Neilson v Stewart

The presence of a clause postponing negotiation about the repayment date and terms of a loan does not of itself prevent the document from being a concluded contract if the postponed matter is not essential to the effectiveness of the primary bargain. A term left to future negotiation will invalidate a contract only where agreement on that term is necessary to give the parties’ bargain operative effect at the time it is made. Ordinary legal presumptions about loans (repayable on demand; interest implied unless excluded) can fill gaps left for future negotiation unless the parties have shown that those matters were intended to be essential.

The pursuer contended that a signed typewritten document recording terms for the sale of his 50% shareholding in a company and a related loan-back was a binding contract. A phrase in the document provided that, after a one-year deferral, "payment shall be negotiated to our mutual agreement and satisfaction." The defender argued that this made the whole document an agreement to agree and therefore unenforceable. The sheriff and sheriff principal gave conflicting interlocutors; the First Division (Inner House) reinstated the sheriff and found a concluded contract. The defender appealed to the House of Lords. The central issue was whether the clause postponing negotiation about repayment was essential so as to defeat the existence of a concluded contract for the sale of shares and the related loan-back.

1. Outcome: The House of Lords dismissed the appeal and affirmed the First Division's restoration of the sheriff's interlocutor that the document contained an enforceable agreement.
2. Leading reasoning (per Lord Jauncey): The document must be read as a single agreement in which the loan-back and deferred repayment provisions were intentionally left for future negotiation after a fixed one-year period. That postponement did not render the whole agreement uncertain because the parties intended the sale and the making of the loan-back to take immediate effect. The time and manner of repayment after one year were not essential to the completion of the sale or to the immediate effectiveness of the loan.
3. Supporting points adopted by the House: The general principle in May and Butcher and related authority was accepted as stating the correct test: a contract is unenforceable only if an essential term has been left to future agreement. The House applied authorities on loans and implied terms (Thomson v. Geekie) to hold that, in absence of agreement to the contrary, a loan is repayable on demand and legal interest is implied; such presumptions can supply reasonable consequences where parties have purposely deferred detailed terms.
4. On severability and illegality: The House preferred a lawful construction of the document where possible and accepted that, if any ancillary provision (for example security) were illegal but solely for the buyer's benefit, that ancillary provision could be severed leaving the principal contract intact (following Carney v. Herbert). Lord Jauncey also preferred a construction that avoided rendering the document unlawful under the Companies Act 1985.
5. Conclusion / order: Appeal dismissed. The First Division's interlocutor recalling the sheriff principal's dismissal was restored and the sheriff's interlocutor of 30 November 1988, allowing the action to proceed to proof on damages, was affirmed.

• House of Lords: Appeal heard before Lord Keith of Kinkel, Lord Brandon of Oakbrook, Lord Ackner, Lord Oliver of Aylmerton and Lord Jauncey of Tullichettle; appeal dismissed (21 March 1991).
• First Division (Inner House, Scotland): Allowed the pursuer's appeal, recalled sheriff principal's interlocutor and affirmed sheriff's interlocutor (1 December 1989).
• Sheriff Principal (Scotland): Allowed defender's appeal and dismissed the action (13 January 1989).
• Sheriff Court (Dundee): Repelled defences except on quantum and allowed proof on damages (30 November 1988).