Northash Ltd v Zeff Farms Ltd
[2022] NZHC 645
•31 March 2022
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2021-488-96
[2022] NZHC 645
UNDER The Arbitration Act 1996 IN THE MATTER
of an application for leave to appeal against an arbitral tribunal award dated 17 August 2021
BETWEEN
NORTHASH LTD
Applicant
AND
ZEFF FARMS LTD
Respondent
Hearing: 3 February 2022 Counsel:
T S Burtenshaw for Applicant R C Mark for Respondent
Judgment:
31 March 2022
JUDGMENT OF BREWER J
This judgment was delivered by me on 31 March 2022 at 4 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Argyle Welsh Finnigan (Ashburton) for Applicant Richard Mark (Kerikeri) for Respondent
NORTHASH LTD v ZEFF FARMS LTD [2022] NZHC 645 [31 March 2022]
Introduction
[1] The applicant (Northash) seeks leave to appeal an arbitral award made by Ms Penny Mudford on 17 August 2021 (the Arbitrator).1
Background
[2] Northash leased a dairy farm from the respondent (Zeff). Northash breached the lease by not maintaining the farm, and in particular failed to reinstate pasture. Zeff gave notice of arbitration. Zeff subsequently sold the farm in an unremediated state.
[3] The issue for the Arbitrator was the quantum of damages Zeff was entitled to as a result of Northash’s (admitted) breaches of the lease.
[4] The Arbitrator found that damages arising from breaches of the lease amounted to $536,524.50, being the sum of:
(a)The cost to reinstate 73 hectares of pasture was $93,184.50 including GST;
(b)The cost to clean the drains and replace 40 culverts was $36,340 including GST; and
(c)The lost future milk production was $407,000.
[5] However, the Arbitrator also found 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 Arbitrator held the loss of value to be $490,000. Since the loss of value was less than the damages claim, the arbitrator’s award was for the lesser sum.
[6] In summary, Northash wants to argue on appeal that the proper measure of damages is the cost of reinstatement, and that that cost does not include lost future milk production.
1 Arbitration Act 1996, sch 2 cl 5(1)(c).
The proposed appeal
[7] Leave may be granted only in respect of a question of law. This is defined in the Arbitration Act 1996:2
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.
[8] Northash sets out the questions of law on which it seeks leave to appeal as follows:
(a)Whether the arbitrator erred in the consideration and application of the law (including Maori Trustee v Rogross, Puhinui Farms v Wedding and Tito v Waddell) by awarding loss of value of land as the measure of damages for failure to deliver up a lease in a certain condition rather than reinstatement costs;
(b)Whether the arbitrator erred in determining that potential future lost milk production was a reasonable and proper reinstatement cost of the lease;
(c)Whether the arbitrator erred in consideration of whether the defendant had suffered loss or had mitigated its loss;
(d)Whether the arbitrator erred in consideration of any deductions available to the reasonable and proper reinstatement costs including:
(i)the effect of the defendant’s new lessee’s contractual obligations to undertake the reinstatement works of cleaning drains and culverts and re-grass at no cost to the defendant;
(ii)the effect of the claimant declining a third party offer to lease the property on usual terms and conditions (including cleaning of drains and culverts and re-grassing);
(iii)avoided expenses that would have to have been incurred to achieve the determined level of milk production; and
2 Schedule 2 cl 5(10).
(iv)the impact of the use of an additional runoff block on the milk production achieved prior to the lease period.
(e)Whether the arbitrator erred in the application of the onus and burden of proof in relation to the valuation evidence by determining that, in the absence of a competing valuation from the plaintiff, the arbitrator did not need to consider the challenges to the underlying basis for the defendant’s valuation.
[9] These questions of law were clarified by Northash in a memorandum filed on 10 February 2022 which outlined the particular expressions of law which it says were incorrectly decided by the Arbitrator, namely:
(a)That the appropriate measure of loss can be the loss of value of the farm not exceeding the cost of reinstatement (including consequential loss) rather than “a reasonable and proper amount for putting the premises into the state of repair in which they ought to have been left.”
(b)That “a reasonable and proper amount for putting the premises into the state of repair in which they ought to have been left” includes the consequential loss of future milk production.
