Scarlett v Attorney-General HC Wellington CP321/94

[2001] NZHC 620

IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY CP321/94

IN THE MATTER of Part VII of the High Court Rules

AND IN THE MATTER of the Judicature Amendment Act 1972

BETWEEN ROSS SCARLETT
Plaintiff

AND THE ATTORNEY-GENERAL sued in respect of the Ministry of Forestry Defendant

Hearing: 30 May 2001

Counsel: J.O. Upton QC with M.J. Gilbert for Plaintiff
M.T. Parker for Defendant

Judgment: 6 July 2001

JUDGMENT OF ELLIS J.

Solicitors:
M.J. Gilbert. Solicitor, Nelson for Plaintiff
Crown Law Office, Wellington for Defendant

[1] This case involves a dispute over the amount the plaintiff Mr Scarlett is entitled to as a result of the Government’s ban on the export of native timbers which came into force on 3 July 1990. The Government stated that its policy was to compensate those adversely affected by the ban. It was to include not only those who were already working in the indigenous timber area, but also those who as at the day before the ban were contemplating doing so. The settling of claims was in the hands of the Ministry of Forestry. The initial decision was that Mr Scarlett was not eligible as he did not have a concluded contract for the sale of his timber as at 2 July 1990. He successfully applied to this Court for a review of this decision. In his Judgment dated 27 March 1996 (Wellington Registry, CP321/94) Doogue J. said this:

“To the extent that the plaintiff relies upon there being an existing contract in place which could no longer be met as a result of the Government’s change in policy of 3 July 1990, I find there is no basis for relief. I cannot find that the Secretary of Forestry either misdirected himself or proceeded on a wrong basis or that he took into account irrelevant considerations or failed to take into account relevant considerations.

However, that is not an end of the matter. The Secretary was also required to consider whether but for the ban there would have been a formal contract to export in the immediate future. That is the second alternative adumbrated in the letter by the Adjustment Assistance Negotiating Team to the plaintiff’s solicitors of 22 May 1991, namely that ‘claimants are able to establish that, but for the ban, a formal contract to export would have been in effect in the immediate future, i.e. within the next few months, with supply to commence within six months.”

[2] Doogue J. accordingly directed that the Secretary decide whether or not Mr Scarlett qualified on the second basis. The Secretary did so and decided that Mr Scarlett did qualify and proceeded to decide on the amount of compensation that would be offered. To follow what happened necessitates starting with Mr Scarlett’s position as at 2 July 1990.

Mr Scarlett’s dealings with Westport Sawmilling Company Limited (Westport)

[3] In March 1990 Westport had plans to export sawn and dried indigenous timber to Australia. On 13 March Mr Scarlett approached Westport for advice on the export of his rimu trees growing on land he owned in Karamea. Before Westport committed itself to buy Mr Scarlett’s rimu, it needed to make sure of its overseas buyer. To take Mr Scarlett’s rimu would involve an increase in the mill’s production. The timber available from Mr Scarlett was estimated at 5000m3 and the price to be paid by Westport to Mr Scarlett was $100 per m3. This was agreed subject to Westport completing its negotiations with the Australian purchaser. This involved a second New Zealand company Pacific Trading Company Limited (Pacific), and the purchaser TRT Builders Limited (TRT). Westport would extract mill and dry the timber which Pacific would machine to dressed profiles and this would be exported to TRT in Australia. By 24 May 1990 Westport had completed negotiations with the other parties to supply rimu for a minimum of ten containers per month with a first shipment in July 1990. Westport told Mr Scarlett that it was therefore willing to purchase Mr Scarlett’s rimu at $100 per m3 and Mr Scarlett agreed to sell. Mr Dooley, the secretary of Westport, deposed that the agreement was to be expressed in a formal written contract. However, no such contract was prepared by the time the ban was imposed.

Was there a contract between Westport and Mr Scarlett as at 2 July 1990?

[4] Doogue J. has already held that there was not. Mr Upton invited me to come to the contrary conclusion. I am satisfied that Westport and Mr Scarlett had agreed the essential terms of estimated quantity and price and that extraction could start. However, the bare bones of the agreement had to be fleshed out in a formal contract which was never done. I therefore respectfully agree with the conclusion of Doogue J. I have already set out. I also agree with the decision by the secretary that Mr Scarlett qualified as a claimant who, but for the ban, would have entered into a contract in the period immediately after 3 July 1990. The precise nature of the contract is the basis for the dispute as to quantum. Those terms have been approached on the basis of the question, what were Mr Scarlett’s reasonable expectations.

