IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-1630 [2015] NZHC 1274

UNDER	Section 24C(4) of the Judicature Act 1909	

BETWEEN	
NEW ZEALAND CARBON FARMING LIMITED
First Plaintiff	

AND	
NZCF LAIDMORE LIMITED Second Plaintiff	

AND	
MIGHTY RIVER POWER LIMITED Defendant	

Hearing:	24 - 27 November 2014	

Appearances:	
CP Browne and MRM Gale for the plaintiffs
JE Hodder QC and DT Street for the defendant	

Judgment:	
9 June 2015	

JUDGMENT OF TOOGOOD J [Redacted for publication]

This judgment was delivered by me on 9 June 2015 at 2:00 pm
Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

NEW ZEALAND CARBON FARMING LIMITED v NZCF LAIDMORE LIMITED [2015] NZHC 1274 [9 June 2015]

Introduction	[1]

Summary of the issues		 [6] The New Zealand Emissions Trading Scheme		 [8] The background facts		[13] Measuring carbon sequestration		[18] Methods for calculating a forest’s entitlement to units	[19]
The modelling systems                                                                     [22] Look-up tables                                                                                 [26] The field measurement approach                                                     [30]
The timing of regulatory changes	[31]

The   Emissions   Reduction   Purchase   Agreement   dated
12 January 2012

[37]

Regulatory background	[37]

MRP’s strategy for meeting its surrender obligations
under the ETS

[40]

The negotiators		[44] Outline of the agreement	[46] Security measures provided in MRP’s ERPAs	[51] Interpretation of the contract – the principles to be applied		[53] General principles	[53] Commercial absurdity	[55]
Pre-contractual negotiations                                                           [57] Subsequent conduct                                                                          [63] Private dictionary                                                                            [66]
The “wash-up” claim	[68]

NZCF’s claim                                                                                   [70]

The relevant provisions	[72]

NZCF’s submissions                                                                        [75] MRP’s submissions                                                                          [81] Discussion                                                                                        [90] Conclusion on the wash-up issue                                                     [95]
The “scale-up” claim			[96] What is the effect of clause 2.1(d)?			[99] What triggers the scaling under the clause?		[102] NZCF’s submissions		[104] Plain meaning of the words	[104] Commerciality	[109]
MRP’s submissions                                                                         [111]

The key to the interpretation of clause 2.1(d): Was the
FMA “in operation” at the signing of the agreement on
2 January 2012?

[112]

Other factors supporting the plain meaning                                   [118]

Conclusion on scale-up issue		[128] The document obligation issue		[131] The parties’ positions	[135]
NZCF’s submissions                                                                        [137] MRP’s submissions                                                                         [140] Discussion                                                                                       [144]
The set-off issue                                                                                         [149] Relevant provisions of the agreement                                             [150] NZCF’s submissions                                                                        [152] Discussion                                                                                       [153]

Conclusion	[156]

Payment date issue                                                                                    [157] NZCF’s submissions                                                                       [162] MRP’s submissions                                                                         [165] Conclusion                                                                                      [166]
Summary of findings	[168]

Form of orders	[173]

Introduction

[1]       As a signatory to the United Nations Framework Convention on Climate Change, New Zealand has joined other sovereign states in expressing concern that human activities have been substantially increasing the atmospheric concentrations of greenhouse gasses, resulting on average in an additional warming of the earth’s surface and atmosphere which may adversely affect natural ecosystems and humankind.1   The reduction of emissions of greenhouse gasses has been accepted by governments  worldwide  as  being  necessary  to  manage  and  limit  the  impact  of climate change on society, the economy and the environment.

[2]       The  ultimate  objective  of  the  Convention  is  to  achieve  stabilisation  of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous interference with the climate system by human activity.2

[3]       One of the purposes of the Climate Change Response Act 2002 is to provide for the implementation, operation, and administration of a greenhouse gas emissions trading scheme (“ETS”) in New Zealand that supports and encourages global efforts to  reduce  the  emission  of  greenhouse  gasses  by  reducing  New  Zealand’s  net emission of those gasses to below business-as-usual levels.   The ETS, which was
incorporated into the legislation in 2008,3 puts a price on emissions thereby creating

a financial incentive to New Zealand businesses and consumers to modify their behaviour  by  reducing  emissions,  investing  in  clean  technology  and  renewable power generation, and planting trees.

[4]       The ETS creates a tradable measure of greenhouse gas emissions, a carbon credit called a New Zealand Unit (“NZU”), which is equivalent to one tonne of carbon  dioxide.    Under  the  ETS,  emitters  of  greenhouse  gasses  are  obliged  to monitor and report their emissions to the Crown and to surrender units in accordance with the amount of carbon dioxide they emit.   Net emitters (those who have not
acquired sufficient credits or NZUs by a reduction or removal of carbon emissions to

1           Preamble to the United Nations Framework Convention on Climate Change 1771 UNTS 171 (opened for signature 4 June 1992, entered into force 21 March 1994) set out as Schedule 1 to the Climate Change Response Act 2002.
2	Article 1(2).
3	Climate Change (Emissions Trading) Amendment Act 2008.

offset the amount of their emissions) are required to purchase units.   Those who reduce or remove carbon emissions, for example by growing trees which absorb and store carbon dioxide as they grow, can earn units under the ETS.  Forest owners who participate in the ETS earn units that reflect the amount of carbon stored in their forests over a period.

[5]       Thus, a market has been created for the sale by forest owners of carbon credits to significant emitters of carbon dioxide such as stationary energy companies.

Summary of the issues

[6]       This case concerns a dispute between two plaintiff companies, who are the owners of the Hawarden Forest in North Canterbury (“the forest”), and Mighty River Power Limited (“MRP”), an electricity generation, wholesaling and retailing company, over the interpretation and operation of an emissions reduction purchase agreement (“ERPA”) between them dated 12 January 2012, for the sale and purchase of NZUs.

[7]       The parties have identified six issues arising under the ERPA, namely:

(a)       An issue concerning the date on which payments fall due under the agreement (“the payment date issue”).

(b)       A dispute over MRP’s entitlement to set off or withhold what MRP claims to have been an overpayment for 2013 against the sum payable to the plaintiffs for the 2014 delivery of units (“the set-off issue”).

(c)       An issue concerning the disclosure of documents and information by the plaintiffs to MRP to enable MRP to verify the plaintiffs’ claims for payment for units delivered under the agreement (“the document obligation issue”).

(d)       A question about whether MRP is required to purchase only those NZUs which can be attributed to the forest’s carbon performance in the prior year, or whether it is obliged to take additional units received

from the mandatory re-assessment of carbon performance at the end of a five-year commitment period (“the wash-up issue”).

(e)       Whether the minimum and maximum volumes provided for in the agreement should be scaled up as a result of the introduction of a change in the accounting mechanism for the calculation of units to be delivered and paid for under the agreement (“the scale-up issue”).

(f)	Whether MRP is entitled to rectification of the agreement if issue (e)

is decided against it (“the rectification issue”).

The New Zealand Emissions Trading Scheme

[8]       After having been enacted in 2002 to ratify the Kyoto Protocol and to meet New Zealand’s obligations under the United Nations Framework Convention on Climate Change, the Climate Change Response Act was amended with effect from
9 September 2008 to provide for the ETS, a scheme designed to place a cost on the emission   of   carbon   dioxide-equivalent   emissions   and,   therefore,   encourage emissions reduction.  Under the ETS, emitters of greenhouse gasses are required to surrender  units  equivalent  to  their  emissions  and  foresters  are  granted  units equivalent to the amount of emissions absorbed by their forests.  Participation in the ETS for emitters in the energy, transport, waste, industrial and pre-1990 forestry sectors (that is forests planted before 1990) is mandatory.   Participation for post-
1989 forestry (forests planted after 1989) is voluntary.

[9]       Individual sectors of the economy entered the ETS on different dates, when their  obligations  to  report  emissions  and  surrender  emission  units  took  effect. Forestry entered the ETS on 1 January 2008 and forests planted after 1989 (“post-
1989 forests”) began earning NZUs for net increases in carbon stock.   Stationary energy companies such as MRP entered the scheme on 1 July 2010 and became responsible for surrendering emission units in early 2011.   To soften the financial cost of the introduction of the ETS, the scheme included transitional provisions which allowed participants in energy, fossil fuels and industry to surrender one NZU for two tonnes of carbon dioxide equivalent emissions, rather than one NZU per

tonne.  Participants were enabled to purchase NZUs from the government for a fixed price of NZ$25, providing a maximum cost of $12.50 per tonne of emissions. Although the transitional provisions were due to expire at the end of the first commitment period (CP1) of the Kyoto Protocol on 31 December 2012, the scheme was amended following a government review in 2011 to extend the two-for-one transitional measures indefinitely.  Although it has been possible for emitters under the ETS to acquire units on an international market for surrender under the New Zealand scheme, MRP was required from May 2015 to surrender only New Zealand units.

[10]     The ETS provides an accounting mechanism for calculating the amount of carbon that is emitted, reduced or removed by any given activity.   Because the amount of emissions reported in any time period carries significant financial implications for any participant, the method, form and timing of reporting and calculating emissions is strictly controlled and enforced by regulation.

[11]     Participants who register post-1989 forestry in the ETS must calculate and report the total amount of carbon dioxide a forest absorbs or emits over a given period, expressed in tonnes of carbon dioxide.  The calculation sets the number of units which the forest owner (or other eligible participants such as leaseholder or forestry-right holder) should receive.

[12]     Under the ETS, participants may file voluntary emissions returns (VERs) annually to record their entitlements to units.  They are required to file a mandatory emissions return (MER) at the conclusion of each five-year ETS commitment period, beginning with a MER in 2013 which covered the initial five-year commitment period of 2008 to 2012.

The background facts

[13]     The essential background facts are largely undisputed.

[14]     The first plaintiff, New Zealand Carbon Farming Limited (“NZCF”)  is a carbon farming business.  Its objective is to acquire forests around New Zealand, not

for the traditional purpose of harvesting timber, but for the purpose of collecting NZUs earned by those forests for selling to entities required to surrender carbon credits to the government under the ETS.  One of the forests acquired by NZCF was the Hawarden Forest in North Canterbury which comprises 2,200 hectares of established forest.

[15]     According to Mr Matthew Walsh, a director of the plaintiff companies, the Hawarden Forest has certain unique characteristics which make it particularly attractive for carbon farming.  Forests planted for timber harvest are usually planted at around 1,200 trees per hectare and then thinned down to between 200 and 300 trees per hectare when they are around 10 years old.  At the same time, the trees are usually pruned to remove branches.  The processes of thinning and pruning, together known as “tending”, remove significant wood mass from the forest.  Because carbon unit yield is based on wood mass, tending significantly reduces the unit yield of the forest.  Hawarden Forest was predominantly untended, meaning that its wood mass and, therefore, its unit yield was higher than a forest which had been tended in the usual way.

[16]     NZCF’s intention in acquiring the Hawarden Forest was to manage it as a

“carbon sink” which would never be harvested.

