Education Update - Contract
Published: 18th December 2009
Agreements to agree - not too vague?
R & D Construction Group Limited v Hallam
Land Management Limited [2009]
In this case, Hallam were granted an option to buy land at a price to be agreed (the option agreement). Subsequently, R&D agreed to buy some of the land from Hallam conditional on, among other things, Hallam agreeing a purchase price under the option agreement that was "wholly acceptable" to Hallam. Hallam agreed to use "all reasonable endeavours to agree" a wholly acceptable price option agreement, with a fall back position of an independent valuation.
Hallam never reached an agreement with the seller and R&D issued proceedings.
The court held that the obligation was enforceable and, said that, while the "wholly acceptable" element of the condition was a subjective criterion, this did not make the condition unenforceable because the obligation was directed towards a particular object. This object was only the negotiation of the purchase price under the terms of the option agreement, rather than the negotiation of the whole agreement.
In short the agreement was to agree only one part of the sale (the price) - not the whole of the terms.
However, on the facts, the court held that Hallam was not in breach of the obligation.
This decision further develops the case law on agreements to agree, and confirms that they need to be assessed carefully to establish their enforceability. The court based its decision on the legal principle that where the subject matter is capable of being objectively ascertained, the obligation to use reasonable endeavours can be enforceable.
It remains to be seen whether, in a case where there is no fall-back mechanism to determine price, the courts would reach the conclusion that a price that is "wholly acceptable" to one party, a seemingly subjective evaluation, is in fact capable of being objectively determined. Interestingly, the court also said it would leave consideration of the distinction between an obligation to use reasonable endeavours to agree and an obligation to negotiate in good faith for another day.
Whose terms apply?
In Tekdata Interconnections Ltd v Amphenol
(2009), the seller appealed against a decision that the
parties' dealings were on the terms of the buyer.
The parties had been doing business for over 20 years. For most, if not all, of that time the supply of components had been controlled by the end customer who required the buyer to purchase the components from the seller to a specification and price stipulated by the customer.
The seller had also had a long term contract with the customer pursuant to which it agreed to supply components to the buyer for the price determined by the end customer.
The buyer sent purchase orders to the seller containing the buyer's own terms and conditions. The seller acknowledged the purchase orders by sending an acknowledgment which stated that the seller's own terms and conditions applied.
Although an offer to buy on the purchaser's terms which was followed by an acknowledgement of purchase on the seller's terms and then delivery would normally result in a contract on the seller's terms, the judge held that the buyer's terms applied because it was never intended that seller's terms should apply and the parties had always intended that the buyer's terms were to apply, as dictated by the end customer's contract with the seller.
The seller submitted that the judge should not have analysed the
overall relationship between the parties and come to the conclusion
which he did, but should have applied the traditional offer and
acceptance analysis resulting in a contract on the seller's
terms.
It was held that the traditional offer and acceptance analysis had
to be adopted unless the documents passing between the parties and
their conduct showed that their common intention was that some
other terms were intended to prevail.
The traditional analysis would conclude that the terms on the seller's acknowledgment would be the terms on which the parties contracted.
There was no precise matching between the terms of the agreement between the seller's and the end customer's and the buyer's terms. The parties had had an opportunity to agree a single set of terms but did not do so.
Although the context of a long term relationship and the conduct of the parties might be strong enough to displace the result which a traditional offer and acceptance analysis would dictate, the circumstances were not strong enough to do so in the instant case. The judge should have held that the seller's terms and conditions applied.
