McLachlan & Ors v. Mercury Geotherm Limited & Ors (New Zealand ) [2006] UKPC 27 (23 May 2005)
Privy Council Appeal No 36 of 2005
(1) Alistair Stuart McLachlan and Ava Marie McLachlan
(as Trustees of the Waituruturu Trust)
(2) Alistair Stuart McLachlan and Ava Marie McLachlan Appellants
v.
(1) Mercury Geotherm Limited (in receivership)
(2) Piohipi Land Limited (in receivership)
(3) Mercury Network Limited Respondents
FROM
THE COURT OF APPEAL OF
NEW ZEALAND
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JUDGMENT OF THE LORDS OF THE JUDICIAL
COMMITTEE OF THE PRIVY COUNCIL
Delivered the 23rd May 2006
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Present at the hearing:-
Lord Hoffmann
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Baroness Hale of Richmond
Sir Martin Nourse
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[Delivered by Lord Walker of Gestingthorpe]
- This appeal is concerned with the
aftermath of an ambitious joint venture which unfortunately ended in
heavy losses for the participants. The object of the venture was to
build and run a geothermal power station near Taupo in North Island,
using the area's natural geothermal resources for large-scale
generation of electricity for supply to consumers in the Auckland
district. The participants in the venture were the appellants, Mr and
Mrs McLachlan (together with some family companies which they
controlled) and Mercury Network Limited, later renamed MEL Network
Limited ("Network") a subsidiary of a quoted company now known as
Vector Limited ("Vector"). Two new companies were formed for the
purposes of the joint venture, Mercury Geotherm Limited ("Geotherm"),
owned as to 67% by Network and as to 33% by the McLachlans (either as
trustees or beneficially); and Poihipi Land Limited ("Poihipi"), a
wholly-owned subsidiary of Geotherm. Geotherm and Poihipi, both now in
receivership, are the first and second respondents respectively;
Network is the third respondent.
- The joint venture was the subject of a
preliminary written agreement entered into in 1994. This was later
varied and a final consolidating agreement (called the second Poihipi
joint venture agreement) was entered into on 15 December 1995. This
agreement ("the master agreement") was supported by a large number of
ancillary contractual documents, some but not all of them set out in
schedules to the master agreement. They included a lease ("the lease")
granted on 15 December 1995 by Poihipi and Geotherm as lessors to the
McLachlans and Mr David Ross (then the trustees of a McLachlan family
trust called the Waituruturu Trust) as lessees.
- The failure of the joint venture has led
to some complex and hard-fought litigation raising a number of
different issues (some of those issues were remitted to the High Court
by the Court of Appeal and the Board was told that they are now again
on their way to the Court of Appeal). By contrast the issues before the
Board are in quite a small compass, focusing on the correct
construction of a right of pre-emption in clause 16.1 of the master
agreement, and on whether (if clause 16.1 does not get the appellants
home) they can achieve the same or a similar result by relying on an
implied duty of good faith. Mr Bryers (who appeared for the appellants
before the Board, not having appeared below) also sought to make
submissions on an unusual provision which appears in clause 10.1 of the
lease, but (as explained below) it is not really an issue on this
appeal.
- The issues before the Board are therefore
quite limited. Nevertheless it is necessary to sketch in, at least in
outline, the commercial context in which the issues arise, and the
course which the litigation has followed.
- The McLachlans and their companies have
owned land near Taupo since 1965, using it for rearing beef cattle and
sheep, with a sideline in growing roses and (latterly) orchids, so
making limited use of the geothermal resources which the power station
was intended to exploit on a very much larger scale. They owned two
adjoining areas of freehold land (referred to in the lease and in these
proceedings as Land A and Land B) located between the Poihipi Road and
the Tukairangi Road; Land A extended to about 76 hectares and Land B
(to the south of Land A) to about 86 hectares. They also had options
(granted in 1991) to acquire a further 287 hectares of freehold land
(Land C) to the north and west of Land A. Lots 1 and 2 (which are at
issue in the proceedings remitted to the High Court) are small areas
adjacent to Land C. These figures for areas may not be precisely
correct (there are some variations in different documents throughout
the Record) but they serve to give a general indication of the position
on the ground.
- The general intention was that the
McLachlans should contribute all this land to the joint venture,
together with various regulatory licences which the McLachlans had
negotiated, taking a leaseback (for farming purposes) of all the land
except so much of Land A as consisted of the actual site of the power
station. The freehold of Land A and Land B was transferred to Poihipi
and the freehold of Land C was transferred to Geotherm, which is why
they were both parties to the lease. The McLachlan interests received
in return 33% of the shares in Geotherm and a substantial sum of cash
(much of which was needed to pay off existing indebtedness to third
parties).
