The Paris Energy Series No. 3: Pre-contractual agreements:

The Paris Energy Series No. 3:
Pre-contractual agreements:
how to keep out of the woods
Michael Polkinghorne
Partner
Michael Polkinghorne
White & Case llp, Paris
Courtney Kirkman
White & Case llp, Paris
“A verbal contract is not worth the paper
it is written on.”1
1. Introduction
Imagine this scenario. You are counsel
for a company, and learn that your
company’s business people have signed
a Memorandum of Understanding
(“MOU”) regarding a potential transaction
in the fabled country of Fredonia. Being
from a common law jurisdiction, your
company’s business people made sure
to follow your instructions, and hence
ensured that the MOU included language
stating that the MOU was subject to
execution of a contract and/or was “ just”
an “agreement to negotiate”. Given that
this is an MOU, there is no applicable law
clause or dispute resolution clause.
Unfortunately, the negotiations fall
through. Your company’s business
people are disappointed about failing to
reach a deal, but imagine that matters
end there.
1
2
But they don’t end there. You then find
yourself before a local court in Fredonia,
facing a claim for breach of contract
brought by the other party. The action
is brought in the village or town of the
other party, where you fear that the local
judge may be partial. You have engaged
a local attorney who tells you that under
local (civil) law principles, liability may
attach to your MOU, notwithstanding
that this would not be true in your own
legal system. 2 What went wrong?
Courtney Kirkman
Associate
Section 2 of this article will discuss
what went wrong – the common law
lawyer’s expectations based on his
own legal system versus the realities
of pre-contractual liability in (for the
most
part)
civil
law
systems.
Section 3 of this article will set forth
considerations for your next MOU (or
other preliminary agreement).
Sam Goldwyn (1882-1974), cited in “The Great Goldwyn” (Alva Johnston: 1937).
Fredonia is a civil law system whose law is based upon French and Islamic law.
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Pre-contractual agreements: how to keep out of the woods
2.What went wrong? Common law v. Civil law
Your company’s business people made the mistake
of ignoring the important differences between
common law and civil law regarding pre-contractual
liability for business negotiations. Business people
from common law jurisdictions often erroneously
assume that liability does not come into play before
an actual contract is signed. This view is false in
both civil and common law jurisdictions, and is
particularly dangerous with respect to civil law
jurisdictions, where courts are more willing to find
pre-contractual liability.
2.1 The common law lawyer’s expectations
The common law lawyer typically thinks that his
client can walk away from business negotiations
at any time before a formal contract is signed, free
of the risk of liability. To be extra careful, he may
add language to any preliminary agreement such as
“subject to contract”. In many (but by no means all)
respects, he or she would be right.
In common law systems, courts have traditionally
given parties an expansive “freedom of
negotiation”.3 This has been referred to as common
law’s “aleatory view” of negotiations: a party that
enters into negotiations in the hope of benefit must
also bear the risk of loss should the negotiations fall
through.4 In the words of an English court, a party
to negotiations “undertakes this work as a gamble,
and its cost is part of the overhead expense of his
business which he hopes will be met out of the profits
of such contracts as are made.”5 This “aleatory
view” of negotiations reflects a concern that
3
4
5
6
7
8
9
limiting the parties’ freedom to negotiate will have
a chilling effect on the parties’ willingness to enter
into negotiations (which would stifle business).6 As
a result, it is often said that “agreements to agree”
are unenforceable.
Any potential pre-contractual liability of the parties
depends largely on the phase of the negotiations in
which the parties found themselves when one party
broke off the negotiations. Although the phases of
negotiations are often fluid and indeterminate, the
following three general categories suffice for our
purposes: (1) the parties have engaged in preliminary
negotiations by discussing a transaction, but have
not agreed to anything; (2) the parties have made
a preliminary agreement in which they have agreed
on certain terms but left other terms open; and (3)
the parties have agreed on all material terms and
intended to memorialize them in writing, but did not
actually do so.7 The potential liability and remedies
for each phase of negotiations are discussed in
turn below.
2.1 (A) Preliminary negotiations
If the parties have simply engaged in preliminary
negotiations about a possible transaction but have
not agreed to anything, each party is free to walk
away from the negotiations without fear of liability
vis-à-vis the other party.8 Common law courts in
the United States have not as a rule recognized any
general obligation of good faith or fair dealing arising
out of the preliminary negotiations themselves.9
The general duty of good faith and fair dealing set
forth in the Uniform Commercial Code and the
E. Allan Farnsworth, “Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations”, 87 Colum. L.
Rev. 217, 221 (1987).
