AIRFLO HOLDINGS LIMITED v EASTBAY ELDERCARE LIMITED [2002] NZCA 38 (27 March 2002)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca170/01

	between	Airflo holdings limited
		Appellant

	and	EASTBAY ELDERCARE LIMITED
		Respondent

Hearing:	12 March 2002
Coram:	Tipping J Hammond J Randerson J
Appearances:	P J Dale for Appellant S J Clews for Respondent
Judgment:	27 March 2002

judgmentS of the court

Judgments
	Para No
Tipping and Randerson JJ Hammond J	[1] - [20] [21] - [28]

TIPPING AND RANDERSON JJ

(DELIVERED BY TIPPING J)

Introduction

[1] The ultimate issue in this case is whether the respondent bound itself to buy the appellant's rest home at an arbitrated price.In the High Court Tompkins J held that the respondent, Eastbay Eldercare Limited (Eastbay) had not done so.The appellant, Airflo Holdings Limited (Airflo) challenges that conclusion.Resolution of the issue involves consideration of a most unhappily drawn right of pre-emption in favour of Eastbay contained in the leases between it as lessee and Airflo as lessor.The pre-emption clause, which is the same terms in both leases, is expressed in this way:

Right of First Refusal to Purchase Premises

The Lessee shall throughout the term of the Lease and any renewal(s) thereof have the option to purchase the premises in the event that the Lessor chooses to sell the premises.In the event that the Lessor chooses to sell the premises the following provisions shall apply but it is hereby agreed and declared that any sale or transfer of the premises by the Lessor to a company in which DONALD TREVORATKINSON has the controlling interest or to a Family Trust for the benefit of the family of the said DONALD TREVOR ATKINSON shall not be deemed to be a sale within the terms of this clause:

(a) The Lessor shall give notice to the Lessee offering the premises to the Lessee and stating a reasonable market price at which the Lessor is prepared to sell to the Lessee (called "the purchase price").

(b) The Lessee shall give notice to the Lessor either agreeing with the purchase price or disputing it.If the Lessee disputes the purchase price the parties shall take all reasonable steps to agree upon the purchase price within 30 days.

(c) If no agreement can be reached within such period, the purchase price shall be determined by arbitration in accordance with the clause 36.

(d) Subject to agreement on the purchase price, the Lessee shall be given two (2) weeks from the date of such notice to accept or decline the offer.The Lessor and the Lessee acknowledge that it shall be entirely at the discretion of the Lessee to accept or decline the offer.

(e) If the Lessee accepts the offer, the Lessor and the Lessee shall enter into an agreement for sale and purchase (to be on the standard Real Estate Institute of New Zealand and New Zealand Law Society form at the time) which inter alia, will provide for a settlement and possession dated 30 days from the date of acceptance of the offer by the Lessee.

(f) If the Lessee declines the offer, the Lessor shall be entitled to offer the premises to any other party PROVIDED THAT if the Lessor intends offering the premises to another party at a price or on more favourable terms, the Lessor shall first re-offer the premises to the Lessee at such price or on such terms and the provisions of the foregoing clauses shall apply mutatis mutandis.

Relevant facts

[2] The case went to trial in the High Court on an agreed statement of facts and correspondence.The agreed statement was in these terms:

1 Airflo is the registered proprietor of the land and rest home the subject of the lease.

2 The rest home known as Golden Pond is an architecturally designed, purpose built, 40 bed private geriatric hospital and rest home located in Whakatane.

3 The rest home was built following negotiations between the Plaintiff and Defendant.As a consequence of those negotiations the Defendant entered a Rest Home Development Agreement.Consequently a lease agreement was entered into dated 25 August 1992.

4 The rest home is valued at approximately $1.6 million.The current annual rental is $177,700 per annum (plus GST).

5 Airflo desires to sell the freehold.

6 Airflo offered the freehold to the Lessee pursuant to clause 34 "Right of First Refusal to Purchase Premises".

7 No agreement on the purchase price could be reached.

8 Under Clause 34(c) the purchase price is being determined by arbitration.

9 The parties have agreed to suspend the arbitration in relation to the value of the rest home pending the outcome of this proceeding.

[3] On 9 November 1999 Airflo's solicitors wrote to Eastbay's solicitors saying:

... the lessor offers the freehold interest in the premises to the lessee at a reasonable market price of $1.8 million plus GST (if any).This information has already been provided to Mr Lowry of your client company and who has also indicated that the lessee does not intend to pursue the Option to Purchase the freehold interest.Could you kindly confirm to us that this is the situation.

