Pre-contractual liability - under Dutch law?

Negotiating, letters of intent and liability - under Dutch law

What are your legal obligations while you are negotiating a contract under Dutch law? What is the legal status of pre-contractual documents? Are you bound by a letter of intent? Can you enforce a “Gentleman’s agreement” under Dutch law?

What role do good faith and reasonableness have in contract negotiations under Dutch Law?

Dutch law adheres to the doctrine of freedom of contract. Freedom of contract means that parties may, within the bounds of the law, freely enter, or not enter, into contracts.

However, a feature of Dutch law is its adherence to an obligation of reasonableness and good faith in contractual dealings. Dutch case law supports that negotiating parties have obligations of good faith and reasonableness. In general terms, good faith and reasonableness require that a negotiating party takes into account the legitimate interests of the other party. The obligation of good faith and reasonableness should always be kept in mind if you are negotiating a contract under Dutch law, for example if you are contemplating breaking off the negotiations.

When is a contract a binding contract under Dutch law?

Under Dutch law, a contract is formed through offer and acceptance: see "Acceptance of an offer under Dutch law". In most cases, a contract does not have to be in writing or contained in a single document and the parties do not need to have reached an agreement on all details of the contract. Therefore, the point in time in the negotiations at which a contract is formed may not always be obvious.

What is the liability under Dutch law during negotiations?

Pre-contractual negotiations are not explicitly regulated in the Dutch Civil Code. However, case law from the Supreme Court (Hoge Raad) demonstrates a well-established approach to determining the parties' obligations during negotiations. Whether a negotiating party is under a legal obligation to continue negotiations or alternatively to pay damages for withdrawing from negotiations will depend on the stage of the negotiations. The more extensively the parties have negotiated and discussed the details of the proposed contractual relationship, the more difficult it will be for a party to break-off the negotiations.

There are three phases of negotiations:

1. During the initial “free negotiation” phase, the parties are free to break off the negotiations without paying damages to the other party
2. During the second stage of negotiations the parties are still free to break-off the negotiations but may be required to compensate the expenses of the other party to fulfil their obligation of reasonableness and good faith.
3. At the third stage of negotiations, the obligation of good faith dictates that the parties cannot break off the negotiations without compensating the other party. If the other party reasonably believed that a contract would come into existence, the damages may be calculated on the basis of what the position of the other party would have been if the contract had indeed been concluded, in other words, a loss of profit.

What is the legal status of Letters of Intent and gentlemen’s agreements under Dutch law?

It is not uncommon for documents to be produced during the negotiation process.

Common names of such documents are:

1. Letter of Intent (LoI)
2. Heads of Agreement (HoA), and
3. Memorandum of Understanding (MoU).

As mentioned above, it is not necessary for the parties to have reached an agreement on all major points for a contract to have come into existence under Dutch law. The Dutch courts will look at 'substance over form'. This means that the name or form of the document is not decisive. It is, therefore, possible under Dutch law that documents produced during the negotiations will individually, or collectively with other communications, have contractual force. A Dutch court may use default provisions of Dutch contract law and the principle of reasonableness and fairness to fill in the gaps of the agreement.

What are common conditions precedent in the Dutch jurisdiction?

Under Dutch contract law, parties are free to choose to stipulate in documents that the documents, or parts thereof, are not to be considered binding. Documents may also include “conditions precedent” that is, conditions that must be fulfilled before a contract will be formed.

Common conditions precedent in the Dutch jurisdiction are subject to contract:

1. subject to contract,
2. subject to a written agreement,
3. subject to signature,
4. subject to approval from the executive board,
5. subject to approval from the supervisory board,
6. subject to approval from the (general meeting of) shareholders.

To ensure maximum effectiveness, these clauses must be drafted in a careful and detailed manner. It is advisable to consult a Dutch lawyer in relation to such clauses. A Dutch lawyer will also be able to advise whether you, or the other negotiating party, are likely to be able to rely on documents produced during the negotiations.