Mercury Geotherm Ltd (In Receivership) v McLachlan HC Auckland CIV 2000-404-2161
[2005] NZHC 1207
•23 May 2005
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2000-404-2161
M 129/IM00
IN THE MATTER OF Section 143 of the Land Transfer Act 1952
BETWEEN MERCURY GEOTHERM LIMITED (IN RECEIVERSHIP)
First Plaintiff
AND POIHIPI LAND LIMITED (IN RECEIVERSHIP)
Second Plaintiff
AND ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN OF TAUPO, AS TRUSTEES OF THE WAITURUTURU TRUST
First Defendants
AND ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN
Second Defendants
CIV 2000-404-2455
M 1569-AS00
AND IN THE MATTER OF Section 143 of the Land Transfer Act
1952
BETWEEN MEL NETWORK LIMITED Plaintiff
AND ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN OF TAUPO, AS TRUSTEES OF THE WAITURUTURU TRUST
First Defendants
MERCURY And Anor V MCLACHLAN And Anor HC AK CIV 2000-404-2161 [23 May 2005]
AND ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN
Second Defendants
AND CONTACT ENERGY LIMITED Counterclaim Defendant
Hearing: 4-8 October 2004
Appearances: P J Dale for the plaintiffs (the Receivers)
S P Bryers and D A Towle for the defendants
P C Chemis and J Opie for Contact Energy Limited
Judgment: 23 May 2005
JUDGMENT OF POTTER J Re Lots 1 and 2 DPS 69822
This judgment was delivered by me on at , pursuant to
Rule 540(4) of the High Court Rules.
Registrar/Deputy Registrar
Date
Solicitors: Grove Darlow & Partners, P.O. Box 2882, Auckland
Buddle Findlay, P.O. Box 2694, Wellington
Wilson Harle, P.O. Box 4539, Auckland
Martelli McKegg Wells & Cormack, P.O. Box 5745, Wellesley Street, Auckland
Copy to: S.P. Bryers, P.O. Box 5444, Wellesley Street, Auckland
A.S. McLachlan, P.O. Box 444, Taupo
INDEX
Introduction [1]-[3] Definitions [4]
Parties’ positions [5]-[8]
Lots 1 and 2: Background [9]-26] Issue 1: Was the relationship and conduct of Network [27]-[37]
and the Receivers such that the offer to sell or sale
to Contact triggered the Trustees’ right to purchase?
The evidence [38]-[39] (a) 11 February 1999 visit [40]-[49] Discussion [50]-[54]
(b) Joint venture documents [55]-[56]
Discussion [57]-59] (c) Receiver’s letter of 21 June 1999 [60]-65] (d) Letters from the McLachlans’ solicitors [66]-[77]
Confusion in relation to Lots 1 and 2 [78]-[92]
Findings in relation to the letters [93]-[97] Conclusions on the evidence [98]-[100] Further submissions [101-112]
Summary of conclusions on Issue 1 [113]-[114]
Issue 2: Is Contact a bona fide purchaser for value so as to prevail over the Trustees’ equitable
rights leaving them with a non-proprietary claim only? [115]-[120]
Section 182 Land Transfer Act 1952 [121]-[138] Principles relating to competing equities [139]-[143] Doctrine of notice [144]-[152] Occupation as constructive notice [153]-[158] Mr McLachlan’s evidence [159]-[160]
(a) Contact’s inquiries of Taupo District Council concerning sale of Lots 1 and 2 to Geotherm
Energy Limited [161]-[173]
(b) MGL’s 1997 resource consent application [174]-[185]
(c) Contact’s due diligence inquires as proposed
purchaser of Lots 1 and 2 [186]-[198]
(d) Historical consultation with Contact concerning
transmission corridor and reservoir matters [199]-[210]
(e) Contact’s knowledge of occupancy and farming
activities carried out on Lots 1 and 2 [211]-[214]
Conclusions re (d) and (e) [215]-[217]
Evidence of the witnesses for Contact [218] Theodore Montague [219]-[255] Brian Stewart Carey [256]-[279] Martin John Exelby [280]-[305] Wayne Murray Christie [306]-[323] Peter Gary Owles [324]-[373]
Discussion about the evidence [374]-[378] What Contact knew [379]-[387] Should Contact have made further inquiry? [388]-[393] The McLachlans’ conduct [394]-[401] The McLachlans taking advantage [402]-[404]
Issue 3: Can the Receivers resist the claim by the Trustees of the right to purchase on the grounds That they do not have funds to pay MEL Network
Limited to transfer the land to them? [405]-[406] Summary of conclusions [406]-[408] Result [409]-[412] Costs [413]
Leave Reserved [414]
Introduction
[1] This judgment is a further chapter in the ongoing litigation concerning the Poihipi Power Station and concerns three issues raised for determination in relation to Lots 1 and 2 DPS69822, by the Court of Appeal in its judgment of 28 August
2003.
1) Was the relationship and conduct of MEL Network and the Receivers such that the offer to sell or sale to Contact Energy triggered the Trustees’ right to purchase.
2) Is Contact Energy a bona fide purchaser for value so as to prevail over the Trustees’ equitable rights leaving them with a non-proprietary claim only.
3) If the Trustees succeed on the first two issues can the receivers resist the claim by the trustees of the right to purchase on the grounds that they do not have funds to pay MEL Network to transfer the land to them.
[2] The High Court in its judgment dated 14 June 2002, declared at [157] that MEL Network Limited held Lots 1 and 2 DPS69822 as a constructive trustee for Mercury Geotherm Limited and that the McLachlans are entitled to an equitable lease from Mercury Geotherm Limited of Lots 1 and 2 in like terms to the lease of the leased land dated 15 December 1995, subject however to any prior equity in favour of Contact Energy Limited which may be established.
[3] The High Court made no orders for relief pending the determination of a number of issues, including Contact Energy’s claim to priority as a bona fide purchaser for value without notice of the McLachlans’ prior interest in Lots 1 and 2 under the equitable lease. The nature of the McLachlans’ prior interest turns on whether a right to purchase in cl 16.1 of the equitable lease has been triggered by the offer to sell or sale to Contact Energy. The Court of Appeal allowed an appeal
against the High Court’s finding that it had not, to the extent that the three inter- related issues set out in [1] could be investigated and determined together.
Definitions
[4] In this judgment the following definitions and abbreviations are adopted:
MGL: Mercury Geotherm Limited (in Receivership) Poihipi: Poihipi Land Limited (in Receivership)
the Receivers: the Receivers of MGL and Poihipi, Mr L G Chilcott and Mr P C Chatfield
theMcLachlans: the first and second defendants as trustees of the Waituruturu Trust and/or in their personal capacities, as the case may be
the Trustees: the McLachlans as trustees of the Waituruturu Trust the Trust: the Waituruturu Trust, the lessee and farmer of the
land surrounding the Power Station Site leased from
MGL and Poihipi
Network: MEL Network Limited, previously named Mercury
Network Limited
Contact: Contact Energy Limited
Vector: Vector Limited, previously named Mercury Energy
Limited the parent company of Network
Lots 1 and 2 Lots 1 and 2 DPS69822, CT 56A/137 and CT
56A/138
thepower station: the Poihipi Power Station (formerly known as the McLachlan Power Station) the subject of the joint venture between Network and the McLachlans, now sold to Contact
the Power Station Site: the area of land occupied by the Poihipi Power
Station (as defined by the Court)
the joint venture
agreement: the joint venture agreement dated 15 December 1995 entered into between Network and the McLachlans in relation to the construction and operation of the Poihipi Power Station
thelease: the lease dated 15 December 1995 entered into between MGL and Poihipi as lessors and the Trust
as lessee pursuant to which the McLachlans farm the land surrounding the Power Station Site
the leased land: the land leased by MGL and Poihipi to the Trust by the lease, which excludes the Power Station Site. The leased land includes the areas known as Land A, Land B and Land C but does not include Lots 1 and 2
High Court judgment: Judgment dated 14 June 2002 in these proceedings
Court of Appeal
judgment: Judgment dated 28 August 2003 in CA 142/02 on appeal from the High Court judgment.
