MARIMA VALLEY FARM LIMITED V FLORA BERYL BARTHOLOMEW, DAVID JOHN TULLOCH AND DOUGLAS ROWAN CA509/2010

MARIMA VALLEY FARM LIMITED V FLORA BERYL BARTHOLOMEW, DAVID JOHN TULLOCH AND DOUGLAS ROWAN CA509/2010 24 September 2010IN THE COURT OF APPEAL OF NEW ZEALAND CA509/2010 [2010] NZCA 441BETWEEN MARIMA VALLEY FARM LIMITED Appellant AND FLORA BERYL BARTHOLOMEW, DAVID JOHN TULLOCH AND DOUGLAS ROWAN Respondents Hearing: 9 September 2010 Court: Glazebrook, Arnold and Ellen France JJ Counsel: P S J Withnall for Appellant G A Paine and D Rowan for Respondents Judgment: 24 September 2010 at 4.30 pmJUDGMENT OF THE COURT A The appeal is allowed and the judgment of Joseph Williams J of 4 August 2010 is set aside. B The respondents must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Glazebrook J)Table of ContentsPara NoSale of a dairy farm [1]The agreement [6]Fonterra's constitution [13]Joseph Williams J's judgment [15]The legal position [19]Our assessment [22]Result [29]Sale of a dairy farm[1] Marima Valley Farm Ltd (Marima) owns a dairy farm near Pahiatua. By agreement for sale and purchase dated 15 April 2010, it agreed to sell its land and 71,696 shares in Fonterra Co-operative Group Ltd (Fonterra) to the respondents as trustees of the Bartholomew Tulloch Trust (the Trustees). Settlement was to be on 2 June 2010 and the price was set at $2.6m. [2] As the shares could only be transferred with the consent of Fonterra, there was a specific clause in the agreement covering that approval. Clause 22.9 of the agreement required the Trustees to make an application to supply Fonterra with milk. Under Fonterra's constitution, such an application is deemed to be an irrevocable application to become a shareholder in proportion to the applicant's milk production. Clause 22.9 also provided that if the application was received by Fonterra after 28 February then the agreement was conditional on Fonterra accepting the Trustees' application for supply. [3] The condition in cl 22.9 was to be satisfied on or before 29 April 2010. On 28 April 2010 the Trustees' solicitors wrote to Marima's solicitors seeking an extension to the deadline. The Trustees said that they saw no difficulty in their application to become a Fonterra shareholder being approved and that they anticipated settlement would occur smoothly on 2 June 2010.11 Fonterra subsequently (but before 7 May 2010) communicated its approval of the Trustees' application to supply.[4] On 29 April 2010 Marima refused the extension. It indicated that, if the condition in cl 22.9 was not satisfied by 5pm on that day, the agreement would be at an end. The Trustees' solicitors replied on the same day. They purported to waive the condition in cl 22.9. They said that the clause was for their exclusive benefit and that they viewed the contract as now unconditional. In a later letter on that same day they advised that their application to supply had been received by Fonterra. The next day Marima replied, denying that the condition in cl 22.9 was for the sole benefit of the Trustees and, as it had not been fulfilled, formally cancelled the agreement. [5] The Trustees applied for summary judgment seeking either specific performance of the agreement or damages. By judgment of 4 August 2010, 2 Joseph Williams J held that the condition in cl 22.9 was inserted for the sole benefit of the purchaser and could be waived by the Trustees, who were therefore entitled to an order for specific performance. Marima appeals against that decision.The agreement[6] The agreement entered into by the parties was a package. It included land and improvements used for dairying and shares in Fonterra. This enabled the resulting milk output to be supplied to Fonterra. The agreement was on the standard terms set out in the ADLS/REINZ Standard Form Agreement for Sale and Purchase (the ADLS agreement), but also contained a number of special conditions. [7] One of the special conditions in cl 22.2 recorded that the agreement and price included: 3(a) 71,696 shares in Fonterra, less any shares that would be surrendered as a result of production fluctuations in the current season. (This was on account of the fact that shareholding in Fonterra is proportionate to the supply of milk solids.)2 Bartholomew v Marima Valley Farm Ltd HC Wellington CIV-2010-454-373, 4 August 2010.3 Except to the extent an additional payment is required under the agreement: see for example at [8]. Additional payments and the timing of such payments were dealt with in cl 22.6.(b) An amount equal to the value that any surrendered shares would have in the season following the current season if they had not been surrendered. (c) All additional shares and other items that were required to enable the purchaser to supply milk to Fonterra as a "fully shared supply". A "fully shared supply" was defined as meaning a supply of milk to Fonterra no part of which was an "unshared supply" or a "contract milk supply" (each as defined by Fonterra). (d) The Bonus (if any). [8] As noted in the agreement, the parties in fact expected that there would be additional shares to be transferred (and additional payment to be made for those shares). Clause 22.18 provided:22.18 Additional sharesFor purposes of clarification the parties to this Agreement agree that the Purchase Price on the first page of this Agreement includes 71,696 Fonterra Co-operative shares. They further acknowledge that milk production to 31 May 2010 is highly likely to exceed 71,696kg milksolids, meaning additional shares will have to be acquired. Such additional shares shall be paid by the Purchaser as per clause 22.6 herein.[9] Under cl 22.4, Marima was required to give the Trustees signed security transfer forms for the transfer of the shares as soon as the purchase price (and any additional amounts to take account of an increase in shares due to the current year's production) had been paid in full. Under cl 22.8, any shares or other "Fonterra instruments" held or acquired by Marima after the settlement date were to be held on trust by Marima for the Trustees. 