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Grazing Contracts - Getting Paid

11 July 2011

The law books are full of cases deciding who is going to get the goods (and get paid) when a business goes belly up. In Stockco Limited v Walker[i] Mrs Walker was successful, but the result could easily have been different as her success was probably due just as much to accident as design.

 

Stockco Limited v Walker

Capehorn Farming Company limited (Capehorn) was in the business of fattening cattle and making a profit from the killing and processing of the stock. Capehorn signed grazing agreements with various farmers in order to do this. One such agreement was signed with Mrs Walker of Birch Hill Station, Northern Wairarapa.

Stockco provided funds for Capehorn to purchase the stock. As security for these advances, Stockco registered its interest in the stock in the Personal Property Securities Register (commonly called the PPSR). The PPSR is a register created under the Personal Property Securities Act (the PPSA) where security interests (such as mortgages, hire purchase agreements, and certain leases) over personal property can be searched by the public. Personal property includes a wide variety of property including livestock, crops, minerals, trees, vehicles, company shares, patents, trademarks and copyright.

Mrs Walker took delivery of some 200 bulls in March and April 2010. Her first invoice to Capehorn was paid, but later invoices were not. Capehorn was placed into receivership in December 2010. Once in receivership payment by Capehorn would have been doubtful, so both parties looked to the bulls to secure payment. Stockco issued legal proceedings claiming that it was entitled to the bulls because it had a registered security interest. Mrs Walker claimed that she was entitled to retain possession of the bulls until she had been paid under a common law lien. Among the questions the judge had to decide were:

  1. Whether Mrs Walker had a common law lien over the bulls.
  2. If Mrs Walker did have a common law lien, whether her lien took priority over Stockco’s registered security interest.

 

A Common Law Lien

A lien is the right of one person to retain possession of the property belonging to another until the owner of the property has satisfied his or her obligations to the lien-holder. For example, a garage (the lien-holder) has the right to retain your car until you have paid for the repairs.

A common law lien is one which has been created by the cases which have come before the courts. Liens can also be created by agreement, or by statute - for example, an unpaid seller has the right to retain goods under the Sale of Goods Act 1908.

A common law lien is lost if the lien-holder gives possession of the property back to the owner.

A lien-holder will not have a lien where he or she is maintaining chattels or preventing their deterioration, as distinct from improving the chattels. This can be a difficult distinction to make. A person who trains a horse, provides the services of a mare, and cares for an animal through illness will have a lien, whereas a person who merely keeps a horse in a livery stable will not. A grazing contract will not normally support a claim to a common law lien.

The judge decided that Mrs Walker had a common law lien because the contract between her and Capehorn was not a grazing contract, but a contract for improvement of the bulls. The reason for this was that Mrs Walker would only be paid if the bulls gained weight while on her property. The judge noted that the contract between Cape Horn and Mrs Walker had not been professionally prepared, so neither of them would probably have considered whether Mrs Walker might have a common law lien over the bulls, or how such a lien might be preserved.

 

Who Should Have First Claim to the Bulls?

Having decided that Mrs Walker had a common law lien, the judge had to decide which claim had priority – Mrs Walker’s lien, or Stockco’s security interest.

The judge turned to the PPSA. That Act states that a lien will have priority over a security interest if certain conditions are met, one of which was that Mrs Walker did not know that her lien was prohibited by Stockco’s security interest. The judge found that all the PPSA conditions had been met. Mrs Walker was therefore entitled to retain the bulls until she had been paid.

 

How Could the Result Have Been Different?

Although Mrs Walker probably did not realise it at the time, she might have lost her case if:

  1. She had given up possession of the bulls.
  2. The contract had been a true grazing contract, not a contract requiring improvement of the bulls.
  3. Stockco had given Mrs Walker notice that its security interest prohibited her lien.

In the light of the decision in Stockco v Walker, both graziers and financiers would be well advised to review their paperwork and procedures and take legal advice as to how best to protect their interests.

 

[i] CIV 2011-441-110

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


 

Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.