Farrand Orchards Limited v Kerikeri Irrigation Company Limited
[2022] NZHC 765
•13 April 2022
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2020-488-000013 [2022] NZHC 765
BETWEEN FARRAND ORCHARDS LIMITED
First Plaintiff
KERRY ALFRED FARRAND and
KRISTIN JAYNE FARRAND, as trustees of the FARRAND FAMILY TRUST
Second Plaintiff
AND
KERIKERI IRRIGATION COMPANY LIMITED
Defendant
Hearing: 21-25 March, 29 March 2022 Appearances:
M Nicholls for Plaintiffs
J Anderson QC and J G A Day for Defendant
Judgment:
13 April 2022
JUDGMENT OF VENNING J
This judgment was delivered by me on 13 April 2022 at 11.00 am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Martin Nicholls Limited, Kerikeri
Law North, Kerikeri
Counsel: J Anderson QC, Auckland
FARRAND ORCHARDS LTD v KERIKERI IRRIGATION COMPANY LTD [2022] NZHC 765 [13 April 2022]
Introduction [1]
Parties [3]
The Laurenson Orchard [5]
The Kerikeri Irrigation Scheme and KI [13]
Supply of water to the Laurenson Orchard [16]
The dispute with the Hows as background to the September 2016 meeting
with KI [18]
KI discovers the easement issue [25]
The first installation of and subsequent removal of, the second meter (1577) [31] The second installation in December 2017 of the second meter [41] The relocation of meter 476 to its current position [48]
The plaintiffs’ claim [52]
The evidence [54]
The pleaded claim [57]
The issues [58]
The 2010 WSA [59]
The contracting parties – a preliminary issue for the plaintiffs [60] Undisclosed principal [65]
Transferred loss [87]
The 2010 WSA [106]
Implied terms [134]
The 2016 Agreement [154]
The psi and restrictor valve issue [173]
The compromise Agreement [188]
Additional costs [191]
The digger issue [193]
Loss of production [196]
Summary/result [228]
Costs [229]
Introduction
[1] Kerry Farrand and his wife, Kristin Farrand, have a number of kiwifruit orchards at Kerikeri. The orchard in issue in this case is known as the Laurenson Orchard. The Farrands carry on the business of the orchard through a company, and hold the land on which the orchard is planted in a trust. Kerikeri Irrigation Company Limited (KI) supplies water to orchardists, such as the Farrands, in the Kerikeri area.
[2] The plaintiffs in this case sue KI alleging that on three occasions between 6 October 2016 and 14 January 2019 KI breached a contract to supply water to the Laurenson Orchard and caused them subsequent production losses. They claim damages for loss of production of $401,488.00. They also seek to recover excess water
charges, costs they incurred in mitigating their loss, and an alleged overcharge relating to a digger. In total they seek $435,455.32 from the defendant.1
Parties
[3] The first plaintiff is Farrand Orchards Limited (FOL). It carries on business as a kiwifruit orchardist. Mr Farrand is its director. FOL leases land from the second plaintiffs, Kerry and Kristin Farrand as trustees of the Farrand Family Trust (FFT). The Laurenson Orchard is on land owned by the FFT which is leased to FOL. FOL operates the Laurenson Orchard as a kiwifruit orchard. FFT is the majority shareholder of FOL.
[4] KI is a co-operative company. It was established in 1990 by Kerikeri horticulturists and farmers to purchase the assets of the Kerikeri Irrigation Scheme from the New Zealand Government. The Kerikeri Irrigation Scheme had been established by the Government in the early 1980s to supply water to orchardists in Kerikeri to encourage the development of horticulture and farming in that area. Tony Corcoran is KI’s current general manager.
The Laurenson Orchard
[5] The Laurenson Orchard is on part of land originally owned by Philip Barham and John Laurenson. In the late 1970s kiwifruit was planted on the land.
[6] Mr Farrand initially became involved in kiwifruit in 1976 when he purchased a separate block of land at Kapiro Road, which is now known as the Home Block, and developed that into a kiwifruit orchard.
[7] In about 1994 Mr Farrand and his wife purchased land on Pukeko Lane from Laurenson.
[8] In 1996 FOL was incorporated and shortly thereafter the FFT was settled. Mr Farrand and his wife then gifted their interests in the land and orchards to the FFT.
1 That is the sum claimed in the amended statement of claim filed on 13 March 2022 shortly before trial. In closing Mr Nicholls calculated the plaintiffs’ claim at $448,243.05. In addition the plaintiffs still seek to recover excess water charges of $5,000 and $919.14 for the cost of a digger.
The original trustees of the FFT were Mr Farrand, his wife and Alan McLeod, their lawyer. Mr McLeod died about six years ago and has not been replaced.
[9] The legal description of the Laurenson Orchard is Lot 1 and Lot 3 on DP 174528. Although in two lots, the orchard land is held in one title. Farrand Lot 1 is to the east side of Pukeko Lane and Farrand Lot 3 is to the west side. Pukeko Lane runs northwards from Kapiro Road. Physically Pukeko Lane is a metal roadway with earth drains on the side. There are three easement strips over Pukeko Lane in favour of the Venners, the Hows, and the Williams. Each strip is 3.5 m in width. KI has easements over the Venners’ and Hows’ strips which enables it to carry water up Pukeko Lane which it does through underground pipes. It does not have an easement over the Williams’ strip.
[10] Immediately to the south of Lots 1 and 3 owned by the FFT are two lots owned by Curtis Interests described as Lot 3 DP 428938 (Curtis Lot 3) and Lot 2 DP 174528 (Curtis Lot 2).
[11] In about 1997 a land swap involving land previously owned by the Farrand and Curtis interests was carried out. As a result, Farrand Lots 1 and 3 were merged into a single title owned by FFT and Curtis Lots 2 and 3 were also merged into a single title. Following the land swap Farrand Lots 1 and 3 were separated by Pukeko Lane, as were the Curtis Lots, even though the land was held in one title in each case. At about that time easements were created which enabled the FFT to convey water over two strips of land on the boundaries of the Curtis land.
[12] Farrand Lot 3 is split into four orchard blocks (Blocks 1–4). Farrand Lot 1 is split into three separate orchard blocks (Blocks 5–7). In 2012 Mr Farrand converted block 1 of Farrand Lot 3 from green kiwifruit to G3 kiwifruit. The remaining blocks (2-7) were later converted from Hort 16a kiwifruit to G3 kiwifruit in 2015 because of the disease PSA. The grafting took place in about July/August of the relevant year. The blocks have 4.2 m row spacings and male kiwifruit vines planted in every second row. The bays are 5 m long, each bay containing two root stocks. The first root stock was planted when the orchard was initially established and the second root stock was planted in 2015.
The Kerikeri Irrigation Scheme and KI
[13] As early as 1976, the Ministry of Works and Development (MOW) published a feasibility report proposing an irrigation scheme for Kerikeri in response to the water supply constraints experienced by Kerikeri horticulturalists. The proposal was implemented and a Government sponsored scheme established. The Government funded the construction of two storage dams, 50 per cent of the reticulation costs and provided loans and subsidies to growers to encourage the orchard development.
[14] In 1982 the MOW finished construction of the Sandy’s Road Dam, which was a major part of the Kerikeri Irrigation Scheme. Orchardists such as Mr Farrand had shares in the Scheme, which were financed by a suspensory loan from the Rural Bank. Prior to the Scheme each grower and farmer had provided their own water. Once the Scheme was established existing water rights ceased and water was provided by and under the Scheme.
