Barton v Air New Zealand Limited HC Wellington Civ-2002-485-838
[2004] NZHC 1013
•6 October 2004
IN THE HIGH COURT OF NEW ZEALAND CIV-2002-485-838 WELLINGTON REGISTRY
BETWEENGEORGE PATERSON BARTON
Plaintiff
AND AIR NEW ZEALAND LIMITED
Defendant
Hearing: 29 and 30 July 2004 Appearances:
P D McKenzie QC and C Batt for the Plaintiff
N S Gedye and J Guest-Alloway for the Defendant
Judgment:
6 October 2004
JUDGMENT OF FRANCE J
CONTENTS
Introduction
Construction of contract – ability to vary in this way? Effective decision?
Illusory contract? Discretion
Result Costs
Para No.
[1]
[11]
[52]
[72]
[108]
[109]
[110]
Introduction
[1] Air New Zealand operates a programme called the Koru Club to provide improved services for frequent travellers who use the airline. The Koru Club programme operates on a membership basis. Generally, membership involves a paid subscription. Membership brings with it a number of privileges, of which one is access to Air New Zealand lounges at a number of domestic and international terminals.
[2] The plaintiff, Dr Barton, joined the Koru Club in May 1989. He renewed his membership after that, most recently in November 2001, paying $975 for a two year membership for himself and his wife. When Dr Barton joined the Koru Club and at the time he renewed membership in 2001, a member could use the Koru Club when the member was accompanying a guest. Either the member or the guest had to be travelling on Air New Zealand on the day they accessed the lounge and the guest had to have a Guest Pass. Membership entitled the member to a set number of Guest Passes and there was an ability to purchase an Annual Guest Pass. Dr Barton says this aspect of membership was important to him when deciding whether or not to renew his membership to the Koru Club.
[3] In June 2002, Air New Zealand wrote to Koru Club members advising of a change in relation to access to the airport lounges. Following the change, both members and their guests had to be travelling on the day they sought to access the lounge.
[4] Dr Barton and his wife sought to access the Koru Club lounge at Wellington Airport on 6 October 2002 with their grand-daughter who was travelling on Air New Zealand that day. Access to the lounge was refused. Dr Barton was told the Koru Club had a new policy which only permitted access to the lounge for persons who had boarding passes for travel that day.
[5] Dr Barton wrote to Air New Zealand about what had happened. He was not happy with Air New Zealand’s explanation and, promptly after that, the present proceedings were brought.
[6] Essentially, Dr Barton says that in denying access to the lounge on 6 October 2002, Air New Zealand breached their contract with him. He argues, first, a proper construction of the contract does not allow Air New Zealand to unilaterally, permanently, cancel or withdraw the privilege relating to access to guests as Air New Zealand purports to have done here. Second, Dr Barton says there has been no empowering or proper decision on the part of Air New Zealand to make the relevant changes to the contract. The relief sought includes a declaration.
[7] Alternatively, Dr Barton says that if the contract can be changed in this way, the terms and conditions of the contract are illusory promises and so are without legal effect.
[8] Air New Zealand’s response is that the contract gave it the power to make this change; in accepting the contract, Dr Barton accepted that Air New Zealand had that power; and the change was properly made by Air New Zealand. Air New Zealand says the change made here concerns a minor aspect of how it will carry out its promise and so does not fall into the category of illusory contracts.
[9]The issues are:
a)Does the contract allow Air New Zealand to vary the contract to restrict access to lounges in this way?
b)If it does, was an effective decision to that effect made by Air New Zealand?
c)If the answers to (a) and (b) are yes, are the promises made by Air New Zealand illusory promises and so without legal effect?
d)Depending on the answers to (a), (b), and (c), should the Court in the exercise of its discretion, grant the declaration sought by Dr Barton?
e)Depending on the answers to (a), (b), and (c), is Dr Barton entitled to restitution from Air New Zealand of the proportionate part of the
Koru Club subscription for which Dr Barton was denied the benefit of membership, namely, $547.60?
[10] Air New Zealand pleaded an affirmative defence of waiver but, at the hearing, Mr Gedye for Air New Zealand confirmed waiver was now only raised as an aspect of the exercise of the discretion to grant relief.
Construction of contract – ability to vary in this way?
(i)The parties’ positions
[11] The respective parties’ positions are clear. The plaintiff says that taking into account the promises made in the application booklet to attract an individual to join the Koru Club and given also the importance of access to the lounges, the contract is to be construed as not allowing the permanent withdrawal or removal of the ability to use the guest card in the situation in which the plaintiff found himself on 6 October 2002.
[12] In this context, Dr Barton’s evidence is that a significant factor in his decision to join the Koru Club and retain membership has been the ability to use the facilities to meet and farewell travellers and to entertain guests when travelling himself. He says that prior to renewing membership in November 2001, he and his wife discussed whether they were likely to have sufficient use of the facility to justify the membership fee. They decided that they would renew the membership because of the ability to use the Koru Club facilities on the terms set out in the Membership Directory. He says that had he known that the use of the lounge vis a vis non-travellers would be denied him, he would almost certainly not have renewed membership.
