PULLINGTON INVESTMENTS PTY LIMITED v KAIWARUA-EALING LIMITED COA CA587/2012

PULLINGTON INVESTMENTS PTY LIMITED v KAIWARUA-EALING LIMITED COA CA587/2012 [20 May 2013]IN THE COURT OF APPEAL OF NEW ZEALANDCA587/2012[2013] NZCA 163BETWEEN PULLINGTON INVESTMENTS PTYLIMITEDAppellantAND KAIWARUA-EALING LIMITEDFirst RespondentAND ANDREW JAMES MORRIS ANDRACHELE SARAH MORRISSecond RespondentsAND MARGARET JEAN HUBBARD IN HERCAPACITY AS EXECUTRIX IN THEESTATE OF THE LATE ALAN JAMESHUBBARD AND MARGARET JEANHUBBARDThird RespondentHearing: 30 April 2013Court: O'Regan P, Ellen France and Randerson JJCounsel: C A McVeigh QC and G M Brodie for AppellantA S Butler and R J Hopkins for RespondentsJudgment: 20 May 2013 at 12 noonJUDGMENT OF THE COURTA Save as noted in B, the appeal is dismissed.B The declarations in the High Court are confirmed but varied so that declaration (d) reads:(d) The plaintiffs are not required to sell their interests to Pullington Investments Pty Ltd in the assets of the Ealing Land Partnership and the Ealing Pastures Partnership assets.C The appellant must pay costs to the respondents as for a standard appeal on a Band A basis with usual disbursements. We certify for second counsel.____________________________________________________________________REASONS(Given by Randerson J)Introduction[1] This appeal arises from a farming partnership between the appellant, Pullington Investments Pty Ltd, and the first respondent, Kaiwarua-Ealing Ltd. We will refer to these parties as Pullington and Kaiwarua-Ealing respectively. In 2000, the partnership acquired a property of some 1,245 hectares at Ealing1 for $5 million. Although draft partnership agreements were prepared, they were never signed. Nevertheless, farming operations commenced and continued until Kaiwarua-Ealing gave notice on 7 November 2011 dissolving the partnership. The land is now said to be worth approximately $60 million.[2] The main question before the High Court was whether Pullington was entitled upon the dissolution of partnership to a right of pre-emption to acquire the land. The respondents were the plaintiffs in the High Court and sought a declaration that there was no right of pre-emption.2 After an extensive examination of the evidence, Mallon J made a declaration that Kaiwarua-Ealing was not required to sell its share of the partnership to Pullington.3[3] There is some dispute between the parties as to the precise nature of Mallon J's findings. Pullington submits that the Judge found there was a right ofpre-emption, at least for a period of five years after the commencement of the partnership. Pullington also contends that the Judge should have gone on to consider the application of s 30 of the Partnership Act 1908 (the Act), which provides that the1 Situated between Timaru and Ashburton.2 Pullington brought a counterclaim which is no longer in issue.3 Kaiwarua-Ealing Ltd v Pullington Investments Pty Ltd [2012] NZHC 2226.rights and duties of the members of a fixed term partnership may continue beyond the expiry of the fixed term so far as those rights and duties are consistent with the incidents of a partnership at will.[4] The respondents submit that the Judge's finding was that the parties did notagree upon any rights of pre-emption and that, upon the dissolution of the partnership the land acquired by the partnership and any other partnership assets must now be sold in accordance with s 42 of the Act.[5] The issues on appeal are:(a) Did the Judge find that the parties did not agree upon a right of pre-emption and, if so, was she correct in that respect?(b) Did the Judge find that there was, at the least, a right of pre-emption for a period of five years?(c) If there was a right of pre-emption, did it continue forPullington's benefit after the expiry of five years?(d) Should this Court make an order for the sale of the land and, if so, on what terms?Background facts[6] Pullington is a company registered in Western Australia controlled by Mr Geoffrey Holman or interests associated with him. In 1999, Mr Holman was introduced to the late Mr Alan Hubbard who, until his death in a motor accident in September 2011, was a prominent Timaru accountant and businessman. Mr Holman had funds to invest following the sale of a business in Australia. The capital gain from that sale was taxable in Australia but liability for tax could apparently be deferred by re-investment in a qualifying asset including investments in New Zealand assets.[7] Mr Hubbard had earlier made an unconditional offer to purchase the Ealing farm and negotiations then ensued between Mr Hubbard and Mr Holman with a viewto forming a partnership to farm the property. At an early stage, Mr Holman made it clear that, depending on how Pullington's involvement in the partnership wasstructured, there was a risk Pullington might become liable for capital gains tax. He provided to Mr Hubbard a copy of a letter from his Australian accountants dated 25 January 2000. This letter advised that Pullington needed to acquire its interest in the farm before 2 November 2000 and that if the replacement asset was sold within five years, then the "rolled capital gain" would crystallise and Pullington "may not be eligible for a subsequent rollover".[8] In a memorandum setting out his "long term objectives", Mr Holman advised: he would be content with a long term holding but if opportunities arosefor profitable disposals then the constraints would be to make no disposals before 01/07/2001 and preferably 01/07/2005 at which date a further rollover would be permitted by the Australian Tax Office.The memorandum also noted that the 16 titles which made up the property would need to be shared in an equitable manner and held by each investor.[9] This memorandum was sent by facsimile to Mr Hubbard on 26 January 2000 and tabled at a meeting on 28 January 2000. Those present at the meeting included Messrs Hubbard, Holman, and a Mr Turney. The latter and his brother were then possible investors in the partnership. After the meeting, Mr Holman typed up arough draft entitled "An Agreement to Farm in Co-operation". It listed Pullington,the Turney brothers and Hubbard Churcher (Mr Hubbard's accounting firm) as theparties. It provided for each party to own approximately equal assets in the property, stock and other assets. Profits and losses were to be shared equally. It then provided:It is hereby agreed as follows:-At such time that one party may wish to end this agreement, notice not less than 12 months, will be given in writing to Ealing Pastures Farming and copied to other parties.The procedure will be as follows:-Ealing Pastures Farming will instruct a licensed valuer to value the total area of land buildings and fixtures, plant, livestock and conserved feed being farmed under this agreement.With not less than 6 months unexpired notice remaining, a new average value by area will be determined and used to assess the value of the portion which is to be withdrawn from management under this agreement.That portion will then be offered for sale to the other two parties for each to buy 50%.If a contract of sale has not been made within one calendar month, the portion will be offered to each of the other parties as one complete lot.If a contract of sale has not been made within a further calendar month then the selling party may sell his portion to a new investor, providing that the new investor is approved in writing by the remaining parties.If with 3 months unexpired notice remaining, a contract of sale is not in place, the selling party will have the right to demand that the total area of land, and stock be placed on the market as a going concern, and that no reasonable offer to purchase should be refused.Any dispute arising from this agreement will be referred to arbitration by the xxxxxxxxxxxx.