[17]     In the course of acquiring the forest, NZCF learned that part of the forest had already been registered as a participant under the ETS.   The originally registered portion of the forest was known as the Laidmore Forest.  It is owned by the second plaintiff, NZCF Laidmore Limited (“Laidmore”) and the balance of the Hawarden Forest is owned by NZCF.   For the purposes of this judgment, it is convenient to refer to the plaintiffs together as NZCF and the entire forest as the Hawarden Forest.

Measuring carbon sequestration

[18]     Measuring the amount of carbon removed from the atmosphere and stored in the forest is a matter of estimation rather than precise calculation.  The system of measurement assumes that a tree of a particular dimension will absorb and retain a particular quantity of carbon, thus removing the carbon from the atmosphere.  When

the ETS was first introduced, all participants were required to use look-up tables to calculate their forest carbon stocks when filing a voluntary emissions return,  or ceasing to be a participant or, for pre-1990 forest land, calculating the effect of deforestation.

Methods for calculating a forest’s entitlement to units

[19]     There are two methods for calculating a forest’s entitlement to units under the ETS:  the default look-up table method (for forests under 100 hectares) and the field measurement approach (FMA) which is compulsory for post-1989 forests over 100 hectares.   Both methods rest on the same forest growth and carbon absorption or sequestration  models:    the  300-Index  growth  model  and  the  C_Change  carbon model.   Industry participants use modelling systems which incorporate these two models in order to calculate a forest’s unit entitlement.

[20]     The 300-Index growth model calculates the increase in stem volume over time  for  Pinus  radiata  enabling  a  reasonably  accurate  prediction  of  growth throughout New Zealand.  The 300-Index is a measure of the volume productivity of the site and it estimates the expected mean annual increment in volume for a radiata pine stand pruned to six metres, thinned at completion of pruning to achieve a stocking of 300 stems per hectare at 30 years of age.  It can be estimated for a site
from measurements of an existing stand together with stand history.4

[21]     C_Change is the only comprehensive model available for calculating carbon sequestration.   The 300-Index growth model and C_Change models have been embedded in the various carbon modelling systems used to calculate a forest’s entitlement to units.

The modelling systems

[22]     The three most relevant carbon modelling systems are PRAD Calculator, Forecaster and Forecaster-Carbon.

4	A “stand” is a sub-area of a forest which was planted at the same time and has been managed in the same way.

[23]     PRAD Calculator is a relatively simple Microsoft Excel-based growth and yield modelling system.  The 300-Index growth model is included, on a stand-level basis, with C_Change.   This modelling system is the most popular with smaller companies, infrequent and less-experienced users.

[24]     Forecaster is a modelling system in which the 300-Index growth model is an option, on an individual stem or tree basis, together with C_Change.  Forecaster is a very detailed system which has numerous options allowing it to be used for many different forestry tasks.   For example, in Forecaster there are at least 40 different growth models for a variety of different species and purposes.  It is important that users  of  the  Forecaster  system  select  the  appropriate  growth  model  and  other functions for the analysis they wish to conduct.

[25]     Forecaster-Carbon is a slimmed-down version of Forecaster, developed by MPI for managing the FMA and is based on the forest carbon predictor (FCP) system used by the Ministry for the Environment.  In the opinion of Professor Bruce Manley,  head  of  the  New  Zealand  School  of  Forestry  at  the  University  of Canterbury, the Forecaster-Carbon is closer in nature to the PRAD Calculator than to the more wide-ranging Forecaster system.  Those two systems are based on a stand- level 300-Index growth model, while Forecaster has a more detailed individual stem- level version of the same model.   In Professor Manley’s opinion, however, if the same inputs and parameters are chosen, the three systems will produce results within five percent of each other.

Look-up tables

[26]     Look-up tables are used in both approaches for the estimation of carbon sequestration.  In this judgment, the terms “default look-up tables” or “the look-up tables approach” are used in reference to the regional or default look-up tables used in the method discussed in this section.  They are to be distinguished from look-up tables used in the participant-specific field measurement approach (“FMA”) for individual forests, described in the next section.

[27]     The default look-up tables provide pre-calculated values and stocks by forest type, age, and, in the case of Pinus radiata, by region.  The values are intended to be generic estimates of the weight of carbon dioxide that is being removed from the atmosphere and stored in the forest during growth.  The carbon stocks, expressed in tonnes of carbon dioxide per hectare, are multiplied by the area of the forest to obtain total forest carbon stocks.   ETS participants can claim NZUs for the change in carbon stocks over time.

[28]     The current default look-up tables are listed in a Guide published by the Ministry for Primary Industries (“MPI”), the successor to the Ministry of Agriculture and Fisheries (“MAF”).  The tables are calculated based on average growth rates for typical forests in regionally-averaged environments, presuming standard forest thinning and pruning regimes.  The growth rates are obtained using the 300-Index growth model.  The information from the 300-Index growth model is entered into C_Change, the “engine” which is then used to calculate carbon stock values.

[29]     Default look-up tables are a low-cost method of determining carbon stocks without the need for expensive measurements of the forest.  For radiata forests, the method requires only limited details about the size and location of the forest and the age and species of the trees.  Because the default look-up tables are based on average numbers, however, they may not be accurate for any individual forest.  It was always intended by the regulators that the default look-up tables would be replaced by a measurement-based, forest-specific approach for larger forests of more than 100 hectares.

The field measurement approach

[30]     The FMA is a field inventory-based approach to determining the carbon stock in participants’ registered post-1989 forests.  It uses forest growth and carbon models specific to New Zealand’s forests.  Personalised look-up tables are generated under the FMA by the forester first submitting to the Ministry initial information regarding the size and type of its forest.  The Ministry then generates a set of plots within the forest.   The forester measures its forest at those plot points, in accordance with guidelines issued by the Ministry, before submitting that data to the Ministry.  The

Ministry then runs its carbon model for each of the plots and averages the result to produce a participant-specific look-up table for the forest.  The table is then applied to produce a return estimating the net emissions for a relevant period.   Re- measurement of the forest occurs at least once in every MER period.

The timing of regulatory changes

[31]     The  New  Zealand  ETS  came  into  force  on  9 September 2008  under  the Climate Change Response Act 2002.  In October 2008, MAF published its Guide to Forestry in the Emissions Trading Scheme.  The Guide explained that the Look-up Table approach would be used for smaller forests and interim reporting for larger forests, and that the FMA would be used with mandatory reporting at least once every five years for larger forests.   In March 2009, the MAF Guide to Look-Up Tables was published.  Carbon forestry workshops were begun in April 2010, part of the workshops being to explain the difference between the default look-up tables approach and the field management approach.  A consultation document, confirming the key elements of the FMA, was released by MAF in October 2010.

[32]     In March 2011, MAF announced that regulations introducing the FMA were expected to come into force in August 2011 with the result that the FMA would be used for the mandatory emissions returns at the end of the 2008-2012 Commitment Period 1.  The Climate Change (Forestry Sector) Amendment Regulations 2011 were promulgated  on  1 May 2011.     Regulation  2(1)  provided  that  the  regulations prescribing the FMA would take effect from 1 September 2011.

[33]     A draft FMA standard was released on 1 September 2011 with a Guide to the FMA for Forestry in the ETS being released later that month.  Version 2 of the FMA Information  Standard,  which  included  the  form  and  format  in  which  FMA information collected at sample points must be submitted to MAF, was released on
22 December 2012.

[34]     In June 2012, the Ministry of Primary Industries released the FMA Guide, Checklist, Standard, and Information Standard to provide further detail about the operation of the FMA including:

(a)       the  manner  in  which  allocated  permanent  sample  plots  must  be located and established; and

(b)       the form and electronic format of information that an FMA participant would receive when allocated permanent sample plots under the regulations.

[35]     In September 2012, FMA participants could submit their FMA information to MPI to generate their participant-specific tables and, after the FMA look-up tables were released in January 2013, FMA participants could submit their first mandatory emissions returns using the tables.

[36]     There is a significant difference of view between NZCF and MRP as to the ability of forestry participants in the ETS to estimate, during 2011 and 2012, the units which a particular forest would generate under the FMA.  NZCF asserts further that it is self-evident that, until the FMA tables were issued by MPI in early 2013, the forestry industry could not use them and so the FMA was not in operation when the ERPA was signed by the parties in January 2012.

The Emissions Reduction Purchase Agreement dated 12 January 2012

Regulatory background

[37]     The regulatory background to the emissions reduction purchase agreement which is the subject of this proceeding is conveniently summarised in the pleadings and is largely undisputed.

[38]     As owners of post-1989 forests and participants in the ETS, NZCF receives carbon credits (New Zealand units) from the Crown, at a rate of one unit for each tonne of carbon dioxide equivalent the trees are calculated as absorbing as they grow. Under the ETS, participants may file voluntary emissions returns annually to record their entitlement to NZUs, but are required to file a mandatory emissions return at the conclusion of each ETS commitment period of five years, the first MER being required in 2013 in relation to the 2008-2012 ETS commitment period.

[39]     The MER involves a “wash-up” of the previous five years’ entitlements to units, such that any over or under allocation of units in any voluntary returns filed during the commitment period must be corrected by an adjustment to the number of units issued in respect of the mandatory emissions return year.

MRP’s strategy for meeting its surrender obligations under the ETS

[40]     Mighty River Power established and maintains a portfolio of units sufficient to meet its obligations both to the Crown under the ETS and to its suppliers of natural gas.  MRP purchases natural gas to run its thermal power station at Penrose, Auckland, and for on-sale to its retail customers.   MRP’s suppliers under these contracts themselves have obligations to surrender NZUs to the Crown in relation to their natural gas mining activities.  Under the terms of its natural gas contract, MRP is entitled to transfer NZUs to the suppliers, rather than pay cash.   MRP also has surrender obligations in relation to its ownership and operation of geothermal electricity generation power stations.   MRP’s emissions are variable depending on the extent of production at its Southdown gas turbine power station.  MRP’s future surrender obligations are estimated on the basis of its production plan and its assumptions regarding the future structure of the ETS.

[41]     MRP’s  carbon  portfolio  was  established  with  NZUs  obtained  from  three

sources:

(a)       Units  received  from  the  Crown  under  the  Projects  to  Reduce Emissions (PREs) programme, which provides NZUs in return for the development   of   renewable   energy   projects,   namely   the   two geothermal power stations which the company has built since 2008;

(b)       NZUs  purchased  under  long-term  ERPAs  such  as  the  agreement which is the subject of this proceeding; and

(c)	NZUs purchased on the spot market.

[42]     This mixed approach allows MRP to manage its exposure to changes in unit prices through a combination of taking the risk, whether a positive or negative, of fluctuations in “floating” prices on the spot market, and having the certainty of “fixed” prices secured through long-term agreements.  MRP considers the approach particularly necessary because of the variable nature of its surrender obligations, caused by the uncertainty of the demands of the Southdown power station.   MRP developed a market credit risk management policy which called for the company to have sufficient NZUs to cover at least 50 percent, and at most 100 percent, of its surrender obligations.  The limits had been set because of the regulatory uncertainty regarding surrender obligations at the time MRP negotiated its long-term unit purchase agreements.  In a somewhat delicate balancing exercise, MRP was required to obtain at least sufficient units to cover half its obligations to surrender units on a one-for-one basis relative to its emissions but it did not wish to acquire too many units should the two-for-one transitional provisions be extended, as proved to be the case.  Since MRP’s units were required for compliance purposes, it did not wish to acquire more units than it was required to surrender to the Crown.

