Issue of Certainty in a Contract
“The cases provide many examples of judicial awareness of the danger that too strict an application of the requirement of certainty could result in the striking down of agreements intended by businessmen to have binding force” – Treitel.
Critically evaluate this statement in light of case law and consider in your answer whether the extent to which the parties have acted on an agreement influences the judges.
Introduction
In looking to critically evaluate the above statement in view of the case law that has been decided in this area, so as to also be able to consider the extent to which parties have acted on a business agreement serves to influence any judge, this essay will first look to consider the importance of certainty in agreements by recognising the significance where there is a lack thereof. Then, this essay will also look to reflect upon how a contract is generally formed and as to how the issue of certainty relates specifically to a contract’s formation in this regard for when it is said to come into being. Following on from this, this essay will look to determine the issues that a court will look to consider in evaluating as to whether a particular agreement before them is sufficiently certain to be considered a legally binding contract, whilst also looking to consider the extent to which the parties have acted on an agreement serves to influence the judges in coming to their decisions in relation to these matters, before finally looking to conclude with a summary of the key points that have been derived from an understanding of this discussion.
The significance of certainty
On this basis, to begin with it must be appreciated that the issue of certainty in any business agreement is generally considered to be paramount to the formation of a formal contract because it has been a long-held maxim of the law that that which is certain is that which can be made so leading to a binding contract being formed that is enforceable by the courts[1]. Consequently, a lack of certainty increases the costs of disputes because the ability to avoid, manage and/or resolve any dispute early, and on a reasonable commercial basis, is clearly negated where there is a lack of accurate documentation, whilst the lack of certainty also serves to create risks for those involved where there is a lack of a formally recognised agreement in place.
Therefore, by way of illustration, it was recognised in Montreal Gas Company v. Vasey[2] that where the company in question made a contract with the other party to this case with the promise that, if it was ‘satisfied’ with them as a customer, the company would then look ‘favourably’ on an application for renewal of their contract with them, this was not considered sufficiently certain to create a legal obligation because of the indefinite or unsettled nature of such a term. Nevertheless, it is also important to appreciate a transaction that may otherwise be considered to have left some essential term of their agreement undetermined may provide some method of determination other than what is considered to be a future agreement.
The formation of a contract – Where do the problems lie?
Ostensibly, it is commonly understood that a contract is effectively formed where there is an offer, consideration and acceptance that is sufficiently certain so that it is then for the courts to determine whether the required elements are present in any business arrangement[3]. This is because the offer refers to a proposal that is expressed orally or in writing from one party (the ‘offeror’) to another (the ‘offeree’) to do or give something for remuneration with a view to forming an agreement that is usually legally binding on the basis of the conduct the parties. Such a view arises from the fact it was recognised in Adams v. Lindsell[4] the rules in relation to the recognition of a valid offer states that thus will be so where it is (a) made to definite person, class, or the world; (b) it is effectively communicated; and (c) it reaches the offeree. Then, with regards to the element of consideration required, this consists of a “right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other”, in keeping with the decision in Currie v. Misa[5], that must be legal, not past, and move from the promisee to the promisor[6].
However, the problem with certainty in business agreements arguably arises most commonly in relation to the issue of acceptance of an offer to formalise the agreement between the parties in the prescribed manner. This is because it was recognised in Hyde v. Wrench[7] that the offeree must accept the offer made by the offeror unequivocally without qualification in words or through conduct in conformation with the indicated or prescribed terms of the offer. But then, in the decision in Chillingworth v. Esche[8], it was effectively understood that it is possible to have an acceptance of terms that are ‘subject to contract’ where the parties will only be bound by a formal contract. Moreover, where the terms of an offer are not accepted by the offeree without alteration, then it could be argued that negotiations will continue because anything that the offeree then proposes may be considered to be a counter-offer so that the positions of the respective parties change (i.e. offeror becomes offeree and vice versa). Therefore, this effectively means that there is only likely to be an agreement on terms that are substantially different from those originally put forward by the parties in such circumstances[9].
