Ecowize Limited v Affco New Zealand Limited HC Ham CIV 2006-419-001119

[2009] NZHC 2253

IN THE HIGH COURT OF NEW ZEALAND

HAMILTON REGISTRY

CIV-2006-419-001119

BETWEEN  ECOWIZE LIMITED

Plaintiff

ANDAFFCO NEW ZEALAND LIMITED Defendant

Hearing:         6-10 July 2009

Counsel:         A M Braun and M D Branch for plaintiff

R J Hollyman and A Holmes for defendant

Judgment:      14 December 2009 at 4pm

RESERVED JUDGMENT OF DOBSON J

In accordance with r 11.5 I direct the Registrar to endorse this

judgment with the delivery time of 4pm on the 14th.day of December 2009.

Solicitors:

Harkness Henry, Private Bag 3077. Hamilton

Solutions Law Office, PO Box 3462, Richmond 7031, Nelson

ECOWIZE LIMITED V AFFCO NEW ZEALAND LIMITED HC HAM CIV-2006-419-001119  14 December

2009

Table of Contents

Factual background ........................................................................................................................... [6] The Heads of Agreement ................................................................................................................. [16] The law on Heads of Agreement ................................................................................................... [22]

The parties’ contentions................................................................................................................ [27] Agreement on sufficient terms to be a binding substantive contract? ........................................... [33] Terms missing .......................................................................................................................... [33]

Price revision............................................................................................................................ [42] Conduct subsequent to the HoA ............................................................................................... [52]

The HoA as a process contract ....................................................................................................... [62] AFFCO’s approach on negotiating variations in price ................................................................ [71] Relief claimed under s 9 of the Contractual Remedies Act 1979 ............................................... [116] AFFCO counterclaim .................................................................................................................... [124] Costs ................................................................................................................................................ [136]

[1]      These  proceedings  relate  to  a  dispute  over  the  circumstances  in  which  the defendant (AFFCO) terminated the services of the plaintiff (Ecowize) for cleaning a new meat processing plant operated by AFFCO at Horotiu, near Hamilton.  Ecowize cleaned the plant from the date it commenced operations on 16 January 2006 until its services were dispensed with from 3 July 2006.

[2]      As to the status of the parties, Ecowize is an incorporated company providing specialised  cleaning  services  in  commercial  and  industrial  settings  such  as  meat processing  works.           It  has  its  registered  office  in  Hamilton,  and  claimed  expertise from running similar operations in Australia and South Africa as well as operating in Scandinavia  and  New Zealand.           AFFCO  is  a  publicly  listed  meat  processing  and marketing company with its head office at Horotiu, and processing plants there and elsewhere throughout New Zealand.

[3]      Ecowize relies upon a Heads of Agreement (HoA) document completed in October 2005 that referred to a 48-month contractual period for cleaning the Horotiu plant, effectively from the date of its opening. Ecowize alleges that the HoA had the status of a binding contract which has been repudiated by AFFCO, entitling Ecowize

to damages for the breach of that 48 month contract.  Alternatively, Ecowize claimed that it had accepted AFFCO’s repudiation of the agreement in accordance with s 7(2)

of the Contractual Remedies Act 1979 (the  CRA)  (whether  it  was  the  substantive

48 month year cleaning contract, or a narrower process contract for agreeing terms

for the longer term cleaning contract) and sought an order under s 9 of that Act for payment of such sum as the Court deems just.

[4]      For its part, AFFCO claims that any contractual obligations it assumed were subject to Ecowize settling on a reasonable level of charges once both parties could assess what was involved after the plant had been operational for a period of time. AFFCO considered Ecowize’s level of charges excessive, and resolved to undertake the  cleaning  itself  unless  Ecowize  reduced  its  charges  sufficiently.  AFFCO  has counterclaimed for what it considers to be Ecowize’s over-charging, on the basis that Ecowize should be limited to what was reasonable, on a quantum meruit basis that should  be  retrospectively  reduced  by  reference  to  the  costs  AFFCO  claims  that  it subsequently incurred in carrying out the cleaning itself.

[5]      The first issue arising is the status of the HoA.   That leads on to an analysis

of the relevant terms of any contractual commitments between the parties. Depending on the contractual terms determined as applying, there is a question as to whether such terms were breached by AFFCO.  Any finding of breach leads to issues as  to  the  quantum  of  Ecowize’s  claimed  loss,  and  whether  AFFCO  has  indeed suffered any recoverable loss on its counterclaim.

Factual background

[6]      In  2004,  Ecowize  acquired  the  business  of  another  cleaning  company, Ecolab,  and  thereby  inherited  existing  cleaning  contracts  for  AFFCO’s  plants  at Horotiu and Rangiuru.

[7]      In 2005, AFFCO upgraded its plant at Horotiu.   This involved a closure of the  old  plant,  and  a  subsequent  commissioning  of  a  new  plant  some  months  later. The principal witness for Ecowize, Mr Lucien Milner, became involved in dealings with AFFCO in June 2005.

[8]      In September 2005, Mr Milner raised with the AFFCO plant manager at Horotiu, Mr Peter Lockley, the desirability of installing equipment to facilitate cleaning of the new plant in the  course  of  construction  of  the  plant. Mr Milner

recommended an open plant cleaning system (OPCS) of a type with which he was familiar.   Mr Milner pointed out that if AFFCO did not make provision for OPCS equipment,  but  wanted  Ecowize  to  do  so,  then  any contract  for  cleaning the  plant would have to include terms allowing Ecowize to recover that cost from AFFCO.

[9]      Mr Lockley referred Mr Milner to AFFCO’s operation manager, Tony Miles. There are healthy differences in the recollection of those involved in the discussions leading to signing of the HoA. From Mr Milner’s perspective, he recalled AFFCO

as  being  happy  with  the  services  Ecowize  had  provided  in  cleaning  the  existing plant, and that they were keen to commit Ecowize to satisfactory arrangements for cleaning  the  new  plant. He  took  AFFCO  to  understand  the  need  for  a  firm commitment  to  a  cleaning  contract  of  a  substantial  period  before  Ecowize  would commit  to  the  capital  expenditure  involved  in  installing  an  OPCS.  Further,  that AFFCO understood the need to defer final pricing for the cleaning services until the new  plant  was  operational  to  allow  the  accurate  assessment  of  the  extent  of  work involved.

[10]     From Mr Miles’ perspective, AFFCO expected a reduction in existing cleaning  charges, because it anticipated that its new plant could  be  cleaned  more efficiently. Mr Miles recognised that there were difficulties in working out the cost of cleaning a new plant and agreed that that could not be done until the plant was operational. He claims that he was wary of making any commitment, but understood that Mr Milner had two purposes in requesting the completion of a heads of agreement. First,  that  Ecowize’s  Board  required  it  to  give  them  “some  comfort” before they would approve the capital expenditure on an OPCS. Secondly, a heads of agreement would operate as an interim measure since the parties could not complete  a final contract until the plant was completed and numerous variables determined. Mr Miles appreciated that Ecowize would not install the OPCS without a heads of agreement completed.

[11]     It was important to Mr Miles that Ecowize would review prices once the plant was  operational,  with  an  expectation  of  substantial  reductions  from  the  level Ecowize charged for cleaning the old plant. From  his  perspective,  if  satisfactory reductions were not achieved, then AFFCO would be entitled to terminate Ecowize’s

services. In such circumstances, he anticipated that the parties would be able to resolve what to do with the OPCS that Ecowize was to install. AFFCO’s  later conduct was consistent with this, in that it offered to buy or lease the equipment that Ecowize had installed, when agreement could not be reached on a review of prices.

[12]     There are also differences about the circumstances in which the HoA was concluded on 17 October 2005. Mr Milner recalls visiting Mr Miles in his office at AFFCO, observing that he had been reading the nine pages of the proposal attached

to  the  HoA,  that  Mr Miles  went  through  the  content  again  and  both  signed  at  that time.  Mr Milner produced a diary note recording that a meeting with Mr Miles had occurred that day.

[13]     In contrast, Mr Miles’ recollection is that he signed the agreement when on

his own, in his office, on 17 October 2005 and that he then faxed the HoA to Mr Milner for his signature, after which Mr Milner faxed the completely signed document back to Mr Miles. Mr Miles therefore disputes the accuracy of Mr Milner’s file note recording there had been a meeting between them on 17 October 2005. There is no dispute that the HoA was executed for both parties by executives authorised to do so. Accordingly, the difference on this issue relates more to challenges each party seeks to raise to the credibility of the witness for the other  party. I  do  not  find  it  necessary  to  make  a  positive  finding  between  the versions as to execution, for that secondary purpose.

[14]     The new plant commenced operations on 16 January 2006.  On 31 January

2006 Ecowize provided  a revised  schedule  of  charges,  reflecting  the  categories  of cleaning work it was undertaking in the new plant.  The core charges, in the absence

of any extras, were $27,315 per week.

