Alistair Stuart v McLachlan and AVA Marie McLachlan
[2003] NZCA 212
•28 August 2003
IN THE COURT OF APPEAL OF NEW ZEALAND
CA142/02
BETWEENALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN AS TRUSTEES OF THE WAITURUTURU TRUST
First AppellantsANDALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN
Second Appellants
ANDMERCURY GEOTHERM LTD (IN RECEIVERSHIP)
First RespondentANDPOIHIPI LAND LTD (IN RECEIVERSHIP)
Second RespondentANDMERCURY NETWORK LTD
Third Respondent
Hearing:12 and 13 May 2003
Coram:Gault P
Keith J
McGrath JAppearances: A S McLachlan in person
P J Dale and C R Darlow for Respondent
Judgment:28 August 2003
JUDGMENT OF THE COURT DELIVERED BY GAULT P
[1] This appeal arises in a dispute between lessees claiming certain pre-emptive purchase rights, and their lessors, companies in receivership, in respect of the sale of assets of an unsuccessful joint venture formed to construct and operate a geothermal power station. It is an appeal from the judgment of Potter J delivered in the High Court at Auckland on 14 June 2002.
[2] The joint venture vehicle was Mercury Geotherm Ltd (“MGL”) of which Poihipi Land Ltd (“Poihipi”) is a wholly owned subsidiary. The shareholders in MGL were Mercury Energy Ltd (now Vector Ltd), having the majority interest, and the Waituruturu Trust. The Trust, of which Mr and Mrs McLachlan are the trustees, owned and farmed land in the Taupo area on which the development took place. Mr and Mrs McLachlan first acquired the farm in 1965. Originally it comprised blocks which for convenience are referred to as “A” and “B”. Subsequent purchases from neighbouring farms and the local authority enlarged the holdings to include block “C”. Further expansion to include Lots 1 and 2 DPS 69822 (“Lots 1 and 2”) was negotiated by Mr McLachlan.
[3] By way of implementation of the joint venture agreement the land in blocks A and B was transferred to Poihipi and that in block C was transferred to MGL. The whole of the land in those three blocks, excluding the power station site, was leased by the two companies to the trustees who continued their farming activities. The funding for the power station development was provided by Mercury Network Ltd, subsequently MEL Network Ltd (“MEL Network”), and was secured by debentures charging the assets of MGL and Poihipi.
[4] Title to Lots 1 and 2 was taken in the name of MEL Network. As Potter J found, it was the intention of the parties that this land would be brought within the joint venture, would be transferred to MGL and would be included in the lease to the Trust. Documents to effect this were prepared but were not completed. The Judge held that the land was held on trust for MGL and that the Waituruturu Trust had an equitable leasehold interest.
[5] The lease from MGL and Poihipi to the Waituruturu Trust was executed on 15 December 1995. It expressly excluded from the lease of Land A the Power Station Site which was defined as:
… the area of Land A which is intended to be occupied by the geothermal power station to be constructed under the Joint Venture Agreement including, without limitation, steamfield well pads, steamlines, piping, other steamfield works, access roads and the Poihipi Road planted areas.
[6] Clause 10 gives the lessors the right to exclude areas from the leased land in certain circumstances. Clause 10.1 reads:
If the lessors require the Land for any purpose related to the construction and operation of MGL’s proposed geothermal power station or the Lessors reasonably believe the use of the Land (or part of it) for the permitted use conflicts with, or limits, that purpose, the Lessors shall have the right to unilaterally vary this Lease to alter the area of the Land which it relates to, to suspend the Lease in respect to all or part of the Land, and/or vary the Term in respect of part or all of the Land, provided the Lessor gives the Lessee not less than 2 months’ written notice of its intention to vary or suspend this Lease. If the Lease is materially varied or suspended in accordance with this clause and such variation or suspension occurs following the date of Commissioning, the annual rent shall be reduced on a pro rata basis in respect of the area of the Land which the Lessee is not permitted to use following the variation, or the period during which any suspension remains in force.
[7] Clause 16.1 provides a first right of refusal in favour of the lessee. The part material for present purposes reads:
In consideration of the mutual promises contained in this Lease and in the Joint Venture Agreement, the Lessors grant to the Lessee or its nominee a first right of refusal in respect of the Land or any part thereof, should the Lessors wish to sell or dispose of those parcels of land (together, the “Relevant Land”) as are comprised in the Land, or in the property the subject of the Landcorp Property Agreement (as that term is defined in the Joint Venture Agreement) or in any other parcels of land which the Lessors may acquire after the date of this Lease.
The remainder of the clause provides the machinery by which the right of first refusal would be exercised.
[8] Development and construction of the power station commenced in November 1994 and generation commenced in September 1997. The station did not operate at the planned capacity and proved uneconomic. Relations between the joint venture parties deteriorated. In 1998 MGL and Poihipi were placed in receivership by the debenture holder MEL Network. The receivers determined to sell the assets of the two companies in receivership including the power station and certain generation equipment that had not been installed. With a view to this one of the receivers wrote to Mr McLachlan on 21 June 1999 giving notice that:
All of Land A is deemed to be the Power Station Site. This will take effect as of 1 August 1999. Please ensure that all stock is removed from this site by this date.
Under clause 10.1 of the Deed of Lease, the Lessors wish to alter Land B to remove portions of the land used by the geothermal power station. Land B will, from 1 September 1999, consist of CT 26D/78 only.
Under clause 10.1 of the Deed of Lease, the Lessors wish to alter Land C to remove portions of the land used by the geothermal power station. Land C will, from 1 September 1999, be the area highlighted in the attached map only. The excluded area containing the reinjection pipeline and the reinjection bores will be either fenced or subdivided off.
Please make arrangements to ensure that all stock is removed from the appropriate areas of Land B and Land C by September 1999.
Attached is a map showing the land that will remain under the Deed of Lease.
Vector has requested we remind you that the land, as highlighted in green on the attached map [Lots 1 and 2], is owned by MEL Network Ltd, a wholly owned subsidiary of Vector Ltd. This area is not covered by the Deed of Lease, and should not be being used by the Waituruturu Trust.
