Certainty and Completeness
Statement of the Rule
In order to constitute a valid contract the parties must so express themselves that their meaning can be determined with a reasonable degree of certainty. It is plain that unless this can be done it would be impossible to hold that the contracting parties had the same intentions; in other words the consensus ad idem would be a matter of mere conjecture (G Scammell and Nephew Ltd v HC and JG Ouston).
There are a number of facets to this principle.
- A contract containing language that is so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention will be unenforceable (G Scammell and Nephew v HC & JG Ouston). The uncertainty may relate to one of the pivotal terms of the agreement or may go to the very heart of the agreement.
- Even where uncertain or ambiguous language is not used, if the parties have not agreed on all of the essential terms of the agreement, the contract will be unenforceable.
- A contract will be unenforceable if it reserves a discretion for one party not to carry out his or her obligations (Thorby v Goldberg).
Ambiguity and Uncertainty
Individual Terms
There can be no contract unless what the parties agreed can be determined objectively with a reasonable degree of certainty. Whether the clause is said to be vague, ambiguous or uncertain the clause is void. Sometimes the court will label a term meaningless or illusory. A meaningless clause is one to which a meaning cannot be attributed and will be treated the same way as an uncertain clause. An illusory clause has an identifiable meaning but will be treated as uncertain as it promises an illusory term. The modern approach appears to emphasise the courts willingness to uphold an agreement entered into by the parties, particularly where the circumstance indicate that the parties intended to be bound by the agreement.
Agreements to Negotiate
Parties who are interested in pursuing some kind of joint venture, but are not yet at the stage of being able to commit to final, specific terms, may choose to enter an agreement to negotiate at a later state, also called a heads of agreement.
If parties do not reach final agreement on essential terms, instead agreeing to finalise such matters at a later time, the contract is an agreement to agree and is unenforceable. If an agreement to negotiate is regarded as an agreement to agree, it to will be unenforceable (Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd).
Saving Ambiguous, uncertain or meaningless contracts
Link to External Standard
A clause in a contract which, on its face, appears uncertain may be enforceable if a meaning can be given to it by reference to an external standard. The parties may provide for “a standard, machinery or formula designed by the parties to take the place of their own agreement” (Hawthorn Football Club v Harding).
The reference may be made in a direct way for example, incorporating standard hire purchase terms used by the particular hiring company. If such a set of standard hire purchase terms exists, the clause will be valid.
Recourse may also be made to external standards, even where the contract itself does not expressly provide such a link. In Hillas and Co Ltd v Arcos Ltd the contract gave the purchaser an option to buy more timber for delivery next year. The option was held to be valid despite it not stating the kind, size or quality of the timber to be supplied or dates or ports of shipment. Specifications agreed in the original contract could be regarded as an external standard.
Link to reasonableness standard
The court may be willing, in some circumstances, to adopt principles of reasonableness to make certain something that, on its face, is not. ‘The implication of what is just and reasonable to be ascertained by the court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail’ (Hillas and Co Ltd v Arcos Ltd).
In Hillas v Arcos the parties had clearly intended to be bound by the contract and consequently the court was prepared to give meaning to a clause which gave the purchasers an option to buy ‘100 000 standards for delivery during 1931’. The conclsion that this was a reference to a hundred thousand standards ‘of softwood goods of fair specification’ was reached by the court both by reference to an earlier clause in the contract and its preparedness to imply standards of reasonableness to otherwise uncertain clauses.
Severance
The invalidity of one term will not necessarily mean that the whole contract will be unenforceable. In some circumstances the invalid term can be severed and the remainder of the contract will be enforceable. Generally, if the parties would have intended to be bound in the absence of an uncertain clause, the clause can be severed and the remainder of the contract be enforceable (Fitzgerald v Masters).
A contrary decision will be reached where the offending clause forms a pivotal part of the contract, so that the parties could not have intended to be bound in its absence. In Whitlock v Brew the granting of the lease to shell was considered to be ‘definitive of the ultimate rights which its contemplated the purchaser is to get under his contract’. Therefore, severance was not possible.
Waiver or Removal of Uncertainty
If a clause is inserted in a contract for the benefit of one party only, but is drafted in such vague terms as to make it void, that party can choose to waive the benefit of the clause and have the remainder of the contract specifically enforced (Whitlock v Brew (1967)).
Incomplete agreement
Parties must reach final agreement on the essential aspects of the contract before they will be regarded as having entered a contract. It is not enough for them to leave a matter to be agreed upon at a later state ie an agreement to agree. However, if parties provide a mechanism for finalizing terms it will no longer be regarded as an agreement to agree and will be enforceable.
Agreement contains mechanism to complete
It may suit the needs of contracting parties not to finalise various aspects of their agreement, but rather to insert in a mechanism for determining one or more terms at a later date for example external standard or third party.
a)Reference to a third party
Parties to a contract may leave terms of the contract to be decided by a third party, even essential terms (Godecke v Kirwan).
b)Discretion retained by a contracting party
It is uncertain that a contract that leaves terms to be determined by one of the contracting parties is enforceable. A contract that leaves essential matter for later determination by one of the contracting parties will be unenforceable as it is either incomplete or uncertain or because the promises contained in the agreement are illusory (Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd). However, if a subsidiary matter was left to the determination of one of the parties such as how the contractual obligation are carried out by that party, it may be enforceable (Godecke v Kirwan).
Breakdown of Mechanism to Complete
The traditional view of contract formation is that the court will not rewrite the agreement for the parties where the parties themselves have failed to agree on all terms. If the parties have established a mechanism for determining a term and the mechanism fails, the court will not substitute its own view and complete the agreement (Milnes v Gery).
Saving Incomplete Agreements
Implication of Terms
The willingness of the courts to imply terms into agreements is, however, illustrated by the decision in Hillas v Arcos, which involved the enforceability of an option to sell timber which did not specify the quality or price of the timber nor the dates for delivery. The court held that it is not for the court to make the contract for the parites, or to go outside the words they have used, except insofar as there are appropriate implication of law, as for instance, the implication of what is just and reasonable to be ascertained by the court as matter of machinery where the contractual intention is clear but the contract is silent on some details.
However, the court may not rewrite the agreement for parties where the parties themselves have failed to agree on essential terms. The greater the number of terms not finally agreed upon by the parties, the less inclined the court will be to exercise its discretion to imply a term. In Hall v Busst, Fullagar J opined that the contract could only be regarded as concluded if the parties agreed on the three essential elements: the parties, the subject matter and the price and if these elements have been agreed upon with sufficient certainty the court will provide the rest.
In addition, there are two other factors which may be relevant in the courts determination. First, if it is clear that the parties have gone beyond the state of negotiation and intend to be contractually bound, the court will be more minded to imply a term and enforce the agreement (Hillas v Arcos). Secondly, and related to the first, if the contract has between partly executed, for example in a contract for the sale of goods, property has been delivered and title has passed, the court will seek to imply a term necessary for the validity of the agreement (Hall v Busst).
Failure to specify price
a)Contract silent on price
The general principle is that a contract will only be regarded as validly constituted if the parties to agree on price would mean that the contract is not complete, and would not be upheld by the court.
However, there are exceptions. There is a distinction between the sale of land and sale of goods with respect to the implication of terms by a court. For the sale of goods, the court is sometimes prepared to imply a term that the purchaser will pay a reasonable price for the goods. This intention is demonstrated for example, where the contract is partly executed and property in the goods has passed. A court will not imply a term for payment at a reasonable price into a contract for the sale of land (Hall v Busst (1960)).
b)Contract provides for parties to agree in future
An agreement to agree in the future also offends against the general principle of completeness. However, in some instances, in contracts for the sale of goods the court may imply a reasonable price and the contract will be upheld (Foley v Classique Coaches Ltd). However, if the contract is to sell land, or on rental in an option to renew a lease, it is unlikely to be upheld (Stocks &Holdings Pty Ltd v Arrowsmith) and will be treated as such matters which are silent on price.
c)Contract makes provision for mechanism to complete
A contract that contains a mechanism for setting a term at a later time is likely to be valid. It is not uncommon for such a mechanism to be used in relation to setting a price.
d)Contract provides for payment of a reasonable price
Again, whether the agreement is upheld as being sufficiently certain may turn on the nature of the subject matter in dispute. A contract for the sale of goods at a reasonable price is likely to be valid. Reasonable price is an objective standard that can be determined without further agreement between the parties. If one party breaches the agreement, the court can assess the price to be attributed to the goods, and damages can be awarded accordingly. However, clause to attribute to reasonable price to the sale of land will be generally be uncertain or for the sale of goods if they are unique or of very special character eg original painiting (Hall v Busst).
