Wool Board Disestablishment Company Limited v Saxmere Company Limited

[2007] NZCA 349

IN THE COURT OF APPEAL OF NEW ZEALAND

CA288/05
[2007] NZCA 349

BETWEENWOOL BOARD DISESTABLISHMENT COMPANY LIMITED

Appellant

ANDSAXMERE COMPANY LIMITED

First Respondent

ANDTHE ESCORIAL COMPANY LIMITED

Second Respondent

ANDRICHARD KING

Third Respondent

ANDRUSSELL STEWART EMMERSON AND FOREST RANGE LIMITED

Fourth Respondent

Hearing:2, 3 and 4 April 2007

Court:William Young   P, Glazebrook and Wilson JJ

Counsel:A R Galbraith QC, R A Dobson QC, D M McLellan and J L Bates for Appellant

F M R Cooke QC, L Theron and S Grey for Respondents

Judgment:15 August 2007 at 12.30 pm

JUDGMENT OF THE COURT

A        The appeal is allowed and the cross-appeal is dismissed.

B        We set aside all orders made by the High Court Judge.

CThe respondents are to pay the appellant costs in relation to the High Court proceedings to be fixed in the High Court.  The respondents are to pay the appellant costs of $18,000 and usual disbursements in this Court.

____________________________________________________________________

REASONS OF THE COURT

(Given by William Young P)

TABLE OF CONTENTS

Para No

Introduction  [1]

The background to the dispute  [6]
           The structure of the wool industry in the mid 1990s  [6]

Saxmere  [8]
           The Wool Board Act 1997  [14]
           The first of the challenged decisions  [20]
           The second of the challenged decisions  [22]
           The 2001 settlement  [24]
           Further industry restructuring  [25]
           The third of the challenged decisions  [27]
           The fourth of the challenged decisions  [28]

Did Saxmere’s proposal to the Board engage s 6 of the Act?                  [29]
           The issue  [29]
           The Saxmere business plan  [34]
           How the proposal was dealt with by the Board           [38]
           Evaluation  [44]
The first challenged decision: the appointment by the Board of

Merino New Zealand to perform its marketing and

promotion functions for fine wool  [51]

The second challenged decision: the refusal by the Board in May

1998 to fund Saxmere    [58]

The third challenged decision: the Board’s capitalisation of the

New Zealand Merino Company Limited  [63]

The fourth challenged decision: the Board’s June 2002 decision

to decline Saxmere funding  [66]

Other issues argued in the case  [73]
Result  [75]

Introduction

[1]       Section 6(2) of Wool Board Act 1997 (“the Act”) provided for the functions (including elements of functions) of the Wool Board (“the Board”) to be performed by either the Board, partnerships or joint ventures involving the Board or third parties.  When the Board was deciding how a function should be performed, s 6(6) required the Board to consider broadly all the relevant options and only to select a particular option if satisfied that it was likely to be the most efficient and effective mechanism for the performance of the relevant function (or element of a function).

[2]       Saxmere Company Limited and The Escorial Company Limited (to which we will refer collectively as “Saxmere”) are closely associated with Mr Peter Radford who has long had an interest in Saxon sheep.  Saxmere set out to establish a market for Saxon wool involving close association with spinners, weavers and clothes manufacturers.  Associated with its business plan was heavy promotion of Saxon wool and market development of products made from Saxon wool (although confined to Saxon wool which Saxmere acquired and sold on).  There was inevitably a degree of overlap between Saxmere’s promotion of its own wool and more general promotion of fine wool which formed a subset of the functions of the Board.  Between late 1997 and June 2002, Saxmere wanted the Board to accept that Saxmere’s promotional activities involved the performance of an element of the Board’s functions and, associated with this, to have access to funding from the Board.  Saxmere came to see itself as a rival of Merino wool marketing organisations which the Board did support.

[3]       In issue in this case are four decisions made by the Board between 1998 and 2002, two of which involved the funding of Merino wool marketing organisations and two of which involved refusals by the Board to fund Saxmere.  In a judgment delivered on 6 December 2005, Miller J held that the Board had failed to comply with s 6(6) of the Act when it declined to provide funding to Saxmere in May 1998 and again in August 2001 when it capitalised Merino New Zealand Company Limited (“MNZCL”), a Merino wool marketing organisation.  He granted declarations accordingly.  He also held that in relation to the May 1998 decision, the Board had acted in breach of statutory duty and negligently, with the result that the Board incurred a liability in damages to Saxmere and associated growers (represented by the third and fourth respondents).  The Judge dismissed complaints in relation to two other decisions made by the Board on 20 February 1998 and 7 June 2002.

[4]       We now face an appeal by the appellant (which is the statutory successor to the Board) and a cross-appeal by the respondents.

[5]       In the course of this judgment we will discuss the four challenged decisions.  We will also discuss briefly the other issues argued in the case.  But before we do that we will discuss the background to the dispute and address the question whether Saxmere’s proposals engaged s 6(6) of the Act.

The background to the dispute

The structure on the wool industry in the mid 1990s

[6]       The New Zealand wool industry has long been dependent on the sale at auction of unprocessed wool.  Once sold at auction, wool has traditionally been shipped overseas for processing, blending, spinning and weaving.  From the mid-1990s there has been a real effort in the New Zealand wool industry to shift away from this pattern of business and, associated with this, there has been an increased focus on specific and targeted marketing emphasising country of origin and wool type.

[7]       Associated with this movement was the establishment of Merino wool marketing organisations.  For ease of reference, we will refer to the particular organisations which were the precursors of MNZCL as “Merino New Zealand”.  In 1996 Merino New Zealand entered into an arrangement with the Board under which it promoted Merino wool alongside similar activities carried out directly by the Board (through its Wools of New Zealand division).  There was a degree of rivalry and disharmony between Wools of New Zealand and Merino New Zealand and some overlap in their promotion activities.  During the latter part of 1997 the Board and Merino New Zealand engaged in a mediation over the future control of Merino marketing.

