ANZCO Foods Waitara Ltd v Affco New Zealand Ltd Ca181/04
[2005] NZCA 166
•23 June 2005
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IN THE COURT OF APPEAL OF NEW ZEALAND
CA181/04
BETWEENANZCO FOODS WAITARA LIMITED
First AppellantANDITOHAM NEW ZEALAND LIMITED
Second AppellantANDRIVERLANDS LIMITED
Third Appellant
ANDAFFCO NEW ZEALAND LIMITED
Respondent
Hearing:16 and 17 November 2004
Court:Anderson P, Glazebrook and William Young JJ
Counsel:W M Wilson QC, R D McInnes and C F Finlayson for Appellants
R A Dobson QC and B K Murphy for Respondent
Judgment:23 June 2005
JUDGMENT OF THE COURT
AThe appeals are allowed in relation to the direct liability of Itoham and activities of Riverlands (for the reasons recorded in [69], [78] and [112]) but otherwise dismissed.
BThe terms of the formal orders are to be settled by counsel for the parties but with leave to revert to this Court if necessary.
CLeave is also reserved to the parties to apply to this Court for orders as to costs in this Court and in the High Court.
REASONS
William Young J (dissenting in part) [1]
Glazebrook J [161]
Anderson P [296]WILLIAM YOUNG J
Table of Contents
Para No
Introduction [1]
BACKGROUND
The meat industry context [5]
The down-sizing of AFFCO [8]
Waitara [9]
The Waitara sale [11]
The dispute between AFFCO and Mr Thurston [17]
ANZCO acquires Waitara [28]
THE USES (ACTUAL AND PROPOSED) OF WAITARA TO WHICH [37]
AFFCO TAKES EXCEPTIONThe High Court judgment [39]
Overview [41]DOES THE ENCUMBRANCE DIRECTLY BIND ANZCO, ITOHAM
and Riverlands?
A brief introduction to the relevant legal issues [42]
A general comment on the issues to be determined [57]
The approach of Ronald Young J in the High Court [59]
ANZCO’s position [63]
Itoham’s position [66]
Riverlands’ position [70]
ARE THE ACTIVITIES (ACTUAL OR PROPOSED) OF ITOHAM AND
RIVERLANDS WITHIN THE ENCUMBRANCE?Itoham [79]
Riverlands’ activities [89]
CAN RIVERLANDS RELY ON THE 4 MARCH 2003 SETTLEMENT [91]
BETWEEN AFFCO AND MR THURSTON AND HIS COMPANIES
AND THE ASSOCIATED CORRESPONDENCE AND COMMUNICATIONS
DIRECT BETWEEN AFFCO AND RIVERLANDS?
OUGHT THE ENCUMBRANCE BE MODIFIED UNDER S 126G OF [113]the Property Law Act 1952?
Is enforcement of the encumbrance precluded by the
Commerce Act 1986?Legislation [123]
The relevant market [129]
The evidence at trial [130]
The Judge’s approach [132]My approach – anti-competitive effect [135]
My approach – anti-competitive purpose [138]
Result [159]
Introduction
[1] AFFCO New Zealand Ltd (“AFFCO”) is a substantial meat processing company. During the 1990s AFFCO shut down a number of its plants, including the Waitara plant which is the subject of these proceedings. When it came to sell the plants, AFFCO sought to do so on terms involving the registration of encumbrances intended to prevent their future meat industry use for terms of 20 years.
[2] The Waitara land has now been acquired by ANZCO Foods Waitara Ltd, which is a wholly-owned subsidiary of ANZCO Foods Ltd. Except where it is necessary to distinguish between these companies I will refer to both as “ANZCO”.
[3] The defendants in the High Court were ANZCO Foods Waitara Ltd, Itoham New Zealand Ltd (“Itoham”) and Riverlands Ltd (“Riverlands”). Riverlands is a wholly owned subsidiary of ANZCO Foods Ltd and Itoham is a joint venture between ANZCO Foods Ltd and a Japanese partner. They wish to use the Waitara land for the cooling, freezing and storage of meat and the production of small goods. In issue in these proceedings is whether AFFCO, relying on the encumbrance, can prevent them from doing so.
[4] In the High Court, Ronald Young J found in favour of AFFCO and ANZCO. Itoham and Riverlands now appeal.
Background
The meat industry context
[5] For many years, those on the procurement side of the meat industry have believed that there are too many meat processing plants in New Zealand (and particularly in the North Island) competing for stock to slaughter.
[6] In 1994, Weddel New Zealand Ltd went into receivership. A number of meat companies, including AFFCO, formed a consortium for the purpose of purchasing five Weddel meat processing plants and closing them down. The consortium was known as Trial Run Holdings Limited (“TRH”). TRH purchased the Weddel properties from the receivers and registered encumbrances restricting future use of the land. The object was to reduce killing capacity in the North Island and thereby assist the viability of the existing companies.
[7] TRH sought and obtained Commerce Commission approval for the implementation of this strategy: see Commerce Commission Decision 273, 2 February 1995.
The down-sizing of AFFCO
[8] In the 1990s AFFCO has closed and sold on a number of its own plants. This process began before the Weddel receivership and continued after it. In each instance, AFFCO required an encumbrance to be registered against the land which purported to restrict the use of the land (in effect to prevent use for meat processing purposes for 20 years). On my understanding of the evidence, AFFCO has done this in relation to no fewer than six properties including Waitara. The other properties are Longburn, Mamaku, Omanu, Taumarunui and Whangarei.
Waitara
[9] Waitara had been used by AFFCO as a beef processing plant. Beef was slaughtered and cut into portions. The potions were either boned and blast frozen or cooled and stored. Stock through put became increasingly limited and eventually Waitara was closed in September 1997.
[10] Before, or as part of the sale process, most of the meat processing equipment and plant was stripped out, but the cool storage complex was left in place.
The Waitara sale
[11] Mr Kevin Thurston, as trustee for a company to be formed, made offers for, and eventually purchased, the Waitara works. He had earlier purchased an AFFCO plant at Longburn and was later to acquire plants in Taumarunui and Whangarei.
[12] The Waitara agreement for sale and purchase was entered into on 31 March 1999. The sale price was $3.2 million.
[13] Restrictions on future use of the land were initially imposed pursuant to clause 19.1 of the sale contract:
The Purchaser covenants that it will not use the property or any part of it for the purpose of slaughtering, further processing, cooling or freezing of lamb, sheep, bobby calves, cattle or goats for a period of twenty (20) years from the Possession Date.
And clause 20.1 provided:
The Purchaser further agrees as a condition subsequent to this Agreement to execute and permit registration of a Memorandum of Encumbrance to secure the performance of the covenant in clause 19.1 above by the Purchaser and its successors in the title and to obtain the covenants set out in clause 19.1 and in this clause 20.1 from any person to whom the Purchaser may sell the property.
[14] At the time of the sale, the land and buildings at Waitara were being utilised by Tegel Chicken. They had also been utilised for processing other food products.
[15] The sale was settled on 26 July 1999 with the transferee being Manawatu Food & Technology Ltd (a company associated with Mr Thurston). This company executed a memorandum of encumbrance which was registered against the land on 6 August 1999. The encumbrance provides:
[T]he Encumbrancer will not use the Land, or any part of it, for the purpose of slaughtering, further processing, cooling or freezing of lamb, sheep, bobby calves, cattle or goats for a period of twenty (20) years from 19 July 1999.
[16] Manawatu Food & Technology Ltd later changed its name to Property Food & Technology Ltd (“PFT”) and subsequently transferred Waitara to another of Mr Thurston’s companies, Aotearoa Coolstores Ltd (“Aotearoa”).
The dispute between AFFCO and Mr Thurston
[17] Mr Thurston had earlier (in 1993) acquired the Longburn plant from AFFCO. As I have noted, he also acquired the AFFCO plants at Taumarunui and Whangarei.
[18] Aotearoa used both the Waitara and Whangarei properties for the blast freezing of meat. In the case of the Whangarei plant, the meat came from Richmond Ltd’s Dargaville facility. In relation to the Waitara plant, Aotearoa entered in a joint venture with Whakatu Coolstores Ltd to freeze meat which had been slaughtered and cut up at the Eltham beef processing plant operated by Riverlands.
[19] For present purposes, it is the arrangements with Riverlands which are important. These arrangements began 1999 with Whakatu blast freezing Riverlands’ meat at Waitara. But, as time went on, Riverlands wished to take control of the process and to have blast freezing and cold storage on the same site. From December 2001, Riverlands began to blast freeze and store product at Waitara. The arrangements as to this were formalised in a lease which was executed on 1 February 2002.
[20] Just before the lease was signed, Riverlands became aware of the terms of the encumbrance registered against the Waitara land. Mr Thurston apparently assured Riverlands that he had AFFCO’s consent to blast freezing at Waitara. The position as to this alleged consent is a little murky. Mr Thurston’s position was that the then chief executive of AFFCO, Mr Ross Townshend, had given him consent. After he had left AFFCO in apparently acrimonious circumstances, Mr Townshend confirmed in a letter that he had given such consent and he later said the same thing in an affidavit. Whether or not he had in fact conveyed such consent was not the subject of elaborate consideration in the trial before Ronald Young J, presumably because the parties considered that if such consent had been given, it was subsequently overtaken by the events to which I am about to refer.
[21] Proceedings were issued by AFFCO in respect of the Whangarei and Waitara plants alleging Aotearoa had breached the encumbrances. Subsequently Richmond and Riverlands were joined as parties to these proceedings.
[22] AFFCO obtained an interim injunction with respect to the Whangarei property at the end of 2002. Its attempts to obtain an injunction in relation to the Waitara plant failed essentially because the evidence then before the Court supported the Townshend waiver defence.
[23] On 4 March 2003, AFFCO and Mr Thurston entered into a deed settling this litigation and differences between them. Riverlands was not a party to this deed although it had tried unsuccessfully to convince AFFCO that it should be a party.
[24] The deed:
(a)Contained undertakings by AFFCO not to pursue claims against Riverlands and Richmond and partially waived the Waitara encumbrance to allow the cooling, freezing and storage of meat from Riverlands’ Eltham and Bulls plants. Similar arrangements for Richmond were made at Whangarei. The terms of the deed as a whole made it clear that the beneficiaries of the waiver were Mr Thurston and his companies and not Riverlands and Richmond.
(b)Provided for payments to be made by Mr Thurston, Aotearoa and PFT to AFFCO. These involved a lump sump (which was paid) and royalties based on the throughput of the Whangarei and Waitara plants and associated revenue.
(c)Conferred on AFFCO the right to terminate the partial waivers in the event that Mr Thurston, Aotearoa and PFT defaulted on payments required under the deed.
[25] Although not a party to the deed Riverlands was a necessary, if peripheral, party to the settlement process because it was a party to the proceedings which were eventually compromised by the deed. I will be referring later in this judgment, in more detail, to the correspondence and communications which passed between AFFCO and Riverlands in relation to this deed.
[26] AFFCO subsequently (on 30 March 2004) cancelled (or at least purported to cancel) the partial waivers contained in the 4 March 2003 deed. This was based on its allegation that Mr Thurston, Aotearoa and PFT had defaulted in payments required under the deed. A perusal of the correspondence suggests that AFFCO may have been influenced by the sale of the Waitara land to ANZCO. It was certainly AFFCO’s position that the partial waivers provided for in the 4 March 2003 deed could not survive a sale by Aotearoa of the Waitara land.
