We highlight important lessons for landowners and others negotiating multi-stage contracts from a recent decision of the Court of Appeal.
Many agreements contain obligations for the other parties to enter into a further agreement in the future, the terms of which are not always certain at that point in time. In January 2016, the Court of Appeal revisited the question of the extent to which such an agreement to agree is enforceable.
WHAT IS AN AGREEMENT TO AGREE?
An agreement to agree can arise when an agreement contains obligations to enter into a subsequent agreement in the future, the terms of which are not certain at the time of the initial agreement. As a result, such agreements frequently lack sufficient certainty to constitute a legally enforceable contract - but what constitutes sufficient certainty can be difficult to ascertain.
Case law has established some key indicators as to whether an arrangement is an agreement to agree - and is unenforceable.
- The clarity of the terms - Where the subject matter of the agreement is not easily ascertainable, the agreement is likely to be an agreement to agree. The courts are unwilling to insert or substitute terms into such agreements to make them legally binding.
- The intentions of the parties - Including an arbitration clause may serve as evidence of the parties' intentions to be bound by a legally enforceable contract, having provided a mechanism for determining any outstanding terms that could not be agreed between the parties.
- The wording of the obligation to enter into the agreement - Mandatory wording, such as "shall" conveys an absolute obligation and makes it less likely that the arrangement is an agreement to agree.
In January 2016, the Court of Appeal revisited the question of the extent to which an agreement to agree is enforceable in the case of Hughes v Pendragon Sabre Limited (t/a Porsche Centre Bolton)1.
A customer had placed a deposit with a car dealership to purchase a limited edition model of Porsche. He completed the dealership's standard contract, although the price and specification clauses were left blank. After payment of the deposit, the customer was advised by email that he would be first in the queue to be sold the vehicle in question, should one be allocated to the dealership. This statement contradicted the standard form contract, which stated that the dealership was under no obligation to fulfil orders in the sequence in which they were placed.
The Court went further than previous case law and decided that the agreement was a legally enforceable contract, despite the absence of price, specification, and an ascertainable delivery date. Furthermore, verbal assurances made to the customer that he was first in the queue for the vehicle superseded part of the original agreement and created a collateral contract, which the dealership had breached when it had ultimately supplied the vehicle to another customer.
The judgment confirms that agreements to agree can be binding where the lack of detail is not so significant to the working of the contract that the subject matter is not easily ascertainable and the parties intended to create legal relations despite the lack of certainty.
However, those seeking to secure the ability to enter into future agreements, such as deeds of easements required for development after a land sale, should still ensure that as much detail as possible is included, backed by mechanisms for determining detailed terms.
It is also advisable to include 'entire agreement clauses' in contracts. Those entering into discussions with parties with whom they have contracts should be wary of giving verbal assurances during negotiations that go beyond the terms of the concluded agreement, even if that agreement specifies that variations must be in writing.