Agreement to negotiate — Rival purchasers of business — ‘Lock-out agreement’ — Whether agreement enforceable — Whether a severable enforceable promise of exclusivity — Alternative claim in misrepresentation — Judge below held that there had been a breach of a separate contract, also that there had been misrepresentation — Court of Appeal divided — ‘The disputed border country which divides legally binding contracts from engagements binding, if at all, in honour only’ — Majority of court, allowing appeal on main issue, held that the agreement was unenforceable but that a small claim for misrepresentation was established — Bingham LJ, dissenting, would, while setting aside the award for misrepresentation, have dismissed the appeal on the main issue — Leave not given to appeal to House of Lords
defendants, a husband and wife, appellants in the Court of Appeal, wished to
sell their photographic processing business and premises — Two possible buyers
were seriously interested and were negotiating at about the same time — There
had been some previous abortive negotiations but in the present round the
plaintiffs made the first offer, subject to contract; their rivals, however,
Messrs Patel and Khanderia (‘P & K’) were not far behind with an offer also
subject to contract — The conflict in this case was as to the legal status of
an oral agreement made while the offers to purchase the business were still
subject to contract — The oral agreement, as found by the judge below, was
that, in consideration of the plaintiffs’ producing a ‘comfort letter’ from
their bankers as to their finances and of their undertaking not to withdraw
from negotiations, the defendants would break off negotiations with any third
party, would not consider any alternative offer, would not accept a better
offer and would deal exclusively with the plaintiffs — The judge below held
that this was a separate binding collateral contract, not subject to contract
as were the main negotiations on the sale — The defendants were held by the
judge to have been in breach of this contract and also to have misrepresented
to the plaintiffs that they were not in negotiations with P&K — He awarded
£700 in respect of costs incurred by reason of the misrepresentations, with
general damages to be assessed — The defendants appealed
thrust of the defendants’ submissions in the Court of Appeal was that the oral
agreement relied on by the plaintiffs was merely an agreement to negotiate or
to continue to negotiate and as such was unenforceable — This view was accepted
by the majority of the court (Dillon and Stocker LJJ) — Bingham LJ dissented —
He accepted that a mere agreement to negotiate was unenforceable; there was
binding authority on this point, Courtney & Fairbairn Ltd v Tolaini Brothers
(Hotels) Ltd and Mallozzi v Carapelli SpA (in the Court of Appeal), rejecting the heresy of
Lord Wright in Hillas & Co Ltd v Arcos Ltd — Bingham LJ, however, held that
there was an enforceable agreement, separate and severable from the agreement
to negotiate, namely, an agreement not to negotiate with any party other than
the plaintiffs and not to entertain any alternative proposal — Such an
agreement was supported by consideration and was enforceable — The majority
refused to recognise this suggested severance — In their view, the undertaking
not to negotiate was merely the negative aspect of an agreement to continue to
negotiate with the plaintiffs — The reasoning in support of these differing judicial
opinions approaches the arcane realm in which commercial law shades into
jurisprudence
result, the majority’s decision was to allow the appeal by the defendants,
setting aside the judgment in favour of the plaintiffs, save for the sum of £700
awarded for misrepresentation
The following cases are referred to in
this report.
Atlantic Lines & Navigation Co Inc v Didymi Corporation
[1988] 2 Lloyd’s Rep 108
Brown v Gould [1972] Ch 53; [1971] 3
WLR 334; [1971] 2 All ER 1505; (1971) 22 P&CR 871
Courtney & Fairbairn Ltd v Tolaini Brothers
(Hotels) Ltd [1975] 1 WLR 297; [1975] 1 All ER 716, CA
Credit Suisse White Weld Ltd v Hyman Davis
unreported, December 20 1977
Foley v Classique Coaches Ltd [1934] 2
KB 1
Hillas & Co Ltd v Arcos Ltd (1931) 40
Lloyd’s Rep 307
Lavarack v Woods of Colchester Ltd [1967]
1 QB 278
Mallozzi v Carapelli SpA [1976] 1 Lloyd’s
Rep 407, CA; [1975] 1 Lloyd’s Rep 229
Scandinavian Trading Tanker Co AB v Flota Petrolera
Ecuatoriana [1981] 2 Lloyd’s Rep 425
F&G Sykes (Wessex) Ltd v Fine Fare Ltd [1967]
1 Lloyd’s Rep 53
Talbot v Talbot [1968] Ch 1; [1967] 2
All ER 920; [1967] 3 WLR 438, CA
Trees Ltd v Cripps (1983) 267 EG 596,
[1983] 2 EGLR 174
Voest Alpine Intertrading GmbH v Chevron International
Oil Co Ltd [1987] 2 Lloyd’s Rep 547
Winn v Bull (1877) 7 Ch D 29; 47 LJCh
139
This was an appeal by the defendants,
Peter Norman Miles and his wife, Valerie Jean Miles, from a decision of Judge
Bates, sitting as a judge of the High Court, holding that they were in breach
of an oral agreement with the plaintiffs, Martin Keith Walford, Charles Kenneth
Walford and a company owned by the Walford brothers, Macar Properties Ltd, and
that the defendants had made misrepresentations to the plaintiffs. The decision
of Judge Bates was reported at [1990] 1 EGLR 212; [1990] 12 EG 107.
Stanley Brodie QC and Edward Cohen
(instructed by Tarlo Lyons Randall Rose) appeared on behalf of the appellants;
Philip Naughton QC and Angus Moon (instructed by Wedlake Bell) represented the
respondents.
Giving the first judgment at the
invitation of Dillon LJ, BINGHAM LJ said: This appeal arises in the
disputed border country which divides legally binding contracts from
engagements binding, if at all, in honour only. It is common ground that the
first defendant agreed with the first plaintiff to act in a certain way. The
plaintiffs contended that he did not do so and thus acted in breach of
contract. The defendants contended that there was no contract in existence for
the
High Court, upheld the plaintiffs’ contention in a judgment delivered on July
21 1989. The defendants now appeal against that decision.
The first plaintiff, Mr Martin Walford,
is a solicitor in private practice. Mr Charles Walford, the second plaintiff,
is his brother. He is a chartered accountant with commercial experience here
and in the United States. The third plaintiff is a company owned by the two
brothers; it is of no significance in the case and I shall henceforth ignore it.
The defendants, Mr and Mrs Miles, are
husband and wife. In 1969 Mr Miles started a photographic processing business
which was in due course transferred to PNM Laboratories Ltd, a company which he
and his wife owned. They also owned premises in Blackfriars Road, London SE1,
which were let to the company and used as the company’s business premises. The
company prospered.
The company’s auditors at all material
times were a two-partner firm named Patel Khanderia & Co, the partners
being Messrs Patel and Khanderia.
During 1985 Mr Miles fell ill, and
although Mrs Miles continued to run the company’s business they decided to
explore the possibility of selling the company and its business premises. At
this stage it seems that the only serious bidders were Mr Patel and Mr
Khanderia, who proposed to buy through a company (Statusguard Ltd) in which
they both had substantial interests. The negotiation of sale terms began, and
solicitors came in on both sides, but these negotiations came to nothing.
By about the end of 1986 Mr and Mrs Miles
were once again minded to sell the company and its business premises.
Discussions between Mr Miles and Mr Khanderia (acting for Mr Patel or Mr Patel
and himself) were resumed and an offer of £1.9m put forward.
The plaintiffs heard that the business
was for sale. There was a preliminary meeting on January 21 1987 and both
plaintiffs met Mr Miles on February 23 1987. On the following day they made a
written offer to buy, subject to contract. The defendants consulted their
solicitor, Mr Randall of Tarlo Lyons Randall Rose, who on March 10 replied,
summarising the terms upon which the defendants were willing to sell.
Mr Patel had meanwhile also consulted his
solicitor (Mr Wright of Campbell Hooper Wright & Supperstone) and he wrote
to Mr Randall on February 26 enclosing Mr Patel’s proposed terms for purchase,
subject to contract. Mr Randall replied to Mr Wright on March 10, reporting
that the defendants had received and were considering a bigger offer than Mr
Patel’s. He added:
I do not rule out the possibility that my
clients will wish to proceed with your client’s offer but in this event I would
want to have some information as to how the purchase would be financed backed
up by some concrete evidence that the finance is available.
