Forest Holdings Limited v Mangatu Blocks Incorporation [2018] NZHC 3272 (12 December 2018)

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2018-470-000084

[2018] NZHC 3272

FOREST HOLDINGS LIMITED

(APPLICANT)

V

MANGATU BLOCKS INCORPORATION

(RESPONDENT)

DATE OF HEARING: 23 August 2018

DATE OF JUDGMENT: 12 December 2018

 

JUDGMENT OF COURTNEY J

Introduction

[1] In 2003, Mangatu Blocks Incorporation (Mangatu) granted Forest Holdings Ltd (FHL) a Forestry Right in respect of land owned by Mangatu. In 2013, Mangatu purported to terminate the Forestry Right without giving the required notice. In an arbitration before the Hon. B J Paterson QC, Mangatu was found to have repudiated the contract (the Liability Award). It took some time to identify the correct basis on which damages should be assessed and, ultimately, FHL advanced its costs on a loss of chance basis. Eventually, the Arbitrator held that FHL had not sustained any compensable loss (the Further Ruling). FHL seeks leave under cl 5(1)(c) of Schedule 2 of the Arbitration Act 1996 to appeal that decision.

[2] The grounds advanced by FHL in its written submissions were expressed differently from its notice of application, but there was no objection and I proceed on the basis of the grounds as they were argued. Those grounds can be summarised broadly as being that the Arbitrator:

(a) made factual findings as to what steps Mangatu would have taken had it not repudiated the contract, even though Mangatu had failed to adduce evidence on the point (the evidential gap);

(b) made errors in his approach to assessing whether FHL had lost a commercial opportunity to extract value from the Forestry Right in the event of being served with the required notice and the value of any such opportunity (the loss of chance assessment); and

(c) failed to consider the discretion available under s 9 of the Contractual Remedies Act 1976.

[3] Mangatu opposes leave being granted. It says that the Arbitrator’s assessment of evidence is not a question of law, the Arbitrator correctly applied the law relating to the loss of chance assessment and there was no error in the Arbitrator declining to make an order under s 9 CRA (and, in any event, the exercise of a discretion cannot ground an appeal as an error of law).

Jurisdiction

[4] A party to an arbitration can appeal an arbitral award only on a question of law and only in limited circumstances; cls 5(1) , (2) and (10) of Schedule 2 of the Arbitration Act 1996 provide that:

(1) Notwithstanding anything in articles 5 or 34 of Schedule 1, any party may appeal to the High Court on any question of law arising out of an award

(a) if the parties have so agreed before the making of that award; or

(b) with the consent of every other party given after the making of that award; or

(c) with the leave of the High Court.

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

(10) For the purposes of this clause, question of law –

(a) includes an error of law that involves an incorrect interpretation of the applicable law (whether or not the error on the record of the decision); but

(b) does not include any question as to whether –

(i) the award or any part of the award was supported by any evidence or any sufficient or substantial evidence; and

(ii) the arbitral tribunal draw the correct factual inferences from the relevant primary facts.

[5] Even if the determination of the question of law could affect a party’s rights, the Court still has a discretion whether to grant leave; in Gold & Resource Developments (New Zealand) Ltd v Doug Hood Ltd the Court of Appeal said that:

Once the statutory threshold has been passed, the Court should in each case exercise its discretion in a disciplined way. The following are factors to be considered. Other than the first, which is the most important, they are not listed in any particular order. As a matter of caution, it should be said that there may be other considerations which should be taken into account in the circumstances of a particular case. They are to be seen as guidelines to, rather than as governing, the exercise of the discretion

The Court should consider in a preliminary way…the strength of the argument that there has been an error of law and the nature of that point. If it is a one- off point, in the sense that it is unlikely to occur again and cannot be seen as having any precedent value, either generally or to the parties on another occasion, then unless there are very strong indications of error leave should rarely be given. In other cases, the Court will be looking for a somewhat less stringent assessment. In those cases a strongly arguable case would normally be required for leave to be granted. The existence of conflicting decisions will also be relevant.

Background

[6] Mangatu granted the Forestry Right by way of a Memorandum of Transfer and Grant of Forestry Right registered against the titles to the subject land. The Forestry Right granted FHL the rights “to manage, protect, harvest and carry away and otherwise utilise trees, timbers, logs growing on or to be grown on the land and within the Indigenous Forest, in accordance with this Grant”. FHL was required to comply with the Resource Management Act 1991 (RMA) and to indemnify Mangatu against any liability arising under the RMA.

[7] The RMA consent, finally issued in 2010, was the product of a long and difficult process that culminated in an Environment Court decision imposing some 60 conditions. It was common ground that compliance with these conditions would have been a complex and costly exercise.

[8] Subject to certain conditions, Mangatu was entitled to terminate the Forestry Right if FHL failed to meet its obligations. One of the constraints on the right of termination was that Mangatu had to give FHL 120 days’ notice to remedy any default. In July 2013, Mangatu’s solicitors wrote to FHL asserting breaches by it of the RMA consent and of the reporting obligation under the Forestry Right. The letter advised that the Forestry Right was cancelled with immediate effect and required FHL to remove its equipment and contractors from the land. FHL treated the termination as a repudiation and cancelled the Forestry Right. Prior to the cancellation, the Forestry Right still had 40 years to run.

[9] FHL had paid a non-refundable advance of $1.5 million plus GST which was to be set against royalties due to Mangatu under the Forestry Grant. When the grant was terminated, there remained more than $1 million that had not been offset and which Mangatu was entitled to retain.

