Z Energy Limited v Oceana Gold (New Zealand) Limited [2012] NZHC 3333 (19 December 2012)

Last Updated: 24 January 2013

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2012-485-1810 [2012] NZHC 3333

BETWEEN Z ENERGY LIMITED Plaintiff

AND OCEANA GOLD (NEW ZEALAND) LIMITED

Defendant

Hearing: 10 December 2012 (Heard at Wellington)

Counsel: V.L. Heine & N.S. Wood - Counsel for Plaintiff

T.C. Stephens & S.J. Fairbrother - Counsel for Defendant

Judgment: 19 December 2012

_{JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL}

Under r 11.5 of the High Court Rules I direct the Registrar to deliver this judgment at 11.30 am on 19 December 2012.

Solicitors: Chapman Tripp, Solicitors, PO Box 993, Wellington 6140

_{Simpson Grierson, Solicitors, PO Box 2402, Wellington}

Z ENERGY LIMITED V OCEANA GOLD (NEW ZEALAND) LIMITED HC WN CIV-2012-485-1810 [19

December 2012]

Introduction

[1] Before the Court is an application for summary judgment by the plaintiff seeking judgment against the defendant for $1,146,940.40 which it says represents the balance of unpaid invoices for the supply and delivery of diesel fuel for the defendant’s Macraes & Reefton gold mining and processing operations.

[2] The application is opposed by the defendant. Its claim is essentially that the plaintiff is not entitled to payment because the invoices in question said to be outstanding are simply wrong. It is said that they were issued in breach of the plaintiff’s contractual obligations to properly calculate and notify invoiced charges in accordance with the contract between the parties which had terminated on 31 May

2012. The alleged breaches of the contract which are the basis for the defendant’s defences include a counterclaim for damages which the defendant says it is entitled to set off against the plaintiff’s claim.

Background Facts

[3] On 27 May 2009 the parties entered into a written agreement for the supply and delivery by the plaintiff of diesel fuel to the defendant (the Supply Agreement). The Supply Agreement expired on 31 May 2012.

[4] From July 2010 the plaintiff began charging, it says as it was entitled to do under the Supply Agreement, an additional cost component in relation to its obligations under the Emissions Trading Scheme (ETS).

[5] It is those charges to which the defendant now objects. As noted above, they relate to the plaintiff’s costs of complying with its obligations under the Climate Change Response Act 2002 (the Act). As a “participant” in the Emissions Trading Scheme (ETS) established under the Act, from July 2010 the plaintiff was required annually to surrender to the Government “units” relating to emissions equated to its fuel supply.

[6] Pursuant to the Supply Agreement, the plaintiff was entitled to pass through to the defendant its costs of meeting its ETS surrender liability in relation to fuel supplied to the defendant. However, the defendant contends that the plaintiff could do so only after undertaking a transparent pricing review which it has not done here and only after calculating the invoice charges by reference to the plaintiff’s actual underlying costs.

[7] The defendant says that the plaintiff has done neither of these things. Instead, it is said the plaintiff imposed an “Emissions Trading Scheme AGO Fee” without the disclosure required of it by the Supply Agreement and has calculated the fee erroneously by reference to a statutory maximum price of $25.00 per tonne which the plaintiff itself has not been paying, rather than by reference to the costs that the plaintiff has actually incurred when complying with its obligations under the ETS.

[8] According to the defendant, the result is that the plaintiff has obtained additional unauthorised profit margin under its Supply Agreement with the defendant in circumstances where the plaintiff ’s profit on the supply of diesel fuel to the defendant under that contract was supposed to be fixed and could not be increased without agreement between both parties. The difference between the plaintiff’s actual and its invoiced costs it is said represents a windfall profit to which the plaintiff is not contractually entitled.

[9] In response, it is suggested by the plaintiff that the defendant’s counterclaim at this late point is “opportunistic” and that the defendant has raised the ETS issue only after termination of the Supply Agreement between the parties. The defendant in response, however, contends that this suggestion is misplaced. It says it has considered the ETS charges to be illegitimate from their inception and told the plaintiff this immediately after the ETS charge was applied for the first time. The defendant says that the parties have been in discussion on the ETS issue from the outset in July 2010 right up to the termination of the Supply Agreement under its terms on 31 May 2012.