[27] In the High Court, ANZCO and Riverlands sought to rely directly on the terms of the March 2003 deed and there was some limited challenge (albeit not particularly detailed) to the validity of the 30 March 2004 cancellation. In this Court, ANZCO and Riverlands did not rely directly on the deed (and rightly so in my view) but rather on the surrounding correspondence and communications which occurred direct between AFFCO and Riverlands which I will be discussing later in some detail.
ANZCO acquires Waitara
[28] ANZCO owns and operates a plant at Green Island, Dunedin. It manufactures Japanese hamburgs (a coarse ground meat pattie made of beef or pork, onions, breadcrumbs and egg which is thicker than a traditional hamburger) and other beef products. As well, up until 2003, ANZCO also used this plant for cutting and boning sheep meat for export.
[29] ANZCO decided to increase its capacity to manufacture beef products by purchasing and developing another site. Given limited beef production in the South Island, ANZCO came to concentrate on the North Island in its search for a new site. Waitara, already familiar to ANZCO through its subsidiary Riverlands, was identified as potentially suitable.
[30] In January 2004, ANZCO Foods Waitara Ltd entered into a Heads of Agreement with Aotearoa to purchase the Waitara site. ANZCO was aware of the terms of the encumbrance and the Heads of Agreement was conditional on ANZCO reaching a satisfactory arrangement with AFFCO regarding the encumbrance.
[31] ANZCO prepared a deed between itself and AFFCO by which AFFCO would waive the encumbrance over the Waitara site so as to permit the cooling or freezing of meat that had been slaughtered and/or boned elsewhere and the further processing and manufacture of meat, meat-based products and other foods. Mr Graeme Harrison, the CEO of ANZCO arranged to discuss the proposed deed with Mr Talley a representative of the largest (40%) shareholder in AFFCO. The meeting took place on 8 January 2004. At the meeting, Mr Michael Talley rejected the proposed waiver.
[32] Subsequently, on 3 February 2004, Mr Harrison met Mr Sam Lewis the Chairman of AFFCO and discussed the encumbrance. Mr Lewis suggested that ANZCO should put its request in writing to Mr Tony Egan, the CEO of AFFCO. Mr Harrison did so by letter of 4 February 2004.
[33] A few days later Mr Harrison received a fax with a handwritten note from Mr Talley on a copy of Mr Harrison's original letter to the CEO. The handwritten note said:
(Without Prejudice)
Graeme as we discussed the answer is no - we are not negotiable while North Island expansion is still on your agenda.
The reference to “North Island expansion” was to plans by ANZCO to increase its stock processing capacity in the North Island.
[34] The note was followed up by a letter of 9 February 2004 from Mr Egan, as follows:
Thanks for your letter dated 4th February 2004 in relation to the Waitara Coolstore.
Our position on this issue has been made clear by discussions with Michael Talley and I understand that he has sent you a further note to that effect on 9 February 2004.
The encumbrance came at considerable cost to AFFCO and certainly prohibits the type of activity ANZCO propose.
[35] ANZCO made the Heads of Agreement with Aotearoa unconditional and a final agreement for sale and purchase was signed on 25 February 2004 with settlement 3 March 2004. The purchase price paid was $5,075,000.
[36] These proceedings were issued on 15 March 2004.
The uses (actual and proposed) of Waitara to which AFFCO takes exception
[37] Itoham intends to lease part of the Waitara property from ANZCO and to manufacture Japanese hamburgs, hamburger patties, beef jerky, salamis and weiner sausages and cool and/or freeze and store them. AFFCO maintains that all these activities are in breach of the encumbrance.
[38] In the case of Riverlands, AFFCO maintains that all current activities of Riverlands involving the use of the cooling and freezing facilities at Waitara for meat killed at Riverlands’ Eltham and Bulls plants represent a breach of the encumbrance.
The High Court judgment
[39] The proceedings were heard in the High Court in July 2004 and in a judgment delivered on 23 August 2004, Ronald Young J found in favour of AFFCO.
[40] In his judgment, Ronald Young J found that:
(a)Itoham and Riverlands are bound by the encumbrance.
(b)The proposed use of the premises by ANZCO and Itoham to manufacture “small goods” is in breach of the encumbrance.
(c)The cooling and freezing of meat from the Eltham and Bulls plants and in the course of the manufacture of small goods is in breach of the encumbrance.
(d)The purpose and/or effect of the encumbrance is not to substantially lessen market competition and accordingly defences based on the Commerce Act 1986 could not succeed.
(e)There was no waiver or estoppel nor argument based on the Contracts (Privity) Act available to ANZCO, Itoham and Riverlands.
(f)The encumbrance ought not to be modified under s 126G of the Property Law Act 1952.
Overview
[41] The arguments raised by the case are many and varied and they raise a number of largely discrete issues which must be addressed and resolved. I see those issues as most easily and conveniently dealt with under the following headings:
(a)Does the encumbrance directly bind ANZCO, Itoham and Riverlands?
(b)Are the activities (actual or proposed) of ANZCO, Riverlands and Itoham within the encumbrance?
(c)Can Riverlands rely on the 4 March 2003 settlement between AFFCO and Mr Thurston and his companies and the associated correspondence and communications direct between AFFCO and Riverlands?
(d)Ought the encumbrance be modified under s 126G of the Property Law Act 1952?
(e)Is the enforcement of the encumbrance precluded by the Commerce Act 1986?
Does the encumbrance directly bind ANZCO, Itoham and Riverlands?
A brief introduction to the relevant legal issues
[42] It is not easy to explain the somewhat dense issues which arise in relation to this part of the case without first providing a brief introduction to the underlying legal principles. I note that there is a full and scholarly discussion of the relevant area of law which appears in chapter 17 of Hinde McMorland and Sim, Land Law in New Zealand (2003), a discussion to which I am much indebted.
[43] It is elementary that a contractual promise which restricts the ability of the promisor to use land is enforceable by the promisee against that promisor. The problem which I have to address concerns the extent to which such a promise may be enforced against those who subsequently obtain an interest in the land - in other words, the extent to which the burden of the promise runs with the land.
[44] In the case of an orthodox restrictive covenant under which restrictions are imposed in respect of one area of land (the “servient tenement”) for the benefit of other land (“the dominant tenement”), the burden of the covenant runs with the servient tenement and can thus be enforced against the successors of the original covenantor. Likewise the benefit of the covenant runs with the dominant tenement and thus the covenant can be enforced by the successors of the original covenantee.
[45] Mr Dobson QC for AFFCO did not seek to argue that the “restrictive covenant” in this case attached to a dominant tenement and I think he was right to do so. Although there is a sense in which it might be thought that the encumbrance was for the benefit of AFFCO’s remaining sites which continued to operate as meat processing plants, those plants are physically well removed from Waitara and there is nothing in the encumbrance to identify any of them as being a dominant tenement associated with the “restrictive covenant”. I note that broadly similar considerations arose in Clem Smith Nominees Pty v Farrelly (1978) 20 SASR 227. As well, if AFFCO were to dispose of its existing plants and focus its efforts on new sites, it would still no doubt wish to enforce the encumbrance, a consideration which strongly suggests that it sees its rights under the encumbrance as personal rather than as attaching to the ownership of any particular plant.
[46] A restrictive covenant in respect of which there is no dominant tenement is usually called a restrictive covenant in gross. Such a covenant can be enforced as between the original parties, but it is a matter of debate whether the burden of such a covenant runs with the servient tenement. If the covenant in the encumbrance in issue here is properly to be regarded as a “restrictive covenant”, it is plainly in gross.
[47] In Staples & Co Ltd v Corby (1899) 17 NZLR 734, this Court held that the burden of a restrictive covenant in gross could run with the land.
[48] The English authorities on which this Court relied (albeit reluctantly) in upholding the validity of a restrictive covenant in gross have subsequently been held to have been wrongly decided, see Formby v Barker [1903] 2 Ch 539, London County Council v Allen [1914] 3 KB 642 and Re Union of London v Smiths Bank Ltd’s Conveyance [1933] 1 Ch 611. Australian authority has followed the later English decisions, see for instance Howie v New South Wales Lawn Tennis Ground Ltd (1956) 95 CLR 132, Pirie v Registrar General (1962) 109 CLR 619 and Clem Smith Nominees Pty v Farrelly, supra. As an authority, Staples thus became an orphan very soon after it was decided.
[49] Despite the decision in Staples providing encouragement for the use of restrictive covenants in gross, the Land Transfer Acts have never provided any obvious or direct mechanism by which restrictive covenants in gross can become registered. Accordingly, there are practical difficulties associated with the implementation of restrictive convenants in gross given the general principles of indefeasibility of title which underpin the Land Transfer Act system. The position is otherwise in relation to restrictive covenants which are associated with a dominant tenement, see what is now s 126A of the Property Law Act 1952.
[50] There are conveyancing techniques which can be deployed in lieu of a restrictive covenant in gross. Staples was a tied house case and (leaving aside competition law arguments) such trade restrictions can be implemented by the lease and lease back system. There are other mechanisms which can also be employed, see the articles by Professor Brookfield, “Restrictive Covenants In Gross” [1970] NZLJ 67 and “Possible Hazards of Memoranda of Encumbrances: A Reply” (1998) 8 Butterworths Conveyancing Bulletin 13. As the title of the latter of those two articles suggests, these include the use of memoranda of encumbrance.
[51] A memorandum of encumbrance is a mortgage and is thus registrable. Covenants in a memorandum of encumbrance (which can be akin to those provided for by a restrictive covenant) therefore become enforceable against the covenantor’s successors in title under s 104 of the Property Law Act (which I set out below). As well, the usual remedies of a mortgagee, including the power of sale, are available if such covenants are breached.
[52] The artificiality of all of this has caused some concern, see for instance Thomas “Possible Hazards of Memoranda of Encumbrance” (1997) 8 Butterworths Conveyancing Bulletin 1 and Brookfield “The Rentcharge As A Device For Binding Successors in Title To Perform Covenants” [1980] Recent Law 225. But the authorities suggest that such an encumbrance is effective to provide a mechanism for enforcement, via s 104 of the Property Law Act, of what is a de facto restrictive covenant in gross, see for instance Underwood v Bevin [1992] 3 NZLR 129. Mr Wilson QC for the appellants did not seek to challenge the conveyancing efficacy of the device and I will accordingly say no more about it.
[53] Of course, if it is possible to create an effective restrictive covenant in gross, the memorandum of encumbrance would provide a mechanism by which a convenantee could ensure that those who deal with the affected land have notice of the restrictive covenant in gross.
[54] The legislative provisions which are primarily relied on by AFFCO are ss 64, 64A and 104 of the Property Law Act 1952. They relevantly provide:
64Burden of covenants relating to land
(1) A covenant, whether express or implied under this or any other Act, relating to any land of a covenantor or capable of being bound by him by covenant shall, unless a contrary intention is expressed, be deemed to be made by the covenantor on behalf of himself and his successors in title and the persons deriving title under him or them, and, subject as aforesaid, shall have effect as if those successors and other persons were expressed.
(2) This section extends to a covenant to do some act relating to the land, notwithstanding that the subject-matter may not be in existence when the covenant is made.
(3) For the purposes of this section in connection with covenants restrictive of the user of land the expression “successors in title” shall be deemed to include the owners and occupiers for the time being of the land.
64A Covenants to run with land
(1) … [T]his section applies to every covenant, whether express or implied under this or any other Act, and whether positive or restrictive in effect, where—
(a) The covenant relates to any land of the covenantor and is intended to benefit the owner for the time being of the covenantee's land; and
(b)There is no privity of estate between the covenantor and the covenantee.
(2) Notwithstanding any rule of law or equity to the contrary, but subject to subsections (3) to (5) of this section, every covenant to which this section applies shall, unless the contrary is expressed—
(a) Be binding in equity on—
(i)Every person who acquires a fee simple estate in the land (whether from the covenantor or any of the covenantor's successors in title, and whether for valuable consideration or not, and whether by operation of law or otherwise); and
(ii)Every other person who is for the time being the occupier of the land within the meaning of section 126 of this Act; and
…
(5) Nothing in this section shall limit or affect—
(a) The duty to observe the terms of any restrictive covenant affecting any land owned by any person holding any interest in the land (other than the occupier within the meaning of section 126 of this Act); or
(b)The law relating to restrictive covenants in gross.
…
104 Purchaser personally liable to mortgagee
(1) Where a person acquires any land by conveyance or transfer subject to any mortgage, the person acquiring the land shall, unless a contrary intention appears in the mortgage, and irrespective of whether he has signed the conveyance or transfer, become personally liable to the mortgagee for the payment of all principal money and interest secured by the mortgage, and shall also become personally liable to the mortgagee for the fulfilment and observance of any other covenant or agreement contained or implied in the mortgage as if he were an original mortgagor of the land and had covenanted with the mortgagee for such payment as aforesaid and for the fulfilment and observance of such covenants and agreements as aforesaid, and the mortgagee shall have remedy directly against that person accordingly, but nothing herein shall extinguish the liability of any original mortgagor under the mortgage or the liability of any intermediate transferee of the land acquired by him subject to the mortgage aforesaid.
...
(5)For the purposes of this section the term “conveyance” does not include a lease, or a conveyance by way of security only.
(Emphasis added)
[55] As pointed out in Hinde McMorland and Sim, at [17.018], s 64 is merely an interpretative provision (or as they put it, a “word saving provision”) which does not, in itself, impose liability on parties who are down-stream of the original covenantor. Rather its effect is to make the original covenantor liable for the actions of such down-stream parties. This is an important point because Mr Dobson argued that Riverlands was directly liable to AFFCO under s 64. This argument was misconceived. The relevant effect of s 64 is merely to attribute the actions of Riverlands to upstream parties who may be directly liable to AFFCO on the covenant.
[56] Given the approach taken by Ronald Young J in his judgment, it is also necessary to set out the definition of “occupier” in s 126 of the Property Law Act:
(a) In relation to any land other than a public reserve, means the owner of the land, except that,—
(i) Where another person is in occupation of the land under a tenancy granted for a term of not less than 10 years certain or continues to be in occupation of it under such a tenancy, that other person shall be the occupier of the land for the purposes of those sections:
…
A general comment on the issues to be determined
[57] Section 104 plainly has the consequence that ANZCO Foods Waitara Ltd is bound by the encumbrance. This was not really disputed by ANZCO which instead argued that it was not relevantly using the premises in breach of the encumbrance. To be more specific, in relation to the activities of Riverlands, ANZCO maintains that it is not using the premises (save as lessor) and that the relevant user of the premises for the purposes of the encumbrance is therefore Riverlands. If Itoham proceeds with its proposed manufacturing activities, this will be pursuant to a lease as well. So according to ANZCO, the relevant user will be Itoham (as lessor) and not ANZCO as lessee. I will consider shortly whether these arguments are right.
[58] The other issues which I have to address in relation to this aspect of the case come down to whether AFFCO has direct rights against Itoham and Riverlands based on the encumbrance.
The approach of Ronald Young J in the High Court
[59] Ronald Young J was unimpressed by the argument that Itoham’s proposed actions would not result in ANZCO being in breach of the encumbrance:
[33] I have no doubt that in the context of this case ANZCO by making the property available in whatever form to Itoham knowing what Itoham proposes to do at Waitara comes within the definition of use within the Waitara encumbrance. At present, there is no lease between Itoham and ANZCO and in any event given s 119 of the Land Transfer Act any such lease would not be binding on Affco unless it consented (which it clearly does not intend to do so). I consider that ANZCO’s action by providing the property to Itoham knowing and indeed assisting in its proposal to process meat products constitutes "use" in the sense intended by the encumbrance.
[60] He likewise had no difficulty in concluding that Itoham too would be in breach of the encumbrance:
[34] While Itoham is not covered by s104 of the Property Law Act (see s104(5)) its proposed activities are covered by the encumbrance in other ways. As I have previously concluded, by allowing Itoham to breach the encumbrance on the land ANZCO is itself using the land in breach of the covenant. To conclude otherwise would be to create the absurd situation whereby such a restrictive covenant could easily be defeated by the purchaser simply allowing another to use the land in breach of the restricted covenant. Essentially ANZCO has constructed a device which it says avoids accusations against it of “use” by allowing use by a closely associated company Itoham. I note the interrelation between the various companies … . In this context Itoham is the alter-ego of ANZCO. The evidence from Mr Harrison is that ANZCO will lease the property to Itoham. This is essentially use through an agent and can in this context properly be seen as use by ANZCO.
[61] Further, he was of the view that New Zealand law recognises restrictive covenants in gross:
[35] Secondly, I reject the defendants’ proposition that s64A requires there to be a continuing dominant tenement. If correct this would, for example, prevent a developer who sells land from enforcing covenants registered against the land controlling the effects of a subdivision. …
[36] As I have observed, any lease to Itoham requires Affco’s consent. Affco has made it clear it does not intend to consent to any such proposal. In such a situation even if Itoham and ANZCO signed the lease its existence could hardly compromise the plaintiff's rights to enforce the encumbrance. … .
[62] As for Riverlands, Ronald Young J considered that its status as an “occupier” meant that it was subject to the encumbrance by virtue of s 64A(2).
ANZCO’s position
[63] In the encumbrance “the Encumbrancer” is defined as including PFT and “its successors and assigns”. This definition and ss 64 and 104 of the Property Law Act mean that ANZCO is contractually liable on the covenant (by reason of s 104) for its own actions and those of:
(a)Its successors in title and persons deriving title under it (by reason of s 64);
(b)Its successors or assigns (by virtue of the definition in the encumbrance).
Obviously there is a high degree of overlap between categories (a) and (b) and I will refer to both categories simply as “successors and assigns”.
[64] On the other hand ANZCO is not contractually liable for the actions of successors and assigns of Aotearoa. This is important because Riverlands, although closely associated with ANZCO, is the successor or assign of Aotearoa from whom it took the relevant lease rather than the successor or assign of ANZCO which merely bought the property subject to the lease. I note that the absence of a contractual claim against ANZCO would not necessarily leave AFFCO without a remedy as to the activities of Riverlands, given under its power of sale under the encumbrance, see [78] below.
[65] On this basis, ANZCO would be liable in relation to the activities of Itoham, providing such activities breach the encumbrance. On the other hand it is not liable in relation to the actions of Riverlands because Riverlands is not its successor or assign but rather the successor or assign of Aotearoa.
Itoham’s position
[66] The claim against Itoham was on quia timet basis. If it is the case that its proposed activities would breach the encumbrance (and thus be in breach of the s 104 obligations of ANZCO) it was open to Ronald Young J to grant an injunction against ANZCO to prevent such activities occurring (something which is well within the power of ANZCO).
[67] Further, if Itoham’s activities are in breach of the encumbrance then it necessarily follows, for the reasons already given, that ANZCO is in breach of the covenant. Given the encumbrance is a mortgage and that it brings into play the covenant’s conditions and powers implied in mortgages via the fourth schedule of the Property Law Act 1952, it would be open to AFFCO to prevent Itoham’s use of the premises via the mortgagee sale procedure provided for in the fourth schedule.
[68] Further, there may well be causes of action available to AFFCO against Itoham in tort (associated with inducement of breach of contract), a point not explored in argument or in the judgment below.
[69] In all those circumstances, the issue whether Itoham would have a direct liability pursuant to the encumbrance is theoretical. It is fair to say, however, for myself, I cannot see how such direct liability in contract can arise. Plainly it could not arise under s 104 (for the reasons given by Ronald Young J) and I see no other mechanism by which such direct liability might be imposed other than via a piercing of the corporate veil. But the closeness of the association between ANZCO and Itoham is not such that the latter could fairly be regarded as the alter ego of the former.
Riverlands’ position
[70] Mr Wilson maintained that s 64A is not available to AFFCO because, by its terms, that section applies only where the covenant is:
intended to benefit the owner for the time being of the covenantee’s land.
He argued that this is not the case here because the encumbrance was not expressed to be for the benefit of any land. He also challenged the subdivision example given by the Judge because in such a case the restrictive covenants are usually expressed to be in favour of all the lots which comprise the subdivision.
[71] I think there are insurmountable difficulties for AFFCO in relation to the contention that it has a direct contractual claim against Riverlands.
[72] Contrary to the approach of the Judge, s 64A is not available; this for the reason given by Mr Wilson.
[73] A memorandum of encumbrance provides a practical mechanism by which restrictive covenants in gross can be enforced against the parties who are identified by s 104. But Riverlands is not within s 104.
[74] As noted, Mr Dobson also sought to invoke s 64 but that section does not operate so as to impose liabilities on any one other than the original covenantor.
[75] There are also difficulties with Ronald Young J’s reliance on the Land Transfer Act 1952. If AFFCO did not consent to the lease to Riverlands, then it is not bound by that lease. But there is no obvious connection between AFFCO not being bound by the lease and Riverlands being subject to contractual obligations to AFFCO.
[76] On this basis, AFFCO is only entitled to relief direct against Riverlands if Staples & Co Ltd v Corby is to be followed. I am not inclined to do so; this for the following reasons:
(a)The English decisions which were followed in Staples have since been over-ruled, see [48] above.
(b)The Australian authorities follow the English decisions, see [48] above.
(c)There is no obvious reason why New Zealand law should differ from English and Australian law and indeed Staples was not based on any supposed difference between New Zealand and English law.
(d)Given the legislative mechanisms available for the enforcement of restrictive covenants, and the underlying difficulties associated with extra legislative enforcement of such covenants by reason of indefeasibility of title principles, there has been no settled conveyancing practice in New Zealand based on the supposed correctness of Staples.
(e)In that context, the relevant New Zealand legislation appears to have been predicated on the assumption that restrictive covenants in gross cannot be effected; despite the savings provision in s 67A(5)(b).
[77] It is true that the related concept of easements in gross has received statutory recognition. It might be thought that this indirectly provides some support (or legislative acceptance) of the correctness of Staples. This section, however was not passed for the purpose of bringing the law as to easements in gross into line with the law as to restrictive covenants in gross as “established” by Staples but rather to bring New Zealand property law into line with what was thought to be English law, see my judgment in Emmons Developments New Zealand Ltd v RFD Investments Ltd & Anor High Court Christchurch CP 42/01, 5 July 2002 at [26] – [32].
[78] Accordingly, I am of the view that AFFCO has no direct claim on the encumbrance against Riverlands. On the other hand, if it is the case that AFFCO did not approbate the lease to Riverlands (a point to which I will be referring later in this judgment), it would, probably be open to AFFCO to exercise a power of sale against the property. Whether this is so raises issues which were not argued and I therefore do not express a final view on the point.
Are the activities (actual or proposed) of Itoham and Riverlands within the encumbrance?