[10] FHL claimed that Mangatu’s purported termination led to losses in excess of
$10 million. The parties agreed to arbitrate. In his Liability Award, the Arbitrator found that Mangatu’s actions amounted to repudiation of the Forestry Grant because no right to terminate arose until the required notice had been given. However, he also made a finding that FHL would not have been able to remedy the breach within the 120-day notice period.

[11] The Arbitrator gave a decision as to the basis on which damages might be assessed (the Preliminary Damages Decision). He found that FHL was entitled to claim damages for its capital loss and that, in assessing such damages, future events could be taken into account if there was a real possibility that they would have occurred at the time of the repudiation. But the Arbitrator also commented that, although he had not made a specific finding, the evidence suggested that Mangatu wanted to terminate the Forestry Right and would have issued a 120-day notice if that had been necessary. The Arbitrator considered that, consequently, the prospects of FHL obtaining more than a nominal damages award appeared to be minimal.

B J Paterson QC, 29 July 2016.

[12] FHL successfully appealed that decision. Alluding to the possibility of assessing FHL’s claim as one for loss of a chance, Heath J held that, although the finding that FHL could not have remedied the breach within 120 days could not be challenged, FHL could have used the notice period to negotiate with Mangatu and may have been able to persuade Mangatu to withdraw the notice, or it may have been able to assign its interest in the Forestry Right. Without going so far as to say that FHL could have established the necessary factual foundation, Heath J considered that FHL was entitled to adduce evidence of the value of the rights of which it had been deprived.

[13] The Arbitrator scheduled a further hearing to determine what action Mangatu would have taken if it had not repudiated the contract, what the resultant factual situation would have been and what consequential action FHL may have taken (the Amended Ruling). The parties were permitted to file further evidence. FHL filed a brief of evidence producing correspondence between the parties’ solicitors in August 2013. Mangatu did not file further evidence. It advised that it would rely on the affidavit evidence filed in the proceeding and on the evidence contained in briefs of evidence and cross-examination given at the earlier liability hearing.

The Further Ruling

[14] The Arbitrator identified the issues to be determined as:

(a) Whether FHL can succeed in claiming damages on the loss of chance basis?

(b) If the answer to (a) is “yes”, what is the percentage of the value of the Forestry Right at the date of repudiation which FHL is entitled to claim as damages?

(c) If loss of chance damages are not recoverable are reliance damages recoverable?

[15] After briefly summarising events to that point and setting out the parties’ respective positions, the Arbitrator turned his attention to the causation issue i.e.

whether FHL had been “denied a valuable commercial opportunity and that there was a real or substantial chance that it would have achieved this opportunity”. He canvassed the relevant principles before moving to the factual position. He considered that he had to determine the factual issues relating to damages on the basis of the evidence given at the liability hearing and whatever inferences could be drawn from that evidence. He identified the two issues on which factual findings were necessary as being, first, what Mangatu would have done had it not repudiated the contract and, secondly, what FHL would have done in response to Mangatu’s actions.

[16] The Arbitrator considered that Mangatu would have issued a notice requiring the breaches to be remedied within 120 days and then terminated the Forestry Right because it wished to terminate and would have taken every opportunity to do so. He considered that FHL would have taken such steps as it could to extract commercial value from the Forestry Right during the notice period. However, after canvassing the options available to FHL at some length, the Arbitrator concluded that FHL would have been unable to remedy the breaches within 120 days, persuade Mangatu to withdraw the notice or to have taken some other action to extract commercial value from the Forestry Right within the notice period. FHL had therefore failed to establish that it had anything other than a speculative right to secure a commercial opportunity of value. It could therefore not recover more than nominal damages.

[17] The Arbitrator also rejected any possibility of reliance damages beyond nominal damages.

First ground: the “evidential gap”

[18] There was no direct evidence from Mangatu as to what it would have done had it not terminated the Forestry Right in the (unlawful) way it did. It did not address that issue at the liability stage and, as already noted, it elected not to file further evidence for the purposes of the damages hearing. Nevertheless, the Arbitrator said that he accepted the submission made by Mangatu’s counsel that Mangatu would have issued a notice to remedy, and then continued:12

A finding to this effect was not made in the liability award. However, the evidence does establish that Mangatu wished to terminate and would have taken every opportunity to do so. It is difficult to see how there could be any other finding than that Mangatu would have issued a notice to remedy shortly after 10 July 2013.

In view of the onus which is on Mangatu in this matter, I have reviewed the evidence and confirm that if it had been necessary in the liability award, I would have determined on the balance of probabilities that Mangatu wished to terminate the Forestry Right and would have issued a notice to remedy shortly after 10 July 2013….

[19] He identified the evidence that he considered supported his conclusion. This included the nature of the breaches of RMA consent by FHL, the concern expressed by Mangatu’s officers about the breaches, the cost of remedying the breaches and FHL’s level of indebtedness.

[20] FHL frames its proposed ground of appeal as being that the Arbitrator “excused” Mangatu from discharging the onus on it of proving that it would have issued a notice to remedy. But this is not an apt characterisation; it is clear that the Arbitrator was alive to the onus and did not fail to apply it. What is really being said is that the Arbitrator made his finding as to what Mangatu would have done without an evidentiary foundation and/or in the face of evidence that was to opposite effect, for example evidence of the possibility of FHL being able to negotiate changes to the RMA consent with the Gisborne District Council (GDC).

