Clearmont (Queenstown) Limited v Redwood Group Limited
[2022] NZHC 1567
•4 July 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-001006
[2022] NZHC 1567
BETWEEN CLEARMONT (QUEENSTOWN) LIMITED
First Plaintiff
QUEENSTOWN GATEWAY (5M) LIMITED
Second Plaintiff
AND
REDWOOD GROUP LIMITED
Defendant
Hearing: 11 February 2022 Counsel:
P G Skelton QC and S A Rankin for plaintiffs J W A Johnson and J R Halligan for defendant
Judgment:
4 July 2022
JUDGMENT OF KATZ J
This judgment was delivered by me on 4 July 2022 at 3:00 pm pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Harmos Horton Lusk, Auckland
Wynn Williams, Auckland
Counsel:P G Skelton QC, Bankside Chambers, Auckland S A Rankin, Bankside Chambers, Auckland
J W A Johnson, Bankside Chambers, Auckland J R Halligan, Wynn Williams, Auckland
CLEARMONT (QUEENSTOWN) LTD v REDWOOD GROUP LTD [2022] NZHC 1567 [4 July 2022]
Introduction
[1] Queenstown Gateway (5M) Limited (Gateway) is the developer of a large-scale retail, commercial and industrial development known as Five Mile in Frankton, Queenstown (the Five Mile Project). Prior to 1 June 2019, Gateway held the assets of the Five Mile Project as corporate trustee for Clearmont Queenstown Limited (Clearmont) and Victoria Street West Limited (in liquidation) (VSW). VSW is a wholly owned subsidiary of Redwood Group Limited (Redwood). VSW and Redwood are both associated with Anthony Gapes. Craig Greenwood is a director of both Clearmont and Gateway.
[2] Various disputes arose between the parties and, as a result, they became embroiled in three interrelated sets of High Court proceedings. On 31 May 2019, shortly before trial, the parties attended a mediation at which they were all represented by counsel. At about 1.00 am the following morning, 1 June 2019, they entered into a full and final settlement agreement pursuant to which Clearmont and Gateway agreed to make certain payments to Redwood and VSW, and VSW agreed to transfer its beneficial interest in the Five Mile Project to Clearmont.
[3] A dispute has since arisen as to the proper interpretation of one of the clauses in the settlement agreement. It provides that:
1.4 Tax Uplift: If [Redwood] secures a binding ruling from the Inland Revenue Department (following consultation with BDO on structure and the form of the application, and with such ruling in a form acceptable to each of [Redwood] and [Gateway], each acting reasonably) to the effect that all of the properties in the Five Mile Project are held on capital account (i.e. no tax is payable on sale of any property), such ruling obtained within 2 years of the date of this Agreement, then upon provision of that binding ruling to [Gateway], Clearmont will pay to VSW an amount equal to the sum of
$1,638,950. Such amount will be an additional amount payable for the purchase of the second beneficial interest.
[4]The parties disagree over what is required to trigger the additional payment of
$1,638,950 to VSW. Two key issues require determination:
(a)what is the proper meaning of the phrase “all of the properties in the Five Mile Project”; and
(b)what is the effective date on which “all of the properties in the Five Mile Project” are required to be held on capital account?
