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McLachlan and McLachlan (as Trustees of the Waituruturu Trust) and ors v Mercury Geotherm Limited (in receivership) and ors [2006] NZCA 333 (4 December 2006)

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McLachlan and McLachlan (as Trustees of the Waituruturu Trust) and ors v Mercury Geotherm Limited (in receivership) and ors [2006] NZCA 333 (4 December 2006)

Last Updated: 12 December 2006

IN THE COURT OF APPEAL OF NEW ZEALAND

CA117/05

BETWEEN ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN AS TRUSTEES OF THE WAITURUTURU TRUST
First Appellants

AND ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN
Second Appellants

AND MERCURY GEOTHERM LIMITED (IN RECEIVERSHIP)
First Respondent

AND POIHIPI LAND LIMITED (IN RECEIVERSHIP)
Second Respondent

AND MEL NETWORK LIMITED
Third Respondent

AND CONTACT ENERGY LIMITED
Fourth Respondent

CA239/05

AND BETWEEN CONTACT ENERGY LIMITED
Appellant

AND ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN AS TRUSTEES OF THE WAITURUTURU TRUST
First Respondents

AND ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN
Second Respondents

MEL NETWORK LIMITED
Third Respondent

Hearing: 17 July 2006

Court: Hammond, Robertson and Arnold JJ

Counsel: S P Bryers and D A Towle for First and Second Appellants in CA117/05 and for First and Second Respondents in CA239/05
P J Dale and T J P Bowler for First, Second and Third Respondents in CA117/05 and for Third Respondent in CA239/05
P C Chemis and J Opie for Fourth Respondent in CA117/05 and for the Appellant in CA239/05

Judgment: 4 December 2006 at 2 pm

JUDGMENT OF THE COURT

A The appeal in CA117/05 is dismissed.
B The McLachlans are ordered to pay costs of $6,000 to the first, second and third respondents jointly together with usual disbursements.

C The appeal in CA239/05 is allowed.

D The McLachlans are ordered to pay costs on a 3C scale to Contact Energy Limited in respect of the High Court hearing leading to the judgment of 23 May 2005 and costs of $3,000 together with usual disbursements in respect of this appeal.

____________________________________________________________________

REASONS OF THE COURT

(Given by Robertson J)

Introduction

[1] These appeals are yet another step in a long-running litigation saga. The relatively narrow issues now in contention relate to whether a right of first refusal was triggered by the sale of two lots of land, plus an issue of costs. These matters are understandable only in context.
[2] The litigation arises from the breakdown of an ambitious joint venture which ended in heavy losses for the participants. The object of the venture had been to build and run a geothermal power station near Taupo using natural geothermal resources for large scale generation of electricity for supply to consumers.
[3] The participants in the venture were the second appellants in CA117/05 (Mr and Mrs McLachlan) together with some family companies which they controlled, and Mercury Network Limited, later named MEL Network Limited (Network) which was a subsidiary of a listed company now known as Vector Limited (Vector).
[4] Two companies were formed for the purposes of the joint venture. Mercury Geotherm Limited (Geotherm) was owned 67% by Network and 33% by the McLachlans either as trustees or beneficially. The second company was Poihipi Land Limited (Poihipi), which was a wholly owned subsidiary of Geotherm. Geotherm and Poihipi are now both in receivership. They are the first and second respondents in CA117/05. Network is the third respondent in both appeals.

Factual background

[5] In associated litigation (McLachlan v Mercury Geotherm Ltd (In Receivership) PC36/05 23 May 2006), the Privy Council described the history thus:

[5] The McLachlans and their companies have owned land near Taupo since 1965, using it for rearing beef cattle and sheep, with a sideline in growing roses and (latterly) orchids, so making limited use of the geothermal resources which the power station was intended to exploit on a very much larger scale. They owned two adjoining areas of freehold land (referred to in the lease and in these proceedings as Land A and Land B) located between the Poihipi Road and the Tukairangi Road; Land A extended to about 76 hectares and Land B (to the south of Land A) to about 86 hectares. They also had options (granted in 1991) to acquire a further 287 hectares of freehold land (Land C) to the north and west of Land A. Lots 1 and 2 [DPS 69822] (which are at issue in the proceedings remitted to the High Court) are small areas adjacent to Land C. These figures for areas may not be precisely correct (there are some variations in different documents throughout the Record) but they serve to give a general indication of the position on the ground.
[6] The general intention was that the McLachlans should contribute all this land to the joint venture, together with various regulatory licences which the McLachlans had negotiated, taking a leaseback (for farming purposes) of all the land except so much of Land A as consisted of the actual site of the power station. The freehold of Land A and Land B was transferred to Poihipi and the freehold of Land C was transferred to Geotherm, which is why they were both parties to the lease. The McLachlan interests received in return 33% of the shares in Geotherm and a substantial sum of cash (much of which was needed to pay off existing indebtedness to third parties).