By this time Mr Patel was seeking an
advance from Investors in Industry plc to help him finance the purchase and a
visit was made to the company on about March 10.
On March 12 1987 there was a meeting at
Mr Martin Walford’s office attended by him, Mr Miles, Mr Randall and (in his
capacity as financial adviser, not counter-bidder) Mr Khanderia. At this
meeting the main terms of a purchase by the plaintiffs for £2m were agreed. On
March 16 Mr Martin Walford (as solicitor for the plaintiffs) faxed a letter,
expressly headed ‘Subject to Contract’, to Mr Randall. It recorded the
agreement in principle which had been reached on the purchase price, the sum
payable on completion, the deposit of the purchase price, the vendors’ warranty
of trading profit in the year following completion, the vendors’ warranty of
the company’s net worth at the date of completion, the company’s cash resources
at completion and the company’s cash-flow forecasts. The letter also said:
It is recognised that the matter remains
subject to contract and that in any event Mr Miles is unlikely to want to
exchange formal agreements before Monday 6th April. Mr Miles has however given
an assurance that provided my clients give him a clear indication that they
intend to proceed by no later than close of business on Wednesday 25th March he
will not treat with any third party or consider any other alternative. My
clients are now making their final arrangements and it is their earnest
intention to provide that indication within the time specified.
Later that day Mr Martin Walford faxed a
further letter to Mr Randall, again subject to contract, confirming that the
plaintiffs had now given Mr Miles their clear indication that they intended to
proceed and anticipating that the respective firms of solicitors would start to
deal with the draft contractual documentation. As these letters make clear, Mr
Martin Walford believed that Mr Miles had at that stage undertaken to deal with
the plaintiffs alone. The essential elements of a deal appeared to have been
agreed subject to contract. Mr Martin Walford expected Mr Miles to instruct his
solicitors accordingly.
Mr Randall replied to these two letters
in a letter of March 17, saying that he had no instructions to proceed with a
sale to the plaintiffs. He added that Mr Miles had not given any assurance
about not treating with any third party or considering any other alternative
and that consideration was still being given to the company’s cash resources at
completion. This letter was, however, overtaken by oral exchanges which
occurred on the same day, March 17. It is with these oral exchanges that this
action and this appeal are primarily concerned.
The course of events on March 17 is best
described in the judge’s own words*:
The first defendant did speak on the
telephone to the first plaintiff. It was a vitally important conversation. The
first plaintiff accepts that a letter he wrote dated March 18 accurately
reflects the telephone conversation on the 17th. And this would appear to be
accepted, too, in para 7(xi) (xii) (xiii) of the defendants’ amended defence.
The first plaintiff gave oral evidence about the telephone conversation on
March 17 and put it in a context. I shall have to refer to this in some detail.
The first defendant did not give any oral evidence at all. Neither did Mr
Randall.
The first plaintiff said in evidence that
he phoned Mr Randall at about three o’clock on March 17. He asked Mr Randall if
he had received the two letters dated March 16 which he had faxed to Mr
Randall. Mr Randall said he had, and the first plaintiff then asked what was
the position. Mr Randall replied that he had received no instructions to
answer. This was also what Mr Randall said in his letter dated March 17 to the
first plaintiff. The first plaintiff said he was most concerned by what Mr
Randall told him. He could not understand it because he said the first
defendant had told him he would be in touch with Mr Randall. The first
plaintiff said he would speak to the first defendant direct, and Mr Randall
said he preferred that he did not, because ‘you are a solicitor’ and the first
defendant was feeling pressurised. The first plaintiff said that may be, but he
was also a principal and that it was of the utmost importance that he spoke to
the first defendant direct. He also said that he was not putting the first
defendant under pressure. The business was for sale for £2m and he would buy
for £2m.
The first plaintiff said he had a meeting
on the 17th with the solicitors Harbottle & Lewis at 4.15pm and he had
waited in his office until four o’clock and had not heard from the first
defendant. He therefore phoned him. The first defendant said he was in the
middle of supervising a difficult order and could be phoned back between 6pm
and 6.30pm. The first plaintiff did this at 6.15pm from the offices of
Harbottle & Lewis.
The first plaintiff said he told the
first defendant of his conversation with Mr Randall and that he found it
perturbing that nothing was happening after their previous conversations and
his letters to Mr Randall. He asked if the first defendant had a problem, to
which the answer was ‘No’. He asked: ‘Do you have a problem with me or
not?’ ‘No,’ said the first defendant,
according to the first plaintiff’s evidence, ‘nothing personal but I have some
reservations’. These related to the payments to be made for the business, and
the first plaintiff agreed with what the first defendant required.
The first defendant also said that he did
not know that the plaintiffs definitely had the financial ability to do the
deal. The first plaintiff explained that he would ask his bank to write what he
described, accurately as it seems to me, as a ‘comfort letter’ indicating that
the plaintiffs had resources to pay £2m.
The first plaintiff then told the first
defendant that he was worried by his recent experience and that he was not
going to proceed further and get the comfort letter unless he was satisfied
that the first defendant was not dealing with anyone else. The first plaintiff
said he was not buying a sweetie shop; it was a £2m deal. Both plaintiffs were
committing everything, including their houses, to the deal. The first plaintiff
asked if the auditors were involved and, according to the first plaintiff, the
first defendant said: ‘I promise you they are not.’ But the first defendant also said that ‘there
is another alternative purchaser’. They had not inspected the property and they
would have to have a credit committee meeting to consider reports.
The first plaintiff said that that was
not good enough for him. He was not prepared to be in a contract race or to act
as anyone’s midwife. He said he would not proceed with the comfort letter and
would withdraw completely unless he had a specific agreement with the first
defendant. That agreement was that the first plaintiff would produce a comfort letter
by Friday March 20 and carry on and not withdraw. This he did. The first
defendant was to break off negotiations with any third party and would not
consider any other 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 April 6. If the first defendant would not agree to that,
the first plaintiff said ‘count me out’.
The significance of April 6 was,
apparently, that it took the disposal of the business by the defendants into a
new fiscal year.
The first plaintiff said that he was
incensed at what he thought was going on. He said he was very plain and
specific to the first defendant, there was no chance of him misunderstanding.
If there was no agreement, he would withdraw. There was an agreement.
So far as it goes, the documentary
evidence supports the oral evidence given by the first plaintiff. And, as I
have already indicated, the first defendant did not give any evidence. I accept
the evidence of the first plaintiff.
*Editor’s note: Reported at [1990] 1 EGLR
212 at p213 L.
In his letter of March 18 to which the judge
referred, Mr Martin Walford summarised further discussions between himself and
Mr Miles in which agreement had been reached on the vendors’ warranty of the
company’s net trading profits in the year after completion, adjustment of the
purchase consideration if the warranty was not met and a deposit to be made in
the joint names of the parties’ respective solicitors. He continued:
The last matter discussed between Mr
Miles and me related to our ability to make payment for the shares in the
business and the property. He asked me to provide a comfort letter from our
bankers confirming that they are, subject to contract, prepared to provide the
finance of £2,000,000 to enable Acquisition Corpn to effect the purchase. Mr
Miles agreed that if such a letter were in your hands by close of business on
Friday of this week he would terminate negotiations with any third party or
consideration of any alternative with a view to concluding agreements with me
and my brother and Acquisition Corpn and he further agreed that even if he
received a satisfactory proposal from any third party before close of business
on Friday night he would not deal with that third party and nor would he give
further consideration to any alternative.
The letter from Lloyds Bank, which Mr
Walford enclosed, was dated March 18, addressed to Mr Randall and expressed to
be given without responsibility; it confirmed that the bank had offered the
plaintiffs loan facilities to enable them to make the purchase for a
consideration of £2m. On March 19 Mr Walford and Mr Miles spoke on the
telephone and agreed to a metaphorical handshake.
