Ipsofactoj.com: International Cases [2003] Part 10 Case 12 [NZCA]



The Wellington City Council

- vs -

Body Corporate 51702





7 AUGUST 2002


Tipping J


  1. The Wellington City Council (the Council) appeals from a judgment of Wild J holding it liable to pay to the second respondent, Alirae Enterprises Ltd (Alirae) damages of $580,209 for breach of contract. The contract which the Judge found the Council to have breached was what he called a "process" contract. It obliged the Councilís officers to "negotiate in good faith" with Alirae the sale of the Councilís interest as lessor in premises at 20 Brandon Street, Wellington. Alirae was the lessee. The Judge found that the Council, through its officers, was in breach of that contract by failing to conduct the negotiations in good faith. He assessed damages on the basis that if the Council had not been in breach, a substantive contract for sale and purchase would probably have resulted. On that premise Alirae had lost the profit it would have achieved from developing the premises in the manner it had in mind, if able to acquire the freehold.

  2. The Councilís first challenge to Wild Jís judgment rests on the proposition that the process contract, upon which the Judge relied for his breach and damages findings, was not a contract enforceable at law. Hence its breach, which the Council in any event denies, did not give rise to any cause of action. The Councilís argument, shortly stated, is that the so-called process contract amounted to no more than an agreement to try to agree which the law does not recognise as an enforceable contract. This argument was supported by the contention that an agreement of the present kind is not sufficiently certain to be enforceable in law. Before addressing this issue further, it is appropriate to describe its factual context and deal with some incidental points. For that purpose only a general outline is required.


  3. The Council is the ground lessor of 20 Brandon Street. Alirae purchased the ground lesseeís interest as an investment in June 1997. It was a bad purchase. Much of the work done in the premises by the previous lessee was substandard. The previous lessee was not considered worth pursuing for compensation. The premises were not capable of generating enough rental income even to cover the ground rent payable to the Council. Alirae fell into arrears as soon as October 1997. The amount of arrears mounted steadily thereafter; at trial that amount was approximately $500,000. Since acquisition Alirae has paid only $38,000 in respect of ground rent.

  4. On 5 May 1998 the Council wrote to all its ground lessees indicating a willingness to sell its lessorís interest to them. Various terms and conditions were set out in the letter. At much the same time Alirae had decided to sell its interest to minimise losses but on the basis that it would be worthwhile to endeavour to acquire the freehold from the Council as a first step.

  5. On 26 June 1998 the Council formally resolved to negotiate sales of its ground leases to existing lessees. The resolution recorded that the price was to be "the highest possible, but not less than current market value". In addition the resolution provided that "the investment yield Ö from the proceeds of sale must be greater than the long term rate of return from retention". The resolution also stipulated that each agreement was to be submitted "to full Council" for approval prior to implementation. Alirae was aware of the terms of this resolution. A summary of the material ingredients had been conveyed to it in the letter of 5 May. The Council advised Alirae that it would not be negotiating with lessees who were in arrears of rental. Alirae nevertheless responded that it was interested in negotiating. There was discussion and correspondence between the parties over the ensuing months.

  6. On 2 March 1999 the Council wrote to Alirae the letter which formed the basis of Aliraeís later claim. Other parts of this letter are material for other purposes but in respect of this particular issue only one passage requires citation. Under the heading "Process" the Council wrote:

    Council officers will negotiate, in good faith, sales of Councilís leasehold interests to existing lessees at not less than the current market value of those interests.

  7. Alirae argues, and Wild J found, that the Council thereby offered to negotiate in good faith, which offer Alirae accepted by its conduct in entering into negotiations on that basis. Each party provided consideration to the other by their mutual exchange of promises. The crucial question is whether a legally enforceable contract came about. Mr. Wilson argued that Wild J had been correct in holding that an enforceable "process" contract came into existence in these circumstances. Mr. Fowler argued the contrary.

  8. As the issue is whether an enforceable contract came into existence, it is necessary to consider what the terms of that contract might be only to the extent that question bears on the primary issue. But, that said, there is the immediate difficulty which derives from Mr. Wilsonís argument that current market value was both the floor below which the Council did not have to go in the negotiations, and also the ceiling above which Alirae did not have to go. That equates the process contract with an agreement to buy and sell at current market value. Demonstrably this cannot have been what the parties intended. Had they been of a mind to contract on that basis they would no doubt have said so and the present issue would not have arisen. Once it is accepted, as it must be, that the Council was entitled to seek more than current market value, the further difficulty inherent in a process contract with such an elusive end in view must be reckoned with.