[13] The plaintiff accepts that Air New Zealand can make changes which are in the nature of regulating access. For example, the plaintiff accepts that in an emergency, such as a fire or terrorism incident, a lounge may have to be closed. Further, in the event of a strike on the part of staff, services may be suspended and
lounges closed. If a traveller had a health emergency such as a heart attack, admissions to the lounge may be temporarily denied. Similarly, an inebriated or disorderly guest or traveller can properly be refused access or asked to leave. The other example given by the plaintiff of change of a regulatory nature is where building alterations require the temporary suspension of services and the closing of a lounge. The submission is that while the terms and conditions of the contract can be read as providing for such temporary change or withdrawal of services, they do not provide for the unilateral abrogation of privileges which are offered.
[14] The plaintiff’s submission is that the language used in the contract is not clear enough to do what Air New Zealand purports to have done here.
[15] The defendant’s position is that the terms of the contract are those set out in the Membership Directory. The application booklet is irrelevant as a matter of principle and also because there is no evidence that the current booklet was the one which was sent to the plaintiff. In any event, even if the Court considers the application booklet, that does not support the plaintiff’s interpretation. Rather, the application booklet makes it clear that the purpose of the Koru Club is to provide a haven for travellers, not non-travellers.
[16] Air New Zealand further submits that the contract gave it the right to change the terms and conditions in this way and the words in the contract are clear and unambiguous. Further, the context and purpose of the contract support Air New Zealand’s interpretation. The submission is that if Air New Zealand could not change the contract in this way, that would create great difficulties for Air New Zealand.
[17] Dougal Swift, who was the Manager of Air New Zealand’s loyalty programmes at the relevant time, explains that there were two reasons for the change to the lounge access policy, namely,
a)To reduce overcrowding in the lounges in the main centres; and
b)Because Aviation Security at Auckland airport advised that it would be prohibiting any non-flying persons through the security checkpoint which exists before access to the Koru lounge there can be gained. (Aviation Security is a division of the Civil Aviation Authority.)
[18] Mr Swift also gives evidence about the Koru Club more generally. As at 31 December 2003, the programme had 37,598 members. In addition there were some 11,000 Gold members and 5,000 Gold Elite members of the airpoints frequent flyer scheme who are both entitled to use the lounge. This makes over 53,000 people entitled to use the Koru lounges. In addition, Silver air points members are entitled to one lounge visit each per annum. There were some 30,000 Silver airpoints members as at the end of last year.
[19] Mr Swift says that a programme involving 11 Koru Club lounges in New Zealand for some 83,000 members with right to access to 11 international lounges as well is inevitably going to require some changes from time to time. He says it would be impractical to enter into a variation of contract with 83,000 individual members each time Air New Zealand wanted to make a change to the terms of use of the Koru lounges or the international lounges. He says it would be unworkable to only have the ability to make a change when membership was renewed or initiated given that each member has a different renewal date and some members take out a two year rather than a one year membership. Further, some 2,875 people had life memberships at the end of 2003.
[20] Mr Swift’s evidence is that approximately 1,042,000 customers used Koru Club lounges within New Zealand in 2003. Further, that the Koru lounges are subject to peak surges usage in response to flight schedules.
[21] Mr Swift points out that delays and disruptions could lead to a heavy influx of people and that heavy lounge usage can lead to operational problems in relation to flow through to the aircraft and on time departures. Accordingly, he argues that Air New Zealand needs to have well defined rules about access for its customers.
[22] Mr Swift does not regard use of the Koru lounge by non-travellers as a core or significant benefit to members. He says that the whole point of such lounges is to facilitate the member’s travel on Air New Zealand.
(ii)Use of application booklet to construe contract
[23] I deal first with the relevance or otherwise of the membership application booklet.
[24] The plaintiff’s argument is that the contract is to be construed having reference to the application booklet. It does not matter whether or not the plaintiff had knowledge of the booklet although Mr McKenzie argues there is sufficient evidence to indicate the plaintiff did receive the document corresponding to the current version of the application booklet. Hence the plaintiff says that there is an analogy to the facts in ICS v West Bromwich Building Society [1998] 1 All ER 98 where, in interpreting a claim form, some regard was had to an associated explanatory note.
[25] The plaintiff submits that access to the lounges and the use of the guest pass is one of the significant features Air New Zealand promotes as attaching to membership of the Koru Club. Further, the application booklet does not say that Air New Zealand can unilaterally change or withdraw any of the privileges. Finally, the plaintiff points to the references in the application booklet to “all privileges” attaching to the particular classes of membership.
[26] The defendant says it is wrong in principle to consider the application booklet in construing the contract given there is no plea of pre-contractual misrepresentation. It is further submitted that reference to the booklet is irrelevant because there is no evidence that the version of the booklet before the Court was the one that Dr Barton saw. Finally, Air New Zealand submits that the application document cannot assist the plaintiff because:
a)The terms of the contract are set out in the Membership Directory and that does not incorporate the application booklet.
b)The terms of the Membership Directory are clear and unambiguous, it is inappropriate and unnecessary to have recourse to pre-contractual material like the application booklet.
c)The section in the application booklet on complimentary guest passes is no more or less prominent than the 12 other sections on privileges. This section addresses guest passes and not non-traveller access.
d)The question of non-travelling access is not dealt with separately and is covered only in an oblique way. It is referred to only by a sidewind in the context of guest passes and is of small significance.