[43]     Each of MRP’s long-term unit purchase agreements fell into one of three categories:

(a)	agreements between MRP and the Lake Taupo Protection Trust, where

MRP agreed to purchase all of the units from the relevant forest;

(b)       look-up table contracts where MRP agreed to a contractual delivery volume set around the default look-up table volumes for the relevant forest with the maximum delivery volume often being based on an estimate of FMA volumes;

(c)       the NZCF agreement where MRP agreed to a contractual delivery volume set around the parties’ estimates of the Hawarden Forest’s unit entitlement under the FMA.

The negotiators

[44]     Negotiations for an ERPA between NZCF and MRP began in August 2011. By then, MRP had signed five ERPAs with other forest-holders and was negotiating others.   The negotiator on behalf of NZCF was Mr Bruce Miller, who had been employed by MRP up to July 2011.  In his capacity as head of wholesale markets for MRP, Mr Miller’s responsibilities included developing MRP’s carbon credit portfolio and negotiating similar agreements on MRP’s behalf with other ETS participants. Mr Miller was in the unusual position, therefore, of being NZCF’s representative while  having  full  knowledge  and  understanding,  as  at  1 July  2011,  of  MRP’s obligations under the ETS; of MRP’s policy for the purchase of NZUs in order to meet its obligations under the Scheme; and of the nature of the ERPAs which MRP had already concluded.

[45]     The negotiators for MRP were Mr Phil Gibson who succeeded Mr Miller, from 1 July 2011, as wholesale markets manager, and Mr Aaron Smith who was then employed  by  MRP as  a  carbon  analyst.    Mr Smith  had  been  responsible,  with Mr Miller, for the development of the MRP carbon portfolio.

Outline of the agreement

[46]     The agreement is an exclusive arrangement for the acquisition by MRP of the carbon credits generated under the ETS by the Hawarden Forest.  NZCF is required to deliver annually to MRP, on 1 March each year, the NZUs transferred to them by the Crown in relation to the forest for the preceding calendar year, subject to minimum and maximum volumes, at specified unit prices.   If the number of units received by NZCF is less than the minimum required to be delivered in respect of any year, NZCF can elect either to top up the supply with replacement units obtained from another forestry project or make a payment to MRP of an amount equivalent to the amount MRP would be required to pay for the shortfall on the spot market (an “Alternative Units Payment”).

[47]     The agreement requires NZCF to deliver annually, in respect of the forest, a copy of the emissions return or similar document provided to the Crown, including a

record of each of NZCF’s emissions and removals as calculated (and if necessary verified) for that return, and as assessment of NZCF’s net entitlement or liability to receive  or  surrender  units.    The  copy  return  is  required  to  be  delivered  on
10 February in each year.  The parties disagree about whether NZCF was required to deliver to MRP the records necessary for MRP to verify that the units received by it under the agreement were those which MRP had agreed to purchase both as to volume and type.

[48]     Schedule One to the agreement provides that the minimum delivery volume in each of the 15  years shall be […redacted…] units and the maximum agreed volume shall be […redacted…] units. The minimum and maximum volumes operate such that, if NZCF receives fewer than […redacted…] units, they must deliver the equivalent of […redacted…] units to MRP, being the units received in respect of the forest and the balance made up of replacements units or an alternative units payment. If NZCF receives between […redacted…] and […redacted…] units in respect of the forest, NZCF must deliver the number of units received.   If NZCF receives more than […redacted…] units, it must deliver […redacted…] units but MRP will have a first right of refusal in respect of any units received in excess of […redacted…].

[49]     NZCF  is  required  to  invoice  MRP  for  the  units  delivered  within  five workings days of the delivery.  MRP must pay NZCF for the units delivered “no later than the 20th  of the month following” the date of invoice.  Whether that means the
20th  of March for an invoice submitted on 1 March in any year, or the 20th of April

that year, is one of the disputed issues.

[50]     If a party fails to pay any amount payable under the agreement, it will be liable to pay interest at an annual rate of three percent above the bank bill rate from the date of default.  Where there is a dispute between the parties, they are obliged to continue to use reasonable endeavours to meet their respective obligations under the agreement as if no dispute had arisen.  MRP has a right of set-off where NZCF has failed to pay “any other amount payable and owing” to it.  The parties must attempt to resolve any dispute between them by meeting within five business days of the dispute being raised.

Security measures provided in MRP’s ERPAs

[51]     To secure the performance of the obligations of the ETS participants with whom MRP negotiated its ERPAs, a mix of security arrangements were put in place. MRP’s senior managers had a degree of discretion as to whether all of the available security measures were required in respect of any particular agreement.  Mr Miller, as the more senior of the managers responsible for developing MRP’s carbon emissions policy, was fully familiar with the security requirements of the policy.  On one occasion he provided Mr Smith with advice as to what mix of securities might satisfy MRP’s policies.  The security measures which MRP conventionally sought in any ERPA included a combination of the following:

(a)       an emissions unit register block which ensured that credits could only be  transferred  to  another  party with  MRP’s  consent,  to  prevent  a forester from selling units on the spot market;

(b)       an encumbrance or mortgage to ensure that the agreement travelled with the land in the event of the sale of the land by the original counterparty;

(c)	registration of MRP’s security interests in the carbon credits under the

Personal Property Securities Act 1999;

(d)	a requirement that the forester should take out insurance for MRP’s

benefit against damage to the forest by fire, wind or other cause;

(e)       a performance bond to ensure that the forester had funds available to purchase  replacement  units,  if  necessary  to  meet  the  minimum delivery volume;

(f)       a provision for replacement units or the making of an alternative units payment in satisfaction that the counterparty had the ability to obtain or meet the same;

(g)       a provision for retained units to ensure that a forester held sufficient units to cover the following years’ delivery obligations;

(h)       a provision ensuring that no third party had any claim over the units to be delivered under the agreement;

(i)        a provision allowing MRP to withhold from any purchase payment a sum equivalent to any amount owing, such as an alternative units payment, to MRP by the forester.

[52]     As Mr Smith emphasised, a number of the security provisions reflected a link between the unit purchase agreement and the forest which would generate the units, by the suite of securities being sufficient to reduce the risk to MRP of the seller failing to deliver the minimum volume.

Interpretation of the contract – the principles to be applied

General principles

[53]     In  Firm  PI 1  Ltd  v Zurich Australian  Insurance Ltd,5   the New  Zealand Supreme Court confirmed that the approach to contractual interpretation that is applicable in New Zealand is an objective one which draws on the speeches of Lord Hoffmann in Investors Compensation Scheme Ltd v West Browmwich Building Society6  and Chartbrook Ltd v Persimmon Homes Ltd.7    Lord Hoffmann described contractual interpretation as “the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”8   The objective meaning is taken to be that which
the parties intended.9    The background includes “absolutely anything which would
have affected the way in which the language of the document would have been understood by a reasonable man”,10 subject to the requirements that “it should have

5	Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60].
6	Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL).
7	Chartbrook Ltd v Persimmon Homes Ltd [2009] 3 WLR 267 (HL).
8	Investors Compensation Scheme Ltd v West Bromwich Building Society, above n 6, at 912.
9	Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 at [16].
10	Investors Compensation Scheme Ltd v West Bromwich Building Society, above n 6, at 913.

been reasonably available to the parties”11 and that it is background that a reasonable person would regard as relevant.12

[54]     The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.13    The Supreme Court identified in Firm PI 1 Ltd that the text remains centrally important and if the language, in context, has a natural and ordinary meaning that “will be a powerful, albeit not conclusive, indicator of what the parties meant”.14     But where a judge concludes from the background “that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had”.15    So, where it is clear that something has gone wrong with the language” and also “clear what a reasonable person would have understood the parties to have meant”, then there is not “a limit to the amount of red ink  or  verbal  rearrangement  or  correction  which  the  court  is  allowed”.16      The Supreme Court noted in Firm PI 1 Ltd that it has been confirmed in New Zealand that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.17

Commercial absurdity

[55]     If  a particular  meaning  produces  a commercially absurd  result,  that  is  a reason to read the contract in a different way than the language might suggest.18   A court is not justified, however, in concluding that a contract does not mean what it seems to say simply because the court considers that, so interpreted, the contract is unduly favourable to one party;19 commercial absurdity “tends to lie in the eye of the
beholder”.20   Given the commercial context in which the contract is drafted (i.e. the

11	At 912.
12	Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 at [39].
13	Investors Compensation Scheme Ltd v West Bromwich Building Society, above n 6, at 913.
14	Firm P1 Ltd v Zurich Australian Insurance Ltd, above n 5, at [63].
15	Investors Compensation Scheme Ltd v West Bromwich Building Society, above n 6, at 913.
16	Chartbrook Ltd v Persimmon Homes Ltd, above n 7, at [25].
17	Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 5, at [61], referring to Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
18	Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 5, at [88]-[89].
19	At [89].
20	At [90].

parties themselves have control over the language they used, judges are not commercially minded, and contracts emerge from the process of negotiation and will reflect accommodations of the parties’ varying interests which are not easily perceived by the Court),21  a conclusion that the natural meaning of the contract produces a commercially absurd result should be reached only in the most obvious and extreme of cases.22

[56]     Mr Hodder QC referred to Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro Rata Cho 2 BV23 as adopting an iterative process in which part of the exercise of contractual interpretation is to place the rival interpretations within their commercial setting and investigate the commercial consequences of each meaning.24   If, after having considered the commercial setting and consequences, the relevant language is open to question, the Court should adopt the interpretation that is more commercial.25    This view is consistent with the New Zealand approach to contractual interpretation, which does not require an ambiguity to depart from the plain meaning of the words if those words would carry a different meaning in the specific context of the contract.

Pre-contractual negotiations

[57]     In Investors Compensation Lord Hoffmann identified that “[t]he law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.”26   Later in Chartbrook Lord Hoffmann said: 27

I do  however  accept that it would not be inconsistent  with the  English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used.

[58]     In  Vector  Gas,  the  New  Zealand  Supreme  Court  re-examined  the  rule excluding pre-contractual negotiations.28   Given the differing approaches which may

21	At [90]-[91].
22	At [93]
23	Napier Park European Credit Opportunities Fund Ltd v Habourmaster Pro Rata Cho 2 BV
[2014] EWCA Civ 984.
24	At [32].
25	At [36].
26	Investors Compensation Scheme Ltd v West Bromwich Building Society, above n 6, at 913.
27	Chartbrook Ltd v Persimmon Homes Ltd, above n 7, at [33].

be seen in the discussion by the members of the Court, I respectfully adopt the summary by the Court of Appeal in Trustees Executors Ltd:29

The majority of the judges in  Vector adopted the approach in Investors Compensation whereby the language the parties have used must be read in the context of the document as a whole and the surrounding circumstances. Under  that  approach,  the  wider  background  and  circumstances  should always be considered, even if there is no ambiguity or other interpretive difficulty with the words used by the parties. Evidence of background circumstances is not, however, relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean or to prove what a parties' negotiating stance may have been at a particular time.

