Lecture 3: Certainty of Terms

1. Reasonable Certainty & Essential Terms Re Estate of Kong Wing Hong (2014), Chan Man
Tin v Cheng Leeky (2008), May and Butcher Ltd v R (1934)

2. Recognizing Essential Terms in Commercial Agreement

A. Agreed mechanism
I. Agreement to agree or negotiate May and Butcher Ltd v R (1934), Walford v Milles (1992)
II. Unilateral determination and good faith Paragon Finance Ltd (2001), Chan Kam Yau (2007)
III. Certainty of mechanism Hyundai Engineering & Construction Co Ltd (2005)
IV. Arbitration Foley (1934), Fletcher Challenge Energy Ltd (2002), New Hope Collieries Ltd (1989)
V. Non-cooperation with agreed mechanism Eggleton (1983)
B. Contextual construction
I. Language of agreement as a whole Jumbo King Ltd (1999), Hillas & Co Ltd (1932)
II. Trade usage Arnold (1989)
C. Prior course of dealings Hillas & Co Ltd (1932)
D. Post-contractual conduct
I. Apparently missing terms Texas Commerce International Bank Ltd (1982), Agrila Ltd (2013),
Archital Luxfer Ltd (1993), Fine Fare Ltd (1967)

II. Obscurely expressed terms New World Development (2006)

III. Non-ambiguity of conduct Marks & Spencer plc (2001), World Food Fair Ltd (2006/7)
E. Implication in law of essential terms
I. Terms implied by legislation s(10) Sales of Good Ordinance (Cap 26), s(7) Supply of Services
(Implied Term) Ordinance (Cap 457), May and Butcher Ltd (1934), Novinex (1949), Anstalt Nybro (1980)

F. Failure to identify or imply essential terms Toppan Printing Co (2005), H C & J G Ouston (1941)
3. Meaningless Term Nicolene Ltd (1953), Gee Tai Trading Co Ltd (1993/4), China Great Wall Finance Co (2004)
4. Non-essential Terms New World Devt (2006), Yiu Yau-ping (1992), Lo Yuk Sui (2016), iRiver Hong Kong Ltd

(2008)
Lecture 3: Certainty of Terms

I. Reasonable Certainty on Essential Terms

 Parties can fail to reach consensus ad idem because 1 or more essential terms are too
ambiguous or missing, resulting in fatal uncertainty which prevent contract formation
 Reasonably certain: whether terms are certain is by the standard of reasonable man in the
position of the position
 If the party failed to agree on essential terms with reasonable certainty, the court will try to
“fill in the gap” (clarify or supplement express term1) to enforce the parties’ agreement.

II. Essential Terms or not?

 In order to establish consensus ad idem, it is necessary for the parities to settle all terms
essential to performance of the contract (otherwise it would be void!!)
 Definition: depends heavily on what parties have set out to achieve2 (e.g. price, date)
 Failed to specify essential terms /without sufficient certainty or RP cannot ascertain
meaning

 No commencement date in a lease agreement

Re Estate of Kong Wing Hong [2014]
Held: Lease Agreement was void for uncertainty because it fails to specify essential
terms of commencement date

 Language employed in terms is too abstract that lacks enforceability

Chan Man Tin v Cheng Leeky [2008]
Held: Terms such as “loyalty”, “chastity” and “living happily together” were too
abstract for reasonable people in the position of parties to ascertain its meaning

May and Butcher Ltd v R [1934]

Facts: Agreement provides that “price to be paid, and the date on which payment is to be
made by purchaser to the commission for such tentage shall be agreed upon
sometimes ”
Held: (1)They failed to settle on essential terms (price to be paid) which rendered contract

1
The orthodox doctrinal position of common law is that court will enforce agreement rather than make
the agreement for the parties (imposing terms which they have not agreed)
2
For example, in contract to lease land in HK, essential terms are identities of party, premises to be
leased, duration of the term and the rent and other considerations.
 void for uncertainty; and (2) failed to agree mechanism (for determining price)
which does not depend on reaching a future agreement.

