Geddes v New Zealand Dairy Board
[2005] NZCA 159
•20 June 2005
IN THE COURT OF APPEAL OF NEW ZEALAND
CA180/03
BETWEENJAMES JEFFREY GEDDES as representative of the CONCERNED DAIRYMEN'S ASSOCIATION
First AppellantANDLEVELS GENTECH LIMITED
Second AppellantANDBRENCO LIVESTOCK LIMITED
Third Appellant
ANDNEW ZEALAND DAIRY BOARD
First RespondentANDLIVESTOCK IMPROVEMENT CORPORATION LIMITED
Second Respondent
Hearing:26-29 July 2004
Court:Anderson P, Hammond and Chambers JJ
Counsel:G J Judd QC and F M R Cooke QC for Appellants
L J Taylor, S D Galloway and A L Sherriff for Respondents
Judgment:20 June 2005
JUDGMENT OF THE COURT
A The appeal is dismissed.
BThe appellants must pay costs to the respondents in the sum of $25,000, plus usual disbursements. The liability of the first, second, and third appellants is joint and several. We make no determination as to the entitlements of the first and second respondents as between themselves.
REASONS
(Given by Chambers J)
Table of Contents
Para No
A new animal evaluation system for the dairy industry [1]
Issues on the appeal [11]
Farmer plaintiffs’ fiduciary cause of action [18]
Levels Gentech’s and Brenco’s fiduciary cause of action [60]
Fair Trading Act
Overview [65]
The alleged representations [67]
Applicable legal principles [77]
First core representation [82]
First core representation: an offshoot [100]
Second core representation [113]
Third core representation [129]
Costs [153]
A final word [154]A new animal evaluation system for the dairy industry
[1] Mr James Geddes, a dairy farmer from Christchurch, and a number of other dairy farmers formed the Concerned Dairymen’s Association (“CDA”) in 1996 following the introduction of a new animal evaluation system by Livestock Improvement Incorporation Limited (“LIC”), at that time a wholly owned subsidiary of the New Zealand Dairy Board (“the Board”). Mr Geddes and his cohorts believed that their herds had been devalued through the introduction by LIC of a flawed animal evaluation system. When the Board and LIC refused to meet the CDA concerns, the CDA sued the Board and LIC in the High Court in Wellington.
[2] Later they were joined by two other companies who had similar concerns, Levels Gentech Limited and Brenco Livestock Limited. Levels Gentech and Brenco were importers and sellers of bovine genetic material.
[3] The dispute finally came to hearing before Wild J in April 2003. The hearing continued through to July that year. There were no fewer than seven causes of action against the Board and LIC. Wild J delivered a reserved decision on 27 August 2003: Geddes v The New Zealand Dairy Board HC WN CP52/97 and CP30/02 (“judgment”). The plaintiffs failed on all causes of action.
[4] The seven causes of action represented different challenges to a core complaint. The essence of the complaint is this. In 1996, LIC implemented a new system for the genetic and productive evaluation of dairy stock for use in New Zealand. The new system replaced an earlier evaluation system which had been in use since the 1960s. The new Animal Evaluation System (“AES”) comprised an animal model and an economic model, together producing a single index, purportedly ranking dairy stock across breeds in terms of their genetic worth. The farmer plaintiffs, as Wild J termed the members of CDA, Levels Gentech, and Brenco all believe that the economic model within the AES is flawed. Speaking generally, their animals rank less well under the AES than they did under the old evaluation system it replaced. As a consequence, their herds are less valuable. Further, many of the farmer plaintiffs, together with Levels Gentech and Brenco, are in the business of selling bull semen to the dairy industry. The semen is now harder to sell because of the lower ranking of their bulls.
[5] Since the AES was introduced, the plaintiffs found it much harder to compete with LIC, which is, apart from being the developer of the AES, a major player in the semen-supply business. The plaintiffs’ fundamental aim was to obtain an injunction restraining LIC from continuing with the operation of the AES. If that could not be achieved, then a fallback position was an injunction restraining LIC from competing in the semen-supply business. The difficulty the plaintiffs faced was how to achieve that result legally. The fact that there were seven causes of action perhaps indicates uncertainty as to what the legal remedy was for the undesirable state of affairs in which the plaintiffs found themselves, if there was a legal remedy at all.
[6] Only one of the seven causes of action tackled the AES directly. That was a cause of action in negligence. In essence, the plaintiffs alleged that LIC owed them a duty of care when devising and implementing the AES. They said that LIC had failed to exercise reasonable care, in that the AES was “unsound and unreliable”. Particulars of such unsoundness and unreliability were given. Wild J considered in detail all those particulars and the evidence relating to them. He found that LIC had not been negligent. Indeed, he went much further and said that he was satisfied, on the basis of the evidence before him, “that the AES is sound, that it is working well, and that the vast majority of its users, both nationally and internationally, are satisfied with it”: judgment at [398]. The plaintiffs have not appealed against his decision on the negligence cause of action.
[7] On this appeal, the plaintiffs are pursuing only two causes of action. Relief is now sought against only LIC.
[8] The first alleges that LIC breached fiduciary obligations it is said to have owed to the dairy farmers of New Zealand and to Levels Gentech and Brenco. This cause of action does not attack the AES directly. This cause of action, even if successful, would not prevent the continued operation of the AES. But it would, if the appellants were to obtain the relief they seek, remove LIC from the semen-selling market. As it is easily the largest player in that market, that would have, one assumes, a significant effect on the financial fortunes of the semen-selling appellants presently having to compete with it.
[9] The essence of this cause of action is that LIC cannot be both the deviser and promulgator of the AES and a semen seller. To carry on both activities is said to breach a duty of loyalty LIC owes to the appellants (among others). The appellants assert that LIC should have chosen to follow one course or the other. For reasons which we shall later explain, the appellants contend that Parliament has now made the choice for LIC: since it must continue its AES responsibilities, it is the semen selling activity which must be divested.
[10] The other cause of action which remains on the table was brought under the Fair Trading Act 1986. The allegation was and is that LIC engaged in conduct that was misleading or deceptive or likely to mislead or deceive, in breach of s 9. This too is not a direct attack on the AES, but it is undoubtedly an indirect attack. In essence, the appellants complain that LIC has exaggerated the worth and reliability of the AES. Wild J rejected the appellants’ claim under this cause of action. He held that what LIC had said about the AES was not misleading or deceptive.
Issues on the appeal
[11] We shall deal first with the cause of action based on breach of fiduciary duty.
[12] The first issue is whether LIC owed any sort of fiduciary obligation to the farmer plaintiffs (as Wild J called the members of CDA). Wild J found that “LIC is not in a fiduciary relationship with the farmers”: judgment at [366]. On appeal, Mr Judd QC, who argued this branch of the appeal on behalf of the appellants, submitted that that conclusion was wrong.
[13] For the reasons which follow, we shall find for LIC on that first issue. Had we not done so, we would have needed to go on and consider a limitation defence LIC raised. Wild J found it unnecessary to deal with that defence: judgment at [372]. We too find it unnecessary, especially in circumstances where neither party advanced detailed submissions on the topic.
[14] The second issue is whether LIC owed any sort of fiduciary obligation to Levels Gentech and Brenco. Wild J found that it did not: judgment at [369].
[15] The third issue is whether what LIC said about the AES, before, at, and after its introduction, was misleading or deceptive in terms of s 9 of the Fair Trading Act. In this regard, Mr Cooke QC, who argued this aspect of the case on behalf of the appellants, submitted that three core representations had been made by or on behalf of LIC and that those representations were misleading and deceptive. Under this head, we shall examine what was said, whether what was said did amount to the representations alleged, and whether what was said was, in context, misleading and deceptive.
[16] For the reasons which follow, we shall find for LIC on this issue. Had we not done so, we would have needed to go on and consider three further issues:
(a)whether any breach of the Fair Trading Act had been causative of loss to any of the appellants;
(b)the form of any injunction;
(c)whether the cause of action pleaded by Levels Gentech and Brenco was time-barred.