Parties’ positions
[5] The plaintiffs, MGL and Poihipi, seek orders for the removal of the McLachlans’ caveats lodged against Lots 1 and 2 on 16 February 2000. They say that the right to purchase in cl 16.1 of the equitable lease declared in favour of the McLachlans has not been triggered as the Receivers did not believe Lots 1 and 2 were theirs to sell and therefore as lessors, they never formed any wish or intention to sell Lots 1 and 2. The wish and decision to sell was Network’s who believed it owned Lots 1 and 2. They further say, that they are without funds to implement the constructive trust declared by the High Court in favour of MGL; they cannot pay Network for Lots 1 and 2 in order to take title.
[6] The defendants, the McLachlans, seek a declaration that the right of first refusal in cl 16.1 of the equitable lease has been triggered in respect of Lots 1 and 2 by the sale by Network to Contact. Against Contact, they rely on their equity as lessee being prior in time and therefore having priority over Contact’s equity as purchaser from Network. They say that Contact had actual notice of their prior equity. They seek a mandatory injunction directed to Network as registered proprietor, requiring Network to offer Lots 1 and 2 for sale to them at the price of
$153,000 (being the price at which Network agreed to sell to Contact in January
2000).
[7] Contact says that it had no notice of the McLachlans equitable interest in Lots
1 and 2 prior to the McLachlans lodging their caveat on 16 February 2000 claiming
an interest as equitable lessee. Further that the McLachlans acted, and omitted to act, in such a manner and to such an extent as caused Contact to believe or suppose that the McLachlans had no interest in Lots 1 and 2. Contact supports the plaintiffs’ application for an order removing the McLachlans’ caveat so that the sale to Contact can be completed.
[8] Nevertheless, in negotiations prior to the hearing, Contact offered to recognise the McLachlans’ interest as equitable lessee as declared by the High Court and to hold Lots 1 and 2 subject to that interest. Alternatively, by arrangement with the Receivers, that MGL and Poihipi should hold Lots 1 and 2 subject to the McLachlans’ interest as equitable lessees under the equitable lease on the same terms and conditions as the other leased land. The McLachlans rejected those offers because they say they are entitled to own Lots 1 and 2, by exercising their right to purchase under cl 16.1 of the equitable lease which has been triggered by the sale to Contact. They would grant an easement over Lot 2 in favour of the Power Station Site for the reinjection pipeline serving the power station which runs under Lot 2.
Lots 1 and 2: Background
[9] Lot 1 DPS69822 (CT56A/137) comprising 2.0689 hectares and Lot 2
DPS69822 (CT56A/138) comprising 2.4306 hectares, are located northwest of Taupo on the junction of Oruanui and Poihipi Roads where Poihipi Road bends to the west and Oruanui Road proceeds in a northerly direction. They are situated to the north of the power station and on the northern boundary of the leased land. Lots
1 and 2, were formerly known as Sections 8 and 9, and together with Section 10 which comprises 16.1844 hectares and is situated on the eastern side of the junction of Oruanui and Poihipi Roads, were originally set aside in the 1960’s by the Lands and Survey Department for the siting of a second Wairakei Power Station on Section
10, with the balance of the land, Sections 8 and 9, being intended for a school and hall site.
[10] Following the abandonment of the second Wairakei Power Station proposal the Lands and Survey Department sold Sections 8, 9 and 10 to the then Taupo County Council for district purposes. In 1972 Taupo Saleyards Limited was formed
to establish a stock sale centre for the central North Island utilising Section 10 as the saleyard site. Mr McLachlan chaired that company through most of the 1970’s. It leased and still leases section 10 from the local authority.
[11] In 1993 the Taupo District Council determined that as Sections 8 and 9 had not been required for the purposes of the saleyards, they could be sold. On 22
October 1993 the Taupo District Council advertised in the Taupo Times Sections 8 and 9 for sale. A McLachlan company, Geotherm Energy Limited, put in a tender for Sections 8 and 9 (Lots 1 and 2). Mr McLachlan said in evidence that there were two reasons for this. Lot 2 was contiguous with Section 20 acquired from the Bishop family, and was not separately fenced from Section 20. (Lot 1 on the opposite eastern side of Poihipi Road from Lot 2 had been farmed by another neighbour Mr Koster, since the early 1960’s). Secondly, as both Sections would be possible sites for rural residential locations they might attract in the hands of new owners, objections to the proposed power station. Mr McLachlan regarded it as important to purchase the land to protect the power station project from resource and land consent objections.
[12] Geotherm Energy Limited was the successful tenderer at the price of $90,000 plus GST for each lot. Agreements for sale and purchase were signed in December
1993. Settlement was to follow deposit by Council of a subdivisional plan but not to be earlier than 31 March 1994. Council agreed to defer payment of the deposit pending Mr McLachlan arranging finance through Westpac Banking Corporation.
[13] In mid-1994 the McLachlans entered into negotiations with Vector (then Mercury Energy Limited) regarding a joint venture in relation to the power station. Mr McLachlan says that it was agreed that the joint venture project would acquire Geotherm Energy’s rights to purchase Lots 1 and 2 and that Network as interim financier for the joint venture company MGL, would hold the land titles until the acquisition date (being the date when Guaranteed Production of Quantity – 1800 tonnes of steam) was achieved. Vector would then arrange the transfer of the titles to MGL, with the Trustees leasing the land from MGL. The lease would be on the same terms and conditions as the leased land, including a right of first refusal over Lots 1 and 2. These arrangements, in essence, were conceded by witnesses for the
plaintiffs at the previous High Court hearing, in particular Mr Dennis Andrews a director and general manager of finance for Vector at the relevant time. They were reflected in the declaration in the High Court judgment that Network held Lots 1 and
2 as a constructive trustee for MGL and that the McLachlans are entitled to an equitable lease of Lots 1 and 2 on the same terms as the lease of the leased land.
[14] On 30 March 1995 the new Certificates of Title, 56A/137 and 56A/138, were issued for Lots 1 and 2, and on 7 June 1995 the transfer to Network was registered.
[15] On 15 December 1995 the joint venture agreement, the lease and a power sale agreement were entered into. The power station, construction of which had commenced in November 1994, was completed and generation started in September
1997.
[16] The power station never operated at full capacity with the result that financial difficulties were encountered. In December 1998 Network, which was funding the joint venture project, appointed receivers of MGL and Poihipi under debentures in its favour.
[17] In July 1999 the Receivers requested expressions of interest and issued a confidential information memorandum for the sale of the assets of MGL. After describing (erroneously, and subject to later correction) the land of MGL which was offered for sale, the information memorandum continued:
Furthermore MEL Network Limited owns a further 4.5 hectares of land (highlighted in orange on the map in Appendix 1, figure 2) which it will make available for selling (independently, but simultaneously to this sales process), to the purchaser.
The map referred to, showed Lots 1 and 2 coloured orange.
