Certainty

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This article is a topic within the subject Principles of Private Law.

Contents

Required Reading

Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009), pp. 105-115 (chapter 6).

Introduction

[1]An offer will only be effective if it spells out the terms of the contracts with sufficient certainty. This doesn’t mean that every detail needs to be identified so clearly that there is only one possible interpretation. The contract simply needs to be sufficiently certain – certain to a degree.

When interpreting contracts, the courts attempt to give effect to the clauses rather than interpret them in such a way that will declare them void.

Difficulties with certainty resolutions:

  • Resolution requires consideration of circumstances and nature of the agreement, and deals with abstract principals.
  • Judicial opinion as to the extent of certainty required differ.

Judges are reluctant to write contracts (or fill in gaps). However, they are more inclined to do so today than in the past.

Things to consider:

  • Intention of the parties
  • Subject matter
  • Relation of the parties
  • Social and economic contexts

3 aspects to certainty:

  1. “The contract must be sufficiently complete…the parties must at least reach agreement on all terms that they intended to fix by agreement, rather than have someone else set for them, and also on all matters the court cannot simply resolve by implication.[2]
  2. “The agreed terms must be sufficiently certain and clear that the parties can understand their rights and obligations and the courts can enforce them.[3]
  3. Promises must not be illusory – a promise is illusory if it is “an unfettered discretion as to performance of a promise.[4]
  • This means that if a party has a choice whether or not to perform a promise.

Questions of incompleteness, uncertainty and illusory depend on whether they are integral to the contract.

  • If the problematic part can be severed, remaining part will remain binding
  • If the problematic part confers a benefit to one party, that party can waive it and enforce the rest.

Completeness

[5]No contract is made unless all the essential terms have been agreed upon[6]. Factors that must be taken into account are:

  1. How important is the term?
  2. Why has the term been left out?
  3. Is the agreement still wholly executory, or has it been partly performed already?

Essential Terms

[7]An essential term, for the purpose of this area of contract law, is “a term without which the contract cannot be enforced[8]” and without which the parties would not have not intended to enter the contract.

  • This doesn’t consider ‘importance’
  • Depends on the nature of the contract, circumstances of the case
    • For example, commencement date and rental price are essential to lease agreements
    • In transfer of land agreements, subject matter and price are essential, and most other details can be filled in by the courts.
    • In transfer of goods, price isn’t essential because reasonable price may be imposed by Sales of Goods Acts.[9]
  • In Trollope & Colls Ltd v Atomic Power Constructions Ltd[10], Megaw J said the parties must agree upon terms which are essential “in order to make the contract commercially workable[11]”.
  • Australia and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd.

The more complex the case is, the less likely the courts will fill in implied gaps.[12]

Agreements to Agree

[13]Usually, it makes no difference whether the agreement is silent on an essential term, or provides that the essential term will be agreed upon in the future. In both cases the agreement is incomplete.

The second type is an Agreement to Agree, which is important in a case where a court might otherwise have implied a term. The court will only imply a term (namely, the obligation to pay a reasonable price) in cases of a contract is silent in relation to an agreed term. This rule will not apply to an agreement to agree.

  • May and Butcher Ltd v The King[14], the court established that when parties have agreed to defer price negotiations, this indicates that they want to set the price themselves, and the court imposing a reasonable price would be inconsistent with their intentions.

Executed Contracts

[15]The courts are less inclined to deem a contract incomplete if it has been wholly or partly performed.

  • This is because once performance begins, a ruling that the contract was not binding will have more serious consequences.
  • “The further the parties have gone on with the contract…the courts will do their best not to destroy the bargain.[16]
  • Foley v Classique Coaches Ltd[17].

Machinery for settling a term

[18]Agreements to agree will also be valid if the parties provide an effective mechanism for determining the term if they fail to reach an agreement. The court recognises mechanism for the expediency of commerce.

  • i.e. providing an option for renewal at a price to be agreed, or to be determined by a valuer or arbitrator.
  • However, if this mechanism fails, the agreement will be void – George v Roach[19]:
    • Valuer refused to carry out the task
    • Court held that the courts determining the price would be inconsistent with the intention of the parties
    • Agreement void

Formula for settling a term

[20]Parties can also set a formula for settling terms which the court may use in the case of a dispute.

  • Usually very precise, i.e. mathematical formula for increase in rent
  • Can also be a standard, i.e. “a reasonable price”.

Certainty

[21]A term may be too vague' or imprecise so that the courts cannot attribute a meaning to it. The courts cannot enforce an agreement if they are unable to discern the obligation with sufficient certainty. Once again, the courts are less inclined to deem a contract incomplete if it has been wholly or partly performed[22]

Reasonableness

[23]Standard of reasonableness can sometimes be applied in cases where there is no completeness or certainty. However, the standard of reasonableness cannot extend to all circumstances.

Agreements to Negotiate

[25]In England, agreements to negotiate or agreements to negotiate in good faith cannot be binding – they lack the certainty which is required to form an enforceable obligation.

  • Walford v Miles[26]

The refusal to recognize an agreement in good faith has been criticised, as the law should respect those intentions.