[10] Almost immediately after the meeting of 28 January 2000, Mr Turney informed Mr Holman that he could not participate in the partnership and Mr Hubbard arranged for the second respondents, Mr and Mrs Morris, to be introduced to Mr Holman. As the Judge noted, there was a dispute as to exactly when Mr Holman and Mr Morris met. Mr Holman maintained that they met at ameeting in Mr Hubbard's office on 3 February 2000 but Mr Morris thought it was later that month. Mr Holman said it was agreed at the meeting on 3 February between himself, Mr Hubbard and Mr Morris that a partnership would be formed with Pullington taking a 50 per cent interest, Mr and Mrs Hubbard 25 per cent andMr and Mrs Morris 25 per cent (subject only to Mr Morris obtaining his wife'sagreement).[11] There was discussion at the 3 February 2000 meeting between Mr Hubbard and Mr Holman about obtaining approval from the Overseas Investment Commission (the OIC). At Mr Hubbard's suggestion, Mr Holman visitedMr Hubbard's solicitor, Mr Bradley, later that day. After this meeting, Mr Bradley sent a memorandum to Mr Hubbard about what he understood was to occur. The memorandum related to the half share to be taken by Pullington, the need for OICapproval and Mr Holman's "main concern" about farming the land in accordancewith standard farming practices. The memorandum also recorded that Pullington's "half share would be taken up by having transferred land approximately equivalent in value to the company holding but on a split up the total value of the assets less liabilities would be the basis on which calculation is made".[12] As the Judge noted, Mr Bradley's memorandum made no reference to the drafting of a partnership agreement nor to the involvement of Mr Morris.[13] There is no dispute that Mr Morris inspected the Ealing property on 3 February 2000 and that Mr Holman later returned to New Zealand on 28 February 2000. There was discussion at that time about the terms of a partnership agreement and the formation of a company to hold the half share of the land for Mr and Mrs Hubbard as well for Mr and Mrs Morris. Mr Morris recalled Mr Holman raising the need to invest for a period of five years in farming or in land in order to avoid having to pay capital gains tax. He said there was no discussion about Pullington needing to be a permanent participant. He agreed there was discussion along the lines that if anyone wished to "exit" then the other parties would have an option ofbuying. Mr Morris' evidence was that it was after the meeting with Mr Holman on 28 February 2000 that he and his wife committed to entering the partnership.[14] In the meantime, Mr Hubbard had concluded an agreement to buy the Ealing property with settlement due on 30 June 2000. After the decision by Mr and Mrs Morris to enter the partnership, there was an exchange between Mr Morris and Mr Holman on issues relating to the ongoing management of the property. On 15 March 2000, Mr Holman responded to Mr Morris on that subject including the following: We do need to get on with the issue of dividing the titles so we both have approximately the same area of land. I am happy for Alan to do this but you might care to mention that my view is to mix them up in patchwork style. That will consolidate the principle that we are acting as a team and frustrate any future attempts to break our agreement other than by mutual consent or by due process provided for in the agreement.I am more than confident that Alan, you and I will have no bother dealing with each other but who knows what may happen some time in the future when one or more of us has gone to heaven.You might also check that Alan has someone working on the terms of our land valuation and share farming agreement. I think it can be very short and simple but let us ensure that it is done properly.It is important that you have an agreement which gives you some certainty for the future. If Fran and I get bowled over by a bus you do not want to be left in a position where our estate could give you six months notice to sell up and move on. But I guess a rolling 3 year agreement would be fair to both sides.[15] On 21 March 2000, Mr Bradley sent a memorandum to Mr Hubbard enclosing a first draft of the application for OIC approval. This draft included the following:It has been agreed between Pullington and Kaiwarua that on a split up(a) the total value of the assets less liabilities would be the basis on which the calculation is made irrespective of the then values of individual pieces of land and(b) if either party wished to sell the other would have the right to purchase at a price to be fixed by agreement or arbitration[16] On 18 May 2000, Mr Bradley wrote to the OIC seeking approval for Pullington to purchase a half share in the Ealing property. The letter included reference to the agreement in the same terms as the draft letter of 21 March 2000. Mr Holman provided information to Mr Bradley for the OIC application but Mr Morris was not involved in this.[17] In the meantime, on 15 May 2000, Mr Hubbard had written to a farm consultant instructing him to work out a division of the titles. The letter said that, due to some Australian tax problems, Pullington was to take title in its own name. The letter also advised the farm consultant that:The two partners intend to enter into an Agreement providing that despite the different ownership the property will be farmed as one, and if one partner wishes to sell to the other, the total property will be valued and the result divided in two.[18] By letter of 12 June 2000 Mr Hubbard instructed Mr Bradley to form Kaiwarua-Ealing in which Mr and Mrs Hubbard and Mr and Mrs Morris were to be equal shareholders. Mr Hubbard also instructed Mr Bradley to prepare a partnershipagreement. Relevantly, Mr Hubbard's instructions were that the agreement was toinclude the following terms:Partners – Pullington and Kaiwarua-Ealing.Period – 5 years.Profits/losses – split 50/50.Manager to be Andrew Morris; salary to be fixed by mutual agreement.A provision needs to be made that either party wishes to sell, his share is to be offered to the other party first. It was suggested that some notes prepared by Mr Holman could be incorporated into the agreement. (It is common ground that the notes referred to were the"Agreement to Farm in Co-operation" already noted.)