11.01  A contract is said to be void if it is uncertain or incomplete. Though true, this statement hides more than it reveals. Initially, issues regarding certainty and completeness are concerned with the certainty and completeness of the terms and promises contained in a contract. If a term is uncertain or incomplete, then that term will be void. Whether or not such a void term will have the effect of avoiding the entire contract for uncertainty or incompleteness is the question that then follows that initial finding.¹ This latter issue is one of severance and turns on the intention of the parties. In rare cases even though it might be possible to give meaning to all the agreed terms, a transaction may still be held to be void for uncertainty or incompleteness.

11.02  Even the statement that for a contract to exist its terms must be certain and complete, hides much complexity. The statement assumes that any issues about certainty and completeness concern the ‘terms’ of a contract. Therefore, it appears to be an issue that is addressed after any issues as to whether or not the statements alleged to form the contract are or are not terms are decided. For a promissory term to be part of a contract the maker must guarantee its truth; this is determined from the position of a reasonable person in the position of the promisee. For other statements to become terms they must be incorporated (p. 288) by writing, notice, course of dealing, or reference. However, arguably, under the objective theory of contract there can be no legal agreement unless the terms are certain and complete. Without sufficient certainty and completeness there can be no meeting of the minds.² Thus, an ‘offer’ that is uncertain or incomplete is not an offer at all under the objective theory.³ The objective theory does not entirely discount subjective intention.⁴ For example, if it can be shown that the parties knew the meaning of a term that a reasonable person would have trouble understanding then the meaning attributed to it by the parties must prevail.⁵ But it is not sufficient that one party knew the other party intended a term to have a particular meaning for it to have that meaning. It is necessary for the parties to have agreed that it have that meaning. Once a term is recognized as being incorporated into the contract it is taken to represent the intention of both parties and must be construed as such.⁶

11.03  There is a distinction between uncertainty and incompleteness, although, on any given set of facts, a term or a contract can be void for both.⁷ The requirement of certainty dictates that it must be possible to attribute meaning to the agreed terms. The need for a contract to be complete dictates that there must be agreement on all the essential terms of the contract. Completeness does not require the parties to have expressly dealt with every eventuality.⁸ If it did there would be no need for the institution of the implied term or the doctrine of frustration. The modern approach is to leave it to the parties to determine what the important terms are.⁹ The court generally does not concern itself with whether or not (p. 289) it thinks the parties have agreed all the ‘important’ terms. The perspective in determining whether the parties have reached that point of agreeing the ‘important’ terms is that of a reasonable person in the position of the parties. It follows that the type of contract before the court will be a relevant matter.¹⁰ In addition, the courts must exercise an overriding control of issues of certainty and completeness according to law. No matter what the parties may have agreed, if a court cannot give it meaning in the sense of being able to enforce the contract by fashioning an appropriate remedy then the transaction or the term must necessarily be uncertain or incomplete. It is therefore necessary that there be agreement on those terms required to enforce the contract. These may be called ‘essential’ terms, but that word is ambiguous and may also be used to express those terms the parties think important.¹¹ Generally, what is essential in this enforcement sense will depend on the facts of the particular transaction, but agreement (express or implied) on the parties and subject matter (which usually includes the price) are the basic essential terms for any contract.¹² It follows that if the parties were to agree that a ‘fair price’ would be paid, with no mechanism for working that out, then it does not help for the parties to claim they agreed what they thought were the ‘essential’ terms as a court cannot fashion an order to enforce such a term.¹³

11.04  In matters of uncertainty and incompleteness, the onus of proof will lie with the party who raises the issue.¹⁴ The resolution of some issue of uncertainty or incompleteness will often involve the application of contract law ‘gap-filling’ techniques. In addition, issues of uncertainty are often dealt with by interpreting and giving meaning to agreed terms, and to this extent it is often said that whether or not a term of a contract is uncertain or incomplete is an issue of construction.¹⁵ Similarly, issues of incompleteness are initially dealt with by construction as this is the process that identifies any gap in the contract, but it can also be used to fill perceived gaps. Issues of construction are said to be issues of law rather than of fact.¹⁶ Where an issue is one of construction, this necessarily means that the evidence available to determine meaning is governed by the principles of construction which limit the extent to which extrinsic evidence may be referred to.¹⁷ Where extrinsic evidence is available to show a term in a contract was intended to have a meaning other than what might otherwise be its primary meaning, the search for that intention is an issue of fact.¹⁸ More importantly, when the court turns its mind to determining whether the parties intended to contract in the face of some uncertainty or incompleteness that is a question of contract formation and is one of fact. Being a question of fact, extrinsic evidence is allowed to determine that question. It follows in theory that it is possible that on (p. 290) construction a term might be found to be uncertain but when the court then turns to consider whether that uncertainty impacts on intention to contract, extrinsic evidence may be taken to determine the intention of the parties on that issue which in turn might turn up evidence that resolves the uncertainty. Indeed, being an issue of contract formation, conduct engaged in after the alleged moment of formation may be taken into account. This has led one commentator to suggest that in the case of ambiguity or vagueness (in contrast to when there is a lack of meaning) contracts should never be considered to be ‘void’ but rather ineffective ‘for the time being, but capable of being rendered wholly effective by events subsequent to their conclusion’.¹⁹ Having said that, it needs to be pointed out that it has been held on numerous occasions that issues of severance are dealt with by construction.²⁰ That is, whether or not the contract can continue to operate despite some uncertainty or incompleteness is determined as a matter of construction. This is because issues of severance concern whether the parties intended to assume legal obligations; it is not merely an issue involving intention to contract.

11.05  If the parties have not reached agreement on the essential terms of an agreement then that incompleteness may evidence a lack of an intention to contract.²¹ Similarly it may be that uncertainty may evidence a lack of intention to contract.²² For example, in Brookhaven Housing Coalition v Solomon,²³ the employees at a new regional Internal Revenue Service (IRS) centre brought an action against the Town Board of Brookhaven seeking specific performance of an alleged agreement to implement a programme of low and moderate income housing for employees at the centre. Although the letter from the Town Board stated that the ‘Town of Brookhaven will provide whatever programs would be necessary to meet the housing needs for all Federal employees which may develop as a result of the award of the project to the Town of Brookhaven’, it did not define the programs. The court dismissed the action on the ground that the provision was uncertain and in the circumstances there was no intention that the letter was intended to give rise to legal obligations because, if that were the intention, the town’s obligations would have been specified with certainty as they were in respect of other aspects of the construction.

11.06  In any discussion about certainty and completeness it must be kept in mind that commercial courts are slow to draw the conclusion that a contract is void for uncertainty or (p. 291) incompleteness. This has long been the position and is also reflected in approaches to construction.²⁴ In recent years this approach has further developed, and modern courts are particularly concerned with the expectation of the parties and in upholding contracts they seek to give effect to the reasonable expectations of the parties.²⁵ The modern approach was stated by McHugh JA in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd²⁶ in the following terms:²⁷

11.07  It is implicit in this passage that the courts’ slowness to conclude an agreement void for uncertainty or incompleteness is limited to when the courts detect an intention to be bound,²⁸ and the more uncertain or incomplete an agreement the less likely it is that the parties intended to be bound.²⁹ It is of course possible for the parties to agree all of what they consider to be the essential terms and still not intend to be bound until some other terms are agreed or (p. 292) conditions satisfied.³⁰ It follows that the reference to an intention to be bound here refers to an intention to immediately assume legal obligations.³¹ This approach dictates that courts do not require contracts to be ‘worked out in meticulous detail’.³² This is necessarily the case in a contract where it is not possible to predict how it is to be performed in the future.³³ Subject to what is said below, it is only necessary for the parties to have agreed on those essential terms that cannot otherwise be implied.³⁴

11.08  As noted above, there must be some overriding limits to the courts giving effect to such intention.³⁵ Thus, where the parties have expressed an intention to be bound but the terms agreed are so uncertain or incomplete that a court could not enforce the contract by granting a remedy then the agreement will be void. As Mahoney JA pointed out in Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd,³⁶ in all cases it is necessary to ask, ‘did the parties arrive at a consensus?; (if they did) was it such a consensus as was capable of forming a binding contract?; and (if it was) did the parties intend that the consensus at which they arrived should constitute a binding contract?’³⁷ Perhaps today the order of questions two and three might be reversed, but this does not deny the importance of question two.

11.09  In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd,³⁸ Gleeson CJ recognized a minimum legal requirement of certainty and completeness overriding the intention of the parties in the following terms:³⁹

11.10  This paragraph recognizes three issues. First, that the motivation for a court to uphold a bargain exists to the extent there is an intention to immediately assume legal obligations and not merely an intention to contract. Second, that intention to immediately assume legal obligations is distinct from a finding that the parties have agreed all what they consider to be the essential terms. Third, despite agreement by the parties on what they consider to be the essential terms, there are overriding legal requirements of certainty and completeness which must be made out to a standard that allows a court to enforce the agreement.

11.11  It is important to emphasize these limits. It is possible to identify many statements in judgments to the effect that if the parties intend to contract and have agreed on all the ‘essential’ terms and those essential terms are certain, then the contract will not be held void for uncertainty or incompleteness.⁴⁰ If the view is adopted that whether or not a term is essential depends on the intention of the parties,⁴¹ encapsulating those terms the parties believe to be important, then such statements on their face suggest that it is possible to enforce a contract that may be entirely unworkable. That cannot be correct, and it follows that issues of certainty and completeness have a distinct legal role over and above agreement on such ‘essential’ terms.⁴² The law requires certain minimum standards of certainty and completeness to be reached so that if called upon the court can deal with any dispute. These might have been called ‘essential’ terms in the sense that the contract will not work without them.⁴³ Certainly the case can be made that, ‘essential’ should be limited to those terms necessary for enforcement by a court.⁴⁴ Nevertheless, it is a term that has been used to describe both those terms necessary for enforcement and those the parties believe to be important. It is always necessary to determine in what sense it is being used. Often in those cases where such statements are made the analysis that follows evidences the distinct legal role that investigations into certainty and completeness have; thus one sees conclusions that the parties had agreed all ‘essential’ terms but there is still a long analysis as to whether the terms agreed leave any uncertainty or incompleteness.⁴⁵

(p. 294) 11.12  It follows that courts will attempt to overcome problems that arise where terms have not been expressed in clear language or are not precise, particularly if deficiencies in drafting or the absence of terms were not considered by the parties as preventing a contract from coming into existence.⁴⁶ It also necessarily follows that clear acts of performance when carried out against a background of an intention to be bound will carry a lot of weight and rarely will a contract be held to be void for uncertainty or incompleteness if these are in evidence.⁴⁷ But the court has limited tools at its disposal to make a bargain.⁴⁸ Thus, although a court may be prepared to give much weight to an intention to be bound, the more complex the transaction the more likely that it may be found void for uncertainty or incompleteness. Moreover, the more omissions that exist in a bargain the more reason a court has ‘to doubt that the parties have set down or expressed the whole of the terms upon which they wish to deal’.⁴⁹

11.13  To sum up, it is suggested that the current position is as follows. If there is agreement on all the essential terms—being those terms the parties believed had to be settled before a contract could come into effect—and evidence of an intention to assume immediate legal obligations, then a court will be loath to hold that the agreement is void for uncertainty or incompleteness. However, that statement merely deals with motivation, it does not address legal doctrine. In terms of doctrine, it is suggested that the position is that the law requires, in terms of completeness, for the parties to agree on all those ‘essential’ terms that they and only they can agree on.⁵⁰ ‘Essential’ here encapsulates those terms the parties considered necessary before a contract could come into effect and those that a court requires agreement on in order to enforce the contract. The reference to the need to only agree those terms the parties and only the parties can agree on acknowledges that the law can supply terms, even essential terms. These may be terms thought necessary for enforcement as well as terms the parties thought necessary. In terms of certainty, the law requires the terms to be sufficiently certain so that it is possible to apply them according to the intention of the parties.

11.14  A term will be uncertain if it totally lacks meaning or if a court cannot determine the meaning the parties intended.⁵¹ Generally, a contract will be void for uncertainty if it is not possible to prescribe meaning to an essential term.⁵² The requirement of certainty dictates that it must be possible to attribute meaning to the terms of a contract. That meaning must be found within certain perimeters, it must reflect the presumed intention of the parties. It is not enough that the court can give a term meaning, it must be able to attribute that meaning to the parties.⁵³ This rarely causes problems if a term has only one meaning but it is in the (p. 295) nature of language to be ambiguous and the court usually must choose between different meanings. In some cases a term may be incapable of being given any meaning.

