Laws 203 Contract PDF

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FINALITY, COMPLETENESS AND CERTAINTYReading:Burrows Finn & Todd Law of Contract in New Zealand, Ch 3 – 3.Cases listed. Those marked with a “#” should be regarded as essential reading.1. INTRODUCTIONHow uncertain can an agreement be and still be a contract? Often contracts can be very complex...

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FINALITY, COMPLETENESS AND CERTAINTY Reading: Burrows Finn & Todd Law of Contract in New Zealand, Ch 3.7 – 3.7.9 Cases listed. Those marked with a “#” should be regarded as essential reading. 1.1. INTRODUCTION How uncertain can an agreement be and still be a contract? Often contracts can be very complex, where judgements need to be made as to whether agreements are contracts. Courts often have to deal with less than complete or precise agreements. This can be: (i) Where negotiations are complete, but not all relevant matters are provided for. This is generally when one party thinks they have done everything necessary of them, but there is still a problem. It must be decided if this problem is enough to end the contract though; or (ii) Where the parties have reserved some matters to be decided in the future. This is where one party knows they have not done everything they could/should have done in terms of the contract. Are such agreements enforceable as contracts? Recent important discussion of this is in Electricity Corporation of NZ v Fletcher Challenge Energy Ltd [2002] 2 NZLR 433 #, especially pp443-445. 1.2. the ECNZ decision Principal feature of case was that ECNZ and FCE were negotiating large-scale long-term supply of natural gas. The parties drew up Heads of Agreement (HoA), and noted one matter was “to be agreed"; others were “not agreed”. No later agreement was reached; FCE tried to enforce the HoA as a contract; HC found for FCE (see [2001] 2 NZLR 219) but the CA allowed ECNZ’s appeal - no contract. CA decision turns on lack of any indication parties intended HoA to be immediately binding in law; also important that no machinery provisions existed to resolve uncertain matters. 1.3 ECNZ dicta as to principle. See para 53 of the judgment. 1.3.1.. Question 1 – intention to be bound. First question is whether the parties intended to become legally bound. Court takes a neutral approach to this. If no contractual intention at x time, no contract then. This is whether people are taking on legally enforceable obligations for legally enforceable rights. At this point was there a definite contract, not just an agreement? When did the parties agree to be legally bound? At what point was the intention to be bound occur? 1.3.1 2. material to be considered. Court can take into account the “factual matrix” in which agreement is made, including earlier negotiations, AND post-agreement conduct. How do we judge on what was agreed? What were the circumstances in the contract that were made? What was the conduct after? In Fletcher, the electric company asked to change the deal, but if there wasn’t a contract why did they ask? Why did Fletcher negotiate if they thought there was a binding agreement? 1.3.3. Second question – are the terms of the agreement sufficiently certain as to “essential matters”? If there was an intention to be bound, Court will try to find a way to make agreement binding. Question is whether there is sufficient certainty as to matters which are legally essential or were considered by parties as essential. Did they do enough to allow the courts to enforce the contract, after the agreement? If the parties intended to sign to the contract, the court can sometimes enforce the contract even if it is not wholly complete, to try and make it work for both of the parties due to their original intentions. 1.3.4. Matters “legally essential” Little or no guidance from CA in ECNZ as to what things are “legally essential” or how much certainty is needed. Logic suggests one requires certainty as to, or method of making certain, identity of parties, of subject matter; nature of consideration and time for performance. What are the things the courts would have to know to make something enforceable? We need a method of making clear who the parties are, what are they bargaining about, the nature of consideration (not how much, but what kind – land, money, work etc), and what is goin to happen? If we do not have these, how can we enforce the contract? For example - Svenson v Ngakuru [2008] 2 NZLR 149 (area of land to be sold not sufficiently indicated). Requirements will vary with nature of contract. We know the parties and the nature (land), but the problem was the identity of the subject matter, as the agreement never said how much land was being sold. Certainty exists if matters can be made certain certum est quod certum reddi potest . See as example Marxen v Smith [1990] 3 NZLR 585 (filling in agreement for purchase of restaurant). There were disputes as to what should be paid, and the judge fleshed out all the essentials of the case to try and reach a decision. The more a matter is “consequential”, perhaps the more likely it is not essential – cf ECNZ, [51]. Here, the Court of Appeal said a contract would not be invalid if people had not gone though and thought about risk allocation

