Why breaking off negotiations is not always possible

It happens frequently: two parties are negotiating with each other to reach an agreement. Everything seems to be hunky-dory and final agreement on the deal seems very close. Suddenly, the negotiations collapse and one of the two parties is left destitute. Sometimes not even aware of why the negotiations broke down. The question then arises: were negotiations allowed to break down just like that?

Agreements are established by offer and acceptance, and freedom of contract is paramount. As long as there is no agreement, both parties are in principle free to break off negotiations. However, this is not always the case. In fact, parties are obliged to not let their behavior be guided solely by their own interests. They must also take into account the legitimate interests of the party with whom they are negotiating. If the other party has a legitimate expectation that an agreement will be reached, it may be unacceptable to break off negotiations. Other circumstances of the case may also lead to that judgment. If negotiations do break down at such a time, a liability to pay damages may arise.

Unacceptable by justifiable reliance?

When answering the question of whether breaking off negotiations is unacceptable because of the other party's legitimate expectation, various circumstances should be taken into account. For example, the extent to which and how the party breaking off negotiations contributed to the creation of the legitimate expectation. A circumstance contributing to this legitimate expectation is present, for example, if the terminating party had noted at a distant stage of the negotiations that reaching agreement could no longer fail. A reservation regarding the approval of the management board, on the other hand, may prevent the creation of justified trust. Another important factor may be whether unforeseen circumstances arose during the course of the negotiations. A factor here is whether the negotiations continued for a long time despite the changed circumstances. Ultimately, what is decisive is the legitimate expectation of the non-breaching party at the time the negotiations were broken off. Incidentally, a situation in which breaking off negotiations is unacceptable does not easily occur.

Compensation or further negotiation

If it is unacceptable to break off negotiations, the party that does break off negotiations may sometimes be obligated to reimburse the other party for costs incurred in the negotiations. If there was a situation in which the other party legitimately trusted that an agreement would be reached and breaking off was unacceptable, sometimes even (much) higher compensation is due. In fact, the aborting party may then be obliged to compensate the so-called positive contract interest. This is the amount that the other party loses by not reaching an agreement, and this amount can be quite large. Instead of compensation, it is sometimes also possible to successfully claim that the terminating party be obliged to continue negotiating.

Incidentally, there may also be a situation where negotiations were allowed to break down, but where, given the circumstances of the case, the costs incurred by the other party must still be (partially) compensated.

Conclusion

If your counterparty breaks off negotiations or threatens to break off negotiations, it may be advisable to seek legal advice. The same applies if you yourself intend to break off negotiations. By making strategic choices, you can ensure that any legitimate trust on the part of your counterparty disappears after all, without you becoming liable for damages. In the opposite situation, you can ensure that your counterparty is less likely to take the position that you no longer had a legitimate expectation when your counterparty ceased negotiations. This may actually allow you to claim damages.