Last edited 20 Jul 2016

Essentials of a contract


[edit] Introduction

Subject to the provisions of the Housing Grants, Construction and Regeneration Act, construction contracts are governed by the ordinary rules of formation and interpretation. What distinguishes construction contracts from other types of contract is their factual complexity and the widespread use of standard form contracts. However these characteristics merely increase the burden of forensic analysis rather than changing the rules of such analysis.

Ignoring for the moment the effect of the Contracts (Rights of Third Parties) Act, there are four essentials of a contract:

  • Two or more parties; and
  • An intention to create legal relations; and
  • An agreement; and
  • Consideration

[edit] Parties

There must be two or more parties present to create a contractual obligation. This statement may seem axiomatic, however, the law defines party by reference to legal capacity as well as physical existence. For example, if there is a parent company with subsidiary companies then contracts can be made between the parent and the subsidiary and between the various subsidiaries provided of course they are all registered companies.

However, if a company operates by way of a divisional structure then the various divisions do not have a legal capacity to enter into contracts. Similarly in Henderson v Astwood the court held that a mortgagee who was selling a property at auction under his power of sale in the mortgage document was not entitled to bid at the auction as otherwise he would be selling to himself.

If you are drunk, insane, bankrupt, an enemy alien or a minor, then your legal capacity will be impaired.

[edit] Intention to create legal relations

Even though the other essentials of a contract are present the courts may consider that a promise is unenforceable if the parties are not animo contrahendi, i.e. did not intend to create legal relations. There is a presumption in law that domestic or social arrangements are not intended to be legally binding. For example, if A agrees to take B, his son, to the cinema provided that B tidies his room, there is a promisor A and consideration moving from the promisee B; nevertheless the presumption in law will be that no legally binding obligation comes into existence. The presumption is rebuttable depending upon the facts of each particular case.

Clearly in commercial transactions there is no such presumption although there may be particular circumstances where the parties are not animo contrahendi. The House of Lords considered this point in Independent Broadcasting Authority v EMI Electronics Limited and BICC Construction Ltd.

[edit] Independent Broadcasting Authority v EMI Electronics Limited and BICC Construction Ltd

This case concerned the collapse of a cylindrical steel area mast belonging to the IBA, at Emley Moor in Yorkshire. The mast was nearly a quarter of a mile high with a diameter at its base of only 9 feet. The mast had been designed, supplied and erected by BICC as nominated sub-contractors to EMI who were main contractors to IBA in respect of works, which included the aerial mast. The collapse of the mast was caused by a tension fracture of a flange in a leg of a lattice at 1027 feet. The lattice failure had been caused primarily by vortex shedding, also to a lesser extent by asymmetric ice loading. IBA alleged this was a design fault and proceeded against EMI for damages for breach of contract and negligence and against BICC for damages for negligence, breach of warranty and negligent mis-statement.

The claim against BICC for the breach of warranty arose from the following circumstances. The Emley Moor mast was one of a series of three cylindrical masts being designed and erected by BICC. Other masts were being erected at Belmont and Winter Hill. Work had started first at the Winter Hill site and on 16 October 1964 when the mast had reached a height of 851 feet it began to oscillate with the result that the labour putting up a building at the foot of the mast left the site and refused to return to it.

IBA raised their concerns to BICC by a letter dated 23 October in which IBA expressed concern that very little was known about how such cylindrical structures were likely to behave under certain wind conditions. IBA suggested the matter be investigated fully by taking appropriate readings from instruments attached to the Winter Hill mast in order to confirm the data upon which the design calculations had been based.

BICC replied by a letter dated 11 November 1964 when they stated, inter alia, 'I think we will be extremely fortunate if the oscillations at Winter Hill keep within their present limits when the structure is completed. No doubt we shall learn from experience how to overcome these difficulties and I think it should be realised by all concerned that we have achieved something unique in the design of the 1250 ft mast. We expected problems with aerodynamic instability as this phenomenon is well known with cylindrical structures. However we are well satisfied that the structures will not oscillate dangerously...'

