The High Court in England recently determined that a contract for the sale of goods was only partly enforceable, because while there was a contract in effect, pricing for some of the goods was left to be agreed between the parties at a later date. The decision in KSY Juice Blends UK Ltd v Citrosuco GMBH [2024] EWHC 2098 (Comm) is under appeal, with a hearing scheduled for July 2025. Irrespective of the final outcome, it serves as a reminder of the importance of agreeing, or providing an objective mechanism to determine, the price or any other material aspect of a contract at the time of contracting. This will help to avoid the risk of a bargain being held to be an unenforceable ‘agreement to agree’, even where the parties clearly intended to be bound.
A contract for orange solids
KSY Juice Blends UK Limited (KSY) contracted to deliver 1,200 metric tonnes (MT) of orange pulp wash or “wesos” (water extracted soluble orange solids) to Citrosuco for each of the years 2019, 2020 and 2021. The price of the first 400 MT per year was agreed to be EUR1,350/MT, invoiced at EUR1,600/MT with additional wesos, referred to as “free trucks”, being provided to reduce the effective price to EUR1350/MT. The price of the remaining 800 MT per year was also agreed to be invoiced at EUR1,600/MT, but the quantity of “free trucks” to be provided was left to be agreed by the parties by December of the year preceding the delivery year – the contract recording an “open price to be fixed”.
KSY delivered the first batch of 400 MT of wesos in 2019, which Citrosuco accepted and paid for in accordance with the contract. However, Citrosuco declined to take delivery of a further 800 MT of wesos through a failure to give delivery instructions. In 2020, KSY delivered a further 126 MT, for which Citrosuco accepted it was liable to pay. KSY terminated the contract in September 2020 alleging that Citrosuco was in repudiatory breach.
Decision: contract partly unenforceable as an agreement to agree
The High Court held that because the price of the remaining 800 MT of wesos had not been specified in the contract, there was no enforceable agreement as to its sale. In reaching this conclusion, Mr Justice Pearce rejected KSY’s argument that EUR1,600 was a fallback price in the event no price could be agreed for the 800 MT of wesos. This would be inconsistent with the pricing scheme for the first 400 MT, where the final price was less than the invoiced price because of the “free” wesos, indicating that the invoiced price was not intended to be the final price. This would also provide no commercial incentive for KSY to negotiate a lower price as it would insist on a very favourable invoiced price.
The Judge relied on Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2001] 2 Lloyd’s Rep 76 which set out key principles regarding agreements to agree. Essentially, where essential terms are “to be agreed”, a contract does not come into existence, because it is too uncertain. However, where parties intended to be bound, courts will attempt to preserve, rather than destroy, bargains. Because of this, where for instance there is an objective benchmark or some contractual machinery to determine a price, such as an express reference to a reasonable measure or a reasonable price, a court will use this objective criterion to fix a price. Even in the absence of express language, e.g. where the contract is silent as to pricing, courts may be prepared to imply an obligation in terms of what is reasonable. In this case, however:
- There was no express reference to a reasonable price. Even if there had been, the Court considered that there was too much uncertainty about what a reasonable price in the circumstances would be, for the Court to substitute its judgment for that of the parties.
- Similarly, there was no reference to agreeing to use ‘reasonable endeavours’ to agree a price. However, this would also have been too uncertain a term to be enforced – the parties were at liberty in their negotiations to disagree about what the “open price” was. It is not clear how a court is to judge whether the parties have used their reasonable endeavours to agree a price if there is no definition of the basis on which the price is to be determined.
- The Court also considered that there was no scope for a pricing term to be implied, because the contract was not silent as to pricing – it expressly stated that the price of the 800 MT of wesos was to be agreed by the parties.
Interestingly, the Judge observed that a court will be less troubled by a finding that no price was agreed where this would undermine only part, rather than the whole, of the parties’ bargain. Accordingly, his Honour took solace in the fact that there was agreement as to the price of the initial 400 MT of wesos per year and this part of the contract was binding on the parties.
New Zealand approach
The decision is broadly consistent with the New Zealand approach to agreements to agree. The leading case continues to be Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433. The Court of Appeal in that case held that it was a prerequisite to contract formation that the parties agree - expressly or by implication - or agree a means of agreeing all essential terms. An “essential term” was defined as a term which was legally essential to the contract’s formation or was regarded by the parties as essential to their bargain. The Court recognised the potential for gaps to be filled by implication, but only if there is a “skeleton of express terms combined with an intention to contract”.
It is worth noting that New Zealand courts will also enforce a reasonable endeavours clause in appropriate circumstances. For instance, in Focus Construction Interiors v Spaceworks Design Group Ltd [2019] NZHC 2211, the High Court held that, while a reasonable endeavours obligation is not an absolute or unconditional obligation and does not require a party to sacrifice its commercial interests, it is an enforceable obligation. This is consistent with the Court of Appeal’s decision in Fletcher Challenge that “[w]here the objective and the steps needing to be taken to attain it are able to be prescribed by the Court, a best endeavours or reasonable endeavours obligation will be enforceable”. It is more likely that a reasonable or best endeavours clause (noting that these are different standards) will be upheld in respect of contract negotiations “of relative simplicity and predictability” than those which are more complex and therefore more difficult for a Judge to determine. Similarly, pricing provisions will not fail for uncertainty where there is an enforceable mechanism by reference to an objective standard (e.g. market price) or independent determination (e.g. referral to an expert).
Where part of a contract is unenforceable, whether the rest of the agreement will be upheld depends on whether the unenforceable term of the contract was essential or not. If it was not essential, it may be severed from the rest of the contract [1]. However, if the term was regarded as essential by the parties, the term may not be severed and the whole bargain is at an end [2].
Key takeaways
The decision is a useful refresher on the importance of precise drafting and carefully considering possible outcomes at the time of contracting. It is also a reminder that where parties have not reached agreement, even when they wished to be bound, the Court will be slow to impose an agreement upon them unless there is some contractual touchpoint from which to do so. While there may be a preference to defer setting a price, whether to allow for market fluctuations or because there has not been agreement, parties may inadvertently ‘buy a dispute’ or worse - render a contract partly or wholly unenforceable - where the method for arriving at a price is unclear or non-existent. Such provisions should provide, at a minimum, a fall-back position, and objective mechanism or a reference by which the price can be determined. Without this, a party seeking to enforce a contract may find that an agreement to agree is a “thing writ in water and of no value to anybody” [3].
This article was co-authored by Charlotte Wong, a Solicitor in our Litigation and Dispute Resolution team.
Footnotes
- Examples include Walsh v Matamau Co-operative Dairy Co Ltd [1918] NZLR 850 and Williams v Wairarapa Automobile Association Mutual Insurance Co [1943] NZLR 322.
- An example is Van Der Hulst v Tainui Corp Ltd [1998] 2 NZLR 359 at 363. In this case, there was a lack of agreement as to the appropriate deposit amount. The amount was held to be an essential term of the contract such that it could not be severed.
- Asquith LJ in Howard v Pickford Tool Co Ltd [1951] 1 KB 417 (CA) at 421.
Key contacts
Speak with one of our experts.