11.15  This necessarily raises the question as to what standard is required to be met before a term will be held to be uncertain. Generally, the courts require a reasonable degree of certainty.⁵⁴ Courts must be able to construe an agreement so that they can enforce it. As regards promissory terms, the search for a reasonable degree of certainty is a search for an obligation that can give rise to a breach of contract and which will attract a remedy.⁵⁵ The degree of certainty required is linked to the remedy sought.⁵⁶ The Restatement (2d) Contracts, section 33(2) provides:⁵⁷

The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

11.16  Comment b to section 33(2) explains this rule in the following terms:⁵⁸

The rule stated in Subsection (2) reflects the fundamental policy that contracts should be made by the parties, not by the courts, and hence that remedies for breach of contract must have a basis in the agreement of the parties. Where the parties have intended to make a contract and there is a reasonably certain basis for granting a remedy, the same policy supports the granting of the remedy ….

[T]‌he degree of certainty required may be affected by the dispute which arises and by the remedy sought. Courts decide the disputes before them, not hypothetical disputes which might have arisen. It is less likely that a reasonably certain term will be supplied by construction as to a matter which has been the subject of controversy between the parties than as to one which is raised only as an afterthought. In some cases greater definiteness may be required for specific performance than for an award of damages; in others the impossibility of accurate assessment of damages may furnish a reason for specific relief. Partial relief may sometimes be granted when uncertainty prevents full-scale enforcement through normal remedies.⁵⁹

11.17  The search for the meaning of a term is a search for the intention of the parties and is often expressed as an issue of construction in a written contract or an issue of fact in an oral contract.⁶⁰ As most commercial contracts are written, the search for certainty involves an (p. 296) issue of construction.⁶¹ The construction of a contract involves two aspects, one of finding the meaning of a term and the other its application (there is also the legal effect of a term such as when a term needs to be characterized under the tripartite classification of terms). A term may fail for uncertainty at either stage. It may be void for uncertainty because it is not possible to give it any meaning or because the application of any possible meaning makes no commercial sense and could not represent the intention of the parties.⁶² It is also possible that words used in a contract may appear meaningless in a literal sense but take on meaning when applied to the facts.⁶³ Often a term may have multiple meanings but only one meaning when applied to the facts. For example, in Timmerman v Nervina Industries (International) Pty Ltd,⁶⁴ a contract contained a covenant for the vendor to repurchase certain property ‘at cost plus CPI’. The expression ‘CPI’ (consumer price index) had multiple meanings as one existed for each capital city and varied with each metropolitan area. However, as the parties here were both Queensland residents and the contract a Queensland contract it was only possible to give the phrase one application which was the Brisbane All Groups Index.

11.18  A further aspect of ‘application’ is that a term may be found to have a number of reasonable applications but fail for uncertainty because it is not possible to determine which of those applications represents the intention of the parties.⁶⁵ For example, in the case of an ambiguity it may be possible to attribute multiple meanings and applications to a term but impossible to determine which application was intended by the parties. The classic example is that of Raffles v Wichelhaus.⁶⁶ This involved a contract to buy and sell cotton ‘to arrive ex “Peerless”’ from Bombay. However, there were two ships called Peerless sailing from Bombay, one left in October and one in December. The goods were shipped on the December ship and the buyer refused to accept them arguing that the contract required them to be on the October ship. The question that went before the court was whether the buyer was in breach of contract for failing to accept the tender of the December goods. The court gave judgment for the buyer so the buyer was not in breach of contract. There are no reasons given for the decision in the report. One view might be that the buyer was correct and the goods should have been on (p. 297) the earlier vessel giving the buyer a right to sue for damages for breach of contract. The more accepted analysis of the facts is that it was not reasonably possible to determine the intention of the parties even though the limits of the ambiguity are clear, the goods were intended to be carried on one of the ships. Thus, in terms of literal meaning the contract was clear, the goods had to arrive on a ship called Peerless. But within the four corners of that contract there were two possible applications of that meaning; both applications were possible given the nature of the goods and the circumstances surrounding the contract which did not evidence any urgency in delivery. The contract was therefore void. However, counsel was stopped by the court and judgment was given for the buyer just after a submission to the effect that there was no consensus ad idem because of the ambiguity; so it is not clear what the ultimate reasoning of the court was, although in the result the court accepted the buyer’s argument that he intended the goods to arrive on the October ship.

11.19  It follows from what has been said above that in practice both investigations overlap and it can be difficult to distinguish the two issues. It is therefore necessary to carry out investigations as to both meaning and application and not cut short an investigation just because a clause makes no literal sense.⁶⁷ It follows that it is convenient to refer to the two processes together as the search for meaning and only distinguish them when necessary.

11.20  As noted above, a contract term or a contract will be uncertain if it is meaningless or, if it has meaning, the court cannot determine the meaning the parties intended it to have. A term, being a promissory term, will be illusory if the promisor retains an unfettered discretion whether or not to perform.⁶⁹ Issues concerning the illusory nature of a term are usually discussed in the context of consideration. If a promise made by a party is illusory, then that promise will not constitute valuable consideration to support a contract.⁷⁰ It is clear that issues of meaning and discretion may overlap.⁷¹ And just as in the case of (p. 298) uncertainty a court will not easily conclude a contract is illusory when there is a clear intention to be bound. A promise is not illusory merely because the promisor has some discretion, even a broad discretion, in how or when its obligations are to be performed.⁷² It is only necessary that there be an obligation that the promise be performed and that the discretion is contained within defined parameters.⁷³ For example, a promise to pay a salary between £7,000 and £9,000 will be upheld with an obligation inferred to pay the lower figure if there is a dispute.⁷⁴

11.21  A term can often have more than one meaning.⁷⁶ Such a term may be considered ambiguous in a strict sense. Usually in practice a term will not be held to be uncertain simply because it is ambiguous in this sense as it is usually possible to determine what application was intended by the parties.⁷⁷ Such ambiguity is resolved by construction. Most words appearing in a contract are capable of being ambiguous in terms of literary meaning as many words in the English language are capable of more than one meaning. When words are added together such as in a contract term, the chance of such ambiguity is reduced because each word in the sentence will narrow down the possible meanings; in short, the sentence gives context to the individual words, the clause gives context to the sentences contained in it, and the contract as a whole gives context to the clauses contained in it. This is the process of construction and the court will choose that construction which it thinks represents the presumed intention of the parties using all the construction techniques that are available under the general law.⁷⁸ For example, in Waldron v Tsimiklis,⁷⁹ the parties entered into a contract of sale which was ‘subject to the approval of all relevant authorities for the erection of a residential flat building on the subject land’. One question that went before the court was whether the term ‘residential flat building’ was uncertain. This was a case of ambiguity in the sense being discussed as (p. 299) everyone knows what a residential flat building is, the term is not therefore meaningless. The term would only be uncertain and the contract void if it was not possible to define the type of residential flat building contemplated, that is, if a specific meaning could not be attributed to the parties. The issue was resolved by construction, the clause was for the benefit of the buyer so the clause was held to be referring to a ‘genuine flat project’ which the buyer had decided upon and wished to proceed with.⁸⁰ Similarly, in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd,⁸¹ it was noted that a term referring to the ‘supplier’s costs’ was a matter that could give rise to various arguments as to its meaning in a particular case; that is, it did give rise to evidential uncertainty. But is was nevertheless capable of meaning because, ‘the concept of a cost of doing something is certain in the sense that it provides a criterion by reference to which the rights of the parties may ultimately and logically be worked out’.⁸²

11.22  Before moving on, it is important to note that, in law, a term will not be considered ambiguous simply because different judges come to different conclusions as to its meaning, each judge being certain that their understanding of the term is correct. Moreover, there has been a legal concept of ambiguity distinct from its meaning of a word or phrase capable of two or more meanings. In law, the tendency has been to call a term ‘ambiguous’ only when it is incapable of meaning. That narrow meaning is breaking down, and such a term today is more likely to be called ‘uncertain’. For example, it is more common today for a court to determine that a term is ambiguous if it is capable of two or more meanings in order to access extrinsic evidence to determine its meaning or to attract a construction rule such as the contra proferentem rule.⁸³

11.23  There are limits to resolving ambiguity. Although an ambiguous provision in the sense discussed in paragraph 11.21 above cannot be said to give rise to an absence of meaning, it can still be uncertain in its application. As the example of Raffles v Wichelhaus⁸⁴ discussed above shows, despite finding literal meaning and possible reasonable meanings in application it may still not be possible to determine which meaning or which application was intended by the parties. This is particularly the case where a term can have more than one application and those applications conflict, so that either meaning is possible but not both. In such a case if the court is unable to attribute any of those meanings to the intention of the parties then the term will be uncertain.⁸⁵ For example, in Peter Lind & Co Ltd v Mersey Docks and Harbour Board,⁸⁶ the plaintiff was asked to submit, and did submit, two tenders for the construction of a container freight terminal, one for a fixed price and the other at a variable price. The defendant wrote to the plaintiff stating that it accepts ‘your tender’. Cooke J held that a reasonable person in the position of the plaintiff would find such a communication ambiguous and ultimately the agreement was void as there was no way to resolve the ambiguity.

(p. 300) 11.24  If the court can attribute both meanings to the intention of both parties then the application of those meanings still needs to determined: that is, can the contract work with both meanings? A more common finding is that a clause has two meanings, one of which has been adopted by one party and the other meaning by the other party.⁸⁷ This becomes an issue if there is a material difference in the meanings adopted by the parties.⁸⁸ Such a situation may mean there is no contract as there is no consensus ad idem, particularly if neither party is aware of the other’s understanding⁸⁹ and even if both are aware of the other’s understanding but have not assented to it. Section 20 of Restatement (2d) Contracts deals with this situation in American law. It provides:⁹⁰

11.25  Subsection (2) then goes on to deal with the situation of where one party only is aware of a conflict of meaning. It provides:

1. (2)  The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if

   1. (a)  that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or

   2. (b)  that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

11.26  The basic principle of subsection (1) is that ‘no contract is formed if neither party is at fault or if both parties are equally at fault’.⁹² Subsection (2) deals with a unilateral error.⁹³ The crucial question will invariably be whether either party knew, or had reason to know, of the meaning attributed by the other.⁹⁴

11.27  It is also possible, particularly in the context of standard form contracts drafted for the benefit of one party that a dispute involving ambiguity can be resolved by application of the (p. 301) contra proferentem rule.⁹⁵ In United States of America ex rel Union Building Materials Corp v Haas and Haynie Corporation,⁹⁶ Haas and Haynie Corporation (H & H) had secured a contract to construct the United States Courthouse and Federal Office Building in Honolulu and had entered into a subcontract with Union Building Materials Corporation (UBM) for the acquisition and installation of padding and carpeting for the building. The standard subcontract form normally used by H & H was used. UBM had been primarily engaged in the sale of lumber products and was a newcomer to the market in carpet products. During the negotiations leading up to the signing of this contract, UBM repeatedly stated that their financial position was not strong so that, for cash-flow reasons, they required immediate payment from the project.

11.28  A dispute arose concerning payment terms and UBM claimed that payment for materials delivered but not yet installed should include a proportion of the total overhead and profit for the job, while H & H claimed that it should not. The contract was ambiguous on this point since it merely specified that payment for materials delivered would only be made after proof of quality and value had been presented without specifying how that value was to be computed.

