Breaking off negotiations under Dutch law: when do you have to pay?

Under Dutch law you may, as a rule, break off negotiations without paying anything. Liability arises only if breaking off is unacceptable, typically because the other party could justifiably rely on a contract being concluded, and even then a claim for wasted costs succeeds far more often than a claim for lost profit.

Talks ran for months, everyone assumed the deal was done, and then one side walks away. Below we explain when breaking off becomes wrongful under the Dutch Civil Code (BW) and Supreme Court case law, what the disappointed party can claim, and how you prevent the question from arising.

Are negotiating parties already bound to each other?

Yes, to a degree. From the moment you start negotiating, you are in a legal relationship governed by reasonableness and fairness (redelijkheid en billijkheid), in which each party must take account of the other’s justified interests.

This has been settled law since the Supreme Court’s Baris/Riezenkamp judgment of 15 November 1957. Articles 6:2 and 6:248 BW carry the principle through the law of obligations.

That relationship can create a duty to disclose information the other side clearly needs, and it can prevent a party from negotiating with others while suggesting exclusivity. It also limits simply walking away.

When is breaking off negotiations wrongful?

Breaking off is wrongful only if it would be unacceptable, either because of the other party’s justified reliance that a contract would be concluded, or because of other circumstances of the case. The Supreme Court calls this a strict standard that requires restraint from the court.

The rule comes from the Supreme Court’s judgment of 12 August 2005 in CBB/JPO (ECLI:NL:HR:2005:AT7337). The court must take into account the extent to which the party breaking off contributed to the reliance, that party’s own interests, and any unforeseen changes during the negotiations. What counts is the situation at the moment of breaking off, seen against the whole course of the negotiations.

Three things follow from that wording, and they decide most cases.

• Freedom is the starting point. A party may break off. The disappointed party must show why this particular break crosses the line, not the other way round.
• Reliance must be justified. Hoping the deal would close is not enough. The reliance must be one that the other party’s own conduct made reasonable.
• The moment of breaking off is judged in context. A party who breaks off because the market changed is in a different position from one who breaks off because a better offer came in, after telling the other side the deal was closed.

What do courts take into account?

The case law depends heavily on the facts, but a pattern recurs. Circumstances that have weighed in favour of the disappointed party include agreement on all essential points with only formalities outstanding, a jointly prepared final draft, a party being encouraged to start work or incur costs before signing, and assurances about the outcome.

Circumstances that weigh the other way include open points on price or scope, an express reservation, a party that was known to be negotiating with others, and a change in the underlying facts, such as financing falling through or a permit being refused.

An example to illustrate: a supplier who, at the buyer’s request, starts producing custom parts after the final draft has been agreed and only the signature is missing stands much stronger than a supplier who invested on its own initiative while the price was still under discussion.

What are the three phases of negotiation?

Dutch practice still uses the three phases from the Supreme Court’s Plas/Valburg judgment of 18 June 1982. In the first phase you may break off freely, in the second you may break off but may have to pay the other party’s costs, and in the third breaking off may be unacceptable.

Does the second phase still exist?

That question is debated. CBB/JPO does not mention Plas/Valburg and sets a single strict standard rather than a graduated one. Some authors read that as the end of the second phase. Others point out that CBB/JPO concerned a claim for lost profit only, so it says nothing about a claim for costs.

In practice, lower courts continue to award negotiation costs in suitable cases, based on reasonableness and fairness rather than on the strict CBB/JPO test. The practical lesson is that a claim for costs has a clearly better chance than a claim for lost profit. Do not argue the two as though they stand or fall together.

What can you claim if the other side breaks off?

You can claim your negotiation costs, in exceptional cases lost profit, or an order that the other party continues negotiating. In each case, you bear the burden of proof.

• Negotiation costs (the negative interest): external advisers, due diligence, engineering or design work, travel. This claim succeeds most often, especially when invoices show what was done and when.
• Lost profit (the positive interest): what you would have earned had the contract been concluded. This requires the third phase and therefore the full strict standard. It is rarely awarded.
• An order to continue negotiating: the court can order the parties back to the table, if necessary in summary proceedings (kort geding) and backed by a penalty payment (dwangsom). This is a real remedy where the other party is manoeuvring rather than genuinely withdrawing, but it cannot force a contract into existence.

