12 February 2020
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?
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.
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.
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.
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.
In short, three phases of negotiations can be distinguished:
Do you have a question about this subject? Please contact me.
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