When can we agree to agree? High Court weighs in on waste dispute

Traditionally, the courts have found agreements to enter into future agreements to be unenforceable. However, in modern times, courts have taken a more pragmatic and process focused approach. We sometimes see parties say that that they will "take all reasonable steps to enter into" another, separate agreement. Will this be a binding contractual term? What happens when that other agreement does not eventuate? The High Court's recent judgment in Remediation (NZ) Limited v Enviro (NZ) Limited [2024] NZHC 860 squarely considers these questions.

 

What happened?

Background

Tauranga City Council (TCC) and Western Bay of Plenty District Council had jointly invited submissions for tender for waste management services. Enviro (NZ) Limited, its subsidiary Enviro Waste Services Limited (together, Enviro), and Remediation (NZ) Limited (Revital) collaborated on a tender submission.

This arrangement was reflected in a letter of intent (LOI) signed between the two parties expressed to be legally binding. The LOI stated 'the parties must take all reasonable steps to enter into the Service Agreement within 6 months from the Award Date'. The parties then collaborated on a tender submission based off the LOI, which contemplated that Enviro would be the head contractor, and Revital, the subcontractor, for the processing of TCC's food waste and green waste. Their tender was successful. Enviro duly entered into an agreement for the provision of specified services with TCC. But Enviro and Revital failed to conclude the 'Service Agreement' between themselves pursuant to the LOI.

Revital sued Enviro. It alleged Enviro had failed to take all reasonable steps to enter into the Service Agreement after becoming the preferred tenderer. Revital argued this was a breach of contract¹, because the term in the LOI was enforceable. In the High Court, his Honour Justice Gault agreed.

Had Enviro and Revital agreed to anything?

The starting point of Gault J's analysis was whether the obligation to 'take all reasonable steps' was, in fact, binding. Enviro argued that the clause was an unenforceable agreement to agree. Revital argued that it was indeed a binding term.

Gault J agreed with Revital.

Another clause in the LOI was critical. It expressly provided that the LOI was to be a 'binding contractual agreement'. The parties had expressed an intention to be bound contractually – and the Court had to do its best to give effect to this intention.

The LOI also contained enough certainty to be an enforceable contract. It was not, as Enviro argued, an agreement to agree in the abstract. There was an end in view, and it was sufficiently certain from the terms of the LOI. Accordingly, there was sufficient certainty in the LOI to hold that it was indeed a binding agreement between the parties.

 

Reasonable steps — what did the Judge say?

In finding that Enviro had failed to take 'all reasonable steps' to enter into the Service Agreement, Gault J focussed on the process in which Enviro concluded its head contract with TCC, and how it engaged with Revital.

What does 'all reasonable steps' mean?

There was no dispute as to the meaning of 'all reasonable steps'. The Court emphasised the following factors went to assessing whether 'all reasonable steps' had been taken:

• Reasonableness is assessed objectively. It is informed by the commercial context, and the terms and nature of the contract;
• All reasonable paths or actions are to be exhausted;
• Parties are not required to go beyond the bounds of reason to arrive at an agreement; and
• An agreement does not need to eventuate out of negotiations.

Did a breach occur?

In the context of this case, the Court said that taking 'all reasonable steps' required Enviro to:

• Promptly inform Revital of the selection of Enviro as preferred tenderer for the head contract;
• Seek to incorporate the commercial framework of the LOI into the new Service Agreement with Revital (given the six-month time period to negotiate that agreement);
• Be transparent with Revital as soon as reasonably possible about any difficulties in achieving that commercial framework (in light of negotiations with the Councils for the head contract);
• Consult with Revital. The Court said that Revital may have been able to assist reaching an agreement with the Councils that was more consistent with the LOI and the tender submission. Or, at least Revital would have had more time to consider its commercial position.
• Inform itself as to Revital's commercial needs, particularly to address the terms in the LOI (given Enviro intended to have "back-to-back" contracts).

The Court considered the facts and ultimately found Enviro failed to take all these reasonable steps. This was a breach of the LOI. Some legal debate ensued about whether the breach caused loss to Revital but ultimately the Court found in favour of Revital.

 

Key takeaways and lessons

From our perspective, key takeaways from this case are:

• When entering into agreements, always be 100% clear whether commitments are legally binding contractual terms or simply non-binding expressions of intent.
• In this case, the parties made it clear in the LOI that it was to be legally binding. However, this may have not been well understood by the parties. As the Court noted, 'an explanation for Enviro's approach was the erroneous perception of its management at the time that Revital was only a potential subcontractor and the LOI was merely a non-binding agreement to agree'.
• Always assume a legally binding obligation to use 'reasonable endeavours' or take 'reasonable steps' to do something, including to enter into another agreement, has 'legal teeth'. The courts will likely hold parties to account if they are viewed as not taking those steps.
• Finally, when jointly tendering for projects, the lead bidder should carefully consider the process for engaging with partners/subcontractors on head contractual terms and how to ensure these are, to the extent possible 'back to back'.
• If a process is agreed with partners/subcontractors, particularly in a document that is expressed to be legally binding, each party will need to follow that process. Genuine engagement will likely be required (even if this is inconvenient due to a focus on head contract terms).

Members of our team are very happy to help navigate these issues, which as demonstrated by the case, can be fraught!

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¹Revital also argued that in failing to conclude the Service Agreement, Enviro was in breach of fiduciary duty and also breached the Fair Trading Act 1986 for misrepresentation. These claims were rejected by the Court.