(c)That the lessor suffered loss, notwithstanding that the lessor avoided loss by immediately leasing the farm to a third party who, by the terms of the new lease, was obliged to pay rent and to reinstate the farm at no cost to the lessor.
(d)That the Arbitrator could, due the absence of a competing written valuation, treat the claimant’s valuation as unchallenged and/or uncontroverted.
(e)That the Arbitrator could, in the absence of a competing estimate of reinstatement costs, determine reinstatement costs without considering the burden and standard of proof on the claimant and instead proceed, in effect, on an unchallenged or uncontroverted basis without considering the effect of the use of a 100 hectare runoff on historical production or avoided expenses when assessing future lost milk production.
[10]The threshold for leave for leave to appeal is:3
(2) The High Court shall not grant leave under subclause (1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of 1 or more of the parties.
3 Schedule 2 cl 5(2).
[11] Once that threshold is met, the Court must decide whether to exercise its discretion to grant leave by reference to a number of factors:4
(a)The strength of the challenge/nature of 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.
[12] The parties agree, and I accept, that the issues on this appeal could substantially affect the rights of both parties to the arbitration agreement. The relevant question is whether this Court should exercise its discretion to grant leave. I will address each factor in turn.
The strength of the challenge/nature of point of law.
The law
[13] It is necessary first to discuss (briefly) the law relating to the proper measure of damages in an action for breach of a covenant to repair.
4 See Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) at [54].
[14] The English Court of Appeal in Joyner v Weeks held that the appropriate measure of damages for breach of a covenant to repair ought to be the cost of repairs to the premises:5
[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.
[15] That rule has attracted much judicial and academic criticism including by the Law Commission.6 In Maori Trustee v Rogross Farms Ltd, the Court of Appeal addressed the approach taken to the rule in this country.7 The Court considered the rule to be broadly consistent with the purpose of damages for breach of contract:8
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.
[16]Tipping J, delivering the judgment of the Court, summarised accordingly:9
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.
[17]The Court of Appeal has declined to revisit its decision in Rogross.10
5 Joyner v Weeks [1891] 2 QB 31 (CA) at 43.
6 See Law Commission Aspects of Damages: The Rules in Bain v Fothergill and Joyner v Weeks
(NZLC R19, 1991).
7 Maori Trustee v Rogross Farms Ltd [1994] 3 NZLR 410 (CA).
8 At 418–419.
9 At 420.
10 Cornwall Park Trust Board Inc v Chen [2016] NZCA 65, [2016] 2 NZLR 637 at [100].
Does lost milk production form part of the reinstatement costs?
[18] The first question of law is whether lost milk production forms part of the reinstatement costs.11
[19] Northash submits that the Arbitrator erred in determining that future lost milk production fell within the category of reinstatement costs. It submits that lost milk production is not “a reasonable and proper amount for putting the premises into the state of repair in which they ought to have been left”.12 It is instead a “lost opportunity to extract the full value from the property”. Zeff submits that the cost of repairs is the normal measure of damages along with an allowance for loss of rent or occupation. In the context of a farm lease, that would equate to reinstatement of the pasture and loss of production while the pasture is being reinstated.
[20] I consider that Northash’s argument is weak. An allowance for lost milk production during the period of reinstatement ought to be recoverable as a cost of the reinstatement. It was recognised by the Court in Joyner that the cost of repairs includes “some allowance for loss of rent or occupation during the time of reparation”.13 The same principle applies here. If Zeff chose to reinstate the pasture it would have been required to forgo milk production during the period of reinstatement. That is a necessary or unavoidable cost of reinstating the premises. Northash suggests that this is not a cost of the reinstatement but instead a “lost opportunity to extract the full value from the property”. The two are not mutually exclusive. Zeff is plainly unable to extract full value from the pasture while it recovers, but that does not mean that it should be prevented from recovering lost revenue as a cost of the reinstatement.