[21] In relation to the reliance-based claim, FHL asserts that the position is clearer still because it was for Mangatu to prove that FHL would not have recovered any value at all from the Forestry Right. FHL relied on The Healey Holmberg Trading Partnership v Grant in arguing that Mangatu’s failure to produce evidence as to whatit would have done should have been taken into account in making the finding that it would have issued a notice.

[22] Mangatu’s position is that decisions about the evidence are matters for the Arbitrator and not questions of law that can be the subject of appeal. In the usual course, an assertion that a finding of fact was unsupported by any evidence may amount to an error of law on appeal. But that is not the position in the arbitral context; clause 5(10) Schedule 2 of the Arbitration Act is clear that such a question is not one of law for the purposes of leave to appeal. In Gold & Resource Developments the Court of Appeal said:

[55] While not expressing a final view, we see some force in the argument that whether there was any evidence to support a particular finding of fact made by the arbitrator is not a question of law in the context of the 1996 Act. In Edwards (Inspector of Taxes) v Bairstow [1955] UKHL 3; [1956] AC 14 at 29 Viscount Simonds said that findings of fact made by a tribunal could be set aside by a Court if it appeared that the tribunal had acted without any evidence, or upon a view of the facts which could not reasonably be entertained. The authors of Mustill & Boyd, Commercial Arbitration assert at 592-593 and 596 that this principle cannot be applied to the review of arbitral decisions. To do so, they say, would be to broaden the basis on which arbitral awards can be appealed on questions of law. This would be contrary to the general principle that the arbitrator is master of the facts (now to be found in this country in art 19(2) of the First Schedule to the 1996 Act) and to the specific aims of the legislation, which include the promotion of finality in arbitral awards and the limiting of judicial intervention. See also David Williams QC, Arbitration and Dispute Resolution [2000] NZ Law Review 61, 77-78, citing Russell on Arbitration (21st ed, 1997), para 8-057.

[23] Mr Branch, for FHL, submitted that Gold & Resource Developments did not represent the most recent authorities. However, the cases he cited do not deviate from the position articulated in Gold & Resource DevelopmentsCommerce Commission v Harmoney Ltd was not decided in the context of an arbitration but in a case stated under the Commerce Act 1980, and Wai-O-Tapu Partnership, although an arbitration case, was not concerned with an assertion of factual findings unsupported by evidence. This ground accordingly fails.

Second ground: errors in the loss of chance assessment

The issues

[24] It was common ground that FHL’s claim was one for loss of a chance. FHL maintained that if it had been given the required 120 days’ notice, it would have been able to obtain some commercial value from the Forestry Right. It identified a number of possible means of achieving this: persuading Mangatu to withdraw the notice, invoking the dispute resolution clause in the Forestry Right, seeking cancellation of the abatement notices, applying to the Environment Court or High Court for relief; persuading Mangatu that it was not entitled to cancel at the end of the 120-day period; selling 50 per cent of its shares or, alternatively, the entire Forestry Right. Some of these proposed courses of action overlapped. In particular, FHL maintained that it would have been able to argue that it had not actually logged illegally and, on that basis, would have been in a position to persuade Mangatu either to withdraw the notice or to consent to the involvement of a new investor.

[25] The Arbitrator accepted that FHL probably would have considered these alternatives. He saw the real issue as whether any one of them could have produced a commercial opportunity of substantial value, and concluded that they would not.

[26] FHL says that the Arbitrator misdirected himself as to the correct approach for the loss of chance assessment. Specifically, it is said that the Arbitrator:

(a) wrongly determined that the whole loss of chance enquiry was to be undertaken on a balance of probabilities basis, and therefore he failed to properly consider the percentage chance that FHL had of obtaining a commercial benefit;

(b) wrongly assumed that facts previously determined before the liability hearing were a 100 per cent certainty, whereas the previous finding meant only that a particular fact had been established to a degree of more or less than 50 per cent depending on the onus;
(c) wrongly required FHL to establish on the balance of probabilities that there was a market and buyer for the Forestry Right and that Mangatu would have approved assignment to that buyer;

(d) wrongly concluded that a chance of less than 10 per cent was not compensable; and

(e) failed to consider the overall effect of multiple chances rather than each chance separately.

[27] Mangatu argued that the Arbitrator correctly applied settled principles to both the causation and quantum questions, with the result that the proposed ground of appeal does not raise any question of law.

[28] I encountered difficulties with some aspects of the submissions (especially in relation to (a) and (d)) because both parties proceeded on the assumption that the Arbitrator had considered both causation and quantum issues. However, on my reading of the Further Ruling, the Arbitrator considered only causation and, having concluded that Mangatu’s conduct did not cause FHL to lose a commercial opportunity of any value, found it unnecessary to go further to consider quantum. I have endeavoured to address the substance of FHL’s complaints on the basis of my understanding of the Further Ruling.

Relevant principles

[29] The recognised approach for assessing the value of a loss of chance was described in Takaro Properties v Rowling:

In general a calculation of damages based upon the value of a chance will involve assessment at three levels. First there is the question as to whether there is affirmative evidence from a plaintiff that in the absence of the negligent conduct complained of he would have had some opportunity of achieving a particular purpose. For reasons already given that evidence is present in this case. Second, there is a need to estimate what would have been the outcome had there been complete success. And finally, that outcome reduced to money terms will have to be discounted to accord with what can fairly be regarded as the actual prospect of success….

