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

Hillas agreed to buy 22,000 standards of Russian softwood timber from Arcos with an option to purchase 100,000 standards the following year. When Arcos sold their entire 1931 output to another buyer, Hillas exercised the option. The House of Lords held the option clause created a binding contract despite its imprecise terms, as courts should give effect to commercial agreements.

Facts

The Appellants (Hillas) and Respondents (Arcos) entered into an agreement dated 21st May 1930 for the purchase of 22,000 standards of Russian softwood goods ‘of fair specification’ over the 1930 season. Clause 9 of the agreement granted Hillas an option to purchase 100,000 standards for delivery during 1931 at prices showing a 5% reduction on the official price list. On 20th November 1930, Arcos sold their entire 1931 timber output to the Central Softwood Buying Corporation. On 22nd December 1930, Hillas exercised the option under Clause 9. Arcos repudiated the option, initially claiming the agreement had been cancelled.

Previous Proceedings

A jury found the agreement had not been cancelled. At the damages hearing, Arcos raised for the first time that there was no contract at all, arguing the terms were too uncertain. MacKinnon J rejected this argument and awarded £30,000 damages. The Court of Appeal unanimously reversed, holding there was no enforceable contract.

Issues

The central issues were: (1) Whether Clause 9 of the agreement constituted a binding contract when the option was exercised, or whether it was merely an agreement to agree; (2) Whether the description of goods as being ‘of fair specification’ was sufficiently certain to be enforceable; (3) Whether the absence of express terms regarding shipping dates rendered the contract incomplete.

Judgment

The House of Lords unanimously allowed the appeal and restored MacKinnon J’s judgment.

Construction of Commercial Documents

Lord Tomlin emphasised the importance of construing commercial documents in context, stating that courts must balance essential legal principles against treating the dealings of men as effective, so that the law does not become ‘the destroyer of bargains.’ The parties clearly intended to make and believed they had made a concluded bargain, as evidenced by Clause 11 which cancelled all previous agreements.

Meaning of ‘Fair Specification’

Lord Tomlin held that the words ‘of fair specification’ meant goods distributed over kinds, qualities and sizes in fair proportions having regard to the output of the season and its classifications. This was something that, if the parties failed to agree, could be ascertained by the court, just as the fair value of property could be determined.

Legal Implications and Reasonable Terms

Lord Wright explained that in contracts for future performance over a period, parties may leave many details to be adjusted in working out the contract. He stated that such contracts are completed by the legal implication of what is just and reasonable, and cited the maxim ‘verba ita sunt intelligenda ut res magis valeat quam pereat’ (words are to be understood so that the matter may have effect rather than fail). Where contractual intention is clear but the contract is silent on detail, the law implies what is reasonable.

Shipping and Delivery Terms

Clause 6, which dealt with shipping dates for the 1930 purchase, was held to be incorporated into Clause 9 by implication. Lord Wright further noted that Section 29(2) of the Sale of Goods Act 1893 would in any event imply a requirement for delivery at reasonable times.

Distinguishing May & Butcher v The King

The Lords distinguished the unreported case of May & Butcher v The King, where prices were expressly left to be agreed between the parties. In the present case, there was no such stipulation requiring future agreement on essential terms.

Implications

This case established important principles regarding the enforceability of commercial contracts:

• Courts should adopt a commercially sensible approach to construction, seeking to give effect to agreements rather than defeat them on technical grounds
• Where parties clearly intend to be bound, courts will imply reasonable terms to fill gaps rather than declare the contract void for uncertainty
• The legal machinery of implying what is reasonable can make certain what parties have deliberately left undefined
• Business people should be entitled to decide what degree of precision is essential in their contracts
• The principle ‘id certum est quod certum reddi potest’ (that is certain which can be made certain) applies to give certainty to terms that are capable of objective determination

The decision remains a leading authority on the construction of commercial agreements and the courts’ willingness to give effect to the intentions of contracting parties in business contexts.

Verdict: Appeal allowed. The judgment of the Court of Appeal was reversed and the judgment of MacKinnon J restored, with costs to the Appellants in the House of Lords and in the Courts below. The case was remitted to the King’s Bench Division.

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