iSOFT Group Plc v Misys Holdings Ltd. & Anor

An agreement to negotiate the sale of a business is not made enforceable merely by describing the proposed sale as an “offer”. Construction depends on the agreement as a whole and the commercial context. Where the later terms remain open-ended, and no objective machinery or criteria enable the court to settle them, the obligation is too uncertain for specific enforcement.

Contractual exceptions must also be construed commercially. An exception permitting an acquired business to continue in competition may extend to the ordinary relationship between that business and its parent, including ordinary group assistance, where the agreement so indicates. The court will not impose a narrower distinction between permitted subsidiary activity and prohibited parent assistance if that distinction is commercially unrealistic.

iSOFT acquired ACT from the Misys group under an agreement containing restrictive covenants protecting goodwill. Clause 11.2 restricted competition and related activities. Clause 11.4 permitted the Misys group to acquire an entity carrying on a restricted business, subject to an obligation under clause 11.4.2 to offer the target business to iSOFT at fair market value and on fair and reasonable terms.

After Misys acquired Sunquest, whose UK subsidiary Europa competed with iSOFT, the parties negotiated over the proposed sale of Europa or its business. The negotiations failed. iSOFT also alleged breaches arising from Misys’s assistance to Europa, including support for a major contract and re-branding. Lawrence Collins J rejected specific performance and an injunction. The central issues were whether clause 11.4.2 created an enforceable offer obligation and how far the clause 11.4 exception permitted assistance to the acquired business.

1. Appeal dismissed. The Court of Appeal unanimously upheld Lawrence Collins J’s refusal of specific performance and an injunction.
2. Lord Justice Carnwath, with the agreement of the other members of the court, held that clause 11.4.2 did not require a fully formed offer immediately capable of acceptance. Read as a whole and in its commercial context, it contemplated an indication of willingness to sell, followed by the provision of information and negotiations in good faith. The first two sentences therefore constituted an agreement to negotiate. On the judge’s findings, that agreement was unenforceable for want of certainty.
3. The court distinguished Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503, where commercial wording and trade evidence supplied an objective standard, from this one-off sale of a technology business. Here, the court would have had to construct a complex contract from scratch, including fair market value and terms fair and reasonable to both parties. No objective standard or manageable machinery was available.
4. Lord Justice Carnwath added obiter that an arrangement beginning with an invitation to treat and followed by negotiations need not invariably be unenforceable. The result could depend on whether the process was entirely open-ended or supported by suitable machinery or objective criteria for resolving disputed terms. That issue was unnecessary to decide because the clause was in any event too uncertain. Lord Justice Buxton applied the approach in Walford v Miles [1992] 2 AC 128 to the agreement in this case.
5. Clause 11.4 had to be read commercially. Its opening words prevented nothing in clauses 11.2.1 and 11.2.2 from preventing the permitted acquisition. The exception therefore allowed the acquired business and its owner to maintain their ordinary business relationship, including ordinary parent-company assistance. The complained-of activities fell within that implied permission, so the refusal of an injunction was upheld.

• Court of Appeal (Civil Division): [2003] EWCA Civ 229. Appeal dismissed.
• Chancery Division: Lawrence Collins J rejected specific performance of the clause 11.4.2 process and refused an injunction for the alleged breaches of clause 11.2.