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High Court of New Zealand Decisions |
Last Updated: 5 January 2010
IN THE HIGH COURT OF NEW ZEALAND
HAMILTON REGISTRY
CIV-2006-419-001119
BETWEEN ECOWIZE LIMITED
Plaintiff
AND AFFCO NEW ZEALAND LIMITED Defendant
Hearing: 6-10 July 2009
Counsel: A M Braun and M D Branch for plaintiff
R J Hollyman and A Holmes for defendant
Judgment: 14 December 2009 at 4pm
RESERVED JUDGMENT OF DOBSON J
In accordance with r 11.5 I direct the Registrar to endorse this
judgment with the delivery time of 4pm on the 14th.day of December 2009.
Solicitors:
Harkness Henry, Private Bag 3077. Hamilton
Solutions Law Office, PO Box 3462, Richmond 7031, Nelson
ECOWIZE LIMITED V AFFCO NEW ZEALAND LIMITED HC HAM CIV-2006-419-001119 14 December
2009
Table of Contents
Factual background ........................................................................................................................... [6] The Heads of Agreement ................................................................................................................. [16] The law on Heads of Agreement ................................................................................................... [22]
The parties’ contentions................................................................................................................ [27] Agreement on sufficient terms to be a binding substantive contract? ........................................... [33] Terms missing .......................................................................................................................... [33]
Price revision............................................................................................................................ [42] Conduct subsequent to the HoA ............................................................................................... [52]
The HoA as a process contract ....................................................................................................... [62] AFFCO’s approach on negotiating variations in price ................................................................ [71] Relief claimed under s 9 of the Contractual Remedies Act 1979 ............................................... [116] AFFCO counterclaim .................................................................................................................... [124] Costs ................................................................................................................................................ [136]
[1] These proceedings relate to a dispute over the circumstances in which the defendant (AFFCO) terminated the services of the plaintiff (Ecowize) for cleaning a new meat processing plant operated by AFFCO at Horotiu, near Hamilton. Ecowize cleaned the plant from the date it commenced operations on 16 January 2006 until its services were dispensed with from 3 July 2006.
[2] As to the status of the parties, Ecowize is an incorporated company providing specialised cleaning services in commercial and industrial settings such as meat processing works. It has its registered office in Hamilton, and claimed expertise from running similar operations in Australia and South Africa as well as operating in Scandinavia and New Zealand. AFFCO is a publicly listed meat processing and marketing company with its head office at Horotiu, and processing plants there and elsewhere throughout New Zealand.
[3] Ecowize relies upon a Heads of Agreement (HoA) document completed in October 2005 that referred to a 48-month contractual period for cleaning the Horotiu plant, effectively from the date of its opening. Ecowize alleges that the HoA had the status of a binding contract which has been repudiated by AFFCO, entitling Ecowize
to damages for the breach of that 48 month contract. Alternatively, Ecowize claimed that it had accepted AFFCO’s repudiation of the agreement in accordance with s 7(2)
of the Contractual Remedies Act 1979 (the CRA) (whether it was the substantive
48 month year cleaning contract, or a narrower process contract for agreeing terms
for the longer term cleaning contract) and sought an order under s 9 of that Act for payment of such sum as the Court deems just.
[4] For its part, AFFCO claims that any contractual obligations it assumed were subject to Ecowize settling on a reasonable level of charges once both parties could assess what was involved after the plant had been operational for a period of time. AFFCO considered Ecowize’s level of charges excessive, and resolved to undertake the cleaning itself unless Ecowize reduced its charges sufficiently. AFFCO has counterclaimed for what it considers to be Ecowize’s over-charging, on the basis that Ecowize should be limited to what was reasonable, on a quantum meruit basis that should be retrospectively reduced by reference to the costs AFFCO claims that it subsequently incurred in carrying out the cleaning itself.
[5] The first issue arising is the status of the HoA. That leads on to an analysis
of the relevant terms of any contractual commitments between the parties. Depending on the contractual terms determined as applying, there is a question as to whether such terms were breached by AFFCO. Any finding of breach leads to issues as to the quantum of Ecowize’s claimed loss, and whether AFFCO has indeed suffered any recoverable loss on its counterclaim.
Factual background
[6] In 2004, Ecowize acquired the business of another cleaning company, Ecolab, and thereby inherited existing cleaning contracts for AFFCO’s plants at Horotiu and Rangiuru.
[7] In 2005, AFFCO upgraded its plant at Horotiu. This involved a closure of the old plant, and a subsequent commissioning of a new plant some months later. The principal witness for Ecowize, Mr Lucien Milner, became involved in dealings with AFFCO in June 2005.
[8] In September 2005, Mr Milner raised with the AFFCO plant manager at Horotiu, Mr Peter Lockley, the desirability of installing equipment to facilitate cleaning of the new plant in the course of construction of the plant. Mr Milner
recommended an open plant cleaning system (OPCS) of a type with which he was familiar. Mr Milner pointed out that if AFFCO did not make provision for OPCS equipment, but wanted Ecowize to do so, then any contract for cleaning the plant would have to include terms allowing Ecowize to recover that cost from AFFCO.
[9] Mr Lockley referred Mr Milner to AFFCO’s operation manager, Tony Miles. There are healthy differences in the recollection of those involved in the discussions leading to signing of the HoA. From Mr Milner’s perspective, he recalled AFFCO
as being happy with the services Ecowize had provided in cleaning the existing plant, and that they were keen to commit Ecowize to satisfactory arrangements for cleaning the new plant. He took AFFCO to understand the need for a firm commitment to a cleaning contract of a substantial period before Ecowize would commit to the capital expenditure involved in installing an OPCS. Further, that AFFCO understood the need to defer final pricing for the cleaning services until the new plant was operational to allow the accurate assessment of the extent of work involved.
[10] From Mr Miles’ perspective, AFFCO expected a reduction in existing cleaning charges, because it anticipated that its new plant could be cleaned more efficiently. Mr Miles recognised that there were difficulties in working out the cost of cleaning a new plant and agreed that that could not be done until the plant was operational. He claims that he was wary of making any commitment, but understood that Mr Milner had two purposes in requesting the completion of a heads of agreement. First, that Ecowize’s Board required it to give them “some comfort” before they would approve the capital expenditure on an OPCS. Secondly, a heads of agreement would operate as an interim measure since the parties could not complete a final contract until the plant was completed and numerous variables determined. Mr Miles appreciated that Ecowize would not install the OPCS without a heads of agreement completed.
[11] It was important to Mr Miles that Ecowize would review prices once the plant was operational, with an expectation of substantial reductions from the level Ecowize charged for cleaning the old plant. From his perspective, if satisfactory reductions were not achieved, then AFFCO would be entitled to terminate Ecowize’s
services. In such circumstances, he anticipated that the parties would be able to resolve what to do with the OPCS that Ecowize was to install. AFFCO’s later conduct was consistent with this, in that it offered to buy or lease the equipment that Ecowize had installed, when agreement could not be reached on a review of prices.
[12] There are also differences about the circumstances in which the HoA was concluded on 17 October 2005. Mr Milner recalls visiting Mr Miles in his office at AFFCO, observing that he had been reading the nine pages of the proposal attached
to the HoA, that Mr Miles went through the content again and both signed at that time. Mr Milner produced a diary note recording that a meeting with Mr Miles had occurred that day.
[13] In contrast, Mr Miles’ recollection is that he signed the agreement when on
his own, in his office, on 17 October 2005 and that he then faxed the HoA to Mr Milner for his signature, after which Mr Milner faxed the completely signed document back to Mr Miles. Mr Miles therefore disputes the accuracy of Mr Milner’s file note recording there had been a meeting between them on 17 October 2005. There is no dispute that the HoA was executed for both parties by executives authorised to do so. Accordingly, the difference on this issue relates more to challenges each party seeks to raise to the credibility of the witness for the other party. I do not find it necessary to make a positive finding between the versions as to execution, for that secondary purpose.
[14] The new plant commenced operations on 16 January 2006. On 31 January
2006 Ecowize provided a revised schedule of charges, reflecting the categories of cleaning work it was undertaking in the new plant. The core charges, in the absence
of any extras, were $27,315 per week.
