OMISSION OF ESSENTIAL TERMS. ELECTRICITY CORPORATION …

312 Case Notes (2001) 20 AMPLJ

ENFORCEABILITY OF HEADS OF AGREEMENT, INTENTION TO BE BOUND ANDOMISSION OF ESSENTIAL TERMS.

ELECTRICITY CORPORATION OF NEW ZEALAND LIMITED V FLETCHERCHALLENGE ENERGYLIMITEDt

Intention to be bound - absence of essential terms - agreements voided for uncertainty giving effect to the intentions of parties to a contract.

James Willis*

BACKGROUND

This case was an appeal from the New Zealand High Court decision2 regarding the enforceabilityof a "gas contract heads of agreement" ("the RoA") entered into on 28 February 1997 betweenNew Zealand's then largest oil and gas producer, Fletcher Challenge Energy Limited ("FCE") andNew Zealand's then largest electricity utility, Electricity Corporation of New Zealand Limited("ECNZ"). FCE contended that the HoA was a binding and enforceable contract. ECNZ arguedthat FCE was seeking to tum an incomplete and unsuccessful negotiation into a binding contractfor the supply ofgas worth between NZ$I.2 and 1.8 billion over a 17 year term.

In the High Court, Wild J found that the parties intended to be bound by the RoA, that there was acomplete contract containing agreement on all essential terms and that any alleged uncertainties inthe contract could be resolved or did not render the contract unworkable. Wild J made adeclaratory order that the HoA was a valid and binding contract for the sale and purchase of gas.He also decided that ECNZ breached its obligation to use all reasonable endeavours to agree a fullsale and purchase agreement. ECNZ appealed to the Court of Appeal.

FACTS

For the sake of convenience the facts summarised in the earlier AMPLA Journal case note3 arerepeated here.

The parties negotiated successfully in 1995 for ECNZ to obtain from FCE a gas supply for itsHuntly power station beyond 2002. During 1996 the parties discovered that they were the onlybidders for a 40% interest held by Western Mining Corporation ("WMC") in the Kupe gas field.FCE consequently approached ECNZ with a view to a mutually beneficial proposal. Thisapproach eventually resulted in a letter of agreement signed by the parties' respective CEOs on 28February 1997 (Fletcher/Frow letter). Amongst other things, the Fletcher/Frow letter provided thatthe parties would enter into a HoA for long term gas supply by the end of the day and specifiedsome essential terms. It was stated that the HoA was conditional on ECNZ Board approval within13 days.

* Barrister and Solicitor, Bell Gully, Wellington, New Zealand..Court of Appeal, New Zealand, Unreported, 10 October 2001, CA132/00.High Court, Wellington, unreporttrl 9 June 2000, CP 412/98.(2000) 19 AMPLJ 3 at 267.

(200 I) 20 AMPU E'~forceability{~fHeads {~fAgreement 313

On 27 and 28 February, the parties met to negotiate the HoA. The HoA was signed toward the endof the afternoon on 28 February by Mr Taylor for ECNZ and Mr Kirk for FCE. It covered somethree and a half pages. Pursuant to the FletcherlFrow letter, both parties resubmitted their previousbids to WMC for its stake in Kupe. On 4 March 1997, WMC advised FCE that its bid had beenaccepted. On 12 March ECNZ's Board approved the HoA, subject to challenging the preferredcustomer clause.

The parties then agreed that for the remainder of March 1997 they would focus their efforts on theagreements necessary to complete the purchase of WMC's stake in Kupe. Those agreements weresigned on 14 and 27 March 1997. Negotiations for the full Sale and Purchase Agreementcontemplated by the HoA began with a meeting on 3 April 1997.

Full agreement was not reached. FCE alleged that the HoA was a binding agreement and thatECNZ had breached the "reasonable endeavours" obligation. FCE further contended that ECNZmade a deliberate decision not to reach full agreement because the price of electricity had changedin the interim and it wanted out of the deal. Eventually proceedings were commenced in the HighCourt which resulted in a 16 day trial in March and April 2000. Wild J delivered his judgment on9 June 2000.

