LECTURE 7

CERTAINTY & COMPLETENESS: PART 1

CERTAINTY

1. Requirements for Certainty

In order to be enforceable, a contract must be sufficiently certain. There are three

requirements for certainty:

a. Contract must be sufficiently complete. Parties have to reach an agreement on all

essential terms they intended to fix.
b. Agreed terms must be sufficiently certain and clear so that parties understand their
obligations and rights and the courts can enforce them.
c. Promise made must not be illusory. It is illusory if a party has unfettered discretion
about whether or not to perform the promise.

2. Requirements for Completeness

In order to be enforceable, a contract must be sufficiently complete. This means that the
parties must reach an agreement on all essential terms:

a. If a term is omitted, in order to determine whether the omission is fatal to formation

of the contract, the Court will consider:

i. Whether the term was essential;
ii. Why the term was left out - deliberate deferral of agreement? Or did
parties simply fail to turn their minds to it?
iii. Whether the agreement remains wholly executory (no performance) or
has been wholly/partly performed by one of the parties.

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 (a) Essential terms

 An essential term is one without which the contract cannot be enforced and without
which the parties would not have intended to enter the contract.
 Whether the term is essential depends on the nature and circumstances of the contract
- eg:
o In a lease agreement, the commencement date and rental price are essential
terms.
o In an agreement for the sale of land, it is the price which is essential, not the
commencement date.
o In a sale of goods contract, price won’t be an essential term as a reasonable
price can be imposed by the Sale of Goods Act NSW 1923.
 See Hall v Busst where Windeyer J took the view that the obligation to
pay a reasonable price would arise in the case of a wholly executory
contract which was silent on price.
 Milne v Attorney General (Tas) (1956) 95 CLR 460, 473 - the more complex the case, the
less likely the courts will imply necessary terms.

(b) Agreements to Agree

 It won’t matter whether an agreement is silent on an essential term or whether it

stipulates that an essential term will be agreed upon in the future, the agreement is
incomplete.
 The latter is an “agreement to agree”, which the courts will not enforce. The distinction
between silence and an agreement to agree becomes important in a situation where
the court might otherwise have implied a term, such as an obligation to pay a
reasonable price in a contract for the sale of goods where the contract is silent on price.
o However, see May and Butcher Ltd v The King, where the House of Lords held
that the provision of the Sale of Goods legislation implying an obligation to pay
a reasonable price has no application where parties had deliberately deferred
agreement on price.

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 o Where parties have agreed to defer price negotiations, this indicates that they
want to set the price themselves, and the court imposing a reasonable price
would be inconsistent with their intentions.

(c) Executed contracts

 Courts are less inclined to find an agreement to be incomplete if it has been wholly or
partly performed.
 This is because where land has been conveyed, goods delivered or services performed,
a finding that an agreement is not binding will have more serious consequences than if
it remains wholly executory.
 F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53,57 - “The further the
parties have gone on with the contract…the courts will do their best not to destroy the
bargain.”

(d) Machinery for settling a term

 A contract is valid if essential terms are not agreed upon but the parties have decided
to reach a compromise based on an effective mechanism in the event that they fail to
reach agreement:
o For example, in a lease agreement, an option for renewal at a price to be agreed
or determined by a third party such as a valuer or arbitrator.
 HOWEVER, if the mechanism fails – eg – valuer refuses to undertake the
task, court will find the agreement void as to determine the price would
be inconsistent with the intention of the parties – George v Roach (1942)
67 CLR 253.

(e) Formula for settling a term

 Parties may set a formula for settling terms which the court may use in the case of a
dispute:

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 o Can be very precise – eg - where a commercial lease specifies a mathematical
formula for increases in rent to reflect movements in the CPI; or
o Can be standard – eg – an option to renew the lease at “a reasonable price.”
 The validity of the contract will depend on whether the court regards the formula or
standard as sufficiently certain.

3. Certainty

(a) Unclear Language

 If a term is so vague or imprecise that the courts cannot discern the obligation with
sufficient certainty, it will not be able to enforce the agreement.
 However, if a term is capable of being given some meaning (even more than one), it will
not be void for uncertainty.

Council of the Upper Hunter Country District v Australian Chilling and Freezing
“Cost Terms”

Facts:
 The council agreed to supply the company with electricity at certain rates.
 The agreement provided for automatic changes in the rates according to changes in
costs of coal and changes in the basic wage.
 Clause 5 stated, “during the term of this agreement if the [council's] costs shall vary in
other respects that has been hereinbefore provided the [Council]
shall have the right to vary the maximum charge and the energy charge by notice in
writing to the purchaser.”
 The agreement also provided for arbitration in the event of a dispute.
 The council sought to increase the charge pursuant to clause 5.
 The company argued that the clause was uncertain and therefore the council had no
entitlement to increase the charge.
 CoA held that cl 5 was void for uncertainty.

