BENMARROC ESTATES LIMITED V MOLYNEUX MANAGEMENT LIMITED HC DUN CIV-2007-412-000735

BENMARROC ESTATES LIMITED V MOLYNEUX MANAGEMENT LIMITED HC DUN CIV-2007-412- 000735 22 April 2010IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY CIV-2007-412-000735BETWEEN BENMARROC ESTATES LIMITED Plaintiff AND MOLYNEUX MANAGEMENT LIMITED Defendant Hearing: 2 and 3 February 2010 Counsel: D R Tobin for Plaintiff C D McKenzie for Defendant Judgment: 22 April 2010JUDGMENT OF PANCKHURST JTable of ContentsPara NoThe claim [1]The factual background [5]What was the cause of the successive crop failures?The frost protection method [20]The expert evidence in this case Alex Smith [24]Earnscy Weaver and Timothy Jones [32]Errol Hewett [44]The conflict between experts [49]Some other themes [74]Was Molyneux in breach of its duty of care?Ordinary negligence [80]Gross negligence [84]The quantum of damagesThe amount of the claim [91]Failure to mitigate loss [92]Replacement of trees [99]Wasted expenditure [105]GST [109]Result [113]The claim[1] The plaintiff company developed a commercial cherry orchard near Cromwell in Central Otago. Molyneux Management Limited was retained by it to develop and then manage the orchard. In this proceeding Benmarroc alleges that Molyneux failed to exercise due care in the management of the orchard and was thereby in breach of the management agreement. Benmarroc claims damages for wasted expenditure, lost profits and for tree replacement costs in the total sum of $921,326. [2] The principal allegation is that Molyneux was negligent in relation to the operation of a frost protection system in each of the seasons 2003-04, 2004-05 and 2005-06. In the result, it is said that the crop failed in each of these seasons. [3] Molyneux, however, denies that it was negligent. It maintains that any problems experienced in the three relevant seasons were due to a bacterial infection (known as bacterial blast infection). In one season severe pre-harvest rainfall is said to have destroyed the crop. [4] Both liability and quantum are in dispute. The management agreement included a clause that Molyneux would not be responsible for lost production "except where caused by gross negligence". Gross negligence is denied. In addition, certain of the heads of damage claimed by Molyneux are challenged as duplicitous, or otherwise not sustainable.The factual background[5] Jeni and Vance Connelly are the directors and shareholders of Benmarroc. In 1998 a block of land comprising approximately nine hectares was purchased from Mrs Connelly's father. The land is situated on McNulty Road, near Cromwell. [6] Subsequently the Connellys approached Molyneux about development of the land and its management as an orchard. Soil tests were undertaken and, eventually, a decision was made to establish a cherry orchard. Although Molyneux had favoureda mix of apples and cherries, Mr and Mrs Connelly ultimately decided to grow cherries alone. [7] On 21 August 2000 a development agreement was signed. This contemplated the erection of shelter belts around the perimeter of the orchard, and the planting of cherry trees on part of the nine hectare block. This work was successfully completed by the end of 2000. [8] Following establishment the trees grew well and the first crop was anticipated in the 2003-04 season. Management of the orchard was undertaken by Molyneux under an agreement dated 1 February 2004. I shall refer to the signing of the agreement later. The agreement was for a term of three years, deemed to have commenced on 1 July 2003. In essence Molyneux was to recommend an annual management plan and, following approval, it was to:... undertake and manage on behalf of the Grower all capital, developmental, operational, sales and marketing and management works necessary to achieve planned objectives on the Grower's orchard; at all times exercising full control over the Grower's block in respect of all operational activities thereon. (Clause 2 of the agreement)Benmarroc was also obliged to pack its crop at Molyneux Packhouse Limited. [9] Clause 9(a) provided:THE MANAGER WILL: (a) Undertake its obligations with due care. In the event of the orchard suffering any damage by an act of the Manager, or any act of any employee of the Manager, the parties agree that the Manager will, where practicable, repair or replace any damage but will accept no responsibility for lost production except where caused by gross negligence;Payment to Molyneux was to be made following the provision of fortnightly invoices, which itemised management fees, labour and material costs. [10] In anticipation of the conclusion of the management agreement Molyneux provided a revised budget for the expected return in the first three seasons. These were 2003-04, 2004-05 and 2005-06 – but I may refer to them as 2003, 2004 and2005, since this case is concerned with the issue of frost protection in the spring of each season. [11] By the spring of 2003 a frost protection system had been installed under Molyneux's control. For this purpose the orchard was divided into two areas with a separate bore water supply to each. Overhead sprinklers were placed at a height of five metres and in a triangular design at 20 x 20 metre centers on an offset grid. This system was designed to operate at a specific average pressure (3.8 bar), giving a precipitation rate of between 4.18 mm per hr (minimum) and 4.4 mm per hour (maximum). It is common ground that similar systems have been successfully used for about 30 years in Central Otago to guard against frosts down to minus 6-7 degrees centigrade. Hence, the plaintiff's claim against Molyneux focused upon the operation of the irrigation system, as opposed to its suitability for purpose. [12] Somewhat over 3000 trees were planted in the orchard in the second half of 2000. Over half of the stock (57%) was Sweetheart, a relatively new cultivar which was introduced into commercial production in Central Otago at about this time. The other major cultivar was Compact Stellar (about 20%), with Sonnet, Ranier, Bing and Romance trees making up the balance of the orchard. [13] The frost protection system was used on a number of occasions in the spring of 2003. On 7 December of that year Mrs Connelly was telephoned by her father, who resides in Cromwell, whereas Mrs Connelly and her husband live in Christchurch. He expressed concern about the condition of the orchard. Mrs Connelly travelled to Cromwell the following day. She inspected and found the trees in the orchard to be in a damaged state. Mrs Connelly telephoned Mr Basil Goodman, who had been her point of contact with Molyneux during the developmental phase. He had retired as the chief executive officer of the company in late 2002, but agreed to visit the orchard. Amongst other things, he suggested that Mrs Connelly might consult her lawyer. [14] Mrs Connelly also spoke to Mr Earnscy Weaver who was then the general manager of Molyneux, and Mr Timothy Jones, who was the orchard manager at that time. She conveyed her concerns as to the condition of the orchard. The groupinspected the orchard. Mrs Connelly was left with the impression that Mr Weaver did not think there was a problem. However, she remained concerned. [15] That evening she contacted Mr Alex Smith, a horticultural expert and consultant trading as NZ Horticultural Advisory Service Limited. He suggested she take leaf bud and branch tip samples and bring them back