Australia: Where An Expression Of Interest Has Been Accepted, Failure To Disclose Negotiations With A Third Party May Amount To Misleading Or Deceptive Conduct - Section 42 Of The Fair Trading Act 1987 (NSW)
Curwoods Case Note

Judgment date: 2 July 2010

Fabcot Pty Ltd v Port Macquarie-Hastings Council [2010] NSWSC 726

Supreme Court of New South Wales¹

In Brief

• The Court found that a municipal council's deliberate failure to disclose that negotiations were no longer exclusive amounted to misleading or deceptive conduct within the meaning of section 42 of the Fair Trading Act 1987 (NSW), in circumstances where it had accepted an Expression of Interest from the plaintiff
• However, the plaintiffs' claim failed as it was unable to show, based on objective evidence and history of behaviour, that it would have acted differently had it known that the negotiations were no longer exclusive.

Background

This dispute concerned a supermarket development site ("the Land") in regional New South Wales. The plaintiffs (collectively "Woolworths") and the second defendant ("Coles") are major Australian supermarket operators. The first defendant ("the Council") is the municipal council and Development Consent Authority for the Port Macquarie-Hastings Shire. It acquired the Land before 1988 and used it as a car park.

In November 2007 the Council publicly invited Expressions of Interest in purchasing and developing the Land. Both Woolworths and Coles responded with conditional "offers". The Woolworths offer was made subject to agreement being reached and a contract entered into, and approval being given by the board of Woolworths. On 21 January 2008, the Council accepted Woolworths "offer" subject to a number of conditions, including that contractual negotiations were completed by 30 June 2008. In fact, negotiations between Woolworths and the Council dragged on well after that date. The negotiations covered a plethora of issues including liability for remediation of land contamination and developer charges for connection of essential services such as water and sewerage.

In April 2009, the Council also started negotiating with Coles, but it did not inform Woolworths that it was doing this. Coles made it a condition of the negotiations that Woolworths not be informed of its involvement.

The negotiations between Woolworths and the Council reached an impasse, and on 1 July 2009 the Council sold the land to Coles.

Woolworths commenced proceedings in the Supreme Court of New South Wales against the Council and Coles, claiming for breach of contract and statutory misleading or deceptive conduct. Before the trial began, Woolworths abandoned its claims in contract (including a claim that it was entitled to contractual exclusivity in its negotiations with the Council). However it pursued a claim under section 42 of the Fair Trading Act 1987 (NSW) that the Council had indulged in misleading or deceptive conduct by failing to disclose to Woolworths that it had commenced negotiations with Coles².

Woolworths claimed damages on the basis that, had the Council disclosed to it that it was negotiating with its major competitor, it would have abandoned many of its negotiating positions in order to secure the land against its rival.

The matter came before Hammerschlag J who considered the following issues:

1. Did the Council engaged in conduct which was misleading or deceptive?

Section 42(1) of the Fair Trading Act 1987 (NSW) provides: "A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive".

There was no issue that the Council deliberately refrained from revealing to Woolworths that it was negotiating with a third party, which in turn meant that it was no longer negotiating exclusively with Woolworths.

Hammerschlag J framed the issue in this way: In the particular circumstances of this case, did Woolworths have a reasonable expectation that the Council would inform it, if the Council decided to no longer deal exclusively with Woolworths and negotiate with a third party?

The Council argued that being "gazumped" was a well-known hazard in negotiations for purchase of land, that it had never stated to Woolworths that it was negotiating exclusively with it, and Woolworths had never enquired of the Council whether it was dealing with another party.

Hammerschlag J noted that the process of inviting Expressions of Interest entailed an initial selection of only one candidate for negotiation. The Council had informed Woolworths by letter that its offer had been accepted subject to conditions, which created an expectation on Woolworths' part that the Council would be negotiating only with the successful nominee. This was in circumstances where both parties realised that Woolworths would now spend significant time and money in order to realise the opportunity granted to it.

Furthermore, the evidence showed that the Council was well aware that Woolworths believed that it was negotiating exclusively with the Council, and that knowledge that this was not so would have been material to Woolworths.

Whilst the Council relied on the fact that one of the conditions of approval had been that negotiations would be complete by 30 June 2008, his Honour saw little significance in the fact that negotiations had in fact continued well beyond this date, as the basis of those negotiations had not changed.

It was also material that the Council admitted having given confidential information which Woolworths disclosed during the negotiations to Coles. Relevant Council officers were not called to give evidence or explain why the Council acted in the way that it did.

Hammerschlag J therefore found that the deliberate silence by the Council as to the fact that its negotiations with Woolworths had ceased to be exclusive, was in the circumstances misleading or deceptive or likely to mislead or deceive and a contravention of s 42(1) of the fair Trading Act 1987 (NSW).

2. Did Woolworths suffer any loss by the conduct complained of?

However, Hammerschlag J did not accept that Woolworths would have changed its position and made concessions to secure the contract, even if it had been made aware that the Council was no longer negotiating exclusively with it.

A number of factors led to this conclusion:

• During negotiations with the Council, representatives of Woolworths had repeatedly threatened to walk away on the basis that certain conditions were "deal breakers". Woolworths argued at trial that these threats were insincere at the time, but his Honour did not accept this;
• Woolworths' senior Development Manager had stated in an affidavit that had he known that the land was not going to be sold to Woolworths he would have followed an alternative strategy to build stores on other land in the area. This was put forward in support of Woolworths' original claim in contract, but was not consistent with the proposition that Woolworths would have conceded to the Council's demands in order to secure the contract at any cost;
• During negotiations, Woolworths had written a letter to the Council stating that it could not "afford to absorb a further $470,000 in developer contributions on the project". It was inconsistent of Woolworths to now argue that if it had known about Coles' involvement it would have dropped this objection, when there appeared to be an objective financial reason for it not to do so;
• There was other evidence to indicate that Woolworths was genuinely troubled by the Council's position on a number of negotiating points and would not necessarily have proceeded with the purchase even if it had known of Coles' involvement.

The onus lay on Woolworths to satisfy the court that it would have changed its position if it had known that the Council had begun to negotiate with Coles. It had not discharged this onus. Accordingly, its claim failed.

Implications

The case turns on its own facts, but is nevertheless a useful indicator of the way in which a court will view a situation that frequently arises during commercial negotiations.

The inviting of Expressions of Interest may not usually lead to contractual liability, but it is clear that section 42 of the Fair Trading Act 1987 (NSW) (and related legislation such as section 52 of the Trade Practices Act 1974 (Cth)) requires that parties to Expressions of Interest and tenders act fairly and reasonably towards each other.

The process of selecting an Expression of Interest is likely to carry an implication that negotiations thereafter are conducted on an exclusive basis between the two parties. Therefore, if the initiating party wishes to commence negotiating with a third party, it would be well advised to state the position clearly and unambiguously to its current negotiating partner.

1 Hammerschlag J

2 Woolworths joined Coles as a second defendant on the basis that it had been knowingly concerned in the Council's contravention. The Council counterclaimed against Woolworths for committing misleading or deceptive conduct during negotiations. Neither claim nor counterclaim succeeded.

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