Krishnayya v Forest Owner Marketing Services Limited
[2013] NZHC 514
•18 March 2013
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2011-441-000017 [2013] NZHC 514
BETWEEN GORINOORI RAMA KRISHNAYYA Plaintiff
ANDFOREST OWNER MARKETING SERVICES LIMITED
Defendant
Hearing: 25-28 February 2013
Counsel: J G Krebs for Plaintiff
T J Castle and T A Castle for Defendant
Judgment: 18 March 2013
In accordance with r 11.5 I direct the Registrar to endorse this judgment with the delivery time of 4.45pm on the 18th day of March 2013.
RESERVED JUDGMENT OF COLLINS J
TABLE OF CONTENTS
Introduction ....................................................................................................................................... [1] Breach of contract .......................................................................................................................... [6] Misrepresentation ........................................................................................................................... [7]
Fair Trading Act 1986 .................................................................................................................. [10] Counterclaim ................................................................................................................................ [13] Issues ................................................................................................................................................ [14] Preliminary matters ........................................................................................................................ [16] Economic risks associated with harvesting and marketing pine forests in New Zealand ......... [17] General assessment of key witnesses ............................................................................................. [21] Narrative .......................................................................................................................................... [33] Background................................................................................................................................... [33] Events leading to the contract ...................................................................................................... [35] The contract ..................................................................................................................................... [50] Clause 3 Standard of Care............................................................................................................ [51] Clause 6 Manager’s Obligations .................................................................................................. [52] Clause 11 Term and Termination .................................................................................................. [53]
Was Dr Krishnayya induced to enter into the contract because of misrepresentations made by
FOMS about the returns he could expect to return from his forest? .......................................... [55]
What did FOMS tell Dr Krishnayya about anticipated returns? .................................................. [61]
Was Dr Krishnayya misled by FOMS’ representations?............................................................... [68] What did FOMS intend? ............................................................................................................... [71] Events leading up to the commencement of harvesting ............................................................... [75]
KRISHNAYYA V FOREST OWNER MARKETING SERVICES LIMITED HC NAP CIV-2011-441-000017 [18
March 2013]
Advice to Dr Krishnayya’s financiers ........................................................................................... [76] Advances to Dr Krishnayya .......................................................................................................... [78] TPT Reports.................................................................................................................................. [82] Preparing for harvesting .............................................................................................................. [83] Did FOMS prepare an appropriate harvesting and marketing plan? ........................................ [91] Assessment of work necessary to harvest and market the forest................................................... [94] Estimates of the quantities and grades of logs that would be yielded .......................................... [95] Anticipated markets ...................................................................................................................... [98] Estimates of production costs and returns .................................................................................... [99] Health and safety policy ............................................................................................................. [102] Harvesting and marketing by FOMS .......................................................................................... [104] Overview..................................................................................................................................... [104] Logging crews ............................................................................................................................ [105] Did FOMS fail to ensure appropriate roads were constructed? ............................................... [107]
Did FOMS breach the contract by using gravel/rocks from Dr Krishnayya’s property to repair
a neighbour’s road? .......................................................................................................................[112] Felling and removing of native trees .............................................................................................[116]
Did FOMS leave unacceptable quantities of slash in water courses? ....................................... [124] Did FOMS harvest the forest in a haphazard and inefficient way? .......................................... [129] Did FOMS fail to report to Dr Krishnayya in a timely and meaningful way? ........................ [134]
(i) What reports did Dr Krishnayya receive? ........................................................................ [136]
(ii) What information did Dr Krishnayya receive? ................................................................. [140]
Events leading to cancellation of the contract ............................................................................ [146]
Cancellation of the contract ....................................................................................................... [147]
No basis for cancelling contract ................................................................................................... [153] Fair Trading Act 1986 ................................................................................................................... [154] Counterclaim ................................................................................................................................. [157] Conclusions .................................................................................................................................... [158] Costs ............................................................................................................................................... [163]
Introduction
[1] Dr Krishnayya owns a forestry block at Te Haroto which is approximately halfway between Napier and Taupo. Forest Owner Marketing Services Ltd (FOMS) is a forestry harvesting and marketing company.
[2] In January 2009 Dr Krishnayya and FOMS signed a “Mature Forest Management Agreement” (the contract). Under the terms of that contract FOMS harvested and marketed pine trees growing on Dr Krishnayya’s forestry block.
[3] In January 2010 Dr Krishnayya cancelled the contract after approximately 42 per cent of the forest had been harvested and marketed.1 At the time he cancelled the
contract Dr Krishnayya had arranged for another company, Forest Management Ltd
1 FOMS calculated that the forest would produce 72,900 tonnes of logs. FOMS harvested and marketed 30,344 tonnes of logs.
(FML) to harvest and market the balance of his forest. FML harvested and marketed
the remainder of Dr Krishnayya’s forest during the course of 2010 and 2011.2
[4] In his amended statement of claim3 Dr Krishnayya sought damages totalling
$710,934.72. During the course of his closing submissions Mr Krebs, counsel for Dr Krishnayya, reduced the claim to $293,626. FOMS denies any liability and in a counterclaim seeks $91,742.04 in damages.
[5] Dr Krishnayya pleads three causes of action: (1) Breach of contract;
(2) Misrepresentation; and
(3) Breach of the Fair Trading Act 1986.
Breach of contract
[6] Dr Krishnayya’s claim for breach of contract alleges that FOMS breached the terms of the contract and that as a consequence Dr Krishnayya was entitled to cancel the contract and to be paid for the losses he claims to have suffered. In this cause of action Dr Krishnayya pleads that FOMS failed to discharge the following duties it had under the contract:
(1)To report properly to Dr Krishnayya on the returns he was receiving from the harvesting and marketing of his forest during a period when returns were low. Dr Krishnayya says this breach caused him not to suspend harvesting the forest. In his amended statement of claim Dr Krishnayya sought $540,684.72 for this alleged breach of contract.
However, during the course of his closing submissions Mr Krebs
2 For present purposes I find FML harvested and marketed 45,664 tonnes of logs. There continues
to be an issue about precisely how much was harvested from Dr Krishnayya’s forest and the value per tonne of the amount that was harvested. It transpires I do not have to reach definitive conclusions on these matters.
3 Dated 26 June 2012 but served on 20 February 2013. The amended statement of claim was permitted to be filed and served by Mallon J in a decision delivered on 31 July 2012: Krishnayya v Forest Owner Marketing Services Ltd [2012] NZHC 1917.
advised he had instructions to reduce this aspect of Dr Krishnayya’s
claim to $121,376.
(2) To prepare and adhere to an appropriate harvest plan.
(3)To construct appropriate roads through the forest to enable trees to be harvested.
(4)Not to extract and use shingle otherwise than in accordance with the contract.
(5) Not to cut down and remove native trees.
(6) Not to leave tree debris (slash) in water courses on the forest block. (7) To fell the forest in a logical and efficient manner.
Dr Krishnayya says the contractual breaches (2)-(7) outlined above cost him a further $172,250 making the total claim $293,626.
Misrepresentation
[7] Dr Krishnayya’s claim based upon misrepresentation is that he was induced to enter into the contract by statements made by Mr Bartells, the managing director of FOMS.4 Dr Krishnayya’s case is that before he signed the contract Mr Bartells told Dr Krishnayya that he could realistically expect a return of between $37 to $41 per tonne. Dr Krishnayya maintains that in the absence of these assurances he would not have signed the contract.
[8] It transpired that the returns received from the forest were significantly less than $37 per tonne. The evidence is that prior to Dr Krishnayya cancelling the
4 Contractual Remedies Act 1979, s 6.
contract he received on average $17.01 per tonne, compared to $19.52 per tonne that he received from FML.5
[9] Dr Krishnayya now claims $121,376 which he says is the loss he suffered through receiving significantly diminished returns from the forest. This is an alternative claim to the first alleged breach of contract claim.
Fair Trading Act 1986
[10] Dr Krishnayya’s third cause of action alleges that FOMS’ failure to advise Dr Krishnayya during the course of the harvesting and marketing of his forest that market conditions had changed adversely constituted a breach of s 9 of the Fair Trading Act 1986. That section prohibits those in trade from engaging in conduct which is misleading or deceptive or which is likely to mislead or deceive.
[11] Dr Krishnayya now seeks an order under s 43(2) of the Fair Trading Act 1986 that FOMS pay him $121,376.
[12] This is a “further alternative” cause of action to the claim based upon misrepresentation and the first alleged breach of contract. However, Dr Krishnayya’s claim for the same sums for breach of contract/misrepresentation and breach of the Fair Trading Act 1986 is misconceived. Damages for breach of contract and misrepresentation are not calculated in the same way as damages for
breaches of s 9 of the Fair Trading Act 1986.6
5 This figure was calculated by FOMS after all expenses, including roading were apportioned across the entire harvesting and marketing of Dr Krishnayya’s forest.
