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Drafting a contract? Beware the well-intentioned but unenforceable agreement to agree

05 February 2019. Published by Jonathan Cary, Partner

"Such period as shall reasonably be agreed between (the parties)" is an agreement to agree and therefore unenforceable according to the Court of Appeal in Philip Morris v Swanton Care & Community Limited.

Facts of the dispute

The case concerned a company called Glenpath Holdings Limited which provided residential care for autistic men and women.  The shares in the company were sold by the claimant, Mr Morris, and his business partner to the defendant, Swanton. The dispute concerned Mr Morris' entitlements under an earn-out provision in the Share Purchase Agreement (SPA).  The relevant clause read:

“Mr Morris shall have the option for a period of 4 years from Completion and following such period such further period as shall reasonably be agreed between Mr Morris and the Buyer to provide the following services… [the Consultancy Services]” (emphasis added).

Mr Morris provided the Consultancy Services during the initial 4 years and was paid £4,146,371 under the earn-out provisions.

Towards the end of the four year period following the SPA, Mr Morris wrote to Swanton seeking a "reasonable extension" of the period in which he could provide the Consultancy Services.  Swanton refused the extension.   Mr Morris brought proceedings claiming that, after the expiry of the initial four years, he was entitled to a further period of time to be agreed between the parties under the earn-out provision in which he would provide the Consultancy Services and earn further consideration.

Swanton defended the proceedings on the basis that:

(i)      the reference to a further period to be agreed was no more than an agreement to agree and  applicable only if both parties agreed;

(ii)      the wording was not mandatory on its true meaning; and

(iii)     it was reasonable for the defendant not to agree an extension.

The judge at first instance agreed with Swanton and found that whilst Mr Morris had enforceable right to provide Consultancy Services for the initial four year period, he did not have an enforceable right to provide the Consultancy Services during any further period to be reasonably agreed between the parties.  There was an obligation on the parties under the SPA to agree on the length of the second period in a reasonable way but there was no mechanism in the SPA to enable the court to determine the length of the second period and as such it was no more than an “agreement to agree” and was therefore unenforceable under established case law.

Court of Appeal Decision

The Court of Appeal found that the words "as shall reasonably be agreed between Mr Morris and the Buyer", when construed in the context of the entire agreement, made it plain that for there to be any further period there had to be a further agreement between the parties.   At the time of entering into the SPA the parties did not specify a further period but, instead, agreed that there would have to be a further agreement in the future, which is the "very paradigm of an agreement to agree".  At that future point, either party was therefore free to agree or disagree.  “Reasonably” in this context applied only to the manner of agreement and not to the period.

The provision was therefore void for uncertainty but the SPA otherwise remained binding. The Court of Appeal commented that whilst the relevant provision required the parties "reasonably" to agree, it did not turn an unenforceable provision into an enforceable agreement; there is a long line of case law which suggests that there is no obligation on parties to negotiate in good faith about matters which remain to be agreed and Swanton was therefore free to negotiate in accordance with its own commercial interests.

Certainty is key

It is a truism to say that there is no place for ambiguity in a contract. Flexibility between the parties can be well intentioned but may ultimately be the source of uncertainty; the very opposite of what was intended by the drafters, and often a path to unwanted litigation.

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