[27] The Court has the application booklet issued in February 1995. The evidence is that Dr Barton cannot be sure what version of the booklet he saw. The 1995 application booklet makes it clear that the terms and conditions are those set out in the Membership Directory.
[28] It appears that renewing members do not get resent the application booklet at the time of renewal. It is not entirely clear what Dr Barton received when he renewed at the relevant time and there have been some changes in the information provided to renewing members over time. For example, the 1999 version of the renewal form to which a copy of Dr Barton’s cheque dated 1 November 1999 is attached states:
“Conditions of membership are contained in the brochures ‘MEMBERSHIP DIRECTORY’ included in the membership kit and the ‘MEMBERSHIP APPLICATION’.” (My emphasis)
[29] The renewal form sent to Dr Barton in 2003, by contrast, says: “Conditions of Membership are contained in the brochure ‘Members’ Guide’ .. and online ..” with no reference to the membership application booklet. There is no evidence before the Court about the contents of the form when Dr Barton renewed at the critical time, i.e., November 2001.
[30] In these circumstances, I consider the defendant is right that reference to the application booklet is not appropriate in construing the terms of the contract. A mis-
match between the application form and the terms and conditions might potentially give rise to issues under the Fair Trading Act 1986 but that is not in issue here. The terms of the contract are those set out in the Membership Directory. Clause 1.2 of the Membership Directory states:
“These terms and conditions and the provisions of the Membership Directory govern the operation of the Koru Club.”
[31] In any event, at least in this case, the application booklet does not assist particularly because the relevant parts of the Membership Directory are clear. Further, while the application booklet (1995 version) gives some prominence to the privileges associated with membership like Guest access, the defendant is correct that the primary focus is on the facilities for travelling members.
(iii)The terms and conditions
[32] Turning then to the relevant contractual provisions in the Membership Directory. Those provisions include the statement that members have agreed to be bound by the terms and conditions. Clause 3 states that by using the membership card, “a Member agrees to be bound by these terms and conditions.”
[33]Further, the power to change terms is expressed broadly. Clause 1.3 says:
“These terms and conditions may be changed at any time with or without notice as Air New Zealand may decide in its absolute discretion.”
[34] In addition, clause 1.4 gives Air New Zealand the ability to suspend or terminate the operation of the Koru Club at any time “in its absolute discretion”.
[35] Clause 1.5 deals with giving notice to a member under the terms and conditions. Notice is deemed to have been given if posted to the member at the last address provided by the member to Air New Zealand for the purposes of membership of the Koru Club.
[36]Clause 2 sets out the different types of membership.
[37] Clause 4.1 states that the “privileges” available to members are set out in the Koru Club Membership Directory and that privileges are not transferable. “Privileges” means “The benefits, facilities, arrangements and services offered or made available to Members from time to time by the Koru Club.” (Clause 1.1). Clause 4.2 states:
“Air New Zealand does not guarantee or warrant the Privileges will be available or will be available at any time or place. Air New Zealand is not liable for any loss, expense or damage arising from the provision or non- provision, whether in whole or in part, of any of the Privileges. Air New Zealand is not liable for the refusal of any provider of Privileges to accept or honour the Card nor is it responsible for Privileges made available to or utilised by the Member. Any complaints by the Member must be resolved with the provider of the relevant Privilege.”
[38]Clause 4.3 is critical. That states:
“Air New Zealand reserves the right in its absolute discretion to withdraw, cancel, vary, or in any way change, at any time without notice, any of the Privileges offered or advertised as available to the Member by virtue of Membership of Koru Club and Air New Zealand shall not be liable for any loss or damage suffered by the Member resulting from such withdrawal, cancellation, variation or change.”
[39] Clause 5 deals with access to lounges. Clause 5.1 gives Air New Zealand staff the discretion to refuse entry to a lounge to any member or member’s guests at any time.
[40] Under clause 5.2 Air New Zealand staff may in their absolute discretion at any time require a member or a member’s guest to leave a lounge immediately without providing any reason or prior notice or warning.
[41]Clause 5.3 reads as follows:
“Air New Zealand reserves the right to restrict, limit, curtail or discontinue the availability of any Lounge or facility therein, including the self-service bar in any or all of the Lounges at any time as Air New Zealand in its absolute discretion so decides.”
[42] Clause 5.4 deals with the dress code. Clause 5.5 states that access to Koru Club domestic lounges in New Zealand is subject to the enumerated conditions. There then follow a number of bullet point conditions which include:
“Members may access the Koru Lounges at the Domestic Terminals in Auckland, Wellington, Christchurch or Dunedin Airports for meeting or farewelling a passenger travelling on an Air New Zealand Domestic service upon presentation of their Card and provision of the name of the passenger if Air New Zealand so requests.”
[43] Under the heading “General”, clause 1.1 includes various definitions. A “Guest Card” means:
“a card purchased by a Member .. from Air New Zealand on payment of an annual fee, to enable admission of a guest of the Member to specified Air New Zealand Lounges when the guest is travelling with that Member.”