to Christchurch. This was done. I shall refer to the conclusions he reached later. [16] The harvest in early 2004 was a disappointment. An aspect of the present claim is for lost production in this season. I shall evaluate this issue, later. [17] On account of the significant failure of the crop in 2003-04 Mr Smith continued in a consultancy capacity to Benmarroc. His evidence, to which I will refer shortly, will detail the course of events over the next two seasons. At this point it is sufficient to note that the crop failed in each year. [18] By 1 July 2006 Molyneux's management agreement had run its course (three years). The Connellys had lost faith in Molyneux, and had no desire to renew the arrangement. Nor did they have the resources to reinvigorate the orchard. Instead they sold netting and poles, and parts of the sprinkler system, in an endeavour to recoup at least part of their capital expenditure. This raised about $6,000. The orchard is now derelict. [19] In September 2007 Benmarroc filed this proceeding.What was the cause of the successive crop failures?The frost protection method[20] The methodology used to prevent damage to cherry trees may be seen as counter-intuitive. Sprinkler frost protection equipment was installed. Sprinklers are positioned above the trees in an orchard, to enable water to be sprinkled over the trees at a carefully controlled flow.[21] The sprinkler system is activated at a point above 0 oC in order to prevent frost damage to buds and foliage. The water, once sprayed onto the trees, will commence to freeze as the frost bites with the lowering of the temperature. If ice from the sprayed water forms continuously there is a release of energy, termed the latent heat of fusion. This process of ice formation and the consequent generation of latent heat ensures that the temperature of the tissue surface beneath the ice layer remains above freezing point so long as water is continuously applied. [22] Professor Errol Hewett, an expert called by the defence, was the pioneer of frost protection using overhead sprinklers in New Zealand. He commenced his scientific career with the then DSIR at Earnscleugh, Central Otago. This was in the early 1970s when the oil crisis precipitated a need to move from the use of diesel burning frost pots to an overhead sprinkler-based system. This work led to the production of a handbook, which continues to be used to this day. Although the research work was undertaken with reference to apricot trees, the frost protection method proved to be of more general application. [23] In the result the use of overhead frost protection systems in areas such as Central Otago is a well established feature of the stone fruit industry. Provided the design of a sprinkler system is adequate, and the system is operated in accordance with the manufacturer's specifications, it should prevent frost damage to fruit trees and ensure the growth of a commercial crop even in a harsh season.The expert evidence in this case Alex Smith[24] Mr Smith qualified in agricultural science in 1971, worked several years as an advisory officer with the Ministry of Agriculture and Fisheries, and since 1977 he has been a self-employed horticultural consultant and contract lecturer at Lincoln University. He was retained to advise Benmarroc in early December 2003. Initially, he examined cherry fruit samples supplied by Mrs Connelly. He considered these to exhibit damage typical of that caused by frost. The fruits exhibited various degrees of damage to the epidermis and, although the flesh of the fruit was generallyrelatively unaffected, there was internal browning of the ovary and style. This indicated that the cherry seeds, or ovule, being the most frost susceptible tissue, was damaged, with the result that the seed would not develop and the fruit itself would be unable to ripen. Instead, the fruits would perish and fall from the tree. [25] In order to confirm that the damage was due to frost, Mr Smith forwarded samples of the damaged fruit to a pathologist for testing for the presence of disease. Pseudomonas syringae was found to be present, but no other pathogen was identified. This is the bacteria which causes stone fruit blast. [26] On 22 December 2003 Mr Smith inspected the Benmarroc orchard. He concluded that the development of the orchard had generally been good, save for frost damage which was present throughout the orchard to varying degrees. Mr Smith considered that the frost damage was obvious and from this point his investigative work was confined to the elimination of other possible causes. [27] In the winter of 2004 Mr Smith engaged the services of an agricultural engineer, Mr Bill Allison, to carry out tests on the Benmarroc frost protection system. Although there were improvements which could be made to the system, essentially it had the capacity to protect against frost, provided the system was operated correctly. Also in the winter of 2004 Molyneux installed temperature data loggers in the orchard. These were housed 1.5 metres above ground level and provided a record of temperature at 15 minute intervals. [28] On 4 October 2004 Mr Smith inspected the orchard. Again, he considered that frost damage was evident. No frost protection measures had been taken to that point. Although upon visual examination Mr Smith considered that the damage was confined to about 30% of the flowers, upon using a microscope to examine samples he found that the damage affected about 70% of the flower set. The incidence of blast in the 2004 season was contained. As in the previous year Mr Smith concluded that the commercial crop failed on account of the early frost damage to the trees. Such damage was sustained before the frost protection system was deployed.[29] In 2005 Mr Smith visited Benmarroc orchard in late September and early October. He considered that the trees were healthy, and that flowers and buds were developing well. However, on five nights between 5 and 16 October there were frosts, and on a subsequent visit in late October Mr Smith, accompanied by Mrs Connelly, found that the trees were suffering from leaf burn, tip burn and that more than 50% of the flowers were damaged with blackening evident in the ovary area. In light of discussions he had with representatives of Molyneux, Mr Smith formed the opinion that deployment of the frost protection system had been delayed, with the result that the orchard sustained extensive frost damage for the third successive year. [30] Mr Smith and Mrs Connelly also inspected another cherry orchard near Earnscleugh in order to compare the health of the trees on that block with those on the Benmarroc block. The Earnscleugh orchard had been developed at much the same time as Benmarroc. They considered that the trees in the other orchard were in good health, whereas the Benmarroc trees were stressed. Mrs Connelly consulted her solicitor, Mr Darryl Fletcher in Alexandra. Subsequently she spoke to Mr Timothy Jones, the then manager of Molyneux, and commented to him that there was "no crop". He responded that there were issues, but that other cherry growers in the region had similar problems. [31] On 16 December 2005 Mr Smith and Mrs Connelly surveyed all the trees at Benmarroc and concluded that the great majority were not salvageable. In Mr Smith's assessment over 75% of the trees were dead or dying. Funds permitting, the better course was to remove the trees and replant with fresh stock. Mr Smith considered that the damage was the "expected cumulative result of repeated frost damage over the prior three seasons".Earnscy Weaver and Timothy Jones[32] Mr Weaver was the general manager of Molyneux from September 2002 to September 2004, and a consultant thereafter. He has considerable experience in the commercial cherry industry in Central Otago. Mr Jones became the general manager in September 2004 and remains in this position. He holds a diploma of horticulture and also has considerable experience in the industry.