Airports: McElroy v. Auckland Airport

Widely viewed as a retail park with airport attached, Auckland International Airport expansion has been protected by a Court of Appeal ruling that undeveloped land not currently being used for airport activity need not be offered back to former owners.

The Craigie Trust, former owners of 36 hectares compulsory acquired in 1975 for airport expansion argued that legislation governing land taken for public works gave it first option to recover the land on payment of the current market price. Craigie was looking to buy the land at its then market price of February 1982, arguing that was the date when the land was no longer to be used for an airport. Craigie’s 36 hectares has in part been converted to airport use with major roads and an avgas pipeline across its former land. It said the Trust was agreeable to the Airport leasing this land should a buyback be ordered.

Craigie argued that its land was compulsorily acquired for use as an “aerodrome” and construction of shops and amusement parks did not amount to use as an “aerodrome”.

The Court of Appeal said the word “aerodrome” had fallen out of use. It should not be read too narrowly given current commercial practice at the world’s major airports. The Court said extensive ancillary services are required in an airport’s environs not only for tourists passing through, but also for use by airport staff.

The Court ruled the 36 hectares were still required for “public works”: future expansion as part of airport activity.

And even if the land wasn’t required for expansion, the Court ruled it would be impracticable and unreasonable to allow Craigie to buy back. The entire airport precinct had been radically altered over the passage of time.

McElroy v. Auckland Airport – Court of Appeal (23.12.09)

04.10.001

Resource Management: Central Plains Water v. Ashburton Water

With shades of goldminers racing to be first to stake a claim, the Court of Appeal has ruled the first to file a complete application for water rights gets priority for a hearing. This gives “first mover” advantage to those quick off the mark and leaves rivals in the position of having to attack the proposal – not advance their own interests.

Demand for water can exceed supply. There is no separate regime in New Zealand dealing with claims to water resources. Claimants need to apply for resource consent under the Resource Management Act 1991.

Consent applications have been a hot issue in Canterbury where conversion of sheep and cropping land to large industrial dairy units has led to increased demand for water use. Anglers, jet boat enthusiasts and local authorities jostle with large commercial users in disputes over how much water can be properly extracted from rivers such as the Rakaia and Waimakariri.

The courts have adopted a first come first served approach: whoever first files a completed water resource application has the right to be heard first. Applicants with competing claims can object to the filed proposal, but are not entitled to put up a counter application to be judged against the proposal filed first.

Since the case was heard, Parliament enacted the Resource Management (Simplifying and Streamlining) Amendment Act 2009 to reduce the procedural hurdles in getting resource consents dealt with.

Central Plains Water Trust v. Ashburton Water Trust – Supreme Court (18.12.09)

(04.10.005)

Class Action: Saunders v. Houghton

For 800 investors bringing a class action following complaints about the 2004 Feltex float, it is going to be a long haul before they see any action. The Court of Appeal has given tepid support for the class action but sent everyone back to the High Court for a long think about the funding arrangements.

Investors, who bought into Feltex at $1.70 per share in the public float, were stung into action when the share price fell to sixty cents per share within two years. It is alleged that Feltex’ financial position was dressed up prior to the float, for the primary benefit of then majority shareholder Credit Suisse PE which received some $180 million from the float proceeds.

In particular, it is alleged that just prior to the float Feltex unilaterally slashed end-of-year rebates to major customers with the effect of creating a $10 million one-off boost to annual profit. This damaged customer goodwill and reduced future profits, it is argued.

It is also alleged Feltex management engaged in “channel stuffing” in the period after the float. This involves delivery of goods in excess of customer’s orders, with an immediate boost to recorded sales, despite the likelihood that some or all of this excess will be returned. Investors allege this was done to massage post-float profitability.

Legal action has been taken against Feltex directors who signed the float prospectus, Credit Suisse as promoter, and the joint lead managers: First New Zealand Capital and Forsyth Barr.

Class action litigation was filed in the names of two representative investors. A class action is the only economic way in which disparate small investors can mount a common action against a large corporate. It enables legal liability (if any) to be fixed, allowing individual shareholders to use the representative court judgment as a template to then prove for their individual loss.

There was evidence that individual investors had put $450,000 into the kitty to get litigation started. This will not be sufficient funding for complex commercial litigation.

A company called Joint Funding has been established to collect funds and direct the litigation.

The Court of Appeal ruled the class action was to remain on hold, pending full details of the legal claim and some clarity about the status of the funding arrangement for the litigation. In particular, the Court wanted to see some controls over how the litigation would be managed – to avoid the perceived abuses in US class actions where litigation funders often stand accused of pursuing unmeritorious claims to extort a settlement out of defendants.

Saunders v. Houghton – Court of Appeal (18.12.09)

04.10.002

Maori: Paki v. Attorney-General

Using legal concepts of relational good faith should be to the fore in dealing with historical Treaty grievances, suggests the Court of Appeal. This avoids the heavy legal baggage of arguing that the Crown has been in breach of a fiduciary duty to Maori.

Over the last two decades, iwi and individual hapu have made regular trips through the nation’s courts alleging historical failures by the Crown in honouring terms of the Treaty of Waitangi. Maori cultural views from the mid-nineteenth century when the Treaty was signed do not translate easily into the legal-speak of English common law inherited by the New Zealand legal system.

The core of many claims has been that the Crown breached a fiduciary duty owed to Maori. At its simplest, this argues the Crown was in a position of trust, and abused this position for its own benefit.

