One basic principle of contract law is that terms must be certain. Certainty, however, tends to be a slippery beast and is rarely ever achieved in any walk of life. The legal principle that we review in this arcle can more accurately be summarised as requiring contractual terms to be sufficiently certain, and not too vague or too ambiguous, to be legally enforceable.
As we will see, on balance the courts have applied English law so By the second half of the 20th century, English law had openly as to uphold contracts. They are slow to conclude that agreements between commercial parties, who plainly intended to be bound and were ready to incur costs in performing their bargain, are too uncertain to be enforceable. The cases show that it is much better to take the time to spell things out in writing at the outset, otherwise the law may fill in the gaps with potentially undesirable results for one (or the other) party. That is a lesson that bears repeating.
The origins of the principle
The origins of the principle can be found in the reluctance of English law to uphold ‘agreements to agree’. The decision in May and Butcher v The King [1934] 2 KB 17 provides a neat illustration of this. The parties had arranged to sell tentage at prices to be agreed, and to be delivered at times also to be agreed. The court found that, perhaps unsurprisingly, the parties had failed to seal their bargain with a legally binding contract.
English law does, however, recognise that parties do not always record their agreement perfectly. It will seek to uphold a contract wherever this is possible. Hillas v Arcos 1932 147 LT 503, confirmed that:
“. even if the construction of the words used may be difficult, that is not a reason for holding them too ambiguous or uncertain to be enforced if the fair meaning of the parties can be extracted.”
The case itself concerned an agreement for the sale of timber over two years, concisely stated as being for:
“22,000 standards softwood goods of fair specification over the season 1930", with an opportunity "of entering into a contract with sellers for the purchase of 100,000 standards for delivery during 1931.”
The parties completed a sale during 1930, but fell out in the following year. The High Court found that their agreement for 1931 was in fact enforceable, even though it had been expressed in skeletal terms. The goods to be sold were to be of fair specification (just like the previous year), something that a court would be able to ascertain with the help of expert evidence. The arrangement for 1931 was characterised as an option, which could be exercised immediately. As such, it was not a future bargain, or an agreement to agree. The price, in the absence of agreement, would be a reasonable one. That is, of course, also the position today under the Sale of Goods Act 1979 (Section 8), or the Supply of Goods and Services Act 1982 (Section 15(1)), depending on whether the contract is for goods or services.
The importance of reasonableness and third party determination
By the second half of the 20th century, English law had openly accepted that its role was to assist parties, where the contractual wording that they managed to agree clearly showed that they wanted to be bound. In 1967, Lord Denning considered a contract for the sale of chickens over a five year term. The number of chickens had been agreed for the first year, but was ‘to be agreed’ for the other four years. The contract contained an arbitration clause. It was binding on the parties, because in the absence of agreement, the arbitrator could always decide how many chickens should reasonably be supplied in any given year (F & G Sykes (Wessex) Ltd v. Fine Fare Ltd [1967] 1 Lloyd's Rep 53). Lord Denning held that:
“In a commercial agreement, the further the parties have gone on with their contract, the more ready are the Courts to imply any reasonable term so as to give effect to their intentions. When much has been done, the Courts will do their best not to destroy the bargain. When nothing has been done, it is easier to say that there is no agreement between the parties because the essential terms have not been agreed. But when an agreement has been acted upon and the parties, as here, have been put to great expense in implementing it, we ought to imply all reasonable terms so as to avoid any uncertainties. In this case there is less difficulty than in others because there is an arbitration clause which, liberally construed, is sufficient to resolve any uncertainties which the parties have left …”
The reference to the role of the arbitrator, as someone who can fill in the gaps left by the parties, reflects the legal maxim ‘id certum est quod certum reddi potest’, or ‘whatever can be made certain, is certain’, if only by an independent third party deciding the issue.
The operation of that rule is illustrated by Sudbrook Trading Estate Ltd v Eggleton [1983] AC 444. In that case, the contract provided for an option to purchase leases at a price to be agreed on by two valuers, one each to be appointed by the purchasers and sellers respectively. The sellers refused to appoint their valuer, so the contractual machinery broke down. The Court of Appeal concluded that this was merely an agreement to agree. The House of Lords disagreed. Their Lordships overruled an earlier authority that had purported to prevent the courts from substituting themselves for the parties’ agreed method of valuation, and construed the agreement as a binding option to purchase the leases for a fair and reasonable price. That price was something the court could decide if the contractual process came to a dead end.
