Binding contract or ‘agreement to agree’?

Posted: 12th February 2018

AgreeOne good reason why contracts should always be drafted by a lawyer is to avoid subsequent debate as to whether a document represents a binding deal, or merely an ‘agreement to agree’. Exactly that issue arose in a case concerning a family company that was left high and dry when a joint venture foundered.

The company specialised in manufacturing and selling high-grade diamond blades and had achieved success both in the UK and overseas. With a view to breaking into the mass DIY market, the company entered into negotiations with a tools supplier in respect of a proposed joint venture.

A document described as an exclusive supply and trading agreement was in due course signed and exchanged. The agreement was expressed to last for five years and included provision for profit sharing and payment of commission. However, it had only run for about two years when it broke down and the company launched proceedings.

The company argued that the tools supplier had not paid commissions due and had breached the agreement by purporting to terminate it before the end of the five-year term. The tools supplier, however, insisted that the agreement was not binding and that it was understood on both sides that it would only become so on exchange of further contractual documents.

Ruling in the company’s favour, the High Court found that the evidence pointed overwhelmingly to the existence of a binding contract on the terms set out in the agreement. By purporting to terminate the contract early, the tools supplier had committed a repudiatory breach and the contract had come to an end on the company’s acceptance of that breach.

There had been no repudiatory breaches of the contract on the company’s part and there was no implied term that the agreement could be terminated on reasonable notice. The Court gave directions as to the basis on which the company’s compensation should be calculated.