Game quality does not matter for these prices. Demand/rarity does.
It was a mediocre game with a limited pressing and could not be purchased from a store shelf. You had to purchase it from Blockbuster, which limits the quantity even more. Then take into account how many of those instruction manuals are lost, stolen, or destroyed, and the manuals become even rarer. Especially one that was in as good of condition as that manual was.
If you go and look on eBay right now, I don't think you'll find another instruction manual out there right now. They come up very rarely. While I don't personally think the manual is worth $1200, I can see why it would be considered the hardest thing to find when trying to find a complete copy of Sculptor's Cut. There are two completed auctions on eBay.com right now of two different manuals in similar condition, both going for ~$1200. I wouldn't say it's fixed. The box usually goes for about $400. It's one of the rarest games for the N64.