CARTER HOLT HARVEY LIMITED v CARROLL LOGGING LIMITED AND PHS (LOGGING SOLUTIONS) LIMITED [2003] NZCA 268 (21 November 2003)

IN THE COURT OF APPEAL OF NEW ZEALAND

CA204/03

BETWEEN CARTER HOLT HARVEY LIMITED

Appellant

AND CARROLL LOGGING LIMITED AND PHS (LOGGING SOLUTIONS) LIMITED

Respondents

Hearing: 18 November 2003

Coram: Glazebrook J

Heath J

Doogue J

Appearances: J R F Fardell QC and R A Edwards for Appellant

G J Kohler and J L Libbey for Respondents

Judgment: 21 November 2003

JUDGMENT OF THE COURT DELIVERED BY HEATH J

Introduction

[1] Carter Holt Harvey Ltd [Carter Holt] owns, or has cutting rights to, large tracts of forests in New Zealand.Its usual practice is to enter into contracts with “key suppliers” to harvest the timber.Those “key suppliers” are charged with the responsibility of procuring the services of logging gangs to carry out the necessary harvesting work.

[2] In 1999, Carter Holt had cutting rights in large forestry blocks in Northland.Those blocks were ripe for harvest.However, experienced logging gangs were not available in Northland.The conditions in which logging work is undertaken in Northland are different from those experienced in other parts of New Zealand.Specific problems are said to include more difficult terrain, muddier forests, smaller wood, the availability of fewer, and less reliable, workers to undertake various tasks and greater cartage costs to transport the products to the nearest port, at Whangarei.

[3] In late 1999 Carter Holt contracted with Carroll Logging Limited [Carroll Logging] to undertake some of the cutting work in Northland.About 30 employees relocated from the central North Island to Northland, including about 20 families.That relocation occurred over the Christmas holiday period, 1999/2000.

[4] In about April 2002 a further contract was signed between Carter Holt and Carroll Logging.Mirror contracts were then executed by Carroll Logging with various subcontractors.The subcontractors provided the logging gangs.The new contract was deemed to have commenced on 1 January 2002.

[5] In 2001 PHS (Logging Solutions) Limited [PHS] responded to an invitation from Carter Holt to submit tenders to carry out logging work in Northland.PHS was advised that its tender had been accepted, subject to a formal contract, by letter from Carter Holt dated 14 December 2001.A contract, identical in all material respects to the Carroll Logging contract, was executed by PHS and Carter Holt on 27 February 2002 and 8 April 2002 respectively.Like the Carroll Logging contract, the contract was deemed to have commenced on 1 January 2002.The PHS contract was slightly different in nature, in that it was designed to promote the training of new crews in Northland to assist with anticipated continuing work from Carter Holt.

[6] Both the Carroll Logging and the PHS contracts were for terms of five years, commencing from January 2002.

[7] By two letters dated 30 July 2003 Carter Holt purported to terminate both contracts.It purported to terminate the Carroll Logging contract on the ground that score cards from the three previous consecutive quarterly reviews “clearly identify that Production, Health and Safety and Training have been areas where improvement has been necessary.However, despite notification by [Carter Holt] at each quarterly review that improvement was necessary, it is evident from the consistency of the scores that sufficient improvement has not been made in these areas”.The PHS contract was terminated because the score cards from the three previous consecutive quarterly reviews “clearly identify that PHS has failed to meet the required minimum target score for those reviews.However, despite notification by [Carter Holt] at each quarterly review that improvement was necessary, it is evident from the consistency of the scores that sufficient improvement has not been made”.

[8] The decisions to terminate the contracts were made in close proximity to a public statement by Carter Holt, when announcing its half-yearly financial results for the period ended 30 June 2003, that it intended to reduce its national harvest by 15 percent.The economic factors which led Carter Holt to that decision were described, in contemporaneous media reports, as including the value of the New Zealand dollar, increased competition for export markets as a result of Russian softwood being imported by China and an increase in international freight rates.Both Carroll Logging and PHS express some concern at the coincidence of timing of the public announcement and the purported termination of their contracts.

The appeal

[9] Carroll Logging and PHS sought interim injunctions from the High Court to restrain Carter Holt from taking steps consequent upon its purported termination of the contracts.Interim injunctions were issued by Potter J in a reserved judgment delivered on 3 October 2003.

[10] The orders restrain Carter Holt from “taking steps of and incidental to a purported termination” of two contracts entered into between it and Carroll Logging and PHS respectively.Both orders enure pending further order of the Court or determination of the dispute by arbitration.In granting the interim injunctions Potter J applied the settled principles enunciated in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA) at 142.

[11] Carter Holt challenges Potter J’s finding of a serious question to be tried.While, strictly speaking, such a finding is but part of an analysis designed to determine whether it is appropriate to issue an interim injunction, it is plain, in this case, that an injunction could not be justified if there was no serious question to be tried.

[12] In the High Court, and initially in this Court, Mr Fardell QC, for Carter Holt, submitted that relief ought to be refused on discretionary grounds, even if there was a serious question to be tried.Mr Fardell QC submitted that the undertakings as to damages were inadequate and that it would be futile to grant interim relief because of other contractual remedies open to Carter Holt.

[13] Circumstances have changed since the hearing before the High Court.Shortly after delivery of the High Court judgment, as had been foreshadowed as a possibility to Potter J, Carter Holt gave notice under cl 3 of the respective contracts suspending the performance of services to be provided by both Carroll Logging and PHS.Suspension of services (as opposed to suspension or termination of the contract) may trigger an obligation for Carter Holt to pay Carroll Logging and PHS under contractual provisions guaranteeing minimum volumes of work.It is now accepted by Mr Fardell QC that Carter Holt’s losses, if any, will be limited to moneys paid under those minimum volume provisions if it is found, ultimately, to have been justified in terminating the contracts.

[14] In our view, provided a prompt hearing can be obtained (and both Carroll Logging and PHS agree to seek an expedited hearing) the nature of the loss that Carter Holt might suffer is insufficient to justify refusal of an interim injunction if there is a serious question to be tried.Accordingly, we focus attention on the question whether there is a serious question to be tried.

Is there a serious question to be tried?

[15] The critical contractual provisions are set out below.We use the Carroll Logging contract for that purpose.Identical provisions appear in the PHS contract.

a) Immediately before the numbered terms is a shaded box containing, among other things, the following words:

Contract Principles:The overall principle of this contract is fair, open and honest dealing.

b) Also included, within the same shaded box, are other statements of purpose or intent some of which are not repeated in the specific contractual terms that follow.The balance of that particular shaded box reads:

[Carter Holt] and Carroll [Logging] intend that by such dealings they will maximise the benefit of this contract for each of them.

Work Relationship:Due to the changeable nature of the forest estate and economic environment the amount of work [Carter Holt] requires will be constantly fluctuating and cannot be guaranteed above any minimum volume commitment.

Under this contract [Carter Holt] commits to provide Carroll [Logging] minimum volumes representing approximately 80% of allocated volumes on an annual basis and 90% over the entire term.Carroll [Logging] must have the capacity to provide, and if required by [Carter Holt] must provide, harvesting services under this contract representing 120% of allocated volumes.Carroll [Logging] must always give [Carter Holt] priority for any of its service requirements.

Where due to urgency, specific requirements, failure by anyone to perform as required (including the maintenance of competitive prices) by [Carter Holt], additional capacity requirements or any other factors [Carter Holt] believes the service of other contractors are required it may, utilise those other supplier’s services.

Innovation is prized and Carroll [Logging] is to look to continuously improve and implement innovation in its operations.

c) Clause 3 provides:

Suspension: [Carter Holt] may at any time suspend performance of any service by written notice to Carroll [Logging].

d) Clause 16 provides:

Reviews/inspections: [Carter Holt] may:

(a) review the overall performance of Carroll [Logging] and provide to Carroll [Logging] points for improvement;

(b) observe any stage of any service in respect of this contract; and

(c) inspect or audit (and where relevant take copies), at reasonable times and on reasonable notice, any matter relating to OPIDs, health and safety, environmental records and any other thing in respect of this contract.

Carroll [Logging] will:

(d) participate in such reviews, audits and inspections to the extent reasonably required by [Carter Holt]; and

(e) provide all reasonable assistance in respect of such inspection or audit including access to documents and/or property/premises relating to OPIDs, health and safety, environmental records and any other matter relevant to this contract.

These will not constitute any acceptance or prejudice any of [Carter Holt’s] rights.

e) Clause 33, so far as is relevant, provides:

Failure to comply: If:

...

(c) any 3 consecutive reviews by [Carter Holt] consistently identify the same or similar points for improvement and/or Carroll [Logging] fails to meet the required minimum target score for those reviews;

[Carter Holt] may:

...

(k) suspend or terminate (in whole or in part) this contract by written notice to Carroll [Logging];

f) Clause 44 provides:

Further assurances:Each party will promptly do every reasonable thing to complete its obligations and the intent of this contract.

[16] A process of review of both Carroll Logging’s and PHS’s performance was initiated in the manner contemplated by cl 16(a) of each contract.At the least, it is seriously arguable that the ground for termination, to be found in cl 33(c) of each contract, is referable to the type of review contemplated by cl 16(a).Specifically, cl 33(c) refers to consistent identification of the same or similar “points for improvement” – a phrase also used in cl 16(a).It is seriously arguable that the phrase “points for improvement” denotes a more specific assessment of what was required to be done to improve performance than might be gleaned from a numerical grading on a score sheet.We regard this point as seriously arguable irrespective of the use made of the contract principle set out in para [15](a) above.

[17] A critical issue is whether the contract principle of fair, open and honest dealing is an express term of each contract or, at least, an aid to the interpretation of express terms.Justice Potter was persuaded that effect should be given to the contract principle set out in the contract.At para [37] of her judgment, Potter J said:

While [Carter Holt] in the case of Carroll [Logging] points to under performance in the first three quarters of the contract term (71.1%, 75% and 72.4% against a minimum requirement of 80%) and failure to meet minimum targets in the areas of production, health and safety and training in the last three consecutive reviews; and in the case of PHS failure to meet minimum target scores for three consecutive reviews (64% 4^th quarter 2002, 78.64% and 66.6% for the 1^st and 2^nd quarters of 2003), it is not open to [Carter Holt] simply to rely on those performance measures as a ground for termination on the basis that these were the performance measures agreed by the parties when there is a substantial dispute as to the implementation, assessment, recording and review of the performance measures and significant disagreement as to whether [Carter Holt] has properly performed its obligation under the contract of fair, open and honest dealings.This must particularly be so when the implementation, assessment and recording of the performance score card is within the sole control of [Carter Holt] and the right to terminate for under-performance rests solely with them.(our emphasis)

[18] Mr Fardell QC sought to meet Potter J’s finding with four specific arguments: namely,

a) The “overall principles of this contract of fair, honest and open dealing” is not an enforceable term of the contract.Rather, it is a statement of intent of the fairness achieved by adoptions of the specific terms of the contract that follow.

b) That principle could not, in any event, be the source of new rights not expressly stated in the contract.

c) The nature of the claim improperly invites the Court to sit on appeal from Carter Holt’s commercial judgment.

d) There is no requirement in law for contractual rights to be exercised reasonably.

[19] This is not a case in which the Court is asked to imply a term into a contract requiring fair, honest and open dealing among contractual parties.The parties have provided expressly for such a principle in their contracts.It is, therefore, seriously arguable that the words would not have been included in the contracts unless the parties intended them to have some meaning.

[20] The exact nature of the “overall” contract principle ought not, in our view, to be finally determined in an interlocutory context.However, at the very least, it is seriously arguable that the power to terminate the contract under cl 33(c) and (k) must be interpreted by reference to the need for fair, honest and open dealing.That conclusion is reinforced by the terms of cl 44 of the contract (in particular in its reference to “intent”) and the nature of the relationship between the respective parties as captured in the words set out in para [15](b) above.

[21] It is the existence of an express provision for an “overall” contract principle that is determinative of Mr Fardell QC’s fourth point: namely, that there is no requirement in law for contractual rights to be exercised reasonably.As express words have been used in the contracts to record the “contract principle” it must be arguable that some meaning must be given to those words, at least as an aid to interpretation.We leave open whether, and to what extent (if any), they may impose any procedural or substantive obligation to act fairly or for proper purposes.

[22] The voluminous evidence placed before the High Court on the interim injunction applications demonstrates many material conflicts in testimony among deponents for the opposing parties.In particular, we refer to disputes of the type summarised in the extract from para [37] of Potter J’s judgment: see para [17] above.Necessarily, we must approach the question whether a serious question to be tried exists on the basis that evidence adduced on behalf of Carroll Logging and PHS is capable, if accepted at trial, of providing an evidential foundation for the claims.We are satisfied that the evidence goes that far.

[23] We say no more about the substance of the respective cases as we are dealing only with an appeal from interlocutory orders granting interim injunctive relief.It is undesirable that we comment further because it is unclear what facts will be found at trial.

Conclusion

[24] For the reasons we have given we are satisfied that there is a seriously arguable question to be tried.There are no factors militating against interim injunctive relief.In those circumstances we are satisfied that Potter J did not err in ordering that interim injunctions issue.

[25] We have not considered separately the question whether the subsequent suspension under cl 3 is justified.That issue was not before Potter J and counsel were agreed that it was inappropriate for us to embark upon a consideration of it.

[26] It is important that this proceeding be allocated a trial promptly: if possible, for disposition by the end of the first quarter of next year.The livelihood of a significant number of people is dependent upon the outcome of the proceeding.A directions conference is scheduled in the High Court at Auckland on 26 November 2003.We are told by counsel that they estimate the trial will take approximately four weeks.No doubt the Judge presiding at that conference will be able to make appropriate orders for the expeditious determination of the proceeding.

[27] The appeal is dismissed.We award one set of costs in favour of Carroll Logging and PHS in the sum of $6000, plus disbursements to be fixed by the Registrar.Disbursements are to include the reasonable travelling and accommodation expenses of two counsel.

Solicitors:

Lee Salmon Long, Auckland for Appellant

David Shanahan & Associates, Whangarei for Respondent Carroll Logging Ltd

East Brewster, Rotorua for Respondent PHS (Logging Solutions) Ltd