  9. Wild J resolved that difficulty by finding that the Council had committed itself "to negotiate a sale at around current market value". That presents its own difficulties which are not lessened by the Judgeís explanation that this meant the Council could not insist on a price "well above, or unrelated to, current market value". With these observations in the background, we turn to examine the law on the enforceability of contracts of the present kind.


  10. The principal authorities to which we will refer are decisions of the Court of Appeal in England, the House of Lords, the Court of Appeal of New South Wales, and this Court. It is convenient to examine them in chronological order. The first case is the decision of the New South Wales Court of Appeal in Coal Cliff Collieries Pty Ltd v Sijehama (1991) 24 NSWLR 1. The Court held that a provision in heads of agreement for a complicated proposed joint venture in respect of a coal mine was not binding as a contractual promise. The provision stated that the parties would "proceed in good faith to consult together upon the formulation of a more comprehensive and detailed Joint Venture Agreement". The Court regarded this provision, in its overall context, as being too vague and uncertain to be enforceable. In his judgment Kirby P surveyed a considerable number of cases from various jurisdictions, and a substantial amount of academic literature. He referred to the then existing English authorities which we will mention below. He noted, at 25F, the contention that the Courts are not well placed to determine what parties might do in fulfilment of a promise to "contract in good faith" (sic), and cited from his own previous judgment in Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130, 133:

    It is an attribute of a free society, as we know it, that it is generally left to parties themselves to make bargains. It is therefore left to them sometimes to fail to make bargains or to fail to agree on particular terms. Well meaning, paternalistic interference by courts in the market place, unless authorised by statute or clear authority, transfers to the courts the economic decisions which our law, properly in my view, normally reserves to parties themselves.

  11. As to that, Kirby P observed:

    This idea is also reflected in the United States decision on this question: see, e.g. Candid Productions Inc v International Skating Union 530 F Supp 1330 (1982) at 1337 (USDC NY). In a case such as the present (as in Donwin in England) the answer to this objection is that it is the very exercise of the right to contract which has bound the parties to the negotiation in good faith that they promised. In this sense, to enforce that obligation is not to interfere in the freedom to contract, but to uphold it.

  12. Under the heading "Enforceable agreement: conclusion", Kirby P said at 26D-27B:

    From the foregoing it will, I hope, be clear that I do not share the opinion of the English Court of Appeal that no promise to negotiate in good faith would ever be enforced by a court. I reject the notion that such a contract is unknown to the law, whatever its term. I agree with Lord Wrightís speech in Hillas that, provided there was consideration for the promise, in some circumstance a promise to negotiate in good faith will be enforceable, depending upon its precise terms. Likewise I agree with Pain J in Donwin that, so long as the promise is clear and part of an undoubted agreement between the parties, the courts will not adopt a general principle that relief for the breach of such promise must be withheld. It follows that in this regard I agree with the conclusion of Clarke J on the principle presented by the first issue before him Ė and now before this Court.

    Nevertheless, alike with Goff LJ in Mallozzi and the substantial body of United States authority which has been cited in this case, I believe that the proper approach to be taken in each case depends upon the construction of the particular contract: see Australia & New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695; see note (1991) 65 ALJ 59. In many contracts it will be plain that the promise to negotiate is intended to be a binding legal obligation to which the parties should then be held. The clearest illustration of this class will be cases where an identified third party has been given the power to settle ambiguities and uncertainties: see Foster v Wheeler (1888) LR 38 Ch D 130; Axelsen v OíBrien (1949) 80 CLR 219 and Biotechnology (at 136). But even in such cases, the court may regard the failure to reach agreement on a particular term as such that the agreement should be classed as illusory or unacceptably uncertain: Godecke v Kirwan (at 646f) and Whitlock v Brew (1968) 118 CLR 445 at 456. In that event, the court will not enforce the arrangement.

    In a small number of cases, by reference to a readily ascertainable external standard, the court may be able to add flesh to a provision which is otherwise unacceptably vague or uncertain or apparently illusory: see, e.g., Powell v Jones [1968] SASR 394 at 399; Sweet and Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699; cf Meehan v Jones (1982) 149 CLR 571 at 589; Jillcy Film Enterprises (at 521); Ridgeway Coal Co (at 408).

