Cases - Pagnan Spa v Feed Products Ltd

Record details

Name

Pagnan Spa v Feed Products Ltd

Date

[1987]

Citation

2 Lloyd's Rep 601

Keywords

Contract - When is a contract made

Summary

Although not strictly speaking a case concerning letters of intent the judgment in this case was nevertheless extensively referred to and approved by the Supreme Court in RTS v Molkerei.

The details of the case are not important. The issue concerned whether a contract had been made between parties who were corresponding and negotiating but had not reached any definitive agreement. And if they had made a contract, when this took place. The Court of Appeal set out the following 6 principles:

(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole.

(2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary ‘subject to contract’ case.

(3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed.

(4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled.

(5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.

(6) It is sometimes said that the parties must agree on the essential terms and it is only matters of detail which can be left over. This may be misleading, since the word ‘essential’ in that context is ambiguous. If by ‘essential’ one means:

• a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract;
• a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous;
• only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue.

It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge [at page 611] ‘the masters of their contractual fate’. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so called ‘heads of agreement’.