[15]     In February 2006, there was a first informal request on behalf of AFFCO for Ecowize to consider a price reduction. Substantially more pressure to achieve that was applied from April 2006 onwards. In the middle of May 2006, a revised schedule was provided, to apply from that time on.  The core charges were reduced to  $24,565 per week. Thereafter,  AFFCO  maintained  the  pressure  for  further reductions and although a new pricing schedule was proposed by Ecowize at the end

of June, conditional on entry into a 48-month contract, AFFCO consistently rejected

all offers and took over the cleaning itself from 3 July 2006.

The Heads of Agreement

[16]     The HoA comprised a single page  with  nine  pages  of  an  attachment.  The

HoA page was dated “10/12/2005”, it being common ground that that was intended

to mean 12 October 2005.   A box at the top of the page identified it as an Ecowize document in respect of AFFCO Horotiu as the client, and the subject being “Heads

of Agreement”.   It was described as page “1 of 1” and, after identifying the parties, specified:

It  is  hereby  agreed  that  the  cleaning  contract  will  be  awarded  to  Ecowize

Ltd.

The Heads of Agreement is based on the following:

1.        Ecowize  Ltd  will  service  the  areas  as  outlined  in  chapter  7  of  the

Proposal Document.

2.The  working  hours  will  be  as  per  the  specified  working  hours  in chapter 8 of the Proposal Document.

3.        The commencement date of the contract shall be .

4.        The contract period will be 48 months from the commencement date.

5.The weekly contract fee will be, refer to section 8.3 of the proposal document.  Ecowize reserves the right to amend the existing contract price up to 3 months after the start of the new AFFCO Horotiu plant.

6.The  weekly contract fee  will  be  payable  weekly based  on  14  days credit terms from the date of invoice.

7.The heads of Agreement will remain binding and enforce (sic) until such time that the Service Agreement is signed between the Parties.

[17]     That is followed by the signatures of Mr Miles as authorised to sign on behalf

of AFFCO and Mr Milner for Ecowize.   Both signatures are endorsed with the date

“17/10/05”.

[18]     What followed were pages numbered 1 to 9 of a document dated “13/10/05” with the box at the top of the page having “Calculation factors / pricing” as its subject, instead of “Heads of Agreement” as appeared on the HoA page.  Reference

to “PD.8” can be taken to refer to chapter 8 of a Proposal Document with the first of the nine pages identifying the topics covered as Working hours, Operational costs, Pricing and Implementation plan.   Those topics are covered in the following pages numbered 2 to 9.  None of the nine pages were signed or initialled.

[19]     On page 6 of the Proposal Document, in a section intituled ‘8.3 Pricing’, as referred to in paragraph 5 of the HoA, was the following detail:

The charge for the service will comprise of the following:

Ecowize  will  charge  AFFCO  Horotiu  the  current  charge  rates  with  the addition  of  the  Open  Plant  Cleaning  System.          Ecowize  will  review  the current charge rates once the new plant is operational and a new charge rate will be submitted.

[20]     The following page 7 reproduced what had apparently been the schedule of charges for the old plant as at 1 October 2004, with the addition of a monthly charge

for provision of the OPCS.   Then on the following page, numbered 8, certain notes were set out as bullet points, including:

…

·The    Price    and    any    rates    are    fixed    for    12    months    from commencement  and  thereafter  subject  to  increases  in  CPI,  and statutory increase.

…

·The capital investment for the low-pressure technology included in the pricing is based on a 4-year contract.  Ecowize reserves the right

to remove all low-pressure equipment  and  make  good  (at  Ecowize cost) after expiry of term if the contract is not renewed or the term

extended.

…

·After the service areas are signed, the heads of agreement must be signed as well as a starting date agreed.

Procedures  for  dealing  with  changes  to  the  Scope  of  Work  or  work additional  to  the  Scope  should  be  formalised  by  mutual  negotiation.   We need  to  recognise  and  develop  a  strong  partnership  ethic  between  both parties, thus ensuring the long term protection of both our business interests.

[21]     A draft Sanitation Services Agreement was provided to AFFCO shortly after the HoA  was  completed, but in circumstances  recognising that it could  not in any

event be finalised until the plant was operational.  No Sanitation Services Agreement was ever concluded.

The law on Heads of Agreement

[22]     The Court of Appeal decision in Fletcher Challenge Energy Ltd v Electricity

Corporation of New Zealand Ltd [2002] 2 NZLR 433 provides a thorough analysis

of the approach to be adopted in determining whether the parties have concluded a binding  contract  when  entering  into  a  heads  of  agreement  (see  [50]  to  [66]  in  the judgment  of  the  majority).  The  spirited  dissent  of  Thomas  J  in  the  same  appeal provides a classic  example of how the relative  weight  attributed to various factors may dictate contrary outcomes.

[23]     The judgment of the majority began its analysis of the correct legal approach with the following:

[50]     The  question  whether  negotiating  parties  intended  the  product  of their negotiation to be immediately binding upon them, either conditionally

or unconditionally, cannot sensibly be divorced from a consideration of the

terms expressed or implicit in that product.  They may have embarked upon their negotiation with every intention on both sides that a contract will result, yet  have  failed  to  attain  that  objective  because  of  an  inability  to  agree  on particular  terms  and  on  the  bargain  as a  whole.   In  other  cases, which  are much less common, the intention may remain but somehow the parties fail to reach  agreement  on  a  term  or  terms  without  which  there  is  insufficient structure to create a binding contract…

[24]     The judgment continued:

[53]     The prerequisites to formation of a contract are therefore:

(a)An intention to be immediately bound (at the point when the bargain is said to have been agreed); and

(b)An agreement, express or found by implication, or the means of  achieving  an  agreement  (eg  an  arbitration  clause),  on every term which:

(i)       was  legally  essential  to  the  formation  of  such  a bargain; or

(ii)      was regarded by the parties themselves as essential to their particular bargain.

A term is to be regarded by the parties as essential if one party maintains the position that there must be agreement upon it and manifests accordingly to the other party.

[25]     Whether an incomplete agreement will be binding will depend on whether the Court  is  able  to  fill  the  gap  in  the  express  terms,  that  being  a  matter  of  fact  and degree in each case as to whether the gap left by the parties is simply too wide to be filled:

The Court can supplement, enlarge or clarify the express terms but it cannot properly  engage  in  an  exercise  of  effectively  making  the  contract  for  the parties by imposing terms which they have not themselves agreed to and for which there are no reliable objective criteria. ([63])

[26]     The  majority  warned  against  a  process  of  successive  implied  terms,  where each implied term relies upon the existence of the previously implied terms which could lead to “…a contract [that] is built up out of implied terms from no express bargain at all” ([64]).

The parties’ contentions

[27]     AFFCO argued against the terms of the HoA being treated as having any binding effect. The notions of commitment were all expressed prospectively (“will be”), and material terms needed for any agreement were not concluded. Nor was the scope of cleaning services accurately defined.  As to the first of these points,  Mr Hollyman cited the Court of Appeal decision in Design at Space Ltd v Julian CA149/05 19 July 2006 for the proposition that use of the future tense is inconsistent with such a document creating a binding contract.   However, I am not persuaded  that  that  decision,  depending  as  it  did  very much  on  its  own  facts,  can assist  this  particular  argument  for  AFFCO  in  the  different  context  of  the  present HoA.   In  Design  at  Space,  an  agreement  for  the  potential  sale  of  land  where  the vendors were to retain part of the property included:

The  vendor  will  identify  a  portion  of  land  in  mutual  agreement  with  the purchaser that will be retained by the vendor for a home block.  This will be identified  in  the  draft  survey  plan  provided  by  the  purchaser  prior  to  the contract becoming unconditional.

[28]     The Court of Appeal was able to reject very easily the strained interpretation

of this wording which suggested that the  step  required  of  the  vendor  had  already occurred.  That very different factual context cannot help in discerning the presence

or absence of contractual effect for provisions cast in prospective terms, but where the services are also all  prospective  and  intended  to  start  from  a  date  that  was identifiable by description but not at that time by reference to a particular day.

[29]     Ecowize relied primarily on clause 7 of the HoA, providing that the HoA was

to remain binding and “enforce” until the Service Agreement had been completed.

In  addition,  Ecowize  relied  on  the  context  in  which  it  conveyed  to  AFFCO  the requirement for a binding contract before it was prepared to commit to the capital expenditure on the OPCS.

[30]     I consider that the dynamics  of  the  respective  parties’  positions  in  October

2005 meant that they did intend to make some form of contractual commitment for Ecowize to clean the new premises from the date the plant was to begin operating. Ecowize represented its position as requiring a  commitment  before  it  would fund capital expenditure on the OPCS. I find that AFFCO accepted  that  requirement. Accordingly, completion of the HoA provided Ecowize with a sufficient assurance to commit to the expenditure on the OPCS, even if (on AFFCO’s view) an unwinding

of the arrangement without concluding the 48 month contract referred to in the HoA

would involve compensation to Ecowize.