Itoham
[79] As I have noted, Itoham proposes to use the Waitara site for the manufacture of meat-based foods, Japanese hamburgs, hamburger patties, beef jerky, salamis and weiner sausages using stock slaughtered at other sites.
[80] For ease of reference, I set out again the terms of the encumbrance:
… [T]he Encumbrancer will not use the Land, or any part of it, for the purpose of slaughtering, further processing, cooling or freezing of lamb, sheep, bobby calves, cattle or goats for a period of twenty (20) years from 19 July 1999.
[81] Mr Wilson’s argument was that “further processing” in the encumbrance refers only to activities such as boning and cutting which traditionally occur between slaughter and cooling and freezing, in other words, the disassembly of stock to its component parts. Noting that the words “lamb, sheep, bobby calves, cattle or goats” refer to types of stock rather than meat, he argued that processing of stock involves boning and cutting activities rather than manufacture of meat products. He claimed that that there is a well-understood difference in the meat industry between processing of stock and processing of meat. Save in the case of beef jerky, what is to be produced by Itoham does not consist solely of beef.
[82] By way of context, Mr Wilson noted that when AFFCO owned the Waitara property, the activities which it carried out there were confined to slaughtering, boning and cutting and cooling and freezing.
[83] Mr Wilson also argued that there must be limits to the scope of the encumbrance. As a matter of commonsense, it could hardly preclude the use of the site for leather production or for the manufacture of pharmaceutical products from material which originates with sheep, cattle or goats.
[84] Mr Wilson also analysed carefully the evolution in the language used in relation to encumbrances and referred extensively to the wording of the encumbrances taken by AFFCO (and indeed TRH) in respect of other sites.
[85] He invited to construe the encumbrance restrictively and on a contra‑proferentem basis as being in effect a derogation from grant.
[86] Mr Dobson invited us to take a common sense approach to this aspect of the case. The word “processing” is of wide import and the industry evidence as a whole did not support the case advanced by Mr Wilson. He accepted that there was some indeterminacy in the underlying concepts but denied that this involved the sort of ambiguity which attracts the operation of the contra-proferentem approach to interpretation.
[87] The Judge had no hesitation in finding that the operations planned by Itoham would breach the encumbrance:
[49] … I reject the proposition that the sequence of the words or phrases defines or limits the breadth of “further processing” as the defendants claim. I do not consider that the sequence of words limits the meaning of further processing. Further processing naturally has a wide meaning. If there was a basis to limit its meaning that would need to be clear and unambiguous. If for example the claim by the defendants that the phrase further processing of stock (as distinguished from meat) did limit the meaning of further processing then the encumbrance would need to use the word “stock” to raise the argument. Using the words “lamb, sheep, bobby calves, cattle or goats” at the end of the encumbrance does no more than define the type of meat the restriction applies to. For example further processing of deer is not covered. It does not refer to stock any more than meat type. And some “further processing” which is not simply carcass related can occur, for example hot boning of lamb, before freezing.
Having rejected the relevance of different clauses used in relation to different sites, he went on:
[52] … [T]his wide definition fits with the background to the introduction of such encumbrances. As I have recounted, the TRH closures and subsequent closures by Affco of its plants were all designed to reduce over capacity of stock killing facilities in the North Island. It was more than just that, however. Affco wanted to ensure that no meat company could use the facilities at Waitara and other plants it was closing for anything to do with meat processing in the meat industry. The potential buyers were its competitors. It did not want to hand to them a processing plant at a discounted price. The defendant company’s interest was a good example of the very problem Affco wanted to avoid. ANZCO were direct competitors with Affco for stock for processing in the North Island. A sale of Waitara to ANZCO at a discount which allowed them to manufacture small goods would advantage ANZCO and disadvantage Affco. Affco wanted the widest possible range for the encumbrance to protect its position given it was selling Waitara and other plants at a discount price. This was the commercial background against which the encumbrance was entered into (see Yoshimoto v Canterbury Golf International Ltd [2004] 1 NZLR 1 for the proposition that words in a contract should be given their natural meaning in light of the commercial objective of the provision).
[53] I am therefore satisfied that the plain meaning of the words “further processing” covers the intended manufacture of small goods by the defendants. I consider that industry usage typically supports this view. I consider the context of the words both within the phrase and considered against other similar encumbrances support a wide meaning for the phrase. And I consider the commercial background and the reasons for the encumbrance support a broad definition of further processing. I see no reason either in context or otherwise to restrict the plain and ordinary meaning of the words “further processing”. I therefore conclude the prohibition in the encumbrance does cover what ANZCO/Itoham is proposing to manufacture at Waitara.
[88] I am of the view that the proposed activities of Itoham are within the encumbrance. On this point I agree with the approach of the Judge and the reasons he has given. I see the commercial context as favouring the AFFCO case. The ability of a meat processing company to procure to stock is plainly closely associated with its ability to place resulting product into the market. The processing/manufacturing activities proposed by Itoham are plainly relevant to the ability of ANZCO to compete with, inter alia, AFFCO in procuring stock. The manufacturing processes to be carried out are not of a different kind from those which have often enough been associated with stock processing and I simply cannot draw sensibly the distinction between “stock” and “meat” which Mr Wilson urged on us.
Riverlands’ activities
[89] The argument for Riverlands on this aspect of the case involves the contention that the prohibition on freezing should be read as confined to the freezing of meat slaughtered at the site. This is all that AFFCO did.
[90] This contention was pressed only faintly by Mr Wilson QC and it is plainly wrong. The activities of Riverlands are clearly within the terms of the encumbrance.
Can Riverlands rely on the 4 March 2003 settlement between AFFCO and Mr Thurston and his companies and the associated correspondence and communications direct between AFFCO and Riverlands?
[91] As I have already noted, AFFCO and Mr Thurston and his companies entered into a deed dated 4 March 2003 which settled the then current litigation to which they, along with Richmond and Riverlands, were parties. Riverlands (and Richmond for that matter) were not parties to this deed. Indeed AFFCO declined to negotiate with them direct (in any real sense) about the settlement and instead sought to deal primarily with Mr Thurston and his companies.
[92] As is apparent from what I have already said, Riverlands cannot rely directly on the deed of settlement. It was not a party to it and in context it is clear that those who were parties to it did not intend to confer, via the deed, contractual rights on Riverlands. Although Riverlands sought to argue to the contrary in the High Court, no similar arguments were presented to us on appeal.
[93] Nonetheless, as I have already indicated, Riverlands was still a necessary, if peripheral, party to the settlement process; this because it was a party to the proceedings which were to be eventually compromised by the deed. One of the issues (albeit very minor) which had to be addressed was how the costs of those proceedings should be dealt with.
[94] At this point it is necessary to refer to the correspondence which passed between AFFCO’s solicitors and Riverlands’s solicitors. In assessing this correspondence, the terms of the deed of settlement must be put on one side; this because Riverlands and its solicitors were not privy to the terms of that deed.
[95] On 25 February 2003 AFFCO’s solicitors wrote (by email) to Riverlands solicitors as follows:
WITHOUT PREJUDICE
The settlement proposal (which has not yet been accepted or finalised) is that the covenant at Waitara be waived insofar as it pertains to blast freezing, cooling and storing meat from Riverlands’ plants at Eltham and Bulls. Thus, there would be no impediment to your client using the premises in those terms.
[96] Riverlands’ solicitors responded, also by email on 25 February 2003:
Thanks for that. We are still awaiting instructions but could you please confirm that this will be a permanent waiver, i.e apply to all successors in title indefinitely.
[97] There was no direct response to that email but instead, on 5 March, AFFCO’s solicitors wrote to Riverlands’ solicitors:
Our client has reached agreement with the first and second defendants [Aotearoa and PFT] as consequence of which we will shortly discontinue the proceedings against all defendants.
Could we please have a letter from you confirming that Riverlands agrees not to claim costs upon discontinuance.
[98] Riverlands solicitors responded on the same day with a request for confirmation that the waiver would be permanent (ie apply to Riverlands and successors in title). There was no response and Riverlands wrote again on 11 March, seeking a reply. On the same day, AFFCO’s solicitors would appear to have sent (by fax) a discontinuance to Riverland’s solicitors but if they addressed the request for a “permanent” waiver, they must have done so unfavourably. I say this because Riverlands’ solicitors wrote (by email) again to AFFCO’s solicitors on 14 March:
Working on it. Is there any way you could persuade your guys to drop the limitation of the waiver to the existing plants? That seems to be the sticking point.
[99] This produced a response, also by email, of the same day:
No: the deal is done. It was worked out on the basis of the existing plants. Your suggestion would extend what was agreed and recast the agreement, If or when Riverlands operates another plant, no doubt Thurston may wish to approach AFFCO at that time.
[100] On 17 March 2003, Riverlands’ solicitors wrote to AFFCO’s solicitors confirming that Riverlands would not seek costs against AFFCO on the discontinuance.
[101] In deciding what effect should be given to these communications it is important also to note that in February 2003, an affidavit from the chief executive of Riverlands was filed and served and that attached to this affidavit was a copy of the deed of lease between Aotearoa and Riverlands. So the communications between AFFCO’s solicitors and Riverlands’ solicitors must have been on the basis that there was, in existence, a lease between Aotearoa and Riverlands. This was obviously known to Riverlands’ solicitors and must likewise have been known to AFFCO’s solicitors (who were of course acting not only on the settlement but also in relation to the litigation).
[102] There were also communications between the chairmen of AFFCO (Mr Lewis) and ANZCO (Mr Tonks). Mr Tonks, the chairman of ANZCO was told by Mr Lewis that the deal with Mr Thurston and his companies was subject to money being paid and later that it had been paid. Mr Lewis did not seriously challenge the evidence of Mr Tonks on this point but his position was that he was not aware at the time of the Riverlands’ lease. It is certainly possible that the two men were, to some extent, at cross-purposes as it is not necessarily the case that Mr Lewis, the chairman of AFFCO, would have been aware of the detail of what was contained in the affidavits or the minuate of the arrangements between Aotearoa and Riverlands.
[103] The Judge dealt with the discussions between Messrs Tonks and Lewis in this way:
[101] … At various times between December 2002 and March 2003 the Chairman of Affco Mr S. Lewis had discussions with Mr E J Tonks, then Chairman of Riverlands. It is common from the evidence that both Mr Tonks and Mr Lewis informally discussed issues of mutual interest between the respective companies. In these conversations Mr Lewis confirmed that the Waitara encumbrance had been waived in respect of Mr Thurston’s ability to contract with Riverlands to allow cooling and freezing of stock from Riverlands’ Eltham and Bulls plants. It is also clear, having heard both give evidence, that there was a misunderstanding between the two with respect to the discussion relating to Riverlands’ use of the Waitara site. Mr Tonks and Mr Lewis clearly discussed Riverlands continued use of the Waitara freezing facilities owned by Mr Thurston. I am satisfied that at the time of the discussions between the two Mr Lewis did not know a lease had been signed by Riverlands. He assumed the previous contractual arrangements between Aotearoa and Riverlands was in existence. Mr Lewis indicated to Mr Tonks while Thurston was in breach of the covenant Affco was prepared to negotiate with Thurston and allow, through Thurston, Riverlands’ use of the Waitara site to continue. Mr Tonks believed Mr Lewis knew about the existence of the lease and was therefore essentially giving Affco’s consent to the lease. Mr Tonks’ impression of his conversation with Mr Lewis may also have been influenced by Mr Thurston’s claim (incorrect) that Affco had consented to Riverlands’ lease.