[18] Contact entered a bid and on 1 October 1999 was accorded preferred bidder status by the Receivers. However, in mid-October 1999 the Receivers withdrew their offer and required bids to be resubmitted on the basis of revised information as to the land included in the sale. On 17 December 1999 Contact was again confirmed
as the preferred bidder. An agreement was entered into between the Receivers and
Contact on 24 December 1999, which was settled on 25 January 2000.
[19] In the meantime, on 29 October 1999, the McLachlans lodged a caveat against the leased land held by MGL and Poihipi. The caveat did not refer to Lots 1 and 2.
[20] On 19 January 2000 Contact made an offer to Network to purchase Lots 1 and 2 at $153,000, which was government valuation. The offer was subject to a condition that Contact’s purchase of the power station assets was completed, and included a warranty by the vendor Network, that there were no adverse interests affecting the title to Lots 1 and 2. That agreement was executed and handed over on
25 January 2000 when the sale and purchase of the power station assets was completed.
[21] On 21 January 2000 Grove Darlow, who acted for the Receivers, advised Buddle Findlay acting for Contact, that they had been instructed in relation to the sale of Lots 1 and 2. They had not prepared the agreement for sale and purchase; that had been prepared in-house by Contact. Grove Darlow were unable to locate the Certificates of Title for Lots 1 and 2 so settlement could not proceed at that point.
[22] On 27 January 2000 Contact lodged caveats against Lots 1 and 2 claiming an equitable interest as purchaser under the agreement for sale and purchase with Network. Those caveats were registered on 1 February 2000.
[23] By 15 February 2000 Mr Darlow had located the Certificates of Title and Network was in a position to settle. Mr Darlow had made inquiry of Mr Cargill of Taupo, a former solicitor of Mr McLachlan, who forwarded the Certificates of Title to him.
[24] Contact put Buddle Findlay in funds to settle which were paid to Grove
Darlow on 21 February 2000.
[25] However, on 16 February 2000, the McLachlans had also lodged a caveat against Lots 1 and 2 claiming an interest as lessee under an agreement to lease made on or about 15 December 1995 between Network as registered proprietor, MGL as purchaser and lessor and the McLachlans as lessees of Lots 1 and 2.
[26] Settlement of the sale by Network to Contact therefore could not be completed, and the funds have since been retained by Grove Darlow on trust pending the outcome of these proceedings.
Issue 1: Was the relationship and conduct of Network and the Receivers such that the offer to sell or sale to Contact triggered the Trustees’ right to purchase?
[27] The High Court declared that Network held Lots 1 and 2 as a constructive trustee for MGL and that the McLachlans have an equitable lease of Lots 1 and 2 in like terms to the lease of the leased land dated 15 December 1995.
[28] In cl 16.1 the lease provides under the heading Right of First Refusal:
In consideration of the mutual promises contained in this Lease and in the Joint Venture Agreement the Lessors grant to the Lessee or its Nominee a first right of refusal in respect of the Land or any part thereof, should the Lessors wish to sell or dispose of those parcels of land (together, the “Relevant Land”) as are comprised in the Land, or in the property the subject of the Landcorp Property Agreement (as that term is defined in the Joint Venture Agreement) or in any other parcels of land which the Lessors may acquire after the date of this Lease.
Then follow provisions as to the manner in which the right of first refusal is to be offered and exercised.
[29] There is no dispute that in terms of the equitable lease declared in favour of the McLachlans by the High Court, Lots 1 and 2 in the hands of the Receivers, would be subject to the right of first refusal in cl 16.1. Lots 1 and 2 would fall within the definition of “Relevant Land” as:
… any other parcels of land which the Lessors may acquire after the date of this Lease.
[30] Under cl 16.1 the right of first refusal is triggered if “the Lessors”, MGL and
Poihipi, wish to sell or dispose of “Relevant Land”.
[31] The principles applicable in determining whether a right of first refusal, or a right of pre-emption as it is sometimes called, has been triggered, are set forth in Motorworks Limited v Westminster Auto Services Limited [1997] 1 NZLR 762 which decision is referred to in both the High Court judgment and the Court of Appeal judgment. Before the right of first refusal can be triggered there must be an overt manifestation by the vendor of both a wish to sell, and the essential terms on which he is willing to sell. The Court must assess objectively whether there has been an overt manifestation by the vendor of his intention to sell; Motorworks; Gainford v Stimson (1994) 2 NZConv.C 191,768.
[32] Pursuant to cl 16.1 the overt manifestation of the wish to sell which would trigger the right of first refusal must be that of MGL, the lessor in whose favour the constructive trust has been declared in respect of Lots 1 and 2. But the offer to sell to Contact was made by Network, the registered proprietor of Lots 1 and 2, a fact which is not disputed. So the issue is, whether Network’s decision to sell was in fact, or also, a decision or wish to sell by MGL, or more precisely, the Receivers of MGL, because at the time of sale to Contact (January 2000), MGL was in receivership and had been for two years.
[33] The plaintiffs’ case is straightforward. The Receivers say that they did not believe Lots 1 and 2 were assets of MGL or Poihipi. As far as they knew they were owned by Network and thus were not assets available to the Receivers for sale. Accordingly they could not, and did not, form any intention or wish to sell Lots 1 and 2. Hence in the information memorandum, Lots 1 and 2 were offered for sale by Network “independently but simultaneously”, with the sale of the power station assets.
[34] The defendants plead in their statement of defence and counterclaim dated 10
April 2002 at para 54, that Network, MGL and Poihipi formed a wish to sell or dispose of the land comprised in the lease, including Lots 1 and 2. They rely on a number of particularised events which were addressed in evidence by the
defendants’ only witness Mr McLachlan, as establishing that the Receivers at the relevant time had knowledge of the correct position regarding Lots 1 and 2, namely that it was, and had always been, the intention of the joint venture parties that Lots 1 and 2 would be brought into the joint venture and be subject to the lease.
[35] Mr Bryers for the defendants developed a further argument in submissions, which he said was at the heart of the defendants’ case, that the decision by Network to sell Lots 1 and 2 was effectively a decision of the lessors, i.e. MGL and Poihipi, in terms of cl 16.1, thus triggering the right to purchase. The argument (which is reflected in part in a pleading by way of affirmative defence in the defendants’ pleading of 10 April 2002) was presented in the defendants’ written submissions as follows:
The Trustees’ case is that:
(a) To its knowledge, MEL Network held Lots 1 and 2 in trust for Mercury Geotherm Limited as beneficial owner and for the McLachlans as lessee;
(b) MEL Network controlled Mercury Geotherm Limited by virtue of its majority shareholding (57%) by its control of the Board (see para
3.2 and 5.1 of the 1995 joint venture agreement) and by virtue of the debenture it held over the company’s assets;
(c) As owner of Poihipi Land Limited, Mercury Geotherm Limited controlled Poihipi Land Limited;
(d) Accordingly, any decision by MEL Network as to disposal of the joint venture assets was inevitably bound to be complied with by the joint venture company;
(e) Therefore the decision by MEL Network to sell Lots 1 and 2 is effectively a decision by “the lessors”, i.e. Mercury Geotherm Limited and Poihipi Land Limited in terms of cl 16.1 of the terms of the lease between the lessors and the Trustees, thus triggering the Trustees’ right to purchase.
[36] The submission then continued:
The position of the Receivers is not particularly relevant to [this] issue. The Receivers did not sell Lots 1 and 2. The decision to sell and the sale itself were effected by MEL Network. The Receivers’ role was limited to realising the assets of Mercury Geotherm Limited and Poihipi Land Limited. The Receivers co-operated with and assisted MEL Network to effect the sale of Lots 1 and 2. The Receivers’ solicitors acted on the sale. It is not known if the Receivers were aware initially that Lots 1 and 2 were an asset of the joint venture company. They may have been misinformed by Vector on that
issue and misled Contact accordingly. However, the Receivers were informed of the correct position by the letters from the McLachlans’ solicitors in November/December 1999.