11.29  The court considered whether either party knew or had reason to know of the meaning given to the contract by the other. H & H was judged to have had reason to know that UBM expected recovery of some profit and overhead at the time of delivery of the material because of UBM’s repeated indications that it was important to them to receive such expenses at an early stage. However, H & H argued that since the trade custom did not allow for recovery of profit and overheads on the delivery of materials, UBM should be held to have reason to know that such was the meaning attached by H & H. The court held that UBM, being a newcomer to the field of carpet subcontracting, had no reason to know of the trade custom and therefore should not be bound by it. The court went on to say, ‘if only one party knows or has reason to know of the conflict in meaning, the contract will be interpreted in favour of the party who does not know of the conflict’.⁹⁷ Accordingly, the meaning attributed to the agreement by UBM prevailed. The case also suggests that in the United States trade usages may be utilized in appropriate cases to show that a party had reason to know of a given meaning attributed to a particular term. Generally, for a person to be bound by a trade usage they must have knowledge of that usage, or, if not, the usage must be so well known that knowledge can be inferred⁹⁸ since the party in question must be in a position to know of the trade usage.⁹⁹

11.30  A court will not enforce an incomplete agreement or an incomplete term.¹⁰⁰ A term will be incomplete if it does not adequately deal with an issue that has arisen under the contract and which falls within its subject matter. A contract will be void for being incomplete if any incomplete term or terms are essential to the contract and cannot be supplied by some gap-filling technique;¹⁰¹ here the courts often view the agreement as no more than an agreement to agree.¹⁰² That analogy may not be correct in all cases, especially where the parties not only intend to be bound but where there is reliable evidence of their belief that the bargain is complete. Given that the importance of terms is determined by the intention of the parties,¹⁰³ it follows that whether or not an important term is missing is also informed by the intention of the parties.¹⁰⁴ However, the more important a term is in an objective sense, the more likely a court will conclude that the parties intended the contract to come into effect only after agreement has been reached on that term.¹⁰⁵

11.31  In practice, a large proportion of everyday agreements made by business people are incomplete and few would satisfy a strict requirement of completeness. Business people are generally satisfied as long as there is agreement on the essential terms. They may be reluctant to spend much time negotiating the terms in meticulous detail.¹⁰⁶ In addition, in long-term contracts, some terms, even terms considered ultimately essential by the parties, may not be capable of being fixed at the time of executing the contract. If, in all such cases, the courts were to deny the existence of a binding contract, it would defeat the reasonable expectations of commercial parties and interfere with the efficiency and smooth running of business transactions.¹⁰⁷ It follows that courts will try hard to uphold a bargain even though it is not (p. 303) complete by using the techniques discussed later in this chapter. However, it may be noted here that the general approach to this issue was expressed by Lord Wright in Hillas & Co Ltd v Arcos Ltd, in the following terms:¹⁰⁸

11.32  Finally, it must be noted that even if the agreement is complete as regards what the parties consider to be the essential terms, it may still be found to be void for being incomplete if gaps are such that a court cannot determine the existence of a breach of contract and fashion an appropriate remedy when approached by one of the parties. The courts must ‘feel confident enough in their ability to fill in the gaps which the parties have left’ before they will uphold an incomplete agreement that evidences an intention by the parties to be bound but which cannot operate on its agreed terms without the court filling the gaps.¹⁰⁹

11.33  The expression ‘agreement to agree’ can be used to mean different things in different contexts. For example, where all the terms of an agreement are settled but it is made ‘subject to contract’, a determination must be made, by reference to the intention of the parties, whether or not they intended the agreement to have immediate effect or was to come into effect when a formal contract was executed.¹¹¹ If the intention is that the agreement is not to be enforceable until a formal contract is executed, then one could say that the ‘agreement’ is no more than an agreement to agree. But that conclusion does not of itself provide any reason as to why that result was reached. A related expression is a ‘contract to contract’. This too does not necessarily dictate a particular legal response. In Chillingworth v Esche,¹¹² Sargant LJ said of this expression:¹¹³

11.34  Despite having no doctrinal force of its own, the expression ‘agreement to agree’ has long been used to denote a classification of negotiations that results in an agreement that is illusory, uncertain,¹¹⁴ and incomplete.¹¹⁵ It has also been said that a true unenforceable agreement to agree lacks an intention to be bound.¹¹⁶ Whether an agreement is an agreement to agree has been said to be an issue of construction if the agreement is in writing and a question of fact if it is oral.¹¹⁷ However, as noted, the words themselves are not conclusive and carry no legal implication.¹¹⁸ It is possible for the parties to enter into a legally enforceable contract with an express or implied intention that further terms are still to be agreed.¹¹⁹ What is relevant is whether or not the ‘agreement’ requires further consensus; a true ‘agreement to agree’ in the sense that it denotes a category of agreement, lacks the assent required for a contract.¹²⁰ The leading statement and example is contained in May & Butcher Ltd v The King.¹²¹ In this case, May & Butcher proposed to purchase ‘tentage’ from the Disposals Board (a body set up by the government to dispose of goods formerly required for war purposes). Tentage was (p. 305) a term used to describe a class of goods relating to the construction and equipment of tents. The Company received a number of letters from the Controller of the Board purporting to confirm the sale of ‘the whole of the old tentage which may become available’ up to 31 March 1923 upon terms which included the following:

11.35  There was a commercial reality to this transaction because the ‘tentage’ covered a variety of products of varying qualities and until the buyer viewed what was on offer it could not realistically determine its value.

11.36  At one point, May & Butcher made price proposals but these were refused by the Board. The Board then considered that it was no longer bound by the agreement on the ground that the price was never agreed. May & Butcher claimed, first, that if the price was not agreed then the price was to be a reasonable price, and second, that even if the price was not agreed, the arbitration clause in the contract was intended to apply in the event of a dispute and arbitration could therefore be used to fix the price.

11.37  The House of Lords held that since there was no agreement on these matters there could be no concluded contract. In his reasoning, Lord Buckmaster made an unambiguous statement that an agreement to agree was void, but on the same page he made the more equivocal statement 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’.¹²²

11.38  Viscount Dunedin stated that:¹²³

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 … . We are here dealing with sale, and undoubtedly price is one of the essentials of sale, and if it is left still to be agreed between the parties, then there is no contract. It may be left to the determination of a certain person, and if it was so left and that person either would not or could not act, there would be no contract because the price was to be settled in a certain way and it has become impossible to settle it in that way, and therefore there is no settlement. 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. As long as you have something certain it does not matter.

11.39  Lord Warrington similarly emphasized that the court could not imply a reasonable price because that would be at odds with the intention of the parties which was to agree a price. (p. 306) A term cannot be implied if it is inconsistent with an express term.¹²⁴ Thus, depending on the subject matter, a court can often resolve a case where there is agreement to pay a reasonable price but not an agreement to agree a price.¹²⁵

11.40  As regards the arbitration provision, Lord Buckmaster thought the clause was not operative as it dealt with disputes arising out of the ‘agreement’ and there was no agreement. Lord Warrington agreed, the lack of a binding contract meant the clause was not binding.¹²⁶ Lord Dunedin held that the clause dealt only with ‘disputes’ and this was not a dispute but a ‘failure to agree’.¹²⁷

11.41  Since this case there has been a continuing debate as to whether the courts should accord that much primacy to the intention of the parties to agree and therefore refuse to impose an obligation inconsistent with that intention. The alternative is that primacy should be given to an overall intention to be bound if it exists. For some a clear distinction should be drawn between an agreement to agree a contract which should be held illusory as the whole transaction is in a state of negotiation, and an agreement that contains an undertaking to agree a term. The latter often arises in a commercial context¹²⁸ and it is here that the courts are most likely to uphold the agreement unless the term to be agreed is an essential term.¹²⁹ Often parties enter into some preliminary agreement with an intention to contract and agree to agree the remainder of the terms. In many cases this is because it is not possible to determine all the rights and obligations at that time. There is a view that if there is a clear intention to be bound this should be given paramount importance so that if the courts can use the normal techniques to resolve any uncertainty or incompleteness then such agreements should not be struck down out of hand.¹³⁰ There is certainly a view in the modern law that those cases where an agreement to agree has been upheld can be explained by reference to the court being loath to hold a contract void for uncertainty and incompleteness if there is an intention to be bound and it is possible to give effect to the transaction.¹³¹ The decision in May & Butcher itself has come in for some express criticism. In Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd¹³² the court said the case ‘is no longer to be regarded as authority for any wider proposition than that an “agreement” which omits an essential term … or a means of determining such a term, does not amount to a contract. No longer should it be said … if something essential is left to be agreed upon by the parties at a later time, there is no binding agreement’.¹³³ Arguably, given the analysis of the judgments in the case set out above, it was never intended to be authority for any broader proposition. The (p. 307) difficulty with the proposal suggested in Fletcher Challenge is to determine what was meant by the reference to ‘essential’ terms. It is suggested that the court meant that the agreement could be enforced despite lacking terms the parties considered important but not those necessary for its enforcement.

11.42  As noted earlier, the word ‘essential’ in this context is ambiguous. The leading statement on its meaning is that of Lloyd LJ in Pagnan SpA v Feed Products Ltd.¹³⁴ In this case Lloyd LJ suggested that an agreement to agree should be upheld unless what is agreed is unworkable or void for uncertainty. That is, it lacks terms necessary for its enforcement. As regards the meaning of ‘essential’ he said:¹³⁵

11.43  Perhaps the most forceful commentator for upholding agreements to agree is McLauchlan who also suggests that primacy be given to the intention to be bound so that even if a material term is left to be agreed the agreement should be upheld.¹³⁶ He writes:¹³⁷

[A]‌greements intended to be legally binding ought never to be rejected simply on the ground that a material term was deferred for future agreement between the parties. The fact that a term is designated as ‘to be agreed’ will often be simply an indication of the parties’ understanding that the term is capable of being agreed in the future and that it is their intention to do so, not that there is to be no contract until such agreement is reached. Such an understanding is perfectly consistent with the existence of the further intention that, failing agreement, the gap is to be filled if possible by reference to the objective standard of what is reasonable in the circumstances.

11.44  It is interesting that there are some Australian cases that have adopted similar views¹³⁸ because the decision of the High Court of Australia in Masters v Cameron¹³⁹ appears to be against such a proposition. That case is the authoritative Australian case on the meaning of ‘subject to contract’ which is dealt with in detail in another chapter.¹⁴⁰ However, the court suggested that the phrase may have one of three meanings: the parties may intend to be immediately bound and be required to perform, they may intend to be immediately bound but performance is suspended until the condition is fulfilled, or they may intend (p. 308) not to be bound at all until the condition is fulfilled.¹⁴¹ In explaining the third class they said:¹⁴²

11.45  Although it might be possible to argue that these statements were made in the context of an agreement that lacked an intention to immediately assume legal obligations, in suggesting that there can be no contract when the parties ‘have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document’ the High Court has not left much if any room for upholding an agreement to agree even when what remains ‘to be agreed’ are some non-essential terms.¹⁴³ The High Court did recognize that when a formal document is executed it could contain further terms. That is the court recognized the efficacy of a case where ‘the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms’.¹⁴⁴ This must be correct, the parties are free to agree further terms which may take effect as a variation or re-negotiation. The essential point though is that there should be nothing in the original agreement that suggests a need to agree further terms for the operation of that agreement. In terms of certainty and completeness the original agreement must stand on its own feet.¹⁴⁵ This, it is suggested, is the key to the High Court’s formulation of the (p. 309) principle. Where an ‘agreement’ evidences a need to agree further terms in order for that ‘agreement’ to take effect then that evidences a lack of an intention to assume legal obligations.¹⁴⁶ The parties must have agreed all those terms that their own intention to be bound was contingent upon.¹⁴⁷ It is therefore possible for the parties to agree very few terms in a complex agreement and have that agreement enforced as long as they intend to immediately be bound and, in terms of certainty and completeness, the court does not require any further terms to enforce the agreement.¹⁴⁸

11.46  The case usually put forward to evidence a contrasting approach to the May & Butcher case is Foley v Classique Coaches Ltd.¹⁴⁹ Here the defendant entered into an agreement to buy land from the plaintiff to be used for the defendant’s trailer park business for a certain price. In a separate agreement, executed at the same time, the defendant undertook to purchase all their petrol requirements from the plaintiff ‘at a price to be agreed by the parties in writing and from time to time’. There was also an arbitration clause which was stated to be applicable to any dispute or difference arising over the subject matter or construction of the agreement. After the petrol sale agreement had been operating for three years at prices charged by the plaintiff, disputes arose and eventually the defendant repudiated the contract by informing the plaintiff of its intention to purchase petrol supplies elsewhere. The defendant claimed that no binding contract existed because there was no agreement as to price.

11.47  The Court of Appeal distinguished the May & Butcher case and held the agreement to be valid and binding by implying a term that the petrol was to be supplied at a reasonable price; it should be noted that the result is arrived at by reference to an implied term rather than an imposed standard of reasonableness.¹⁵⁰ To get to that point the court had to determine where the line was drawn between the House of Lords decision in the May & Butcher case and the decision of the House of Lords in Hillas & Co Ltd v Arcos Ltd.¹⁵¹ The facts of the Hillas case are dealt with later, it is not an express agreement to agree case but a case where the terms were not complete.¹⁵² Suffice it to state here that the court in the Foley case said that the House of Lords in the Hillas case had made it clear that they were not laying down any general principles in the May & Butcher case and that each case turned on its own particular facts.

11.48  In the Foley case, in arriving at its decision that there was a contract, the court considered a number of factors which were in addition to finding that an intention to contract existed. First, there was reliance, the parties had acted on the agreement for three years. Second, the price paid for the land was linked to the defendant’s undertaking to purchase its petrol needs from the plaintiff. If at the time of contract that undertaking was not given, it was likely the plaintiff would either have negotiated for a higher price for the land or not agreed to sell at (p. 310) all. Third, the provision for arbitration demonstrated that the parties were willing for prices to be fixed by some external method if they failed to agree.