[15] In 1990 KI was incorporated. The assets of the Scheme, including all pipe work and the two dams were transferred to it. KI took over the supply of water to orchardists and other users. The water was supplied to users in accordance with the terms of water supply agreements (WSA) entered from time to time.
Supply of water to the Laurenson Orchard
[16] FOL irrigated the Laurenson Orchard on Farrand Lot 1 and Farrand Lot 3 using water supplied by KI to a water meter (number 476) installed on Farrand Lot 3. KI supplied water to that meter under WSAs with FFT. The operative WSA in issue is dated 1 June 2010. To get the water to Farrand Lot 1, in 1997 Mr Farrand ran a pipe under Pukeko Lane from Farrand Lot 3 to Farrand Lot 1.
[17] Neither of the plaintiffs had an easement to run the pipe across Pukeko Lane from the meter on Farrand Lot 3 to Farrand Lot 1. The Farrand Interests relied on a “gentlemen’s agreement” with the owners of the easement strips, the Venners, the Hows, and the Williams, to enable them to run the pipe under Pukeko Lane and across to Farrand Lot 1.
The dispute with the Hows as background to the September 2016 meeting with KI
[18] In early 2016 Mr Hows and Mr Farrand fell out. As a consequence, in April/ May 2016, Mr Hows ploughed up the pipe which the plaintiffs relied on to supply water from Farrand Lot 3 to Farrand Lot 1 in two places. Mr Farrand reinstated the pipe. Mr Hows removed it again.
[19] An impasse followed. A prolonged series of negotiations between the plaintiffs and the Hows involving lawyers failed to lead to any agreement. At one point the owners of the Hows’ strip offered an easement in exchange for $95,000 but the Farrand Interests were not willing to pay that much for an easement.
[20] Instead, Mr Farrand decided to ask KI to install a new water meter to supply water to Farrand Lot 1. Mr Farrand proposed that the meter be installed at the point the Hows’ strip touched the Williams’ strip. Mr Farrand relied on the “gentlemen’s agreement” he had with the Williams to run a pipe from the meter under the Williams’ strip to Lot 1.
[21] Mr Farrand went to the offices of KI and met with Mr Corcoran in mid to late September 2016. Mr Corcoran had recently (May 2016) been appointed KI’s general manager. There is a factual dispute about what occurred at that meeting. Mr Farrand says he filled out an application form to have a new, second water meter permanently connected to supply Lot 1 and that Mr Corcoran agreed a second meter would be installed within a couple of days. Mr Corcoran accepts that Mr Farrand asked for the installation of a new meter to service Farrand Lot 1 but says Mr Farrand did not fill out an application form for a new WSA. Mr Corcoran and KI say no agreement was made in relation to Mr Farrand’s request for a second meter. No WSA was ever prepared or executed.
[22] Following the meeting, KI did start a process to consider the installation of a second meter to service Lot 1 of the Laurenson Orchard directly as requested by Mr Farrand. In the course of that process, KI generated a new connection checklist and issued an invoice for a standard connection charge which FOL paid on 4 October 2016. Mr Corcoran also began a review of the relevant easements.
[23] In the meantime, Mr Farrand and his advisers continued to pursue a practical resolution with the Hows. On 28 October 2016, FOL’s then solicitor, Mr Dodds, wrote to the Hows’ solicitors and claimed that FOL had an equitable easement over Pukeko Lane. He suggested that if that was disputed, FOL could commence proceedings to have the issue resolved in Court, noting that if ultimately successful, it would be seeking damages from the Hows. Mr Dodds suggested a solution that would involve FOL installing a concrete culvert to carry the pipes at depth under Pukeko Lane at its cost and also advised that FOL was open to discuss a modest payment for the right.
[24] Unfortunately, at about the same time as the letter was sent and without waiting for the Hows’ response, Mr Farrand commenced excavating a right-of-way to install the pipes and culverts on Pukeko Lane. In the course of doing so, Mr Farrand also cut a telephone cable, affecting all the neighbours on Pukeko Lane. Mr Farrand’s foray back into Pukeko Lane was not well received. He was arrested for trespassing and the Hows rejected his lawyer’s proposal.
KI discovers the easement issue
[25] On 24 November 2016 FOL’s Mr Dodds wrote to Mr Corcoran noting that the Hows disputed FOL had any easement (legal or equitable) to convey water over Pukeko Lane and that any application to the Court to resolve that issue with the Hows would be expensive and involve delay. Mr Dodds proffered a “fix” through KI. He suggested two options. The first was for KI to install a meter on the eastern side of the lane on Farrand Lot 1 and allow access, effectively splitting the existing water take allowance from the meter on Lot 3, with FOL agreeing not to access more than seven cubic metres per hour at any one time on both Lots 1 and 3. The second was to appoint FOL as agent of KI to install, at FOL’s expense, irrigation pipes under Pukeko Lane to enable water supply from the existing meter on Lot 3 to Lot 1. The letter was apparently written on the misunderstanding that KI had an easement enabling it to carry water over the entire width of Pukeko Lane. As noted above, KI did not have an easement over the Williams’ strip.
[26] On 25 November 2016, Mr Corcoran replied and advised that KI would consider a proposal under option one. Mr Dodds then sent a schematic plan outlining
the proposed pipe layout and meter site to Mr Corcoran on 2 December 2016. When prompted on 5 December for a response, Mr Corcoran advised that he was awaiting an easement plan for Pukeko Lane from a surveyor. He noted that he needed to know that KI had an easement all the way across the lane.
[27] The proposal for the installation of a second meter on Lot 1 stalled at about this time because it became apparent to Mr Corcoran that the plaintiffs did not have an easement to enable them to carry water from the existing meter on Farrand Lot 3 across Pukeko Lane to service Lot 1 and did not have any formal right to lay pipes across the Venners’, Hows’ and Williams’ strips. Further, and more importantly for KI, while KI had an easement which enabled it to convey water up Pukeko Lane on the Venners’ and Hows’ strips, it did not have an easement over the Williams’ strip to enable it to take pipes across it to a new meter on Lot 1.
[28] Mr Corcoran did not consider KI could install a water meter or run pipes to a meter where it had no legal right of access. KI was not prepared to rely on the “gentlemen’s agreement” between the Farrands and the Williams. It required security for the installation of its water meter and associated pipe work.
[29] To advance the matter, KI instructed its solicitors to engage with the Williams’ solicitors regarding the preparation of a formal easement that would enable KI to install pipes and run water across the Williams’ strip. Although agreement in principle appeared to have been reached late in December 2016 and a draft easement was prepared and approved by Land Information New Zealand, ultimately the Williams would not agree to sign a formal easement. On 13 January 2017, the Williams’ lawyers formally confirmed the Williams had decided not to proceed with the easement in favour of KI.
[30] Despite their earlier falling out, in order to enable FOL convey water to Lot 1 during the dry summer season, on about 15 December 2016 the Hows granted FOL permission to pipe water over the top of the Hows’ strip between the hours of 12 midnight to 6.00 am. From 15 December 2016 until 30 January 2017 Mr Farrand ferried water between Farrand Lot 3 (sourced from the existing meter number 476) to
Farrand Lot 1 by trailer during the day and supplied Lot 1 between the hours of 12 midnight and 6.00 am through a pipe laid across Pukeko Lane.
