GXL ROYALTIES LIMITED V SWIFT ENERGY NEW ZEALAND LIMITED AND ANOR CA CA100/2009

GXL ROYALTIES LIMITED V SWIFT ENERGY NEW ZEALAND LIMITED AND ANOR CA CA100/2009 24 September 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA100/2009 [2009] NZCA 433BETWEEN GXL ROYALTIES LIMITED Appellant AND SWIFT ENERGY NEW ZEALAND LIMITED First Respondent AND GREYMOUTH GAS KAIMIRO LIMITED, GREYMOUTH GAS PARAHAKI LIMITED, GREYMOUTH GAS TURANGI LIMITED AND GREYMOUTH PETROLEUM TURANGI LIMITED Second Respondents Hearing: 20 August 2009 Court: Glazebrook, Ronald Young and Venning JJ Counsel: A S Olney and M A Corlett for Appellant G M G Joe for First Respondent M D O'Brien and B S Clarke for Second Respondents Judgment: 24 September 2009 at 11.30 amJUDGMENT OF THE COURT A The appeal is allowed. B The appellant is not required to plead to the respondents' allegation that the appellant refused consent to the transfer of Swift's interest in the petroleum permit for collateral reasons. C The second respondents must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Ronald Young J)Introduction and Background[1] GXL Royalties Limited ("GXL") owned a petroleum exploration permit. It sold most of its interest in the permit but retained a royalty interest. The sale provided that GXL's consent was required to any subsequent sale or assignment. Swift Energy New Zealand ("Swift") came to own a significant portion of the exploration permit. Swift sold its interest in the permit to the second respondents ("Greymouth"). GXL refused to consent to that sale. [2] In the agreement between Swift and GXL (the Royalty Deed), the relevant consent provision (cl 7.2(a)) allowed Sift to sell, assign or transfer its interest if:the Grantor (Swift) obtains the prior consent of the Grantee (GXL), which consent shall not be unreasonably withheld, where it is established that the purchaser, assignee or transferee (Greymouth) has sufficient financial capability to meet the obligations under the Permit and this Deed. [3] GXL said in proceedings before the High Court that the sale from Swift to Greymouth was unlawful, because the sale proceeded without GXL's consent. In its statement of defence and counterclaim however, Greymouth alleged in part that GXL had refused consent from Swift to Greymouth for collateral purposes, unrelated to Greymouth's financial capabilities. GXL refused to plead to this allegation, saying that it has a contractual right to withhold consent unless the financial capability of Greymouth had been established on an objective basis. Accordingly, GXL's motive in withholding consent was irrelevant. [4] Greymouth therefore sought an order in the High Court for more explicit pleadings from GXL requiring it to plead to the allegation of collateral purpose. This raised the question of whether collateral purpose was relevant in terms of the consent required.[5] In the High Court, Dobson J concluded that collateral purpose was potentially relevant, and therefore ordered GXL to plead to that allegation. In reaching that conclusion, he said:[24] One basis open to Greymouth for arguing its defence and counterclaim is to contend that the withholding of consent by GXL was unreasonable in light of what GXL actually had regard to, did, and failed to do, rather than whether the information available to GXL was sufficient to reasonably establish Greymouth's financial capability. In essence, this argument would be that consent was withheld for a "bad" reason, and is therefore unreasonable irrespective of whether, had GXL conducted itself differently, it may have established a "good" reason for withholding consent. [25] Of course, it would be open to GXL to argue that such an approach is wrong, and that the clause requires no more than a finding to the effect that all information available to a party in GXL's position at the requisite time would reasonably have left it with a doubt about Greymouth's financial capability, for the refusal of consent to be held to be reasonable. The immediate point in endeavouring to confine the pleadings as the basis for identifying the scope of contested factual issues is that GXL cannot deny Greymouth the opportunity to present its case on grounds including that just postulated. [26] Further, on the substance of whether the requisite financial capability could be made out, determining whether the information available to GXL about Greymouth could justify reasonable doubts as to its financial capability is likely to involve a complex set of factors. Certainly it is the antithesis of a "bright line" test. In a marginal case where the consenting party might arguably have decided either way, Greymouth may wish to contend that the relative importance of collateral purposes to GXL in fact were the determining influence, and that withholding consent in such circumstances