[44] “Guest Pass” is defined as meaning the complimentary pass issued by Air New Zealand “for the one-time entry of a guest of a Member .. to an Air New Zealand Lounge in accordance with these terms and conditions.”
[45] A later bullet point condition in clause 5 deals with admission of a guest at Koru lounges at domestic airport terminals at Auckland, Wellington, Christchurch and Dunedin airports prior to:
“the Member boarding an Air New Zealand Domestic flight, or while the Member is in transit between Air New Zealand Domestic flights .. upon presentation of a Guest Card or a Guest Pass, when accompanied by the Member who presents the Member’s Card and an Air New Zealand Domestic flight ticket or boarding pass for travel from that terminal on that day.”
[46] Clause 6 of the Terms and Conditions deals with airpoints eligibility. Clause 7 is headed “Termination and Suspension”. In terms of clause 7.1, Air New Zealand reserves the right to revoke “in its sole discretion” membership of the member of the Club at any time “without notice and without giving a reason”. Subject to condition 7.3, if membership is so revoked Air New Zealand will refund a proportion of the membership fee paid by the member. There are then provisions dealing with termination or suspension if the member has abused or misused the privileges.
[47] Clause 8 deals with Air New Zealand’s privacy policy. Clause 9 deals with tax liability. Clause 10 deals with miscellaneous matters. Clause 10.1 states that the
terms and conditions are to be construed in accordance with the laws of New Zealand.
[48] Ultimately, the difficulty with the plaintiff’s argument is that the provisions are clear and do, on their face, allow Air New Zealand to make the change it has made. It is hard to see what additional words would clarify Air New Zealand’s ability to restrict access as it has done here for the reasonable business and security reasons Mr Swift explains.
[49] The plaintiff acknowledges that clause 1.3 is the most difficult for the plaintiff to deal with. I agree because on its face the clause provides for this “change” to a term and condition to be made. Clauses 4.2 and 4.3 reinforce that.
[50] The plaintiff’s submission is that the contract allows of change so as to better regulate or manage the provision of the privileges provided for in the contract. Similar submissions are made in relation to clauses 4.2 and 4.3. However, I consider that the change made by Air New Zealand is in the nature of regulation of access to the lounges rather than an abrogation of privileges. Mr Swift’s explanation of the reasons for the change supports that conclusion as does the focus on provision for travellers, rather than non-travellers. Accordingly, even on the plaintiff’s analysis, the change is one within Air New Zealand’s powers.
[51] It is not necessary for these purposes to construe Air New Zealand’s powers any more broadly. Clauses 1.3, 4.2 and 4.3, are sufficient to enable this change of a regulatory nature to access to the lounges be made. The plaintiff’s claim on this aspect is unsuccessful.
Effective decision?
[52] The plaintiff argues that if there was power to vary the contract, then the contract requires both the exercise of a discretion and a decision on the part of Air New Zealand. Essentially, the plaintiff says the change had to be made by someone or somebody higher up the management hierarchy than Mr Swift. The plaintiff refers to clauses 1.3 and 4.3 of the terms and conditions. Clause 1.3 refers to
changes “as Air New Zealand may decide in its absolute discretion”. Clause 4.3 is “Air New Zealand’s” reservation of the right in its absolute discretion to change etc the terms and conditions.
[53] In clause 1.1, “Air New Zealand” is defined to mean “Air New Zealand Limited, the operator of Koru Club.” Air New Zealand is a company under the Companies Act 1993, securities of which are listed on the New Zealand Stock Exchange.
[54] The plaintiff submits that it is not contemplated that the exercise of powers in relation to matters of such major corporate significance can be dealt with wholly at corporate level. It is submitted that is particularly so in this case where there is an exercise of a broad discretion to vary the terms of a significant corporate contract.
[55] The plaintiff refers by way of analogy to the development of approaches in relation to criminal responsibility for companies. In Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 170-171, Lord Reid referred to what has been termed the principle of identification under which there is a need for a determination of who within the company is in a position of control.
[56] The plaintiff also refers to the principle of attribution adopted by the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 in preference to the identification principle advanced in Tesco. Under the attribution principle, to determine whether an action can be attributed to a corporate body, it is necessary to look at all of the statutory settings in fact relating to the area of responsibility and determine from that context whether an employee’s actions can be attributed to the corporate body. The concept is to ask whether the actions of that person in that particular setting can properly be attributed to the company as the actions of the company (see Linework Ltd v Department of Labour [2001] 2 NZLR 639, (CA)).
[57] The submission is that neither principle can make the actions and exercise of an absolute discretion by Mr Swift, who is the Manager of the Koru lounges, the act
and decision of Air New Zealand Limited. The plaintiff emphasises that the change affects thousands of Air New Zealand customers.
[58] The plaintiff’s submission is that the reasonable expectation of the parties to the contract are relevant. The expectation is that the decision will be made by the corporate body, that is, at the appropriate corporate level carrying the necessary corporate authority. The plaintiff relies on ICS v West Bromwich Building Society [1998] 1 All ER 98 for the proposition that these reasonable expectations can be taken into account in interpreting the contract.
