Mobil Oil New Zealand Ltd v Development Auckland Ltd (Formerly Auckland Waterfront Development Agency Ltd): [2016] NZSC 89

Remediation costs for contaminated sites at Pakenham and Beaumont Streets, Wynyard Quarter

Introduction and background

In a judgment delivered by William Young J, the Supreme Court upheld Mobil Oil New Zealand Ltd’s (“Mobil“) appeal against the Court of Appeal’s decision requiring Mobil to pay Development Auckland Ltd (“Development Auckland“) $10 million in remediation costs for contaminated sites at Pakenham and Beaumont Streets, Wynyard Quarter (“Sites“).

From the mid-1920s the Sites were leased from the Auckland Harbour Board (now Development Auckland) to Mobil or its Australian predecessors for the bulk storage of hydrocarbons. Earlier leases granted in the 1950s and 1960s were replaced by tenancy agreements in 1975 and 1985. The 1985 leases contained a condition requiring that Mobil “keep” the land in “good order” and “clean and tidy” (“Condition“) as follows:

At all times to keep the said land hereby demised in good order and clean and tidy and free from rubbish weeds and growth and will at all times keep all buildings oil storage tanks structures fixtures and other improvements in or upon the said land in good and tenantable repair and condition to the reasonable satisfaction of the Board and will upon the determination of this tenancy or any new tenancy for any reason or cause whatsoever yield and deliver up to the Board the said land and any improvements left thereon in such good and tenantable repair and condition and clean and tidy to the reasonable satisfaction of the Board.

Wynyard Quarter is now being developed for mixed commercial and residential uses. However, due to significant contamination (of which Mobil was not the only source) the Sites must be substantially remediated if they are to be developed. Development Auckland contended that Mobil was obliged to remediate the land so as to remove all contamination at the expiration of the tenancies. This was based on the Condition, and an argument that an implied term of the 1985 tenancy agreements required remediation of previous hydrocarbon contamination.

In the High Court, Katz J held that the true construction of the Condition did not require remediation of the Sites and rejected the contention that an implied term existed.

In the Court of Appeal, the majority held that Mobil had come to the negotiation table in 1985 with actual or potential liability for prior contamination and that the Condition required remediation of that contamination. The Court of Appeal expressed some support for Development Auckland’s implied term arguments, but was not required to reach a final conclusion.

Decision

In reversing the Court of Appeal’s decision, the Supreme Court considered the lengthy and complicated history to the dispute, emphasising that the contamination was not solely attributable to Mobil. For example, the Court referred to the significant aviation fuel spill that occurred in 1986 on an adjoining property, which contributed to the accumulated contamination on the land leased by Mobil.

The Court carefully considered the meaning of the words “keep”, “good order” and “clean and tidy” from the Condition. The Court held that the word “keep” can require more than maintenance, relying on authority from the English Court of Appeal in Proudfood v Hart (1890) 25 QBD 42 (CA). Despite this, the Court found that “keep” does not signify an obligation to effect transformative change, a point that favoured Mobil.

In respect of “good order” and “clean and tidy” the Court considered Canadian authority on similarly worded “clean and neat” clauses, but ultimately found that the words did not support the construction Development Auckland sought to give them. Importantly, the Court considered it problematic that Development Auckland’s interpretation would lead to two different meanings of “clean and tidy” – an obligation to maintain the same standard throughout the tenancy, but an obligation to undertake significant remediation at termination. The Court found no commercial or other context that justified that construction.

Accordingly, the Court concluded that the Condition did not impose the remediation obligation contended by Development Auckland.

Turning to the implied term, the Court considered relevant authority, including the Privy Council’s decision in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, which established five criteria that needed to be satisfied before an term could be implied:

(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that “it goes without saying”;

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract.

The Supreme Court found that at least three of the criteria could not be met in the circumstances, on the basis that:

(a) the agreements were effective without the implied term;

(b) the absence of a complaint about the contamination in 1985 suggested a remediation obligation was not so obvious as to go without saying; and

(c) the implied term would impose obligations which went beyond the ordinary meaning of the Condition.

Accordingly, the Supreme Court allowed the appeal, reversed the Court of Appeal’s decision and reinstated the judgment of Katz J (including the costs orders made).

Comment

While essentially an exercise in contractual interpretation, this serves as a reminder of the importance of clear, unambiguous drafting of remediation and make-good conditions. While the Resource Management Act 1991 provides other avenues to require remediation of more recent contamination, this case will be relevant for landowners and tenants seeking to renegotiate leases or tenancy agreements made before 1991 that may have uncertain remediation obligations.