Main Farm Limited (in rec) v Otago Regional Council HC Dunedin Civ-2010-412-000385

[2011] NZHC 1673

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2010-412-000385

BETWEEN  MAIN FARM LIMITED (IN RECEIVERSHIP)

Plaintiff

ANDOTAGO REGIONAL COUNCIL First Defendant

ANDEWAN ROBERT CARR Second Defendant

Hearing:         11 and 12 October 2011 (Heard at Christchurch)

Appearances: J Toebes for Plaintiff

A J Logan for First Defendant
J J Moss for Second Defendant

Judgment:      21 November 2011

RESERVED JUDGMENT OF HON JUSTICE FRENCH

Introduction

[1]      This is a dispute about the beneficial ownership of a water permit.

[2]      On 21  April  2008  the  Otago  Regional  Council  granted  Mr Carr  a water permit to take and use water from the Taieri River.  The receivers of Main Farm say the water permit belongs to Main Farm and the regional council should never have issued it to Mr Carr.

[3]      For his part, Mr Carr says he is the rightful owner.

Factual background

[4]      Mr Carr has lived and farmed in the Maniototo region for most of his life.

MAIN FARM LIMITED (IN RECEIVERSHIP) V OTAGO REGIONAL COUNCIL HC DUN CIV-2010-412-

000385 21 November 2011

[5]      For many years, in conjunction with others, he operated a dairy farm under the trading name Alnwick.  There was an Alnwick partnership, and then in 1993 a limited liability company, Alnwick Limited was formed.  In 1999 Mr Carr acquired options to purchase all the shares in Alnwick Limited and a number of other entities, with a view to gaining control of three dairy farms.  Having acquired the options, he subsequently entered into negotiations for a 50/50 joint venture with a financier, Mr Humphries.

[6]      In June 2000, Mr Carr settled his purchase of the shares in Alnwick Limited and the other entities.  There was then a further set of transactions whereby the assets of the various companies he had acquired – including the assets of Alnwick Limited

– were transferred to newly created joint venture companies, one of which was the plaintiff, Main Farm.[1]   All the newly created companies, including Main Farm, were under the umbrella of the joint venture parent company, Blue Sky Dairy Farms Limited.

[1] As at June 2000, Main Farm was called 'Alnwick Dairy Limited’.  For convenience, I refer to it throughout this judgment as Main Farm.

[7]      The crucial transaction for the purposes of this proceeding is the agreement for sale and purchase between Alnwick Limited and Main Farm.

[8]      The  agreement  is  dated  26  June  2000.    Under  the  agreement,  Alnwick Limited agreed to sell Main Farm the farm business operated as Alnwick as a going concern, with settlement due on 29 June 2000.  The purchase price was $7,324,500.

[9]      Clause 17 of the special conditions provided:

SPECIAL CONDITIONS OF SALE

…

17.      Regional Council Consents

17.1On the possession date the Vendor will assign to the Purchaser its interest in Otago Regional Council permit numbers 3606A, 3606C and 3518.

[10]     It is permit 3518 which is at the centre of this case.[2]

[2] Permit 3518 was deemed to be a resource consent under the Resource Management Act 1991.

[11]     The agreement was signed on behalf of the vendor Alnwick  Limited by Mr Carr.  He was by that time the sole director and the sole shareholder.  Mr Carr also signed on behalf of the purchaser Main Farm, along with Mr Humphries.  Both were directors of Main Farm and also 50/50 shareholders.

[12]     As the documentary evidence shows,[3] all parties to the agreement knew that water permit 3518 was held in the joint names of  Mr Carr and  a neighbouring farmer, Mr Beattie.  It had been granted in 1989 and authorised the take of 400,000 litres per hour from the Taieri River.

[3] In so far as aspects of Mr Carr’s affidavit appear to suggest he did not know the water permit was in his name rather than Alnwick Limited, and did not know it had expired, those claims are not sustainable.  The overwhelming contemporaneous documentary evidence is to the contrary. See for example a fax dated 30 May 2000 sent by Mr Carr’s accountant to the solicitors for both Alnwick Limited and Main Farm.

[13]     As all parties to the agreement also knew, although water permit 3518 had expired on 1 April 1999, Messrs Carr and Beattie had signed an application for a replacement permit.

