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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd  ScotCS CSIH_1 (03 July 1964)
Cite as: 1964 SLT 353, 1964 SC 308,  ScotCS CSIH_1, 2 BLR 104, 1964 SLT (Notes) 82
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03 July 1964
|R. & J. Dempster|
|Motherwell Bridge and Engineering Co|
Counsel for the respective parties quoted law extensively in their admirable addresses to me at the hearing on evidence. This was a proof before answer, and it was accordingly open to either side to argue the case on a purely legal, as distinct from a factual, basis. There was no disagreement between counsel regarding the general principles of the law of contract involved in this dispute. Where they parted company was in relation to the category or classification into which this particular case falls, and even there the issue was narrow but certainly not free from difficulty.
In order to focus what I conceived to be the fundamental issue between the parties in this preliminary legal argument, which in itself might produce the answer to the basic question in the case, I shall set out their respective propositions in law. The pursuers' counsel submitted as follows:—The parties must have reached a point beyond negotiations before there is a contract. There must be consensus in idem, inter alia, in relation to the subject-matter. If the parties have reached a point beyond negotiations, it does not follow that every point must have been settled before a contract is concluded. Abbreviated modes of expression, e.g., standards, can be determined by external evidence or the law will infer standards according to the previous course of conduct between the parties. A phrase which is ambiguous or mere surplusage should not derogate from an agreement made. In a commercial document concerning dealings in a trade with which parties are familiar, the court is willing, if the parties thought that they had made a binding contract, to imply terms, and, in particular, terms regarding the method of carrying out the contract, which it would be impossible to supply in any other form of contract. The court will exclude a phrase which adds nothing to words which by themselves constitute a bargain. The court will always try to give effect to dealings of litigants, in order that the court will not suffer the reproach of being a destroyer of bargains. It is the duty of the court to construe commercial agreements broadly, without being too astute or subtle in finding defects. In order to imply terms the court will look, if necessary, to a previous course of dealings between the parties. In the event of a standard of conduct being left unascertained the court will apply, if possible, the standard of what is reasonable in the circumstances. An example of this would be that the price would be a reasonable price, although the implication of reasonableness would not be confined to price alone.
Counsel for the defenders did not dispute many of these basic legal propositions, but he argued as follows:—While there must be consensus in idem before a contract is concluded, the determination as to whether there is an agreement is settled by reference to the words used in the writings constituting the agreement, not as these were understood by the parties, but as they would be understood by a reasonable man. While it is not essential in a commercial contract that every point must be expressly settled, an essential term must be expressly stated or agreed upon, or, if not, the parties being silent thereon, it must be capable of legal implication. If it is otherwise, there is no concluded contract. For the purposes of the present case it can be accepted that a phrase in a written offer or acceptance which is meaningless cannot derogate from a contract otherwise valid. It was further accepted that the court will try to give legal effect to the dealings of men, so that the court may not incur the reproach of being a destroyer of bargains, but only provided that in doing so there was no violation of an essential principle. The defenders' counsel maintained that one essential principle of the law of contract is that the court will not make a contract for the parties—it is their duty to do that for themselves—nor will the court construe a contract contrary to express words used by the parties. It is only when parties are silent on detail, and not on essentials, that the court will allow implications in order to preserve the bargain. The courts may define "reasonableness," but this only happens (apart from statutory provisions) when the parties are silent on some matters necessary for the working out of the contract. When the parties leave to be settled by a future agreement an essential term of the bargain, there is no contract till that essential term is agreed. In a contract for the manufacture and sale of goods, where the price is expressly left to the parties to settle by a future agreement, there is no concluded bargain until that agreement has been reached. The court will not imply a term in a contract between the parties where there is an express provision on the point. If an agreement is indefinite, it will have no legal effect, and the test is the one laid down by Lord President Inglis in M'Arthur v. Lawson, (1877) 4 R. 1134, that "a contract which cannot be enforced by specific implement, in so far as regards its form and substance, is no contract at all, and cannot form the ground of an action of damages."
In essence the argument by counsel for the defenders was that price is an essential of a contract, that in the present case the prices were "to be mutually settled at a later and appropriate date," that this involved the settling of an essential by a future agreement, that there could be no decree of specific implement in respect of such a contract, and that accordingly there was no contract at all, and nothing which could form the ground of an action of damages.
As I understood his argument, he conceded that, if price was not an essential of the contract, then there was a concluded bargain which could form the ground of an action of damages. This seems to me to narrow the arena of dispute considerably. Before turning to examine the law in the light of all this, I deem it desirable to consider what was involved in the "arrangement" (again to use the word in a neutral sense) contained in the letters [of 18th and 21st December 1956]. In saying that they would issue orders to the pursuers in due course for 1000 tons of tankage in each of the three years, the defenders were not saying that they would be placing one specific order involving 1000 tons of steel in each of the years. What was clearly intended, and equally clearly understood by the parties, was that various orders amounting in all to 1000 tons of tankage would be placed by the defenders in each of the three years. The number of orders might vary, the amount of steel involved would vary according to the order, and the price of a particular order would be conditioned by the nature of the order and the governing circumstances at the time when it was placed. Whether the orders were "open orders" or were orders wherein the price was fixed before fabrication began, the price could not be considered until the specification of the order was known. Thus the cumulo price for 1000 tons of tankage made up of several orders might vary as between one year and another. In that situation it seems to me that the reference to prices (in the plural) in the pursuers' letter must refer to the individual prices of the individual orders, which could only be determined at some future date. This arrangement, therefore, was not for the specific orders, which would determine the prices, but was for the placing of a number of orders which would involve in cumulo 1000 tons of tankage in each year. In that situation, the reference to prices in the letter related to these future individual orders and not to the undertaking to place the requisite number of orders to absorb 1000 tons of tankage in each year. If that be so, then the question is whether it was a legally binding agreement when the defenders agreed to place, and the pursuers agreed to execute, orders to the extent of that tonnage in each year, without reference to the individual orders which would constitute the requisite tonnage and which would be subject-matter of individual contracts at some future date, involving, inter alia, the settling of the price. Taking the criterion relied on by the defenders' counsel, could there be a decree of specific implement ordaining the defenders to place orders amounting in cumulo to 1000 tons of tankage in each of the three years, albeit the actual orders would have to be the subject of individual contracts and agreements on, inter alia, the question of price in each case? Was this a binding contract enforceable by law or was it just an agreement to make an agreement or agreements ? The law by which this question falls to be decided is not free from difficulty. In Scammell (G.) and Nephew Ld. v. Ouston (H. C. and J. G.),  A. C. 251. Viscount Maugham said (at p. 255):
"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."
