[2009] CSOH 128
In 1999 Hallam entered into an option agreement with a landowner, Kerr, in which Hallam were given an option to purchase land at a price to be agreed. In 2003 R&D entered into a contract with Hallam by which R&D contracted to buy part of the land from Hallam at a price of £571,314. The purchase contract was subject to conditions precedent. One of conditions precedent, which is at centre of the dispute in this action, is clause 4.1.10 which provided:
"The [contract] shall be essentially conditional upon:
4.1.10 the Seller [Hallam] agreeing a purchase price for the Subjects with the current proprietor in terms wholly acceptable to the Seller (the Seller being required to use all reasonable endeavours in this regard)"
The issue that arose was whether the obligation to use all reasonable endeavours was an agreement to agree and therefore unenforceable.
Lord Hodge
Discussion
[33] There are many cases in which it has been held that an agreement to agree cannot be enforced as it is too uncertain. In Foley v Classique Coaches Ltd [1934] 2 KB 1 Maugham LJ (at p.13) stated:
"It is indisputable that unless all the material terms of the contract are agreed there is no binding obligation. An agreement to agree in the future is not a contract; nor is there a contract if a material term is neither settled nor implied by law and the document contains no machinery for ascertaining it."
In May and Butcher Ltd v The King [1934] 2 KB 17 Lord Buckmaster (at p.20) stated
"It has long been a well recognised 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."
Viscount Dunedin in the same case (at p.21) said:
"To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties. In the system of law in which I was brought up, that was expressed by one of those brocards of which perhaps we have been too fond, but which often express very neatly what is wanted: "Certum est quod certum reddi potest.""
[34] While in recent years some judges have questioned whether the court would now reach the same conclusion on the facts as the House of Lords did in May and Butcher Ltd, the courts have confirmed the proposition that an agreement to agree cannot be enforced. Where terms which the law treats as essential or which parties have agreed are essential for their bargain have not been agreed and cannot objectively be ascertained, the contract is unenforceable. Thus in Little v Courage Ltd (1994) 70 P&CR 469 Millett LJ, in a passage which judges have adopted in later cases, stated (at p.476):
"An undertaking to use one's best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use one's best endeavours to agree, however, is no different from an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable legal obligation."
[35] Another case to which judges have often referred in recent years is Walford v Miles [1992] 2 AC 128. In that case the defendants entered into an oral agreement to negotiate exclusively with the plaintiff for sale of a photo processing business. The plaintiff's counsel submitted that there was an implied term that the defendants would continue to negotiate in good faith with the plaintiff so long as the defendants wished to sell the business. He also argued that the defendants could only terminate the negotiations "for a proper reason" but he submitted that the test of whether the reason given for termination was a proper reason was a subjective one: the defendants could be irrational so long as they acted honestly. The House of Lords decided that the agreement was unenforceable. Lord Ackner (at p.138C-G) stated:
"The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively, a proper reason existed for termination of negotiations? The answer suggested depends upon whether the negotiations have been determined "in good faith." However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. .... How is the vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an "agreement?" A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a "proper reason" to withdraw. Accordingly a bare agreement to negotiate has no legal content."
[36] The courts have taken a similar approach in P & O Property Holdings Ltd v Norwich Union Life Insurance Society (1994) 68 P & CR 261, Lord Browne-Wilkinson at p.268, East Anglian Electronics Ltd v OIS plc 1996 SLT 808, the Lord President (Lord Hope) at p.812E-F, Phillips Petroleum Co UK Ltd v Enron Europe Ltd [1997] CLC 329, Potter LJ at pp.343-344, London & Regional Investments Ltd v TBI Plc [2002] EWCA Civ 355, Mummery LJ at paras 39 and 40, Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand [2002] 2 NZLR 433, at paras 114-117 and Multiplex Construction (UK) Ltd v Cleveland Bridge UK Ltd [2006] EWHC 1341 (TCC), Jackson J at paras 633-637.
[37] Hallam's first ground of challenge relied on these authorities and categorised clause 4.1.10 as an agreement to agree. Their second ground of challenge also rested principally on the uncertainty of the requirement that the price to be agreed should be "wholly acceptable" to them…
… as I explain below, I do not consider that the clause is unenforceable either for that reason or because it is an agreement to agree.