6 Section 6 of the Contractual Remedies Act 1979 provides that misrepresentations are treated the same as breaches of contract, for the purposes of calculating damages. Therefore, even where the misrepresentation is made negligently or fraudulently (which would previously have
constituted a common law action in tort) damages are assessed on a contractual basis. A plaintiff is entitled to a measure of damages that would put him in the position he would have been in had
the term of the contract been performed (Stirling v Poulgrain [1980] 2 NZLR 402 (CA) at 419 and Bloxham v Robinson (1996) 7 TCLR 122 (CA) at 133). Under Dr Krishnayya’s claim, that would be the difference between the return Dr Krishnayya received for the forested timber from both FOMS and FML, and the return he said was promised to him if the price of $37 to $41 per
tonne had been realised. In contrast, damages awarded for breach of s 9 of the Fair Trading Act
1986 are calculated on a tortious, not contractual basis, the purpose being to compensate for loss resulting from misleading conduct (Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA) and Harvey Corporation Ltd v Barker [2002] NZLR 213 (CA)). In this case the appropriate calculation for tortious damages would have been the difference between the return
Dr Krishnayya received for the harvested timber, and the return he would have received if the
Counterclaim
[13] In its counterclaim FOMS pleads that Dr Krishnayya unlawfully cancelled the contract and that as a consequence Dr Krishnayya is liable to pay FOMS for:
(1)$31,744.82 for logs that had been harvested and stock piled on site but not sold prior to the contract being cancelled;
(2)$21,874.86 being an outstanding harvesting fee payable under the contract;
(3)$5,285.25 for approximately six loads of pulp logs that were left on site; and
(4)$36,490.41 being a marketing fee for eight months that had not been paid.
This totals $95,395.34 from which FOMS deducts $3,653.30 being the balance of the sum owing to Dr Krishnayya for logs FOMS harvested in December 2009 and sold in January 2010, thereby producing a final figure of $91,740.04 which FOMS seeks from Dr Krishnayya. Dr Krishnayya does not dispute the calculations contained in FOMS’ counterclaim. As I understand Dr Krishnayya’s case, he says that once he lawfully cancelled the contract he ceased to be liable to pay FOMS anything.
Issues
[14] In this case, issues of liability are firmly anchored to the facts which I find proven to the requisite standard.
high projections had never been made by FOMS. In that situation he would most likely have contracted the company with the next highest projections to harvest and market the timber in his forest, therefore the appropriate measure of damages would be the additional amount
Dr Krishnayya would have obtained from the harvest if he had used that company from the beginning of the harvest. This is closer to the calculation that Mr Krebs opted for in his closing, being the difference between what Dr Krishnayya received from FOMS and the amount that he received from FML, namely $121,476.
[15] In addressing the issues raised by this case I will answer the following key questions in the following sequence:
(1)Was Dr Krishnayya induced to enter into the contract because of misrepresentations made by FOMS about the returns he could expect receive from his forest?
(2) Did FOMS breach the contract by:
(a) not preparing and adhering to a harvesting plan;
(b) failing to ensure that appropriate roads were constructed;
(c) using gravel/rocks from Dr Krishnayya’s property to prepare a neighbour’s road;
(d) cutting down and removing native trees;
(e) leaving unacceptable quantities of slash in water courses; (f) not felling the forest in a logical and efficient manner; and
(g)failing to report in a timely and meaningful way to Dr Krishnayya so as to enable him to decide whether or not to suspend harvesting.
(3)If FOMS did breach the contract in one or more of the ways claimed by Dr Krishnayya, did FOMS’ breach(es) justify Dr Krishnayya cancelling the contract?
(4)Did FOMS fail to warn Dr Krishnayya that market conditions had changed adversely, and if so, did FOMS’ failure to warn Dr Krishnayya about these changes constitute misleading or deceptive conduct?
(5) If Dr Krishnayya was not entitled to cancel the contract, is FOMS
entitled to the sums it seeks in its counterclaim?
Preliminary matters
[16] Before addressing these questions and the facts which underpin my answers to these questions, I will refer to two important matters that are relevant to many of the questions raised in this case, namely:
(1)The economic risks associated with harvesting and marketing pine forests in New Zealand; and
(2) My overall assessment of the key witnesses.
Economic risks associated with harvesting and marketing pine forests in New
Zealand
[17] Exotic forests are an important ingredient in New Zealand’s economy. Currently New Zealand has approximately 1.8 million hectares of planted production forests of which about 90 per cent are radiata pine.7 Exports of forest products were valued at $3.438 billion for the year ending 30 June 2009.8
[18] Those who are in the business of growing, harvesting and marketing pine forests appreciate that the net returns for a forest owner are dependent upon a number of variables. Once a forest has reached the point where it can be harvested and marketed, the returns which the forest owner may achieve will depend on factors such as:
(1) the price paid for the logs in both international and domestic markets;
(2) the value of the New Zealand dollar at the time export logs are sold;
7 Statistics New Zealand New Zealand Official Year Book 2010 (David Bateman, Wellington,
2010), at 373. This is the most recently published New Zealand Official Year Book.
8 At 376.
(3) the availability and costs of shipping;
(4)the costs of harvesting, and in particular: (a) roading and engineering costs;
(b) felling costs; and
(c) cartage costs.
[19] The international market price for logs, currency values and shipping costs can change significantly from month to month and may be unpredictable. These factors can move quickly in directions that are adverse to a forest owner. They are also factors that can quickly move in directions that are favourable to a forest owner, thereby increasing their net return.
[20] The fluctuating nature of returns for a forest owner during the period covered by this judgment was well illustrated by the evidence given by Mr Colley, an expert in forestry. He explained that during the period when FOMS harvested and marketed Dr Krishnayya’s forests, log prices were at a comparatively low point. This factor, combined with a steadily rising New Zealand dollar explain why Dr Krishnayya did not receive the returns that he hoped he would receive when FOMS was harvesting and marketing his forest.
General assessment of key witnesses
[21] In my judgment I will explain my reasons for the answers I provide in relation to each of the key questions I am required to answer. However, from the outset I will explain my overall assessment of the key witnesses because, as will become apparent, some of the issues I have to address involve my assessment of witnesses’ credibility.
[22] Dr Krishnayya is a registered medical practitioner. He is now 71 years old and suffers a number of health issues.9 Dr Krishnayya has retired from medical practice. Prior to his retirement Dr Krishnayya faced a number of challenges.10
[23] During the course of his evidence Dr Krishnayya emphasised that he was a well-educated and intelligent man. He explained that he read farming and forestry journals and managed an investment portfolio that included rental properties and a private hospital. Dr Krishnayya thought the gross value of his real estate and
business investments exceeded $10 million.11
[24] I have endeavoured to make every allowance I can for Dr Krishnayya’s age, state of health and the fact that at times he struggled to express himself clearly and logically. Even when I make allowance for these factors I am driven to the conclusion Dr Krishnayya was a poor witness.
[25] At times Dr Krishnayya was clearly very irritated at having to give evidence. On occasions he was belligerent and dismissive of anyone whose evidence did not support his version of events. Dr Krishnayya described Mr Bartells as being a thief and of engaging in deceptive practices. He dismissed Mr Van Der Voort, the operations manager of FOMS, as being a “nobody” and said he was a person who had “made up numbers”. As will become apparent in my judgment, Dr Krishnayya’s allegations about Mr Bartells and Mr Van Der Voort were totally unjustified and wrong.
[26] Dr Krishnayya relied upon the evidence of Mr Schrider, who is the director and shareholder of a forestry consulting business. Mr Schrider was forced to amend a number of his initial criticisms of FOMS because he made the fundamental mistake of basing a number of his initial criticisms primarily upon the information conveyed
to him by Dr Krishnayya. Mr Schrider did not inspect the forest and gave his
9 Diabetes, hypertension and depression. In addition, during the course of giving his evidence it was apparent that Dr Krishnayya has developed significant hearing difficulties.
10 He was found guilty of professional misconduct by the Health Practitioners Disciplinary
Tribunal in 2006. Conditions were placed on his ability to practise medicine. In addition,
Dr Krishnayya’s wife was diagnosed with cancer in 2009. Sadly she passed away in September2010.
11 The details of which are set out in an affidavit from Dr Krishnayya dated 9 August 2011 which he affirmed in opposition to an application for security for costs.
evidence at a point where he did not have the benefit of understanding all of the material that was presented to me. Had Mr Schrider fully discharged his obligations as an expert witness he could have avoided the obvious embarrassment he suffered when he was cross-examined. I noted that although Mr Schrider received the brief of evidence from FOMS’ expert witness, Mr Colley, Mr Schrider did not engage with Mr Colley’s evidence. However, it was to Mr Schrider’s credit that he properly accepted that a number of his initial criticisms of FOMS were wrong.
[27] Dr Krishnayya also relied upon the evidence of Mr Moir, the managing director of FML. I found Mr Moir to be an honest person but I have not found it possible to give much weight to his criticisms of FOMS because he competed directly with FOMS to try and obtain access to Dr Krishnayya’s forest, both before FOMS signed the contract with Dr Krishnayya and during the time that Dr Krishnayya was preparing to cancel the contract he signed with FOMS.
[28] Mr Bartells and the other directors of FOMS12 have had extensive experience in the forestry industry in New Zealand. Mr Bartells has been in the forestry industry for 40 years. He held a number of senior positions in Fletcher Challenge Forests Ltd/Tenon, including the role of harvesting manager for the company’s forest estate. That role involved Mr Bartells managing over five million tonnes of forest harvesting each year.
[29] I was impressed by Mr Bartells as a witness. He was willing to make concessions where appropriate and he maintained his professional dignity throughout the hearing, even when he was subjected to Dr Krishnayya’s unpalatable allegations. An example of Mr Bartells’ honesty emerged during cross-examination when he volunteered that projections thought to be attached to an email he sent on
12 December 2008 were the wrong figures and that the correct figures assisted
Dr Krishnayya’s case.
