A recent case heard by the Supreme Court of Appeal has highlighted the dangers of assuming exclusivity in commercial dealings and the use of certain words in your negotiations. In fact, if the findings in this case are anything to go by, telling the other party that a certain issue is a "deal breaker" could allow them to strike a deal with your competitor while you think you are still trying to reach an agreement!

Supermarket Wars

In 2007, Port Macquarie-Hastings Council invited Expressions of Interest for the purchase and development of land in the Council area to build a supermarket. This was the second time that the Council had tried to sell the land following a breakdown in the original negotiations with Coles and Woolworths.

In the second round of offers, the Council ultimately preferred the Woolworths offer and entered negotiations with Woolworths to purchase and develop the land in question. A series of discussions were held and various draft contracts were exchanged between Woolworths and the Council's legal representatives.

After a lengthy period, these negotiations reached a stale mate over contamination on the land and the parties could not agree on how to deal with this particular issue. Woolworths was sticking to its desired position of having the right to rescind if the cost of remediation was excessive, which the Council rejected, and informed the Council that the issue was a 'deal breaker'.

Without informing Woolworths, the Council entered into parallel negotiations with Coles to purchase and develop the land and ultimately exchanged contracts with Coles.

Were the Council's Actions Misleading?

Woolworths subsequently sued the Council and Coles claiming that the Council engaged in misleading and deceptive conduct, and that Coles was a party to that contravention of legislation. Woolworths claimed that it would have eventually agreed to terms with the Council and bought the land if it was aware of the negotiations with Coles, and as a result the company had suffered commercial loss.

The Supreme Court of NSW held that, despite the fact that there was no contractual or statutory liability that the Council deal with Woolworths exclusively, there was a reasonable expectation that the Council would inform Woolworths that the negotiations ceased to be exclusive, and that "the Council would not clandestinely conduct negotiations outside the framework of the process".

As a result, the Court found that not informing Woolworths amounted to misleading and deceptive conduct by the Council, and that it had acted outside the accepted commercial standards and norms contemplated by the law. Importantly however, it was found that Woolworths had failed to establish that it had suffered any economic loss or that Coles was a party to the Contravention. In fact, the continued use of the term 'deal breaker' by Woolworths during the impasse over the contamination issue was found to be sufficient evidence that Woolworths would not have proceeded to execute the contract.

No action was taken against Coles and damages were not awarded to Woolworths.

Woolworths lodged an Appeal against the decision of the Supreme Court, in an attempt to prove that it had suffered economic loss and that Coles was a party to the contravention of the law. The Court of Appeal agreed with the initial findings that Woolworths had failed to prove that it had suffered economic loss as a result of the Council's conduct, and that if it had known of the negotiations with Coles it would have taken an alternate position so the Appeal was dismissed.

The decision illustrates the importance of showing caution and restraint and in not 'jumping the gun' when dealing with protracted negotiations at a considerable cost to all parties.

How does this apply to your contract negotiations?

This case does highlight some important points to keep in mind:

  1. Be aware of the terminology used in negotiations, particularly when throwing the first stone and threatening to 'walk away' from negotiations as it may prove to be a 'deal breaker' when making a claim for damages;
  2. Circumstances can arise where a party holds a reasonable expectation that it is dealing with you exclusively. If the relationship is not expressed in writing to be exclusive, you may need to inform the proposed contracting party that you are also in negotiations with other parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.