III. Uncertainty and Commercial Agreement

 Where there is commercial contract & the parties show contractual intention to be
bound, the court will attempt to fill gaps in essential terms on the objective basis
 It is the result of failure to express their actual agreement but the parties’ intention to
agree can be reasonably ascertained (i.e. agreed but unexpressed)

Common law develops 5 techniques to recognize agreed but unexpressed essential

terms:
(a) agree that essential terms are supplied by mechanism, including arbitration, that does not
depend simply on future agreement (i.e. agree to agree)
(b) unexpressed agreement can be established by construing the contract as a whole
(c) or can be revealed by prior course of dealing between them
(d) or can be revealed by post-contractual conduct unambiguously referable to an intention to
comply with obligation that was created at the time of agreement’s conclusion
(e) even where the parties have not agreed an essential term, still supplied as an implied term
in “law” (such as legislation)

A. Agreed mechanism (mechanism to ascertain essential term, not agreement to agree in future)

 General Rule: The party may avoid uncertainty of essential terms such as price by
agreeing a mechanism by which the terms can be determined (esp. contract for
future performance over a period) [reasonably certain, see below]

 Exception: The mechanism established by the parties cannot depend simply on their
future agreement. Similarly, an agreement to negotiation is void for uncertainty

Walford v Miles [1992]

Facts: P negotiated the purchase of D’s photographic proceeding business. D sold to another
party, but P alleged that D had promised to continue negotiation only with them. P
sued for breach of the alleged contract to continuing negotiation.
Held: An agreement to negotiate is unenforceable because it lacks necessary uncertainty

 Method 1: If the agreement allows one of the parities unilaterally to determine a

term of the contract3 (without assent), discretion must not be exercised dishonestly,
for an improper purpose, capriciously or arbitrary [i.e. act in good faith] (Paragon
Finance Ltd [2001])

Chan Kam Yau v Hong Kong University of Science & Technology [2007]
Facts: D had exercised its unilateral discretion under a contract of employment to alter the
terms on which two of their employees participated in a provident fund. P argued that
it was an impermissible exercise of University’s unilateral discretion.
Held: University did not exercise his discretion irrationally in that no reasonable
employer would have exercised his discretion in this way (new scheme “not without
merit”)

 Condition: The mechanism agreed by the parties to resolve any uncertainty must be
itself reasonably certain. A failure to specify a mechanism with reasonable certainty
will cause it to fail. (result in an agreement to agree)

Hyundai Engineering & Construction Co Ltd v Vigour Ltd [2005]

Facts: The agreement provided “anything that cannot be finalized will be resolved and
decided by the managing director …provided failing the ultimate agreement then both
party shall agree and submit to Third Party Mediation procedure”
Held: The failure to settle or specify the steps to implement the agreement to submit
disputes to mediation (e.g. who the mediator is, what procedures to follow)
rendered the clause (i.e. essential terms) fatally uncertain, which is an agreement
to agree.

 Method 2 - Arbitration4: Provided an arbitration clause is in sufficiently wide terms,

common law courts will nowadays readily permit the agreed arbitration mechanism
to supply a missing term.

3
specific obligation of good faith is endowed on the party with discretion in order not to cause abuse.
4
It is usual for commercial contracts to contain a clause requiring the parties to submit unresolved
dispute concerning the interpretation or application of contract to arbitration.
 Foley v Classique Coaches Ltd [1934]
Facts: Both parties did not provide a price for the agreement (“at a price to be agreed by the
parties from time to time”) but included arbitration clause (“if any dispute or
difference shall arise on the subject matter”). The parties had performed the
agreement for 3 years before D rejected the agreement because it did not specify price
for petrol.
Held: (1) Both parties obviously believed they had a contract and acted for 3 years as if
they had (on the basis of post-contractual conduct)
(2) Arbitration clause can apply to any failure to agree as to the price
Similar Case Fletcher Challenge Energy Ltd (2002) & New Hope Collieries Ltd (1989)
“find curious a notion that in a commercial contract where price is left to be agreed
and there is an arbitration clause, the clause cannot be used to determine the price
”

 Situation - Non-cooperation of agreed mechanism: If the machinery established by

the parties is rendered ineffective due to non-cooperation of one of the parties, a
court will step in to fill the apparent gap in the essential terms if the machinery
indicates an intention to settle the disagreement according to objective and
justiciable criteria (i.e. reasonably certain mechanism)

Sudbrook Trading Estate Ltd v Eggleton [1982]

Facts: A lease gave the tenant (D) an option to purchase the freehold of the property at a
price to be agreed by two surveyors one appointed by D and one appointed by the
landlord (P). D sought to exercise the option but P refused to appoint a surveyor. P
claimed that the clause was too vague to be enforceable as it did not specify a price.
Held: The mechanism did not depend simply on parties’ future agreement but was only
stalled by P’s non-cooperation of agreed mechanism. The court resolved to appoint
a surveyor in P’s stead. (the court’s action is arguably de facto rewrite contract)