Buying and selling
More specifically, where there is an unequivocal desire to buy and sell, but a lack of certainty as to terms of the agreement, the courts will look to consider the nature of the transaction for themselves that may be determined by the standard of reasonableness (i.e. what is considered reasonable) in the specific circumstances of the case. Such a view is effectively illustrated by the examples of the decisions in Brown v. Gould[10], where what was considered the ‘market value’ of the goods was determined by the courts, and Didymi Corporation v. Atlantic Lines & Navigation Company Ltd[11], where the idea that an agreement regarding a hire was to be ‘equitably decreased’ was also determined by the courts. But, in the case of price of goods and services in such cases, this has largely been governed by section 8 of the Sale of Goods Act 1979[12] which effectively means that the courts are able to allow actions for the recovery of reasonable sums of the value of the goods or services in question[13] so long as the contract itself is silent as to the issue of price[14]. Therefore, by way of illustration, in May & Butcher v. The King[15] when the supplicants agreed to purchase all of the Crown’s old tentage for a price “agreed upon … as the quantities of the said old tentage become available and are offered to the purchasers” it was held there was no concluded contract because the price would be agreed subsequently for the transference of the goods in question.
The influence of parties to an agreement upon the courts
However, more generally, the function of any court is to put a fair construction on what the parties have said and done because Lord Wright in Hillas & Co v. Arcos Ltd[16] said “Business men often record the most important agreements in crude and summary fashion”, that are “far from complete or precise” to those unfamiliar so that it is arguable that the parties to such agreements may be considered to have some influence over the approach that the courts may take in such cases. On this basis, this means that it is “the duty of the court to construe such documents fairly and broadly”[17] because the courts need to be satisfied that parties to an agreement have concluded a contract, whilst also still considering what has been said and done in its context, the relative importance of the unsettled matter and whether the parties have provided machinery within the terms of their agreement for settling any dispute.
By way of further illustration, in the decision in Hillas & Co v. Arcos Ltd[18] the court decided that the terms of the contract in this case were based on previous transactions (the original contract) between the parties and the custom of the timber trade because it was determined that in view of their previous agreements there was still sufficient intention to be bound in the future. Therefore, with this in mind, in view of the influence of the parties in acting on the same basis as under their previous transaction, clearly, in such circumstances it will be extremely difficult for the courts to say that a “contract is void for vagueness or uncertainty”, where it has been either or wholly or partially performed, since this serves to make it easier to imply a term into an agreement to resolve such problems[19].
However, as well as the influence acceded to the parties to agreements by the courts, it is also important to appreciate that a court will not commonly allow a contract to fail for uncertainty more generally if the contract also provides the means to acquire the level of certainty required for the particular contract. For example, in cases including Foley v. Classique Coaches Ltd[20], it was recognised that if the contract in question provides parties are to agree a price or quantities for delivery, but also contains an arbitration clause in this regard, the courts will imply a reasonable price will be paid where there is otherwise default on the part of the parties to the agreement determined by arbitration so that parties to the agreement still retain a level of influence even where they are in dispute.
Moreover, matters in this regard may actually only be further complicated by the fact that parties in business often act on their informal agreements – even their version of events – pending the formalising of their agreement into a contract[21]. Then, where a contract is formalised, the courts may allow this contract to take on a retrospective effect to cover the work done during the period when the parties were working on the basis of an informal agreement[22]. But where there is no formalisation of an agreement between parties, work that is done, or goods that are delivered, under a letter of intent may lead to a restitutionary obligation to pay a reasionable sum by way of remuneration for this[23] so that the parties actions continue to have an effect on any decision that is reached.
The problem with documentation
In spite of the influence of the parties themselves on the decisions reached by the courts, however, in looking to consider how the courts deal with the issue of certainty (or lack thereof) in business contracts, it is important to appreciate that matters are also complicated somewhat by the use of other documents in the build up to the recognition of a formal agreement. Such a view is effectively illustrated by the use of letters of intent in the construction industry with a view to formalising a contract at a later date. This is because whilst, in the past, in decisions including British Steel Corporation v. Cleveland Engineering Co[24], such a document may have been considered akin to a conditional contract by the courts since it is effectively looked upon as a sign that one party is likely to want to contract with another, in Regalian Properties Plc v. London Dockland Development Corporation[25] there was an unsuccessful action for reimbursement of expenses incurred by a property developer regarding preparatory work regarding a contract that also never materialised in spite of the presence of a letter of intent since it is a matter of interpretation.
Consequently, it is important to appreciate that the courts have become prone to taking a differing view from case to casxe because they do not consider cases decided in this area to be analogous in the circumstances. Such a view is reflected in the fact that whilst one party, in British Steel Corporation v. Cleveland Bridge Engineering Co[26], requested the other to perform services and supply goods needed under the expected contract, the costs Regalian Properties Plc v. London Dockland Development Corporation[27] sought reimbursements for what it did in an effort to put itself in a position to obtain and then perform the contract that was unsuccessful. This is largely because the court in such cases may be unwilling to imply a contract on the basis of a letter of intent because the language used is often uncertain and, in view of previous negotiations, it may also be argued that all that is assumed is a moral responsibility and not something that is contractual but, again, that is something for the courts to determine on the facts as they arise as a matter of interpretation[28].
Nevertheless, matters in this regard are also not helped in relation to the recognition of certainty in business agreements where the contract between the parties is considered incomplete because of a failure to cover all of the pertinent points that are considered significant by the parties so that one party asserts that a contract has been formalised and the other claims that it has not. Therefore, it is important to appreciate that in such cases the courts will need to consider whether an agreement is reached by the parties to a contract at a particular time, or as to whether there are other terms of the intended contract without the settlement of which the parties to the agreement have no hope of formalising a contract[29].
But where documentation produced in correspondence between the parties in dispute shows the parties have definitely come to terms – despite having some material points left open – a subsequent revival of negotiations will not affect the contract that is believed to have been made in the eyes of the court without the consent of the parties to the agreement that has been made so that they retain some influence over the courts that look to resolve their disputes[30]. More specifically, Justice Parker recognised in the decision in Von Hatzfeldt-Wildenburg v. Alexander[31] that if “documents or letters relied on as constituting a contract contemplate the execution of a further contract … it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through”[32]. Consequently, it is matter upon which the courts could arguably go either way on in looking to interpret because it is really something to be decided upon on the facts of each individual case.
Negotiations
However, even where negotiations are successful, it was recognised in practice, as long ago as the decision in Kennedy v. Lee[33] that it may prove difficult to say with certainty when an agreement has been reached. This is because of the fact that it was recognised in this case that negotiations can often be long and complex with significant variations derived from offers and counter offers that may serve to detract or embellish the original basis of attempted agreement between the parties. Nevertheless, in the dcecision in Davies v. Sweet[34] it was understood that in spite of a prolonged period of negotiations courts may still find a concluded bargain by the conduct of the parties – thus seemingly bypassing the need for certainty – so that any continuance of the negotiations will not necessarily serve to terminate an agreement between the parties. Such a need largely arises from the fact it is important to look to give effect to the reasonable expectations of business people that is an important object of the law of contract to facilitate in relation to their ongoing relations[35].
