Air New Zealand Ltd v BP Oil New Zealand Ltd and Others

• Jurisdiction: New Zealand
• Judge: Venning J
• Judgment Date: 28 May 2019
• Neutral Citation: [2019] NZHC 1187
• Court: High Court
• Docket Number: CIV-2018-404-000492
• Date: 28 May 2019

Between

Air New Zealand Limited

Plaintiff

and

BP Oil New Zealand Limited

First Defendant

Z Energy Limited

Second Defendant

Z Energy 2015 Limited

Third Defendant

[2019] NZHC 1187

CIV-2018-404-000492

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

COMMERCIAL PANEL

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Contract — compensation for losses — damaged fuel pipeline — implied terms

Appearances:

N S Gedye QC and J A MacGillivray for Plaintiff

V L Heine, T Smith and R Goss for Defendants

Counsel:

N S Gedye QC, Auckland

JUDGMENT OF Venning J

TABLE OF CONTENTS

Introduction	[1]
Air NZ's fuel usage	[7]
The fuel supply chain	[9]
The “contracts” in issue	[14]
The pipeline failure	[20]
Air NZ's response to the allocations	[25]
Issues	[26]
Is there a supply obligation at all?	[27]
What type of supply obligation is to be implied?	[43]
The context to the fuel supply agreements	[57]
The practice of allocation	[72]
Prior dealings	[81]
Reasonable and equitable	[86]
Necessary for business efficacy	[98]
Obviousness	[107]
Clear expression	[113]
No contradiction with express clause	[118]
Conclusion – implied term	[119]
Pleading point	[120]
Has Z satisfied the reasonable endeavours obligation?	[123]
Frustration	[149]
Result/orders	[160]
Costs	[163]

Introduction

1 Between 16 and 30 September 2017, damage to the fuel pipeline from Marsden Point Refinery to Wiri in Auckland caused a severe disruption to the supply of aviation fuel (Jet A1) to Auckland Airport and affected Air New Zealand Limited's (Air NZ) operations.

2 Air NZ purchases Jet A1 from four fuel companies: Exxon Mobil Aviation International Asia Pacific, a division of Exxon Mobil Asia Pacific Pte Limited (Exxon); Air BP, a division of BP Oil New Zealand Limited (BP); Z Energy Limited (ZEL); and Z Energy 2015 Ltd (Z 2015). ZEL was formerly Shell New Zealand Limited. Z 2015 is wholly owned by ZEL and operates the fuel business formerly operated under the Caltex brand. Since 2015, the two Z companies have been managed together as Z Energy.

3 During the period of the disruption the fuel companies supplied Air NZ with substantially less fuel than it required to operate its scheduled air services. At times during the outage Z was only able to supply 30 per cent of the required volumes. Air NZ was forced to cancel some scheduled services and incurred considerable additional cost in maintaining other scheduled services. It brings this proceeding to seek compensation for the losses sustained.

4 Air NZ has resolved its claim against BP. It maintains its claim against ZEL and Z 2015 Limited (collectively Z). Air NZ's case is that it was dependent upon Z supplying its fuel requirements, and it was an implied term of the contracts that Z would supply the full volume of fuel required by Air NZ each day, on a continuous basis, (an “unqualified supply obligation”) to enable it to operate its scheduled services.

5 Z does not accept there was any such implied term to supply fuel on that basis. It says the parties' relationship worked perfectly well without any obligation to supply, but if any obligation to supply is to be implied, it was a reasonable endeavours obligation.

6 Paul Kelway, the Treasurer of Air NZ, gave evidence in support of Air NZ's claim. For Z, Nicolas Williams, the General Manager, Commercial Division at ZEL and Hamish Dyer, the Commercial Optimisation Manager at ZEL, gave evidence.

Air NZ's fuel usage

7 Air NZ uses Jet A1 to fuel both its jets and turbo-prop aircraft. In September 2017 the fleet size was approximately 100 aircraft. Air NZ's annual fuel requirement at that time was approximately 209 million US gallons, of which 174 million US gallons were used at Auckland international and domestic airports.

8 In September 2017 Air NZ's expected average monthly fuel requirement at Auckland Airport was approximately 14.5 million US gallons made up of:

• (a) international fleet – 11.5 million US gallons. This was supplied by Exxon 26.9 per cent; BP 23.5 per cent; ZEL 32.7 per cent; and Z 2015 16.9 per cent;

• (b) domestic jet fleet – 2 million US gallons. This was supplied entirely by Z 2015;

• (c) domestic turbo-prop fleet – 1 million US gallons. This was supplied by BP.

