Under negotiation “Who abandons the negotiation may have to compensate the other party”

Marcello Mantelli
Lawyer in Milan and Turin


When preparing to conclude an international contract, except in rare cases, the counterparty is almost never willing to accept in full the contractual terms proposed to it. Therefore, a preliminary negotiation phase is necessary, with the aim of agreeing on a shared contractual text that takes into due consideration the needs of both parties.

One of the mistakes to avoid in the context of pre-contractual negotiations with a foreign partner is to think that you are the weak party, so that you have to passively accept all the claims and impositions of the counterpart: you should always keep in mind the strength of your product (good or service) and the appeal that “made in Italy” has always exerted on foreign partners.

On the other hand, with regard to the conditions suggested by foreign partners, which at first glance may appear both extremely onerous and non-negotiable, most often it is good to keep in mind that they are initially more rigid precisely to leave room for negotiation and bargaining.

That said, the principle of the entrepreneur’s freedom to negotiate with a partner, to finalize or not an international contract, or to break off negotiations, applies in all legal systems of the most advanced countries. But is this freedom without limits, or must rules of conduct be followed? It depends on the applicable law.

The Italian “good faith”

Consider the case of a negotiation between an Italian and a British buyer over the sale of a complex industrial facility. After months of analysis and technical solutions, meetings between the respective business contacts and an agreement very close to conclusion, when by now the seller is confident that the contract will be signed, he gets the unexpected news that the buyer has decided to withdraw from the negotiation, without even giving a clear reason. In such a case, the Italian seller, under Italian law, if he is able to prove the breach of the conduct obligations according to good faith in the negotiation process, can claim compensation from the English counterparty for the damages suffered.

On this point Italian law – and in a very similar way many civil law legal systems – provides that “the parties in the negotiation process and in the formation of the contract must behave according to good faith.” This, in practical terms, implies that negotiations should be conducted fairly and justly, without harming the interests of the other party.

The concept sounds vague and perhaps far from the daily activity of the entrepreneur, but it is in fact firmly embedded in precise rules. In fact, in our system, liability for violation of the general rule of fairness provided for in Article 1337 of the Civil Code is delineated when the following circumstances are present and can be proven:

1. the pending of negotiations between the parties;

2. the negotiations have reached a stage that is likely to give rise in the other party a reasonable expectation that the contract will be concluded (thus, an informative contact, for example, to ask for a quote/estimate or some insight analysis on the latter contact, is not sufficient);

3. the termination of negotiations, by one party, occurs without justified reason;

4. there are no appropriate facts capable of excluding the reasonable reliance of the party invoking the liability of the other on the conclusion of the contract (see Court of Cassation, Second Civil Edition, judgment 7545/2016).

Compensation for damages for breach of the good faith obligation is limited to the so-called negative interest, i.e., pecuniary loss suffered due to unnecessarily incurred expenses in negotiations and loss of opportunities to conclude other contracts during the negotiation phase.

The English “misrepresentation”

On the other hand, from the perspective of English law, and in most Common law jurisdictions (among others the United States and Australia although with different approaches) the same request, presented by the English seller to an Italian buyer who withdraws from the negotiation, even in the presence of the same aforementioned conditions, would not in principle give rise to any liability on the withdrawing party, since in this legal system there is no obligation to conduct negotiations in good faith.

Under the English rules, each party may legitimately withdraw from negotiations at any time and for any reason, simply bearing on itself the costs unnecessarily incurred to negotiate, although a limited formula of protection of the injured party from interruption of negotiations is guaranteed through the institute of misrepresentation, that is the challenge to the other party of a false representation of the facts relevant to the conclusion of the contract or of an untruthful statement.

It follows from what has been said that in some countries, when negotiation has reached a very advanced stage, the free withdrawal from negotiations is inconsistent with the limits that a capable businessman – perhaps negotiating at the same time on several tables – must absolutely know, in order to avoid exposing his company or his personal assets to claims for damages.

Therefore, when negotiating an international contract, the first problem to be addressed is to identify which legal system the partner belongs to and, in order to verify whether there is a pre-contractual liability, it is necessary to identify the law governing the negotiations.

European regulations

From our “European” point of view this must be done in accordance with the provisions of the Community private international law system referring to the Rome II Regulation (Ec/864/2007). It identifies it in the law that applies to the contract or that would have been applicable to the contract had it been concluded (identifiable in turn, at European level, by Regulation Ec/593/2008, Rome I).

In order to avoid uncertainty about the binding effect of the negotiation and to prevent the risk of liability, the practical advice is to regulate negotiations with specific agreements. For example, a non-disclosure agreement may be suitable to protect the exchange of confidential information, including reimbursement of expenses incurred during the negotiation in the event that the contract is not finalized.

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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