[17] It is both unnecessary and inappropriate to consider those remaining issues, particularly in circumstances where we have not had the benefit of the trial judge’s views: judgment at [351] – [352].
Farmer plaintiffs’ fiduciary cause of action
[18] This cause of action proved during the hearing before us to be an elusive beast. It was hard to pin down exactly what the appellants were contending for. The elusiveness stems largely from the fact that Mr Judd’s argument before us differed significantly from the case as presented in the pleadings.
[19] The farmer plaintiffs’ case as pleaded was in essence this. LIC owed a duty “to be loyal to the CDA members”: consolidated amended statement of claim (“claim”), para 58. The implications of this duty of loyalty were set out in the claim at para 61:
The duty of loyalty owed by the defendants requires that they not be in the business of selling semen when they are also the providers of the information on which dairy farmers and in particular CDA members must rely when making decisions concerning the breeding of their stock.
[20] The farmer plaintiffs contended that LIC breached that duty by engaging in “breeding and the selling of semen, in competition with farmers who are also engaged in these activities, and in particular in competition with CDA members”: claim, para 59. In short, the farmer plaintiffs’ contention, as pleaded, was that LIC could not be an information provider to the dairy industry and a supplier of semen: it could be only one or the other. The primary relief sought under this cause of action was an injunction to restrain LIC from engaging in the business of selling semen. In addition, the farmer plaintiffs also sought an enquiry as to the damages CDA members had sustained as a consequence of LIC’s breach of fiduciary duty.
[21] As pleaded, LIC was in breach of its alleged duty of loyalty right from its incorporation in 1988, as right from that date it was involved in breeding and selling semen, as well as being the provider of information on which no doubt many dairy farmers relied when making decisions concerning the breeding of their stock.
[22] In the argument before us, however, Mr Judd developed the fiduciary obligation somewhat differently. While not overtly jettisoning the pleadings, he submitted that the breach occurred when the AES was promulgated in 1996. On this argument, it was the allegedly defective status of the new system which caused loss to the farmer plaintiffs. Their animals’ semen was improperly rated less favourably under the new system than the old, and the assertion was that that was because the AES had been “skewed to advantage or disadvantage particular animals”. The assertion was that the AES favoured LIC’s breeding stock over the farmer plaintiffs’ breeding stock.
[23] That was, in our view, a significant shift from the pleadings. That the appellants had such difficulty in formulating their proposition highlights perhaps the inherent weakness of this cause of action, whatever its ultimate nuance.
[24] In order to evaluate properly this argument (however formulated), it is necessary to provide a factual background to the farmer plaintiffs’ complaint so that the analysis of the argument takes place in the correct statutory and factual context. A full factual account can be found in Wild J’s judgment, particularly at [12]-[60].
[25] Herd testing began in New Zealand in 1909 when the Department of Agriculture and a Wairarapa dairy company tested cows for butter fat yield. Herd testing by groups of farmers had its origin in the Waikato in 1922-1923. Eventually, some 28 herd test farmer cooperatives were formed throughout New Zealand: judgment at [15]. These herd test farmer co-operatives later amalgamated into six regional Herd Improvement Associations: judgment at [18].
[26] Herd testing became a national service with the approval of a plan called the Herd Improvement Plan in 1939. Its major objective was to increase the net farm income of dairy farmers: judgment at [19]. Policy under the plan was developed by a Herd Improvement Council, comprising representatives of the Board, Government, the Herd Improvement Associations, breed societies, and the Ministry of Agriculture: judgment at [20].
[27] At the same time these developments were taking place, Sir Arthur Ward was undertaking pioneering research into animal evaluation systems: judgment at [22]. As a result of that research, the first artificial insemination of dairy cows began on a trial basis in 1945: judgment at [23]. By 1949 this research had progressed to the stage where it could be applied commercially on farms: judgment at [24].
[28] In 1950, the Board agreed to accept responsibility for the establishment of a national artificial breeding service administered by its Herd Improvement Department, with Herd Improvement Associations distributing semen and inseminating cows. In 1952, the Board purchased a farm in the Waikato on which it established the Newstead Artificial Breeding Service. The Board’s artificial breeding service grew rapidly: 4,000 cows were inseminated in 1950, but by 1960 the figure was 496,000: judgment at [25].
[29] The Board’s Herd Improvement Department, as well as acting as secretariat for the Herd Improvement Council, administered national systems for the council and the six Herd Improvement Associations. The systems included the consulting officer group, herd testing, compiling and publishing an annual economic survey of dairy farms, and researching, developing and operating a national animal evaluation system. Included in these systems were the development, financing and management of the national Dairy Sire Progeny Testing Programme. Part of that programme was the operation of bull farms and artificial breeding centres: judgment at [26].
[30] In 1981, the Board set up a committee to consider the best long term structure for administering dairy herd improvement and farm management services throughout New Zealand. This committee was known as the Frampton committee, after its chairman. The Frampton committee recommended that the Board’s Farm Production Division and the six Livestock Improvement Associations (as by then the Herd Improvement Associations were known) agree to operate as though they were a single entity: judgment at [28].
[31] On 5 September 1984 the parties signed a Deed of Establishment which implemented this recommendation. The Herd Improvement Council was renamed the Livestock Improvement Council and the new organisation was called the Livestock Improvement Division of the Board: judgment at [29]. The deed recorded that the primary object and function of the Livestock Improvement Council was:
(a)to promote, organise, carry out, manage and control by such means as may be deemed necessary or expedient the improvement of livestock in New Zealand including (but not by way of limitation):
(i)The measurement or evaluation of the growth, yield of milk or milk constituent, feed conversion efficiency, or any other factor relevant to decisions on breeding of livestock;
(ii)The development and commercial application of artificial breeding of livestock;
(iii)The purchase, sale and provision of livestock, semen, services and products of all kinds.
[32] In 1988, the Board resolved to wind up the six Livestock Improvement Associations and to transfer their assets to the Board. The Board would in turn establish Livestock Improvement Corporation Limited as a wholly owned subsidiary of the Board and would then transfer to it the assets of the former six associations and of the Board’s Livestock Improvement Division: judgment at [30]. Following that resolution, LIC was incorporated. Among those assets was the core database, containing the information built up over the years as a result of herd testing and animal evaluation.
[33] LIC continued with the herd testing and artificial breeding operations that its predecessor organisations had been undertaking. This included work on a new animal evaluation system. As already noted, there was an existing system, which was being constantly improved as new information and techniques became known. But 1996 saw the introduction of a completely new system, which we have referred to as the AES. This event, on the argument presented to us, was a significant event, which constituted a breach of the duty of loyalty. We shall return to evaluate that submission later. In the meantime, we shall continue with the chronological account, insofar as it is relevant to this cause of action.
[34] The next major event was the passage of the Dairy Industry Restructuring Act 2001 (“the Restructuring Act”). Part 2 Subpart 4 of the Act dealt with restructuring of LIC and with the future of the core database.
[35] The relevant parts of the Restructuring Act for present purposes are these.
[36] First, the Act clearly envisaged that LIC could continue to be a certified herd tester. Section 62 of the Act provided that regulations could be made, requiring, among other things, “LIC to offer a nationwide herd testing service” and requiring “LIC to charge uniform prices for its herd testing service within regions specified in the regulations”: see paras (c) and (d). Regulations were in fact made under s 62: see Dairy Industry (Herd Testing and New Zealand Dairy Core Database) Regulations 2001 (“the 2001 Regulations”). Regulation 9(2) stipulated that, while LIC was a certified herd tester, it had to provide its herd testing services to any dairy farmer in New Zealand who requested those services and who paid the fee due to LIC for the supply of those services. The regulation further provided that LIC had to use the same methodology to calculate prices for herd testing services for all dairy herds within specified regions, so that prices were uniform throughout the region. So there can be no doubt about LIC’s continued ability to undertake herd testing.