[31]     Mr Hollyman raised the prospect that the 48-month term, described as “the contract period” in clause 4 of the HoA, was only the term that would apply once the formal contract was concluded. In effect, the contract would be for a 48-month term, but in the meantime the HoA could not have that standing. I do not consider that a

48-month term can be excluded from the HoA simply by relying on such a narrow construction of what was meant by “the contract period”. The length of the term was important to Ecowize, and it was obvious that it relied on the commitment made in the HoA. The difficulty for Ecowize is rather in establishing to what such a period would relate, ie whether the HoA was sufficient to constitute a substantive contract,

or whether it depended on additional terms that had not been addressed.   The HoA

recorded that when the parties had a contract, it would be for 48 months.  Further, on

the  literal  wording  of  the  HoA,  a  distinction  can  be  drawn  between  the  contract period,  which  was  to  be  48  months,  and  the  term  for  the  HoA,  which  was  to  be binding and remain (in) force until the contract was signed.   Accordingly, the HoA did not have a 48 month term.  That close analysis of the wording can also be tested against the question whether the HoA was a contract, or whether the matters omitted meant   that   no   substantive   contract   arose   until   a   subsequent   agreement   was concluded.

[32]     Accordingly, irrespective of the intentions  discerned   from   the   parties’ conduct  leading  up  to,  and  the  terms  of,  the  HoA,  the  question  is  whether  it contained sufficient to constitute a binding contract.  Two alternatives arise, first that the HoA constituted a substantive contract for the provision of cleaning services, or alternatively that it constituted a process  contract in the nature of an  agreement to agree upon terms for provision of such services.

Agreement on sufficient terms to be a binding substantive contract?

Terms missing

[33]     A first detail missing from the HoA was the date of commencement. However, it was common ground that the cleaning services would start from the first day of operation of the new plant, and there was  no  controversy  in  the  date  of

16 January 2006 being inserted, once that was known.

[34]     Secondly, the parties recognised in October 2005 that they could not precisely define the areas that were to be cleaned by Ecowize.  The HoA referred to Chapter 7 of the Proposal Document and the common bundle included a single page with the reference “PD7”, dated 12 October 2005 that listed the various areas that might be cleaned. It was not among the pages attached to the HoA. The table describing the various areas was endorsed “Draft” and it is common ground that confirmation of the precise limits on the areas to be cleaned was contingent on the plant becoming operational. The schedule of prices was broken down by reference

to a charge for each area of the plant, and was accordingly adaptable to changes in the areas to be cleaned.

[35]     Thirdly, as to the working hours, page 2 of the nine page proposal accompanying the HoA stipulated hours that various parts of the plant would be available for cleaning, for the most part from midnight to 6am and in respect of “pre- op” from 5am to 6am. That page included provision for signature by representatives

of Ecowize and the “customer”, together with dating, but there were no signatures. That is consistent with the hours being a provisional suggestion at that stage, to be settled in precise terms once the plant was operational.

[36]     Fourthly, the HoA did not have any provision for a penalty payable by Ecowize in the event that it failed to re-deliver the premises on time to AFFCO in a completely clean state. The previous contract for cleaning services in relation to the old plant had a penalty provision with a meaningful sanction for breach by Ecowize

of  this  obligation,  measured  by  AFFCO  wages  paid  without  productivity,  and revenue lost.  The draft Sanitation Services Agreement for the new plant proposed a substantially reduced quantum of liability for breach of the obligation to return the premises cleaned completely and on time, which would be subject to a limit of the daily charge  for  Ecowize  to  clean  the  area  unable  to  be  returned  on  time.   Under cross-examination, Mr Milner accepted that he was seeking to reduce the extent of this potential liability.

[37]         Mr Milner stated that in the meantime he treated the penalty provision from the old contract as continuing to apply. He did not provide any explanation as to how it would be so, in the contractual sense, beyond acknowledging that its importance meant that there would always be such a provision applying. The only reference in the material with the HoA that could possibly trigger the continued application of the previous contract was in a note on page 8. Under the  heading

“Calculation factors/pricing” a second bullet point stated:

The Price is exclusive of GST and subject to the terms and conditions of our standard contract.

[38]     I do not consider that sufficient to trigger the continuation of some or all of the provisions in the old contract. It had related to a different plant, and rather than looking backwards, the parties had completed the HoA looking forward to the commissioning of a new plant. The terms governing the relationship were intended

to  be  recorded  in  a  new  contract,  and  more  would  have  been  required  than  this incidental  reference  to  renew  any of  the  former  obligations.   The  2004  contract  is nowhere identified as “standard”, and it seems more likely that the reference in the notes on page 8 was as  a result of “cutting and pasting” a provision used in other cases without intending a specific application here.

[39]     Given the importance of having the plant available for the resumption of AFFCO’s work each  morning, a provision imposing time  limits  on  Ecowize, with quantified adverse financial consequences, qualifies as an essential contractual term

on the approach suggested by the Court of  Appeal,  in  its  reasoning  in  Fletcher

Challenge cited at [24] above.

[40]     Ecowize’s case that the HoA could stand on its own as an entire agreement is difficult to sustain in the absence of a term dealing with the indemnity/penalty for failure to return the plant on time and completely clean, and the acknowledged importance of such a provision.  The proposal on behalf of Ecowize of a different extent of liability for breach is inconsistent with implying the continuation of the provision that had been agreed in the contract for cleaning of the old plant. Although that inconsistency was not apparent at the time the HoA was signed, it does demonstrate, in the context of Ecowize’s intentions to flesh out the contractual terms

in a complete contract, that it wished to provide for certain matters in different terms from the previous agreement.   Further, the  HoA  did not make any reference to an indemnity/penalty  provision,  and  in  particular  did  not  contemplate  any  indicia  by reference  to  which  the  parties  could  negotiate  its  terms,  or  ultimately  have  an external party resolve it for them.

[41]     The test for implied terms retains the five conditions enumerated by the Privy

Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR

266 at 283.  However, the independence of those previously discrete conditions is now qualified by an overall evaluation  of  what  the  contract  would  reasonably  be

understood to mean (see Attorney-General  of  Belize v Belize  Telecom  Ltd  [2009]

2 All  ER  1127  and  Nielsen  v  Dysart  Timbers  Ltd  [2009]  NZSC  43  at  [64]).   On either approach, a detailed penalty provision could never be recognised as being so obvious as to “go without saying”, and nor can the HoA be reasonably understood to mean  that  it  included  such  a  provision.  Further,  the  absence  of  any  benchmark against  which  such  a  term  could  objectively be  implied  counts  heavily against  the HoA having status as a substantive contract.

Price revision

[42]     The most contentious provision was that  in  relation  to  prices,  and  how variations might be achieved.  It was addressed in paragraph 5 of the HoA (as quoted

in [16] above) and in section 8.3 of the Proposal Document which is that quoted in

[19] above.

[43]     The effect of these provisions is that the charges would initially be the same

as  Ecowize  had  charged  to  clean  the  old  plant,  subject  to  the  addition  of  the stipulated charge for the OPCS which was specified under a column headed “Daily Charge” at a rate of $4,963.20 per month.   The prospect of a change in the level of charges  was  cast  initially  as  a  right  reserved  by  Ecowize,  but  also  in  terms  that Ecowize would review the rates of charge that had applied for the old plant once the new plant was operational, and that Ecowize would submit new rates of charges to AFFCO.

[44]     Ecowize’s case was that this constituted a unilateral right to impose new levels of charge, which AFFCO simply had to accept. Mr Milner suggested that AFFCO would have agreed to that because of their previous good relationship, and AFFCO’s trust in Ecowize to undertake a review that was reasonable. On this approach, the stipulation that Ecowize would “submit” new rates of charge has the sense of advising or dictating that it would henceforth apply, as distinct from the first step in a negotiation of new prices that would need AFFCO’s concurrence.

[45]     AFFCO’s case placed substantial weight  on  its  personnel  believing  at  the time of the HoA that the new plant would be more efficiently cleaned than the old

plant, therefore leading to a reduction in prices once Ecowize had some experience

in cleaning the new plant.   Consistently with that, it contended for an interpretation

of  these  provisions  that  committed  Ecowize  to  proposing  revised  charges  which would then be the subject of further negotiation when both parties could appreciate the scale of the cleaning tasks.

[46]         Messrs Lockley and Miles claimed that, prior to signing the HoA, Mr Milner represented that the cost revision would produce a substantial reduction in charges. Mr Milner denied that he made any such representation, but it appears likely that the terms of the dialogue may have included some non-specific assurances, or possibly agreement with the proposition put by AFFCO representatives to the effect that the new plant would be capable of being more efficiently cleaned, and implicitly therefore at a lower cost. The one positive representation that Mr Milner recalls making before the HoA was signed was to the effect that the plant would be more efficiently cleaned with the OPCS he was proposing than without it.