[9] Shortly after sending that notice the receivers circulated a “Confidential Information Memorandum” to selected potential purchasers including Mr McLachlan. In this memorandum the receivers indicated that they had been mandated to sell the assets of the two companies including the power station. In the description of the site and land the memorandum referred to the area of land highlighted and coloured green on an attached map as land to be transferred to the purchaser. The map shows that land to be all of Land A. The description in the memorandum went on to state:
In addition to the land described above, Mercury Geotherm Limited also owns approximately 353 hectares of land in the vicinity of the station. This area is highlighted in yellow and blue on the map in Appendix One, Figure 2). This land is currently leased to the Waituruturu Trust. The purchaser will be granted an easement allowing it to own, use, and maintain any geothermal assets on that land. This area over which the easement will be granted is highlighted in yellow on the map in Appendix One, Figure 2.
Furthermore, MEL Network Limited owns a further 4.5 hectares of land (highlighted in orange on the map in Appendix One, Figure 2), which it will make available for selling (independently, but simultaneously to this sales process) to the purchaser.
[10] The McLachlans contended that these documents evidenced the necessary “wish to sell” by the receivers so as to trigger their right to purchase the land in block A excluding the power station site, and in Lots 1 and 2. They challenged also the entitlement of the receivers to offer prospective purchasers the easements proposed.
[11] The receivers realised that the power station site did not comprise the whole of Land A and proceeded with their realisation in a manner designed to avoid triggering the McLachlans’ right of first refusal.
[12] In fact McLachlan interests offered to purchase the power station and related assets, but the receivers selected Contact Energy Ltd as the preferred bidder and eventually entered into a contract for sale with that company on 24 December 1999. That contract specified the fee simple land to be sold as being the power station site which was to be determined in court proceedings. The assets sold included specified “Encumbrance Interests” and “Easement Interests”.
[13] The easements envisaged included rights of access to the power station and to facilities essential to the power station operation, though outside the boundaries of the power station site. These are a reinjection facility, a seismic station, a fire-fighting reservoir and a potable water pumpshed. The proposed encumbrances were designed to secure for the benefit of Contact Energy the lessor’s rights under the Waituruturu Trust lease to vary or suspend that lease in respect of any of the leased land required for any purpose related to the construction and operation of the power station. This was to be effected by registering over each of the titles to the leased land a memorandum of encumbrance obliging the grantor (the receivers) to exercise rights under cl 10.1 of the lease on receipt of notice from the grantee (Contact Energy). The wording of the proposed grants follows the wording in cl 10.1 of the lease. Their effect was to insert the mechanism of an exercise notice in situations where Contact Energy “in good faith and on a reasonable basis requires land or has reasonable belief that the farming operation conflicts with, or limits the construction or operation of the power station”, enabling Contact Energy to give notice to the grantor requesting the grantor to exercise the cl 10.1 powers. In order for Contact Energy to exercise its rights under the encumbrances and to survey any land which it proposes should be taken, Contact Energy would have a right of access to the leased land.
[14] Clause 10.7 of the agreement for sale to Contact Energy reads:
Right of Refusal If at any time the Deed of Lease is terminated (other than in circumstances contemplated by clause 16 of the Deed of Lease) and following such termination the Vendor, continues to own the fee simple of all or any part of the Easement Land, the Encumbrance Land and/or the Additional Land the Vendor shall, within 30 days of such termination, offer the fee simple to all or that part of the Easement Land, the Encumbrance Land and the Additional Land to the Purchaser for a price equal to the then government valuation of that land.
[15] By separate subsequent agreement for sale and purchase MEL Network agreed to sell to Contact Energy Lots 1 and 2 for the sum of $153,000. On the Judge’s finding that MEL Network held the land in trust for MGL and subject to the equitable leasehold interest of the Waituruturu Trust, there are competing equities of Contact Energy and the Trust in respect of this land.
[16] The sale to Contact Energy was structured specifically to avoid triggering the Trust’s right of first refusal because the receivers were anxious to realise greater value through the sale by maintaining the benefit of the wide powers to vary or suspend the lease under cl 10.1. By the time the contract for sale was executed it was clearly understood that if land other than the power station site was offered to Contact Energy the appellants would have exercised their right to purchase the land and the powers under cl 10.1 would have been lost.
[17] In the proceedings the receivers sought a declaration defining the boundaries of the power station site and orders removing caveats lodged by the McLachlans over the leased land and the land in Lots 1 and 2.
[18] The McLachlans sought a declaration that the right of first refusal under cl 16 of the lease had been triggered in relation to both the leased land and to Lots 1 and 2. They sought an order for specific performance requiring the land to be offered to them at Government valuation. They sought further a declaration that the receivers had acted in breach of a duty to act in good faith towards them as a joint venture partner, an order for specific performance requiring registration of the lease against the relevant titles, an injunction restraining registration of the proposed easements and encumbrances the receivers had purported to offer and a declaration that MEL Network holds Lots 1 and 2 on trust for MGL and subject to an equitable lease on like terms to those contained in the executed lease in favour of the Trustees.
The High Court judgment
[19] In her judgment, Potter J found that:
(a)The right of first refusal under clause 16.1 had not been triggered.
(b)There had been no breach of the implied duty of good faith.
(c)The Power Station Site could be defined according to the definition in the lease.
(d)The receivers were entitled to register certain easements.
(e)The receivers were not entitled to register the encumbrances.
(f)Lots 1 and 2 were subject to a constructive trust, but the right of pre-emption under the equitable lease had not been triggered.
[20] The Judge’s reasons will be summarised under each head.
Right of first refusal
[21] The judge adopted the test in Motor Works Ltd v Westminster Auto Services Ltd [1997] 1 NZLR 762: In order to trigger the right, the vendor must “overtly manifest” a wish to sell, and also the terms upon which to sell. Without such terms, there cannot be an order of specific performance. The intention is to be assessed objectively. In this case, none of the facts relied on by the McLachlans constituted an overt manifestation of a wish by the receivers to sell the leased land because:
(a)The desire of Mercury Energy to divest itself of its generation business following the electricity industry reform was not relevant to the actions of the receivers who acted independently of MEL Network or Vector. The actions of the receivers were entirely explicable within their primary legal obligations as receivers to recover debt.
