Mobil Oil New Zealand Ltd v Development Auckland Ltd (Formerly Auckland Waterfront Development Agency Ltd)

• Jurisdiction: New Zealand
• Judge: William Young J
• Judgment Date: 20 July 2016
• Neutral Citation: [2016] NZSC 89
• Docket Number: SC 107/2015
• Court: Supreme Court
• Date: 20 July 2016

BETWEEN

Mobil Oil New Zealand Limited

Appellant

and

Development Auckland Limited (Formerly Auckland Waterfront Development Agency Limited)

Respondent

[2016] NZSC 89

court:

Elias CJ, William Young, Glazebrook, Arnold and O'Regan JJ

SC 107/2015

IN THE SUPREME COURT OF NEW ZEALAND

Appeal against a Court of Appeal (CA) decision which found that a clean and tidy condition in a lease agreement did reach subsurface contamination, and awarded $10 million to the respondent for cost of remediation — the CA overturned the decision of the High Court (HC) — the appellant had leased land which was used for bulk storage of oil and the land became contaminated — under the lease agreements, the appellant was required to deliver up, the properties “in good order and clean and tidy” — during the tenancies the condition was expressed in terms which required the appellant to “keep” the land in that condition — the initial leases were with Australian companies that subsequently became part of the Mobil group — the leases were taken over by New Zealand Mobil companies — under a 1985 lease agreement the appellant succeeded to the liabilities of the NZ companies but not those of the Australian companies — the land had become contaminated to the point of requiring complete remediation in the 1970s — whether the clean and tidy condition required remediation of the land — if not, whether a term requiring remediation should be implied.

counsel

M G Ring QC and J P Greenwood for Appellant

A R Galbraith QC and M C Smith for Respondent

• A The appeal is allowed, the judgment of the Court of Appeal is reversed and the judgment of Katz J (including the costs orders made by her) is restored.

• B Mobil is entitled to costs in respect of the appeal to the Court of Appeal to be fixed by that Court and to costs of $25,000 and reasonable disbursements in respect of the appeal to this Court.

JUDGMENT OF THE COURT

REASONS

(Given by William Young J)

Table of Contents

	Para No.
The appeal	[1]
The occupation of the land by Mobil and its Australian predecessors	[8]
The contractual arrangements prior to the 1985 tenancy agreements	[17]
The context in which the 1985 tenancy agreements were negotiated	[22]
Likely future uses of the land as envisaged in 1985	[22]
Knowledge of contamination	[24]
The liability, if any, of Mobil as at 1985	[27]
The 1985 tenancy agreements	[32]
The judgment of Katz J	[39]
The judgment of the Court of Appeal	[45]
Our approach to the case	[54]
A breach of the clean and tidy condition?	[56]
Some general comments	[56]
The overall scheme of the 1985 tenancy agreements	[63]
The authorities	[68]
Drawing the threads together	[75]
Should a term requiring remediation be implied?	[76]
Disposition	[85]

The appeal

1 From the mid-1920s until 2005, properties in Pakenham Street and Beaumont Street, Freemans Bay, Auckland were used for the bulk storage of oil and associated purposes including distribution of oil and petrol (bulk oil storage). The land in question had been reclaimed from Waitemata Harbour by the Auckland Harbour Board in the early years of the last century. The initial use of the land for bulk oil storage was pursuant to leases from the Auckland Harbour Board to Vacuum Oil Co Pty Ltd and Atlantic Union Oil Co Pty Ltd. They were Australian companies and later became part of the Mobil Australia group. In the 1950s and 1960s the leases were taken over by similarly named New Zealand registered companies that were subsequently amalgamated to form the appellant, which accordingly succeeded to their liabilities. In contradistinction, the appellant has not succeeded to the liabilities of the Australian Vacuum and Atlantic Union Oil companies. In recognition of this distinction, we will refer to the New Zealand predecessor companies and the appellant collectively as “Mobil” and to the Australian Vacuum and Atlantic Union companies as “Mobil's Australian predecessors”. The Harbour Board was the lessor under all relevant leases. These leases were replaced by tenancy agreements in 1975 and 1985 between the Harbour Board and Mobil.

2 The Harbour Board was later disestablished. Its initial successor was Ports of Auckland Ltd (Ports of Auckland). At the time the litigation commenced and until after the Court of Appeal decision, Auckland Waterfront Development Agency Ltd stood in the shoes of the Harbour Board. That company has since changed its name to Development Auckland Ltd 1 (Development Auckland) and we will refer to it in these reasons by its current name.

