Kleinwort Benson

Introduction Contractual certainty If businessmen are often not overly-concerned with the niceties of offer and acceptance it follows that their contracts may not be all-embracing and complete in every respect. The parties may have reached an agreement in principle and then prefer to rely on experience from previous dealings, business practice and goodwill. The law’s overall policy is to uphold bargains wherever possible and although businessmen tend to record their agreements in ‘crude and summary fashion’ the law should not be ‘too astute or subtle in ?

nding defects’ (Hillas & Co. Ltd v Arcos Ltd (1932) 147 LT 503, 514, per Lord Wright). However, the parties must ? x the boundaries of their own obligations and the law cannot paternalistically intervene to create a contract on their behalf. Consequently, in seeking to clarify and enforce agreements the law must tread a middle line, avoiding wanton destruction of agreements on one side and the imaginative creation of bargains on the other (compare Hillas (supra) with Scammell (G) & Nephew Ltd v Ouston [1941] AC 251).

In pursuit of the general policy of upholding bargains, the law may (a) ignore a meaningless clause if it adds nothing to an otherwise complete agreement (see Nicolene Ltd v Simmonds [1953] 1 QB 543), (b) enforce an agreement where one party is under a duty to resolve the uncertainty (see David T Boyd v Louis Louca [1973] 1 Lloyd’s Rep 209), (c) refer to previous dealings and trade practices (see Hillas (supra) ) and, (d) resolve vagueness by reference to custom (see Shamrock SS Co.

v Storey & Co. (1899) 81 LT 413). Often the parties attempt to allow for ? uctuating economic conditions by introducing a variable provision into their agreement, e. g. dates of payment and delivery to be ? xed from time to time in the future. Such a provision may be regarded by the courts as ‘an agreement to agree’ and be so uncertain as to be incapable of enforcement (see May & Butcher v R [1934] 2 KB 17n; Smith v Morgan [1971] 1 WLR 803).

As the courts are reluctant to strikedown provisions which are intended to have legal effect, they may uphold some agreements even if further terms are to be agreed by the parties (see Foley v Classique Coaches Ltd [1934] 2 KB 1; British Bank for Foreign Trade v Novinex [1949] 1 KB 623) and this is particularly so where there are criteria for resolving the uncertainty (see Brown v Gould [1972] Ch 53; Sudbrook Trading Estate Ltd v Eggleton [1982] 1 AC 493). 24 CERTAINTY OF TERMS AND INTENTION Letters of intent cause problems with certainty.

Here the sender of the letter states that he intends to contract with the recipient and the latter may act in reliance on the letter in commencing performance. It is quite possible to establish a certain, binding contract in such cases (see Trollope & Colls Ltd v Atomic Power Constructions Ltd [1963] 1 WLR 333; Wilson Smithett & Cape (Sugar) Ltd v Bangladesh Sugar and Food Industries Corporation [1986] 1 Lloyd’s Rep 378). Similarly, letters of comfort may be either binding contracts or informal and uncertain assurances resting entirely upon business goodwill (see Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 WLR 379).

The House of Lords has recently considered the status of a contract to negotiate and denied the existence of an enforceable, positive contract to negotiate in good faith as lacking suf? cient certainty (see Walford v Miles [1992] 2 AC 128) although it is clear that a purely negative lock-out arrangement, for a speci? c period of time, is an enforceable contract (see Pitt v PHH Asset Management Ltd [1993] 4 All ER 961). Contractual Intent As well as the other elements required for the formation of a contract, there must be an intention to create legal relations, this being assessed objectively.

In commercial contracts there is a presumption of intention and the onus is on the party who asserts that no legal effect is intended to rebut the presumption. The parties may expressly deny any intent but, in the absence of such an express denial, rebuttal is extremely dif? cult (see Edwards v Skyways Ltd [1964] 1 WLR 349; Rose & Frank Co. v J R Crompton & Bros Ltd [1923] 2 KB 261; Jones v Vernons Pools Ltd [1936] 2 All ER 626). The litigation in Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 WLR 379, is important.

The ? rst instance decision applied the presumption of intention ([1988] 1 WLR 799) but the Court of Appeal’s reasoning appears to allow a circumvention of the presumption rather than its rebuttal. Conversely, many social and domestic agreements lack suf? cient intent to make them legally binding (see Balfour v Balfour [1919] 2 KB 571) but a husband and wife, for example, can make a binding contract (see Pearce v Merriman [1904] 1 KB 80; Merritt v Merritt [1970] 1 WLR 1211). Similarly, other domestic arrangements can involve dif?

culties of intention (see Jones v Padavatton [1969] 1 WLR 328; Simpkins v Pays [1955] 1 WLR 975; Parker v Clark [1960] 1 WLR 286). Recently the Court of Appeal implicitly questioned whether the presumptions regarding commercial and domestic agreements represented the correct starting point, preferring to concentrate on the ‘seriousness’ of any promise as the primary indicator of intent (see Edmonds v Lawson [2000] QB 501). Clearly an interesting parallel can be drawn with the earlier decision in Kleinwort Benson (see above).

