The Kainui Partnership v Zespri Group Limited
[2022] NZHC 3152
•29 November 2022
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2022-470-000093
[2022] NZHC 3152
BETWEEN THE KAINUI PARTNERSHIP
Plaintiff
AND
ZESPRI GROUP LIMITED
Defendant
Hearing: 3 November 2022 Counsel:
JK Goodall and JA Clark for the Plaintiff SA Barker and LC Sizer for the Defendant
Judgment:
29 November 2022
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
[Summary judgment]
This judgment was delivered by me on 29 November 2022 at 12.00 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors/Counsel:
P Magee, Whangarei Buddle Findlay, Wellington
JK Goodall, Bankside Chambers, Auckland
THE KAINUI PARTNERSHIP v ZESPRI GROUP LTD [2022] NZHC 3152 [29 November 2022]
Introduction[1]
Issues [12]
Factual background [14]
Zespri and its Regulatory Context [15]
Cultivars and Plant Variety Rights [19]
Allocation of Gold3 licences [24]
2022 Gold3 Licence Allocation Process [27]
Summary judgment principles [66]
The Tender Rules [70]
Introduction [72]
Background [76]
Checklist [87]
Allocation Process Rules [88]
Appendix 1 [118]
Evaluation Panel - Terms of Reference [121]Did Zespri breach the Tender Rules by excluding Kainui’s Bid based solely on price? [127] Did Zespri breach the Tender Rules by using its discretion under Rule 18(a) to fix a minimum price? [145]
Has Zespri acted arbitrarily, capriciously and unreasonably in exercising its discretion under Rule 18(a)? [170]Did Zespri breach the Tender Rules by failing to give Kainui the opportunity to submit a further bid at or above the minimum price? [185]
What is the appropriate relief? [193]
Specific Performance [195]
Plaintiff autonomy [203]
Economic efficiency [205]
Relative severity of the remedy on the parties [207]
The nature of the right being supported by the remedy [217]
The moral view to be attached to the interests at stake [218]The effect of a given remedy on a third party (or the public) [219]
Difficulties of calculation [220]
The practicality of enforcement [228]
The conduct of the parties [229]
Conclusion [230]
Result [234]
Costs [235]
Introduction
[1] The plaintiff, The Kainui Partnership, is seeking summary judgment of its claim that Zespri Group Limited breached the terms of the 2022 Closed Tender Bid for the Allocation of Licences for Gold3 Kiwifruit.
[2] Kainui submitted three bids for three of its orchards. Only one of the bids was successful.
[3]The rejection letter from Zespri in respect of the two remaining bids stated:
Taking into account the Allocation Process Rules and the Panel’s1 Terms of Reference, and in particular the principle in the Panel’s Terms of Reference “to allocate licences in a manner that is, as far as possible, fair, practicable, and commercially reasonable having regard to all relevant circumstances including any impact on the current market value of similar licences that have previously been allocated”, the Panel resolved that it would use its discretion in Allocation Process Rule 18(a) to decline Gold3 Bids priced below
$519,742.50 per ha (GST inclusive) being the average of the two previous years’ lowest successful bid prices for the Gold3 Closed Tender Bid.
Your Zespri Gold3 Closed Tender Bid was not successful because your bid price was below the above price. Other than checking and confirming your bid price, your bid was not validated or examined further.
[4] The 2022 Licence Allocation Process was carried out pursuant to the 2022 Gold3 Licence Application Overview and Rules (LAOR) published by Zespri in February 2022. The Allocation Process Rules referred to in the email above were included in the LAOR, The general counsel for Zespri, Group Limited, Katherine Anne Evans, who has filed affidavits in support of Zespri’s opposition refers to the LAOR as the Tender Rules and I adopt that definition.
[5] Zespri accepts that the Tender Rules created a process contract between Zespri and Kainui.
[6]Kainui alleges that Zespri breached the Tender Rules in four respects:
(a)Zespri excluded Kainui’s bids based solely on price which was not permitted.
(b)Zespri purported to use its discretion under Rule 18(a) to fix a minimum price which was not permitted because it contradicted an express term of the Tender Rules that there would be “no … minimum prices” for bids (Rule 7.3).
(c)If Zespri was permitted to fix the minimum price, and purported to use its discretion to do so and exclude all bids below that price, Zespri acted arbitrarily, capriciously and unreasonably. In particular:
1 Evaluation Panel formed pursuant to Rule 13 of the Tender Rules.
(i)the discretion had to be exercised in relation to each individual bid;
(ii)the Panel needed to consider the individual circumstances of each bid;
(iii)in this case the Panel did not do that, excluding all bids below the price fixed;
(iv)the Panel failed to consider Kainui’s bid on its merits as confirmed in the rejection letter to Kainui.
(d)Zespri acted unreasonably, unfairly and in a commercially unreasonable manner by failing to give Kainui the opportunity to submit a further bid at or above the minimum price.
[7] Zespri submits that Rule 18(a) in the Tender Rules provides a complete defence to Kainui’s claim as the Rule allows the Panel “in its sole discretion” to “accept or decline any bid”. Rule 18 further provides that “[t]he highest or any bid will not necessarily be accepted”.
[8] Furthermore, Zespri says the scope of Rule 18 is confirmed by Rules 28 and 29, which exclude any legal obligation to bidders in respect of the outcome of the tender process and permit Zespri to vary or cancel the tender process at any time. Zespri says that these clauses are privilege clauses which have been held by appellate courts to be effective in avoiding any obligation otherwise arising under a process contract to award tenders.2
[9] Zespri submits that in relying on Rule 18(a) to reject bids below $519,742.50, the Panel expressly considered that price was necessary to protect the value of similar existing licences based on complex commercial judgment and consideration of a range of options and their merits. Zespri says that these factors can only fully be understood
2 South Waikato District Council v Roading and Asphalt Ltd [2013] NZCA 566 at [39] and [41]-[44]; Transit New Zealand v Pratt Contractors Ltd [2002] 2 NZLR 313 (CA) at [90] and
[104] affirmed on appeal Pratt Contractors Ltd v Transit New Zealand [2005] 2 NZLR 433 (PC).
with discovery and oral evidence and so it is not appropriate for Kainui’s claim to be determined by way of summary judgment.
[10] In terms of relief, Zespri submits that if there was a breach (which is denied) specific performance is not available as it can only be granted on summary judgment in clear cases – which this case is not. Zespri says that if summary judgment were granted, it would risk undermining the value of Gold3 licences and the tender process as a whole. If there is a breach (which Zespri denies), Zespri submits that damages are an adequate remedy.
[11] I record at the outset that Kainui is only pursuing summary judgment in respect of one of the rejected bids, the Bid in respect of KPIN 8937 (for reasons that are not relevant to this judgment).
Issues
[12] The issues relate to the terms of the tender contract, consideration of whether there was a breach of the tender contract and, if so, the appropriate relief and whether it is available on summary judgment.
[13] After setting out the factual background, the principles relevant to summary judgment and the terms of the tender rules, I consider the following questions:
(a)Could the Evaluation Panel exclude Kainui’s bid based solely on price?
(b)Could the Evaluation Panel use its discretion under Rule 18(a) to fix a minimum price despite Rule 7.3 of the Tender Rules that there would be “no maximum or minimum price”?
(c)If the Evaluation Panel was permitted to fix a minimum price, and used its discretion to do so and exclude all bids below that price, did it act arbitrarily, capriciously or unreasonably including by:
(i)not exercising its discretion in relation to each individual bid?
(ii)not considering the individual circumstances of each bid?
(d)Did the Evaluation Panel act unreasonably, unfairly and in a commercially unreasonable manner by failing to give Kainui the opportunity to submit a further bid at or above the minimum price?
(e)If there was a breach of the Tender Rules, what is the appropriate remedy and is it available on summary judgment?
Factual background
[14] I have largely taken the factual background from Mrs Evans’ affidavit for Zespri with which, so far as the matters recorded in the following background, the plaintiff did not raise any dispute (other than in relation to Mrs Evans’ expertise as to the grafting window in December).
Zespri and its Regulatory Context
[15] Zespri was established under the Kiwifruit Industry Restructuring Act 1999. Under the Kiwifruit Export Regulations 1999 (Regulations), no one may export kiwifruit grown in New Zealand for consumption in any country other than Australia, unless authorised to do so by Kiwifruit New Zealand.
[16] Zespri accounts for around 30 per cent of global kiwifruit sales. It has sales and marketing capacity in over 50 countries. In 2021, kiwifruit was New Zealand’s largest horticultural export, earning export receipts of $2.7 billion, while Zespri achieved global operating revenue of $4.465 billion. At present there are around 2,800 growers operating on around 13,000 hectares of orchards in New Zealand.
[17] The Regulations and Zespri's Constitution contain special provisions to ensure Zespri works in the interests of kiwifruit growers and shareholders. Mrs Evans gives as an example that ownership of Zespri shares is restricted to past and present New Zealand kiwifruit producers, and voting is restricted to shareholders who are currently producing kiwifruit, with their voting power being determined by reference to a combination of voter’s shares and production.
[18] Mrs Evans’ evidence is that, in seeking to obtain the best returns possible for growers in a competitive international market, it is important that Zespri (among other matters):
(a)matches anticipated supply with anticipated demand; and
(b)drives innovation in relation to new kiwifruit cultivars with a view to development of new products meeting changes in consumer preferences, superior agronomic performance and mitigation against agronomic risks such as pathogens and pests.
Cultivars and Plant Variety Rights
[19] New Zealand's kiwifruit industry was first established based on the most common kiwifruit cultivar, the green-fleshed “Hayward” variety. Hayward is not subject to any intellectual property protection, and is widely produced in numerous other countries and marketed in competition with Zespri. Global demand and commercial returns for Hayward have, generally, been decreasing.
[20] Since 2004, Zespri has been in partnership in kiwifruit cultivar breeding with Plant & Food Research, a New Zealand government-owned Crown Research Institute.
[21] Zespri’s evidence is that breeding a successful new cultivar involves about a ten-year process which is then followed by a pre-commercial block trial. If that is successful across orchard agronomics, supply chain performance and in market positioning/consumer response, then the cultivar may be commercialised. The incentive to undertake this long and costly process is provided by Plant Variety Rights (PVRs), which are designed to allow a breeder to control the commercialisation of a new variety, and give the breeder an opportunity to make a return on the breeder’s investment in research and development of the new variety.
[22] By June 2010 more than 50,000 potential new varieties had been examined as part of the research programme, more than 10,000 had made the initial short list, 40 went to initial growing trials, four made it to on-orchard trials and underwent
on-orchard, storage, shipping and taste tests, and only three reached the stage of the pre-commercial trials. One of these three was Gold3.
[23] In November 2010, a bacterial disease affecting kiwifruit known as Psa was found in kiwifruit orchards in New Zealand. One of the gold cultivars, Hort16A, was particularly susceptible and it rapidly spread through New Zealand orchards. As a result Zespri accelerated its commercialisation of the Gold3 variety which proved to have a superior tolerance to Psa than Hort16A.
Allocation of Gold3 licences
[24] Since 2012, Zespri has operated an annual licence allocation for the Gold3 kiwifruit cultivar (marketed as Zespri Sungold) for which Zespri owns the PVRs. Licences permit the holder to graft Gold3 budwood onto rootstock, or to purchase grafted Gold3 plants. Mrs Evans’ evidence for Zespri is that, following grafting, limited fruit is produced in the following season, followed by up to a half yield in the second season. Thereafter, the vine generally returns to full yield.