[39] While the courts require legal certainty and do not enforce an agreement if parties have not sufficiently formulated an intention, judges have repeatedly stated the position that where they are satisfied that parties intended to enter into binding obligations they should attempt, so far as is consistent with essential principle and binding precedent, to give effect to the agreement and not be the destroyer of bargains: Hillas and Co Ltd v Arcos Ltd [1932] 147 LT 503, and G Scammell and Nephew Ltd v HC and JG Ouston [1941] AC 251, Lord Wright at p.268. In R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd 1964 SC 308, in a passage which appears relevant to the present case, Lord Guthrie (at p.332) stated:
"The object of our law of contract is to facilitate the transactions of commercial men, and not to create obstacles in the way of solving practical problems arising out of the circumstances confronting them, or to expose them to unnecessary pitfalls. I know of no rule of law which prevents men from entering into special agreements to meet the requirements of special circumstances."
More recently Lord Steyn has stressed that, when considering contractual problems, the courts should seek to uphold the reasonable expectations of honest men: G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd's Rep 25 at p.27, First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd's Rep 194 at p.196 and his article, "Contract law: fulfilling the reasonable expectations of honest men" (1997) 113 LQR 433. The yardstick in a commercial contract is the reasonable expectations of sensible businessmen.
[40] The task of the court of attempting to uphold such expectations will vary depending on the nature of the alleged contract. Where the contract provides an objective criterion, such as the current open market price, and states that the parties are to agree the price, the court can determine the price if the parties fail to do so: Scottish Wholefoods Collective Warehouse Ltd v Raye Investments Ltd 1994 SC 65, Didymi Corporation v Atlantic Lines and Navigation Co Inc [1987] 2 Lloyd's Rep 166, [1988] 2 Lloyd's Rep 108. In such circumstances the requirement to agree may be seen as inessential to the operation of the clause and the court itself may apply the objective criterion or standard. Thus, where the court is able to identify the objective criterion, it may provide the machinery for ascertaining the price where the contractual machinery has broken down: Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444, Lord Fraser of Tullybelton at p.484C. As Lord Hope stated in Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd's Rep 209 (at p.223), "commercial contracts should so far as possible be upheld".
[41] In this case the disputed clause is in formal missives drafted by skilled solicitors. There can be no doubt that the clause is part of a document which the parties intended to have contractual effect…
[44] In some cases the courts will enforce what can properly be called an agreement to agree. Thus in The Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyd's Rep 205 (PC), the Privy Council considered that an implied obligation to make reasonable endeavours to agree the terms of supply and failing which to do everything reasonably necessary to procure the appointment of an arbitrator could be enforced as it was implicit in the agreement that the terms of the price structure would be fair and reasonable and the agreement laid down broad guidelines as to how a fair and reasonable price was to be ascertained. Much depends upon the terms of the particular contract and whether judges can construe, or imply terms into, the contract so as to give it ascertainable criteria.
[46] If the courts are prepared to police an obligation to use reasonable endeavours to obtain a planning permission or an export licence, as Lord Ackner suggested in Walford v Miles, or to use all reasonable endeavours to secure a planning agreement with a local authority (Yewbelle Ltd v London Green Developments Ltd [2008] 1 P & CR 17 (CA)), the court should be able to police the negotiation of a price so long as the object of the negotiations can be objectively ascertained. See also IBM United Kingdom Ltd v Rockware Glass Ltd (1980) FSR 335. In Total Gas Marketing Ltd the House of Lords did not comment adversely on an obligation to use reasonable endeavours to become a party to an allocation agreement where it was provided that the obligor did not have to accept unreasonable terms: see Lord Hope at p.224. In The Queensland Electricity Generating Board, the Privy Council implied into the contract an obligation to make reasonable endeavours to agree a price. In this case the object is a price "wholly acceptable" to Hallam.
