Northash Limited v Zeff Farms Limited
[2022] NZCA 471
•6 October 2022 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA279/2022 [2022] NZCA 471 |
| BETWEEN | NORTHASH LIMITED |
| AND | ZEFF FARMS LIMITED |
| Court: | Cooper P and Goddard J |
Counsel: | J W A Johnson for Applicant |
Judgment: | 6 October 2022 at 11.00 am |
JUDGMENT OF THE COURT
AThe application for special leave to appeal is declined.
BThe applicant must pay costs to the respondent for a standard application on a band A basis, with usual disbursements.
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REASONS OF THE COURT
(Given by Goddard J)
Introduction
The applicant (Northash) leased a dairy farm from the respondent (Zeff ). Northash breached the lease by failing to maintain the farm, and in particular failing to clean ditches, drains and watercourses and maintain good grass pasture. As a result, the pasture was seriously damaged. Zeff sold the farm in an unremediated state.
Zeff claimed damages from Northash for breach of the lease. Its claim was referred to arbitration. The arbitrator, Ms Penny Mudford, delivered an award determining that Northash had breached various terms of the lease and specifying the damages that Zeff was entitled to recover as a result of those breaches.
The arbitrator found that the cost of reinstating the farm to the state it would have been in had the breaches not occurred amounted to $536,524.50, being the sum of:
(a)the cost to reinstate 73 hectares of pasture: $93,184.50 including GST;
(b)the cost to clean the drains and replace 40 culverts: $36,340 including GST; and
(c)loss of future milk production while remediation was undertaken: $407,000.
However, the arbitrator went on to find that the proper measure for damages in this case was the loss of value of the farm when it was sold by Zeff in its unremediated state: the difference between the sale price obtained by Zeff for the farm in an unremediated state and the market value that the farm would have had if the lease had been complied with, and the pasture had been in good condition. That loss of value was $490,000. Because the loss of value was less than the damages assessed by reference to remediation costs and lost milk production, the arbitrator made an award for that lesser sum.
The proposed appeal
Northash wishes to appeal to the High Court, arguing that the proper measure of damages in this case is the cost of reinstatement of approximately $130,000, and that Zeff is not entitled to recover any amount in respect of lost future milk production.
Clause 5 of sch 2 to the Arbitration Act 1996 provides that a party may appeal to the High Court on a question of law arising out of an award with the leave of the High Court.[1] Northash applied to the High Court for leave to appeal to that Court. Brewer J declined to grant leave.[2]
[1]Arbitration Act 1996, sch 2 cl 5(1)(c).
[2]Northash Ltd v Zeff Farms Ltd [2022] NZHC 645 [High Court judgment].
Northash then sought leave from the High Court to appeal to this Court against the refusal to grant leave to appeal from the award. The Judge declined to grant leave to appeal to this Court.[3]
The application before this Court
[3]Northash Ltdv Zeff Farms Ltd CIV-2021-488-96, 17 May 2022 [Minute].
Northash now applies to this Court for special leave to appeal to this Court against the High Court judgment declining leave to appeal to the High Court on a question of law arising out of the award.
Northash identifies as its “central proposition” its argument that Zeff’s claim for lost milk production is not permitted as a matter of law. It characterises this argument as a question of law relating to the proper scope of the rule in Joyner v Weeks.[4] Northash says it does not seek to impeach the ongoing role of Joyner v Weeks as a “prima facie” rule in New Zealand law.[5] But Northash says it “asks the Court to reflect on and circumscribe the parameters of that rule” and “[i]t is time for this Court to explain exactly what types of loss Joyner v Weeks is (and is not) intended to cover.”
Threshold for leave to appeal
[4]Joyner v Weeks [1891] 2 QB 31 (CA).
[5]See Maori Trustee v Rogross Farms Ltd [1994] 3 NZLR 410 (CA) at 420.
Leave to appeal to the High Court from an arbitral award may only be granted on a question of law.[6] In this context the term “question of law” is narrowly defined:[7]
For the purposes of this clause, question of law—
(a)includes an error of law that involves an incorrect interpretation of the applicable law (whether or not the error appears on the record of the decision); but
(b)does not include any question as to whether—
(i)the award or any part of the award was supported by any evidence or any sufficient or substantial evidence; and
(ii)the arbitral tribunal drew the correct factual inferences from the relevant primary facts.
[6]Arbitration Act, sch 2 cl 5(1)(c).
[7]Schedule 2, cl 5(10).
