Attorney-General v Mobil Oil NZ Ltd

• Jurisdiction: New Zealand
• Judgment Date: 01 July 1987
• Date: 01 July 1987
• Court: High Court

New Zealand, High Court.

(Heron J)

Attorney-General

and

Mobil Oil NZ Ltd1

Arbitration Stay of proceedings Convention on the Settlement of Disputes between States and Nationals of Other States Jurisdiction of domestic courts Arbitration clause in contract between Government and company Reference of matter to International Centre for the Settlement of Investment Disputes Whether domestic proceedings relate to matter over which proceedings brought pursuant to Convention Dispute over effect of subsequently enacted legislation Whether dispute arising under the terms of the agreement Whether Court having residual discretion to take jurisdiction over matter Whether Government bound by agreement to international arbitration Arbitration (International Investment Disputes) Act 1979 The law of New Zealand

Summary: The facts:In 1982 the Government of New Zealand entered into a participation agreement (the Agreement) with the defendants Mobil Oil NZ Ltd (Mobil) to participate in a project for the conversion of natural gas into synthetic gasoline. The Agreement provided, inter alia, for rights of purchase (offtake rights) favourable to Mobil in respect of the production of gasoline. These offtake rights, the terms of which were governed by Article XI of the Agreement,2 represented a significant market advantage enjoyed by Mobil.

In 1986 the New Zealand Government enacted the Commerce Act 1986 (the Act), Section 273 of which prohibited contracts or arrangements which had the purpose of or were likely to have the effect of substantially lessening competition in a market. Implementation of Section 27 was delayed, so far as the Agreement was concerned, until March 1987.

Upon implementation of Section 27, the New Zealand Government took the position that Article XI of the Agreement was in breach of Section 27 of the Act and that a new agreement would have to be negotiated. Mobil denied that Article XI of the Agreement had the effect of substantially lessening competition in the market and, pursuant to Article VII of the Agreement,4 referred the matter to the International Centre for the Settlement of Investment Disputes (ICSID).

The New Zealand Government commenced interim injunction proceedings to restrain Mobil from continuing to refer the matter to ICSID on the basis that any inquiry as to the application of Section 27 of the Act to the Agreement was not a dispute which had arisen under the terms of the Agreement. The New Zealand Government also sought, inter alia, a declaration that the offtake rights were unenforceable and would require adjustment under the provisions of the Act.

Mobil applied for a stay of proceedings pursuant to Section 8 of the Arbitration (International Investment Disputes) Act 19795 (the Arbitration Act), which empowered the Court to stay proceedings before it in respect of any matter to which the proceedings pursuant to the International Convention on the Settlement of Investment Disputes (the Convention) relate, if the Court was satisfied that no sufficient reason existed why the matter should not be dealt with under the Convention.

Held:A stay of proceedings was granted until the Arbitral Tribunal had been constituted and had determined its jurisdiction and, thereafter, until such further order of the Court.

(1) Under Section 8 of the Arbitration Act the Court had the discretion to stay proceedings where there was a relevant relationship or nexus between the domestic proceedings and the issues raised therein and the proceedings under the Convention and the issues raised therein. The issues raised in the domestic court proceedings were, inter alia, whether the dispute had arisen under the terms of the Agreement and whether Article XI had become unenforceable by virtue of Section 27 of the Act. The Court proceedings were, therefore, undoubtedly in respect of a matter to which the proceedings pursuant to the Convention related (pp. 6301).

(2) Mobil was an international company dealing with a sovereign State. An objective assessment of the Agreement showed that there was a deliberate design by the parties to constrain the domestic Court's jurisdiction and to include all disputes, including those relating to the application of later legislation, within the jurisdiction of ICSID. The choice of a New Zealand chairman of the Arbitral Tribunal and the direction that disputes be settled in accordance with New Zealand law indicated that the parties had incorporated a comprehensive dispute settlement mechanism into the Agreement. The existence of a dispute under the Act and of any infringement of Section 27 of the Act depended on the terms of the Agreement. Whether Section 27 had given the Agreement the flavour of substantially reducing competition in the market and whether the New Zealand Government was thereby entitled to be discharged from further performance were not issues independent of the Agreement but rather amounted to a dispute under the Agreement. As such, either party was entitled to refer the matter to ICSID (pp. 6324).