[15] In February 2006, there was a first informal request on behalf of AFFCO for Ecowize to consider a price reduction. Substantially more pressure to achieve that was applied from April 2006 onwards. In the middle of May 2006, a revised schedule was provided, to apply from that time on. The core charges were reduced to $24,565 per week. Thereafter, AFFCO maintained the pressure for further reductions and although a new pricing schedule was proposed by Ecowize at the end
of June, conditional on entry into a 48-month contract, AFFCO consistently rejected
all offers and took over the cleaning itself from 3 July 2006.
The Heads of Agreement
[16] The HoA comprised a single page with nine pages of an attachment. The
HoA page was dated “10/12/2005”, it being common ground that that was intended
to mean 12 October 2005. A box at the top of the page identified it as an Ecowize document in respect of AFFCO Horotiu as the client, and the subject being “Heads
of Agreement”. It was described as page “1 of 1” and, after identifying the parties, specified:
It is hereby agreed that the cleaning contract will be awarded to Ecowize
Ltd.
The Heads of Agreement is based on the following:
1. Ecowize Ltd will service the areas as outlined in chapter 7 of the
Proposal Document.
3. The commencement date of the contract shall be .
4. The contract period will be 48 months from the commencement date.
[17] That is followed by the signatures of Mr Miles as authorised to sign on behalf
of AFFCO and Mr Milner for Ecowize. Both signatures are endorsed with the date
“17/10/05”.
[18] What followed were pages numbered 1 to 9 of a document dated “13/10/05” with the box at the top of the page having “Calculation factors / pricing” as its subject, instead of “Heads of Agreement” as appeared on the HoA page. Reference
to “PD.8” can be taken to refer to chapter 8 of a Proposal Document with the first of the nine pages identifying the topics covered as Working hours, Operational costs, Pricing and Implementation plan. Those topics are covered in the following pages numbered 2 to 9. None of the nine pages were signed or initialled.
[19] On page 6 of the Proposal Document, in a section intituled ‘8.3 Pricing’, as referred to in paragraph 5 of the HoA, was the following detail:
The charge for the service will comprise of the following:
Ecowize will charge AFFCO Horotiu the current charge rates with the addition of the Open Plant Cleaning System. Ecowize will review the current charge rates once the new plant is operational and a new charge rate will be submitted.
[20] The following page 7 reproduced what had apparently been the schedule of charges for the old plant as at 1 October 2004, with the addition of a monthly charge
for provision of the OPCS. Then on the following page, numbered 8, certain notes were set out as bullet points, including:
...
...
to remove all low-pressure equipment and make good (at Ecowize cost) after expiry of term if the contract is not renewed or the term
extended.
...
Procedures for dealing with changes to the Scope of Work or work additional to the Scope should be formalised by mutual negotiation. We need to recognise and develop a strong partnership ethic between both parties, thus ensuring the long term protection of both our business interests.
[21] A draft Sanitation Services Agreement was provided to AFFCO shortly after the HoA was completed, but in circumstances recognising that it could not in any
event be finalised until the plant was operational. No Sanitation Services Agreement was ever concluded.
The law on Heads of Agreement
[22] The Court of Appeal decision in Fletcher Challenge Energy Ltd v Electricity
Corporation of New Zealand Ltd [2002] 2 NZLR 433 provides a thorough analysis
of the approach to be adopted in determining whether the parties have concluded a binding contract when entering into a heads of agreement (see [50] to [66] in the judgment of the majority). The spirited dissent of Thomas J in the same appeal provides a classic example of how the relative weight attributed to various factors may dictate contrary outcomes.
[23] The judgment of the majority began its analysis of the correct legal approach with the following:
[50] The question whether negotiating parties intended the product of their negotiation to be immediately binding upon them, either conditionally
or unconditionally, cannot sensibly be divorced from a consideration of the
terms expressed or implicit in that product. They may have embarked upon their negotiation with every intention on both sides that a contract will result, yet have failed to attain that objective because of an inability to agree on particular terms and on the bargain as a whole. In other cases, which are much less common, the intention may remain but somehow the parties fail to reach agreement on a term or terms without which there is insufficient structure to create a binding contract...
[24] The judgment continued:
[53] The prerequisites to formation of a contract are therefore:
(a) An intention to be immediately bound (at the point when the bargain is said to have been agreed); and
(b) An agreement, express or found by implication, or the means of achieving an agreement (eg an arbitration clause), on every term which:
(i) was legally essential to the formation of such a bargain; or
(ii) was regarded by the parties themselves as essential to their particular bargain.
A term is to be regarded by the parties as essential if one party maintains the position that there must be agreement upon it and manifests accordingly to the other party.
[25] Whether an incomplete agreement will be binding will depend on whether the Court is able to fill the gap in the express terms, that being a matter of fact and degree in each case as to whether the gap left by the parties is simply too wide to be filled:
The Court can supplement, enlarge or clarify the express terms but it cannot properly engage in an exercise of effectively making the contract for the parties by imposing terms which they have not themselves agreed to and for which there are no reliable objective criteria. ([63])
[26] The majority warned against a process of successive implied terms, where each implied term relies upon the existence of the previously implied terms which could lead to “...a contract [that] is built up out of implied terms from no express bargain at all” ([64]).
The parties’ contentions
[27] AFFCO argued against the terms of the HoA being treated as having any binding effect. The notions of commitment were all expressed prospectively (“will be”), and material terms needed for any agreement were not concluded. Nor was the scope of cleaning services accurately defined. As to the first of these points, Mr Hollyman cited the Court of Appeal decision in Design at Space Ltd v Julian CA149/05 19 July 2006 for the proposition that use of the future tense is inconsistent with such a document creating a binding contract. However, I am not persuaded that that decision, depending as it did very much on its own facts, can assist this particular argument for AFFCO in the different context of the present HoA. In Design at Space, an agreement for the potential sale of land where the vendors were to retain part of the property included:
The vendor will identify a portion of land in mutual agreement with the purchaser that will be retained by the vendor for a home block. This will be identified in the draft survey plan provided by the purchaser prior to the contract becoming unconditional.
[28] The Court of Appeal was able to reject very easily the strained interpretation
of this wording which suggested that the step required of the vendor had already occurred. That very different factual context cannot help in discerning the presence
or absence of contractual effect for provisions cast in prospective terms, but where the services are also all prospective and intended to start from a date that was identifiable by description but not at that time by reference to a particular day.
[29] Ecowize relied primarily on clause 7 of the HoA, providing that the HoA was
to remain binding and “enforce” until the Service Agreement had been completed.
In addition, Ecowize relied on the context in which it conveyed to AFFCO the requirement for a binding contract before it was prepared to commit to the capital expenditure on the OPCS.
[30] I consider that the dynamics of the respective parties’ positions in October
2005 meant that they did intend to make some form of contractual commitment for Ecowize to clean the new premises from the date the plant was to begin operating. Ecowize represented its position as requiring a commitment before it would fund capital expenditure on the OPCS. I find that AFFCO accepted that requirement. Accordingly, completion of the HoA provided Ecowize with a sufficient assurance to commit to the expenditure on the OPCS, even if (on AFFCO’s view) an unwinding
of the arrangement without concluding the 48 month contract referred to in the HoA
would involve compensation to Ecowize.
[31] Mr Hollyman raised the prospect that the 48-month term, described as “the contract period” in clause 4 of the HoA, was only the term that would apply once the formal contract was concluded. In effect, the contract would be for a 48-month term, but in the meantime the HoA could not have that standing. I do not consider that a
48-month term can be excluded from the HoA simply by relying on such a narrow construction of what was meant by “the contract period”. The length of the term was important to Ecowize, and it was obvious that it relied on the commitment made in the HoA. The difficulty for Ecowize is rather in establishing to what such a period would relate, ie whether the HoA was sufficient to constitute a substantive contract,
or whether it depended on additional terms that had not been addressed. The HoA
recorded that when the parties had a contract, it would be for 48 months. Further, on
the literal wording of the HoA, a distinction can be drawn between the contract period, which was to be 48 months, and the term for the HoA, which was to be binding and remain (in) force until the contract was signed. Accordingly, the HoA did not have a 48 month term. That close analysis of the wording can also be tested against the question whether the HoA was a contract, or whether the matters omitted meant that no substantive contract arose until a subsequent agreement was concluded.
