Irish society of comparative law

3° - The contractual stipulation of duties

30. In many cases, parties will sign a letter of intent that causes special and mutable duties: secrecy, exclusivity or not, increased obligation of loyalty, clause of “best efforts”, “clause of best endeavours”, etc ... This letter of intent may engender various expectations. Thus, a Swiss author demonstrates clearly the consequences provoked by these expectations in Suisse law: “It is crucial in this context to judge the rupture of contractual negotiations by the expectations created by the letter of intent. For instance, when the pre-contractual document assigns a list of issues on which the mutual consent can be assumed, returning to any partial agreement generally engenders a culpa in contrahendo situation. Because, there is a venire contra factum proprium situation that justifies compensation, unless the author of the rupture achieves to handle the rupture plausible and relies on reasons for which he cannot be reproached (analysis of the feasibility is evaluated as unfavourably, inability to find a mutable contentment concerning an essential point, etc.) “⁴⁷

31. In English and American law, these letters of intent are essential, because without it, only few opportunities could be envisaged in favour of litigants.

32. Sometimes, the letter of intent contains a break-up clause. These clauses including a payment of a reverse break-up fee are likely to be challenged as soon as they undermine the freedom to withdraw from negotiations at any time. In English law, for example, these break-up fees must correspond to a reasonable estimation of the real costs incurred by the injured party. In addition, damages should be liquidated damages. Beyond liquidated damages, judges could reclassify payments as penalties, which are not allowed under English law⁴⁸.

33. Obviously, the preliminary agreement cannot oblige the culmination of the operation and also cannot provoke the liability of the party that breaks off the negotiations. Indeed, of course, some of the possible consequences of these multiple clauses which reinforce or generate the negotiators’ duties are that parties will examine their reasons for breaking off the negotiations more severely⁴⁹.

B - The scope of the duties

34. The scope of the duties is partly related to the nature of the liability. Indeed, depending on the country, the liability may have a tortious (1°) or contractual nature (2°). In addition, the liability also may have an autonomous regime that is neither tourtious, nor contractual (3°). Finally, some legal systems are using a very controversial basis (4°). But truthfully, this repartition is not only geographical: Within the same legal system coexist liabilities of different natures.


1° - The duties deriving from Tort Law: main hypothesis of tortious breaking off

35. In French law, the parties are obliged to negotiate in good faith. Indeed, there are two different situations of blameworthy conduct committed by the parties that are well documented by case law. Initially, the brutal rupture of negotiations, committed without prior notice and justification, presents a blameworthy conduct that is recognized by courts… unless the respective party relies on a serious justification or a real disagreement⁵⁰. Thus, for instance a French court of appeal had to reach a decision in a case in which the financial situation of a company had deteriorated during all the time of the negotiations to such a point that “a perspective of recovery was absolutely illusory”⁵¹. In another case, the Supreme Court considered that nothing could be held against the author of the rupture because “the result of the project was tightly bound to the overall economic situation of the time”, and this one was of course particularly bad at this fair moment⁵². The breaking off of negotiations is also legitimate when there is a deep disagreement between the parties that blocks the entire situation⁵³.

36. In contrast, the undue prolongation of the pre-contractual negotiations, namely the absence of the rupture of contractual negotiations in the knowledge that the contract will not at all be concluded, presents also a blameworthy conduct. If negotiations are conducted without the intention of concluding the contract, the first case applies: the blameworthy party negotiates and generates the other parties’ expectation concerning the conclusion of the contract; however, this expectation has no reality.
In other terms, French case law that mainly uses to refer to the criterion of the brutality of the breaking off has now established the reference to the broken trust and the lack of intention to conclude the contract. “When a party maintains the other one in the expectation, she is letting her believe that she is actually trying to run the negotiation with the goal to reach an agreement. If it is not the case, she is violating the other one’s trust” ⁵⁴.
Additionally, the negotiations can be conduct with fraudulent intention: For instance, to find out about confidential information obtained during the negotiations, to prevent the other party from negotiating with a competitor, etc. Under this hypothesis, parties’ conduct may be considered as blameworthy which distracts the freedom of contract from its esprit.

37. On the contrary, engaging a party that is already engaged in negotiations with a third party does generally not present a blameworthy conduct, unless the negotiations are conducted with the intention to harm the other party or the violation is committed with a full knowledge of an exclusivity stipulation. In this context, the term “tortious interference” that is well known in American law is often used.
It is important to realize, however, that the blameworthy conduct may be committed without the parties’ agreement to essential elements of the future contract. Because, this agreement is a fundamental condition for the conclusion of a contract but not for a blameworthy conduct that could be punished⁵⁵.

