The General Principles of Contract Law - Case Study Example

The General Principles of Contract Law The views expressed by Lord Denning apply the general principle that where there is a fundamental matter left undecided and to be the subject of negotiation, there is no contract.1 This view rests upon the element of uncertainty in contract or agreements made before a contract. Such uncertainties will impede recoveries that are possible on the basis of such agreements. In particular this may also occur in cases where the terms agreed to between the parties and spelt out in an agreement prior to contract are inominate or of an uncertain nature. In such cases the Courts have generally demonstrated a tendency to render a decision on the basis of interpretation of such agreements, taking into account all the circumstances of the case. In the case of contracts where the price for a service or transaction is to be determined, this element of uncertainty has become even more relevant. The extent to which Courts have allowed recoveries in some cases has been determined by the extent to which damages may be suffered by one party, but when there is uncertainty introduced into the contract or pre-contractual agreement, such recoveries may be difficult. In the case of Courtney and Fairbairn Ltd v Tolaini Bros(Hotels) Ltd2 the appellants were property developers and had secured finances for the defendants to develop a hotel. Prior to the appellants securing the monies, they had entered into negotiations with the defendants; there was a written agreement between them that the defendants would negotiate to use the services of the appellant to develop the hotel property. However, when the appellant actually secured the finances, the defendants went ahead and hired different property developers rather than using the services of the appellants. This led to the legal action. Lord Denning, in providing the judgment on the case, pointed out that there had been some preliminary steps taken by both parties as an act of good faith in pursuance of their negotiations. Mr. Courtney of the appellants found a person willing to finance the property development, while the defendant Mr. Toliani appointed a quantity surveyor with a view to negotiating the price with Mr. Courtney. There was a written agreement between them; however Lord Denning did not equate this to a contract. He held that there was no actionable contract between the two parties because the agreement between them was only an agreement “to negotiate fair and reasonable contract sums”, and no agreement could be found “on the price or on any method by which the price was to be calculated.”3 Lord Denning based his judgment on the wording of the contract between the parties which showed that estimates and contract sums had not yet been agreed upon; it was to be agreed in the future and by the parties themselves. On this basis, he concluded: “seeing that there is no agreement on so fundamental matter as the price, there is no contract.”4 The problem arising in a case such as Courtney v Toliani is the question of whether a contract should be held to exist in view of the fact that there was an agreement between the parties to negotiate. There was a duty of good faith implied on the part of both parties, which mandated that the parties work with each other. The case of Channel Home Centers Division of Grace Retail Corporation v Grossman5 held that an agreement to negotiate in good faith, if supported by consideration, is an enforceable contract. Applying this precedent, it would appear that the defendant Toliani would have been liable under contract, especially since Mr. Courtney had arranged finances. However according to Lord Wright in the case of Hillas and Co Ltd v Arcos Ltd6, while discussing agreements to negotiate made before contracts, “there is then no bargain except to negotiate and negotiations may be fruitless and end without any contract”. In such a case, there may be only nominal damages that are caused by repudiation by one party of the contract to negotiate, which will not justify the imposition of a contract by the courts. In the case of British Steel Corporation v Cleveland Bridge and Engineering Co Ltd7 a letter of intent was provided by CBE specifying an intent to enter into a contract with British Steel for the supply and delivery of steel casings. The company proceeded to deliver them despite no formal contract. In this case the Court held that although no contract had come into existence, due to the existence of only a latter of intent rather than a definite contract, British Steel was entitled to be compensated on a quantum meruit basis for the casings it had supplied. Robert Goff J stated: “There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement; everything must depend on the circumstances of the particular case.”8 In the case of British Steel v CBE, there was the absence of an “if” clause in the agreement, which could have led to uncertainty, the issue was merely one of time, since a contract had to be formulated but this had not yet occurred. But there was agreement between the parties on the price; hence this matter was not subject to negotiation. In such cases where the element of uncertainty generated by the “if” does not arise, then letters of intent may be held to be enforceable.9 Although they will not be deemed to be contracts, as stated by Parker J in OTM Ltd v Hydranautics10 the only effect of a latter of intent “would be to enable the defendants to recover on a quantum meruit for work done pursuant to the direction contained in the letter. In the case of Walford v Miles11 which involved a similar action as in the Courtney case, by an appellant on the grounds that defendant had not adhered to the contract to negotiate, the Court held that the defendants were liable to pay damages because they had agreed to lock themselves out of negotiations with other parties for a specified period and they were liable to that extent. The Court pointed out however that “the reason why an agreement to negotiate, like an agreement to agree, is unenforceable is simply because it lacks the necessary certainty.”12 During the process of enforcing the terms of a contract, courts are guided by the agreement between the parties as it is reflected in the wording of the contract, subject to the general contractual rules of offer, acceptance and communication of acceptance of the terms of contract.13 However, when the obligations of the parties remains unclear, due to an “if” clause that may be noted in the terms agreed to between the parties, then an enforceable contract that can eventuate breaches may not exist. The Court may determinate that no contractual breach has occurred, as a result of which no recoveries are