COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
(Mr Justice Thomas)
Strand, London, WC2A 2LL
Thursday 22nd March 2001
B e f o r e :
LORD JUSTICE RIX
SIR RONALD WATERHOUSE
| Mamidoil-Jetoil Greek Petroleum Company SA
- and -
|Respondent to Cross-Appeal
Okta Crude Oil Refinery AD
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Michael Briggs QC and Daniel Lightman (instructed by Messrs Bird & Bird for the Respondent/Cross-Appellant)
Crown Copyright ©
LORD JUSTICE RIX:
The 1993 contract
"Today 5.03.1993 in Athens between Skopje Refinery…referred to as "Refinery" and Mamidoil-Jetoil…referred to as Jetoil, have agreed the following:
1. The Refinery wants and Jetoil accepts to manipulate via its Salonica Installations the quantities of not heated crude oil that the Refinery will buy and process for its own account in Skopje Refinery.
2. Manipulation under this agreement means receiving the Crude Oil from the vessel, storing in tanks and loading on Rail wagons supplied by the Refinery with destination Skopje Refinery.
3. The manipulation fee is fixed to U.S. $4.00 per MT for the period 1.11.1992 until 31.12.1994. If, however, in a particular calendar year i.e. 1993 or 1994 the min quantity of 500,000 MT stipulated in the "Three Parties" contract is covered, then for any quantity over the 500,000 MT manipulated through this agreement a discount of USD 0.50 per MT will be granted.
Jetoil will invoice Refinery on the basis of Customs Protocol Quantity…
5. Both parties agree to elaborate all technical and other details and include them in an Annex which will constitute an integral part of this agreement…
6. Jetoil wishes and Refinery agrees to give to Jetoil first refusal for the purchases of the Crude Oil that the Refinery will make for its own account ...
7. This agreement is valid for 10 years starting from the date of the Signature."
"1. The ten years initial contract term can be amended by mutual agreement for another ten years or for an indefinite period…
5. Any dispute arising under or in connection with this agreement and which cannot be amicably solved shall be referred to arbitration in London, English law will apply."
The two issues
"I accept that evidence as it is consistent with the invoices and also with other evidence to the effect that Jugopetrol and then Makpetrol were the state enterprises who made the importation."
Addendum no 5 to the 1979 contracts
Amendments to the 1993 contract
"If, however, during a particular year, i.e. 1993, 1994 or 1995 the min quantity of 500,000 MT stipulated in the "Three Parties" contract is covered, then…"
The reference to the 1979 contract made sense for 1993 and 1994, even if not for 1995. Fortunately, the court does not have to decide whether a minimum of 500,000 tonnes was guaranteed for 1995 under some ghost extension of the 1979 contract. Certainly, come the December 1995 addendum to the 1993 contract, all reference to a minimum of 500,000 tonnes or to the 1979 contract had disappeared, then and thereafter..
Further amendments to the 1979 GM contract
Minimum quantities, the requirements of Macedonia and the capacity of the Refinery
The significance of the 1993 contract in its context
The operation of the 1993 agreements
"I accept the greater part of Mr Kiriakos Mamadakis' evidence [on behalf of Jetoil]. I accept his evidence that it was generally intended that the oil to be imported by Makpetrol would be imported by G. Mamadakis and that the oil to be imported by Refinery Skopje would be imported by Jetoil; it seems clear that no oil was in fact manipulated under the 1979 Jetoil agreement or the 1993 addendum except in the circumstances to which I have referred. He gave his evidence impressively and did his best honestly to assist the Court. Moreover his evidence was supported by the documents made available after the hearing; he was the only witness who gave oral evidence as Okta did not call any oral evidence to contradict his evidence. However there is one part of his evidence I cannot accept. I do not accept that the addendum to the 1979 [contract] was only intended to regularize matters up to the time of execution; this is wholly inconsistent with the annual minimum quantity specified in the addendum and with the reference in the addendum to the 1993 agreement made in September, 1995 to the minimum quantity under the 1979 agreement for the 1993, 1994 and 1995 years. Although no oil was in fact shipped under the 1979 agreement or the addenda to that agreement, it was nonetheless anticipated in March, 1993 that oil might be shipped under that agreement if in the uncertain situation then pertaining in Macedonia that proved necessary in the event that Refinery Skopje did not import oil for its own account. I cannot see that there was any purpose in framing the addendum to the 1979 agreement in the terms it was made unless it was contemplated that it might be used."
