Ipsofactoj.com: International Cases  Part 1 Case 14 [NZCA]
COURT OF APPEAL, NEW ZEALAND
Electricity Corporation of
New Zealand Ltd
- vs -
Fletcher Challenge Energy Ltd
10 OCTOBER 2001
Richardson P, Keith , Blanchard and McGrath JJ
(delivered by Blanchard J)
Electricity Corporation of New Zealand Ltd (ECNZ) appeals against a declaratory order of the High Court at Wellington that a document called a Heads of Agreement (HoA) signed on behalf of Fletcher Challenge Energy Ltd (FCE) and ECNZ on 28 February 1997 is a valid and binding contract for the sale and purchase of gas. It also appeals a finding that it is in breach of an obligation in the HoA to use all reasonable endeavours to agree on a full sale and purchase agreement within three months of the date on which the HoA was executed.
The High Court judgment of Wild J delivered on 9 June 2000 is reported at  2 NZLR 219.
In 1997 the offshore Maui field, majority owned by FCE, was by a considerable distance the largest oil and gas field in New Zealand. Production from that field was expected to continue until 2009. A smaller but significant offshore field known as Kupe had not yet been developed. However, if development were to proceed in the near future, Kupe was expected to be a producing field until 2011. After 2011 the position was uncertain both in relation to these two fields and generally.
As part of the Government’s reform of the electricity industry, ECNZ, which was a state owned enterprise, had been required to divest itself of certain generating assets. It found itself short of gas to fuel a power station which it owned at Huntly. The Huntly station is capable of being fuelled either with gas or coal. It is connected by a pipeline to the Maui Field. ECNZ also had plans to build a new combined cycle gas turbine power plant at Huntly, which would be gas fuelled and was anticipated to be a much more efficient producer than the existing Huntly station.
Negotiations between FCE and ECNZ over the long-term supply of gas to Huntly had broken down in 1997. Part of the difficulty, as the judgment below records (at para ), was FCE’s inability to provide that supply in addition to its existing commitments.
Western Mining Corporation Ltd (WMC) held a 40% interest in the Kupe field and had called for tenders for the purchase of that interest. Both FCE and ECNZ submitted bids. The judgment records that they were "closely competing". WMC called for a second round of bidding, to close on 28 February 1997.
In the meantime FCE managed to acquire the 20% interest in Kupe held by the Norcen group. It remained interested in WMC’s interest through which it could obtain the operatorship of the field. But at the same time FCE wanted to limit its financial exposure to Kupe. It appears to have been concerned by the level of anticipated capital costs of developing the field.
Against this background, including particularly the lack of any source for the acquisition of a gas supply other than Kupe and the FCE controlled Maui, the parties entered into discussions. Representatives met at the ECNZ offices in Wellington on 27 and 28 February in an attempt to negotiate an agreement for a long-term gas supply for Huntly. Those representatives were Messrs McLaughlin, Taylor and Boshier of ECNZ and Kirk and Russell of FCE.
On 28 February while these talks were still underway, Mr Hugh Fletcher, Chief Executive Officer of the Fletcher Challenge Group and Mr Dave Frow, his counterpart at ECNZ, respectively signed and endorsed agreement on a letter from FCE to ECNZ (the Fletcher/Frow letter). The letter is expressed to be an "attempt at capturing the agreed proposal". It is in four parts. In the first part the letter states that ECNZ and FCE would that day resubmit their first round bids to WMC. If either bid was accepted, they would each buy the shares in the Kupe field in the proportions of 25.75% for ECNZ and 14.25% for FCE.
The second part of the letter read:
By the end of today, ECNZ and Fletcher Challenge Energy will enter into the Heads of Agreement for long term gas supply. This Heads of Agreement will specify all essential terms for it to be a binding agreement, including annual quantities, max/min flow rates, start date, duration, prices throughout, force majeure terms. This Heads of Agreement will be conditional on ECNZ Board approval within eight days.
In the third part of the letter ECNZ and FCE set out certain terms relating to the Kupe field, including a commitment from ECNZ to support FCE’s bid to replace WMC as the field’s operator.
In the last part of the letter the parties agreed that in the event of ambiguity or uncertainty Messrs Frow and Fletcher would "interpret the current intent and that will prevail".
Later on the same day, 28 February, the HoA was signed on behalf of ECNZ by Mr Taylor, its General Manager, Business Development, and on behalf of FCE by Mr Kirk, its General Manger, Marketing and Commercial.
The HoA is set out in full in a schedule to the judgments. It has four unusual features. The words "to be agreed" appear against the efficiency factor (K) in the formula for calculating the liability of FCE for non-delivery of gas (other than due to force majeure). The words "Not agreed" appear under the marginal heading "Force Majeure" and in the text of that item there is the statement ("Not agreed: Extension to National Grid)". Below the marginal heading "Prepaid Gas Relief" there is the notation "not agreed". Finally, above the signatures, there is the following:
Agreed (except where indicated)
There are two matters stated to be "Conditions Precedent". The first is the securing of the 40% Kupe stake. The second is "ECNZ’s Board Approval".
There is also an item called "Time Frame for Proceeding" which reads:
FCE/ECNZ to use all reasonable endeavours to agree a full sale and purchase agreement within three months of the date of this agreement.
The bids were re-submitted to WMC in accordance with the Fletcher/Frow letter and on 4 March WMC advised that FCE’s bid had been accepted.
On 12 March Messrs Fletcher and Frow re-signed an amended version of their letter. The first part of the letter was altered to remove some portions which had placed restrictions on voting in the joint venture. It seems this was thought likely to attract the disapproval of the Commerce Commission. The second part of the letter was amended to read as follows (with the changes as italicised):
By the end of today, ECNZ and Fletcher Challenge Energy will enter into the Heads of Agreement for long term gas supply. The gas to be supplied under this Agreement will be sourced by Fletcher Challenge Energy from a variety of sources available to it. This Heads of Agreement will specify all essential terms for it to be a binding agreement, including annual quantities, max/min flow rates, start date, duration, prices throughout, force majeure terms. This Heads of Agreement will be condition [sic] on ECNZ Board approval within thirteen days.
There was no change to parts three and four of the letter.
The extension of the date for obtaining ECNZ Board approval was made at the request of ECNZ. Its Board met on the same day, 12 March. A resolution was passed in the following terms:
the Heads of Agreement for the contract for the sale of gas between FCE and ECNZ be approved, subject to challenging the provision that FCE should only deliver gas in the period 2011–2017 if such delivery were to be economic;
the Committee of the Board comprising of Messrs Cushing, Gentry and Wu and that that Committee be authorised to approve the final contract for the Sale and Purchase of the Gas with Fletcher Challenge Energy and to authorise the execution of that document.
It was the uncontested evidence of Mr Kirk of FCE that he was told by Mr Taylor of ECNZ in a telephone call on 13 March that ECNZ’s Board had given approval to the HoA. He was not told about the qualification concerning gas deliveries from 2011 to 2017. FCE did not learn of this qualification until after this proceeding had been commenced.
The parties became pre-occupied for a while with completing the Kupe interest purchase. That was achieved on 27 March. It was not until 3 April that they met to begin their endeavours to agree the "full sale and purchase agreement". As a first step, each side prepared a list of issues requiring agreement. These were not, as listed, restricted to the matters stated in the HoA as to be agreed or not agreed.
Further discussions were delayed until May by a Commerce Commission investigation into the parties’ acquisition of WMC’s Kupe interest. About three weeks into the negotiations which then ensued, ECNZ, concerned to have a secure supply of gas until 2017, raised with FCE the question of the "economic test", which formed the basis upon which FCE could decline to deliver gas after 30 September 2011 under the "Preferred Customer" obligation in the HoA ("FCE will deliver gas only if delivery is economic"). FCE objected to the test proposed by ECNZ which was a net present value test extending to FCE’s entire gas and liquids business in New Zealand. As Mr Russell of FCE put it in his evidence:
Under the test posed by ECNZ, if the net present value of the whole of FCE’s gas and liquids revenues in New Zealand, taking into account revenues from, and the costs of, the supply of gas to ECNZ, was positive, then FCE would have to supply gas to ECNZ. In other words, FCE would be forced under that test to cross-subsidise the delivery of gas to ECNZ with its revenues from all its other gas and liquids activities in New Zealand if the price ECNZ paid to FCE was not sufficient in and of itself to cover the cost of delivering the gas to ECNZ. And, in other words, FCE would be required to supply ECNZ with gas except to the extent that to do so would place FCE in a net loss situation over the whole of its gas and liquids business in New Zealand.
The negotiations in the end appear to have broken down principally over this question. In the meantime, developments in the electricity market had altered ECNZ’s view about the prices set under the HoA. Lower price forecasts predicting future oversupply of electricity coupled with the development of the Government’s plans for further re-structuring of ECNZ and the electricity market made the gas supply from FCE a less attractive proposition.
Eventually, although the parties continued their discussions and proposals flowed to and fro between them, an impasse was reached in January 1998. The negotiations collapsed. ECNZ took the position that the HoA did not constitute a legally binding contract and declined to proceed with the purchase of gas. FCE instituted this proceeding seeking declarations that the HoA was binding on ECNZ and that, whether or not that was so, ECNZ was in breach of a binding obligation to use "all reasonable endeavours" to agree on the full sale and purchase agreement.
HIGH COURT JUDGMENT
While recognising that the HoA contemplated a subsequent agreement that would more fully deal with the transaction, Wild J held that the parties did in fact intend to be bound by the terms of the HoA when it was signed on 28 February.
He said that both parties agreed the transaction was important, complex and of substantial "value". ECNZ emphasised the large capital expenditures and potential liabilities involved which, combined with the contemplation of a full agreement, were submitted to negate any suggestion that the parties intended immediately to be bound under the bullet-point-styled HoA, only four pages long. The Judge disagreed, saying that commercial parties often bind themselves under heads of agreement, leaving important matters for subsequent agreement. The Judge said also that the HoA was "toward the top end of formality", despite its simple composition. The HoA was concluded urgently, he said, as part of the parties’ wider agreement spelt out in the Fletcher/Frow letter, and against the deadline specified in that letter. "Necessity dictated brevity".
The Judge considered the structure and language of the HoA. The first clause, which was headed "Condition Precedent", required ECNZ board approval. The Judge said that there would be no point in including a condition precedent in an agreement not intended to be binding. The penultimate clause required both FCE and ECNZ to keep "the contracts of agreement totally confidential except with the approval of the other party" (emphasis added). The Judge found this to be referring at least to the HoA and any full agreement subsequently conducted, as supported by the use of contractual terms in the HoA, such as "agreed", "obligation", "liability" and "elect". The Judge took into account also that, in stark contrast to normal business practice in Britain and North America, neither party had taken the simple step of including a clause saying clearly that the HoA had no binding effect.
Wild J placed considerable importance on the Fletcher/Frow letter which outlined the parties’ joint venture. As mentioned above, the second part of the letter said the HoA would "specify all essential terms for it to be a binding agreement". This letter was signed by the respective CEOs of both parties and, significantly, was re-signed again on 12 March 1997, well after the HoA had been executed. The only change material to this case, the Judge said, was an alteration, from 8 to 13 days, in the timeframe in which the ECNZ board had to approve the HoA. The Judge saw the re-signing as being consistent only with Messrs Fletcher and Frow regarding the HoA as conditionally binding, with both CEOs considering ECNZ board approval to be so fundamental that its timeframe was altered to ensure the board had sufficient time to meet the condition precedent.
The Judge took into account also the parties’ conduct, both before and after the HoA was signed. Internal documentation, communications between the two parties and communications between each party and other unrelated third parties were all found to be consistent with both sides regarding the HoA as binding.
Having held that the parties intended to be bound by the HoA, Wild J sought to do his best to give effect to that intention. Where a term is ambiguous, as being capable of two or more meanings, the Judge said the Court should chose whichever meaning seems to make the most sense in the context of the contract and the surrounding circumstances as a whole. Where a term essential to the workability of the contract is instead uncertain, as being incapable of ascertaining any sensible meaning at all, or where a contract is incomplete, because such an essential term has been omitted, the Judge said the Court could imply terms reasonable in all the circumstances. However, if the uncertainty or incompleteness vitiates instead an inessential term only, then the Judge said the Court could disregard that term and enforce the remainder of the contract.
Wild J held that the alleged problems of uncertainty or incompleteness in relation to the terms of the HoA, as submitted by ECNZ, could be overcome by implying reasonable terms to ensure its workability. The HoA was held to be legally enforceable.
ECNZ had submitted that the qualification in its Board’s resolution of the HoA showed the approval was conditional on FCE agreeing to a different delivery obligation for the 2011-2017 period. It was submitted therefore that the condition precedent in the HoA had never been met. Wild J held, however, that the Board’s approval was not conditional. He said it was absolute, with an accompanying instruction to ECNZ management to try to negotiate a better deal than that expressed in the HoA. The Judge saw this to be consistent with the communication by Mr Taylor (of ECNZ) on 13 March advising that Board approval of the HoA had been given.
After a careful analysis of the parties’ conduct subsequent to the execution of the HoA, the Judge held that ECNZ had breached the "reasonable endeavours" clause, which, on the basis that the HoA was a contract, he considered sufficiently clear and certain to be binding.
ARGUMENT FOR APPELLANT
Mr Craddock QC, for ECNZ, stated what he said were the fundamental issues in the case in this way:
Assessed objectively on 28 February 1997:
had the parties agreed all the terms they regarded as essential;
did the parties intend to be finally and exclusively bound to a contract on the terms agreed in the HoA excluding those terms not agreed;
and, if so, was the HoA legally complete?
It was submitted that the parties had failed to reach agreement on a number of terms they considered essential to their bargain:
the efficiency factor (K) was still "to be agreed";
an additional clause was needed "to cover non supply liabilities";
force majeure terms were "not agreed" either generally or at least in respect of the extension to the National Grid;
repayment terms for pre-paid gas (in the case of force majeure and non-delivery) were stated to be "not agreed";
the HoA did not contain minimum flow rates (compare the Fletcher/Frow letter which included in essential terms "max/min flow rates"), nor did it prescribe a maximum hourly flow rate.
The terms had been stated generally to be "Agreed (except where indicated)." Counsel submitted that the parties were clearly not ad idem on terms which they regarded as essential to any contract. It was for them to determine what was essential to their bargain. If both parties or either party regarded a term as essential then it was.
The appellant submitted also that, upon an objective assessment of the documents, it is clear that the parties did not intend to be immediately bound by the HoA. They had recorded that lack of agreement and their intention to continue negotiating. They remained in a state of negotiation. Counsel submitted that the HoA simply recorded the point in the negotiation which they had reached. They had not provided for agreement on outstanding issues to be reached by resort to an expert or an arbitrator or by another mechanism.
Mr Craddock submitted that the Judge erred in his general approach, being predisposed towards finding a binding contract and ignoring the intentions of the parties. He had also erred in his approach to specific terms. He had purported to create a "workable" contract by supplying terms on a basis rejected by the parties or had determined that they could do without terms which they had expressly identified as being essential to their intended bargain. The Judge was said to have ignored the fact that in a contract of this kind the terms are inter-related. The result of this process, it was said, was to impose on ECNZ a contract containing an allocation of risks which it would never have agreed to. The Court had made a bargain for the parties. ECNZ had been left with a high gas price which it had been prepared to accept only on the basis that substantial risk mitigation clauses would be negotiated and included. As this had never happened, the contractual balance had thereby been upset.
Mr Craddock said that it could not possibly be the case that ECNZ intended to bind itself finally and conclusively to a 17-year multi-billion dollar gas contract without reaching agreement on a force majeure term, minimum flow rates (even if these were zero), a formula for calculating non-delivery liabilities, a clause dealing with other liabilities, a prepaid gas relief term, a clause defining price-escalation, a term defining the economic test and the rest of the other terms which the appellant submitted were uncertain.
And even if the parties had intended to be bound, it was the appellant’s submission that their negotiations did not reach a point of sufficient certainty to be binding in law. Counsel took the Court to several provisions, including that for the delivery of gas after 2011 only if "economic" for FCE, which he said were incapable of interpretation.
The appellant argued also that the condition precedent requiring the ECNZ Board approval was not fulfilled by the "conditional approval" which was given.
Finally, Mr Craddock submitted that the "all reasonable endeavours" clause was not binding because the HoA was not a contract and, in any event, was a mere agreement to agree and thereby unenforceable (Walford v Miles  2 AC 128). In the alternative, ECNZ said that, on the facts, it had nevertheless used reasonable endeavours to reach agreement. The negotiations had gone on for many months during which time FCE had never complained about ECNZ’s conduct.
ARGUMENT FOR RESPONDENT
Mr Wilson QC, for FCE, submitted that the appellant’s argument had subordinated the question of intention to be bound to the question of completeness and had thus inverted the proper approach. It was the respondent’s contention that the approach of the Judge was correct in law; that he had first determined that the parties intended to be bound and only then had sought to give effect to their intention, following the modern approach to contract formation. The terms in the Fletcher/Frow letter were said to be merely illustrative of the types of terms which might be agreed in order to create a binding HoA; the signatories to the letter were not attempting to define the essential terms. Their object was merely to ensure that the HoA would be binding when signed. It was open to the appointed negotiators to come to a different view on what was essential, accepting as they did so that the HoA was necessarily an imperfect document because of the limited time available to work out its terms. The position taken by the negotiators had been confirmed by the re-signing of the letter when the CEOs knew that not all of the terms mentioned in their letter had been covered.
It was said that each party had elected to take a risk on the outcome of the unresolved matters. That risk was outweighed by the perceived value of getting an agreement which in fact included all terms essential in law or thought by the parties to be essential. Omission or non-agreement on other matters therefore did not prevent effect being given to the intention of the parties to be bound. The existence of the "not agreeds" ought, it was said, to be relevant only to the likelihood that the parties intended to be bound or to whether any matter not agreed was objectively essential.
