Picture the following scenario: a property owner has entered into negotiations with a prospective lessee. After lengthy negotiations and in an advanced stage of reaching a consensus, the prospective lessee signs and returns its version of the lease to the owner. Happy with this result, the owner proposes to add a short piece of text to the lease, which it believes is merely a matter of detail and of little consequence. The next day, the parties have dinner and attend a football match together. During that meeting the parties discuss their working relationship and make a toast. After that evening, the owner does not hear anything from the prospective lessee for a while and when it finally does, the lessee breaks off the negotiations. May the lessee do that?
A similar situation involving a service agreement was the subject of a recent judgment rendered by the Court of Appeal of The Hague on 6 June 2017. The question raised before the court was whether breaking off negotiations under these circumstances is unacceptable and consequently results in the party breaking off the negotiations being liable for damages.
The general rule is that negotiations can, in principle, be broken off without the party breaking off the negotiations being liable for damages, unless: (1) the parties have legitimate grounds to expect that the negotiations would result in a contract, or (2) other – extraordinary – circumstances exist that make breaking off the negotiations unacceptable. The extent to which and the manner in which the party breaking off the negotiations have contributed to those expectations and the legitimate interests of that party are relevant factors in this regard. Another factor that might be important is whether unforeseen circumstances arose during the course of the negotiations. A situation is not quickly deemed to involve a scenario in which a party could rely on a contract being formed. The Dutch Supreme Court referred to a standard that “is bound by strict rules and requires restraint”.
As such, in the case in question, the judge applied the standard strictly and reticently. The court of appeal acknowledged that the negotiations were broken off at a rather advanced stage, namely after (i) the drafted lease had been signed by one of the parties, (ii) the implementation of the service to be rendered had already been tested extensively and with positive results by the parties, and (iii) the parties had attended a football match together, whether in a business setting or otherwise. However, given that the response to the lease signed by one party was a proposal to add text to the lease that would have farther reaching obligations for the party that broke off the negotiations, that party was permitted to break off the negotiations without being liable for damages. In short: renegotiating (details or other aspects) in an advanced stage is a negotiation technique that is used regularly, but it could result in your counterparty throwing in the towel without being liable for any damages whatsoever. Not only is this a waste of time and money spent on the negotiations, you also lose out on a contract. You should remain aware of the level of consensus in which the negotiations are and of how much you can/want to lower this level.