[4] To this letter Eastbay's solicitors replied on 11 November 1999 in these terms:

Thank you for your letter of the 9^th November.Mr Atkinson mentioned to Mr Lowry casually at lunch prior to Labour Weekend that he was thinking of selling the Resthome property, but that he would think about it further over Labour Weekend.

Our clients had no further contact from Mr Atkinson nor anybody on his behalf until Saturday the 30^th of October when Mr Kevin Weihipeihana from Bayleys Real Estate called to the Resthome and told the Charge Nurse that he was coming to take photographs as the property was for sale.Our clients subsequently received Bayleys Invoice on the 1^st of November which was passed onto you.

It appears that the invoice had been paid prior to the discussion over lunch between Mr Atkinson and Mr Lowry.

Your client company is not free to offer the property for auction and we are so advising Bayleys.A copy of that letter is enclosed.Our clients requires that the procedures in Clause 34 Lease B.102276 and Clause 32 of Lease B.295617 be followed and is seeking valuation advice.

Will you please ask your client to ensure that no Real Estate Agents/prospective purchasers come onto the property.

[5] At the same time Eastbay's solicitors wrote as follows to Mr Kevin Wehipeihana of Bayleys Distinction Realty Limited:

We are the solicitors for Eastbay Eldercare Limited which is the lessee:

a. Under Memorandum of Lease B.102276 of the Resthome property in Bracken Street; and

b. Under Memorandum of Lease B.29561 of Principal Unit 12 Unit Plan S.70924.

Both properties are owned by Airflo Holdings Limited.Advertising material distributed by you states that an auction of the property is to take place on the 10^th of December next.

Airflo Holdings Limited is not free to sell the property until our clients rights of first refusal to purchase under the Leases have been exhausted.

We have advised the solicitors for Airflo Holdings Limited that the procedures in the leases must be followed.Will you please acknowledge receipt of this letter.

As noted, a copy of that letter was enclosed with the letter to Airflo's solicitors.

[6] No other communications between the parties are in evidence.What is apparent, however, from the agreed statement of facts is that the parties referred the purchase price to arbitration in terms of subclause (c) of the pre-emption clause in the lease.That arbitration was, by agreement, suspended pending the outcome of the proceeding with which we are now concerned.

High Court judgment

[7] In the High Court Airflo sought a declaration that Eastbay was bound to purchase the property at a price determined by arbitration.The Judge declined to make such a declaration and ruled that Eastbay was not so bound. Tompkins J summarised the arguments of the parties in this way:

Mr Dale submitted that the letter of 11 November 1999 constituted a binding acceptance of the offer to sell where it stated, "our clients requires that the procedures in clause 34 ... be followed ...".He supported this approach by submitting that it cannot have been the intention of the parties that, when the lessor had given notice under clause 34(a), it would then have to wait for the whole arbitration process to be completed before the lessee was required to accept or reject the offer.The lessee is likely to have lost its original purchaser, have taken the property off the market, and yet still not have a binding sale.The clause does not provide for a fresh offer and acceptance after the arbitration process.

Mr Clews for the defendant submitted as follows.The letter of 9 November was an offer to sell at the nominated price.Under the procedure set out in clause 34 there were two elements, namely, the making of the offer and the fixing of the price.The action of the defendant in declining to accept the price proposed by the plaintiff, and requiring the price fixing procedure to be followed, cannot without more amount to a binding acceptance of the offer to sell.Sub clause (d) recognised that once the purchase price is fixed by agreement or arbitration, the defendant has a further period of two weeks to accept or decline the offer.

The clause, in his submission, envisages the fixing of the price at which the plaintiff is to offer the premises to the defendant, and two weeks from the time the offer is certain as to price during which the defendant may accept or decline the offer.As the offer never became certain as to price, there has never been a binding contract.

[8] In his discussion of the competing contentions, the Judge took the view that the key provision was subclause (d).He noted that when the lessor gave the lessee notice under subclause (a), the lessee had 2 weeks from the date of that notice to accept or decline the offer to sell.The Judge observed that although the clause did not expressly say so, it was presumably intended that if the lessee took no action, that is if the lessee neither expressly accepted nor declined the offer, it had in effect declined the offer.The Judge held that the phrase in subclause (d) "subject to agreement on the purchase price" was intended to make it clear that if the lessee accepted the offer, it could also under subclause (b) dispute the offered purchase price which then had to be fixed either by agreement or by arbitration.

[9] The Judge then continued:

So the overall effect of the first sentence in sub clause (d) is that the lessee has two weeks to accept the offer.It may do so subject to disputing the purchase price and having it fixed either by agreement or arbitration.If it either does nothing within two weeks or declines the offer within that time, the lessor is free to sell the property to another buyer subject to sub clause (f).This approach overcomes the difficulty referred to by Mr Dale that the parties cannot have intended to require the lessor to wait for the price to be fixed by arbitration, thereby possibly loosing another prospective buyer.

