Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

CA132/00

BETWEEN	ELECTRICITY CORPORATION OF NEW ZEALAND LIMITED
Appellant

AND	FLETCHER CHALLENGE ENERGY LIMITED
Respondent

Hearing:	2, 3, 4, 5 July 2001
Coram:	Richardson P Thomas J Keith J Blanchard J McGrath J
Appearances:	R J Craddock QC, G P Curry and R J Latton for Appellant W M Wilson QC, S S Williams and S L Rees-Thomas for Respondent
Judgment:	10 October 2001

JUDGMENTS OF THE COURT

Judgments

Para No

Richardson P, Keith, Blanchard and McGrath JJ                 [1] – [119]
Thomas J  [120] – [251]
Schedule  [252]

RICHARDSON P, KEITH, BLANCHARD AND McGRATH JJ

(DELIVERED BY BLANCHARD J)

Electricity Corporation of New Zealand Ltd (ECNZ) appeals against a declaratory order of the High Court at Wellington that a document called a Heads of Agreement (HoA) signed on behalf of Fletcher Challenge Energy Ltd (FCE) and ECNZ on 28 February 1997 is a valid and binding contract for the sale and purchase of gas. It also appeals a finding that it is in breach of an obligation in the HoA to use all reasonable endeavours to agree on a full sale and purchase agreement within three months of the date on which the HoA was executed.
The High Court judgment of Wild J delivered on 9 June 2000 is reported at [2001] 2 NZLR 219.
In 1997 the offshore Maui field, majority owned by FCE, was by a considerable distance the largest oil and gas field in New Zealand. Production from that field was expected to continue until 2009. A smaller but significant offshore field known as Kupe had not yet been developed.However, if development were to proceed in the near future, Kupe was expected to be a producing field until 2011. After 2011 the position was uncertain both in relation to these two fields and generally.
As part of the Government’s reform of the electricity industry, ECNZ, which was a state owned enterprise, had been required to divest itself of certain generating assets. It found itself short of gas to fuel a power station which it owned at Huntly. The Huntly station is capable of being fuelled either with gas or coal. It is connected by a pipeline to the Maui Field. ECNZ also had plans to build a new combined cycle gas turbine power plant at Huntly, which would be gas fuelled and was anticipated to be a much more efficient producer than the existing Huntly station.
Negotiations between FCE and ECNZ over the long-term supply of gas to Huntly had broken down in 1997. Part of the difficulty, as the judgment below records (at para [15]), was FCE’s inability to provide that supply in addition to its existing commitments.
Western Mining Corporation Ltd (WMC) held a 40% interest in the Kupe field and had called for tenders for the purchase of that interest. Both FCE and ECNZ submitted bids. The judgment records that they were “closely competing”. WMC called for a second round of bidding, to close on 28 February 1997.
In the meantime FCE managed to acquire the 20% interest in Kupe held by the Norcen group. It remained interested in WMC’s interest through which it could obtain the operatorship of the field. But at the same time FCE wanted to limit its financial exposure to Kupe. It appears to have been concerned by the level of anticipated capital costs of developing the field.
Against this background, including particularly the lack of any source for the acquisition of a gas supply other than Kupe and the FCE controlled Maui, the parties entered into discussions. Representatives met at the ECNZ offices in Wellington on 27 and 28 February in an attempt to negotiate an agreement for a long-term gas supply for Huntly. Those representatives were Messrs McLaughlin, Taylor and Boshier of ECNZ and Kirk and Russell of FCE.
On 28 February while these talks were still underway, Mr Hugh Fletcher, Chief Executive Officer of the Fletcher Challenge Group and Mr Dave Frow, his counterpart at ECNZ, respectively signed and endorsed agreement on a letter from FCE to ECNZ (the Fletcher/Frow letter). The letter is expressed to be an “attempt at capturing the agreed proposal”. It is in four parts. In the first part the letter states that ECNZ and FCE would that day resubmit their first round bids to WMC. If either bid was accepted, they would each buy the shares in the Kupe field in the proportions of 25.75% for ECNZ and 14.25% for FCE.
The second part of the letter read:
(ii) By the end of today, ECNZ and Fletcher Challenge Energy will enter into the Heads of Agreement for long term gas supply. This Heads of Agreement will specify all essential terms for it to be a binding agreement, including annual quantities, max/min flow rates, start date, duration, prices throughout, force majeure terms. This Heads of Agreement will be conditional on ECNZ Board approval within eight days.
In the third part of the letter ECNZ and FCE set out certain terms relating to the Kupe field, including a commitment from ECNZ to support FCE’s bid to replace WMC as the field’s operator.
In the last part of the letter the parties agreed that in the event of ambiguity or uncertainty Messrs Frow and Fletcher would “interpret the current intent and that will prevail”.
Later on the same day, 28 February, the HoA was signed on behalf of ECNZ by Mr Taylor, its General Manager, Business Development, and on behalf of FCE by Mr Kirk, its General Manger, Marketing and Commercial.
The HoA is set out in full in a schedule to the judgments. It has four unusual features. The words “to be agreed” appear against the efficiency factor (K) in the formula for calculating the liability of FCE for non-delivery of gas (other than due to force majeure). The words “Not agreed” appear under the marginal heading “Force Majeure” and in the text of that item there is the statement (“Not agreed: Extension to National Grid)”. Below the marginal heading “Prepaid Gas Relief” there is the notation “not agreed”. Finally, above the signatures, there is the following:
Agreed (except where indicated)
There are two matters stated to be “Conditions Precedent”. The first is the securing of the 40% Kupe stake. The second is “ECNZ’s Board Approval”.
There is also an item called “Time Frame for Proceeding” which reads:
FCE/ECNZ to use all reasonable endeavours to agree a full sale and purchase agreement within three months of the date of this agreement.
The bids were re-submitted to WMC in accordance with the Fletcher/Frow letter and on 4 March WMC advised that FCE’s bid had been accepted.
On 12 March Messrs Fletcher and Frow re-signed an amended version of their letter. The first part of the letter was altered to remove some portions which had placed restrictions on voting in the joint venture. It seems this was thought likely to attract the disapproval of the Commerce Commission. The second part of the letter was amended to read as follows (with the changes as italicised):
(ii)By the end of today, ECNZ and Fletcher Challenge Energy will enter into the Heads of Agreement for long term gas supply. The gas to be supplied under this Agreement will be sourced by Fletcher Challenge Energy from a variety of sources available to it. This Heads of Agreement will specify all essential terms for it to be a binding agreement, including annual quantities, max/min flow rates, start date, duration, prices throughout, force majeure terms. This Heads of Agreement will be condition on ECNZ Board approval within thirteen days.
There was no change to parts three and four of the letter.
The extension of the date for obtaining ECNZ Board approval was made at the request of ECNZ. Its Board met on the same day, 12 March. A resolution was passed in the following terms:
RESOLVED
that
(i)the Heads of Agreement for the contract for the sale of gas between FCE and ECNZ be approved, subject to challenging the provision that FCE should only deliver gas in the period 2011–2017 if such delivery were to be economic;
(ii)the Committee of the Board comprising of Messrs Cushing, Gentry and Wu and that that Committee be authorised to approve the final contract for the Sale and Purchase of the Gas with Fletcher Challenge Energy and to authorise the execution of that document.
It was the uncontested evidence of Mr Kirk of FCE that he was told by Mr Taylor of ECNZ in a telephone call on 13 March that ECNZ’s Board had given approval to the HoA. He was not told about the qualification concerning gas deliveries from 2011 to 2017. FCE did not learn of this qualification until after this proceeding had been commenced.
The parties became pre-occupied for a while with completing the Kupe interest purchase. That was achieved on 27 March. It was not until 3 April that they met to begin their endeavours to agree the “full sale and purchase agreement”. As a first step, each side prepared a list of issues requiring agreement. These were not, as listed, restricted to the matters stated in the HoA as to be agreed or not agreed.
Further discussions were delayed until May by a Commerce Commission investigation into the parties’ acquisition of WMC’s Kupe interest. About three weeks into the negotiations which then ensued, ECNZ, concerned to have a secure supply of gas until 2017, raised with FCE the question of the “economic test”, which formed the basis upon which FCE could decline to deliver gas after 30 September 2011 under the “Preferred Customer” obligation in the HoA (“FCE will deliver gas only if delivery is economic”). FCE objected to the test proposed by ECNZ which was a net present value test extending to FCE’s entire gas and liquids business in New Zealand. As Mr Russell of FCE put it in his evidence:
Under the test posed by ECNZ, if the net present value of the whole of FCE’s gas and liquids revenues in New Zealand, taking into account revenues from, and the costs of, the supply of gas to ECNZ, was positive, then FCE would have to supply gas to ECNZ. In other words, FCE would be forced under that test to cross-subsidise the delivery of gas to ECNZ with its revenues from all its other gas and liquids activities in New Zealand if the price ECNZ paid to FCE was not sufficient in and of itself to cover the cost of delivering the gas to ECNZ. And, in other words, FCE would be required to supply ECNZ with gas except to the extent that to do so would place FCE in a net loss situation over the whole of its gas and liquids business in New Zealand.
The negotiations in the end appear to have broken down principally over this question. In the meantime, developments in the electricity market had altered ECNZ’s view about the prices set under the HoA. Lower price forecasts predicting future oversupply of electricity coupled with the development of the Government’s plans for further re-structuring of ECNZ and the electricity market made the gas supply from FCE a less attractive proposition.
Eventually, although the parties continued their discussions and proposals flowed to and fro between them, an impasse was reached in January 1998. The negotiations collapsed. ECNZ took the position that the HoA did not constitute a legally binding contract and declined to proceed with the purchase of gas. FCE instituted this proceeding seeking declarations that the HoA was binding on ECNZ and that, whether or not that was so, ECNZ was in breach of a binding obligation to use “all reasonable endeavours” to agree on the full sale and purchase agreement.