[6] Lots 1 and 2 (which at times are referred to as the "saleyard land") were acquired from the Taupo District Council in 1993. One of the McLachlans’ companies put in the successful tender and the sections were eventually acquired in June 1995 with registration in the name of Network. There is now no dispute that Network, although registered as the proprietor, held the land on trust for the joint venture. It was an oversight by all parties that this land was not transferred to Geotherm and a formal lease to the McLachlans was never signed. As there was no legal lease for Lots 1 and 2, counsel referred us to the lease relating to Land A (Lease of Land A).
[7] Because of the difficulties in predicting the precise needs of the power station once it was constructed, commissioned and put into production, clause 10.1 of the Lease of Land A contained the following provision:

If the Lessors require the Land for any purpose relating to the construction and operation of [Geotherm’s] proposed geothermal power station or the Lessors reasonably believe that use of the Land (or part of it) for the permitted use conflicts with, or limits, that purpose, the Lessors shall have the right to unilaterally vary this Lease to alter the area of the Land which it relates to, to suspend the Lease in respect of all or part of the Land, and/or vary the Term in respect of part or all of the Land, provided the Lessor gives the Lessee not less than two months’ written notice of its intention to vary or suspend this Lease. If the Lease is materially varied or suspended in accordance with this clause and such variation or suspension occurs following the date of Commissioning, the annual rent shall be reduced on a pro-rata basis in respect of the area of the Land which the Lessee is not permitted to use following the variation, or the period during which any suspension remains in force.

[8] The Lease of Land A was for a term of just under 20 years. No term was specified in relation to the lease of Land B and C.
[9] Of particular importance in the appeal before us, the Lease of Land A also contained the right of pre-emption in clause 16.1 which provided:

In consideration of the mutual promises contained in this Lease and in the Joint Venture Agreement, the Lessors grant to the Lessee or its nominee a first right of refusal in respect of the Land or any part thereof, should the Lessors wish to sell or dispose of those parcels of land (together, the "Relevant Land") as are comprised in the Land, or in the property the subject of the Landcorp Property Agreement (as that term is defined in the Joint Venture Agreement) or in any other parcels of land which the Lessors may acquire after the date of this Lease.

[10] In the unexecuted lease in respect of Lots 1 and 2, a slightly different wording is used:

10.1 If the Lessor requires the Land for any purpose related to the construction and/or operation of the Lessor’s proposed geothermal power station or the Lessor reasonably believes the use of the Land (or part of it) for the permitted use conflicts with, or limits, that purpose, the Lessor shall have the right to unilaterally vary this Lease to alter the area of the Land which it relates to, to suspend the Lease in respect to all or part of the Land, and/or vary the Term in respect of part or all of the Land, provided the Lessor gives the Lessee not less than 2 months’ written notice of its intention to vary or suspend this Lease. If the Lease is materially varied or suspended in accordance with this clause [and such variation or suspension occurs following the date of Commissioning], the annual rent shall be reduced on a pro rata basis in respect of the area of the Land which the Lessee is not permitted to use following the variation, or the period during which any suspension remains in force.
16.1 In consideration of the mutual promises contained in this Lease, the Lessor grants to the Lessee or its nominee a first right of refusal in respect of the Land or any part thereof, should the Lessor wish to sell or dispose of those parcels of land (together, the "Relevant Land") as are comprised in the Land, or in any other parcels of land which the Lessor may acquire after the date of this Lease. ...
[emphasis in original]

[11] The new power station ran into financial difficulties. The debenture holder, Network, appointed receivers in 1998. The receivers sold the power station together with such part of the land as was defined by the Court as comprising the power station site to Contact Energy Limited (Contact), the fourth respondent in CA117/05 and the appellant in CA239/05. At the same time Network sold Lots 1 and 2 to Contact as part of that arrangement.
[12] The McLachlans, either personally or as trustees of the Waituruturu Trust (the first appellant in CA117/05), contended that they had a right to purchase all of the land. They caveated what had been Land A and also Lots 1 and 2, all of which had been sold to Contact.
[13] The relevant litigation saga commenced with proceedings to remove these two caveats.
[14] There were various amended proceedings leading to a hearing before Potter J in the High Court at Auckland between 6 and 17 May 2002 of proceedings M:129-IM00 and M:1569-AS00, which were related to s 143 of the Land Transfer Act 1952. In a reserved judgment of 14 June 2002, the Judge concluded that the alleged first refusal under the lease between Geotherm and the McLachlans was not triggered as Geotherm’s receiver had no "wish to sell or dispose" the subject land and, therefore, the caveats should be removed.
[15] An appeal filed by the McLachlans from that decision was heard in this Court on 12 and 13 May 2003. In a judgment delivered on 28 August 2003 (CA142/02) the appeal was allowed in part including the setting aside of the High Court’s finding that the right of first refusal to purchase Lots 1 and 2 had not been triggered. This aspect was referred for further consideration in the High Court.
[16] Pursuant to that referral back, relevant matters were considered before Potter J from 4 to 8 October 2004. In a judgment delivered 23 May 2005, the learned Judge concluded:

Issue 1
[407] I find there was no wish or intention to sell Lots 1 and 2 by the lessors [Geotherm] and Poihipi in Receivership. Accordingly there is no triggering event under cl 16.1 of the equitable lease of Lots 1 and 2.
Issue 2
[408] Contact has not discharged the onus of establishing that it was a bona fide purchaser for value so as to prevail over the Trustees’ equitable rights. Contact will take title to Lots 1 and 2 subject to the equitable lease in favour of the Trustees.