[25] Each year Zespri conducts tenders to issue licences for the cultivation of additional Gold3 hectares as well as other cultivars. Zespri determines how many additional hectares it will release for each cultivar based on forecast global demand. In determining the allocation, Mrs Evans’ evidence is that Zespri considers the potential implications of additional licence hectares on (in no particular order):
(a)grower returns from being undercut by oversupply of fruit;
(b)the value of growers’ capital investments made in reliance on granted licences and future Orchard Gate Return potential –including not only licence cost but also associated orchard development costs – from being eroded by diminution in fruit returns;
(c)Zespri’s share price and potential royalty streams from new varieties which are relevant to Zespri’s previous investment in and ability to continue investing in developing new kiwifruit varieties; and
(d)industry, supply chain and market infrastructure and capacity to distribute the additional volumes of fruit without compromising grower returns.
[26] In 2022 Zespri decided to release up to 350 further hectares for Gold3 (down from 700 hectares in each of 2020 and 2021). Mrs Evans deposes that the decrease was a result of a combination of factors including:
(a)stronger than anticipated per hectare Gold3 yields in the 2021 growing season, which suggested that supply was potentially growing at a faster pace than in previous modelling;
(b)Zespri’s focus on driving sustainable value for New Zealand kiwifruit growers in respect of market returns;
(c)a range of challenges facing the industry as a result of Covid-19 such as labour and supply chain constraints; and
(d)a desire by Zespri temporarily to slow licence releases to allow it time to understand and address the impacts of labour and supply chain issues.
2022 Gold3 Licence Allocation Process
[27] As set out above, the 2022 Licence Allocation Process was carried out pursuant to the LAOR published by Zespri on or around 18 February 2022. The LAOR contained an Introduction, Background Information to the Licence Allocation Process, a Checklist for Bidders and the Allocation Process Rules which attached “Appendix 1: Gold3 Application Form – Closed Tender Bid”.
[28] The Introduction recorded at B.2 that the Introduction, the Background Information to the Licence Allocation Process, the Allocation Process Rules (APR) and the “Appendix 1: Gold3 Application Form – Closed Tender Bid” were all intended to have legal effect. The only part of the LAOR document that was not intended to have any legal effect was the Checklist for Bidders.
[29] The Tender Rules explain the bidding and licence allocation processes, including the submission and evaluation of bids, and the process for successful bidders. The terms of the Tender Rules are considered in more detail below but for the purposes of the factual background the Tender Rules include:
(a)the requirements to which bids must adhere to be valid;
(b)the “pre-approvals” or “pre-validation” process by which Zespri’s legal adviser, Cooney Lees Morgan, assesses submitted bids for validity prior to evaluation by the Evaluation Panel;
(c)the composition of the Evaluation Panel;
(d)the method by which the Evaluation Panel assesses valid bids;
(e)the Evaluation Panel’s role, power and obligations in evaluating valid bids;
(f)the appeals process for unsuccessful bidders; and
(g)the rights, powers and immunities of Zespri in respect of the tender process and any licences allocated.
[30] The Tender Rules provided that the Evaluation Panel comprised the following persons:
(a)up to four representatives of Zespri;
(b)one independent director from the Zespri Board; and
(c)one independent person appointed by Zespri.
[31] The Panel was required by Rule 14 of the APR to operate in accordance with Terms of Reference which had been approved by the Zespri Board and published on the “Canopy Website”, a website run by Zespri providing information to the kiwifruit industry. There appears no dispute that the Terms of Reference form part of the process contract. Nor could there be as Rule 14 requires the Panel to operate in accordance with them and the Terms of Reference are published on the Canopy Website so are available to all participants in the tender.3
3 See discussion in Pratt Contractors Ltd v Transit New Zealand Ltd [2005] 2 NZLR 433 (PC) at [44].
[32] The 2022 Tender Rules (unlike previous licence allocation rules) contained a prohibition on bids from “Associated Bidders”, to avoid circumvention of the 10-hectare limit per bidder. Mrs Evans’ evidence is that this rule was implemented with the intention to spread licence allocations across a greater number of bidders and orchards than in previous licence allocations.
[33] The bidding process opened on 21 March 2022 and closed at 5 pm on 30 March 2022. 270 Gold3 bids were received for 354 hectares. By comparison, in 2021, Cooney Lees Morgan received 716 bids for 1,511 hectares.
[34]Mrs Evans’ evidence is that Cooney Lees Morgan:
… conducted validation of bids between 31 March and 13 April 2022 (including bids for both Gold3 and Red19). As part of the pre-validation process, Cooney Lees Morgan ranked all bids by price per hectare and presented this preliminary data to the Panel on 31 March 2022.
[35] The Panel met on 31 March and 1 April 2022 to consider Cooney Lees Morgan’s provisional summary of bids. No minutes of these meetings are included in the evidence. Mrs Evans’ evidence is that at these meetings the Panel considered that:
(a)Subject to the validation process, the Gold3 allocation was likely to be undersubscribed. Consequently, there was sufficient Gold3 allocation that licences could, in theory, be allocated to all bids, regardless of bid price.
(b)The preliminary data:
(i)showed a greater range of prices than previous years with the low end of bids falling within a range of less than $10,000 per hectare;
(ii)demonstrated a general bidding profile largely consistent with previous years and that the majority of bid prices fell within a moderately tight range, with a reducing number of bid prices moving towards the ends of the pricing range;
(iii)indicated that more bids had been received for smaller area allocations – consistent with Zespri’s intended objective for the 2022 Tender Process;
(iv)did not support the conclusion that the degree of undersubscription would materially affect Zespri’s ability to meet planned market strategies.
[36] Mrs Evans’ evidence is that the Panel considered five potential options to address the undersubscription:
(1)Cancel the Tender process;
(2)Re-open / extend the bidding window;
(3)Accepting all bids, regardless of price;
(4)Declining bids not considered commercially reasonable; and
(5)Alternatively to (4), allowing bids to be amended up to a commercially reasonable price.
[37] Of those options, Mrs Evans’ evidence is that the Panel considered that Option (4) was the most consistent with the principles of fairness and commercial reasonableness set out in the Panel’s Terms of Reference. In particular, Mrs Evans deposes that the Panel noted that calculating the Gold3 Minimum Price based on the average of the lowest successful bids in 2020 and 2021 ($378,900 and $525,000 per hectare, respectively, excluding GST) would mean that such price:
(i)was calculated by reference to the value of licence in previous licence allocations;
(ii)represented a rational link between the value of licences and anticipated grower returns, rather than an arbitrary valuation of licences;
(iii)respected the principle of preserving the value of the investments previously made by growers and licences allocated to them in previous tenders.
[38] Mrs Evans says that, moreover, the Panel considered that this option was consistent with:
(iv)Zespri’s comments to growers as to Zespri’s likely response to an undersubscribed tender;
(v)past practice (Zespri having declined bids not considered commercially realistic for Hort16A Licence Allocations in 2007);
(vi)the Panel’s wider obligations under the Terms of Reference.
[39] Mrs Evans’ evidence is that in relation to the other options, the Panel considered that:
(a)cancelling the Tender process would prejudice growers who had otherwise been successful and/or who had committed to orchard developments and investments;
(b)re-opening/extending the bidding window would be unfair to bidders who would have been successful if the window were not extended. Moreover, to ensure fairness to bidders under Terms of Reference, Zespri would have needed to re-run the entire Tender process which, given industry discussions about pricing, may have impacted on bidding behaviour in a way that could undermine the principles of the tender process. Extending the bidding window would also have placed pressure on post-allocation processes of issuing licence and allocating budwood ahead of the grafting window;
(c)accepting all bids, regardless of price risked skewing the value of licences – those allocated in the 2022 Tender process, in previous years and in future allocations – and prejudicing the value of orchards to which licences had been allocated, particularly given that the bidding profile was largely consistent with prior years (a high volume of bids clustered within a range, though there was a wider range of pricing than previous years);
(d)allowing bids to be amended up to a commercially reasonable price would not be fair to bidders who paid above the decided cut-off (permitting low bidders to obtain a preferential result) or to growers that declined to bid because they anticipated being unable to pay the anticipated market price. Further, the Panel considered this option could encourage speculative bidding for future allocation processes.
[40] Mrs Evans deposes that the Panel sought input from Zespri’s Board about the allocation of licences (as permitted by Rule 15 of the Tender Rules). In particular, whether the Board was of the view that other factors or options ought to be given in consideration by the Panel before making its determination. Mrs Evans records no individual bid information was made available to the Board as part of this process.
[41] The minutes of the Board meeting held on 7 April 2022 are in evidence. Four members of the Evaluation Panel attended. The minutes record that the Board asked whether other approaches had been considered in addition to “applying a cut-off price based on the average of the last two years’ allocation processes”. Tracy McCarthy, the Grower Services Manager for Zespri, advised that the Panel had considered “multiple other options” including:
(a)accepting all bids, which was considered not to be consistent with the principles in the Evaluation Panel terms of reference regarding consideration of the commercial value of licences that have previously been allocated and could give rise to preferential access;
(b)applying a cut-off calculated by reference to the average of the median, but this fails to take into account that bidders below the median were successful in prior years;
(c)applying a cut-off based on the average lowest price in the last 4 years, but this cannot be applied for Red;
(d)applying a model similar to Fonterra’s dairy auction of setting the starting price at 15% less than the last auction price, which resulted in a similar cut-off price to the average of the last two years’ cut-off, and was also largely consistent with where the differences in bids became more significant.
[42] The minutes record the Board asked about other options for calculating the cut- off price and whether accepting the highest outlying bids would potentially be open to challenge for not being commercially reasonable. Mr Denyer, a consultant solicitor at Cooney Lees Morgan who assisted with the tender responded that historically there have always been a small number of materially higher bids accepted and that there was a good distribution of bids between the majority and the highest bids. Mr Denyer noted on this basis that, while those bidders may express concerns about having offered too much, this is a reflection of the commercial process and is largely consistent with previous bidding profiles.
[43] The minutes further record that the Board asked what had happened in previous undersubscription situations. Ms McCarthy responded that in Hort16, Zespri allocated less than the permitted amount. On the other hand, an undersubscription in Green14 had been treated differently with Zespri offering the opportunity to submit additional bids at a fixed price. However, the allocation remained undersubscribed even after the second opportunity. The minutes state that the Board noted that it may be appropriate to add the undersubscription amount to a future allocation. Further, the Board noted the potential risks to the value of existing licences and orchards if all bids were accepted, as well as noting that the commercial price should bear some relationship to potential return as people were likely to have formulated their bids on the basis of current and future Gold3 Orchard Gate Returns.
[44] Some parts of the Board minutes are redacted as privileged but the minutes further record that Ms McCarthy noted the Panel’s discretion has not changed since the rules were put in place since 2010 and that Zespri has previously communicated that the full area may not be allocated in the case of undersubscription.
[45] The minutes record that the Board noted that accepting all bids would be consistent with a pure commercial market and that applying a multi-year average could be inconsistent with this, but that the pure commercial model fails to reflect broader influences including people simply failing to bid because they believed Gold prices would be too high. The Board noted the importance of considering potential precedent in whatever decisions were made by the Panel.
[46] On 14 April 2022 Mrs Evans’ evidence is that the Panel met remotely “to discuss the bid evaluation process and the Board’s input to the Panel’s questions on a minimum price”. The meeting is referred to in the minutes of the Panel’s meeting on 26 April 2022 but no minutes of the 14 April 2022 meeting itself are in evidence.
[47] Mrs Evans’ evidence is that at the 14 April 2022 meeting “the Panel reconsidered the options in light of the input from Zespri’s Board and determined to exercise its discretion to set the Minimum Price” as being the average of the lowest successful bids in 2020 and 2021 resulting in a Minimum Price of $519,742.50 per hectare (including GST) as described above at [37].
[48]Mrs Evans continues:
The Panel also evaluated valid bids ranked by [Cooney Lees Morgan] during their pre-validation process, and exercised its discretion to decline those bids (including 2 of the 3 bids submitted by Kainui) whose bid prices fell below the Minimum Price.
