Maclab (NZ) Limited v Brown [2013] NZHC 686 (8 April 2013)

Last Updated: 12 April 2013

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2013-442-000135 [2013] NZHC 686

UNDER the Declaratory Judgments Act 1908

BETWEEN MACLAB (NZ) LIMITED Plaintiff

AND MICHAEL GORDON SINCLAIR BROWN

Defendant

Hearing: 8 April 2013 (at Wellington)

Counsel: B M Nathan and S Galbreath for Plaintiff

J M Fitchett for Defendant

Judgment: 8 April 2013

_{ORAL JUDGMENT OF COLLINS J}

Introduction

[1] The issue I have to resolve is encapsulated in the following question:

Should Mr Brown be restrained from selling a licence to a marine farm to a third party?

[2] The issue arises because MacLab (NZ) Ltd (MacLab) seeks an interim injunction pending determination of its application for a declaration as to the meaning of a “first right of refusal” clause in a sub-licence agreement between Mr Brown and MacLab. The sub-licence concerns a mussel farm licence called “MFL 116”.

[3] The clause at issue in the sub-licence provides MacLab with a “first right of

_{refusal to buy all or any of the sub-licence waterspace on MFL 116 at valuation”.}

MACLAB (NZ) LIMITED V BROWN HC NEL CIV-2013-442-000135 [8 April 2013]

[4] On 27 September 2012, Mr Brown notified MacLab that he had received an offer to sell the licence to Two Tides Ltd (Two Tides) for $1 million. Mr Brown invited MacLab to exercise its right of first refusal and match Two Tides’ offer.

[5] MacLab says it should not be required to match Two Tides’ offer in case Two Tides is proposing to pay more than MFL 116 is worth. For this reason MacLab argues that a valuation of MFL 116 must be obtained from a valuer before it is required to exercise its right of first refusal.

[6] I am required to deliver my decision very quickly because:

(1) Mr Brown wishes to settle with Two Tides on or before 1 May 2013. (2) The sub-licence agreement between Mr Brown and MacLab expires

on 1 May 2013, although there is also an automatic right of renewal in perpetuity for each year from that date.

(3) The right of renewal only applies if Mr Brown continues to hold MFL

116.

Background

[7] On 23 November 2007 Mr Brown, in his capacity as a sub-licensor1 sold to MacLab his marine farming business. Included in that contract was the sub-licence for MFL 116, located in Wainui Bay, Golden Bay. Wainui Bay is one of two principal areas in New Zealand where mussel spat is grown. MFL 116 is therefore a highly desirable mussel farm licence. There are six mussel farm licences in close proximity to each other in Wainui Bay.

Key terms of the agreement

[8] The key terms of the sub-licence provide:

(1) The term of the sub-licence is five years from 1 May 2008;2

(2) MacLab is to pay Mr Brown an annual licence fee of $5,000 for each

of the 12 “long lines” at the MFL 116 site;3

(3) Mr Brown was prohibited from selling MFL 116 before 1 May 2011;4

(4) After 1 May 2011 Mr Brown could sell MFL 116 to a third party “but

subject to the right of refusal to MacLab”;5

(5) MacLab has:

(i) first right of refusal to buy all or any of the sub-licence waterspace on MFL 116 at valuation. If MacLab does not exercise the right of first refusal then [Mr Brown] is free to sell the waterspace, but not at a lower price than offered to MacLab. If this right of refusal is not exercised, it is not extinguished but continues on for all of [Mr Brown’s] sub- licensed waterspace.6

(6) The sub-licence is “... to be perpetually renewed automatically on an annual basis as long as owned by [Mr Brown] ... This clause does not prevent [Mr Brown] ... selling the underlying waterspace ... after three years, and subject to the rights of refusal in [8](5)(i) above. On the sale of any waterspace ... after the first five years the sub-licences of any line so affected will terminate at the end of that year. Any sale in the first five years will be subject to MacLab’s

_{sub-licences”.}7

Negotiations between the parties

[9] In mid-2012 the parties commenced negotiations for the sale and purchase of the licence. At this juncture I cannot precisely determine the complete history of the

_{negotiations. For present purposes I conclude:}

2 _{Clause 2(a).}

3 _{Clause 2(b)(i).}

4 _{Clause 2(c).}

5 _{Clause 2(d).}

6 _{Clause 2(e)(i).}

7 Clause 2(i).

(1) By 7 June 2012, after offers and counter offers had been made, MacLab appeared to be willing to purchase MFL 116 for $1 million. The parties’ negotiations at this juncture appeared to lapse.

