When you're negotiating with a seller, are you entitled to be told if the seller's talking to other potential buyers?
According to the NSW Supreme Court, in some circumstances, you do have such a right. A vendor of land who was negotiating with a potential buyer was recently held to have misled the buyer by not revealing that it was simultaneously in negotiations with a third party.
This doesn't mean that sellers are now required to put all their cards on the table. What sank the seller in this case was the way it had gone about the sale process. Its actions had created a reasonable expectation that it would only negotiate with one buyer at a time.
The take-home lesson, therefore, is that this situation may be avoided if the seller conducts itself in such a way that no such reasonable expectation arises.
Fabcot Pty Ltd v Port Macquarie-Hastings Council  NSWSC 726 involved a long-running process for the sale of a block of land by the Council.
In late 2005, the Council ran an "Expression of Interest" (EOI) process and received interest from Coles and Woolworths. The Council shortlisted both companies, and then approved Woolworths' proposal. Subsequent negotiations between the Council and Woolworths eventually stalled, and Woolworths withdrew. The Council then went back to Coles and gave it an exclusive negotiation period, but still no sale contract eventuated.
In late 2007 the Council decided to run another EOI process. Coles and Woolworths again expressed their interest. In early 2008, the Council shortlisted Woolworths. Woolworths apparently sought an exclusivity arrangement, but this was declined by the Council, even though at a practical level the parties were acting on an exclusive basis.
The sale to Woolworths seemed to be progressing well. In February 2008, the Council informed Woolworths that it had approved Woolworths' proposal, although the details needed to be finalised and contracts prepared. In early 2009, the contract negotiations were drawing to a close but one significant stumbling block remained: Woolworths wanted an indemnity in respect of possible contamination on the site.
In April 2009 the Council decided to get in touch with Coles to see if it was still interested in the site. This was the Council's self-described "back-up plan". As it turned out, Coles was very interested in the site. The Council originally planned to tell Woolworths that it had restarted communications with Coles. Usually, informing a bidder that there are other interested parties is one of the best ways to reintroduce some competitive tension. However, for reasons unknown, the Council deliberately refrained from telling Woolworths.
As negotiations with Woolworths about the contamination indemnity were coming to a head, the Council was busy behind the scenes finalising its deal with Coles. Coles moved quickly to take up the opportunity. Whilst the Coles' bid contained provisions regarding site contamination, these were slightly more favourable to the Council than those insisted upon by Woolworths. Contracts with Coles were prepared and then signed on 1 July 2009. In short, Woolworths had been gazumped.
When it found out about the sale to Coles, Woolworths sued the Council. It alleged that the Council's non-disclosure of its behind-the-scenes negotiations with Coles was misleading and deceptive. More specifically, Woolworths alleged that it had a "reasonable expectation" that it would be told if its negotiations with the Council were not, or had ceased to be, exclusive.
The Court agreed with Woolworths. It thought the following factors were key to giving rise to the "reasonable expectation" in this instance:
the EOI process involved the selection of one and only one bidder for negotiation (although. there was actually nothing in the EOI documentation which indicated that the Council would deal with only one party);
the Council had approved Woolworths' bid (although that approval was subject to further negotiation in relation to several matters);
after being short-listed, a potential buyer still had to expend considerable time and money to realise the opportunity; and
the Council's starting a new EOI process when the negotiations stalled after the first EOI process indicated that Council would only involve other interested parties if a new EOI process was undertaken.
(Although not raised in the case, it is possible that the identity of the vendor was also a factor in recognising a reasonable expectation in this instance.)
The Court specifically held that the lack of a contractually binding exclusivity arrangement did not "displace the reasonable expectation that the Council would not clandestinely conduct negotiations outside the framework of the process". Overall, the Court concluded that the Council's conduct fell "well short of commercial fair dealing" and "well short of the standards which a commercial party dealing [with the Council] was entitled to expect".
Unfortunately for Woolworths, the Court held that, even if it had been told about the Council's parallel negotiations with Coles, Woolworths still would not have bought the site because the contamination indemnity was a deal-breaker on which neither the Council or Woolworths were prepared to concede. The Court reached this conclusion even though at the trial Woolworths claimed that it would have conceded on the indemnity if it had known that the Council was about to sell to Coles.
The case generates a clear liability risk if a vendor fails to tell its shortlisted bidder that the vendor is going to restart negotiations with other bidders. The case is particularly significant because it is the first case to recognise a "reasonable expectation" regarding the disclosure of what is essentially the vendor's strategic planning, rather than the disclosure of information regarding the actual asset proposed to be sold.
Although every case will depend on its own special facts (including the identity of the vendor), vendors should consider some steps to keep their options open and thus minimise exposure to "reasonable expectation" claims of the type made by Woolworths. For instance, a vendor should not act in a way to implicitly suggest exclusivity. Rather, the vendor should reserve its position and keep its options open. Well-drafted sale process provisions in the sale process documents may also assist, by expressly stating what the expectations of the parties are.