Preliminary Agreements

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Commercial parties often negotiate a preliminary document with the intention of replacing that document with a more formal document at a later stage. In somecircumstances it is difficult to determine whether thepreliminary document was intended to have contractualeffect. When faced with resolving such problems courtsadopt a two-stage process of inquiry. The first, andmost crucial inquiry, is to determine whether the partiesintended to be bound. If not, there is no contract.However, if the parties did intend to be bound the courtconducts a second inquiry to determine whether theparties’ agreement is complete and certain enough to bea contract. The modern trend has led courts toincreasingly hold that a contract exists even wherethere are substantial gaps in the agreement concludedby the parties. This modern trend can be contrastedwith the more traditional position where courts wereprepared to hold that no contract existed where partieshad left essential matters to be agreed to at a later time.Despite this modern trend some courts, when decidingwhether the parties intended to be bound, continue toplace more weight on factors such as the absence of anessential term than they do on factors such as partperformance. Courts are faced with finding a balancebetween not imposing contracts on parties and notmaking contracts for them on the one hand, and on theother hand courts not wishing to be accused of beingthe destroyer of bargains.
Original languageEnglish
Pages (from-to)151-186
JournalUniversity of New England Law Journal
Issue number2
Publication statusPublished - 2006

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