Relevant principles of contractual interpretation
[5] The relevant principles of contractual interpretation are set out in the Supreme Court’s decision in Bathurst Resources Ltd v L & M Coal Holdings Ltd.1 On the issue of the admissibility of extrinsic evidence for the purposes of contract interpretation, the Court stated that:2
We are satisfied that in New Zealand, the admissibility or otherwise of extrinsic evidence, and the application of any related exclusionary rules, is to be regarded as an evidential issue, to be determined in accordance with the law of evidence in light of the substantive law on contractual interpretation …
[6] The Court confirmed that, in principle, both pre-contractual negotiations and the parties' post-contractual conduct may be admissible when interpreting a contract. The Court noted that the admissibility of such evidence “is determined by the laws of evidence”.3 However, the law of evidence and the law of contractual interpretation “do not … operate independently”: the law of contractual interpretation “fundamentally shapes what is relevant, and what is therefore admissible, extrinsic evidence”..4 On that basis, the Court held that the admissibility of extrinsic evidence must be examined through the framework of the Evidence Act 2006, and in particular ss 7 and 8 which are “the touchstones for admissibility”.5 That is, the evidence must be relevant and probative,6 and the probative value of the evidence must not outweigh the risk that the evidence will have an unfairly prejudicial effect on the proceeding or will needlessly prolong the proceeding.7
1 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696. All members of the Court agreed on the approach to the admissibility of extrinsic evidence in cases of contractual interpretation (set out at [54]–[90] of the judgment of Winkelmann CJ and Ellen France J) and on the test for the implication of terms (set out at [106]–[117] of the judgment of Winkelmann CJ and Ellen France J): at [2] per Winkelmann CJ, Glazebrook, O’Regan, Ellen France and Williams JJ and [232] per Glazebrook, O’Regan and Williams JJ.
2 At [57] per Winkelmann CJ and Ellen France J.
3 At [54] per Winkelmann CJ and Ellen France J.
4 At [54]–[55] per Winkelmann CJ and Ellen France J.
5 At [59]–[65] per Winkelmann CJ and Ellen France J.
6 At [61]–[62] per Winkelmann CJ and Ellen France J.
7 At [63]–[64] per Winkelmann CJ and Ellen France J.
[7] The Court confirmed that contractual interpretation is an objective exercise: the court’s task is to determine the meaning the contract would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract.8 Pre-contractual negotiations or the parties’ post-contractual conduct may assist a court in this exercise. Evidence of uncommunicated subjective intent, however, is irrelevant under this objective approach.9 Evidence of the content of prior negotiations will therefore be inadmissible to the extent that it proves only a party’s subjective intention or belief as to the meaning of the words, or what their undeclared negotiating stance was at the time.10 However, if evidence shows what a party intended the words to mean, and that this was communicated, it may tend to show a common mutual understanding as to the meaning of the contract. Logically, however, the party who claims to have communicated their intention would have to be able to point to something on the part of the other party to bring that intention into the realm of mutual understanding.11
[8] As to the parties’ post-contractual conduct, the Court must ask itself whether the subsequent conduct tends to prove anything relevant to the objective approach to interpretation. To the extent that evidence of subsequent conduct may cross the relevance threshold (which the Supreme Court suggested will not be often) care is needed to assess the probative value of the evidence. For example, conduct that occurs after a dispute has arisen is very unlikely to be admissible, as it may well be self-serving.12
[9] On the issue of implication of terms into a contract, the Court noted that this issue only arises after the express terms of the contract have been interpreted and found not to provide for the eventuality. The initial process of interpretation, however, includes any logical or necessary inferences from the expressly agreed terms. Only if the contract does not address the eventuality through express language or necessary inferences from that language will the court move on to address whether a term should
8 At [62] per Winkelmann CJ and Ellen France J.
9 At [48] and [68] per Winkelmann CJ and Ellen France J.J
10 At [75] per Winkelmann CJ and Ellen France J.
11 At [76] per Winkelmann CJ and Ellen France J.
12 At [89]–[90] per Winkelmann CJ and Ellen France J.
be implied.13 The legal test for the implication of a term is a standard of strict necessity, a high hurdle to overcome.14
[10] Finally, while the factual matrix or context is a necessary element of interpretation, the text of the contract remains of central importance.15
Background
[11] Both Mr Greenwood, on behalf of Clearmont and Gateway, and Mr Gapes, on behalf of Redwood, filed affidavit evidence. Their evidence includes a number of references to what Mr Gapes and Mr Greenwood subjectively intended or understood cl 1.4 to mean. Their conflicting evidence on this issue is not helpful, as it does not reveal a mutual understanding as to the meaning of the clause. I therefore put the evidence describing their subjective views to one side. I will instead focus on the parts of their evidence that more generally set out the background knowledge or “factual matrix” available to the parties at the time they entered into the settlement agreement.