[32] Accordingly, irrespective of the intentions discerned from the parties’ conduct leading up to, and the terms of, the HoA, the question is whether it contained sufficient to constitute a binding contract. Two alternatives arise, first that the HoA constituted a substantive contract for the provision of cleaning services, or alternatively that it constituted a process contract in the nature of an agreement to agree upon terms for provision of such services.
Agreement on sufficient terms to be a binding substantive contract?
Terms missing
[33] A first detail missing from the HoA was the date of commencement. However, it was common ground that the cleaning services would start from the first day of operation of the new plant, and there was no controversy in the date of
16 January 2006 being inserted, once that was known.
[34] Secondly, the parties recognised in October 2005 that they could not precisely define the areas that were to be cleaned by Ecowize. The HoA referred to Chapter 7 of the Proposal Document and the common bundle included a single page with the reference “PD7”, dated 12 October 2005 that listed the various areas that might be cleaned. It was not among the pages attached to the HoA. The table describing the various areas was endorsed “Draft” and it is common ground that confirmation of the precise limits on the areas to be cleaned was contingent on the plant becoming operational. The schedule of prices was broken down by reference
to a charge for each area of the plant, and was accordingly adaptable to changes in the areas to be cleaned.
[35] Thirdly, as to the working hours, page 2 of the nine page proposal accompanying the HoA stipulated hours that various parts of the plant would be available for cleaning, for the most part from midnight to 6am and in respect of “pre- op” from 5am to 6am. That page included provision for signature by representatives
of Ecowize and the “customer”, together with dating, but there were no signatures. That is consistent with the hours being a provisional suggestion at that stage, to be settled in precise terms once the plant was operational.
[36] Fourthly, the HoA did not have any provision for a penalty payable by Ecowize in the event that it failed to re-deliver the premises on time to AFFCO in a completely clean state. The previous contract for cleaning services in relation to the old plant had a penalty provision with a meaningful sanction for breach by Ecowize
of this obligation, measured by AFFCO wages paid without productivity, and revenue lost. The draft Sanitation Services Agreement for the new plant proposed a substantially reduced quantum of liability for breach of the obligation to return the premises cleaned completely and on time, which would be subject to a limit of the daily charge for Ecowize to clean the area unable to be returned on time. Under cross-examination, Mr Milner accepted that he was seeking to reduce the extent of this potential liability.
[37] Mr Milner stated that in the meantime he treated the penalty provision from the old contract as continuing to apply. He did not provide any explanation as to how it would be so, in the contractual sense, beyond acknowledging that its importance meant that there would always be such a provision applying. The only reference in the material with the HoA that could possibly trigger the continued application of the previous contract was in a note on page 8. Under the heading
“Calculation factors/pricing” a second bullet point stated:
The Price is exclusive of GST and subject to the terms and conditions of our standard contract.
[38] I do not consider that sufficient to trigger the continuation of some or all of the provisions in the old contract. It had related to a different plant, and rather than looking backwards, the parties had completed the HoA looking forward to the commissioning of a new plant. The terms governing the relationship were intended
to be recorded in a new contract, and more would have been required than this incidental reference to renew any of the former obligations. The 2004 contract is nowhere identified as “standard”, and it seems more likely that the reference in the notes on page 8 was as a result of “cutting and pasting” a provision used in other cases without intending a specific application here.
[39] Given the importance of having the plant available for the resumption of AFFCO’s work each morning, a provision imposing time limits on Ecowize, with quantified adverse financial consequences, qualifies as an essential contractual term
on the approach suggested by the Court of Appeal, in its reasoning in Fletcher
Challenge cited at [24] above.
[40] Ecowize’s case that the HoA could stand on its own as an entire agreement is difficult to sustain in the absence of a term dealing with the indemnity/penalty for failure to return the plant on time and completely clean, and the acknowledged importance of such a provision. The proposal on behalf of Ecowize of a different extent of liability for breach is inconsistent with implying the continuation of the provision that had been agreed in the contract for cleaning of the old plant. Although that inconsistency was not apparent at the time the HoA was signed, it does demonstrate, in the context of Ecowize’s intentions to flesh out the contractual terms
in a complete contract, that it wished to provide for certain matters in different terms from the previous agreement. Further, the HoA did not make any reference to an indemnity/penalty provision, and in particular did not contemplate any indicia by reference to which the parties could negotiate its terms, or ultimately have an external party resolve it for them.
[41] The test for implied terms retains the five conditions enumerated by the Privy
Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR
266 at 283. However, the independence of those previously discrete conditions is now qualified by an overall evaluation of what the contract would reasonably be
understood to mean (see Attorney-General of Belize v Belize Telecom Ltd [2009]
2 All ER 1127 and Nielsen v Dysart Timbers Ltd [2009] NZSC 43 at [64]). On either approach, a detailed penalty provision could never be recognised as being so obvious as to “go without saying”, and nor can the HoA be reasonably understood to mean that it included such a provision. Further, the absence of any benchmark against which such a term could objectively be implied counts heavily against the HoA having status as a substantive contract.
Price revision
[42] The most contentious provision was that in relation to prices, and how variations might be achieved. It was addressed in paragraph 5 of the HoA (as quoted
in [16] above) and in section 8.3 of the Proposal Document which is that quoted in
[19] above.
[43] The effect of these provisions is that the charges would initially be the same
as Ecowize had charged to clean the old plant, subject to the addition of the stipulated charge for the OPCS which was specified under a column headed “Daily Charge” at a rate of $4,963.20 per month. The prospect of a change in the level of charges was cast initially as a right reserved by Ecowize, but also in terms that Ecowize would review the rates of charge that had applied for the old plant once the new plant was operational, and that Ecowize would submit new rates of charges to AFFCO.
[44] Ecowize’s case was that this constituted a unilateral right to impose new levels of charge, which AFFCO simply had to accept. Mr Milner suggested that AFFCO would have agreed to that because of their previous good relationship, and AFFCO’s trust in Ecowize to undertake a review that was reasonable. On this approach, the stipulation that Ecowize would “submit” new rates of charge has the sense of advising or dictating that it would henceforth apply, as distinct from the first step in a negotiation of new prices that would need AFFCO’s concurrence.
[45] AFFCO’s case placed substantial weight on its personnel believing at the time of the HoA that the new plant would be more efficiently cleaned than the old
plant, therefore leading to a reduction in prices once Ecowize had some experience
in cleaning the new plant. Consistently with that, it contended for an interpretation
of these provisions that committed Ecowize to proposing revised charges which would then be the subject of further negotiation when both parties could appreciate the scale of the cleaning tasks.
[46] Messrs Lockley and Miles claimed that, prior to signing the HoA, Mr Milner represented that the cost revision would produce a substantial reduction in charges. Mr Milner denied that he made any such representation, but it appears likely that the terms of the dialogue may have included some non-specific assurances, or possibly agreement with the proposition put by AFFCO representatives to the effect that the new plant would be capable of being more efficiently cleaned, and implicitly therefore at a lower cost. The one positive representation that Mr Milner recalls making before the HoA was signed was to the effect that the plant would be more efficiently cleaned with the OPCS he was proposing than without it.
[47] There was considerable evidence on whether, in light of experience by both parties in cleaning the new plant, it was in fact capable of being cleaned more efficiently than the old plant. Opinions differed, in particular on the respective merits of different conveyor systems used in the different plants. Mr Milner insisted that a system of plasticised links on stainless steel frames in the new plant afforded more opportunity for trapping waste and needed greater care and attention to be properly sanitised than a belt system had in the old plant. I accept the analysis of Mr Nidd, an experienced industrial designer who was responsible for the design of the new plant, to the effect that it was better designed for cleaning purposes than its predecessor. As against that, there appears to have been more equipment included in the new plant, all of which had to be thoroughly cleaned and sanitised.