- As already noted, the power station site
was to be excluded from the lease of Land A. However it is not easy to
define the site of an as yet unbuilt power station using geothermal
energy, as appears from the definition in the lease:
"'Power Station Site' means the area of Land A
which is intended to be occupied by the geothermal power station to be
constructed under the Joint Venture Agreement including, without
limitation, steamfield well pads, steamlines, piping, other steamfield
works, access roads and the Poihipi Road planted area."
The precise delimitation of the site was a major issue before Potter
J and in the Court of Appeal, but it is not an issue before the Board.
- The difficulties of predicting in advance
the precise needs of the power station once it had been constructed,
commissioned and put into production were also reflected in clause 10.1
of the lease:
"If the Lessors require the Land for any
purpose relating to the construction and operation of [Geotherm's]
proposed geothermal power station or the Lessors reasonably believe the
use of the Land (or part of it) for the permitted use conflicts with,
or limits, that purpose, the Lessors shall have the right to
unilaterally vary this Lease to alter the area of the Land which it
relates to, to suspend the Lease in respect of all or part of the Land,
and/or vary the Term in respect of part or all of the Land, provided
the Lessor gives the Lessee not less than two months' written notice of
its intention to vary or suspend this Lease. If the Lease is materially
varied or suspended in accordance with this clause and such variation
or suspension occurs following the date of Commissioning, the annual
rent shall be reduced on a pro-rata basis in respect of the area of the
Land which the Lessee is not permitted to use following the variation,
or the period during which any suspension remains in force."
The lease was, in relation to Land A, for a term of just under 20
years. No term was specified in relation to Land B and Land C. In
relation to all the leased land there were (apart from clause 10.1)
various provisions for termination of the lease, including termination
if the lessees (or parties associated with them) ceased to be
shareholders in Geotherm (see clauses 10.2, 10.3 and 11).
- The other participator in the joint
venture, Network, was to contribute capital and expertise in the
construction and operation of the power station. Its rights and
obligations are spelled out at some length in the master agreement,
especially clause 4 (new articles [of Geotherm]), clause 5
(decision-making and control), clause 6 (funding) and clause 12
(operation of the power station). The details of these fairly
complicated clauses do not matter, but they do show that the joint
venture must be regarded as a sophisticated commercial agreement (or
set of interlocking agreements) drafted by professionals who were aware
that the interests of the participants might come into conflict in
unforeseen ways.
- Clause 6 of the master agreement
envisaged that Network would initially finance the project, taking
security in various forms including a first charge on Land A, Land B
and Land C, but that this initial funding would be replaced by
long-term loans from a suitable outside source. However that plan was
overtaken by events. The power station was completed by December 1996
but for regulatory reasons it did not start generating electricity
until September 1997. The McLachlans' case at trial was that in the
course of 1997 Network's parent company decided to withdraw from the
business of generating electricity, and that in March 1998 Network
declined to provide further finance, despite Geotherm's need for more
capital. It is not in dispute that on 11 December 1998 Network
appointed joint receivers (Mr Lawrence Chilcott and Mr Peter Chatfield)
in respect of both Geotherm and Poihipi. There were other proceedings,
with which the Board is not concerned, alleging that the appointment of
receivers was made in bad faith, and in breach of contractual and
fiduciary obligations. The Board is concerned only with the actions
taken by the receivers, especially in relation to the land comprised in
the lease.
- After the appointment of receivers the
McLachlans wished to reacquire the freehold interest in all the land
which they had contributed to the joint venture. Whether they had the
financial resources to buy the power station may be in doubt; but for
whatever reason, the receivers eventually declined to negotiate with
the McLachlans and designated Contact Energy Limited ("Contact") as the
preferred bidder. Contact was the new name of ECNZ, which had in the
past opposed the McLachlans' plans for developing the geothermal
potential of their land, and so the choice of Contact as preferred
bidder must have added to the McLachlans' feelings of frustration. But
if they could not acquire the whole power station, they wished at least
to reacquire the freehold of Land B, Land C, and as much of Land A as
was not within the power station site.