11.49  How then do those factors allow the court to intervene when the parties had expressly agreed to agree? Scrutton LJ’s reasons are quite brief. Essentially, he said that the parties had intended to contract and the arbitration clause was there to deal with the situation that arose if they failed to agree. Drawing an analogy with principles governing tied houses,¹⁵³ he said there was an implied term that the petrol would be supplied for a reasonable price and be of a reasonable quality. Greer LJ expressly recognized that a court cannot imply a term if to do so would be inconsistent with the intention of the parties but thought that here the implication would give effect to the intention of the parties.¹⁵⁴ Whether he was referring to the intention to contract as opposed to the intention to agree a price is not made clear.¹⁵⁵ In his judgment, Maugham LJ said some weight, but not too much, could be placed on the intention to contract.¹⁵⁶ Indeed, Maugham LJ, by focusing on the exclusive dealing arrangement aspect of the case—and by reference to an ‘old-established rule in the case of tied houses’—was much clearer in expressing why this implication was not inconsistent with the intention of the parties, he said:¹⁵⁷

Are we to assume that both parties were so ignorant of business that no dispute as to price could possibly arise? Price is the very basis of this agreement, which surely does not mean that the company are not to purchase petrol from any other person or corporation if they are unable to agree in writing on the price or if the vendor chooses to fix a price above the commercial price which the company could possibly pay. If the clause were to be construed in that way it would be nonsense, and in my opinion it is necessary to imply … a proviso that so long as the vendor is able and willing to supply the company with sufficient petrol either at a price to be agreed … or at a fair and reasonable price if the price has not been so agreed, the company shall purchase it from him.

11.50  It would seem to follow from the above analysis that there may be three distinct approaches to overcoming incompleteness resulting from an agreement to agree all of which assume an intention to be bound. First, in some cases when the contract is construed as a whole, it may not be inconsistent with the intention of the parties to agree a term for the court to imply a term if the parties fail to agree.¹⁵⁸ Second, there may be some recognition that it is possible to imply a term to fill a gap in the face of an agreement to agree that term when to do so gives effect to the overall expectation of the parties that the agreement should carry legal force.¹⁵⁹ Third, acts of performance and reliance may be resorted to not only to show an intention to (p. 311) be bound but to provide an insight into the meaning the parties intended and thus resolve any uncertainty and incompleteness. There is a view that acts of performance or reliance are of themselves a reason for a court to either impose a standard of reasonableness or an implied term.¹⁶⁰ The use of such evidence is clearly legitimate if the issues of certainty and completeness are seen as going to contract formation. Similarly, such conduct can be resorted to as evidence of a variation of the contract, that is, what was initially an agreement to agree a term has by conduct been agreed.¹⁶¹ Use of such evidence is more problematic if issues of certainty and completeness are seen as issues of performance involving pure questions of construction.¹⁶²

11.51  The first and second of these approaches is adopted in the United States under the Uniform Commercial Code (UCC), which provides in section 2-204(3) that:¹⁶³ ‘Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.’ Article 2-305 which has been redrafted in the 2014–2015 Official Text of the UCC, specially deals with price and provides:¹⁶⁴

1. (1)  The parties if they so intend may conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if:

   1. (a)  nothing is said as to price; or

   2. (b)  the price is left to be agreed by the parties and they fail to agree; or

   3. (c)  the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.¹⁶⁵

11.52  Similarly, the Restatement (2d) Contracts, section 204, emphasizes the importance of intention to contract. It provides:¹⁶⁶

11.53  The effect of this section is to imply a term that is reasonable which is distinct from implying a term on the basis that it is reasonable to do so. Comment d to section 204 explains the application of the section as follows:

11.54  Speidel, commenting on the previous draft of the UCC, notes that this approach to ‘the problem of open price is carried over to other omitted terms in Article Two, Part Three of the UCC. If the parties “intend” to create a contract, if there is no agreement to the contrary, and if there is a reasonably certain basis for enforcement, the Code provides judicial “gap filling” standards for all terms thought essential to the bargain.’¹⁶⁷ There is certainly clear evidence that the courts draw on article 2-305 of the UCC for authority in non-sale and non-Code transactions,¹⁶⁸ on the basis that this provision illustrates ‘the approach of the modern law, with its emphasis on reasonable commercial dealings and its rejection of technical requirements’.¹⁶⁹ In Aycock v Vantage Management Co,¹⁷⁰ the court held that, although article 2-305 was technically not applicable to leases of real estate, the principle expressed in that provision was sound and could apply so that a renewal provision was not held unenforceable simply because the rental was not specified. The renewal rent was to be based on a number of enumerated factors such as the then prevailing rental rates for properties of equivalent quality, size, utility, and location. It was held, citing UCC, article 2-305(b), that the lessor was obliged to make a good faith determination consistent with these factors. The court was clearly keen to hold the parties to their evident intention to be bound by a provision that did not specify the exact rental.

11.55  In Anglo-Australian law the agreement to agree rent has been one of the textbook examples of an agreement to agree. There have been numerous cases over the years suggesting that a court cannot uphold an agreement for lease if the rent is to be agreed and there is no formula for its determination if there is a failure to agree.¹⁷¹ Courts have been reluctant to apply a standard of reasonableness to such contracts.¹⁷² In more recent years, there has been some relaxing of that position which may evidence an adoption of the approach being discussed. One example of this relaxation was to distinguish between an agreement to agree a lease, such as an option to take a lease where the rent is to be agreed and a rent review clause under an existing lease where (p. 313) the review clause states that the rent is to be agreed.¹⁷³ The latter could be upheld as there was a contract in existence while the former could not as it was nothing more than an agreement to agree. This is the distinction between an agreement to agree and an agreement to agree a term. However, even this distinction appears to have been rejected by the Court of Appeal in Corson v Rhuddlan Borough Council.¹⁷⁴ Here a lease provided for an option to renew ‘at a rental to be agreed (but such rental shall not in any event exceed the rental hereby reserved)’. In upholding that provision the court made a number of important statements. First, Ralph Gibson LJ (with whom Balcombe LJ agreed)¹⁷⁵ placed a lot of weight on the construction of the contract as a whole which clearly evidenced that the parties intended an obligation to flow from this agreement. He thought that if it was plain that the parties intended to contract a provision that the rent payable should be a fair rent could be implied.¹⁷⁶ He saw no reason to distinguish the principles that ‘should be applicable to the construction, so far as concerns voidness for uncertainty, of a rent revision clause in an existing lease as contrasted with an option for a new lease or further lease in an existing lease’.¹⁷⁷ Staughton LJ agreed saying that one must first consider all the express and implied terms of a contract before holding it void for uncertainty.¹⁷⁸ He went on to say that the parties clearly intended a contract, and if they were asked what would happen if they failed to agree would have answered that the court or an arbitrator would decide and the solution they would impose would be a fair rent. This result he said was grounded in the terms of the contract and surrounding circumstances.¹⁷⁹ It is therefore not a direct application of the approach under the Restatement (2d) Contracts § 204 discussed above. He did not think the parties would have expected the contract to fail if they failed to agree. There is an overriding importance attached the intention to be bound in his judgment.

11.56  There has also been some express acceptance of the third approach. For example, in British Bank for Foreign Trade LD v Novinex LD,¹⁸⁰ the Court of Appeal approved this statement of principle of the trial judge:¹⁸¹

(p. 314) 11.57  This statement clearly adopts the view that by their conduct the parties may be taken to have agreed to pay a reasonable price. Despite this there are many cases that adopt a different view.¹⁸³ For example, in British Electrical and Associated Industries (Cardiff) Ld v Patley,¹⁸⁴ a sale was made ‘subject to force majeure conditions that the government restricts the export of the material at the time of delivery’. This clause was held to be meaningless, and McNair J added, ‘notwithstanding that the parties may have thought and acted on the basis that a contract existed between them, no consensus ad idem will be held to exist where there still remains to be negotiated and agreed the exact form of the clauses or conditions referred to by the parties’.¹⁸⁵ It follows that although it has been said many times that a court will be reluctant to hold an agreement void for uncertainty when it has been acted upon¹⁸⁶ — particularly when such reliance will clearly evidence an intention to contract¹⁸⁷—if the circumstances are such that despite such reliance, all there is is an agreement to agree, then the court cannot uphold the transaction. Performance will not cure all ills.¹⁸⁸ However, performance helps when it evidences agreement on that which was to be agreed.

11.58  Finally, it needs to be stressed that there will be contracts where agreement on a term may be considered by the court to be so important that the court cannot consider there to be an intention to contract without agreement on that term. In such cases the court will not use its techniques to fill that gap. In Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd,¹⁸⁹ a construction contract was expressed to be of such a nature. It is also possible for there to be agreement on what may be considered all the essential terms and for the parties still to evidence an intention not to contract until some further step is taken.¹⁹⁰

11.59  At present, in Anglo-Australian law a simple agreement to negotiate a contract is void.¹⁹² It does not help to attempt to provide some standard for negotiation, such as (p. 315) good faith by which to gauge the conduct of the parties and such a standard will generally not be implied.¹⁹³ The difficulty with such agreements is that they appear to be both incomplete and uncertain.¹⁹⁴ It is different if the agreement involves an undertaking not to negotiate with a third party—a lock-out agreement—which does not require the promisor to negotiate with the promisee¹⁹⁵ and rights of pre-emption which do not have to be exercised.¹⁹⁶ These are enforceable.¹⁹⁷ Before looking at the case law in more detail it is important to note that the concern here is not with the existence of a pre-contractual duty to negotiate in good faith. The issue is the efficacy of a contract to negotiate so that the negotiation becomes a performance obligation. In recent years, there has been a number of English decisions recognizing ‘good faith’ as a sufficiently certain standard of performance for some contractual obligations, that it may be a standard that applies to contractual discretions,¹⁹⁸ and even considering the case for the implication of such an obligation.¹⁹⁹ However, that recognition is limited and still in development, and in any case has not resulted in any revision of the position as regards a simple contract to negotiate in good faith. The concern here is whether an agreement to negotiate is void for uncertainty and whether the parties subjecting an obligation to negotiate to an express standard of good faith helps in overcoming any perceived uncertainty.

(p. 316) 11.60  The decision of the House of Lords in Walford v Miles²⁰⁰ is the leading decision on simple agreements to negotiate. In this case, the defendant/seller and the plaintiff/buyer entered into an oral ‘agreement’, under which the defendant agreed that if the plaintiff could provide a letter of comfort from its bank the defendant would ‘terminate negotiations with any third party’ in respect of the sale of certain property. That comfort letter was received and the defendant confirmed in writing, ‘subject to contract’ to sell the property to the plaintiff. In due course the defendant decided to sell the property to a third party and that sale was carried out. The case was initially pleaded on the basis of a lock-out agreement whereby the defendant promised to terminate negotiations with third parties in return for the provision of the comfort letter and the plaintiff’s promise to continue negotiations, all this being ‘subject to contract’. The pleadings were amended to argue that there was a term implied in fact into the agreement that the defendant would continue to negotiate in good faith with the plaintiff—the lock-in agreement; thus giving rise to the agreement to negotiate point. It was held that an agreement to negotiate was too uncertain to be enforceable. The addition of the standard of ‘good faith’ did not help bring certainty to the duty to negotiate because it was a standard that made no sense in the circumstances, those circumstances being the adversarial position of parties involved in negotiation.²⁰¹ Moreover, it was not possible to apply such a duty because parties have a legal right to withdraw from negotiations whenever they choose.²⁰²

11.61  The court rejected the argument that an agreement to negotiate was synonymous with a promise to use ‘best endeavours’²⁰³ which was enforceable on the basis that it set a standard by which a court could judge whether or not there has been proper performance. Lord Ackner, with whom the other members of the court agreed, said:²⁰⁴

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 (p. 317) 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 the 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. [Counsel for the plaintiff] accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question—how is a 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.

11.62  Often in practice parties do not enter into a simple agreement to negotiate a contract. Rather, the typical situation is where the parties reach agreement on all the essential terms of the contract and expressly agree to negotiate the remaining terms.²⁰⁵ The efficacy of these agreements will depend on the general rules governing certainty and completeness, assuming the parties otherwise intend to be bound.²⁰⁶ If the jurisdiction does not enforce terms requiring negotiation of terms, then that term will be void and the efficacy of the remainder of the agreement will depend on whether that term can be severed. Given the decision in Walford v Miles,²⁰⁷ this probably represents the position in England. It would generally then follow that if the essential terms are agreed, the contract may be upheld unless there was a clear lack of intention to be bound until minor terms were also agreed.²⁰⁸ In practice, where the term for negotiation forms part of a preliminary agreement as opposed to an agreement that is intended to take effect as a final agreement, the issue of intention is more likely to be in issue.²⁰⁹ Moreover, if there is no intention to be bound should negotiations break down, then despite agreement on many terms, the agreement is no more than a mere agreement to negotiate. The magnitude and complexity of the particular transaction will be an important indicator as to whether the parties intend to be bound while any part of the contract remains (p. 318) at the negotiation stage.²¹⁰ Finally, before moving on, it is relevant to note that there is recent case law suggesting that Walford v Miles does not prohibit upholding obligations to negotiate in some types of contract that are otherwise complete.²¹¹ This may be limited to where there is no dispute as to the existence of the contract and the agreement to negotiate relates to a matter arising under such a contract, for example, a dispute resolution provision.²¹²

11.63  Closely related to the scenario dealt in the last paragraph is where the parties enter into a preliminary agreement, or even what they consider to be a final agreement, and leave an essential term to be negotiated. If there is an intention to be bound and if machinery exists within the contract to deal with the position should negotiations break down, then there appears no good reason for not upholding the contract. Such provisions are often expressed in terms of an obligation to negotiate in good faith. In Australia there is some limited scope for upholding such agreements. The leading authority is Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd.²¹³ This case concerned negotiations between a number of companies to obtain ministerial approval for a coal mine and to carry out the necessary work when approval was given. The companies had executed a draft ‘heads of agreement’. The preamble referred to the ‘heads of agreement’ as being a ‘proposal … subject to completion and implementation of agreements on the basis of [the] heads of agreement’. The ‘heads of agreement’ provided:

11.64  The proposed joint venture agreement never eventuated. Negotiations broke down when Coal Cliff Collieries (the appellant) varied its proposal from one of ‘joint venture’ to a ‘share sale agreement’. This change was based upon the appellant’s research which indicated, to the appellant at least, that the joint venture was no longer viable. Sijehama (the respondent) treated this as a repudiation of the ‘heads of agreement’ and terminated the contract. The court held that the agreement to ‘proceed in good faith to consult together upon the (p. 319) formulation of a more comprehensive and detailed joint venture agreement’ was illusory, vague and therefore unenforceable.