[30] The first limb is concerned with causation; has the defendant’s conduct led to the loss of an opportunity that had some value? This limb is not concerned with the precise monetary worth of the opportunity, as explained by the High Court of Australia in Sellars v Adelaide Petroleum NL:

… The general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing the applicant’s case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.

[31] In the present case, the answer to the first limb of Takaro Properties depended not only on FHL’s own conduct (i.e. its decision to negotiate or sell etc) but also on the response by third parties (e.g. Mangatu’s willingness to negotiate, the availability and interest of potential buyers). That type of situation requires the more nuanced approach described in Allied Maples Group Ltd v Simmons and Simmons:

… Where the plaintiff’s loss depends on the actions of an independent third party, it is necessary to consider as a matter of law what is necessary to establish as a matter of causation, and where causation ends and quantification of damage begins.

If the defendant’s negligence consists of an omission … causation depends, not upon a question of historical fact, but on the answer to the hypothetical question, what would the plaintiff have done … this can only be a matter of inference to be determined from all the circumstances. …

Although the question is a hypothetical one, it is well established that the plaintiff must prove on the balance of probability that he would have taken action to obtain the benefit or avoid the risk. But again, if he does establish that, there is no discount because the balance is only just tipped in his favour

In many cases the plaintiff ’s loss depends on the hypothetical action of a third party, either in addition to action by the plaintiff, as in this case, or independently of it. In such a case does the plaintiff have to prove on the balance of probability … that the third party would have acted so as to confer the benefit or avoid the risk to the plaintiff or can the plaintiff succeed provided he shows that he had a substantial chance rather than a speculative one, the evaluation of the substantial chance being a question of quantification of damages?

… I have no doubt that … the second alternative is correct. (emphasis added)

[32] The Court of Appeal applied this statement in Benton v Miller and Poulgrain (a firm). That case concerned the assessment of a loss of chance arising from the failure of a solicitor to advise the appellant on the implications of the Matrimonial Property Act 1976 (MPA). Following separation from his wife, the appellant found that he was adversely affected by not having an agreement under s 21 of the MPA providing that the couple’s home was his separate property. The Court said:

Applying [the Allied Maples] approach to the case at hand, uncertainties as to how Mr Benton would have acted had proper advice been given are to be dealt with on an all or nothing basis and decided on the balance of probabilities while uncertainties as to Mrs Benton’s conduct fall to be determined on a loss of a chance principles.

In making a “loss of chance” assessment, broad judgments are called for. At one end of the spectrum, very low probabilities are unlikely to be reflected in an award of damages. So if the chance of avoiding an adverse event is as low as say one in ten, a Court will probably reject the claim rather than fix damages at 10 per cent of the cost to the plaintiff associated with those adverse events. At the other end of the spectrum that approach is sometimes, but not always, adopted. So a 90 per cent chance of avoiding an adverse event may result either in the complete recovery of all losses associated with that adverse event (on the theory that the chance of not avoiding those losses was sufficiently speculative to be able to be ignored) or alternatively a discount of 10 per cent for contingencies.

[33] Applying the “loss of chance” principles to the facts before it, the Court said that the appellant had to prove on the balance of probabilities that he would not have entered into the transactions unless accompanied by a s 21 agreement. If he could do so, then he would be entitled to damages either if he could establish to a high degree of probability that Mrs Benton would have signed the s 21 agreement or if he could not establish that “but could show that there was a reasonable likelihood of Mrs Benton signing such an agreement”, loss of chance principles would require an award of damages proportionate to the likelihood of a s 21 agreement having been signed, less perhaps an adjustment for the possibility that the agreement might not have been upheld.

[34] Referring to the description of “speculative” in relation to the chance said to have been lost, the Court commented that:

The Judge seems to have regarded “speculative” as a synonym for “uncertain” whereas, in the context of loss of a chance principles, a possibility is only able to be ignored as “speculative” if it is at the unlikely end of the probability spectrum….

[35] It is apparent, on these principles, that the first limb of Takaro Properties required FHL to show

(1) on the balance of probabilities that it would have acted to extract some commercial value from its Forestry Right during the 120-day period and
(2) that it had “a substantial chance rather than a speculative one” or “a reasonable
likelihood” of being able to achieve that.

[36] If the answer to either question was negative, there would have been no need to go further and assess the value of the lost chance. But if the answer was affirmative then, on the Takaro Properties approach, the counter-factual would have to be identified (i.e. what FHL’s position would have been had it achieved its objective) and a discount applied to reflect the actual prospect of success.

The Arbitrator’s approach to the standard of proof

[37] In identifying the relevant principles, the Arbitrator did not cite Takaro Properties, nor refer specifically to the three-stage test. But he did refer to (among others) Benton v Miller and Poulgrain and Allied Maples Group v Simmons and Simmons. He said:

FHL’s damages claim is based on the loss of chance principle, namely that FHL was denied a valuable commercial opportunity and that there was a real and substantial chance that it would have achieved this opportunity. Whether it would have achieved that opportunity is in some respects dependent upon the hypothetical actions of third parties. The law is quite clear that when assessing for the purposes of damages arising from a loss of a chance, the hypothetical actions of third parties, it is necessary to assess the consequences not on the basis of the balance of probabilities but on the basis of the degree of possibilities or the probabilities of those hypothetical actions succeeding. If the assessment is less than 50 per cent there is an appropriate deduction in the damages awarded. Thus, even if there is only a 30 per cent chance of the valuable commercial opportunity being achieved, damages are awarded proportionally.