- The lease contains in clause 16.1 a right of pre-emption which lies at the heart of this appeal. It is in the following terms:
"In consideration of the mutual promises
contained in this Lease and in the Joint Venture Agreement, the Lessors
grant to the Lessee or its nominee a first right of refusal in respect
of the Land or any part thereof, should the Lessors wish to sell or
dispose of those parcels of land (together, the "Relevant Land") as are
comprised in the Land, or in the property the subject of the Landcorp
Property Agreement (as that term is defined in the Joint Venture
Agreement) or in any other parcels of land which the Lessors may
acquire after the date of this Lease."
Clause 16.1 then proceeds to set out the detailed terms for exercise of the right of pre-emption.
- The receivers and Contact and their
advisers seem to have been well aware that clause 16.1 made it
impossible to proceed with a sale to Contact of the whole of Land A,
Land B and Land C. Conversely a sale of the power station site alone
could not trigger clause 16.1, but might give rise to problems at some
future time, if the new owners of the power station wished to secure
the exercise by the lessors (that is, the two joint venture companies
then in receivership), but for the benefit of the new owners, of the
powers contained in clause 10.1 of the lease. Negotiations between the
receivers and Contact produced what they regarded as a satisfactory
solution, that is terms under which (i) Contact was to be granted a
right of pre-emption over the leased land, but exercisable only after
the expiration or sooner termination of the lease (and only if the land
was then unsold), and (ii) the sale to Contact was to include various
"easement interests" and "encumbrance interests" specified in a
schedule to the sale agreement.
- The sale agreement between the two
joint venture companies (in receivership) and Contact was entered into
on 24 December 1999. The right of pre-emption granted to Contact was
set out in clause 10.7 in the following terms:
"Right of Refusal: If at any time the Deed of
Lease is terminated (other than in circumstances contemplated by clause
16 of the Deed of Lease) and following such termination the Vendor,
continues to own the fee simple of all or any part of the Easement
Land, the Encumbrance Land and/or the Additional Land the Vendor shall,
within 30 days of such termination, offer the fee simple to all or that
part of the Easement Land, the Encumbrance Land and the Additional Land
to the Purchaser for a price equal to the then government valuation of
that land."
The "Additional Land" was defined so as to amount, in effect, to all
the leased land other than that burdened under the sale agreement with
easements or encumbrances. It is common ground that the "government
valuation" basis would produce lower than current market value.
- By the time that the sale agreement was
entered into these proceedings were already on foot. The sequence of
events leading to the sale was considered by Potter J (at paras 49-62
of her judgment) as relevant to "the crucial question, whether or not
the receivers formed a wish to sell the leased land." Potter J accepted
the evidence of Mr Chilcott, the more active of the receivers, that he
acted independently of Network and Vector. She described him as a very
experienced receiver who took independent legal advice and reached his
own decisions.
- Mr Chilcott issued a confidential
information memorandum in July 1999 referring to the receivers as being
mandated to sell the assets of Geotherm and Poihipi. But the assets
listed for sale were the power station (together with some plant in
storage at Taupo). The land to be sold was identified on a map as the
whole of Land A, but Mr Chilcott said that that was a mistake. In
arguing that the receiver had evinced an intention to sell the whole of
the leased land the McLachlans relied particularly on a letter dated 21
June 1999 from Mr Chilcott to the trustees of the Waituruturu Trust,
expressed as exercising the lessors' powers under clause 10.1 of the
lease, and extending to the whole of Land A, most of Land B, and a part
of Land C.
- Potter J described this letter as
"somewhat peremptory in tone and clearly erroneous in deeming all of
Land A to be the Power Station Site and in the claims made by the
Receivers in respect of Lands B and C in reliance on clause 10.1 of the
lease." Nevertheless she held that the letter and the memorandum did
not indicate a wish on the part of the receivers to sell the leased
land. This part of her judgment was upheld by the Court of Appeal
(ground 4, paras 41-47) and it is not as such a ground of appeal before
the Board. It calls for mention only as demonstrating the limited
nature of the first ground of appeal that is before the Board, which
focuses on clause 16.1 of the lease and clause 10.7 of the contract for
sale to Contact.
- Mr Chilcott's letter of 21 June 1999
caused a sharp deterioration in the already strained relations between
the parties. Mr McLachlan described it (in an affidavit which he swore
on 29 February 2000 as an "arbitrary demand . . . to vacate our leased
property"). The outcome was that on 28 October 1999 the McLachlans
lodged caveats in respect of all the leased land, in order to protect
the lessees' interests; and on 20 December 1999, a few days before
the sale agreement was entered into, the receivers brought proceedings
for the removal of the caveat. The sale agreement referred to the
proceedings and contained provisions for retention in escrow of part of
the total purchase price of $50.5m. The details of the retention are
not relevant to this appeal. It is however noteworthy that the
purchaser, Contact, was given the opportunity to become a party to
these proceedings, but declined. The McLachlans did not themselves take
any positive steps to have Contact joined as a party.