[37] Before giving further consideration to the submissions I shall turn to consider the evidence.
The evidence
[38] The Receivers and the McLachlans each called a single witness, respectively Mr Darlow and Mr McLachlan. In addition, the plaintiffs relied on the evidence of Mr Chilcott, one of the two receivers of MGL and Poihipi, who gave evidence at the previous High Court hearing in May 2002. I shall consider the evidence of Mr McLachlan and the response by Mr Darlow, to the matters relied on by Mr McLachlan as establishing that the Receivers at the relevant time had knowledge of the correct position regarding Lots 1 and 2.
[39] After detailing the history of Lots 1 and 2, Mr McLachlan stated that because
Network did not complete the transfer of Lots 1 and 2 to the joint venture, Lots 1 and
2 were not included by the Receivers in the assets owned by MGL and Poihipi. He stated:
However, I believe the Receiver must have been aware of the true state of affairs in relation to Lots 1 and 2.
He then referred to the evidence which, he claimed, supports that belief. (a) 11 February 1999 visit
[40] Mr McLachlan stated:
The Receiver was aware from his visit to Taupo with Mr Darlow on 11
February 1999 that Lots 1 and 2 were farmed (and therefore leased) by the Waituruturu Trust together with leased areas A, B, C. In fact I personally pointed out the location of all the joint venture land titles used by my Trust including Lots 1 and 2 to both men while travelling with them in my vehicle around the property.
[41] Mr Darlow recollected visiting the site on 11 February 1999 with Mr Chilcott but had no recollection of Mr McLachlan explaining the status of Lots 1 and 2 as he saw it. He stated:
While he may have pointed out Lot 2 and the reinjection pipeline which covered the land, he did not say that the land should have been leased to his Trust.
[42] In answer to cross-examination by Mr Bryers, Mr Darlow said that he had no recollection of Mr McLachlan pointing out Lots 1 and 2 as such, though he certainly recalled Mr McLachlan showing them the reinjection line which runs from the power station to the reinjection wells, and in that context he (Mr McLachlan) could have mentioned that it crossed over a separate piece of land but he had no specific recollection of such a comment.
[43] Mr Darlow stated that he and Mr Chilcott were well aware of the controversy that had surrounded the Receivers’ appointment and the litigation that preceded it. He was aware that Mr McLachlan and his family farmed the land and he was very concerned that he and the Receivers should not be doing anything that might deprive Mr McLachlan and his interests of their rights. He clearly recalled telling Mr McLachlan that the Receivers would do nothing to deprive him and his interests of their lawful entitlements. Therefore had, for example, Mr McLachlan pointed out that Lots 1 and 2 had been overlooked and that they should be joint venture assets and subject to a lease in the same terms as the lease to the Trustees over the balance of the land, he would have taken notice of that. Had he been told, when Lot 2 was pointed out to him, that it was an MGL asset:
… (it) would have stuck in my memory.
But he had no recollection of any such statement being made.
[44] Mr Chilcott in his affidavit of 23 April 2002 described the visit thus:
6.The (information) memorandum stated that I intended to sell the power station and the land upon which it was located. I did not wish to sell any land that was the subject of the lease to the defendant, and I did not wish to trigger the pre-emptive rights accorded by cl 16.1 of the lease.
7. I believe that Mr McLachlan was aware of my attitude, because on
11 February 1999 shortly after my appointment as Receiver, I visited
Mr McLachlan at the Power Station Site in the company of my solicitor Mr Darlow …
8.During the course of the visit Mr McLachlan showed Mr Darlow and I around the Power Station Site and the farm. The meeting was cordial.
9.During the course of the visit I explained to Mr McLachlan that although it was likely that the power station would be sold, I as Receiver had no intention of selling any of the land which was the subject of the lease. I said to Mr McLachlan that whatever his legal rights were, they would not be disturbed.
Mr Chilcott’s evidence on this matter was not challenged.
[45] It was put to Mr McLachlan in cross-examination by Mr Dale for the plaintiffs, that despite the numerous lengthy affidavits he had filed in these proceedings, one of which was devoted almost entirely to the defendants’ claims to Lots 1 and 2, his brief of evidence dated 8 October 2004 was the first time Mr McLachlan had referred to the meeting of 11 February 1999 with Mr Darlow and Mr Chilcott. Mr McLachlan could not remember if that was so. Nor in answer to Mr Dale, could he remember that Mr Chilcott had sworn an affidavit in April 2002 in which he referred to the 11 February 1999 visit and described the meeting.
[46] When pressed for an explanation as to why this new detail was now being put forward, Mr McLachlan stated that it was not possible to control what counsel would say at trial or in cross-examination of a witness. He denied that the reason the matter had not been canvassed in the May 2002 hearing, was because Mr McLachlan had not given Mr Darlow or Mr Chilcott any indication that Lots 1 and 2 were the subject of a lease to his interests. He said:
Of course I did; that is nonsense.
[47] But subsequently in cross-examination when it was again put to Mr McLachlan that he did not mention to Mr Darlow and Mr Chilcott any question of a lease of Lots 1 and 2 at the 11 February 1999 visit, he replied:
No, but we did not lease Lots 1 and 2 separately. It was part of area C so there was no reason to mention Lots 1 and 2 in terms of a separate lease, because we have got an exact parallel position on the opposite side of the
joint venture land in area B where Section 7 is never expressed as a separate lease, an identical situation.
[48] He went on to say that he produced a map evidencing the land titles and gave a copy to each man. He said that he explained where the land titles were physically, and showed them every land title. No such document was produced in evidence. Mr Darlow could not recall such a map.
[49] Mr McLachlan asserted that Mr Darlow and Mr Chilcott were being dishonest in saying that they did not know the correct position about Lots 1 and 2 and the true ownership of them, and agreed in answer to Mr Dale that the meeting on
11 February 1999 was one of the reasons he held that view.
Discussion
[50] Mr McLachlan accepted in answer to cross-examination, that he did not mention to Mr Darlow and Mr Chilcott at the 11 February 1999 meeting that Lots 1 and 2 were leased to the Trustees and explained the reason why that was so (refer [47]). Indeed, it is unlikely that in April 1999 Mr McLachlan would have been as specific as he now claims, because it was his evidence that it was not until the information memorandum issued in July 1999, that he became aware that the task he had expected his joint venture partner to complete, namely the transfer of Lots 1 and
2 from Network to MGL, had not in fact been completed. He also referred to a letter received from the Receiver in June 1999 advising that the Trustees should not be using lots 1 and 2 as they were owned by the Network, as alerting him. He further stated that in October 1999 when he instructed his solicitors in Taupo to caveat the leased land, he believed and had “always understood” that Lots 1 and 2 were part of Land C, so he gave no specific instruction to caveat Lots 1 and 2.
[51] A general indication by Mr McLachlan that the area comprising Lots 1 and 2 was farmed by the Trust along with other areas which he pointed out while the parties travelled in his vehicle over a farm comprising some 1100 acres of which Lots 1 and 2 comprise approximately ten acres, and even production of a map, would not have alerted Mr Darlow and Mr Chilcott to anything material or particular in
relation to the McLachlans’ interests in Lots 1 and 2, in the absence of specific advice. On Mr McLachlan’s own evidence nothing was said or done that could or should have alerted them to consider or inquire in particular regarding Lots 1 and 2. Clearly neither Mr Darlow nor Mr Chilcott derived any specific information or message regarding title to or the leasing of Lots 1 and 2 from what Mr McLachlan described to them on that day.