The appeal was heard over a four day period in July 2001 before a full bench of 5 Court of Appealjudges. Judgments were issued on 10 October 2001 consisting of a majority judgment of 4 judges(Richardson P, Keith J, Blanchard J and McGrath J) delivered by Blanchard J and a lengthydissenting judgment from Thomas J. Both judgments warrant scrutiny given the decision that hasbeen made to pursue the case further to the Privy Council.

THE MAJORITY JUDGMENT

The correct legal approach

After summarising the facts the majority set out the prerequisites to formation of a contract asbeing:

(a) an intention to be immediately bound;

(b) an agreement, express or found by implication, or the means of achieving an agreement onevery term which:(i) was legally essential to the formation of such bargain; or(ii) was regarded by the parties themselves as essential to their particular bargain.

Legal principles

Against the background of that approach, the Court set out the following legal principles:

• The questions of whether the parties intended to enter into a contract and whether they havesucceeded in doing so are to be determined objectively.

• For that purpose it is permissible to look beyond the words of the agreement to thebackground circumstances from which it arose (the matrix of facts), including statements the

314 Case Notes (2001) 20 AMPU

parties made orally or in writing in the course of their negotiations and drafts of the intendedcontractual document.

• When interpreting a contract it is possible to look at the factual matrix but evidence ofnegotiations and statements of subjective intention must be disregarded. The Court expresslydeclined to reconsider that rule despite noting the renewed criticisms of it by Professor DavidMcLauchlan.4

• However, the principle of excluding evidence of negotiation and statements of subjectiveintention does not apply when the issue is one of contract formation. McHugh JA in AirGreat Lakes Pty Limited v KS Easter (Holdings) Pty Limited5 was cited:

"We need not begin excluding parol evidence until we know a contract has been made"

and

"The intention to be bound is a jural act separate and distinct from the terms of theirbargain."

• It is also permissible to look at subsequent conduct including what the parties ·have said toeach other after the date of the alleged contract. However, internal memoranda and statementsof subjective intention given in evidence made by individuals are to be approached withcaution.

• The Court has a neutral approach when "determining whether the parties intended to enter intoa contract but, having decided they had that intention, the Court's attitude will change. TheCourt will then do its best to give effect to the intention of the parties and, if at all possible, touphold the contract despite any omissions or ambiguities. The principles are outlined inHitlas & Co Limited v Arcos Limitecf. The Court expressly agreed with the manner in whichthe position was expressed by Anderson J in Anaconda Nickel Limited v Tarmoola AustraliaPty Limited:7

Where the parties intended to make an immediately binding agreement, and believe theyhave done so, the courts will strive to uphold it despite the omission of terms or lack ofclarity. However, the principle that courts should be the upholders and not the destroyersof bargains, which is the principle that underlies this approach, is not applicable wherethe issue to be decided is whether the parties intended to form a concluded bargain. Indetermining that issue, the court is not being asked to enforce a contract, but to decidewhether or not the parties intended to make one. That enquiry need not be approachedwith any predisposition in favour of upholding anything. The question is whether there isanything to uphold.

A Contract Contradiction (1999) 30 VUWLR 175.(1985) 2 NSWLR 309,337.[1932] ALL ER Rep 494.(2000) 22 WAR 101, 132-3.

(2001) 20 AMPLJ Enforceability ofHeads ofAgreement 315

Of interest to many will be the Court's rejection of the House of Lords' decision in May & ButcherLimited v The King8

We take the view that this case is no longer to be regarded as authority for any widerproposition than that an "agreement" which omits an essential term (or, as LordBuckmaster called it, "a critical part"), or a means of determining such a term, does notamount to a contract. No longer should it be said, on the basis of that case, that primefacie, if something essential is left to be agreed upon by the parties at a later time, there isno binding agreement. The intention of the parties, as discerned by the Court, to bebound or not to be bound should be paramount. If the Court is satisfied that the partiesintended to be bound, it will strive to find a means of giving effect to that intention byfilling the gap.9

Thus, on its own facts the majority doubted that May & Butcher would be decided by the House ofLords in the same way today.

The Court expressly agreed with Professor McLauchlan 10 that:

An agreement to agree will not be held void for uncertainty if the parties have provided aworkable formula or objective standard or a machinery (such as arbitration) fordetermining the matter which has been left open.

