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How Disagreeable are Agreements to Agree?

Looking to enter into a new agreement with a supplier? Hoping to secure a contract with a new business and lock down further work in the future? Perhaps you are looking to sell your business but thinking of staying on as an employee or consultant?

Whatever your potential commercial activity may be, it is worth being sure your agreement with the other party or parties is valid and enforceable. This article takes a look at enforceability from the perspective of parties making an agreement to decide something at some point in the future, i.e. an “agreement to agree”.

When looking back through UK case law, “agreements to agree” have often been held to be unenforceable. Such agreements are where two parties make an initial agreement covering specific terms, but also within this agreement they provide for making an additional agreement in relation to other obligations at some point in the future. It is the provision or clause for this second agreement, the agreement to make an agreement in the future, which courts have often held as invalid, i.e. a party cannot enforce the provision in the first agreement that requires the other party to enter into the second agreement.

Primarily, this unenforceability stems from an agreement or clause’s lack of certainty. Without certainty the court cannot determine with confidence:

  • the intentions of the parties when the agreement was made; or
  • whether the parties had even intended to create legal relations in regard to the agreement,

and must therefore hold the agreement (or relevant clause) to be invalid.

Generally, the courts will look to uphold agreements where it is clear that there was an intention to create legal relations, and courts are willing in certain circumstances to imply certain terms into an agreement where possible in order to enable an agreement to be performed. However, the courts will not imply terms which would change the nature and effect of the agreement beyond what the parties had clearly intended).[1] Therefore, courts have previously implied terms into such agreements, but their willingness to do so completely depends on the wording of the agreement and how much is lacking or uncertain. If the basis for the agreement and terms intended to be agreed are too vague then there will still be uncertainty, and the agreement will be held invalid.[2]

Consequently, it is crucial for parties to be as clear and precise regarding their future intentions and obligations at the outset when dealing with contractual relationships if they want such intentions to be able to be upheld by the courts. The parties can then continue to update and make new agreements as necessary as their relationship grows and develops to ensure both sets of intentions are understood and reflect their changing circumstances.

The latest judgment shedding light on agreements to agree comes from the Court of Appeal case Philip Morris v Swanton Care & Community Limited in which the claimant, Morris, had entered into a share purchase agreement (the “SPA”) with the defendant for the purchase of his shares in the defendant. This was by initial consideration of £16 million and deferred consideration by way of the claimant providing consultancy services for 4 years (affording him a further £4 million). The SPA stated that, in addition to and after the 4 years, the claimant “shall have the option” to provide his consultancy services for “such further period as shall reasonably be agreed”. The courts held that the claimant was not automatically entitled to provide further consultancy services just because the claimant had the option to provide them – it was not deemed an obligation. As per the provision “such further period as shall reasonably be agreed” it required agreement from both parties after the 4 year period in order for such further consultancy services to be provided, and following such agreement (if reached) a time period for such services could then be set, i.e. it was up to the parties decide after the 4 year period whether they wished to agree for further services to be provided; there was no obligation without further agreement for such services to be provided.

As displayed above, it is of the utmost importance to have not only clear and precise intentions, but also clear and precise obligations in order for the courts to enforce them. Merely agreeing to agree something in the future will not necessarily be enforceable, rather it simply means that the parties have the ability to enter into a future agreement with certain obligations as opposed to those obligations being in the original agreement.

If you require advice in drafting commercial agreements, whether in relation to pinning down future obligations or not, do not hesitate to contact any member of LA’s experienced Corporate and commercial team.

[1] Mamidoil-Jetoil Greek Petroleum Co SA v. Okta Crude Oil Refinery AD [2001] 2 Lloyd’s Rep 76

[2] Barbudev v. Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 548

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