    Finally, in many cases, the promise to negotiate in good faith will occur in the context of an "arrangement" (to use a neutral term) which by its nature, purpose, context, other provisions or otherwise makes it clear that "the promise is too illusory or too vague and uncertain to be enforceable": see McHugh JA in Biotechnology (at 156) and Adaras Development Ltd v Marcona Corporation [1975] 1 NZLR 324 at 331.

  13. With reference to the case before him, Kirby P concluded that the contract was unenforceable. It was not, he said, a case involving an external arbitrator. The Court was clearly ill-equipped to fill the remaining blank spaces. There was no objective standard to which the Court could appeal. His Honour repeated the caution he had expressed on an earlier occasion that Courts should hold back from giving effect to arrangements which the parties have not concluded, at least in circumstances like those in the Coal Cliff case.

  14. We are bound, respectfully, to point out that both Kirby Pís analysis and his application of it to the facts merged questions of process contract and substantive bargain. A contract purporting to bind the parties to negotiate, whether expressed in terms of good faith, best endeavours or otherwise, is in substance a contract to try to agree. Breach lies in failure to try, either at all or according to whatever may be required. Breach does not lie in failing to agree. No question of what the terms of the substantive agreement should or might have been directly arises at this stage of the inquiry. Kirby Pís references to external standards and an external arbitrator would be relevant to fixing the terms of the substantive contract. It is difficult, however, to see them as relevant to fixing the terms of an agreement to try to agree, when the parties have not themselves provided for any external standard in aid of that exercise.

  15. It is, in this kind of case, important to keep the process aspect conceptually separate from the substantive agreement which the process contract purportedly obliges the parties to endeavour to reach. As will emerge later, we agree with Kirby P that contracts to negotiate should not be held in all circumstances to be unenforceable. Their enforceability will depend on their terms and particularly on the specificity of those terms. It is, in our view, vital to emphasise from the outset that whether the terms of a process contract are sufficiently specific to be enforceable is an issue separate and apart from whether the substantive agreement, if reached, is sufficiently certain to be enforceable. If it is, the process contract will have borne fruit and no question of a breach of that contract can arise. If the substantive agreement is not sufficiently certain to be enforceable, the negotiations will have failed to bring about an enforceable contract. An issue may remain as to whether the process contract itself was enforceable and, if so, whether there was a breach of it. For these reasons we do not regard Kirby Pís judgment in Coal Cliff as providing much assistance on the present issue, namely whether the process contract in the present case was enforceable.

  16. We turn now to the judgment of Handley JA in Coal Cliff. He noted, at 40C, that it was established law both in England and Australia that agreements to agree, or contracts to make contracts containing as yet unascertained terms were not legally enforceable. He cited a number of cases clearly demonstrating that elementary proposition. He then turned to examine whether the introduction into the equation of the concept of good faith, in the form of an obligation to negotiate in good faith, made any difference. For the reasons he gave, at 41F and G, Handley JA held that a promise to negotiate in good faith is illusory and therefore cannot be binding. His primary reasons were that parties negotiating for a contract are free to pursue their own interests. Generally speaking neither party is under any legal duty to consider the interests of the other. Whether and how long and in what manner the parties should negotiate, are matters within their own discretion.

  17. We add, at this point, that an obligation to negotiate in good faith is not the same as an obligation to negotiate reasonably. Mr. Wilson properly accepted the distinction. An obligation to negotiate in good faith essentially means that the parties must honestly try to reach agreement. They remain able to pursue their own interests within what is subjectively honest, rather than what is objectively reasonable. In this respect the absence of an objective external criterion, as mentioned by Kirby P, is clearly relevant. What stance a negotiating party may take within the bounds of subjective honesty is very much more difficult to determine than if the bounds were those of objective reasonableness. This unexpressed reasoning is what we think underpinned Handley JAís conclusion that a promise to negotiate in good faith is illusory and therefore not binding. The third Judge in Coal Cliff, Waddell A-JA, agreed "generally" with Kirby Pís reasoning but did not deliver a substantive judgment of his own.

  18. The next case to be considered is Walford v Miles [1992] 2 AC 128. The House of Lords held that an agreement to negotiate in good faith was unenforceable for lack of certainty, and amounted to no more than a bare agreement to negotiate. As Mr. Wilson acknowledged, this conclusion is fundamentally inconsistent with Wild Jís judgment in the present case. Counsel argued we should prefer the approach of Kirby P in Coal Cliff, albeit, as we have said, it is not easy to discern the material ingredients of that approach.

