	Home \| Databases \| WorldLII \| Search \| Feedback Court of Appeal of New Zealand

Home | Databases | WorldLII | Search | Feedback

Court of Appeal of New Zealand

You are here: NZLII >> Databases >> Court of Appeal of New Zealand >> 2019 >> [2019] NZCA 332

Tower Insurance Limited v Nicon Limited [2019] NZCA 332 (25 July 2019)

Last Updated: 30 July 2019

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

CA533/2018
[2019] NZCA 332

	BETWEEN	TOWER INSURANCE LIMITED First Appellant QUSOL NZ LIMITED (FORMERLY KNOWN AS STREAM GROUP (NZ) PTY LIMITED) Second Appellant
	AND	NICON LIMITED Respondent

Hearing:	30 May 2019
Court:	French, Miller and Lang JJ
Counsel:	M C Smith and M H A Ho for First Appellant J P Forsey for Second Appellant P B McMenamin for Respondent
Judgment:	25 July 2019 at 9.30 am

JUDGMENT OF THE COURT

The appeal is dismissed.
The appellants must pay the respondent one set of costs for a standard appeal on a band A basis together with usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by French J)

Introduction

[1] The parties in this case signed a document entitled “Heads of Agreement”. In the High Court, Gendall J held that the document was intended to be legally binding and that correctly interpreted its effect was to oblige the appellants in certain circumstances to offer the respondent demolition work to the exclusion of other contractors.^[1]
[2] The appellants now appeal those rulings which were given in answer to certain preliminary questions.

Background

[3] The first appellant, Tower Insurance Ltd, insured numerous properties that were damaged in the Christchurch earthquakes of 2010 and 2011. In order to assist it with processing the large volume of claims, Tower appointed the second appellant, whom we shall call Stream, as its loss adjuster and project manager.
[4] Nicon Ltd was a Christchurch demolition contractor. Its sole director and shareholder was Mr Giltrap.
[5] The first Christchurch earthquake occurred on 4 September 2010. It caused widespread damage and, as Gendall J put it, presented a major problem for insurance companies.^[2] They had a contractual obligation to their policyholders to make good any damage but in order to discharge that obligation they needed to find contractors to do the work. There was an unprecedented demand for contractors and so it was imperative for the insurers to secure supply of the necessary services for an extended period.
[6] The month after the earthquake, Mr Giltrap was given a letter from a building contractor, Stonewood Homes Ltd. Stonewood had been engaged by Stream on behalf of Tower to undertake the demolition and rebuilding of approximately 300 houses under claims due to the earthquake. The letter dated 8 October 2010 formally advised Nicon that it was Stonewood’s intention to utilise its services for the scope of works involving demolition and site clearance on an “as and when needed” basis. The letter ended by asking Nicon to confirm its capacity and various machine and attachment rates.
[7] In evidence, Mr Giltrap said the letter provided him with an assurance he would be allocated work and that he needed this assurance in order to make an investment in additional equipment worthwhile. He relied on the letter and went ahead and purchased additional machinery, confirming to Stonewood that Nicon would keep itself available to perform the work when it eventuated.
[8] The process that was agreed was for Nicon to inspect sites where demolition was a possibility, make an assessment and provide a quote for the demolition. The quote would be forwarded to Tower for consideration and a decision then made as to whether there would be a demolition and a rebuild, a repair, or a cash settlement. All of that was likely to take time and as a result according to Mr Giltrap, pricing was agreed to be on a “swings and roundabout” basis. That meant demolition rates had to be adequate to compensate Nicon for cases where it would have to absorb extra costs due to unforeseen difficulties with the job or because of increases in costs since the assessment had been undertaken.
[9] Not long after the October letter was written, Stream took direct charge of the demolition process for Tower.
[10] Then followed several discussions between Mr Giltrap and Stream’s project manager, a Mr Honeybone. The two men discussed Nicon’s capacity to deliver the services required and pricing. Mr Giltrap said he confirmed his commitment to keep Nicon available to perform the work as required and that Mr Honeybone confirmed the commitment to engage Nicon as well as the swings and roundabouts costing principle.
[11] By February 2011 however, Mr Giltrap found himself in a dilemma. Although Stream and Tower had plenty of demolition work in the pipeline only one job had eventuated. There was other demolition work becoming available in the city’s central business district but if Nicon took up that work it would prejudice its ability to complete the work expected from Tower.
[12] Mr Giltrap contacted Mr Honeybone and, as Mr Giltrap phrased it, he put his cards on the table. He told Mr Honeybone that Nicon was starved for work, running low on cash and needed income immediately. He said he needed a firm commitment that he would receive work. Otherwise he would have no choice but to take up other opportunities.
[13] Mr Honeybone said he did not have the authority to provide any written commitment or guarantee but would check with Stream’s chief executive. The upshot was that a document titled “Heads of Agreement” and printed on Stream letterhead was signed by the chief executive Mr Norriss, and given to Mr Honeybone who in turn handed it to Mr Giltrap. There was never any direct communication between Mr Norriss and Mr Giltrap.
[14] At trial, Mr Honeybone claimed to have very limited recall of the circumstances surrounding the provenance of the “Heads of Agreement” document. Despite it being on Stream letterhead, he was unable to recall who had drafted it, unable to identify the handwriting on it and also unable to recall what he said to Mr Norriss about the document when he took it in to him for signature. At the time Mr Norriss saw it, it had not been signed by Mr Giltrap.
[15] The document which is at the heart of this case reads as follows:

