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When you’re in the process of negotiating a deal, it can be hard to guarantee whether or not the other party will simply move on to someone different before you’ve managed to sign the contract.
As a result, you end up wasting a lot of time and resources on something only to see it fall through.
Alternatively, you might want to make sure you’re the only one who is able to purchase a particular good.
In order to prepare for these scenarios, you might want to consider getting a lock-out agreement.
What Is A Lock-Out Agreement?
A lock-out agreement is a type of contract that stops the seller of something from contracting or talking to other parties during their negotiation stage with you.
Lock out agreements are often used with major purchases, such as a home or a large quantity of products. These transactions often require negotiations which can take a matter of weeks or even months.
Having a lock-out agreement in place gives you the assurance the other business will not bail on you during this time.
It’s important to keep in mind that a lock-out agreement does not secure the purchase nor does it guarantee that a contract will be formed between the parties. Rather, it just prevents the parties from negotiating with others during this time.
A lock out period can end in either with a contract for the product that was being negotiated or both parties agreeing to go their separate ways.
What Is Included In A Lock-Out Agreement?
Lock-out agreements are catered to the parties using it. There’s no set standard for how a lock-out agreement should look, however, they will typically include:
- A description of the item being negotiated
- Identification of the parties to the agreement
- The time frame for the lockout period
- Confidentiality
- What happens when one party is no longer interested in the deal
- Payment or fees
- Acting in each other’s best interest
Even though there is no standard form for a lock-out agreement, it should still adhere to ordinary legal principles. For example, the contract cannot be for something illegal or have a clause that causes harm to one party.
Lock-Out Agreement Vs Exclusivity Clause
Lock-out agreements and exclusivity clauses have a similar principle, however, they are used in different scenarios and operate a little differently.
A lock-out agreement prevents one party from talking to another buyer while they are in the midst of negotiations with another party. There is no contract for the purchase yet.
An exclusivity clause, on the other hand, is used when there already is or there is going to be a contract between the two parties. It prevents one or both parties from providing a particular product or service to others either for a certain time period or within a specific geographical limit.
The purpose of an exclusivity clause is generally used to manage competition and ensure other competing businesses don’t start using the same materials as them. It can also provide assurance that neither party will leave in the middle of the agreement to do business with somonelse.
| Example Reece runs a beauty salon. He uses exclusive hair and skin products from Hannah’s business. The agreement between Recee and Hannah contains an exclusivity clause where Reece cannot purchase hair and skin products from another seller for the duration of their agreement. The exclusivity clause also notes that Hannah cannot sell the products in the same locality as Reece’s salon for as long as she has a contract with Reece. |
Is A Lock-Out Agreement The Same As A Non-Compete Agreement?
Like exclusivity clauses, Non-Compete Agreements can also be used to manage competition. Non-compete agreements are used with other businesses or individuals to prevent them from engaging in practices that put them in a position of direct competition with your business.
A non-compete agreement prevents a party from working for or doing business with a business that is similar to yours for a certain amount of time. They can also prevent the signing party from starting a business just like yours in the future (something that can be useful when it comes to former employees).
Non-compete agreements are also usually there when a business already has an agreement with the other party, such as an Employment Agreement.
| Example Annie runs a bakery and hires a couple of employees to help. There are a number of other bakeries in Annie’s local area so, along with an employment agreement, Annie has her bakers sign a non-compete agreement. As they will have access to her recipes and some of her kitchen secrets, the agreement is there to make sure her current employees don’t leave the business and utilise the knowledge they gained while working for Annie against her. |
It’s important to remember that non-compete clauses and exclusivity clauses must be used within reason. That is, they should be there as a reasonable means to achieve a business objective.’
They cannot be used to put unreasonable or unfair demands on the parties signing them. Doing so could make the terms of the contracts void.
What Happens If You Breach A Lock-Out Agreement?
A lock-out agreement is a legally binding contract and therefore, breaching its terms can have legal consequences.
The actual consequence will depend on the nature of the breach itself and how much loss it caused the other party. In some cases, the aggrieved party will have the option to seek damages.
Therefore, it’s really important to take a lock-out agreement seriously and uphold the terms that were agreed to in the contract.
What Else Is Involved In A Lock-Out Agreement?
As we mentioned, lock-out agreements can be catered to suit the needs of both parties. Therefore, it can be written to add any additional duties or responsibilities that are necessary for fair practice.
However, none of the elements of the contract should put one party in an unjust position. Remember – the objective of the contract is to prevent the parties from securing deals with other businesses while they are in the midst of a negotiation for the same product with you. The lock-out agreement should aim to meet this purpose and not be overly restrictive of any party.
Finally, it can be easy to simply agree verbally to a lockout agreement but this puts your and your business at risk. Without actually taking the time to determine the details and getting them in writing, misunderstandings can occur causing disputes to arise.
Even though some verbal promises can be legally binding, it’s better to have a written agreement that is reviewed then signed by all parties.
Key Takeaways
Lock-out agreements can be a useful way of protecting your business’ interests when you’re in the middle of negotiating a deal. To summarise what we’ve discussed:
- A lock-out agreement is a contract between two negotiating parties, preventing the seller from striking a deal with another party during the negotiation stage for the same product
- Lock-out agreements usually cover the item being discussed, the lockout period as well as the receptive roles and responsibilities of each party
- Lock-out agreements are different to exclusivity clauses. Lock-out agreements are used when a deal is being negotiated whereas exclusivity clauses are there to ensure the business is the sole receiver of a particular good or service
- Non-compete agreements are used to prevent someone from competing with your business- usually once their current contract with you ends
- Lock-out agreements should be in writing and fair to to all parties- they should not contain clauses that are unreasonable or overly restrictive
If you would like a consultation on lock-out agreements, or need any business contracts reviewed by a legal professional, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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