On March 25 1987 Mr Randall wrote to Mr
Martin Walford and acknowledged receipt of the bank’s comfort letter. He
confirmed that the defendants agreed to the sale of the shares and the property
at a total price of £2m. He also confirmed agreement of the terms summarised in
Mr Walford’s letter of March 18, repeating a reservation previously voiced
concerning the cash in the company on completion. He awaited a draft contract
and promised to let the plaintiffs have as much paperwork as he could within
the next few days.
Also on March 25 Mr Randall wrote to Mr
Patel’s solicitor, Mr Wright, who had on March 23 telexed him in response to
his letter of March 10, confirming Mr Patel’s serious wish to buy and his
concern that he should not simply be treated as a second string. On, it seems,
March 25 Mr Wright telexed again to repeat that his clients were anxious to
establish whether their offer was being seriously considered. Mr Randall’s
reply on March 25 1987 was that the defendants had concluded terms for the sale
of the shares and the property to another party and that he was waiting to
receive a draft contract. He pointed out that everything was still subject to
contract and the transaction might not go through, and if it did not the
defendants would be interested to pursue discussions; but for the present the
defendants could deal only with the other interested party. By this time
Investors in Industry had confirmed, in a letter direct to Mr Miles, that £1.7m
would be made available to Mr Patel to enable him to complete the purchase.
It appears that on Thursday March 26 Mr
Martin Walford’s firm sent preliminary inquiries and a draft share purchase
agreement to Mr Randall. He sent them to Mr Miles on the following day, Friday
27. Mr Martin Walford, according to this evidence, spoke to Mr Miles on that
day and tried to arrange a meeting, but Mr Miles pleaded unavailability.
The evidence of Mrs Miles was that she
and her husband spent the afternoon of Friday March 27 1987 at the company’s
premises and during that time decided not to sell to the plaintiffs. They
doubted, she said, whether they and their staff would get on well with Mr
Martin Walford; they feared disharmony might prejudice the company’s
achievement of the profit warranty; and she feared the effect on her husband’s
health of working with Mr Martin Walford. They decided to continue in business
themselves or ask Mr Patel if he was still interested.
Late on the evening of Friday March 27 Mr
Miles telephoned Mr Patel to ask if he was still interested. He was. Agreement
was quickly reached on an increased sale price of £2m. Mr Patel asked for Mr
Miles’ agreement to deal exclusively with him, no doubt because (as he agreed
in evidence and as an earlier telex of his solicitors indicated) he was
reluctant to incur costs if the negotiation was to prove abortive as it had in
1985. Mr Miles agreed to deal with Mr Patel exclusively.
On Monday March 30 Mr Randall wrote to Mr
Martin Walford to tell him that after careful consideration of all relevant
matters the defendants had decided to sell to a company associated with the
auditors. He hoped that the plaintiffs would be kind enough to accept the
defendants’ decision without question. The plaintiffs did not accept the
defendants’ decision without question. Instead, they treated Mr Randall’s
letter as a repudiation of what they alleged to be a contract and in due
course, following an unfriendly correspondence, issued their writ. Well before
this, the shares in the company and the property in Blackfriars Road had been
sold for £2m to Statusguard Ltd. This company, of which Mr Patel was director
and Mr Khanderia secretary, was the corporate vehicle through which Mr Patel
and Mr Khanderia had tried to make the purchase in 1985.
The plaintiffs sued on an oral contract
allegedly made on the telephone between Mr Martin Walford and Mr Miles on March
17 and evidenced by Mr Walford’s letter to Mr Randall dated March 18. As
pleaded, the contract was:
. . . that in consideration for the
plaintiffs agreeing to continue the negotiations and not to withdraw and if the
plaintiffs provided a letter of comfort from their bankers confirming that the
said Bankers were, subject to contract, prepared to provide the finance of
£2,000,000 to enable the Third Plaintiff to effect the purchase of the said
property and shares prior to close of business on 20th March 1987, the First
Defendant on behalf of himself and the Second Defendant would terminate
negotiations with any Third Party or consideration of any alternative with a
view to concluding an agreement with the Plaintiffs and further that if he
received a satisfactory proposal from any Third Party prior to close of
business on the 20th March 1987, he would not deal with that Third Party or
give further consideration to any alternative.
The plaintiffs also pleaded that, as the
comfort letter was duly provided, the defendants (or the first defendant) were
precluded from dealing with third parties or considering alternative offers
until negotiations pursuant to this agreement broke down.
The learned judge’s factual conclusions
relevant to the alleged oral agreement on March 17 1987 appear from the passage
of his judgment I have already quoted. His final conclusions, partly fact and
partly law, are contained in the following passage*:
On the evidence of the first plaintiff as
to what was said in the telephone conversation on March 17, my view is that the
parties intended to be bound and enter into legal relations when they made
their oral agreement. They were both principals. They were both men of
business. The first plaintiff was not prepared to continue unless he got
undertakings from the first defendant. These undertakings were, provided the
plaintiffs’ bankers’ comfort letter was in the defendants’ hands by Friday of
that week, the defendants would terminate negotiations with any third party or
consideration of any alternative, and even if they received a satisfactory
proposal from any third party before close of business on Friday night he would
not deal with that party nor give further consideration to any alternative. The
consideration moving from the plaintiffs was that they would provide a comfort
letter from their bankers and would not withdraw, and would continue negotiations.
This constituted, in my judgment, a separate, collateral contract which was not
subject to contract.
*Editor’s note: Reported at [1990] 1 EGLR
212 at p 215C.
In this court Mr Stanley Brodie QC, for
the defendants, expressly conceded that Mr Miles agreed to deal exclusively
with the plaintiffs provided that a comfort letter was produced showing that
the plaintiffs had the necessary money available. Such a comfort letter was
admittedly produced. Where, as the judge was fully entitled to hold on the
evidence and did hold was the case here, businessmen dealing in a commercial
context intend to bind themselves, the courts will seek, so far as the law
properly allows, to give effect to that intention. They will, for example,
strive to avoid holding a provision void for uncertainty: Brown v Gould
[1972] Ch 53 at pp 56G, 58E per Megarry J. Thus the courts will not readily
refuse to enforce a lock-out agreement of a not uncommon type such as that into
which these parties purported to enter. Were they to do so, it would strengthen
the regret expressed by Scrutton LJ 60 years ago that ‘in many commercial
matters the English law and the practice of commercial men are getting wider
apart’: Hillas & Co Ltd v Arcos Ltd (1931) 40 Lloyd’s Rep 307
at p 311; (1932) 147 LT 503 at p 506.
Mr Brodie’s first submission was that the
oral agreement on which the plaintiffs relied did not give rise to a legally
binding contract because it formed part of a continuum of negotiations which
were expressly subject to contract and was not clearly and expressly excepted
from that overriding qualification. He did not suggest that
making of any contract ancillary to or parasitic upon those negotiations.
Indeed, he accepted that if V and P were negotiating a sale subject to
contract, V could (for valid consideration and for a stated period) validly
contract to deal with P and no one else. He took his stand on a statement of
principle by Bridge LJ (as he then was) in Credit Suisse White Weld Ltd v
Hyman Davis (Court of Appeal, unreported, December 20 1977):
The common understanding of all who are
familiar with conveyancing practice is that when a negotiation for the sale and
purchase of land is being conducted with a stipulation introduced by either
party that it shall be subject to contract, neither party will assume any
binding contractual obligation until the formal written contracts have been
exchanged.
Of course, that common understanding can
be displaced, and it is perfectly possible for the parties to such a
negotiation to manifest an intention to assume contractual obligations at some
other time and in some other way: but in order that the common understanding
shall be thus displaced, the intention to be contractually bound at some other
time and in some other way must be clearly and unambiguously manifested.
Here, Mr Brodie submitted, there was no
such clear and unambiguous manifestation.
The learned judge did not accept this
submission and nor do I. It is of course clear that an offer or acceptance made
subject to contract is made upon the basis, fully recognised in law, that
neither offer or nor acceptor shall be bound, and no binding contract shall exist,
unless and until the parties’ entire agreement is embodied in a written
document and duly executed (and, if need be, exchanged). The negotiation
between the plaintiffs and the defendants for purchase and sale of the
defendants’ shares and land was from beginning to end conducted upon that
basis. Thus, although the parties reached agreement on the central terms of the
proposed transaction, such agreement was, as a matter of law, without effect.
Either the plaintiffs or the defendants were free, as a matter of law, to
reopen any of those matters. But the agreement which the parties admittedly
made on March 17 did not relate to any term of the proposed purchase and sale
transaction. It was not an agreement which could ever in any circumstances have
formed part of any formal written agreement; it was an agreement relating not
to the substance of the subject to contract negotiation but to the machinery
for conducting it. It is true, as Mr Brodie observed, that Mr Walford did not
point out to Mr Miles that this agreement was not subject to contract, but no
reasonable person could possibly have supposed that it was. Mr Walford’s
evidence of the conversation leading up to the agreement, summarised by the
judge, made plain his unwillingness to participate in a contract race and Mr
Miles must clearly have appreciated that he could keep the plaintiffs in play
only by making the lock-out agreement which Mr Walford sought. The plaintiffs
were at this stage the highest bidders and (if they produced the comfort letter)
the only bidders who could demonstrate financial ability to pay. So Mr Miles
agreed to Mr Walford’s request for exclusivity. In my judgment, the subject to
contract qualification which applied to the substantial negotiation cannot have
applied to this quite separate agreement.
Mr Brodie’s second submission was that
the agreement on which the plaintiffs sued could not amount to anything more
than an agreement to make an agreement or to negotiate or continue to negotiate
subject to contract and was therefore unenforceable.
It is not in doubt but that (subject to
certain exceptions: see, for example, Hillas & Co Ltd v Arcos
Ltd, supra, at p 315 per Romer LJ; The Didymi* [1988] 2 Lloyd’s Rep
108 at p 117 per Nourse LJ) the law does not recognise a contract to
enter into a contract. But the plaintiffs have never at any stage suggested
that the defendants, or they themselves, were parties to such a contract nor,
in my opinion, is that contention implicit in any suggestion the plaintiffs have
made.
*Editor’s note: Atlantic Lines & Navigation Co Inc
v Didymi Corporation.
Mr Brodie submitted that a contract to
negotiate in good faith with a view to reaching a mutually acceptable solution
was conceptually impossible and in any event precluded by authority. I am not
for my part persuaded that the concept is impossible. Such distinguished
commercial judges as Lord Wright (Hillas & Co Ltd v Arcos Ltd
(1932) 43 Lloyd’s Rep 359 at p 369) and Kerr J (Mallozzi v Carapelli
SpA [1975] 1 Lloyd’s Rep 229 at pp 249-50) were prepared to accept it and my
impression is that such a contract might well be recognised elsewhere (see, for
example, Contract Law Today: Anglo-French Comparisons, ed Harris and Tallon,
1989, at p 148, para 15). If such a contract were recognised, breach could not
of course be demonstrated merely by showing a failure to agree, and if
negotiations were shown to have broken down it might be necessary for the court
to decide whether the parties had reached a genuine impasse or whether one or
other party had for whatever ulterior reason aborted the negotiation. This
could be hard to decide, but no harder than other matters which regularly fall
for judicial decision. Again, if breach were established the damages would be
nominal unless the aggrieved party were able to show that but for the breach a
concluded agreement would probably have resulted. That would no doubt depend on
all the circumstances and in particular on whether, as here, the core of the
proposed contract was already agreed or whether, as in Courtney &
Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297, the
terms of the transaction were almost entirely at large. It is, however, idle to
pursue this speculation, since Mr Brodie was, in my view, right to submit that
recognition of such a contract is precluded by authority binding on this court.
In the Courtney & Fairbairn
case Lord Denning MR (at p 301) expressed the view that a contract to negotiate
was not a contract known to the law and Lord Diplock (at p 302) described Lord
Wright’s dictum in Hillas & Co Ltd v Arcos Ltd, supra, as an
attractive theory but bad law. In Mallozzi v Carapelli SpA [1976]
1 Lloyd’s Rep 407 the Court of Appeal (although acknowledging that Lord
Wright’s observation had over the years been often followed and applied by
practitioners and judges of first instance: pp 414,412) felt bound to rule that
legal effect could not be given to an agreement to negotiate. This has become
the orthodox view: see, for example, The Scaptrade* [1981] 2 Lloyd’s Rep
425 at p 432 (Lloyd J); Voest Alpine Intertrading GmbH v Chevron
International Oil Co Ltd [1987] 2 Lloyd’s Rep 547 at p 561 (Hirst J).
*Editor’s note: Scandinavian Trading Tanker
Co AB v Flota Petrolera Ecuatoriana.
Mr Naughton QC, for the plaintiffs,
sought to distinguish the Court of Appeal authorities on the ground, as I
understood, that in them there was no agreement on fundamental terms of the
transaction whereas here there was and that in them there was a subsisting
difference whereas here there was not. I do not, however, think that the
statements of principle in those cases permit of such refinement. Since,
moreover, all the negotiations on the terms of the proposed transaction in this
case were subject to contract, such agreement as was reached cannot be regarded
as other than provisional. This court is, in my view, bound by authority to
conclude, in accordance with Mr Brodie’s submission, that legal effect cannot
be given to an agreement to negotiate.
It is, however, noticeable that when Mr
Walford in his letter of March 18 recorded the terms of the oral agreement made
the previous evening he made no mention of any duty to negotiate. Nor, if I
understand the plaintiffs’ pleading correctly, it is alleged that the
defendants undertook such an obligation and the contract found by the judge did
not contain such a term, as shown by the passage in his judgment quoted above.
But Mr Naughton (perhaps lured on by me) did in argument contend that the
defendants undertook an obligation to negotiate. Since the law cannot give
effect to such a term, the parties’ bargain must be considered as if that term
formed no part of it and it is necessary to see what if anything remains.
If any obligation by either party to
negotiate is disregarded as legally ineffective, there remains a clear
undertaking by Mr Miles on behalf of himself and his wife, conditional on
timely production of a comfort letter, not to deal with any party other than
the plaintiffs and not to entertain any alternative proposal. If this
undertaking was supported by consideration moving from the plaintiffs as
promisees and was sufficiently certain to be given legal effect, I see no
reason why it should not form part of a legally enforceable contract. The
defendants perhaps recognise this, for Mr Brodie submitted that the agreement
was supported by no consideration and was void for uncertainty.
Mr Naughton contended that the
defendants’ undertaking was supported by two elements of consideration: Mr
Walford’s agreement on the telephone not to withdraw his offer there and then
and the provision of the comfort letter. As to the first of these elements, Mr
Brodie’s objection was in my view sound: the oral agreement was to take effect
only upon the plaintiffs’ timely production of a comfort letter and the
plaintiffs did not bind themselves not to withdraw their offer at any time
thereafter. I do not therefore think that there was any reciprocal promise not
to withdraw capable of amounting to consideration for the defendants’
undertaking. As to the second element, Mr Brodie objected that the
bank’s comfort letter was illusory consideration because it was given without
responsibility and was legally unenforceable. I have no hesitation in rejecting
that submission. Just as Mr Randall in his letter of March 10 1987 to Mr
Patel’s solicitor said he would want evidence of Mr Patel’s ability to pay, so
Mr Miles during the crucial telephone conversation with Mr Walford on March 17
gave the lack of such evidence from the plaintiffs as his sole ground for
unwillingness to exclude all other bidders from consideration so as to deal
with the plaintiffs alone. It was, quite naturally, he and not the plaintiffs
who wanted such evidence. I cannot, moreover, accept that a comfort letter
issued by a reputable bank at the behest of obviously reputable customers is
valueless merely because it is unenforceable. Mr Miles cannot have thought so
or he would not have wanted it and Mr Randall cannot have thought so or he
would have expressed dissatisfaction on reading its terms. I think it plain
that provision of this comfort letter was good consideration for the
defendants’ undertaking.