Id.
R.J.P. Kottenhagen, “Freedom of Contract to Forcing Parties into Agreement: The Consequences of Breaking Negotiations in Different Legal
Systems”, 12 IUS Gentium 58, 67 (Spring 2006), quoting William Lacey (Hounslow) Ltd. v Davis [1957] 2 All ER 712, [1957] 1 WLR 932 (QB).
Farnsworth, supra note 3, at 221.
Alan Schwartz and Robert E. Scott, “Precontractual Liability and Preliminary Agreements”, 120 Harvard Law Review No. 3, 661-707
at 664 (January 2007).
Id.
Farnsworth, supra note 3, at 222.
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Pre-contractual agreements: how to keep out of the woods
Restatement (Second) of Contracts does not appear
to extend this far.10 Unless there is evidence that the
parties intended to be legally bound in some way
by such preliminary negotiations, US courts will not
impose liability.11 The same is true for England.12
2.1 (b) Preliminary agreements
When parties’ negotiations have reached a stage
where the parties have agreed on certain (but not
all) terms of an eventual contract, parties often like
to memorialize this in writing, often in an effort
to minimize the uncertainties of negotiation.13
Preliminary agreements can take many different
forms, including “letters of intent”, “commitment
letters”, “memoranda of understanding”, “heads of
agreement” and “agreements in principle”, to name
a few.14
Although the content of these types of preliminary
agreements will vary, they generally set out the
points agreed upon by the parties, while other
terms are left open for negotiation. A key issue in
determining liability at this stage is whether, and
to what extent, the parties intended to be legally
bound.15 The common law courts’ default rule is
the presumption that a preliminary agreement is
not a binding contract.16 Under English law, parties
to a preliminary agreement can stipulate that the
agreement is “subject to contract” and thereby
substantially reduce (but not eliminate) the risk
that the agreement will be deemed a legally
enforceable contract.17 Even here, however,
exceptions can arise.18
Under American law, a court will consider the
following factors in determining whether an MOU
or letter of intent is binding on the parties: (1) the
amount of detail; (2) the language used; (3) the
presence of “escape clauses”; (4) the use of
“subject to formal contract/definitive agreement”
language; (5) contrariety; (6) the complexity of the
transaction; (7) the behavior of the parties in the
precontractual stage; and (8) custom.19
An “agreement to negotiate” may set out the
parties’ agreement on certain terms of an eventual
agreement.20 However, if the parties fail to reach
a final agreement, they are not bound by any
allegedly final agreement. 21 As a practical matter,
if managers enter into an “agreement to negotiate”
and then turn matters over to their company’s
lawyers, the managers have not bound the company
in the event that the parties’ lawyers fail to reach an
ultimate agreement.22
10 As the relevant provisions of the Uniform Commercial Code and the Restatement (Second) of Contracts provide that they apply to contracts,
they do not, by negative implication, apply to pre-contractual negotiations. Farnsworth, supra note 3, at 221 and 239. Section 1-203 of the
Uniform Commercial Code, “Obligation of good faith”, provides: “Every contract or duty within this Act imposes an obligation of good faith in
its performance or enforcement.” U.C.C. § 1-203 (1978). Section 205 of the Restatement (Second) of Contracts, “Duty of Good Faith and Fair
Dealing”, provides: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”
Restatement (Second) of Contracts § 205 (1981). Comment c to Section 205 specifically provides that Section 205 does not deal with good faith
in the formation of a contract.
11 Schwartz and Scott, supra note 7, at 664 and 668-673.
12 Paula Giliker, “Pre-Contractual Liability in English and French Law” (Kluwer 2002) at 32-36.
13 Farnsworth, supra note 3, at 249.
14 Id. at 250. Mirian Kene Omalu, “Precontracutal Agreements in the Energy and Natural Resources Industries – Legal Implications and Basis for
Liability (Civil Law, Common Law and Islamic Law)”, J.B.L. 2000, JUL, 303-331 at 308-321 (2000).
15 Schwartz and Scott, supra note 7, at 674-675. Ralph B. Lake, “Letters of Intent: A Comparative Examination Under English, U.S., French and
West German Law”, 18 Geo. Wash. J. Int’l L. & Econ. 331, 335 (1984-1985).
16 Schwartz and Scott, supra note 7, at 675.
17 Lake, supra note 15, at 336. Lake notes that the English rule is that “when a condition in an agreement provides that the agreement is not a
legally binding contract, the condition governs the agreement and renders it unenforceable at law.”
