The Court of Appeal has recently given judgment in a case about what constitutes an agreement to agree.
In 2006, Philip Morris and his partner sold a business providing residential care for autistic people to Swanton Care & Community Ltd. The purchase price comprised an initial payment of some £16 million plus a further payment, described as earn-out consideration, to be paid in return for certain consultancy services that Mr Morris would provide to Swanton after completion.
The share purchase agreement provided as follows in relation to the consultancy services: ‘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 [Swanton] to provide the following services.’
The services comprised identifying up to seven new properties for use as small care homes, redeveloping them and populating them, so as to provide up to 35 new beds in all. During the initial four-year period, Mr Morris redeveloped four new properties, filled 29 beds, and was paid earn-out consideration amounting to some £4 million.
When Mr Morris requested an extension to the consultancy period, however, Swanton declined. The market had changed in the period from 2006 to 2010, and the company was now focused on building new 60-bed private-pay care homes.
Mr Morris brought a claim against Swanton, arguing that he was entitled to an extension. Swanton argued that it was not obliged to agree. The High Court found for Swanton, and Mr Morris appealed.
The Court of Appeal upheld the High Court’s decision, holding that the words ‘as shall reasonably be agreed between Mr Morris and [Swanton]’ constituted no more than an unenforceable agreement to agree. The provision did not amount to an agreement to extend the consultancy services for a reasonable period, and the court could not determine what a reasonable period would be. Rather, each party remained free to agree or disagree to an extension, taking their commercial interests into account.
That the Court of Appeal has reached this decision is unsurprising. The case is, nonetheless, a useful reminder that an agreement to agree on a matter, or even to use best or reasonable endeavours to do so, will not be enforceable if the parties do not in fact reach such agreement.