Saxmere

[8]       Saxon sheep are related to Merinos.  They were traditionally bred in Saxony for their fine wool but no longer exist as a discrete breed in Europe.  A number of Saxon sheep were imported into Australia in the nineteenth century and, as a result of subsequent cross-breeding, much of the Australasian Merino flock now has some Saxon influence.  As well, a pure Saxon flock has been maintained at the Winton Stud in Tasmania since the 1830s.

[9]       Saxon wool is 12 – 18 microns and classed as superfine. Merino wool covers a wider range, from 12 – 24 microns, and the bulk of the Merino clip is around 18 – 23 microns.  The Judge concluded that Saxon wool had particular characteristics which enabled it to be differentiated from Merino wool.  This had been established in 1996 in a research paper commissioned by the Wool Research Organisation.  That said, in 1997 and 1998 the wool industry remained divided on the distinctiveness of Saxon sheep and whether it was practicable to draw a distinction between Saxon and Merino wool. 

[10]     In 1984 Mr Radford established a flock of Saxon sheep (which he initially described as “Saxon Merino”).  Since 1991 he has promoted the wool, first in New Zealand and then to English and Italian weavers, spinners and fashion houses.  Associated with this promotion has been his development of the Escorial brand.  In October 1997 he presented the fabric known as “Escorial” at a fashion industry show in Paris.  That led to an order from Brioni, an Italian clothing manufacturer.

[11]     Saxmere intended to market Saxon wool under three brands: “Escorial”; “Marrakech”; and “Saxon 1765”.  Of these, “Escorial” was the most expensive and “Saxon 1765” the cheapest.  Initially, Saxmere’s primary focus was on “Escorial”.  As part of its brand development and business strategy, it wished to set up a system of accredited Saxon wool producers who would supply Saxmere with wool.

[12]     Mr Radford was unenthusiastic about levies payable to the Board on wool acquired by Saxmere being used to fund promotion and market development by Merino New Zealand, which he saw as working with Saxmere’s competitors. He particularly wished to distinguish Saxon wool from Merino wool.

[13]     The Saxmere operation was reasonably small in the 1997 – 98 year.  In that year Saxmere purchased 1,252 kilograms of wool from eight suppliers (with 69 per cent coming from Mr Radford).  This was approximately 0.01 per cent of the nine million kilograms of fine wool produced in New Zealand.  Merino wool production represented approximately four per cent of total wool production. 

The Wool Board Act 1997

[14]      In 1997, producer board reform was well under way and this resulted in, inter alia, the Act which came into force on 17 December 1997.  With the benefit of hindsight this statute can now be seen as a precursor to the eventual disestablishment of the Board in 2003 (under the Wool Industry Restructuring Act 2003).  It certainly marked a major departure from the statutory regime under the Wool Industry Act 1977 under which the Board was entitled to intervene in the market and had a formidable array of regulatory powers.  Nonetheless, the Act reflected a pattern of thinking which was still widespread in the wool industry (and indeed in the primary produce sectors generally in New Zealand) along the lines that fragmentation of marketing and promotion would be associated with “weak selling” and, as a result, lower returns for New Zealand primary produce.  In the associated debates there was much discussion of “niche marketing” and the desirability of splitting what were regarded as the Board’s “funder/provider” roles.  In the end, the legislature decided against permitting niche marketers to opt out of the Board’s levy system, but provided for the possibility of the Board operating at least in part as a funder rather than a service provider.  It is this last aspect of the legislation which has given rise to this litigation. 

[15]      The 1997 Act provided that the Board’s assets belonged ultimately to woolgrowers and were for the time being held and administered for their benefit.

[16]      The object of the Board was identified in s 5:

(1)The object of the Board is to help in the attainment, in the interests of growers, of the best possible net ongoing returns for New Zealand wool.

(2)In pursuing its object, the Board must have regard to the desirability of the wool industry's making the best possible net ongoing contribution to the New Zealand economy.

[17]     Section 6 set out the Board’s functions:

(1)  The functions of the Board are,—

(a)    With a view both to increasing the volumes sold and to obtaining higher returns for each unit sold, to increase the demand for New Zealand wool and wool products (in existing and new markets); and

(b)    To maintain the confidence of buyers and users of wool and wool products in the New Zealand wool industry; and

(c)    To help obtain improved access to overseas markets for New Zealand wool and wool products; and

(d)    To conduct (whether alone or jointly with other bodies) research and development into sheep and wool, including research and development into—

(i)The rearing of sheep; and

(ii)Increasing the quantity or quality of the wool produced by sheep in New Zealand; and

(iii)The harvesting, handling, preparation, and processing of wool; and

(iv)The manufacture of wool products; and 

(v)The handling, marketing, packaging, product

(vi)development, and transport, of New Zealand wool and wool products; and

(e)    To encourage the adoption of more efficient processes and practices for—

(i)The rearing of sheep in New Zealand; and

(ii)Increasing the quantity or quality of the wool produced by sheep in New Zealand; and

(iii)The harvesting, handling, preparation, and processing of New Zealand wool; and

(iv)The manufacture of New Zealand wool into products; and the handling, marketing, packaging, product development, and transport, of New Zealand wool and wool products; and

(f)     To collect, process, maintain, and make available, information for the purposes of assisting production, investment, processing, product development, and marketing decisions in respect of—

(i)Market requirements for wool and wool products; and

(ii)Other matters relevant to the New Zealand sheep and wool industries; and

(g)    To account to growers on the Board's activities and its use of levy money and other resources; and

(h)    To discuss the Board's activities with any persons and organisations in the New Zealand wool industry the Board thinks fit;  and

(i)     To perform such other functions as are conferred on the Board by this Act or any other enactment.