Finally, a statement inducing a contract may be a ‘mere puff’ and the test is one of intention (see Weeks v Tybald (1605) Noy 11; Carlill v Carbolic Smoke Ball Co. Ltd [1893] 1 QB 256). Similarly, intention determines whether a statement is a term of the contract or a ‘mere representation’ (see Heilbut, Symons & Co. v Buckleton [1913] AC 30). CERTAINTY OF TERMS AND INTENTION 25 Q Question It is a basic axiom of English law that, although the courts cannot make a contract for the parties, they will strive to uphold a bargain wherever possible.

Discuss. Commentary This question calls for an understanding of certainty of terms and, to a lesser extent, intention to create legal relations. Students must be able to make an accurate analysis of the lengths to which the courts will go in enforcing contracts. The decisions tend to make technical distinctions but students should be aware of the important substantive issues raised in Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 WLR 379 and Walford v Miles [1992] 2 AC 128.

• What is meant by the rule that a contract must have certainty of terms? • To what extent will the courts strive to uphold a bargain and seek to clarify the terms of the contract? • To what extent can the parties leave a term of the contract to be agreed upon in the future • Do recent decisions adopt a more rigorous approach than formerly in demanding that intent and certainty must unite to forge an intelligible and enforceable undertaking? Suggested answer It is the parties who make their own contract and ?

x its boundaries whilst the courts enforce the bargain thus created. It follows that if the agreement is uncertain and imprecise the courts will be unable to enforce it and may decide that it also lacks the requisite intention to create legal relations. In Scammell (G) & Nephew Ltd v Ouston [1941] AC 251 there was an agreement to acquire goods ‘on hire-purchase terms’ but the House of Lords held that this could not be a binding contract as it was ‘so vaguely expressed that it cannot, standing by itself, be given a de?

nite meaning’. Similarly, in Jacques v Lloyd D George & Partners [1968] 1 WLR 625 there was an uncertain and unenforceable agreement where an estate agent was to be paid commission should he be ‘instrumental in introducing a person willing to sign a document capable of becoming a binding contract’. However, the courts will uphold bargains whenever possible and, as Lord Wright emphasised in Hillas & Co. Ltd v Arcos Ltd (1932) 147 LT 503, the courts should not be 26 CERTAINTY OF TERMS AND INTENTION ‘too astute or subtle in ?nding defects’ even though commercial agreements may be crudely drafted by businessmen.

In Hillas, the plaintiffs agreed to buy from the defendants a quantity of Russian softwood timber of a particular quality, the agreement containing an option for the plaintiffs to buy more timber at a later date but with no particulars of size or quality. When the plaintiffs sought to exercise the option, the defendants objected that the clause was vague and indeterminate and provided, at best, a basis for future negotiations.

The House of Lords held that, having regard to previous dealings, there was suf? cient intention to be bound and the agreement could be rendered certain by referring to the parties’ previous dealings and the normal practice in the timber trade. Hillas is illustrative of the courts willingness to imply terms thereby making commercial sense of the agreement, but an alternative method of resolving uncertainty is to delete a meaningless, subsidiary provision, leaving the remainder of the contract complete and enforceable.

In Nicolene Ltd v Simmonds [1953] 1 QB 543, the defendant agreed to sell a quantity of steel bars to the claimant on terms which were clear except for the statement that ‘we are in agreement that the usual conditions of acceptance apply’. It was held that the words were meaningless but that they did not destroy the contract as they were severable, leaving the core of the obligation intact.

The rationale of this decision was explained by Denning LJ in that, if the opposite conclusion had been reached, defaulters would be ‘scanning their contracts to ?nd some meaningless clause on which to ride free’. However, the Nicolene principle cannot function if the meaningless clause is intended to govern an undertaking central to the agreement, for then its uncertainty may vitiate the whole agreement. The courts look favourably on agreements which, although leaving some issue to be resolved in the future, provide the machinery or criteria for its resolution. Thus, an agreement will not fail simply because it provides for the resolution of outstanding issues by arbitration, and, in Brown v Gould [1972].

Ch 53, an option to renew a lease ‘at a rent to be ? xed having regard to the market value of the premises’ was binding in that it provided a criterion, albeit somewhat elusive, for resolving the vagueness. Moreover, this notion was extended in Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444. A lease gave the tenant an option to purchase the premises ‘at such price as may be agreed upon by two valuers’ who were to be appointed by each party. The landlord refused to appoint a valuer but the House of Lords held that the option did not fail for uncertainty.

