UK: International Trade - Concluding Your Contract And Agreeing On Terms: Don’t Hold Your Peace

Last Updated: 24 February 2012
Article by Stuart Shepherd and Reema Shour

The recent case of Wilmar Oleo Pte Ltd v. Vinmar Chemicals and Polymers BV (MT Varkan Ege) [2011] EWHC 2067 (Comm) involved a dispute between the parties to an FOB sale contract for biofuel as to what terms, if any, had been agreed between them with regard to determination of the quality of the cargo. The judge's decision is interesting not so much for the detailed review of the facts and the expert evidence presented to the court, which we do not focus on in this Bulletin, but rather for the judge's comments on the court's approach to the determination of what the parties have agreed by way of contract terms.

We summarise below some relevant principles applicable to the negotiation of contracts and their terms under English law and then consider the relevance of what the judge in the case had to say on the subject.

The basic principles

Under English law, a contract will be binding on the parties where it is the parties' intention to enter into contractual relations and they have agreed on the essential terms - even if they have left over other, less crucial, terms to be agreed at a later stage. In 1987, in Pagnan SpA v. Feed Products Ltd, there was a dispute between the parties as to whether negotiations for the sale and purchase of corn gluten feed pellets that had been conducted via intermediary brokers had resulted in a binding contract. The Court of Appeal held that they had. Lord Justice Lloyd usefully set out the relevant principles as follows:

  1. Where an agreement is being negotiated in an ongoing exchange of correspondence, all the correspondence has to be looked at to determine whether a binding contract has been concluded in the course of that correspondence.
  2. Even if the parties have reached agreement on all the terms of the proposed contract, they may still intend that the contract is not to become binding until a further condition has been fulfilled. That is the usual "subject to contract" situation.
  3. The parties may intend that the contract is not to become binding until some further term or terms have been agreed.
  4. On the other hand, the parties may intend to be bound even though there are further terms to be agreed or some further formality to be fulfilled. If the parties fail to reach agreement on such further terms, the existing contract is not invalidated.
  5. There is no legal obstacle preventing parties from agreeing to be bound while deferring important matters to be agreed later (for example, when parties enter into "heads of agreement"). What is an essential term for the purposes of a binding contract will vary from case to case but, in essence, they are terms without which the contract is unworkable and the absence of which cannot be remedied by the court implying a term into the contract.

These principles reflect the parties' freedom of choice and freedom of contract under English law; the parties are considered to be the "masters of their contractual fate" and the court's role is to give effect to the parties' (objective) intentions, to be established on the basis of their oral and written exchanges.

Applying the principles

In 2008, in Statoil ASA v. Louis Dreyfus Energy Services LP (Harriette N), the parties disagreed on whether the terms of a contract for liquid propane gas (LPG) contained a demurrage time bar clause. The contract had been negotiated by e-mail correspondence via an intermediary broker with no contact between the parties' traders. Mr Justice Aikens (as he then was) said that, as per the Pagnan SpA case, the court had to review what the parties said and did and, from that material, infer the parties' objective intentions as to the terms of the contract. The judge cited with approval the Commercial Court decision in Pagnan SpA (upheld by the Court of Appeal), where Mr Justice Bingham (as he then was) said that, where parties are still "sorting out details against the background of a concluded contract", then the normally strict requirements of positive offer and positive acceptance under English contract law are not necessarily appropriate and that "if one party makes a proposal for terms and the other does not object to it when asked if it has objections, that can, in appropriate circumstances be taken as acceptance of that term". The correspondence in the Harriette N was on an accept/reject basis so, according to the judge, the parties did not have to spell out what was being agreed. Rather, they just had to identify what terms were being rejected and where an alternative term was being proposed instead. In that case, the judge decided that the final recap was wrong in including a demurrage time bar provision because that did not reflect the parties' objective intentions as expressed to one another in their correspondence.

In 2009, in Petroplus Marketing AG v. Shell Trading International Ltd (the Ninae), the dispute arose out of an FOB contract for high sulphur fuel oil (HSFO) which was again made through brokers without either party's traders communicating directly. The issue was whether a revised pricing clause had been agreed. The judge held that it had not. He concluded in that case that the correspondence did not demonstrate an intention to agree to vary the pricing provision in circumstances where Shell, having received a new proposal from Petroplus for pricing the HSFO, purported to accept some parts of it but also required some changes.