HEADS OF AGREEMENT

THE PARTIES

This agreement shall be between Nicon Ltd (herein named “the contractor”) and Stream Group NZ LTD as agent for Tower Insurance (herein named “Stream”) where it is agreed that both parties shall act in good faith to meet all of the intended objectives and outcomes of this agreement.

DESCRIPTION OF SERVICES

Stage 2 (Quoting)

The contractor is to provide Stream with expert advice on cost effective demolition options and pricing.

The contractor shall provide an accurate estimate of the costs recovered from salvageable items and offset these against the demolition costs for each individual project.

Stage 3 (Execution of the works)

The contractor shall provide the necessary resources to tender and carry out the demolition work as allocated by Stream Management Team.

SERVICE LEVEL AGREEMENT

It is desired that the contractor visits the site and returns the detailed quote to demolish the dwelling within 2 working days to maintain the required momentum to achieve the target completion dates for stage 3.

TERMS OF ENGAGEMENT

The contractor agrees to keep all shared pricing information confidential.

In exchange for the provision of this service by the contractor it is also then agreed that Stream will offer the opportunity to undertake the demolition work for Tower and its contracted partners to Nicon Ltd as a preferred contractor.

The agreement shall not preclude Stream from engaging other contractors if required to facilitate the timely remediation of the complete claim volume. Stream reserves the right to enter into a competitive tendering process for any of its contracts, at any stage, to ensure a market rate for demolition contracts is maintained.