Mr Wilson referred to ECNZ’s need for gas, with the only two sources being Maui (controlled by FCE) and Kupe. ECNZ had been exposed to the risk that FCE would put in a higher bid. It could not afford to miss out on Kupe because, if it did, FCE could then have named its own price for gas supplies.
Mr Wilson asked why ECNZ would have made the agreement subject to its Board’s approval if there had been no intention that it be binding. He explained FCE’s attitude to the subsequent negotiations towards a full agreement as deriving from their view that while the HoA was a binding contract, a full agreement would cure its imperfections and be a much more satisfactory basis for the long-term relationship.
Because the parties intended to be bound at the time of signature (described by Mr Wilson as the "key point"), it was proper for Wild J to take the view that, by a process of implication and interpretation, the contract could be found to be complete or made to be complete. While the Judge had proceeded actually to resolve the alleged incompleteness and uncertainty, it was not necessary to go that far. The Court had only to form the view that these matters were capable of resolution should the need arise during the performance of the contract. All the allegedly incomplete or uncertain terms were either capable of being rendered certain or were not essential to the bargain. The HoA, it was said, contained all the terms needed to make it enforceable. It was not unworkable in the sense of being objectively impossible to perform.
It was submitted that the condition precedent concerning ECNZ Board approval had been fulfilled. The terms of the Board’s minute and ECNZ’s contemporaneous and subsequent conduct showed an intention to approve the HoA. The resolution said so. It did not say that there was merely a conditional approval. The reference to a "final" contract suggested that there was an earlier one. If this were not so, the unqualified notice of approval nevertheless prevented ECNZ from denying the approval. Counsel pointed out that the terms of the Board resolution had not been pleaded by ECNZ until its statement of defence to a fourth pleading by FCE.
Finally, the respondent submitted that Wild J was correct in finding that the obligation to use all reasonable endeavours was enforceable (either as part of a binding HoA or standing by itself), although Mr Wilson accepted that the Judge had proceeded on this point on the basis that the HoA was binding. The evidence was also said to support the view that ECNZ was in breach of the obligation, particularly in the stance it took on the economic test.
THE CORRECT LEGAL APPROACH
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. This latter situation is uncommon because normally negotiating parties will have an appreciation of what basic terms they need to reach agreement upon in order to form a contract of the particular type which they are negotiating. It is comparatively rare that, having an intention to contract immediately, not only do they fail to deal expressly with an essential or fundamental term but it also proves impossible for the Court to determine the contractual intent in that regard by implication of a term or by reference to what was reasonable in the particular circumstances or to some other objective standard.
A contract is not legally incomplete merely because consequential matters have been omitted, particularly when they relate to questions of contingency and risk allocation. The parties may have thought it unnecessary to the essence of their bargain to reach agreement upon such matters or it may have been difficult or even impossible to predict what might arise in the future, particularly under a long term contract. It may therefore have been thought satisfactory – and it would often be more economically efficient - to leave such matters to be worked out if necessary in the course of the performance of the contract.
But even where the parties are ad idem concerning all terms essential to the formation of a contract – the basic structure of a contract of the type under negotiation is found to have been present in the terms which have been agreed – they still may not have achieved formation of a contract if there are other unagreed matters which the parties themselves regard as a prerequisite to any agreement and in respect of which they have reserved to themselves alone the power of agreement. In such cases, what is missing at the end of the negotiation is the intention to contract, not a legally essential element of a bargain. (In theory, it is of course possible that, having concurred that a legally inessential matter is in fact essential to them in the particular circumstances, the parties have then overlooked it in the turmoil of negotiation and mistakenly have thought that they have agreed everything essential, when in fact they have not. But this would be very unusual and certainly did not happen in the present case.)
The prerequisites to formation of a contract are therefore:
An intention to be immediately bound (at the point when the bargain is said to have been agreed); and
An agreement, express or found by implication, or the means of achieving an agreement (e.g. an arbitration clause), on every term which
was legally essential to the formation of such a bargain; or
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.
Whether the parties intended to enter into a contract and whether they have succeeded in doing so are questions to be determined objectively. In considering whether the negotiating parties have actually formed a contract, it is permissible to look beyond the words of their "agreement" to the background circumstances from which it arose – the matrix of facts. This can include statements the parties made orally or in writing in the course of their negotiations and drafts of the intended contractual document.
The established rule is that in interpreting a contract it is permissible to look to the factual matrix, but that evidence of negotiations and statements of subjective intention must be disregarded. For present purposes we have no need to re-consider that rule (noting, however, Professor David McLauchlan’s renewal of his criticisms of it in his article A Contract Contradiction (1999) 30 VUWLR 175). But it is inapplicable when the issue is, instead, one of contract formation. It is likewise inapplicable when rectification is claimed: evidence of negotiations and all other surrounding circumstances will be received (Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617). It is therefore just as permissible to prove that one party told the other that the otherwise apparently binding contract was not in fact to be binding as it is to prove that they agreed upon a term but then did not correctly record that agreement in their written document. In Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, 337, McHugh JA drew attention to Corbin’s observation in Contracts (s 577, vol.3 at 385) that "we need not begin excluding parol evidence until we know a contract has been made". McHugh JA also noted that "the intention to be bound is a jural act separate and distinct from the terms of their bargain".
It is also permissible when considering contract formation (or rectification) to look at subsequent conduct of the parties towards one another, including what they have said to each other after the date of the alleged contract (Australian Broadcasting Corporation v XIVTH Commonwealth Games Ltd (1988) 18 NSWLR 540, 550). However, as Gleeson CJ observed in the Australian Broadcasting case (at 550), the position is by no means so clear in connection with internal memoranda, communications of one party with a third party or statements of subjective intention made by individuals in the course of giving evidence. We have proceeded on the basis of treating such material as admissible but we share that reservation, particularly in relation to direct expressions of subjective intent. In this case, as in the case before the New South Wales Court of Appeal, these types of material have proved to be contradictory and ultimately largely unhelpful.
It is also very important, in considering the intention of the parties to be bound, to bear in mind the dynamics of the negotiation process and the internal inter-relationship of the terms of a commercial bargain. Tamberlin J of the Federal Court of Australia made the following valuable observation in Seven Cable Television Pty Ltd v Telstra Corporation Ltd (2000) 171 ALR 89, 114 (para ):
When parties are negotiating in order to arrive at a contract to govern their legal relations the process is often complex, especially in cases of detailed and wide ranging agreements intended to endure over many years. In the course of negotiations there will generally be a constant and ongoing process of adjustment and readjustment of the positions adopted by the parties on particular clauses. This process sometimes involves a series of mutual "trade-offs" whereby a concession is made by one party in respect of one provision in exchange for the giving of a concession by the other party in respect of a different provision. It will also involve compromise and adjustment so that it is often difficult to determine whether at any particular point of time prior to execution of a final agreement the parties have entered into contractual relations. Before a final contract is made it is also difficult to detach any particular provision from its context and say that a final agreement has been reached on that particular clause as a discrete agreement.
The Court has an entirely neutral approach when determining whether the parties intended to enter into a contract. Having decided that they had that intention, however, the Court’s attitude will change. It will then do its best to give effect to their intention and, if at all possible, to uphold the contract despite any omissions or ambiguities (Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503;  All ER Rep 494; R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd 1964 SC 308 and Attorney-General v Barker Bros Ltd  2 NZLR 495). We agree with the way in which Anderson J expressed the position in Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101, 132-3:
I think it is fair to say, speaking very generally, that where the parties intended to make a final and binding contract the approach of the courts to questions of uncertainty and incompleteness is rather different from the approach that is taken when the uncertainty or incompleteness goes to contractual intention. Where the parties intended to make an immediately binding agreement, and believe they have done so, the courts will strive to uphold it despite the omission of terms or lack of clarity: see Trustees Executors & Agency Co Ltd v Peters (1960) 102 CLR 537; Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429; Meehan v Jones (1982) 149 CLR 571. However, the principle that courts should be the upholders and not the destroyers of bargains, which is the principle that underlies this approach, is not applicable where the issue to be decided is whether the parties intended to form a concluded bargain. In determining that issue, the court is not being asked to enforce a contract, but to decide whether or not the parties intended to make one. That inquiry need not be approached with any predisposition in favour of upholding anything. The question is whether there is anything to uphold.
In the Australian Broadcasting case (at 548), Gleeson CJ commented on the need to examine together both contractual intent and adequacy of agreed terms:
It is to be noted that the question in a case such as the present is expressed in terms of the intention of the parties to make a concluded bargain: see, eg, Masters v Cameron [(1954) 91 CLR 353, 360]. That is not the same as, although in a given case it may be closely related to, the question whether the parties have reached agreement upon such terms as are, in the circumstances, legally necessary to constitute a contract. To say that parties to negotiations have agreed upon sufficient matters to produce the consequence that, perhaps by reference to implied terms or by resort to considerations of reasonableness, a court will treat their consensus as sufficiently comprehensive to be legally binding, is not the same thing as to say that a court will decide that they intended to make a concluded bargain. Nevertheless, in the ordinary case, as a matter of fact and commonsense, other things being equal, 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.
Something should be said about the place that the controversial decision of the House of Lords in May and Butcher Ltd v The King  2 KB 17n has in the modern law of contract. We take the view that this case is no longer to be regarded as authority for any wider proposition than that an "agreement" which omits an essential term (or, as Lord Buckmaster called it, "a critical part"), or a means of determining such a term, does not amount to a contract. No longer should it be said, on the basis of that case, that prima facie, if something essential is left to be agreed upon by the parties at a later time, there is no binding agreement. The intention of the parties, as discerned by the Court, to be bound or not to be bound should be paramount. If the Court is satisfied that the parties intended to be bound, it will strive to find a means of giving effect to that intention by filling the gap. On the other hand, if the Court takes the view that the parties did not intend to be bound unless they themselves filled the gap (that they were not content to leave that task to the Court or a third party), then the agreement will not be binding.
On its own facts we respectfully doubt that May and Butcher would be decided by their Lordships in the same way today. We are now perhaps more accustomed to resort to arbitration in order to settle even matters of considerable importance to the contracting parties. We find curious the notion that, in a commercial contract where price is left to be agreed, a reasonable price cannot be fixed and that, even where there is an arbitration clause, that clause cannot be used to determine the price because "unless the price has been fixed, the agreement is not there". (p20)
We agree with Professor McLauchlan (Rethinking Agreements to Agree (1998) 18 NZULR 77, 85) that "an agreement to agree will not be held void for uncertainty if the parties have provided a workable formula or objective standard or a machinery (such as arbitration) for determining the matter which has been left open". We also agree with him that the court can step in and apply the formula or standard if the parties fail to agree or can substitute other machinery if the designated machinery breaks down. This is generally the approach taken by this Court in Attorney-General v Barker Bros Ltd.
However, if essential matters (i.e. legally essential or regarded as essential by the parties) have not been agreed upon and are not determinable by recourse to a mechanism or to a formula or agreed standard, it may be beyond the ability of the Court to fill the gap in the express terms, even with the assistance of expert evidence. In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, 20, Kirby P remarked:
Courts are not well equipped, drawing on their own experience, to fill out the detail of such contracts where the parties leave gaps in their own agreement. The fact that this may result in wasted time and money is a risk which parties to negotiation must always weigh up. Courts cannot enforce such agreements because they are incapable of judging where the negotiation on particular points would have taken the parties, acting bona fide but legitimately in their own interests.
It will be a matter of fact and degree in each case 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.
Where the intention to contract is found to have existed, the Court may supply an omission by implying a term. It is true that the Privy Council remarked in Aotearoa International Ltd v Scancarriers A/S  1 NZLR 513, 555 that, in order to determine whether there is a legally binding bargain, it is impermissible to add to the express terms further implied terms upon which the parties have not expressly agreed, and then, by adding the express terms and the implied terms together, thereby to create "what would not otherwise be a legally binding bargain". But this observation was made on the particular facts of that case, where there does not appear to have been a mutual intention to contract. Mustill LJ, having referred to it in Malcolm v Chancellor, Masters and Scholars of the University of Oxford  EMLR 17, said that there could not be found in this passage the route to a decision on whether there is a contract or not "since it requires the court to assess the contractual efficacy of express terms which the court knows, ex hypothesi, could be bulked out by implied terms" (at p35). It provided, he said, a valuable reminder of the risks involved in the exercise of taking potential implied terms one group at a time, implying them, moving on to another group, implying those, and so on until a contract is built up out of implied terms from no express bargain at all. Mustill LJ thought it was necessary instead to "consider whether there was a sufficient skeleton of express terms to be fleshed out by implication". We respectfully agree. Gaps can be filled by implication, but only if there is such a skeleton of express terms combined with an intention to contract.
A helpful analysis of various possible situations is given by Lloyd LJ in Pagnan S.p.A. v Feed Products Ltd (1987) 2 Lloyd’s Rep 601, 619. After pointing out that the parties may intend to be bound forthwith even though there are further terms still to be agreed, his Lordship said that, if they then failed to reach agreement on the further terms, the existing contract is not invalidated unless the failure to reach agreement renders the contract as a whole "unworkable" or void for uncertainty. By "unworkable" we take him to mean that the transaction is lacking in business efficacy. Lloyd LJ continued:
It is sometimes said that the parties must agree on the essential terms and that it is only matters of detail which can be left over. This may be misleading, since the word "essential" in that context is ambiguous. If by "essential" one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by "essential" one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by "essential" one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge, "the masters of their contractual fate". Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called "heads of agreement".
It follows that merely because an important term is deferred to be settled on a future occasion, that does not mean that there is no intention to be bound. In such circumstances, provided the Court is satisfied that the parties did intend to enter immediately into a contractual relationship, it will do its best to find a means of giving effect to that intention by determining, if possible, the outstanding matter.
Lack of clarity or ambiguity in express terms can also be resolved so as to "save" the contract. It is only if there is such uncertainty in an essential term that the Court cannot determine what the parties meant that the agreement will be held to be meaningless or void – where "the language used was so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention" (G Scammell & Nephew Ltd v Ouston  AC 251 per Lord Wright at 268). Where the term in question is meaningless but inessential (both in law and to the parties) it will simply be disregarded in determining the rights of the parties under the contract.
DID THE PARTIES INTEND THE HoA TO BE A CONTRACT?
There can be no doubt that ECNZ and FCE both went into the negotiations on 27 and 28 February intent on concluding an agreement in the form of a heads of agreement. They must have appreciated that a relatively sketchy, perhaps incomplete, document was likely to result from the hurried negotiations. But it is clear from the Fletcher/Frow letter that the companies embarked on the negotiations with every intention of completing a binding deal.
We accept also that the negotiators had authority to determine what matters were to be regarded as essential to any binding contract. We do not read the Fletcher/Frow letter as doing more than illustrating the kinds of things which might emerge as being essential. Whatever Mr Fletcher and Mr Frow may have contemplated, they appear to have left it to Mr Kirk and Mr Taylor to make the final determination by signing the HoA, subject of course to the opportunity to be reserved to ECNZ’s Board to withhold its approval.
The critical matter is whether the negotiators achieved their objective of agreeing on all terms they (or either of them) considered essential; whether, by signifying that certain matters had not been agreed they were indicating that essential matters remained outstanding or, alternatively, were withdrawing those matters from the list of what was, at the end of the negotiation, still regarded as essential. Did they, at the end of the negotiations on the HoA, intend to have an immediately binding contract?
We consider that it is very significant in a document which on its face appeared incomplete – where items were actually marked "not agreed" - that the negotiators did not record that their agreement was to be regarded as complete, or legally binding. (Compare what was done by the negotiators in Anaconda where it was said that the HoA "constitutes an agreement in itself" intended to be replaced by a fuller agreement not different in substance or form). Nor did they provide for any machinery, such as an independent expert or an arbitrator, to resolve the matters on which they had not agreed.
It is significant also that the negotiators made what seems to be a deliberate distinction between two items which they recorded as being "not agreed", and two others, one of which they left "to be agreed" and one in respect of which they merely stated that an additional clause would be required. If "not agreed" was intended merely to signify the desirability of reaching a further agreement at a later time, pursuant to the "reasonable endeavours to agree a full sale and purchase agreement" provision, why did the negotiators not use the same language in relation to the K factor and the other liabilities? And why, in relation to those items, was there no notation in the margin as there was for the "not agreed" items?
The HoA has the appearance of a memorandum listing the points which have been agreed, those which have not been agreed and those which the parties are content to put to one side for the moment, together with a statement of their intention to negotiate a full (i.e complete) agreement within three months. FCE argues that ECNZ had assessed the value of getting a binding agreement on the terms actually agreed and was prepared to take the risks involved in not obtaining agreement on the other items. But if that were the case, why did the parties include the "not agreed" items and make it plain, immediately above the signatures, that there had been no agreement in those respects? It seems to us very likely that this was done because, unlike the K factor which could be independently assessed or measured at a later time, and unlike the other liabilities clause which the parties seem to have regarded as relatively unimportant "boilerplate", the "not agreed" items were of a kind which could not be expected to be settled for the parties by a Court or other third party. There were no objective standards or precedents from similar past dealings between the parties or even dealings in the industry generally (this was thought to be the first such contract not tied to a particular gas field) by which an adjudicator or expert could determine how to accommodate the risk factors which were the subject of or underlay the force majeure and pre-paid gas provisions. Those provisions, it seems to us, had such substantial financial implications – for ECNZ if they were not included and for FCE if they were – that it would be surprising if the parties had simply left them to be negotiated at a later time. We consider that they were marked "not agreed" as an indication of their importance, and that they were regarded as essential terms.
The HoA accordingly seems to us to be in the nature of a progress report from the negotiators, containing also a statement on the course intended to be followed in order to complete the agreement. Both sides were evidently very confident of ultimately reaching that full agreement. However, it seems to us very probable that, if the negotiators had been asked before placing their signatures on the HoA whether, in the unexpected event of failure to do so, the HoA was to stand on its own as the contractual document to govern the parties’ relationship until 2017, both Mr Kirk and Mr Taylor would have answered in the negative. They had simply reached an important staging post on the way to final agreement.