Mr Brodie’s submission that the alleged
agreement was void for uncertainty rested in part, as I understand, on its
being an agreement to agree or negotiate (which I have already considered) and
in part on the lack of any agreement on the period during which the defendants
should remain bound. It is true that Mr Walford and Mr Miles did not expressly
agree on the telephone how long Mr Miles’ undertaking not to deal with other
parties should continue to bind the defendants. It would, however, be entirely
contrary to practice and principle to hold that an agreement, otherwise valid
and intended by commercial men to have legal effect, should be defeated by lack
of express agreement on the effective period of the obligation. The stock
response of the common law, in my view appropriate here, is to hold that such
obligation should remain binding for such time as is reasonable in all the
circumstances. It is unnecessary to consider what time would have been
reasonable on the facts here. Plainly the time would have had to be long enough
to give the parties a reasonable opportunity to come to terms; otherwise the
agreement would be futile. Equally plainly, the time would end once the
parties, acting in good faith, had found themselves unable to come to mutually
acceptable terms: the plaintiffs would by then have enjoyed what alone they had
contracted for, an exclusive opportunity to try to come to terms; they would
have reached a genuine impasse; and they could not expect the defendants to be
debarred from dealing with other parties thereafter. If the defendants decided
not to sell at all, that would not strictly bring the reasonable time to an
end, but there would in that event be no breach of the defendants’ negative
obligations not to deal with third parties and not to entertain alternative
offers. The defendants could not, in my view, bring the reasonable time to an
end by procuring a bogus impasse, since that would involve a breach of the duty
of reasonable good faith which parties such as these must, I think, be taken to
owe each other. It may be said that in this indirect way the defendants are in
effect subjected to a duty to negotiate in good faith, and in some measure this
is true. But I do not see this as an objection, since it is without doubt what
the parties intended should happen.
Mr Brodie submitted lastly that even if,
contrary to all his other submissions, there were a binding agreement between
the parties, there was no breach of it and a breach could not in any event
found a claim for more than nominal damages.
The agreement that there was no breach
rested on a passage in the judgment in which the judge, having recited the
evidence of Mrs Miles without any indication that he rejected it, concluded*:
It may be that the first and second
defendants came to the conclusion that the first plaintiff was not easy and
would not get on well with the staff; but there had been no indication of this
in the first plaintiff’s evidence of the telephone conversation on March 17 or
in Mr Randall’s letter of March 25 confirming his clients’ agreement, subject
to contract, to sell to the plaintiffs.
*Editor’s note: Reported at [1990] 1 EGLR
212 at p 215B.
That, in Mr Brodie’s submission, amounted
to acceptance by the judge of Mrs Miles’ evidence and a finding by the judge
that the defendants had good grounds for bringing the period of exclusivity to
an end. I do not, for my part, think that the tentative language used by the
judge was intended to convey acceptance of Mrs Miles’ evidence, particularly
since he had no evidence from Mr Miles, the prime mover in this negotiation on
the defendants’ side. But even if Mrs Miles’ statement of the defendants’
reasons for calling the negotiation off is to be regarded as accurate and
comprehensive, I do not see how those reasons (which were never communicated to
the plaintiffs and which they accordingly had no opportunity to meet or deal
with) can possibly be regarded as showing an impasse or genuine inability to
come to terms such as would bring the plaintiffs’ contractual period of
exclusivity to an end.
For the argument that, even if there were
a contract and a breach, there could in law be no right to recover more than
nominal damages, Mr Brodie relied on Lavarack v Woods of Colchester
Ltd [1967] 1 QB 278 and the distinction there drawn between broken
obligations and disappointed expectations. In this case (it was submitted) the
defendants were not obliged to come to terms with the plaintiffs; they were
entitled to perform the contract (assuming there was one) in the manner most advantageous
to themselves; they were not obliged to exercise their contractual rights
reasonably; and thus, even if the plaintiffs had been deprived of an exclusive
opportunity to try to make a deal they could have lost nothing of value. I do
not think that in law this conclusion is necessarily correct. The defendants
undertook a negative obligation not to deal with parties other than the
plaintiffs and not to entertain alternative proposals for a reasonable time.
They broke that obligation by doing what they had undertaken not to do. The
plaintiffs are entitled to be placed in the same position as if the defendants
had performed their obligation, albeit in the manner most favourable to
themselves. Depending on the facts as found by the court, the proper inference
might be that the parties would probably not have come to terms even if the
defendants had complied with their obligation or that the defendants would have
decided not to sell; in that event the plaintiffs’ damages would be nominal.
But the proper inference might be that if the defendants had complied with
their obligation the parties would probably have come to terms because all
potential points of difference would have been compromised or conceded. If that
were the correct factual inference, the plaintiffs’ damages could, I think, be
more than nominal. Mr Brodie was, however, right, in my judgment, to submit
that having regard to the order made on the summons for directions the judge
was not asked to rule whether, had the defendants complied with their
obligation, the parties would probably have come to terms or not. That was an
issue relating to damage which was reserved for a later hearing and the judge
should have expressed no opinion.
The plaintiffs advanced an alternative
claim in misrepresentation. If my judgment up to this point is correct, it may
well be that this claim adds nothing to the plaintiffs’ claim for breach of
contract. This may no doubt be why the learned judge dealt with the matter
rather summarily. If, however, there was no contract it seems to me much more
likely that the plaintiffs were induced to incur the expense they did by the
mistaken belief that there was a contract than by any representations Mr Miles
made, which were not in any event (with no exception) shown to have been false
at the time he made them. I do not think it would be fair to infer that Mr
Miles misrepresented his (then) present intentions on March 17 when the letter
written by Mr Randall on his instructions on March 25 to Mr Patel faithfully
reflected the intentions which Mr Miles had expressed. The exception is Mr
Miles’ statement that the auditors were not involved. I do not think the claim
in misrepresentation can properly be upheld on the strength of that
misrepresentation —
(a) because the judge did not found his judgment
on it; and
(b) because Mr Miles did on March 17 say that he
was dealing with an alternative purchaser and it can have mattered little to
the plaintiffs whether the alternative purchaser was the auditors or someone
else.
What mattered to them, and what they
relied on, was the defendants’ promise of exclusivity, and if that is legally
invalid I do not think that on the judge’s findings their claim in
misrepresentation can save them.
I would accordingly set aside the judge’s
order in so far as it upholds the plaintiffs’ claim in, and awards damages for,
misrepresentation but otherwise dismiss the appeal.
STOCKER LJ said: I have read in draft the judgment
of Bingham LJ and adopt with gratitude his account of the facts, which I shall
not repeat save so far as may be necessary for the purposes of the development
of my own conclusion. I regret that I have not felt able to accept the
conclusion which Bingham LJ has reached, for the reasons which I shall
endeavour to give hereunder.
My regret is due to the fact that
agreements conferring exclusive rights to negotiate are sensible, at least in
the interest of proposed purchasers, and are widely adopted (both parties to
this dispute sought such an agreement). However, agreements which are sensible
and directed, inter alia, to saving costs and expenses which would
otherwise probably be incurred are not lightly to be held unenforceable, 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. My own
views coincide to a large extent with those of Dillon LJ, whose judgment I have
also read in draft.
I do not need to consider in great detail
the law relating to ‘contracts to negotiate’. The dispute between the parties
to this appeal relates not so much to the law in this regard but to whether
this case was a ‘contract to negotiate’ or whether upon its proper construction
the elements of prospective negotiation by each party can be eliminated without
depriving the agreement of consideration or mutuality. It is argued that such
severance can properly be applied to the facts of this case.
Some support to the proposition that a
contract to negotiate, if supported by consideration, can be effective and
enforceable was given by the dictum of Lord Wright in Hillas & Co Ltd
v Arcos Ltd (1932) 147 LT 503 at p 515 where Lord Wright said:
There is then no bargain except to
negotiate, and negotiations may be fruitless and end without any contract
ensuing; yet even then, in strict theory, there is a contract (if there is good
consideration) to negotiate, though in the event of repudiation by one party
the damages may be nominal, unless a jury think that the opportunity to
negotiate was of some appreciable value to the injured party.
