Is an agreement to agree ever enforceable?Print publication
In the recent case of Morris v Swanton Care & Community Ltd , the Court of Appeal provided a useful summary of the principles regarding agreements to agree and served a timely reminder of the dangers of leaving matters to be agreed at a later date. The court held that the claimant did not have an enforceable right to provide consultancy services during a period to be reasonably agreed between the parties to a share purchase agreement.
Background to the case
In November 2009, Mr Morris and his business partner sold their shares in Glenpath Holdings Limited (a company which provided residential care to people with autism, the Company) to Swanton Care & Community Limited (Swanton) for an initial consideration of approximately £16 million subject to certain adjustments and a deferred consideration payment to be achieved through an earn-out provision (the Earn-Out Consideration).
The terms of the share and purchase agreement (the SPA) said that:
“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).
In return for Mr Morris providing the Consultancy Services the Buyer agreed to pay the Earn-Out Consideration.
There was no dispute that Mr Morris had the right to provide Consultancy Services during the initial four-year period of the SPA. However, Mr Morris claimed that, after the expiry of the four-year period, he was entitled to a further period of time to provide Consultancy Services. Towards the end of the four-year period, Mr Morris asked Swanton for a ‘reasonable extension,’ which was refused.
The High Court judge held that while Mr Morris had an enforceable right to provide Consultancy Services during the initial four-year period, he did not have an enforceable right to provide Consultancy Services during any further period because the agreement was effectively an agreement to agree. There was no mechanism set out in the SPA to enable the court to reach a conclusion as to the length of the further period and there was no objective standard to which the court could resort to determine the length of the further period.
Mr Morris appealed.
Court of Appeal decision
In dismissing the appeal, the Court of Appeal highlighted the following:
- At most, after the initial four year period, the agreement between the parties was an agreement to agree. Either party would be free to agree or to disagree about the matter. Accordingly, even though the SPA amounted to a binding agreement in other respects, the provision as to the further period of time was void for uncertainty.
- It was clear, as a matter of construction, that the further period required a further agreement between the parties if it was to follow on from the initial four-year period. The Court of Appeal rejected Mr Morris’ submissions that the judge had wrongly treated the initial four-year period and the further period as ‘wholly distinct’.
- The express terms of the SPA did not impose any framework or objective standard from which the court could determine what an appropriate further period should be. The length of the further period was not capable, in the absence of agreement by the parties, of being determined by some objective criteria of fairness or reasonableness.
The case provides a useful summary of the principles regarding agreements to agree. The message to take home is that if the subject matter is important, do not be tempted to leave it to be agreed at a later date.