11.65  Kirby P (Waddell AJA concurring) did, however, envisage that a promise to negotiate in good faith could in certain circumstances be enforceable.²¹⁴ He did not think the argument that such provisions should not be enforced because the court cannot fashion a remedy should be accepted. The court can award nominal damages if necessary or damages for loss of chance or damages for wasted expenditure.²¹⁵ Nor did he think that in upholding such provisions the courts were interfering with the right of a person to contract or not to contract; he said: ‘it is the very exercise of the right to contract which has bound the parties to the negotiation in good faith that they promised … . [T]‌o enforce that obligation is not to interfere in the freedom to contract, but to uphold it.’²¹⁶ In the result, the efficacy of such a provision, he thought, depended on construction; there must be a present intention to contract and there must be sufficient certainty.²¹⁷ He thought that a clause that allowed a third party to settle uncertainties and ambiguities would evidence an intention to contract. However, even with such a provision he thought there would be some cases where the contract was still illusory or unacceptably uncertain.²¹⁸ In this case, he thought the agreement could not be enforced. No arbitrator had been appointed. Many terms were yet to be agreed, and a court was not equipped to fill in the spaces in such a complex transaction by reference to any objective standards or its own experience.²¹⁹

11.66  Apart from expressing approval for Lord Wright’s speech in Hillas & Co Ltd v Arcos Ltd,²²⁰ Kirby P’s comments seem to be limited to the enforcement of a provision for the good faith negotiation of remaining terms that is incorporated as a term of a contract. His comments arguably cannot be taken to be authority for upholding a mere contract to negotiate a contract, that is, a form of process contract aimed at settling the terms of a principal agreement.²²¹ This seems to follow from his statement that such a promise will be enforceable ‘depending on its precise terms … [and] … so long as the promise is clear and part of an undoubted agreement … .The courts will not adopt a general principle that relief for the (p. 320) breach of such a promise will be withheld.’²²² Arguably, he would not have insisted on both negotiations being well advanced and a dispute resolution clause if he was not dealing with such a complex transaction as he suggested that if the subject matter was not as complex a court could use the tools it has at its disposal to deal with uncertainty and incompleteness.²²³ Moreover, as noted above, he made reference to a dispute resolution clause as evidencing an intention to be bound by the agreement and this could be proved by other means. In the result, Kirby P appeared to hold this agreement void for being incomplete (referring to various ‘blank spaces’ in the agreement) and uncertain (suggesting differences the parties still had).²²⁴ However, in a later case, Allsop P concluded that Kirby P’s decision was based solely on uncertainty.²²⁵ Importantly, Kirby P does not engage in the debate as to whether a good faith obligation can be used to uphold an agreement to negotiate. His approach was focused on whether or not there was a clear obligation to be bound and whether the agreement was sufficiently certain and complete, such that the court could enforce that which was agreed. Arguably if the law goes a step further and gives some recognition to a good faith standard, this would further aid the efficacy of such agreements. The New South Wales Court of Appeal in United Group Rail Services Ltd v Rail Corp New South Wales²²⁶ did venture further down that path and this case is discussed in more detail in Chapter 13.²²⁷ However, it is important to note that, although later cases have not always maintained the distinction,²²⁸ the facts in United Group Rail involved a dispute resolution clause in an existing contract that required ‘genuine and good faith negotiations with a view to resolving the dispute’. It was in that context that Allsop P adopted a subjective standard to good faith which required an honest and genuine approach to resolving the dispute with a fidelity to the bargain. He distinguished this from the facts in Coal Cliff and the test he fashioned requiring fidelity to the bargain is clearly focused on where there is an existing contract. Moreover, the subjective standard of honesty is problematic when the issue concerns the existence of a bargain. Where parties merely undertake to negotiate the remaining terms of an agreement in good faith then they have not committed themselves to that contract and can therefore legitimately still form the opinion that they wish to walk away from the deal. However, once a party has formed that view, then to say anything in the next meeting of the parties other than they want out would be dishonest but at the same time that would not constitute an act of negotiation; they would therefore be in breach of the agreement no matter what they did. That position is nonsensical and although the position taken by the court is Walford v Miles may have been too cautious one can understand why the court was concerned to protect the adversarial position of the parties and why Kirby P in Coal Cliff set such a high barrier to enforcement.

(p. 321) 11.67  The remaining judge in Coal Cliff was Handley JA who found the joint venture agreement was subject to contract so any binding obligation, if it existed, was only binding ‘in the meantime’.²²⁹ He concluded that a ‘contract to negotiate in good faith’ was illusory as parties are free to pursue their own interests in negotiation, exercise their discretion to withdraw or continue negotiations and there was no identifiable criteria to determine the content of the obligation.²³⁰ He suggested that an ‘agreement to negotiate’ was less likely to be upheld than an agreement to agree. His reasoning was, that an ‘agreement to agree’ would bind a promisor to act reasonably and to compromise in order to reach an agreement. Such an obligation he thought could not be implied into an ‘agreement to negotiate’.²³¹ It followed that if an agreement to agree is not upheld under the current law an agreement to negotiate in good faith could be in no better position.²³² In respect of the enforceability of the terms of the ‘heads of agreement’ during the period of negotiation, he found the ‘heads of agreement’ contradictory. To his Honour it appeared to be intended to be binding and subject to contract.²³³ He thought that its concluding words which related to the agreement’s ‘full and binding effect’ did not refer to the whole of the ‘heads of agreement’ but only to that which was ‘now agreed’.²³⁴ He noted that what was ‘now agreed’ was only to be binding ‘in the meantime’,²³⁵ and since there would be no joint venture agreement until it was agreed, approved, and executed,²³⁶ then those provisions in the heads of agreement which were to be part of the joint venture were never binding even in the meantime. He said, ‘only those provisions of the heads of agreement which contemplated or required performance in the period before the joint venture agreement was entered into were “now agreed” and were intended to be fully binding “in the meantime”’.²³⁷ He did not think a contract would be struck down for incorporating such a provision as long as all the essential terms were agreed and the contract could operate on its agreed terms if negotiations broke down.²³⁸ That is, it is possible to enter into an agreement that is subject to the agreement of further terms and for that original agreement to be enforceable if further terms are not agreed so long as it is certain and complete as regards the essential terms and intended to operate according to the terms agreed.²³⁹

11.68  It should be noted that Samuels JA of the New South Wales Court of Appeal in a later case—Trawl Industries of Australian v Effem Foods Pty Ltd Trading as ‘Uncle Bens of Australia’²⁴⁰—suggested that the decision of Kirby P was at odds with the decision of the High Court of Australia in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd.²⁴¹ Strictly, the reference here to Booker Industries is a reference to where the court said it would not uphold an incomplete agreement being no more than an agreement to agree. On its face, this does categorize (p. 322) all incomplete agreements as unenforceable agreements to agree even though no express provision may appear in the contract to that effect. However, it does not necessarily dictate that the High Court was of the view that an agreement containing a provision for negotiation was necessarily incomplete. More recently in United Group Rail Services Ltd v Rail Corp New South Wales,²⁴² Allsop P made the point that the Booker case concerned incompleteness whereas the Coal Cliff case concerned uncertainty.²⁴³

11.69  Finally, there is as yet no clear statement as to the assessment of damages if in such a case one party breaches its obligation to negotiate. The damages may be assessed on the basis of a loss of chance but this may still result in a nominal sum being awarded.²⁴⁴ Alternatively, the damages could be assessed by reference to reliance loss.²⁴⁵ As regards specific performance, the approach in Coal Cliff Collieries was not to hold the parties to their promise to negotiate but to determine the efficacy of the contract by reference to what a court can do to fill in the gaps if negotiations break down. Unless a court is prepared to recognize some basic standard for negotiations by, for example, giving some content to the concept of good faith, then it is doubtful that an order of specific performance would be granted.²⁴⁶ Of course, if the purpose of the proposed negotiation has become impossible the parties will be excused from the obligation to negotiate.²⁴⁷

11.70  In the United States there has long been accepted an obligation to perform a contract in good faith although there is still dispute over the meaning and application of that obligation. As regards the simple agreement to negotiate in good faith, there is authority, consistent with that in England and Australia, that such an agreement would not be upheld. For example, Candid Products Inc v International Skating Union²⁴⁸ concerned a series of contracts whereby the ISU (International Skating Union) granted Candid exclusive North American television rights to cover certain ice-skating events. The agreement reached between the parties referred to a right of first refusal to extend the rights and an agreement to negotiate in good faith. The relevant provision stated:

11.71  The right of first refusal was later deleted at the request of ISU and only the good faith negotiation provision remained which read as follows: ‘The ISU agrees that it will not negotiate any further contract for the rights for the World Championships after 1982 without first negotiating in good faith with Candid.’²⁴⁹ In February 1980 discussions began concerning television rights for the World Championships after 1982, and ISU informed Candid that instead of contracting for a single event for a period of years, as it had in the past, it now wanted to structure the contract to cover all six ISU championships for a five-year period. However, Candid was not prepared to make an offer on these terms and, although there were further discussions, they did not result in an agreement.

11.72  During this same period Candid alleged that ISU had negotiated with CBS and granted it the exclusive television broadcasting rights and that the ISU had thereby breached its good faith negotiation obligation. However, ISU argued that the good faith negotiation clause was so vague and uncertain that it was unenforceable. Candid relied on the decision in DeLaurentiis v Cinematografica De Las Americas²⁵⁰ to support its assertion that the good faith negotiating clause was sufficiently certain. That case involved a contract to produce and distribute a motion picture and contained an undertaking to ‘make every effort in good faith to cause to be created … a story outline, screen treatment and final scenario acceptable to both’ DeLaurentiis and the author of the book on which the picture was based. The court in the Candid case considered that the decision in DeLaurentiis did not assist Candid since in DeLaurentiis the purpose of the contract, namely the production and distribution of a motion picture, was ‘clear and definite and provided a reference by which defendant’s performance could be evaluated’.²⁵¹ In short, the issue in DeLaurentiis concerned a more general issue of good faith in performance, rather than performance by way of negotiation with good faith operating as a standard of performance. It was said that the issue in Candid was not that of good faith, but ‘whether the promise by ISU to negotiate is sufficiently certain, or can be made so, such that this Court can enforce it’.²⁵²

11.73  Candid therefore needed to show that the obligation to negotiate was sufficiently certain and definite. It attempted to do this by arguing that the court should, as a requirement of good faith negotiation, imply various duties on the ISU, for example, ‘to continue negotiations for a sufficient minimum period of time before signing with another to permit Candid a fair opportunity to overcome in all respects the comparative attractiveness of other proposals’. However, the court rejected this argument on the basis that implying such terms would amount to making a contract for the parties rather than simply enforcing any bargain the parties themselves might have reached. The court also concluded that the parties’ prior course of dealing could not be used to give meaning to the obligation to negotiate since the last negotiations were conducted under the dictates of a time limitation and a right of first refusal clause that was absent from this contract. Attention was drawn to the fact that the right of first refusal had recently been rejected by the ISU, and (p. 324) therefore it was concluded that it would be expressly contrary to the parties’ intentions to imply such a term.

