#7415 - Certainty - Contract Law

Week 8- Certainty

Page 105-111

What is certainty and completeness of a contract?

• Certainty and completeness of a contract are requirements that overlap with intention. It is implicit in a contract to make it legally binding.

• Courts apply the maxim “it is better for a thing to have effect than be found void”.

• They are questions of degree. They must be sufficient for ambiguous gaps to be filled in by a judge.

• The idea of sufficient is difficult to resolve because different judges assign different degrees of certainty and completeness to a contract. Come judges are reluctant to write contracts to resolve issues that parties have failed to resolve.

• Other do not want to destroy the bargain.

What are the requirements for certainty?

• The requirement for certainty has three parts:

  • Contract must be sufficiently complete. Parties have to reach an agreement on all terms they intended to fix. They cannot get someone else to do it for them.

  • Agreed terms must be sufficiently certain and clear so that parties understand their obligations and rights and the courts can enforce them.

  • Promise made must not be illusory. It is illusory if a party has unfettered discretion about whether they should perform a promise. This is not a contractual obligation.

What are the requirements of completeness?

• The parties have to reach agreement on essential terms.

  • If a term is omitted, this can be fatal to the contract.

  • The judge has to ask, was the term essential? Why the term left was out (was it deliberate or just ignored)? Has the agreement been fulfilled on one side?

What is an essential term?

• An essential term is one that means the court cannot enforce the contract without it.

• Whether the term was important depends on the nature and circumstances of the contract. In a lease, the commencement date and rental price are essential. In the sale of land, the price is essential and not the commencement date.

• E.g Hall v Busst, showed failure to price goods is not an essential term. People must pay a reasonable price.

• When the contract is complex, the court will not imply the necessary terms.

What happens when there is an agreement to agree?

• If an agreement is silent on an essential term or if they decide to agree to agree, the agreement is incomplete and there is no contract.

What happens if the incomplete agreement has been partly performed?

• Courts will uphold these agreements and give effect to their intentions.

What happens if essential terms will be agreed upon using specific machinery?

• A contract is valid if essential terms are not agreed on but the parties have decided to reach a compromise based on an effective mechanism if later they cannot reach agreement.

• For example, in a lease the rent may be agreed later and if this does not occur a third party will make the valuation for them. The agreement is avoid if the third party refuses to make a valuation.

What happens when parties agree on a formula for settling the terms?

• E.g. For increase in rent, they must reflect CPI or a standard like ‘reasonable rental’.

• The contract will be valid if the courts find the formula sufficiently certain.

What requirements are there for a term under certainty?

• If a term is so vague and imprecise that the courts cannot find meaning, it will not be able to enforce the contract.

• Reasonableness can be employed to decide whether a term is sufficiently certain.

What happens with agreements to negotiate?

• In Australia a promise to negotiate in good terms is part of the contract. The court must decide if the parties have negotiated in good faith. If this occurs and they cannot agree, then they can withdraw. It is an agreement to negotiate and not to agree.

Cases

Uncertain clauses and mechanisms provided to reach agreement in the future

Page 146

Council of the Upper Hunter Country District v Australian Chilling and Freezing (1968)

Facts:

• The Council agreed to supply the ACF Company with electricity at certain rates.

• A clause in the agreement provided for automatic changes in the rates according to changes in costs.

• Clause 5 stated, “during the term of this agreement if the [council’s] costs shall vary in other respects that has been hereinbefore provided the [Council] shall have the right to vary the maximum charge and the energy charge by notice in writing to the purchaser”.

• The agreement also provided for arbitration in the event of a dispute.

Remedy sought:

• ACF claims that clause 5 is too uncertain and so the Council cannot increase their charge.

Prior proceedings:

• The Court of Appeal of the Supreme Court of NSW held that clause 5 was void for uncertainty. ACF won.

• The Council is appealing to the High Court.

Legal issues:

• Is clause 5 void for uncertainty?

• Does the agreement to have an arbiter make vague undecided terms contractual?

Outcome:

• Council won. Appeal allowed.

