To agree or not to agree

Friday 15th March, 2019

Court of Appeal finds clause in a sale agreement void as an agreement to agree

Agreements to Agree

It is a long-established principle that the formation of a contract requires certainty as to terms – the Courts will not enforce a provision in a contract in circumstances where essential terms are yet to be agreed between the parties.

Depending on the facts of a particular case, the Courts may have the ability to “fill the gaps” left by the parties, but they will not create an agreement which the parties have not made themselves (Willis v Cable & Wireless plc and another [2005] EXCA Civ 806).

In the recent case of Philip Morris v Swanton Care & Community Limited [2018] EWCA Civ 2763, the Courts were asked to consider whether a clause in a sale and purchase agreement was clear enough to impose an obligation on the parties to take further steps to reach agreement on the ongoing terms of a consultancy agreement which was put in place on Completion.

The Facts

The Claimant and the Defendant entered into a share purchase agreement pursuant to which the Defendant purchased shares in a company from the Claimant (the “SPA”).

The SPA provided that, for a period of four years from Completion and “such further period as shall reasonably be agreed [between the parties]”, the Claimant shall have the option to provide consultancy services to the Company. The earn out consideration to be paid to the Claimant pursuant to the SPA was calculated by reference to the provision of the consultancy services.

The Claimant argued that he was entitled to provide consultancy services for a further period beyond the initial four-year period and to have the opportunity to earn further earn out consideration.

Judgment

The Court of Appeal dismissed the Claimant’s appeal on the basis that, amongst other things, the provision was void for uncertainty as the parties had left an essential matter (being the length of the extended option period) to be agreed between them in the future and, accordingly, the Defendant was not obliged to accept and permit the provision of services during any further period.

Commentary

The Court of Appeal’s ruling provides a helpful reminder that:

  1. all essential matters relating to the subject matter of the agreement must be finalised, such that there is a sufficient degree of certainty as to what the parties intended at the time the contract was made; and
  2. if any further agreement is required before there is certainty as to the terms, the Courts will not hesitate to find that no legally binding agreement has been made.

The nature of the “essential matters” to be decided upon will inevitably depend on the nature of the agreement to be made, but may include, by way of example, any price to be paid, timing or the nature of services provided or assets sold.

To summarise, when making an agreement, be clear and precise as to your intentions, specifically address all “essential matters” and avoid an over-reliance on the use of wording such as “reasonably to be agreed” or “best endeavours to agree”, which will not of itself, be sufficient to establish a legally binding contract.

 

This article is current as of the date of its publication. The information and any commentary contained in this article is for general information purposes only and does not constitute legal or any other type of professional advice.  Marriott Harrison LLP does not accept and, to the extent permitted by law, excludes liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this article.