B. Contextual construction (ascertained by the language of the contract as a whole & trade usage)
 One must construe (esp. poorly expressed) contractual terms in context of the
agreement as a whole, including language elsewhere in agreement, rather in isolation

Jumbo King Ltd v Faithful Properties Ltd [1999]

Held: The construction of document is attempt to know what reasonable person would
 have understood the parties to mean …not merely individual words…but to the
agreement as a whole, the factual and legal background…practical object intended
to achieve

Hillas & Co Ltd v Arcos [1932]

Fact: Arcos agreed to supply Hillas with lumber in a contract stating the sale of “22,000
standards of softwood of fair specification”. In the contract Clause 9 was an option to
“purchase of additional 100,000 standards for delivery during 1931”. Arcos put
forward the claim that the option “was an agreement to make an agreement, the
terms of which were not defined, and so was unenforceable”.
Held: (1) The court noted that the agreement elsewhere provided for standards of
softwood which justified contextual interpretation of Clause 9 as “standards of
softwood”
(2) The court ruled that “fair specification” was not vague enough to void the
contract. Both parties had experience in the trade and had completed similar
bargains in the past thus each would have known each other’s intentions at the
time.

Trade Usage
 The parties’ intention in agreeing an obscurely expressed term can also be
illuminated by reference to a trade usage. (factual and legal background)

Ashburn Anstalt v Arnold [1989]

Held: An agreement to grant a tenancy was held to be sufficiently certain despite that it
was expressed to be in respect of a shop “in prime position” and court would
determine whether a site offered was in prime position.

C. Prior course of dealings (illuminate parties’ intention by reference to this to ascribe meaning)

 Any prior course of dealings between parties can form part of the context in which
the contract was concluded and potentially illuminate the parities’ common
intention
see Hillas & Co Ltd v Arcos [1932]

D. Post-contractual conduct (illuminate parties’ intention by conduct in performing contract)

  The court will strive to fill apparent gaps in the essential terms of commercial
agreement5 where the parties have already embarked on a course of conduct in
performing the arrangement (which show their intention to create legal
relationship)

 General Rule: The extent to which a commercial agreement is performed is

significant to determine whether it is tainted by such a degree of uncertainty as to
deprive it contractual force [Texas Commerce International Bank Ltd (1982), Agrila
Ltd (2013)]

 Both fully executed but no written agreement (at least have intention)
G Percy v Archital Luxfer Ltd [2006] (做完裝修唔比錢)
Facts: P (building engineers) had entered into a contract with a developer to construct a
building. P then entered into arrangement with D to install windows and doors on the
project. After the arrangement had been fully executed on both side, D asserted that no
contract exists as numerous terms had not been agreed and no written agreement.
Held: Either fully or partly executed transactions are under consideration. It is
unrealistic to argue that there was no intention to enter into legal relations and
submit the contract is void for uncertainty when the transactions have been
performed both side.
Similar case: F & G Sykes (Wessex) Ltd v Fine Fare Ltd (1967)
“In the commercial agreement the further the parties have gone with their contact,
the more ready are the Courts to imply any reasonable term to give effect to
intention.”

The task6 is to select a term that corresponds to parities’ objectively manifested

intentions at the time an agreement was made, explained by part performance of the
agreement

Obscurely expressed terms (朦朧不清的條文)

5
in order not to defeat reasonable commercial expectations that a contract has been concluded
6
This should not be understood as authorizing the court to fill apparent gaps in an agreement’s essential terms
in any way which seems reasonable
  General Rule: The common law is reluctant to strike down as uncertain a
commercial agreement concluded between parities in circumstance where
 their conduct indicated that they regarded themselves as contractually bound by
a definite set of undertakings whose meaning is tolerably weak (行為能夠反映
雙方合約意圖，即使條文未能清晰顯示該項意圖)
 any otherwise fatal uncertainty in the term is reasonably dispelled by reference
to the parties’ conduct in performance of the agreement (條文極不明確的地方
藉由雙方履行合約的行為得以消除)

New World Development Co Ltd v Sun Hung Kit Securities Ltd [2006]
Facts: Both parties orally agree that SHK would assume stake in NWD’s share of the project
but SHK had made substantial contribution but later ceased to do so on the basis that
oral agreement lack certainty required of a complex undertaking
Held: The simplicity of terms of oral agreement is not inherently vague and left nothing
to be settled by future agreement. Doubt over certainty of terms will be dispelled by
the parties’ conduct in performing the agreement.

