In Law, What Is an Agreement in Principle?
An agreement in principle is an agreement that makes the major terms clear, laying the groundwork to make a contract. Agreements in principle are not legally enforceable as a general rule because they are not formal contracts, although sometimes they will be used in legal cases if there is a dispute. For people outside the legal field, this type of agreement can be confusing because it may make it seem as though everything is agreed when this is not actually the case.
When two parties are working together to reach an agreement, they often have a great deal of debate about the major points and terms, especially when the agreement surrounds a contentious issue. The process of nailing down the basics of the agreement leads to an agreement in principle, in which both parties arrive at a set of generally agreed-upon terms that will be used in the final contract. This is essentially the foundation of the contract, used when drafting the language because it includes everything the parties have negotiated.
A number of things can upset an agreement in principle. For example, when a bank reaches one with a customer and pre-approves a mortgage, the bank may later decide after additional investigation to change the terms, offering less money or a higher interest rate on the basis of newly learned information about the customer. Likewise, when diplomats reach this sort of agreement with their negotiating powers and take it home, government officials may reject or request modification to some of the terms.
The agreement is not legally binding because it has not been finalized. However, it indicates that the two parties have reached some level of consensus and that they intend to move forward with a contract. As a result, backing out of the agreement or radically changing the terms may be viewed as an activity in bad faith. For example, when a country reaches an agreement in principle with another and then reneges, it can make them look bad in the eyes of the international community.
It's important to note that the term is “agreement in principle,” not “agreement in principal.” These two homonyms are often confused, even by experienced English speakers. In this case, it can help to remember that it is the principles of an agreement that are included in the document.
Does an Agreement in Principle Involve a Credit Check?
This depends on the parties involved. First, it is important to remember that there are different types of agreements in principle. Some, such as an agreement in principle between two organizations to form a partnership, may have no reason for a credit check. Others, such as an agreement in principle on a real estate mortgage, may involve a credit check if the parties decide to make that a term of the agreement in principle.
For the example of a real estate mortgage, some lenders opt to run a credit check at this stage and others opt to wait for a later stage of the process. In most cases, there will be at least a soft pull credit check. This is a type of credit check that provides basic information to the lender and does not negatively impact your credit score (it also isn’t recorded on your credit report, unlike a hard pull). However, some mortgage lenders prefer to do a hard pull credit check at this stage to ensure that you are likely to qualify for the loan.
The best way to determine whether an agreement in principle will involve a credit check or not is to simply ask the lender. Additionally, you will need to provide authorization for the lender to run a credit check. Of course, sometimes this gets buried in paperwork and legalese. So, simply asking beforehand is usually a good policy.
Bear in mind that you will not typically be entering into an agreement in principle until both parties are confident that they are interested in working with the other. Thus, you should not be signing similar agreements with other potential lenders. Therefore, you likely should not need to be concerned about having multiple credit checks run at this stage.
How To Write an Agreement in Principle
Agreements in principle are typically relatively simple documents. They need to contain a few basic elements:
- Identities: The involved parties should both be clearly identified. This often includes their names and addresses.
- Description of the Proposed Agreement: Whether the agreement in principle is for a loan, partnership or some other business, that should be described in basic terms. If any specific assets are involved, such as real property, they should also be identified.
- Terms of the Agreement: The main purpose of an agreement in principle is to describe the major points of an agreement before coming to a final version of the contract. Therefore, you should include all the currently settled major terms.
- Statement of Nonbinding Nature: An agreement in principle is not a formal binding contract. There should be clear language stating that neither party is currently bound by the agreement in principle.
- Signatures and Dates: Strictly speaking, a signature is not necessary because the document is non-binding. Nonetheless, many parties prefer to have a signed document. Furthermore, signatures may provide some level of legal protection for the involved parties.
You can easily draft an agreement in principle using a template. Alternatively, you may prefer to have a lawyer draft the document for you. Since it is non-binding, it is usually less important to have a professional write the document. However, it may still be prudent to do so, especially for the clause indicating that it is an agreement in principle and not a contract.
Are Agreements in Principle Binding?
Typically, agreements in principle are not considered binding documents. Their purpose is to serve as an intermediary outline of the terms of an agreement without forming a formal, binding contract. Thus, under most circumstances, you will not be legally obligated to abide by the terms of an agreement in principle.
However, there are some situations in which this may not be the case. The most common is that the document does not clearly state that it is only an agreement in principle and one or both parties acted as if a formal contract had been formed.
There can also be some limited circumstances in which a party to an agreement in principle may be found to be legally bound by the terms due to acting in bad faith combined with other mitigating circumstances. However, this is a very rare case.
Most of the time, neither party can hold the other to the terms of the agreement in principle. If you want to create an enforceable and binding agreement, you should opt for an alternative type of agreement. For example, if you have an agreement in principle for a mortgage, neither you nor the lender has a legal obligation to continue with finalizing the loan agreement.
Frequently Asked Questions
How does a legal agreement in principle vary from a legally binding contract?
A preliminary agreement that outlines the essential terms and circumstances of a possible contract is known as an agreement in principle. It is frequently used in complicated transactions or negotiations where the parties must come to an understanding on crucial details before moving forward with the drafting of a formal contract. An agreement in principle does not create any legal duties and is not legally enforceable, unlike a contractual contract. Instead, it serves as a declaration of the parties' understanding of the clauses they plan to include in a future agreement.
What advantages do agreements in principle have in legal negotiations?
A mutual understanding of the essential clauses of a possible contract can be established by an agreement in principle, which helps speed up the negotiation process. By displaying a dedication to coming to an amicable agreement, it can also serve to increase trust and confidence between the parties. An agreement in principle can also assist in preventing misunderstandings and disagreements that can occur later in the negotiating process by outlining the fundamental components of the agreement in advance.
How is a letter of intent or memorandum of understanding different from an agreement in principle?
Preliminary agreements used in legal negotiations include letters of intent, memorandums of understanding, and agreements in principle, but they all have different functions. A letter of intent often sets forth the parties' intention to discuss a future agreement, whereas an agreement in principle is concentrated on establishing the fundamental terms and conditions of a possible contract. In theory, a memorandum of understanding is comparable to an agreement, however it is frequently used in non-binding or informal agreements between governments or between organizations.
If the parties decide to proceed with a formal contract in the future, can an agreement in principle be rendered enforceable?
In rare circumstances, the parties may elect to formally bind an agreement in principle by including its provisions in a written contract. The agreement in principle must be drafted in a way that is clear, specific, and enforceable, and this usually necessitates that the parties carefully analyze the legal ramifications of doing so. Generally speaking, it is advised that parties consult legal counsel before attempting to make an in principle agreement binding.
What happens if one side violates a fundamental understanding?
In general, if a party violates the conditions of an agreement in principle, there are no legal recourses available because it is not legally enforceable. Nonetheless, a violation of a fundamental understanding might harm the rapport between the parties and jeopardize trust and goodwill. The parties may need to reevaluate their alternatives and choose whether to proceed with a formal contract or end discussions entirely if they are unable to remedy the breach through negotiation or mediation.
This kind of agreement is fine if you just keep in mind that it is not set in stone until the final settlement is signed. I used to sell cars, and any number of times we would reach a deal, get everything all lined up, and then the guy would want to add this or that at the last minute, or would want to change the terms of the deal, or the loan agreement. Very frustrating, especially since you get no money until everything is done. It's just something that people who negotiate and bargain for a living have to build up a tolerance for. If everyone stays flexible, both parties will be happy in the end.
@ bigjim - I know what you mean. It is helpful to have a general idea of what both sides are going for, but if they start changing things as the process goes on it can be irritating. This kind of situation reminds me of the old joke, "If you have one lawyer in a small town, he will starve, but if you have two, they will both get rich".
I get why this can be a useful thing, but it seems confusing. It seems kind of pointless to tell someone they can borrow a certain amount of money at a given rate, and then when it comes time to finalize the loan agreement the terms can change. It's kind of like those so-called approved credit card offers you get in the mail, and then you send in the application it tells you that it is declined. Frustrating, really.
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