High Court judgment

While recognising that the HoA contemplated a subsequent agreement that would more fully deal with the transaction, Wild J held that the parties did in fact intend to be bound by the terms of the HoA when it was signed on 28 February.
He said that both parties agreed the transaction was important, complex and of substantial “value”. ECNZ emphasised the large capital expenditures and potential liabilities involved which, combined with the contemplation of a full agreement, were submitted to negate any suggestion that the parties intended immediately to be bound under the bullet-point-styled HoA, only four pages long. The Judge disagreed, saying that commercial parties often bind themselves under heads of agreement, leaving important matters for subsequent agreement. The Judge said also that the HoA was “toward the top end of formality”, despite its simple composition. The HoA was concluded urgently, he said, as part of the parties’ wider agreement spelt out in the Fletcher/Frow letter, and against the deadline specified in that letter. “Necessity dictated brevity”.
The Judge considered the structure and language of the HoA. The first clause, which was headed “Condition Precedent”, required ECNZ board approval. The Judge said that there would be no point in including a condition precedent in an agreement not intended to be binding. The penultimate clause required both FCE and ECNZ to keep “the contracts of agreement totally confidential except with the approval of the other party” (emphasis added). The Judge found this to be referring at least to the HoA and any full agreement subsequently conducted, as supported by the use of contractual terms in the HoA, such as “agreed”, “obligation”, “liability” and “elect”. The Judge took into account also that, in stark contrast to normal business practice in Britain and North America, neither party had taken the simple step of including a clause saying clearly that the HoA had no binding effect.
Wild J placed considerable importance on the Fletcher/Frow letter which outlined the parties’ joint venture. As mentioned above, the second part of the letter said the HoA would “specify all essential terms for it to be a binding agreement”. This letter was signed by the respective CEOs of both parties and, significantly, was re-signed again on 12 March 1997, well after the HoA had been executed. The only change material to this case, the Judge said, was an alteration, from 8 to 13 days, in the timeframe in which the ECNZ board had to approve the HoA. The Judge saw the re-signing as being consistent only with Messrs Fletcher and Frow regarding the HoA as conditionally binding, with both CEOs considering ECNZ board approval to be so fundamental that its timeframe was altered to ensure the board had sufficient time to meet the condition precedent.
The Judge took into account also the parties’ conduct, both before and after the HoA was signed. Internal documentation, communications between the two parties and communications between each party and other unrelated third parties were all found to be consistent with both sides regarding the HoA as binding.
Having held that the parties intended to be bound by the HoA, Wild J sought to do his best to give effect to that intention. Where a term is ambiguous, as being capable of two or more meanings, the Judge said the Court should chose whichever meaning seems to make the most sense in the context of the contract and the surrounding circumstances as a whole. Where a term essential to the workability of the contract is instead uncertain, as being incapable of ascertaining any sensible meaning at all, or where a contract is incomplete, because such an essential term has been omitted, the Judge said the Court could imply terms reasonable in all the circumstances. However, if the uncertainty or incompleteness vitiates instead an inessential term only, then the Judge said the Court could disregard that term and enforce the remainder of the contract.
Wild J held that the alleged problems of uncertainty or incompleteness in relation to the terms of the HoA, as submitted by ECNZ, could be overcome by implying reasonable terms to ensure its workability. The HoA was held to be legally enforceable.
ECNZ had submitted that the qualification in its Board’s resolution of the HoA showed the approval was conditional on FCE agreeing to a different delivery obligation for the 2011-2017 period. It was submitted therefore that the condition precedent in the HoA had never been met. Wild J held, however, that the Board’s approval was not conditional. He said it was absolute, with an accompanying instruction to ECNZ management to try to negotiate a better deal than that expressed in the HoA. The Judge saw this to be consistent with the communication by Mr Taylor (of ECNZ) on 13 March advising that Board approval of the HoA had been given.
After a careful analysis of the parties’ conduct subsequent to the execution of the HoA, the Judge held that ECNZ had breached the “reasonable endeavours” clause, which, on the basis that the HoA was a contract, he considered sufficiently clear and certain to be binding.