[49] The Panel met on 22 April 2022 to consider bids that Cooney Lees Morgan had identified as having validity issues. No minutes of this meeting are in evidence although, again, this meeting is referred to briefly in the minutes of the Panel’s meeting on 26 April 2022. Mrs Evans’ evidence is that Kainui’s bids were not considered at the meeting on 22 April “given the amount of the bid price is not a validity issue (unless the bid price is unclear due to the bid not containing all required price and hectare information)”. The later minutes simply record that the 26 April meeting had a narrow scope “with all validity issues previously dealt with at the meeting on Friday, 22 April 2022”.
[50] The Panel met again on 26 April 2022. Mrs Evans does not refer to this meeting in her affidavit; nor does Mr Denyer from Cooney Lees Morgan in his affidavit for Zespri. Minutes of the Panel’s meeting on 26 April are however annexed as evidence that the Panel met on 14 April 2022.
[51] The 26 April 2022 minutes record that the meeting opened with discussion about the online licence release process and then refer to the previous meetings on 14 and 22 April 2022 as discussed above. The minutes record that the Panel resolved on 14 April 2022 “to decline certain bids, namely bids which were not commercially reasonable as set out in the Terms of Reference”.
[52] The 26 April 2022 minutes then record that Cooney Lees Morgan reported in detail on the verification and pre-validation procedures undertaken by them. A number of matters from this process are noted including that:4
During the pre-validation procedure, contact between Cooney Lees Morgan staff and Zespri staff in relation to individual Bids was restricted to that which was absolutely necessary, and in every case no price sensitive information was ever disclosed, with the exception of those discussions concerning the undersubscription issue. Where possible, Bidder identification was not disclosed (although for some matters, such as considering associated persons, identification was necessary and this was contemplated by the LAOR).
[53] The minutes next record that Cooney Lees Morgan presented the Panel members with “[a] proposed methodology for the Panel to assess the Gold bids and to allocate licences for the Gold bids which the Panel adopted”.
[54]No copy of the proposed methodology presented is in evidence.
[55]The next paragraph of the minutes states:
Once the allocation procedure was completed, Zespri and Cooney Lees Morgan were instructed to work together to identify the successful Bidders and confirm the final allocations. Cooney Lees Morgan and Zespri were also instructed to notify the unsuccessful Bidders of their outcome.
[56] On 28 April 2022 Zespri sent an email to Kainui advising that its bid was not successful as set out in the Introduction to this judgment, including stating:
4 Emphasis added.
Your Zespri Gold3 Closed Tender Bid was not successful because your bid price was below the above price. Other than checking and confirming your bid price, your bid was not validated or examined further”.
[57] On 4 May 2022, Zespri emailed kiwifruit industry participants with the results of the 2022 Gold3 licence release. Among other matters, the email advised:
(a)The licence for Gold3 had been undersubscribed so out of the 350 hectares available, bids were received for only 343 hectares and only 324 hectares had been allocated.
(b)A total of 268 bids had been received from 181 bidders. Of these, 255 bids had been successful and 13 had been unsuccessful.
(c)The median price of a Gold3 Licence was $801,000 per hectare excluding GST, up from $550,000 per hectare excluding GST in 2021.
(d)The minimum successful bid price in 2022 was $451,950 per hectare excluding GST ($519,742.50 including GST), down from $525,000 per hectare excluding GST in 2021.
[58] On 5 May 2022 Kainui lodged an appeal of the Panel’s decision to decline its bids with its email stating:
The appeal is based on the fact that clause 7.3 of the LAOR states there is no minimum or maximum price and that 350 hectares will be allocated. The decline letter states that the bid was not considered as it was below the agreed Minimum Price. The tender did not allocate the full 350 hectares of licence as required under Rule 8 and therefore the terms and conditions of the LAOR have not been met.
[59] The minutes of the Board meeting held on 25 May 2022 at which the appeals were discussed are annexed to Mrs Evans’ affidavit. In the section headed “2022 Licence Appeals” the minutes record that the statement in the recommendation paper (a copy of which is not provided in evidence) that the Board had supported the Panel decision was incorrect as the Panel had only consulted the Board, with the Panel not explicitly seeking Board approval or endorsement of the process. The Board noted:
… that the Panel applied their best efforts to apply the rules in circumstances which no-one anticipated, but also recognising that industry feedback regarding the application of a cut-off price has been significant.
[60] On 26 May 2022 Zespri advised Kainui that the appeal had been declined because:
… [t]he Board determined that the Evaluation Panel had acted in accordance with the 2022 SunGold Licence Application Overview and Rules (including the Evaluation Panel terms of reference) and that no new information or circumstances were raised to warrant overturning the decision of the Panel so the appeal was declined.
[61] The email further records that a review of the Licence Allocation Process is underway and welcomes Kainui’s feedback.
[62] On 25 July 2022 Kainui’s solicitor sent a letter to Zespri on a without prejudice basis save as to costs in which privilege has now been waived. The letter alleged that Zespri had breached the Tender Rules and attached a draft statement of claim but offered to settle on the following basis:
(a)Kainui will increase its tender bid to $519,743 per hectare (including GST);
(b)Zespri will accept Kainui’s two rejected bids and immediately issue SunGold licences; and
(c)upon licences being issued, there would be full and final settlement.
[63] The letter stated the offer would remain open for acceptance until 1 August 2022.
[64] Zespri’s solicitors responded on 8 August 2022 rejecting the offer and setting out in detail why Zespri denies that it had breached the tender contract.
[65] Proceedings were filed by Kainui on 25 August 2022 with a priority fixture sought to allow Kainui to utilise the December planting window. As a hearing date was available on 3 November 2022, the application for priority was not determined. This judgment has however been delivered with some urgency as a result.
Summary judgment principles
[66] As set out at the outset, Kainui is seeking summary judgment of its claim. The Court may grant summary judgment against a defendant only “if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action”.5 The general principles are summarised in the well-known decision of Krukziener v Hanover Finance Ltd.6
[67] It is inappropriate to determine questions of contractual interpretation on summary judgment when there is insufficient contextual evidence before the Court,7 the factual matrix is relevant and disputed, or when the issues turn on contested expert evidence or extrinsic evidence.8
[68] As Zespri submits, however, in this case evidence specific to Zespri and Kainui is unlikely to be relevant to the interpretation of the Tender Rules and Terms of Reference. That is because, while the approach to contractual interpretation in New Zealand is an objective one, informed principally by the words used by the parties in the context in which those words were used,9 the extent to which context informs the interpretation of the words used by the parties is itself contextual.10 Accordingly, “[i]dentification of the relevant audience is important, because it serves to identify the range of background facts relevant to interpretation”.11
[69] The Court of Appeal has held that tender documents should normally be interpreted without reference to extrinsic evidence, such as the parties’ knowledge, because that information would not be reasonably available to the body of tenderers.12
5 High Court Rules 2016, r 12.2.
6 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
7 Ferrer-Aza v NZONE Race Management Ltd [2016] NZHC 885 at [44]; citing as an example
Trustees Executors Limited v QBE Insurance (International) Limited [2010] NZCA 608 at [42].
8 Central Dairy Goats Ltd v Bubs New Zealand Pty Ltd [2021] NZHC 1230 at [11]–[13].
9 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60].
10 At [62], citing Re Sigma Finance Corp (in admin rec) [2009] UKSC 2, [2010] 1 All ER 571 at
[37] per Lord Collins discussing the interpretation of security trust deed that secured a number of creditors. See also recent summary with reference to Firm Pl 1 Ltd v Zurich Australian Insurance Ltd in Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] NZLR 696 at [43]–[47].
11 LB Re Financing No.3 Ltd v Excalibur Funding No.1 Plc [2011] EWHC 2111 (Ch) at [43] per Briggs J.
12 South Waikato District Council v Roading and Asphalt Ltd, above n 2, at [44], citing Opua Ferries Ltd v Fullers Bay of Islands Ltd [2003] UKPC 19, [2003] 3 NZLR 740 at [20][25].
Therefore, the starting point is the terms of the Tender Rules and Terms of Reference, interpreted against the commercial context reasonably available to Zespri and the body of tenderers as a whole.
The Tender Rules
[70] Zespri accepts that the Tender Rules created a process contract between Zespri and Kainui. The documents that make up the Tender Rules are:
(a)four of the five documents in the LAOR, namely:
(i)Introduction;
(ii)Background;
(iii)APR;
(iv)Appendix 1; and
(b)the Evaluation Panel – Terms of Reference.
[71] I consider each of these documents below in detail as it is important for context to understand the information published to the tenderers before considering the particular rules in issue.
Introduction
[72] The first document in the LAOR is the Introduction. Paragraph A invited “applications (“Bids”) in relation to this allocation process”.
[73] Paragraph B.1 recorded that “[a] maximum of 350 hectares of Gold3 variety licence will be available under the 2022 closed tender allocation process”. Paragraph
B.1 further confirmed that the key features of this “Closed Tender Allocation Process” included:
(a)a Closed Tender Bid – successful Closed Tender Bids will be allocated to the bidder and must relate to an identified property with an assigned KPIN;
(b)the property must be leased or owned by the bidder at the time of bidding; and
(c)“Bidders can submit a Closed Tender Bid for Gold3 Variety Licence at any price”.
[74] Paragraph C.2 of the Introduction referred to the “provisional pre-approvals process”, and explained that it had been introduced because of “the additional complexity in the 2022 Gold3 Closed Tender Bid process”. It sets out that the pre-approvals process would be operated in relation to the “associated” bidder rules, the determination of the “plantable area” on any property and determining whether any lease meets the leasing requirements. Paragraph C.2 confirmed that the pre-approvals process would be overseen by the Evaluation Panel.
[75] Paragraph D refers to the exclusion of Zespri’s liability for the accuracy of information made available to bidders in connection with the tender process.
Background
[76] The second document in the LAOR, the “Background Information to Licence Allocation Process” (Background), includes in the first paragraph that since the commercialisation of Gold3 in 2010, Zespri had released just under 9,000 hectares of licences for the Gold3 variety and that the Zespri Board considers it prudent to release an additional 350 hectares of Gold3 to meet future growth and market demand for the variety. Subject to continued market performance, future global demand and potential future release mechanisms, and normal annual review, the Background states that Zespri intends to continue releasing Gold3 licences at a rate of between 350-750 hectares per year from 2023 to 2026.
[77] The Background further records that all successful bidders will initially be required to pay 25 per cent of the bid price, with at least three days’ advance notice being given by email to successful bidders so they have time to arrange payment of their deposit.
[78] The Background confirms that any licences issued in accordance with the bid process are not transferable until all funds owing on the bid price are paid in full and the licence area is both planted and/or grafted to Zespri’s satisfaction on the property identified in the bid and has matured into a producing orchard from which a commercial crop has been supplied to Zespri.
[79] Under the heading “Evaluation Panel and Allocation Process”, the Background records “[t]he bid evaluation process will be conducted in accordance with Rules 13 to 19 of the APR, and will be overseen by the Evaluation Panel (Panel) established under Rule 13 of the APR”. The deadline for receipt of bids was stated as 5pm on 30 March 2022. The Background then sets out the following process:
Cooney Lees Morgan will open Bids, subject to strict confidentiality protocols, after 5pm on 30 March 2022 in order to conduct pre-validation in accordance with Rule 15 of the APR.
Cooney Lees Morgan will report to the Panel on all pre-validated Bids and will present all invalid Bids to the Panel for assessment. The Panel will then make rulings on any validity issues, and will make licence allocations to valid Bids in accordance with the APR.
[80] The Background contains further details about payment of deposits, the document pack to be received following successful bids, the payment of the balance of the licence monies and the timetable for the Licence Allocation Process. In the timetable it records against 26 April 2022 “Evaluation Panel makes decisions regarding allocation of Licences and successful bidders notified …”.
[81] The Background records that unsuccessful bidders will be notified by email as soon as practicable and notes that there is an appeals process, referring bidders to Rule 20 of the APR for details.
[82]The Background further records that:
Following completion of the Bid process, the independent member of the Panel will provide a report addressed to Zespri and the New Zealand Growers’ Forum, giving his or her opinion as to whether the process has been carried out in compliance with the provisions of the APR.