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 Council appealed to HC – questions to be considered were whether the clause was void
for uncertainty and whether the agreement to have an arbitrator would remedy vague
terms in the contract such as to make them enforceable.

Held:
 Council won. Appeal allowed.
 Barwick CJ reasoned that clause 5 was not uncertain. The concept of a cost of doing
something is certain in the sense that it provides a criterion by reference to which the
rights of the parties may ultimately and logically be worked out, if not by the parties
then by the courts. The contract provides a means of resolution of any question by an
arbitrator. Clause 5 is not meaningless:
o “I do not think there is any uncertainty or for that matter ambiguity in the
expression ‘supplier's costs’ in cl 5, however wide may be the area of possible
disagreement as to its denotation in a particular case. A contract to build a
bridge at cost could not, in my opinion, be held void for uncertainty: it could not
properly, in my opinion, be said to be meaningless.”
 A contract is valid when the parties have agreed to agree on a term such as cost in an
ongoing contract if it is supported by a mechanism like the opinion of an arbitrator if
parties cannot agree in the future.
 However, if it were found that the term “cost” was meaningless or uncertain, then
the presence of an arbitration clause would not save the clause:
o Arbitrator would need to know what the cost is before he/she can make a
determination about the dispute!

(b) Reasonableness

 Standard of Reasonableness can be employed to decide whether a term is sufficiently

certain – as we know - a valid contract may be made for the sale of goods “at a
reasonable price.”
 The reasonableness standard may be harder to discern in other circumstances.

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 Hall v Busst
Reasonableness in Respect to the Sale of Land (Restrictive Approach)

Facts:
 Vendor of land was given an option to repurchase it at a specified price less “a
reasonable sum to cover depreciation of all buildings and other property on the land”.

Held:
 The High Court, by a majority - 3:2, held that the clause was void for uncertainty, since
there were many ways in which to measure depreciation, all of which could be regarded
as reasonable.
 The majority took the view that although a sale of goods at a reasonable price was
enforceable, this principle did not extend to land.
 Accordingly, a contract for the sale of land at a reasonable price would be void for
uncertainty.
 Kitto J and Windeyer J both dissenting, found that the law has never found the standard
of reasonableness too vague.

NOTE: This decision is regarded as reflecting a more restrictive approach to questions of

certainty than that which is now applied by the courts.

Whitlock v Brew
Courts/Parties may Import a Requirement of Reasonableness to Overcome Uncertainty,
but only if Objective Criteria are Available to Ascertain what is Reasonable.

Facts:
 Concerned a contract for the sale of land that included a Shell petrol station.
 Clause provided that the land would be sold on condition that the purchaser would
grant a lease of part of the land to the Shell Company of Australia Ltd (a third party) “on
such reasonable terms as commonly govern such a lease.”

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 Agreement provided that in the event of a dispute as to the interpretation or operation
of the clause, an arbitrator was to be appointed.
 Purchaser claimed the clause was void for uncertainty and sought to recover his
deposit.
 Vendor claimed that clause simply provided that in the event of there being no
agreement as to the terms of the contemplated lease, including both the lease period
and the rent to be paid, the parties would enter into a lease in the form settled by an
arbitrator.
 First instance - clause was found to be void but as it was severable from the rest of the
contract, the whole contract was not void - judgment for the vendor.
 Purchaser appealed.

Held:
Kitto J
 Observed that the reference to “reasonable terms” would have been sufficiently certain
had there been evidence of what was standard and reasonable in such a lease.
 Re the arbitrator - they would have the power to determine what terms are reasonable
and commonly govern such a lease, if such terms had existed. However, the clause
could NOT authorise the arbitrator to force upon the purchaser the terms that they
themselves thought reasonable and ought govern such a lease, for to do so would be to
alter the contract.
 Re severance - had that clause been severed, it would have turned the sale of land into
a different sort of sale to that which the parties had contemplated.

Taylor, Menzies and Owen JJ

 Considered that the expression “upon such reasonable terms as commonly govern such
a lease” neither referred to the period of the lease or the rent payable as the Vendor
had argued.
 Re arbitrator - expression “as to the interpretation or operation” does not cover a
dispute as to either of those matters. Therefore - the clause is uncertain in that it neither

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 specifies nor provides a means for the determination as between the parties of the
lease period or the rent payable.
 Re severance - the clause was material to the parties’ intentions and therefore
unseverable.

McTiernan J (dissent)
 the commencement date and term of the lease could be inferred from the
circumstances, and the parties had expressly agreed that the rent should be reasonable.
Although a court might hesitate to grant specific performance, the agreement was
enforceable by an action for damages.