The Court of Appeal said arguments based on an alleged breach of fiduciary duty demean Maori. It suggests Maori were of inferior standing, not equal Treaty partners.

Better, said the Court, for Maori litigants to view the Treaty relationship like a modern-day employment contract: a relationship contract where implementation of the earlier contract is bound by obligations of good faith. A breach of the Treaty relationship becomes a breach of good faith, not a breach of fiduciary duty.

These views were aired in litigation by the Pouakanui hapu over ownership of the bed of the Waikato River near Mangakino. The hapu argued that they did not understand, and the Crown did not tell them, that sales of hapu land to the Crown also included sale of the riverbed adjoining the land. Loss of the riverbed resulted in a serious loss of mana, given the historical importance of the river to local Maori.

The Court ruled that this claim was defeated by 1903 legislation which nationalised the riverbeds of all navigable rivers. This was done to protect Crown use of waterways for hydroelectric power projects. Since the Waikato River near Mangakino was navigable at the time of the legislation ownership rights in the riverbed were lost for Pouakanui, as they were for all other riverside landowners.

Paki v. Attorney-General – Court of Appeal (11.12.09)

04.10.003

Relationship Property: Ward v. Ward

With the wisdom of Solomon, the courts have split a family trust in two to accommodate a marriage split and to settle disputes between a former married couple over how the trust should operate.

The court was told the family trust was established well into an 11 year marriage. This arose after the husband gained full ownership of a family farm trading as Lang Park Ltd. The husband made use of matrimonial property legislation to gift a half interest in the farm to his wife tax free. The farm, together with other assets, were then put into a family trust with themselves as trustees and members of the family as beneficiaries.

Nearly three years later, the marriage broke up. The trust assets then had a net value of some $1.8 million. The wife shifted off the farm, while the husband remained living on the farm and received a management fee based on the annual after-tax profit for running the farming business. This left the wife with no financial support out of trust assets. Husband and wife, as trustees, were deadlocked as to how the trust should operate.

While the spouses controlled the trust assets as trustees, the assets were no longer matrimonial property to be divided 50/50 under matrimonial property legislation. Courts have very limited powers under the legislation to bust open family trusts and treat them as matrimonial assets.

But the Family Proceedings Act 1980 allows trust assets to be rearranged where required to protect the interests of any children.

The husband argued that any rearrangement should take into account that he had originally provided the lion’s share of the assets – half of which he had gifted to his wife prior to setting up the family trust.

The Supreme Court ruled that the gift could not be taken into account. The earlier matrimonial property deal was separate from the subsequent creation of the family trust. When looking at rearranging trust assets, the starting point was that each spouse had contributed half of the trust assets. Having contributed equally, the wife had every expectation that she would share equally with her spouse in the benefits, said the Court. Circumstances had changed with the marriage breakup.

Equal division of the trust was held to be the best way out of the impasse. The Court ordered that two separate trusts be established, with the trust assets divided equally between the two and each spouse being a trustee of a separate trust.

Ward v. Ward - Supreme Court (8.12.09)

04.10.004

Retirement: Cashmere Capital v. Carroll

Christchurch retirement village residents found their rights of occupation were worthless when the owner failed to properly bring them under the new consumer protection regime in the Retirement Villages Act 2003.

Concerns about the level of understanding enjoyed by elderly people buying into retirement villages and the complexity of legal arrangements on offer led to government intervention with the 2003 Act. The new Act imposes statutory obligations on village owners for residents’ health and welfare. To protect residents’ legal position, an independent statutory supervisor is appointed.

Importantly, mortgagees enforcing their security over a registered retirement village must still honour the rights of village residents. But this was to prove of no benefit to residents of an unregistered retirement village in Curlett’s Road, Christchurch, because the owner had failed carry out registration with the Registrar of Retirement Villages.

The court was told that part of a motel complex in Christchurch had been converted into a retirement home. Occupiers made a one-off unsecured loan to the owner in return for what was described as a lifetime occupation licence. Their interests as licenced occupier were not recorded against the land register title.

Subsequently, the owner mortgaged the property to Cashmere Capital Ltd, receiving loan advances totalling $940,000. Cashmere said they were told the occupiers were tenants.

Two years later, Cashmere sought to enforce its security. Only then, it said, did it become aware that the tenants were not in fact tenants, but claimed rights of occupation for life.

To protect their position, the occupiers claimed Cashmere had become an “operator” under the 2003 Act, and as an operator was legally obliged to register their interests with the Registrar of Retirement Villages. If done, this would stop Cashmere from evicting them in advance of a mortgagee sale.

The Supreme Court ruled that the mere fact a creditor took steps to enforce its mortgage does not make it an “operator” of a retirement village. Further steps are required, which indicate that the creditor is assuming control and management of the property.

The case was sent back to the High Court for further evidence on this point.

Cashmere Capital v. Carroll – Supreme Court (4.12.09)

12.09.006

Telecoms: Vodafone v. Telecom

The Kiwi share created when Telecom was privatised is annoying Telecom’s competitors. They are obliged to contribute each year to Telecom’s costs of subsidising a basic residential service to uneconomic customers and Vodafone doesn’t agree with the manner in which these costs are calculated because mobile phone coverage gets minor consideration.

In March 2007, the Commerce Commission determined contributions payable for the 2003-2004 year and Vodafone appealed. It challenged the methodology used to determine Telecom’s losses, claiming more significance should be given to the possibility of using mobile phone technology instead of long lengths of copper wire to service distant customers.

The Court of Appeal did not overturn the Commission’s method of calculation but signalled that changes might be needed in future annual calculations given the rapid introduction of new technology.

On privatisation, Telecom was required to continue free local calling and a capped line rental for all residential customers. With a proportion of residential lines uneconomic, Telecom sought to recover some of its losses with a cross-subsidy from interconnection charges with competitors.

Resulting litigation over interconnection charges led to an agreement with government and a process for Telecom to recover from competitors the cost of subsidising uneconomic residential customers.

It is not for Telecom to decide the size of the subsidy. The Commerce Commission annually obtains information from Telecom and then assesses what would be the net costs incurred by an efficient telco in providing the subsidised service.

For the 2003-2004 year calculation, the Commission used Telecom’s existing core fixed wire network as the starting point. Vodafone’s complaint was that the Commission should have included in its starting point existing mobile phone towers. Vodafone said failing to take mobile technology into account overstated the net cost incurred by Telecom and increased the subsidy claimed.

Vodafone v. Telecom – Court of Appeal (2.12.09)

12.09.005

Retirement: Jackson Mews v. Menere

Residents of a Petone retirement village failed in their attempt to escape a 99 year service agreement. A charge registered against their property titles meant the service agreement had to run its course, even though some residents were dissatisfied with the quality of the services provided.

The Court of Appeal was told that disgruntled residents of the Jackson Mews retirement village wanted to replace the village manager, Jackson Mews Management Ltd. Residents hold freehold title to their village units. But a charge is registered against each title, binding the individual owners to a 99 year contract of services provided by Mews Management. The registered charge requires payment of a nominal annual sum of ten cents. A separate fortnightly levy is charged for services actually provided.

To get rid of Mews Management, legal action was taken to remove the 99 year charge from the titles. It was argued that the charge operated like a mortgage; by paying the sum of $9.90 dollars each, being the total fixed payment due over the 99 year term of the contract, residents would be entitled to have the charge removed from their titles as if they had paid off a mortgage. This would leave residents free to appoint a new management company.

The Court of Appeal agreed that the charge operated like a mortgage, but the law governing mortgages states that a mortgage remains in place until not only all money due is paid, but also the debtor has “performed all other obligations secured by the mortgage”. In this case, the obligation to allow Mews Management to continue as manager for the balance of the 99 year term still remained after any payment of the $9.90 nominal sum as being the money due.

Jackson Mews Management Ltd v. Menere – Court of Appeal (27.11.09)

12.09.004

Transport: Ports of Auckland v. Southpac

Port companies are permitted to shelter under the statutory liability limits contained in transport legislation even when cargo is damaged by port employees while under the control of stevedore companies sub-contracted to do the work, the Supreme Court has ruled. This decision saves port companies substantial increases in their liability insurance premiums.

The issue came to a head after a collision between a Ports of Auckland fork hoist and a Kenworth truck being unloaded from a vessel. The fork hoist packed a punch. The Kenworth needed repairs totalling $60,200.

Southpac Trucks, who imported the Kenworth from Australia, sued Ports of Auckland for negligence.

Goods transportation is governed by the Carriage of Goods Act 1979. The standard rule is that carriers’ liability is limited to $1500 per unit of goods carried, regardless of fault. Two categories of carrier enjoy the benefit of this rule: The “contracting carrier” who entered into the contract of carriage, and the “actual carrier” who had possession of the goods at the time of the damage. This recognises that goods pass through a chain of transport companies and couriers before reaching their end destination.

Knowing the rule, all parties can take insurance to the amount required for cover of their respective risks.

The “contracting carrier” in respect of the Kenworth truck was CP Ships (UK) Ltd, who carried the vehicle across the Tasman. CP Ships engaged Ports of Auckland to unload the vessel, which would make the Port the “actual carrier”. But the Port subcontracted the task to Southern Cross Stevedores Ltd who in turn further subcontracted the work to a company called Wallace Investments Ltd.

While being driven by a Wallace employee to the storage area dockside, the Kenworth was hit by a fork hoist driven by a Ports of Auckland employee. It was agreed, the fork hoist driver was negligent in failing to keep a proper lookout.

The owner of the Kenworth sued Ports of Auckland, arguing it couldn’t claim the benefit of limited liability under the standard rule because it was not acting as a carrier at the time of the accident, Wallace Investments was the “carrier”.

The Supreme Court ruled that Ports of Auckland was a “carrier” under the Act. You do not have to be “carrying” the goods to be a “carrier”. Ports of Auckland became a “carrier” when it procured Wallace Investments (through Southern Cross Stevedores) to unload the truck.

While it did not have physical possession of the truck at the time of the accident, Ports of Auckland could still claim to be a “carrier” with Wallace Investments as the “actual carrier”. This meant Ports of Auckland potential liability was limited to $1500.

Ports of Auckland v. Southpac Trucks – Supreme Court (30.10.09)

12.09.003

Tax Avoidance: Westpac v. CIR

Nine structured finance transactions involving funds totalling $4.36 billion engineered by Westpac Bank have been struck down by the High Court as tax avoidance. As a result, Inland Revenue has clawed back tax due and use of money interest totalling $961 million.