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– it would be their own fault. If something goes wrong and it is not covered in the contract, this doesn’t make the contract invalid. 1.4. Using Contractual Machinery Where parties leave matters to be settled by an external reference point or by some machinery provision in the contract at a future date - no uncertainty. We are usually talking about people who want immediate contracts, but don’t know the issues involved so agree to sort them out at a later day – this is problematic though. There are methods to say that once you do this, you can do that etc. Similarly parties may that the precise terms will be drafted by one party (or the party's agent) using "standard" provisions - e.g. see Robertson Enterprises Ltd v Cope [1989] 3 NZLR 391. Parties agreed to a transaction drafter by one of the parties’ solicitor – acceptable and legally valid. 1.4.1. arbitration clauses - a widely drafted arbitration clause can be used to cover a failure to agree as to some future matter, if there is agreement to accept arbitration. See Attorney-General v Barker Bros [1976] 2 NZLR 495# (extension of lease of land for an airstrip in the Chatham Islands). NOTE ECNZ indicates that no prior contractual obligation to accept arbitration is needed. If we don’t know what is to be in a contract we can put in this machinery to allow things to go through and begin. There can be problems of what to do and if it will work though. The law will allow parties to have fallback machinery process, e.g. if it is not resolved then it will be sorted out later, and if this does not work then there will be a definite way that it will be resolved. The simplest default could be an arbitration clause – process where parties go to an arbitrator and they say what it ought to be. 1.5. Matters “to be agreed” The CA in ECNZ signal significant change in the law as to matters left to be agreed in the future. A clause needs to be wide enough to cover failures to agree. In a way, making a contract enforceable by going to arbitration to sort it out – but arbitration s for binding contracts. This is a problem the courts have not sorted out. Arguments for the future combined with machinery for the future can be problematic. You can’t say “we ourselves will decide this later” – contract to make a contract. A court can’t treat it as a contract as they have nothing to guide them in making a decision, as well as the fact they can’t intervene because it says “ourselves”. If parties intend matter to be settled ONLY by their future agreement – no contract, as no intention to be bound – ECNZ p 444 and see Barrett v IBC International Ltd [1995] 3 NZLR 170# (settlement at date to be mutually agreed – no contract). There was nothing the court could do because the parties said they would sort things out themselves – the court must walk away. See also Plowman v Franklin District Council [2010] 1 NZLR 537 (HC) “agreement in principle” not binding. Trying to enforce an ‘agreement in principle’ suggests there are other things to agree. If the parties left a gap and have not mentioned anything, the courts may step in. There are distinctions between deciding in the future and deciding by ‘ourselves’. One allows the court to step in and the other doesn’t. But if matter is to be agreed and there is an intention to be bound, court will try to resolve matter even if no machinery provided. – see ECNZ – if no subjective agreement needed. Compare Wellington City Council v Body Corporate 51702 (Wellington) [2002] 3 NZLR 486, # at 495-496. The court said a contract to negotiate in good faith is not binding. Negotiations suggest it will be between the parties themself and courts can’t get involved. Court may settle matter by implying term as to machinery, or reasonableness, or drawing from prior dealings. May not always be possible . 1.6. Gaps and meaningless or ambiguous terms Courts may find some gaps not to be filled, so no contract. See e.g. Scammell v Ouston [1941] AC 251; 1 All ER 14 (sale of a vehicle "on hire-purchase terms" - no indication of which kind of terms).BUT meaningless or ambiguous words may be severed if they do not affect the real nature of the agreement - Nicolene Ltd v Simmonds [1953] 1 QB 543. Compare Van Der Hulst v Tainui Corporation [1998] 2 NZLR 359, 363.

1.7 Defective machinery and the "objective" approach What happens when we have machinery which breaks down? If the machinery was the way to fix the problem, but the process fails, now what? For example, you agree to buy a painting and if you don’t agree the cost, it will be at the cost of what an expert values it at, but then the expert dies. The expert was the machinery to fix the contract so now what? The court used to say there would be no contract, but today the courts ask if they can fix it themselves for an objective, fair and reasonable way. Older cases revealed difficulties where contractual machinery was defective. New view, set up in Sudbrook Trading Estates Ltd v Eggleton [1983] 1 AC 444# A tenant wanted to buy land and there was a machinery