Did the parties intend the BoA to be a contract?

Against the legal framework summarised above, the first question for the Court was whether theparties intended the HoA to amount to a binding contract. The majority reversed Wild J's decisionin the High Court and held that the parties did not intend the HoA to be a binding contract. Thefactors relevant to the majority's decision were cited as follows:

•

•

•

8

9

10

There could be no doubt that ECNZ and FCE both went into the negotiations on 27 and 28February 1997 intent on concluding the agreement in the form of a Heads of Agreement. Itwas also clear to the majority that the companies embarked on the negotiations with everyintention of completing a binding deal.

The majority considered it was "very significant" in a document which on its face appearedincomplete - where items were actually marked "not agreed" - that the negotiators did notrecord that their agreement was to be regarded as complete or legally binding. Theycompared this to the outcome of the negotiations in the Anaconda case where the concludedHoA was said to "constitute an agreement in itself'. No machinery was provided to resolvethe matters on which there had not been agreement.

The majority considered that the HoA-

(1934) 2 KB 17.Unreported judgment, at para 60.Rethinking Agreements to Agree - (1998) 18 NZULR 77,85.

316 Case Notes (2001) 20 AMPU

•

•

•

•

•

•

11

[H]as the appearance of a memorandum listing the points which have been agreed, thosewhich have not been agreed and those which the parties are content to put to one side forthe moment, together with a statement of their intention to negotiate a full (Le. complete)agreement within three months. II

Accordingly, they considered that the HoA seemed to be in the nature of a progress reportfrom the negotiators, containing also a statement on the course intended to be followed inorder to complete the agreement. Both sides were evidently very confident of ultimatelyreaching that full agreement. However, the majority considered it "very probable" that if thenegotiators had been asked, before placing their signatures on the HoA, whether, in theunexpected event of failure to do so, the HoA was to stand on its own as the contractualdocument to govern the parties relationship until 2017, both Mr Kirk and Mr Taylor wouldhave answered in the negative. They had simply reached an important staging post on theway to final agreement.

The majority then considered the fact that the ECNZ Board had given their approval to theHoA. The majority considered that the ECNZ Board was not being asked to approve acompleted bargain. The matter had gone to the Board for approval of what had been done todate. It was approved by the ECNZ Board on that basis.

The FletcherlFrow letter was re-signed on 12 March 1997, well after the HoA had beenexecuted, with the alteration of the time frame in which the ECNZ Board had to approve theHoA from 8 to 13 days. FCE had submitted that this re-signing, and the inclusion in the letterof the intention that the HoA be binding, when both CEOs must have been aware of the "notagreed" items in the HoA, showed that the HoA was accepted by them as binding on theparties. The majority disagreed, saying that the opportunity was there for the CEOs to say justthat, but they did not do so. Instead they confirmed that the HoA "will specify" all theessential items for it to be binding. It did so, but it also indicated a lack of agreement on someof those items and the re-signed letter did not change that position. Other alterations in theletter concerning the arrangements for the WMC bidding appeared to be the reason behind there-signing of an altered letter.

When the parties came to negotiate the full agreement, each treated itself as free to renegotiatesupposedly agreed items and neither challenged the other's right to do so.

Although in some instances ECNZ internal correspondence referred to the HoA as a bindingdocument, this was not done consistently, even in the material that went to the ECNZ Board.Evidence of internal FCE documents which treated the HoA as non-binding were presented.However, the Court considered that little weight should be placed on internal documentationas it reflected the understanding (or misunderstanding) of a particular person at a particulartime, or even how that person wished to portray the position to others in the organisation or, inECNZ's case, to its shareholding minister.

ECNZ had sought FCE's consent to disclose the existence of the HoA in its 1997 AnnualReport. ECNZ also complained to FCE about a press release on this subject. FCE argued that

Unreported judgment, at para 73.


this was evidence of compliance with the confidentiality clause and evidence that ECNZregarded the HoA as binding. The Court rejected this argument and held that it was entirelyunderstandable that the parties, having gone so far with their negotiations, would regardthemselves as bound in honour not to make disclosures without the consent of the other,whether or not they considered the clause was legally binding.