[37] Secondly, the Restructuring Act required LIC to register under Part II of the Co‑operative Companies Act 1996: s 45(c). The LIC board was to prepare for the relevant minister a restructuring plan, which was to “contain a constitution for LIC that complies with the requirements of this Act”: s 45(b). Section 47 of the Restructuring Act provided:
The LIC board must ensure that the constitution in the restructuring plan requires LIC to retain the core database.
[38] “Core database” was defined in s 5(1) of the Act as meaning:
The part of the database operated by LIC that comprises the following information:
(a)information provided to LIC under the Herd Testing Regulations 1958 or under the terms and conditions of any licence issued under those regulations:
(b)information provided to LIC under any regulations made under this Act.
[39] LIC’s new constitution did indeed provide for retention of the core database, as required by s 47. Clause 1.4 of the constitution, as approved by the relevant minister and ultimately registered, provides:
The Company shall retain the Core Database and this requirement shall be construed by reference to the provisions of the Restructuring Act and the obligations of the Company and the Board under that Act.
[40] So again, there can be no possible question about LIC’s entitlement, at least since the 2001 Act came into force, to continue to maintain the database. Mr Judd accepts that.
[41] The third important change made by the Restructuring Act was as to ownership of LIC. LIC was to cease being a subsidiary of the Board and was to become instead a co-operative company, owned by those who had used LIC’s products or services in the previous year. Section 46 of the Restructuring Act reads as follows:
(1)The LIC board must ensure that the share allocation plan in the restructuring plan—
(a)provides for the allocation of the shares in LIC, on the approved restructuring day, to persons—
(i)who derive an income from farming dairy cows in New Zealand whose milk is supplied for processing in New Zealand (including sharemilkers); and
(ii) who have purchased qualifying products or services from LIC to the value of $500 or more (exclusive of GST) during the year ending 31 May 2001; and
(b)provides that shares in the company are to be allocated on a proportionate basis (as determined by the LIC board), calculated by reference to the higher of—
(i)the amount paid by the purchaser for qualifying products or services purchased from LIC during the year ending 31 May 2001; and
(ii)the amount paid by the purchaser for qualifying products or services purchased from LIC during the year ending 31 May 2000; and
(c)specifies clearly the proposed basis of allocation.
(2)LIC must, in the share allocation plan, treat participants in LIC's Sire Proving Scheme and contract mating scheme who acquired qualifying products or services at no cost, or less than full cost, as if they were purchasers who had paid the amount that would have been payable if they were not participants in those schemes.
[42] “Qualifying products or services” are defined in s 5(1) as meaning:
Premier Sires, all nominated semen options, Sire Proving Scheme, contract mating scheme, AB Technician Services, MINDA, MINDA Herd Testing, GeneMark, identification tags, and FarmWise products and services, provided by LIC.
[43] Thus there can be no doubt that Parliament saw those products and services – which included the sale of semen – as being within LIC’s responsibility. That is also reflected in clause 1.1 of the constitution (approved by the relevant minister under s 55 as complying with the Act). It specified that, among the “principal activities” of LIC, were to be “the development and commercial application of artificial breeding of livestock” and “the purchase, sale and provision of livestock [and] semen”.
[44] It is absolutely clear that to grant the injunction the appellants seek would be directly contrary to Parliamentary fiat. It is not as though Parliament was not aware of the concerns of the farmer plaintiffs, Levels Gentech, and Brenco, as submissions had been made on their behalf to the select committee considering the Dairy Industry Restructuring Bill.
[45] Although it is clear that the injunctive relief applied for cannot be granted given the terms of the Restructuring Act, that does not mean that the farmer plaintiffs are not entitled to damages or compensation with respect to the period between 1996 and the coming into force of the Restructuring Act. We say 1996 as the start point, as that appears to be the year in which the farmer plaintiffs assert either that LIC started to breach the alleged duty of loyalty owed to them or that loss started to flow from LIC’s being in competition with them in the supply of semen. And the event which is said to create the breach or loss was the promulgation of the new AES. The farmer plaintiffs had, prior to 1996, been selling semen to New Zealand farmers. In so doing, they competed against LIC, seemingly without complaint. Their complaints developed after the new AES was promulgated because their animals fared less well under the new AES, making them less desirable as breeding stock. Their complaint is that the new AES is deficient, and particularly that aspect of it termed the economic model.
[46] Because this new system is said to be defective, the farmer plaintiffs assert that LIC has breached a duty of loyalty it owed to all farmers, and in particular to them. The farmer plaintiffs do not, it seems, assert that the new system has been in fact skewed or manipulated so as to favour LIC’s own breeding stock, but they assert that it was capable of being so skewed or manipulated. Because of that potential, Mr Judd submitted that LIC was now placed in a position of conflict. He said that LIC, from the introduction of the AES, had to divest itself of one of its activities. LIC could not on the one hand be the nation’s herd tester and developer of animal evaluation systems, while on the other running its own breeding programme and being the seller of semen. One or other activity had to be abandoned. There was no choice now, Mr Judd said, as to which activity must go. It was, he said, the breeding programme and the selling of semen, as Parliament had decreed that LIC could continue as a herd tester and must retain responsibility for the core database. For reasons already explained, it is our view that the Restructuring Act also required LIC to continue its breeding programme and its role as a supplier of semen, and to that extent Mr Judd’s argument is in error. But this is something of a side point to Mr Judd’s main point, namely, that in the period 1996 to 2001, LIC was in, what may loosely be called, a conflict position.
[47] Wild J rejected the argument that LIC owed fiduciary obligations to the farmer plaintiffs. We do too, though for slightly different reasons.
[48] The appellants’ analysis is, with respect, fundamentally flawed. LIC was, at the relevant time, an ordinary company registered under the Companies Act. The appellants mounted a challenge to the Board’s power to incorporate LIC and to invest in it. That challenge failed, and there is no appeal from that. It is incorrect to say that LIC was, at the relevant time, owned by the dairy farmers of New Zealand. It was owned by the Board. The Board in turn was a statutory entity, the functions of which were governed by the Dairy Board Act 1961. LIC had no relationship at all with some dairy farmers, namely those who did not choose to use its products and services. With respect to those dairy farmers who did use some of its products and services, the relationship was one of provider and user, its terms governed by the terms of the relevant contracts. As a supplier of goods and services, it did not owe fiduciary obligations to its customers. Similarly, it did not owe them to its competitors. It certainly was not obliged to desist from selling semen because some dairy farmers wanted to be in the semen selling business themselves. The relationship between LIC and the dairy farmers of New Zealand is a mile away from any recognised fiduciary relationship and from any relationship analogous thereto. It is noteworthy that Mr Judd did not cite any case holding a duty of loyalty to arise in circumstances like these.
[49] The special status of the Dairy Board in New Zealand does not create fiduciary duties where none would otherwise exist. The Board’s subsidiary is entitled to be treated like any other company. Its relationship with its customers and its competitors is no different from the relationships other companies enjoy with their customers and competitors. It is, with respect, loose thinking to extrapolate duties of loyalty from the co-operative nature of aspects of the New Zealand dairy industry.
[50] LIC, like any other trader, could have been pursued under the Commerce Act 1986 if it had indulged in restrictive trade practices as proscribed by that Act. The present appellants have not alleged any breach of the Commerce Act, either by the Board or by LIC. That would be the appropriate route by which any misuse of market power could be restrained.
[51] It is, of course, the case that, until the 2002/2003 dairy season, LIC operated the only licensed herd testing service in New Zealand : judgment at [41]. The fact that it was the only licensed herd testing service is not a result of anything done by LIC. That was the Board’s decision. The fact that the Board did not choose to license others cannot cause LIC to assume fiduciary obligations which it would not otherwise have. Others could have applied to the Board for herd testing licences; indeed, in the 1990s, others did apply. The Board declined their applications. The legality of those declinatures has not been challenged. LIC as herd tester did assume obligations to those whose herds were tested. Those obligations to its clients were governed solely by its contract with those clients. There is no pleading that LIC has breached any of those contracts.
