
reasons at all. He argued that the enquiry
should be limited to the objective assessment as to what information was necessary
to
enable GXL to form a view and whether, if sufficient information was provided,
that ought objectively to have satisfied a party in
GXL's position of the financial
capability of Greymouth. The extent of its argument would be that either GXL was
right in considering
it was entitled to more information, or (as a fallback position)
even if it was wrong on that, then the information provided to it
failed to establish
that Greymouth had sufficient financial capability to meet the obligations under the
permit and the royalty deed.
Both analyses would be de-personalised, reflecting the
conduct of a reasonable company in GXL's position.                  Any idiosyncratic
considerations it had regard to could neither help nor hinder its case on this objective
analysis.


[21]   Mr O'Brien argued that
the unreported English Court of Appeal decision in
British Gas Trading Ltd v Eastern Electricity plc & ors 18 December 1996, is an
example of the approach adopted in landlord and tenant cases on the reasonableness
of withholding consent applying where a dispute
arises over the reasonableness of
withholding consent in other commercial contexts. The reasoning of Leggatt LJ for

the Court of
Appeal does not explicitly acknowledge the appropriateness of doing so.
A majority of the short judgment is uncritical summaries of the arguments
presented,
including a submission for one party that the commercial contract there involved was
different from landlord and tenant
cases. Although some of the authorities referred
to do involve landlord/tenant situations, they go more to illustrate the importance
of
beginning with an analysis of the relevant contractual provision to discern its
contractual purpose than to consider the adoption
of any particular rules on how
unreasonableness of withholding of consent is to be assessed. The decision turned
on a finding that
withholding of consent for a purpose extraneous to that for which
consent was contemplated under the contract was unreasonable. The
determination
was made in light of adoption of an observation in the earlier Court of Appeal
decision in West Layton Ltd v Ford and
anor [1979] EWCA Civ 1; [1979] QB 593;  [1979] 2 All ER 657
that the Court's task was to look first at the covenant and construe the covenant in
order to see what its purpose was when the parties
entered into it.


[22]   Mr O'Brien also submitted that the decision of McGechan J in WEL Energy
Group Ltd v Electricity Corporation
of New Zealand HC AK CL18/99 26 June 2006
similarly supported the application of the approach in landlord/tenant cases involving
withholding of consent, into more general commercial disputes where consents are
withheld. The review of submissions for WEL in the
judgment includes reference to
a submission that the British Gas Trading case demonstrated the applicability of
principles in lease
cases more generally to commercial cases in other contexts.
However, again a consideration of the whole judgment reveals that the
outcome was
not influenced in any way by reference to any "principles" derived from
landlord/tenant cases. As in the British Gas
Trading decision, the outcome turned on
a close analysis of the contractual provisions in issue, in particular the scope of the
legitimate
purpose for which consent was required and might be withheld, namely
the creditworthiness of the party seeking consent after a business
transformation.


[23]   Accordingly, I do not see that as a matter of law there are any particular
principles derived from landlord/tenant
cases involving withholding of consent that
will apply in the argument in the present case. The two decisions specifically cited
by Mr O'Brien for the more general application of principles from such
landlord/tenant cases illustrate that the analysis will always
be a reflection of the

relevant contractual provisions. I do note that both decisions turned on findings that
withholding consent
was unreasonable because consent was withheld for collateral
purposes.


[24]   As to whether this is a case in which the disputed
refusal of consent should
proceed with a two-stage enquiry, I am not persuaded that should occur merely
because it is the course
adopted in landlord/tenant cases. Again, the issue has to
reflect the terms of the relevant contractual provision which here each
side says the
other has breached. One basis open to Greymouth for arguing its defence and
counterclaim is to contend that the withholding
of consent by GXL was unreasonable
in light of what GXL actually had regard to, did, and failed to do, rather than
whether the information
available to GXL was sufficient to reasonably establish
Greymouth's financial capability. In essence, this argument would be that
consent
was withheld for a "bad" reason, and is therefore unreasonable irrespective of
whether, had GXL conducted itself differently,
it may have established a "good"
reason for withholding consent.


[25]   Of course, it would be open to GXL to argue that such an
approach is wrong,
and that the clause requires no more than a finding to the effect that all information
available to a party in
GXL's position at the requisite time would reasonably have
left it with a doubt about Greymouth's financial capability, for the refusal
of consent
to be held to be reasonable. The immediate point in endeavouring to confine the
pleadings as the basis for identifying
the scope of contested factual issues is that
GXL cannot deny Greymouth the opportunity to present its case on grounds
including
that just postulated.