[17] It is from that judgment that the appeal CA117/05 was lodged in this Court on 20 June 2005 on the basis that the findings in respect of Issue 1 were wrong in fact and law. Issue 2 has not been in contention before us.
[18] Subsequently Potter J delivered a costs judgment. Relevant to what is now before this Court, she refused to award costs in favour of Contact against the McLachlans as Trustees and/or personally. Contact did not become aware of the judgment for almost two months and an application for special leave to appeal was necessary (CA239/05) because the time limit was not met. Without opposition, leave was granted by this Court on 28 November 2005 with a direction that the appeal in CA239/05 be heard at the same time as CA117/05.

High Court decision of 23 May 2005

[19] It was common ground before the High Court that Network made the decision to sell Lots 1 and 2 to Contact. Because of a general confusion with regard to the ownership of the various parcels of land, as evidenced by the incomplete transfer of land from Network to the joint venture companies and the unexecuted lease, Potter J said at [98]:

I find that neither the Receivers nor their legal advisor Mr Darlow were aware at any time prior to February 2000 that Lots 1 and 2 were assets of [Geotherm].

[20] As the receivers did not know they owned the land, Potter J held that they could not form a "wish to sell or dispose" of Lots 1 and 2. Accordingly she determined that the right of first refusal contained in clause 16.1 of the equitable lease was never triggered.
[21] The Judge also found that, although the receivers co-operated and assisted Network to effect the sale of Lots 1 and 2, the receivers were acting independently of Network. She rejected an argument by the McLachlans that Network’s decision to sell was effectively a decision of the joint venture companies.
[22] Potter J also rejected an argument advanced by the McLachlans that any decision made by Network was inevitably a decision of the joint venture companies because of Network’s controlling interest in the joint venture.

The appellants’ case in CA117/05

[23] Mr Bryers, on behalf of the appellants, summarised his case as follows:

(a) The Judge erred in finding that the receivers did not know that Lots 1 and 2 were beneficially owed by Geotherm. The receivers had actual or constructive knowledge as a result of letters sent to them by the appellants’ solicitors. Accordingly the sale by Network was with the knowledge and consent (or at least acquiescence) of the receivers and so triggered the right of first refusal.
(b) Alternatively, Network had implied authority to sell Lots 1 and 2 on behalf of the joint venture companies. Network’s decision to sell was therefore binding on Geotherm and amounted to a manifestation of an intention to sell by Geotherm.
(c) Alternatively, if Network did not have authority to sell, the receivers, by electing, with full knowledge of the relevant facts, to remove the McLachlans’ caveats so as to allow completion of the sale to Contact, consented to the sale and thus manifested an intention to sell.

[24] Mr Bryers did not shy away from the fact that his argument before us necessitated a refinding of facts and was rooted in determining that the Judge’s reasoning meant that the appellants’ right of first refusal was circumvented. In other words Network (who in fact held the land in trust for the joint venture companies) had been permitted to sell the land in breach of trust and in breach of the appellants’ rights of first purchase.
[25] With respect to Mr Bryers’ ingenuity, the argument is circular. It cannot survive analysis even at the level at which he advanced matters. If the lessors wanted to dispose of Lots 1 and 2, the appellants had a first right of refusal. However, Network was not the lessor. The Judge found as a matter of fact that everybody mistakenly treated Lots 1 and 2 as the property of Network. The liquidators on behalf of the joint venture never had to turn their minds to the disposal of that land, let alone could they evidence an intention to be rid of it. The right of first refusal was never triggered. As for the breach of trust claims, these are only actionable by the joint venture companies as beneficiaries, not by the McLachlans as lessees.
[26] Mr Bryers returned frequently to the theme that at the time of the sale of Lots 1 and 2 by Network, the power station had been sold by the receivers to Contact and Lots 1 and 2 were surplus to the joint venture project. Network and the liquidators acting in cohorts was the thrust of the appellants’ case. The evidence, however, was quite to the contrary. The Judge, on numerous occasions, found that the decisions taken after the appointment of the receivers were those of the receivers and not the directors of the joint venture companies.

Knowledge of receivers

[27] Mr Bryers submitted that the Judge had erred in finding that the receivers did not know that Lots 1 and 2 were beneficially owned by Geotherm. He contended that the receivers had either actual or constructive knowledge.
[28] In support of his actual knowledge argument, Mr Bryers pointed to a letter sent by the McLachlans’ solicitor to the receivers on 10 November 1999 (amongst others) which stated that Lots 1 and 2 were beneficially owned by Geotherm. This letter was before Potter J who determined that given the flurry of correspondence flying between the parties that contained contradictory statements this letter was not enough to import actual knowledge. There is no basis to depart from this finding. The Judge determined that there was general confusion regarding the ownership of Lots 1 and 2 created by the fact that:

(a) Network was the registered proprietor of Lots 1 and 2;

(b) The Joint Venture Agreement did not refer to Lots 1 and 2 in its definition of land;

(d) The advice the receivers received was that Network owned Lots 1 and 2.