Westpac has suffered a similar fate to a tax case lost by the Bank of New Zealand last July. But learning from the BNZ case, Westpac concentrated on two narrow issues: the deductibility of a guarantee procurement fee (GPF) paid by Westpac as part of the structured finance transactions, and; whether an interest deduction could be legitimately claimed for the cost of funds borrowed to finance the transactions.

The common template used for these transactions saw a loan structured as an equity investment in offshore special purpose vehicles. The equity investments took the form of redeemable preference shares, structured so that the dividend paid was deductible for the issuer but was received tax free by Westpac as the shareholder.

This had the economic effect of having Westpac offset substantial expenditure against its New Zealand sourced income, with the counterparty who issued the preference shares able to borrow at significantly below market rates.

As part of the deal, Westpac paid to the counterparty a GPF fee to guarantee repayment of the preference shares on redemption. Tax benefits claimed for the GPF fee alone amounted to $176 million, or nearly 30% of the tax benefits claimed by Westpac.

The High Court disallowed a deduction for the GPF fees, ruling that they had no commercial justification. There was expert evidence that the owners of special purpose vehicles used for such structured transactions routinely gave such a guarantee as a matter of course, with no fee payable.

Westpac’s claimed cost of funds led to the remaining 70% of the tax benefits claimed.

Westpac gave evidence that funding for the transactions came out of its general pool of funds managed by its treasury division and claimed that the Bank’s general funding costs should be an allowable deduction in respect of the structured finance transactions.

In disallowing a deduction for the cost of funds, the High Court ruled that while Westpac’s general pool was the immediate source of funds, there was distinct capital raising on the London capital markets in the months prior to a structured finance transaction. Each transaction was of such a size and duration that specific funds had to be raised and allocated in advance. At its peak, Westpac had 18% of its assets committed to the structured finance transactions.

The High Court ruled that the transactions were void for tax purposes as tax avoidance. Justice Harrison said parliament would not have contemplated that the tax deductibility provisions would be used to provide funding to a counterparty at a price considerably below market rates by returning a share of the domestic taxation benefit derived from claiming a deduction for a non-existent expense.

The deductions for Westpac’s cost of funds and GPF were disallowed. Justice Harrison added that Westpac might count itself fortunate that Inland Revenue did not disallow Westpac’s claim that the income on the redeemable preference shares was exempt income.

Westpac v. CIR – High Court (7.10.09)

12.09.001

Commerce Act: Astrazeneca v. Commerce Commission

Pharmaceutical companies are given special exemptions from the general provisions of anti-trust law when dealing with Pharmac. The Commerce Commission cannot use its investigative powers to go on general “fishing expeditions” in relation to negotiations over funding of drugs.

The Commerce Act 1986 prohibits restrictive trade practices which may limit competition. The Commerce Commission has power to investigate and prosecute.

Pharmac is in an unusual position. As the sole purchaser of drugs for the health service it is a monopsonist: a monopoly buyer. Legislation establishing Pharmac exempts it from Commerce Commission oversight when negotiating contracts for the bulk supply of medicines.

But Pharmac found the Commission to be a useful ally when negotiations with Astrazeneca over supply of beta-blocker drugs fell apart.

In 2007, with Astrazeneca product Betaloc IV about to come off-patent, the pharmaceutical company sought to commit Pharmac to a long-term contract by tieing further supply to the continued supply of another Astrazeenca product, Betaloc CR.

Pharmac went on the offensive with a press campaign accusing Astrazeneca of acting in an anti-competitive manner by attempting to tie supply of one product to another and holding patients to ransom as a result. If Pharmac agreed, Astrazeneca would retain a protected market for Betaloc IV even when generic competitors arrived and patients would be forced to pay a part charge for use of the Astrazeneca product.

The Commerce Commission swung into action, commencing an investigation and issuing a section 98 notice demanding Astrazeneca provide specific information. It alleged the company was acting in an anti-competitive manner in its negotiations.

The Supreme Court ruled that the specific wording of the legislation establishing Pharmac exempted not only Pharmac from the anti-competitive provisions of the Commerce Act, but also exempted any pharmaceutical companies in their negotiations with Pharmac.

It further ruled that the Commission can only issue a s.98 notice when it has some objective evidence of a breach of the Act. It cannot act on a suspicion or whim and then justify its actions retrospectively on the basis of anything found following an investigation.

The section 98 notice served on Astrazeneca was invalid. The court was told that by the time the case got to the Supreme Court, Astrazeneca had responded to the Commission’s enquiries. The Commission said it had closed its investigation, finding no breach of the Commerce Act.

Pharmac’s published policies make it clear that cross deals or bundled arrangements might be approved.

Astrazeneca v. Commerce Commission – Supreme Court (26.8.09)

12.09.002

Employment: Finau v. Atlas Specialty

Employees cannot be forced to cover for striking colleagues, they must agree to taking on the work.

The Court of Appeal ruled that Atlas Specialty incorrectly suspended two employees who refused to operate machinery when the regular operators were on strike. The two were entitled to arrears of wages for an unlawful suspension.

The dispute arose during wage negotiations in 2005. Staff who normally operated a coil slitter were on strike. Atlas asked two employees who were not on strike to handle the machine. They were competent to do the work, and regularly operated the coil slitter when the regular operators were on leave or away sick. They refused to do their colleagues work during the strike, and were immediately suspended.

The legal issue centred on the manner in which an employer could use strike breakers.

The employer argued that any employee who normally undertook the work in question could be required to do the strikers’ work.

The Court of Appeal said the Employment Relations Act 2000 prohibits the use of new employees, or contractors, to break a strike, but does allow existing employees to do the work – provided they agree to do so.

Employers argued this meant strikes could never be broken: employees would always refuse to cover for striking colleagues. The Court said there are other options: employees refusing to provide cover might carry out work being done by other existing employees who in turn might cover for the striking workers.

Finau v. Atlas Specialty – Court of Appeal (7.8.09)

10.09.003

Maori: Clarke v. Takamore

Cross-cultural differences in “body snatching cases” pit rights of individual freedom against the collective decisions of tribal custom. The High Court ruled that individual freedom takes priority where before death the deceased has made a clear choice about funeral arrangements.

Arrangements following the 2007 death in Christchurch of Jim Takamore gained national exposure when his body was taken by close relatives back to his home marae in the Bay of Plenty against the wishes of his grieving widow who planned to bury her late husband in Christchurch.

The court was told that Mr Takamore had chosen to live outside the tribal life and customs of Tuhoe, his tribe. He had lived in Christchurch for over twenty years and described himself as a “South Island Maori”, meaning he no longer identified with the life and traditions of his North Island ancestry.

Justice Fogarty ruled that under common law Mr Takamore was entitled to have his views respected on death, especially where he had chosen his widow to carry out these wishes as executor. The collective will of Tuhoe could not be imposed on his executor.

Evidence was given that Tuhoe tikanga for dealing with disputes over where a burial should take place could be settled by consensus or compromise, but failing that strong-arm tactics could be used relying on cunning, courage and determination.

The court case followed heated discussions following Mr Takamore’s death between his immediate family and relatives who had travelled down from the Bay of Plenty with the intention of returning his body to the home marae. Under Tuhoe custom, an important spiritual link exists between your place of birth and burial. The body was taken north, over the widow’s protestations.

Mr Takamore’s widow immediately got a court injunction to prevent his burial in the Bay of Plenty, but the burial went ahead in any event.

The Court ruled that members of Tuhoe had taken Mr Takamore’s body north without legal authority. His widow was entitled to have the body returned.

One complication however is that Mr Takamore was buried on private land at his home marae. Consent of his Tuhoe relatives was required to disinter his body. The case was adjourned to give all parties a chance to reflect on the court ruling. There was evidence that some Tuhoe were distressed that tribal members had taken Mr Takamore’s body north against the wishes of his widow.

Clarke v. Takamore – High Court (29.07.09)

10.09.001

Employment: McAlister v. Air NZ

Discrimination on grounds of age can be applied to airline pilots, but employers must first make an effort to adjust scheduling to minimise the problem.

Issues of age discrimination reached the Supreme Court when Air New Zealand faced United States restrictions on pilots aged 60 or older flying into its airspace. These pilots could fly into the US as first officer, but not as pilot-in-command.

In response, Air NZ policy was to demote senior long-haul pilots to first officer, enabling them to continue flying the US route.

In a test case, Mr McAlister argued this policy was age discrimination in breach of the Employment Relations Act 2000. Human rights legislation does permit age discrimination, provided age is a genuine occupational qualification.

In this case, US-imposed rules did make age a genuine occupational qualification for long-haul pilots.

But first, Air NZ had to establish that it could not adjust its staff scheduling to accommodate affected pilots without first demoting them. The case was referred back to the Employment Court to deal with this issue.

McAlister v. Air NZ – Supreme Court (20.07.09)

10.09.002

Trademarks: Intellectual Reserve v. Sintes

It looked like an unequal match: a sixty year old sole litigant arguing his own case in the Court of Appeal against the moneyed might of the Mormon Church.  But the Mormon Church failed in its attempt to block trademark registration for a logo phrased as “familysearch” designed to complement the litigant’s domain name: familysearch.co.nz.

The Church already holds trademark registration for the words “family search” under headings tied to geneaology. While approved, the logo’s registration was tagged to make it clear that others could still use the phrase “family search” and not be in breach of the trademark.

The Utah based church has an extensive archive with biographical details for over 400 million people.  The archive was established to assist in tracing the ancestors of current adherents.  The Mormon Church allows ancestors to be posthumously received into the faith.  This archive is commercially valuable.  Non-Mormons use the database to search their own family trees.

In New Zealand, a Mr Robert Sintes set up a web-based operation called New Zealand Family Tracing Service in 2000 to help individuals trace relatives spread around the world.

Initially the Church challenged use of his domain name, familysearch.co.nz.  The court was told this action had been discontinued.  It also challenged trademark registration arguing that the proposed logo was not “distinctive” as required by trademark legislation and that it would cause confusion.

Trademarks are not permitted where they are not distinctive to the owner’s goods or services and instead seek to appropriate some common word in the English language and stop others from using it in business; such as the names of towns or regions, or laudatory words like better or best.

The court expressed surprise that the Mormon Church had already obtained trademark rights in the words: family search.  These words are not distinctive to the Church’s religious interest in geneaology and are precisely the words any person would use when searching their family tree.

There was evidence that the words “family” and “search” are in the top two per cent of the most commonly used words in the English language.

The fact that Mr Sintes did not use these words alone, but instead surrounded the words with embellishments in the form of his logo meant that the logo in its entirety was distinctive.  Registration was permitted with the caveat that this did not stop others using the same words.

Intellectual Reserve v. Sintes – Court of Appeal (16.7.09)

08.09.004

Tax avoidance: BNZ v. CIR

The High Court has disallowed as tax avoidance a series of BNZ structured finance transactions described as tax machines having no commercial purpose or rationale.

Losses to the New Zealand taxpayer were estimated at $335 million, with benefits of $238 million accruing to National Australia Bank, owner of the Bank of New Zealand.

The transactions relied on international tax arbitrage, exploiting the tax asymmetries under which different legs of a structured finance deal could be viewed differently in different countries. For BNZ in New Zealand, the beauty of the scheme was that its costs would be deductible while income would be tax exempt. All this unravelled when the High Court ruled that the deals constituted tax avoidance and removed all the tax advantages gained. This included disallowing the funding costs incurred by the BNZ. The BNZ hotly argued that funding costs were part of the Bank’s ordinary fundraising activities unrelated to the disputed transactions and should still be allowed as a tax expense.

The transactions in question spanned eight tax years between 1998 and 2005. Colloquially called “repo” deals, they typically involve an equity investment in an overseas counterparty on the basis that the counterparty would buy back the shares. Financially, this amounts to secured collaterised borrowing. Economically, it is a loan secured by a pledge of shares. Legally, it is an offshore equity investment.

Overseas tax authorities have got wise to the tax avoidance possibilities inherent in these cross-border tax transactions. Under US tax law, they are treated as “abusive arrangements”. In the UK, the supposed equity leg of the transaction is treated and taxed as if it were debt.

The High Court was told that National Australia Bank had second thoughts in the mid-1990s about setting up these structured finance transaction through a UK subsidiary because of what was delicately described as potential tax “uncertainties”.

Instead, they were structured through the BNZ, its NZ subsidiary.

The first BNZ transaction, in 1995, was a five year deal consummated with the AIG group. Pricing on the transaction resulted in a positive tax benefit for the NZ taxpayer: BNZ gained an $18 million tax deduction; but the counterparty paid tax of $21 million – a net tax benefit of three million dollars.

For this initial transaction, BNZ obtained a binding ruling from Inland Revenue. This operates as advance advice from Inland Revenue as to how it will view a transaction should it later be included in a tax return. A strong point supporting the favourable ruling was the knowledge that the transaction would be tax positive for the NZ tax base.

BNZ then used the same template for subsequent structured finance deals which were tax negative for NZ, but did not apply for a binding ruling. Applying for a binding ruling would obviously disclose these transactions to Inland Revenue, Justice Wild commented in the High Court.

By fiddling with the pricing parameters, BNZ could make future deals tax negative. It resulted in BNZ offering counterparties funds at well below their normal cost of funds for their participation in an arrangement whereby there was an agreed share of the resulting tax benefits.

How the benefits were split was described as bearing no relation to any normal commercial considerations such as current market conditions or the credit status of the counterparties.

Inland Revenue called the deals “tax machines”. A formulaic approach was used, churning out tax losses for BNZ on a predetermined basis.

BNZ was concerned that overuse of the tax machine would affect its effective tax rate, which would become apparent from its published accounts.

In response, BNZ attempted to restructure the deals so as to consolidate the counterparty’s side of the transaction in its consolidated accounts – and did succeed in doing so in two of the transactions. Consolidation meant tax paid in the counterparty’s jurisdiction would be recorded in BNZ’s consolidated accounts, though that payment would be of no advantage to the NZ tax base.

Applying the first test for tax evasion from the Ben Nevis Case the question was did the transactions appear commercially and economically realistic.

Justice Wild answered: No. They returned high yields for BNZ with no risks other than tax. Those tax benefits were the benefit of expenses deductible against BNZ’s other income, and the tax exempt income received.

But despite this, the transaction was not tax avoidance if it fell within the scheme and purpose of a specific tax provision: the second test from Ben Nevis.

The tax provision relied on was the conduit relief regime which allows a “pass through” of foreign sourced income; from overseas sources, through a NZ subsidiary to the subsidiary’s foreign owner. This income passes through tax free, subject to a 15 per cent withholding tax.

Justice Wild ruled that the BNZ transactions were not within the scheme and purpose of the conduit relief regime. There was no income stream to pass through to its parent company. The transactions generated only tax benefits.

The High Court agreed with Inland Revenue that the effect of the transactions should be nullified as tax avoidance.

This had the effect of increasing BNZ’s tax liability by some $416 million, and triggering penalty interest of about $240 million.

BNZ Investments v. CIR – High Court (15.7.09)

09.09.001

Mortgage: Westpac v. Clark

Westpac Bank learnt it had no security worth enforcing after it was the victim of a sophisticated fraud lending $180,000 to a con artist masquerading as a woman owning property in Remuera, Auckland.

The con artist vanished, along with the money.  She left a trail of confusion behind: the property owner who knew nothing of the mortgage; a solicitor who had signed off on the legal documents; and the Bank which was out of pocket.

A central principle of the land registration system in New Zealand is that "the register is everything”.  Any interests registered against the title are enforceable, provided the person claiming the interest is not guilty of fraud.  Despite being an innocent victim, Westpac found this principle did not apply because while registration would give it security over the land this secured a non-existent loan.

To recover its losses, Westpac sued the solicitor who signed off on the legal documents.  He had certified to the Bank that the mortgage documents were in order and would be registered against the title, before the Bank released the money.  The solicitor had been conned by the fraudster who used a false passport and other documents to impersonate the true owner.

The fraud was discovered before the mortgage was registered, but the Bank sued the solicitor for negligence on the basis that if the mortgage had been registered it would have gained the protection of being “on the register” as secured creditor.

The Supreme Court pointed out that there is a difference between what is secured and what is owing.  Registration would have given Westpac security over the land.  But the Bank’s standard-form loan documents assumed that the person giving the security was the person taking out the loan.  The loan document was not enforceable against the true owner of the Remuera property: she never signed it; the fraudster did.  By contrast the mortgage document secured monies owed by the true owner.  In this case the true owner owed nothing.

The Court ruled that even if the solicitor had registered the mortgage on behalf of the Bank before the fraud was discovered, the Bank would be in no better position – it would have security but no loan enforceable against the owner of the property.

The claim against the solicitor failed.  It was for the Bank to pursue the fraudster.

Westpac v. Clark – Supreme Court (3.7.09)

08.09.009

Relationship Property: Rose v. Rose

On separation, a wife was able to claim a substantial share of her husband’s business on the basis that her work around the home and her income from selling cosmetics freed up her husband’s time and capital to develop what would otherwise be his separate property.

A Marlborough vineyard was the asset in question, with marital entitlements disputed after a 23 year marriage.  Two blocks of land were in issue: Cloverlea (owned by the husband at the time of the marriage and his separate property) and Poplar (farmed in partnership with relatives).

Generally, business assets held at the time of a marriage are separate property and remain separate property when the relationship comes to an end.  But any increase in the value of separate property attributable to the non-owner spouse is to be divided according to the contribution provided.

The Supreme Court drew a distinction between passive investment assets and a business requiring physical attention and application – such as a farm.

In respect of Cloverlea, the wife did not physically work on the property.  But the court ruled that a spouse could benefit separate property without physically working on it.  Indirect assistance could suffice.  In this case, the work done around the home and the wife’s employment outside the home were assistance.  Her financial contributions helped minimise farm debt.  There was evidence that part of Cloverlea would have been sold to reduce debt, but for her financial contribution.  It enabled the husband to contribute more resources to the farm: his separate property.  It did not matter that the husband in fact provided the greater proportion of cash for household living expenses.

As a result, the court ruled that the wife was entitled to 40% of the increase in value of the Cloverlea business over the period of the marriage.  This amounted to just under $300,000.

As regards Poplar, the husband’s share of the partnership increased during the marriage on inheritance from his father’s estate.  Generally, inherited assets remain as separate property, unless the assets are acquired for the “common use or common benefit” of both spouses.

Finance to develop Poplars into a vineyard was secured over the family home.  The husband had told his wife that “we own half [the vineyard]” indicating that his half share of the vineyard partnership was being treated as a marital asset.  Profits which would otherwise be available for family expenses were ploughed back into developing the vineyard.

The court ruled that the husband’s share of increases in the value of the Poplar partnership from the date of conversion into a vineyard to the end of the marriage was relationship property to be split 50/50.  The wife’s share amounted to $283,000.

Rose v. Rose – Supreme Court (19.05.09)

08.09.008 

Gift Duty: Begg v. Inland Revenue

A deferred gifting programme used by Public Trust clients has survived attack by Inland Revenue in the Court of Appeal.  The programme was designed to strip assets from older clients, circumventing asset testing for state social welfare benefits.

In a test case, the court was asked to rule on liability for gift duty on the deferred gifts.  Whether asset stripping could secure better social welfare benefits was not in issue.

Earlier this decade, the Public Trust offered a standard-form asset stripping trust for elderly clients having substantial equity in their family home.  The trust document recited that an annual gift of $27,000 was made to their children.  The figure chosen ensured each gift was under the threshold for payment of gift duty in any one 12 month period.  But no money was paid out.  Payment of the promised gift was deferred until the parents’ death.

This liability had the effect of reducing client assets by the amount of the promised gifts.

Inland Revenue claimed the supposed gifts were not a completed “disposition” at the time of the gift.  This would mean the accumulated total “gifts” were not treated legally as a gift until the parents’ died and the total sum promised was paid – with the result that the accumulated sum would exceed the 12 month gifting limit and gift duty would be payable.

The court ruled that the gift duty definition of a “disposition” was wide enough to include deferred gifts.  Words of gift in a trust amount to a “disposition”.  If not paid on the parents’ death, children had the right to sue their parent’s estates to recover payment.

Begg v. Inland Revenue – Court of Appeal (30.04.09)

08.09.007 

Maritime: Tasman Orient v. NZ China Clays

Which insurance companies will have to bear insured maritime losses turn on whether reckless navigation increased losses after the Tasman Pioneer ran aground off Japan en route to Busan in Korea.

The vessel from the Tasman Orient Line ran aground in May 2001 in the early hours during a heavy rain storm.  Cargo, including NZ Dairy Board exports, was lost as a result of the grounding and subsequent delayed salvage.

Dairy Board losses totalling some $US 498,000 arose when refrigerated reefers were left without power at some unidentified point in the voyage.  If the generators failed prior to the grounding, Tasman Orient accepts liability.  If they failed after the grounding, Tasman Orient says it was not liable, protected by exclusion clauses in its contract of carriage.

Standard international contracts of carriage for shipping exempt the carrier from liability for cargo losses after running aground except where losses arise from reckless management of the vessel.  The actions of the Tasman Pioneer captain in taking a shortcut through the Sea of Japan came before the New Zealand courts.

The court was told the normal route went through the Kanmon Strait.  Compulsory pilotage is required because of strong currents in the narrow strait.

The vessel was behind schedule.  The captain elected to take a shortcut, cutting about 40 minutes off the journey.  Two groundings in quick succession damaged the hull, causing the vessel to list.  Instead of contacting the Japanese coastguard and looking to beach the damaged vessel, the captain steamed at full speed for the main channel in the Strait while the crew pumped water to maintain trim.

Nearly three hours after the grounding, the captain anchored and then alerted the authorities.  Crew were mustered and a story fabricated that the vessel had hit a submerged container.  The ship’s chart was doctored to hide the actual course travelled.

The court ruled that the decision to attempt the shortcut was “unwise”, but the captain had taken this route before, albeit in a smaller vessel.  The claim of reckless navigation arose not from attempting the shortcut, but from the delay in notifying authorities of the grounding.  There was evidence that this delay increased the amount of cargo damage.  Salvage tugs with high capacity pumps would have reached the vessel earlier but for the late notification.

Evidence from the salvors also indicated the Dairy Board reefers were without power during the salvage.  Power cables were cut.  They were hindering the salvage.  There were delays before replacement generators could be put on board.

The Court of Appeal found that the “outrageous” behaviour of the captain in continuing to run at full speed after the groundings and failing to notify the authorities amounted to reckless behaviour such that Tasman Orient could not hide behind the exclusion clause.  It was liable for losses caused by the delay, including losses to the Dairy Board’s refrigerated cargo.

Tasman Orient v. NZ China Clays – Court of Appeal (9.4.09)

08.09.006    

Copyright: Tiny Intelligence v. Resport Ltd

Ripping off merchandise sold to supporters of the Crusaders rugby team cost one entrepreneur $50,000 in payment of profits made.  The Supreme Court refused to award further damages to the true merchandiser as compensation for lost business opportunities.

Back in 2006, a company called Resport Ltd was held in breach of copyright when it produced toy swords and toy trumpets for sale to Crusader supporters.  This merchandise had the status of “artistic works” under copyright law.  A company called Tiny Intelligence Ltd held copyright.

Resport was ordered to hand over all stocks it held and to compensate Tiny Intelligence $50,000 as an assessment of the profit made on the merchandise sold.

There was evidence that Resport copied Tiny’s products not caring whether that amounted to a breach of copyright or not.  Given the flagrant breach, Tiny Intelligence argued it was entitled to more than just an account of profits made.  Lost revenue amounted to an opportunity cost – the cost of expanding its existing business relationships with the potential for new products and a bigger business.

The Supreme Court ruled that any award of additional damages would amount to a penalty or fine – exemplary damages.  This was possible where there had been a flagrant breach of copyright, but by asking for an account of profits Tiny Intelligence was barred from also getting exemplary damages.

The two categories of damages have separate origins.  Exemplary damages come from common law and are intended as a form of punishment and as a warning to others.  An account of profits is derived from equity.  Historically, the two categories of damages are not allowed in tandem.

Tiny Intelligence v. Resport Ltd – Supreme Court (8.04.09)

08.09.005

Resource Management: Kawarau Jet v. Queenstown Lakes

Kawarau Jet Services fought hard to prevent a competitor breaking its monopoly on tourist operations down the Kawarau River near Queenstown.  It successfully challenged approvals given to a rival.

Over the last twenty years, jet boat operations on the Kawarau have been consolidated.  The High Court was told that Kawarau Jet Services has spent over three million dollars to buy out competitors.  The company runs eight boats on the river, and has approval to operate up to 19 boats.

In 2008, Queenstown Lakes District Council granted to newcomer, Frontier Adventure Tours, a consent to run four commercial sightseeing tours per day on the river.  This consent proved to be unlawful.  By an oversight, the Council did not send details of the application to Kawarau Jet who was entitled to be told as an “affected person”.

Jet boat operations on Queenstown rivers can be dangerous; three people were killed in 2008.

On hearing of the new rival, Kawarau Jet moved swiftly.  It contacted Maritime New Zealand to have Frontier’s consent suspended and asked it to assess safety issues potentially arising with multiple operators on the river.  Maritime New Zealand lifted the suspension after being satisfied that radio protocols between the two companies could prevent collisions.  Frontier then started operations.

The High Court was then asked to rule whether the otherwise unlawful consent granted to Frontier should be validated, or should Queenstown Lakes be required to rehear the application.  

Kawarau Jet argued that its operations were seriously compromised by having Frontier on the river.  It had to reduce the frequency of its trips to minimise the likelihood of collisions and it was unable to exercise the full number of trips allowed by its own consents.

Frontier argued that requiring the Council to rehear its application would close down Frontier’s operations despite Maritime New Zealand having approved the safety protocols.

The High Court ordered that the Council rehear the application.  There were serious safety issues.  There was evidence that Frontier had specifically told the Council that prior written approval from  Kawarua Jet was not required.  And Frontier had decided to push on and purchase a boat after it had been warned that Kawarau Jet would be taking legal action.

Kawarau Jet Services v. Queenstown Lakes – High Court, Invercargill (09.03.09)

08.09.002