[14]     Unfortunately, the application for a replacement permit had been filed too close to the expiry date.   It was filed in early February 1999, ie less than three months before the expiry date.  That had important legal consequences.  Had it been filed more than three months earlier, s 124 of the Resource Management Act 1991 would have allowed the activity to continue post the expiry date, pending determination of the application.  As it was, once the permit expired in April 1999, the continued taking of the water became unlawful.

[15]     The Alnwick Limited/Main Farm transaction was duly settled on 29 June

2000.

[16]     The following year, Dunedin businessman Howard Patterson joined Messrs

Carr and Humphries in the joint venture.

[17]     In June 2003 Mr Patterson died unexpectedly, as the result of an accident. Mr Humphries purchased Mr Patterson’s share in the joint venture, and so gained

control of the Blue Sky Group.

[18]     Relations between Mr Humphries and Mr Carr deteriorated to the point of complete breakdown by October 2004.

[19]     As at that date, the Carr/Beattie application for a replacement water permit had still not been determined.  Despite that, the water continued to be taken which, as mentioned above, was strictly speaking unlawful.

[20]     The Otago Regional Council file shows that there were various reasons for the long delays in processing the application.  These included non-payment of fees, delays  in  obtaining  information  from  Mr Beattie  and  Mr Carr,  and  delays  in obtaining required approvals from third parties.

[21]     Mr Beattie appears to have been the main point of contact for the regional council.      However,   there   is   evidence   that   Mr Carr   was   also   involved   in communications with the council about the application, including a site discussion in

2001.

[22]     Counsel  for  Mr Carr  conceded  that  up  until  September/October  2004

Mr Carr’s  dealings  with  the  council  regarding  the  application  were  done  in furtherance of the contract between Alnwick and Main Farm.  Had the consent been granted prior to October 2004, he would have transferred it to Main Farm.  However, once  his  relationship  with  Mr Humphries  had  completely  broken  down,  he considered himself as acting on his own behalf and for his own personal benefit.  By October 2004 Mr Carr had, in his own words, only one overriding ambition, and that was to again secure the full ownership and control of the farms and to rid his life of

Mr Humphries.[4]

[4] Affidavit of Ewan Robert Carr, paragraph 114.

[23]     In late 2004, Mr Carr secured options to re-purchase outright all of the assets of the Blue Sky Group.   Exercise of those options would mean that Main Farm would no longer own the property to which the water permit related.  Mr Carr says he was confident he would eventually get back the Blue Sky farms, and so from that time on never intended the water permit to be in Main Farm’s name, but in his own

personal name.

[24]     In January 2005 the council advised Mr Beattie and Mr Carr that under the regional water plan, their application for a replacement permit was not entitled to be considered as a primary allocation, but an application for supplementary allocation. This was a direct result of the late filing of the application which, for the reasons I have already explained, meant no permit was held after the expiry date.

[25]     What the change of status meant in practical terms was that the water take would   now   be   restricted   to   times   when   flows   in   the   river   exceeded   the supplementary minimum flow, whereas before Mr Beattie and Mr Carr had taken water essentially when they liked.

[26]     The letter went on to state that in light of this information, Mr Beattie and

Mr Carr might wish to consider whether they still wanted to pursue the application.

[27]     Mr Beattie and Mr Carr confirmed they did wish to continue.  Then followed further correspondence between the council and Messrs Beattie and Carr.

[28]     In October 2006, Mr Carr exercised his option to purchase all of the assets of the Blue Sky Group.   A dispute arose between him and Mr Humphries over the calculation of the purchase price.   That dispute culminated in Mr Carr applying without notice in late January 2007 for a Court order to appoint an interim liquidator of the Blue Sky Group of companies.  The order was granted.  However, in March

2007 the Bank of New Zealand put all the Blue Sky companies, including Main

Farm, into receivership.

[29]     Mediation then followed, the upshot of which was an agreement between Messrs Carr and Humphries and the receivers.  Under the agreement, Mr Carr was required to settle his purchase of the Blue Sky Group by 4 p.m., 31 May 2007, time being of the essence.

