What is an Agreement to Agree?
Agreements to agree ("ATA") are a common a tool often overlooked by non-lawyers. These clauses set out an intention to develop a future contract through good faith negotiations.
The Courts recognize ATAs as a valid tool that parties can use. These provisions may therefore often be relevant to the resolution of a dispute in a situation where the parties have expressed a willingness to enter into a future agreement.
Applicable legislation
ATA’s can be found in various contracts – often relating to marketing, landlord and tenant operations or where the main concern is the assignment of rights and obligations. Such agreements do not need to be in writing and can form the basis of a contract that is enforceable in a court.
Under s8 of the Sale of Goods (Amendment) Act 1971, "an agreement to agree" is valid for the purposes of a purchase but may only be enforced when the actual terms of the contract have been decided. Parties commonly use an ATA to enter into a long-term arrangement. The ATA states that the parties will negotiate the price at a later stage.
Such clauses may be used to govern the sale of goods, where the price has not yet been agreed. Here, the parties may decide on a price based on the market price or other objective factors.
Judicial approach
In 1825, the Court of Chancery held in Coutts v Goudy that agreements to agree are enforceable. This was a case involving a trust deed, which required the trustees to pay the wealthy benefactor’s charitable intentions at death, with the clause "on such terms as the Trustees shall think fit". At first instance, the deed was held not to impose any legally enforceable obligation. However, on appeal, Lord Eldon overturned this decision and stated that the trustee had a contractual duty to carry out the charitable intention.
This early case illustrates the importance of allowing some flexibility in the legal system. The Court took the view that the general purpose of the clause was to implement the charitable intention. Therefore, the parties were bound by contract and the Court would have the final say if the parties could not agree on the terms at which the fund should be distributed during and after the benefactor’s lifetime. While it appears that the Court’s primary aim was to look at the general intention of the clause , ATAs are still subject to wider interpretation from judges, such as in the case of Eccentric Club v De Medici.
Further rulings were made in relation to this clause. In Re: Struben’s Trust, the grantor had expressed a highly individualistic intention, which the Court was bound to implement. Conversely, in Currie v Workers Building Society, the words "as the trustees in their discretion may think fit" were considered to impose legally binding obligations.
The common law
Over the years, various UK cases have found that ATAs are valid instruments. In the case of May v Butcher, an arrangement for the sale of land at a future date that made no reference to price was valid since it stated that it should be sold for the "best price reasonably obtainable." In the well-known English tort case, Walford v Lane, a trust deed was held to be unenforceable, since the parties did not specify whether it could be terminated if the settlement was not successful. In the case of Eccentric Club v De Medici, a decision was taken where an open-ended clause was considered to be binding despite it not specifying the exact time at which the obligation should be fulfilled.
The Court of Appeal decided in the case of Emcor Drake & Scull v Ove Arup & Partners (2000) 16 Cost LR 364 that an ATA did not create a legally binding obligation. Here, the parties agreed to the content and form of a sub-contract but not the price at which it should be entered. Since the parties had failed to agree on this issue, the Court found that there was no contract.
The Court of Appeal did find that the contract formed in the full case of Satterthwaite v Spencer (1980), which related to a conveyance that had been carried out in connection to an Advance Payment Circular. The Court found that the deeming clause neither increased nor diminished the rights of the investors, who were bound by contract accordingly.
Degree of effect
UTPAS is reluctant to enforce open-ended agreements, which offer unlimited flexibility. Where some form of person or process will make a decision on the merits of a case – such as a judge or an abitrator – the Court is more likely to enforce a clause. For this reason, in international arbitration, parties are likely to agree that the clause will be binding in order to protect their interests.
Enforceability of Agreements to Agree
The law has developed in this area since the first reported case over 30 years ago (Rosenhead v Law Society [1976] 1 WLR 613). The most recent case is Palmer Birch Associates Ltd v Lloyd (2014) EWHC 2929 (Ch) which discusses some of the previous authorities. The court will interpret an Agreement to Agree to see if the parties have intended to create contractual relations. When considering whether there is a binding contract, the court will consider whether the agreement: (1) has the necessary elements of a legally enforceable contract, or (2) can be regarded as an ‘enforceable promise’. Where there is an agreement to agree on a future matter and no mechanism is provided for how the matter will be agreed then there will not be a legally enforceable contract. However, if there is an objective standard by which a matter is to be agreed (for example by obtaining the consent of an independent third party) then the agreement will be binding. In Palmer the Court said that the "presence of an objective standard" is a "good indicator that the parties intended to create a binding and enforceable agreement". Elsewhere it has been stated that the promise to agree is not enforceable if the court has to make a declaration of satisfaction with a potential offer (as that would always be capable of being unfair). What happens if the parties try to make the agreement into a binding contract by recording their agreement?! This may involve the parties putting in writing what has been agreed at a later date. The later agreement document will not be binding if the terms of the original agreement were such that the agreement was not binding.
