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Pre contractual negotiations
  • Is there an implied duty of good faith to negotiate?

    During negotiations, each party is entitled to decide whether or not to enter into a contract. However, they are under a duty to act in good faith during negotiations.

    What are the consequences of termination of negotiations by one party unilaterally?

    The consequences of termination of negotiations depend on the state of the negotiations.

    • If it is only beginning, the parties are free to terminate the negotiations unilaterally at will and without consequence.

    • If it is advanced and that the negotiations give rise to a reasonable expectation by the other party that the deal will be concluded, then it is not necessary that the terminating party’s acts constitute a serious breach or are fraudulent for that party to be in breach of this duty to act in good faith. It will be in breach of the said duty if it abruptly terminates the negotiations without reason, independently of any intent to cause harm.

    Should the second case occur, the non-defaulting party may claim damages on the grounds of tortuous liability to compensate costs borne during the negotiations (for example, time spent on the negotiations and expenses). On the French1 case law, the party may not claim damages on the basis of a loss of preference to enter into contract.

    It is now common for parties in France to define contractually their rights to terminate pre-contractual discussions.

    What is the potential impact on third party rights?


Confidentially agreements
  • Are there implied confidentiality obligations where there are no formal confidentiality agreements entered into by the parties?

    Under French law, there are no general implied confidentiality obligations between parties, although it may be argued that they tacitly exist under the duty of reservation and discretion2. Thus, parties will normally enter into written confidentiality agreements or undertakings as to avoid the disclosure of confidential information.

    The parties to a confidentiality agreement will be required to keep information confidential during and after negotiations, for a certain period of time. Indeed, under French law, perpetual obligations are, generally speaking, unenforceable. Any confidentiality agreement relating to negotiations should therefore be reasonable in terms of duration (eg: 1 to 5 years).

    What are the consequences of breach?

    If there is a breach of a confidentiality agreement, the non-breaching party will be entitled to claim damages from the breaching party and to apply to the court for an order prohibiting the use of the confidential information it provided. The burden is on the claimant to show that the defendant has disclosed or used the confidential information.

    Are specific terms/formalities required for a binding confidentiality agreement?

    No, but the terms used in the confidentiality agreement should be defined thoroughly, for instance the information which is subject to confidentiality. A list of the obligations of both parties should be drawn with particular care.

Exclusivity arrangements
  • Can an obligation to negotiate exclusively be implied where no formal agreements are entered into by the parties?

    In France, an obligation to negotiate exclusively during negotiations will not be implied by law, based on the principle of freedom of contract.

    Consequently, parties who wish to have exclusivity will have to enter into an exclusivity agreement. This may be expressed as a "lock-in" or a "lock-out", but the duration of the obligation must be limited in time in order to prevent the exclusivity arrangement from being unenforceable.

    If there is a breach of an exclusivity arrangement, the non-breaching party will be entitled to claim for damages from the breaching party. Damages can include any cost borne by the non-breaching party such as expenses, loss of time, and loss of opportunity to negotiate with other persons or entities. The amount awarded is subject to the review of the French courts, which generally award a lower amount than the costs actually incurred by the non-breaching party.

    Are any specific terms/formalities required to make exclusivity arrangements enforceable?

    No, but the terms used in the exclusivity arrangement should be defined thoroughly. A list of the obligations of both parties should be drawn with care.

    Also, a penalty clause in case of breach can be agreed upon by the parties, which, under French law, is always subject to the power of the judge to reduce or increase its amount.

Heads of agreement
  • Are they legally binding?

    Letters of intent or heads of agreement will generally speaking not be legally binding on the parties. There is no rule of French law specifically regulating pre-contractual documentation. Such communications are known under various names in France such as lettre d’intention, protocole d’accord or lettre de confort.

    However, if the letter of intent sets out in detail the principal terms of the transaction, a court, in case of dispute, may consider that the letter of intent constitutes a binding agreement, having regard to the purpose of the transaction itself. Even wording in the headings, such as “subject to contract”, may be mitigated by the text of the document itself. It is therefore very important to draft such documents with great care, and set out issues that the parties consider to be essential to the contract and on which no agreement has been reached.

    Where heads of agreement contain confidentiality and/or exclusivity clauses, it is usual to state that only these particular clauses are binding.

    Are any specific terms/formalities required to make them legally binding?

    In order to be binding, the heads of agreement should contain as much detail as possible concerning the transaction and clearly state that the parties commit to enter into a contract. If the heads of agreement appear to be a definitive contract with specific, clear and autonomous obligations that have been duly accepted in the proper form, then it may again constitute a legally binding agreement between the parties, regardless of whether the intention to contract is expressly stated.

    What are the consequences of breach?

    As for any breach of contract, in the event that a party breaches the terms of a legally binding heads of agreement, the other party may be entitled to damages. If the heads of agreement are not found to be legally binding, then a breach would have, from a legal point of view, no consequences.

    Can heads of agreement have any tax implications/adverse consequences?


Break fees
  • Are break fees usually payable?

    One party can agree to reimburse to the other party all or part of the expenses it incurred during, and in the context of, the negotiations if it unilaterally terminates the negotiations. Such break fees are not subject to regulations or case law yet and constitute a means of putting pressure onto the other party.

    Another option is for the parties to set a price option clause which requires a certain amount of money to be paid at the beginning of the negotiations: if the contract is concluded, the amount paid will be deducted from the amount still outstanding on the contract and if not, it will constitute fees to be kept by the beneficiary as an allowance.

    Finally, parties can set a penalty clause, which provides for the payment of a certain amount as damages in the event that a party defaults.

    What are the main legal issues to be considered eg enforceability?

    The enforceability of break fees is easier when they have been set out at the beginning of the negotiations. Also, the amount of break fees should be carefully decided in advance as to avoid any dispute between the parties.

    In the context of negotiations in relation to the acquisition of a target company, these shall be paid by the shareholders rather than the target company.

    French courts may reduce or increase the amount of a penalty clause when such amount is unrelated to the damages incurred.

    Finally, it should be noted that in France, for public listed companies, such break fee agreements have to be brought to the knowledge of both the stock exchange control authorities and the shareholders of the company.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.