OMMENTUNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS FORMATION
A
(Negotiations in bad faith)
(1) A party is free to negotiate and is not liable for failure to reach an agreement.
(2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party.
(3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.
C
1. Freedom of negotiation
As a rule, parties are not only free to decide when and with whom to
enter into negotiations with a view to concluding a contract, but also if,
how and for how long to proceed with their efforts to reach an
agreement. This follows from the basic principle of freedom of contract
enunciated in Art. 1.1, and is essential in order to guarantee healthy
competition among business people engaged in international trade.
2. Liability for negotiating in bad faith
A party’s right freely to enter into negotiations and to decide on the
terms to be negotiated is, however, not unlimited, and must not
conflict with the principle of good faith and fair dealing laid down in
Art. 1.7. One particular instance of negotiating in bad faith which is
expressly indicated in para. (3) of this article is that where a party
enters into negotiations or continues to negotiate without any intention
of concluding an agreement with the other party. Other instances are
where one party has deliberately or by negligence misled the other
party as to the nature or terms of the proposed contract, either by
actually misrepresenting facts, or by not disclosing facts which, given
the nature of the parties and/or the contract, should have been
disclosed. As to the duty of confidentiality, see Art. 2.1.16.
A party’s liability for negotiating in bad faith is limited to the losses
caused to the other party (para. (2)). In other words, the aggrieved
party may recover the expenses incurred in the negotiations and may
also be compensated for the lost opportunity to conclude another
contract with a third person (so-called reliance or negative interest),
but may generally not recover the profit which would have resulted
had the original contract been concluded (so-called expectation or
positive interest).
Only if the parties have expressly agreed on a duty to negotiate in
good faith, will all the remedies for breach of contract be available to
them, including the remedy of the right to performance.
I l l u s t r a t i o n s
1. A learns of B’s intention to sell its restaurant. A, who has no
intention whatsoever of buying the restaurant, nevertheless enters
into lengthy negotiations with B for the sole purpose of preventing
B from selling the restaurant to C, a competitor of A’s. A, who
breaks off negotiations when C has bought another restaurant, is
liable to B, who ultimately succeeds in selling the restaurant at a
lower price than that offered by C, for the difference in price.
2. A, who is negotiating with B for the promotion of the
purchase of military equipment by the armed forces of B’s country,
learns that B will not receive the necessary export licence from its
own governmental authorities, a pre-requisite for permission to pay
B’s fees. A does not reveal this fact to B and finally concludes the
contract, which, however, cannot be enforced by reason of the
missing licences. A is liable to B for the costs incurred after A had
learned of the impossibility of obtaining the required licences.
3. A enters into lengthy negotiations for a bank loan from B’s
branch office. At the last minute the branch office discloses that it
had no authority to sign and that its head office has decided not to
approve the draft agreement. A, who could in the meantime have
obtained the loan from another bank, is entitled to recover the
expenses entailed by the negotiations and the profits it would have
made during the delay before obtaining the loan from the other bank.
4. Contractor A and supplier B enter into a pre-bid agreement
whereby they undertake to negotiate in good faith for the supply of
equipment in the event that A succeeds in becoming prime
contractor for a major construction project. A is awarded the
Formation
Art. 2.1.1661
construction contract, but after preliminary contacts with B refuses
to continue the negotiations. B may request enforcement of the duty
to negotiate in good faith.
3. Liability for breaking off negotiations in bad faith
The right to break off negotiations also is subject to the principle of
good faith and fair dealing. Once an offer has been made, it may be
revoked only within the limits provided for in Art. 2.1.4. Yet even
before this stage is reached, or in a negotiation process with no
ascertainable sequence of offer and acceptance, a party may no longer
be free to break off negotiations abruptly and without justification.
When such a point of no return is reached depends of course on the
circumstances of the case, in particular the extent to which the other
party, as a result of the conduct of the first party, had reason to rely on
the positive outcome of the negotiations, and on the number of issues
relating to the future contract on which the parties have already
reached agreement.
I l l u s t r a t i o n
5. A assures B of the grant of a franchise if B takes steps to gain
experience and is prepared to invest US$ 150,000. During the next
two years B makes extensive preparations with a view to
concluding the contract, always with A’s assurance that B will be
granted the franchise. When all is ready for the signing of the
agreement, A informs B that the latter must invest a substantially
higher sum. B, who refuses, is entitled to recover from A the
expenses incurred with a view to the conclusion of the contract.