IBA alleged that the words in italics amounted to a contractual warranty. This argument was accepted by the judge at first instance but rejected by the Court of Appeal. Consideration of this particular issue was not necessarily for the House of Lords decision; however their Lordships considered the matter and disagreed with the Court of Appeal. The House of Lords rejected the finding that the assurance given in BICC's letter dated 11 November1964 was a contractual warranty on the basis that there was no evidence that, at the time when it was given, either IBA or BICC intended the letter to create a contractual undertaking. Viscount Dilhorne stated:

'In the statement of claim it was alleged that this assurance was a warranty and that in consideration of it IBA forbore from requiring further investigations and from seeking independent advice as to the stability of the mast. . . In the present case I can find nothing which can by any possibility be taken as evidence that [IBA] when they wrote their letter on 20 October or thereafter had any intention of entering into a contract or that [BICC] when they gave the assurance had any intention of undertaking a contractual obligation.'

On the same issue Lord Fraser of Tullybelton stated:

'They [i.e the judge at first instance and the Court of Appeal] treated the letter [dated 11 November 1964] as containing a promise for which they held that ample consideration had been given by IBA in forbearing from insisting on further investigation of the oscillation problem. But I am unable to agree that the letter is capable of being read as containing a promise. The most important sentence in the letter says "We are well satisfied that. . ." and that expression does not in its terms bear to be a promise or offer. Nor do I think that the circumstances show that there was at that time no direct contract between IBA and BICC to which a Warranty could be collateral, so if there was a Warranty with Contractual force, it can only have been because a separate independent contract on the matter was made and that would require animus contrahendi on both sides’

It is to be noted that the representation in the IBA case was made after the date of the contract for the construction of the Emley Moor television mast. That is to say the representation was not collateral to the main contract, the Contractual result may have been different if the representation had been made befoye or at the time of the Emley Moor contract and the court may have found that there was a Collateral contract.

[edit] Edwards v Skyways Ltd

By way of contrast to the decision in IBA is the case of Edwards v Skyways Ltd.

E was an aircraft pilot employed by S and a member of S's contributory pension fund which entitled him on leaving the defendants' employment in advance of retirement age to a choice of either withdrawing the sum of his own contributions to the fund or taking the right to a paid up pension payable at retirement age.

In January 1962 some 15% of S's pilots, including E, were made redundant. The Pilots' Union BALPA agreed with S (as recorded in the notes of the meeting) that 'pilots declared redundant and leaving [the defendant company] would be given an ex gratia payment equivalent to the defendant company's contributions to the Pension Fund'.

On the evidence at trial, it appeared that this was an incorrect record of what was agreed as S's representative had said at the meeting that the company would make ex gratia payments 'approximating to' S's contribution.

E elected to Withdraw his contributions to the pension fund and to receive the ex gratia payment. S paid the contribution but refused to pay the ex gratia payment contending that the recorded agreement was not intended to create legal relations and was too vague and thus was not legally binding.

The court held that where there was an agreement and the subject of the agreement related to business affairs, the onus of establishing that the agreement was not intended to create legal relations, (Which was on the party setting up that defence) was a heavy onus. S had failed to discharge this burden for the following reasons: the Words 'ex gratia' were used simply to indicate that the party agreeing did not admit any pre existing liability on S's part and the mere use of the phrase 'ex gratia' as part of a promise to pay did not show that the promise when accepted should have no binding effect in law.

Further, the use of the Words 'approximating to' did not render the terms of the agreement too vague to be enforceable for at most the phrase would denote on the evidence a rounding off of a few pounds downwards to a round figure.

[edit] Orion Insurance Co plc v Sphere Drake Insurance plc

This issue was further considered by the Court of Appeal in the case of Orion Insurance Co plc v Sphere Drake Insurance plc, the facts of which were concerned with the operation of an insurance pool agreement establishing a no gain no loss underwriting agreement between insurers.

Sphere got into financial difficulties and at a meeting, being one of numerous meetings being held between the parties, appeared to agree to a disposal of all liabilities under the pool agreement on the basis that the agreement to the disposal was 'a goodwill agreement and not a legal contract. Despite the use of those words the presence of a contract was strenuously debated before the Commercial Court, Sphere contending that the parties had reached an agreement which was a final and binding disposal of all liabilities under the pool agreement whilst Orion argued that the agreement should be a goodwill agreement only and not legally binding and that, in consequence, the pool agreements still stood.

Hirst J found that on the facts and evidence Orion had succeeded in satisfying, on the balance of probabilities, the heavy burden of proving that the agreement had been made Without any intention of creating legal relations and was not therefore binding as a contract.

The Court of Appeal upheld the decision of Hirst J. The Court of Appeal also held that it was permissible to adduce parol evidence to establish that there was no intention to create legal relations even if this was not apparent on the face of the written agreement.

[edit] Agreement

The presence or otherwise of an agreement is determined by an objective test and not a subjective test. Objectivity is based upon a reasonable man's understanding of a particular set of circumstances or facts. In its purest form the test excludes that which was actually in the minds of the parties although as a matter of practice when the courts are exploring the issue of consensus they sometimes blur the distinction between objectivity and subjectivity. Of the objective test in relation to an intention to create legal relations, Megaw J in the Edwards case stated:

'I am not sure that I know what that means in this context. I do however think that there are grave difficulties in trying to apply a test as to the actual intention or understanding or knowledge of the parties especially where the alleged agreement is arrived at between a limited liability company and a trade association, and especially where it is arrived at at a meeting attended by five or six representatives on each side. Whose knowledge, understanding or intention is relevant? But if it be the 'objective' test of the reasonable man, what background knowledge is to be imputed to the reasonable man, when the background knowledge of the ten or twelve persons who took part in arriving at the decision no doubt varied greatly between one another?'

An exhaustive examination of case law to establish the borderline between objectivity and subjectivity goes beyond the ambit of this article. Suffice it to say that whilst the courts have well in mind the basic rules as to formation of contract they sometimes adopt a pragmatic solution to the forensic problems created by a strict application of the rules.

The courts have moved further down the road of pragmatic and subjective analysis of the issues of contract formation and interpretation as illustrated by the erudite judgement of Lord Hoffman in the case of Investors Compensation Scheme Ltd v West Bromwich Building- Society. That being said it is a basic rule that agreement is evinced by offer and acceptance.

[edit] The offer

An offer is a written or oral statement by a person of his willingness to enter into a contract upon terms that are certain or are capable of being made certain. The offeror’s intention to enter into a contract may be actual or apparent. An apparent intention is determined by the objective test discussed above. However, in First Energy v Hungarian Bank, the Court of Appeal considered that offer letters must be construed against the contextual scene and the Court should take into account the surrounding circumstances that reasonable persons in the position of the parties would have had in mind.

An offer must be distinguished from what is merely a request for information or an invitation to treat. An invitation to treat is a request for an offer. Neither a request for information nor an invitation to treat can be converted into a binding Contract by an acceptance. Competitive tendering is a common method of procurement in the construction industry.

In the absence of special circumstances the invitation to tender sent out to contractors by the employer or by the consultant on behalf of the employer, is an invitation to treat and not an offer. It is the contractor's submission of tender which constitutes the offer and which in turn must be accepted by the employer to give rise to a formally binding contract. For this reason the employer is not bound by the lowest tender nor as a general rule is the employer responsible for the contractor's costs of preparing the tender.

An offer can be withdrawn at any time prior to it being accepted. This is so even though the offeror stipulates that the offer shall be kept open for a particular period of time.

[edit] Routledge v Grant

G offered to buy a house from R stating that R had six weeks in which to decide Whether or not to purchase. Before the expiration of the six-week period G withdrew his offer and the court held that he was entitled to do this. In order for the offeror to be bound by a statement that an offer shall be open for acceptance for a particular period, the statement must form part of a contract of option, which is a contract having a separate legal existence to the main transaction.

The withdrawal of an offer is not effective until the withdrawal has been communicated to the offeree. This communication may be written or oral. If, as in Routledge v Grant, the offeror has stated that the offer will be open for a specified time then the offer will lapse at the end of the relevant period even though there has not been any communication of withdrawal between offeror and offeree.

It is also arguable that where no time is specified an offer may lapse after a reasonable period of time and no longer be capable of being accepted even though no communication of an intention to withdraw the offer has been made to the offeree. What is a reasonable time will depend upon the particular circumstances of each case.

