Mobil Oil New Zealand Limited v Development Auckland Limited (formerly Auckland Waterfront Development Agency Limited) [2016] NZSC 89
Mobil Oil New Zealand Limited recently won its Supreme Court appeal, thereby avoiding a hefty $10 million bill for the restoration of contaminated land in Wynyard Quarter.
Facts
The contaminated properties, located in Pakenham Street and Beaumont Street in Freemans Bay, were used for bulk storage of oil from the mid 1920s until 2011. The properties have a complex history of lease agreements between companies associated with the broader Mobil Group (who used the sites for bulk oil storage) and the Auckland Harbour Board (later Ports of Auckland Limited).
In 1985, Mobil and the Harbour Board entered into five tenancy agreements, which provided, in different ways, for Mobil to remove improvements from the land upon termination of the leases,[1] and for it to keep the land in “good order and clean and tidy” throughout the tenancies. The leases expired in 2011, and Mobil vacated the site.
As a result of the leakage and spillage of petroleum products associated with Mobil and its predecessors’ activities, the properties became seriously contaminated. The contamination was also exacerbated by a major aviation fuel spill on a neighbouring site leased by Shell, and the fact that contaminated fill had been used when the properties were historically reclaimed from the Waitemata Harbour in the early 1900s.
The Wynyard Quarter (where the properties are situated) is now being developed for mixed commercial and residential uses. In order for the contaminated sites to be developed, they would need to be remedied via the removal and replacement of soil up to a depth of 3.5 metres, across approximately 2.5 hectares of land – at a cost of approximately $50 million.
Issue
The issue was whether Mobil Oil was responsible for the remedial work required at the contaminated properties.
History
High Court
In the High Court, the Auckland Waterfront Development Agency Ltd (“in the shoes of” the Harbour Board) argued that Mobil had been obliged to remove all contamination (but for that caused by the original fill material) at the termination of its lease. It argued that this obligation arose from the ‘clean and tidy’ condition, or alternatively, an implied term to the same effect. It claimed a sum of $10million, which represented “the incremental cost to Auckland Waterfront of remediating the land as part of its own development.”[2]
Mobil had argued that the contaminated land had already reached a ‘tipping point’ in the 1970s, whereby the land had become so polluted that it would require complete remediation before being fit for general use. This, argued Mobil, meant that the subsequent activities by Mobil since 1985 had not caused any loss.
The High Court considered the words “keep the said land hereby demised in good order and clean and tidy” in detail. It noted that the word “keep” does not ordinarily require improvement beyond the status quo, but it was capable of this meaning in the right context. The Court therefore considered a number of relevant factors that impacted on the interpretation of what became known as the ‘clean and tidy’ condition. It found that the fact that the sites were already contaminated at the outset of the 1985 tenancy agreements; the fact that the original 50-year leases for the sites did not impose obligations on tenants in relation to the condition of the land (as opposed to the buildings and fixtures); and the short length of the agreements all pointed against there being a contractual obligation on Mobil to remedy the historical (pre-1985) sub-surface contamination on the properties.
The High Court also rejected Auckland Waterfront’s argument that an implied term obliged Mobil to remedy the properties, because such as term would be “broader than, and thus inconsistent with, the clean and tidy condition”.[3]
The Court did not make a definitive finding as to the ‘tipping point’, but concluded that Auckland Waterfront had and could not establish any loss solely in relation to contamination which occurred after 1985.
Court of Appeal
Auckland Waterfront appealed to the Court of Appeal, which overturned the High Court’s decision. The Court of Appeal took the view that the express permission in the tenancy agreements to use the properties for bulk oil storage did not amount to authorisation of incidental contamination. It therefore concluded that Mobil had breached its covenant not to injure the lessor.
The Court of Appeal found that Mobil’s obligation in respect of the contaminated land naturally extended to the subsurface, and went on to consider whether the obligation related to contamination predating the 1985 tenancy agreements. It found that the short length of the 1985 tenancies was misleading given the parties themselves had considered the agreements as stopgap measures within the context of a longstanding and continuing relationship. It also considered that it was unsurprising that Mobil would have assumed responsibility for the activities of other group companies, and surmised that Mobil likely caused much of the contamination itself.
The Court concluded that the “clean and tidy” condition required remediation of the contamination caused by Mobil and its predecessors. It also expressed support for Auckland Waterfront’s ‘implied condition’ argument but did not need to reach a final conclusion on this point, having already ruled that Mobil was caught by a contractual obligation.
Mobil Oil appealed this decision.
Supreme Court
The Supreme Court cited the following factors as relevant to its decision:
- there were multiple original causes of the contamination;
- while it remains unclear whether the contamination was authorised under the leases or tenancy agreements (as a necessary or reasonable incident of the permitted use), it is clear that the contamination from the activities of Mobil and its predecessors were an incident of the permitted use of bulk oil storage in an area in which the Harbour Board had actively encouraged oil companies to locate;
- it appears to be impossible to allocate particular aspects of the contamination to particular parties;
- while Mobil is related to its Australian predecessors, there is a legal (“but not necessarily moral”) disconnect between the original lessees and Mobil;
- there is a discontinuity between the original leases and the 1895 agreements, with the ‘clean and tidy’ condition appearing for the first time in the 1985 agreements;
- it was unclear in 1985 as to what other/future uses of the land might be (and therefore the extent and implications of the contamination were not fully appreciated); and
- there was no claim by the Harbour Board that Mobil was required to remediate the land surrendered to it by Mobil in 1985.
Accrued liability
The Supreme Court claimed it was “unrealistic” to assume that there had been an understanding that Mobil was carrying an already accrued liability to remediate the land at the time that it entered the 1985 tenancy agreements.
The Court also noted that language of the 1985 tenancy agreements indicates that the parties did not consider the contamination a “problem warranting attention”.[5]
The ‘clean and tidy’ condition
The Supreme Court noted that the verb ‘keep’ “is not a word which is apt to signify an obligation to effect transformative changes.”[6] It considered in some detail the words “clean and tidy”, which Mobil had argued only related to the external appearance of the land. The Court concluded that Mobil’s interpretation of these phrases were more consistent with their natural and ordinary meanings than the interpretations advanced by Auckland Waterfront.
The Supreme Court did find the short nature of the tenancies relevant, noting that they “count[ed] against an interpretation of the clean and tidy condition so as to impose new and substantial remediation obligations, obligations which, if complied with to the letter would have cost Mobil many millions of dollars”.[7] The Court held that this latter interpretation would be “fundamentally inconsistent with the commercial purpose of the tenancies.”[8]
Finally, the Supreme Court rejected Auckland Waterfront’s argument that Mobil was obliged to remedy the land by way of an implied condition, stating its “distinct reservations” regarding whether such a condition could be implied.[9]
Outcome
The Supreme Court upheld Mobil’s appeal, reversing the Court of Appeal’s judgment and restoring that of the High Court. Mobil was also awarded costs of $25,000 in relation to the Supreme Court appeal, in addition to costs relating to the two former cases.
[1] Two of the five agreements included a provision to this effect.
[2] Mobil Oil New Zealand Limited v Development Auckland Limited (formerly Auckland Waterfront Development Agency Limited) [2016] NZSC 89, at[7].
[3] Ibid at [44].
[4] Ibid, at [54].
[5] Ibid, at [55].
[6] Ibid, at [58].
[7] Ibid, at [65].
[8] Ibid, at [66].
[9] Ibid, at [77].