Hillas and Co. Ltd. v. Arcos Ltd.
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Hillas v. Arcos (1932) 40 Lloyd’s Rep. (C.A.), (1932) 147 L.T. 503 (H.L.) is a landmark House of Lords case on contract law where the court first began to move away from a strict, literal interpretation of the terms of a contract, and instead interpreted it with a view to preserve the bargain. The Court ruled that judges may infer terms into a contract based on the past dealings of the parties rather than void the agreement.
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[edit] Background
Arcos agreed to supply Hillas with lumber in a contract stating the sale of "22,000 standards of softwood of fair specification". In the contract there was an option to purchase additional "100,000 standards" of lumber. The only terms of the option stated,
- whatever the conditions are, buyers shall obtain the goods on conditions and at prices which show to them a reduction of 5 per cent on the f.o.b. value of the official price list at any time ruling during 1931.
Hillas tried to exercise the option but Arcos claimed the contract was cancelled. At trial the jury found that the contract had not been cancelled but Arcos put forward the claim that the option "was an agreement to make an agreement, the terms of which were not defined, and so was unenforceable."
Though they expressed regret for doing so, MacKinnon J. of the Court of Appeal followed rule set out in the case of May & Butcher which stated that if there are any essential terms of a contract of sale that are to be set by a future agreement then the contract is void.
[edit] House of Lords' ruling
There were two issues put to the Court. First, whether the description of the goods in the option clause was sufficient, and second, whether the option clause "contemplate[d] a future bargain the terms of which remained to be settled."
Lord Tomlin noted that the words of the option clause were also present in the rest of the contract which was certain. He argued that the context of the language could suggest a precise meaning that would give certainty to the option clause.
Lord Wright noted that businessmen familiar with their trade often "record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise." To which he concluded, that Courts must interpret contracts "fairly and broadly" following the maxim that "Words are to be so understood that the subject-matter may be preserved rather than destroyed." Wright qualified this statement by saying that courts can never create a contract where there is none.
Wright further noted that it would be mistaken to interpret the option as an offer into a new contract despite the wording suggesting otherwise. The contract for the option was formed as part of the initial agreement and was only to be executed at a later date.
In application to the facts, the court ruled that "fair specification" was not vague enough to void the contract. Both parties had experience in the trade and had completed similar bargains in the past thus each would have known each others' intentions at the time. Therefore, the option in the contract was valid.
[edit] Commentary
It was not stated anywhere in the case but there was much riding on this case as during this period the price of Russian softwood had skyrocketed. Arcos was likely trying to renege on the contract so he would not have to sell the 100,000 units at a loss.