[21] Indeed, 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.14 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—particularly
11 See the expression of law identified at [8(b)] above.
12 Joyner, above n 5, at 43.
13 At 36.
14 See the observations of Tipping J in Rogross, above n 7, at 418–419.
in a case such as this where the lost revenue comprises the bulk of the total cost of reinstatement.15 An allowance for lost milk production during the period of reinstatement ought to be recoverable as a cost of the reinstatement. Northash has not raised a properly arguable case to the contrary.
Did Zeff actually suffer loss?
[22] The next question of law is whether Zeff actually suffered the loss claimed.16 Northash submits that Zeff never actually suffered the loss claimed as it did not reinstate the property. It instead elected to sell the farm in its current condition with settlement due in June 2022. Moreover, Zeff entered into a lease requiring the new lessee to undertake pasture renewal prior to the end of that lease at no cost to Zeff and to attend to all drains and culverts at no cost to Zeff. Northash accordingly submits that Zeff suffered no loss from the failure to repair.
[23]The Court of Appeal in Joyner dealt with a similar argument:17
… while the term was running and [the lessee] was in possession of the premises, the [lessor] made a demise of the premises to a third person, to commence from the determination of his lease, which demise was at an advanced rental and contained a covenant that the new lessee should pull down and alter part of the premises, and a covenant to repair; [the lessee argued] that under the circumstances the breach of his covenant did the [lessor] no harm, inasmuch as the [lessor] had re-demised the premises on terms that were not affected by the want of repair; and that, at any rate, with regard to the part of the premises that was pulled down, the want of repair did no harm.
[24] Even in these circumstances, where the new lease to a third party contained a covenant to repair and a covenant that the new lessee was to pull down and alter part of the premises, the Court concluded that the appropriate measure of damages was still the cost of repairs. It awarded judgment in favour of the lessor.
[25] Likewise, in Puhinui Farms Ltd v IH Wedding & Sons Ltd the lessee failed to reinstate the premises in breach of the lease.18 The lessor elected to sell the property,
15 The Arbitrator accepted evidence that the cost of reinstatement included $93,184.50 to reinstate the pasture, $36,340.00 to clean drains and replace culverts and $407,000.00 to compensate for lost milk production during the period of reinstatement.
16 See the expression of law identified at [8(c)] above.
17 Joyner, above n 5, at 42.
18 Puhinui Farms Ltd v IH Wedding & Sons Ltd HC Auckland CIV-2006-404-771, 15 February 2008.
accepting a lower sale price owing to its condition, and seek recovery from the lessee under the lease. The lessee claimed that having sold rather than reinstated the property, the lessor had suffered no loss for which the lessee was responsible. Potter J was unpersuaded:19
[113] [The lessor] was placed in the position where it did not have a reinstated property to sell because [the lessee] had failed to reinstate in terms of the very specific provisions of the lease. …
[114] Faced with that situation, [the lessor] elected an option that was available to it … to accept a lower sale price and relieve itself of the responsibility of either trying to enforce the reinstatement obligations under the lease against [the lessee] or itself to carry out reinstatement … and seek recovery from [the lessee] under the lease. In all the circumstances, I consider the election made by [the lessor] was commercially logical, justifiable and reasonable. The alternatives carried real risks of delay, uncertainty and additional costs …
[26] The same reasoning applies here. The fact that Zeff chose to sell rather than reinstate the farm does not mean that 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 was “commercially logical, justifiable and reasonable”.20 It does not prevent Zeff from recovering damages for Northash’s breach. I do not consider Northash to have raised a properly arguable case on this point.
What was the appropriate measure of damages in this case?
[27] I turn now to the central question of law in Northash’s challenge: that the Arbitrator awarded the wrong measure of damages.21 The Arbitrator found that the total cost of reinstatement was $536,524.50. This figure was comprised of $93,184.50 to reinstate the pasture, $36,340.00 to clean drains and replace culverts and
$407,000.00 to compensate for lost milk production during the period of reinstatement. The Arbitrator noted that Northash brought “no substantial or persuasive evidence” to counter Zeff’s assessment of what the cost of reinstatement would likely be. She therefore concluded that Northash had not shown by way of sufficiently cogent evidence that in both the short term and the long term Zeff would
19 At [113]–[114].
20 At [114].
21 See the expression of law identified at [8(a)] above.
suffer no loss or would suffer a loss which can be assessed at less than the prima facie measure.
