IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 485-2003-2724 UNDER Part 1 of the Judicature Amendment Act 1972 IN THE MATTER OF an application under the Wool Act 1997 and the Wool Board Disestablishment Act 2003 BETWEEN SAXMERE COMPANY LIMITED First Plaintiff AND THE ESCORIAL COMPANY LIMITED Second Plaintiff AND RICHARD KING AS REPRESENTATIVE Third Plaintiff AND RUSSELL STEWART EMMERSON & FOREST RANGE LIMITED AS REPRESENTATIVES Fourth Plaintiff AND THE WOOL BOARD DISESTABLISHMENT COMPANY LIMITED Defendant Hearing: 8-19 August 2005 3-4 November 2005 Appearances: F M R Cooke QC & L Theron & S Grey for Plaintiffs R Dobson QC & J Bates for Defendant Judgment: 6 December 2005 RESERVED JUDGMENT OF MILLER J SAXMERE COMPANY LIMITED AND OTHERS V THE WOOL BOARD DISESTABLISHMENT COMPANY LIMITED HC WN CIV 485-2003-2724 6 December 2005 TABLE OF CONTENTS The Saxon story The parties The pleadings Impetus for reform of the New Zealand Wool Industry in the 1990s The Wool Board Act 1997 The 1998 joint venture with MNZI The Saxmere business plan The state of Saxmere’s business in December 1997 Meeting of 17 December 1997 The Saxmere business plan The Board meeting of 5-6 May 1998 The Board’s reasons for declining the application: discussion The 2001 settlement and retrospective funding of Saxmere Failure of negotiations with MNZL and non-payment of levies Negotiations with the Board The Board’s decision to invite MNZL to fund Saxmere The settlement agreement Significance of the Board’s acknowledgement that Saxmere was an efficient and effective marketer The McKinsey Report Restructuring of MNZL The Board’s June 2002 decision to decline Saxmere funding Saxmere’s request for continued funding The Board meeting of 7 June 2002 Judicial review and restitution: First cause of action The decision to appoint MNZL The funding criteria and the May 1998 decision The decisions to restructure MNZI and fund NZMC, and to decline funding to Saxmere in June 2002 Declaration: discretionary considerations The claim for restitution Breach of statutory duty: Second cause of action Negligence: Third cause of action Whether the Board would have appointed Saxmere but for its errors Damages Result The Saxon story [1] Saxon sheep are so called because they were bred from a flock of fine merinos gifted in 1765 to Xavier, Elector of Saxony, by his cousin, the King of Spain. The animals were from the Royal Escurial flock, which in turn had been bred from merinos that Merin Berbers brought to Spain from North Africa in the 11th century. In Saxony the animals were carefully bred for their very fine wool. [2] One hundred Saxons were exported to Australia in 1830. There they were crossed with a number of breeds to establish what are recognised in Australasia as merinos. Cross-breeding was necessary because Saxons are small and susceptible to illness and have a low birth rate. In the result, pure-bred Saxons now represent a very small part of the Australasian merino flock, but much of the flock has some Saxon influence. [3] The German flock was lost to cross-breeding in the 1930s under an edict issued by the Nazi regime, which wanted to increase mutton production. Fortunately a pure Saxon flock has been maintained at the Winton Stud in Tasmania since the 1830s. [4] Saxon wool possesses a distinctive combination of curvature, crimp and fineness. It has a strong helical or three-dimensional crimp formation which, with the associated curvature, significantly differentiates it from other wools. The wool is 12-18 microns and classed as superfine. Merino wool covers a wider range from 12- 24 microns and the bulk of the merino clip – more than 95% in 1996 - is around 18- 23 microns. It tends to have a two-dimensional and weaker crimp. A Wool Research Organisation of New Zealand study dated October 1996 records that Saxon wool possesses superior aesthetic properties. It is light yet bulky, soft, and has high lustre. Fabrics woven from it are soft yet have a high spring and elasticity. However, it also presents processing difficulties because the crimp and short staple length make it hard to form even yarns. [5] To Mr Peter Radford is due the credit for developing pure Saxon wool as a distinctive luxury fabric called Escorial. Mr Radford is one of a small number of perhaps 30 New Zealand growers whose animals display strong Saxon characteristics. His own flock, which he established in 1984, is a daughter flock of the Winton Stud. Since 1991 he has promoted the wool, first in New Zealand and then to English and Italian weavers, spinners, and fashion houses, which came to recognise it as an exclusive product that could allow them to meet increasing competition from sophisticated man-made fibres and mass-produced natural fabrics. The latter include merino and cashmere, or fabrics that are often so labelled. His remarkable