[10] Certain provisions in the Supply Agreement are relevant here and it is useful to set these out in detail:

4. RATES

Subject to the other terms of this Agreement, the Rates to be paid by the Company to the Supplier for the Product are set out in Schedule 1 to this Agreement and are expressed exclusive of GST (if applicable). All payments shall be made by the Company in the Agreement Currency together with GST (if applicable) in the Agreement Currency. Subject to the other terms of this Agreement including without limitation this clause 4, the Supplier confirms that all of its overhead and other costs of complying with the terms of this Agreement are included in the Rates.

The Rates apply only in relation to deliveries of the Products to the Delivery Points as at the Commencement Date of this Agreement. Accordingly, the cost components of the Rates which are subject to review as set out in Schedule 1, excluding the ‘Supplier Overhead Costs (including working capital) and Profit’, may be changed by the Supplier following a review by the Supplier of the factors that influence the cost components. The Supplier shall notify the Company of the review and the relevant factors that influence the cost components prior to any change of the cost components. The Supplier may not change the cost components prior to 1 August 2009 and thereafter may not change the cost components following such reviews more than once in any six (6) month period.

In relation to the ‘Supplier Overhead Costs (including working capital) and Profit’ component of the Rates, in the event the Supplier’s review of the factors that influence that component determines that an increase is necessary, then the Supplier shall initiate a meeting with the Company to review the component. The Parties shall then meet and act in good faith, having regard to the collaborative nature of this Agreement, to attempt to reach an agreement on any change to the component. If the Company, acting reasonably, agrees to an increase then the Rates shall be changed accordingly.

[11] Schedule 1 of the Supply Agreement noted that the pricing for the product to be supplied to the defendant was calculated on a variable weekly price. That pricing was set out in accordance with items shown in an attached weekly pricing template (WPT) which was recorded in Schedule 1 to the Supply Agreement as follows:

Oceana Gold Ltd – Weekly Pricing Template

Invoice price for week beginning 15-Apr 22-Apr 29-Apr 6-May

MOPS USD/bbl Variable 63.10 63.33 59.01 59.16

Exchange Rates for Currency NZD/US$ Variable 0.5817 0.5797 0.5588 0.5844

Conversion from NZD barrel to NZD litre NZD/bbl to NZD/ltr Fixed 158.9886 158.9886 158.9886 158.9886

Oceana Gold Ltd Fuel Supply Pricing

Structure

_{Base Cost 100% Gas Oil} USD/bbl _{Variable 63.10 63.33 59.61 59.16}

International Sea Transportation & Insurance

USD/bbl Variable 3.45 3.30 3.07 3.01

Supplier Premium (if any) USD/bbl Variable 0.00 0.00 0.00 0.00

NZRC Premium USD/bbl Variable 0.50 0.60 0.50 0.60

Quality USD/bbl Variable 0.39 0.39 0.39 0.45

Survey USD/bbl Variable 0.02 0.02 0.02 0.02

Loss USD/bbl Variable 0.13 0.15 0.13 0.13

Wharfage USD/bbl Variable 0.30 0.30 0.30 0.30

Demurraga USD/bbl Variable 0.06 0.06 0.06 0.06

Total USD/bbl USD/bbl 67.95 68.05 64.08 63.63

Exchange Rate NZD/USD 0.5817 0.5797 0.5588 0.5644

Conversion ratio (NZD/bbl to NCD/ltr) NZD/bbl to NZD/ltr 1.59 1.59 1.59 1.59

Base cost NZD cents litre NZD (cents ltr) 73.48 73.84 72.13 70.91

_{Government Taxes and Charges} NZD (cents ltr) _{Review 0.37 0.37 0.37 0.37}

NZ Storage & Handling Costs – Oceana

Gold

NZ Storage & Handling Costs – Reefton

Mine

Supplier Overhead Costs (including working capital) and Profit

Supply Cost Ex Port Terminal for

Oceana Gold

Supply Cost Ex Port Terminal for

Reefton

Transportation to Oceana Gold for

Oceana Gold

NZD (cents ltr) Review 0.44 0.44 0.44 0.44

NZD (cents ltr) Review 0.86 0.86 0.86 0.86

NZD (cents ltr) Review 2.28 2.28 2.28 2.28

NZD (cents ltr) 76.56 76.92 75.21 73.99

NZD (cents ltr) 76.99 77.35 75.64 74.42

NZD (cents ltr) Review 2.30 2.30 2.30 2.30

Transportation to Reefton Mine NZD (cents ltr) Review 4.64 4.64 4.64 4.64

Oceana Gold Invoice Price 78.86 79.22 77.51 76.29

Reefton Mine Invoice Price 81.63 82.00 80.29 79.07

Orica Mining Services NZ Invoice Price 78.86 79.22 77.51 76.29

SHELL SYSTEM INPUT PRICES

Oceana Gold – AC 349834 75.92

Reefton Mine – AC 896556 78.70

Orica Mining Services NZ – AC 907476 75.92

[12] And as noted above, the “Emissions Trading Scheme AGO Fee” was imposed by the plaintiff as an aspect of the pricing component entitled “Government Taxes & Charges”. This term was also defined in clause 2 of the Supply Agreement as follows:

Government Taxes & Charges means any:

(a) tax, regulatory levy, excise impost or duty of any description or nature; or

(b) cost, charge, levy, payment obligation or liability of any description whatsoever in relation to the emission of greenhouse gases (including carbon) or under or relating to any New Zealand emissions trading scheme, and for the avoidance of doubt includes a payment obligation or liability imposed or required (including to purchase or satisfy credits, debits or units) in respect of any emissions cap or reduction target or emissions trading regime (including by way of example only and without limitation as

a consequence of the Climate Change Response Act 2002). To the extent possible, the Supplier shall endeavour to identify such cost, charge or levy in a separate manner when invoicing the Company.

[13] It should be noted here too that it seems this item “Government Taxes & Charges” was a “Review” cost component under the WPT in Schedule 1, together with other costs such as storage and handling, supply from the port, and transport costs. These costs appear generally to form a category which are ‘contract specific’ overheads relating to the plaintiff’s fuel supply – costs incurred by it in supplying fuel to the defendant which were external to the plaintiff, applicable to that particular supply of fuel, and which the parties agreed the plaintiff could recoup from the defendant. These “Review” cost components could be changed in the way specified in the second paragraph of clause 4 of the Supply Agreement noted at [10] above.

Counsels Arguments and My Decision

[14] The plaintiff’s present summary judgment application is brought pursuant to r

12.2(1) of the High Court Rules which provides:

12.2 Judgment when there is no defence or when no cause of action can succeed

(1) The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.

[15] The principles of summary judgment have been summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26]:

[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1

NZLR 1; (1986) 1 PRNZ 183 (CA), at p 3; p 185. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant

will have to respond if the application is to be defeated: MacLean v Stewart

(1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not

accept uncritically evidence that is inherently lacking in credibility, as for

example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently

improbable: Eng Mee Yong v Letchumanan [1980] AC 331; [1979] 3 WLR

373 (PC), at p 341; p 381. In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach

where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ

84 (CA).

[16] So far as the ETS is concerned, before me counsel for the plaintiff explained that the plaintiff became a participant in the scheme from 1 July 2010 under which it was required to collect prescribed data and calculate the “emissions” from the supply of diesel in accordance with methodologies prescribed in regulations for each “year” being a calendar year ending on 31 December.

[17] Annual emissions returns were required to be submitted in respect of the relevant activities that the plaintiff carried out in an immediately preceding year. The return amongst other things needed to record the plaintiff ’s emissions as calculated under the prescribed methodologies and to provide an assessment of its liability to surrender units in respect of its omissions.

[18] The plaintiff was then required to surrender a certain number of “units” for each whole tonne of emissions from each relevant activity that it carried out, and this was required to occur in an annual return by 31 May following. In order to surrender units, participants were required to acquire them either by being allocated units by the Crown or by buying them.

[19] Transitional arrangements under the ETS were applicable from 1 July 2010 to

31 December 2012 (which covers the whole period material to this proceeding) for certain participants including the plaintiff. These provided what is described as a “two-for-one” arrangement and an ability for participants to satisfy their obligation to surrender units either by surrendering these or by paying to the Crown the sum of

$25.00 for each unit that the participant was liable to surrender.

[20] In this instance, the plaintiff chose to satisfy its obligations under the ETS by adopting the transitional arrangement noted above and as I understand it by paying to the Crown $25.00 for each unit that the plaintiff was liable to surrender. It was this charge of $25.00 per unit which was then simply passed on to the defendant as part of the “Government Taxes and Charges” component of the WPT. As I understand the position however, this was notwithstanding the fact in this case that the plaintiff’s actual final liability to the Crown under the ETS for its diesel supply to the defendant has proved to be substantially less than $25.00 per unit, possibly in the region of only about $14.00 per unit. As a result, the defendant argues that since 1 July 2010 it

has been overcharged by the plaintiff for these ETS charges. This overcharged amount I understand is claimed to be at least about $1.2 million, a sum exceeding the payment now sought by the plaintiff in its present summary judgment application.

