Attorney-General v Forestry Corporation of NZ Ltd (t/a Central North Island Forest Partners)
[2002] NZCA 288
•3 September 2002
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA 92/01 |
| BETWEEN | ATTORNEY-GENERAL OF NEW ZEALAND |
| Appellant |
| AND | FORESTRY CORPORATION OF NZ LIMITED AND CITIC LIMITED (TRADING AS CENTRAL NORTH ISLAND FOREST PARTNERS) |
| First Respondents |
| AND | FLETCHER WOOD PANELS LTD & OTHERS |
| Second Respondents |
| Hearing: | 7 & 8 May 2002 |
| Coram: | Gault P Keith J Anderson J |
| Appearances: | T C Weston QC and M T Parker for Appellant M E Casey and P H Mulligan for First Respondents P D Sills for Second Respondents |
| Judgment: | 3 September 2002 |
| JUDGMENT OF THE COURT DELIVERED BY ANDERSON J |
Table of Contents Paragraph Number Nature of the appeal [1] Historical background – Tasman Agreements [7] Historical background – FCNZ and licences [11] The sale of FCNZ and related instruments [17] Memoranda of Variation of CFLs [20] Deed of Covenant [21] Deed of Release [22] Subsequent developments [26] The High Court judgment [35] Appellants submissions [45] First respondents’ submissions [49] Second respondents’ submissions [52] Discussion – Interpretation [54] Discussion – Waiver [66] Result [76] Costs [80]
Nature of the appeal
This appeal from a judgment of the High Court is concerned with the effect on certain Crown Forestry Licences (CFLs) of related and subsequent agreements to which the Crown was a party. It is the appellant’s contention that covenants included in the CFLs and known as special management restrictions (SMR), which impose obligations on the licensee, have been extinguished by the other agreements or by waiver on the part of the Crown. The original licensee was Forestry Corporation of New Zealand (FCNZ). The first respondents, a partnership to which the licences were assigned, maintains that it is still subject to the SMR. The second respondents support the first respondents in this contention. The seeming paradox of a beneficiary of a covenant asserting it no longer applies and the party on whom the onus of the covenant lies contending the opposite, is explained by a perception that as long as the SMR remain effectual annual licence fees payable by the latter will be significantly lower than if the SMR no longer applied.
The SMR relate to the supply of logs pursuant to various agreements with the Crown known as “The Tasman Contracts”. In the High Court Williams J said that he had “no difficulty in accepting the evidence that the impact of the Tasman Contracts on the Crown Forestry Licences is to reduce the licence fees payable thereunder.” That finding was not challenged on this appeal which proceeded on the assumption that the effect on the licence fees was as found. As we understand it, the reason for that is as follows.
On the first and second triennial review dates stipulated under a licence the annual fee for a succeeding three year period commencing on any review date is 7% of the land value as at that date. The term “land value” is defined in a licence as follows:
“Land value” in relation to the Land … as at any Review Date … means the sum that the Land, if unencumbered by any mortgage or other charge thereon, might be expected to realise at that Review Date if offered for sale on such reasonable terms and conditions as a bona fide seller of the land might be expected to impose but adjusted as may be necessary to take into account the terms and conditions of this licence. (Emphasis added).
Under cl 4.7 of each licence there is to be a general review on 30 April 1999 and on every ninth successive anniversary. In terms of cl 4.7.1 either party may seek an amendment of the basis for fixing the licence fee “either by a change to the specified percentage or by making such other changes as is considered appropriate to determine a market rental for the use of the Land, such market rental to take account of the terms and conditions of this Licence”.
At least until the first general review date it might have been questionable whether constraints on a licensee, represented by the SMR, should depreciate the land value rather than the value of the licence. The existence of the licence and the extent to which it constrains enjoyment of the fee might tend to depreciate the land’s value but restrictions upon the licensee could mitigate rather than aggravate that depreciation. However, on a general review, the first of which has now occurred, the potential for fixing the licence fee on a basis which has regard to a market rental for the use of the land could envisage constraints upon the licensee as a relevantly depreciating factor. And in fact, as counsel advised this Court, there has been an arbitration of the 1999 licence fee review resulting in an award which fixes the total annual fees, on the basis that the SMR continued, at $2,078,000 less than if they should not apply.
It will therefore be seen that although the SMR constrain the licensee according to their tenor, they have an incidental, palpable benefit to a licensee in terms of annual fees. This is an important aspect of the question of waiver which is discussed later in this judgment.
Historical background – Tasman Agreements
The forests to which the licences relate stand in the central North Island, in the hinterlands of the Bay of Plenty. In 1951 the Minister of Forests and the Director of Forestry called for the publication of a paper, known to the parties as “The Green Book”, seeking offers and proposals for the establishment of an industry based on the supply of timber from Kaingaroa and nearby forests. A successful private commercial tender for the implementation of proposals led to the formation of Tasman Pulp and Paper Company Ltd. In 1955 the company entered into a long-term agreement with the Crown for the supply of timber which the Tasman Company would fell and remove. That agreement was substituted by another agreement in 1963, providing for the supply of up to 40 million cubic feet of timber per annum. In 1966 the Company and the Crown entered into an additional agreement for the supply of another 20 million cubic feet per annum. The 1963 and 1966 agreements are known to the parties and referred to in this judgment as “The Tasman Contracts”.
The Tasman company developed into a group which included Tasman Forestry Ltd, Tasman Timber Company Ltd and Fletcher Wood Panels Ltd, the last mentioned being one of the components of the second respondent. These companies became part of the Fletcher Challenge Group, upon the formation, in 1981, of Fletcher Challenge Ltd.
In 1990 ownership of the forests which are subject to the obligations in the Tasman Contracts became vested in a State Owned Enterprise, New Zealand Timberlands (Bay of Plenty) Ltd. That company was incorporated on 11 April 1990 and subsequently changed its name to Forestry Corporation of New Zealand Ltd.