[48] Mr Milner claimed the advantage as the only witness who had actually cleaned the plant. However, common sense accords with AFFCO’s position that a modern plant, designed with hygiene and ease of cleaning in mind, ought to be capable of being cleaned more efficiently than a very old plant, much of which dated back to 1916. I accept that AFFCO representatives dealing with the proposals for cleaning the new plant at the time of the HoA were anticipating lower cleaning
charges, and had reasonable grounds for such belief. I am also satisfied that the price reductions offered by Ecowize in May 2006, albeit under pressure, demonstrated that price reductions could in fact be achieved. AFFCO’s evidence was that once it cleaned the plant itself, substantial further savings were achieved. Although that is not a direct comparator for the costs reasonably incurred by an outside contractor, it does add a measure of confirmation that the new plant could be expected to be cleaned for less than the old one.
[49] The terms of paragraph 5 of the HoA reserved to Ecowize a right to amend the prices. Ordinarily those terms would convey an entitlement to its advantage, ie because in the absence of such right AFFCO could treat the stipulated prices as being fixed. Conventionally, for a party in Ecowize’s position, the prospect of a review protects the contractual opportunity to recover more (rather than less) out of the contract. Paragraph 5 does not oblige Ecowize to undertake a review, whereas an obligation might be expected if the parties acknowledged at the time that the prices were expected to decrease, ie a change in AFFCO’s favour. However, with the inclusion of the last sentence in section 8.3, I find that in concert, the provisions as to price did commit Ecowize to undertaking a review.
[50] I further find that the “right” reserved by Ecowize in paragraph 5 of the HoA obliged it to undertake a review of the prices at some point during the first three months after the new plant started operating. That does not extend to a unilateral right to impose on AFFCO any particular variations Ecowize proposed. Consistently with that, the obligation to “submit” new rates of charges to AFFCO required Ecowize to convey such rates for the purposes of discussion or negotiation, and does not carry the meaning that such rates are thereafter automatically to apply.
[51] Considerably more would be required in the HoA before it entitled Ecowize unilaterally to impose price revisions without any provision constraining the extent
of those revisions. On Ecowize’s interpretation of the HoA, such unilaterally varied prices would apply for the vast majority of a 48 month term, with AFFCO continuing to be bound even although it had no ability to constrain the extent of changes. That would be utterly uncommercial, and is not warranted on any
reasonable interpretation of the HoA. Nor is it warranted in the context in which the
HoA was signed.
Conduct subsequent to the HoA
[52] Both parties sought to support their respective interpretations of the HoA by reference to subsequent conduct. Within appropriate limits, reference to the parties’ conduct subsequent to entry into the contract may aid interpretation of its terms. Different nuances are discernible from the separate judgments of the Supreme Court
in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277. In the present context, I derive guidance from Tipping J’s following observations:
[52] As a matter of principle, the Court should not deprive itself of any material which may be helpful in ascertaining the parties’ jointly intended meaning, unless there are sufficiently strong policy reasons for the Court to limit itself in that way. I say that on the basis that any form of material extrinsic to the document should be admissible only if capable of shedding light on the meaning intended by both parties. Extrinsic material which bears only on the meaning intended or understood by one party should be excluded. The need for the extrinsic material to shed light on the shared intention of the parties applies to both pre-contract and post-contract evidence. Provided this point is kept firmly in mind, I consider the advantages of admitting evidence of post-contract conduct outweigh the disadvantages. The latter comprise primarily the potential for ex post facto subversion of earlier jointly shared intentions and the lengthening of interpretation disputes by encouraging the parties to produce evidence which
is often only tenuously relevant at best.
[53] Given the relative brevity of the HoA and its contemplation that a more formal contract would be concluded, this is a situation in which the conduct of the parties after its execution may be relevant to its interpretation. However, there is not a great deal of subsequent conduct that qualifies as the mutual approach of both parties to the interpretation of the HoA.
[54] On 7 February 2006, Mr Milner emailed Mr Lockley at AFFCO, advising that there had been a mistake in the price listed for one of the scenarios, and attaching a corrected document. He then asked:
Have you had time to review the prices yet? Please call Brian or myself if you have any queries.
[55] The course of conduct suggests that Ecowize treated the HoA as requiring the parties to negotiate and agree on new prices, as is implicit in Mr Milner’s email. Mr Milner’s email is inconsistent with Ecowize asserting any unilateral right to impose changes in pricing. Instead, it is consistent with both parties acknowledging the need for AFFCO to consent to variations in the basis of charging.
[56] There is also mutual conduct which might suggest an acceptance by AFFCO
of some form of contractual commitment in relation to cleaning at Horotiu. This arises in a series of exchanges about the prospect of AFFCO inviting Ecowize (together with other contracting companies) to tender for cleaning services for all of AFFCO’s nine plants. On 20 April 2006, Mr Willis (whose involvement on behalf
of AFFCO I describe in more detail below) emailed Mr Milner, inviting Ecowize to tender for cleaning services at all nine of AFFCO’s processing sites. The invitation acknowledged:
We note that Rangiuru is subject to a contract and Horotiu a head of agreement, with rates yet to be agreed, with Ecowize.
[57] After specifying the basis on which tenders were being called, Mr Willis continued:
Should Ecowize wish to tender for the other plants then the existing Rangiuru agreement and the Horotiu HoA would need to be surrendered prior to that. They would both continue to apply during the course of the tender up until 1 July. This surrender is necessary for AFFCO to achieve the best possible price by offering all sites.
[58] Ecowize was not prepared to forgo the existing contractual arrangements it had. Mr Milner conveyed that and Mr Willis appeared to accept it in an email dated
24 April 2006 to Mr Milner in which he commented:
Although it is disappointing that we will not have all plants available to offer
as a package, we will continue the process with the remaining seven...
[59] That email also asked for brief confirmation in writing of the position that Mr Milner had outlined and, by reply, Mr Milner emailed Mr Willis, which included the following paragraph (references to “Cowie” being intended to read “Ecowize”):
As mentioned in your email Cowie Limited currently has existing arrangements in place at both AFFCO Horotiu and AFFCO Rangiuru.
Cowie Limited has made capital investments in excess of $250,000 in AFFCO plants based on the fact that we have committed ourselves to a long term partnership with AFFCO. As such it is not possible for Cowie Limited
to surrender the existing arrangements.
[60] However, those exchanges do not reflect a shared view of the effect of the HoA as is necessary for post-contractual conduct before it is an aid to interpretation of the contract. Mr Willis was looking for a “clean slate” and in addition to an existing contract at Rangiuru there was a contractual process underway with Ecowize in relation to cleaning services at Horotiu. I do not accept that anything in these exchanges reflects an agreed position that the HoA amounted to a substantive contract for a 48 month term. Rather, Mr Willis’s 20 April 2006 reference to “...a heads of agreement, with rates yet to be agreed...” suggests that the parties were in a process of negotiating a contract, and not that they were bound to a substantive contract.
[61] It was argued for Ecowize that the new schedule, updated to reflect the areas actually going to be cleaned and submitted to AFFCO at the end of January 2006, constituted the review provided for in the HoA that was to be undertaken “up to three months after the start of the new...plant”, and that acceptance of that was demonstrated by AFFCO’s payment of invoices presented in accordance with that schedule. I do not accept that the price schedule submitted with effect from the first day constitutes a review, such as was provided for in section 8.3. That contemplated that the review would occur “... once the new plant is operational...”, and the natural meaning of that expression in the context of the HoA means that it would be
a review undertaken once Ecowize had the experience of a period actually cleaning the new plant. Accordingly, payment by AFFCO of charges in accordance with that schedule does not signify acceptance of the amount payable on an on-going basis, as
if the review contemplated by the HoA had occurred.
The HoA as a process contract
[62] Accordingly, I find that the HoA represents an agreement to review the level
of charges once the contractor had some experience of precisely what was involved after the plant had become operational. In addition, so much else was not addressed
because of uncertainty at the time, and the absence of material terms such as the indemnity/penalty provision means that the HoA was not a substantive contract for cleaning services. It follows that the HoA could be no more than an agreement to agree on a longer term contract, depending in particular on agreement as to the prices from the time Ecowize conducted a review within the first three months of operation
of the new plant. It also follows that to have any contractual effect, an agreement to agree on this most fundamental provision would require a provision to deal with the consequences of the parties’ inability to reach such agreement. I will return to that,
as it becomes appropriate.