Argument for appellant

Mr Craddock QC, for ECNZ, stated what he said were the fundamental issues in the case in this way:
Assessed objectively on 28 February 1997:
[a]had the parties agreed all the terms they regarded as essential;
[b]did the parties intend to be finally and exclusively bound to a contract on the terms agreed in the HoA excluding those terms not agreed;
and, if so, was the HoA legally complete?
It was submitted that the parties had failed to reach agreement on a number of terms they considered essential to their bargain:
[a] the efficiency factor (K) was still “to be agreed”;
[b] an additional clause was needed “to cover non supply liabilities”;
[c]force majeure terms were “not agreed” either generally or at least in respect of the extension to the National Grid;
[d]repayment terms for pre-paid gas (in the case of force majeure and non-delivery) were stated to be “not agreed”;
[e]the HoA did not contain minimum flow rates (compare the Fletcher/Frow letter which included in essential terms “max/min flow rates”), nor did it prescribe a maximum hourly flow rate.

The terms had been stated generally to be “Agreed (except where indicated).” Counsel submitted that the parties were clearly not ad idem on terms which they regarded as essential to any contract. It was for them to determine what was essential to their bargain. If both parties or either party regarded a term as essential then it was.

The appellant submitted also that, upon an objective assessment of the documents, it is clear that the parties did not intend to be immediately bound by the HoA. They had recorded that lack of agreement and their intention to continue negotiating. They remained in a state of negotiation. Counsel submitted that the HoA simply recorded the point in the negotiation which they had reached. They had not provided for agreement on outstanding issues to be reached by resort to an expert or an arbitrator or by another mechanism.
Mr Craddock submitted that the Judge erred in his general approach, being predisposed towards finding a binding contract and ignoring the intentions of the parties. He had also erred in his approach to specific terms. He had purported to create a “workable” contract by supplying terms on a basis rejected by the parties or had determined that they could do without terms which they had expressly identified as being essential to their intended bargain. The Judge was said to have ignored the fact that in a contract of this kind the terms are inter-related. The result of this process, it was said, was to impose on ECNZ a contract containing an allocation of risks which it would never have agreed to. The Court had made a bargain for the parties. ECNZ had been left with a high gas price which it had been prepared to accept only on the basis that substantial risk mitigation clauses would be negotiated and included. As this had never happened, the contractual balance had thereby been upset.
Mr Craddock said that it could not possibly be the case that ECNZ intended to bind itself finally and conclusively to a 17-year multi-billion dollar gas contract without reaching agreement on a force majeure term, minimum flow rates (even if these were zero), a formula for calculating non-delivery liabilities, a clause dealing with other liabilities, a prepaid gas relief term, a clause defining price-escalation, a term defining the economic test and the rest of the other terms which the appellant submitted were uncertain.

And even if the parties had intended to be bound, it was the appellant’s submission that their negotiations did not reach a point of sufficient certainty to be binding in law. Counsel took the Court to several provisions, including that for the delivery of gas after 2011 only if “economic” for FCE, which he said were incapable of interpretation.
The appellant argued also that the condition precedent requiring the ECNZ Board approval was not fulfilled by the “conditional approval” which was given.
Finally, Mr Craddock submitted that the “all reasonable endeavours” clause was not binding because the HoA was not a contract and, in any event, was a mere agreement to agree and thereby unenforceable (Walford v Miles [1992] 2 AC 128). In the alternative, ECNZ said that, on the facts, it had nevertheless used reasonable endeavours to reach agreement. The negotiations had gone on for many months during which time FCE had never complained about ECNZ’s conduct.

Argument for respondent

Mr Wilson QC, for FCE, submitted that the appellant’s argument had subordinated the question of intention to be bound to the question of completeness and had thus inverted the proper approach. It was the respondent’s contention that the approach of the Judge was correct in law; that he had first determined that the parties intended to be bound and only then had sought to give effect to their intention, following the modern approach to contract formation. The terms in the Fletcher/Frow letter were said to be merely illustrative of the types of terms which might be agreed in order to create a binding HoA; the signatories to the letter were not attempting to define the essential terms. Their object was merely to ensure that the HoA would be binding when signed. It was open to the appointed negotiators to come to a different view on what was essential, accepting as they did so that the HoA was necessarily an imperfect document because of the limited time available to work out its terms. The position taken by the negotiators had been confirmed by the re-signing of the letter when the CEOs knew that not all of the terms mentioned in their letter had been covered.
It was said that each party had elected to take a risk on the outcome of the unresolved matters. That risk was outweighed by the perceived value of getting an agreement which in fact included all terms essential in law or thought by the parties to be essential. Omission or non-agreement on other matters therefore did not prevent effect being given to the intention of the parties to be bound. The existence of the “not agreeds” ought, it was said, to be relevant only to the likelihood that the parties intended to be bound or to whether any matter not agreed was objectively essential.
Mr Wilson referred to ECNZ’s need for gas, with the only two sources being Maui (controlled by FCE) and Kupe. ECNZ had been exposed to the risk that FCE would put in a higher bid. It could not afford to miss out on Kupe because, if it did, FCE could then have named its own price for gas supplies.
Mr Wilson asked why ECNZ would have made the agreement subject to its Board’s approval if there had been no intention that it be binding. He explained FCE’s attitude to the subsequent negotiations towards a full agreement as deriving from their view that while the HoA was a binding contract, a full agreement would cure its imperfections and be a much more satisfactory basis for the long-term relationship.
Because the parties intended to be bound at the time of signature (described by Mr Wilson as the “key point”), it was proper for Wild J to take the view that, by a process of implication and interpretation, the contract could be found to be complete or made to be complete. While the Judge had proceeded actually to resolve the alleged incompleteness and uncertainty, it was not necessary to go that far. The Court had only to form the view that these matters were capable of resolution should the need arise during the performance of the contract. All the allegedly incomplete or uncertain terms were either capable of being rendered certain or were not essential to the bargain. The HoA, it was said, contained all the terms needed to make it enforceable. It was not unworkable in the sense of being objectively impossible to perform.
It was submitted that the condition precedent concerning ECNZ Board approval had been fulfilled. The terms of the Board’s minute and ECNZ’s contemporaneous and subsequent conduct showed an intention to approve the HoA. The resolution said so. It did not say that there was merely a conditional approval. The reference to a “final” contract suggested that there was an earlier one. If this were not so, the unqualified notice of approval nevertheless prevented ECNZ from denying the approval. Counsel pointed out that the terms of the Board resolution had not been pleaded by ECNZ until its statement of defence to a fourth pleading by FCE.
Finally, the respondent submitted that Wild J was correct in finding that the obligation to use all reasonable endeavours was enforceable (either as part of a binding HoA or standing by itself), although Mr Wilson accepted that the Judge had proceeded on this point on the basis that the HoA was binding. The evidence was also said to support the view that ECNZ was in breach of the obligation, particularly in the stance it took on the economic test.