This dictum has been widely applied, and
was so applied by Kerr J in Mallozzi v Carapelli SpA [1975] 1
Lloyd’s Rep 229. However, in that case before this court [1976] 1 Lloyd’s Rep
407) that part of his judgment was disapproved in the light of the decision of
this court in Courtney & Fairbairn Ltd v Tolaini Bros (Hotels)
Ltd [1975] 1 WLR 297 where Lord Denning MR stated that the dictum of Lord
Wright in Hillas v Arcos was not well founded, and Diplock LJ
regarded it as bad law. Lord Denning at p 301 H said:
If the law does not recognise a contract
to enter into a contract (when there is a fundamental term yet to be agreed) it
seems to me it cannot recognise a contract to negotiate.
This dictum was applied by Lloyd J in The
Scaptrade [1981] 2 Lloyd’s Rep 425 and by Nourse J in Trees Ltd v Cripps
(1983) 267 EG 596, [1983] 2 EGLR 174.
Mr Naughton sought to distinguish Courtney
& Fairbairn v Tollaini and Mallozzi v Carapelli on
the grounds that in those cases there had been no agreement even subject to
contract on essential terms particularly as to price — ie there were
fundamental terms yet to be agreed, vide Lord Denning in Courtney
& Fairbairn, whereas in the instant case price had been agreed as had
most of the essential matters necessary for a contract of sale. I would reject
this submission, since the matters agreed in this case were all ‘subject to
contract’ and therefore not finally agreed. Either party could resile. Subject
to this point the parties to this appeal were in broad agreement as to the
correctness of the principle that an agreement to negotiate was not
enforceable.
In my view, the essential issue in this
case is: ‘Was this agreement an agreement to negotiate?’ It is submitted on behalf of the plaintiffs
that this was not such a contract, since effect can be given to it by severance
of the element of negotiation, a view accepted by Bingham LJ. Reduced to its
fundamentals, as I understand the argument, it is that in consideration of the
plaintiffs not ‘withdrawing forthwith’ and thus leaving open and available for
acceptance the offer already made (albeit subject to contract), the defendants
would agree not to negotiate with anybody else, further consideration being the
production of a letter of comfort. Thus on this formulation the agreement did
not involve any undertaking to negotiate by either party, but simply a negative
obligation on the part of the defendants not to negotiate with any other party.
I cannot agree that the agreement can be so compartmentalised. Can an undertaking
‘not to withdraw’ mean anything other than agreement to continue to negotiate
in the context of this case? I feel able
to accept that in certain circumstances an agreement so formulated might have
some practical effect — eg where a proposed purchaser of land was more
interested in the exclusion of a particular rival (perhaps because of his
belief in the use to which that rival was going to put the land) than in his
own acquisition. A proposing purchaser of shares might well be more interested
in blocking the offer of a rival than in his own acquisition if a monopoly or
controlling interest might thus be avoided. Such agreements might be realistic
and, if supported by consideration, enforceable. Either of these situations
might be subject to difficult factors of duration or give rise to difficult
questions of fact if, for example, some nominee of the proposed purchaser who
had been excluded in fact carried out the sale.
However, no such situation arises here.
If there be no agreement to continue to negotiate by either party, the
advantage to the plaintiffs of the defendants’ undertaking not to negotiate
with anyone else is virtually meaningless. The negotiations were all subject to
contract. If there were no obligation on the defendants to continue to negotiate,
they could break them off at will, as could the plaintiffs themselves. It is
true that the offer made up to the relevant date by the plaintiffs was £100,000
greater than the offer at that date of Mr Patel, and thus there was an
advantage to the defendants for the higher offer to remain in being, but this
is, in my view, illusory where the negotiations were at all times subject to
contract and could be broken off at any time. Thus it seems to me that the
plaintiffs’ agreement ‘not to withdraw forthwith’ must be the same thing as
‘undertaking to continue to negotiate’ and the two cannot be detached from each
other.
I am also of the view that an obligation
to continue genuine negotiations and not to withdraw until and unless a bona
fide agreement for sale became incapable of achievement was in fact the true
basis of this agreement. Before turning to the details which I consider support
this view, I should say that I cannot agree with Mr Brodie QC’s submission that
this agreement was itself subject to contract and formed part of the continuing
negotiations carried on as a whole. Plainly this agreement was not subject to
contract or it would have no practical subject-matter at all.
The matters which, in my mind, support
the conclusion that one of the obligations on both parties was to continue in
negotiations may be stated to be as follows.
(a)
The plaintiffs’ pleaded case in the amended statement of claim was as
follows:
The first defendant on behalf of himself
and the second defendant agreed with the first plaintiff on behalf of himself
and the second and/or the third plaintiff, that in consideration for the
plaintiffs agreeing to continue the negotiations and not to withdraw, and if
the plaintiffs provided a letter of comfort from their bankers confirming that
the said bankers were, subject to contract, prepared to provide the finance of
£2,000,000 . . . the first defendant on behalf of himself and the second
defendant would terminate negotiations with any third party, or consideration
of any alternative with a view to concluding an agreement with the plaintiffs
and further that even if he received satisfactory proposal from any third party
at close of business on the 20th March 1987 he would not deal with that third
party . . .
It seems to me that in that paragraph the
phrase ‘in consideration for the plaintiffs agreeing to continue the
negotiations . . . with a view to concluding an agreement with the plaintiffs’
indicates that continuing negotiations were part of the agreement. The
amendment to that paragraph reads:
It was a term of the said collateral
agreement necessarily to be implied to give business efficacy thereto that, so
long as they continue to desire to sell the said property and shares, the first
defendant on behalf of himself and the second defendant would continue to
negotiate in good faith with the plaintiff.
There again is a reference to the
continuation of negotiation by the defendant as being part of the agreement to
which effect cannot be given if continued negotiations are not part of it.
(b)
In the course of the appeal each party submitted a document in which a
notional written contract might be expressed in accordance with the agreement
pleaded. Both included terms which involved an obligation to negotiate; the
plaintiffs ‘so long as Miles wished to sell and Walford to buy to negotiate in
good faith’; the defendants ‘A as vendor and B as purchaser agree they will
negotiate together with a view to entering a binding and enforceable contract’,
and in a second formulation ‘for as long as negotiations are in progress and
have not broken down . . . the vendor shall not deal with any other party’.
Thus the parties themselves through their counsel seem to have formulated the
terms of this agreement so as to make continuation of negotiations part of the
agreement: see Mr Walford’s own evidence of the oral conversation on March 17
as recorded by the judge (judgment p 5 D to E*):
The first plaintiff then told the first
defendant that he was worried by his recent experience and that he was not going
to proceed further and get the comfort letter unless he was satisfied that the
first defendant was not dealing with anyone else.
*Editor’s note: Reportedc at [1990] 1
EGLR 212 at p 214C.
The words ‘proceed further and get the
comfort letter’ would suggest to me that further negotiations are contemplated.
At letter G on that page to A on p
6† the judge, continuing his account of
the oral agreement, said:
He [the plaintiff] said he would not
proceed with the comfort letter and would withdraw completely unless he had a
specific agreement with the first defendant. That agreement was that the first
plaintiff would produce a comfort letter by Friday March 20 and carry on and
not withdraw. This he did. The first defendant was to break off negotiations
with any third party and would not consider any other 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 April 6. If the first
defendant would not agree to that, the first plaintiff said, ‘count me out’.
† Editor’s note: Repoted at [1990] 1 EGLR
212 at p 214D.
It seems to me that the phrase ‘and carry
on and not withdraw’ involves the proposition that the negotiations were to be
carried on and the expression ‘would deal exclusively with the plaintiffs with
a view to concluding the deal’ also seems to me necessarily to involve the
proposition that continued negotiations were part of the agreement, and cannot
be severed from it if the agreement is to have meaningful effect.