[38] It is unclear from this passage what the Arbitrator perceived to be the relevant legal principle for determining the causation limb when causation depended either entirely or in part on the hypothetical actions of third parties. This is because, having identified the issue, he moved immediately to state the legal position applying to the quantum stage. It appears from the Arbitrator’s next statement that he was uncertain as to what was required in terms of proof of the causation limb when it depended in part on the actions of third parties:

What is not so clear is what needs to be established on the balance of probabilities onus when considering causation … thus, if this is a loss of chance case, which Mangatu does not accept, FHL is required to discharge the onus on the balance of probabilities basis of establishing that the chance lost is valuable and not really speculative …

The New Zealand Court of Appeal in Benton referring to the uncertainty as to what would have happened in the future, noted that this uncertainty can be addressed in two ways. Either on an “all or nothing” approach by reference to the balance of probabilities standard of proof or alternatively, on a proportionate (or loss of a chance) base according to the judge’s assessment of probabilities. The Court acknowledged that the law as to when which of these approaches to causation and damages should be taken is difficult. That case dealt with a breach of duty but the principles applied, in my view, have a more general application.

[39] I respectfully consider that the Arbitrator took a wrong turn at this point. It is evident from a close reading of Benton that the “all or nothing” approach was not being discussed in relation to the hypothetical actions of third parties for the purposes of assessing causation. Rather, it was being discussed in the context of cases that turn on how the plaintiff itself would have acted. As a result, I consider that by the time the Arbitrator came to summarise the principles on which he intended to rely, he was under a misapprehension as to what the standard of proof of causation required in the circumstances of this case.

[40] At [12]–[13] of his decision, the Arbitrator said:

In summary, the principles which I intend to apply are:

(a) FHL needs to establish on the balance of probabilities that it has lost a commercial opportunity of some value (not being a negligible value).

(b) In the circumstances of this case, it is necessary to determine whether Mangatu would have issued the notice to remedy defaults under the provisions of Schedule D of the Forestry Right (notice to remedy). This needs to be established by Mangatu on the balance of probability basis.

(c) If it is accepted that the notice to remedy would have been issued, FHL is required to establish on the balance of probabilities what action it would have taken and that such action would have achieved a commercial opportunity of some value. The commercial opportunity must be more than a speculative opportunity.

(d) If a commercial opportunity of value is established, the damages are to be assessed on the degree of probabilities and possibilities.

I do not accept, as FHL appears to contend, that the future actions of the parties need to be assessed on the balance of probabilities and possibilities basis. As is implicit in the principle stated in the previous paragraph, the likely actions of both parties are relevant to establishing causation. In my view, their actions before the date of repudiation and the inferences that can be drawn from them are relevant in establishing causation and are to be assessed on the balance of probabilities basis.

[41] Nowhere in this passage does the Arbitrator specifically identify the different approach required to be taken to the part played by third parties in the causation assessment. I infer that he has treated that aspect as being required to be proved on the balance of probabilities. But Allied Maples and Benton make it clear that this is not the correct approach. Although FHL’s own conduct was to be proved on the balance of probabilities, the likely conduct of third parties (including Mangatu) did not require that standard; all that was required was a “substantial chance rather than a speculative one” of third parties acting so as to allow FHL to extract some commercial value from the situation.

The causation finding

[42] The Arbitrator identified the two issues on which factual findings were required as being, first, what Mangatu would have done had it not repudiated the contract and, secondly, what FHL would have done in response to Mangatu’s actions. He said:

As these would have been actions of the parties, I do not intend to determine them on a degree of probabilities and possibilities basis but will do so on the balance of probabilities basis.

[43] I consider that the Arbitrator made an error at this point. FHL’s actions were certainly to be determined on the balance of probabilities. But Mangatu’s actions were, for the purposes of the loss of chance assessment, those of a third party. What it would have done fell to be determined on loss of chance principles in the way described by the Court of Appeal in Benton. However, I do not think that the error had any significant consequences at this point, because the Arbitrator concluded that Mangatu would have issued a notice requiring FHL to remedy the breaches, thereby providing FHL with the factual basis for the loss of chance claim.

[44] The Arbitrator then considered FHL’s own position. He accepted that it would have sought to extract some commercial value from the Forestry Right during the 120- day notice period if at all possible and, to that end, it would have considered taking the various actions that FHL had identified as available to it.

[45] The Arbitrator then turned to the contentious issue of what was required to establish causation on the basis of the courses of action open to FHL. In doing so, he signalled his intention to apply the approach that I have held to be erroneous:

… It is necessary to establish on a balance of probabilities basis that one at least of these actions would have given FHL a commercial opportunity of value and that the opportunity was not merely speculative. It is necessary to do so on the basis of the evidence adduced at the liability hearing and the submissions made at the current hearing.

[46] However, when the Arbitrator actually examined the various options available to FHL, he referred to an alternative finding on a “degree of probabilities and possibilities basis”. As I come to later, I do not consider that this approach overcame the earlier error.

[47] The Arbitrator began with the issue of whether FHL could have negotiated with Mangatu to withdraw the notice. In his Liability Award, the Arbitrator had found that the 2013 harvest, although not a breach of the 2011 abatement notice, was a breach of the Annual Harvest Operational Plan (AHOP) required by the RMA consent and that FHL could not have remedied that breach. He also found that Mangatu had acted on the basis that there had been illegal harvesting. In the Further Ruling, the Arbitrator proceeded on the basis that FHL “does not, and could not, rely on an assertion that it would have remedied the defaults within 120 days”.