  19. In Walford, Lord Ackner delivered the leading speech. The other members of the Appellate Committee, who all expressed their agreement with him, were Lord Keith, Lord Goff, Lord Jauncey and Lord Browne-Wilkinson. At 136G Lord Ackner noted that an agreement to negotiate did not in English law amount to an enforceable contract. That was first decided by the Court of Appeal in Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 W.L.R. 297; [1975] 1 All ER 716. In Courtney the leading judgment was delivered by Lord Denning MR. Lord Diplock and Lawton LJ concurred. That case was followed by the Court of Appeal in Mallozzzi v Carapelli S.P.A. [1976] 1 Lloyds Rep 407, and subsequently by a number of first instance decisions as noted by Lord Ackner at 137F.

  20. Counsel for the appellant in Walford argued that Courtney had been wrongly decided. The House of Lords did not accept that proposition. At 138B Lord Ackner referred to the decision of the United States Court of Appeal, Third Circuit, in Channel Home Centres, Division of Grace Retail Corporation v Grossman (1986) 795 F.2d 291, and said of it:

    That case raised the issue whether an agreement to negotiate in good faith, if supported by consideration, is an enforceable contract. I do not find the decision of any assistance. While accepting that an agreement to agree is not an enforceable contract, the Court of Appeal appears to have proceeded on the basis that an agreement to negotiate in good faith is synonymous with an agreement to use best endeavours and as the latter is enforceable, so is the former. This appears to me, with respect, to be an unsustainable proposition.

  21. His Lordship continued (138D):

    The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively [Lord Acknerís emphasis], a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined "in good faith." However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. Mr. Naughton, of course, accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question Ė how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an "agreement?" A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a "proper reason" to withdraw. Accordingly a bare agreement to negotiate has no legal content.

  22. Clearly, if this Court considers it appropriate to follow the approach taken by the House of Lords in Walford, the Councilís appeal must succeed. We do not have the benefit of Wild Jís views as to whether that would be appropriate nor as to the relationship of the judgments in Coal Cliff and Walford to the present issue.

  23. The Court of Appeal in England returned to the present subject in the light of Walford in Little v Courage Ltd (1994) 70 P. & C.R. 469. An option to renew a lease was conditional upon the parties reaching agreement on what were described as a Further Business Plan and a Further Business Agreement. They related to the running of the hotel premises which were the subject of the lease. The respondent lessor refused to enter into negotiations to try to settle the new Plan and Agreement. The issue was whether in those circumstances it could decline to grant the appellant lessee the renewed lease he was seeking. The Court held that the lessor could not adopt the stance of refusing even to put forward a proposal for the new Plan and Agreement. On a previous occasion the lessor had done so and the Court held that this is what the parties must have intended for the present occasion. The obligation on the lessor was therefore not to negotiate but to put forward a proposal which the parties had implicitly agreed could be put forward on a take it or leave it basis. Having not done so, the lessor was unable to take advantage of its own default so as to frustrate the lesseeís right to exercise his option.

  24. Millett LJ, who delivered the judgment of the Court, said at 475 that unlike some systems of law, English law does not recognise a pre-contractual duty to negotiate in good faith, and will neither enforce such duty when it is expressly agreed nor imply it when it is not. He cited from Lord Acknerís speech in Walfordís case at 138 in support of those propositions. Millett LJ noted Lord Acknerís reference to such an agreement lacking the necessary certainty, albeit Lord Ackner did say that an agreement to use best endeavours would have sufficient certainty. However, as Millett LJ pointed out, Lord Acknerís reference to sufficient certainty in relation to best endeavours was too loosely expressed. A contractual duty to use best endeavours to achieve a defined object is enforceable, whereas an obligation to use best endeavours to achieve an indefinite object is not. Hence an agreement to use best endeavours to agree a mutually acceptable price is unenforceable: see Goff LJ in IBM United Kingdom Ltd v Rockware Glass Ltd [1980] F.S.R. 335, 348:

    In Bower v. Bantam Investments Ltd [1972] 1 W.L.R. 1120 I was not in any way suggesting that an obligation to use best endeavours is uncertain and cannot be enforced. The difficulty over uncertainty in Bowerís case was that the object which the best endeavours were to be used to achieve was left wholly indefinite.

  25. Millett LJ summarised the position as the Court saw it in Littleís case in the following way (at 476):

    An undertaking to use oneís best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use oneís 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.

