STOCKCO LIMITED V TAWHITI-ARIKI LIMITED HC AK CIV-2010-404-003413

STOCKCO LIMITED V TAWHITI-ARIKI LIMITED HC AK CIV-2010-404-003413 28 April 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2010-404-003413BETWEEN STOCKCO LIMITEDPlaintiffAND TAWHITI-ARIKI LIMITEDFirst DefendantAND MICHAEL PHILLIP PROUDESecond DefendantHearing: 18-19 November 2010Counsel: B Gustafson and K Puddle for the PlaintiffA Barker for the DefendantsJudgment: 28 April 2011JUDGMENT OF WOOLFORD JThis judgment was delivered by me on Thursday, 28 April 2011 at 4:00 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:B Gustafson, PO Box 1297, Shortland Street, Auckland.Email: bret@gustafson.co.nzA Barker, Shortland Chambers, PO Box 4338, Shortland Street, Auckland 1140.Email: ab@shortlandchambers.co.nzLowndes Jordan, PO Box 5966, Wellesley Street, Auckland 1141. DX CP21511Email: mhm@lojo.co.nzHarris Harvey Nash, PO Box 3, Ohakune 5461. DX PA85505Introduction[1] The plaintiff is a livestock financing company. The second defendant is ashareholder and the sole director of the first defendant. The first defendant carrieson a farming business at Ohakune.[2] Between 30 March 2010 and 9 April 2010 the first defendant sold 172 bullsto Affco New Zealand Ltd for $162,800.89. Between 4 May 2010 and 17 May 2010,it also sold 263 bulls to PGG Wrightson Ltd for $186,067.09.[3] It did not own the bulls it sold. They had however been grazing on the firstdefendant‟s farm property (the farm property) in accordance with a weaner bullgrazing agreement and a share farming grazing agreement entered into between thesecond defendant‟s father and John Hudson, said to be the owner of the bulls. Thesecond defendant‟s father had sold the farm property to the first defendant while thebulls were being grazed on the property.[4] The plaintiff says that it was the owner of the bulls. It had entered into alivestock agreement on 30 July 2002 with Gwavas Station Partnership which is saidto have been a trading partnership comprising Mr Hudson and his wife,Fiona Hudson. It had also entered into a second livestock agreement on18 December 2009 with Gwavas Station Ltd which it says was effectively anassignment of the first agreement. Mr and Mrs Hudson are shareholders of GwavasStation Ltd. Mr Hudson is the sole director.[5] The livestock agreements enabled Gwavas Station Partnership and GwavasStation Ltd to procure livestock on behalf of the plaintiff and to graze and managethe stock for the plaintiff. Title and property in all stock acquired in terms of theagreements passed to and remained with the plaintiff.[6] The relationships between the parties can be illustrated as follows:[7] The plaintiff claims the sum of $382,531.71 which includes the proceeds ofsale received by the first defendant from Affco and PGG Wrightson andconsequential losses. It alleges that the defendants converted the stock. It alsoalleges that the security interests created by the livestock agreements were perfectedby registration of financing statements. Accordingly, the rights granted under thelivestock agreements are enforceable against the defendants. Finally, it also allegesas a result of the stock sales the plaintiff suffered permanent injury to itsreversionary interest in the stock.[8] The defendants say that Mr Hudson was the plaintiff‟s agent and gave hisconsent to the sale of the bulls. They also say by entering the livestock agreementsand by its subsequent conduct the plaintiff voluntarily assumed the risk of harm.Finally, the defendants say that the sum claimed by the plaintiff represents a level ofunjustifiable enrichment to the plaintiff whose legitimate expectation is only to getPlaintiff(owner of bulls)Gwavas Station PartnershipGwavas Station LtdEntities controlled by Mr & Mrs HudsonLivestock agreements:bailment of bullsBailorBaileeSecond defendant‟s fatherFirst defendantCompany controlled by second defendantGrazing agreementsSold farm property Affco New Zealand LtdPGG Wrightson LtdSold 172 bullsSold 263 bullsback its advance plus interest, less money already paid. The defendants also counterclaim against the plaintiff and Mr Hudson and the Gwavas Station Partnership who were joined as third parties.[9] Mr Hudson suffered a serious injury on 10 October 2010 and at the request ofthe defendants and the third parties the High Court directed severance of thedefendants‟ claim against the third parties from the trial between the plaintiff and thedefendants.Livestock agreements[10] There were two livestock agreements between the plaintiff and either the Gwavas Station Partnership or Gwavas Station Limited, entities associated with Mr John Hudson. The first is dated 30 July 2002 and is between the plaintiff and the Gwavas Station Partnership (the partnership).[11] The agreement appointed the partnership as the plaintiff‟s agent for thepurpose of acquiring stock which it would then graze and manage on behalf of the plaintiff. The plaintiff was at all material times the owner of the stock and had bailed them to the partnership.[12] The plaintiff, accordingly, had a security interest in the stock for the purposes of the Personal Property Securities Act 1999 and registered its security interests over stock acquired in terms of the agreement by way of financing statements.[13] During the term of the bailment, the partnership was responsible for all outgoings, including farm management and veterinary expenses required to maintain the stock. The partnership was to deliver the stock to a processing plant nominated by the plaintiff at a time also specified by the plaintiff.