The contract negotiation process tends by its nature to be adversarial. You negotiate to get the best outcome you can. The other side should look after itself, do its homework and make its own inquiries. If it doesn’t, then that’s entirely its problem, isn’t it? Well, not always. Several Australian cases show that if you have material information which the other side ‘reasonably expects’ would be disclosed, and you fail to do so, then you may have engaged in misleading and deceptive conduct. In practice, it can be very difficult to discern when the courts will recognise a reasonable expectation of this type.
A recent decision of the Supreme Court of New South Wales provides a useful illustration of the factors that are taken into account.
Who needs to know?
Anyone who is involved in negotiating contracts, including procurement contracts and sale agreements in merger & acquisition deals.
Background
The decision of the Supreme Court of New South Wales in Woollahra Municipal Council v Secure Parking Pty Ltd [2015] NSWSC 257 involved a tender by the Council for the management of its car parks in Double Bay (including at Kiaora Lane) and Bondi Junction.
The management contracts were for 7 year terms except for Kiaora Lane which was only offered on a monthly basis pending redevelopment of that site. The Council indicated that once the Kiaora Lane site was redeveloped its management would be put out to a separate tender.
Secure was the successful tenderer. It offered significantly higher guaranteed income for the Council than the other bidder. In fact, the Council was concerned that Secure may have miscalculated its bid. On two separate occasions the Council raised this with Secure and on each occasion Secure said it stood by its figures.
The proposed development of Kiaora Lane was significant. It involved a new or expanded supermarket plus an increase in the number of parking bays from 110 to about 500. It seems that this would likely reduce the patronage, and therefore the revenue, at the other Bondi car parks (particularly Cross Street).
Secure argued that the Council engaged in misleading and deceptive conduct by not adequately disclosing details about the redevelopment. It argued this amounted to a breach of section 18 of the Australian Consumer Law (being the section which prohibits misleading and deceptive conduct) and that the management contracts should therefore be set aside. It argued that it had a ‘reasonable expectation’ that the Council would make detailed disclosure about the redevelopment (particularly the significant increase in the number of car parks) so that it could submit an appropriately informed bid.
The Tender Documents
The tender documents made it clear that the Kiaora Lane site was going to be redeveloped. This was the main reason why the tender only included a monthly contract for that site pending its redevelopment whilst all the other car parks had 7 year contracts. However, the tender documents did not contain significant detail about the redevelopment and, in particular, no disclosure was at anytime made to Secure about the proposed increase in the number of car parks. This may have been because no firm decision about the redevelopment had been made at that time. Moreover, no development application had even been submitted to the Council, albeit some details (including car park spaces) were publicly available on the Council’s website (see below).
The tender documents expressly stated that tenderers would be deemed to have “examined all information relevant to the risk, contingencies and other circumstances having an effect on their Tender and which may be obtained by making reasonable inquiries”. Similar statements were included to the effect that each tenderer had satisfied itself as to the “correctness and sufficiency” of its bid. The documents also stated that tenderers must rely on their own investigations and inquiries, and that the Council accepted no responsibility for any ambiguity, discrepancy or error in the invitation to tender.
You should have told me!
After the tender had been awarded to Secure, there were meetings between the Council and Secure to finalise the terms of the management contracts. Ultimately, Secure refused to sign the management contracts, however, it was during one of these meetings that a Council representative referred to the Kiaora development and mentioned how it was proposed to build a car park for in excess of 400 cars. This revelation caught Secure by surprise. The Court held that this was the first occasion on which Secure became aware of this information.
Both before and during the tender process, the Council published numerous press releases and other documents on its website about the redevelopment, including a proposal to construct a public car park with up to 500 spaces. The redevelopment also received significant media coverage.
Several staff from Secure searched the Council’s website (including the tenders page and the page containing major development applications), but apparently none of them found information about the redevelopment. Even so, the Court said the information was “not difficult to find” via the “Building and Development” page and the “News” page. It seems that Secure did not ask the Council for any information about the redevelopment.
It is also relevant to note that Secure’s bid included a SWOT analysis. One of the ‘opportunities’ was “no new car parks being developed in the area”. This is discussed further below.
