Rainbow Holdings Pty Ltd v Central Province Forest Industries Pty Ltd (Provisional Liquidator Appointed) [1983] PNGLR 34 (2 March 1983)

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[1983] PNGLR 34 - Rainbow Holdings Pty Ltd v Central Province Forest Industries Pty Ltd (Provisional Liquidator Appointed)

PRINCIPAL AND AGENT - Authority of agent - Implied or ostensible authority - Test for - Contract negotiated and signed by solicitor - Whether binding.

CONTRACT - Enforceability - Public policy - Sale of goods - Title to goods acquired in breach of statutory regulations - Scope and purpose of statutory purpose - Forestry Act (Ch. No. 216) - Forestry Regulations, regs. 16, 17, 18.

Negotiations for the sale and purchase of timber logs in the possession of the vendor and stockpiled on a beach were entered into between the appellant as purchasers and the respondent as vendor. The actual negotiations and correspondence in relation thereto took place between the solicitors to whom the vendor was referred by the purchaser on behalf of their “client”, for the purchaser, (the solicitor actually signing the contract), and the liquidator of the vendor. At the time of acquiring the “timber logs” the vendor did not hold a native timber authority which was required under the provisions of the Forestry Regulations made pursuant to the Forestry Act (Ch. No. 216). The penalty for purchasing from a traditional or customary owner in breach of the regulation is a fine not exceeding K100.

(1) Whether there was a binding contract depended upon whether it was reasonable to believe that the solicitor had authority to sign the contract.

Mitsui and Co. Ltd v. Mapro Industrial Ltd. and Goukeket and Co. N.V., [1974] 1 Lloyd’s Rep. 386 adopted and applied.

(2) In the absence of actual authority, apparent or ostensible authority may be found to exist, where it is shown: (a) that a representation has been made that the agent has authority to enter into a contract of that kind on behalf of the principal; (b) that the representation was made by a person or persons who had actual authority to manage the business of the principal either generally or in respect of those matters to which the contract related; and (c) that the contractor was induced by the representation to enter into the contract.

Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] 1 All E.R. 630 at 644 adopted and applied.

(4) Insofar as the subject of the contract was goods acquired in a manner which was prohibited by the Forestry Regulations (the contract itself not being subject to any such prohibition) the court could have regard to public policy in determining its enforceability.

(5) The question for determination was whether, having regard to the scope and purpose of the statutory provisions, the legislative purpose would be fulfilled without the court regarding the contract as void and unenforceable.

(6) In the circumstances (including by Bredmeyer J, the possession of the timber logs), the vendor would have had title sufficient to complete the contract, which was therefore enforceable.

Mitsui and Co. Ltd v. Marpro Industrial Ltd and Goukeket and Co. N.V. [1974] 1 Lloyd’s Rep. 386.

Vita Food Products Inc. v. Unus Shipping Co. Ltd [1939] A.C. 277; 1 All E.R. 523.

PRATT J: I agree with the judgments of Bredmeyer and McDermott JJ and would dismiss the appeal with costs. I would also certify for overseas counsel.

BREDMEYER J: I agree entirely with the judgment of McDermott J, but wish to add the following:

I consider that the respondent had a “good” or at least an adequate title at the agreed completion date to pass on to the purchaser appellant. That title was based on possession — the vendor was in possession of the logs stockpiled on the beach and was in a position to give possession of them to the purchaser. It is true that as at the date of completion, the original customary owners had not been paid but they were to be paid K36,450 royalty out of the purchase price in satisfaction of their rights and upon that payment, were unlikely to take any action to frustrate the sale and delivery of the logs to the appellant. It is true too that in obtaining the logs prior to making the contract of sale with the appellant, the respondent and/or others had breached the Forestry Regulations. The logs had been obtained without the issue of N.T.A.s or any other statutory authority for obtaining logs from customary owners. But that breach did not in my view affect the respondent’s title to the logs. The Director of Forests was not about to seize the logs for breach of the Regulations. On the contrary, he fully endorsed and supported the sale and was prepared to order his inspectors to issue the N.T.A.s retrospectively. I consider that had the appellant paid the purchase moneys on the day of completion, it would have gained good title to the logs.

Counsel for the appellant argued that we should declare the contract of sale void because of the breach of reg. 18 — the non-issue of N.T.A.s. The first thing to note is that, reg, 18 was breached by the respondent or some other person before the contract in question was made. This contract is thus a subsequent contract of logs illegally obtained. The second thing to note is that, the regulation does not expressly declare void any contract of sale of logs obtained in breach of the regulations; neither does it prohibit any such contract. So the effect of a breach of the regulation on a subsequent contract falls to be decided by the Common Law.

