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Termination of contractnegotiations

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The precontractual good faith concerns the legal relationship between parties as soon as they are in negotiations. The Supreme Court (Hoge Raad) has provided case law for this doctrine, starting with the most well-known ruling PLAS/VALBURG, but also in later rulings such as VSH/SHELL. What this basically comes  down to is that the legal relationship between parties who are in negotiations is controlled by good faith which means that during this process their actions should have regard for the legitimate interests of the other party. This process can be differentiated into three phases.  Firstly, the phase where parties have exploratory talks and are free, and without any obligation to pay compensation, to break off negotiations. The second phase where the parties’ negotiations have progressed to such an extent that the withdrawing party must pay the other party any costs they incurred in this context. And subsequently the third phase where the cancelled party could in fact expect there to be some kind of agreement between the parties. In this phase there is also room for acknowledging loss of profits. In recent years the Supreme Court has indicated that restraint should be exercised when determining any liability in negotiation procedures (ruling CBB/JPO). One of the reasons for this concerns the principle of freedom of contract, implying that in principle a party can freely choose not to enter into a contract with another party.

In Austria liability based on breaking of negotiations is not easily accepted (see the following ruling  OGH 21 April 2010). This is based on the fact that as long as negotiations are continuing, parties are generally free to decide not to enter into a contract (for ruling see for example OGH 27 November 1963 and OGH 11 September 1979). It can be concluded from the ruling that liability could arise if the cancelling party breaks off negotiations at the last minute without any (objectifiable) reasons (‘grundloses Abstehen’). With regard to liability it is required that the cancelling party has given the disappointed party the impression that a contract would certainly be drawn up (the concluding of the contract only being a formality). Relevant circumstances that play a role here, for example, include the case where based on the created expectations the disappointed party had already entered into contracts with other parties or incurred costs (based on the not yet formalised contract).