Pacifica Shipping Ltd v Centreport Ltd
[2002] NZCA 168
•17 July 2002
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA279/01 |
| BETWEEN | PACIFICA SHIPPING LIMITED |
| Appellant |
| AND | CENTREPORT LIMITED |
| Respondent |
| Hearing: | 8 and 9 July 2002 |
| Coram: | Gault P Tipping J McGrath J |
| Appearances: | R C Laurenson for Appellant W M Wilson QC, D J Friar and H J P Wilson for Respondent |
| Judgment: | 17 July 2002 |
| JUDGMENT OF THE COURT DELIVERED BY TIPPING J |
Introduction
This appeal concerns the common law doctrine of prime necessity. The essence of the doctrine was captured in the judgment of this Court in Vector Ltd v Transpower New Zealand Ltd [1999] 3 NZLR 646 at 666 (paragraph [51]). There it was said the doctrine embodied the principle “that monopoly suppliers of essential services must charge no more than a reasonable price”. The appellant, Pacifica Shipping Ltd (Pacifica), was, at the time of the dispute with which the case is concerned, a long term user of wharf and allied facilities at the Port of Wellington. The Port is owned and operated by the respondent, Centreport Ltd (Centreport).
A lease between the parties in respect of the wharf used by Pacifica was due to expire on 27 October 2000. In the weeks prior to that date the parties were in negotiation for a new lease but difficulties arose over the amount of the rental. As the date of expiry approached no agreement had been reached. Centreport wanted $60,000 per month for the existing facilities and $55,000 per month for alternative facilities. Pacifica wished to continue with the existing facilities but was willing to pay only some $43,000 per month. Centreport indicated that in the absence of agreement Pacifica would have to vacate the existing facilities immediately on the expiry of the lease.
Pacifica obtained an interim injunction in the High Court pursuant to which it stayed in possession on the basis of paying Centreport $43,250 per month plus $8,388 per month to a stakeholder. At trial, before Ronald Young J, Pacifica established that the case was one in which the doctrine of prime necessity, prima facie, applied. But the Judge held, by parity of reasoning with the decision in Vector, that the doctrine was ousted by the Commerce Act 1986, the Act being intended to cover the ground to the exclusion of the common law. Ronald Young J also held that Pacifica had, in any event, failed to demonstrate that the rent sought by Centreport was unreasonable.
Pacifica’s appeal from the decision of the High Court holding that the doctrine of prime necessity had no application and therefore refusing it relief, involves three issues. First, it argues that the Judge misapplied the doctrine by not concentrating on the reasonableness of the amount of rent it had offered rather than on the reasonableness of the rent which Centreport was seeking to charge; second, it contends that the Commerce Act aspect of Vector can be distinguished; and third, that if the doctrine is as Ronald Young J held it to be, ie. that Pacifica had to show that the rent sought by Centreport was unreasonable, the Judge was in error in rejecting Pacifica’s contention to that effect. As will become apparent, we reject Pacifica’s first two arguments and therefore have no occasion to examine the reasonableness of the rental proposed by Centreport.
Prime necessity
The expression “prime necessity” was first coined by the Privy Council in Minister of Justice for the Dominion of Canada v City of Levis [1919] AC 505. In that case the City was prepared to supply water to a building owned and occupied by the Dominion of Canada in return for an annual payment of $300. The Crown had offered $35 per annum. The City declined to supply when the Crown would not pay the amount it requested. The Crown challenged the City’s stance. In view of the nature of Mr Laurenson’s argument, it is desirable to set out the whole of the relevant passage in the judgment of their Lordships, delivered by Lord Parmoor, at 513-514:
It must be recognized, however, that water is a matter of prime necessity, and that, where waterworks have been established to give a supply of water within a given area for domestic and sanitary purposes, it would be highly inconvenient to exclude from the advantages of such supply Government buildings, on the ground that these buildings are not liable to water taxation. The respondents are dealers in water on whom there has been conferred by statute a position of great and special advantage, and they may well be held in consequence to come under an obligation towards parties, who are none the less members of the public and counted among their contemplated customers, though they do not fall within that class who are liable to taxation, and who being in the immense majority are expressly legislated for and made subject to taxation. Their Lordships are therefore of opinion that there is an implied obligation on the respondents to give a water supply to the Government building provided that, and so long as, the Government of Canada is willing, in consideration of the supply, to make a fair and reasonable payment. The case stands outside of the express provisions of the statute, and the rights and obligations of the appellant are derived from the circumstances and from the relative positions of the parties. The question, therefore, arises whether the respondents have made any such default in their obligation to supply water to the Government building as would entitle the appellant to an order for a mandamus.
