In business negotiations, parties often sign preliminary documents that record their intention to finalise terms at a later stage. These are sometimes called “agreements to agree” or agreements in principle. While they can be useful for setting a framework, they raise serious questions about enforceability.
What is an Agreement to Agree?
- A preliminary commitment between parties to negotiate specific contract terms in the future.
- Common in mergers, joint ventures, leases, and procurement deals.
- Typically states that parties will negotiate “in good faith” to finalise outstanding terms.
The Legal Problem: Certainty
- For a contract to be enforceable, its material terms must be clear, defined, and unambiguous.
- Agreements to agree often lack this certainty, making them vulnerable to being declared unenforceable.
- Courts are reluctant to enforce vague promises to negotiate later.
Judicial Approach in South Africa
- The Court held that an agreement to negotiate in good faith was enforceable because it included a deadlock-breaking mechanism (arbitration if parties failed to agree).
- The Court emphasised that agreements to agree are only enforceable if safeguards exist to resolve uncertainty.
- General principle: Without certainty or a mechanism to resolve disputes, agreements to agree are usually unenforceable.
Key Risks for Businesses
- False security: Believing you have a binding contract when you don’t.
- Negotiation breakdowns: If one party walks away, you may have no legal recourse.
- Litigation costs: Disputes over enforceability can lead to expensive court battles.
Practical Drafting Tips
To make agreements to agree more robust:
- Include a deadlock mechanism: e.g., arbitration or expert determination if parties can’t agree.
- Define material terms upfront: Even if some details are left open, core obligations must be clear.
- Use “framework agreements”: Set binding principles now, with flexibility for later detail.
- Avoid vague language: Replace “we will agree later” with concrete obligations and timelines.
Agreements to agree later are risky. Courts generally require certainty in contracts, but they may uphold such agreements if they include mechanisms to resolve disputes and define material terms. For corporates, the safest approach is to lock down key obligations early and use clear drafting to avoid unenforceable promises.
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