The first installation of and subsequent removal of, the second meter (1577)
[31] Mr Farrand kept pressing KI to install the second water meter to enable the plaintiffs to directly irrigate to Lot 1.
[32] Despite the fact KI had no easement over the Williams’ strip, it installed a second meter on it adjacent to Farrand Lot 1 on 30 January 2017. There is a dispute between the parties as to why it was installed, but FOL accepts that from 30 January 2017 it was able to access water from that second meter (number 1577) and directly irrigate Farrand Lot 1.2
[33] During the 2016/2017 irrigation season, the plaintiffs exceeded the water allocation permitted under the existing WSA. KI issued invoices for the excess water charge and also for the cost of the installation of the second meter.
[34] That led to further issues between the parties. Mr Farrand objected to the charges. He considered the extra water used had been necessary to sustain the vines which had been stressed from lack of water. He considered the situation had arisen as a direct result of KI’s failure to supply the second connection to Lot 1. Nor did he accept all the costs claimed for the installation of the second meter were properly payable by the plaintiffs.
[35] During 2017 the legal position regarding both issues remained unresolved. The prospect of arbitration was raised. KI took advice about the outstanding accounts and was advised that the second meter, number 1577, that it had installed on the Williams’ accessway, was there illegally and should be removed.
2 Mr Farrand considered that KI only installed the meter because Richard Curtis, at the time the Chair of KI’s board, asked for a meter for the Curtis lots. Mr Curtis and Mr Corcoran deny that. Mr Curtis’ evidence, which I accept, is that he had no pressing need for the meter at the time as the Curtis Orchard was in citrus. It was only later, in March 2017 it was planted in kiwifruit. Mr Curtis explained that when the work was being done to install the meter for the plaintiffs he took advantage of that and asked that a meter be installed for his block. It was only by chance his meter was ultimately connected a few days before the plaintiffs’ one. I regard this issue as a red herring and not relevant.
[36] The Farrand Interests and KI also remained in dispute about the excess water charges of $5,358.31 and the other unpaid account owing to KI for the costs of installation of meter 1577 of $2,986.55.
[37] On 12 October 2017 KI’s lawyers wrote to FOL’s lawyers, addressing both issues. KI’s lawyers first noted that the connection to Lot 1 was illegal because it crossed the Williams’ property without any legal right to do so:
Simply put, [KI] is, at the date of this letter, committing a trespass (on your clients’ behalf) and this must now end.
Notice was given that KI was going to take steps to remove the illegal connection following the expiry of five working days.
[38] The letter then went on to make an offer to address the outstanding invoices KI had issued to K and K Farrand. The letter concluded:
Please note this offer to settle the dispute concerning the invoices has nothing to do with the illegal connection. We suggest your client take steps – right now – to sort out how he will get the water over, or under, Pukeko lane.
[39]KI then removed the second water meter number 1577 on 2 November 2017.
[40] Later in November the parties settled the outstanding invoices issue. FOL effectively paid $5,300 in full settlement of the excess water charge.3 As well as accepting that sum in settlement of the charge, KI wrote off its invoice for $2,986.55 in relation to the installation of meter 1577.
The second installation in December 2017 of the second meter
[41] The supply of water to Lot 1 remained an issue for the plaintiffs, particularly as they faced the prospect of being unable to supply water to Lot 1 over another summer.
[42] On 29 November 2017 FOL’s lawyer attended Mr Corcoran at KI’s office and left a completed application form for an additional WSA to service Lot 1. Mr Corcoran
3 FOL paid $5,000 and agreed that a cheque for $300 which had been tendered previously but not banked by KI, could be banked as part of the settlement.
reviewed the application and advised FOL’s lawyers by email of 1 December 2017 that there already was a WSA for meter 476 to supply both Farrand Lots 1 and 3. Mr Corcoran advised that he considered there was no precedent or obligation on KI to install multiple water meters on the same property to resolve what were “on property” reticulation issues. Mr Corcoran said that, while KI had bent the rules for the Farrands to alleviate what was becoming a significant “on property” issue during the previous dry summer, that had been a spectacularly unsuccessful and expensive decision by KI and would not be repeated.
[43] Mr Corcoran went on to suggest that one possibility would be for KI to accept the advice from Thomson and King Limited Surveyors there was an easement that allowed title holders in Pukeko Lane to cross the lane to convey services at or around a point further up the lane towards Kapiro Road. Mr Corcoran suggested the Farrand Interests install a pipe down from meter 476, around and over Pukeko Lane at the point E where FFT had an easement and back up the lane to service both Lots 1 and 3 from the existing meter (this became known as the down and around option).
[44] The down and around option would also involve the use of the FFT’s existing easements over the Curtis’ land. As noted, FFT had an easement over both Curtis Lots 2 and 3 which had been created at the time of the land swap. The easement enabled the FFT to convey water both sides of Pukeko Lane over the Curtis property. FFT also had an easement on a small area of the Williams’ strip adjacent to its easement on the south-eastern corner of the eastern Curtis easement at point E. That easement would enable the linking up of the “down and around” option.4
[45] Alternatively, Mr Corcoran proposed that KI could utilise its, KI’s easement, to access part way across Pukeko Lane and the FFT could use their easement rights to allow KI to convey services from that point onwards to a practical (not in the roadway) point where KI was legally entitled to install above ground fixed assets such as a water meter.
4 The attached survey plan identifies the FFT’s easements over the Curtis property and point E, the FFT’s easement over the Williams’ strip in red.
[46] Mr Farrand did not accept the proposals and the parties remained unable to agree on a resolution.
[47] Instead, Mr Farrand approached the then chairman of KI, Carl Muller, directly. On 3 December 2017 Mr Muller directed Mr Corcoran to reinstate meter 1577. It was reinstated on 5 December 2017 but was relocated approximately 1.5 m to the west of where it had been installed in January 2017 so that it was on the boundary of the Williams’ and Hows’ strips.
The relocation of meter 476 to its current position
[48] During the winter of 2018 Mr Farrand decided to simplify and improve the irrigation supply to Farrand Lots 1 and 3. Mr Farrand applied for the removal of the existing meter 476 from Lot 3, and installation of a meter at the south-eastern corner at point E.
[49] The work was carried out in late September 2018. At the time KI installed the meter it also installed a precision (restrictor) valve.
[50] FOL says that the restrictor valve reduced the pressure available to Farrand Lots 1 and 3 to 8 psi so that its sprinkler system, which had been set up to run with a minimum pressure of 35 psi, was unable to operate.
[51] The restrictor was removed on 15 January 2019 when KI’s policy regarding restrictor valves changed. By that time, as KI was able to rely on the data from smart meters to track excess water usage, it was considered unnecessary to install and rely on restrictor valves. Mr Farrand says that once the restrictor was removed his irrigation system worked as it should.
The plaintiffs’ claim
[52] The plaintiffs say they suffered lost production of kiwifruit as a consequence of the failure of KI to supply water to Farrand Lot 1. They claim a total of $401,488.00 for lost production during the 2016/17, 2017/18 and 2018/19 seasons. The plaintiffs identify three relevant periods of non-supply: 6 October 2016 to 30 January 2017, 2
November 2017 to 5 December 2017, and then 1 October 2018 to 14 January 2019 (while the pressure was restricted).
[53] The plaintiffs also seek the return of the $5,000.00 paid for the excess water charges. Then, they seek $16,639.31, for Mr Farrand’s labour costs and the costs of transporting water to Lot 1 during the 2016/2017 season. In closing, Mr Nicholls recalculated that additional claim for legal and surveying costs at $46,755.05. Finally the plaintiffs also claim $919.14, the costs charged by KI relating to a digger used when the meter was relocated in September 2018.