11.74  The court concluded that in this case there was not even an agreement to agree because all the material terms were left open. It was merely an agreement to negotiate. Accordingly, Weinfeld J concluded that: ‘An agreement to negotiate in good faith is amorphous and nebulous, since it implicates so many factors that are themselves indefinite and uncertain that the intent of the parties can only be fathomed by conjecture and surmise.’²⁵³ The court expressly referred to the possibility that during negotiations one party might state that it preferred not to do business with the other and questioned whether that meant that the court had the power to direct that party to continue negotiations despite its business judgment that it did not believe the negotiations to be in its best interests. The court had no difficulty in rejecting this possibility and concluding that ‘[a]‌ commitment to good faith negotiations does not carry with it a surrender of one’s right to decide not to enter into another contract with a party.’²⁵⁴

11.75  A further example is provided by the decision in Necchi SPA v Necchi Sewing Machine Sales Corp²⁵⁵ which involved a claim by Necchi Sewing Machine Sales that Necchi had failed to negotiate with them in good faith for an extension of their distributorship agreement and claiming damages suffered as a result. The contractual provision required the parties ‘to examine the possibility of executing a new … long term distributorship agreement for the same territory and at such terms and conditions as will be then discussed and defined’. The court held that this did not impose any obligation on Necchi to grant a renewal of the distributorship and that made it impossible to say what relief would be appropriate where Necchi failed to examine the possibility of renewal. Marshall CJ (giving the opinion of the court) stated:²⁵⁶ ‘It is impossible to assess any damages, as there is no way that anyone could foresee what would have come from examining the possibility of executing a new contract, even if this were done in the utmost good faith.’ He considered that it was not open to the court to write the terms of the renewal contract for the parties and that, in the absence of a clear definitive statement that the parties wished to litigate or arbitrate differences over the failure to engage in such discussions for renewal, ‘the courts should hesitate before enforcing such a contract provision’.²⁵⁷

11.76  The case that is put forward to show a contrasting approach in the United States is Itek Corp v Chicago Aerial Industries.²⁵⁸ This case concerned an asset sale agreement between the parties. The parties executed a letter of intent which confirmed the price and other terms of sale that had been agreed upon and then stated that the parties, ‘shall make every reasonable effort to agree upon and have prepared … a contract providing for the foregoing purchase … embodying the above terms and such other terms and conditions as the parties shall agree upon. If the parties fail to agree upon and execute such a contract they shall be under no further obligation to one another’. The court concluded that it is ‘apparent that the parties obligated themselves to “make every reasonable effort” to agree upon a formal contract, and (p. 325) only if such effort failed were they absolved from “further obligation” for having “failed” to agree upon and execute a formal contract … . [T]‌hese provisions … obligated each side to attempt in good faith to reach final and formal agreement.’²⁵⁹ Arguably, the case is not concerned with a mere agreement to negotiate but rather a preliminary agreement containing a clause under which the parties undertook to negotiate further terms and failing such successful negotiation the deal would fail for a lack of intention to contract. However, it is arguable that where such a preliminary agreement is intended to fail if negotiations break down then, despite all its agreed terms, that overriding intention dictates that it is no more than an agreement to negotiate.

11.77  A similar case is Channel Home Centers v Grossman.²⁶⁰ This case involved a letter of intent which was expressly made to induce the prospective tenant to enter into a lease with the lessor and contained a promise by the lessor to withdraw the property from the rental market and only negotiate with the prospective tenant. It also contained detailed provisions to be contained in the lease which covered most of the main topics covered in a lease. The lessor later withdrew from the negotiations and granted the lease to a third party. The Court of Appeals held that there was evidence of a valid contract to negotiate which obliged both parties to use their best efforts to negotiate in good faith in order to reach agreement. Again, because of the detail contained in the letter of intent, the case could be viewed as involving a preliminary agreement incorporating a negotiation clause; the letter could not be viewed as a binding lease. However, the case was successfully run on the basis that it was a valid agreement to negotiate.

11.78  Courts dealing with uncertainty and incompleteness have constantly emphasized the need to take account of certain realities. First, commercial people do not always express themselves in clear terms, yet it is necessary to give effect to their bargains if possible.²⁶¹ Second, and more relevant to incompleteness, in many contracts, particularly long-term contracts, it is not possible to predict and deal with every eventuality at the time of contract and it would be a harsh result if a contract which had been accepted and performed by the parties was later found to be void from its inception upon the happening of an event not dealt with by its terms.²⁶² Third, and clearly related to the second point, there is an imperative to uphold a bargain that has been partly performed.²⁶³

(p. 326) 11.79  It follows that if a term is intended by the parties to have legal effect then a court will be loath to find it void for uncertainty.²⁶⁴ Moreover, the modern law places a lot of weight on the overall intention to contract in the sense of intending to immediately assume legal obligations. This can result in the court using a technique to overcome uncertainty or incompleteness even though that might not accord with the intention of the parties with respect to a particular term. A simple example is that, traditionally, if the parties incorporate some mechanism into a contract to resolve an uncertainty that exists at the time of the contract and that mechanism breaks down, then the courts would not step in because to do so would not represent the intention of the parties which was to have their mechanism operate. Today, if the court has available to it a technique to resolve the ambiguity, the fact the contract mechanism has broken down will not prevent the court using that technique unless it is clear the parties did not intend to contract should the mechanism break down. In this way the overall expectation of the parties is respected.²⁶⁵ The contract mechanism is, unless otherwise agreed, treated as a non-essential term.²⁶⁶

11.80  Although it is no doubt possible to find amongst the vast number of cases in this area examples and statements of where a court has upheld a bargain based on broad-based policy considerations, the leading English authorities have always said that the quest is one of finding the intention of the parties. The court will use those legitimate techniques developed over many years to seek to find and give effect to the intention and expectation of the parties.

11.81  Prior to looking at the techniques used to overcome uncertainty and incompleteness it needs to be emphasized that the approach taken by the courts is not a narrow approach. The approach was explained in the following statement by Lord Wright in G Scammell & Nephew Ltd v Ouston:²⁶⁷

11.82  The approach therefore is commercial in nature. If it is possible to give a clause a reasonable meaning a court will generally do so.²⁶⁸ In the search for that meaning the language is interpreted ‘fairly and broadly’ but without the court making the contract.²⁶⁹ The court cannot go outside the contract except using the accepted techniques of implying terms and characterizing standards of performance.

(p. 327) 11.83  Finally, because the search is for the intention of the parties it is a matter that opinions can and will differ on. Many cases have dissenting opinions. It is therefore not helpful to provide endless examples of cases as each decision depends on its own facts. The concern here is with principle.

11.84  One technique used to resolve issues of uncertainty or incompleteness is by reference to a standard of reasonableness.²⁷⁰ It is necessary to explain how this technique operates at the level of legal doctrine. The use of standards of reasonableness is well documented in contract law. For example, if a contract is silent on the date for performance the law implies an obligation that performance must be within a reasonable time. That obligation may flow from a statute or an implied term; although the statutory provision may merely reflect the position that existed at law prior to the enactment of the statute.²⁷¹ Similarly, there are many examples of where a contract is subject to some condition or contingency and where a party will be under an obligation to take reasonable steps to ensure that that event occurs.²⁷² The importance of recognizing that the standard operates as a term—whether express or implied—lies in the fact that for there to be an action for damages for breach of contract there must be a breach of a term. The term here is one of performing within a reasonable time and what then constitutes a reasonable time will depend on the circumstances of the case. The law here is not using a standard of reasonableness which then gives rise to a term to, for example, perform within two weeks. In this example, the term is one of a ‘reasonable time’. English law does not imply terms on the basis of reasonableness.²⁷³ For a term to be implied in law it must be necessary and for a term to be implied in fact it must be obvious and necessary for the business efficacy of the contract. Thus, in the example being discussed, reasonableness is the standard implied and not the reason for the implication. Being an implied term it is possible to take account of extrinsic evidence to imply the term and to determine whether the term has been breached.²⁷⁴ Very few, if any, contractual obligations do not flow from a contractual term.²⁷⁵

(p. 328) 11.85  If this standard of reasonableness technique is distinct from the implied term technique for resolving uncertainty and incompleteness (which is discussed below), then it must flow as a matter of construction from the other terms of the contract. It cannot ‘come out of the ether’ because such an approach would undermine the rule that terms cannot be implied solely on the basis of reasonableness. It also must be the case that the standard of reasonableness technique only applies where the application of that standard represents the presumed intention of the parties. Often this means that what is reasonable is drawn from the terms of the contract. But it is also possible that the standard of reasonableness may be an external standard. Such standards are discussed in more detail below. It is suffice here to note that for such a standard to be applied it must exist—in the sense that there are objective criteria that can be applied to determine what is reasonable²⁷⁶—and it must be referred to expressly or impliedly in the contract so as to represent the intention of the parties when applied.

11.86  The best known example of the application of this standard in the context of this chapter is that of Hillas & Co Ltd v Arcos Ltd.²⁷⁷ This case involved a contract for the supply of ‘22,000 standards of softwood goods of fair specification over the 1930 season’ together with an option in favour of the buyer which provided:

11.87  The 1930 agreement was duly performed but, when the buyers sought to exercise the option for 1931 it was found that the sellers had already sold their entire production to a third party. The buyer sought damages claiming that there was a breach of contract. The sellers argued that there could be no contract for 1931 because the option was void for uncertainty in that it did not specify the type of goods to be supplied, the sizes or the quality. Nor did it specify the delivery dates. These were matters that required further agreement.

11.88  The House of Lords was able to fill these gaps by first implying the words ‘of softwood goods of fair specification’ after the words ‘100,000 standards’. The reference to ‘softwood goods’ was a necessary implication to identify the subject matter of the contract. The words (p. 329) ‘fair specification’ were thought to be sufficiently certain having the same meaning that the phrase had in relation to the first contract, it was therefore a phrase capable of being rendered certain. Lord Tomlin advocated a negative approach to determining whether ‘fair specification’ was uncertain which was to see if no reasonable meaning of that term could represent the intention of the parties.²⁷⁸ Indeed, the sale conditions relating to the 22,000 standards were to be imported into the sale of 100,000 standards. Important to the reasoning of the court was the knowledge the parties had of the industry. Each had a lot of experience in the Russian softwood timber trade, they had carried out the initial purchase of 22,000 standards without incident, and clearly intended the option to give rise to legal relations.²⁷⁹ This formed part of the matrix of facts. The evidence showed that the nature of the business was such that it was not possible to predict in advance what kinds, qualities, and sizes of timber would be available in the next season.

11.89  It was the fair specification implication that invoked a standard of reasonableness. That standard could take effect as an implied term but that was not necessary as it flowed not merely from the matrix of facts that surrounded this option but the terms of the contract as the initial contract and option had to be construed together. The result therefore is grounded in construction. Lord Wright went on to set out how the standard operates. He said:²⁸⁰

under such a description, the parties will work out the necessary adjustments by a process of give and take in order to arrive at an equitable or reasonable apportionment on the basis of the respondents’ actual available output, according to kinds, qualities, sizes and scantlings; but if they fail to do so, the law can be invoked to determine what is reasonable in the way of specification, and thus the machinery is always available to give the necessary certainty … . [It cannot be] objected that, though a fair and reasonable specification may not be impossible of ascertainment, the reasonable specification is impossible. The law, in determining what is reasonable, is not concerned with ideal truth, but with something much less ambitious, though more practical.

11.90  It is also possible for the parties to adopt an express standard of reasonableness. For example, in Corthell v Summit Thread Co,²⁸¹ the plaintiff employee offered to sell some patents to his employer, the defendant. The parties entered into an agreement which, inter alia, increased his salary for a five-year period, offered a payment for the existing patents and provided for ‘reasonable recognition’ in return for his promise to turn over his rights to future inventions to the company. The basis and amount of recognition was expressed to rest entirely with the employer. The contract also stated that its terms were ‘to be interpreted in good faith on the basis of what is reasonable and intended and not technically’.

11.91  The plaintiff turned over his rights to other inventions in accordance with the terms of the contract but did not receive any compensation. In its defence to an action for breach of contract brought by the plaintiff, the defendant contended that although the words ‘reasonable recognition’ could be given meaning, when combined with the absolute discretion reserved to the defendant they were rendered vague and uncertain. However, the court laid stress on the last clause of the agreement which provided for an interpretation in accordance with what is reasonable and intended. This exhibited a clear intention to contract, the employer (p. 330) could not therefore decide to pay nothing and was required to pay reasonable compensation for the inventions. Here the reference to good faith was held to impose an obligation on the employing company ‘to determine and pay the plaintiff the reasonable value of what it accepted from him’.²⁸²

11.92  There will be occasions where an express standard will fail. As with implied standards of reasonableness they can only operate if there is some criteria available to determine what is reasonable.²⁸³ For example, Varney v Ditmars²⁸⁴ concerned an action by an employee against his employer alleging that the employer had agreed to pay the employee an extra $5 a week plus ‘a fair share of my profits’. The court held that the words ‘fair share’ were uncertain and indefinite. The court went on to suggest that, had the word ‘reasonable’ been used in the place of ‘fair’, it would still not have been sufficiently certain.²⁸⁵ In his judgment Chase J stated:²⁸⁶

11.93  It should also be noted that unlike the situation in the Corthell case where the employee acted in reliance on the employer’s promise, in the Varney case the employee’s service subsequent to this promise amounted to no more than his normal duties as an employee.

