Wednesday, May 29, 2013

Agreements to Agree

As we have noted on this blog, the common law generally imposes no duty on a contracting party to negotiate in good faith. This is so even when parties ‘agree’ to agree, that is, purport to conclude a contract leaving certain (sometimes essential) terms to be agreed in the future. The House of Lords held in the well-known case of Walford v Miles [1992] AC 128 that such an agreement imposes no obligation on either party to attempt to reach agreement on the terms left open. But this is not the end of the story: in many cases, the courts have been willing to imply a term in order to make the contract effective, for example, by concluding that ‘price to be agreed’ means ‘reasonable price to be determined by the arbitrator’. The entire law on this subject was reviewed by the Court of Appeal in two leading cases, Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery and BJ Aviation Ltd v Pool Aviation. There is a valuable summary, in the form of ten (non-exhaustive) principles, of the effect of the numerous authorities at paragraph 69 of Rix LJ’s judgment in the former case. Principle (vii) is that the court will more readily imply a term to make the contract effective “where where one party has either already had the advantage of some performance…

This issue arose recently in the Court of Appeal in MRI Trading AG v Erdenet Mining Corporation LLC, a case that neatly illustrates principle (vii) and, more generally, one factor that persuades the court to imply a term to make a contract effective: part performance of a contract and the existence of a network of agreements of which the supposed contract is part. MRI Trading agreed to sell, and EMC agreed to buy, a certain quantity of copper concentrate in 2005. Disputes arose between then parties and arbitration was commenced at the London Metal Exchange [“LME”]. The parties then drew up a Settlement Agreement dated 30.01.2009 which provided that the arbitration would be discontinued; that MRI would give up all its claims under the previous contract. On its part, EMC agreed that it “shall sell MRI Trading 40,000 WMT of EMC Copper Concentrates in each of 2009 and 2010, all pursuant to new, separate contracts between EMC and MRI Trading…” The present dispute arose out of EMC’s purported obligation to sell copper concentrate in 2010. As envisaged by the Settlement Agreement, a new contract was agreed, which provided that “MRI agrees to buy…and EMC agrees to sell...40,000 WMT of concentrate plus or minus 10 % at EMC’s option”. The crucial clauses of this contract, and the basis of EMC’s contention that there was no contract at all, were 6.1, 9.1 and 9.2. These provided, in summary, that shipping schedule (6.1), Treatment Charge [“TC”] and Refining Charge [“RC”] “shall be agreed during the negotiation of terms for 2010”.

The arbitral tribunal found that the shipping schedule, TC and RC were essential terms of the contract to buy copper concentrate; that since these terms were not agreed, there was no obligation on EMC to sell. Crucially, the Tribunal held that the contract should be construed without reference to the Settlement Agreement, overlooking, as Tomlinson LJ points out at [14], that the Entire Agreement Clause in the contract expressly excluded the Settlement Agreement. Once it came to this conclusion, it could not be said that EMC had received any benefit for the purpose of Rix LJ’s seventh principle: the fact that MRI had abandoned its claims by virtue of the Settlement Agreement was irrelevant because the Settlement Agreement could not be taken into account in construing the Sale Agreement.

The general reluctance of the English courts to interfere with the reasoning of an arbitral Tribunal, particularly when no question of jurisdiction arises, is well-known. Tomlinson LJ notes that two very experienced judges of the Commercial Court (Christopher Clarke J., granting leave to appeal, and Eder J., who decided the appeal) were nevertheless driven to conclude that this award was “obviously wrong” and one that no reasonable Tribunal correctly applying the law on the point could have made. In the appeal, MRI’s principal contention was that the court could not revisit the Tribunal’s conclusion that shipping schedule, TC and RC are essential terms: that is a matter for the Tribunal alone. Tomlinson LJ rejected this submission, essentially because the Tribunal had failed to take the Settlement Agreement into account, and also because the parties had supplied a mechanism to resolve this dispute, should agreement not be forthcoming: arbitration. The Tribunal’s conclusion was also inconsistent with the peremptory language of other portions of the agreement, particularly the Recitals, which placed a positive obligation on the parties to buy and sell, respectively. The Court was therefore willing to imply a term. As Tomlinson LJ explains at [19]:

In my judgment the language used by the parties in both the Settlement Agreement and the 2010 contract shows beyond any doubt that they did not intend that, in the language of Chadwick LJ in the B J Aviation case, they should remain free to agree or to disagree about the TC/RC and the shipping schedule as their own perceived interests should dictate with the result that, should they not reach an agreement, there would be no obligation in respect of 2010 at all.  I have no doubt that, just as in Foley v Classique Coaches and Wessex v Fine Fare [1967] 1 Lloyd’s Rep 53, another decision of this court, a term is to be implied that the TC/RC and shipping schedule shall be reasonable, and in the event of any dispute as to the appropriate charges and schedule the dispute is to be determined by arbitration.

1 comment:

vswami said...

Sporadic Reaction (jottings):
This instantly brings to one's mind a (contract) agreement, dubbed so but incomplete, in many respects. Such type can be said to be very commonly-come-across these days. Reference is those virtually one-sided agreements. In that, the terms and conditions, as drafted and incorporated, are heavily leaning to the side of the principal party being the, first named. For a glaring but often noted instance in real life, focus may be made to an “agreement to sell" executed by by a promoter in respect of sale of an 'apartment' (i.e. unit of a building – seen mushrooming in every place - village or town or city). No doubt, there are certain crucial clauses of stipulation e.g. known as ”‘Indemnity Clause” which are necessarily required to be included. For, without those clauses, any agreement of the referred type, even on the first blush, might have to be compulsively inferred to have been deliberately drafted , in a shamefully crafty manner, only with a view to defeating the purposes/interests of the second party. The most painfully irritating part of it all is the fact that , if and when confronted, the first named party invariably tries and seeks shelter by saying that the document has been drafted by his project consultant and /or law adviser, rolled into one,

Indisputably, no fist named principal party, much less his professional law adviser, if qualified or duly equipped, can rightfully and lawfully claim, or defend self by making an averment to the effect that, any such agreement has to be considered as a ‘contract agreement’, within the framework of the law, That is, as one truly effective and purposeful, in law; More so, if due regard be had to, and is kept in full view, the governing law (INCLUDING ALL RELATED STATUTORYRULES AND REGULATIONS as are in force); such as the special enactment governing apartments, in force , in most of the states, If were to be accepted, is, for obvious reasons, bound to have the disastrous result of defeating the rights and interests vested by law in the other party ,being the second named; in the referred case, purchaser of the apartment.

(Anyone truly interested, having direct concern or otherwise, may care to go through the related Blogs on the topic of 'realty sector'/'apartment law'- @swamilook

(May be contd.)