(Footnotes omitted).

[59]	This summary reflects the approach that Tipping J took in Vector Gas.  That approach was adopted by Asher J in i-Health Limited v i-Soft NZ Ltd where he said:30

[40]      In  accordance  with  the  judgment  of Tipping  J  in  Vector  Gas,  I propose to take into account in the interpretation process the evidence of relevant background facts that can be extracted from the negotiations, and also any exchange between the parties in the negotiations which on an objective reading points conclusively to a particular meaning.   Such an approach is consistent with s 7 of the Evidence Act 2006.  Section 7 provides that all relevant evidence is admissible unless specifically declared inadmissible  or  excluded  by  the  Evidence  Act  or  another  enactment. Evidence is relevant under s 7(3) if it has the tendency to prove or disprove anything that is of consequence to the determination of a proceeding.  If the negotiations construed objectively cast light on meaning by, for instance, showing the purpose of a clause, they will be relevant.

[41]      In summary:

a)         Exchanges  in  negotiations  which  construed  objectively  tend  to establish background facts known to both parties are relevant;

b)        Exchanges between the parties in negotiations which, construed objectively, cast light on meaning are relevant;

c)         Material created by one party that relates to negotiations but is not communicated  and  relates  to  the  subjective  understandings  and beliefs of that party is irrelevant.

[60]	The Court of Appeal did not take issue with Asher J’s analysis on this point when the matter was appealed.31

28	Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
29	Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 at [32].
30	i-Health Limited v i-Soft NZ Ltd HC Auckland CIV 2006-404-7881, 8 September 2010.

[61]     Justice Venning took  a similar approach  in  M  v M.32      He described  the approach as requiring a judge to examine the relevant previous drafts, documents and communications in the negotiation process to firstly determine objective background facts, and then to discern the extent to which they shed light on the parties’ intended meaning.  A judge must then carefully exclude subjective material from that which asserts internal exchanges of individual thought.33

[62]     I respectfully adopt those principles.

Subsequent conduct

[63]     In New Zealand subsequent conduct is admissible as an aid to interpretation although the approach is not free of judicial disagreement.  Members of the Supreme Court divided in Gibbons Holdings Ltd v Wholesale Distributors Ltd34  on whether the conduct must be “mutual” or “shared”.   Tipping and Anderson JJ thought the subsequent conduct must be that of all the parties to the contract; Thomas J felt that the conduct of one party alone could be relevant, at least if that conduct was inconsistent with the interpretation that party was arguing before the court. Although the Chief Justice did not find it necessary to have regard to the subsequent conduct of the parties in Gibbons Holdings, she endorsed the approach of Thomas J.35

[64]     Later, in Vector Gas,36 Tipping J moved somewhat from the requirement for mutuality, saying he had referred to it to emphasise the importance of ensuring that extrinsic evidence was admitted only for the purpose of demonstrating objectively what meaning both or all parties intended their words to bear.   In  Vector Gas, Wilson J observed the lack of mutuality to post-contractual conduct did not prima facie make it irrelevant – rather, post-contractual conduct that was not mutual should
go to its weight rather than admissibility.37

32	M v M [2012] NZHC 2522.
33	At [22].
34	Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277.
35	At [7].
36	Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 28, at [28] and following.

[65]     I have considered the careful arguments of counsel addressing the issue of post-contractual conduct but, because of the views I have reached on the disputed matters of interpretation,  I have determined that  there is  no  relevant subsequent conduct which assists in their resolution and do not need to express a concluded view.

Private dictionary

[66]     I have considered, however, observations of Tipping J in Vector Gas about the  use  of  a  private  dictionary  by  parties  which  may  give  the  wording  in  an agreement a meaning which resolves an ambiguity appearing a plain meaning approach:

[31]      … extrinsic evidence is admissible if it tends to establish a fact or circumstance capable of demonstrating objectively what meaning both or all parties intended their words to bear.  Extrinsic evidence is also admissible if it tends to establish an estoppel or an agreement as to meaning.   Such an agreement  can  demonstrate  a  special  (private  dictionary)  meaning or  an accepted meaning of words which would otherwise be ambiguous.  I should expand a little on the latter proposition.

[32]      If the parties have reached agreement on what meaning an otherwise ambiguous word or phrase should have for their purposes, that definitional agreement is itself an objectively determinable fact. When the issue is which of two possible meanings is objectively the more probable, the existence of a definitional agreement is obviously relevant, indeed it should be decisive. There is no logic in ascribing a meaning to the parties if it is objectively apparent they have agreed what that meaning should be.

[33]      The foregoing analysis recognises that, generally speaking, issues of contractual interpretation arise in three circumstances: mistake; ambiguity; and special meaning.  A mistake can represent either a drafting error or a linguistic error.  Errors of this kind are primarily the subject of rectification. But a clear drafting or linguistic error, combined with equal clarity as to what was intended, can be remedied by way of interpretation, and in that respect context can and should be taken into account.  An ambiguity arises when the language used is capable of more than one meaning, either on its face or in context, and the court must decide which of the possible meanings the parties intended their words to bear.  A special meaning exists when the words used, even after the contractual context is brought to account, are linguistically still capable of only one meaning or are wholly obscure; but it is nevertheless evident from the objective context that the parties, by custom, usage or agreement, meant their words to bear a meaning which is linguistically impossible (for example, black means white), or represents a specialised and generally unfamiliar usage.

[34]      Although  an  estoppel  will  usually  arise  from  the  adoption  of  a special meaning, it is in cases where words are capable of bearing more than

one meaning that estoppel is likely to have its primary application.  A party may be estopped from denying that one of two possible meanings was the meaning the parties intended their words to bear.

…

[37]   Of   course,   the   court   must   be   satisfied   that   an   agreement   or representation as to meaning, reached or made during negotiations, was still operating at the time the contract was formed and represented a linguistic premise on which it had been formed.

(Emphasis added)

[67]     Against the background of those observations, I turn to address the matters in dispute.

The “wash-up” claim

[68]     The  issue  at  the  centre  of  the  “wash-up”  claim  arises  because  of  the requirement to file a mandatory emissions return for the fifth year of each commitment period.   The purpose of the MER is to adjust the number of NZUs issued for the forest in respect of the fifth year of the commitment period, to reflect the performance of the forest over the full five years. The result of such a return may be that more NZUs are issued to NZCF for the fifth year than would have been the case if a voluntary return had been submitted for that year alone.

[69]     So the question is whether the agreement requires NZCF to transfer, subject to the contract minimum and maximum volume provisions, all units received from the forest for the calendar year, including any wash-up units, or only those which can be attributed to the forest’s carbon performance in that immediately preceding year.

NZCF’s claim

[70]     NZCF’s position is that, in any given year, NZCF is required to provide all units received from the Crown as recorded in the emissions return filed prior to delivery, regardless of the carbon performance of the forest in the previous year or the year in which the relevant units are said to have accrued. It says the agreement covers all units transferred by the Crown to NZCF for the forest, under the ETS, for the preceding calendar year, regardless of the year of sequestration.

[71]     MRP’s  position  is  that  is  required  to  purchase  only  such  units  as  were transferred to NZCF under the ETS for the forest for the calendar year that immediately precedes the delivery date during the term of the agreement (subject to replacement unit requirements) and is not required to purchase wash-up units reflecting the performance in other years.  In other words, the agreement covers only those units equivalent to the emissions sequestered by the forest in the preceding calendar year.

The relevant provisions

[72]     Clause 2.1(a) of the ERPA provides:

Agreement to sell: Subject to Clauses 2.12 and paragraphs (b) and (c) of this clause 2.1 below, during the Exclusive Term, the Sellers agree to sell exclusively to the Buyer, and the Buyer agrees to purchase, on the terms and conditions of this Agreement, the Units transferred to the Sellers under the NZ ETS for the Converted Area for each calendar year.

[73]     Clause 2.1(b) provides:

Delivery: The Sellers shall:

(i)         on an annual basis starting on 1 March 2013 (in respect of Units transferred to the Sellers for the 1 January to 31 December 2012 calendar year) and on 1 March 2014 and each subsequent 1 March for the Units transferred to the Sellers for the preceding calendar year within the Exclusive Term (each 1 March, staring on 1 March
2013, being a “Delivery Date”);

(A)      Deliver to the Buyer the Units arising from the Converted Area (or Replacement Units or Alternative Units Payment), subject to clause 2.1(c); and

(B)      if one or more of the Sellers has a net liability as described in clause 2.1(b)(ii) below or is entitled to a number of Units that is less than the Minimum Delivery Volume, deliver a report specifying the number, origin and serial numbers of the Replacement Units provided in place of the Units that would otherwise have comprised the Minimum Delivery Volume; and

(ii)       deliver on an annual basis starting on 10 February 2013 (in respect of the 1 January to 31 December 2012 calendar year) and on or before 10 February 2014 and each subsequent 10 February for the immediately preceding calendar year, a copy of the emissions return or similar such document provided to the Crown in respect of the Converted Area in the relevant calendar year, including a record of

each of the Seller’s emissions and removals as calculated (and if necessary verified) for that return and an assessment of each of the Seller’s:

(A)      net entitlement to receive Units;

(B)	net liability to surrender or repay Units, in respect of the Converted Area.

[74]     Clause 2.3(b)(iii) provides:

The Sellers agree to:

…

(iii)      monitor, calculate and report the emissions and removals from the post-1989 forest planted on the Converted Area in a particular calendar year in accordance with the Act and any regulations thereunder,   provided   that   where   there   is   an   option   of   the measurement approach that may be used for monitoring emissions and removals from such post-1989 forest the Sellers shall use the measurement approach that will yield the most emissions units being awarded to it in respect of the Converted Area.

NZCF’s submissions

[75]     NZCF argues that in any given year it is required to transfer, and MRP is required to take, all the units received as recorded in the emissions return, filed prior to the delivery, even though, in the case of a mandatory return, the receipt might include units that have not been allocated in the returns for specific prior years but were accrued during those other years.   NZCF submits that its interpretation is supported by the text of the agreement and is not inconsistent with a tenable commercial view of the arrangements.

[76]     Mr Browne highlights the following clauses as relevant:

(a)       Clause 2.1(a), which makes the primary sale and purchase obligation “the Units transferred to the Sellers under the NZ ETS for the Converted Area for each calendar year”.

(b)	Clause  2.1(b),  which  states  that  delivery  is  required  of  the  Units

transferred “for the preceding calendar year”.

(c)       Clause 2.3(b)(iii), which creates an obligation to monitor, calculate and report, by 10 February each year, the emissions and removals in a particular year “in accordance with the Act and any regulations thereunder”. That obligation mirrors the obligation in clause 2.1(b)(ii) to provide a copy of the resulting emissions return to MRP (“the Buyer” referred to in the clause) on an annual basis by 10 February.

