NORTHASH LTD v ZEFF FARMS LTD [2022] NZCA 471

NORTHASH LTD v ZEFF FARMS LTD [2022] NZCA 471 [6 October 2022]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA279/2022[2022] NZCA 471BETWEEN NORTHASH LIMITEDApplicantAND ZEFF FARMS LIMITEDRespondentCourt: Cooper P and Goddard JCounsel: J W A Johnson for ApplicantR C Mark for RespondentJudgment:(On the papers)6 October 2022 at 11.00 amJUDGMENT OF THE COURTA The application for special leave to appeal is declined.B The applicant must pay costs to the respondent for a standard applicationon a band A basis, with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Goddard J)Introduction[1] The applicant (Northash) leased a dairy farm from the respondent (Zeff ).Northash breached the lease by failing to maintain the farm, and in particular failingto clean ditches, drains and watercourses and maintain good grass pasture. As a result,the pasture was seriously damaged. Zeff sold the farm in an unremediated state.[2] Zeff claimed damages from Northash for breach of the lease. Its claim wasreferred to arbitration. The arbitrator, Ms Penny Mudford, delivered an awarddetermining that Northash had breached various terms of the lease and specifying thedamages that Zeff was entitled to recover as a result of those breaches.[3] The arbitrator found that the cost of reinstating the farm to the state it wouldhave been in had the breaches not occurred amounted to $536,524.50, being thesum of:(a) the cost to reinstate 73 hectares of pasture: $93,184.50 including GST;(b) the cost to clean the drains and replace 40 culverts: $36,340 includingGST; and(c) loss of future milk production while remediation was undertaken:$407,000.[4] However, the arbitrator went on to find that the proper measure for damages inthis case was the loss of value of the farm when it was sold by Zeff in itsunremediated state: the difference between the sale price obtained by Zeff for the farmin an unremediated state and the market value that the farm would have had if the leasehad been complied with, and the pasture had been in good condition. That loss ofvalue was $490,000. Because the loss of value was less than the damages assessed byreference to remediation costs and lost milk production, the arbitrator made an awardfor that lesser sum.The proposed appeal[5] Northash wishes to appeal to the High Court, arguing that the proper measureof damages in this case is the cost of reinstatement of approximately $130,000, andthat Zeff is not entitled to recover any amount in respect of lost future milk production.[6] Clause 5 of sch 2 to the Arbitration Act 1996 provides that a party may appealto the High Court on a question of law arising out of an award with the leave ofthe High Court.1 Northash applied to the High Court for leave to appeal to that Court.Brewer J declined to grant leave.2[7] Northash then sought leave from the High Court to appeal to this Court againstthe refusal to grant leave to appeal from the award. The Judge declined to grant leaveto appeal to this Court.3The application before this Court[8] Northash now applies to this Court for special leave to appeal to this Courtagainst the High Court judgment declining leave to appeal to the High Court on aquestion of law arising out of the award.[9] Northash identifies as its "central proposition" its argument that Zeff's claimfor lost milk production is not permitted as a matter of law. It characterises thisargument as a question of law relating to the proper scope of the rule inJoyner v Weeks.4 Northash says it does not seek to impeach the ongoing role ofJoyner v Weeks as a "prima facie" rule in New Zealand law.5 But Northash says it"asks the Court to reflect on and circumscribe the parameters of that rule" and "[i]t istime for this Court to explain exactly what types of loss Joyner v Weeks is (and is not)intended to cover."Threshold for leave to appeal[10] Leave to appeal to the High Court from an arbitral award may only be grantedon a question of law.6 In this context the term "question of law" is narrowly defined:7For the purposes of this clause, question of law—(a) includes an error of law that involves an incorrect interpretation of theapplicable law (whether or not the error appears on the record of thedecision); but1 Arbitration Act 1996, sch 2 cl 5(1)(c).2 Northash Ltd v Zeff Farms Ltd [2022] NZHC 645 [High Court judgment].3 Northash Ltd v Zeff Farms Ltd CIV-2021-488-96, 17 May 2022 [Minute].4 Joyner v Weeks [1891] 2 QB 31 (CA).5 See Maori Trustee v Rogross Farms Ltd [1994] 3 NZLR 410 (CA) at 420.6 Arbitration Act, sch 2 cl 5(1)(c).7 Schedule 2, cl 5(10).(b) does not include any question as to whether—(i) the award or any part of the award was supported by anyevidence or any sufficient or substantial evidence; and(ii) the arbitral tribunal drew the correct factual inferences fromthe relevant primary facts.[11] Clause 5(2) provides that the High Court must not grant leave unless itconsiders that, having regard to all the circumstances, the determination of thequestion of law concerned could substantially affect the rights of one or more ofthe parties. If that statutory threshold is met, the Court must decide whether to exerciseits discretion to grant leave by reference to a number of factors identified bythis Court:8(a) The strength of the challenge/nature of the point of law.(b) How the question arose before the arbitrator.(c) The qualifications of the arbitrator.(d) The importance of the dispute to the parties.(e) The amount of money involved.(f) The amount of delay involved in going through the courts.(g) Whether the contract provides for the arbitral award to be finaland binding.(h) Whether the dispute before the arbitrator is international or domestic.[12] Appeals to this Court are governed by cl 5(5) and (6), which provide:(5) With the leave of the High Court, any party may appeal to the Courtof Appeal from any refusal of the High Court to grant leave or fromany determination of the High Court under this clause.8 See Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) at[54].(6) If the High Court refuses to grant leave to appeal under subclause (5),the Court of Appeal may grant special leave to appeal.[13] If the High Court has refused leave to appeal to that Court from an arbitralaward on a question of law, a party may appeal to this Court against that refusaldecision. But an appeal to this Court from a decision of the High Court refusing leaveto appeal to that Court may be brought only with the leave of the High Court undercl 5(5) or, if such leave has been declined, with the special leave of this Court undercl 5(6).[14] Because there has been some confusion about this point in submissions in thepresent case, and in other cases, we emphasise that the issue that is now beforethis Court is whether special leave should be granted to appeal to this Court againstthe decision of the High Court refusing leave to appeal from the award tothe High Court. If special leave is granted, this Court will then hear an appeal fromthe High Court judgment declining leave to appeal to that Court on a question of law.That is, this Court will consider whether the High Court Judge erred in declining leaveto appeal from the award to the High Court. If the appeal is successful, the resultwould be a grant of leave to appeal from the arbitral award to the High Court on oneor more questions of law.9[15] An application for special leave to appeal from a refusal of the High Court togrant leave under cl 5(1) does not provide an opportunity for a leap-frog appeal on theunderlying question of law arising out of the award to this Court. That is not what cl 5provides for. And it would be wrong in principle for this Court to entertain an appealon the substantive question of law, without that question having first been decided inthe High Court.[16] Put another way, if this Court grants special leave to appeal, the question thatit will need to consider is whether there should be a first appeal from the award tothe High Court on a question of law. The principles governing second appeals onquestions of law are not relevant at this stage of the process. They are relevant only ifthere has been an appeal to the High Court on a question of law, and leave is sought to9 See Restaurant Brands Ltd v QST Ltd [2021] NZCA 680, (2021) 22 NZCPR 815 at [3] and [33]–[38].appeal from the High Court to this Court on the question of law determined bythe High Court.10 That is not the position here.[17] As this Court said in Downer Construction (New Zealand) Ltd v SilverfieldDevelopments Ltd, in the related (but not identical) context of applications for specialleave to appeal to this Court from a determination of the High Court on a question oflaw, the application for special leave to appeal:11 should not be a second bite at the same cherry. This Court will be verymindful of why the High Court declined leave, and will grant special leaveonly if the High Court Judge's decision was plainly wrong or if the test set outabove was not applied or was misapplied. We would hesitate to say that thetest under subcl (6) is different from the test under subcl (5). It is simpler tosay the test is the same, but this Court will exercise its powers sparingly andmindful of why the High Court declined leave. [18] We approach the application for special leave on that basis.High Court judgment declining leave to appeal to that Court[19] The Judge began by setting out the test for granting leave to appeal from anarbitral award. That test was summarised above. It is not suggested that there wasany error in the Judge's statement of that test.