There then follows a reference to the case of Hillas & Co. Limited v. Arcos Limited, (1932) 147 L T 503. In the case of Foley v. Classique Coaches Ld.,  2 K. B. 1, Lord Maugham (then Maugham, L.J.) had said (at p. 13):
"It is indisputable that unless all the material terms of the contract are agreed there is no binding obligation. An agreement to agree in the future is not a contract; nor is there a contract if a material term is neither settled nor implied by law and the document contains no machinery for ascertaining it."
The phrase "contract to enter into a contract" was explained by Sargant, L.J., in Chillingworth v. Esche,  1 Ch. 97, in a passage at p. 113 which was later endorsed by Lord Buckmaster in May & Butcher Ld. v. The King,  2 K B 17, at p. 20:
"In the strictest sense of the words the Court will often enforce a contract to make a contract. The specific performance of a formal agreement of purchase is the enforcement of a contract to make a contract; the ultimate conveyance being often in itself in many respects a contract…The true meaning of the phrase is that the Court will not enforce a contract to make a second contract part of the terms of which are indeterminate and have yet to be agreed, so that there is not any definite contract at all which can be enforced, but only an agreement for a contract some of the terms of which are not yet agreed."
It has been repeatedly said by eminent judges that the decision in any particular case turns on the construction of the relevant documents, which perhaps explains what sometimes appear to be conflicting decisions. Principles of construction have been laid down and have to be observed, but it may be dangerous and misleading to proceed on the parallel of other cases, where the facts have a prima faciesimilarity, but which might contain certain important differences. The pursuers' counsel founded strongly on Hillas & Co. Limited v. Arcos Limited, while counsel for the defenders relied equally strongly on May & Butcher, Ld. v. The King, both decisions of the House of Lords. Broadly speaking, the contention of the pursuers' counsel was that, when dealing with commercial documents in a trade with which the parties are familiar, the court is willing, if the parties thought that they had made a binding contract, to imply terms regarding the method of carrying out the contract which it would be impossible to supply in any other form of contract; the parties here manifestly thought that they had made a binding contract; and the phrase in the letter of 18th December 1956, "The prices to be mutually settled at a later and appropriate date," was one which the court would fill out to mean "settled amicably between the parties, which failing by the court itself." Counsel for the defenders submitted that price was an essential term of the bargain; that there could be no contract until that essential term was agreed; and that an agreement which left an essential term to be decided solely by agreement between the parties at a future date was not a binding legal agreement.
In Hillas & Co. Limited v. Arcos Limited an agreement was entered into for the sale and purchase of Russian softwood timber for delivery in 1930, with an option to the buyers to enter into a contract with the sellers for the purchase of further timber for delivery during 1931. The option clause did not specify what kinds or sizes or what qualities were to be supplied, nor did it define the dates and ports of shipment and discharge. The House of Lords held that, the option having been exercised, the parties intended to enter into and did in fact enter into a complete and binding agreement not dependent on any future agreement for its validity. As regards both the quality and the description of the goods and the times of delivery and shipment the contract was neither uncertain nor incomplete. The contract did, however, contain a reference to the manner in which the price of goods bought under the option would be determined, viz., by reference to the official price list ruling at any time in 1931. In May & Butcher Ld. v. The King, which was a petition of right, the suppliants and the Disposals and Liquidation Commission exchanged letters whereby the Commission agreed to sell and the suppliants agreed to purchase the total stock of old tentage, the price or prices to be paid, and the date or dates of payment, to be agreed on from time to time between the parties as the quantities of old tentage became available for disposal and were offered to the suppliants by the Commission. These terms were, subject to qualifications of no legal importance, carried into further correspondence regarding further tentage. The House of Lords decided that, since a critical part of the contract matter, viz., price, had been left undetermined, there was no contract at all. Lord Buckmaster said (at p. 20):
"It has long been a well recognized principle of contract law that an agreement between two parties to enter into an agreement in which some critical part of the contract matter is left undetermined is no contract at all. It is of course perfectly possible for two people to contract that they will sign a document which contains all the relevant terms, but it is not open to them to agree that they will in the future agree upon a matter which is vital to the arrangement between them and has not yet been determined."
He proceeded to negative the argument that, as the fixing of price had broken down, a reasonable price must be assumed. Viscount Dunedin stated (at p. 21):
"This case arises upon a question of sale, but in my view the principles which we are applying are not confined to sale, but are the general principles of the law of contract. To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties…We are here dealing with sale, and undoubtedly price is one of the essentials of sale, and if it is left still to be agreed between the parties, then there is no contract."
He then went on to say that there would have been a perfectly good settlement of price if the contract had said that the price had to be settled by some form of arbitration, but that had not been done.
Dealing with the sale of goods, he said (at p. 21):
"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 expressed himself thus (at p. 22):
"The decision of this case depends upon the application of a well known and elementary principle of the law of contract, which is that, unless the essential terms of the contract are agreed upon, there is no binding and enforceable obligation. In the present case we have a document which purports to be an agreement for the sale by one party to the other party of certain specified goods at a price to be hereafter agreed between them…If the parties fail to arrive at an agreement, then the price has not been ascertained in the way in which the parties stipulated it should be ascertained, and there is therefore no binding agreement."
