An agreement to agree occurs when parties decide that certain commercial arrangements should be decided at a later date. For example, this may include the amount of rent paid in a commercial lease or the number of goods a distributor must purchase from a supplier. However, because it is not always clear what the parties have actually agreed to, the courts can be reluctant to enforce these terms. This article explains an agreement to agree and how you can ensure these terms have certainty.
What is an Agreement to Agree?
An agreement to agree is an attempt to enforce a future arrangement between parties. This is useful when parties wish to work together in the future but still need to figure out specific details.
Initially, this appears paradoxical. How can a party know what they will agree to in future if they do not know what they are agreeing to now? However, some commercial arrangements contain elements that parties should negotiate at a later point in time. In particular, clauses relating to prices and logistics cannot immediately be agreed to and require extra time to negotiate. Often, parties want to work together for a ‘trial’ period to determine if they are commercially compatible before locking into a longer-term arrangement.
Some common agreements that may be considered agreements to agree are:
A heads of agreement is an agreement you enter into before the final contract. It is an excellent way to record understandings and formalise the negotiations.
A memorandum of understanding is a preliminary agreement outlining the contract’s framework and critical terms.
Is an Agreement to Agree Enforceable?
The question of enforceability ordinarily comes into play when one party decides they no longer want to proceed with the next phase of engagement and the other party claims to suffer loss consequently. Whether or not an agreement to agree is actually enforceable depends on a range of factors, primarily focused on the contract’s wording and whether it establishes contract certainty.
Continue reading this article below the formContract Certainty
Contractual certainty is crucial. If you wish to enter into an enforceable future arrangement, you should draft the contract’s clauses to avoid uncertainty.
For example, if your agreement requires you to “negotiate a distribution agreement in good faith” in the future, ensuring the contract is certain may require:
- a clause allowing the parties to determine the resolution processes of any issue of uncertainty. This may include agreeing that the parties should appoint an independent third party, such as an arbitrator, to resolve a particular future problem;
- including express guidelines for negotiation. This may require each party to attend three mediation sessions with the other party to resolve any issues; or
- inserting a draft agreement setting out the commercial details of the future arrangement.
Wording Your Contract
In a contractual dispute, the court will ask whether the parties intended to be bound to a future arrangement. To determine your intention, the court analyses the specific wording of a contract. Therefore, you should draft your future agreement to agree in a way that displays your intention to follow the terms.
When analysing the wording of a contract, a court will pay consideration to:
- whether the parties’ obligations are vague or uncertain;
- if the parties included a way to resolve uncertainty; and
- whether the parties intended for the contract to have a future enforceable agreement.
Overall, it is often a fine line as to whether the wording of a contract or future agreement indicates the parties’ binding intention.
Alternatively, you may contemplate entering into an arrangement in the future but are still unsure whether you wish to commit to the arrangement. Therefore, you should draft the contract and clauses in a way that renders the contract unenforceable. This may include using words such as ‘may’ instead of ‘shall’ and not including any clauses around resolving uncertainty.
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Key Takeaways
There are several main takeaways for anyone wishing to ensure their agreement to agree is enforceable. Consequently, you should remember that certainty in a contract is key. Therefore, if a party wishes to enter an enforceable agreement, you should draft the contract’s clauses to avoid uncertainty. Additionally, you should have a method to settle uncertainty. Uncertainty is a crucial element that may cause your agreement to be unenforceable. Therefore, a well-drafted contract should set out procedures to overcome uncertainty. Lastly, you should provide specific descriptions for “negotiating in good faith” or “using reasonable endeavours”. If your contract includes express definitions and examples, a court will be more likely to consider the agreement binding. This can be as simple as the parties participating in two meetings or attending a mediation session.
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Frequently Asked Questions
Should I include an agreement to agree in my contract?
If you are not currently in a position to finalise all aspects of your contract, then both parties may decide that an agreement to agree is a good idea. However, you should ensure both parties are on the same page about whether this clause, or agreement is binding and that the wording reflects this.
Is the agreement to agree enforceable?
There is no clear definitive answer to this, and it will vary in each contract depending on the parties’ intentions and the wording of the clause or contract. The courts will look at how vague or certain the obligations of each party are and whether a clause has been included to deal with uncertainty or disagreement.
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