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

JurisdictionNew Zealand
CourtHigh Court
JudgeVenning J
Judgment Date28 May 2019
Neutral Citation[2019] NZHC 1187
Docket NumberCIV-2018-404-000492
Date28 May 2019

[2019] NZHC 1187

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

COMMERCIAL PANEL

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

CIV-2018-404-000492

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
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

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

The Court held when considering whether to imply words into a contract the words used, the surrounding circumstances known to both parties at the time of the contract, commercial common sense and the reasonable reader or reasonable parties are all factors to be considered.

The parties had intended to commit to a contract for the supply of fuel and had so based on express and implied terms and past practice.

The implied term Air NZ argued for would place the entire risk of failure in the pipeline with Z. With the known risks of disruption and the informed reluctance of Air NZ (and other airlines) to pay extra for the fuel to support the additional expenditure to ensure continuity of supply, it would be unreasonable to place the entire risk of failure on Z without any qualification.

A condition clarifying Z's obligation to supply was necessary to give the agreement between the parties business efficacy. Z did not control the supply chain, Refining NZ did. In the event of disruptions to the fuel source Z must respond and still make reasonable endeavours to satisfy its obligation of supply. Z's reasonable endeavours clause satisfied the test of business efficacy.

Z had satisfied the obligation on it to take reasonable endeavours to supply fuel to Air NZ during the disruption.

The contracts would not have been frustrated had an obligation of continuous supply been implied. The provisions of the Contract and Commercial Law Act 2017 did not provide for partial frustration. For a limited period (15 days) Z was unable to supply as much fuel as Air NZ required but it could not be said the main purpose and common intention of the contracts was radically altered, such as to make it unattainable.

The supply contracts were to have implied into them a term that Z was to take all reasonable endeavours to supply the fuel required by Air NZ. Air NZ's claim for an inquiry into damages was dismissed.

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...

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