[48] On the issue of FHL persuading Mangatu to withdraw the notice, the Arbitrator said:

FHL’s position is that it would have negotiated to have Mangatu withdraw the notice to remedy on the basis that it had not logged illegally. Despite a finding to this effect in the Liability Award, FHL says that the logging was not illegal and that when appraised of this by FHL’s lawyer, there was a strong chance that Mangatu would have withdrawn the notice to remedy.

There are three matters which need to be considered in determining whether FHL would have achieved a substantial prospect of a beneficial outcome on this ground. They are:

(a) Was illegal harvesting the sole reason for determination as alleged by FHL?

(b) Was the logging in fact illegal?

(c) Would FHL have been persuaded to withdraw a default notice on the basis of this submission?

I will determine the above issues on the balance of probability test. Because of the confusion in the authorities as referred to above, I will also consider what the position would have been on a degree of probabilities and possibilities basis.

The conclusion that I have come to is that the discovery by Mangatu of illegal harvesting was certainly the tipping point which led to the termination notice which was ultimately held to be a repudiation of contract. However, it was not the sole reason. It brought to a head simmering discontent by Mangatu with FHL’s performance. It was also concerned that FHL had misled it when it said it had complied with the consent conditions. When all the circumstances are considered, I am not persuaded, if the logging was in fact illegal, that FHL could have persuade Mangatu to withdraw a notice to remedy. The evidence from Mangatu is such that FHL could not have on the balance of probabilities established that the notice would have been withdrawn. If I was required to assess this matter on the degree of probabilities and possibilities, my assessment would be that FHL’s chances on this particular point were less than 10%.

(emphasis added)

[49] Mr Branch argued that the Arbitrator should have set aside his earlier finding that the breach could not have been remedied for the purposes of the damages assessment and instead assessed the chance of that happening in accordance with loss of chance principles. This would have required him to consider chances of FHL remedying the breach afresh and a 50 per cent chance of doing so would result in judgment of 50 per cent of the market value of the Forestry Right. I do not accept this. As I have discussed, under the Allied Maples and Benton approach what FHL would have done, had it been given the opportunity, was to be considered on the balance of probabilities, which is what the Arbitrator had already done. Even if the earlier factual finding were wrong, no error of law was made.

[50] Mr Branch also challenged the Arbitrator’s finding that Mangatu had acted in the belief that the 2013 harvest was illegal. He submitted that this finding was an error because the harvest had not, in fact, contravened the abatement notice and the Arbitrator’s previous finding in the Liability Award that it had breached the AHOP was wrong, and the earlier finding had been the subject of a recall application that, ultimately, was not advanced because it was agreed that the issue of whether there had been illegal logging would be addressed as part of the loss of chance assessment. Mangatu did not dispute the assertion that there had been a recall application, but pointed to evidence at the liability hearing and the Arbitrator’s findings on this issue, which it said could not now be impugned.

[51] I do not appear to have documents relating to the recall application. If the parties had agreed to proceed at the damages hearing on the basis that the question of illegal logging was to be considered afresh, there may have been an error of law because, clearly, it was not considered afresh. But I cannot conclude that that is the case on the information before me. That aside, the position must be that the Arbitrator’s findings of fact must stand, whether correct or not. They cannot be impugned as a question of law in the present context.

[52] In considering the prospect of alternative dispute resolution, the Arbitrator found that:37

… FHL had the right to invoke the provisions of this clause and was entitled to endeavour to resolve the matter by discussion failing which it could have referred the matter to arbitration. On the findings already made, Mangatu would not have been prepared to have withdrawn the notice to remedy and would have been prepared to terminate. As already noted, I do not accept the submission that in assessing the actions which either party would have taken, it is necessary to do so on the degree of probabilities or possibilities basis.

The second step in the dispute resolution process would have been to refer the matter to arbitration. On the authorities noted above, FHL would be required to establish on the balance of probabilities that it had a substantial chance rather than a speculative one of achieving a satisfactory result. …

An arbitrator under the interim relief powers in the Arbitration Act 1996 has the power to stay the determination pending the arbitration. However, it is still necessary in my view, for FHL to show that it would have had a substantial, rather than a speculative chance of success. In my view for the reasons already given, I am of the view that the chances of success are speculative and not substantial. …

If I am incorrect and the matter has to be determined on the degree of probabilities or possibilities, I assess the chance of succeeding in an arbitration as no greater than 10%.

(emphasis added)

[53] On the question of whether FHL could have sought cancellation of the abatement notices that were (among other things) factors leading to the notice to terminate being served, the Arbitrator said:

Notwithstanding the previous history if FHL can establish on the balance of probabilities that it had a substantial chance of obtaining a commercially valuable opportunity either through an application to the GDC or on an appeal or application to the Environment Court, it is entitled to have an assessment of the degree of probabilities and possibilities made. It did not call further evidence on this aspect.

It is necessary to assess what possible action to have the abatement notices cancelled would have had on the decision-making process of Mangatu as well as that of GDC. In summary, FHL’s position is that by challenging the abatement notices it would have either persuaded GDC to cancel the notices or have persuaded Mangatu that it should not proceed with termination or would have been successful in the Environment Court which would have led to the abatement notices being cancelled. To assist FHL’s position it is necessary for it to establish on the balance of probabilities that there would have been a substantial prospect of achieving value by one of these methods

It is my opinion that on the basis of the above findings FHL did not have a substantial chance of either persuading Mangatu to withdraw a notice to remedy if one had been issued or of having GDC cancel the abatement notice. If it is necessary to assess on a degree of probabilities and possibilities basis, the chances were in my view negligible.