Over subsequent years differences of opinion arose between the Tasman Group and FCNZ, leading to an arbitration before Mr C R Carruthers QC. Following the arbitral award the parties entered an agreement on 19 December 1995, called “The Implementation Agreement”. This agreement declared that its primary purposes were “to implement the Award in such a way as to establish clear principles to govern the price and supply of wood by the Corporation to Tasman over the 35 year period until the expiry of the Agreements and to allow for changes in the circumstances of both the Corporation and Tasman over that period”.
Historical background – FCNZ and licences
On 1 April 1987 the Crown established an SOE, New Zealand Forestry Corporation Ltd, to assume the responsibility for the Crown’s commercial forestry assets. Following litigation by the New Zealand Maori Council, discussed in New Zealand Maori Council v Attorney-General [1989] 2 NZLR 142, the legislature, on 25 October 1989, passed the Crown Forests Assets Act 1989 which authorised the Crown to sell trees and other forestry assets but required it to retain the underlying land. The Act’s Long Title declares that it is to provide for:
(a)The management of the Crown’s forest assets:
(b)The transfer of those assets while at the same time protecting the claims of Maori under the Treaty of Waitangi Act 1975:
(c)In the case of successful claims by Maori under that Act, the transfer of Crown forest land to Maori ownership and for payment by the Crown to Maori of compensation:
(d)Other incidental matters.
The method by which the objects of the Act were to be met included the granting of Crown Forestry Licences (s14) which do not transfer to, nor confer on, the licensee an estate or interest in the land.
The State-Owned Enterprises Act 1986, s23(1) and (4) authorise the transfer by the Crown to an SOE of assets and liabilities of the Crown relating to the activities of the SOE, whether or not any Act or agreement relating to the asset or liability permits such transfer or requires any consent to such a transfer. However by virtue of s23(5)(d) the Crown remains liable to any third party “as if the asset or liability had not been transferred”. An amendment to that subsection, passed on 28 March 1990, mandates an indemnity to the Crown by an SOE transferee. The effect of such provisions is that although an SOE becomes liable by virtue of the transfer, the Crown liability is not thereby extinguished.
On 11 April 1990, the day FCNZ was incorporated under its original name, the Crown entered into an agreement with it for the transfer of Crown forestry assets by way of licences. The agreement provided for the transfer and assignment to FCNZ of the rights and obligations of the Tasman Contracts. Tasman Pulp and Paper and Tasman Forestry challenged the Crown’s power to transfer the assets but if there was any doubt about that power it was resolved by s4 State Owned Enterprises Amendment Act (No. 3) 1990 which provides as follows:
4 Transfer of Crown assets and liabilities to New Zealand Timberlands (Bay of Plenty) Limited – (1) Nothing in the principal Act shall be treated as preventing the shareholding Ministers for New Zealand Forestry Corporation Limited from –
(a) Exercising, in relation to New Zealand Timberlands (Bay of Plenty) Limited, a power conferred by section 23 of that Act even though, -
(i)At the time the power is exercised, it is or may be intended to transfer or dispose of all or any of the shares in that company; or
(ii)A purpose of exercising the power is or may be the obtaining of the benefits of sections 23 to 29 of that Act in relation to the transfer of Crown assets or liabilities to that company.
(b) Exercising, in relation to New Zealand Timberlands (Bay of Plenty) Limited, a power conferred by section 23 of that Act at or about the same time as shares in that company are transferred or disposed of.
(2) This section shall be deemed to have come into force on the 11th day of April 1990.
On 21 December 1995, two days after the Implementation Agreement was signed, Hon Philip Burdon, the Minister for State-Owned Enterprises, wrote to FCNZ and Fletcher Challenge Ltd as follows:
I confirm that the Crown acknowledges that it will be liable to the Tasman group of companies under s23(5)(d) of the State-Owned Enterprises Act 1986 (“the Act”) as if the implementation agreement had been one of the agreements assigned to the Corporation under the Act. The liability of the Crown in this respect has been explained in a decision of the Court of Appeal under CA 272/99.
I also confirm that the Corporation’s liability pursuant to the Act in respect of the agreements assigned to the Corporation under the Act shall also be construed on the basis that the implementation agreement was one of the agreements assigned to the Corporation.
Reverting now to the licences, we remark that the Crown was astute to facilitate the performance of the Tasman Contracts by incorporating the SMR into the licences for the central North Island forests. In their original form, appearing in an appendix to each licence, the SMR stipulated as follows:
Restrictions Relating to the Tasman Contracts
1.The Licensee agrees to protect manage and develop trees on a sufficient area of the Land and of the other land described in the other Crown Forestry Licences bearing even date herewith and granted by the Crown to the Licensee to ensure compliance with the obligations that were imposed on the Crown by Clause 2 of the two log supply contracts dated 18 November 1963 and 27 October 1966 each made between the Crown of the one part and Tasman Pulp and Paper Company Limited (“Tasman”) of the other part relating to the sale and purchase of a quantity of logs not exceeding in the aggregate 60 million cubic feet annually and the renewals and variations of such contracts notwithstanding the transfer and assignment of such contracts by the Crown to the Licensee.
2.The Licensee will within one month from the Date of Commencement prepare for approval by the Crown a schedule setting out the broad programme showing by volumes, species and sources the manner in which the Licensee proposes to meet the estimated projected annual log requirements of Tasman known to the Crown or the Licensee at the Date of Commencement for the period from 1 April 1990 through to 1 April 2005 being the date of expiry of the current term of each such contract.
3.It is acknowledged that the provisions of such programme represent the best estimates of volumes, species and sources which it is possible to make within the time specified in paragraph 2 and that changes in the programme may become necessary in order to protect manage and develop the Trees on the Land to ensure compliance with the obligations that were imposed on the Crown by Clause 2 of each such contract.
4.The Licensee may, with the prior written approval of the Crown, amend or vary the programme in accordance with Clause 3(2) of each such contract.
5.Notwithstanding paragraph 1 hereof, the Licensee, being the purchaser from the Crown of the Trees on the Land at the Date of Commencement, may enter into any agreement to sell or supply logs from the Land except that it will not enter into any such agreement for a term in excess of two years without the prior written approval of the Crown which will not be unreasonably withheld unless the Crown is of the opinion that the supply of logs under such proposed contracts would result in a default of the obligations that were imposed on the Crown by each such contract.
