Parul
Agreement to Agree or Negotiate
Parul Madaan 13 Mar 2020

Agreement to Agree or Negotiate

Introduction

An agreement pursuant to Section 29 of the Indian Contract Act, 1872, is void when its terms are vague and unclear, and cannot therefore be made clear. For example: X agrees to exchange one ton of oil. This agreement is unenforceable because it is ambiguous because the expected classification cannot be ascertained.

A contract to negotiate the terms of an agreement is not an "agreement to agree" in appearance or in substance. If despite their bonafide effort, the parties fail to arrive at an ultimate agreement on the terms in effect the contract to negotiate is deemed performed and the parties are released from their obligations. Failure to acknowledge is not itself a contractual violation of the contract of negotiate.  A party will only be responsible if a failure to attain ultimate agreement emerged from a breach of that party’s obligation to negotiate in good faith.

"Agreements to Agree" is a concept wherein any party say a Company will  come to an agreement on the basis of an understanding (whether explicit or implied) that a further arrangement will be reached at some scheduled time, when the commercial grounds for and proposed terms of that further agreement may have become more manifest.

As a consequence, instead of negotiating their proposed secondary agreement at the main contracting stage, the parties slightly agree that some or all of the contractual terms of that agreement will be decided in the future.

R&D Construction Group Limited v. Hallam Land Management Limited, [2010] CSIH 96

Hallam had entered into a 5 year optional agreement with a landowner in 1999 to purchase land once Hallam had obtained planning permission. Hallam were obliged to use all reason endeavours to obtain planning permission. In 2002, Hallam entered into a contract in which R&D contracted to buy part of land. This contract was subject to Hallam agreeing a purchase price with the landowner in terms “all reasonable acceptable” to the landowner. The contract also include a longstop provision whereby Hallam had seven months to complete the purchase from the landowner after receiving written notice from R&D solicitors. Hallam could 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 months 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:

1.      Was the proviso requiring the landowner to use all reasonable endeavours to agree the price enforceable given that it was an agreement to agree?

2.      If the provision was enforceable were Hallam in breach of contract?

Indicators of Agreement to Agree

An agreement to agree shall constitute the following:-

1.      Clarity for such agreements is crucial

If the subject matter of the agreement cannot be easily ascertained, the agreement is likely an agreement to agree. When legality comes to court, it is impossible that the judge can substitute or incorporate terms to make it legally binding in the agreement.

2.      Intention of parties

If the intention of the parties are made unclear by the lack of an arbitration clause, for example, the insertion of which would indicate an intention to agree, then the contract may be legally enforceable.

3.      Word used

If the terms such as “shall”, which conveys an absolute obligation to agreement, are missing, then the agreement is more likely an agreement to agree.

If the above measures are absent, an agreement can also be a completely enforceable that must include clearly defined terms and adequate consideration, but leaves some specifics to be worked out by the parties. While the parties intend to respond to an agreement on the missing words, what they expect is often uncertain about their failure to reach an agreement.

Mentioned below are several keys takeaways available for anyone who wants to ensure that their agreement is enforceable in the future-

1.      Certainty in a contract

If a party wishes to enter into an enforceable agreement, the contract’s clauses should be drafted to avoid uncertainty.

2.      Methods to settle uncertainty

Uncertainty is a crucial element that may cause the agreement to be unenforceable. A well-drafted contract should set out methods or express ways to overcome uncertainty. This may include outing steps to follow if negotiations break down or requiring specific dispute resolution processes.

3.      Provide specific descriptions for “negotiating in good faith “or using reasonable endeavours”

If the contract include express definitions and examples, a court will be more likely to consider the agreement binding. This can be as the parties taking part in two meetings or attending a mediation session. 

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