The High Court has issued judgment against unprincipled trustees who sold a forest on trust land without the co-owner’s knowledge or consent.  The co-owner sought to recover its losses from the trust.  Due to the trust’s breach, there was little evidence of the value of the lost forest. The key issues of interest to liability insurers are the date for assessment of loss and the consequence of spoliation of evidence.

Facts


The Peria Charitable Trust (Trust) owned the Peria Forest, a large piece of forestry land in Northland.  In 1996 the Trust granted a forestry right over the Peria Forest to FNAJ/V No 2 Ltd (FNA). FNA was to plant and manage a pinus radiata forest on the land, for which it would receive 68.8 % of the proceeds of sale. The Trust would receive the remaining 31.2 %.

In 2002 FNA transferred its interest in the Peria Forest to Northland Forestry Investments Ltd (NFI). Far North Forests Ltd (FNF) then purchased NFI’s assets.  On 31 March 2010 FNF, with five other companies, became OHL Ltd (OHL).  The Trust was unaware of the changes in ownership.  FNF did not advise the Trust of the amalgamation nor the fact that it resulted in OHL holding FNF’s forestry right and the Trust’s point of contact remained the same, a Mr Finnigan.

In 2016, the owners of the adjoining property, the Ross family, offered to sell their property to the Trust. The Ross property was planted with 230 ha of pine forest.  The Trust wanted to harvest the pine on both properties and plant mānuka on both sections for honey production.  However, in order to do this, the Trust and OHL would have to sell the trees before they reached their optimal age and value.

Unbeknownst to OHL, in September 2016 the Trust entered into a contract to purchase the Ross property, which it would fund by the sale of cutting rights to both the Ross and Peria forests.  The Trust then entered into a conditional contract with Pango Limited for the sale of the cutting rights for $1.1m.

The Trust offered to purchase FNF’s interest in the Peria Forest, making a lowball offer of $100,000.  In making this offer, the Trust misled FNF and withheld critical information from it.  The Trust did not disclose that it had already conditionally sold all of the cutting rights over the Peria Forest to Pango.  It did not disclose the $1.1m sale price, based on which the Peria Forest was worth at least $350,000.

The Trust obtained (incorrect) legal advice that FNF had been de-registered and therefore its forestry right no longer existed.  The Trust’s lawyer misread FNF Companies Office page and did not identify OHL’s successive ownership.  Based on this advice, in February 2017, the Trust withdrew its offer to purchase FNF’s share and proceeded with the Ross purchase and Pango deal as if it was the sole owner of the Peria Forest.  The Trust did not notify FNF of the transactions.

In mid-2017 Pango harvested the immature Peria Forest. OHL did not discover the Trust’s sale to Pango or the harvest of the forest until October 2018, when it made enquiries about harvesting and selling the forest.

Legal Issues


There was no question of liability in this case.  The only question was one of loss, and in particular the date on which loss should be assessed.  The Court also considered how the defendant’s spoliation of evidence affected issues of proof and uncertainty quantifying the plaintiff’s loss.

When should damages be assessed?

OHL’s position was that its loss should be assessed at December 2018 when it would likely have felled and sold the Peria Forest, not February 2017 the date of breach of contract, when the Trust sold the Peria Forest to Pango.  In OHL’s case, damages were considerably higher due to the maturity of the forest and stronger timber prices in December 2018.  The Trust argued that the orthodox position applied, and damages ought to be assessed at the date of breach.

The Court may, if it is in the interests of justice, fix another date that is appropriate in all the circumstances.  This is to achieve the objective of contractual damages: to place the injured party in the position it would have been in if the contract had been performed.  The Court may take into account subsequent events if those events show what loss the plaintiff has actually suffered, in particular where:

  • The asset in issue subsequently substantially increases or decreases in value
  • Those subsequent events were likely to happen and would have affected the value of the asset were it not for the breach
  • The innocent party acting reasonably only discovers the breach sometime after it has been committed

Here Muir J considered that assessing damages as at date of breach would not fully compensate OHL.  The Court found that damages should be determined in May 2019.  This date more fully compensated the plaintiff.  The Court’s key considerations in concluding this were:

  • The Trust’s “clandestine, deceptive and harmful” conduct in depriving OHL of its forestry right. A defendant ought not benefit from its inappropriate conduct
  • The nature of the asset, which was growing trees. The forest increased in value each year as it matured.  The owner had only one opportunity to sell the trees and maximise the return.  The Trust’s premature sale deprived OHL of its right to sell at the optimum time
  • The breach occurred when a reasonable owner in OHL’s position would not have agreed to sell the forest due to market conditions
  • The Trust concealed the breach, which OHL did not discover until October 2018

Justice Muir held that the Court was entitled to consider the counter-factual: what OHL would have done if it were not for the Trust’s breach.  It accepted OHL’s evidence that it would have sought to sell the Peria Forest in late 2018, concluding that it would be unjust to impose on OHL a notional sale at a sub-optimal value, to which it would not have agreed at the time.

Proof of loss: spoliation of evidence

OHL (and the Court) struggled to quantify loss because the Trust had not obtained any independent valuation of the Peria Forest before the sale to Pango and had felled the Ross and Peria forests without keeping separate records of the timber recovered from each.  There was therefore uncertainty about the exact loss OHL had suffered.

OHL sought to apply a presumption against the Trust as the spoliator of the evidence,1 arguing that the Trust’s breach of contract prevented OHL from ascertaining the necessary information to quantify its loss, and the Court should adopt a more “benign” approach to OHL’s evidence of loss where there was uncertainty.  As the Trust had created that uncertainty, it should suffer the consequence of it, not OHL.

The Court agreed.  It rejected the Trust’s submission that the presumption against a spoliator is limited to cases of deliberate destruction or concealment of evidence.  The principle of spoliation can apply to a wide range of circumstances.  It does not displace the burden of proof, rather, the party who has made it more difficult to adduce relevant evidence must run the associated risk.

Result

The Court found for the plaintiff and awarded damages of $755,602 plus interest to OHL.

Comment


The decision is important for the flexible approach taken by Muir J to assessment of contractual damages.  In this case it would have been unjust to assess damages at the earlier date of breach and would not have restored OHL to the position it would have been in if the contract had been performed. The Trust’s egregious wrongdoing was a significant factor in Muir J’s decision to fix the date of damages after the breach and to take into account subsequent events, as well as his approach to evidential uncertainties and spoliation when quantifying loss.

Spoliation is a common issue in property damage and liability disputes, and Muir J’s adoption of the principle in this case will be welcome to both insurers and their insureds.


If you would like to know more about the issues arising in this judgment please contact Kiri Harkess, Jo Stafford or Colin Hunter


  1. Omnia praesumuntur contra spoliatorem

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