Don’t agree to agree – make your drafting definitive

Agreeing to agree is not the same as agreeing, the Court of Appeal recently decided, in a case in which a seller claimed further earn-out consideration under the terms of a written sale and purchase agreement (SPA).

In the case of Philip Morris v Swanton Care & Community Limited [2018] EWCA Civ 2763, the claim was rejected on the basis that the clause upon which the seller was seeking to rely was unenforceable because it was held to be an ‘agreement to agree’.

What did the SPA specify?

The sellers had sold their shares in Glenpath Holdings Limited for an initial consideration of over £16m, which was subject to certain adjustments. The dispute arose when one of the sellers claimed he was entitled to additional earn-out consideration under the SPA.

The SPA provided that the consultancy services by the sellers would be paid as earn-out consideration for a period of four years from completion. However, the SPA endeavoured to enable an extension “by such further period as shall reasonably be agreed between the parties”. The seller sought to rely on this clause to allege that he could continue to provide consultancy services and therefore continue to receive additional earn out consideration after the end of the four year period.

The Court of Appeal’s decision

At the time of constructing the SPA, the parties specified the wording to be “as shall reasonably be agreed’’. There was no caveat or restriction on the length of any such further period but just an implication that a further period could be agreed.

Accordingly, the provision was held to be an “agreement to agree” and the court dismissed the seller’s appeal because ‘’reasonably’’ only applied to the manner of the agreement and not the period. The remaining clauses in the SPA were held to be binding and only the earn-out provision was void.

What does this mean for us?

An “agreement to agree” is unenforceable and should not be used as a drafting option. Certainty in clauses is critical, particularly in SPAs, which usually only come under scrutiny when a dispute has arisen which involves substantial amounts of money.

For advice and help on this subject, please contact Claire Holford at [email protected] or on 01189 450 176.