[12] First, however, I will briefly summarise certain tax issues relating to the Five Mile Project. As Mr Gapes and Mr Greenwood both explain in their evidence, there was uncertainty around whether tax would be payable on the sale of properties in the Five Mile Project. These uncertainties impacted the valuation of VSW’s interest, and ultimately resulted in the inclusion of cl 1.4 in the settlement agreement.
The Five Mile Project — tax issues
[13] At the outset of the parties’ joint venture in 2012 they envisaged that some of the land required for the Five Mile Project would be held long-term. Other properties, however, would need to be sold to allow Gateway to meet the loan to valuation ratios and presales required by the development’s funder, the ANZ Bank. Later, other properties also had to be sold to fund the acquisition of VSW’s beneficial interest.
13 At [113] per Winkelmann CJ and Ellen France J.
14 At [116(a)] per Winkelmann CJ and Ellen France J.
15 At [78].
[14] The triggering event for the payment due under cl 1.4 is Redwood obtaining a binding ruling from the Inland Revenue Department that all of the properties in the Five Mile Project are “held on capital account”. The term “capital account” is not defined in the settlement agreement. However, the parties accept that the term marks a distinction with property held on “revenue account”.
[15] The Income Tax Act 2007 includes a complex set of tax rules for land transactions. In general, if property is purchased with the intention of deriving rental income over time, it will be treated as a capital asset where its ultimate sale will give rise to a non-taxable capital gain or capital loss.16 On the other hand, if property is purchased with the intention of making a profit from the sale of the asset, it will be treated as “ordinary income” on revenue account and will generally be subject to a land taxing provision in the Income Tax Act. Hence, the Income Tax Act defines “revenue account property” as “property that … if disposed of for valuable consideration, would produce income for the person”.17 Income means taxable income, as distinguished from a capital gain, which is not prima facie taxable. Property “held on capital account” is generally therefore property that, if disposed of, would produce an untaxed capital gain rather than taxable income. It appears to be common ground in this case that this is the intended meaning of the phrase “capital account” in cl 1.4.
[16] The land disposal provisions of the Income Tax Act include the “land tainting rules” which are contained in sub-pt CB of the Act. These provisions include in the tax base land owned by an associated person of a land dealer, developer or builder, if it is acquired or improved at the time the dealer, developer or builder was in business, and is subsequently disposed of within 10 years of acquisition or improvement.
[17] Redwood is, and always has been, a property developer. Any party “associated” with Redwood in terms of the Income Tax Act will therefore also be
16 Income Tax Act 2007, ss CB 23 and CC 1.
17 Section YA 1 definition of “revenue account property”, para (b). See also Peter Spiller New Zealand Law Dictionary (9th ed, LexisNexis, Wellington, 2019) at 271: “Property the cost of which allows a person to claim a deduction for expenditure for income tax purposes.”
“tainted” as a developer. An associated party would therefore be required to pay tax on the disposal of a property within 10 years of its acquisition.18
The parties’ understanding of the tax issues at the time of the settlement agreement
[18] The key issue to be resolved at the mediation was the value of VSW’s beneficial interest in the Five Mile Project.
[19] The Clearmont team had prepared a valuation spreadsheet that was put up on an overhead projector for discussion purposes. This showed Clearmont’s assessment of the value of the properties as at the date of the mediation. The spreadsheet shows that in assessing the value of VSW’s beneficial interest, Clearmont started by valuing all of the properties then owned by Gateway, taking into account the costs of completing those buildings still under construction, and repayment of Gateway’s debts and funding facilities. Clearmont then deducted the tax that would be payable on an arms-length sale of the properties. Mr Greenwood explains that this was done on the basis that the winding up of the joint venture by way of a sale of the Five Mile Project to a third party was the default position, if the parties could not agree the terms upon which VSW’s beneficial interest would be purchased. The result was an assessment of the amount that each joint venture partner would receive if the joint venture project was sold to an arms-length third party as at the date of the mediation, and the proceeds distributed to the joint venture parties on the winding up of Gateway.