[16] Nicon claims the effect of the document is that, except in two situations, Tower was obliged to offer Nicon the demolition work that eventuated on properties in respect of which Nicon had provided assessments. The two exceptions were that Tower was free to use other demolition contractors if Nicon was unable to do the demolition in the required time frame or if, after a competitive tendering process, its prices were not competitive.
[17] Stream denies the document was intended to be binding and denies it created an exclusive contractor relationship or conferred any right of first refusal on Nicon. It was not a contract. It was simply a letter of intent. At its highest, the promise was to treat Nicon as one of its preferred — meaning approved or accredited — contractors and that promise was honoured.
[18] At trial, Mr Norriss said he understood from Mr Honeybone that Nicon needed the letter to support an application it was making for a loan. When asked in crossexamination how he envisaged it would support a loan application, he said a lender would require “something written round a commitment” and that a lender was likely to take from the document that Nicon had secured an income stream to support its borrowings. Mr Norriss also agreed the letter could only have value to Mr Giltrap if he believed it to be a binding document. He said he was happy for Mr Giltrap and his financier to think it was binding.^[3]
[19] Between February 2011 and September 2012, Nicon was requested by Tower to undertake around 1,407 assessments. Sometimes the requests came from Stream. Others were channelled through Stonewood. Not all of the assessed properties ended up being demolished but of those that went to demolition, Nicon undertook virtually all of them.
[20] Things however started to change once the demolitions in the city centre came to an end and Stream had a new project manager who admitted he was unaware of the existence of the Heads of Agreement. The demolition contractors who had been doing the city work turned to house demolitions.
[21] In August 2012, Mr Giltrap noticed that the number of demolition jobs from Tower had reduced significantly even though there was work to be done on properties Nicon had been asked to assess. He contacted Stream’s new project manager and was advised that Stream was using other contractors whose prices were more competitive than the Nicon quotes.
[22] The last demolition job undertaken by Nicon for Tower was in November 2012.
[23] Nicon claimed that in giving the work to other contractors, Stream and Tower had breached their obligations under the Heads of Agreement. It issued proceedings in the High Court seeking recovery of damages for lost income.
[24] The numbers as to how many assessments Nicon undertook and how many demolition jobs it was allocated and missed out on are disputed and are properly reserved for trial. The most recent iteration of the statement of claim alleges that Nicon undertook 1,376 assessments, was allocated 186 of the demolition jobs that eventuated on those assessed sites and was wrongly denied the opportunity to undertake the work in respect of 1,190 sites. The income lost as a result of being denied that opportunity is pleaded to exceed $4 million.
[25] The parties agreed it would be desirable to obtain answers from the Court to certain preliminary questions before trial, using the procedure under r 10.15 of the High Court Rules 2016. The agreed preliminary questions, which Gendall J answered in the decision under appeal, were:^[4]

(a) Was the Heads of Agreement binding on Tower, Stream and Nicon?

(b) If yes, did the Heads of Agreement oblige Tower and Stream to offer all the demolition work to Nicon in respect of properties for which Nicon had provided assessments?

(c) Was Stonewood Homes an agent of Tower and Stream for the purposes of the Heads of Agreement?

(d) Was Nicon entitled to a fee of $350 (excluding GST) for each assessment that was commissioned after 21 July 2011 and prepared by Nicon?

[26] The answers given by the Judge to the last two questions — “yes” to the agency question and “no” to Nicon’s claim for a fee — have not been challenged on appeal and therefore we say no more about them.^[5]
[27] The focus of the appeal is solely on the answers given by the Judge to the first two questions and it is to the issues raised by those questions that we now turn.

Was the Judge wrong to find the Heads of Agreement document was intended to be legally binding?

Arguments on appeal

[28] In answering yes to the first question, Gendall J relied principally on three factors:^[6]

(a) the parties had agreed all the essential terms;

(b) the absence of any later formal contract after the Heads of Agreement had been signed; and

(c) the subsequent conduct of the parties.

[29] On appeal, Tower’s counsel Mr Smith submitted that none of these three reasons was valid.
[30] He contended that the Judge’s first reason wrongly conflated the two prerequisites to the formation of a contract. As identified by this Court in Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd the two prerequisites are that first the parties must have intended to enter into a legally binding contract and secondly that there has to be agreement on every essential term.^[7] Mr Smith submitted these were two distinct prerequisites and that even if the parties in this case had agreed on all the essential terms (which he disputed) that was not an indicator of an intention to be legally bound.
[31] As for the second and third reasons given by Gendall J, in Mr Smith’s submission, the second was question begging and the third in the circumstances of this case was a neutral factor. Tower had never denied there was a commercial value to the Heads of Agreement for both parties so acting in accordance with it was equally consistent with it not being a contract as with it being a contract.
[32] Mr Smith further submitted that the focus of the Judge’s inquiry in answering the first question should have been on the document itself and its context. In this regard, Mr Smith emphasised the uncertain business environment generated by the earthquakes, the absence of any procurement process, the casual approach to the creation of the document, the sparse nature of the document, its loose language, the numerous matters that were not agreed (such as price, performance standards, equipment and termination) the absence of any statement that it was intended to be legally binding, the absence of any definitions of key terms such as “preferred”, and “market rates” and the fact that neither party ever referred to the document when they conducted business afterwards. Tower did not appear to even have a copy of it. All of these factors, Mr Smith submitted, strongly pointed to the lack of any intention to be bound.