(emphasis added)

[54] Finally, on the question of whether FHL had a substantial opportunity to sell some of its shares or assign the Forestry Right, the Arbitrator said:

FHL’s position is that a sale of half of the shares in it would have no doubt allayed Mangatu’s concerns and would have provided significant cash resources which could then be used to ensure any breach was remedied. …

The only evidence adduced in support of the prospects of a sale was at the liability hearing when Mr Scott referred to two possible purchasers, …

Accepting that these two possible purchasers did express interest, the hearsay evidence of Mr Scott is not sufficient to satisfy the onus of FHL that there was a realistic rather than a speculative prospect of selling a half-interest in the company or assigning FHL’s interest in the Forestry Right. There was no evidence at the liability hearing and as noted no further evidence was called at the recent hearing, which establishes on the balance of probabilities that a sale of a half-interest was a realistic or significant prospect. …

… I do not necessarily accept that [Mangatu] would not have consented to a transfer of shares if the proposition involved a commercial benefit to Mangatu.

However, in summary, the evidence is not sufficient to show that if a notice to remedy had been issued, the prospective purchasers or any other purchaser knowing of the notice to remedy and knowing of the true condition of the Forestry Right would have made an offer to purchase either half the shares in FHL or the Forestry Right itself. The need to obtain Mangatu’s consent to either transaction would be another factor. This ground cannot assist FHL because the prospects of such a sale would at the most be speculative.

(emphasis added)

[55] FHL maintained that it had good prospects of securing a sale of part of its shareholding and securing Mangatu’s consent to that course. It says that the Arbitrator erred in his consideration of this possibility, because he was required to proceed on the basis that both a market and a buyer existed. Mr Branch relied on the following statement by Cooke J (as he then was) in Takaro Properties:

Whether or not there was in fact a market, in the sense of any potential outside purchaser or purchasers, for Takaro’s assets, including the prospect of ultimately successful development, seems to me irrelevant. In the light of more recent events and trends, the possibility of some outside interest cannot be excluded. Be that as it may, the honesty of Mr Rowling was expressly found and is accepted by all, so there could be no question of exemplary damages. The issue is simply as to provable economic loss. In that situation, it seems to me legitimate to think in terms of hypothetical willing seller and a hypothetical willing buyer, by analogy with the fields of compensation for compulsory acquisition and land valuation. In those fields, it is well settled that it makes no difference that in fact the only or most likely “buyer” would be the person deprived of the property or the owner whose land is being valued: … That is only to say in other words that the value of the potentiality of profits has to be assessed and that it must be done fairly and objectively, excluding wishful thinking.

[56] As I have indicated, I consider that the Arbitrator’s references to FHL’s chances being less than 10 per cent in relation to all of these issues were part of the causation assessment rather than quantum. Although the use of percentages is typically associated with the third limb in the Takaro Properties approach of quantifying the lost opportunity, the Arbitrator has, as part of the causation assessment, used percentage assessment of 10 per cent or less as, essentially, a proxy for the finding that the opportunity that existed was merely speculative. This is evident in his concluding paragraphs:

[85] It follows from the above that in my view FHL has not established on the balance of probabilities that it had other than a speculative right to obtaining a commercial opportunity of value if Mangatu had proceeded and given its notice to remedy. Any damages award based on loss of chance can therefore only be nominal.

[86] In several instances I have determined causation on the basis that FHL has not satisfied the onus on the balance of probabilities. If in any of these instances I am incorrect and should have determined the matter on the degree of probabilities and possibilities, I would have assessed such degree as being no more than 10% and therefore in the negligible category. As such, any award of damages could not be more than nominal.

[57] I prefer not to express a view on whether an assessment at 10 per cent or less will inevitably represent a merely speculative chance because counsel have not had the opportunity to respond to my view of what the Arbitrator meant when he used this percentage as the basis for an alternative view on causation.

[58] It is, however, evident that the Arbitrator failed to approach the issue with the standard of proof clearly in mind. Even in the instances in which he sought to make an alternative finding on the basis of “probabilities and possibilities”, the risk of a flawed assessment remained because his consideration of the evidence relating to the hypothetical actions of third parties was largely focused on the balance of probabilities. I therefore accept that the Arbitrator did approach the causation limb of the assessment on the incorrect basis that it was to be decided on the balance of probabilities and his references to the alternative “probabilities and possibilities basis” was not sufficient to overcome that error.

[59] Finally, I turn to the argument that the Arbitrator erred in not approaching the avenues open to FHL on a totality basis. Counsel did not provide any authority to support this argument. Mr Branch simply submitted that assessing each avenue separately rather than the single overall chance was an error because “the chances of getting heads in a single coin toss is 50 per cent [but] the chance of getting heads from two coin tosses is 75 per cent”. I do not find that analogy helpful. In order to assess a lost opportunity as being one of substantial value, there must be a reasonably clear path visible as to the means by which the plaintiff could achieve the proposed outcome.
If each proposed means of achieving the desired outcome is merely speculative, the prospects of a substantial commercial opportunity cannot be stronger merely because there are several of them. I therefore do not accept that the Arbitrator made an error in principle in considering the various possible ways in which FHL could have secured a better outcome at the end of the 120-day notice period.