4 "Fonterra instruments" were defined by cl 22.1 to mean the Fonterra shares, any "items" and any bonus payments set out in cl 22.2. The term "items" was defined as meaning anything required by Fonterra to be held by the purchaser to enable the purchaser to supply milk from the property as a "fully shared supply". 54 Marima was to have no right to exercise any rights with regard to those Instruments, except as required by the agreement itself or in accordance with the instructions of the Trustees.5 See definition at 0.[10] As noted above, this case concerns cl 22.9, the full wording of which was as follows:Transfer of Supply and Ongoing Supply22.9 The purchaser must complete Fonterra's application for supply (existing) for the property and lodge it with Fonterra as soon as is reasonably possible after this agreement is signed, but (a) If the application will be received by Fonterra after 28 th February this agreement will be conditional upon Fonterra accepting the purchaser's application for supply, and (b) The condition must be satisfied on or before the 10 th working day after the day on which this agreement is signed by all parties ("the 10th working day"). If however, the 10 th working day falls on or after the settlement date the condition must be satisfied on or before the working day before the settlement date.[11] There was nothing in evidence about the significance of the date of 28 February but we were told by Mr Withnall that his understanding was that a policy statement by Fonterra guarantees approval as a supplier if an application is made before the date of 28 February by the purchaser of a farm and existing shares. [12] For completeness, we note that cl 8.7 of the ADLS agreement provides (in relevant part) that time for the fulfilment of any condition is of the essence. 6 It provides also that a purchaser may waive any finance condition and either party may waive any other condition which is for the sole benefit of that party. Any waiver shall be by notice. 7Fonterra's constitution[13] As noted above,8 the shares were tied to a supply agreement with Fonterra. Fonterra's constitution prohibits non-suppliers from holding shares in the co- operative. A supplier's shareholding is in proportion to its supply of milk. Fluctuations in a supplier's milk supply are dealt with by the surrender of shares or the acquisition of additional shares. Where shares are surrendered, payment is made6 At cl 8.7(3).7 At cl 8.7(6).8 At [2].by Fonterra for those surrendered shares, either in cash or capital notes. By contrast, payment is required to be made to Fonterra for the acquisition of any additional shares. The method of fixing the consideration for such transfers is set out in the constitution.[14] Under Fonterra's constitution, there is a restriction on the transfer of shares.Clause 30.3 of Fonterra's constitution provides:30.3 Restrictions on Transfer: No Co-operative Shares may be transferred by a Shareholder to: (a) any person who is not: (i) a Shareholder; or (ii) a person whose application to become a Shareholder has been accepted in writing by the Company in accordance with clause 2.3; or (b) a Shareholder, who following the transfer, would hold more Shares than are permitted to be held under clause 3.1(b); or (c) any other person if that Share is subject to a resolution of the Board requiring its surrender.Joseph Williams J's judgment[15] Joseph Williams J, relying on Globe Holdings Ltd v Floratos,9 held that the only relevant interest of Marima in this case was in knowing whether the transaction would be completed on 2 June 2010, as agreed. He considered that Marima had that certainty because the Trustees, having waived the condition in cl 22.9, could not refuse to settle even if Fonterra refused their application to become a shareholder. [16] The Judge held further that cl 22.8 of the agreement was an effective "plan B". That clause provided that "Fonterra instruments" held or acquired by Marima after the settlement date were to be held on trust for the Trustees. Thus, any shares acquired by Marima after settlement would be held on trust, as well as any cash or capital notes received on surrender of any Fonterra shares. This was because, pursuant to Fonterra's constitution, a supplier exiting production was9 Globe Holdings Ltd v Floratos [1998] 3 NZLR 331 (CA) (discussed below at [20]-[21]).required to surrender its shares at the end of its last production season in return for the appropriate value in cash or capital notes. [17] The Judge pointed also to cl 22.2 of the agreement, 10 which provided that the Trustees were buying 71,696 shares less any shares that were required to be surrendered. The Judge went on to say that, if that happened, the value of those surrendered shares would be deducted from the final purchase price. 11 The Judge held that, although cl 22.2 was expected to be used for the value abatement calculation related to fluctuations in supply, its plain words covered the more radical possibility that Fonterra could require Marima to surrender all of its shares. This would occur if Marima sold the farm but Fonterra refused to accept the Trustees as suppliers and shareholders. [18] The Judge considered there to be no reason to read down either cl 22.2 or cl 22.8 so that they related only to value abatement through loss of production and thought that there was every reason to treat them as relating to any compulsory surrender, however caused.The legal position[19] A party may waive a condition in a contract which is solely for that party's own benefit and is severable. 