But, in the context of negotiations, a ‘lock out’ has also come to be considered to be unenforceable where it does not specify a time limit for its duration because it would indirectly impose a duty to negotiate in good faith which could not be considered a contract[36] – although such an agreement may be considered thuse if it is for a fixed period[37] – regardless of this it has been argued that certainty should have been resolveable in the interests of the parties through the recognition of the standard of reasonableness alluded to earlier in this discussion. Moreover, the courts have also felt at liberty to ‘strike out’ indefinite, but subsidiary, provisions as being insignificant so as to be able to give effect to the rest of the agreement[38]. Furthermore, with regards to an agreement to negotiate, the House of Lords recognised in Walford v. Miles[39] that such an agreement was effectively an agreement to agree so it was considered unenforceable because “it lacks the necessary certainty”[40]. Such a view has arisen because negotiations are, by their very nature, adversarial and allowed them to pursue their own interests, so long as they do not make misrepresentations, and withdraw where they see fit[41], whilst damages were also out of the question because no can tell whether the negotiations would be successful and what the result would be[42].
Conclusion
In conclusion, in looking to critically evaluate the aforementioned statement so as to also be able to consider the extent to which parties have acted on a business agreement serves to influence any judge, it must be recognised that certainty within any agreement perpetrated by a business is extremely important. This is because certainty in relation to the agreements that are formed between parties clearly goes some way to limit and even negate the need to go to seek the resolution of their disputes. However, by its very nature, business negotiations are somewhat adversarial. Everyone involved with business wants to get ahead so it is perhaps little wonder that disputes do arise. But just because a dispute arises does not mean that the parties want to end the relationship that they have built up just because there is a lack of certainty in some aspect of the agreement that has been formed.
Therefore, whilst the courts may look to resolve issues of certainty between the parties on the basis of the law as it stands and the understanding of what is considered reasonable in the circumstances, the parties themselves can and do retain an element of influence over proceedings between them. Consequently, the respective parties intentions when forming an agreement must be taken into account when determining the binding nature of any agreement. However, that is not meant to assuage the role that the courts do play in the resolution of disputes. It is just that the area is actually somewhat complicated by the lack of certainty in aspects of an agreement that is formed that need to be effectively resolved and, in view of the close proximity of the parties to their dispute, it is sometimes considered best for the parties to accede to the resolution of their dispute to the courts where they cannot otherwise be resolved between the parties themselves despite the influence that the courts will still allow their dealings to have on their decisions in most cases.
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(i) Research Strategy
To begin with it is necessary to decide what the question set is asking – i.e. in this case, determining the need for something different to rectify a problem that apparently exists. This effectively means that any research carried out is required to seek to facilitate a ‘discussion’ involving the specific terms identified within the question so as to effectively determine and incorporate the academic and legal opinions of authorities to support the pertinent issues that have been derived from the research that has been carried out here for the purposes of answering the question.
(ii) Materials
Therefore, on this basis, it is particularly important to look to include case law in particular, in view of the stated requirement in the scope of the question, throughout the writing of this essay before listing them all in the bibliography for ease of further reference. As a result, both ‘Lexis Nexis Professional’ and ‘Halsbury’s Laws of England’ are websites that serve as significant research aids for writing this kind of work in view of the fact that they offer the most contemporary accounts of all legal subjects.
(iii) Search Terms
Legal professor David Stott’s work on legal research[43] has recognised the best approach to researching an essay is to look to take the title/question that you have been given and then highlight what you think are the key words and phrases so that, in this case, the following search terms are recognised –
‘Business’
‘Contract’
‘Buying’
‘Selling’
‘Legislation’
‘Dispute Resolution’
‘Certainty’.
Then, having identified search terms for the purposes of research, combinations of these terms must be uses, whilst also looking to appreciate the fact that certain terms (i.e. ‘legislation’) will offer very little in view of the specifics elsewhere within the question without looking at more specific aspects. As a result, in view of the fact that the focal point of this essay’s discussion is the issue of certainty within, a particular context (i.e. business agreements), then it is clear that this must be recognised so as to be able to effectively achieve the required results to lead to further research into judicial decisions and other paper based sources outlined in the bibliography by looking at combinations of the aforementioned search terms (e.g. ‘contract’, ‘certainty’, ‘business’ and ‘agreement’).
