"Locking out" and "Locking in": The Enforceability of Agreements to Negotiate

Author(s): Edwin Peel

Source: The Cambridge Law Journal , Jul., 1992, Vol. 51, No. 2 (Jul., 1992), pp. 211-213
Published by: Cambridge University Press on behalf of Editorial Committee of the
Cambridge Law Journal

Stable URL: https://www.jstor.org/stable/4507668

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C.L.J. Case and Comment 211

"locking out" and "locking in":

the enforceability of agreements to negotiate

In Walford v. Miles [1992] 2 W.L.R. 174 the

decided upon the enforceability of (1) an agre
good faith with a particular party (a "lock-in")
not to negotiate with any third party (a "lo
confirms that a "lock-in" agreement is unenfo
the necessary certainty" and that a "lock-out"
enforceable in limited circumstances.
In Walford the defendants entered into negotiations with the
plaintiffs for the sale of the defendants' photographic processing
business. Those negotiations were "subject to contract". Anxious not
to lose what they saw as a "bargain", the plaintiffs obtained from
the defendants an oral undertaking that, during negotiations with the
plaintiffs, the defendants would not negotiate with any third party
or consider any alternative offer. In return, the plaintiffs promised
to continue negotiations and to provide a "comfort letter" from their
bankers confirming that they had the finances available to complete
the deal. Ten days later the defendants agreed to sell their business
to a third party and so informed the plaintiffs. The plaintiffs
commenced proceedings for what they claimed was breach of a
collateral agreement not to negotiate with a third party thereby
depriving the plaintiffs of the opportunity to purchase the business.
The plaintiffs were successful at first instance ([1990] 1 E.G.L.R.
212) but the Court of Appeal (Bingham L.J. dissenting) ([1991]
27 E.G. 114 & [1991] 28 E.G. 81) allowed the defendants' appeal.
The House of Lords accepted that the agreement not to negotiate
with a third party was collateral to the principal negotiations and
not, therefore, "subject to contract" and that the promise to provide
a "comfort letter" was valid consideration. On the facts alone the
agreement amounted to a simple "lock-out" since the defendants
only agreed not to negotiate with a third party. However, during
course of the proceedings, the plaintiffs amended their claim
contend that there was also an implied obligation upon the defend
to negotiate with the plaintiffs in good faith. As such, it becam
"lock-in" agreement.
Approving the decision of the Court of Appeal in Courtney a
Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd. [1975] 1 W.L.R. 2
Lord Ackner, with whom all of their Lordships agreed, fou
that such an agreement was unenforceable. The courts could
realistically be expected to say when negotiations had broken do
for a "proper reason" as opposed to a failure by one of the part
to negotiate in good faith. He also found that "the concept of a d
to carry on negotiations in good faith is inherently repugnant to

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212 The Cambridge Law Journal [1992]

adversarial position of the parties when involved in

During the course of his speech Lord Ackner dis
following dictum of Lord Wright in Hillas & Co. Ltd
[1932] 147 L.T. 503, 515:
There is then no bargain except to negotiate, and
may be fruitless and end without any contract ens
then, in strict theory, there is a contract (if
consideration) to negotiate, though in the event of
by one party the damages may be nominal, unless
that the opportunity to negotiate was of some app
to the injured party.
This disapproval by their Lordships is of considerabl
since, in the earlier case of Mallozzi v. Carapelli SpA [
Rep 407, 412, 414 it had been noted by the Court
Lord Wright's observation had been often followed
practitioners and judges of first instance.
Counsel for the plaintiffs had claimed that there w
obligation to negotiate in good faith in order to pre-emp
that, without it, the agreement between the parties w
futile. However, in the Court of Appeal, Bingham L
with the majority's "orthodox view" that a "lock-in"
unenforceable, found that a simple "lock-out" agreem
futile in that it provided the plaintiffs with an "exclusiv
to try and reach an agreement with the defendants. Furt
that such an agreement was enforceable and that the d
in breach.
In the House of Lords, Lord Ackner agreed that there may be
"good commercial reasons" for entering into a "lock-out" agreement
and that such an agreement could be enforced but only if it was for
a fixed period. As no period of time had been stipulated by the
parties Bingham L.J. had held that the defendants' obligation would
"remain binding for such time as is reasonable in the circumstances".
This time would come to an end "once the parties, acting in good
faith, had found themselves unable to come to mutually acceptable
terms" (emphasis added) and not where the defendants had procured
a "bogus impasse" (the defendants claimed that they sold to a third
party because neither they nor their staff were likely to get on with
the plaintiffs as new owners). However, as Bingham L.J. recognised,
this approach was open to the objection that, indirectly, it subjected
the defendants to the very duty to negotiate in good faith which was
rejected as the basis of a "lock-in" agreement. For this reason Lord
Ackner found that a "lock-out" agreement which failed to specify a
particular period during which it was to operate was not enforceable.
In dealing in this way with an agreement which the Court of