(b)The description of the land to be sold in the letter of 21 June and the Information Memorandum were “unfortunate errors”. However, none of those documents, individually or together, contained a statement of the receivers’ intention to sell the leased land. In any event, none of the documents stated terms or conditions upon which the receivers were prepared to sell, as required by the Motor Works case.
.
(c)The selection of Contact Energy as the “preferred bidder” was an entirely usual procedure, and could not indicate an intention by the receivers to sell to Contact Energy only.
(d)The right of refusal given to Contact under clause 10.7 of the Contract agreement only applied once the lease to the McLachlans was terminated, and did not bind the receivers during the existence of the lease. As such, it did not derogate from or trigger the right of first refusal given to the appellants in the lease.
Implied duty of good faith
[22] The Judge accepted that the joint venture agreement, and the lease contemplated by the agreement, were “relationship contracts” where an implied duty of good faith would exist. However that implied duty had to be interpreted by reference to the contractual documents. Here, wide powers were available to the lessors through cl 10.1. This was regarded as important in achieving the full value of the power station. The decision of the receivers to proceed so as to preserve the cl 10.1 powers was commercially justified, and in furtherance of their legal duties as receivers. The decision was not taken in bad faith.
Power station site
[23] The Power Station Site was defined in terms of the lease definition. It does not include areas that may be taken by exercise of powers under the lease. The definition in cl 1.1 is expressed to be “without limitation”. Therefore, the Site includes all components that are “necessarily or reasonably” part of the geothermal power station. Such components were not contemplated as being the subject of easements. The Judge rejected the “as-built” description proposed by the appellants and the expert evidence, presented without reference to the lease definition, as not being in accord with the lease. The Judge also rejected the receivers’ argument that the Site should include all the area that encountered noise over 50 decibels from the plant. In addition, the Judge considered that:
(a)The Power Station Site should include the power station, steamfield (including pipeline), water reservoir and pump station and seismic station.
(b)The “earthing grid” was a necessary part of the power station and should be included in the Site definition.
(c)The Site definition should not include allowance for future well pads.
(d)The term “access roads” referred only to roads giving access to the Power Station. The Power Station Site therefore excluded the farm access lane, save for the portion where it ran together with the Power Station access road.
(e)Drains should not be included in the defined Site.
Easements
[24] The respondents were entitled to register certain easements set out in appendices B, C and D to the Contact Energy sale agreement. However, those easements must necessarily be limited to the purposes of the power station as the lessors reasonably believe them to be. This means the easements as currently proposed were drafted too widely.
Encumbrances
[25] The Judge found that the receivers were not entitled to register the encumbrances because they breached the McLachlans’ right of quiet enjoyment, and derogated from the grant of the leasehold interest. The receivers were entitled to exercise powers under cl 10.1 of the lease as agents of MGL, even though MGL no longer ran the power station. However, the proposed encumbrances would bind not only the receivers but also purchasers of the land. Contact Energy would not be an assignee of the lessors. That the rights under cl 10.1 could be effectively assigned in this way was not in the contemplation of the parties when the lease was entered into.
Lots 1 and 2
[26] Lots 1 and 2 held by MEL Network were the subject of a constructive trust in favour of MGL. Therefore the Trust would be entitled to an equitable lease of Lots 1 and 2 on the same terms as the leased land. However, MEL Network’s wish to sell Lots 1 and 2 to Contact Energy would not have triggered the cl 16 right because MEL Network was not the lessor of the leased land. The receivers could not have formed a wish to sell land they did not believe was MGL’s or Poihipi’s property, and not subject to the lease. Therefore, the right of first refusal under the equitable lease had not been triggered, and the Court would not order MEL Network to offer Lots 1 and 2 to the Trust.
[27] In addition, performance of the constructive trust presented difficulties because:
(a)MGL was in receivership, and there were no funds to pay the price for Lots 1 and 2; and
(b)MEL Network had already transferred Lots 1 and 2 to Contact Energy. Contact had also lodged a caveat against the title claiming to be a bona fide purchaser for value without notice.
[28] Potter J noted that further proceedings are needed to complete the factual determinations in relation to Lots 1 and 2, and also to resolve the competing equities of the Trust and Contact Energy.
The appeal
[29] Mr McLachlan, who appeared and argued the case in person, demonstrated detailed familiarity with the issues and with the factual background to them. This reflected his close involvement with the power station development from the very beginning as its initiator. The thoroughness of his preparation and the moderate way in which he presented his case have been of assistance. He advanced some eleven grounds of appeal. A twelfth depends on an amendment to the pleadings. Some of them overlap. By way of cross-appeal two grounds were argued for the receivers. It is convenient to deal with each of the grounds in turn.
Ground one
[30] Mr McLachlan’s first ground did not raise a matter going to the actual decision of the Judge on any point. It was directed to terminology in the judgment. No issue was taken with the corrections identified and nothing turns on them in the present appeal. They have been noted and taken into account in the preparation of this judgment.
Ground two
[31] The second ground was directed to the Judge’s factual narrative so far as it dealt with the control of the joint venture business before and after the power station was commissioned. Those matters may be material in other contexts, but they do not bear upon the Judge’s decisions on matters she had to decide. Therefore, they are not matters that are appropriate for us to go into in the present appeal. We make no finding on them.
Ground three
[32] The third ground raises an amalgam of points relating to the findings in the judgment that the receivers had not breached their duty of good faith, whether the McLachlans’ right of purchase has been triggered and whether the receivers were entitled to assume obligations to grant to Contact Energy the easement and encumbrance “interests”. The focus of the argument on this ground is the manner in which the receivers structured their transaction with Contact Energy to circumvent the McLachlans’ right of first refusal. There was a challenge to the Judge’s finding that by dealing as they did with the assets of MGL and Poihipi, the receivers did not breach the obligations of good faith those companies owed to the McLachlans as joint venture partners. It was contended that it was inconsistent with those obligations, considered in light of the joint venture documentation, for the receivers deliberately to avoid offering the land to the McLachlans, undertaking to grant easements and encumbrances inconsistent with their rights as lessees, granting to Contact Energy the right to purchase the land (in cl 10.7 of the Contact Sale agreement) and undertaking to exercise for the benefit of Contact Energy the right to vary or suspend the lease (in cl 10.1 of the Trust lease). It was contended further that the Trust’s right to purchase was triggered by the inclusion in the Contact Energy sale agreement (cl 10.7) of the option for that company to purchase the land leased to the Trust after termination of the lease.
