The Netherlands

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

    Under Dutch law, the relationship between parties in negotiations is governed by the principles of good faith, reasonableness and fairness. Generally, parties are free to break off negotiations unless they have led the counterparty to have justified expectations. If such expectations exist, ending the negotiations may be regarded as frustrating the reasonable expectations of the other party that an agreement would be reached. This is treated as a breach of good faith principles.

    In Dutch case law, four separate negotiating phases are identifiable. The rights and obligations of the parties to the negotiations - and in particular whether unilateral termination is possible (with or without compensation for damages) - differ depending on which negotiation phase the parties are in. During the negotiations the parties may shift from one phase to the other and back depending on the specific circumstances. The four phases are:

    1.  introductory discussions:  the discussions between the parties have not reached the stage where breaking off the negotiations would constitute a wrongful act (Phase 1)

    2.  discussions between the parties have reached such a stage that breaking off the negotiations would constitute a wrongful act if the breaking party did not compensate the other party for its costs (Phase 2)

    3.  discussions between the parties have reached such a stage that the non-breaking party has developed a justified expectation that an agreement will be reached (Phase 3), and

    4.  the parties have reached a binding agreement on the transaction (Phase 4). Note that this phase may even be reached before the parties have executed a written agreement.

    The parties are, however, free to specifically agree on the negotiations process to be followed and the stage at which binding obligations will arise, so that the aforementioned phases and accompanying rights and obligations do not apply. Typically, this would be agreed upon in writing through a letter of intent or similar document before negotiations commence in earnest. Such document may state that no binding obligations will arise until, for example, an agreement in writing is executed or certain specific conditions have been met. It should be noted that these arrangements on the transaction process are subject to the requirements of reasonableness and fairness, and the fair expectations of the other party. Breach of these arrangements may again lead to liability for damages.

    If, for example, the letter of intent provides that no agreement will be deemed to have been reached until a written agreement has been executed, then walking away from the transaction may still constitute a wrongful act if all conditions precedent (eg satisfactory outcome due diligence) have been fulfilled and the parties have (more or less) reached full agreement on the wording of the agreement. In such case the breaking party has to have a good reason for breaking off the negotiations, eg an unexpected development of results below budget or other unexpected material adverse change.

    Generally, specifically agreed conditions precedent will be upheld by the courts if they are objective conditions. Conditions precedent such as availability of bank financing, a satisfactory outcome of the due diligence and prior board or shareholder approval are regular and will generally be upheld. However, invoking such conditions may still constitute a wrongful act if the withdrawing party has caused the non-fulfillment of the conditions, or if the justified expectation was created in the opposite party that conditions will be fulfilled. For instance, if the party invoking the conditions has throughout the process referred to the conditions as "a mere formality", or if it becomes clear that the corporate body whose approval was required, was actively involved in the entire process, invoking the conditions may still constitute a wrongful act. In other words, the principle of law applied is "substance over form". The factual behaviour of the parties and the expectations they have raised with each other as to the outcome of the negotiations will be taken into account in judging whether breaking off the negotiations was acceptable or not.

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

    Under Dutch law, the breach of a binding agreement may give rise to liability on the part of the breaching party.

    Even where there is no binding agreement, an unacceptable termination of negotiations could lead to liability for costs (negative contractual value) and - in extreme circumstances - for loss of profits (positive contractual value).

    The consequences of unilaterally terminating negotiations will depend on which negotiating phase the negotiations are in:

    Phase 1 - the parties are free to terminate the negotiations at will without consequence
    Phase 2 - the parties may terminate the negotiations, but the terminating party may be required to compensate for the costs incurred by the non-terminating party
    Phase 3 - If a party terminates the negotiations, it may be compelled to resume the negotiations by court order given in injunction proceedings. Terminations of discussions will constitute a breach of contract and may result in liability for damages, including loss of profit. Courts tend to be more reluctant to order a party to continue negotiations or to attribute damages on the basis of positive contractual value than on the basis of negative contractual value, and these will only be attributed under exceptional circumstances, and
    Phase 4 - a binding agreement has been reached, and a termination of the negotiations will be considered a breach of contract. The non-breaching party may claim specific performance and/or compensation of damages.