38. The different cases of unjust breaking off of negotiations developed by the Belgian case law and described as “culpa in contrahendo” are fairly similar to those of the French case law. Indeed, the Belgian jurisdiction developed the following cases:
- Engagement and pursuit of negotiations without the serious intention to conclude the contract but, for example, in order to eliminate competitors.
- “The unilateral, brutal and unjustified breaking off of advanced negotiations”⁵⁶.
- “The breaking off that causes a serious harm at the expense of the other party that is disproportionate to the advantages withdrawn by the author of the rupture”⁵⁷.

2° - The scope of duties set by the contract: a possible liability beyond the contract?

39. As noted above, in legal systems that adopted common law, the letter of intent and other similar documents provokes only marginal consequences. English law, as mentioned above, is not in favour of the idea of moral duties that reduces the parties’ freedom of contract. Are there possible legal actions to protect legitimate expectations? There are only few successful outcomes of these actions⁵⁸.
However, even if the contractual basis is the only one that seems to be efficient in English law, extra-contractual liability of the author of the breaking off may also be envisaged beyond the signed letter of intent. Thus, “fraudulent statements” generated by one of the parties or situations where one of the parties negotiates with the only intention to obtain from the other party some confidential information may be imagined⁵⁹.
As a matter of fact, in English Law, the inexistence of a good faith principle can be corrected through multiple other legal mechanisms⁶⁰. As Lord BINGHAM is underlining it⁶¹, « English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness ».

40. American law recognise the duty to negotiate in good faith, if the agreements of the parties provide such an obligation, or if the bad faith constitutes a criminal offence.

However, American judges may think about correctives. Therefore, a party could refer to the “promissory estoppel” doctrine⁶² in order to obtain the execution of promise made during the negotiation, even if there is no “consideration “as strictly defined⁶³.

41. Nevertheless, the contractual liability may be found in some legal systems such as the French legal one in which the basis of compensation is essentially tortious, provided that the agreements have been signed in order to frame the negotiation. These agreements of negotiation generate contractual duties whose ignorance could be sanctioned⁶⁴.


3° - The scope of duties deriving from a sui generis source: the culpa in contrahendo principle

42. As mentioned before, the German law recognises a very special liability that emerges from the culpa in contrahendo doctrine. In detail, this liability is very special, because it is neither contractual nor tortious⁶⁵.

43. In the absence of additional agreements⁶⁶, articles 311 II, 241 II, 280 I BGB are applicable in the context of business sale transactions, so that the injured party is entitled to assert its reliance damages under specific conditions. In this context, the mutual trust between the parties that engenders mutual duties according to § 241 II BGB is documented in the letter of intent at the latest⁶⁷. Initially, pre-contractually liability may arise where a seller violates its information requirements or confidentiality obligation⁶⁸. According to the German jurisdiction, the pre-contractual liability may also be asserted as a basis for claims where the transaction is terminated abruptly on the condition that (i) the injured party relies on the conclusion of the contract legitimately as well as (ii) the injuring party terminates the pre-contractual negotiations without good reason (ohne triftigen Grund). However, according to the principle of freedom of contract (Vertragsfreiheit), the German jurisdiction does not make great demands on this good reason⁶⁹. In detail, at the beginning of the pre-contractual negotiation, the freedom of contract (Vertragsfreiheit) and personal autonomy (Privatautonomie) overweight the parties’ reliance whereas the parties’ reliance becomes more and more important with progressing of the negotiations⁷⁰. To give some examples of the German jurisdiction for blameworthy conduct in business sale transaction pursuant to articles 311 II, 241 II, 280 I BGB: The injuring party only simulates its intent to close the contract without intending the transmission in reality; one party fails to inform the other party about the fact that it does not intend to close the contract anymore⁷¹.

44. In accordance with the general principles, obtaining persuasive evidence will be the claimant’s primary issue. Given that it will be very difficult for the claimant to prove that no other reason existed to break off the contractual negotiations, some German courts impose lower requirements on the burden of proof applying article 138 II German code of civil procedure (Zivilprozessordnung, ZPO)⁷².

45. In Swiss law, the same idea of culpa in contrahendo seems to be applied. However, the Swiss case law appears to be sensitive to the idea of legitimate expectations. Generally, a party breaches its duty of care because, breaking off the negotiations, she adopts an attitude which is in contradiction with the legitimate expectations that she induced to her contractual partner. On this basis, a certain liability may be initiated. This liability, based on the confidence, differs from contractual liability. It could apply whether the injuring party leads the other party to expectations about the prospect conclusion of the contract⁷³.