  • This is distinguished from agreements to agree – merely to make an effort to reach an agreement rather than actually reach one.

In Australia, Walford v Miles has been rejected. A promise to negotiate (or mediate) in good faith could be enforceable (in cases of mediation, a cost provision must be specified).

This is reiterated in Coal Cliff Pty Ltd v Sijehama Pty Ltd[27], and in Aiton Australia Pty Ltd v Transfield[28].


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Illusory Promises

[29] “A promise will be illusory if the Promisor has an unfettered discretion in relation to performance[30]”.

  • The Promisor has a free choice how much (if it all) to perform.
  • Placer Development Ltd v Commonwealth - Commonwealth had complete discretion as to how much subsidy it pays Placer
  • Therefore, the Commonwealth has no obligation (can just determine it to be 0) and the promise is illusory.

A promise which contains an exemption clause which “effectively deprives the promise of any force[31]” is also illusory.

Effect of illusory promises on a contract

[32]

  • Illusory promises do not constitute good consideration.
    • If only illusory promises were made in return for another promise, the contract will collapse for want of consideration
  • Contracts containing illusory promises are considered incomplete.
    • If an essential term has been left to be determined at the discretion of one party, the whole contract will be considered as illusory.

Exemptions

[33]Contracts will not be considered illusory if:

  • Important matters are to be determined by a third party
    • Godecke v Kirwan – accepted that a contract can leave even essential terms to be determined by a third party.
  • Matters to be determined by one of the parties are subsidiary.
  • “The discretion relates to the fulfilment of a condition on which performance of the contract depends[34]
  • “The discretion is to be exercised according to objective criteria.[35]
    • Meehan v Jones – fulfils the last two criteria.
    • “A contract is illusory when one of the parties is given discretion as to whether to perform the contract, but not where one of the parties has a discretion in relation to the fulfilment of a condition on which the contract depends.[36]”.

Severance

[37]If the court can infer an intention that the agreement should be valid in the absence of the an uncertain, incomplete, or illusory provision, than that provision can be severed and the remaining agreement will still be enforceable.

  • Fitzgerald v Masters - problematic clause was merely an appendage. Parties clearly intended for the agreement to remain intact if the problematic cause should fail.
  • Whitlock v Brew - an example of how the problematic clause could not be severed –“the parties had no intention of agreeing upon a sale which would entitle the purchaser to a vacant possession without having to grant any lease to the Shell Co.[38]

Waiver

[39] Uncertain, incomplete, or illusory provisions may be waived by the party for whose benefit the provision was included.

  • Grime v Bartholomew[40] – parties cannot waive uncertain essential terms, because the uncertainty means that the parties didn’t reach an agreement.
  • Bradford v Zahra[41] – Purchaser waived an uncertain ‘subject to finance clause’.
  • Machinery clauses may also be waived, “provided it is entirely for the benefit of one party and is not essential to the operation of the agreement.[42]

References

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009)

  1. Textbook, pp. 105-6 [6.05]
  2. Textbook, p. 106 [6.05]
  3. Textbook, p. 106 [6.05]
  4. Textbook, p. 106 [6.05]
  5. Textbook, p. 106 [6.10]
  6. Thorby v Goldberg (1964) 112 CLR 597, 607
  7. Textbook, pp. 106-8 [6.15]
  8. Thomson v White [2006] NSWCA 350, [100]
  9. Hall v Busst (1960) 104 CLR 206
  10. [1962] 3 AII ER 1035
  11. [1962] 3 AII ER 1035, 1038
  12. Milne v Attorney General (Tas) (1956) 95 CLR 460, 473
  13. Textbook, p. 108 [6.20]
  14. [1934] 2 KB 17
  15. Textbook, p. 109 [6.25]
  16. F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53,57
  17. [1934] 2 KB 17
  18. Textbook, p. 109 [6.30]
  19. (1942) 67 CLR 253
  20. Textbook, pp. 109-10 [6.35]
  21. Textbook, p. 110 [6.40]
  22. York Air Conditioning and Refrigeration (Australasia) Pty Ltd v Commonwealth (1949) 80 CLR 11, 53
  23. Textbook, p. 110 [6.45]
  24. (1960) 104 CLR 206
  25. Textbook, p. 111 [6.50]
  26. [1992] 2 AC 128
  27. (1991) 24 NSWLR 1
  28. (1999) 153 FLR 236
  29. Textbook, pp. 112-3 [6.55]
  30. Textbook, p. 112 [6.55]
  31. Textbook, p. 112 [6.55]
  32. Textbook, p. 113 [6.55]
  33. Textbook, pp. 113-4 [6.60]
  34. Textbook, p. 113 [6.60]
  35. Textbook, p. 113 [6.60]
  36. Textbook, p. 114 [6.60]
  37. Textbook, p. 114 [6.65]
  38. (1968) 118 CLR 445,457
  39. Textbook, pp. 114-5 [6.70]
  40. [1972] 2 NSWLR 827
  41. [1977] Qd R 24
  42. Textbook, p. 115 [6.70]
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