Q&As

Would a clause containing a negative obligation not to withdraw from negotiations be enforceable, or would it be construed as an unenforceable 'lock-in' provision?

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Published on LexisPSL on 26/11/2014

The following Corporate Q&A provides comprehensive and up to date legal information covering:

  • Would a clause containing a negative obligation not to withdraw from negotiations be enforceable, or would it be construed as an unenforceable 'lock-in' provision?
  • Walford v Miles
  • Radiant Shipping

It is common at the outset of transactions, such as the sale and purchase of a private company, for the parties to agree that they shall exclusively negotiate with each other, to the exclusion of others, for a certain period of time. In a private M&A transaction, the parties generally set out such an 'exclusivity' arrangement either in the heads of terms or in a separate exclusivity agreement. It is in the buyer's interests to negotiate an exclusivity provision, so as to prevent the seller from negotiating with, or soliciting competing offers from, other interested parties.

It is established principle, following the case of Walford v Miles, that the enforceability of an 'exclusivity' arrangement will depend on whether it is worded as a 'lock-in' or 'lock-out' arrangement:

  1. a lock-in clause seeks to commit a party to complete the transaction (the buyer in private M&A deals) and is considered to be uncertain and unenforceable

  2. a lock-out (or shut out) clause seeks to prevent one or both of the parties from entering into negotiations with third parties (or soliciting competing offers from such third parties) and is considered to be enforceable

What though of a clause which is worded so as to explicitly prevent one party (or both parties) from withdrawing from negotiations? Would this negative covenant be likely to be found to be enforceable (as with the

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