Our view

[33] It is settled law that the determination of whether parties have intended to enter into a contract requires an objective assessment.^[8] It is not a question of deciding the credibility of their competing claims as to their actual intentions. It is also settled law that in undertaking that objective assessment, the Court may have regard to the context or purpose of the document, its wording and the subsequent conduct of the parties as well as what they said both before and after the document was signed.^[9]
[34] Having considered the evidence on all those matters ourselves, we are satisfied the Heads of Agreement was intended to create a legally binding contract as Gendall J found.
[35] As to the purpose of the document, the evidence established that before the Heads of Agreement was signed, there had been an oral agreement for Nicon to prepare demolition quotes and carry out demolitions. It also established that the document came into existence because Mr Giltrap wanted more than this. He required a written assurance that Tower/Stream would provide Nicon with work.
[36] There was a conflict in the evidence as to whether Mr Giltrap required this written assurance for the purpose of raising finance, as Tower claimed, or for the purpose of deciding Nicon’s future direction. However, as Mr McMenamin submitted, it is unnecessary for us to resolve that conflict because what matters is that, on the evidence, both parties knew of the existing arrangement, knew that Mr Giltrap was seeking a binding commitment, and knew he intended to make significant and immediate financial commitments if he received it. The signatories to the document — Mr Giltrap and Mr Norriss — also appreciated the agreement could only be effective for Mr Giltrap if it was binding. In those circumstances the absence of a statement it was intended to be legally binding is hardly surprising. On the contrary, having regard to the context, it is legitimate to place weight on the absence of a statement in the document that it was not intended to be legally binding.
[37] The fact the agreement was intended to have immediate effect and did have immediate effect also supports the Judge’s reliance on the absence of a later contract. There was no need for one. To rely on that factor does not, in our view, involve faulty reasoning.
[38] We acknowledge the document was skimpy and prepared without either party seeking legal advice. However, significantly it uses words of obligation such as “shall”. That the parties appreciated the legal import of those words is demonstrated by the parties’ deliberate use of the different words “it is desired” when wanting to denote something that was not an obligation.
[39] There may have been gaps in the sense it would have been possible to prepare a much more detailed agreement but that must be seen in the context of an existing relationship which also explains the absence of protracted negotiations. We agree with the Judge that there were sufficient terms in the document to indicate an intention to be bound.
[40] Criticism of the Judge that he conflated two distinct requirements is in our view also misconceived. As was said in Fletcher Challenge, the question whether negotiating parties intended the product of their negotiation to be immediately binding on them either conditionally or unconditionally cannot be sensibly divorced from a consideration of the terms expressed or implicit in that product.^[10] The more numerous and significant the areas in respect of which the parties have failed to reach agreement, the slower a court will be to conclude that they had the requisite contractual intention. It follows that if the converse applies, then that is an indicator of an intention to be bound. In this regard we note that, unlike the Heads of Agreement document in Fletcher Challenge, the document in this case did not identify any matters as not yet agreed.
[41] As mentioned it is also permissible when considering contract formation to look at the subsequent conduct of the parties towards one another, including what they said to each other after the date of the alleged contract. In this case, in the context of deciding whether there was an intention to be bound, what can be relied upon is that for the next 18 months after the document was signed both parties took significant steps which it is highly arguable they were unlikely to have taken had they not considered themselves bound to do so.
[42] Thus, Nicon for example did not seek work from other sources despite there being plenty of other opportunities, and it undertook over 1000 assessments at Tower’s request for no charge. As recorded in an internal Stream email of September 2012, Stream was “getting Nicon to quote for everything”, something that clearly puzzled the new project manager who did not know about the Heads of Agreement. And Stream did allocate virtually all its demolition work to Nicon. There were rare exceptions where other contractors did the work, but on the evidence the reason for that was obscure and likely to have been the result of the insured’s own efforts, or part of a project management organisation (PMO) joint venture or house relocation.
[43] Having regard to all these circumstances, we agree the answer to question one was “yes”.

