What is an ‘Agree to Agree’ Contract?
An ‘agree to agree’ contract is a promise to make an agreement in the future or to negotiate in good faith to reach an agreement. When it comes to contractual obligations, however, the law requires an actual signed agreement (or at least a signed offer and acceptance) for there to be an agreement between contract parties.
So how does an "agree to agree" issue come up? Generally, it stems from a situation where one party to a negotiation is expecting a deal to be finalized and the other feels that the deal is still only in the negotiation phase.
Courts often view "agree to agree" contracts as lacking good faith and enforceability. Contracts, especially when the parties expect to be bound to the terms, require sincerity and mutual intent to be contractually bound.
An "agree to agree" situation can also occur when the parties to an agreement intend to create a binding agreement at a later date, but the agreement does not spell out the conditions under which the agreement will become final and legally binding.
For example, the parties may have an understanding that they want to be bound to a contract by a specific date, but have not reached an understanding of the terms of the contract.
In real estate transactions, "agree to agree" issues can arise in such situations as verbal agreements on purchase prices and written documents that allow the parties to issue a binding agreement at a later date . Courts in some states may review these types of agreements and look for statements of intent that are sufficiently clear to indicate that a binding contract existed.
"Agree to agree" scenarios can also happen when there is an expectation of some type of continuing relationship, such as with general business negotiations, joint ventures and strategic alliances. Parties may have some type of shared understanding that a business deal is going to happen, but may not be ready to enter into a legally binding agreement that will ensure that the terms are enforceable.
Many "agree to agree" situations may have some level of enforceability under certain circumstances. This is sometimes referred to as a quasi-contract, such as when the parties actually sit down and talk about the terms and negotiate about the various points of the agreement.
If a situation arises when the parties have not agreed to all the essential terms of the contract, but intend to be bound by them, the person relying on the "agree to agree" contract may have some recourse to recover any losses incurred as a result of the lack of a formal agreement.
Parties entering into any type of formal agreement should make every attempt to ensure a clear understanding of the terms of the anticipated agreement among all involved parties. Parties who fail to do so run the risk of a blown transaction and may find themselves with no rights of recovery.
Can It Be Enforced By Law?
Whether the terms of an "agree to agree" contract are legally enforceable varies from jurisdiction to jurisdiction. The courts in California have found, for example, that such contracts do not afford a right to any party to insist on a performance of the indefinite promise or unwritten commitment. See, e.g., Mayhew v. Germania Fire Ins. Co., 40 Cal. App. 151 (1919) ("A mere agreement to agree in the future is a mere statement of intention and not a contract legally binding. Nor, independent of a statute, do we think a contract, the performance of which is indefinitely postponed or abandoned altogether, will be specifically enforced."); Seitz v. Union Pac. R.R. Co., 138 Cal. App. 2d 569, 575 (1955) ("[I]t is agreed that the agreement made by the parties is not enforceable."); McCormick v. Kayes, 225 Cal. App. 2d 932, 936 (1964) ("Where a contract is indefinite, making performance impossible, it is unenforceable . ."). The California courts also have refused to enforce "agreements to agree" where the parties have failed to agree on the essential elements of their bargain and where the actual words of the "contract" are tentative and lacking in completeness. See Atkinson v. Edwards, 218 Cal. App. 2d 300, 308 (1963), See also Atkinson v. Smith, 268 Cal. App. 2d 318, 321 (1968) (holding that an agreement to buy property on "such terms as can be mutually agreed upon" is too indefinite to be enforced); Equitable Fire & Marine Ins. Co. v. Advertising Syndicate, 88 Cal. App. 277, 282, 263 P. 822 (1934) (holding that an advertisement specifying that the "commission at which we shall contract" is too indefinite to be enforced).
In other jurisdictions, however, the bar to enforcement is not as high. See, e.g., Collette, Inc. v. U.S. Bank Trust Co., 776 N.E.2d 672, 675-76 (Mass. 2002) (holding "that an agreement to negotiate in good faith is enforceable even if the agreement does not contain all material terms as long as the parties intended to make an agreement and manifested consent sufficient to conclude a contract."); Arkwright-Boston Mfrs., Inc. v. Travelers Ins. Co., 491 F. Supp. 1146, 1153 (D. Mass. 1980) (holding that an "agreement to agree is valid if the minds of the parties are met if the terms of negotiation may be made sufficiently definite to be capable of being made definite by performance [and] if the performance is not on terms sufficiently definite to enable the court to judge of breach and default."