[30]     Mr Carr failed to settle in time, and the receivers accordingly cancelled the agreement.   Further litigation ensued over the validity of the cancellation.   On 29

February 2008, Randerson J found in favour of the receivers.[5]   Mr Carr appealed the decision, but it was upheld by the Court of Appeal on 25 September 2008.[6]

[5] Frost v Carr HC Dunedin CIV-2007-412-507, 29 February 2008.

[6] Frost v Carr [2008] NZCA 391.

[31]     Meantime, the council had finally determined the water permit application. At the request of Mr Beattie, and with the authority of Mr Carr, it split the permit

50/50 and issued each of them a separate water right to take a half-share of the

400,000 litres per hour.  The consent granted to Mr Carr was allocated the number

2008.193.

[32]     The consent was granted on 21 April 2008, ie after Randerson J’s decision

but before the Court of Appeal decision.

[33]     The consent authorises the taking of water for the purposes of irrigating the

Main Farm land, which Mr Carr of course does not own.

[34]     Following the Court of Appeal decision, the receivers requested the regional council to amend its ownership records so as to show Main Farm and not Mr Carr as the holder.  The regional council declined, on the grounds it had no power to do that. The receivers also requested Mr Carr to complete a transfer form, but he refused.

[35]     The receivers then issued these proceedings in June 2010, initially against the regional council only.  Mr Carr was subsequently joined as a second defendant by an Associate Judge on 21 August 2010.

[36]     Since filing the proceedings, the receivers have sold all of the assets of the Blue Sky Group to another party.  The sale was settled in September 2010.  The sale included the benefit of water permit 2008.193.

[37]     In evidence, the receiver Mr Frost explained that the sale contract contains a mechanism  to  protect  the  parties  in  the  event  this  Court  case  goes  against  the

receivers.

[38]     According to the receivers, the right to take water under the consent is a necessary and integral part of the operation of the dairy farm.  Without it, levels of production will be adversely affected.

[39]     Mr Carr disputes this.  However, he does also say that the water right is worth around $500,000 to $600,000 to him.  He believes he could use it on nearby farm land he is contemplating buying in the future, or he could sell or lease it to others.[7]

[7] An application to the regional council under s 36(2)(b) Resource Management Act 1991 would be required before the right could be used on other land.

[40]     The statement of claim seeks an order that the regional council cancel the permit on the grounds it has made an error in processing the application in the name of Mr Carr.  As against Mr Carr, Main Farm seeks an order requiring him to execute the necessary transfer form.

[41]     Finally, for completeness I should record that in his statement of defence Mr Carr pleaded that any claim against him was statute-barred by virtue of s 4 of the Limitation Act 1950, the cause of action having accrued more than six years prior to the issuing of the proceeding in June 2010.  This pleading was on the basis of the claim against him being one in contract, the argument being that any breach must have occurred on 29 June 2000 when Alnwick Limited failed to transfer ownership of the water right to Main Farm.

[42]     Limitation is an affirmative defence, and under the High Court Rules if a plaintiff does not deny an affirmative defence by filing a reply, the plaintiff is deemed to have admitted the affirmative defence.[8]

[8] Rules 5.62 and 5.63(2) High Court Rules.

[43]     Main Farm never filed a reply, because its lawyers never turned their minds to  the need  to  do  so.   The oversight  was  not  realised  until  counsel  exchanged submissions.

[44]     At the commencing of the hearing, Mr Toebes sought leave to amend the statement of claim so as to deny the claim was statute-barred and to plead that the

breach occurred on 10 December 2007 when Mr Carr failed (on a site visit) to advise

the council of his lack of interest in the lands where the water was to be used; or in October  2008,  after  2008.193  had  issued,  when  he  refused  to  sign  the  council transfer form.

[45]     The application for leave to amend the statement of claim was opposed by Mr Carr’s counsel.   However, in the absence of any prejudice to Mr Carr, I was satisfied that it was in the interests of justice that leave should be granted.

[46]     As the hearing unfolded, the issue became academic for two reasons.  First, because   of   the   concession   by   Mr Moss   that   it   was   not   in   fact   until September/October 2004 that the contract was breached, Mr Carr up until that point of time acting in furtherance of the contract.   October 2004 is less than six years before the proceedings were issued.

