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Arck put to the acid test - CA finds binding legal contract

15 January 2016

One of the essential elements in the formation of a binding legal contract is the existence of an offer by one party which has been accepted the other party. More often than not the process of contract formation is not so simple. The Courts will therefore infer the existence of a binding legal contract where the parties have engaged in a course of dealings which when “viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain." This is referred to in contract law as the “acid test”. Our Court of Appeal applied the acid test in a recent case and found a binding legal contract (Savvy Vineyards 3784 Ltd v Arck Ltd [2015] NZCA 534).

The Grape Supply Agreements

Savvy was in the business of managing and purchasing grapes from vineyards in the Marlborough area and on-selling them for the production of wine. In order to secure the supply of grapes Savvy set up vineyards, sold them to investors and entered long-term agreements with those investors to manage the vineyards and buy the grapes.

In 2007 Arck purchased two blocks from Savvy and entered vineyard management and grape supply agreements. The agreements were for an initial term of 10 years. During the 10 year term Savvy had the option, exercisable by notice in writing at specified times, to buy part or all of the harvest for a minimum of three years. Savvy did not serve notices on Arck exercising the options as required by the agreements. However, Savvy did purchase the grapes from the first harvest in 2010 and again in 2011. At Savvy’s request, Arck invoiced Savvy on the basis of the target cropping levels in the agreements. Savvy paid those invoices. The crop harvests Savvy received exceeded the target cropping levels.

In early 2012 Arck became concerned Savvy was making significant profits from grapes harvested in excess of the agreed target cropping levels. Arck was also concerned Savvy had harvested grapes in 2009 without disclosing the harvest or paying for it. Arck cancelled the agreements and refused to supply the 2012 and subsequent vintages.

The Court of Appeal’s decision

In the Court of Appeal the court was asked to hold that there were binding contracts in place through the parties’ communications and dealings despite the lack of notice exercising the options. The Court of Appeal agreed. It found that, viewed as a whole and objectively from the point of view of both sides, a contract was formed for the supply of grapes for the entire 10 year term. The evidence showed that Savvy and Arck intended the grape supply to extend beyond that initial three year term. It was only after the dispute arose and Arck took legal advice that it argued no binding contract existed for the supply of the 2012 and subsequent harvests.

The Court also reached the same conclusion by an offer and acceptance analysis – Savvy, through its correspondence and actions, indicated its intention to purchase the grapes for the duration of the initial 10 year term of the agreements. Arck accepted that offer.

Understand your contract and act consistently with it

It is common for parties to a contract to act without considering the actual terms of document they have signed - until a dispute arises. When the written document is examined, the parties can find their bargain is not the same as they believed it to be. A layperson might say that Arck looked at the “fine print” to see if it could “get out of the contract”. Fortunately for Savvy, the Court found there was a binding contract even though Savvy had not followed its strict wording. In any contract situation you can reduce the likelihood of the expense and stress of court proceedings if you understand the terms of your written contract before you sign it, you comply with its terms after you have signed it and you take legal advice if you are not sure what it means.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.