[20] The spreadsheet calculated the net tax effect of an immediate sale of the properties as being over $10 million. The parties had different views, however, on whether a deduction should be made for tax when assessing the value of VSW’s interest. Mr Greenwood’s recollection is that:
… at the time of the mediation, Mr Gapes believed that no tax should be deducted when assessing the value of the 24.9% interest. I doubted at the time whether it would be possible to avoid the 10-year rule unless it was somehow possible to argue that Clearmont or [Gateway] were not “associated with” Redwood or VSW. I am not, however, a tax expert and so I could not refute Mr Gapes’ claim that Clearmont was wrong to deduct tax from its assessment of value. The compromise was to include clause 1.4 in the Settlement Agreement to give Mr Gapes the opportunity to obtain a binding ruling from
18 Subpart CB. See in particular ss CB 9 (Disposal within 10 years: land dealing business) and CB 10 (Disposal within 10 years: land development of subdivision business).
the IRD that all of the properties were held on capital account (i.e., no tax is payable on the sale of any property).
[21] Mr Gapes’ evidence is that the key focus of the discussions was on the value to be put on VSW’s shareholding. There was uncertainty around whether tax would be payable on the sale of any properties in the Five Mile Project, and this impacted the value of VSW’s interest. His evidence is that he believed that if Gateway could make a tax-free capital gain, Redwood should be entitled to benefit from this via an enhanced settlement. Redwood’s submissions accept that the starting point was the value of the properties owned by Gateway, and that whether this was a pre-tax or post-tax valuation was initially a relevant consideration. However, negotiations subsequently became more simplistic. Mr Gapes does not recall “tax being discussed throughout the day” and says “[i]t wasn’t high on anyone’s agenda”. His recollection is that the parties only got around to discussing cl 1.4 at the very end of the mediation, after most of the other terms had been agreed.
[22] Whatever the precise detail of the tax discussions, and their timing, it is apparent that the parties had a different view regarding the impact of taxation on the fair value of VSW’s interest, and that cl 1.4 was included in the settlement agreement as a result of this difference.
[23] Although the 10-year rule was not discussed at the mediation, the evidence indicates that the parties had a common understanding at the time of the mediation that it was possible to avoid the “tainting” rule by holding the properties in the Five Mile Project for more than 10 years from the date of acquisition. It would not automatically follow, however, from a finding that the land was not tainted that it could be sold without incurring a tax liability. Other applicable tax provisions could potentially apply to a particular transaction, although the most significant tax risks related to the application of the tainting rules.
[24] There does not appear to have been a common understanding at the time of the mediation as to whether it might be possible to establish that Clearmont and Gateway were not associated with Redwood, such that sales of any of the properties within the 10-year period would not be subject to tax. Mr Greenwood’s position on this issue is summarised at [20] above. In short, while he doubted that Redwood would be able to
establish that Clearmont and Gateway were not associated parties, he is not a tax expert and could not refute Mr Gapes’ claim that Clearmont was wrong to deduct tax from its assessment of value.
[25] Mr Gapes’ view is that all parties must have understood that the only chance of avoiding tax on a sale was to hold the land for more than 10 years (although he does not suggest that this was specifically discussed). He asserted that this view is supported by some tax advice that BDO gave to the parties in 2014.
[26] I do not accept that the BDO advice proves the existence of such a common understanding, for the following reasons:
(a)The BDO advice was prepared in 2014 (five years prior to the mediation) at a time when the parties were negotiating with a potential investor. The proposed transaction did not proceed, nor did the proposed restructuring option referred to in the BDO advice.