The respondent argues that the existence of a "condition precedent" of ECNZ Board approval shows, by use of an expression normally of contractual significance, that the signatories regarded the HoA as a contract. Why else, it is asked, would they contemplate submitting it to the Board of ECNZ for approval? We think the use of the contractual language is probably explained by the sequence in which the HoA was put together. It was written up on a whiteboard item by item and transcribed as the negotiation proceeded towards an anticipated agreement. But, whether that is so, the noticeable feature is that the document actually put before the ECNZ Board included the "not agreed" items. The Board was not being asked, it seems to us, to approve a completed bargain. The matter went to the Board for approval of what had been done to date. It was approved on that basis, with the Board indicating that there should be a challenge to one of the items the negotiators had agreed. It is perhaps because of the provisional status of the document – a yet to be completed work – that Mr Taylor omitted to mention the Board’s instruction when he told FCE that there had been an approval. Knowing that a final negotiation was still to come, including discussions on that particular item, he may have been keeping ECNZ’s powder dry.
It is also said for FCE that the re-signing of the Fletcher/Frow letter, including its reference to the intention that the HoA be binding, when both CEOs must have been aware of the "not agreed" items in the HoA, shows that the HoA was accepted by them as binding on the parties. We disagree. The opportunity was there for the CEOs to say just that, but they did not do so. Instead they confirmed that the HoA "will specify" all the essential terms for it to be binding. It did so, but it also indicated a lack of agreement on some of those items. The re-signed letter left that position unchanged. The letter altered the date for the Board approval. If that had been the only change, it might have indicated that the alteration was made because the HoA had contractual force and would lapse if there were a delay in the date of the Board meeting. But the more substantial alterations related to the first part of the letter and concerned the arrangements for the WMC bidding. The need to avoid criticism from the Commerce Commission, not any difficulty with the HoA itself, seems to have been the reason behind the re-signing of an altered letter.
When FCE and ECNZ came to negotiate the full agreement, it is plain that they did not pick up where they had left off. Each treated itself as free to re-negotiate supposedly agreed items. Neither challenged the other’s right to do so. Both seemed to accept that, as progress might be made on one item, a consequential adjustment or balancing might then be needed on another point. We refer in this connection to Tamberlin J’s observation quoted in para  above. As an example, we note the suggestion made by FCE at one point that the credit built up by ECNZ under the Take or Pay provision should be measured in money rather than in volumes of gas. The nature of the negotiation naturally reflected the inter-relationship between agreed and unagreed items listed in the HoA. Agreement on many of them was necessarily provisional. That is so in any normal commercial negotiation process. A party may wish to re-visit an item apparently settled if that party cannot get what it is seeking on another item to which the negotiators subsequently turn their attention. Nothing can be regarded as set in concrete until there is an overall agreement – until the actual point of contracting. That does not mean that the parties will not sometimes commit themselves contractually, leaving important matters for later negotiation. But the greater the significance of the inter-relationship of terms, the less likely they are to do so, as for instance where the undecided terms concern serious risk factors which the parties have been trying to address, as they did here. It is to be expected that the affected party would wish to preserve its position, so as not to be committed until all matters are weighed in the contractual balance.
It is said that internally ECNZ personnel made reference to the HoA as a binding document both before and after it was put to the Board. In some instances that certainly happened, but not consistently, even in the material which went to the Board. For example, in his report to the Board, Mr Taylor said that the HoA specified all necessary terms for it to be a binding agreement. But of course it specified some of them as being "not agreed". Then later in his report he listed essential terms and it is said by FCE to be significant that he did not include the "not agreeds". But Mr Taylor also talked in the same document of the "proposed" gas contract and so did the Board’s minute of the discussion preceding the passing of its resolution. In addition, the request made to the Board was not for an approval of a contract but for it to "approve in principle" the "gas contracting arrangements" on the terms negotiated.
Mr Craddock was also able to refer us to internal FCE documents which treated the HoA as non-binding (e.g. a memorandum of 28 September 1998 which speaks of "seeking to negotiate the HoA to a binding contract"). As we have indicated, however, we consider that little weight should be placed upon internal documentation, which reflected the understanding (or misunderstanding) of a particular person at a particular time, or even how that person wished to portray the position to others in the organisation or, in ECNZ’s case, to its shareholding Minister.
FCE has also argued that it would not have renewed its WMC bid at the same level as the first round (and implemented the first part of the Fletcher/Frow letter) except on the basis that the HoA was binding, subject only to ECNZ Board approval. In his evidence Mr Hugh Fletcher stated that the letter anticipated signature of the HoA and, if it was not signed, the whole letter would "fall away". He said it would only have life if the HoA had life. But the very fact that the ECNZ Board could have refused an approval after the second round bids were submitted, and even after one of them had been accepted, indicates to us that FCE was relying not on the binding nature of the HoA but on its assessment that ECNZ’s need for a long-term gas supply was so pressing that the HoA would receive approval and that a gas contract would be finally negotiated. FCE was, after all, attaining a major objective merely by acquiring a stake in Kupe which would give it the operatorship but without over-committing itself to the field. In his evidence Mr Kirk admitted that FCE took the risk:
Can I get direct answer, was not Fletchers decision whether or not gas agreement eventuated whether or not ECNZ Board approval was forthcoming, it would submit its original bid and ECNZ would do likewise? Yes. We were taking risk that ECNZ Board would approve and we were led to believe that [it] was highly likely they would, yes.
It seems to us that FCE elected to take this risk because they took comfort from the progress which had been made already, the mutual intent to negotiate a full agreement and their own assessment of ECNZ’s need for a gas supply. If FCE had not proceeded on the basis of the position which had been reached, there was a danger that ECNZ might have tried to outbid it for the full WMC stake.
Counsel for FCE also endeavoured to make something of the fact that ECNZ treated the confidentiality clause in the HoA as imposing an obligation upon it. ECNZ sought FCE’s consent to disclose the existence of the HoA in its 1997 Annual Report. It complained to FCE about a press release on the subject. But it is entirely understandable that the parties, having gone so far with their negotiations, would regard themselves as bound in honour not to make disclosures without the consent of the other, whether or not they considered the clause was legally binding.
An argument of somewhat greater weight was that ECNZ drafted its own press release, in terms approved by FCE, in October 1997. It spoke of ECNZ’s "commitment to purchase". And ECNZ’s Annual Report for 1997 listed the HoA under "Long-term contracts". However, even as these matters were being attended to, the parties themselves were evincing a very different attitude in their tortuous negotiations to try to achieve the full agreement anticipated by the HoA.
For these reasons, although we do not agree with the criticism made of the Judge that he approached the question of contractual intent with a pre-disposition to find that there was a contract, we have concluded that he erred in finding that the HoA was intended to be a binding contract.
Having reached that conclusion, we are not required to address whether the terms agreed upon by the parties were sufficient in law to constitute a gas supply contract. But, as this dispute may proceed further, we now briefly give our views on that question and on various other issues dealt with by the trial Judge concerning whether the HoA was binding.
ABSENCE OF TERMS ESSENTIAL IN LAW?
Four matters were mentioned as alleged instances of a failure to agree on legally sufficient terms. They were force majeure, prepaid gas relief, the efficiency factor in the formula for limiting liability for non-delivery (the K factor) and non-supply liabilities.
(a) Force majeure
As a preliminary point, there was the question of whether the "not agreed" notation relating to force majeure applied only to the extension to the National Grid. Wild J interpreted the force majeure clause as recording agreement upon that subject except in respect of the extension. He formed that view by looking at the clause in isolation and was confirmed in his opinion when he read it "with its interrelated clauses i.e those referring to force majeure, or upon the operation of which force majeure impacts". On this point he preferred the evidence of the FCE witnesses.
Although in this Court ECNZ preserved its argument that the "not agreed" related to the whole of the clause, that argument was pressed only faintly. Mr Craddock understandably pursued the point more upon an assumption that the qualification related to the extension only. We take the same view as Wild J on this preliminary point.
We are not persuaded that without agreement on a force majeure clause relating to the National Grid the HoA lacked as a matter of law an essential ingredient. No doubt the issue of ECNZ’s obligation if the Grid went down was of importance to the parties, particularly to ECNZ, but the contract was capable of working without such a clause, as Mr Astrop, an expert called for ECNZ, conceded in his evidence. Grid failure presented the risk to ECNZ that it would not be able to distribute electricity generated by means of use of the gas supplied by FCE. If it could not distribute, it could not generate. The Take or Pay provision might well mitigate loss to some extent. It provided for deferment from taking gas for up to two contract years. The risk was such that it was perhaps unlikely that ECNZ would finally commit itself in the absence of an extension of the force majeure clause to the National Grid, but failure to reach agreement on it would not mean that the contract was legally incomplete.
(b) Pre-paid gas relief
We take the same view on this item. It was important for ECNZ. It did not want to have to rely on restitutionary remedies to recover money paid in advance (under the Take or Pay clause) if FCE failed to deliver gas either in breach of its obligation to do so or because delivery was affected by an event of force majeure. But the agreement could operate without it, with ECNZ being left to those remedies, which presumably could have produced a reasonably fair result.
(c) The K factor
Without determination of the efficiency factor, the formula for limiting FCE’s liability for non-delivery of a notified quantity of gas could not be applied. Plainly the parties had agreed that there would be a limit. They had settled the constituents of the formula except for the efficiency factor of the ECNZ plant being supplied. That was because the requested supply might be intended either for the old (somewhat inefficient) Huntly plant or for the new combined cycle plant whose efficiency – expected to be much greater – would not be precisely known in advance of its being designed and built. When it was operating its efficiency could be objectively assessed.
Wild J reached the view that the parties had reserved the K factor for agreement if and when it needed to be agreed, i.e. in the event of a liability for non-delivery arising. He saw the use of the words "to be agreed" as intended to distinguish this matter from those which had simply been "not agreed". We think he was right to take this view, notwithstanding that the parties in fact negotiated on this issue after the HoA had been approved by the ECNZ Board – which is an instance of the freedom both parties thought they had to negotiate afresh. The Judge pointed out that both parties’ expert witnesses had agreed that the K factor was capable of accurate and objective measurement after an event of non-delivery, but not earlier.
The Judge concluded that the K factor was not essential to the efficacy of the HoA. It was capable of being assessed objectively if and when it was needed. We agree. Further, the Judge found that its effect was to limit FCE’s liability more than the general law might do. We are of the same view. It is unnecessary as a matter of law to have a limitation of liability provision in a gas contract.
(d) Other liabilities
It was obviously not a legal prerequisite that there be a clause covering miscellaneous liabilities for non-supply. This item was not marked "not agreed". Although the parties flagged their wish to settle a suitable clause, they do not seem to have regarded it as essential to any bargain, nor is it essential as a matter of law.
TERMS SAID TO BE ESSENTIAL TO PARTIES
ECNZ submitted that in three respects the HoA failed to deal with matters which had been stipulated in the Fletcher/Frow letter as being regarded by the negotiating parties as essential to a binding agreement. They were force majeure, minimum flow rates and a start date for gas supply.
We have already indicated that in our view the letter was merely giving illustrations and that it was intended that the negotiators would, in the end, decide what, at the time the HoA was signed, should still be regarded as essential items. As already indicated, we think that they did at that time regard force majeure (not yet agreed in full) as being essential, which is why they marked it as "not agreed".
The HoA specified a maximum delivery obligation (120% of average daily quantity) but said nothing about any minimum flow. (Nor did it deal with hourly quantities, to which we will refer shortly.) This is unlikely to have been an oversight on the part of FCE. It must be taken to have accepted the inconvenience that the minimum flow rate was zero, possibly considering that on practical grounds it would be possible to obtain the agreement of ECNZ to a more suitable minimum at a later time. The Judge dealt with this topic in para  of his judgment. We agree with his conclusions.
As to a start date, the HoA stipulated that a contract year was to commence on 1 October and end on 30 September in each year. It specified quantities for years from 2000 to 2017. The start date is therefore easy to pinpoint as 1 October 2000.
We deal only with those matters which were addressed in oral argument, taking the view that counsel for ECNZ correctly felt that there was little prospect of establishing that other matters rendered the contract arguably incomplete or uncertain (i.e that an essential ingredient had been so vaguely addressed that no meaning could be given to the words used by the parties).
(a) Maximum hourly quantity (MHQ)
The Judge found that the lack of an MHQ meant that ECNZ could call for all of its maximum daily quantity of gas to be delivered over a few peak hours of each day. The Judge accepted Mr Russell’s evidence on behalf of FCE that ECNZ’s negotiators had not required an MHQ. He also accepted the conclusion of Mr Ward, an expert called by FCE, that the maximum delivery obligation and notification terms in the HoA, read together, were workable.
The appellant’s submissions primarily approached this issue as one of alleged failure to agree on an essential term. For the reasons given above, we are of the view that the negotiators must be taken to have decided that it was enough to agree upon a maximum daily delivery obligation with no minimum quantity. An MHQ cap was deemed unnecessary.
Nor do we consider that the arrangements were too uncertain to be capable of interpretation by a Court guided by expert evidence of gas pipeline practices in New Zealand and of the maximum capacity of the pipeline which the parties intended to use. The "notification" provision ("suitable for end use (power generation and reticulated market) and gas supply requirements") would be relevant to the determination of the issue. If no other meaning could be found, ECNZ would be entitled to such maximum flow as the capacity of the pipeline allowed.
(b) Price adjustment
The HoA sets prices per gigajoule for the contract years 2000-2004 and 2004-2011. For the years 2011-2017 the price is stated to be the put/call result. The item for "Put/Call" contains a price at which ECNZ may call and a price at which FCE may put. Put or call can be made on any day prior to 30 September 2009 (for full period and annual quantity).
The provision for price adjustment reads:
Price Adjustment: PPI – Annually: 1 October
Base date measurement: year ending 30 September 1997.
ECNZ argues that this is uncertain because it is unclear which Producer Price Index is to apply and whether the reference is to an input or an output index (there are more than 50 of each). It argues, further, that there is no provision for what is to occur if an index is re-based. Finally, it is said that it is not clear to which prices the price adjustment provision is to apply.
Ambiguity does not mean uncertainty (Anaconda at 112, per Ipp J.). "PPI" is not, in context, a meaningless expression. We are satisfied that, guided by expert evidence of market practices, a Court is perfectly able to interpret "PPI". The Judge, without any apparent difficulty, concluded on the basis of the evidence he heard that it was the "All Groups Inputs" index. It is unnecessary for us to say whether he was right, although we intend to cast no doubt on his conclusion. It is enough to be able to say, as we do, that there is no uncertainty.
We take the same view on the other arguments. The Court can determine the application of the price adjustment. In fact, we ourselves would see it as a simple matter, as the Judge obviously did in para .
(c) Preferred customer – when delivery is "economic"
We now come to a matter which, if we had to resolve it in detail, would be far from simple. We deal with it relatively concisely since we have already concluded that the HoA was not contractually binding; and, if it had been, the Court would have needed only to determine whether "economic" had, in context, a meaning which it was capable of elucidating, without proceeding to give that interpretation.
The HoA provided for a firm delivery obligation for the period to 30 September 2011 (subject to force majeure) and thereafter for a "Preferred Customer" delivery obligation. The next item reads:
Preferred Customer: Means:
Provided FCE complies with the foregoing there shall be no retrospective assessment of liability/responsibility.
We have italicised the sentence which is said to be so bereft of meaning as to be legally uncertain. There is no dispute that the preferred customer obligation (the basis on which supplies would be made from 2011-2017) is an essential term and that, if the word "economic" is meaningless, the HoA is unenforceable. For the reasons set out at paras  to  of his reported judgment, Wild J found that, although there was "considerable room" for differing views, there was no uncertainty. The word was capable of being interpreted. Indeed, he himself gave his interpretation in a step by step process guided by the expert evidence he had before him.
The submission for the appellant was that the preferred customer clause was no more than a concept. No method of interpreting "economic" was given. There was said to be no industry standard by which an objective observer could measure what is economic for FCE. One of the witnesses, Mr Copeland, had likened answering the question whether delivery is economic to answering "How long is a piece of string?" For the Court to give the clause meaning, Mr Craddock said, would be to impose on the parties criteria that they had not even begun to negotiate. Reference was made to the vastly differing positions taken by the parties on this issue when they were trying to negotiate the full agreement.
On the other hand, FCE’s counsel submitted that there was in the evidence a degree of consensus about the meaning of the word in the context of the HoA – that delivery must be financially rewarding or profitable for FCE. Mr Wilson said that the clause was capable of interpretation by application of a "reasonable person" test. He added that it was economically rational for the parties to rely upon an interpretation by the Court, rather than bear the cost (in time) of spelling out the test in detail when faced with urgent need to reach a concluded contract.
It is rare in modern times for a Court to throw up its hands and say that an essential express provision of an intended commercial contract is so vague that it cannot be given a meaning. Although it may be a considerable task, we are satisfied that the term "economic" can be interpreted by the Court guided by expert evidence. Wild J has shown how that may be done. We are quite sure that if the parties had implemented the HoA without settling the meaning of the preferred customer provision and after 2011 a dispute had arisen over FCE’s refusal to deliver gas at the price payable at that time, the Court, if called upon to declare the rights of the parties, would have gone through an exercise similar to that undertaken by Wild J. By following a series of steps, the Court would determine what was and what was not to be taken into account in deciding whether FCE could deliver economically. It would not be easy – there might be differences of judicial opinion, as there frequently are on questions of interpretation – but, in the end, we are sure that an appropriate meaning could be found. The word "economic" has built in to it the standard to be applied. It is in this context ambiguous but not uncertain. The parties accordingly reached an agreement on this clause.
