EWCA Civ 406,  2 Lloyd's Rep 76
Court of Appeal
The issue before the court was whether a binding 10 year contract had been entered into between the parties despite the fact that a price had not been agreed beyond the first 2 years. Was the 'contract' merely 'an agreement to agree'?
1. ... these appeals raises respectively a point of construction on the wording of a contract dated Mar 5, 1993. Under this contract, the claimant (Mamidoil-Jetoil Greek Petroleum SA or "Jetoil") contracted with the defendant (Okta Crude Oil Refinery AD or "the refinery") concerning the "manipulation" (which I shall call the "handling") of crude oil brought in tankers to Jetoil's facilities at Salonica in north eastern Greece and put on rail for carriage to the refinery at Skopje in Macedonia. The 1993 contract was operated successfully by its parties down to the end of 1999. There was then disagreement...
The two issues
4. The issue raised by the appeal (Jetoil's appeal) is as to the length of the 1993 contract. Mr Justice Thomas held that the 10 year term referred to in cl 7 was not binding. It was only a maximum period, and continued existence of the contract beyond Dec 31, 1994 (see cl 3) was dependent upon further agreement as to the handling fee for future years (at p 561). Jetoil submits, on the contrary, that the contract has a fixed 10 year term and that the handling fee for the period beyond Dec 31, 1994, in the absence of agreement, would have to be fixed as a reasonable fee by the Court. The refinery submits that the Judge was right.
7. In themselves these two issues are, or appear to be, relatively short points of construction. There is, however, something of a background to the relationships between the parties and it is necessary to say something about that.
The issue on the appeal: cll 3 and 7 of the 1993 contract
50. Jetoil submits that the primary provision is cl 7, with its reference to a 10 year term. Where a contract has without question come into existence in the first place, but a necessary term, such as price, has only been agreed for a specific period of a longer term contract, the Courts will do what they can to uphold rather than destroy the bargain by implying the need for a reasonable price. The refinery, on the other hand, submits that Mr Justice Thomas was right to say that, beyond the end of 1994, the 1993 contract was a mere agreement to agree and thus unenforceable, indeed no contract.
51. Mr Justice Thomas essential reasoning is contained in the following pars (at p 561):
Moreover the agreement leaves at large questions as to whether the rate is to be affected by the volume of oil manipulated or whether if the price is fixed for a longer period, whether the price should be higher or lower. If a price was to be fixed by an arbitrator in default of an agreement, some guidance would be expected as there would be no obvious market price for such work; for example, in long term pipeline contracts, provision is sometimes made for the price to be fixed by reference to the rate of return on the investment in the facility.
In my view, when the parties provided for the agreement to be valid for 10 years, they fixed the maximum period for which it was to apply. They envisaged that the parties would, after the initial period for which the price was agreed, try and agree a new price and the period for which that subsisted; however, the continued subsistence of the agreement was dependent on that agreement being reached; they never envisaged the price payable to be a reasonable one, but a price to be reached by agreement. In other words there would be a series of agreements for which the document signed on Mar 5, 1993 was the framework.
52. Although each case has ultimately to be decided on its own facts, there are some well known authorities which it is necessary to mention, for the sake of such principle as it is possible to extract from them, rather than for their decisions.
53. May and Butcher Ltd v The King,  2 KB 17 is in one sense the leading case within the last century, decided in 1929, and is authority for the "well recognized principle of contract law that an agreement between two parties to enter into an agreement in which some critical part of the contract matter is left undetermined is no contract at all", or "the principle that you cannot agree to agree" (at p 20 per Lord Buckmaster). The case concerned the sale of old tentage at prices as "shall be agreed from time to time" and at such delivery periods as should be similarly agreed. It was held that there was a mere agreement to agree and that no contract had ever come into existence. Lord Dunedin said (at p 21) --
No doubt as to goods, the Sale of Goods Act, 1893, says that if the price is not mentioned and settled in the contract it is to be a reasonable price. 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.