In New York, the enforceability of an "agree to agree" contract depends on whether the contract contains agreement on essential terms that are capable of being made definite. See, e.g., Federated Dept. Stores, Inc. v. Moitie, 687 F.2d 372, 384 (2d Cir. 1982) (applying New York law and holding that "[a]n ‘agreement to agree’ is not enforceable."); Ellington v. Goodman, 635 F.2d 1101, 1107 (2d Cir. 1980), cert. denied, 451 U.S. 911 (1981) (holding that the enforceability of an "agreement to agree" "turn[s] on the degree of indefiniteness in the means or methods by which the ultimate agreement is to be reached.").
However, many courts are now willing to recognize the possibility of legal enforceability in some cases. In reaching this conclusion, courts have found that certain "agree to agree" contracts are enforceable under a common law exception recognizing the enforceability of a contract where the parties have agreed on all material terms, even if the contract lacks a material term or the method for determining a material term. See, e.g., Transatlantic Sugar Ltd. v. Fruit & Vegetable Distrs., Inc., 226 F. Supp. 2d 492, 501 (S.D.N.Y. 2002) (under New York law a "agreement to agree" is enforceable provided the parties "have agreed on all material terms and that the only thing remaining to be negotiated is a matter of degree"); L & D Grp. v. Dep’t of Corrections, 589 S.E.2d 805, 809 (N.C. Ct. App. 2004) ("an agreement to negotiate a contract is not unenforceable because it is incomplete if the parties have agreed on all terms which are legally essential to the formation of a binding contract, even if the parties have left some terms open or to be determined later"); Jewel Tea Co. v. Bay Colony Shopping Center, Inc., 338 A.2d 571, 577 (Md. Ct. Spec. App. 1975) ("The court must determine from the particular facts of each case whether or not the words indicate an intention on the part of the defendant to be legally bound-i.e., to become liable in damages for a breach of the agreement.").
In addition, many courts now have found additional grounds on which to find such "agree to agree" contracts to be enforceable. See, e.g., C. Itoh & Co. (America), Inc. v. Devon Robotics, Inc., 347 F. Supp. 2d 1, 22 (D. Conn. 2004) (finding that "parties to a commercial transaction which is subject to the statute of frauds may nevertheless create an enforceable contract, provided the contract is not ‘void’ for vagueness or lack of consideration."); Summa Corp. v. Alleghany Corp., 126 F.2d 717, 720-721 (5th Cir. 1942) (holding that the policy of protecting the commercial integrity of the transaction precluded the argument that parties could not be bound if a number of details were left to subsequent determination).
Case Law Illustrations
A 1996 case from the California Court of Appeal involved a dispute over whether a contract to agree to arbitrate was enforceable. The court discussed several cases regarding agreements to agree and stated, "as demonstrated by plaintiff’s misfortunes in the present matter, innocent, unsuspecting parties may be entrapped by agreement to agreement arrangements." (Gurovich v. Boys Market, Inc. (1996) 45 Cal.App.4th 300, 303.) The court held that one company was liable to another company for damages, attorney fees and punitive damages even though there was no contract because the companies had agreed to agree to arbitrate a year earlier but never executed a final contract. The court noted that, in another case, a lessor did not have an enforceable lease because it was held to an "agreement to agree" email concerning the real estate lease. (Dino v. Arthashop, Inc. (2017) 8 Cal.App.5th 554, 555-556.) In awarding rescission of the lease, the court stated: "We hold that there was no contract or agreement requiring the tenant to pay a $20,000 refundable security deposit where the email quoted above merely expressed ‘intent to enter into a sub-lease with [the lessor],’ but did not specify any material terms—such as the lease period, rental amount, amenities, or utility costs." (Id. at 557.) A Florida court ruled that an "agreement to agree" between a property developer and general contractor to form a joint venture did not require the contractor to fund the project. (Shores I Homeowners’ Assn v. Shores of Vero Beach Dev. Co. (2005) 904 So. 2d 413, 415.) The Florida court emphasized that courts will not supply material terms absent evidence of mutual intent of the parties to form a contract.
The Good and the Bad
Pros and cons exist for both parties when using "agree to agree" provisions in contracts.
From the perspective of the offeror, the pros include:
If you can bind the other party to an "agree to agree" provision, you may have a better shot than you would otherwise have of reaching an agreement on the future subject, date or event. Your contract would vest you with more certainty regarding whether the other party would actually come to an agreement on the future subject, date or event, since the other party may be bound to use best efforts to come to an agreement on the future subject, date or event.