The evidence
[54]The plaintiffs called five witnesses:
(a)Mr Farrand as director of FOL and one of the two trustees of the FFT;
(b)Roger Barber, a retired research scientist with expertise in growing kiwifruit and background knowledge of the irrigation scheme. In December 2017 Mr Barber observed the state of the vines on Lot 1 and advised Mr Farrand to flood the vines on Lot 1;
(c)the evidence of Bob Donaldson, a surveyor, regarding the easements on Pukeko Lane was read;
(d)the evidence of David Skinner, an experienced kiwifruit grower, regarding the origins and purpose of the Scheme, was also read; and
(e)Ms Chelsea Downey, a registered accountant, who has accounting experience in the horticulture industry, gave evidence of her estimate of losses sustained by FOL for loss of production.
[55]The defendant called six witnesses:
(a)Tony Corcoran, the general manager of the defendant. Mr Corcoran gave evidence of his dealing with Mr Farrand from 2016 on;
(b)William (Bill) Hunter, the former general manager of KI until mid-early 2016. Mr Hunter gave evidence of the general irrigation scheme, his administration of it, his understanding of the history of the Pukeko Lane arrangements, and his dealings with Mr Farrand prior to his retirement in 2016;
(c)Richard (Rick) Curtis, a board member of the defendant and owner of the adjacent land in Pukeko Lane;
(d)Jason Bennett, a service technician employed by KI. Mr Bennett gave evidence about the connection of the new water meter for the plaintiffs in September 2018 and the installation and subsequent removal of the pressure flow valve;
(e)Anthony Bryce, a technical director at Tonkin Taylor. Mr Bryce gave evidence of the hydraulics of the defendant’s irrigation scheme; and
(f)Sandra Scarrow, a registered horticultural consultant, and expert in kiwifruit horticulture. Ms Scarrow gave expert evidence about the degree of harm to the plaintiffs’ kiwifruit vines that would have been caused by the lack of water in the relevant periods with reference to the weather, ET data and other evidence. She also gave evidence of the relevance of the plaintiffs’ recent conversion of their kiwifruit vines to the gold variety and other orchard management issues.
[56] Both parties took exception to aspects of the opposing evidence-in-chief, principally in relation to the evidence of Mr Farrand and Mr Corcoran. I have taken those objections into account when considering the evidence the Court can properly admit and rely on.
The pleaded claim
[57]In the amended statement of claim the plaintiffs plead two causes of action:
(a)breach of contract with reference to the 2010 WSA; and
(b)breach of contract with reference to the 2016 Agreement.
The issues
[58]The claim raises the following principal issues:
(a)What were the obligations of Kerikeri Irrigation under the 2010 WSA and who were they owed to?
(b)Was there a separate contract concluded in September/October 2016 for the installation of a second water meter?
(c)Is there a term to be implied into the WSA(s) that KI would supply water at a certain minimum psi?
(d)If so, what pressure did KI supply the water at?
(e)Has FOL sustained a loss of production in any one of the three periods claimed?
(f)Has FOL or FFT sustained the other losses claimed?
The 2010 WSA
[59] The WSA in issue is dated 1 June 2010. The contracting parties are the defendant, KI, and KA and KJ Farrand & AD McLeod as trustees of the FFT. The meter is identified as number 476. The property is described as Kapiro Road, Kerikeri, Lot 1 and Lot 3, DP 174528. The title area is 7.2086 ha (the total of both Lots 1 and
3) and the irrigable area is 5.5 ha. The water allocation is 16,500 cubic metres per annum (calculated at 3,000 cubic metres per irrigable ha) with a maximum draw-off rate of 132 litres a minute.
The contracting parties – a preliminary issue for the plaintiffs
[60] As pleaded the plaintiffs’ claim raises a preliminary issue. The principal claim by the plaintiffs is for damages for loss of production caused by KI’s breach of
contract. FOL carries on the business of operating the orchard. It is FOL that has sustained the loss of production (if any). However the WSA, under which any contractual obligations arose, was made between KI and the FFT. FOL was not a party to the 2010 WSA.
[61] Mr Nicholls’ first response to that issue was to suggest that if the FFT was the only party able to sue for breach of contract, it had sustained loss in any event, because KI’s breach of contract had caused loss to FOL which had led to a diminution in the value of FOL. As FFT owned virtually 100 per cent of the shares in FOL then FFT had suffered a loss.
[62] There is a fundamental flaw with that proposition. A shareholder (such as FFT) cannot recover damages merely because the company, (FOL) in which they are interested has suffered damage.5 The loss is the loss of the company, in this case FOL.
[63]As Lord Bingham observed in Johnson v Gore Wood & Co:6
(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company.
[64] Further, any consequential loss FFT may have suffered can only be the diminution in the value of its shares in FOL, which, even if such loss was recoverable at law, is a quite different claim from the one pleaded and before the Court.
Undisclosed principal
[65] Mr Nicholls then submitted that, when dealing with KI, and particularly when executing the 2010 WSA in his capacity as trustee of the FFT, Mr Farrand did so on the basis FFT was acting as agent for FOL. Mr Farrand said as much in his evidence- in-chief in his witness statement.
5 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA) at 222-223; Johnson v Gore Wood & Co [2002] 2 AC 1 (HL) at 35; and Jojaro Investments Ltd v ASB Bank Ltd [2012] NZHC 980 at [105] and [108].
6 Johnson v Gore Wood & Co, above n 5, at 35.
[66] Mr Nicholls suggested in closing that KI was aware FFT was acting as agent for FOL so there was no impediment to FOL suing for breach of the WSA. But neither the relevant documentation nor the evidence supports the proposition that FFT disclosed it was entering the WSA as agent for FOL or that KI was aware that was FFT’s position at the time the 2010 WSA was made.7
[67] The WSA makes no reference to FOL. The contracting parties are the FFT and KI. Mr Farrand signed as duly authorised agent for the Water User which was identified in the WSA as the trustees of the FFT.
[68] Nor does the evidence suggest that KI knew that FFT was acting as agent for FOL in its dealings regarding the WSA. Mr Corcoran did not accept that proposition when it was put to him in cross-examination:
Q. Now, it would be fair to say that most of the time you dealt with Mr Farrand or his lawyers, they held themselves out to be acting for Farrand Orchards? A.
Well, we didn’t make a distinction –
I have never, until this case, made a distinction between Kerry Farrand, Farrand Orchards and the Farrand Trust, it’s just the Farrand’s place, I just assume that it was Farrand’s place. Not making a distinction about who was legally speaking.
[69]
On the
basis of that evidence it does not appear Mr Corcoran turned his mind
to the issue. It cannot be said he was aware that the FFT was acting as agent for FOL or that it had entered the WSA on FOL’s behalf.
[70] Further, Mr Corcoran was, of course, only appointed general manager in May 2016. Mr Hunter, who was the manager at the time the WSA was entered, was not cross-examined on the point.
