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05 February 2019
Court of Appeal decision
Certainty is key
"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.(1)
The case concerned a company called Glenpath Holdings Limited which provided residential care for autistic men and women. Shares in the company were sold by the claimant, Mr Morris, and his business partner to the defendant, Swanton. The dispute concerned Morris's entitlements under an earn-out provision in the share purchase agreement. 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.)
Morris provided the consultancy services during the initial four years and was paid £4,146,371 under the earn-out provision.
Towards the end of the four-year period following the share purchase agreement, Morris wrote to Swanton seeking a "reasonable extension" of the period in which he could provide his consultancy services. Swanton refused the extension. Morris brought proceedings claiming that, after the expiry of the initial four years, he was entitled to a further period to be agreed between the parties under the earn-out provision in which he would provide his consultancy services and earn further consideration.
Swanton defended the proceedings on the basis that:
The judge at first instance agreed with Swanton and found that while 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 share purchase agreement to agree on the length of the second period in a reasonable way, but there was no mechanism 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.
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 in order for there to be any further period, there had to be a further agreement between the parties. At the time of entering into the share purchase agreement, the parties had not specified a further period but, instead, had 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 the agreement and not the period.
The provision was therefore void for uncertainty, but the share purchase agreement otherwise remained binding. The Court of Appeal commented that while 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.
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.
For further information on this topic please contact Rebecca Birkby or Jonathan Cary at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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