(2)The Board may perform any of the functions specified in paragraphs (a) to (f) of subsection (1) (or any element of any of those functions) alone, or—

(a)   In a partnership or joint venture with; or

(b)  By arranging for its performance by—

any other person or persons (including a company or companies in which the Board holds shares).

(3)The Board may perform any of the Board's functions, or arrange for its performance, to the extent only that its performance is consistent with the Board's object.

…

(6)The Board must not determine that a function or element of a function is to be performed by a particular mechanism and entity (that is to say the Board, a partnership or joint venture, or some person other than the Board) unless it has—

(a)    Considered other mechanisms and kinds of entity that might reasonably be expected to be able to perform the function or element efficiently and effectively; and

(b)    Satisfied itself that the mechanism and entity are likely to be the most efficient and effective means of performing the function or element.

[18]     For practical purposes, it is easiest to focus on the s 6(1)(a) function (“to increase the demand for New Zealand wool and wool products”).  In adopting this approach to the case, we have not overlooked the fact that some of the other functions are also incidentally relevant.  For instance, Saxmere’s activities also involve research and development associated with Saxon wool and products made from it (see s 6(1)(d)), and the adoption of more efficient processes and practices associated with the marketing and product development of New Zealand wool and wool products (see s 6(1)(e)).

[19]     Mr Radford regarded s 6(6) of the 1997 Act as “the Saxmere clause” because, in his view, the promotion and marketing of Saxmere’s wool involved an element of the Board’s functions which Saxmere was best placed to perform efficiently and effectively.

The first of the challenged decisions

[20]     On 20 February 1998 the Board entered into a heads of agreement, with Merino New Zealand (which was then an organisation representing Merino growers).  Under this agreement, Merino New Zealand was to have responsibility for all Merino wool and other wool up to 24 microns, and access to the levy stream associated with that wool after allowing for the Board’s other funding requirements.

[21]     This is the first of the decisions which is the subject of challenge.  Essentially the complaint is that before deciding to enter into this agreement, the Board did not engage in the sort of exercise contemplated by s 6(6) of the Act.

The second of the challenged decisions

[22]     In late 1997 Mr Radford sought funding assistance from the Board.  This resulted in a meeting on 17 December 1997 (the day the new Act came into force) with Mr Jeff Jackson, the chief executive officer of the Board, to discuss Saxmere’s request for funding.  Mr Jackson was reasonably supportive and agreed to fund the preparation of a business and marketing plan.

[23]     The business plan was duly developed and Mr Jackson put Mr Radford’s proposition, broadly anyway, to the directors of the Board which they considered at their meeting held on 5 and 6 May 1998.  In the result the Board declined to provide funding assistance to Saxmere in relation to the implementation of its business plan.  This is the second of the challenged decisions.

The 2001 settlement

[24]     On 15 September 1999 Saxmere began to withhold levies payable on the wool that it acquired.  They were placed in a trust account.  The Board and Mr Radford began negotiations in 2000 in an attempt to settle the dispute.  The upshot was an agreement of 2 April 2001 between Saxmere, the Board and Merino New Zealand. The agreement recited that the Board would engage Saxmere to provide promotion and market development services for accredited Saxmere suppliers to Saxmere’s programmes, and that the Board had satisfied itself that Saxmere was the most efficient and effective delivery mechanism of marketing services for accredited Saxon suppliers of fibre into Saxmere’s programmes.  The Board agreed to pay Saxmere a fee for services, being the total of levies paid on Saxon fibre purchased by Saxmere net of core costs.  The agreement recorded that it was for a fixed term expiring on 30 June 2001 and that the parties recognised that the circumstances governing wool promotion in New Zealand were in transition and that the agreement could not be continued in its current form beyond 30 June 2001.

Further industry re-structuring

[25]     An international consultancy, McKinsey & Company, was engaged by the Board in late 1999 to report on all the options for improving revenue from the various categories of wool, to review cost structures and productivity associated with all stages of the supply chain and to short-list the most appropriate and viable options for change.  Its final report was delivered in June 2000.  Its principal recommendation was that levy-funded promotion be discontinued and the assets of Wools of New Zealand and Merino New Zealand be used as a foundation for new commercial wool marketing companies.  Growers should be given the option to invest a portion of their share of reserves in the proposed companies or have their share of reserves returned in cash.

[26]     The McKinsey report was the subject of extensive consultation with growers, who strongly supported its recommendations.  The Board duly resolved to cease levying growers for promotional purposes.  The levy for the year from 1 July 2001 was set at two per cent instead of five per cent, and that levy was reserved for funding industry good initiatives.

The third of the challenged decisions

[27]     At its meeting on 1 August 2001, the Board resolved to carry out a restructuring of Merino New Zealand to establish a new grower-owned company, MNZCL,  to give effect to the McKinsey recommendations.  As a result, it entered into an agreement under which MNZCL was to perform the Board’s functions and obligations under s 6(1)(a) – (c), (d)(iv) – (v), (e)(iii) – (v), and (f)(i) of the Act.  Under the agreement the Board was to pay what was described as a services fee of $1m on the commencement date, and $500,000 on each of 1 January and 1 April 2002 which in effect amounted to the capitalisation of MNZCL.  The decision to capitalise MNZCL is the third of the challenged decisions.

The fourth of the challenged decisions

[28]     The fourth of the challenged decisions was made on 7 June 2002.  Mr Radford requested funding from the Board essentially on the basis of his 1998 business plan.  It would seem that in effect he sought retrospective funding of approximately $4,000,000.  This request was declined

Did Saxmere’s proposal to the Board engage s 6 of the Act?

