Pitfalls of ‘agreements to agree’ – why it pays to be specific
In order to create a legally binding contract, the terms agreed between the parties to an agreement must be sufficiently certain.
Sometimes, contracts are written in which particular terms are left subject to further negotiation at a later date. While this flexibility may seem appealing, these so-called ‘agreements to agree’ can, as a recent case demonstrates, lead to difficulties.
In Teekay Tankers Ltd (TT) v STX Offshore and Shipbuilding Company Limited, the parties had entered into an option agreement under which TT could order three more sets of four ships from STX, provided that the delivery date for the four ships was such date as ‘shall be mutually agreed’ upon and that STX would use its ‘best efforts’ to deliver the ships within a stipulated time period.
A dispute arose between the parties. STX argued the option agreement was uncertain and therefore unenforceable because it did not specify the dates for delivery. TT argued that the court should (a) imply a reasonable date for delivery or (b) imply the delivery date to be such date as STX had offered.
The court found that the option agreement was an ‘agreement to agree’, and therefore unenforceable. It would not imply the term that TT was seeking because it ran contrary to the express words of the agreement, which stated that they were to be ‘mutually agreed upon’. The court stated that the parties were free to agree or disagree about a proposed delivery date according to their own interests, but that left no room for the delivery date to be identified by determining what was reasonable. STX was only required to “make best efforts” to identify a delivery date within the time period.
This recent case is important because it highlights that you must be as specific as possible when drafting these provisions. A court will imply a clause into an agreement if possible but they will not do so if it runs contrary to an express term of the contract. There is always a risk that any contract provision which is ‘to be agreed’ will be held by a court to be uncertain and therefore unenforceable.
Sophie is an associate in our corporate & commercial department with wide experience of mergers & acquisitions, business start-ups, reconstructions, joint ventures, corporate finance and corporate governance. Clients have praised her for delivering an “excellent service” and providing “good solid advice”.We're here to help