[14] The plaintiff was to receive the processing proceeds from which it would deduct the purchase price of the stock, interest on the purchase price, and all other costs incurred by the plaintiff before paying the balance to the partnership. If theprocessing price was less than the monies due to the plaintiff then the deficiency was a debt payable by the partnership to the plaintiff.[15] The agreement operated as an umbrella financing facility and over time various stock purchases were made and separately recorded as different lots under the same contract number.[16] The second agreement is dated 18 December 2009 and is between the plaintiff and Gwavas Station Limited (the company) on essentially the same terms as that between the plaintiff and the partnership. It specified the same contract number and listed in schedule A all the stock purchased by the partnership which remained under bailment to the partnership. Although the defendants‟ counsel queried the status of the stock purchased under the agreement between the plaintiff and the partnership when that agreement was later cancelled, the partnership had effectively assigned all of its rights and obligations to the company.[17] At the time of the execution of the second livestock agreement an oral agreement was entered into between the plaintiff and Mr Hudson on behalf of the company that all processing proceeds would be retained by the plaintiff and applied against the overall indebtedness of the company to the plaintiff. Mr Hudson would then request that the plaintiff release funds to pay specific debts incurred in the management of the Gwavas Station. Accordingly, had the processing proceeds from the stock at issue not been paid to the first defendant, the plaintiff would have retained the entire proceeds to apply against the overall indebtedness of the company to the plaintiff.Acquisition of stock[18] Between 19 February 2009 and 16 March 2009 the following livestock wasacquired pursuant to the livestock agreement dated 30 July 2002 between theplaintiff and the partnership.Date Number of bulls Price19 January 2009 169 weaner bulls $57,037.5019 January 2009 171 weaner bulls $57,712.50Total 340 weaner bulls $114,750.00Date Number of bulls Price19 January 2009 60 18 month bulls $35,910.0010 February 2009 52 rising two year bulls $38,154.2913 February 2009 70 rising two year bulls $53,395.6516 March 2009 61 rising two year bulls $46,411.77Total 243 bulls $173,871.71[19] The plaintiff paid a total of $288,621.71 to the vendors of the weaners andthe older bulls. Mr Hudson confirmed that all the above stock was delivered directlyto the farm property and was thereafter subject to the weaner bull grazing agreementand the share farming grazing agreement which had been entered into between thesecond defendant‟s father (who at the time was the owner of the farm property) andMr Hudson. Although the weaner bull grazing agreement referred to "approximately320 weaner bull calves", 340 were in fact delivered and were subject to thatagreement. The share farming grazing agreement did not specify the number ofolder bulls but it is common ground that 243 were delivered and were subject to thatagreement.Disposal of stock[20] Of the 340 weaner bulls delivered to the farm property in January 2009, 15had died by the end of July 2009. Between 4 and 17 May 2010 the first defendantsold 263 of the remaining weaner bulls to PGG Wrightson as follows:Date Number of bulls Price4 May 2010 40 rising one year bulls $28,591.204 May 2010 198 rising one year bulls $140,519.1617 May 2010 25 rising one year bulls $16,956.73Total 263 bulls $186,067.09[21] PGG Wrightson paid the total sum of $186,067.09 to the first defendant. Itappears that up to 62 of the weaner bulls may remain on the farm property.[22] Of the 243 older bulls delivered to the farm property between January andMarch 2009, 7 died between April 2009 and March 2010. 40 bulls were then soldthrough the plaintiff on 17 March 2010 at the request of Mr Hudson. The seconddefendant emailed a copy of the share farming grazing agreement to the plaintiffnoting that in terms of the agreement, he was entitled to receive 50 percent of theproceeds of sale of the bulls after deduction of the input price of $540 per bull. The40 bulls were processed through the Riverlands Eltham plant. The sum of$44,739.32 was paid to the plaintiff for them.[23] At the request of both Mr Hudson and the first defendant, half the proceeds ofsale of the 40 bulls was paid to the first defendant after deduction of the input priceof the bulls. This sum was $7,152.68. It was calculated by the plaintiff by taking thesum received from Riverlands Eltham net of GST being $39,768.28 and deductingthe actual input price of $676.31 (excl. GST) per bull (not the indicative value of$540 in the share farming grazing agreement) and halving the sum before addingGST to it.[24] As to the remaining 196 older bulls, the first defendant sold 172 to Affco asfollows:Date Number of bulls Price12 April 2010 41 bulls $39,877.0213 April 2010 13 bulls $11,893.4619 April 2010 42 bulls $40,655.5620 April 2010 36 bulls $33,929.4722 April 2010 40 bulls $36,445.38Total 172 bulls $162,800.89[25] Affco paid the total sum of $162,800.89 to the first defendant. It appearsthat up to 24 of the older bulls may remain on the farm property.Weaner bull grazing agreement[26] The weaner bull grazing agreement tendered to the Court is signed by Mr Hudson but not the second defendant‟s father. However, it is not in dispute that it evidenced a binding contract between Mr Hudson and the second defendant‟sfather. It is also not in dispute that the first defendant succeeded to the seconddefendant‟s father‟s obligations under the agreement.