The facts show that the respondents have not refused to supply water provided that the Crown is willing to pay a reasonable amount. An arrangement was made in 1906 under which the respondents supplied water to a portion of the Government building used as a Post Office in consideration of an annual payment of 250 dollars. This arrangement remained in force over a series of years, but an additional payment was subsequently claimed when the rest of the building was used as an office of Customs and Inland Revenue. After negotiation, the respondents offered to supply the whole building for an annual payment of 300 dollars, but Mr. P. Hearson Gregory, writing on behalf of the Government, declared that the proposed charge was absolutely absurd and repeated a former offer, without prejudice, that a flat rate be entered into, for the whole of the service of the building, at 35 dollars per annum, as a sum in every way fair for the amount of water consumed. The Superior Court of Quebec, and the Superior Court in review, have found that the sum claimed by the respondents, and which the Crown was not willing to pay on the ground that it was absolutely absurd, was not excessive having regard to all the conditions, and the charges imposed on the owners or occupiers of taxable property. The result is that at the time when the petition was presented for an order for mandamus the respondents were not in default since the Government of Canada at that time was not willing to pay a price for the supply of water which had by a concurrent finding of two Courts been held not to be excessive. The respondents were therefore no longer bound to supply a commodity for which the appellant as their customer was no longer willing to pay, and equally they were entitled to discontinue the supply, not as an exercise of an express power to cut it off, but as an implied correlative right, arising because the appellant was no longer prepared to perform his reciprocal obligation. (emphasis added in aid of discussion)
Mr Laurenson referred to the words “provided that, and so long as the Government … is willing … to make a fair and reasonable payment” in the first paragraph of the passage from City of Levis just cited. He argued that these words meant that a supplier to whom the doctrine of prime necessity applied was obliged to accept any reasonable offer from the proposed purchaser of the goods or services involved. That submission stands the doctrine on its head. The focus of the doctrine is on abuse of monopoly power. Hence the common law control is directed to the terms and conditions stipulated by the supplier. The doctrine does not oblige the supplier to accept any offer that may be characterised as reasonable. It requires the supplier to charge no more than a reasonable sum. Mr Laurenson did not cite any authority which supported his argument, albeit he referred to several cases on the premise that they did so. This lack of authority is not surprising in view of the commercial consequences if the argument were correct. Any customer could challenge a published list of prices, even if those prices were entirely reasonable, on the basis that the customer was prepared to pay a lesser price which was also reasonable.
Counsel endeavoured to find support for his argument in Allnutt v Inglis (1810) 12 East 527; 104 ER 206. While that case is of respectable antiquity, the judgments uniformly support the view, later authoritatively laid down by the Privy Council in City of Levis, that the doctrine places an obligation on the supplier to charge no more than is reasonable. That is quite different from saying that the duty on the supplier is to accept any reasonable offer. At 538, 211 Lord Ellenborough CJ said that if the supplier is to take the benefit of the monopoly, he must, as an equivalent, perform the duty attached to it on reasonable terms. That puts the focus on the terms proposed by the supplier. Grose J at 541, 211 also focused on the price the supplier could charge rather than on what price the supplier had to accept. Le Blanc J at 542, 212 characterised the question as being whether the supplier could claim an unreasonable price. He emphasised that the supplier’s charges must be reasonable. Bayley J at 543, 212 similarly focused on the nature of the terms imposed by the supplier. It is therefore impossible to take from Allnutt v Inglis any support for Mr Laurenson’s argument.
