Agreement to Agree is No Agreement

What happens when parties in a business negotiation “punt” a difficult decision down the field to a later day? Rather than finalize terms on an important issue, they simply pledge that they will “agree to agree” at some point in the future. Once that future day comes, can one party “force” the other to reach an agreement?

Consider this example: two shareholders enter into a written agreement with a third, founding shareholder. The agreement states that the three shareholders “will create a mutually agreeable succession plan,” which will be effective no later than a date certain. The succession plan will include one of two options for the two new shareholders to buy out the founding shareholder.

Now imagine that the promised succession plan is never developed. The only signed writing is the “agreement to agree” at a later date. (While such agreements may expressly provide they are non-binding, there is no such provision here.) If the two new shareholders sue the founding shareholder for failing to agree to a written plan, can they win in court?

The Michigan Court of Appeals decided a case on similar facts and found that the “agreement to agree” in this case was unenforceable. The court determined that for an “agreement to agree” to be binding on the parties, the agreement must include all the essential terms that will be included in the final, signed agreement. If a material term is missing, such as the actual buy-out process, or other material issues are addressed but left unresolved, the agreement to agree is unenforceable. In short, the “agreement to agree” must itself be an enforceable expression of the parties’ future agreement.

Agreements to agree should include provisions to:

  1. delineate any limits on the parties’ obligation to agree upon terms left open,
  2. describe the parties’ obligation to negotiate in good faith, and
  3. address suitable disclaimers and termination provisions to excuse a party’s obligation to execute a final agreement (i.e., define when someone can walk away).

In the event of #3 above, material adverse changes of business conditions, market instability, and other commercial factors may be used to trigger a termination. Doing so would help prevent problems if a proposed deal loses its luster.

If you are tempted to sign a contract qualified by language that suggests the parties will mutually agree at a later date to specific terms that are material to the agreement or important to your side of the bargain, better to negotiate those terms now rather than invest in the time and expense to pursue resolution later.

Recent Blog Posts

RV Giant Hits a Roadblock

Business Law Update Webinar 2024

Reforming Donor Advised Funds