(2) Soon thereafter, MacLab purchased another of the mussel licences (MFL 115) in Wainui Bay from Sealords. I have not been told what price MacLab paid for this mussel farm licence which is immediately adjacent to MFL 116.

(3) On 27 September 2012 Mr Brown advised MacLab that Two Tides wished to purchase MFL 116 for $1 million and that as MacLab had a first right of refusal Mr Brown required MacLab to advise within five working days whether or not it wished to exercise its right of refusal.8

(4) On 3 October 2012 MacLab told Mr Brown that under the terms of the first right of refusal clause the parties needed to first obtain a valuation from a valuer before MacLab could be required to exercise its right of first refusal.

(5) On 3 October 2012 Mr Brown told MacLab that he would not be selling MFL 116 before 30 April 2013.

(6) On 17 October 2012 Mr Brown told MacLab:

(a) that MacLab had no legal right to purchase MFL 116 for less than MacLab had offered earlier in the year;

(b) that he would not sell to anyone before the end of April 2013;

and

(c) that MacLab no longer had a right of first refusal.

(7) On 6 December 2012 the parties unsuccessfully attempted to mediate a solution to their dispute.

(8) In January 2013 the parties entered into further negotiations in an attempt to settle their differences.

(9) On 6 March 2012 MacLab sought an undertaking that Mr Brown would not sell MFL 116 without giving MacLab a right of first refusal.

(10) On 8 March 2012 Mr Brown:

(a) undertook not to sell MFL 116 before 19 March 2012; and

(b) told MacLab that it would need to obtain an injunction if it wished to stop Mr Brown selling to a third party.

(11) On 18 March 2013 MacLab commenced its proceeding for a declaration as to the meaning of the right of first refusal clause. That day MacLab also filed its application for an interim injunction.

(12) On 20 March 2013 Mr Brown gave an undertaking not to sell MFL

116 before either:

(a) the determination of the interim junction; or

(b) 22 April 2013.

(13) On 27 March 2013 a telephone conference was convened by Kós J.

That day Mr Brown undertook not to deal with MFL 116 until close of business on 8 April 2013. That undertaking was subsequently modified slightly in the event that today’s fixture could not proceed.

[10] The three questions I will consider in deciding whether or not to issue an interim injunction are:

(1) Is there a serious question to be tried?9

(2) Does the balance of convenience favour the granting of an interim injunction?10

(3) Does the overall justice of the matter favour the granting of an interim injunction?11

Is there a serious question to be tried?

[11] The answer to this question focuses upon the words “at valuation” contained

in cl 2(e)(i) of the sub-licence (refer [8](5) above).

[12] Mr Brown’s case is that the parties never intended that his ability to sell MFL 116 three years after the commencement of the sub-licence would be compromised through having to go through the process of obtaining a valuation from a valuer as a pre-condition to MacLab exercising its right of first refusal. Mr Brown

explains in his affidavit that his:12

... rights to sell would be in limbo for the weeks (or months) it would take to get a valuation and, even after meeting (or sharing) the valuation costs, I could find that MacLab then decided not to buy.

[13] MacLab’s position is that its right of first refusal is conditional upon it being

able to purchase MFL 116 after obtaining a valuation from a valuer. MacLab says

_{Mr Brown triggered the right of first refusal process by his letter of 27 September}

9 American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396 and Klissers Farmhouse Bakeries Ltd v

_{Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA).}

10. American Cyanamid Co v Ethicon Ltd, Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, Congoleum Corp v Poly-Flor Products (NZ) Ltd [1979] 2 NZLR 560 (CA), Cayne v Global Natural Resources plc [1984] 2 All ER 225 (CA).

11 _{Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd.}

12 Affidavit of M G S Brown at [32].

2012 (refer [9](3) above) and that a valuation needs to be carried out by a valuer before MacLab exercises its right of first refusal.

Is the right of first refusal clause in the sub-licence void for uncertainty?

[14] Mr Brown says there is not a serious question to be tried because the words “at valuation” are so uncertain that cl 2(e)(i) of the sub-licence is void. In particular, Mr Brown submits that the words “at valuation” lack certainty because it is impossible to ascertain how the value of MFL 116 is to be determined.

[15] The difficulty Mr Brown faces in relation to this aspect of his argument is that there are powerful precedents against his submission.

[16] In the Privy Council decision of Money v Ven-Lu-Ree Ltd,13 Lord Goff of

Chieveley explained:14

It is now well settled, in New Zealand as in England, that an agreement for sale at a valuation is capable of constituting a binding agreement, even if the machinery established by the parties for the ascertainment of the price should for some reason fail ...

[17] The Privy Council referred to the House of Lords judgment of Sudbrook

Trading Estate Ltd v Eggleton where Lord Diplock said:15

... when honest parties to a contract for the sale of land or an option to enter into such a contract have in the past inserted provisions for the ascertainment of the purchase price ... they must have intended to create legal rights to have those provisions acted on by both parties and not flouted by either party at his own sweet will, otherwise there is no point in inserting them at all.

[18] In my assessment, it is possible to give efficacy to the words “at valuation” by ascertaining the meaning of the first right of refusal clause of the sub-licence. There are two aspects to this exercise, namely the purpose of the clause, and the

_{mechanism by which the valuation of MFL 116 is to be set.}

13 _{Money v Ven-Lu-Ree Ltd [1989] 3 NZLR 129.}

14 _{At 133.}

15 Sudbrook Trading Estate ltd v Eggleton [1982] 3 All ER 1 (HL) at 7.

[19] The purpose of a first right of refusal, or pre-emption is explained in the following way in Law of Contract in New Zealand:16

... a right of pre-emption consists of a contractual agreement between two or more parties to the effect that if, at some future time, one of the parties wishes to engage in contractual dealings in respect of some matter or thing, the other party or parties are to have the first opportunity to enter into a binding form of contract in relation to the matter or thing.

And

Such a contractual right of pre-emption may be valid even if there are no provisions relating to the terms of the future agreement as the courts will imply a term that the grantor of the right must offer to the holder of the right of pre-emption the opportunity to contract on the terms that the grantor would offer to any other person with whom he or she might wish to contract.

[20] A right of first refusal is usually given effect through the following steps: (1) Receipt of an offer which the vendor is prepared to accept;

(2) Communication of that offer to the party who holds the right of first refusal with a request that the right of refusal be exercised within the time specified in the right of refusal provision; and

(3) If the right of refusal is exercised it becomes a binding contract. [21] The essential features of a right of first refusal are:

(1) It grants a preference to the holder of the right of first refusal, which is contingent upon the vendor being willing to sell;

(2) The rights of the holder of the right of first refusal are triggered when the vendor receives an offer from a third party which the vendor is

_{willing to accept;}

16 Burrows, Finn and Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012)

at [3.7.4].

(3) Once the vendor has an offer that they are willing to accept the holder of the right of first refusal must be given an opportunity to purchase upon the terms offered by the third party.

By what mechanism is the value of MFL 116 to be set?

[22] The correct approach to ascertain the value of MFL 116 is to determine the market value of the property based upon what a willing but not anxious buyer would be willing to pay for the property and what price a willing but not anxious vendor would be willing to sell the property for.17

[23] In the present case Two Tides has offered to purchase MFL 116 for

$1 million. That price coincides with the sum that MacLab appears to have been willing to purchase MFL 116 for earlier in 2012. Significantly, MacLab has not questioned the genuineness of Two Tides’ offer. MacLab has not adduced any evidence to suggest that the offer from Two Tides is anything other than an offer from a willing but not anxious purchaser. For this reason I am satisfied the market has spoken and that it is not necessary to obtain a valuation from a valuer in order to ascertain the market value of the licence.

