When is an Agreement to Agree Enforceable? The High Court Gives Guidance
Parties often include provisions in commercial agreements that amount to being 'agreements to agree'.
Courts try to give effect to contracts where they can, but will not enforce agreements that are uncertain. Therefore, 'agreements to agree' are often deemed to be unenforceable, and this is the case where the item to be agreed relates to an essential term.
Exceptions may arise where the parties are familiar with the trade and acted in the belief where they had a binding contract and terms could be implied. A court may also refer to a mechanism in the contract that allows a matter to be determined by objective criteria. A court will not, however, imply a term into a contract where this would contradict any express contractual terms.
Despite these rules cases still come before the courts, and the High Court has now looked at the issue yet again in the recent case of Teekay Tankers Ltd v STX Offshore and Shipbuilding Co Ltd. Although the case is about shipping, the core commercial contract principles are relevant and could apply to any supply or other agreement.
Facts
T and S entered into four contracts for S to build some ships. They also entered into an option agreement for T to order more ships. The option agreement contained terms that the delivery dates for the ships would be mutually agreed between the parties and S would use its best efforts to deliver the ships. S refused to build the extra ships, so T terminated the option agreement and claimed damages to the tune of US$178m. S claimed that the option agreement was not binding due to uncertainty over the delivery dates. They both accepted that the option agreement had been intended to be binding and enforceable. However, did the lack of agreement over the delivery dates cause this to be an unenforceable agreement to agree?
High Court Decision
The High Court ruled that it was unenforceable, as it was an agreement to agree. Although the parties had intended the option agreement to be binding, T had not managed to show that there was an implied term as to what the delivery dates would be or how they would be calculated. T had argued that the best efforts obligation created a requirement on S to provide delivery dates, but the Court dismissed that argument as the dates could not be unilaterally imposed based on the wording but had to be agreed.
Comment
This decision shows that the courts will not allow an agreement to be effective, even if both parties had wanted it to be at the time of signing, if a key term - in this case delivery dates - had not been agreed and there was no clear mechanism for setting that key term. In this case, requiring S to stipulate a date would have contradicted the express term that it needed to be agreed rather than unilaterally imposed.