[1987] 2 Lloyd's Rep 601
Court of Appeal
NB Compare the following case with the cases considered below under the topic of 'Certainty'; especially the cases considered under Vagueness.
NB See also: Summary of legal principles governing the resolution of the dispute about whether the parties have reached an agreement.
On Monday 1 February Feed Products offered to sell 30,000 tonnes of feed pellets at $158.50 fob stowed and trimmed for shipment at the rate of 10,000 tonnes per month, 5 per cent more or less at vessel's option during the months May to July 1982 to Agrimec, Pagnan's agent. Agrimec passed on the offer by telephone to Pagnan but he added two further terms of his own which had not been mentioned by Feed Products. These were, first, that the shipping tolerance, that is to say the 5 per cent more or less at vessel's option, should be paid for at contract price, and, secondly, that payment should be cash against documents in New York. Pagnan telephoned Agrimec and told him to book the business. Agrimec telephoned Feed Products and told them that Pagnan had accepted their offer. Agrimec then sent a confirmation telex to each of the parties which read 'We confirm the following business today concluded through out intermediary...' The telex set out the terms which had been agreed on the telephone with Pagnan including the two additional terms which were agreed subsequently with Feed Products. On 2 February Feed Products sent a long telex to Pagnan which made certain amendments to Pagnan's telex of 1 February. On 3 February Pagnan drew attention to these discrepancies. Further telexes were exchanged. Finally Pagnan stated that no contract had been concluded.
The issue before the court was whether a binding contract was made on February 1.
Lloyd LJ
We are concerned on this appeal with the perennial question whether the parties reached a concluded contract...
I now return to Mr Rokison's [counsel for Pagnan] first and main argument. He submits that it is wrong to look at Agrimec's telex of Feb 1 in isolation. The telex may appear to record a concluded contract, but when you look at the context it takes on a different aspect. Although the parties had reached agreement on the most important terms, such as price, quantity and date of delivery, there were other important terms still to be agreed. The only proper inference, says Mr Rokison, is that the parties were still negotiating and did not intend to become bound until the negotiations were complete.
... As to the law, the principles to be derived from the authorities... can be summarized as follows:
(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole (see Hussey v Horne-Payne).
(2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary 'subject to contract' case.
(3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed; see Love and Stewart v Instone, where the parties failed to agree the intended strike clause, and Hussey v Horne-Payne, where Lord Selborne said:
... The observation has often been made, that a contract established by letters may sometimes bind parties who, when they wrote those letters, did not imagine that they were finally settling the terms of the agreement by which they were to be bound; and it appears to me that no such contract ought to be held established, even by letters which would otherwise be sufficient for the purpose, if it is clear, upon the facts, that there were other conditions of the intended act, beyond and besides those expressed in the letters, which were still in a state of negotiation only, and without the settlement of which the parties had no idea of concluding any agreement. [Lloyd LJ's emphasis].
(4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled (see Love and Stewart v Instone per Lord Loreburn).
(5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.
(6) It is sometimes said that the parties must agree on the essential terms and that it is only matters of detail which can be left over. This may be misleading, since the word 'essential' in that context is ambiguous. If by 'essential' one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by 'essential' one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by 'essential' one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge, 'the masters of their contractual fate'. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called 'heads of agreement'. Mr Rokison submits that that is a special case, but I do not think it is.
Mr Rokison relied heavily on the fact that the Judge described the terms on which the parties had not yet agreed as 'terms of economic significance to these buyers'. If I am right in the propositions I have stated, and in particular propositions (4) and (6), the fact that the terms yet to be agreed were of economic significance would not prevent a contract coming into existence forthwith if that is what the parties intended. So I can find no error of law in the Judge's approach.
Was the Judge right to draw the inference which he did as to the parties' intentions? [The more important] matters upon which the Judge relied... are the following:
(1) Pagnan told Agrimec on Feb 1 to book the business.
(2) Agrimec sent a confirmatory telex the same day referring to the business as -
... having been concluded through our intermediary.
(3) Neither party raised any objection to the confirmatory telex.
(4) The plaintiffs thereafter headed their telexes 'Contract 1/2/82'.
(5) There was no communication of any kind between Feb 8, when the defendants agreed the loading rate, and Mar 9 when Agrimec despatched the documents.
(6) The plaintiffs did not then react as one would have expected if there had been no question of a binding contract.
Mr Rokison argued that the parties' reactions are as irrelevant as their beliefs. I agree of course that the test is objective and the reactions of the parties are not conclusive. But I cannot accept that they are irrelevant. As to the other matters relied on by the Judge, some of the more important of which I have mentioned, Mr Rokison submitted that the Judge gave them altogether too much weight. As for the gap between Feb 8 and Mar 9, Mr Rokison said that there could be several explanations. To choose one rather than another would be mere speculation.
I cannot accept those submissions. The Judge regarded the matters to which I have referred as being -
... very strong indications that the parties intended to, and did, make a binding contract on Feb 1.
In my view he was right. Indeed the only indication the other way is that the parties continued with their negotiations after the confirmatory telex of Feb 1. But that is not really an indication at all. Once one accepts that the parties are in law capable of making what I will call an interim agreement, it was only to be expected that they would continue negotiating the terms that remained without delay. This is what they did. In my view the Judge drew the right inference as to the parties' intentions.
... For the reasons I have given I would dismiss the appeal.