Forestry Corporation of New Zealand Ltd v Attorney-GeneralHC Auckland M2080-Sd/00

[2001] NZHC 349

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY M2080-SD/00

BETWEEN FORESTRY CORPORATION OF NEW ZEALAND LTD and CITIC LTD trading as Central North Island Forest Partnership
First Plaintiff

AND ROTORUA DISTRICT COUNCIL
Second Plaintiff

AND THE ATTORNEY GENERAL
Defendant

Hearing: 6 April 2001

Counsel: M E Casey for the Plaintiffs
M T Parker for the Defendant

Judgment: 9 May 2001

RESERVED JUDGMENT OF PATERSON J

Introduction

[1] The plaintiffs seek leave to appeal from an arbitral award dated 6 October 2000 (the award).

[2] The award was given by Mr Gribble as umpire (the arbitrator) in an arbitration between the first plaintiffs (the partnership) and the second plaintiff the Rotorua District Council (the Council) on the one hand, and the Crown on the other. The award determined the basis on which the licence fees under 22 Crown Forestry Licences (the licences) will be determined on three periodic reviews of licence fee.

Background

[3] The award applies to 22 licences involving approximately 170,000 hectares of former State Forest in the central North Island, including Kaingaroa.

[4] The licences were issued under the provisions of the Crown Forestry Assets Act 1989 (the Act). A purpose of the Act is to enable Crown forestry assets, (principally exotic timber forests), to be disposed of by the Crown with ownership of the underlying land being retained by the Crown in order to satisfy the claims of Maori under the Treaty of Waitangi Act 1975. A licence in respect of any Crown forest land can only be granted to a person to whom Crown forestry assets on, or that relate to, that land have been transferred under the provisions of the Act. The Act provides for the land subject to a licence, to be returned to Maori ownership if there is a final recommendation under the Treaty of Waitangi Act 1975. There is also a provision for compensation to be paid to the Maori owners in such circumstances.

[5] The 22 licences contain, for the purposes of the application, the same terms and conditions. The initial period of the licence was for a term of five years but there is a provision that the term shall run from year to year by way of automatic extension. If the Waitangi Tribunal recommends the return of the land to Maori ownership, the Crown will give to the licensee a 35 year termination notice. If no such recommendation is made in respect of land subject to a licence, the licence becomes effectively for a minimum 70 year term.

[6] At the time the licences were issued in 1990, s 29(1) of the Act read:

“29. Other provisions of Crown forestry licences-

(1) Every Crown forestry licence-

(a) Shall provide for the payment, and periodic review, of an annual fee for use of the licensed land based on market rates for that land in its unimproved state taking into account the terms and conditions of the licence;

(b) May, subject to the terms of the licence, be assigned by the licensee at any time.”

[7] There are two provisions in each licence dealing with the review of the licence fee. The licence fee is to be reviewed every three years and the initial provision provided:

“that the yearly licence fee for the next three year period commencing on any Review Date will be 7% of the Land Value as at that date.”

There is a mechanism for agreeing or determining the land value which was defined as:

“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.”

[8] In addition to the three year review based on 7% of the land value, referred to in the previous paragraph, there is also a provision for reviewing the basis for fixing the licence fee at nine yearly intervals. The relevant provision reads:

“4.7 Review of Basis for Fixing Licence Fee

Prior to the review of the licence fee due on the 30th day of April 1999 in accordance with Clause 4.3 and prior to every ninth successive anniversary thereafter (each such date being herein called a “General Review Date”) the basis for fixing the licence fee may be reviewed in accordance with the following provisions:

4.7.1 At any time not earlier than nine (9) months but no later than four (4) months prior to each successive General Review Date either the Crown or the Licensee may notify the other party in writing (“the General Review Notice”) that it wishes the basis for fixing the licence fee (initially based on 7% of the Land Value) to be amended 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;”

[9] Section 29 of the Act was amended retrospectively from 25 October 1989 by the Crown Forest Assets Amendment Act 1995. The relevant portion of s 29, which because of its retrospective application was deemed to have been in force at the time the licences were entered into, states:

“29. Annual licence fee - (1) Every Crown forestry licence shall provide for the payment, and periodic review, of an annual fee for the use of the licensed land.

(2) The annual licence fee shall be a market rate agreed, or determined in a manner agreed, between the Crown and the licensee and specified in the Crown forestry licence.