[20] The Judge recorded that the parties agreed, and he accepted, that the issues onthe appeal could substantially affect the rights of both parties to the arbitrationagreement. So the cl 5(2) threshold was met. The remaining question was whetherthe High Court should exercise its discretion to grant leave.12[21] The Judge addressed each of the factors identified at [11] above. The Judgebegan by examining the points of law that Northash wished to pursue on appealconcerning the rule in Joyner v Weeks.10 See Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2007] NZCA 355,[2008] 2 NZLR 591 at [29]–[33].11 At [35].12 High Court judgment, above n 2, at [12].[22] In Joyner v Weeks the English Court of Appeal held that the appropriatemeasure of damages for breach of a covenant to repair in a lease ought to be the costof repairs to the premises:13[The] rule is that, when there is a lease with a covenant to leave the premisesin repair at the end of the term, and such covenant is broken, the lessee mustpay what the lessor proves to be a reasonable and proper amount for puttingthe premises into the state of repair in which they ought to have been left.[23] The Judge set out the approach which this Court has held should be adopted inrelation to the rule in Joyner v Weeks. In Maori Trustee v Rogross Farms Ltd,this Court observed that that rule is broadly consistent with the purpose of awards ofdamages for breach of contract, and went on to summarise the way in which that ruleshould be applied in New Zealand:14Damages in contract are designed to represent the monetary equivalent of thepromised benefit which has not been provided. In other words, they aredesigned to put the injured party, as nearly as possible, and so far as moneycan do it, into the position he would have been in if the contract had beenperformed.Thus, if a lessee fails to perform a covenant and the term has expired a sum ofmoney must replace the performance of the covenant. That sum of moneywill ordinarily equate the cost to the lessor of having the covenant performed.It is when the lessor is unable or does not wish, for whatever reason, to havethe covenant performed that the difficulties said to be inherent in the rule arise.It follows that there is justification for holding that the rule is not absolute.But on a prima facie basis the rule fits comfortably with the purpose ofdamages for breach of contract.We would therefore state the law as follows. The rule in Joyner v Weeks is notan absolute rule. It is, however, the prima facie rule which will be appliedunless the lessee can show by sufficiently cogent evidence that in both theshort and the long term the lessor will definitely suffer no loss or will suffer aloss which can definitely be assessed at less than the prima facie measure.13 Joyner v Weeks, above n 4, at 43.14 Maori Trustee v Rogross Farms Ltd, above n 5, at 418–420.[24] As the Judge noted, this Court has declined to revisit its decision inRogross Farms.15[25] The first question of law proposed by Northash and considered by the Judgewas whether lost milk production forms part of the cost of reinstatement of the farm.Northash wished to argue on appeal that the arbitrator had erred in determining thatfuture lost milk production fell within the category of reinstatement costs for thepurposes of the rule in Joyner v Weeks.[26] The Judge considered that Northash's proposed argument was weak.An allowance for lost milk production during the period of reinstatement ought to berecoverable as a cost of reinstatement.16 The Judge said it was recognised by the Courtin Joyner v Weeks that the cost of repairs includes "some allowance for loss of rent oroccupation during the time of reparation".17 The Judge considered that the sameprinciple applied in this case.18[27] The Judge went on to say that the purpose of an award of damages is to placethe injured party into the position they would have been in had the contract beenperformed. An award of damages which ignored revenue lost during the period ofreinstatement would fail to capture the true cost to Zeff of Northash's failure tomaintain the farm. An allowance for lost milk production during the