The issue

[29]     Section 6(6) of the Act was engaged by Saxmere only if it proposed to carry out a function (or element of a function) of the Board as provided for in s 6(1).  As noted above, the primary function in issue was that provided for by s 6(1)(a), namely:

With a view both to increasing the volumes sold and to obtaining higher returns for each unit sold, to increase the demand for New Zealand wool and wool products (in existing and new markets) …

[30]     Mr Radford considered that the promotional activities of Saxmere necessarily involved increasing the demand for that portion of the New Zealand wool clip which Saxmere acquired and sold on.  In his opinion, Saxmere was better placed than anyone else in the industry to promote its own wool and Saxon wool generally.  He saw no reason why the Wool Board levy on wool which was acquired by Saxmere should be paid to Merino New Zealand and spent on promotional activities which, to some extent, involved brands which competed with those with which he was associated.  Perhaps because he saw all of this as so obvious that it went without saying, the business plan which was developed in early 1998 and his communications with Mr Jackson did not identify why the promotion of Saxmere wool was a function (or element of a function) of the Board.  Nor did he identify the precise arrangements which he postulated the Board should enter into with Saxmere under s 6(2).  All he proposed was that the Board should make substantial payments to Saxmere on an annual basis.

[31]     The Judge plainly agreed with Mr Radford’s view of the situation.  On our appreciation of the situation, however, the Board did not see it that way; albeit that it did not articulate this view with great clarity.  Instead, the Board appears to have approached the issue on the basis that s 6(6) of the Act was not engaged by Saxmere’s proposal.  Hence its “failure”, as the Judge saw it, to engage in a s 6(6) analysis.

[32]     On Saxmere’s approach to the section, the New Zealand sourced wool which Saxmere was marketing was a differentiated subset of the New Zealand wool clip and therefore promotional activities associated with that wool necessarily involved the performance of an element of the Board’s functions.  The Judge’s adoption of this approach to s 6 was fundamental to the findings which he made against the Wool Board.  On this view of the section it is practicably inevitable that some at least of the decisions made by the Wool Board which are in issue in the case are open to legitimate criticism.  On the other hand, if the Board was entitled to act on the basis that when Saxmere was promoting its own wool it was not thereby performing an element of the Board’s function, the case against the Wool Board largely falls away.

[33]     Before we discuss this issue in more detail it is necessary to address more fully the facts as found by the Judge.

The Saxmere business plan

[34]     As we have recorded (see [22]), on 17 December 1997 Mr Jackson met Mr Radford to discuss Saxmere’s request for funding.  Mr Radford explained his view that s 6(6) of the Act established a right for his organisation to access levies paid for Saxon wool and outlined the commercial opportunity presented by the unique characteristics of Saxon wool.  Mr Jackson agreed to fund the preparation of a business and marketing plan.  From the outset, Mr Radford was very insistent on the confidentiality, a recurrent theme throughout his dealings with the Board.

[35]     Mr Radford supplied Mr Jackson with a draft business plan at a meeting on 25 March 1998.

[36]     This plan outlined what was referred to in the case as “the Saxon story” and emphasised the fibre’s potential as an exclusive fabric.  There was much discussion of the association with Brioni.  The business plan noted that Brioni wanted ten tonnes of Saxon fibre as soon as it became available.  The plan outlined current and projected fibre supplied.  Only three flocks (of which two were Australian), comprising 35,000 animals, met accreditation criteria at the time.  It was estimated, however, that another 30 flocks would be able to meet accreditation criteria on inspection.  As many as 200,000 animals, representing 500 – 550 tonnes of greasy wool, could achieve Saxon accreditation.  The plan also set out projected expenditure and revenues.  Expenditure for 1998/1999 would be $810,200 and projected sales were $5.5m, representing some 80 tonnes of wool.

[37]     As is apparent from this explanation, the plan was focused on the development of Saxmere’s business.  It did not purport to address explicitly how the implementation of the plan would involve the performance of Board functions.  Nor did it stipulate any arrangements between Saxmere and the Board other than that the Board would pay Saxmere a total of $800,000 between 1998 and 2003 (starting with $100,000 in the 1998/1999 year).

How the proposal was dealt with by the Board

[38]      Mr Jackson wrote two memoranda on the proposal.

[39]     The first, dated 21 April 1998, was to Mr Munro, the Board chairman.  It recorded the funding request and noted that that there were 30 near-pure Saxon flocks in Australasia, with the potential to produce 500 tonnes of clean useable fibre.  Mr Jackson calculated the levy payments by taking one-third of the projected production (on the basis that two-thirds of the wool to be acquired by Saxmere would come from Australia) and deducting a share of the Board’s overheads and industry good costs.  The levies to be paid in respect of Saxon wool were substantially less than the funding requested.  In 1998/1999, estimated gross Saxon levies were $22,720 but the funding requested was $100,000.  Levies were projected to rise to $116,408 in 2002/2003, but the budgeted funding requested for that year was $200,000.  As we have noted, in all, funding of $800,000 was sought for the years 1998 – 2003.  Mr Jackson recorded that the grower organisation was Australian based, the brands would not be available for the Board and there was a limited amount of synergy with some of the work being initiated by Merino New Zealand.  He recommended that Mr Radford be advised that his request for funding did not meet the Board’s minimum criteria for a special grower marketing group, and that the Board’s assistance be limited to covering the cost of preparing the business plan.  The Board had no funding criteria at the time but Messrs Jackson and Munro drafted a set for the Board’s consideration.

[40]     The report from Mr Jackson was in the form of a Board paper which repeated the essence of his memorandum to Mr Munro and contained the same recommendation.

[41]     At its 5 and 6 May 1998 meeting, the Board adopted the following relevant criteria on the basis that they were to be reviewed by the Board’s legal advisors to confirm they complied with the Act:

1.        Applicants must establish an organisation which represents the collective interests of a specific group of New Zealand wool growers (the grower group).

2.        The Board must be able to establish the viability of the proposal and the likelihood of success. The Board will require a business plan to be prepared by a reputable organisation. The Board may assist with the funding of the business plan.

3.        In the opinion of the Board, the organisation must be representative of the grower group, have critical mass and be able to demonstrate the skill base to deliver the business plan.