11.94  Where a term or terms of a contract are on their face uncertain or incomplete the courts may have regard to an ‘external standard’ in order to resolve that uncertainty or incompleteness. To a large extent, the law on external standards to resolve uncertainty is linked to the rules relating to the incorporation of terms by reference. Thus, for such a standard to apply it must be expressly or impliedly incorporated into the contract by the parties. Very often the reference will be to an external set of standard form terms that are intended to apply to the extent that they are not inconsistent with express (specific) terms of the contract.²⁸⁷

11.95  Where an external standard is referred to, the issues that arise are: first, does the external standard exist; second, if more than one such standard exists, can the court identify which (p. 331) standard was intended to be adopted by the parties; third, assuming a standard can be identified, does it provide the certainty or completeness required? Where the standard does not exist or if it is itself uncertain or does not complete the contract, the issue will then become one of severance to determine whether the certain agreed terms can stand on their own.

11.96  Issues regarding the existence of a standard tend to arise where the parties attempt to incorporate terms such as the ‘usual terms’ or ‘reasonable terms’. For example, in Whitlock v Brew,²⁸⁸ an agreement was entered into to lease certain land ‘on such reasonable terms as commonly govern such a lease’. No such terms existed. Moreover, the terms to be supplied by the external standard were essential to the contract so the contract could not be upheld without them.²⁸⁹ Similarly, in Nicolene Ltd v Simmonds,²⁹⁰ in a letter alleged to form part of a contract for the sale of steel bars it was stated, ‘I assume we are in agreement that the usual conditions of acceptance apply’. It was held that that expression was meaningless, as no such terms existed. However, in this case it could be ignored. Denning LJ suggested that if a clause is merely meaningless, then often it can be ignored particularly if the party arguing that the contract is void was the party who suggested the clause in the first place and the clause is for the benefit of that party. He distinguished this from the situation that arises where an essential term is yet to be agreed.

11.97  Where there are more than one set of such terms in existence, then the issue becomes whether it is possible to identify which, if any, were intended by the parties. For example, G Scammell & Nephew Ltd v Ouston²⁹¹ concerned an agreement to buy a motor-van with the balance of the purchase price being payable on hire-purchase terms. The reference to ‘hire-purchase’ terms is a reference to an external standard. The House of Lords held that there were a variety of hire-purchase agreements in existence and the language used did not sufficiently indicate which of these hire-purchase terms the parties intended. Again, as in the Whitlock case, the terms to be supplied by the external standard were essential and the contract was therefore held to be void.

11.98  The above cases can be contrasted with Allcars Pty Ltd v Tweedle.²⁹² Here the defendant offered to take a car on ‘on the terms of [the plaintiff’s] usual hiring agreement or that of [the plaintiff’s] nominee’. The plaintiff had no such usual terms but such terms did exist in the (p. 332) market and it was possible to make the terms certain by the plaintiff appointing a nominee who had such terms. In Tonelli v Komirra Pty Ltd,²⁹³ in relation to a sale contract, interest payable on any outstanding part of the purchase price was to be one-quarter per cent above ‘the current bank overdraft rate’. It was argued that this was uncertain as it referred to a current rate charged by any bank that the plaintiff might happen to approach for a loan that was open to negotiation between the bank and its customer. This was rejected, Smith J concluded that it did not refer ‘to a rate of interest currently charged by banks for loans of a certain size or class, but [referred] to the only uniform rate that did exist, namely, the uniform maximum bank overdraft interest rate prescribed and published from time to time by the Reserve Bank’.²⁹⁴

11.99  In some cases, resort to an external standard may not derive from incorporation by reference. Where a court determines that it falls within the intention of the parties to use a standard of reasonableness then what is reasonable may be determined by an external standard which is identified either by reference to relevant extrinsic evidence or because it falls within the matrix of facts.²⁹⁵ The decision in Bettancourt v Gilroy Theatre Co²⁹⁶ may be an example. Here vendors sold land on condition that the purchaser would erect a ‘first class theatre … as soon as materials, equipment, and furnishings were available at reasonable prices’. However, three years later, when the purchaser sold the land without having erected a theatre, the vendors sued for damages caused by the failure to enhance the value of the neighbouring land. The court held that the subject matter, namely a ‘first class theatre’, was sufficiently certain; there was reliable oral evidence as to the parties’ understanding of what that meant, there was a frame of reference because the purchaser operated another theatre in the same city and to the city building code and fire laws prescribed minimum standards for theatre construction.

11.100  The importance of performance and reliance has already been stressed in the above discussion on agreements to agree.²⁹⁷ In F & G Sykes (Wessex) Ltd v Fine Fare Ltd,²⁹⁸ Lord Denning MR expressed the importance of performance and reliance in the following terms:²⁹⁹

11.101  Similarly, in G Percy Trentham Ltd v Archital Luxfer Ltd,³⁰⁰ Steyn LJ commented generally on the significance of performance of an agreement when he stated that:³⁰¹

11.102  What these statements show is that performance and reliance are important in determining whether or not an intention to be bound exists.³⁰² If it does, then as already noted, the courts will be loath to hold the contract is void for uncertainty or incompleteness. The performance or reliance may form the impetus for a court using one of its techniques to uphold the bargain. That technique might be the use of a standard of reasonableness or the implication of a term or even severance of an uncertain term on the basis that by their conduct the parties have shown that it is not essential.³⁰³ However, it is still necessary to satisfy the requirements of those techniques which become more difficult if it is clear that essential terms have not been agreed.³⁰⁴ Nevertheless, recourse to performance and reliance is a distinct method of resolving uncertainty.³⁰⁵ It may evidence that the parties did have an understanding of a term of the contract that might otherwise be held to be uncertain.³⁰⁶ The limit of this approach is that it is only relevant to when the parties have applied a provision.³⁰⁷ Finally, to the extent that the issue before the court is seen as one of contract formation there is no problem in (p. 334) admitting that evidence as that is an issue of fact. There certainly appears to be a long history of accepting such evidence.³⁰⁸ It would seem to follow that even if the issue is said to be one of construction, that is, an issue of law, a court will accept such evidence on the question of whether the parties intended to contract. For example, in Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd³⁰⁹ Ipp J (with whom Pidgeon J agreed) said:³¹⁰

11.103  In the same case Anderson J said:³¹¹

It is well settled that, where the parties have reduced what they have agreed to writing, it is primarily a question of construction of the document as to whether or not the parties intended to make a binding contract at that point …

However, it is also clear that, on the question of intention to contract, extrinsic evidence may be admitted.

As to what extrinsic evidence may be referred to, the evidence of the parties as to their subjective intent is, of course, not admissible but regard may be had to the conduct of and communications between the parties, both before and after the formation of an allegedly binding agreement for the purpose of determining, objectively, whether or not they intended to form a binding agreement. There are many authorities to the effect that a court may have regard to subsequent conduct and communications.

11.104  To the extent that the application of a standard of reasonableness or an external standard is dependent on the standard being incorporated into the contract and thus within the presumed intention of the parties, these techniques could be categorized as being applications of the terms of the contract. But what those techniques do is prove that there is no issue of uncertainty or incompleteness. There is a need to recognize another distinct technique which is labelled here ‘terms of the contract’. Within this category fall contract mechanisms which resolve an issue of uncertainty or incompleteness rather than prove that no such issue exists.

11.105  The classic example is a provision that appoints one or more third parties to resolve the issue.³¹² Such provisions usually appoint a third party as an expert—such as a valuer to value the subject matter of the contract or the solicitor³¹³ of one of the parties to settle the (p. 335) terms—or an arbitrator. Such provisions are infinite in their variety and can be used in those cases where at the time of contract it is impossible to predict such issues as the price of the subject matter of the contract. That is, they may be used to prevent the agreement being found to be an agreement to agree or otherwise void for uncertainty or incompleteness.³¹⁴ In terms of efficacy, it is necessary that the provision itself be certain and complete and, as a matter of construction, that it evidence that the third party is empowered to resolve the issue.³¹⁵ The key to the efficacy of such provisions lies in the contract not requiring any further agreement by the parties.³¹⁶ It is not sufficient if the third party is to agree terms with one of the parties to the contract.³¹⁷ It follows that, theoretically, the parties could leave to a third party the formulation of a term that the parties consider essential to the contract.³¹⁸ In such a case, often there will be no intention to be bound until that term is formulated but it is also possible that the parties intend the contract to come into force immediately with only performance being suspended until that term is formulated.³¹⁹ Where the parties appoint a person to act as an expert, for example to value the subject matter of the contract in order to determine the price payable, then it is possible to simply appoint that person and allow them to use their expertise to resolve the issue; no standard or yardstick need be provided in the contract although any decision would need to be reasonable and consistent with the contract.³²⁰ However, often such a third party will be required to apply some pricing formula stated in the contract and here it is necessary that that clause be certain.³²¹

11.106  One important issue concerns the approach of a court when the machinery set up under the contract to resolve some uncertainty breaks down. For example, the clause might require each party to appoint a third party to resolve the dispute. What then happens to the contract if one party, in breach of contract, refuses to appoint a third party? Similarly, what happens if a third party is appointed but he or she cannot or will not act to resolve the issue. In (p. 336) Milnes v Gery,³²² a mechanism was incorporated into the agreement that the price was to be determined by two valuers, the parties appointing one each. If the valuers could not agree, then they were to appoint a third person whose decision would be final. As it turned out, the valuers could not agree on a price but could also not agree on a third person to settle the dispute. Thus, the contract machinery broke down. Grant MR held that the court could not substitute its own machinery.³²³ Much of his reasoning was based on the notion that a court will not make a contract for the parties and a court will not act inconsistently with the intention of the parties. He said:³²⁴

11.107  This decision had been treated as settling the law on this point until Sudbrook Trading Estate Ltd v Eggleton.³²⁵ Here an option clause provided that on the giving of notice the lessees were to become the purchasers of the reversion ‘at such price not being less than £12,000 as may be agreed upon by two valuers one to be nominated by the lessor and the other by the lessees and in default of such agreement by an umpire appointed by the … valuers …’. The lessees exercised the option and nominated their own valuer. However, the lessors refused to nominate their valuer and claimed that the option was void for uncertainty.

11.108  The Court of Appeal followed the decision in Milnes v Gery holding that the court could not compel a party to appoint a valuer. The lessees appealed to the House of Lords, which decided that such a result would be remote from what parties normally intended and expected in including such a valuation clause, and was inconvenient in practice. The House of Lords held (Lord Russell dissenting) that on construction this was an agreement for sale at a fair and reasonable price and since the price was to be ascertained by machinery which was a subsidiary part of the contract, if that machinery broke down then the court would substitute its own (p. 337) machinery to ascertain that fair and reasonable price. Note that this approach is dependent on the machinery being construed as not being an essential term according to the intention of the parties.³²⁶ This methodology gives effect to the expectation of the parties that legal relations were intended and less weight to the intention encapsulated in a single term to have a third party value some subject matter.³²⁷ Lord Fraser stated:³²⁸

11.109  His Lordship concluded that:³²⁹

where an agreement is made to sell at a price to be fixed by a valuer who is named, or … who … will have special knowledge relevant to the question of value, the prescribed mode may well be regarded as essential. Where, as here, the machinery consists of valuers and an umpire, none of whom is named or identified, it is in my opinion unrealistic to regard it as an essential term. If it breaks down there is no reason why the court should not substitute other machinery to carry out the main purpose of ascertaining the price in order that the agreement may be carried out.

11.110  Lord Fraser also noted that the principles in Milnes v Gery had been whittled away by the following exceptions: first, there were cases that did not apply it where the agreement was partly performed; second, there were cases that did not apply it where the machinery related to a subsidiary part of the contract and to apply it would result in the wider contract failing.³³⁰ These comments again raise the importance of performance and reliance running through this area of law. A further example is the American case of Tureman v Altman.³³¹ The question here was whether the court had jurisdiction to value a property and fix the rent under the lease when the agreed mechanism failed. The lease in question provided for an annual rental of $6,000 for the first 15 years. Thereafter there was to be an appraisement ‘to be made by three appraisers, one to be selected by each party … and the third selected by the two appraisers so chosen’. The lease also specified that the annual rental for the five years after the first period of 15 years was to be 6 per cent of the valuation so fixed. An agreement was (p. 338) not reached on valuation between the appraisers selected by the parties. The court held that it had jurisdiction to value the property and thereby fix a fair and reasonable rental. On the facts, the intervention could not be justified on the usual ground that the valuation provision in the lease was subsidiary or incidental to the main purpose of the contract because on these facts, due to the failure to agree, it had become the most vital part of the contract. The court noted the reluctance to generally order specific performance of arbitration provisions and noted an exception where the machinery provision was subsidiary to the main purpose of the contract. However, the court recognized that other reasons may exist allowing for the court to intervene. Performance and reliance were such reasons. Here the contract had been in place for 55 years, there had been part performance, the original parties did not expect the contract to fail if the rent review mechanism failed but rather expected a fair valuation to take place and a fair rent be payable.