Mr Scarlett’s reasonable expectations

[5] There is no doubt that Mr Scarlett felt he had secured the sale of his standing timber for approximately $500,000. This is dramatically shown by the fact that he immediately went to Christchurch and purchased a new Mercedes Benz for over $100,000. Mr Upton emphasised that it is what Mr Scarlett’s expectations were that is decisive in the present context. While Mr Parker accepted that an assessment of what Mr Scarlett’s reasonable expectations were is the correct test, he submits that this is an objective test and was correctly applied by the officials assessing the claim. In my view Mr Parker is correct. In another context reasonable expectations and subjective expectations have been contrasted. In the context of the law of contract Thomas J referred to this in Yoshimoto v Canterbury Golf International Ltd [2001] 1NZLR 523 C.A. at paragraph 59:

“59. It is accepted that for reasons of commercial convenience the law insists on an objective theory of contract. Lord Steyn, writing extra-judicially, has pointed out that this involves adopting an external standard given life by using the concept of the reasonable person. Thus, in contact law effect must be given to the reasonable expectations of honest people. The expectations which will be protected are those that are, in an objective sense, common to both parties. Generally the law of contract is not concerned with the subjective expectations of a party. Thus, the function of the law of contract is to provide an effective and fair framework for contractual dealing, a function which requires an adjudication based on the reasonable expectation of parties (Johan Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433 at pp 433-434).”

[6] In my view the enquiry is not what his actual expectations were, but what were his reasonable expectations: those of a reasonable person in his shoes. On this basis they are the reasonable expectations of a man who had reached an agreement for the sale of his trees subject to a contract being drawn up. The contract would provide for contingencies such as the possible default of the overseas buyer and the possible effects of government policies. On the accepted evidence the market prospects in Australia seemed bright, but the government controls on the export of timber were tight and the future uncertain. A reasonable man would certainly not be counting his chickens before they hatched.

The process and the decision

[7] The Government was not bound by statute to compensate those who had suffered commercial loss. The offer of compensation was made as a matter of policy. Accordingly, there was no statutory power of decision involved. But Mr Parker said the Government accepted that this Court could review its decisions on the same basis as judicial review of a decision authorised by statute. Originally the Ministry had set up a Negotiating Team to deal with claims, but by the time Mr Scarlett’s claim was accepted in 1996, the Team had long disbanded and so the calculation of compensation was dealt with by Mr Novis, a senior officer in the Ministry. There had already been a report prepared by a Mr Reay and meetings and correspondence with Mr Scarlett and his legal advisers, although the process was terminated by Mr Gilbert, whose instructions were simple as Mr Scarlett claimed the loss of the sale of all his timber and disputed any attempts or discussions directed to reducing the amount by reference to “commercial realities” as proposed by Mr Novis. Mr Novis made his recommendation in due course and described what he did in his affidavit filed in these proceedings. After he concluded that Mr Scarlett was eligible for compensation, he turned to quantum:

“21. The more difficult issue was that of quantum. Again, there was little formal guidance on how this was to be assessed. I understood the process to involve the AANT assessing the basis for the quantum included in the claim and then negotiating towards an agreed value where there was a difference of opinion.

22. A memorandum from the Acting Secretary of Forestry to the Minister of Forestry dated 30 January 1991 (Document 14, paragraph 22 (v)), recommended that adjustment assistance claims for landowners comprise three components: the loss of royalties for indigenous timber that would have been exported if the export controls were not introduced; loss of income opportunity from the land from which indigenous forest was to be cleared and exported; and professional advice in preparing claims. The Acting Secretary was advised on 1 March 1991 that the Minister had approved this and other recommendations.

23. I understood that the quantum to be paid to an eligible claimant related only to indigenous timber that would have been exported but for the export controls, and not to any timber that might have been sold on the domestic market.

24. The question I needed to address, therefore, was what volume of timber was Mr Scarlett likely to have sold that would have been exported, but for the export controls?

25. Mr Gilbert had stated in correspondence to the Crown Law Office dated 21 July 1997 (Document 4, paragraph 33) that ‘As eligibility in this case cannot be measured in degrees we seek the full sum claimed by Ross Scarlett together with full costs and interest for the delay in payment’. While I agreed that eligibility could not be measured in degrees I did not accept the implication that once eligibility was determined the quantum was then automaticlaly the amount sought by the claimant, regardless of the merits of the claim.

26. The starting point in my consideration of the quantum was the statement at page 7 of the High Court judgment that ‘On all the documentation before me I think it is clear that there was merely an intention that the plaintiff would sell to WSC what may be required by WSC to fulfill orders by TRT as a result of any orders placed with TRT by PTC.

27. The implication was that the volume of timber that Mr Scarlett would have sold for export (but for the export controls) was dependent on the successful operation of all stages in a process that involved another three parties.

28. I considered commercial realism to be a valid approach for addressing the success or otherwise of the overall business venture. Indeed, I could not see any other satisfactory approach. I was aware that commercial realism had been applied in capping the volume of beech sawlogs involved in claims from the Southland Region. These claims, in total, involved double the volume that was being exported immediately prior to the July 1990 export controls. In a letter from the Secretary of Forestry to the Secretary of Treasury and the Controller & Auditor General Document 15) it is stated:

‘The view is that, unlike woodchipping, the expansion of sawn timber production, and in particular markets for the timber, can not be readily achieved. Special purpose sawn timber is not a bulk commodity and market expansion is time consuming. The main current export market is the Australian furniture manufacturing industry. There is competition from other special purpose timbers. New clients must be satisfied that high quality timber can be supplied on an on-going basis. Contracts with current suppliers must expire before a substitution can be made. These and other factors act to constrain the ability to rapidly expand markets. It is, therefore, difficult to accept an argument that sawn timber exports could expand as rapidly as is suggested by the profile of landowner claims. The domestic market for indigenous sawn timber is relatively static.’

29. As a result, where claimants had an on-going business of supplying the volumes claimed, or the volumes were very small (below 500 cubic metres), the volumes were accepted. Other sawlog claims were pro-rated down so that the total payment for sawlogs related to the previous level of sawlog production in the Southland Region. The balance of the sawlog volume was assessed as chipwood.

30. I was also aware that the Ministry had used independent consultants extensively in assessing Adjustment Assistance claims. KPMG Peat Marwick and Ward Wilson had provided reports on contractors and wood processor claims, and Valuation NZ had provided reports on some landowner claims. I was not aware of the detail of these reports.

31. Evaluating the commercial reality of a claim that was based on a net value of $100 per cubic metre compared to an indicative valuation from the Marketing and Sales manager, Timberlands West Coast Ltd (Document 16) of $30 net per cubic metre, also seemed appropriate.

32. I understood the matter of export approval to be of fundamental importance. Mr Fogarty’s affidavit gave considerable attention to export approval and the High Court judgment stated that ‘I should go on to record that the plaintiff accepted that the plaintiff had also to satisfy the Secretary of Forestry acting on behalf of his Ministry that his timber would have been converted into a form which would have led to export approval’.

33. Other distinctive features I considered to be associated with the claim (in addition to the four-link-chain of the business venture and the net value of $100 per cubic metre) were the significant volume of rimu products which the parties thought would be exported, and the lack of an established market for rimu in Queensland where the products were primarily destined.

34. In assessing these and other matters identified in my report I referred to Mr Reay’s report (Document 17), Mr Gilbert’s response to the report (Document 4), and further comments from Mr Reay (Document 18). For the key issue of export approval I referred to other material contained on the files. I concluded that there were six principal areas within the overall business venture leading to wood export where significant uncertainty existed. These areas were: the uncertain export market; doubts over export approval; the lack of any documented orders; the lack of operational planning and business continuity; doubts concerning the ability to process the volume in a timely fashion; and ultimately the viability of processing logs purchased at $100 per cubic metre on the stump.

35. The matter of export approval was fundamental to the success or otherwise of the business venture. Before the Secretary of Forestry could recommend approval he had to be satisfied that the timber was surplus to the requirements of the New Zealand industry and that the sawmills seeking to export had not taken steps to increase output in order to supply the export order. No approach for approval had been made to the Ministry. possibly because Mr Turton incorrectly believed that export approval was not required.

36. Mr Reay considered this issue and in his Summary and Conclusion on export approval (page 27) stated:

‘If the exporters had achieved quickly the proposed 10-15 containers a month, the Ministry of Forestry would have been presented with export applications well beyond the precedents set by past applications. It is difficult to predict the outcome of their administrative process.

If the exporters had achieved a much smaller export quantity, say, 1-3 containers a month then I believe approval would have (sic) given’.

37. I was aware that the 10-15 containers were not directly relevant to Mr Scarlett’s claim.

38. Mr Reay also pointed out that the planned volumes were large by industry standards and the proposal to mill an additional 5,000 cubic metres of rimu logs over 12 months would have required the Westport Sawmilling Company to increase production by at least 50%. Information from Mr Dooley of the Westport Sawmilling Company in a letter dated 23 March 1993 (Document 19) indicated that they were operating at 60% capacity and ‘The export order would have taken up some of the slack in production capacity. . .’. This increase in mill output was contrary to the requirements for export approval. Mr Gillions, a long-term exporter of indigenous timber from the West Coast, stated in a letter (Document 20) that ‘The question of increased output was carefully watched when timber was being exported.’

39. The Secretary of Forestry, Mr John Valentine, stated in his affidavit in the previous proceedings, paragraph 30, that:

‘The material before me clearly indicated that for Westport Sawmilling Company the cut was an increase in output. I did not therefore believe that my officials would have recommended a clearance to export the timber that would have been produced from Mr Scarlett’s property.’

40. Mr Fogarty’s affidavit also gave considerable attention to the matter of export approval. He stated in paragraph 59:

‘The AANT’s conclusion was that an export approval for all of Mr Scarlett’s wood was most unlikely to be granted, not least because the mill, as we understood the situation, would have had to increase its output in order to supply the export order.’

41. Given the lack of understanding of the export approval requirements, the significant volume involved compared to the then current national level of exported sawn timber of all indigenous species (about 4 000 cubic metres sawn in 1989/90), the significant increase in output from the Westport Sawmilling Company, the views of the Secretary of Forestry and Mr Fogarty, I concluded that there was significant doubt whether export approval would have been given for all the products processed from 5 000 cubic metres of logs. I considered that small volumes might well have been given approval.

42. Overall I concluded that the cumulative effect of the six areas of uncertainty was that the probability of a successful business venture was low. If wood was exported then it would probably have involved small volumes periodically over the two years for which Adjustment Assistance applied.

43. That led to the difficult question of how much a small volume exported might involve? The only objective information I had to use was that the Westport Sawmilling Company cut 24 cubic metres over three months in 1990 for a first order of sawn timber involving the same processing parties and Queensland customer. I used this and a conversion rate of 55% to calculate the volume of logs from Mr Scarlett’s forest that may have been processed and exported. The total came to 352 cubic metres.

44. I took the conversion rate of 55% from the judgment of Greig J in the case between the Westport Sawmilling Company and Timberlands West Coast. This value was favoured in the judgment after allowing for the introduction of some improvements in the machinery and organisation of the milling, and making an allowance for the higher price of the timber which would spur efforts on the part of management to ensure improved conversion.

45. 1 was also aware that 55% was consistent with information held at the Ministry’s Christchurch office on Canterbury and West Coast wood processors. Mr Vince Scarlett, Manager, Westport Sawmilling Company, advised the Ministry in 1994 that the mill’s Native Species Conversion Factor ranged from 50-55% (Document 21). Given that the rimu on Mr Scarlett’s forest was reported to be of high quality the top end of this range seemed appropriate.

46. I recommended to the Director-General that an offer of $35,200 (352 cubic metres at $100 per cubic metre) plus reasonable legal expenses and interest calculated in accordance with the formula which had been suggested by the High Court in the Donald Family Trust proceedings, be made to Mr Scarlett.”

The criticism and claim

[8] The Statement of Claim refers to compensation being assessed on a “but for” approach and it is plain that that is how the Ministry’s officers proceeded. The applicant claims that the use of a “commercial realism” approach is wrong and that the decision is inconsistent, unfair and unreasonable. He further claims that the Director-General misdirected himself and failed to respond to Mr Scarlett’s legitimate expectations which were based on a series of media releases, letters, and a questionnaire issued by the Ministry. It is unnecessary to set them out.

Conclusions

[9] I am satisfied that the Government was offering compensation on an ex gratia basis and that the approach was to consider the benefits a person such as Mr Scarlett would have received but for the ban. I am satisfied that Mr Scarlett did not have a concluded contract for the sale of his trees, but that a contract would have been concluded shortly after the ban. I am satisfied that a reasonable man in Mr Scarlett’s position would have expected that such a contract would have addressed the commercial realities of the situation and have provided for the uncertainties created by the export controls in force or anticipated and for the possible collapse of the export orders over which Westport may have no control. On this basis, Mr Novis and the others involved in considering Mr Scarlett’s claim traversed the likely effect of the contingencies as set out in Mr Novis’ affidavit which I have recorded. Of particular significance is the policy relating to export and production quantities. It has to be accepted that the proposed conversion of trees to finished product on the Queensland market involved several steps, each with its own risks. These too were addressed. I therefore am of the opinion that it cannot be said that the Ministry considered inappropriate material or that it considered material on an inappropriate basis. The final result certainly appears small in relation to what Mr Scarlett plainly saw as a done deal, but the figure has been arrived at by the exercise of expert judgment and knowledge of the industry. As I have said, the existence of the export and production controls alone could have put a virtual end to the deals. As has been pointed out, Mr Scarlett’s position was not like most of the other claimants and I was not shown similar cases for direct comparison that indicate any inconsistency or unfairness in that sense. While a list of other claims was produced, it did not provide any comparable detail. I am aware of the overall situation of claims: Donald v Attorney-General (Wellington Registry, CP105/95, unreported, 22 November 1996).

[10] I therefore conclude on the facts that none of the grounds for judicial review have been established and the application must be dismissed.

Result

[11] The application is dismissed. The respondent is entitled to costs which I fix at $3,500 plus disbursements if any.