[47]     The second reason why it became academic was because as the hearing unfolded, the analysis changed with both Mr Moss and Mr Toebes agreeing that correctly analysed this was not a case about contract law but about equitable proprietary rights.  The Limitation Act, while relevant by analogy, did not therefore directly apply and questions of delay were more correctly considered under the heading of laches.

[48]     I should add that although Mr Toebes opened on the basis that this was a claim in contract, the statement of claim did not actually identify any specific cause of action.  The changed analysis did not prejudice Mr Carr.

Discussion

[49]     It was common ground that, logically, it was the claim against Mr Carr that was the key cause of action.  If I were to hold that Mr Carr was entitled to the permit, then the council’s records were correct.  If, on the other hand, I were to find Mr Carr was not entitled, then the council was under an obligation to correct the record so as to reflect the true beneficial ownership.  Counsel, Mr Logan, likened the position of the council to that of a neutral stakeholder faced with competing claims.  The council does not know who is in the right and would abide the decision of the Court.

[50]     In support of his claim to beneficially own the permit, Mr Carr advanced the following arguments:

[i]       He was not a party to the June 2000 agreement with Main Farm.   Main Farm’s only remedy was against its vendor, Alnwick Limited.  Although Alnwick Limited had been struck off the register, it could be reinstated.

[ii]      At the time the agreement was signed in June 2000, water permit 3518 had expired and so ceased to exist.   It was incapable of being transferred.

[iii]     The water permit that was eventually issued was not the same as water permit 3518.  While it authorised a take of the same volume of water from the same source for the same land, there were fundamental differences, including the fact that it was no longer a jointly-held permit and was a secondary allocation.  It is not possible to transfer a derivative of property.

[iv]     In so far as this was an equitable claim, the equities favoured

Mr Carr in that:

a.   Main Farm and the receivers were guilty of inordinate delay (laches/acquiescence/estoppel);

b.it was Mr Carr who had expended time and money in pursuing the application;

c.   Mr Carr has accused Mr Humphries of fraud and other unlawful acts, and it will be Mr Humphries who will benefit if Main Farm is successful;

d.there has been prejudice to Mr Beattie in that, had he known a half-share would go to Main Farm and not Mr Carr, Mr Beattie may well have sought the granting

of a permit covering the full amount for his property only.

[51]     I do not accept any of those arguments.

[52]     I appreciate that Mr Carr may well genuinely believe his position is morally justifiable, but legally it is without merit.

[53]     In my view, the correct legal analysis of the situation is as follows.

[54]     What was sold to Main Farm in 2000 was in effect a bundle of rights.  While water permit 3518 may have expired, there was in existence an application for a replacement permit.  Mr Carr was the only shareholder and the only director of the vendor.  Whether he was holding the water permit and the application on trust for his company or whether it is a situation of setting aside the corporate veil, there is no doubt that Mr Carr unequivocally represented that he would make it possible for ownership of the water right or its replacement to be transferred to Main Farm.  All parties acted in reliance on that representation to their detriment and to Mr Carr’s benefit.   All intended that the outcome of the application, the replacement permit, would belong to Main Farm.  It formed part of the consideration which Main Farm paid.

[55]     In those circumstances, I consider that Mr Carr clearly holds the legal title to the water right on trust for Main Farm.   Certainly there are differences between permit 3518 and consent 2008.193.  However, the differences are not material to the issue of beneficial ownership.  As Mr Logan pointed out, the application filed was for a replacement to authorise the same take.  There was no absolute guarantee that the application would be granted and certainly no guarantee that it would be on the same conditions.   The fact the conditions might differ was therefore something within the contemplation of the parties at the time Mr Carr signed the contract.  So, too, the change to a secondary allocation in the sense that it was the inevitable and direct result of the date the application had been filed.   As for the splitting of the permit, it would be a strange result if, by consenting to a change, Mr Carr could thereby circumvent the obligations he otherwise owed to Main Farm.  What Main

Farm purchased was Mr Carr’s/Alnwick’s interest in the application and its outcome,

whatever that might be.