[24] For these reasons I would hold that the option to purchase at valuation in the right of first refusal clause of the sub-licence can be given effect by determining that MacLab has the option to purchase MFL 116 for $1 million.

Has the right of first refusal expired?

[25] The second limb to Mr Brown’s argument that MacLab has no arguable case is his submission that the right of first refusal has expired. This submission is based upon the evidence that in his letter of 27 September 2012 Mr Brown:

(1) explained the offer from Two Tides;

_{(2) acknowledged that MacLab had a right of first refusal;}

17 Coleman v Myers [1977] 2 NZLR 225 at 258 (SC) and Holt v Holt [1990] 3 NZLR 401 (PC).

(3) noted that the agreement of November 2007 provided no timeframe within which MacLab should exercise its right of first refusal;

(4) proposed a five day timeframe for MacLab to advise if it wished to exercise its right of first refusal.

[26] Mr Brown says that if MacLab wished to purchase MFL 116 it had to exercise its right of first refusal within five working days and that it could not engage in any exercise of tactical delay while it went about obtaining a valuation from a valuer.

[27] I am satisfied, albeit by a slim margin, that MacLab’s right of first refusal has not yet expired. My reasons for reaching this conclusion are:

(1) The five day time limit was unilaterally imposed by Mr Brown and not agreed to by MacLab;

(2) The focus of the parties since 27 September 2012 has been upon the price that MacLab should have to pay for MFL 116 if it wishes to purchase that licence;

(3) The crucial date for the parties is 1 May 2013 because if at that date Mr Brown has sold MFL 116 to Two Tides, MacLab will lose the right to a one year renewal contained in cl 2(i) of the sub-licence (refer to [8](6) above).

[28] However, I am also satisfied that a reasonable time limit must be implied in order to give efficacy to the right of first refusal clause of the sub-licence. In my assessment that time limit should now be calculated by reference to 1 May 2013 rather than 27 September 2012. I believe that proper effect can be given to the parties’ intentions when they agreed to the right of first refusal clause in the sub- licence if MacLab is given until 12 noon on 19 April 2013 to notify Mr Brown if it wishes to purchase MFL 116 at the price which Two Tides has offered.

[29] I hold therefore that as at today’s date MacLab has an arguable case that it still has the option to purchase MFL 116 from Mr Brown. However, if I were to issue an interim injunction it would be conditional on that injunction lapsing at

12 noon on 19 April 2013. That would provide MacLab with sufficient time to

notify Mr Brown if it wished to match Two Tides’ offer.

Does the balance of convenience favour the granting of an interim injunction?

[30] Issuing an interim injunction for the limited time that I have indicated would not prejudice either party. Instead, issuing an injunction until 12 noon on 19 April

2013 would provide the parties with a final opportunity to give effect to the right of first refusal clause in the sub-licence. The balance of convenience therefore favours the granting of an interim injunction for the short period that I have indicated.

Does the overall justice favour the granting of an interim injunction?

[31] I am satisfied that the overall justice of this case favours the issuing of an interim injunction for the period I have indicated. My reasons for reaching this conclusion are:

(1) Mr Brown has a legitimate offer on the table from Two Tides which should not be permitted to lapse through delays caused by MacLab and Mr Brown continuing to disagree;

(2) There is nothing to suggest Two Tides’ offer is unrealistic. It is significant that the offer from Two Tides reflects a purchase price MacLab appears to have been willing to pay for MFL 116 earlier in

2012;

(3) MacLab should have the opportunity afforded by an interim injunction that expires on 19 April 2013 to decide if it wishes to risk Two Tides owning the sub-licence from 1 May 2013.

Conclusion

[32] An interim injunction will be issued preventing Mr Brown from selling the sub-licence in MFL 116 to any third party. That interim injunction will lapse at noon on 19 April 2013.

Costs

[33] Although I am issuing an interim injunction, this is a case in which the honours have been evenly shared. Accordingly, I believe this is a situation in which

_{each party should bear their own costs.}

_{D B Collins J}

Solicitors:

Duncan Cotterill, Nelson for Plaintiff

Rout Milner Fitchett, Nelson for Defendant