[63] Once this point is reached, the alternatives are either:
• to imply a term by which the parties could resolve their negotiations,
in particular as to price; or
[64] Can appropriate constraints reasonably be implied on the respective parties’ aspirations as to the extent of changes in price? Further, would such a term address the consequences flowing from a failure of the parties to agree on revised charges?
[65] A relatively simple term to the effect that the parties are obliged to negotiate reasonably on the extent of any proposed variations to the schedule of charges would
fill a major part of the gap that arises in the terms of the HoA, once it is interpreted
to require a revision as I have said in [62] above. I am satisfied that a reasonable interpretation of the HoA imputes such an obligation to both parties. A provision in such general terms does, however, raise the spectre of how workable it will be, when
it is invoked. Some objectively measurable criteria would be required to measure the reasonableness of each party’s stance.
[66] There are a number of idiosyncratic features that would have to be taken into account. The first is Ecowize’s capital commitment to the cost of installing the OPCS. The second of the bullet points from page 8 of those accompanying the HoA quoted in [20] above meant that Ecowize retained ownership of the OPCS and theoretically at least saw residual value in those assets after a 48 month term. The monthly charge stipulated in the pricing proposal attached in October 2005 was $4,963.20 per month. That amounted to $59,558.40 per annum and $238,233.60 over a 48 month term. That appears to equate roughly to a full recovery of the cost of the equipment (some $177,000) plus the cost of supervising its acquisition and installation. Apparently at AFFCO’s request, that separate charge disappeared from the schedule provided as from 16 January 2006 when cleaning operations commenced.
[67] Any reasonable analysis of permissible charges would need to take into account Ecowize’s cost of provision of that equipment, as well as reasonable components for its own overheads, provision of chemicals and materials, labour costs and a profit margin for Ecowize. The pricing schedules presented to AFFCO were not broken down in that way. I am only able to suggest these components because of the evidence traversed on Ecowize’s claim for loss of profits, rather than because there were any documents identifying the parameters of its costs, or evidence of dialogue about it, either when the HoA was concluded or when new schedules were proposed in January and May 2006.
[68] During the course of the hearing, I raised with counsel the difficulty of determining this dispute on a finding as to whether Ecowize had unreasonably refused to reduce prices, or AFFCO had unreasonably refused to accept the extent of reductions in price offered in May 2006, by reference to any detailed financial analysis of what the reasonable prices ought to have been. That reflects the absence from the HoA of objectively measurable criteria for assessing whether the parties’ conduct was reasonable.
[69] AFFCO’s case was that it was entitled to negotiate reductions commensurate either with the costs for which it could get the cleaning done by others, or the costs it would incur to do the cleaning itself. It obtained quotes from other cleaning
companies, but then elected to clean the plant itself from early July 2006. It adduced evidence of the extent of savings that produced. However, that comparator needs a number of adjustments. For example, to recognise a profit margin for any external contractor, to the extent it is not factored in, and some allowance for the capital cost
of the OPCS and the cost to Ecowize of providing a warranty and indemnity for the plant not being returned on time and in a completely cleaned condition.
[70] AFFCO adduced evidence of the quotes obtained from other cleaning companies. Mr Willis’s analysis of this, on which he was not challenged on cross- examination, was that the other quotations were for considerably less than what Ecowize was then charging. However, Mr Milner criticised each of the quotes which he had seen only in the course of inspecting discovered documents in the proceedings as not being comparable with the services Ecowize was providing. One was on a “labour only” basis, they appeared not to include any commitment to the warranty and consequent indemnity for failure to return the fully cleaned plant in a timely way, and at least one omitted any allowance for clothing, chemicals and other consumables which AFFCO was not providing. I am not able to make a definitive finding as to whether, after making allowances for any different scope or quality in the respective services offered, these quotations would still have been for less than Ecowize was charging. I am inclined to the view that if they were brought into line, they would cost less, but with some risk that they delivered a lower quality of cleaning service. In the end, it is not decisive, as AFFCO did not accept any of the other quotes and nor did its decision to terminate Ecowize’s services depend on this price comparison.
AFFCO’s approach on negotiating variations in price
[71] I accept the submission on behalf of Ecowize that the approach adopted by AFFCO towards the contract changed materially in the period between commencement and termination of its cleaning services at the new plant. Although Messrs Lockley and Miles, based at Horotiu, were in general terms conscious of the need to monitor costs, recognising cleaning costs as a large item of AFFCO’s expenditure, there was nothing in their communications with Mr Milner in the early
months of 2006 that sought to test Ecowize with the rigour that Mr Willis did thereafter. Mr Willis is an executive with Talleys, and became involved, notionally
at AFFCO’s request, to apply more rigour in the monitoring of costs at AFFCO plants. Talleys had a material interest in this, as a significant shareholder in AFFCO. Later in 2006, Talleys became a majority shareholder in AFFCO.
[72] It appears that Talleys’ own plants had moved or were moving to systems involving their own employees undertaking all the cleaning, and Mr Willis perceived that as at least a viable alternative for AFFCO plants as well. It is unnecessary to make a finding on Mr Milner’s perception that Mr Willis was keen to achieve that outcome from the commencement of his involvement, but it is clear that the benchmark used by Mr Willis to pressure reductions in the cleaning charges from Ecowize was in part by reference to Mr Willis’s perception of savings achievable if AFFCO took over all cleaning responsibilities itself.
[73] In February2006, Mr Willis dealt with one of the staff working for
Mr Milner, a Mr Lykkegaard, in terms implying an expectation of price reductions:
How is the pricing coming along and any effort made on a reduction for AFFCO.
Two days after that enquiry, Mr Wills urged Mr Lykkegaard to:
...look at what you can do on the Horotiu and Rangiuru accounts immediately, even if it is a 15% reduction to be reviewed after 6 months.
[74] The communications described in [56] to [59] above then occurred, followed
by those described below.
[75] On 26 April 2006, Mr Willis again emailed Mr Milner, this time to point out
his view that the HoA anticipated new rates would be submitted once Ecowize was familiar with the new plant. He observed that the rates submitted in the draft Sanitation Service Contract had not altered, and it appeared that Ecowize had not given consideration to the new structure. He continued:
Please review and submit a new price structure taking into account the age of the plant ASAP.
[76] On 1 May 2006, Mr Milner explained Ecowize’s view of what was possible
by way of cost savings at Horotiu, as well as providing detail on the amount that he described Ecowize had spent on the OPCS, and on creation of a portable office and drying room for Ecowize staff. On 3 May 2006, Mr Willis replied to Mr Milner’s email in the following terms:
We do not accept your justification of costs. The proposed schedule of rates
to clean the new Horotiu plant is unacceptable and unless you review these rates we will be forced to carry out cleaning internally.
[77] A subsequent exchange revealed that Mr Willis had omitted Ecowize from those invited to tender for the remaining AFFCO plants, because of the precondition
he had proposed that Ecowize would have to surrender its agreement in respect of Rangiuru and its HoA in respect of Horotiu. As that had not occurred, Ecowize had been excluded from those invited to tender.
[78] On 17 May 2006, Mr Milner submitted a schedule of charges as at 15 May
2006 that identified numerous savings in several of the cleaning scenarios required at
Horotiu. On 20 May 2006, Mr Willis emailed Mr Milner in the following terms:
The new schedule of prices sent 17/05/06 is still unacceptable. Cleaning can be completed internally for considerably less.
AFFCO have no alternative but to commence the cleaning at Horotiu plant using internal resources as of the 3/07/06.
Please provide a price to purchase or lease the cleaning system that has been installed at the AFFCO Horotiu plant.
[79] The oral evidence did not focus in detail on the respective negotiating positions of Ecowize and AFFCO in the period between the end of May and early July 2006. The common bundle included a number of further exchanges up to 3 July
2006. A 30 June 2006 letter addressed to Mr Andrew Talley (a Talleys director) by another of the Ecowize directors proposed two scenarios. One in which Ecowize continued to own the equipment, and the second under which AFFCO would buy the equipment but Ecowize would continue to provide the cleaning services. The annual difference between those costings and what AFFCO had projected its estimated costs would be if it undertook the cleaning itself were:
• $248,000 if Ecowize continued to provide the equipment, and
• $185,000 if AFFCO owned the equipment and Ecowize merely continued to carry out the cleaning.