• ECNZ drafted a press release in terms approved by FCE in October 1997 which spoke ofECNZ's "commitment to purchase". In addition, ECNZ's annual report for 1997 listed theHoA under its "long-term contracts". The majority did not regard these matters as evidence ofan intention to be bound.

As a result of all these factors the majority concluded that the HoA was not intended to be abinding contract.

Absence of terms essential in law?

Having reached the conclusion that there was no intention that the HoA be a binding contract, theCourt was not required to address whether the terms agreed upon by the parties were sufficient inlaw to constitute a gas supply contract. However, because "this dispute may proceed further" (i.e.it could be the subject of an appeal to the Privy Council) the majority briefly gave its views on thatquestion. It is quite clear that the majority approached the various issues that were said to createexcessive uncertainty or were legally insufficient on the basis that they would be predisposed touphold a contract if the parties had intended to be bound. Their analysis of various points incontention proceeded as follows:

Force Majeure. This clause was marked "Not agreed: Extension to National Grid". The majorityheld that the· lack of agreement on a force majeure clause relating to the National Grid did notmean that the HoA lacked, as a matter of law, an essential ingredient.

Pre-paid gas relief. The majority also found that the agreement could operate without this clauseas ECNZ could rely on restitutionary remedies to recover money paid in advance (under the takeor pay clause) if FCE failed to deliver gas either in breach of its obligation to do so or becausedelivery was affected by an event of force majeure.

The K factor. This clause was marked "to be agreed". The majority agreed with Wild J in theHigh Court that use of the words "to be agreed" was intentional to distinguish the matter fromthose clauses which had simply been "not agreed". Wild J held that the K factor was not essentialto the efficacy of the HoA and it was capable of being assessed objectively if and when it wasneeded. The majority agreed with this assessment.

Other liabilities. This clause was marked "Additional clause to cover non supply liabilities". Themajority held that it is not a legal pre -requisite that there be a clause covering miscellaneousliabilities for non-supply, nor did the parties seem to have regarded it as essential to the bargain.

318

Terms said to be essential to the parties

Case Notes (2001) 20 AMPLJ

The majority rejected various arguments that certain terms which were essential to the partieseither were not included or were not able to be determined by the Court.

Was the agreement too uncertain?

Maximum hourly quantity. The, majority did not consider that the lack of an MHQ rendered theagreement uncertain.

Price adjustment. ECNZ argued the price adjustment clause was uncertain because it was unclearwhich producer price index was to apply and whether the reference was to an input or outputindex. The Court held that there was no uncertainty as a court, guided by expert evidence ofmarket practices, would be able to interpret "PPI".

Preferred customer clause. The preferred customer clause' contained the sentence "FCE willdeliver gas only if delivery is economic". Although it may be a considerable task, the majorityconsidered that the term "economic" could be interpreted under the guidance of expert evidence.The term was ambiguous, but not uncertain.

The condition for ECNZ board approval

The majority had previously concluded that the ECNZ Board was merely approving progress madeto date in the attempt of the negotiators to reach agreement on the terms which they considered tobe essential for a binding agreement. Even if the Board had been of the view that the HoA wasintended to be a binding agreement, they would have held that the Board's approval wasconditional upon re-negotiation of the preferred customer clause.

The reasonable endeavours obligation

Even had the agreement been binding, the obligation to use all reasonable endeavours to agree afull sale and purchase agreement within 3 months, would have been insufficiently precise for theCourt to be able to spell out what the parties needed to do in exercising their reasonableendeavours. Negotiation of complex contractual terms is such a variable matter, and so dependenton the individual position which each party may reasonably take from time to time during thebargaining, that it is impossible for a court to define for them what they ought to have done inorder to reach agreement.

THOMAS J'S DISSENTIN G JUDGMENT

In a lengthy dissenting judgment, Thomas J provided what this commentator considers, with duerespect to the majority, to be a compelling analysis.

