Developments in contract: Certainty of terms
A brief summary of the principles, recent developments and practical tips relating to the requirement for certainty of contractual terms.
- Contractual terms may be void if they are too uncertain to be enforceable.
- Where an agreement contains an ostensible obligation on the parties to enter into a subsequent agreement in the future (known as an agreement to agree), that provision may be void for uncertainty.
- In Morris v Swanton Care & Community Ltd, the Court of Appeal was asked to decide whether the first instance court had been right to dismiss a claim for additional earn-out consideration under a share purchase agreement (SPA), on the basis that the provisions relied upon by the claimant (described below) constituted an agreement to agree.
- The SPA provided for a set period of four years in which the earn-out consideration would accrue to the claimant, in return for his consultancy services, in addition to “such further period as shall reasonably be agreed” between the parties.
- The Court of Appeal dismissed the appeal, determining that the requirement in question was for the parties “reasonably” to agree a subsequent period, rather than obliging them to agree a reasonable further period. It therefore did not provide an objective reference by which the provision could be enforced and constituted an agreement to agree that was void for uncertainty.
What this means
- When seeking to account for future uncertainty in contracts, parties should have in mind that agreements to agree will usually be unenforceable. They should be regarded as little more than a statement of intent, rather than a binding obligation, and should therefore be treated with appropriate caution in any commercial negotiations.
- Agreements to agree should nevertheless be distinguished from contractual scenarios in which the parties have reached agreement but have nevertheless deliberately left gaps to be completed subsequently by reference to objective criteria capable of determination by the court; such an agreement would ordinarily lead to enforceable obligations.
- In some circumstances, an agreement to do something for a “reasonable” period, amount or price may be enforceable where a court could objectively determine what would be reasonable in the circumstances.
- Commonly used contractual qualifiers such as an obligation “reasonably” to agree or a requirement to use “best endeavours” will not usually save an agreement to agree from unenforceability.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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