Case Update: Agreement to Agree is not Fatal (in a Subsisting Contract)

It is a well-settled principle of law that a so-called agreement to agree between parties is void and unenforceable for uncertainty. Lord Ackner in the House of Lords’ decision in Walford and Others v Miles and Another [1992] 2 AC 128  observed (at 138) that “[t]he reason why…an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty.”

However, in the recent case of MRI Trading AG v Erdenet Mining Corporation LLC [2013] EWCA Civ 156, the English Court of Appeal unaminously upheld the decision of the High Court which had set aside an arbitration award on the basis that the tribunal had made an error of law with respect to the enforceability of certain clauses which appeared to be agreements to agree.

The parties had entered into a contract for the sale of copper concentrate by Erdenet to MRI. However, the contract had left certain key terms subject to further agreement by the parties. In particular, the shipping schedule, the treatment charge (“TC“) and the refining charge (“RC“) were subject to further negotiations and agreement by parties. A dispute arose between the parties as to whether Erdenet was obliged to deliver copper concentrate to MRI under the contract and the matter was submitted to arbitration. The Tribunal found that there was no obligation on the part of Erdenet to deliver the copper concentrations as the relevant clauses constituted an agreement to agree which impugned the entire contract.

Both the English High Court and Court of Appeal disagreed and held that the factual matrix was such that it was obvious that parties had intended the contract to have legal effect. This was especially so given that the contract was one of three similar contracts entered into as part of a settlement agreement between the two parties. If the matter had been before them, the English courts would have implied the necessary terms into the contract in order to save it.

Decision of the Tribunal

The findings and conclusions of an arbitral tribunal are generally granted a lot of deference by the courts. The English courts are generally loathe to set aside awards from an appeal on a question of law (see section 69 of the UK Arbitration Act 1996) and will only do so on the basis that the tribunal was “obviously wrong” or one which “no reasonable tribunal correctly applying the relevant legal principles could have reached such a conclusion” (see paragraph [1] and [23]).

It is therefore worth setting out the Tribunal’s reasoning in some length. It also gives a good summary of what might generally be understood as constituting an unenforceable agreement to agree.

“The Tribunal has considered whether or not Clauses 6.1 and 9.1 and 9.2 (shipping schedule and TC/RC) are a matter of detail, or a significant part of the pricing of the goods. While clearly aware that the largest part of the price was purely dependent upon the underlying LME copper price, the Tribunal is also aware, as was confirmed by the experts, that the negotiation of the TC/RC plays a significant role in the conclusion of concentrates contracts. Although the monetary value is considerably smaller than that of the underlying, it is still an amount of around $200,000-$300,000. The Tribunal concludes that the TC/RC is an integral part of the contract negotiation, and is not to be dismissed as a matter of detail. Likewise, the shipping schedule is not a matter of detail, as it needs to conform to the ultimate requirements of the final end-user. It is worth noting the following (Lewison, The Interpretation of Contracts) “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.”

Furthermore, after citing the relevant legal authorities (which the English courts and the parties all agreed was an accurate summary of the law, see paragraph [16]), the Tribunal concluded as follows:

“17. Clauses 6.1 and 9.1 and 9.2 constitute an agreement to agree. In Foley v Classique Coaches the court found that it could imply a term into the contract; however, in this case there had already been some lengthy period when the contract had been performed. In the case before the Tribunal, as noted above, the contract in question is to be construed in the light of its own wording, and it is clear that there had been no part performance. Relevantly, in May and Butcher Ltd v the King (1934), Viscount Dunedin observed “The simple answer in this case is that the Sale of Goods Act provides for silence on the point and here there is no silence, because there is a provision that the two parties are to agree.”

18. In the light of the above, the Tribunal finds that the answer to the question “Was there an enforceable obligation on Erdenet to deliver the copper concentrates?” is no. The contract had left material terms as ‘agreements to agree’, and the Tribunal has no option but to conclude that the delivery obligation was therefore non-existent.

19. As the Tribunal finds there is no enforceable obligation to deliver, the second and third questions addressed, “What is the reasonable price at which the concentrates should have been delivered” and “When should the concentrates have been delivered” therefore fall away.”

Decision of the English Courts

As mentioned, parties and the courts were in agreement that the Court of Appeal decision of Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD [2001] 2 Lloyd’s Rep 76 (per Rix LJ) and in BJ Aviation Ltd v Pool Aviation Ltd [2002] 2 P & CR 25 (per Chadwick LJ) set out an accurate summary of the law with respect to agreements to agree and the implication of terms to save such an agreement (see paragraph [16]).

In brief, a critical distinction is to be drawn between a contract which has not come into being “to be agreed” as opposed to a subsisting contract with future executory obligations “to be agreed” where parties did not intend for the contract to fall away in the absence of agreement.

In the case of the former, an agreement to agree is fatal to the contract coming into being. In the case of the later, “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 reddi potest” (see Mamidoil-Jetoil at paragraph [69(iv)]; see also BJ Aviation at [21] and [23]).

The critical question is whether parties were free to agree or disagree with the term to be determined. If parties were free to disagree and walk away, then the clause would be an unenforceable agreement to agree and void for uncertainty. If however,

“…the court concludes that the true intention of the parties was that the matter to be agreed in the future is capable of being determined, in the absence of future agreement, by some objective criteria of fairness or reasonableness, then the bargain does not fail because the parties have provided no machinery for such determination, or because the machinery which they have provided breaks down. In those circumstances the court will provide its own machinery for determining what needs to be determined—where appropriate by ordering an inquiry (see Sudbrook Trading Estate Ltd v. Eggleton [1983] A.C. 444).” (see BJ Aviation at paragraph [24])

In this respect, both the High Court and the Court of Appeal considered that the true intent of the parties was that they were not free to disagree and thereby walk away from the contract. In particular, the “use of the mandatory ‘shall’ [in the relevant clauses was] a strong indicator that parties did not intend that a failure to agree should destroy their bargain” (see paragraph [21]).

The Court of Appeal stressed that Erdenet had “the advantage of some performance reflecting the parties agreement on a long-term relation“. Furthermore, the contract in question was one of three similar contracts which arose out of a settlement agreement in which MRI had abandoned its claim against Erdenet (see paragraph [18]). In this respect, the Court of Appeal considered that the Tribunal had been wrong to construe the contract without reference or regard to the settlement agreement (see paragraph [14]).

Crucially, the Court of Appeal found that that the Tribunal had erred by (a) not addressing the “critical question” of what was the parties intention in the event that they could not agree on the schedule or charges were not reached and (b) “not ask[ing] themselves whether the parties [had] supplied a machinery whereby any uncertainty [could] be resolved” (see paragraph [24]).

Accordingly, the award was a decision of a Tribunal that had construed the contract erroneously and was one that “no reasonable tribunal correctly applying the relevant legal principles could have reached the conclusion that the contract was unenforceable“. Therefore, the award had to be set aside and there was no scope to remit the decision back to the Tribunal (see paragraph [26]).

Conclusion

The issue of legal certainty of clauses has been the subject of recent Singapore cases. This was examined in relation to an agreement to negotiate in good faith (see HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd, [2012] SGCA 48) as well as the enforceability of the preconditions in a multi-tier arbitration clause (see International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and anor, [2012] SGHC 226).

In HSBC v Toshin, the Singapore Court of Appeal at paragraph [45] similarly considered (like the English courts) that the courts should not be too quick to strike down contractual provisions, but should instead strive to give effect to what parties have agreed to. It held that,

“[i]t is important that the courts, as upholders of bargains, give practical effect to agreements entered into by commercial persons, rather than be quick in finding abstract difficulties. The choice made by contracting parties, especially when they are commercial entities, on how they want to resolve potential differences between them should be respected. Our courts should not be overly concerned about the inability of the law to compel parties to negotiate in good faith in order to reach a mutually-acceptable outcome.”

As a matter of commercial certainty and policy, it makes sense that courts strive to uphold contractual provisions rather than strike them down on the basis of “abstract difficulties”.

Nonetheless, in the case of agreements to agree on material terms of the contract, commercial parties should not be too quick to rely on the courts to imply the necessary terms to resolve any disagreements or to provide a reasonable sum or fair market value. Instead, such parties would be well advised to include an explicit deadlock/dispute resolution mechanism into the agreement instead.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
This entry was posted in Arbitration, Singapore, UK and tagged , , , , , , , , . Bookmark the permalink.

2 Responses to Case Update: Agreement to Agree is not Fatal (in a Subsisting Contract)

  1. Pingback: Singapore Law Watch Commentary: Agreement to Agree | Singapore International Arbitration Blog

  2. liaqat hayat says:

    Can you clarify where ‘agreement to agree’ can be used without any ambiguity

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