[33] Throughout the period relevant to this proceeding Molyneux managed 12 cherry orchards in Central Otago, some on its own account and some for independent owners as in the case of Benmarroc. Protection of the orchards from frost in the spring of each season was an integral part of the management function. [34] An automatic temperature sensor and alarm system was situated on one orchard considered by Molyneux to be the coldest in the area. If the temperature dropped sufficiently to trigger the alarm, the general manager would receive a warning call to his cellphone. It was then his responsibility to call out Molyneux staff. [35] Staff members would drive to the orchard(s) under their management. Their vehicles were fitted with accurate ambient temperature gauges. Following an onsite assessment at each orchard, and consultation by portable radio, the field staff would determine whether the drop in temperature posed a frost risk and, if so, the overhead sprinkler systems would be activated. Pumps, valves and operating pressures would be checked. It was also normal practice to drive through the orchard and check by visual inspection that the sprinklers were in operation. [36] In 2003 the Benmarroc frost protection system was deployed on nine nights. These were in mid-October and the second half of November. In December Messrs Weaver and Jones inspected the orchard with Mr Smith. They did not, however, accept the view that the frost protection system had failed, with the result that the trees had suffered extensive frost damage leading to an almost complete failure of the crop. [37] Rather the effect of their evidence was that the eight frost events necessitated a considerable application of water at Benmarroc, that parts of the orchard sit on a "pan" resulting in poor drainage of surface water and that, in the result, the trees suffered "water logging". This compromised their health and gave rise to a set of circumstances where bacterial blast seriously affected the trees. This was probably exacerbated by their youth, which rendered them more susceptible to the disease.[38] In large measure this evaluation reflected the views of Professor Gregory Lang of the Michigan State University who was resident at Clyde for six months from October 2003. He was on sabbatical leave and working at a HortResearch centre. He visited Benmarroc sometime in December 2003 and walked through the orchard. On 15 May 2006 Professor Lang provided a letter to Molyneux which included this:... upon seeing the symptoms in the Benmarroc block (the soil of which appeared to be still quite saturated when I visited), it was my opinion that the spur/fruit/leaf damage we were observing in December was most likely the culmination of a "perfect storm" of bacterial blast infection brought on by a unique combination of excessively wet, cold soils and repeated wetting of the tender young shoots, foliage, and fruits during an extended period of frost-fighting events. All of these factors favour rapid proliferation of bacterial blast populations on plant tissues that are in a somewhat "stressed" situation due to low root activity – such conditions are actually more conducive to growth of Pseudomonas syringae than to growth and normal metabolism of plant tissues. I believe that Earnscy subsequently had tissue samples taken from the damaged trees to test for Pseudomonas and, indeed, these came back positive.[39] In the end result Molyneux ascribed the loss of a commercial return from the crop in 2003-04 to bacterial blast infection. It did not accept Mr Smith's view that the blast problem was a sequel to extensive frost damage. As Mr Weaver said in evidence, "we advised the Connellys that the trees would grow through and survive to be in a position to produce a commercial crop in following seasons". [40] In 2004 Molyneux changed its frost protection protocol to the extent that the commencement temperature for frost fighting was lowered in an endeavour to limit water application via the overhead sprinkler system. The change was termed a 90/10 strategy. A 10% loss of the crop to frost damage would be tolerated in order to limit the application of water to the orchard. [41] In the result the first frost of the season (20/21 September 2004) occurred without the frost protection system being activated. The temperature did not reach the lowered commencement point applied in terms of the 90/10 strategy. The loss to frost was greater than expected, being substantially more than 10% in relation to the Sweetheart variety, although a much lesser loss in relation to other varieties. Molyneux disagreed with Mr Smith's assessment of a 60%-70% bud kill. Hence, theConnellys were advised that, despite the frost damage, the trees were carrying more than enough viable flowers to produce a commercial crop as per the budget. [42] There was no damage from bacterial blast that season. However, unseasonal and high pre-harvest rainfall destroyed the commercial viability of the crop. Nothing was harvested that season. This was described by the Molyneux witnesses as a disaster which affected cherry growers all over the region. [43] In 2005 there were six frost events, which occasioned the need to apply extensive amounts of water to prevent frost damage. By early October Benmarroc was again affected by bacterial blast infection. By the end of that month Molyneux advised the Connellys that the trees would not produce a commercial export crop. It was considered uneconomic to harvest any fruit that year. As in the 2003-04 season, the crop failure was attributed to bacterial blast infection, which proliferated following the heavy application of water required in the course of protection against heavy frosts.Professor Errol Hewett[44] Professor Hewett holds a doctorate in plant physiology and is an acknowledged horticultural expert, including in relation to the protection of stone fruit from frost damage. He worked for the DSIR from 1973 to 1986 and thereafter was a professor of horticultural science at Massey University until 2001 (and an Ameritus professor since then). Since 2001 Professor Hewett has worked as a private consultant to the horticultural industry in New Zealand and overseas. [45] Professor Hewett was engaged by Molyneux soon after this proceeding was filed. He reviewed the frost protection history in each of the relevant seasons. In 2003 frost protection was undertaken at Benmarroc on nine nights in mid-October and during November. The sprinklers were operated for 77 hours and should have applied about 330 millimetres of water over that time. [46] In 2004 there were only three frost events, and the sprinklers were deployed for 25 hours applying about 100 millimetres of water. In the 2005 season there weresix frosts and the sprinklers operated for 40 hours (between 19 September and 16 October) and applied about 170 millimetres of