[83] There is reference to an audit conducted by Zespri of all bidders to ensure compliance with the APR and the terms of the Zespri Gold3 Variety Licence with the
potential for Zespri to cancel licences, in which case the bidders forfeit any monies due or paid to Zespri.
[84] The Background then sets out a number of risks that growers need to consider. A particular risk identified for Gold3 is that “the rate of growth of production for Gold3 may exceed the market’s ability to optimally absorb additional volume in any given year” which would adversely affect impact on the potential fruit returns per tray.
[85] Finally, the Background notes that Covid-19 is having a dramatic impact across all sectors of the global economy including fresh fruit production, processing, supply chains and markets. It then states:
Licences allocated to successful bidders in 2022 will not come into production until 2024 onwards, by which time the impact of Covid-19 may have partly or fully abated. However bidders for 2022 licence allocations should keep in mind the risk related to Covid-19 that may have impacts that endure for a longer period of time.
[86] The Background encourages bidders to carefully consider their own current financial situation in light of the above risks and whether they will be in a position to pay the licence money in full and on time. It records that those who are unable to settle in full and on time as a result of Covid-19 or for any other reason will be in breach of their obligations under the Licence Allocation Rules and that Zespri may revoke the licence allocated and disqualify them from participating in future licence releases for up to five years, at Zespri’s sole discretion.
Checklist
[87] Although not included in the documents which are intended to have legal effect, for context it is worth noting one of the questions in the Checklist:
Have you ensured that your Bid(s) meet the other eligibility requirements? Check the evaluation and validity criteria in Rules 6 and 7 of the APR [Allocation Process Rules].
Allocation Process Rules
[88] The Allocation Process Rules are included as Part 4 of the LAOR and record in Rule 1 that they cover the application by Bidders for Gold3 Licences “for Closed
Tender Bids” in accordance with the Gold3 LAOR. Rule 2 defines Bidders as “a legal entity that submits a Closed Tender Bid using the application form included in the Gold3 LAOR (“Bid”)”. Rule 3 provides that once a Bid is received by Cooney Lees Morgan it becomes Zespri’s property and cannot be amended or revoked unless Zespri agrees otherwise (at Zespri’s sole discretion). Rule 4 confirms that Zespri may collect and use any information about the Bidder for the purposes of evaluating the bid. Rule 5 contains technical details for the submission of Bids.
[89]Rule 6 then states:
Your Bid must cover all the information requested elsewhere in this Gold3 LAOR and must comply with the following:
[90] Rule 6 lists the documents that need to be attached and requires that only one bid may be submitted per email. Rule 6.2 provides that it is possible for a Bidder to make multiple bids on a single property but that separate application forms must be used for each and every bid and expressly states “[e]ach bid will be evaluated separately”. Rule 6.3 states the deadline for receipt of bids, with a discretion for Zespri to extend this deadline or any other deadline in the Gold3 LAOR at its sole discretion. Rule 6.4 states:
Your Bid will not be valid if:
(a)you do not comply with the terms and conditions of the APR;
(b)you, or any entity related to you, has overdue payments in relation to any previous Licence Allocation Process;
(c)Zespri considers that you, or any entity related to you has been in breach of any existing Zespri Kiwifruit Variety Licence, Zespri’s rights under the Plant Variety Act 1987 or any previous Licence Allocation Process.
[91] Rule 7 is headed “Rules for Closed Tender Bids”. Rule 7.1 requires that bids must relate to an identified property with an assigned KPIN that is owned or leased by the bidder and in Rule 7.2, that there is no minimum bid area. Rule 7.2 includes:
The Panel has discretion, under Rule 18(f) to reject Bids from “Associated” Bidders where in the Panel’s opinion such entities have been used as a means of circumventing the 10 hectare maximum bid limit per Bidder.
[92]Rule 7.3 provides:
There are no maximum or minimum prices for a Closed Tender Bid.
[93] Rule 7.4 then provides for the provisional pre-approvals process being undertaken by Cooney Lees Morgan as referred to above. It records that details of this process are available on the “Canopy Website” and that “[a]ny confirmation or approvals by Zespri or Cooney Lees Morgan during this process will be confirmed by the Panel formed under Rule 13”.
[94]Rule 8 provides:
The method of allocation of Licences to all valid Bids to be used by the Panel shall be as follows:
(a)All valid Closed Tender Bids will be ranked in order of price, and the highest priced Bids up to a total area limit of 350 hectares will be identified.
(b)If there is more than one valid Closed Tender Bid at the lowest or “cut- off” price under the identification process under Rule 8(a), then all of those Bids will be selected, but with the remaining area available apportioned and allocated across each Bid on the ratio of area Bid to the remaining area available.
(c)If there is one valid Closed Tender Bid at the lowest “cut-off” price under the identification process under Rule 8(a) which would cause the initial 350 hectare limit to be exceeded, then that Bid shall be selected, but allocated a reduced area so that the 350 hectares is not exceeded.
A Bidder whose Bid is pro-rated in accordance with Rule 8(b) or (c) shall be obliged to accept the reduced pro-rated area, and must complete the settlement requirements under these Rules in respect of such reduced pro-rated area.
[95] Rule 9 requires the full names of all partners, trustees and joint venturers (as applicable) where bids are from unlimited partnerships, trusts or joint ventures and provides that the bid must specify which person or other legal entity will contract with Zespri.
[96] Rules 10, 11 and 12 relate to various warranties and other general matters including at Rule 12(a) that the bidder has:
examined and accepted the Gold3 LAOR, any documents referred to in that document and any other information made available in writing by Zespri to Bidders for the purpose of bidding including, in particular, (but without
limitation) the Zespri Gold3 Variety Licence and any supplemental information available on the Canopy Website.
[97]Rule 13 provides:
Zespri shall form an Evaluation Panel (“Panel”) comprised of the following persons:
(a)up to four representatives of Zespri;
(b)one independent director from the Zespri Board; and
(c)one independent person appointed by Zespri.
[98] Rule 14 requires the Panel to operate in accordance with the Terms of Reference approved by the Zespri Board as published on the Canopy Website and goes on to say:
The Panel shall have authority to make rulings on the validity or otherwise of all Bids received, however Cooney Lees Morgan is appointed as the Panel’s delegate to undertake pre-validation of all Bids in accordance with Rule 15.
[99] Rule 15 sets out the process for Cooney Lees Morgan to conduct pre-validation by evaluating “all Bids in accordance with the evaluation and validity criteria set out Rule 6 and 7”. It provides that Cooney Lees Morgan may contact individual bidders if there appear to be any validity issues giving as examples “key information missing or unreadable, or Valid GPS map not included when required, etc” but confirming Cooney Lees Morgan is not obliged to do so.
[100] Rule 15 further records that Cooney Lees Morgan may make additions or amendments to a bidder’s application with the bidder’s agreement but that “under no circumstances is Cooney Lees Morgan able to alter or make validation queries about the Bid price per hectare that you have entered on your Bid application form” and that “Cooney Lees Morgan is also unable to query the reasonableness of your stated Bid Price per hectare”.
[101] In addition, Rule 15 provides that Cooney Lees Morgan may consult Zespri or the Panel during the pre-validation period regarding any issues relating to pre-validation and the bid process and the eligibility of any bid. However, in doing so, Cooney Lees Morgan will use reasonable endeavours to avoid providing any
information to Zespri which would identify any bidder or KPIN at issue, “although this will not always be possible”. Importantly, Rules 15 states:
Cooney Lees Morgan will report to the Panel on all pre-validated Bids, and will present all invalid Bids to the Panel for assessment. The Panel will then make rulings on any validity issues. The Panel shall have the right to consult with the Zespri Board and/or Zespri management if it deems this to be necessary during the evaluation process.
[102] I set out Rule 16 in full as it contains the first of the Panel’s discretions in issue in this case:
The Panel shall follow the relevant allocation procedures set out in Rule 8, and shall otherwise have the sole discretion to allocate Zespri Gold3 Variety Licences for such areas up to such maximum number of hectares as specified in paragraph B.1 of the Introduction or as otherwise approved by the Zespri Board.
[103]Rule 17 provides that any remaining unallocated area:
… after completion of the Bid Allocations under Rule 8 shall be passed in and will not be re-offered under this 2022 Licence Allocation Process, but may be made available in future allocations.
[104] Rule 18 is the first of the Rules referred to by Zespri as a privilege clause and provides:
The Panel may in its sole discretion:
(a)accept or decline any Bid;
(b)negotiate with any Bidder it wishes to in respect of any Bid (but is not obliged to do so);
(c)consider any alternative, late, or otherwise non-valid Bid (but is not obliged to do so).
Without limiting the generality of the foregoing, the Panel reserves the right to:
(d)reject any Bid which is submitted with “tags”, conditions or any such other proviso or terms contrary to the form specified in the Bid;
(e)waive any irregularity, breach of APR or other non-compliance by any Bidder including without limitation accepting a non-signed or non- compliant Bid;
(f)reject any Bid including, but not limited to any Bid that in the Panel’s opinion has been structured in such a way that circumvents the APR and/or obtains a preferential outcome not consistent with the
principles intended in this licence release process. In particular, the Panel may reject Bids from “Associated” Bidders which together exceed the maximum bid area per Bidder as set out in Rule 7.2 …
(g)reject any Bid where, in the Panel’s opinion, insufficient information has been provided in order to rule out any breach or circumvention of the APR.
The highest or any Bid will not necessarily be accepted. Bids may be accepted in part (e.g. as a result of part acceptance under Rules 8(b) and (c)).
[105] Rule 19 provides that the Panel reserves the right not to advise why any Bid was accepted or declined or disclose any information in relation to any Bid or disclose the results, acceptances or other aspects of the process to any bidder or the industry generally.
[106] Rule 20 provides for notification by Zespri to successful and unsuccessful Bidders and the steps for payment and allocation of licences. In addition, it provides a right of appeal to the Zespri Board whose decision on any such appeal shall be final.
[107] Rule 21 provides for payment of the balance of the licence money to Zespri, completion of the licence form prior to collecting budwood and planting/grafting and requires successful Bidders to complete planting/grafting to Zespri’s satisfaction by 31 January 2024.
[108] Rule 22 provides for the planting or grafting of successful multiple bids on the same property.
[109] Rule 23 provides that a successful Bidder must not commence planting and/or grafting of the relevant variety until:
(a)the Licence has been completed and signed;
(b)if the Bidder is the lessee of the property, an acknowledgement by the owner has been signed and returned to Zespri; and
(c)the balance of the Bid price paid.
[110] Rule 23 further restricts transfer of the property until it has matured into a producing orchard and a commercial crop from the licence area has been supplied to
Zespri (although it records an exception when the licence is included in the sale and purchase agreement and remains on the property).
[111] Rules 24 and 25 provide Zespri with the right to revoke a licence allocation or terminate any licence with no right to a refund of any licence monies in the event a Bidder’s licence allocation is revoked under Rule 24.
[112] Rule 26 provides that bidders must pay their own costs and expenses when preparing their bid and allows for an administration fee where replacement documentation is requested by bidders.
[113] Rule 27 provides that Zespri will not be liable for any direct or indirect damage, loss or cost that a bidder incurs as a result of the Bid process. Kainui submitted that Rule 27 prevented an award of damages being made in its favour if Zespri breached the Tender Rules. Zespri responded however that the Rule does not refer to or exclude damage, loss or cost arising from any breach of the Tender Rules by Zespri, submitting that if that is wrong, Zespri waives any such limitation against Kainui.
[114] Rules 28 and 29 are the second and third of the rules that Zespri refers to as privilege clauses. Rule 28 provides:
Apart from Zespri’s obligation to notify unsuccessful Bidders, no other legal obligation other than Zespri’s audit rights under Rule 12(e), arises between you and Zespri in relation to the outcome of the Bid Process unless and until your Bid is accepted (either in whole or in part).