[30] Mr Van Der Voort has had 39 years experience in the forestry industry. He joined FOMS in 2008 and in 2009 became responsible for managing the harvesting
and marketing of Dr Krishnayya’s forestry block.
12 FOMS was formed on 1 September 2004.
[31] Mr Van Der Voort also impressed me as a witness. He gave his evidence in a thoughtful and considered manner. It was clear that he was doing all he could to assist me in fully understanding the events that gave rise to this litigation. Like Mr Bartells, Mr Van Der Voort made appropriate concessions and did not shy away from acknowledging facts that did not support FOMS’ position.
[32] Mr Colley was called as an expert witness by FOMS. Mr Colley has been in the forestry industry since he graduated with a Bachelor of Forestry degree in 1972. Mr Colley displayed all of the qualities that are looked for in an expert witness. He was dispassionate and willing to acknowledge alternative points of view. Unlike Mr Schrider, Mr Colley fully immersed himself with the evidence. He inspected the forest on two occasions and sat through the entire evidence so as to ensure that his opinions were based upon all the evidence presented to me.
Narrative
Background
[33] In about 1980 Dr Krishnayya purchased approximately 177.5 hectares of land at Te Haroto. The land had previously been cleared of its native forest and converted into pasture. Soon after he purchased the land Dr Krishnayya arranged for part of the the land to be planted in pine trees. It appears the planting took place over two stages. Dr Krishnayya arranged for a house to be built on the site. A few years later he subdivided the house and curtilage from the balance of the forestry block and sold the house and curtilage. Mr and Mrs McKenzie purchased the house and curtilage in
1996.
[34] By 2007 the forest had reached maturity. Dr Krishnayya wanted to realise a return from his investment. He explored a number of options. It appears that at one point a purchaser was interested in offering to buy the forestry block for approximately $3.24 million. No sale eventuated.
Events leading to the contract
[35] In mid-November 2007 Mr Bartells heard that Dr Krishnayya wished to realise his investment in his forest. Mr Bartells telephoned Dr Krishnayya and asked if he would be interested in receiving a proposal from FOMS. When Dr Krishnayya indicated he would be interested in receiving a proposal Mr Bartells prepared a harvesting and marketing financial projection. In that document he indicated that once harvested and marketed the trees in the forest could yield a net return to Dr Krishnayya of between $16.12 to $23.29 per tonne.
[36] Mr Bartells prepared a more detailed proposal in January 2008. At that time he indicated that Dr Krishnayya could expect a return of $17.25 per tonne. In this report Mr Bartells said that the harvesting of the forest would take 18 to 20 months and that given this timeframe there were likely to be several market swings because of factors such as foreign exchange movements, shipping cost increases, and changes in the price which overseas purchasers were willing to pay for New Zealand logs. Mr Bartells recommended a harvesting and marketing management agreement which he said was the best structure for forest owners to achieve maximum value at the time of harvesting. Mr Baretells explained that FOMS’ fee for its services would be fixed at “$3.00 per tonne and 6% of the net sales of volume”. Mr Bartells said that the proposal he had prepared was based upon a “snapshot” in time. This proposal was presented to Dr Krishnayya at his home in Napier in January 2008 by Mr Bartells and Mr Musson, a fellow director of FOMS.
[37] In the January 2008 report FOMS explained the steps which would be taken if FOMS were engaged. Those steps included:
(1) A formal contract being signed; (2) A harvest plan being prepared;
(3)An updated harvesting and marketing plan and budget being prepared; and
(4) Harvesting commencing.
[38] In May 2008 Dr Krishnayya asked Mr Bartells to meet him at his home. During that meeting FOMS were asked again for a proposal relating to the older trees on the block. As a result Mr Bartells arranged for one of its contractors, a Mr James, to walk the block and provide an assessment of potential grades of the timber in the block.
[39] FOMS prepared a second proposal for Dr Krishnayya. That report, dated
22 May 2008 dealt only with 28 hectares of the forest which was expected to yield a return of 14,000 tonnes. The report suggested that if that block were harvested in the next six months it was likely to produce a return of $20.13 per tonne.
[40] No response was received from Dr Krishnayya.
[41] In November 2008 Dr Krishnayya requested an updated harvesting and marketing financial projection from FOMS. FOMS complied with this request. On
28 November 2008 Mr Bartells wrote to Dr Krishnayya. Attached to that letter were two harvesting and marketing financial projections. The difference between the projections was based upon different assessments of the grades of timber that would be harvested from Dr Krishnayya’s forestry block.
[42] In his letter of 28 November 2008 Mr Bartells explained that the projections contained significantly higher returns because at that time shipping costs and the New Zealand dollar were at lower rates than had been previously experienced. Mr Bartells warned that the:
financial projections [were] a snapshot in time and that the returns to [Dr Krishnayya] may be worse or better depending on movement [in shipping costs and the New Zealand dollar] and other economic variables.
Mr Bartells also said:
... with shipping and foreign exchange rates currently lower than they have been for quite a few years, and sales prices higher than they have been for many years, the stumpage returns currently being achieved for export saw logs are considerably higher than they have been for many years. From this point of view alone, now is a good time to start harvesting.
[43] The harvesting and marketing financial projections estimated that the net revenue return to Dr Krishnayya would be $33.01 to $36.70 per tonne or $37.80 to
$41.56 exclusive of FOMS’ management fee.
[44] FOMS also sent a proposed contract to Dr Krishnayya on or about
28 November 2008.
[45] On 12 December 2008 Dr Krishnayya asked Mr Bartells if he would send Dr Krishnayya an email which Dr Krishnayya could send to his bank. Mr Bartells did this later on 12 December 2008. In that email Mr Bartells said:
I have prepared two harvesting and marketing financial projections, dated 28
November 2008, which I have attached. These are a snapshot in time as at the date prepared, but used conservative export projections based on
predictions from our export providers.
Given market conditions similar to those used in the projections, this forest could realistically expect to return $37-$41 per tonne.
Based on the estimated volume of almost 73,000 tonnes a net return of $2.6 -
$2.8 million.
[46] The two harvesting and marketing financial projections which accompanied the 12 December 2008 email were similar to those FOMS had sent to Dr Krishnayya with its letter of 28 November 2008.13 Mr Bartells explained when giving his evidence that the estimated net returns in the harvesting and marketing financial projections of 12 December 2008 were $37 to $41 per tonne.
[47] The harvesting and financial projections are comprehensive documents. They contain detailed assessments of, amongst other matters:
(1) Log grades;
(2) Volume per grade;
13 During the course of Mr Bartells’ evidence it emerged that two marketing and financial projections that appeared to be attached to the 12 December 2008 email in the common bundle of documents were not in fact the projections sent with the 12 December 2008 email. The
harvesting and marketing financial projections actually sent with the email of 12 December 2008 were not produced in evidence.
(3) Likely customers; (4) Log diameter size; (5) Knot sizes;
(6) Log lengths;
(7) Delivery price; (8) Cartage costs; (9) Roading costs;
(10) Weighbridge costs;
(11) Export pricing schedules, including sales prices, shipping costs and exchange rates;
(12) Daily and weekly production estimates; (13) A proposed roading budget;
(14) A proposed budget for machinery costs; and
(15) A financial summary that contains estimates of the net revenue per
tonne (both inclusive and exclusive of FOMS’ management fee).
[48] On 14 January 2009 Mr Bartells received a telephone call from Dr Krishnayya who said that he had signed FOMS’ contract and that he wanted Mr Bartells to sign a contract as soon as possible. Dr Krishnayya told Mr Bartells that he was under financial pressure and that he wanted FOMS to start harvesting his forest as soon as possible.
[49] On 15 January 2009 Mr Bartells went to Napier and met with
Dr Krishnayya’s lawyer. He signed the contract that day.
The contract
[50] For the purposes of this proceeding, the key provisions in the contract are clauses 3, 4.1, 5.1, 5.2, 5.3, 6.1, 6.2, 6.4, 8.1 and 11.1. Those clauses are set out in full as an appendix to this judgment. At this juncture it is only necessary to draw attention to clauses 3, 6.4 and 11.1(a) and (b).
Clause 3: Standard of Care
[51] Clause 3 provides:
The Manager shall carry out its obligations hereunder in good faith in accordance with the terms of this Agreement, employing the same degree of care and skill as a reasonable manager with expertise in large scale commercial forestry harvesting and marketing would use in carrying out equivalent obligations.
Clause 6: Manager’s Obligations
[52] Clause 6.4 provides:
The Manager shall provide the Owner each month with a report on the Logs sold and their grades detailing for export markets the market location, and for domestic markets actual customer name, revenue received by log grade and actual production costs.
Clause 11: Term and Termination
[53] Clause 11.1(a) and (b) provides:
The Owner may terminate this Agreement forthwith by notice in writing if: (a) the Manager has failed to perform any of its duties under this
Agreement in any material respect; and
(b) such failure has had a material adverse effect on the Owner;
...
[54] The fee that the parties agreed that FOMS would be paid was $3.00 per tonne/JAS14 excluding GST. There was no evidence which explained when this fee was negotiated or why FOMS agreed not to charge Dr Krishnayya a percentage of the net sales as envisaged in FOMS’ January 2008 proposal.
Was Dr Krishnayya induced to enter into the contract because of misrepresentations made by FOMS about the returns he could expect to return from his forest?
[55] Although this question arises from Dr Krishnayya’s second cause of action, it is logical to answer this question at this juncture as it requires an analysis of the events that occurred before FOMS’ alleged breaches of contract and breaches of the Fair Trading Act 1986.
[56] Dr Krishnayya’s claim for damages for misrepresentation is based upon s 6(1) of the Contractual Remedies Act 1979. That section provides that where a plaintiff has been induced to enter into a contract by a misrepresentation made by a defendant then the plaintiff is entitled to damages as if the representation had been a term of the contract that had been broken by the defendant.
[57] The essence of this aspect of Dr Krishnayya’s case is that he maintains that Mr Bartells assured him that he could realistically expect a return of $37 to $41 per tonne. Dr Krishnayya points to the marketing and financial projections which accompanied Mr Bartells’ letter of 28 November 2008 and Mr Bartells’ email of
12 December 2008 as being sources of the assurances that he could realistically expect to receive $37 to $41 per tonne. In his evidence Dr Krishnayya also said that Mr Bartells had told him orally that he could expect to receive $37 to $41 per tonne.
[58] Initially Dr Krishnayya claimed $540,684.72 for misrepresentation. That figure was calculated by Mr Moir who deducted $37 per tonne from what he thought Dr Krishnayya received per tonne from FOMS. However, by the time it came to closing submissions Dr Krishnayya appreciated that there were difficulties with the
approach taken by Mr Moir. Dr Krishnayya instructed Mr Krebs to change the basis
14 Japanese Agricultural Standard which equates to approximately .93 tonnes for logs exported
from the Hawke’s Bay.
of the way he calculated his alleged loss for misrepresentation to one that involved the difference between what he received from FOMS per tonne and the amount he received per tonne from FML. The difference per tonne between the two companies was about $4, and produced the revised claim of $121,476.
[59] However, Dr Krishnayya’s revised approach to quantifying his loss has a number of difficulties. The main difficulty is that Dr Krishnayya’s revised approach is unrelated to the alleged assurance he received from FOMS that he would receive at least $37 per tonne from his forest. The revised approach to quantification is based solely on the difference in net returns achieved for Dr Krishnayya by FOMS and FML.
[60] Even if I put aside issues relating to the way Dr Krishnayya has quantified his loss there are, in my view, even more fundamental difficulties with this aspect of Dr Krishnayya’s claim. Those difficulties are best addressed by focusing upon the following three questions:
(1) What did FOMS tell Dr Krishnayya about anticipated returns? (2) Was Dr Krishnayya misled by FOMS’ representations?
(3) What did FOMS intend when it made the representations in question?
What did FOMS tell Dr Krishnayya about anticipated returns?
[61] While Dr Krishnayya is correct when he says that Mr Bartell’s email of
12 December 2008 said that Dr Krishnayya could realistically expect to receive a return of $37 to $41 per tonne, that assessment was heavily qualified.
[62] In FOMS’ first proposal, which it sent to Dr Krishnayya in mid November
2007, FOMS estimated the forest would yield a net return to Dr Krishnayya of between $16.12 to $23.29 per tonne. In its more detailed proposal of January 2008 that figure had changed to $17.25 per tonne. Of more importance is the fact that as early as January 2008 FOMS explained to Dr Krishnayya that its projections of net
returns were “a snapshot in time” based on data available at the time the projections were made. FOMS very carefully explained that the actual returns would depend on a variety of factors, such as foreign exchange movements, changes in shipping costs and the price overseas buyers paid for New Zealand logs.
[63] In his letter of 28 November 2008 Mr Bartells again explained that FOMS’ financial projections were “a snapshot in time”. He re-emphasised to Dr Krishnayya that the returns he received may be better or worse than current projections depending on changes to the value of the New Zealand dollar, shipping costs and other economic variables.
[64] In his email of 12 December 2008 Mr Bartells re-emphasised that the projections which accompanied his email were “a snapshot in time” based on data available at the time the projections were prepared.
[65] Dr Krishnayya was not willing to accept that FOMS had qualified its projections. He said he had no recollection of ever being told that FOMS’ projections were a “snapshot in time”. Dr Krishnayya repeatedly focused on the assessment contained in the 12 December 2008 email and maintained that it constituted an assurance that he would receive $37 to $41 per tonne.
[66] In my assessment, Dr Krishnayya has deliberately chosen to disregard the warnings repeatedly given by FOMS about the weight that could be placed upon the projections of financial returns that could be achieved from harvesting and marketing his forest. Even Mr Schrider agreed in cross-examination that the representations made by FOMS in the 12 December 2008 email about projected returns were “an entirely appropriate and conditional piece of advice”.15
[67] I conclude that, as a matter of fact, FOMS did not misrepresent to Dr Krishnayya that he could receive $37 to $41 per tonne for logs that were harvested and marketed by FOMS at any given time. All FOMS did was provide
accurate projections based upon data available at that time, qualified by warnings
15 Krishnayya v Forest Owner Marketing Services Ltd Notes of Evidence, HC Napier CIV-2011-
441-17, 25 February 2013 at 155, line 18.
that the actual returns would depend upon a variety of economic and marketing factors.
Was Dr Krishnayya misled by FOMS’ representations?
[68] Furthermore, I am not satisfied that Dr Krishnayya was misled by FOMS’
representations about projected returns.
[69] There is no specific requirement in s 6(1) of the Contractual Remedies Act
1979 that a plaintiff must reasonably rely upon the defendant’s representation. However, it is settled law that a representation will not be actionable if no reasonable person in the position of the plaintiff would have relied upon the representation.16
[70] I find it impossible to accept that any reasonable person, let alone someone with the advantages of Dr Krishnayya’s intelligence, experience with investment, and interest in forestry could genuinely believe that the qualified projections made by FOMS were an assurance that he would receive $37 to $41 per tonne. I am therefore not satisfied Dr Krishnayya was induced to enter into the contract because of FOMS’ representations.
What did FOMS intend?
[71] I also unhesitatingly conclude that FOMS had no intention of inducing Dr Krishnayya to enter into the contract when it provided him with its “snapshot” of projections in their marketing and financial projections of 28 November and 12
December 2008.
[72] As stated by the Court of Appeal in Savill v NZI Finance,17 it is not enough for a plaintiff to say that a representation caused him to act in a particular way. The plaintiff must also show either that the defendant intended him to act in a particular way, or that the defendant wilfully used language calculated, or of a nature, to induce
a normal person in the circumstances of the plaintiff to act as the plaintiff did.
16 Vining Realty Group Ltd v Moorhouse [2010] NZCA 104 and Humphries v Edinborough [2010] NZCA 416 at [34]-[37].
17 Savill v NZI Finance Ltd [1990] 3 NZLR 135 (CA).
[73] All FOMS was doing when it provided its projections was accurately state on the basis of current data what returns could be expected but qualified with the warning that actual returns could change depending upon exchange rates, shipping costs, overseas markets and other economic and marketing factors.
[74] The conclusion that I have reached about Dr Krishnayya’s claim that he was not induced to sign the contract through a misrepresentation is reinforced by the terms of clause 5.3(a) of the contract. Dr Krishnayya endeavoured to persuade me that he did not bother to read the contract before signing it. Even if that is correct, clause 5.3(a) of the contract makes it perfectly clear that FOMS was not “warranting” or “guaranteeing” its estimates of net returns for Dr Krishnayya. If I were to hold that FOMS’ projections of net returns were a “warranty” or “guarantee” clause 5.3(a) of the contract would have no purpose. In my assessment clause 5.3(a) cannot be rendered otiose simply to suit Dr Krishnayya’s objectives. I must strive to
give effect to the plain meaning of the key clauses of the contract.18
Events leading up to the commencement of harvesting
[75] FOMS commenced harvesting Dr Krishnayya’s forest on 4 May 2009. Prior
to then a number of important steps occurred.
Advice to Dr Krishnayya’s financiers
[76] Within days of signing the contract Dr Krishnayya asked Mr Bartells for a report for the Public Trust, one of Dr Krishnayya’s financiers. That report, called a “Proposed Harvesting Programme, Financial Analysis and Sensitivity Analysis” was sent to the Public Trust and Dr Krishnayya by Mr Bartells on 21 January 2009. In that report Mr Bartells explained:
(1) There would be a six to eight week delay from harvesting to payment for export logs;
18 Benjamin Developments Ltd v Robert Jones (Pacific) Ltd [1994] 3 NZLR 189 (CA).
(2) FOMS would bear the costs of road construction and contractors’
costs pending receipt of payments for the harvested logs;
(3)
The harvesting and marketing financial projections prepared by
FOMS were a “snapshot in time” using data for that day and “not the
best case” information when earlier information suggested a higher
return;
(4)
The financial returns for Dr Krishnayya were dependent on variables such as:
(a) foreign exchange rates;
(b) shipping rates;
(c) export sales prices; and
(d) the total volume of timber in the block.
(5)
The report cautioned that “the results could range from stellar if all the
moons align to disastrous at the other extreme. The option in this
second scenario is simply to stop harvesting”. (6)
No one can predict with any certainty what the returns will be.
[77]
The
harvesting and marketing financial projection which accompanied that
report estimated a net return of $33.71 per tonne.
Advances to Dr Krishnayya
[78] At one point Dr Krishnayya asked Mr Bartells if FOMS would be willing to advance him money against the anticipated revenues from marketing his logs. Mr Bartells explained that FOMS did not normally do this, but that he would not rule out making advances to Dr Krishnayya.
[79] On 22 January 2009 Dr Krishnayya asked FOMS for an advance of $44,000. FOMS agreed to provide this advance and to charge interest19 on all advances made to Dr Krishnayya.
[80] A striking feature of this case is that Dr Krishnayya sought and was paid advances by FOMS on a very regular basis, right up to the time Dr Krishnayya was preparing to cancel the contract. FOMS agreed to make these advances to Dr Krishnayya to help relieve the financial pressure he said he was experiencing.
[81] The following schedule of advances was presented in evidence by
Mr Bartells. His evidence on this point was not challenged:
Date Advance 22 January 2009 - $ 44,000 11 February 2009 - $ 15,000 20 February 2009 - $ 7,000 24 February 2009 - $ 27,000 27 February 2009 - $100,000 6 March 2009 + $ 40,00020 16 April 2009 - $ 38,000 14 May 2009 - $ 32,000 16 June 2009 - $ 30,000 15 July 2009 - $ 35,000 17 August 2009 - $ 40,000 16 September 2009 - $ 35,000 15 October 2009 - $ 32,000 16 November 2009 - $ 31,000 15 December 2009 - $ 30,000
19 At 10 per cent.
20 Dr Krishnayya re-credited FOMS with $40,000 on 6 March 2009.
TPT Reports
[82] FOMS regularly forwarded to Dr Krishnayya reports prepared by TPT, a large timber exporting agency based in Tauranga. TPT are FOMS’ export agents and each month they prepare a “New Zealand Log Market Commentary and Price Forecast”. That report analysed monthly sales rates, shipping rates, market updates, exchange rates and price forecasts. It is a comprehensive report. FOMS first sent a copy of TPT’s monthly report to Dr Krishnayya in September 2008. After the contract was signed FOMS regularly sent TPT’s monthly reports to Dr Krishnayya.
Preparing for harvesting
[83] On or about 15 January 2009 Mr Van Der Voort commenced his work in
preparing Dr Krishnayya’s forest for harvesting.
[84] The steps taken by Mr Van Der Voort included visiting the site on 26 January
2009. During this visit Mr Van Der Voort introduced himself to Mrs McKenzie. She showed Mr Van Der Voort around the boundaries of the McKenzies’ property. Mr Van Der Voort commenced his physical appraisal of Dr Krishnayya’s forest that day. That appraisal included assessing entry points to the forest.
[85] Mr Van Der Voort returned to Dr Krishnayya’s forestry block on 13 February
2009. He completed his physical appraisal of the block that day and determined that at least half the block would involve cable logging because of the steepness of the terrain.21
[86] One of the first difficulties which Mr Van Der Voort encountered was a direction from Dr Krishnayya that FOMS only access his forest from within the boundaries of Dr Krishnayya’s land. Because of the nature of the terrain it would have been simpler if FOMS could have accessed part of the high back section of Dr Krishnayya’s forest from neighbouring land. However, for reasons which were
not made clear it appears that Dr Krishnayya did not want to be “beholden” to any of
21 Ground or haulage harvesting involved ground-based machinery cutting and removing logs. The maximum slope that can be worked with ground-based equipment is 23 degrees after which
cable systems are used to haul logs up to a point from where the logs can be hauled out.
his neighbours. This complicated the challenges of forming logging roads on Dr Krishnayya’s land and added to the cost of harvesting and the time it took to commence harvesting.
[87] Mr Van Der Voort also faced challenges in planning an entrance way to Dr Krishnayya’s forest. Five entrance way options were assessed by Mr Van Der Voort. Ultimately he settled upon an entrance way that he believed was the most feasible and which created the least risk for traffic travelling on State Highway 5 between Napier and Taupo.
[88] Mr Van Der Voort worked out the most feasible locations for the logging roads22 and skid locations.23 These were then plotted on a map. In addition, as part of his harvest plan Mr Van Der Voort plotted the roads and loading sites on the ground.
[89] On 19 February 2009 Mr Van Der Voort spoke with engineers over the site of the entrance way to the forest block. He also had discussions with the New Zealand Transport Authority. These discussions ultimately resulted in consent for the entrance way being granted on 16 March 2009. Immediately thereafter, Mr Van Der Voort sought tenders to construct the entrance way. A quote was received from Higgins Contractors on 27 March 2009. No other company sought to quote for this work. It was undertaken by Higgins at a cost of $40,000.
[90] Notwithstanding Dr Krishnayya’s reluctance to engage in discussions with neighbouring properties, Mr Van Der Voort did explore options of accessing the forest through neighbouring forests (Rayonier) and (Awauhohonui Iwi Trust) in April
2009. When Mr Van Der Voort broached the subject of accessing part of his forest through the neighbouring forests with Dr Krishnayya he was told not to consider trying to use the neighbouring property. This reaffirmed for Mr Van Der Voort that all of the engineering work and access arrangements would have to be achieved
within the boundaries of Dr Krishnayya’s land.
22 Approximately 4.5 kilometres of logging roads were constructed by FOMS.
23 Seven skid (loading locations) were constructed by FOMS.
Did FOMS prepare an appropriate harvesting and marketing plan?
[91] Both Mr Schrider and Mr Moir were critical of FOMS because they could not identify a written harvesting plan.
[92] However, in my assessment, the criticisms that Mr Schrider and Mr Moir made about the absence of a written harvesting and marketing plan were misplaced.
[93] The contract specified24 that FOMS prepare a harvesting and marketing plan that outlined:
(1) The physical work necessary to harvest and market the forest;
(2)An estimate of the quantities of logs that the forest would yield, and the grades of those logs;
(3) The expected markets for those logs;
(4)An estimate of production costs, cartage costs, gross stumpage values and net stumpage values; and
(5) Details of FOMS’ health and safety policy in respect of the work
which FOMS would carry out in Dr Krishnayya’s forest. I will now explain the evidence in relation to each of those topics. Assessment of work necessary to harvest and market the forest
[94] As will be apparent from [83]-[89] Mr Van Der Voort took a number of steps to establish the tasks that need to be completed to harvest and market Dr Krishnayya’s forest. Those steps included establishing access to the forest, plotting and mapping where roads and skids were to go, working out how the forest
was going to be felled, and what machinery and crews would be required.
24 Clause 5.2(a) to (e).
Estimates of the quantities and grades of logs that would be yielded
[95] From an early stage in its dealings with Dr Krishnayya, FOMS calculated the forest would yield 72,900 tonnes of logs. That figure can be found on all of the marketing and financial projections completed by FOMS except for the 22 May
2008 projection which dealt with just 28 hectares of the forest.
[96] It transpired that FOMS and FML harvested a combined total of 76,008 tonnes. Nothing hinges upon the minor difference between FOMS’ estimated volume of production and the actual volume that was harvested.
[97] FOMS’ financial and marketing projections also contained very detailed
assessments of the grades of logs that it anticipated harvesting.
Anticipated markets
[98] FOMS’ financial and marketing projections also contained comprehensive assessments of the likely purchasers of the logs that they anticipated harvesting and marketing. The financial and marketing projections differentiated between domestic and export sales.
Estimates of production costs and returns
[99] FOMS’ financial and marketing projections also contained detailed estimates of production costs. For example, the financial and marketing projection which FOMS sent to Dr Krishnayya and his financial advisors on 21 January 2009 explained:
(1) That the roading and engineering costs were estimated to be
$284,600;
(2) Logging (felling) costs were estimated to be $2,187,000; and
(3) Cartage costs were estimated to be $1,035,792.36.
[100] The same report also explained that FOMS’ management fee was expected to be $218,700 and that other costs (weigh bridge and miscellaneous costs) meant that the total cost of production was estimated to be $3,768,152.36.
[101] In the same report FOMS explained the estimated gross stumpage value of the logs (according to estimated grades) and the net stumpage values of those logs.
Health and safety policy
[102] In his evidence Mr Van Der Voort carefully explained the approved Code of Practice for Health and Safety in Forestry Operations and the Rules for Tree Felling Safety Areas that are promulgated under occupational safety and health regulations. Importantly, Mr Van Der Voort explained that each time permitted work had to be undertaken the work plan which was prepared recorded the health and safety steps that would apply, including the qualifications, training and experience of those undertaking the work in question. Mr Van Der Voort’s evidence about the steps FOMS took to comply with its health and safety requirements was not challenged.
[103] When the evidence is carefully analysed it is apparent that FOMS discharged its obligations to prepare a harvesting and marketing plan, albeit not one that had all of the contents of that plan in the one document. The fact that the contents of a comprehensive harvesting and marketing plan were prepared but in different documents does not, in my assessment, constitute a failure by FOMS to prepare an appropriate harvesting and marketing plan.
Harvesting and marketing by FOMS
Overview
[104] The harvesting of Dr Krishnayya’s forest by FOMS commenced on 4 May
2009 and continued through until Christmas of that year. On or about 2 January
2010 Dr Krishnayya demanded that FOMS cease harvesting his forest and leave his property. Mr Van Der Voort oversaw the harvesting and marketing of
Dr Krishnayya’s forest. Mr Van Der Voort visited the forest on average twice a week
when FOMS was harvesting the forest.
Logging crews
[105] The delays incurred in gaining access into the forest meant that FOMS was unable to gain the services of a logging crew that had been working at a nearby forest. However, FOMS was satisfied with the crews it was able to engage. Two crews were established, one crew focused upon clear felling operations while the other crew focused on line clearing operations.
[106] The nature of the terrain of Dr Krishnayya’s forest meant that the logging crews worked on both ground hauling methods of felling and extracting logs and cable hauling operations to haul logs on steeper terrains to points from which they could be carted from the forest.
Did FOMS fail to ensure appropriate roads were constructed?
[107] Mr Schrider and Mr Moir suggested that some of the roads constructed by
FOMS were unnecessary and/or poorly planned.
[108] The evidence reveals that FOMS estimated that the cost of creating roads and skids through the forest would be $284,600.25 As it transpired, FOMS spent
$251,846 on the roads and skids that it installed. During the course of 2010 FML constructed a further 600 metres of roading at a cost of $74,750.26 The total amount spent on roading and skids on Dr Krishnayya’s forest was $326,596.
[109] The evidence also reveals that FOMS were required to construct more roading than they would have wished because of Dr Krishnayya’s insistence that FOMS access his forest within the boundaries of his property. By the time FML
became involved in harvesting and marketing Dr Krishnayya’s forest he had changed
25 Which equated to $3.90 per tonne that was expected to be harvested.
26 Which equated to a total of $4.30 per tonne of logs actually harvested and marketed from Dr
Krishnayya’s forest.
his views about this issue. As a consequence FML were able to access part of
Dr Krishnayya’s forest from a neighbouring forest. [110] The evidence clearly establishes that FOMS:
(1) constructed roads that were necessary;
(2) constructed roads to an appropriate standard; and
(3) incurred reasonable road construction costs.27
[111] I have reached the conclusion that the evidence does not support Dr Krishnayya’s claim that FOMS constructed roads which were unnecessary, of an inappropriate standard and/or were poorly planned.
Did FOMS breach the contract by using gravel/rocks from Dr Krishnayya’s
property to repair a neighbour’s road?
[112] An issue which caused Dr Krishnayya concern was the fact that unbeknown to Dr Krishnayya, FOMS’ logging crews accessed part of the forest by driving on the McKenzies’ driveway during the early stages of the logging of Dr Krishnayya’s forest. When Mr Van Der Voort heard of this he instructed the logging crews to only utilise the new access way that had been created. Unfortunately, in the meantime, damage had been done to the McKenzies’ driveway.
[113] Mr Van Der Voort thought it only fair and reasonable that the McKenzies’ driveway be repaired. He arranged for this to be done by having the roading crew extract gravel/rocks from a pit on Dr Krishnayya’s land. The gravel/rocks were used to repair the McKenzies’ driveway. Approximately three truckloads of material was
extracted from Dr Krishnayya’s land.28
27 Mr Colley explained that FOMS’ road costs were $3.63 per tonne. This compares to roading
costs that may vary from $2.76 to $5.80 per tonne for forests of a similar scale.
28 Approximately 18 cubic metres.
[114] Dr Krishnayya expressed his deep dissatisfaction with FOMS for extracting gravel/rocks from his land without permission. Dr Krishnayya believed that the extraction of gravel/rocks from his land and the unauthorised use and repair of the McKenzies’ driveway constituted grounds for him cancelling the contract. He complained that the pit that was left behind when gravel and rocks were extracted was a hazard, particularly for children.
[115] In my judgement Mr Van Der Voort acted entirely responsibly and appropriately when he authorised the repair of the McKenzies’ driveway using rock and gravel extracted from Dr Krishnayya’s land. In particular, I find:
(1)The contractors accessed the McKenzies’ driveway because at that time it was the most convenient and cheapest way to take logs from Dr Krishnayya’s forest in an area near to the McKenzies’ driveway.
(2)Mr and Mrs McKenzie did not object to their driveway being utilised provided any damage that was done was repaired.
(3)Mrs McKenzie expressed her confidence in the logging work that was done at this time. She said that this crew was “professional” and “considerate”.
(4)Mr Van Der Voort acted as Dr Krishnayya’s agent and that in these circumstances it was not necessary for him to get specific approval from Dr Krishnayya to extract gravel/rocks from Dr Krishnayya’s land to repair the McKenzies’ road.
(5)Had FOMS been able to leave Dr Krishnayya’s property in a timely and orderly manner then Mr Van Der Voort would have ensured that the gravel/rock pit was made safe.
Felling and removing of native trees
[116] Dr Krishnayya was particularly aggrieved by what he believes to have been the deliberate felling and removal of native trees from his property by FOMS. Not only is the unauthorised felling of native trees an offence under the Forests Act
1949,29 but the unauthorised removal of native trees is also theft.
[117] Mr Van Der Voort explained that on one occasion he authorised the felling of a rimu tree which he believed needed to be removed for the safety of those working in the vicinity of that tree. I do not know exactly where that tree was located, how big it was or what happened to it after it was felled. However, in view of the explanation provided by Mr Van Der Voort I do not believe any criticism can be levelled at FOMS for the felling of that one tree.
[118] Mrs McKenzie was also concerned about the felling and removal of native trees from Dr Krishnayya’s forest. She explained that she saw native trees being taken from the forest and she also took photographs of a portable mill and the remains of native tree stumps and logs.
[119] Dr Krishnayya called evidence from Mr Rolls, a forestry officer employed by the Ministry of Primary Industries. Mr Rolls told me that he inspected Dr Krishnayya’s property on 22 April 2010 where he was shown one matai and two miro stumps which he thought had probably been harvested more than a year previously (i.e. prior to 22 April 2009). He also saw a maire stump which had noticeable decay. He thought that tree had probably been harvested at the same time as the matai and two miro trees. Mr Rolls also inspected a rimu stump which he thought was from a tree that had been felled within the preceding month (i.e. since
22 March 2010). He also inspected another rimu stump which he also thought was from a tree that had been felled since 22 March 2010.
[120] Thus, aside from the rimu tree which Mr Van Der Voort authorised to be felled, the native tree stumps inspected by Mr Rolls related to trees that had been
29 Forests Act 1949, s 67DB.
felled either before FOMS started harvesting trees on Dr Krishnayya’s property, or
after FOMS had been evicted from the property.
[121] In these circumstances I cannot conclude that FOMS was responsible for the felling of the native trees whose stumps were inspected by Mr Rolls.
[122] I am equally satisfied that Ms McKenzie was correct when she explained that contractors removed native timber from Dr Krishnayya’s property. I believe that timber was in all likelihood the remnants of native logs that had been left on the property for many years and that it was cut up and removed primarily for firewood. It is also possible some may have been removed by persons who intended to use some of the old timber for woodwork hobbies.
[123] It was wrong of the contractors to remove this timber without permission. When Mr Van Der Voort became aware that native timber had been removed he took steps to stop the practice. However, because most of the timber could only be used as firewood, and because I cannot assess the value of that timber I cannot conclude that the actions of FOMS’ contractors in removing that old timber constituted either:
(1) a material breach of the contract; or
(2) had a material adverse effect upon Dr Krishnayya.30
Did FOMS leave unacceptable quantities of slash in water courses?
[124] Slash are tree heads and branches left behind in a forest by loggers. Slash should not be left in a position which results in this debris blocking water courses. Slash left in water courses risks forming dams that may burst or the debris itself may move down stream causing severe damage.
[125] Dr Krishnayya expressed major concern about the amount of slash that
FOMS left in the water courses on his land. Mr Moir was also critical of the amount of slash that was left in water courses on Dr Krishnayya’s property.
30 Clause 11(1)(a) and (b) of the contract. Refer [53] above.
[126] However, Mr Colley inspected Dr Krishnayya’s property and concluded that the slash remaining in two areas milled by FML was the worst that Mr Colley had seen. By comparison, Mr Colley thought that the slash that was left by FOMS was “not excessive” and “will not create a problem”. Mr Colley said that the slash left by FOMS “... matched practices commonly seen in the industry”.
[127] In my judgment Mr Van Der Voort gave a convincing answer to Dr Krishnayya’s criticisms of FOMS’ failure to clean up the slash when he explained that FOMS did not have the opportunity to ensure that slash was cleared from major water courses or from other water courses that could give rise to problems. FOMS were unable to do this remedial work because Dr Krishnayya cancelled the contract and demanded FOMS promptly leave his property. Mr Van Der Voort explained that clearing out slash that needed to be removed would have been done after harvesting was completed. FOMS never had the opportunity to complete its harvesting and was therefore unable to undertake remedial and tidy up work.
[128] In my assessment, any slash left behind by FOMS did not constitute a material breach of the contract.
Did FOMS harvest the forest in a haphazard and inefficient way?
[129] Mr Moir was critical of the way in which FOMS had left trees standing in close proximity to the state highway because those trees posed a hazard in winter by shading the highway. However, Mr Van Der Voort provided a complete answer to this criticism. He explained that the traffic control contractors who were meant to go on site when those trees were to be felled failed to attend on three occasions. In any event, the exclusion of FOMS from the forest in early January 2010 prevented FOMS from felling the trees near the state highway before the winter of 2010.
[130] Mr Moir was also critical of FOMS for having felled but not extracted a number of trees. Again, however, this concern is misconceived. The exclusion of FOMS from the forest in early January 2010 prevented FOMS from undertaking a number of tasks it would otherwise have completed, including the extraction of felled logs.
[131] I can find no meaningful evidence to support the suggestion that FOMS harvested the forest in a haphazard and inefficient way. This conclusion is reinforced by the evidence of Mr Colley, who could find nothing abnormal about FOMS’ methods of harvesting the forest. He explained that:
... it is usual for a harvest operation to be “patchy” to a degree. Tree fellers will open up several faces in the forest, in different locations. This gives them a choice of practicable and safe felling areas depending on which way the wind is blowing on a particular day.
[132] In my assessment, it is likely there were small but insignificant “patches” of trees left to be harvested at the time FOMS were told to leave Dr Krishnayya’s forest. However, those “patches” would have been cleared had FOMS been permitted to complete its responsibilities under the contract.
[133] FOMS did not breach the contract by failing to harvest the forest in a logical and efficient manner.
Did FOMS fail to report to Dr Krishnayya in a timely and meaningful way?
[134] Dr Krishnayya was most aggrieved by what he claimed was a failure by FOMS to report to him in a timely and meaningful manner about the returns he was getting from the timber that FOMS harvested and marketed. Dr Krishnayya says FOMS breached clause 6.4 of the contract which required FOMS to provide him with monthly reports about the grades of logs sold, the markets to which the logs were sold, the production costs and the revenue received for each grade of log that was sold.
[135] The gravamen of Dr Krishnayya’s case was that had he been told that market conditions were generating lower returns for him than had been anticipated he would have instructed FOMS to suspend harvesting and wait for marketing conditions to improve. This aspect of Dr Krishnayya’s case requires me to focus upon two questions, namely:
(1) What reports did Dr Krishnayya receive from FOMS?
(2)Did Dr Krishnayya receive sufficient information to enable him to suspend harvesting his forest if he wanted to do so?
(i) What reports did Dr Krishnayya receive?
[136] Dr Krishnayya was adamant he did not receive the monthly reports that
FOMS maintains it sent to Dr Krishnayya.
[137] Having heard and considered the evidence of Dr Krishnayya, Mr Bartells and Mr Van Der Voort, I am very satisfied FOMS sent Dr Krishnayya the following reports during the course of 2009:
(1) The report of 21 January 2009 prepared for Dr Krishnayya’s
financiers;
(2) May report (sent in June 2009);
(3) June cash forecast (sent in June 2009); (4) June letter for Dr Krishnayya’s bankers;
(5) July 2009 detailed budget (sent August 2009); (6) June report (sent July 2009);
(7) July report (sent August 2009);
(8) August statistical review (sent September 2009); (9) September report (sent October 2009);
(10) October harvesting and marketing update;
(11) October report (sent November 2009);
(12) November report (sent December 2009); and
(13) December summary report.
[138] I am also satisfied that in January 2010 FOMS sent Dr Krishnayya its
December report.
[139] My reasons for reaching the conclusions set out in [137] and [138] are:
(1) Mr Van Der Voort prepared the monthly reports between the 20th and
25th of the following month. He did so in order to ensure that Dr Krishnayya understood how much progress had been made in harvesting his forest, and what Dr Krishnayya’s net return was from his forest. I find it impossible to accept that Mr Van Der Voort would undertake the time consuming and detailed task of preparing the monthly reports and not bother to send them to Dr Krishnayya.
(2)All but one monthly report31 were sent to Dr Krishnayya’s email address: “[email protected]”. Dr Krishnayya acknowledged that was his email address at all relevant times. However, he endeavoured to persuade me that he “did not do emails” and that he expected people either to send him a letter or telephone him. I found Dr Krishnayya’s explanation very hard to accept because:
(a) the net returns that Dr Krishnayya claims he was assured he would receive ($37 to $41 per month) were contained in Mr Bartells’ email of 12 December 2008. It was not logical that Dr Krishnayya would have received an email on 12 December 2008 but not other
emails from FOMS;
31 The exception was the May monthly report.
(b)not long after the contract was cancelled Mrs Krishnayya telephoned FOMS and asked if the August monthly report could be sent to Dr Krishnayya as they did not have that report.32 It is difficult to believe Dr Krishnayya when he says on the one hand he did not receive any of the monthly reports but by
early 2010 he appears to have acknowledged, through
his wife, that they had all but the “August 2009 report”.
(3) Throughout 2009 and at least into the early stages of 2010
Dr Krishnayya faced difficult financial pressure. Accordingly, he took the unusual step of seeking advances from FOMS in anticipation of sales of logs from his forest. He also frequently questioned Mr Van Der Voort about increasing FOMS’ capacity to harvest his forest. Dr Krishnayya was committed to getting what return he could from his forest as quickly as possible. The claim that he did not receive FOMS’ monthly reports is a reconstruction of events by Dr Krishnayya designed to provide him with a justification to cancel the contract.
(ii) What information did Dr Krishnayya receive?
[140] The reports which Dr Krishnayya received were very comprehensive and contained a significant amount of information. It was for that reason that mid-way through 2009 Dr Krishnayya enlisted the assistance of Mr Makam to assist him in understanding FOMS’ reports. Mr Makam is an accountant who has worked in the forestry industry for many years. Coincidentally, Mr Makam had worked with both Mr Bartells and Mr Van Der Voort in previous roles. It was a relief to Mr Bartells and Mr Van Der Voort that Dr Krishnayya had access to someone of Mr Makam’s abilities because they were frustrated that Dr Krishnayya was not responding to them
and not engaging with the reports that they sent him.
32 In fact the August monthly report was a statistical summary, not the usual monthly report.
[141] As a result of Mr Makam’s instructions Mr Van Der Voort changed the reporting format of the monthly reports.33 This commenced with the completion of a detailed statistical analysis which was prepared by Mr Van Der Voort and sent to Dr Krishnayya in September 2009. This particular report was a substitute for the regular monthly report for August.
[142] The monthly reports and the August statistical analysis sent by FOMS to
Dr Krishnayya included clearly understandable information about: (1) The volume of logs that had been harvested;
(2) The percentage of harvested logs that were graded for exports;
(3) The percentage of harvested logs that were graded for domestic sale; (4) The revenue received per grade of logs;
(5) The production costs; and
(6) The net return per tonne for Dr Krishnayya.
[143] The reports also contained a lot more information, but in my assessment, the six matters referred to in [142] were the key points that interested Dr Krishnayya.
33 Mr Makam played an important role in relation to the issue of what reports Dr Krishnayya received and whether Dr Krishnayya was sufficiently informed so as to enable him to suspend harvesting if he wished to do so. It was therefore surprising that Dr Krishnayya did not call
Mr Makam as a witness. Even more surprisingly, prior to the conclusion of the plaintiff ’s case Dr Krishnayya instructed Mr Krebs to produce an email from Mr Makam which Dr Krishnayya wanted me to read as evidence. The email was dated 25 February 2013. I did not allow the email to be produced as evidence. My reasons for disallowing the production of the email were:
(1) Dr Krishnayya had more than sufficient time to prepare for trial. The hearing of this case had already been adjourned once on 31 July 2012 because of Dr Krishnayya’s circumstances.
(2) Mr Makam now lives in Auckland. If given sufficient time and notice he could easily have made himself available to be a witness.
(3) The email contained a number of hearsay and highly contentious statements. (4) The email was not in the form of an acceptable brief of evidence.
(5) Mr Makam’s “statement” could not be produced without affording FOMS the opportunity to cross-examine Mr Makam. Mr Makam’s “inability” to attend court meant his email was of no evidential value.
That information was able to be easily extracted from FOMS’ reports, particularly by
a person with Dr Krishnayya’s intelligence and understanding of forestry.
[144] For these reasons I am very satisfied that FOMS provided Dr Krishnayya with timely reports that contained sufficient information to have enabled him to suspend the harvesting of his forest if he wished to do so. I am also very satisfied that Dr Krishnayya did not wish to suspend the harvesting of his forest during the course of 2009 because of the financial pressures that he was under at that time.
[145] For these reasons I conclude that FOMS complied with its contractual obligations to report to Dr Krishnayya in the way that was required of it by clause 6.4 of the contract.
Events leading to cancellation of the contract
[146] By December 2009 Dr Krishnayya’s frustrations over the poor returns he was
receiving from his forest reached the point where he resolved to take action. He:
(1)asked Mr Bartells to change the basis upon which he was paid so that instead of being paid once his logs were sold either to a domestic or overseas purchaser he would be paid either “at the wharf gate” (AWG) rates for export logs, or “at the mill gate” (AMG) rates for domestic logs. This arrangement was put in place in December 2012.
(2)commenced negotiations with Mr Moir and FML for that company to take over the harvesting and marketing of his forest.
Cancellation of the contract
[147] On 2 January 2010 Dr Krishnayya telephoned Mr Van Der Voort and left a message on his cellphone telling him to cease harvesting and that he wanted to see all documentation regarding the harvesting of his forest before work could recommence.
[148] On the following day Dr Krishnayya complained to the police. The police then spoke to Mr Van Der Voort on 6 January, who agreed that FOMS would immediately cease working in Dr Krishnayya’s forest.
[149] On 6 January 2010 Dr Krishnayya sent the following email to Mr Bartells:
We have been informed by the police that you agreed to leave our property today and that any remaining machinery will be removed tomorrow.
Please be aware that we will be seeking compensation from you for any pine and native wood that has been stolen from the property. Also any damage done to the property or the fences.
[150] On 13 January 2010 Dr Krishnayya wrote to Mr Bartells seeking payment for the timber that had been marketed in December 2009. In the same email Dr Krishnayya accused FOMS and/or its contractors of illegally taking native timber for firewood and, that FOMS had put him “in a difficult financial position”.
[151] On 18 January 2010 Mr Van Der Voort sent Dr Krishnayya the December monthly report. On 28 January 2010 Dr Krishnayya sent Mr Bartells a letter in which he explained the basis upon which he was cancelling the contract. The grounds cited by Dr Krishnayya and which have formed the basis of his proceeding were:
(1) unauthorised taking of native timber;
(2) failure to provide “account information”; (3) poor harvesting methodology;
(4) unauthorised taking of gravel; and
(5) misrepresentation.
[152] In March 2010, FML commenced harvesting and marketing the balance of Dr Krishnayya’s forest. FML undertook its tasks through to May/June 2010 when it ceased harvesting and marketing for many months when market conditions were not
favourable to forest owners. FML completed its harvesting and marketing of
Dr Krishnayya’s forest in 2011.
No basis for cancelling contract
[153] It will be apparent from [91]–[145] that I have concluded FOMS did not breach the contract in any material way.34 On the contrary, I find that FOMS carried out its obligations in good faith and in accordance with the standards expected of a reasonable and experienced forestry, harvesting and marketing company.35
Accordingly, Dr Krishnayya had no valid basis to cancel the contract.
Fair Trading Act 1986
[154] Dr Krishnayya’s third cause of action alleges that FOMS failed to warn him of the economic and market conditions that reduced his returns from his forest from May to December 2009 constituted misleading or deceptive conduct under s 9 of the Fair Trading Act 1986. Mr Krebs described this cause of action as a “back stop” claim.
[155] I have already concluded that FOMS provided Mr Krishnayya with sufficient information to enable him to appreciate what was happening with the harvesting and marketing of his forest from May to December 2009. That information was sufficient to enable Dr Krishnayya to direct the suspension of the harvesting of his forest if he wished. In addition, I also find:
(1)FOMS wanted to engage with Dr Krishnayya during the time that FOMS was harvesting and marketing his forest. FOMS even offered to pay for an independent accountant to review the accounts and reports. FOMS’ efforts generally met with little or no response from
Dr Krishnayya.
34 Clause 11.1(a) of the contract. Refer [53] above.
35 Clause 3 of the contract. Refer [51] above.
(2)Dr Krishnayya wanted to keep harvesting and marketing his forest from May to December 2009 because he needed a source of revenue to help him meet his financial commitments. The scope of his financial challenges can be gleaned from the fact that Dr Krishnayya obtained $456,000 in advances from FOMS during the course of
2009. I believe Dr Krishnayya was under considerable financial pressure to have his forest harvested and marketed as quickly as possible.
(3)FOMS’ actions were neither misleading or deceptive. At all times FOMS was acting in what it genuinely thought was in accordance with Dr Krishnayya’s wishes.
[156] In these circumstances the claim that FOMS should be held liable for breaching s 9 of the Fair Trading Act 1986 fails by a significant margin.
Counterclaim
[157] Dr Krishnayya had no valid reason to cancel the contract. In these circumstances FOMS is entitled to the sums it has claimed from Dr Krishnayya for the losses it incurred as a direct result of Dr Krishnayya cancelling the contract. All of the items claimed by FOMS are legitimate losses. The amount of FOMS’ counterclaim is not disputed.
Conclusions
[158] Dr Krishnayya was not induced to enter into the contract he signed with
FOMS because of misrepresentations made by FOMS.
[159] FOMS did not breach the contract in any material way. [160] Dr Krishnayya had no valid reason to cancel the contract.
[161] FOMS did not mislead or deceive Dr Krishnayya into continuing to harvest and market his forest.
[162] FOMS’ counterclaim succeeds.
Costs
[163] FOMS is entitled to costs.
[164] During the course of his submissions Mr Castle, counsel for FOMS, signalled that he would be seeking indemnity costs.
[165] I am not minded to award costs on an indemnity basis. I am, however, willing to consider submissions on whether or not I should order an uplift of scale 2B costs. Mr Castle has 10 working days to file any submissions he wishes to make on this issue. Mr Krebs has a further 10 working days in which to reply. I will
then decide on the papers if an uplift in costs should be ordered.
D B Collins J
Solicitors:
Langley Twigg, Napier for Plaintiff
Treadwell Gordon, Wanganui for Defendant
Appendix
Clause 3 Standard of Care
Clause 3 provides:
The Manager shall carry out its obligations hereunder in good faith in accordance with the terms of this Agreement, employing the same degree of care and skill as a reasonable manager with expertise in large scale commercial forestry harvesting and marketing would use in carrying out equivalent obligations.
Clause 4 Access
Clause 4.1 provides:
The Owner shall grant to the Manager access to and over the Land for the purposes of this Agreement and shall use all reasonable endeavours to procure access over any other land necessary for the Manager to perform its obligations under this Agreement.
Clause 5 Harvesting and Marketing Plan
Clause 5.1 provides:
The Manager shall, if specifically requested by the owner, prepare and submit a Harvesting and Marketing Plan to the Owner in respect of the Block described in schedule 2, and submit the Harvesting and Marketing Plan in respect of such Block within 10 Business Days of the commencement of harvesting.
Clause 5.2 provides:
The Harvesting and Marketing Plan shall outline:
(a) details of the physical work to be carried out in order to harvest and market the Forest Products;
(b) an estimate of the qualities of Forest Products to be harvested and marketed and an estimate of Log grades to be produced;
(c) expected markets for each Log type;
(d) an estimate of Production Costs, Cartage Costs, Gross Stumpage
Values and Net Stumpage Values;
(e) details of the Manager’s Health and Safety policy in respect of all work to be carried out on the Land by the Manager’s employees and/or contractors.
Clause 5.3 provides:
(a) The Owner acknowledges that the Manager does not guarantee or warrant and shall not be liable to the Owner in respect of the Gross Stumpage Value arising from the Forest Products or the economic assumptions, judgements, estimates, projections and other factors affecting the value or accuracy of any Harvesting and Marketing Plan and any other plans, budgets, or reports provided or made by the Manager pursuant to this Agreement.
(b) The Manager warrants that in respect of any information, which is provided to the Owner, to the best of the Manager’s knowledge and belief, such information is complete and accurate and has been prepared or collected with due care and diligence.
Clause 6 Manager’s Obligations
Clause 6.1 provides:
The Manager shall, either directly or through contractors, implement each Harvesting and Marketing Plan. In carrying out its obligations, the Manager shall:
(a) at all times comply, or require compliance by contractors with all laws and regulations applicable to the harvesting of Forest Products;
(b) meet the standard of performance set out in clause 3;
(c) pay on behalf of the Owner and subsequently recover from the
Owner all Production Costs and Cartage Costs;
(d) adopt and implement such supervisory, accounting, payment and control procedures as shall meet the standard of performance set forth in clause 3 and are consistent with the Harvesting and Marketing Plan;
(e) recognise ownership of the Forest Products stays with the Owner until paid in full.
Clause 6.2 provides:
The Manager shall treat and market the Forest Products in the same manner in which it treats and markets its own and other third parties forest products. The Manager’s marketing may include domestic sales or export sales. The Manager may contact and negotiate with prospective purchasers and may conclude contracts in its own name without reference to the Owner and
deliver any documents necessary to reflect such sales, including, without limitation, log sales contracts, invoices, shipping documents and bills of lading.
Clause 6.4 provides:
The Manager shall provide the Owner each month with a report on the Logs sold and their grades detailing for export markets the market location, and for domestic markets actual customer name, revenue received by log grade and actual production costs.
Clause 8 Harvesting and Marketing Fee
Clause 8.1 provides:
In consideration of the manager carrying out its obligations under this Agreement, the Owner shall each month pay to the Manager a Harvesting and Marketing Fee by deduction from the amount of the Gross Stumpage Value forwarded by the Manager to the Owner pursuant to clause 7.1.
Clause 11 Term and Termination
Clause 11.1 provides:
The Owner may terminate this Agreement forthwith by notice in writing if: (f) the Manager has failed to perform any of its duties under this
Agreement in any material respect; and
(g) such failure has had a material adverse effect on the Owner; and
(h) in the case where such failure and material adverse effect can be cured, within ten (10) days of notification by the Owner to the Manager of the failure, the Manager and the Owner have failed to reach agreement as to how and within what period such failure and material adverse effect is to be cured or, if a method and period within which such failure and material adverse effect is to be cured has been agreed to by the Owner and the Manager, the Manager has failed to cure such failure and material adverse effect according to the method and within the period agreed; or
(i) the Manager shall enter into any agreement or make any arrangement with its creditors for liquidation of their debts by composition or otherwise, or proceedings (except any frivolous, vexatious or spurious action or proceedings) shall be taken to wind up the Manager either voluntarily or compulsorily (except for the purpose of reconstruction or amalgamation) under any legislation relating to companies, or a receiver shall be appointed or an encumbrancer takes possession of the undertaking or property of the
Manager or a receiver or debenture holder or mortgagee becomes entitled to exercise a power of sale, or the Manager is placed under official management or an official manager is appointed.
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