[29] Mr Bryers sought to substantiate his claim of constructive knowledge with two main arguments. First, that the letter of 10 November 1999 was sufficient to put the receivers on notice that they were the beneficial owners of Lots 1 and 2 and that turning a blind eye to the claims made in the letter amounted to wilful blindness. Secondly, that because of the involvement of some individuals in both the joint venture companies and Network there must have been constructive knowledge.
[30] Mr Dale, for Geotherm and Poihipi, responded that the receivers had made inquiries but had received wrong information. He contended that given the state of confusion regarding the ownership of Lots 1 and 2 any further inquiry would have been futile.
[31] The constructive knowledge argument was rejected by Potter J at [97]:

While, as Mr Darlow accepted in answer to cross-examination, with the benefit of hindsight, he might have checked the position regarding Lots 1 and 2 in light of some of the statements in the solicitors’ letters, presented on the one hand with clear evidence that Lots 1 and 2 were not assets under receivership but owned by Network, and on the other hand with confused messages from the McLachlans, neither he nor the Receiver did so. Thus, they did not discover the true position regarding Lots 1 and 2. I am satisfied that this occurred, not from any wilfulness or dishonesty on their part, but simply from a misunderstanding that arose from the oversight by [Network], and the confusion that was perpetuated, in part by Mr McLachlan himself.

[32] The constructive knowledge argument was rejected by the Judge on the facts as she found them and there is no basis to go behind her finding.

Implied authority

[33] The alternative argument was that Network had implied authority from the lessors to sell Lots 1 and 2 by virtue of its controlling position in the joint venture. Network’s decision to sell was therefore binding on Geotherm and was enough to trigger clause 16.1.
[34] First it is to be noted that there is no evidence of any such authority. It is difficult to construct an argument which concludes that Geotherm could give implied authority to sell land that it did not know it owned. There was no evidence before the Court that the directors of Geotherm were even aware of the decision by Network to sell Lots 1 and 2.
[35] Secondly, once the receivers were appointed, the powers of the directors had become substantially circumscribed: Brooklands Motor Company Ltd (In Receivership) v Bridge Wholesale Acceptance Corporation (Australia) Ltd (1994) 7 NZCLC 260,499 (HC). The receivers were the agents of the joint venture companies, and they operated independently of Network.
[36] This aspect of the appeal also fails on the facts and the inevitable consequences which flow from Potter J’s findings.

Removal of caveats

[37] The third argument put forward by Mr Bryers was that the receivers, having full knowledge of the beneficial ownership of Lots 1 and 2 by Geotherm, agreed to the removal of the McLachlans’ caveat and therefore ratified the sale by Network. He submitted that by agreeing or acquiescing to the removal of the caveat, the right of first refusal was triggered.
[38] It is clear that it was Network, not the receivers, that brought the action to remove the caveats. Further, at the time of removing the caveats, there was a binding contract between Contact and Network for the sale of the land upon which Contact was entitled to specific performance. A right of first refusal cannot have been triggered at this stage as the sale had already been completed.
[39] The Judge properly reflected the equitable position of the appellants by maintaining their rights under the equitable lease once the sale occurred. She directed that Contact, as the purchaser, take the interest which Network had in Lots 1 and 2 which makes it subject to the McLachlans’ leasehold interest.

Ancillary issues

[40] Two final points should be made. The interests of the receivers and of Network are not identical. Potter J found that if the receivers had known or believed that Lots 1 and 2 were assets of Geotherm, they would have treated them in exactly the same way as the rest of the leased land. This meant that the lots would not be offered for sale so as to preserve the value of the Clause 10.1 provision of the lease in respect of the power station assets. That is a position which is contrary to Network’s interest in selling Lots 1 and 2.
[41] The Judge found that in the 2002 judgment, had the receivers known that Lots 1 and 2 were part of the leased land which they were controlling, they would have treated it as they did the rest of the land and held it. They would have regarded the sale of Lots 1 and 2 as detrimental to the function of maximising the value of the power station assets over the relevant time period.
[42] Secondly, it cannot be overlooked that the McLachlans are in exactly the same position now that they would have been had there not been this administrative error and an oversight with regard to legal ownership of Lots 1 and 2. They continue to have a leasehold interest in Lots 1 and 2 with a right of refusal should the Lessor, now Contact, wish to sell.

Conclusion

[43] Accordingly we are satisfied that the appeal in CA117/05 is without merit and must be dismissed.
[44] There is no reason why costs should not follow the event. The appellants jointly are ordered to pay $6,000 together with usual disbursements for the benefit of the first, second and third respondents jointly.