"I consider his evidence largely to be evidence of the subjective intention of the parties and thus inadmissible. In so far as it may be admissible as to the continued effect of the 1979 agreement, his evidence is consistent with the conclusion I have reached on exclusivity."
The issue on the cross-appeal: clause 1 of the 1993 contract
"1. The Refinery wants and Jetoil accepts to manipulate via its Salonica Installations the quantities of not heated crude oil that the Refinery will buy and process for its own account in Skopje Refinery."
"I do not accept that argument. If the parties had intended that the 1993 [contract] would in effect provide an option to Refinery Skopje, then as a matter of language, they would have expressed themselves differently; they would have referred to quantities of oil that Refinery Skopje elected or decided to have manipulated by Jetoil. They would not simply have referred to "the quantities" of oil. In my view the wording chosen pointed to the obligation of Refinery Skopje being an exclusive one imposing an obligation upon Refinery Skopje to have the oil it bought for its own account manipulated by Jetoil. I also consider that the use of the words "the Refinery wants" points to an obligation being undertaken by Refinery Skopje and not merely to having an option.
"This view also accords with the commercial purpose of the agreement in the context of the surrounding circumstances. Refinery Skopje wanted to be sure that it would have in place the capability to have the oil it purchased for its own account manipulated at Salonica. It is consistent with the common understanding that Refinery Skopje would compete with Makpetrol. It seems to me inconceivable that Jetoil would have agreed to give Refinery Skopje the option to make use of its services where no minimum quantity was stipulated without Refinery Skopje being obliged to use its services when it purchased oil for its own account. This was the only agreement to which the Refinery was a party in respect of purchases for its own account."
The issue on the appeal: clauses 3 and 7 of the 1993 contract
"Moreover the agreement leaves at large questions as to whether the rate is to be affected by the volume of oil manipulated or whether if the price is fixed for a longer period, whether the price should be higher or lower. If a price was to be fixed by an arbitrator in default of an agreement, some guidance would be expected as there would be no obvious market price for such work; for example, in long term pipeline contracts, provision is sometimes made for the price to be fixed by reference to the rate of return on the investment in the facility.
"In my view, when the parties provided for the agreement to be valid for 10 years, they fixed the maximum period for which it was to apply. They envisaged that the parties would, after the initial period for which the price was agreed, try and agree a new price and the period for which that subsisted; however, the continued subsistence of the agreement was dependent on that agreement being reached; they never envisaged the price payable to be a reasonable one, but a price to be reached by agreement. In other words there would be a series of agreements for which the document signed on Mar. 5, 1993 was the framework."
"No doubt as to goods, the Sale of Goods Act, 1893, says that if the price is not mentioned and settled in the contract it is to be a reasonable price. The simple answer in this case is that the Sale of Goods Act provides for silence on the point and here there is no silence, because there is a provision that the two parties are to agree."
Lord Warrington of Clyffe spoke to similar effect at 22.
"That may be the proper conclusion; but before it is reached it is, I think, necessary to exclude as impossible all reasonable meanings which would give certainty to the words. In my opinion this cannot be done."
He then held, in part as a pure matter of construction, but also "having regard to the admissible evidence as to the course of the trade", that "of fair specification" meant –
"goods distributed over kinds, qualities, and sizes in the fair proportions having regard to the output of the season…That is something which if the parties fail to agree can be ascertained just as much as the fair value of a property" (at 512).