[52] The fact that LIC acquired ownership of the core database is not, notwithstanding the appellants’ pleading, a step towards the imposition of the alleged fiduciary obligation. There is no extant challenge to the way in which the Board acquired those parts of the database it did not already own in 1988. There can also be no challenge to the Board’s decision to transfer the database to what was then its wholly owned subsidiary. Indeed, that situation has now been confirmed by Parliament in that LIC is bound to retain the core database under the Restructuring Act.
[53] In the 1990s, others sought access to the database. As a result, the Board set up a committee to review the operation of the database. On the recommendation of that committee, the Board established a Dairy Herd Improvement Tribunal as an independent body to develop guidelines and conditions for access to the information contained in the database and to mediate on issues referred to it by any party. That tribunal managed access until the New Zealand Dairy Core Database Access Panel was created by reg 13 of the 2001 Regulations.
[54] The fact that the Board set up a structure in the 1990s permitting access on terms may be an indication that the Board considered itself or considered LIC vulnerable to challenge. If it was, however, that potential challenge almost certainly arose via the Commerce Act, not via any supposed equitable obligation of loyalty.
[55] The principal complaint, of course, is combining the activities of providing information to dairy farmers with the operation of a breeding and semen-supply business, in circumstances where some farmers also operate a breeding and semen‑supply business. If this attack is well founded, then it is not just LIC which has been in breach; the Board too must have been with respect to the period prior to 1988, as the Board and its associated entities have run both services for decades.
[56] It is noteworthy that no one complained about the dual activity prior to July 2002, when this cause of action was first pleaded against LIC. No one apparently said in 1988 when LIC was set up with the dual functions that the functions were incompatible and represented a breach of fiduciary duty towards New Zealand’s dairy farmers. Even in 1996 with the advent of the AES, no one said that. The complaint is not articulated until 2002. Surely if the point is a good one, one would have expected some complaint at a much earlier stage.
[57] The point is not a good one. LIC did not owe a duty of loyalty to the farmers of New Zealand not to compete in the supply of semen because it also provided an animal evaluation service. No one was compelled to use either service LIC provided. Farmers could choose to use both services, just one of them, or neither of them. Obviously, if a farmer chose to use the information service, that farmer would have certain expectations as to its utility; what those expectations were would depend upon the terms of contract entered into between the farmer and LIC. Those terms of contract are not before us. So far as we are aware, no farmer has complained about breach of those terms. Certainly the farmer plaintiffs in this proceeding, if they have used the service, have not complained of breach.
[58] As now presented to us, the conflict arose when the AES was promulgated in 1996. It is in effect said that the defective nature of the new AES has created the problem. But the creation of the alleged duty of loyalty cannot turn on how good or bad the AES is. Nor can breach of a duty of loyalty hinge on that. Even if the AES does have defects, that cannot lead to a conclusion that LIC must stop selling semen and must compensate the farmer plaintiffs for having sold semen in the past.
[59] For these reasons, we are satisfied that LIC did not owe a duty of loyalty to the farmer plaintiffs, which required them to elect whether they wanted to be an information provider or a seller of semen. This cause of action rightly failed before Wild J.
Levels Gentech’s and Brenco’s fiduciary cause of action
[60] The pleading for this cause of action closely followed the pleading for the farmer plaintiffs’ fiduciary cause of action. Levels Gentech and Brenco are importers and sellers of bovine genetic material. As such, they are in competition with LIC.
[61] From the discussion in the preceding section of this judgment, it will be clear that the alleged fiduciary duty of loyalty does not really stem from the identity of the plaintiffs. For instance, the farmer plaintiffs did not assert that the fiduciary duty of loyalty was owed to them because they had supplied confidential information to LIC through herd testing. Indeed, there is no pleading that they did supply such confidential information. Rather, the duty was said to arise because LIC was the sole custodian of the core database and hence the sole supplier of information derived from it, while at the same time being involved in breeding and the selling of semen. The argument was that the farmer plaintiffs who were themselves engaged in breeding and the selling of semen should be compensated because they were facing competition from LIC which they ought not to have been facing.
[62] Exactly the same argument is mounted on behalf of Levels Gentech and Brenco. Mr Judd asserted as follows:
Whilst fiduciary duties are not ordinarily owed to competitors, the special position which LIC occupies as custodian of the database and provider of the AES means that the fiduciary relationship exists not just with farmers but also with other industry participants, such as the second and third appellants, who perforce were required to rely on the AES. The competitor position arises because LIC has chosen both to provide the AES (in respect of which it is not in competition with other providers of breeding services) and to engage in the business of providing breeding services (where it is in competition with other providers). If LIC had the animal evaluation services function only, LIC would not be in competition with other providers of breeding services. LIC’s competitive activities make it breach the loyalty duty.
[63] In essence, therefore, on the appellants’ case, Levels Gentech and Brenco are in the same position as the farmer plaintiffs who are involved in breeding and selling semen. All are facing competition which they should not be facing.
[64] We reject the claim by Levels Gentech and Brenco for the same reasons we rejected the farmer plaintiffs’ fiduciary duty claim. LIC was not in a fiduciary relationship with Levels Gentech or Brenco.
Fair Trading Act
Overview
[65] The essence of this cause of action is that LIC in various ways exaggerated the reliability of the AES. Indirectly, of course, this is as well an attack on the AES as, unless it is unreliable in the manner alleged, what LIC said about it could not be challengeable.
[66] All appellants sought compensation for the losses they said they had suffered as a result of LIC’s misleading and deceptive conduct. In addition, the appellants, in their pleadings, sought “an injunction restraining the Board and LIC from continuing with the operation of the [AES]”. It is impossible to see how an injunction in those terms could arise from allegations that the AES was misrepresented. At best the appellants could have hoped for an injunction restraining misrepresentations in the future and, perhaps, some form of corrective advertising. Mr Cooke accepted before us that the terms of any injunction could not be as pleaded. He did not have alternative wording to give us. He said that, were the appellants successful on this cause of action, the wording of any injunction should be a matter for discussion between the parties. Its wording might depend, he said, on the extent to which this court found the AES had been misrepresented.
The alleged representations
[67] The appellants pleaded that, in promoting, introducing and operating the AES, LIC had made express and implied representations as to the accuracy of the AES and the information it produces: claim, para 52. The appellants then provided particulars of 14 representations, which they said were misleading or deceptive.
[68] The representations were said to be contained in the following publications emanating from LIC or its representatives:
(a)A booklet called Animal Evaluation User Guide;
(b)A video called Farming with Pictures;
(c)Other written information provided by LIC describing the attributes of the AES;
(d)Oral statements made by LIC representatives at meetings with farmers and other industry representatives in promoting the AES;
(e)The animal evaluation rankings themselves, produced and distributed by LIC after the AES was introduced.
[69] Although there was before Wild J little dispute as to what had been said – most of it was, after all, in hard form – there was nonetheless dispute as to how that information would have been understood by the intended recipients of the information, the dairy farmers of New Zealand. Before us, Mr Cooke attempted to condense the particularised representations to what he said were the three core representations made by LIC:
(a)That the AES figures calculated an animal’s genetic ability to make the additional net profit specified (i.e., it calculated the animal’s true economic worth);
(b)That the accuracy of that net profit figure was shown by the reliability percentage figure provided alongside the dollar figure; and
(c)That the AES system had been thoroughly trialled, and then audited by a team of independent experts to ensure that the AES did indeed do those things.
[70] Although those three core representations do not match exactly the pleaded particulars, they are nonetheless near enough to them, and certainly Mr Taylor, for LIC, did not challenge them as a summary of the key allegations the appellants had made. He disputed, however, whether what was said did amount to the three core representations.
[71] Mr Cooke did not attempt to tie any one of his core representations to specific passages in the publications to which he referred us. Rather, he looked at LIC’s material generally and submitted that, viewed overall, the material could be said to make the representations. We accept that approach, but stress that, in a case of this sort, it is necessary to look at all the information LIC put out and which the dairy farming community generally could have been expected to read or view. The User Guide itself indicated that it did not purport to be a complete answer. It informed farmers that they would receive a list of dates and venues for animal evaluation farmer meetings being held in their region. It went on:
Attending these meetings will increase your understanding of the new system and help to answer common questions regarding the new evaluations. If you have outstanding queries after attending a meeting you will have the opportunity to fill in a query form and have your query returned with an answer.
