The uncertainty of agreements to agree

In a recent case between a shipping company and a shipbuilder, Teekay Tankers Ltd v STX Offshore and Shipbuilding Co Ltd [2017] EWHC 253 (Comm), an agreement granting the shipping company the option to purchase ships from the shipbuilder was ruled void for uncertainty by the High Court.

Teekay Tankers (TT), the shipping company, claimed that STX, the shipbuilder, had renounced the option agreement (the “Agreement”) and so, as they were entitled to under the Agreement, TT had terminated the Agreement and brought a claim for the loss of profits it would have earned if STX had complied with its obligations under it. STX’s initial defence was that the Agreement was void for uncertainty as it was an agreement to agree.

There was no question that the parties intended to be legally bound by the Agreement but certain key terms had not been agreed. The Agreement provided that the delivery date of the ships was to be “mutually agreed upon” but that the shipbuilder would “make best efforts” to deliver the ships within a specified time period.

The Judge confirmed that the court will strive to find an implied term to save an agreement by lending it sufficient certainty. However, in accordance with M&S v BNP Paribas [2015] UKSC 72, the court will not imply a term where to do so would be inconsistent with express wording within the Agreement. TT asserted that it was an implied term of the Agreement that the date of delivery would either be such date as shall be offered by STX (having used its best efforts) or that it would be an objectively reasonable date (having regard to STX’s obligation to use its best efforts), to be determined by the court if not agreed. The court disagreed with this suggestion and found that the suggested implied term that the delivery date would either be determined by STX, or would be identified by reference, to what is reasonable was inconsistent with the express clause requiring that the parties use their best efforts to agree a delivery date.

In reaching its judgement, the court confirmed the importance of the principles set out in Mamidol-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD [2000] EWCA Civ 406 and BJ Aviation Ltd v Pool Aviation Ltd [2002] EWCA Civ 163 for analysing ‘agreements to agree’. These principles, which should not be considered exhaustive, include:

• Each case must be decided on its own facts and the construction of the words used in that agreement.
• Where no contract exists, the use of the expression “to be agreed” in relation to an essential term is likely to prevent a contract from coming into existence on the grounds of uncertainty. Where a contract does exist, use of the expression “to be agreed” in relation to future executory obligations is not necessarily fatal to its continued existence.
• Where no contract exists, an absence of an agreement on essential terms of the Agreement may prevent any contract coming into existence on the grounds of uncertainty.
• Where there are commercial dealings between parties that are familiar with the trade in question and the parties have acted in the belief that there is a binding contract, the courts are willing to imply terms to enable the contract to be effective.
• Particularly in the case of contracts for future performance over a period, where the parties may leave matters to be adjusted in the working out of the contract, the court will assist parties to do so, so as to preserve rather than destroy bargains. This is particularly so, where one party already has the advantage of some performance which reflects the parties’ agreement on a long-term relationship, or has had to make an investment premised on that agreement.
• For these purposes, an express stipulation for a reasonable or fair measure or price will be sufficient for the courts to act on. In the absence of express language, the courts are prepared to imply an obligation in terms of what is reasonable, as long as it is not inconsistent with express wording within the agreement.
• The presence of an arbitration clause may assist the court to hold a contract to be sufficiently certain.
• There is no obligation on the parties to negotiate in good faith about the matter which remains to be agreed between them.

The key message from this case is that although it might be possible in some circumstances to imply terms to save an uncertain ‘agreement to agree’, it may not be enough to create a binding agreement where key terms remain to be agreed. It is safer to agree all terms of commercial contracts from the outset and avoid any risk that they may be found unenforceable.

If you have any further questions or concerns regarding the above topic please contact Eoin Broderick – Associate, or any member of Edwin Coe Corporate & Commercial team.

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