Royalty Disputes Referred to Arbitration Under the IAA

This proceeding concerned whether disputes relating to royalty calculations, specifically depreciation and decommissioning (D&D) costs, arising under a long-standing royalty arrangement for hydrocarbons extracted from Bass Strait were required to be resolved through arbitration, rather than by a court.

Oil Basins Limited (OBL) holds a 2.5 per cent overriding royalty on hydrocarbon production within a defined Bass Strait area. The royalty is governed by a Royalty Agreement executed more than six decades ago. Over time, that agreement was supplemented and amended, including by a 1994 Settlement Agreement which established a detailed methodology for calculating royalties and introduced a dispute-resolution framework. That framework included provision for arbitration and the appointment of a “Special Referee” with defined and limited powers.

background

In 2023, OBL raised concerns regarding the Producers’ application of the agreed methodology to the treatment of GST and D&D costs. Arbitrators were appointed in March 2024 to address both categories of dispute. However, OBL contended that, under the terms of the Settlement Agreement, disputes concerning D&D costs were excluded from arbitration.

On that basis, OBL commenced proceedings in the Supreme Court of Victoria in April 2024, seeking declarations that the D&D disputes were not arbitrable and injunctive relief restraining the arbitration from proceeding.

The Producers, including Esso Australia Resources Pty Ltd, applied under s 7 of the International Arbitration Act 1974 (Cth) for a stay of the court proceedings, contending that the disputes fell within the scope of the arbitration agreement and should be determined by an arbitral tribunal.

The Nature of the Issue Before the Court

Critically, the proceeding was not concerned with whether OBL had been underpaid, nor with the correctness of any royalty calculation. No assessment was undertaken of the merits of OBL’s allegations, the quantum of any claimed shortfall, or the proper construction of the royalty methodology itself.

Instead, the case turned on a threshold procedural question: Through which legal process, if any, disputes about D&D costs were required to be determined before any substantive claims could be adjudicated?

The court was asked to decide whether it should itself determine the arbitrability of the D&D disputes, or whether that question was one that, consistent with the parties’ contractual arrangements and Australian arbitration law, should be left to the arbitral tribunal in the first instance.

Until that issue was resolved, no further direct claims concerning entitlement, underpayment, or adjustment of royalties could properly be heard in any forum.

Court Proceedings

The stay application was heard before Croft J in November 2024. OBL sought declarations that the D&D disputes were not arbitrable and injunctive relief preventing the arbitration from proceeding.

The Producers submitted that the arbitration agreement was broad, that the carve-outs did not clearly exclude the D&D disputes, and that any jurisdictional objections should be determined by the arbitral tribunal itself.

The court was not asked to, and did not, determine the correct interpretation of the royalty provisions or the financial consequences of any alleged misapplication.

Legal Considerations

The proceeding was not concerned with the merits of any alleged underpayment. Instead, it addressed the procedural construct under which disputed royalty entitlements are to be determined, namely whether those questions must be resolved by arbitration before any substantive adjudication can occur.

The proceeding resulted in no determination of royalty entitlements; it established only that any such determination must, if at all, be made through arbitration.

The case engaged several technical aspects of Australian arbitration law:

• Arbitration Clause Scope: Clause 19 of the Settlement Agreement provided that any dispute “arising out of or related to or connected with” the Agreement was subject to arbitration, except where specifically carved out. Determining the arbitrability of D&D issues required analysis of whether the carve-out clauses excluded these financial adjustments.

• Kompetenz‑Kompetenz: The doctrine allows arbitral tribunals to decide their own jurisdiction. The court considered whether it should preemptively determine arbitrability or defer to the tribunal.

• Pro-Arbitration Jurisprudence: Australian courts have consistently prioritised party autonomy in arbitration. The decision required assessing whether there was a “sustainable argument” that the D&D disputes fell within the arbitration agreement, consistent with Hancock Prospecting Pty Ltd v Rinehart.

• Section 7 IAA Stay Test: The court had to consider whether a stay of judicial proceedings was appropriate in favour of arbitration, balancing efficiency, procedural fairness, and the parties’ contractual intentions.

  
  

Court Proceedings

The application was heard before Croft J in November 2024. OBL sought declarations that the D&D disputes were not arbitrable and requested injunctive relief to prevent arbitration. The Producers argued that the disputes were encompassed within the arbitration agreement and that any issue of carve-outs or interpretation should be resolved by the arbitral tribunal itself.

Decision

On 13 February 2025, Croft J granted a stay under s 7 of the International Arbitration Act 1974 (Cth), referring the D&D dispute to arbitration.

The court held that:

• The arbitration agreement was valid and operative. Clause 19 was expressed in broad terms, encompassing disputes connected with the Settlement Agreement. The alleged carve-outs did not clearly or conclusively exclude disputes concerning D&D costs.

• Questions of arbitrability were for the tribunal to determine. Where disputes involve mixed questions of fact and law, particularly in technically complex commercial contexts, courts should not pre-emptively determine jurisdiction unless the issue is confined to a narrow and purely legal question.

• A pro-arbitration approach was required. Unless there is no sustainable argument that the dispute falls within the arbitration agreement, a stay should ordinarily be granted to give effect to the parties’ contractual intentions.

• Procedural efficiency favoured a stay. Allowing parallel court proceedings would undermine the agreed dispute-resolution mechanism and risk inconsistent outcomes.

Justice Croft observed that challenges to the jurisdiction of an arbitral tribunal should ordinarily be determined by the tribunal itself, rather than by the court at a preliminary stage

What has been determined

The Supreme Court of Victoria has finally determined that the court is not the forum for deciding the D&D royalty dispute at this stage.

By granting a stay under s 7 of the International Arbitration Act 1974 (Cth), the court has conclusively decided that:

• The dispute must proceed through arbitration, and

• Any questions about whether D&D issues are included or excluded by the Settlement Agreement are to be decided by the arbitral tribunal, not the court.

That procedural determination is final unless overturned on appeal.

No court or tribunal has yet determined:

• Whether the royalty methodology was correctly applied

• Whether depreciation or decommissioning costs were miscalculated

• Whether OBL is entitled to additional royalties

• Whether the Producers have fully complied with their payment obligations

• The quantum of any royalties payable, if any

• Any adjustment to income, past or future

The Arbitral Tribunal

The arbitral tribunal will determine, in sequence:

• Whether it has jurisdiction over the D&D disputes

• How the relevant contractual provisions are to be interpreted

• Whether the royalty methodology was correctly applied

• Whether any adjustment to royalties is required

• If so, the amount and manner of any adjustment

Only after that process is completed could any party’s income or entitlement be conclusively defined.

Conclusion

Oil Basins Limited v Esso Australia Resources Pty Ltd confirms the primacy of arbitration in resolving complex commercial disputes in Australia. The Supreme Court of Victoria’s decision underscores that parties’ contractual agreements to arbitrate are enforceable even in legacy resource contracts and that questions of jurisdiction and interpretation should generally be determined by the arbitral tribunal.

In short, no final entitlements have been defined. Only one process can now determine final royalty entitlements: