A business acquisition or investment is typically preceded by a long and intensive period of negotiations. The parties sign various documents, such as a Non-Disclosure Agreement, a Letter of Intent, a Memorandum of Understanding, or a Term Sheet. All of these documents are intended to formalize the parties’ intention to exchange information and negotiate the proposed transaction.
If the parties are well into negotiations, can one of them just walk away from the negotiating table?
✅The basic principle is that negotiating parties are required to allow their conduct to be guided in part by each other’s legitimate interests, but that they simultaneously enjoy freedom of negotiation and freedom of contract. This means that, in principle, either party may change its mind and walk away from the negotiating table.
✅This may not apply if the party terminating the negotiations has led the other party to reasonably expect that an agreement would be reached, or if other circumstances exist that make the termination of negotiations unacceptable under the principles of reasonableness and fairness.
✅An agreement can still be formed even if the parties do not agree on all aspects of the agreement and have not yet signed the final agreement. A so-called framework agreement can be formed if the parties agree on the essential terms of the intended agreement.
✅ If terminating the negotiations is unacceptable under the principles of reasonableness and fairness, the following remedies may be available:
- (i) damages consisting of the positive contractual interest (lost profits), or
- (ii) damages consisting of the negative value of the contract (reimbursement of costs incurred during the negotiation phase and loss of opportunity), or
- (iii) a court order to continue negotiations.
✅Loss of profits is rarely awarded by judges.
✅ Whether it is permissible to suspend negotiations depends largely on the parties’ intentions and the facts and circumstances of the specific case.
✅ To avoid any debate over whether or not a legitimate expectation has been created, it is important to include in the documents signed during the negotiation phase a provision stating that no agreement is concluded until both parties have signed the final agreement.
✅ Seek legal advice before breaking off (advanced) negotiations.
