UK: Court Of Appeal Holds Spa Earn-Out Unenforceable As An Agreement To Agree

Last Updated: 27 December 2018
Article by John Ogilvie, Neil Blake and Andrew Cooke

The Court of Appeal has rejected a seller's claim that he was entitled under a sale and purchase agreement ("SPA") to provide consultancy services to the target company for a further period after an initial four year earn-out. Applying settled principles, the court held that an agreement to provide consultancy services for "such further period as shall reasonably be agreed" was not enforceable because it was an agreement to agree: Morris v Swanton Care & Community Ltd [2018] EWCA Civ 2763.

Though each case will turn on the words used in the specific contract, the decision illustrates that where parties seek to account for future uncertainty by stipulating that the parties will ultimately have to reach further agreement, the courts will be slow to find that either party has an enforceable right in relation to the terms or even the existence of that further agreement. The same is true of a clause requiring parties "reasonably" to agree, or to use best or reasonable endeavours to agree. Such formulations cannot turn an unenforceable provision into an enforceable agreement.

As this case shows, there is a fundamental difference between parties postponing agreement (which, commercially, may be justified given uncertainties surrounding what may happen in the future) and parties actually reaching agreement in relation to future terms of their relationship, albeit with gaps to be resolved between them based on objective criteria capable of assessment by the court. The former does not give rise to any enforceable obligations; the latter may be enforceable, provided that the gaps do not give rise to such uncertainty as to call into question whether there has been a meeting of minds at all.

In the particular context of earn-out provisions in SPAs, parties should be careful to ensure that the relevant provisions preserve sufficient flexibility for the parties to react to future developments but without creating such uncertainty as to render the clause unenforceable. Since each SPA turns on its own terms, it is impossible to adopt a one size fits all approach; however, it is at least clear that if the SPA provision leaves open the possibility of parties agreeing or disagreeing (whether reasonably or not), the courts will be slow to give such a provision binding contractual effect. The Court of Appeal's judgment also makes clear that if parties wish to create an enforceable agreement by reference to an objective framework which can fill in any gaps later, they are well advised to set out in detail how this objective framework should operate and what factors should, or should not, be taken into account, insofar as these are known at the time the SPA is signed.

John Ogilvie, Neil Blake and Andrew Cooke consider the decision further below.

Background

For present purposes, the facts can be shortly stated. In 2006, Mr Morris sold shares in Glenpath Holdings Limited to Swanton Care & Community Limited. Together with initial consideration of approximately £16 million, Swanton agreed to pay Mr Morris earn-out consideration to be calculated in accordance with an earn-out schedule to the SPA. The earn-out schedule provided a formula for assessing the amount of such earn-out consideration in consideration for Mr Morris providing ongoing consultancy services in relation to Glenpath.

The earn-out schedule provided that Mr Morris "shall have the option" to provide consultancy services for a period of four years after completion and "following such period such further period as shall reasonably be agreed between Mr Morris and [Swanton]".

Mr Morris supplied the relevant services for four years and was paid approximately £4 million by way of earn-out consideration. In 2010, Mr Morris purported to give formal notice of his request for a "reasonable extension" to the earn-out period. Swanton rejected the extension on the basis that there was "no appetite in the business for an extension".

Mr Morris issued proceedings in 2015, claiming that he had a contractual entitlement to a further earn-out period during which he would have earned additional earn-out consideration. He argued that the wording of the relevant clause was mandatory because it provided that he "shall" have an "option" for a further period, and that his exercise of this option had been wrongly rejected by Swanton.

Decision

The High Court and the Court of Appeal both found that Mr Morris did not have an enforceable right to provide consultancy services during any earn-out period other than the initial period of four years. Insofar as the clause related to a further period, this was an unenforceable agreement to agree. The reference to the parties "reasonably" agreeing the further earn-out period did not save the clause because the word "reasonably" was used as an adverb to describe the manner in which the parties were required to reach agreement, not to mandate them to reach an agreement which was reasonable. Ultimately, for there to be any further period, there had first to be agreement between the parties which, the Court of Appeal held, was the "very paradigm of an agreement to agree" which could not be enforced.

The Court of Appeal contrasted the drafting in this case with a hypothetical clause which provided for an extension of time for a reasonable period – in that case, there would at least have been an existing agreement for a reasonable period which the courts might be able to enforce (as to which see below), whereas in Mr Morris's case the parties had not reached any agreement (and could not be compelled to reach any agreement) as to an extension.

Because the clause in this SPA contemplated that the parties would be free to agree or disagree about any extension (even if they acted reasonably when discussing a potential extension), it was void for uncertainty.

Mr Morris did not allege that Swanton had acted unreasonably in denying the extension but, even if Swanton had acted unreasonably, Mr Morris would still not have a claim because it was open to the parties to disagree even if they acted reasonably.

Even if the clause had provided for a further extension for a reasonable period, rather than requiring the parties reasonably to agree a further period, this would still have been unenforceable.

The Court of Appeal agreed with the High Court that the SPA did not provide any framework to determine the reasonable length of the period. It rejected Mr Morris's contention that the SPA did make provision because "reasonable" imported an objective framework which the court could apply to quantify the duration of his extension "option". The mandatory language of the clause ("shall") did not assist and nor did reference to Mr Morris's "option" because the character of the option was too uncertain to be enforced.

In any event, there was nothing in the performance of the SPA in the initial four years after completion from which a court could extrapolate a reasonable period of an extension. Though Mr Morris sought to identify relevant factors, all of them were commercial factors for the parties to factor into a commercial negotiation, in which they could agree or disagree to an extension, not factors permitting a court to determine the reasonable period of an extension.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions