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Reimbursement costs when negotiations break down?

Blogs Marc Janssen Corporate M&A

Introduction

On June 14, 2024, the Supreme Court issued a judgment in a case involving the defendants' 2016 sale of two plots of land to developers. The municipality established a right of first refusal on the plots in 2017. As a result, the plots could not be delivered to the developers immediately. Initially, the latest delivery date agreed upon was December 24, 2017. Subsequently, the parties concluded an extension agreement until July 1, 2019 at the latest. The parties then negotiated a further extension, but did not reach an agreement. The plots were sold by the defendants to a third party in 2020. The developers claimed damages, among other things. The court rejected the claim. It is complained in cassation that the court of appeals did not consider the claim for damages on compensation for the "negative contract interest" to be allowable. The Supreme Court addressed the legal status of negotiations in the 1980s. The Supreme Court then formulated the so-called "three-phase doctrine": in the first phase the parties are completely free to break off negotiations, in the second phase breaking off is permitted, but the costs incurred by the other party (the negative contractual interest) must be compensated, and in the third phase breaking off is no longer permitted, as a result of which, in addition to the costs, damages and possibly even lost profits (the positive contractual interest) must be compensated. The question is whether given later Supreme Court case law this "three-stage doctrine" still applies.

The Supreme Court on June 14, 2024

The Supreme Court considered that even if the breaking off of negotiations is not unacceptable according to standards of reasonableness and fairness, circumstances may arise on the basis of which the party breaking off negotiations is obliged to compensate (part of) the costs incurred by the other party. This may be the case, according to the Supreme Court, if the party breaking off negotiations has been unjustly enriched by work performed by the other party. The answer to the questions of whether any enrichment of the defendants at the expense of the project developers is unjustified and, if so, to what extent it is reasonable to require them to compensate the project developers for their damages depends, in the Supreme Court's opinion, in part on the content of the purchase agreement and the extension agreement. The property developers argued on appeal, inter alia, that the defendants were unjustly enriched by the breakdown of the negotiations, because it was due to the efforts of the property developers that the municipality established the residential and supermarket zonings on the plots and, as a result, the defendants were able to sell the plots to a third party for a considerably higher amount. In the Supreme Court's view, the court did not manifestly involve this reasoning in its assessment of the developers' claim for damages. The court of appeal limited itself to (denying) answering the question of whether the defendants' breaking off of the negotiations was unacceptable by the standards of reasonableness and fairness. The developers' appeal in cassation therefore succeeds.

Practice tip

In some (international) negotiations use is made of a letter of intent. This is also called: 'letter of intent' or 'memorandum of understanding'. The freedom of contract means that the parties are free to make agreements about it. Especially in expected lengthy and complicated negotiations, it is wise to record pre-contractual agreements. These agreements contain the limits within which the parties are obliged to negotiate with each other, when a (basic) agreement exists between the parties, the reservations on the basis of which a party may break off negotiations, the law applicable to the pre-contractual phase and the court that has jurisdiction with respect to disputes in the pre-contractual phase. Also in view of the Supreme Court's ruling of June 14, discussed above, it makes sense to draw up a letter of intent and to include in it provisions on whether or not a (certain) cost and/or compensation is due. In practice, there is talk of a "break-up fee" or "termination fee. In this case, a certain fee is stipulated in case the negotiations do not lead to a (final) agreement. Depending on the agreed amount, such a provision ensures that at least the costs incurred in the context of the negotiations are reimbursed and perhaps the main advantage, it has a deterrent effect with regard to breaking off negotiations. Instead of stipulating a certain amount of compensation, a clause can also be included in the letter of intent to the effect that, in the event of the breakdown of negotiations, a party is - precisely not - obliged  to compensate (certain) costs and/or (certain) damages.   Do you have questions as a result of this blog or do you have other corporate law questions? Then please feel free to contact Marc Janssen or any of the other members of the Corporate Law Section.
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