[72] The User Guide also went on to explain that queries could be submitted to representatives of AB companies, breed associations, or LIC advisory consulting officers. LIC also set up an “Animal Evaluation Query Service”, the address of which was given in the User Guide.
[73] As well as this, there was a series of articles about the AES in the NZ Dairy Exporter, a monthly magazine published by NZ Dairy Exporter Limited and circulated free to almost all dairy farmers in the country.
[74] Finally, LIC made available to dairy farmers the Animal Evaluation Technical Manual, a 95 page book describing the new system in detail in non‑technical terms.
[75] All of that material must be looked at when evaluating LIC’s conduct in its explanation of the AES to dairy farmers.
[76] Before analysing whether the three core representations were made, we think it desirable to set out some legal principles applicable on the facts of this case.
Applicable legal principles
[77] The first point to emphasise is that the commercial law of New Zealand is “based on the premise that society’s resources are best allocated in a competitive market where rivalry between firms ensures maximum efficiency in the use of resources”: Tru Tone Limited v Festival Records Retail Marketing Limited [1988] 2 NZLR 352 at 358; Telecom Directories Limited v Ad.Viser (NZ) Limited (1992) 5 TCLR 60 at 62. The normal response to a trade rival’s allegedly innovative product or service should be a trade or marketing response, not a rush to the court door with “some arguable item in the competitor’s promotional material which might be labelled misleading or deceptive”: Squibb & Sons (NZ) Limited v ICI NZ Limited (1988) 3 TCLR 296 at 324.
[78] Secondly, in evaluating conduct which is allegedly misleading or deceptive, the court must always identify those who have been or are likely to be misled or deceived: Unilever New Zealand Limited v Cerebos Gregg’s Limited (1994) 6 TCLR 187 (CA) at 192. In this case, the audience is clear, the dairy farmers of New Zealand. It is reasonable to assume that those dairy farmers know a lot about cows and bulls. As well, virtually all would have a reasonably good knowledge of systems like the AES, as less sophisticated versions had been in use for decades. That is not to say, however, that the farmers would know the science behind these systems or the individual animal evaluation rankings under the various systems.
[79] Thirdly, when determining whether advertising or promotional material is misleading or deceptive, the courts must adopt a robust approach – “a degree of robust realism is necessary”: Stuart Alexander & Co (Interstate) Pty Limited v Blenders Pty Limited (1981) ATPR 40-244 at 43,203; Unilever at 193.
[80] Fourthly, the conduct of a defendant must be viewed as a whole. “Where the conduct complained of consists of words it would not be right to select some words only and to ignore others which provided the context which gave meaning to the particular words”: Parkdale Custom Built Furniture Pty Limited v Puxu Pty Limited (1982) 149 CLR 191 at 199.
[81] Finally, in trade description cases, the focus is upon what is said and done rather than on what is not said or done. The legal obligation is to avoid falsehood. It is not an obligation to provide compendious explanations: Unilever at 192.
First core representation
[82] Mr Cooke referred us to three passages which, he said, amounted to the first core representation, which, for convenience, we repeat:
The AES figures calculated an animal’s genetic ability to make the additional net profits specified (i.e., it calculated the animal’s true economic worth).
[83] First there was this passage in the User Guide:
Breeding animals for profit and efficiency
Animal evaluation will identify the most profitable and efficient animals in your herd, i.e. those cows which are the most efficient converters of feed into profit.
[84] Secondly, he referred us to an LIC advertisement in June 1996, which said, in part:
Focus on profit. Cows which produce the most milk are not necessarily the most profitable to farm. The new system identifies the most profitable and efficient cows in the herd.
[85] And finally, Mr Cooke referred us to a passage in the video:
It is important to remember the dollar figure does not represent income per cow but the ability of that animal to convert a given amount of feed into income, relative to other animals. This will ensure the herd you are milking in the future is making you the most money from the feed available.
[86] Before we analyse whether what was said did amount to the first core representation, we need to explain the reference in the core representation to “the additional net profits specified”. The quoted passage from the video also needs explanation. Our explanation will be brief. Those wanting a complete understanding of this aspect of the AES should refer to Wild J’s judgment.
[87] One of the new features of the AES was that it gave to each animal “a dollar figure”. That figure did not represent what the animal was worth. But the figure was intended to assist in the ranking of animals, assuming the farmer’s aim was to make the most profit. LIC explained the essential utility of the AES in this way in the User Guide:
On New Zealand dairy farms, a common objective is to convert available feed into profit. Profit is the output, and feed (or land) is the input. The machinery used to do this is the dairy cow. Animal Evaluation ranks animals in terms of their expected profit per unit of feed eaten *, i.e. it identifies those animals in your herd which are the most efficient converters of feed into income.
*The unit of feed represents 4.5 tonnes of Dry Matter, the average yearly intake of a New Zealand dairy cow and replacements. This standard unit of feed is used to measure the efficiency of all dairy cattle in the country, regardless of their actual herd situation. In this way, all animals are given the same opportunities to earn their ranking.
[88] When a dairy farmer received a herd test report under the new system, each cow would be given a Breeding Worth (BW), a Production Worth (PW), and a Lactation Worth (LW). For current purposes we can ignore the LW. The User Guide recommended that breeding decisions should be made using the BW index, culling decisions using the PW index, and buying and selling stock decisions should be made using a combination of BW and PW.
[89] The User Guide gave as an example a cow having a BW of 48/49. The explanation was as follows:
BW (Breeding Worth)
The expected ability of an animal to breed replacements which are efficient converters of feed into profit. The reliability of this evaluation is also shown.
A Breeding Worth of 48/49 indicates the animal (bull or cow) is expected to generate an extra $48 profit per year, through breeding replacements which are more efficient converters of feed into profit, above the base of 0. This figure has a reliability of 49%.
[90] The like explanation of PW is this:
The expected lifetime ability of a cow to convert feed into profit. The reliability of this evaluation is also shown.
A Production Worth of 72/56 indicates the cow is expected to generate an extra $72 profit per year, per 4.5 tDM, on average over her lifetime, above the base of 0. This figure has a reliability of 56%.
[91] We do not accept that the statements to which Mr Cooke referred us do amount to a representation that the AES told the farmer either what “additional net profits” the animal would make or its “true economic worth”. Mr Cooke, when submitting why the representation was a misrepresentation, said that “the net profit figure was no more than a prediction based on a series of assumptions, simplifications and (ultimately) guesses”. He further said that “to portray that the dollar figure identified the animal’s genetic ability to make the additional net profits specified was inherently misleading without explaining those significant qualifications”.
[92] In reply, Mr Taylor submitted that the AES figures were no more than predictions or opinions as to future relative profitability. He said that that was the only sensible interpretation open on the information, when read in context. He further submitted that there was no evidence of a single farmer having interpreted it any differently.
[93] We accept Mr Taylor’s submission. First, we agree with Mr Taylor that it is extraordinary that not a single farmer was called to testify that he or she had been confused or misled on this point (or indeed on the other two core representations). Mr Cooke attempted to justify their absence in the following way:
It is hard to see how such evidence could have assisted. Even the experts on both sides had difficulties fully understanding the system. In any event, the test for infringement is an objective one, and the function of the court is to assess whether the conduct is misleading or deceptive or likely to mislead or deceive.
[94] We accept that such evidence was not essential, but the absence of such evidence is surely striking. It is certainly true that evidence that a particular person or particular people formed an erroneous conclusion does not itself establish that conduct is misleading or deceptive or likely to mislead or deceive: Taco Co of Australia Inc v Taco Bell Pty Limited (1982) 42 ALR 177 at 202. But that is not to say that such evidence is not of assistance to the court. There may be some cases where the misrepresentation is made to the public at large and where the misleading nature of the conduct is sufficiently obviously that the court can make findings without actual evidence of confusion. But this case is surely not in that category. The representations were made to a specific group of skilled people, with a store of knowledge on matters relating to animal evaluation. How much knowledge is difficult for any court to evaluate without proper evidence. Contrary to Mr Cooke’s submission, we consider that evidence from farmers as to their understanding on these core representations would have been extremely valuable. That must have occurred to the appellants and their legal advisers. We consider that Wild J was justified in drawing inferences from the absence of evidence from farmers as to their misunderstandings on these core representations. It is also noteworthy that none of the appellants claimed to be misled by this material. What they did not like was the fact that their animals ranked less well under the AES compared with previously.