[115]Rule 29 then provides:
Zespri may vary or cancel this Licence Allocation Process at any time. Zespri may amend the Gold3 LAOR at any time, and may (without limitation) change any date, time or timeframe in the Gold3 LAOR. If any such amendments are made, such amendments will be posted on the Canopy Website.
[116] Rule 30 excludes Zespri’s liability for misrepresentation and so forth or any reliance by any person on any information or documentation Zespri or any of its representatives discloses or fails to disclose at any time to prospective Bidders or their representations in connection with the Bid.
[117]Rules 31 and 32 concern tax and notice requirements.
Appendix 1
[118] The Gold3 Application Form is attached to the Allocation Process Rules headed “Appendix 1: Gold3 Application Form - Closed Tender Bid.” Each of the headings for the first three sections in Appendix 1 begins with “Closed Tender Bid”, with the second section which relates to “Bid Area and Price” stating “ALL CLOSED TENDER BIDDERS MUST COMPLETE THIS SECTION.” Before the section where the price is set out, the Appendix records at Note 9:13
Closed Tender Bids may be for any price. The Bid price per hectare (GST
inclusive) stated below will be used for the purposes of ranking your Bid
against others for the purposes of Rule 8(a). Please Note: Cooney Lees
Morgan will not alter or make validation queries about the Bid price per
hectare that you have entered on your Bid Application Form.
[119] In the section where the bid area and price are to be set out, the Appendix form further states “(CAUTION: BID PRICE PER HECTARE DETERMINES
ELIGIBILITY AND MUST BE THE GST INCLUSIVE PRICE)”.
[120] The “BIDDER STATEMENT” in section 1C of the Appendix includes an acknowledgment that the Application Form will become a binding contract between the Bidder and Zespri on the terms set out in the LAOR and associated documents. In addition the statement includes the granting of a power of attorney to Zespri to sign all documents and do all things that are necessary to give full effect to the acceptance by Zespri of the Bids.
Evaluation Panel - Terms of Reference
[121] As referred to above, there is no dispute that the Tender Rules incorporate the “Evaluation Panel - Terms of Reference”: Rule 14 of the Tender Rules requires the Evaluation Panel to operate in accordance with the Terms of Reference.
[122] The Terms of Reference were approved by the Board of Zespri and provide for the constitution of the Panel under the Allocation Process Rules for the relevant licence
13 Emphasis in original.
allocation process and year. The Terms of Reference refer to the Tender Rules as the Allocation Rules. As far as the Panel’s authority, the Terms of Reference provide:
The Panel shall have the power to do all things necessary to carry out its duties and exercise such discretions as are provided within the scope of the Allocation Rules.
[123]The Panel’s scope of responsibility is described in the Terms as follows:
The Panel’s primary responsibility is to oversee process of evaluation and allocation of Zespri Kiwifruit Variety Licences pursuant to the Allocation Rules. In particular, the Panel shall have sole and absolute discretion to:
· assess and make rulings on the validity or otherwise of all Bids received.
· assess and make rulings on the allocation of Zespri Kiwifruit Variety Licences to Bidders subject to any requirements set out in the Allocation Rules.
In carrying out the above responsibility, the Panel may (but is not obliged to):
· take advice from external advisors as to the validity or otherwise of Bids, based in particular on the pre-validation work performed by Cooney Lees Morgan under the Allocation Rules
· provide advice and guidance to Cooney Lees Morgan in relation to any compliance issues that arise during the pre-validation process
· consult or seek advice from the Zespri Board or any other person it may deem necessary, provided that the Panel must not as far as possible disclose details that identify any individual Bidder, and if such disclosure is required, only under the obligations of confidentiality
· correspond and/or communicate with any individual Bidder or group of Bidders
· establish such protocols, processes, formulae and methodologies as it deems necessary in order to properly discharge its duties
[124] The Terms of Reference provide that in the performance of its responsibilities, the Panel is to use “its best efforts to adhere to the following principles”:
· no discrimination between Bids or Bidders other than on criteria established in accordance with the Allocation Rules
· allocation of Zespri Kiwifruit Variety Licences in a manner that is, as far as possible, fair, practicable, and commercially reasonable having regard to all relevant circumstances including any impact on the current market value of similar licences that have previously been allocated.
· Confidentiality – no publication or (other than as required for the purposes of consulting or seeking advice under obligations of confidentiality) disclosure of details that identify any individual Bidder.
[125] There is an express duty of good faith, with the “Duties of Panel Members” being:
Panel Members must act in good faith and perform their duties strictly in accordance with the provisions of the Terms of Reference and the Allocation Rules.
There is also a strict duty of confidentiality.
[126] Finally, the Terms of Reference record that the Panel shall meet if circumstances require and that all meetings are to be minuted with a representative from Cooney Lees Morgan to act as secretary in this regard.
Did Zespri breach the Tender Rules by excluding Kainui’s Bid based solely on price?
[127] It is not disputed that the sole reason for declining Kainui’s bid was because it was below the minimum price determined by the Panel.
[128] Kainui submits that the Evaluation Panel was not able to exclude a valid Bid solely on price as Rule 16 requires the Panel to follow the allocation procedure based on price set out in Rule 8 based on price and “otherwise” to have the sole discretion to allocate licences. In Kainui’s submission, the use of “otherwise” limits the Panel to matters not dealt with by Rule 8. As Rule 8 is based on price, Kainui submits price cannot be relevant to the exercising of the Panel’s discretion “otherwise”. Kainui continues that the Tender Rules give examples in Rule 18 of the types of situations where a bid might be declined under the Rule 16 and 18 discretions and none of these relate to price.
[129] Zespri submits in response that Rule 18(a) allows the Panel “in its sole discretion” to “accept or decline any Bid”. In addition, Zespri refers to the final paragraph in Rule 18 that the “highest or any Bid will not necessarily be accepted”. Zespri therefore submits that neither Rule 16 nor Rule 18(a) are constrained in the manner Kainui submits.
[130] Zespri further submits the scope of Rule 18 is confirmed by Rules 28 and 29 which excludes any legal obligation to bidders in respect of the outcome of the tender
process until a bidder’s bid has been accepted and permit Zespri to vary or cancel the tender process at any time. Counsel submits this is the same as in Onyx Group Ltd v Auckland City Council14 and Transit New Zealand v Pratt Contractors Ltd.15
[131] In Onyx however, no process contract was held to exist because the relevant privilege clause said that no legal or other obligations arose between the parties “in relation to the conduct or the outcome of the tender process” unless or until the tenderer receives written notice of acceptance. In this case, Rule 28 only protects Zespri’s position in relation to the outcome, but not the conduct, of the tender process.
[132] In Transit New Zealand v Pratt Contractors Ltd, Transit accepted that there was a process contract as Zespri does here. The decision can be distinguished however as the discretion to reject all tenders in that case was being exercised directly by Transit whereas here the discretion in issue, Rule 18(a), is a discretion of the Panel. Rules 28 and 29 reserve powers to Zespri, rather than the Panel, including the power in Rule 29 to vary or cancel the allocation process. In my view the only privilege clause that can be relied on in terms of the Panel’s actions is therefore Rule 18, although I accept Rules 28 and 29 are still relevant to context.
[133] Zespri further refers to South Waikato District Council v Roading and Asphalt Ltd,16 where the Court of Appeal held the relevant privilege clause reserved to the Council the right to accept a tender other than at the lowest price offered, despite the tender methodology being the Lowest Price Conforming Method. The Court of Appeal held that the question of liability turned on the wording of the invitation to tender and the tender documents to which the tenderer responded.17 The question the Court asked was:18
Did the Council make it clear that it reserved an ability to award the contract to a tenderer who had not offered the lowest price?
14 Onyx Group Ltd v Auckland City Council [2003] 11 TCLR 40 (HC).
15 Transit New Zealand v Pratt Contractors Ltd, above n 2, at [90].
16 South Waikato District Council v Roading and Asphalt Ltd, above n 2, at [42].
17 At [41].
18 At [41].
[134] The Court described the premise on which the tenderer’s case was based as being that there was no evaluative exercise to be undertaken – once the Stage 1 assessment had been completed, it was simply a matter of the Council choosing the lower price. The Court held that this did not accord however with the actual terms of the tender document firstly because there were various references to the Council’s ability to accept any tender (whether the lowest or otherwise), or not to accept any of them. Secondly, the Court held that the premise of the tenderers’ case was not consistent with the express second stage evaluative exercise required in relation to the “price attribute”, a stage not usually included when employing the Lowest Price Conforming Method.19 The Court held that the Council made it clear in the tender documents that the “Schedule of Tenderer’s Resources” would be “considered when evaluating the price attribute” and that “the lowest or any tender will not necessarily be accepted”, concluding that:
… [i]f stage two were to consist only of a comparison between the two prices offered, there would be no need for the Council to “consider” the Schedule of Tenderer’s Resources or to undertake an evaluative exercise.
[135] The tenderer put forward an alternative argument that if there was an evaluative exercise to be undertaken, any evaluation of the “price attribute” was limited to the “Schedule of Tendered Resources”, and did not enable the Council to take into account other considerations. The relevant clause in the tender document required the Council to consider two factors – the tenderers’ respective prices and the Schedule of Tenderers’ Resources. The Court held however that other factors could be considered when evaluating the “price attribute”, saying:
An evaluative exercise, involving an assessment of comparative value by reference to a series of criteria is very different from the mechanical requirement to pick the lowest of the prices offered.
[136] The Court of Appeal therefore allowed the appeal, concluding that the High Court Judge erred by “placing too much emphasis on the generic nature of the tender methodology”, at the expense of the specific contractual terms on which the Council was seeking bids.
19 South Waikato District Council v Roading and Asphalt Ltd, above n 2, at [39(c)].
[137] Zespri submits the same applies here and that Rule 18(a) is a complete answer to Kainui’s claim as it permits Zespri to reject any bids – including Kainui’s.
[138] Zespri submits that the proper scope of Rule 18(a) is confirmed by reference to the evaluative process necessary for the allocation of licences under the Terms of Reference.
[139] Zespri goes on to say on the issue of allocation that Kainui is wrong to assert that Rule 8 fetters the privilege clause in Rule 18 as Rule 8 simply says that “the highest priced Bids up to a total area limit of 350 hectares will be identified”. In Zespri’s submission “identified” does not mean “accepted”, which is the language used in Rule 20 when discussing a “successful Bidder”.
[140] Zespri further submits that Rule 8 addresses the identification of bids primarily to address an oversubscription scenario, submitting that this is confirmed by Rules 8(b) and (c).
[141] I do not accept that Rule 8 addresses the identification of Bids primarily to address an oversubscription scenario as Rule 17 expressly provides for the situation where there is remaining unallocated area after completion of the bid allocations under Rule 8 and appears to presume that the Bid Allocations will be completed under Rule 8.
[142] I agree that the fact that Rule 16 states that the Panel shall follow the relevant allocation procedures set out in Rule 8, and “shall otherwise have the sole discretion to allocate” licences, supports Zespri’s submission that there is an evaluative process required by the rules similar to that in South Waikato. Furthermore, the principles set out in the Terms of Reference (to which the Panel is required to use its best efforts to adhere) include “all relevant circumstances including any impact on the current market value of similar licences that have previously been allocated in the absence of a clear exclusion of price” which appears to reserve a broad discretion to the Panel to reject Bids including on the basis of price.
[143] In addition, Rule 16 provides that the Panel’s discretion is to allocate “up to such maximum number of hectares as specified in paragraph B.1 of the Introduction or as otherwise approved by the Zespri Board”. It is reasonably arguable that Zespri has the discretion not to allocate licences “up to” the maximum under Rule 16 and 18(a), although Rule 16 could simply be allowing for undersubscription as Rule 17 does.
[144] In the end however, I conclude that there is a reasonably arguable defence that the discretion in Rules 16 and 18 is not confined to non-price attributes. Summary judgment is not therefore available on this basis.
