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Case law: Court confirms that ‘agreement to agree’ in a contract is unenforceable

Parties negotiating contracts should ensure no clauses in the final contract are mere ‘agreements to agree’, as the courts will refuse to uphold them.

February 2019

This update was published in Legal Alert - February 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A shareholder (the ‘seller’) sold all the shares in his limited company. Part of the payment to him was a four-year earn-out, ie, an amount which depended on the performance of the business over a four-year period after the sale. The share sale agreement gave the seller an option to provide consultancy services to the business during that period - and then for ‘such further period as shall reasonably be agreed’.

At the end of the initial four-year period the seller gave notice that he wanted to continue as a consultant, entitling him to further earn-out monies. However, the company told him it did not want his services any longer. He responded by claiming he had a contractual right to choose to continue to provide them.

The Court of Appeal ruled that the clause, insofar as it related to the further period, was merely an ‘agreement to agree’, and was therefore legally unenforceable.

There is an ‘agreement to agree’ when the contractual parties deal with future uncertainty by providing in the contract that the parties will reach a further agreement in relation to it when the time comes.

Depending on the wording used in the contract, an agreement to agree will usually still be unenforceable even if the parties commit to using their best, or all reasonable, endeavours to reach agreement.

Operative date

  • Now

Recommendation

  • Parties negotiating contracts should ensure no clauses in the final contract are mere ‘agreements to agree’, as the courts will refuse to uphold them.

Case ref: Morris v Swanton Care & Community Ltd [2018] EWCA Civ 2763

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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