On the other hand, the cons of such "agree to agree" clauses for the offeror include the offeror being bound to the other party’s agreement to use best efforts to come to an agreement on the future subject, date or event. The offeror may find itself having to accept terms in the end that it otherwise would have rejected as unacceptable. The offeror thus may be getting a false sense of security regarding what it ultimately will get from the other party. If the offeror’s confidence is bolstered by the "agree to agree" provision, the offeror’s confidence may diminish whenever the other party fails to meet the "best efforts" threshold .
From the perspective of the offeree, the pros include:
If you can get the offeror to bind itself to "agree to agree" or "agree to use best efforts" language, you are getting what may be the best deal you can get from the offeror under the circumstances. You may otherwise be in a "take it or leave it" position, at least on the future subject, date or event.
The cons for the offeree include being bound down the road to the agreement on the future subject, date or event that ultimately is reached. In getting the offeror to bind itself to "use best efforts", you might be getting a promise from the offeror to use its best efforts to get you to come to an agreement that both of you find acceptable, and you may be getting the meaningful moral suasion entailed by binding itself to "use best efforts". The offeror may send a message to you on a daily basis that it needs you to come to an agreement on the future subject, date or event soon. The regular pressure on you to come to an agreement may occur every few days or weeks. Agree to agree provisions, as opposed to other types of provisions such as standby rights or break-even calculations, can be particularly frustrating to you when those other provisions allow you to walk away and know exactly where you will be in the future if you do.
Alternatives Available
One of the easiest ways to avoid "agree to agree" language in a contract or settlement agreement is simply not to include such language at all. That seems simple enough, but frequently parties may not be able to—or simply may not wish to—agree on certain terms with sufficient specificity necessary to form a legally enforceable, binding contract. Sometimes, the parties honestly and in good faith do not believe they should be legally bound until other conditions are satisfied, such as the completion of certain due diligence and contingencies. While it is rightly said that the parties may enter into an enforceable contract without agreeing on every detail, it also is right to say that where the language shows an intent by the parties to leave something open for future negotiation (an "agreement to agree" of sorts) it is likely the agreement will not be enforceable.
What are the alternatives when parties do not want to "agree to agree?" They can try:
Even a letter of intent, term sheet, memorandum of understanding, memorandum of agreement, or similar document, if sufficiently specific, might be the parties’ intent to form a binding contract. It is important to pay attention to the level of specificity exacted by the laws of the relevant jurisdictions and how much is meant by the terms "letter of intent," "term sheet," etc. These terms have varying meanings and consequences in different jurisdictions.
Where parties intend to express their intent to be legally bound in a "letter of intent," it should be explicit as to all material terms. A contract can contain a severability clause that allows enforcement of the remaining terms if one or more items or provisions are ruled unenforceable or otherwise problematic. A choice of law provision can make reference to the laws that would apply to an agreement containing these provisions.
Where parties wish to ensure an enforceable agreement until a later date, they can agree to defer the decision of a contract term until a later date, allowing them to consider further factors, as long as the parties intend to be legally bound in the meantime. If they do not intend to be bound, of course, then they should not agree then, but rather agree to "agree to agree" later.
The parties also can agree to a contract for a specific period of time subject to contingencies or contingencies that will extend the agreement or allow them to terminate earlier.
Helpful Hints for Lawyers
When including an "agree to agree" clause or variation thereof in a contract, lawyers will want to do their best to limit risk. Telecommunications lawyers may want to keep in mind the following tips to avoid unintended consequences.
1. Avoid "agree to agree" provisions altogether. What principles underlie your "agree to agree" provision? Does your client really need it?
The "agree to agree" is a vague term that can cause many problems. If you can avoid it, your colleagues (and your future self) will likely appreciate your efforts down the road.
2. Ask the right questions before including an "agree to agree" provision.
If you cannot avoid an "agree to agree" provision, or if you see a need to include it in a particular context, make sure you ask the right questions beforehand. The case law demonstrates that an "agree to agree" provision can be unenforceable if key contractual terms remain unspecified . For example, the parties will need to agree on the duration of the lease. Failure to include such details could result in the lease being unenforceable.
3. Be specific.
In general, specific terms are more enforceable than vague "agree to agree" promises. If you plan to include an "agree to agree" provision, use clear and specific language. For example, if the parties plan to formalize their agreement within six weeks, is there a specific reason for choosing that period of time as opposed to some other timeframe? If the parties have agreed to six months, say that in the contract.
4. Include dispute resolution mechanisms.
Is there a reliable way of resolving disputes if the parties disagree about whether they reached a final agreement? If not, are there any potential remedies if a third party, like a court, gets involved? Keep in mind that if your client’s only remedy is a request for declaratory relief, it may be tough to have a judge enforce your verdict.