18 See the English court decision in ProForce Recruit Ltd. v The Rugby Group Ltd. ([2005] EWHC 70 (QB)) in which the court found that there was an
enforceable contract in place despite the agreement’s “subject to contract” clause.
19 Kottenhagen, supra note 5, at 64-65.
20 Farnsworth, supra note 3, at 251.
21 Id.
22 Id.
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Pre-contractual agreements: how to keep out of the woods
Although the parties to an “agreement to negotiate”
are not obliged to reach a final agreement, they are
obliged to negotiate with each other. Breach of an
“agreement to negotiate” occurs when one party
obstructs the negotiation process to prevent the
reaching of an agreement. Such obstruction can
take the following forms: (1) refusal to negotiate
(unreasonable delay can amount to an effective
refusal); (2) improper tactics, including inflexibility;
(3) unreasonable proposals; (4) non-disclosure of
material information; (5) negotiation with others;
(6) reneging on agreed terms; and (7) breaking
off negotiations.23
Parties to a preliminary agreement may also be
obliged to negotiate in good faith, depending on the
particular common law jurisdiction. There appears
to be an obligation of good faith and/or fair dealing
with respect to preliminary agreements in the United
States, but this does not appear to be the case in
England.24 Although English law does not recognize
the validity of such an obligation, it does appear to
accept obligations to “use best endeavours”.25
Common law courts have often been unwilling
to enforce “agreements to negotiate” and other
preliminary agreements on the grounds of
uncertainty, indefiniteness, or lack of clarity regarding
the parties’ intent to be bound. 26 A member of the
English House of Lords stated as far back as 1857:
“An agreement to enter into an agreement upon
terms to be afterwards settled between the parties
is a contradiction in terms. It is absurd to say that
a man enters into an agreement till the terms of
that agreement are settled.”27 English courts will,
as a rule, not enforce preliminary agreements in the
absence of a formal contract.28
A second reason for common law courts’
unwillingness to enforce “agreements to negotiate”,
at least in the United States, is the courts’ difficulty
in determining the scope of the obligation of fair
dealing and/or good faith under the agreement. 29
However, legal scholars have noted that courts have
not made much effort to determine a standard of
fair dealing in the context where negotiations fail to
result in an agreement.30 Courts will consider, inter
alia, the following factors:31
(1) Language of the agreement – do the parties
specify “good faith” or “best efforts” (which
is generally considered a higher standard than
good faith)?
(2) Exclusivity or non-exclusivity of the negotiations.
(3) Duration of the negotiations – the longer the duration, the greater the parties’ expectations
become of reaching an ultimate agreement.
(4) What was disclosed during the negotiations.
(5) What was to be kept confidential during
the negotiations.
(6) Any previous relationship or history of dealing
between the parties.
(7) Any relevant trade practice.
The standard of “fair dealing” under an “agreement
to negotiate” usually requires: (1) actual negotiations
with no imposition of improper conditions; (2)
sufficient disclosure about parallel negotiations to
enable the other party to make competing proposals;
23 Id. at 273-285.
24 Schwartz and Scott, supra note 7, at 664. Halsbury’s Laws of England – Contract Vol. 9(1) Section 631.
25 Giliker, supra note 12, at 34-35. English courts will enforce express “best endeavours” or “all reasonable endeavours” clauses. See Lambert
v HTV Cymru (Wales) Ltd [1998] EMLR 629 (CA). English courts have also found that a duty to use one’s “best endeavours” may be implied by
market practice, even where there was no express “best endeavours” clause in the contract. See General Accident Fire and Life Assurance
Corporation v Tanter, The Zephyr [1985] 2 Lloyd’s Rep 529 (CA).
