| ||1. Contract with terms deliberately left open
A contract may be silent on one or more issues because the parties simply did not think of them during the negotiations. Provided that the parties have agreed on the terms essential to the type of transaction concerned, a contract will nonetheless have been concluded and the missing terms will be supplied on the basis of Articles 4.8 or 5.1.2 (see Comment 1 on Article 2.1.2). Quite different is the case dealt with in this Article: here the parties intentionally leave open one or more terms because they are unable or unwilling to determine them at the time of the conclusion of the contract, and refer for their determination to an agreement to be made by them at a later stage, or to a determination to be made by one of them or by a third person.
This latter situation, which is especially frequent in, although not confined to, long-term contracts, gives rise in essence to two problems: first, whether the fact that the parties have intentionally left terms open prevents a contract from coming into existence and second, if this is not the case, what will happen to the contract if the parties subsequently fail to reach agreement or if the party or third person who is to make the determination does not do so.
2. Open terms not in themselves an impediment to valid conclusion of contract
Paragraph (1) states that if the parties intended to conclude a contract, the fact that they have intentionally left a term to be agreed upon in further negotiations or to be determined by one of the parties or by a third person does not prevent a contract from coming into existence.
In cases where it is not expressly stated, the parties’ intention to conclude a contract notwithstanding the terms left open may be inferred from other circumstances, such as the non-essential character of the terms in question, the degree of definiteness of the agreement as a whole, the fact that the open terms relate to items which by their very nature can be determined only at a later stage, the fact that the agreement has already been partially executed, etc.
1. A, a shipping line, enters into a detailed agreement with B, a terminal operator, for the use of B’s container terminal. The agreement fixes the minimum volume of containers to be discharged or loaded annually and the fees payable, while the fees for additional containers are left to be determined if and when the minimum volume is reached. Two months later A learns that B’s competitor would offer better conditions and refuses to perform, claiming that the agreement with B never resulted in a binding contract because the question of the fees had not been settled. A is liable for non-performance because the detailed character of the agreement as well as the fact that both A and B began performance immediately indicate clearly that their intention was to enter into a binding agreement.
3. Failure of mechanism provided for by parties for determination of open terms
If the parties are unable to reach agreement on the open terms or if the party or the third person who is to make the determination does not do so, the question arises as to whether or not the contract comes to an end. According to paragraph (2) of this Article the existence of the contract is not affected “provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties”.
The alternative means of supplying the missing term will generally be application of the “gap-filling” provisions in Section 1 of Chapter 5 and Section 1 of Chapter 6, for example, by determining the price under Article 5.1.7(1) or by fixing the time for performance under Article 6.1.1 where those provisions can appropriately supply the relevant term. There may be situations, particularly in respect of long-term contracts, where those provisions may not be appropriate even where they cover the subject-matter of the missing term. In such situations, the term will be supplied by Article 4.8 or Article 5.1.2.
Where the parties have deferred the determination of the missing term to a third person to be nominated by a named institution or person such as the President of a Tribunal, or a Chamber of Commerce, etc., if the nominated third person does not determine the term, a new third person may be nominated. The cases in which it will be necessary to nominate a new third person are likely to be quite rare in practice. Few problems should arise as long as the term to be implemented is of minor importance. If, on the other hand, the term in question is essential to the type of transaction concerned, there must be clear evidence of the intention of the parties to uphold the contract: among the factors to be taken into account in this connection are whether the term in question relates to items which by their very nature can be determined only at a later stage, whether the agreement has already been partially executed, etc.
2. The facts are the same as in Illustration 1, except that when the minimum volume of containers to be loaded or unloaded is reached the parties fail to agree on the fees payable in respect of the additional containers. A stops performing, claiming that the contract has come to an end. A is liable for non-performance, since the fact that the parties have started performing without making future agreement on the missing term a condition for the continuation of their business relationship is sufficient evidence of their intention to uphold the contract even in the absence of such agreement. The fees for the additional containers will be determined according to the criteria laid down in Article 5.1.7.
4. Open terms in long-term contracts
As stated above and particularly in the case of long-term contracts, the parties may leave a term to be agreed when that term applies only to obligations at a later stage of the contract. For example, the parties may agree a price which is only to apply during the first year of the contract, leaving open the price to apply for the second or subsequent years. Equally, the parties may leave open the date for delivery because, for instance, the delivery of a piece of machinery may depend on the completion of a building before it is delivered. In such circumstances the term as to price may not be appropriately supplied by reference to Article 5.1.7 nor may time of performance be appropriately supplied by reference to Article 6.1.1. The appropriate term would then be supplied by Article 4.8 or Article 5.1.2.
3. The facts are the same as in Illustration 1, except that the fees payable in respect of the additional containers are fixed for the first year but there is no provision as to the fees to be charged for the second or subsequent years. In such a case it may not be appropriate to determine the fees in accordance with Article 5.1.7 by reference to a price “at the time of the conclusion of the contract”. Instead, it may be appropriate to fix a fee by reference to the date at the end of the first year. A term to that effect could be supplied under Article 4.8 or Article 5.1.2.
4. X is a power company and has decided to construct a new power station. X is purchasing a generator from Y. The generator will be installed directly onto the foundations in the generator building at the power station after that building has been completed. A generator can be delivered no earlier than 3 years after it is ordered. X has not yet entered into a construction contract for the power station but the generator building will only take 6 months to complete once the construction contract starts. X places a contract now for the generator so that it will be ready in time but cannot yet fix a time for delivery. The parties leave the date of delivery as “to be agreed”. If they do not agree a date for delivery, it may not be appropriate to determine the time for delivery as being “within a reasonable time after conclusion of the contract” between X and Y, in accordance with the provisions of Article 6.1.1. It may be appropriate to fix a term by reference to the completion of the generator building. A term to that effect could be supplied under Article 4.8 or Article 5.1.2.