The modern test for certainty of terms
Some 80 years after May and Butcher and Hillas v Arcos, the Court of Appeal considered the issue of certainty again in two appeals, decided one year apart. These judgments set out what is considered to be the modern test of certainty of terms under English law. One formulation of the test has no less than ten constituent parts. That complexity no doubt reflects the fact that commercial contracts have become more sophisticated, including those accused of being ‘too uncertain’.
In Mamidoil‐Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD [2001] EWCA Civ 406, the Court of Appeal reviewed the authorities and distilled a (non‐exhaustive) list of principles that should guide any court or arbitrator considering contractual provisions that might appear uncertain or incomplete. The first principle, a hallmark of the law of contract, is that each agreement must be constructed in light of its own terms and surrounding circumstances. Subject always to that. Rix L J gave the following pointers (as supplemented by us):
“The presence of an arbitration clause may assist the courts to hold a contract to be sufficiently certain or to be capable of being rendered so, presumably as indicating a commercial and contractual mechanism, which can be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, may resolve their dispute.”
In relation to the latter point, Rix L J would have had in mind that the certainty (or lack thereof) of terms in a contract with an arbitration clause would fall to be determined by the arbitrators in the first instance, and only by the court in the exceptional circumstances in which an appeal to the court lies under the Arbitration Act 1996.
The contract before the Court of Appeal in the Mamidoil case was expressed to have a term of ten years, but was extremely brief. The key terms were as follows:
“Today 5.03.1993 in Athens between Skopje Refinery … referred to as “Refinery” and Mamidoil‐Jetoil … referred to as Jetoil, have agreed the following:
The judge at first instance had refused to give effect to the ten year term stipulated by Clause 7. He had thought that the contract in fact came to an end on 31 December 1994, because the parties had not provided for a fee for any of the following years. That was not consistent with the principle that English law will not hesitate to imply a term that any fee or price to be paid is to be a reasonable one, and so it would be for these parties.
The Court of Appeal noted that the rule against ‘agreements to agree’ did not pose any obstacle to upholding the contract, because the parties had been silent as to the fee that would be payable after 31 December 1994. If they had, instead, provided that the fee for the remaining eights years of the term was “to be agreed”, the result might have been different. The problem with that latter scenario was explained by Chadwick L J in BJ Aviation Ltd v Pool Aviation Ltd [2002] EWCA Civ 163:
“… if on the true construction of the words which they have used in the circumstances in which they have used them, the parties must be taken to have intended to leave some essential matter, such as price or rent, to be agreed between them in the future ‐ on the basis that either will remain free to agree or disagree about that matter ‐ there is no bargain which the courts can enforce.
… in such a case, there is no obligation on the parties to negotiate in good faith about the matter which remains to be agreed between them ‐ see Walford v Miles [1992] AC 128, at page 138G.”
What if the parties have left open details about their performance?
The examples given above related to situations where the parties had not specified the price or remuneration. What happens if the contract fails to specify precisely what a party should do, in terms of performance? In the first instance, where a party has promised to perform a particular obligation, and the contract is plainly intended to be legally binding, English law will seek to find substance in the obligation, even if it is described in general terms. Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485 concerned a contract under which an airline had contracted to ‘operate and fly’ two of a particular type of aircraft from an airport, for a period of ten years. All fees and payments for services had been provided for in the contract. Nonetheless, the agreement was found to have been too uncertain by the judge at first instance. In the absence of a term providing a minimum number of flights over any particular period of time, the judge found that the obligations had not been expressed with sufficient precision to be enforceable.
The Court of Appeal disagreed, and upheld the agreement. The use of the word ‘operating’ showed that, as a matter of construction, the airline had agreed to fly the aircraft commercially - providing a passenger service. When read as a whole, the contract also showed that the aircraft had to take off and land at the airport on any day of operation. If it could not do so for technical reasons, that would not put the airline in breach. Beyond that, the frequency of flights or the destination of the flights was a matter for the airline. This case offers another example of the Court of Appeal disagreeing with the trial judge, and finding that the contract was, after all, enforceable.
Best endeavours – an empty promise?
Contracts sometimes contain clauses requiring a party to use its best endeavours either to accomplish something specific, or to do something more general, like promote one party’s business or interests. Do these clauses have teeth, or are they too uncertain to be enforceable? Looking first at a clause that requires a party to use its best endeavours to bring about a particular result, for example obtaining a permit or a licence, it has long been recognised that best endeavours “means what the words say; they do not mean second‐best endeavours” (Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451).