[47]     There was considerable evidence on whether, in light of experience by both parties in cleaning the new plant, it was in fact capable of being cleaned more efficiently than the old plant. Opinions differed, in particular on the respective merits of different conveyor systems used in the different plants.  Mr Milner insisted that a system of plasticised links on stainless steel frames in the new plant afforded more  opportunity for trapping waste and needed greater  care  and  attention  to  be properly sanitised than a belt system had in the old plant.  I accept the analysis of Mr Nidd, an experienced industrial designer who was responsible for the design of the new plant, to the effect that it was better designed for cleaning purposes than its predecessor.  As against that, there appears to have been more equipment included in the new plant, all of which had to be thoroughly cleaned and sanitised.

[48]     Mr Milner claimed the advantage as the only witness who had actually cleaned the plant.  However, common sense accords with AFFCO’s position that a modern plant, designed with hygiene and ease of cleaning in mind, ought to be capable of being cleaned more efficiently than a very old plant, much of which dated back to 1916. I accept that AFFCO representatives dealing with the proposals for cleaning the new plant at the time of the HoA  were  anticipating  lower  cleaning

charges, and had reasonable grounds for such belief.  I am also satisfied that the price reductions offered by Ecowize in May 2006, albeit under pressure, demonstrated  that price reductions could in fact be achieved. AFFCO’s evidence was that once it cleaned the plant itself, substantial further savings were achieved. Although that is not a direct comparator for the costs reasonably incurred by an outside contractor, it does add a measure of confirmation that the new plant could be expected to be cleaned for less than the old one.

[49]         The terms of paragraph 5 of the HoA reserved to Ecowize a right to amend the prices. Ordinarily those terms would convey an entitlement to its advantage, ie because in the absence of such right AFFCO could treat the stipulated prices as being fixed. Conventionally, for a party in Ecowize’s position, the prospect of a review protects the contractual opportunity to recover more (rather than less) out of the contract. Paragraph 5 does not oblige Ecowize to undertake a review, whereas an obligation might be expected if the parties acknowledged at the time that the prices were expected to decrease, ie a change in AFFCO’s favour. However, with the inclusion of the last sentence in section 8.3, I find that in concert, the provisions as to price did commit Ecowize to undertaking a review.

[50]     I further find that the “right” reserved by Ecowize in paragraph 5 of the HoA obliged it to undertake a review of the prices at some point during the first three months after the new plant started operating. That does not extend to a unilateral right to impose on AFFCO any particular variations Ecowize proposed. Consistently with  that, the obligation to “submit” new rates of charges to AFFCO required Ecowize to convey such rates for the purposes of discussion or negotiation, and does not carry the meaning that such rates are thereafter automatically to apply.

[51]     Considerably more would be required in the HoA before it entitled Ecowize unilaterally to impose price revisions without any provision constraining the extent

of those revisions. On Ecowize’s interpretation of the HoA, such unilaterally varied prices would apply for the vast majority of a 48 month term, with AFFCO continuing to be bound even although it had no ability to constrain the extent of changes. That would be utterly uncommercial, and is not warranted on  any

reasonable interpretation of the HoA.  Nor is it warranted in the context in which the

HoA was signed.

Conduct subsequent to the HoA

[52]     Both parties sought to support their respective interpretations of the HoA by reference to subsequent conduct. Within appropriate limits, reference to the parties’ conduct subsequent to entry into the contract may aid interpretation of its terms. Different nuances are discernible from the separate judgments of the Supreme Court

in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277. In the present context, I derive guidance from Tipping J’s following observations:

[52]     As a matter of principle, the Court should not deprive itself of any material which may be helpful in  ascertaining the  parties’ jointly intended meaning, unless there are sufficiently strong policy reasons for the Court to limit  itself in that  way. I say that on the basis  that  any  form  of  material extrinsic to the document should be admissible only if capable of shedding light on the meaning  intended by both  parties. Extrinsic material which bears only on the meaning intended or understood by one party should  be excluded. The  need  for  the  extrinsic  material  to shed  light on  the  shared intention of the  parties applies to both pre-contract and post-contract evidence. Provided this point is kept firmly in mind, I consider the advantages of admitting evidence of post-contract conduct  outweigh  the disadvantages. The latter comprise primarily the potential for ex post facto subversion of earlier jointly shared intentions and the lengthening of interpretation disputes by encouraging the parties to produce evidence which

is often only tenuously relevant at best.

[53]     Given the relative brevity of the HoA and its contemplation that a more formal contract would be concluded, this is a situation in which the conduct of the parties after its execution may be relevant to its interpretation.  However, there is not a great  deal  of  subsequent  conduct  that  qualifies  as  the  mutual  approach  of  both parties to the interpretation of the HoA.

[54]     On  7 February  2006,  Mr Milner  emailed  Mr Lockley  at  AFFCO,  advising that  there  had  been  a  mistake  in  the  price  listed  for  one  of  the  scenarios,  and attaching a corrected document.  He then asked:

Have you had time to review the prices yet?   Please call Brian or myself if you have any queries.

[55]     The course of conduct suggests that Ecowize treated the HoA as requiring the parties to negotiate and agree on new prices, as is implicit in Mr Milner’s  email. Mr Milner’s email is  inconsistent with Ecowize  asserting  any  unilateral  right  to impose changes in pricing. Instead, it is consistent with both parties acknowledging the need for AFFCO to consent to variations in the basis of charging.

[56]     There is also mutual conduct which might suggest an acceptance by AFFCO

of some form of contractual commitment in relation to cleaning at Horotiu. This arises in a series of exchanges about the prospect of AFFCO inviting Ecowize (together with other contracting companies) to tender for cleaning services for all of AFFCO’s nine plants. On 20 April 2006, Mr Willis (whose involvement on behalf

of AFFCO I describe in more detail below) emailed Mr Milner, inviting Ecowize to tender for cleaning services at all nine of AFFCO’s processing sites.  The invitation acknowledged:

We  note  that  Rangiuru  is  subject  to  a  contract  and  Horotiu  a  head  of agreement, with rates yet to be agreed, with Ecowize.

[57]     After  specifying  the  basis  on  which  tenders  were  being  called,  Mr Willis continued:

Should  Ecowize  wish  to  tender  for  the  other  plants  then  the  existing Rangiuru  agreement  and  the  Horotiu  HoA  would  need  to  be  surrendered prior to that.   They would both continue to apply during the course of the tender up until 1 July.  This surrender is necessary for AFFCO to achieve the best possible price by offering all sites.

[58]     Ecowize was not prepared to forgo the  existing contractual  arrangements  it had.  Mr Milner conveyed that and Mr Willis appeared to accept it in an email dated

24 April 2006 to Mr Milner in which he commented:

Although it is disappointing that we will not have all plants available to offer

as a package, we will continue the process with the remaining seven…

[59]     That email also asked for brief confirmation in writing of  the  position  that Mr Milner had outlined and, by reply, Mr Milner emailed Mr Willis, which included the following paragraph (references to “Cowie” being intended to read “Ecowize”):

As mentioned in your email Cowie Limited currently has existing arrangements  in  place  at  both  AFFCO  Horotiu  and  AFFCO  Rangiuru.

Cowie Limited has made capital investments in excess of $250,000 in AFFCO plants based on the fact that we have committed ourselves to a long term partnership with AFFCO. As such it is not possible for Cowie Limited

to surrender the existing arrangements.

[60]     However, those exchanges do not reflect a shared view of the effect of the HoA as is necessary for post-contractual conduct before it is an aid to interpretation of the contract. Mr Willis was looking for a “clean slate” and in addition to an existing contract at Rangiuru there was a contractual process underway with Ecowize in relation to cleaning services at Horotiu. I do not accept that anything in these exchanges reflects an agreed position that the HoA amounted to a substantive contract for a 48 month term. Rather, Mr Willis’s 20 April 2006 reference to “…a heads of agreement, with rates yet to be agreed…” suggests that the parties were in a process of negotiating a contract, and not that they were bound to a substantive contract.

[61]     It was argued for Ecowize that the new schedule, updated to reflect the areas actually going to be cleaned and submitted to AFFCO at the end of January 2006, constituted the review provided for in the HoA that was to be undertaken “up to three months after the start of the new…plant”, and that acceptance of that was demonstrated by AFFCO’s payment of invoices presented in accordance with that schedule. I do not accept that the price schedule submitted with effect from the first day constitutes a review, such as was provided for in section 8.3. That contemplated that the review would occur “…  once the new plant is  operational…”,  and the natural meaning of that expression in the context of the HoA means that it would be

a review undertaken once Ecowize had the experience of a period actually cleaning the new plant. Accordingly, payment by AFFCO of charges in accordance with that schedule does not signify acceptance of the amount payable on an on-going basis, as

if the review contemplated by the HoA had occurred.