[33] This last point can be dealt with briefly. As the Judge noted, the right of purchase granted to Contact Energy was expressly conditional upon the Trust’s right of purchase in its lease (cl 16.1) having been extinguished – by termination of the lease. Accordingly, there is nothing inconsistent with the trustees’ rights in the grant of the conditional right of purchase. We agree with the reasons of the Judge to the same effect on this point.
[34] The Judge held that the manner in which the receivers have gone about realising the power station assets was “commercially justified”. It is to be kept in mind that the Judge also determined that the proposed grant of the encumbrance interests was inconsistent with the rights of the trustees as lessees of the land it was proposed to encumber. That, of course, was part of the transaction agreed between the receivers and Contact Energy. That is the subject of a cross-appeal but, for reasons to be given, we dismiss that. The immediate issue therefore is whether the sale transaction, excluding the encumbrances, was rightly held not to involve breach of obligations owed by the receivers to the McLachlans.
[35] The express inclusion in the joint venture documentation (of which the lease was part) of a right to purchase the land excluding the power station site points strongly away from any general obligation, to be implied, to offer the power station and its site to the participants in the event of the joint venture assets being disposed of. The receivers therefore were free to sell the power station and the land in block A excluded from the Trust’s lease. The complaint comes down to the receivers having adopted the course of maximising the value of the assets to be sold by attempting to preserve the rights under cl 10.1 of the lease for the benefit of the purchaser – although without being able to provide the assurance of registered encumbrances. This raises the question of the extent of the rights of the lessors to vary the lease under cl 10.1 once they no longer own the power station. As appears in greater detail when we come to grounds eight and nine, Potter J considered the lessors would enjoy the benefit of the clause during the currency of the lease.
[36] It was contended at one point that the provision was intended to operate only during the period of construction of the power station. That cannot be right. The last sentence provides for the situation in which it is invoked “following the date of Commissioning”. Accordingly, we do not consider it arguable that the rights in cl 10.1 were intended to lapse in the event that the power station came to be owned and operated by a party other than the lessors. Poihipi, the lessor (of land A and B), perhaps most likely to invoke the provision because of the location of the power station, neither owned nor operated the power station and was not intended to when the lease was signed.
[37] Proceeding, as the Judge did, on the basis that the rights under cl 10.1 endure for the term of the lease, we are not persuaded the Judge erred in deciding that sale of the power station site, together with covenants to invoke cl 10.1 if called upon by the purchaser, constituted breach by the receivers of any obligations of good faith the lessor companies owed to the Trust. We understand it is an issue in other proceedings whether there has been any breach of obligations upon the other joint venture partner(s), but that is not before us.
[38] Mr McLachlan submitted that the powers in cl 10.1 could only be invoked in the interests of all joint venture partners and only when there exists a demonstrable need to do so. The second aspect is correct and nothing the receivers have done or covenanted to do is inconsistent with the necessity of showing that the land is required (or reasonably believed to be required) for a purpose related to the construction or operation of the power station. But there is no requirement that the power is to be invoked only where that serves the interest of the joint venture partners. Necessarily a variation of the lease for the benefit of the joint venture would affect the farming interest of the trustees as lessors. Clause 10.1 plainly was intended to benefit those who owned the power station and so it added to its value. The receivers were seeking to realise that value. On the other hand, the position of the lessees, in the absence of registered encumbrances, will be no different after the sale of the power station. They will be vulnerable, as they have been all along, to the exercise of the rights in cl 10.1 where that is required for a purpose related to the construction or operation of the power station.
[39] We are not persuaded that any breach of the obligations on the lessors under the lease was involved in the decisions of the receivers to subdivide off and sell the power station site (for which there was no right of pre-emption in the lease) and to retain the leased land. There is the separate argument Mr McLachlan seeks to advance that there is a surviving right of first refusal in the first joint venture agreement signed in 1994 to purchase the power station site itself, but we will deal with that separately.
[40] On this ground of appeal we find no error on the part of Potter J.
Ground four
[41] The fourth ground of appeal is at the heart of the trustees’ case. They submit that the Judge was wrong in determining that the right to purchase the leased land conferred in cl 16.1 of the lease has not been triggered by the conduct of the receivers. The challenge in the submissions is directed primarily to the Judge’s finding of fact. It was not suggested that there was any error of law by the Judge in adopting the principles set out in Motor Works Ltd v Westminster Auto Services. The material aspect of the judgment in that case is the clear finding that to trigger a pre-emptive right specified as arising in the event that the landlord “wishes to sell” there must be, in addition to some overt manifestation of that wish, sufficient certainty of the terms on which the landlord is prepared to sell. It is not enough to point to evidence of an intention to embark upon a course leading to a sale of the property. There must be terms in respect of which the first right of refusal can be exercised. That is clearly apparent from cl 16 of the lease in the present case. Clause 16.1 grants the right of first refusal and then states:
The terms of that first right of refusal are as follows:
(a)… the Seller shall give notice of that fact to the Lessee and shall specify the price at which and terms on which the Seller proposes to sell …
…
(e)If the Seller wishes to sell any part of the Land on terms more favourable to the purchaser than terms previously offered to the Lessee under the foregoing provisions, the parties shall resubmit to the procedure outlined in paragraphs (a) to (d) above.
[42] It is on the absence of terms on which the receivers could be said to have indicated a wish to sell the leased land that the trustees failed. The Judge said: (para [59])
Even if those documents did indicate on the part of the Receivers a wish to sell the leased land (which I reject), there is markedly absent any reference to the terms and conditions upon which the Receivers were prepared to sell to a bidder. As was clearly stated in Motor Works, and accepted in submissions on behalf of the defendants, the terms and conditions upon which the seller is prepared to sell are essential before the Court can become involved in ordering specific performance of a right of pre-emption which has been triggered.