(c) Agreements to negotiate

 In England, agreements to negotiate cannot be binding – they lack the certainty

required to form an enforceable obligation - Walford v Miles - “a bare agreement to
negotiate has no legal content” because negotiating parties are free to withdraw at any
time.”
 The refusal to recognise an agreement to negotiate in good faith has been criticised, as
the law should respect those intentions.
 The difference between agreements to agree and agreements to negotiate is that an
agreement to negotiate is simply an agreement to make good faith efforts to reach an
agreement rather than to actually reach one.
 In Australia, Walford v Miles has been rejected. A promise to negotiate (or mediate) in
good faith may be enforceable (in cases of mediation, a cost provision must be
specified).

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 United Group Rail Services Limited v Rail Corporation New South Wales
Good faith, in some degree or to some extent, is part of the law of performance of
contracts

Facts:
 RailCorp and United entered into two contracts, in which United agreed to design and
build new infrastructure for RailCorp.
 The two contracts contained dispute resolution clauses. The clauses required that in
the event of a dispute, it was to be referred to a senior representative of each of the
parties, who were required to “meet and undertake genuine and good faith
negotiations with a view to resolving the dispute or difference.”
 If the parties could not resolve the dispute within 14 days, the contract provided that
the dispute would be referred to the Australian Dispute Centre for mediation.
 If after the mediation, the parties are still unable to resolve the dispute, the contract
provided that the dispute would be referred to arbitration.
 Both parties agreed that the mediation referral clause was uncertain as there was no
such thing as the Australian Dispute Centre, and therefore unenforceable.
 United argued that the clause requiring the parties to undertake genuine and good faith
negotiations was also uncertain, or alternatively that it was unenforceable because it
was linked to the mediation clause.

Held (Allsop J with Ipp and Macfarlan J agreeing):

 Justice Allsop summarised the proper approach when considering agreements to
negotiate in good faith as follows:
a. An agreement to agree is incomplete due to the absence of essential terms
(nothing to do with uncertainty or vagueness).
b. The task of the court is to give effect to business contracts where there is a
meaning capable of being ascribed to a word or phrase or term or contract.
c. Good faith is not a concept foreign to the common law. NSWSC has previously
held that a duty of good faith, both in performing obligations and exercising
rights, may, by implication, be imposed upon parties as part of a contract.

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 What the phrase “genuine and good faith” means in any particular context depends on
the context of that contract.
 Here - the context needs little explanation as it indicates an honest and genuine
approach to the task at hand.
 A promise to negotiate genuinely and in good faith is not vague or uncertain when it
respects the contractual rights of the parties and allows for honest and genuinely held
views about those pre-existing rights.
 Where business people exercise judgment and use express words that are broad and
general, and which have a sensible meaning, then the role of the Court is to assist, not
impede, these express contractual provisions.
 Court concluded that the clause to negotiate genuinely and in good faith should be
enforced, as the clause was not uncertain and had identifiable content.
 Re Severability - the Court found no unseverable nexus to bring down the arbitration
clause with the failure of enforceability of the mediation clause:
o The contract had in place a regime to avoid litigation in court - this was what the
parties intended.
o The consecutive placement of less formal methods of consensual resolution
(negotiation and mediation) before arbitration says no more than the desire for
the operation of those mechanisms.
o So the mediation clause being unenforceable had not real bearing on the
contract as it pertained to the parties’ intentions.
 Question - what conduct counts as negotiating genuinely and in good faith?
 In some circumstances, it may be difficult to conclude that a party has not undertaken
an honest and genuine attempt to settle a dispute. In other cases however, such a
conclusion might be “blindly obvious.”
 Court noted that such a clause will not necessarily prevent parties from negotiating in
their own self-interests, provided they proceed from the basis of an honest and
genuine assessment of their rights and entitlements in respect of the dispute at hand.
 Court gave some examples of conduct that might contravene an obligation to negotiate
genuinely and in good faith:

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 o A party may not be entitled to threaten a future breach of contract in order to
bargain for a lower settlement sum than it genuinely recognises is due; and
o A party would not be entitled to pretend to negotiate, having decided not to
settle what is recognised to be a good claim, in order to drive the other party
into an expensive arbitration that it believes the other party cannot afford.

4. Implying Objective Standards

Biotechnology Australia v Pace
Courts do not fill in gaps in uncertain or illusory contracts

Facts:
 Dr Pace, a senior scientist, entered into an employment contract with Biotechnology.
 The letter of offer from a Biotechnology director stated, “I confirm a salary package of
$A36, 000 per annum, a full maintained company car and the option to participate in
the company's senior staff equity sharing scheme.”
 At the time of the offer, Pace was aware that no such scheme existed. Nor was any such
scheme ever brought into effect.
 On termination of his employment, Pace claimed damages in respect of Biotechnology's
failure to provide him with an option to join a company senior staff equity sharing
scheme as promised.
 First instance - Biotechnology liable for damages for breach of contract.
 Biotechnology appealed and argued that the promise to provide the option to
participate in the scheme was illusory and that it was void for uncertainty.