[19] Mr Bradley prepared a first draft of the partnership agreement which was circulated to the parties some time prior to settlement. Mr Bradley understood that he was preparing the draft agreement for all parties. His further understanding was that his instructions from Mr and Mrs Morris would be conveyed by Mr Hubbard. The draft named Pullington and Kaiwarua-Ealing as parties. It provided that the partnership would be for a term of five years commencing on 1 July 2000, subject to cl 6 which was in the following terms:6. Termination6.1 Notwithstanding the provisions of clause 1.2 of this Deed either partner shall be entitled to terminate the partnership by giving to the othernot less than one year's notice in writing at any time.6.2 If the partnership is terminated in this way then the partner ("the purchasing partner") to whom notice was given shall be entitled to purchasethe interest of the partner giving notice to terminate ("the retiring partner")upon giving notice to the retiring partner within three months of receiving the notice to terminate.6.3 After notice has been given by the purchasing partner the partners will instruct a registered valuer or valuers to value all land, buildings, fixtures, plant, livestock and conserved feed as at the date of termination or if the parties shall not be able to agree upon the registered valuer or valuers each partner shall be entitled to appoint its own valuer or valuers with such valuer or valuers appointing an umpire. Half the total value of all the landand buildings shall be deemed to be the value of each partner's interest in thesame notwithstanding ownership as shown on the titles. Likewise half the total value of all other assets shall be deemed to be the value of eachpartner's interest in such assets. In all other respects the price to be paidshall be fixed by agreement between the partners or failing agreement byarbitration as hereinafter provided. Settlement of the purchase shall be effected on the date of termination of the partnership or as otherwise agreed upon between the partners.6.4 If no sale shall eventuate pursuant to the provisions of clause 6.2 the retiring partner shall be entitled to sell its interest in the partnership to any person, persons or company approved by the other partner. For that purpose either partner may require ownership of the various pieces of land to be adjusted to take into account changes brought about since the commencement of the partnership by virtue of specific investment strategies and improvements to land which may have in any way disadvantaged such partner in relation to the other such adjustment to be made by David Montgomery Agribusiness Consultants & Valuers Ltd or its nominee.6.5 If no sale shall eventuate pursuant to the provisions of clauses 6.2 or 6.4 by the date of termination of the partnership all the assets of the partnership including each partners share of the land and buildings and all fixtures plant and livestock and conserved feed shall be sold with all convenient speed and the proceeds applied in paying and discharging such debts and liabilities and the expenses of and incidental to the winding up of the partnership affairs. The balance of such proceeds shall be shared equally between the partners.6.6 The partners shall execute all necessary or proper instruments, acts, matters and things for facilitating any other matters above referred to.[20] After this draft was circulated to the parties, Mr Holman said that he visited New Zealand shortly before settlement and had discussions with Mr Morris. Mr Holman's evidence was that certain matters were agreed orally in relation to theterm of the agreement and termination provisions. Mr Holman's evidence was that,on the advice of Mr Hubbard, he would need to be a permanent participant in the Ealing property to avoid adverse implications for the Australian capital gains tax provisions. Mr Morris disputed this evidence, stating that he would not have agreed to an indefinite term since he wanted the certainty of a five year term as farm manager.[21] Mr Holman made notes on a copy of the first draft of the partnership agreement. Importantly, these included in relation to the term of the agreement a note stating: why is this term limited at all? I wonder are we creating a termination date unnecessarily.Mr Holman also wrote alongside cl 6.4 "please explain".[22] Mr Holman then sent a note to Mr Bradley stating:Dear EdgarEaling Pastures Deed - Draft1. Please consider my preamble. Just in case we are all dead and no- one knows why done this way.2. 1.2 Why 5 years. Would an indefinite time be better.3. 6.4 I need to discuss because I'm not sure I understand why we might need this.4. 7.1 Typing error final line.I will ring later.Geoff Holman[23] The settlement of the land purchase was completed on 3 July 2000. Pullington and Kaiwarua-Ealing each invested $2 million and the partnership borrowed a further $3 million for stock, plant and development capital. The debt was secured against the land. Two of the sixteen titles were taken in the name of Pullington and the remainder in the name of Kaiwarua-Ealing.[24] A second draft partnership agreement was prepared by Mr Bradley and circulated on the day of settlement (3 July 2000). The second draft agreement contained a preamble drawn from an earlier note prepared by Mr Holman:A Pullington and Kaiwarua have pooled resources to purchase from Ngai Tahu Holdings Ltd, a 1284 ha grazing property, known as Ealing Pastures, which had been owned and managed by Landcorp until 30th June 2000.B Pullington would be nominating its share of the investment as a"roll-over" asset pursuant to Australian Tax Office Capital Gains Taxregulations.C These regulations created a requirement for Pullington to hold direct title to the new assets; not a 50% share in a company or similar entity which might otherwise have been formed for the purpose.D This deed arises from those constraints but with the partner'sprimary objective of being even-handed in the treatment of both parties, during the resolution of any events, envisaged or otherwise, which might arise.[25] Clause 1.2 was amended to provide that "The partnership shall be for an indefinite period commencing on 1 July 2010 and expiring as provided in clause 6.1of this Deed". Clause 6.1 was consequentially amended to provide that "Either party shall be entitled to terminate the partnership by giving to the other not less than oneyear's notice in writing at any time". Clauses 6.2 to 6.6 relating to pre-emptive rights remained the same as in the first draft as did the other provisions.[26] In his covering letter to Mr Holman sending the second draft of the partnership agreement Mr Bradley said: on reflection I have retained clauses 6.3 and 6.4 as they are since it seemsto me they cover two separate circumstances. In clause 6.3 one partner is buying out the other so who owns which pieces of land is irrelevant. In clause 6.4 it is contemplated one of the partners will remain farming its own pieces of land while the other will sell its pieces of land to a third party. In such event who owns what is very relevant.I have also sent a copy of this draft to Allan.