Case study: Legal dispute over a harvesting contract

November 16, 2015

1-timber

A dispute between a harvesting contractor and plantation owner over timber volumes ended up in a costly court case that took eight years to reach a messy conclusion. DAVE DOBSON unpicks the issues and provides some lessons that contractors can take out of this case to avoid going down this road …

Introduction
This case study deals with a recently concluded dispute between a Contractor and the Plantation Owner who had employed him to harvest and extract mature pine on his property.

The compartment in question varied from relatively flat areas to steep areas requiring specialised cable yarding equipment. Three different Contractors harvested in the compartment using different machinery but no records were kept of where each operated. The Contractor whose operation was subject to the dispute was responsible for the final harvesting in the compartment.

The contract was repudiated because of alleged fraud on the part of the Contractor. Because of the repudiation of the contract, the Contractor suffered financial damages in the form of unpaid invoices and future earnings. The matter was referred for arbitration in terms of the provision in the contract and as it was a legal matter, members of the legal profession became involved in the case.

The case
The Plaintiff in the case (the Plantation Owner) alleged that the Defendant (the Contractor) had committed fraud and consequently terminated his contract. The alleged fraud revolved around the manner in which the log tally sheets were recorded such as to inflate the volume of timber delivered to the Plantation Owner’s sawmill.

In addition, the Contractor was accused of bribing the Plantation Owner’s staff to falsify the tally sheets recording the quantity of timber harvested. This in turn resulted in fraudulent monthly statements reflecting an increase in the quantity of timber harvested.

The Plantation Owner produced three Expert Reports in total. The first was a thorough and well-presented report produced by an independent expert. This report dealt with an investigation into the significant discrepancy between the top page of the triplicate books in which logs harvested by the Contractor were tallied, and third page that was retained in the triplicate books. This investigation took the form of estimating the average volume per tree according to the top copy in the triplicate books and comparing this to the average volume per tree estimated from the third page retained in the same triplicate books. The Expert was then asked to investigate whether the compartment concerned was capable of yielding the volume per tree reflected on the relevant top copy of the triplicate books. The investigation and the subsequent report were thorough, unbiased, and objective. In short, work of a high standard. The single shortcoming identified in this first exercise, was information that the Expert was unable to verify personally and related to trees pulled during the Contractor’s skyline operation.

Presentation and cross examination of first expert report
During the initial stage of the arbitration hearing, witnesses were presented to substantiate the charge of fraud as this related to the discrepancies noted in the triplicate books. Once the Expert Report had been presented and dealt with, some of the Plantation Owner’s staff were brought in to explain the methodology followed in the recording of the logs harvested by the Contractor.

It was during the cross examination of one of these staff members that the explanation for the triplicate book discrepancies became clear. The triplicate books used did not have self-carbonising pages with the result that carbon paper was required. This proved difficult to manage infield with the carbon paper constantly slipping. In order to overcome this difficulty the responsible staff decided to rely on the top copy and to produce photocopied duplicates of this top copy for the Contractors records. As this was done without the knowledge of administrative staff charged with reconciling the records, when a comparison of the top and third copies of the log tally sheets was made a large difference in the two recordings was noted. This was to form the basis of the fraud allegation.

Further expert reports
By all accounts, the arbitration hearing should have been concluded at this point. However, the issue relating to the number of trees “pulled” in the skyline operation remained unresolved. At this stage, missing documents detailing the skyline activity were discovered. On closer inspection, it became clear that there had been a misunderstanding relating to the “number of trees pulled” and that adjusting for the actual timber mass that could be extracted using this machinery would account for the discrepancy. The Plantation Owner however remained sceptical and commissioned a further Expert Report aimed at proving that the daily harvesting and extraction volumes claimed by the Contractor were simply not feasible.

The second Expert Report relating to the skyline operation was prepared by one of the Plantation Owner’s staff. The operation in question consisted of a combined skidder/skyline operation in which the skyline pulled the trees to roadside for processing and the skidder was used to “cream” the flat areas and the trees next to the road. By applying “Best Operating Practices” supplied by Forestry Solutions to the skyline operation, an estimated daily volume of 93.5 m3 per day was calculated. This formed the basis of the argument that the claimed daily volumes were simply not possible.

What was not taken into account however was the fact that the skyline in question had been modified to enable it to pull heavier loads. The modification that entailed the addition of an Allison gearbox, a larger diameter haul back cable, and an increase in the size of the motor from a 76kW naturally aspirated to a 106kW turbo charged motor resulted in the skyline being capable of pulling 120 m3 of timber per day to roadside. Coupled to the use of the skidder ‘creaming” the flat areas, the combined skyline/skidder operation was shown to be capable of harvesting 150 m3 of timber on a daily basis. This daily volume was sufficient to justify that claimed by the Contractor. Nevertheless the Plantation Owner remained unconvinced and a third Expert Report was commissioned.