water. Professor Hewett considered that all of the frosts over the three year period were manageable; that is the Benmarroc frost protection system was capable of providing protection against frost damage if operated according to specification. [47] Having reviewed the materials gathered in the course of the proceeding, Professor Hewett considered that the likely cause of the crop failures was a "perfect storm" of events in 2003/04 and 2005/06, in that the application of water by the frost protection sprinklers led to the orchard being waterlogged, the trees became stressed and bacterial blast so compromised the crop as to render it commercially unviable. In the middle season (2004/05) he concluded that "inclement weather at harvest time resulted in soft fruit that was prone to infection and of very limited market value", being a problem across the district in what proved to be a very difficult harvest year. [48] Professor Hewett was also critical of the adequacy of Mr Smith's investigations and conclusions. He critiqued aspects of the contemporaneous reports which were provided to the Connellys, and also aspects of the evidence given by Mr Smith at trial. For example Professor Hewett noted that Mr Smith mentioned in his evidence that in each of the relevant seasons he looked at other orchards in the area for comparison purposes "but he does not say which cherry tree varieties he observed, nor does he indicate the location or micro climate of these orchards, so it is not possible to make a useful comparison of these orchards with Benmarroc orchard that is purported to be the coldest in the area".The conflict between experts[49] This case is characterised by a stark conflict of expert evidence. It was also a case where the opportunity to see and hear the witnesses was of considerable assistance. In relation to the central issue, whether Benmarroc has established that the crop failures were caused by frost damage to the trees, I have reached a clear view. I prefer the evidence of Mr Smith to that of the Molyneux witnesses and Professor Hewett. Various aspects have prompted that conclusion.[50] Mr Smith said that the presence of frost damage to the trees was obvious to the naked eye when he first inspected the trees in December 2003, and subsequently in the 2004 and 2005 seasons. He described, and explained, both the external and internal damage to the cherry flowers, as well as the damage to other parts of the tree foliage. In light of this observable frost damage, his approach thereafter was to examine and exclude other possible causes. I shall refer to these aspects shortly. [51] Professor Hewett, by contrast, did not have the opportunity to inspect the orchard at the times when damage was first observable. I consider this placed him at a considerable disadvantage. When Mr Weaver was asked how it could be that Mr Smith wrongly attributed the condition of the trees to frost damage rather than blast infection in December 2003, he said that he (Mr Smith) must have completely misread the situation. This impressed me as an unlikely mistake on the part of someone of Mr Smith's experience and competence. [52] Secondly, Mr Smith observed and described a pattern of damage to the trees, at least at the time of the December 2003 inspection. He found that fruits within approximately two metres of each frost protection sprinkler were largely undamaged, while the fruit on more distant trees was severely damaged and would never ripen. In percentage terms he calculated that within the two metre radius the fruit was 85% sound, whereas fruit on more distant trees was about 15% sound. Leaf damage also reflected this pattern. [53] Mr Smith regarded this observation as most unusual. The only explanation he could think of was that the sprinklers provided sufficient water for frost protection purposes within the two metre radius, but not beyond it. All in all he concluded that the pattern of damage indicated that the frost protection system had not performed properly, although the cause of the system failure was not immediately obvious. [54] When cross-examined as to this aspect Professor Hewett ultimately accepted that "perhaps in part" the pattern of damage undermined his opinion that bacterial blast was the primary cause of the crop failures in at least the first season.[55] Thirdly, it seemed to be common ground that for bacterial blast to be the primary cause of damage to the trees it was necessary for them to be under stress and therefore susceptible to a disease. Professor Hewett described Pseudomonas syringae as endemic and ubiquitous in the Central Otago region. The pathogen will infect stone fruit tissues which are damaged or stressed. His evidence continued that in 2003 and 2005 the Benmarroc orchard experienced soils which remained very wet and cold for an extended period because of the length of time that water was sprinkled in the course of frost fighting. This, he said, "undoubtedly reduced the metabolic activity of roots at a time when shoot growth was vigorous and this would put trees under stress, particularly for nutrient uptake and production of essential root produced plant growth regulators". [56] Mr Smith, however, examined the root systems in a sample of the affected trees and also tested the soil conditions. He also took soil samples for nutrient testing. The tests indicated that the nutrient status of the soil was good. [57] The roots themselves were found to be healthy and vigorous, with no sign which Mr Smith could find of wet feet or root death through water logging. [58] He also investigated the drainage of the soil at Benmarroc digging to a depth of 1.2 metres at 20 sites. He did not find a pan which impeded drainage. Nor was there evidence of "fines" within the soil which had been washed down so as to form an impediment to free drainage of the soil. By the use of a system which focuses upon the colours of soil particles to determine the extent of drainage, he concluded that the soil remained free draining. [59] Mr Smith also said that these findings were consistent with his visual observations of the orchard. He witnessed the frost protection system in operation when it was being tested, and also visited the orchard in the course of each of the frost protection seasons. He did not observe a problem in relation to water logged soil. This was contrary to the evidence of Mr Jones who spoke of water lying between the rows which necessitated wearing gumboots for many hours (up to five hours) after a prolonged frost fighting event. Whether this was the case in both 2003and also 2005 (the seasons when blast infection affected the orchard to a major degree) was not explained. [60] In 2004 Molyneux "ripped" between the rows of the Benmarroc orchard. This is the acknowledged procedure to maintain free drainage of soil. Between the rows of an orchard soil can become compacted from the transit of machinery, and also soil fines can gather at a level so as to impede free drainage. Experience has shown that if soil is ripped to a depth of about a metre free drainage is restored. [61] I much prefer the evidence of Mr Smith concerning the question of soil drainage. As Professor Hewett pointed out, the greatest application of water during a frost protection season was in 2003, when about 330 millimetres of water was applied. This was almost twice the amount applied in 2005. If, as Molyneux suggests, the Benmarroc orchard was water