The enforceability of an agreement to reach an Agreement in the future
When entering into a contract, the parties take on
legally binding obligations. In some situations, people
may envisage that they will, at a later stage, enter into
an agreement with one another, but are unable at the
present moment to agree on what the terms of that
future agreement will be.
For example, L may enter into an agreement to lease
premises to T for a year at a rental of R10 000 per
month. They nvisage that the lease will be extended
thereafter for a further year at a market-related rental,
but the rental market is volatile and they cannot predict
what the market rental will be at the commencement
of the second year. Is it possible for them, at this
juncture, to enter into a binding agreement of lease for
a second year even though they cannot agree on what
the rental will be for that second year?
The essentials of a contract of lease are that the
identity of the lessor and lessee, the property to be
leased, the amount of the rental and the period of the
lease must be certain. In the circumstances just
outlined, one of the essentials is lacking, namely a
defined rental for the second year. No legally binding
agreement of lease has therefore come into force in
relation to the second year.
APPOINTING A THIRD PARTY TO FIX
THE TERMS OF THE AGREEMENT
Is this problem surmountable? It is indeed. As the
Supreme Court of Appeal has recently affirmed
(Southern Developments (Pty) Ltd v Transnet Ltd;
29 September 2004; as yet unreported in the law
reports) our law recognises that parties to a contract
can delegate to a third party the responsibility of fixing
certain terms of their agreement. Thus, for example, a
prospective landlord and tenant can delegate to a
third person the power to determine what the rent of
the premises shall be – as long as the instruction to
the third party in this regard is not too vague. It has
been held that an instruction to the third party to fix a
market-related rental is sufficiently clear to be valid,
and that it is not necessary for the parties to formulate
a mathematically precise formula. (See Letaba
Sawmills (Edms) Bpk v Majovi (Edms) Bpk 1993 (1) SA
768 (A).)
A second possibility was recently examined by the
Supreme Court of Appeal in Southern Developments
(Pty) Ltd v Transnet Ltd (noted above). In this case, the parties entered into an agreement to “negotiate in
good faith” at a stipulated future time with a view to
entering into an agreement, and that if they were then
unable to agree, “the dispute” would be referred
to arbitration, and the arbitrator’s agreement would
be final.
The Johannesburg High Court held that this was an
unenforceable “preliminary agreement” and that the
failure of the parties to reach an agreement could not
be regarded as a “dispute” which could be settled by
arbitration.
The Supreme Court of Appeal disagreed, and reversed
the High Court judgment.
The Supreme Court of Appeal held that if the parties
failed to agree, this would indeed constitute a “dispute” which was capable of being resolved by
arbitration in the manner contemplated by the parties.
Arbitration in these circumstances was a “deadlockbreaking
mechanism” that had been specifically
agreed upon by the parties. It could not be said that a
third person was making a contract for the parties.
What the parties had done was to entrust an arbitrator
with the task of putting flesh on the bones of what
they had already agreed. Hence, the agreement
between the parties to negotiate in good faith to try to
reach agreement and, if they could not reach
agreement, to refer the matter to arbitration, was valid
and legally enforceable. In so deciding, the Supreme
Court of Appeal pointed out that it was not interfering
in the parties’ freedom to contract, but was upholding
that freedom. The parties had not merely entered
into “an agreement to agree” (which would be
unenforceable) but had bound themselves to a
dispute-breaking mechanism if they failed to reach
agreement. Their undertaking to negotiate in good
faith did not stand on its own, but was linked to a
provision that, if they failed to reach agreement, the
dispute would be referred to an arbitrator whose
decision was to be final and binding.
The judgment in this case is thus binding authority for
the principle that, while an “agreement to reach
agreement in the future”, on its own, is unenforceable,
it will become enforceable if the parties go further
and lay down a deadlock-breaking mechanism (such
as arbitration) which is to come into play if they are
unable to agree.
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