Can a Legally Binding Contract Exist Before a Contract Document Is Written and Signed?

When Promises to Complete a Contract to Follow Are Exchanged Such May Already Be a Legally Binding Agreement Known As a Contract to Contract So Long As the Essential Terms Required to Form An Enforceable Contract Were Already Discussed and Accepted.

Understanding What Differs Between a Contract to Contract and An Agree to Agree Including Legal Enforceability

Contract Document Within a negotiation details as terms of a possible deal may be discussed.  If enough details, being what the law refers to as the essential terms required for contract formation are exchanged and accepted, then a legally enforceable deal may exist, even if a formal contract document is to follow. However, if the details are legally insufficient to form a contract, then a legally enforceable deal fails to exist.

The Law

What legal differs when parties stop negotiating and enter into a contract to contract as a legally binding deal versus an unenforceable agree to agree is whether a sufficient extent of the essential terms required for genuine formation of a contract were discussed and agreed to.  If an agreement occurs prior to negotiation and acceptance of the essential terms required for forming a contract, then the law interprets such a deal as just an agree to agree rather than as a contract to contract.  This difference was explained well within the case of Abdulla v. Sulaiman, 2021 ONSC 6349 wherein it was said:

[4]  The principles applicable to this matter can be summarized as follows:

1.  At common law, an agreement is binding if it contains all essential terms, even if the parties agree that a more formal document will be drawn up at a later date.  However, an “agreement to agree” on essential provisions is unenforceable.[1]

2.  These primary principles apply equally to family law matters,[2] and, where essential terms are agreed upon, the inclusion of a statement confirming the parties’ intention to generate a more detailed and formal separation agreement does not defeat the settlement.[3]

3.  The test is whether a reasonable observer would have understood that the parties were making a final agreement resolving all essential issues.[4]

4.  The parties’ behaviour after the date upon which the settlement theoretically crystallized can be instructive to the Court in assessing whether an agreement was reached.  If, in the eyes of an objective observer, the parties took steps consistent with the terms reached, it is reasonable to infer that the parties believed themselves to be bound by those terms.[5]  If, however, the parties’ subsequent course of conduct emphasized the importance of a formal document, then the opposite can be inferred.[6]

The concept is actually quite simple.  When parties to a negotiation are communicating the terms of a potential deal, whether verbally or in writing, at some point enough details are exchanged, and if accepted, become sufficient to form a legally binding relationship.  The parties may state that a formal document will follow and require signing; however, if the required terms essential to forming a contract were exchanged and accepted, then the promise to prepare and sign a more formal document is just a formality and a contract to contract, being a binding promise to complete the formal document requirement, arises.  However, if the details exchanged are insufficient to legally form a contract, despite that the terms detailed may be accepted, and the parties may state that a formal document will follow, all that really occurs is an agree to agree which is without binding effect and is unenforceable.

Examples

The following sample statements are provided to help illustrate what are inappropriate personal thoughts, viewpoints, and opinions, within an Affidavit document:

Enforceable
Contract to Contract

Bob Says:

  1. Hey Joe, I'll sell you my car.
  2. The Ford Mustang, serial #54321.
  3. The price I want is $10,000.
  4. The delivery date can be June 1st.
  5. This will be an as-is deal.

Joe Says:

  1. Sounds good, write it up and send over the paperwork for me to sign.
Unenforceable
Agree to Agree

Bob Says:

  1. Hey Joe, I'll sell you a car.
  2. One of the Ford Mustangs.
  3. The price will be fair.
  4. You pick the delivery date.
  5. This will be an as-is deal.

Joe Says:

  1. Sounds good, write it up and send over the paperwork for me to sign.

Interestingly, even if the parties, such as Joe and Bob within the example above, both perceive that a binding deal is done and an enforceable conract exists, the law may view otherwise.  Accordingly, if a dispute arises, such as a dispute about the price in the agree to agree example above, and then litigation develops, Joe and Bob could each argue in court that an enforceable agreement exists and that the court should decide the price; however, a court will be unwilling to add the essential terms required to genuinely form a contract; and accordingly, treat any perceived deal as just an unenforceable agree to agree rather than a contract to contract

Summary Comment

The essential details to sufficiently establish an understanding of the terms within a deal must be exchanged and accepted prior to a binding contract being legally formed and thereby enforceable in law.  If parties to a negotation agree to subsequently determine terms which are, legally, essential to forming a contract, then all the parties have done is agree to an unenforceable agree to agree.

Learn More About
Agree to Agree

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