Toa case reveals weaknesses in key institutions

What further evidence does one need than the Toa Petroleum affair and other failed or mismanaged projects, that all our best brains and talent have migrated to greener pastures overseas.
While it made some sense for government to consider taking charge of the country’s fuel sector in view of escalating oil prices, the process we followed, unlike the Samoans, was flawed.
The Affair exposed serious gaps and shortcomings in our public institutions. It served notice that in key institutions of State we are weak and vulnerable. This results in poor decision making putting the country at risk.
In his 24 page written Judgment on the Toa case, handed down on Tuesday 18 May, Chief Justice Weston, after hearing substantial legal argument from some of New Zealand’s finest legal minds, declared that the Settlement Agreement between Apex Agencies Ltd (Toa Petroleum) and the Crown, was binding on the Crown (P 24, para 96).
The case between Apex Agencies and the Attorney General (on behalf of the government) was heard on 21-22 April 2010. PJ Dale (NZ Bar) and A Manarangi appeared for Apex and Rasmussen (Attorney General), Elikana (Solicitor General) and A Frame (NZ Bar) appeared for the Crown.
The CJ declared that the Crown should fulfill its obligations pursuant to clause 6 and enter into a new template agreement on the terms set out in clause 6 of the Settlement Agreement.
Earlier under para 95, the CJ ruled that clause 6© was not a guarantee contemplated by s59 of the MFEM Act 1995-96 and consequently was not prohibited by it. The CJ ruled clause 6© was lawful and the Settlement Agreement as a whole could be enforced by Toa.
The Court reserved the matter of interest and costs and noted Apex Agencies sought damages. The CJ called on Counsel to agree on a way forward and to submit a memorandum setting out their proposals.
Now that government must fulfill its obligations under clause 6 of the Settlement Agreement, what does that entail? See the following extract for the Judgment, page 7, para 27. (Extract 1)
Public concern was raised concerning the requirement for government to pay Toa $1.2 million per year for 8 years. The Judgment clarifies this on page 9 and 10.
(Extract 2)
The CJ warned Apex Agencies not to consider clause 6© as a “cash box” and that Toa could not run its business down then ask the government for a top up.
Of some interest is that on p22, para 86 the CJ noted in response to a request by Dale that the Court had not seen the legal advice provided to government by the special consultant Kit Toogood QC for which privilege was claimed by the Crown.
In the Judgment the CJ makes reference in a number of instances to matters of law which the Solicitor General may wish to consider further and for possible review of the MFEM Act.
One reference is on page 18, para 69 in relation to the term “guarantee.” (Extract 3)

·Extract 1
“6 As soon as practicable, (in any event not later than 31 March 2010) TOA and the Government shall enter into a new Fuel Pricing Template (“the New Template”) incorporating the terms of the current Fuel Pricing Template between the Government, TOA and Exxon Mobil (“the Old Template”) as far as may be applicable and subject to the following variations:
(a) The terms of the Old Template shall be varied to
include such terms of the Pricing Template
agreements attached as schedules 1 and 2 to
the Heads of Agreement together with such
other terms as the Parties deem appropriate to
provide certainty in the application of the New
Template and the process for review thereof.
(b) The Parties shall agree on the detailed terms of
an agreement for the application of the New
Template.
(c) The New Template shall replace the 20% ROI
guarantee and related provisions with a
guaranteed minimum EBITDA (Earnings Before
Interest, Tax, Depreciation and Amortization) of
$1,200,000 per annum and such other
provisions as may be necessary for the
application of the guarantee, including, but not
limited to:
(i) payment of an advance on the guarantee,
subject to bi-monthly reconciliation of $100,000
per calendar month
(ii) the New Template shall be in force for a period
of 8 years
(iii) Exxon Mobil shall not be a party to the New
Template
(iv) TOA shall not, and TOA shall procure that Exxon
Mobil shall not, make any claims or take any
proceedings whatsoever against the Government
or any of its officers, employees or agents,
arising out of or in connection with the operation,
application or interpretation of the Old Template
or any predecessor fuel pricing arrangements.”