Did Zespri breach the Tender Rules by using its discretion under Rule 18(a) to fix a minimum price?
[145] Kainui submits that Zespri was not entitled to use its discretion to fix a minimum price as this contradicted Rule 7.3 of the Tender Rules.
[146] Part 7 of the Rules is headed “Rules for Closed Tender Bids”. As already set out, Rule 7.3 simply states:
There are no maximum or minimum prices for a Closed Tender Bid.
[147] Zespri says that Kainui is wrong to submit that Zespri could not impose a Minimum Price as Rule 7.3 simply permits bids at any price. It is a preliminary eligibility issue, consistent with Rules 6 and 7 being preliminary evaluation and validity criteria assessed by Cooney Lees Morgan, as referred to in Rules 14 and 15.
[148] Zespri submits that Rule 7.3 is therefore concerned only with the initial validity and eligibility of a bid but does not concern the Panel’s acceptance or rejection of a bid under Rule 18(a), as interpreted with the Terms of Reference. In Zespri’s submission the Panel was therefore entitled to determine the minimum price and reject bids that fell below it.
[149] Kainui submits that by doing so, Zespri has not only contradicted an express term of the Tender Rules but has altered the fundamental basis on which parties were tendering, which was that there was no minimum price and the market would
determine the cut-off price. Instead, Kainui says that Zespri introduced a new qualifying criterion for bids, which was that they had to be over a minimum price and it did not advise any of the tenderers.
[150] I agree with Kainui’s submission and do not accept that Zespri was entitled to determine the minimum price and then reject Bids that fell below it without further consideration. The process dictated by the Rules begins with the Panel making a decision on validity under Rule 15 after pre-trial validation by Cooney Lees Morgan and then evaluating the valid bids pursuant to Rule 16 using the allocation process in Rule 8. The Terms of Reference support such a two-stage process as they set out the “Scope of Responsibility” of the Panel in two stages:
(a)to assess and make rulings on the validity or otherwise of all bids received; and
(b)to assess and make rulings on the allocation of the licences “subject to any requirement set out in the Allocation Rules”.
[151] Zespri accepts that Rule 7.3 is a validity requirement. A Bid cannot therefore be rejected as being invalid on the basis that it does not meet the minimum price. The Bid needs to be treated as valid. It follows that it must then be evaluated pursuant to Rule 16. At that stage price may be relevant because of the principles in the Terms of Reference as referred to above, but the Bid must be evaluated pursuant to the Rules and the Terms of Reference, including using best efforts to act in accordance with the principles.
[152] The rejection letter makes it clear that Kainui’s bid was not evaluated. It expressly states “other than checking and confirming your Bid price, your Bid was not validated or examined further”.
[153] Mr Denyer’s evidence of the pre-validation process conducted by Cooney Lees Morgan supports this:
[22]… We made a decision on or about 11 April 2022 to set aside all lower priced Bids (including [the relevant Kainui Bid]) pending a decision from the Panel, knowing we would have time later to complete our validation of these Bids should that become necessary.
[23]As such, only [Kainui’s successful Bid] was fully progressed through the validation process (including completion of the Bids summary and full validation of all Bid parameters … . While preliminary work had begun on [Kainui’s unsuccessful Bids], as I have already outlined, no further work was undertaken. Subsequently, these two Bids were ruled out by the Panel’s decision so were not processed further. Had the Panel decided to accept these and other Bids at their Bid Price, then we would have completed the validation process using the information we had already obtained.
[154] In addition, Mrs Evans’ evidence for Zespri is that the Panel met on 22 April 2022 to consider bids for which Cooney Lees Morgan had raised validity issues but that “Kainui’s bid was not one of those bids, given that the amount of the bid price is not a validity issue (unless the bid price is unclear due to the bid not containing all required price and hectare information)”.
[155] By declining bids below the Panel’s minimum price decided upon without further consideration, the Panel effectively made the minimum price a validity issue. In Mrs Evans’ first affidavit she does say that at the meeting on 14 April 2022 the Panel “evaluated valid bids” ranked by Cooney Lees Morgan during the pre-validation process and exercised its discretion to decline those bids below the minimum price.
[156] However, if any evaluation by the Panel occurred (which I doubt given the terms of the rejection letter and Mr Denyer’s affidavit), I do not consider that the evaluation is consistent with the evaluation process required by the Tender Rules as the Bids themselves were not considered individually.
[157] Counsel for Zespri suggested that any obligation to consider all relevant circumstances was only a best efforts obligation as the Terms of Reference only required the Panel to use its best efforts to act in accordance with this principle.
[158] “Best efforts” has been held to be the same as “best endeavours” and “best endeavours” has been held to mean the same as “all reasonable endeavours”.20 As the
20 Barclay v Tuck [2018] EWHC 1125 (QB) at [102]; and see also Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 at [33]. See also Focus Construction Interiors Ltd v Spaceworks Design Group Ltd [2019] NZHC 2211 at [36] which contrasts “all reasonable endeavours and “best endeavours” with the less stringent obligation of “reasonable endeavours”.
Court in Barclay v Tuck summarised, finding a breach of a requirement for “best efforts” means:21
… proving that the defendant has not been genuine in his efforts to achieve that objective and that there was a reasonable step he could and should have taken but failed to take.
[159] The Scope of the Panel’s responsibility and the Duties of Panel Members, as set out in the Terms of Reference, are to “act strictly in accordance with the Tender Rules”. Any departure from the allocation process set out had to be in accordance with the privileges reserved to the Panel by the Rules. The Panel’s privileges are confined to the discretions in Rules 16 and 18. The exercise of the Panel’s discretion under those Rules again had to be in accordance with the Rules and with the principles in the Terms of Reference. “Best efforts” need therefore to be understood in that context.
[160] Furthermore Zespri is relying on the second principle which includes the obligation to have regard to all relevant circumstances to justify the setting of the minimum as the principle goes on to include as an example of those circumstances “any impact on the current market value of similar licences that have previously been allocated”. Zespri is not able to select one part of the principle and ignore the remainder. If it is going to rely on the impact on market value, the principle requires Zespri to consider “all relevant circumstances.”
[161] It may have been within the Panel’s power to consider a bid and determine that allocating a licence on the basis of the price offered would, taking all relevant circumstances into account, “impact on the current market value of similar licences that have previously been allocated” and so decline to accept that bid. However, the process dictated by the Rules clearly does not allow the Panel to determine a minimum price and decline bids below that price, without evaluating each valid bid and considering all other relevant circumstances.
[162] Such consideration would have allowed the Panel to consider whether Kainui’s Bid itself (rather than all 13 Bids below the “Minimum Price” imposed) would be
21 Barclay v Tuck, above n 20, at [103].
likely to impact on the current market value of licences. It is difficult to see how an extra 1.3 hectares of licences at $500,000 would be likely to materially impact on the market value of licences, given that 350 hectares worth of licences at a median price for the 2022 round of $801,000 were being allocated in this round alone and there are 9000 hectares with Gold3 licences altogether. This is especially the case where there are so many variables that affect value, including levels of production, market demand, supply costs, COVID delays and so forth.
[163] As is clear from the repeated references to it being a “Closed Tender Bid” in the Tender Rules set out above, the process that the Bidders expected to participate in was a Closed Tender Bid process. The Tender Rules allowed for that process to be departed from in confined circumstances where the Panel, in exercising its controlled discretions in Rules 16 and 18(a), considered that to be in accordance with the principles on which the Panel was required to use its best efforts to act in accordance with. But being a departure from the usual process, the Tender Rules require that all relevant circumstances are considered. This may allow Zespri to determine what it considers to be the commercially reasonable price floor but that factor must be considered against all relevant circumstances in relation to each Bid. This must include how much lower than that price floor the Bid in question was.
[164] In South Waikato the tender documents themselves recorded that the “lowest or any tender will not necessarily be accepted” despite the methodology expressly stating that tenders “will be evaluated according to the Lowest Price Conforming method”.
[165] Here, however, there was no such express contradiction of the closed tender methodology in the privilege reserved to the Panel – the discretion did say that the Panel could “accept or decline any Bid” but it did not say that a minimum price could be imposed. Framing the question in the same way the Court of Appeal did in South Waikato, the question for the Court is:
“Did Zespri make it clear that it reserved an ability to set a minimum price?”.
[166] The answer must be no as the Tender Rules never suggest that despite the Closed Tender model not involving minimum or maximum prices, the Panel has a discretion to set such a price. The Tender Rules instead simply say the Panel may, in its discretion as constrained by the Terms of Reference, accept or decline any Bid.
[167] Zespri is correct that Rule 29 allows Zespri to vary or cancel the Licence Allocation Process at any time but this is a privilege reserved to Zespri, not to the Panel. As counsel for Kainui submits, the Tender Rules very clearly separate out the role and powers of the Evaluation Panel and the role and powers of Zespri.
[168] As set out above, if it was decided that a minimum price was required, then Zespri was required to post the amendment to the Tender Rules on the Canopy Website pursuant to Rule 29. Kainui submits that although no process is set out for steps following notice of amendment, it would be expected that growers would have an opportunity to respond to any such amendment in the process. Whether that is correct or not, this is not what happened. Zespri did not set the minimum price, or even approve it as the minutes of the Board meeting on 25 May 2022 referred to above make clear. Nor was any amendment to the Tender Process notified.
[169] I therefore consider that Zespri has breached the Tender Rules by the Panel purporting to exercise its discretion under Rule 18(a) to fix a minimum price in the way that it did and decline Bids below that price without further evaluation.
Has Zespri acted arbitrarily, capriciously and unreasonably in exercising its discretion under Rule 18(a)?
[170] Kainui submits that even if Zespri had the power to fix a minimum price, Zespri was required not to exercise its discretion to do so arbitrarily, capriciously or unreasonably as it has done here. Because of the view I have reached in relation to the second question, I do not need to consider this question. I do so however for completeness in case I have erred in relation to the above question.
[171] Kainui relies on the decision of Mander J in C & S Kelly Properties Ltd v Earthquake Commission in which it was held:22
… absolute discretions in a contract must be exercised in a way that is not capricious, arbitrary or unreasonable, and that an apparently unfettered discretion may be subject to an implied term of reasonableness and the need to give business efficacy to the contract.
[172] The principles relating to the exercise of contractual discretions have recently been considered in Woolley v Fonterra23 and Canaan Farming Dairy Ltd v Westland Dairy Company Ltd,24 with Doogue J in the latter case summarising the position as follows:25
(a)absolute contractual discretions may not be exercised in a way that is arbitrary, capricious, or unreasonable, having regard to the provisions of the contract;
(b)the meaning of good faith in this context is the parties to the contract must be true to the ideal that lies behind the contract or, in other words, “the reasonable expectations of honest men must be protected”; and
(c)an approach focussed on the contract itself, a broad view of the purpose of the venture, and the uncertainty the contractual discretion was designed to manage ensures the Court is focused on giving effect to the bargain the parties made.
[173] Zespri submits that the Panel was not required under Rule 18(a) to consider the “individual circumstances” of “specific bids” and consider “Kainui’s bid on its merits”. Zespri submits that Rule 18(a) applies to “any bid” and a limitation to “specific bids” makes no sense as Zespri could not use Rule 18(a) to resolve common issues between bids or protect its growers from unforeseen and uncommercial outcomes on the tender.
[174] The discretion in Rule 18(a) is not in my view an absolute discretion to accept or reject any bid as the Terms of Reference provided the Panel with the power to exercise its discretion only “within the scope of the Allocation Rules”. The Panel is
22 C & S Kelly Properties Ltd v Earthquake Commission [2015] NZHC 1690 at [68], and see discussion at [66]–[74].
23 Woolley v Fonterra Co-operative Group Ltd [2021] NZHC 2690 at [411]–[461].
24 Canaan Farming Dairy Ltd v Westland Dairy Company Ltd [2022] NZHC 2524 at [115]–[122].
25 At [122].
required by the Tender Rules to act in good faith strictly in accordance with the Tender Rules in performance of its responsibilities:
(i)assessing validity; and
(ii)assessing and making rulings on allocations.