4.        The applicant must demonstrate to the satisfaction of the Board an ability to be more efficient and effective than other delivery options available to the Board.

5.        The Board must be satisfied that the proposed activities will not be in conflict with those of any other party contracted by the Board to deliver services in the same or a related field.

6.        Funding assistance will be limited to market development and research & development and under levy streaming rules will be limited to the levy generated by the grower group less core costs.

7.        Ownership of intellectual property can be shared by the parties.  In general the proportions held by the Board and the grower group will depend upon the level of contribution of the parties and the policy of the Board with respect to other areas of Board involvement.

8.        All requests over $50,000 will be required to be approved by the Directors of the New Zealand Wool Board.

[42]     The Board then addressed the Saxmere proposal. The Board resolved that Saxmere be advised that its application did not meet the criteria.  We note that after this meeting the Board took legal advice on the criteria which were subsequently adopted with some variations, which are not material for present purposes.  We also note that Mr Jackson and a Board member met with Mr Radford on 19 May 1998.  They gave him a set of the criteria and suggested that he should deal with Merino New Zealand.  Mr Jackson wrote a later letter to Mr Radford which was broadly in similar terms albeit that this letter recorded that the directors of the Wool Board had determined that the most efficient and effective means to deliver marketing sectors to the Merino sector was through Merino New Zealand. 

[43]     Miller J found that the Board declined the Saxmere proposal for four reasons (at [65] – [67]):

(a)The “dominant reason” was that the Board was only willing to provide funding to grower groups;

(b)A “secondary reason” was that the funding sought exceeded the levy stream associated with Saxmere wool (meaning that if the request had been granted in full there would have been associated funding cuts for Merino New Zealand);

(c)A “further consideration” was the extent of Australian involvement; and

(d)      Also relevant was Mr Radford’s insistence on confidentiality.

Evaluation

[44]     Obviously Saxmere was best placed to promote its own wool.  If the promotion of Saxon (or Saxmere’s) wool can be regarded as an element of a function of the Board, with the consequence that s 6(6) was engaged, there could logically be only one answer as to how the s 6(6) exercise would be resolved.  Saxmere would plainly provide the most efficient and effective mechanism for performing that element of the relevant function.  But on this approach, any trading organisation operating in the wool industry could claim that the promotion of its own services or products incidentally involved performance of an element (or elements) of the Board’s functions.  Since such an organisation would be more efficient and effective in promoting its own services and products than anyone else, a s 6(6) analysis would have only one outcome.

[45]     We note in passing that the approach to these sections adopted by Saxmere (and by the Judge) did not necessarily resolve the terms of any arrangement under which the Board would or should commission such an organisation to perform elements of its functions (s 6(2)).  But on the approach favoured by Saxmere, the organisation would presumably be entitled to at least the non-core costs component of the levy stream associated with the wool in issue.  This in turn would lead to what would in effect be the sort of opt out mechanism which the legislature rejected when the Act was passed (see [14] above).

[46]     Under the Act, a wide discretion was left to the Board as to the performance of its functions.  The various functions provided for in s 6(1) were all prescribed at a high level of generality.  It was for the Board to decide how much money should be spent on each of those functions and - very importantly - what particular steps should be taken by way of implementation.  Decisions had to be made as to how much money should be spent on each “element” of each function and as between different functions.  It was thus for the Board to decide to what extent it should promote wool or particular classes of wool on a generic basis.  For instance, at least in the first instance, it was for the Board to decide whether to promote fine wools generally or Saxon and Merino wool discretely.  We say in the first instance because decisions of this type would, of course, be susceptible to judicial review albeit not under s 6(6).

[47]     As at May 1998 the Board had not made a specific decision that it should promote Saxon wool as a discrete kind of wool, let alone the Saxmere product lines.  The corollary of the Judge’s approach to this issue is that the marketing and promotional activities and aspirations of Saxmere in effect committed the Board to a policy under which there was to be discrete and specific promotion of Saxmere wool. We see this as inconsistent with the scheme of the Act under which strategic decisions of that nature were for the Board.  To put this another way, unless and until the Board concluded that performance of its functions required specific promotion of Saxon (or Saxmere’s) wool, such promotion could not sensibly be regarded as an element of its functions.

[48]     We see this approach as consistent with the refusal of the legislature to countenance an opt out clause as sought by, inter alia, Saxmere.  We also see it as consistent with the legislature intending to provide for a split between the Board’s funder and provider roles.  The Board had the overall strategic responsibility for deciding what particular activities would be carried out and funded but in terms of settling on a mechanism for the actual performance of those functions, it was required to comply with s 6(6).  Where funding decisions are separated from associated service provision, it is not orthodox for the service providers to decide what activities are to be funded.

[49]     Some further context is important.  As we have recorded already, in the 1998 year Saxmere accounted for approximately 0.01 per cent of the fine wool produced in New Zealand, which in turn represented only four per cent (approximately) of total wool production.  The Judge was entitled to conclude (as he did) that Saxon wool had particular characteristics which enabled it to be differentiated from Merino wool.  But, as we have also noted, in early 1998, the distinctiveness of Saxon wool and whether it was practicable to draw a line between Saxon and Merino wool were still matters of debate in the industry.  Mr Radford himself had described his own flock as “Saxon Merino”.  Throughout the period in issue in the litigation, Mr Radford was very guarded in the information he was prepared to supply and very insistent on stringent confidentiality arrangements.  So the Board’s reluctance to engage in the promotion and marketing of Saxon (or Saxmere’s) wool is not remarkable.

[50]     Against that background we are satisfied that, in the situation which existed in May 1998, the proposal made by Saxmere did not engage s 6(6) of the Act. 