[27] Although the agreement specified that it related to "approximately 320 weaner bull calves," in fact 340 were delivered to the farm property in mid- January 2009 for grazing in terms of the agreement. The initial grazing rate was $4 per head per week or $16.80 per calendar month. The rate was to increase from 1 May 2009 to $7.50 per week or $31.50 per calendar month. These sums were to be paid on the 20th of the month following.[28] At the end of the grazing period there was to be an adjustment of the initial grazing rate to $5.25 per head per week i.e. there was to be a supplementary payment of $1.25 per head per week from the delivery of the weaner bulls in mid-January 2009 to 30 April 2009. This sum can be calculated as 101 days x 17.86 cents x 340 weaner bulls = $6,133.13 (excl GST).[29] The defendants led evidence from an expert that overall a rate of $5.25 per week per head until 1 May 2009 and thereafter a fixed rate of $7.50 per week per head reflected a very reasonable rate.[30] As noted above, 15 weaner bulls had died by the end of July 2009. The first defendant accounted for these in the accounts for grazing that he sent to Mr Hudson. Up until 31 July 2009 it charged Mr Hudson for 340 weaner bulls. Thereafter, it charged him for 325 weaner bulls. It is accepted by the defendants that Mr Hudson has paid the grazing rates which had been charged by the second defendant‟s fatherand the first defendant up until February 2010. However, the grazing rates charged from 1 May 2009 until 31 January 2010 were at the initial rate of $4 per head per week rather than the increased rate of $7.50 per head.[31] Up until the end of January 2010 this undercharge can be calculated as follows:Date Days and Rate Number of bulls TotalMay 2009 31 days x 50 cents per day 340 weaner bulls $5,270.00June 2009 30 days x 50 cents per day 340 weaner bulls $5,100.00July 2009 31 days x 50 cents per day 340 weaner bulls $5,270.00August 2009 31 days x 50 cents per day 325 weaner bulls $5,037.50September 2009 30 days x 50 cents per day 325 weaner bulls $4,875.00October 2009 31 days x 50 cents per day 325 weaner bulls $5,037.50November 2009 30 days x 50 cents per day 325 weaner bulls $4,875.00December 2009 31 days x 50 cents per day 325 weaner bulls $5,037.50January 2010 31 days x 50 cents per day 325 weaner bulls $5,037.50Total $45,540.00(excl GST)[32] In addition, no grazing charges were paid by Mr Hudson from the end of February 2010 until the bulls were sold to PGG Wrightson in May 2010. The defendants have calculated this period as 64 days. The amount owing for grazing from 1 March 2010 until sale can, therefore, be calculated as 64 days x 1.07 cents x 325 weaner bulls = $22,256 (excl GST).[33] The total sum owing for grazing charges by Mr Hudson to the first defendant can then be calculated by adding the above three figures, namely:Top up from 19 January 2009 to 1 May 2009 $6,133.13Undercharge from 1 May 2009 to 31 January 2010 $45,540.00Charges from 1 March 2010 to 4 May 2010 $22,256.00Total $73,929.13Add GST $9,241.14Total $83,170.27[34] In his witness statement, the second defendant calculated the grazing charges owing to the first defendant on the basis of the number of weaner bulls sold by it to PGG Wrightson, namely 263. The number being grazed for Mr Hudson was in fact 325 and in terms of the weaner bull grazing agreement the first defendant is entitled to be paid grazing charges for them all.[35] Although the first defendant may be owed $83,170.27 by Mr Hudson for grazing charges, it has, however, received the sum of $186,067.09 from the sale of the bulls. It has not accounted to Mr Hudson or the plaintiff for the proceeds of sale.Share farming grazing agreement[36] Although the share farming grazing agreement tendered to Court was not signed, it is not in dispute that it also evidenced a binding contract between Mr Hudson and the second defendant‟s father. It is also not in dispute that the first defendant succeeded to the second defendant‟s father‟s obligations under the agreement.[37] The substance of the agreement was that the bulls said to be owned by Mr Hudson would be grazed on the farm property and upon their sale, the purchase price would be deducted from the sale price and this amount split evenly between thetwo parties, i.e. the parties would share equally from the increase in the bulls‟ value.[38] Mr Hudson undertook that on arrival at the farm property the bulls were at an average weight of 300 kilograms. The agreement then stated:They [the bulls] are assessed at a price of $1.8 per kg l.w., or a value of $540 per head.In fact, the bulls were on average 10 percent heavier – the average weight being 334 kilograms. The bulls were also acquired at a slightly higher price of between $1.85 per kilogram to $1.95 per kilogram. Accordingly, the average price paid for the bulls was $636 (excl GST) per head rather than the indicative value of $540 per head.[39] As noted earlier, 40 bulls were sold through the plaintiff on 17 March 2010. The plaintiff has accounted to the first defendant for its share of the sale of these 40 bulls.[40] A further 172 bulls were then sold by the first defendant to Affco on dates between 12 April 2010 and 22 April 2010. The total price received by the first defendant was $162,800.89 (or $144,711.90 excl GST). In order to calculate the amount owing to the first defendant under the share farming grazing agreement, it is necessary to deduct the purchase price of the bulls (clause 12 states the actual purchase price is to be deducted from the sale price – not the indicative value of $540 per head specified in clause 2).