[102] In any event Riverlands Ltd could not, indeed would not, have assumed consent by Affco to its lease arising from this casual and informal conversation between Mr Lewis and Mr Tonks.
[103] I am satisfied that all Mr Lewis did, in his conversation with Mr Tonks, was to confirm, once a settlement was reached with Mr Thurston, ANZCO could use Waitara for cooling and freezing as part of its continuing contract with Thurston. I am satisfied that Mr Tonks thought there was more to Mr Lewis' statements and he misunderstood (understandably) Affco’s position. Affco however was clear throughout that the negotiations with Thurston would give Riverlands no rights at all. There was no waiver therefore by Affco in relation to Riverlands arising from the discussions between Mr Lewis and Mr Tonks. At best, there was a misunderstanding between the two which could hardly give rise to an unequivocal waiver.
…
[104] He then discussed the 25 February 2003 email:
[106] I do not consider that this email was intended or indeed understood by Riverlands to be a waiver entitling them, independent of Thurston, to cool and freeze meat at Waitara. Riverlands were well aware at the time of the email that Affco was not prepared to involve them as a party to the negotiations over Thurston’s allegation of a waiver of the encumbrance. Affco had made it clear that the negotiations would be between Affco and Thurston and not Riverlands Ltd. The correspondence subsequent to the email of 25 February also makes it clear what Affco’s solicitors meant by the email and what Riverlands understood it to mean.
…
[108] Based on this email alone I consider it would have been clear to Riverlands what was being described was an arrangement between Thurston and Affco which would allow Riverlands to use the Waitara plant through Thurston. This would have been clear to Riverlands because the email said that this was a “settlement proposal”. Riverlands knew Thurston and Affco were attempting to settle the litigation and that Riverlands were specifically excluded from those settlement discussions. And the use of Waitara by Riverlands was to be “in those terms”, that is, within the terms of the Thurston/Affco settlement.
[105] Having referred to the subsequent communications (which I have already set out) the Judge concluded:
[113] The question raised by Riverlands’ solicitors asking Affco to confirm the waiver will apply “to our clients” illustrates that Riverlands knew it was not part of the waiver but hoped Affco might extend the waiver to include it. The reply on 14 March confirmed that no such broadening of the waiver would be given. Given this correspondence there can be no doubt there was never any clear unequivocal partial waiver given by Affco to Riverlands relating to cooling and freezing other than in the context of their use through Thurston’s ownership of Waitara.
[106] I take a different view.
[107] The Judge appears to have overlooked the undisputed fact that the Aotearoa/Riverlands lease had been disclosed to AFFCO prior to the correspondence which started on 25 February and prior to the most important of the Lewis/Tonks discussions. What Mr Lewis could fairly be taken as conveying to Mr Tonks must be construed objectively and not by reference to his subjective intentions. More importantly the correspondence between the solicitors must be assessed in light of the fact that they were both aware of the existence of the deed between Aotearoa and Riverlands.
[108] The correspondence reveals that there was a quid pro quo reached between AFFCO and Riverlands. AFFCO’s solicitors told Riverlands’s solicitors that “the covenant at Waitara” was to:
be waived insofar as it pertains to blast freezing, cooling and storing meat from Riverlands’ plants at Eltham and Bulls. Thus, there would be no impediment to your client using the premises in those terms.
Although Riverlands would have preferred a more extensive waiver, their response was, in the end, to accept what was offered and to agree to a discontinuance of the proceedings without costs.
[109] It seems to me that the Judge approached this aspect of the case very much from the viewpoint of AFFCO and in light of his knowledge of AFFCO’s intentions and the terms of the deed. So in effect he construed the 25 February email as if it read that “the covenant at Waitara” was to:
be waived insofar as it pertains to blast freezing, cooling and storing meat from Riverlands' plants at Eltham and Bulls. Thus, there would be no impediment to your client using the premises in those terms. But you will benefit from this only indirectly, via Mr Thurston and his companies. So if Mr Thurston and his companies default under the agreement or if they sell the Waitara premises, AFFCO will be entitled to insist on a cessation of the blast freezing, cooling and storage of meat at Waitara.
I simply cannot read those qualifications which I have added and emphasised into the communications actually sent by AFFCO’s solicitors.
[110] Given that AFFCO’s solicitors were well aware that there was a lease between Aotearoa and Riverlands, their email of 25 February 2003 can only sensibly be read as indicating that the result of the settlement would be “no impediment to Riverlands continuing to use the premises in terms of that lease”. This issue must be judged objectively and in light of how the communications from AFFCO and its solicitors would be viewed by someone who was not aware of the terms of the deed of settlement between Mr Thurston and his companies and AFFCO.
[111] The result was a discontinuance without costs (which probably provided at least technical consideration albeit of no particular moment) but more significantly the loss of an opportunity to resolve the situation over the lease once and for all. Further, there is the reality that within a year, the Waitara site was owned by ANZCO. In context, it seems to me that it would not be equitable to permit AFFCO to renege from the assurance conveyed, perhaps inadvertently, through its solicitors in 2003.
[112] I note that for more than a year after the March 2004 deed, AFFCO was content for Riverlands to continue to use the Waitara premises and indeed, indirectly, via the royalty arrangement in the deed, took advantage of that use. Throughout all of this, AFFCO played its cards particularly close to its chest and did not disclose to Riverlands the detail of its arrangements with Mr Thurston and his companies pursuant to the deed. As AFFCO has in effect approbated the lease, it is now far too late for it to challenge the entitlement of Riverlands to use the Waitara land pursuant to the lease providing this is confined to the “blast freezing, cooling and storing meat from Riverlands’ plants at Eltham and Bulls”.
Ought the encumbrance be modified under s 126G of the Property Law Act 1952?
[113] Section 126G of the Property Law Act 1952 provides:
126G Power for Court to modify or extinguish easements and covenants
(1) Where land is subject to an easement or a positive covenant or a restrictive covenant, a Court may from time to time, on the application of the occupier of the land, by order, modify or wholly or partially extinguish the easement or covenant upon being satisfied—
(a)That, by reason of any change since the creation of the easement or covenant—
(i)In the nature or extent of the user of the land to which the benefit of the easement or covenant is annexed or of the user of the land subject to the easement or covenant; or
(ii)In the character of the neighbourhood; or
(iii)In any other circumstances of the case that the Court considers relevant,—
the easement or covenant ought to be modified or wholly or partially extinguished; or
(b) That the continued existence of the easement or covenant in its present form would impede the reasonable user of the land subject to the easement or covenant in a different manner or to a different extent from that which could have been reasonably foreseen by the original parties at the time of the creation of the easement or covenant; or
(c) That every occupier of full age and capacity of the land to which the benefit of the easement or covenant is annexed has agreed to the easement or covenant being modified or wholly or partially extinguished, or by his or her acts or omissions may reasonably be considered to have abandoned or waived the easement or covenant wholly or in part; or
(d) That the proposed modification or extinguishment will not substantially injure the persons entitled to the benefit of the easement or covenant.
…
(3) Where any proceedings are instituted to enforce an easement or a positive covenant or a restrictive covenant, or to enforce any rights arising out of a breach of any such covenant, any person against whom the proceedings are instituted may, in those proceedings, apply to the Court for an order under this section.
…
(5) An order under this section shall, when registered in accordance with the succeeding provisions of this section, be binding on all persons, whether of full age or capacity or not, then entitled or thereafter becoming entitled to the benefit of the easement or covenant, and whether or not those persons are parties to the proceedings or have been served with notice.
(6) In the case of land under the Land Transfer Act 1952, the District Land Registrar may of his or her own motion, and on the application of any person interested in the land shall, make all necessary amendments and entries in the register book for giving effect to the order in respect of all grants, certificates of title, and other instruments affected thereby and the duplicates thereof, if and when available.
(7) In the case of other land, a memorandum of the order shall be endorsed on such of the instruments of title as the Court directs.
[114] In the High Court, ANZCO sought to invoke this section by way of alternative to arguments as to interpretation and waiver. Essentially it sought modification of the encumbrance to permit the actual activities of Riverlands and the proposed activities of Itoham.
[115] Ronald Young J dealt with this aspect of the case on the assumption that there was jurisdiction to modify the encumbrance:
[135] It is common ground it is for ANZCO to satisfy the Court there are proper reasons to modify or extinguish the encumbrance. (See Waikau Bay Reserves Ltd v Jamieson (HC Auckland, CP 1981/87, 12 February 1990, Gault J).
[136] And Brookers Land Law at p9.19.01(3) suggests three useful principles which I adopt in this case.
(i) The Act is not designed to enable an owner of a property to get a benefit by being freed from the restrictions imposed on the property by a covenant merely because it would make it more enjoyable or convenient for his/her private purposes.
(ii) The length of time between the imposition of the covenant and the application for its modification is a relevant factor to be taken into account.
(iii) The Court should not exercise its discretion to permit contractual obligations undertaken in the recent past from being swept aside unless there are shown very strong grounds for doing so.
[137] I can resolve the defendants' counter-claim here quite simply.
[138] I have found that the encumbrance registered against the land prohibits what the defendants propose to do on the property. As to the cooling and freezing I have found the plaintiff did not partially waive the encumbrance as far as Riverlands was concerned. I have found the encumbrance does not offend against the Commerce Act anti-competitive provisions. ANZCO purchased the property knowing of the existence of the encumbrance and knowing the risks it took in purchasing the property for the manufacture of small goods when Affco maintained that this was prohibited by the encumbrance.
[139] To return to the three guiding principles. This counter-claim seems to offend against all three. ANZCO’s case is that they should be free from the encumbrance because it would make it financially attractive for them. This is a restriction which is, on the face of it, for a limited time (20 years) and has only now run for five years. ANZCO bought the land knowing the content of the encumbrance and taking the commercial risks which it now asks the Court to cancel or amend. Affco sold the land at an undervalue accepting a loss to ensure the land would not be used for processing of stock. To cancel the encumbrance would clearly cause Affco economic loss. It is not the function of s126G or this Court to redefine the parties’ rights and interest s because one party to a commercial arrangement does not like the result. There are no grounds upon which a s126G order could or should be made.
[116] Mr Wilson challenged this reasoning but, as in the High Court, on arguments which were primarily alternatives to his primary interpretation and waiver contentions. These arguments relied very much on the merit (in a general sense) of those contentions.
[117] I have accepted that AFFCO is not entitled to prevent Riverlands using Waitara for blast freezing, cooling and storage of meat from its Eltham and Bulls plants. That leaves in the ring in terms of proposed modification only the question whether the covenant should be modified to allow for Itoham’s activities.
[118] I resolved the interpretation issue against ANZCO and Itoham, both on a textual analysis of the encumbrance and because I see the proposed activities of Itoham as being very much within the “mischief” to which the encumbrance was addressed. In a practical sense that tells heavily against the argument for modification, and assuming that there was jurisdiction to modify the encumbrance under s 126G I would regard the refusal by Ronald Young J to do so as well within his discretion.
[119] There is however a more fundamental problem with this aspect of the appeal.
[120] The expression “restrictive covenant” is not defined but the context in which s 126G appears (namely as part of a family of sections which includes s 126A (which deals with “orthodox” restrictive covenants) suggests that s 126G is confined in its application to “true” restrictive covenants, that is, covenants in respect of which there is a dominant tenement. This approach is consistent with s 126G(1)(a)(i), (5), (6) and (7). It does not seem very likely that s 126G was intended to confer a jurisdiction to vary contractual provisions (perhaps in a lease or a mortgage) merely because they impact on the use to which a particular site can be put.