The first challenged decision: the appointment by the Board of Merino New Zealand to perform its marketing and promotion functions for fine wool

[51]     The decision to appoint Merino New Zealand was taken in principle at the Board meeting of 22 December 1997 (ie five days after the Act came into effect). On 18 February 1998, the Board resolved (subject to some caveats) to enter into a heads of agreement with Merino New Zealand.  Such a document was executed on 20 February.  The implementation of the final contractual structure continued through the rest of the year with the final and formal agreement being executed in December 1998.  For present purposes it is appropriate to treat the decision as having been made on 18 February 1998 which is effectively the approach taken by the Judge.

[52]     It is common ground that the decision by the Board to appoint Merino New Zealand to carry out this function was subject to s 6(6) and that accordingly, the Board ought not to have appointed Merino New Zealand unless it had:

(a)Considered other mechanisms and kinds of entity that might reasonably be expected to be able to perform the function or element efficiently and effectively; and

(b)Satisfied itself that the mechanism and entity are likely to be the most efficient and effective means of performing the function or element.

[53]     In his judgment, Miller J concluded that s 6(6) had been satisfied:

[46]     I am satisfied that the Board turned its mind to the question of Merino New Zealand’s efficiency and effectiveness, and the alternatives during the period December 1997-February 1998. As Mr Munro pointed out, the Board concluded that its alternatives in 1997 were the joint venture or the status quo, Wools of New Zealand. Mr Munro’s and Mr Ensor’s evidence, which I accept, was that the Board did consider Merino New Zealand’s efficiency and effectiveness relative to the status quo, and that it dealt with the position of niche providers by reserving the right to appoint others in lieu of [Merino New Zealand]. It is true that the Board did not analyse efficiency and effectiveness in a comprehensive way, even when approving the joint venture documents on 4 November 1998. There are no minutes recording its deliberations under s6(6), and no documented comparative analysis of the performance of Wools of New Zealand against the proposed joint venture entity [Merino New Zealand] or anyone else. Mr Munro confirmed that the Board did not conduct a s6(6) analysis when resolving in December 1997 to adopt the joint venture structure. But the Board was very much aware of s6(6), having participated fully in the legislative process. It understood that growers such as Mr Radford were keen to strike out on their own. It intended to and did address the question of efficiency and effectiveness in the negotiations that a group of Board members then conducted with [Merino New Zealand]. In particular, the Board insisted on the right to appoint others who might prove to be more effective. I conclude that the Board did determine that [Merino New Zealand], when established, would be the more efficient and effective marketer. When reaching that decision, it took a forward-looking approach, recognising that [Merino New Zealand] would take time to achieve its potential and that it was necessary to give [Merino New Zealand] a degree of contractual security.

[47]     It is true that Mr Radford had very clearly signalled his wish to market Saxon wool and his intention to seek financial support. He also approached Mr Jackson on 17 December 1997, the day the Act came into force. But the outcome of his discussion with Mr Jackson was that the Board agreed to fund a business plan that would form the basis of a proposal. On any view of it, that proposal could not substitute for [Merino New Zealand]. It is necessary to bear in mind that Saxon wool was a very small proportion of the merino clip, which in turn was only four percent of the total New Zealand wool clip. (A 2003 study records that in 1996 wools finer than 18 microns formed only 4.69% of the merino clip.) That being so, Saxmere’s proposal manifestly did not preclude appointment of [Merino New Zealand], in circumstances where the Board preserved the opportunity to appoint others in the contracts under which [Merino New Zealand] was established.  Because the Board preserved that right, neither did the decision to appoint [Merino New Zealand] require that it conduct a detailed analysis of the alternative mechanisms that would be available during the term of the contract with [Merino New Zealand]. A comprehensive comparative analysis would have been required in the circumstances only if the decision precluded the Board from appointing Saxmere instead of deferring that decision until the Saxmere proposal had been developed.  Until then, the Board was able to take the view that Saxmere had yet to establish itself as a reasonable alternative to Merino New Zealand.

(Emphasis added)

[54]     In support of the cross-appeal against this part of the judgment, Mr Cooke QC for Saxmere argued that the Board simply failed to undertake anything like the comparative exercise which s 6(6) required.  It did not seek to identify the entities which had the capacity to increase demand for New Zealand wool and wool products, entities which included not only Wools of New Zealand and Merino New Zealand, but also small organisations such as Saxmere.  Nor did the Board address the possibility of separating responsibility for fine and superfine wool.  The overarching complaint is that there was no s 6(6)(a) analysis. But Mr Cooke’s primary complaint focused on the words which we have italicised in the passage we have cited from the judgment.  He contended that the decisions taken in December 1997 and February 1998 were not subject to any “opt out” condition of the kind postulated by the Judge and that no such opt out appeared in the February 1998 heads of agreement.  Such a clause did not surface until the final agreement which was entered into in December 1998.

[55]     The challenge by Saxmere to this part of the Judge’s conclusions must fail.

[56]     As is apparent from what we have already said, our contextual approach to this issue is less favourable to Saxmere’s position than that of the Judge.  In our view, the Board was entitled to make a decision that treated fine wool as a discrete class of wool for marketing and promotion.  The “element” of the Board’s functions under consideration was, accordingly, the promotion of fine wool.  When making a decision under s 6(6) as to how that particular element of its functions could be most efficiently and effectively performed, the Board was not required to engage in further subdivision of this element (ie the promotion of Saxon wool and the promotion of other fine wools).  Instead it was entitled to look for an efficient and effective mechanism for the marketing of fine wool generally.  On that approach, there can be no credible challenge to the conclusions of the Judge because Merino New Zealand offered the only practical mechanism by which this element of the functions of the Board could be performed.  On this basis, there is no need for us to engage directly with the factual issue raised by Mr Cooke, namely the late emergence of the opt out mechanism which was a part of the eventual contractual documentation entered into at the end of 1998.  It is, however, right to say that the decisions and actions of the Board in December 1997 and February 1998 did not involve it incurring any obligation to Merino New Zealand which was inconsistent with it later making specific and separate provision for the promotion of particular types of fine wool.