[41] The 40 bulls sold earlier through the plaintiff were said to come from Lot 680.300, a line of bulls bought at a price per head of $676.31. It is not possible to ascertain the particular lots from which the further 172 bulls were sold but if the 40 bulls earlier sold which had been purchased at $676.31 are taken out of the equation, the average purchase price of the remaining 203 bulls was $628.08 (excl GST) per head (rather than $636 if the 40 bulls earlier sold were included).[42] The purchase price of the 172 bulls later sold to Affco can then be calculated as 172 x $628.08 = $108,029.76 (excl GST).[43] This sum is then to be taken from the net proceeds of sale of $144,711.90 (excl GST). The difference between the two figures is $36,682.14. This sum is then to be split equally between Mr Hudson and the first defendant. Each is, therefore, due $18,341.07 in terms of the share farming grazing agreement. GST should, however, be added to this figure, leaving a final figure of $20,633.70 due to the first defendant in terms of the agreement.[44] The first defendant has, however, received the sum of $162,800.89 from the sale of the bulls. It has not accounted to Mr Hudson or the plaintiff for the proceeds of sale.Amount owing by Mr Hudson to first defendant[45] If the sum of $20,633.70 is added to the amount of $83,170.27 which is due to the first defendant under the weaner bull grazing agreement, the total sum owing by Mr Hudson to the first defendant is $103,803.97.[46] By letter dated 6 May 2010 the second defendant, on behalf of the first defendant, terminated all grazing arrangements with Mr Hudson. The first defendant has, however, yet to account to Mr Hudson and or the plaintiff as owner of the stock for the 62 weaner bulls and the 24 older bulls that may remain on the farm property.[47] The sums I have calculated as owing to the first defendant in terms of the weaner bull grazing agreement and the share farming grazing agreement are, of course, the sums that are owing under the agreements if both had been performed in strict accordance with their terms. The first defendant had various obligations under the agreements, including drenching the stock, observing good animal husbandry, and feeding the stock at optimum levels at all times. If those obligations were not complied with, then the sale prices of the stock would have been less than might otherwise have been achieved.[48] On the other hand, Mr Hudson had obligations to supply the drench for the stock and to pay the grazing charges on the 20th of the month following. The defendants say that Mr Hudson did not supply sufficient drench and was constantly late with the payments he did make. The first defendant was, therefore, unable to purchase the amount of fertilizer necessary to apply to the farm property to achieve optimum growth for the stock.[49] Because the third party claim against Mr Hudson has been severed, there has been insufficient evidence lead to enable me to make any finding whether and to what extent the sums owing under the agreements should be modified. In the absence of evidence to the contrary, I therefore have to rely on the above calculations for the purpose of giving judgment in this case.Conversion[50] The plaintiff‟s primary cause of action is an allegation that the first and second defendants, in a manner inconsistent with the rights of the plaintiff, convertedthe plaintiff‟s stock. There are three essential elements of the tort of conversion:1a) The defendant‟s conduct was inconsistent with the rights of the owner (or other person entitled to possession);b) The conduct was deliberate, not accidental;c) The conduct was so extensive an encroachment on the rights of the owner as to exclude him from use and possession of the goods.[51] The second and third elements are satisfied. The defendants‟ actions weredeliberate in selling the stock at auction or to the works for slaughter. By selling thestock the plaintiff‟s interest as owner of the stock was also irretrievably extinguished.1 Kuwait Airways Corpn v. Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883 (HL) at 1084 per Lord Nicholls of Birkenhead.[52] At issue is the first element and in particular, whether the plaintiff had a sufficient possessory right in the stock to have standing to sue for conversion.[53] The plaintiff submits that it had a right to immediate possession of the stock which gave it a sufficient possessory interest to sue in conversion. It submits that it bailed the stock to the partnership under the livestock agreements. Neither the weaner bull grazing agreement nor the share farming grazing agreement granted the bailee ownership rights or a security interest in the stock. Rather, it submits that the subsequent agreements between Mr Hudson and the second defendant‟s fathercreated a debtor/creditor relationship. Moreover, the plaintiff submits that the defendants were told that the stock was leased by the plaintiff to Mr Hudson. In any event, the plaintiff contends that, irrespective of the terms of the livestock agreements, it had an immediate right as owner to claim its stock from any party without ownership rights.