An unenforceable ‘agreement to agree’
TEEKAY TANKERS v STX OFFSHORE AND SHIPBUILDING [2017]
The Court decided that an agreement by which an option was granted to purchase ships was unenforceable. The agreement provided that the delivery date for the ships was to “be mutually agreed ”. This was considered to be an ‘agreement to agree’ and the express wording meant that it was not possible to imply a term to give the agreement sufficient certainty to make it enforceable.
Facts:
- A shipping company, Teekay Tankers (“T”), entered into agreements with a shipbuilder, STX Offshore and Shipbuilding (“S”), for it to build four ships with an option over a further three sets of four ships (“Optional Vessels”).
- T claimed that S was in breach of the option agreement and that it was therefore entitled to terminate the agreement, which it then did. T claimed damages for the loss of profits it said it would have made had S complied with its obligations under the option agreement.
- There was no dispute that the parties had intended for the option agreement to be binding and enforceable. However, S’s response to being liable for loss of profits was that the option agreement was void for uncertainty as it was an ‘agreement to agree’.
- S focused its argument on two particular provisions of the agreement (our emphasis added):
- “The Delivery Dates for each [of the] Optional Vessels shall be mutually agreed at the time of [T’s] declaration of the relevant option.”
- “… but S will make best efforts to have a delivery within 2016 for each [of the] First Optional Vessels, within 2017 for each [of the] Second Optional Vessels and within 2017 for each [of the] Third Optional Vessels.”
- To establish that the contract was binding, T had to show that the Court could imply some method to determine the delivery dates if the parties were not able to reach agreement. T argued that one of two alternative terms should be implied into the agreement, either
that the delivery date of each Optional Vessel was to be:
- such date as S offered, having used its best efforts, and if S was unable to offer a date within the relevant year despite using its best efforts, the earliest subsequent date which S was able to offer using its best efforts; or
- an objectively reasonable date, having regard to S's obligation to use its best efforts to provide delivery dates within 2016 or 2017, to be determined by the Court as appropriate.
Decision:
- The Court considered that the delivery dates were an essential term of the contract and it was not possible to imply terms that would lend the agreement sufficient certainty for it to be enforceable, without going against the express wording.
- Previous decisions have established certain principles regarding ‘agreements to agree’:
- each case must be decided on its own facts and the construction of the words used in the particular agreement;
- if on the true construction of the words used, the parties intended to leave an essential matter to be agreed later, where the parties would both remain free to agree or disagree on the matter, then there is no bargain which the Courts can enforce;
- where the Court is satisfied that the parties intended that their bargain should be enforceable, it will strive to give effect to that intention by construing the words in a way that allows the matter to be agreed to be determined in the absence of agreement;
- however, the Courts cannot imply a term which is inconsistent with what the parties have actually agreed.
- Applying these principles, the Court said it should strive to uphold the agreement but on the facts, even though the parties had intended for it to be enforceable, it found the option agreement was an ‘agreement to agree’ and so was void.
- The fact that there had been previous cases where the Courts had upheld a contract as sufficiently certain even though it involved an express ‘to be agreed’ provision was found to be irrelevant.
Points to note:
- This case is relatively unusual but it does illustrate the risks of leaving important details to be agreed later. We would ordinarily have expected the Court to have found some way to give the agreement sufficient certainty although it was possibly pertinent that this dispute related to an ‘option agreement’ which had yet to be performed as opposed to a contract which had already been performed. In the latter case the Courts will generally find some way to identify a binding, workable contract. Indeed in Astor Management v Atalaya Mining [2017], the judge explicitly quoted the case as, “A recent example of the willingness of the courts (and increasingly so in recent times) to give legal effect to contractual provisions even when they are cast in very open-ended language”. That comment does not seem to sit terribly comfortably with this decision.
- To avoid a finding of an ‘agreement to agree’, contracting parties should ensure that all the material terms of the contract have been agreed or that there is a clear mechanism set out in the agreement by which the missing element can be conclusively determined. Sometimes this might be by a nominated independent expert or arbitrator making a binding decision.