Contract Law - Agreements to Agree / Agreements to Negotiate

Background

Historically, Canadian contracts law has generally held that “agreements to agree” are not enforceable. In modern Canadian contracts law, especially over the past 45 years, this statement has become less reliable. Agreements to agree and agreements to negotiate can be enforceable, especially if they contain an actual specific agreement[i].Additionally, an agreement to negotiate may create a contractual obligation[ii].In other words, the parties might not be obliged to actually agree, but they may be obliged to at least try and negotiate in good faith with each other in a bona fide attempt to reach an agreement.

When is an Agreement to Agree an Agreement?

The courts still generally hold that a pure agreement to agree or to negotiate is unenforceable, because such terms are usually so vague that it makes it difficult for the court to determine the actual intention of the parties in a way that can be legally enforced.[iii]Among other things the courts will now look at, to see if an agreement to agree can be enforced, is the presence of a “benchmark” or objective standard, e.g., “we agree to negotiate the renewal terms at the fair market rate” as that “fair market rate” could then be determined by the court. However, the court is careful to distinguish that they will be much more likely to imply a term such as “fair rent” that is not expressly written in a contract to an agreement that is within its term, such as a 5-year lease in its 4^th year.[iv]

The Duty of Good Faith

Where there is an agreement to negotiate, the courts will require that this negotiation be done in good faith[v].This then creates a duty for negotiation for each party. If one party is negotiating with the intent of never reaching an agreement, then they are not negotiating in good faith, and are in breach of that duty. Elements of this duty to negotiate in good faith include negotiating honestly and reasonably, so that negotiating in such a way as to cause the agreement to be terminated, rather than trying to reach a reasonable agreement, is considered a breach of this duty.

Remedies and Damages

The courts have held that a breach of the duty of good faith could then create a possible remedy similar to a breach of contract – to put the injured party(s) in the same position as if the contract had been performed. In other words, if the plaintiff can establish that “but for the breach of the duty of good faith a profitable contract would have been agreed to by the parties, the plaintiff should be entitled to, in principle, the value of the bargain.”[vi]Alternatively, plaintiffs may be awarded damages calculated on a “loss of chance” basis, or for expenses incurred due to failed negotiations. Finally, a court may also award injunctive relief, where the court might compel a party to complete the contract as if termination of the contract had not occurred.

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Could you and your company benefit from a legal review of your current contracts to help ensure that those contracts are legally enforceable in the way that you intend?
If so, please contact the author Andrew M.A. Reed at ar@jfblaw.ca and let's discuss how we can help you and your company reduce your risk of contractual misinterpretation.

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Endnotes:

[i] Walford v. Miles (1975) CA

[ii] Empress Towers Ltd v. Bank of Nova Scotia (1990) BCCA

[iii] Mannpar Enterprises Ltd. v. Canada (1999) BCCA

[iv] Hargreaves v. Fleming (1995) Sask QB

[v] 0856464 BC Ltd v. TimberWest Forest Corp. (2014) BCSC

[vi] Molson Canada v. Miller Brewing Co. (2013) ONSC

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Sources:

McCamus, J. (2020). The law of contracts, 3/E. Irwin Law.

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