Clause 5(2) provides that the High Court must not grant leave unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties. If that statutory threshold is met, the Court must decide whether to exercise its discretion to grant leave by reference to a number of factors identified by this Court:[8]
(a)The strength of the challenge/nature of the point of law.
(b)How the question arose before the arbitrator.
(c)The qualifications of the arbitrator.
(d)The importance of the dispute to the parties.
(e)The amount of money involved.
(f)The amount of delay involved in going through the courts.
(g)Whether the contract provides for the arbitral award to be final and binding.
(h)Whether the dispute before the arbitrator is international or domestic.
[8]See Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) at [54].
Appeals to this Court are governed by cl 5(5) and (6), which provide:
(5) With the leave of the High Court, any party may appeal to the Court of Appeal from any refusal of the High Court to grant leave or from any determination of the High Court under this clause.
(6) If the High Court refuses to grant leave to appeal under subclause (5), the Court of Appeal may grant special leave to appeal.
If the High Court has refused leave to appeal to that Court from an arbitral award on a question of law, a party may appeal to this Court against that refusal decision. But an appeal to this Court from a decision of the High Court refusing leave to appeal to that Court may be brought only with the leave of the High Court under cl 5(5) or, if such leave has been declined, with the special leave of this Court under cl 5(6).
Because there has been some confusion about this point in submissions in the present case, and in other cases, we emphasise that the issue that is now before this Court is whether special leave should be granted to appeal to this Court against the decision of the High Court refusing leave to appeal from the award to the High Court. If special leave is granted, this Court will then hear an appeal from the High Court judgment declining leave to appeal to that Court on a question of law. That is, this Court will consider whether the High Court Judge erred in declining leave to appeal from the award to the High Court. If the appeal is successful, the result would be a grant of leave to appeal from the arbitral award to the High Court on one or more questions of law.[9]
[9]See Restaurant Brands Ltd v QST Ltd [2021] NZCA 680, (2021) 22 NZCPR 815 at [3] and [33]–[38].
An application for special leave to appeal from a refusal of the High Court to grant leave under cl 5(1) does not provide an opportunity for a leap-frog appeal on the underlying question of law arising out of the award to this Court. That is not what cl 5 provides for. And it would be wrong in principle for this Court to entertain an appeal on the substantive question of law, without that question having first been decided in the High Court.
Put another way, if this Court grants special leave to appeal, the question that it will need to consider is whether there should be a first appeal from the award to the High Court on a question of law. The principles governing second appeals on questions of law are not relevant at this stage of the process. They are relevant only if there has been an appeal to the High Court on a question of law, and leave is sought to appeal from the High Court to this Court on the question of law determined by the High Court.[10] That is not the position here.
[10]See Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2007] NZCA 355, [2008] 2 NZLR 591 at [29]–[33].
As this Court said in Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd, in the related (but not identical) context of applications for special leave to appeal to this Court from a determination of the High Court on a question of law, the application for special leave to appeal:[11]
… should not be a second bite at the same cherry. This Court will be very mindful of why the High Court declined leave, and will grant special leave only if the High Court Judge’s decision was plainly wrong or if the test set out above was not applied or was misapplied. We would hesitate to say that the test under subcl (6) is different from the test under subcl (5). It is simpler to say the test is the same, but this Court will exercise its powers sparingly and mindful of why the High Court declined leave. …
[11]At [35].
We approach the application for special leave on that basis.
High Court judgment declining leave to appeal to that Court
The Judge began by setting out the test for granting leave to appeal from an arbitral award. That test was summarised above. It is not suggested that there was any error in the Judge’s statement of that test.
The Judge recorded that the parties agreed, and he accepted, that the issues on the appeal could substantially affect the rights of both parties to the arbitration agreement. So the cl 5(2) threshold was met. The remaining question was whether the High Court should exercise its discretion to grant leave.[12]
[12]High Court judgment, above n 2, at [12].
The Judge addressed each of the factors identified at [11] above. The Judge began by examining the points of law that Northash wished to pursue on appeal concerning the rule in Joyner v Weeks.
In Joyner v Weeks the English Court of Appeal held that the appropriate measure of damages for breach of a covenant to repair in a lease ought to be the cost of repairs to the premises:[13]
[The] rule is that, when there is a lease with a covenant to leave the premises in repair at the end of the term, and such covenant is broken, the lessee must pay what the lessor proves to be a reasonable and proper amount for putting the premises into the state of repair in which they ought to have been left.
[13]Joyner v Weeks, above n 4, at 43.