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provision to decide the price he would pay. Both the seller and buyer would get valuers who would decide what it was worth, and if they would not agree then a third party umpire would be appointed to decide, however there was no provision saying who this person would be. The seller decided since there was none there would be no sale, but the House of Lords said this was commercially impossible, due to the intentions of the parties they said they could find a way to do it. The court can replace defective machinery with machinery of its own in appropriate cases. Can do so if: (a) the machinery provision could classed as a subsidiary or minor element of the entire bargain, (b) the parties had clearly intended the machinery to determine a contractual obligation objectively (as with a "market” or "fair" value). If the parties intend to have machinery but it is not good enough the court can step in and fix it due to the intentions of them. The machinery in this case is not broken, it is just not successful. Sudbrook has been extended to allow the courts to supply machinery provisions to cases where the machinery provided was essentially defective and did not allow for proper decision of the issue. See the case of Money v VenLu-Ree Ltd, reported at [1988] 1 NZLR 685 (HC); [1988] 2 NZLR 414 (CA) # and [1989] 3 NZLR 129 (PC) # (purchase of shares with parties to get valuations - no other machinery provided). In this case there was an agreement that parties would get accountants to value shares of a company, so one person could be bought out of his shares. However, during this another company bought the company and the share prices rose. Where was the binding agreement made? Before the company was bought, where the shares were worth less, or after when they were worth more? The High Court said there was no agreement, but the Court of Appeal and Pricy Council said they could make it work – the agreement for valuation of the shares shows intention to pay the market value. The machinery was not good, but the intention was there so the court could put in another provision to fix this. It allows the parties to not have to work out the machinery, all they need is an objective intention, e.g. market price. It would be different if a subjective one, e.g. market price less amount decided by the buyer – court can’t intervene. 1.7.1. The limits of the machinery approach. Sudbrook or Money v Ven-Lu-Ree can not apply: 1.7.1.1. where the parties want to settle on subjective grounds - see Hinterleitner v Heenan (1990) 1 NZ ConvC 190,468 (CA) and Plowman v Franklin District Council [2010] 1 NZLR 537 (HC), [53]. If agree later what the market price is but say you will pay less than that depending on your own reasoning – the machinery is not objective so how can the court settle this? Can’t put in a objective one instead. 1.7.1.2. if the parties have regarded the machinery provision as essential to the agreement. See as example Nelson v Cooks McWilliams Wines Ltd [1986] 2 NZLR 215 (grape-purchasing case - price to be determined solely by a special committee) If the parties say machinery is the only way it will be sold then it is that or nothing. In Nelson, grapes were being grown for buyers, and the price paid would be a critical and standard agreement with two different machinery provisions. The first was an arbitrary way over dealing with the grapes quality, delivery, time etc, but price could not be decided this way, but instead by a fixed later agreement of the grower and company, or by a special committee of growers and buyers (but no committee existed), so the machinery did not work. But the court said nothing they could do to solve this – no contract. There were no provisions saying who would be in this committee and how it would be chosen so what could be done. 1.7.1.3. where there is an existing, effective machinery provision - Northern Regional Health Authority v Derek Crouch Construction Co Ltd [1984] 1 QB 644; 2 All ER 175. A court cannot be asked to improve machinery if it is already working but just slow. 1.8 FUTURE AGREEMENTS 1.8.1. "agreements to agree" The common law does not recognise a contract to make a contract see Walford v Miles [1992] 2 AC 128; [1992] 1 All ER 453. Agreement to negotiate in good faith not contractually enforceable - Wellington City Council v Body Corporate 51702 (Wellington) [2002] 3 NZLR 486# (but see McLachlan (2003) 20 NZULR 265). The body corporate said there was a contract for them to buy land that flats were on from the council. They said they had a contract saying they would enter into negotiations for sale. The High Court said there was a contract, but the Court of Appeal said there wasn’t – can’t have a contract enforcing people to negotiate in faith. Could be different if objective guidelines within original contract, e.g. look for market price, could be resolved. But negotiations are not binding. You can’t force people to negotiate with you at a later date, but you could put in machinery provisions if negotiations fail. BUT there are ways around the difficulties of future agreements: (i) to leave matters to be determined by the use of a machinery provision or external standard. (see above for principles). (ii) to make the contract conditional on some future event - as to this see later lectures on conditional contracts.