[121] As I have already held, the encumbrance is effective on the somewhat artificial basis that it is a mortgage and the covenants within it are therefore effective against PFT’s successors in title by virtue of s 104 of the Property Law Act 1952. It is not in the nature of a true restrictive covenant. On that basis, s 126G is inapplicable.
[122] The jurisidictional issue was not raised by counsel in either this Court and or the High Court and was not addressed in the judgment of Ronald Young J.
Is enforcement of the encumbrance precluded by the Commerce Act 1986?
Legislation
[123] This aspect of the case turns on s 28 of the Commerce Act 1986 which provides:
28 Covenants substantially lessening competition prohibited
(1) No person, either on his own or on behalf of an associated person, shall-
(a) Require the giving of a covenant; or
(b) Give a covenant-
that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
(2) No person, either on his own or on behalf of an associated person, shall carry out or enforce the terms of a covenant that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
…
(4) No covenant, whether given before or after the commencement of this Act, that has the purpose, or has or is likely to have the effect of substantially lessening competition in a market is enforceable.
…
It was common ground that the encumbrance in question is a “covenant” for the purposes of s 28. Therefore there is no need to refer to the definition of “covenant”.
[124] “Substantially” is defined at s 2(1A) as follows:
2 Interpretation
(1A) In this Act (except section 47(3) and (4)) “substantial” means real or of substance.
[125] The concepts of “effect” and “likely effect” are addressed in s 2(3):
(3) Where any provision of this Act is expressed to render a provision of a contract or a covenant unenforceable if the provision of the contract or the covenant has or is likely to have a particular effect, that provision of this Act applies in relation to the provision of the contract or the covenant at any time when the provision of the contract or the covenant has or is likely to have that effect, notwithstanding that—
(a) At an earlier time the provision of the contract or the covenant did not have that effect or was not regarded as likely to have that effect; or
(b)The provision of the contract or the covenant will not or may not have that effect at a later time.
[126] “Purpose” is referred to in s 2(5) as follows:
(5) For the purposes of this Act—
(a) a provision of a contract, arrangement or understanding, or a covenant shall be deemed to have had, or to have, a particular purpose if—
(i)the provision was or is included in the contract, arrangement or understanding, or the covenant was or is required to be given, for that purpose or purposes that included or include that purpose; and
(ii) that purpose was or is a substantial purpose:
(b) a person shall be deemed to have engaged, or to engage, in conduct for a particular purpose or a particular reason if—
(i)that person engaged or engages in that conduct for that purpose or reason or for purposes or reasons that included or include that purpose or reason; and
(ii)that purpose or reason was or is a substantial purpose or reason.
[127] “Lessening” is defined in s 3(2) as:
3 Certain terms defined in relation to competition
…
(2) In this Act, unless the context otherwise requires, references to the lessening of competition include references to the hindering or preventing of competition.
[128] I refer also to s 3(6) of the Act which provides:
For the purposes of section 28 of this Act, a covenant shall be deemed to have or to be likely to have the effect of substantially lessening competition in a market if—
(a) That covenant; and
(b) Any other covenant to the benefit of which that person or an associated person (within the meaning of section 28(7) of this Act) is entitled or would be entitled if the covenant were enforceable—
taken together, have or are likely to have the effect of substantially lessening competition in that market.
The relevant market
[129] There is no issue in this case regarding how the market is to be defined. It is the market for procurement of beef for slaughtering and processing in the North Island.
The evidence at trial
[130] At trial, the Judge had the benefit of hearing industry witnesses and also from economists, Mr Davison (for ANZCO, Itoham and Riverlands) and Mr Mellsop (for AFFCO). The evidence adduced was addressed to the Waitara property. No consideration was given to the reality that AFFCO has shut down a significant number of plants all of which have been sold on terms broadly similar to those included in the sale of the Waitara property; this despite the terms of s 3(6) of the Act (which I have set out in [128] above) and the approach taken by the Commerce Commission in the TRH case (which focused on the anti‑competitive effect – and counterbalancing benefits – associated with the closure of a number of plants).
[131] The evidence in issue is discussed in detail in the judgment of Glazebrook J.
The Judge’s approach
[132] The flavour of the Judge’s approach to whether the effect of the encumbrance to lessen competition is apparent from the following passages from his judgment:
[67] It was common ground with both economists who gave evidence, Mr Davison for the defendants and Mr Mellsop for the plaintiff, that the barriers to entry in the market for freezing works were low. Thus it was said there was little or no reason, in a competition sense, to require an encumbrance to prevent use of a property as a meat processing plant and accept a lower price for a property. The “competitor” in such a market could go elsewhere and easily enter the market given the low entry barrier. This proposition therefore seems to support the plaintiff’s contention that the purpose of the encumbrance was not anti-competitive. Preventing a competitor from using the Waitara property would have no effect on competition given the generally low entry barrier and therefore would be valueless in achieving this purpose.
[69] Mr Davison’s arguments in favour of the purpose and effect of the encumbrance as being anti-competitive, revolve in the main around the proposition that without the encumbrance a competitor, he said:
… may well have been able to do so [purchase the facility] at a reduced cost relative to the plaintiff's own overhead. Indeed, I note there are references in the plaintiff's affidavits to its concern that ANZCO may have been able to acquire the property at a discount from the plaintiff's view of its value.
And further at paragraph 27 of Mr Davison’s brief he said:
If a competitor had acquired the Waitara property for use as a slaughter facility at a reduced cost relative to the plaintiff's own overhead, that lower cost structure would have given it a competitive advantage in procurement markets, for the reasons that are explained in para 14 above. Accordingly, if the plaintiff's objective in registering the encumbrance was to prevent the Waitara property from being used as a beef slaughter facility, then particularly in light of the then falling beef cattle numbers its purpose is likely also to have been to reduce competition in the market for the procurement of beef for slaughter, by preventing a competitor from obtaining a competitive advantage by means of lower entry costs and consequently overheads than those of the plaintiff.
[70] Mr Davison stressed the fact that one measure of the efficiency of an individual company was the level of fixed overheads that needed to be recovered from each stock unit. Thus, as Mr Davison’s proposition went, the capacity to reduce the level of fixed overheads that need to be recovered from each stock unit would ultimately be seen in profitability. Thus he said ANZCO’s ability to reduce the level of fixed overheads by reducing its entry cost into the Waitara plant could increase profitability and could in turn advantage the ability of ANZCO to purchase stock.
[71] I consider Mr Davison has misconstrued the facts. Affco’s concern about a competitor getting the Waitara site at a discount related not to an open market (unrestricted) sale but to a discounted sale with the encumbrance in force. ANZCO is hardly entitled to a lower cost structure arising from a reduced purchase price obtained on the basis that the encumbrance was unenforceable. Without the encumbrance the price of Waitara would no doubt have been increased to reflect the advantage to a purchaser wishing to use the facility for a slaughter and processing facility. The lower entry costs would then disappear. Mr Harrison’s thesis in part is that ANZCO was entitled to the competitive advantage of a reduced price based on the alleged mistaken belief of Affco that it could restrict, by its covenant, the use to which the land was put. Accordingly, this failure to provide a capital advantage to ANZCO does not seem to fit s 28 of the Commerce Act which is concerned with competition in the market place rather than a lost opportunity by another meat processing company.
[72] The defendants’ case was therefore in part based on the proposition that it should be able to purchase Waitara at the “reduced” price and without the encumbrance which would in turn give it a competitive advantage. This cannot be a competitive advantage it is entitled to rely upon in the context of this case. In a competition sense the proper assumption is a price for Waitara without the encumbrance which would take into account all of its advantages, for example, existing resource consents, closeness to trained labour and other relevant factors. On that basis ANZCO would not be getting a “cheap price”. And as I have observed the advantage of a lower cost structure from the Waitara purchase would disappear.
…
[82] Even if it could be said that preventing a competitor from getting hold of the Waitara site for slaughter processing had an anti-competitive purpose or effect I cannot see how it could be said to result in a substantial lessening of competition in this case given the statutory definition of “substantial”. For the lessening of competition to be real it must be more than trivial or more than of little importance or minor in the market. “Real” or of “substance” are clearly intended to be synonymous.
[133] The Judge was unimpressed by the arguments advanced by ANZCO referable to Mr Talley’s behaviour:
[68] There was evidence in February 2004, some considerable time after the imposition of the encumbrance that Mr Talley, a representative of a 40% shareholder of Affco tried to use the encumbrance for an anti-competitive purpose relating to the entry of ANZCO into the sheep slaughtering and processing market in the North Island (see paragraphs [18] and [19] of this judgment). The evidence with regard to Mr Talley does not assist the defendants. Mr Talley was not involved with the company in 1999 (when the encumbrance was signed) and ANZCO’s entry into the North Island sheep market was not known then. At best it could be alleged Mr Talley’s response to ANZCO’s note reflected Affco’s earlier purpose in 1999 when the encumbrance was registered. However, in the absence of any evidence to support this proposition I set it to one side. It is the purpose at the time the encumbrance was registered which is important.
[134] He also dismissed the contention that the purpose of the encumbrance was to substantially lessen competition:
Affco’s concern is not trying to prevent a competitor from getting an advantage from purchasing the property for a full price without the encumbrance. They do want Waitara out of the meat slaughtering processing business. They do not want to give a competitor the advantage of a cheap purchase and unencumbered rights to use the property as they wish. This would be little more than a gift by Affco to the competitor. It is hardly anti‑competitive of Affco to resist giving ANZCO this “gift”. This is the context from which I consider Mr Lewis made these comments. I am satisfied therefore that the purpose of the encumbrance was not to lessen competition in the relevant market. I am satisfied even if the purpose was to lessen competition it was not to substantially lessen competition.
[268] Examining the second of these alleged effects first, it must be remembered that what is being assessed is the effect on competition in the market and not on individual competitors – see at [242] and [248] above. In that context, ANZCO’s particular strategy for the use of the site is not relevant. In any event, as pointed out by Mr Dobson, ANZCO has not explained why it needs to use the Waitara site as against its existing sites or a new site. There does not seem to be evidence that resource consents would not be forthcoming for other sites, although obviously use of an existing site like Waitara would mean less delay in that regard. There would be the advantages of the existing buildings and plant on the Waitara site but, from the evidence of Mr Harrison, these would seem to be of limited value to ANZCO, with substantial new investment on the site being needed - see at [207] above. There is, too, the advantage of an existing workforce but the skill of that workforce presumably lies more in slaughtering than the type of further processing ANZCO intends to carry out on the site. In addition, the workforce could be utilised on any nearby site. As pointed out by Ronald Young J, the possibility of a competitive advantage for ANZCO is in any event speculative – see at [56] above.
[269] This leaves Mr Davison’s first alleged effect. In that regard, there is no doubt that using an existing site would mean, as Mr Mellsop conceded, less sunk cost risk (but with the corresponding disadvantage of older plant) and lower regulatory hurdles - see at [177] above. These would, however, only cause short term effects in what was conceded by Mr Davison to be an industry which is highly competitive with continued over capacity (despite the sale of a number of properties with encumbrances) and one which has low barriers to entry and a history of new investment - see at [164] and [169] above. As noted above at [247], short term effects in a generally competitive market are not likely to be substantial and, in my view, Ronald Young J was right to accept Mr Mellsop’s evidence that they were not in this case - see at [217] above. It is clear that competition in the market with or without the Waitara encumbrance would, after the short term, be unaffected. I note, too, that this analysis is without considering any pro-competitive effects of the encumbrance on the market - see at [249] above.
