Agreements to Agree: Three Reasons why This Last Resort now has Legal Teeth
Byon June 4, 2018
Many pressures beset those responsible for large-scale projects, forcing them to choose between a fastidious approach to procurement and project management, and meeting the time restrictions or budgetary constraints they are often required to work under.
These are the circumstances in which corners can be cut, in which mistakes might be made or in which people can be convinced to enter into an ‘agreement to agree’.
We would urge anyone considering an agreement to agree as anything other than a last resort to reassess their options. No matter the pressure from potential project partners and/or from within your own organisation, there will rarely be a case when a ‘fit for purpose’ contract would not be a better choice. However, we also recognise that there will be circumstances where such choice is not entirely your own, or where it is genuinely the best option available. This article is therefore about the protection the law now affords even those who followed this path of last resort, should your project hit a bump in the road and you are later forced to seek legal recourse.
What is an ‘agreement to agree’?
Legal contracts ideally should be precise documents, devoid of ambiguity, guides to help all parties to understand and appreciate the needs of the project and the expectations on them throughout the relationship. Of course, as we all know, this is often not the case, and an agreement to agree is when parties to a contract recognise that not everything has been quantified and defined, but for one reason or another they are required to progress the project all the same. In these circumstances the parties agree that, though the contract is incomplete, they will sign it and revisit the unquantified or vague clauses within it at a later stage when a more precise assessment can be determined. In doing so, they agree to put it/them to one side to discuss at a later date so as to not delay the start of the project.
Time pressures are among the leading causes of such a deal being struck. These pressures may include instances when budgets must be spent by a particular deadline, when cuts are introduced, or when a vendor, under target pressures of their own, attempts to induce a client with a time-sensitive offer that seems too good to pass up. There can be a lot of posturing at the procurement stage of a relationship and whether true, believed or stated, the ‘everything will fall apart if the contracts are not signed by [this] date’ play can, at times, be a tough one to resist.
Agreements to agree are notoriously difficult to police, so if you find yourself in a situation where accepting one is your only or best course of action, then make sure that you do all that you can to minimise any risk.
A step in the right direction for any agreement to agree
When circumstances necessitate that you proceed with an agreement that is not as complete as you would have liked, it is important that you make sure that a scoping and due-diligence activity is built into the contract. This must be agreed upon before any other project work begins so that there is a framework to be guided by. We would usually advise that this activity take place pre-contractually, but where time is short, making sure the supplier completes it prior to the work being carried out. The outcomes of this scoping and due-diligence phase will help you to better police the contract. At the same time, you should build in dates to revise and restructure the contract to include other parts of the project as they become easier to quantify and measure.
This approach alone cannot be entirely relied upon as disputes can arise at any time, even early on in a working relationship. Therefore at the outset you need to agree a comprehensive dispute resolution plan of action and include it within your contract.
Thankfully it seems that the law may be beginning to recognise that these agreements happen more often than you might think, and recent case law offers hope to those who previously would have been at the mercy of unscrupulous suppliers/vendors looking to exploit such weaknesses in an agreement.
Three ways the law may now look to address the ambiguities inherent in an agreement to agree
The case of MRI Trading v Erdenet Mining Corp LLC (CA) seemed clear-cut enough at the outset. When the client took their vendor to task for ‘breach of contract’ because they had not supplied all of the products and services they had agreed to supply, previous case law was not in their favour. Other agreements to agree had been considered unenforceable simply because of the ambiguity inherent in them. And this is exactly what the arbitrator concluded in this case also. However, when the client took their case to the High Court the verdict was overturned, and then again when the vendor escalated the case to the Court of Appeal (CA), they also concluded that the agreement to agree was enforceable.
So why was this, and what can we learn from this case in order to minimise risk in similar circumstances?
1. The courts now consider deeds as well as documents.
Written agreements should be the clearest representation of intent between two parties, but what happens when there are too many grey areas to form a clear opinion on said document? The answer is that the court (at least in this case) takes note of performance. Do the vendor’s actions indicate their intention, and is this enough to imply a contractual obligation?
2. If it looks like an agreement and smells like an agreement…
The behaviour of parties to an agreement can give important context to a court’s decision. In fact, it is possible that behaviours can be considered even more indicative of intent than the written contracts that bind that relationship.
3. What makes sense?
When all else fails, what would be a reasonable person’s logical conclusion from seeing the way the vendor acted under their agreement? Sometimes ‘what makes sense in the circumstances’ is a powerful ally in the courtroom.
While this case may offer peace of mind to some it should be remembered that this is just one case among many that have resulted in less favourable rulings. There is no substitute for an agreement that has gone through all the correct due diligence, where every feasible element has been addressed, outcome quantified and eventuality considered.
A strong contract that all parties can understand and rely upon not only offers a road map to success, it also offers confidence and stability, it encourages innovation through a closer working relationship and it simplifies the legal process should that relationship become troubled or fail.