[43] The only argument Mr McLachlan was able to advance as showing the price at which the receivers wished to sell the leased land was by reference to cl 10.7 in the Contact Energy sale agreement. As mentioned, that clause gave Contact Energy a right of purchase after the Trust lease is terminated at government valuation.
[44] We have already rejected the argument that cl 10.7 of the Contact Energy sale agreement separately triggered the trustees’ first right of refusal. It was a separate submission, as we apprehend it, that the indication of willingness to accept government valuation should be taken together with earlier indications of an intention to sell the assets of the two companies in receivership, as amounting to sufficient to trigger the trustees’ pre-emptive right.
[45] Mr McLachlan relied on a passage in the judgment in Beneficial Finance Corporation Ltd v Multiplex Construction Pty Ltd (1995) 36 NSWLR 510, 524:
If, on the true construction of the documents, or, in the case of an oral contract, what the parties have said, one can see that contingently or unconditionally the proprietor of property has put it out of his or her control to prevent the grantee from acquiring the property, then a proprietary right (ie an option to purchase) is conferred on the grantee. If, however, the right of the grantee only extends to impose a personal obligation on the grantor (to make an offer in defined circumstances) then there is no proprietary right conferred.
[46] Whether or not some contingent proprietary right might have been conferred on Contact Energy (and we express no view on that), it cannot be said that the receivers have manifested a wish to sell the leased land at government valuation at any time while the trustees’ first right of refusal is extant. While the lease continues it is within the power of the receivers to sell the leased land to the trustees or, if they do not wish to buy it on the terms offered, to any third party other than Contact Energy. They have not manifested any wish to do that.
[47] Because we are satisfied the Judge was correct on these points, it is unnecessary for us to review the matters relied upon by Mr McLachlan as amounting to expressions by Vector, or the receivers, of the intention to divest all the assets of MGL and Poihipi, including the leased land. We add, however, that we have not been convinced that the Judge’s assessment of the evidence was wrong. We reject this ground of appeal.
Ground five
[48] The fifth ground of appeal is directed to the causes of action in the trustees’ counterclaim alleging breach by the receivers of obligations of good faith and fiduciary duties arising from the joint venture. There is considerable overlap with the submissions advanced under the third ground and, to that extent, they have already been dealt with. The point repeatedly made, and formulated in differing arguments, is that having taken the land into the joint venture, the trustees were owed duties, over and above those expressed in their lease, translating into entitlements to have their offers to purchase the assets of the joint venture, including the power station, accorded some priority. They contend that, in breach of those entitlements, their joint venture partner (the receivers) refused their offers, then contracted not only to sell the power station and site, involving subdivision of the land, but also to grant an option to purchase and, until that is exercised, to create encumbrances over their leased land without their consent and to covenant to exercise the powers in cl 10.1 of their lease for the benefit of the purchaser and to their detriment.
[49] The reality is, as the Judge recognised, that the receivers’ duties are to recover debt and to realise assets of the companies concerned to that end. They may do that to the extent that they are not constrained by legal obstacles. Potter J held that they cannot create the encumbrances over the leased land as they have undertaken to do. That would breach the lessees’ rights of quiet enjoyment and derogate from their grant. But that aside, there is nothing in the various joint venture documents to prevent the course taken by the receivers. It was submitted that the Judge’s conclusion that the steps taken by the receivers were commercially justified is no excuse for breach of fiduciary duties. That might be so if there were established duties not to do what they have done. It is not enough to say that parties are in a relationship that gives rise to fiduciary obligations; it is necessary to identify those obligations. It is one thing to assert that in establishing and operating a joint venture the parties must act towards each other in good faith, but it is quite another thing to contend that in addition to the obligations they have assumed and must carry out in good faith, the law should impose further and separate duties of the kind suggested here.
[50] Mr McLachlan’s argument on this ground extended into the sale by MEL Network of Lots 1 and 2. He sought to associate MEL’s Network’s sale of that land to Contact Energy in breach of the trustees’ equitable rights. We are not persuaded that provides any support for the claims of breach of duties of good faith by the receivers. We could not differ from the Judge’s finding that the receivers have acted independently and were not directed by MEL Network.
Ground six
[51] The sixth ground relates to the definition of the boundaries of the Power Station Site being the land in block A excluded from the lease. There is a measure of common ground between the parties in light of the High Court judgment so that we focus only on the areas of remaining dispute. It is no longer productive to go into the argument as to whether the site should be defined by what were said to be the “as built” boundaries. We comment, however, that on the broad assumption that what, according to the lease definition, was intended to be built was in fact built, the “Site” encompasses what was built. There is no real dispute about the power station itself. The outstanding matters are in respect of the boundaries of the Site. The three points at issue are the earthing grid and conductor cable and the access roads.
[52] In extensive written argument Mr McLachlan criticised the approach taken by the Judge in determining the boundaries of the Power Station Site. His submission was that the boundaries should be determined as a question of fact on the evidence of what occurred when the power station was built, and what expert witnesses said should be included within a geothermal power station site. Potter J’s approach was to work from the definition included in the lease. Since the whole object of the exercise was to determine what land is not within the lease, as that is what the receivers wished to sell, the Judge’s approach was correct. Working from the lease definition she relied upon evidence to assist in assessing what is covered by aspects of the descriptions. That was open to her, and it is not for an appeal court to find that she should have preferred the evidence of some other witness.
The earthing grid
[53] It was submitted, however, that there may have been some confusion between what were described as the earthing grid and the conductor cable. Mr McLachlan said that the power station earthing grid is located within the security fence surrounding the power station (though we could not find the evidence supporting this) and there is no dispute that the land on which it is located is part of the Site. The conductor cable on the other hand is an earthing cable associated with the transmission rather than the production of electricity. It is buried below the level of normal tillage activities and extends across much of the land area A outside the perimeter fence of the power station. The witnesses referred to this conductor cable as the earthing grid and this, it was said, led the Judge wrongly to include the land in which it is located within the Site.
