Senior federal counsel Azahar Mohamed found himself in a bit of a fix today when a Court of Appeal judge hearing the oil royalty suit filed by the Terengganu government slapped him with a difficult question.

The judge asked him why Petroleum Nasional Bhd (Petronas) and the federal government paid the state the five percent royalty for oil which was won and saved offshore for 20 years if they knew that the state's right was confined to those found onshore?

Azahar had argued that the breach of contract suit filed by the PAS-led state government against the oil giant and the federal government purely involved the question of law and not of facts.

Provoking question

However the judges assured the counsel that the question was merely to provoke him to raise convincing arguments.

"Don't worry we have not made up our minds yet. We just want to provoke you to convince us," said Justice Mohd Nor Ahmad who heard the appeal together with Justices Hashim Mohd Yusof and Richard Malanjum.

Azahar is representing the federal government who - with Petronas - are appealing against the Kuala Lumpur High Court decision on Aug 29 last year dismissing their application for a summary judgment seeking the court to decide the case based solely on documentary evidence.

Justice Ariffin Zakaria had ruled then that the matter be resolved by a full trial stating that if he was to accept the application to decide the case by just determining certain preliminary legal issues, the state would be prejudiced.

Urging the Court of Appeal to set aside this decision, Azahar argued that the court needed to only determine the interpretations on points of law in order to decide whether the state had any rights to the oil won and saved offshore.

For this, he added the court only had to refer to legislations like the Petroleum Development Act 1974 and the Continental Shelf Act, and also the agreement entered by the three parties in 1975 in respect to the oil royalty payment.

"The agreement states that Petronas shall pay royalty of five percent of oil won and saved in the state.

"What is important here is the definition of Terengganu. For that we only need to look at the laws. We are contending that it means the land and three nautical miles of the waters, that's all," he said.

Azahar also said to date oil that had been won and saved came from areas within the continental shelf.

Rationale questioned

This prompted Justice Mohd Nor to ask if the state's right was only restricted to oil found onshore, then why did Petronas and the federal government subsequently pay five percent royalty for oil won and saved offshore.

"What was the rationale of the federal government and Petronas in paying for the oil found within the continental shelf for many years?

"What had triggered them to make the payment?" he added.

Azahar replied that the conduct and discussion before or after the agreement was signed were irrelevant.

He added that the money was not paid in pursuant to the agreement but was actually wang ehsan (goodwill payment).

To this, Justice Mohd Nor said the issue of wang ehsan had arose only recently and the court was concerned on the interpretation of the agreement at the time when it was signed by the parties.

"The subsequent conduct of the parties may be important for the court to interpret the payment clause. What is your explanation that although no oil was ever been found on the state's land, the state was still paid. Documents may not be sufficient to explain this," he added.

Azahar said the conduct of the parties after the signing of the agreement should not be confused with the conditions set in the agreement and reiterated that the court should only confine its consideration on the laws and the interpretation of the agreement.

Legally aware

However, the judge reminded him that the agreement was entered between high-profile people who must have been fully aware of the laws and the interpretation.

"This is not an agreement between kampung people They knew the laws. If they interpreted as what you are contending than why did they pay?," asked Justice Mohd Nor.

Justice Richard also pointed out that if one looked at the agreement and the subsequent conduct, it could be seen that the issue of onshore or offshore was not in the minds of the parties when they entered into the agreement.

The hearing continues tomorrow.

The Terengganu government is suing Petronas for failing or refusing to pay RM850 million in cash for petroleum obtained in the first half of 2000.

Lawyers Tommy Thomas is acting for the state, Cecil Abraham for Petronas and senior prosecutor Mary Lim for the federal government.

Former lord president Salleh Abas and Terengganu Deputy Menteri Besar Mustafa Ali were also present in court today.