[60] I accept that there may be cases in which the various options available to a plaintiff overlap to such an extent that an overall view would be needed. And in some respects, FHL’s case was advanced in this way. But to the extent that it was advanced in this way, the Arbitrator dealt with the overlap. Specifically, FHL was proposing a multi-pronged approach by which it hoped to use errors in Mangatu’s understanding of the breach, and arguments as to whether there was a breach, as leverage in the negotiation to either persuade Mangatu to withdraw the notice or to consent to a partial assignment of FHL’s interest in the Forestry Right. But the Arbitrator was alive to this issue and considered it in relation to the question whether FHL could have persuaded Mangatu to withdraw the notice.

Summary

[61] In respect of FHL’s various points, I have concluded that

(a) The Arbitrator made an error in his approach to the causation assessment by applying the balance of probabilities standard to the hypothetical question of how Mangatu and other third parties would have acted in response to FHL’s efforts to retrieve its position during the notice period.

(b) Subject to the question whether there had been agreement to approach the issue of Mangatu’s belief as to breach by FHL afresh following withdrawal of FHL’s application for recall of the Liability Award, the Arbitrator did not err in adopting factual findings made at the liability stage.
(c) The Arbitrator did not err in his approach to the likelihood of a potential buyer being found for part or all of FHL’s interest in the Forestry Right.

(d) The Arbitrator made no error in considering each of the courses of action proposed by FHL separately rather than in totality.

[62] In my view, the error at (a) had a potentially significant effect. I consider that, by virtue of that error, this ground for leave is made out.

Third ground: failure to consider s 9 of the Contractual Remedies Act 1979

[63] The Contractual Remedies Act 1979 (since repealed by the Contract and Commercial Law Act 2017) continued to apply in this case. Section 9 provided that:

(1) When a contract is cancelled by any party, the court, in any proceedings or on application made for the purpose, may from time to time if it is just and practicable to do so, make an order or orders granting relief under this section.

(2) An order under this section may –

(b) … direct any party to the proceedings to pay to such other party such sum as the court thinks just.

[64] FHL argued that the Arbitrator was required to, and failed to, consider a remedy for FHL under s 9, particularly in relation to the prepaid royalties of over $1 million that still remained at the time the grant was terminated which, in the absence of any other remedy, Mangatu would simply retain.

[65] Mangatu argued that FHL’s position was nothing more than an attempt to have the Arbitrator punish Mangatu for its failure to the give the 120-day notice, thereby attaching moral culpability to Mangatu’s breach of contract, for which there is no recognition in contract law.41 Mangatu also argued that the exercise of an arbitrator’s discretion under s 9 is not an error of law and, thus, not amenable to an appeal.

[66] FHL’s initial claim included one for relief under s 9 even if it were found that Mangatu had not repudiated the agreement.42 In the Liability Award, the Arbitrator expressed the view that if (contrary to his finding) Mangatu had lawfully terminated the Forestry Right, then FHL would have been entitled to have its s 9 claim considered in respect of the unused portion of the royalty ($1,280,984) and other costs.

[67] In the Preliminary Damages Decision, the Arbitrator noted that, on the pleadings, FHL had not sought s 9 relief in the event of him holding that Mangatu had unlawfully repudiated the contract, but that s 9 allowed him to consider a reliance award in respect of the unused portion of the royalty and the costs incurred, though FHL would need to amend its pleadings. The Arbitrator did make the observation that FHL would face difficulty in advancing a claim of that kind, given that the Forestry Right entitled Mangatu to retain the unused portion of the royalty payment. Nevertheless, FHL was invited to consider its position and advise what it proposed to do.

[68] There is nothing in the documents before me to indicate that FHL did take the opportunity to amend its pleading. However, in the Further Ruling the Arbitrator identified one of the issues to be determined as:

If loss of chance damages are not recoverable, are reliance damages recoverable?

[69] Since FHL’s claim for the unused portion of the royalty as reliance damages had been specifically considered in the Preliminary Damages Decision as falling within the discretion to grant relief under s 9, I infer that the reference to reliance damages in the Further Ruling was similarly intended to refer to s 9. However, the discussion on this aspect of FHL’s claim made no reference at all to s 9. Instead, the Arbitrator rejected the claim for reliance damages on the basis that reliance expenditure could only be recovered to the extent that future profits would have been made to enable such expenses to be recovered, and, since there would not have been future profits, no such damages were available.

[70] Since I do not have the benefit of the current pleadings or the submissions made to the Arbitrator on this issue, it is not possible to resolve this issue. If the claim for reliance damages had been advanced, either in pleadings or submissions, as being amenable to relief under s 9, the Arbitrator would have made an error in not considering the issue. Such an omission would not be the exercise of a discretion as such, but rather the failure to actually consider a legal issue raised in the proceeding. If, however, the issue had not been advanced by counsel in that way either in pleadings or submissions, then I cannot see that any error was made.

Leave should be granted

[71] FHL has satisfied me that the Arbitrator made an error in identifying the correct standard of proof required for determining causation in cases based on loss of a chance where the loss turns, in part, on the hypothetical actions of third parties. It may also be that there was an error in failing to consider the application of s 9 of the CRA in relation to the retained portion of the royalty payment, though I cannot resolve that question on the material before me.

[72] Not only is the issue important to the parties to this case, but the identified error of law is likely to be relevant to others involved in arbitration proceedings. I consider that this is an appropriate case for leave to appeal to be granted.

Result

[73] The application for leave to appeal is granted.

[74] The parties may address the issue of costs by way of memoranda filed by FHL within 10 days of the date of the judgment, by Mangatu within a further seven days, with any response seven days after that.