period ofreinstatement ought to be recoverable as a cost of the reinstatement. Northash had notraised a properly arguable case to the contrary.19[28] The Judge then turned to Northash's argument that Zeff never actually sufferedthe loss claimed because it did not reinstate the property. Instead, it chose to sellthe farm without reinstating the pasture. The Judge did not accept that this wasproperly arguable. The fact that Zeff chose to sell rather than reinstate the farm didnot mean it suffered no loss. Northash's failure to maintain the land, and the cost15 Cornwall Park Trust Board Inc v Chen [2016] NZCA 65, [2016] 2 NZLR 637 at [100].16 High Court judgment, above n 2, at [20].17 At [20], citing Joyner v Weeks, above n 4, at 36.18 High Court judgment, above n 2, at [20].19 At [21].required to reinstate it, would have been reflected in the sale price. Zeff's choice tosell did not prevent Zeff from recovering damages for Northash's breach.20[29] The Judge next considered what he described as the central question of lawraised by Northash's challenge: whether the arbitrator awarded the wrong measure ofdamages.21 The Judge considered that it followed from this Court's decision inRogross Farms that the prima facie measure of damages for breach of a covenant torepair is the cost of reinstatement. That prima facie measure applies unless the lesseeestablishes that the loss suffered by the lessor was definitely less than that measure.22In this case, the Judge said, Zeff suffered loss which can definitely be assessed at lessthan the cost of reinstatement so the prima facie measure did not apply.The appropriate award of damages was thus $490,000 representing the diminution invalue of the property. The arbitrator was right to take that figure as the appropriatemeasure of damages.23[30] The Judge went on to deal with two proposed questions of law relating tovaluation evidence which are not advanced by Northash before this Court, so need notbe described further here.[31] The Judge then turned to the remaining factors going to the Court's discretionas to whether leave to appeal should be granted. After analysing each of these,the Judge concluded that he was satisfied that leave to appeal should not be granted.24None of the questions of law raised by Northash provided a strong basis upon whichto seek leave to appeal. The Judge did not consider that the law would exclude thecost of lost milk production from the cost of reinstatement. The award of $490,000 toZeff representing the diminution in value of the property was available tothe arbitrator. The remaining factors which influence the Court's discretion did notmaterially alter the equation.2520 At [26].21 At [27].22 At [30].23 At [31]–[32].24 At [47].25 At [47].High Court decision declining leave to appeal to this Court[32] Northash then applied to the High Court for leave to appeal to this Court fromthe High Court judgment. The single question of law that Northash said it wished topursue before the Court of Appeal was:Whether the learned Judge erred in law by finding that losses attributable tolost milk production ought to be recoverable as a cost of reinstatement underthe rule in Joyner v Weeks.[33] For reasons explained briefly in Brewer J's minute, the Judge considered thatthe proposed question of law was not capable of bona fide and serious argument.There was no interest of sufficient importance to justify a further appeal. Leave toappeal was declined.DiscussionDoes the proposed appeal raise a question of law?[34] As already mentioned, Northash says that the purpose of its appeal is to askthis Court to circumscribe the parameters of the rule in Joyner v Weeks, and explainwhat types of loss Joyner v Weeks is (and is not) intended to cover. It seems to us thatthis proposed argument reflects a misconception about the nature and effect of the rulein Joyner v Weeks as a matter of New Zealand law.26[35] As this Court pointed out in Rogross Farms, and reiterated in Cornwall ParkTrust Board Inc v Chen, the assessment of damages is a question of fact that shouldnot be trammelled by rigid rules.27 The observations of Tipping J in the Supreme Courtin Marlborough District Council v Altimarloch Joint Venture Ltd are to similar effect:28There are no absolute rules in this area, albeit the courts have establishedprima facie approaches in certain types of case to give general guidance anda measure of predictability. The key purpose when assessing damages is toreflect the extent of the loss actually and reasonably suffered by the plaintiff.26 It also appears to reflect a misapprehension about the effect of a grant of leave: that would resultin this Court considering whether there should be an appeal to the High Court, rather thanthis Court itself determining the parameters of the rule in Joyner v Weeks.27 Cornwall Park Trust Board Inc v Chen, above n 15, at [99], referring to Maori Trustee v RogrossFarms Ltd, above n 5, at 420.28 Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11, [2012] 2 NZLR726 at [156]. See also [23]–[27] per Elias CJ and [157]–[158] per Tipping J.