should be treated as unreasonable. [27] In many of the evidentiary contexts that a dispute like this might produce, it is likely that GXL's conduct could be determined solely by reference to objective criteria of what a reasonable party wishing to protect its royalty interest could require by way of information, and whether a notional party in that position ought reasonably to have been satisfied of the adequacy of the assignee party's financial capability on the information provided. However, there may be some circumstances in which the credibility of GXL's explanation on either aspect of this enquiry might be more robustly tested, if the prospect of a collateral purpose for seeking additional information or for refusing consent was also in issue. [28] In a marginal case, the Court may be influenced in assessing the reasonableness of the party withholding consent, by evaluating not only the weight of matters going to the relevant ground (here the financial capability of the proposed assignee to discharge the obligations inherent in the permit and the royalty deed), but also by testing the wider factual context in which the consent has been refused. The WEL Energy decision recognised "rules prohibiting the taking of collateral advantage in relation to consents" ([36]) and the reasoning there extends to the wider contractual context. Without there being any certainty about it, it is not possible at this stage to rule outthe prospect that the change in ownership of GXL and Todd's competing interests in the area of the permit will assume some relevance to that wider contractual context. Mr O'Brien accepted that GXL's status as a competitor could not affect the extent of information reasonably required to be provided to it. However, the competitor status may be raised in support of claims that the extent of information demanded was excessive, part of the explanation being that a noncompetitor would not need it to assess Greymouth's financial capability but a competitor would find it valuable for unrelated purposes. [29] Accordingly, the factual matter of alleged collateral purpose may become relevant at trial on the primary issue of whether GXL has reasonably, or alternatively unreasonably, withheld consent to the assignment[6] GXL has, in response to Dobson J's order, filed amended pleadings denying it had any collateral purpose in refusing consent. In this appeal, GXL challenges Dobson J's conclusion that collateral purpose may be relevant to the resolution of the dispute between it and Greymouth.The parties' submissionsAppellant's submissions[7] The appellant says that cl 7.2(a) identifies a clear test: whether, objectively, Greymouth has established sufficient financial capability. To "establish" this state of affairs it must firstly provide (on an objective assessment) sufficient information on which such an assessment can be made. Secondly, this information must establish Greymouth has sufficient financial capability to meet the financial obligations under the Royalty Deed (also on an objective assessment). [8] The appellant says that whether its action in refusing consent is objectively justifiable will determine the parties' rights. Whether the appellant therefore had any motive for refusing its consent is, the appellant says, irrelevant because the assessment is to be solely objective and based on financial criteria only. [9] In GXL's submission, either:(a) it has been established, on an objective basis, that Greymouth has sufficient financial capability to meet the obligations under the Permit and Royalty Deed, in which case GXL must consent to the assignment– in that situation GXL has no right to withhold consent and its motives are irrelevant; or (b) it has not been established, on an objective basis, that Greymouth has sufficient financial capability to meet the obligations under the Permit and the Royalty Deed – in which case GXL does have a right to withhold consent and its motive for exercising that right is irrelevant.Respondents' submissions[10] The respondents submit that in the circumstances of the present proceeding, it is incorrect to say that the subjective motives of the party exercising a contractual right to withhold consent are irrelevant. What is required is a two-stage inquiry – first, what was the actual reason for GXL refusing consent (a subjective inquiry) and secondly, whether that reason was reasonable (an objective inquiry). [11] The respondents accept that the only valid category for refusal of consent is the ground of financial capability. But the respondents say that if, having carried out the "first stage" subjective inquiry, it is established that the exclusive or dominant purpose of GXL in refusing consent under cl 7.2 was other than on financial grounds, then this is a collateral purpose and the refusal to grant consent would not be valid. In making this submission, Greymouth relies on Woodfall's Law of Landlord and Tenant (looseleaf, 2007) at [11.139]:If the landlord has a good and a bad reason for withholding consent, consent may nevertheless have been reasonably withheld if the good reason is a sufficient reason and is not otherwise vitiated by the bad reason. However, there may be cases where the real reason for refusal is a bad one, and the good reasons are no more than makeweights, or where the bad reason vitiates the good one.