26 Farnsworth, supra note 3, at 264-265. Giliker, supra note 12, at 32-35.
27 Farnsworth, supra note 3, at 264.
28 Lake, supra note 15, at 346.
29 Farnsworth, supra note 3, at 267.
30 Id. at 269.
31 Id. at 272-273.
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Pre-contractual agreements: how to keep out of the woods
and (3) continued negotiation until an impasse
has been reached unless there is a reasonable
justification for breaking off the negotiations.32
A third reason for common law courts’
unwillingness to enforce “agreements to negotiate”
is the difficulty in providing a remedy, given that
the parties cannot know in advance the outcome
of their negotiations. 33 For this reason, expectation
interest and specific performance are not generally
considered to be appropriate remedies.34 Instead,
the appropriate remedy is usually reliance interest –
but only if the non-breaching party in fact relied and
suffered harm.35 The party seeking recovery must
show reliance and prove that its loss was caused
by that reliance (including expenditures in reliance
and any lost opportunities).36 Thus if a party to a
preliminary agreement fails to negotiate in good
faith, the other party may be entitled to recover its
reliance expenditures.37
In addition to good faith/fair dealing, liability
for preliminary agreements has been found on
other grounds, although it has been noted that
“[t]he legal rules that have evolved to treat claims of
precontractual liability travel under a confusing
array of legal doctrines.”38 Common law courts
have increasingly recognized the following
grounds for imposing pre-contractual liability: (1)
unjust enrichment; (2) fraudulent or negligent
misrepresentations made during the negotiations;
and (3) specific promises made during the
negotiations.39 Recovery based upon unjust
enrichment is restitution, by which the wrongful
party must return the benefit to the wronged
party.40 Recovery based upon misrepresentation or
specific promises made during the negotiations is
based upon reliance interest (by which the wrongful
party is liable for the loss suffered in reliance on the
misrepresentation or promise).41 It has been said
that none of the three grounds described above
gives rise to recovery of an expectation interest
(i.e., profits) or the remedy of specific performance,
however.42 Courts have also allowed recovery based
on the doctrine of promissory estoppel, although it
appears that the courts grant recovery on this basis
in only very limited circumstances.43
2.1 (c) All terms agreed, but no writing
A third scenario is that in which the parties had
agreed on all material terms of an agreement and
intended to later memorialize their agreement in a
writing, but one party backed out before the writing
was done.44 In this case, courts may find that there is
a binding contract if they conclude that the intent of
the parties was to be bound and that the parties did
not intend for the formalization of their agreement to
be essential.45 The problems here tend to more of
proof (“who said what”) than principle.
One point: if there is a binding agreement, with all
the requisite terms, the mere addition of “subject to
contract” at the top will not change this.46 It is all a
question of intention.
Id. at 284 and 286.
Id. at 267.
Id. at 263-264.
Farnsworth, supra note 3, at 267.
Id. at 267-269.
Schwartz and Scott, supra note 7, at 664-665.
Id. at 663.
Farnsworth, supra note 3, at 222. Kottenhagen, supra note 5, at 68-69.
Farnsworth, supra note 3, at 223.
Id. at 224.
Id. at 223. Kottenhagen, supra note 5, at 69.
Schwartz and Scott, supra note 7, at 668-671. Schwartz and Scott argue that the much-taught case of Hoffman v. Red Owl Stores, Inc., in which
the court allowed Hoffman to recover sunk costs on the basis of the doctrine of promissory estoppel, has little precedential value and that
most courts have established strict limitations on using the promissory estoppel doctrine to impose liability based on representations made
during negotiations. (Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (1965)).
44 Id. at 664.
45 Id.
46 See ProForce v The Rugby Group, supra note 18.
32
33
34
35
36
37
38
39
40
41
42
43
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Pre-contractual agreements: how to keep out of the woods
2.2 The civil law position
In comparison with common law courts,
civil law courts are much more willing to
impose liability on parties with respect to
pre-contractual negotiations.
The concepts of good faith and fair dealing in
business negotiations are firmly entrenched in civil
law systems. The concept of a duty of good faith
and fair dealing dates back (at least) to 1861.47 At
that time, a German jurist named Rudolf von Jhering
set forth the theory that parties to pre-contractual
negotiations have a duty of good faith, fair dealing,
care and loyalty.48 A breach of this duty – a “culpa
in contrahendo” (fault in negotiations) – results in
recovery of reliance damages. German courts have
applied von Jhering’s theory as a basis for liability in
failed negotiations.49 A similar view was developed
in France in 1907 by a French scholar named
Raymond Saleilles.50 Saleilles put forth the view that
a party that has entered into negotiations must act
in good faith and cannot break off the negotiations
arbitrarily without compensating the other party for
reliance damages.51
It has been suggested that whereas the common
law of contract focuses on the bargain, the civil law
of contract focuses on the relationship between
the parties.52 It has also been suggested that since
contracts are formed with less formality in civil law
systems (the formal contract is not the “dramatic
event” it is in common law), civil law courts are
more likely to find that the parties are legally bound
at an earlier stage of the negotiation process.53 It
has also been noted that French law “is far more
willing to contemplate contractual obligations at an
early stage and less concerned with the demands
for security and stability in the market place, which
influence its English counterpart.”54
Similar to common law systems, pre-contractual
liability differs depending on the stage of the
parties’ negotiations.
