Is it possible to have an agreement to agree? From the bus in the morning, to that mid-afternoon pick-me-up coffee, we constantly enter into informal "contracts" or "agreements" with others. These transactions benefit from certainty. Pay £1.80 and you will receive a bus ticket. Simple. But contracts can be much more complex than this.
We still see many formal contracts with startling degrees of informality and uncertainty in the drafting.
The question of how much certainty a contract must have to be enforceable was tackled by the Court of Session in 2010 in the case of Scottish Coal Co Ltd v Danish Forestry Co Ltd.
The case turned on whether an option agreement could compel Danish Forestry to enter into a ranking agreement (in relation to a standard security) "reasonably to regulate the [ranking] relationship" in the future. Ultimately, when the time came, Danish Forestry, Scottish Coal and Scottish Coal's bank could not agree upon the terms of the ranking agreement and Danish Forestry sought to withdraw from the option agreement.
The court decided that although it is possible to have an agreement to agree added contractual terms at a future date, the option agreement suffered from a lack of certainty and therefore was deemed to be unenforceable. The fact that the parties had to act "reasonably" did not provide the necessary objective test. In addition, as the bank was not a party to the original option agreement, it was not required to "act reasonably" in negotiating the terms of the ranking agreement with the other parties. With the ranking agreement failing, the whole option agreement was rendered unenforceable.
This case demonstrates that parties should:
- avoid any contract or option agreement which includes an agreement to agree further terms
- ensure clarity and certainty are key requirements
- if you require flexibility in your agreement - it is imperative that objective criteria are set out to dictate how the future terms are to be agreed. If this is not done, the agreement to agree may be rendered unenforceable.
If you are looking for advice on option agreements, conditional property or leasing contracts - please do not hesitate to get in touch.