[175] The Panel is further required to use its best efforts to act in accordance with the principles: including not to discriminate between Bidders and to consider all relevant circumstances as discussed above.
[176] As I have already found, I consider that Zespri was required to consider individual bids under Rules 16 and 18 because the second stage of the process, once validity had been determined, is to evaluate the bid in accordance with Rules 13 to 19 of the APR, as referred to under the heading “Evaluation Panel and Allocation Process” in the Background and in the two-stage process set out above in the Panel’s Scope of Responsibilities.
[177] The principles in the Terms of Reference require the Panel to use its best efforts not to discriminate between Bids or Bidders other than on criteria established in accordance with the Tender Rules and then to allocate the licences in a manner that is fair, practicable and commercially reasonable having regard to all of the relevant circumstances including any impact on the current market value.
[178] If an individual evaluation is not undertaken, that would be in breach of the first principle not to discriminate between bids or bidders other than on criteria established in accordance with the Allocation Rules – as a new “minimum price” criterion would have been introduced. In addition, the second principle, which expressly relates to “allocation” of the licences, requires the Panel to have regard to “all relevant circumstances including any impact on the current market value”. If a bid is not evaluated individually then the Panel will not have acted in accordance with the second principle.
[179] The minutes of the Evaluation Panel meeting at which the bids were allocated record firstly:
… it was noted that this particular meeting had a narrow scope, with all validity issues previously dealt with at the meeting on Friday, 22 April 2022.
[180]The minutes further record:
… the Panel had also resolved previously (on 14 April) to decline certain Bids namely Bids which were not commercially reasonable as set out in the Terms of Reference. At that meeting, and having considered a range of options as to how a commercially reasonable price floor or “cut-off price” would be set, the Panel had decided to use a “cut-off price” averaged over the previous two years for both Gold and Red. …
[181] The reference to the price being a “cut-off price” rather than a minimum price appears to be because Rule 8 refers to “the lowest” or “cut-off” price. The process set out in the Tender Rules however was clearly for the market to set the “cut-off price” with the reference in Rule 8 to “cut-off price” being the price bid for the 350th hectare once the Bids have been ranked in order of price. The price that the Panel determined was “the commercially reasonable price floor” is not a “cut-off” price as that term is used in Rule 8.
[182] Considering the “uncertainty” that the contractual discretion in Rules 16 and 18 was intending to address (in the words of Doogue J from Canaan as referred to above), it is clear that the discretion was not intended to allow the Panel to exercise its discretion to impose a minimum price and change such a fundamental part of the Closed Tender Bid process.
[183] The reservation of the right to vary or cancel the Licence Allocation Process to Zespri (and not the Panel), and only with notification, reinforces that the exercise of the Panel’s discretion to set the minimum price and not individually evaluate bids below that price was not in accordance with the Tender Rules. In my view the Panel’s setting of a minimum price and declining of the Bids without further individual consideration is clearly an arbitrary exercise of the constrained discretion provided to the Panel and is in breach of the Tender Rules.
[184] I therefore consider summary judgment is available for breach of the Tender Rules on this basis as well.
Did Zespri breach the Tender Rules by failing to give Kainui the opportunity to submit a further bid at or above the minimum price?
[185] Zespri submits that it did not act unreasonably, unfairly or in a commercially unreasonable manner (in breach of the Terms of Reference) by failing to give Kainui an opportunity to submit a further bid at or above the cut-off price. Mrs Evans states that the Panel decided not to give Bidders below the minimum price the opportunity to amend their Bids because:
[This] would not be fair to bidders who paid above the decided cut-off (permitting low bidders to obtain a preferential result) or to growers that declined to bid because they anticipated being unable to pay the anticipated market price. Further, the Panel considered this option could encourage speculative bidding for future allocation processes.
[186]Kainui submits that these reasons are “nonsensical” because:
(a)There could be no unfairness to bidders who bid over the minimum price; they were completely unaffected. No preference would have been given to bidders below the minimum price simply by disclosing the minimum price and giving them the opportunity to submit a further bid over that minimum. In fact, the Tender Rules expressly contemplated that the Panel could “negotiate with any Bidder” (rule 18(b));
(b)Growers who declined to bid could have no basis for alleging unfairness;
(c)Giving growers the opportunity to increase their bids above a minimum could not encourage speculative bidding. On the contrary a minimum price discourages speculative bidding; and
(d)The Panel failed to take into account the interests of those bidders who would miss out as a result of a retrospectively imposed minimum price that had never been signalled.
[187] It is difficult to understand why, if the Panel reached a view on a minimum price that would prevent impact on the current market value of licences, it would not be fair to Bidders who paid above that price to go back to a Bidder below and ask whether they were prepared to meet that price when the Tender Rules referred to this as an option available to the Panel. It would not appear to impact negatively on those who paid higher prices as there is always a risk in a Closed Tender that a bidder may pay significantly more than the seller would have been prepared to accept. Any concern about overpaying is expected and simply a reflection of the closed tender
process (as Mr Denyer said in his response to the Board’s questions referred to in the minutes of the Board meeting on 7 April 2022). Negotiation with a Bidder whose Bid does not meet the Panel’s price floor could be justified by Zespri on the basis that it is protecting the value of the licences, which is in the interests of the Bidders who bid at higher prices.
[188] The Rules clearly prevent Cooney Lees Morgan at the pre-validation stage from discussing or altering price (Rule 15). In contrast, Rule 18(b) expressly allows the Panel to negotiate with any Bidders in respect of any Bid (although the Rule expressly states that the Panel is not obliged to do so). Rule 18(c) provides a discretion to consider any alternative, late, or otherwise non-valid Bid, so Rule 18(b) must relate to valid bids. Rule 18(b)’s permitted negotiation must include price because otherwise it would be excluded as Rule 15 does in respect of the pre-validation stage. In my view this makes it clear that Zespri could give Bidders below the minimum the opportunity to meet the Panel’s minimum price. Such an opportunity would appear to be consistent with the second principle in the Terms of Reference: to act in a manner that is fair, practicable and commercially reasonable having regard to all relevant circumstances including the impact on the market value of licences.
[189] Furthermore, it is difficult to see why it would be unfair to those who had not chosen to participate in the process at all. Importantly the Tender Rules do not include duties owed to “non-bidders” and the non-discrimination principle applies between Bids and Bidders, not Bidders and non-Bidders.
[190] It may be that the Panel would have to go back to all Bidders declined on the basis that their Bids were below the Panel’s minimum price so as to avoid discrimination between Bidders but this is a matter for the Panel, being a principle that it has to adhere to on a best efforts basis, rather than an absolute obligation.
[191] Having said the above, however, I do not consider that Kainui has established on a summary judgment basis that failing to give Kainui the opportunity to submit a further bid at or above the minimum price is a clear breach of the Tender Rules. I do not therefore enter summary judgment on this basis.
[192] I record that there was some discussion as to whether the requirement to act in a manner that is fair imported public law concepts of fairness into the tender process. In this case there was an express duty for the Panel to act in good faith and to use its best efforts to act in accordance with the second principle which included allocating licences in a manner that was “fair, practicable and commercially reasonable….” For the purposes of this summary judgment I do not need to determine whether public law concepts of fairness are imported into the process and so I refrain from doing so.
What is the appropriate relief?
[193] As I have found that the Tender Rules have been breached, I now consider the appropriate remedy and whether it is available on summary judgment.
[194] Kainui seeks specific performance of the process contract only to the extent that the remaining Bid in issue, relating to KPIN 8937, is ordered to be evaluated by the Panel in accordance with the Tender Rules. Initially, an alternative order for specific performance was sought, for a licence to be allocated in response to Kainui’s valid Bid. At the hearing it was accepted that this alternative order was maybe not appropriate.
Specific Performance
[195] Specific performance is discretionary and some caution needs to be exercised where it is sought by way of summary judgment. In Hart v Bankfield Farm Ltd,
French J recorded:26
[39] I am also mindful of authority to the effect that in cases involving specific performance, special care needs to be taken at summary judgment level. This is because issues relevant to the exercise of the Court’s discretion to order specific performance of a contract of land may well be different from or additional to those bearing on whether a defendant has an arguable defence as regards liability (see for example Lyons v Stewart [1998] NZAR ConvR 95)
…
26 Hart v Bankfield Farm Limited (2008) 9NZCPR 685. In the event, specific performance was ordered in that case, and upheld on appeal in Bankfield Farm Limited v Hart [2009] NZCA 297. Cited in Seabrook v Draiocht Trust Partnership Ltd [2019] NZHC 3117 at [34].
[196] The question of the availability of specific performance at the summary judgment stage appears overwhelmingly in cases involving contracts relating to land. As Ellis J stated in Millbrook Estate Ltd v Town before making orders for specific performance:27
[79] I acknowledge that cases where specific performance has been ordered by way of summary judgment are not common. … More particularly, I note that such a remedy is more common where the subject matter of the contract is (as here) land.
[197] The commentary in Laws of New Zealand summarises the position as follows:28
Specific performance can be granted at summary judgment stage in an appropriate case. So an order for specific performance of an agreement which does not also seek damages in addition to or in substitution for such order may be made on a summary judgment application. An applicant in a summary judgment application has the onus of showing that the defendant has no tenable defence. In the context of an application for specific performance, the plaintiffs may be able to pass an evidential onus to the defendant by exhibiting the contract which prima facie entitles them to the remedy. The defendants are then in a position of having to demonstrate a tenable defence, but the overall onus remains on the plaintiffs to satisfy the Court as to the absence of a defence. The Court must be satisfied that the plaintiff has shown to the requisite standard that there are no grounds upon which specific performance could be refused at trial. If there is evidence that raises serious doubts the remedy should not be granted.
[198] To succeed in specific performance being granted in summary judgment French J held in Hart v Bankfield Farm Ltd that, after finding that there is no arguable defence to the claim, the question of whether specific performance should be ordered can be framed as:29
…whether there is anything to preclude the Court from finding specific performance is without question the remedy which should be ordered.
[199] Zespri submits that where damages are adequate, specific performance ought not to be ordered. In contrast, Kainui submits that the adequacy of damages is just one factor to consider in determining the appropriate remedy.
27 Millbrook Estate Ltd v Town [2015] NZHC 1207.
28 J November Laws of New Zealand Specific Performance (online ed, Lexis Nexis) at [140] (footnotes omitted).
29 Hart v Bankfield Farm Limited, above n 26, at [85].
[200] Kainui’s position is supported by the following commentary in Laws of New Zealand:30
More recently some Judges have doubted whether cases in which specific performance can be ordered should be limited to certain categories, rather than by general principles. The true test has been held to be appropriateness of the relief; adequacy of damages is only a factor to take into account. The question has been phrased as: is it just in all the circumstances that a plaintiff should be confined to a remedy in damages?
[201] In Burrows, Finn and Todd Law of Contract in New Zealand the learned authors refer to developments whereby the notion that common law remedies have primacy over equitable remedies have been called into question.31 In Butler v Countrywide Finance Ltd Hammond J referred to those developments and held that what was required was a “context specific evaluation of which remedy was most appropriate in the circumstances of the given case”.32 It appears increasingly uncontroversial that the exercise of the equitable jurisdiction to grant specific performance is a matter for the Court’s discretion.33 As a framework for the exercise of that discretion, Hammond J in Butler held the question was one of informed remedial choice for the Court exercisable on the basis of factors such as the following:34
(a)plaintiff autonomy;
(b)economic efficiency;
(c)the relative severity of the remedy on the parties;
(d)the nature of the right being supported by the remedy;
(e)the moral view to be attached to the interests at stake;
30 J November Laws of New Zealand Specific Performance (online ed, Lexis Nexis) at [8] (footnotes omitted).
31 Stephen Todd and Matthew Barber Burrows, Finn and Todd Law of Contract in New Zealand
(7th ed, Wellington, LexisNexis Ltd 2022) at [21.4.2(h)].