In terms of his analysis of the relevant legal principles there is little in the judgment of Thomas Jto distinguish it from the view of the majority. Thomas J expressly agreed with the majority thatMay & Butcher should no longer be regarded as a sound authority:


The fact that the case has withstood challenge for so long is a triumfh of servitude toprecedent over the recognition of commercial realities and plain logic. 1

Thomas J also cited McHugh JA in the Air Great Lakes case and adopted the same passage asrelied upon by the majority.

Thomas J considered that no case law needed to be cited beyond that relied upon by Wild J in hisHigh Court judgment in order to arrive at the correct approach. This was because that case lawhad been long established. He considered that the law must give effect to the reasonableexpectations of commercial men and women by giving legal effect to their bargains so that it doesnot incur the reproach, as observed by Lord Tomlin in Hillas & Arcos as "being the destroyer ofbargains".13

He then said:

With respect, I believe that the majority's decision fails the law in this regard. Closelyanalysed, their decision rests upon the fact that two matters stipulated in the agreement;force majeure relating to the National Grid and prepaid gas relief, were marked "notagreed" in the HoA. Yet, when addressing the question whether the terms agreed uponby the parties were sufficient in law, the majority held that the absence of either provisionwould not render the HoA unenforceable ....The failure to reach agreement on the forcemajeure provision did not mean that the contract was legally "incomplete"....Similarly,the agreement could operate without a provision relating to prepaid gas relief....Theresult is incongruent. The HoA is denied binding force essentially because the parties didnot agree on two provisions, the absence of which did not render the parties' agreementincomplete or uncertain! 14

Thomas J agreed with the majority that the HoA was not so incomplete as to be unenforceablebecause of the absence of certain provisions. Nor was it so uncertain as to be unenforceable inrespect of the clauses dealing with the maximum hourly quantity, price adjustment and thepreferred customer clause. However, he considered that the arguments and evidence that the HoAwas intended to be binding were overwhelming.

Thomas J considered that the decision denying the HoA binding force ill-served commerce.

If heads of agreement entered into in the circumstances of this case are not to behonoured by the parties and enforced by the courts a valuable and essential commercialtool will be seriously prejudiced. 15

The majority argued that the parties should have expressly said that they intended to be bound.Thomas J described this response as outmoded:

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13

14

15

Unreported judgment, at para 125.See above, note 7, at 499.Unreported judgment, at para 129.Unreported judgment, at para 135.


It suggests that the law will lay down the rules and commerce can abide by those rules orcome asunder. 16

Intention to be bound

Unlike the majority, Thomas J thought that extrinsic evidence in the form of internal memorandawould be more likely to confirm the parties' actual intention than communications between theparties which may be self-serving or affected by other considerations. He felt that the documentswhich were completed by ECNZ senior executives at or about the time the HoA was completedand the ECNZ Board approval of the agreement provided concrete evidence that it was intendedand accepted by ECNZ that the HoA was a binding agreement.

Even without reference to the extrinsic evidence, he believed that the subsequent conduct of theparties made it plain that the HoA was intended to be a binding contract having regard to thecommercial context and purpose of the agreement, the terms of the Fletcher/Frow letter, the termsof the HoA itself, the re-signing of the Fletcher/Frow letter and the ECNZ Board's approval of theHoA pursuant to the expressly stated condition precedent. He held that in this case, the objectivelyassessed intention of the parties accorded with their actual intention.

Evidence ofparties' intentions to be bound

•

•

•

16

Commercial context and purpose of the HoA. The commercial context was that FCE andECNZ had to seek an immediate binding agreement. It was to the commercial advantage ofboth to do so. Neither the commercial context nor the purpose of the agreement left any scopefor a heads of agreement that was nothing more than a step in the process of negotiations or aprogress report from the negotiators on the course intended to be followed in order tocomplete the agreement. An interim document of this kind would not have completed thearrangement contemplated by the Fletcher/Frow letter, and it would not have achieved thecommercial advantage both parties regarded as essential.

The Fletcher/Frow letter. The letter included a paragraph that the HoA is to include all theessential terms for it to be a "binding agreement". The HoA did not make the agreementconditional on anything other than WMC's stake in Kupe being secured by either FCE orECNZ and the ECNZ Board's approval. Thomas J felt it was difficult to read this letter andnot conclude that the parties intended the HoA to be binding.

