Commercial Court finds binding contract formed even though not all terms agreed

The Commercial Court recently decided that a contract was formed for the supply of crude oil blend even though some of the core terms were subject to further negotiation: Proton Energy Group SA v Orlen Lietuva [2013] EWHC 2872 (Comm). The decision acts as a reminder that a contract may become binding even though there are still terms to be agreed. Gregg Rowan and Rory Wilson consider the case below.  

Gregg Rowan
Senior Associate
+44 20 7466 2498
rory.wilson@hsf.com_HGS Rory Wilson
Trainee solicitor
+44 20 7466 2047
 

Background

The claimant sent an email to the defendant making a "firm offer" to sell 25,000 tonnes of a crude oil blend, of which the specifications had been provided.  It said that the oil was of European origin, set out several key terms including "UK law; London courts" and added that all other terms and conditions were as per the claimant's standard CIF contract.  In a further exchange of emails, the claimant stated that "all other contractual terms not indicated…shall be discussed and mutually agreed…upon contract negotiations."  The defendant sent a reply email stating "confirmed".

The claimant then sent various drafts of the detailed contract terms to the defendant. Each draft began: "We are pleased to confirm our sale of old blend concluded on 14th June on the below terms and condition of contract". However, the dialogue between the parties broke down and the defendant sent the claimant a letter terminating negotiations. 

The claimant alleged that this was a repudiatory breach, which it accepted.  The defendant denied that a contract had been formed.  It also alleged that, if there was a contract, there was an implied condition precedent that the defendant would only be bound if satisfied by a certain date as to the origin of the oil (and that it was sold not in breach of sanctions against Iran), and this was not fulfilled. Further, the defendant alleged that it would have been entitled to reject the cargo under section 13 of the Sale of Goods Act 1979 as the product was materially different from the description provided in the specifications.

Decision

The court (His Honour Judge Mackie QC) held that a contract had been formed which the defendant had repudiated. 

The principles were common ground following the decision of the Supreme Court in RTS Flexible Systems Ltd. v Molkerei Alois Müller GmbH & Co [2010] 1 WLR 753. Whether a contract has been formed must be determined through objective inquiry, not by examining the subjective state of mind of the parties. Parties may intend that a contract shall be binding immediately even though there are further terms still to be agreed.   

In this case, a contract came into existence when the defendant sent the email stating "confirmed".  It was a classic spot deal; the speed of the market necessitated that the parties agree the main terms and leave others to be negotiated later.  Both parties used language of commitment and subsequently conducted themselves as if a contract had been agreed. 

The judge also refused to imply a condition precedent as alleged by the defendant. A contract term can only be implied if it is necessary, not simply because it would be reasonable or useful.  There was nothing in the correspondence, particularly prior to the formation of the contract, to justify the implication of such a condition precedent.

Further, this was not a sale by description under section 13.  Whilst concepts of description and quality sometimes overlap, in order to amount to a description, the specifications must relate to the identity of the oil. Here this was not the case; the identity of the oil was stated as "Oil Blend … NC 2710; the specifications related only to quality.  This meant that, unlike with sales by description, they were not conditions of the contract and non-compliance did not give rise to an automatic right of rejection.

Comment

This decision is a reminder that the courts may find that a contract has been formed even where some terms remain to be agreed, which is typically the case with spot market transactions.  Parties to negotiations must be wary of what they say, including in email correspondence, lest their words be construed as evincing contractual intention.  Where there is no such intention, it is advisable to use the words "Subject to Contract" to emphasise this (although even these words will not always be decisive). Another recent decision had demonstrated this point in the context of settlement negotiations (see post).

The case also illustrates the importance of incorporating essential terms, such as conditions precedent, in writing rather than seeking to argue that they should be implied.  A term will only be implied where necessary, which is a high threshold.  Similarly, if contracting parties wish to make compliance with specifications a condition of the deal, they should do so expressly; the courts may be slow to find there has been a sale by description.

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