An agreement to agree. Worth the paper it’s written on?

Liquor Traders (Pty) Ltd and Property Company (Pty) Ltd have entered into an agreement granting Liquor Traders a concession to develop a liquor depot on property owned by Property Company, subject to the condition that Liquor Traders must obtain a valid liquor trading license. The agreement further provides that if Liquor Traders fails to obtain the required license, Liquor Traders would be able to lease the same site from Property Company on terms and conditions to be determined by a further agreement negotiated between the parties in good faith and that any dispute between the parties as to the terms of such lease agreement would be resolved by arbitration.

Liquor Traders however fails to obtain the necessary liquor license and now falls back on the leasing option to develop another retail depot on the site and tries to negotiate the terms of the lease agreement with Property Company. But Property Company has just received a better offer for the site from another developer and now claims firstly, that as the agreement does not stipulate the rental to be paid by Liquor Traders the essential terms of a lease are not present and secondly, that as an agreement to negotiate the terms of a new agreement (an agreement to agree) is not enforceable in our law, the agreement to conclude a lease cannot be enforced against Property Company.

In our law a contract containing provisions that the parties agree to in future negotiate the terms of a new agreement is generally not enforceable as it provides either party with an absolute discretion to agree or disagree leading to a stalemate from which no agreement is capable of being concluded and therefore unenforceable.

Our courts have however started making exceptions to this general principle. With a similar set of facts as described above our courts have found that although a rental amount may not have been stipulated in an agreement, the fact that the agreement provided for a mechanism to determine the rental (eg. through arbitration) in addition to providing that the parties must negotiate in good faith and included a dispute resolution process to establish a “deadlock-breaking mechanism”, it may result in the agreement not completely being open to the absolute discretion of the parties and accordingly unenforceable.

Our Constitutional Court recently even went further and remarked that even if no mention is made in the contract that the negotiations must be conducted “in good faith”, our constitution and the values which inform it in principle demand that such negotiations between the parties must be done “reasonably”. This provides an indication of the direction our courts are taking to accommodate the intention of the parties and not just declare the future agreement unenforceable.

Should you thus be required to enter into an agreement that contains an agreement to agree the terms of a new contract in future you would be well advised to seek a legal opinion on the enforceability or not of such a provision and the inclusion if necessary of sufficient deadlock-breaking mechanisms to ensure that the future agreement is capable of being concluded and enforceable against both parties.

October 25, 2012
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