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Contract enforceable despite certain terms left "to be agreed"

03 May 2013

MRI Trading AG v Erdenet Mining Corp [2013] EWCA Civ 156, 8 March 2013

A commercial supply contract was enforceable despite there being provisions that still had to be agreed. The parties intended the contract to be enforceable, as evidenced by the mandatory nature of the wording used, the history of their relationship (two related supply contracts had already been performed) and the fact that all substantial matters, such as the pricing mechanism, had been agreed. The presence of an arbitration clause was also a strong factor in persuading the court to find the contract enforceable as it provided a contractual mechanism for achieving certainty if the parties were unable to agree on the outstanding matters.

MRI Trading AG (MRI), a Swiss trading company, and Erdenet Mining Corporation (EMC), a Mongolian mining company, were involved in an arbitration at the London Metal Exchange concerning the performance of a contract for the supply of copper concentrates. The arbitration was terminated by a settlement agreement, which was governed by English law and contained an arbitration clause. The terms of the settlement agreement included obligations for EMC to sell MRI various amounts of copper concentrates in 2009 and 2010, pursuant to three separate contracts attached to the settlement agreement. Two of these contracts were performed; one was not (the 2010 Contract).

The 2010 Contract contained agreed terms for the majority of relevant matters, including a method of calculating the purchase price for the concentrates. Three terms of the contract were yet to be agreed, relating to the shipping schedule, and certain charges. The wording of these terms was that they "shall be agreed…during the negotiation of terms". The monetary value of the charges yet to be agreed, USD 200,000-USD 300,000, was small in comparison to the total sum in dispute, approximately USD 10 million.

MG sought enforcement of the 2010 Contract, claiming damages for non-delivery and interests and costs. EMC resisted, arguing that these terms rendered the 2010 Contract unenforceable as a mere agreement to agree.
An arbitration tribunal considered the 2010 Contract in isolation and decided that there was no enforceable obligation to supply. On appeal to the High Court (under s69 of the Arbitration Act 1996) Eder J disagreed, but granted permission to appeal to the Court of Appeal.

Court of Appeal decision
In delivering the lead judgment, Tomlinson LJ relied heavily on Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD [2001] EWCA Civ 406 (Mamidoil) in which Rix LJ set out ten principles relating to the unenforceability of a contract due to uncertainty. Tomlinson LJ found that the arbitral tribunal should not have interpreted the 2010 Contract in isolation because the settlement agreement was excluded from the entire agreement clause in the 2010 Contract.

Preserve a bargain
Tomlinson LJ referred in particular to Rix LJ’s principle (vii) in Mamidoil – the court will assist parties in preserving rather than destroying bargains in contracts for future performance where one party has had the advantage of some performance which reflects the parties’ agreement on a long term relationship. The 2010 Contract was part of a wider arrangement between the parties, which the parties had been acting upon for more than a year. The language used throughout the 2010 Contract was mandatory and inconsistent with EMC’s preferred interpretation that there would be no obligation to deliver anything unless the subject matter of the terms to be agreed had been agreed. The use of the word "shall" (eg the shipping schedule "shall be agreed") strongly indicated that the parties did not intend that a failure to agree should destroy their bargain. In this regard, Tomlinson LJ noted principle (iv) from Mamidoil: for a commercial dealing between parties familiar with the trade and who had acted as if they had a binding contract, the contract should be construed, where possible, to enable the contract to be carried out.

Presence of arbitration clause provides certainty
Tomlinson LJ also relied on principle (x) from Mamidoil: that the presence of an arbitration clause provides a commercial and contractual mechanism in the absence of agreement between the parties to resolve disputes, with the assistance of experts in the field. Given that the 2010 Contract contained an arbitration clause, Tomlinson LJ used this principle to support the conclusion that the 2010 Contract was sufficiently certain or capable of being rendered so by means of arbitration.

Tomlinson LJ dismissed the appeal and upheld the High Court’s decision. In practice, this meant that a term was implied into the 2010 Contract that the shipping schedule and charges shall be reasonable. Any dispute between the parties as to what are reasonable charges and schedule will be determined by arbitration.

Comment: Whilst this decision does not alter the basic regime applying to enforceability of a so-called "agreement to agree", it does provide useful guidance on when such agreements can be enforceable and in particular how courts may apply the set of principles laid out by Rix LJ in Mamidoil. The court confirmed that, as a general matter, an agreement to negotiate terms of a contact is not enforceable. However, that is not a blanket rule and where, as here, the contract clearly indicates that the parties intended it to be enforceable, the court will give it effect. The key distinguishing characteristics of this contract, which assisted the court in upholding its enforceability, were:

  • the terms that were left to be agreed were not "key" to the working of the contract (most aspects of the contract had already been concluded, leaving the parties to agree on certain minor issues);
  • the contract had already been partially performed (which reflected the parties’ agreement on a long term relationship);
  • mandatory language – "shall be agreed" – used by the parties (the use of the verb "shall" as opposed to "may" indicated that the parties intended the contract to be enforceable); and
  • the contract contained an arbitration clause (the parties’ decision to, absent agreement, let a third party impose an agreement on them indicated that they did not intend the contract to fail).