[77]     Mr Browne submits, therefore, that each 1 March NZCF must deliver the units received in relation to an emissions return which must be filed by 10 February in respect of the calendar year just past.  Mr Browne directs the Court’s attention to Schedule One of the Agreement where the column showing the years in respect of which the NZUs are delivered as “Vintage of Units from Converted Area”.  He says “vintage” refers to the year in respect of which a return is lodged, and the schedule confirms that on each delivery date, delivery is required of the units obtained during the prior calendar year.

[78]     Mr Browne identifies that under the ETS, at the end of each commitment period, a MER must be filed.  The statutory framework means that the MER year’s return must be calculated on a different basis from any voluntary returns filed in the preceding four  years;  namely,  taking into  account the entitlement  for the entire period and deducting the total of all intervening voluntary returns.  So, he submits, because vintage refers to the calendar year prior to the delivery date, the means of determining a vintage result depends on whether it is a VER vintage or an MER vintage.  While a VER would contain information about the vintage year alone, the ETS does not provide for both a VER and a MER to be filed for the fifth year of the commitment period.

[79]     Mr   Browne   submits   that   NZCF’s   interpretation   does   not   create   a commercially absurd result because all units to which there is an entitlement are received during the course of the agreement, even though in respect of the MER for CP1, the carbon producing the units may have been sequestered in earlier years. Furthermore, whatever is received by NZCF is delivered to MRP subject to annual minimum and maximum volumes which restrict the impact of any unusually large adjustments.

[80]    So, Mr Browne submits, the result is not unfair, disruptive, difficult or contentious during the course of the term of a long-term agreement.  Counsel says that,   conversely,   MRP’s   interpretation   would   lead   inevitably   to   potentially contentious calculations, unsupported by official records.  He argues that the impact of adjustments, which are likely to be fair over time, would be unpredictable.

MRP’s submissions

[81]     MRP contends that the essential subject matter of the agreement is that during the exclusive term there will be sale by NZCF and purchase by MRP, on the terms of the agreement, of the units transferred to NZCF under the NZ ETS for the Converted Area for the immediately preceding calendar year.

[82]     Mr Hodder QC also directs the Court to the wording of the agreement.  He identifies  clause  2.1(a)  as  the principal  “sale  and  purchase” provision. The key phrase in that clause, he submits, is “the Units transferred…for the Converted Area for each calendar year.”  Counsel submits that there is a linking of units both to the forest and to a calendar year.   He argues accordingly that the natural reading of clause 2.1(a) is that the subject of the agreement are the units transferred for the carbon sequestration in each calendar year.

[83]     Mr  Hodder  then  says  that  clause  2.1(b)  provides  clarification  in  that “delivery” occurs on 1 March in the year following that calendar year.  He sought to identify a sequence in the provision, which is designed to operate in the same way for each of the years within the exclusive term:

(a)	there is a “preceding” calendar year;

(b)	in that “preceding year”, units “arise” from the forest;

(c)	NZCF files an emissions return to claim those units from the Crown; (d)	such units are transferred to NZCF “for” that preceding year;

(e)       NZCF provides its emission return for that preceding year to MRP by

10 February of the year of sale; and
(f)	by 1 March of that year of sale, NZCF delivers those units to MRP. [84]	Mr Hodder argues that this sequence is consistent with the description in

Schedule One which specifies the minimum and maximum delivery volumes by references  to  delivery  dates  and  to  the  preceding  calendar  year,  for  which  the relevant heading is “Vintage of Units from Converted Area”.   Although the term “vintage” is not defined or used elsewhere in the agreement or contained in the Act or regulations, it has the usual connotation of date of yield or production.

[85]     Mr  Hodder  then  points  to  the  definition  of  “Maximum  MRP  Agreed

Volumes” in clause 1.1:

“Maximum MRP Agreed Volume” means the maximum amount of Units to be delivered to the Buyer, without the Buyer’s further agreement, on a Delivery Date relating to the units arising from the previous calendar year, being the amount specified as the Maximum MRP Agreed Volume for a particular calendar year.

(Emphasis added)

[86]     It is submitted for MRP that the parties entered into the agreement with a reasonable understanding of the NZ ETS scheme.  They were aware of the rationale to award units for carbon sequestration and the requirement that those units to be surrendered  for  emissions,  as  well  as  the  scheme’s  annual  and  calendar  year emphasis for filings and allocations, subject to giving five-yearly mandatory reports and wash-ups.  Mr Hodder invites the Court to conclude, therefore, that the language of “arising from” and “transferred…for” a preceding calendar year implies a causal connection with relevant performance for that year.  This is consistent with the ETS rationale.

[87]     Mr Hodder also notes that the agreement does not employ language such as “Units transferred to Seller in the year of Delivery”, “Units transferred for any previous calendar years”, “Units transferred to Seller in the year of Delivery” or “Units  transferred  for  any  previous  calendar  years”.    He  makes  a  comparison

between  the  similarly  worded  purchase  agreement  for  the  sale  of  carbon  units between Paraheka Holdings Ltd and MRP.  Schedule Three of that agreement, which contains the Minimum Delivery Volume and the Maximum MRP Agreed Volume, provides for the first “Vintage” period to be “2008-2012”.

[88]     Mr Hodder submits that as at 1 September 2011, reasonably informed persons knew that the Forest would be entitled to a significant number of “wash-up” units after filing its  MER  in early 2013  because the  default  look-up  tables  produced conservative  estimates  compared  to  the  FMA  accounting.     The  language  of clause 2.1(a) and (b) and Schedule One makes no allowance for this.  Aaron Smith on behalf of MRP gave evidence that it was clear from the outset that the forest would earn significantly more units under the FMA than the default look-up tables approach.  He calculated that the forest was entitled to an average of 49,000 units per year under the default look-up tables.

[89]     Having regard to the language, Mr Hodder says, NZCF is not entitled to sell, and MRP is not required to purchase, “wash-up” units from years other than the immediately preceding calendar year.

Discussion

[90]     I accept that a return is filed and units are delivered to NZCF at the beginning of the year following the calendar year in which the carbon emissions giving rise to the units are sequestered (the vintage).  It is clear from the principal operative clause, clause 2.1(a), however, that what is bought and sold under the agreement are “the Units transferred to the Sellers under the NZ ETS for the converted area.”  This is an agreement about the delivery to MRP, to meet its obligations under the ETS, of units transferred to NZCF by the Crown.  During the first four years of each commitment period, the units transferred will be based on voluntary emissions reports.   In the fifth  year of the commitment period, the units  transferred will be based on the mandatory emissions report.   The MER  may produce  a number of units which exceeds or is less than the number of units which would have been transferred had a VER been filed for that year.   I accept that there is some force in Mr Hodder’s argument that the reference to the units being transferred under the scheme for the

converted area are the units “for each calendar year” but that expression is used, in my view, only to reflect that the buying and selling of units takes place on an annual basis.  The emphasis of the agreement is on the transference of units from the Crown to the sellers, howsoever those units are allocated, and on the delivery of those units to MRP.

[91]     While it is correct that the filing of an MER may result in the transfer of units based on sequestration occurring earlier than the immediately preceding calendar year, that is simply a result of the nature of the ETS which was well understood by the parties.

[92]     I accept that it may be that MRP will be required to purchase units derived from sequestration in the years 2008-2011, before the agreement was even contemplated, let alone in effect, but any aberrant effect of such a consequence is ameliorated by the maximum delivery volume provided for the units delivered on
1 March 2013.  Furthermore, for the MER years during the remainder of the 15-year term,  the  sequestration  for  any  wash-up  units  would  have  occurred  during  the contract  period.    There  may be something in  Mr Hodder’s  submission  that  the agreement could have used language more clearly articulating the inclusion of wash- up units, such as appears in the Paraheka agreement, but the focus of the wording of the NZCF/MRP agreement on the buying and selling of units, rather than the making of a payment for sequestration, produces the same result.

[93]     As for the point concerning the use of default look-up tables for VER’s for the   2008-2011   vintages,   which   produced   an   estimated   average   of   only […redacted…] units per year, MRP argues that the application of the FMA to the production of units for the 2012 vintage was known to the parties; it is a feature which is emphasised by MRP in its principal argument on the claim for scaling.  The setting of a […redacted…] unit minimum for the 2012 vintage renders any consideration of what units would have been transferred under the default look-up tables approach irrelevant.

[94]     I  agree  with  Mr Browne’s  submission  that  NZCF’s  position  is  more

commercially sensible in that the result flows naturally from the wording of the

clause and does not produce an unfair or unreasonable outcome.   Conversely, the interpretation sought by MRP, which would focus on the units related to carbon emissions sequestered in the 2012 calendar year, would require calculations similar to those required for the filing of a VER for that year as well as the filing of the MER required by the regulations.  Such a calculation would have no official status and not be subject to regulatory scrutiny by the Ministry.

Conclusion on the wash-up issue

[95]     I find, therefore, that NZCF was obliged to sell, and MRP was obliged to buy, the units transferred to NZCF by the Crown, pursuant to the filing of the MER for the first commitment period and delivered to MRP on 1 March 2013.

The “scale-up” claim

[96]     I  turn  next  to  consider  the  scale-up  issue  which  is  the  most  financially significant of the matters to be determined.  If the plaintiffs succeed in their claim on this issue, the value of the units MRP is required to purchase under the agreement will double over the life of the 15-year agreement.

[97]     Clause 2.1(d) of the Agreement records:

Change  in  accounting  mechanism:  Subject  to  clause  2.3(b)(iii),  in  the event that the accounting mechanism provided for under the Act for determining the carbon stock in a post-1989 forest is amended thereby resulting in the Sellers being allocated a change in Units in respect of the Converted Area from what would have been allocated under the “Look-up Table” approach or any other approach in operation under the Act at the signing of this Agreement, then the parties agree that the Minimum delivery volume and Maximum MRP Agreed Volume for and from the calendar year in which such amendment takes effect shall be increased or decreased, pro rata to the overall increase or decrease in Units which the Sellers would then be allocated.

[98]     The “scale-up” claim involves a dispute between the parties over whether

clause 2.1(d):

(a)	applies following the change for the Hawarden Forest from the default look-up table mechanism to the FMA mechanism, so as to adjust the

minimum	and	maximum	delivery	volumes	specified	in	the

Agreement; or

(b)       applies only if the FMA accounting mechanism is replaced in the future by an alternative accounting mechanism.

What is the effect of clause 2.1(d)?

[99]	Clause 2.1(d) has triggering and operative parts to it; the parties agree about the effect of the clause but they disagree about whether it applies.

[100]   The operative parts of the clause provide:

(a)       The comparison which determines whether there is to be an increase or a decrease, and its proportion, is between units received before and units received after a change in mechanism.

(b)       The comparison units are the units received in respect of the forest under each of the existing and new mechanisms.

(c)       The  contractual  minimum  and  maximum  volumes  stipulated  are increased or decreased proportionally.

(d)     The extent and direction of movement between them is applied proportionally to the minimum and maximum contractual volumes to increase or decrease them in proportion to the movement between the comparison units.

[101]   There is no restriction on the extent of the movement in either direction.

What triggers the scaling under the clause?

[102]   The parties’ dispute concerns the triggering element of the clause.  The clause is triggered in the following circumstances:

(a)       An accounting mechanism provided for under the Act for determining carbon stock is amended.

(b)       The amendment has the effect of the seller being allocated a change in units.