[52] I reject any suggestion that on the basis of the information they received from Mr McLachlan on that visit, Mr Chilcott or Mr Darlow subsequently acted dishonestly in maintaining they did not know the correct position in relation to Lots
1 and 2. In February 1999, Mr McLachlan was not aware that there was any issue with Lots 1 and 2; he did not alert Mr Chilcott and Mr Darlow to any particular issue in relation to Lots 1 and 2; he provided a general tour of the power station and the considerable area of surrounding farm land which would comprise receivership assets. Even if Mr McLachlan was as extensive and precise as he claimed in evidence, in pointing out the location of the various titles, then, at most, the parties were at cross-purposes as to the significance and purpose they attached to the information conveyed.
[53] However, I doubt that was so. This was a familiarisation visit offered by Mr McLachlan. The Receiver and his legal adviser were provided the opportunity to view and understand the general physical context and extent of assets under receivership. I accept Mr Darlow’s account that matters of historical and current concern, particularly in relation to the joint venture with Mercury, were raised by Mr McLachlan, and that matters of land title and land holdings were also referred to, but in general terms.
[54] The evidence does not support an inference or conclusion that as the result of the visit on 11 February 1999, the Receivers knew, or ought to have known the correct position regarding Lots 1 and 2. I find accordingly.
(b) Joint venture documents
[55] Mr McLachlan stated that Vector, Network and the Receivers had within their actual possession or control or available to them all of the relevant joint venture documents which show the true intention of the parties in relation to Lots 1 and 2. Mr McLachlan listed these documents as including:
• the 8 September 1994 Heads of Agreement
• the 26 September 1994 joint venture agreement
• the draft documentation completed by Russell McVeagh including the draft agreement for sale and purchase between Network and MGL
• the draft lease of Lots 1 and 2 on the same terms and conditions as the 15
December 1995 lease
• the memorandum of post-settlement matters to be completed which refers in paras 9 and 10 to completion of the agreement for sale and purchase and the lease after 15 January 1996 when the Land Settlement Promotion legislation changes were to become effective
• the Russell McVeagh process map which again refers to the matters to be completed in relation to the “TDC property” (a reference to Lots 1 and 2)
• an amended form of agreement for sale and purchase between Network and
MGL
• the unexecuted deed of lease
[56] Mr Darlow said that had all the relevant files been called for from Vector, no doubt the listed documents would have been made available to him. However, he did not consider it was necessary to go through all the extensive documentation and he did not advise Mr Chilcott to do so. He was concerned on behalf of the Receiver with the assets of MGL and Poihipi and believed those to be clearly identified. They
were the assets the subject of the debenture and the assets available to the Receiver to meet the debt owing under the debenture (some $120m). He said it did not occur to him that there was an unresolved issue in relation to Lots 1 and 2. He was simply aware from searches made, that Network was the registered proprietor. He had regard to the lease under which the Trust occupied the land excluding the Power Station Site, because that leasehold interest continued despite the receivership and affected the assets available to the Receiver. The lease did not refer to Lots 1 and 2. In fact he was not aware of the documentation listed in the previous paragraph, until a report received from Mr McLachlan on 9 May 2000, which was after Contact had purchased and paid for Lots 1 and 2. Mr Darlow said that he simply focused on the assets that were available to the Receiver and the documentation relevant to them.
Discussion
[57] Mr Chilcott and Mr Darlow, both very experienced in handling receiverships, took a practical and predictable approach to their task. Their priority was to ascertain the assets available to the Receiver for realisation. They concentrated on the source documents which would provide that information and also on information available from Network and Vector. They did not delve, as Mr McLachlan suggested they might have, into a mountain of historical documentation which they considered would have done little to advance their search for relevant information. Network was shown as the registered proprietor of Lots 1 and 2. Lots 1 and 2 did not form part of the leased land. There were no other indicators that there was unfinished business with Lots 1 and 2 which would alter the apparent situation that these lots were owned by Network and not part of the assets under receivership.
[58] Further, as Mr Darlow said in evidence, had he at that stage, made inquiry about the status of Lots 1 and 2 from Network or Vector, he would not have received information that would have put him on the alert. For, until a full inquiry and analysis were conducted by Vector and Network during 2001, which led to the concession made by the plaintiffs at the previous High Court hearing in May 2002, a change of guard at Vector meant that the then directors were unaware of the oversight which had continued since 1995 when Network became registered
proprietor, and which had resulted in the failure to transfer Lots 1 and 2 to MGL in accordance with the common intention of the joint venture parties.
[59] Mr McLachlan’s assertion amounts to no more, than that a combination of documents that could have been available to the Receivers, would or should have informed them of the true position. There does not seem to be any dispute that these documents were in the possession of or available to Network. But for the reasons given by Mr Darlow, he did not refer to them and did not advise Mr Chilcott to do so. He was not challenged on this evidence. Nor, as Mr Darlow pointed out, would inquiry of Network in mid-1999 regarding the ownership of Lots 1 and 2, have yielded information to inform or alert the Receivers that the true position was inconsistent with the Certificate of Title and the lease, because Network’s continuing oversight since 1995 in failing to transfer Lots 1 and 2 to MGL, had not then come to light. The reality is, and I find as a fact, that the documents, available though they may have been, did not serve to inform the Receiver nor his advisors.
(c) Receiver’s letter of 21 June 1999
[60] On 21 June 1999 the Receiver wrote to the Trust in relation to the lease dated
15 December 1995 giving notice in respect of various aspects of Land A, Land B and
Land C and concluding:
Vector has requested we remind you that the land, as highlighted in green on the attached map, is owned by MEL Network Limited, a wholly owned subsidiary of Vector Limited. This area is not covered by the deed of lease and should not be being used by the Waituruturu Trust.
[61] Attached to the Receiver’s letter of 21 June 1999 was a map. On it, land areas A, B and C are shown. Land area C is coloured dark orange. Together with land area B it is designated “Land available under lease”. Lots 1 and 2 are shown coloured green and designated “Land owned by MEL Network Limited”. This map shows a clear distinction between land area C and Lots 1 and 2.
[62] Mr McLachlan said that this was the first time he became aware that Network had not carried out its obligations to complete the transfer of Lots 1 and 2 to MGL.
[63] On 20 July 1999 the Receivers made available their confidential information memorandum which included the statement:
Furthermore, MEL Network Limited owns a further 4.5 hectares of land (highlighted in orange on the map in Appendix 1, figure 2), which it will make available for selling (independently, but simultaneously to this sales process) to the purchaser.
[64] Both those communications gave clear notice to the Trustees as to the way in which the Receivers were treating Lots 1 and 2, i.e. as an asset of Network.
[65] Mr McLachlan’s evidence was that he was concerned at the prospect of the Receiver breaching the Trust’s right of first refusal not only in respect of land areas A, B and C but also section 7 and Lots 1 and 2. But it was not until October 1999 that he took any action, when caveats were registered against the leased land.
(d) Letters from the McLachlans’ solicitors
[66] On 21 October 1999 his then solicitor, Mr Cargill of Taupo, wrote to Grove
Darlow & Partners:
We put the Receiver on notice that having stated his intention to sell the property defined as land area A excluding the Power Station Site, the Receiver must now specify the price and terms on which he proposes to sell the relevant land as defined in cl 16.1 of the lease. Our client instructs us that it has funding available to complete this purchase and for that matter the purchase of Areas B and C as defined in the lease.