The HoA as a process contract

[62]     Accordingly, I find that the HoA represents an agreement to review the level

of charges once the contractor had some experience of precisely what was involved after the plant had become operational.  In addition, so much else was not addressed

because of uncertainty at the time, and the absence of material terms such as the indemnity/penalty provision means that the HoA was not a substantive contract for cleaning services. It follows that the HoA could be no more than an agreement to agree on a longer term contract, depending in particular on agreement as to the prices from the time Ecowize conducted a review within the first three months of operation

of the new plant. It also follows that to have any contractual effect, an agreement to agree on this most fundamental provision would require a provision to deal with the consequences of the parties’ inability to reach such agreement. I will return to that,

as it becomes appropriate.

[63]     Once this point is reached, the alternatives are either:

·    to imply a term by which the parties could resolve their negotiations,

in particular as to price; or

·if the absence of such a term is too large a ‘gap’ for the Court to fill, then irrespective of their intentions at the time of concluding the HoA, the parties did not achieve agreement on sufficient details to create a process contract in relation to a later substantive contract.

[64]     Can appropriate constraints reasonably be implied on the respective parties’ aspirations as to the extent of changes in price? Further, would such a term address the consequences flowing from a failure of the parties to agree on revised charges?

[65]     A relatively simple term to the effect that the parties are obliged to negotiate reasonably on the extent of any proposed variations to the schedule of charges would

fill a major part of the gap that arises in the terms of the HoA, once it is interpreted

to require a revision as I have said in [62] above. I am satisfied that a reasonable interpretation of the HoA imputes such an obligation to both parties. A provision in such general terms does, however, raise the spectre of how workable it will be, when

it is invoked.  Some objectively measurable criteria would be required to measure the reasonableness of each party’s stance.

[66]     There are a number of idiosyncratic features that would have to be taken into account. The first is Ecowize’s capital commitment to the cost of installing the OPCS. The second of the bullet points from page 8 of those accompanying the HoA quoted in [20] above meant that Ecowize retained ownership of the OPCS and theoretically at least saw residual value in those assets after a 48 month term. The monthly charge stipulated in the pricing proposal attached in October 2005 was $4,963.20 per month. That amounted to $59,558.40 per annum and $238,233.60 over a 48 month term. That appears to equate roughly to a full recovery of the cost of the equipment (some $177,000) plus the cost of supervising its acquisition and installation. Apparently at AFFCO’s request, that separate charge disappeared from the schedule provided as from 16 January 2006 when cleaning operations commenced.

[67]     Any reasonable analysis of permissible charges would need to take into account Ecowize’s cost of provision of that equipment, as well as reasonable components for its own overheads, provision of chemicals and materials, labour costs and a profit margin for Ecowize. The pricing schedules presented to AFFCO were not broken down in that way. I am only able to suggest  these components because of the evidence traversed on Ecowize’s claim for loss of profits, rather than because there were any documents identifying the parameters of its costs, or evidence of dialogue about it, either when the HoA was concluded or when new schedules were proposed in January and May 2006.

[68]     During the course of the hearing, I raised with counsel the difficulty of determining  this  dispute  on  a  finding  as  to  whether  Ecowize  had  unreasonably refused to reduce prices, or AFFCO had unreasonably refused to accept the extent of reductions  in  price  offered  in  May  2006,  by  reference  to  any  detailed  financial analysis of what the reasonable prices ought to have been.  That reflects the absence from the HoA of objectively measurable  criteria  for assessing whether the parties’ conduct was reasonable.

[69]     AFFCO’s case was that it was entitled to negotiate reductions commensurate either with the costs for which it could get the cleaning done by others, or the costs it would incur to do the cleaning itself. It  obtained  quotes  from  other  cleaning

companies, but then elected to clean the plant itself from early July 2006. It adduced evidence of the extent of savings that produced. However, that comparator needs a number of adjustments. For example, to recognise a profit margin for any external contractor, to the extent it is not factored in, and some allowance for the capital cost

of the OPCS and the cost to Ecowize of providing a warranty and indemnity for the plant not being returned on time and in a completely cleaned condition.

[70]         AFFCO adduced evidence of the quotes obtained from other cleaning companies. Mr Willis’s analysis of this, on which he was not challenged on cross- examination, was that the other quotations were for considerably less than what Ecowize was then charging. However, Mr Milner criticised each of the quotes which he had seen only in the course of inspecting discovered documents in the proceedings as not being comparable with the services Ecowize was providing. One was on a “labour only” basis, they appeared not to include any commitment to the warranty and consequent indemnity for failure to return the fully cleaned plant in a timely way, and at least one omitted any allowance for clothing, chemicals and other consumables which AFFCO was not providing. I am not able to make a definitive finding as to whether, after making allowances for any different scope or quality in the respective services offered, these quotations would still have been for less than Ecowize was charging. I am inclined to the view that if they were brought into line, they would cost less, but with some risk that they delivered a lower quality of cleaning service. In the end, it is not decisive, as AFFCO did not accept any of the other quotes and nor did its decision to terminate Ecowize’s services depend on this price comparison.

AFFCO’s approach on negotiating variations in price

[71]     I accept the submission on behalf of Ecowize that the approach adopted by AFFCO towards the contract changed materially in the period between commencement and termination of its cleaning services at the new plant. Although Messrs Lockley and Miles, based at Horotiu, were in general terms conscious of the need to monitor costs, recognising cleaning costs as a large item  of  AFFCO’s expenditure, there was nothing in their communications with Mr Milner in the early

months of 2006 that sought to test  Ecowize  with  the  rigour  that  Mr Willis  did thereafter.   Mr Willis is an executive with Talleys, and became involved, notionally

at  AFFCO’s  request,  to  apply  more  rigour  in  the  monitoring  of  costs  at  AFFCO plants.  Talleys had a material interest in this, as a significant shareholder in AFFCO. Later in 2006, Talleys became a majority shareholder in AFFCO.

[72]     It appears that Talleys’ own plants had moved or were moving to systems involving their own employees undertaking all the cleaning, and Mr Willis perceived that as at least a viable alternative for AFFCO plants as well. It is unnecessary to make a finding on Mr Milner’s perception that Mr Willis was keen to achieve that outcome from the commencement of his involvement, but it is clear that the benchmark  used  by Mr Willis  to  pressure  reductions  in  the  cleaning  charges from Ecowize was in part by reference to Mr Willis’s perception of savings achievable if AFFCO took over all cleaning responsibilities itself.

[73]     In February2006, Mr Willis dealt  with   one   of   the   staff   working   for

Mr Milner, a Mr Lykkegaard, in terms implying an expectation of price reductions:

How is the pricing coming along and any effort made  on  a  reduction  for AFFCO.

Two days after that enquiry, Mr Wills urged Mr Lykkegaard to:

…look at what you can do on the Horotiu and Rangiuru accounts immediately, even if it is a 15% reduction to be reviewed after 6 months.

[74]     The communications described in [56] to [59] above then occurred, followed

by those described below.

[75]     On 26 April 2006, Mr Willis again emailed Mr Milner, this time to point out

his view that the HoA anticipated new rates would be submitted once Ecowize was familiar with the new plant. He observed that the rates submitted in the draft Sanitation  Service  Contract  had  not  altered,  and  it  appeared  that  Ecowize  had  not given consideration to the new structure.  He continued:

Please review and submit a new price structure taking into account the age of the plant ASAP.

[76]     On 1 May 2006, Mr Milner explained Ecowize’s view of what was possible

by way of cost savings at Horotiu, as well as providing detail on the amount that he described Ecowize had spent on the OPCS, and on creation of a portable office and drying room for Ecowize staff.   On 3 May 2006, Mr Willis replied to Mr Milner’s email in the following terms:

We do not accept your justification of costs.  The proposed schedule of rates

to clean the new Horotiu plant is unacceptable and unless you review these rates we will be forced to carry out cleaning internally.

[77]     A subsequent exchange revealed  that  Mr Willis  had  omitted  Ecowize  from those invited to tender for the remaining AFFCO plants, because of the precondition

he had proposed that Ecowize would have to surrender its agreement in respect of Rangiuru and its HoA in respect of Horotiu.  As that had not occurred, Ecowize had been excluded from those invited to tender.

[78]     On 17 May 2006, Mr Milner submitted a schedule of charges as at 15 May

2006 that identified numerous savings in several of the cleaning scenarios required at

Horotiu.  On 20 May 2006, Mr Willis emailed Mr Milner in the following terms:

The new schedule of prices sent 17/05/06 is still unacceptable.  Cleaning can be completed internally for considerably less.

AFFCO have no alternative but to commence the cleaning at Horotiu plant using internal resources as of the 3/07/06.

Please provide a price to purchase or lease the cleaning system that has been installed at the AFFCO Horotiu plant.

