May & Butcher Ltd v King, The [1929] UKHL 2 (22 February 1929)

An agreement for the sale of goods stated the price was 'to be agreed upon from time to time'. The House of Lords held this was not a binding contract, as an essential term was left for future agreement, making it fatally incomplete.

Facts

The appellants, May & Butcher Ltd, sought to purchase the entire stock of ‘old tentage’ from the British Government’s Disposals Board following the First World War. An agreement was outlined in a letter dated 29 June 1921, which stated that the price for the tentage, dates of payment, and delivery schedule would be ‘agreed upon from time to time’ as the goods became available. The agreement also contained an arbitration clause for any disputes that might arise under the arrangement. The appellants paid a deposit of £1000. When a new Disposals Board took over, it refused to recognise the agreement as a legally binding contract, leading to the legal dispute.

Issues

The central legal issue before the House of Lords was whether a legally binding contract had been formed. Specifically, the court had to determine whether an agreement could be considered a concluded contract if a fundamental term, such as the price, was left to be determined by future agreement between the parties. A secondary issue was whether the arbitration clause could be used to ‘fix’ the missing price and thereby perfect the contract.

Judgment

The House of Lords unanimously held that no valid contract existed. The judgment, led by Viscount Dunedin, established that certainty on essential terms is a prerequisite for a binding contract.

Reasoning of the Court

Viscount Dunedin explained that it is a fundamental principle of contract law that an agreement is not a concluded contract if a critical part is left undetermined. He stated:

It has long been a well-recognized principle of contract law that an agreement between two parties to enter into an agreement in which some critical part of the contract matter is left undetermined is no contract at all.

He reasoned that ‘an agreement to agree’ is not a contract. The price is an essential term in any contract for the sale of goods. Since the parties had explicitly provided that the price was to be agreed upon in the future, and they failed to reach such an agreement, the contract was incomplete and therefore unenforceable. The arrangement was considered nothing more than an agreement to make an agreement in the future.

The Court distinguished this from cases where the contract is silent on price. In such instances, section 8 of the Sale of Goods Act 1893 would imply a term that a ‘reasonable price’ must be paid. However, that section did not apply here because the parties had explicitly stated a different mechanism for determining the price – mutual agreement.

Regarding the arbitration clause, the Court held that it could not save the agreement. An arbitration clause only functions if there is a binding contract in the first place; it cannot create the contract. Viscount Dunedin clarified this point:

The second point is that the arbitration clause is sufficient to float the agreement. … As the Lord Chancellor said in a case to which I shall presently refer, the arbitration clause is a clause to settle disputes, but you cannot have a dispute until there is a contract.

Lord Buckmaster concurred, stating forcefully that an agreement which is uncertain on a critical point is not a contract and cannot be enforced.

Implications

The decision in May & Butcher Ltd v The King is a cornerstone of English contract law, reinforcing the principle of certainty of terms. It establishes that for a contract to be enforceable, the parties must have reached a consensus on all essential terms, or have provided a clear mechanism (such as a formula or a third-party valuer) for determining them. An ‘agreement to agree’ on an essential term, without more, is void for uncertainty. This case clearly demarcates the limits of judicial intervention in contract formation, preventing courts from making a contract for the parties where they have failed to do so themselves. It also clarifies that arbitration clauses are for resolving disputes arising from an existing contract, not for completing an incomplete one.

Verdict: Appeal dismissed. The Court held that no legally binding contract existed between the parties.

Source: May & Butcher Ltd v King, The [1929] UKHL 2 (22 February 1929)