Fear of commitment: when is a binding contract formed?


Proton Energy Group SA v Orlen Lietuva [2013] EWHC 2872 (Comm)

A recent decision of the Commercial Court dealt with the question of whether a binding contract had been formed between the parties in circumstances where the speed of the market required the parties to agree the main terms but leave the details to be negotiated later.


It is well established in contract law that a so-called 'agreement to agree', or a contract which leaves key terms to be agreed in the future, creates enough uncertainty to render the contract unenforceable. However, this case highlights that when deciding whether or not a contract has been formed, the courts will analyse not just whether essential terms have been agreed, but also whether or not the language and conduct of the parties demonstrates that they are contractually committed to each other.

The Facts

Proton Energy Group SA ('Proton'), a Swiss trader of oil and gas products, engaged in email correspondence with a Lithuanian petroleum refinery Orlen Lietuva ('Orlen') regarding the sale of crude oil mix as per an attached specification. Proton emailed Orlen a "firm offer" which was stated to be open to acceptance by close of business on the same day. After some negotiation, Orlen finally responded with an email stating 'Confirmed'. Later that day, Proton entered into a contract with its supplier to obtain the crude oil mix it would then arrange to ship to Orlen.

One week later, Proton sent Orlen a draft written contract. This provoked further email correspondence between the parties and then a revised draft. At this point there was still at least one issue outstanding between the parties. Orlen then wrote to Proton stating that it was withdrawing from the negotiations. Proton subsequently made an application for summary judgment as to whether there was a binding contract between the parties in order to then pursue a claim for breach of contract.

The Decision – had a contract been formed?

The case was put to full trial and the Court ultimately held that a contract did exist between the parties and furthermore that Orlen was now liable to Proton in damages for breach of contract. The Court referred to the legal principles set out in the key authority regarding 'agreements to agree',

RTS Flexible Systems Ltd. v Molkerei Alois Muller GmbH & Co

, and stated that the question to consider was whether the parties agreed on all the terms that they objectively regarded as essential for the formation of legally binding relations between them.

In answering this question, the judge conducted an objective evaluation of the email communication between the parties and their conduct and held that it was clear that each party considered itself to be committed to the contract, despite the fact that certain key terms were stated to be subject to "contract negotiations". The decision was based on the following factors:

Language: the email correspondence between the parties clearly used "the language of commitment" demonstrating an offer and an acceptance;
Industry practice: the deal was described as a "classic spot deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later". The judge recognised that commercial practice and market conditions do not always accord with the requirements of contract law;
Urgency: the urgent nature of the deal was made expressly clear by Proton. The offer was intended to expire on the same day if not accepted, and performance of the deal would be required immediately afterwards – Proton had contracted with its own supplier to purchase the required oil mix within hours. The urgency of the offer demanded an immediate binding commitment or rejection in response; and
Terms still to be agreed: the offer stated that all contractual terms not indicated therein would be "discussed and mutually agreed between the parties upon contractual negotiations". The judge considered that the parties therefore agreed to be bound from that point onwards even though they recognised certain provisions would be agreed at a future date.

Specification of goods – a description or a statement of quality?

The case also addressed the difficult question of whether a specification of goods forms part of the description of the goods or simply deals with quality. The judge recognised that the distinction between description and quality is often blurred. However, it was stated that a description should ultimately be limited to the identification of the goods. The specification therefore was clearly a matter of quality. Whilst the parties were free to make quality a condition of the contract, in this case they had not done so and such a condition could not be implied into the contract by statute, unlike a description.

Comment – what should you take from this decision when negotiating a contract?

Courts are prepared to accept that commercial practice does not always fit neatly within the requirements of contract law. Utmost care should therefore be taken during contractual negotiations to ensure that parties only form a binding contract when they wish to do so. This should be made expressly clear. Parties should also make sure that they are not acting or corresponding in a way which demonstrates a contractual commitment to each other before they are ready to do so.

Parties should also be wary of relying on an attached specification of goods which is not specifically incorporated into the contract as a condition. An implied description will normally be limited to identification of the goods alone. If parties wish to impose additional requirements regarding the quality of the product, this should be expressly addressed in the contract.