possible. For example, in the case of Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha14 it was stated that the “legal consequences of a breach…..depend upon the nature of the event to which the breach gives rise and do not follow automatically….”15 When an agreement is reached between the parties that is “subject to contract”, it is an inominate term which may not be legally enforceable. It is intended to mean a binding agreement that will need to be replaced by a formal contract; however in some instances the courts have introduced flexibility in interpreting the meaning of the phrase.16 For example, in Alpenstow Ltd v Regalian properties plc17 where costs were incurred in the preparation of a contract which did not materialize finally, but those costs were held to be losses, recoveries were not allowed. It was held that the term ‘subject to contract’ meant that the terms agreed to before a formal agreement could not be incurred and no restitution for losses could be claimed. In other cases, courts have enforced the terms of such “provisional agreements” for which the “legalized agreement” had not yet been signed.18 In charter contracts for example, where a given option may or may not arise, and where a breach cannot be predicted and is caused by unanticipated developments, such breaches may not be liable for damages because of the element of uncertainty19. This was also the reason why in the case of Walford v Miles cited above, where the question of what constituted “fair and reasonable sums” was in dispute, the Court held that a contract did not exist due to uncertainty, hence such terms could not be enforced and defendants were liable merely to the extent they had locked themselves into negotiating only with the appellants for a specified period. In the case of British Bank for Foreign Trade v Novinex Ltd20 however, the Court held that an agreement to negotiate was legally enforceable. The terms used in the contract were “at a price to be agreed” which was deemed to constitute enough certainty to enforce the payment of a reasonable amount as set forth by the court. This was also the case in Foley v Classique coaches, where further terms were to be agreed by the parties21. These cases show that Courts have allowed recoveries where some certainty can be imputed into the agreement. A notable case which attempted to tackle the issue and put an end to commercial uncertainty in contract was that of In re Spectrum Plus Ltd.22 Several legal questions were addressed in this case and clarity was sought to be brought into the issue of uncertainty in commercial transactions. Turner has discussed this case in detail and points out the two stage characterization approach that was adopted by the Court which appears to be correct, however he also notes that company charge characterization is unlikely to address many of the legal difficulties that arise in terms of uncertainty in contract.22 The basic question that rises in the case of contracts to negotiate, letters of intent or such preliminary agreements is the question of certainty in the contract and the Courts are often guided by the wording that exists in the agreement. From the above discussion of cases, it appears that the guiding factor that leads the courts to determine whether or not an enforceable contract exists will depend upon the extent to which the intentions of the parties can be clearly ascertained. The issue of uncertainty in contract and the question of whether or not a contract to negotiate will be deemed to be enforceable will depend to a great extent on the price that is specified and the extent of damages, if any, that are suffered by the parties. In the case of Courtney v Toliani, there was a clear indication in the wording of the letter between the parties that the price for services was to be negotiated between them and there was no indication of such an agreement on price having been reached, which rendered the contract legally non enforceable. In cases where there is an “if” element introduced into the contract, where the price is not clearly stated but is subject to be negotiated, then recoveries by an injured party will not be possible because a definite contract which clearly spells out the price which both parties have agreed to, does not exist. However, as may be noted from the discussion of cases above, there have been instances where the Courts have allowed recoveries, but this is only when the element of uncertainty can be eliminated through an established clarity in the intentions of the parties to go through with a contract. It appears therefore, that the mere absence of a formal contract and the existence of a contract to negotiate will not impede recoveries as a general rule in every instance. Rather, on the basis of the judgments handed down by the courts, it appears that the good faith of the parties to enter into a contract will be enforced only when there is a clear demonstration of some kind of agreement reached between the parties on the price and contractual terms and the existence of such agreement can be determined by the courts through an interpretation of the intent of the parties. Unless there is a definite agreement between the parties, which indicates that a contract is in place, there will be uncertainty in the contract where the intentions of the parties leading to agreement cannot be determined and will result in a legally non enforceable contract. Bibliography * Furmston, Michael, 2006. “Powell-Smith and Furmston’s Building Contract Casebook”, Blackwell Publishing at pp 4 * McKendrick, Ewan, 2000. “Contract Law” (4th edn) Basingstoke: Macmillan, pp 42-45 * Turner, P.G. (2006). “Charge characterization in English law: A settled debate?” Singapore Journal of Legal Studies, July 2006: 200 Cases cited: * Alpenstow Ltd v Regalian properties plc (1985) 2 All ER 545 1 WLR 721 * Branca v Cobarro (1947) KB 854; (1987) 2 All ER 101 * British Bank for Foreign Trade v Novinex Ltd (1949) 1 KB 623 * British Steel Corporation v Cleveland Bridge and Engineering Co Ltd¸ Queen’s Bench Division, (1981) 24 BLR 94 * Channel Home Centers Division of Grace Retail Corporation v Grossman (1986) 795 F 2d 291 * Courtney and Fairbairn Ltd v Tolaini Bros(Hotels) Ltd (1975) 1 WLR 297 CA 981) 2 Lloyds Reporter 211 * Foley v Classique Coaches Ltd (1934) 2 KB 1 * Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha (1962) 2 QB 26 * In re Spectrum Plus Ltd (2005) A.C. 680 (2005) UKHL 41 * Maredelanto Co. Nav. S.A. v. Bergbau-Handel GmbH. ("The Mihalis Angelos") [1971] 1 QB 164 * OTM Ltd v Hydranautics (1 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297; [1975] 1 All ER 716. * Turriff Construction Ltd v Regalia Knitting Mills Ltd (1971) 9 BLR 20 * Walford v Miles (1992) 2 AC 128 Read More