Counsel for the defenders submitted that the present case was in pari casu with May & Butcher, Ld. With equal emphasis counsel for the pursuers sought to equiparate this case to Hillas & Co. Limited. In the latter case Lord Tomlin said (at p. 512):
"The governing principles of construction recognised by the law are applicable to every document, and yet none would gainsay that the effect of their application is to some extent governed by the nature of the document."
He then compared conveyance of real estate with commercial documents and proceeded:
"…both fall to be construed by the same legal principles, and the problem for a court of construction must always be so to balance matters, that without violation of essential principle the dealings of men may as far as possible be treated as effective, and the law may not incur the reproach of being the destroyer of bargains. The principles are not in dispute. It is in the application of them to the facts of a particular case that the difficulty arises; and the difficulty is of such a kind as often to afford room for much legitimate difference of opinion and to present a problem the solution of which is not as a rule to be found by examining authorities."
He referred to May & Butcher, Ld., but said, without any analysis of that case, that it did not afford any assistance in determining the case under consideration, the result of which had to depend on the meaning placed upon the language used. Lord Wright referred early on in his opinion to the passage in the judgment of Lord Dunedin in Charrington and Co., Limited v. Wooder,  A. C. 71, at p. 82, where the words "fair market price" were to be construed:
"Now, in order to construe a contract the Court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it—or, as it is sometimes phrased, to be informed as to the surrounding circumstances."
This, however, related to a term of the agreement in a tied house case, where the court was in the position of construing what the parties meant by the phrase "fair market price," which was something not left to ultimate determination by the parties themselves. Later on Lord Wright said (at p. 514):
"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 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."
It respectfully seems to me that, in the illustration which he gave regarding prices in contracts for sale of goods, it has to be read subject to the decision in May & Butcher, Ld.that, if the price is left to be agreed between the parties themselves, and nothing more, there is no contract. Lord Wright went on to say (at p. 515):
"…it is said that this is merely a contract to enter into a contract, whereas in law there cannot be a contract to enter into a contract. The phrase is epigrammatic, but may be either meaningless or misleading. A contract de prœsenti to enter into what, in law, is an enforceable contract, is simply that enforceable contract, and no more and no less; and if what may not very accurately be called the second contract is not to take effect until some future date but is otherwise an enforceable contract, the position is as in the preceding illustration, save that the operation of the contract is postponed. But in each case there is eo instanta a complete obligation. If, however, what is meant is that the parties agree to negotiate in the hope of effecting a valid contract, the position is different. There is then no bargain except to negotiate, and negotiations may be fruitless and end without any contract ensuing; yet even then, in strict theory, there is a contract (if there is good consideration) to negotiate, though in the event of repudiation by one party the damages may be nominal, unless a jury think that the opportunity to negotiate was of some appreciable value to the injured party."
Later on in his speech Lord Wright, dealing with a passage in the judgment of Greer, L.J., in the Court of Appeal in the same case "if there are any essential terms of a contract of sale undetermined and therefore to be determined by a subsequent contract, there is no enforceable contract," said (at p. 517):
"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 through the whole of modern English law in relation to business contracts."
He then went on to explain how the law might, for example, determine price, if the parties had been silent on that factor. Turning to May & Butcher, Ld., he stated that no one would dispute the rule that "promissory expressions reserving an option as to the performance do not create a contract" or its application to the instrument in May & Butcher, Ld. With respect, I hardly think that the rule quoted was the ratio decidendi in the latter case. Dealing with May & Butcher, Ld., he said (at p. 517):
"…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 pause to observe that in May & Butcher, Ld. the fact that price was left to be agreed between the parties at a later date was at the basis of the judgment in that case. In Hillas & Co. Limited the prices were agreed to be the prices prevailing in the appropriate year, and the court was interpreting what was meant by and involved in a phrase which the parties had used in the agreement.
Counsel for the pursuers submitted that the present case was even more akin to Foley v. Classique Coaches, Ld., where the parties entered two agreements, the first for the sale and purchase of a piece of land and the second, supplemental to the first, for the purchasers to purchase from the sellers all the petrol required by them for the running of their business "at a price to be agreed by the parties in writing and from time to time." The first agreement was carried through, and for three years the purchasers carried out the provisions of the second agreement. They then sought to repudiate the second agreement on the ground that there was no agreement regarding price, and relied on the authority of May & Butcher, Ld. in support of their submission. The Court of Appeal had obviously no sympathy with this contention and would appear to have been able to distinguish that case from May & Butcher, Ld. on the ground that any failure to agree prices was covered by the arbitration clause in the agreement, thus eliding the basis of the decision in May & Butcher, Ld.
What, then, was the effect of the interchange of the letters in December 1956 ? In arriving at a decision on this point the court is, in my view, entitled to look at the whole surrounding circumstances with a view to ascertaining the nature of the agreement reached by the parties. That there was an agreement there can be no doubt. Counsel for the defenders admitted this, but said that it was not the agreement which the pursuers maintained. The questions are, what was the nature of that agreement; had it legally a binding effect; and, if so, what ?It is perfectly clear, and I so find, that, when the parties entered into the agreement, they both had in contemplation (1) that the steel shortage would continue for an indefinite time, involving the continuation of the quota system or some other form of restricted supply, (2) that the demand for oil storage tanks would continue for an indefinite time, (3) that in that situation the defenders would be in a position to place subcontracts for oil storage tankage with the pursuers, and (4) that so long as these conditions prevailed, supplies of steel and productive capacity were basic considerations, and prices would not be as competitive as they would be in a free market. What the pursuers were offering was a reservation of 1000 tons of steel for the three years in question out of their total allocation, with a consequential reservation of capacity in their works to fabricate that steel into the appropriate tankage. In the conditions which prevailed this involved a restriction on their free use of available steel and capacity in order to be in a position to honour their obligation. In consideration of this the defenders undertook to issue orders for 1000 tons of tankage in each of the three years. This, as I have already pointed out, did not mean that they were obliging themselves to buy 1000 tons of a commodity, such as steel, each year. What was clearly in the contemplation of both parties was that the defenders would place a number of orders for tankage, amounting in all to 1000 tons, in each of the years, and that this would be effected by placing individual orders. This in turn involved the defenders' sending to the pursuers the specifications for the particular job, and such matters as price, time of delivery and place of delivery might vary with each order. Each order was a contract in itself, and so the effect of the letters was that the defenders obliged themselves to place in each of the three years a number of orders involving individual contracts amounting in all to 1000 tons of tankage as the counterpart of the pursuers' making a reservation of steel and capacity to meet these orders. In that situation it was impossible to incorporate in this agreement any of the conditions, e.g., specifications, price, delivery, &c., which might ultimately be attached to the subsequent individual contracts. Accordingly, in my view the phrase "The prices to be mutually settled at a later and appropriate date" bears no greater or less significance than would have attached to the phrase "The terms and conditions of the individual orders to be mutually settled at a later and appropriate date." Since prices were likely to be affected by the price of steel, which might well vary over the three-year period in contemplation, it would obviously be sound business to settle prices at the time of the individual contract. The prices to be agreed were not the prices for 1000 tons of tankage en masse, but the prices for the tankage in each individual order. Was this, therefore, just a contract to make subsequent contracts, the terms of which were indeterminate and had still to be agreed, and consequently not a legally binding contract ? The answer to that question in my opinion is "No." The counterpart of the pursuers' reservation of steel and capacity was to place orders amounting to 1000 tons of tankage in each of the three years. This seems to me, in commercial dealings in the state of the trade as it was, to be a complete bargain in itself with reciprocal rights and obligations, and the reference to prices, being a reference to prices in subsequent individual agreements, was quoad this agreement surplusage and a meaningless phrase which the court is entitled to ignore—cf. Denning, L.J., in Nicolene Ld. v. Simmonds,  1 Q. B. 543, at p. 551. In that situation it does not appear to matter, so far as this agreement is concerned, whether the subsequent orders were "open orders" or not. And, in any event, open orders in themselves need not have provided any insuperable obstacle in view of the previous dealings between the parties on this basis. The contrary interpretation of the letters means that the pursuers were obliging themselves to keep out of their normal schedule the appropriate amount of steel and capacity against the defenders' placing orders with them, provided that (a) the defenders were willing to place such orders, and (b) the terms and conditions of such orders were acceptable to them. This was the interpretation sought to be placed on the letters by defenders' witnesses, but this, I am satisfied, was a retrospective view, and one which was not in the contemplation of the parties at the time. The view presented by the pursuers' witnesses, that the parties at the time recognised that these letters constituted a binding obligation, consists with the correspondence between the parties, which in the earlier stages clearly demonstrates that the defenders felt that they were under an obligation to place such orders with the pursuers. I have little reason to believe that, if the conditions which prevailed in 1956 had been carried forward into the succeeding years, the defenders would have found any real difficulty in implementing their side of the bargain. It was only the change in conditions which made it economically difficult for them to do so, but if the bargain was a legally binding one, then they cannot resile because it had ceased to be profitable for them, or they had difficulty in implementing their part of it. Nor can the difficulties which they might have experienced with their own customers have any effect on their obligation in a binding agreement with the pursuers.
In the whole circumstances, then, I am of opinion that the letters constituted a legally binding agreement and that the defenders (subject to the question regarding 500 tons in 1958) have failed to implement it. This was not a contract to enter into subsequent contracts, but was a contract which was to be implemented by the giving of subsequent orders, the terms and conditions of which would be subsequently agreed or settled by the court. The open order system had worked before. If it broke down, the court could settle the dispute on the basis of reasonableness.
In view of that finding, it is unnecessary to deal with much of the voluminous evidence in the case. It is quite clear, both from the evidence and the correspondence between the parties subsequent to December 1956, that for more than a year after the agreement was entered into both parties acted on the basis that there was such an agreement. I accept the evidence of the pursuers' witnesses that in their forward programmes they made provisional allocations with regard to both steel and workshop capacity for the defenders' anticipated orders, so far as it was practicable to do so. In doing so, several possible alternative orders were turned down at the inquiry stage. The correspondence is fairly enlightening on the question of the attitude of the parties to this agreement. Throughout the pursuers treated the matter as one of a binding nature involving reciprocal obligations. I need not go through the correspondence in detail to vouch this, but would simply refer to the letters from the pursuers to the defenders dated 29th April, 1957, 17th October 1957, 12th November 1957, 12th December 1957 and 5th March 1958. No reply was received to any of these letters, apart from the one of 12th December 1957. During 1957 the defenders were apologising for their inability to place orders with the pursuers in terms of the "arrangement," and recognised the difficulty which the pursuers had in placing advance orders for steel with the steel mills. Their letter to the pursuers of 30th December 1957, fairly read, seems to be not only an apology for failure to place orders but an acknowledgment of their obligation to do so. The first indication in the correspondence of their inability to place the orders for 1958 was contained in a letter to the pursuers dated 4th March 1958 and it is only by inference that this letter contains for the first time any repudiation of a binding obligation. Their silence in failing to answer the previous letters from the pursuers wherein reference was made in one way or another to their obligations for 1958 is perhaps not without significance. The letter of 4th March 1958 has a number of interesting features. It contains the phrase "Consequently, we are unable to take up the capacity offered by you." This suggests that in the mind of the writer the pursuers were simply in the position of offerers whose offers were liable to be turned down. Yet in the penultimate paragraph of the letter the writer says:
"With regard to the 1000 tons' capacity we have reserved for 1959 and 1960, please note the reservation is made without commitment, and it would be appreciated if you would inform us at what date we must decide whether we will place firm orders or cancel the reservations."