Held:
 Appeal allowed. Biotechnology won.

Kirby P:
 Kirby P sets out general principles when it comes to determining whether a promise is
void for uncertainty:
o Extrinsic Evidence:

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  It is permissible to consider extrinsic evidence to give the agreement
meaning.
o Methodology:
 The determination of every case depends on its facts.
 The meaning of the agreement is to be determined objectively.
 The court should, where possible, uphold contracts; in the search for the
intention of the parties, no narrow or pedantic approach is warranted -
Australian Chilling & Freezing Co Ltd.
 However, courts will not spell out, to an unacceptable extent, matters
the parties have themselves failed to agree.
o Certainty:
 Leaving a term to be settled by an identified third party is likely to be
sufficiently certain.
 However, if the term is so vital that leaving it to one only of the parties
unacceptably removes certainty in the arrangement, the court may or
may not refuse to enforce it as illusory or unacceptably uncertain – so
whether the courts will permit parties to leave terms to one of the
parties depends on the importance of the term so left.
o Objective standards:
 Where there is a readily ascertainable external standard, the court will
have regard to it in order to flesh out the uncertain provision - Meehan
v Jones.
 Where the term specifies a range of possibilities the party making the
promise will be held to (at least) the minimum provision in that range -
see Lewandowski v Mead Carney-BCA Pty Ltd – a contract had provided
for the payment of a salary in the range of $7 000 to $9 000 per annum.
Court held that the effect of the agreement between the parties was to
prescribe the minimum of $ 7 000 so that the contract was not void for
uncertainty.
 Having set out these principles – Kirby then considered whether the promise of an
equity sharing arrangement was so devoid of meaning and so dependent upon the

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 initiative and decisions of one party only to the transaction (Bio) as to be illusory? Or
alternatively, was it so uncertain of content that it could not now be enforced in its
terms, even as elaborated by admissible extrinsic evidence?
 He found that the answer to BOTH questions was yes.
 Regarding whether the promise was ILLUSORY, it WAS because:
o It depended on fulfilment by Bio only. It was purely up to Bio to decide whether
to implement the scheme.
o No external standard could be identified, which could dictate an “appropriate”
or “reasonable” scheme that could be implemented:
 Bio never was a publicly listed company. Therefore - no external
standard by which shares in the enterprise could be determined
authoritatively.
 No evidence of any standard or market reference point for a
participation scheme in the equity of a company such as Bio.
 The existence of other schemes in other companies with other products
and other scientists provides no reference point such as the High Court
was able to find in Meehan.
 Even if the promise was found NOT to be illusory, it was nonetheless void for
UNCERTAINTY. There were too many elements left uncertain and therefore too many
decisions would be left to the Court to fill in the gaps.
o Eg - how many shares in Biotech were to be devoted to the participation
scheme?
o What class of shares were to be held by the senior scientists such as Pace?
o What were to be the terms of the options upon [which] the shares would issue?
o Any differentiation between employees? Where would Pace stand?
o What rights would attach to the shares?
o Upon what terms were they to be acquired and subject to what terms disposed
of by employees?
 Given that no objectively ascertainable standard existed for such schemes, the Court
Couldn’t fill the gaps and the term had to be void for uncertainty.

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 McHugh JA:
 Agreed with Kirby that there was no external evidence to allow the Court to fill the gaps
here as the “‘salary packages’ of comparable scientists in the biotechnological fields
could [not] be compared in a way which would produce a criterion of reasonableness.”
 Went on to say that even if there WAS a benchmark of reasonableness, the promise
was illusory because it was too vague and uncertain.

Hope JA (dissented):
 Noted how far courts have been prepared to go in order to find that there is an
enforceable contractual promise.
 Promise was not too illusory or uncertain because of an implied obligation to act
“reasonably.”
 Courts have the requisite commercial experience to determine a reasonable, minimum
amount payable:
o “The role of staff equity sharing schemes in employment contracts is sufficiently
well established to enable courts to apply the concept of reasonableness to
them.”

THE PREFERENCE IS TO USE SOME FORM OF OBJECTIVE BENCHMARK TO RESOLVE ANY

UNCERTAINTY, BUT FACTS WHICH MITIGATE AGAINST THE APPLICATION (OR
IDENTIFICATION) OF SUCH A STANDARD SHOULD ALWAYS BE CONSIDERED.

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