New Exclusivity and Lockout Documents
We have recently added to our Heads of Terms, Contract Formation and Exclusivity subfolder (in the Commercial Agreements Group) some new templates which can be used to create an “exclusive” or “lockout” arrangement between two parties involved in negotiating a definitive commercial arrangement or transaction.
What is “exclusivity” or “lockout”?
In this context, the words “exclusive” or “lockout” are interchangeable. Both expressions are used to mean in essence that you are able to negotiate with another person/entity and exclude them from doing the same with a third party for that period. In effect it “locks out” any such third party.
This “lock out” can be established by use of a binding exclusivity agreement between you and the other person/entity whereby each of you undertakes to the other that, for a stated period, you and they will not engage in any rival negotiations or arrangements with any third party.
The objective is to ensure that, in good faith, the other party commits to negotiate and seeks to reach a definitive deal with you. If the other party were not prepared to tie itself in this way, that would tend to indicate that it was not committed to you and might do a deal with a competing third party at any time, possibly without breaking off negotiations with you. In other words, it might conduct negotiations with one or more other rivals and in parallel continue its discussions with you before “dropping” you and signing a deal with the third party.
An exclusivity/lockout agreement can therefore provide a degree of protection for each party, although of course it does not confer a right to buy from or sell to or otherwise deal with the other party, and they will be free at the end of the period to do a deal with another if your negotiations have not led to a deal. If you do need to create a right to buy, sell or do a deal with your negotiating partner, you should instead consider entering into an agreement with them that confers an option to buy etc.
What is the benefit for each party of exclusivity/lockout?
You might spend a good deal of time and expense working towards a deal with the other party. There is no guarantee for you or them that you will be able to successfully conclude a satisfactory deal and sign a detailed contract with them, but you will be concerned to increase the chance of doing so, and to seek to reduce the risk that your time, trouble and expense will be wasted.
If you can seek to avoid the other party discussing a rival deal with a third party while you and the other party spend a reasonable amount of time exploring a possible deal, that will tend to increase the chance that you will achieve a deal. If you can stave off the prospect of a third party getting a deal instead of you, you may not only avoid seeing your third party competitor gaining at your expense but you might also gain a profitable deal.
Furthermore, the time, trouble and expense incurred by you could be considerable: apart from time spent by your management in discussions with the other party, you may need to gather and analyse commercial, technical, financial and other data received from the other party (i.e carry out investigations and due diligence) and negotiate terms. If you can reduce the chance that your negotiating partner will turn to a third party, your time, trouble and expense is less likely to be wasted.
About these new documents
There are four new templates. Two of them are designed to be used as stand-alone pre-contract agreements which precede a definitive full agreement setting out all of the terms of a commercial transaction. The Exclusivity Agreement includes confidentiality clauses and some minor optional provisions. The Lockout Agreement is similar to it but it does not contain confidentiality clauses and various provisions in it have been shortened and simplified so that it can be used for less complex and/or lower value proposed commercial deals.
The other two templates are designed to be used as part of a heads of terms or similar document signed as a preliminary agreement pending negotiation and signature of the full definitive agreement (rather than being used on a stand alone basis). One is similar to the Exclusivity Agreement, and the other is similar to the Lockout Agreement.
We suggest that you read the information accompanying each of these four new documents to see which suits your situation best. Incidentally, you might wish to use the Memorandum of Understanding (Commercial Transactions) BS.MOU.01 as a pre-contract document. It contains exclusivity/lockout provisions similar in effect to these four new documents. Depending on your particular needs, you can use it instead of one of our four new documents. You can find this document in this same subfolder.
When to use these documents
These four new documents are generic fairly simple templates and so they can be used in a wide variety of contexts. For example, they can be used when two parties are discussing potential supply of any goods or services, intellectual property licensing, joint ventures, sale of shares, sale of a business, sale of business assets, or indeed any other potential deal. In each case, you will need to consider whether the content of the template will need any addition or change to meet your requirements, for example you might wish to add provisions for agreed damages at a specified level or for compensation for particular types of wasted costs (e.g. legal costs) to make the other party think twice before breaching the exclusivity/lockout agreement
The contents of this Newsletter are for reference purposes only and do not constitute
legal advice. Independent legal advice should be sought in relation to any specific