We revert to City of Levis. If their Lordships’ judgment is read as a whole, as is appropriate, it becomes clear beyond serious argument that they were of the view that the onus rested on the recipient to demonstrate that the supplier’s charges were unreasonable. There was no suggestion that the doctrine was concerned with the reasonableness of any offer made by the proposed recipient of the goods or services. Their Lordships spoke of the question being whether the City had made default in its obligation to supply water. They envisaged that a default would have arisen if the amount sought had been unreasonable. The Privy Council’s focus on the concurrent findings in the Courts below that the City’s charges were reasonable, clearly shows that the question related to the reasonableness of the charge, not the reasonableness of the Government’s offer. Towards the end of the cited passage, their Lordships said that the City was “therefore” no longer bound to supply. The reason was that its charges had not been held to be excessive. That was the crucial point – whether the Government had shown the City’s charges were excessive. This is what a plaintiff invoking the doctrine of prime necessity must show; not that it has made a reasonable offer.
Pacifica also sought support for its argument in the decision of this Court in Hutt Golf Course Estate Co Ltd v Hutt City Corporation [1945] NZLR 56. Again the judgments in that case, far from supporting Pacifica, support the conventional and long established understanding of the doctrine referred to above. The case involved the supply of water and drainage services. At first instance (66) Blair J identified the question as being whether the fee charged by the Council was or was not a reasonable sum. This was a straightforward application of City of Levis which he cited at 67. On appeal (at 74) Myers CJ also focused on the reasonableness of the sum charged. Smith J’s formulation (at 79) was equivocal on this point but consistent with the received approach to the subject. At 85, Johnston J was very specific. He said the recipient was bound to pay the amount charged by the supplier so long as it was reasonable, and (at 88) Fair J said it was an inescapable inference from City of Levis that the water supply authority was entitled to insist on the performance of every reasonable condition of supply. The fifth Judge (Northcroft J) expressed his agreement with the judgment of Myers CJ.
It is very difficult to see how this case helps Pacifica. In our view it clearly supports Centreport’s argument as to the correct approach to the doctrine. None of the other authorities cited by Mr Laurenson assists Pacifica’s argument either. That is not surprising because the law on this point was clearly stated by the Privy Council in 1919. What is more, it was clearly re-stated to the same effect by this Court, sitting as a full Court, in Vector only three years ago. The proposition advanced by Pacifica is in any event contrary not only to clear authority but also to commercial common‑sense.
In coming to this conclusion we have considered all Mr Laurenson’s submissions, both written and oral. We find it necessary to mention only two further points which, as we understood them, related to the issues of timing and reciprocity. Counsel several times urged upon the Court the need to view matters as at the time Centreport threatened to withdraw its supply of wharfage facilities. It was a threatened “withdrawal” only in the sense of an unwillingness to enter into a new lease unless Pacifica agreed with the proposed rent. We do not see the timing question as having the crucial importance which Mr Laurenson endeavoured to ascribe to it. Even if the focus were on Pacifica’s offer rather than on Centreport’s demand, the reasonableness or unreasonableness of either would necessarily, in the case of a dispute, have to be determined after the event. The issue must be judged as at the time the disputed charge is demanded but any adjudication must obviously come later; how much later is beside the present point.
That leads into the second matter concerning the so-called reciprocity of the obligations of supplier and purchaser. Towards the end of the passage cited above from City of Levis, the Privy Council spoke of the Government no longer being prepared to perform its reciprocal obligation. Mr Laurenson endeavoured to use this concept of reciprocity to suggest that while Pacifica was prepared to continue negotiations about the rental, Centreport was not entitled to refuse supply of the wharf and associated facilities. Counsel emphasised the longstanding nature of the relationship between the parties in support of this argument but we fail to see the relevance in law of this factor. The submission based on reciprocity represents a misunderstanding of the essence of the prime necessity doctrine. While it is perfectly appropriate to describe the obligations of the parties as reciprocal, that reciprocity cannot mean that a willingness to continue negotiations excuses a refusal to pay what is found to be a reasonable rent. Nor does the reciprocity concept alter the fact that the supplier’s obligation to continue supply is conditional upon the purchaser’s willingness to pay the price sought, provided it is reasonable.