(b)The BDO advice was not considered or discussed at the mediation in June 2019 and there is nothing to suggest that it was at the forefront of the parties’ minds at that time. Rather, it appears to have come to the express attention of Mr Gapes again in September 2019, when BDO referred to its previous advice when advising Mr Gapes on the draft application for a binding ruling.
(c)The overall tenor of the BDO advice appears to suggest that (in the various different scenarios discussed in the paper) Clearmont or Gateway would likely be associated persons of Redwood. The advice is complex, however, as well as being subject to a number of qualifications. It does not expressly state that there was no way to avoid the “association” rule other than to hold the land for more than 10 years.
(d)As Mr Greenwood notes in his evidence, he is not a tax expert.
(e)It would be inappropriate to reject Mr Greenwood’s evidence on this issue and, in effect, make a credibility finding against him, in circumstances where he has not been cross-examined.
[27] For the reasons outlined, I am not satisfied that the evidence establishes that there was a mutual understanding at the time of the mediation that it would not be possible for Redwood (and its tax advisers) to demonstrate that Clearmont and Gateway were not “associated with” Redwood such that tax might not be payable for a sale as at the date of the mediation (or any time prior to the expiry of the 10-year tainting period).
Commercial purpose of cl 1.4
[28] In my view the evidence, considered as a whole, supports the conclusion that cl 1.4 was included in the agreement to try and find a way to bridge the parties’ differences of view as to whether VSW’s beneficial interest should be valued on a net tax basis. Given the conflicting views of the parties on their understanding of the relevant tax issues, it is difficult to express the purpose more precisely than that.
Subsequent events
[29] With BDO’s assistance, Redwood prepared a draft application for a binding ruling and forwarded it to Clearmont and Gateway’s solicitors for comment and input. The draft application did not suggest that there was any basis for arguing that Clearmont and Gateway were not associated with Redwood. Rather, a ruling was sought on the basis that the relevant land would not be sold until 10 years or more after acquisition.
[30] Clearmont and Gateway took exception to the terms of the draft application which, in their view, were not consistent with cl 1.4. Correspondence ensued between the parties’ solicitors. In accordance with the principles of contractual interpretation I have outlined above, it is my view that that correspondence (which was sent after the dispute arose and which refers extensively to the subjective views of the parties) does not assist with the objective interpretation of cl 1.4.
[31] Clearmont and Gateway filed an originating application seeking declaratory relief on 17 September 2021. Redwood filed its notice of opposition on 1 October 2021 asserting, amongst other things, that the application was premature
and that it was “unclear at this point whether a substantive dispute has in fact arisen between the parties as to the proper interpretation and application of [cl 1.4]”.
[32] Following a change of counsel Redwood filed a proceeding seeking rectification of cl 1.4 and applied to have that proceeding joined with the current proceeding. As a hearing date for this proceeding was imminent, that application was declined.19
The correct interpretation of cl 1.4 — overview of the parties’ positions
[33]As set out above, cl 1.4 provides:
1.4 Tax Uplift: If [Redwood] secures a binding ruling from the Inland Revenue Department (following consultation with BDO on structure and the form of the application, and with such ruling in a form acceptable to each of [Redwood] and [Gateway], each acting reasonably) to the effect that all of the properties in the Five Mile Project are held on capital account (i.e. no tax is payable on sale of any property), such ruling obtained within 2 years of the date of this Agreement, then upon provision of that binding ruling to [Gateway], Clearmont will pay to VSW an amount equal to the sum of
$1,638,950. Such amount will be an additional amount payable for the purchase of the second beneficial interest.
[34] Clearmont and Gateway’s contention is that, correctly interpreted, this clause provides that if Redwood secures a binding ruling from Inland Revenue to the effect that all of the properties in the Five Mile Project were held on capital account (that is, no tax is payable on sale of any property) as at the date of the settlement agreement, Clearmont is required to pay VSW an additional sum of $1,638,950.