The correct legal approach

The question whether negotiating parties intended the product of their negotiation to be immediately binding upon them, either conditionally or unconditionally, cannot sensibly be divorced from a consideration of the terms expressed or implicit in that product. They may have embarked upon their negotiation with every intention on both sides that a contract will result, yet have failed to attain that objective because of an inability to agree on particular terms and on the bargain as a whole. In other cases, which are much less common, the intention may remain but somehow the parties fail to reach agreement on a term or terms without which there is insufficient structure to create a binding contract. This latter situation is uncommon because normally negotiating parties will have an appreciation of what basic terms they need to reach agreement upon in order to form a contract of the particular type which they are negotiating. It is comparatively rare that, having an intention to contract immediately, not only do they fail to deal expressly with an essential or fundamental term but it also proves impossible for the Court to determine the contractual intent in that regard by implication of a term or by reference to what was reasonable in the particular circumstances or to some other objective standard.
A contract is not legally incomplete merely because consequential matters have been omitted, particularly when they relate to questions of contingency and risk allocation. The parties may have thought it unnecessary to the essence of their bargain to reach agreement upon such matters or it may have been difficult or even impossible to predict what might arise in the future, particularly under a long term contract. It may therefore have been thought satisfactory – and it would often be more economically efficient - to leave such matters to be worked out if necessary in the course of the performance of the contract.
But even where the parties are ad idem concerning all terms essential to the formation of a contract – the basic structure of a contract of the type under negotiation is found to have been present in the terms which have been agreed – they still may not have achieved formation of a contract if there are other unagreed matters which the parties themselves regard as a prerequisite to any agreement and in respect of which they have reserved to themselves alone the power of agreement. In such cases, what is missing at the end of the negotiation is the intention to contract, not a legally essential element of a bargain. (In theory, it is of course possible that, having concurred that a legally inessential matter is in fact essential to them in the particular circumstances, the parties have then overlooked it in the turmoil of negotiation and mistakenly have thought that they have agreed everything essential, when in fact they have not. But this would be very unusual and certainly did not happen in the present case.)
The prerequisites to formation of a contract are therefore:

(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 (e.g. 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.

Whether the parties intended to enter into a contract and whether they have succeeded in doing so are questions to be determined objectively. In considering whether the negotiating parties have actually formed a contract, it is permissible to look beyond the words of their “agreement” to the background circumstances from which it arose – the matrix of facts. This can include statements the parties made orally or in writing in the course of their negotiations and drafts of the intended contractual document.
The established rule is that in interpreting a contract it is permissible to look to the factual matrix, but that evidence of negotiations and statements of subjective intention must be disregarded. For present purposes we have no need to re-consider that rule (noting, however, Professor David McLauchlan’s renewal of his criticisms of it in his article A Contract Contradiction (1999) 30 VUWLR 175). But it is inapplicable when the issue is, instead, one of contract formation. It is likewise inapplicable when rectification is claimed: evidence of negotiations and all other surrounding circumstances will be received (Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617). It is therefore just as permissible to prove that one party told the other that the otherwise apparently binding contract was not in fact to be binding as it is to prove that they agreed upon a term but then did not correctly record that agreement in their written document. In Air Great Lakes Pty Ltd v K S Easter(Holdings) Pty Ltd (1985) 2 NSWLR 309, 337, McHugh JA drew attention to Corbin’s observation in Contracts (s577, vol.3 at 385) that “we need not begin excluding parol evidence until we know a contract has been made”. McHugh JA also noted that “the intention to be bound is a jural act separate and distinct from the terms of their bargain”.
It is also permissible when considering contract formation (or rectification) to look at subsequent conduct of the parties towards one another, including what they have said to each other after the date of the alleged contract (Australian Broadcasting Corporation v XIVTH Commonwealth Games Ltd (1988) 18 NSWLR 540, 550). However, as Gleeson CJ observed in the Australian Broadcasting case (at 550), the position is by no means so clear in connection with internal memoranda, communications of one party with a third party or statements of subjective intention made by individuals in the course of giving evidence. We have proceeded on the basis of treating such material as admissible but we share that reservation, particularly in relation to direct expressions of subjective intent. In this case, as in the case before the New South Wales Court of Appeal, these types of material have proved to be contradictory and ultimately largely unhelpful.
It is also very important, in considering the intention of the parties to be bound, to bear in mind the dynamics of the negotiation process and the internal inter-relationship of the terms of a commercial bargain. Tamberlin J of the Federal Court of Australia made the following valuable observation in Seven Cable Television Pty Ltd v Telstra Corporation Ltd (2000) 171 ALR 89, 114 (para [97]):
When parties are negotiating in order to arrive at a contract to govern their legal relations the process is often complex, especially in cases of detailed and wide ranging agreements intended to endure over many years. In the course of negotiations there will generally be a constant and ongoing process of adjustment and readjustment of the positions adopted by the parties on particular clauses. This process sometimes involves a series of mutual “trade-offs” whereby a concession is made by one party in respect of one provision in exchange for the giving of a concession by the other party in respect of a different provision. It will also involve compromise and adjustment so that it is often difficult to determine whether at any particular point of time prior to execution of a final agreement the parties have entered into contractual relations. Before a final contract is made it is also difficult to detach any particular provision from its context and say that a final agreement has been reached on that particular clause as a discrete agreement.
The Court has an entirely neutral approach when determining whether the parties intended to enter into a contract. Having decided that they had that intention, however, the Court’s attitude will change. It will then do its best to give effect to their intention and, if at all possible, to uphold the contract despite any omissions or ambiguities (Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503; [1932] All ER Rep 494; R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd 1964 SC 308 and Attorney-General v Barker Bros Ltd [1976] 2 NZLR 495). We agree with the way in which Anderson J expressed the position in Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101, 132-3:
I think it is fair to say, speaking very generally, that where the parties intended to make a final and binding contract the approach of the courts to questions of uncertainty and incompleteness is rather different from the approach that is taken when the uncertainty or incompleteness goes to contractual intention. Where the parties intended to make an immediately binding agreement, and believe they have done so, the courts will strive to uphold it despite the omission of terms or lack of clarity: see Trustees Executors & Agency Co Ltd v Peters (1960) 102 CLR 537; Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429; Meehan v Jones (1982) 149 CLR 571. However, the principle that courts should be the upholders and not the destroyers of bargains, which is the principle that underlies this approach, is not applicable where the issue to be decided is whether the parties intended to form a concluded bargain. In determining that issue, the court is not being asked to enforce a contract, but to decide whether or not the parties intended to make one. That inquiry need not be approached with any predisposition in favour of upholding anything. The question is whether there is anything to uphold.
In the Australian Broadcasting case (at 548), Gleeson CJ commented on the need to examine together both contractual intent and adequacy of agreed terms:
It is to be noted that the question in a case such as the present is expressed in terms of the intention of the parties to make a concluded bargain: see, eg, Masters v Cameron [(1954) 91 CLR 353, 360]. That is not the same as, although in a given case it may be closely related to, the question whether the parties have reached agreement upon such terms as are, in the circumstances, legally necessary to constitute a contract. To say that parties to negotiations have agreed upon sufficient matters to produce the consequence that, perhaps by reference to implied terms or by resort to considerations of reasonableness, a court will treat their consensus as sufficiently comprehensive to be legally binding, is not the same thing as to say that a court will decide that they intended to make a concluded bargain. Nevertheless, in the ordinary case, as a matter of fact and commonsense, other things being equal, the more numerous and significant the areas in respect of which the parties have failed to reach agreement, the slower a court will be to conclude that they had the requisite contractual intention.
Something should be said about the place that the controversial decision of the House of Lords in May and Butcher Ltd v The King [1934] 2 KB 17n has in the modern law of contract. We take the view that this case is no longer to be regarded as authority for any wider proposition than that an “agreement” which omits an essential term (or, as Lord Buckmaster called it, “a critical part”), or a means of determining such a term, does not amount to a contract. No longer should it be said, on the basis of that case, that prima facie, if something essential is left to be agreed upon by the parties at a later time, there is no binding agreement. The intention of the parties, as discerned by the Court, to be bound or not to be bound should be paramount. If the Court is satisfied that the parties intended to be bound, it will strive to find a means of giving effect to that intention by filling the gap. On the other hand, if the Court takes the view that the parties did not intend to be bound unless they themselves filled the gap (that they were not content to leave that task to the Court or a third party), then the agreement will not be binding.
On its own facts we respectfully doubt that May and Butcher would be decided by their Lordships in the same way today. We are now perhaps more accustomed to resort to arbitration in order to settle even matters of considerable importance to the contracting parties. We find curious the notion that, in a commercial contract where price is left to be agreed, a reasonable price cannot be fixed and that, even where there is an arbitration clause, that clause cannot be used to determine the price because “unless the price has been fixed, the agreement is not there”. (p20)
We agree with Professor McLauchlan (Rethinking Agreements to Agree (1998) 18 NZULR 77, 85) that “an agreement to agree will not be held void for uncertainty if the parties have provided a workable formula or objective standard or a machinery (such as arbitration) for determining the matter which has been left open”. We also agree with him that the court can step in and apply the formula or standard if the parties fail to agree or can substitute other machinery if the designated machinery breaks down. This is generally the approach taken by this Court in Attorney-General v Barker Bros Ltd.
However, if essential matters (i.e. legally essential or regarded as essential by the parties) have not been agreed upon and are not determinable by recourse to a mechanism or to a formula or agreed standard, it may be beyond the ability of the Court to fill the gap in the express terms, even with the assistance of expert evidence. In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, 20, Kirby P remarked:
Courts are not well equipped, drawing on their own experience, to fill out the detail of such contracts where the parties leave gaps in their own agreement. The fact that this may result in wasted time and money is a risk which parties to negotiation must always weigh up. Courts cannot enforce such agreements because they are incapable of judging where the negotiation on particular points would have taken the parties, acting bona fide but legitimately in their own interests.