"The document of the 21st May 1930 cannot be regarded as other than inartistic, and may appear repellent to the trained sense of an equity draftsman. But it is clear that the parties both intended to make a contract and thought they had done so. Business men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects; but, on the contrary, the court should seek to apply the old maxim of English law, verba ita sunt intelligenda ut res magis valeat quam pereat. That maxim, however, does not mean that the court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as for instance, the implication of what is just and reasonable to be ascertained by the court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail. Thus in contracts for future performance over a period, the parties may neither be able nor desire to specify many matters of detail, but leave them to be adjusted in the working out of the contract. Save for the legal implication I have mentioned, such contracts might well be incomplete or uncertain; with that implication in reserve they are neither incomplete nor uncertain. As obvious illustrations I may refer to such matters as prices or times of delivery in contracts for the sale of goods, or times for loading or discharging in a contract of sea carriage. Furthermore, even if the construction of the words used may be difficult, that is not a reason for holding them too ambiguous or uncertain to be enforced if the fair meaning of the parties can be extracted…
"The contract is clearly an instalment contract "over the season 1930," since the whole quantity could not be delivered in one shipment; it is obvious that the parties either cannot or do not desire to fix precise dates for the plurality of shipments which is contemplated; hence they leave the apportionment of these shipments over the period to be determined as circumstances require, first, by the readiness of the goods, including no doubt ports of shipment, which will depend on the position of the respondents, who accordingly will have to declare it from time to time, and, secondly, on the action of the appellants, who on receiving these declarations will be entitled to a reasonable time on each occasion in which to give the necessary shipping instructions in accordance with which the respondents will have to provide tonnage - because it is a c.i.f. contract. Such matters may require, as the performance of the contract proceeds, some consultation and even concessions between the sellers and the buyers, but there is no uncertainty involved because, if there eventually emerge differences between the parties, the standard of what is reasonable can, in the last resort, be applied by the law, which thus by ascertaining exact dates makes precise what the parties in the contract have deliberately left undefined. Hence in view of this legal machinery id certum est quod certum reddi potest…
"Hence the 100,000 standards are to be of Russian softwood goods of fair specification. In practice, under such a description, the parties will work out the necessary adjustments by a process of give and take in order to arrive at an equitable or reasonable apportionment on the basis of the respondents' actual available output, according to kinds, qualities, sizes and scantlings; but, if they fail to do so, the law can be invoked to determine what is reasonable in the way of specification, and thus the machinery is always available to give the necessary certainty. As a matter of strict procedure, the sellers would make a tender as being of fair specification, the buyers would reject it, and the court or an arbitrator decide whether it was or was not a good tender, It is, however, said that in the present case the contract quantity is too large, and the range of variety in descriptions, qualities, and sizes is too complicated to admit of this being done. But I see no reason in principle to think that such an operation is beyond the powers of an expert tribunal, or of a judge of fact assisted by expert witnesses. I cannot find in the record any evidence to justify this contention of the respondents, even if such evidence be at all competent.
"When the learned Lord Justice speaks of essential terms not being precisely determined, i.e., by express terms of the contract, he is, I venture with respect to think, wrong in deducing as a matter of law that they must therefore be determined by a subsequent contract; he is ignoring, as it seems to me, the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts. To take only one instance, in Hoadly v. M'Laine (10 Bing. 482), Tindal, C.J. (after quoting older authority) said, at p.487: "What is implied by law is as strong to bind the parties as if it were under their hand. This is a contract in which the parties are silent as to price, and therefore leave it to the law to ascertain what the commodity contracted for is reasonably worth." It is unnecessary, in my judgment, to multiply illustrations of this principle, which goes far beyond matters of price. After all, the parties being business men ought to be left to decide what degree of precision it is essential to express in their contracts, if no legal principle is violated."
"No one would dispute such a rule, and its application to the instrument before the House in May and Butcher Limited v. The King has been finally determined in that case; but in my judgment the Court of Appeal were not justified in thinking that this House intended to lay down universal principles of construction or to negative the rule that it must be in each case a question of the true construction of the particular instrument. In my judgment, the parties here did intend to enter into, and did enter into, a complete and binding agreement, not dependent on any future agreement for its validity. But in any event the cases cited by the Court of Appeal do not, in my judgment, apply here, because this contract contains no such terms as were considered in those cases; it is not stipulated in the contract now in question that such matters as prices or times or quantities were to be agreed. I should certainly share the regret of the Lords Justices if I were compelled to think such important forward contracts as the present could have no legal effect, and were mere "gentlemen's agreements" or honourable obligations."
"In Hillas & Co v. Arcos the House of Lords said that they had not laid down any universal principles of construction in May & Butcher v. The King, and that each case must be decided on the construction of the particular contract…"
Maugham LJ said (at 13):
"I desire to say, first, that it is plain from the surrounding circumstances that the agreement as to the sale and purchase of the petrol was intended to be a binding contract and it formed part of the inducement for the sale of the land. Secondly, the agreement was duly stamped and bears all the signs of a legal contract, and was not, as in May & Butcher v. The King a mere informal letter."
"In order to constitute a valid contract the parties must so express themselves that their meaning can be determined with a reasonable degree of certainty. It is plain that unless this can be done it would be impossible to hold that the contracting parties had the same intention; in other words the consensus ad idem would be a matter of mere conjecture. This general rule, however, applies somewhat differently in different cases. In commercial documents connected with dealings in a trade with which the parties are perfectly familiar the court is very willing, if satisfied that the parties thought that they made a binding contract, to imply terms and in particular terms as to the method of carrying out the contract which it would be impossible to supply in other kinds of contract: see Hillas & Co v. Arcos, Ld."
