Legal agreements seek to provide certainty and clarity for those relying upon them. For this reason certain essential elements must be agreed before a contract is legally enforceable, for example, price, property and parties involved. In some commercial situations however, the contracting parties may wish to leave specific contractual terms outstanding to provide for flexibility and instead provide some form of mechanism for reaching agreement in the future.
Traditionally the courts have held that agreements to agree a contractual term in the future are not enforceable as they are too uncertain. In a recent Court of Session case however, the court decided that where a sufficiently objective mechanism existed for agreeing the unresolved issue then an agreement to agree could be enforceable. The judge quotes a previous case which stated that "The object of our law of contract is to facilitate the transactions of commercial men, and not to create obstacles in the way of solving practical problems…" If this judicial activism continues then we may see more agreements to agree being held to be enforceable and hence become a more commonly used tool in commercial negotiations. The judgement of the court does however make it clear that any such provisions need to be drafted precisely and with sufficient objectivity to be held enforceable by the courts.
Agreement to agree
In the case of R&D Construction Group Limited v Hallam Land Management Limited, Hallam had entered into a 5 year option agreement with a landowner in 1999 to purchase land once Hallam had obtained planning permission. Hallam were obliged to use all reasonable endeavours to obtain planning permission. In 2003 Hallam entered into a contract in which R&D contracted to buy part of the land. This contract was subject to Hallam agreeing a purchase price with the landowner in terms "wholly acceptable" to the landowner (the landowner being required to use "all reasonable endeavours in this regard"). The contract also included a longstop provision whereby Hallam had seven months to complete the purchase from the landowner after receiving written notice from R&D's solicitors. Hallam could withdraw from the contract without penalty if the purchase was not completed within the 7 months.
Due to the rising land market and a disagreement regarding access Hallam were unable to agree a price within the seven month period and decided to withdraw from the contract. In March 2005 Hallam finally bought the land and resold it to a third party. R&D then brought an action for breach of contract against Hallam. Two questions arose:
- Was the provision requiring the landowner to use all reasonable endeavours to agree the price enforceable given that it was an agreement to agree? and;
- If the provision was enforceable, were Hallam in breach of contract?
Existence of a sufficiently objective mechanism
Ultimately the case failed on its facts, as a "wholly acceptable" price was deemed never to have been agreed. The judgement however, indicates that where a sufficiently objective mechanism exists then an agreement to agree will be held to be enforceable. The option agreement with the landowner provided for the price to be calculated as a percentage of the market value. The court held that such a basis was sufficiently objective. The disputed clause of the missives with R&D in this case did not exist due to an inability to agree what was meant at the negotiation stages. The clause was drafted by skilled lawyers and was designed to impose binding obligations on the parties.
Effectively, the court takes the view that agreements to agree should not be unenforceable simply because they fall within this category. The court takes a commercial and practical view and implies that unless there is a reason for not giving effect to such an agreement then the court should find it enforceable. Although the term "wholly acceptable" price is subjective, it is not uncertain simply because the price was not known at the time of the agreement, if a mechanism exists providing for a certain price in the future.
The court held that although the clause was enforceable, Hallam did not breach their contract with R&D, as on the facts of the case they had not failed to use all reasonable endeavours to agree a "wholly acceptable" price. From the judgement it is clear however, that had those facts been different, the court would have found Hallam in breach of contact.
Clarity for such agreements is crucial
Despite this recent decision it is still crucial to ensure that contractual agreements are drafted to provide certainty, and ultimately avoid challenge on the basis of uncertainty. If provision is to be made for agreement at a future date then this must be set out clearly and with a sufficiently objective mechanism to allow the parties or perhaps ultimately the courts to ascertain what was intended.
The full decision in the case of R&D Construction Group Limited v Hallam Land Management Limited is available on the Scottish Courts website.