01/09/2014 03:06 pm ET Updated Mar 11, 2014

Agreements to Agree Create Legal Problems

Contracts require an offer and an acceptance. What constitutes an offer or acceptance may be disputed. Consequently, when negotiating carefully label proposals as, for example, "Draft discussion document not subject to acceptance." When parties want to rapidly create a contract, they may gloss over uncertainties by inserting language that they "agree to agree" on the items at a later date. This almost certainly creates a future dispute after the parties have invested in the transaction. Additionally, an agreement to agree is not legally enforceable.

A recent decision by the U.S. Court of Appeals for the Fourth Circuit upheld a District Court's dismissal of a breach of "teaming agreement" lawsuit since Virginia law does not enforce agreements to agree (Cyberlock Consulting, Inc. v. Information Experts, Inc.). The language in question stated "...agrees to execute a subcontracting agreement ...containing provisions ...that are reasonably necessary to .. perform the requirements of the prime contract." The District Court characterized this provision as an unenforceable agreement to agree. Agreements to agree are "too vague and indefinite to be enforced." Additionally, Virginia does not enforce an agreement to negotiate. The Court refused to allow external (extrinsic) evidence to explain the meaning of the phrase since it determined that the entire agreement was unambiguous. At best the questioned language created a "contractual objective and agreed framework for negotiations."

Another recent federal District Court decision in Pennsylvania reached a similar conclusion (Fish Net, Inc, v. ProfitCenter Software, Inc.). In this case the dispute involved words spoken by an executive at a meeting including that "he wanted to meet with somebody... with authority that could pursue this and have a conversation about what they were going to do." Several statements in question were too vague to be legally binding and additionally the executive may not have had the authority to create a contract.

Some jurisdictions in limited circumstances will enforce an agreement to negotiate. However, as the Alaska Supreme Court recently noted, requiring the parties to participate in negotiations does not mean that the parties will reach an agreement (Fernandez v. Fernandez).

The U.S. Court of Appeals for the First Circuit recently determined that Washington state law would likely uphold the language in a letter of intent that the parties would "negotiate and enter into a separate Purchase Agreement..." (Butler v. Balolia). However, all that phrase imposed was a duty to negotiate in good faith.

There may be serious legal problems when contracting parties leave items open for future agreement or negotiation. Additionally, one must be careful not to imply that an agreement has been reached in the course of ongoing negotiations. Courts may determine that contractual language creates an agreement to agree even if that precise phrase is not used. Courts will not create an agreement for the parties or compel the parties to reach an agreement. Freedom of contract also means freedom not to contract. As there are many different situations and pitfalls to avoid, one should always consult with an attorney in the circumstances outlined in this comment.