[54] The defendants submit that the plaintiff did not have a right to immediate possession of the stock. Rather, under the terms of the livestock agreements, the rights to possession of the stock lay with Mr Hudson, not the plaintiff. Under the livestock agreements, the plaintiff was only entitled to possession where there was a report as to the poor condition of the stock (clause 3.4) or in the event of termination on default (clause 8). The defendants submit that while the plaintiff may have had a right to terminate the agreement on the sale of any stock by the defendants, it had not elected to do so. Absent termination, it had neither an immediate right to, nor actual possession. Instead, the plaintiff was in the position of a bailor during the unexpired term of a bailment. In accordance with Gordon v Harper2 such a party has no right to sue in conversion.[55] Both parties agree that the livestock agreements constituted a bailment of the stock. Where a bailment is for a set term, it is the bailee that will have the right to sue third parties for conversion during that period, not the bailor. The bailor does not have a right to possession during the term of bailment; instead they hold a right to sue for permanent injury to their reversionary interest. The exception to this is a gratuitous bailment under which a bailor will have standing to sue in conversion.2 Gordon v Harper [1775-1802] All ER Rep 95.This is because under a gratuitous bailment, while the bailee has actual possession, the bailor retains an immediate right to possession throughout the continuance of the bailment, an unfettered power to recall the goods whenever he chooses.[56] As Palmer on Bailment states:3The allocation of possessory title between bailor and bailee is clearly different where the bailee has a fixed and enduring term of possession. In that case, as long as the situation remains static, the bailor cannot by definition assert an immediate right of possession. The bailee will have both possession and the immediate right to possess, while the bailor will have only a reversionary interest based on a suspended right of possession.[57] I am of the view that the livestock agreements may be characterised as bailments for a set term. In Manders v Williams,4 it was established that a bailment for a set term may last until a certain event occurs. For example, transmission back to the bailor from the bailee might occur on the seizure of the goods by way of execution, or the emptying of casks by the bailee, or the death of a bailed animal in a public place, or simply the effluxion of time. Under the livestock agreements, the bailment was to terminate on delivery of the stock to plaintiff‟s nominatedprocessing plant.[58] Clauses 3.4 and 8.2 of the agreements gave the plaintiff the right to remove the stock from the farm property prior to delivery of the stock to the processing plant. These clauses were exceptions to the otherwise set term of the bailment. They gave the bailor a right to immediate possession in the limited circumstances that the bailment was terminated before the expiry of its set term.[59] However, because there was no breach of the conditions of clauses 3.4 and 8.2, the plaintiff as bailor of a set term bailment did not have the right to immediate possession. Accordingly, the plaintiff does not have the right to sue in conversion.[60] The plaintiff submits, however, that it gained the right to immediate possession and ownership rights when the stock was dealt with by the defendantswithout the plaintiff‟s express consent.3 Palmer on Bailment (3rd ed, Sweet & Maxwell, London, 2009) at 4-012.4 Manders v Williams (1849) 4 Ex 339.[61] The actions of a bailee may amount to a repudiatory breach of the bailment, if the bailee violates one of the essential terms on which the bailor conferred possession on him, or otherwise departs radically from the bailment. As Henderson J stated in Calor Gas Ltd v Homebase Ltd,5 there is a:...well-established principle that a breach of the contract of bailment by the bailee terminates the bailment and leads to the revival of the bailor‟s right toimmediate possession, thereby entitling him to maintain an action for conversion...[62] As Latham J described in Penfolds Wines Pty Ltd v Elliot,6 in order to determine the breach of bailment, the act of the bailee must be "wholly repugnant to the holding as bailee". Such forms of misconduct may automatically revive the bailor‟s right to immediate possession.7 Very clear language is required before a Court would accept that express terms in a bailment contract precluded the operation of this common law rule.8[63] The plaintiff‟s argument is that Mr Hudson, as bailee, acted repugnantly tothe bailment when he signed the grazing agreements with the second defendant‟sfather without consent. Accordingly, following the breach of the bailment by the bailee, the bailment was terminated, meaning that the right to immediate possession reverted to the plaintiff. If this is the case, then the plaintiff would have a sufficient possessory right to sue the defendants in conversion. Moreover, clauses 3.4 and 8.2 did not express an intention to oust the common law principle expressed in Calor Gas Ltd v Homebase Ltd.[64] I disagree. On the facts of this case, the plaintiff had knowledge of, and consented to, the grazing agreements. Mr Hudson‟s actions in entering into thegrazing agreements were in my view not so repugnant to the bailment to amount to a repudiatory breach.