Legal reasoning:

• Barwick CJ reasoned that clause 5 was not uncertain. The concept of cost is a criterion by which reference to the rights of the parties may be logically worked out by the parties or by the courts. The contract provides a means of resolution of any question by an arbitrator. Clause 5 is not meaningless.

Ratio decidendi:

• A contract is valid when the parties have agreed to agree on a term such as cost in an ongoing contract if it is supported by a mechanism like the opinion of an arbitrator if parties cannot agree in the future.

Implying objective standards: courts do not fill in gaps in uncertain or illusory contracts

Page 147

Biotechnology Australia v Pace (1988)

Facts:

• Dr Pace, a senior scientist, entered into an employment contract with Biotechnology.

• In a letter of offer from a Biotechnology director, it stated, “I confirm a salary package of $A36, 000 per annum, a full maintained company car and the option to participate in the company’s senior staff equity sharing scheme”.

• At the time of the offer, Pace was aware there was no scheme in existence.

Remedy sought:

• Pace wants damages because Biotechnology failed to provide him with the option of an equity sharing scheme.

Prior proceedings:

• Pace won.

• Biotechnology is appealing to the Court of Appeal of the Supreme Court of NSW.

Arguments:

• Biotechnology argued that the promise was illusory. The terms were too uncertain to be enforced. Questions like how many shares and what types were not negotiated. The company was not even listed publically.

• Pace argued that Biotechnology had to create the scheme like it promised.

Legal issues:

• Is the promise illusory because there was no scheme in place to begin with?

• Are the amount of shares and the obligation of the company to begin the scheme essential terms that make the contract uncertain by being left out?

• Can a reasonableness test find out the worth of the scheme to Pace or would this involve the courts writing the contract for the parties?

Outcome:

• Appeal allowed. Biotechnology won.

Legal reasoning:

• Kirby P reasoned that the scheme was fundamentally unclear. It was also so dependent on the initiative of Biotechnology that the agreement was illusory. Uncertain elements included how many shares, what class of shares, the options, the rights attached to the shares...etc. The court would have to fill in the gaps too much and this cannot happen.

• McHugh JA reasoned that Biotechnology never promised to implement the scheme although both parties assumed there would be a scheme. Ultimately it was up to Biotech to decide the nature and rights of the individuals participating in the scheme. Finding the value of the package is too difficult and comparisons with other research companies do not provide the answer.

• Hope JA dissented. There was a valid and enforceable contractual promise on Biotech to establish an equity scheme. They had to honestly try to perform the promise. The promise was intended to induce Pace to take the job and there was the intention that the scheme would be reasonable enough to keep Pace in the company.

Ratio decidendi:

• A court will not fill in missing gaps in a contract where the terms are uncertain or illusory.

The standard of reasonableness employed in the contract terms to provide completeness and certainty to a contract. Also when can a term be severed from a contract?

Page 155

Whitlock v Brew (1968)

Facts:

• Whitlock agreed to sell land to Brew for 165, 000 pounds.

• Brew paid a deposit of 15,600 pounds.

• Clause 5 of the agreement said that Brew must sell Shell a portion of his land on lease upon reasonable terms. In the event of any dispute, an arbitrator appointed by the President of the Law Institute of Victoria shall be called upon.

Remedy sought:

• Brew declined to complete the purchase and is bringing an action to recover the deposit on the ground that the contract is void for uncertainty.

Prior proceedings:

• Whitlock won at the trial. Clause 5 was void but that did not make the whole contract void.

• Brew won in the Full Court of the Supreme Court of Victoria.

• Whitlock wants to appeal to the High Court.

Legal issue:

• If clause 5 is uncertain does this make the whole contract void or can the provisions be severed to constitute a contract?

• What is a reasonable price for the rent in the lease?

Outcome:

• Brew won. Only McTiernan dissented. Appeal dismissed.

Legal reasoning:

• Kitto J reasoned that clause 5 was not a concluded agreement because the duration and the rent have not been decided in regards to the lease. Clause 5 is void and so the whole contract is void because the parties had no intention on agreeing on the sale of the land without the lease. Getting rid of clause 5 would have changed the contract from what...