Morris v Swanton Care & Community Ltd

A contractual provision for a further period “as shall reasonably be agreed” is an unenforceable agreement to agree where the parties have left the existence and duration of that period for future agreement. The word “reasonably” does not necessarily make the period objectively determinable or authorise the court to impose one.

The court may determine an omitted matter where the contract supplies an objective criterion of fairness or reasonableness. It cannot do so where the available considerations are matters of commercial negotiation and any determination would amount to guesswork or the making of a new bargain. A party asked reasonably to agree may pursue its own commercial interests, absent an express restriction.

The claimant sold shares in a residential care business to the defendant under a share purchase agreement. The consideration included an earn-out linked to consultancy services and new residential placements. The claimant could provide those services for four years and for “such further period as shall reasonably be agreed” between the parties.

After receiving earn-out consideration for placements made during the initial period, the claimant requested an extension. The defendant refused. His Honour Judge Bird held that the provision concerning a further period was an unenforceable agreement to agree and dismissed the claim.

The claimant appealed, contending principally that the provision created a binding right to a reasonable extension which the court could determine. The central issue was whether the contractual language and surrounding provisions supplied an enforceable obligation or an objective standard for determining a further period.

1. Appeal dismissed. On its true construction, the provision concerning a further period was an agreement to agree and was unenforceable. The Chancellor of the High Court agreed with Dame Elizabeth Gloster.

2. The words “as shall reasonably be agreed” required a future agreement between the parties before any further period could arise. Grammatically, “reasonably” modified the process of agreeing; it did not convert the provision into an existing agreement for an objectively reasonable period. Either party therefore remained free to agree or disagree about an extension. The absence of a binding extension did not affect the validity of the remainder of the share purchase agreement.

3. The duration of any extension was an essential commercial matter. The agreement supplied no framework, reference point or objective benchmark from which a court could determine its length. The competing considerations concerned the parties’ commercial interests and were matters for negotiation. Judicial selection of a period would therefore involve guesswork and impermissibly make a new bargain for the parties.

4. The requirement that the parties should “reasonably” agree did not cure the uncertainty. An undertaking to agree, try to agree or use endeavours to reach agreement remains unenforceable where the matter itself has been reserved for future agreement. Nor was either party obliged to negotiate in good faith. Unless the contract expressly provides otherwise, a party required to use reasonable endeavours or reasonably to agree may take account of its own commercial interests.

5. The principles concerning part performance and judicial preservation of bargains did not assist the claimant. His transfer of the shares and performance of consultancy services supplied no basis for extrapolating the duration of an extension. This was not a case in which an agreed objective criterion merely required machinery for its implementation. The parties had instead chosen to require a further agreement before their arrangement continued beyond four years.

1. Court of Appeal (Civil Division): The appeal was dismissed by [2018] EWCA Civ 2763. The court upheld the conclusion that the provision for a further period was an unenforceable agreement to agree.
2. High Court, Mercantile Court, Manchester District Registry: His Honour Judge Bird dismissed the claimant’s claim on 24 March 2017. He held that the obligation to agree the length of a further period reasonably was unenforceable because the contract supplied neither machinery nor an objective standard for determining that period. Permission to appeal was refused on 20 April 2017, before Longmore LJ granted permission on 14 September 2017.