The Court of Appeal has upheld a supplier’s appeal against a decision that a contract to supply orange juice pulp wash was partly unenforceable because the price paid for some of the supply was to be agreed at a later date. The ruling provides useful clarification on the enforceability of contracts in such circumstances.
The supplier contracted with a buyer to supply 1,200 metric tonnes of orange juice pulp wash per year over a three-year period. The price was adjustable according to quality, and the actual amount supplied would vary depending on the ‘real price’ agreed between the parties, in order to account for differences between the contract price and the market price. A real price was agreed in respect of 400 metric tonnes per year; the price for the remaining 800 metric tonnes each year was to be agreed by December of the previous year.
No agreement was in fact reached for the price of the remaining supply for any of the years of the contract. The supplier eventually terminated the contract, alleging that the buyer was in repudiatory breach.
Ruling on the supplier’s damages claim, the High Court found that the parties had both intended to deal in 1,200 metric tonnes of orange juice pulp wash per year for three years. However, the Court rejected the supplier’s argument that there was an implied term that the price for the remaining 800 metric tonnes would be a reasonable or market price. That supposed that the courts could determine what was reasonable, and the Court identified several difficulties with determining a reasonable price. The Court also rejected the argument that there was an implied obligation to use reasonable endeavours to agree the price. The supplier appealed to the Court of Appeal.
The Court noted that there was no explicit statement that the price was left to be agreed between the parties. The contract merely stated that the price was ‘open’ and was to be fixed by December each year: there was nothing about how the price was to be fixed. Nevertheless, it implicitly envisaged that the parties would seek to fix the price by agreement. However, that did not preclude the implication of a term that, in the absence of reaching agreement, the price would be a reasonable or market price.
The starting point in considering whether such a term should be implied was the fact that the parties had intended to reach a binding agreement as to the full quantity of orange juice pulp wash. The market was generally volatile, which provided an obvious incentive for the parties to leave some flexibility as to pricing in a long-term contract. In the Court’s judgment, the difficulties in identifying a market price were not so great as to preclude the parties having intended to conclude a binding contract on the basis that, in the absence of agreement, the price would be fixed by reference to an objectively reasonable price. Allowing the appeal, the Court considered that a term to that effect should be implied into the contract.