55. The very next case, however, also in the House of Lords, went the other way. In Hillas and Co Ltd v Arcos Ltd, (1932) 147 LT 503 the parties had agreed a contract for the sale of Russian timber. The contract was for "22,000 standards softwood goods of fair specification over the season 1930", with an option "of entering into a contract with sellers for the purchase of 100,000 standards for delivery during 1931". The 1930 season contract was performed and two problems arose in connection with the option for 1931, one as to the identity of the goods sold, the other as to whether the option merely contemplated a future bargain the terms of which remained to be settled. The first problem was solved (a) by implying into the option the term "of softwood goods of fair specification", and (b) by holding that the term "of fair specification" could be ascertained objectively in the absence of agreement by the parties. The second problem was solved by holding that there was an immediate contract for the stated option, on terms which were either sufficiently certain or could be made certain...
61. In Foley v Classique Coaches Ltd,  2 KB 1 the sellers sold to the buyers a piece of land to use for the latter's business as coach proprietors, and also contracted with them to supply all the petrol required for that business "at a price to be agreed by the parties in writing and from time to time". There was an arbitration clause. The Court of appeal said that a term was to be implied that in default of agreement the price of the petrol was to be a reasonable price: if that could not be agreed, it could be settled by arbitration. The fact that the contract had operated in the past, and was part of an overall transaction under which the land had been conveyed, as well as the utility of the arbitration clause, were all factors in the Court's decision. It might have been said that the critical factor on the reasoning of May and Butcher v The King was that the language of "to be agreed" had been used, thus ousting the possibility of implying a term for a reasonable price: but that was not the result. As Lord Justice Scrutton said (at p 10):
In Hillas & Co v Arcos the House of Lords said that they had not laid down any universal principles of construction in May & Butcher v The King, and that each case must be decided on the construction of the particular contract . . .
Lord Justice Maugham said (at p 13):
I desire to say, first, that it is plain from the surrounding circumstances that the agreement as to the sale and purchase of the petrol was intended to be a binding contract and it formed part of the inducement for the sale of the land. Secondly, the agreement was duly stamped and bears all the signs of a legal contract, and was not, as in May & Butcher v The King a mere informal letter.
62. Foley v Classique Coaches was approved by Lord Wright in G Scammell & Nephew Ltd v Ouston,  AC 251, and in the same case Viscount Maugham said (at p 255):
In order to constitute a valid contract the parties must so express themselves that their meaning can be determined with a reasonable degree of certainty. It is plain that unless this can be done it would be possible to hold that the contracting parties had the same intention; in other words the consensus ad idem would be a matter of mere conjecture. This general rule, however, applies somewhat differently in different cases. In commercial documents connected with dealings in a trade with which the parties are perfectly familiar the court is very willing, if satisfied that the parties thought that they made a binding contract, to imply terms and in particular terms as to the method of carrying out the contract which it would be impossible to supply in other kinds of contract: see Hillas & Co Arcos, Ltd.
63. In British Bank for Foreign Trade v Novinex,  1 KB 623 the Court of Appeal upheld an agreement to pay "an agreed commission on any other business transacted with your friends". The Court approved this passage from the judgment of Mr Justice Denning at first instance (at pp 629-630):
The principle to be deduced from the cases is that if there is an essential term which has yet to be agreed and there is no express or implied provision for its solution, the result in point of law is that there is no binding contract. In seeing whether there is an implied provision for its solution, however, there is a difference between an arrangement which is wholly executory on both sides, and one which has been executed on one side or the other. In the ordinary way, if there is an arrangement to supply goods at a price "to be agreed", or to perform services on terms "to be agreed", then although, while the matter is still executory, there may be no binding contract, nevertheless, if it is executed on one side, that is, if the one does his part without having come to an agreement as to the price or the terms, then the law will say that there is necessarily implied, from the conduct of the parties, a contract that, in default of agreement, a reasonable sum is to be paid.
