When Do Negotiations Become a Contract?
By Stacia Hofmann
Cornerpoint Case Pops are dedicated to summarizing relevant, new cases — and their business and risk management lessons — in bite-size posts.
You’ve probably “agreed to disagree” to end a discussion or argument. But have you ever “agreed to agree” during a stalemate? Sometimes, when parties have agreed on a few terms, but have not worked through all of the details, they will leave additional, important terms open, incomplete, or ripe for further discussion. Is the result an enforceable contract? Or are these communications just negotiations?
Earlier this month, the Washington Court of Appeals highlighted the difference between enforceable contracts and mere negotiations.
The Case: Delgardo v. Piper, Washington Court of Appeals, Division I, No. 76592-2-I (March 4, 2019 – Unpublished)
The parties to the Delgardo case were involved in a lawsuit. To try to resolve the dispute, they agreed to the purchase and sale of a business for $75,000, with $3,000 down and $1,000 monthly payments thereafter. The did not agree on other terms about the purchase, but did agree, in writing, to work together in good faith to agree on those terms in the future. The future arrived, and when the parties discussed and negotiated these additional terms, they were unable to reach agreement. One party argued that there was an agreement for the purchase and sale of the business; the other said no agreement had been reached.
A Contract Must Have Mutual Assent: A “Meeting of the Minds” Between the Parties
To be an enforceable contract, the parties must agree on its important terms. What is an important term can differ from contract to contract, and is dependent on the parties’ intentions.
If I’ve said it once, I’ve said it a thousand times: the law loves categories. What follows is a summary of the court’s classifications for contracts with missing terms.
Category One: Agreements to Agree
- The parties have not agreed on all of a contract’s important terms.
- The parties agree to agree on all of the contract’s important terms in the future, but never do.
- Is there a contract? No. Agreements to Agree are unenforceable as a whole. In other words, the Agreement to Agree is unenforceable, and the contemplated agreement in the Agreement to Agree is also unenforceable.
Category Two: Contracts to Negotiate
- A Contract to Negotiate is a beefed-up Agreement to Agree. That is, the parties not only agree to agree on important terms in the future, but also agree on how to agree.
- For example, the parties may agree on a course of conduct such as negotiating in good faith, or on terms like exclusivity in, or a time frame for, negotiations.
- Is there a contract? Yes and No. The Contract to Negotiate itself is enforceable, but if the parties ultimately fail to agree on the important terms of the contemplated agreement, then the contemplated agreement is not enforceable.
- The Delgardo court concluded that this was the proper category for the lawsuit. The parties had a Contract to Negotiate in good faith that was enforceable, but there was no agreement for the purchase and sale of the business.
Category Three: Agreements with Open Terms
- The parties have agreed on some of the terms of the contract, but have not agreed on all terms.
- The terms that have been agreed upon are important and sufficient to create a contract, and the parties do not intend further negotiations.
- Is there a contract? Yes. The missing terms will be supplemented by the law.
Risk Management Lesson
When negotiations stall, it may be tempting to call it a day and leave certain important terms unresolved or up in the air. But as the Delgardo case shows, a party trying to enforce an incomplete contract will face an uphill battle, even if the parties have agreed on some key terms. Of all of the types of projects that can be left unfinished, contracts should not be one.
This blog is for informational purposes only and is not guaranteed to be correct, complete, or current. The statements on this blog are not intended to be legal advice, should not be relied upon as legal advice, and do not create an attorney-client relationship. If you have a legal question, have filed or are considering filing a lawsuit, have been sued, or have been charged with a crime, you should consult an attorney. Furthermore, statements within original blogpost articles constitute Stacia Hofmann’s opinion, and should not be construed as the opinion of any other person. Judges and other attorneys may disagree with her opinion, and laws change frequently. Neither Stacia Hofmann nor Cornerpoint Law is responsible for the content of any comments posted by visitors. Responsibility for the content of comments belongs to the commenter alone.