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Breakdown in negotiations (In the context of the purchase of a business) : the risks in French law


Rédigé par Antoine Adeline le 20 Janvier 2006


By contrast to English law where the parties, other than in very limited circumstances, have the right to break off negotiations at any point and where there is usually no right to any indemnity, French law imposes a general obligation that the parties will negotiate in good faith.

LIABILITY FOR THE BREAKDOWN OF NEGOTIATIONS

If a party is "at fault" for the breakdown of discussions and if the other party can prove resulting loss, the party at fault may be liable to pay damages to the other.
In proving fault, the French Courts rely on the notion that the parties should conduct and, where relevant, terminate negotiations in "good faith".
In considering "good faith" the Courts will, in particular, refer to:

- The duration of negotiations and the stage at which negotiations were terminated
The breakdown in negotiations is more sensitive and must in particular be justified when there have been lengthy negotiations and when a binding agreement was very likely.

The Courts consider that a party is at fault if the negotiations have been prolonged artificially when it was clear to that party that the contract would not be concluded.

The circumstances of the breakdown

The suddenness of the breakdown and the existence of aggravating circumstances are considered by the Court to be exemplary of bad faith.

It is particularly important to note that an action for "abusive breaking off of negotiations" (rupture abusive de pourparlers) is an action in tort and may arise even where an appropriately worded letter of intent has been signed and even if this is subject to another law to that of France. Whilst of course this is not a reason to dispense with such a document, caution still needs to be exercised.

Under French law compensation for loss can include direct loss (e.g. costs linked to the negotiations, such as professional fees), indirect loss (such as loss of opportunity to contract) and possibly even intangible loss (e.g. loss of goodwill or loss of reputation).


SOME PRACTICAL ADVICE

1. One must observe the principle of good faith in all negotiations

It is important to be able to demonstrate that in your dealings with the Sellers, you have been sincere, supplied correct information and been transparent and honest in negotiations.

2. Avoid giving the impression that the agreement has been all but reached during the negotiations (to the extent that this is commercially possible.)

This is particularly important when the approval of the board of the parent company needs to be obtained before signing. It is essential that the Sellers are reminded of this throughout the process and that if the final approval is either not obtained or conditional upon material changes being made to the then agreed terms, this must be communicated carefully. In such circumstances, we strongly suggest seeking legal advice prior to communication of such a change to the Sellers.

3. Justify the breakdown of negotiations, giving explanations according to objective criteria (ie a change in market conditions)

It is vital not to continue negotiations when it is known that no contract will be reached.
However one should avoid hurried and sudden breaking off (a period of several days and maybe one or two weeks to allow for explanation and discussion is advised).

4. Precautions in relation to contractual documents amended by negotiations

Include in successive drafts a reference to "subject to contract" or similar terminology

In comparison to English law, the French Courts place less value on this and it will be determined by the Courts according to the intention of the parties. Nonetheless, this is still an important precaution.

Retain at all stages outstanding conditions (and ensure the other party is informed of these regularly in writing, such as on the front page of successive drafts by way of note). These might include open due diligence items, approvals required (internal and regulatory), or terms of the deal itself. However, it may not be possible to rely on a condition too closely connected to the Buyer or dependent on its own will (such as internal approval or outcome of due diligence expressed as merely "satisfactory to purchaser") in avoiding a legal claim from the Sellers. An objective or independent condition will carry more weight.

Avoid however excessive reliance on stated conditions which could actually have been satisfied. In contrast to the English courts, French law looks much more at the spirit of behaviour than the letter of the document. For example, "subject to due diligence" may not be adequate if this could have been started a significant time beforehand. If due diligence is being delayed pending agreement, this should be made clear.

5. Record all exchanges which may justify termination in writing

It should be remembered that the French Courts place little value on evidence from witnesses.

Accordingly, great care should be taken as to the content of all relevant written correspondence, including e-mails.

Conclusion

The risk that an action will be brought for unnecessary or rash termination of negotiations can never be totally avoided. However, by taking a minimum of precautions, one can limit the risks considerably.
In practice, it is important to take legal advice as soon as possible and where necessary take the relevant steps to limit such risks.





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