64. In F & G Sykes (Wessex) Ltd v Fine Fare Ltd,  1 Lloyd's Rep 53 chicken breeders entered into a five year agreement with a supermarket chain to provide a stipulated number of chicks in the first year and thereafter "such other figures as may be agreed". There was an arbitration clause. The essence of the decision is in the following passage from the judgment of Lord Denning, MR (at pp 57-58):
In a commercial agreement the further the parties have gone on with their contract, the more ready are the Courts to imply any reasonable term so as to give effect to their intentions. When much has been done, the Courts will do their best not to destroy the bargain. When nothing has been done, it is easier to say that there is no agreement between the parties because the essential terms have not been agreed. But when an agreement has been acted upon and the parties, as here, have been put to great expense in implementing it, we ought to imply all reasonable terms so as to avoid any uncertainties. In this case there is less difficulty than in others because there is an arbitration clause which, liberally construed, is sufficient to resolve any uncertainties which the parties have left . . . You can either imply a term that, in default of agreement, the number shall be a reasonable number, with a subsequent provision that in case of any dispute as to what is reasonable, it should be determined by arbitration: or, alternatively, run the two terms together and say "such reasonable figures as the arbitrator may determine". Whichever is adopted, it all comes to the same thing.
65. In Sudbrook Trading Estate Ltd v Eggleton,  AC 444 four leases contained options to purchase "at such price . . . as may be agreed upon by two valuers . . ." The lessors refused to appoint a valuer and the agreed valuation mechanism therefore could not be carried out. The Court of Appeal held the options to be mere agreements to agree, but the House of Lords held that they were contracts for sale at a fair and reasonable price, and that on the breakdown of the agreed machinery for establishing that price there could be substituted for it the Court, since the machinery was a subsidiary and non-essential part of the contract. The context was not that of a commercial contract and the particular difficulty of the case was that there existed earlier authority that the Courts would not intervene to substitute themselves for the agreed valuation machinery where that had broken down. That authority, which bound the Court of Appeal, was overruled in the House of Lords (Lord Russell of Killowen dissenting). The House of Lords had no difficulty in construing the option, by implication, as one for sale at a fair and reasonable price. Lord Fraser cited with approval Lord Dunedin's invocation of the principle of certum est quod certum reddi potest in May and Butcher v The King at 21.
66. The interest of Sudbrook Trading v Eggleton for present purposes is that it may be said to demonstrate the difficulty for the parties of providing for a price when the event which requires the determination of the price will not happen until some time in the future: it is a price which, as under any long term contract, cannot be determined at the time of contract. There the device was used of referring the valuation to a panel of valuers. But, as Lord Fraser said (at p 483F-G) --
In the ordinary case parties do not make any substantial distinction between an agreement to sell at a fair value, without specifying the mode of ascertaining the value, and an agreement to sell at a value to be ascertained by valuers appointed in the way provided in these leases. The true distinction is between those cases where the mode of ascertaining the price is an essential term of the contract, and those cases where the mode of ascertainment, though indicated in the contract, is subsidiary and non-essential.
67. There is, in my view, implicit support here for the doctrine that in a commercial contract, which, when dealing with the future and sometimes the long-term future of necessity leaves certain matters such as price to be worked out over time, an arbitration clause assists the Court to find sufficient certainty by means of the implication of what is reasonable. Which is not to say, that the Court will not itself provide the dispute resolution machinery, even in the absence of an arbitration clause.
68. In G Percy Trentham V Archital Luxfer Ltd,  1 Lloyd's Rep 25 the Court of Appeal was considering whether certain contracts had ever been concluded. The earlier of the disputed contracts had in fact been performed. Lord Justice Steyn at p 27 referred to British Bank for Foreign Trade Novinex at p 630 where Mr Justice Denning (see above) had spoken of the relevance of one sided performance. Lord Justice Steyn continued:
The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations. It will often make it difficult to submit that the contract is void for vagueness or uncertainty. Specifically, the fact that the transaction is executed makes it easier to imply a term resolving any uncertainty, or, alternatively, it may make it possible to treat a matter not finalised in negotiations as inessential.