- Potter J and the Court of Appeal
decided that the inclusion of clause 10.7 in the sale agreement between
the receivers and Contact did not trigger the lessees' right of first
refusal under clause 16.1 of the lease, because clause 10.7 provided
for the possibility of a sale to Contact only in circumstances in which
the lessees' rights under clause 16.1 had already come to an end with
the expiration or determination of the lease. In paras 63 to 72 of her
judgment Potter J held that clause 10.7 did not operate "in derogation
of" the lessees' rights (the expression used by Tipping J in Motorworks Limited v. Westminster Auto Services Limited
[1997] 1 NZLR 762, 766). The freeholders had not done anything which
put it out of their power to satisfy the lessees' rights so long as
they existed. The Court of Appeal reached the same conclusion,
expressing it quite briefly (para 33):
"As the Judge noted, the right of purchase
granted to [Contact] was expressly conditional upon the Trust's right
of purchase in its lease (clause 16.1) having been extinguished – by
termination of the lease. Accordingly, there is nothing inconsistent
with the Trustee's rights in the grant of the conditional right of
purchase. We agree with the reasons of the Judge to the same effect on
this point."
- Their Lordships see no error in the
reasoning and conclusions of the courts below. The right of first
refusal granted to Contact by clause 10.7 of the sale agreement was (no
doubt advisedly) expressed as being contingent on the lease having come
to an end without the lessees' right of first refusal having been
exercised. In that event the price payable by Contact, if it exercised
its rights under clause 10.7, was to be determined by a formula which
was most unlikely to reflect its open market value at that time. Potter
J and the Court of Appeal were right to hold that these deferred and
wholly contingent rights granted by clause 10.7 of the sale agreement
did not trigger the lessees' right of first refusal.
- In argument before the Board both sides referred to the decision of the English Court of Appeal in Pritchard v Briggs [1980] 1 Ch 338. That decision is rather controversial (see Megarry & Wade, The Law of Real Property, 6th ed. (2000) pp.683-684), although most of the controversy has focused on points which are not in issue in this appeal. Pritchard v Briggs
resembled the present case in that there were successive grants of
contractual rights (what Stephenson LJ at p421E called "two promises")
to two different potential purchasers: the first a right of pre-emption
exercisable until the death of the survivor of the landowners, and the
second an option exercisable after the death of the survivor. The Court
of Appeal held that the grant of the option (the second promise) did
not trigger the right of pre-emption (the first promise): see Templeman
LJ at p419F and Stephenson LJ at p422B. To that extent the case
provides some assistance to the respondents. The Court of Appeal also
held that the option was not impliedly made conditional on the land
remaining unsold at the death of the survivor of the landowners: see
Goff LJ at p387F, Templeman LJ at pp.419H-420B and Stephenson LJ at
p422D. The second promise was not therefore inconsistent with the first
promise, but it "confined" the first promise (as Stephenson LJ put it
at p421H; see also Templeman LJ at p420F-G). In the present case, by
contrast, the second promise (in clause 10.7 of the sale agreement) was
expressly made conditional and did not in any way confine (or derogate
from) the first promise (in clause 16.1 of the lease).
- There remains the appellant's argument
based on an implied duty of good faith. This argument was raised before
Potter J, who dealt with it in paragraphs 79 and 80 of her judgment:
"The McLachlans seek an order from the Court
that the plaintiffs do that which they should have done in good faith,
namely offer the land to the McLachlans at government valuation. They
contend that the steps for setting up the easements and encumbrances
and the option given to Contact in clause 10.7 of the Contact
agreement, so as to avoid triggering clause 16.1, was no less than an
effort to deprive the defendants of the fruits of its contract and the
mutual promises in the joint venture agreement.