(3) For the purposes of this section, a Crown forestry licence may, if the Crown and the licensee agree,-

(a) Provide that on a periodic review the annual licence fee shall be an amount equal to a specified percentage of the value of the licensed land:

(b) Provide that the annual licence fee shall be based on the value of the licensed land excluding improvements specified in the licence, . . .”

[10] In accordance with the provisions referred to in paragraph 7 above, the licence fees were reviewed for the three periods commencing 30 April 1993 and 30 April 1996 on the basis of 7% of the Land Value as at the review date. The matter which was referred to arbitration and the subject of the award arose from the review of the basis for fixing the licence fee on the nine yearly review, the provision for which is set out in paragraph 8 above.

[11] The partnership and the Council gave notice on 31 July 1998 that they wished the basis for fixing the licence fee to be amended from 30 April 1999 in accordance with the following formula:

“The yearly licence fee payable on 30 April 1999 will be the yearly licence fee which was payable on 30 April 1990, increased by the same percentage increase as the percentage increase in the Consumer Price Index from the December 1989 quarter up to the December quarter immediately preceding 30 April 1999 and every third successive anniversary thereafter.”

What was being sought on future reviews for the nine year period commencing 30 April 1999 was an indexation of the licence fee based on the Consumer Price Index rather than on a percentage of the land value.

[12] The Crown’s counter proposal was that the licence fees payable for the next three year period commencing on any review date be the market rent for the land after excluding any improvements owned by the licensee.

[13] The arbitrator was appointed by order of this Court. He was required to consider both the validity of the Crown’s counter notice making the proposals set out in the previous paragraph and the basis on which the licence fees under the licences was to be fixed on each three year review during the period of nine years commencing on 30 April 1999. The Crown’s counter notice was held to be valid and the arbitrator determined that the licence fees were to be reviewed on 30 April 1999 and every third successive anniversary thereafter on the basis that the annual licence fee for each licence payable for the next three year period commencing on any review date will be the “market rent” for the land as at that date. In effect, the arbitrator determined that a market rent was to be determined each three years rather than being fixed on an indexation basis. The arbitrator also determined the formula for the assessment of market rent. It was the amount, exclusive of GST, which might be expected to be paid on a review date for the use of the land in its condition as at the date of the commencement of the licence, subject to the specific terms and conditions of the licence by a willing licensee to a willing licensor in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The award also stated that for avoidance of doubt the assessment of the market rent was to be based on an analysis of the relevant evidence using all applicable valuation methodologies.

The question of law

[14] The plaintiffs in their application for leave to appeal listed six questions of law which they wish to have determined by this Court. In effect, however, all the points are part of one general over-arching question of law, namely, whether the arbitrator made an error of law in departing from an indexation or similar system and determining that on each review the licence fee is to be assessed on the basis of a market rent based on an analysis of the relevant evidence using all applicable valuation methodologies. The position is aptly summarised in the written submissions of the applicants in the following terms:

“The question of law in this application relate what is the essential nature of the revised “basis” for fixing the licence fees, to take the place of the 7% of Land Value basis. Put simply, it is the plaintiff licensees’ position that the Act and CFLs intend that the general review will result in a methodology comparable to, although not the same as, the 7% of Land Value methodology originally provided. The Crown’s position, upheld by the umpire, was that no such methodology could be assured of producing a then current “market rental” at future review dates, and so the only possible outcome of the review was to provide a definition of market rental and for this to be determined at each review date.”

The Law

[15] A party to an arbitration award may appeal to this Court on any question of law arising out of an award with leave of this Court - clause 5(l)(c) of the Second Schedule of the Arbitration Act 1996. Clause 5(2) of the same Schedule states:

“The High Court shall not grant leave under sub-clause (1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties.”

[16] The principles upon which this Court considers leave applications were considered by the Court of Appeal in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318. It is first necessary to consider the threshold test referred to in clause 5(2), namely, whether having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties. If that threshold is surmounted, there are at least eight other matters which are relevant, namely:

(i) The strength of the challenge/nature of the point of law;

(ii) How the question arose before the arbitrators;

(iii) The qualifications of the arbitrator;

(iv) The importance of the dispute to the parties;

(v) The amount of money involved;

(vi) The amount of delay involved in going through the Courts;

(vii) Whether the contract provides for the arbitral award to be final and binding;

(viii) Whether the dispute before the arbitrator is international or domestic.

The Threshold Test

[17] While the Crown opposes the application for leave, Mr Parker, counsel for the Crown, conceded he could not argue the threshold test had not been met. With respect, this was a concession appropriately made. The determination of the question of law in this case could, in my view, substantially affect the rights of both parties. There is a substantial sum of money involved. This is indicated by the fact that in current negotiations to fix the licence fees for the period commencing 30 April 1999, there is a difference of approximately $12 m. between the licence fees sought by the Crown and the licence fees offered by the partnership and the Council. 22 licences and an area of approximately 170,000 hectares of forest are involved. The method of fixing the licence fees will apply for three reviews over a period of nine years, and may influence the fixing of licence fees for approximately 60 years. The rights of the parties could, therefore, be substantially affected depending on the outcome of the award.

The other tests

[18] The strength of the challenge/nature of the point of law. (a)The basic error which it is submitted the arbitrator made, is that he wrongly interpreted clause 4.7.1 of the licence when he determined the words “by making such other changes as is considered appropriate” applied only to the machinery or process provisions of the licence rather than to the methodology or basis for fixing the market rental. Mr Casey submitted the options available to the arbitrator were to retain the 7% of land value formula; to adopt the same basic formula but with a different specified percentage of land value; to adopt a methodology based on a percentage of land value with both percentage and the land value being determined at the relevant review dates; or a different methodology similar in concept but being a predetermined formula. The submission was that it was necessary on the general review every nine years to fix a formula which would be applied on each three year review until the next nine year review. This basic requirement is said to be the true construction when considered against the purpose of both the licence and the statutory provisions.

(b) An important part of the submission on behalf of the plaintiffs was the effect of the amendment to s 29 of the Act and in particular, the phrase “determined in a manner agreed” as the alternative method of fixing the annual licence fee under s 29(2). Initially there were more than 90 licences and the reason for the amendment was a challenge by most of them to the standard formula for the fixing of the licence fee on the first three year review (see para 7 above). It was contended by the licensees and accepted by the Crown that the formula based on 7% of Land Value did not produce a “market rate” for the annual licence fee as was then required by s 29(1)(a) of the Act (see para 6 above). The principal change which applied retrospectively by the amendment Act, allowed as an alternative the licence fee to be “determined in a manner agreed.” In other words, it did not need to be a “market rate.” Mr Casey submitted this amendment showed it was not the intention of the legislature that the periodic reviews always produce a licence fee based on a market rate at the time of the review. It is likely, in my view, that the main purpose of the amendment was to ensure the review provisions in more than 90 licences were not invalid. It regularised the position by retrospectively amending a statute which effectively precluded a challenge, based on the original wording of s 29 of the Act, to the three year review provision in the licences.

(c) I also have a difficulty with the submission that a statutory amendment made after the licence was entered into, but retrospective to a date prior to the commencement of the licence, can be a strong determinative factor in interpreting the terms of the licence. If the submission is correct, and the words “determined in a manner agreed” assist in the interpretation of clause 4.7.1, the meaning of the clause may have been changed by retrospective legislation. At the time the licences were entered into, the Act required the annual licence fee fixed on a review to be based on market rates for the land. It was common ground that at the time the licences were entered into, there was no accepted formula for fixing licence fees for forestry land of this type. The licences were put out to tender after the form had been fixed by interested parties, but not the licences. It is not surprising in these circumstances, in my view, that the initial agreement to fix licence fees on review at a percentage of land value was made subject to review after a nine year period. Thus, on a general review, the parties could agree to amend the specified percentage or, alternatively, make “such other changes as is considered appropriate to determine a market rental for the use of the land” (clause 4.7.1 of the licence). The purpose in allowing the parties to depart from the indexation formula was to provide a process to determine a market rental for the use of the land. The arbitral provisions in the licences effectively meant that a party, if it was dissatisfied with the specified percentage of land value formula, could seek to have a change to the provisions of clause 4.3 of the licences to ensure that on three yearly reviews, the licence fee was fixed at a market rental, as required by the then statutory provision. I find some difficulty in the submission that a later amendment, albeit retrospective, for the purposes of validating what may have been an invalid provision in the licences, can now lead to the adoption of a formula which on the basis of the findings in the award may well lead to a non-market rental being determined on the three year review. It is the applicant’s position that a methodology should be determined even though it may not give a market rental at the review date.

(d) Further, I do not read into the words of clause 4.7.1 the restriction contended for by the applicants. The umpire had to determine what other changes were considered appropriate to determine a market rental for the use of the land. These words are general and are not restricted to methodology or basis. If experience since the licences commenced has shown that no one formula is appropriate to determine a market rental for the use of the land, I cannot see that the wording of the clause means the parties cannot agree the licence fee will be fixed at market rental on each three year review using the appropriate methods used at the time. Consequently the arbitrator can determine accordingly.

(e) I accept, substantially for the reasons set out in para 17, that this is not a one-off point. It does have a precedent value not only to the parties but in respect of the future licensors and licensees of the 22 licences and possibly to many of the other licences. The Court of Appeal in Gold and Resource Development noted Trustees of Rotoaira Forest Trust v Attorney-General [1998] 3 NZLR 89 and its classification of one-off cases but still determined that in non one-off cases a strongly arguable case would normally be required for leave to be granted (p 333). I accept that there is an arguable case but for the reasons given, do not accept that it is a strongly arguable case. This view suggests leave should not readily be granted.

[19] How the question arose before the arbitrator. (a)The matter went to arbitration in accordance with the provisions of the licence. It was necessary for each party’s arbitrator and for the umpire to be a member of the New Zealand Institute of Valuers. On behalf of the applicants it was submitted that at the time the licences were entered into there was no contemplation that the arbitrators would have to determine what was intended by the term “determined in a manner agreed” in s 29. A further point made on behalf of the plaintiffs was that there was an earlier attempt to have this matter determined by the Court.

(b) It is quite normal for reviews of licence fees or rents to be determined by registered valuers as arbitrators, and it is also quite common for legal issues to arise in such determinations. In this case, the parties entered into a licence which provided this matter be determined by arbitration conducted by valuers. While the central issue was that of determining the licence fee, the parties must have been aware at the time the licence was entered into that legal issues were likely to arise.

[20] The qualification of the arbitrator. In this case the licences provided for the arbitrators and the umpire to be registered valuers. However, before entering into the arbitration, the arbitrator obtained from the parties an agreed list of Queen’s Counsels to whom he could refer legal issues. It is apparent from the award that he came to his conclusions on the advice of a Queen’s Counsel. In the circumstances the qualification of the arbitrators and umpire is not as strong an indicator for the granting of leave as it might otherwise have been.

[21] The importance of the dispute to the parties and the amount of money involved. It is appropriate to consider these two factors together. The likely amount of the money involved has already been noted in para 17 above. That alone makes this an important dispute to the parties. However, it is not insignificant, in my view, that if the applicants are correct in their interpretations one party may benefit substantially from the licence fees being fixed other than at a market rental. It is difficult to see this was the purpose of the Act, even after amendment.

[22] The amount of delay involved in going through the Court. There will be delays if leave is given. I would not however consider the delays to be a material factor if other factors favour the granting of leave.

[23] Whether the contract provides for the award to be final and binding. Clause 4.7.6.6 of the licence provides that the umpire’s determination “should be final and binding on the parties hereto.” As noted in Gold and Resource Developments this is an important consideration but is not determinative. In this case the parties to licences which may continue for 70 years determined issues relating to fixing a licence fee, which was effectively a market rental, should be determined by arbitration with the umpire’s award being final and binding. This provision weighs against granting leave.

[24] Whether the dispute is international or domestic. This is not an international dispute and as such, it cannot be said that a party opted into the provisions of Clause 5 of the Second Schedule.

Conclusion

[25] This is a case where the threshold test has been met but, in my view, the balancing of the other factors which this Court must consider leads to the conclusion that leave should not be granted. While there is an arguable case there is not, in my view, a strongly arguable case. The legal point arose from an arbitration to be conducted by valuers but it is quite usual for legal issues to arise during rental valuations. Although the arbitrator was not legally qualified, he acted on advice from a Queen’s Counsel. The parties did agree that the award would be final and binding. These factors, and particularly the fact that I do not consider the applicants to have a strongly arguable case, tip the balance against leave being granted.

[26] Although I have not needed to take the matter into account in reaching my decision, it is arguably relevant that parties to the licences seek to have the licence fees fixed on a basis which, by acknowledgement, may lead to the licence fees being fixed at non-market rates. Arguably, the purpose of the Act is to grant licences the benefits of which can in appropriate cases, be transferred to Maori. The construction sought by the applicants may lead to Maori having to take over licences where the licence fees were fixed on a basis which does not represent market values.

[27] Application for leave is accordingly declined.

Costs

[28] The Crown is entitled to costs which are fixed on the basis of Category 2B of the Second and Third Schedules of the High Court Rules.