[54] Having reviewed the evidence, we are not persuaded that there was confusion among the witnesses. We are satisfied that they all were referring to what Mr McLachlan called the conductor cable and that is what the Judge (describing it as the earthing grid) decided is within the lease definition of the Power Station Site.
[55] That same review has given rise to concern whether the Judge’s finding on this point is supported by the evidence. She adopted as a test for determining if particular “components” fall within the term “geothermal power station” in the lease definition, as amplified by the words “without limitation”, whether any component “is necessarily or reasonably part of the geothermal power station”, restated as “essentially or reasonably part”. Her conclusion in respect of the earthing grid was:
The differing views of the experts tended to reflect the perspective of the party for whom they give their evidence. There seems to be no universal practice, but the preferred situation from a safety perspective is that supported by Mr Bottomley and Mr Wolters with whom Mr Horvarth agreed, that the power station owner for safety reasons should if possible retain the earthing grid under its ownership and control.
The earthing grid is not specifically mentioned in the definition and I am not attracted to a submission from the plaintiffs that it may be treated as included within “other steamfield works”. The earthing grid is not part of the steamfield or the steamfield works. It is a separate grid with a specific safety purpose, and in the case of the Poihipi power station is sunk below the earth surface outside the fenced perimeter of the power station pad.
The definition of geothermal power station is expressed to be “without limitation” and takes a broad inclusive approach, extending specifically to include the Poihipi Road planted areas, a buffer zone on the road frontage. I am satisfied on balance, that the earthing grid should be included in the Power Station Site. The earthing grid will need to be surveyed (the evidence of Mr Norrie was that this was a straightforward matter).
[56] The Judge relied on a report prepared for the receivers by PB Power (N.Z.) Ltd from which a Senior Engineering Consultant, Mr Bottomley swore two affidavits and was cross-examined. The passage from this firm’s report quoted by the Judge was:
The earthing grid is structurally integral with the power house and naturally forms part of the constructed power station facilities. Due to safety considerations, we believe the land area covering the buried earthing conductor grid should be inaccessible to the general public or farmers and only be accessible to operators/owners of the station who will be legally responsible for the safety of the equipment as stipulated by OSH.
[57] The Judge also noted that the report placed the land in the category of essential for the operation of the station. When cross-examining Mr Bottomley it became clear that the views expressed in his affidavits directed to the earthing grid were not his own. The Judge’s notes of evidence record the following questions and answers:
Q.We’ll put to one side shall we then what you have had to say in your affidavits about the grid – and also we should put to one side its not your evidence what the PB report says about the earth grid.
A.That is correct, the evidence to do with the earth grid, any aspect of electrical engineering in that report is from electrical engineering colleagues in our company.
[58] The witness deferred to the views of his colleague Mr Wolters. There were two affidavits sworn by Mr Wolters, the second in reply to an extensive affidavit from Mr Horvarth. In that second affidavit he said:
I agree with the following propositions:
(i)There is nothing in New Zealand legislation or codes of practice that requires power plant earthing grids to be contained within the boundaries of the power plant;
(ii)There are many examples of power plants where earthing grids are shared or where earthing grids extend beyond the boundaries of the plant;
(iii)There is no particular technical issue that requires the earthing grid to be on the land owned by the power station owner providing some means of ensuring its continued integrity is agreed between land owner and station owner;
(iv)There is no particular technical issue that requires control and power cables to be on land owned by the power station owner provided some means of ensuring their continued functionality is agreed between land owner and station owner.
(v)The earth grid may need to be expanded in the future to accommodate increases in fault current contribution over time, and this would require renegotiation of easements.
[59] This is a considerable retreat from the categorical statements about safety in his company’s report.
[60] In his submissions to this Court Mr Dale, for the receivers, relied on a statement in Mr Horvarth’s affidavit recognising that a power station owner would prefer to site the works on his own land (though the whole theme of the affidavit is that it is not necessary), a statement in the second Wolter’s affidavit that if the station owner has a choice he will opt to retain the land where the earthing grid is buried, and a statement in evidence to similar effect by Mr Glucina who was the project engineer for construction of the power station. That shared view falls short of the test propounded by the Judge of being necessarily or reasonably part of the power station which is appropriate and substantially the same test as in cl 10.1.
[61] It is perhaps worthy of note, with reference to this evidence, that until the receivers came to sell the power station there appears to have been no concern that the McLachlans’ farming activities extended on land A to the area where the earthing grid is buried.
[62] Accordingly, we have reached the view that the finding, by reference to safety, is not supported by the evidence and that, on the Judge’s own test, the earthing grid is not part of the geothermal power station, and the land in which it lies should not have been included within the defined Power Station Site.
[63] We do not understand there to be any difficulty should access to this conductor cable be required. Indeed, should difficulties be presented, the lessors’ powers under cl 10.1 of the lease could be invoked.
The farm access lane
[64] There is a farm access lane essential to the farming activities. It is used also by the power station operator to give access to resources for the power station. This is the subject of both appeal and cross-appeal. Mr McLachlan’s objection is to the inclusion in the judgment of the comment:
… that should the Farm Access Lane or parts of it be, or become reasonably necessary for access to the Power Station … the Lessors would have recourse to their clause 10.1 powers.
[65] It was said that this is contrary to undertakings given to the McLachlan family at the time the power station was constructed. In effect, Mr McLachlan claims that no matter how necessary for the operation of the power station, cl 10.1 of the lease could not be invoked so as to interfere with the use of the farm lane for farming purposes. We do not accept that. As the Judge pointed out this is inconsistent with cl 5.4 of the lease in which the lessee acknowledges that the predominant use of the [leased] land is for the purposes of the construction and operation of the power station. Indeed the view we reach hereafter is that the Trust’s rights in respect of the farm access lane are even more restricted than the Judge found.
[66] Of greater importance, however, is the argument on behalf of the receivers that the farm access lane is within the lease definition of the Power Station Site being an “access road” as expressly included. Potter J did not accept that. She considered those words were not to be interpreted more widely than to include roads giving access to the power station, whereas the farm access lane was essentially created to give access between land B and C for farming purposes. She held that it does not give “essential access” to the power station.