[95] Secondly, we think it clear, when one views LIC’s information as a whole, that the predictive nature of the BW and PW figures was clear. What LIC did say, in the User Guide among other places, was that the animal evaluations “[could] be used as an aid to making three types of decisions”, namely breeding replacements, culling poorer animals, and buying and selling stock.
[96] Any farmer reading the material would have realised that the figures were no more than opinions and predictions. For a start, the User Guide itself made clear that BW and PW were in part “based on future price predictions for milk components”. It was said that those future price predictions would be reviewed every year, just as they were under the system AES replaced.
[97] Further, as Mr Taylor noted, the use of a reliability figure in itself suggested that the information was not definitive. For instance, in the video, the commentator explained how animal evaluations could be used as an aid for making various types of decisions. He explained that farmers, when making buying and selling decisions, should take into account “both the average Breeding Worth and average Production Worth of the group or herd”. He went on:
You may place more emphasis on one or the other, depending on whether the animals are intended mainly for breeding or production purposes. Lactation worth should never be used by itself for making decisions as it is only a current season measure of an animal’s producing ability. Also the reliability of a valuation should always be taken into account when making decisions.
[98] It was also made clear in various articles that further improvements in the AES were expected. That too suggests, as any farmer would have expected, that this was not the last word in terms of animal evaluation models.
[99] We consider that the appellants rightly failed on this first core representation, principally on the basis that any dairy farmer, reviewing all the material available to him or her, would have recognised that the net profit figures given were no more than predictions or opinions based, in part, on assumptions. It was not incumbent on LIC to spell out the assumptions on which the predictions were made. In any event, the assumptions were extensively reviewed by Wild J when dealing with the negligence cause of action and were found to have been justified.
First core representation: an offshoot
[100] Before considering the second core representation, we deal now with another argument which Mr Cooke developed at the end of his submissions. This argument is indirectly related to the argument on the first core representation, as it relates to another way in which Mr Cooke said the net profit figures were misleading. Mr Cooke said that the BW figures were actually a dollar figure above a base profit figure which the User Guide described as “0”. He said that the profit base in 1996 was actually $571. He said that the net profit figures exaggerated the real differences between different animals’ BW and PW. He said that the difference between an animal with a BW of $50 and an animal with a BW of $75 “is not nearly as important when the base figure is added”: the figures become $621 compared with $646. Mr Cooke submitted that, if the base figure is added, “the difference between the animals is apparently less significant”.
[101] In response, Mr Taylor submitted that the “base of 0” was not identified as a deficiency in the appellants’ pleadings or in the paper setting out the position of the appellants’ experts following a conference of experts held under r 330A of the High Court Rules. (That was a conference Wild J ordered when by day 7 of the trial it had become clear that there was a wide divergence of views between the parties’ experts on highly technical aspects of the AES. The experts had not previously met, nor made any attempt to resolve their differing views or even to identify areas of disagreement: judgment at [69].) Mr Taylor submitted that it was not until seven years after the system was introduced that this argument was finally formulated. He said it was indicative of an approach where the appellants’ counsel have dissected those aspects of the system that they think they understand and work backwards to match them up with isolated statements or examples of confusion, taken out of context, to create apparent inconsistencies, which they then seek to evaluate to misrepresentations.
[102] The system in use prior to the AES had used a fixed base (in that case, 100). It related to a 1960 born animal, whereas the base used in the AES was a 1985 born animal. The use of a base was not therefore new, even though the actual base had changed. Indeed, Dr Paul Miller, one of the appellants’ experts at trial, had said, when he was consulted by the Technical Advisory Committee shortly before the introduction of the AES, that the use of a base was appropriate. He said in a report to his principals why he supported the concept. He said that New Zealand had a long history of using a fixed base and that the concept was well understood by New Zealand breeders, farm advisers, and dairymen. He explained to his principals the advantages of a fixed base over a moving base. He also explained why it was appropriate to use 1985 cows to form the genetic base.
[103] Like Wild J, we do not consider that the use of a base of 0 was misleading. Indeed, the use of a base seems to be accepted scientifically. It is used in comparable systems overseas. Dairy farmers were already used to the concept from the old system. There is no evidence that any farmer took the base to be $0, which is the assumption which would have had to be made if Mr Cooke’s contention were to be right. In our view, the position was made absolutely clear in the video which accompanied the launch of the AES:
The current system expresses indexes in percentage units. For example a PI of 138 indicates a cow which is 38% better than the base of 100. The base of 100 represents the PI of the average 1960s cow. …
In future evaluations will be expressed in dollars relative to a base of zero. The base of zero represents the average evaluation of those 1985 born cows which have records for fat, protein and milk as well as records for confirmation and type, such as udders and temperament. This group of animals was used as they were the first generation with records of all of these traits.
So we have established that there will be three types of evaluation on herd reports just as there are now but they will be expressed as a difference in dollars relative to a base of zero.
[104] We acknowledge that there was some confusion on a related aspect when the AES was introduced. Apparently some members of the Holstein-Friesian Association became agitated when they saw the average Breeding Worth figures for the different breeds in New Zealand. The BW figures for the breed were interpreted by some as showing “Holstein-Friesians are 30% less efficient than Jerseys”.
[105] This confusion arose from the farmers’ misinterpretation of the breed average figures. The BW figures were these:
Holstein-Friesian $18.4
Jersey $28.2
Ayrshire $ 9.8
[106] What the farmers forgot was that the base cow profit of $571 (per 4.5 tonnes of Dry Matter) had to be added. When that was included, the profitability of the different breeds was this:
Holstein-Friesian $589.4 (18.4 + 571)
Jersey $599.2 (28.2 + 571)
Ayrshire $580.8 (9.8 + 571)
[107] Therefore, the relative profitability of the Holstein-Friesian and Ayrshire cows compared to the Jersey was:
Holstein-Friesian 98%
Ayrshire 97%
[108] Accordingly, when the base cow profit figure was included, the Jersey cow was only marginally more profitable (on average) than the Holstein-Friesian.
[109] After this misinterpretation was reported to LIC, LIC published articles in appropriate magazines and newsletters to correct the misunderstanding.
[110] This misunderstanding, of course, had nothing to do with using a base of 0 compared with a base of a monetary value, as Mr Cooke suggested. Rather the error arose because the farmers concerned forgot that there was a base. With respect to those farmers, that was a most surprising mistake to make, given that it is extremely hard to understand how any of them could have thought the profit figures were as low as they appear to be when the base dollar figure is excluded. It was also a surprising error given that BWs for individual animals were always expressed to be extra profit above a base of 0.
[111] This evidence of confusion rightly did not assist the appellants. On the contrary, we consider that LIC’s prompt correction of the misunderstanding showed its legitimate concern to make sure that farmers did understand, at least to a reasonable level, what was a very sophisticated evaluation system.
[112] In short, the fact that some people might not understand an accurately stated but complex regime, does not render the statements unfair or misleading.
Second core representation
[113] Again for convenience, we repeat what Mr Cooke termed the second core representation:
The accuracy of the net profit figure was shown by the reliability percentage figure provided alongside the dollar figure.
[114] In respect of this representation, Mr Cooke referred us to two publications. First there was this passage from LIC’s web page:
A BW of 50/48 indicates an animal (bull or cow) is expected to generate an extra $50 profit per year, through breeding replacements which are efficient converters of feed into profit, above a base of zero. This evaluation has a reliability of 48%, indicating how much confidence can be placed in the figure. Reliabilities can range from 0% (no confidence) to 99% (nearly complete confidence).
