An agreement for disagreement? A reminder of the importance of ensuring certainty when contracting with third parties.

The recent Court of Appeal judgement in the case of Morris v Swanton Care & Community Ltd [2018] EWCA Civ 2763 found that an earn-out provision in a share purchase agreement contained an unenforceable clause that rendered the agreement as nothing more than just an “agreement to agree”.

Background 

Mr Morris (the claimant) and his business partner sold shares in a residential care business to Swanton Care & Community Ltd. Part of the purchase price was deferred through an earn-out provision as set out in the share purchase agreement. The earn-out schedule provided a formula for assessing the amount of such earn-out consideration in return for Mr Morris providing ongoing consultancy services.  The clause that was subject to dispute stated “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 remainder of the clause set out the services that Mr Morris would provide.

Mr Morris provided consultancy services for the specified four year period and was paid under the earn-out provisions. At the end of the four year period, Mr Morris requested a “reasonable extension” but this was denied by Swanton Care. Mr Morris issued legal proceedings, arguing (amongst other factors) that:

• He had a contractual entitlement to a further earn-out period during which he would have earned additional earn-out consideration; and
• The wording of the relevant clause was mandatory because it provided that he “shall” have an “option” to provide consultancy services for a further period and this was wrongly denied by Swanton Care.

Swanton Care rejected Mr Morris’ claims citing that:

• Reference in the clause to a further period to be agreed was no more than an agreement to agree and applicable only if both parties agreed; and
• The wording of the clause was not mandatory on its true meaning.

The Decision 

The Court ruled in favour of Swanton Care stating that the phrase “as shall reasonable be agreed between Mr Morris and the Buyer” meant that both parties had to agree for there to be any further period of consultancy services. The court held that there was no doubt, on its construction, the above mentioned clause that was at the heart of the dispute amounted to an agreement to agree and therefore unenforceable.  

Comments

The judgement in Morris v Swanton Care reaffirms the boundaries between the courts powers to interpose within agreements where both parties have failed to clearly define what has been agreed.  It also determines further the importance of ensuring that a key term of a contract is void of any uncertainty and no room is left for ambiguity.

If you would like to discuss your contractual arrangements with third parties or other matters concerning your business, please contact our Company Commercial team. Call 0330 0945 500, email info@nevesllp.co.uk or complete our Contact Form and we'll get back to you.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.