[28] The Arbitrator then held that in this case the actual cost to Zeff was not the cost of reinstatement but rather the diminution in value of the property when it was sold. She referred to the observation of Tipping J that the rule in Joyner has in some cases “not been applied on grounds of pragmatism rather than principle”.22 She also referred to a statement from the Court in Joyner that “the better measure is the amount of the diminution of value, but not exceeding the cost of doing the repairs”.23 On this basis, she concluded that the law allows for a measure of loss other than reinstatement costs. As the loss of value claimed by Zeff ($490,000.00) was less than the cost of reinstatement ($536,524.50), she held the loss of value to be the appropriate measure of damages.
[29] I cannot tell from the Arbitrator’s decision whether her reference to Tipping J’s observation about “grounds of pragmatism” implies that the Arbitrator thought this to be a principle on which damages in cases like this may be awarded. It would be incorrect if it does. The Court of Appeal in Rogross held that the appropriate measure of damages for breach of a covenant to repair will be the cost of reinstatement:24
… 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.
[30] There is no discretion to award damages other than the cost of reinstatement unless the lessee can show that the loss suffered by the lessor was definitely less than that measure. The observation of Tipping J that a different measure had sometimes been applied on grounds of pragmatism was made in the course of discussing how the rule from Joyner had been applied in New Zealand up until 1994. It does not provide scope to award a different measure of damages simply for pragmatic reasons. Nor does the observation from the Court in Joyner that diminution in value may be the “better measure” take the point any further. The statement of the law given in Rogross
22 Rogross, above n 7, at 417.
23 Joyner, above n 5, at 37. The Arbitrator mistakenly attributed this quote to the Court of Appeal, a confusion which likely arose because the judgments of Wills and Wright JJ in the Divisional Court were reported under the same headnote as those from the Court of Appeal.
24 Rogross, above n 7, at 420.
is clear: the prima facie measure applies unless the lessee establishes that the loss suffered by the lessor was definitely less than that measure. That is the position in New Zealand today.
[31] The question then is whether the prima facie measure applies in this case. In other words, whether Zeff suffered loss which can definitely be assessed at less than the cost of reinstatement, namely $536,524.50. I am satisfied that it did suffer a lesser loss. The Arbitrator accepted evidence that the value of the farm at the end of the lease, had the breaches not occurred, would have been $3,735,000. The farm actually sold for $3,244,800. The difference between those figures is approximately $490,000. That is the loss actually suffered by Zeff and the sum required to put it back into the position it would have been in had the contract been performed.
[32] On this basis, given that Zeff suffered loss which can definitely be assessed at less than the cost of reinstatement, the prima facie measure does not apply. The appropriate award of damages is $490,000 representing the diminution in value of the property. In these circumstances, I consider the Arbitrator was right to take the diminution in value figure as the appropriate measure of damages.
Challenges to the valuation evidence
[33] The remaining two questions of law raised in Northash’s application for leave concern the Arbitrator accepting Zeff’s valuation evidence and evidence of reinstatement costs. As a preliminary point, I consider there to be a real question as to whether these appropriately qualify as questions of law within the meaning of that term in sch 2 cl 5 of the Arbitration Act. Clause 5 expressly provides that a question of law does not include any question as to whether “the award or any part of the award was supported by any evidence or any sufficient or substantial evidence”.25 Northash’s challenge here could be characterised as a challenge to the sufficiency or cogency of the evidence underlying Zeff’s valuation and, in turn, the arbitral award. A challenge to the evidential basis of an arbitral award, clothed as a question of law, will not be granted leave.
25 Arbitration Act, sch 2 cl 5(10)(b)(i).
[34] However, I am satisfied that there is no question here for which leave should be granted. The Arbitrator appropriately considered the competing evidence from the valuers engaged by Zeff and Northash, Mr Nicholls and Mr Thomas respectively. This included consideration of whether the “market value approach” was appropriate in light of market conditions and the ongoing effect of the COVID-19 pandemic:
9.5.9In regard to some of the other factors Mr Thomas raised, I have some sympathy for his point of view about using the market value approach in this situation and that it did not fully take into account factors such as the impact of market uncertainty created by the evolving Covid-19 situation at the time the farm was sold. I note that the sales comparisons that Mr Nicholls used were sales that took place between 2017 and 2019, prior to the emergence of Covid-19 in New Zealand, and therefore were not affected by the Covid-19 situation. There may well have been a valid argument that the productivity approach was a more appropriate way to value the farm.
