Uncertainty in Commercial Contracts

Whilst it is understandable that parties may wish to conclude a contract leaving certain issues to be agreed at a later date, this might introduce the risk that the contract becomes void from uncertainty.  This important issue was considered by the Court of Appeal earlier this year in MRI Trading AG v Erdenet Mining Corporation LLC ([2013] EWCA Civ 156).

Essentially the dispute involved a sale of copper concentrates, in terms of which EMC, a Mongolian mining company, was the seller and MRI, a Swiss trading company, the buyer.  Disputes arose between the parties, and in 2009 they entered into arbitration.  The arbitration was terminated when they entered into a Settlement Agreement.  That Settlement Agreement bound both parties to enter into new contracts of sale.  One of those contracts of sale, the 2010 agreement, was the subject of the dispute eventually heard by the Court of Appeal.  Three clauses of this sale contract, clauses 6.1, 9.1, and 9.2 were, so EMC argued, so uncertain as to be agreements to agree, rendering the entire contract void.  In effect these clauses stipulated that the shipping schedule, and two deductions, the Treatment charge and the Refining Charge, were to be agreed during negotiations which normally took place between the parties annually.  The parties had entered into to arbitration to resolve this dispute.  Lord Justice Tomlinson, with whom Lords Justice Pill and McCombe agreed, found that the uncertainty in these clauses did not have this effect, and the contract was binding on the parties, thus overturning the arbitral award.

Court of Appeal Decision – Statement of the Law
Early in his judgment, Lord Justice Tomlinson referred the leading case Walford v Miles in which Lord Ackner confirmed that agreements to agree imposed no binding obligation ([1992] 2 AC 128).  Having thus set the scene he examined the terms of the arbitral award, in particular a quote from Lewison’s The Interpretation of Contracts which the Tribunal indicated was worth noting (quoted by Lord Justice Tomlinson at para 15):

“The effect of uncertainty may be that no contract comes into existence; or it may be that one provision in an otherwise binding contract is unenforceable.  Which of these two possibilities is likelier depends on the importance of the term which is uncertain.  The more important the term, the more likely it is that the contract as a whole is unenforceable.”

The arbitrators then considered two leading cases on uncertainty in commercial contracts, Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD ([2001] 2 Lloyd’s Rep 76) and BJ Aviation Ltd v Pool Aviation Ltd ([2002] 2 P & Cr 25).  In the former, Mamidoil, Rix LJ had summarised the law in a number of principles ([2001] 2 Lloyd’s Rep 76, para 69):

“ i) Each case must be decided on its own facts and on the construction of its own agreement.  Subject to that,
ii) Where no contract exists, the use of an expression such as “to be agreed” in relation to an essential term is likely to prevent any contract coming into existence, on the ground of uncertainty.  This may be summed up by the principle that “you cannot agree to agree.”

iii) Similarly, where no contract exists, the absence of agreement on essential terms of the agreement may prevent any contract coming into existence, again on the ground of uncertainty.

iv) However, particularly in commercial dealings between parties who are familiar with the trade in question, and particularly where the parties have acted in the belief that they had a binding contract, the courts are willing to imply terms, where that is possible, to enable the contract to be carried out. 

v) Where a contract has once come into existence, even the expression “to be agreed” in relation to future executor obligations is not necessarily fatal to its continued existence.

vi) Particularly in the case of contracts for future performance over a period, where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the courts will assist the parties to do so, so as to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain.  Certum est quod certum redid potest [translated in A.G.M. Duncan (ed) Trayner’s Latin Maxims, 4th edn, 1993, p. 76 as “That is certain which can be made certain].

vii) This is particularly the case where one party has either already had the advantage of some performance which reflects the parties’ agreement on a long term relationship, or has had to make an investment premised on that agreement.

viii) For these purposes, an express stipulation for a reasonable or fair measure or price will be a sufficient criterion for the courts to act on.  But even in the absence of express language, the courts are prepared to imply an obligation in terms of what is reasonable.   

x) 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.”