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(iii) to "buy" a right to be able to enforce at some future time a set of currently agreed terms - the option approach. (iv) to settle for some lesser fetter on one or other party's freedom of action: - by securing a right of pre-emption or "first refusal". - a "lock-out" provision - or by creating some other minor degree of obligation We will NOT discuss in lectures numbers (iii) and (iv). For them see Burrows Finn & Todd Law of Contract in New Zealand, 3.7.4 The most common way in keeping flexibility but creating binding contracts is with:

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2. CONDITIONAL CONTRACTS 2.1 INTRODUCTION. A "condition" is a stipulated fact or occurrence, the existence of which affects the obligations of parties to a contract. E.g. if you want to buy a house you would want to get an engineering report first. You know the price and don’t want them to sell to someone else, but you don’t want to buy before the report – you make a conditional contract on the report being successful. A similar situation when needing to get mortgage – subject to finance conditions. 2.1.1. Conditions precedent and subsequent A condition precedent in theory is a condition which must fulfilled before an agreement becomes contractually binding. A condition subsequent is in theory a condition which must be fulfilled if the contract is to continue to have binding effect. A functional analysis of conditions may be more useful. In one you are bound to comply with the contract, but in the other you are entitled to change your mind. You can avoid such problems by simply stating what you must actually have done to start or continue the contract. 2.2. CONDITIONS REQUIRED FOR THE FORMATION OF AN AGREEMENT This is where part of the offer and acceptance procedure is made subject to a condition. Until that condition is fulfilled, the offer and acceptance procedure has not been completed and there is no contract. 2.2.1. Conditional offers - See Buhrer v Tweedie [1973] 1 NZLR 517 2.2.2. Conditional acceptance Frampton v McCully [1976] 1 NZLR 270. We assume the parties went through offer and acceptance – do you have a contract? Was there intended to be a contract? Are there conditions which still need to be met? We must remember, that contracts do not have to be in writing – an oral agreement is fine. However, in the case of large scale transactions the courts will assume that a formal contract is required and that an oral one will not be enforceable, as this is usually the case. 2.3. CONDITIONS REQUIRED FOR AGREEMENT TO BECOME A CONTRACT Offer and acceptance is complete, but until the condition is fulfilled, the agreement has no contractual force. 2.3.1. Subject to contract cases. Normal position is that any contractual liability of the parties is to be suspended until the formal document is signed - a presumption of law to this effect (see Chillingworth v Esche [1924] 1 Ch 97 at 114). 2.3.1.1 presumption in large scale land transactions. If the transaction is of a type normally recorded in a formal written document (as with major land sales), rebuttable presumption that no contract until document executed - see Carruthers v Whitaker# [1975] 2 NZLR 667; also Spengler Management Ltd v Tan [1995] 1 NZLR 120 and Verissimo v Walker [2006] 1 NZLR 760, 768-70. 2.3.1.2. Rebutting presumption. The presumption is rebuttable on the facts - see France v Hight [1990] 1 NZLR 345 (intended lease of farmland effective immediately, despite statement that the terms of the lease shall be "incorporated" in a formal lease). In a rebuttable presumption, one part can point to the evidence and show the court that what was intended is not the truth of what can be done, so in return the court can say if this is not possible then you must reach another particular requirement. If something is irrebuttable though then no intervention is allowed by the court. The parties point to evidence that they did not in fact intend to have formal document before a binding contract. 2.3.1.3. presumption in large scale commercial transactions Same presumption applies in complex commercial contracts - Concorde Enterprises v Anthony Motors [1981] 2 NZLR 385#. See also Holmes v Australasian Holdings Ltd [1988] 2 NZLR 303, (oral agreement not intended to be binding until a contemplated written contract signed) and compare Shell Oil Ltd. v Wordcom Investments Ltd [1992] 1 NZLR 129. No contract until formal document = presumption for common ordinary position. Two other possibilities may result. 2.3.1.4 full contract is to settle matters not yet agreed between the parties. No complete offer and acceptance. No contract until final document executed (e.g. Winn v Bull (1877) 7 Ch D 29). The parties can have an agreement and say anything not sorted out will be done in the drafting of the contract. This is not a contract as there is no agreement on all the important details. It is uncertain and unenforceable. BUT if the parties have agreed how incomplete matters are to be filled in later, can be a binding contract (machinery provision) - Coachman Properties Ltd v Panmure Video Club Ltd [1984] 2 NZLR 200 and Rober...