Entering into business agreements without fully defined terms can lead to costly disputes down the line, especially for early-stage founders and SME business owners. If key details are left to be decided later, the agreement may not be enforceable, exposing both parties to risks.
While this can feel practical and flexible and is often quite common, it creates legal risks you may not have considered. For example, a startup and retailer agree to provide software at 'market price' – but six months later, they're stuck in a dispute when the startup wants £5,000 monthly and the retailer expects £2,500. Since this vital detail wasn't specified upfront, neither party can enforce their preferred price, potentially wasting months of work.
This article aims to help entrepreneurs, business owners, and teams that negotiate deals understand the potential pitfalls of 'agreements to agree' and why ensuring enforceability is crucial. Remember, even small oversights in your contracts can lead to lengthy disputes, financial loss, and stress.
Taking legal advice is key to ensuring your agreements are drafted clearly and protecting your business from unnecessary risks. Our commercial solicitors can assist you in drafting contracts that ensure clarity and enforceability, while our business dispute resolution solicitors are here to support you if you are in a conflict over a contract.
Contents:
Why might you leave contract terms open?
Your business might want to leave some future contractual terms undecided to move quickly, keep your options open and flexible, or finalise the details as a business relationship develops. This approach may seem practical, but now, it can cause problems. Under English and Welsh law, ‘agreements to agree’ are generally unenforceable, so if your contract is too uncertain, you might be unable to enforce it.
Another ‘agreement to agree’ scenario is to imagine you agree with a supplier under your current contract that you will receive a discount on a future services contract. Still, the actual details of that discount will be decided later. Pricing is a key term here - so if there’s no clear method for determining it, your contract may not be legally binding. If the supplier later refuses to honour their discount, you could be left without much recourse - even if you really need that discount and the services are business critical.
Sometimes, businesses decide to enter into preliminary-style documents. Heads of terms and term sheets are examples of documents where businesses outline the structure of a deal but postpone the finer details for later negotiation. These, too, can be uncertain and come with risk if they’re unclear, so they are important to get right.
Sometimes, businesses decide to enter into preliminary-style documents to outline the structure of a deal while deferring finer details for later negotiation. Heads of terms, also known as letters of intent, are documents that set out the key commercial principles of an agreement before a formal contract is drafted. Term sheets serve a similar purpose, commonly used in investment and financing deals, to summarise the main terms before finalising binding agreements. While these documents can clarify early negotiations, they can also create legal uncertainty if not carefully drafted, making it essential to define their terms clearly.
What are the risks of leaving contract terms open?
Problems can typically arise when there is a dispute, e.g., when one party states that a contract is unenforceable because it was only an agreement to agree.
Courts have historically ruled that agreements to agree are generally invalid. This is because contracts must be sufficiently certain to be binding - meaning that key details should be clearly defined.
However, context does matter. If you and the other party have already started performing the contract, or if an industry standard clearly indicates missing terms, a court may still decide that the agreement is valid.
While in some cases, the courts have taken a practical approach around agreements to agree; it’s better to be safe than sorry and not put yourself in circumstances where a dispute over your contract’s enforceability could arise. For the safest approach, ensure your key terms are defined clearly upfront to avoid uncertainty and the risk that you could be left without an enforceable agreement.
Remember to be cautious about relying on agreements to agree, as they’ll generally carry little legal weight. You may want to see them as simply expressions of intent rather than binding commitments you’ll be able to enforce.
How can you reduce risk in preliminary agreements?
Preliminary agreements like heads of terms can be common in business relationships. These are documents where you'll agree on important terms for a project but park other terms to follow later in a more comprehensive contract. Typically, these documents will set out your intentions to negotiate on the terms of a future contract.
If you’re using heads of terms, you must draft them carefully to avoid legal risks.
For example, ensure your document clearly states whether it is legally binding. For instance, you can expressly set out which of the terms in your document are legally binding to avoid doubt. By clearly separating binding and non-binding terms, you should be able to reduce the risk of arguments which could escalate into disputes.
Say so explicitly if you don’t want a contract legally binding until a formal agreement is signed.
Should I take legal advice before signing preliminary documents?
Poorly drafted preliminary agreements (such as heads of terms and term sheets) can create legal uncertainty and trigger disputes. Legal advice can help you ensure that your agreements are drafted properly, with clear wording reflecting your intentions and minimising risk. A commercial solicitor can guide you through defining which terms are binding and which are not. For instance, legal advice is especially important when drafting heads of terms or entering into early negotiations to ensure key terms are clearly defined. Consulting a solicitor early can help prevent misunderstandings and disputes, giving you peace of mind throughout the agreement process.
Conclusion
Many businesses will assume they can be vague on contract terms and ‘agree to agree’ things and work out the details later. However, leaving key terms undecided can lead to costly disputes. Courts require certainty to enforce a contract, and if critical terms are missing - you could be left with an unenforceable agreement. Even though the courts have taken a more practical approach in recent years, and you may be lucky if your ‘agreement to agree’ is upheld - it’s always best to be clear to avoid litigation in the first place.
The best approach to giving your terms the strongest chance for enforceability is to define key terms clearly upfront so your contract is certain. Even a small oversight in the early stages of a contract can lead to lengthy disputes, financial loss, and stress.
Investing in legal advice is so important. Our commercial solicitors take the time to ensure your contracts are drafted correctly from the start, helping prevent costly litigation and ensuring that your agreements provide the protection your business needs.
If your contracts or negotiations have landed you in hot water and a conflict has arisen, our dispute resolution solicitors are here to help.