 Exception: Essential terms will not be established on the basis of conduct which is
ambiguous (i.e. conduct which can be reasonably explained on a basis other than an
intention to comply with a contractual obligation already in existence prior to the
conduct in question). (如果合約方的行為不是履行合約義務，或者能合理解釋是出
於其他原因，該行為不能澄清重要條文的證據) (合理解釋是明理人在合約方立場)

 Example: In particular, conduct which merely preparatory to the conclusion of a

contract(尤其是該行為是合約訂立前的準備工作)

Baird Textile Holdings Ltd v Marks & Spencer plc [2001]

Facts: Baird Textile Holdings Ltd had supplied clothes to Marks & Spencer plc. for 30 years.
All of a sudden, M&S said they were cancelling their order. Baird sued M&S on the
grounds that they should have been given reasonable notice. The problem was, there
was no express contract under which such a term could be said to have arisen. Baird
argued that a contract should be implied through their course of dealings
Held: If the party has acted as they did without any contract, there is no necessity to imply
such contract.
  **** Hong Kong courts take a cautious view on missing essential terms can be
established by inference from parties’ conduct. It must clearly prove that the parties
reasonably believe (i.e. reasonable man in the position of the parties) they have
intention to establish a contract (香港法庭採用較為謹慎方式，只有明理人在合約
方立場也同意合約雙方具有訂立合約的意圖，才能確定該重要條文在合約中生效)

 Not enough to deduce such intention from a party’s conduct which may reasonably
explained on grounds that do not depend on the belief in existing contractual
obligation. (不能僅從合約其中一方的行為，便推斷該行為沒有履行合約義務的意
圖)

 裝修公司在缺乏雙方就合約條文的同意下，便支付按金和開始裝修工程
World Food Fair Ltd v Hong Kong Island Development Ltd [2007]
Facts: In the course of negotiations which were still incomplete, P subsequently paid
deposits to D and took the possession of the premises for the fitting out-work of
food court. But final agreement had not been reached on the commencement date,
on what should be the period of the rent free period, and on an option to renew, all
being matters which the parties had plainly intended to be regulated by their contract.
Held: *** CFA was not satisfied that reasonable person in the position of the parties
would have believed themselves to contractually bound as a result of payment of
the deposit and the giving of vacant possession. These act are ambiguous because
they are also consistent with industry practice (or the custom within the industry) in
anticipation of (i.e. before) concluding a binding agreement. It therefore could
easily be explained on commercial grounds than contractual commitment.

E. Implication in law of essential terms (legislation & legal principles may imply term in remedy)
 Even where the parties have not agreed an essential term, it may be
possible to imply term in law.
 Example: parties have entered into agreements of a reasonably common
 type7 and a term is implied in law either at common law or by legislation.

1. Terms implied by legislation

 General Rule: Where the parties to a contract for the sale of goods in HK have
made no agreement as to the price (i.e. no agreed fixed charge, not established a
mechanism to determine the price/charge or course of dealing does not reflect), the
agreement may be rendered certain by a term implied by legislation8.

 Exception: Based on May and Butcher, it is unlikely that these provisions will
save an arrangement (void) in which the parties have agreed to agree price or
charge9

 Similar to sales of good with rule exception, Section 7(1) Supply of Service (Implied
Terms) Ordinance Cap. 457) will impose on the receiving party in a contract for
the supply of a service an obligation to pay a reasonable charge for the service.

 In any sales of good or service agreement which are executed on one side (i.e. one
does his part without agreeing a reasonable price), the law will then be implied,
from the parties’ conduct, a contract with a reasonable sum to be paid. (British
bank for foreign trade v Novinex [1949]) (unilateral contract in this sense???)

2. Other essential terms

 Of further practical importance that legislation, absent the parties’ contrary

intention, which makes legally binding provision for a matter which is essential to
the contract’s performance (form from the book, extremely unclear…)

Anstalt Nybro v Hong Kong Resort Co Ltd [1980] (better illustration than above)
Held: A contract can be saved if the uncertainty of essential terms can be objectively

7
include contract for sales of goods, residential and commercial tenancy and contract of employment
8
“where the price is not determined in accordance with the foregoing provision, the buyer must pay a reasonable
price. What is a reasonable price is … dependent on the circumstances” Section 10(2) Sale of Goods Ordinance
(Cap.26)
9
rationale from British courts: parties have shown intention that price might not be reasonable or they may have
precluded contractual intention. Therefore, applying legislation may impose a bargain on the parties by the court
 resolved by reference to legislation [Company Ordinance Cap. 32] or general law
principle [contract law] without resorting to further agreement by the party.