Examples of Agreements to Agree
Agreements to agree are not restricted to the world of joint ventures. You will often see agreements to agree used in other sectors which may at first glance seem to have little resemblance to joint venture arrangements. They will be relevant in the following industries: construction, business partnerships, real estate and insurance.
In the construction industry it is not uncommon for a project to be won after initial discussions between contractors of how that project should be looked at. Therefore a commitment to work together can be subject to a detailed review of the issues before the contractor is prepared to commit to moving the project forward. This is very commonplace and occurs at various points throughout the life of most construction projects.
In the context of business partnerships you will often see agreements to agree being used when considering how partners will re-invest or withdraw profits from the business. It is important that partners in business share their profits but how they will be shared is important. They may want to have a discussion on how that profit should be used rather than received. It is not uncommon for business partnership agreements to have an element of uncertainty and open palmedness built into them so that partners can review how the business is performing and adapt their arrangements accordingly.
Real estate is another area where agreements to agree are very commonly used. Examples include renewal terms in commercial leases. You will regularly see the provision of options to renew leases contained within some of the more complex lease arrangements on the market today. The lease will often give the tenant the right to renew for a specified term giving both landlord and tenant the time to consider the viability of the lease being extended. During the renewal process the rent will usually be subject to open market valuation by an independent surveyor.
Joint venture agreements are also commonly used in the insurance industry. In joint ventures which involve insurers, an agreement to agree to follow an earlier letter of intent to enter into a joint venture is important so as to prevent the failure of negotiations having cost the parties unnecessary time and expense and because commitments have already been quasi-made.
Despite agreement to agree being a precarious concept, if correctly handled, it can facilitate a slow burner culture within the business relationship that can often lead to renewed value and vitality, like any good flame.
Pitfalls and Issues
It’s important to note that often a contract that is described as an agreement to agree is just an invalid letter of intent that requires the parties to negotiate in good faith but lacks enforceable provisions. These types of contracts have been noted by the California Court of Appeal in Brea Mall Ltd. P’Ship v. Oxford Props. Inv. Ltd., to be "little more than an agreement to agree … a contract that is no contract at all". An agreement to agree in this form will often state in its main body that it alone is not binding or that the agreement only becomes binding upon the execution and delivery of a definitive agreement.
In addition to the lack of specificity, another potential problem with these agreements is that they do not always sufficiently express the mutual intent of the parties in order to allow a court to fashion potential remedies for breach. However, the failure of the parties to reach an agreement on all terms that still constitutes a binding, enforceable contract happens quite rarely. Similar to an offer, an agreement to agree creates an implied duty to negotiate the final terms of a contract in good faith. Often times, should careful drafting be absent from the agreement to agree, a court will find that sufficient intent to be bound existed, even though many terms were not agreed on.
How to Draft an Agreement to Agree
While an agreement to agree is usually unenforceable as a matter of course, there is no reason why a contractual provision agreeing to agree in the future cannot have some binding effect. The law may not enforce the terms of that agreement, but it may not seek to prevent the parties from coming to an agreement at a later date.
A practical solution is to treat the agreement to agree as if it were an offer that could be accepted. The parties could agree in their contract to consult before the end of a specified period and continue to negotiate in good faith. This could resemble a term of the type that is commonly used to agree early in the process to consult before making any material decisions or undertake any significant actions.
However, to ensure that the liability for breaking off negotiations without reaching an agreement is minimal, the following tips are suggested:
1. a strict timetable;
2. requirements for parties to submit proposals in writing and/or cash bids;
3 . detailing the information the parties must exchange and when that will happen;
- listing the people who must meet and where and when that will happen;
- establishing proper channels for communication;
- agreeing a structured timetable for decision making with binding deadlines;
- specifying how a binding obligation to consult can be triggered;
- requiring the parties to keep the information confidential;
- noting that any final agreement will not be binding until it has been reduced to writing and signed (subject to a few exceptions, including in court proceedings);
- spelling out that there will be no liability for agreeing to agree in the future.
It should be noted that all parties will be relying on the agreement to agree, therefore it may be the case that the parties will have to rely on a common sense approach to the requirements above. If they are all seeking to achieve a common goal then particularity should not be needed, but where the parties have specific agendas, more particularity may be required.
Alternative Considerations to Agreements to Agree
The law surrounding agreements to agree is important, but it is also extremely narrow. Lawyers for parties who would like a document which commits the parties but does not commit them to any specific terms are therefore left with few options. One of the clearest alternatives to agreements to agree is an option contract. An option contracts gives certainty to the parties because it creates a legal obligation when the option is exercised or ‘called’. This option will obviously be more appropriate in some situations than others, but should not be forgotten when drafting the initial stages of a contract.
