What is ‘Agreement to Agree’
An ‘agreement to agree’ is an agreement to reach a further agreement in the future. It is widely agreed that such an agreement is not enforceable, except in cases where that agreement is a mandate for an agent to enter into a contract on the principal’s behalf. Where agency law applies, the agent’s knowledge of his principal’s bargaining position is imputed to the principal, so no further agreement is required.
‘Agreement to agree’ stands in contrast to ‘agreement to negotiate’ – a more ambiguous and less commonly encountered concept in contract law. The former relates to an agreement to make a separate agreement in the future, while the latter relates to an agreement to negotiate in the future.
The earliest leading case to deal with ‘agreement to agree’ was May & Butcher Ltd v The King, in which the plaintiff and defendant tried to negotiate a sale of the plaintiff’s surplus war supplies. Neither party could agree on the prices for the goods, so the parties agreed by correspondence that the sale would be for ‘current market prices at the date of delivery’. It was held by the Court of Appeal that the contract was void for lack of agreement on an essential term (the price) because the term was too vague and uncertain. In other words, they had not formed a contract; they had simply formed an ‘agreement to agree’.
A recent case in the UK, Walford v Miles, also concerned an ‘agreement to agree’. The plaintiff before the House of Lords was the mortgagee, who had agreed with the defendant the mortgagor, that the properties be sold subject to agreed terms . The case concerned a clause in the agreement that went to the commercial validity or viability of a contract, because it obliged the defendant to pay all costs negligently incurred by him in relation to a proposed yet unsuccessful sale of the property. The clause was struck down on the basis that the ‘measure of damages’ or ‘responsibility’ attached to those costs was not sufficiently certain to constitute an obligation at law. As such, the lender would be unable to enforce the clause without first having to know how much it would cost to respond to the defendant’s ‘negligence’. Following the Court of Appeal and the Privy Council, it was held by the House of Lords that such a clause did not fall within the ‘scope of the mortgage contract’, as there was no binding agreement to link the obligation with any responsibility.
‘Agreement to agree’ also has a precedent in the United States. Emmott v Michael Wilson & Co Ltd concerned the purchase of real property by the American and Dutch governments in Kuwait. The US found that it would be inappropriate to pass a certainty test in determining whether the provisions of the clause ought to be enforced. The clause provided that the United States, by advance written notice, might require the seller to submit to arbitration if a dispute ever arose between them. The foreign legislative intention that such a clause should not be enforceable and, thereby, prevented by public policy, did not outweigh the corporate interests of the plaintiff company, as well as that of the defendant via Article 28 of the Dutch-American Treaty.
Legally Binding Agreement to Agree
Generally, an "agreement to agree" is unenforceable if the parties do not set out clear terms of agreement. However, the parties can avoid this outcome by including language in the "agreement to agree" that gives the terms that will form a binding contract some degree of specificity. Courts have held that a contract is enforceable where the parties sought to agree on issues but were unable to come to consensus. For example, in an unlawful competition case, one party brought suit over an alleged oral agreement entered into following a merger. The defendant denied that any agreement had been reached but, at trial, effectively admitted to the creation of a contractual obligation by stating that they were still negotiating the "details of the license" agreement. The trial court found an oral contract to exist based on the parties’ agreement to "agree to agree" and "their course of dealing," relying in part on their respective intentions [FN]:
[fn] Where parties have agreed to all the terms on which they will be bound, but have left some of them to be agreed upon, they will [have created an enforceable contract] … [S]ome courts have implied an obligation to … use reasonable efforts to agree upon details of a contract, where the parties intend to agree, but have failed to agree on all terms, such as where the parties have agreed to execute a lease but have not agreed on the location of the property to be leased.
Accordingly, in this circumstance the court found that there was "an enforceable contract for the license to do business in California." Maintaining this position, the court pointed out that where the parties have conclusively resolved all issues except the choice of a particular provision, an implied agreement can be inferred from their actions. In other words, if the courts find that the parties have reached the ultimate agreement, but have not agreed on certain details, they will not interpret this as a failure to reach an agreement at all. Conversely, if the court finds that no agreement has been reached, the "agreement to agree" does not exist. Further, courts have determined that agreements to agree are enforceable where the parties do not expressly reserve the right to make a binding agreement. For example, in a dispute over whether a settlement agreement existed, the parties reached a "tentative agreement," providing a written exchange to support the existence of a legal contract.
Traps and Pitfalls
As is often highlighted in dispute resolution, a major pitfall in contract disputes is often the lack of attention to the minutiae of the agreement. As with any contract, reliance on an "agreement to agree" causes a high risk of dispute.
An "agreement to agree", or "in principle agreement" (IPA), is an expression of intent to enter into a future legally binding contract, but that does not specify the detail of the terms to be agreed upon. Carried out to their intended conclusion, these agreements can be a positive commercial tool, for example when a party may wish to tie up a transaction as quickly as possible, but push through certain terms at a later date. However, in practice, the parties will chart a course to the IPAs intended conclusion in a piecemeal fashion, and it is this ambiguity or vagueness in an IPA that can cause disputes at a later stage, when either party takes a different interpretation of a key term.
Case Examples
The ‘Agreement to Agree’ has been a further topic for case law to consider in the light of the changing drafting practices and types of agreements which parties seek to enter into. The leading English authority on this area is the case of Peabody Trust v Perks (1999) Chartered Institute of Arbitrators Case No 518.
