LOCK-IN AND LOCK-OUT AGREEMENTS

Date01 December 1992
AuthorTER KAH LENG
Published date01 December 1992
Citation(1992) 4 SAcLJ 349

Walford v. Miles

Introduction

A vendor in the course of negotiations with a purchaser agrees not to negotiate with any third party in relation to the sale of his property. In what circumstances is that lock-out agreement binding? The answer to this commercially relevant question emerges from the House of Lords’ recent decision in Walford v. Miles.1 Good commercial reasons were cited why a purchaser should desire to obtain such an agreement from the vendor. The purchaser may have to expend considerable time and money before he can be in a position to assess whether to make an offer and if so, what he is prepared to offer. But before incurring such expenditure, the purchaser would certainly wish to guard against the possibility of the vendor either not owning the property or not being prepared to consider his offer by the time he decides to make an offer to the vendor. Lord Ackner, in his leading judgement, saw no reason in English contract law why the purchaser should not achieve a legally enforceable exclusive opportunity, for a fixed period, to come to terms with the vendor, provided he gives good consideration or makes his agreement under seal. That, however, was not the result achieved by the lock-out agreement in Walford. Neither was the implied lock-in agreement to negotiate only with the purchasers effective.

The Facts

In Walford, the respondent vendors agreed in principle with the appellant purchasers to sell their business and premises for £2m and warranted that minimum profits in the 12 months following completion would be £300,000. The respondents further agreed that if the appellants could furnish a letter of comfort from their bank confirming the provision of loan facilities for the purchase of the property, the respondents “would terminate negotiations with any third party or consideration of any alternative with a view to concluding agreements” with the appellants and even if a satisfactory proposal was obtained from a third party by a certain date, they “would not deal with that third party… nor give further consideration to any alternative.” On receiving the comfort letter, the respondents confirmed that, subject to contract, they agreed to sell their property to the appellants for £2m. Subsequently, the respondents began to fear that staff incompatibility with the appellants might cause a turnover and put the warranted profits in jeopardy. They therefore broke off

negotiations with the appellants and decided to sell to a third party from whom they had received an offer prior to negotiating with the appellants. The appellants sued the respondents for breach of the lock-out agreement which they alleged was collateral to the “subject to contract” negotiation to purchase whereby the appellants were given an exclusive opportunity to come to terms with the respondents but for an unspecified time. The consideration for the lock-out agreement was stated to be the appellants’ agreement to continue negotiations and the provision of the comfort letter. By an amendment to the pleadings, the appellants further alleged that in order to give business efficacy to the collateral lock-out agreement, a term must be implied to the effect that so long as the respondents continued to desire to sell their property, they would continue to negotiate in good faith with the appellants. The effect of the pleadings was that the respondents were not only locked-out for an unspecified time from dealing with any third party but were locked-in to dealing with the appellants, also for an unspecified period. The appellants further claimed damages for misrepresentation by the respondents in continuing to deal with third parties.

Decision at First Instance

At the trial it was contended that the alleged lock-out agreement was no more than an agreement to negotiate and as such was unenforceable. The judge did not deal with this contention. He found that there was a collateral agreement by the respondents not to deal with any party other than the appellants and not to entertain any alternative proposal and that the agreement had been breached by the respondents. The trial judge accordingly upheld the collateral lock-out agreement (with whom Bingham LJ (dissenting) in the Court of Appeal held a similar view) and ordered that damages for loss of opportunity be assessed. He further held that the promises under the collateral agreement amounted to misrepresentations and awarded the appellants £700 being agreed damages for wasted expenditure.

Decision of the Court of Appeal

By a majority, the Court of Appeal overruled the judgment at first instance (save for the award of damages for misrepresentation)2 on the ground that the collateral agreement was no more than an agreement to negotiate and was therefore unenforceable.

Decision of the House of Lords

The appellants appealed to the House of Lords who unanimously dismissed the appeal.

A. The lock-out agreement as originally pleaded

As originally pleaded, the effect of the lock-out agreement was to provide the appellants with an exclusive opportunity to try and come to terms with the respondents. It did not in any legal sense lock the vendors into negotiating with the purchasers. The House of Lords found that although the lock-out agreement contained the essential characteristics of a valid agreement, it lacked one essential element in that it did not specify for how long it was to last. To imply that it was to last “for such time as is reasonable in all the circumstances” would indirectly impose upon the respondents an obligation to negotiate in good faith which, for reasons which will become apparent below, cannot be imposed. On the other hand, without the implied term, the agreement would be uncertain because there was no way of determining for how long the respondents were locked-out from negotiating with a third party. The lock-out agreement as originally pleaded was therefore unenforceable as it lacked the necessary element of certainty.

B. The lock-in agreement as alleged in the amended pleadings

As seen above, the lock-out agreement did not expressly lock-in the vendors to negotiate with the purchasers. The appellants therefore amended the pleadings to further allege that in order to give the collateral agreement business efficacy or to make it “workable” it was to be implied that so long as the respondents continued to desire to sell their property, they would continue to negotiate in good faith with the appellants. However, no period was specified for the obligation to negotiate. Neither was there any provision for the respondents to determine the negotiations. In reply, the appellants contended that it was to be implied that the respondents could terminate only if they had a “proper reason,”...

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