6.11.2020

Is a Contract a Contract (if a Court says it’s not)?

Savvy Vineyards 4334 Ltd v Weta Estate Ltd [2020] NZSC 115

The Supreme Court had to grapple with this question in its latest judgment in long-running litigation brought by Savvy to enforce contracts for the supply of grapes from Weta’s vineyards.[1] 

The lower courts held a declaration that the contracts were terminated was provisional, and the parties had to perform the contracts or face the consequences of not doing so if the order was reversed on appeal. 

The Supreme Court disagreed.  Parties are entitled to act in accordance with the law as it is stated in a judgment, for so long as that judgment is in force.

Options to purchase grapes

The contracts were part of an investment package offered by Goldridge Estate Ltd for the acquisition and conversion of land suitable for viticulture in the upper Wairau Valley in Marlborough.  Goldridge established and managed the vineyards and had options to purchase grapes from each of the vineyard blocks.

The options were effective on the commencement date before the first planned harvest, and were repeated on each third anniversary of that date.  Goldridge had to give notice of exercise before the effective date.  If an option was exercised for a block, Goldridge would purchase grapes from that block for the remaining term of the contracts (up to 50 years.)  If Goldridge did not exercise an option for two consecutive periods of three years, the option lapsed.

The sequence of events

The commencement date was 1 May 2009.  Goldridge did not exercise any of its options.  It novated its management agreements and the supply contracts to Savvy, as part of a business restructure.  In February 2010, Weta made its first attempt to terminate the contracts, on the grounds that the options had not been exercised.  Savvy obtained an interim injunction, observing it had six years to exercise the options.  Weta accepted it could not terminate the supply contracts, but continued to assert a right to terminate Savvy’s management agreements.  

In December 2010, Weta issued fresh notices of termination.  It claimed the contracts had been assigned, rather than novated, to Savvy.  Weta said it was entitled to terminate as Goldridge, the contracting party, was in liquidation. 

Savvy rejected the notices and the parties pursued completing declarations to determine their validity.

In March 2012, the High Court held that the contracts had been novated to Savvy, and the termination notices were invalid.  Weta appealed.  As the appeal could not be determined before the next effective date for the options (the third anniversary on 1 May 2012), the parties agreed a 12-month extension.  If the options were exercised by 1 May 2013, Savvy would start purchasing grapes from the 2014 vintage.

In April 2013 the Court of Appeal allowed the appeal, and declared that the December 2010 termination notices were valid.  Savvy obtained leave to appeal to the Supreme Court, which in September 2014 set aside the Court of Appeal’s judgment and restored the declarations made in the High Court.[2] 

Savvy then gave notice it was exercising all options from the next effective date (the sixth anniversary on 1 May 2015).  Weta rejected the notices, claiming – for the first time – that the options lapsed if not exercised by the third anniversary, rather than the sixth.  Savvy issued the present proceeding.

Duration of the options

There were two issues before the Supreme Court; first, the correct interpretation of the option clauses in the supply contracts and second, the effect of the earlier Court of Appeal and Supreme Court judgments dealing with termination of the contracts on the parties’ legal position.  

The Supreme Court agreed with the High Court that on a plain reading of the option clauses, Savvy had up to six years to exercise the options.  It followed that Savvy had validly exercised the options effective on 1 May 2015, and Savvy was entitled to purchase grapes starting from the 2016 vintage.[3] 

A claim for damages?

The central issue raised by the second question before the Court was whether Weta was liable for damages for its repudiation of the contracts in December 2010.  The High Court had made a factual finding that Savvy would have exercised all of its options prior to 1 May 2013, had the appeal not gone against it.  Savvy said that it was prevented from exercising the options by the April 2013 declaration that the contracts had been terminated.  The declaration was made at Weta’s instigation, and Savvy sought damages for its lost opportunity to purchase grapes starting from the 2014 vintage.

Weta argued there was nothing to prevent Savvy from giving notice exercising the options.  As the Supreme Court’s judgment of September 2014 had retrospective effect, the contracts were in force all along and effective notice could have been given.  The High Court and Court of Appeal agreed: they held that Savvy did not serve a notice due to its own assessment of its legal position, and not due to any action taken by Weta.  

The Supreme Court found that Savvy’s assessment of its legal position was correct.  While the April 2013 declaration remained in effect, both parties were entitled to act as if the contracts were not on foot.  Savvy could not give a notice that resulted in an enforceable entitlement to the grapes, and Weta was free to enjoy the fruits of its judgment.  Savvy was accordingly prevented by the declaration from exercising the options.

The Supreme Court noted that actions taken in reliance on a judgment that is later overturned will not constitute a breach of legal duty, giving rise to a new cause of action.  However, a plaintiff can still claim damages for losses that flow from the original wrongful act.  Weta’s repudiation prompted the Court of Appeal’s declaration and caused Savvy to lose its opportunity to purchase grapes from the 2014 vintage.  Weta could not complain Savvy did not exercise the options when Weta was itself responsible for obtaining the declaration which prevented Savvy from doing so.[4]

Power to amend

The Supreme Court had invited the parties to make further submissions on whether the grant of leave should be amended to address the legal effect of Weta’s failure to raise its view that the options lapsed on 1 May 2013 in the original proceedings.  A second hearing would be required, and the Court decided against amending the grant in circumstances where determination of the additional issues would impose further costs without altering the overall outcome.   It rejected Weta’s argument the Court did not have a power to amend the approved grounds if leave to appeal a particular issue had previously been declined.

Result

Weta was liable to Savvy on both causes of action and the proceeding was remitted to the High Court for an inquiry into damages. 

Although the circumstances of this case were unusual, the Supreme Court’s judgment provides assurance that parties bound by a declaration may act in reliance on it, without a risk that their actions will become unlawful, or be imbued with a legal effect they did not previously have, if the declaration is reversed on appeal.  This principle does not shield a litigant from damages that flow from the original cause of action.

Hesketh Henry acted for Savvy in these proceedings.

[1] Savvy Vineyards 4332 Ltd had agreements with Weta Estate Ltd, and Savvy Vineyards 3552 Ltd had agreements with Tirosh Estate Ltd (formerly Kakara Estate Ltd).  The Supreme Court used the terms Savvy and Weta for simplicity, and we will do likewise. 

[2] Savvy Vineyards 3552 Ltd v Kakara Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281

[3] The Court of Appeal reached a different view by undertaking a comparison of the text of the first and final drafts of the option clauses.  The Supreme Court did not make a finding on the relevance of the parties’ pre-contractual negotiations, which was excluded from the grant of leave.  It is due to revisit this issue in Bathurst Resources Ltd v L&M Coal Holdings Ltd SC29/2020.

[4] William Young J commented that it was open to Savvy to accept Weta’s repudiation of the option arising on 1 May 2013, while keeping the contracts alive for the next option.  In that event, Savvy would be entitled to damages for the repudiatory breach.

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