efforts have resulted in Escorial being used as a branded fabric in suits by Brioni and other leading fashion houses and in the formation of a guild comprising six English weavers, one leading French topmaker (Chargeur) and one Italian spinner (Drago). These firms have mastered the techniques necessary to process and weave Saxon wool. The result is a system that integrates all steps in the manufacturing process from grower to retailer, and a strong brand (Escorial) that is almost always displayed on the final product. Within the last three years an Italian firm, Zegna Baruffa, has developed techniques necessary to use Saxon wool in knitted apparel. That is expected to increase the market for Saxon wool considerably, particularly for 16-18 micron wool that can be positioned below Escorial in the market. [6] In this proceeding Mr Radford complains that the New Zealand Wool Board, whose statutory function it was to increase demand for New Zealand wool, refused to support his initiatives by funding some of the substantial promotion and development costs. On the contrary, grower levies imposed on Saxon wool in New Zealand were used to fund generic merino marketing efforts by Merino New Zealand Limited (MNZL), a joint venture between the Board and Merino New Zealand Incorporated (MNZI), a society owned by Merino growers. (Where it is not necessary to distinguish between MNZL and MNZI I will refer to them as Merino New Zealand.) Mr Radford regards Merino New Zealand as a competitor that sought to control marketing of all New Zealand merino wool including Saxon. He says its inept marketing efforts at best afforded him no assistance and at worst damaged his business by attempting to pass off other merino wool as Saxon. The parties [7] The first and second plaintiffs are companies that trade or promote and market Saxon wool. The first plaintiff was formerly a trading and marketing company and levy collection agent representing a number of growers in New Zealand and Australia. It was and is owned by Mr Radford. Its operations have since been subsumed within those of the second plaintiff, of which Mr Radford is the majority shareholder. The other shareholders are Nga Tahu Holdings and entities associated with two leading Australian Saxon growers, the Taylor and Crawford families. I will call the first and second plaintiffs Saxmere to distinguish them from the Escorial fabric. For purposes of this judgment they can be treated as one entity. [8] The third plaintiff sues as a representative of 13 woolgrowers, including Mr Radford, who supply wool either to Saxmere or to overseas processors under Saxmere’s auspices. The fourth plaintiff sues as a representative of 44 growers who would like to sell their wool through Saxmere but have not been able to do so because, they say, the market for Saxon wool is smaller than it would have been but for the Board’s failings. Each of the growers represented by the third and fourth plaintiffs supplied a written authority. Some of them simply record that the grower concerned is a Saxon grower who wishes to register support for a claim against the Board and consents to being named as a representative plaintiff in this proceeding. Others record that the grower is unhappy with the Wool Board’s failure to promote Saxon wool, supports the legal proceedings, and authorises use of its levies paid to the Board for Saxon-type wool and recovered in this proceeding to pay legal and other costs, with the balance being put into a trust fund to be used for future promotion and marketing of Saxon wool. It will be necessary to return to the position of the third and fourth plaintiffs because the defendant takes issue with the extent to which they are, or were at the material times, representative of grower interests and have proved their individual claims. It also says it cannot owe them a duty in tort since Saxmere concealed the identity of its growers from the Board. [9] The events the subject of this proceeding co-incided with reforms that led to the dismantling of the producer board system and the Board’s withdrawal from marketing and industry good functions. The defendant is a company established under the Wool Industry Restructuring Act 2003. That Act deems it to be the same entity as the former Wool Board, which was constituted at the relevant times under the Wool Board Act 1997. I will refer to it throughout as the Board. The pleadings [10] The plaintiffs say the Board failed to appoint and fund the first and second plaintiffs to promote Saxon wool. Rather, it insisted that MNZI or MNZL conduct marketing and promotion for merino wool and receive levy funding from merino growers. By so doing, the Board breached s 6(6) of the Wool Board Act 1997, because the first and second plaintiffs were more efficient and effective when it came to marketing Saxon wool.