It will be a matter of fact and degree in each case whether the gap left by the parties is simply too wide to be filled. The Court can supplement, enlarge or clarify the express terms but it cannot properly engage in an exercise of effectively making the contract for the parties by imposing terms which they have not themselves agreed to and for which there are no reliable objective criteria.

Where the intention to contract is found to have existed, the Court may supply an omission by implying a term. It is true that the Privy Council remarked in Aotearoa International Ltd v Scancarriers A/S [1985] 1 NZLR 513, 555 that, in order to determine whether there is a legally binding bargain, it is impermissible to add to the express terms further implied terms upon which the parties have not expressly agreed, and then, by adding the express terms and the implied terms together, thereby to create “what would not otherwise be a legally binding bargain”. But this observation was made on the particular facts of that case, where there does not appear to have been a mutual intention to contract. Mustill LJ, having referred to it in Malcolm v Chancellor, Masters and Scholars of the University of Oxford [1994] EMLR 17, said that there could not be found in this passage the route to a decision on whether there is a contract or not “since it requires the court to assess the contractual efficacy of express terms which the court knows, ex hypothesi, could be bulked out by implied terms” (at p35). It provided, he said, a valuable reminder of the risks involved in the exercise of taking potential implied terms one group at a time, implying them, moving on to another group, implying those, and so on until a contract is built up out of implied terms from no express bargain at all. Mustill LJ thought it was necessary instead to “consider whether there was a sufficient skeleton of express terms to be fleshed out by implication”. We respectfully agree. Gaps can be filled by implication, but only if there is such a skeleton of express terms combined with an intention to contract.
A helpful analysis of various possible situations is given by Lloyd LJ in Pagnan S.p.A. v Feed Products Ltd (1987) 2 Lloyd’s Rep 601, 619. After pointing out that the parties may intend to be bound forthwith even though there are further terms still to be agreed, his Lordship said that, if they then failed to reach agreement on the further terms, the existing contract is not invalidated unless the failure to reach agreement renders the contract as a whole “unworkable” or void for uncertainty. By “unworkable” we take him to mean that the transaction is lacking in business efficacy. Lloyd LJ continued:
It is sometimes said that the parties must agree on the essential terms and that it is only matters of detail which can be left over. This may be misleading, since the word “essential” in that context is ambiguous. If by “essential” one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by “essential” one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by “essential” one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge, “the masters of their contractual fate”. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called “heads of agreement”.
It follows that merely because an important term is deferred to be settled on a future occasion, that does not mean that there is no intention to be bound. In such circumstances, provided the Court is satisfied that the parties did intend to enter immediately into a contractual relationship, it will do its best to find a means of giving effect to that intention by determining, if possible, the outstanding matter.
Lack of clarity or ambiguity in express terms can also be resolved so as to “save” the contract. It is only if there is such uncertainty in an essential term that the Court cannot determine what the parties meant that the agreement will be held to be meaningless or void – where “the language used was so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention” (G Scammell & Nephew Ltd v Ouston [1941] AC 251 per Lord Wright at 268). Where the term in question is meaningless but inessential (both in law and to the parties) it will simply be disregarded in determining the rights of the parties under the contract.

Did the parties intend the HoA to be a contract?