Terms of the HoA. The terms of the HoA indicated that the parties intended to be bound. Thedocument was headed "FCE/ECNZ Gas Contract: Heads of Agreement". The HoA containedtwo conditions, first that the FCE/ECNZ Kupe joint venture would secure the 40% stake beingsold by WMC and second that the ECNZ Board gave its approval. Thomas J agreed withWild J that there was no point in including conditions precedent if the parties did not intendthe HoA to bind them upon tXecution. In addition, the HoA is relatively detailed and useslanguage appropriate to an agreement intended to be binding. Finally, the agreementconcludes with the words "Agreed (except where indicated)." This must mean that, other thanin the accepted respects, the rest of the HoA has been agreed in the sense of being binding on

Unreported judgment, at para 136.


the parties. What would be the point in noting general agreement and excepting the twoprovisions that have not been agreed if it were intended that the whole HoA was not agreed?

• The re-signing ofthe Fletcher/Frow letter. Thomas J agreed with the majority that the need toavoid any criticism from the Commerce Commission would have been the reason for makingthe amendments and backdating the letter. However, he did not agree that it did not providelegitimate evidence of the parties' intention. The letter stipulating that the parties would enterinto an HoA specifying "all essential terms for it to be a binding agreement" was re -signedafter the HoA had been signed. Why would the chief executives have re-signed the letter inthe same form on 12 March if the HoA had failed to meet the critical requirement which theyhad stipulated in their original letter of 28 February?

• FCE and ECNZ acted on the agreement.

The parties resubmitted their previous tenders to acquire the Kupe interest from WMC.This action was dependent on a binding HoA being completed.

The parties gave effect to the agreed shares in Kupe. The transfer of shares from FCE toECNZ was not suspended until the full agreement had been completed. Yet, that wouldhave appeared the logical course if it had not been accepted that the HoA was binding.

EeNZ Board approval. The ECNZ Board approved the HoA but "questioned" thedefinition of the "preferred customer supplied" basis and whether it was "appropriate thatFCE should deliver gas during the final period only if the delivery was economic". Theresolution resolved that the HoA be approved subject to "challenging" the provision thatFCE should only deliver gas in the period 2011 to 2017 if such delivery were to beeconomic. On the following day, Mr Taylor of ECNZ advised FCE that the Board hadapproved the HoA and did not mention that the approval was conditional in any way.Again Thomas J agreed with Wild J that he resolution did not state that the Board'sapproval to the HoA was conditional upon FCE agreeing to a different delivery obligationduring the period 2011 to 2017. If ECNZ's negotiators mounted an unsuccessfulchallenge - which is essentially what happened - the Board's approval would stand. Themajority contended that the Board was only approving what had been done to date.Thomas J regarded this construction of events as unrealistic, particularly as the majorityhad concluded elsewhere· that the absence of these provisions did not render the contractincomplete or uncertain.

• Extrinsic evidence. As mentioned above, Thomas J had regard to extrinsic evidence which heregarded as obviously relevant to the parties' intention. The relationship and proximity ofthose documents to the HoA and ECNZ Board's approval of the HoA was such that Thomas Jconsidered that it was probably unnecessary to describe the material as extrinsic evidence atall.

Executive summary for the ECNZ Board. An Executive Summary from Mr Taylor (ofECNZ) to the Chairman and Directors of the ECNZ Board recommended that the Boardendorse the ECNZ/FCE alliance and approve ECNZ entering into the long-term gascontract with FCE. That report contained the paragraph:


[9] Heads of agreement were also entered into for a long term gas supply withFCE for the period October 2000 to 2017. This heads which specifies allnecessary terms for it to be a binding agreement is conditional on ECNZBoard approval within eight days.

Thomas J questioned why Mr Taylor would misstate the position to the Board? Heconsidered this Executive Summary as strong evidence that ECNZ intended the HoA tobe a binding agreement.

Background paper for the ECNZ Board. A background paper was attached to theExecutive Summary for the ECNZ Board. Reference was made in that paper to the"ECNZ/FCE gas contract", the essential terms of the HoA were set out and a copy of theHoA was attached to the report. The report recommended that the Board approve inprinciple ECNZ entering into the proposed Kupe alliance and gas contractingarrangements with FCE "on the terms negotiated" and directed that the terms, once fullynegotiated, be referred to the Board's finance committee for review and approval. Thereis nothing to contradict the proposition that the bargain in the HoA is to be approved so asto become unconditional.