[35]Redwood offered two alternative interpretations of the clause:
(a)If Redwood secures a binding ruling from Inland Revenue to the effect that all of the properties in the Five Mile Project (as at settlement date) will be held on capital account (that is, no tax is payable on sale of any property) if Gateway continues to own each property for more than 10 years after the date it was acquired, then Clearmont is required to pay VSW an additional sum of $1,638,950.
19 Clearmont (Queenstown) Ltd v Redwood Group Ltd [2021] NZHC 3562.
(b)Alternatively, if Redwood secures a binding ruling from Inland Revenue to the effect that those properties within the Five Mile Project that are (or will be) held beyond the 10-year tainting period will be held on capital account (that is, no tax is payable on the sale of any such property), then Clearmont is required to pay VSW an additional sum of $1,638,950.
[36] The parties’ competing interpretations give rise to two separate, but interrelated, interpretation issues:
(a)what is the proper meaning of the phrase “all of the properties in the Five Mile Project”; and
(b)what is the effective date on which “all of the properties in the Five Mile Project” are required to be held on capital account?
Issue 1: What is the meaning of the phrase: “all of the properties in the Five Mile Project”
[37] Clause 1.4 provides for a tax uplift payment if Redwood secures a binding ruling from Inland Revenue to the effect that:
… all of the properties in the Five Mile Project are held on capital account (i.e. no tax is payable on sale of any property) …
(emphasis added.)
[38] The first issue is — what is the proper meaning of the phrase “all of the properties in the Five Mile Project”? Specifically:
(a)Does the phrase mean all of the properties that were owned by Gateway as at the date of the settlement agreement? This is Clearmont and Gateway’s contention. Redwood also accepts that this is an available interpretation, but only if the Court accepts Redwood’s argument that it is only required to obtain a binding ruling on the basis that all of the properties will be held on capital account if Gateway continues to own them for more than 10 years after the date of acquisition.
(b)Alternatively, should the phrase be construed to mean only those properties owned by Gateway that it intended to hold for more than 10 years? This is Redwood’s alternative contention.
[39] The “Five Mile Project” is a defined term in the settlement agreement. It is defined to mean “a large scale retail, commercial and industrial development known as Five Mile in Frankton, Queenstown”. The legal title to the various properties in the Five Mile Project was held by Gateway at all material times, on behalf of the joint venture parties.
[40] The ordinary meaning of “all” is “the whole amount, quantity, or extent of”.20 The ordinary and natural meaning of the phrase “all of the properties in the Five Mile Project” is quite simply that — it is all of the properties held by Gateway as part of the Five Mile Project, as at the date of the settlement agreement. This is essentially the interpretation advanced by Mr Skelton QC, for Clearmont and Gateway, who submitted that the phrase “all of the properties in the Five Mile Project” was objectively intended to refer to all of the properties owned by Gateway at the date of the settlement agreement, those properties being valued in order to determine the value of the 24.9 per cent beneficial interest that was being sold. This plain meaning interpretation is also consistent with the additional explanatory words in brackets — “i.e. no tax is payable on sale of any property”.21
[41] Mr Johnson, counsel for Redwood, accepted that an available interpretation of “all of the properties in the Five Mile Project” is that it refers to all of the Five Mile Project properties owned by Gateway as at the date of the settlement agreement, but only if the Court accepts Redwood’s argument that it is only required to obtain a binding ruling on the basis that all of the properties will be held on capital account if Gateway continues to own them for more than 10 years after the date of acquisition. In that event, Mr Johnson submitted, every property in the Five Mile Project (as at the date of settlement) would be capable of being held on capital account, regardless of whether it is sold before or after the expiry of the tainting period.
20 “All” Dictionary by Merriam-Webster <merriam-webster.com>.
21 Emphasis added.
[42] For the reasons set out at [53]–[54] below, however, I do not accept Redwood’s submissions as to the effective date on which all of the properties must be held on capital account. It is therefore necessary to focus on Redwood’s alternative submission on the meaning of the phrase “all of the properties in the Five Mile Project”, which is that it refers only to that subset of the properties within the Five Mile Project that are (or will be) held beyond the 10-year tainting period.