(c)       The change is between (i) what would have been allocated under the default look-up table approach or any other approach in operation under the Act at signing and (ii) what is allocated after the change.

[103]   The amendment alone is insufficient to trigger the application of the clause;

there must also be a change in unit allocation before the clause can apply.

NZCF’s submissions

Plain meaning of the words

[104]   NZCF submits that the wording of the provision should be given its plain meaning.  It says that at the date of the signing of the agreement on 12 January 2012, the regulations imposing the FMA to the Hawarden Forest had been promulgated but were not  “in  operation”.    No ETS  participant had  been  allocated  units  using a mechanism other than default look-up tables. Although release of the data collection standards meant that forest data relevant to the FMA could be collected from the participant forests from December 2011, under the regulations, the forest measurement data could not be submitted to MPI for processing until 1 September
2012, one year after the commencement of the regulations.

[105]   Mr Browne submits that, although the necessary regulatory amendment had been passed and commenced to allow the initial preparatory work for the future operation of FMA, the FMA accounting mechanism was not “in operation” when the agreement was signed because it could not be used to produce a change in the allocation of units.   The relevant amendment was not the enabling regulation to develop the new mechanism, but an amendment which made its use compulsory from a particular time.

[106]   NZCF further submits that a strong focus on the wording of the provision is appropriate in the light of the exclusive discussion and negotiation of the clause under close review by legal counsel and the parties themselves, all of whom were aware that the FMA would come into effect in 2013.

[107]   Mr Browne further submits that NZCF’s interpretation is consistent  with

clause 5.3 of the Agreement, which provides that MRP acknowledges:

(a)	that NZCF gave no representation or warranty as to the future volume of the units, and

(b)	that the information about the potential future volume is indicative only and has not been relied on when entering the Agreement.

[108]   Anticipating Mr Hodder’s argument that the agreement is connected to the forest, and that it does not contemplate a scaling-up of contract volumes which the Hawarden Forest could never provide, Mr Browne notes that the agreement allows the delivery volume to exceed unit receipts in instances where replacement units have to be used to buy volumes up to the minimum volume, and that there is no restriction in the agreement on the source of such units.

Commerciality

[109]   Mr Browne also submits that applying clause 2.1(d) from the 2012 vintage does not offend commercial commonsense.  He says the interpretation benefits MRP commercially because:

(a)	At that time, MRP remained in breach of its policy to have covered

50% of its liability during 2011;

(b)	MRP expected  the  carbon  price  to  rise  sharply  over  the  contract period;

(c)       The NZCF contract delivered the most favourable present value of all of the ERPAs it had entered into to that date – of all the contracts entered, MRP had the greatest incentive to maximise the contract.

(d)	MRP expected a market for the mortgage of units in the future.

(e)       MRP treated the clause as an option – obscurity of language and delayed effect meant counterparties would overlook it.

(f)       If  commercial  advantage  could  be  obtained,  MRP would  be  in  a strong position to resist delivery of replacement units.

(g)       NZCF was in an unusually strong position to perform even a highly elevated delivery obligation.

(h)       MRP could and did report contracts containing the clause without reference to its existence, thus achieving additional units in the long term without apparent breach of policy.

[110]   Mr Browne  submits  the  interpretation  is  also  commercially  sensible  for NZCF because it is a bulk supplier of units, with a large portfolio. It would not be dependent upon receiving enough units from the forest if the volumes were sealed above receipts.  It would not  be required to resort to the spot market to source replacement units in adverse circumstances because its portfolio provided it with flexibility. The size of its portfolio made it sensible to pre-sell a portion at fixed prices on a long-term basis.

MRP’s submissions

[111]   MRP  argues  that  clause  2.1(d)  applies  only  if  the  FMA  accounting mechanism is replaced in the future by an alternative accounting mechanism. This interpretation is based on:

(a)	the words of clause 2.1(d);

(b)       the  fact  that  the  delivery  volumes  that  were  set  were  based  on estimates of the forest’s annual unit entitlement under the FMA, not under the default look-up tables;

(c)       the fact that the agreement is inherently connected to the forest and its capacity to deliver carbon credits;

(d)	that NZCF’s interpretation is not commercially sensible for the buyer;

and

(e)	that NZCF’s interpretation is not commercially sensible for the seller.

The key to the interpretation of clause 2.1(d): Was the FMA “in operation” at the
signing of the agreement on 2 January 2012?

[112]   Against the undisputed background of the application of the FMA to the determination of the carbon stock in a post-1989 forest, the definitive question on the scale-up issue is whether the FMA accounting mechanism was in operation under the Act at the signing of the agreement on 12 January 2012.   If the FMA accounting mechanism was brought into operation subsequently, so as to amend the accounting mechanism  and  result  in  a  change  in  the  allocation  of  units  in  respect  of  the converted area from what would have been allocated under the default look-up table, the plaintiff’s  claim that the scaling provision  is triggered must be upheld.   If, however, the FMA mechanism was “in operation” on 12 January 2012, the scaling- up provision would have to be triggered after that date by an amendment of the ETS to bring into operation an accounting mechanism under the Act other than the default look-up table approach and the FMA.

[113]   The expression “in operation” is not a term of art in the context  of the agreement and bears its plain and ordinary meaning.  To be in operation, means to be in the condition of functioning or being active.38

[114]   I am satisfied that, in that sense, the FMA was in operation in mid-January

2012.   From 1 September 2011, regulation 21(1) of the Climate Change (Forestry

38	The New Shorter Oxford English Dictionary (1993 ed.) at 2005-2006.

Sector) Regulations 2008 was amended by substituting, for post-1989 forests over

100 hectares, the prior provisions for the calculation of carbon stock with the field measurement approach.   New regulations were also inserted, with effect from that date, imposing duties upon FMA participants to take the necessary steps to facilitate the production of participant-specific tables and, significantly, specifically for the use
of participant-specific tables in the first commitment period.39

[115]   Although it is correct that the FMA was not in operation in January 2012 for the purposes of calculating carbon stocks in the preceding year, the agreement does not relate to that period.  The scheme of the amendment regulations was to put in place and commence the operation of a regime for the calculation of carbon stocks in the 2012 calendar year, the first vintage year under the agreement.  For post-1989 forests of over 100 hectares, the default look-up tables approach had ceased to apply from 1 September 2011 and the FMA became operative.  The initial stages of the operation of the new approach involved the release of relevant information by the Ministry  including,  on  22 December 2011,  Version  2  of  the  FMA  information standard which included the form and format in which FMA information collected at sample points must be submitted to the Ministry.

[116]   The FMA was in operation in mid-January 2012, in that it was functioning and active, albeit that it was in a preliminary stage and not fully operational.  Given that there was by then no other accounting mechanism which could apply to the forest  the  subject  of  the  agreement,  it  would  be  nonsensical  to  interpret  the expression “in operation” to mean fully operational in the sense that an emissions report could have been filed at that date.  The scheme was not intended to provide for the filing of an emissions report at the start of the 2012 vintage year.

[117]   Those conclusions are sufficient to dispose of the  plaintiffs’ claim under
clause 2.1(d) for a scaling-up of the minimum and maximum volumes under the agreement.

39	Climate  Change  (Forestry  Sector)  Regulations  2008,  reg 22E  inserted  by  Climate  Change
(Forestry Sector) Amendment Regulations 2011, reg 11.

Other factors supporting the plain meaning

[118]   I am mindful, however, of the warning that a meaning which appears plain and unambiguous on its face is always susceptible to being altered by context.40   It is prudent, therefore, to look at the implications of an interpretation which appears to be plain, to test it for commerciality or common sense in the context of the surrounding commercial environment.

[119]   I have already referred  briefly to  the supporting arguments  presented  by Mr Hodder QC, all of which I have considered and which have varying degrees of force.   There is one aspect of the agreement which, in my view, puts the matter beyond any doubt.   I refer to the inevitable conclusion from the evidence, notwithstanding Mr Browne’s submissions to the contrary, that the minimum and maximum delivery volumes contained in Schedule One to the agreement were based on reasonably accurate estimates of the forest’s annual unit entitlement under the FMA, not under the default look-up tables.

[120]   I reject Dr McClintock’s attempt on behalf of the plaintiffs to persuade me that, because the Ministry for Primary Industry would not reveal the basic characteristics of its carbon modelling tools to the forestry sector, no ETS participant could  accurately  model  or  forecast  their  entitlements  under  the  FMA.    To  the contrary, one of NZCF’s founders, Mr Walsh, acknowledged  that the modelling being done for NZCF by Dr McClintock had nothing to do with default look-up tables and that he was trying to figure out what a measuring regime could produce from the forest.

[121]   Mr Miller, for NZCF, and Mr Smith, for MRP, were frank with each other and entirely transparent, during the negotiation of the delivery volumes, in their exchanges  of  estimates  on  behalf  of  NZCF  and  MRP respectively,  of  the  unit production of the Hawarden Forest based on an approximation of the FMA, using the PRAD model combined with C_Change.  Mr Browne properly acknowledged in the course of his closing argument that Mr Miller and Mr Smith had a shared history,
having worked together on the development of MRP’s carbon emissions policy up to

40	See, for example, Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 28, at [24] per Tipping J.

the time of Mr Miller’s move to NZCF in mid-2011.   They used their common understanding of the ETS and of MRP’s needs to construct a workable commercial arrangement.   As Mr Browne reminded me, at one point Mr Miller used what he recalled of MRP’s internal processes to assist Mr Smith by suggesting an approach he might take to satisfy the senior management and Board of MRP that the deal was one to which they should agree.  There was a particularly telling exchange of emails on 30 August 2011 in which Mr Miller and Mr Smith reached a consensus that the Hawarden Forest had the capacity to deliver between […redacted…] and […redacted…]  units calculated using the FMA.  Mr Smith was not moved from his evidence  that  he  calculated  that  the  forest  was  entitled  to  an   average  of […redacted…] units per year under default look-up tables and an average of […redacted…] units per year under the FMA.  He maintained that Mr Miller and he agreed the contract volumes of […redacted…] minimum and […redacted…] maximum based on his modelling.

[122] No doubt the fluctuations in the propositions made between the two representatives, during their negotiations, as to the minimum and maximum volumes were designed to meet or promote other commercial imperatives, such as the extent to  which  a potential  purchaser of  NZCF would  feel  that  the targets  set  by the agreement were achievable.   And as Mr Smith explained, MRP needed to satisfy itself that the Hawarden Forest could reasonably be expected to deliver at least the minimum volume prescribed for each year over the 15-year term.  But MRP’s carbon policy was founded on a suite of options, including the delivery of credits under ERPAs with other foresters, and a finite obligation to obtain carbon credits based on its production plans.   It needed a degree of certainty, within a range, of what the Hawarden Forest would deliver.  These considerations were well known to Mr Miller and, therefore, to NZCF.