[71] For his part, Mr Farrand effectively accepted in cross-examination that he had never advised KI that in entering the WSA the FFT did so as agent for FOL. When
7 Peter Watts and F M B Reynolds Bowstead and Reynolds on Agency (22nd ed, Thomson Reuters, London, 2021) at [1-039(1)]. See also Hamilton v Hull (1896) 19 NZLR 49 (HC) at 55; Davies v Ernest Adams Ltd CA7/83, 9 February 1984; Papanui Timber Co Ltd v Parsons HC Christchurch CP19/86, 9 April 1987; and Rothwell v Mawhinney [1998] 2 NZLR 87 (HC) at 98.
questioned by Ms Anderson QC whether his evidence was that, at the time the WSA was signed the correct party was FOL, rather than the Trust, Mr Farrand’s evidence was somewhat different to that in his prepared statement:
A.I see where you’re coming from but the fact is the water is an asset that belongs to the property.
Q. And the Trust owns the property, correct?
A.Yes, it’d be, to me, from a layman’s perspective, to me it makes sense that this is handled by the Trust, not by the orchard, I stand to be corrected.
When the matter was pursued:
Q.And you’re asking his Honour to find that this agreement’s really with [FOL], do you understand that’s what you’re asking his Honour to do?
A. This particular agreement?
Q. Yes.
A. Is with [FOL]? This particular agreement is with the [FFT], it’s [FFT’s] name there, it clearly it has to do with the [FFT], doesn’t it?
[72] Ms Anderson returned to the matter later when discussing the application for the new WSA that the plaintiffs’ lawyer left with KI on 29 November 2017. She put to Mr Farrand:
Q.Now, this is an application drawn for [WSA], and as I understood your evidence yesterday, it’s the Trust that deals with property matters with respect to its water, so, the Trust applies for water agreements and signs water agreements, that’s correct, isn’t it?
A. Yep.
Q. So,you're approaching the company on behalf of the Trust to say: “I want a new water connection.”?
A. It appears that way, yes.
[73] Mr Nicholls made the point that there was no change in the way KI dealt with the Farrands after the FFT was established. KI continued to invoice K and K Farrand for the supply of Scheme water even after the establishment of the Trust. Further, he noted that FOL paid the invoices due under the contract, not the Trust. He also noted
that correspondence from the plaintiffs’ former lawyer, Mr Dodds, identified the issue of non-supply as being an issue for FOL.
[74] However, as Ms Anderson noted, payment of the invoices by FOL is legally irrelevant. KI cannot be taken to know what arrangements existed between FFT and FOL. The lease terms between FFT and FOL are not in evidence. More relevant is the fact not a single invoice was directed by KI to FOL for the supply of water. Further, the correspondence referred to from Mr Dodds post-dates both the entry of the 2010 WSA and the meeting in September 2016 which the second alleged contract is based on.
[75] In summary, the evidence does not support the plaintiffs’ submission that KI was aware FFT was acting as FOL’s agent.
[76] Assuming for the present that Mr Farrand as a trustee of FFT had authority to enter the 2010 WSA in the trustees’ name on behalf of FOL (as Mr Farrand was both a trustee of the FFT and a director of FOL), the issue is whether FOL can rely upon the doctrine of the undisclosed principal to sue for its losses.
[77] In Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd Diplock LJ summarised the law to undisclosed principal as:8
Where an agent has … actual authority and enters into a contract with another party intending to do so on behalf of his principal, it matters not whether he discloses to the other party the identity of his principal, or even that he is contracting on behalf of a principal at all, if the other party is willing or leads the agent to believe that he is willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract. In the case of an ordinary commercial contract such willingness of the other party may be assumed by the agent unless either the other party manifests his unwillingness, or there are other circumstances which should lead the agent to realise that the other party was not so willing.
[78] In Siu Yin Kwan v Eastern Insurance Co Ltd the Privy Council reviewed the main features of the law relating to recovery by an undisclosed principal. Lord Lloyd summarised the position as follows:9
8 Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 545 at 555.
9 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (PC), at 207.
The main features of the law relating to an undisclosed principal have been settled since at least at the end of the 18th century. A hundred years later, in 1872, Blackburn J. said in Armstrong v. Stokes (1872) L.R. 7 Q.B. 598, 604 that it had often been doubted whether it was originally right to hold that an undisclosed principal was liable to be sued on the contract made by an agent on his behalf, but added that “doubts of this kind come now too late.”
For present purposes the law can be summarised shortly. (1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act on the principal's behalf. (3) The agent of an undisclosed principal may also sue and be sued on the contract. (4) Any defence which the third party may have against the agent is available against his principal. (5) The terms of the contract may, expressly or by implication, exclude the principal's right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal.
[79]The particularly relevant issues in the present case are:
(a)in entering the 2010 WSA, did FFT intend to act on behalf of FOL;10
and
(b)do the terms of the WSA expressly or by implication exclude FOL’s right to sue.11
As noted, for present purposes, given Mr Farrand’s dual roles as trustee of the FFT and director of FOL, I accept that if the above considerations are satisfied in the plaintiffs’ favour it can be taken he was acting within the scope of his authority.
[80] Despite Mr Farrand’s evidence-in-chief the above extracts from his cross- examination do not support a finding that FFT intended to enter the contract on FOL’s behalf, rather they suggest the reverse is the case. Taken overall the evidence suggests Mr Farrand considered FFT was the contracting party and entered the WSA for itself.
[81] Nor does the wording of the WSA assist the plaintiffs’ case on this point. The wording of the WSA contemplates the contract will be between the water user and KI. User must, as a matter of construct of the contract, be the owner of the property, in this
10 Schrimshire v Alderton (1743) 2 Stra 1182; Burrows, Finn and Todd, Law of Contract in New Zealand (5th ed, LexisNexis, Wellington, 2018) at [16.3.2].
11 Dillicar v West [1921] NZLR 617 (SC); Siu Yin Kwan v Eastern Insurance Co Ltd, above n 9; and Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919.
case the FFT. Clause 1.3 of the WSA confirms KI may terminate the WSA by giving three months’ notice in writing to the user if:
(b) the User is not the owner of the property described in this Agreement.
The property must be the land described in the WSA. In the present case the actual user of the water is FOL rather than the FFT. The user of the water is not, in this case, the owner of the property. The importance of the user under the WSA being the landowner is confirmed by cl 2.5(b) which provides that:
The Water Allocation may only be used on the Land, as it is described in the Agreement if the User owns the Land. …
[82] Clause 2.5(c) does permit of the possibility another person may occupy the land, but it does not affect the contractual relationship which remains between KI and the land owner.
[83] The Constitution of KI itself confirms that only a current water user can have shares in the company and only a shareholder has rights to the water.12
[84] The express wording of the contractual documentation does not support the application of an undisclosed principal recovering losses for breach of the WSA.
[85] The contractual documentation and Mr Farrand’s evidence, taken together, supports the conclusion that, at the times he entered the WSA in 2010, and sought the second meter in 2016, Mr Farrand was acting on behalf of the FFT not FOL.
[86] I conclude that FOL cannot pursue the damages claimed for the loss of production on the basis it was an undisclosed principal to the WSA and the 2016 agreement.
Transferred loss
[87] Mr Nicholls then submitted that the principle of transferred loss could apply so that the FFT had standing to sue KI for the loss that FOL had suffered because it
12 Clauses 3 and 4.2 of the Constitution of KI.
could be foreseen by KI at the time the contracts were entered into that a breach of either the 2010 WSA or the 2016 Agreement would cause a significant loss to FOL.
