An agreement to agree occurs where 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 what an agreement to agree is 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 where parties wish to work together in the future but are still unsure about 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 which should be negotiated 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. Some common agreements that may be considered agreements to agree are heads of agreements or memorandums of understanding.
Contractual certainty is crucial. If you wish to enter into an enforceable future arrangement, you should draft the contract’s clauses in a way which avoids 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 an independent third party such as an arbitrator should be appointed to resolve a particular future problems;
- 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 which displays your intention to follow the terms.
When analysing the wording of a contract, a court will pay consideration to:
- whether the obligations on the parties are vague or uncertain;
- if the parties included a way to resolve uncertainty; and
- whether the parties intended for the contract to include an enforceable future 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 you wish to commit to the arrangement. Therefore, you should draft the contract and clauses in a way which renders the contract unenforceable.
There are several main takeaways for anyone wishing to ensure their agreement to agree is enforceable in the future. Consequently, you should remember that:
- certainty in a contract is key: If a party wishes to enter into an enforceable agreement, the contract’s clauses should be drafted to avoid uncertainty.
- methods to settle uncertainty: Uncertainty is a crucial element that may cause your agreement to be unenforceable. A well-drafted contract should set out methods or express ways to overcome uncertainty. This may include outlining steps to follow if negotiations break down or requiring specific dispute resolution processes.
- 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 taking part in two meetings or attending a mediation session.
If you need help drafting, reviewing or ensuring the enforceability of your agreement to agree, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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