Introduction
Ghana’s Supreme Court recently decided in Foto-X Ltd v Driver and Vehicle Licensing Authority (DVLA) that a contract is invalid and unenforceable if all “essential” terms are not agreed upon by the parties or the parties fail to provide a workable mechanism to ascertain those “essential” terms. The decision raises an important question concerning when an agreement will be sufficiently complete and certain to constitute a binding contract notwithstanding that some matters remain outstanding between the parties. A further question is what the court meant by essential terms, calling into question at what point a term becomes essential or merely ancillary; by what metric is the “essentialness” or otherwise of the term to be determined; and who determines which term is essential or merely incidental—the court or the parties?
These questions are especially significant in commercial transactions. Commercial parties may—and indeed, many a time do—commence performance before every detail of their relationship is finally documented. They may execute an agreement while contemplating subsequent addenda; leave aspects of price or performance to later determination; commence performance while negotiations continue; or establish machinery through which outstanding matters are subsequently to be resolved. What stems from this is whether we can reasonably conclude that the mere existence of an unresolved matter invariably means that no contract has, therefore, arisen.
Facts of Foto-X
In Foto-X, the parties had enjoyed a substantial commercial relationship dating from 2006. Under their original arrangement, Foto-X undertook to design, supply, install and operate an integrated system for the processing and production of drivers’ licences. Foto-X invested approximately US$2.77 million in the project, while the parties operated a revenue-sharing arrangement under which Foto-X received eighty per cent of net revenues and the DVLA retained twenty per cent.
The controversy relevant to the present discussion concerned a subsequent arrangement allegedly concluded in 2012. Foto-X maintained that the parties entered into a fresh ten-year contract on the same eighty-twenty revenue-sharing basis and that it subsequently performed obligations pursuant to that agreement. The DVLA contended, however, that no concluded contract had arisen because essential matters remained unresolved.
The High Court accepted that a concluded contract had arisen in 2012, but the Court of Appeal reversed that conclusion. Before the Supreme Court, Foto-X consequently argued that the Court of Appeal had erred in holding that no binding contract existed despite evidence of mutual assent, performance and written acknowledgment of the contractual relationship by the DVLA.
The Supreme Court ultimately agreed with the Court of Appeal that the alleged 2012 contract was not enforceable. In reaching that conclusion, Ackah-Boafo JSC stated that “the law is well settled that a contract is formed only where the parties have reached agreement on all its essential terms; where material terms remain unresolved or are left for future agreement, no binding contract arises, and an agreement to agree on an essential term lacks the certainty required for contractual enforceability.” His Lordship subsequently qualified the proposition by recognising that the rule does not apply where the parties have provided workable machinery for resolving the outstanding matter or where the unresolved matter is merely subsidiary. The distinction, according to the Court, was whether the unresolved matter was fundamental and left for future agreement or merely ancillary and capable of determination through an agreed mechanism.
This article questions the breadth of 0000the Court’s formulation. The first difficulty is that, although the Court repeatedly employs the expressions “essential,” “material,” “fundamental,” and “ancillary” terms, it does not articulate an objective criterion by which a term is to be placed within any of those categories. Nor does it explain precisely what it means by an “essential term” in the context of contractual formation. The terminology is potentially confusing. The Court cannot, presumably, have been invoking the traditional distinction between conditions, warranties and intermediate terms, since those classifications principally concern the nature and consequences of contractual obligations after a contract has been formed. The question before the Court was anterior: whether the parties had reached a sufficiently complete and certain agreement for a contract to arise at all. –
In applying its formulation to the alleged 2012 agreement, the Court identified several matters that it considered unresolved. Of particular significance, it characterised the duration of the contract, the scope of the services, and the basis for calculating the revenue share as “essential elements of the bargain.” The difficulty, however, is that identifying these matters as essential does not itself explain why they were essential for the purposes of contractual formation.
The Court also failed to explore if the outstanding matters could be objectively ascertained from Exhibit S, the parties’ previous contractual relationship, the 80/20 revenue-sharing formula, their course of dealing, an implied reasonable standard, or subsequent implementation?
The lack of independent doctrinal criterion for determining an essential term makes the Court’s reasoning circular. It runs as follows:
Why is there no contract?
Because an essential term is unresolved.
Why is the term essential?
Because it is fundamental to the contract.
Why is it fundamental?
Because it goes to the heart of the bargain.
Here it can be seen that the essential question of what constitutes essential is still unresolved.