There can be no doubt that ECNZ and FCE both went into the negotiations on 27 and 28 February intent on concluding an agreement in the form of a heads of agreement. They must have appreciated that a relatively sketchy, perhaps incomplete, document was likely to result from the hurried negotiations. But it is clear from the Fletcher/Frow letter that the companies embarked on the negotiations with every intention of completing a binding deal.
We accept also that the negotiators had authority to determine what matters were to be regarded as essential to any binding contract. We do not read the Fletcher/Frow letter as doing more than illustrating the kinds of things which might emerge as being essential. Whatever Mr Fletcher and Mr Frow may have contemplated, they appear to have left it to Mr Kirk and Mr Taylor to make the final determination by signing the HoA, subject of course to the opportunity to be reserved to ECNZ’s Board to withhold its approval.
The critical matter is whether the negotiators achieved their objective of agreeing on all terms they (or either of them) considered essential; whether, by signifying that certain matters had not been agreed they were indicating that essential matters remained outstanding or, alternatively, were withdrawing those matters from the list of what was, at the end of the negotiation, still regarded as essential. Did they, at the end of the negotiations on the HoA, intend to have an immediately binding contract?
We consider that it is very significant in a document which on its face appeared incomplete – where items were actually marked “not agreed” - that the negotiators did not record that their agreement was to be regarded as complete, or legally binding. (Compare what was done by the negotiators in Anaconda where it was said that the HoA “constitutes an agreement in itself” intended to be replaced by a fuller agreement not different in substance or form). Nor did they provide for any machinery, such as an independent expert or an arbitrator, to resolve the matters on which they had not agreed.
It is significant also that the negotiators made what seems to be a deliberate distinction between two items which they recorded as being “not agreed”, and two others, one of which they left “to be agreed” and one in respect of which they merely stated that an additional clause would be required. If “not agreed” was intended merely to signify the desirability of reaching a further agreement at a later time, pursuant to the “reasonable endeavours to agree a full sale and purchase agreement” provision, why did the negotiators not use the same language in relation to the K factor and the other liabilities? And why, in relation to those items, was there no notation in the margin as there was for the “not agreed” items?
The HoA has the appearance of a memorandum listing the points which have been agreed, those which have not been agreed and those which the parties are content to put to one side for the moment, together with a statement of their intention to negotiate a full (i.e complete) agreement within three months. FCE argues that ECNZ had assessed the value of getting a binding agreement on the terms actually agreed and was prepared to take the risks involved in not obtaining agreement on the other items. But if that were the case, why did the parties include the “not agreed” items and make it plain, immediately above the signatures, that there had been no agreement in those respects? It seems to us very likely that this was done because, unlike the K factor which could be independently assessed or measured at a later time, and unlike the other liabilities clause which the parties seem to have regarded as relatively unimportant “boilerplate”, the “not agreed” items were of a kind which could not be expected to be settled for the parties by a Court or other third party. There were no objective standards or precedents from similar past dealings between the parties or even dealings in the industry generally (this was thought to be the first such contract not tied to a particular gas field) by which an adjudicator or expert could determine how to accommodate the risk factors which were the subject of or underlay the force majeure and pre-paid gas provisions. Those provisions, it seems to us, had such substantial financial implications – for ECNZ if they were not included and for FCE if they were – that it would be surprising if the parties had simply left them to be negotiated at a later time. We consider that they were marked “not agreed” as an indication of their importance, and that they were regarded as essential terms.
The HoA accordingly seems to us to be in the nature of a progress report from the negotiators, containing also a statement on the course intended to be followed in order to complete the agreement. Both sides were evidently very confident of ultimately reaching that full agreement. However, it seems to us very probable that, if the negotiators had been asked before placing their signatures on the HoA whether, in the unexpected event of failure to do so, the HoA was to stand on its own as the contractual document to govern the parties’ relationship until 2017, both Mr Kirk and Mr Taylor would have answered in the negative. They had simply reached an important staging post on the way to final agreement.
The respondent argues that the existence of a “condition precedent” of ECNZ Board approval shows, by use of an expression normally of contractual significance, that the signatories regarded the HoA as a contract. Why else, it is asked, would they contemplate submitting it to the Board of ECNZ for approval? We think the use of the contractual language is probably explained by the sequence in which the HoA was put together. It was written up on a whiteboard item by item and transcribed as the negotiation proceeded towards an anticipated agreement. But, whether that is so, the noticeable feature is that the document actually put before the ECNZ Board included the “not agreed” items. The Board was not being asked, it seems to us, to approve a completed bargain. The matter went to the Board for approval of what had been done to date. It was approved on that basis, with the Board indicating that there should be a challenge to one of the items the negotiators had agreed. It is perhaps because of the provisional status of the document – a yet to be completed work – that Mr Taylor omitted to mention the Board’s instruction when he told FCE that there had been an approval. Knowing that a final negotiation was still to come, including discussions on that particular item, he may have been keeping ECNZ’s powder dry.
It is also said for FCE that the re-signing of the Fletcher/Frow letter, including its reference to the intention that the HoA be binding, when both CEOs must have been aware of the “not agreed” items in the HoA, shows that the HoA was accepted by them as binding on the parties. We disagree. The opportunity was there for the CEOs to say just that, but they did not do so. Instead they confirmed that the HoA “will specify” all the essential terms for it to be binding. It did so, but it also indicated a lack of agreement on some of those items. The re-signed letter left that position unchanged. The letter altered the date for the Board approval. If that had been the only change, it might have indicated that the alteration was made because the HoA had contractual force and would lapse if there were a delay in the date of the Board meeting. But the more substantial alterations related to the first part of the letter and concerned the arrangements for the WMC bidding. The need to avoid criticism from the Commerce Commission, not any difficulty with the HoA itself, seems to have been the reason behind the re-signing of an altered letter.
When FCE and ECNZ came to negotiate the full agreement, it is plain that they did not pick up where they had left off. Each treated itself as free to re-negotiate supposedly agreed items. Neither challenged the other’s right to do so. Both seemed to accept that, as progress might be made on one item, a consequential adjustment or balancing might then be needed on another point. We refer in this connection to Tamberlin J’s observation quoted in para [57] above. As an example, we note the suggestion made by FCE at one point that the credit built up by ECNZ under the Take or Pay provision should be measured in money rather than in volumes of gas. The nature of the negotiation naturally reflected the inter-relationship between agreed and unagreed items listed in the HoA. Agreement on many of them was necessarily provisional. That is so in any normal commercial negotiation process. A party may wish to re-visit an item apparently settled if that party cannot get what it is seeking on another item to which the negotiators subsequently turn their attention. Nothing can be regarded as set in concrete until there is an overall agreement – until the actual point of contracting. That does not mean that the parties will not sometimes commit themselves contractually, leaving important matters for later negotiation. But the greater the significance of the inter-relationship of terms, the less likely they are to do so, as for instance where the undecided terms concern serious risk factors which the parties have been trying to address, as they did here. It is to be expected that the affected party would wish to preserve its position, so as not to be committed until all matters are weighed in the contractual balance.
It is said that internally ECNZ personnel made reference to the HoA as a binding document both before and after it was put to the Board. In some instances that certainly happened, but not consistently, even in the material which went to the Board. For example, in his report to the Board, Mr Taylor said that the HoA specified all necessary terms for it to be a binding agreement. But of course it specified some of them as being “not agreed”. Then later in his report he listed essential terms and it is said by FCE to be significant that he did not include the “not agreeds”. But Mr Taylor also talked in the same document of the “proposed” gas contract and so did the Board’s minute of the discussion preceding the passing of its resolution. In addition, the request made to the Board was not for an approval of a contract but for it to “approve in principle” the “gas contracting arrangements” on the terms negotiated.
Mr Craddock was also able to refer us to internal FCE documents which treated the HoA as non-binding (e.g. a memorandum of 28 September 1998 which speaks of “seeking to negotiate the HoA to a binding contract”). As we have indicated, however, we consider that little weight should be placed upon internal documentation, which reflected the understanding (or misunderstanding) of a particular person at a particular time, or even how that person wished to portray the position to others in the organisation or, in ECNZ’s case, to its shareholding Minister.
FCE has also argued that it would not have renewed its WMC bid at the same level as the first round (and implemented the first part of the Fletcher/Frow letter) except on the basis that the HoA was binding, subject only to ECNZ Board approval. In his evidence Mr Hugh Fletcher stated that the letter anticipated signature of the HoA and, if it was not signed, the whole letter would “fall away”. He said it would only have life if the HoA had life. But the very fact that the ECNZ Board could have refused an approval after the second round bids were submitted, and even after one of them had been accepted, indicates to us that FCE was relying not on the binding nature of the HoA but on its assessment that ECNZ’s need for a long-term gas supply was so pressing that the HoA would receive approval and that a gas contract would be finally negotiated. FCE was, after all, attaining a major objective merely by acquiring a stake in Kupe which would give it the operatorship but without over-committing itself to the field. In his evidence Mr Kirk admitted that FCE took the risk:
Can I get direct answer, was not Fletchers decision whether or not gas agreement eventuated whether or not ECNZ Board approval was forthcoming, it would submit its original bid and ECNZ would do likewise? Yes. We were taking risk that ECNZ Board would approve and we were led to believe that [it] was highly likely they would, yes.

