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Lloyd's Maritime and Commercial Law Quarterly

LOCK-OUT AGREEMENT IS UNENFORCEABLE

Walford v. Miles
In his judgment in the Court of Appeal in Walford v. Miles,1 that a lock-out agreement was unenforceable, being a contract to negotiate, Stocker, L.J., said:
Agreements conferring exclusive rights to negotiate are sensible, at least in the interest of proposed purchasers, and are widely adopted … but the fact that such an agreement is sensible and widely adopted does not necessarily mean that it is enforceable if in the event it is breached.

The facts

Mr and Mrs Miles had a photographic processing business, operated through PNM Laboratories Ltd. (“PNM”), the shares in which they decided to sell. They had two offers for their business, one from a company owned by the auditors to PNM of £1.9 million and another of £2 million from the plaintiffs. Agreement on the principal terms of a sale to the plaintiffs was reached subject to contract. On 17 March 1987 there was a conversation between Mr Miles and Mr Walford, one of the plaintiffs, in which Mr Miles expressed concern as to the plaintiffs’ financial ability to conclude the deal. Mr Walford offered to provide by 20 March a “comfort letter” from his bank indicating that the necessary resources were available. However, he said that he was not willing to proceed further and obtain the comfort letter unless he was satisfied that Mr Miles was not dealing with anyone else. In answer to Mr Walford’s question, Mr Miles said that PNM’s auditors were not involved but that there was another possible purchaser. Mr Walford said he was not prepared to proceed on this basis. It was then agreed that, if the plaintiffs produced the comfort letter by 20 March, the defendants would break off negotiations with any third party, would not consider any alternative and would not accept a better offer but would deal exclusively with the plaintiffs with a view to concluding the deal as soon as possible after 6 April.
The comfort letter was produced by the specified date, confirming that the plaintiffs had sufficient funds for the purchase. Shortly afterwards the draft share purchase agreement was sent to the defendants’ solicitors. In the meantime the defendants had been contacted again by the auditors’ solicitors, who confirmed their offer and the availability of supporting finance. Towards the end of March, the defendants decided that they would not sell their shares to the plaintiffs. According to Mrs Miles’ evidence, she and her husband doubted whether their staff would get on well with Mr Walford, they feared that disharmony might prejudice the company’s achievement of a profit warranty and feared the effect on Mr Miles’ health of working with Mr Walford. They decided either to continue in business themselves or to ask the auditors if they were still interested. The defendants then contacted the auditors to ask if they were still interested, and agreement was

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