The sudden breaking off of negotiations (“La rupture abusive des pourparlers”)

Introduction

Where parties decide to enter into negotiations in relation to a proposed transaction (in particular regarding an asset or share deal), they are of course under no obligation to conclude this transaction. The only obligation imposed by French Law (irrespective of whether or not a formal agreement has been entered into between the parties to conduct their negotiations) is that the parties conduct them in good faith and loyally.

Requirement of loyalty and good faith

A party has the right to terminate negotiations at any stage without incurring any liability as long as this is done in good faith and loyally. Tortuous liability or contractual liability may however arise in certain circumstances.

In most cases the courts will look at whether the duty of goof faith and loyalty has been complied with. If a party terminates negotiations in breach of this duty, such termination may be found to be “abusive” and the terminating party may be held liable.

Breach of requirement of loyalty and good faith

The party terminating negotiations in breach of its duty of good faith and loyalty may be held liable towards the other party, if the wronged party can show a causal link between any loss it has suffered and the terminating party’s breach of this duty.

The existence of a breach of such duty is a matter of fact and the courts will look at each case on its individual circumstances. In general, the courts, when assessing if the terminating party is in breach of its duty, will take into account a number of factors including:

  • The advanced nature of the negotiations - specific attention must be given when terminating negotiations, in particular where all of the main and key provisions of the transaction have been agreed between the parties. The closer the transaction is to being finalised, the more likely the courts are to find the termination “abusive” (i.e. an unjustified and unfounded change in a previously agreed key substantial provision may be viewed as an “abusive” termination).
  • The length of negotiations – the longer negotiations have been ongoing and the later they are terminated, the more likely the courts are to find the termination “abusive”.
  • The genuine belief of the wronged party – when one party causes the other party to believe or gives it the impression that the transaction is on the verge of completion. If the wronged party’s belief is deemed to be reasonable, the trend of the courts is to find the termination “abusive”.
  • The “brutality” of the termination – French courts appear particularly sensitive to the manner in which terminations are handled. For instance, a party is at fault where it casually and all of a sudden terminates negotiations where the other party could not foresee the termination.

A defence to an alleged breach of this duty resulting from one of the examples set out above, is to demonstrate a legitimate reason for terminating negotiations.

Damages to the wronged party

If there is a breach of this duty, which results in loss to the other party, the courts cannot (i) order the parties to resume negotiations or, in most cases (ii) rule that the transaction is completed and it must take place.

The only remedy available to the wronged part is damages. In order to assess the level of damages, the courts will generally look at the reasonable costs and disbursements incurred by the wronged party during the “wasted” negotiations.

The courts may then award the wronged party all or part of these costs and disbursements. In certain circumstances, the court may also award the wronged party damages for damage to its reputation. The issue here is to assess the value of this intangible loss.

The courts could also award damages to a wronged party where the latter can demonstrate that it suffered a loss by not having the opportunity to contract with another party as a result of these “wasted” negotiations.

The wronged party will however not be awarded damages for any loss of profits expected to be made out of the presumed contract (perte de profit/chance).

Recommendation

Parties may be willing to enter into an agreement before negotiations have begun (i.e. a letter of intent or memorandum of understanding etc.) to insert provisions relating to costs, the breaking off of negotiations or limitation of liability. Whilst such provisions may offer effective protection, all or part of them may nevertheless be held null and void in specific circumstances. Indeed, if the termination of negotiations is viewed as a ‘material/serious breach’ (inexécution qualifiée) (such as wilful misconduct, gross negligence etc.), the effect of such provisions may be set aside by the courts.

Consequently, even though such provisions have been agreed, specific attention is to be paid to the conduct and termination of negotiations.