Preliminary Agreements

Abstract

Commercial parties often negotiate a preliminary document with the intention of replacing that document with a more formal document at a later stage. In some circumstances it is difficult to determine whether the preliminary document was intended to have contractual effect. When faced with resolving such problems courts adopt a two-stage process of inquiry. The first, and most crucial inquiry, is to determine whether the parties intended to be bound. If not, there is no contract. However, if the parties did intend to be bound the court conducts a second inquiry to determine whether the parties' agreement is complete and certain enough to be a contract. The modern trend has led courts to increasingly hold that a contract exists even where there are substantial gaps in the agreement concluded by the parties. This modern trend can be contrasted with the more traditional position where courts were prepared to hold that no contract existed where parties had left essential matters to be agreed to at a later time. Despite this modern trend some courts, when deciding whether the parties intended to be bound, continue to place more weight on factors such as the absence of an essential term than they do on factors such as part performance. Courts are faced with finding a balance between not imposing contracts on parties and not making contracts for them on the one hand, and on the other hand courts not wishing to be accused of being the destroyer of bargains.