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198 precontractual liability in european private law

statement which could found a claim based on misrepresentation. In English law, each party is generally free to withdraw from the negotiations even up to the moment immediately before the contract is finally concluded. In many commercial transactions it is common for the parties expressly to reserve such a right, by stating that their negotiations are ‘subject to contract’, that is, that they acknowledge that there is no binding agreement until a formal contract is entered into. But though such an express reservation assists a court by dispelling any doubt about whether the negotiations had yet culminated in a concluded agreement, it is not necessary, and as long as it is sufficiently clear on the facts that the parties have not yet reached a binding agreement, either party may still withdraw.

Finland

In situation 1, where the parties recognise that they have not yet reached agreement on all major points and A has not made any statement that it is convinced that the final agreement will be reached, the principle of freedom of contract negotiations prevails. It includes freedom to break off negotiations with no need to give good reasons. So A is not liable for breaking off the negotiations in any of the alternative circumstances (i) to (iv), even if it does not give any reason for its withdrawal. But if A knew of its reason to withdraw a year in advance, then it should have informed B about it without delay. If it has neglected to do this, it would very likely be held to have acted contrary to good practice, and thus shown culpa in contrahendo. This is a basis for the compensation of B’s costs insofar as they have accrued during the period of A’s omission to inform B of its reasons to withdraw.

In situation 2, the parties have reached agreement, which they acknowledge, on all major points and only a few minor points remain to be settled. A has, however, made no statement that it is convinced that the final agreement will be reached. In this case, too, the principle of freedom of contract negotiations prevails, as a starting point. It means freedom to break off negotiations with no need to give good reasons. So A would perhaps not be held liable for breaking off the negotiations in any of the alternative circumstances (i) to (iii), even if it does not give any reason for its withdrawal. But this case is a bit more complicated than situation 1. If both parties acknowledge that agreement has been reached on all major points, we should perhaps refer to aspects of reliance protection discussed in relation to case 2. If a party has very good grounds to believe that the conclusion of the contract is

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at hand, lacking no more than just the formal confirmation, his reliance may be worth protecting. In order to impose reliance-based liability on the other party, it must have been at fault in giving some basis to the other party’s reliance. Withdrawing from negotiations should under these circumstances be sanctioned with liability covering at least the costs of the other party. Too little information about the facts is given, however, to decide upon A’s possible liability on this basis. Further limits to the freedom of negotiations are derived from the fact that a party is not entitled to enter into negotiations with no true intention to conclude a contract. But none of the circumstances

(i) to (iii) given in the facts indicate such motives on A’s part. So A’s possible liability should be judged on the basis of the protection of B’s reliance.

Situation 3 is similar to situation 1 (the parties have not yet reached agreement on all major points) but here A has more than once made statements to B that it is convinced that the final agreement will be reached. In this case there could be some scope for the application of the principle of reliance protection, discussed above. B can have wellfounded reasons to believe that the conclusion of the contract is at hand, lacking no more than just the formal confirmation. A has also given some basis to B’s reliance. Withdrawing from negotiations should under these circumstances be sanctioned with liability covering the costs of the other party. So in this case A may be liable for B’s costs.

France

A is free to break off negotiations until a real agreement on all the points to be discussed has been reached (that is, until a contract has been concluded) and as long as it does not do so wrongfully.11 In order to obtain damages, B must prove that A is liable under articles 1382 or 1383 of the Civil Code, therefore needing to establish harm suffered because of A’s wrongful conduct (fault).

To establish A’s fault, B must show that the breaking-off occurred suddenly while an agreement seemed to be close. The fault is assessed with regard to the circumstances of the breaking-off.12

In situation 1, on the one hand, as the negotiations lasted three years – a long time – one might think that the condition of fault is satisfied. On the other hand, the two parties had not yet reached a

11Civ 1, 12 Apr. 1976, Bull Civ I, no. 122. See the French report on case 1.

12Com 20 Mar. 1972, Bull Civ IV, no. 93.

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complete agreement, and A never made any statement to B that they would reach a final agreement. Furthermore, they have not agreed on all major points about the merger. As a result, it is not likely that A would be held liable for the breaking-off of the negotiations about the merger, because the breaking-off does not appear wrongful.13 However unlikely the evidence of fault might be, it remains possible because it depends on the judges’ assessment of the facts. If so, A would have to give a ‘legitimate reason’ to escape its liability.14 If A does not justify the breaking-off, and if its behaviour is considered wrongful by the judges, it will be held liable for it.15

If A gives a reason for the breaking-off, the judge will determine whether the reason is ‘legitimate’ or not. Reasons (i), (ii) and (iv) may be considered as legitimate, whereas reason (iii) is not likely to be so considered. Reason (i) is a good reason because the purpose of A, as well as B, is to obtain the most profitable merger. However, A may have to inform B of C’s offer before breaking off the negotiations, in order to respect the duty of good faith in negotiations, according to article 1134 alinea 3 of the Civil Code.16 Otherwise, it could be held liable for not having allowed B to make a counter-offer. Reason (ii) is acceptable as well, as it is probably revealed by the difficulty of the negotiations, which lasted a very long time without an agreement on all major points of the merger. Reason (iii) is unlikely to appear legitimate because three years of negotiations are surely long enough for A to calculate the probable cost of the merger. Reason (iv) may be considered as a legitimate reason, as a recession is not due to one of the parties, and

13Com 18 Dec. 1990, Jurisdata no. 003753, where the termination of negotiations appeared to be ‘inevitable’ because of the deep disagreement between the parties.

14On this, see the French report on case 1. It is quite difficult to determine whether the burden of proof lies on A, or if it is only in its interest to establish a legitimate reason, because case law is unclear on this point.

