According to the freedom of contract, anyone is free to start, entertain, and even terminate negotiations with any person of their own choosing. Nonetheless, the ill-founded termination of negotiations may, in certain circumstances, be unlawful and punishable. In this article, we zoom in on the legal (and possible financial) ramifications of unlawful termination of pre-contractual negotiations as set forth in article 5.17 CC of the new and modernized Belgian Civil Code (CC).
As a general rule of thumb, the CC obliges negotiating parties to act in accordance with the principle of good faith (Article 5.15). Furthermore, Article 5.17 CC subjects pre-contractual negotiations to the rules on extra-contractual liability. In practice, this means that it is not unlawful to end negotiations as such but it can be if you do so in specific wrongful circumstances.
If a party has not acted like a reasonable, normal contract party, or has been negligent toward the other party when ending negotiations, then unilateral termination may be considered to be unlawful.
Consider these examples that would constitute unlawful termination:
- All aspects of a share deal have been settled and the seller wants a fundamental modification of the representations and warranties without which he refuses to sell to the buyer.
- An asset deal has already been scheduled for closing and signing. Yet, the buyer still withdraws because, in the end, he is not convinced of the environmental situation of the property, notwithstanding all required paperwork was made auditable during due diligence.
Now, article 5.17 CC expressly stipulates the consequences of unlawful termination of negotiations. The basic idea is that the aggrieved party must be put into the position she would have been in if the discontinued negotiations had never taken place. The aggrieved party may thus recover costs incurred for the negotiations. Moreover, she may demand compensation for the loss of profit, insofar as she is able to prove that she had the legitimate expectation that the contract would be concluded. As a result, the compensation upon unlawful termination of negotiations can be considerably high.
The essence is clear: negotiations are not just fun and games. Both parties must be able to rely on each other and take the negotiation process seriously. However, one should remember that when claiming a loss of profit, the burden of proof is heavy. Evidently, the further into the negotiation process, the easier it will be to do just that. This seems to be a fair quid pro quo. Only time will tell if courts are eager to apply Article 5.17 CC and in which situations they will consider the lawful expectation of contract formation as proven.
Laura Van Gompel
Lawyer – Managing Partner
- Corporate law
- Technology & Privacy
- International contracts