THE CONDITION FOR FCE BOARD APPROVAL
We have concluded that the Board was merely approving progress made to date in the attempts of the negotiators to reach agreement on the terms which they considered to be essential for a binding agreement. The instructions to challenge the preferred customer clause do not read like an unconditional approval. Therefore, if we had been of the view that the HoA was intended to be a binding agreement, we would have held that the Board’s approval was conditional upon re-negotiation of the preferred customer clause. We would not have considered ECNZ estopped by Mr Taylor’s advice on 13 March from relying upon the Board’s qualification of its approval. FCE does not appear to have acted in relation to the subsequent negotiations any differently from the way in which it would have acted had it been told of the qualification. It knew that ECNZ wanted the term clarified and it responded accordingly. The only way in which it was suggested that FCE might have acted differently related to the completion of the WMC purchase. By the time of the Board approval, FCE was committed to the acquisition. Its bid had been accepted. We were not referred to any evidence suggesting that FCE would have refused to allow ECNZ to participate had it known of the Board’s qualification. To have done so would have required FCE to make a greater commitment to Kupe than it apparently felt comfortable with.
THE BEST ENDEAVOURS OBLIGATION
On the basis that we have found that the HoA is not a binding agreement, the argument that the "Time Frame for Proceeding" clause by itself obligates ECNZ as a matter of law to use all reasonable endeavours to agree a full sale and purchase agreement within three months seems to us quite hopeless. The Judge found that it could not be binding if the HoA was not binding and there has been no cross-appeal on that point. But, even if the clause were part of an otherwise binding HoA, we would have difficulty in seeing that, because of the nature of the "not agreed" items, it could create any legally enforceable obligation to negotiate further. In Little v Courage Ltd (1994) 70 P & C R 469, 476 Millett LJ said:
An undertaking to use one’s best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use one’s best endeavours to agree, however, is no different from an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable legal obligation.
The end in view (the full agreement) is insufficiently precise for the Court to be able to spell out what the parties must do in exercising their reasonable endeavours. Where the objective and the steps needing to be taken to attain it are able to be prescribed by the Court, a best endeavours or reasonable endeavours obligation will be enforceable. That may be possible in relation to some contractual negotiations of relative simplicity and predictability (Coal Cliff Collieries). But a negotiation of complex contractual terms is such a variable matter, both in process and in result, and so dependent on the individual positions which each party may reasonably take from time to time during the bargaining, that it is impossible for a Court to define for them what they ought to have done in order to reach agreement. The Court neither knows the result nor is able to say how each offer should have been made, nor whether it should have been accepted. If ECNZ had sat on its hands and absolutely declined to bargain – which was not the case – it would have been necessary, in order to provide a remedy to be able to state what, as a minimum, it was obliged to do as part of the bargaining process. That may have been possible, as can be seen from the presumption for good faith bargaining now to be found in s32 of the Employment Relations Act 2000 and the Code promulgated pursuant to s35 of that Act, but in fact ECNZ did actively participate in a lengthy bargaining process.
We take one item at random – the extension of the force majeure clause to the National Grid. Did FCE have to agree to it? If so, on what terms? And if FCE was obliged to come to terms on this item, could it seek in return a price adjustment, and by how much? We have no idea how a Court could resolve these questions – by what standards they would be considered and how value would be attributed to the particular covenant which a party might be seeking. A meaning can, with some trouble, be given to "economic", but the task of assessing the parties’ performance during a negotiation of this kind and determining whether a position taken by one side – perhaps influenced by the current position of the other – was or was not consistent with "reasonable endeavours", is beyond the expertise of the Court. In Coal Cliff Collieries, notwithstanding Kirby P’s view that some contracts to negotiate in good faith may be enforceable, he expressed his conclusion that a Court would be extremely ill-equipped "to fill the remaining blank spaces" which a lengthy negotiation between the parties to a mining contract had failed to remove. He pointed out that the Court could not appeal to objective standards or its own experience. At stake were commercial decisions "involving adjustments which would contemplate binding the parties for years and deciding issues that lie well beyond the expertise of the court". How mining executives, attending to the interests of their corporation and its shareholders, might act in negotiating such a complex transaction was "quite unknowable" (p27). Those remarks are entirely apposite to the present case.
As we do not know what ECNZ was obliged to do towards a full agreement, we are unable to say that it in fact acted unreasonably in circumstances where the HoA was not legally binding and where ECNZ was entitled to seek a firm supply of gas until 2017. Notably FCE did not complain until well afterward. FCE also faces the difficulty that bargaining continued for much longer than three months.
For these reasons, by majority, we allow the appeal and set aside the declaratory order made by the High Court.
The respondent must pay the appellant’s costs on the appeal in the sum of $20,000 together with its reasonable disbursements, including travel and accommodation costs to be fixed by the Registrar in the absence of agreement.
I do not doubt that when the senior executives signed the Heads of Agreement (HoA) on behalf of Fletcher Challenge Energy Ltd (FCE) and Electricity Corporation of New Zealand Ltd (ECNZ) on 28 February 1997 they intended to be bound by that agreement. The HoA was to be binding until superseded by a full agreement which the parties contemplated would, with "all reasonable endeavours", be completed within a relatively short time. Arguments and evidence that the HoA was intended to be binding are overwhelming. Nor was the HoA so incomplete or uncertain that the courts would decline to enforce it.
It follows that I would dismiss the appeal and endorse the declaratory orders made by Wild J in the Court below to the effect that the HoA is a valid and binding contract for the sale and purchase of gas in accordance with its terms. I would also support his finding that ECNZ is in breach of its obligation under the HoA to use all reasonable endeavours to agree to a full agreement. While, as will subsequently appear, there are certain aspects of his judgment with which I am not wholly in accord, I consider Wild J’s judgment to be a first-rate judgment. His analysis of the issues and relevant law, his findings of fact following a lengthy hearing, and his reasoning in arriving at his decision are to be commended.
What happened in this case can be discerned with tolerable certainty. The Chief Executives of FCE and ECNZ deliberately set out to reach accord on a number of matters. They negotiated a broad agreement which was recorded in their letter of 28 February 1997. It provided, inter alia, the framework by which a binding agreement would be concluded relating to a long-term agreement for the supply of gas from FCE to ECNZ. The senior executives did their Chief Executive’s bidding and negotiated and signed the HoA. They reported their success back to the Chief Executives. The Chief Executives shook hands on the deal. They had a drink together to celebrate their success. Both parties acted on the HoA and acknowledged that the HoA was intended to be binding. Negotiations were set in train to complete a full agreement. But market conditions changed significantly. The price of electricity dropped and it appeared that it would remain depressed for a number of years. ECNZ no longer regarded the agreement as commercially favourable. It set about making demands in negotiation which FCE considered unrealistic and which it could not possibly agree to. Negotiations stalled. When challenged by FCE, ECNZ sought to withdraw from the agreement. It raised numerous arguments designed to avoid liability, many of which lacked sufficient substance to be pressed on appeal in this Court.
At trial, Mr Frow, ECNZ’s Chief Executive, who had negotiated the letter of 28 February and duly reported to the Board of ECNZ that the HoA had been concluded subject to the approval of the Board, was not called to give evidence. Nor was Mr Taylor, ECNZ’s General Manager of Business Development, who had been the chief negotiator for ECNZ in negotiating the terms of the HoA with FCE’s negotiators, called to give evidence. Mr McLaughlin, ECNZ’s other negotiator was called, but his evidence was rejected by the trial Judge in favour of what was said in a contemporaneous memorandum from Mr Taylor to the Board which Mr McLaughlin had prepared. Mr Cushing, the Chairperson of ECNZ, was not called to give evidence. No member of the Board was called to give evidence. Nor were critical areas of evidence given by FCE’s witnesses challenged in cross-examination by ECNZ’s counsel. Essentially working backwards from the alleged incompleteness and uncertainty of the HoA, ECNZ argued that the parties could not have intended to enter into legal relations and be bound by the HoA. Rather than negotiate an end to the agreement, ECNZ sought, I believe, to take advantage of the residual judicial "negativism" or aversion to less than comprehensive contracts still evident in this area of the law.
I therefore differ from the majority’s view that the HoA is not a binding agreement. I have had the advantage of reading the draft judgment prepared by Blanchard J, and have been advised that the other members of the Court will join in that judgment.
I should pause, however, to indicate the areas or points in the majority’s judgment with which I am in agreement. I agree –
May and Butcher Ltd v The King  3 KB 17n should no longer be regarded as a sound authority. (Majority judgment, para  to ). The fact that the case has withstood challenge for so long is a triumph of servitude to precedent over the recognition of commercial realities and plain logic. (See D W McLaughlin "Rethinking Agreements to Agree" (1998) 18 NZULR 77).
The matters listed in the Fletcher/Frow letter of 28 February as essential terms for the HoA to be a binding agreement were illustrative, and the negotiators had the authority to determine what was essential. (Paras  and ). The force majeure provision which was "not agreed" related to the National Grid only. (Paras  to ).
The HoA is not so incomplete as to be unenforceable because of the absence of a provision dealing with force majeure or the prepaid gas relief, or the omission of finite agreement as to the K factor. (Paras  to ).
The HoA is not so uncertain as to be unenforceable in respect of the clauses dealing with the maximum hourly quantity, price adjustment and the preferred customer clause turning on when delivery to be regarded as "economic". (Paras  to ).
THE CORRECT APPROACH
I would be less than frank if I did not admit that I find the reasoning of the majority relating to the question whether the parties intended to be bound frustrating. It seems to me that the oft-repeated rhetorical question of Mr Craddock, senior counsel for ECNZ, during the course of oral argument has had an impact disproportionate to its merit. Confronted with the formidable arguments and evidence which indicate that the parties intended to be bound by the HoA, Mr Craddock would respond; "But, bound to what?". I believe that the correct approach became confused.
No case law need be cited, beyond that relied upon by Wild J, to arrive at the correct approach. It is long-established. The first question is whether the parties intended to be bound at the time of their agreement. The intention of the parties is paramount and the courts must give effect to that intention. The second question, which follows if they did intend to be bound, is whether, notwithstanding that contractual intention, the contract is so incomplete or uncertain as to be unenforceable at law. (See D W McLauchlan, supra, at 78). Of course, the fact matters have been deferred for future agreement or a number of significant matters have not been agreed may be an indication that the parties did not have the requisite contractual intention. But where there are otherwise compelling arguments and evidence pointing to that contractual intention it should be accepted that the parties have struck a bargain. The absence of matters which have been deferred are then relevant to the second question, that is, whether the contract as it stands is so incomplete or uncertain as to be incapable of being given legal effect.
Adhering to this approach serves the law’s purpose. It enables the law to give effect to the reasonable expectations of commercial men and women by giving legal effect to their bargains. The law, as Lord Tomlin observed in Hillas & Co Ltd v Arcos Ltd  All ER Rep. 494, at 499, does not then incur the reproach of being the destroyer of bargains. Bargains are the essence of commerce and they should not be frustrated by the courts unless the incompleteness or uncertainty of the bargain renders the contract incapable of enforcement. At issue, is the autonomy of the will of the parties. The courts cannot work wonders, but they can positively seek to serve the interests of commerce and the reasonable expectations of commercial men and women by facilitating their deliberate and intended transactions.
With respect, I believe that the majority’s decision fails the law in this regard. Closely analysed, their decision rests upon the fact that two matters stipulated in the agreement; force majeure relating to the National Grid and pre-paid gas relief, were marked "not agreed" in the HoA. (See paras  to ). Yet, when addressing the question whether the terms agreed upon by the parties were sufficient in law, the majority hold that the absence of either provision would not render the HoA unenforceable. (I deal later with the supposition that because the negotiators marked these clauses "not agreed" the parties must have considered them essential). The failure to reach agreement on the force majeure provision did not mean that the contract was legally "incomplete". (See paras  to ). Similarly, the agreement could operate without a provision relating to pre-paid gas relief. (See para ). The result is incongruent. The HoA is denied binding force essentially because the parties did not agree on two provisions, the absence of which did not render the parties’ agreement incomplete or uncertain!
HEADS OF AGREEMENT
There is another respect in which I consider that commerce is ill-served by a decision denying the HoA binding force. Heads of agreement are an integral part of commercial activity. They, and the regularity with which business men and women resort to them, are a commercial reality. Sometimes they are complete. More often than not, however, they leave important matters to be decided later. As Lord Lloyd (then Lloyd LJ), who was for a time a distinguished Judge of the Commercial Court in the United Kingdom has stated, parties may agree to be bound now while deferring important matters to be agreed later. "It happens," he said, "every day when parties enter into so-called ‘heads of agreement’". See Pagnan S.p.A v Feed Products Ltd  2 Lloyd’s Rep 601, at 619.
Experience indicates why heads of agreement are an essential feature of commercial activity. Commercial agreements are frequently complex documents, but what is crucial is the essence of the bargain. Doing the initial deal or bargain is the task of senior managers. They are the deal-makers. Often the circumstances require the bargain to be "struck under great pressure of events and time" (Johan Steyn, "Contract Law: Fulfilling the Reasonable Expectations of Honest Men" (1997) 113 LQR 433, at 439). Heads of agreement suffice to complete a binding transaction. The managers, the deal-makers, then move to other productive areas of the company’s business, leaving the core agreement to be expanded into a comprehensive document by subordinate executives and the parties’ legal advisers.
Naturally, the chief executives or deal makers will focus on the essential elements of a proposed agreement. Contingencies will frequently be incompletely dealt with in that the contract will fail to specify a party’s obligation on the occurrence of a future contingency or fail to address a future contingency at all. (See David Goddard, "Long-Term Contracts: A Law and Economics Perspective" (1997) NZ Law Rev 423, at 426). Provisions to cover both forms of contingency deal with the allocation of risk and, if no explicit provision is agreed, the parties accept the risk involved. By and large essential terms do not relate to contingencies. There are various reasons why this is so: by definition, the contingency may be a remote possibility and may never occur; the sensible outcome, should the contingency occur, may be able to be determined by agreement or, failing agreement, by resorting to the common law; the appropriate provision may be a "boiler plate" clause or one that can readily be determined by reference to industry practice; or the parties may simply not be prepared to risk jeopardising a favourable bargain, the essential elements of which have been agreed, by arguing about a contingency which is remote and may never occur. Thus, it is not uncommon for commercial parties to enter into heads of agreement which have gaps, but which are intended to be binding pending the completion of a more comprehensive agreement. Where the heads of agreement are not intended to be binding, but only the forerunner to a formal contract, commercial prudence (if not the sense of self-preservation of the executives carrying out the negotiation) will ordinarily dictate that this conditional status be clearly spelt out.
There is nothing novel in this perception. Take, for example, Lord Wright’s speech in Hillas & Co Ltd v Arcos Ltd, supra. The learned law Lord affirmed, at 503, that "[b]usiness men often record the most important agreements in "crude and summary fashion", and (at 504) that "in contracts for future performance over a period, the parties may not be able nor may they desire to specify many matters of detail, but leave them to be adjusted in the working out of the contract." Thus, the notion that the adversarial ethic prevails in commercial negotiations relating to a prospective deal is misconceived. Indeed, in the context of a prospective deal it is a myth. More often than not business men and women approach such negotiations with a "win/win" objective and outlook. A bargain can be struck which, certainly overall and notwithstanding the inevitable and unresolved risks involved, will be perceived to be advantageous to both parties.
Mr Craddock sought to make much of the argument that the parties could not feasibly have intended to create legal relations by a mere heads of agreement in respect of a contract allegedly worth 1.2 to 1.8 billion dollars spanning a period of 17 years. They would need certainty on numerous risk and mitigation provisions so that financiers could rely on the contract as guaranteeing a secure supply of gas. This argument prompts a number of points.
First, the submission runs counter to the description of heads of agreement and their important function in commerce which I have just set out. I do not doubt that it may appear surprising to persons who are not engaged in commerce that such a vast matter can be concluded in such a short form. But it is not surprising to anyone with commercial experience, direct or indirect, who has seen such deals completed with a shake of the hands and a heads of agreement, or even an exchange of letters.
Secondly, it is to be borne in mind that the negotiators envisaged that, with all reasonable endeavours, a "full" agreement would be able to be completed within three months. There is no reason, therefore, why they should not have intended the HoA to have binding force pending the completion of the full agreement. Failure to reach that agreement does not change their intention to be bound by the HoA.
Thirdly, the parties themselves contemplated that an HoA containing all essential terms would be sufficient to record a binding agreement. The majority agree that it is clear from the Fletcher/Frow letter that ECNZ and FCE embarked on the negotiations with every intention of completing a binding deal. (Para ). If, then, this was their intention at that time, they must have accepted that a binding agreement worth in excess of a billion dollars and spanning 17 years could be completed by way of a heads of agreement.
Hence, heads of agreement, unless qualified to the contrary, are what they purport to be, the "heads" of the "agreement" reached. If heads of agreement entered into in the circumstances of this case are not to be honoured by the parties and enforced by the courts a valuable and essential commercial tool will be seriously prejudiced.
Consequently, I am reluctant to endorse any approach which would tend to restrict the utility of heads of agreement. Of course, the courts can say that, if parties wish to give effect to their intention to be bound, they can expressly say so, and if they do not say so they cannot blame the courts for not giving effect to their intention. But such a response is outmoded. It suggests that the law will lay down the rules and commerce can abide by those rules or come asunder; not that the law should seek to serve the needs and realities of commerce. No doubt those of a formalistic persuasion will applaud such a negative approach on the ground that it provides "certainty and predictability" in the law. But it will never be explained how it is that denying parties who have manifested an intention to be bound the binding force which they seek for their contract facilitates certainty and predictability. On the contrary, one would think that if parties manifest an intention to be bound they deserve the certainty of knowing that the courts will recognise their intention and endeavour to give effect to that intention.