(iv) Review of Results
In looking to effectively be able to evaluate the academic value of the research that has been carried out here, it is abundantly clear that, whilst the initial materials uncovered were excellent in view of their relevance, a true understanding of as to how successful the research actually was is only possible where we look to consider the content of what has been written in the essay itself. But then it is also necessary to look to consider as to how the answer to the question set looks to show an effective appreciation of how the materials that have been identified in the bibliography have been used. Therefore, it would seem that the results of this research have served to effectively facilitate a broad discussion of various areas in relation to the recognition of certainty within the context of business agreements and as to how the courts have dealt with the resolution of disputes, whilst also recognising the influence that the parties themselves can have in relation to the courts resolution, that have put been together in this paper so as to present an effective answer to the question that has been posed here.
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Beatson. J ‘Anson’s Law of Contract’ 27th Edition, Oxford University Press (1998)
Fridman. D. F ‘Construing, without constructing, a contract’ (1960) 76 LQR 521
‘Halsbury’s Laws of England’ Lexis Nexis, Butterworths (2007)
Lexis Nexis Professional (2007)
(www.lexisnexis.com)
Stott. D ‘Legal Research’ Cavendish Publishing Ltd (1998)
Adams v. Lindsell (1818) 1 B & Ald. 681
Bishop & Baxter v. Anglo-Eastern Trading Co & Industrial Ltd [1944] KB 12
British Steel Corporation v. Cleveland Bridge Engineering Co [1984] 1 All ER 504
Brown v. Gould [1972] Ch 53
Butler Machine Tool Co v. Ex-Cell-O Corp [1979] 1 WLR 401
Carlill v. Carbolic Smoke Ball Company [1893] 1 QB 256
Chillingworth v. Esche [1924] 1 Ch 97
Courtney & Fairbairn Ltd v. Tolaini Brothers (Hotel) Ltd [1975] 1 WLR 297
Currie v. Misa (1875) LR 10 Ex 153
Davies v. Sweet [1962] 2 QB 300
Didymi Corporation v. Atlantic Lines & Navigation Company Ltd [1988] 2 Lloyd’s Rep 108
Foley v. Classique Coaches Ltd [1934] 2 KB 1
G. Percy Trentham Ltd v. Arhital Luxfer Ltd [1993] 1 Lloyd’s Rep 25
G. Scammell & Nephews Ltd v. Ouston [1941] AC 251
Hillas & Co v. Arcos Ltd (1932) 147 LT 503
Hussey v. Horne Payne (1879) 4 App Cas 311
Hyde v. Wrench (1840) 3 Beav 334
Kennedy v. Lee (1817) 3 Mer 441
Kleinwort Benson Ltd v. Malaysia Mining Corporation Bdh [1989] 1 WLR 379 at
Lipkin Gorman v. Karpnale [1991] 3 WLR 10
May & Butcher v. The King [1934] 2 KB 17n
Mitsui Babcock Energy Ltd v. John Brown Engineering Ltd (1996) 51 Con LR 129
Montreal Gas Company v. Vasey [1900] AC 595
Nicolene Ltd v. Simmonds [1953] 1 QB 543
Pitt v. PHH Asset Management Ltd [1994] 1 WLR 327
Queensland Electricity Generating Board v. New Hope Collieries Property Ltd [1989] 1 Lloyd’s Rep 205
Regalian Properties Plc v. London Dockland Development Corporation [1995] 1 WLR 212
Trollope & Colls Ltd v. Atomic Power Construction Ltd [1963] 1 WLR 333
Von Hatzfeldt-Wildenburg v. Alexander [1912] 1 Ch 284
Vosper Thornycroft Ltd v. Ministry of Defence [1976] 1 Lloyd’s Rep 58
Walford v. Miles [1992] 2 AC 128
Sale of Goods Act 1979
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