46. Obviously, the commentary to the of the UNIDROIT principles concerning the article 2.1.15 follows the logic previously developed:
“3. Liability in case of a breaking off of negotiations in bad faith.

The right to break off negotiations is submitted to the principle of good faith. Where an offer is made, the offeror is entitled to retire its offer only under the conditions set out in Article 2.1.15. But before this time, or during the negotiations without verifiable process of offer and acceptance, a party has no right to break off the negotiations abruptly and without justification any more. If such a point of no return is reached, depending on the specific circumstances of the case, the other party has fair reasons to rely on the successful outcome of negotiations and on all agreements that the parties already reached concerning the future contract.

4° - The scope of duties defined by uncertain bases

47. The Italian civil Code imposes a duty of good faith during negotiations (Art. 1337). The fact that this obligation had been enshrined in the law has been much discussed. The Italian Supreme Court considers this duty as general duty not to cause any harm at the expense of the other party (neminem laedere) and regards it as extra contractual⁷⁴.

48. Initially, the doctrine approved the aforementioned analysis⁷⁵, before another opinion emerged, considering that this liability may have a contractual nature. According to these scholars, Art. 1337 Italian civil Code generates mandatory duties between contracting parties, notably, the duty to behave in good faith from the execution of the contract to its formation⁷⁶. A substantial argument for this point of view is the fact that Art. 1337 only imposes duties to the contracting parties. Therefore, Art. 1337 does not impose a general and absolute duty⁷⁷. Consequently, the author of the breaking off made in bad faith would have to indemnify the aggrieved party for the consequences of the failed execution of his obligation.

49. According to a current minority point of view, the pre-contractual liability constitutes an autonomous liability compared to contractual and extra contractual liability⁷⁸. And according to this doctrine, the parties’ good faith could neither be attached to the execution of a contractual obligation nor to a harm resulting in liability in tort. This doctrinal opinion is the most condemned point of view for the reason that the liability is either contractual or extra contractual with no possible third option!

50. Which meaning has to be attributed to the parties’ good faith during negotiations pursuant to Art. 1337 of Italian civil Code? The good faith imposes precise behaviour: clear and correct information about its own intentions, the duty to cooperate, the confidentiality of communicated information, etc.

51. Italian case law has decided that the pre-contractual liability depends on strict requirements that must be fulfilled, particularly:

- Advanced negotiations that cause the parties to rely on the conclusion of the contract;

- An unjustified rupture of negotiations either the proof of the blameworthy rupture is brought or there is no serious reason for it.


II – The consequences of the wrongful breaking off of negotiations

52. There are several ways to punish such a blameworthy conduct (A). A review of comparative law emphasises notable disparities concerning the use of several sanctions (B).


A – Conceivable sanctions

53. What possibilities could be envisaged to punish the blameworthy party? In absolute terms, three types of sanctions are conceivable: The mandatory execution of the contract (1°), the compensation of loss suffered (2°), and in extreme circumstances criminal sanctions (3°).


1° - Mandatory conclusion of the contract

54. In legal systems where the conclusion of the contract is based on mutual declarations of intent (principle of the freedom of contract), the mandatory execution of the contact as sanction seems to be unconceivable. Logically, the parties that are free to conclude a contract also are free not to conclude it. Therefore, Australian judges rely on the principle of estoppel to hold the liability of the retracting party. Though, Australian judges do not apply the mandatory execution of the contract in this context, even though the aggrieved party asks such an execution⁷⁹.

55. Simply, the parties have to be suspicious regarding the running of the pre-contractual negotiations. In legal systems where the contract of sell is considered as formed as long as the parties on the object and price (such as French and Belgian law), it is conceivable that the contract may be conclude without the parties being aware of it⁸⁰. If, at any given moment during the negotiations, the parties agree on the price and the purchased good, the parties will be completely protected from the risk of legal actions before the court due to a rupture, and the contract will be concluded at any given moment. This will not apply, if parties agree otherwise (for example: reiteration of consents in a written document). And if the parties conclude the contract, the lack of any agreements concerning non-essential elements will be accomplish by the judge…


2° - Granting of damages

56. The compensation of harms suffered seems to be the most simple and the less controversial sanction. To convict a party to compensate another party may have multitude of diverging bases (a). However, ii is necessary to categorize the prejudice that will be compensated through an action for damages (b). Here, we find again the inevitable distinction between the damnum emergens and the lucrum cessans.

