Breaking off negotiations

Breaking off negotiations and justified trust can lead to damage sometimes. Examples are costs for research or preparations that have already been made. Sometimes even loss of profit can be claimed. Prevent being addressed for such damages. Or claim the damage you suffer yourself after negotiations that have been broken off unexpectedly by your intended partner.

Freedom of contract

The Netherlands know freedom of contract. This means that in principle parties may decide for themselves with whom they close agreements and what they agree upon. This freedom is not absolute though. Standard case law show that parties must behave reasonably and fairly, also before closing the agreement. Parties may not discriminate when choosing a contract partner and the content of the agreement may not be in conflict with a binding provision of law, public order or good morals. Examples of agreements that are invalid because of their content are agreements of prostitution, or the agreement with a hired assassin, but you can also think of agreements on waste dump, which is illegal because it is in conflict with binding laws. The principle of freedom of contract also entails that parties are in principle also free to break off negotiations at any given moment. This also ties to the basic assumption that someone is only bound to something, after he has agreed to it (has signed the contract). This freedom is not unlimited either though.

Justified interests

In 1957 the Supreme Court of the Netherlands has stated that parties that are in the process of negotiating an agreement with each other, must take into account each other’s justified interests. In later rulings the Supreme Court has judged that this can mean that it is unacceptable to use your freedom/competence to break off negotiations. The main condition for this is that the actions of the party must have given the negotiation partner a justified trust that the agreement would be established.

Compensation or continuing the negotiations

The negotiation partner is entitled to compensation, when one of the parties breaks off the negotiations at a point that the freedom to terminate has been passed. This compensation can not only consist of the costs that have already been made (for example expenses for research), but also of lost profits. One can also claim that the terminating party must continue the negotiations. This can even be connected to a prohibition to negotiate with third parties. Even if the negotiations have not reached the phase when negotiations cannot be broken off, they can have reached a phase in which the terminating party is obliged to compensate costs made by the negotiation partner. This most often happens when the terminating party knows that the partner has done considerable expenses because of the negotiation process.

Your possibilities for compensation

Below you find some advice to enlarge the chance for compensation in case your negotiation partner ends the negotiations unilaterally in the middle of the process:

1. Agree on a time path fort he negotiations. The longer this path is followed, the more you may trust that the negotiations will continue to be fruitful and (thus) that an agreement will be established;
2. Try to established as many (partial) agreements as possible. If you and your partner have agreed upon a large number of points, it becomes defendable that you trusted that you would agree upon the remaining points, especially when these points were less important;
3. Inform your negotiation partner during the process on the expenses you have made. If your partner knows that you have spent substantial amounts of money on the negotiations, he can be bound to compensate these.

What if you want to break off negotiations

Despite what is mentioned above, the main rule is that you have the freedom to terminate negotiations at any given moment. Exceptions mentioned above (on liability for terminated negotiations) only apply if your negotiation partner could trust on the establishment of the agreement justifiably. That trust must be there at the point that the negotiations are terminated. Whether your negotiation partner can trust on the establishment justifiably, is in your hands. After all, that trust must be instigated by you. You should be aware of this during negotiations.

Not only your partners interests play a role for liability for terminating the negotiations. Your interests also are a factor, besides any unforeseen (external) circumstances, that occured during the negotiation process. Think of the financial crisis that made it harder or even impossible for entrepeneurs to borrow money. A good reason to terminate will be accepted more easily by a judge than a bad reason.

Minimize the risk of liability

The reasons described below can decrease the risk of liability for terminating the negotiations:

1. Prevent the situation that your negotiation partner starts to trust that, no matter what, an agreement will be reached. For instance by agreeing that an agreement won’t be reached until you have agreed upon all discussion points and/or that you are only bound by agreements that are recorded in writing in an agreement signed by both parties (at the beginning of the negotiations, possibly in a ‘letter of intent’).The negotiator, that acts on behalf of a (bigger) organisation, could indicate that the result of negotiations is only binding when another person or organ, for example a manager, the board of directors and/or the supervisory board, agrees on the end result of the negotiations;
2. If you want to terminate the negotiations at a moment that your partner can trust that the agreement will be established, you can take away the trust, for example by reopening discussion points discussed earlier or open new discussions. If you are able to take away the trust, you can terminate the negotiations without being liable;
3. If you ever have to break off negotiations at a moment that your partner trusts upon the establishment and you have no time to take away this trust, it is wise to correspond with your negotiation partner carefully. Blame the termination, where possible, on credible external effects that have occured during the negotiations process.

Ask for expert advice in time

Know that you can already involve us during the negotiation process. As attorney we can advise you on how to prevent liability for damage connected to the termination of negotiations. Of course we can also support you excellently, after you have suffered damage because of the termination by your negotiation partner. We can also initiate interlocutory proceedings to claim a continuation of the negotiation for you, when your partner terminates the negotiations without a reason, while you had already signed a contract that had been agreed upon for 99%.

For more information and all possibilities: contact us.