[270] I also note Mr Mellsop’s evidence that there was no evidence that the closure of Waitara in 1997 had had any impact on the market - see at [182] above. It seems to have been accepted by Mr Davison that any effects on prices in the market from the closing down of Waitara and its subsequent sale were not discernible - see at [171] above. Indeed, the sale of Waitara on terms that ensured it remained closed for meat slaughtering and processing ensured that these non-discernible effects continued. The sale with the encumbrance had no greater effect than AFFCO’s continued ownership of the plant would have had. Despite this, Mr Davison’s evidence was that there must have been some effect in that the healthy competition would have been even healthier – see at [172] above. The Commerce Act does not seek to interfere in healthy markets (except to the extent of the “per se” practices). It is the function of the market and not the Commerce Act to make healthy markets healthier. It is difficult too to see how effects that are not discernible could be other than minimal or ephemeral in competitive terms. Thus they cannot be substantial – see discussion of the term “substantial” at [239] - [240] and [245] - [246] above.
[271] As Ronald Young J noted, Mr Davison has also not explained how there could be a substantial effect on the market from the loss of Waitara, which represented such a small portion of the total market - see at [219] above. It would appear too, from the evidence of Mr Lewis, that, in any event, over half of the stock processed through the Waitara plant came from outside Taranaki - see at [193] above. If Mr Dobson’s submission is accepted that the proper counter-factual in this case is the market with and without the capacity represented by Waitara, it is clear that its loss could have had no substantial effect on competition in the total North Island market.
[272] I also consider that Ronald Young J was correct to label ANZCO’s argument on this issue circular. In my view, William Young J falls into the same trap as ANZCO with his comments at the end of [149]. If there was no encumbrance then it would be expected that any advantages (such as existing resource consents) would have been built in to the price for the property - see Mr Mellsop’s evidence on this point at [178].The price, at least at the time of the initial sale by AFFCO, would therefore have been higher. This presumably would have removed, or substantially lessened, any overhead advantage. The lower price is predicated on the existence and enforceability of the encumbrance and the Judge was correct to hold that it is not the function of the Commerce Act to force AFFCO to give a gift to ANZCO of any reduced purchase price.
[273] Looking at the case more generally, I note that the element of market structure said in Re Queensland Co-operative Milling Association Ltd: Re Defiance Holdings Ltd to be the most significant is the height of barriers to entry as it is the threat of entry of a new firm or plant which ultimately regulates competitive conduct - see at [243] above. In the case of the meat industry, the low barriers to entry point to a market structure that allows competition to flourish. The conclusion as to low barriers to entry is not just theoretical, as William Young J appears to be suggesting in his reasons [149], but is shown in a practical sense by the level of new investment in the industry, which Mr Davison accepted readily occurred - see at [169] above. See also Mr Mellsop’s evidence on new investment and expansion in the industry summarised at [57].The large number of players in the market, the necessity to ensure throughput of stock and the existence of excess capacity are also important factors in ensuring a highly competitive market – see the evidence of Mr Mellsop summarised at [176] above. In my view, it is clear that the closure of Waitara merely reduced over-capacity to some small degree. It did not create a shortage of capacity. The encumbrance merely maintained that position.
[274] In terms of market behaviour (see at [244] above), the closing of Waitara appears in fact to have had the effect of making other meat companies compete more vigorously for the procurement of stock in Taranaki and, indeed, successfully compete – see the evidence of Mr Lewis summarised at [191] above and that of Mr Murray at [201]. The existing overcapacity in the industry and the number of players in the market, together with the ability to gear up processing capacity at short notice (see the evidence of Mr Foster summarised at [204] above), meant that the extra stock from the Waitara plant was able to be absorbed easily.
[275] The conclusion must be that the encumbrance could not possibly have the effect or likely effect of substantially lessening competition in the North Island market. This is not a borderline case. Indeed, as William Young J acknowledges at [154], AFFCO’s case on absence of anti-competitive effect was formidable. Thus, in my view, the conclusion on effect answers the question of purpose in this case. I do not consider, however, that the conclusion as to purpose would be different, even if, as in Australia, purpose is taken to be AFFCO’s subjective purpose. In this case there is no “smoking gun” in the form, for example, of an internal memorandum saying that the purpose of the encumbrance was to affect competition in the North Island market or anything of that kind. It would have been most surprising if there had been, given the small size of the Waitara and the state of the market in the North Island.
[276] The conduct is not made anti-competitive by the mere fact that the encumbrance was designed to enhance AFFCO’s competitive position and, by extension, harm a rival’s position – see the discussion at [256] above. Section 28 is contravened only if the purpose of the encumbrance is to achieve a substantial lessening of competition in the market, which it is agreed is the procurement market for beef in the North Island. The statute requires the identification of the market and that the purpose be the substantial lessening of competition in that market.
[277] For the reasons given above, the encumbrance would have minimal, if any, effect on that market. AFFCO must have been aware of this, if for no other reason than that the closure of Waitara some eighteen months before its sale had had no discernible effect, apart perhaps from a negative effect on AFFCO through loss of Taranaki stock numbers. In addition, AFFCO must be taken to have been well aware of the small size of the Waitara market and the fact that stopping the use of the Waitara site could at most delay the entry of a competitor into the market. It was also fully aware of the Commerce Commission’s decision and reasoning in the TRH application which dealt with a much greater proportion of the market – see at [289] ‑ [294] below – see also the Minister’s letter quoted at [287] below.
[278] The purpose of the encumbrance, therefore, cannot logically have been substantially to lessen competition in the whole of the North Island market. See at [173] the concession made by Mr Davison in this regard and see also the evidence of Mr Mellsop at [185]– [187] and the evidence of Mr Lewis at [192] - [194] above. I am unable to attribute to AFFCO a purpose (end in view), whether subjectively or objectively, which it must have been perfectly well aware it could not achieve. In my view, the approach taken in William Young J’s judgment would have the effect of making s 28 a per se offence like exclusionary arrangements (s 29) or price fixing (s 30). His approach would mean that a supermarket complex could not sell off (with presumably a consequential price adjustment) excess adjoining land with a covenant that it cannot be used for another supermarket without having a purpose of substantially lessening competition imputed to it. Equally, a meat company which operates only in Taranaki could not sell off one of its plants with an encumbrance to stop it being used by a competing meat company without being held to have a purpose of substantially lessening competition. This despite the fact that its only interest could be in the Taranaki area market and where the relevant geographic market is the whole of the North Island.
[279] William Young J concludes, at [140], that AFFCO’s purpose must have been to lessen competition. It must be remembered that, to fall foul of s 28, the purpose must be to lessen competition in the North Island market and to do so substantially – see at [276] above. In this case, it is difficult to see how AFFCO could rationally have thought it could lessen competition in the whole North Island market (let alone to do so substantially) by not allowing a competitor to use a site that accounted for such a small proportion of the market. It must also be remembered that the intention to harm one competitor where there are numerous competitors in a geographically wide market (and it could only ever be one competitor who could have used the Waitara site) is unlikely to be relevant to the lessening of competition in the sense that the term is used in the Commerce Act – see at [248] above. Neither are short term effects relevant to an assessment of lessening of competition in a generally competitive market like the market for beef procurement in the North Island see at [247] above. The definition of competition cannot change when considering the purpose limb of s 28, even if a subjective approach is taken. The fact that, loosely speaking in a business sense, the purpose might be said to have been to lessen competition, does not mean that the purpose was to lessen competition in an economic sense in the relevant market.
[280] William Young J’s conclusion on purpose also appears to be based on the view that AFFCO must have been acting irrationally if it did not wish substantially to lessen competition in the market by creating the encumbrance ‑ see at [154] - [156] above. This appears to result partly from his view, expressed in his judgment at [139], that the focus must be on the encumbrance, which was given in 1999, and not on AFFCO’s closure of the Waitara plant in 1997. I do not consider that it is possible to separate the closure and the encumbrance in that manner. The encumbrance was clearly motivated by AFFCO’s wish to continue to receive the benefits obtained by its closure of the Waitara plant in 1997 but, at the same time, to diminish the costs of that closure by eliminating the holding costs with regard to the property. In any event, as indicated above at [273], the encumbrance had no greater effect on the market than AFFCO’s continued ownership of the plant would have had. Whether AFFCO continued to own the plant or whether it was sold with the encumbrance, the Waitara plant was not available to a competitor. Looked at in this narrow manner, the encumbrance can logically have had no extra effect on the market.
[281] That said, there is no doubt, as William Young J says at [140], that, if the encumbrance is looked at on its own, then the purpose of AFFCO must have been to stop a competitor using the Waitara site and thereby to delay the entry of a competitor into the market. The delay would occur because of the necessity to find another site, to obtain resource management consent in relation to that site and to replicate such buildings as were on the Waitara site. There is also no doubt that AFFCO accepted what it considered to be a lower than market price for the property in order to secure that result. It goes without saying that AFFCO must have considered that the encumbrance gave it a competitive advantage at least equal to the amount by which the market price exceeded the price actually received for the property – from Mr Lewis’ evidence the price would have been something in excess of $800,000 higher - see at [190] above.
[282] AFFCO would, however, have been acting perfectly rationally if the benefit from the encumbrance was expected to be (even) $1 more than the loss in sale price. Even if we assume the loss in sale price was some $2.3m (the difference between the book value and the sale price), which seems an unlikely figure given the Larmer valuation, such a sum is hardly substantial in the context of the market for beef in the North Island (and it is the whole market which must be considered). There is no need to attribute to AFFCO any purpose greater than this, as William Young J does at [154] – [155] and no logic in doing so when AFFCO would clearly have known any greater effect on the market to be impossible.
[283] I accept that there were also costs in shutting down the plant at Waitara – see at [189] above. AFFCO must thus also have considered that the advantages to it of closing Waitara exceeded those costs as well. It is clear that AFFCO’s aim in closing and selling Waitara was to remove a low performing plant and to increase the throughput and thus the efficiency of its other plants. This strategy is to some degree dependent on not losing the stock numbers previously channeled through Waitara, although the removal of the costs associated with running Waitara, including the holding costs, would presumably also have provided a financial benefit to AFFCO.
[284] The evidence was that AFFCO continued to compete for stock from Taranaki after the closure of Waitara, although perhaps not as successfully as it would have hoped. Given the vigorous competition from other players in the market and the loyalty of Taranaki farmers to local businesses (see the evidence of Mr Murray at [200]), it must be assumed that AFFCO’s stock losses would have been even greater had another company been able to set up using the Waitara assets. It is thus perfectly rational, in terms of such a strategy, to prevent that happening. The concern of AFFCO must, however, have been on procurement of stock simpliciter. AFFCO’s purpose, contrary to what William Young J asserts in [155], cannot have been to affect the price it would pay for stock. It was agreed by both economists that the closure of Waitara some 18 months earlier had had no discernible effect on the price paid for stock. It is difficult to see why AFFCO would have thought that this would change.
[285] In business terms, it made perfect sense for AFFCO to try to delay the opening of a plant in Waitara in order to continue to secure for itself the Waitara stock. In doing this it clearly intended to affect the market for the procurement of stock in Taranaki (no doubt substantially) and to deprive another company of the ability to use the Waitara site to compete for that stock. However, it is the whole market - rather than the effects on small parts of that market or on individual players in that market - that is important in this context. I accept Mr Dobson’s submission (recorded at [233] above) that the points agreed to by Mr Ralph and Mr Murray in cross-examination reflect only micro effects between ANZCO and AFFCO, and not competition in the market as a whole. If AFFCO’s purpose in requiring the encumbrance was, as a consequence, a muted purpose (see at [156] of William Young J’s judgment) then it nevertheless made sense in business terms. In an industry with very small margins (as this one is) every little bit counts.
