Broken-off negotiations: when are you entitled to compensation?
Months of negotiation, costs incurred, and then the other party walks away. Is that simply allowed?
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Dutch law starts from the principle of freedom of contract. Parties are free to negotiate and equally free to break off those negotiations. In certain cases, however, breaking off negotiations may give rise to an obligation to compensate the other party's costs, or even its lost profits.
The starting point: you may walk away
As long as there is no agreement, either party may end the negotiations. Negotiating involves costs, and in principle each party bears its own. Anyone who negotiates knows that the outcome is uncertain.
The exception: justified reliance
According to settled case law of the Dutch Supreme Court (Hoge Raad), breaking off negotiations may be unacceptable where the other party was justified in relying on an agreement being reached, or where other special circumstances make breaking off unacceptable. The court also considers the extent to which, and the manner in which, the party breaking off contributed to that reliance, as well as the interests of both parties. It is an assessment of all the circumstances, and the courts are cautious.
What can be compensated?
If breaking off is unacceptable, the party breaking off may be liable for damages. Usually this concerns compensation for costs incurred, such as advisory and preparatory costs. Only in special cases may lost profits also be awarded, where the other party was entitled to rely on the agreement being concluded. In exceptional situations, the court may even order that negotiations be continued.
Which factors play a role?
In practice, relevant factors include how far the negotiations had progressed, whether agreement had already been reached on the main points, whether the future cooperation had already been put into effect, and what commitments and signals had been given. The reason for breaking off also matters, for example an unexpected change in circumstances.
Letters of intent and reservations
Many parties record the state of negotiations in a letter of intent. Such a document can make clear what has already been agreed and what has not, and on what terms the negotiations may be ended. A reservation such as "subject to board approval" or "subject to contract" can help to limit the other party's reliance, provided you actually act accordingly in practice.
What can you do if you want to end the negotiations?
Be timely and clear. Explain why you do not wish to proceed and avoid the other party incurring further costs in the belief that the agreement will go ahead. Anyone who breaks off negotiations after leaving the other party under a false impression for a long time runs more risk than someone who communicates early and openly.
International negotiations
When negotiating with a foreign party, the question arises as to which law governs the pre-contractual phase. German law, for example, has its own rules on liability in the pre-contractual phase (culpa in contrahendo). Make arrangements on this point early as well.
This article contains general information and does not constitute legal advice. Legislation and case law may change, and the outcome always depends on the circumstances of your situation. For advice on your matter, please get in touch with us.