1. 
   The different types of damages
   

57. If there is a prejudice generated by the rupture of negotiations, a quantity of compensations will be possible:
- Compensation for loss of profit resulting from the non-conclusion of the contract to which negotiations should have led to.
- Compensation for loss of profit resulting from the non-conclusion of a contract with a third party, broken negotiations having prevented the aggrieved party to enter into others.
- Moral damages resulting from the disappointment caused by the non-conclusion of the contract.
- Bad publicity for the company when the existence of the negotiations is publicly known and the contract is eventually not concluded.
- Expenses arising from negotiations (audit, assessments, meetings, investments, etc.).


b. The difficulty to assess the loss of profits

58. For comprehension, in French law the loss of profits has to be interpreted as a “loss of an opportunity”. The financial prejudice that is caused by the non-conclusion of the contract is not considered as the direct result of the breaking off of negotiations. In deed, maybe the contract was not concluded due to the rupture of negotiations caused by one of the parties, but finally it is possible that the contract would never have been concluded, because parties could have discover many reasons for which their consent wont have met.
In all cases, this prejudice raises the delicate question of the assessment of the probability that the missed opportunity would have been carried out.
3° - Other sanctions

59. Further sanctions are more marginal. For example, American law recognises the punitive damages. In addition, criminal sanction could be envisaged: This is the case, for instance, in situations where the future buyer only simulates the intention to close the contract in order to obtain confidential information and breaks off the negotiations brutally after getting enough information.


B – Held solutions

60. Anyway, different local solutions recognise the same general idea: most of the diverging legal systems agree to the compensation of the reliance damages including fees for the negotiations (damnum emergens, reliance interests, Vertrauensschaden). In contrast, the recognition of the lucrum cessans (positive interest damages, expectation interest, Erfüllungsschaden) is much more controversial.

On the basis of the culpa in contrahendo doctrine, positive interest damages could be accepted. On this basis, the compensation of the injured party will be possible: “but not only the compensation for injuries caused by the non-conclusion of the contract but also the compensation of the supposed profit which the injured party could have in case of the conclusion of the contract”⁸¹.

1°- The commonly admitted granting of reliance interests

61. Already during the pre-contractual negotiations, business sale transactions such as Mergers & Acquisitions and Private Equity transactions engender high fees. To give some illustrations: Fees of a complex due diligence process and legal and consultancy fees occur at the expense of the buyer; fees for the preparation of the data-room and the formation of the contractual documents generally arise at the expense of the vendor. That notwithstanding, the parties accept these fees in order to realize the transaction⁸². If pre-contractual negotiations are terminated abruptly by one of the parties, the question arises if the other party is entitled to compensation for loss suffered.

62. The recovery of expenses incurred by the parties seems to be elementary. However, there are still legal systems that are not completely in favour of the recovery of expenses and sometimes, strong doctrinal and judicial reservations about it may be noticed.
For instance, the Swiss case law seems to refuse the idea to compensate the amounts committed by the aggrieved party due to the fact that such compensation could infringe the principle of the freedom of contract. Thus, a Swiss author emphasises: “if it had not been possible to break off negotiations without making itself liable for damages, a large part of the principle of freedom of contract would have been replaced by the duty to conclude the contract”⁸³.

63. More generally, the compensation of expenses is recognised as soon as its existence is confirmed. This is the case in France⁸⁴ and in Germany. Under German law, the damages recoverable under articles 311 II, 241 II, 280 I BGB do not include ‘positive interest damages’, but only ‘negative contractual interests’ or reliance damages⁸⁵. According to articles 249 - 253 BGB, the person who is liable in damages must restore the position that would exist if the circumstance obliging him to pay damages had not occurred. Correspondingly, the injuring party has to compensate the injured party as if the violation did not take place. Expenses which fall within the ‘reliance damages’ category embrace all voluntary expenses that the injured party has made in good faith, relying on the conclusion of the contract, in particular legal fees⁸⁶.
French case law sometime integrates, with a lot of realism, some very precise prejudices. Thus, it appends that cases assess, apart from the advice expenses, traveling expenses and even sometimes the time spent negotiating⁸⁷.

64. Italian law accepts the principle of a compensation in favour of the party victim of a blameworthy breaking off of negotiation but those damages are related to the fees of negotiation⁸⁸.
In American law, parties will acquire compensation for prejudices caused by the blameworthy rupture of contractual negotiations, if the judge accepts it.