[36] Consistent with that approach, in Rogross Farms this Court held that the "rule"in Joyner v Weeks is not an absolute rule.29 That is, it is not a rule of law thatdetermines what damages are and are not recoverable by a lessor in thesecircumstances. It is just a prima facie approach to determining recoverable loss thatwill be applied unless it can be clearly shown that that approach would not beconsistent with the fundamental legal principle that governs the award of damagesin contract. That principle — which is properly described as a rule of law — is thatsuch damages are designed to put the injured party, as nearly as possible, and so far asmoney can do it, into the position they would have been in if the contract hadbeen performed.[37] As this Court held in Rogross Farms, the courts will depart from theprima facie approach set out in Joyner v Weeks where the lessee can show (bysufficiently cogent evidence) that in both the short and the long term the lessor willdefinitely suffer no loss or will suffer a loss which can definitely be assessed at lessthan the prima facie measure. That is a factual inquiry.[38] Similarly, whether the lessor is entitled to recover consequential losses such aslost rent or lost income from the land, or a loss of value of the land, will depend onwhether there is sufficiently cogent evidence establishing that the lessor has sufferedsuch losses as a result of the lessee's breach, with the result that compensation forthose losses is required to put the lessor into the position they would have been in ifthe contract had been performed. Again, that is an essentially factual inquiry.[39] Northash's request that the Court explain "exactly what types of lossJoyner v Weeks is (and is not) intended to cover" misunderstands the nature of the"rule" in that case as it is applied in the New Zealand courts. It is neither necessarynor helpful for the courts to attempt to provide detailed guidance on what precisely isrecoverable under the Joyner v Weeks approach. Rather, the position established by aseries of decisions of this Court is that:(a) The starting point for assessment of damages in cases of this kind is thereasonable cost of remedying the lessee's defaults.29 See the passage set out at [23] above.(b) A greater or lesser sum may however be awarded if it is shown bysufficiently cogent evidence that this is required by the fundamentalprinciple governing assessment of contractual damages.(c) The question whether the starting point should be departed from, and adifferent approach adopted to the assessment of damages, turns on afactual inquiry. It does not turn on fine-grained legal rules about whattypes of loss are and are not recoverable.[40] Put another way, the arbitrator's conclusion that it was appropriate to departfrom the prima facie measure of damages in Joyner v Weeks by awarding thediminution in value of the land caused by Northash's defaults involved a factualassessment of the losses actually suffered by Zeff in this case, not a determination ofquestions of law about the scope of the "rule" in Joyner v Weeks.[41] It follows that Northash's proposed appeal does not raise any question of lawfor the purposes of cl 5 of sch 2. Rather, it relates to the assessment of the loss sufferedby Zeff in this case, which is a question of fact.[42] We accept Northash's submission that the High Court erred in proceeding onthe basis that the Court in Joyner v Weeks recognised that the cost of repairs includes"some allowance for loss of rent or occupation during the time of reparation".30Northash rightly points out that the passage referred to by the High Court is found inthe judgment of the Divisional Court, which was overturned on appeal by theCourt of Appeal. The Court of Appeal did not make any reference to allowances forloss of rent or occupation during the time of repair. But the Judge's reference to thatpassage in the decision of the Divisional Court in Joyner v Weeks was not material tothe result reached in the High Court in the present case for two reasons. First, Northashdoes in fact accept that compensation for lost rent or occupation is recoverable inprinciple under the approach in Joyner v Weeks. Second, as explained above, theextent to which loss of rent or occupation, or some other loss of benefit from use ofthe land, should be recognised in the damages awarded to the lessor turns on a factual30 High Court judgment, above n 2, at [20], citing Joyner v Weeks, above n 4, at 36.inquiry and does not involve refined questions of law about the precise scope ofthe rule in Joyner v Weeks, as that rule is applied in New Zealand.