Bartholomew v Marima Valley Farm Ltd HC Auckland CIV 2010-454-373

[2010] NZHC 1692

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-454-373

BETWEEN  FLORA BERYL BARTHOLOMEW DAVID JOHN TULLOCH DOUGLAS ROWAN

Plaintiffs

ANDMARIMA VALLEY FARM LIMITED Defendant

Hearing:         27 July 2010

Counsel:         G Paine for the Plaintiffs

P Withnall for the Defendant

Judgment:      4 August 2010

RESERVED JUDGMENT OF JOSEPH WILLIAMS J

In accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 9.00am on the 4 August 2010.

Solicitors:

G Paine, Barrister, PO Box 12-015, Palmerston North

P S J Withnall, PO Box 10-201, Wellington

BARTHOLOMEW AND ORS V MARIMA VALLEY FARM LIMITED HC WN CIV-2010-454-373  4 August

2010

[1]      The plaintiffs in this case are the trustees of the Bartholomew Tulloch Trust. By agreement for sale and purchase dated 15 April 2010, they agreed to purchase a dairy farm at Kopikopiko Road, RD1, Pahiatua.  The price was set at $2.6 million with  settlement  to  be  on  2  June  2010.    The  vendor  was  Marima  Valley  Farm Limited.   The price included both the 83 hectare farm and its associated Fonterra shares.

[2]      Because the shares do not go with the farm, but can be transferred only with the approval of Fonterra, there was a specific clause in the agreement covering that approval.   Clause 22.9 provided that the purchaser must make an application to Fonterra to supply that company with milk.  By the terms of clause 2.2 of Fonterra’s constitution, an application to supply is also deemed to be an irrevocable application to become a shareholder in proportion to the applicant’s milk production.  Once the approval was in place the shares could be transferred by the vendor.  Clause 22.9 in the agreement stated expressly that the agreement was conditional on Fonterra accepting the purchaser’s application.  It also provided that the condition was to be

satisfied on or before 29 April 2010 (being the 10th  working day after the date of

agreement).  The actual terms of the clause were as follows:

Transfer of Supply and Ongoing Supply

22.9The  purchaser  must  complete  Fonterra’s  application  for  supply (existing) for the properly and lodge it with Fonterra as soon as is reasonably possible after this agreement is signed, but

(a)       If   the   application   will  be   received   by  Fonterra  after

28th February   this   agreement   will   be   conditional   upon

Fonterra accepting the purchaser’s application for supply, and

(b)The  condition  must  be  satisfied  on  or  before  the  10th working day after the day on which this agreement is signed by all parties (“the 10th working day”).

If however, the 10th working day falls on or after the settlement date the condition must be satisfied on or before the working day before the settlement date.

[3]      On 28 April 2010 the purchasers’ solicitors wrote to the vendor’s solicitors seeking an extension to the deadline on condition 22.9.  They said:

… we trust your clients will bear with us as we make the application.  We see no difficulty in the application being approved and proceeding along the line that everything will proceed for settlement smoothly on 2 June 2010.

[4]      On 29 April 2010, the vendor’s solicitors refused the extension and indicated that if condition 22.9 was not satisfied by 5pm on that day the agreement would be at an  end.    On  the  same  day  the  purchasers’  solicitors  replied  that  they  waived condition 22.9 (it being, they said, entirely for their exclusive benefit) and viewed the contract as now unconditional.  In a later letter that day they also advised that the application to supply had been received by Fonterra.

[5]      The next day the vendor retaliated by denying that condition 22.9 was for the sole benefit of the purchaser and, as it had not been fulfilled, then formally cancelled the agreement.

[6]      Fonterra subsequently (but before 7 May 2010) communicated its approval of the purchaser’s application to supply.

The proceeding

[7]      The purchaser now applies to this court for summary judgment seeking either specific performance of the agreement or damages.   The purchaser says that the condition in clause 22.9 is for its sole benefit because it ensures that the purchaser has the necessary share transfer and supply approvals in place before paying for the farm and shares.   Without those approvals it will be far more difficult (if not impossible) for the purchasers to sell the milk they intended to produce.

[8]      The  vendor’s  primary  argument  was  that  the  purchaser  could  not  waive clause 22.9 because it was not in fact for the purchaser’s exclusive benefit.   The vendor argued that its benefit was in knowing that once clause 22.9 was satisfied, it will not be exposed to complications that might arise if, after 29 April 2010, Fonterra did not approve the transfer.