The Receiver, having now stated its intention to sell land area A, is now invited to state its sale price for land areas B and C and sections 8 & 9 owned by Mercury Network Limited on behalf of the joint venturer.
(It appears that this letter was also transmitted by facsimile on 22 October 1999).
[67] Mr Darlow said in respect of this letter:
Mr Cargill referred to sections 8 and 9 (which from now on I refer to as Lots
1 and 2) as being owned by Mercury Network Limited. While Mr Cargill called for the Receivers to state sale terms for, among other things, Lots 1 and 2, he did not explain why Mr McLachlan’s Trust had claims to those properties. But since Lots 1 and 2 were not receivership assets I took no particular notice of these claims.
[68] In answer to cross-examination Mr Darlow said that he had never regarded Lots 1 and 2 as being owned by the joint venture. He sent on the letter to Vector and its solicitors, and to the Receivers. He received no instructions. He agreed in answer to Mr Bryers, that with the benefit of hindsight he might have checked out the statement made in relation to Sections 8 and 9, but given his understanding of the situation at the time, he simply forwarded the letters and left it at that.
[69] A week later, on 29 October 1999 Mr Cargill wrote again to Grove Darlow & Partners, referring to his letters of 21 and 22 October. He stated:
Our client instructs us to register caveats against the titles to the land owned by Poihipi Land Limited and Mercury Geotherm Limited pursuant to the terms of the lease in order to preserve Waituruturu Trust’s rights under the lease … Our client has undertaken this step in order to preserve its legal rights.
That letter made no reference to Lots 1 and 2. It did specifically refer to the Trust’s right of first refusal “in respect of Land Area A (excluding the Power Station Site)” and to the creation of easement corridors which the Trust regarded as excessive and in breach of its right to quiet enjoyment. Caveats registered on 28 October 1999 were, as foreshadowed by the letter, against the land owned by MGL and Poihipi and leased to the Trustees. Lots 1 and 2 were not caveated.
[70] Following registration of the caveats, on 4 November 1999, Grove Darlow (Mr Darlow) wrote with reference to the 29 October 1999 letter, stating clearly the Receiver’s position:
We are surprised that you have lodged caveats in respect of the land owned by Poihipi Land Limited (In Receivership) and Mercury Geotherm Limited (In Receivership) (together “Companies”).
Your client has no right or entitlement to lodge caveats in respect of any part of the property owned by the Companies. Even if it were not for the clear prohibition contained in cl 12.4 of the Lease, the Receiver does not, at this stage of the process, wish to sell any part of the property other than the Power Station Site, and you acknowledge yourself that the Power Station Site is exempt from the provisions of the right of first refusal. The Receiver is taking considerable care to ensure that the property which will be sold will comprise only the Power Station Site, and the Receiver will be prepared (if required) to provide an undertaking to a Court that the only part of the property which will be sold at this stage will be the Power Station Site.
This letter confirms the Receiver’s understanding that the McLachlans had caveated all the land of Poihipi and MGL, and that the Receiver did not wish to sell any part of the property except the Power Station Site which was “exempt from the provisions of the right of first refusal”.
[71] On 10 November 1999, new solicitors for the McLachlans, Edwards Clarke
Dickie, wrote to the solicitors for the Receivers on a number of issues including Lots
1 and 2. Their letter stated that the Receivers’ information memorandum appeared to be seriously misleading in a number of respects including that:
MNL is the rightful legal owner of Lots 8 and 9.
At para 8 the letter stated:
The Information Memorandum refers to Mercury Network Limited being the legal owner of Sections 8 and 9. However, if that is so, then it is not in terms of the arrangements made between our clients and Mercury prior to execution of the joint venture contract.
Prior to execution of the Joint Venture contract Mr McLachlan’s company Geotherm Energy Limited, having arranged for the purchase of those sections from the Taupo District Council, then agreed that the land would be transferred to the joint venture company. Accordingly Mercury Network Limited is not entitled to be the legal owner of those two sections. Its role is limited to that of financier to the joint venture. Sections 8 and 9 are thus part of the leased area C.
In these circumstances we must advise that the caveats cannot be withdrawn.
[72] Of course, at that point caveats had not been lodged against Lots 1 and 2, as Mr Darlow noted in his evidence. He said he forwarded the letter to Vector and its solicitors but he took no other steps in relation to that issue. In answer to cross- examination he stated:
The short point is, since these lots were not receivership assets I simply, speaking for myself, disregarded these claims.
[73] Mr Darlow disagreed that he ignored Mr Dickie’s letter. He said that he forwarded it on to his clients and received no further instructions from them. He accepted that he did not acknowledge the letter. He said that by November 1999 he was becoming consumed with other aspects of the complex power station sale. Through this period he had a number of meetings with Mr Dickie and with Mr Noel
Ingram, who was then lead counsel for the McLachlans. While Mr McLachlan’s concerns on a wide front were articulated during those meetings, at no stage did Mr Dickie make any particular issue about Lots 1 and 2, and certainly did not elaborate in any way in relation to Lots 1 and 2. The Lots 1 and 2 issue was not canvassed at all. Furthermore, as no caveats had been registered over Lots 1 and 2 and a caveat had been registered against the other leased lands, Lots 1 and 2, said Mr Darlow, simply did not loom large on his horizon.
[74] On 3 December 1999 Mr Dickie again wrote on behalf of the McLachlans, this time to the Receiver, Mr Chilcott. The letter canvassed a range of matters including Mr McLachlan’s concerns that parties bidding for the power station were unaware of the Trustees’ rights under the lease, and noted that caveats had been lodged to protect the Trustees’ position. After referring to a number of other concerns with the information memorandum, the letter concluded by enclosing a number of documents and requested a written assurance from the Receivers that parties tendering would be provided with copies. They included:
Draft agreement for sale and purchase Mercury Network Limited to Mercury Geotherm Limited (“the saleyard sections” which have also been incorrectly described in the Information Memorandum).
[75] Mr Darlow stated that he did not ignore this letter, but he did not take any steps in relation to Lots 1 and 2 for the reasons previously given. He noted the draft agreement for sale and purchase, that it was not signed and that it provided for a purchase price of $180,000 payable by MGL to Network. He said he knew that MGL had no money except such money as Vector provided so that in a way this asset would be going around and would not swell the assets available to the Receiver. He stressed that in this period, October through to December 1999 “rightly or wrongly”, he did not give any particular attention to Lots 1 and 2. He said:
… if one is alerted to a potential asset you pursue it, but I didn’t see Lots 1 and 2 as being an asset of the company, a net asset in the hands of the joint venture company. It was owned by the debenture holder; I was not aware of the history, and for that reason and because I was not asked, I did not give the matter any further thought.
[76] Mr McLachlan noted in evidence, that on 9 December 1999 the Receivers wrote to bidders offering the opportunity to resubmit their bids on the basis of amended information, particularly as to the definition of the Power Station Site. No mention was made of Lots 1 and 2. Mr McLachlan was sent this letter on behalf of Geotherm Group Limited.
[77] Mr McLachlan contended that on the basis of the evidence which he summarised as “three written warnings and one physical personal warning”, the Receivers as well as Vector and Network, at all relevant times knew the true intention of the joint venture parties in relation to the ownership of Lots 1 and 2 and the lease to the Trustees. Mr McLachlan asserted that Mr Darlow and the Receivers acted dishonestly. In response to a question in cross-examination from Mr Dale:
Are you asserting dishonesty on the part of Mr Darlow and the Receivers?
He replied:
I most certainly am. My lawyers warned them three times in writing. How many times do you have to warn them.
He accepted that the assertion that they had been acting dishonestly, was not put to
Mr Chilcott at the first trial, nor to Mr Darlow in cross-examination.