There is no mention that the 1958 reservation was without commitment, and by taking a line through their inquiries about 1959 and 1960 there seems to be an acknowledgment that, even on the defenders' then interpretation of the position, they were under an obligation to place firm orders by a certain date or cancel the reservation quoad the 1958 commitment. This was the first time, amid a mass of apologies, verbal and written, for not placing orders, that it was ever suggested that any of the reservations were made without commitment, and this was the first information that the 1958 reservation could not be taken up. In view of the time factor between intimation of the orders and the obtaining of steel from the mills, and the time taken to complete fabrication once the steel had been obtained, it is doubtful if much, if any, work on orders given subsequent to this date could have been completed within the pursuers' 1958 programme. In effect, therefore, the defenders were saying that, although the pursuers had made a reservation for the defenders' work in 1958, no such work could be provided by them. It is also noteworthy that it is said that the reservation for 1959 and 1960 "is" made without commitment, not "was." This may be purely grammatical, but it is capable of being construed as an endeavour to qualify the terms of an existing agreement. The significant thing is that this letter was signed by M'Kay, the estimating manager, but was dictated by Adams, who was in charge of the subletting of contracts, yet neither of these two gentlemen, nor M'Lean, the General Manager, had seen the letters of 18th and 21st December 1956, and apparently they knew nothing about them when this repudiation was sent. In fact, Adams said that he understood from Baxter, who was responsible for the subletting of contracts in December 1956 and who was responsible for the letter of 21st December 1956, that the agreement was a verbal one. The position is, therefore, that the defenders, through their responsible senior officials, were in this letter of 4th March 1958 seeking to put an interpretation on an agreement without ever having seen the documents on which that agreement was based. In doing so, they were going in the face of their attitude towards their obligations as evidenced in the documents produced relating to the period between December 1956 and the beginning of March 1958. They may have been right, but, if they were, they were fortunate. In my opinion they were not right, but were merely trying to extricate themselves from an obligation in view of the changed trade conditions without knowing what their obligation really was. Credibility may play little part in this case, but I was generally more impressed by the pursuers' witnesses than by the defenders' and M'Lean struck me, both by his evidence and his actions, as a "gettough" individual, who was anxious to get his company out of an embarrassing obligation. It is again worthy of comment that when the pursuers sent the defenders a reply to all this in their letter of 5th March 1958, in which they fully stated their position towards the agreement and pointed out the way in which they had been damnified as a result of the defenders' having failed to honour their commitment, not even an acknowledgment was sent. To complete this part of the picture, the pursuers sent to the defenders a letter dated 10th June 1958, in which they again set out their position, and called upon the defenders to state their position. In reply the defenders wrote a letter dated 20th June 1958, in which they in effect said that they could not take up the reservation of 1000 tons for 1959 and 1960. It is but right to say that from time to time during 1958 the defenders passed on to the pursuers various enquiries from their customers and that the pursuers quoted for these, but none of their quotations was accepted by the customers.
[His Lordship then dealt with the question of damages, with which this report is not concerned, and concluded]—In the summation, therefore, the pursuers have established their claim of £50,000 as the loss which they have suffered as a result of the defenders' breach of contract. I shall accordingly sustain the first two pleas in law for the pursuers, repel the pleas in law for the defenders and grant decree for the sum of £50,000.
The defenders reclaimed and the case was heard before the First Division (without Lord Migdale) on 16th, 17th, 18th, 19th and 23rd June 1964.
At advising on 3rd July 1964,—
The main facts which are relevant to the issue of breach of contract fall within a relatively narrow compass. The pursuers are manufacturers of gas-holders and other tanks in Manchester. The defenders carry on business in Scotland in manufacturing tanks, principally for oil storage companies. In the years 1952 to 1957 there was a lack of oil storage tank fabricating capacity in Great Britain, and, what was more serious, there was a shortage of steel. At the same time there was a very heavy demand from the oil storage companies for tanks. Owing to the steel shortage, supplies from the steel mills were placed on a quota system. In this situation the defenders found that their quota of steel was not sufficient to enable them to meet all the orders they received from their oil storage customers. Accordingly the defenders endeavoured to find other companies with a steel quota, who did not normally do business with oil storage companies, so that they might subcontract to them the fabrication of oil storage tanks for the defenders' customers. One of the important factors in the present case is that, owing to the heavy demand for tanks and the shortage of steel and fabricating capacity between the years 1952 and 1957, the prices payable were a quite minor consideration. Partly for this reason and partly because it had been found that frequent alterations of the original drawings became necessary in the course of fabrication, the usual method in the trade then was for the oil storage companies to place orders on an "open order" basis, i.e., to send to the manufacturers the orders and drawings and to adjust the prices for tanks during or after their fabrication.
In the light of these market conditions the defenders in 1956 subcontracted with the pursuers to fabricate some oil tanks for the defenders' customers. These orders absorbed 910 tons of the pursuers' steel quota for 1956. The orders were placed with the pursuers on an open order basis, and no difficulty was experienced in adjusting prices after delivery, for conditions in the market were still such that the supply of additional tankage was of crucial importance to the oil storage companies.
In 1956 the defenders ascertained that the pursuers' steel quota for the ensuing year was practically all committed to their own ordinary customers, and the defenders were therefore only able to subcontract in 1957 some six or seven small tankage orders to the pursuers, some on an open order basis and some on a fixed price basis.
The crucial letters upon which the issue in this case turns passed between the parties in December 1956. It is established on the evidence that, when the parties exchanged these letters, they both had in contemplation that the steel shortage would continue for an indefinite time in the future, involving the continuance of the quota system or some other form of restricted supply, and that the demand by the oil storage companies for more and more tankage would continue for an indefinite period. In that situation there was every reason to anticipate that the defenders in the years ahead would be in a position to place subcontracts with the pursuers for oil storage tanks, and it was obviously advantageous to the pursuers to have such contracts for some years ahead so as to ensure steady employment at their works. Moreover, in the prevailing market conditions, with the shortage of steel and also of productive capacity, and particularly in the light of the clamant needs of the oil companies for tanks, prices had ceased to be a basic consideration, and the existing method of the oil companies' placing orders and adjusting prices after delivery was likely to continue.
It was in this setting that the arrangement was made out of which this case arises. It took the form of two letters. Prima facie at least they are couched in obligatory language, and were intended to deal with the trading between the parties in the years 1958, 1959 and 1960, so as to obviate the difficulty that had emerged in 1957, when the pursuers did not have enough steel quota available to assist in meeting the pressing demands of the defenders' customers for tanks. The first letter, dated 18th December 1956, was from the pursuers to the defenders. It was in the following terms:—
"Oil Storage Tanks
"Programme for 1958, 1959 & 1960
"We confirm telephonic conversations of last week and today when it was agreed to include in our progranne on your behalf for 1958, 1959 and 1960 one thousand tons of tankage in each of these years, thus making a total commitment of 3000 tons for the three years named.
"On your part you promised to confirm this commitment and in this regard we thank you in anticipation.
"The prices to be mutually settled at a later and appropriate date." The reply from the defenders was dated 21st December 1956 and was as follows:—
"We wish to acknowledge with thanks your letter of 18th December 1956, references as above, and have pleasure in confirming that we will issue orders in due course to you for 1000 tons of tankage in each of the following years:—1958, 1959 and 1960.
If you find you can increase this tonnage at any time, we would be pleased to place additional orders with you."
In my opinion these two letters constituted a valid and binding commercial contract between the parties. The pursuers on their side undertook to set aside in each of the three years 1000 tons of their steel quota to fabricate oil tankage for the defenders, and thereby undertook to restrict by that amount the steel which would have been available for their other customers. The defenders on their part undertook to issue orders for this tonnage of tanks in each of these three years. The considerations on each side were complementary and correlative. The undertakings were expressed in quite unconditional terms on both sides, and in the existing market conditions the obligations respectively undertaken represented a sound and intelligible business proposition for each party. In the existing market conditions prices were of minor importance to both sides, and the bargain left the prices to be adjusted after orders were placed. This was the practice of the oil storage companies and represented the pattern of trading between the parties themselves which had operated successfully in 1956.
In fact, however, the market conditions did not remain as the parties expected. In 1958 the oil companies' urgent pressure for storage tanks fell away, the defenders found themselves able to meet their customers' requirements without calling on the pursuers' quota of steel, and in fact no orders for any of the 1000 tons of tankage were ever issued by the defenders in accordance with the contract.
I am confirmed in my conclusion that a binding contract had been made between the parties by a consideration of their subsequent actings. In each of the three years in question the pursuers out of their steel quotas kept available 1000 tons for the defenders' orders in terms of the contract. They also had available throughout sufficient capacity in their works to meet these orders. It is established in the evidence that the pursuers turned away enquiries for other work from other customers, in order to be able to implement the defenders' orders. On at least one occasion they informed the defenders that they had rejected the approaches of an oil storage company for an order for oil tanks direct to themselves because of their obligations to the defenders. Throughout the period of the contract the pursuers repeatedly called on the defenders to send orders, various excuses were put forward, and on several occasions the pursuers' calls were not even answered. In my opinion the Lord Ordinary was well founded in concluding, as he did, that for more than a year after the bargain was made both parties acted on the basis that there was a binding agreement.
The first hint of a change of front on the part of the defenders is contained in a letter signed by one of their officials and sent to the pursuers on 4th March 1958. The last paragraph of this letter is as follows:—
"With regard to the 1000 tons' capacity we have reserved for 1959 and 1960 please note the reservation is made without commitment and it would be appreciated if you would inform us at what date we must decide whether we will place firm orders or cancel the reservations."
This change of front as regards the second and third years of the bargain was actuated by a desire to find a way of stopping the pursuers' persistent demands for orders. But it is of some considerable significance that the officials of the defenders who were concerned in the drafting of this letter had never seen the original contract of 1956 nor realised its obligatory nature so far as orders were concerned. The pursuers in their reply repudiated any justification for qualifying the obligation to which the defenders were committed, and this repudiation was accepted by the defenders in silence. Both parties accordingly, in my view, proceeded throughout on the basis that an enforceable and binding contract had been made in December 1956.
In the whole circumstances, therefore, in my opinion a binding contract was reached between the parties in December 1956, and, if so, it is not disputed that the defenders were in breach of it by failing to issue any orders in terms of it.
The defenders' case, however, is that no binding and concluded contract was reached in these letters. A whole series of different reasons was put forward for inferring that no binding contract was made. Before examining these reasons in detail, I should just observe that when a court of law is asked to construe a commercial arrangement couched in terms which are prima facie obligatory, and which are acted on by the parties as obligatory, the court will prefer a construction which gives the contract binding effect. For the essence of commerce is making bargains, and unenforceable arrangements are the exception and not the rule. As Lord Tomlin said in the House of Lords in Hillas & Co. Limited v. Arcos Limited, "the problem for a court of construction must always be so to balance matters, that without violation of essential principle the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains."