The substance of the undertaking was an agreement to sell at a reasonable price to be determined by valuers and the extra stipulation that each party should nominate a valuer was ‘subsidiary and inessential’. Furthermore, provided that the machinery is ‘subsidiary’ the court may institute its own procedures for resolving the uncertainty should the original machinery break down, e. g. ascertain the price with the help of expert evidence (see Re Malpas [1985] Ch 42).

The courts will thus not be deterred from clarifying uncertainty where there is a determinate intention of the parties to form a binding contract but the vagueness in CERTAINTY OF TERMS AND INTENTION 27 question may relate to a fundamental obligation which the parties have deliberately left open-ended. This may occur where both parties are reluctant to enter into a ? nalised contract for a lengthy period of time, preferring to leave questions such as the price and manner of payment for later consideration and agreement. Are such agreements enforceable? In May & Butcher v R [1934] 2 KB 17n, an agreement for the sale of tentage provided that the price, dates of payment and manner of delivery should be agreed ‘from time to time’.

On these facts, the House of Lords held that the agreement was incomplete as it amounted to nothing more than an agreement to agree in the future. If the agreement had been silent on these issues, the House thought that s. 8(2) of the Sale of Goods Act 1893 might have applied meaning that a reasonable price should be paid, but the parties had shown that this was not their intention by providing for a further agreement.

May & Butcher has been distinguished in several cases and it is very dif? cult to make generalisations in this area but it seems that the courts look for substantial agreement between the parties and, if this is present, it accords with commercial practice that some points may be left for future resolution without vitiating the agreement. It is nevertheless very dif? cult to ascertain the nature and extent of the issues which may be left for future agreement.

In Foley v Classique Coaches Ltd [1934] 2 KB 1, the plaintiff owned a petrol station and adjoining land which he agreed to sell to the defendants on condition that they should agree to buy all the petrol for their coach business from him.

The agreement regarding the petrol was executed and provided that it was to be supplied ‘at a price to be agreed by the parties in writing and from time to time’. The land was conveyed and the petrol agreement was acted on for three years but the defendants then repudiated it arguing that it was incomplete in relation to the price of the petrol. The Court of Appeal held that the agreement was enforceable and that, consequently, the defendants must pay a reasonable price for the petrol.

The most in? uential factors in the decision appeared to be that the contract had been acted upon for several years and that the petrol agreement formed part of a linked bargain with the sale of the land, the defendants paying a price for the land which no doubt re? ected the fact that they would buy their petrol from the plaintiffs. Two recent and important decisions cast doubt upon the notion that the courts will strive to uphold the parties’ bargain. Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 WLR 379 concerned a letter of comfort which the defendant issued to the plaintiff in respect of a loan of ?

10 million to one of the defendant’s subsidiary companies. Comfort letters possess varying degrees of formality but here the letter was negotiated between the parties and contained the statement by the defendant that it was its ‘policy to ensure that the business of [the subsidiary] is at all times in a position to meet its liabilities to you under the above arrangements’.

The defendant argued that neither party intended this statement to be contractually binding. At ? rst instance, it was held that the plaintiff should succeed as: (a) the presumption of intention to create legal relations which applies to commercial contracts had 28 CERTAINTY OF TERMS AND INTENTION not been rebutted by the defendant; (b) the wording was unambiguous and ‘crystal clear’; and (c) the undertaking was of crucial importance and the plaintiff had acted in reliance on it in advancing the loan.

The Court of Appeal reversed the decision and held that the wording of the undertaking did not amount to a contractual promise and thus the question of rebutting the presumption of intention to create legal relations never arose. Moreover, the court considered that the statement was only one of present intention in that the defendant’s ‘policy’ could change in the future.

The Court of Appeal’s reasoning appears to ignore the presumption of intention and, if that presumption has not been rendered redundant by the decision, it is very dif? cult to ascertain in which circumstances it will apply. The second decision, Walford v Miles [1992] 2 AC 128, concerned the enforceability of a contract to negotiate.

The plaintiff and defendant were negotiating the sale of the defendant’s business and an agreement was reached by which the plaintiff would provide the defendant with a letter of comfort from the plaintiff’s bankers con? rming that a loan would be granted to the plaintiff. In return, the defendant agreed to terminate any negotiations with third parties and not to consider any alternative offers. The comfort letter was provided but the defendant withdrew from the negotiations and sold the business to a third party.

The House of Lords held that the plaintiff’s action must fail. The House considered that it was possible to have a contract not to negotiate with third parties provided that the duration of this ‘lock-out’ was speci? ed expressly but that the parties could never be ‘locked-in’ by such an arrangement to negotiate positively as this would amount to an uncertain and unenforceable contract to negotiate. Kleinwort and Walford are paradigmatic of laissez-faire principles of self-reliance and judicial non-interventionism. It is suggested that the decisions ignore English law’s basic tenet that agreements should be validated wherever possible and, in so doing, will encourage bad faith in commercial transactions.