TRADITIONALLY, so-called “agreements to agree” were considered unenforceable under English and Scots law because they lacked the necessary certainty.
Many lawyers still advise that such “agreements” are not enforceable. However, the law has evolved in recent years and the picture is now far more complex than many people appreciate.
Although most oil and gas industry contracts appoint English law as the governing law for the contract, “agreements to agree” rarely include choice of law provisions
Where the parties are based in Scotland and working in Scotland, then it may be Scots law that determines whether a contract has been entered into. Consequently, the industry should be aware of the approach taken in both jurisdictions on this issue.
The courts are shifting away from the traditional approach restated in Walford v Miles, which led to the view that “agreements to agree” were unenforceable.
Recent case law shows that the courts are now willing to adopt a more practical approach to take into account the commercial realities of modern business.
Contracts have become increasingly complex. Many are very high value with a long duration of sometimes decades. The importance of such contracts means that negotiations can be lengthy and so it is not unusual for parties to reach agreement on certain terms while deferring other important matters to be agreed later.
The judiciary seem to have responded to these developments and are now willing to give force to an “agreement to agree” if it is contained within a contract that includes all the essential terms.
In particular, once performance has commenced by the parties the courts are even willing to take proactive steps to keep a contract alive by implying terms into an “agreement to agree” in order to finalise the outstanding terms and provide a remedy to an aggrieved party.
In determining whether an “agreement to agree” renders a contract unenforceable, the courts have made a distinction between “essential” and “non-essential” terms.
“Non-essential” terms have been defined as those terms which can be filled in at a later date using what the courts refer to as a “specified objective standard”.
The “objective standard” may be specified in the contract, e.g. an equitable price, or implied by law, for example, the Sale of Goods Act 1979. The court has taken the view that if an objective standard or criteria exists to finalise outstanding terms, then these terms will be non-essential to the contact as the finalisation of these terms will merely be a matter of machinery, such as determination by an arbitrator.
Although the issue has been dealt with less frequently in the Scottish courts, to date the judiciary in Scotland have taken a similar approach; the Court of Session recently held that an “agreement to agree” may be enforceable if there is a sufficiently objective mechanism for agreeing uncertain terms.
Readers should particularly take note in the context of letters of intent. Letters of intent are regularly issued in the oil and gas industry to allow parties to get started with a project before the full contract has been agreed.
In this instance, the parties may want the document to be legally binding for the short period of time while they draft the full terms of the agreement, and to contain an agreement to agree a more comprehensive contract in the near future. In other circumstances, letters of intent may be used as statements of moral intent.
In this situation, the parties will not want the document to be legally binding and so the letter will typically be labelled “subject to contract”.
The general principle is that the phrase “subject to contract” makes it not legally binding because, absent other words and conduct, these words indicate an express intention not to be legally bound.
However, the courts have held that these words alone will not protect parties if they then proceed to perform the provisions in the letter as if a contract had come into existence as such conduct will constitute a waiver of the general principle.
“Agreements to agree” are more enforceable than most people think. This issue arises often within the industry. Just think of the number of “Heads of Terms” and “MOUs”,
It is therefore important to stop and think carefully about the implications of your drafting and conduct in order to effectively manage the risk of contractual exposure.
Penelope Warne is head of energy at international law firm CMS Cameron McKenna