Introduction
Am I entitled to compensation if the party I’m negotiating with suddenly pulls the plug? The general rule is that negotiations can in principle be broken off without any liability for damages arising, but this depends on the stage the negotiations are in. A recent Supreme Court ruling confirmed that breaking off negotiations by one party was not unacceptable, but that party could nevertheless still be required to reimburse the other party’s costs. Quite complicated. We are happy to explain this doctrine in this blog, as well as what you, as the party breaking off negotiations, can do to reduce liability risks.
The three phases of negotiations
It follows from the principle of freedom of contract that parties are in principle free to contract with whomever, about whatever, and whenever they wish. This also implies that parties may break off negotiations on an agreement. However, this freedom does not extend so far that a party can always walk away from the negotiating table without risk. This is not permitted, for example, if the negotiations have progressed so far that breaking them off would be unlawful. That this regularly happens is evident from the many proceedings and summary proceedings brought on this issue.
To determine whether this is the case, the “three-phase doctrine” has been distilled in legal literature and lower case law.
- In the first phase, the parties are at such an early stage that they can break off negotiations without any liability for damages. For example, a party stops negotiations when there is not yet agreement on one or more essential elements of the agreement, such as the price. At that point, only interest has been shown.
- In the second phase, parties remain free to break off negotiations, but this does lead to liability for damages on the part of the breaking-off party in respect of the costs incurred by the aggrieved party (reliance interest). This may be the case, for example, if the parties have already reached agreement on part of the essential elements and have already incurred negotiation costs.
- In the third phase, parties are no longer free to unilaterally break off negotiations. The non-breaking party was then justified in trusting that the agreement would come about. For example, the situation in which the parties have already been negotiating for a long time and have reached agreement on virtually all commercial points. In such a case, the breaking-off party can be ordered to continue negotiating or to pay damages that also extend to the lost profit (expectation interest).
Project developers rejected by the seller do not let it go!
In its ruling of 14 June 2024, the Supreme Court held that a party can also be liable for damages even where breaking off the negotiations is not unacceptable. In the case, two project developers were opposed to the sellers of two plots of land. To that end, they had entered into a purchase agreement. However, delivery could not yet take place because the municipality held a right of first refusal on the plot, and the zoning plan and the leasehold conditions first had to be amended. After 18 months, the aforementioned resolutive condition in the purchase agreement was triggered. The parties did still conclude an agreement extending the resolutive condition, but when that period also expired, the patience of the plot owners ran out and they broke off the negotiations.
When the project developers later heard that the sellers had sold the plot to a third party for a higher amount, they went to court and claimed damages. They were unsuccessful before the district court and the Court of Appeal. Breaking off the negotiations was not, in fact, unlawful. And now it gets interesting.
The Supreme Court ruled that, while this was indeed the case, the Court of Appeal had not sufficiently taken into account the fact that the plot owners had been enriched by the efforts of the project developers. They had managed to get the zoning plan amended, as a result of which the land had increased in value. The plot owners were therefore nevertheless found to be in the right.
Limiting the liability risks of the breaking-off party
The ruling above shows that the circumstances of the case are decisive in determining whether a party breaking off negotiations is liable for damages. Even so, as the breaking-off party you can somewhat limit your risks.
Our tips
One way to limit these kinds of risks is to conclude a letter of intent with the necessary reservations and cost-limiting clauses. Or, if that stage has already passed, to have your situation properly reviewed by a lawyer, so that you know which phase you are in and what you can and cannot do.
The lawyers at The Legal Company are experts in corporate law, contract law, employment law, and privacy law. We are happy to help protect your business to the fullest. Feel free to contact us via info@thelegalcompany.nl or call 020-345 0152 to schedule an appointment.