2.2(a) Preliminary negotiations
(i) Liability
In some civil law systems, pre-contractual liability
for preliminary negotiations is based upon tort law
instead of contract law. This is the case in France.
Under French law, the general “catch-all” tort liability
clauses of the French Civil Code are generally used
as the basis for liability for preliminary negotiations.55
Under French law, pre-contractual liability may be
found in situations of preliminary negotiations, in
contrast with common law systems.
47 Omalu, supra note 14, at 326. Farnsworth, supra note 3, at 240.
48 Omalu, supra note 14, at 326. Farnsworth, supra note 3, at 240.
49 Omalu, supra note 14, at 326. Farnsworth, supra note 3, at 240. The Bundesgerichtshof (the highest court in Germany’s system of ordinary
jurisdiction) found in one judgment: “A fault in contractual negotiations that renders one liable for damages can also exist in that one party
awakes in the other confidence in the imminent coming into existence of a contract subsequently not concluded – and this causes the latter party
to incur expenses.” Farnsworth, supra note 3, at 240, citing the judgment of July 14, 1967, Budesgerichtshof, W. Ger., Lindenmaier-Möhring,
Nachschlagewerk des Bundesgerichtshofs, BGB § 276 (Fa.) no. 23 (1968).
50 Omalu, supra note 14, at 327. Farnsworth, supra note 3, at 240.
51 Omalu, supra note 14, at 327. Farnsworth, supra note 3, at 240.
52 Lake, supra note 15, at 342. Giliker, supra note 12, at 4.
53 Lake, supra note 15, at 342-343.
54 Giliker, supra note 12, at 45.
55 Article 1382 of the French Civil Code provides: “Any act whatever of man, which causes damage to another, obliges the one by whose fault it
occurred, to compensate it.” (“Tout fait quelconque de l’ homme, qui cause à autrui un dommage, oblige celui par la faute duquel il est arrivé,
à le réparer.”) Article 1383 of the French Civil Code provides: “Everyone is liable for the damage he causes not only by his intentional act, but
also by his negligent conduct or by his imprudence.” (“Chacun est responsable du dommage qu’ il a causé non seulement par son fait, mais
encore par sa négligence ou par son imprudence.”) (Articles and official translations available at http://www.legifrance.gouv.fr.)
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Pre-contractual agreements: how to keep out of the woods
The most common categories of claims relating
to preliminary negotiations are: (1) unjustified and
abusive rupture of negotiations (the most common
form); (2) negotiation without a serious intent to
contract; (3) failure to cooperate; (4) misuse of
information gained in confidence (for example, trade
secrets, know-how or confidential information); (5)
entry into negotiations with the goal of preventing
the other party from negotiating with a third party;
(6) conducting parallel negotiations in bad faith; and
(7) failure to disclose essential and material facts.56
Under French law, simply breaking off preliminary
negotiations does not per se constitute a fault
unless done in bad faith. Bad faith will be judged
from the circumstances, including: (1) the timing or
suddenness of the rupture; (2) the expenses incurred;
(3) the preparatory work done; (4) the importance
of the transaction; (5) the stage of the negotiations;
(6) the length of the negotiations; (7) whether the
parties are professionals or not; (8) any publicity put
out by the party breaking off the negotiations; (9) the
rupturing party’s behavior; and (10) the justification
provided by the rupturing party.57 No single criterion
is, by itself, determinative of bad faith. French
judges consider all of the circumstances.
The leading French case on the issue is a
decision by the Cour de cassation (the Supreme
Court) in 1972.58 The facts are as follows: The
claimant and the exclusive distributor in France of
American-made machines for the manufacture of
cement pipes conducted intensive negotiations,
during the course of which the claimant visited the
US to observe the machines and obtain additional
information. The distributor was later found to
have withheld information from the claimant. The
distributor suddenly terminated the negotiations
and contracted with the claimant’s competitor. The
distributor’s contract with the claimant’s competitor
included an exclusive distribution clause for fortytwo months. The Cour de cassation concluded
that the negotiations had been broken off suddenly
(“brutalement”), unilaterally and without any
legitimate justification, for which the distributor
was liable.59
The Court of Appeal of Riom, following the reasoning
of the Cour de cassation, found:
“If freedom [of contract] is the main principle
in the pre-contractual period and includes the
freedom to break off negotiations at any time,
it is still true that when the latter have reached
a length and level of intensity such that one
party may legitimately believe that the other is
about to conclude the contract and in readiness
encourages him to incur certain expenses,
breaking off such negotiations is wrong, causes
loss and gives rise to reparation”.60
Another French example involved the case of two
parties who had negotiated for a period of four
years, during which they held numerous meetings
and made various proposals.61 One party broke
off negotiations citing internal difficulties, which it
admitted had nothing to do with the quality of the
product in question.62 The Cour de cassation found
that the party that broke off negotiations had shown
a lack of fairness (“loyauté”) and did not have a
legitimate reason for doing so at that stage.63
56 See, inter alia, Giliker, supra note 12, at 126-128. Giliker notes that in contrast to English law, French law imposes a pre-contractual obligation
on parties to disclose information.
