#16744 - Certainty Pq Notes - Contract Law

Hillas v Arcos: An agreement will be binding if the essential terms are clear or if there is an objective yardstick by which the courts can render the agreement complete (in the absence of the parties having reserved negotiation to themselves or referred an important matter to a third-party intervener whose appointment and co-operation is essential). Verdict: uncertainty in language of contract to buy timbre could be ironed out by objective reference to the criterion of a “fair specification” in the 1930 agreement, which was a clear enough yardstick as to what kind of timber was to be sold.

There is a general wariness of making the contract for the parties. Hillas v Arcos: (1) at [502]: “The question on which I have had doubt is whether the words "of fair specification," on their proper construction, will enable the subject to be identified by the court. In other words, do they provide a standard by which the court is enabled to ascertain the subject-matter of the contract, or do they involve an adjustment between the conflicting interests of the parties, which the parties have left unsettled and on which the court is not entitled to adjudicate…”. (2) at [514]: “Businessmen often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects…That maxim, however, does not mean that the court is to make a contract for the parties, or to go outside the words they have used, except in so far as they are appropriate implications of law.”

Baird (2001) ECA Civ 274: “Any debate about certainty of contractual terms and implications of reasonableness to avoid uncertainty must start with the decision of the House of Lords in Hillas v Arcos…He distinguished (at p 513) between cases where the contract provides for an objective standard which the court applies by ascertaining what is reasonable and those where, there being no such standard, the test of reasonableness is being used to make an agreement for the parties which they have not made for themselves. He was impressed by the consideration that a commercial matter was involved and the parties themselves thought that they had made a contract”

Walford v Miles: An agreement to negotiate in good faith or reasonably lacks sufficient certainty Facts: The parties had entered into a preliminary agreement to regulate the conduct of their negotiations for the sale of a photographic business. Held: “The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty... How can a court be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations?”

There is no obligation to negotiate in good faith in contract law

• Lord Ackner in Walford v Miles

At 138: “However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms... how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an "agreement?" A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a "proper reason" to withdraw. Accordingly a bare agreement to negotiate has no legal content.’”

• Longmore LJ held in Petrolmec Inc v Petroleo Brasilero SA Petrobas at 116:

“The traditional objections to enforcing an obligation to negotiate in good faith are (1) that the obligation is an agreement to agree and thus too uncertain to enforce, (2) that it is difficult, if not impossible, to say whether, if negotiations are brought to an end, the termination is brought about in good or in bad faith, and (3) that, since it can never be known whether good faith negotiations would have produced an agreement at all or what the terms of any agreement would have been if it would have been reached, it is impossible to assess any loss caused by breach of the obligation.”

Nb. however, Longmore LJ distinguished these 3 objections on the facts of Petrolmec Inc and gave reasoned dicta that the law should uphold an express clause requiring the parties to negotiate in good faith, where this clause is ancillary to the main contract

However, an agreement to negotiate only with a nominated person is valid (if supported by consideration), provided the period of exclusivity is fixed in time and not left open-ended.

• Walford v Miles (1992) at 139

• Pitt v PHH Asset Management Ltd [1994] 1 WLR 327, CA

Berkeley Community Villages Ltd v Pullen: An agreement to perform (not negotiate) in good faith may be valid. Once a contract is formed, a clause which expressly imposes a duty of ‘utmost good faith’ during performance is valid. Facts: The parties had entered into an agreement whereby B was to use its property development expertise to maximise the potential of a substantial part of P's land for development; in return B would receive a fee if and when the land was sold with consent for development. P, however, sought to sell to a third party. The contract provided that “the parties will act with the utmost good faith towards one another and will act reasonably and prudently at all times”. Verdict: sufficiently certain. This clause validly imposed “on D a contractual obligation to observe reasonable commercial standards of fair dealing and…faithfulness to the agreed common purpose”.

Little v Courage Ltd (1994):“An undertaking to use one's best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use one's best endeavours to agree, however, is no different from an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable legal obligation.”

Parties can validly commit themselves so that, before a party commences arbitration against the other, they will both conduct `friendly’ negotiations for a finite period or at least that they will engage in such negotiations, followed by a specified period for reflection.

Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd (2014): contract had three clauses –

1. `The Parties shall first seek to resolve the dispute or claim by friendly discussion.’ the court interpreted this as an obligation for parties to actively engage in “fair, honest and genuine negotiations aimed at resolving a dispute”, and it was contractually binding

2. `Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim.’ not contractually binding

3. `If no solution can be arrived at between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.’ contractually binding

Sulamerica v Enesa (2012): A mediation clause stated that “the parties undertake that, prior to a reference to arbitration, they will seek to have the Dispute resolved amicably by mediation.” Verdict: This was merely a “gentleman’s agreement” that each party would invite the other to consider the possibility of mediation, and not a valid mediation clause

Cable & Wireless plc v IBM UK (2002): An agreement to mediate is valid only if (i) if the mediation clause is final and thus does not require further negotiation over its own terms (so that is it clear the parties have unequivocally committed themselves to mediate), (ii) the clause nominates a mediation provider or indicates how one is to be appointed, and (iii) the mediation process should be either already finalised by the agreed mediation provider or the parties must themselves supply minimum details. Facts: IBM had agreed to supply long-term IT services to C. The contract contained a multi-level dispute-resolution clause, which included mediation. C skipped the mediation and went straight to the court. IBM sued C. Verdict: Successful. It was held that the requirements for mediation had been reached. The courts will stay formal proceedings until the stipulated prior mediation process has been properly considered. A and B in their main agreement further agree (1) to try to resolve any dispute arising under their main agreement in good faith; failing which (2) they would use a named London mediation organisation; one party bypassed (2) and went straight to High Court; Held: other party entitled to stay of civil case pending resort to mediation.

Initially, if a price is left open, a...