I consider there are two competing principles involved in the Common Law. One is that the courts have a vested interest in enforcing contracts entered into by competent parties without fraud, duress, misrepresentation and the like. To quote Lord Wright in a passage cited by McDermott J, from Vita Food Products Inc. v. Unus Shipping Co. Ltd [1939] A.C. 277, the courts should as a matter of public policy “refuse to nullify a bargain save on serious and sufficient grounds.” On the other hand, if there has been a serious illegality, the courts have a vested interest in seeing that the law is enforced and that people do not profit from their illegal conduct.

I consider that the correct way to apply these principles to the contract in issue — as Devlin L.J, said in Archbold’s (Freightage) Ltd v. S. Spanglett Ltd [1961] 1 Q.B. 374 at 390, is to examine the language used in the statute and the scope and purpose of the statute. Does it further the objects of the legislation to enforce this contract or to declare it void? On that test clearly, this contract must be enforced. The aim of the Forestry Regulations, regs. 16 to 18 is to prevent customary owners being exploited. The regulations provide that the customary owners can only sell logs to non-natives on terms and conditions which the Government considers fair. These logs were initially cut in breach of those regulations and without payment to the native owners. The contract between the respondent and the appellant for the sale of those logs contains a condition that the customary owners be paid K36,450, a price which, according to the documentary exhibits, the customary owners were willing to accept and which the Director of Forests considered fair. To enforce this contract ensures that the customary owners will be paid a fair price and thus achieves the main objective of the regulations as well as upholding a bargain made between two persons. Not to enforce it, would mean that the native owners are less likely to be paid for the logs — the logs being a wasting asset on the beach — and would frustrate the objectives of the regulations.

I too, would dismiss the appeal with costs and would certify for overseas counsel.

MCDERMOTT J: The appellant disputes liability to pay a judgment debt of K242,000 payable to the respondent as damages for breach of contract.

The second ground of appeal will be dealt with first. It was submitted that there was no binding contract between the parties as it was signed on behalf of the appellant by a person without actual, implied or ostensible authority and was not ratified by the appellant.

After preliminary contact between Mr Davis, Managing Director of Rainbow Holdings Pty Ltd and Mr Kelly on behalf of the provisional liquidator in January and early February 1980 concerning purchase of timber, a letter of confirmation was received by the liquidator from Davis as managing director of the company. He concluded the letter with this sentence:

“Should you require clarification of our offer, please contact Mr Gordon Smith of Russell Hay’s office, telephone 212066 with whom negotiations may be conducted.”

This letter was followed by one from Russell Hay’s office dated 18 February 1980. It confirmed that:

“We act on behalf of Rainbow Holdings Pty Ltd in respect of the above matter.”

There was no further contact between Kelly and Davis. Correspondence continued between the provisional liquidator and the solicitor for Rainbow Holdings in March, April and May. The position of the solicitors appears not to have changed.

“Our client is now prepared to offer... The variation of our clients previous offer issue to...”

“... Enclosed herewith our clients acceptance of the conditions of your offer.”

“... And confirmed our clients instructions that your offer is accepted and that the terms of the offer will be complied with...”

“... Our client expects to complete all financial and shipping aspects of this transaction by late May...”

In deference to counsel’s argument, his client’s first letter above is a strong holding out. There was nothing to suggest to the liquidator that the negotiating position had changed in any way. The acceptance of the offer was signed by Mr Smith as — “Solicitor for Rainbow Holdings Pty Ltd”. In the circumstances, why should the liquidator have been put upon inquiry?

That Mr Davis was aware of the negotiations is apparent from his examination-in-chief, and it was not suggested to him that ratification was a pre-requisite before the agreement became binding. The trial judge found:

“This contract was signed by the solicitor for the defendant on behalf of the defendant on 26 March 1980.”

The appellant alleges the solicitor had no authority and that it would be unreasonable to believe he did.

Whilst there was no evidence at the trial that there was an “actual” authority between principle and agent, there was sufficient evidence to show “apparent” or “ostensible” authority. This is been described by Diplock L.J, in Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] 2 Q.B. 480 at 503:

“... a legal relationship [exists] between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority as so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.”

His Lordship then stated four pre-conditions before such a contract between contractor and company can be enforced (at 505):

(1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced made to the contractor;

(2) that such representation was made by a person or persons who had ‘actual’ authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

(3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4) that under its memorandum or articles of association the company, was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.”

In this case, the last matter was never raised at the trial and is an irrelevant consideration.

As to reasonableness, reference was made to Mitsui and Co Ltd v. Mapro Industrial Ltd and Goukeket and Co N.V. [1974] 1 Lloyd’s Rep. 386 where the above approach was followed. There the court said, at 392 the question to be answered was:

“Would a reasonable person in the position of Mr Willan in all the circumstances have concluded that Mr Van Bakkum had the necessary authority to accept the bid when he did so...”