[27] There was disputed evidence about whether Mr Holman signed the agreement. The letter sending the second draft to Mr Holman was addressed to him C/- Hubbard Churcher. Mr Holman said that Mr Morris brought it to him and he (Mr Holman) signed it just before returning to Perth on 5 July 2000. He said he asked Mr Morris to take it to Mr Hubbard to get it signed. He acknowledged it was important to have the agreement in place because of the disproportionate ownership of the titles.[28] Mr Morris did not recall taking an agreement to Mr Holman to sign. If he had seen an agreement he would certainly have remembered it. No signed copy of a partnership agreement has ever been produced and it is accepted that none was completed.[29] Mr Bradley said there was only one occasion when he discussed the agreement with Mr Hubbard after sending the draft. At that stage, Mr Hubbard was non-committal and Mr Bradley gained the impression that Mr Hubbard and Mr Holman had fallen out with each other. Mr Bradley noted in a letter of 14 August 2000 to Mr Hubbard that completion of the partnership agreement remained outstanding but he said he never received further instructions.[30] Despite the absence of a written partnership agreement, farming operations proceeded and part of the farm was converted to dairy farming at considerable expense. At the end of the first year, Mr Hubbard produced trading accounts for the partnership under cover of a letter dated 26 November 2001. Significantly, the letter noted there were two separate partnerships. The first was known as the Ealing Land Partnership (which owned the land in equal shares between Pullington and Kaiwarua-Ealing) and the second was Ealing Pastures Partnership (a farming partnership owning the livestock, plant and equipment, with Pullington holding 50 per cent and Mr and Mrs Morris and Mr and Mrs Hubbard holding 25 per cent each). The financial statements were prepared on the basis of the two separate partnerships without objection from Mr Holman or Mr Morris.[31] It seems there was some discussion around the time of the partnerships' first annual meeting in late 2001 about completion of a partnership agreement. Mr Morris' evidence was that Mr Hubbard said he would talk to Mr Bradley aboutgetting it resolved. Mr Morris and Mr Holman went to see Mr Bradley after the annual meeting and asked that he prepare a draft partnership agreement and send it to them. Mr Bradley had a vague recollection of being asked to attend to this matter but although he telephoned Mr Hubbard, he received no further instructions. There is no evidence that Mr Holman ever pursued the completion of a partnership agreement after the end of 2001.[32] The land and farming partnerships continued for the next decade. During that time, two milking sheds and two new houses for farm staff were constructed. This involved substantial bank borrowings totalling $20 million by the time of dissolution. Then, on 20 June 2010, after the collapse of South Canterbury Finance Ltd, Mr and Mrs Hubbard and associated entities were placed in statutory management. There were discussions between Mr Morris and the statutory managers about a sale of the Hubbard interests in Kaiwarua-Ealing to Mr and Mrs Morris. When Mr Holman became aware of this, he was annoyed and maintained he was entitled to a right of pre-emption in respect of the Hubbard interests in Kaiwarua-Ealing if they were to be sold. That cannot be correct as Mr Holman's counsel acknowledged. If there were a right of pre-emption, it could only be in respect of the interest of Kaiwarua-Ealing in the partnership property.[33] As already noted, Mr Hubbard died in a motor accident on 2 September 2011. This had the effect of dissolving the Ealing Pastures Partnership from that date by virtue of s 36(1) of the Act. By letter of 7 November 2011 Kaiwarua-Ealing gave notice to Pullington of its intention to dissolve the Ealing Land Partnership with effect from the date of the notice. The notice was given under s 35(1)(c) of the Act which provides that subject to any agreement between the partners, a partnership of an undefined period is dissolved by one partner giving notice to the other.[34] The respondents then commenced the High Court proceedings on 23 December 2011.The Judge's findings of fact[35] After carefully reviewing all the evidence both oral and documentary, the Judge made a series of factual findings. In doing so, she generally preferred the evidence of Mr Morris to that of Mr Holman where there were areas of dispute. We summarise the factual findings:4(a) During February 2000 Mr Hubbard, Mr Morris and Mr Holman discussed the basic parameters of how the proposed partnership would work.(b) While it is possible that Mr Holman tabled his Agreement to Farm in Co-operation when Mr Morris was present, the Judge accepted Mr Morris' evidence that he did not recall seeing thedocument and did not commit to it.(c) Mr Holman's note to Mr Morris of 15 March 2000 wasconsistent with an intention by the parties that an agreement was to be drafted and that it would provide pre-emptive rights.(d) The Judge rejected Mr Holman's evidence that, at the meeting on 3 February 2000, Mr Hubbard had told Mr Holman to see Mr Bradley for preparation of the partnership agreement4 Kaiwarua-Ealing Ltd v Pullington Investments Pty Ltd, above n 3, at [103] to [126].(although it appears that a meeting did take place that day between Mr Holman and Mr Bradley).(e) At that time, the parties had not committed to the pre-emptive provisions in the Agreement to Farm in Co-operation.(f) The Judge noted that it was not disputed that Mr Hubbard and Mr Morris knew that Mr Holman was investing in farm land to defer paying capital gains tax. But she rejected Mr Holman'sevidence that they knew that the Pullington investment needed to be permanent (noting that this was inconsistent with the advice from the Australian tax accountants of 25 January 2000and Mr Holman's long term objectives referred to at [7] above, and with the Agreement to Farm in Co-operation).(g) The other parties knew that Pullington needed to hold theinvestment for at least five years to achieve Mr Holman's taxobjectives. This was why Mr Hubbard had instructed Mr Bradley there was to be a five year term.(h) Mr Holman had not made it known that Pullington needed pre-emptive rights to ensure Pullington's holding waspermanent.(i) The Judge accepted Mr Morris' evidence (in preference to thatof Mr Holman) that Mr Morris never saw the draft partnership agreement prior to settlement nor discussed it with Mr Holman at any stage.(j) Mr Holman's evidence that, after Mr Bradley circulated thesecond draft agreement, he (Mr Holman) signed it and askedMr Morris to obtain Mr Hubbard's signature was not reliable.(k) Mr Holman knew that Mr Hubbard had not signed the partnership agreement on or before settlement.