02 January 2019 - Post by:Bethany Gregory
In Morris v Swanton Care, the Court of Appeal held that an earn-out provision in a share purchase agreement contained an unenforceable agreement to agree.
When Morris sold shares in a residential care business to Swanton, the parties included an earn-out mechanism in the share purchase agreement to enable him to receive deferred consideration. This stated that Morris “shall have the option” to provide consultancy services for four years after the sale and, then, for “such further period as shall reasonably be agreed” between the parties. Morris provided the services for four years and was paid. Morris then purported formally to seek a reasonable extension. The request was refused. Morris started proceedings saying he had a contractual entitlement to a further earn-out period.
The court determined that further agreement was required between Morris and Swanton in order for any further period to exist. Either party was free to agree or disagree about that matter. This was the very paradigm of an agreement to agree. So although Morris had an enforceable right during the initial four-year period, he did not have that right in respect of any further period to be agreed.
The court emphasised that the grammar and language of the clause did not result in an ability of Morris to provide consultancy services for a further “reasonable” period. The (unenforceable) obligation set out in the clause was only that Morris and Swanton should agree any further period in a “reasonable” way. There was no existing agreement that the service period would be extended. The clause was effectively an agreement to agree in the future, leaving an “essential matter” open and therefore void for uncertainty.