3 The Pakenham and Beaumont Street sites are in the Wynyard Quarter area which is now being developed for mixed commercial and residential uses. These sites are heavily contaminated and, if they are to be so developed, must be substantially remediated — an exercise involving removal of soil to a depth of 3.5 m across both sites (approximately 2.5 ha) — and its replacement with clean material. This contamination mainly resulted from leakage and spillage of petroleum products associated with the activities of Mobil and its Australian predecessors although there are other contributing causes, in particular the nature of the fill used in the original reclamation and spillage of contaminants on adjoining sites.

4 Under the original leases and the tenancy agreements entered into in 1975, Mobil was required to surrender to the lessor the improvements which it and its Australian predecessors had placed on the sites. The tenancy agreements which are primarily in issue in this appeal were entered into in 1985. The agreements provided, in different ways, for the removal by Mobil of the improvements from the land and, pursuant to what we will call “the clean and tidy condition”, for Mobil during the tenancies to keep, and at their end to return the land, in “good order and clean and tidy”. 2

5 The tenancies came to an end in 2011.

6 In the High Court, Development Auckland contended that Mobil had been obliged to remediate the land so as to remove all contamination (other than that caused by the original fill) at the expiration of the tenancies. Development Auckland relied on two bases for this obligation; first, the clean and tidy condition; and secondly, in the alternative, an implied term. We have already explained what such a remediation exercise would involve. The cost to Mobil of such an exercise would

have been in the order of $50 million. The actual claim, however, was for only $10 million. This figure represents the incremental cost to Development Auckland of remediating the land as part of its own development work compared to what that development work would have cost if Mobil had remediated the land itself

7 These claims failed in the High Court, with Katz J: 3

A subsequent appeal to the Court of Appeal was allowed and judgment was entered for Development Auckland for $10 million. 4

• (a) finding that on its true construction, the clean and tidy condition did not reach subsurface contamination; and

• (b) dismissing the implied term argument.

The occupation of the land by Mobil and its Australian predecessors

8 The land in issue forms part of a 67 acre reclamation at Freemans Bay, known as “the Western Reclamation” which the Harbour Board completed between 1905 and 1917. Bulk oil storage facilities came to be located at Freemans Bay in the mid-1920s and from mid-1930s Auckland's bulk oil storage facilities were consolidated there. This was with the active encouragement of the Harbour Board.

9 The first of the relevant leases was granted in 1925 (to Vacuum) with the second being granted in 1927 (to Atlantic Union). Subsequent leases were entered into in 1938 and 1951 with Vacuum. In 1953, Vacuum's interest in the leases was transferred to Vacuum Oil Co (NZ) Ltd and in 1962, Atlantic Union's interest in the lease of the Beaumont Street property was transferred to Atlantic Union Oil Co NZ Ltd. As noted, these companies were later amalgamated to form the appellant, which thus succeeded to their liabilities. For this reason we propose to treat Mobil's occupation of the properties as having commenced in 1953 and in 1962. In 1975, the

parties entered into two tenancy agreements which replaced four of the five leases. 5 The two tenancy agreements terminated in December 1980. From that time Mobil held over until the 1985 tenancy agreements were signed. 6 At that time some of the land was surrendered. Mobil stopped using the rest of the land for bulk oil storage in 2005 and handed it back to Development Auckland in 2011

10 Over the decades that the land was occupied by Mobil and its Australian predecessors, their activities resulted in substantial contamination. This was due to:

• (a) leakage from tanks and underground pipes resulting from corrosion;

• (b) the clearing of pipelines using seawater “slugs” which resulted in a mixture of water and hydrocarbons settling in the bottom of storage tanks and then being drained into the tank compounds;

• (c) the use of water to remove petroleum products (which would float on the water) from tanks with the resulting mixture being discharged into the compounds; and

• (d) spillage associated with Mobil's operations.

11 Mobil and its Australian predecessors were not the only sources of contamination. The fill used for the reclamation included demolition debris, gas works waste, refuse from city tips and material extracted from the harbour in the vicinity of sewage and gas works discharges. As well, in 1986 Shell spilled a considerable amount of aviation fuel on adjoining land which also contributed to the accumulated contamination on the land leased by Mobil.

12 The evidence led by Mobil in the High Court suggest that at some time during the 1970s the land leased by Mobil had become so polluted as to require complete...