12 February 2020

Everything you need to know about breaking off negotiations

By Christiaan Mensink

Negotiations are conducted daily in business. Often this goes well, but not always.

Sometimes one of the parties breaks off the negotiations to the disappointment of the other. When is breaking off negotiations permitted, and when is it too late?

Starting point

The starting point is that all parties must be able to begin negotiations openly. This also means that, in principle, they are free to break off those negotiations. However, that freedom in negotiations is limited. As parties get closer to each other, negotiations can deepen to a point where the parties are no longer free to break off those negotiations. It is impossible to identify a fixed point at which the freedom to break off negotiations still exists, and at which breaking off is no longer permitted. Every situation is different. It depends on what the parties can reasonably expect from each other.

In short, termination of negotiations is no longer allowed if your negotiating partner has ‘justifiable confidence’ that some form of agreement will arise. The further the negotiations have progressed, and the more sub-topics the parties have already reached agreement on, the sooner a party may have such a legitimate expectation on the conclusion of an agreement. Of course, the relevance of those components in relation to the total package that is being negotiated is of great importance.

Once this turning point has been reached, all negotiating parties have a legal obligation to reasonably pursue the negotiations with the aim of reaching an agreement.

Consequences of broken negotiations

What if one negotiating party breaks off the negotiations, even though they have reached the stage that they may no longer be broken off? The disappointed party has the choice of two options. He may require the other party to continue negotiations until a definitive agreement has been concluded, or he may claim compensation for damages. The other party must then compensate the lost revenue. This is an amount to put the disappointed party in the same financial situation as if a contract had been concluded and this contract had been properly performed. This amount includes lost profit. The disappointed party can also choose to claim the costs incurred. Consider the costs of advisers, purchasing, transport, etc.

NB: After the other party has wrongly broken off the negotiations, it is the choice of the disappointed party to demand further negotiations or to claim compensation. If compensation is opted for, the other party no longer has the right to conclude a contract. This is only possible if the disappointed party appears to be willing to negotiate further, but he is not obliged to do so.

How can you prevent the consequences of broken negotiations?

As indicated, a negotiating partner no longer has the freedom to terminate negotiations at its own discretion once the other party has the legitimate expectation that an agreement will be reached. Those who want to keep their hands free to break off negotiations must (continue to) make that clear to their negotiating partner. It is possible to make conditions, such as the financing reservation, the approval of the supervisory board or shareholders’ meeting, the condition of a written, signed agreement, or the explicit condition that negotiations may be interrupted for as long as not all parts of the agreement have been agreed upon. As long as those conditions have not been met, you retain the right to withdraw from the negotiations.

The influence of a proposed alternative scenario

A party may propose an alternative route during negotiations. For example, if the sale of a company is negotiated where the purchase price will be paid at once, in the final phase the buyer proposes to pay the purchase price in long term instalments (as a loan). If you as a seller agree, and discuss the terms and conditions of that loan (term, interest, periodic repayment, etc.), there is a possibility that no agreement will be reached afterwards, and the buyer will break off the negotiations.

To answer the question of whether the other party was still free to terminate negotiations at that point, it is necessary to look at the moment when those negotiations are actually terminated. In this example, that is the alternative scenario: a time when there was no longer any reasonable confidence that the parties would come to any form of agreement. As a disappointed seller, you can no longer go back to the earlier moment when you still had that confidence.

Three phases

In short, three phases of negotiations can be distinguished:

  1. The parties have negotiated, but there is still no legitimate expectation that an agreement will be reached. Terminating negotiations at this point is free and will not lead to an obligation to pay damages or compensation.
  2. There is a justified confidence in the conclusion of an agreement. The party who has broken off the negotiations is then liable for the damages that the disappointed party has suffered as a result. The compensation may consist of lost revenue or costs incurred. The starting point is that the obligation to pay compensation in the event of broken negotiations consists of the payment of the lost revenues.
  3. A binding agreement has been reached for all parties. Under Dutch law, an agreement is established by an offer and an acceptance. Both the offer and the acceptance thereof are generally form-free. It is not necessary that the agreement be recorded in writing. An agreement can also be concluded verbally or even be derived from behaviour. For the establishment of an agreement it is also not required that there is agreement on all (sub-) components. If agreement is reached on the main points of the agreement, a binding agreement has been reached in principle. An agreement reached has passed the negotiation stage. If a counterparty does not want to “continue to negotiate”, then that does not mean breaking off negotiations, but rather not fulfilling the agreement already reached. The disappointed party can simply demand compliance with the agreement.

4 useful tips

  1. Be aware of the risks of breaking off negotiations.
  2. Learn to recognise the moment when you can no longer break off negotiations.
  3. Make reservations to make it clear to all negotiating parties on what grounds or until what time negotiations can still be terminated.
  4. Enclose a letter of intent where this is recorded or send a one-sided message to the other party.
  5. As soon as the other party proposes an alternative scenario during the negotiations, first record the current status quo so that you can fall back on it.

Do you have a question about this subject? Please contact me.

Christiaan Mensink

Christiaan Mensink

Lawyer / partner

Christiaan Mensink is one of the most experienced and specialised WHOA lawyers in the Netherlands.

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