[43] Because this Court has treated the rule in Joyner v Weeks as a prima facieapproach to be adopted when carrying out the (quintessentially factual) task ofassessment of damages, we are not materially assisted by authorities from otherjurisdictions where the approach in Joyner v Weeks appears to be treated as more inthe nature of an absolute rule of law.[44] In the absence of a qualifying question of law about assessment of damages,there is no jurisdiction to grant leave to appeal.The cl 5(2) threshold[45] It was common ground before the High Court that the proposed questions oflaw identified by Northash met the threshold in cl 5(2): that is, the determination ofthose questions could substantially affect the rights of one or more of the parties.[46] However we consider that this threshold is not met. Even assuming that theformulation of the prima facie approach in Joyner v Weeks could be described as aquestion of law, the precise formulation of that approach would not matter in a caselike the present where it has been demonstrated that, as a matter of fact, the losssuffered by the lessor as a result of the lessee's breaches is best measured by adifferent approach. The starting point identified in accordance with Joyner v Weeks isnot determinative of the outcome of the assessment of the loss caused by the breach.Whatever starting point was adopted in this case, the result — applying thefundamental principle that governs damages in contract to the facts established beforethe arbitrator — would be the same.[47] Clause 5(2) is intended to ensure that appeals from arbitral awards are confinedto cases where the answer to a question of law will have a substantial practical effecton the outcome of the case. That is not the position here. For this further reason, leaveto appeal to the High Court from the arbitral award would not be appropriate, andspecial leave should not be granted to appeal to this Court.Other factors relevant to leave[48] It follows that the other factors relevant to leave, set out at [11] above, neednot be considered. But we agree with the Judge that nothing in those factors providesmaterial support for the grant of leave to appeal.[49] In particular, we agree with the Judge that it is not seriously arguable that thearbitrator was not entitled to depart from the prima facie measure of damages inthis case. The result reached is plainly consistent with the overarching legal principlereferred to at [36] above.Is our conclusion affected by the recent decision in Gama Foundation?[50] Finally, we record that Northash referred us to a recent decision of this Courtin Gama Foundation v Fletcher Steel Ltd in which leave was granted under cl 5(6) toappeal on questions of law relating to the rule in Joyner v Weeks.31 The questions oflaw that the panel in that case identified as arguable were:(a) Did the arbitrator err in finding that the rule in Joyner v Weeks precludesrecovery of costs reasonably incurred in mitigation?(b) If yes, which party bears the onus of proving the reasonableness of thecosts incurred in mitigation?(c) In all the circumstances, did the arbitrator err, when considering thereasonable and proper amount required to put the premises into the stateof repair in which they ought to have been left, in failing to have regardto the prevailing circumstances at the time the lessor undertook therepair work?[51] That case may be distinguishable from the present one, as it appears to be acase where the prima facie approach was not found to be displaced on the facts.Be that as it may, we do not consider that there is anything in that leave decision which31 Gama Foundation v Fletcher Steel Ltd [2022] NZCA 314.suggests that there is a qualifying question of law in the present case in respect ofwhich leave to appeal might properly be granted.Result[52] The application for special leave to appeal is declined.[53] The applicant must pay costs to the respondent for a standard application on aband A basis, with usual disbursements.Solicitors:Argyle Welsh Finnigan Ltd, Ashburton for Applicant