[79]     The oral evidence did not focus in detail on the respective negotiating positions of Ecowize and AFFCO in the period between the end of May and early July 2006. The common bundle included a number of further exchanges up to 3 July

2006.  A 30 June 2006 letter addressed to Mr Andrew Talley (a Talleys director) by another of the Ecowize directors proposed two scenarios. One in which Ecowize continued to own the equipment, and the second under which AFFCO would buy the equipment but Ecowize would continue to provide the cleaning services. The annual difference between those costings and what AFFCO had projected its estimated costs would be if it undertook the cleaning itself were:

·   $248,000 if Ecowize continued to provide the equipment, and

·$185,000 if AFFCO owned the equipment and Ecowize merely continued to carry out the cleaning.

[80]     AFFCO acknowledged that Ecowize could charge a 6.31% “margin for management”. However, in the final offer on behalf of AFFCO on 3 July 2006, Mr Willis proposed that the work would have to be done at the rate of AFFCO’s projected daily cost ($2,600) plus the 6.31% margin, rather than at Ecowize’s revised daily cost ($3,634) plus a similar margin. Nor was a value attributed to the warranty/indemnity provision that Mr Milner treated as applying pending completion of a substantive contract. Ecowize was drawn to debating the extent of difference between AFFCO doing the cleaning internally, and Ecowize carry out the cleaning which would have to be on the basis that it could generate a positive return as an independent contractor. This does not comply with the term I consider was reasonably implied in the HoA, namely that Ecowize’s cost revisions had to be reasonable by reference to the provision of the services by an independent contractor. When AFFCO insisted the comparison be done without any allowance for a  profit margin and other distinctions present with an outside contractor, that materially  changed  the  rules  that  I  have  implied  into  the  HoA  for  the  process  of reviewing prices once Ecowize was familiar with cleaning the new plant.

[81]         However, there is an issue as to the materiality of this breach of the implied term that AFFCO negotiate reasonably on variation of the rates of charges. As mentioned in [69] above, AFFCO had procured quotes for other contractors to clean the new plant. Those were described as being at significantly lower prices than Ecowize proposed. In the somewhat artificial reconstruction of how the matter would have been dealt with if the implied term retrospectively articulated had instead been an explicit term of the HoA available to both parties at the time, then it seems likely that AFFCO could reasonably have relied on the unreasonableness of Ecowize’s prices by reference to quotes from other contractors, rather than by reference to its projection of internal costs for doing the cleaning itself.

[82]     Ecowize criticised AFFCO for not disclosing the other quotes it had received,

in the course of their negotiations.  That criticism is not warranted.  The parties were

in  a  commercial  negotiation  and  in  the  absence  of  a  challenge  that  AFFCO  was acting in bad faith by misrepresenting the terms of other quotes, that was commercial information  procured  by  AFFCO  and  able  to  be  retained  by  it  as  a  source  of comparison with Ecowize’s proposals.

[83]     AFFCO  did  not,  but  may  have  been  able  to  bring  Ecowize’s  supply  of services to an end on the basis that it had exhausted the reasonable endeavours it was obliged to make by the HoA.

[84]     Certainly, characterising the conduct on behalf of AFFCO as being in breach

of this form of implied term could certainly not lead to any basis on which Ecowize could claim that it was a breach causing the failure of the parties to conclude a substantive contract. Too many other matters were still to be resolved, for that causative link to be made out. Obvious concerns of disproportionality would also arise in contrasting the  consequences of AFFCO measuring its expectation fo  the extent of reduction in prices by reference to the wrong comparator, against the scale

of  adverse  consequences  Ecowize  would  claim  from  the  inability to  conclude  and earn profits from a substantive contract.

[85]     The preferable approach is to analyse whether the implied terms in their process contract extended to dealing with the period of notice required to cease Ecowize’s involvement, as well as recognising the cost to Ecowize of the capital commitment made in respect of the OPCS, if a substantive contract was not entered into.

[86]     I am satisfied that if the parties contemplated the consequences of non- agreement on the extent of variation in prices after Ecowize’s review, then AFFCO would have readily agreed to compensate Ecowize for the failure of the HoA to progress to a 48 month contract. The issue is whether such an implied term would reasonably extend to a formula for calculating compensation for Ecowize, or whether

it would have been left to be resolved,  if  necessary,  by some  third  party.  Such  a

formula would be a step along the way towards a formula for damages flowing from

a breach of the process contract, but is not necessarily the same thing.

[87]     Ecowize’s case was pursued on the premise that, assuming it made out a breach of a substantive contract, it was entitled to expectation damages quantified as the loss of net profits that it would otherwise have earned in the balance of a 48 month term.

[88]     Instead, I have found that the HoA was limited to a process contract requiring reasonable negotiations on the extent of variation in prices and, failing agreement on that and other terms, the contemplated 48 month term would not ensue. In that eventuality, Ecowize would be compensated for commitments it had made on a longer term basis not being recoverable. This is a form of reliance losses in terms of the categorisation used by Fisher J, in the context of s 9 of the Contractual Remedies Act, in Newmans Tours Ltd v Ranier Investments Ltd [1992] 2 NZLR 68 (HC). It would reflect the commitment made by Ecowize to the OPCS, plus labour and other organisational overheads reasonably contemplating that it could conclude a 48 month contract.

[89]     Resolving the appropriate measure of compensation for a party that has not been dealt with reasonably in respect of an agreement to agree will inevitably require

a case-specific analysis of what constitutes the just outcome. That is an aspect of the more flexible approach that is urged in assessing contract damages (see, for example, the cases and commentary at paragraph 1.2.3 of Civil Remedies in New Zealand, 2003). The appropriateness of an approach at common law may then be tested by what is perceived to be the appropriate remedy where s 9 of the CRA would apply.

[90]     On this approach, the reasonable compensation would, as Mr Lockley suggested, begin with some formula that addressed the capital cost involved in the OPCS. In addition, there would be some formula for compensating Ecowize for the costs of disengaging from provision of cleaning services such as redundancy costs arising from the loss of the work, and some allowance for sunk costs in setting up the cleaning regime on the assumption that a long term contract would follow. A further

predictable head of loss would be the lost profits that would have been earned during

a reasonable period of notice, to the extent it was not given.

[91]     As to the costs of the OPCS, AFFCO’s conduct reflected an acknowledgement that it had to offer reimbursement in respect of the cost of  the equipment. A number of enquiries were made on behalf of AFFCO as to what the OPCS had cost, on the basis that AFFCO would acquire it for what it had cost Ecowize. There was an obvious element of self-interest in that, as presumably AFFCO appreciated it was easier for them to take over the existing equipment than arrange for replacements.

[92]     In  the  end,  Ecowize  refused  to  deal  on  such  terms,  instead  insisting  that  it would  remove  the  OPCS.     It  may  well  be  that  this  decision  by  Ecowize  was influenced  by  its  perception  that  selling  the  OPCS  to  AFFCO  made  it  easier  for AFFCO  to  replace  Ecowize,  and  therefore  insisting  on  its  removal  if  Ecowize’s services  were  dispensed  with  could  add  a  measure  of  pressure  to  AFFCO’s  final decision  not  to  do  so.         If  that  was  Ecowize’s  motivation,  then  AFFCO  called  its bluff.

[93]     Certainly, when AFFCO was proposing a settlement in which it compensated Ecowize for the costs incurred on the OPCS and Ecowize rejected such overtures, a reasonable inference (ignoring any tactical behaviour on Ecowize’s part) is that the OPCS equipment had sufficient residual value to Ecowize for it to remove the equipment. In those circumstances, I find that rejection of AFFCO’s offer to negotiate the purchase of the OPCS system must negative the entitlement of Ecowize

to claim compensation in relation to the costs of that equipment.

[94]     In terms of direct losses suffered by Ecowize, the largest item is the extent of redundancy payments required on terminating the employment of the workers who had undertaken the cleaning work at AFFCO.

[95]     AFFCO complained that there were not genuine redundancies for the majority of the on-site employees, as AFFCO took over their employment. Ecowize’s  response  to  this  was  that  because  the  terms  of  employment  of  those

Ecowize staff characterised the situation that  ensued  as  one  of  redundancy,  then

Ecowize was liable to make the payments, irrespective of the prompt re-employment

of the personnel involved, effectively doing the same work for AFFCO.   I find that

Ecowize’s redundancy expenses were reasonably incurred in those circumstances.

[96]     I approach the measure of direct  costs  by  what  Mr Lane,  the  accounting expert called for Ecowize, calculated under the heading of “wasted expenditure”.