[12] The respondents say that a party refusing consent is only entitled to rely on the reasons that were in his or her mind at the time of the refusal, that a refusal for acollateral purpose is always unreasonable, and that a party seeking consent may challenge the veracity of the stated reason. [13] The authorities referred to by the respondents to support their position are primarily lease contract cases. These cases typically involve disputes between landlord and tenant, where the lease contains a clause that a tenant must not assign their interest without consent of the landlord, but where the covenant states that the landlord must not unreasonably refuse that consent. See Lovelock v Margo [1963] 2 QB 786 (CA), Bromley Park Garden Estates Ltd v Moss [1982] 1 WLR 1019 (CA), Tollbench Limited v Plymouth City Council [1988] 1 EGLR 79 (CA) andLouis Vuitton New Zealand Ltd v Prince's Wharf Property Fund Ltd (2005) 5 NZ ConvC 194,073 (HC). The respondents also referred to the commercial contract cases of British Gas Trading Ltd v Eastern Electricity plc [1996] EWCA 2205, andWEL Energy Group Ltd v Electricity Corporation of New Zealand [2001] 2 NZLR 1 (HC). The respondents say British Gas and WEL Energy Group demonstrate "the general approach taken in the lease contract cases being adopted in the context of other commercial contract cases involving issues as to the reasonableness of withholding consent".Supplementary question and discussion[14] The respondents' case, as developed in oral argument before us, was that if the sole or dominant purpose for GXL's refusal of consent was collateral (rather than financial), then refusal was invalid. Greymouth maintained that in those circumstances GXL would be deemed to have consented whether financial capacity was demonstrated or not. [15] At the conclusion of the hearing, we asked the parties' for supplementary submissions on the following question:If it is determined at trial that GXL's stated reason for withholding consent (i.e. inadequate financial capability) was an objectively good reason, is GXL prevented on relying on that good reason if its actual reason for withholding (at the time) was a bad reason (e.g. entirely collateral to financial capability)?[16] Dobson J concluded that the existence of an alleged collateral purpose could become relevant at trial on the primary issue of whether GXL had reasonably or unreasonably refused consent especially if, he thought, it was a close call as to whether the financial conditions had been met. [17] The respondents' submissions in response to this supplementary question may be summarised that, if they establish at trial that collateral purpose was the dominant, or a significant, reason for the refusal of consent then, without financial enquiry of Greymouth, GXL is deemed to have consented to the transfer to Greymouth. Thus, once a "bad" motive for refusing consent is established, consent is deemed to have been given irrespective of the merits of any "good" (in this case financial) reason for refusing consent. Thus, Greymouth's submission is reduced to the proposition that if GXL has refused consent for a collateral reason, GXL is deemed to have consented to the transfer to Greymouth, even if Greymouth cannot meet the financial criteria. [18] Relating this proposition to the landlord/tenant cases on consent is, as the appellant said in its submissions, summed up in the idea that:. the landlord would have to accept a "rogue" as a tenant notwithstanding an express contractual right to refuse consent to an assignment other than to someone of good standing.[19] It is common for a lease contract between landlord and tenant, to contain a clause to the effect that a tenant may not assign the lease without the consent of the landlord but that that consent may not be unreasonably withheld. Similar clauses can be expected in respect of a proposed change of use for the land the subject of the lease. The majority of the landlord/tenant cases referred to by the respondent involve "general" consent provisions. Lovelock v Margo and Bromley Park Garden Estates Ltd v Moss are two such examples. [20] In Lovelock, the tenant wished to assign the lease. The lease contained the "usual covenant" not to assign without consent, that consent not to be unreasonably withheld. The landlord had refused a request from the tenant to assign the lease because she was "not satisfied with the area proposed to be used". Finding for the tenant, Denning LJ said at 790:It seems to me that, when the tenant produced an assignee, a responsible person with good references to which no objection could be taken, the landlord had no good ground for objecting. She put forward a bad ground and she has not shown any other before the court, and, in those circumstances the judge was perfectly justified in holding that consent had been unreasonably withheld and making a declaration accordingly.