[9]      It is necessary to set out in a little more detail that part of the agreement dealing with the Fonterra shares.   This is covered in clauses 22.0 to 22.18 of the agreement.   I have already referred to clause 22.9 which is the primary focus, but other clauses in clause 22 help with understanding why clause 22.9 is drafted the way it is.

[10]     Clause 22.2 provides in part that the vendor holds 71,696 shares in Fonterra less any shares that may be required by Fonterra to be surrendered as a result of production fluctuations in the current season.   By clause 22.3 those 71,696 shares were valued at $324,065.92 being $4.52 per share.   By clause 22.4 the vendor is required to give the purchaser signed security transfer forms for the transfer of those shares as soon as the purchase price and any additional adjustments to take account of increases or decreases in shares due to the current year’s production have been paid in full.   By clause 22.8 any shares or other ‘Fonterra Instruments’ held or acquired by the vendor after settlement date are held on trust by the vendor for the purchaser without right to exercise any rights except as required by the agreement itself or in accordance with the instructions of the purchaser.

[11]     For  completeness,  I  note  clauses  8.7(2)  and  (6)  of  the  Standard  Form

Auckland District Law Society Agreement.  Subclause (2) provides:

The party or parties for whose benefit the condition has been included shall do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.

[12]     And subclause (6) provides that:

At any time before this agreement is avoided the purchaser may waive any finance condition and either party may waive any other condition which is for the sole benefit of that party.  Any waiver shall be by notice.

Applicable legal principles

[13]     The principles for summary judgments are well settled.   The plaintiff must show that the defendant has no real defence to the claim, the onus being on that

party.  The court would not normally resolve material conflicts of evidence or make assessments of credibility but there is a discretion in the court to take a robust and realistic approach where the facts warrant it.[1]If the facts are adequately ascertained, and the court can be confident that the issue turns on questions of law or interpretation, the court should be prepared to determine, on adequate argument, even difficult legal questions.[2]

[1] Krukziener v Hanover Finance Ltd [2010] NZAR 703 (CA) at [26].

[2] International Ore and Fertilizer Corporation v East Coast Fertilizer Co Ltd (1986) 1 PRNZ 69 (CA) at 76.

[14]     The issues in this case are essentially matters of contractual interpretation. Clause 8.7(6) of the agreement codifies the principle that a party may, with sufficient notice and before the agreement has been brought to an end, unilaterally waive a condition  where  it  is  for  the  sole  benefit  of  that  party.    Clause  22.9  does  not expressly state who is to benefit from it so it is necessary to construe its intended effect in light of the wider agreement and the factual matrix.   The inquiry is into whether the substance of the condition benefits only the purchaser in this case.

[15]     The leading authority is Globe Holdings Limited v Floratos a 1998 Court of

Appeal decision.[3]

[3] [1998] 3 NZLR 331.

[16]     In Globe Holdings an apartment block was sold with possession date to be “the first Friday three months after confirmation”.   There were special conditions relating to a sub-divisional consent being obtained within 60 days of acceptance, and a  requirement  that  the  vendor  make  one  unit  available  for  marketing  once  the contract became unconditional.  There was also a unilateral waiver clause similar in terms to clause 8.7(6) in this case.  Blanchard J writing for the court held that the special conditions were for the sole benefit of the purchaser, were severable and could therefore be waived without undermining the agreement.  The Judge held that the vendors’ only legitimate interest was in knowing whether the transaction would proceed or not.   When the purchaser waived the special conditions, the relevant

certainty was provided.[4]   Implicitly, the court held that if a benefit was to be found in

[4] At [339].

favour of the purchaser it had to go to the issue of certainty of completion after the

waiver.  On the court’s analysis, the vendor could not properly claim any relevant benefit in that respect.

Analysis

[17]     In this case, the purchasers declared the transaction unconditional on 29 April having waived both the requirement for Fonterra’s approval of the purchasers’ application for supply (clause 22.9(a)) and –  necessarily – the  requirement that approval be given by 29 April (clause 22.9(b)).   They did this, as can be seen, to prevent the vendor from avoiding the contract as it threatened to do in its letter of

29 April 2010.

[18]     According to Globe Holdings the only relevant interest of the vendor in this case is in knowing whether or not this transaction would be completed on 2 June as agreed.  What if Fonterra had not given its approval?  Would the purchaser – having already waived the requirement for Fonterra’s approval – have been able to argue that the failure to provide the 71,696 shares (more or less) in accordance with clause

22.2 provides a proper basis for the purchaser then refusing to settle?   In other words, without Fonterra’s approval, could the purchaser have legitimately walked away?

[19]     Clause 22.2 provides that:

The following Fonterra Instruments are included in this agreement.