[edit] The acceptance

An acceptance is a written or verbal expression of assent to the terms of the offer. It must be unequivocal and unconditional. For example, acknowledgement of the receipt of an offer is not an unequivocal acceptance nor is an acceptance that fails to distinguish between alternative offers.

[edit] Peter Hind & Co Ltd v Mersey Docks and Harbour Board

The employer, the Mersey Docks and Harbour Board, invited the building contractor to submit alternative tenders for the construction of a container freight terminal, one tender to be at a fixed price and the other at a price varying with the cost of labour and materials. The employer wrote to the contractor stating that they accepted 'your tender'. The court held that this letter was imprecise because it did not specify which tender was being accepted so that there was no concluded contract at that stage.

A conditional acceptance is not effective; indeed a conditional acceptance may, on its wording, be a counter offer terminating the original offer so that it is no longer capable of being accepted even though an unconditional acceptance is subsequently sent to the offeror.

[edit] Hyde v Wrench

W offered to sell his farm to H for a price of £1000. H made a counter offer in the sum of £950, which was rejected. H then purported to accept the original offer; however the court held he was no longer entitled to do so and there was no contract for the sale of the farm.

There is a general rule that an acceptance must be communicated by the offeree to the offeror to create a binding contract. In the absence of any particular requirements set out in the offer, communication of an acceptance may be oral or in writing. There are certain exceptions to the general rule.

Firstly, posted acceptances are deemed to take effect from the date of posting regardless of whether or not the letter actually reaches the offeror. The same rule applies to telegrams but not to instantaneous communications such as telephone, telex or facsimile transmission and possibly emails.

The rationale is that the sender should be aware immediately that the communication has not been received by the offeree and will have a further opportunity to effect the communication of the acceptance. The uncertainty relating to emails (e.g. the internet service provider receives communication from the sender but unknown to the sender fails to transmit it to the offeree, or the offeree is operating a system which downloads emails at time intervals) takes this type of electronic communication outside the rationale.

[edit] Anson v Trump

The Court of Appeal held, in respect of service of a defence document in High Court proceedings, that a pleading was served by fax when the complete document was received by the recipient's fax machine even though it might not be printed out until later. Nevertheless, there is doubt that the postal acceptance rule will be extended to emails. The safe course is therefore to confirm emails by post - a somewhat Luddite solution.

Secondly, communication of acceptance is not necessary for the creation of a unilateral contract as compared to a synallagmatic or bilateral contract. A synallagmatic contract involves the mutual exchange of promises whereas a unilateral contract binds only one party, for example an offer to reward a person who supplies information in relation to a lost article.

[edit] Carlill v The Carbolic Smoke Ball Company

The defendants who were proprietors of a medical preparation called 'the Carbolic Smoke Ball' issued an advert in which they offered to pay £100 to any person who contracted influenza after having used one of their smoke balls in a specified manner for a specified period. C purchased one of the smoke balls on the faith of the advert, used it in the specified manner and subsequently contracted influenza. The Carbolic Smoke Ball Company refused to pay over the £100 and upon being sued for breach of contract the court held that C was entitled to recover. Bowen LJ stated:

‘It is not a contract made with all the world... It is an offer made to all the world; and why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition.’

Thirdly, the offeree's conduct may preclude them from relying upon a failure of communication of an acceptance. Denning LJ considered this problem in Entores Limited v Miles Far Eastern Corporation when he stated:

'Now take a case where two people make a contract by telephone. Suppose for instance, that I make an offer to a man by telephone and, in the middle of his reply, the line goes "dead" so that I do not hear his words of acceptance. There is no contract at that moment. The other man may not know the precise moment when the line failed. He will know that the telephone conversation was abruptly broken off, because people usually say something to signify the end of the conversation. If he wishes to make a contract, he must therefore get through again so as to make sure that I heard. Suppose next that the line does not go dead, but it is nevertheless so indistinct that I do not catch what he says and I ask him to repeat it. He repeats it and I hear his acceptance. The contract is made, not on the first time when I do not hear, but only the second time when I do hear. If he does not repeat it, there is no contract. The contract is only complete when I have his answer, accepting the offer.'

Silence cannot be taken as an acceptance of an offer even though the offer stipulates the same. This is to be contrasted with conduct that may constitute a binding acceptance. Consider for example the situation where a sub-contractor for the supply of ready mixed concrete has forwarded an offer in response to a main contractor's enquiry.