The Judge set out the approach which this Court has held should be adopted in relation to the rule in Joyner v Weeks. In Maori Trustee v Rogross Farms Ltd, this Court observed that that rule is broadly consistent with the purpose of awards of damages for breach of contract, and went on to summarise the way in which that rule should be applied in New Zealand:[14]
Damages in contract are designed to represent the monetary equivalent of the promised benefit which has not been provided. In other words, they are designed to put the injured party, as nearly as possible, and so far as money can do it, into the position he would have been in if the contract had been performed.
Thus, if a lessee fails to perform a covenant and the term has expired a sum of money must replace the performance of the covenant. That sum of money will ordinarily equate the cost to the lessor of having the covenant performed. It is when the lessor is unable or does not wish, for whatever reason, to have the covenant performed that the difficulties said to be inherent in the rule arise. It follows that there is justification for holding that the rule is not absolute. But on a prima facie basis the rule fits comfortably with the purpose of damages for breach of contract.
…
We would therefore state the law as follows. The rule in Joyner v Weeks is not an absolute rule. It is, however, the prima facie rule which will be applied unless the lessee can show by sufficiently cogent evidence that in both the short and the long term the lessor will definitely suffer no loss or will suffer a loss which can definitely be assessed at less than the prima facie measure.
[14]Maori Trustee v Rogross Farms Ltd, above n 5, at 418–420.
As the Judge noted, this Court has declined to revisit its decision in Rogross Farms.[15]
[15]Cornwall Park Trust Board Inc v Chen [2016] NZCA 65, [2016] 2 NZLR 637 at [100].
The first question of law proposed by Northash and considered by the Judge was whether lost milk production forms part of the cost of reinstatement of the farm. Northash wished to argue on appeal that the arbitrator had erred in determining that future lost milk production fell within the category of reinstatement costs for the purposes of the rule in Joyner v Weeks.
The Judge considered that Northash’s proposed argument was weak. An allowance for lost milk production during the period of reinstatement ought to be recoverable as a cost of reinstatement.[16] The Judge said it was recognised by the Court in Joyner v Weeks that the cost of repairs includes “some allowance for loss of rent or occupation during the time of reparation”.[17] The Judge considered that the same principle applied in this case.[18]
[16]High Court judgment, above n 2, at [20].
[17]At [20], citing Joyner v Weeks, above n 4, at 36.
[18]High Court judgment, above n 2, at [20].
The Judge went on to say that the purpose of an award of damages is to place the injured party into the position they would have been in had the contract been performed. An award of damages which ignored revenue lost during the period of reinstatement would fail to capture the true cost to Zeff of Northash’s failure to maintain the farm. An allowance for lost milk production during the period of reinstatement ought to be recoverable as a cost of the reinstatement. Northash had not raised a properly arguable case to the contrary.[19]
[19]At [21].
The Judge then turned to Northash’s argument that Zeff never actually suffered the loss claimed because it did not reinstate the property. Instead, it chose to sell the farm without reinstating the pasture. The Judge did not accept that this was properly arguable. The fact that Zeff chose to sell rather than reinstate the farm did not mean it suffered no loss. Northash’s failure to maintain the land, and the cost required to reinstate it, would have been reflected in the sale price. Zeff’s choice to sell did not prevent Zeff from recovering damages for Northash’s breach.[20]
[20]At [26].
The Judge next considered what he described as the central question of law raised by Northash’s challenge: whether the arbitrator awarded the wrong measure of damages.[21] The Judge considered that it followed from this Court’s decision in Rogross Farms that the prima facie measure of damages for breach of a covenant to repair is the cost of reinstatement. That prima facie measure applies unless the lessee establishes that the loss suffered by the lessor was definitely less than that measure.[22] In this case, the Judge said, Zeff suffered loss which can definitely be assessed at less than the cost of reinstatement so the prima facie measure did not apply. The appropriate award of damages was thus $490,000 representing the diminution in value of the property. The arbitrator was right to take that figure as the appropriate measure of damages.[23]
[21]At [27].
[22]At [30].
[23]At [31]–[32].
The Judge went on to deal with two proposed questions of law relating to valuation evidence which are not advanced by Northash before this Court, so need not be described further here.
The Judge then turned to the remaining factors going to the Court’s discretion as to whether leave to appeal should be granted. After analysing each of these, the Judge concluded that he was satisfied that leave to appeal should not be granted.[24] None of the questions of law raised by Northash provided a strong basis upon which to seek leave to appeal. The Judge did not consider that the law would exclude the cost of lost milk production from the cost of reinstatement. The award of $490,000 to Zeff representing the diminution in value of the property was available to the arbitrator. The remaining factors which influence the Court’s discretion did not materially alter the equation.[25]
High Court decision declining leave to appeal to this Court
[24]At [47].
