When entering into a new strategic relationship for outsourcing or a major technology solution project, the agreement at some point in its formation will be subjected to time pressures from internal or external sources.
It could be that the client is up against a time restriction where a budget must be spent by a particular date. Or it could be that a vendor is under pressure to meet its year-end or quarterly financial targets – and offers its client a ‘once in a lifetime’ discount if the deal is signed quickly.
Whatever the circumstances, one party or other will draw a line in the sand and claim that all must be agreed by a particular date or everything will fall apart. In light of these pressures, a client will often fold and allow their agreements to proceed at a pace that will result in shortcuts being taken. This can result in more ambiguity, and ultimately legal risk, than one realises.
We understand the complexities of being stuck between a rock and a hard negotiator, which is why we felt it was so important to broach the subject of the dangers of contractual vagueness.
Agreements to Agree: New Court Ruling Offers Some Recourse
When parties allow themselves to be forced by time pressures to poorly or incompletely quantify elements of an agreement or relationship, they leave themselves open to the likelihood that these ambiguities could be exploited to their detriment by the vendor. Fortunately, a new court ruling can offer a little welcome relief for those who find themselves in this situation.
In these circumstances, we are referring to what is known as an ‘agreement to agree’ – when a vendor says that they will undertake work that has not been quantified in a contractual agreement on a time and material remit ‘based on previous discussions’. The expectation, of course, being that this unquantified work will be clarified as the project progresses and there is more time to consider how to clarify such matters.
Issues can arise when these elements remain unclarified for longer than expected and the scope is left ‘open’. If you are happy with the deliverables then all is well and good, but if not – what then? Without clear contractual evidence that the vendor had agreed to your expectations, what recourse is actually open to you?
The Law Is On Your Side – at least for today…
In most situations we’ve come across, trying to contract for ‘things that will evolve’ can be a challenge – particularly if pressured timescales are at the forefront of the client’s mind.
In a recent blog, we reported that a recent court case had helped to support the view that you should be able to enforce a service provider’s duty to act in ‘good faith’ towards you. In this respect, contracting for ‘things that evolve’ can give you some protection against that rare occurrence when a vendor thinks it can take advantage of you. However, we strongly advised that you should take the route of being clear on the provider’s ‘expert responsibilities’ rather than simply relying on good faith, as the case law here is better established.
A more helpful case in these circumstances is MRI Trading AG v Erdenet Mining Corp LLC (CA) . This is where an ‘agreement to agree’ in respect of certain charges and a delivery schedule in a contract was found to be enforceable by the client. This was even though such an arrangement in previous case law would normally have been considered unenforceable due to a lack of certainty.
Facts of the case:
- The organisations entered into three contracts for the supply of products and services.
- The vendor complied with the first two contracts, but refused to deliver under the third. Ironically, this was the contract that contained the ‘agreement to agree’ clause. What is of note is that this third contract contained an arbitration clause. It provided a process where independent experts would be asked to resolve disputes about charges and delivery schedules if the organisations were unable to come to an agreement between themselves.
- The client organisation litigated against the vendor for not delivering against the third contract because it believed the vendor was in ‘breach of contract’.
- Interestingly, the arbitrator found in favour of the vendor and said the contract was unenforceable because of the ‘agreement to agree’; i.e. key items were not quantified in the contract.
- An about-turn: the client did not agree with the arbitrator’s ruling and, as a result of taking the appeal to the High Court, the arbitrator’s ruling was overturned in favour of the client.
- Upholding the about-turn. The vendor appealed to the Court of Appeal (CA), but they too found in favour of the client stating that the ‘agreement to agree’ was enforceable by the client over the vendor.
Lessons We Can Learn From This Case
Both the High Court and the Court of Appeal came to a different conclusion from that of the arbitration tribunal on three main questions, and these questions in turn lead us to three important lessons:
Question 1: Can performance indicate agreement?
Whether an agreement existed with sufficient part performance to imply a contractual obligation on the vendor to deliver against the disputed third contract. The courts decided that all three contracts should be interpreted as part of a wider arrangement between the parties, which had only been partly performed.
Lesson 1: Actions do speak louder than words
The lesson here is that ‘behaviours’ between parties often take precedence over a written contract. Where uncertainty reigns, behaviours can and often do clarify matters for the courts. Note that both the client and the vendor had been acting under that arrangement for some time so the courts felt that it should continue to do so on a similar basis.
Question 2: What were the parties’ intentions?
Whether the parties intended that the third contract should be legally binding. This can be trickier to establish. However, given that both parties behaved as though they had a binding contract, it seemed clear they intended for it to be binding.
Lesson 2: Behaviour offers clarity
The lesson here is that if the past performance and behaviour of parties implies a binding contract, the courts will, where possible, take the view that the contract should be carried out.
Question 3: What is fair?
Whether the ‘to be agreed’ gaps in the third contract could be filled by implying some objective criteria of fairness or reasonableness, based on the behaviours of the parties. Again, this can be tricky – however, the existence of the behaviours in the other two contracts and the arbitration clause assisted the conclusion by the court(s) that the agreement was sufficiently certain or capable of being rendered.
Lesson 3: The application of logic is always a sensible fall back
If it is fair and reasonable to consider that the parties meant for a contract to be enforceable, then this can be justifiable enough for the court(s) to rule that it should be.
While this court ruling in the case of MRI Trading AG v Erdenet Mining Corp LLC (CA)  is encouraging for clients who deal with strategic vendors, it follows a long line of previous rulings where the courts haven’t taken this view. This decision does, though, demonstrate that where a ‘contract’ has been performed or partially performed, the courts have a greater willingness to consider uncertain or implied terms for fundamental provision to be enforceable. This is particularly the case where the parties have behaved as though they had a binding contract.
It is of particular note that the Court of Appeal said that the courts should strive to preserve parties’ deals, rather than destroy them.
Where matters remain ‘to be agreed’ (and in some cases this is unavoidable to do pre-contract), it is advisable to set out as clearly as possible the mechanism by which any outstanding issues will be resolved if the parties are unable to reach agreement themselves – i.e. for the matter to be referred to an expert for binding determination. As a preventative measure we ideally suggest that a service review and reshaping process are implemented at the outset so the ‘to be agreed’ parts of the contract are quantified within as short a time as possible to avoid any ambiguity in the contract.
Ideally, your agreements should always have as much as possible clarified up front in the right manner to avoid having a situation where arguments erupt over what should and should not be done. Our white papers on Strategic Commissioning and Vendor Responsibilities have been written to help put into perspective the key areas that should be agreed up front before any work starts. So, though the latest legal precedent is to be generous towards clients where contractual ambiguity is tied to implied agreement through behaviour and action, the best way to form a contract is always through the detailed inclusion of as broad a consideration for all eventualities that need to be quantified at the outset of your relationship.