[56]     I accept, as did Mr Frost himself, that there has been delay.   Mr Frost said that in hindsight he should have taken steps earlier than he did to secure Main Farm’s interest.  However, I consider there is a reasonable explanation for the delay on the part of Mr Humphries when he was in control of Main Farm, and on the part of the receivers at least up until the Court of Appeal decision in 2008.  Until then there was still a possibility Mr Carr might re-acquire the assets of Main Farm for himself.   Not so excusable is the delay between the date of the Court of Appeal decision and the issuing of the proceedings, a gap of some 18 months.   However, there is no evidence of Mr Carr suffering any prejudice as a result of delay during that period.  By the time he had been issued with the right, he was unable to use it without making a further application to the council.

[57]     I am also not persuaded on the evidence that any inaction on the part of Main Farm meant Mr Carr was entitled to assume (or did in fact assume) Main Farm was no longer interested in obtaining the right for itself.

[58]     I  have  considered  the  issue  of  prejudice  to  Mr Beattie.    However,  the suggestion is entirely speculative.   There is no hard evidence to support the suggestion that he might have sought the full benefit of the application.

[59]     As regards the position of Mr Humphries, he has an indirect interest in this litigation because the money being used to fund the proceeding is money that would otherwise have gone to one of his companies which holds a second mortgage. However, in evidence the receiver, Mr Frost, confirmed that the decision to bring these proceedings was made entirely independently of Mr Humphries.  He was not a party to the decision.  Mr Frost explained that the reason for it going ahead is that the receivers have a contractual responsibility.

[60]     I  am  satisfied  this  proceeding  has  been  brought  in  good  faith  and  that Mr Carr’s  as  yet  unproven  claims  against  Mr Humphries  should  not  affect  the outcome.

[61]     Having regard to all the circumstances, I consider that the equities clearly favour Main Farm.   I am therefore prepared to make the orders sought against Mr Carr, but subject to the condition that Main Farm pay him the sum of $5000, being  costs  he  incurred  in  processing  the  water  right  application.    Mr Toebes accepted that Main Farm should pay this.

[62]     Because of my finding that Mr Carr holds the water right on trust for Main Farm, it is unnecessary for me to consider Main Farm’s claim against the council. Suffice it to say that on the evidence I do not consider the council to have been at fault in the matter.  The delays appear to have been due to dilatoriness on the part of others, including Messrs Beattie and Carr themselves.   There was also never any unequivocal communication to the regional council about Main Farm being the true owner.  As Mr Logan put it, the high point of Main Farm’s case against the council was a letter written to it by Main Farm’s solicitors in July 2000.   There was no follow-up from Main Farm, and another eight years of history.  No active steps were taken until after the replacement permit was issued, and in the meantime no-one, including  Mr Carr,  had  corrected  the  council’s  misunderstanding  that  Mr Carr personally was an applicant and the intended consent holder.

Outcome

[63]     Subject to Main Farm paying Mr Carr the sum of $5000, Mr Carr is forthwith to complete and sign the Otago Regional Council transfer form for the transfer of water permit 2008.193 to Main Farm, and to arrange for the original to be delivered to the Otago Regional Council’s solicitors, Ross Dowling Marquet Griffin of Dunedin.

[64]     In the event of any default by Mr Carr in complying with this order, a Deputy Registrar of the Dunedin registry of the High Court, upon receiving a certificate to that effect from the solicitors for Main Farm, endorsed by Ross Dowling Marquet Griffin, shall execute the transfer form and release same to Ross Dowling Marquet Griffin.

Costs

[65]     At the hearing, Mr Moss submitted that if Main Farm were to succeed and Mr Carr accordingly become liable to pay costs then I should take into account the fact that Mr Carr had been joined by an order of the Court, and that his participation had assisted the Court, enabling me to hear the full story.

[66]     I do not accept that submission.

[67]     As  I  pointed  out  to  Mr Moss,  very  few  defendants  are  ever  joined  to proceedings by their own volition.   Further, once he was joined, Mr Carr had a choice whether to take an adversarial role or abide the decision of the Court.   He chose the former, as was his right, but having taken that course of action he thereby rendered himself liable to an award of costs.

[68]     In my view, Mr Carr should pay costs to Main Farm on a 2B basis.

[69]     I reserve the right for counsel to make further submissions, if agreement is not able to be reached, about the costs position of the Otago Regional Council.

Solicitors:

JT Law, Wellington

Ross Dowling Marquet Griffin, Dunedin

GCA Lawyers, Christchurch

(Counsel: J Moss, Christchurch)