The fuel supply chain

9 Jet A1 fuel for Auckland Airport originates at the Marsden Point Oil Refinery. The delivery of Jet A1 to Auckland Airport is dependent on the 160 km pipeline Refinery to Auckland Pipeline (RAP) that runs between the Refinery and the Wiri fuel storage facility in Auckland. The RAP is owned and operated by The New Zealand Refining Company Limited (Refining NZ). The fuel companies that supply fuel to Air NZ hold 40 per cent of the shares in Refining NZ.

10 The Wiri fuel storage facility is owned and operated by a joint venture between the fuel companies, Wiri Oil Services Limited (WOSL). The WOSL facility has storage capacity for approximately 36 million litres of Jet A1 fuel. Once fuel leaves the RAP Pipeline and enters the WOSL facility a holding and settling period of 24 hours is needed before the fuel can be further despatched to the airport. WOSL's practice is to hold approximately 24 million litres of available fuel at the Wiri facility, although the volume fluctuates.

11 A further pipeline runs between the WOSL facility at Wiri and Auckland Airport. This is known as the Wiri to Airport Pipeline (WAP). At the airport a number of tanks provide a further storage facility of some 12 million litres approximately.

12 The WAP and the tanks at the airport storage facility are owned by the fuel companies. The management and operation of the fuel facilities at the airport is carried out on behalf of the fuel companies by an entity known as the Joint User Hydrant Installation (JUHI) which is a joint venture between the fuel companies and acts as their agent in fuel operations.

13 The actual fuelling of aircraft on the ground is carried out by two joint venture companies at Auckland Airport. Joint Into-plane Fuelling Services (JIFS) is operated by BP and is a joint venture between BP and ZEL. Joint Into-plane Fuelling (JIF) is operated by Exxon and is a joint venture between Exxon and Z 2015.

The “contracts” in issue

14 Air NZ says that an exchange of emails concluding on 20 April 2016 led to a contract with ZEL for the supply of Jet A1 fuel for international jet aircraft at Auckland Airport. The series of emails between the parties contain the following terms:

• (a) the pricing basis: price per gallon was fixed based on MOPS, 1 plus a margin, plus a charge for freight;

• (b) location: Auckland International Airport; 2 and

• (c) term: 1 May 2016 to 31 October 2017.

15 Again, by exchange of emails concluding on or about 3 October 2016, Air NZ says it entered a contract with Z 2015 for the supply of Jet A1 fuel for both domestic and international jet aircraft at Auckland Airport. The series of emails between the parties contain the following terms:

• (a) pricing basis: price per gallon was fixed based on MOPS, plus a margin, plus a charge for freight;

• (b) location: Auckland International Airport and Auckland Domestic Airport; and

• (c) term 1 October 2016 to 30 June 2018. 3

16 Both ZEL and Z 2015, in their respective statements of defence, deny that the parties made a contract for supply, and instead plead that on or about the dates specified above agreement was reached between the parties as to the price at which any jet fuel supplied by Z at Auckland Airport would be provided, and the term (as in length of time) for which that price would apply. They also accept that the agreement contained implied terms to the effect that the fuel to be supplied was Jet A1, and that the delivery point was into the wing, though no terms to that effect appear in the emails.

17 In neither exchange of emails was there any agreement on the volume of Jet A1 fuel to be supplied to Air NZ, or any reference to either party having any obligation to supply or purchase Jet A1 fuel from the other, although Z accepts the terms of the agreement were based on a percentage allocation of Air NZ's uplift and indicative volumes of Jet A1 provided by Air NZ.

18 In practice, Air NZ's treasury department issued forecasts of required fuel volumes at Auckland Airport to the fuel companies two to three times a year. Those forecasts set out, on a month by month basis, the forecast volumes expected to be required by Air NZ at Auckland Airport. From time to time Air NZ also responded to direct queries from the fuel companies about the expected forecasts. Air NZ then supplied a schedule of its expected daily fuel requirements to JUHI the day before. That enabled JUHI to arrange with JIFS and JIF the necessary fuelling on the following day.

19 The fuel volumes supplied were measured at the hydrant truck which pumped the fuel into the wing. Delivery occurred at the wing attachment point. While the amount supplied by Z was based on the percentage Z had of the allocation of Air NZ's uplift at Auckland Airport the actual quantities supplied were ultimately determined by the pilot and were recorded and subsequently invoiced.

The pipeline failure

20 On 15 September 2017 the RAP suffered an outage because of damage to the pipeline. Subsequent investigations by Refining NZ and the Northland District Council suggest the outage was most probably caused by a mechanical digger operating illegally without Refining NZ's knowledge or consent. Because of the damage the RAP was unable to be used to transport fuel, including Jet A1, to Auckland for a period of 11 days while...