15Com 7 Jan. 1997, D. 1998, J, 45; Com 20 Mar. 1972, Bull Civ IV, no. 93.

16Versailles, 1 Mar. 1991, JurisData no. 043489. The question of a duty of good faith in negotiations is debated among academic writers, because art. 1134 C.civ. only applies to contractual situations and not before the conclusion of the contract. Some authors think that the article applies to the formation of contract as well as to its performance (see J. Schmidt-Szalewski, ‘La sanction de la faute pre´contractuelle’, RTDCiv 1974, 52), and some explain that the duty of good faith is an integral part of the ‘normes ge´ne´rales de comportement’, breach of which leads to liability under arts. 1382 and 1383 of the Civil Code (see P. Chauvel, note on Com 7 Jan. 1997, D. 1998, J, 45, no. 9; P. Mousseron, ‘Ne´gociations contractuelles et responsabilite´ civile de´lictuelle’, RTDCom 1998, 253; J. Mestre, RTDCiv 1997, 651).

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because we can assume that each party could foresee this recession17 to a certain extent.

If A knew the reason one year before it broke off the negotiations, none of the reasons given should be considered as legitimate, because of the duty of good faith in negotiations imposed on each party.18

If A’s fault is established, B would have to prove both harm and causation. These two last conditions do not raise difficulties. As far as the harm is concerned, three years of negotiations definitely represent ‘considerable expenses’ incurred in negotiations, as well as a long time during which B did not take advantage of the opportunity to conclude a contract with a third party. Each of these should be included in the damages awarded to B if A is liable. Finally, it is clear that a chain of causation between the fault and harm is established, because the breaking-off directly caused the harm suffered.

In situation 2, the negotiations have been carried out quickly, and though the parties have reached an agreement on all the major points of the merger, such an operation is complex enough to say without doubt that even a disagreement on minor points may cause a failure in the negotiations. Thus, A’s withdrawal is not in itself a fault, even if the agreement seemed very close. Furthermore, A never made B believe that they would reach an agreement. Therefore, it is not likely that fault can be proved. However, if we assume that A’s behaviour has been wrongful, it will need a legitimate reason in order to escape liability, and the analysis will be as discussed above in relation to situation 1, except that here reason (ii) can be considered as ‘legitimate’ because the negotiations did not take place over a long period of time and in consequence we can assume that the parties did not know each other very well; which is confirmed by the fact that A never made any statement about the fact it was convinced that they would reach final agreement. And here reason (iii) does not seem to be legitimate because one can assume that the price of the merger is one of the major points of the negotiations. That is why, as an agreement

17Paris 4 Dec. 1996, JurisData no. 024388; Rennes 3 Nov. 1998, JurisData no. 049142. The recession is not foreseeable in itself, but it does not correspond to what French law calls force majeure. That is why judges prefer to consider that, because a recession is always possible when negotiations are long-lasting, there is no fault of either of the parties when one of them breaks off the negotiations. Force majeure is a technical tool used to paralyse the effect of an existing fault, whereas in our case the recession impedes the judges in recognising the existence of a fault.

18See above n. 16. See Com 20 Mar. 1972, Bull Civ IV, no. 93.

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has already been reached on all major points, the price is considered to have been accepted by A, which means it thought that it could afford the merger.

In situation 3, even if the parties had not yet reached an agreement on all major points of the merger, B ‘legitimately’ believed,19 because of A’s repeated statements about the future success of the negotiations, that they would reach final agreement. By breaking off the negotiations, A has not acted consistently with its repeated statements, therefore breaching its duty of good faith in negotiations. A’s action in breaking off the negotiations is therefore likely to be held wrongful by the judge, if B is able to justify its reliance on A’s statements. As discussed above, A can, however, escape liability by giving a legitimate reason justifying the breaking-off. As in situation 1, reason

(i) is certainly a ‘legitimate reason’, although A may have to inform B of C’s offer before breaking off the negotiations. Reason (ii) is, on the contrary, less likely in this situation to be considered as ‘legitimate’, for it appears inconsistent, on the one hand, to repeat several times that an agreement can be reached, which means that the present difficulties of the negotiations are likely to be solved, and, on the other hand, to find out finally that cultural differences justify the breaking off. The last justification (iii) might be ‘legitimate’, because the parties have not yet reached an agreement on all major points, that is, including the price of the merger. But on the other hand, A made statements to B several times that the negotiations would succeed. Therefore, one might think that, as A certainly knows very well how much it could pay for the merger, and never told B that it might have difficulties in affording the price, it has behaved inconsistently and

19The concept of ‘legitimate belief’ (croyance le´gitime) has been proposed as a criterion for precontractual fault by some authors. This criterion focuses on the victim: as soon as the victim had good reasons to believe the contract was to be concluded, because of the behaviour of the other party, the breaking-off should be considered wrongful. See J. Schmidt-Szalewski, ‘La sanction de la faute pre´contractuelle’, RTDCiv 1974, 46, no. 11. Courts have to a certain extent recognised the influence of this ‘legitimate belief ’ on the fulfilment of the condition of fault in precontractual liability: Paris, 16 Oct.

1998, JurisData no. 024108; Riom, 10 June 1992, RJDA 1992, 732; Com 31 Mar. 1992, Bull Civ IV, no. 145. However, this criterion is just one among others in revealing the fault of the author of the breaking-off. See P. Chauvel, note on Com 7 Jan. 1997, D. 1998, J, 45, no. 11; P. Mousseron, ‘Ne´gociations contractuelles et responsabilite´ civile de´lictuelle’, RTDCom 1998, 258. The concept of ‘legitimate belief’ may be related to a certain extent to the common law concept of reliance: see H. Muir-Watt, ‘Reliance et de´finition du contrat’ in Me´langes Jeantin (Paris, 1999), p. 57.