[286] It is also noted by William Young J at [149] that he has some unease about the apparent disconnection between the analysis of economists and industry practice. In his view the industry obviously regards encumbrances such as the Waitara encumbrance as important and as affecting the market. There is nothing odd about businesses finding short term effects important, especially in an industry like the meat industry where the margins are very fine. Short term effects would not, however, usually be seen as important by economists in a generally competitive market – see at [247] above. The Commerce Act is concerned with the economic view of competition and not with a business or an industry view. The Courts must judge matters accordingly.
[287] In any event, it is clear from the TRH application that the industry players (including AFFCO) involved with that application did not consider that their proposals with regard to the Weddel plants had any substantial effect on competition. Indeed, they considered that there would be an overwhelmingly positive effect. The TRH consortium argued, successfully, that the pro-competitive effects well outweighed any detriments. Indeed the then Minister agreed with the meat industry’s analysis when, on 25 September 1989, he provided a letter to the Commission pursuant to s 26 of the Commerce Act – see Appendix 2 to the TRH Commission decision. The Minister said:
For some time the New Zealand meat processing industry has been endeavouring to reduce processing capacity in the face of reducing stock numbers and excess killing capacity. The Government understands proposals to further rationalise processing facilities are the subject of applications under Part V of the Commerce Act 1986 that are either currently before the Commission or are likely to be submitted to the Commission in the near future. The meat processing industry is New Zealand’s largest export earner, a significant employer and is of strategic importance to the New Zealand economy.
The Government supports the rationalisation process which it believes provides the opportunity for maintaining a viable productive base for future expansion, for improved performance in relation to international markets, as well as ensuring there is adequate competition for stock now and in the longer term. Rationalisation also provides an opportunity for greater producer ownership of processing facilities, and for improved producer benefits as a result.
In view of the above it is part of the economic policy of the Government to encourage the rapid rationalisation of the New Zealand meat processing industry, so as to enhance the export performance and international competitiveness of the New Zealand meat industry. The Government believes that the public interest is best served by this process occurring as soon as possible.
This statement should not be seen as providing support for any individual application as the Government appreciates that it is not aware of all the particular circumstances which the Commerce Commission will examine in carrying out its statutory functions. However it wishes the Commission to take into account the public benefit in achieving the rationalisation of the industry as soon as this is reasonably practicable.
[288] Finally, William Young J, in his reasons, suggests that his decision would have been different as to effect had the evidence and the argument concentrated not only on the Waitara closure and encumbrance but on the encumbrances that had been required on the five other properties closed and sold by AFFCO. He also appears, at [158], to draw some support for his conclusion as to purpose from those other encumbrances. This is despite indicating, at [137], that it would not be right to deal with this aspect of the case otherwise than on the basis that the only encumbrance that is challenged is the Waitara encumbrance. In my view, it must be inappropriate to take those other encumbrances into account, even in the limited confirmatory manner indicated at [158]. There is no evidential basis to make any findings on those other encumbrances and we heard no argument on the point.
[289] Even had those other encumbrances been at issue, the result of the TRH application would suggest that, there would, in any event, have been no substantial lessening of competition. This is because of the existing over-capacity in the industry, the ability of existing firms in the market to gear up production and the low barriers to entry. The TRH application concerned an application from a consortium of meat processing companies for the authorisation of an arrangement to acquire and close the processing plants formerly operated by Weddel, and to prevent the remaining structures from being used for slaughtering and processing for at least 10 years. Prior to its closure, Weddel’s share of the North Island sheep throughput was 23% and its share of the beef throughput was 12%. Weddel had therefore been a relatively significant player in the market (unlike Waitara).
[290] The minority of the Commerce Commission took the view, that, under the legislation as it then stood, the lessening of competition must reach the “substantial” threshold contained in ss 27 and 28 of the Act for there to be a contravention of the Act which required authorisation. They considered that this threshold was not reached. Therefore there was no necessity (or, indeed, jurisdiction) to consider authorisation. If they were wrong in that conclusion they noted for the record that they would have agreed with the conclusions of the majority.
[291] The majority of the Commission took the view that, once it is established that there is or is likely to be a lessening of competition (however slight), the Commission was required to move on to the next step of balancing the public benefits and detriments arising from that lessening. The majority’s conclusion was that there would, or would likely, be a lessening of competition in the relevant markets (which were the procurement of beef and the procurement of sheep and lambs for slaughter and processing in the North Island). The lessening of competition arose principally by removing the opportunity for new entrants to enter the industry quickly and easily through the acquisition of existing plants and associated quota (see at [230] of the Commission decision).
[292] In the view of the majority of the Commission, this would have had a small effect on the number of processors competing for livestock, on the likelihood of a company similar in size to the industry leaders – AFFCO and Richmond – entering the market, and on the total capacity of the industry. The detrimental impact of those factors would, however, have been significantly greater were it not for the relatively large number of remaining players, the relatively low cost of new Greenfields entry or expansion by existing players and the fact that the Weddel plants were on average inefficient compared with the remaining plants in the industry - see at [232]. The majority concluded that the detriments arising from the lessening of competition as a result of the proposal would be minor – see at [240].
[293] They also concluded that the benefits to the public arising from the proposal would be significant. These benefits would arise from the improvement in productive efficiencies by the removal of fixed costs and from the part the proposal would play in a beneficial restructuring of the industry - see at [265]. It must follow that the conclusion of the majority was that, far from there being a substantial lessening of competition, the net effect on competition was positive. Mr Wilson’s submission, recorded at [224], that the Commerce Commission had held that the TRH proposal would adversely affect competition is therefore incorrect.
[294] AFFCO, as one of the consortium members in the TRH application, must have been well aware of the Commission’s analysis. There does not appear to be any suggestion that the state of the meat industry at the time of the High Court hearing in this case differed in any significant manner from that pertaining at the time of the TRH application. Such evidence as there was, therefore, would suggest that those other encumbrances had had no effect on competition. It was agreed that the market, despite the existence of all of the encumbrances, remained highly competitive, that there was still over capacity and that barriers to entry remained low. There is thus no reason to consider that the conclusion, either as to effect or purpose, would have been different had ANZCO challenged all the encumbrances and not just the Waitara one.
Conclusion
[295] For the above reasons, I would uphold Ronald Young J’s decision on the Commerce Act issues.
ANDERSON P
[296] At my invitation, William Young J and Glazebrook J have delivered their reasons for judgment in the order in which they appear. I concur with those reasons in all respects in which they are congruent. But on the significant point of difference between them, namely whether Ronald Young J erred in holding that the covenant did not have the purpose of substantially lessening competition in the relevant market, I am not satisfied that the High Court judgment was wrong. I therefore agree with Glazebrook J’s opinion on that issue.
[297] In selling the property subject to the covenant, AFFCO was lessening, in the sense of hindering, competition in the market, to the extent that Mr Thurston and his successors would not compete for stock which otherwise could or would be processed at Waitara. But for s 28 of the Commerce Act to be breached, the lessening of competition which was purposed had to be substantial. The epithet is not absolute but relative to the market under consideration and in my opinion the prohibition does not contemplate influences on the market which are relatively minor or transient.
[298] Immediately before giving the covenant, Mr Thurston was entitled to establish an appropriate works at some other place and he was not prevented from doing so even after giving the covenant. And, on the evidence, the encumbered property was available to Mr Thurston at a lesser price than if it were unencumbered.
[299] What is not shown by the evidence is what it would have cost Mr Thurston or any other person to acquire elsewhere a comparable but unencumbered property. The fact that Mr Thurston bought the Waitara property subject to the encumbrance suggests that he was unwilling at that time to pay for the competitive potential of an alternative property.
[300] The following inferences and facts are relevant:
(a)Mr Thurston did not in fact intend to compete in the market by purchasing another property otherwise he would not have bought the subject property but some other asset.
(b)If Mr Thurston had wished to compete at that time, or should have wished to do so in the future, the covenant would not prevent him from doing so. The covenant only prevents him from using the Waitara property for that purpose.
(c)Before being sold, the property had not been used for some time in a manner that influenced the market in any relatively substantial way. After sale, it still did not do so.
(d)The market effect of the covenant should be evaluated in terms of the potential effect on the market upon the hypothesis of the property being unencumbered for the period and in the circumstances which would apply in acquiring a similar property and setting it up for competition.
(e)The potential effect of the property as a competing works can be gauged by its actual effect when it was operating as such without the encumbrance. The evidence indicates that the works accounted for about 2% of market purchases. But the evidence does not show that after AFFCO closed the works and before the property was sold to Mr Thurston, competition in the market was substantially lessened.
(f)On the evidence, the barriers to entry into the market are relatively low and envisage a relatively short timeframe. Although the obtaining of resource consents may take some time, the extent of delay is somewhat speculative.
[301] Those matters lead to the following conclusions, in terms of probabilities:
(a)The closure of the Waitara works did not have the effect of substantially lessening competition in the relevant market.
(b)The use of the property subject to the covenant could not therefore have had a more significant lessening effect on competition in the market.
(c)If the covenant had any lessening effect it was so relatively minor and potentially transitory as not to warrant being characterised as substantial, as that concept is elucidated by McGechan J in Commerce Commission v Port Nelson (1995) 5 NZBLC 103,762, at 103,781.
[302] There can be a prohibited purpose without it resulting in a prohibited effect because, for example, the parties to a restrictive covenant may have made a mistake about the likely effect. There is a mischief of course in the attempt, but as with states of mind, proof will normally be found in inferences rather than in direct evidence. So, of course, an anti competitive purpose may in some circumstances be plainly inferential from a proved anti competitive effect.
[303] The covenant in question could have had no other purpose than to lessen competition in the particular market; that much is obvious from its terms. But the fact that Mr Thurston and his successors would be prevented from using the Waitara property actually to compete in the market does not, of itself, imply a purpose of substantial lessening of competition. A policy or other motivated desire not to sell an asset in circumstances where it could be used to compete with even relatively minor and potentially transitory effect on the market could not be considered irrational and does not offend against the statutory prescription.
[304] Nor can a prohibited purpose be inferred from the effect of the covenant because, as Ronald Young J found and all members of this Court agree, the covenant did not have such an effect.
[305] Further, on the evidence, including that of ANZCO’s expert Mr Davison, AFFCO must have known that it could not affect the state of the market in any substantial way in terms of price procurement.
[306] The result of this analysis is as follows:
(a)There is no direct evidence to show that the parties to the covenant had the purpose in entering into it of substantially lessening competition in the relevant market; and
(b)There is no evidence from which it can be inferred, whether from the terms of the covenant, its actual effect, or otherwise, that the covenant had that proscribed purpose; and
(c)The imposition of the covenant is rationally explicable on a basis other than the proscribed purpose.
[307] It must follow that ANZCO has failed to establish that the covenant had either the purpose or effect of substantially lessening competition in the relevant market. I would accordingly uphold Ronald Young J’s conclusions on those issues. The result is as shown by the formal judgment of this Court.
Solicitors:
Crengle Shreves & Ratner, Wellington for Appellants
Bell Gully, Auckland for Respondent
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