The importance of certainty in contract terms

Supplier, distributor, principal, or agent: ensuring that written contracts are in place is very important. But equally important is the need for the distributorship and agency contract to be sufficiently clear and provide certainty as to what has been agreed between supplier and distributor, or principal and agent. Otherwise, as the two cases we discuss in this article demonstrate:

  • a contract term can be treated by a court as being uncertain to the extent that it cannot be relied upon; or
  • despite the lack of certainty in a contract, the court may need to step in to identify whether there was an intention to create legal relations and provide for a binding agreement, or to imply a term in the contract which may not necessarily be to your benefit.

Uncertainty in terms can lead to disputes, which can in turn lead to costly litigation between supplier and distributor or principal and agent as to what was in fact agreed.

Two recent court judgments highlight key principles in contract law. The underlying theme that arises from both cases, however, is of the care needed to ensure that distributorship and agency contracts set out clearly the agreed terms between parties.

Case 1: Morris v Swanton Care and Community Limited

What happened in the Morris v Swanton case?

A sale contract provided for the purchaser to pay £16 million.

In addition, it was agreed that Mr Morris was entitled to an additional payment for the provision of consultancy services. In particular, there was a clause (specifically paragraph 1.1 of Schedule 5) which stated the following:

“Mr Morris shall have the option for a period of 4 years from Completion and following such period such further period as shall reasonably be agreed between Mr Morris and the Buyer to provide the following services…”

Paragraph 1.1 then proceeded to list certain consultancy services which Mr Morris was to provide to the purchaser.

Mr Morris provided these consultancy services during the first four years after completion and was paid approximately £4 million.

Mr Morris requested from the purchaser that the period in which he provided the consultancy services be extended. However, the purchaser refused. Mr Morris therefore commenced litigation against the purchaser, claiming that, after the expiry of the initial four years, he was entitled to a further period to be agreed between the parties during which he would provide his consultancy services and receive further earn-out payments. He relied on paragraph 1.1 of Schedule 5 above.

What did the judge decide?

The judge found that, although Mr Morris had an enforceable right to provide consultancy services during the initial four-year period, he did not have that right during any further period to be agreed. He found that paragraph 1.1 imposed an obligation on the parties to agree on the length of a further period in a reasonable way, but that that obligation was not enforceable because the agreement was effectively an “agreement to agree”.

What did the Court of Appeal decide?

Mr Morris appealed. However, the Court of Appeal agreed with the judge’s finding that paragraph 1.1 amounted to an agreement to agree.

What is an agreement to agree?

An agreement to agree arises in a contract where it has provided that an issue is to be agreed or negotiated in future. In other words, it means putting a clause in a contract with words to the effect of: “we’ll decide on that later”.

But one of the requirements for a contractual obligation or right to be binding is that the obligation or right must be certain. Otherwise, it is not likely to be enforceable. Therefore, agreements to agree are unlikely to be enforceable.

In this case, the Court of Appeal found that the words "as shall reasonably be agreed between Mr Morris and the Buyer", when construed in the context of the entire agreement, made it plain that in order for there to be any further period, there had to be a further agreement between the parties. The parties did not, at the time of entering into contract, specify a further period but, instead, only agreed that there would have to be a future further agreement. As the Court of Appeal put it, that was the “very paradigm of an agreement to agree”!

What can we learn from this case?

It is important that terms are agreed in a contract upfront or, if certain terms are to be agreed at a later date, the parties should give thought as to how supplier and distributor or principal and agent will agree and also what is the default outcome if the parties fail to agree. For example, parties in a distribution agreement may decide that they will agree on a pricing structure for the first contract year but agree on a different structure for subsequent years. It is important to make clear in the distributorship agreement, therefore, the mechanism of the negotiations in respect of the new yet-to-be-agreed pricing structure. Thought should be given to the following questions:

  • When should the parties meet to discuss the new structure?
  • What criteria should be taken into consideration in that meeting?
  • How long do the parties have to agree the new structure?
  • What is the default position if the parties fail to agree a new pricing structure? Does the pricing remain as it was before or does it increase or decrease automatically?

Case 2: Wells v Devani

What happened in the Wells v Devani case?

The facts sound familiar. An agent was to set up a sale in return for an allegedly agreed commission percentage. The terms were discussed between the parties on a phone call.

On completion of the sale, the agent was not paid. Why? The principal claimed, amongst other things, that there was no binding contract as the terms were too uncertain by virtue of the parties not having agreed the event that would trigger payment.

What did the judge decide?

The judge found in favour of the agent, holding that the parties had created a binding oral contract. To give business efficacy to that contract, the judge implied a term to the effect that commission would become payable when the agent introduced a buyer who completed the purchase. The principal appealed the decision.

What did the Court of Appeal decide?

The Court of Appeal decided in favour of the principal and decided that the contract was non-binding. In summary, the identification of the trigger event for payment was of “critical importance” and, therefore, necessary for the contract to be binding. It stated that it is not possible to turn an incomplete bargain into a binding contract by adding together a combination of express or implied terms.

What did the Supreme Court decide?

The Supreme Court disagreed with the Court of Appeal and decided that, from an objective assessment, the parties had intended to create legal relations by their words and conduct. It found that the parties had agreed the commission that legal relations were intended, and that it would be understood by a reasonable person that payment was to arise on completion and be paid out of the purchase price.

As the intention to create legal relations was clear, the Supreme Court held it was not necessary to consider whether an implied term of a payment trigger event was incorporated into the contract. However, helpfully, it nevertheless explored this point further.

The Supreme Court considered that a term will be implied where it is so obvious as to “go without saying”, or where it is necessary to give the contract business efficacy. The Supreme Court expressed a view that implying a term consisting of an event triggering payment would give a contract, such as this, business efficacy and that there is no general rule preventing a term from being implied into a contract in order to make it certain or complete.

The Supreme Court gave the example of a contract being binding despite leaving a term, such as price, to be agreed further between the parties. In certain circumstances, it may be appropriate to imply a term that such price should be reasonable. It is interesting to consider the difference in approach between the Supreme Court’s decision in this case and the Court of Appeal’s decision in Morris v Swanton (discussed above), where the provision which triggered payment in that case was held to be an agreement to agree. 

What can we learn from this case?

As this case dealt with a bargain of “find me a purchaser” in the context of a property, the facts helped the argument that payment of commission would flow from completion. Each case will, however, turn on its own facts.

Whilst the Court decided that there was a binding contract, the judgment also drew attention to the risk of contracts being judged to be non-binding on the parties, due to missing a fundamental provision, or being so vague and uncertain that the contraction cannot be enforced.

In order to avoid uncertainty and potential future disputes, you should ensure that your contracts are written, complete, and contain all the necessary terms.

This case concerned an oral contract and serves as a useful reminder about the uncertainty it creates regarding what was agreed between the parties verbally. Oral contracts are, therefore, best avoided for, as this case shows, it is possible for such contracts to be legally binding and for courts to imply terms which may not necessarily be to your benefit.

Lucy Coffey
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