(l) Mr Holman was prepared to commit to the purchase and to complete settlement without ensuring there was a finalised signed partnership agreement in place.(m) This was not as risky as it seemed because Mr Holman had already put in place some protection of his position. Pullington had titles in its name and no tax issue would arise if it held onto those titles for five years. The titles were"jumbled" (using Mr Holman's words) to "consolidate theprinciple that we are acting as a team and frustrate attempts to break our agreement other than by mutual consent or by dueprocess provided for in the agreement".(n) The mutual consent of the parties was needed because there was the possibility that improvements paid for by thepartnership would be made to the land in one partner's name,disproportionately to improvements made to the land in theother partner's name.(o) Had it been important to Mr Holman to have a finalised partnership agreement in place, he would surely have followed it up but he did not do so.(p) Although the matter of the partnership agreement had been raised at the first annual meeting in late 2001, Mr Holman did not insist on getting the agreement signed and took no steps thereafter to ensure it was in place.(q) Mr Holman's concerns about the partnership agreement arose only after Mr Hubbard's statutory management some 10 yearslater.The Judge's assessment[36] Having made these factual findings, the Judge commenced her assessment by stating:[127] To be bound by the draft partnership agreement as forwarded to Mr Hubbard and Mr Holman on 3 July 2000, each party must have communicated its acceptance to it. That communication can be by words or conduct. The question is whether, objectively viewed, each party manifested an intention, through words or conduct, to be bound by the terms of that agreement.[37] The Judge referred to her finding about the unreliability of Mr Holman'sevidence that he had communicated his acceptance of the agreement. But even if he had communicated his acceptance of the term of the second draft, Kaiwarua-Ealing also needed to communicate its acceptance. Pullington had submitted that Mr Hubbard's silence after 3 July 2000 was conduct that amounted to acceptance. The Judge observed that silence was usually equivocal as to consent. It was therefore necessary to consider whether there were words or conduct which, objectively viewed, indicated that Kaiwarua-Ealing's consent had beencommunicated. It was Mr Hubbard's words or conduct that were important sinceboth sides knew he was representing Kaiwarua-Ealing and that Mr Morris was not involved in the partnership negotiations.[38] The Judge then said:[131] From the outset the parties envisaged that the partnership agreement would include pre-emptive rights. This was included in the Agreement to Farm in Co-operation discussed with Mr Hubbard, it was included in theOIC application, it was referred to in Mr Holman's note to Mr Morris on 15 March 2000, it was referred to in Mr Hubbard's instructions toMr Montgomery on 15 May 2000, and it was included in Mr Hubbard'sinstructions to Mr Bradley on 12 June 2000. However it was also always envisaged that a written partnership agreement would be prepared, and Mr Bradley was instructed to prepare a draft agreement. It can be presumed that, at the time those instructions were given, the parties envisaged that once they were all happy with the draft it would be signed by them.[39] The Judge found it was significant that Mr Hubbard's instructions toMr Bradley were that the partnership was to be for a term of five years. As at 12 June 2000, she found that Mr Hubbard's words showed he was agreeable topre-emptive rights if one party wished to sell within the five year period of thepartnership agreement. However, Mr Hubbard's instructions were silent about whatwas to occur after five years.[40] Mr Holman had proposed certain amendments to the first draft agreement including a proposed amendment to the length of the term of the partnership but:[135] Crucially, Mr Holman heard nothing to indicate that Mr Hubbard(or Mr Morris) had agreed to a partnership agreement which did not have a five year term, nor whether the parties envisaged that the pre-emptive rights would continue to apply if the partnership agreement extended beyond five years.[41] The Judge went on to say that in the absence of consent communicated on behalf of Kaiwarua-Ealing, it could not be assumed that Mr Hubbard or Mr Morris were agreeable to Mr Holman's amendments. From their perspective, the Judgefound that they knew only that Pullington wished to hold the title to the land in its name for five years. The Judge considered there were other reasons why Kaiwarua-Ealing might not have been agreeable to Mr Holman's amendments.These included the possibility contemplated by Mr Morris that the partners might want to go their separate ways but continue to own a share of the land. That could be achieved by dividing the land in two and re-allocating the titles. The Judge then said:[137] Therefore the words or conduct from Kaiwarua-Ealing Ltd up until 3 July 2000 did not manifest an intention to be bound by the draft partnership agreement. After 3 July 2000 the farming operation was underway. It was not until the annual meeting in November/December 2001 that further thought was given to finalising the agreement. At that time, Mr Bradley was asked about it. Mr Bradley responded by seeking instructions from Mr Hubbard but did not hear back from him. Mr Bradleywas therefore of the view that the agreement would need Mr Hubbard'sapproval. Mr Morris and Mr Holman must have thought that also, because they did not themselves take the initiative to sign the draft partnership agreement. Thereafter Mr Morris continued to contemplate the possibility of the farms being divided into two and he made decisions about houses andmilking sheds with that possibility in mind and with Mr Holman'sknowledge. There the matter was left until after Mr Hubbard's financialproblems arose and he was put into statutory management, Mr Holman and Mr Morris had fallen out with each other, and Mr Holman had been unsuccessful in securing an agreement with the statutory managers.[42] The Judge also noted that Mr Hubbard had not at any time expressly confirmed to Mr Bradley or the other parties that he was happy with the draft. Indeed, she found that Mr Hubbard appeared to have made a deliberate decision notto respond to Mr Bradley's request for instructions or, perhaps, that he was simply too busy to do so. As an experienced businessman, the Judge found that Mr Hubbardmight well have decided it was better to have no agreement at all and therefore no obligation to stay in partnership with Pullington for even five years. As an experienced businessman himself, Mr Holman must have known he had no certainty as to the terms of the arrangement without a signed agreement from Mr Hubbard.