"The principle to be deduced from the cases is that if there is an essential term which has yet to be agreed and there is no express or implied provision for its solution, the result in point of law is that there is no binding contract. In seeing whether there is an implied provision for its solution, however, there is a difference between an arrangement which is wholly executory on both sides, and one which has been executed on one side or the other. In the ordinary way, if there is an arrangement to supply goods at a price 'to be agreed,' or to perform services on terms 'to be agreed,' then although, while the matter is still executory, there may be no binding contract, nevertheless, if it is executed on one side, that is, if the one does his part without having come to an agreement as to the price or the terms, then the law will say that there is necessarily implied, from the conduct of the parties, a contract that, in default of agreement, a reasonable sum is to be paid."
"In a commercial agreement the further the parties have gone on with their contract, the more ready are the Courts to imply any reasonable term so as to give effect to their intentions. When much has been done, the Courts will do their best not to destroy the bargain. When nothing has been done, it is easier to say that there is no agreement between the parties because the essential terms have not been agreed. But when an agreement has been acted upon and the parties, as here, have been put to great expense in implementing it, we ought to imply all reasonable terms so as to avoid any uncertainties. In this case there is less difficulty than in others because there is an arbitration clause which, liberally construed, is sufficient to resolve any uncertainties which the parties have left…You can either imply a term that, in default of agreement, the number shall be a reasonable number, with a subsequent provision that in case of any dispute as to what is reasonable, it should be determined by arbitration: or, alternatively, run the two terms together and say "such reasonable figures as the arbitrator may determine". Whichever is adopted, it all comes to the same thing."
"In the ordinary case parties do not make any substantial distinction between an agreement to sell at a fair value, without specifying the mode of ascertaining the value, and an agreement to sell at a value to be ascertained by valuers appointed in the way provided in these leases. The true distinction is between those cases where the mode of ascertaining the price is an essential term of the contract, and those cases where the mode of ascertainment, though indicated in the contract, is subsidiary and non-essential."
"The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations. It will often make it difficult to submit that the contract is void for vagueness or uncertainty. Specifically, the fact that the transaction is executed makes it easier to imply a term resolving any uncertainty, or, alternatively, it may make it possible to treat a matter not finalised in negotiations as inessential."
i) Each case must be decided on its own facts and on the construction of its own agreement. Subject to that,
ii) Where no contract exists, the use of an expression such as "to be agreed" in relation to an essential term is likely to prevent any contract coming into existence, on the ground of uncertainty. This may be summed up by the principle that "you cannot agree to agree".
iii) Similarly, where no contract exists, the absence of agreement on essential terms of the agreement may prevent any contract coming into existence, again on the ground of uncertainty.
iv) However, particularly in commercial dealings between parties who are familiar with the trade in question, and particularly where the parties have acted in the belief that they had a binding contract, the courts are willing to imply terms, where that is possible, to enable the contract to be carried out.
v) Where a contract has once come into existence, even the expression "to be agreed" in relation to future executory obligations is not necessarily fatal to its continued existence.
vi) Particularly in the case of contracts for future performance over a period, where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the courts will assist the parties to do so, so as to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain. Certum est quod certum reddi potest.
vii) This is particularly the case where one party has either already had the advantage of some performance which reflects the parties' agreement on a long term relationship, or has had to make an investment premised on that agreement.
viii) For these purposes, an express stipulation for a reasonable or fair measure or price will be a sufficient criterion for the courts to act on. But even in the absence of express language, the courts are prepared to imply an obligation in terms of what is reasonable.
ix) Such implications are reflected but not exhausted by the statutory provision for the implication of a reasonable price now to be found in section 8(2) of the Sale of Goods Act 1979 (and, in the case of services, in section 15(1) of the Supply of Goods and Services Act 1982).
x) The presence of an arbitration clause may assist the courts to hold a contract to be sufficiently certain or to be capable of being rendered so, presumably as indicating a commercial and contractual mechanism, which can be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, may resolve their dispute.
i) The context is that of a long term (ten year) commercial agreement between parties who have had long familiarity with the subject matter of agreement and with each other.
ii) The agreement in question undoubtedly arises out of a contract, the 1993 contract. This is not, therefore, one of those cases where the initial issue is whether the parties have ever reached the stage of contractual relations. If the question is whether any contract has ever been arrived at, lack of certainty in essential terms may well make it difficult or impossible to say that the parties ever intended to have legal relations, or even if they did, whether they had reached sufficient certainty to enable a court to find a contract. If they never achieved a contract in the first place, then there is no assistance to be gained from agreement of an arbitration clause, or from statutory or any other implications. That is not to say, however, that the possibility of such implications or the presence of such an arbitration clause may not assist the court in the overall question of whether a contract can be found. However, once a contract exists, it not only needs to be construed for its terms, but the courts will seek to make it work, as the parties must have intended, in accordance with its terms, that it should.
