29/09/2009

What is an Agreement to Agree and is it a binding contract?

We were recently asked to advise a client on whether they could enforce their contract to provide services. One of the provisions of their contract said essentially:

“Prior to commencement of the second year we will review the preceding 12 months work and in conjunction with the client settle on a fee for the final 12 months of the 2 year contract in proportion to the existing rate plus a CPI adjustment.”

A clause like this that provides for certain rights or obligations of the parties to be determined at a later date is often referred to as an “Agreement to Agree”.

The above clause shows that the fees for the second 12 month period of the contract had not been fixed and agreed.  The law permits this if there is a clear formula that will allow an objective calculation of the amount. In the absence of any such formula the words of the paragraph constitute only an Agreement to Agree.  Such agreements are not enforceable.

So the question is: does the paragraph contain a clear formula for calculating the charges in the second year of the contract? That formula may be present in the words “in proportion to the existing rate plus a CPI adjustment”. However, it is likely that the other party will argue that those words are not clear and concise enough to constitute a formula.

If the underlined words do not constitute a formula for objective calculation of the charges our client could argue that there is an implied term in the contract that provided, for example, that the fees would not fall below the current level, thereby putting a floor in the fees and making the agreement enforceable to that extent. 

However, beware that Courts are loathe to imply terms into a contract without very clear indication that the term would have been inserted by the parties had they thought about it at the time the contract was formed.

Of course whenever faced with such a proposed action one party denies they ever would have allowed such a clause and so immediately the other party is faced with an evidenciary hurdle in convincing the Court otherwise. 

If there is no clear formula in the contract, and you cannot rely on an implied term in the contract, you will need to look to other evidence such as documents from the negotiations or industry practice, which may support the proposition that the parties understood what these words really meant and that they therefore constitute an acceptable and enforceable formula. 

One of the keys to having a binding, enforceable contract is to ensure that there is sufficient certainty concerning the subject matter of the contract. Where possible, always include specific details about the services or deliverables, the fees or charges, and the time frame for performing the contract, and beware of Agreements to Agree.

If you have any questions relating to contractual advice, please contact Mark Dupuis at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.