[25]At [47].
Northash then applied to the High Court for leave to appeal to this Court from the High Court judgment. The single question of law that Northash said it wished to pursue before the Court of Appeal was:
Whether the learned Judge erred in law by finding that losses attributable to lost milk production ought to be recoverable as a cost of reinstatement under the rule in Joyner v Weeks.
For reasons explained briefly in Brewer J’s minute, the Judge considered that the proposed question of law was not capable of bona fide and serious argument. There was no interest of sufficient importance to justify a further appeal. Leave to appeal was declined.
Discussion
Does the proposed appeal raise a question of law?
As already mentioned, Northash says that the purpose of its appeal is to ask this Court to circumscribe the parameters of the rule in Joyner v Weeks, and explain what types of loss Joyner v Weeks is (and is not) intended to cover. It seems to us that this proposed argument reflects a misconception about the nature and effect of the rule in Joyner v Weeks as a matter of New Zealand law.[26]
[26]It also appears to reflect a misapprehension about the effect of a grant of leave: that would result in this Court considering whether there should be an appeal to the High Court, rather than this Court itself determining the parameters of the rule in Joyner v Weeks.
As this Court pointed out in Rogross Farms, and reiterated in Cornwall Park Trust Board Inc v Chen, the assessment of damages is a question of fact that should not be trammelled by rigid rules.[27] The observations of Tipping J in the Supreme Court in Marlborough District Council v Altimarloch Joint Venture Ltd are to similar effect:[28]
There are no absolute rules in this area, albeit the courts have established prima facie approaches in certain types of case to give general guidance and a measure of predictability. The key purpose when assessing damages is to reflect the extent of the loss actually and reasonably suffered by the plaintiff.
[27]Cornwall Park Trust Board Inc v Chen, above n 16, at [99], referring to Maori Trustee v Rogross Farms Ltd, above n 5, at 420.
[28]Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11, [2012] 2 NZLR 726 at [156]. See also [23]–[27] per Elias CJ and [157]–[158] per Tipping J.
Consistent with that approach, in Rogross Farms this Court held that the “rule” in Joyner v Weeks is not an absolute rule.[29] That is, it is not a rule of law that determines what damages are and are not recoverable by a lessor in these circumstances. It is just a prima facie approach to determining recoverable loss that will be applied unless it can be clearly shown that that approach would not be consistent with the fundamental legal principle that governs the award of damages in contract. That principle — which is properly described as a rule of law — is that such damages are designed to put the injured party, as nearly as possible, and so far as money can do it, into the position they would have been in if the contract had been performed.
[29]See the passage set out at [23] above.
As this Court held in Rogross Farms, the courts will depart from the prima facie approach set out in Joyner v Weeks where the lessee can show (by sufficiently cogent evidence) that in both the short and the long term the lessor will definitely suffer no loss or will suffer a loss which can definitely be assessed at less than the prima facie measure. That is a factual inquiry.
Similarly, whether the lessor is entitled to recover consequential losses such as lost rent or lost income from the land, or a loss of value of the land, will depend on whether there is sufficiently cogent evidence establishing that the lessor has suffered such losses as a result of the lessee’s breach, with the result that compensation for those losses is required to put the lessor into the position they would have been in if the contract had been performed. Again, that is an essentially factual inquiry.
Northash’s request that the Court explain “exactly what types of loss Joyner v Weeks is (and is not) intended to cover” misunderstands the nature of the “rule” in that case as it is applied in the New Zealand courts. It is neither necessary nor helpful for the courts to attempt to provide detailed guidance on what precisely is recoverable under the Joyner v Weeks approach. Rather, the position established by a series of decisions of this Court is that:
(a)The starting point for assessment of damages in cases of this kind is the reasonable cost of remedying the lessee’s defaults.
(b)A greater or lesser sum may however be awarded if it is shown by sufficiently cogent evidence that this is required by the fundamental principle governing assessment of contractual damages.
(c)The question whether the starting point should be departed from, and a different approach adopted to the assessment of damages, turns on a factual inquiry. It does not turn on fine-grained legal rules about what types of loss are and are not recoverable.
Put another way, the arbitrator’s conclusion that it was appropriate to depart from the prima facie measure of damages in Joyner v Weeks by awarding the diminution in value of the land caused by Northash’s defaults involved a factual assessment of the losses actually suffered by Zeff in this case, not a determination of questions of law about the scope of the “rule” in Joyner v Weeks.