logged as a result of frost fighting, this would have been most evident in 2003. Yet, Mr Smith looked for root damage and could find none. He also tested the soil at 20 sites, and concluded there was no drainage issue. Although this testing was undertaken in December 2003, and therefore after frost fighting had concluded, I still regard it as highly persuasive evidence as to the soil condition. [62] I am also influenced by the evidence of Mr Fergus Mitchell. He is a retired orchardist of over 40 years' experience in the Cromwell area. He gave evidence for Benmarroc in relation to two matters. He observed Benmarroc, initially on a drive past basis, noticed what he believed to be frost damage in 2003 and in the two subsequent years. Mr Stowell (Mrs Connelly's father) asked him to carry out a bud count on one occasion and he visited the orchard and obtained a count which confirmed his view that the trees had suffered bad frost damage. [63] Mr Mitchell also gave evidence concerning the soil condition. In the 1960s he worked for a farmer who grew lucerne on the Benmarroc land. His experience was that the soil was very porous, to the point where a border dyke irrigation system was necessary in order to secure a good lucerne crop. This evidence was consistent with that of Mr Smith, who relied upon the soil maps for the area, as well as the soil tests he conducted in December 2003.[64] The final factor is my assessment of Mr Smith as a witness. In light of his evidence I am satisfied that the inquiries he conducted at Benmarroc were thorough, if not meticulous, and his evidence was equally careful and measured. [65] For these reasons I am satisfied that frost damage was the essential cause of the damage to the Benmarroc trees, at least in 2003 and 2005. I find that inadequate frost protection measures in the spring of each year occasioned extensive frost damage to the orchard, which caused stress to the trees and in turn led to the spread of the blast pathogen. It remains, however, to consider the 2004 season which, unlike the other two years, was not marked by damage caused by blast. Mr Smith considered that the crop failure in this season was attributable to a failure to deploy the frost protection system in late September resulting in frost damage to about 70% of the flowers across the orchard. [66] Molyneux, however, maintained that any frost damage from later deployment of the frost protection system was much less than 70%, that a sufficient flower set for a commercial harvest existed, but that pre-harvest rainfall destroyed the commercial viability of the crop. Mr Weaver, for example, said:A viable commercial crop remained on the trees up to the 2004/05 harvest time. Unfortunately, pre-harvest rainfall destroyed the commercial viability of the crop. This was a disaster suffered by cherry growers all over the region.Mr Jones adopted this description in his evidence. [67] The paucity of the evidence given by Molyneux in relation to this aspect I found most surprising. The above excerpt from Mr Weaver's account comprises assertion rather than evidence. No particulars were given concerning the timing and extent of the pre-harvest rainfall events which were said to have ruined the crop. Professor Hewett commented that he had been "informed that the harvest season was abnormally wet, with fruit quality severely compromised by the wet weather", but he too did not refer to the concrete evidence supportive of these observations. [68] Nor, was any evidence adduced in support of the contention that other cherry growers in Central Otago suffered total, or significant, crop losses on account of thepre-harvest rainfall. Molyneux, I infer, was uniquely placed to provide evidence of this nature. It managed 12 cherry orchards in the area, and its packing company handled 25%-35% of the cherries exported from New Zealand in the previous 10 year period. Yet, no statistical evidence was adduced concerning cherry production in 2004/05, let alone evidence to substantiate that some growers sustained losses similar to those of Benmarroc. [69] On balance, I am of the view that the evidence of frost damage leading to the loss of the crop given by Mr Smith, is to be preferred. He said that upon microscopic examination of samples from Benmarroc he found about 70% of the flowers had sustained frost damage. He provided photographic evidence of this. He also observed other crops of cherries in the district, which had been successfully protected from spring frosts in 2004. [70] This finding raises the need to confront two sub-issues. Messrs Weaver and Jones gave evidence of a meeting in Christchurch on 9 October 2004 at Mr Smith's home. They said that at this meeting Mrs Connelly and/or Mr Smith agreed to the 90/10 frost fighting strategy (see [40]). Neither Mrs Connelly nor Mr Smith had any recollection of this. Mr Smith recalled that some research information from the United States of America was referred to, but he was clear that a 90/10 strategy was not authorised on behalf of Benmarroc. He recalled that the Molyneux representatives insisted the crop remained viable, and this led to a discussion concerning the erection of bird netting. [71] I do not consider it is necessary to resolve this conflict. The fact is that Mr Smith visited Benmarroc on 4 October 2004. It was then that he discovered frost damage affecting up to 70% of the flowers. It follows, in my view, that any "agreement" reached on 9 October (if there was one) was of no moment. The damage had already occurred as a result of the frosts in late September. An alleged agreement as to a management method or technique cannot be given retrospective effect.[72] Secondly, Molyneux contended that its management oversight of Benmarroc was detrimentally curtailed by a "stopwork" notice from Mr Smith on 5 October 2004. This was a letter to Mr Jones which said this:There is considerable frost damage of the flower buds on this orchard. I hereby, on the authority of Mr & Mrs Connelly, instruct Molyneux Management to cease all work on the erection of bird netting, forthwith. This instruction includes any other work which is not necessary for the good health of the trees. This order to remain in place until revoked in writing by myself or the owners. The damage occurred over a week ago.[73] I accept the plaintiff's submission that this was not a stopwork notice, as Molyneux contended. It was an instruction limited to the erection of bird netting and other non-essential work. Unsurprisingly, it reflected Mr Smith's assessment there was not a viable crop to manage. I also note that in a further letter dated 10 October Mr Smith recorded the content of a phone discussion he had had with Mr Jones the previous night, namely that frost protection was to continue and only the erection of bird nets was to be postponed. If anything, this aspect provides corroboration of Mr Smith's evidence that by early October 2004 he had already reached the view that the crop was not commercially viable on account of previous frost damage.Some other themes[74] Molyneux's case raised a number of other themes which I have not considered to this point. [75] The management agreement dated 1 February 2004 (see [8]) was not signed by Mrs Connelly on behalf of Benmarroc until late 2004. On 22 October Molyneux wrote in an endeavour to cancel the management relationship, and on 22 November Mr Jones wrote again setting a deadline of 15 December 2004 for Benmarroc to sign the agreement. At some point the impasse was resolved. However, any delay on Benmarroc's part was not important in terms of performance of the managerial function. As Mr Jones acknowledged in evidence, Molyneux elected to continue with management of the orchard during the period the agreement was unsigned.