Mr Frow's report to the ECNZ Board. Mr Frow's report dated 6 March 1997 advised:

FCE were extremely keen to conclude a gas contract with us as part of the deal,however, at the eleventh hour, they agreed to do the deal with the proposed gascontract remaining conditional on ECNZ Board approval.

Thomas J felt that the inescapable implication of this advice that the contract isconditional on ECNZ Board approval was that, once that approval is given, the HoAwould be unconditional. Mr Frow's report made it evident that the HoA' was not binding,but only because it had not yet been approved by the Board. Thomas J questioned how itwas plausible to read this document, and other contemporaneous documents, andconclude, as the majority did, that the HoA was no more than a step in a negotiatingprocess or something in the nature of a progress report to the Board from the negotiators.

The ECNZ Board minutes. As discussed above, Thomas J regarded this document as afirm indication that ECNZ intended to be bound while reserving the right to challenge, innegotiating the full agreement, the basis of supply after 2001, but that nothing sensiblysuggested that the HoA was not being approved so as to become an unconditional bindingagreement.

• Subsequent conduct.

The course of negotiations. Thomas J agreed with Wild J's conclusion that there wereindications from the start to the end of the negotiations that the parties regarded the HoAas legally binding. Of course, there were phrases which were ambiguous and some whichmay even have pointed in the other direction. But the overall impression was perfectlyplain, the parties worked at the task of transforming or converting the binding BoA into a"full" contract. Thomas J referred to internal memoranda within ECNZ during


negotiations. One such memoranda directly addressed the legal status of the HoA andstated:

The report concludes that the stage will soon be reached were [sic] ICNZ may bejustified in taking the position that a long period of negotiations has not proceeded, andthe AoA contains too much uncertainty to constitute a binding agreement.

Thomas J noted that the ground on which it was thought the HoA could be abandonedwas not that it was not intended to be a binding agreement, but that its terms were toouncertain to constitute an enforceable agreement.

The confidentiality provision. Both parties had treated the confidentiality provision as acontractual obligation (see above). Thomas J felt the correspondence suggested morethan a moral obligation (as the majority concluded) to retain confidentiality until suchtime as the full agreement had been completed.

ECNZ's annual report. ECNZ recorded the entering into the iliA with FCE in itsfinancial statements noting that, under the HoA, "ECNZ is required to purchase specifiedannual gas quantities ... ". Thomas J held this was valid evidence of an acknowledgementof ECNZ's intention. If the contract was subject to a formal agreement, it would not beacceptable to fail to note that fact.

Media release. Thomas J regarded ECNZ's media release, which recorded ECNZ'scommitment to purchase, would not have been intended to mislead the public, but ratherto inform the public, including the financial markets, of ECNZ and FCE's long-termarrangements for gas supply.

The Chairperson's letter to the Minister. In a letter responding to the Minister's concernsfollowing the media release, the Chairperson of ECNZ described the AoA as "legallybinding". Thomas J considered it unlikely that Mr Cushing (the Chairperson) wouldmisstate the position to the Minister.

e The "speaking silence" - Thomas J also referred to what was not said and what was not donein concluding that the parties intended to be bound by the HoA. There were no documentswhich indicated an appreciation that the original intent (of concluding an agreement) had beenreplaced by another intent. There were no documents which suggested that the negotiatorshad failed to deliver on their Chief Executives' direction to reach a binding agreement. Therewere no documents in either FCE or ECNZ's files that would indicate the uncertainty whichwould at once attach to the situation where no long-term gas supply agreement existed ormight never eventuate.

eTwo provisions marked "not agreed". Thomas J disagreed with the majority conclusion thatthe two provisions marked "not agreed" were an indication that the parties did not intend theAoA to be binding. The General Manager of ECNZ described the HoA as containing "theessential terms of the gas contract" and the inability of the negotiators to reach agreement ontwo terms did not negate the agreement arrived at on the essential terms. The fact that thematters were deferred did not necessarily mean that the rest of the agreement was not intended


to stand pending that full agreement. Thomas J questioned the majority's claim that the factthe two clauses were marked "not agreed" was an indication of their importance and that theywere regarded as essential terms. His Honour felt that the fact that they were marked "notagreed" could just as well indicate that they were not considered important or essential andthat in the context, that must surely be the preferred interpretation.

