Agreements to agree clauses: just say no

Like drugs, clients should just say no to “agreement to agree” clauses in most cases. These clauses appear when parties to a business relationship are too lazy, too tired, or simply want to avoid a complex issue. The usual form is something like this: “The parties will agree in the future on pricing and discounts for third party distributors.” Lawyers hate these clauses. Why? First, there is a body of cases in Maryland that address the issue of determining the obligation this imposes on each party. Does it mean that they must negotiate in objective good faith? Subjective good faith? Both? What happens if one party, now having discovered they made a bad deal, wants out of the agreement? Can this clause be used to “stonewall” the other party? The short answer under Maryland cases is that if you do not specify the obligation, the court will probably apply the objective theory of contracts and require objective good faith negotiations. However, all this does is engender higher litigation costs.

Second, agree to agree clauses allow parties to a contract to rush into a relationship without fully understanding the ramifications or addressing key business points. Can I put you in this car today, it’s on sale? Almost nothing good comes from rushing a deal. While clients often view negotiations over the smaller points that might seem to call for agree to agree clauses as lawyers delaying, or trying to run up the bill, a competent lawyer has only one goal in mind – to clearly, concisely, and unambiguously, define the legal relationship between the parties. Achieving that goal results in substantially reduced litigation bills if a dispute arises. In a sense the first contractual relationship between parties can often be viewed as the building block of the next negotiation – which might come in good times, or might come in times of dispute. We have to plan for the worse.

Third, pushing material issues to agree to agree clauses can actually impact other, agreed upon terms. Often the parties will negotiate on some points and reach consensus, but then be unable to decide on one issue or simply think that it is unimportant and not even address it – and when they discover (often later) what the other party was thinking, it can affect the other terms and provisions that they did agree to. For example, if two parties agree on a direct use fee but do not agree on a sublicense fee, and then later, when a material sublicense is proposed, one party suggests a very high rate and the other a very low one . . . you have the making of a disaster.

Finally, agree to agree clauses, particularly on a material term, often are agreed to without any process or mechanics around dispute resolution. The most common process is to allow for a cooling off period, followed by third party resolution, mediation or arbitration. For example, if at the time of the initial negotiation the value of an equity interest is not critical, but knowing that value at the inception of the deal could become critical at a later date, then some process needs to be designed around what happens when the time comes for the parties to sit down and agree, but they cannot agree. We see many contracts that were “90% negotiated” like this but that last 10% can be a real mess to clean up later.

For further information on this issue, please contact Mike Oliver at oliver@bowie-jensen.com.