Agreements to agree, collateral contracts and damages: There is no substitute for certainty

9th May 2016

Parties often enter into contracts for the future purchase of goods, or into contracts containing obligations for parties to reach further agreement in future. Such contracts can give rise to difficulties and in some circumstances they may lack sufficient certainty to be legally enforceable.

Pre-sale contract

In Hughes v Pendragon Sabre [1] the claimant, Mr Hughes, paid a deposit to the defendant car dealership, Pendragon, in respect of the future purchase of a limited edition Porsche 911, if and when one or more of the cars in question were allocated to the dealership. Mr Hughes entered into Pendragon’s standard contract, but with certain key clauses (including price, specification and delivery date) left uncompleted. Clause 2 of the contract terms provided that Pendragon had discretion with regard to the timing of fulfilment of customers’ orders regardless of the sequence in which they were placed. A few days later, by an e-mail dated 23 March 2011, Pendragon confirmed to Mr Hughes that he would get the first of any such cars allocated to them.  In the end, however, Pendragon were only allocated one such car and they sold it to another customer.

Mr Hughes sued for breach of contract. The case reached the Court of Appeal, which had to decide:

• Was the contract legally binding or was it a mere, unenforceable ‘agreement to agree’?
• If the contract was valid, did the e-mail of 23 March 2011 amount to a variation or a collateral contract that Mr Hughes would get the first or only car?
• If so, how should any damages be calculated?

Court of Appeal clarification

The Court of Appeal found for Mr Hughes and clarified the following points, which are of wide applicability and interest:

• Certainty of terms is a pre-requisite for a valid, binding contract. So, where an agreement lacks sufficient certainty and amounts only to an ‘agreement to agree’, it is not legally enforceable.
• However, the Sale of Goods Act 1979 (SGA): permits agreements to sell future goods; provides that prices need not be fixed and may be left to be fixed in a manner agreed by the contract or determined by a course of dealings between the parties; and implies a reasonable period for delivery where no date is specified [2].
• As a matter of principle, the courts are generally prepared to find a binding contract in the absence of specified terms so long as there exists some means or standard by which terms can be ascertained [3].
• The e-mail of 23 March 2011 did not amount to a variation of contract per se. Pendragon’s terms contained the common prohibition against variations not in writing and signed by the parties and the e-mail post-dated the contract.
• However (and this is crucial) the e-mail was a valid collateral contract between the parties that Mr Hughes would be sold the first car allocated to Pendragon. The practical effect of that collateral contract was to vary or override Clause 2 of the original contract.
• Section 51 SGA provides that breach of contract damages for non-delivery are to be the difference between the contract price and the market price at the time the goods ought to have been delivered or if (as here) no delivery date is specified, the time of refusal to deliver.
• The specialised nature of the limited edition Porsche meant that there was an absence of available market to feed into that damages calculation. The Court of Appeal therefore confirmed that the common law measure of damages (that is, the loss directly and naturally resulting, in the ordinary course of events, from the breach of contract) [4] would apply.
• To determine loss naturally flowing from the breach the Court of Appeal had to ascertain the contract price and calculate the difference between that and what Mr Hughes would have had to pay to obtain the nearest equivalent vehicle.
• Whilst it was not actually relevant in the instant case, the court gave a specific reminder that the common law measure of damages requires a claimant to mitigate its loss [5].

WM Comment and practical advice

While the subject of this particular pre-sale contract may be rare – a limited edition luxury sports car – the contractual arrangement; the variation prohibition; and the factual circumstances of the follow-up e-mail are not. As such, this case clarifies important principles of which anyone involved with commercial contracts should be aware. In particular:

• Contracts for future sales or even agreements to agree can be legally binding if the contract contains a mechanism for ascertaining as-yet unspecified terms.
• Apart from certainty of terms or existence of the mechanism for ascertaining terms, it will be necessary, for the finding of a valid contract, for parties to demonstrate their intention to be legally bound.
• A standard contractual term which purports to exclude oral statements and which requires variations to be in writing and signed may not always suffice.
• Parties should include ‘entire agreement’ clauses in their contracts and should train staff against making oral or e-mail assurances which go beyond the intended terms, so as to minimise the risk of any extraneous discussions forming part of the binding contract.
• Finally, SGA and the common law measure of damages can determine recoverable damages in the case of a non-delivery breach of contract even where key terms are prima facie unspecified and in the absence of a market for replacement of goods.

Although legal principles exist to resolve and quantify disputes even in cases with apparently incomplete or contradicting contractual terms, there is no doubt that much time, cost and inconvenience could have been saved if the parties in this case had properly understood the legal status of their communications.

Parties need not be put off entering into pre-sale contracts or other arrangements for future agreement, but where terms cannot be specified at the time, parties should seek to ensure the certainty and validity of their contracts by including as much detail as possible, along with workable mechanisms for fixing terms.

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[1] Hughes v Pendragon Sabre Limited (t/a Porsche Centre Bolton) [2016] EWCA Civ 18
[2] Sections 5, 8 and 29.
[3] Ibid para 30; and Cudgen Rutile (No 2) Pty Limited v Chalk [1975] AC 520
[4] This is known as the ‘first limb’ of the measure of damages rule in Hadley v Baxendale (1854) 9 Ex 341
[5] Para 37; and see our briefing on mitigation.