F. Failure to identify or imply essential terms

 Where an essential term is unexpressed and none of five techniques for

recognizing or implying essential terms are successful, agreement will be void for
uncertainty.

Toppan Printing Co v Chinese United Press [2005]

Held: Lack of certainty such that no party could have intended to have been bound by the
terms. The conduct post event (silence) failed to show intention to have contract.

G Scammell & Nephew Ltd v H C & J G Ouston [1941]

Facts: “This order is given on the understanding that the balance of purchase price [$168]
can be had on hire-purchase terms over a period of 2 years.”
Held: The agreement was therefore void for no reasonably certain meaning can be
ascribed to the terms “hire-purchase” and none of five techniques were effective to
remedy.
1. established no mechanism to ascertain the term
2. the phrase cannot be ascertained by reference to language of contract as a whole
and other trade usage
3. no prior dealing and relevant post-contractual conduct that illuminated intention
4. no any legislation and general legal principle might have implied a term in
remedy

IV. Meaningless Term

 The inclusion of a meaningless term will not cause the entire agreement to fail if it can
be severed. In order to be severed, the remainder of the contract must be workable
without it. In other words, a severable/meaningless term is not essential.

Nicolene Ltd v Simmonds [1953]

Facts: D sought to evade a claim for breach of a contractual obligation to deliver goods on
 the basis that the agreement had stipulated “the usual conditions of acceptance
apply”. D argued that the uncertainty of this term rendered the contract void
Held: It was held that the rest of the agreement was complete without the meaningless
term and should be enforced.

Gee Tai Trading Co Ltd v Sun Wah Oil & Cereal [1994]
Facts: An agreement to deliver ten thousand metric tons of an industrial fertilizer was made
with the following provision “Force majeure/arbitration: standard term to apply.”
Held: No such standard term exist, and the provision was meaningless but because the
remainder of the agreement was otherwise workable, HKCA severed the
meaningless

China Great Wall Finance Co v Wonderyouth Industries Ltd [2004]

Facts: Clause 3 in the supplemental agreement provided “in appreciation of the extended
loan, [Wonderyouth] agreed to let [Great Wall] share 50% of the selling profit for
property after minus all related costs.”
Held: Court was unable to objectively assign a reasonably certain meaning to phrase “the
selling profit after minus all related costs” (meaningless but non-essential severed)

V. Non-essential Term
 Even if certain terms the parties have not been finalized or agreed to negotiate
further, an objective appraisal to words and conduct may suggest that they did not
intend such term to be a precondition to a binding contract.

 A failure to settle non-essential terms will not be fatal provided

(a) ALL the essential terms are settled
(b) the parties intend to be bound without reaching agreement on further non-
essential term (either by conduct such as in New World Development and iRiver)

 Whether the parties consider the term essential and intended to bound?
 Whether the post-contractual conduct is suffered from the lack of such term?
New World Development Co Ltd v Sun Hung Kai Securities [2006]
Held: Although certain matters remained unresolved in the agreement between party, for
example whether D would become a registered holder of shares in the joint venture
company, the agreement was nevertheless sufficiently certain because such matters
were not considered important by the parties and they demonstrated by their
 conduct an intention to be bound without reaching agreement on the outstanding
matter.

Yiu Yau-ping v Fong Yee-lan [1992]

Held: An agreement can be legally enforceable as a contract despite that the parties also
agree that further terms are to be agreed in the future. It is not an agreement to
agree because all settled (essential) terms were intended to be legally binding.

 An interim agreement must include all essential terms and was intended to be bind.
 Failure to agree on further term will not render interim agreement uncertain/unworkable
Lo Yuk Sui v Fubon Bank (HK) Ltd [2016]
Held: It was held that arrangement may be contractually binding even where the parties
are not willing to settle all details. Once they reached substantial agreement, it is
not fatal that some point even important ones, remain to be settled by further
negotiation

iRiver Hong Kong Ltd v Thakral Corp (HK) Ltd [2008]

Held: There was a concluded contract despite that a formal distribution agreement had
never been concluded. All essential terms were settled on an interim basis and
parties’ conduct indicated that they considered themselves legally bound by such
essential terms.

 “Subject to” contract will not be contractually binding because the party stipulating the
requirement has showed his intention not to bound unless a settlement was reached !!!

Tutorial Tips: Always argue that prime facie essential terms is missing before toning down
to agreed mechanism, ascertained by reference to the language of the contract as a whole,
prior course of dealing, trade usage or post-contractual conduct that illuminate parties’
intention on such essential terms and any legislation or general law principle that implied a
term in remedy.