    What is the potential impact on third party rights?

    Unless specifically stipulated otherwise, agreements and negotiations do not create third party rights. However, if certain expectations were created in a third party (for instance that a transaction would take place) on the basis of the conduct or (verbal or written) undertakings of a party, the party breaching those expectations may be liable on the grounds of tort.

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

    Under Dutch law, there is no implied duty of confidentiality. In the absence of an express commitment, the aggrieved party can only make a claim on the basis of a wrongful act (onrechtmatige daad) by the other party, which carries with it a heavy burden of proof. It is therefore common to specifically agree on confidentiality before entering into negotiations. A confidentiality agreement will be binding on the parties to it. Penalty clauses pursuant to which the party in breach forfeits a penalty to the aggrieved party, are allowed and in fact customary. The court may mitigate the amount of the penalty if excessive.

    What are the consequences of breach?

    In the event of a breach, the aggrieved party may seek specific performance (forcing the party in breach to stop using or disclosing confidential information) and/or compensation of damages. If a penalty clause was agreed, the party in breach may forfeit a penalty.

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


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

    Under Dutch law there is no implied duty of exclusivity. Exclusivity agreements are customary in Dutch law.

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

    Subject to the overriding principles of reasonableness and fairness, there are no legal constraints or requirements on those agreements and they will be binding.

Heads of agreement
  • Are they legally binding?

    The fact that a document is called "letter of intent" or "heads of agreement" is in itself not decisive under Dutch law as to whether or not the document contains binding and enforceable commitments. Even remarks in the headings, such as "subject to contract", may be mitigated by the text of the document itself and more importantly by the factual behaviour and the content of communications between the negotiating parties (substance over form). It is therefore very important to carefully word letters of intent or similar pre-contractual documents so that there can be no misunderstanding about the extent of their desired binding effect. Compensation may be awarded if a party who terminates the negotiations clearly disappointed the non breaking party's justified expectations that an agreement would be reached. In that case the non binding agreement provision or a condition precedent will have no effect. In order to prevent such justified expectations arising it is advisable to first of all include clear and objective conditions precedent and secondly clearly communicate on the conditions precedent and the (expected) fulfilment thereof.

    What are the consequences of breach?

    Breach of pre-contractual agreements may result in liability for the defaulting party. In general, damages will be the remedy but actions for specific performance may also be brought. In exceptional circumstances, compensation for "lost opportunity" can be claimed. A pre-contractual agreement may also set out a specific basis on which damages will be payable (eg liquidated damages). The courts tend to be more reluctant to order a party to continue negotiations or to award damages on the basis of positive contractual value. The courts would be less reluctant to award compensation of costs (eg of professional advisers) but again only where the party that terminates the discussions has clearly disappointed the non breaking party's justified expectations that an agreement would be reached, or has caused the other party to incur extraordinary costs in the negotiation process.

    Letters of intent which are intended to be legally binding are enforceable by and against the parties to the agreement. A third party (eg the target company) may in some circumstances make a claim on the basis of a wrongful act (onrechtmatige daad).

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

    Letters of intent serve the valuable purpose of setting out the commercial reasons for the transaction, especially those transactions that are tax driven. This might assist the parties in avoiding any tax avoidance challenges by the local tax authorities under applicable anti abuse provisions. Depending on the content of the letter of intent, signing of such a letter could be considered as constituting an obligation and/or alienation which could trigger Dutch tax consequences (such as the termination of a fiscal unity, or the use of existing losses of the target company, etc). 

Break fees
  • Are break fees usually payable?

    Termination of pre-contractual agreements such as letters of intent may result in the payment of a break fee, if this is specified in the agreement.

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

    The pre-contractual agreement may set out specific termination events in which break fees are payable. An arrangement for the payment of break fees in pre-contractual agreements is legally binding and enforceable. Break fees may increase as negotiations become more advanced. In public takeovers, standard market practice is a doctrine that the extent of break fees payable by a target company should be reasonable in the given circumstances and should not act as a de facto block to terminating negotiations.

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.