This third Expert Report was aimed at determining the area harvested by the Contractor, the stocking in this area, and finally the possible timber volume that could have been harvested. A combined site visit by parties representing both the Plantation Owner and the Contractor was conducted during which the area harvested by the Contractor was mapped together with that harvested by the other two Contractors that worked in the compartment. This was done by recording clearly identified markings in field on a GPS and later transferring this information onto a map of the compartment. This resulted in four different areas being identified. The first three were the undisputed areas harvested by each of the Contractors, while the fourth was where their areas overlapped.

An assessment of the stocking was carried out using an earlier aerial photograph of the plantation and conducting a tree crown count in stratified random plots laid out over the compartment in question. This was later verified infield by locating the aerial photograph plots on the ground and counting the stumps in a sample of the plots. The crown count method used proved to be satisfactory to both parties and provided a good estimate of the stem count in different parts of the compartment. Stump diameters were also measured during the ground verification exercise. This information when applied to the stump/diameter regression developed by the first Expert Witness for the Plantation Owner, provided valuable information on the average tree size in the different harvest areas.

The compartment was finally stratified by differentiating between disputed and undisputed areas harvested. Adjusting for stocking and diameter within the different areas it was possible to provide an estimate of the harvest volume that was within 7.5% of that recorded on the top sheet of the triplicate book.

Ruling
Confronted with this evidence the Plantation Owner made a settlement offer to the Contractor. Although this offer did not cover the full cost incurred by the Contractor in defending the case against him, the offer was accepted. The Contractor had in effect been out-litigated and was able to claim a rather hollow victory for his efforts.

Discussion
Legal proceedings tend to be long, drawn out and expensive and wherever possible should be avoided. A case such as this one took eight years to reach a conclusion. Each time the matter is adjourned, the parties are expected to pay their legal teams, and the resulting costs can escalate rapidly. In this case, the contract was pulled in 2004, Pleadings were issued in 2005, and the first Expert Report was released by the Plantation Owner’s legal team in 2008. The arbitration then dragged on for a further four years before reaching a conclusion in 2012. This is a long time after the event and memories tend to fade with time, witnesses disappear! It is most important to ensure that in the event of a dispute all possible evidence that might be of use to investigators is collected as early as possible. In this instance witness reports, photographic records, enumeration data, and maps for example should have been accumulated early in the process. The exact area harvested by the different contractors would have been most useful. Particularly, while the operation was still fresh in the memories of those involved.

Staff tasked with carrying out particular functions (recording logs in the log tally sheet books in this case) need to understand why they are required to perform the function. In this instance, faced with the practical problem of slipping carbon paper, the solution of simply photo copying the top page for the Contractor’s records appears simple and practical. The fact that the action undermined the purpose of using the triple page tally sheet books as a control mechanism was lost to the staff tasked with the job.

Had these folk had a better understanding of the nature of their work a different solution would no doubt have presented itself (self-carbonising paper?). In addition, the Contractor himself should have been aware of the nature of the recording system and insisted on a suitable alternative arrangement. The term “normal forestry practice” is often used. This is a typical case where “normal forestry practice” was not followed with disastrous consequences.

Recommendations
A number of valuable lessons can be learnt from this case.

Contractors must have a thorough understanding of the contracts they sign and must adhere strictly to the requirements of the contract. In this particular case, our Contractor should have insisted on the correct use of the tally sheet book. Any deviations should be brought to the attention of the other party so that no misunderstanding arises.

If more than one Contractor is going to harvest in a single compartment, the different harvest areas should be carefully recorded. This can be easily achieved by simply using a GPS to record the different areas on the compartment map.
If a compartment is to be sub-divided, as was the case here, each of the sub divisions should be enumerated before the

Contractor is allowed to begin harvesting his sub-division. This will provide a good estimate of what to expect in terms of both productivity and volume.

Finally, a Contractor needs to be realistic about his chances when faced with litigation. This realism stretches not only to culpability but also to his ability to see the case through to its conclusion. Litigation is expensive. If you must litigate then litigate to win!

*Dave Dobson is an independent forestry consultant involved in project feasibility studies, due diligence studies, valuations and expert witness testimony in fire cases. Email: ddobson@umziki.co.

**First published in SA Forestry magazine, October 2015

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