57 Giliker, supra note 12, at 123-126.
58 Kottenhagen, supra note 5, at 80 (discussing Cass. Com. 20.3.1972 JCP 1973 II 17543). Giliker, supra note 12, at 123.
59 Kottenhagen, supra note 5, at 80. Giliker, supra note 12, at 123.
60 Kottenhagen, supra note 5, at 80-81. Giliker, supra note 12, at 124 (discussing Court of Appeal decision of Riom, June 10, 1992; RTD civ. 1993, p.
343, note J. Mestre).
61 Giliker, supra note 12, at 125 (discussing (Sté Laboratoires Sandoz c/Sté Poleval) Com., April 7, 1998 D 1999.514 note P. Chauvel, JCP 1999 E Jur
579 note J Schmidt-Szalewski).
62 Id. at 125.
63 Id.
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Pre-contractual agreements: how to keep out of the woods
It appears from these and other decisions of French
courts that the following key factors, taken together,
can give rise to liability: (1) the advanced stage
of negotiations; (2) the amount of work already
undertaken; and (3) the suddenness of the breaking
off of negotiations.64
French courts do not consider concurrent
negotiations with third parties, in the absence of an
exclusivity clause in the preliminary agreement, to
constitute an actionable fault.65 Moreover, unless
required by the terms of their preliminary agreement
(by a “clause de sincerité”), a party does not even
have to inform the other party that it is negotiating
with a third party.66 However, French courts may
find a party liable for leading another party to believe
that it was negotiating solely with that other party
and that a contract was almost certain, while it
concealed its negotiations with third parties.67
Parties should not reveal confidential information
gleaned from preliminary negotiations, even in the
absence of a confidentiality clause (“accord de
confidentialité”) in a preliminary agreement. A party
who uses or disseminates such information without
authorization from the other party commits a tort
(“concurrence déloyale” or “parasitaire”).68
French courts do not require a finding of intent
to harm the other party in order to impose precontractual liability.69 Although evidence of such
intent would certainly support a claim of bad faith,
malicious intent is not itself necessary for a finding
of liability.
A legitimate justification for breaking off negotiations
is a defense against a claim for unjustified rupture of
negotiations. Examples of legitimate justifications
for breaking off negotiations include financial
reasons, a change in circumstances, or the parties’
simple inability to agree on key points (of course
these depend on the circumstances).70
(ii) Remedy
The remedy for wrongful breaking off of preliminary
negotiations can be either a limited form of specific
performance or the payment of damages.
The remedy of specific performance is very limited
and indeed highly controversial. A judge cannot
force a party to sign a contract where the parties
have not agreed on the terms.71 However, a French
judge may order the parties to recommence
negotiations.72 The French judge may even appoint a
“mandataire-négociateur” to follow the negotiations
and note his findings to the judge in a report should
the negotiations fail, although this remedy is
exceptional and controversial.73
The remedy of damages and interest is by far more
common.74 A party can recover its expenditures,
including preparatory studies, travel for negotiations,
expert reports, etc., if such expenses were
reasonably and timely made in the circumstances.75
Although French law does not allow recovery of
loss of profits, it does allow a claim for “loss of
the chance” (“perte de chance”) to conclude the
64 Kottenhagen, supra note 5, at 81. Giliker, supra note 12, at 125.
65 Civ. 2e, January 5, 1994, case No. 92-13856 (available at http://www.legifrance.gouv.fr); Court of Appeal of Versailles, March 5, 1992; RTD
civ. 1992, p. 752, note J. Mestre; François Terré, Philippe Simler and Yves Lequette, “Droit civil – Les obligations” (Dalloz 2005) at 185-186.