[59] The defendant submits that clause 1.3 does not contemplate a formal decision making process relevant to the member of the Koru Club or involving that member. It is also submitted that the words of clause 1.3 do not state that a Board decision is required. It would be necessary to imply such a term, for example, on the basis of business efficacy, but there is in fact no basis for implying this term. The defendant submits that the short answer is that the contract does not expressly or impliedly provide for what the plaintiff submits.
[60]In any event, it is submitted as follows:
a)Air New Zealand did decide to change lounge access terms. Mr Swift had the authority and was not, as Mr Gedye put it, “on a frolic of his own”.
b)Clause 1.3 does not require a decision by the Board of directors of Air New Zealand. Nor do any of the other terms in the contract or Air New Zealand’s constitution.
c)As a matter of fundamental company law and practice, a decision to change lounge access terms did not need to be made by the Board to be effective.
[61] Air New Zealand also relies on Durie J’s decision of 6 June 2003 in these proceedings. Durie J was dealing with the plaintiff’s application for judgment on the admission of facts. His Honour stated:
“.. The plaintiff effectively accepted that the Board itself need not decide so long as a decision was in fact made under the Board’s direction or supervision. If the plaintiff did not expressly so concede that point, then I find it well settled that the Board is not bound to manage all matters itself” (para [13], with reference to ss 128 and 130 of the Companies Act 1993 and to Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30, at 79-80).
[62] Both parties refer to ss 128 and 130 of the Companies Act 1993. Section 128 reads as follows:
“128 Management of company
(1) The business and affairs of a company must be managed by, or under the direction or supervision of, the board of the company.
(2) The board of the company has all the powers necessary for managing, and for directing and supervising the management of, the business and affairs of the company.
(3) Subsections (1) and (2) of this section are subject to any modifications, exceptions, or limitations contained in this Act or in the company’s constitution.”
[63]Section 130 deals with delegation and states:
“(1) Subject to any restrictions in the constitution of the company, the board of a company may delegate to a committee of directors, a director or employee of the company, or any other person, any one or more of its powers other than its powers under any of the sections of this Act set out in the Schedule 2 to this Act.
(2) A board that delegates a power under subsection (1) of this section is responsible for the exercise of the power by the delegate as if the power had been exercised by the board, unless the board—
(a) Believed on reasonable grounds at all times before the exercise of the power that the delegate would exercise the power in conformity with the duties imposed on directors of the company by this Act and the company's constitution; and
(b) Has monitored, by means of reasonable methods properly used, the exercise of the power by the delegate.”
[64]It is agreed there is no relevant restriction in Air New Zealand’s constitution.
[65] Both parties also rely on the statement of directors’ functions and responsibilities in exercising powers of management in Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30, 79-80. There Thomas J states:
“It should not be necessary to restate that it is the fundamental task of the directors to manage the business of the company. Theirs is the power and the responsibility of that management. To manage the company effectively, of course, they must necessarily delegate much of their power to executives of the company, especially in respect of its day to day operations. Although constantly referred to as “the management”, the executives’ powers are delegated powers, subject to the scrutiny and supervision of the directors. Responsibility to manage the company in this primary sense remains firmly with the directors.
Beyond emphasising this fundamental obligation I do not want to embark upon a dissertation on corporate governance. The literature on the subject is voluminous, and includes my own contributions. .. It is the function of directors to determine the corporate objectives and strategies and ensure that the management implement those policies, to determine the extent and priority of the company’s investment in new ventures having regard to the resources available and the risks involved, to approve revenue and capital expenditure budgets, business plans and specific major investments such as joint ventures, equity shareholdings and major fixed assets, to select a chief executive officer, to ensure that the company is well managed, and that the company’s accounting and information systems are adequate to monitor the performance of the company and provide reliable data for sound decision making by management and the board of directors. It can at once be seen that the directors’ role in monitoring the performance and direction of the company is vital. The directors provide the company with its direction, and act as a check on management to ensure that the direction is adhered to and pursued.”
[66] I accept the submissions of the defendant that ss 128 and 130 are to be read together. What this means is that, with the exception of Schedule 2 powers, directors can allow management to make such decisions. That is sufficient to answer the plaintiff’s claim. In any event, I do not see this decision as being in the category of requiring a decision by the Board. It clearly affected all members but not in such a way as to require Board attention. Further, I also agree with the defendant that the nature and terms of the contract do not give rise to an expectation by a member that this decision would be made by any particular process or at any level. The Board’s statutory duty is met by normal reporting by management to the Board and by Board level oversight of the business.
[67] The evidence is that the Board has not considered the matter. However, Mr Swift explains that the decision was made by him as the Air New Zealand
manager with responsibility for the lounge operation. He says that it was within his management authority to make the decision. There was no direct challenge to Mr Swift’s claim that he had management authority to make the decision and the plaintiff accepts, appropriately, that it was not necessary for there to be written documentation of a formal delegation.
