Martin Walford v. Charles Miles
 ADR.L.R. 01/23
(Lock-out and Lock-in Agreements; Uncertainty)
On 17th March M agreed that, provided that W’s bank confirmed that W had the necessary financial resources to purchase M’s business for 2m pounds, they would ‘break off any negotiations with any third party and would not consider any other alternative and would not accept a better offer but would deal exclusively with W, with a view to concluding the deal as soon as possible. M continued to keep in touch with another interested party and on 27th March withdrew from the negotiations with W. M later sold the business to the third party. W sued for breach of contract and for misrepresentation.
- The main issue at first place was whether it was a contract or just an agreement to enter into negotiation?
- Is an agreement to negotiate legally enforceable?
- Secondly, whether it was a valid lock out agreement which could have been enforceable in law?
Plaintiff contended that there was a valid contract by virtue of which defendants were bound to effect the sale of the property. According to him, the consideration for this oral contract was in the form of his agreeing to continue negotiations and providing comfort letter from his bankers. He further contended that it was a ‘lock out’ agreement, thereby providing him the exclusive opportunity to try and come to terms with the defendant.
An agreement to negotiate is unenforceable ‘simply because it lacks the necessary certainty’ to have any binding force. When there is any fundamental term left undecided and subject to negotiation then there is no contract. (S.29)
These Lock-In Agreements are assumed to make it obligatory for parties to continue to negotiate only with each other to conclude a contract until there is a ‘proper reason’ for any of them to withdraw. Since a Court in these kinds of agreements will be unable to decide subjectively whether there was any ‘proper reason’ that existed for termination of negotiations save by indulging in discussion as to whether the negotiations were carried in ‘good faith’, hence, these agreements are unenforceable. This is because, “the concept of duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties involved in negotiations.”
However, agreements, supported by consideration, which provide exclusive opportunity to a party for fixed duration of time to try and come to terms with other party not necessarily in ‘good faith’; and both of which can terminate the negotiations without giving any ‘proper reason’ whatsoever; such agreements are called ‘Lock-Out Agreements’ and are enforceable in law for commercial reasons: it provides opportunity to offeree to assess the offer given by other party, while being assured that party so locked-out will not negotiate with any third party for disposing off the offer.
- Since everything agreed upon, except price, was ‘subject to contract’, hence, it was fundamentally left undecided and was merely unenforceable for it was agreement to negotiate.
- The court observed that the statement of letter suggest that not only was defendant ‘locked out’ for some unspecified duration of time but was also ‘locked in’ to dealing with the appellant, also for an unspecified time.
- While lock-in agreements are unenforceable, the court further observed that since there was no specified duration of time specified in the “lock out” agreement, hence, it was not legally enforceable as it lacked necessary certainty. It was however contended in dissenting judgment in Court of Appeal that the obligation to negotiate in these circumstances, when the agreement itself does not provide for any time limit, should endure for a reasonable time: time reasonably necessary to reach a binding agreement. But, House of Lords held that reading such an implied term will be equivalent to indirectly imposing duty to negotiate in good faith and would thus be unenforceable because of inconsistency with the negotiating parties.
On these bases, the court dismissed the appeal of the plaintiff.
Author: Vishrut Kansal (National University of Juridical Sciences, Kolkata)