[76] Messrs Weaver and Jones referred to the use of dew point temperature as an additional guide to the deployment of frost protection systems. This was an issue not considered by Mr Smith. Professor Hewett explained that dew point temperature is the temperature at which air can no longer hold all of its water vapour and some of the vapour must condense into liquid water. Despite the suggestion raised by the Molyneux witnesses that dew point temperature was relevant to the deployment of frost protection systems in Central Otago in 2003-2005, I doubt that this was the case. [77] Professor Hewett explained that dew point measurements were not in his view relevant for New Zealand growers, whereas in continental Northern America stone fruit growers may need to take dew point temperature into account because of their particular climatic conditions. To my mind this aspect was in the nature of an afterthought, and not something of direct relevance to the issues in this case. [78] The defendant's witnesses also raised whether the Sweetheart cherry variety was more susceptible to frost damage than more traditional varieties, and whether this knowledge was available throughout the period relevant to this case. Hence, the contention continued, the loss of the Sweetheart crop, if found to be due to frost damage, may not indicate negligent management on Molyneux's part. Mr Parker submitted that the evidence in this case pointed to an increased understanding and awareness of the new cultivar as one particularly susceptible to frost damage, but that this knowledge was only acquired subsequent to the 2005/06 season. [79] It may be that Sweetheart is a more frost sensitive cherry than the more longstanding varieties grown in New Zealand. But, I do not consider that the evidence as to the greater susceptibility of the cultivar was sufficient to show that it must be placed in a separate category. There was no more than a suggestion of this. It must also be remembered that this is a case characterised by the total loss of Benmarroc's crop on three successive seasons. This indicates management failures which went to the core of proper orchard management, as opposed to an inadvertent failure attributable to an absence of knowledge concerning a new cultivar.Was Molyneux in breach of its duty of care?Ordinary negligence[80] This question must be approached on two levels. The first issue is whether "ordinary" negligence is established. That is, does the finding that frost damage caused the loss of the crop in three seasons also establish that Molyneux negligently managed the orchard? I am satisfied that this is the case. [81] It is common ground that the frost protection system was adequate to safeguard the trees. The evidence of Professor Hewett in particular showed that the frost events in 2003, 2004 and 2005 were not exceptional. Exactly why the system failed to provide the necessary level of protection is not established. Mr Smith considered various causes of failure. These included that the frost protection system was run in tandem with the orchard and shelter belt irrigation system, that the system was turned on too late, that the system was not maintained in operation for the correct time period or that water pressure at the sprinkler heads was inadequate to provide effective ongoing coverage of the orchard. [82] To my mind the first possibility was excluded by the evidence of Messrs Weaver and Jones. They pointed out that water for the frost protection system was drawn from two bores, only one of which also serviced the irrigation system. Hence, if this was the cause of the failure, only half of the orchard would have sustained frost damage. In any event, both witnesses were adamant that visual surveillance of the orchard would have ensured that the sprinkler and irrigation systems were not operating contemporaneously. [83] By contrast, the other possibilities advanced by Mr Smith do not appear to me to have been similarly excluded. Nor, however, has a specific cause of the system failure then identified. Nonetheless, I am satisfied that the frost protection system could not have functioned to a reasonable standard and that Molyneux must bear responsibility for this ongoing failure. It is common ground that a properly managed system would have prevented frost damage at Benmarroc in each of the three years.Gross negligence[84] The second issue concerns the interpretation of cl 9(a) of the management agreement. Was Benmarroc's lost production "caused by gross negligence" on the part of Molyneux? Counsel could not locate an authority as to the meaning of gross negligence used in a comparable context. [85] The case of "The Ardent" 1 contains a discussion of the meaning of the phrase gross negligence used in the context of agreements which governed the relationship between the purchasers of an oil tanker (the "Ardent") and advisors who provided assistance to parties interested in acquiring a sea-going vessel. The relevant agreement made the advisors not tortiously liable except for damages resulting from "bad faith, gross negligence or wilful misconduct" on their part. In relation to gross negligence Mance J said this at 586:"Gross" negligence is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence. But, as a matter of ordinary language and general impression, the concept of gross negligence seems to me capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious disregard of or indifference to an obvious risk. The difference in the way in which the concepts [in the agreement] are expressed appears to me entirely consistent with the phrase receiving its ordinary meaning and embracing both situations.[86] Immediately following these observations the Judge referred to the criminal law, where gross negligence is required for the commission of the offence of manslaughter. By reference to R v Adomako 2 Mance J noted that a finding of gross negligence necessarily entailed the assessment of a question of degree and expressed the opinion that any attempt to further define the concept was not likely to be helpful. I think that this is so. It is of some interest that in New Zealand the "major departure test" necessary for criminal liability under s150A of the Crimes Act 1961 has similarly been commonly equated with gross negligence. In that context, as in the present one, it is in the end a question of fact and degree whether gross negligence is established on the evidence.1 "The Ardent" (1997) 2 Lloyd's Rep 5472 R v Adomako (1995) 1 AC 171 (HL).