Extract 2
The Court is to look at the substance of the obligation. For all that, the Crown was inclined to emphasise the use of the language, against the background that lawyers were involved in drafting the Settlement Agreement. The Court believes this is only of limited relevance. Rather, the Court must determine the substance of the obligation.
[30] The expected operation of clause 6(c) was
explained both in evidence and by way of
submission. It can be summarised:
[a] if Toa makes a profit in excess of $1.2m in a
given year it will repay to the Crown that excess;
[b] if Toa makes a profit of $1.2m in a given year
that will be the end of the matter (it will keep the
profits);
[c] if Toa makes a profit of less than $1.2m in a
given year (or even a loss) the Crown will top-up
the payment, up to a maximum of $1.2m.
That is, the Crown’s potential liability could
exceed $1.2m in a given year.
[31] The above summary refers to Toa making a profit.
In actual fact, the wording in the Settlement
Agreement is more technical. The accounting
expression “EBITDA” is used. That is not a
synonym for net profit. Nevertheless, and for the
purposes of summary, it is sufficient to speak of
Toa’s profit in order to explain the operation of
the clause. That was how it was approached by
counsel in argument.
[32] One way for the Crown to avoid paying the top-up
and/or to ensure any excess is paid to it from Toa
is to ensure a sufficient volume of fuel is
purchased by it through Toa. Toa (both by counsel
and in Mr Porter’s evidence) is quite candid that
that is the purpose of the provision. Shortly
prior to the Settlement Agreement Toa was told
that the Crown had entered into a contract
with another party (understood to be Triad) for
the purchase of fuel. Toa was concerned that
unless there was some financial incentive on the
Crown, the Crown would not purchase fuel
through Toa.
[33] At this point it is necessary to explain the fuel
template which is referred to in clause 6 of the
Settlement Agreement. This was a pricing model
in place up to and including the settlement and
which the settlement was intended to supersede.
The Court was shown a copy of the fuel template
as at June 2006. There are three parties: Mobil
Oil Australia, Toa, and the Government Fuel Price
Review Committee. The template is a complex
model and the full workings of it were not
explained to the Court. Mr Leith gave some
evidence as to its operation but the Court does
not pretend to have a full understanding of
its operation. A full understanding does not
appear to be necessary to address the issues in the present case.
[34] Provisions of potential relevance are as follows:
“7. ROI: In view of the impending sale the ROI will
remain unchanged at 25% before tax until after
the sale to TOA is completed when it will change
to 20% before tax.”
“13. Compensation for lost business: This issue
relates to the situation where the dominant
supplier loses volume to a competitor and as a
result of the same costs being spread over a
lower volume and market price increases. It was
agreed that this is a complex issue that could
only be addressed by a review of the overall fuel
policy for the Cook Islands and should be left to
the Review committee that is to be established by
Government to consider.”
“17. Premium paid by Toa to Mobil of US$6.40
per barrel: There is an arrangement in place
between Mobil and Toa that Toa will pay a
premium to Mobil of US$6.40 per barrel on the
continued supply of fuel after the Mobil/Toa sale.
This premium which at current rates
equates to about 6.49cents per litre is regarded
as security for the continued supply and the
continued application of the basis of this
template. It also acknowledges Mobil’s role which
previously was dealt with within their ROI, is now
excluded from the calculations.
The premium acknowledges that TOA has no
expertise in going direct to the market and
accordingly represents also a procurement cost,
which previously Mobil absorbed and recouped in
their ROI. The committee has been advised by
both Mobil and Toa that despite the payment of
the US$6.40 per barrel premium there are savings
to be made under local ownership and these
should be reflected in future regulated prices.
For the purposes of the template this premium
shall be included in the LCT costs and shown as
LCT Freight cost and Premium.”
[35] The expression “ROI” used in clause 7 is a
reference to a return on investment. The effect
of clause 7 is to give Toa a fixed return on its
investment. It was explained to the Court that such
a provision is necessary to ensure the supply of
fuel within a small economy. Without such fixed
returns it might be difficult to induce potential
participants to supply fuel within the Cook Islands.

Extract 3
[69] Mr Frame relies on Heisler v Anglo-Dal Limited
[1954] 2 All ER 770 to argue that “guarantee”
is sometimes used in a looser sense as part of
everyday parlance. That case, however, takes the
matter little distance. It is trite that “guarantee” is
sometimes used loosely. In that case, the Court
was considering a contract drafted by “commercial
men” rather than lawyers. But we are here talking
about a statute and a statute specifically designed
(at the least) to ensure the financial prudence of
the Crown. In those circumstances one might
reasonably think that the draughtsman would take
some care in the use of language and have close
regard to how lawyers might use the term
“guarantee”.

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