Giliker, supra note 12, at 127.
66 Giliker, supra note 12, at 127.
67 Id.
68 Com., October 3, 1978; Bull. civ. IV, No. 208; June 3, 1986, Bull. civ. IV, No. 110. Giliker, supra note 12, at 123-126.
69 Civ. 3e, October 3, 1972, Bull. civ. III, No. 491. Giliker, supra note 12, at 124-125.
70 Giliker, supra note 12, at 125.
71 Pierre Mousseron, RTD Com. 1998 p. 243 at para. 73.
72 Id. at paras. 75-76.
73 Id. at para. 76.
74 Giliker, supra note 12, at 129.
75 Id.
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Pre-contractual agreements: how to keep out of the woods
contract.76 Under this claim a party can recover a
proportion of the anticipated benefit of the contract,
representing the probability of success.77
2.2(b) Preliminary agreements
(i) Liability
Civil law systems allow for a wide variety of types
of preliminary agreements, similar to those found
in common law systems (including, for example,
“agreements to negotiate”, “letters of intent”, etc.).
As in common law systems, the parties are free to
memorialize their points of agreement as well as
any wish to be legally bound by such agreement.
Under French law, once a preliminary agreement
is concluded, the basis for the parties’ potential
liability moves from the realm of tort law (where it
was for the preliminary negotiations) to the realm of
contract law.78
French courts will consider the preliminary
agreement to determine whether the parties had
reached a sufficient consensus and intended to have
a contractual agreement.79 There is a presumption
that the failure to fulfill subsequent formalities will
not prevent contract formation unless there is a
clear showing of the parties’ intent to the contrary.80
(It has been observed that French courts “have
demonstrated a particular willingness to overcome
ambiguity in favour of contractual enforcement.”81)
Labeling the preliminary agreement as “sans
engagement” (“without commitment”) will not of
itself preclude liability.82
As mentioned above, French law imposes an
obligation of good faith.83 What this means in practice
is that a party must make serious, constructive and
acceptable propositions which are likely to advance
the negotiations, within a reasonable time frame,
and should not go back on any points already agreed
with the other party.
(ii) Remedy
Here again, the remedy for the wrongful breaking
off of negotiations can be either a limited
specific performance or damages.84 And as
above, the French judge can order the parties to
recommence negotiations, and can even appoint a
“mandataire-négociateur”
to
monitor
the
negotiations (although this is exceptional and
controversial).85 As distinct from above, however,
a French judge can even order the parties to sign
a contract when the parties’ agreement has been
memorialized in at least a partial draft contract.86
The remedy of damages and interest, however, is
again by far the more common remedy.87 The injured
76 3ème Civ., June 28, 2006; Bull. civ. III, No. 164; RTD civ. 2006, p. 754, note J. Mestre and B. Fages. Kottenhagen, supra note 5, at 81-82. Giliker,
supra note 12, at 129-130.
77 Giliker, supra note 12, at 130.
78 Id. at 42.
79 Id. at 52. Terré, Simler and Lequette, supra note 65, at 191.
80 Giliker, supra note 12, at 52. Terré, Simler and Lequette, supra note 65, at 191.
81 Giliker, supra note 12, at 52.
82 Id.
83 Article 1134 of the French Civil Code provides that “[a]greements lawfully entered into […] must be performed in good faith.” (“Les conventions
légalement formées […] doivent être exécutées de bonne foi.” ) (Articles and official translations available at http://www.legifrance.gouv.fr.)
See also Giliker, supra note 12, at 42.
84 Giliker, supra note 12, at 44. Giliker states that under French law, all contractual obligations are capable of specific performance. However,
Giliker notes the practical difficulty of ordering specific performance in the context of negotiations: “on ne saurait davantage contraindre une
partie à négocier qu’un peintre à exécuter le tableau promis” (“you can no more force a party to negotiate than you can force an artist to paint” ).
See also Jean-Marc Loncle and Jean-Yves Trochon, “La phase des pourparlers dans les contrats internationaux (The Negotiating Phase of
International Contracts)”, RDAI/IBLJ N° 1, 1997, at 29.
85 Mousseron, supra note 71, at para. 76.
86 Id. at para. 73. Mousseron states that a French judge may find that a preliminary agreement is binding (“réputé conclu” ) where the parties
agreed on its essential terms. See also Terré, Simler and Lequette, supra note 65, at 191. Terré, Simler and Lequette note that the parties’ lack
of agreement on non-essential terms of a preliminary agreement will not prevent the French judge from finding that the preliminary agreement
is binding (where the parties agreed on the essential terms). Terré, Simler and Lequette observe that the French judge has the liberty to
evaluate the parties’ intent regarding the preliminary agreement.