The main contractor responds with a purchase order that sets out the main contractor's standard terms of contract, some of which are at variance with the terms of the sub-contractor's offer. The sub-contractor intends to negotiate these matters with the main contractor; however, unbeknown to the sales department of the sub-contractor the first deliveries of concrete have been sent from the batching plant.

The next day the sub-contractor communicates with the main contractor notifying the main contractor that its terms and conditions of contract are not acceptable. In such circumstances the courts have held that the delivery of the concrete by the sub-contractor to the main contractor constitutes an acceptance, by conduct, of a contract based upon the terms of the main contractor's purchase order.

[edit] G. Percy Trentham Ltd v Architral Luxfer, Steyn LJ

This case found that a contract may come into existence even though there was no coincidence of offer and acceptance, during and as a result of the performance of the subject matter of the negotiated contract.

[edit] The 'last shot' doctrine

Commercial negotiations, particularly in the construction industry, can be both protracted and tortuous, with offers being met with counter offers and counter offers with counter counter offers; each party endeavouring to impose a standard form contract or their own terms and conditions of trade.

As stated above, the law of contract requires the offer and the acceptance to be in the same terms, and the courts are often faced with a difficult burden of forensic analysis to decide whether, and if so what, contract came into existence.

The ‘last shot' doctrine provides that where there is a series of conflicting documents they shall all be treated as counter offers and the contract, if indeed one comes into existence at all, is to be based upon the last document in time.

[edit] Butler Machine Tool Co Ltd. v Ex-Cell-O Corporation (England) Ltd

This case involved a quotation for a machine tool given by Butler to Ex-Cell-O and stated to be subject to certain terms and conditions (one of which provided for the price to be that prevailing at time of delivery, there being a ten month delivery period) which should prevail over any terms and conditions in the Ex-Cell-O's order.

Ex-Cell-O placed an order for the machine, their order form stated to be subject to terms and conditions that were materially different from those of Butler; in particular there was no provision for variation in the price. At the foot of Ex-Cell-O's order form was a tear-off acknowledgement of receipt of order stating 'We accept your order on the Terms and Conditions stated thereon'.

Butler completed and signed the acknowledgement slip and returned it to Ex-Cell-O with a letter stating that the order was being entered in accordance with Butler's original quotation. Upon delivery a dispute arose as to price that was greater at time of delivery than that originally quoted. Ex-Cell-O argued that on the facts the contract had been concluded on their terms and conditions and was therefore fixed price.

The court rejected this argument and held that Butler's terms and conditions had been stated in their quotation to prevail over any other terms or conditions and the contract should be construed accordingly.

Ex-Cell-O's appeal against this decision was allowed by the Court of Appeal who held that Ex-Cell-O's order was a counter-offer, which destroyed the offer in Butler's original quotation.

Accordingly when Butler completed and returned to Ex-Cell-O the acknowledgement slip, they accepted Ex-Cell-O's counter-offer. The covering letter with the acknowledgement slip was irrelevant as it merely referred to the price and identity of the machine and did not operate to incorporate Butler's terms back into the contract. Lawton LJ stated:

'...the modern commercial practice of making quotations and placing orders with conditions attached, usually in small print, is indeed likely, as in this case, to produce a battle of forms. The problem is how should that battle be conducted? The view taken by the judge was that the battle should extend over a wide area and the court should do its best to look into the minds of the parties and make certain assumptions. In my judgment, the battle has to be conducted in accordance with set rules. It is a battle more on classical eighteenth century lines when convention decided who had the right to open fire first rather than in accordance with the modern concept of attrition.'

Lord Denning MR was less emphatic, anticipating the modernist approach of the matrix and recognising that various approaches could be taken to resolve the battle of forms. He stated:

‘In some cases the battle is won by the man who fires the last shot. He is the man who puts forward the latest terms and conditions ... That may however go too far. In some cases, however, the battle is won by the man who gets the blow in first. If he offers to sell at a named price on the terms and conditions stated on the back and the buyer orders the good purporting to accept the offer on an order form with his own different terms and conditions on the back, then, if the difference is so material that it would affect the price, the buyer ought not to be allowed to take advantage of the difference unless he draws it specifically to the attention of the seller.

'There are yet other cases where the battle depends upon the shots fired on both sides. There is a concluded contract but the forms vary. The terms and conditions of both parties are to be construed together. If they can be reconciled so as to give a harmonious result, all well and good. If differences are irreconcilable, so that they are mutually contradictory, then the conflicting terms may have to be scrapped and replaced by a reasonable implication.'

Whilst the last shot doctrine assists in the forensic process, as anticipated by Lord Denning it is not an absolute doctrine and each contract must be considered on its own particular facts.

[edit] OTM Limited v Hydranautics

On 8 September 1978, H offered to sell to OTM a device for tensioning chains on a monitoring buoy in the North Sea. The offer incorporated H's terms and conditions including a Californian arbitration clause and a Californian proper law clause, i.e. that Californian law should govern the formation, construction and performance of the contract.

On 29 September H telexed OTM stating 'it is our intention to place an order for one chain tensioner... A purchase order will be prepared in the near future but you are directed to proceed with the tensioner fabrication on the basis of this telex. The purchase order will be issued subject to our usual terms and conditions.’ On 5 October OTM sent to H a purchase order that had the following condition:

'Acceptance of contract. The written acceptance of this contract, the commencement of performance pursuant thereto... by the sellers constitutes an unqualified acceptance by the seller of all the terms and conditions of this contract. This contract... constitutes the entire agreement between the parties either oral or written.. ‘

The purchase order led to an exchange of telexes. However, H made no objection to the above condition although they complained that they had commenced work on the understanding that their offer was acceptable and they were now facing the introduction of new contractual terms. Negotiations continued and an agreement was reached on variations to the terms of the purchase order.

On 20 October OTM sent a telex to H agreeing to the one outstanding point and asked H whether in view of the changes to the purchase order H would prefer that OTM re-issued their purchase order. On 20 December H replied to the effect that they saw no need to re-issue the purchase order and enclosed a formal acknowledgement of order which contained the following clause:

'Acceptance of buyers’ order is conditional and subject to... the following conditions... Unless buyer shall notify seller in writing to the contrary within five days of receipt of this document the buyer shall be deemed conclusively to have accepted the exact terms and conditions hereof.’

A copy of this acknowledgement of order was signed by OTM and returned to H on 3 January. The court held that OTM's telex dated 29 September was not an acceptance of H's offer dated 8 September (it was a letter of intent). Further, OTM's purchase order dated 5 October was a counter offer, which destroyed the original offer in total. The contract was concluded by OTM's telex sent on 20 October. The clause in H's letter dated 20 December was meaningless since there was nothing left to accept: the contract had already been made.

[edit] Incomplete agreements

To create a legally binding contract the process of offer and acceptance must result in the parties being in agreement on all the terms which are essential to their bargain; there must be consensus ad idem.

As a general rule the essential terms of a construction contract are parties, description of the works, price and period for construction. A failure to agree on price or time for performance is not necessarily fatal; in certain circumstances the courts may apply terms as to reasonable price and a reasonable period for performance.

A particular difficulty arises in respect of collateral warranties in so far as the ultimate beneficiary of the warranty might not be known at the time the parties enter into the principal contract. Does this constitute a failure to agree an essential term?

[edit] May and Butcher Ltd v The King

Lord Buckmaster stated that:

'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. It is of course perfectly possible for two people to contract that they will sign a document which contains all the relevant terms, but it is not open to them to agree that they will in the future agree upon a matter which is vital to the arrangement between them and has not yet been determined.’

Viscount Dunedin added:

'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... Therefore you may very well agree that a certain part of the contract of sale, such as price may be settled by someone else... as long as you have something certain it does not matter. For instance with regard to price it is a perfectly good contract to say that the price is to be settled by the buyer.'

It follows that if the contract had been silent it might have been rescued by an implied term, for example under the Supply of Goods and Services Act. In May and Butcher, 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.’

[edit] Foley v Classique Coaches Ltd.

This case provides a useful illustration of how a contract can be rescued by the use of an implied term.

This case concerned an agreement by F to sell to Classique Coaches certain land, which Classique Coaches intended to use for their business of motor coach operators. The sale was subject to a second agreement in which Classique Coaches agreed to purchase from F all the petrol required for the purposes of their business at 'A price to be agreed by the parties in writing and from time to time'.

The land was conveyed to Classique Coaches and the petrol agreement operated for three years. Thereafter disputes arose and Classique Coaches purported to repudiate the petrol agreement alleging that it was not binding because there was no agreement as to the price of the petrol. The court rejected this argument holding that a term must be implied in the agreement that the petrol supplied by F should be of a reasonable quantity and sold at a reasonable price and that if any dispute arose as to what was a reasonable price it was to be determined by an arbitration clause in the petrol agreement. The agreement was therefore valid and binding.

[edit] Global Container Lines v State Black Sea Shipping

The issue of incomplete agreements was considered by the Court of Appeal in this case, the facts of which concerned a complex tiered arrangement for the sale of four former USSR military vessels by the Ukranian state shipping company to the USA.

The court, referring to the cases of May and Butcher and Foley, confirmed that the relevant principles to be derived from those cases were that where there was an agreement which provided for the parties to agree something further, then it would be inferred as a matter of construction that the whole contract was conditional upon the further agreement of those matters.

However, the court felt that this was not a conclusive presumption because it was always possible to have a contract which did refer to a further agreement in such manner, but which nevertheless constituted a binding agreement. See, for example, F. & G. Sykes (Wessex) Ltd. v Fine Fare Ltd.

Each case depended upon its own circumstances and had to be construed on the wording used. It was not conclusive that wording which contemplated a further agreement, necessarily meant that there was no complete agreement between the parties sufficient to form a binding agreement, but it was a factor which may lead to that conclusion which indeed was the finding in May and Butcher. In the Global case the court held that the words 'to be finalised' did not leave anything to be agreed between the parties but instead related to questions of formalisation or performance of documents and transactions.

Where there is an agreement to agree, which does not constitute a binding contract, the courts have refused to imply a term that the parties must continue to negotiate in good faith (see Walford v Miles).

[edit] Consideration

Save for contracts made under seal, and subject to the Contracts (Rights of Third Parties) Act, the courts will not enforce gratuitous promises. There must be valuable consideration. Valuable consideration is 'something of value in the eye of the law' (Thomas v Thomas).

Clearly the payment of money or a promise to pay money is valuable consideration. However 'in the eyes of the law' other acts, however insignificant, may provide valuable consideration.

For example, a promise to give £50 'if you will come to my house' was held to be valuable consideration in Gilbert v Ruddeard. However, as a general rule, a moral obligation does not provide valuable consideration for example a promise made 'in consideration of natural love and affection' (Brett v J.S.). Nor is a pre-existing legal obligation sufficient to provide valuable consideration, often referred to as 'past consideration'.

The giving of a collateral warranty by an architect in consideration of terms of appointment that have already been fulfilled or the giving of a guarantee by a construction company in consideration of a payment under the construction contract, are examples of past consideration.

Valuable consideration need not be adequate consideration in a sense that the courts are not concerned as to the fairness of the bargain between two contracting parties. For this reason payment of nominal consideration is sufficient. Collateral warranty agreements usually provide that consideration for the agreement shall be the payment by the promisee to the promisor of the sum of £1 or £10. Whether it be £1 or £10 this consideration though nominal is valuable consideration for the purposes of enforcing the warranty.

Valuable consideration must support the promise and not the contract. That is to say there must be some detriment to the promisee (the giving of value) or some benefit to the promisor (receipt of value). In many cases a detriment to the promisee will be the same as a benefit to the promisor, for example, a sub-contractor promises to carry out piling works in consideration for which the main contractor promises to pay the price of those works.

The carrying out of the piling works and the promise to pay the price of the works are respectively both detriments and benefits. However, whilst consideration must move from the promisee it is not necessary for consideration to move to the promisor. For example, if A promises to B that A will guarantee the repayment of a loan of finance to be made by B to C, whilst A derives no benefit from the transaction if B, in consideration of A's promise, makes the loan to C, then B will suffer a detriment which provides valuable consideration moving from B (the promisee) to A (the promisor) in respect of a contract of guarantee.

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