Certainty in Contract Formation
The Role of Certainty in Contract Formation
For a contract to be formed, the following requirements of certainty must be met:
- The intention to contract must be expressed in sufficiently precise terms that a clear meaning can be given to it: Gould v Gould  1 QB 275;
- The parties must have clearly agreed on the main, essential and important contract terms: Willis Management (Isle of Man) Ltd & Anor v Cable and Wireless plc  EWCA Civ 806. Examples include the price and subject matter of the contract: May & Butcher  2 KB 17.
If these conditions are met, it does not matter that the parties have yet to agree on less important terms. However, an ‘agreement to agree’ is too uncertain and unenforceable: Walford v Miles  2 AC 128.
If important terms are not explicitly stated, the court should consider whether the factual matrix allows any gaps to be resolved.
- If there has been a consistent past course of dealing or trade custom, the courts may be able to imply the missing terms: WN Hillas v Arcos (1932) 147 LT 503;
- If a clause states that the parties will agree on the term later, this is normally too uncertain.
If an important term is ambiguous, the courts will seek to interpret it by reference to the factual matrix to see if the parties’ intentions can be determined. The normal rules for interpreting express terms apply.
- If the parties use a vague term (such as ‘reasonable’ or ‘proportionate’) but state objective criteria by which the meaning of that term can be determined, the agreement may be sufficiently certain: Baird Textile Holdings Ltd v Marks & Spencer plc  EWCA Civ 274.
- A term which allows key matters to be determined by a specific third-party (or which provides an objective mechanism for choosing such a third-party) is normally sufficiently certain: Sudbrook Trading Estate v Eggleton  1 AC 444.
- If a completely ambiguous clause is not important to the overall contract and all the other terms are clear, it can be severed, saving the rest of the agreement: Nicolene v Simmonds  1 QB 543.
Agreement ‘Subject to Contract’
Problems arise if an agreement is reached on all important terms, but the agreement is stated to be ‘subject to contract’. By this, parties normally mean that the agreement should be in signed writing first.
Normally in these situations, there is no contract. This is because the inclusion of these words shows that the parties do not intend to create legal relations. However, if the parties have begun performing as if they have an agreement, there may be sufficient legal intention. In such a case, what are the terms of the agreement?
If the parties’ behaviour indicates objectively that they both intend to waive the ‘subject to contract’ stipulation, then the terms of the contract are those agreed in the written document: Bieber v Teathers Ltd (In Liquidation)  EWHC 4205 (Ch).
If not, the court will examine the parties’ conduct and all the circumstances to determine what terms have been agreed: RTS Flexible Systems Ltd v Molkerei Alois Müller  UKSC 14. The written terms will not necessarily be the terms applicable to the case.