Subject to agreements
Sometimes parties may be ready to sign a contract but not able or not prepared to commit to one or more aspects of the agreement. In these circumstances pares may decide to enter into agreements subject to the happening of a particular event.
Subject to finance agreements
Contracts for sale may contain a clause stating that the contract is subject to the purchaser receiving approval for finance on satisfactory terms and conditions. The contract is immediately binding on the parties but will come to an end of the purchaser is unable to obtain finance and terminates the contract pursuant to its terms.
a)Satisfactory Finance
It has been argued that a clause which provided for finance to be obtained on ‘satisfactory terms’, is either to uncertain to be valid or gave the purchaser such a wide discretion that it was illusory. The High Court disagreed, and stated that as the clause was inserted for the benefit of the purchaser, the determination of whether the finance was satisfactory was left to he purchaser (Meehan v Jones).
b)Steps to be taken to obtain finance
The finance clause in most standard land contracts impose an obligation on the purchaser to take all steps reasonably necessary to obtain finance approval.
Subject to Contract
For agreements that are formed subject to contract, the case could fall into one of three categories:
- The parties have reached finality in arranging all terms and intend to be immediately bound to perform those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. The parties intend to be bound immediately thus a binding contract is formed.
- The parties have completely agreed upon all terms and intend no departure from or addition to those terms, but have made performance of one or more of those terms conditional upon the execution of a formal document. An offer is such a case is not expressed to be subject to or conditional upon a formal execution of a contract and all essential terms have been agreed upon thus a binding contract is formed.
- The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. Parties in such a case do not intend to be bound until they entered into a formal document thus no binding contract is formed.
The category a particular case falls into turns on the intention of the parties. If the parties intend the agreement to be binding on them even before entry into the final contract, the contract will fall into one of the first two categories.
The case law provides illustration of the three categories described by the High Court in Masters v Cameron.
a) First Category Branca v Corbarro
The parties agreed to the sale of a mushroom farm, the buyer paying a deposit to the seller. The agreement contained a clause stating that the agreement was a provisional agreement until a fully legalized agreement, drawn up by a solicitor and embodying all the condition herewith stated is signed.
The court held that the parties intended to be bound immediately. Relevant to this determination was the use of the words provianl and until. Also relevant was the payment by the purchaser to be made by a date before the formal agreement was to be executed.
b) Second Category Niesmann v Collingridge
The parties agreed on the sale of land, the seller signing a written document which provided for certain portion of the price to be payable on the signing of the contract. The document also contained a statement that value received for option sixpence and that amount was paid by the purchaser to the seller.
The court held that the parties had entered into a binding agreement. The offer was not expressed to be subject to or condition upon the execution of a formal contract. The execution of the contract was simply relevant for the fixing of a date of payment for the purchase money. All of the essential terms had been agreed upon.
c) Third category Masters v Cameron
The parties agreed to the sale of a farm. The agreement was stated to e ‘subject to the preparation of a formal contract of sale which shall be acceptable to the vendors solicitors on the above terms and conditions. The purchaser agreed to the purchase in these terms, paid a deposit to the vendor’s agent and, among other things, made some minor structural alteration to the property. The purchaser subsequently claimed that a binding contract had not been entered into.
The court agreed and held that a binding agreement had not been entered into. The parties had not intended to be bound until they entered into a formal document. The payment of deposit to the seller was made on the basis that if a formal contract should be executed, the amount should be treated as a deposit and, if such an agreement were no entered into, should be returned to the purchaser.