When negotiating, a party may be entitled to know if the other party is simultaneously dealing with third parties in circumstances where the other party creates a reasonable expectation it will negotiate with only one party at a time.
However, a plaintiff’s claim may fail if it is unable to show, based on objective evidence and history of behaviour, that it would have acted differently had it known of the non-exclusive status of negotiations.
In Fabcot Pty Ltd v Port Macquarie-Hastings Council  NSWSC 7261, the court found that a municipal council’s deliberate failure to disclose parallel dealings amounted to misleading or deceptive conduct in breach of s42(1) of the Fair Trading Act 1987 (NSW) (Act) in circumstances where it had accepted an expression of interest (EOI) from the plaintiff, Woolworths, even though no exclusivity arrangement was in place.
However, Woolworths’ repeated use of the phrase ‘deal-breaker’ at the negotiation table meant it was unable to show it would have shifted its position had it known that negotiations were no longer exclusive.
Implications of the decision
This decision has significance for various industries including the IT industry, where customers often negotiate with a number of vendors. It demonstrates the importance of disclosing parallel negotiations in circumstances where a party would reasonably expect that negotiations will be exclusive, and which involve significant costs to both parties.
In particular, accepting a conditional offer from only one party following an invitation to submit an EOI is likely to implicitly suggest that negotiations thereafter will be conducted on an exclusive basis. The initiating parties should therefore take steps to reserve their positions and keep their options open to minimise exposure to ‘reasonable expectation’ claims of this kind.
The decision also serves as a warning that threats to walk away should be carefully considered as they may hinder a party’s ability to claim damages if the deal collapses.
In November 2007, a municipal council and development consent authority for the Port Macquarie-Hastings Shire (Council) for the second time publicly invited EOIs in purchasing and developing a supermarket development site.
Both Woolworths and Coles responded and in February 2008 the Council accepted a conditional offer from Woolworths. While various drafts of the contract for sale were exchanged, unresolved issues included the Council’s willingness to provide a contamination indemnity and insistence on the payment of developer charges for connection of essential services such as water and sewerage. The Council refused to provide the indemnity but agreed to be liable for removing any contamination found up to a limit of $500,000. Woolworths accepted this position provided it was able to undertake further due diligence between exchange and settlement and was given a right to rescind the contract if the cost of removal was excessive. The Council, however, refused to accept these terms.
In mid-2009, while it was negotiating with Woolworths, the Council also started negotiating with Coles. The Council deliberately refrained from telling Woolworths. Negotiations between Woolworths and the Council stalled, and on 1 July 2009 the Council sold the site to Coles.
Woolworths commenced proceedings against the Council and Coles, claiming the Council had engaged in misleading or deceptive conduct and that Woolworths had suffered loss as a result. Woolworths argued that had the Council disclosed to Woolworths that it was negotiating with a major competitor, Woolworths would have agreed to proceed on the terms required by the Council to secure the site against its rival.
At issue was:
- whether the Council’s deliberate failure to inform Woolworths that the Council was not, or was no longer, negotiating exclusively with Woolworths was misleading or deceptive, or likely to mislead or deceive, in breach of s42(1) of the Act
- if so, whether Coles was ‘knowingly concerned’ in the contravention
- whether Woolworths suffered any loss by the alleged contravention, and if so the quantum of loss, and
- the Council’s cross-claim against Woolworths (see below).
Was the Council’s conduct misleading or deceptive?
The Council argued that being ‘gazumped’ was a well-known hazard in negotiations for purchase of land. Further, 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.
But Hammerschlag J held that the deliberate silence over the fact that negotiations with Woolworths were not exclusive was misleading or deceptive or likely to mislead or deceive. His Honour found that the circumstances were such as to give Woolworths a clear and reasonable expectation that the Council would inform it (if it were the case) that its negotiations with Woolworths had ceased to be exclusive. Any reasonable person in Woolworths’ position would have had such an expectation because:
- the EOI process entailed an initial selection of only one candidate for negotiation
- the Council had approved Woolworths’ bid (subject to further negotiations on several matters)
- Woolworths was to spend significant time and money in seeking to realise the opportunity, and the Council knew that Woolworths was under the misapprehension that the Council was negotiating with it exclusively, and that disclosure of this fact would have been material to Woolworths.
Woolworths had no binding exclusivity arrangement from the Council and there was no statutory inhibition on the Council dealing with Coles. But this did not displace the reasonable expectation that the Council would tell Woolworths that negotiations were no longer exclusive. Hammerschlag J said that the Act imposed a norm for conduct in trade or commerce and the Council deliberately fell short of that norm.
Although it was unnecessary to do so, Hammerschlag J found that Woolworths had failed to establish that Coles was knowingly concerned in the contravention. While Coles knew that the Council had been negotiating with Woolworths, it was told very little about the state of these negotiations. Even if Coles knew or believed at some point that the Council was negotiating exclusively with Woolworths, Coles did not know that the Council had not disclosed to Woolworths that its position was no longer exclusive.
Did Woolworths suffer loss?
To establish it suffered loss by the Council’s conduct Woolworths had to show, on the balance of probabilities, first, that it would have agreed to proceed on the Council’s terms had it known of the non-exclusive status of the dealings and, secondly, that the Council would have sold the site to Woolworths.
Despite Woolworths’ efforts to convince the court otherwise, Hammerschlag J found that even if it had been told about the Council’s dealings with Coles, Woolworths still would not have bought the site because the contamination indemnity was a ‘deal-breaker’ on which neither the Council nor Woolworths was prepared to concede. His Honour did not accept Woolworths’ claim that its threats to walk away over the issue were insincere.
Woolworths’ contention that it would have shifted its stance at any cost conflicted with earlier evidence put forward in support of Woolworths’ original claim in contract that had it known the Council would not sell the site to Woolworths, it would, as soon as possible, have actioned an alternative strategy to build stores on other land in that area.
Also material was that 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’. This served as evidence of another reason for Woolworths not proceeding with the transaction, regardless of Coles’ involvement.
Hammerschlag J considered the amount of damages he would have assessed had Woolworths suffered loss by the Council’s conduct.
Having not acquired the site, Woolworths proceeded with the refurbishment of the Food for Less at Plaza Centre it operated in Port Macquarie and the construction of a freestanding Dan Murphy’s outlet next door. Damages were therefore framed as the difference between the financial position Woolworths would have been in had the development proceeded and the position it was in, that is, without the development, but with the aforementioned refurbishment. Based on expert evidence, Hammerschlag J held that Woolworths would have been entitled to a net present value of 5.22%, being the difference between the present value of cash inflows and the present value of cash outflows.
The Council’s cross-claim
The Council cross-claimed against Woolworths, alleging that Woolworths had engaged in conduct which was misleading by holding out that it would not proceed with the purchase of the site unless certain conditions were met, when its true position was otherwise. The Council argued that if Woolworths suffered loss by its conduct, it correspondingly suffered loss by Woolworths’ conduct and claimed indemnity.
Hammerschlag J held that the Council was not misled by anything said or done by Woolworths, and, if it was, it had suffered no loss.