I would not base my conclusion solely on
these passages, which could be ambiguous but seem to me to convey the meaning
that ‘not withdraw’ involved ‘continuing to negotiate’. The letter of March 18
seems to me to bear the same implication. The passage in question is in the
middle of the third main paragraph:
Mr Miles agreed that if such a letter
were in your hands by close of business on Friday of this week he would
terminate negotiations with any third party or consideration of any alternative
with a view to concluding agreements with me and my brother and Acquisition
Corpn, and he further agreed that even if he received a satisfactory proposal
from any third party before close of business on Friday night he would not deal
with that third party and nor would he give further consideration to any
alternative.
That passage again seems to me to involve
the conclusion that the words ‘view to concluding agreements with me’ mean that
continued negotiation is envisaged. That seems to have been the plaintiffs’
formulation on trial:
The consideration moving from the
plaintiffs was that they would provide a comfort letter from their bankers and
would not withdraw, and would continue negotiations.
‘Continue negotiations’ seems to me
necessarily to mean that it was envisaged that the negotiations would continue
between the plaintiffs and the defendants.
For these reasons, contrary to my initial
view of the matter, I am of the opinion that this agreement did constitute an
‘agreement to negotiate’ and was thus not enforceable. I also agree with the
conclusion and reasoning of Dillon LJ on this aspect of the case.
As to the judge’s award of £700 in
respect of negligent misrepresentation, the matter has to be considered in the
light of my finding that there was no enforceable contract. If there were, the
costs incurred representing the £700 would be recoverable as damages. If there
were not, it seems to me that the factual misrepresentations which were
negligently made were made to the effect that the defendants would not
negotiate with anybody else and that they were not in negotiation with the
auditors (who were Mr Patel’s own firm). The judge’s finding that this was
knowingly a false representation may be difficult to justify on the evidence,
but it was the conclusion to which he arrived. The defendants must have
realised that Investors in Industry were not potential buyers but were the
backers of Mr Patel, whose firm were the auditors. This, too, indicates the
falsity of the assertion that they were not in negotiation with the auditors as
alternative purchasers. I would therefore agree with the judge’s finding on
this aspect of the case and agree with the order he made with regard to these
damages.
Accordingly, I would set aside the
judgment in favour of the plaintiffs, save to the sum awarded for
misrepresentation of £700.
DILLON LJ said: I gratefully adopt the account of
the facts of this case in the judgment of Bingham LJ.
The crucial question in the case is
whether what has been called a ‘lock-out’ agreement — an agreement for valuable
consideration between a vendor of property and a potential purchaser that the
vendor will negotiate exclusively with that purchaser with a view to achieving
at the end of the negotiation a binding contract for the sale of the property
to the purchaser and will not deal with any other prospective purchaser — can
be other than futile under English law.
It is essential to my mind, if the
lock-out agreement is to be other than futile, that the vendor must be bound to
continue to negotiate in good faith with the prospective purchaser with whom
the lock-out agreement has been made. The agreement would necessarily be futile
if the vendor were free to break off negotiations at any time on the mere
ground that the negotiations were, as in the present case, ‘subject to
contract’; in that event the maximum the aggrieved prospective purchaser could
hope to recover in the event of a repudiation of the lock-out agreement by the
vendor would be mere nominal damages. Nominal damages are not the objective of
a lock-out agreement nor are they what this action is about.
Accordingly, Mr Naughton was right, in
his formulation for the respondents of a suggested form of agreement, to
include in it an obligation on both parties to negotiate in good faith and
without unnecessary delay. Mr Brodie, for the appellants, included a similar
provision in his suggested form of agreement. Neither side suggested at any
stage in the argument that there could be an effective lock-out agreement which
did not impose on the vendor an obligation to continue to negotiate with the
preferred purchaser in good faith with a view to achieving ultimately a binding
contract for sale.
We are not concerned in this case with a
right of pre-emption. That is a concept well known in law, but it is a
different concept in that the terms on which the purchaser is to be entitled to
acquire the property in question must have been adequately defined by the
agreement which conferred the right of pre-emption: see Smith v Morgan
[1971] 1 WLR 803, where the real question was one of the true construction
of the agreement conferring the right of pre-emption as to the terms of the
offer which the vendor was thereby contractually obliged to make.
We are equally not concerned with cases
where on its true construction the agreement was, though no price was
mentioned, an agreement to sell at a reasonable price or at a reasonable
valuation, such as Foley v Classique Coaches Ltd [1934] 2 KB 1
and Talbot v Talbot [1968] Ch 1, or where there was some other
objective standard, probably backed by an arbitration clause, whereby any
lacuna in the terms expressly agreed could be filled, as in The Didymi
[1988] 2 Lloyd’s Rep 108 and F&G Sykes (Wessex) Ltd v Fine Fare
Ltd [1967] 1 Lloyd’s Rep 53. It is not suggested that in the telephone
conversation between Mr Martin Walford and Mr Miles on the evening of March 17
1987 Mr Walford and Mr Miles reached a binding agreement that the appellants
would sell and the respondents would buy the shares and property in question at
the price and on the other terms then or previously agreed in principle between
the parties and on such other terms as to warranties and otherwise as were in
the context reasonable. It is the respondents’ case that the negotiation of the
ultimate contract, if any, remained ‘subject to contract’, with the consequence
that the respondents could break off the negotiations at any time if they chose
to do so. But the respondents assert that the appellants, though free to break
off negotiations if they decided in good faith not to sell at all to anyone,
were bound to continue negotiating in good faith with the respondents, as long
as the respondents were willing to negotiate, until final binding agreement or
a genuine deadlock and breakdown of negotiations was reached.
But in this court we are bound by the
decision of this court in Courtney & Fairbairn Ltd v Tolaini
Brothers (Hotels) Ltd [1975] 1 WLR 297 where Lord Denning MR held at p 301H
that:
If the law does not recognise a contract
to enter into a contract (when there is a fundamental term yet to be agreed) it
seems to me it cannot recognise a contract to negotiate. The reason is because
it is too uncertain to have any binding force . . . It seems to me that a
contract to negotiate, like a contract to enter into a contract, is not a
contract known to the law . . . I think we must apply the general principle
that when there is a fundamental matter left undecided and to be the subject of
negotiation, there is no contract.
Lord Denning rejected as not well founded,
and Lord Diplock concurring with Lord Denning rejected at p 302B as bad law,
the dictum of Lord Wright in Hillas & Co Ltd v Arcos Ltd
(1932) 147 LT 503 at p 515 that:
There is then no bargain except to
negotiate, and negotiations may be fruitless and end without any contract
ensuing; yet even then, in strict theory, there is a contract (if there is good
consideration) to negotiate, though in the event of repudiation by one party
the damages may be nominal, unless a jury think that the opportunity to negotiate
was of some appreciable value to the injured party.
Part of the reasoning of Lord Denning for
his conclusion was the difficulty of assessing damages for breach of a contract
to negotiate. That was a difficulty more apparent on the facts of Courtney
& Fairbairn v Tolaini (where nothing whatever had been agreed
when the agreement to negotiate terms of a building agreement was made) than on
the facts of the present case. I would for my part hesitate to hold that there
could be no binding contract in law because it would be very difficult to
assess damages, and I do not think Lord Denning
Fairbairn v Tolaini was followed as binding authority by Megaw,
Roskill and Goff LJJ in Mallozzi v Carapelli SpA [1976] 1 Lloyd’s
Rep 229. In that case a contract for the sale of grain included a clause:
C.i.f. FREE OUT ONE SAFE PORT WEST COAST
ITALY — excluding Genoa. First or second port to be agreed between Sellers and
Buyers on the ship passing the Straits of Gibraltar.
Kerr J, deciding the case at first
instance before Courtney & Fairbairn v Tolaini had been
decided, applied the dictum of Lord Wright in Hillas v Arcos and
held that there was an obligation on the parties at least to negotiate bona
fide with a view to trying to reach agreement on the first or second port. But
this court held that in view of Courtney & Fairbairn v Tolaini
it was impossible to say that the provision in the contract which I have cited
was legally enforceable or that there was any legally binding obligation to
negotiate.