It also follows from this approach that I do not accept the submission of Mr Clews that the offer must remain open for acceptance until the price has been fixed by agreement or by arbitration.The offer remains open for acceptance for two weeks from the time it is made.If the lessee wishes to challenge the price without accepting the offer, and that process takes longer than two weeks, it risks loosing the opportunity to buy.The lessor can withdraw the offer two weeks after it has been made.Alternatively, the lessee can accept the offer within the two weeks, or later if it has not been withdrawn, and still challenge the price.In that case, it is bound to buy at whatever price is fixed by agreement or arbitration.

It remains to consider Mr Dale's submission that the statement in the letter from the defendant's solicitors of 11 November 1999, "our clients requires that the procedures in clause 34 ... be followed ..." amounts to an acceptance of the offer to purchase on the terms set out in clause 34.Does the phrase clearly convey an intention to accept the offer, thereby becoming contractually bound to complete the purchase?Or does it indicate an intention that the lessee, without accepting the offer and becoming contractually bound, wishes to go through the price fixing procedure in clause 34?

It is my clear conclusion that the second hypothesis is to be preferred.I do not consider that the defendant, by the use of that phrase, intended to become contractually bound to complete the purchase.Rather the draftsman of the letter very carefully did not state that the offer was accepted.It wanted to keep its options open to see at what price the premises would be available, and then decide whether it would accept or decline the offer, if it were still open.In doing so it ran the risk, once two weeks had passed from the giving of the notice offering the premises for sale, that the plaintiff might withdraw the offer and sell the premises to another buyer.That was the risk it ran through not electing to accept the offer and become contractually bound to buy at whatever price may be fixed.

Analysis and discussion

[10] There can be no doubt that, by its solicitor's letter of 9 November 1999, Airflo gave notice as contemplated by subclause (a).Equally, there is no doubt that Eastbay, by its solicitor's letter of 11 November 1999, gave the notice contemplated by subclause (b).That notice disputed the proposed purchase price.In itself, as Mr Dale was rightly constrained to accept, Eastbay's subclause (b) notice neither accepted the proposed price nor unequivocally agreed to buy at an agreed or arbitrated price.It would be reading too much into Eastbay's requirement that the procedures in the relevant clause be followed to ascribe to it an intention to be bound to buy at an agreed or arbitrated price.Had Eastbay expressly agreed to buy on those terms, with Airflo's concurrence, there would have been a valid contract because, absent agreement on price, the parties had provided a mechanism, ie. arbitration, for fixing the price.That, however, is not what happened.

[11] Viewed in isolation, the final sentence in the letter of 11 November 1999, asking that prospective purchasers and agents not come onto the property, might have signalled an agreement to buy at an agreed or arbitrated price, but not when read with Eastbay's concurrent statement to Bayleys that Airflo was not free to sell until its own rights of first refusal had been exhausted.That way of putting the matter cannot be reconciled with an unequivocal agreement to buy at an agreed or arbitrated price.

[12] Against that background Mr Dale re-focussed his argument from that referred to by Tompkins J and submitted that Eastbay's agreement to submit the price to arbitration could, and should, be viewed as an unequivocal acceptance of Airflo's offer at whatever price might be fixed by arbitration. Quite apart from the provisions of the pre-emption clause, there are difficulties with that proposition.If, as is the case, immediately before the submission to arbitration there was no binding agreement that Eastbay would buy at an arbitrated price, it is difficult to see how the mere act of submitting the price to arbitration could of itself create such agreement.There is no evidence of the basis on which the arbitration was established or of the terms of the submission.It is a reasonable inference that there was nothing in that respect which would assist Airflo to show that, by means of the submission to arbitration, Eastbay became committed to buy at the price fixed, when it had not hitherto been so committed.

[13] Analysis of the remaining terms of the pre-emption clause does not assist Airflo either.Upon the giving of the subclause (b) notice, whereby the proposed price was disputed, the parties were obliged to take all reasonable steps to agree the price within 30 days.No issue arises as to the reasonableness of the steps taken and obviously agreement was not reached.The next stipulation in the sequence adopted by the clause is that in these circumstances the purchase price shall be determined by arbitration. This mandatory procedural requirement neither states nor implies with any clarity that the lessee is bound to purchase at the price so fixed.

