18 July 2011

Agreeing to differ?

Agreements to agree are unenforceable in England. That includes obligations to negotiate in good faith.
The logic is that (i) an agreement to agree in good faith is too uncertain to enforce, (ii) it is difficult to say whether termination of negotiations is brought about in good faith or not, and (iii) it is impossible to say whether good faith negotiations would have led to an agreement, and if so on what terms, so it is impossible to establish any loss flowing from breach of the obligation to negotiate.[1] To be a binding contract, there has to be an intention to create legal relations and sufficient certainty as to the essential terms.
A recent case [2] has affirmed these principles in relation to heads of terms for a deal: for an agreement to be enforceable, the parties must have reached sufficiently complete and certain agreement on all essential terms. The parties can leave out non-essential terms, but the absence of essential terms means there is no contract, and it cannot be saved by an obligation to negotiate.
A common tourist trap for English companies doing deals abroad is to assume that the same rule applies elsewhere. Our “subject to contract” concept may not be recognised. In many countries the opening of negotiations or the agreement of heads of terms may lead to obligations of good faith, and to possible liability for breaking off negotiations.

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