[35] The Arbitrator heard evidence from each valuer and provided the opportunity for them to confer and come to an agreed valuation figure, but Northash declined:
9.5.10At the hearing, and after hearing the valuers’ evidence, I gave the parties the opportunity for their respective valuers — Mr Nicholls and Mr Thomas — to confer and discuss the valuation evidence to see if they could come up with an agreed valuation. Zeff was open to the suggestion, but Northash declined.
[36] While the valuer engaged by Northash criticised the valuation evidence put forward by Mr Nicholls, he did not provide any alternative assessment of what the farm was worth as he was not in a position to do so.26 The Arbitrator provided Northash with the opportunity to revisit its valuation evidence and it chose not to.27 The Arbitrator considered that “in the absence of any viable alternative valuation” it was appropriate for her to accept the valuation evidence put forward by Zeff. I agree. The Arbitrator considered the competing evidence from the parties’ respective valuers and, after considering the various challenges to Zeff’s valuation evidence including market conditions and the ongoing effects of COVID-19, accepted that valuation for the purpose of calculating the diminution in value of the property.
26 Mr Thomas, the valuer for Northash, said that “he was engaged to critique Mr Nicholls’ valuation, which he did. Mr Thomas said he had declined to provide a valuation for Northash as he was not familiar with the property at the beginning of the lease, nor was able to determine the state of the property at the end of the lease.”
27 At [9.5.12].
[37] Northash has not raised a strongly arguable case that the Arbitrator erred in accepting Zeff’s valuation or that she failed to apply the appropriate burden or standard of proof.
[38] As to determining reinstatement costs in the absence of a competing estimate, that is what the Arbitrator had to do. I see no indication that the Arbitrator was unaware of the onus and standard of proof.
[39] I turn now to the remaining factors going to the Court’s discretion as to whether leave to appeal should be granted.
How the question arose before the arbitrator
[40] The question of how to measure the lessor’s loss in particular was one of the central issues in the arbitration. The first hearing date was adjourned to enable Zeff to amend its pleading to expressly plead the alternative measure of loss. This factor does not favour leave to appeal.
The qualifications of the Arbitrator
[41] The Arbitrator is an experienced arbitrator with knowledge of dairy farming, appointed by AMINZ after the parties had been unable to reach agreement on the appointment of an arbitrator. This factor does not favour leave to appeal.
The importance of the dispute to the parties
[42] The dispute involves a significant sum of money and in that sense is important to the parties, albeit there is no ongoing relationship between them. This factor weighs, to an extent, in favour of leave to appeal.
The amount of money involved
[43]As above, there is a significant sum of money involved.
The amount of delay involved in going through the Courts
[44] Northash submits that given the amount of money at stake the delay resulting from the Court hearing the appeal is not disproportionate to the amount in dispute. I note however that the farm has sold with the sale due to settle in June 2022. Zeff submits, and I agree, that there is a need for certainty and finality prior to the settlement of the sale.
Whether the contract provides for the arbitral award to be final and binding
[45] The lease does not expressly provide for the arbitral award to be final and binding.
Whether the dispute before the arbitrators is international or domestic
[46]The arbitration is solely domestic.
Should the Court exercise its discretion to grant leave to appeal?
[47] I am satisfied that leave to appeal should not be granted. None of the questions of law raised by Northash provide a strong basis upon which to seek leave to appeal. In particular, I do 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 do not materially alter the equation.
Result
[48]The application for leave to appeal is declined.
[49] Zeff has been successful in opposing the application for leave and is entitled to an award of costs.
[50] Zeff is to file and serve its memorandum by 5.00 pm on 29 April 2022. Northash is to file and serve its memorandum by 5.00 pm on 20 May 2022. The costs
memoranda are not to exceed two pages in length excluding the title page and annexures or schedules.
Brewer J