[14] Mr Dale argued that it can hardly have been intended that the lessor should suffer the delay and expense of an arbitration without having the lessee bound to purchase at the arbitrated price.There is force in that argument when, as is appropriate, one contemplates objectively the likely intentions of the parties.But, on the other side, it is also unlikely that the lessee, unless expressly so agreeing, would intend to be bound to a figure of which it had no advance knowledge.In short, the fact that arbitration is described as a mandatory step in the sequence, does not signal with the necessary clarity that, having disputed the offered price and having failed to reach agreement on an alternative price within the stipulated time, the lessee is nevertheless bound to purchase at an arbitrated price.

[15] It is significant in this respect that subclause (b) is drafted so as to allow only two possibilities - accept or dispute the offered price.As Mr Clews submitted, it is highly unlikely that it was intended that the lessee should become bound to buy at an agreed or arbitrated price simply as a result of taking the dispute route.Subclause (b) does not provide contractually for a notice to the effect that the lessee is not interested in buying at all. The contractual formula confines the lessee to agreeing with the price or disputing it.In these circumstances it cannot be right that a decision to dispute rather than agree inevitably leads to the lessee being bound to buy at an agreed or arbitrated price.

[16] One comes next to subclause (d) and the difficult words "subject to agreement on the purchase price".Leaving those words aside for the moment, the clear intent of the subclause is that the lessee is to have 2 weeks to accept or decline the subclause (a) offer.As subclause (d) must be referring to the lessor's offer to sell under subclause (a), the notice referred to in the subclause as "such notice" can only be the lessor's notice under subclause (a).The words "subject to agreement on the purchase price" are words of qualification.It is contextually and grammatically likely that they were intended to qualify some aspect of subclause (d) itself. It is difficult to read them as in some way qualifying an aspect of the earlier subclauses.The words under discussion can have no logical reference to the immediately preceding subclause (c).That deals solely with arbitration and is not concerned with agreement on price.It is subclause (b) which deals with that concept but the problematic introductory words of subclause (d) can hardly qualify anything in subclause (b).They could possibly mean "if there is agreement on purchase price" but then the concept of declining the offer, which is one of the two alternatives which follow, would follow only in the rather strained sense of the lessee being in agreement with the proposed price but nevertheless not wanting to buy.

[17] Against that background we consider the most natural and likely meaning of the words, albeit they are strangely placed in this sense, is that the lessee is given 2 weeks to accept or decline the offer, any such acceptance being capable of being subject to agreement on price under subclause (b), with arbitration implicitly to follow if such agreement is not reached.Read in this way subclause (d) allows the lessee to take one of three possible steps. The first is to agree to buy at the offered price.The second is to agree to buy at an agreed price or (as is necessarily implicit) at an arbitrated price. The third is to decline to buy.The subclause does not contemplate that the lessee can say, as of right under the clause, rather than by further agreement, that there should be an arbitration and then the lessee can say whether it is willing to buy at the arbitrated price.That fourth possibility is not within the contemplation of subclause (d) when read in the context of the clause as a whole.While this may have been the lessee's earlier stance, as noted by the Judge below, that construction was understandably not advanced before us. Whichever of the three available possibilities are adopted, the parties will know at the end of the 2 weeks exactly where they stand.That must have been the purpose of the 2 week time limit.Either the lessee is bound to buy at the offered price or at an agreed or arbitrated price, or the lessee will not be buying at all in terms of its right of pre-emption.

[18] How then does all this fit with the evidence of what actually happened. The letter of 11 November 1999 which constituted the lessee's notice under subclause (b) disputed the purchase price.It did not amount to an agreement to buy "subject to agreement on the price" in terms of subclause (d). That has already been discussed.We do not know whether the submission to arbitration was made within the 2 week period.Assuming that it was, we cannot, for the reasons earlier given, regard the act of submission to arbitration of itself as signalling clearly and unequivocally that Eastbay was agreeing to buy at the arbitrated price.Nor does the very awkward contractual background against which the submission to arbitration took place make the argument for unequivocal commitment to purchase at an arbitrated price any stronger.In short, Airflo made an offer to sell at a stipulated price. Whatever Eastbay has done, it has not agreed with that price or any other price.For Airflo to succeed, it must show that Eastbay has unequivocally and unconditionally agreed to buy at an arbitrated price.To the extent that it relies on the terms of the pre-emption clause as evidencing or supporting such agreement, it is building more on sand than on rock in view of the difficulties inherent in the clause.

