Agreement to Agree: Unenforceable in Law
When negotiating your commercial terms, are you ever tempted to allow for the contract terms to leave possible eventualities open-ended, for example, having a clause that the parties will agree in due course what’s to happen in future?
If so, you should take a recent Court of Appeal ruling as a warning not to include anything that amounts to an ‘agreement to agree’ – otherwise you may find it will be legally unenforceable.
An agreement to agree is a clause that the contractual parties will only agree that there would have to be a further agreement in the future. As such, this is unenforceable. Though it may seem the best way to deal with potential uncertainties in future, it is not acceptable as far as the courts are concerned. But is it always clear whether an agreement to agree actually exists?
What happened in this case?
A shareholder (and his business partner who has since died – her estate playing no part in the proceedings) sold all the shares in his company in return for £16,000, together with a deferred consideration through an earn-out provision for four years. At issue was what would happen when the four-year period expired.
The parties did not come to a solid agreement about the future. Instead, the SPA gave the seller the option that following the four-year period “… such further period as shall reasonably be agreed between [the parties] to provide the following services…”. Those services were various consultancy services in the shareholder’s field of property redevelopment.
Four years went by – but four years can be a long time in businesses, particularly where the economy dips in the meantime. Here, the shareholder wanted to continue as a consultant and requested a “reasonable extension” to the earnout in accordance with the SPA terms. However, the defendant declined for various reasons, including the fact that the economic climate had changed dramatically since the agreement was entered into.
The seller was not happy, and took proceedings claiming he was contractually entitled to provide consultancy services to the defendant company for an additional period beyond the initial four-year period. For its part, the defendant submitted that it was not obliged to give the claimant an extension of the earn out period. The Court of Appeal agreed with the trial judge who rejected the seller’s claim. But on what basis?
On the proper construction of the wording of the SPA, the relevant provisions amounted to an agreement to agree, and were unenforceable. The Court’s reasoning was that: “On the proper construction of the relevant provisions … there was no existing agreement in place that the Consultancy Services would be extended by a reasonable period. To the contrary, the option is expressed to continue for "such further period as shall reasonably be agreed". Thus, any period of extension could be agreed, with the words "shall reasonably" applying to the agreeing, and not to the further period itself.” The seller could not, therefore, rely on an unenforceable clause to extend his consultancy period.
What does this mean for business?
Negotiating your commercial terms is serious business. Unless you can safely rely on your standard terms and conditions (or those of the other party), great care is needed when you negotiate your commercial terms, particularly if you foresee a level of uncertainty in future.
This ruling is a salutary warning that businesses must avoid any clause that amounts to an agreement to agree, otherwise it will probably be unenforceable and may leave you at significant economic risk. When considering the case, the appeal court looked at earlier cases on the same theme and made clear that similar wording is also unenforceable, including:
"An undertaking to use one's best endeavours to agree”, and
“…on the terms to be agreed between us….”
If you make sure you avoid such nebulous, open-ended wording and ensure your terms are clear, unambiguous and watertight - you significantly reduce the risk of an expensive dispute. Make sure all parties know with certainty at what point all their obligations cease.
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