The [majority's] conclusion that the non-essential terms were regarded by the negotiatorsas essential terms because they were marked "not agreed", with the result that the rest ofthe HoA becomes a step in the negotiating process or report of the negotiators as toprogress made, is untenable and flies in the face of all the arguments and evidence to thecontrary.17

• The existence of the words "Agreed (except as otherwise indicated)" immediately above thesignatures was more likely to have indicated that the parties were making it clear that, otherthan as expressly noted, the terms of the HoA had been agreed as essential and binding terms.Otherwise, signatures would have been sufficient to simply denote that all but two provisionshad been agreed to. Unlike the majority, Thomas J did not consider that anything significantcould be read into the difference between "not agreed" and "to be agreed".

The agreement is complete and certain

Thomas J agreed with the majority that the HoA was sufficiently certain and corrplete.

Reasonable endeavours

Thomas J rejected the majority's findings that, even if the all reasonable endeavours clause werepart of the binding HoA, because of the nature of the "not agreed" items, it would be difficult tosee that the clause could create any legal obligation to negotiate further.

To me, the notion, assuming that the HoA is binding, that either party could have legallydeclined to undertake any negotiations directed to completing the full agreement isdisturbing. If that is the law it is an ass. I8

Conclusion

Thomas J finally gave ,his prediction that an appeal to the Privy Council would be highly unlikelyto be successful due to the different approach which is nurtured within the ranks of the judiciary.He views the outcome in this case as following the approach which is adopted or identified. Forhimself, he considers it is important that the law should endeavour to meet the needs of commercerather than requiring commerce to meet rules laid down by the law.

If and when it is able to do so, I am confident that in a case such as the present, the Courtwill reject the influence of lingering formalism and decline to artificially restrict the scope

17

18Unreported judgment, at para 223Unreported judgment, at para 243


of the inquiry so as to admit of an outcome which is at variance with the true intention ofthe parties.19

A COMMENTARY

There is a remarkable similarity in the basic approach to a contract dispute as adopted by themajority and Thomas J in their judgments.

Both the majority and Thomas J agree that all the surrounding facts including actions after thealleged contract has been signed are relevant to determining whether the parties intended to createlegal relations. Both the majority and Thomas J agreed that having found that there is a bindingcontract, the Court must strive to uphold that contract and not be the destroyer of bargains. Themajority and Thomas J both rejected the lingering formalism manifest in May & Butcher.

However, it is the application of these well known and accepted legal principles to the particularfacts of the case that sees such a marked contrast in approach. One cannot help but feel that themajority was uncomfortable to create a binding contract of such value on the basis of a four pageHeads of Agreement expressed in deliberately staccato terms. Thomas J, on the other hand,expressed his reluctance to endorse any approach which would tend to restrict the utility of Headsof Agreement. As he noted,

If Heads of Agreement entered into in the" circumstances of this case are not to behonoured by the parties and enforced by the courts a valuable and essential commercialtool will be seriously prejudiced.2o

Since the case commenced, FCE has been acquired by Shell. ECNZ has been split and the benefitor burden of the HoA is now held by a large New Zealand electricity generator and retailer,Genesis Power Limited. An announcement has been made to the effect that the decision of theCourt of Appeal will be appealed to the Privy Council. However, there remains a real commercialissue as to whether Shell/FCE would wish to be bound by the contract given changing marketconditions for large scale natural gas supply within New Zealand and ongoing reassessments as tothe commercial attractiveness of the gas price recorded in the HoA. That price remainsconfidential and has not been disclosed by either party to the dispute.

We all now have to await the third instalment.

19

20Unreported judgment, at para 251.Unreported judgment, at para 135.

Documents

OMISSION OF ESSENTIAL TERMS. ELECTRICITY CORPORATION …