[67] Mr Dale submitted that it must have been contemplated that the farm access lane would be part of the power station because there was included in the lease (cl 5.3) the lessee’s express “entitlement to utilise the access roads and underpass situated on the Power Station Site …”. The underpass was to provide stock and farm vehicle access beneath the power station access road. It is not in dispute that the power station access road is part of the Power Station Site. The lease definition expressly includes “access roads”. Is the farm access lane an “access road” for the power station? That it was formed for the primary purpose of farm use (as the evidence shows) cannot be conclusive. If it serves as an access road for the power station (including steamfield well pads, steamlines etc) then it falls within the definition. As we understand it, the farm access lane, as well as providing farm access to land B and C, runs along parallel to the Poihipi Road boundary to block A and in that area provides access to steamlines if not other components of the power station complex. To the extent it does that, we differ from the Judge and consider it comes within the definition.
[68] On that view, the issue of which predominates where the farm access lane and the power station access road cross at the entry from Poihipi Road, does not arise. Both are part of the Power Station Site and subject to the lessees’ rights under cl 5.3 of the lease. Even if that is incorrect, we would agree with the Judge that the power station access road extends across the farm access lane to Poihipi Road. Mr McLachlan’s argument to the contrary by reference to what he says was always understood could not prevail.
[69] We are conscious that we are differing from the Judge on the factual matters of the exclusion of the earthing grid and the extent to which the farm access lane provides access to components of the power station complex. And we are not in a position to determine the boundaries of the Site. The matter will have to go back to the High Court for that. In fixing the boundaries (in the absence of agreement) the Judge should take account of what we have said on these issues.
Ground seven
[70] There appears to be no matter to be resolved by this Court in respect of easements. Mr McLachlan expressed concern that the Trust and those engaged in farming the leased land were being denied access to a registered water easement as a result of communications from the receivers. This likely arose at a time the receivers did not fully appreciate that the Power Station Site did not extend to all of land A. We were assured by Mr Dale that there is no longer any question of the farm’s potable water supply. This is unrelated to the “easement interests” the receivers agreed to sell to Contact Energy which were the subject of the pleadings. The allegation on behalf of the Trust was that the receivers were not entitled to grant to Contact Energy the easements affecting the leased land. The Judge did not accept that.
[71] The purpose of the easements is to enable the power station operator to access those parts of the Power Station Site remote from the station itself. Mr McLachlan no longer challenges the entitlement. There remains in issue the scope of the easement rights. The Judge has required the easements to be re-drafted. That has not yet been done. Accordingly, there is nothing for this Court to determine on the issue.
[72] The encumbrances require separate consideration. They are the subject of a cross-appeal which will be dealt with separately later in this judgment.
Grounds eight and nine
[73] The eighth and ninth grounds of appeal were dealt with together. They raise points already addressed. These arise from Mr McLachlan’s conviction that the lessor’s rights in cl 10.1 of the lease endured only so long as the power station was owned and operated by the joint venture (MGL). For the reasons we have already given we do not accept that. Neither did Potter J. She said:
Before turning to the encumbrances, it is necessary to consider submissions by the defendants that clause 10.1 is not available to the Receivers but only to Geotherm, and that clause 10.1 applies only while the power station is owned and run by Geotherm. As will be apparent from previous observations as to the availability and value of clause 10.1 to the Receivers, neither contention is correct, in my view.
While in opening submissions the defendants contended that cl 10.1 was not and is not available to the Receivers but only to Geotherm, I believe in closing submissions counsel drew back, correctly in my view, from that position. The Receivers are agents of Geotherm under the Receiverships Act 1993 and are thus competent as the company’s agent, to take decisions and to form a reasonable belief for the company.
Further, I consider that the power in clause 10.1 of the lease vested in the lessors to require the leased land –
… for any purpose related to the construction and operation of MGL’s proposed geothermal power station …
continues to be exercisable by the lessors notwithstanding that Geotherm no longer owns or operates the power station. Although the lease was executed before construction of the power station was completed, clause 10.1 was clearly intended to have continuing effect, for the clause contemplates variation or suspension of the lease “ … following the date of commissioning”, and for the lessors to exercise the powers for the purpose of the “operation” of the power station.
There is nothing in the lease which states or suggests, as have the defendants, that the clause 10.1 powers exist only while the power station is run by Geotherm. In fact it appears that Geotherm has either never or only briefly, operated the power station. It was operated by Mercury/Vector under contract from Geotherm as provided by the joint venture agreement. But Geotherm owned it until the sale to Contact. That the power station and the Power Station Site on the one hand, and the surrounding leased land on the other, are now in different ownership, does not prevent the lessors from acting pursuant to clause 10.1 to require the land for a purpose related to the operation of the power station, or to form a reasonable belief that the use of the land under the lease conflicts with or limits any purpose related to the operation of the power station. The lessors would no doubt source their information to inform their decision from the power station owners, but that does not prevent them taking the decision to require land or from forming their own belief. The resultant situation may be clumsy but perhaps no more clumsy than if the lessors as the power station owners had sought to exercise powers under clause 10.1 to meet operational requirements of the power station as determined by those contractually responsible for the operation of the power station (formerly Mercury/Vector).
[74] We agree.
Grounds ten and eleven
[75] Grounds of appeal ten and eleven relate to the land in Lots 1 and 2. As already mentioned, the Judge determined that although the titles remained registered in the name of MEL Network, this land was held in trust for the joint venture (MGL) and was subject to an equitable lease, on the same terms as the executed lease, in favour of the Waituruturu Trust. Mr McLachlan’s concern is that although the Trust succeeded to this extent, it is to no avail because the Judge held that, notwithstanding the contract for sale of this land to Contact Energy, the trustees’ first right of purchase has not been triggered.
[76] The Judge’s reason for this is that the land has been sold not by the receivers but by MEL Network and it is only a wish to sell by the receivers that could trigger the right to purchase. The receivers did not know MGL was the beneficial owner.
[77] For the receivers Mr Dale submitted that there is nothing for this Court to decide because the competing equities of the trustees and Contact Energy have yet to be investigated and ruled upon in the High Court.
