In the pre-contractual phase, parties are, in principle, free to break off negotiations. That freedom, however, has its limits. Breaking off is unacceptable if the other party, given the trust that was raised and the circumstances, could reasonably expect that an agreement would be reached.
A recent ruling shows that this standard extends further than just the moment of breaking off. Conduct during the negotiations can also be unlawful. Notably, in this case it was not the party breaking off that was held liable, but the other party, for taking an unreasonable negotiating stance (which forced the other side to break off).
What was this case about?
Two software companies in the social domain wanted to jointly offer municipalities an integrated software package. They submitted joint tenders, with an agreed income split of 70/30, but without yet having signed a fully worked-out cooperation agreement. After a major contract was awarded, technical integration began, but there was still no agreement between the two software companies.
The parties were still in the pre-contractual phase, meaning the phase before a signed contract exists. In that phase, standards of fair dealing also apply, and it is not always legally the case that you remain free to simply break off.
The two partners were negotiating the cooperation agreement and a possible takeover, by one partner, of the other partner’s software, so that everything would come under one roof. Unfortunately, the parties failed to reach agreement on essential points, such as:
- the division of licence income;
- responsibilities for management and maintenance.
In the meantime, one of the software partners, the smaller one, had already put in many hours on the tendered contract and asked by email for assurance from the larger partner, since the latter handled invoicing to the municipality. The smaller partner wanted to be able to invoice the larger partner up to €100,000 for work performed. The larger partner explicitly agreed to that €100,000, but later did not pay the invoice.
The negotiations became increasingly strained and stalled when it turned out that the smaller partner was demanding fees higher than the licence income the municipalities paid to the larger partner. For the larger partner, continuing under those conditions was no longer financially viable. When the smaller partner did not adjust its demands, the larger partner ended the negotiations and engaged a different technical partner.
What did the court rule?
The court ruled that no cooperation agreement had come into existence. No agreement had been reached on essential elements. Claims based on the existence of a cooperation were therefore rejected.
The €100,000 invoice, however, did have to be paid. The email exchange qualified as an independent, binding agreement that also applied even if the cooperation did not go ahead.
Breaking off the negotiations was, however, not unlawful. The larger partner could no longer justifiably rely on a contract being concluded, because the smaller partner kept insisting on demands that bore no realistic relation to the project’s financial returns.
In fact, the court reversed the usual approach. It was not the party that broke off, here the larger partner, but rather the party, the smaller partner, that kept insisting on unreasonable conditions, that acted unlawfully in the pre-contractual phase and was held liable for the other party’s damage.
Why is this relevant for you as an entrepreneur?
When negotiations break down, attention often focuses on the question of whether the party breaking off is liable for damages, for example for costs incurred or lost profit. This ruling, however, shows that the court assesses the entire negotiation process and looks at your role and conduct.
It is not only the moment of breaking off that is relevant, but also conduct during the negotiations. Continuing to insist on unreasonable conditions can be classified as unlawful.
In such a case, it can actually be the party that keeps “negotiating” while locking the situation up with unreasonable demands who becomes liable for the other party’s damage. Be aware of this when determining your negotiating strategy and formulating your demands.
What can you learn from this?
- Record essential agreements in good time: first properly document the cooperation between yourselves before jointly committing, with a partner, to (a tendered contract) from a third party. Without agreement on core points, no cooperation contract comes into existence, and therefore no right to expected proceeds and profits either.
- Be careful with interim commitments: an agreement by email can already be a binding commitment, as here with that €100,000 invoice for work performed, regardless of whether the cooperation goes ahead or not.
- Negotiate realistically and reasonably: demands that are evidently unattainable can be classified as unreasonable negotiating, for which you can then be held liable.
- Do not automatically assume “whoever breaks off, pays”: the court looks at the overall conduct of the parties and at whether reliance on a contract being concluded was still justified.
Need help?
Would you like to limit risks in the pre-contractual phase or create certainty during negotiations? The corporate lawyers of The Legal Company are happy to think along with you. Please feel free to contact us via info@thelegalcompany.nl or call 020-3450152.