[97]     These comprised the following:

$

Costs incurred to get the contract:

Recruitment and training of the site manager  14,772

Installation costs for the Open Plant Cleaning

System: John Jensen  85,620

Finance  costs  in  relation  to  the  Open  Plant

Cleaning System to 30/6/2008  20,883

Abnormal repairs & maintenance  6,725

Total preliminary costs  128,000

$

Costs incurred after repudiation:

Redundancies paid to on site employees  57,988

Redundancies paid to off-site employees:

-     Maryanne Partridge (45.5%)

-     Brian Stephenson

Estimated removal costs for Open Plant

1,881

4,638

Cleaning System pumps & satellites  15,000

Storage costs for pumps and  satellite  to

30 June 2008 @ $120/month  2,880

Total post repudiation costs  82,387

[98]     Of the items under the first heading, I accept the recoverability of installation

costs of the OPCS.  However, the finance costs for the balance of the period to June

2008 could have been avoided if Ecowize negotiated with AFFCO for a sale of the equipment and I have found that Ecowize’s election not to do so must disqualify it from recovery of such items.

[99]     It can reasonably be assumed that the rates Ecowize was charging and intended to continue charging over a 48 month term would be calculated to recover such establishment costs over that term. Accordingly,  of  these  preliminary  costs,

after deduction of the financing costs, the amount of $107,117 is to be reduced by the number of months in which Ecowize was able to recover charges for doing the work.  This means that Ecowize is to be treated as having recovered 5.5 48ths of these costs, reflected in the calculation 5.5/48 x $107,117/1 = $12,273.   This reduces the recoverable costs from getting into the contract to $94,844.

[100]   As to the costs incurred after repudiation, notwithstanding AFFCO’s challenge, I am satisfied that the figures used by Mr Lane, including those for redundancies, reflect actual sums paid. Further, that they are costs of a type that arose because of the failure to reach agreement for the longer term contract that was contemplated. I also accept the redundancies for off-site employees. However, because of the view I have taken on AFFCO’s offer to acquire the OPCS, the costs incurred after termination of Ecowize’s services cannot include anything in relation

to  its  removal  or  storage. That  reduces  the  costs  described  as  “incurred  after repudiation” to $64,507.   The total of allowable establishment and disestablishment costs on this analysis is therefore $159,351.

[101]   A further, predictably recognised, head of loss that would be provided for in

an implied term on the consequences of failing to agree on a substantive contract is any inadequacy in the period of notice that Ecowize’s services at Horotiu were being terminated. In reliance on Paper Reclaim Ltd v Aotearoa International Ltd [2007]

3 NZLR 169 (SC), it was submitted for Ecowize that an arrangement of this type could reasonably have implied in it a period of notice for premature termination of between six and 12 months. I am not satisfied that that analogy is appropriate. In the absence of a substantive contract, the essence of the loss flowing from the failure

of the agreement to agree is to restore Ecowize to the position it would have been in prior to the contract, had it not made the commitments it did to pursue a longer term contract, in reliance on the process contract that could have led to that. The addition

to those heads of expense of a period of notice is justified to reflect compensation for the numerous additional costs of disengagement that are not adequately reflected in the wasted expenditure as claimed.

[102]   On the analysis thus far, the relevant period of notice is that required to bring

to an end the initial arrangements which ran on pursuant to the HoA, in anticipation

of the parties concluding a substantive contract.  The period of notice is not therefore

to be measured by reference to the unexpired portion of a substantive contract, but rather to reflect the failure of the parties to conclude one. Whilst the circumstances reflect a more compelling interest on Ecowize’s part to secure the long-term contract than is reflected in AFFCO’s interests, on a careful analysis of the effect of the HoA

at the time, it is reasonable to attribute to Ecowize the assumption of some measure

of the risk that the longer term contract it contemplated would not in fact ensue.

[103]   From AFFCO’s perspective, I have attributed to it the assumption of the obligation to reasonably negotiate variation to the prices, with a view to concluding the longer term substantive contract, in circumstances recognising the commitment

of  capital  expenditure  for  equipment  and  other  training  and  planning  expenses  on Ecowize’s part that it could only reasonably expect to fully recover if the longer term substantive contract ensued.  Accounting for the consequences of that not occurring would  reasonably  include  the  acknowledgement  of  a  period  of   notice  before termination  of  services,  although  that  could  not  be  expected  to  be  as  long  as  if  a substantive contract was concluded.   Although an obligation in these terms was not specifically accepted in submissions for AFFCO, its position was not far away from this, and the question is really what length of notice was reasonable.   Weighing the circumstances as they presented themselves at the time of the HoA, I consider the appropriate period that would have been included in an implied term would be three months’ notice.

[104]   The parties argued for different events as constituting the giving of notice of termination by AFFCO.  Mr Willis’s email of 23 May 2006 included:

As  stated  previously  the  new  schedule  of  prices  sent  17/05/06  is  still unacceptable.   AFFCO  will  have  no  alternative  other  than  to  commence cleaning of the plant internally from the 03/07/06…

[105]   That communication is in conditional terms, and I do not consider it sufficient to constitute notice of termination in the circumstances of the dealings that were then on-going between the parties.

[106]   Instead, I consider the exchange of emails between Messrs Milner and Willis

on 12 June 2006 did constitute the giving of notice.  In the first of these, Mr Milner

advised that Ecowize was not in a position to further reduce the charges and asked AFFCO  to  confirm  that  it  would  be  cancelling  the  HoA  “effective  2  July”. Mr Willis’s  response  on  the  same  day  included  a  statement  that  AFFCO  “will commence cleaning the plant internally from 3/07/06”.

[107]   That gave Ecowize three weeks’ notice, when I consider three months’ notice would have been reasonable.  The appropriate measure for the inadequacy in notice

is the net profit forgone by Ecowize for the difference between three and 12 weeks, namely nine weeks at the appropriate rate.

[108]   There were also differences over the appropriate profit margin to be used in any component of Ecowize’s claims for loss of profits.  A plant by plant breakdown

of profit margins in Ecowize’s management accounts reflected its work at Horotiu as relatively more profitable than its work at any other site. Those management accounts for the year to June 2006 reflected a site operating profit of 29.5% compared, for example, with 16.1% for the cleaning at AFFCO’s Rangiuru plant and other results for sites where there had been a full year of operations, ranging between

27% and losses.

[109]   The independent accountant who gave evidence for Ecowize of the calculations of losses in respect of a substantive contract used a rate of 35.6%, which was challenged by AFFCO.

[110]   I accept that such a rate is not made out. Precise arithmetic accuracy is not appropriate, particularly given the lack of any sufficient experience of the level of profitability achieved by Ecowize subsequent to its revision of charges in May 2006. The weekly contract fee from that time for core services was $24,565, and it was at that weekly rate that Ecowize charged AFFCO until termination on 3 July  2006. Nine weeks at that rate is a gross charge of $221,085. I am satisfied that the profit component would have been not less than 23%. That was the working assumption made by AFFCO’s own independent accounting witness, Mr Davis. It reflected an industry-wide survey and appeared to be reasonably justified. Had the May prices been accepted, it seems more likely than not that they were calculated to produce an

adequate  but  not  generous  level  of  profit,  given  the  pressure  to  keep  the  work. Accordingly, the appropriate calculation would be $221,085 x 23% = $50,849.

[111]   On this analysis, I have projected the losses that would be payable under what I consider to be the reasonably predictable content of an implied term addressing the consequences of the parties failing to agree on price and therefore on a substantive contract, as was contemplated by the HoA.  In summary:

Reimbursement for establishment and

disestablishment costs  $159,351

Profit forgone on inadequate notice  50,849

Total  $210,200

[112]   In doing so, I have no doubt gone close to the boundaries of what is justified

by way of implied terms. I am conscious of the caution sounded by the Court of Appeal in Fletcher Challenge (refer [22] above), warning against building a sequence of implied terms, each of which depends on the preceding implied term and does not derive from a  substratum of agreement  evidenced in what the  parties did commit to at the time. However, I remain satisfied that elements of an implied term extending to the consequences of a failure to conclude a substantive contract, when Ecowize’s commitment was overtly dependent on that, are part of the process contract as it would reasonably be understood. Further, that the compensation calculated by application of such an implied term is the appropriate and proportionate response to what transpired.

[113]   In   the   event   that   I   am   wrong   in   extending   an   implied   term   to   the compensatory  consequences  of  failing  to  conclude  an  agreement,  then  I  would approach the appropriate measure of compensation for the breach by AFFCO of its obligation to reasonably negotiate a variation in prices, on the same basis.  However, rather than provide a rationale of the analysis as it would apply at common law, it is sufficient to observe that it would also match the amounts reflected  in an analysis under s 9 of the CRA.

[114]   I do not overlook AFFCO’s submission that had it been held to a substantive

48 month contract that was substantially more expensive than cleaning the new plant itself, AFFCO would have resolved to reduce production from the plant to three days

a week, so as to reduce its cleaning expense.  I consider that threat to be somewhat unrealistic  and  potentially  overstated,  given  the  imperative  for  meat  processing companies  to  maximise  the  throughput  in  terms  of  recovery  on  their  fixed  assets. However, the point made for AFFCO does illustrate the disjunct between a breach of the standards of conduct implied into the process contract, and the ultimate failure of the parties to conclude a substantive contract.