With this preliminary I now turn to the various contentions of the defenders on the construction of the letters. In the first place, they contended that they represented a mere gesture of goodwill between the parties, without any obligatory effect. Apart from the inherent improbability of such a construction, the language of both letters is quite inconsistent with so ephemeral a meaning. In the second place, they contended that at the very highest the letters amounted to an arrangement under which the pursuers were bound each year to make 1000 tons of their steel quota and also the necessary fabricating capacity in their works available for the defenders, but that the defenders were under no obligation to take up any of the quota or fabricating capacity if they did not so wish. It is difficult to believe that two commercial firms would make so one-sided a bargain, but in any event the provisions of the letters will not fit such a construction. The defenders do not state that they will issue orders for tankage "if they so wish"; on the contrary they undertook an unqualified obligation that they "will issue orders…for 1000 tons of tankage in each of the following years."
Lastly, the defenders argued that the meaning and effect of the arrangement was that the pursuers were only to keep steel and manufacturing capacity in their works available if orders were given by the defenders at prices which could be agreed mutually. If no orders were given, and in particular no prices mutually agreed, then, it was contended, neither party was bound and the pursuers were free to fabricate and sell to others. In the first place, however, such a construction creates a quite impracticable bargain. The pursuers would require to keep the 1000 tons of steel quota and working capacity in the shop available for the year, in case the defenders issued orders, and would only be free at the end of the year to use that year's quota and capacity for other work. But this would mean that they would have to retain their quota and capacity idle for twelve months and these would only be available for other customers when it was too late to use them. Nothing in the evidence on either side indicates that such a modus operandi would have been practicable.
But, in the second place, the real fallacy of this construction of the arrangement is that it assumes that the fixing of the price for a fabricated tank was of the essence of the bargain and that no contractual obligation was undertaken until the prices had been adjusted. It overlooks the fact that it was the usual practice of the oil storage companies at this time to place orders and only adjust prices after delivery of the fabricated tanks, owing to the fact that tanks and not prices were the material consideration in the then conditions of the market. Moreover, it overlooks the fact that in 1956 and 1957 the pursuers and defenders operated on this open order basis and had without difficulty adjusted prices for fabrication after delivery by the pursuers had taken place. The defenders' argument seeks to equate the bargain to a contract of sale of oil storage tanks, in which the adjustment of the price is an essential element, without which there would be no concluded contract: Foley v. Classique Coaches Ld .; May & Butcher Ld. v. The King, reported in a note to Foley; Hillas & Co. Limited v. Arcos Limited . These were all cases of contracts of sale, in which, of course, price is an essential. The present case is not a contract of sale at all; on the contrary, it is a contract involving on each side immediately enforceable obligations independent of any contract of sale of an individual tank. Its object was to make available means of fabricating oil storage tanks, in the difficult supply conditions of the market, for the use of the oil storage companies, whose need for tanks was such that the price no longer mattered. In these circumstances, in my opinion, the adjustment of the price was not only not a sine qua non of the issue of an order for fabrication but was not a material element in this contract at all. The arrangement was a commercial bargain as it stood, enforceable by both sides, in which prices played no material part and were meant to be mutually settled when the work was done. As Lord Dunedin said in May & Butcher Ld. (at p. 21), "As a matter of the general law of contract all the essentials have to be settled. What are the essentials may vary according to the particular contract under consideration." In my opinion, in the special market conditions operating when this contract was made all the essentials were settled. In these circumstances, in my opinion, the defenders' endeavour to argue that this contract was unenforceable has failed. If there was a binding and concluded bargain in the letters of December 1956, it is not now in dispute that this contract was breached by the defenders in issuing no orders at all, and the pursuers are entitled to damages. [His Lordship then dealt with the question of damages, with which this report is not concerned, and concluded]—
In the whole circumstances the Lord Ordinary in my view reached the correct conclusion and his interlocutor should stand.
The circumstances giving rise to the litigation are clearly set forth in the Lord Ordinary's opinion, and at the hearing of the reclaiming motion his findings as to the facts were mostly unchallenged. Those which were disputed by the reclaimers are fully supported by the evidence.
In 1956, owing to a shortage of steel, supplies were allocated to manufacturers on a quota system. The defenders, who are manufacturers of steel products, were unable out of their quota to meet their orders from oil companies for oil tanks. Therefore they agreed with the pursuers, who make certain kinds of tanks, that the pursuers would make oil tanks for them, to the extent of 910 tons of steel, to enable them to fulfil certain orders from the oil companies. Because of the urgency of the work, the subcontracts were on an "open order" basis, which meant that the orders were placed by the defenders, and work was begun on them by the pursuers, on an arrangement that the prices would be settled at a later date. The work was done by the pursuers on these subcontracts, and the prices were agreed with the defenders in November 1956. At that time it was expected that the shortage of steel and the urgent demand for oil tanks would continue indefinitely, and negotiations took place between the pursuers and the defenders with the object of securing that the pursuers would use part of their quota of steel in each of the years 1958, 1959 and 1960 to manufacture "oil tankage" on behalf of the defenders. These negotiations resulted in the exchange of two letters between the parties in December 1956. The pursuers' case is that these letters effected a binding contract between the parties, but the defenders maintain that no enforceable contract was entered into between them.
[His Lordship quoted the letters dated 18th December 1956 and 21st December 1956, and continued]—
It is not now disputed that the pursuers did set aside steel and productive capacity in their works to enable them to meet orders for 1000 tons of oil tanks in each of the three years. It is also now admitted by the defenders, subject to one qualification, that they did not place orders for 1000 tons of oil tankage with the pursuers in any of the three years. The qualification relates to an inquiry by the defenders in 1958 as to whether the pursuers would supply five hundred tons of steel plates. The pursuers refused to do so. The defenders maintain that they attempted to place an order within the terms of the letters, but that the pursuers rejected the proposal. The pursuers reply that the inquiry did not relate to "oil tankage," and therefore did not fall within the scope of the letters. This controversy requires to be considered in connection with damages. The question which arises on the merits is whether there was a binding agreement between the parties which required the defenders to place orders for a thousand tons in each of the three years. If there was a binding agreement, the defenders admit that they were in breach of it.