69. In my judgment the following principles relevant to the present case can be deduced from these authorities, but this is intended to be in no way an exhaustive list:
Each case must be decided on its own facts and on the construction of its own agreement. Subject to that:
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".
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.
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.
Where a contract has once come into existence, even the expression "to be agreed" in relation to future executory obligations is not necessarily fatal to its continued existence.
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 reddi potest.
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 had had to make an investment premised on that agreement.
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.
Such implications are reflected but not exhausted by the statutory provision for the implication of a reasonable price now to be found in s 8(2) of the Sale of Goods Act, 1979 (and, in the case of services, in s 15(1) of the Supply of Goods and Services Act, 1982).
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.
70. In the present case, the following factors are to be found. The 1993 contract is undoubtedly a contract, and that is not in dispute. The only question is whether it survives as a contract for longer than the period for which cl 3 provides an agreed handling fee. The contract stipulates a 10 year period, even though cl 3 agreed a fee for less than the first two years (down to the end of 1994). The annex to the 1993 contract contemplates a relationship of even more than 10 years. The context is commercial, and the parties have long familiarity both with each other and the commercial arrangements made between themselves...Clause 3 does not contain the language "to be agreed", with which the Courts have sometimes had difficulty. The contract contains an arbitration clause, even though the parties were content to leave their disputes, when they came, to the Commercial Court. The contract in fact survived until at least the end of 1999, with successive agreements over periods of one to two years as the terms of cl 3. As far as is known, the parties had no difficulty in agreeing the fee for the purposes of cl 3 as the years passed: in fact it remained at US$4 per tonne.
73. In my judgment, the 1993 contract should be viewed as a contract for a fixed period of at least 10 years and a term should be implied that in the absence of agreement reasonable fees should be determined for the period after 1994. I would seek to put the matter in the following way.
(i) The context is that of a long term (10 year) commercial agreement between parties who have had long familiarity with the subject matter of agreement and with each other.
(ii) The agreement in question undoubtedly arises out of a contract, the 1993 contract. This is not, therefore, one of those cases where the initial issue is whether the parties have ever reached the stage of contractual relations. If the question is whether any contract has ever been arrived at, lack of certainty in essential terms may well make it difficult or impossible to say that the parties ever intended to have legal relations, or even if they did, whether they had reached sufficient certainty to enable a Court to find a contract. If they never achieved a contract in the first place, then there is no assistance to be gained from agreement of an arbitration clause, or from statutory or any other implications. That is not to say, however, that the possibility of such implications or the presence of such an arbitration clause may not assist the Court in the overall question of whether a contract can be found. However, once a contract exists, it not only needs to be construed for its terms, but the Courts will seek to make it work, as the parties must have intended, in accordance with its terms, that it should.
(iii) The parties have provided that their 1993 contract is "valid for 10 years" as from signature (cl 7). This language is, to my mind, particularly strong. It is the language of legal effectiveness. It is not the language of mere projection. Nor is cl 7 talking about a 10 year umbrella agreement which is separate from the terms of the 1993 contract as a whole. That is shown both by the fact that cl 7 begins "This agreement is valid for 10 years . . ." (emphasis added) and by its annex (see cl 5) which not only contemplates a longer term still, but distinguishes that longer term from "The ten years initial contract term . . .". That language fits with the strong language of cl 7. If the "initial contract term is 10 years, then I do not see how it can be said that the initial contract term is only until the end of 1994.
(iv) It follows that if the effect of cl 3 is to cut down the contract to a period ending with 1994, this cannot be so as a matter of construction, but because the agreement is incomplete or uncertain beyond that period. The authorities suggest, however, that at any rate in principle there is no difficulty in implying a term that the fee should be a reasonable one.