[65] The plaintiff also seeks to rely on the principle that a party who has a contractual right to immediate possession may bring an action in conversion,5 Calor Gas Ltd v Homebase Ltd [2007] EWHC 1173 (Ch) at [38].6 Penfolds Wines Pty Ltd v Elliot [1946] 74 CLR 204 (HCA)at 214.7 R v Russell [1977] 2 NZLR 20 (CA) provides a New Zealand example of such a case.8 Union Transport Finance v British Car Auctions [1978] 2 All ER 385; Hill v Reglon Pty Ltd[2007] NSWCA 295.referring to a number of cases discussed by Lord Phillips CJ in Islamic Republic of Iran v Barakat Galleries Ltd.9[66] In Barakat, Lord Phillips CJ described the paradigm in which contractual rights to possession may arise:[19] Controversy exists as to the position where „A‟ who is in possession ofa chattel, or who is entitled to immediate possession of the chattel, agrees that another (B) may enter into possession of the chattel. Can B rely upon his contractual right to immediate possession to found an action in conversion against C who wrongly interferes with the chattel? If by the agreement A has transferred to B not merely the rights to enter into possession, but the ownership that A enjoyed, so that B enjoys both proprietary title and an immediate right to possession, he will be entitled to sue in conversion. If, however, A has retained his proprietary title, it is not clear that B can rely on his contractual right to enter into immediate possession to found a claim in conversion.[67] Whilst it could be said that, under clause 3.4 and 8.2, the plaintiff retained a contractual right to possession, the cases to which the plaintiff refers can be readily distinguished on the basis that they concerned claimants who did not have a proprietary right on which to base a right to possession. In contrast, in this case, the plaintiff does have a proprietary interest in the stock, as the owner. Those caseswhich the plaintiff discusses concern claimants that did not have any „property‟ assuch in the assets concerned, rather a subsisting right under contract to immediate possession on which they sought to found a claim in conversion.[68] In any event, Lord Phillips CJ‟s dicta in Barakat supports the conclusion that the plaintiff does not have a possessory right, giving rise to standing to sue in conversion:[30]...Where the owner of goods who has an immediate right to possession of them, albeit that they are in the possession of a third party, by agreement transfers his title to a new owner, the new owner can bring a claim in conversion against the person in whose possession they are. Where the owner of goods with an immediate right to possession of them by contract transfers the latter right to another, so that he no longer has an immediate right to possession, but retains ownership, it would seem right in principle that the transferee should be entitled to sue in conversion.9 Islamic Republic of Iran v Barakat Galleries Ltd [2007] EWCA Civ 1374.[69] The present case falls squarely in the second scenario contemplated by Lord Phillips CJ. The immediate right to possession transferred to Mr Hudson under the livestock agreement. The plaintiff, as transferor, is not entitled to sue in conversion.[70] In conclusion, applying the principles of possession in a set term bailment, the plaintiff does not have a sufficient possessory right to sue for conversion. Rather, it has a deferred right of possession in the form of a reversionary interest. Because there is no evidence that Mr Hudson, as bailee, acted repugnantly to the bailment, the right to immediate possession did not revert to the plaintiff.Permanent injury to plaintiff's reversionary interest[71] As an alternative cause of action, the plaintiff claims to have had areversionary interest in the stock which was permanently injured by the defendants‟actions in selling the stock. It relies on a cause of action that exists where a bailor who is out of possession, and who has no immediate right to possession, seeks damages done to its reversionary interest in goods by a third party.[72] The elements of this tort are:10a) The plaintiff has ownership of the goods.b) The plaintiff has no immediate right to possession of the goods because of a bailment for a set term or a right to possession on the fulfilment of a condition.c) Permanent damage has been done to the goods such that it affects theplaintiff‟s reversionary interest.[73] Mr Hudson gave evidence that the bulls he placed on the farm property were livestock owned by the plaintiff. I am satisfied on the balance of probabilities that the stock, the subject to the weaner bull grazing agreement and the share farming10 Checker Taxicab Co Ltd v Stone [1930] NZLR 169 (SC).grazing agreement, were indeed owned by the plaintiff. I have held above that the plaintiff had no immediate right to possession of the stock. It is also clearlyestablished that the plaintiff‟s reversionary interest was extinguished completely.[74] In their closing submissions, the defendants accepted that if the plaintiff was able to establish ownership of the stock but was unable to establish possession, it may be that the alternative cause of action of permanent injury to the plaintiff‟sreversionary interest was available to it. In other words, the defendants did not seriously challenge that the plaintiff would be able to succeed on this cause of action.[75] Having found that the plaintiff has established to my satisfaction that the firstdefendant has permanently damaged the plaintiff‟s reversionary interest in the stock,it is unnecessary for me to consider the remaining pleaded cause of action relating tothe enforcement of the plaintiff‟s security interest in the stock in terms of the Personal Property Securities Act.Defences to the plaintiff's claim[76] The defendants have advanced a number of positive defences. The defendants submit that what these defences have in common is that they share the basic complaint that if the plaintiff wants to stand in as owner of the stock it cannot ignore the responsibilities of ownership. Those responsibilities include the cost of keeping the stock alive.[77] The defendants submit that the fundamental principle of fairness can be reflected in a number of different legal frameworks but believe that they are best understood by reference to two particular causes of action – unjust enrichment and estoppel. It is, however, my view that equitable set-off provides the most appropriate avenue through which to recognise the defendants‟ entitlement torecover the grazing costs.[78] To establish a right of equitable set-off, the equity must be such as to impeach or call into question the plaintiff‟s title to demand payment. It is necessary for the defendant to show that he has some equitable right to be protected from theplaintiff‟s claim. The existence of cross-demands alone is insufficient, even if the cross demands arise out of the same subject matter.[79] Equitable set-off relies on the relationship and closeness of connection between the two claims, and the general conduct of the parties, when there exists circumstances that make it unjust or inequitable that a plaintiff should be permitted to proceed with his or her claim. As stated in Rawson v Samuel,11 the debt relied on by the defendant must be so closely related as to subject matter that the claim sought to be set-off impeached the other in the sense that it made it positively unjust that there should be recovery without deduction.[80] Two New Zealand Court of Appeal decisions, Grant v NZMC Ltd12 andHamilton Ice Arena Ltd v Perry Developments Ltd,13 provide a comprehensive discussion of the principles of equitable set-off.[81] Firstly, in Grant, the Court of Appeal stated:14The principle is, we think, clear. The defendant may set-off a cross-claimwhich so affects the plaintiff‟s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.[82] In Hamilton Ice Arena Ltd, the Court of Appeal stated:[3] Before examining the facts of the present case, we will identify the general principles which apply to equitable set-off. A set-off is a right vested in a defendant facing a money claim by a plaintiff to use its own money claim against the plaintiff to absolve itself wholly or partially from its obligation to the plaintiff. A set-off is different from a counter claim which, if established, gives the defendant a right to an independent judgment against the plaintiff, but no ability to reduce or extinguish the plaintiff‟s claimagainst the defendant. Common law set-off originated in statutes passed early in the 18th century. Essentially the common law right was to set-off mutual liquidated debts. Equity intervened to allow set-off on a wider basis than that available at law. Cross-claims were allowed by way of defence, and the Courts of equity would also restrain a plaintiff from proceeding at law if11 Rawson v Samuel (1841) Cr and Ph 161.12 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).13 Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 (CA).14 At 12-13.the defendant could show a cross-claim which had the effect of impeachingthe plaintiff‟s title to make the claim at law. It is helpful to remember this historical origin when examining claims of equitable set-off today.[4] Equity would intervene only if the defendant in the suit at law could show some cross-claim for a sum of money which, in the eyes of equity, undermined the right of the plaintiff in the suit at law to enforce his legal claim either at all, or to the extent of the cross-claim. Equity always acknowledged the defendant‟s right to counterclaim but took the view that in some circumstances such right was not sufficient to do justice. The Courts of equity would not readily interfere with the proceedings at law and confinedthemselves to cases where the claim at law and the defendant‟s cross-claim were so closely inter-related that it would be unconscionable for the plaintiffto seek judgment at law without bringing the defendant‟s cross-claim to account.[5] The need for such close interrelationship was and still is underscored by the fact that an equitable set-off extinguishes the plaintiff‟s right tojudgment, either entirely or pro tanto, according to the amount which the defendant is entitled to set-off.[83] In that regard, I have an account of the following factors which, in my view, make the claims interdependent.[84] Firstly, the plaintiff did not take the usual steps that would be expected to identify the stock as the plaintiff‟s stock. It did not insert ear tags or require Mr Hudson to insert ear tags on the stock. It did not audit the farm property at any time to ensure that the identity of its stock was kept separate from the other livestock on the farm property.[85] Secondly, the plaintiff became aware that the stock was on the farm property in November 2009. It was given a copy of one or both of the grazing agreements. The plaintiff was familiar with their terms, including the fact that the grazing agreements described Mr Hudson as the owner when he was not. He also knew that the defendants were to be paid for the grazing in their terms.[86] Thirdly, the plaintiff was content to leave the stock on the farm property because Mr Hudson would be paying the grazing charges. However, the plaintiff knew that Mr Hudson was in some financial difficulty at the very least because of the drought.[87] Fourthly, the plaintiff was asked to arrange for the sale of 40 bulls which were the subject of the share farming grazing agreement, and at the request of both Mr Hudson and the defendants, it paid the half sum received on the sale of the bulls to the first defendant.[88] In those circumstances it would be unjust to allow the plaintiff to claim the entire proceeds of sale without making a reduction from those proceeds to cover the costs incurred by the first defendant in caring for and maintaining the plaintiff‟s stock. It is my view that the first defendant therefore has a right of equitable set-off against the total amount claimed by the plaintiff.[89] In those circumstances it is unnecessary for me to consider the further defences pleaded of unjust enrichment and estoppel. It is however my preliminary view that it would be difficult for the defendants to establish all the requirements of the restitutionary defence of unjust enrichment. Furthermore, the defendants would have some difficulty in their estoppel argument because the plaintiff did not make any representation that Mr Hudson was the owner of the stock nor did it make any representation that it would ensure that the first defendant would be paid for their grazing costs. Having said that, I have not reached any concluded view on these alternative defences as it is unnecessary for me to do so.Result[90] The plaintiff is entitled to judgment against the first defendant for the sale proceeds of the stock on the basis that by selling the stock owned by the plaintiff the first defendant committed the tort of causing permanent injury to the reversionary interest of the plaintiff in the stock. The measure of damages is clearly the value of the stock which is able to be accurately ascertained by the record of their sale on market in April and May 2010. The sale proceeds amounted to $348,867.98.[91] The first defendant is, however, entitled to an equitable set-off as a partial defence against the plaintiff‟s claim for the sale proceeds of the stock. It would be unjust to allow the plaintiff to claim the entire proceeds of sale without making anallowance to cover the costs incurred by the first defendant in grazing the stock for 15 months.[92] Those costs are also able to be accurately ascertained from the terms of the weaner bull grazing agreement and the share farming grazing agreement. I have calculated those costs at $103,803.97.[93] However, not all the plaintiff‟s stock were sold on market by the first defendant in April and May 2010. There were 62 weaner bulls and 24 older bulls not sold or accounted for. The existence of at least the 24 older bulls and the need to account for them was recognised by the second defendant in his letter to Mr Hudson dated 6 May 2010. The question then arises as to the value to be ascribed to the 62 weaner bulls and 24 older bulls.[94] As to the 62 weaner bulls, I noted earlier that the second defendant had calculated the grazing charges owing to the first defendant on the basis of the number sold to PGG Wrightson, namely 263. However, I calculated the sums owing to the first defendant on the basis that the number being grazed for Mr Hudson was, in fact, 325 and in terms of the weaner bull grazing agreement, the first defendant was entitled to be paid grazing charges for them all. If the first defendant is to receive credit for the grazing charges then the value to be ascribed to the 62 weaner bulls should be the value of them when the weaner bull grazing agreement was cancelled by the first defendant and 263 of them were sold to PGG Wrightson.[95] The average price of the 263 weaner bulls sold was $707.50. Accordingly, the 62 weaner bulls not sold or accounted for can be valued at $43,865 (the plaintiff had paid $20,925 ($337.50 x 62) for them 15 months earlier)).[96] As to the 24 older bulls, the first defendant has not received credit for grazing them (unlike the 62 weaner bulls) and therefore the value ascribed to them should be the cost of their purchase by the plaintiff.[97] Leaving aside the 40 bulls sold through the plaintiff on 17 March 2010 which were said to have an average input price of $676.31 (excl GST) per head, the averagepurchase price of the older bulls was $628.08 (excl GST) per head. Accordingly, the 24 older bulls at the time that they were placed on the farm property can be valued at $16,958.16 (the second defendant valued them at $1,250 each when he recognised that his retention of them should be taken into account when he was calculating what was owing to Mr Hudson from the proceeds of sale of the stock).[98] If the sum of $16,958.16 is added to the amount of $43,865, which is the value of the 62 weaner bulls not sold or accounted for, the total sum of $60,823.16 needs to be deducted from the amount of $103,803.97 which would otherwise be available to the first defendant as an equitable set-off.[99] Judgment is, therefore, given in favour of the plaintiff against the first defendant in the sum of $305,887.17 together with 5 percent interest from the date of the last sale of cattle (17 May 2010) to the date of judgment. I have intended that the judgment sum should be GST neutral for the first defendant. If there are difficulties in that regard I will receive memoranda from counsel regarding any variation necessary to the judgment order. Leave is also reserved for counsel to make submissions on any supplementary orders which may be necessary to give effect to this judgment, for example, to discharge or modify existing interlocutory orders.[100] Costs would normally be payable by the unsuccessful party. Here, where the defendants have established an equitable set-off, they cannot be regarded as unsuccessful. In those circumstances, costs are to lie where they fall._________________________Woolford J