Bridging the Gap: English Courts Uphold Enforceability of Long-term Commodity Supply Contracts

by Reed Smith
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Term contracts for the supply of commodities – especially over a term of several years – are often expressed to be legally binding, but can leave important terms to be agreed between the parties, for example, on an annual basis. When the parties are unable to reach agreement on the relevant commercial terms, disputes can often arise as to whether the agreements are legally binding and enforceable contracts, or rather non-binding "agreements to agree" from which either party may walk away.

Such cases raise a tension between two important principles of English contract law: on the one hand, the principle that commercial parties should be held to the bargains they have made – especially if the indications are that they intended to be legally bound – and, on the other hand, the principle that an agreement must be sufficiently certain in its terms in order to be legally binding.

This issue commonly arises in the context of contracts for the sale of concentrates, which, while containing agreed mechanisms for establishing base prices, often contain terms requiring the parties to discuss and agree treatment charges and refining charges (TCRCs) (which are relevant to the determination of final prices), usually on an annual basis. One party may work on the basis that, if agreement on the TCRCs is not reached for the relevant year, either the entire contract is to fall away, or performance is to be suspended for a year (sometimes called a contract "holiday"), whereas the other party may regard the provisions as being subsidiary to the uninterrupted continuation of the contract to full term.

A recent Court of Appeal decision1 (the main thrust of which was to consider the principles of appealing arbitration awards), has helped to clarify the position as regards the enforceability of such arrangements – and shows the efforts that English courts will go to in order to uphold a contract as binding where the parties have clearly considered it to be so, notwithstanding that important commercial terms may remain to be agreed.

The Case

The parties had entered into a contract for the supply of copper concentrates. Following disputes arising out of the contract and referral to arbitration under the London Metal Exchange (LME) Arbitration Rules, the arbitration was resolved by way of a settlement agreement.

It was agreed that certain tonnages of concentrate would be delivered under three subsequent, separate contracts. The seller delivered under the first two contracts, but refused to perform the third contract (the "2010 contract") on the basis that the parties had failed to agree the TCRCs for 2010.

The TCRC provisions in the 2010 contract provided as follows:

"9.1 Treatment Charge shall be agreed between [Buyer] and [Seller] during the negotiation of terms for 2010.

9.2 Refining charge shall be agreed between [Buyer] and [Seller] during the negotiation of terms for 2010."

The buyer claimed breach of contract by the seller and the dispute was referred to arbitration under LME Arbitration Rules in accordance with the arbitration clause. An experienced LME arbitral tribunal concluded that the delivery obligation was "non-existent", and the buyer’s claim failed because "the contract had left material terms as ‘agreements to agree’".

The Appeals

The buyer appealed and Eder J overturned the tribunal’s decision finding that, "no reasonable tribunal correctly applying the relevant legal principles could have reached the conclusion that contract was unenforceable". Then it was the turn of the seller to appeal.

The Court of Appeal upheld the first instance decision of Eder J. Both courts considered the decision of the tribunal, so "bizarre" that there was no need to remit the matter to the arbitrators, as would have been the usual course of action. Instead the court varied the award in favour of the buyer in accordance with what it considered to be the correct legal principles. Some may find Eder J’s critical approach to the decision of the arbitrators surprising, as it could be regarded as reflecting a standard industry view of the effect of such TCRC provisions – i.e., that both parties would have understood the provisions to mean that, where the TCRCs could not be agreed, no further performance by the parties would be expected.

The Clarification

To the extent that any such industry approach existed prior to the Court of Appeal decision, it must now be consigned to history. This is probably good for concentrates traders as it has introduced a greater degree of certainty as to how an arbitral tribunal and/or the English courts will seek to interpret TCRC provisions. In essence, they will be treated in the same way as any other clause in the contract and be construed on their wording in each case – with no preconceived ideas of industry practice. In this case the presence of the words "shall be agreed" proved decisive.

Once the court had found that the parties intended their bargain to be enforceable, it referred to another general principle to the effect that the court would then "strive to give effect to that intention by construing the words which they have used in a way which does not leave the matter to be agreed in the future incapable of being determined in the absence of future agreement".

The Practical Impact

It is certainly not the case that it is no longer possible for the parties to agree TCRC provisions that expressly, and in clear terms, allow the parties to walk away from a contract if in future years the TCRCs cannot be agreed, and there will no doubt be contracts currently being performed that contain such provisions. This is because the starting point is always that each case will depend on its own facts and on the wording of the contract in question. However, in light of the case, it would be prudent to review such TCRC clauses in order to have realistic and up-to-date expectations before entering in to any TCRC negotiations in future years.

In broader terms, the case also provides a reminder that, where the parties are found to have a contractual intention to perform a contract, the English courts have a willingness to fill in any gaps left in the written document that reflects that intention. They will seek to find a "fair, market or reasonable" price, or it will quantify "whatever matter it is that has to be agreed by some equivalent epithet". This will be the case even where the parties to a contract might leave "material" provisions to be agreed in the future. The courts will also impose their own "machinery" for determining what needs to be determined if the machinery in the contract "breaks down". They will, however, stop short of seeking to impose terms where what has been agreed is so vague as to be unworkable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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