  26. Our final reference to case law is to the decision of this Court in Fletcher Challenge Energy v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433. That case turned on whether the parties intended to be bound, a point not directly addressed in the present case. The discussion is nevertheless of some relevance to the present issue. There is, as we mention in paragraph [31] below, an analogy between this Courtís approach in ECNZ to a best endeavours obligation within an existing contractual relationship and a process contract involving negotiations in good faith. That analogy and the law on whether a substantive rather than a process contract is enforceable should not be allowed to obscure the fact that the enforceability of a process contract derives from the certainty of its terms rather than those of the substantive contract which the process contract envisages. This must also be kept in mind in relation to the textbook references we make in paragraph [29] below. The reasoning from them is also by analogy rather than direct.

  27. At paragraphs [114] and [115] Blanchard J, writing for the majority in ECNZ, referred with approval to the passage from Millett LJís judgment in Little to which we have referred above. He observed that in best endeavours cases the end in view, what he called the full agreement, must be sufficiently precise for the Court to be able to spell out what the parties must do in exercising their reasonable endeavours. The majority in ECNZ then observed that where the objective of the best endeavours, and the steps needing to be taken to attain that objective, are able to be prescribed by the Court, a best or reasonable endeavours obligation will be enforceable. That such might be possible in some cases was acknowledged and reference was made to Coal Cliff.

  28. The law in Canada is basically the same as that in England: see The Law of Contract in Canada by G H L Fridman (4th ed, 1999) at 24, 67 and 85. At 85, under the heading Negotiation in good faith, the author says that an agreement to bargain in good faith does not give rise to an enforceable contract. The only exception is where an already concluded contract requires the parties to negotiate a specific contract outside that contract; for example the rent on a renewal of lease: Empress Towers Ltd v Bank of Nova Scotia (1990) 73 DLR (4th) 400, a decision of the British Colombia Court of Appeal. Leave to appeal to the Supreme Court in this case was declined: [1991] 3 W.W.R. xxvii (S.C.C.). It is significant that the general rule, as stated by Fridman, has the influential support of Professor Stephen Waddams: see Pre-Contractual Duties of Disclosure in Essays for Patrick Atiyah, edited by Cane and Stapleton (1991) Chapter 10, especially at 253-254.

  29. Support for the conclusion we favour can also be found in Treitelís Law of Contract (10th ed, 1999) at 57; Chitty on Contracts, Volume 1, General Principles (28th ed, 1999) at 2-216ff; and Burrows Finn & Todd, Law of Contract in New Zealand (2nd ed, 2002) at 3.7.3ff. In the last mentioned work, the authors appropriately point out that when the parties intend that an essential obligation is to be determined by some objective criterion, the Court will supply the answer if the parties cannot agree and even if the agreed machinery proves defective. However, when the content of the obligation is left for future determination on a purely subjective basis, the Court cannot assist and the contract fails for want of sufficient certainty. Hence an agreement to buy and sell at a price to be agreed will be unenforceable, whereas an agreement to buy and sell at market or some other objectively ascertainable price will be enforceable, even if the Court is the only implicitly agreed or default arbiter of the price: see Attorney-General v Barker Bros Ltd [1976] 2 NZLR 495, and Money v Ven-Lu-Ree Ltd [1988] 2 NZLR 414 (CA); [1989] 3 NZLR 129 (PC).


  30. The position can be summed up in the following way. The essence of the common law theory of contract is consensus. It follows that for there to be an enforceable contract, the parties must have reached consensus on all essential terms; or at least upon objective means of sufficient certainty by which those terms may be determined. Those objective means may be expressly agreed or they may be implicit in what has been expressly agreed. Taking price as an example, for a contract to be enforceable the parties must have agreed upon the price, or at least they must have agreed upon objective means of sufficient certainty whereby the price can be determined by someone else, or by the Court. If the price is left for later subjective agreement between the parties, the contract is not enforceable.

  31. As we indicated a little earlier, the same theory of consensus applies by analogy to a process contract which obliges the parties to negotiate in good faith for the purpose of trying to reach agreement on all essential terms. Good faith in this context is essentially a subjective concept, as the House of Lords pointed out in Walford. There is thus no sufficiently certain objective criterion by means of which the Court can decide whether either party is in breach of the good faith obligation. The Court is unable in such cases to resolve the question whether a particular negotiating stance was adopted in good faith. The law regards the task of reconciling self interest with the subjective connotation of having to act in good faith as an exercise of such inherent difficulty and uncertainty as not to be justiciable. The ostensible consensus is therefore illusory.