A purchaser in these circumstances can only complain about cessation of or failure to supply, if it is able to show that the price stipulated by the supplier was, at the time of its stipulation, unreasonable. The Privy Council spoke of a reciprocal obligation resting on the Government as purchaser. That obligation was to pay any reasonable price requested. While the supplier’s obligation can also appropriately be described as reciprocal, it is important to recognise that it is not only reciprocal, but also conditional, in the sense mentioned above. These are the reasons why we find ourselves unable to accept what we understood to be Pacifica’s principal arguments on these two dimensions of the case.
Vector
That brings us to the applicability of the Vector decision to the facts of this case. The Judge below held, in reliance on Vector, that Pacifica could not invoke the doctrine of prime necessity because the common law rule which it incorporated had been abrogated by the Commerce Act. Mr Laurenson had not given any notice that he wished to argue that Vector was wrongly decided. His argument was that it could be distinguished, albeit at times Pacifica’s submissions seemed to amount to an attack on the reasoning in Vector.
We proceed on the basis that Vector was correctly decided. Can it be distinguished? It is important at the outset to make the elementary observation that to avail Pacifica, any point of distinction must be a material one. It is not enough to say, as Pacifica seemed to be suggesting at times, that Vector concerned the supply of bulk electricity but the present case involved the supply of wharf and allied facilities. The essence of the decision in Vector was that the doctrine of prime necessity was excluded by the Commerce Act. This conclusion was held to be reinforced by the State-Owned Enterprises Act 1986. The reason the doctrine is excluded is that the only price control available under current New Zealand law is that provided for in Part IV of the Commerce Act, and such control is available only when the conditions set out in Part IV are satisfied.
Mr Laurenson argued that what was at issue in the present case was not price control but a refusal to supply. We cannot accept that proposition. At the heart of the argument between the parties lay the question of the amount of the rental. Centreport refused to supply because Pacifica was unwilling to pay what the High Court found to be a not unreasonable rent. Pacifica’s complaint that the rent demanded of it was unreasonable must in substance amount to an attempt to control the price Centreport wished to charge for its facilities. The attempt at control was made by means of the common law doctrine of prime necessity. Control of a monopolist’s prices is one of the essential purposes of the doctrine. While a supplier’s ability to refuse supply is the consequence of a refusal by the proposed recipient to pay a reasonable price, it is inappropriate for present purposes to sever the concepts of price and refusal to supply. Their reciprocity was emphasised by Mr Laurenson himself for other purposes. We cannot therefore accept Pacifica’s submission that in this case Pacifica’s reliance on prime necessity did not involve price control.
In Vector this Court took the view that the methods of price control available under Part IV were intended by Parliament to be the only methods of price control available under New Zealand law. Refusal of supply is not per se objectionable under the Commerce Act; it is objectionable only if done for a purpose proscribed by s36. No suggestion of that kind has been made in this case. In Vector at paragraph [66] the Court spoke of the importance (for the reasons given) of respecting “the exclusivity of the price fixing mechanism under Part IV”. In his separate judgment at paragraph [69] Thomas J agreed that the doctrine was excluded, “essentially because it is inconsistent with the Commerce Act 1986”. Once it is recognised, as it must be, that the invocation of the doctrine necessarily involves at least an attempt at price control, Pacifica could not, on the one hand, seek to invoke prime necessity to control the rent which Centreport wished to charge, yet, on the other hand, assert that Vector could be distinguished. The flaw in its argument is that although prime necessity has the effect of determining when supply may or may not be refused, it does so through a criterion which is designed to control the prices which qualifying monopolists may impose on their customers.
It follows that Vector cannot be materially distinguished. We agree with Mr Wilson’s submissions to that effect and uphold the conclusion to which Ronald Young J came on this topic. He rightly held that Vector meant Pacifica could not rely on the doctrine of prime necessity. As we mentioned at the outset it is therefore neither necessary nor appropriate for this Court to go into Pacifica’s challenge to Ronald Young J’s conclusion (expressed lest he be wrong on the Vector point) that the rent sought by Centreport was not unreasonable.
Formal orders/costs
The appeal is accordingly dismissed. We order Pacifica to pay Centreport for costs in this Court the sum of $10,000 plus disbursements to be fixed if necessary by the Registrar.
Solicitors
Kiely Thompson Caisley, Wellington, for Appellant
KPMG Legal, Wellington, for Respondent
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