In the light of these authorities, Lloyd
J was justified in saying in The Scaptrade [1981] 2 Lloyd’s Rep 425 at p
432 of an agreement to seek a mutually acceptable conclusion that it ‘is like
an agreement to agree or an agreement to negotiate. It is a thing writ in
water. It confers no rights or obligations of any kind’. Similarly, in Trees
Ltd v Cripps (1983) 267 EG 596 at p 600, [1983] 2 EGLR 174 Nourse J
held that an agreement to accept the highest offer subject to contract could
not possibly be enforceable because it would amount merely to an agreement to
negotiate over the terms of a contract with him who made the highest offer. I
respectfully agree with that decision.
Mr Naughton submits that Courtney
& Fairbairn v Tolaini and Mallozzi v Carapelli are
distinguishable from the present case because what was referred to negotiation
with a view to agreement in those cases was an existing difference between the
parties, whereas in the present case at the end of the telephone conversation
of March 17 there was no existing difference; every point that had been raised
for discussion had been agreed. I do not, however, accept that as a valid
ground of distinction.
In the first place, I do not accept that
there was an existing difference between the parties, as opposed to an absence
of agreement, in either of the two cases cited when the contracts were made
which were expressed to be, or were relied on as, contracts to negotiate.
Beyond that, however, it is long
established that when parties are negotiating ‘subject to contract’ no term
becomes binding, even if provisionally agreed, until the final contract
embodying all the terms has been ultimately entered into. Each party is
therefore at liberty during the course of the negotiation to go back on a
provisional agreement, eg as to price. Moreover, as Sir George Jessel MR
pointed out in the well-known case of Winn v Bull (1877) 7 Ch D
29 at pp 30-31, when a man agrees to buy an estate there are a great many more
stipulations wanted than a mere agreement to buy the estate and the amount of
the purchase price that is to be paid. That is equally applicable to a sale of
the share capital of a private company, as is apparent from the length of the
draft sale agreement put forward by the respondents in the present case. In
particular, experience shows that the warranties to be given by the vendors in
such a sale agreement, and especially those as to profits, the provisions made
in the company’s accounts and taxation need serious consideration (which they
do not always receive).
So long as Courtney & Fairbairn v
Tolaini stands as binding authority, and the dictum of Lord Wright in Hillas
v Arcos and the decision of Kerr J at first instance in Mallozzi v
Carapelli remain discredited, the respondents’ claim for substantial
damages for loss of opportunity against the appellants must, in my judgment,
fail because the ‘agreement to negotiate’ which Mr Miles made on March 17 is
not an agreement which the law will recognise as imposing any enforceable
obligation on the appellants.
There is, however, a separate aspect to
the case in that the respondents claimed and were awarded their costs, fixed at
the sum of £700, incurred from March 17 until Mr Miles broke off the
negotiations with the respondents at the end of that month. These included in
particular the costs of preparing the draft sale agreement, and they were
awarded by the judge as damages for negligent misrepresentations made by Mr
Miles to Mr Walford in the telephone conversation of March 17.
Mr Brodie says that the judge has not
made sufficient findings of fact to support his award of the £700 and that if
the respondents wanted to uphold the award they should have served a
respondent’s notice.
Mr Miles did not give evidence. Mr
Walford did, and the evidence he gave was at no point disputed by the judge.
But though the judge referred to various documents in the agreed bundle, his
judgment is short on findings of fact.
The judge did make a finding, in relation
to Mr Patel, that Mr Patel appeared to him to be unconvincing and unreliable,
and having read the transcript of Mr Patel’s evidence I would not dream of
interfering with that finding. But it does not follow that the judge was
entitled to assume without evidence the contrary of whatever Mr Patel had said
in his evidence.
The only other possibly relevant finding
of fact made by the judge was a finding that Mr Miles and Mr Patel ‘continued
to be in touch’, notwithstanding the March 17 oral agreement and Mr Randall’s
letter of March 25. Plainly Mr Miles and Mr Patel were continually in touch
from Mr Miles’ telephone call of the evening of Friday March 27 onwards. But if
the judge was intending to find that there was continuous unauthorised contact
between Mr Miles and Mr Patel during the period from the telephone call of the
evening of March 17 until the telephone call of March 27, it is highly doubtful
whether there was any material which entitled the judge to make such a finding.
The analysis of the facts by Bingham LJ
gives no indication of such unauthorised contact. There was of course the visit
of Mr Noble of Investors in Industry plc, with Mr Khanderia, to Mr Miles’
offices on March 18, but the probabilities are that that had been set up before
the telephone conversation of March 17 and could not have been cancelled (as Mr
Miles had to come from Solihull); and anyhow it is not clear that that visit
took place after Mr Miles knew that the comfort letter from bankers, of which
Mr Walford had spoken on March 17, was to hand.
The representations alleged in the
statement of claim to have been made negligently by Mr Miles in the telephone
conversation of March 17 are:
(i) a specific representation that the
appellants were not dealing with the auditors or anyone associated with them
and
(ii) inferentially a representation as to the
appellants’ state of mind, that they were at March 17 ready and willing to
continue negotiations exclusively with the respondents if the comfort letter
was provided.
As to (i), the evidence of Mr Martin
Walford is clear that the representation was made, and if it was made it must
have been false to the knowledge of Mr Miles. But the judge has made no finding
that the representation was made.
As to (ii), the judge has found that the
‘promises’ of Mr Miles under the collateral agreement were representations and
that they were misrepresentations because Mr Miles did not terminate
negotiations with Mr Patel. That picks up the judge’s finding, to which I have
already referred, that Mr Miles and Mr Patel continued to be in touch
notwithstanding the March 17 oral agreement; I have already indicated my doubts
whether there was any material to support that finding in relation to the
period from March 17 to 26.
As I see it, the judge has not addressed
his attention to the real question on aspect (ii) of the case founded on
misrepresentation, namely is this a case in which Mr Miles at the time of the
telephone conversation of March 17 genuinely intended to do what he promised to
do, but subsequently changed his mind, or is it a case in which Mr Miles said
what he did on March 17 recklessly, not caring whether it was true or false?
Since Mr Miles did not give evidence and
the judge expressed no reservations over Mr Walford’s evidence, this court is,
in my judgment, in the circumstances of this case in as good a position as the
judge to make the findings which the judge failed to make.
I would hold that Mr Miles did represent
to Mr Walford on March 17 that the appellants were not dealing with the
auditors, or anyone associated with them, and I would further hold that he did
so, notwithstanding that the representation was to his knowledge false, in
order to induce Mr Walford to continue negotiating with him.
I would further hold that he did
inferentially represent to Mr Walford on March 17 that the state of mind of the
appellants at that time was that they were ready and willing to continue
negotiations with the respondents exclusively if the comfort letter was
produced. But he said what he did say recklessly, not caring whether it was
true or false, in order to induce Mr Walford to continue negotiations with him.
I would further hold that the Walford
brothers were induced by those representations (i) and (ii) to continue
negotiating with Mr
other costs included in the £700 which the judge awarded. Reliance on the
representations is thus proved.
Bingham LJ takes the view that the
respondents proceeded to incur the costs not in reliance on any representations
made to them but in reliance on their belief that they had a binding contract
with Mr Miles. But that, in my respectful view, is a distinction without a
difference. Whether or not they had a binding contract is, in this case, a
question of law. On the facts they were induced to believe that they had a
contract by the misrepresentations of fact made to them by Mr Miles on March
17. Accordingly, there was reliance on the representations notwithstanding that
there was reliance also on what, in my judgment, was an erroneous view of the
law. It is well established that it is not necessary that the
misrepresentations should be the sole cause which induced the representee’s
actions; it is sufficient if it can be shown to have been one of the inducing
causes: see, for example, Chitty on Contracts, 26th ed, vol 1 at para
426.
Accordingly, I would hold the claim
founded on negligent misrepresentation made out.
For my part, therefore, I would leave the
judgment for the £700 standing, but, for the reasons given earlier in this
judgment, I would allow this appeal to the extent of setting aside the judge’s
award of further damages to be assessed.
Appeal allowed in part. Order set aside.
Plaintiffs to have their costs on the High Court scale down to June 1 1988.
Defendants to have three-quarters of their costs below after that date and
three-quarters of the costs of the appeal. Application for leave to appeal to
the House of Lords refused.