[19] It is elementary contract law that offer and acceptance must be in the same terms and the offeree's acceptance of the offer must be unequivocal and unconditional.That is ultimately so whether one adopts a conventional offer and acceptance analysis or a wider approach focussing more on a commercial appraisal of the outcome of the parties' negotiations or communications. Airflo's initial offer at the stipulated price was not accepted.To the extent that the pre-emption clause has the effect of Airflo making a further offer to sell at an arbitrated price, it is not possible to hold that Eastbay unequivocally accepted that offer.Nor can it be said that Eastbay made an offer to buy at an arbitrated price which Airflo accepted.In the circumstances, and against the background we have discussed, Eastbay's joining in the arbitration cannot be regarded as conduct sufficiently evidencing agreement to buy at whatever price was fixed by the arbitration.

Conclusion

[20] For these reasons, which are not entirely those adopted by Tompkins J, we agree with his conclusion that Eastbay is not bound to buy at a price determined by arbitration.The appeal is therefore dismissed, with costs to Eastbay in the sum of $3500 together with disbursements including the reasonable travel and accommodation expenses of counsel, to be fixed if necessary by the Registrar.

HAMMOND J

[21] I agree with the disposition of this appeal.My reasons differ somewhat from those of my brothers.The burden of this judgment is, therefore, to state my reasons, in short form.

[22] The first, and central issue on the appeal is whether there was acceptance of the undoubted offer which was made by Airflo.The law on that issue is well settled and uncontroversial:a parties intention will be held to be what a reasonable man or woman in the position of the other party would conclude his or her manifestation to be.The test considers what the second party knows or should know about the intention of the first party.

[23] In this case, the letter of reply from Eastbay would have conveyed (and did in fact convey to Airflo), that Eastbay was of the view that it was entitled to proceed through an entire arbitration process, and then to have two weeks to decide whether to purchase the subject property, at the arbitrated price.

[24] The provisions of the lease should not be construed to support such a commercial monstrosity, unless there is the clearest and most compelling language.The clause was very badly drafted.It has to be read as a whole.I agree that (d) can only apply to a notice under (a).The clause is structured, and should be read, sequentially.When so read, (d) seems to me to be referring to that situation where the lessee says in response to the offer, "your price is reasonable [and thus there is then agreement on the purchase price], but I need the two weeks [to raise finance, or decide whether I can afford that reasonable price]".The lessee then has to "accept" the offer within two weeks; and sub-clauses (e) requires settlement under the consequential agreement for sale and purchase within 30 days of the notification of final acceptance.If the clause is so construed, then the possibility of the temporal deferment Eastbay has read into the lease is simply not possible.

[25] In any event, for present purposes, once the construction placed upon the clause by Eastbay is put to one side as being quite untenable, it is of no significance which of the other possible constructions suggested by the members of this Court is ultimately correct.Whether the view Eastbay took of these provisions in the lease was genuinely mistaken; whether Eastbay was prevaricating ("keeping its options open", as Tompkins J put it); or even whether its interpretation was perverse, matters not.What Eastbay conveyed by its correspondence was something quite different from what Airflo had put forward.There was not, therefore, a "final and unqualified expression of assent" (Chitty, Contracts, 28^th ed, para 2-024) to the terms of the offer as actually made; and a reasonable offeror in the position of Airflo could have come to no other conclusion than that the parties were talking past each other.

[26] Mr Dale conceded as much in his argument in this court.He expressly said that if he had to rely on the exchange of letters alone, the appeal must fail. In the end, he relied on the fact of submission to arbitration, as being evidence of conduct confirming "acceptance".No estoppel argument was raised. Nor was there any suggestion that somehow Eastbay had accepted the provisions of the lease with all their imperfections (which might then have required a collateral determination as to what the relevant provisions meant).

[27] I accept that, in appropriate cases, conduct can constitute acceptance (provided it meets the objective test already noted).But here it cannot be said that entering into a (presently suspended) arbitration is unequivocal. For, that act is equally consistent with the view Eastbay was (wrongly) taking of the provisions in the lease.

[28] Then there is another point, which counsel did not raise and which has therefore not been the subject of considered argument.It is long since settled that acceptance must conform to a specified mode of acceptance.(As good a case as any is still Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256, 269 per Bowen LJ).Here, as I read them, the relevant sub-clauses required written "notice" of Eastbay's decision.This view of the sub-clauses is consistent with the requirement for a written memorandum in the case of a sale of land.But the entry into arbitration is not of that character.It may be that the submission to arbitration (if unequivocal, which it is not) could be part performance, but that would still not obviate the requirement for the acceptance itself to conform to the prescribed mode of acceptance.In principle, doubtless that "mode of acceptance" could be waived by Airflo, but there is no evidence it has done so in this case.It may be therefore, that the "acceptance" also fails for want of form.

Solicitors

Grove Darlow & Partners, Auckland, for Appellant

Osborne Gray, Whakatane, for Respondent