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C.L.J. Case and Comment 213

Appeal
Appealrecognised
recognised
was of
was
a "not
of auncommon
"not uncommon
type" the importance
type" the importance
of
of the
theHouse
Houseof Lords'
of Lords'
decision
decision
should not
should
be underestimated
not be underestimated
(cf. (cf.
Coal
CoalCliff
CliffCollieries
Collieries
Pty. Ltd.
Pty.v.Ltd.
Sijehama
v. Sijehama
Pty. Ltd. [1991]
Pty. Ltd.
24 [1991] 24
N.S.W.L.R.
N.S.W.L.R. 1). 1).
Further,
Further,
if no if
party
no can
party
be obliged
can be to obliged
negotiate to
then
negotiate then
the
thedecision
decisionin Blackpool
in Blackpool
and Fylde
andAero
Fylde
Club
Aero
Ltd. v.
Club
Blackpool
Ltd. v. Blackpoo
Borough
Borough Council
Council[1990]
[1990]
1 W.L.R.
1 W.L.R.
1195 that,
1195
in certain
that, in
circumstances
certain circumstances
(local
(localauthority
authorityinviting
inviting
a limited
a limited
number number
of sealed tenders),
of sealeda party
tenders), a party
may
maybebe obliged
obliged
to "consider"
to "consider"
an offerancould
offer
be called
couldinto
be doubt.
called into doubt.
However,
However, in in
thatthat
case case
there there
was no was
roomnoforroom
negotiation
for negotiation
and the and the
courts
courtsappear
appear
ableable
to determine,
to determine,
with certainty,
with certainty,
whether an whether
offer has an offer has
been
been"considered"
"considered"
if not
ifwhether
not whether
there hasthere
been "negotiation".
has been "negotiation".

EDWIN PEEL.

CONTRACT-IMPLIED TERMS IN STOCK EXCHANGE TRANSACTION

THE reserved judgment of Cole J. of the Supreme Cour

South Wales in FAI Traders Insurance Company Ltd
McCaughan Securities Ltd. (1991) 9 A.C.L.C. 84; (1990
279 again illustrates the important role of the courts in the
of commercial disputes by the implication in a contract
give effect to the presumed intention of the parties.
The case resulted from the failure of settlement of a stock
exchange transaction involving the sale and purchase of shares
plaintiff seller, FAI Traders Insurance Company Ltd., a
company listed on the Australian Stock Exchange, had agr
July 1989 with Fulham Holdings Ltd., another listed public com
("the purchaser") to sell its 12 per cent. holding in Hooker Cor
tion for some $A12m by a "special crossing" on market. (Und
special crossing, the one broker acts for both purchaser and
on terms already agreed between purchaser and seller.) Settle
was to be deferred until December 1989. Before settlement Hooker
went into voluntary liquidation, and as its shares became worthles
the purchaser and the defendant broker purported to cancel the
transaction.
The plaintiff unsuccessfully sued the defendant broker for pay-
ment, alleging the existence of a usage of the stock exchange that a
seller's broker is obliged to pay the seller, whether or not the seller's
broker is paid by the purchaser or the purchaser's broker.
The case also provided answers to the question whether terms
could be implied into the contract between the plaintiff and the
defendant by the incorporation of terms from the contract note (and
through it, the business rules and the listing rules of the stock
exchange).

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