This was further explained by the Court of Appeal to require the obligors “to take all those steps in their power which are capable of producing the desired results … being steps which a prudent, determined and reasonable [obligee], acting in his own interests and desiring to achieve that result, would take” (IBM United Kingdom Limited v Rockware Glass Limited [1980] FSR 335). It is generally accepted that someone who promises to use their best endeavours does not guarantee the outcome, but will be prepared to incur some financial expenditure in attempting to bring it about.
‘Best endeavours’ language is also sometimes used for wider obligations, to “promote” or “support” the counterparty, or a joint enterprise. The Court of Appeal has recently held, with one Lord Justice dissenting, that such a clause can operate so as to require a party to take specific steps, and that it is not too uncertain to be enforceable. In Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417, an airport operator and a budget airline had agreed that:
“1. Jet2.com and BAL will co‐operate together and use their best endeavours to promote Jet2.com's low cost services from BA and BAL will use all reasonable endeavours to provide a cost base that will facilitate Jet2.com's low cost pricing.”
The airport operator argued that this clause was not enforceable, because it was not sufficiently certain what it would need to do to ‘facilitate low cost pricing’ or provide ‘a cost base’. The majority of the Court of Appeal disagreed, and found that the clause required the airport to allow the budget airline to take off and land outside of the airport’s normal opening hours. The court reached that view even though the contract said nothing about hours of operation, and the airport would in fact make a loss as a result.
The Court of Appeal was prepared to give effect to an obligation to use best endeavours to facilitate the airline’s low cost services (the obligation to provide a ‘cost base’ gave rise to more difficulties, because it was more uncertain). Counsel for the airline submitted that the factual and commercial background to this particular contract showed that operating outside of the airport’s normal operating hours was essential to the airline’s business. This may have influenced the majority. Lewison LJ dissented. He reasoned that:
“If a contract says nothing about a particular topic, then even if that topic is demonstrated by the admissible background to be an important one, the default position must surely be that the topic in question is simply not covered by the contract.”
While a case on the interpretation of a particular contract cannot set any wider precedent, the Jet 2 decision warns against including such general ‘supportive’ or ‘facilitative’ language in contracts: a party that believes that this is just fluff or something akin to a preamble, might face a real impact on its bottom line.
The last word: no cop outs allowed!
The latest decision of the Court of Appeal on certainty of terms is MRI Trading AG v Erdenet Mining Corporation LLC [2013] EWCA Civ 156. EMC, a Mongolian mining company, and MRI, a Swiss trading company, settled an arbitration relating to the supply of copper concentrate. They attached to the settlement agreement three contracts under which copper was to be supplied. The first two supply agreements related to 2009, and were performed. The third one, concerned with deliveries during 2010, led to a further dispute. MRI claimed damages for failure to deliver, seeking more than US$ 10 million. EMC’s defence was that the relevant provisions in the 2010 contract on which MRI’s claim was based were mere agreements to agree. The relevant terms read:
6.1 Shipping schedule shall be agreed during the negotiations of terms for 2010.
9.1 Treatment Charge shall be agreed between [MRI] and [EMC] during the negotiation of terms for 2010.
9.2 Refining charge shall be agreed between [MRI] and [EMC] during the negotiation of terms for 2010.”
The dispute under the settlement agreement was remitted to the arbitral tribunal. The arbitrators found that the delivery obligation was ‘non‐existent’. Both the High Court and the Court of Appeal disagreed. Although the case makes no new law, it does show how the principles in Mamidoil (described above) ought to be applied.
The first question was whether there was a binding contract in existence – if there is, the use of expressions such as ‘to be agreed’ is less likely to be fatal to enforceability. The Court of Appeal found that the 2010 contract had to be construed as part of the settlement agreement, together with the 2009 contract, and not in isolation as the tribunal had done. The parties had already been performing their bargain for a year – and part performance is one of the foundations that can be used to build an implied term of reasonableness or fairness into an existing legal relationship. Both parties were familiar with the trade or industry, and had performed similar transactions previously.
The Court of Appeal also noted the use of the mandatory “shall” in both Clauses 6 and 9. The parties had not intended to remain free to either agree or disagree on these matters. If they could not agree, then the matter would be referred to the arbitrators who would determine a reasonable processing charge and shipping schedule. In other words, the agreement was sufficiently certain (or capable of being rendered certain), since:
“… it provided a commercial and contractual mechanism, which could be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, could resolve a dispute about reasonable processing charges and the shipping schedule.”
The tribunal had set out to apply Rix LJ’s criteria, but had ultimately reached the wrong conclusion. Unless the contract is truly skeletal, or speaks purely of an intention to agree at some point in the future, it is unlikely to be struck down for uncertainty under English law.