[80] AFFCO acknowledged that Ecowize could charge a 6.31% “margin for management”. However, in the final offer on behalf of AFFCO on 3 July 2006, Mr Willis proposed that the work would have to be done at the rate of AFFCO’s projected daily cost ($2,600) plus the 6.31% margin, rather than at Ecowize’s revised daily cost ($3,634) plus a similar margin. Nor was a value attributed to the warranty/indemnity provision that Mr Milner treated as applying pending completion of a substantive contract. Ecowize was drawn to debating the extent of difference between AFFCO doing the cleaning internally, and Ecowize carry out the cleaning which would have to be on the basis that it could generate a positive return as an independent contractor. This does not comply with the term I consider was reasonably implied in the HoA, namely that Ecowize’s cost revisions had to be reasonable by reference to the provision of the services by an independent contractor. When AFFCO insisted the comparison be done without any allowance for a profit margin and other distinctions present with an outside contractor, that materially changed the rules that I have implied into the HoA for the process of reviewing prices once Ecowize was familiar with cleaning the new plant.
[81] However, there is an issue as to the materiality of this breach of the implied term that AFFCO negotiate reasonably on variation of the rates of charges. As mentioned in [69] above, AFFCO had procured quotes for other contractors to clean the new plant. Those were described as being at significantly lower prices than Ecowize proposed. In the somewhat artificial reconstruction of how the matter would have been dealt with if the implied term retrospectively articulated had instead been an explicit term of the HoA available to both parties at the time, then it seems likely that AFFCO could reasonably have relied on the unreasonableness of Ecowize’s prices by reference to quotes from other contractors, rather than by reference to its projection of internal costs for doing the cleaning itself.
[82] Ecowize criticised AFFCO for not disclosing the other quotes it had received,
in the course of their negotiations. That criticism is not warranted. The parties were
in a commercial negotiation and in the absence of a challenge that AFFCO was acting in bad faith by misrepresenting the terms of other quotes, that was commercial information procured by AFFCO and able to be retained by it as a source of comparison with Ecowize’s proposals.
[83] AFFCO did not, but may have been able to bring Ecowize’s supply of services to an end on the basis that it had exhausted the reasonable endeavours it was obliged to make by the HoA.
[84] Certainly, characterising the conduct on behalf of AFFCO as being in breach
of this form of implied term could certainly not lead to any basis on which Ecowize could claim that it was a breach causing the failure of the parties to conclude a substantive contract. Too many other matters were still to be resolved, for that causative link to be made out. Obvious concerns of disproportionality would also arise in contrasting the consequences of AFFCO measuring its expectation fo the extent of reduction in prices by reference to the wrong comparator, against the scale
of adverse consequences Ecowize would claim from the inability to conclude and earn profits from a substantive contract.
[85] The preferable approach is to analyse whether the implied terms in their process contract extended to dealing with the period of notice required to cease Ecowize’s involvement, as well as recognising the cost to Ecowize of the capital commitment made in respect of the OPCS, if a substantive contract was not entered into.
[86] I am satisfied that if the parties contemplated the consequences of non- agreement on the extent of variation in prices after Ecowize’s review, then AFFCO would have readily agreed to compensate Ecowize for the failure of the HoA to progress to a 48 month contract. The issue is whether such an implied term would reasonably extend to a formula for calculating compensation for Ecowize, or whether
it would have been left to be resolved, if necessary, by some third party. Such a
formula would be a step along the way towards a formula for damages flowing from
a breach of the process contract, but is not necessarily the same thing.
[87] Ecowize’s case was pursued on the premise that, assuming it made out a breach of a substantive contract, it was entitled to expectation damages quantified as the loss of net profits that it would otherwise have earned in the balance of a 48 month term.
[88] Instead, I have found that the HoA was limited to a process contract requiring reasonable negotiations on the extent of variation in prices and, failing agreement on that and other terms, the contemplated 48 month term would not ensue. In that eventuality, Ecowize would be compensated for commitments it had made on a longer term basis not being recoverable. This is a form of reliance losses in terms of the categorisation used by Fisher J, in the context of s 9 of the Contractual Remedies Act, in Newmans Tours Ltd v Ranier Investments Ltd [1992] 2 NZLR 68 (HC). It would reflect the commitment made by Ecowize to the OPCS, plus labour and other organisational overheads reasonably contemplating that it could conclude a 48 month contract.
[89] Resolving the appropriate measure of compensation for a party that has not been dealt with reasonably in respect of an agreement to agree will inevitably require
a case-specific analysis of what constitutes the just outcome. That is an aspect of the more flexible approach that is urged in assessing contract damages (see, for example, the cases and commentary at paragraph 1.2.3 of Civil Remedies in New Zealand, 2003). The appropriateness of an approach at common law may then be tested by what is perceived to be the appropriate remedy where s 9 of the CRA would apply.
[90] On this approach, the reasonable compensation would, as Mr Lockley suggested, begin with some formula that addressed the capital cost involved in the OPCS. In addition, there would be some formula for compensating Ecowize for the costs of disengaging from provision of cleaning services such as redundancy costs arising from the loss of the work, and some allowance for sunk costs in setting up the cleaning regime on the assumption that a long term contract would follow. A further
predictable head of loss would be the lost profits that would have been earned during
a reasonable period of notice, to the extent it was not given.
[91] As to the costs of the OPCS, AFFCO’s conduct reflected an acknowledgement that it had to offer reimbursement in respect of the cost of the equipment. A number of enquiries were made on behalf of AFFCO as to what the OPCS had cost, on the basis that AFFCO would acquire it for what it had cost Ecowize. There was an obvious element of self-interest in that, as presumably AFFCO appreciated it was easier for them to take over the existing equipment than arrange for replacements.
[92] In the end, Ecowize refused to deal on such terms, instead insisting that it would remove the OPCS. It may well be that this decision by Ecowize was influenced by its perception that selling the OPCS to AFFCO made it easier for AFFCO to replace Ecowize, and therefore insisting on its removal if Ecowize’s services were dispensed with could add a measure of pressure to AFFCO’s final decision not to do so. If that was Ecowize’s motivation, then AFFCO called its bluff.
[93] Certainly, when AFFCO was proposing a settlement in which it compensated Ecowize for the costs incurred on the OPCS and Ecowize rejected such overtures, a reasonable inference (ignoring any tactical behaviour on Ecowize’s part) is that the OPCS equipment had sufficient residual value to Ecowize for it to remove the equipment. In those circumstances, I find that rejection of AFFCO’s offer to negotiate the purchase of the OPCS system must negative the entitlement of Ecowize
to claim compensation in relation to the costs of that equipment.
[94] In terms of direct losses suffered by Ecowize, the largest item is the extent of redundancy payments required on terminating the employment of the workers who had undertaken the cleaning work at AFFCO.
[95] AFFCO complained that there were not genuine redundancies for the majority of the on-site employees, as AFFCO took over their employment. Ecowize’s response to this was that because the terms of employment of those
Ecowize staff characterised the situation that ensued as one of redundancy, then
Ecowize was liable to make the payments, irrespective of the prompt re-employment
of the personnel involved, effectively doing the same work for AFFCO. I find that
Ecowize’s redundancy expenses were reasonably incurred in those circumstances.
[96] I approach the measure of direct costs by what Mr Lane, the accounting expert called for Ecowize, calculated under the heading of “wasted expenditure”.
[97] These comprised the following:
$
Costs incurred to get the contract:
Recruitment and training of the site manager 14,772
Installation costs for the Open Plant Cleaning
System: John Jensen 85,620
Finance costs in relation to the Open Plant
Cleaning System to 30/6/2008 20,883
Abnormal repairs & maintenance 6,725
Total preliminary costs 128,000
$
Costs incurred after repudiation:
Redundancies paid to on site employees 57,988
Redundancies paid to off-site employees:
- Maryanne Partridge (45.5%)
- Brian Stephenson
Estimated removal costs for Open Plant
1,881
4,638
Cleaning System pumps & satellites 15,000
Storage costs for pumps and satellite to
30 June 2008 @ $120/month 2,880
Total post repudiation costs 82,387
[98] Of the items under the first heading, I accept the recoverability of installation
costs of the OPCS. However, the finance costs for the balance of the period to June
2008 could have been avoided if Ecowize negotiated with AFFCO for a sale of the equipment and I have found that Ecowize’s election not to do so must disqualify it from recovery of such items.