[78] There appear to be three issues. The first is whether the relationship and conduct of MEL Network and the receivers was such that the offer to sell or sale to Contact Energy triggered the trustees right to purchase. The second is whether Contact Energy is a bona fide purchaser for value so as to prevail over the trustees’ equitable rights leaving them with a non-proprietary claim only. The third is whether, if the trustees succeed on the first two issues, the receivers can resist the claim by the trustees of the right to purchase on the ground that they do not have funds to pay MEL Network to transfer the land to them.
[79] We consider these three issues are so inter-related that they should be determined together. Without full investigation of the relationship between MEL Network and the receivers in respect of the sale of this land, we think it is premature to determine that the trustees’ first right of refusal could not have been triggered. We take that view because of the Judge’s finding that it was the common intention of the parties, including MEL Network, that Lots 1 and 2 would be leased to the Trust on the same terms. Accordingly, we prefer to refer these matters back to the High Court and to preserve the rights of all parties. We allow the appeal against the finding that the right of refusal has not been triggered so that it can be dealt with along with the related issues
Ground twelve
[80] Mr McLachlan’s final ground rests on an application to amend the pleadings to introduce a new counterclaim. He wishes to argue for the first time that there is a separate and wider right of first refusal in cl 14.9 of a joint venture agreement dated 1 October 1994. This was superseded by the joint venture agreement dated 15 December 1995. In the later agreement it was provided in cl 1.3 that the provisions of the previous agreement merged in the later agreement with the proviso that any accrued rights under the previous agreement survived. In the earlier agreement under cl 14.9 McLachlan interests were to have a first right of refusal in respect of “the land”, which in that document included the land that has become the power station site.
[81] The application to amend to introduce this new claim was strenuously opposed on behalf of the receivers.
[82] We do not need to dwell on whether or not the circumstances are such that amendment to the pleadings to raise a new argument on appeal should be permitted. We are satisfied that, even if allowed, the argument cannot succeed. As at 15 December 1995, when the later joint venture agreement was signed, the McLachlan interests did not have an “accrued right” for that agreement to preserve.
[83] This issue arises not infrequently in the law; usually when legislation is repealed while saving existing, vested or accrued rights. In that context the saving is for existing, presently exercisable rights as distinct from those which might arise in the future: Foodstuffs (Auckland) Ltd v Commerce Commission [2002] 1 NZLR 353, 361, 367, Marsal v Apong [1998] 1 WLR 674 (PC), Accolade Autohire Ltd v Aeromax Ltd [1998] 2 NZLR 15.
[84] Clause 1.3 of the later joint venture agreement plainly contemplated a distinction between rights under the earlier 1994 agreement that merged and accrued rights which survived. An accrued right is a right that has arisen, exists, has vested or been triggered. The right under the 1994 agreement was a right conditional upon the joint venture company at some time wishing to sell or dispose of the land, to be offered the opportunity to buy. The contingency had not arisen at the time the later agreement was executed. There was no accrued right. It was submitted that the execution of the later joint venture agreement which encompassed the lease with a new, and different, right of first refusal, triggered the right in the earlier agreement. We cannot accept that. The very document that extinguished the conditional right cannot be said to have at the same time satisfied the condition. But in any event, the granting of a lease with a postponed right of purchase cannot amount to a wish to sell for the reasons already given with reference to the fourth ground of appeal.
[85] In this situation there is no point in allowing the amendment and it is refused.
The Encumbrances
[86] The receivers have cross-appealed against the Judge’s finding that the encumbrance interests they purported to sell to Contact Energy were in conflict with the rights of the trustees as lessee. The Judge held the proposed encumbrances invalid and granted a declaration to that effect. She held that the encumbrances, effectively easements in gross in favour of Contact Energy intended to encumber the leasehold interest of the trustees, derogated from the lessor’s grant and would interfere with the lessees’ right of quiet enjoyment. She rejected the argument that the encumbrances simply gave notice of the rights to which the lessees could be subject under cl 10.1 of the lease. They would give rights to a third party to which the lessees were not contractually bound.
[87] It is provided in the lease that it is not to be registered. The intention was that the encumbrances be registered against the freehold titles standing in the names of MGL and Poihipi. It is said that the objective is of registration to give notice to purchasers of the circumstances in which the powers under cl 10.1 of the lease might be exercised – i.e. at the request of Contact Energy. That pre-supposes the unlikely event that the receivers will sell (when Vector and MEL Network have covenanted not to sell except to Contact Energy) and the trustees will not exercise their right of first refusal.
[88] The proposed encumbrances purport to confer on Contact Energy rights of access to the leased land. Plainly, even if the lessors have such rights under the lease, they cannot confer those on strangers to the lease.
[89] We heard no argument upon whether, once they have no interest in the power station, the lessors could assert implied rights of entry for the purpose of determining whether to exercise rights under cl 10.1 of the lease. But assuming they could, it must detract from the lessees’ rights to grant such powers of entry to a third party. We have not been convinced the judge erred in her conclusion.
[90] Doubtless recognising this as a fall-back position, Mr Dale submitted that, instead of declaring the encumbrances wholly invalid, the Judge should have confined the declaration to only those clauses derogating from the lessees’ interests by granting rights of access. We do not consider it was for the Judge to consider whether severance would be appropriate – especially in the absence of Contact Energy as a party. However, bearing in mind the powers under cl 10.1 of the lease and the acknowledgement in cl 5.4 already mentioned, we have little doubt that once the rights of the parties have been clarified in this litigation, workable arrangements between the parties should be agreed.
[91] The cross-appeal on this ground is dismissed.
Conclusion
[92] In the result we allow the appeal but only to the extent of excluding from the Power Station Site the earthing grid and set aside the finding that the trustees’ right of first refusal to purchase Lots 1 and 2 has not been triggered (which is referred for further consideration in the High Court). We allow the cross-appeal but only to the extent of including within the Power Station Site the farm access lane to the extent that it provides access to component elements of the power station.
[93] Each party has succeeded to a limited extent and accordingly we make no order as to costs.
Solicitors:
Grove Darlow & Partners, Auckland, for Respondents
1
0