Definiteness and Enforceability of "Agreement to Agree" Clauses: Analysis of Ray Fischer v. CTMI

Introduction

The Supreme Court of Texas, in the case of Ray Fischer and Corporate Tax Management, Inc. v. CTMI, L.L.C., Mark Boozer, and Jerrod Raymond (479 S.W.3d 231, 2016), addressed a pivotal issue concerning contract enforceability. This case revolves around the enforceability of an "agreement to agree" clause within an asset-purchase agreement related to the sale of Fischer's tax-consulting business. The dispute emerged from the interpretation of payment obligations contingent upon project completions and revenue benchmarks, raising fundamental questions about contractual definiteness and the binding nature of conditional agreements.

Summary of the Judgment

The Texas Supreme Court held that the pending-projects clause within the asset-purchase agreement was enforceable, despite claims that it constituted an unenforceable "agreement to agree." The court determined that the clause's terms were sufficiently definite, enabling a court to ascertain the buyer's obligations and provide appropriate remedies in cases of breach. Consequently, the Supreme Court of Texas reversed the Court of Appeals' judgment, reinstating the trial court's decision in favor of Fischer.

Analysis

Precedents Cited

The judgment extensively referenced established precedents to frame its reasoning on contract definiteness and enforceability:

PACE CORP. v. JACKSON, 155 Tex. 179 (1955): Highlighted the necessity for contracts to possess a "reasonable degree of certainty and definiteness" in their essential terms.
Fort Worth Independent School District v. City of Fort Worth, 22 S.W.3d 831 (2000): Emphasized that an agreement must be sufficiently definite to demonstrate mutual intent to be bound.
McCalla v. Baker's Campground, Inc., 416 S.W.3d 416 (Tex.2013): Underscored that agreements containing all material terms are enforceable even if some aspects are to be agreed upon in the future.
RADFORD v. McNENY, 129 Tex. 568 (1937): Asserted that material terms must be agreed upon for enforceability.
PLAYOFF CORP. v. BLACKWELL, 300 S.W.3d 451 (Tex.2009) and Four Eights, LLC v. Salem, 194 S.W.3d 484 (Tenn.Ct.App.2005): Discussed scenarios where agreements to agree were deemed unenforceable due to insufficient definiteness in critical terms.

Legal Reasoning

The central issue was whether the pending-projects clause, requiring mutual agreement on project completion percentages, constituted an unenforceable "agreement to agree." The court applied several guiding principles:

Contractual Definiteness: The clause was analyzed for its ability to provide a clear basis for determining obligations and remedies, even if specific terms were to be agreed upon later.
Avoidance of Forfeitures: The court emphasized that Texas law disfavors interpreting contracts in a manner that leads to forfeitures, thus favoring interpretations that uphold enforceability.
Implication of Terms: The court recognized that terms not explicitly stated but reasonably inferred from the context and the parties' conduct could be implied to fulfill contractual obligations.
Prior Conduct and Performance: The parties' previous dealings concerning account receivables provided a framework that supported the enforceability of the pending-projects clause.

Applying these principles, the court concluded that:

The pending-projects clause provided a clear method for determining payments based on project completion percentages.
The inclusion of mutual agreement on percentages did not render the entire clause indefinite, as the essential method for calculation was predefined.
The parties had demonstrated an intention to be bound by the agreement through their actions and prior contractual practices.

Impact

This judgment sets a significant precedent in Texas contract law by clarifying the enforceability of "agreement to agree" clauses, provided that essential terms are sufficiently definite. It underscores the importance of including clear methods for determining variable terms within contracts to avoid challenges based on indefiniteness. Future cases involving conditional payment structures, earn-out agreements, or similar clauses can reference this decision to argue for enforceability, provided they align with the standards of definiteness and mutual intent outlined in this case.

Complex Concepts Simplified

Agreement to Agree

An "agreement to agree" occurs when parties to a contract agree to settle certain terms at a later date rather than specifying them upfront. Typically, such agreements are unenforceable because they lack the necessary definiteness, meaning the essential terms are not sufficiently clear to hold the parties to the agreement.

Definiteness in Contracts

Definiteness refers to the clarity and precision of a contract's terms. For a contract to be enforceable, its essential terms must be clear enough for a court to determine each party's obligations and provide remedies in case of breach. Lack of definiteness can render a contract, or specific clauses within it, unenforceable.

Earn-Out Payments

Earn-out payments are sums agreed to be paid in the future based on the performance of the business being sold. They often depend on achieving certain financial targets or project completions post-acquisition. The challenge in enforcing such clauses lies in defining the exact conditions and methods for calculating these payments.

Conclusion

The Supreme Court of Texas' decision in Ray Fischer v. CTMI reinforces the enforceability of conditional payment clauses when they are framed with sufficient definiteness and a clear methodology for determining obligations. By affirming that an "agreement to agree" can be enforceable under specific circumstances, the court provides valuable guidance for drafting contracts that anticipate future uncertainties without sacrificing enforceability. This judgment emphasizes the necessity for precision in contractual terms and the importance of demonstrating mutual intent to be bound, thereby enhancing the stability and predictability of commercial agreements.