[99] It can reasonably be assumed that the rates Ecowize was charging and intended to continue charging over a 48 month term would be calculated to recover such establishment costs over that term. Accordingly, of these preliminary costs,
after deduction of the financing costs, the amount of $107,117 is to be reduced by the number of months in which Ecowize was able to recover charges for doing the work. This means that Ecowize is to be treated as having recovered 5.5 48ths of these costs, reflected in the calculation 5.5/48 x $107,117/1 = $12,273. This reduces the recoverable costs from getting into the contract to $94,844.
[100] As to the costs incurred after repudiation, notwithstanding AFFCO’s challenge, I am satisfied that the figures used by Mr Lane, including those for redundancies, reflect actual sums paid. Further, that they are costs of a type that arose because of the failure to reach agreement for the longer term contract that was contemplated. I also accept the redundancies for off-site employees. However, because of the view I have taken on AFFCO’s offer to acquire the OPCS, the costs incurred after termination of Ecowize’s services cannot include anything in relation
to its removal or storage. That reduces the costs described as “incurred after repudiation” to $64,507. The total of allowable establishment and disestablishment costs on this analysis is therefore $159,351.
[101] A further, predictably recognised, head of loss that would be provided for in
an implied term on the consequences of failing to agree on a substantive contract is any inadequacy in the period of notice that Ecowize’s services at Horotiu were being terminated. In reliance on Paper Reclaim Ltd v Aotearoa International Ltd [2007]
3 NZLR 169 (SC), it was submitted for Ecowize that an arrangement of this type could reasonably have implied in it a period of notice for premature termination of between six and 12 months. I am not satisfied that that analogy is appropriate. In the absence of a substantive contract, the essence of the loss flowing from the failure
of the agreement to agree is to restore Ecowize to the position it would have been in prior to the contract, had it not made the commitments it did to pursue a longer term contract, in reliance on the process contract that could have led to that. The addition
to those heads of expense of a period of notice is justified to reflect compensation for the numerous additional costs of disengagement that are not adequately reflected in the wasted expenditure as claimed.
[102] On the analysis thus far, the relevant period of notice is that required to bring
to an end the initial arrangements which ran on pursuant to the HoA, in anticipation
of the parties concluding a substantive contract. The period of notice is not therefore
to be measured by reference to the unexpired portion of a substantive contract, but rather to reflect the failure of the parties to conclude one. Whilst the circumstances reflect a more compelling interest on Ecowize’s part to secure the long-term contract than is reflected in AFFCO’s interests, on a careful analysis of the effect of the HoA
at the time, it is reasonable to attribute to Ecowize the assumption of some measure
of the risk that the longer term contract it contemplated would not in fact ensue.
[103] From AFFCO’s perspective, I have attributed to it the assumption of the obligation to reasonably negotiate variation to the prices, with a view to concluding the longer term substantive contract, in circumstances recognising the commitment
of capital expenditure for equipment and other training and planning expenses on Ecowize’s part that it could only reasonably expect to fully recover if the longer term substantive contract ensued. Accounting for the consequences of that not occurring would reasonably include the acknowledgement of a period of notice before termination of services, although that could not be expected to be as long as if a substantive contract was concluded. Although an obligation in these terms was not specifically accepted in submissions for AFFCO, its position was not far away from this, and the question is really what length of notice was reasonable. Weighing the circumstances as they presented themselves at the time of the HoA, I consider the appropriate period that would have been included in an implied term would be three months’ notice.
[104] The parties argued for different events as constituting the giving of notice of termination by AFFCO. Mr Willis’s email of 23 May 2006 included:
As stated previously the new schedule of prices sent 17/05/06 is still unacceptable. AFFCO will have no alternative other than to commence cleaning of the plant internally from the 03/07/06...
[105] That communication is in conditional terms, and I do not consider it sufficient to constitute notice of termination in the circumstances of the dealings that were then on-going between the parties.
[106] Instead, I consider the exchange of emails between Messrs Milner and Willis
on 12 June 2006 did constitute the giving of notice. In the first of these, Mr Milner
advised that Ecowize was not in a position to further reduce the charges and asked AFFCO to confirm that it would be cancelling the HoA “effective 2 July”. Mr Willis’s response on the same day included a statement that AFFCO “will commence cleaning the plant internally from 3/07/06”.
[107] That gave Ecowize three weeks’ notice, when I consider three months’ notice would have been reasonable. The appropriate measure for the inadequacy in notice
is the net profit forgone by Ecowize for the difference between three and 12 weeks, namely nine weeks at the appropriate rate.
[108] There were also differences over the appropriate profit margin to be used in any component of Ecowize’s claims for loss of profits. A plant by plant breakdown
of profit margins in Ecowize’s management accounts reflected its work at Horotiu as relatively more profitable than its work at any other site. Those management accounts for the year to June 2006 reflected a site operating profit of 29.5% compared, for example, with 16.1% for the cleaning at AFFCO’s Rangiuru plant and other results for sites where there had been a full year of operations, ranging between
27% and losses.
[109] The independent accountant who gave evidence for Ecowize of the calculations of losses in respect of a substantive contract used a rate of 35.6%, which was challenged by AFFCO.
[110] I accept that such a rate is not made out. Precise arithmetic accuracy is not appropriate, particularly given the lack of any sufficient experience of the level of profitability achieved by Ecowize subsequent to its revision of charges in May 2006. The weekly contract fee from that time for core services was $24,565, and it was at that weekly rate that Ecowize charged AFFCO until termination on 3 July 2006. Nine weeks at that rate is a gross charge of $221,085. I am satisfied that the profit component would have been not less than 23%. That was the working assumption made by AFFCO’s own independent accounting witness, Mr Davis. It reflected an industry-wide survey and appeared to be reasonably justified. Had the May prices been accepted, it seems more likely than not that they were calculated to produce an
adequate but not generous level of profit, given the pressure to keep the work. Accordingly, the appropriate calculation would be $221,085 x 23% = $50,849.
[111] On this analysis, I have projected the losses that would be payable under what I consider to be the reasonably predictable content of an implied term addressing the consequences of the parties failing to agree on price and therefore on a substantive contract, as was contemplated by the HoA. In summary:
Reimbursement for establishment and
disestablishment costs $159,351
Profit forgone on inadequate notice 50,849
Total $210,200
[112] In doing so, I have no doubt gone close to the boundaries of what is justified
by way of implied terms. I am conscious of the caution sounded by the Court of Appeal in Fletcher Challenge (refer [22] above), warning against building a sequence of implied terms, each of which depends on the preceding implied term and does not derive from a substratum of agreement evidenced in what the parties did commit to at the time. However, I remain satisfied that elements of an implied term extending to the consequences of a failure to conclude a substantive contract, when Ecowize’s commitment was overtly dependent on that, are part of the process contract as it would reasonably be understood. Further, that the compensation calculated by application of such an implied term is the appropriate and proportionate response to what transpired.
[113] In the event that I am wrong in extending an implied term to the compensatory consequences of failing to conclude an agreement, then I would approach the appropriate measure of compensation for the breach by AFFCO of its obligation to reasonably negotiate a variation in prices, on the same basis. However, rather than provide a rationale of the analysis as it would apply at common law, it is sufficient to observe that it would also match the amounts reflected in an analysis under s 9 of the CRA.
[114] I do not overlook AFFCO’s submission that had it been held to a substantive
48 month contract that was substantially more expensive than cleaning the new plant itself, AFFCO would have resolved to reduce production from the plant to three days
a week, so as to reduce its cleaning expense. I consider that threat to be somewhat unrealistic and potentially overstated, given the imperative for meat processing companies to maximise the throughput in terms of recovery on their fixed assets. However, the point made for AFFCO does illustrate the disjunct between a breach of the standards of conduct implied into the process contract, and the ultimate failure of the parties to conclude a substantive contract.