In 2010, in Papas Olios JSC v. Grains & Fourages SA, in the context of a dispute relating to a time bar provision in the FOSFA rules, the Court of Appeal stated that when using standard form contracts in commercial life, it was commonplace for parties to agree on all the essential terms necessary to bring about the conclusion of an oral contract and for the oral contract to then be followed by a written document (e.g. a confirmation or recap), which not only sets out the essential terms but also other terms common in the market and that "if there is no comeback from the other party, it may be easy to infer assent." Where the oral contract is followed by a written confirmation setting out fuller terms to which the other party is taken to have agreed, then the written contract can fulfil a dual function; it can confirm the oral agreement but also supplement the oral agreement if, from the conduct of the parties, agreement to it can be inferred.

In 2010, in RTS Flexible Systems Ltd v. Molenski Alois Muller GMbH & Co, the Supreme Court held that the parties had entered into a binding contract even though the contract was unsigned and expressly provided that it would not become effective until each party had executed a counterpart (a "subject to contract" scenario). Their Lordships found that the parties had, by their conduct in starting work pursuant to the draft contract, waived their agreement that the contract would only become effective on signature. The Supreme Court held that where the court concluded objectively that the parties had intended to create legal relations and had agreed on the essential terms, then even if certain other significant terms had not been finalised, the parties' words and conduct may lead to the conclusion that they did not intend agreement on such terms to be a precondition to a legally binding agreement.

Wilmar Oleo Pte Ltd v. Vinmar Chemicals and Polymers BV

The brokers' firm in this case acted for both parties, with an individual broker at that firm representing each party in the negotiations. The core terms (price, quantity and delivery) were agreed on the telephone on 27 August 2008. These core terms were set out in a Broker Confirmation Note ("BCN") which was subsequently e-mailed to the parties with the following recommendation: "we encourage Seller and Buyer to promptly exchange their own documentation". The BCN contained a number of other provisions which had not been agreed in addition to the core terms referred to above, including a provision relating to the determination of cargo quantity/quality at the loadport.

After receipt of the BCN, the seller e-mailed the buyer a draft contract form stating "Please read and sign and return to our Singapore Office" but the buyer did not respond to this e-mail. That draft contract form differed from the BCN in a number of respects, including as to inspection of the cargo. The seller subsequently sought to argue that the entire agreement between the parties was contained in the BCN or, alternatively, that the inspection clause in the draft contract form had been agreed. The buyer, on the other hand, maintained that the BCN contained terms that the parties had not agreed and that provisions relating to the appointment of surveyors and inspection of the cargo in the draft contract had not been agreed.

The judge concluded that the parties had agreed on the core terms on 27 August 2008 but that there was no agreement between them on the other terms contained in the BCN. The seller had not referred to the BCN when sending out its draft contract form and the inference to be drawn from that was that the seller was not content with the terms of the BCN. The judge also said there was no agreement on the basis of the seller's draft contract form. Whilst the seller might have put forward its draft contract form as a document containing the entire agreement between the parties, the seller had asked the buyer to read, sign and return the draft contract form, which the buyer had not done.

In the judge's view, the present case was distinguishable from a situation where a party proposes a particular term or terms and the other side does not object when asked if it has objections. As with the Harriette N, the judge said that the latter situation can in appropriate circumstances be taken as acceptance of the proposal. Indeed, he said that if neither party had objected to the BCN he would have concluded that the conduct of the parties judged objectively would have indicated that both parties had agreed the terms in the BCN. Here, however, the seller had not asked the buyer to state whether it had objections to that draft contract form and so mere failure on the buyer's part to object could not, in the judge's view, be taken as acceptance of that form.

Comment

Whilst the courts will apply the usual strict rules about offer and acceptance in determining whether there is a contract in the first place, including the principle that silence alone does not amount to acceptance, judges apply a more relaxed approach in determining whether the parties have agreed to vary or supplement their deals post contract. The courts are attuned to the practice of commodity contracts being concluded on main terms, with the parties then seeking to agree the complete package of contractual terms thereafter. In that context it is possible, if you are not careful, that you might be judged objectively to have agreed to additional terms by doing nothing but perform the contract. So the obvious message must be: do not ignore contractual exchanges and make your objections clear if you do not agree to the alternative or additional terms being proposed by your counterparty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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