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"Let's Agree on that Later"
Implications for Research Agreements and License Agreements

A university and a company negotiated a Research Agreement. The terms of the whole agreement had been finalised except for the precise scope of the research (Schedule 1) and the amount and timing of the research funds to be paid (Schedule 2).

The company’s Research Director and the university’s Chief Investigator were still discussing the scope of research for the latter half of the research program. Agreement had been reached on the first half of the research program.

Meanwhile, the Chief Investigator was increasingly anxious about getting started. There were two post-docs in the research team on fixed term contracts. If the research work did not start soon those post-docs would not finish what they needed to do, and who knows if they would still be around when their fixed term contracts expired.

“How about we just sign the contract now and provide that “Schedules 1 and 2 will be agreed and finalised by the parties within three months,” it was suggested.

The Research Agreement was signed with incomplete Schedules 1 and 2, and a provision that agreement on Schedules 1 and 2 was to be reached within three months. The first instalment of research funds was paid which funded the research for the first three months.

There were long gaps between meetings and discussions on Schedules 1 and 2. Agreement was never completely reached.

A new CEO was appointed seven months into the research program. The new CEO could not quite see the point of investing money on the research.

A letter arrived from the company’s lawyer stating “we have advised our client that the Research Agreement is void as Schedules 1 and 2 were incomplete and were to be agreed later.”

The university had committed expenditure for a 12 month research program, and had received research funds covering only the first three months.

Was the university entitled to research funds for the whole 12 months? Was it entitled to the research funds for at least the first six months about which the scope of research had been agreed?

The university was not entitled to either.

For an agreement to be legally binding, agreement must be reached on all the essential terms of the agreement.

What is a Research Agreement about? It is about the research to be done, and the research funds to be paid. If agreement has not been reached on either the whole agreement is void.

Other terms in the agreement may be essential terms as well, such as the research being led by the Chief Investigator

An agreement that suffers from lack of agreement on any essential term is said to be incomplete, and therefore void.

As the whole agreement was void, notwithstanding the university’s commitment (and legal obligation) to 12 months of expenditure, the university was not entitled to any further research funds.

Was the university obliged to refund the one payment it did receive for the first three months of research? The company did not ask for this so the issue did not arise.

What if an agreement contains a provision that is similarly an agreement to agree, but it is not about an essential term, instead it is about a non-essential term that is not vital or essential to the agreement?

For example, suppose a Research Agreement contains a term that “In addition to the Research Funds in Schedule 2, the parties will discuss and reach agreement about three student projects to be undertaken in the field of the Research Program, and the payment of corresponding student stipends for those projects.”

The clause is still an agreement to agree. However, the student projects are a subsidiary or non-vital part of the Research Agreement. In this case the whole Research Agreement is not void, but that clause is. Because it is non-vital, the void clause is severed from the agreement, and the whole of the remaining agreement remains valid.

The law about agreements to agree resulting in the whole agreement being void if it concerns an essential or vital term, or a clause being severed and leaving the remaining agreement valid, if it concerns a non-essential or non-vital term of a contract, applies to all contracts.

Here are a few more examples:

A licensor and licensee concluded that they could not predict the full scope of research outcomes under a Research Agreement, and therefore could not meaningfully negotiate royalty rates and other financial terms in the separate License Agreement. They agreed to include this term in the License Agreement: “Within three months of the delivery of the Final Report under the Research Agreement, the parties will negotiate and agree upon the royalties and other financial terms payable under this agreement.” Both the Research Agreement and the License Agreement were signed. Result: This was an agreement to agree about an essential and vital term of the License Agreement. The License Agreement was incomplete and therefore void.

A License Agreement of a late-stage engineering technology contained minimum product sales to be achieved within the first 12 months of the date of product launch, which was a modest number. Neither the licensor nor licensee could predict the extent of sales after the first 12 months. The License Agreement provided: “Within 9 months of the date of product launch, the parties will discuss and agree upon the minimum sales to be achieved in the period commencing 12 months from the date of product launch.” Result: This was an agreement to agree about a non-essential, non-vital part of the License Agreement. The clause was void, but severable from the License Agreement leaving the remainder of the License Agreement to remain valid.

A licensor was concerned about a licensee solely making decisions about which countries to pursue patents in. The licensee in turn was concerned about the licensor requiring patents to be pursued in countries that the licensee considered unjustified. The worldwide License Agreement contained a clause that “the parties will discuss and agree upon the countries in which to pursue national phase patent applications within 12 months of the date of filing a PCT application.” Result: This similarly was an agreement to agree about a non-essential, non-vital part of the License Agreement. The clause was void, but severable from the License Agreement leaving the whole of the rest of the License Agreement to remain valid

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What is the criteria to decide if a term is essential or vital (so that if it is subject to an agreement to agree the whole agreement is void), or non-essential or non-vital (so that if it is subject to an agreement to agree it is severed leaving the remainder of the agreement valid)?

More descriptions of essential terms like “important” or “substantial” are unhelpful. There are an infinite variety of contracts, and the criteria needs to be workable for all of them.

While criteria such as “essential” or “vital” appear imprecise, in practice, there is little difficulty recognising when a term has (or lacks) the requisite importance that it should be properly classified as essential or vital.

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