The appellant’s case in CA239/05

[45] Contact’s argument in this costs appeal can be briefly stated as it arises out of the background discussed in the first part of the judgment in CA117/05.
[46] In the 2005 hearing before Potter J there were effectively two matters in issue. First, whether the McLachlans could obtain the legal ownership of Lots 1 and 2 which had been sold by Network to Contact, and secondly, whether the McLachlans were to have an equitable lease over Lots 1 and 2 if they could not be the owners.
[47] It was common ground that there were a number of offers of settlement made by Contact many months out from trial. The offers were generally that Contact would recognise the McLachlans’ equitable lease over Lots 1 and 2 if the McLachlans withdrew the claim for equitable ownership. These offers continued up to trial, during the trial and through to judgment. If the offers had been accepted prior to trial each party would have borne its own costs.
[48] As a result of the litigation, ownership of Lots 1 and 2 has remained with Contact and the McLachlans have their equitable lease. This is not what the McLachlans wanted.
[49] In a stand-alone costs judgment, Potter J awarded costs to Network in the vicinity of $66,000 – 3C scale costs. The justification for this was that the McLachlans had failed on Issue 1 and were, therefore, liable to pay costs. Potter J, however, held that the McLachlans and Contact had been both successful and unsuccessful in that litigation and that they should each bear their own costs.
[50] Mr Chemis, on behalf of Contact, submitted that in all the circumstances costs should have been awarded in favour of Contact. He argued that Contact had been as successful as Network and that this should have been reflected in Potter J’s costs judgment.
[51] In particular he argued that the McLachlans are liable for costs in favour of Contact because:

(a) The McLachlans personally and as Trustees failed in the litigation in that they did not achieve anything more than that which was offered by Contact well prior to the trial (namely the perfection of their equitable lease over Lots 1 and 2);
(b) Contact succeeded in the litigation in that it was able to protect itself from the McLachlans’ attempt to obtain legal ownership of Lots 1 and 2. Contact was not attempting to defeat the McLachlans’ prior equity;
(c) The McLachlans rejected Contact’s offers on the basis that the offers required them to concede their cause of action against Network (the right of first refusal argument). The McLachlans failed in this cause of action and costs were awarded against them in favour of Network. In the circumstances costs also ought to have been awarded in favour of Contact; and
(d) Potter J erred in holding that the requirement in Contact’s settlement offers that the McLachlans concede their cause of action against Network was a significant concession.

[52] Although costs are discretionary, there is a clear underlying assumption that costs will follow the event unless there is some good reason why that should not occur.
[53] Potter J (at [21]) provides some light as to the basis of the exercise of her discretion:

There was no offer capable of acceptance by the McLachlans which did not involve a significant concession on their part, i.e. to condone the sale of Lots 1 and 2 to Contact by Network when the ability of Network to effect that sale was at the heart of Issue 1 identified by the Court of Appeal.

[54] We are unable to adopt this reasoning. There is no question but that Contact consistently asserted that it had acquired an unimpeachable title to the land in Lots 1 and 2. That is what the Court found to be the position. We cannot see why their consistent offer to grant the McLachlans the equitable lease, which was all that they ended up with, should be diminished or diluted.
[55] It is of course true that to have settled the McLachlans would have had to give away the first issue, but they lost on that point anyway.
[56] At the end of this case, the McLachlans are in the position which they could have been as much as eight months before the hearing if they had accepted Contact’s offers. We are unable to follow why Network should get costs in the conventional manner because it won on Issue 1, but Contact are left lamenting.
[57] Although we are dealing with the exercise of a discretion, we are satisfied that Network and Contact were at least on an equal plane in respect of Issue 1 of the litigation and that there is no principled reason why they should not have been treated equally. On Issue 2, all the McLachlans achieved is what they had been offered so there is no disentitling influence from that.
[58] Mr Chemis argued that, because of the manner in which the McLachlans conducted the litigation, there should be an increased order for costs based on the offer to settle and/or Contact’s proposal for a split trial to enable the right to purchase argument to be heard first thereby potentially obviating the need for the competing equities issues to be determined.
[59] Potter J rejected this argument and we are not persuaded that she has been shown to have been wrong in her assessment of what occurred on this aspect of the judgment.
[60] This litigation arises from the fact that there was oversight and mistakes made by all parties which should have been exposed and remedied at an early date. That did not occur. In such circumstances it would be unduly punitive and wrong in principle to do anything other than follow a routine approach to costs.
[61] The Judge held that Network’s costs should be determined on a 3C basis. There was no appeal against that determination, and the categorisation was not the subject of any submissions before us. Attention was directed only to whether there should be a costs order, and whether there should be an uplift on scale for part of the time.
[62] It is inconsistent with the principles of the costs regime in the High Court Rules to make a blanket order for costs on a 3C basis. Rule 48 contemplates a categorisation of the proceeding. A blanket category 3 is unexceptional. Rule 48B(2)(c) contemplates a determination by reference to band C where a comparatively large amount of time is considered reasonable for a particular step.
[63] It is only open to a Judge to determine that costs on a 3C basis are appropriate where the Judge is satisfied that every step took a comparatively large amount of time compared with normal. That will rarely be the case. Although category 3 will apply across the proceedings, individual assessments will be required in respect of different steps.
[64] The awarding of 2B across a case is unobjectionable because that is simply a recognition of an average case taking normal amounts of time at every step.
[65] There was no argument before us that there should be any differentiation between the position of Contact and that of Network in respect of an entitlement to a costs award.
[66] In the absence of argument about this issue, and because our concern is to maintain consistency of treatment, we will apply the approach adopted in the High Court.