[115] I accept that there is no necessary confluence of the approach to compensating Ecowize, whether it derives from an implied term in the process contract, or is the appropriate measure of compensatory damages for breach of that contract, or in the further alternative by applying s 9 of the CRA. However, for reasons I can relatively shortly explain, that third alternative does also produce the same result in the present circumstances.
Relief claimed under s 9 of the Contractual Remedies Act 1979
[116] The closing submissions for Ecowize focused on this alternative in the context of the appropriate relief that could be granted, in the event that I found the HoA constituted a process contract. It was submitted that if a contract of such narrow scope was found, then “...it necessarily follows that s 9 is applicable”. The submission is on the premise that once there was a contract, it had in fact been cancelled.
[117] The trigger for application of s 9 is the existence of a repudiation, as provided for in s 7(2) of the CRA. That section provides:
7 Cancellation of contract
[...]
(2) Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.
[118] A shared aim when such process contracts are agreed is that the parties will
go on and negotiate further within recognised parameters, to agree on certain finite commitments. The nature of such arrangements will reflect various risks that the substantive contract is not agreed so that steps taken that are sufficient to perform the process contract may not produce a positive result. Both parties may fulfil their obligations even although a substantive contract does not ensue, and in that circumstance the process contract ends without a repudiation.
[119] However, I am satisfied in the present case there was a sufficiently clear breach of the obligations imposed on AFFCO by the HoA to constitute a repudiation
of the process contract that entitled Ecowize to cancel it.
[120] There is an element of artificiality in analysing the exchanges that evidenced the repudiation, when Ecowize treated itself as entitled to enforce a substantive contract for provision of cleaning services for 48 months, whereas the contract was limited to an agreement to agree. However, the termination arose out of the failure of the parties to agree on the extent of variation in prices, and that in turn was at least contributed to by AFFCO’s application of a standard other than that contemplated by the terms implied into the HoA.
[121] I accept, therefore, that Ecowize is entitled to seek relief under the relatively broad powers in s 9 of the CRA. On this head, Ecowize had conveyed to AFFCO prior to trial that it would seek reliance damages on the s 9 claim. That reliance on AFFCO performing the process contract is reflected in the wasted expenditure incurred by Ecowize in anticipation that the process contract afforded it a reasonable opportunity to conclude a substantive 48 month, plus the costs of disengaging when the substantive contract did not ensue. In addition, Ecowize could rely on getting a reasonable period of notice of the informal arrangements for cleaning coming to an end.
[122] Ecowize cited the analysis of Fisher J in Newmans Tours Ltd for the flexibility of the relief able to be crafted, as most appropriate to an individual case. Without reviewing the reasoning in detail, I am satisfied that the appropriate measure
of relief under s 9 involves the same components and same amounts as those I have
determined in favour of Ecowize, whether measured by reference to the terms I consider can appropriately be implied as to the consequences of breach, or reflecting the measure of compensatory damages arising from the breach of the process contract.
[123] Accordingly, if for any reason the analysis under those earlier heads proceeds
on a wrong basis then, quite independently of it, the same result is available to
Ecowize under its invocation of the CRA.
AFFCO counterclaim
[124] AFFCO counterclaimed on the basis it had paid more than it ought to have
for Ecowize’s services on two alternative grounds. First that if the HoA was not binding, then Ecowize was only entitled to charge a reasonable price and, on a quantum meruit basis, had overcharged to the extent that AFFCO’s analysis demonstrated a lower reasonable price. Alternatively, if the HoA was binding, then
it is to be taken as including an implied term that Ecowize would only charge a reasonable price for its services and that implied term is breached to the extent that AFFCO establishes that it overpaid for the services received.
[125] AFFCO raised an objection to Ecowize’s opposition to the counterclaim, on the basis that Ecowize had not pleaded to AFFCO’s Second Amended Statement of Defence and Counterclaim, so that the extent of positive allegations in that form of counterclaim were not formally responded to and therefore, on AFFCO’s analysis, are deemed to have been accepted by Ecowize.
[126] The relevant counterclaim was filed and served in September 2008. At that time, r 169(2) of the High Court Rules provided that it was not obligatory to file and serve a reply to affirmative defences or defendants’ pleadings containing any positive allegation affecting any other party. However, since the new form of High Court Rules came into force on 1 February 2009, the previous position in relation to such pleadings has been reversed, and the current High Court rr 5.62 and 5.63 impose a positive duty to file and serve a reply to such pleadings, with the default
position being that an affirmative defence or a positive allegation that is not denied is treated as being admitted.
[127] Mr Hollyman analysed the pleading on AFFCO’s counterclaim in reliance on the current form of the rule, whereas Mr Branch defended the counterclaim on the basis of the Rules as they applied at the time any response was properly to be considered. As Mr Branch pointed out, compliance with the new r 5.62 was impossible here because the obligation to file a pleading in response to a positive allegation on behalf of a defendant did not exist at the time that step was to be contemplated, namely in September 2008.
[128] I am satisfied that the obligations as to pleading have to reflect the Rules in operation at the time, and the new rr 5.62 and 5.63 cannot have retrospective effect without creating a risk of injustice.
[129] I am reinforced in that view by the practical position of the parties. Although
in some details, AFFCO might be left with a doubt as to the precise nature of Ecowize’s rebuttal of the positive allegations in its counterclaim, in substance the differences between the parties were well articulated on the existing pleadings. As the hearing unfolded, I could not discern any prospect of material prejudice to AFFCO arising from the absence of a reply to the positive allegations in its counterclaim. Accordingly, I propose dealing with the counterclaim on the substance of the issues between the parties.
[130] AFFCO’s claim that it had paid too much relied upon a comparison of the amount Ecowize charged, with the costs that AFFCO subsequently incurred itself in carrying out the cleaning after Ecowize terminated. However, those two amounts are not directly comparable. For instance, as an independent contractor, Ecowize warranted the timely return of the premises to AFFCO at the conclusion of every cleaning, sanitised to relatively exacting standards, on terms that required Ecowize to pay a form of compensation that the parties had previously treated as a penalty, for any failure to do so. The history of Ecowize’s work at the old plant included an instance of breach of this obligation, and payment of a relatively significant sum. The provision of that warranty and indemnity would have had a cost to Ecowize.
There was no comparable cost for AFFCO, and apparently no attempt to make an allowance for the absence of such cost.
[131] Further, a business in the position of AFFCO procuring services such as those provided by Ecowize has reasonably to expect that prices will include a profit margin for the provider of the services. There is no suggestion that AFFCO treated
its internal provision of cleaning services as a separate business so as to require any such margin.
[132] In short, AFFCO failed to establish an appropriate measure by which to calculate the extent, if any, that it was “overcharged”.
[133] Perhaps more fundamentally, I find that AFFCO agreed to pay the charges that Ecowize invoiced it for, even although that agreement was implicitly qualified
as being an interim arrangement only. The protests that AFFCO was paying too much for the cleaning services were all made in the context of an expectation that the level of prices would, on a prospective basis, be reduced. This stance reflected an expectation that efficiencies would be possible as the Ecowize staff became more familiar with the new plant.
[134] AFFCO was not paying Ecowize on terms such as that they were paying under protest and expected subsequently to resolve the extent to which AFFCO would be entitled to a refund. Rather, the focus was on a concern that, prospectively, the charges should be reduced.
[135] For these reasons, it is not possible for AFFCO to make out any basis for a quantum meruit entitlement that it had paid too much, and was entitled to a refund.
Costs
[136] Ecowize has had relatively modest success on its claims. AFFCO has failed
on both its total opposition to any further liability to Ecowize, and also on it counterclaim. My provisional view is that Ecowize would be entitled to a costs
award in its favour, but perhaps reduced to some degree from what might otherwise
be its full costs entitlement on a larger measure of success.
[137] However, I make no order as to costs, not being privy to any exchange of positions prior to the hearing on a “without prejudice save as to costs” basis. Accordingly, I invite the parties to settle the issue as to costs. If that is not possible, then within 28 days of delivery of this judgment, Ecowize may file a Memorandum seeking an order as to costs, with AFFCO having a right of reply to that within a further 14 days (such time limits to exclude the summer vacation).
[138] I regret the delay in delivery of this judgment.
Dobson J
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