It seems to us that FCE elected to take this risk because they took comfort from the progress which had been made already, the mutual intent to negotiate a full agreement and their own assessment of ECNZ’s need for a gas supply. If FCE had not proceeded on the basis of the position which had been reached, there was a danger that ECNZ might have tried to outbid it for the full WMC stake.

Counsel for FCE also endeavoured to make something of the fact that ECNZ treated the confidentiality clause in the HoA as imposing an obligation upon it. ECNZ sought FCE’s consent to disclose the existence of the HoA in its 1997 Annual Report. It complained to FCE about a press release on the subject. But it is entirely understandable that the parties, having gone so far with their negotiations, would regard themselves as bound in honour not to make disclosures without the consent of the other, whether or not they considered the clause was legally binding.
An argument of somewhat greater weight was that ECNZ drafted its own press release, in terms approved by FCE, in October 1997. It spoke of ECNZ’s “commitment to purchase”. And ECNZ’s Annual Report for 1997 listed the HoA under “Long-term contracts”. However, even as these matters were being attended to, the parties themselves were evincing a very different attitude in their tortuous negotiations to try to achieve the full agreement anticipated by the HoA.
For these reasons, although we do not agree with the criticism made of the Judge that he approached the question of contractual intent with a pre-disposition to find that there was a contract, we have concluded that he erred in finding that the HoA was intended to be a binding contract.
Having reached that conclusion, we are not required to address whether the terms agreed upon by the parties were sufficient in law to constitute a gas supply contract. But, as this dispute may proceed further, we now briefly give our views on that question and on various other issues dealt with by the trial Judge concerning whether the HoA was binding.

Absence of terms essential in law?

Four matters were mentioned as alleged instances of a failure to agree on legally sufficient terms. They were force majeure, prepaid gas relief, the efficiency factor in the formula for limiting liability for non-delivery (the K factor) and non-supply liabilities.

(a) Force majeure

As a preliminary point, there was the question of whether the “not agreed” notation relating to force majeure applied only to the extension to the National Grid. Wild J interpreted the force majeure clause as recording agreement upon that subject except in respect of the extension. He formed that view by looking at the clause in isolation and was confirmed in his opinion when he read it “with its interrelated clauses i.e those referring to force majeure, or upon the operation of which force majeure impacts”. On this point he preferred the evidence of the FCE witnesses.

To my mind, once the HoA was completed, the parties were obliged to negotiate in good faith. Neither party could sit on its hands and decline to negotiate or fail to negotiate in good faith. To decline to negotiate or to negotiate in bad faith (or other than in good faith) would be a breach of that obligation. Essentially, this is Wild J’s finding, and I cannot fault it.

Conclusion

I repeat what I said at the outset that the arguments and evidence that the HoA was intended to be binding are overwhelming. It seems to me that the highest the contrary case can be stated is to say that, although the parties clearly intended to be bound, they would not have had that intention if they had appreciated that the “full” agreement might or would not be completed, whether due to the default of one party or otherwise. Their overt intention, in other words, was based on an assumption which permits the Court to redefine their intention. As I have sought to show, that view is untenable for a number of reasons, not the least being that the parties’ intention is paramount and, having been objectively determined, the Court is obliged to move to the second question and determine whether the contract is so incomplete and uncertain as to be unenforceable.
In his excellent article, which bears repeated reference, “Does Legal Formalism Hold Sway in England?” (1996) 49 II Current Legal Problems, 45, Lord Steyn expressed the view (at 47) that formalism in the sense of an exclusive reliance on formalist methods has not been exorcised in England, but it is on the wane. Is it possible that in this case the exorcist may be knocking at the door? Undue adherence to formalism, it seems to me, is required in the context of contract formation to sanction any of the following notions:

The notion that the object of the courts’ inquiry is or can be something other than the actual intention of the parties, objectively assessed; or
The notion that the courts can impute an “objective” intention to the parties which is not their actual intention; or
The notion that the “subjective” evidence which the courts will disregard is not limited to what the parties say about their intention to be bound, but extends to evidence of what they said and did which points to their intention; and
The notion that the scope of the inquiry is to be restricted to an examination of the terms of the agreement, or that otherwise relevant and reliable evidence is to be excluded, by reference to rules pertaining to the objective interpretation of contractual terms.