[115]   I accept that there is no necessary confluence of the approach to compensating Ecowize, whether it derives from an implied term in the process contract, or is the appropriate measure of compensatory damages for breach of that contract, or in the further alternative by applying s 9 of the CRA. However, for reasons I can relatively shortly explain, that third alternative does also produce the same result in the present circumstances.

Relief claimed under s 9 of the Contractual Remedies Act 1979

[116]   The  closing  submissions  for  Ecowize  focused  on  this  alternative  in  the context of the appropriate relief that could be granted, in the event that I found the HoA  constituted  a  process  contract.  It  was  submitted  that  if  a  contract  of  such narrow scope was found, then “…it necessarily follows that s 9 is applicable”.  The submission  is  on  the  premise  that  once  there  was  a  contract,  it  had  in  fact  been cancelled.

[117]   The trigger for application of s 9 is the existence of a repudiation, as provided for in s 7(2) of the CRA.  That section provides:

7        Cancellation of contract

[…]

(2)Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.

[118]   A shared aim when such process contracts are agreed is that the parties will

go on and negotiate further within recognised parameters, to agree on certain finite commitments.   The  nature  of  such  arrangements  will  reflect  various  risks  that  the substantive contract is not agreed so that steps taken that are sufficient to perform the process  contract  may  not  produce  a  positive  result. Both  parties  may fulfil their obligations even although a substantive contract does  not  ensue,  and  in  that circumstance the process contract ends without a repudiation.

[119]   However, I am satisfied in the present  case  there  was  a  sufficiently  clear breach of the obligations imposed on AFFCO by the HoA to constitute a repudiation

of the process contract that entitled Ecowize to cancel it.

[120]   There is an element of artificiality in analysing the exchanges that evidenced the repudiation, when Ecowize treated itself as entitled to enforce a substantive contract for provision of cleaning services for 48 months, whereas the contract was limited to an agreement to agree. However, the termination arose out of the failure of the parties to agree on the extent of variation in prices, and that in turn was at least contributed to by AFFCO’s application of a standard other than that contemplated by the terms implied into the HoA.

[121]   I accept, therefore, that Ecowize is entitled to seek relief under the relatively broad powers in s 9 of the CRA. On this head, Ecowize had conveyed to AFFCO prior to trial that it would seek reliance damages on the s 9 claim. That reliance on AFFCO performing the process contract is reflected in the wasted expenditure incurred by Ecowize in anticipation that the process contract afforded it a reasonable opportunity to conclude a substantive 48 month, plus the costs of disengaging when the substantive contract did not ensue. In addition, Ecowize could rely on getting a reasonable period of notice of the informal arrangements for cleaning coming to an end.

[122]   Ecowize cited the analysis of Fisher J in Newmans Tours Ltd for the flexibility of the relief able to be crafted, as most appropriate to an individual case. Without reviewing the reasoning in detail, I am satisfied that the appropriate measure

of relief under s 9 involves the same components and same amounts as those I have

determined  in  favour  of  Ecowize,  whether  measured  by  reference  to  the  terms  I consider can appropriately be implied as to the consequences of breach, or reflecting the  measure  of  compensatory  damages  arising  from  the  breach  of  the  process contract.

[123]   Accordingly, if for any reason the analysis under those earlier heads proceeds

on a wrong basis then, quite independently  of  it,  the  same  result  is  available  to

Ecowize under its invocation of the CRA.

AFFCO counterclaim

[124]   AFFCO counterclaimed on the basis it had paid more than it ought to have

for Ecowize’s services on two alternative grounds. First that if the HoA was not binding, then Ecowize was only entitled to charge a reasonable price and, on a quantum meruit basis, had overcharged to the extent that AFFCO’s analysis demonstrated a lower reasonable price. Alternatively, if the HoA was binding, then

it  is  to  be  taken  as  including  an  implied  term  that  Ecowize  would  only  charge  a reasonable price for its services and that implied term is breached to the extent that AFFCO establishes that it overpaid for the services received.

[125]   AFFCO raised an objection to Ecowize’s opposition to the counterclaim, on the basis that Ecowize had not pleaded to AFFCO’s Second Amended Statement of Defence and Counterclaim, so that the extent of positive allegations in that form of counterclaim were not formally responded to and therefore, on AFFCO’s analysis, are deemed to have been accepted by Ecowize.

[126]   The relevant counterclaim was filed and served in September 2008. At that time, r 169(2) of the High Court Rules provided that it was not obligatory to file and serve a reply to affirmative defences or defendants’ pleadings containing any positive allegation affecting any other party. However, since the new form of High Court Rules came into force on 1 February 2009, the previous position in relation to such pleadings has been reversed, and the current High  Court  rr 5.62  and  5.63 impose a positive duty to file and serve a reply to such pleadings, with the default

position being that an affirmative defence or a positive allegation that is not denied is treated as being admitted.

[127]   Mr Hollyman analysed the pleading on AFFCO’s counterclaim in reliance on the current form of the rule, whereas Mr Branch defended the counterclaim on the basis of the Rules as they applied at the time any response was  properly  to  be considered. As Mr Branch pointed out, compliance with the new r 5.62 was impossible here because the obligation to file a pleading in response to a positive allegation  on behalf of a defendant did not exist at the time that step was to be contemplated, namely in September 2008.

[128]   I am satisfied that the obligations as to pleading have to reflect the Rules in operation at the time, and the new rr 5.62 and 5.63 cannot have retrospective effect without creating a risk of injustice.

[129]   I am reinforced in that view by the practical position of the parties.  Although

in some details, AFFCO might be left with a doubt as to the precise nature of Ecowize’s rebuttal of the positive allegations in its counterclaim, in substance the differences between the parties were well articulated on the existing pleadings. As the hearing unfolded, I could not discern any prospect of material prejudice to AFFCO arising from the absence of a reply to the positive allegations in its counterclaim. Accordingly,  I propose dealing with the counterclaim on the substance of the issues between the parties.

[130]   AFFCO’s  claim  that  it had  paid  too  much  relied upon  a  comparison  of  the amount Ecowize charged, with the costs that AFFCO subsequently incurred itself in carrying out the cleaning after Ecowize terminated.  However, those two amounts are not directly comparable. For instance, as an independent  contractor,  Ecowize warranted  the  timely return  of  the  premises  to  AFFCO  at  the  conclusion  of  every cleaning, sanitised to relatively exacting standards, on terms that required Ecowize to pay a form of compensation that the parties had previously treated as a penalty, for any failure  to  do  so. The  history of  Ecowize’s  work  at the old  plant  included  an instance of  breach  of  this  obligation,  and  payment  of  a  relatively significant  sum. The  provision  of  that  warranty  and  indemnity  would  have  had  a  cost  to  Ecowize.

There was no comparable cost for AFFCO,  and  apparently no attempt to  make an allowance for the absence of such cost.

[131]   Further, a business in the position of AFFCO procuring services such as those provided by Ecowize has reasonably to expect that prices will include a profit margin for the provider of the services. There is no suggestion that AFFCO treated

its internal provision of cleaning services as a separate business so as to require any such margin.

[132]   In  short,  AFFCO  failed  to  establish  an  appropriate  measure  by  which  to calculate the extent, if any, that it was “overcharged”.

[133]   Perhaps more fundamentally, I find  that  AFFCO  agreed  to  pay the  charges that Ecowize invoiced it for, even although that agreement was implicitly qualified

as  being  an  interim  arrangement  only.   The  protests  that  AFFCO  was  paying  too much for the cleaning services were all made in the context of an expectation that the level of prices would, on a prospective basis, be reduced.   This stance reflected an expectation  that  efficiencies  would  be  possible  as  the  Ecowize  staff  became  more familiar with the new plant.

[134]   AFFCO  was  not  paying  Ecowize  on  terms  such  as  that  they  were  paying under  protest  and  expected  subsequently  to  resolve  the  extent  to  which  AFFCO would be entitled to a refund.  Rather, the focus was on a concern that, prospectively, the charges should be reduced.

[135]   For these reasons, it is not possible for AFFCO to make out any basis for a quantum meruit entitlement that it had paid too much, and was entitled to a refund.

Costs

[136]   Ecowize has had relatively modest success on its claims.  AFFCO has failed

on both its total opposition to any further liability to Ecowize, and also on it counterclaim. My provisional view is that  Ecowize  would  be  entitled  to  a  costs

award in its favour, but perhaps reduced to some degree from what might otherwise

be its full costs entitlement on a larger measure of success.

[137]   However,  I make  no  order  as  to  costs,  not  being privy to  any exchange  of positions  prior  to  the  hearing  on  a  “without  prejudice  save  as  to  costs”  basis. Accordingly, I invite the parties to settle the issue as to costs.  If that is not possible, then within 28 days of delivery of this judgment, Ecowize may file a Memorandum seeking an  order as to  costs, with AFFCO having a right of reply to  that within a further 14 days (such time limits to exclude the summer vacation).

[138]   I regret the delay in delivery of this judgment.

Dobson J