11.111  In Australia the leading decision is that of Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd.³³² Here a lessee had an option to renew the lease with rental to be agreed between the parties and failing agreement it was to be fixed by an arbitrator appointed under the terms of another provision in the contract. The lessee exercised the option and the lessor refused to grant the lessee a new lease. The question before the court was whether there was a concluded agreement between the parties. Gibbs CJ, Murphy and Wilson JJ after noting authorities that have held that a court will not decree specific performance of an agreement to appoint an arbitrator to fix a price, held:³³³

11.112  Thus, although an order for specific performance of the lease could not be granted prior to the rent being fixed the court could enforce the implied term that both parties would do that which was reasonably necessary to procure the nomination of an arbitrator.³³⁴

11.113  The approach under the Uniform Commercial Code is similar to that in Sudbrook Trading Estate Ltd v Eggleton. The relevant provision is section 2-305(1)(c).³³⁵ This provision deals with agreements to buy and sell goods where the price term is left open. The provision ignores such a gap in the contract if there is an overriding intention to contract. Where the price is to be fixed by a third person or agency and this does not occur, then if there is a clear intention to contract a reasonable price at the time of delivery will be payable despite the break down in the machinery. However, effect is given to the intention of the parties if in that circumstance there is no intention to contract; the provision does not make a contract. (p. 339) Comment 4 to this provision makes it clear that there may be instances where a particular third person’s judgment is an essential condition to the making of the contract rather than intended ‘as a barometer or index of a fair price’. The Comment uses a specific example of ‘a known and trusted expert’ who is to value a particular painting for which there is no market standard and compares this with a sale of cotton priced according to grade where the named expert is to determine that grade. Whereas, in the first instance, if the expert were unavailable, it would support a finding that the parties did not intend to make a binding agreement; that would clearly not be the position if the expert in the latter case were unavailable. Where the price is to be fixed otherwise than by agreement by the parties and there is a failure in the mechanism through the fault of one of the parties, then the innocent party may either elect to cancel the contract or fix a reasonable price.³³⁶

11.114  The last point above brings up the point of waiver. In Sudbrook Trading Estate Ltd v Eggleton,³³⁷ Lord Diplock emphasized that the only reason the machinery broke down was because one party breached the contract by failing to appoint. He did not think contract law should allow such a party to take advantage of its own wrong by effectively getting out of the contract. That party must be taken to have waived its right to have the price determined under the machinery provisions. On the facts the innocent party must also be taken to have waived its right to rely on the machinery provision.³³⁸ He expressly left open the question whether the court would have power to appoint a valuer if the innocent party had not waived its right. On the other hand, the thrust of Lord Fraser’s speech suggests that the court could enforce an agreement to value in any case except where the valuer was a named valuer or a particular person having particular expertise.

11.115  If all the essential terms are agreed it is possible to agree to leave the other terms to be formulated by one of the parties.³³⁹ Thus, in Sweet & Maxwell Ltd v Universal News Services Ltd,³⁴⁰ where the parties agreed the rent and the term of the lease, it was possible to uphold the contract which contained a provision that the ‘lease shall contain such other covenant and conditions as shall be reasonably required’ by the lessor. Even without that provision, once those essential terms were agreed, the lease could be upheld on the basis that the court would insert the ‘usual’ covenants.³⁴¹ Interestingly, Pearson LJ appeared to suggest that the ‘reasonableness’ requirement was important as that stopped the agreement being no more than an agreement to agree.³⁴² This would be taking a very broad view of what constitutes an agreement to agree.³⁴³ Perhaps he meant no more than that if the parties have not agreed all the terms of a contract but want to bring a contract into existence immediately then agreeing to other reasonable terms might be a way to do this as it gives the court a standard to fix terms should the parties fail to agree.³⁴⁴ In any case, if one party is given the power to fix (p. 340) the remaining terms such a standard is likely to be imposed.³⁴⁵ In the result the key issue is whether or not the contract requires any further agreement of the parties.³⁴⁶

11.116  Difficulties arise where one party has power to settle an essential term. Here issues of illusory consideration may arise.³⁴⁷ If such a party’s discretion includes the power to refuse to settle terms, such that they make no promise to contract at all, then no contract will exist. For Australian lawyers, Gibbs J in Godecke v Kirwan³⁴⁸ gave the following warning:³⁴⁹

11.117  The doctrinal point Gibbs J makes is sound in so far as it reflects the concept of illusory consideration. However, unless there is an express term to the contrary, it would be rare for a contract not to incorporate an obligation to carry out the subject act especially if there was an expectation that legal relations were intended to flow from the agreement. Moreover, there are many transactions in which an important term like the price cannot be determined at the time of contract and it may be left to be determined later and in some cases by one of the parties. These contracts would rarely today be struck down on the basis that they involved an illusory consideration.³⁵⁰ It follows that it is possible to leave to one party the formulation of a term that the parties consider to be important.

11.118  So long as the tests for implication in fact, law, or custom are satisfied, a gap in a contract can be filled with an implied term. These are more appropriately dealt with in detail in standard works on contract law.³⁵¹ As regards resolving uncertainty and incompleteness perhaps the best-known examples are the implication that performance occur within a reasonable time (p. 341) when no time is set for performance under the contract³⁵² and the implication of a term to pay a reasonable price for goods accepted by the buyer when no price is set under the contract.³⁵³ Sometimes, rather than applying a standard of reasonableness the courts use the language of implied terms to do that which is reasonable.³⁵⁴ However, generally, the law has not up until now implied terms solely on the basis that it is reasonable to do so.³⁵⁵ Moreover, up until now it has always been held that a term will not be implied if the implication is inconsistent with an express term of the contract. For example, the implication that the buyer must pay a reasonable price has traditionally only been available if the provision for the price has been left blank. If the price was expressed to be one which was to be agreed or negotiated by the parties the implication is not available.³⁵⁶ In such a case the seller would need to look to one of the other techniques for overcoming uncertainty.³⁵⁷ As already noted in this chapter, there appears to be a view that in matters of uncertainty and incompleteness the courts should strive to uphold the contract when that would give effect to the overall expectation of the parties even if that is not entirely consistent with a term of the contract. However, that approach has not yet found its way into the tests for implication. Nevertheless, the courts have imposed a standard of reasonableness to pay a reasonable price in the face of an agreement to agree or negotiate a price.³⁵⁸

11.119  The one unresolved difficulty in using the implied term for the purpose of resolving uncertainty and incompleteness is the famous comment of Lord Roskill in Aotearoa International Ltd v Scancarriers A/S,³⁵⁹ where he suggested that a court cannot imply a term into a contract until it has decided that there is a legally enforceable agreement. On its face that remark would appear to prevent the implied term concept being used to overcome uncertainty and incompleteness. Indeed, some have taken that view.³⁶⁰ Most commentators have taken the (p. 342) view that Lord Roskill could not have meant this, but differ on what he did mean. One possibility is that he was only referring to terms implied in fact. That possibility must be set aside for the reasons put forward by Coote, viz:³⁶¹

11.120  McLauchlan has suggested that Lord Roskill was in fact referring to the intention to contract and when he said you cannot imply a term to find a ‘legally binding bargain’ those words are meant to be read ‘contractual intention’.³⁶² Thus, one cannot imply a term in order to derive an intention to contract; if no intention to contract exists there is no point carrying on and trying to overcome any uncertainty in the bargain. As a doctrinal point this must be correct and may be a solution. However, the thrust of Lord Roskill’s comment, and the context in which it was made, seems to suggest that the concern was that of uncertainty and incompleteness. In full he said:³⁶³

It is not correct in principle, in order to determine there is a legally binding bargain, to add to those terms which alone the parties have expressed, further implied terms upon which they have not expressly agreed and then by adding the express terms and the implied terms together thereby create what would not otherwise be a legally binding bargain.

11.121  One observation that may be made is that Lord Roskill’s statement is only concerned with that level of uncertainty and incompleteness that would render the contract void. This would not prevent the implied term technique being used to overcome some uncertainty or incompleteness in relation to a term that would not otherwise affect the efficacy of the contract as a whole.³⁶⁴ From this it would seem to follow that the implied term technique could not be used to provide an essential term.³⁶⁵ But the implication of a price provision in a sale of goods contract would appear to do just that and although that implication is now dictated by statute, that statute does no more than reflect what would now be the common law position. Moreover, as has been pointed out, the law can imply an entire contract.³⁶⁶ Indeed, the more familiar a court is with the type of contract before it the more willing it is to fill any gaps by way of implication despite very open terms.³⁶⁷

11.122  Both Coote and Carter suggest a third interpretation, both emphasizing that the point that Lord Roskill was referring to was that a court will not make a contract for the parties, (p. 343) everything the court does must be consistent with what the parties intended. It is suggested that these reflect the better view. Coote states:³⁶⁸

[T]‌he first question must always be whether any legally binding contract has been made. The answer to that first question depends not on whether the expressly agreed terms are sufficient in themselves to constitute a contract but on whether, given an intention to contract, the parties have specifically agreed all the terms which only they can decide. These … may be very few indeed as in the case of a tenancy agreement or a contract of employment, for example, may be no more than the date of commencement, with all the rest being unstated but nevertheless, in the objective sense, ‘intended’ and capable of being deduced, inferred or implied.

On the other hand, in a complex matter where a range of matters have been settled which only the parties can agree, and only some of those matters have been agreed by them, there is no basis (other than second-guessing the parties) upon which the gaps can be filled by implication. That, it is submitted was the situation in the Aotearoa case, at least as the Privy Council perceived it … .

Perhaps the real truth is that Lord Roskill was saying rather less than he appeared to be. No court wants to be the destroyer or bargains but there has to be a bargain in the first place. On that point, the courts traditionally have insisted that they will not make contracts for the parties which the parties have not made for themselves.

11.123  Carter, in discussing the reticence of courts to imply terms into complex contracts, states:³⁶⁹

The qualification in relation to complex commercial contracts reflects the absence of general implications for unique transactions. This may explain what otherwise appears to be an inconsistent proposition, namely, the law does not permit a court to imply terms for the purpose of making incomplete negotiations an enforceable contract. The proposition seems to be based on the view that in order for an implication to be made the parties must have finally agreed on a bargain. Accordingly, it is not sufficient for a court to be able to identify terms which, if they were implied, would complete an otherwise incomplete agreement. Instead, it must be possible to infer—under normal principles governing implication—that the parties impliedly agreed to the matter which has not been the subject of express provisions. Expressed in a slightly different way, where, for example, a contract is silent on a matter such as the price or quality of the subject matter of the contract, it must be possible to infer that the parties agreed to a particular standard which a court is capable of implying. Accordingly, an implication of a reasonable price or reasonable quality can only be made if that was the agreement. Mere consistency with the contract is not enough for the simple reason that a court cannot make a contract for the parties.

On this basis, cases in which arguments for the implication of terms have succeeded are cases in which the parties have negotiated all essential terms, and agreed to a particular criterion omitted from their express agreement. Thus, in Hillas & Co Ltd v Arcos Ltd a buyer’s option to take a further supply of goods did not specify kinds, sizes or quality or the dates and ports of shipment and discharge. However, the contract was upheld on the basis that in carrying out an initial part of the contract the parties attributed meaning to the agreement. It could therefore be implied that the contract required goods to be of a fair specification. Again, in Foley v Classique Coaches Ltd, where there was an agreement to purchase all petrol required at a price to be agreed by the parties from time to time, it was inferred that the parties intended to agree for the supply of reasonable quality petrol at a reasonable price. Cases in which arguments for the implication of terms have failed are cases in which the parties were still in the process of negotiating essential terms. Thus, in May and Butcher Ltd v R an agreement for the sale of goods at prices to be agreed upon was invalid because a vital term had still to be agreed. In the (p. 344) absence of agreement that a reasonable price would be paid no such term could be implied. More recently, in Australian and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd there was held to be no enforceable contract where essential terms, including the price, size, style and design of goods to be supplied was not agreed. The court would not imply terms to deal with these matters as there was, in the court’s view, nothing to indicate the basis for implication.

11.124  Where all the above methods fail it may still be possible to sever an uncertain provision or see if the contract can operate despite it being incomplete. Whether or not severance is possible is determined by reference to the intention of the parties.³⁷⁰ It needs to be determined whether the parties envisaged that the subject provision could be severed or did they expect the whole contract to be void if the uncertainty could not be resolved.³⁷¹ The issue has been said to be one of construction which would prevent a court having recourse to extrinsic evidence.³⁷² It will generally be necessary to show that any severance will not affect the essential terms of the agreement. Moreover, severance will not be allowed if to do so would fundamentally change the nature of the agreement.³⁷³ The contract must still be able to achieve its main purpose. For example, in a sale and leaseback arrangement, if the lease is void for uncertainty it would not then be commensurate with the intention of the parties to enforce the sale agreement.³⁷⁴