Chapter 2. Certainty. This chapter explains that:

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1 Chapter 2 Certainty This chapter explains that: the legal requirement that the terms of the agreement must be certain in order for there to be a binding contract; an agreement can be sufficiently certain if it lays down how the terms can be clarified; clear terms can be implied by statute; terms can be clarified by the common law; and minor uncertain terms can simply be deleted.

2 Certainty In order to be a binding contract, an agreement must be certain that is, it should not be unduly vague, or obviously incomplete. Two businessmen might orally reach an agreement over the telephone or during a business lunch. They might intend to put the agreement in writing at a later stage, but the oral agreement could be sufficiently certain (and made with an intention to create legal relations) so that it would itself immediately be a binding contract. Thus, in Bear Stearns Bank plc v Forum Global Equity Ltd (2007), Forum Global was owed money by the Parmalat group of companies which had collapsed in Italy in Under the subsequent insolvency procedures, it was expected to receive payment of a portion of the money owed. In a telephone conversation Forum Global agreed to sell the title to these loans to Bear Stearns for 2.9 million euros. Much of the detail of the agreement was left to be finalised at a later stage by the parties lawyers. Forum Global later decided not to proceed with the sale and Bear Stearns brought civil proceedings. The High Court allowed the claim, finding that as the price and product had been agreed, there was a sufficiently certain agreement to bind the parties. By contrast, in Loftus v Roberts (1902) Roberts engaged an actress to appear in a play at a West End salary to be mutually arranged between us. The court held that there was no binding contract between them because the provision concerning payment was too vague. Similarly, in Scammell v Ouston (1941), Ouston agreed to buy a van from Scammell, providing his old lorry in part-exchange and paying the balance on hire-purchase terms over two years. Before the precise nature of those terms could be negotiated, Scammell decided not to go ahead with the deal, and claimed there was no contract between the parties. The House of Lords agreed, pointing out that although the courts aimed to uphold an agreement if there really was one, the terms used were too vague to signify any true agreement. The phrase hire-purchase terms could be used to describe many different arrangements: it left open such questions as whether payments would be made on a weekly, monthly or yearly basis; whether there would be an initial deposit; and what the interest rate would be. Consequently, the parties could not be said to have made a sufficiently certain agreement to constitute a contract. In Baird Textile Holdings Ltd v Marks & Spencer plc (2001) (discussed on p. 106) Baird Textile Holdings argued that they had a contract with Marks & Spencer under which Marks & Spencer would acquire garments from BTH in quantities and at prices which in all the circumstances were reasonable. The Court of Appeal held that these terms would be too uncertain to be part of a valid contract. The production of the highly successful television show, Fame Academy, gave rise to litigation in the courts in the case of McNicholas Construction (Holdings) Ltd v Endemol UK plc (2003). The claimants owned a house that the Fame Academy production company had been interested in renting. Following negotiations the house owners thought that a binding agreement had been reached, but the production company rented an alternative property. The claimants brought proceedings for the unpaid rent of 185,000, but their claim was rejected. The Chancery Division concluded that no binding contract had been formed to rent the property. One of the reasons for their decision was that the terms of any agreement had not been finalised, with a range of important terms still to be agreed. However, the courts will usually look to see if there is any way to make an apparently vague or incomplete agreement more certain; as Lord Tomlin observed in Hillas v Arcos (1932) (below), they do not want to incur the reproach of being the destroyer of bargains. The following are the main methods used. 53

3 Chapter 2 Certainty Provision for clarification In some circumstances prices and other factors affecting a contract are likely to fluctuate, and the parties to an agreement will therefore be reluctant to commit themselves to a rigid arrangement concerning those factors. In such cases, contracts may leave such details vague, but contain provisions stating how they are to be clarified (such as by independent arbitration). Generally, an agreement to agree will not be binding, but where a mechanism has been provided to finalise the details of the contract, an agreement to agree can amount to a binding contract. In Foley v Classique Coaches (1934) the claimant was the owner of a petrol station and some land adjoining it. The defendants ran a coach business, and the claimant sold them the land, on condition that they entered into an agreement to buy all the petrol they needed for the coaches from him, at a price to be agreed by the parties in writing and from time to time. This agreement went ahead, but the defendants broke it, and argued that it was incomplete, and therefore not a binding contract, because the term regarding price was too vague. In fact, the contract provided that any dispute should be referred to arbitration in accordance with the Arbitration Act 1889 (now the Arbitration Act 1996). The Court of Appeal interpreted this as meaning that there was an implied term that the petrol should be sold at a reasonable price, with the arbitration clause being intended to sort out any dispute as to whether a price was reasonable. This meant that the contract was more certain than it looked at first glance, and the court decided that it was sufficiently certain to be binding on the parties. Terms implied by statute In some cases, statutes provide that certain terms should be read into contracts of particular types, even though those terms have not actually been agreed between the parties. For example, under the Sale of Goods Act 1979 an agreement for the sale of goods can become binding as soon as the parties have agreed to buy and sell, with the details of the contract being laid down by law, or determined by the standard of reasonableness. In such a case, the parties do not even have to have agreed on a price s. 8(2) of the Act provides that if the contract does not specify a price, the buyer is entitled to pay a reasonable price. We will look at terms implied by statute more fully in Chapter 7. Previous course of dealing Where two parties have had dealings in the past, their previous agreements may be used to clarify uncertain terms in a contract. 54