The argument for the defenders was that the letters did not constitute a concluded contract between them and the pursuers. The whole arrangement was dependent upon prices being mutually settled for tankage to be ordered by the defenders. Until prices were mutually settled, the whole matter was inchoate, and neither party was bound. The subsequent actings of parties showed that they did not intend to conclude a contract until orders were actually placed for tankage at agreed prices.
In my opinion the terms of the letters establish that the parties did intend to enter into an agreement involving binding obligations on both sides. The pursuers' letter bore to be a confirmation of previous negotiations by telephone. It recorded that an agreement had been arrived at. It stated that there was a "commitment" for the three years. It asked that the defenders should, as promised, "confirm this commitment." The sought-for confirmation was expressly given in the defenders' answering letter, which contained an undertaking to "issue orders in due course." It is also important that their letter concluded with a proposal to place additional orders with the pursuers, which was dependent only on the pursuers' ability to increase the tonnage available. The arrangement about the 3000 tons was not expressly made conditional upon an agreement about prices. Indeed, if the arrangement was to have any practical effect, it was necessary for the pursuers to fulfil their part without waiting for such settlement. Clearly they had to allocate their quota of steel so as to leave 1000 tons available for orders to come from the defenders, and to make corresponding plans for their labour force and machines. It is difficult to understand why they should so modify their work programme and pledge their resources if they had no firm undertaking from the defenders that their resources would be called upon. The mention of prices comes late in the first letter, after the reference to commitment, and prices are not mentioned in the reply. The inference which I draw from the terms and layout of the letters is that parties agreed to make stipulations and counter-stipulations which were to be fulfilled immediately or "in due course," and to leave to a later stage the matter of the prices to be paid for the tankage to be ordered. In other words, the letters effected a continuation of the system of "open orders" which they had successfully operated in connection with the 910 tons, and which, according to the defenders' witness Masterton, was a common practice in the steel industry during the period of shortage of supplies. As the Lord Ordinary has put it, price was a lesser consideration at that time.
The defenders, however, maintain that, although oil companies and tank manufacturers found open orders convenient, they could not in law create binding contracts by open orders, because price is an essential of a contract to supply tanks, and, in the absence of agreement on this essential, there could be no enforceable contracts, and consequently no claims for damages could arise out of such arrangements.
If this contention were legally sound, it would reflect adversely upon the law of Scotland. The object of our law of contract is to facilitate the transactions of commercial men, and not to create obstacles in the way of solving practical problems arising out of the circumstances confronting them, or to expose them to unnecessary pitfalls. I know of no rule of law which prevents men from entering into special agreements to meet the requirements of special circumstances. In particular, if A and B are dealing with an urgent situation, and they agree that, to meet the needs of that situation, A shall do something at once, and that, for his part, B shall do something else, a binding contract is effected although they also agree that the amount of money to be paid by one to the other shall be settled at a later date. In the circumstances in which they are placed, money is not an essential of the agreement. The essential matter is to secure immediate or early performance of certain acts. If the parties are at one on that essential matter, the agreement is, in my opinion, a binding contract, with the usual consequences of enforceability and of liability in damages for breach.
The matter for decision must always be whether parties have not got beyond the stage of negotiation, or whether there is a concluded bargain. In the usual case, the price to be paid is one of the essential matters on which agreement is necessary before either party is bound. If they have not agreed upon the actual sum or on a method of deciding that sum, there is not the consensus in idem requisite before a contract can be completed. But if they agree that the question of price shall be deferred, and agree on the things to be done to meet the immediate needs of the situation, there is consensus in idem,and each can require the other to do what he has undertaken to do before the price is settled. In such circumstances the matter of price is not "vital to the arrangement between them," to use the words of Lord Buckmaster in May & Butcher Ld. v. The King . For these reasons I regard the present case as distinguishable upon its facts from the English cases to which we were referred. I think that the Lord Ordinary was right when he held that by the letters the parties entered into a valid and binding agreement.
Without requiring to deal with the difficult question as to how far the subsequent actings of parties can be looked at in considering the effect in law of writings exchanged between them, I agree with the Lord Ordinary that the actings disclosed by the evidence do not support the defenders' contention that the letters were not intended to be a binding agreement. The pursuers' insistent demands for orders in fulfilment of the "commitment," and the defenders' apologies for failure to place orders, until their belated attempt, by letter dated 4th March 1958, to transform the arrangement into a "reservation without commitment." are fatal to the argument.
Accordingly I reach the conclusion that the Lord Ordinary's judgment on the merits should be affirmed.
[His Lordship then dealt with the question of damages, with which this report is not concerned, and concluded]—
Accordingly on the whole matter I would refuse the reclaiming motion and adhere to the interlocutor of the Lord Ordinary.
The foregoing opinions having been delivered, counsel for the pursuers moved for interest on the sum awarded as from the date of the Lord Ordinary's interlocutor.
As I read that subsection, it is not intended to introduce a general rule. On the contrary, under the subsection a power is conferred on the court, if, in the exercise of its discretion the court sees fit, to vary, owing to some special circumstances in the particular case, the normal rules regarding payment of interest. In my view the circumstances in the present case are not such as to warrant this unusual power being exercised. In substance all that is said in favour of the circumstances being special is that the sum of damages is substantial, but that in my view would be no ground for differentiating the present case from any other.
There is no question here of undue delay or any other special circumstance warranting such remedy being made available. Were we to give effect to the motion of the pursuers, it appears to me that we would be converting what was intended to be a remedy applicable in special circumstances only into a remedy which would become a general rule. That is not, as I see it, what Parliament intended. I therefore propose to your Lordships that the motion should be refused.
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