There are many instances in practice where one is confronted with a scenario where parties have held discussions, the culmination of which is an expression of some kind of intention to conclude an agreement in the future. If you are lucky, the parties have drafted and signed a letter of intent or memorandum of understanding, in terms of which they have set out their intention to negotiate the conclusion of an agreement with a particular content.

These latter agreements (for want of a better phrase) can adequately be referred to as "Agreements to Agree". The common element of such agreements is that they provide for the conclusion of a binding agreement in due course and at a time in the future.

The question to be asked and answered is whether such an "Agreement to Agree" creates a legally binding agreement and if not, how parties to such an agreement can protect themselves, and ensure that such an agreement will be legally binding or alternatively will lead to the conclusion of a legally binding agreement?

This issue was considered in Southernport Developments (Pty) Ltd v Transnet Limited [2004] JOL 13030 (SCA).

The facts of this case are briefly, that Southernport Developments' predecessor had concluded an agreement with Transnet, in terms of which Southernport would lease property from Transnet. This latter agreement was subject to the suspensive condition that the Appellant obtained a casino licence. The parties concluded a second agreement in terms of which an alternative agreement would be concluded between the parties in the event of Southenport not obtaining a casino licence. The parties would negotiate in good faith to conclude such an alternative agreement and should they not be in a position to reach agreement on any of the terms and conditions of the alternative agreement, such dispute would be referred to arbitration.

In the court of first instance the Judge found that there was no agreement between the parties, and the mere fact that there was an obligation to negotiate in good faith did not take the matter any further. For this conclusion he relied upon the decision in Premier, Free State and others v Firechem Free State (Pty) Ltd which held that:

"An agreement that parties would negotiate to conclude another agreement is not enforceable, because the absolute discretion vested in the parties to agree or disagree".

Such reasoning can prima facie not be faulted by virtue of the fact that the parties should be allowed to negotiate the terms and provisions of an agreement, and in particular the essential terms of the agreement. Should the parties during the course of their negotiations not be in a position to reach finality on the essential terms of an agreement, then an agreement should not be held to have been concluded. However, where parties have already put their "flag to the mast" and expressed their intention to conclude an agreement in regard to a certain matter, can it be expected that one party can hold the remaining party to such an expressed intention? In the present case Transnet expressed their intention to conclude a lease agreement in respect of the properties, irrespective of whether the Appellants obtained a casino licence or not.

The Supreme Court held that the present case had o be distinguished from the Firechem case by virtue of the fact that the parties had created a specific mechanism to ensure that an agreement was concluded. This mechanism was the dispute resolution mechanism of arbitration, and provided that in the event of the parties not being in a position to agree on any of the terms and conditions, such dispute would be referred to an arbitrator.

The latter case sets out the appropriate protective measures to be used by any third party that is a party to an "agreement to agree". It is imperative that such a letter of intent / memorandum of understanding contain a provision, which provides that in the event of the parties not being in a position to reach agreement on any of the terms of the proposed agreement, that such a dispute be referred to arbitration.

It is these bolts and braces that will ensure that which was envisaged when the parties met at a coffee shop in Sandton, is brought to finality by way of a conclusion of a substantive agreement, clearly defining the parties' rights and obligations.

Written by: Burton Meyer of Cliffe Dekker Hofmeyr