[26]   Further, on the substance of whether the requisite financial capability could
be made out, determining
whether the information available to GXL about
Greymouth could justify reasonable doubts as to its financial capability is likely
to
involve a complex set of factors. Certainly it is the antithesis of a "bright line" test.
In a marginal case where the consenting
party might arguably have decided either
way, Greymouth may wish to contend that the relative importance of collateral
purposes to
GXL in fact were the determining influence, and that withholding
consent in such circumstances should be treated as unreasonable.

[27]   In many of the evidentiary contexts that a dispute like this might produce, it
is likely that GXL's conduct could be determined solely by reference
to objective
criteria of what a reasonable party wishing to protect its royalty interest could require
by way of information, and
whether a notional party in that position ought
reasonably to have been satisfied of the adequacy of the assignee party's financial
capability on the information provided. However, there may be some circumstances
in which the credibility of GXL's explanation on
either aspect of this enquiry might
be more robustly tested, if the prospect of a collateral purpose for seeking additional
information
or for refusing consent was also in issue.


[28]   In a marginal case, the Court may be influenced in assessing the
reasonableness
of the party withholding consent, by evaluating not only the weight
of matters going to the relevant ground (here the financial capability
of the proposed
assignee to discharge the obligations inherent in the permit and the royalty deed), but
also by testing the wider
factual context in which the consent has been refused. The
WEL Energy decision recognised "rules prohibiting the taking of collateral
advantage in relation to consents" ([36]) and the reasoning there extends to the wider
contractual context. Without there being any
certainty about it, it is not possible at
this stage to rule out the prospect that the change in ownership of GXL and Todd's
competing
interests in the area of the permit will assume some relevance to that
wider contractual context. Mr O'Brien accepted that GXL's
status as a competitor
could not affect the extent of information reasonably required to be provided to it.
However, the competitor
status may be raised in support of claims that the extent of
information demanded was excessive, part of the explanation being that
a non-
competitor would not need it to assess Greymouth's financial capability but a
competitor would find it valuable for unrelated
purposes.


[29]   Accordingly, the factual matter of alleged collateral purpose may become
relevant at trial on the primary issue
of whether GXL has reasonably, or alternatively
unreasonably, withheld consent to the assignment. Substantive, and not evasive,
responses
to the particulars in paragraph 30(e), and the cross-reference back to that
in paragraph 54 of Greymouth's counterclaim are therefore
required and I so order.

[30]    I am mindful of GXL's realistic concerns that this pleading on collateral
purpose substantially
broadens the scope of the proceedings in terms of discovery,
the extent of evidence, and the length of trial.      Those are legitimate
concerns,
particularly when the issue of collateral purpose is unlikely to help the Court
determine the real issue if the objective
analysis is relatively clear-cut either way.
However, attempts to prematurely confine the factual scope of issues have to be
approached
cautiously. If these issues are finely balanced at trial, then resort to the
additional matters Greymouth wishes to raise could well
assume importance.


[31]    Limited vindication for GXL will arise when costs are addressed, if it
ultimately transpires that all
matters going to the existence of collateral purpose were
indeed irrelevant to a full resolution of the issues raised by the claim
and
counterclaims.


[32]    Counsel for Swift did not contribute to the present argument.          It has a
pleading in substantially
the same terms as that of Greymouth. GXL accepts that if it
is required to respond to Greymouth, then without further application
it would also
respond to Swift. Obviously that should now occur.


Costs


[33]    For Greymouth, Mr O'Brien argued that GXL's refusal
to plead was
unreasoned and unjustified. He also argued that the complexity of the proceedings
warranted categorisation as 3B for
costs' purposes. GXL resisted any notion that, in
the event it lost the present argument, Greymouth should be entitled to costs on
any
increased basis. Mr Corlett submitted that the case ought to be categorised as 2B for
costs' purposes.


[34]    As the above analysis
suggests, there is an element of "belts and braces"
about Greymouth's pleadings as to collateral purposes. I do not accept that GXL's
resistance to engage on this factual issue was unreasoned, although I also do not
accept that GXL can peremptorily prevent Greymouth
including the issue among the
factual matters to be contested at trial.

[35]    Greymouth is entitled to costs, having succeeded
on the present application,
which I order on a 2B basis. That is not to be a general categorisation for all steps in
the proceedings,
as I recognise that the potential complexity of subsequent steps may
warrant category 3.




                                   
                                 Dobson J




Solicitors:
Russell McVeagh, Auckland for plaintiff
Simpson Grierson, Wellington for
first defendant
Bell Gully, Wellington for second defendants