This case concerned an "Option Agreement" which provided for the grant of an underlease of commercial premises in return for the payment of a premium and annual rent for 125 years. The last version of the document retained the requirement that the vendor and purchaser enter into a formal agreement, having first agreed the premium and rent, before the transaction could proceed. The person signing on behalf of the vendor had authority to bind the company subject to approval of the final terms by the Chairman of the Vendor’s Board.
The Chairman did not give his approval, apparently because he was opposed to the ‘flip’ transaction proposed by the tenant. The Chairman had sent a letter to the tenant saying that the Chairman’s "opinion on this situation is that he did not approve this purchase and will not approve it until some other purchase has been agreed for what he deems the land is worth".
The property remained on the market and the tenant brought a claim for specific performance for breach of contract against the vendor to secure the underlease.
The Court of Appeal held that there was no binding contract between the parties. The agreement was considered to be void for uncertainty because the parties had not yet reached a final agreement on all of the necessary terms. In order for the vendor to be bound, the parties had to agree a fixed price for the premium, as there was simply "no point in the vendor surrendering a beneficial lease at less than the fair price and entering into a long term commitment at a low rent". The fact that the parties had not agreed the premium meant that they had not reached agreement on the underlease.
There was also no binding agreement on the rent, as the agreement for the underlease referred to "a review of the rent at two yearly intervals" instead of a set rent figure. The Court said that the reference to a review of rent "does not mean that the rent was not agreed or could not be agreed. But it does mean that what the parties provide for the future does not constitute a term of the contract (just like the provision that there will be a rent review sooner or later but the level of rent is not yet known) but rather conditions on which the agreement proceeds." The agreement therefore failed as the parties had not agreed a fixed price for the property , not agreed the rental terms and decided instead that agreement would be reached at a future date. The agreement to agree the terms was not sufficient to create a binding agreement.
In Hafner v LHA Properties [2006] WL 933990, the Applicant landlord developed a property as a school building and entered into an agreement with an independent company allowing the independent company to occupy part of the property at zero rent for the next 125 years. The agreement was accompanied by a planning obligation which required the local authority to obtain planning permission for a change of use of the upper floors within a period of 10 years and, if the planning obligation was not fulfilled, the premises were to revert to the landlord. The landlord failed to obtain the necessary consent from the landlord’s Board and, as a result, the planning obligation lapsed.
Over 10 years later, the landlord issued a claim for recovery of possession of the land and also for breach of contract for refusing to enter into the new lease offered by the landlord. The Agreement was said not to be binding upon the parties because the landlord had not ensured that the conditions of the handover obligation were met. The court held that the no-objection letter was not a condition precedent just because there was an implied acceptance that the conditions of the planning obligation had to be fulfilled before the grant of the sublease. The confirmation letter was not a condition precedent and was merely a precondition that the parties had to overcome.
The judgement makes it clear that there was nothing in the agreement that suggested that the landlord must obtain no-objection consent from any third party first. From a contracting perspective this arguably demonstrates that the Contracting Authority recognised the real situation between the parties, which was that the landlord retained control over the land and the tenant had the right to possession as an unpaid licensee at zero rent until the conditions of the planning obligations were fulfilled.
These cases demonstrate the importance of ensuring that all parties understand the key terms of any agreement that they are about to enter into, in order to avoid the situation in which parties mistakenly believe that they are bound by an agreement which is not actually binding at all.
Clause Drafting Best Practices
When faced with a situation where an agreement to agree seems our only recourse, we should consider how the deal could most appropriately be documented. The checklist below may not be exhaustive or even universally applicable, but it provides guidance for reducing the scope and increasing the efficacy of litigation:
Avoid exposing the parties to liability for a breach, or damage claim for failure, to negotiate or finalize a principal agreement. The agreement to agree should be explicit, stating that the agreed intention is to enter into a definitive agreement in the future, and all of the necessary elements of such an agreement should be set forth.
Expressly state the intended governing law. This is most relevant in international transactions, but this is important to do, no matter what the parties’ home countries.
When it is indeterminate whether one party or both parties are at risk of liability for damage, set clear ground rules as to liability and damage for either party. For example, if a dispute involves both parties’ services, clarify which party is at risk of liability for damages.
Avoid any suggested remedies that might be inherently legally redressable. For example, failure to provide timely notice of an alleged failure to commence negotiations.
Alternative Approaches
An alternative to an ‘agreement to agree’ is an opt-in right which can be included in the relevant document as a condition precedent to a legally binding agreement being entered into. For a lease, this might be that the tenant could exercise an option to lease the same property at a subsequently determined rent. The issue that often arises is whether, in such circumstances, the parties would be bound to act in good faith to agree the rent – which is a requirement of the relationship of landlord and tenant. In this respect, a party would need to bear in mind the judgment in Walford v Lane Wellesley Wilberforce J held, back in 1998 , that there was no implied obligation in English law to conduct negotiations in good faith. However, such conditions have been held to be acceptable in some commercial contexts where it is appropriate.
Another alternative is for a right of first refusal, often in the context of a sale of shares or assets in a business. In essence, the initial party would provide the other with an option to purchase such shares or assets prior to proceeding with a sale to a third party.
A further alternative is for a right of first offer, which is similar to the right of first refusal detailed above but is where the sale proceeds first on the open market to the third party without the right of first refusal having been offered to the second party.