The doctrines of certainty and completeness remain fundamental requirements of contract formation. However, the Supreme Court’s formulation risks converting what is fundamentally a contextual inquiry into contractual intention and sufficient certainty into an overly categorical inquiry about whether all “essential terms” have been agreed.
The better common-law position is that an agreement may be contractually binding notwithstanding that some matters remain unresolved where, objectively assessed, the parties intended immediate legal commitment and the bargain already made provides a sufficiently certain basis upon which their obligations can be identified without the court making a contract for them. In other words, objectively construed, is there a valid offer, acceptance and consideration?
The Supreme Court’s Conception of Contractual Completeness
There is a longstanding common-law principle that an agreement may fail where the parties leave a matter essential to their bargain for future agreement. Contract law enforces agreements actually made by parties; it does not authorise courts to construct bargains that the parties themselves never concluded.
In May & Butcher Ltd v The King [1934] 2 KB 17, the parties had purported to make arrangements for the sale of surplus tentage, but matters including price were to be agreed from time to time. The House of Lords concluded that no binding agreement had arisen. The difficulty was not merely that the precise numerical price was unknown at the time of contracting. Rather, the parties had left the price to their own future agreement. The court could not substitute its own determination for the consensus that the parties had expressly reserved for themselves. To that extent, the Supreme Court was correct to invoke May & Butcher. An agreement that merely provides that the parties will subsequently agree on an indispensable component of their bargain may be no more than an agreement to negotiate.
The difficulty arises when that proposition is transformed into the broader statement that a contract is formed only where the parties have reached agreement on all its essential terms. Taken literally, the Cort’s formulation risks obscuring several distinctions recognised by the common law: the distinction between agreement and express articulation; the distinction between incompleteness and indeterminacy; the distinction between a matter reserved for future consensual agreement and one capable of determination through an objective criterion already incorporated into the parties’ bargain; and the role of objective intention where negotiations continue after contractual commitment.
When these distinctions are appreciated, the common-law inquiry becomes considerably more nuanced than asking whether every “essential term” had been finally agreed.
The law undoubtedly requires certainty. But certainty is not synonymous with exhaustive specification, as illustrated by Hillas & Co Ltd v Arcos Ltd [1932] AC 470. The importance of Hillas lies in its resistance to an excessively technical approach to commercial agreements. Courts are not entitled to create a contract where none exists, but neither should they approach commercial arrangements with a predisposition toward discovering uncertainty. The fundamental question is whether the parties’ bargain, interpreted objectively and within its commercial context, supplies a sufficiently certain foundation for determining their respective obligations.
The existence of an expressly agreed mechanism is one means by which certainty may be achieved, but it is not necessarily the only means. There is nothing inherently objectionable about determining the content of an obligation through implication, an objective standard of reasonableness, commercial context, previous dealings or other legally recognized criteria.
Indeed, contracts are not only concluded based on express terms. Courts have mostly shown willingness to consider context, background, conduct and course of dealings between the parties in deciding if an agreement has been made. In this case, while the Appellant urged the Court to consider the Parties’ conduct, the Court was too quick to discount such conduct as providing sufficient basis to find a valid contract.
For instance, in Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444, the parties held four separate leases over adjacent industrial properties, one of which gave the lessees an option to purchase freehold reversion at a price not less than £12,000 to be agreed by two valuers. The other leases contained similar clauses with varying minimum prices. When the lessees sought to exercise the option, the landlord refused to appoint a valuer, and the lessees sued for specific performance. The landlord argued that the clauses were too uncertain to be enforceable because they did not fix an exact price.
The House of Lords allowed the appeal, holding that since the price was capable of being ascertained, a valid contract for sale had been constituted between the lessor and lessee. The court would substitute its own machinery to fix a fair price rather than let the contract fail. The principle therefore is that failure of machinery will not render the contract void for uncertainty. The court can and will substitute alternative machinery to give effect to the parties’ intention.
This case thus establishes that merely because there is no mechanism, or such mechanism for determining a term of an agreement has failed in the future, does not mean, automatically, that no contract exists.
Similarly, in Wells v Devani [2019] UKSC the UK Supreme Court held that a contract is not necessarily void merely because the parties have failed expressly to articulate every term relevant to their relationship. The court must first determine what, objectively understood, the parties agreed and whether the allegedly missing matter can appropriately be resolved through the ordinary techniques of contractual interpretation and implication. Therefore, to suggest that a contract is not valid only because all essential terms are not agreed is an overstatement, especially in this case, where the Court failed to define what objectively is meant by an essential term.
