1 min read
The possibilities to abort negotiations
7 April 2020

The coronacrisis has an enormous impact on the economy and thus on businesses. Although the economic outlook varies, in general the outlook is not optimistic and a recession seems inevitable. In these times, companies are often confronted with liquidity shortages due to the loss of turnover and customers suspending payments. Against this background, it is not illogical to re-evaluate intended investments, transactions and collaborations critically: is it really necessary to enter into these commitments now or would it be more prudent to abort negotiations in view of the (partly unknown) consequences of the coronacrisis? The question that arises is, however, to what extent the parties are still free – without being liable – to walk away from such negotiations.

The starting point to answer that question is freedom of contract: the parties are free to choose when and with whom they do (or do not) enter into an agreement. As long as no agreement has been concluded, the parties may therefore, in principle, terminate their negotiations at any time and for any reason whatsoever, without the terminating party being liable to pay damages to the other party as a result.

However, this could be different under certain circumstances as parties must also take into account the legitimate interests of the party with whom they are negotiating. Aborting negotiations may be unacceptable if the other party has the legitimate expectation that an agreement would be concluded or due to other circumstances of the case. In that case, the aborting party may be liable. Under circumstances, the other party may also claim that the parties must continue to negotiate.

In short, there are 2 categories of cases in which liability for aborting negotiations exists. Firstly, it may be contrary to reasonableness and fairness if the terminating party does not offer the other party compensation for the costs it has incurred (this is the negative contractual interest). The other party must then be brought in the situation as if the negotiations had not taken place (i.e. the reimbursement of, for example, negotiation costs, consultancy and legal costs, etc.). Whether a party can claim damages, depends on circumstances of the case.

Secondly, a party may be held liable for aborting off negotiations if aborting negotiations is unacceptable because the other party had a legitimate expectation that an agreement would be concluded. In very specific cases, this may lead to the obligation to compensate the positive contractual interest of the other party. That positive contractual interest equals the upside that the other party would have had if the agreement would have been concluded. Generally, this would be the loss of profit, which can be considerable. Account should also be taken of the extent to which and the manner in which the party terminating the negotiations has contributed to the legitimate expectation off the other party that an agreement would be concluded. The bar for awarding these damages is high and is only met in exceptional cases.

Whether a claim for compensation for the negative or positive contractual interest is successful will depend on all the circumstances of each case. It is possible that the terminating party has a legitimate reason justifying the termination of the negotiations. It is relevant whether unforeseen circumstances have occurred in the course of the negotiations. It is not inconceivable that the coronacrisis and its consequences may in certain situations be seen as unforeseen circumstances justifying the termination of the negotiations. Whether this is the case may vary from sector to sector. Some sectors are affected more severely than others. It is also relevant here whether, despite these changed circumstances, the parties have continued to negotiate for a long period(s). This may limit the possibilities for termination. Ultimately, the decisive factor is the legitimate expectation of the other party at the time the negotiations were broken off.

Negotiations can no longer be broken off once an agreement has been reached and the pre-contractual phase has ended. Whether or not an agreement was reached depends on what the parties have communicated towards each other and what they could have reasonably conclude and inferred from each other’s statements in the given circumstances. The distinction between the moment that the pre-contractual phase still exists and the moment that an agreement has been concluded is often difficult to assess. If an agreement (whether or not on key points) has been reached, the other party can, in principle, demand performance of that agreement. Read more about the impact of the corona crisis on concluded agreements here

Finally, if the parties agreed on a precontractual regime (e.g. in a letter of intent or a term sheet), those arrangements in principle determine the parties’ pre-contractual relationship. For instance, the parties can agree in advance at what moment an agreement is deemed to be reached and until which moment they can freely walk away from the negotiations. Such a clause may, for example, stipulate that a binding contract will only be concluded once a written contract has been signed or if the company’s management agrees with the result of the negotiations. Parties can also agree, for example, that a certain break fee (a kind of penalty) will be payable when negotiations are broken off (for any reason whatsoever). In times of corona, such a clause is in principle simply enforceable, unless reliance on it is unacceptable according to standards of reasonableness and fairness.