[87] Mr Tobin submitted that Benmarroc had established gross negligence in this instance. In essence, he stressed the cumulative failure over three years to adequately guard against frost damage to the orchard, which ultimately resulted in the loss of most of the trees. Mr Parker, however, disputed that gross negligence was made out. [88] I am not satisfied that this was a case of gross negligence. The history of events to which I have already referred does not suggest to me that the Molyneux personnel were indifferent to the plight of the orchard. Nor do I think they acted with serious disregard in relation to the risk of frost damage. Rather, this was a case of negligent misjudgement. When the trees suffered from bacterial blast in 2003- 2004 this was put down to a "perfect storm" of events which enabled the pathogen to flourish. Mr Smith's view that frost damage had stressed the trees was rejected on Molyneux's part. [89] In the spring of 2004 Molyneux moved to a new 90/10 strategy, but again frost damage extensively affected the crop. This represented a negligent failure by Molyneux to protect the orchard against frost damage, but not I think anything approaching a serious disregard of the risk - much less an indifference to that risk. Similarly, in 2005 Molyneux continued on a similar path, but again it failed to ensure that the frost protection system functioned at a level sufficient to guard against frost damage. Particularly in this year, given the experience of the previous two seasons, the level of failure was high, but still did not in my estimation amount to gross negligence. [90] For these reasons I find that Benmarroc cannot recover damages for lost production. The contractual exemption clause avails Molyneux in relation to this head of damages.The quantum of damagesThe amount of the claim[91] Three statements of claim were filed. The first claimed damages of $1,245,000 for lost production, damage to trees and wasted expenditure. The secondsought damages of $648,000 under the same three heads. The third and final statement of claim claimed the amount of $921,326 made up as follows: Loss of production (to 2005-06) $144,640 Replacement of trees $133,706 Wasted expenditure $371,329 Loss of production (2006/07, 2007/08 seasons) $271,651 The earlier iterations of the claim had not included a claim for future lost production. In any event, in light of the gross negligence finding the focus is upon the remaining aspects of the claim – tree replacement and wasted expenditure.Failure to mitigate loss[92] Mr Parker cross-examined Mrs Connelly concerning an offer which she and her husband received in about August 2005 for the land. The offer was for about $4m. Further cross-examination identified that the land is close to Cromwell township, was originally zoned Rural Residential, but that following rezoning it has considerable potential for residential subdivision. In re-examination it emerged that the offer to purchase was conditional and that the numerous conditions were not acceptable to the Connellys. Despite the subdivisional potential of the land, it remains in Benmarroc's ownership to the present time. [93] Mr Parker argued in closing submissions that, if it was found that the orchard failed on account of frost damage, Benmarroc should not receive an award of damages on account of a failure to mitigate its losses by subdividing the land, or selling it to a developer for subdivision. If there was a breach of contract on Molyneux's part, its consequence was that Benmarroc was unable to re-establish the orchard venture, but this opened the door to realising the subdivisional potential of the land. Hence, Mr Parker submitted, with proper steps in mitigation taken, no recoverable loss would have eventuated. [94] Reliance was placed upon the decision in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd 3. The3 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL).defendant supplied turbines to the plaintiff which, in breach of contract, were unfit for purpose. The plaintiff replaced the turbines with others which proved to be far more efficient, with the result that operating costs decreased and profits increased. The plaintiff sued for the cost of the substitute turbines. The House of Lords held that because the resultant savings exceeded the cost of the new turbines, the plaintiff had not in the end result sustained damage. Mr Parker submitted that the principle applied in British Westinghouse was of equal application in the present case. [95] I do not accept this. In the first place no savings have been made by the Connellys following the failure of the orchard. At most, there is the prospect of gain from the sale or development of the land. [96] But more importantly, this case is different in kind to British Westinghouse. Another English case demonstrates the point. It is Hussey v Eels 4 . The plaintiffs purchased a house in reliance upon a representation that the property had not experienced subsidence. In fact it had, and work to the house to stabilise its foundations would have cost £17,000. In due course, however, the plaintiffs obtained planning permission to demolish the house and subdivide the land into two building sites. They profitably undertook a scheme of subdivision. Nonetheless action was taken against the vendor for misrepresentation. [97] At first instance the Judge held that the plaintiffs' gains arising from the subdivision wiped out their initial loss. The Court of Appeal, however, held that the plaintiffs were entitled to damages of £17,000 being the diminution in the value of the property at the time of purchase on account of the risk of subsidence. The Court of Appeal posed the question at 241 "Did the negligence which caused the damage also cause the profit – if profit there was?". This question was answered in the negative, and Mustill LJ added this:... the reality of the situation is that the plaintiffs bought the house to live in, and did live in it for a substantial period. It was only after two years that the possibility of selling the land and moving elsewhere was explored, and six months later still that this possibility came to fruition. It seems to me that when the plaintiffs unlocked the development value of their land they did so for their own benefit, and not as part of a continuous transaction of which the purchase of the land and bungalow was the inception. (emphasis added)4 Hussey v Eels (1990) 2 QB 227 (CA).[98] I consider this reasoning demonstrates the fallacy of the argument advanced in the present case. There is no sufficient nexus between the breach and the gains (or prospective gains) enjoyed by the plaintiff – as was the case in British Westinghouse. Put another way, the gain or prospective gain was not part of a continuous transaction which flowed from the original contractual arrangements. For these reasons I reject the argument.Replacement of trees[99] The claim was particularised in para 26 of the third statement of claim as follows: Preparation of ground $35,217.00 Purchase of replacement trees $40,248.00 Planting costs $8,385.00 Irrigation adjustment/repair $12,000.00 Incidentals $5,000.00 Establishment care costs $18,000.00 GST $14,856.25 __________ $133,706.00 __________ In giving evidence Mr Smith said that he established these figures at the request of Mrs Connelly. The costs represented actual calculated figures for the purchase of substitute trees and chemicals, plus contractors' rates for planting, repairs and care of the new trees. There was no challenge to this analysis in cross-examination. [100] To provide a cross check I have endeavoured to compare Mr Smith's figures against those of Molyneux as set out in a development budget which was provided to the Connellys before development of Benmarroc commenced in 2000. A number of differences emerged. For example, a significant initial development cost was $17,000 to establish an under-tree irrigation system, followed by a further capital outlay of $37,300 to establish the frost protection system and to commission the under-tree irrigation system in the first year of production. Mr Smith's budget does not need to include this expenditure, save for $12,000 allowed for irrigationadjustments and repairs (a point to which I will return shortly). On the other hand, his calculation includes $35,217 for ground preparation – which no doubt includes removal of the old frost damaged trees. This figure is very large by comparison to the original Molyneux figure for land preparation of $2,000. [101] On the other hand, Mrs Connelly gave evidence concerning the actual development costs paid to 31 March 2003 being a sum of about $125,000 in total. This figure is close to the amount assessed by Mr Smith for re-establishment of the orchard at 2010 costs and, therefore, provides some comfort in relation to the reasonableness of the amounts claimed. [102] But, I consider that there is a problem with the approach adopted by Mr Smith. The amounts claimed appear to represent the sum required to reinstate the orchard to a fit and proper condition, including the replacement of the tree stock. To my mind the plaintiff cannot maintain a claim assessed on this basis. Benmarroc is only entitled to recover reinstatement costs attributable to the frost damage. It is important to recognise that from early 2006 the orchard was effectively abandoned. In the course of her evidence Mrs Connelly described the present condition of the orchard as "derelict". Damages, in my view, must reflect the expenditure required to reinstate the orchard in the aftermath of the frost damage it had suffered in three successive seasons – not the expenditure required to reinstate it from a subsequent derelict condition. Put another way, Molyneux is not responsible for deterioration to the orchard which occurred from early 2006 on account of neglect. [103] Returning to the amounts claimed I consider that the sum of $12,000 for irrigation adjustments and repairs must be disallowed, and likewise the claim for incidental expenses of $5,000. These amounts have no apparent connection with frost damage. I also moderate the claim for ground preparation to $25,000, since this figure seems to be very high for the work necessary to remove the old stock and ready the ground for replanting. [104] Hence, the reduced amount of the claim is $91,633, before GST.Wasted expenditure[105] This claim, for $371,329.61, was made up of development and maintenance costs incurred by Benmarroc to 31 March 2006 as follows:To 31.03.01 87,707.44 To 31.03.02 10,367.89 To 31.03.03 27,213.87 To 31.03.04 99,439.67 To 31.03.05 114,101.75 To 31.03.06 32,499.09 __________ $371,329.71 __________[106] Mrs Connelly gave evidence in support of this head of the claim. The effect of her evidence was that Benmarroc paid Molyneux over $370,000 in development and management costs to the end of the 2005-06 season. She produced a chronological bundle of invoices in support of the claim. [107] Again, there was no direct challenge to these figures in cross-examination, nor through evidence adduced in response to them. However, in my view the claim is overstated. Not all of the costs met by Benmarroc to March 2006 was wasted expenditure. An apportionment is required to identify expenditure incurred in order to plant and tend for the trees until they were ultimately lost on account of frost damage. But expenditure incurred to establish the shelter belt system, the under-tree irrigation system and perhaps the frost protection system, was not wasted. Both the capital and labour cost incurred in the development of these structural elements of the orchard was not lost or wasted. These elements remained intact as at the beginning of 2006. [108] I have considered the bundle of invoices produced by Mrs Connelly in the course of her evidence. However, upon reflection, I do not consider that it is appropriate for me to endeavour to make the necessary apportionment between wasted expenditure on the one hand, and expenditure on structural elements which were not affected by frost damage on the other. Instead, I reserve this aspect forfurther consideration. I anticipate that counsel should be able to analyse the invoices and reach agreement as to the required apportionment. If not, there may be a need for further evidence and argument. This aspect is reserved for further consideration.GST[109] Is GST payable in respect of the $91,633 award for tree replacement? No submissions were made in relation to this point. I refer counsel to the discussions contained in Montgomery v Dobsons Refrigeration & Electrical (1992) Ltd 5at 897 and Gunton & Anor v Aviation Classics Ltd 6 at [199]-[204]. These cases demonstrate that whether GST is payable on an award of damages depends on the character of the payment and, in addition, the particular circumstances of the recipient. [110] For example in Gunton the plaintiff recovered costs which he had to meet as a result of the defendant's breach in supplying a helicopter which was in need of repair. In the event, GST was not payable in relation to the damages, because, although Mr Gunton had paid GST on the repair bill, he had also received an input credit of like amount as his farming business was registered for GST purposes. On the other hand, as Chambers J noted at [203], GST would have been payable in damages if the recipient had paid GST but did not receive a GST input credit. [111] I am not aware whether Benmarroc was GST registered; nor do I know whether reinstatement of the orchard is likely to occur in fact – given the potential to use the land for other purposes. This range of factors illustrates why it would be premature to determine the GST issue at this point. [112] In relation to the wasted expenditure head of damages, GST is not claimed as a separate or add-on component. Nonetheless, there may be a GST issue which requires consideration and resolution. If Benmarroc paid GST on the relevant invoices and received an input credit, then a GST neutral position would result i.e. GST would have been levied and paid, but the payment recovered. In this situation5 Montgomery v Dobsons Refrigeration & Electrical (1992) Ltd [1998] DCR 883.6 Gunton & Anor v Aviation Classics Ltd HC Auckland CIV 2001-404-2424, 20 August 2004.it may be necessary for the GST component to be deducted from the invoices the total of which otherwise makes up the head of damages for wasted expenditure. Accordingly, the issue of GST is reserved. It should be a matter capable of resolution between counsel.Result[113] It is not appropriate to enter judgment at this stage. I also note that the prayer for relief includes a claim for interest. Counsel did not broach this aspect at the hearing in February. [114] My tentative view is that interest is payable on the wasted expenditure figure from, say, 1 January 2006. However, I am doubtful that interest is appropriate in relation to the figure for tree replacement, given that Benmarroc has not been out of pocket for this sum in the meantime. However, this point is also reserved for further consideration. [115] Leave is reserved for counsel to revert to me, as required. Otherwise, I await a memorandum of counsel explaining whether the outstanding aspects are capable of agreement or not.___________________________________________________________________Solicitors: Fletcher & Associates, Alexandra for Plaintiff Michael E Parker, Queenstown for Defendant