I have little difficulty in accepting that the
joint venture agreement and the lease which is contemplated by that
agreement annexed as Schedule 4 and executed on the same day (15
December 1995), are in the nature of a relationship contract. Clause
16.1 containing the right of first refusal in issue in these
proceedings expressly links the lease with the joint venture agreement
by stating that the provisions are in consideration of the mutual
promises contained in the lease and the joint venture agreement. This
was a long-term joint venture for a large scale, complex, commercial
undertaking. The power supply agreement between Geotherm and
Mercury/Vector was for 32 years. It would not be possible for
contractual documents executed in 1995 to specify with particularity
every facet of the arrangements which would impact on the joint venture
and the parties to it in the years to come. There are necessarily to be
implied mutual covenants on the joint venture parties to co-operate and
proceed with good faith in the achievement of their agreed common
purpose. But the agreed common purpose and their contractual
obligations must be interpreted by reference to the contractual
documents and the agreements of the joint venture parties expressed in
those documents."
- The judge then set out clause 10.1 of
the lease and discussed the way in which the receivers had gone about
the exercise of their powers, especially in relation to clause 10.1.
She then made some observations (in para 86 of her judgment) about the
right of first refusal: (the first sentence refers to "clause 10.1" but
it is common ground that she must have meant clause 16.1):
"The McLachlans are correct in asserting that
the Receivers acted so as to avoid triggering clause [16.1]. I find
that they did so not in bad faith but pursuant to a commercial decision
in furtherance of their legal duties as Receivers; they acted not to
destroy or injure the "fruits of the contract" for the McLachlans
(although consequentially clause 16.1 has not been triggered) but to
preserve powers specifically vested in them by the lease. Later in this
judgment under Encumbrances I hold that the Receivers are not
entitled to register two proposed encumbrances against the fee simple
titles to the leased land. The Receivers have misconceived the extent
of their powers under clause 10.1 but that does not affect my
determination that in acting so as to preserve their rights and powers
under clause 10.1, the Receivers did not breach an implied duty of good
faith to the McLachlans."
- In the Court of Appeal (in which Mr
McLachlan appeared in person) the judge's conclusion on this point was
challenged by Mr McLachlan's fifth ground of appeal. As it was put in
para 48 of the judgment of the court delivered by Gault P:
"The point repeatedly made, and formulated in
differing arguments, is that having taken the land into the joint
venture, the trustees were owed duties, over and above those expressed
in their lease, translating into entitlements to have their offers to
purchase the assets of the joint venture, including the power station,
accorded some priority."
- The Court of Appeal rejected that argument as misconceived (para 49):
"The reality is, as the Judge recognised, that
the receivers' duties are to recover debt and to realise assets of the
companies concerned to that end. They may do that to the extent that
they are not constrained by legal obstacles. Potter J held that they
cannot create the encumbrances over the leased land as they had
undertaken to do. That would breach the lessees' rights of quiet
enjoyment and derogate from their grant. But that aside, there is
nothing in the various joint venture documents to prevent the course
taken by the receivers. It was submitted that the Judge's conclusion
that the steps taken by the receivers were commercially justified is no
excuse for breach of fiduciary duties. That might be so if there were
established duties not to do what they have done. It is not enough to
say that parties are in a relationship which give rise to fiduciary
obligations; it is necessary to identify those obligations. It is one
thing to assert that in establishing and operating a joint venture the
parties must act towards each other in good faith, but it is quite
another thing to contend that in addition to the obligations they have
assumed and must carry out in good faith, the law should impose further
and separate duties of the kind suggested here."
- Again, their Lordships can see no error
in the reasoning and conclusions of the courts below (and in so far as
the appellants emphasise and rely on the particular facts of the case,
they are met by the formidable obstacle of concurrent findings of
fact). The master agreement and its inter-linked contractual documents
represented sophisticated commercial arrangements (negotiated, no
doubt, with expert professional advice). These arrangements recognised
the uncertainties of the venture and the possibilities of unforeseen
conflicts of interest. Clause 16.1 of the lease was inserted in order
to give the lessees certain rights in certain events. The sub-clause
must be construed fairly in its commercial context, and that, in their
Lordships' opinion, is what the courts below did. The rights conferred
by the sub-clause, fairly construed, cannot be stretched so as to cover
other events not specified in the sub-clause.
- Mr Bryers wished to make submissions to
the Board as regards some passages in the judgment of Potter J (para
125) and the Court of Appeal (paras 38 and 73) in relation to clause
10.1 of the lease. That may remain an issue in other parts of this
complex litigation, but it is not an issue on this appeal to the Board.
Their Lordships can only record without comment Mr Bryers' general
submission that the passages just mentioned were not necessary to the
decisions below, and are not correct.
- For these reasons their Lordships will
humbly advise Her Majesty that this appeal should be dismissed with
costs before the Board (without disturbing the cost orders made below).