[43] The Judge then concluded:[139] In these circumstances a reasonable person would not conclude that the terms of the draft agreement as circulated on 3 July 2000 (nor any earlier draft) had been agreed to by Mr Hubbard on behalf of Kaiwarua-Ealing Ltd.Mr Hubbard's last instruction was for a five year term. Even if he was agreeable to the process in clause 6, he gave no indication to Mr Holman that he agreed to a term beyond five years, and that in that case the process in clause 6 would still apply.[44] Mallon J reviewed relevant authorities noting the following points:5(a) The business relationship between the parties had already commenced before the partnership agreement had been finalised.(b) The parties intended there would be pre-emptive rights but had not settled the form of them nor agreed whether they would apply after five years.(c) The parties' conduct did not show they intended to be bound by cl 6 of the draft partnership agreement.(d) Neither the Agreement to Farm in Co-operation nor the draft partnership agreement were ever signed by both parties, nor were they adopted or unconditionally committed to by Kaiwarua-Ealing.(e) There is no evidence showing ratification of cl 6.(f) The creation and adoption of the separate farming partnership meant that further amendments would be necessary if the5 At [140]–[142].partnership agreement were to set out accurately the partnership structure Mr Hubbard put in place.(g) The end result was that the parties had not agreed on what was to occur on termination of the partnership if it extended beyond five years. As the partnership had extended beyond five years, termination was governed by the Act.[45] The Judge made declarations in the following terms:6(a) The Ealing Land Partnership and the Ealing Pastures Partnership are terminable under the Partnership Act 1908;(b) The Ealing Land Partnership was terminated by the notice given on 7 November 2011;(c) The Ealing Pastures Partnership was terminated by the death of Mr Hubbard on 2 September 2011;(d) The plaintiffs are not required to sell their interests in the assets of the Ealing Land Partnership and the Ealing Pastures Partnership assets.Did the Judge find that the parties did not agree upon a right of pre-emption and, if so, was she correct in that respect?[46] Mr McVeigh QC first submitted on Pullington's behalf that the Judge foundthat there was a right of pre-emption agreed between the parties. We cannot accept that submission. The tenor of the judgment is clear.7 The Judge made it clear thatwhile the parties "envisaged" at the outset that the partnership agreement wouldinclude pre-emptive rights, the parties contemplated that a draft agreement would be prepared and would be signed once the parties accepted its terms.[47] The Judge also found that the parties did not intend to be bound until they had each communicated to the other their intention to be bound. Since Mr Hubbard had not communicated any such intention to Mr Holman, the draft agreement did not become binding.86 At [148].7 At [131] (cited at [38] above).8 At [127], [137] and [139].[48] Mr McVeigh submitted nevertheless that there was evidence of an agreement to grant Pullington a right of pre-emption. He relied upon the Agreement to Farm in Co-operation, the application for OIC approval, Mr Holman's note to Mr Morris of15 March 2000, Mr Hubbard's instructions to the farm consultant of 15 May 2000 and Mr Hubbard's instructions to Mr Bradley of 12 June 2000. Counsel also referredto Mr Morris' acknowledgement in cross-examination that there was an oral agreement that if either party wanted to sell to the other, it had to offer it to the otherfirst. Finally, reference was made to Mr Bradley's evidence that Mr Hubbard alwaysrequired a right of pre-emption when entering any joint arrangement. Counsel pointed to the commercial improbability of the parties entering into an arrangement of this kind without providing for full rights of pre-emption.[49] Pullington submitted that a contractual right of pre-emption may be enforceable even if there are no provisions relating to the terms of the agreement which might in the future be concluded if the right is exercised and a contract concluded. Reliance was placed on the following passage from Burrows, Finn and Todd Law of Contract in New Zealand:9Such a contractual right of preemption may be valid even if there are no provisions relating to the terms of the future agreement as the courts will imply a term that the grantor of the right must offer to the holder of the right of preemption the opportunity to contract on the terms that the grantor would offer to any other person with whom he or she might wish to contract. Again, in such a case it can be said that there is a machinery for determining the terms, and therefore the contractual right of pre-emption will not be challengeable for uncertainty.[50] The same principle is described in Chitty on Contracts:10A right of pre-emption, on the other hand, is not itself an offer but an undertaking to make an offer in certain specified future circumstances. An agreement conferring such a right is, therefore, not void for uncertainty merely because it fails to specify the price. It obliges the landowner to offer the land to the purchaser at a price at which he is in fact prepared to sell; and if the purchaser accepts that offer there is no uncertainty as to price.9 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed,LexisNexis, Wellington) at [3.7.4].10 HG Beale (ed) Chitty on Contracts (31st ed, Sweet & Maxwell, London, 2012) at [2–128].[51] Pullington relied in particular on the decision of the (then) Supreme Court inAdaras Developments Ltd v Marcona Corp.11 The parties entered into a contract giving the plaintiff a "first option" to enter into a joint venture with the defendant onthe following terms:5. Should the Principal proceed with the establishment of the industry it records its intention to give to the Consultant the first option of taking up in whole or part the rights for any New Zealand participation in such industry.[52] O'Regan J found that cl 5 created a legal obligation on the defendant, in theevent that it decided to establish the industry in New Zealand, to make the plaintiff an offer of participation in the venture "in a form capable of acceptance before it treated with any other person". 12[53] In so finding, O'Regan J relied on Smith v Morgan.13 The relevant clause inSmith provided:[For a period of five years] should the vendor wish to sell [a particular piece of land] the first option of purchasing the said land ... shall be given to the purchaser at a figure to be agreed upon. Provided that any such offer for sale shall only remain open for a period of three months from the date on which the said offer for sale is made by the vendor.