[88] The concept of a plaintiff being able to recover on the basis of transferred loss was discussed recently by the United Kingdom Supreme Court in Lowick Rose LLP (in liquidation) v Swynson Ltd where Lord Sumption said:13
The principle of transferred loss is a limited exception to the general rule that a claimant can recover only loss which he has himself suffered. It applies where the known object of a transaction is to benefit a third party or a class of persons to which a third party belongs, and the anticipated effect of a breach of duty will be to cause loss to that third party. It has hitherto been recognised only in cases where the third party suffers loss as the intended transferee of the property affected by the breach. The paradigm case is the rule which has applied in the law of carriage of goods by sea ever since the decision of the House of Lords in Dunlop v Lambert (1839) 2 Cl & F 626, that the shipper may sue the shipowner for loss of or damage to the cargo notwithstanding that the loss has been suffered by the consignee to whom property and risk (but not the rights under the contract of carriage) have passed. In Albacruz (Cargo Owners) v Albazero (Owners) [1977] AC 774, 847 Lord Diplock, with whom the rest of the Appellate Committee agreed, expressed the rationale of the carriage of goods rule as being that:
“in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into.”
The party recovering is accountable to the third party for any damages recovered: ibid, p 844.
[89] In Linden Gardens Trust v Lenesta Sludge Disposals Ltd the rationale was extended to a commercial construction contract.14
[90] As Lord Sumption acknowledged in Lowick Rose v Swynson Ltd the principle of transferred loss is an exception to the fundamental principle of the law of obligations and not an alternative to the principle. It is driven by legal necessity. It is
13 Lowick Rose LLP (in liquidation) v Swynson Ltd [2017] UKSC 32, [2018] AC 313 at [14].
14 Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 (HL).
an essential feature of the principle that the recognition of a right in the contracting party to recover the third party’s loss should be necessary to give effect to the object of the transaction and to avoid a “legal black hole”. Where a third party has a direct right of action for the same loss it will not be available.15
[91] The concept has been considered in New Zealand in a limited number of cases.16 In McKinlay Hendry Ltd v Tonkin & Taylor Ltd, Tonkin & Taylor had carried out a geotechnical investigation into the proposed site for a coolstore on reclaimed land at the Wellington waterfront. It reported the site required improvement to increase its density and recommended a technique known as dynamic compaction. Kings Wharf Holdings Limited were the building owners. Kings Wharf entered a fixed price contract for the construction of the coolstore. Ultimately, the recommended site treatment was not needed. Kings Wharf and McKinlay Hendry, which had promoted the project, sued to recover the sum allowed in the contract for the cost of dynamic compaction. Miller J accepted Tonkin Taylor had been negligent but held McKinlay Hendry could not recover because it did not suffer the loss and Kings Wharf, the company that suffered the loss, was not owed a duty of care.
[92] Miller J considered the rule of transferred loss did not apply in that case because at the time the contract was made the parties did not envisage that it was entered into for the benefit of Kings Wharf, the party which had suffered the loss.
[93] In the course of the decision Miller J considered both the narrow and wider formulations of the rule. The narrow formulation would restrict it to cases where the parties contemplated that ownership of the property, the subject of the contract, might be transferred to another during the currency of the contract before breach. The wider formulation would enable the plaintiff to recover its own loss, although the measure of damages remained the cost of substitute performance. In such a case the plaintiff’s loss takes the form of performance or expectation interest in the contract.17
15 Lowick Rose LLP (in liquidation) v Swynson Ltd, above n 13, at [16].
16 McKinlay Hendry Ltd v Tonkin & Taylor Ltd HC Wellington CIV-1999-485-78, 22 March 2004; Cedenco Foods v Akiaki Ltd (formerly Circle Pacific Ltd) HC Napier CIV-2007-441-439, 21 November 2007; and Napier Tool & Die Ltd v Oraka Technologies Ltd [2016] NZCA 554, [2017] 2 NZLR 611 for example.
17 Darlington Borough Council v Wiltshier Northern Ltd [1995] 1 WLR 68 (CA); and Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL).
[94] Miller J favoured the narrow formulation. He concluded that the narrow formulation corresponded to the purpose of the rule in Dunlop v Lambert18 as explained in Albacruz (Caro Owners) v Albazero (Owners)19 and enlarged upon in Linden Gardens Trust v Lenesta Sludge Disposals Ltd.20
[95] In Cedenco Foods v Akiaki, Cedenco appealed a District Court judgment entering summary judgment for Akiaki.21 The District Court had rejected Cedenco’s proposed counterclaim on the basis that it lacked mutuality. Cedenco supplied squash to Circle for processing. Circle processed it in accordance with specifications provided by Sunrise, a wholly owned subsidiary of Cedenco. The processed squash was sold by Sunrise to a Japanese buyer, Life Foods. Life Foods rejected the consignment on the basis the squash was uncooked. Cedenco withheld payment to Circle on the basis that it had suffered loss as a result of Life Foods withholding payment. One of the issues considered by Potter J on appeal was whether Cedenco could rely on the principle of transferred loss. The Judge reviewed the authorities, including the decision of Miller J in McKinlay Hendry. In the event, Potter J held Cedenco was not entitled to rely on the principle because no matter which formulation of the rule applied, the relevant contractual context must include the parties’ contemplation of the effect of the contract on a third party. In the case before her, Circle had not contemplated the possibility of Sunshine sustaining the loss. Therefore Cedenco was unable to rely on the above authorities to recover that loss.
[96] Napier Tool & Die Ltd v Oraka Technologies Ltd involved consideration of which party had the right to sue on a copyright. Although the Court did not expressly refer to the transferred loss principle it did consider the relevant authorities which discussed that principle.22 The Court of Appeal rejected the “expansive approach” taken in the High Court to recovery of the third party’s loss. The Court cited with approval the following statement of Lord Millett in McAlpine Construction Ltd v
18 Dunlop v Lambert (1839) 6 Cl & F 600 (HL).
19 Albacruz (Cargo Owners) v Albazero (Owners) [1977] AC 774 (HL).
20 Linden Gardens Trust v Lenesta Sludge Disposals Ltd, above n 14.
21 Cedenco Foods v Akiaki Ltd, above n 16.
22 Dunlop v Lambert (1839) 6 Cl & F 600 (HL); Albacruz (Cargo Owners) v Albazero (Owners), above n 19; St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd [1994] 1 AC 85 (HL); and Darlington Borough Council v Wiltshier Northern Ltd, above n 17.
Panatown Ltd and confirmed that the pursuit of justice in an individual case must be principled:23
Compensation is compensation for loss; its object is to make good a loss. It is inherent in the concept of compensation that only the person who has suffered the loss is entitled to have it made good by compensation. Compensation for a third party's loss is a contradiction in terms. It is impossible on any logical basis to justify the recovery of compensatory damages by a person who has not suffered the loss in respect of which they are awarded unless he is accountable for them to the person who has.
[97] In the present case Mr Nicholls submitted that the principle of transferred loss in its narrower form applied and the FFT had standing to sue KI for the loss that FOL had suffered because it could be foreseen by KI both at the time the WSA was entered in 2010 and at the time the 2016 agreement was made that a breach of either would cause significant loss to FOL. He argued that KI had always known that the Scheme water supplied to Laurenson Orchard was to irrigate kiwifruit vines owned by FOL. He submitted that FOL had made itself known to KI and held itself out as being the user of the Scheme water, again relying on Mr Farrand’s evidence and Mr Dodds’ correspondence.