It follows that Northash’s proposed appeal does not raise any question of law for the purposes of cl 5 of sch 2. Rather, it relates to the assessment of the loss suffered by Zeff in this case, which is a question of fact.
We accept Northash’s submission that the High Court erred in proceeding on the basis that the Court in Joyner v Weeks recognised that the cost of repairs includes “some allowance for loss of rent or occupation during the time of reparation”.[30] Northash rightly points out that the passage referred to by the High Court is found in the judgment of the Divisional Court, which was overturned on appeal by the Court of Appeal. The Court of Appeal did not make any reference to allowances for loss of rent or occupation during the time of repair. But the Judge’s reference to that passage in the decision of the Divisional Court in Joyner v Weeks was not material to the result reached in the High Court in the present case for two reasons. First, Northash does in fact accept that compensation for lost rent or occupation is recoverable in principle under the approach in Joyner v Weeks. Second, as explained above, the extent to which loss of rent or occupation, or some other loss of benefit from use of the land, should be recognised in the damages awarded to the lessor turns on a factual inquiry and does not involve refined questions of law about the precise scope of the rule in Joyner v Weeks, as that rule is applied in New Zealand.
[30]High Court judgment, above n 2, at [20], citing Joyner v Weeks, above n 4, at 36.
Because this Court has treated the rule in Joyner v Weeks as a prima facie approach to be adopted when carrying out the (quintessentially factual) task of assessment of damages, we are not materially assisted by authorities from other jurisdictions where the approach in Joyner v Weeks appears to be treated as more in the nature of an absolute rule of law.
In the absence of a qualifying question of law about assessment of damages, there is no jurisdiction to grant leave to appeal.
The cl 5(2) threshold
It was common ground before the High Court that the proposed questions of law identified by Northash met the threshold in cl 5(2): that is, the determination of those questions could substantially affect the rights of one or more of the parties.
However we consider that this threshold is not met. Even assuming that the formulation of the prima facie approach in Joyner v Weeks could be described as a question of law, the precise formulation of that approach would not matter in a case like the present where it has been demonstrated that, as a matter of fact, the loss suffered by the lessor as a result of the lessee’s breaches is best measured by a different approach. The starting point identified in accordance with Joyner v Weeks is not determinative of the outcome of the assessment of the loss caused by the breach. Whatever starting point was adopted in this case, the result — applying the fundamental principle that governs damages in contract to the facts established before the arbitrator — would be the same.
Clause 5(2) is intended to ensure that appeals from arbitral awards are confined to cases where the answer to a question of law will have a substantial practical effect on the outcome of the case. That is not the position here. For this further reason, leave to appeal to the High Court from the arbitral award would not be appropriate, and special leave should not be granted to appeal to this Court.
Other factors relevant to leave
It follows that the other factors relevant to leave, set out at [11] above, need not be considered. But we agree with the Judge that nothing in those factors provides material support for the grant of leave to appeal.
In particular, we agree with the Judge that it is not seriously arguable that the arbitrator was not entitled to depart from the prima facie measure of damages in this case. The result reached is plainly consistent with the overarching legal principle referred to at [36] above.
Is our conclusion affected by the recent decision in Gama Foundation?
Finally, we record that Northash referred us to a recent decision of this Court in Gama Foundation v Fletcher Steel Ltd in which leave was granted under cl 5(6) to appeal on questions of law relating to the rule in Joyner v Weeks.[31] The questions of law that the panel in that case identified as arguable were:
(a)Did the arbitrator err in finding that the rule in Joyner v Weeks precludes recovery of costs reasonably incurred in mitigation?
(b)If yes, which party bears the onus of proving the reasonableness of the costs incurred in mitigation?
(c)In all the circumstances, did the arbitrator err, when considering the reasonable and proper amount required to put the premises into the state of repair in which they ought to have been left, in failing to have regard to the prevailing circumstances at the time the lessor undertook the repair work?
[31]Gama Foundation v Fletcher Steel Ltd [2022] NZCA 314.
That case may be distinguishable from the present one, as it appears to be a case where the prima facie approach was not found to be displaced on the facts. Be that as it may, we do not consider that there is anything in that leave decision which suggests that there is a qualifying question of law in the present case in respect of which leave to appeal might properly be granted.
Result
The application for special leave to appeal is declined.
The applicant must pay costs to the respondent for a standard application on a band A basis, with usual disbursements.
Solicitors:
Argyle Welsh Finnigan Ltd, Ashburton for Applicant
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