[43] On this limb of his argument, Mr Johnson submitted that the parties must have objectively intended that the phrase “all of the properties in the Five Mile Project” refer only to that subset of properties held beyond the 10-year tainting period. Otherwise, he submitted, cl 1.4 would be frustrated from the outset, given that it was always intended that some properties would need to be sold to fund the payments under the settlement agreement. Hence, if the clause required a ruling that every property owned by Gateway at the date of the settlement agreement was held on capital account regardless of when it was sold, then this would have made the clause pointless. It would mean that any single sale occurring within the 10-year tainting period would defeat the operation of the clause.
[44] The difficulty with this submission is that it is predicated on the Court accepting Redwood’s submission that there was a mutual understanding at the time the settlement agreement was entered into that the only way of avoiding the tax effect of the tainting provisions in the Income Tax Act would be for each relevant property to be held for more than 10 years. I have found that there was no such mutual understanding, for the reasons outlined at [24]to [27] above.
[45] There are a number of other difficulties with Redwood’s interpretation that “all of the properties in the Five Mile Project” does not mean what it says on its face, but actually means “only those properties within the Five Mile Project that are still held by Gateway at the end of 10 years.” These include that:
(a)Redwood’s interpretation is contrary to the natural and ordinary meaning of the phrase “all of the properties” and would require the Court to read additional words into cl 1.4 (“still held by Gateway at the end of 10 years”) that are not there.
(b)The 10-year tainting rule for tax purposes is assessed on the basis of individual properties and runs from the date of acquisition of the relevant property. The 10-year period will therefore vary from property to property, as the properties were acquired at different times. The settlement agreement does not, however, specify dates for the end of the relevant 10-year period applicable to each property (for the purposes of obtaining a binding ruling).
(c)Clearmont and Gateway approached the valuation of VSW’s interest by first assessing the value of all of the properties owned by Gateway at the date of the mediation. They did not exclude any land owned by Gateway from that exercise, whether on the ground that it had to be sold to meet the ANZ funding requirements, or that it had to be sold to raise money to pay the sums due under the settlement agreement.
(d)The is no evidence that the parties ever reached a common understanding or agreement as to which of the properties within the Five Mile Project were to be held for 10 or more years, or which of the properties were intended to be sold to meet the ANZ funding requirements, or to fund the settlement. Gateway’s right to sell any of the properties whenever it wishes is not restricted by the terms of the settlement agreement.
(e)As set out in Redwood’s submissions, the compensation payable ($1,638,950) was calculated to reflect the fact VSW would be compensated in advance for the value of its 24.9 per cent interest (with a consequent ability to invest that sum for its benefit), while Gateway stood to take 100 per cent of the benefits of any tax-free capital gains in the future. In this context, if “all of the properties” actually refers to only a subset of the properties, it would reasonably be expected that the parties would have attempted to identify those properties and (at the very least) provided for a variable tax uplift payment linked to the number of actual properties still held at the end of 10 years. The tax uplift payment would reasonably be expected to
be proportional to only those properties held (or likely to be held) at the end of the 10-year period.
[46] For the reasons outlined, it is my view that the correct interpretation of the phrase “all of the properties in the Five Mile Project” is the natural and ordinary meaning of that phrase, namely all of the properties in the Five Mile Project that were owned by Gateway as at the date of the settlement agreement, rather than some subset of those properties. The plain and ordinary meaning of the phrase aligns with commercial common sense. There is no need to read in additional words to make the clause workable.
Issue 2: What is the effective date on which “all of the properties in the Five Mile Project” are required to be held on capital account?
[47] Clause 1.4 does not specify a date on which “all of the properties in the Five Mile Project” are required to be held on capital account.
