Share Sale Agreement: Terms Of Earn-Out Unenforceable As Agreement To Agree

A Court of Appeal decision on the terms of an earn-out is a reminder that a term in a contract that amounts to an agreement to agree is unenforceable.

Background

It is a well-established principle that, if a contract is lacking an essential term or otherwise uncertain, a court may not be able to enforce it. In deciding whether the parties have agreed all the essential terms, the court will assess whether a reasonable honest businessman would have concluded that they had agreed all the terms they considered to be a precondition to creating legal relations.

Facts

Under the terms of a share sale agreement Mr Morris sold his shares in a company to Swanton Care & Community Ltd (Swanton). As well as initial consideration payable on completion, Swanton agreed to pay Mr Morris an earn-out in consideration for Mr Morris providing on-going consultancy services.

The agreement provided that: "Mr Morris shall have the option for a period of four 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 ...".

Mr Morris provided consultancy services for four years after completion and towards the end of that period asked Swanton for "a reasonable extension". Swanton turned down this request saying that there was "no appetite in the business" to extend the consultancy.

Mr Morris started court proceedings, arguing that under the terms of the agreement he was entitled to an option to provide consultancy services for a further period.

Decision

Mr Morris failed in his argument. The Court of Appeal, agreeing with the High Court, found that the provision to extend beyond the original four-year period was an "agreement to agree" and so was too uncertain to be enforceable. The fact that it required the parties "reasonably" to agree did not turn an unenforceable provision into an enforceable agreement. The formulation still entitled a party to negotiate in accordance with its own commercial interests, so a party was entitled to take the view that its own commercial interests went against agreeing the relevant matter.

Mr Morris also argued that the "reasonable" requirement related to the period itself, rather than the act of agreeing, on the basis that the court could then determine what a reasonable period was. The court rejected this. Not only was this not what the agreement provided, but it presupposed that there were such a thing as a reasonable period...