The Court’s fixation with the existence of essential terms also obscures the fact that a binding agreement could exist despite continuing negotiations. Commercial negotiations do not always proceed neatly from negotiation to agreement and only thereafter to performance. Parties may agree on some matters, commence performance, continue negotiating others, and contemplate the execution of a fuller document at a later stage.
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 is important in this respect. In this case, an Italian company negotiated with Feed Products Ltd, an American company, to buy feed pellets for chicken feed under a contract governed by English Law. The parties reached agreement on central commercial terms but had not yet agreed on several other matters, including the loading port and the rate of loading. The parties nevertheless began performance before finalizing these outstanding points. When a dispute arose, Pagnan denied that a completed contract existed, arguing that not all important terms had been agreed.
The court held that the agreement had contractual force. The parties’ correspondence and conduct demonstrated an intention to be bound by the terms they had already agreed even though other terms remained outstanding.
Again, in the case of RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH [2010] UKSC 14, RTS supplied automated food packaging machines to Muller, a dairy products manufacturer, for installation at Muller’s factory. The parties intended to enter into a detailed written contract but as often happens commercially, had not finalised its terms before work needed to begin. They therefore entered into an arrangement formed by a letter of intent dated 21 February 2005 and a further letter from RTS dated 1 March 2005, intended to enable work to start on agreed terms pending a full agreement and contemplating that the eventual contract would incorporate the MF/1 model form terms used in the engineering industry, including a clause 48 stating that the terms were subject to contract until formally signed. RTS carried out and completed the work and Muller paid roughly 70% of the price. A dispute later arose over whether the equipment met the agreed specification and Muller withheld payment.
The issue for determination was whether a binding contract existed. The court held unanimously that a binding contract had been reached based on an objective assessment of the parties’ intentions, on the terms set out in the letter of intent.
Commercial parties may occupy at least three distinct positions. They may intend that no contractual obligation whatsoever arise until every outstanding matter has been agreed. Alternatively, they may intend to be immediately bound by the matters already agreed, notwithstanding that negotiations continue concerning additional matters. Thirdly, they may intend to be immediately bound by an existing arrangement while contemplating that a subsequent, more elaborate agreement will supplement or replace it.
The existence of unfinished negotiations is compatible with each of those situations. It, therefore, does not follow that merely because negotiations are continuing, there cannot be a contract on matters already agreed.
This principle is directly relevant to Foto-X because the appellant’s case was not based merely upon an incomplete draft. Foto-X relied principally upon Exhibit S, a contract executed on 2 August 2012. According to the Supreme Court’s account of the appellant’s case, the document identified the subject matter—that is, the continuation of Foto-X’s provision of the technological system and associated services for the processing and production of drivers’ licences for the DVLA, an estimated investment of approximately US$9.98 million, a ten-year duration and the respective obligations of the parties. Foto-X maintained that Exhibit T, the Statement of Understanding executed on the same date, contemplated merely an addendum concerning outstanding matters rather than demonstrating that no contract yet existed.
Foto-X further relied upon subsequent conduct, including correspondence involving the DVLA, the Public Procurement Authority and UT Bank; documentation referring to the August 2012 contract; sub-addenda; procurement and inspection of customised equipment; and a Factory Acceptance Test. The judgment additionally records Foto-X’s contention that DVLA participated in the inspection and approval of customised machines, knew that Foto-X had incurred expenditure manufacturing and shipping equipment to Ghana, and requested installation of new equipment to address the backlog in licence production. These allegations were not denied by DVLA, even though they contested their significance, on the basis of Exhibit T, which provided that the signed contract, Exhibit S, is not a finality and was subject to the conclusion of an addendum. But saying a document is not a finality is not the same as saying the document is not binding or that the parties do not necessarily agree on essential terms.
The relevant question, from this context, becomes whether the parties’ documentation and subsequent performance, viewed objectively and together, demonstrated an intention to treat Exhibit S as an immediately operative agreement whose outstanding details would subsequently be supplemented, or whether Exhibit S and Exhibit T demonstrated that the parties regarded further agreement as a condition precedent to contractual commitment. And, even if the parties contemplated further agreement as a condition precedent, can subsequent conduct contradict that express intention—for after all, intention is not subjective, but what is objectively deducible from the parties’ conduct.