[68] Mr Swift says that after he made the decision, he reported to his Senior Manager, a Mr Sims, who is Vice President of Marketing and Alliances. He says that Mr Sims confirmed and agreed with his decision. Mr Sims reports to the Chief Operating Officer, Mr Miller, who in turn reports to the Managing Director and Chief Executive, Mr Norris. Mr Norris reports to the Board of Directors.
[69] Further, there has been public notice given by “Air New Zealand” of the change. The undated letter from the Koru Club to “valued customers” dealt with the new lounge access policy and stated:
“We’re introducing a new access policy for all Koru lounges in the main centres, which stipulates that all members and guests must be passengers who are travelling that day. So if you use a guest entry pass, that guest must be someone who’s also travelling. This new policy will take effect in Auckland from 1 July 2002 and in Wellington, Christchurch and Dunedin from 1 October 2002. All passengers will need to provide confirmation of flight details when entering the Lounge by showing a ticket, boarding pass or electronic ticket reference details.”
[70] What has occurred was sufficient to make this change. The concepts of identification and attribution, which are helpful in determining criminal liability in the corporate context, in my view do not add anything here.
[71] I conclude that this part of the plaintiff’s claim also fails. There was an effective decision by Air New Zealand. My conclusion on this aspect is confined to the decision in issue. Other decisions may require a different decision making process.
Illusory contract?
(i)The submissions
[72] The plaintiff relies on the principle of the law of contract that the consideration for a contract will be illusory where it consists of a promise the terms of which leave performance entirely to the discretion of the promisor. The principle is set out in Chitty on Contracts (29 ed 2004, Vol 1, para 3-025) to which both parties refer and which states:
“Consideration would again be illusory where it was alleged to consist of a promise the terms of which left performance entirely to the discretion of the promisor. A person does not provide consideration by promising to do something ‘if I feel like it’ or ‘unless I change my mind’. Promises are not often made in this form; but the same principle may apply in analogous cases. Thus a promise may be illusory if it is accompanied by a clause effectively excluding all liability for the promisor for breach. The promise to pay for ‘so much coal as I may decide to order’ would be an illusory consideration for the seller’s counter-promise to deliver, which would therefore not be enforced.”
[73] The plaintiff submits that the Court has to examine the nature of the promise made. If the promisor reserves a discretion to exempt or cancel the contract which means that no sensible area of obligation remains, then the promises are illusory. The plaintiff says that is the position in the present case. That is because, if clauses 1.3 and 4.3 are to be read as conferring on Air New Zealand the unilateral right at any time to cancel any of the privileges offered under the Koru Club scheme, it must follow that Air New Zealand has kept the option, wholly at its own discretion, to withdraw all of the privileges at any time. If clause 1.3 is read in the way the defendant contends for, that must be read as covering all of the terms and conditions of the contract, so that any and all privileges may be withdrawn at any time. The same reasoning would apply to clause 4.3.
[74] Accordingly, the plaintiff submits that it cannot be said that by embarking on performance of the contract Air New Zealand has furnished consideration and cannot therefore bring itself within the exception referred to by Chitty.
[75] Chitty recognises that a promise which is subject to cancellation by A comes within the same description of being an illusory promise. However, Chitty considers that where the cancellation may only be exercised within a specified time or is subject to some other limitation of that kind then there may be a counter-promise which constitutes a consideration. Similarly there will not be an illusory consideration if the promise is actually performed as such actual performance can constitute consideration. Chitty refers to Stabilad Ltd v Stephens & Carter (No. 2) [1999] 2 All ER (Comm), 651 at 660 in that regard.
[76] The plaintiff emphasises that the promises here are continuing ones, for example, there are one and two year subscribers as well as life members. Hence, the plaintiff argues that members are put in a continuing state of uncertainty as to whether these facilities will be available to them at any point during the currency of their purported contract.
[77] In this context, the plaintiff submits that there are ways in which a “conglomerate” contract like this one can be varied effectively so that there is a sensible area of obligation thereby avoiding the description of illusory.
[78] The overall submission for the plaintiff is that Air New Zealand takes the member’s subscription in return for no real promise of its own.
[79] The defendant argues that it is necessary to focus on the terms and context of the contract. On that analysis, what has occurred here is a minor aspect of how Air New Zealand will carry out is promise not whether it will carry it out at all.
[80] Air New Zealand also submits that an objection that a promise amounts only to illusory consideration can be removed if the promise is performed. It is not accepted that the promise is illusory in this way but, any objection can ultimately be answered on the basis that Air New Zealand did provide full Koru Club services up to July/October 2002 (for Auckland, and Christchurch/Wellington respectively) and after that all services with the exception only of non-traveller access. Hence, the submission is that substantial consideration was actually given and that, for air travellers, the consideration did not diminish at all.
[81] Air New Zealand submits that it will be a question of fact in each case as to whether the nature and extent of a discretion in a contract will amount to illusory consideration. It is submitted that caution is needed because contracts commonly provide for wide discretions and/or unilateral rights to vary and this can be necessary or desirable for good commercial reasons. Air New Zealand also notes that the courts will endeavour to uphold the validity of an agreement (Hillas & Co, Ltd v Arcos, Ltd [1932] All ER Rep 494). Particular caution, Air New Zealand argues, is needed with a conglomerate contract involving one large scale supplier and tens of thousands of counter parties as in this case.
