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Agreement to agree: Court of Appeal rules SPA earn-out unenforceable

The following case serves as an important reminder of the importance of providing certainty within agreements and displays the perils of leaving the option to agree terms at a later date.

Morris v Swanton Care & Community Limited (2018)

In November 2009, Mr Morris (Claimant) and his business partner sold his shares in Glenpath Holdings Limited for an initial consideration of around £16 million to Swanton Care (Defendant). Both parties entered into a Share Purchase Agreement (SPA) which detailed the terms of the agreement and in particular, an earn-out provision, to be calculated in accordance with the schedule annexed to the SPA, which was payable in return for Mr Morris to providing consultancy services to Glenpath Holdings.

As such, the SPA provided: "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)".

Following the sale, the consultancy services were provided by Mr Morris and Swanton Care accordingly paid the earn-out consideration in accordance with the terms of the SPA. However, in 2010, Mr Morris served his formal notice to request an extension to the earn-out period. Swanton Care refused the extension arguing it was not obliged to agree to any extension. Consequently, Mr Morris issued proceedings in the High Court claiming that there was a contractual entitlement to extend the earn-out period as per the provision (above) in the SPA.

Judgment

The High Court rejected the Claimant's extension as an enforceable right. The Claimant subsequently appealed to the Court of Appeal.

The Court of Appeal, agreeing with the High Court, held that the provision in question expressed the option to continue the consultancy services provided by the Claimant, which was to be reasonably agreed after a period of four years from Completion. Further, taking the SPA as a whole, there had to be a further agreement between the parties to agree such extension i.e. an agreement to agree. As such, there was no obligation for the Defendant to agree the extension and this was subject to any further agreement at the time.

Accordingly, the Court of Appeal dismissed the appeal.

What we learn

This case demonstrates that entering into an agreement on the basis of agreeing terms in the future will render such terms within the agreement unenforceable. The remainder of the terms within the agreement will continue to be binding. It is therefore important, where possible, to agree all terms at the time of entering into the agreement.

In this case, the provision in dispute did not seem to be out of the ordinary which, due to the nature of uncertainty, resulted in a very costly dispute. However, specifying a period in this instance, or even outlining an objective criteria within the SPA for the extension, would have avoided the matter reaching the courts and, in turn, would have resulted in an enforceable obligation for the Defendant to agree.

For more information contact Rebecca McCann in our Corporate department via email or phone on 0333 207 1140. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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