  32. It is implicit in what we have just said that there will be some circumstances in which a process contract is enforceable. The tender cases, although sui generis, provide some analogy: see for example Transit New Zealand v Pratt Contractors Ltd [2002] 2 NZLR 313. In such cases a specific procedure is in issue, and the Court can reasonably determine what the parties are required to do and whether they have done it. If a contract specifies the way in which the negotiations are to be conducted with enough precision for the Court to be able to determine what the parties are obliged to do, it will be enforceable.

  33. In this case we do not have to address what the position would be if money has changed hands in return for a contractually unenforceable promise to negotiate in good faith. If the recipient refuses to negotiate at all, the Court could well be able to order repayment on restitutionary principles. There would be some parallel with a total failure of consideration. A promise to negotiate in good faith, given in return for a money sum, if wholly unperformed, could well give rise to an equitable obligation to repay; but issues such as this can be left for another day.

  34. The law being as discussed, we are led inexorably to the view that the process contract between the Council and Alirae was unenforceable. It was a contract to negotiate in good faith with no more definition than that of what the obligations of the parties were. Essentially we agree with the English approach which seems to us to have been accepted, at least implicitly, by this Court in ECNZ. There is of course the rider to that approach that process contracts can be enforceable if sufficiently definitive of the partiesí obligations. That is how we would see Kirby Pís judgment in Coal Cliff fitting into the general approach which we favour.

  35. It follows that the Councilís appeal must succeed. As there was no enforceable process contract, there can have been no actionable breach of it, and hence no basis for an award of damages. For completeness we will, however, after brief reference to another point, examine the Councilís argument that in any event, even if the process contract were enforceable, it was not in breach because it did not fail to negotiate in good faith.


  36. Understandably neither counsel addressed us on whether the statutory duty of parties to employment relationships to deal with each other in good faith (as provided for in s4 of the Employment Relations Act 2000) had any conceptual bearing on the present case. Nevertheless we think it may be helpful to make brief reference to that topic. As noted earlier, contract involves consensus. Some types of consensus are too elusive or illusory to be contractually enforceable. A statutory duty imposed by Parliament is in a different category. Section 4(1) of the Employment Relations Act imposes a statutory duty on parties to an employment relationship to deal with each other in good faith. The content of that duty is set out in a non exhaustive way in the remaining subsections of s4, and in s32 where applicable.

  37. The employment relationship itself immediately provides a degree of contextual objectivity Ė as in the case of the utmost good faith obligations in insurance relationships. The problematic element of subjectivity attaching to good faith negotiations in the law of contract is therefore significantly reduced in the case of the good faith obligations referred to in s4 of the Employment Relations Act. It would therefore be a mistake if it was thought that the reasoning which applies in ordinary contract cases such as the present could simply be translated into the Employment Relations arena. There the good faith obligation must be regarded as having sufficient general certainty; what effect it has in particular cases will be for the Courts to assess on a case by case basis.


  38. We will address this point quite briefly in view of the fact that the appeal succeeds on the prior point. Mr. Wilson, with commendable succinctness, encapsulated Aliraeís complaint as being that the Council failed to respond to or accept reasonable offers made by Alirae. He also submitted that the Council lacked good faith in seeking to sell to a third party (Takaka) on much the same terms as Alirae was proposing, and in terminating negotiations at an early stage without any or sufficient reason. We do not propose to survey all the extensive evidence of the negotiations which took place between the parties, nor the several offers and counter-offers which were made. While at times the Council may have been rather slow in responding to Alirae, and the gap between the partiesí positions overall was at one point as little as $17,000 in respect of premises with a current market valuation at $1.15m, we do not consider that the Councilís negotiating position or its conduct at any time can be characterised as lacking in good faith. We have already said that good faith and reasonableness are, at least for present purposes, different concepts. The Court is not involved in deciding whether the Council acted reasonably. What is in issue is whether the Council at any stage is shown to have lacked good faith in its approach to the negotiations.

  39. The focus must essentially therefore be on the honesty of the Councilís actions and its overall purpose. An obligation to conduct negotiations in good faith (even if it had been enforceable) does not imply an obligation to reach agreement. The negotiating party can hold out for terms which are in the circumstances honestly tenable. The parameters of the good faith obligation were in present circumstances delineated, to a material extent, by the terms of the Councilís resolution. Alirae knew of those terms and they must be relevant to determining what the good faith obligation required of the Council. In particular the resolution contained the desired objective of highest possible price, and the stipulated investment yield. Council officers can hardly be criticised as lacking good faith if they were, as we would infer, honestly endeavouring to meet these requirements.