One further point can be made under this heading. No one would suggest that the courts should "make" the contract for the parties. Of course, the courts cannot and must not do that. Judges must be scrupulous not to fill gaps in the contract in a way which may not reflect the intention of the parties. But this caution should not be pressed to the extent that it becomes an argument in terrorem. The caution is more critically relevant to the second question referred to above, that is, whether, notwithstanding the parties’ contractual intention, the contract is so incomplete or uncertain as to be unenforceable at law. A court is not making the contract or filling in a gap in the contract should it determine that the parties intended to be bound. Of course, the courts must not hold that a contract is binding where the parties have no intention to be bound, but it determines that question on the basis of an objective assessment of the intention of the parties and not on the basis that one party is able to specify a list of matters which have not been decided. As already stated, the fact that there are matters which have been deferred for future agreement or that a number of significant matters may not have been agreed may be an indication that the parties did not have the requisite contractual intention. But sight should not be lost of the fact that the focus of the initial question is the intention of the parties and not the content of the contract.
I would respectfully add that it is just as important not to "remake" the intention of the parties when determining whether or not they intended to be bound. The parties’ actual intention to be bound and some so-called "objective" intention not to be bound cannot comfortably coexist.
INTENTION TO BE BOUND – A DISCRETE JURAL ACT
As I consider it is clear that the parties intended to be bound when they completed the HoA, I do not propose to enter at length into the debate whether that question is to be determined objectively or subjectively. The majority state that the question is to be determined objectively. (Para ). I consider, however, that much of the objective/subjective dichotomy is misplaced in the present context. The question whether the parties intended to create legal relations cannot be determined by simply examining the HoA, in its matrix, as if the question was one of contractual interpretation. The nature of the question; did the parties intend to enter into a binding agreement, makes it necessary to go beyond the agreement itself. As Lloyd LJ said in the Pagnan case, supra, at 619, "It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant". They are the "masters of their contractual fate."
Certainly, the exercise cannot be subjective in the sense that the court listens to the opposing claims of each party and, as a matter of credibility, prefers the evidence of one party to the other. Some objective reference is required to determine the parties’ true intention outside the credibility of their competing claims. That objective reference can only come from the commercial context or purpose of the agreement, the agreement itself, and reliable evidence extrinsic to the agreement.
I would reiterate my sharp distinction, however, that the question whether the parties intended to be bound is not to be determined objectively in the way that the interpretation of a contract is determined objectively, as Mr Craddock urged. With contractual interpretation the focus can be directed at the agreement. The wording can be vested with an objective meaning. With the present exercise the focus must be directed at the intention of the parties for it is their intention and not the meaning of the agreement which is in issue. Further, the rationale for the objective approach in interpreting contracts are the desirability of obtaining certainty in commercial dealings and the need to provide a workable law for those situations where the parties may not have had any intention on the point at all and it is necessary, if the contract is to be saved, to impute an intention to the parties based on the wording which they have adopted. (See Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617, at 632). Neither rationale applies to the formation of a contract.
Consequently, I feel secure in holding that the question whether the parties intended to create legal relations is not to be approached with the same evidential restrictions as apply to contractual interpretation. Extrinsic evidence is both relevant and probative to the question to be decided. Prior negotiations between the parties and the subsequent conduct of the parties may be valuable, and even decisive. There is no reason why the courts should adopt a different approach from the settled approach which is regularly applied where the rectification of a contract is in issue. (Professor Treitel states that the question of contractual intention is, in the last resort, one of fact. Sir Guenter Treitel, The Law of Contract (10th Ed - 1999) at 157.)
An aspect of this point which I found perplexing was Mr Craddock’s rooted hostility to any reference to internal memoranda or documents. His hostility has been reflected in the majority’s view that little weight should be placed on internal documentation. (Paras  and ). I believe this attitude may reflect thinking conditioned by the objective approach to contractual interpretation. I would have thought that, subject always to a close scrutiny of the particular documents, internal memoranda would be more likely to confirm the parties’ actual intention than communications between the parties. As Mr Wilson who appeared for FCE pointed out, communications may be self-serving or affected by other considerations. By and large, there would seem to be no sound reason why internal memoranda should not be referred to in order to ascertain whether the parties intended to enter into legal relations.
Apart from a brief comment later, however, I do not propose to specifically emphasise any internal memoranda or documents as evidence of the parties’ intention other than those documents which were completed by ECNZ’s senior executives at or about the time the HoA was completed and the ECNZ Board approved the agreement. These documents provide concrete evidence that it was intended and accepted by ECNZ that the HoA was a binding agreement. It was the deal. Even then, I believe that, without reference to this extrinsic evidence at all, or to the following evidence relating to the subsequent conduct of the parties, it is plain that the HoA was intended to be a binding contract having regard to the commercial context and purpose of the agreement, the terms of the Fletcher/Frow letter, the terms of the HoA itself, the re-signing of the Fletcher/Frow letter, and the ECNZ Board’s approval of the HoA pursuant to the expressly stated condition precedent.
To sum up, then, my approach to the question whether the parties intended to be bound is the same, or substantially the same, as the approach succinctly articulated by McHugh JA in Air Great Lakes Pty Ltd & Others v K S Easter (Holdings) Pty Ltd  2 NSWLR 309, at 337:
The intention to create a legally binding contract although a matter to be proved objectively, may, nevertheless, in my opinion, be proved by what the parties said and did as well as what they wrote. The intention may be proved in that way even in a case where the document is intended to comprise all the terms of the bargain. This is because the intention to be bound is a jural act separate and distinct from the terms of their bargain.
On the basis of the arguments and evidence which is available, I believe that in this case the objectively assessed intention of the parties accords with their actual intention. While it may be stating the point too strongly, the suggestion of Hope JA in the Air Great Lakes case, supra, at 319, finds favour with me:
If the mutual actual intention of the parties who have signed a document is that it should not have contractual operation, it would be fraudulent on the part of either of them to seek to enforce it as a contract. Consistently, if the mutual actual intention was that there should be a concluded contract, it would be fraudulent to deny that intent ....
THE PARTIES INTENDED TO BE BOUND
I turn now to examine the arguments and evidence of the parties’ intention which I believe to be overwhelming. The headings are listed in the table of contents preceding this judgment.
(1) The commercial context and purpose of the HoA
In my view, the commercial context and commercial purpose of an agreement are critical considerations in determining whether it was intended to be binding. In this regard the commercial context and purpose of the HoA indicate that the parties must have intended to be bound by that document. An HoA which was no more than a step in the process of negotiations or in the nature of a progress report from the negotiators is not consistent with the commercial context and would not have served the commercial purpose which the parties sought to achieve.
Both FCE and ECNZ were in a difficult position. The supply of commercial oil and gas in New Zealand is limited. FCE held a 68.5 per cent interest in the largest oil and gas field, Maui, but that field was expected to be depleted by 2009. The company was therefore bent on acquiring a larger interest in the Kupe field which was expected to last until 2011. It wished to purchase the 40 per cent interest held by the Western Mining Company Ltd. But Western Mining sought to sell that interest by open tender. A further 20 per cent interest which FCE acquired at the time from two other parties did not eliminate its need to acquire this share. But the acquisition would place FCE in a dilemma. If successful in requiring Western Mining’s 40 per cent share, the company would then hold a 62.5 per cent share in Kupe. This share represented a larger capital exposure than was prudent or FCE desired. Hence, the attraction of an agreement with ECNZ to divide the Western Mining share should either company be the successful bidder. Either that or, in order to protect its existing interest and its future supply of gas, it had to be the successful bidder itself.
For its part, ECNZ had been subject to restrictions on its generating capacity imposed by the Government in 1994 in an effort to promote competition in the electricity market. As a result of further restructuring, a competitive market had been established by the end of 1996. But ECNZ was left short of gas to fuel its remaining power stations, in particular, the Huntly station which was connected to the Maui field. Its supply to that station, which was the station’s only supply, was due to end in 2002. ECNZ therefore initiated discussions with FCE to obtain a gas supply for Huntly beyond that date. Negotiations continued throughout 1996, but these negotiations had not resulted in agreement because of FCE’s inability to supply the gas ECNZ needed in the long term.
The acquisition of the interest in Kupe was therefore critical to both companies. Hence, the arrangement evolved whereby FCE and ECNZ would resubmit their previous bids and then, irrespective of which company succeeded, participate in the additional supply on an agreed percentage basis. The arrangement was important to both companies; to FCE if it was to secure the larger interest in Kupe, and to ECNZ if it was not to be put in the position of having to purchase gas from FCE in the future on FCE’s terms. (See majority’s judgment, para ).
Without doubt, the deferred open tender inspired a concentrated effort by both companies to reach agreement. Their respective Chief Executives met and reached the agreement recorded in the Fletcher/Frow letter dated 28 February 1997. The parties were given a day to complete a heads of agreement, including all essential terms for it to be a "binding agreement", for long-term gas supply. The letter embraced not only the agreed tendering and completion of the HoA, but also the development of Kupe in a manner "consistent with each party meeting its obligations" under the HoA.
Thus, the commercial context was such that FCE and ECNZ had to seek an immediate binding agreement. It was to the commercial advantage of both to do so. The shared basis of the Western Mining interest was critical to both companies, and the commercial purpose evident in the Fletcher/Frow letter would not be achieved unless the parties were able to complete a binding HoA. Neither the commercial context nor the purpose of the agreement left any scope for a heads of agreement that was nothing more than a step in the process of negotiations or a progress report from the negotiators on the course intended to be followed in order to complete the agreement. An interim document of this kind would not have completed the arrangement contemplated by the Fletcher/Frow letter, and it would not have achieved the commercial advantage both parties regarded as essential.
(2) The Fletcher/Frow letter
The HoA was part of the wider arrangement recorded in the Fletcher/Frow letter. The terms of that letter are therefore of assistance in determining the intention of the parties. It records the outcome of conversations between the two Chief Executives and sets out the "agreed proposal". The conversations followed a meeting between Mr Kirk, the General Manager Marketing and Commercial of FCE and Mr Taylor, the General Manager, Business Development of ECNZ (the ultimate signatories to the HoA) in late January or early February. Mr Taylor is said to have advised Mr Kirk that ECNZ was very interested in developing a joint approach with FCE to obtain the Kupe interest, provided that FCE also entered into a gas supply contract with ECNZ after that company’s existing contract with another supplier came to an end in 2002.
The letter first confirms the bidding agreement and the respective share each company would take of Western Mining’s interest should either of their bids be accepted. It was agreed that each party would own and pay for the shares or underlying assets in the proportions of 25.75 per cent to ECNZ and 14.25 per cent to FCE. Detailed points follow to govern the relationship of the parties in this event. (Para (i)). But this agreement does not stand alone. Part of the "agreed proposal" is the requirement that by the end of the day the parties will have entered into the HoA for long-term gas supply. (Para (ii)). The HoA is to include all the essential terms for it to be a "binding agreement". The HoA does not make the agreement conditional on anything other than Western Mining’s stake in Kupe being secured by either FCE or ECNZ and the ECNZ Board’s approval. Then, in para (iii), it is recited that both ECNZ and FCE "desire the development of Kupe in a manner which is consistent with each party meeting its obligations under the agreement in (ii) above," that is, the obligations of each party under the HoA. Finally, the parties agree that in the event of any ambiguity or uncertainty Messrs Frow and Fletcher will interpret the current intent, and their determination is to prevail.
It is difficult to read this letter and not conclude that the parties intended the HoA to be binding. Lengthy negotiations had taken place the previous year which, although unsuccessful, had resulted in a significant measure of agreement in the "term sheet" which had been prepared by the negotiators. Wild J specifically rejected the evidence of Mr McLaughlin and held that most of the terms in the HoA were drawn from the term sheet. (Para ). The groundwork done in those negotiations made it possible for the parties to conclude the HoA over two days. (Para ). But there was, of course, nothing binding about the term sheet. In contrast, the HoA was to be binding. Had a binding HoA not been completed there would have been no deal. Both FCE and ECNZ would have been free to submit higher bids. The letter did not contemplate that the HoA would be a step in the negotiations or provide what was in effect a progress report from the negotiators. This document was not a term sheet.
I reject Mr Craddock’s attempt to argue that the various paragraphs in the Fletcher/Frow letter are to be looked at separately, that is, as providing three discrete obligations. They are clearly interrelated. Apart from all else, what was the point in requiring the HoA to be concluded in such urgency - by the end of the day - if it was not to be a pre-requisite to resubmitting the prior bids? One only has to posit the situation where, having resubmitted their bids in accordance with the arrangement in para (i), FCE became the successful tenderer and then refused to supply ECNZ with gas as agreed in the HoA, to see that this submission is untenable. Indeed, had FCE adopted this attitude, ECNZ’s howl of indignant rage would have been heard in London without the formality of an appeal to the Privy Council sitting in that City.
(3) The terms of the HoA
The terms of the HoA also indicate that the parties intended to be bound. They headed their document "FCE/ECNZ Gas Contract: Heads of Agreement". Then, two conditions precedent are stipulated. The first presupposes that the FCE/ECNZ Kupe joint venture will secure the 40 per cent stake being sold by Western Mining. This condition is essential to provide access to the gas which is then made subject to the HoA. The second condition precedent is ECNZ’s Board approval. During the course of negotiating the terms of the HoA, the ECNZ negotiators consulted with members of the ECNZ Board as to the content of the HoA. They reported back that they were comfortable with the terms agreed but insisted that they still required the condition precedent. As Wild J observes, there was no point in including conditions precedent if the parties did not intend the HoA to bind them upon execution. A condition precedent was simply not necessary if either party was free to regard the HoA as a step in the negotiating process or something in the nature of a progress report from the negotiators. There is considerable point in the rhetorical question originally asked by FCE and recorded by Wild J (para ) to this effect: what was intended to become unconditionally binding once the ECNZ Board had approved the HoA?
The HoA is a relatively detailed heads of agreement. Throughout, language appropriate to an agreement intended to be binding is consistently utilised. There are no qualifications, such as agreement to use best endeavours, in relation to any of the obligations set out in the document (other than to agree to a "full" agreement). The obligations are stipulated in absolute terms. All but two terms are "agreed". (See below). Under the heading "Time frame for proceeding", FCE and ECNZ are to use all reasonable endeavours to agree to a "full sale and purchase agreement". The HoA is not made subject to that agreement and it is described as a "full … agreement", suggesting an elaboration of what has been agreed. The time frame refers to the three months by which the negotiators expected the full agreement to be completed. The fact it was thought a period of three months was all that would be necessary to complete the "full" agreement itself indicates that the negotiators did not anticipate any real problems in converting the HoA into that agreement. Because the HoA would stand, the essential bargain would stand and the area for further dispute would be substantially reduced.
Finally, the agreement concludes with the words "Agreed (except where indicated)." The negotiators saw fit to insert these words at the end of the HoA and above their signatures. They were strictly unnecessary as the signatures would have indicated agreement on all terms other than those marked "not agreed" and "to be agreed". The natural meaning to ascribe to the phrase is that, other than in the excepted respects, the rest of the HoA has been agreed, that is, agreed in the sense of being binding on the parties. To restrict the phrase to meaning agreed to be essential or agreed for further negotiation would not make sense. What point would there be in noting general agreement and excepting the two provisions that had not been agreed if it were intended that the whole HoA was not agreed?
(4) The re-signing of the Fletcher/Frow letter
The amendments made to the Fletcher/Frow letter which was re-signed by the Chief Executives on 12 March are recounted in the majority’s judgment. (Para ). I can agree with the majority that the need to avoid any criticism from the Commerce Commission would have been the reason for making the amendments and backdating the letter. But I cannot agree that it does not provide legitimate evidence of the parties’ intention. The letter stipulating that the parties would enter into an HoA specifying "all essential terms for it to be a binding agreement" was re-signed after the HoA had been signed. At that time the Chief Executives were fully aware of the contents of the HoA. They knew that two provisions had been marked "not agreed" and one provision had been noted "to be agreed". But they also knew exactly what had been agreed and must have been satisfied that all terms essential for it to be a "binding agreement" had been included in the document. Why would the Chief Executives have re-signed the letter in the same form on 12 March if the HoA had failed to meet the critical requirement which they had stipulated in their original letter of 28 February?
Conversely, if the HoA had been no more than a step in the negotiating process or in the nature of a progress report from the negotiators it would simply not have fulfilled the Chief Executive’s explicit requirement that it be a binding agreement. The re-signing would simply not have made sense. Indeed, one may also question why the parties would have re-signed and backdated an amended letter to meet a perceived concern about the reaction of the Commerce Commission if it had been no more than a record of the parties’ negotiations toward a full agreement.
(5) FCE and ECNZ act on the agreement
(i) The parties resubmit their previous tenders
Once the HoA had been signed the parties resubmitted their previous tenders as had been agreed in the Fletcher/Frow letter. This action was dependent on a binding HoA being completed. But for this agreement it is certain that, having regard to the importance of securing the supply of gas, both parties would have submitted a fresh and undoubtedly higher bid. In following the agreed course, both parties clearly relied upon the agreement which had been reached.
Suppose that, notwithstanding this agreement, FCE (or ECNZ) had submitted a higher bid and been successful in obtaining the full 40 per cent interest in the Kupe field up for tender. Suppose, too, that when challenged, FCE (or ECNZ) had then claimed that they had been free to do so because the HoA was not a binding agreement. It would, I believe, have quickly become clear that a binding agreement was pivotal to the interrelated agreement recorded in the Fletcher/Frow letter. ECNZ required a supply of gas. This could only be obtained from the Kupe field or from FCE. If the HoA had not been binding, ECNZ exposed itself to the risk that FCE would out-bid it. Having lost access to the Kupe field it would be dependent on FCE to supply it with gas for the long-term on terms that FCE would have been in a position to dictate. (See majority judgment, para ). ECNZ, as with FCE, clearly accepted that the HoA was binding and acted upon it.