[47] I accept that by agreeing that the price had to be "wholly acceptable" to Hallam, the parties excluded any question of the reasonableness of what Hallam found acceptable or not acceptable. Thus where R&D's written pleadings asserted that there was a price which "ought to have been wholly acceptable" to Hallam that assertion was irrelevant. Mr Clark QC for R&D did not argue otherwise. R&D cannot seek to imply into the contract an objective standard such as a reasonable price or a fair and reasonable or equitable price which the court could address. Such a term would be inconsistent with Hallam's stipulation that the price had to be wholly acceptable to them. Mr Borland submitted that, if the clause were enforceable, Hallam, in using all reasonable endeavours to agree the purchase price on terms which they found wholly acceptable, were entitled to take into account their own commercial interests: UBH (Mechanical Services) v Standard Life Assurance Co The Times 13 November 1986, Terrell v Mabie Todd & Co Ltd [1952] RPC 234 and Rackham v Peek Foods [1990] BCLC 895. I agree.
[48] There is thus no conflict between Hallam's own interests in the negotiation of the price and their obligation to use all reasonable endeavours to agree the wholly acceptable price. There is not the "inherent repugnancy" which concerned Lord Ackner. Nor is there the problem, to which Potter LJ referred in Phillips Petroleum, of drawing a line between reasonable and unreasonable behaviour where a party had to balance an obligation to endeavour to agree with his self interest in the negotiations. That is because the clause required Hallam to use all reasonable endeavours to get Mrs Kerr to accept a price which they were prepared to pay.
[49] I therefore do not see any insuperable obstacle which would prevent the courts from reaching a view as to the means of achieving that object and deciding whether Hallam had used all reasonable endeavours to agree the price. The question then becomes: can the court ascertain the object of the endeavour?
[50] It is correct, as Mr Borland submitted, that the "wholly acceptable" price is a subjective criterion but that does not mean that the court cannot ascertain it if there is evidence from which it may be inferred. Judges in criminal courts regularly direct juries that they are entitled to infer a person's state of mind from the circumstances and in particular from what he said or did. So also can a judge in a civil case. I do not think that the subjective nature of the object of the endeavours creates legal uncertainty. It is a question of fact. The parties to the purchase agreement could not tell when they made that agreement what price would be acceptable to Hallam; but that does not make the agreement ineffective for uncertainty as that fact might become ascertainable and ascertained in the future. See Chitty on Contracts (30th ed.) para 2.133, in which it is stated:
"An agreement is not ineffective for uncertainty merely because the facts on which its operation is to depend are not known when it is made. The requirement of certainty will be satisfied if those facts become ascertainable and are ascertained, without the need for further negotiation, after the making of the agreement."
See also Welsh Development Agency v Export Finance Ltd [1992] BCLC 148, Dillon LJ at p.159. Nevertheless, the "wholly acceptable" criterion created an evidential difficulty for R&D. As long as Hallam acted in good faith, they had a wide discretion as to what price was acceptable in the circumstances as the court would not be concerned with the reasonableness of their view. The price which Hallam had to agree with Mrs Kerr was defined in the option agreement as seventy five per cent of the open market value. There was thus an objective standard about which Hallam and Mrs Kerr had to negotiate. But the acceptability of that price to Hallam could depend on what they were entitled to receive from R&D. There might come a point, if Hallam had acted perversely, at which the court would infer that they had been acting in bad faith. Absent bad faith, it was for Hallam to determine the acceptability of the price to which Mrs Kerr would agree.
[51] I therefore consider that R&D have a claim under the clause if they can demonstrate (a) that there was for a sufficient period of time a price to which Mrs Kerr would have agreed and which was wholly acceptable to Hallam in the circumstances that then existed and (b) that during that window of opportunity Hallam did not use all reasonable endeavours to agree that price with her.
[52] Mr Borland suggested, further, that in the missives with R&D there was no obligation on Hallam to exercise the option in their contract with Mrs Kerr and that this was an additional element of uncertainty. He did not develop the argument to any extent but I am not satisfied that the argument has any substance. While in the contract with Mrs Kerr Hallam were not bound to exercise the option and in the missives with R&D there was a condition precedent that Hallam complete the purchase from Mrs Kerr (clause 4.1.11), I consider there is a strong argument for implying a term into the contract with R&D requiring Hallam to exercise the option if an acceptable price had been agreed which had been matched by R&D's offer and the purchase contract was otherwise unconditional. The condition precedent in clause 4.1.11 protected Hallam from any failure on Mrs Kerr's part to implement her bargain with them; it did not give them a licence to decide not to complete their contract with her after agreeing a wholly acceptable price.
[53] Hallam's legal challenge therefore fails.