6.Notwithstanding paragraph 1 hereof, the Licensee may exercise the rights conferred upon it by Section 5 of this Licence of assigning the Licence in whole or in part or of sublicensing any part or parts of the Land but it will not do so without first obtaining the approval in writing from the Crown which approval will not be unreasonably withheld unless the Crown is either;
6.1not satisfied that the Licensee will have retained a sufficient area of the Land or of the other land described in the other Crown Forestry Licences in terms of paragraph 1 hereof to ensure the continued supply to Tasman of its known annual log requirements under both such contracts; or
6.2not satisfied that binding and adequate arrangements have been made with any proposed assignee or sublicensee which in conjunction with the area of land that may have been retained by the Licensee in terms of paragraph 6.1 are adequate to ensure the continued supply to Tasman either by the Licensee or any proposed assignee or sublicensee or any one or more of them of the known annual log requirements of Tasman under both such contracts.
The sale of FCNZ and related instruments
On 3 April 1996 The Rt Hon W F Birch, the Minister of Finance, announced that the government intended to sell the Crown’s shares in FCNZ. As a potential purchaser Fletcher Challenge undertook due diligence in the course of which its representatives noticed a draft copy of a Deed of Covenant in relation to the Tasman Contracts. On 1 July 1996 Mr Michael Andrews, Chief Executive of the Forests Division of Fletcher Challenge Ltd, wrote to the Minister of Finance raising certain issues to which the Minister responded, assuring Mr Andrews that the Crown was well aware of the obligations under the Tasman Contracts, including the Implementation Agreement and that the Corporation’s position in respect of assigning individual Crown Forestry Licences would not be affected by its sale. He stated that the Crown intended to make some changes to the management restrictions and to enter into a Deed of Covenant with the Corporation. The revised management restrictions would refer to the Implementation Agreement and require the Corporation to report to the Crown on its compliance with the Tasman Contracts.
Shortly afterwards Fletcher Challenge made an offer for all the shares in FCNZ and they and the Crown entered into a period of negotiation. The question was raised about the value of the Crown’s obligations under the Tasman Contracts as, respectively, an asset of the Fletcher Challenge Group and a liability of the Crown. Fletcher Challenge contended for a value of $30 million which, after further negotiations, was accepted by the Crown as the consideration it would pay for a release from its obligations. Before such agreement was reached the Crown carried out the intention to amend the SMR and obtain a covenant from FCNZ as a pre-requisite to any sale it might enter into.
These developments led to the creation of the instruments with which this appeal is crucially concerned. First, the relevant Crown Forestry Licences were each amended by a Memorandum of Variation executed on 16 August 1996. On the same day the Crown entered into a Deed of Covenant with FCNZ calculated to ensure full compliance with the Tasman Contracts, which now included the Implementation Agreement, and to permit the Crown to monitor performance. Agreement was subsequently reached with Fletcher Challenge over the purchase of the shares of FCNZ and the consideration for releasing the Crown from its Tasman obligations, and, on 21 August 1996, a Deed of Release from the Tasman Contracts was entered into between the Crown on the one hand and Fletcher Challenge Ltd, Tasman Pulp and Paper Company Ltd and various members of the Fletcher Group of Companies on the other. Also on 21 August an agreement for sale and purchase of the entire issued share capital of FCNZ was entered into between the Crown and Fletcher Challenge.
Memoranda of Variation of Crown Forestry Licences CFLs
The Memoranda of Variation of the relevant CFLs extended the obligation of full compliance with the provisions of the Tasman Contracts to the Implementation Agreement. Clauses 2, 3, 4 and 5 of the original SMR were deleted without substitution and a qualified replanting covenant was instituted.
Deed of Covenant
The background to the Deed of Covenant was set out in a preamble which noted that the Crown was considering selling all the issued shares in the capital of FCNZ and wished to monitor the performance of FCNZ of its obligations under the initial agreements and Implementation Agreement, together referred to as “The Tasman Contracts” and that FCNZ had agreed to certain covenants in favour of the Crown for such purpose. It is appropriate to set out in full the provisions of cls 2, 3, 4 and 5 of the Deed:
2. TASMAN CONTRACTS
2.1Compliance: FCNZ agrees to protect, manage and develop trees on a sufficient area of the Land and/or make such other arrangements as are permitted by the Tasman Contracts and as it may consider appropriate, to ensure full compliance with the provisions of the Tasman Contracts.
3. CROWN FORESTRY LICENCES
3.1Assignment/Sublicences: Notwithstanding any provision contained in any Crown Forestry Licence, FCNZ will not assign or transfer any Crown Forestry Licence in whole or in part, or sublicence any part or parts of the Land, without first obtaining the approval in writing of the Crown which approval will not be unreasonably withheld unless the Crown is either.
(a)not satisfied that FCNZ will have retained a sufficient area of the Land, and/or have made or make other arrangements as referred to in clause 2.1, to ensure full compliance with the provisions of the Tasman Contracts; or
(b)not satisfied that binding and adequate arrangements have been made with any proposed assignee or sublicensee which, in conjunction with the area of the Land that may have been retained by FCNZ in terms of clause 3.1(a) and other arrangements as referred to in clause 2.1 are or will be adequate to ensure full compliance with the provisions of the Tasman Contracts by FCNZ or any proposed assignee or sublicensee or any one or more of them.
3.2Change of Control of FCNZ: If either FCNZ or its holding company is a limited liability company which is not listed on any stock exchange then:
(a)any change or rearrangement in the beneficial ownership of the principal shareholding of FCNZ or its holding company; or
(b)any alteration in the constitutive documents of FCNZ or its holding company,
which in either case has the effect of altering the effective control of FCNZ shall be deemed a proposed transaction which shall require the consent of the Crown under clause 3.
3.3Consent For so long as the Crown is the Licensor under a Crown Forestry Licence, a consent given by the Crown under that Crown Forestry Licence to any matter or thing which would, but for this subclause, require the consent of the Crown under clause 3.1, will satisfy the requirements of clause 3.1.
4. REPORTING
4.1Annual Reporting: On or before 10 December in each year during the term of the Tasman Contracts and the Implementation Agreement FCNZ shall provide to the Crown a report in the form set out in Schedule 1, completed by reference to such particulars and other information as are required to be supplied by such report, signed on its behalf by a director.
5. SURVIVAL OF COVENANTS
5.1 Continue to apply: The provisions of clauses 2, 3 and 4 shall continue to apply, notwithstanding the fact that the shares in FCNZ may be sold by the Crown, the Crown may cease to be the Licensor under any or all of the Crown Forestry Licences or any other act is done or omitted to be done affecting the Tasman Contracts, or the Crown Forestry Licences, for so long as the Crown remains liable in respect of the Tasman Contracts by reason of the matters referred to in Recitals C and E.
Deed of Release
The Deed of Release also recited the historical background and recorded that “Fletcher Challenge and the Tasman Group have agreed to release the Crown, Crown Forestry Management Ltd and New Zealand Timberlands Ltd from the Crown’s Tasman obligations on the terms and conditions of this Deed”. It is appropriate to note that New Zealand Timberlands Ltd is a different company from FCNZ under its original name, New Zealand Timberlands (Bay of Plenty) Ltd.
Relevant definitions, contained in cl 1.1 of the Deed, include the following:
“Crown’s Tasman Obligations” means, at any time, all obligations and liabilities of the Crown (and of Crown Forestry Management Limited and New Zealand Timberlands Limited) of whatever nature and howsoever described whether actual or contingent, under or in respect of the Tasman Contracts and whether such obligations and liabilities arise pursuant to the Tasman Contracts themselves. The Ministerial Letter, Section 23)(5)(d) of the Act or from any other source or in any other manner whatsoever and which, at that time, have not been satisfied and discharged in full;
“Grantors” means Fletcher Challenge and the Tasman Group jointly and severally.
“Release Date” means 2 September 1996;
“Release Price” means NZ$30,000,000.00;
“Tasman Contracts” means the Initial Agreements, the Implementation Agreement, the 1955 Contract and the 1955 Logging Contract; and
“Tasman Group” means each of Tasman, Fletcher Challenge Forests Limited, Kaingaroa Logging Company Limited, Fletcher Challenge Forests (Manufacturing) Limited and Fletcher Wood Panels Limited severally and all of them jointly.
The release of the Crown’s Tasman obligations which, by virtue of cl 2.3 were conditional upon settlement of the FCNZ share sale agreement between the Crown and Fletcher Challenge of the same date (cl 2.3) was in the following terms, set out in cl 2.1:
2.1 The Grantors irrevocably and unconditionally agree that, subject to clause 2.3, the Crown shall, with effect on and from the Release Date and subject only to the payment by the Crown to Tasman on behalf of the Tasman Group of the Release Price on the Release Date, not have any obligation under, or liability in respect of, the Tasman Contracts and shall be absolutely released and discharged from the Crown’s Tasman Obligations and the Grantors shall thereafter save and hold harmless the Crown from and against all costs, losses, expenses, claims, actions, suits, judgments, damages, penalties, liabilities or obligations whatsoever under or in respect of the Tasman Contracts and, without the requirement of any further act by any of the Crown, the Grantors or FCNZ, the Tasman Contracts shall be deemed to be amended accordingly.
We also draw attention to cl 3.1 and 3.2(c) which provide as follows:
Each of the Grantors agrees that, subject to clause 2.3, on and from the Release Date it will do all such things (including without limitation, co-operating with the Crown to give effect to, agreeing to, and in no way obstructing the passage of, legislation to reverse the effect of section 23(5)(d) of the Act as regards the Tasman Contracts) and enter into and execute all such documents as may be reasonably required by the Crown to confirm the release and discharge of the Crown from the Crown’s Tasman Obligations as provided in clause 2.
Fletcher Challenge further agrees that:
…
(c) it will, promptly after Settlement, procure that FCNZ executes a deed in form satisfactory to the Crown whereby it becomes a party to this deed in the capacity of a Grantor.
Subsequent developments
It is now convenient to summarise the developments that had occurred since the late 1980’s. The Crown had alienated the forestry assets, but not the land on which the forests stood, to an SOE. The retention of the land anticipated possible outcomes of Maori claims being pursued before the Waitangi Tribunal. Alienation of the forestry assets did not of itself relieve the Crown of its obligations under the Tasman Contracts and it had sought to cover its exposure by including the SMR in the licences. It divested itself of liability under the Tasman Agreements by the Deed of Release, and sold its shareholding in the SOE to Fletcher Challenge, which had a group interest in the benefit of the Tasman Contracts. The Crown no longer needed to enforce the SMR to protect it from contractual liability. Interests concerned with the benefits of the Tasman Contracts were now to control the forestry assets.
Settlement of the sale of the Crown’s shares in FCNZ to Fletcher Challenge was completed on 27 September 1996 and the relevant condition to that effect was satisfied accordingly.
Following settlement the licensee’s interests in the relevant CFL’s were transferred to a partnership which was subsequently restructured resulting in the current licensees being the first respondent.
When the first general review date of 30 April 1999 was imminent the Manager of Crown Property Contracts wrote to the Manager of Fletcher Challenge Forests Ltd. His letter of 8 March 1999 is in the following terms:
Central North Island Forest Partnership – Crown Forest Licences
As you are aware, Conditions 1 and 2 of Appendix C of each of the 22 licences (as set out in a memorandum of variation dated 16 August 1996) held by the Partnership in general terms require the licensee to manage the forest to ensure full compliance with the provisions of the Tasman Contracts.
In addition, by deed also dated 16 August 1996, Forestry Corporation undertook to comply with the Tasman Contracts and to report annually to the Crown on the steps that it was taking to comply with the contracts. However, the obligation to comply only existed while the Crown was, under s 23(5)(d) of the State-Owned Enterprises Act 1986, liable under the initial agreements or owned the shares in Forestry Corporation.
Since then, the Crown has been released from all of its obligations by Fletcher Challenge, and the shares in FCNZ have also been sold to Fletcher Challenge. As a result, as far as the Crown is concerned, the need for FCNZ to comply with the Tasman contracts ceased in 1996. Likewise, there is no longer any need for the licensee to comply with Conditions 1 and 2 of Appendix C of each licence.
While not necessary, you may want the licence to be formally varied to confirm this (rather than read the licence in conjunction with this letter), as well as the execution of a formal deed confirming termination of the obligations under the 1996 deed. If so, please let me know and I will arrange for the documentation to be prepared.
The respondents did not agree with the Crown’s interpretation of the effect of the various transactions. Doubtless because of the perceptions of the impact of the SMR on valuation, a dispute arose leading to the present litigation at the suit of the Crown. In its second amended statement of claim the Crown sought declarations that (a) as a result of the Deed of Release the obligations under the SMR ceased and/or (b) that the letter of 8 March 1999 validly waived compliance by the licensee with the SMR and/or (c) that the Crown is entitled to waive compliance with the SMR.
The Crown alleged, alternatively, that the mutual intention of the parties was that the Crown be completely released from the Crown’s Tasman Obligations, including any requirement to impose SMR restrictions under the Crown Forest Licences and that it ought therefore have an order rectifying the Deed of Release by including a provision to the effect that the Crown is no longer required to enforce, or permit enforcement of, the Tasman Contracts by the inclusion of SMR and that such restrictions were from the date of the Deed of Release at an end.
Next, the appellant invoked cl 3.1 of the Deed of Release in support of a prayer for an order that the respondents, as grantors, be required to procure execution by the licensees of a memorandum of variation of the licence revoking the SMR.
Finally, the appellant alleged that in negotiating the terms of and executing the Deed of Release it was influenced by a material mistake, namely the nature and extent of the release of its obligations, the Crown believing that it was released in full from its obligations, including any obligation to enforce or permit enforcement of the Tasman Contracts through the provisions of the Crown forest licences. It alleged that the mistake was known or should have been known to the second respondents and resulted in a substantial and unequal exchange of values, wherefore relief ought be granted under the Contractual Mistakes Act.
In its statement of defence the respondents asserted that the obligations of the licensee under a CFL remain unaffected by the Deed of Release, but if the Deed of Release has the effect of allowing the Crown to discharge the obligation of the licensee to comply with the SMR such Deed does not represent the mutual intention of the parties or was entered into under a relevant mistake, so as to justify an order for rectification or relief under the Contractual Mistakes Act in conformity with their assertion. They also denied that the Crown is entitled unilaterally to waive the SMR and they sought a declaration to that effect.
The High Court judgment
Although the decision under appeal was quite extensive it can be succinctly summarised in this judgment because much of it traverses facts and evidential material which call for interpretation rather than conflict resolution.
Williams J held that “the broad essential question is whether, by the August 1996 documents, the Crown purchased complete release from all obligations under the Tasman Contracts or only release from liability under s23(5)(d) leaving liability under the Tasman Contracts intact.” We note that no party saw this as a pertinent issue on this appeal. The Judge found that all four of the August 1996 documents should be read as interdependent, interpreted “conformably with each other and as if executed contemporaneously.” This led him to the conclusion that “on its face cl 2.1 of the Deed of Release freed the Crown on settlement not merely from liability under the Tasman Contracts but also discharged it from obligations and liabilities under the Crown’s Tasman Obligations thus freeing it from all liability under s23(5)(d) and under the Tasman Contracts, and under the Ministerial letter of 21 December 1995 and from any other source including obligations and liabilities under the Crown Forestry Licences.”
The Judge found that the Deed of Covenant was designed to ensure that the Crown, in order to comply with its obligations to the Tasman Group, could insist on compliance by FCNZ with all the Crown’s obligations under the Tasman Contracts and could restrict FCNZ’s actions if they appeared to jeopardise the Crown’s obligation of compliance. However, in his view, that obligation persisted only as long as the Crown remained liable under the Tasman Contracts because of s23(5)(d) and the Minister’s letter of 21 December 1995. “Once those provisions became ineffectual as a result of the Deed of Release, Cll 2, 3 and 4 themselves also became ineffectual.” In consequence, the Crown no longer had any obligations and liabilities under the Crown Forestry Licences other than as is licensor. Williams J held that:
Put shortly, what the documents appear to have attempted to do was to terminate all the rights and obligations of the Crown and the Tasman Group under the Tasman Contracts in every way other than preserving their contractual rights and obligations under the Crown Forestry Licences including the substituted special management restrictions
But, in the Judge’s view, the licensee under the Crown Forestry Licences remained bound by the SMR. As we hold later in this judgment, that really is the issue which concerns the parties and is the focus of this appeal. The essential question is whether the SMR are now operative. The significance of that question is, for present purposes, but not necessarily for all purposes, its impact on the annual rental for the Crown Forestry Licences.
Williams J held that although the August 1996 documents brought about a termination of all rights and obligations as referred to in the passage cited in para [32] above, that was not what Fletcher Challenge intended. What it intended was that the Crown’s statutory liability under s23(5)(d) should be brought to an end and it could do nothing to prevent passage of the necessary statutory amendment to effect that. It did not intend to release the Tasman Contracts to any greater extent.
Because, for reasons he articulated, the Judge held that the Crown was of a like intent, Fletcher Challenge was entitled to rectification. The result was summarised in his judgment in these terms:
The Court accordingly concludes that what the parties were negotiating to terminate was the Crown’s continuing obligation under s 23(5)(d) (and the Ministerial letter of 21 December 1995 and the Implementation Agreement). What the Court has held the August 1996 documents achieved was termination of all Crown obligations to the Tasman Group, however arising other than under the Crown Forestry Licences. Seen in that light, the definition of the “Crown’s Tasman Obligations” wherever used, must be seen as not reflecting the bargain made by both parties and as having unintended consequences well beyond the bargain struck between the parties.
It follows that, considering the matter objectively both from the point of view of a reasonable person having the background knowledge of what the parties were trying to achieve and under the claim for rectification, Fletcher Challenge has made out a case for rectification of the Deed of Release. If the parties are unable to agree on the form of relief a further hearing may be necessary.
Williams J then examined the issues, raised by the pleadings, of mistake in terms of the Contractual Mistakes Act 1977, privity in terms of the Contracts (Privity) Act 1982 and express and implied terms. He also dealt with the matter of waiver, concluding that the Crown had not waived because the letter of 8 March 1999 which the Crown relied on for this argument was not conduct amounting to waiver but a statement of the Crown’s view of the legal effect of the relevant transactions. Also, the doctrine of waiver could not apply because there had been no reliance on a representation, said to be an act of waiver, by the party contending for that legal consequence.
In the result, the High Court found that by virtue of the Deed of Release the Crown no longer had any obligations under the Tasman Contracts, being released entirely from obligations and not merely from its liability arising under s23(5)(d) of the State Owned Enterprises Act; but that the first respondent had made out a case for rectification of the Deed of Release to the intent that FCNZ, as licensee, remained obligated to comply with the licences, including the provisions relating to the Tasman Contracts.
Whether because the pleadings were undeveloped, or because the appellate process has refined the issues as it tends to do, or because, as counsel submitted, the Judge did not understand the essential issue, the arguments before this Court tended not fully to engage the High Court’s analysis of issues. The essential issues argued on this appeal were whether, absent waiver, a licensee under any relevant CFL remained bound by the SMR, that being a question principally of interpretation; and if a licensee were so bound notwithstanding the August 1996 documents, whether the SMR obligations had been extinguished by waiver on the part of the Crown as licensor. The identification of such issues as essential means that this Court need not examine much of the reasoning in the judgment under appeal, including why the Judge considered that all the August documents should be read as one “conformably” with each other; and why the first respondents would be entitled to rectification.
But we note in respect of the first matter that at the time the variation of licence and Deed of Covenant were entered into, no agreement had been reached between the Crown and the other parties to the Deed of Release. As indicated in para [17] of this judgment, the Crown had decided to make changes to the SMR and to enter into a Deed of Covenant, without prior reference to Fletcher Challenge, before it offered the shares for sale. As to the second matter, we would question how the first respondents, constituting a partnership which did not exist at the time the Deed of Release was signed, could be considered a party to that instrument, having a relevant common contractual intention which could be vindicated by rectification.
Appellant’s submissions
Counsel for the appellant submitted that there was no justification for rectifying the Deed of Release. The deed terminated the Crown’s obligations arising pursuant to s23(5)(d) but the Tasman Contracts remained in existence and FCNZ’s liability to comply with those contracts remained unaffected. Only the Crown, the original party and transferor, was removed from involvement. The deed expressed the parties’ intentions and it was an untenable proposition that there was a common intention not recorded in the deed. This was not a matter on which the interests of the parties were congruent. It was in the Crown’s interests that the CFLs be deleted and in the other parties’ interests that they be retained. The Memorandum of Variation and Deed of Covenant had been decided upon before due diligence was undertaken by prospective purchasers in relation to the sale of FCNZ shares and drafts of those documents were included in the due diligence.
Clause 5.1 of the Deed of Covenant operates, following execution of the Deed of Release, to terminate the obligation imposed by the Crown on FCNZ to manage the forests to comply with the terms of the Tasman Contracts. This is so whether the obligation is contained in the Deed of Covenant or in the CFLs. The Memorandum of Variation and the Deed of Covenant are interdependent documents and the obligation in the CFLs to comply exists only so long as the Crown should remain liable under s23(5)(d). That the Memorandum of Variation and Deed of Covenant should be considered interdependent as forming part of the same transaction and contemporaneously executed is consistent with the exposition of principle to that effect in Manks v Whiteley [1912] 1 Ch 735 at 754-755. Counsel submitted there was no reason for the Judge to conclude that the obligations in the Memorandum of Variation should continue to exist even though the equivalent provisions in the Deed of Covenant had been deleted.
On the question of waiver, counsel submitted that the SMR were included for the sole benefit of the Crown to enable it to enforce performance of the Tasman Contracts by the licensee if the Crown had been required to honour its obligations under s23(5)(d). From the point of view of the licensees, now the first respondents, there was no operational need for the SMR. The Tasman Contracts have been transferred to the first respondents and the licensee has a contractual relationship with Tasman Pulp. The supply terms could be enforced by either party directly under the terms of the contract without any recourse to SMR.
Those restrictions do not impose any obligation on the Crown, only on the licensee. Upon the sale of the Crown Forestry assets to NZFC the Crown’s obligations under the Tasman Contracts were transferred but such obligations and their transfer were pursuant to contracts separate from the CFLs. The SMR contained in the CFLs were for the benefit of the Crown, not the Tasman Group. There was no impediment to Crown waiver and it did waive by the letter of 8 March 1999.
First respondents’ submissions
Counsel for the first respondents submitted that the Memorandum of Variation was not a document giving effect to the same transaction as the Deed of Covenant, the former instrument being to update the terms of the CFLs to incorporate the Implementation Agreement as part of the Tasman Contracts and the latter being an agreement between the Crown and FCNZ consequent upon the indemnity obligations and the original asset sale agreement of 11 April 1990 and under s23 of the State Owned Enterprises Act 1986. The Deed of Release did not purport to vary the obligations under the CFLs and if, correctly interpreted, they have that effect then such is contrary to the understanding and intentions of both parties to the deed.
Concerning waiver, counsel submitted that SMR benefited not only the Crown but also the Tasman Group and the licensee. The restrictions had a correlative benefit for a licensee in the form of a reduced rental. The Crown was not entitled unilaterally to waive the terms imposing restrictions unless it could establish by reference to the licence that it was for the Crown’s sole benefit. The letter of 8 March 1999 was not a waiver and if it was it has not been accepted or acted upon by the licensee.
Counsel submitted that a party to a lease or an analogous document such as the licences could not unilaterally waive a restricted use provision for the purpose of obtaining a benefit on a rent review. The Crown’s letter was manifestly for that purpose. Authorities cited as particularly significant to the argument on waiver were Morton v Montrose Ltd [1986] 2 NZLR 496; Burns Philp Hardware Pty Ltd v Howard Chia Pty Ltd (1987) 73 ANZ Conv R 185; also a number of authorities relating to the impact on rental valuations of restrictive covenants. It is unnecessary for us to cite those last-mentioned authorities given the terms of the rent review provisions and the CFLs, the High Court’s findings which have not been disputed on this appeal in the particular respect and the information concerning the arbitrated general rent review previously referred to.
Second respondents’ submissions
The second respondents generally supported the submissions for the first respondents. Counsel pointed out that the second respondents and their predecessors had been active since the late 1980s in protecting their interests under the Tasman Contracts and that such contracts provided a benefit to them in various respects relevant to the SMR. These included the right to enter the forest and clear fell and their rights of access to forest roads. The historical context of the relationship between the parties and the inclusion of the SMR was an important consideration, and counsel referred to such matters in support of a submission that the CFLs confer a benefit on the second respondents pursuant to the Contracts (Privity) Act 1982.
The second respondents also challenged the Crown’s claimed entitlement to waive the SMR on the grounds that there was a consequential benefit in terms of rent for the licensee and that the Crown could not unilaterally waive terms in order to obtain the benefit on a rent review.
Discussion - interpretation
The essential issue in this case is whether, either by virtue of the terms of the Deed of Covenant and in consequence of the Deed of Release, or else by dint of waiver, the licensee under a relevant CFL has ceased to be bound by the SMR.
We commence our discussion of that issue with a reminder that the substantive terms of the Memoranda of Variation and of the Deed of Covenant are not identical. Clauses 1 and 2 of the memoranda have their analogue in cls 2 and 3 of the Deed of Covenant. But the memoranda contain a replanting covenant which is not included in the Deed of Covenant and that latter instrument has covenants in respect of the change of control of FCNZ and an annual reporting covenant, none of which are included in a Memorandum of Variation.
It is common ground that the Deed of Release extinguished the Crown’s liabilities under the Tasman Contracts and Implementation Agreement, but did not extinguish FCNZ’s obligations as the assignee of those contracts. Those obligations would and do subsist whether or not FCNZ remained a licensee of any or all of the relevant licences.
Clause 5.1 of the Deed of Covenant contemplates that the Crown may cease to own the shares in FCNZ or cease even to be the licensor. The licences are by their terms capable of assignment. Plainly, the executing of both a variation of the licences and the Deed of Covenant reflects an appreciation by the Crown that FCNZ’s obligations to the Tasman parties could enure whoever might be the licensor or the licensee of the CFLs. Equally plain is that the Crown was primarily concerned with its own liabilities rather than the obligations of a licensee.
Given that the Crown was the licensor and covenantee and that it wholly controlled the licensee and covenantor, it was entirely within the Crown’s power to qualify the duration of the SMR in the licences, as it did in relation to the covenants, if it had wished and intended to do so. Little could have been easier than to state in the Memorandum of Variation, or the Deed of Covenant, words to the effect that Appendix C of Crown Forestry Licences should cease to apply if the Crown’s liability under the Tasman Contracts ceased. The parties did not do so, stipulating instead only for the period of the covenants in the Deed.
The inevitable inference is that the Crown did not make provision for the expiry of the SMR in the licences because it did not intend such a result. Its concern was to cover its own exposure to liability to Tasman, not gratuitously to relieve the liabilities of others, imposed by other instruments.
If it might be questioned why, conversely, the Crown might not have an intention to relieve others of existing liability, there is a ready explanation in the economic significance, historically and prospectively, of the Tasman industries. It will be recalled that the relationship between the Crown and the Tasman interests had subsisted for more than 40 years and arose out of the Crown’s desire to establish a forestry industry in the central North Island. The general economic significance, regionally and nationally, of such industry is a matter of common knowledge and the government’s responsible interest in that industry is reflected in the evidence in the case. It is entirely understandable that the Crown, although itself unencumbered by liability, should be mindful of the common weal with regard to Tasman.
The present focus on the rental consequences of the SMR is merely fortuitous. There is nothing to suggest that in August 1996 the Crown had such considerations in mind. Its concern was to cover its position with regard to the Tasman liabilities in the event of the sale of FCNZ, not to effect a licence variation which might ameliorate the impact on licence rents of restrictive covenants. Now, when Tasman interests have acquired FCNZ and have coloured to some extent the nature of the licensees, the Crown appears to confuse the economic disadvantage of the present practical consequences of a coincidence of Tasman interests with contractual intent in respect of other parties at an earlier time.
On the assumptions that (a) the Crown’s liability to Tasman is extinct but FCNZ’s liability as assignee is not; and (b) FCNZ’s liability under the covenants is extinct but the liability of a licensee by virtue of the SMR is not; what is the practical result? First, the Crown as present licensor could enforce the SMR, not to cover its own liability because it no longer has any, but to benefit the Tasman interests and indirectly the regional and national interest in the industries based on the central North Island forests.
Next, FCNZ which still has Tasman obligations could, as an assignor of any licence, procure compliance by an assignee of the SMR. Whether or not FCNZ was owned and controlled by Tasman interests, those interests could envisage a benefit to them in the preservation of the SMR in an assignable licence.
For certain reasons, which may include present expediency, the Crown in its capacity of licensor may be unwilling to require compliance with the SMR. But forbearance by the licensor to insist on compliance does not of itself relieve a licensee from a contractual duty to comply. The legal obligation defined by the terms of the contract subsists unless varied or otherwise legally or equitably affected.
Because (1) the instruments created after 16 August 1996 do not, by reason of different times, parties and purposes, affect the interpretation of the Deed of Covenant; and (2) the Deed of Covenant does not expressly purport to affect the SMR in the licences; and (3) for the reasons we have expressed, the Deed of Covenant does not impliedly affect the SMR; and (4) there is a rational explanation for not extinguishing the SMR, notwithstanding the extinction of Crown liability to Tasman; we determine that the Crown and NZFC did not intend that, nor provide that, the SMR would become defunct upon the contingencies stipulated in para 5.1 of the Deed of Covenant and that subject to any question of waiver a licensee is still bound to observe the SMR.
Discussion - waiver
Can the Crown amend the relevant licences by waiver? We express the extant issue in those terms because this is not a case about the waiver of a contractual condition by a party for whose benefit the condition was inserted; nor about a party subject to the burden of a contractual term claiming to have been released from it by conduct on the part of the covenantee. It is a case where the covenantee contends that a contract has been varied by way of extinction of certain covenants because of its own unilateral conduct. A feature of the appellant’s stance is the assumption that it can unilaterally amend a contract by declaring its unwillingness to enforce a particular provision. The doctrines of waiver or estoppel may prevent it from subsequently enforcing a waived term, but can the contract itself be legally varied by a unilateral declaration? We think not.
The Crown’s argument must assume that the licensee has no proper interest in the maintenance of the SMR. However, there is a cognizable interest of the licensee in the restrictive covenants. Before March 1999, according to the evidence, the assumption of the parties and the uncontroverted finding of the High Court, an effect of the SMR was to depress the annual licence fee. In March 1999 it suited the particular licensee to take the benefit of a lesser rental along with the burden, which in its case was more technical than real by reason of its commercial relationships, of the SMR.
Although a party to a contract may waive a condition for its own benefit we do not think there is any principle of law or equity allowing that a party may, by waiver of its own interests, expunge concomitant interests of other non-consenting parties.
Suppose a property, subject to a restrictive covenant in favour of the vendor, is sold on terms that the purchase price will be as determined by a valuation of the property being sold. And suppose that after the contract is signed the vendor purports, unilaterally, to waive the restrictive covenant. How could it be said that the purchaser must, by the unilateral act of the vendor, pay more than the value of the property as characterised at the time of the contract?
Although, practically, an intention not to enforce a contractual obligation may impact on present, actual value, a legal entitlement to enforce may have a different effect on value. The fallacy of the appellant’s argument in relation to waiver is its failure to distinguish between what it volunteers and what the other party declines to accept.
It may seem fundamental that one cannot unilaterally derogate from another’s bargain but it is a proposition not lacking in specific authority. In Burns Philp, supra para [51], commercial premises were demised by a lease containing restrictive covenants as to user. Such restrictions depreciated the rent. The lessor purported by deed poll to waive the restrictions in order to enhance the rent. The Court of Appeal of New South Wales held, without dissent, that as the restrictive provisions in the lease were not for the benefit of the lessor only but at least gave a chance that the rent as reviewed would be less than if user were unlimited, to the benefit of the lessee, the lessor could not unilaterally waive the restrictions.
Similar conclusions on reasonably comparable facts were reached by the English High Court in C & A Pensions Trustees v The British Vita Investments Ltd (1984) 272 Estates Gazette 63; Charles Clements (London) Ltd v Rank City Wall Ltd (1978) 246 Estates Gazette 739; Aldwych Club Ltd v Copthall Property Co Ltd (1962) 185 Estates Gazette 219.
In the judgment under appeal the High Court referred to the authorities we have mentioned but was not persuaded by them because even if the Court had accepted that the letter of 8 March 1999 effected a waiver by the Crown of the special management restrictions in those licences, it would not have regarded it as proven that the letter was written with that intention. Indeed, as already noted, the Court’s view is that the letter did not amount to a waiver but merely summarised the author’s views as to the then legal position of the parties.
Thus, the High Court decided the particular issue on a different basis, namely that the letter of 8 March 1999 was not an act of purported waiver at all. The appellant has of course challenged that conclusion but on either approach the result must be that the licensee remains bound by the SMR.
Counsel for the first respondents took issue with the Judge’s conclusion that it would not be regarded as proven that the letter was written with the intention of reducing licence fees. Counsel noted that the Crown called no evidence as to its reasons for the letter or to explain its timing. It was written almost three years after the transactions to which it refers and only weeks before the general licence review date. Counsel referred to evidence which would reinforce the submission that the Crown’s intention was to affect the rental value. However we think it unnecessary to traverse that material because it is the potential effect of the letter’s purport, rather than the subjective intention of the appellant which prevents any effect on the SMR.
Result
How the appeal ought be formally disposed of is not entirely straight-forward. The judgment under appeal held that pursuant to the Deed of Release the Crown no longer has any obligation under the Tasman Contracts and that the deed released it from those contracts and from the Crown’s Tasman Obligations, not just of its liability arising under s23(5)(d). But there was no question between the parties that such was the case and a formal ruling to that effect was not required. The High Court then held that the first respondent had made out a case for rectification of the Deed of Release but for the reasons appearing in the present judgment, rectification was not a relevant issue. The apparent interpretation of the Deed of Release has been found by this Court to have been commonly intended and consequently issues of rectification or mistake or privity are inapt.
The Judge’s ultimate finding was, as we have previously mentioned:
Further, Forestry Corporation of New Zealand Ltd, as licensee under the relevant Crown Forestry Licences as amended on 16 August 1996, remains obligated to comply with them including complying with the Tasman Contracts and the Crown retains the role appearing in the Crown Forestry Licences as licensor.
That finding bears some resemblance to this Court’s determination of the crucial issue, which we express as follows:
The licensee of any Crown Forestry Licence in issue remains bound by the covenants of Appendix C (known as the Special Management Restrictions) of such licence and the terms of Appendix C enure notwithstanding the release of the Crown’s Tasman obligations, as that term is understood in a certain Deed of Release between the Crown and Forestry Corporation of New Zealand dated 16 August 1996.
In the interests of finality this Court formally allows the appeal, although the appellant has substantially failed, and makes a declaration in the terms expressed immediately above.
Costs
In that this appeal has clarified and settled the essential issue between the parties, we think the outcome is sufficiently mutually beneficial to justify an order that costs on the appeal lie where they fall and we order accordingly. The costs in the High Court remain to be determined by that Court.
Solicitors
Crown Law Office, Wellington for Appellant
KPMG Legal, Auckland for First Respondents
Bell Gully, Auckland for Second Respondents
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