Was the Judge wrong in his interpretation of the Heads of Agreement?

[44] This issue primarily requires a textual analysis of the Heads of Agreement and accordingly for convenience, we set it out again:

HEADS OF AGREEMENT

THE PARTIES

DESCRIPTION OF SERVICES

Stage 2 (Quoting)

The contractor is to provide Stream with expert advice on cost effective demolition options and pricing.

The contractor shall provide an accurate estimate of the costs recovered from salvageable items and offset these against the demolition costs for each individual project.

Stage 3 (Execution of the works)

The contractor shall provide the necessary resources to tender and carry out the demolition work as allocated by Stream Management Team.

SERVICE LEVEL AGREEMENT

TERMS OF ENGAGEMENT

The contractor agrees to keep all shared pricing information confidential.

[45] The preliminary question asked of the Judge about the meaning of the contract was formulated in the following terms:^[11]

[W]hether the [Heads of Agreement] obliged Tower and Stream to offer all the demolition work to Nicon in respect of properties for which Nicon had provided assessments?

[46] The Judge answered “No” to that question but said it was subject to two qualifications or reservations, relating to timeliness and rates.^[12] If Nicon was able to undertake the work in a timely manner and meet the required timeframes, then Stream was not permitted to engage another contractor instead for no specific reason.^[13] The second reservation was that under the Heads of Agreement, Stream was permitted to enter into a competitive tendering process for any contract at any stage.^[14]

Arguments on appeal

[47] Counsel Mr Ho argued this part of the case on behalf of Tower. As already mentioned, Tower contends that correctly interpreted the obligation the agreement imposed on Stream was to recognise Nicon as a preferred contractor. It did not oblige Stream/Tower to treat Nicon as an exclusive contractor.
[48] In support of those contentions, Mr Ho pointed to the Stage 3 phrase “demolition work as allocated by Stream” and the penultimate paragraph which says, “it is ... agreed that Stream will offer the opportunity to undertake the demolition work for Tower ... to Nicon Ltd as a preferred contractor”. Mr Ho stressed the use of the word “opportunity”. What was being offered was an opportunity to undertake the work, not the work itself which is what the document would have said were Nicon’s interpretation correct. Opportunity is not an absolute obligation.
[49] Mr Ho relied heavily too on the use of the word “preferred” and the absence of “exclusive or sole”. Referring us to an English first instance decision discussing the meaning of “preferred supplier status”,^[15] Mr Ho argued that as a matter of language the word “preferred” does not convey any form of exclusive right. All it means is “approved”, which is why it is common commercial practice to have more than one preferred contractor. In effect, he said, Nicon was only one of a panel of approved demolition contractors.
[50] In Mr Ho’s submission, it was also inconceivable an agent (Stream) without consulting with its principal, Tower, would purport to create a long term exclusive relationship of the sort contended for by Nicon.