[115] He also referred us to this passage from the User Guide:
A herd with a Breeding Worth of 30/50 indicates that, on average, these animals are expected to generate an extra $30 profit per year, through breeding replacements which are more efficient converters of feed into profit, above the base of 0. The Breeding Worth of these animals has an average reliability of 50%. Reliability is measured on a scale of 0% (no reliability) to 100% (absolute certainty).
[116] Mr Cooke submitted that the reliability percentage figures placed alongside the dollar profit figures were inherently misleading. They assumed that the assumptions and predictions associated with the profitability assessment were made without error, as the reliability figure was entirely based on the “animal model” part of the AES (i.e., it concerned the uncertainties in the LV, PV and BV genetic assessments, not the economic prediction uncertainties).
[117] Mr Cooke submitted that associating the reliability figure with the dollar figure fundamentally exaggerated the certainty with which the net profit estimate was able to be made.
[118] Mr Cooke submitted that Wild J had erred in his conclusions that the AES was not deficient in basing its reliability figures solely on the animal model: judgment at [298].
[119] Wild J recorded that LIC had accepted before him (judgment at [277]):
(a)That the reliability figure is associated with the dollar BW and PW figures.
(b)That the reliability figures take no account of the accuracy/inaccuracy of the EVs [economic values] because it is impossible to do that.
(c)That the reliability figures assume the EVs are known “without error”.
[120] It was common ground, therefore, that the reliability calculations and figures were based on the animal model and did not measure the reliability of the forecast in the economic model. The reason for that is “that there exists no scientifically established method of calculating the reliability of the economic values produced by the economic model”: judgment at [294].
[121] Wild J concluded that it did not matter that this was not spelt out to the farmers, as he did not accept that any reranking of animals would result as different aspects of the economic equation changed: judgment at [296]. His Honour went on (at [297]):
Any uncertainty in the economic model affects all animals equally. For example, there is obviously a degree of uncertainty as to the accuracy of the prediction of dairy prices in, say, 2008 factored into the model…. The point is that the level of uncertainty is equal for each animal. Similarly, if the reliability of the forecasts and calculations in the economic model could be calculated, those calculations would affect all animals equally because the EVs are applied to all of them. Assessment of the reliability of the economic model would not affect the ranking of animals, although it may well affect (probably by lowering) all the reliabilities attached to the BWs and PWs.
[298] It is a combination of that uniform effect and the absence of any scientifically established method of calculating the unreliability of the forecasts and calculations in the economic model which persuades me that the AES is not deficient in basing its reliability figures it attaches to the BWs solely on the animal model.
[122] Mr Cooke submitted that His Honour’s approach in these two paragraphs was misconceived. What was fundamental was that all evaluations of animals have been overstated in terms of their reliability. Mr Cooke put it this way in his written submissions:
It is difficult to see how this answers the appellants’ case. Indeed those features essentially establish their case. It was the respondents who decided to associate the reliability with the net profit figure the economic model created. It is no answer to say the inherent economic uncertainty affected animals equally. For those wishing to compete with LIC they have the difficulty of persuading a farmer to use an animal with a BW of $65 with the reliability of 95%, as opposed to animals promoted by LIC with a BW of $75 and a reliability of 95%. How was the competitor to persuade the farmer not to follow the BW and take LIC’s animals in those circumstances? The farmer would simply respond by saying that LIC have told him that the profit predictions are 95% accurate. The respondents confirmed that farmers did not understand the model sufficiently to understand the technical issues such as the difference between the animal and economic model.
[123] Mr Cooke’s argument presupposes that the reliability figures should have been lowered. This would then have reflected the uncertainty of future economic predictions. But that was simply not possible: as Wild J found, no scientifically established method of calculating the reliability of the economic values produced by the economic model exists. Rather, the question is whether LIC should have made clear that the reliability figure indicated the amount of genetic information held about that particular animal.
[124] There was no evidence that farmers were misled by the reliability figures. And this is definitely an area in which we as judges feel diffident about concluding that the figures were misleading or deceptive in the absence of evidence. We note that in the video reference was made to the reliability figure “indicating how much information has gone into them”. Further, it was explained in the User Guide that the reliability figure could be as high as 100% (absolute certainty). That may have indicated to the astute reader that economic predictions were not part of the reliability equation, as no prediction of future economic trends could possibly be given on an “absolute certainty” basis.
[125] We suspect that most dairy farmers used the reliability figure as a rough guide to the worth of the BW or PW. The higher the reliability figure, the more likely it was that the extra profit (or the negative profit) was. And if farmers used the reliability figure in that way, they would be acting exactly as LIC intended.
[126] We revert now to Mr Cooke’s example at [120] above. The answer to Mr Cooke’s question is this: the competitor may find it difficult to persuade the farmer not to take LIC’s animal with a BW of $75. Given that the reliability figures are equal, an animal with a BW of $75 is likely to be a better bet (for breeding purposes) than an animal with a BW of $65. And that would be so whether the reliability figures were 95%, 85%, or 75%.
[127] More problematic might be the choice between an animal with a BW of $65 with a reliability of 95% and an animal with a BW of $75 but a reliability of only 40%. That is where a farmer’s judgment would be required. But exactly the same judgment would be required regardless of whether the farmer definitely knew that the reliability figure was based on the animal’s production information (and that of its parents and offspring) or the farmer was uncertain as to how the figure was reached.
[128] In summary, therefore, we do not consider that the way in which LIC explained the reliability percentage was misleading or deceptive.
Third core representation
[129] Mr Cooke’s third core representation was:
The AES system had been thoroughly trialled, and then audited by a team of independent experts to ensure that the AES did indeed do those things [i.e. calculate animals’ true economic worth].
[130] Mr Cooke referred us to the following statement in the video:
The new system’s taken more than three years to develop and has been thoroughly tested in 200 herds throughout the country. It has also been audited by an independent team of experts, known as the Technical Advisory Committee.
[131] Mr Cooke also referred us to some of LIC’s advertising, where it was stated:
The system is audited by an independent team, known as the Technical Advisory Committee, made up of New Zealand and international experts (including representatives from the DRI, the USDA, universities, AgResearch and the DRV) specialising in genetics, nutrition and economics.
[132] Mr Cooke submitted that that representation was untrue because the trialling undertaken and the review work undertaken by the experts did not verify what LIC claimed. Mr Cooke submitted that the evidence showed that the experts themselves had issues about aspects of the AES and the way the outputs of the AES were portrayed.
[133] Mr Cooke challenged the “independence” of many of the experts. Some of those on the Technical Advisory Committee (“the TAC”) had been involved in aspects of the development of the AES, with the consequence, Mr Cooke said, that it was misleading to describe them as “independent” experts to audit it. Further, the evidence revealed that there were differences of view on the TAC. In particular, Mr Cooke submitted that the position of Dr Miller, one of the three international experts involved, had been misrepresented. Dr Miller gave evidence that he did not agree with the system and that LIC had thereby misused him and his name.
[134] In reality, this third representation involves two different matters: the trialling on the dairy farms and the audit by the TAC.
[135] We shall deal with trialling first. Mr Taylor complained that, on this issue, the appellants had changed position significantly since trial. The appellants had pleaded that the representation about trialling was misleading and deceptive because the trial farmers “were not representative of the New Zealand commercial dairy farmers and comprised a significant number of LIC directors and personnel”. Although not explicitly pleaded, the innuendo appears to be that the trialling was not true trialling but was undertaken with farmers, who, by employment, had a commercial interest in the AES being declared successful. On the appeal, however, Mr Taylor submitted that the focus had shifted considerably and inappropriately; there was now no complaint that the farmers were not representative or that they comprised a significant number of LIC directors and personnel. The complaint now became that the trialling did not scientifically verify that the AES had the attributes of accuracy that LIC claimed.