[21] The relevant provision in Bromley Park was also a "general consent" clause. The lease contained a tenant's covenant not to assign without consent in writing of the landlord. It was accepted at 1023 that, by section 19(1) of the Landlord and Tenant Act 1927, the covenant in the lease was "deemed to be subject – (a) to a proviso to the effect that such licence or consent is not to be unreasonably withheld". [22] Cases involving "general consent" clauses cannot assist the respondents' submission. These clauses are couched in general terms, with the limitation on refusing consent being only that such consent is not to be unreasonably withheld. Where a clause is couched in such general terms, the assessment of whether or not the refusal was reasonable will need to be undertaken in each case. There is no specific criteria which the parties have agreed will be determinative of whether or not consent can be refused. These cases therefore do not concern a landlord's entitlement to refuse consent in reliance on the non-satisfaction of a specifiedcontractual criterion. [23] Some of the clauses in the authorities referred to by the respondents are more specific as to the circumstances in which consent can be withheld. In Pakwood Transport Ltd v Beauchamp Place Ltd (1977) 245 EG 309 (CA), the lease contained a covenant against assignment, "such consent not to be unreasonably withheld in the case of a responsible and respectable assignee". This phrase is similar to the GXL/Greymouth consent clause. [24] The Court in Pakwood confirmed the trial Judge had correctly identified the real reason the landlords had refused consent. They wished to get their premises back so they could increase the rent. The Court confirmed that consent of the assignment was therefore wrongly refused and concluded there were no grounds upon which consent could be lawfully refused. The Court found that the landlords'consent had been unreasonably refused, and consent was required. However there is nothing to suggest that the assignee did not satisfy the "responsible and respectable" criteria, and that consent was enforced notwithstanding. The question for consideration by this Court therefore did not arise in Pakwood. [25] Likewise, in WEL Energy Group. This case involved a hedge contract for wholesale electricity prices between the Electricity Corporation of New Zealand (ECNZ),the generator, and WEL as wholesale purchaser. The contract contained a provision prohibiting the sale of either party's business or undertaking without the consent of the other "such consent not to be unreasonably withheld". The Government announced that it was going to split ECNZ into three separating generating units. It was expected that the split would introduce competition at the generation level and reduce wholesale prices. WEL's position under the hedge contract would therefore have been adversely affected by the split. [26] WEL refused consent to ECNZ's proposed disposition of its undertaking to the three entities. WEL claimed it refused consent because one of the likely and intended consequences of the break-up of ECNZ would be that spot prices would have been reduced permanently. This would increase net payments due from WEL to ECNZ, which would result in substantial losses for WEL. [27] McGechan J said that on the correct interpretation of the consent clause as it related to the undertaking, consent could only be withheld if the proposed transfer posed a risk that damage to creditworthiness of the transferor (ECNZ) would occur. The transferee's creditworthiness was not in doubt – as McGechan J explained at [18]:ECNZ and Government sought to foreclose any such residual creditworthiness problems by provision of indemnity to ECNZ, and a direct Crown Deed Poll guarantee of ECNZ obligations under hedge contracts including of course the hedge contract with WEL. The Crown's credit was viewed as unimpeachable.