Confusion in relation to Lots 1 and 2
[78] The background and context in which Mr Darlow and the Receivers received the correspondence from Mr McLachlan’s lawyers, Mr Cargill and Mr Dickie, in October, November and December 1999, needs to be considered.
[79] It appears to be common ground that as the result of an oversight in
1995/1996 the transfer of Lots 1 and 2 from Network to MGL was not completed. Pending amendments to the Land Settlement Promotion Act, completion of the transfer, and the lease of Lots 1 and 2 by MGL to the Trustees, had been deferred by mutual agreement of the joint venture parties, and then was simply overlooked. This was the finding in the High Court judgment at [139], and was accepted by the
defendants in the opening submissions of counsel and by Mr McLachlan in evidence. Mr Dale asked Mr McLachlan in cross-examination:
You then said the documents were not completed and was I believe a genuine oversight on the part of Mercury Energy Limited and Russell McVeagh, remember saying that?
To which Mr McLachlan responded:
I’d like to think that I’m charitable enough to consider mistakes can be made.
Later in answer to Mr Dale he stated:
… it was 1995 when those documents should have been executed. I still think it was probably an oversight but that doesn’t excuse a failure to act.
[80] For the sake of completeness, I refer to two documents Mr McLachlan produced in re-examination. They were a report by Mr Gatland of Mercury/Vector to the MGL Board on “Long Term Steam Access Strategy” dated 22 October 1997 which in the text stated:
Sections 8, 9 and 20 are the areas of land owned by MGL which are closest to the Te Mihi production area
Secondly, a 25 page Kingston Morrison report for MGL on “Well Sites for Step-Out Drilling” dated May 1997 which by map and description included reference to the physical siting of Well WK 661. Mr McLachlan relied on these documents as informing MGL Board members, which included Mercury/Vector representatives, that MGL owned Lots 1 and 2. However, he accepted in response to a question from the Court, that the evidence was no more than Mr Andrews of Vector acknowledged in evidence at the previous hearing.
[81] As the result of the oversight by Network:
a) The documentation on which the Receiver and his legal advisors relied showed Network as the registered proprietor of Lots 1 and 2:
i) Certificates of Title 56A/137 and 56A/138 showed MEL Network Limited as the registered proprietor of Lots 1 and 2 from June 1995.
ii) The joint venture agreement did not refer to Lots 1 and 2. It specifically defined “land” to mean the properties in Certificates of Title 42C/414, 42C/415, 42C/416, 26D/78,
26D/79, 26D/80 and 26C/1390 and specifically provided for the bringing into the joint venture of the Bishop land in Certificate of Title 43B/496 and the Landcorp land in Certificate of Title 50C/304 (Section 7) (but not Lots 1 and 2).
iii) The lease, which contained the right of first refusal in cl 16.1, made no mention of Lots 1 and 2. It defined “land” as including Certificates of Title 42C/414, 42C/415, 42C/416 and
26C/1390 (being land A); 26D/80, 26D/79, 26D/78 and
50C/304 (being land B); and 43B/496 (being land C).
Mr McLachlan, Mrs McLachlan and David John Ross, who in
1995 was a trustee of the Trust, executed the joint venture agreement and the lease. The reason for there being no mention of Lots 1 and 2 was obviously the common intention of the parties that those lots would be dealt with separately by a subsequent transfer to MGL by Network and a lease of Lots
1 and 2 by MGL to the Trustees in like terms to the 15
December 1995 lease. (Such documents were prepared in draft, as later became known when a full review of the situation pertaining to Lots 1 and 2 was undertaken by Network in 2001). Although the definition of “Relevant Land” in cl 16.1 of the lease confirms that the right of purchase extends to after acquired property, since the lease specifically leases Land A, Land B and Land C as defined, either a variation of the lease, or a separate lease of Lots 1 and
2 on like terms would have been required to give effect to the parties’ common intention.
b) The advice the Receivers and their legal advisors received during
1999 from Network and Vector, was that Network owned Lots 1 and
2. As the result of the oversight and a change of guard at Vector and Network, the incumbent personnel were unaware of the correct position in relation to Lots 1 and 2. This is apparent in the Receiver’s letter of 21 June 1999 to the Trustees which states that Lots 1 and 2 are owned by Network, and the information memorandum issued in July 1999 which states that independently of the sale of the power station assets, Network will offer for sale Lots 1 and 2.
[82] When Mr Cargill wrote to Mr Darlow on 29 October 1999 advising of the McLachlan’s instructions to register caveats to protect the interests of the Trustees under the lease, he referred to caveats against the titles to the land owned by Poihipi and MGL. There was no mention of Lots 1 and 2.
[83] When caveats were registered on 28 October 1999, they were registered against the leased land, but not against Lots 1 and 2. The receiver treated the caveats as lodged against all the land of MGL and Poihipi - Grove Darlow letter
4 November 1999.
[84] Mr McLachlan himself was confused. When he wrote to Mr Cargill on 27
October 1999 instructing him to prepare and lodge caveats to protect the interests of the Trust his instructions were:
… with respect to the Mercury Geotherm/Poihipi Land areas as follows: (a) Land area A;
(b) Land areas B and C.
Mr McLachlan pointed out to Mr Cargill that land area B as shown on the Receivers’ “map of land ownership” of July 1999 included Lots 3 and 4 and section 7. No mention was made of Lots 1 and 2. Mr McLachlan said in evidence that he thought area C included Lots 1 and 2. He said he left Mr Cargill to check the Certificates of
Title against which the caveats should be registered, and he relied on Mr Cargill. He explained that Mr Cargill had a nervous breakdown in mid-1999, so it became necessary for him to change solicitors. Mr Dickie then started to act for the McLachlans.
[85] Mr Dickie’s letter of 10 November 1999 perpetuated Mr McLachlan’s misapprehension that Lots 1 and 2 were included in land C. The letter stated that Mercury Network Limited was not entitled to be the legal owner of Lots 1 and 2 because of the agreement that they be transferred to the joint venture company, and then stated:
Sections 8 and 9 are thus part of leased area C.
[86] This was not correct, although it seems it was Mr McLachlan’s belief at the time. The statement is also confusing, for if Lots 1 and 2 (Sections 8 and 9) had been part of leased area C, they would have been included in the leased land and subject to the lease (and right of first refusal). It would appear that at the time Mr Dickie took over responsibility for these matters there were no searches undertaken. These would have revealed that Lots 1 and 2 were registered in the name of Network and that they were not part of land C. Mr McLachlan said that such searches were not undertaken until February 2000 when he himself made searches at the Land Transfer Office in Hamilton.
The McLachlans’ conduct
[394] The Court must consider the conduct of both the equity holders, and thus the conduct of the McLachlans is a relevant consideration. The issue is whether the conduct of the McLachlans has allowed Contact to acquire Lots 1 and 2 in the mistaken belief that the McLachlan’ earlier interest did not exist (Barry v Heider (1914) 18 CLR 197). In this respect the following facts are relevant:
• The McLachlans were parties to the joint venture with Network, shareholders in MGL and Mr McLachlan was a director of MGL. They had detailed knowledge of the joint venture.
• Mr McLachlan was aware of the arrangement in 1994 that Lots 1 and 2 would not be included in the deed of lease but would be subsequently transferred by Network to MGL after the Land Settlement Promotion Act was repealed.
• Network overlooked its obligation to complete the transfer and associated documentation.
• The McLachlans did nothing to pursue the matter and to ensure that the common intention of the joint venture parties was carried into effect.