[48] Mr Skelton submitted that that the clause requires Redwood to obtain a binding ruling that all of the properties in the Five Mile Project are held on capital account as at the date of the settlement agreement. Mr Johnson, on the other hand, submitted that the correct interpretation is that it must obtain a binding ruling that all of the properties will be held on capital account at some future date. Specifically, it would be sufficient for Redwood to obtain a binding ruling that all of the properties will be held on capital account if Gateway continued to own each of them for more than 10 years after the date on which the relevant property was acquired.
[49] Mr Johnson’s submissions assumed, in part, that the Court would accept Redwood’s submission that there was a mutual understanding at the time of the settlement agreement that the only way to avoid paying tax on any property sales would be to show that 10 years had elapsed since the particular property was acquired. If that was the parties’ mutual understanding, he submitted, it would flout commercial common sense if the binding ruling required that the properties be able to be sold tax-free at the date of the settlement agreement, as the 10-year period would not have elapsed at that point. Such a requirement could not, therefore, be satisfied.
[50] For the reasons outlined at [24] to [27] above I have found that there was no mutual understanding at the time the settlement agreement was entered into that the only way to avoid the tainting provisions in the Income Tax Act would be to show that 10 years had elapsed since each of the properties within the Five Mile Project had been acquired. I therefore reject the submission that the parties must necessarily have been of the view that the only way that cl 1.4 could be satisfied was by assessing whether each property would be held on capital account at some time in the future, 10 years after the acquisition of the relevant property.
[51] From Clearmont and Gateway’s perspective it was possible, if unlikely, that Redwood and its tax advisers may find a way to establish that Clearmont and Gateway were not associated with Redwood. As for Redwood, Mr Gapes’ evidence was that tax “wasn’t high on anyone’s agenda” and that he does not “recall tax being discussed throughout the day”. He acknowledges, however, that the backdrop for the discussion of cl 1.4 was the tax issues facing the Five Mile Project.
[52] I have found that cl 1.4 was included in the agreement to try and find a way to bridge the parties’ differences of view as to whether VSW’s beneficial interest should be valued on a net tax basis. Against this background, cl 1.4 provided Redwood with an opportunity to take tax advice following the signing of the settlement agreement, and share in the upside if it could establish that Clearmont and Gateway were wrong to calculate the consideration payable for the VSW interest on a net tax basis.
[53] I have found that the parties had a common understanding at the time of the mediation that it was possible to avoid the “tainting” rule by holding the properties for more than 10 years from the date of acquisition.22 Given this context, a binding ruling stating this fact would largely just be confirming what the parties already understood to be the position. Further, such a binding ruling would only be of value to Clearmont and Gateway in relation to that subset of properties (if any) that it retained beyond 10 years. It is difficult to see how, objectively, such a ruling would have justified such a significant tax uplift payment. Rather, as noted at [49(e)] above, the tax uplift
22 See above at [23].
payment would reasonably be expected to be proportional to only those properties held (or likely to be held) at the end of the 10-year period.
[54] For the reasons outlined, I accept Clearmont and Gateway’s submission that cl 1.4 requires Redwood to obtain a binding ruling that all of the properties in the Five Mile Project are held on capital account as at the date of the settlement agreement, and that this interpretation arises as a matter of logical or necessary inference from the terms and context of the settlement agreement and the relevant background information. Viewed objectively, it cannot have been the intention of the parties that the binding tax ruling should relate to some unspecified future date that may vary on a property-by-property basis.
Result
[55] I declare that for the purpose of cl 1.4 of the settlement agreement any binding tax ruling obtained from Inland Revenue must be to the effect that all of the properties in the Five Mile Project (being all of the properties that were owned by Gateway as at 1 June 2019) were held on capital account (that is, no tax is payable on the sale of any property) as at the date of the settlement agreement (1 June 2019).
[56] Counsel are encouraged to endeavour to resolve the issue of costs between themselves. In the event that they are unable to do so, leave is reserved for the plaintiffs to file a costs memorandum by 25 July 2022. Any memorandum from the defendant in response is to be filed by 8 August 2022. A costs decision will then be made on the papers.
Katz J
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