[136] There is much substance in Mr Taylor’s submission. Wild J noted that the alleged misrepresentation regarding trialling had received little attention during trial and hardly a mention in the appellants’ closing address: judgment at [337]. In particular, His Honour noted that “no evidence [was called] that those farmers [who took part in the trial] were not representative of New Zealand commercial dairy farmers or that they comprised a significant number of LIC directors and personnel”: judgment at [342].
[137] The appellants did not seek to amend their pleadings on this point. We consider they should be held to their pleadings. They did not establish their alleged misrepresentation at trial. They have not satisfied us that Wild J’s conclusion on this point was wrong. Clearly trialling of the AES did take place over the number of farms LIC said it did. The statements made by LIC regarding trialling were not false or deceptive.
[138] We now turn to the allegation concerning audit by the TAC, described as an independent team of experts. On this topic, Wild J found that the principal features of the AES were, prior to its implementation, “audited”, or reviewed, by the TAC, which he regarded as comprising a team of experts independent of LIC. Wild J accordingly found that the alleged misrepresentations in relation to expertise had not been made out: judgment at [335].
[139] Having considered all the evidence on this topic to which we were referred by counsel, we consider Wild J’s conclusion to be correct. Mr Cooke complained that the judge “did not really deal with the appellants’ claims in this respect”, but we consider he did. What has happened here is exactly what has happened on the trialling allegation: the appellants’ submissions now deviate significantly from the case presented in their pleadings and the case presented at trial. The complaint as pleaded was this:
(a)No “audit” of the AES was undertaken by the three “international experts” on the TAC, namely Drs Goddard, Wiggans, and Miller, or by any other international experts;
(b)At least one of the three international experts, Dr Miller, had doubts about the accuracy of reliability of the AES and expressed those doubts at the time; and
(c)Significant changes were subsequently made to the economic aspects of the AES before and after the introduction of the AES.
[140] That is quite a different focus from that presented in argument before us.
[141] So far as the pleadings are concerned, it was never represented that the three named individuals had themselves audited the AES. What was represented was that the TAC had on it international experts, a fact that was and is demonstrably true. Those experts did participate in a review or “audit” of the AES. The chair of the TAC, Professor A L Rae, a distinguished New Zealand statistician and geneticist, presented to LIC’s board a report on behalf of the TAC. The report, in its final, published form, dated 1 February 1996, was a 25 page document (including appendices). The judge considered that, in essence, it amounted to a recommendation that the AES be implemented. We too have considered Professor Rae’s report: we are of the view that it did essentially recommend the implementation of the AES, as Wild J found.
[142] We now turn to consider the role of Dr Miller. Dr Miller was the appellants’ principal expert witness at trial. Dr Miller had become a member of the TAC in the following way. Ambreed Limited, a competitor of LIC and a company which had had considerable success in marketing in New Zealand semen from North America, had raised some concerns over some aspects of the new model’s development during the consultation phase in 1995. As a result, Fraser McKenzie, LIC’s chairman, invited Ambreed to select an appointee for the TAC. Ambreed selected Dr Miller, a US-based geneticist. Dr Miller came to New Zealand for one of the TAC meetings. It is clear that at that meeting the TAC as a group recommended that the AES be introduced. The judge heard evidence from a number at that meeting. He concluded that, although Dr Miller certainly expressed reservations about some aspects of the AES at that meeting, it was not clear that he had opposed the recommendation that the AES be introduced: judgment at [248]. Mr Cooke did not attempt to persuade us that that conclusion was wrong.
[143] Dr Miller, in his reporting letter to Ambreed dated 1 December 1995, did not state that he had dissented from the recommendation to endorse AES. With respect to the animal model, he was enthusiastic. He set out the deficiencies of the current model. He then said:
The proposed animal evaluation procedure corrects these deficiencies using appropriate tested and well known procedures and have been properly applied to all of the traits LIC plans to include in genetic evaluations. I agree with the consensus of the committee that these major improvements should be implemented as soon as possible. [Underlining in the original text.]
[144] Dr Miller then went on to say that the proposed inclusion of all breeds in a single evaluation provided significant advantages.
[145] So far as the economic model was concerned, Dr Miller was less certain. He reported to Ambreed as follows:
The committee endorsed the proposed economic model for calculation of Genetic Worth, Production Worth, and Lactation Worth.
A strong majority of the company wants an economic index which would permit selection on profitability rather than on biological traits. Many felt this should have been done years ago. This opinion is based on strategic rather than technical factors.
This controversial issue does not have the solid technical base of the other issues!
I agree with the consensus of the committee that:
1.Net income is an appropriate and worthy breeding objective,
2.Liveweight has a significant role in determining net income, and
3.The LIC staff has been very responsive to suggestions to make their proposed model more closely approximate the real world prices and pricing structures.
[146] Dr Miller then went on to consider deficiencies of the proposed economic model which left it, in his view, “considerably short of the ideal”. He summed up his opinion on the economic model as follows:
It is my opinion that Genetic Worth as currently defined lacks the precision of measurement and is based upon an economic model which is too incomplete to perform well as the principal basis for a nation’s breeding program.
[147] The fact that one member of the TAC had some reservations about the economic model part of the AES did not mean that the statement that the AES had been audited by a technical advisory committee, including international experts, was wrong. It would be highly unlikely that all 13 members of the committee would have identical, favourable views of the AES. Indeed, had they had identical, favourable views, an impartial observer might have been somewhat suspicious about the rigour of the audit process. As it is, the animal model appears to have won unanimous praise and the economic model was supported by “a strong majority”, to use Dr Miller’s own phraseology. In the circumstances, we are satisfied that the statement made about the audit was neither misleading nor deceptive. It was not incumbent on LIC to explain that one member of the TAC had reservations about one aspect of the new model.
[148] The fact that some changes were made to the AES after the TAC had reported does not invalidate in any way the assertion that the AES had been audited. Small improvements have continued to be made over the years. It was always envisaged that that would be the case. No one ever held out that the system as presented was perfect and incapable of improvement. The essence of the scheme as audited has not altered.
[149] That disposes of the matter as pleaded.
[150] We now turn briefly to the other arguments, apparently advanced for the first time before us. This was the argument that it was misleading to describe the TAC members as “independent”. Mr Cooke picked out, as lacking in independence, Professor Garrick, Professor Holmes, Dr Bryant, Professor Bowden, Professor Goddard, Dr Wiggans, and others (unnamed) who, it was said, “had a direct association with the respondents (such as Dr Marshall from the Dairy Board who had also been a director of LIC)”. Of those, Professors Garrick, Holmes, Bowden, and Goddard gave evidence at the trial. Wild J specifically recorded that the appellants in closing had not submitted that those men lacked independence: judgment at [78]. In any event, we do not consider it open now to advance an assertion that the statement that the TAC was “an independent team of experts” was wrong, when a lack of independence was never pleaded against them.
[151] For these reasons, we do not consider that the third core representation was shown to be misleading or deceptive. We agree with the conclusions reached by Wild J on this topic.
[152] That disposes of this cause of action. Had the appellants succeeded on this limb of the cause of action, it would have been necessary to go on to consider the other issues previously mentioned.
Costs
[153] This was an important and difficult case, fully justifying a senior counsel on both sides. In the High Court, costs were awarded on a category 3 basis, a decision which was clearly correct. Our award of costs in this court is based on the fact that the respondents were reasonably represented by senior counsel. We also fix costs on the basis that two counsel were warranted.
A final word
[154] Before concluding these reasons, we wish to note the skill with which this appeal was presented on both sides. This was a difficult case to present, even in four days of appellate argument. The case on appeal ran to some 15 volumes. In addition, the complexity of the animal evaluation system at the heart of the case required very comprehensive explanations by counsel.
[155] We also wish to record that we found Wild J’s judgment extremely comprehensive and logically presented. His findings of fact were clearly presented and reasoned. His assessment of witnesses, and in particular expert witnesses, was clear. Despite the skilful advocacy of Messrs Judd and Cooke, we have concluded that Wild J’s findings on law and fact were correct, and, with but minor exception, for the reasons he gave.
Solicitors:
Grant Cameron Associates, Christchurch, for Appellants
Minter Ellison, Wellington, for Respondents
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