[57]     As a matter of general administrative law principles,  the Board was required to keep an open mind about the overall structure of its promotion activities.  It would not have been right to structure those activities in a way which excluded the possibility of it later recognising the promotion of Saxon wool (or Saxmere’s wool) as a discrete element of its functions.  As well, an irrational refusal to promote Saxon (or Saxmere’s) wool discretely would also have been reviewable.  But the Board could not be credibly criticised in these respects.  In the final contractual documentation which it concluded with Merino New Zealand, the Board left itself sufficient room to change the structure of its promotion activities and, as we have noted, prior to then it had not entered into any inconsistent contractual commitment.  As well, as at February 1998, it could not be said that the Board’s approach to promotion of fine wool was irrational.

The second challenged decision: the refusal by the Board in May 1998 to fund Saxmere

[58]     We have already recorded (see [43]) the primary factual findings of the Judge.  He later concluded that the Board had acted in breach of s 6(6) in the following respects:

(a)In deciding to restrict funding to grower groups and refusing Saxmere’s application on that basis, the Board failed to carry out what he saw as the required effectiveness and efficiency comparison;

(b)In any event, s 6(6) did not confine the Board to dealing with grower groups;

(c)The Board was wrong to confine the funding it was prepared to make available to the levy stream (less Board costs) associated with the wool in question; and

(d)The Board was guilty of a material procedural error in evaluating Saxmere’s proposal against criteria which had not been disclosed to Mr Radford.

[59]     Our approach to this issue is very different from that of the Judge.  The Judge concluded that when the Board considered the request by Saxmere for funding, it should have engaged in a s 6(6) comparison exercise to decide whether Saxmere provided the most efficient and effective mechanism for promoting Saxon (or Saxmere’s wool).  As we have endeavoured to indicate, this reasoning rested on the assumption that the promotion of Saxon (or Saxmere’s) wool was itself an element of the functions of the Board.  But in our view, the Board’s overall strategic decisions as to promotion were not themselves subject to s 6(6).  Because the Board had not decided to engage in specific promotion of Saxon (or Saxmere’s) wool, such promotion was not itself an element of its functions.  For this reason, we respectfully disagree with the broad approach taken by the Judge.

[60]     Although we think that the Board in substance concluded that the Saxmere proposal did not engage s 6(6), we recognise that it did not say so in an explicit way.  In particular, the Board did not itself identify the distinction which we have drawn between the Board setting the overall parameters of its promotion strategy on the one hand and, on the other hand, decision making as to who should carry out the activities necessary to give effect to that strategy.  Indeed the criteria which it decided upon are drawn in such a way that they could apply to both types of decision.

[61]     That said, the criteria adopted at the 5 – 6 May 1998 meeting seem to us to make reasonable sense.  Once a decision was made to treat promotion of a wool of a particular organisation as an element of the functions of the Board, that organisation would be the most obvious entity to carry out the relevant promotion activities.  Being a grower organisation, the Board might logically be expected to look for segmentation of the industry which reflected grower perceptions.  So at least in deciding whether promotion of a particular kind of wool was appropriately seen as an element of the Board’s functions, identification of an associated grower organisation might be relevant.  So too would be considerations of scale.  Furthermore, in deciding how much might be paid to promote a particular type of wool, anticipated levy receipts associated with that wool might be thought to be a highly relevant consideration. 

[62]     The Judge also criticised the Board for considering the Saxmere application for funding against criteria which it adopted at the time and which it did not disclose to Saxmere until after the decision was made.  That sort of approach is quite often taken by the Courts which will, in the same judgment, identify the relevant criteria and then decide the issue by reference to those criteria.  As well, there was nothing to stop Mr Radford reformulating his proposal in light of the criteria and going back to the Board if that was what he wanted.  Further, the Board was making a decision as to the general parameters of its promotion strategy (on which it could not be expected to engage directly with all interested parties) and not an operational s 6(6) comparison (which would be more susceptible to natural justice/fairness requirements).   So we are not as critical of the Board in this respect as the Judge was.  The Judge’s findings on this aspect of the case were not subject to specific challenge on appeal.  But likewise they do not appear to have been carried into the formal orders which he made at the conclusion of his judgment.  And given that we have concluded that the Board was not engaged in the s 6(6) exercise this aspect of the case is of no particular relevance.

The third challenged decision: the Board’s capitalisation of New Zealand Merino Company Limited

[63]     At its meeting on 1 August 2001, the Board gave effect to the McKinsey recommendation for the restructure of Merino New Zealand.  This involved the establishment of a new grower-owned company, MNZCL, and its capitalisation by the Board.  This capitalisation involved the payment of services fees of $1m on the commencement date, and $500,000 on each of 1 January and 1 April 2002.

[64]     Miller J concluded that in acting in this way the Board had acted in breach of s 6(6) for the simple reason that it gave no consideration to the appointment of Saxmere (or anyone else) to perform elements of the functions which were delegated to MNZCL.

[65]     For the reasons already discussed, we do not accept this conclusion.  The element of the Board’s function which was in issue was generic promotion of Merino wool.  Saxmere was not able to perform that element of the Board’s functions and we see no reason to differ from the perception of the Board as to the appropriateness of the decision to capitalise MNZCL.  In saying this, we recognise that in the April 2001 settlement the Board in effect identified the promotion of Saxmere wool as an element of its functions.  But this was for the period which expired on 30 June 2001, a period which was associated with the availability of levy income.  In the different levy environment which applied after 30 June 2001, the funding available for promotion was appreciably different and necessarily required a reconsideration of the promotional activities which the Board was prepared to fund. 

