Bell Scaffolding (Aust) Pty Ltd (“Bell”) was founded in 1983 by Mr Kevin Bell. It is now one of the leading scaffolding manufacturers and contractors in Eastern Australia. It sought to take advantage of the lower hire costs for scaffolding in the UK and in 1996 entered into a hire agreement with Rekon Ltd (“Rekon”). Mr Bell then set up Bell Scaffolding (UK) Ltd (“Bell UK”) and Bell Scaffolding Ltd (“Bell Scotland”) a few years later.
In 2000, Alba Hire & Sales Ltd (“Alba”) entered into an oral agreement with Bell UK for the purchase of kwikstage system scaffolding. The agreement was recorded in a memorandum that provided that the Alba would increase the hire of scaffolding to Bell Scotland under an existing agreement, on the understanding that all future scaffolding products would be purchased from Bell UK at “agreed prices”, with Rekon to continue to manufacture “specials” for certain clients (“agreement”).
Alba did not go ahead with the agreed purchases. Bell Scotland began to off-hire scaffolding before the hire period with Alba ended, then both Bell Scotland and Bell UK ceased trading. A dispute arose between the parties as to the scope of the agreement; particularly whether the agreement was sufficiently certain to be enforceable.
Bell (who had acquired the rights of Bell Scotland) claimed for loss of profits arising from the agreement between Bell UK and Alba. Both Rekon and Alba contended that it was only an agreement to agree and, in the absence of any agreement as to price, it was not intended to give rise to legal relations between the parties. Rekon and Alba also counterclaimed against Bell Scotland for unpaid sums in relation to scaffolding hire charges and damages for breach of contract.
Did the agreement give rise to enforceable obligations on Alba to purchase scaffolding from Bell UK? Did the reference to the ability of Rekon to produce “specials” affect Alba’s obligation to purchase items which were not specials?
The court decided that the agreement did give rise to an enforceable obligation to purchase scaffolding. It held that there was nothing in the nature of “an agreement to agree” or any intention not to create legal relations that would render that obligation unenforceable.
As a matter of construction, the phrase “agreed prices” differed from “prices to be agreed”. Such an interpretation was supported by the previous dealings between the parties; including a price list formerly submitted by Bell UK. Rekon’s ability to manufacture “specials” did not affect Alba’s obligation to purchase scaffolding from Bell UK.
It is common practice in the building industry for parties to agree to provide products or services (and corresponding payments to be made) at dates well into the future. Generally speaking, the courts will not enforce an agreement where a critical aspect of that agreement (such as how much or when one party will be paid, or the scope of the other party’s work) is uncertain, i.e. “agreements to agree” where the performance of an obligation is to be subject to a later agreement to be made some time in the future.
The critical question is whether parties intended, at the time of the agreement, to create legal relations. This case serves to illustrate how the courts will determine that question. Where there is evidence that a contract is already in existence between the parties and there is a continuing business relationship, the courts are reluctant to undermine the bargain struck.
Therefore, parties to an agreement in relation to the performance of future obligations, particularly those well into the future or over an extended period of time, would be well advised to carefully set out the mechanism for the performance of those obligations to take into account the risk that one party may find itself in the position of being unable to perform what it had promised to do. It may be that provision needs to be made for regular review of performance by all parties and an escape mechanism put in place.