[123]   Furthermore, it is clear that the minimum and maximum delivery volumes were not based on the default look-up tables approach.   It was acknowledged by Mr Miller and Dr McClintock that under the default look-up tables approach, the Hawarden Forest would deliver on average between […redacted…] and […redacted…] units only.  It appears to have been a rule of thumb in the industry to double the outputs from default look-up tables to estimate the FMA outputs.  That

being the case, it would make no commercial sense for the parties to agree on a range of deliveries under the agreement two-and-a-half to three times the forest’s capability,  knowing  that  when  the  FMA  came  into  effect,  the  minimum  and maximum delivery volumes would double again.  Dr McClintock acknowledged that the Hawarden Forest was incapable of producing […redacted…] units.

[124]   There is also force in Mr Hodder’s argument  that MRP would not have agreed to an arrangement which limited its security over the minimum delivery to a second  mortgage  over  the  Hawarden  Forest  and  other  arrangements  if  it  was intending to accept a minimum commitment from NZCF of which 50 percent of the units would be sourced by replacement units and that such supply would be unsecured.

[125]   Finally, there is no evidence that either party anticipated up to, or at, the time they entered into the agreement that the minimum and maximum volumes would be doubled from the Schedule One volumes as a result of scaling when the FMA was utilised for the first delivery on 1 March 2013.  There is a logical inconsistency in NZCF’s proposition that a significant change between volumes delivered according to the default look-up tables and volumes delivered according to the FMA should have a pro-rata effect on minimum and maximum volumes which were calculated according to the FMA.

[126]   Before leaving this issue I observe that, although clause 2.1(d) had its genesis in the negotiation of the Paraheka ERPA which was signed on 14 October 2011, the approach   taken   by  MRP  to   the   exercise   of   its   contractual   rights   and   its counterparties’ obligations under different contracts has little or no relevance to the interpretation and application of the agreement with NZCF.

[127]   The term “accounting mechanism” is not defined in the agreement nor in the Act, but its use in clause 2.1(d) in the wider context plainly refers to a means of calculating Units which is mandatory and new and invalidates the delivery volumes specified in the agreement. This is consistent with s 62(b) of the Climate Change Response Act  2002,  which  requires  participants  to  calculate  the  emissions  and

removals from the activity in accordance with the methodologies prescribed in the regulations made under the Act.

Conclusion on scale-up issue

[128]   The purpose of clause 2.1(d), in my view, is to provide for any change to the accounting mechanism under the ETS not anticipated by the parties.   Such a precautionary provision is prudent in an agreement intended to last for 15 years, given the uncertain nature of the regulatory approach to carbon emission removals in the future.

[129]   I find, therefore, that the FMA was in operation at the time the ERPA between NZCF and MRP was signed and that the scaling provisions of clause 2.1(d) of the agreement have not been triggered.

[130]   It  follows  that  I  do  not  need  to  address  MRP’s  alternative  claim  for

rectification.

The document obligation issue

[131]   MRP seeks a finding on an issue involving the scope of documents and information which NZCF must provide to MRP in relation to every delivery under the agreement.   The issue arose because a MER does not show the emissions sequestered by the Forest and the units earned in any individual year within the commitment period.  The issue has most significance in delivery years involving an MER but it is of general relevance.

[132]   Clause 2.1(b)(ii) provides that NZCF is obliged to:

...deliver on an annual basis starting on 10 February 2013 (in respect of the
1 January to 31 December 2012 calendar year) and on or before 10 February
2014  and  each  subsequent  10  February  for  the  immediately  preceding calendar year, a copy of the emissions return or similar such document
provided to the Crown in respect of the Converted Area in the relevant
calendar  year,  including  a  record  of  each  of  the  Seller’s  emissions  and
removals as calculated (and if necessary verified) for that return and as
assessment of each of the Seller’s:

(A)	net entitlement to receive Units;

(B)	net liability to surrender or repay Units,

in respect of the Converted Area. (Emphasis added)

[133]   The primary obligation under this clause is for NZCF to provide to MRP a copy of the emissions return NZCF provides to the Crown for the transfer of NZUs in connection with the Hawarden Forest for the calendar or vintage year.  NZCF may provide a substitute document of similar functionality if the circumstances require it.

[134]   The ETS and the agreement require NZCF to make an emissions return to the

Ministry for Primary Industries. This can be done in two ways:

(a)       It can be returned online. When the online return is completed, the Ministry’s web programme generates a “receipt” which compiles its responses to the questions on the return form.   The receipt is an original copy of the emissions return, the original being the online data entry.

(b)       It can be returned in hard copy. The form is printed, filled out and filed by post.

The parties’ positions

[135]   NZCF’s position is that it is required to provide to MRP only a copy of the emissions return provided to the Crown.   The return includes a record of the emissions and removals as calculated and an assessment of the net entitlement or liability to receive or surrender units.

[136]   MRP considers that NZCF is required to provide a copy of the emissions return provided to the Crown and any other information reasonably necessary for MRP to verify that the units delivered by NZCF are units that MRP is required to purchase under the agreement.

NZCF’s submissions

[137]   Mr Browne submits that all of the information required by clause 2.1(b) is contained in the emissions return form provided to the Ministry online.  He further submits  that NZCF has  provided MRP with an  original  copy,  generated  by the Ministry’s emissions return system, for each relevant year.  Accordingly, NZCF has complied with its obligations under clause 2.1(b)(ii).

[138]   NZCF argues that the reference to verification in clause 2.1(b)(ii) does not relate to MRP but rather relates to the possibility that the Crown might require verification of the emissions return.  Section 62 of the Climate Change Response Act provides:

62	Monitoring of emissions and removals

A participant must, in respect of each activity listed in Schedule 3 or 4 that is carried out by the participant in a year,—

(a)        collect the prescribed data or other prescribed information (which data or information must, if required by regulations made under this Act, be verified by a person or organisation recognised by the EPA under section 92); and

(b)        calculate  the  emissions  and  the  removals  from  the  activity  in accordance with the methodologies prescribed in regulations made under this Act; and

(c)        if required by regulations made under this Act, have the calculations verified by a person or organisation recognised by the EPA under section 92; and

(d)        keep,  in  the  prescribed  format  (if  any),  records  of  the  data  or information and calculations.

This section essentially provides for the possibility of verification by the Environmental Protection Agency or other authorised persons.   These powers to verify emissions or require further information to ensure compliance with the Act are discretionary.  NZCF says that its data collection has not been subject to verification.

[139]   NZCF ultimately submits that clause 2.1(b)(ii) only places an obligation on NZCF to provide information required to verify their emissions and removals if such information were sought by the EPA.  Because NZCF has not been required to verify its emissions return to the Ministry in either of the relevant years, it has not been

under an obligation to provide anything other than the completed emissions returns form to MRP.

MRP’s submissions

[140]   MRP alleges that NZCF has not supplied all of the information required under clause 2.1(b)(ii) as NZCF has not provided information allowing MRP to verify the emissions and removals calculated.     Mr Hodder submits that NZCF’s interpretation is inconsistent with the objective purpose of the provision which is to verify the validity of the delivery. Such validity, it says, must relate to the statutory regime and the requirements of the agreement itself.

[141]   Mr Hodder says that NZCF’s interpretation is inconsistent with the context of the agreement:

(a)       MRP is dependent on NZCF providing it with documents other than the MER, in particular NZCF’s FMA tables, so that it can confirm that the units delivered are the units earned by the Forest for the preceding calendar year’s carbon sequestration.  MRP is not obliged to take any more than the actual yield if it falls between the maximum and minimum volumes.  This information is not discernible from the MER alone.

(b)       MRP has the right to verify the delivery documentation that it receives from NZCF based on the language of the provision: “…a record of each  of the Seller’s  emissions  and  removals  as  calculated  (and  if necessary verified) for that return…”

[142]   Counsel argues also that NZCF’s interpretation is inconsistent with other

clauses in the agreement:

(a)	Clause 3.1 says:

Delivery Assistance: The Buyer and the Sellers shall provide each other with such assistance as the other reasonably requests in order

to effect the Seller’s Delivery of the Units or Replacement Units in
accordance with clause 2.1.

(b)       Clause 10.17 says:

Further Assurances: Each Party must perform such acts, execute and delivery such instruments and documents, and do all such other things   as   may   be   reasonably   necessary   to   accomplish   the transactions contemplated under the Agreement.

[143]   On the further assurances point, Mr Hodder QC directs the Court to Shell Petroleum Mining Company Ltd v Todd Petroleum Mining Company Ltd.41    In that case, the contract provision (clause 9.1) provided:  “Each party will enter into and carry out all further assurances, and take all steps (or omit to take all steps), reasonably required by the other party to allow the parties to obtain the full benefit of this Agreement.” The Court of Appeal said:42

Effectively, clause 9.1 was a promise by each party to do everything reasonably necessary to allow the other party “to obtain the full benefit of this Agreement” or, alternatively, a promise not to do anything which would prevent the other party obtaining “the full benefit”.   One of the benefits conferred by the HoA was Todd’s continued entitlement to participate during the interregnum in the operation of the joint venture through STOS.  Under clause 9, therefore, Todd was entitled “reasonably” to require Shell to “omit to take … steps” which would take away from Todd that particular benefit.

Discussion

[144]   I am not persuaded that the terms of the agreement require NZCF to provide the further information sought by MRP.   The agreement establishes a regime for disclosure; if the parties had intended that NZCF should be under a wider obligation they could have made an appropriate express provision.  It is not necessary to imply a provision in the agreement requiring NZCF to make full disclosure in order to effect NZCF’s delivery of units or replacement units (clause 3.1); nor is it necessary for  there  to   be   further  disclosure   in   order   to   accomplish   the   transactions
contemplated under the agreement (clause 10.17).

41	Shell Petroleum Mining Company Ltd v Todd Petroleum Mining Company Ltd [2007] NZCA
586, [2008] 2 NZLR 418.
42	At [75].

[145]  NZCF’s obligation under the agreement is to deliver to MRP the units transferred to it by the Crown, under the ETS, in respect of the Hawarden Forest. Once the Crown is satisfied that NZCF has a particular entitlement in respect of any vintage, it is required under the scheme to transfer the appropriate number of units to NZCF which is then obliged to deliver them to MRP.  MRP for its part is required to buy those units which are then available to it to meet its obligations as a participant in the ETS.

[146]   I agree with Mr Browne that the purpose of the verification provision is to ensure, for the benefit of MRP, that NZCF complies with its obligations under s 62 of the Climate Change Response Act to comply with the requirements of the ETS, and to enable the Crown to monitor compliance.

[147]   I acknowledge that this interpretation of the contractual provisions leaves MRP with no power to require NZCF to verify the validity of its returns to MRP’s satisfaction.  The compliance regime under the Act and regulations, however, so far as NZCF’s obligations to the Crown are concerned, are sufficiently comprehensive and detailed to provide an appropriate level of comfort to MRP, in my view.  In the end, the agreement is a relatively straightforward one in which MRP is committed to purchasing each year a number of units within a defined range and in respect of which a compliance regime exists in the legislation and regulations.

[148]   I find that NZCF is not required to provide any more information about its returns than clause 2.1(b)(ii) expressly requires.

The set-off issue

[149]   MRP asks the Court to decide whether, when NZCF delivered units to MRP

in the 2013 delivery that MRP was not required to purchase: (a)	MRP had a valid claim for set-off; and
(b)	MRP was entitled to withhold payment on the 2014 delivery equal to the amount overpaid for the 2013 delivery.

