The Court of Appeal has recently held that a contract for the sale of goods which left matters, including certain charges and a shipping schedule, to be agreed was not unenforceable for uncertainty because it was to be viewed in its wider context: MRI Trading AG v Erdenet Mining Corporation LLC [2013] EWCA Civ 156. The court was prepared to imply a term requiring such charges / schedule to be reasonable.

This decision may be welcomed by commercial parties who are reluctant to commit themselves to a rigid long-term arrangement and may therefore attempt to introduce an element of flexibility by providing that certain terms are to be agreed later. However, each case will turn on its own facts and, for a binding contract to exist, the court must be satisfied that all essential terms have been agreed or are capable of being determined in the absence of future agreement. Parties looking to incorporate some element of flexibility whilst ensuring that their contract is enforceable would be well advised to lay down in their contract clear criteria or machinery for determining matters which are left open.

Background

In 2005 Erdenet Mining Corporation (“EMC”), a Mongolian mining company, contracted to sell copper concentrates to Swiss company MRI Trading AG (“MRI”). Disputes arose about performance of the contract and the matter was referred to arbitration at the London Metal Exchange (“LME”). That arbitration was resolved by way of a settlement agreement, by which the original contract was terminated and the parties entered into three new sale and purchase contracts which were scheduled to the settlement agreement. Two of those new contracts were performed without problems. However no concentrates were shipped by EMC under the third (known as the “2010 contract”). The matter was referred to arbitration under the LME arbitration rules, pursuant to the terms of the 2010 contract.

The 2010 contract contained detailed provisions with regard to a number of matters, including as to the quality and description of the material to be supplied, how the concentrate would be delivered and how the purchase price would be calculated. It provided that a shipping schedule, along with a treatment charge and a refining charge (the “TC/RC”) each “shall be agreed…during the negotiation of terms for 2010″ (a reference to an annual round of negotiations which takes place during a stipulated period each year following an annual meeting of metal traders in London). However, no concentrates were shipped, as no agreement was reached on either the TC/RC or the shipping schedule.

The Tribunal found that those clauses left material terms as ‘agreements to agree’. As such, there was no enforceable obligation on EMC to deliver the copper concentrates. In doing so, it reasoned that it must rely simply on the construction of the contract under dispute, and not upon those other contracts signed as a result of the settlement agreement. MRI appealed to the court on questions of law pursuant to section 69 of the Arbitration Act 1996, in particular (1) whether construction of the 2010 contract should be based solely upon the wording of that contract without taking any account of the settlement agreement or the other two contracts entered into alongside it; and (2) in light of the answer to the first question, was EMC’s obligation to deliver unenforceable or was it to be performed on the basis of a reasonable shipping schedule and TC/RC if no express agreement was reached on those aspects?

First instance decision

The judge at first instance, Mr Justice Eder, set aside the Tribunal’s award. EMC accepted before the judge that the settlement agreement and the other two contracts should form part of the factual matrix against which the 2010 contract should be construed. The judge found that the Tribunal had not, however, taken any proper account of them. As to the second question, the judge referred to the principles summarised by the Court of Appeal in Mamidoil Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2001] EWCA Civ 406 and BJ Aviation Ltd v Pool Aviation Ltd [2002] EWCA Civ 163 as to whether uncertainty renders an agreement unenforceable. As summarised in those cases, even in the absence of express language, the courts may be prepared to recognise an implied requirement of reasonableness in order to fill a gap and enable the contract to be carried out. As such, the use of the expression “to be agreed” is not necessarily fatal. This is so particularly in commercial dealings between parties and where those parties have acted in the belief they had a binding contract. The presence of an arbitration clause may also assist the courts to hold a contract to be sufficiently certain, providing as it does a mechanism by which the parties, in the absence of agreement, may resolve their dispute.

Here, the circumstances in which the 2010 contract came to be signed - the overall “deal” by which EMC got the full benefit of the settlement of the prior dispute (along with performance of the other two contracts) – was, in Eder J’s view, a very powerful factor for the court to bear in mind to strive to uphold the parties’ agreement. The language of both the settlement agreement and the 2010 contract – in particular, the use of the words “shall agree”, rather than “may agree” or “if the parties are able to agree” – plainly showed that the parties intended the 2010 contract to be legally binding. As such, EMC’s obligation to deliver under the 2010 was enforceable and was to be performed on the basis of a reasonable shipping schedule and reasonable TC/RC if no agreement was reached on those aspects.

Court of Appeal decision

The Court of Appeal upheld the first instance decision, and the reasoning of the first instance judge. Lord Justice Tomlinson, giving the leading judgment, found that although the 2010 contract had not itself been performed in any part, it was an integral part of an overall deal pursuant to which both parties had derived benefits – a deal which they had implemented together for over a year without any suggestion that the final part fell into a different and unenforceable category of obligation.

The language used by the parties showed that they did not intend that they should remain free to agree or disagree about the TC/RC and the shipping schedule as their own perceived interests might dictate. As such, a term was to be implied that the TC/RC and shipping schedule should be reasonable, and in the event of any dispute as to the appropriate charges and schedule the dispute be determined by arbitration. In circumstances “where the parties had agreed every other aspect of the contract including quality, specification and price, and where they had stipulated for the arbitration of disputes by a market tribunal, it is almost perverse to attribute to them an intention not to conclude a binding agreement”, in particular “where the agreement was an integral part of a wider overall transaction compromising an earlier dispute”.

Comment

This decision may be welcomed as both commercially sensible and in line with existing authority. The courts are reluctant to strike down agreements intended by the parties to have binding force, particularly where the parties have acted on the agreement.

Commercial parties may be reluctant to commit themselves to a rigid long-term arrangement, particularly when, as in this case, prices and other circumstances affecting performance are likely to fluctuate. They may therefore attempt to introduce an element of flexibility by providing that certain terms are to be agreed later, or from time to time. There is well-established authority that a court may imply a term that goods should be of reasonable quality and sold at a reasonable price in those circumstances: Foley v Classique Coaches [1934] 2 KB 1.

In so doing, the courts are indicating a willingness to “bridge the gap” between the parties. In this respect, two of the factors which are treated as relevant by the courts are particularly worthy of note. First, the fact that the contract itself (or, as in this case, the overall transaction of which it is part) has been partly performed. This is so notwithstanding the general reluctance on construction of a contract to have regard to subsequent events. Second, the existence of an arbitration clause, which in this case stipulated for the arbitration of disputes by a “market” Tribunal. This is so even though arbitrators are to be guided by the legal principles (in this case those of English law) in the same way as the courts.

However, there remain limits upon how big a “gap” the courts are prepared to bridge. A term may be unenforceable if it appears from the words used or other circumstances that the parties did not intend to be bound until agreement on the points left outstanding had been reached. The courts will not normally compel parties to engage in co-operative processes, with ‘agreements to agree’ (and particularly “good faith” negotiation) being generally unenforceable, as most recently confirmed by the Court of Appeal in Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] Civ 548 (see post).

Each case will turn on its own facts and therefore caution is advisable. Parties looking to incorporate some element of flexibility whilst ensuring that their contract is enforceable would be well advised to lay down in their contract clear criteria (such as reference to an official price list) or machinery (such as the determination of outstanding points by arbitration) for the purpose of determining matters which are left open.