[54] The plaintiff in Smith argued that this clause was unenforceable for uncertainty because there was no agreement as to price at which the land would be offered. Brightman J held that there was no uncertainty as there was agreement that there would be an offer to sell the land should the vendor decide that they wanted to sell. There was no need for the price to be agreed upon, or for a mechanism for determining the price to be agreed upon, because the agreement was simply that an offer for sale would be made. The Judge found that it was not necessary to read in terms about offers at market value, all that the term required was that if the vendorwished to sell she was obliged "to make an offer to the purchaser at the price and nomore than the price at which she is, as a matter of fact, willing to sell".11 Adaras Developments Ltd v Marcona Corp [1975] 1 NZLR 324 (HC).12 At 331–332. The Judge later held that cl 5 had been modified by later agreement so that it nolonger had this effect, but this is irrelevant for present purposes.13 Smith v Morgan [1971] 1 WLR 803 (Ch).[55] Smith v Morgan continues to be followed in England, with a recent example being Astrazeneca UK Ltd v Albemarle International Corp.14[56] In summary, where an agreement granting a right of pre-emption is established, the grantor of the right must first offer to the grantee the opportunity to offer to buy the land or other asset that is the subject of the right upon terms the grantor would be prepared to offer to others. The specific term of sale need not be specified since the Court will not hold such an agreement void for uncertainty merely because the parties did not agree on the price for which the asset must be offered for sale or upon the terms of sale. The price and other terms would be commensurate with the terms upon which the grantor would be prepared to offer the asset to others.[57] Cases such as Adaras and Smith v Morgan are clearly distinguishable from the present case. In those cases, there was no doubt as to the existence of the right of pre-emption. The right was clearly set out in a written agreement and the only issue was the method of implementing the right. In the present case, it is the very existence of the right that is in question. For the reasons we shortly discuss, we are satisfied the High Court was right to conclude that no contractual right of pre-emption was ever agreed and that no such right would ever become binding on the parties unless and until its terms were agreed upon and included in a written partnership agreement.[58] We can briefly state the reasons for the first conclusion that the terms of any pre-emptive rights were never agreed:(a) Mr McVeigh abandoned any reliance on cl 6 of the draft partnership agreement as evidence supporting the terms agreed for the pre-emptive rights. It follows that the terms agreed (if any) had to be established by other evidence.(b) The terms described in the various notes and correspondence varied substantially.1514 Astrazeneca UK Ltd v Albemarle International Corp [2011] EWHC (Comm) 1574 at [30].15 See, for example, the obvious differences between Mr Holman's "Agreement to Farm in(c) The circumstances in which a right of pre-emption might be triggered were only vaguely defined with the use on severaloccasions of the expression "split up".(d) The application for OIC approval contemplated that the right to purchase would be triggered by one party wishing to sell to the other. This is consistent with the usual position that a right of pre-emption applies in the event of one party wishing to dispose of their interest in a joint enterprise. There is nothing in the evidence to suggest there was any agreement about what would happen in the event of a general dissolution of partnership when very different considerations apply.(e) This is an important issue since a right of pre-emption would not naturally apply in the case of a dissolution where the entire assets of the partnership are to be realised as distinct from the interests of one member of the partnership. Upon a dissolution of partnership, s 42 of the Act defines the rights of the members to the application of partnership property. The partnership property is to be realised, debts paid and the net balance divided between the members in accordance with their interests in the partnership.(f) It was contemplated at the beginning of the negotiations between Mr Hubbard and Mr Holman and by the draft agreements, that only a single partnership would be formed. After the first year of farming operations, the parties accepted there would be two partnerships, one to hold the land and the other to conduct the farming operations and to own the stock, plant and equipment. There was no evidence as to how a right of pre-emption would operate in relation to each partnership. This was a particular issue in the events that happened withCo-operation" which contained much more detailed terms and the application for OIC approval prepared by Mr Bradley.Mr Hubbard's death bringing the farming partnership to an end by operation of law.(g) Not only were there two different partnerships but they also involved different parties. If Mr Hubbard had sold out of the farming partnership, a right of pre-emption would presumably have allowed Pullington to purchase its share of his interests. In contrast, an exit by Mr Hubbard from the land partnership would have been an internal matter between the shareholders of Kaiwarua-Ealing. These differences highlight the need to have the terms of any pre-emption right agreed.(h) The parties had in mind that the right of pre-emption would be expressed in elaborate terms as contemplated by cl 6.2 and cl 6.3 of the draft partnership agreements but there was no suggestion of terms of that kind in the other evidence relied upon to support the proposition that a right of pre-emption was agreed.[59] The reasons for our second conclusion that the parties never became bound by any pre-emptive provision are these. The correspondence and course of events make it quite clear, as the Judge found, that the parties intended any right of pre-emption to be included in a written partnership agreement. We need not repeat the evidence the Judge relied upon. It is sufficient to note that Mr Hubbard instructed Mr Bradley to prepare a partnership agreement, the need for which was acknowledged by Mr Holman to be important. Mr Holman commented upon the first draft with suggested alterations. Importantly, there was never any meeting of minds over the length of the term of the agreement. Mr Hubbard (representing himself and Mr Morris) instructed Mr Bradley that the term was to be five years. Mr Holman, however, questioned this in his comments to Mr Bradley who then drafted an agreement with an indefinite term. As the Judge found, there was no evidence Mr Hubbard and Mr Morris ever agreed to such a term or, if they did, that they communicated that to Mr Holman.[60] The term of any partnership agreement was important both in itself and because it was linked to cl 6.1 and cl 6.2 of the draft agreements dealing with the right to terminate the agreement and with the right of pre-emption.