A letter of intent is also a common document in this context. Letters of intent are typically associated with transactions, such as the sale of assets or shares. They may be important in the context of deals that involve transferring assets, because the nature of those assets mean that there may be a risk of them disappearing before a contract is signed. Depending on the circumstances of the case, binding letters of intent may also be possible. Binding letters are less common than letters of intent, and the circumstances under which an agreement can be made binding are much narrower. One scenario where a binding contract might be possible is where a letter of intent is signed between parties with equal bargaining power. Another scenario is where a party explicitly states that they have the necessary authority to bind the parties, and does so in a clear manner.
One final alternative to agreements to agree is complete silence about whether the document is binding or not. In Prudential Assurance Co Ltd v Inland Revenue Commissioners [2016] 33 TC 685, the court stated that in some circumstances, the absence of any indication of whether a document is binding or not would result in the document being non-binding.
Case Law on Agreements to Agree
The case law with respect to agreements to agree almost invariably considers the leading case of May & Baker Ltd v R. A. Baker (1957) Ltd. The case concerned an agreement for the sale of the goodwill of the business of a pharmacy in 3 years time in consideration for a lump sum of £8,000 and also profit royalties for the next 3 years. The court found that the agreement could not be enforced because the price of the goodwill had not been agreed.
The case can, however, be distinguished from circumstances where particular matters are expressly stated to be left to the future agreement by way of a mechanism e.g. the appointment of an expert/mediator/valuer/expert valuer etc. and therefore does not automatically govern the outcome of disputes where, contrary to the assumption in May & Baker, the parties have expressly provided for the agreement of the relevant matters at a future date.
However, there have been many other cases where the parties have expressly provided for the settlement of matters at a later date, but the parties’ purpose in doing so has clearly been to have the amount agreed subject to the agreement of that sum on that later date.
In Blackpool Football Club Ltd v PFJB Ltd, the parties entered into an agreement for the sale of a football club for £8m to be payable on 1 February 2010 or earlier if the club was sold or recruited a new investor. The agreement further provided for that sum to be indexed to inflation interest between "the date of this agreement and the completion". The case in fact concerned the date for completion of the sale. The club contended that completion should take place on 1 February 2010 and no later. The sellers argued that completion should take place earlier than 1 February 2010 but was nevertheless two or three weeks after the date of contract.
Mr Justice Stark reviewed the case law, including May & Baker; the decisions that those authorities turn on the language used in the contract as a whole, and the weight attached to specific clauses within it; the context (factual and legal) in which the term is to be implied, and the significance or otherwise of particular parts of the agreement; and the absence of express words importing a binding commitment in respect of any particular matter. He concluded that the seller’s offer for a payment of £8m in 3 weeks’ time was subject to agreement of the amount due by the exercise of its right to receive indexation plus interest. Until that indexation plus interest had been agreed or determined the offer for £8m was in the circumstances binding.
There appears to be no principled distinction between agreements which make provision for the settlement of particular matters (i.e. by a particular mechanism) and provision which makes a particular matter subject to agreement. If the parties have provided for a matter to be agreed/settled then they should not be able to argue that it is not agreed (and binding) because it was intended to be but could not be ascertained at that point.
In another case, Spice Girls Ltd v Aprilia World Service Srl concerned the question of whether Spice Girls had breached a provision in their contract by failing to pay an agreed payment. The relevant clause in issue was on the following terms: "In the event of the SPICE GIRLS choosing to use….or any part of….to terminate this service agreement prematurely, SPICE GIRLS will be liable to pay AIR a sum equivalent to each of £150,000 for the first four (4) appearances and £300,000 thereafter, to a maximum of £950,000. Such sums will be in addition to the loss of profit and costs that air will suffer as a result of such early termination…." The subject of the dispute was whether the word "choose" was to be interpreted, in line with Spice Girls submissions, as meaning elect or choose to terminate the agreement, or, as, contended by Aprilia the word was so ambiguous that it meant that there was no binding agreement. The Court of Appeal rejected Spice Girls contention and held that the word "choose" in the context was a clear and binding commitment to pay damages if they terminated. The use of the word "choose" was a formal and legalistic mechanism to provide for the consequences of terminating the contract. The parties were legally bound to the consequences of exercising that right to terminate and Watford Football Club Ltd v EEB Board was authority for the view that since the word "choose" was a clear intention evidenced both expressly and by the context, it assumed that certain events would occur and the consequences of those events formed an integral part of the contract.
Conclusion: Is an Agreement to Agree Right for You?
In conclusion, the decision on whether to use an agreement to agree, either in a legal or business context, must be weighed case by case. Legal factors such as the risk of enforceability, statutory provisions to consider and jurisdictional nuances , as well as practical considerations such as the potential to favour the party negotiating the agreement over others, must all be taken into account. Couples considering new or progressed relationships should also take into account the impact of agreements to agree on other agreements, and the need to obtain independent advice.