(ii) The parties give effect to the agreed shares in Kupe
Submitting the previous bids was not all that was done by the parties following the completion of the HoA. Mr Kirk said in evidence that ECNZ’s negotiators had been adamant during negotiations that the HoA must be agreed and binding before ECNZ would agree to the sharing of the Western Mining’s interest. Hence, with the HoA completed and approved by the ECNZ Board, the parties moved to complete this aspect of the agreed proposal.
Two days after the HoA had been approved by ECNZ’s Board, ECNZ entered into an agreement with Western Mining for the sale and purchase of the shares. This agreement, dated 14 March 1997, was subsequently novated by a Deed of Variation and Novation dated 27 March 1997 between Western Mining, FCE and ECNZ. Pursuant to this deed, FCE transferred 64.375 per cent of its rights under the 14 March agreement to ECNZ. It was specifically provided that ECNZ was to be treated as an original party to the 14 March agreement to the extent of its 64.375 per cent interest. Settlement of the purchase of Western Mining shares was effected on or about 27 March 1997. A company restructuring was then undertaken. Among other steps, Western Springs’ name was changed to Kupe Development Ltd. Shares in that company were held by ECNZ in the proportion of 64.375 per cent to 35.655 per cent by FCE. The parties’ efforts had been focused on this restructuring, and the three months contemplated for the completion of the HoA had elapsed. With this part of the agreed proposal concluded, however, the parties turned to the process of drafting the full agreement. (See para  below).
It would seem reasonably certain that this aspect of the "agreed proposal" in the Fletcher/Frow letter had been effected on the basis that the HoA was binding. The transfer of the shares from FCE to ECNZ was not suspended until the full agreement had been completed. Yet, that would have appeared the logical course if it had not been accepted that the HoA was binding. Of course, FCE did not want the capital exposure involved in retaining the full interest, but it must be open to question whether the company would have divested itself of the major proportion of the interest it had acquired if that step had not been seen as part of the agreed proposal, including a binding HoA. It would seem to me that the only answer which ECNZ has to this point is Mr Craddock’s argument that the three paragraphs in the "agreed proposal" in the Fletcher/Frow letter were not interrelated. I have already pointed out that this argument is untenable. (See paras  to ).
(6) ECNZ Board approval
Under the heading "FCE Gas Contract", the minutes of the meeting of the ECNZ Board on 12 March 1997 indicate that the Board "questioned" the definition of the "preferred customer supplied" basis and whether it was "appropriate that FCE should deliver gas during the final period only if the delivery was economic". It concluded that the contract was an "appropriate contract to be included in ECNZ’s fuel portfolio". It is evident from the material before the Court that ECNZ had been considering its long-term fuel objectives and strategy for some time and that the arrangement, of which the HoA was a part, fitted in with that objective and strategy.
The resolution of the Board is set out in Wild J’s judgment (para ), and need not be repeated. Suffice it to say that it was resolved in para (i) that the HoA be approved subject to "challenging" the provision that FCE should only deliver gas in the period 2011 to 2017 if such delivery were to be economic.
The second paragraph of the resolution, para (ii), should not be overlooked. A Committee of the Chairperson and two Board members was appointed to approve the final contract and to authorise the execution of it. Other documents before the Court record the emphasis which ECNZ placed on obtaining the approval of the full Board to the long-term supply contract. (See, for example, Mr Frow’s report to the Board. (Para  below). Yet, the Board now saw fit to delegate the task of approving the full agreement to a Committee of three at a time when the approval of the full agreement would lack the pressure of events and timing attaching to the completion of the HoA. The full agreement did not have to be returned to the Board. The resolution is consistent with the Board recognising that the bargain had been struck and that the Chairperson and two other Board members could ensure that the inherent value of the bargain to ECNZ was preserved in the full agreement.
On the following day, Mr Taylor unequivocally advised FCE that the Board had approved the HoA. He did not suggest that the approval was conditional in any way.
Again, it is difficult to construe these facts as anything other than evidence that ECNZ had approved the HoA thereby making that agreement unconditional. The Board had the HoA before it. It will have read that its approval was a "condition precedent". It had before it Mr Taylor’s Executive Summary to the Board (paras  and  below) and Mr Frow’s report to the Board (para ).
Credulity is strained by the suggestion that a Board of experienced directors would not have been fully aware of the legal effect of the Board’s approval. Nor is the qualification to the preferred customer clause worded as a "condition" of the approval. The qualification reflects the Board’s concern at the appropriateness of the preferred customer supply basis only if "economic". It "questioned" that basis. Its resolution then indicates that this basis is to be challenged. Wild J is correct to point out that the resolution does not state that the Board’s approval to the HoA is conditional upon FCE agreeing to a different delivery obligation during the period 2011 to 2017. If ECNZ’s negotiators mounted an unsuccessful challenge - which is essentially what happened - the Board’s approval would stand.
The majority contend that a noticeable feature of the HoA put before the Board is that it included the two "not agreed" items. Thus, they argue, the Board was not being asked to approve a completed bargain. It was simply an approval of what had been done to date. (Para ). With respect, I regard this construction of events as unrealistic, particularly as the majority conclude elsewhere that the absence of these provisions did not render the contract incomplete or uncertain. Certainly, the Board did not approve the "not agreed" provisions. What it approved was the HoA as agreed. It was only that agreement which could became unconditional. I repeat; it is most improbable that experienced Board members could read the four page document and, on the basis that two non-essential items had been marked "not agreed", think that the HoA to which the Board’s approval was being sought to make it unconditional was no more than a tentative document in the nature of a report.
Nor, with respect, can I agree that the Board’s approval was conditional upon renegotiation of the preferred customer clause. (See majority judgment, para ). The Board members of ECNZ were not naïve. If they had wanted to make the Board’s approval subject to the preferred customer clause being renegotiated they would surely have said so. They insisted only that it be challenged. The language used is in fact appropriate for a Board which wishes to contest an issue but at the same time ensure that the agreement recorded in the HoA is made unconditional. It was not prepared to place that agreement in jeopardy.
I also respectfully disagree with the majority’s finding that when FCE resubmitted its previous bid it was relying, not on the binding nature of the HoA, but on its assessment that ECNZ’s need for a long-term gas supply was so pressing that the HoA would receive approval and that a gas contract would be finally negotiated. (Para ). I do not doubt that FCE was confident that ECNZ’s Board would approve the contract. But that is not the point. It was the fact that all the essential terms of a long-term gas supply agreement had been agreed upon that was critical to FCE. As the essential terms of such an agreement were no longer at large the company could go ahead and resubmit its previous tender. Suppose that FCE had made an offer to ECNZ in the same terms as those contained in the HoA. It would not then have resubmitted its bid on the basis that ECNZ was so pressed for a long-term gas supply agreement that it would agree to accept that offer. No doubt, the approval of the ECNZ Board could be assumed with reasonable confidence once an agreement had been forged. But it was the fact that, at the direction of the Chief Executives, the negotiators had determined all the essential terms of a long-term gas supply agreement that would have been the more decisive factor in FCE’s decision to resubmit its earlier tender.
Finally, under this head, the whole process which was followed does not fit comfortably with the notion of a step in the negotiation process or something akin to a progress report from the negotiators. The insistence on ECNZ Board approval as a condition precedent; the extensive and detailed reports prepared for the Board by ECNZ executives (see below), and the formality of resolving to approve the HoA subject only to one item being "challenged", confirms that ECNZ accepted that much more was involved than a provisional document reporting negotiating progress.
(7) Extrinsic evidence
As I have already indicated, I consider that the above matters make it plain that the parties intended the HoA to be binding. Other internal documents of ECNZ confirm that conclusion. It is these documents, in particular, which Mr Craddock was adamant were deserving of "little weight". But, as it seems highly artificial to me not to have regard to reliable evidence which is obviously relevant to the parties’ intention, I propose to refer to certain further material. Indeed, such is the relationship and proximity of these documents to the HoA and ECNZ Board’s approval of the HoA that it is probably unnecessary to describe the material as extrinsic evidence at all. The documents, and the acts which they evidence, bear directly on the parties’ intention and, in particular, on ECNZ’s intention. As I have indicated above, the question is not so much whether the approach is objective or subjective as whether regard can be had to extrinsic evidence to assist in an objective appraisal. I do agree, however, that caution is required. That caution can be exercised by having regard to the timing or the proximity of the document to the signing of the HoA and subsequent Board approval, the status of the parties responsible for it, the purpose of the document, and the extent to which the wording is unequivocal. The documents to which I will refer to meet these criteria.
(i) The Executive Summary for the ECNZ Board
First, reference may be made to the Executive Summary dated 5 March 1997 from Mr Taylor to the Chairman and Directors of the Board. The paper recommends that the Board endorse the ECNZ/FCE alliance and approve ECNZ entering into the long-term gas contract with FCE. Paragraph 9 of this paper reads:
Heads of Agreement were also entered into for a long term gas supply with FCE for the period October 2000 to 2017. This Heads which specifies all necessary terms for it to be a binding agreement is conditional on ECNZ Board approval within eight days.
I believe that this Executive Summary should be taken into account in assessing the parties’ intention to be bound. It is proximate to the date on which the HoA was signed and it was presented by Mr Taylor, ECNZ’s signatory to the HoA itself. It was prepared for the benefit of informing the Board of the FCE/ECNZ alliance and the HoA, and to assist the Board in determining whether to approve the HoA "which specifies all necessary terms for it to be a binding agreement". The terms are explicit. Why would Mr Taylor misstate the position to the Board? There is, it is true, no explanation to the Board that its approval would make the agreement unconditional, but it must be beyond serious dispute that the Chairperson and Board members would have known the effect of such an approval. The Executive Summary is strong evidence that ECNZ intended the HoA to be a binding agreement.
(ii) Background paper for the ECNZ Board
Attached to the Executive Summary is a more lengthy paper, bearing the same date but, at least in part, based on previous papers, also from Mr Taylor to the Chairman and Directors of the ECNZ Board. It reveals that the Finance Committee of the Board had, prior to bids being made to acquire the Western Mining interest in the Kupe field, agreed in principle to the FCE/ECNZ commercial alliance but felt that it should be considered by the full Board. In para 1.2 it is recited that, although the Finance Committee agreed in principle to the concept, they considered that because of the gas contract element the proposal should be considered by the full Board. It is recounted in para 3.1 that the proposed structure of the arrangements with FCE consist of two elements, one an alliance to acquire up to 100 per cent of Kupe to be managed under a formal joint venture agreement, and the other the long-term gas supply contract. In para 4.1 it is recognised that the bidding arrangements are already in place, that FCE has been successful, and that ECNZ will secure 25.75 per cent of FCE’s bid price. The terms of para (iii) of the Fletcher/Frow letter are then substantially repeated. It is then noted, in para 4.2, that while the Kupe alliance and the gas contract are linked for this transaction, they are nevertheless separate stand-alone arrangements which will operate independently in the future. It is noted that FCE’s willingness to "conclude the gas contract" was dependent on ECNZ entering into the Kupe alliance.
Reference is then made to the "ECNZ/FCE gas contract". The objectives approved in a final strategy paper dated November 1996 are repeated. Hence the reference to the "proposed gas contract" and, of course, the contract had still to be approved by the Board so that this description was not inappropriate. The "essential terms" of the HoA are set out. They are the quantities, price, delivery, the take or pay provision, the use provision and the delivery obligation. At this time, of course, Mr Taylor was fully aware that the force majeure and pre-paid gas relief provisions had been marked "not agreed". A copy of the HoA is attached to the report. The advantages to ECNZ of the agreement to purchase gas from FCE is then discussed at length. It is finally recommended that the Board approve in principle ECNZ entering into the proposed Kupe alliance and gas contracting arrangements with FCE "on the terms negotiated" and directing that the terms, once fully negotiated, be referred to the Board’s Finance Committee for review and approval.
The phrase "approve in principle" is not wholly appropriate for the Board’s task of determining whether to approve the HoA so that, if approved, it becomes unconditional. (See majority judgment ). Approval in principle would not achieve that unconditional status. But the approval in principle is sought for both the Kupe alliance and gas contract "on the terms negotiated" and it is to be read in conjunction with the suggestion that the Board direct that the terms "once fully negotiated" be referred to the Committee for review and approval. There is nothing to gainsay the proposition that the bargain in the HoA is to be approved so as to become unconditional.
(iii) Mr Frow’s report to the ECNZ Board
Mr Frow’s report to his Board dated 6 March 1997 could not be more clear. He refers to the separate discussion with FCE to negotiate a "side agreement" and states:
This was successfully concluded in a letter between Hugh Fletcher and myself which provides for us to jointly control our combined participations in the field, which total 73.5% including the Crown’s 11% share. Hugh reluctantly accepted my proposal that if either of our bids is successful then we would split the ownership 25.75% to ECNZ and 14.25% to FCE .... Providing this is successful, both ECNZ and FCE would end up with 36.75% of Kupe.
Referring to the gas contract he then advises:
FCE were extremely keen to conclude a gas contract with us as part of the deal, however, at the eleventh hour, they agreed to do the deal with the proposed gas contract remaining conditional on ECNZ Board approval.
Mr Frow had, of course, also seen the HoA because he refers to it in his report immediately afterwards. The inescapable implication of his advice that the contract is conditional on ECNZ Board approval is that, once that approval is given, the HoA would be unconditional.
Next, he states:
A heads of agreement for the gas contract was concluded following successful negotiation by Trevor Taylor/Brian McLaughlan and David Kirk/Jim Patek.
Again, reference is made to the need for detailed consideration of the gas contract by the full Board before it is approved.
Mr Frow then concludes with this advice:
I attach a copy of my agreement with Fletcher Challenge. Overall I believe this is a very satisfactory outcome in that it achieves our objectives within the fuel strategy and establishes a firm foundation to build a stronger on-going relationship with Fletcher Challenge. Furthermore, the gas contract would provide us with a solid claim on building the next increment of generation post 2000.
Again, I have no compunction in having regard to this document in objectively assessing whether the parties intended to create legal relations by completing the HoA. Mr Frow was the Chief Executive of ECNZ and negotiated the Fletcher/Frow letter containing the direction to the negotiators to agree upon a heads of agreement containing all essential terms to make it binding. As evident from his report, the HoA was not binding, but only because it had not yet been approved by the Board. That report is proximate to the date when the HoA was concluded and to the date of the Board meeting. As with other contemporaneous documents, it is instructive to read this report and then ask at once; how plausible is the construction that the HoA was no more than a step in the negotiating process or something in the nature of a progress report to the Board from the negotiators?
(iv) The ECNZ Board minutes
The extract from the minutes of the Board relating to the "FCE Gas Contract" have already been referred to. It is at once described as "part of the Kupe acquisition proposal". According to the minutes, Mr Taylor traversed the main features of the gas contract confirming that it was subject to Board approval. The Board’s questioning of the preferred customer supply basis and resolution followed.
As already stated, I find it difficult to conceive that Board members were not fully aware that they were giving an approval to the HoA which would render it unconditional. They had before them the General Manager’s covering "Executive Summary", clearly indicating in para 9 that the HoA had been entered into, and a copy of the HoA duly signed by Mr Taylor. Had it not been the intention of the Board to approve the HoA and so make it unconditional it would surely have said so. The Chairperson and Board are not inexperienced directors and they had in attendance Mr Frow, Mr Taylor and, no doubt, other senior executives. I believe that this document is a firm indication that ECNZ intended to be bound, while reserving the right to challenge in negotiating the full agreement the basis of supply after 2011, but nothing sensibly suggests that the HoA is not being approved so as to become an unconditional binding agreement.
I would again reiterate that I consider the above evidence relevant to the task of making an objective determination of the parties’ intention. It is not subjective evidence. It is not evidence by any particular person that he intended the HoA to be binding. It is evidence of statements and acts by the parties which confirms, or tends to confirm, that it was their intention to be bound. Reference to it is part and parcel of the court’s role ".... to ascertain the parties’ intention from the point of view of the reasonable objective observer".
(8) Subsequent conduct
(i) The course of negotiations
Having read the evidence and documents placed before the Court, I am convinced that Wild J was correct in holding that ECNZ’s internal documentation in the months following the HoA is notable for continuously referring to the HoA as a contract, and for the absence of any suggestion that the HoA was nothing but an unenforceable step in negotiations toward a full agreement. (Para ). I am also satisfied that he is correct in his conclusion that there were indications from the start to the end of the negotiations that the parties regarded the HoA as legally binding. Of course, there are phrases which are ambiguous and some which may even point in the other direction. But the overall impression is perfectly plain. The parties worked at the task of transforming or converting the binding HoA into a "full" contract.
The framework for the negotiations to complete the gas contract is evident from the notes of a meeting of FCE and ECNZ executives held on 3 April 1997 "regarding preparations for the development/negotiation of the FCE/ECNZ gas contract Heads of Agreement". The notes are signed by Mr McLaughlin. After the heading; "Contract drafting", Mr McLaughlin records that FCE had signalled the wish to take considerable care over "contract drafting" due to the long term nature of the transaction, that is, until 2017. He too indicated that ECNZ was equally interested to ensure the provisions were "clearly drafted". He added that he did not foresee this contract as being particularly difficult to prepare as gas supply was generic in nature and take or pay has a limited life of two years. The tenor of this note is that the exercise being undertaken was one of drafting the full agreement with care, not negotiating or renegotiating the essential bargain. Negotiations would cover all facets of the agreement, because all facets had to be drafted in a form suitable for a full agreement which would govern the parties relations until 2017. But that did not mean that the deal had not been done.
Memoranda within ECNZ all point in the one direction. Of particular relevance are the documents which demonstrate ECNZ’s diminishing enthusiasm for the gas contract. A memorandum dated 29 May 1998 from Mr McLaughlin to Mr Taylor, with a copy to others, began by stating that the purpose of the memorandum was to provide "an overview of the current status of the negotiations with Fletcher Challenge Energy ("FCE") concerning the transformation of the long term gas supply Heads of Agreement ("HoA") into a formal gas contract".
That exercise is precisely what was being undertaken. The parties were seeking to "transform" the heads of agreement into a formal contract. Negotiations to that end had come to a "standstill, if not a stalemate". Bringing the agreement to an end was contemplated, not on the basis that the HoA was not binding, but because of a "material misunderstanding on vital terms". The purpose of the negotiations is aptly described as "the need to put in place contractually the major HoA terms without any material value shift". Reference is made to ECNZ’s belief that it "had already agreed a premium gas price in return for high level reliability and certainty of gas supply". Mr McLaughlin recites that the difficulties encountered "go to the very essence of the HoA transaction". Hence, his observations on "ECNZ’s approach to entering the HoA". Under the heading; "The HoA transaction is based on a long term supply commitment", the discussion concludes with the statement, "ECNZ was unwilling to commit to an HoA with a shorter supply term".
In yet another part of the paper Mr McLaughlin records that "an economic test for post 2011 deliveries in the HoA was accepted on the basis as it was a ‘high level’ test, involving relatively low risk for ECNZ". He refers back to what was "not intended" by ECNZ. A lengthy review of the HoA provisions followed by a summary of FCE and ECNZ’s contracting position notes that the force majeure and pre-paid gas relief provisions were "not agreed at the time HoA was concluded". It is noted that FCE has declined to transform the "HoA transaction" into a more conventional gas agreement. In another section headed, "Commercial attractiveness of HoA" it is stated that having regard to the "contract negotiation challenges" outlined in the report", it is time to "reflect on the commercial attractiveness of the HoA terms, including gas price".
The "Legal status of HoA" is specifically addressed. After referring to a separate report (apparently not disclosed) para 9.1 reads as follows:
.... The report concludes that the stage will soon be reached were [sic] ECNZ may be justified in taking the position that a long period of negotiation has not succeeded, and the HoA contains too much uncertainty to constitute a binding agreement.
It is to be noted that the ground on which it was thought the HoA could be abandoned was not that it was not intended to be a binding agreement, but that its terms are too uncertain to constitute an enforceable agreement. The report then confronts the risk of what will happen if ECNZ "abandons the HoA".
In the summary and conclusions that follow it is recorded that extensive negotiations have failed to produce any tangible progress on "converting" the HoA into acceptable terms for contracting. It is recorded that "if ECNZ was successful in obtaining its HoA contracting terms, the resulting contract would present an acceptable commercial agreement." The legal perception is then summarised as follows:
From a legal perspective there may be grounds for ECNZ to take the position that the HoA does not constitute a binding agreement due to the extensive and diverse range of issues between ECNZ and FCE (i.e. too much uncertainty). FCE could counter with legal action.
Again, the basis on which ECNZ might repudiate the HoA is not that the parties did not intend it to be binding, but the alleged uncertainty of its terms.
Concern that the HoA was not favourable to ECNZ are indicated in a memorandum from a Mr Powell, a Fuel Strategy Adviser, addressed to Mr McLaughlin in respect of the implications of "ECNZ’s and FCE’s respective interpretations of FCE’s supply obligation post 2011". The introduction also speaks of the "difference in the interpretation" of the HoA between ECNZ and FCE. It is noted that ECNZ signed the HoA because it considered it would gain greater benefit from a long-term firm gas contract than from a field dedication contract or from accepting the future market gas price. The paper concludes with this statement.
It is the opinion of this paper, that if the interpretation of the HoA, and subsequent the wording of the contract does not reflect ECNZ’s position on firm supply, then the contract is of little value to ECNZ.
The question now facing ECNZ, is to what extent can it allow its position on firm supply and the economic test be compromised or modified in order to conclude a deal with FCE, without destroying the value of the contract to ECNZ?
ECNZ still considers that the price for the gas contract is acceptable, provided its interpretation of a firm supply is adhered to.
A memorandum from a Mr Boshier, General Manager of Strategic Development, dated 24 July 1997 is addressed to the Executive Board of ECNZ for the purpose of a meeting on 30 July 1997. The opening paragraph refers to the fact that ECNZ is currently negotiating with FCE to; "transform the contractually binding HoA into full contract terms". Reference is then made to the significant changes since the HoA was signed which make it appropriate to review ECNZ’s position regarding the FCE generic gas contract to guide the negotiators. It is explained that ECNZ was "committed" to buying the FCE gas contract for a number of reasons and, again, the changes which make the gas purchase less attractive are set out at length. Paragraph 1.9, under the heading, "ECNZ negotiates a withdrawal from the HoA", reads:
If it is considered that the business risks are now unacceptably high then ECNZ should negotiate a withdrawal from the HoA.
The changes that have occurred since the HoA was signed are then dealt with at great length. They are described as "significant". It is noted that, although negotiations are proceeding, no material changes are "anticipated" and a number of terms remain to be negotiated. The prospect of buying "the contract in its current form" and, then, the possibility of ECNZ negotiating "a contract with improved terms" are discussed. The alternative of negotiating a withdrawal from the HoA is repeated; "ECNZ should negotiate a withdrawal from the HoA."
The very fact that ECNZ persisted with negotiations over such a prolonged period, including negotiations for sometime after it had been decided by the company that the gas supply contract was not to its advantage, indicate that ECNZ regarded the HoA as binding. It clearly did not feel free to walk away from the HoA, and when it contemplated challenging the validity of the HoA, it did so on the basis that the HoA was uncertain, not that it was never intended to be binding.
In the course of his reply Mr Craddock referred to six internal documents of FCE in an attempt to arrest the firm overall impression that the parties intended to be bound. Four of the documents list the "current priorities" for the Board. Entries such as "negotiate (or conclude) gas supply contract with ECNZ following on from the Kupe acquisition" are equivocal. The draft proposed contract in August 1997 certainly recites that the parties entered into a heads of agreement with a view to negotiating an agreement for the sale and purchase of gas, and that wording is not wholly apt to describe a heads of agreement which has binding force. There is, however, no indication as to who has prepared the draft and it is to be borne in mind that the "full sale and purchase agreement" was to replace the HoA. The final document referred to by Mr Craddock is an e-mail dated 20 September 1998 from an executive who was FCE’s Chief Operating Officer (not its "CEO" as stated by Mr Craddock). He does not appear to have been involved earlier and records that the $1.25 billion gas sale opportunity "represented in the FCE/ECNZ gas supply HoA" had reached a critical juncture before stating that "no close out was achieved on any aspect of the deal". Having regard to the chequered course of negotiations that observation is understandable. The wording is not decisive and there is also reference to "the arrangement entered into" later in the same e-mail. In a letter to ECNZ nine days later the same executive indicates no ambivalence on the question whether the HoA was binding. Overall, it comes close to being a travesty to suggest that FCE did not regard the HoA binding.
These references only serve to indicate that it is most unlikely in a large corporate situation that there will not be statements made from time to time which may appear inconsistent with the overall direction of the documentary evidence. They confirm the need for care but not abstinence. It would be a mechanical reaction to exclude all extrinsic evidence, however reliable, because of a few references, which are, at least for the most part, ambiguous or explicable. The vast volume of FCE’s documents and the key ECNZ documents referred to above clearly point to the fact that the HoA was intended to be binding.
(ii) The confidentiality provision
Brief reference may be made to the confidentiality provision in the HoA. Both parties treated it as a contractual obligation. On 29 August 1997 ECNZ sought FCE’s consent to refer to the HoA in the Annual Report for the year ending 30 June 1997. Later, on 10 October 1997, after FCE had issued a press release about the HoA without first obtaining ECNZ’s permission as required by the confidentiality clause, ECNZ complained making specific reference to the HoA. FCE apologised by letter dated 21 October. Then, on 22 May 1998, ECNZ sought FCE’s consent in terms of the confidentiality provision to release a copy of the HoA to the Electricity Reform Transition Unit. This correspondence suggests more than a moral obligation to retain confidentiality until such time as the full agreement had been completed.
(iii) ECNZ’s Annual Report
The next document bearing mention is ECNZ’s Annual Report for the year ended 30 June 1997. Note 23(b) to the Financial Statements relating to long term contracts records the following gas purchase contract:
ECNZ has entered into a heads of agreement with Fletcher Challenge Energy Ltd under which ECNZ is required to purchase specified annual gas quantities from 1 October 2000 to 30 September 2017.
I regard this note as being valid evidence of an acknowledgement of ECNZ’s intention. It is contained in the Annual Report available to shareholders and interested members of the public. If the contract was subject to a formal agreement, it would not be acceptable to fail to note that fact. On the contrary, ECNZ is advising its shareholders and the world at large that it is "required" to purchase specified quantities of gas to the year 2017. This would be read by the shareholders and interested members of the public alike as providing a long-term supply arrangement requiring FCE to supply and ECNZ to take a certain quantity of gas annually.
(iv) The media release
Next, I would refer to the media release prepared and released by ECNZ in October 1997. It records that ECNZ and FCE have "entered into a Heads of Agreement" for the supply of gas for electricity generation over the next 18 years. ECNZ welcomes the "new arrangement". It is said to provide the "assurance" of supply that ECNZ needs to enable it to maintain its thermal electricity generation capacity. ECNZ’s "commitment to purchase", it continues, will provide FCE with the assurance it needs to enable it to continue with an exploration and development programme over the next two decades.
Again, I consider that this media release is sufficiently reliable to have regard to in determining whether the HoA was intended to be binding. Although no doubt prepared by or with the assistance of the company’s public relations personnel it will have been vetted by senior executives. Further, it is again a statement to the world at large. It will not have been intended to mislead the public, but rather to inform the public, including the financial markets, of ECNZ and FCE’s long-term arrangements for gas supply.
(v) The Chairperson’s letter to the Minister
Finally, reference may be made to Mr Cushing, the Chairperson’s, letter to the Minister of Finance dated 22 January 1998. The Minister or his Office had read the media release of 9 October 1997 stating that ECNZ and Fletcher Challenge Energy had entered into a Heads of Agreement for the supply of a substantial volume of gas. The Minister at once pointed out that the agreement might have implications for the Crown as shareholder, both in terms of the value of ECNZ and in terms of possible break-up configurations of ECNZ. "Ministers understand", it is said, "that the parties to the heads of agreement are now working on draft provisions for a more detailed final contract". Concern is expressed as to the implications for the preferred configuration following a split of ECNZ.
In his reply, Mr Cushing states:
The gas agreement was concluded earlier this year, well ahead of the Government’s announcement that it was initiating an ECNZ break-up investigation. The agreement gave effect to ECNZ’s thermal fuels acquisition strategy that has featured, with increasing importance, in our business planning for the last three years. It secured a long-term (2000-2017) dependable supply of gas and is targeted to enhance ECNZ’s value, while having full regard to the Corporation’s MoU responsibilities and obligations
Mr Cushing then concludes:
Turning to your request for ECNZ to maintain flexibility in conforming the legally binding Heads of Agreement into a fully developed contract, the agreement with Fletcher Challenge Energy has defined prices, quantities and terms. ECNZ, within a normal negotiation process, is seeking to gain additional flexibility, targeting longer than previously envisaged use at Huntly .... Contract changes and delays of the nature suggested in your letter will require direct Government intervention.
The binding status of the HoA could not be more emphatically stated. The letter is a formal letter from the Chairperson of ECNZ to the Minister of Finance. I consider it most unlikely that Mr Cushing, who had been the Chairperson at the time the HoA was approved by his Board, would misstate the position to the Minister. (Moreover, a Minister who is also a major shareholder). I am aware of the suggestion that the Chairperson and Board may have had the somewhat baleful motive of seeking to frustrate the Minister’s intention to split ECNZ, and that it suited ECNZ to hold out the HoA as binding. There may be something in that strategy, I do not know. But I seriously doubt that the Chairperson, members of the Board, and the senior executives who would have been involved in discussing the terms of the reply to the Minister, would have been totally prepared to fabricate the belief that the HoA was binding, or that they would have performed an effective "somersault" in their attitude to the HoA, so that Mr Cushing could inform - or misinform - the Minister that the HoA was a binding agreement.
Overall, there can be no doubt that the subsequent conduct of ECNZ provides potent evidence that ECNZ, along with FCE, intended to be bound by the HoA until it was superseded by a full agreement. The parties’ subsequent conduct is inconsistent with any other interpretation.
(9) The "speaking silence"
The above are the positive reasons for concluding that the parties intended to be bound by the HoA until the full agreement had been completed. (Paras  to  above). Yet, stressing the positive evidence available to support this construction does not capture the full strength of that evidence. What is not said and what was not done also points strongly in the same direction. As Mahon J said in Anderton v Auckland City Council  1 NZLR 657, at 697, speaking of the absence of documents which might have been expected to surface in that case; "That omission, as I see it, invests the … files with a speaking silence which tells its own tale." So it is here. Begin with the fact, which is accepted by the majority, that there can be no doubt that FCE and ECNZ both went into the negotiations with the intention of concluding an agreement. What then changed other than that two terms were marked "not agreed". Where are the documents which would indicate an appreciation that the original intent had been replaced by another intent? Where are the documents which would suggest that the negotiators had failed to deliver on their Chief Executives’ direction to reach a binding agreement? And where are the documents in either FCE or ECNZ’s files that would indicate the uncertainty which would at once attach to the situation where no long-term gas supply agreement existed or might ever eventuate?
It remains to consider whether there is any plausible thesis that would permit the arguments and evidence to be disregarded or explained in another fashion.
TWO PROVISIONS ARE MARKED "NOT AGREED"
An alternative thesis has been advanced by the majority. The majority accept that both FCE and ECNZ went into the negotiations on 27 and 28 February intent on concluding an agreement in the form of a heads of agreement. It was to be a binding deal. (Para ). The majority accept also that the negotiators had authority to determine what matters were to be regarded as essential to any binding contract. Final determination was left to Mr Kirk and Mr Taylor. (Para ). The critical question posed by the majority is whether, at the end of the negotiations on the HoA, the parties intended to have an immediately binding contract. (Para ). The majority answer this question in the negative. To them, the HoA has the appearance of a memorandum listing the points which have been agreed, those which have not been agreed and those which the parties are content to put to one side for the moment, together with a statement of their intention to negotiate a full, that is, "complete", agreement within three months. (Para ). This perception is essentially based on the fact that two provisions were marked "not agreed". The negotiators did not record that their agreement was to be regarded as complete or legally binding. Nor did they provide for any machinery, such as an independent expert or an arbitrator, to resolve these "not agreed" matters. (Para ). Yet, the "not agreed" items were of a kind which could not be expected to be settled for the parties by a court or other third party. These provisions are believed to have been marked "not agreed" as an indication of their importance and the fact that they were regarded as essential items. (Para ). Thus, the HoA is seen to be in the nature of a progress report from the negotiators. (Para ). The majority suggest that it is probable that, if the negotiators had been asked before placing their signatures on the HoA whether, in the unexpected event of failing to reach full agreement, the HoA was to stand on its own as the contractual document to govern the parties’ relationship until 2017, both Mr Kirk and Mr Taylor would have answered in the negative.
There are a number of reasons why I must respectfully decline to support this reasoning.
First, it seems to me that the majority’s construction does not squarely confront the strength of the arguments and evidence confirming that the parties intended to be bound by the HoA until it was superseded by the "full" agreement which they contemplated would be completed within three months by the use of all reasonable endeavours: the commercial context and purpose of the HoA, the terms of the Fletcher/Frow letter, the terms of the HoA itself, the fact that the Fletcher/Frow letter was re-signed after the HoA had been completed, the fact that both parties acted on the agreement as if it were binding, and the fact that the ECNZ Board approved the HoA reserving only the right to "challenge" a particular feature of the HoA in drawing up the "full" agreement. In effect, the majority’s construction is equivalent to saying that the HoA was subject to a formal contract. It clearly was not that, a conclusion which would seem to be put beyond doubt by the extrinsic evidence which cannot be satisfactorily explained away.
In the context of a detailed HoA containing what the General Manager of ECNZ described as "the essential terms of the gas contract", the inability of the negotiators to reach agreement on two terms does not negate the agreement arrived at on the essential terms. As Mr Wilson submitted, working to a whiteboard within a dramatically short time to complete agreement, it is as if these not agreed matters had simply been erased by the negotiators as negotiations proceeded to the more critical issues. The matters remained to be agreed, if possible, as part of the "full" agreement, but the fact that they were deferred at this stage does not necessarily mean that the rest of the agreement was not intended to stand pending that full agreement.
Secondly, it seems to me that the majority’s construction is at least partially undermined by their subsequent conclusion that the absence of a force majeure provision relating to the National Grid and the absence of a pre-paid gas relief provision would not render the agreement incomplete. Why should it be odd for the negotiators to defer items which are not essential in order to complete an urgent deal? It happens with heads of agreement which are undoubtedly intended to be binding every day.
Thirdly, nor is it telling that no machinery was included in the HoA to enable these two terms to be resolved if the parties were unable to agree. Contemplating that all reasonable endeavours on the part of both parties would enable a full agreement to be reached, the negotiators may well not have wanted to resort to arbitration or the like. The sanction lay in the fact that the HoA was intended to be binding: it remained in force until replaced by full agreement containing terms the parties had been able to agree upon.
Fourthly, how can the majority’s claim that the fact the two clauses were marked "not agreed" is an indication of their importance and that they were regarded as essential terms be substantiated? The fact they were marked "not agreed" can just as well indicate that they were not considered important or essential, and in context that must surely be the preferred interpretation. (See above). Why should terms, the absence of which would not render the HoA incomplete, be regarded as essential by the parties? This suggestion seems to be me, with respect, to represent an improbable leap of reason. The conclusion that non-essential terms were regarded by the negotiators as essential terms because they were marked "not agreed", with the result that the rest of the HoA becomes a step in the negotiating process or report of the negotiators as to progress made, is untenable and flies in the face of all the arguments and evidence to the contrary.
