Agreements To Agree: When Pigs Fly

Parties to agreements often fall into the trap of leaving agreement on certain essential aspects of their envisaged contractual relationship to a later date. They do this either because they simply want to close a deal on what seems to be a sterling business opportunity as soon as possible, or because they honestly believe that agreement will be reached at a later stage based on an expectation of good faith of all the contracting parties.

Written By of Cowan-Harper-Madikizela Attorneys

Our law is clear on the conclusion of a valid, and more importantly, enforceable agreement. An “agreement to agree” is generally not enforceable.

Where parties are genuinely unable to reach a specific agreement on any term or condition of an agreement while negotiating but wish to conclude the agreement in any event, thereby deferring an essential term or condition for later agreement, it is highly desirable to ensure that an experienced attorney is on hand to draft the agreement.

The attorney should provide for a deadlock-breaking mechanism to deal with situations where the parties cannot “agree to agree” in the future. The attorney should further reduce the subject matter requiring future agreement to its smallest components and consider linking the aspects requiring future agreement to an external objective standard if possible.

In the matter of Van der Merwe v Bonnievale Piggery (Pty) Ltd (749/2020) [2021] ZASCA 162 the Supreme Court of Appeal was called upon to adjudicate on the continued enforceability and existence of a series of interlinked agreements for the supply of pork products, where the parties had “agreed to agree”.

The parties’ business relationship was regulated by 3 separate interlinked agreements. Agreements for the sale of pig carcasses concluded on the basis of periodically agreed prices, an exclusive supply agreement and a sole distributorship agreement.

When the parties concluded the agreements, they reached an “agreement to agree” on the price of pig carcasses. In essence, Bonnievale would supply pig carcasses to Van der Merwe at reasonable, market-related wholesale prices that would follow market fluctuations.

The parties were able to reach an agreement on prices for the period between 2005 and 2012. In July 2012 they could not reach an agreement on the prices and reached a deadlock.

Bonnievale subsequently instituted action against Van der Merwe for payment of R1 196 868.84 for the supply of pig carcasses. Van der Merwe could not avoid the fact that he had received the pig carcasses, however, he instituted a counter claim against Bonnievale for payment of an amount of R2.5 million for being historically overcharged for the pork product in breach of the agreement of sale and R12 million for a loss of profits from clients that Van der Merwe had previously exclusively supplied.

It transpired that Bonnievale had been supplying pork products to these clients directly after July 2012, cutting Van der Merwe out of the supply chain which Van der Merwe contended was a breach of the exclusive supply agreement and amounted to unlawful competition.

Bonnievale denied that it had competed unlawfully with Van der Merwe or that it had breached the sales agreement. It pleaded that the sales agreement could in any event not continue because of the simple expedient that the parties had failed to reach an agreement on the selling price of pork products in July 2012.

The Court delved to the heart of the matter and identified that the dispute between the parties came down to the simple question of what happens to the business relationship and the interlinking agreements if the parties could not agree on a price for pig carcasses.

In considering the respective arguments the Court found that it was common ground that there was never a fixed price and the standard according to which the price had to be determined had to be market-related. The Court agreed that since the term “market-related” was not precisely defined and that there was no precise mathematical criterion to determine the price, the parties had to negotiate the price for each and every sale.

Likewise, there was no objectively determinable external standard or mechanism to resolve a deadlock provided for in the interlinked agreements, for instance, determination of the price by a third party.

Van der Merwe argued that it was incorrect that there was no deadlock mechanism. He argued that there was an external standard according to which the price could be determined, namely reasonable and market-related value. The Court held that the market-related price was simply a measure according to which prices would be negotiated, it was no more than an indicator that oriented the parties, it merely provided the framework within which the prices for carcasses would be negotiated.

The agreement that the parties reached was not that the price of carcasses would be charged at the prevailing market price, or that the carcasses would be charged at that price if the parties could not reach an agreement on the price – the parties actually agreed that the price of carcasses would be related to pork market prices and be determined by negotiation.

So, in the absence of a proper definition of the determining factor of the price determination, and with no proper deadlock mechanism in place, when the parties reached a deadlock the sale agreement for the pork products came to an end. And with that, the exclusive supply agreement also came to an end. Van der Merwe was as a result unsuccessful in his defences.

So to avoid your pigs flying away and potentially losing out on a lucrative business venture, give very careful consideration to using the services of an experienced attorney to draft the agreements you intend to rely on to govern your business relationship where there may be an “agreement to agree”.

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