Our view

[51] We agree that the penultimate paragraph of the Heads of Agreement is important, but it cannot be read in isolation from the final paragraph. The two paragraphs read:

[52] Two crucial points arise from these paragraphs.
[53] The first is that the words “demolition work” in the penultimate paragraph are preceded by the definite article “the”, denoting that it is alluding to some specific demolition work. As to what that specific demolition work could be, it can only be demolition work in respect of which services as detailed in the preceding paragraphs have been provided.
[54] The second point is that if Tower were correct, there would be no need for the final paragraph. It would be pointless to delineate the circumstances in which Stream was free to engage other contractors, if it had unlimited freedom to do that anyway.
[55] In our view, the ordinary meaning of the words of the document when read as a whole is that Stream must offer Nicon all demolition work in respect of which Nicon has provided an assessment. The only circumstances in which Stream is able to offer the work to another contractor is if Nicon is unable to complete the work in the required time frame or if, following a competitive tender process, its rate is not a market rate.
[56] As to the meaning of “a competitive tender process” we agree with Gendall J that this at the very least required Nicon to be part of a tender process.^[16] It would certainly not be sufficient for Stream to compare the quote Nicon had given at the time it undertook its assessment with a more recent quote from another contractor. We also agree with Gendall J that on the evidence before him, it does not appear a competitive tender process did take place.^[17]
[57] Our interpretation does no violence to the word “preferred”. On the contrary, in context it refers to the fact that Nicon is preferred because it effectively has a first right of refusal, subject to the two limitations identified above. The English decision cited by Mr Ho was a very different case. It turned on the wording of particular letters.
[58] Contrary to Mr Ho’s submission, our interpretation is also not inconsistent with the role of an agent and commercial common sense. The submission overlooks that the only work Stream was obliged to offer Nicon was work in respect of which it had requested Nicon to undertake an assessment. Subject only to its duty to act in good faith, Stream was under no obligation to request Nicon to undertake the assessment in the first place. It was only once it chose to do so that the obligations under the Heads of Agreement were triggered.
[59] We are reinforced in our interpretation by the extrinsic evidence relating to the creation of the Heads of Agreement and the parties’ subsequent conduct, the relevant aspects of which we have already traversed. In addition to the matters already noted, we observe that there was no evidence of a panel of demolition contractors and uncontested evidence that Nicon was always the only demolition contractor present at meetings with Stonewood and Mr Honeybone.
[60] It follows from all of the above that we conclude Gendall J correctly interpreted the Heads of Agreement.
[61] Finally, for completeness, we record two further arguments raised on behalf of Nicon. The first was an argument that Stream/Tower was estopped from denying the agreement had contractual force. However, estoppel was never pleaded and we consider it is too late to advance it now. The second argument was that the contra proferentem rule should be applied against Stream/Tower when interpreting the Heads of Agreement document. We do not accept that principle is capable of being applied to a document of this nature between two commercial parties.

Outcome

[62] The appeal is dismissed.
[63] There is no reason why costs should not follow the event and we therefore order the appellants to pay one set of costs to the respondent for a standard appeal on a band A basis together with usual disbursements.

Solicitors:
Duncan Cotterill, Christchurch for Appellants

^[1] Nicon Ltd v Tower Insurance Ltd [2018] NZHC 2005 [High Court Decision].

^[2] At [6].

^[3] Mr Norriss attempted to resile from these incriminating statements in re-examination. However, we place little weight on his evidence in re-examination because it was elicited in response to blatantly leading questions which should not have been allowed.

^[4] High Court Decision, above n 1, at [5].

^[5] At [89] and [101].

^[6] High Court Decision, above n 1, at [55]–[57].

^[7] Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd [2001] NZCA 289; [2002] 2 NZLR 433 (CA) at [53].

^[8] Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]; citing Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL) at 912 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101 at [14]. See also Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 at [16] and Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA).

^[9] Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd, above n 7, at [53]–[54]; Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277; and Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 8, at [63].

^[10] Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd, above n 7, at [50].

^[11] High Court Decision, above n 1, at [64].

^[12] At [82]–[84].

^[13] At [77].

^[14] At [78].

^[15] Proforce Recruit Ltd v Rugby Group Ltd [2007] EWHC 1621 (QB), [2008] 1 All ER (Comm) 559.

^[16] High Court Decision, above n 1, at [78].

^[17] At [79].

NZLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.nzlii.org/nz/cases/NZCA/2019/332.html