As I reflect on the matter in concluding, I find myself wondering whether I may not have been too quick to allow that Hope JA may have stated the point too strongly in the Air Great Lakes case, supra, at 319, when he said: “…if the mutual actual intention [of the parties who have signed a document] was that there should be a concluded contract, it would be fraudulent to deny that intent”. To FCE which acted upon the bargain struck, continued to act consistently on the basis of the HoA being a binding contract, did not shy away from calling its executives to give evidence, and mounted the arguments which I have rehearsed in this judgment, it must seem as if Hope JA’s words were made to fit this case.
If this perception is correct, FCE could perhaps feel confident that the decision of this Court will be reversed in the Privy Council. It is highly unlikely that will happen. Stating that prevision in slightly less than absolute terms is prudent only because the outcome of an appeal can turn on the particular composition of the Board. So, why will an appeal be highly unlikely to succeed?
I put to one side the fact that statistics confirm that few appeals from decisions of this Court sitting as a Court of five succeed. Rather, the key lies in the different approach which is nurtured within the ranks of the judiciary. The outcome will follow the approach which is adopted or identified. No one today seriously denies the capacity for judicial rationalisation. So the basic approach is all-important.
But this judgment is neither the time nor place for a discourse on the different judicial approaches which are possible or evident in a case such as the present. It must suffice for me to speak for myself. I consider that it is important that the law should endeavour to meet the needs of commerce rather than require commerce to meet rules laid down by the law. It should meet the reasonable expectations of business men and women rather than require the law to meet the possibly overly legalistic expectations of men and women in the law. The realities of commerce should be recognised, and where the law does not accord with those realities it should be made to give way to a more responsive legal approach.
I would like to think that this is the path which New Zealand would wish to follow as an independent judicial system. If and when it is able to do so, I am confident that, in a case such as the present, the Court will reject the influence of lingering formalism and decline to artificially restrict the scope of the inquiry so as to admit of an outcome which is at variance with the true intention of the parties.

SOLICITORS:

Russell McVeagh, Auckland for Appellant
KPMG Legal, Wellington for Respondent

SCHEDULE

FCE/ECNZ Gas Contract

Heads of Agreement

Condition Precedent :- WMC’s 40% Kupe stake being secured under the

FCE/ECNZ Kupe JV.
:- ECNZ’s Board Approval.

QuantitiesContract year commences/ ends 1 October/ 30 September each year.

2000 - 2002: 10PJ/yr = AQ
2002 – 2017: 20PJ/yr = AQ

Maximum Delivery 120% of average daily quantity ie. 365/AQ
Obligation:

Quality:NZS 5443: 1990 Pressure 31 Bar Dewpoint 0°C
(minimum).

Price:2000 - 2004 $[A]/GJ*
2004 - 2011$[B]/GJ*
2011 - 2017put/call price result

Put/Call:- Applies to deliveries in 1 October 2011 – 30 September 2017 period.
-ECNZ may “call” at $[C]/GJ*

- FCE may “put” at $[D]/GJ*
- Put or Call can be made on any day prior to 30 September 2009 (for full period and AQ).

Price Adjustment: PPI – Annually: 1 October

Base date measurement: year ending 30 September 1997.

Delivery Points: Huntly

-     ECNZ may request alternative delivery points.
-     FCE to not unreasonably refuse, and will support if new deliver point(s) are on the Maui onshore pipeline.
-     Consequential incremental costs to be met by ECNZ.

Notifications: Suitable for end use (power generation and reticulated market) and gas supply requirements.

TOP:ECNZ pay for AQ in each year, whether taken or not.
TOP incurred in any year shall be carried forward for use in the two subsequent contract years, any outstanding balance at the end of that second year shall be cancelled (without refund).
TOP gas taken shall not attract any additional payment and shall be taken only after AQ is taken. Taxes to be paid at time of delivery.

Use:No end use or on sale limitations (including contract assignment (all/part) or novation (all/part) to company establish to comply with “Ringfencing” requirements.

Delivery Obligations: - Firm, but subject to Force Majeure for period to 30
September 2011, thereafter:

- “Preferred Customer” delivery obligation.

Preferred Customer: Means:

i   Delivery priority to all FCE Contracts, including extensions and modifications of existing contracts, entered into/modified/extended after 27 February 1997.
i   FCE to ensure that all gas entitlements are available for supply under this contract.
i   In gas contracting matters FCE must ensure that they always give effect to ECNZ’s “Preferred Customer” supply entitlement.
i   FCE will deliver gas only if delivery is economic.

Provided FCE complies with the foregoing there shall be no retrospective assessment of liability/responsibility.

Alternative Fuel In the event FCE is unable to deliver gas to ECNZ, FCE shall have the option of delivering an equivalent quantity (energy equivalent) of an alternative fuel. FCE agree to reimburse ECNZ for any additional operating costs incurred by ECNZ as a result of the delivery of the alternative fuel. FCE also agree to reimburse ECNZ for any reduction in efficiency caused by the delivery of the alternative fuel in place of gas.

Liability for non In the even of non delivery of a notified quantity, FCE

delivery (other than           will pay direct and consequential losses up to a limit of:
due to Force Majeure)
Liability= A x K x C – B
where:A =     The average half hourly
electricity price for the
relevant period expressed in cents per kWh at grid injection point(s). Nearest to gas delivery point(s).

K =An efficiency factor (to be agreed) expressed in kWh/GJ of gas.
C =The volume of gas (GJ) notified by ECNZ and not delivered by FCE for reasons other than Force Majeure.
B =The operating costs saved, or potentially savable, by not running the plant due to the non-delivery of gas

ECNZ will take all reasonable steps to mitigate losses.

For wilful acts unlimited, direct and consequential liability to apply (ie. Both Buyer and Seller).

Other Liabilities: Additional clause to cover non supply liabilities.

Taxes:ERL, to the extent payable, included in price. All new taxes, other than those specific only to FCE, to be reimbursed by ECNZ.

Force Majeure: To apply equally to FCE and ECNZ.
[Not agreed]
ECNZ force majeure restricted to events at Huntly power station or a new gas fired power station if the gas from this contract is used to fuel such new power station.
(Not agreed: Extension to National Grid).
Unforeseen physical force majeure events (excluding reserves and non equipment gas quality related events) and emergency events.
Reasonable operatorship and due diligence standards to apply.
Party claiming Force Majeure to use reasonable endeavours to mitigate effects on other party.

Prepaid Gas Relief: (For Force Majeure, and non delivery – repayment of
[not agreed]prepaid gas).

Non-specification gas: If [in] the Buyer’s opinion (including onsale/assignment/novation purchasers) Non Specification Gas is suitable for use (notwithstanding its offspec), Buyer will use such gas. In such circumstances FCE shall reimburse Buyer all costs incurred in accepting and using such gas, including the consequences of Loss of plant efficiency.

An estimate of such costs shall be advised to FCE as soon as possible. FCE shall either agree to meet costs incurred (by Buyer) or elect not to deliver gas in which circumstances the non delivery provisions shall apply.
If the Buyer’s reasonable opinion rejects non specification gas, such gas shall be deemed to be non delivery of gas by Seller.

Confidentiality: FCE and ECNZ will keep the contracts of agreement totally confidential except with the approval of the other party.

Time Frame for FCE/ECNZ to use all reasonable endeavours to agree a
Proceeding:full sale and purchase agreement within three months of the date of this agreement.

Agreed (except where indicated).

“T Taylor”
________________________________

Trevor Taylor
General Manager, Business Development
ECNZ

“David Kirk”

________________________________

David Kirk
General Manager
Marketing & Commercial
Fletcher Challenge Energy

28 February 1997

*Commercially sensitive prices have been omitted.

[2001] NZCA 289

10 October 2001