Because the burden of proof is on you, the negotiation record decides the case: minutes, dated drafts, emails confirming what was agreed at a meeting, and any message in which the other side expressed confidence about the outcome.

A claim for damages becomes time-barred five years after the day following the day you became aware of both the damage and the party liable (Article 3:310 BW). In practice the evidence is the real constraint: a negotiation file loses value quickly once the people involved have moved on.

How can you avoid a dispute about breaking off?

Make clear in writing, from the start, that no party is bound until a contract is signed, and agree in advance who bears which costs. Almost all of the risk can be avoided with documents that take an hour to prepare.

Use a reservation, and use it properly

A reservation, such as subject to board approval, subject to financing, subject to satisfactory due diligence or subject to contract, prevents justified reliance from arising in the first place. Three rules make the difference between a reservation that works and one that does not.

First, state it in writing at the start, not once the talks become difficult. Second, repeat it in the correspondence, because a reservation made in the first meeting and never mentioned again loses force as the talks progress. Third, act consistently with it. A party that says the deal is subject to board approval while telling the other side to start ordering materials undermines its own reservation.

Put a letter of intent in place

A short letter of intent should state clearly which parts are binding and which are not. It should say that no party is bound until a signed contract exists, that each party bears its own costs, and that either party may withdraw at any time.

Where confidentiality or exclusivity is agreed, those clauses can be made binding while the rest is not. That combination is normal and enforceable.

Agree on costs before they are incurred

Where one party is asked to invest during the talks, for example in a design, a pilot or a survey, agree in writing what happens to those costs if no contract follows. A break fee or cost-sharing arrangement is cheaper than a dispute about phases. It turns a debate about legal doctrine into a matter of arithmetic.

What should you check as the party left behind?

Secure the evidence first, then set out your costs, and only then choose your goal: reimbursement, resumption of talks or damages. Your claim for damages becomes time-barred five years after you knew of the damage and the liable party (Article 3:310 BW).

• Secure drafts, minutes and the message chain before people leave and mailboxes are cleared.
• Note the moment at which each open point, especially price and scope, was settled.
• Collect the invoices for costs you incurred, and show which were incurred at the other party’s request.
• Check whether a reservation (such as “subject to board approval”) was made and repeated.
• Decide on one realistic goal; a demand that asks for everything at once is easier to reject.
• If the other party is stalling rather than withdrawing, consider summary proceedings for an order to continue negotiating.

What should you check as the party breaking off?

Check whether you created justified reliance, and break off as early as possible once you know the deal will not go ahead. The longer you wait, the more costs the other side incurs.

• Did you make a written reservation at the start, and did you repeat it?
• Did you encourage the other side to start work or incur costs before signing?
• Was agreement reached on all essential points, with only formalities outstanding?
• Has something changed, such as financing or a permit, that explains your decision?
• Send a factual, reasoned letter, and consider offering to share costs incurred at your request.

What can we do for you when negotiations are broken off?

As contract lawyer we advise both the party left with the costs of a failed deal and the party that wants to withdraw, in Dutch and in English.

• We assess your negotiation file against the CBB/JPO standard and tell you which claim it supports.
• We draft the demand letter for negotiation costs or the reasoned letter breaking off talks.
• We start summary proceedings for an order to continue negotiating, with a penalty payment.
• We bring or defend a claim for damages before the district court.
• We draft letters of intent with binding confidentiality, exclusivity and cost clauses.

Summary

• You may in principle break off negotiations; liability is the exception.
• Breaking off is wrongful only if it is unacceptable, mainly because of the other party’s justified reliance on a contract (CBB/JPO, 2005).
• A claim for negotiation costs succeeds more often than a claim for lost profit.
• The disappointed party bears the burden of proof, so the negotiation record decides the case.
• A clear reservation, a letter of intent and a cost arrangement prevent most disputes.

Frequently asked questions