[98] Mr Nicholls suggested that if that was not the case then FOL could have claimed damages from the FFT for not supplying it with water. FFT could have settled that claim and then claimed from WSA. Applying the principle of transferred loss, in his words, allowed “the true nature of the claim to be determined by the Court”. It would also avoid a legal black hole.
[99] Like Miller J I favour the more restrictive approach to the application of the transferred loss principle, noting Lord Sumption’s comments in Lowick Rose LLP (in liquidation) v Synson Ltd that it is an exception to the well-established general principle that contractual damages and compensation relate to loss sustained by the party to the contract.24 However, even applying the broader view the principle is not applicable on the facts of the present case.
23 Alfred McAlpine Construction Ltd v Panatown Ltd, above n 17, at 580.
24 Lowick Rose LLP (in liquidation) v Synson Ltd, above n 13.
[100] As emphasised in the Albacruz25 decision and confirmed by both Miller J in McKinlay Hendry and Potter J in Cedenco, for the principle to apply it must have been the intention of both contracting parties at the time of the contract that the FFT was entering the WSA for the benefit of FOL. The known object of the contract must be to benefit the third party. For the reasons discussed above the evidence in this case does not support that proposition. As Ms Anderson submitted, there is no evidence that KI knew FOL would be harmed by a breach of the 2010 WSA (or, for that matter of any later agreement in 2016).
[101] Further, if the plaintiffs’ proposition was correct, even though KI’s WSAs are all made with the land owner, KI would potentially have liability under its WSAs to all lessees and other occupiers of the land to which it supplied water. KI would have to inquire into the background of all contractual arrangements that the land owning contracting party may be involved in. Such a major change in contractual obligations would require clear evidence that was the intended result.
[102] For the above reasons, neither the undisclosed principal nor the transferred loss principle enables FOL to recover damages for any production losses sustained by it caused by breach of the 2010 WSA or any 2016 agreement between FFT and KI.
[103] The WSA is with FFT. Any breach of the WSA or a later 2016 agreement by KI cannot lead to a recovery by FFT as FFT has not suffered any loss of production. Any production loss has been sustained by FOL. But FOL is unable to recover for breach of the 2010 WSA or any 2016 agreement as it was not a party to them. That is sufficient to dispose of the principal claim by the plaintiffs for damages for loss of production.
[104] The other alleged breaches are, in context, relatively minor and are dealt with below.
[105] However, in the event I am wrong in the above analysis, I turn to consideration of the merits of the claims for breach of contract.26
25 Albacruz (Caro Owners) v Albazero (Owners), above n 19.
26 In the discussion that follows I refer to the plaintiffs generally as that is the way their case was presented.
The 2010 WSA
[106] The plaintiffs plead in the first cause of action that, either by express words or by terms implied by custom, the 2010 WSA included terms:
(a)KI would continue to supply water to the FFT’s land where KI’s right to convey water touched the plaintiffs’ right to convey water;
(b)the plaintiffs agreed to pay for the water supplied by KI to the land;
(c)so long as the plaintiffs paid for the water and there was not an event beyond its control KI guaranteed to supply water to the land;
(d)the water supplied to the land was to be supplied through one or more 50 mm pipes where the water supplied in each 50 mm pipe had a pressure of at least 35 psi; and
(e)any works carried out by KI would be charged to the plaintiffs at market rate.
[107]The plaintiffs plead that, in breach of the 2010 WSA the defendant:
(a)refused to supply any water to Lot 1 of the plaintiffs’ land from 6 October 2016 to 30 January 2017 and 2 November 2017 to 5 December 2017;
(b)in August 2018 charged FOL $2,178.84 for a new connection when the market price was $1,121.83; and
(c)from no later than 1 October 2018 to 14 January 2019 supplied water to the plaintiffs’ land at a pressure of about 8 psi in a 50 mm pipe.
[108] In his closing submissions for the plaintiffs Mr Nicholls suggested that under the WSA, KI was obliged to supply water to the Laurenson Orchard via two water meters, one servicing Lot 1 and the other servicing Lot 3. On Mr Nicholls’ analysis
KI was in breach of that obligation from the time the 2010 WSA was concluded (and indeed prior to that) but the plaintiffs mitigated it by piping water to Lot 3 and did not take issue with that breach until the events of 2016. He submitted that KI was put on notice of its breach from the time of the meeting between Mr Farrand and Mr Corcoran in mid to late September 2016 when Mr Farrand requested the installation of a second meter to service Lot 1.
[109] Mr Nicholls referred to the general principles relating to the contractual interpretation as recently considered by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd and the Court of Appeal in Bathurst Resources Ltd v L & M Coal Holdings Ltd.27 In Firm PI 1 Ltd the Supreme Court declined to reconsider the principles of contractual interpretation which it had previously discussed in Vector Gas Ltd v Bay of Plenty MG Ltd.28
[110]In Firm PI 1 Ltd the Court confirmed:29
[60] … the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
…
[63] While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
[111] Mr Nicholls submitted the purpose of the Scheme which was to supply horticulturalists and farmers with irrigation water was important background. He
27 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432; and
Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85 at [60].
28 Vector Gas Ltd v Bay of Plenty MG Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
29 Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 27 (footnotes omitted).
referred to the arrangements that had existed prior to the Scheme and the incorporation of KI. The plaintiffs and others had given up the right to take water from their own resources to become members of the Scheme and shareholders in KI. He submitted that the WSA was for the supply of a utility. There was no other realistic supply of irrigated water in Kerikeri because orchards cannot now draw commercial supplies from any other source. Mr Nicholls submitted it would be common knowledge to any person that if the Scheme has water available and it does not affect the hydraulic integrity of the Scheme then water should be offered to a water user. It was also common knowledge that a water user is reliant on the supply of water.
[112] Mr Nicholls further submitted that the WSA bound KI to supply water to both Lots 1 and Lot 3 and that as the Lots were separated by Pukeko Lane, it was necessary for the supply to be by way of two meters. I note that was a refinement of the pleading that KI was obliged to supply water to the FFT’s land where KI’s right to convey water touched the plaintiffs’ right to convey water.
Total Expected Trays 60,894 57,416 62,421 Less: Actual Trays (55,789) (51,329) (52,399) Total Tray Deficit 5,105 6,087 10,022 Zespri Industry Average OGR
$10.89
$11.86
$12.46
Less: Additional Picking Costs per tray (est) -$0.85 -$0.85 -$0.85 NET Profit per tray $10.04 $11.01 $11.61 REVENUE LOSS $51,258 $67,020 $116,359
[204]Ms Downey summarised the losses as:
SUMMARY OF LOSSES YEAR Tray Deficit Revenue Loss 2017 18,038 trays $166,851 2018 5,105 trays $51,258 2019 6,087 trays $67,020 2020 10,022 trays $116,359 Total 39,252 trays $401,488
[205] KI called Ms Scarrow on the issue of loss. Ms Scarrow is a horticultural consultant employed by Fruition Horticulture (BOP) Limited. She has been employed as a horticultural consultant since May 1987. Before her current position with Fruition she formerly worked as a consultant with Agriculture New Zealand Limited and the Ministry of Agriculture and Fisheries. Overall, Ms Scarrow has 35 years’ experience working as a horticultural consultant. Ms Scarrow is registered through the Agricultural and Horticultural Registration Board. She holds a Bachelor of Horticulture, Science and a postgraduate Diploma in Business and Administration (Management). She is contracted to the Ministry for Primary Industries as a policy agent and has prepared expert evidence for both this Court and the Environment Court. She is familiar with the Kerikeri horticultural region as she travels frequently to that area and personally owns a kiwifruit orchard, including 1.5 ha of Gold 3 and two ha of Hayward.
[206]Ms Scarrow considered the expected production after grafting to be:
(a)zero in the first year after the graft;
(b)35 per cent of eventual full production in the second year after the graft;
(c)75 per cent of full production in the third year after the graft; and
(d)100 per cent of full production in the fourth year.
[207] Ms Downey applied Ms Scarrow’s figures and on her estimate, even using Ms Scarrow’s figures across the four years and to full production that still resulted in a revenue loss of about $218,000.00.
[208] However, Ms Scarrow considered that the more appropriate comparator was between the Laurenson Orchard performance and Northland averages for the years post conversion to the Gold 3 crop. Ms Scarrow considered that on that basis the Laurenson Orchard performed well, particularly if one used the 15 per cent differential applied by Ms Downey to take account of the extended row width of the Laurenson Orchard.
[209] In Ms Scarrow’s opinion the production from the Laurenson Orchard for the relevant years fell within the normal distribution for Gold 3 vines post grafting. Further, other orchards owned by the FFT (and operated by FOL) which were unaffected by the alleged lack of water in 2016/17 and again in late 2018 produced similarly poor results. In her opinion there was no evidence to support a claim for financial loss as a result of the alleged disruptive water supply.
[210] Ms Scarrow considered that if the data showed an impact on production for the 2017 and 2018 harvest years in particular, most of that impact was likely to result from the regrafting in 2015. In her opinion the evidence just did not establish what effect the lack of water had. A good comparator would have been if block 1 on Lot 3 (which had been previously converted to G3) had been sent separately to the packhouses. That had not been done.
[211] Relevantly, both Ms Scarrow and Ms Downey saw it as rather counterintuitive that there was more of a differential between Laurenson Orchard and the Kerikeri
average for the 2019 and 2020 years, the third and fourth years following conversion, which suggested that something other than water loss was affecting production.
[212]Ms Scarrow rejected Ms Downey’s conclusion. In summary she concluded:
·the summer of 2016/17 was a particularly dry summer and kiwifruit vines would have benefitted from irrigation to replace the water lost in evapotranspiration;
·the soil moisture reserves and rainfall in November 2017 were likely to have been sufficient to provide for the needs of the vines on Lot 1 for the period 2 November 2017 to 5 December 2017;
·the FFT had failed to produce any data to show the impact on the yield for blocks 1–4 when compared to blocks 5–7, the area alleged to have been affected. The information would have been relatively easy to obtain by setting up maturity areas grouping blocks 1–4 and blocks 5– 7;
·the production from the orchard in 2017 and 2018, the years where the vines were potentially impacted by the lack of water, followed a typical pattern for vines that had been converted to Gold 3 in 2015.
[213] I prefer the evidence and approach of Ms Scarrow to that of Ms Downey. As an aside, I also note that the loss now claimed is significantly different to the losses that Mr Farrand first suggested in his letter of 17 November 2017 when he claimed
$11,270 for the impact of the lack of water for the first year.
[214] With respect to Ms Downey, who was quite candid in giving her evidence, her experience is limited and is not as broad as Ms Scarrow. Ms Downey had spent three years working with Turners and Growers some time ago. Ms Scarrow has 35 years’ experience as a horticultural consultant. Also, rather than a horticulturalist such as Ms Scarrow, Ms Downey is an accountant.
[215] Although not particularly material, Ms Downey also based her assumptions for the 2016 year, on the basis that the relevant area was .33 ha. However the correct area was .63 ha. She accepted she had taken the total number of vines for the whole .63 area as being what had been produced over a .33 ha area.
[216] Ms Downey’s approach was to assume an industry average for full producing orchards and then to take a percentage of that depending on the time relative to conversion. Ms Scarrow looked at the averages for an orchard in its first year of production post conversion rather than taking the industry average based on subsequent years.
[217] A further difficulty with Ms Downey’s evidence is that she used block 1 as a control block when that was not apposite because it was converted from Hayward rather than Hort 16A which was the variety on the relevant blocks. Further, block 1’s vines were not subject to PSA. Next, block 1 did not produce at all in 2014. The production of the subsequent year following low or no production may obviously have been higher as a result. That could have skewed the 2015 figures as representative of the performance that year.
[218] On the evidence of Ms Scarrow, which the Court prefers to Ms Downey on the issue, the Laurenson Orchard produced quite well compared to other orchards in the Northland area following conversion to G3 kiwifruit.
[219] Further, the evidence is that in the 2016/17 season Lot 3 was supplied with water, albeit at some trouble by Mr Farrand from mid-December until the installation of the second meter, and also that substantial amounts of water, well in excess of the allocated volume, were supplied during that season.
[220] As part of her evidence, Ms Scarrow took into account the rainfall data for Kerikeri over the relevant summers of 2016/17 and 2017/18. She concluded that the 2016/17 season was particularly dry and irrigation water would have been required to supplement rainfall during that season. However, the soil reserves would have been recharged during the winter of 2017 and rainfall was likely to have been sufficient to meet the needs of the vines during the spring and early summer of 2017/2018.
[221] The Court accepts the evidence of Ms Scarrow based on the information and reports she referred to that the natural soil reserves from the winter rain of 2017 would have been sufficient to sustain any shortage in water between the period of November and December 2017.
[222] The onus is on the plaintiffs to establish the damage they have sustained. Mr Nicholls referred to the case of Wordsworth v Purdie36 where Wylie J confirmed that where the Court has some difficulty with a claim for damages and uncertainty makes it difficult to calculate the damages the Court must simply do the best it can in the circumstances, referring to the case of Butler v Countrywide Finance Ltd.37
[223] In Butler Hammond J referred to the general rule that a court must not let difficulties of translating an economic loss into monetary terms stand in the way of an assessment of damages.38 The Court must simply do the best it can.39
[224] However, the present case is not one where it is necessarily difficult for the Court to assess damages. It would be possible to calculate a reduction in production and calculate the damages accordingly.
[225] The difficulty for the plaintiffs in the present case is that, taken overall, the evidence falls short of establishing that any loss of production sustained by them for the relevant years was caused by a lack of water supply to blocks 5 to 7 on Lot 1 during the relevant time periods.
[226] Given that the Court has rejected any reduction in pressure and supply due to the application of the restrictor valve in 2018, the plaintiff fails to establish a causative link between any claimed loss of production and the actions of KI in relation to its obligation under the WSA to supply irrigation water to the plaintiffs.
[227] The evidence does not support the plaintiffs’ claim for damages for loss of production.
36 Wordsworth v Purdie HC Auckland CIV-201-404-001933, 25 October 2011, at [28].
37 Butler v Countrywide Finance Ltd [1993] 3 NZLR 623 (HC).
38 At 625.
39 Chaplin v Hicks [1911] 2 KB 786 (CA); McRae v Commonwealth Disposals Commission (1951) 82 CLR 377; Naylor v Yorkshire Electricity Board [1968] AC 529 (HL).
Summary/result
[228] For the above reasons, the plaintiffs’ claims against KI fail. I enter judgment for the defendant.
Costs
[229] Costs on a 2B basis would seem appropriate. However, in the event there may be correspondence on the issue of costs which the Court is unaware of, I reserve costs. If there is no relevant correspondence costs can be fixed on the 2B basis. I certify for second counsel. The Registrar is to fix disbursements, including witness expenses.
Venning J
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