(3) There were no residual discretionary reasons for not granting a stay. Although the dispute was essentially a domestic dispute, the contract involved complex and interlocking matters, both domestic and international, and to isolate an aspect of the investment which was largely domestic as a ground for applying domestic rather than international principles would be to ignore the overall impact of the Agreement. Other objections to the assumption by ICSID of jurisdiction and the possible disadvantages of such arbitration proceedings were not of sufficient importance to influence the exercise of the Court's discretion against it. The system of dispute resolution adopted by the parties was arguably instituted in order to prevent subsequent hostile legislation affecting the relationship between the parties. It was an almost indispensable precondition to the achievement of orderliness and predictability essential to any international business transaction that a contract specify in advance the forum in which disputes would be litigated and the law to be applied. There was clear agreement of the parties in Article VII of the Agreement as to how their disputes were to be resolved and the New Zealand Government should be held to its agreement (pp. 6379).

The text of the judgment of the Court commences on the following page.

In February 1982 the Government of New Zealand concluded arrangements with the defendants in these proceedings, whereby it was agreed that each of the parties would participate in a project for the conversion of natural gas into synthetic gasoline. The resulting agreement, dated 12 February 1982, provided for a participation agreement, which included related agreements to do with specific aspects of this complex project. In particular it provided for certain rights to be given to Mobil Oil NZ Ltd, the first defendant, to enjoy rights of purchase (offtake rights) in respect of the production of gasoline. Having regard to the nature of the offtake agreement it has been described variously as the most favoured purchaser provision, and in some cases (for some reasons unknown) a most favoured nation agreement. In any event, it creates certain rights to purchase which are regarded as individually favourable to Mobil Oil NZ.

The exact arrangement with regard to offtake rights is governed by article XI of the participation agreement. I was informed that it was, as with other related agreements, to be the subject of a separate agreement. That has not been done, but the provisions of article XI of the agreement, nevertheless, govern the terms relating to the purchase of gasoline production by Mobil Oil NZ. It provides:

Article XI-Offtake rights

• 11.1 Mobil Oil NZ Ltd and the Crown shall enter into an offtake agreement which shall provide, inter alia, as follows:

  • (a) On or before 30 April in each year, Mobil Oil NZ Ltd (which for the purposes of this Article XI shall include any affiliate of Mobil Oil NZ Ltd) shall notify the percentage of the total quantity of gasoline to be produced in the following year it intends to purchase and shall purchase the percentage of gasoline production so notified in such following year.

  • (b) The percentage so notified shall:

    (i) Be not less than the percentage sold by Mobil Oil NZ Ltd of the total quantity of gasoline sold in New Zealand in the calendar year previous to that in which the notification is made; and

    (ii) Be no greater than 60% of the total quantity of gasoline produced in the year in respect of which such notification is made. "Provided however, that if the total quantity of gasoline sold in New Zealand in the calendar year previous to that in which the notification is made exceeds 1,700,000 tonnes, then the maximum percentage of 60% specified in section 11.1 (b)(ii) shall be multiplied by the ratio that such total quantity bears to 1,700,000 tonnes, and the product thereof shall be the maximum percentage for the following year.

  • (c) Mobil Oil NZ Ltd shall not in exercising its rights under this section 11.1, in any year notify a percentage which varies by more than 30% of the percentage notified in the previous year.

  • (d) The price to be paid for any gasoline purchased by Mobil Oil NZ Ltd shall be equal to the price for gasoline which shall be fixed at the time of such purchase in accordance with the mechanism known as the refinery release price (after adjustment of the refinery release price for transportation, in transit losses, quality differentials, blending and additive charges and blending losses).

  • (e) Subject to the aforesaid notification rights in favour of Mobil Oil NZ Ltd, the Crown shall be free to sell in New Zealand all of the gasoline in such quantities and to whomsoever it deems appropriate, provided that if in any calendar quarter the Crown sells gasoline to persons other than Mobil Oil NZ Ltd at a price and/or on terms which are more favourable than the price and/or terms of any gasoline sales to Mobil Oil NZ...