87 Loncle and Trochon, supra note 84, at 35. Giliker, supra note 12, at 44.
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Pre-contractual agreements: how to keep out of the woods
party can recover its reasonable expenditures,
including travel for the negotiations and experts’
reports, etc. The injured party will not recover lost
profits, however.88
3. How can you better protect yourself in
the future?
When entering into negotiations with another party,
it is critical to consider the other party’s background
(i.e., civil v. common law). You should also take
into account the differences between countries’
legal systems, even within the same legal culture
(common or civil law). For example, as discussed
herein, there are significant differences between
English and US law regarding precontractual liability
even though both are common law systems.
This kind of analysis will help you understand
the other parties’ expectations with respect to
the negotiations.
When you are considering entering into a preliminary
agreement with the other party to the negotiations,
carefully consider: (1) what you want to include in the
preliminary agreement (and indeed also what you
want left out); and (2) what matters you wish to be
binding (and which not). Frequently, the problems
arise because parties wish to have this second point
vague (often a product of the desire to “bind him
but not me”…). You should take into consideration
the following factors, and draft the provisions of the
agreement accordingly:
(1) Binding nature. Do you want your agreement
to be legally binding? Your agreement should
expressly state the parties’ intent in this regard.
You may also include a clause providing that
neither party will claim damages from the
other in the event that a final contract is not
concluded.89 If (as is often the case) you
want parts of the agreement to be binding, be
clear about which parts they are (see points
(2) to (6) below).
(2) Exclusivity. Do you want the negotiations to be
exclusive? If so, include an exclusivity clause
in your agreement. It is also a good idea to
specify the duration of the exclusivity.
(3) Confidentiality. You will want a confidentiality
clause providing that all information
exchanged during the negotiations (perhaps
even the existence of the negotiations
themselves) must be kept confidential and
cannot be used or disseminated by the other
party. You may even want the confidentiality
agreement to extend to the very existence
of the preliminary agreement, because there
are certain situations where revealing even
the existence of a preliminary agreement can
be dangerous.
(4)“Best efforts” clause. Do you want the other
party (and yourself) to be obliged to use
best efforts to negotiate and reach a final
agreement? If so, you should include a clause
to this effect.
(5)Disclosure. You may want your preliminary
agreement to set forth explicitly what each
party needs to disclose to the other party
during the negotiations.
(6)Duration of the negotiations. You may want your
preliminary agreement to set out minimum or
maximum durations of the negotiations.
(7)Exclusion of liability/binding nature. You want
extra comfort, make any exclusion express
“for the avoidance of any doubt”.
(8)No extension to parent company. As a general
rule (but particularly in civil law cases), you
should specify clearly that any obligations
attach to the relevant subsidiary and not to
any parent or affiliate.
88 Kottenhagen, supra note 5, at 81.
89 Id.
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Pre-contractual agreements: how to keep out of the woods
(9)Conduct of the negotiations. As you can
imagine, all the drafting in the world may not
save you if you are shown to have acted in
bad faith or in some other fashion attracting a
court’s censure. So be careful.
In summary, your preliminary agreement should very
clearly state the intent of the parties, particularly with
respect to the binding or non-binding nature of each
provision of that document. And any discussions or
negotiations should be closely monitored to ensure
that allegations of bad faith, lack of transparency
and/or dishonesty can never stick. This is the best
way to protect your company against unexpected
claims of contractual or pre-contractual liability.
Michael Polkinghorne is a partner at
White & Case based in Paris. Mr. Polkinghorne
has a broad range of experience in arbitration and
litigation in the areas of energy, project finance,
construction, infrastructure, telecoms and defense
procurement. He has served as counsel and
arbitrator in arbitrations conducted under most
major institutional rules and is an alternate member
of the International Court of Arbitration of the ICC,
where he is a member of the ICC Taskforce on
reducing costs in complex arbitrations. He has
covered disputes arising in many different countries,
and has significant expertise in the area of foreign
direct investment and acting for and against States.
Courtney Kirkman is an associate at White & Case
based in Paris. Ms. Kirkman specializes in
international commercial arbitration and
commercial litigation.
The information in this article is for educational
purposes only; it should not be construed as
legal advice.
Copyright © 2009 White & Case llp
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