Conclusion

[67] On CA239/05, the appeal is allowed in part. Contact is awarded costs on a 3C basis as against the first and second respondents jointly and severally in respect of the hearing in the High Court which culminated in the judgment of 23 May 2005.
[68] Contact is also entitled to costs in respect of this appeal of $3,000 together with usual disbursements.

Result

[69] The appeal under CA117/05 is dismissed. The McLachlans are ordered to pay costs to the first, second and third respondents jointly in the sum of $6,000 together with usual disbursements.
[70] The appeal in CA239/05 is allowed. The McLachlans are ordered to pay costs on a 3C scale to Contact in respect of the High Court hearing leading to the judgment of 23 May 2005 and costs of $3,000 together with usual disbursements in respect of this appeal.

Solicitors:
Martelli McKegg Wells &Cormack, Auckland, for First and Second Appellants in CA117/095 and for First and Second Respondents in CA239/05
Buddle Findlay, Wellington, for Second and Third Respondents in CA117/05 and Third Respondent in CA239/05

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[1]	These appeals are yet another step in a long-running litigation saga. The relatively narrow issues now in contention relate to whether a right of first refusal was triggered by the sale of two lots of land, plus an issue of costs. These matters are understandable only in context.
[2]	The litigation arises from the breakdown of an ambitious joint venture which ended in heavy losses for the participants. The object of the venture had been to build and run a geothermal power station near Taupo using natural geothermal resources for large scale generation of electricity for supply to consumers.
[3]	The participants in the venture were the second appellants in CA117/05 (Mr and Mrs McLachlan) together with some family companies which they controlled, and Mercury Network Limited, later named MEL Network Limited (Network) which was a subsidiary of a listed company now known as Vector Limited (Vector).
[4]	Two companies were formed for the purposes of the joint venture. Mercury Geotherm Limited (Geotherm) was owned 67% by Network and 33% by the McLachlans either as trustees or beneficially. The second company was Poihipi Land Limited (Poihipi), which was a wholly owned subsidiary of Geotherm. Geotherm and Poihipi are now both in receivership. They are the first and second respondents in CA117/05. Network is the third respondent in both appeals.

[8]	The Lease of Land A was for a term of just under 20 years. No term was specified in relation to the lease of Land B and C.
[9]	Of particular importance in the appeal before us, the Lease of Land A also contained the right of pre-emption in clause 16.1 which provided:

[11]	The new power station ran into financial difficulties. The debenture holder, Network, appointed receivers in 1998. The receivers sold the power station together with such part of the land as was defined by the Court as comprising the power station site to Contact Energy Limited (Contact), the fourth respondent in CA117/05 and the appellant in CA239/05. At the same time Network sold Lots 1 and 2 to Contact as part of that arrangement.
[12]	The McLachlans, either personally or as trustees of the Waituruturu Trust (the first appellant in CA117/05), contended that they had a right to purchase all of the land. They caveated what had been Land A and also Lots 1 and 2, all of which had been sold to Contact.
[13]	The relevant litigation saga commenced with proceedings to remove these two caveats.
[14]	There were various amended proceedings leading to a hearing before Potter J in the High Court at Auckland between 6 and 17 May 2002 of proceedings M:129-IM00 and M:1569-AS00, which were related to s 143 of the Land Transfer Act 1952. In a reserved judgment of 14 June 2002, the Judge concluded that the alleged first refusal under the lease between Geotherm and the McLachlans was not triggered as Geotherm’s receiver had no "wish to sell or dispose" the subject land and, therefore, the caveats should be removed.
[15]	An appeal filed by the McLachlans from that decision was heard in this Court on 12 and 13 May 2003. In a judgment delivered on 28 August 2003 (CA142/02) the appeal was allowed in part including the setting aside of the High Court’s finding that the right of first refusal to purchase Lots 1 and 2 had not been triggered. This aspect was referred for further consideration in the High Court.
[16]	Pursuant to that referral back, relevant matters were considered before Potter J from 4 to 8 October 2004. In a judgment delivered 23 May 2005, the learned Judge concluded:

[20]	As the receivers did not know they owned the land, Potter J held that they could not form a "wish to sell or dispose" of Lots 1 and 2. Accordingly she determined that the right of first refusal contained in clause 16.1 of the equitable lease was never triggered.
[21]	The Judge also found that, although the receivers co-operated and assisted Network to effect the sale of Lots 1 and 2, the receivers were acting independently of Network. She rejected an argument by the McLachlans that Network’s decision to sell was effectively a decision of the joint venture companies.
[22]	Potter J also rejected an argument advanced by the McLachlans that any decision made by Network was inevitably a decision of the joint venture companies because of Network’s controlling interest in the joint venture.

