Beware of the "agreement to agree"

26 Jun 2014

What is an agreement to agree?

These are agreements that are “incomplete” in the sense that some contractual term(s), such as precise details of price or property are outstanding and are to be decided at a later stage.

Why should you be concerned?

For a binding agreement to exist and be enforced, the terms must be certain and complete – agreements to agree do not generally fulfill this requirement as some element is missing. 

The unresolved issue will not, in itself, cause the contract as a whole to be unenforceable as long as the subject matter can be easily ascertained, but the absence of a term can have unintended consequences.  

Recent case law

The recent case of Danny Lions Ltd v Bristol Cars Ltd (2014) demonstrates the court’s traditional view that agreements to agree a contractual term in the future are not enforceable as they are too uncertain.

The case of Danny Lions concerned an agreement to use reasonable endeavours to contract with a third party. D and B, the parties in this case, entered an agreement, whereby under clause 2, B was to use “its reasonable endeavours” to enter into a contract with a third party who would complete the restoration of D’s car. D bought an action against B for failure to perform the obligations in the agreement. The court held that although an obligation to use reasonable endeavours was not too uncertain to be enforceable, in this particular case, clause 2 was insufficiently certain to be enforceable.

The agreement set out the work to be completed by the third party, but it did not specify the price and time for payment. These points were left to be decided by the parties who could have differing views and interests. The court therefore had no objective criteria to determine whether it was reasonable for D to refuse or agree to a particular term.    

Although both parties had intended the contract to be enforceable at the time of agreement, the court would not re-write the contract or substitute terms that the parties themselves had failed to agree or include.

However…

If necessary, the court will scrutinise the negotiations leading up to the agreement being completed and will look for any evidence showing conclusion of the incomplete terms was not a precondition to the parties agreeing a legally binding agreement.

Also, if there is a sufficiently objective mechanism or procedure in place to determine the uncertain term in the future, the agreement has a better prospect of being enforced. In the case of R & D Construction Group Limited v Hallam Land Management Limited (2009), it was agreed that the price offered by a landowner to Hallam should be “wholly acceptable” to Hallam and Hallam should use all reasonable endeavours in this regard. The court held that the obligation to agree the price was enforceable. The courts were willing to police the negotiation of a price as it was 'objectively ascertained' and could be derived from an open market value provision which was set out in an option agreement.

In MRI Trading AG V Erdent Mining Corp (2013), the distinguishing features of the agreement to agree which led the court to uphold the enforceability were:

  1. The mandatory nature of the wording – the words “shall be agreed” were used rather than “may” or “should”.
  2. The outstanding terms were minor terms rather than crucial to the working of the contract.
  3. The contract contained an arbitration clause, which meant if the parties could not agree the outstanding terms in the future, a third party would do so – this exemplified the parties’ intention for the contract to be enforced. 

Conclusion

If an agreement to agree is necessary or desired, it should be drafted with the following key points in mind: 

  • If provision is to be made for agreement at a future date then this must be set out clearly and with a sufficiently objective mechanism to allow the parties or perhaps ultimately the courts to ascertain what was intended.
  • Parties should keep a record of all negotiations leading up to the agreement and evidence of the intention to create legal relations despite the lack of certainty.
  • Two key issues that will be considered by the court are:
  1. whether the parties intended to be legally bound by the agreement; and
  2. whether the lack of detail in the agreement results in uncertainty that prevents the agreement from being enforced.

For further information, please contact Howard Ricklow.

Additional information