[28] WEL was not entitled to refuse consent on grounds unrelated to the creditworthiness of ECNZ following transfer. The Crown indemnity to ECNZ removed any justifiable creditworthiness concerns. WEL's reason for refusal wasoutside the scope of the grounds on which consent could be refused. It therefore followed that WEL's consent to assignment was unreasonably withheld. [29] This case does not support the respondents' position. It does not concern a consenting party's entitlement to refuse consent in reliance on the non-satisfaction of a specified contractual criterion. Rather, the proposed transfer did satisfy the specified contractual criteria (ECNZ's creditworthiness following the transfer was not threatened) and therefore WEL was obliged to consent. [30] Winkelmann J's decision in Louis Vuitton Ltd provides a further example of a clause containing specific criteria on which consent could be refused. This case does not assist the respondent. The lessee held a lease in the Ports of Auckland Building, at the entrance to a complex of commercial buildings on Prince's Wharf in Auckland. The lessee's lease was restricted as to use. The lease provided that the consent of the lessor would not unreasonably or arbitrarily be withheld to a proposed change of use that: (a) was not in substantial competition with the business of any other occupant of the property and that might be affected by the use; (b) was reasonably suitable for the premises; and (c) conformed with all town planning provisions. [31] The lessee wanted to assign the lease to a real estate agency, and sought the lessor's consent to that change in use. The lessor refused consent without giving reasons. When reasons were sought, the lessor said that consent had been refused because of the lessor's belief that a real estate agency in the lessee's premises would be in substantial competition with another real estate agency already operating in another building on the wharf. The lessor subsequently conceded that that original reason could not stand (the specified criteria in the contract did not extend to competition with another business outside the property), but presented other reasons why it had refused consent including that it did not wish to have a business (rather than a retail outlet) on the premises that would attract less foot traffic. The landlordsaid the premises were prime retail premises and should be occupied by a quality retailer. [32] Winkelmann J concluded that all the matters which influenced PWP in refusing consent were matters it could properly take into account. PWP's refusal to consent to the change of use was reasonable and not arbitrary. This case involved a refusal to consent being upheld as within the contractual terms quite distinct from the current allegations.Discussion[33] In their submissions both parties proceeded on the basis that cl 7.2, particularly the phrase "shall not be unreasonably withheld", did not extend the scope of the clause into a general consent clause that would enable GXL to decline consent on another basis, even if Greymouth satisfied the financial capability criteria. We do not necessarily agree that the clause limits the consideration of consent in that way. However, given the parties' common approach and, in particular, the appellant's concession that lack of financial capability is the only ground upon which consent could be withheld, it is unnecessary to consider the ambit of the clause further. Once it is accepted that financial capability, objectively assessed, will decide consent then collateral purpose can have no relevance in this case. Even if it could be established that GXL had a collateral (non financial) motive for refusal, the authorities do not support Greymouth's fundamental submission that, in this case, if GXL had collateral reasons to withhold consent it must be deemed to have consented, even if the financial capability test was not met. However, if financial capability is established the consent must be given. [34] We are satisfied, therefore, that whatever (if any) collateral purpose GXL may have had in refusing consent is irrelevant. The questions for trial will be as proposed in [7]. We therefore agree with GXL that Greymouth's pleading was irrelevant and GXL should not have been required to plead to it. As a result, it will not need to be considered at trial what, if any, collateral purpose GXL may or may not have had for refusing consent.[35] In summary, GXL's refusal to grant consent will be objectively assessed based on whether or not it received sufficient financial information on which to assess Greymouth's financial viability and, if it did so, whether or not Greymouth had the necessary relevant financial viability. What, if any, collateral motive GXL may have had will not inform this objective analysis. [36] We therefore allow the appeal for the reasons given.Costs[37] The second respondents must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.Solicitors: Russell McVeagh, Auckland for Appellant Simpson Grierson, Wellington for First Respondent Bell Gully, Wellington for Second Respondents