  40. Much was made of the Councilís wish to recover, in the price payable by Alirae, land agentís fees which the Council had paid when under no legal obligation to do so. We cannot regard that as a stance lacking in good faith. Nor do we see the Councilís discussions with Takaka as evidencing any lack of good faith. The discussions derived from a joint marketing agreement between the Council and Alirae which also involved Aliraeís bank. We are, in any event, not satisfied there was an extant offer from Alirae on the table at the relevant times. Nor do we see the proposals of Takaka and Alirae as sufficiently similar to justify an inference of lack of good faith towards Alirae, from the Councilís willingness to entertain an offer from Takaka. Indeed Alirae vetoed Takakaís offer and then proceeded not long after to offer the Council over $100,000 less than its own previous offer.

  41. At one point Mr. Wilson submitted that the whole case on the facts could be captured by asking which party had to take responsibility for the negotiations having come so close without ultimate agreement. The question could be framed more precisely as whether that state of affairs was caused by a lack of good faith on the Councilís part. In our view Alirae has not established that to be so. The sticking point related to the land agentís fees of $43,000. But in arithmetical terms the Council, when the gap was only $17,000, was asking Alirae to pay only $17,000 of that sum. That stance cannot be characterised as evidencing a lack of good faith. Mr. Wilson valiantly argued that the Council should have gone back to Alirae and insisted on this proportion of the agentís fee being paid, thus giving Alirae a further chance to bridge the gap. That seems to us to be an untenable proposition. There was no good faith premise requiring the Council to assume that Alirae was incapable of simple arithmetic.

  42. We have so far not traversed the basis upon which the Judge found the Council failed to negotiate in good faith. We have concentrated on those aspects which Alirae pursued on appeal. We add that when the Council declined Aliraeís first offer on 15 April 1999, and indicated that negotiations were concluded, we do not consider its stance represented a breach of its good faith obligations. Negotiations were, in any event, resumed. Alirae's first offer was, in its totality including the vendor finance aspect, so far below current market value that the Councilís good faith obligation did not require it to do more than it did. Had negotiations not resumed, a question may have arisen as to the Councilís refusal to negotiate further. But that is not what happened. We do not therefore share Wild Jís view that the Councilís rejection of Aliraeís first offer constituted a breach of the process contract, this being the essence of the breach which the Judge found established. Indeed, if it were a breach, it cannot have been causative of loss in view of the substantial course of negotiations which followed. The process contract did not in terms provide for how long the negotiations should continue, albeit there was an implication of an end date in relation to when the Council proposed to consider the matter. This of course is a further difficulty as to enforceability but on the premise that the intended period was such as was reasonable in the circumstances, and in the light of the resumption of negotiations, and their extended duration which can only have been to Aliraeís advantage, it is impossible to see the Councilís response to Aliraeís first offer, even if it were a breach, as material in a causative sense to any loss Alirae could establish.

  43. These are, in relatively short form, the reasons why we cannot accept the Judgeís conclusion on this aspect of the case, or the submissions made by Mr. Wilson for Alirae. We agree with Mr. Fowlerís argument that Alirae, which carried the onus, did not establish any material failure, indeed any failure to negotiate in good faith on the part of the Council. In the light of our views on this point, and the prior point, we do not propose to embark on any discussion of the way in which the Judge went about determining and quantifying the damages which he ordered the Council to pay.


  44. Alirae also invoked s9 of the Fair Trading Act 1986 as an independent basis justifying the award of damages in its favour. Having found for Alirae in contract, Wild J did not have to address the Fair Trading Act dimension. Aliraeís submissions on this point can, in our view, be dealt with as summarily as they were presented. There is no basis whatever for finding that the Councilís conduct was in any respect misleading or deceptive. It said it would negotiate in good faith and did so. It follows from our earlier discussion that Alirae has not shown that the Council failed to negotiate in good faith. Even if the Council had failed to do so, it by no means necessarily follows that a breach of s9 would have occurred. In any event there was no breach of s9 on the facts as we view them and therefore no basis for awarding damages under the Fair Trading Act.