4 The officious bystander Key Case Hillas v Arcos In Hillas v Arcos (1932) Hillas had contracted to buy timber of fair specification from Arcos in The agreement also included an option to purchase the following year, which did not detail the type or size of the wood to be bought. When Hillas tried to exercise the option, they discovered that Arcos had in fact already sold all the wood they had that year, and so Hillas sued for breach of contract. The House of Lords held that although the terms used were apparently unspecific, the parties were both very familiar with the way business was done in the timber industry, and had done a large amount of business with each other in the past. Consequently, the terms could be interpreted in the light of what they would usually mean in that industry and between those parties. They were therefore sufficiently certain to create a contract. Legal Principle Where two parties have had dealings in the past, their previous agreements may be used to clarify uncertain terms in a contract. Reasonableness Sometimes the courts will clarify vague terms by relying on the principle of reasonableness. In Sudbrook Trading Estate Ltd v Eggleton (1983) leaseholders had the option to buy the premises at such price as may be agreed upon by two valuers, the parties being able to nominate one each. The landlord refused to appoint a valuer, and claimed that the agreement was not a binding contract because there was no provision detailing how the price would be reached if the two valuers disagreed. The House of Lords disagreed, stating that the important point was that the price was to be set by professional valuers. Such individuals would be obliged to apply professional and, by implication, reasonable standards in setting the price, and therefore the option was actually a definite agreement to sell at a reasonable price. The condition that each party should appoint one of the valuers was merely subsidiary and inessential. Custom Apparent vagueness can be resolved by custom as we have seen, the customary way of dealing in the timber industry played a part in clarifying the terms in Hillas v Arcos, in combination with the parties previous mutual dealings. The officious bystander A term may be implied by applying the officious bystander test. This test will be looked at in Chapter 7 at p. 130, but basically the court asks itself whether someone observing the making of 55

5 Chapter 2 Certainty Figure 2.1 Clarification of contractual terms a contract would have believed that a particular term was part of the contract. An example might be that if you heard your next door neighbour offer to buy someone s car for a thousand you would, assuming you were in Britain, presume that she meant 1,000, rather than the same amount in dollars or pesetas, even though the form of currency had not been specified. Removing minor uncertain terms In extreme cases, a minor term may be not only vague but also meaningless. Providing it is sufficiently unimportant, it can be struck out, allowing the courts to enforce the rest of the contract. Thus in Nicolene v Simmonds (1953) Nicolene ordered some steel bars from Simmonds. The terms of the agreement to buy were quite clear, except that the transaction was stated to be subject to the usual conditions of acceptance. The parties later disagreed about the quality of the metal delivered, at which point Simmonds contended that there was no enforceable contract because the words usual conditions of acceptance were too uncertain. The court agreed that the words were uncertain because there were in fact no usual conditions, but it held that, as the problematic term only concerned a subsidiary matter, they could be ignored. Answering questions Albert is an importer and distributor of tea. Two years ago he bought five tonnes of tea from Louise, at a cost of 25,000. Last Monday, Albert ordered from Louise ten tonnes of Indian tea of standard grade at 40,000. The tea was to be packed according to the established hygienic procedures. Louise agreed to deliver the tea, but then later refused to do so. She argued that no contract existed between herself and Albert because there was no precise 56

6 Summary of Chapter 2 agreement as to the quality of the tea and there were no established hygienic procedures for packing tea. In order for there to be a binding contract between Albert and Louise, an agreement must be certain, that is it should not be unduly vague or obviously incomplete. There are two aspects of this agreement which appear uncertain: the type of tea that was to be delivered and the requirement that the tea should have been packed under the established hygienic procedures. In practice, the courts will usually look to see if there is any way to make an apparently vague agreement more certain. Under the Sale of Goods Act 1979 an agreement for the sale of goods (here we have an agreement for the sale of tea) can become binding as soon as the parties have agreed to buy and sell, with the details of the contract being determined by the standard of reasonableness. This principle of reasonableness will also be applied under common law: Sudbrook Trading Estate Ltd v Eggleton. In addition, there is a previous course of dealing between Albert and Louise, so the courts can look at their earlier agreement to clarify the meaning of these uncertain terms: Hillas v Arcos. It may be that there are also relevant customs in the tea trade which can clarify the meaning of the agreement. Applying the principle in Nicolene v Simmonds, the court might be prepared to delete the term as to the usual hygienic procedures on the basis that it is a minor term that is meaningless. In the light of this discussion it is likely that, in the business context, a court will find this agreement sufficiently certain to be binding on Louise. Summary of Chapter 2 In order to be a binding contract, an agreement must be certain that is, it should not be unduly vague, or obviously incomplete. The courts will usually look to see if there is any way to make an apparently vague or incomplete agreement more certain. Provision for clarification Contracts may leave certain details vague, but contain provisions stating how they are to be clarified. Terms implied by statute In some cases, statutes provide that certain terms should be read into contracts of particular types, even though those terms have not actually been agreed between the parties. Previous course of dealing Where two parties have had dealings in the past, their previous agreements may be used to clarify uncertain terms in a contract. Reasonableness Sometimes the courts will clarify vague terms by relying on the principle of reasonableness. 57

7 Chapter 2 Certainty Custom Apparent vagueness can be resolved by custom. The officious bystander A term may be implied by applying the officious bystander test, under which the court asks whether someone observing the making of a contract would have believed that a particular term was part of the contract. Removing minor uncertain terms In extreme cases, a minor term may be not only vague but also meaningless. Providing it is sufficiently unimportant, it can be struck out, allowing the courts to enforce the rest of the contract. Reading list McLauchlan, Rethinking agreements to agree (1998) 18 New Zealand Universities Law Review 77 Visit to access study support resources including interactive multiple choice questions, practice exam questions with guidance, weblinks, glossary flashcards and legal updates all linked to the Pearson etext version of Contract Law which you can search, highlight and personalise with your own notes and bookmarks. 58

Finality and Completeness of Agreement

Finality and Completeness of Agreement Certainty A contractual agreement must be in terms which define with a sufficient degree of certainty the obligations which the parties are to undertake. Incomplete