• Because they did not pay rent for Lots 1 and 2 there was not available to the Receivers a rent trail which would have alerted them that the McLachlans had some kind of interest in Lots 1 and 2.
• When they discovered the incorrect situation in relation to rent payments and corrected it in October 1999 they did not take the opportunity to check and confirm that the “confusion” extended considerably further than the rent payments.
• Following notice by the Receiver’s letter of 21 June 1999 and the information memorandum of July 1999, that their interests in Lots 1 and 2 were at risk, the McLachlans took no action for three months, i.e. until the October 1999 letter of Mr Cargill to Grove Darlow.
• They failed to check the legal documentation, in particular the deed of lease, and thus remained confused as to the protection afforded to Lots 1 and 2.
• They caveated to protect their interest in the leased land but did not caveat Lots 1 and 2, thereby confirming the perception that they did not have a like interest in Lots 1 and 2.
• They did not carry out searches of the title or other checks which would have revealed the situation to them.
[395] The McLachlan’s conduct was the subject of a late filed amended pleading by Contact, which the defendants did not oppose. Mr McLachlan addressed these issues in a supplementary statement of evidence dated 8 October 2004, and also in answer to cross-examination:
• He emphasised that he relied on his joint venture partner, Network/Vector, to carry out its obligations to put into effect the common intention in relation to Lots 1 and 2 and he proceeded on the assumption that they would have done that.
• He referred to his instructions to Mr Cargill and Mr Dickie, and the correspondence with the Receivers and his understanding that Area C included Lots 1 and 2, which was not in fact the case.
• He referred to his own ill health in 1996 and to the health problems that afflicted Mr Cargill (which Mr McLachlan said necessitated his change of solicitor to Mr Dickie) and Mr Veitch, the valuer who carried out the rental valuation and did not include Lots 1 and 2, which Mr McLachlan said, was Mr Veitch’s mistake.
[396] It is unfortunate that for so long, 1995 to 1999, the McLachlans did not become alert to Network’s oversight in failing to carry out the common intention. It is surprising that when alerted in mid-1999 to the fact that the Receivers were not treating Lots 1 and 2 as assets of MGL and Poihipi, and were not treating them as part of the leased land, that the McLachlans did not spring into immediate action to protect their interests in Lots 1 and 2 in an effective way.
[397] The explanation lies in the general confusion that reigned, not only with Network/Vector, but with Mr McLachlan and his legal advisors. This confusion is at the root of this proceeding.
[398] There is no doubt that had the McLachlans acted in their own interests by earlier caveating Lots 1 and 2 thereby ensuring that all parties interested in the power station assets, or interested in or concerned with Lots 1 and 2, had clear notice of their interests, the situation which gives rise to this litigation, would not have arisen. Nor would it have arisen if Contact had been able to achieve registration, and thus indefeasibility of title, immediately following settlement of the purchase of Lots 1 and 2 in January 2000.
[399] However, in all the circumstances I am not convinced that the McLachlans failure to act should be treated as conduct which should reverse the equitable priorities. They relied, understandably, on Network, their joint venture partner, to carry into effect the common intention of the joint venture parties in relation to Lots
1 and 2. Network was the McLachlans’ joint venture partner, and trustee for the
MGL and the McLachlans of Lots 1 and 2 in terms of the trust (an institutional trust),
subsequently formally declared by the High Court judgment, and Network was the vendor to Contact.
[400] On the one hand, Contact relied on the register and the absence of a response to inquiries it made of the immediately involved parties, the Receivers and Network, of any notice or information that contradicted the register and might have put them on inquiry. On the other hand, the McLachlans relied on their joint venture partner who held Lots 1 and 2 on trust for MGL and the Trustees as declared by the High Court judgment, to carry out the common intention of the joint venture parties. The result was confusion. While the equities are finely balanced, in all the circumstances I am not persuaded that the conduct of the McLachlans was such that the equities must be reversed to achieve justice and fairness.
[401] I conclude, therefore, that Contact should take title to Lots 1 and 2 subject to the lease in favour of the Trustees.
The McLachlans taking advantage
[402] Contact submitted that it would be entirely inequitable for the McLachlans to be able to take advantage of the failure by Network to implement the common intention, to put themselves in a better position than they would otherwise have been. Contact argued that if all that should have happened, had happened, then Lots 1 and
2 would have been part of the leased land and subject to the decision taken by the Receivers not to sell the leased land in order to preserve value for the power station assets pursuant to the lessors’ rights under cl 10.1 of the lease. Thus the McLachlans would have remained lessees, not purchasers, of Lots 1 and 2.
[403] Contact contended therefore that if the Court were to hold that the right to purchase had been triggered in respect of Lots 1 and 2 by the sale to Contact, then the McLachlans should do no better than to obtain a lease. Contact referred to Swann v Secureland Mortgage Investment Nominees Limited [1992] 2 NZLR 144 as authority for the proposition that, in equity, the McLachlans should not be put in a better position than they would have been if the sale of Lots 1 and 2 to Contact had
not occurred, submitting that they should not be permitted to attempt to take advantage of a situation that arose, in part at least, from their own negligence.
[404] I do not need to reach a concluded view on this contention, since I have held that the right to purchase in the lease was not triggered by Network’s decision to sell Lots 1 and 2. However, had my decision been otherwise there would need to have been weighed against the McLachlans’ right to purchase, that Contact’s opportunity to purchase flowed from the same oversight.
Issue 3: Can the Receivers resist the claim by the Trustees of the right to purchase on the grounds that they do not have funds to pay MEL Network Limited to transfer the land to them?
[405] This issue falls for determination only if the Trustees succeeded on the first two issues. They have not succeeded on the first issue so it is not necessary to answer this question. Mr Dale argued succinctly but confidently, that implicit in the Court’s declaration at [157] of the High Court judgment were two constructive trusts: by Network in favour of MGL in respect of Lots 1 and 2, and by MGL in favour of the McLachlans as to an equitable lease of Lots 1 and 2. He submitted that because the Receivers have no funds to complete the purchase of Lots 1 and 2, MGL’s interest must fail and consequently, also the equitable lease declared by the second trust.
[406] The overall circumstances would always need to be considered. If the right to purchase had been triggered, then the McLachlans would have paid the Receivers who in turn would have had funds to pay Network. It would be unrealistic to treat the two trusts in isolation in those circumstances.
Issue 1
[407] I find there was no wish or intention to sell Lots 1 and 2 by the lessors MGL and Poihipi in Receivership. Accordingly there is no triggering event under cl 16.1 of the equitable lease of Lots 1 and 2.
Issue 2
[408] Contact has not discharged the onus of establishing that it was a bona fide purchaser for value so as to prevail over the Trustees’ equitable rights. Contact will take title to Lots 1 and 2 subject to the equitable lease in favour of the Trustees.
Result
Issue 1
[409] The declaration and mandatory injunction sought by the defendants are declined.
[410] The McLachlans’ caveats lodged against Certificates of Title 56A/137 and
56A/138 on 16 February 2000 shall be removed within 30 days of the date of this judgment.
This order is to lie in Court until two working days following the expiration of the appeal period, unless an appeal is sooner filed and a stay granted.
Issue 2
[411] There will be a declaration that Contact takes title to Lots 1 and 2 subject to the equitable lease in favour of the Trustees.
[412] No determination is required.
Costs
[413] If counsel cannot agree costs, they may submit memoranda within 28 days. I will determine costs on the papers unless counsels’ submissions persuade me that a hearing is required.
Leave reserved
[414] Should clarification be required in respect of any of the orders or declarations made, leave is reserved to apply on notice within 28 days.
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