The Facts
Two brothers co-own rice farm
A husband and wife began farming in the 1950s.
Over several decades they purchased four farms and involved their children in a family farming partnership.
Two of their children, brothers G and M, co-owned one of the farms, growing irrigated rice.
Brothers co-own shares in water utility
G and M also jointly held shares in the utility that regulated the supply of irrigation water to their farm. The shares had water rights associated with them.
After the introduction of the market for water rights in 2007, a substantial value could be attributable to those shares.
G sells his interest in rice farm to M
In April 2000, the family had a conference to discuss dissolving the family farming partnership.
As part of these discussions, it was agreed that M would buy G’s interest in their farm.
In June 2000, G sold his interest in the farm to M for $250,000. The family also signed a deed of dissolution of the partnership.
M paid a deposit of $25,000 and granted G a mortgage of $225,000 to secure the balance of the purchase price.
Shares and associated water rights remain in joint names
When the sale was completed, the land title to the farm was transferred into M’s name, but the shares in the water utility remained in joint names.
After that point, M conducted the farm’s operations without any communication with G, except in relation to the mortgage.
In September 2008, G wrote to M, offering to sell his interest in their shares in the water utility to M at their current market value.
M took issue with this, believing that he had already purchased these shares in the land sale, although the shares had yet to be formally transferred.
G commences legal action to sell shares in water utility
G commenced legal action in the Supreme Court, seeking the appointment of a trustee to sell the shares in the water utility and to divide the proceeds of sale between G and M equally in accordance with their co-ownership of those shares.
In response, M asked the court for an order requiring G to transfer his interest in the shares to M.
It was up to the court to decide whether M had purchased not only the legal title to the farm, but also the shares and associated water rights.
Expert commentary on the court's decision
Court rules in favour of M, requiring G to transfer the shares to M
In Walsh v Walsh [2011] NSWSC 271 the Supreme Court of NSW ruled in favour of the defendant, Maurice Walsh.
The court declared that the plaintiff, Graham Walsh, held the shares in Murrumbidgee Irrigation Limited (MIL) on trust for Maurice and ordered Graham to transfer his interest in the MIL shares to Maurice.
Principles of equitable estoppel
The court noted that for Maurice to establish an equitable estoppel, he had to prove that:
1. Graham encouraged him to adopt an assumption or expectation that a particular legal relationship existed (ie that Maurice was sole owner of the shares);
2. Maurice had relied upon that assumption or expectation;
3. Maurice’s reliance was known or expected by Graham; and
4. Maurice would suffer detriment if the assumption or expectation that he solely owned the shares was not fulfilled by Graham.
Court finds plaintiff barred from claiming interest in water utility shares
The court agreed with Maurice’s argument that Graham was estopped (barred) from asserting his strict legal rights to an interest in the MIL shares against Maurice.
Graham had permitted Maurice to act in relation to the MIL shares as if Maurice held the exclusive rights to them, and Maurice would suffer detriment if Graham was allowed to keep the shares.
Contrast in strength of witnesses
The court commented that it found Maurice to be a prudent man and an honest witness.
It also accepted his mother’s evidence that upon dissolution of the family partnership “the children would all then go their separate ways and would be completely independent from each other”.
In contrast, the court did not believe Graham’s story about a power of attorney having been granted, stating that the implausible story “significantly damaged Graham’s credit as a witness”.
Court has no need to consider whether shares passed between brothers under sale contract
In addition to arguing equitable estoppel, Maurice argued that although there was no express reference to water rights in the land sale contract, the water allocation and the associated shareholding could be found to be inherently part of the bundle of rights of ownership sold under the contract.
The court said that this could not be decided without detailed analysis of the operation of the MIL Constitution in relation to the title to the farm. Because the court could decide the proceedings on the basis of estoppel, it did not find it necessary to do this analysis or to decide the argument.
Court rejects argument that implied term in land sale contract required transfer of shares
The court rejected Maurice’s argument that a term should be implied in the land sale contract to the effect that “Graham would execute any documents and do all things necessary to convey to Maurice the shares in the MIL and any associated contractual rights in relation to the water allocations”.
The court noted that although a term may be implied to give a transaction the efficacy that both parties intended it to have, Maurice and Graham’s transaction was legally efficacious without the need for an implied term.
Appeal by plaintiff to NSW Court of Appeal dismissed
In Walsh v Walsh [2012] NSWCA 57, Graham appealed the Supreme Court’s decision to the NSW Court of Appeal, but his appeal was dismissed.
Important to document terms regarding water access
It is so important to ensure that everything associated with a sale is clearly dealt with in the contract. Even though in this case, the outcome was that the shares be transferred to the owner of the land, Maurice, he still had to spend much time in court worrying about this and paying his legal advisors.
Water is so important in everyone’s life, especially in rural areas where businesses require water to function. Your contract or deed of transfer should always specify exactly what is included, including specifically water.
Further, where there is a water sharing agreement, the specific details of that agreement should be detailed in writing, including obtaining consent from relevant overarching entities such as Murrumbidgee Irrigation, or your local community bore scheme.
Strength of witness testimony can determine outcome of case
This case demonstrates that even if something is not written down, the court has the power to make a transfer based on the evidence provided before it at trial.
In this case, the mother’s oral evidence at trial was convincing, where she stated that the purpose of the partnership dissolution was to ensure the children were independent of each other.
Sometimes, winning or losing a case can come down to how well you or one of your witnesses perform in the witness box.
If you have strong, clear evidence, you are more likely to convince a judge to order in your favour.
For more information please see “Is it legal for me to pump water from the river?” – laws governing water use in NSW.