[21] In response, the plaintiff contends that it has complied with its obligations under the Supply Agreement and clause 4 in particular in that it addressed the impact of the ETS on its relationship with the defendant as part of a larger review of the plaintiff’s contracts and customers from October 2009 to June 2010. It was on the basis of this review, the plaintiff says that it decided to pass on this $25.00 per unit charge through the Emissions Trading Scheme AGO fee. The plaintiff contends that a similar approach was taken towards its other customers.

[22] According to the plaintiff it is also telling here that, it alleges the defendant never raised any query about how the plaintiff calculated the Emissions Trading Scheme AGO fee until after the termination of the Supply Agreement on 31 May

2012. As noted above, however, this is strongly disputed by the defendant. Further, the plaintiff argues that clause 4 of the Supply Agreement did not require it to consult or negotiate with the defendant as part of the review that occurred. There was a requirement to “notify” the defendant of reviewed charges, but the plaintiff’s position (which I understand is not disputed by the defendant) is that it must retain the ability to pass through legitimate costs incurred in this area without negotiation.

[23] As a result, the plaintiff maintains that this summary judgment application is a simple debt recovery exercise whereby first, it has clearly complied with all its obligations as supplier under the Supply Agreement and secondly, the defendant at the termination of the agreement has simply failed to pay in excess of $1.1 million for a number of outstanding accounts for fuel acknowledged as having been supplied under the agreement.

[24] In response, the defendant argues that the plaintiff ’s invoices in question were not a valid demand for payment of monies properly due, because they were issued in breach of the Supply Agreement. First, the defendant contends that the Supply Agreement required pricing of the fuel to be “detailed and transparent” and that although the plaintiff could recoup the actual underlying costs of its supply of fuel to

the plaintiff, as those costs fluctuated over the life of the contract, the plaintiff ’s margin on the supply was visible and fixed. In essence, the defendant argues that the plaintiff could not (as it has purported to do here) by charging more for ETS liabilities then it paid, obtain additional profit margin on its supply of fuel to the defendant.

[25] On these aspects, the defendant notes that the plaintiff’s profit margin under the Supply Agreement was explicitly identified in the line item entitled “Supplier Overhead Costs (including working capital) and Profit” in Schedule 1 noted at para [11] above and remained at 2.28 cents per litre throughout the entire period of the contract. Clause 4 of the Supply Agreement, according to the defendant, made it clear that this “profit” component of the price could not be altered other than by agreement between the parties and, in fact, it was not adjusted over the term of the Supply Agreement. It must follow therefore according to the defendant, that although the plaintiff’s profit was a fixed and visible component of the pricing structure throughout, here the plaintiff has endeavoured to extract a significant and unjustified increase in that profit by an overcharging of the Emissions Trading Scheme AGO fee it has imposed.

[26] On this aspect, before me Ms Heine counsel for the plaintiff specifically acknowledged the plaintiff had indeed made a profit on its charging to the defendant of the ETS “Government Tax or Charge” of $25.00 per unit when it had paid less than this amount to the Crown. She went on to claim however that there was nothing wrong with this and the plaintiff could make such a profit in terms of the Supply Agreement freely negotiated between the parties. Ms Heine noted also problems she said the plaintiff had necessarily faced here in endeavouring to make future projections of anticipated ETS costs to include in its final pricing.

[27] Whether or not all this represents the true position under the Supply Agreement between these parties must be a matter for further and careful consideration. What is clear to me at this point is that all these aspects must raise a doubt or uncertainty as to the plaintiff’s claim here.

[28] For all these reasons, I am of the view, that this is not an appropriate matter for summary judgment. The defendant has done enough in this case to show there is a possible argument open that the plaintiff has wrongly calculated its “Government Taxes and Charges” component of the supply rates specified in the Supply Agreement, such that over the period of the contract the defendant may have made overpayments which might equate to or exceed the final invoice amounts rendered by the plaintiff. These are matters that need to be properly considered and tested at a full substantive hearing.

Conclusion

[29] The plaintiff’s summary judgment application therefore must fail and is

dismissed.

[30] So far as costs are concerned the general practice of the Court, in cases such as this where a summary judgment application is unsuccessful, is to reserve costs – see r 14.8(3) High Court Rules.

[31] Costs on this application are therefore reserved to be addressed on final disposal of the substantive proceeding.

[32] In order to address matters required to time table the substantive proceeding to hearing, this matter is now adjourned to a call in the List at 11.00 am on 18

February 2014.

‘Associate Judge D.I. Gendall’