Walford v Miles [1992] 2 AC 128

Key points

  • Lock-out agreements (agreements not to negotiate with others) are enforceable where they have a definite end date
  • Lock-in agreements (agreements to negotiate in good faith) are too uncertain to be enforceable in English law

Facts

  • C and D were in negotiations for the sale and purchase of D’s company
  • D agreed to a lock-out agreement to ‘terminate negotiations with any third party’ or considering any alternatives
  • D later sold the company to a third party
  • C brought a claim on two grounds:
    1. Breach of the ‘lock out agreement’
    2. Breach of an implied lock-in agreement to ‘continue to negotiate in good faith’

Held (House of Lords)

  • Claim dismissed
  • The lock out agreement was void for uncertainty due to lack of a specified end date
  • Lock in agreements are generally void for uncertainty

Lord Ackner

Lock-in agreements

  • An agreement to negotiate in good faith (lock-in agreement) is unenforceable as it is too uncertain
  • A court cannot determine whether subjectively a proper reason existed for the termination of negotiations
  • To negotiate in good faith is against the adversarial position of parties involved in negotiations, where they act according to their own interests
  • To advance that interest a party must be allowed to threaten to withdraw or actually withdraw in the hope that negotiations reopen with better terms
  • It is too difficult for a party to know when he is entitled to withdraw

Lock-out agreements

  • A lock-out agreement can be enforceable
  • It is a negative obligation not to negotiate with others, not a positive obligation to negotiate
  • Time and money is dedicated to consider a purchase, the buyer might not want to commit such resources unless he is guaranteed his purchase

Current case

  • In the present case the lock out agreement did not specify an end date and is hence too uncertain
  • Bingham LJ in his dissent in the Court of Appeal argued that the D should not negotiate without parties for such time as is reasonable in the circumstances until parties found that they could no long negotiate in good faith
  • But such a duty would impose on D a duty of good faith

Commentary

  • If both parties have agreed to negotiate in good faith, they would have limited their self-interest and renounce their adversarial positions
  • However, damages for breach of good faith obligation might be too speculative, it would be difficult to tell whether negotiations would be successful and if successful what the result will be
  • In Civil law jurisdictions a duty to negotiate in good faith is implied as a rule of law