The contract does not expressly state that the fee after the end of 1994 is "to be agreed". It is simply silent as to what is to happen in that period. Therefore, this case is simply not presented with the difficulties which arise, in the face of "to be agreed" language, where it is uncertain whether there is any contract at all. It cannot be said, as was said in May and Butcher v The King, that the statutory implication of a reasonable price, or an implication that the fee should be such reasonable fee as the arbitrator may decide, is excluded by express agreement that the parties were to agree the figure.
(vi) There is no evidence that the resolution of a reasonable fee would cause any difficulty at all. On the contrary, the evidence is the other way. In practice, these parties, as well as Makpetrol and GM, had managed to agree a handling fee throughout the best part of 20 years up to 1999. When difficulty arose, it was because of something quite extraneous, namely the merger which brought the refinery and GM into the same group. Although it is not possible to say that there was a market or list price for the handling service, nevertheless Jetoil was not a monopoly, nor, I would infer, was the refinery the only customer of the facilities at Salonica. In the absence of evidence to the contrary, I would infer that it was perfectly possible to derive from the agreements of price and price increases over the years objective criteria for working out a reasonable fee. Thus, although it is true to say that the contract itself contained no mechanism or guidance (other than the arbitration clause) as to how a reasonable fee would be derived, I do not consider that the contract should fail on that ground. Contractually derived criteria or guidance may be of assistance in finding an implied term for a reasonable price: but the authorities indicate that the Courts are well prepared to make the implication even in their absence.
(vii) I do not consider that the additional issues as to the length of any period of price revision, or as to quantity discounts, raise any different problems. In practice agreement was made for one or two years. I see no difficulty in an arbitral tribunal or Court finding that that was a reasonable period for which to fix the fee. The discount for throughput above a certain figure is simply another factor of price. Again, it gave the parties no difficulty over the years.
(viii) The presence of an arbitration clause was not relied on as a particularly strong point by Mr Howard. But I do not think that it is without its effect. It is a contractual mechanism for resolving "Any dispute . . . which cannot be amicably resolved". It involves the parties' autonomous choice of their tribunal. It seems to me to be apposite to deal with a lacuna which, in common with other contracts which have to provide for future events, commercial practicalities lead parties to leave unresolved at the time of contract.
(ix) There was no evidence, or none that was brought to the Court's attention, about investment by Jetoil at its Salonica facilities to deal with its contracts with the refinery (and Makpetrol). It may be that any investment necessitated by the 1979 contract had already been financed by profits made under that contract. It is unknown to what extent the 1993 contract might have required further investment -- perhaps none at all. Therefore, there is not much assistance here in support of Jetoil's construction. But certainly, there is nothing in this consideration to support the refinery's construction. In principle, a 10 year contract requires facilities such as Jetoil's to invest for the future, or to be wary about contracting their services elsewhere, in case they run out of capacity. Therefore, if anything, this factor also cuts in favour of the necessary and businesslike implication of a reasonable fee.
74. For all these reasons, I would respectfully differ from the decision of Mr Justice Thomas on this issue. The preliminary issue posed in connection with cl 3 was as follows:
Whether, upon the failure of the parties to agree a price for manipulation services from and after 1 January 2000 pursuant to the agreement:
(a) the agreement is to be treated as discharged;
(b) whether any (and if so what) mechanism is available to fix such price.
I would answer these questions as follows: (a) No. (b) Yes; a term is to be implied that a reasonable fee, including a reasonable discount for throughput of more than 500,000 tonnes per year, is to be fixed for a reasonable period from and after Jan 1, 2000.
75. In conclusion, Jetoil's appeal succeeds: the 1993 contract is a binding agreement for a minimum of 10 years, and reasonable terms for the manipulation fee for the period after the end of 1999 need to be found...