32 Butler v Countrywide Finance Ltd [1993] 3 NZLR 623 at 632 and 633.
33 See for example, Greymouth Holdings Ltd v Lundon [2022] NZHC 641 at [99]; McCaw v Owen [2021] NZHC 1686 at [22]; Lusty v Thorburn [2021] NZHC 1774 at [85]; and Huang v Tamaki Homes Ltd [2019] NZHC 3032 at [16].
34 Butler v Countrywide Finance Ltd, above n 32, at 623–633. For an example of how these factors can be applied, see Overland Development Ltd v Dong [2018] NZHC 2225.
(f)the effect of a given remedy on a third party;
(g)difficulties of calculation;
(h)the practicality of enforcement; and
(i)the conduct of the parties.
[202]In my view, considering these factors is a useful approach and I do so below.
Plaintiff autonomy
[203] This factor essentially is that the plaintiff as the injured party should have first choice of remedy.
[204] Kainui submits that specific performance is the appropriate remedy in the circumstances because of the difficulties in (and costs of) calculating damages.
Economic efficiency
[205] Kainui submits that calculating damages will be an expensive, lengthy and difficult process with expert witnesses necessary and this should factor against damages as a remedy.
[206] Zespri does not dispute the cost of calculating damages or that experts will need to be involved. Further, Zespri submits that there would need to be a reduction in the damages awarded for steps in mitigation, complicating the process and increasing costs for all parties.
Relative severity of the remedy on the parties
[207] Zespri submits that it would cause great hardship to Zespri if specific performance were ordered. Zespri refers to Mrs Evans’ evidence that if an order is made, Zespri is likely to need to re-run the tender process to avoid breaching the fairness and non-discrimination provisions of the Terms of Reference. Mrs Evans’ evidence is that this would be necessary to maintain the integrity of the Licence Allocation Process as all Bidders would need to be given the chance to amend their
Bids and potentially an opportunity provided for growers who did not Bid in the tender process to submit Bids in the face of the information now available. This would obviously cause a significant burden to Zespri as Zespri has already allocated licences to successful bidders, received payment and so forth.
[208] This evidence proceeds on the basis that specific performance would be ordered either requiring a licence to be allocated or requiring the Bid to be evaluated without a minimum price or after allowing Kainui to amend its bid up to the minimum price. The specific performance being considered is for Zespri to evaluate the bid individually with reference to all of the relevant circumstances, including potentially what the Panel considers to be the commercially reasonable price floor. That evaluation requires, for the purposes of considering the impact on the market value of licences, a comparison between price the Panel considers to be the commercially reasonable price floor and the individual bid by Kainui along with all other relevant circumstances. These would include the many variables that determine value and whether it is fair to reject the Bid in those circumstances. In addition the Panel could consider as part of the evaluation whether to negotiate with Kainui as expressly allowed for in the Rule 18(b).
[209] The breaches that result in such an order for specific performance are confined to the 13 Bids that were declined on the basis of the minimum price without further evaluation. I do not accept that directing Zespri to evaluate Kainui’s bid will cause extreme hardship to Zespri or would require the licence allocation process to be re-run. The outcome of the evaluation of the 13 Bids declined on the basis of price will not affect the outcome of the licences already allocated as the number of hectares bid for in total is still less than the maximum 350 hectares that the Board determined it was appropriate to release.
[210] It was submitted that some successful bids exceeded $1 million per hectare and the unfairness to those licence holders is acute and would put Zespri in breach of the fairness and non-discrimination provisions of the Terms of Reference.
[211] However, as Mr Denyer explained to the Board, this is the likely outcome in every closed tender bid – that some bids will pay significantly more than others in an
effort to ensure that their bid is successful. Evaluating the 13 declined Bids will not cause unfairness to those licence holders who paid more than what Zespri considers to be a commercially reasonable price floor, whether Zespri decides it is appropriate to ask Bidders below that price floor to increase their bids or not.
[212] Zespri further submits that it would encourage speculative or collusive bidding in the re-run tender process or in future tender processes (or both) that risks undermining the value of licences. If Zespri considers that going back to Bidders to ask whether they will meet what Zespri considers to be the “minimum price” will cause speculative bidding in future, then that may not be the course that it considers is appropriate (although it is difficult to understand why that would be the case as parties will still have to put their best Bid forward to ensure that their Bid was accepted in case of oversubscription). In my view, it does not mean that it is inappropriate to order specific performance of Zespri’s obligation to evaluate Kainui’s bid in accordance with the Tender Rules.
[213] Furthermore, the risk of adverse impacts on current licence holders or the value of the Gold3 licences are the same risks that would have arisen if Zespri had completed the evaluation in accordance with the Tender Rules in the first place.
[214] Zespri submits that this case is very similar to Markholm Construction Co Ltd v Wellington City Council in terms of the disruption involved in re-running the tender process.35 Zespri says that while the harm in Markholm Construction was to the Council only, the specific performance sought here creates risks to current licence holders (both those who have obtained 2022 Gold3 licences and those who had obtained licences in previous years).
[215] In Markholm Construction however the specific performance sought was for the Council to run the ballot on the original terms when those terms had been found to undervalue the properties the subject of the ballot significantly. The Council had, as a result, determined that it was appropriate to cancel the ballot. Here the underlying bases for the tender process have not been found necessarily to risk significant prejudice to Zespri and the risks to current licence holders and those who obtained
35 Markholm Construction Co Ltd v Wellington City Council [1985] 2 NZLR 520 (HC).
licences in previous years are only the risks that ordinarily arise if the tender process had proceeded in accordance with the Tender Rules.
[216] I do not consider that specific performance requiring evaluation would have a severe impact on Zespri and nor do I consider that any further evidence on this would change my view on this.
The nature of the right being supported by the remedy
[217] This factor addresses the notion that the function of civil remedies is to be rights enhancing. In this case, the rights affected are the contractual rights of Kainui to participate in a tender process according to the Tender Rules. The Rules are very detailed and create a clearly defined process. If Kainui’s right to participate in accordance with those Rules can be reinstated, then that supports specific performance.
The moral view to be attached to the interests at stake
[218] This factor relates largely to candour and is not a factor that I take into account in this case.
The effect of a given remedy on a third party (or the public)
[219] Zespri submits that specific performance would affect both high and non- bidders. However, again, because the specific performance being considered is simply to evaluate Kainui’s bid in accordance with the Tender Rules, and there is sufficient further hectarage available for licences to be allocated without affecting other bidders, I do not consider this factor goes against specific performance.
Difficulties of calculation
[220] Kainui emphasises this factor as the reason why specific performance should be ordered.
[221] Zespri submits that damages are plainly an adequate remedy for Kainui, consistent with the remedy adopted in Pratt Contractors Ltd v Palmerston North City
Council.36 I note that in Pratt it does not appear that an order for specific performance was sought, presumably because the contract had been performed by the successful bidder. That issue does not appear in this case as further licences could still be issued.
[222] Zespri submits that the result of Kainui’s failure to obtain licences is that Kainui cannot cultivate and supply Gold3 fruit to Zespri from the hectares bid for. Accordingly, Kainui’s loss is the net fruit return that would have been payable to it for any additional fruit supplied pursuant to the terms of the Supply Agreement (less a reduction for steps it must take in mitigation). Zespri says that the amount that would be payable to Kainui is ascertainable from Kainui’s net profit for its other Gold3 plantings.
[223] Zespri further submits that Kainui has not alleged that a licence issued in this year is unique or non-fungible in the way that real property or unique chattels may be and nor could it. On the facts, Zespri says Kainui does not appear to have any commitment to Gold3 licences. In addition, Zespri says if Kainui satisfies the prerequisites for the 2023 Gold3 tender, it can submit further bids as it has done successfully and unsuccessfully since 2016.
[224] In Zespri’s submission, the fact that “there is no guarantee its tender would succeed” does not mean, as Kainui submits, that damages are an inadequate remedy, since the adequacy of damages does not depend on its future tenders succeeding or not.
[225] Kainui says in response, however, that because there is no guarantee that Kainui’s tender will have the same chances of success in future years, this will make quantification of this chance very difficult and that this is relevant to adequacy of damages.
[226] Kainui filed an updating affidavit attaching an email communication, received from Zespri on 19 October 2022, advising that Zespri’s Board had approved the release of 350 hectares of Gold3 for tender in 2023 but that 200 of the 350 hectares had been “ring-fenced” for existing growers of the Hayward and Green14 varieties who want to
36 Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469 (HC) at [487]-[490].
move to Gold3. Mr Thompson for Kainui deposes that Kainui is not in that category of existing growers and so would be bidding against others for the remaining 150 hectares.
[227] In my view the difficulties of calculating damages support an order for specific performance. The difficulties include the fact that calculation relies on likely fruit production, whether the market will absorb additional volume in any given year, how to determine how many years of fruit production to allow for, whether bids will succeed in future, what other steps ought to have been taken in mitigation and the value of those steps, likely seasonal impacts, likely continuing impact of COVID and shipping delays and a number of other factors. Again, I do not consider that further evidence would change this view.
The practicality of enforcement
[228] Here there do not seem to be any real difficulties with enforcement as any order would simply be to evaluate individually in accordance with the Tender Rules.
The conduct of the parties
[229] As an equitable remedy, the conduct of the parties is described as a cornerstone of specific performance. In this case it is not a factor that guides the appropriate relief one way or the other.
Conclusion
[230] After consideration of all of these factors, I consider that specific performance requiring evaluation of Kainui’s bid in accordance with the Tender Rules is, without question, the remedy that would be ordered. I reach this conclusion largely because of the difficulties and cost of assessing damages and also because I do not accept that requiring Zespri to complete the evaluation in accordance with the Tender Rules will cause undue prejudice to Zespri or third parties, as the risks that arise are largely the same risks that would have arisen if the Tender Rules had been followed in the first place.
[231] I make final orders below including a timeframe of 10 working days by which the specific performance is ordered to occur with leave reserved to apply for variation. This timeframe is included in an attempt to ensure the evaluation process takes place as soon as possible to allow planting or grafting in December 2022 if that can be achieved. Leave is however reserved to come back to the Court if necessary. I note that I have considered the fact that this timeframe expires before the period within which any appeal is required to be filed but the requirement for urgency dictates such a timeframe.
[232] I have declined the remainder of Kainui’s application for summary judgment, including for any additional damages for the breaches of the Tender Rules found, so that the remaining claims can proceed in the usual way if not resolved between the parties.
[233] I ask the parties to attempt to resolve any issues that arise with the orders made and seek any variation by consent if that is possible.
Result
[234]For the reasons outlined above I make the following orders:
(a)a declaration that Zespri has breached the Tender Rules by imposing a minimum price and declining Kainui’s bid on that basis without further evaluation;
(b)for specific performance requiring the Evaluation Panel within 10 working days of this judgment to complete validation and evaluate Kainui’s Bid for a Gold3 licence for 1.30 hectares on KPIN 8937 in accordance with the Tender Rules without any minimum price and on the basis that the Panel determines whether to negotiate with Kainui on an increased price as allowed for in Rule 18(b) of the Tender Rules;
(c)summary judgment in respect of the remainder of the plaintiff’s claim, including any damages in respect of the breaches affecting KPIN 8937
as found above, is declined with the remainder of the claim to proceed in the usual way;
(d)leave is reserved to apply for variation of these orders by memorandum (preferably joint) within 10 working days of this judgment.
Costs
[235] Kainui has succeeded and so in the usual course would be entitled to costs. I ask the parties to confer and attempt to reach agreement on costs. If that is not possible, memoranda of no more than five pages excluding schedules may be filed, on behalf of the plaintiff within 20 working days of this judgment and the defendant a further 10 working days. If agreement appears possible, extensions may be sought.
Associate Judge Sussock
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