Relevant provisions of the agreement

[150]   MRP’s obligation to make payment of the purchase price in accordance with clause 4.4 is qualified by clause 10.16, which provides:

Withhold and Set-Off: Notwithstanding any other clause in this Agreement, where the Sellers fail to pay an Alternative Units Payment, in accordance with clause 2.1, to the Buyer on a particular Delivery Date or where the Sellers have failed to pay any other amount payable and owing to the Buyer, the Buyer may withhold and set-off all or a portion (determined by the Buyer) of the unpaid amount owing to the Buyer from the Purchase Price or any other amount owing and payable by the Buyer and the Sellers.

[151]   Further, clauses 9.1 and 9.12 provide:

9.1       Resolution by the Parties: If a dispute arises in relation to any matter  under  this  Agreement  it  must  be  dealt  with  initially  as follows:

(a)        the   Parties   must   endeavour   to   resolve   the   dispute expeditiously by reference to the Parties’ respective representatives  promptly  (and  in  any  event  no  later  than
5 Business Days after both of the representatives have been informed  of  the  dispute)  for  discussion  and  negotiation
between them to endeavour to resolve the dispute;

(b)	if the resolution to the dispute is not reached within a further
5 Business  Days  of  the  representatives’  first  meeting  to resolve the dispute in accordance with (a) above, then either Party may refer the dispute to an Expert in accordance with the following provisions;

(c)        otherwise the Parties shall each be entitled to pursue such course as that Party considers appropriate to resolve the dispute.

…

9.12     Obligations while dispute in progress: Where a dispute is to be referred,   or   already   has   been   referred,   to   the   Expert   for determination   the   Parties   must   continue   to   use   reasonable endeavours to meet their respective obligations under the Agreement as if no dispute had arisen.

NZCF’s submissions

[152]   NZCF contends that MRP did not have the right to withhold the set-off amount from the 2014 payment because:

(a)       The agreement provides expressly only for a limited right of set-off in clause 10.16.   First, in the case of a specific obligation of NZCF to make a payment when defaulting on the delivery (which is not the case here); second, where an amount is “payable and owing”.

(b)       No other provision for set-off is made.   Clause 10.16 excludes the right to assert set-off for unjust enrichment under equity and the statutes of set-off.  Outside of those amounts permitted to be deducted by clause 10.16, any other set-off rights are excluded and MRP cannot seek to rely on the remedies inconsistent with the bargain which the parties’ struck.

(c)       “Payable and owing” excludes disputed liabilities and covers only liabilities which are conceded or determined by a binding process. In order  to  be  “payable”  an  amount  must  be  a  sum  certain  or ascertained.43   The judicially accepted ordinary meaning of “payable” is “legally due if demanded”.44

(d)       MRP’s claim to a refund for the 2013 delivery does not fall within the terms of clause 10.16 because, in the absence of a determination or agreement, it was not a debt.

(e)       In the context of the agreement, the clause permitting a limited right of set-off must be intended by implication to exclude set-off in other circumstances, otherwise the clause is redundant.

(f)       Furthermore, in this case, MRP exercised set-off in order to achieve its desired position on a matter which was and remains in dispute. Setting off disputed claims is inconsistent with clause 10.16 and the
dispute resolution provision in clause 9.12.

43	New Zealand Venue and Event Management Ltd v Worldwide NZ LLC [2013] NZCA 130 at [23].
44	Calibre Financial Services Ltd v Mortgage Administration Services (Calibre) ltd [2013] NZCA
503 at [44].

(g)	With reference to clause 9:

(i)        The  set-off  was  in  breach  of  clause  9.1  because  MRP undertook unilateral self-help action without following the clause 9.1 procedure.

(ii)      When NZCF gave initial notice under clause 9.1(a) and later notice of reference to expert determination, MRP frustrated the latter process by declining to co-operate.  MRP was bound to resolve the matter by expert determination.

Discussion

[153]   This issue may be disposed of briefly.  Clause 10.16 is a permissive clause, entitling MRP to withhold and set off a portion of the purchase price otherwise owing where NZCF has failed to pay an alternative units payment which has become due, or where NZCF has failed to pay any other amount payable and owing to the buyer.   There is no express provision in the clause excluding MRP’s  ability to withhold or set off a payment due whether under common law, equity or otherwise. That the provision addresses particular examples of set-off does not impliedly abrogate MRP’s set-off rights in another context.  If NZCF considers MRP to have set off or withheld an amount unlawfully, it has remedies available to it.

[154]   Furthermore, the dispute resolution provisions of the agreement require only that a dispute in relation to any matter under the agreement must be dealt with “initially” by the parties endeavouring to resolve the dispute expeditiously by reference to the parties’ respective representatives promptly: clause 9.1(a). Significantly, if a resolution of the dispute is not reached within times specified in the agreement, the ability to refer the dispute to an expert is optional: clause 9.1(b). Clause 9.1(c) expressly reserves to the parties the right to pursue such course as a party considers appropriate to resolve the dispute.  Clause 9.12 is itself an optional provision.  In the present case it appears that the mechanism for resolving a dispute by reference to an expert has not been pursued, so clause 9.12 does not apply.

[155]   In  any  event,  clause  9.12  merely  puts  the  parties  under  obligations  to continue to use their reasonable endeavours to  meet their respective  obligations under the agreement as if no dispute had arisen.  That is no more than recognition of the desirability of the parties’ respective obligations under the agreement continuing to have force and effect notwithstanding that the parties may be in dispute on some matter.

Conclusion

[156]   I find that MRP was entitled to exercise its rights to set-off, and that it was entitled to withhold the amount of any overpayment.

Payment date issue

[157]   Clause 4.4 of the agreement provides:

Payment: Payment of the Purchase Price shall be made by the Buyer, by way of direct transfer into an account of the Sellers (as nominated by the Sellers in writing in the invoice provided to the Buyer) no later than the 20th of the month following the date of the Seller’s invoice in accordance with clause [4.3].45

[158]   Clause 4.3 of the agreement provides that NZCF shall invoice MRP for the purchase price payable in respect of the units (or replacement units) delivered within five business days following delivery.

[159]   NZCF submits that clause 4.4 requires payment by MRP by the 20th of March each year where an invoice is rendered in early March in accordance with clause 4.3.

[160]   MRP’s  position  is  that,  although  it  accepts  that  the  parties  intended  the invoice to be paid by 20 March each year, clause 4.4 is not capable of being properly interpreted in that way and can only be read as requiring payment by 20 April each year.  Consequently, MRP says that the clause requires rectification and that has not
been sought.

45	The provision actually says “clause 4.2” but both parties agree that this is an error and the
reference ought to have been to clause 4.3.

[161]   Accordingly, the dispute over the interpretation of clause 4.4 is whether “the

20th of the month following the date of invoice” is capable of being read as the 20th day of the month of the invoice, or whether it can only refer to the 20th  day of the month that follows the month in which the invoice was provided.

NZCF’s submissions

[162]   NZCF  argues  the  text  of  clause  4.4  should  read  in  the  context  of  the obligation in clause 4.3.  Clause 4.4 provides that payment is to be made “no later than the 20th  of the month following the date of the Sellers’ invoice in accordance with clause [4.3].”  In order to be issued in accordance with clause 4.3, an invoice must be rendered within five business days following delivery, which is to be on
1 March each year. A complying invoice must be rendered in early March. This means  that  20  March  will  always  follow  the  date  of  the  invoice.  NZCF  has calculated this gives at least eight business days to make payment.

[163]   During the course of the negotiation of the contract, NZCF says that it was evident that the mutual intention of the parties was that clause 4.4 was to require payment by 20 March each year.  In early January 2012, Aaron Smith of MRP and Bruce Miller of NZCF exchanged emails finalising the terms of the contract with this intention.  Clause 4.4 should be interpreted in accordance with this mutual intention.

[164]   NZCF argues also that MRP paid the invoice relating to the 2013 year on 20

March 2013 in accordance with that intention.  NZCF submits that where the parties have negotiated specific wording of a clause, it will not be a candidate for rectification. The parties not only had a mutual intention as to the effect of clause
4.4, but the evidence demonstrates that they had a mutual intention as to the meaning of the words they had chosen to fulfil their common intention. This is better dealt with as a matter of interpretation.

MRP’s submissions

[165]   MRP has admitted in its pleading that the mutual intention of the parties was that the invoice would be paid by 20 March in each year.  But it says that the only appropriate remedy here, which NZCF has not sought, is rectification of the clause.

Conclusion

[166]   It is by no means clear to me that NZCF was precluded from pleading a mutual mistake and seeking rectification.   Nevertheless, it is clear that the interpretation allowing MRP until 20 April in any year, which might reasonably be assumed to reflect the ordinary meaning of a well-known expression, would not meet the parties’ intentions.  To adopt the commonsense view of Tipping J at [32] of his judgment in Vector Gas,46 there is no logic in ascribing such a meaning to the parties when they agree that it should have another meaning.   I take the view that, as Tipping J suggested at [33] of the judgment, the drafting error can be remedied by
interpretation to accord with the admitted mutual intentions of the parties. A comma following “the 20th of the month” might have made the agreed meaning clearer.

[167]   I  am  satisfied  that  there  is  a  tenable  interpretation  of  clause 4.4  to accommodate the prompt payment contemplated by clause 4.3, which is that the expression “no later than the 20th  of the month following the date of the Sellers’ invoice in accordance with [4.3]” means in respect of an invoice rendered in early March, the 20th day of that same month.  I interpret the clause accordingly.

Summary of findings

[168]   I have held, as to the wash-up claim, that NZCF was obliged to sell and MRP was obliged to buy the units transferred to NZCF by the Crown, pursuant to the filing  of  the  MER  for  the  first  commitment  period  and  delivered  to  MRP  on
1 March 2013.

46	Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 28, at [66] above.

[169]   As to the scale-up claim, I have held that the FMA was in operation at the time the ERPA between NZCF and MRP was signed and that the scaling provisions of clause 2.1(d) of the agreement have not been triggered.   It is not necessary to address MRP’s rectification claim.

[170]   As to the document disclosure issue, I have held that NZCF must provide a copy of the emissions return form provided to the Crown as required by clause
2.1(b)(ii), but that it is not required to provide the further information sought by

MRP.

[171]   As to the set-off issue, I have held that MRP was and is entitled to set off and withhold amounts mistakenly paid for units that it was not required to purchase under the agreement against future payments under the agreement.   Clause 10.16 does not exclude MRP’s ability to withhold or set-off under common law, equity or otherwise.

[172]   As to the payment date issue, I have held that payment of an invoice rendered in early March in any year for the delivery of units under the agreement shall be made not later than the 20th day of that same month.

Form of orders

[173]   The parties sought an opportunity to apply for non-publication orders relating to any commercially sensitive content in this judgment.   For that reason, I have decided not to make, at this stage, declarations which quantify the effect of the Court’s findings.  I invite the parties to confer and file either a joint memorandum or separate memoranda setting out the declarations or other orders they require to be made in the light of these findings.

[174]   Costs are reserved.

…………………………………..

Toogood J