…

(a)       71,696 (sic) less any shares required by Fonterra to be surrendered

…

[20]     That clause affirms that the vendor was selling and the purchaser buying the vendor’s Fonterra shares less any shares required by Fonterra to be surrendered. Ordinarily surrender of some shares would be required if the farm’s production fell below the equivalent share value (that is 71, 696 kilos of milk solids) – one share for each kilo decrease in production.  If that happened, then the clause provided further

that the value of those shares surrendered to Fonterra would be deducted from the final purchase price.

[21]   According to Fonterra’s constitution, a supplier exiting production must surrender its shares at the end of its last production season in return for the appropriate value in cash or capital notes.[5]   Although clause 22.2 was expected to be used for that value abatement calculation, its plain words do cover the more radical possibility that Fonterra may require the vendor to surrender all of its shares.  This would occur if the vendor sold the farm but Fonterra refused to accept milk from the purchaser.   Fonterra’s constitution prohibits non-producers from holding shares in the co-operative.

[5] See Fonterra Constitution clauses 5.3 and 5.6.

[22]     I am conscious that the modern approach to the interpretation of contracts does not bind the court to a strict “plain words” analysis.   That approach is best described by Lord Hoffmann in Investors Compensation Scheme Ltd v West Brunswick Building Society, where he held that:[6]

[6] [1998] 1 WLR 896 (HL) at 912-913. This approach was adopted by the New Zealand Court of

Appeal in Boat Park Ltd v Hutchison [1999] 2 NZLR 74 (CA) at 81-82.

The rule that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that  we  do  not  easily accept  that  people  have  made linguistic mistakes, particularly in formal documents.   On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233...

if detailed semantic and syntactical analysis of  words in a  commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.

[23]     I think that the plain words of clause 22.2, allowing, as I read them for the surrender of all shares, are thoroughly consistent with ‘business commonsense’.  It is obvious, of course, that both sides expected this transaction to result in the purchaser taking over the vendor’s position in Fonterra.  Clause 22 is plainly drafted with that expectation.  But clause 22.9 was designed to safeguard the purchaser’s position in that respect by giving it time to secure its relationship with Fonterra before finally committing to the deal.  It chose, with its eyes wide open, to forego that safeguard

and would have had only itself to blame if Fonterra had ultimately rejected the application.

[24]     Clause 22.8 of the agreement is an effective plan B.  It provides, as I have said, that “Fonterra instruments” held or acquired by the vendor after the settlement date are held on trust for the purchaser.   Fonterra instruments is defined in clause

22.1 to mean shares, “items” and any “bonus” payments.  Thus, any shares held by the vendors after settlement are held on trust and any cash or capital notes received on surrender of such shares are also held on trust.  There is no reason to read down either clause 22.2 or 22.8 so that they relate only to value abatement through loss of production and every reason to treat them as relating to any compulsory surrender however caused.

[25]     It follows in my view that the contract provides a process for addressing the possibility that the vendor might be prevented from transferring its Fonterra shares in accordance with the agreement because Fonterra has not given its approval.

[26]     That being so, it must be concluded that even if the vendor could not provide the Fonterra shares in accordance with clause 22.2, that was no basis upon which the purchaser would have been justified in refusing to settle on 2 June 2010 once the purchaser has itself waived the approval requirement.

[27]     It then follows that clause 22.9 relating to Fonterra’s approval for supply (and therefore share transfer) does not contain any relevant benefit for the vendor as defined by Globe Holdings, and the clause must be construed as being solely for the benefit of the purchaser.   It was therefore able to be waived in accordance with clause 8.7(6) of the agreement and was validly so waived on 29 April 2010.

[28]     This interpretation of clause 22 and clause 8.7(b) must also mean that there is no merit in the defendant’s alternative argument that the plaintiff should not be allowed to avoid the effect of clause 22.9 since that would mean it would benefit from its own breach.  The purchaser had the choice of complying with the timeframe in clause 22.9 or waiving its protection.  It opted to waive and declared that contract unconditional.  It did not breach the contract.  Nor did the vendor suffer any relevant

detriments from the choice the purchaser made.  There is no basis for a quasi-clean hands analysis on these facts.

[29]     There is therefore no defence to the claim and the purchaser will be entitled to an order for specific performance accordingly.  I assume the parties will need a reasonable time to make the necessary arrangements for stock etc.   I assume they will be able to resolve an appropriate timetable, but if they cannot, leave is reserved to make an application for further directions as necessary on 48 hours notice.

[30]     The  plaintiff  will  be  entitled  to  costs  on  a  category  2B  basis,  plus disbursements as fixed by the Registrar.

Joseph Williams J