Chadwick LJ also summarised the law into a number of principles in BJ Aviation.  Worthy of note are his suggestion that if “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…there is no bargain which the courts can enforce” ([2002] 2 P & CR 25, para 21).  If, however, the court is satisfied that the parties intended their bargain to be enforceable, it may imply a term that the price will be “fair”, “market” or “reasonable” ([2002] 2 P & CR 25, para 23). 

Court of Appeal – application of the law to the facts.
The arbitrators had erred in concluding that there had been no part performance in this case.  They had failed to take into account the overall commercial context, i.e. the Settlement Agreement and the fact that the parties had a long-term relationship (para 18).  Both parties had derived benefits from performing this contract for over a year.  The language of the Settlement Agreement also placed it beyond doubt that the parties intended their agreement to be legally binding.  It was certainly not indicative of a mere agreement to agree.  Lord Justice Tomlinson approved the approach of the judge at first instance where he identified the binding language used in the Settlement Agreement.  In particular use of the word “shall” was a “strong indicator that the parties did not intend that a failure to agree should destroy their bargain” (para 21).  Lord Justice Tomlinson also approved the approach of the judge at first instance where he carefully analysed Mamidoil, identifying the ways in which this particular case showed some factual similarities.  Given that both parties were familiar with the trade and had acted in a manner (objectively construed) that suggested they had a binding contract, (para 22). The contract should be upheld. This was particularly so given that EMC, the party arguing that the contract was not binding, had already received benefits from MRI’s performance (para 22).   Finally, the presence of an arbitration clause (para 22):

“…should have supported the conclusion that the agreement was sufficiently certain or capable of being rendered so, 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 a reasonable TC/RC or shipping schedule.”

In general, the arbitrators were subject to stringent criticism for the decision they reached, having failed to ask themselves what the parties’ intention was if agreement was not reached on the points in the clauses in question (para 24).

This case illustrates the extent to which a court will strive to give effect to a contract between commercial parties which is not only fully executed but has also been acted upon by both parties.  Such a contract can be valid notwithstanding the lack of agreement on specific terms.

Although the court did not specifically say so, the quotation with approval of the passage from Lewison’s The Interpretation of Contracts suggests that the court did not consider the factors on which agreement had not been reached, namely the shipping schedule, and two deductions, the Treatment charge and the Refining Charge, so significant as to constitute “essential terms” the lack of agreement of which rendered the contract void.  Both Rix LJ in Mamidoil and Chadwick LJ in BJ Aviation referred to the concept of such “essential terms.”  Exactly what constitutes an essential term may differ depending upon the particular commercial context.  This point can be illustrated by reference to older Scottish case law.  In R & J Dempster v Motherwell Bridge Engineering (1964 SC 308, per Lord President Clyde at 326) the Inner House did not consider lack of agreement over the price fatal to the conclusion of a binding contract.  In that case the commercial background, which involved shortages and quota systems in the industry, explained why agreement of the price could be delayed.  Thus the particular commercial circumstances may explain why the parties have failed to agree a price and need not completely rule out a finding that a binding contract has been concluded.  Lord President Clyde also considered it significant in that case that the parties had acted for over a year as though they had a binding contract (1964 SC 308 at 327).

The court treated the language of the document as significant: in fact, it carried out a very close analysis of the words used in order to reach the conclusion that the document was binding. 
Also worth noting is the availability of implied terms to resolve uncertainty in contract.  That solution was not applied here but is referred to in Rix LJ’s summary in Mamidoil.   As we have already heard today, the bar remains high in the implication of terms.  The term must be “necessary” in one of the senses expressed by Lord Hoffmann in the Belize case. 

Significantly this case reaffirms the proposition that it is possible for the parties to leave issues to be agreed in the future.  As stated by Rix LJ in Mamidoil, the courts “preserve rather than destroy bargains” ([2001] Lloyd’s Rep 76, para 69).   This is likely to be economically efficient: it may suit both parties to delay agreement of a specific issue to a later date.  It also upholds the parties’ intentions: if they intend to agree something later, there is no reason why the courts should prevent them from doing so. 

Also interesting is the effect of the arbitration clause.  By including such a clause the parties had provided a mechanism to deal with the consequences should they be unable to agree.  Thus the clause acts as an indicator that the parties intend to be legally bound.