Fifthly, some meaning must be given to the words "Agreed (except as otherwise indicated)" immediately above Mr Taylor and Mr Kirk’s signatures. Those words may have been included out of caution, but they are unnecessary to simply denote that all but two provisions have been agreed to. The signatures would have achieved that purpose. The more probable interpretation having regard to the commercial context and purpose of the HoA is that the parties were making it clear that, other than as expressly noted, the terms of the HoA had been agreed as essential and binding terms. (See above, para ).
Nor, in the sixth place, do I consider that anything significant can be read into the difference in wording between "not agreed" and "to be agreed". (See majority judgment, para ). A provision can be left open in an agreement to be determined at a future date. In fact the K factor can only properly be determined at a future time. (See majority judgment, para  and ).
Seventhly, while I agree that both parties were confident of reaching agreement, I utterly disagree with the proposition that, if the negotiators had been asked before signing whether, in the unexpected event of a failure to reach agreement on the full agreement, the HoA would stand on its own as the contractual document to govern the parties’ relationship until 2017, both Mr Kirk and Mr Taylor would have answered in the negative. (Para ). This assessment is also contrary to the arguments and evidence I have touched upon in this judgment.
In posing the question whether the negotiators would have intended the HoA to govern the parties’ relationship until 2017, and receiving a negative answer, the majority stipulate the "unexpected event of failing to reach full agreement". But what if the question is changed slightly? If the negotiators had been asked before placing their signatures on the HoA whether, in the event that the other party changed its mind about the commercial desirability of the deal and therefore decided not to proceed with it, the HoA was intended to be a binding agreement, would Mr Kirk and Mr Taylor then have answered in the negative? Of course not. It is certain that they would have said the HoA was binding and would remain binding until the full agreement was completed. Neither party would be free to ignore the binding agreement after it had become unconditional.
The answer which I suggest Mr Kirk and Mr Taylor would have given is indicated by the majority’s acceptance of the fact that the negotiators were very confident of completing the full agreement. The parties did not anticipate for one moment that full agreement would not be reached, and for good reason; the essential terms had been agreed in the HoA and were to the advantage of both parties. Thus, they would have said that the HoA would stand on its own until it had been replaced by the full agreement within the anticipated three months. If, contrary to their expectations, the full agreement did not eventuate, the HoA would, being binding and in force, continue to operate. It would necessarily continue to govern the purchase and supply of the gas in the long-term.
Moreover, the proposition to the effect that Mr Kirk and Mr Taylor, faced with a prescient bystander able to tell them that the "full" agreement would never be completed, would agree that the HoA was not binding injects a speculative element into the question of determining whether the parties intended to be bound. If this proposition is accepted, the parties’ actual or objective intention is replaced by the Court second-guessing the parties, that is, speculating what the parties’ intention would have been if they had shared a different expectation. It is like saying to the parties; "Yes, we accept that you intended to create legal relations alright, but if you had known about such and such or been able to foretell the future you would not have had that intention." In fact, their intention to create legal relations remains intact. It is infinitely preferable to accept that the parties intended to be bound when they concluded the HoA and to then consider the second question; whether that agreement is sufficiently complete and certain to be enforceable at law. (I note that ECNZ have not pleaded or argued mistake).
Eighthly, the fact that when FCE and ECNZ negotiated the full agreement they did not "pick up where they left off" but treated themselves as free to renegotiate agreed terms does not mean that they did not intend the HoA to be binding. With the essential terms agreed, the inherent value of the agreement to each party had been determined. Both parties desired the commercial advantage the long-term gas contract gave them. Why would they place that agreement in jeopardy by renegotiating a new set of terms, including those that had obviously been agreed? The answer has to be that the renegotiation of terms, including the agreed terms, did not place the agreement in jeopardy. In other words, in the process of completing a comprehensive agreement, the parties could, if they chose, seek to renegotiate the terms agreed to in the HoA simply because they were agreed and binding. Failure to renegotiate agreement on any term did not leave a vacuum. (See also para  above noting that the parties at the outset spoke of the pending negotiations and emphasised the care required in "drafting" the full agreement. Negotiation, and renegotiation within the bounds of the inherent value of the agreement to the parties, was not inimical to the preparation of the full agreement).
Nor do I accept for one moment the view that the HoA was binding is contrary to the normal negotiating process, or the dynamic of that process, as elaborated by the majority. (Paras  and ). Of course, there is an interrelationship between one term and another in a contract. A party will adjust and readjust its position, and may compromise its position, before reaching a final agreement. But this is not to say that parties cannot reach agreement in a heads of agreement, even though there may be important matters still to be agreed. (See above). The heads of agreement itself can, and is likely to, reflect that process of adjustment, readjustment and compromise. As Mr Wilson submitted, this process is precisely what happened here. It is why the Chief Executives insisted upon the HoA containing all essential terms to make it binding. These terms fixed the value of the agreement to the parties. Once agreed and binding, neither party in the course of negotiating or renegotiating the "full" agreement would permit the value of the bargain it had made to be diminished.
In concluding this section, may I respectfully urge that it is possible to make altogether too much of the fact that two items were marked "not agreed" in an agreement in which all the essential matters had been agreed and which the parties contemplated would, with all reasonable endeavours, be converted into a full agreement.
THE AGREEMENT IS COMPLETE AND CERTAIN
As I have already indicated, I agree with the majority that the HoA was not incomplete because of the absence of agreement as to the force majeure and pre-paid gas relief provisions. I also agree that the notation "not agreed" in respect of force majeure applied only to the extension to the National Grid. (Para  to ). Failure to reach agreement on the extension of the force majeure clause to the National Grid did not mean that the contract was legally incomplete. (Para ). So, too, the agreement could operate without a pre-paid gas relief provision. (Para ).
While I approve of Wild J’s denunciation of the negative approach of setting out to find incompleteness or uncertainty, I tend to think that his test of "workability" may have been counter-productive in this Court. Once it has been found that the parties intended the agreement to be binding, the discussion should be pursued in terms of completeness and certainty, as in Hillas v Arcos, supra. Although I do not suggest this of Wild J, the danger of invoking a test of "workability" is that a court may be tempted to find that the contract in issue is workable without regard to the parties’ intention. In other words, having decided that the parties intended to create legal relations it is not legitimate to then make - or remake - their bargain on the basis of what is workable. Mustill LJ (as he then was) reminded the Court in Malcolm v Chancellor, Masters and Scholars of the University of Oxford  EMLR 17, at 35, of the risks involved in the exercise of taking potential implied terms one group at a time, implying them, moving on to another, implying those, and so on until a contract is built up to implied terms from no express bargain at all. There must be a sufficient skeleton of express terms to be fleshed out by implication. (See also Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWL 1, per Kirby P at 20.)
But this is simply to reiterate a point which I stressed at the outset, that is, that the courts must be scrupulous not to make the contract for the parties or fill in gaps in the contract in a way which may not reflect the intention of the parties. (Para  above). I do not consider that this difficulty arises in this case because the question of completeness and certainty can be resolved by reference to their intention. All essential terms necessary for a long-term gas supply contract were included in the HoA. (See above).
Ultimately, Mr Craddock’s attack on Wild J’s use of a workability test came down to his argument that the HoA omitted essential terms. For the reasons which I have given above, I believe that it is clear that the two provisions which were worded "not agreed" were not considered essential. Certainly, the parties contemplated that agreement would be reached in respect of such provisions, but in the absence of agreement on them the HoA could stand as a contract for the long-term purchase and supply of gas containing the essential bargain between the parties. Because of the "all reasonable endeavours" requirement to complete a full agreement, neither provision should or would have proved a difficult impediment to reaching full agreement. Indeed, that is just what happened. Negotiations did not break down on these two matters.
I also reject the suggestion that the absence of agreement on these provisions meant that the allocation of risk between the parties was left in an incomplete and uncertain state. First, in starting out to create a binding HoA, the Chief Executives must have contemplated that, provided the HoA contained all essential terms to be binding, the allocation of risk would be acceptable. The HoA would fix the inherent value of the bargain to the respective parties. Secondly, provisions relating to contingencies which cover the allocation of risk as between the parties are regularly omitted from heads of agreement. I have touched on the reasons for this above. (Para ). Utilising the allocation of risk as the criteria for determining whether a term is essential would render many heads of agreement otiose and severely reduce the utility of this valuable commercial tool. Finally, I am impressed by the opinion of Professor Sweeney, a world renowned economist, in evidence who, having noted that the parties were working under pressure of time, observed that, if the process of working out all contingencies were to take too long, the deal might have been lost at a high financial cost to the two parties. This would have greatly increased the "deadweight" cost. The Professor expected that it would have been optimal for both parties to accept an incomplete allocation of risks and, therefore, greater than normal possibility of future disputes, since the cost of working through all contingencies was higher than normal. I do not doubt that ECNZ assumed the risks before the HoA was signed and again when the Board approved the HoA so as to make it unconditional.
I also agree with the majority that the provisions which ECNZ now claim are uncertain fall far short of matters which would cause the courts to declare that an agreement which the parties intended to be binding was unenforceable for uncertainty. Mr Wilson must be correct when he contended that it is sufficient if a disputed term is capable of interpretation. It does not at this stage have to be given an interpretation.
I agree with Wild J that the "K" factor was reserved for agreement if and when it needed to be agreed. As the majority also state, the "K" factor was capable of accurate and objective measurement after non-delivery, but not earlier. (Para ). It was not essential to the efficacy of the HoA. (Para ). With respect to the specification of a maximum hourly quantity, I consider that the essential point is that it was not insisted upon by ECNZ. As the majority conclude, the negotiators must be taken to have decided that it was enough to agree upon a maximum daily delivery obligation with no minimum quantity so that a minimum hourly quantity cap was deemed unnecessary. (Para ). ECNZ’s argument that it is unclear which producer price index is to apply to the annual price adjustment and whether the reference is to an input or output index does not mean that, having regard to the context of the contract as a whole and the surrounding circumstances, the initials "PPI" could not be interpreted by the courts should there be a dispute about its meaning. Expert evidence of market practice might assist the court reach the correct interpretation. I therefore agree with the majority that a court would be perfectly able to interpret the initials "PPI" in the context of the agreement.
ECNZ’s most strenuous argument that the HoA is uncertain related to the provision that FCE would deliver gas only if delivery is "economic". Some ambiguity necessarily exists in the use of such a broad term. But it is capable of interpretation. Suppose, for example, that the question of what is meant by the word "economic" had arisen after the contract had been running for, say, five years. The Court would not throw its hands up and say; "This contract is void for uncertainty". The ambiguity would be resolved by reference to the purpose and scheme of the contract, by having regard to the matrix and, possibly, by reference to industry practice.
Moreover, it is to be borne in mind that the question of interpretation would arise in the context of a dispute in which the parties would advance specific competing arguments as to the meaning which should be imputed to those words. On the basis of the facts as found by Wild J, ECNZ would be arguing that the economic test was a company wide test which required FCE to supply gas unless its whole enterprise was unprofitable. In effect, therefore, FCE would be bound to supply the gas unless insolvent or facing insolvency. For its part, FCE would argue that the word "economic" must relate to the gas which is to be supplied pursuant to the contract, that is, the "gas" which is in issue in the provision; "FCE will deliver gas only if delivery is economic". (Emphasis added). One would imagine that faced with such competing interpretations the Courts would have little difficulty in resolving the correct meaning and, I suspect, resolving it in FCE’s favour.
For these reasons I, too, consider that it cannot be said that the contract is incomplete or uncertain.
In the circumstances I do not propose to say a great deal about the question whether ECNZ failed to use reasonable endeavours to complete the full agreement. I am content to rely upon the findings of Wild J. (See paras  to ). The learned Judge presided over a 14 day trial and heard and saw the witnesses. I utterly reject the majority’s finding that, even if all reasonable endeavours clause were part of the binding HoA, because of the nature of the "not agreed" items, it would be difficult to see that the clause could create any legal obligation to negotiate further. (Para ). To me, the notion, assuming that the HoA is binding, that either party could have legally declined to undertake any negotiations directed to completing the full agreement is disturbing. If that is the law it is an ass.
To my mind, once the HoA was completed, the parties were obliged to negotiate in good faith. Neither party could sit on its hands and decline to negotiate or fail to negotiate in good faith. To decline to negotiate or to negotiate in bad faith (or other than in good faith) would be a breach of that obligation. Essentially, this is Wild J’s finding, and I cannot fault it.
I repeat what I said at the outset that the arguments and evidence that the HoA was intended to be binding are overwhelming. It seems to me that the highest the contrary case can be stated is to say that, although the parties clearly intended to be bound, they would not have had that intention if they had appreciated that the "full" agreement might or would not be completed, whether due to the default of one party or otherwise. Their overt intention, in other words, was based on an assumption which permits the Court to redefine their intention. As I have sought to show, that view is untenable for a number of reasons, not the least being that the parties’ intention is paramount and, having been objectively determined, the Court is obliged to move to the second question and determine whether the contract is so incomplete and uncertain as to be unenforceable.
In his excellent article, which bears repeated reference, "Does Legal Formalism Hold Sway in England?" (1996) 49 II Current Legal Problems, 45, Lord Steyn expressed the view (at 47) that formalism in the sense of an exclusive reliance on formalist methods has not been exorcised in England, but it is on the wane. Is it possible that in this case the exorcist may be knocking at the door? Undue adherence to formalism, it seems to me, is required in the context of contract formation to sanction any of the following notions:
The notion that the object of the courts’ inquiry is or can be something other than the actual intention of the parties, objectively assessed; or
The notion that the courts can impute an "objective" intention to the parties which is not their actual intention; or
The notion that the "subjective" evidence which the courts will disregard is not limited to what the parties say about their intention to be bound, but extends to evidence of what they said and did which points to their intention; and
The notion that the scope of the inquiry is to be restricted to an examination of the terms of the agreement, or that otherwise relevant and reliable evidence is to be excluded, by reference to rules pertaining to the objective interpretation of contractual terms.
As I reflect on the matter in concluding, I find myself wondering whether I may not have been too quick to allow that Hope JA may have stated the point too strongly in the Air Great Lakes case, supra, at 319, when he said: "…if the mutual actual intention [of the parties who have signed a document] was that there should be a concluded contract, it would be fraudulent to deny that intent". To FCE which acted upon the bargain struck, continued to act consistently on the basis of the HoA being a binding contract, did not shy away from calling its executives to give evidence, and mounted the arguments which I have rehearsed in this judgment, it must seem as if Hope JA’s words were made to fit this case.
If this perception is correct, FCE could perhaps feel confident that the decision of this Court will be reversed in the Privy Council. It is highly unlikely that will happen. Stating that prevision in slightly less than absolute terms is prudent only because the outcome of an appeal can turn on the particular composition of the Board. So, why will an appeal be highly unlikely to succeed?
I put to one side the fact that statistics confirm that few appeals from decisions of this Court sitting as a Court of five succeed. Rather, the key lies in the different approach which is nurtured within the ranks of the judiciary. The outcome will follow the approach which is adopted or identified. No one today seriously denies the capacity for judicial rationalisation. So the basic approach is all-important.
But this judgment is neither the time nor place for a discourse on the different judicial approaches which are possible or evident in a case such as the present. It must suffice for me to speak for myself. I consider that it is important that the law should endeavour to meet the needs of commerce rather than require commerce to meet rules laid down by the law. It should meet the reasonable expectations of business men and women rather than require the law to meet the possibly overly legalistic expectations of men and women in the law. The realities of commerce should be recognised, and where the law does not accord with those realities it should be made to give way to a more responsive legal approach.
I would like to think that this is the path which New Zealand would wish to follow as an independent judicial system. If and when it is able to do so, I am confident that, in a case such as the present, the Court will reject the influence of lingering formalism and decline to artificially restrict the scope of the inquiry so as to admit of an outcome which is at variance with the true intention of the parties.
FCE/ECNZ Gas Contract
Heads of Agreement
28 February 1997
*Commercially sensitive prices have been omitted.
Walford v Miles  2 AC 128
Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617
Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309
Australian Broadcasting Corporation v XIVTH Commonwealth Games Ltd (1988) 18 NSWLR 540
Seven Cable Television Pty Ltd v Telstra Corporation Ltd (2000) 171 ALR 89
Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503;  All ER Rep 494
R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd 1964 SC 308
Attorney-General v Barker Bros Ltd  2 NZLR 495
Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101
May and Butcher Ltd v The King  2 KB 17n
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1
Aotearoa International Ltd v Scancarriers A/S  1 NZLR 513
Malcolm v Chancellor, Masters and Scholars of the University of Oxford  EMLR 17
Pagnan S.p.A. v Feed Products Ltd (1987) 2 Lloyd’s Rep 601
G Scammell & Nephew Ltd v Ouston  AC 251
Little v Courage Ltd (1994) 70 P & C R 469
Hillas & Co Ltd v Arcos Ltd  All ER Rep. 494
Pagnan S.p.A v Feed Products Ltd  2 Lloyd’s Rep 601
Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617
Air Great Lakes Pty Ltd & Others v K S Easter (Holdings) Pty Ltd  2 NSWLR 309
Anderton v Auckland City Council  1 NZLR 657
Malcolm v Chancellor, Masters and Scholars of the University of Oxford  EMLR 17
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWL 1
Authors and other references
Professor David McLauchlan, "A Contract Contradiction" (1999) 30 VUWLR 175
D W McLaughlin, "Rethinking Agreements to Agree" (1998) 18 NZULR 77
David Goddard, "Long-Term Contracts: A Law and Economics Perspective" (1997) NZ Law Rev 423
Johan Steyn, "Contract Law: Fulfilling the Reasonable Expectations of Honest Men" (1997) 113 LQR 433
Sir Guenter Treitel, The Law of Contract (10th Ed - 1999)
Lord Steyn, "Does Legal Formalism Hold Sway in England?" (1996) 49 II Current Legal Problems
J Craddock QC, G P Curry and R J Latton for Appellant (instructed by Russell
W M Wilson QC, S S Williams and S L Rees-Thomas for Respondent (instructed by KPMG Legal, Wellington)
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