iii) The parties have provided that their 1993 contract is "valid for 10 years" as from signature (clause 7). This language is, to my mind, particularly strong. It is the language of legal effectiveness. It is not the language of mere projection. Nor is clause 7 talking about a ten year umbrella agreement which is separate from the terms of the 1993 contract as a whole. That is shown both by the fact that clause 7 begins "This agreement is valid for 10 years…" (emphasis added) and by its annex (see clause 5) which not only contemplates a longer term still, but distinguishes that longer term from "The ten years initial contract term…" That language fits with the strong language of clause 7. If the "initial contract term" is ten years, then I do not see how it can be said that the initial contract term is only until the end of 1994.
iv) It follows that if the effect of clause 3 is to cut down the contract to a period ending with 1994, this cannot be so as a matter of construction, but because the agreement is incomplete or uncertain beyond that period. The authorities suggest, however, that at any rate in principle there is no difficulty in implying a term that the fee should be a reasonable one.
v) The contract does not expressly state that the fee after the end of 1994 is "to be agreed". It is simply silent as to what is to happen in that period. Therefore, this case is simply not presented with the difficulties which arise, in the face of "to be agreed" language, where it is uncertain whether there is any contract at all. It cannot be said, as was said in May and Butcher v. The King, that the statutory implication of a reasonable price, or an implication that the fee should be such reasonable fee as the arbitrator may decide, is excluded by express agreement that the parties were to agree the figure.
vi) There is no evidence that the resolution of a reasonable fee would cause any difficulty at all. On the contrary, the evidence is the other way. In practice, these parties, as well as Makpetrol and GM, had managed to agree a handling fee throughout the best part of 20 years up to 1999. When difficulty arose, it was because of something quite extraneous, namely the merger which brought the Refinery and GM into the same group. Although it is not possible to say that there was a market or list price for the handling service, nevertheless Jetoil was not a monopoly, nor, I would infer, was the Refinery the only customer of the facilities at Salonica. In the absence of evidence to the contrary, I would infer that it was perfectly possible to derive from the agreements of price and price increases over the years objective criteria for working out a reasonable fee. Thus, although it is true to say that the contract itself contained no mechanism or guidance (other than the arbitration clause) as to how a reasonable fee would be derived, I do not consider that the contract should fail on that ground. Contractually derived criteria or guidance may be of assistance in finding an implied term for a reasonable price: but the authorities indicate that the courts are well prepared to make the implication even in their absence.
vii) I do not consider that the additional issues as to the length of any period of price revision, or as to quantity discounts, raise any different problems. In practice agreement was made for one or two years. I see no difficulty in an arbitral tribunal or court finding that that was a reasonable period for which to fix the fee. The discount for throughput above a certain figure is simply another factor of price. Again, it gave the parties no difficulty over the years.
viii) The presence of an arbitration clause was not relied on as a particularly strong point by Mr Howard. But I do not think that it is without its effect. It is a contractual mechanism for resolving "Any dispute…which cannot be amicably resolved". It involves the parties' autonomous choice of their tribunal. It seems to me to be apposite to deal with a lacuna which, in common with other contracts which have to provide for future events, commercial practicalities lead parties to leave unresolved at the time of contract.
ix) There was no evidence, or none that was brought to the court's attention, about investment by Jetoil at its Salonica facilities to deal with its contracts with the Refinery (and Makpetrol). It may be that any investment necessitated by the 1979 contract had already been financed by profits made under that contract. It is unknown to what extent the 1993 contract might have required further investment – perhaps none at all. Therefore, there is not much assistance here in support of Jetoil's construction. But certainly, there is nothing in this consideration to support the Refinery's construction. In principle, a ten year contract requires facilities such as Jetoil's to invest for the future, or to be wary about contracting their services elsewhere, in case they run out of capacity. Therefore, if anything, this factor also cuts in favour of the necessary and businesslike implication of a reasonable fee.
"Whether, upon the failure of the parties to agree a price for manipulation services from and after 1 January 2000 pursuant to the agreement:(a) the agreement is to be treated as discharged;(b) whether any (and if so what) mechanism is available to fix such price."
SIR RONALD WATERHOUSE:
LORD JUSTICE SCHIEMANN: