Key Takeaways

  • An "agreement to agree" may or may not be enforceable depending on how definite the terms are and the parties' intent.
  • Courts require a clear intention to be bound and sufficiently definite terms to enforce such agreements.
  • Factors like previous conduct, written terms, and references to future agreements play key roles in interpretation.
  • Agreements to negotiate in good faith are more likely to be enforceable than vague agreements to agree.
  • Jurisdiction and governing law can significantly affect whether a contract is recognized as binding.

Is an Agreement to Agree is a Valid Contract?

The idea that an agreement to agree is a valid contract may be supported by some, but the fact of the matter is that, in the eyes of the law, agreeing to agree to future terms that are not certain is not sufficient grounds to make a legally enforceable agreement. Thus, an agreement to agree remains an unenforceable agreement that merely implies the binding of two parties to a future agreement but does not guarantee it.

When an Agreement to Agree May Be Enforced

Courts generally view an agreement to agree with skepticism, but such agreements can be enforced when the intention to be legally bound is evident and essential terms are sufficiently definite. Enforceability hinges on:

  • Clarity of Terms: If the key terms (such as price, quantity, or timeline) are already established or can be objectively determined.
  • Evidence of Intent: Written documentation, performance under the agreement, or subsequent actions that show intent to be bound.
  • Framework for Future Agreement: Some contracts provide mechanisms for finalizing remaining details—such as requiring parties to act in good faith to resolve outstanding items.

For instance, if parties agree to enter a contract “subject to further negotiation,” courts may rule it unenforceable. However, if the agreement includes a commitment to negotiate specific terms in good faith, it may be upheld depending on jurisdiction and facts.

Agreement to Agree Indicators

In order to tell if an agreement is an agreement to agree and thus unenforceable, the following should be looked for:

  • Clarity of terms. If the subject matter of the agreement cannot be easily ascertained, the agreement is likely an agreement to agree. If the legality of agreement comes to court, the court will be unlikely to substitute or insert terms into the agreement to make it legally binding.
  • Intentions of parties. If the intentions of the parties are made unclear by the lack of an arbitration clause, for example, the insertion of which would indicate an intention to agree, then the contract may not be legally enforceable.
  • Language used. If terms such as “shall,” which convey an absolute obligation to agreement, are missing, then it is more likely that the agreement is an agreement to agree.

Factors Courts Use to Interpret an Agreement to Agree

When assessing whether an agreement to agree is binding, courts may consider:

  • Previous Dealings: A history of working together under similar terms may suggest intent to be bound.
  • Industry Custom: In some sectors, it’s common to finalize key terms and leave minor details for later negotiation.
  • Nature of the Language Used: Phrases like “shall agree” or “subject to contract” influence enforceability.
  • Inclusion of Dispute Resolution Mechanisms: If the document outlines how disputes will be handled, this may support enforceability.

Courts will weigh these factors case-by-case to determine whether there was a meeting of the minds sufficient for contract formation.

Agreement to Agree Legal Issues

Agreements to agree have repeatedly run into a variety of legal issues when cases involving them have been disputed in the courts, with courts ruling against the binding strength of agreements to agree again and again. Examples of such cases include:

  • Cyberlock Consulting, Inc. v. Information Experts, Inc. In this case, the U.S. Fourth Circuit Court of Appeals upheld a district court’s dismissal of a breached “teaming agreement,” since agreements to agree are not enforceable in Virginia. Language in the agreement included, for example: “...agrees to execute a subcontracting agreement...containing provisions...reasonably necessary to...the prime contract.” Such language was deemed by the court to be too vague and indefinite, and thus unenforceable. In addition, external evidence was not allowed for determining the meaning of unclear language.
  • Fish Net, Inc, v. ProfitCenter Software, Inc. In this case, a federal district court in Pennsylvania ruled against the enforceability of agreements to agree for similar reasons. Specifically, this case revolved around an executive at a meeting stating that he wanted to meet with someone who had the authority to make a deal. This and other language was deemed to be too vague to constitute a legally binding agreement, and at best was merely an agreement to negotiate.
  • Butler v. Balolia. This case also distinguished between agreements to negotiate and agreements to agree. In this case, a letter of intent stated that the parties in question would “negotiate and enter into a separate Purchase Agreement.” Such language was ruled by the court to constitute a valid agreement to negotiate, which may be enforceable, but not an agreement to agree, which is not.

Common Legal Challenges in Agreement to Agree Cases

Challenges that arise in disputes over an agreement to agree include:

  • Lack of Certainty: Vague or open-ended provisions can render the agreement unenforceable.
  • Incomplete Terms: If essential elements of the contract are missing or intentionally deferred.
  • Governing Law Conflicts: Different jurisdictions apply varying standards when interpreting the validity of such agreements.
  • Reliance and Estoppel: One party may argue that they relied on the agreement to their detriment, invoking equitable doctrines like promissory estoppel.

In litigation, courts may enforce an agreement if there's evidence of reliance and bad faith refusal to finalize the terms.

Agreement to Agree v. Agreements to Negotiate

An agreement to agree should not be confused with an agreement to negotiate, for although the former is not enforceable, the latter sometimes can be. An example of this in principle, though not in fact (since the case was lost due to an unrelated issue), was the case of Copeland v. Baskin Robbins, U.S.A.

In this case, Copeland entered into negotiates to buy an ice cream manufacturing plant with the condition that Baskin Robbins would buy the ice cream made at the plant for three years, after which time a new packing agreement and negotiated pricing would be determined. An agreement to the initial terms was made, while negotiation to the packing terms was still ongoing, until Baskin Robbins broke off negotiations two months later because the deal was no longer beneficial to their overall business strategy. Copeland then sued for breach of contract, but initially lost because a court ruled that the basic terms of the packing agreement were never finalized.

However, an appeals court disagreed with that aspect of the ruling because it deemed that what was breached was not an agreement to agree but rather an agreement to negotiate, and since the negotiations were not concluded, the terms of the agreement were not kept. It was not required of Baskin Robbins that they reach an agreement over the contract, but only that they negotiate in good faith, and breaking off the negotiations for reasons unrelated to the negotiations was deemed to have violated this requirement. Copeland still lost the case, however, because it had sought damages that it could not by rights recover under the rules of its complaint.

Agreement to Agree vs. Memorandum of Understanding

A memorandum of understanding (MOU) may serve as a more detailed and structured alternative to an agreement to agree. While both outline preliminary understandings, key differences include:

  • Level of Commitment: MOUs often clarify whether parties intend to be legally bound, which reduces ambiguity.
  • Scope of Terms: MOUs typically include more detailed provisions than agreements to agree, which may help satisfy contract formation requirements.
  • Use in Complex Transactions: MOUs are common in mergers, real estate, and international deals where parties need a framework to guide further negotiations.

Unlike a vague promise to agree in the future, a well-drafted MOU can strike a balance between flexibility and enforceability.

Jurisdictional Differences in Enforcing Agreement to Agree

The enforceability of an agreement to agree varies across legal systems:

  • United States: Courts generally require definite terms and intent to be bound; otherwise, they may consider it a non-binding “agreement to negotiate.”
  • United Kingdom: Courts often hold that an agreement to agree is not enforceable unless all essential terms are finalized or objectively determinable.
  • South Africa & Common Law Jurisdictions: Similar to the UK, unless the agreement is sufficiently definite or supported by reliance, it may be unenforceable.

Understanding the applicable jurisdiction is critical when drafting or interpreting such agreements.

Drafting Tips to Avoid Invalid Agreement to Agree

To strengthen the enforceability of preliminary agreements, consider these best practices:

  • Clearly Define Key Terms: Include all essential elements of the deal or mechanisms for determining them.
  • Specify Intent: State whether the agreement is binding or non-binding.
  • Include a Dispute Resolution Clause: Demonstrates seriousness and intent to carry the agreement forward.
  • Set Deadlines for Future Agreement: Adds structure and reduces ambiguity.

Consulting legal counsel during drafting can help ensure the document aligns with the parties’ intentions and withstands scrutiny.

Frequently Asked Questions

  1. Is an agreement to agree legally binding?
    Not always. It depends on whether the agreement includes definite terms and shows clear intent to be bound.
  2. What’s the difference between an agreement to agree and a contract?
    A contract contains all essential terms and is immediately enforceable, while an agreement to agree outlines future intentions that may or may not be enforceable.
  3. Can a memorandum of understanding be enforced like a contract?
    Yes, if it contains sufficient detail and the parties intend it to be legally binding.
  4. What happens if one party backs out of an agreement to agree?
    If the agreement is not enforceable, there may be no legal remedy. However, if there’s evidence of reliance or bad faith, equitable relief may apply.
  5. How can I ensure an agreement to agree is enforceable?
    Define essential terms clearly, express intent to be bound, and avoid ambiguous language like “subject to further negotiation.”

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