Case Facts
The plaintiffs were timber merchants carrying on business at Hull. By a contract dated 21 May 1930, they agreed to purchase 22,000 standards of softwood goods of fair specification from the defendants over the 1930 season. Clause 9 of that contract granted the plaintiffs an option to enter into a contract for the purchase of 100,000 standards of softwood timber for delivery during 1931, at a price representing a 5% reduction on the FOB value of the official price list in force at any time during 1931. The option was required to be declared before 1 January 1931.
The plaintiffs exercised the option by letter dated 22 December 1930. The defendants replied on 24 December 1930, contending that the May 1930 contract had been cancelled by mutual consent in July 1930. The question of cancellation was left to a jury before Roche J, who found that no such cancellation had taken place. The matter then proceeded before MacKinnon J on the question of damages. MacKinnon J held clause 9 to be an enforceable contract and awarded the plaintiffs £30,000 in damages. The Court of Appeal reversed that decision and entered judgment for the defendants. The plaintiffs appealed to the House of Lords.
Held
The House of Lords allowed the plaintiffs' appeal and restored the judgment of MacKinnon J, including the £30,000 award.
On a true construction of the contract as a whole, and having regard to evidence of the course of trade, the words "softwood goods of fair specification" from the opening clause were to be read into clause 9 after the word "standards." The phrase "of fair specification" meant goods distributed across kinds, qualities, and sizes in fair proportions having regard to the output of the season. Such proportions were capable of ascertainment by recourse to the courts in the event of dispute and were therefore sufficiently certain to be enforceable. The word "conditions" in clause 9 referred to conditions as to supply, demand, and prices prevailing in 1931.
Critically, the words "option of entering into a contract" and "such contract to stipulate that" in clause 9 merely indicated that no binding contract for 1931 delivery would come into existence until the option was exercised. Those words did not render the agreement one that was merely an agreement to agree. Clause 9, properly construed, constituted a valid and enforceable option contract. The defendants' contention — relying on May and Butcher v R [1934], in which a contract had been held void for uncertainty where the price was left to future agreement — was rejected. The House of Lords distinguished that decision on the basis that in the present case the terms were sufficiently certain through construction and trade usage, not left to future negotiation.
The House of Lords also noted a procedural point: the defendants had not pleaded that clause 9 was an unenforceable agreement to agree and only raised this argument on the second day of the hearing before MacKinnon J. It was emphasised that where a party is permitted to raise a point that has not been pleaded, the appropriate amendment to the pleadings should always be made.
Ratio Decidendi
The ratio of this decision rests on two complementary principles concerning the construction of commercial contracts.
The first principle was stated by Lord Tomlin, who held that the task of a court of construction must always be to balance matters so that, without violation of essential principle, the dealings of men may, as far as possible, be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains.
The second and more detailed principle was articulated by Lord Wright, who held that it is the duty of the court to construe agreements made by business men — which may often appear to those unfamiliar with the relevant trade as far from complete or precise — fairly and broadly, without being astute or subtle in finding defects. The court should apply the maxim verba ita sunt intelligenda ut res magis valeat quam pereat (words are to be understood so that the matter may be more effective than void). However, Lord Wright qualified this by making clear that the maxim does not authorise the court to make a contract for the parties or to go outside the words they have used, except in so far as there are appropriate implications of law — such as the implication of what is just and reasonable, ascertained by the court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail.
Lord Wright further reasoned that parties to contracts for future performance may not be able or may not wish to specify every matter of detail at the time of contracting, and may instead leave such matters to be adjusted in the working out of the contract. Such contracts are neither incomplete nor uncertain, provided that, with appropriate legal implication in reserve, the contractual intention can be given effect.
Applied to clause 9, the House of Lords held that an agreement de praesenti to enter into what is in law an enforceable contract is simply that enforceable contract. The language of "option of entering into a contract" and "such contract to stipulate" did not make clause 9 a mere agreement to agree; it only signified that the binding 1931 contract would not arise until the option was exercised, which it duly was by the plaintiffs' letter of 22 December 1930.
Obiter Dicta
Lord Wright made an important obiter observation regarding agreements to negotiate. He acknowledged that if what the parties truly intend is not to enter a binding contract but merely to negotiate in the hope of effecting a valid contract, there is in law no bargain except to negotiate, and such negotiations may prove fruitless. Nevertheless, even in that scenario, if good consideration is present, there is a contract to negotiate, and upon repudiation of such a contract a remedy in damages is available — though the damages may be nominal unless the opportunity to negotiate had some appreciable value to the injured party.
This passage has attracted considerable academic and judicial attention in subsequent years, as it acknowledges — albeit in passing — the theoretical possibility of a binding obligation to negotiate in good faith, a concept that has been the subject of sustained debate in English contract law. The case was subsequently considered in Scammell v Ouston [1941], a decision in which the House of Lords held that an agreement expressed to be "on hire-purchase terms" was too uncertain to be enforceable, thereby illustrating the boundary between the purposive construction approved in this case and the irreducible minimum of certainty required for a contract to subsist.