The fourth challenged decision: the Board’s June 2002 decision to decline Saxmere funding

[66]     It will be recalled that the agreement between Saxmere and Merino New Zealand expired on 30 June 2001. On 28 August 2001 Mr Radford wrote to the Board seeking an extension of the agreement.  The Board responded by noting that the settlement agreement was for a fixed term to 30 June 2001, reflecting the transitional environment.  The letter from the Board also pointed out that the levy had been cut and that the Board had ceased levy funding of marketing activities.

[67]     Mr Radford considered that the corollary of the settlement agreement was an acceptance on all sides that Saxmere was the most efficient and effective marketer of Saxon wool.  He considered that the Board had not properly applied s 6(6) when it capitalised MNZCL.  This led him again to withhold the (now reduced) levy and pay it into a trust account.  He also sought to enlist the assistance of the Minister of Agriculture, who wrote to the Board on 23 April 2002 stating that he expected the Board to consider appropriately any detailed proposal to carry out a portion of the Board’s functions. Mr Radford followed this up with a letter attaching the original (ie 1998) business plan and asking for proper consideration by the Board.  Mr Radford later supplied the Board with a report on the previous three years’ performance, evidence of the volume of wool sold through the Escorial brand, and Saxmere’s proposed direction for the next few years.  He claimed that Saxmere had been unable to pursue proposals for knitwear and Saxon 1765 because of the Board’s failure to provide funding.

[68]     Mr Radford made a presentation to the Board on 7 June 2002.  He explained that the presentation was being made on behalf of 70 growers who farmed 350,000 sheep, representing more than 10% of New Zealand’s fine wool clip.  He made it clear that he was seeking funding not just for the Escorial brand but also for the Saxon 1765 brand which he considered had the potential to improve market returns for the 10% of the merino flock that had some Saxon blood.  Mr Radford indicated that he wanted the Board to approve the plan advanced to it in 1998.  He said that “even $2m” would help but he sought a retrospective payment to a Saxon programme of approximately $4m, less $100,000 already paid under the settlement agreement.  This figure (ie of $4m) was advanced on the basis that Pyne Gould Guinness had assessed the value of Saxon wool at 18% of the value of all Merino wool produced over the preceding five years and Merino New Zealand had been paid approximately $22m since 1997.

[69]     After Mr Radford left the meeting, the directors discussed and rejected the proposal.  They continued to see MNZCL as the most efficient and effective mechanism for servicing the Merino sector.  They also considered that it was relevant that the proposal came at a time when the Board no longer collected a promotional levy, thus leaving economic scope for commercial suppliers to pay a marketing charge to fund promotional activities.  Mr Radford was advised accordingly on 11 June 2002.

[70]     In his judgment, Miller J concluded that the Board had not breached s 6(6) when it made this decision:

[121]    … The Board had removed the marketing levy, having determined after exhaustive analysis and consultation that that function was best performed by others. Any Board funding would have come from reserves. Saxmere’s growers meantime were in a position to pay it an amount equal to the former levy if they wished, as other growers were doing with [Merino New Zealand]. Mr Cooke did not pursue the challenge to the decision to reduce the levy, which sets the context against which Saxmere’s application was considered.

[122]    The Board did consider Saxmere’s application on its merits in June 2002. Its decision, in substance, was that the most effective and efficient mechanism for discharging the function of marketing Saxon wool was for Saxmere and its growers to do it themselves. Mr Cooke did not identify any respect in which that decision breached s6, subsections (2) and (3) of which did not compel the Board to carry out any of its functions to any particular level or extent. Rather, the Board was able to perform its functions only to the extent that performance was consistent with the Board's object, as set out in s5. The Board had resolved that its objects were best performed by leaving it to growers and others to carry out the marketing function. Further, s 6(6) did not require the Board to appoint anyone if it was satisfied that another mechanism, requiring no Board funding, was better able to perform that function. The Board did not breach s6(6) by failing to appoint Saxmere in 2002.

[71]     Our conclusion on this aspect of the case is the same as that of the Judge although our reasons are not exactly the same as those he expressed.  It was for the Board to determine what particular activities it was prepared to carry out (or fund) in relation to the promotion of wool and s 6(6) did not apply to decision-making at that strategic level.  Given that the Board had decided not to fund specific promotion of Saxon (or Saxmere’s) wool, it was not required to make a decision as to the most efficient and effective methods of doing so.  So s 6(6) was not engaged. 

[72]     We add that Saxmere was, in any event, not seeking to carry out in the future what it considered to be the functions of the Board.  In effect it was seeking largely retrospective Board funding associated with the prior implementation of its own business plan.

Other issues argued in the case

[73]     The Judge was required to address a number of issues which were down-stream of the findings which he made against the Board: the impact of Saxmere’s delay on its entitlement to relief; whether the Board’s actions exposed it to a claim for damages for breach of statutory duty; whether the Board had owed a duty of care to Saxmere and associated growers and if so whether it had acted in breach of that duty; and whether Saxmere had a restitutionary remedy in respect of levies which it had paid.

[74]     Since our conclusions on the primary issues in the case are so different from those of the Judge and no such down-stream issues arise on our approach to the case, there is no point in us reviewing the Judge’s conclusions or the arguments which were addressed to us on them.  We simply note that the conclusions of the Judge as to breach of statutory duty and the existence and breach of a duty of care are not self-evidently correct, even on his approach to s 6(6).  As to negligence, for instance, we note the recent decisions of this Court in Attorney-General v Body Corporate 200200 [2007] 1 NZLR 95 and Bella Vista Resort Ltd v Western Bay of Plenty District Council [2007] NZRMA 301, the general drift of which runs contrary to the approach of the Judge.

Result

[75]     The appeal is allowed and the cross-appeal is dismissed.

[76]     We set aside all orders made by the Judge.

[77]     The respondents are to pay the appellant costs in relation to the High Court proceedings to be fixed in the High Court.  The respondents are to pay the appellant costs of $18,000 and usual disbursements in this Court.

Solicitors:

Quigg Partners, Wellington for Appellant
Sue Grey Lawyer, Nelson for Respondents