WN Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2 (05 July 1932)

An agreement for the sale of timber included an option for a future purchase 'of fair specification'. The seller claimed this option was unenforceable for uncertainty. The House of Lords held that the court should enforce commercial agreements where possible, and any uncertainties could be resolved by reference to the parties' previous dealings.

Facts

W.N. Hillas & Co. Ltd. (the buyers) entered into a contract with Arcos Ltd. (the sellers) to purchase 22,000 standards of Russian softwood timber for delivery during 1930. The contract specified the timber as being ‘of fair specification’. Clause 9 of this agreement also granted Hillas an option ‘of entering into a contract with the sellers for the purchase of 100,000 standards of soft-wood of fair specification for delivery during 1931’. When Hillas sought to exercise this option, Arcos refused, arguing that Clause 9 was void for uncertainty and was merely an ‘agreement to agree’. Arcos contended that essential terms, such as the specific types, sizes, and quality of the timber, as well as shipping conditions, were not defined and were left for future negotiation.

Issues

The primary legal issue before the House of Lords was whether Clause 9 of the agreement was a legally binding and enforceable contract for the sale of 100,000 standards of timber, or if it was an unenforceable ‘agreement to agree’ because it lacked the requisite certainty of terms.

Judgment

The House of Lords, in reversing the decision of the Court of Appeal, held that Clause 9 constituted a valid and enforceable contract. The court emphasised a judicial policy of upholding commercial bargains wherever possible.

Lord Tomlin

Lord Tomlin criticised the tendency to invalidate contracts on grounds of uncertainty, particularly in commercial dealings. He argued that the parties, being experts in the timber trade, had intended to create a binding agreement. The phrase ‘of fair specification’ was not fatally vague; its meaning could be ascertained by reference to the previous dealings between the parties under the 1930 contract and the general customs of the timber trade. He stated:

The problem for a court of construction must always be so to balance matters, that without violation of essential principle the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains.

Lord Wright

Lord Wright delivered a highly influential speech, arguing that courts should construe commercial documents broadly and fairly, rather than being overly critical in finding defects. He stressed the parties’ clear intention to be bound and that the language they used, while summary, was sufficient for them. The prior performance of the 1930 contract provided a clear benchmark for what would constitute a ‘fair specification’ for the 1931 option. The court could imply a standard of reasonableness to fill any gaps.

But it is clear that the parties both intended to make a contract and thought they had done so. Business men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects…

Lord Thankerton

Lord Thankerton concurred, agreeing that the 1930 contract provided the necessary context to give meaning to the terms of the 1931 option. He found that the agreement did not leave essential terms to be agreed upon later, but rather provided an ascertainable standard (‘fair specification’) which the parties had accepted and which could be objectively determined if they disagreed.

Implications

The decision in Hillas v Arcos is a cornerstone of English contract law concerning certainty. It establishes the vital principle that courts will strive to give effect to the intentions of commercial parties and will not readily void a contract for uncertainty. The case demonstrates that where an intention to be bound is clear, the court will look to the parties’ previous dealings, trade customs, and the standard of reasonableness to add meaning to apparently vague terms. It clarifies the distinction between an unenforceable ‘agreement to agree’ on fundamental terms and a binding contract that leaves some subsidiary matters to be determined later according to an objective standard. This approach promotes commercial efficacy and ensures that the law does not become a tool for parties seeking to escape inconvenient bargains.

Verdict: Appeal allowed. The House of Lords held that the option clause constituted a binding and enforceable contract, reversing the judgment of the Court of Appeal and restoring the judgment of the trial judge.

Source: WN Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2 (05 July 1932)