The parties disputed the effect of a clause in an option agreement, and as to whether it contained an agreement to negotiate and was therefore not binding.
Held: Chadwick LJ said: ‘First, each case must be decided on its own facts and on the construction of the words used in the particular agreement. Decisions on other words, in other agreements, construed against the background of other facts, are not determinative and may not be of any real assistance.
Second, if on the true construction of the words which they have used in the circumstances in which they have used them, the parties must be taken to have intended to leave some essential matter, such as price or rent, to be agreed between them in the future – on the basis that either will remain free to agree or disagree about that matter – there is no bargain which the courts can enforce.
Third, in such a case, there is no obligation on the parties to negotiate in good faith about the matter which remains to be agreed between them – see Walford v. Miles [1992] AC 128, at page 138G.
Fourth, where the court is satisfied that the parties intended that their bargain should be enforceable, it will strive to give effect to that intention by construing the words which they have used in a way which does not leave the matter to be agreed in the future incapable of being determined in the absence of future agreement. In order to achieve that result the court may feel able to imply a term in the original bargain that the price or rent, or other matter to be agreed, shall be a ‘fair’ price, or a ‘market’ price, or a ‘reasonable’ price; or by quantifying whatever matter it is that has to be agreed by some equivalent epithet. In a contract for sale of goods such a term may be implied by section 8 of the Sale of Goods Act 1979 . But the court cannot imply a term which is inconsistent with what the parties have actually agreed. So if, on the true construction of the words which they have used, the court is driven to the conclusion that they must be taken to have intended that the matter should be left to their future agreement on the basis that either is to remain free to agree or disagree about that matter as his own perceived interest dictates there is no place for an implied term that, in the absence of agreement, the matter shall be determined by some objective criteria of fairness or reasonableness.
Fifth, if the court concludes that the true intention of the parties was that the matter to be agreed in the future is capable of being determined, in the absence of future agreement, by some objective criteria of fairness or reasonableness, then the bargain does not fail because the parties have provided no machinery for such determination, or because the machinery which they have provided breaks down. In those circumstances the court will provide its own machinery for determining what needs to be determined-where appropriate by ordering an inquiry (see Sudbrook Trading Estate Ltd v. Eggleton [1983] A.C. 444).’
Judges:
Schiemann, Chadwick LJJ, Sir Murray Stuart-Smith
Citations:
[2002] EWCA Civ 163
Links:
Statutes:
Jurisdiction:
England and Wales
Citing:
Cited – Sudbrook Trading Estate Ltd v Eggleton HL 1982
The grantors of an option, which contained a machinery for fixing the price, had refused to appoint a valuer and that made it impossible for the contractual machinery for the valuation of the option price to work. The House of Lords held that the . .
Cited by:
Cited – MRI Trading Ag v Erdenet Mining Corporation Llc CA 8-Mar-2013
The Commercial Court had found the result of an arbitration award ‘obviously wrong’, and ineed bizarre.
Held: The appeal failed. The award was flawed, in failing to take account of the trading context between the parties: ‘The overall . .
Lists of cited by and citing cases may be incomplete.
Contract
Updated: 23 June 2022; Ref: scu.216677