Where parties execute documents and thereafter embark upon substantial performance apparently referable to those documents, their conduct may illuminate the objective meaning of the earlier dealings and whether they understood themselves to have entered a binding relationship. In this case, the conduct from DVLA was so glaring as to suggest that they did not intend a binding contract. For instance, at one point, DVLA sought to reduce the term of the 2012 agreement to six years; meanwhile, the Court identified duration as one of the unresolved issues. If duration was not agreed upon, then why would DVLA be seeking a reduction of the term?
Secondly, why would DVLA, if the scope of services were not agreed upon, procure, inspect, and approve the customized equipment? Even if we assume that procurement, inspection and approval do not necessarily amount to an agreement, how about the fact that the parties have been dealing in the same customized machines for some time or have previously dealt with same?
These questions are not necessarily resolved by the Court’s simplistic treatment of whether a contract existed or not.
The crucial inquiry should therefore have been whether the contemplated further agreement was constitutive or supplementary. If constitutive, the parties had not yet entered the contractual relationship alleged by Foto-X. Further consensus was necessary before legal obligations arose. If supplementary, however, a contract may already have existed, with the contemplated addendum intended merely to elaborate, adjust or implement the existing contractual relationship.
The authorities considered above suggest that the common-law position can be expressed through two interrelated inquiries.
First: Did the parties objectively intend immediate contractual commitment? This requires consideration of the parties’ words, documents, commercial context and, where legally relevant, their conduct. The existence of further negotiations is relevant but not necessarily decisive. The contemplation of another formal document is relevant but not necessarily decisive.
Second: Is the bargain sufficiently certain to be judicially enforceable? Or is the context sufficient for the Court to infer an agreement even if the parties did not agree on all the terms?
When these two principles are considered, it becomes apparent that a contract may arise notwithstanding that some matters remain unresolved where, objectively assessed, the parties intended immediately to assume legal obligations and the terms agreed provide a sufficiently certain basis upon which those obligations can be determined and enforced. This has nothing to do with whether all essential terms have been agreed upon or whether the parties failed to provide a workable mechanism for determining if an agreement exists.
The proposition that a contract is formed only where the parties have reached agreement on all its essential terms risks suggesting a checklist conception of formation inconsistent with the more contextual approach apparent in the modern authorities. Likewise, the distinction between an unresolved term that is fundamental and one that is merely ancillary risks directing attention to the abstract importance of the outstanding matter rather than the legally decisive questions of objective commitment and ascertainability.
The danger is particularly significant because Foto-X is a decision of Ghana’s final appellate court. Its formulation may consequently influence subsequent courts confronting commercial arrangements in which parties have begun performance while documentation or negotiations remain incomplete.
Applied rigidly, the proposition could lead courts to invalidate transactions merely because a commercially significant matter remained unresolved, without adequately asking whether the parties had nevertheless agreed the legal criterion through which that matter could be determined or had objectively manifested an intention to be presently bound.
Conclusion
The Supreme Court’s decision in Foto-X Ltd v Driver and Vehicle Licensing Authority presents an important opportunity to reconsider the relationship between contractual certainty, completeness and objective intention under Ghanaian contract law. While the Court may have been correct on the common law principle of contractual certainty, the ultimate statement of the principle was too broad. The Court erred in suggesting that every “essential” matter, which, in any event, it failed to define, ought to be agreed for an agreement to exist. Not every unresolved matter constitutes an absence of contractual consensus. Not every essential matter must be exhaustively or numerically determined at the moment of formation. An important term may be sufficiently certain where its content is objectively ascertainable. Parties may also intend immediate contractual commitment notwithstanding continuing negotiations or contemplated further documentation.
On this account, the central inquiry in Foto-X ought to have been whether Exhibits S and T, read in their commercial context and against the parties’ subsequent dealings, objectively demonstrated an immediately binding contractual commitment whose outstanding matters were capable of subsequent implementation, or instead demonstrated that further agreement was a condition precedent to the formation of the alleged ten-year contract.
Accordingly, the broader proposition that contractual formation occurs only once agreement has been reached upon “all essential terms” should not be understood as an inflexible rule of common law. Such a formulation risks collapsing the distinct concepts of agreement, certainty, completeness and determinability.
By: Martin Waana-Ang
J.S.D. Candidate, Yale Law School
LL.M., Yale Law School
Fox Fellow, Australia National University
BL, LLB, Ghana