[24]	Mr Bryers did not shy away from the fact that his argument before us necessitated a refinding of facts and was rooted in determining that the Judge’s reasoning meant that the appellants’ right of first refusal was circumvented. In other words Network (who in fact held the land in trust for the joint venture companies) had been permitted to sell the land in breach of trust and in breach of the appellants’ rights of first purchase.
[25]	With respect to Mr Bryers’ ingenuity, the argument is circular. It cannot survive analysis even at the level at which he advanced matters. If the lessors wanted to dispose of Lots 1 and 2, the appellants had a first right of refusal. However, Network was not the lessor. The Judge found as a matter of fact that everybody mistakenly treated Lots 1 and 2 as the property of Network. The liquidators on behalf of the joint venture never had to turn their minds to the disposal of that land, let alone could they evidence an intention to be rid of it. The right of first refusal was never triggered. As for the breach of trust claims, these are only actionable by the joint venture companies as beneficiaries, not by the McLachlans as lessees.
[26]	Mr Bryers returned frequently to the theme that at the time of the sale of Lots 1 and 2 by Network, the power station had been sold by the receivers to Contact and Lots 1 and 2 were surplus to the joint venture project. Network and the liquidators acting in cohorts was the thrust of the appellants’ case. The evidence, however, was quite to the contrary. The Judge, on numerous occasions, found that the decisions taken after the appointment of the receivers were those of the receivers and not the directors of the joint venture companies.

[29]	Mr Bryers sought to substantiate his claim of constructive knowledge with two main arguments. First, that the letter of 10 November 1999 was sufficient to put the receivers on notice that they were the beneficial owners of Lots 1 and 2 and that turning a blind eye to the claims made in the letter amounted to wilful blindness. Secondly, that because of the involvement of some individuals in both the joint venture companies and Network there must have been constructive knowledge.
[30]	Mr Dale, for Geotherm and Poihipi, responded that the receivers had made inquiries but had received wrong information. He contended that given the state of confusion regarding the ownership of Lots 1 and 2 any further inquiry would have been futile.
[31]	The constructive knowledge argument was rejected by Potter J at [97]:

[33]	The alternative argument was that Network had implied authority from the lessors to sell Lots 1 and 2 by virtue of its controlling position in the joint venture. Network’s decision to sell was therefore binding on Geotherm and was enough to trigger clause 16.1.
[34]	First it is to be noted that there is no evidence of any such authority. It is difficult to construct an argument which concludes that Geotherm could give implied authority to sell land that it did not know it owned. There was no evidence before the Court that the directors of Geotherm were even aware of the decision by Network to sell Lots 1 and 2.
[35]	Secondly, once the receivers were appointed, the powers of the directors had become substantially circumscribed: Brooklands Motor Company Ltd (In Receivership) v Bridge Wholesale Acceptance Corporation (Australia) Ltd (1994) 7 NZCLC 260,499 (HC). The receivers were the agents of the joint venture companies, and they operated independently of Network.
[36]	This aspect of the appeal also fails on the facts and the inevitable consequences which flow from Potter J’s findings.

[37]	The third argument put forward by Mr Bryers was that the receivers, having full knowledge of the beneficial ownership of Lots 1 and 2 by Geotherm, agreed to the removal of the McLachlans’ caveat and therefore ratified the sale by Network. He submitted that by agreeing or acquiescing to the removal of the caveat, the right of first refusal was triggered.
[38]	It is clear that it was Network, not the receivers, that brought the action to remove the caveats. Further, at the time of removing the caveats, there was a binding contract between Contact and Network for the sale of the land upon which Contact was entitled to specific performance. A right of first refusal cannot have been triggered at this stage as the sale had already been completed.
[39]	The Judge properly reflected the equitable position of the appellants by maintaining their rights under the equitable lease once the sale occurred. She directed that Contact, as the purchaser, take the interest which Network had in Lots 1 and 2 which makes it subject to the McLachlans’ leasehold interest.

[40]	Two final points should be made. The interests of the receivers and of Network are not identical. Potter J found that if the receivers had known or believed that Lots 1 and 2 were assets of Geotherm, they would have treated them in exactly the same way as the rest of the leased land. This meant that the lots would not be offered for sale so as to preserve the value of the Clause 10.1 provision of the lease in respect of the power station assets. That is a position which is contrary to Network’s interest in selling Lots 1 and 2.
[41]	The Judge found that in the 2002 judgment, had the receivers known that Lots 1 and 2 were part of the leased land which they were controlling, they would have treated it as they did the rest of the land and held it. They would have regarded the sale of Lots 1 and 2 as detrimental to the function of maximising the value of the power station assets over the relevant time period.
[42]	Secondly, it cannot be overlooked that the McLachlans are in exactly the same position now that they would have been had there not been this administrative error and an oversight with regard to legal ownership of Lots 1 and 2. They continue to have a leasehold interest in Lots 1 and 2 with a right of refusal should the Lessor, now Contact, wish to sell.

[43]	Accordingly we are satisfied that the appeal in CA117/05 is without merit and must be dismissed.
[44]	There is no reason why costs should not follow the event. The appellants jointly are ordered to pay $6,000 together with usual disbursements for the benefit of the first, second and third respondents jointly.