The learned trial judge concluded that there was a contract between the parties. He is not shown to be wrong.

The terms of this contract are set out in the provisional liquidator’s letter of 21 March 1980.

In the second appeal ground — that the respondent failed to show it was ready and able to establish good title at the date for completion or when the contract was terminated, — reliance is placed upon non-compliance by the respondent with the provisions of the Forestry Regulations made under the Forestry Act, (Ch. No. 216), when the logs were purchased. Mr Nordgren argued that as the respondent was not the holder of a Native Timber Authority (NTA) — reg. 17, it could not purchase logs from the owners — reg, 18. In any event, a reg. 17 authority did not permit purchases where royalty would exceed K20.

The penalty for purchasing from a traditional or customary owner in contravention of the regulation, is only minor — a fine not exceeding K100 (reg. 18). The appellant asks us to make the consequences of it extreme.

Now the Forestry Act and Regulations together with Forestry (Private Dealings) Act (Ch. No. 217), are designed to protect not only a valuable natural resource but also to provide adequate payment to the traditional or customary owners of these resources. By this legislation, there are three methods by which timber can be obtained:

(1) The Government can purchase land outright, which of course includes the trees on it, under the provisions of the Land Act; it can purchase the timber rights under the provisions of the Forestry Act over an area which then becomes known as a “timber rights purchase area”. Once the Government has purchased the land or the timber rights from the customary owners, the Minister is empowered to grant a permit or licence over that area to a logger.

(2) If the Minister declares an area to be a local forest area under s. 4 of the Forestry (Private Dealings) Act, the customary owners can sell their timber in that area direct to any person. An agreement for the sale of such timber requires the assent of the Minister and he can refuse his assent if he considers that the sale price is inequitable, etc. (s. 6).

(3) A non-native, who has obtained a native timber authority under s. 2 of the Forestry Regulations (Amalgamated) 1973, can purchase direct from customary owners. A native timber authority can be granted by a forest inspector on payment of a fee of 50 toea. The quantity of timber for export for example which can be bought under an N.T.A., is extremely limited — it is a quantity calculated at the specified royalty rate which does not exceed K20.

There was no evidence at trial about land ownership, the land itself or the selling of the trees. The timber extraction happened prior to the involvement of the liquidator. There was no evidence as to the role played by Central Province Forest Industries Pty Ltd. It may well be that none of the provisions of the Forestry Acts were complied with. However, the situation in which the liquidator found himself was that he had a valuable but deteriorating asset on the beach at Magarida. To fulfil his duties, he had to realize this asset quickly. He found a buyer in the appellant company. They agreed as follows:

(3) The logs are sold on and ‘as is, where is basis’, and no warranties are given for their condition, fitness or purpose for purpose or otherwise.

(4) Delivery of the logs to your client will be given as they presently lie at Magarida and all removal and shipping costs are for your clients expense.

(5) I have made satisfactory arrangements with the local people and customary owners.

(6) Your client is to provide the cash fund to pay the local people their royalty entitlement amounting to K36,450 prior to any movement of the logs.”

The appellant particularly requested items 2 and 5 and had previously agreed to pay the sum which was finally set out in item 6.

The parties knew the traditional owners had to be paid and be paid the correct amount including a sum owing from a previous sale presumably also made in contravention of the Forestry Acts.

The parties were aware that the traditional owners had to be satisfied. This was part of the contract and an essential part of it. Upon receipt of the K36,450, (to be provided by the purchaser), the traditional owners demands would have been satisfied. The parties knew this. Without satisfaction being given, the logs would probably not have been movable.

How this satisfaction was given is another matter. It was to be done with the assistance of the Forests office and Mr Misi Henao. The Director of Forests, obviously anxious to put the erstwhile Central Province Forest Industries dealings on a regular basis went back to the Forestry Act (Ch. No. 216) and tried to apply it “ex post facto”, and as submitted, by misapplying the regulations. But this is not part of the contract, it was a subsidiary matter, the method by which the traditional owners would be satisfied. Once they were satisfied, there was no question of the logs being moved without trouble. In legal jargon, the seller would have established good title as far as the purchaser was concerned.

In this case, the contract itself was not forbidden by the regulation. The prohibition rather, limited the method by which the seller obtained the goods, the subject of the contract. In effect, the buyer is saying that because the seller cannot obtain the goods “legally”, there is no obligation to complete the bargain.

At Common Law, certain types of contract are forbidden and are therefore prima facie illegal. The illegality was based on public policy. There are difficulties in stating the principle in such a wide term. Accordingly, the learned authors of Cheshire & Fifoot Law of Contract (4th Aust. ed.), at par. 1302 said:

“It is imprecise, since judicial views will inevitably differ upon whether a particular contract is immoral or subversive of the common goods; there is no necessary continuity in the general policy of the law, for what is anathema to one generation seems harmless to another; and the public good affects so many walks of life that causes of action that can be said to arise ex turpi causa must in the nature of things vary greatly in their degree of harm to the community.

