Agreement on principles

The things we learn in our formative years stay with us forever. One thing lawyers learn at an early age is that an agreement to agree is not a contract in law. We go through life repeating this and other mantras, convinced we are right because we learned it at law school and it represents one of the eternal verities.

The other day, in the middle of negotiations about a draft contract, my opposite number quoted this maxim in support of his view that one of the clauses in the draft had no legal value. The clause in question required the parties to reach agreement about rates for maintenance work after the first five years of a long-term FM agreement.

Nobody could force the parties to agree, he reasoned, and if we could not do better than that the contract would fail for uncertainty. His proposition sounds right, doesn’t it? Nobody can force people to agree, and the courts will surely not impose their own idea of a reasonable agreement upon recalcitrant parties.

However, it may not be quite that simple. In the recent case of Alstom vs Jarvis, the TCC judge was faced with this very question.

The parties had entered into a subcontract to undertake certain works to extend the Tyne & Wear Metro for Railtrack. The main contract between Alstom and Railtrack contained a pain/gain share provision. If the project came in below the target cost, the net gain would be shared in agreed proportions. If the converse happened, they would share the net pain. The subcontract referred to the pain/gain share concept, but stated that details of the pain/gain mechanism were to be agreed, and once agreed the details should be added to the agreement as an amendment.

When Alstom overran the target cost and had to accept its share of the pain, it sought to obtain a contribution to that pain from Jarvis. But, said Jarvis, this was only agreed in principle with no agreement ever being reached as contemplated by the subcontract. Jarvis argued that the subcontract could and did work without the pain/gain agreement having been concluded and that it was no more than an “inappropriate embellishment to the subcontract.” Further, it was beyond the courts’ powers to intervene by imposing a pain/gain mechanism.

The claimant’s answer was best summarised in the Latin maxim id certum est quod certum reddi potest , or that which is capable of being made certain is certain. A distinction was to be made between situations where a genuine failure to agree prevented a contract from coming into existence at all, and a situation where a contract had definitely been formed but contained obligations on the parties to reach further agreements in the future. In the Alstom case,

When Alstom overran, it sought a contribution from Jarvis. But Jarvis said this was only agreed in principle

the judge agreed that once the parties had contracted, the commercial considerations were quite different from those that applied when negotiations had broken off before a transaction had been agreed. In his view, Alstom and Jarvis undertook what he called “implied primary obligations” to make reasonable endeavours to agree on the pain/gain provisions, and neither of them could thwart the agreement by refusing to negotiate in good faith or to allow the TCC judge to resolve the matter.

This was to be regarded as a “difference” between the parties rather than a dispute, and the court was empowered to resolve that difference between them.

The logic is therefore as follows: if the parties never reach agreement on essential terms then no contract ever gets concluded. But once a contract does exist, the courts – by the application of a kind of judicial polyfilla – will fill in any gaps in order to support the underlying intention. This will not be regarded as a matter of “dispute” but a “difference” between the parties.

Thanks to the wording of the Construction Act, adjudicators will be pleased to note that they have the same broad powers in this respect as the judges.

Tony Blackler is a partner in solicitor Macfarlanes