[45]	Contact’s argument in this costs appeal can be briefly stated as it arises out of the background discussed in the first part of the judgment in CA117/05.
[46]	In the 2005 hearing before Potter J there were effectively two matters in issue. First, whether the McLachlans could obtain the legal ownership of Lots 1 and 2 which had been sold by Network to Contact, and secondly, whether the McLachlans were to have an equitable lease over Lots 1 and 2 if they could not be the owners.
[47]	It was common ground that there were a number of offers of settlement made by Contact many months out from trial. The offers were generally that Contact would recognise the McLachlans’ equitable lease over Lots 1 and 2 if the McLachlans withdrew the claim for equitable ownership. These offers continued up to trial, during the trial and through to judgment. If the offers had been accepted prior to trial each party would have borne its own costs.
[48]	As a result of the litigation, ownership of Lots 1 and 2 has remained with Contact and the McLachlans have their equitable lease. This is not what the McLachlans wanted.
[49]	In a stand-alone costs judgment, Potter J awarded costs to Network in the vicinity of $66,000 – 3C scale costs. The justification for this was that the McLachlans had failed on Issue 1 and were, therefore, liable to pay costs. Potter J, however, held that the McLachlans and Contact had been both successful and unsuccessful in that litigation and that they should each bear their own costs.
[50]	Mr Chemis, on behalf of Contact, submitted that in all the circumstances costs should have been awarded in favour of Contact. He argued that Contact had been as successful as Network and that this should have been reflected in Potter J’s costs judgment.
[51]	In particular he argued that the McLachlans are liable for costs in favour of Contact because:

[52]	Although costs are discretionary, there is a clear underlying assumption that costs will follow the event unless there is some good reason why that should not occur.
[53]	Potter J (at [21]) provides some light as to the basis of the exercise of her discretion:

[54]	We are unable to adopt this reasoning. There is no question but that Contact consistently asserted that it had acquired an unimpeachable title to the land in Lots 1 and 2. That is what the Court found to be the position. We cannot see why their consistent offer to grant the McLachlans the equitable lease, which was all that they ended up with, should be diminished or diluted.
[55]	It is of course true that to have settled the McLachlans would have had to give away the first issue, but they lost on that point anyway.
[56]	At the end of this case, the McLachlans are in the position which they could have been as much as eight months before the hearing if they had accepted Contact’s offers. We are unable to follow why Network should get costs in the conventional manner because it won on Issue 1, but Contact are left lamenting.
[57]	Although we are dealing with the exercise of a discretion, we are satisfied that Network and Contact were at least on an equal plane in respect of Issue 1 of the litigation and that there is no principled reason why they should not have been treated equally. On Issue 2, all the McLachlans achieved is what they had been offered so there is no disentitling influence from that.
[58]	Mr Chemis argued that, because of the manner in which the McLachlans conducted the litigation, there should be an increased order for costs based on the offer to settle and/or Contact’s proposal for a split trial to enable the right to purchase argument to be heard first thereby potentially obviating the need for the competing equities issues to be determined.
[59]	Potter J rejected this argument and we are not persuaded that she has been shown to have been wrong in her assessment of what occurred on this aspect of the judgment.
[60]	This litigation arises from the fact that there was oversight and mistakes made by all parties which should have been exposed and remedied at an early date. That did not occur. In such circumstances it would be unduly punitive and wrong in principle to do anything other than follow a routine approach to costs.
[61]	The Judge held that Network’s costs should be determined on a 3C basis. There was no appeal against that determination, and the categorisation was not the subject of any submissions before us. Attention was directed only to whether there should be a costs order, and whether there should be an uplift on scale for part of the time.
[62]	It is inconsistent with the principles of the costs regime in the High Court Rules to make a blanket order for costs on a 3C basis. Rule 48 contemplates a categorisation of the proceeding. A blanket category 3 is unexceptional. Rule 48B(2)(c) contemplates a determination by reference to band C where a comparatively large amount of time is considered reasonable for a particular step.
[63]	It is only open to a Judge to determine that costs on a 3C basis are appropriate where the Judge is satisfied that every step took a comparatively large amount of time compared with normal. That will rarely be the case. Although category 3 will apply across the proceedings, individual assessments will be required in respect of different steps.
[64]	The awarding of 2B across a case is unobjectionable because that is simply a recognition of an average case taking normal amounts of time at every step.
[65]	There was no argument before us that there should be any differentiation between the position of Contact and that of Network in respect of an entitlement to a costs award.
[66]	In the absence of argument about this issue, and because our concern is to maintain consistency of treatment, we will apply the approach adopted in the High Court.

[67]	On CA239/05, the appeal is allowed in part. Contact is awarded costs on a 3C basis as against the first and second respondents jointly and severally in respect of the hearing in the High Court which culminated in the judgment of 23 May 2005.
[68]	Contact is also entitled to costs in respect of this appeal of $3,000 together with usual disbursements.

[69]	The appeal under CA117/05 is dismissed. The McLachlans are ordered to pay costs to the first, second and third respondents jointly in the sum of $6,000 together with usual disbursements.
[70]	The appeal in CA239/05 is allowed. The McLachlans are ordered to pay costs on a 3C scale to Contact in respect of the High Court hearing leading to the judgment of 23 May 2005 and costs of $3,000 together with usual disbursements in respect of this appeal.