  45. Section 28 of the Unit Titles Act 1972 provides that whenever a Body Corporate (here the first respondent) is in arrears of rent for one month, the lessor (here the Council) may apply to the Court for cancellation of the Unit Plan. The building at 20 Brandon Street is the subject of unit titles. The first respondent is the Body Corporate of the units and common property shown on Unit Plan 51702 (Wellington). The only member of the Body Corporate is Alirae. By separate proceedings the Council sought cancellation of the Plan under s28. The Court had jurisdiction to order cancellation because rental was far more than one month in arrears. The jurisdiction is, however, discretionary, and Alirae endeavoured to persuade Wild J not to exercise it. The Judge decided to order cancellation but subject to giving Alirae a prior opportunity to purchase the Councilís interest as ground lessor and, in the process of doing so, to pay all arrears of rent. If Alirae did not take that opportunity, the Judge indicated that cancellation of the Plan would follow.

  46. An issue arose in this Court concerning whether the High Court had jurisdiction to proceed as it had. Mr. Fowler contended that the giving to Alirae of this further opportunity to buy was not a condition of the cancellation order of a kind envisaged by s28. Rather, he argued, it was a condition, the fulfilment of which would have the effect of revoking or preventing the operation of the cancellation order. We need not address this issue further because, after discussions, the parties agreed that Alirae should have this further opportunity upon terms to be settled by the Court.

  47. In that respect there was no dispute that Alirae should pay current market value and all arrears of rent. It was also agreed that if the Council succeeded, as it has on its appeal, it should have costs in the High Court on a 2B basis. The only area of dispute concerned whether Alirae should also have to pay the sum of $56,000, representing the land agentís fee earlier mentioned, and legal costs incurred by the Council. Having considered the arguments on both sides of this issue, we find they both have some force. It is unnecessary to go into the details. The most equitable solution is for the expenses concerned to be borne equally. Hence Alirae must pay $28,000 on this head.


  48. The Councilís appeal is allowed. The judgment against it in favour of Alirae for $580,209 is set aside. The other orders made by Wild J are also set aside to enable the matter to be addressed afresh in this Court. We make orders as follows:

    1. Unit Plan 51702 (Wellington Registry) is to be cancelled unless Alirae purchases the Councilís interest in the ground lease of 20 Brandon Street, Wellington, upon the following terms and conditions.

    2. The price is to comprise:

      1. current market value as assessed by Brian Samuel Mudge or, if the Council does not accept his assessment, as assessed by an independent valuer acceptable to both parties, in which event the costs of that valuation shall be paid equally by Alirae and the Council; and

      2. all arrears of rental; and

      3. all the Councilís costs of and incidental to the proceedings in the High Court as fixed by that Court on a 2B basis, together with the Councilís costs in this Court as fixed hereunder; and

      4. $28,000.

    3. Settlement is to take place no later than 31 October 2002 or such later date as the parties may agree.

    4. Leave is reserved to either party to apply for any other formal order if required fully to implement the settlement.

    5. Alirae is to pay the Councilís costs in this Court in the sum of $5,000 plus disbursements to be fixed if necessary by the Registrar.


Coal Cliff Collieries Pty Ltd v Sijehama (1991) 24 NSWLR 1; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; Walford v Miles [1992] 2 AC 128; Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 W.L.R. 297; [1975] 1 All ER 716; Mallozzzi v Carapelli S.P.A. [1976] 1 Lloyds Rep 407; Channel Home Centres, Division of Grace Retail Corporation v Grossman (1986) 795 F.2d 291; Little v Courage Ltd (1994) 70 P. & C.R. 469; IBM United Kingdom Ltd v Rockware Glass Ltd [1980] F.S.R. 335; Fletcher Challenge Energy v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433; Empress Towers Ltd v Bank of Nova Scotia (1990) 73 DLR (4th) 400; Attorney-General v Barker Bros Ltd [1976] 2 NZLR 495; Money v Ven-Lu-Ree Ltd [1988] 2 NZLR 414 (CA); [1989] 3 NZLR 129 (PC); Transit New Zealand v Pratt Contractors Ltd [2002] 2 NZLR 313

Authors and other references

G H L Fridman, The Law of Contract in Canada (4th ed, 1999)

Cane and Stapleton (editors), Pre-Contractual Duties of Disclosure in Essays for Patrick Atiyah, (1991)

Treitelís Law of Contract (10th ed, 1999)

Chitty on Contracts, Volume 1, General Principles (28th ed, 1999)

Burrows Finn & Todd, Law of Contract in New Zealand (2nd ed, 2002)


R J B Fowler for Appellant (instructed by Phillips Fox, Wellington)

W M Wilson QC and C Anastasiou for Respondents (instructed by C Anastasiou, Wellington)

all rights reserved