[82] Next, Air New Zealand submits that the importance in value of the non- travelling access benefit in a relative sense should be judged objectively.
[83] Air New Zealand has operated the Koru Club with reasonable operating conditions. It has provided the plaintiff with valuable consideration. Its withdrawal of non-travelling access was based upon reasonable considerations, namely, over crowding and the Aviation Security prohibition. Objectively judged, Air New Zealand submits that the benefit under the contract lost by the plaintiff is small. Some insight into that is gained, Air New Zealand says, by the fact that the plaintiff did not cancel or purport to cancel the contract.
(ii)Discussion
[84] In assessing this cause of action, it is helpful to consider the various authorities relied on by the plaintiff.
[85] First, the plaintiff refers to Placer Development Limited v Commonwealth of Australia (1969) 121 CLR 353. In that case, there was an agreement between the Commonwealth and Placer which provided for Placer to form a company to produce plywood and other timber products. Clause 14 of the agreement stated that if Customs duty is paid by Placer and is not remitted,
“The Commonwealth will pay to [Placer] a subsidy upon the exportation of these products .. of an amount or at a rate determined by the Commonwealth
from time to time, but the amount of subsidy paid shall not exceed the amount of customs duty paid and not remitted.”
[86] The majority held that under this clause, the Commonwealth was not obliged to determine an amount or rate of subsidy, to pay a subsidy of such amount or rate as would recoup the Customs duty paid, or to pay a subsidy.
[87] Kitto J in discussing illusory contracts noted the principle was that wherever words which by themselves constitute a promise,
“.. are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought at all” (at 356).
[88] Kitto J considered that a promise of a governmental subsidy was meaningless in the absence of a specification of some amount or some basis of calculation for the subsidy (at 357).
[89] The other two Judges in the majority, Taylor and Owen JJ, also considered this was an illusory promise. In their judgment:
“Obviously there is a complete absence from the clause, and from the Agreement as a whole, of any identifiable criteria by which it can be said the parties intended the amounts or rates to be determined; this is left solely to the discretion of the Commonwealth. This being so the clause amounts to no more than the promise to pay what, in all the circumstances, the Commonwealth in its discretion thinks fit and, as such, is wholly unenforceable.” (at 361)
[90] Menzies J, dissenting, preferred an interpretation that the Commonwealth’s obligation was both to determine what the subsidy is to be and then to pay it. While the Commonwealth was “at large” in determining the subsidy, Menzies J considered that the character of the provision would have been no different had it gone on to require the Commonwealth to take specified considerations into account in determining the subsidy. From Menzies J’s perspective,
“When the language of legal obligation has been used, as is the case here, it is only stern necessity that would persuade me that it is worthless.” (at 365)
[91] Windeyer J in dissent noted that an illusory promise was a real one but one devoid of legal consequence. His Honour continued:
“It is illusory, not because it is not a promise, but because it deceptively creates the illusion of a contract where there is none.” (at 369)
[92] Acknowledging the “basic assumption” of our law that bargains are to be kept, Windeyer J would not have been prepared to say that the provisions of clause 14 did not amount to a contract.
[93] The defendant refers to the commentary on Placer in Greig & Davis “The Law of Contract” (1987) where the authors state:
“The decision in Placer Development needs to be treated with a degree of caution because there are many circumstances in which a contract might bestow upon a party a right to decide matters arising out of that contract in a manner which, in effect, allows that party a discretion whether or not to continue with performance of the contract. In a commercial setting, .., a court would be extremely reluctant to reach a conclusion which would deprive such an arrangement of all contractual effect.” (at 239)
[94] Second, the plaintiff refers to the decision of the High Court of Australia in MacRobertson Miller Airline Services v Commissioner of State Taxation (Western Australia) (1975) 133 CLR 125 which involved an airline company. The company’s practice was to issue a ticket for a single flight. The prospective passenger was told that a passage was available on the day and for the flight required and the cost. A ticket was then written out in duplicate and tendered to the prospective passenger in return for the price. The passenger held the ticket in duplicate until the day of travel when that was presented with the passenger’s baggage, the weight of the baggage was recorded, the duplicate removed and the original returned to the passenger. The terms and conditions of the ticket included the following:
“2.The Companies reserve the right at any time to abandon any flight, or whether the scheduled flight on which the passenger or goods were booked takes place or not to cancel any ticket or booking of any passenger .. or to carry the passenger for portion only of any booked flight. In the event of a flight being abandoned or altered by the Companies wholly or in part or a ticket or booking being cancelled .., the passenger shall be entitled only to a refund of so much of the passage money as shall be proportionate to the part of his flight so cancelled or abandoned and the Companies shall not under any circumstances be under any further or other liability to
the passenger for failure to carry him at the booked or scheduled time or at all.”
[95] Clause 5 of the terms and conditions provided that the Companies were not common carriers and reserved the right to refuse to carry any passenger, baggage or goods without giving any reason for that. In delivering one of the judgments, Barwick CJ stated that the situation was an example of the payment of a reward for an act performed at request “with no antecedent promise by the person performing the act to do so.” (at 133)
[96] The Chief Justice saw the case as not one in which an obligation is assumed or an offer of an obligation made from or upon which obligations, exemptions or limitations were stipulated. Rather, the exemption of the ticket “fully occupies” the whole area of possible obligation, “leaving no room for the existence of a contract of carriage”. (at 133)
[97] Stephen J in that case did not find it necessary to reach any conclusion as to whether the conditions were such as to prevent the formation of any contract.
[98] Jacobs J concluded that by clause 2, any enforceable promise to carry was negatived. Accordingly, “The appellant undertakes no executory obligation which creates rights in an obligee.” (at 148)
[99] MacRobertson is referred to by Heffey, Paterson and Robertson in “Principles of Contract Law” (2002) as authority for the proposition that a promise may also be rendered illusory by an exemption clause which is so sweeping in its effect that it effectively deprives the promise of any force. Lücke makes the same point in the article “Illusory, Vague and Uncertain Contractual Terms” (1977) 6 Adelaide Law Review 1 at 3.
[100] In the third of the cases referred to by the plaintiff, Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130, Kirby P in the New South Wales Court of Appeal set out some applicable principles including the following:
“1. The determination of every case depends upon its own facts. The meaning of the agreement between the parties must be discovered objectively. ..
2.The court will endeavour to uphold the validity of the agreement between the parties: ..
3.But the court will not do so, where, in effect, it is asked to spell out, to an unacceptable extent, that to which the parties have themselves failed to agree. Nor will the court clarify that which is irremediably obscure. Most particularly, the court will not accept for itself a discretion which the parties have, by their agreement, reserved to one or other of them. ..
4.Views will differ about the classification of the challenged provision and whether the court can or cannot give effect to it. Usually, there is no objectively right decision in these cases. ..” (at 235)
[101] In that particular case, the employment contract between the parties gave the respondent the option to participate in the company’s senior staff equity sharing scheme. No such scheme had been established by the employer.
[102] Kirby P concluded that this agreement was so devoid of meaning and so dependent upon the initiatives and decisions of one party only to the transaction, the appellant employer , as to be illusory. Kirby P placed some emphasis on the absence of any external standard which could be relied on in order to fix an “appropriate” or “reasonable” equity participation scheme.
[103] Placer was also applied in Queensland Cement Ltd v Commissioner of Stamp Duties (1995) 95 ATC 4480.
[104] In response to a question from me, the plaintiff has also provided information as to New Zealand cases which have referred to Placer. Those cases are Rod Milner Motors Ltd v Attorney-General [1999] 2 NZLR 568 at 576-577; Auto Sistema New Zealand Limited v Attorney-General (High Court Wellington, A 416/85, 30 May 1996, Ongley J) at 10-11; Vital Communications Pty Limited (CA 122/86, 2 September 1987) at 5; and The West Coast Regional Council v Attorney-General (High Court Wellington, CP No. 478/82, 29 September 1995, Greig J) at 17-18. None of those cases advance the matter any further.
[105] What has occurred here is factually distinct from the types of situations considered in Placer and the other cases relied on by the plaintiff. Air New Zealand is right that it has performed the contract – in full up to the point when the access policy changed. Thereafter, Air New Zealand has continued to perform although not providing the same level of privilege.
[106] The issue is then whether the plaintiff is right that the Court must look at the nature of the promise rather than what has actually occurred in some objective way. Logically, the defendant must be correct that any objection can be answered on the basis of the performance provided. At the time of renewal, Air New Zealand promised a basket of services and on the whole has delivered them as presumably it intended to do. Further, I do not accept the plaintiff’s argument that this aspect must be viewed on the basis of Air New Zealand having the ability to change all terms and conditions. My decision is narrower than that and is confined to the conclusion the contract can be construed to permit Air New Zealand to make this change to non- traveller access. This interpretation says nothing about, for example, the power to affect travellers’ access more generally. The bargain is that Air New Zealand can make changes of a regulatory nature to restrict non-traveller access to the Koru lounges. On that analysis, the promise is not illusory.
[107]This part of the plaintiff’s claim also fails.
Discretion
[108] The defendant argued that if the plaintiff was successful, the Court should decline to exercise the discretion to grant declaratory relief for a number of reasons. For example, the defendant said the issue was now moot and there was no utility in making the declaration sought. In the circumstances, I do not need to consider these matters and so I do not address them.
Result
[109] For the above reasons, the plaintiff’s claim is unsuccessful. Air New Zealand was able to make the change that it did and an effective decision was made to this effect. In the circumstances, the contract was not an illusory one. It is not necessary to address matters of discretion to grant relief and no question of restitution of the balance of the membership subscription arises.
Costs
[110] Costs are reserved. If the parties are unable to agree, memoranda may be filed by the defendant within 21 days of the date of delivery of this decision and by the plaintiff within a further 14 days.
E France J
Delivered at 4.12pm on 6th October 2004.
Solicitors:
C Batt, Tripe Matthews & Feist, Wellington, for the Plaintiff Bell Gully, Auckland, for the Defendant
Counsel:
P D McKenzie QC, Wellington, for the Plaintiff N Gedye, Auckland, for the Defendant
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