As long as a contract has not yet been concluded, the parties’ freedom of contract is paramount. In principle, the parties are free to decide whether to continue or break off negotiations. Nevertheless, circumstances may arise under which breaking off negotiations is unacceptable. One of the remedies available to the injured party in such a case is to seek a court order to continue negotiations. This blog post discusses the chance of success of such a court order, and the factors involved.
Duty to renegotiate
There is no legal provision in Dutch law for a duty to renegotiate in the event of stranded negotiations. The injured party may invoke the standard of care arising out of tort (Art. 6:162 DCC), or the standards of reasonableness and fairness (Art. 6:2 DCC), as a basis when claiming an order to continue negotiating. Under certain circumstances, the literature also defends breach of contract (Art. 6:74 of the Civil Code) as a basis, for example if the parties already had a contractual (best efforts) obligation towards each other to conclude a contract.
If a party breaks off negotiations when it is not permitted to do so, the injured party has the following remedies:
(i) claim damages consisting of the positive interest (lost profits) or the negative interest (compensation for costs incurred in the negotiation phase and loss of opportunity);
(ii) seek an order to continue negotiations until there is an agreement.
Seeking an order to continue negotiating is less common in practice than seeking damages, but may be the appropriate remedy if the parties have an interest in the formation of a contract.
In the standard judgment HR 12 August 2005, ECLI:NL:HR:2005:AT7337 (CBB/JPO), the Supreme Court determined the standard of review for an order to continue negotiating: facts and circumstances must be presented which establish that the other party (i.e. the non-terminating party) had a legitimate expectation that a contract would be concluded. This standard should be applied strictly and with restraint.
Case law establishes a wide variety of facts and circumstances that can play a role in assuming this legitimate expectation, including:
- agreements and stipulations relating to the negotiation process (letter of intent);
- a long-standing cooperative relationship;
- a relationship of dependency between the parties;
- very serious economic consequences for the business;
- important interests of third parties.
It often takes a cumulative set of facts and circumstances to assign a duty to renegotiate.
Requirements may be set for precisely how the parties must give effect to the order to renegotiate. For example, the judge may rule that the terminating party must continue negotiations with diligence, that the requirements of reasonableness and fairness must be observed, and that negotiations must be given a serious chance.
In exceptional cases, the court may also order the parties to continue negotiating even without legitimate expectations that an agreement will be reached. According to case law, this applies under ‘(very) serious circumstances’ where resumption of negotiations is often a more fitting solution than a claim for damages. This may be the case, for example, when negotiating a collective bargaining agreement. Due to the significant societal interests involved in the formation of such agreement, no possibility of reaching agreement should be neglected. It is also possible to consider the case where the parties have previously stipulated an obligation to renegotiate the continuation of a long-term contract following the expiration of a certain period, or upon the occurrence of certain circumstances.
The reverse situation also occurs, where the judge considers the breaking off of negotiations unacceptable, but still does not grant an order to continue negotiations. Indeed, an order to continue negotiations will not make sense in every situation. In the literature, with reference to case law from summary proceedings, it is assumed that a claim for renegotiation will not be useful if:
- the claim is insufficiently determinable;
- further negotiation is permanently impossible or obviously futile;
- the terminating party has entered into an agreement with a third party, or
- the mutual relationship between the parties has become too disturbed.
An order to continue negotiating has a greater chance of success if the other party’s main interest is in the conclusion of the contract, and that party would not benefit from any compensation for damages. For instance, an order to continue negotiations is obvious in a situation where the parties had a long-term cooperative relationship in which they depended on each other and which they continued to implement.
If the judge must decide whether to issue an order to continue negotiating in the event of broken negotiations, he will only be allowed to do so with great (and appropriate) restraint. Freedom of contract is paramount. It is the combination of facts and circumstances that can lead to an obligation to renegotiate in a specific case. The chances of further negotiation actually leading to an agreement will vary from case to case. This chance seems to be greater where the other party has a greater interest in the conclusion of the agreement.
The post “Breaking off negotiations: obligation to renegotiate” is a post of www.stibbeblog.nl
All posts by Chantal Blokker-Schipper