The Court of Appeal's recent decision in KSY Juice Blends Ltd v Citrosuco GmbH is a helpful and important reminder of the English courts' power to uphold commercial contracts where it is satisfied the parties intended their bargain should be enforceable. In concluding that a reasonable price should be implied into a long term contract, the decision will also be encouraging for parties operating in volatile markets where flexible pricing mechanisms are critical.
Background
In 2018, KSY Juice Blends UK Limited, an international juice supplier, agreed to supply Citrosuco GmbH with orange juice pulp wash, known as "wesos", for three years. Wesos is a natural product and is used as a base for orange flavoured drinks.
The terms of the contract were described as "somewhat opaque" by Lord Justice Zacaroli. Essentially, the total value of the contract was fixed at €5.76 million on the basis that 1,200 metric tonnes of wesos would be supplied each year at an invoicing price of €1,600 per metric tonne. In fact, the amount of wesos to be supplied would be adjusted by reference to the "real" price. Although the "real price" of the first third of the annual deliveries was set at €1,350 per metric tonne, the price for the remaining two thirds was left "open", and would "be fixed latest by December of the previous year ".
Towards the end of 2018, Citrosuco's requirement for wesos reduced and it only accepted delivery of a fraction of the amount to be supplied under the agreement. KSY therefore terminated on the grounds that Citrosuco was in repudiatory breach.
Citrosuco accepted that there was a binding contract for the provision of the first third of the amount to be delivered, where the "real" price was specified. However, it claimed that, as the price in respect of the remainder was to be agreed, the contract was to that extent unenforceable as a mere "agreement to agree".
Agreements to agree the price
Where a contract for the sale of goods is silent as to price, pursuant to the Sale of Goods Act 1979 the law implies a term that the buyer must pay a "reasonable price". However, in May & Butcher v The King, it was held that where the parties have expressly left the price to future agreement, no such term can be implied, as to do so would be to contradict the terms they have agreed. Thus, price being an essential ingredient, there can be no binding contract.
Nevertheless, in various subsequent cases the English courts have concluded that the expression "to be agreed" is not necessarily fatal, and that "particularly in commercial dealings between parties who are familiar with the trade in question, and particularly where the parties have acted in the belief that they had a binding contract, the courts are willing to imply terms, where that is possible, to enable the contract to be carried out."
The decision
At first instance, the High Court accepted Citrosuco's argument that the contract was unenforceable, with the result that the bulk of KSY's claim was dismissed. KSY appealed.
The first task for the Court of Appeal was to determine the true meaning of the contract. In doing so, Lord Justice Zacaroli observed that the contract did not explicitly state that the price was left to be agreed. Instead, the price was "open" and "was to be fixed" each year. Thus, although the contract envisaged that the parties would seek to fix the price by agreement, it did not preclude the implication of a term providing for a reasonable price in the absence of such agreement.
As to whether such a term should be implied, Lord Justice Zacaroli accepted that the parties intended to reach a binding agreement as to the full quantity of wesos to be supplied. The subject matter of the contract was a trade with which the parties were "perfectly familiar"; the market was generally volatile, providing an obvious incentive for leaving some flexibility as to pricing in a long-term contract; and the parties had previously contracted on such a basis successfully. Further, the parties had agreed, or at least provided a mechanism for deciding, most other elements of their agreement. The case was therefore firmly in the territory of those contracts a court will strive to uphold.
The strongest obstacle to doing so was if the difficulty in ascertaining a reasonable or market price was such that the parties could not reasonably have intended the price would be set by reference to it. At first instance the High Court had held just this, but while it was common ground that there was no sufficiently transparent market for wesos, there was a sufficiently established transparent market in relation to frozen concentrated orange juice, and the price for wesos tracked the price for frozen concentrated orange juice.
Accordingly a term could be implied into the contract that, in the absence of agreement, the price for the wesos was to be fixed as a reasonable or market price.
Conclusion
As this decision demonstrates, where the court is satisfied that the parties intended their bargain to be enforceable, it will strive to do just that and will be prepared to imply a term as to reasonable price if there is some way for that price to be objectively determined.
However, as the courts have repeatedly emphasised, each case must be decided on its own facts and on the construction of its own agreement. It remains the case that, if the parties intended to leave an essential matter to be agreed in future, on the basis that each remains free to agree or disagree about that matter according to their own perceived interest, there is no bargain for the court to enforce.
Where volatile markets mean that flexible pricing in long term agreements is critical, parties should therefore consider adopting clear pricing mechanisms rather than simply leaving matters to be agreed at a future date.