In the recent case of Philip Morris v Swanton Care & Community Limited the Court of Appeal considered that a share purchase agreement contained an unenforceable agreement to agree.
The claimant Morris and his business partner sold shares in a residential care business to Swanton. The Share Purchase Agreement contained an earn-out mechanism to enable Morris to receive deferred consideration. A clause was included that Morris had an option to provide consultancy services after the sale for four years and following that for “such further period as shall reasonably be agreed” between the parties. Morris provided the services for four years and was paid under the earn-out provision.
Before the end of the initial four year term, Morris requested a "reasonable extension" of the consultancy period which was rejected by Swanton. Morris brought a claim stating that the Agreement allowed him a further “reasonable” consultancy period after the initial term which was to be agreed between the parties. Swanton defended the claim by stating that the further period was only an agreement to agree and applied only if both parties agreed.
The Court of Appeal ruled that the phrase "as shall reasonably be agreed between Mr Morris and the Buyer" meant that for there to be any further period of consultancy services the parties had to both agree this. At the time of the sale, the parties had not specified a further period after the initial term but, instead, had agreed that there would have to be a further agreement in the future, which the court stated is the "very paradigm of an agreement to agree".
The Court also stated that the language used did not grant Morris the right to provide consultancy services for a further “reasonable” period. The clause only meant that the parties should agree any further period in a “reasonable” way. There was no existing right that the consultancy period would be extended. The clause was effectively an agreement to agree in the future, leaving an “essential matter” open and therefore void for uncertainty. 'Reasonably' in this context applied only to the manner of the agreement and not the period. Swanton was therefore free to negotiate in accordance with its own commercial interests.
Care should be taken to avoid ambiguity in a contract which could lead to potentially costly litigation. Parties often require flexibility in respect of future obligations but it is important to ensure that uncertainty in the drafting is avoided and that the intention of the parties is accurately recorded in the contract. We often see parties requiring an initial term which can then be extended and it is important to consider whether that extension is an automatic right or whether it requires agreement from both parties. Care must be taken to ensure the drafting reflects the required position.