Key Legal Principles
Misleading and deceptive conduct usually involves a positive act such as a misrepresentation. However, silence (including silence by not disclosing information) can amount to misleading and deceptive conduct. There does not need to be a deliberate decision to stay quiet or withhold information; an innocent oversight can still be misleading. What matters is the overall impression. As stated by the High court in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 25 per French CJ:
Characterisation [of the conduct that is misleading or deceptive or likely to mislead or deceive] is a task that generally requires consideration of whether the impugned conduct viewed as a whole has a tendency to lead a person into error.
Other cases confirm that for silence to be misleading, the person who is said to be misled must have had a ‘reasonable expectation’ that if the relevant matter existed it would be disclosed. This general proposition is easy to understand but is notoriously difficult to apply in practice. The Courts have given no hard and fast rules to apply. It is assessed very much on a case by case basis.
Key Factors
Overall, the Court held that Secure did not have a reasonable expectation to be directly told about the 500 space redevelopment. The key factors were:
- the disclaimers in the tender documents, particularly the acknowledgements about making your own inquiries;
- it was not reasonable for Secure to expect the Council to disclose all information relevant to competitive threats or the economic viability of the car parks;
- the Council had in fact made information available on its website and this was not difficult to find;
- Secure could have asked questions about the redevelopment but it did not do so. There was no basis for Secure to have assumed that the redeveloped car park would have the same number of spaces. The Court also thought that if the number of car spaces was material to Secure, and it had not been able to ascertain that information from its own inquiries, it should have asked the Council for the information; and
- the impact of the redevelopment on the other car parks was unknown. It appears that the Council actually thought it would have a minimal impact. The Court said this was “not an unreasonable view”.
There were factors going the other way. As mentioned above, the Council was concerned that Secure may have miscalculated its bid. The SWOT analysis in Secure’s bid also included the “no new car parks” assumption.
The Court stated as follows:
As to disclosure in response to Secure’s tender, if it was apparent to the Council that Secure had submitted its tender on the basis of a false assumption, then Secure could have had a reasonable expectation that Council would correct that assumption.
On the facts, the Court held that the Council did not appreciate that Secure was labouring under a misunderstanding at the time the Council reviewed Secure’s bid. The Court accepted that the Council paid little attention to the SWOT analysis because it was largely of significance only to Secure, rather than the Council. Moreover, the meaning of the ‘no new car parks’ statement was unclear. Secure knew that Kiaora Lane was being redeveloped, so in this context the ‘no new car parks’ statement was viewed by the Court as a reference to entirely new car parks rather than the redevelopment of existing ones.
Consequently, I do not think that it was obvious from what Secure said that it was labouring under a misapprehension concerning the proposed number of bays in the redeveloped car park. It follows that I do not think it could be said that Secure was misled by the Council’s failure to say something in response to Secure’s tender.
Practical Points to Take Away
- If you are a tenderer or bidder and you’ve been unable to satisfy yourself based on your own inquiries, you should ask the other party to disclose the information you require, rather than simply assume that the information will be disclosed. Take steps to protect your own interests. The old phrase “buyer beware” still applies.
- Conversely, if you are running a tender or conducting a sale process, and it becomes apparent to you that a participant is labouring under a material misapprehension, the onus may be on you to disclose information so as to prevent the participant being led into error. If asked for information by a participant, give complete and accurate answers and reiterate the need for participants to make their own inquiries. Be especially careful with evasive answers, half-truths or partial disclosures, as these have a greater risk of being misleading.
- Make sure your tender or sale process documents contain acknowledgements and disclaimers which encourage participants to make and rely on their own inquiries. Consider including express wording to address when (if ever) it is reasonable for a participant to expect disclosure.
- If you are running a tender or conducting a sale process, make sure you do your own homework and make appropriate disclosures of material information, particularly information which is not readily available from other sources. In this case, the Council made disclosure via its website. Ideally, the disclosure would be provided or made available directly to the participants (such as via a deal specific data room or portal), but as this case demonstrates, general disclosures on a website can sometimes be sufficient.