12 Whether that is the case depends on the construction of the condition, considered on ordinary contractual construction principles.1310 Set out at [7] above.11 We note below at [26] that this seems to have been a misunderstanding of the terms of the contract.12 Hawker v Vickers [1991] 1 NZLR 399 (CA) at 402. We note that cl 8.7(6) of the ADLS agreement does not mandate that the condition to be waived needs to be severable. It simply states that the purchaser may waive any finance condition and either party may waive any condition that is for the sole benefit for any party. As outlined in John Burrows, Jeremy Finn and Stephen Todd The Law of Contract in New Zealand (3rd ed, Wellington, LexisNexis, 2007) at 237, the requirement of severability means that the condition sought to be waived must be independent of any other condition affecting the agreement. Thus, it would appear impossible to waive a condition that is not severable, as such a condition would still have to remain part of the agreement.13 Hawker v Vickers at 402–403, approved by this Court in Globe Holdings at 334.[20] The case of Globe Holdings relied on by Joseph Williams J 14 concerned the sale of an apartment block. One of the special conditions required a sub-divisional consent to be obtained within 60 days. The other required the vendor to make one unit available for marketing once the agreement became unconditional. [21] This Court held that the condition requiring consent to be obtained within 60 days was for the sole benefit of the purchaser and was severable. Therefore, it was held that the condition could be waived by the purchaser without undermining the agreement. The Court held that the vendors' only legitimate interest was in knowing whether the transaction would proceed or not. The Court noted that it would not matter to the vendors whether the transaction proceeded because of fulfilment of the condition or because the purchaser had elected to proceed anyway. If the condition was waived, the transaction would proceed as if the condition had been satisfied. Therefore, when the purchaser waived the condition, the relevant certainty that the transaction would proceed was provided.Our assessment[22] On the material currently before the Court, we do not consider that the condition in cl 22.9 was for the sole benefit of the Trustees as purchasers. We accept that one purpose of cl 22.9 was to ensure that the Trustees had in place the necessary share transfer and supply approvals before settlement so that they could be sure of being able to supply Fonterra as a "fully shared supply", as contemplated in the agreement. 15[23] However, in our view, unlike the vendor in Globe Holdings, Marima also had an interest in the condition being fulfilled over and above its interest in knowing whether the transaction would proceed or not. This is because, under Fonterra's constitution, it was prohibited from transferring the shares if Fonterra did not accept14 See above at [15].15 The definition of "fully shared supply" is set out above at [7].the Trustees' application. 16 Marima would thus not have been able to settle and provide signed transfers of the shares without breaching the constitution. 17[24] It was argued on behalf of the Trustees that, if the condition in cl 22.9 had not been satisfied at settlement, then Marima would have been justified, because of the waiver, in not providing the share transfers or in providing them conditionally only until Fonterra's approval had been obtained. In our view, however, Marima would still have breached the constitution because the agreement, at cl 22.8, provided that any shares held by the vendor after the settlement date were held on trust for the purchaser. This would have had the effect of transferring the beneficial ownership of such shares, contrary to cl 30.3 of the constitution. Indeed, cl 22.9 itself recognised that Fonterra's consent had to be in place at settlement. It provided that the condition must be satisfied (at the latest) on the working day before settlement. 18[25] The Trustees argued further that if Fonterra refused their application to become a shareholder then, because of the waiver, they could not have complained and the result would have been that they had "purchased themselves the most expensive sheep farm in the area". The Trustees supported the Judge's conclusion that cls 22.2 and 22.8 deal with the unlikely event of Fonterra's refusal. [26] We note first that the Judge appears to have misunderstood the effect of cl 22.2. On our reading, that clause does not provide for a decrease in the amount ($2.6m) paid for the land and the shares in the event shares are surrendered. It provides instead that any payment received by the vendor for the surrendered shares is to be transferred to the purchaser. [27] We do accept, however, that in a practical sense the provisions relating to surrendered shares in cl 22.2 would mean that the vendors were not out of pocket if all Fonterra shares were surrendered. We are, however, on the material before us, unable to conclude that the parties intended cls 22.2 and 22.8 to apply to a total surrender of shares. If that had been the case, we would have expected the16 Discussed above at [14].17 There is also, in our view, a problem with the severability of the clause because of the constitutional restrictions on transfer. At the very least, the obligation contained at the beginning of the clause to make an application to supply Fonterra must remain.18 Set out above at [10].provisions to be more explicit. For example, they might have required the vendor to surrender its shares immediately (rather than waiting for Fonterra to require surrender). Further, the parties, as noted above, 19 clearly contemplated that Fonterra's consent had to be in place before settlement. [28] We do not rule out the possibility that, when the full background is explored (including Fonterra's usual practice in giving consent), the interpretation of the agreement might differ. What is clear, however, is that this is not a suitable case for summary judgment.Result[29] The appeal is allowed and the judgment of Joseph Williams J of 4 August 2010 is set aside. [30] The respondents must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.Solicitors: Innes Dean, Palmerston North for Appellant Cullinane Steele, Levin for Respondents19 At [24].