[61] Despite Mr Holman's clear wish at the beginning to have a written partnership agreement, he made no real effort to pursue its execution either before settlement of the purchase or at any time thereafter. Instead, he was content to adoptMr Hubbard's suggestion of both a land and farming partnership on terms notrecorded in writing. Mr Holman also authorised the borrowing of very large sums of money secured over the partnership land for the purpose of developing the farm. Farming operations continued on this basis without documentation of the partnership relationship or any right of pre-emption for at least a decade without any apparent concern being expressed by Mr Holman.[62] We agree with the Judge that it is possible Mr Holman thought it better forthe partnership simply to proceed on an indefinite basis and to rely on the "jumbled"title allocation to ensure the parties would be obliged to deal with each other if one wished to sell. And, given the evidence from Mr Bradley about a degree ofcircumspection on Mr Hubbard's part, it may well be that he preferred anopen-ended less formal relationship as well.[63] In summary, while some sort of right of pre-emption was proposed and initially intended, the parties always contemplated that it would be included as part of a written partnership agreement. This would be the ordinary expectation of parties entering a substantial transaction and business arrangement.16 While draft agreements were prepared, there was no consensus on key terms, no written agreement was signed and the matter was then left to lapse. Importantly, there was never any agreement on the terms of a right of pre-emption or the circumstances in which it might be triggered. Nor was there any evidence from which it could be inferred that the parties intended to be bound by such a right in the absence of a written agreement.16 See Burrows, Finn and Todd, above n 9, at [8.2.2].[64] Instead, the parties were content to proceed on the basis of undocumented arrangements with Pullington having a half share and the other half share being owned between Mr and Mrs Hubbard and Mr and Mrs Morris. The land at Ealing was acquired and titles allocated. Farming operations proceeded with Mr Morris as manager on an agreed salary. Mr Hubbard prepared the accounts for the partnership and, after the first year of operations, the parties accepted his suggestion of proceeding with the two separate partnerships. We note that this substantially altered business relationship had not formed any part of the initial discussions in 2000. There is no evidence that the parties ever discussed how a right of pre-emption might apply under these altered arrangements. Thereafter, the partnership business proceeded for at least the next ten years before disputes arose.Did the Judge find that there was, at the least, a right of pre-emption for a period of five years?[65] We do not accept Pullington's submission that the Judge found there was aright of pre-emption for five years. It is evident that the Judge did not find there was any right of pre-emption since the terms of any such right were never agreed and the parties did not intend to be bound in the absence of a written agreement incorporating a right of pre-emption.[66] The Judge's reference to there being no agreement as to whether the right wasto extend beyond five years was simply to illustrate the fact that there was never any meeting of minds by the parties as to the terms of a right of pre-emption. That resulted from her finding that, in Mr Hubbard's mind, the agreement was to be for afixed five year term and the right of pre-emption was to be linked to that term. TheJudge's reference to there being no agreement as to whether the right was to apply thereafter was to reinforce her more general finding that the terms of a written partnership agreement were never agreed. Her observations in this respect did not amount to a finding that there was a right of pre-emption for five years or, indeed, for any period.If there was a right of pre-emption, did it continue for Pullington's benefit afterthe end of five years?[67] Given our finding that no right of pre-emption was agreed or became binding, this question must be decided in the negative. Even if there were such a right, it could not have continued by virtue of s 30 of the Act since this section only applies to a fixed term partnership. As they ultimately proceeded, the partnerships were for an indefinite term.Should this Court make an order for sale of the land and, if so, on what terms?[68] Mr Butler urged us on behalf of the respondents to order a sale of the partnership assets to give effect to s 42 of the Act. The respondents' proposed termsupon which such a sale would proceed include the right for any members of the partnership to bid at auction. Mr Brodie advised the Court that Pullington did not now agree to an order for sale although it had previously indicated this could occur if its appeal failed.[69] We recognise the pragmatism of the course the respondents suggest. But we do not propose to make such an order in the absence of agreement by all parties. In the High Court, the respondents sought only declaratory relief in respect of the pre-emptive rights alleged by Pullington. We consider the proper course is to allow the parties to consider their positions in the light of our judgment. If no agreement can be reached, we have little doubt that the High Court would consider on an urgent basis an application to determine whether a sale should now be ordered and, if so, on what terms. We note that other options such as a division of the land into two farms may be possible by agreement.[70] We conclude by noting our reservations about Pullington's assertions that itwould become liable for capital gains tax if its interest in the Ealing farm were sold within five years of its acquisition. That claim is not supported by the terms of theletter from Pullington's accountants quoted at [7] above and, in any event, it is possible any such risk would be eliminated if Pullington bought the property at auction or acquired other qualifying land in substitution for the Ealing land. It is notpossible to determine whether that is the case from the material currently before the Court.Result[71] The respondents note an apparent error in declaration (d) made in the High Court. It appears that this should have read that the plaintiffs (respondents) are not required to sell their interests in the partnership assets to Pullington. We agree this appears to be an error and we will correct it in the formal judgment.[72] The formal orders of the Court are:A Save as noted in B, the appeal is dismissed.B The declarations in the High Court are confirmed but varied so that declaration (d) reads:(d) The plaintiffs are not required to sell their interests to Pullington Investments Pty Ltd in the assets of the Ealing Land Partnership and the Ealing Pastures Partnership assets.C The appellant must pay costs to the respondents as for a standard appeal on a Band A basis with usual disbursements. We certify for second counsel.Solicitors:Russell Moon & Fail, Ashburton for AppellantGoodman Tavendale Reid, Christchurch for First and Second RespondentsRussell McVeagh, Wellington for Third Respondent