It is this variation in the degree of harm done that requires emphasis, for the work ‘illegal’ has been, and still is, used to cover a multitude of sins and even cases where little, if any, sin can be discovered...

Common sense suggests that the consequences at law of entering into one of these so-called illegal contracts should vary in severity according to the degree of impropriety that the conduct of the parties discloses.”

Therefore the contract is only unenforceable if the court should decline to enforce it because it is associated with the illegal purchase of the contracted goods. It is necessary to consider public policy.

In Yango Pastoral Co. Pty Ltd and Others v. First Chicago Australia Ltd and Others [1978] HCA 42; (1978) 139 C.L.R. 410, the mortgage contract was associated with the illegal purpose or activity of carrying on a banking business without an authority issued pursuant to banking legislation. In reviewing the case law, Jacobs J, said at 432:

"... the prohibition against carrying on a business may not be able to be construed as either an express or implied prohibition against the making of a particular contract. Nevertheless, in such a case, the courts may not enforce such a contract but, if they do not, it is not because the contract itself is directly contrary to the provisions of the statute by reason of an express or implied prohibition in the statute itself, but because it is a contract associated with or in the furtherance of illegal purposes, for instance, the purposes of a business being carried on illegally: McCarthy Bros Pty Ltd v. Dairy Farmers’ Co-operative Milk Co. Ltd [1945] NSWStRp 12; (1945) 45 S.R. (N.S.W.) 266. One then enters the field of contracts not themselves unlawful but made for an illegal purpose. Of these the classic case is Pearce v. Brooks [1866] UKLawRpExch 22; (1866) L.R. 1 Ex. 213. The refusal of the courts to regard such contracts as enforceable stems not from a legislative prohibition but from the policy of the law commonly called public policy. It is of these contracts that Lord Wright said in Vita Food Products Inc. v. Unus Shipping Co. Ltd [1939] A.C. 277 at 293:

'Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.' I would take the reference to 'expressly forbidden' to comprehend the case of a prohibition implied as a matter of construction of the statute itself.

In Archbolds (Freightage) Ltd v. S. Spanglett Ltd [1961] 1 Q.B. 374, the Court of Appeal approached the question before them in the manner which I have indicated. Pearce L.J examined whether the contract was expressly forbidden by the statute, then whether it was impliedly forbidden by the statute and lastly whether, if the contract was neither expressly or impliedly forbidden, nevertheless on grounds of public policy the courts could not enforce it if it could only be performed in contravention of a statute or was intended to be performed illegally or for an illegal purpose. He concluded that the particular contract was not of this last kind. Devlin L.J approached the matter along much the same lines, but it may be that he took a wider view of the power of a court to hold a contract valid even if it was an offence for one party to enter into it, a wider view than that expressed, for instance, by Buckley J in Victorian Daylesford Syndicate Ltd v. Dott [1905] 2 Ch at 629-630. On the other hand it may be that he was dealing only with cases where as a matter of construction there was no express or implied prohibition in the statute and where the only question was whether the enforcement of the contractual rights would be contrary to public policy. In the context of this last question of public policy, but not in a context of construing the statute in order to determine whether it contained either an express or implied prohibition of the making of the contract, I respectfully accept his general enunciation of relevant factors which he expressed in relation to the statute in question as follows [1961] 1 Q.B. at 390:

'I think that the purpose of this statute is sufficiently served by the penalties prescribed for the offender; the avoidance of the contract would cause grave inconvenience and injury to innocent members of the public without furthering the object of the statute.' "

It is therefore proper to consider primarily the scope and purpose of the statutory provision and consider whether the legislative purpose will be fulfilled without the court regarding the contract as void and unenforceable.

For the appellant now to press non-compliance with provisions of the Forestry Regulations (and thus say the seller could not make title without illegality) has all the appearance of endeavouring to cause the mischief which the Act was designed to overcome that is to insure proper payments are made to traditional owners of forest products.

Whilst the learned trial judge may not have appreciated the extent to which the Forestry Act was disregarded when Central Province Forest Industries was in operation and the method by which it was to be used to effect the proper payment to the traditional owners by the liquidator, no error has been shown.

In view of the circumstances of the case and the law as expressed, the conclusion that “... The Native Timber Authority was not a difficulty in this contract” is correct. The seller would have been ready and able to show good title.

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Papua New Guinea Law Reports

Rainbow Holdings Pty Ltd v Central Province Forest Industries Pty Ltd (Provisional Liquidator Appointed) [1983] PNGLR 34 (2 March 1983)

Papua New Guinea Law Reports - 1983