What insights can comparative law provide on the pre-contractual liability rule currently adopted in Dutch law?

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Master Thesis

What insights can comparative law provide on the pre-contractual liability rule

currently adopted in Dutch law?

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1. Introduction

The rules on breaking off negotiations are still developing and therefore it is interesting to write on this. For example, last February the French government published its reform of the French law of obligation with regards to the pre-contractual faulty behaviour.1_{In the new}

article 1112, the duty of good faith during pre-contractual negotiations is finally codified, whereas before it was merely French jurisprudence.2

The pre-contractual phase is the phase prior to the contractual phase. A contract is established by an offer and the acceptance of this offer. In the pre-contractual phase, parties are

negotiating about the offer and instead of accepting this offer, one of the parties makes a counteroffer. Consequently, an agreement has not (yet) been reached, therefore a contract has not come into existence.

Pre-contractual liability is an especially interesting topic when it comes to the Dutch legal system, as comparative research has shown it is different from most other jurisdictions.3

Moreover, it is easy to see that it is important there are unambiguous and uniform rules on pre-contractual liability, since the question of breaking off negotiations will mostly be raised in cases of economically important contracts and therefore it can have a huge impact on the parties. It is highly unlikely that a party would start a dispute about whether a contract has been formed or whether the breaking off of negotiations was lawful if the subject matter of this contract only concerns everyday business. To the contrary, such a dispute of whether the negotiations lead to a contract or if a breaking off was possible will most likely only arise if the content of this contract has substantial economic value, for example when it regards buying property. The question of whether breaking off negotiations can lead to the

compensation of the positive interest and thus de facto to an obligation to perform the contract is therefore crucial.

Freedom of contract is highly valued in private law. It englobes the freedom to conclude a contract with whomever one wants and to the terms one wants and furthermore it englobes the freedom to abstain from concluding a contract.4_{The question is whether the latter is put at}

1 Ordonnance n° 2016-131 du 10 février 2016 portant réforme du droit des contrats, du régime général et de la preuve des obligations, JORF n°0035 du 11 février 2016, texte n° 26

2 http://www.paulhastings.com/publications-items/details/?id=776de969-2334-6428-811c-ff00004cbded 3 The Netherlands is the only country where positive damages can be awarded, see M.W. Hesselink, WPNR 6248, 1996, p. 880-881

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danger by the Dutch Plas/Valburg case,5_{a case wherein the Dutch Supreme court rules that}

under certain circumstances a party may not be allowed to break off negotiations. In the absence of performance, the defaulting party will be obliged to put the aggrieved party into the position it would have been in if the contract would have been fulfilled, which means that the aggrieved party can be reimbursed for the profit it would have enjoyed if the contact would have been executed. Therefore the defaulting party does not only owe the other party negative interest, but also positive interest. Most other jurisdictions only - if at all - allow for negative interest, which does not conflict with the freedom to abstain from a contract.

Negative interest will put the aggrieved party into the position it would have been in if it had never heard about the contract. This basically means this party can have all the costs

reimbursed that it incurred due to negotiating with the other party.

I will research what insights comparative law can provide on the very strict pre-contractual liability rule currently adopted in Dutch law. I will compare Dutch law with the much less strict English rules on pre-contractual liability, as well as the rules on pre-contractual liability in the European Draft Common Frame of Reference (DCFR). I have chosen to research the law in the Netherland and the United Kingdom, since these two countries have very different rules when it comes to pre-contractual liability. You could say that they are both on the other side of the spectrum. The DCFR is a draft for possible European Union rules, which makes it very interesting for me to research. If it will ever be adopted, both the Netherlands and the United Kingdom will possibly have to apply these rules.

In my second, third and fourth chapter I will rely on the classical legal method to set out the current law concerning pre-contractual liability, from within the Dutch and English legal systems and the DCFR. With the use of my sub questions, I will describe when breaking off negotiations gives rise to liability, what the consequences are of breaking off negotiations and what type of liability is connected to this breaking-off. To apply some structure in these sub questions, I will use the different stages that exist when breaking off negotiations, mentioned in the Dutch case Plas/Valburg, as a reference in the Dutch part.

As my research question indicates, I will also perform a comparative study which will take place in my fifth chapter. I will do my comparison based on two questions, namely: What are the main differences between the legal systems and the DCFR? Do these differences lead to different outcomes?

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With these comparative questions I want to find out whether the differences between these systems – if present at all – are only theoretical or practical as well. Looking and the differences, conclusively, I want to evaluate whether these findings can provide some

valuable insights for Dutch law. I want to examine this with reference to legal certainty, since this is highly valued in all legal systems and it has even been referred to as one of the highest values by the author Canaris and a fundamental principles by the author Bydlinski.6_The

DCFR even considers it to be one of the core aims of European private law.7

6 M. Fenwick and S. Wrbka, Legal certainty in a contemporary context, private and criminal perspectives. Springer 2010, p. 10

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2. What are the rules on breaking off negotiations in the Netherlands?

2.1 When does breaking off negotiations give rise to liability and what are the consequences?

In the Dutch legal system, there are no rules on pre-contractual liability laid down in the Dutch Civil Code, therefore the rules are ought to be found in Dutch case law. The rules that we can find in the Dutch Civil Code are on the failure to perform a contract - so when a contract is already established - namely art. 6:74. Since there is no contract yet during negotiations, the question that remains is: can the party that breaks off negotiations be held liable and what are the consequences?

2.1.1 Introduction of pre-contractual liability in the Netherlands

The Netherlands have a long history regarding the liability on breaking off negotiations. For a long time parties were free to break of negotiations at any time without being held liable, since contractual freedom was considered the most important. The first time the concept of pre-contractual liability was mentioned in a case, was in the footnote of the Godefroy/Fontein case in 1954.8

The first time the Dutch Supreme Court introduced the pre-contractual phase and the legal relationships of the parties, was in the case Baris/Riezenkamp.9_{The court came to the}

conclusion that, by entering into negotiations about an agreement, parties enter into a legal relationship governed by good faith, now laid down in art. 6:248 Dutch Civil Code. This means that they have to take the legitimate interests of the other party into account. At the time it was not entirely clear what consequences the Dutch Supreme Court in

Baris/Riezenkamp meant to attach to this legal relationship governed by good faith. However, it is likely that the Dutch Supreme Court did not want to award the aggrieved party positive interests, since it emphasized on the difference of a contract on one side and the legal

relationship governed by good faith on the other hand. Only an existing contract would lead to positive interest, so this relationship governed by good faith probably would only lead to negative interest. In general, good faith and taking into account the legitimate interest of another party is associated with negative interest. For example, Culpa in contrahendo in the German legal system establishes a pre-contractual duty of care. If the latter is breached, so if

8 HR 13 december 1953, NJ 1954, 248 (Godefroy/Fontein), m.nt. Ph.A.N. Houwing 9 HR 15 november 1957, NJ 1958, 67 (Baris/Riezenkamp)

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one party breaks off pre-contractual negotiations, this can lead to negative interest but never to positive interest.

2.1.2 The Plas/Valburg case: introduction of the three phases

The Plas/Valburg case is considered the most important case on the breaking off of pre-contractual negotiations. The facts are as follows: the councils of the municipality of Valburg (Valburg) want to construct an indoor swimming pool. The contractor Plas presents a bid for the build of this pool and Valburg decided to look into it, as well as into the bids of three other parties. At the request of Valburg, Plas gathers information in several areas at his own

expense. Eventually, Plas’s bid turns out to have the lowest price and the mayor of Valburg communicates to Plas that he will give him the assignment, subject to the approval of the councils and to some minor changes in the details. Two months later, the councils decide to give the assignment to another contractor, who is willing to construct the pool for a lower price. Plas goes to court and demands compensation for the incurred preparatory costs (negative interest) and lost profits (positive interest), on the grounds of unlawful conduct c.q. culpable failure.

The lower court decides that Valburg was not in the position to break of the negotiations. To give the assignment to another party, it acts in breach with good faith, which governs the relationship between parties in this pre-contractual phase. It convicts Valburg to pay to Plas both the negative and positive interest.

The Supreme Court judges that parties have entered into a phase wherein breaking off negotiations are in breach with good faith, since parties could rely on the fact that a contract would come into existence, based on the negotiations. In this kind of situation, there is the possibility to obtain the positive interest. A duty to compensate the before mentioned

preparatory costs can exist when parties have not yet entered into the phase governed by good faith, but they have entered a phase wherein the breaking off in the given circumstances is no longer allowed without compensating (a part of) the negative interest.10

The case is in line with the Baris/Riezenkamp case, however it goes beyond as it does not only mention the legal concept as in the Baris/Riezenkamp case, but it explicitly elaborates on the consequences in case a party breaks off negotiations. It does so by introducing three phases that are still being used today to establish whether or not a party can be held liable for breaking off negotiations and if so, to what extent.

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2.1.2.1 The first phase: no relation, no liability

In the first phase, parties are free to break off negotiations at any time without any liability arising from the breaking off, so no party is obliged to reimburse the costs made by the other party.11

In order to be in the first phase, the negotiations must have been in a very early stage: they were not far enough advanced in order to justify one party’s reasonable belief an agreement would be reached in the future. An example could be when one party asks the other party for a bid for a bathroom renovation.

2.1.2.2 The second phase: negative interest

In the second phase, parties are still free to break off negotiations, but not without a duty to reimburse the negative interest the other party incurred.12

An example of a situation in the second phase is a contractor who designed building plans and has taken extensive preparatory measure (investing time and money) and who was under the presumption that he would get the assignment. If this is the case, a legitimate trust has been created by the other party and the contractor will have to be compensated for the costs he has incurred.

2.1.2.3 Discussions on the second stage

Since the Plas/Valburg case, the Dutch Supreme Court has never referred to the second phase again.13_{Therefore, a big discussion arose between Dutch authors about the question whether}

this stage still exists. Authors such as, Drion14_{, Bollen}15_{and Hartlief and Tjittes}16_{have claimed}

the Supreme Court has left the three phases in the Plas/Valburg case and only two phases remain: the situation wherein both parties are free to break off negotiations and the situation wherein parties cannot break off negotiations anymore. In the latter situation, the judge can use its discretion to come to a reasonable result regarding the liability.

The author Drion does not only believe there should be two phases based on the fact that the Supreme Court has not referred to the three phases anymore, but also because there still remained questions on the system of the phases and above all, it was not clear when

11 C. Bollen, ‘Afbreken van onderhandelingen: de drie mythes van Plas/Valburg. Van drie fasen naar twee stadia in het onderhandelingsproces’, WPNR 2004, 6596, p. 4

13 M.R. Ruygvoorn, Monografieën privaatrecht. Afbreken van onderhandelingen, Denventer: Kluwer 2005, p. 40

14 C.E. Drion, Ons onderhandelingsrecht onder handen, NJB 2005/34, p. 29

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negotiations were in which phase.17_{I agree that this unclarity is not desirable and could even}

lead to legal uncertainty.

Other authors believe that the three phases do still exists, even though the Supreme Court has not explicitly mentioned them in later cases.18_{After all, the Supreme Court has never}

questioned the existence of the three phases in any case either. The lower courts seem to agree with this standpoint, which becomes clear in its jurisprudence. To give an example: in the case Roompot/Efteling19_{a situation existed wherein a party (the Efteling) broke off}

negotiations. According to the court, the Efteling was free to break off negotiations, but not without being held liable. The second phase is clearly distinguishable here, since it differs from the first phase in a way that in this case consequences are connected the breaking off and that is not the case in the first phase. It also differs from the third phase since parties were allowed to break off negotiations in this case and they are not in the third phase anymore. In another case, the court even explicitly stated that there is not enough evidence that the Supreme Court is leaving the concept of the three phases mentioned in Plas/Valburg.20

However, all these discussion lead to a lot of confusion and different ideas about the rules on breaking off negotiations. Even though it is considered the three phases do still exist, this cannot be said with absolute certainty, since the Supreme Court has not commented on this matter in any of the cases discussed in this research.21

2.1.2.4 The third phase: positive interest

The transition from the second to the third phase happens when parties have agreed on the essentials of the contract and the only thing left to fill in with regards to the contract are some details.22_{However, the basic rule remains: the further the negotiations have developed, the}

more obligations parties have towards each other.

The third phase is the last phase before the contract would have been concluded. In this phase, parties are not allowed to break off negotiations anymore. If one party does break off

negotiations it does so in breach with good faith and it can be condemned to reimburse the damages of the aggrieved party that not only consists of negative interest, but also includes

17 C.E. Drion, Ons onderhandelingsrecht onder handen, NJB 2005/34, p. 29

19 Hof Den Bosch 31 januari 2006, NJF 2006, 308

20 Hof Arnhem 27 januari 2009, case number 104.003.701, par. 4.33

21 E. Nagel, ‘Afgebroken onderhandelingen: aansprakelijkheid vormt uitzondering’, Ondernemersbrief, 2006, nr. 1

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the positive interest.23_{The defaulting party can also be obliged to continue with the}

negotiations24_{or to conclude an agreement.}25_{In some cases, the obligation to conclude an}

agreement results from good faith, as is evidenced in a case of the Court of Appeal.26

An example of negotiations that are considered to be in the third phase is a case wherein the aggrieved party makes investments at the request of the defaulting party to gain an assignment and the defaulting party tells the aggrieved party he can have the assignment, subject to some details. The aggrieved party then has justified trust that a contract will be established.

2.1.3 Cases after the Plas/Valburg case: establishing liability

It is not always easy to establish when exactly parties enter which phase. Especially since it is assumed that the phases follow each other according to a set pattern, which is not the case. Sometimes parties have entered the third phase, but they are going back to the second phase due to the passing of time and the justified that has diminished due to this.27_{Besides, the}

liability of the broken off negotiations will depend on the circumstances of the case and this makes it hard to create an objective benchmark. In cases following the Plas/Valburg case, the Supreme Court tried to give some guidelines when it comes to the establishment of the liability. These will follow below in chronological order.

The VHS/Shell case is on the compensation of the positive interest, whereof the possibility was established in the Plas/Valburg case. The Supreme Court judged in this case that the breaking off of negotiations has to be ‘unjustified’ in order to have damages compensated. Whether it is unjustified or not depends on the justified trust of parties that a contract would come into existence and/or other circumstances.28_{The justified trust is a minimum}

requirement to label the breaking off as unjustified.29

In the Vogelaar/Skil case the Supreme Court defines the third phase even more: it came to the conclusion that parties can also be involved in the preparations of a contract without

negotiating with one another. For example, when one of the parties performs a lot of activities

24 For example when a concept-agreement has been established, see the case Rechtbank Roermond 19 december 2008, LJN BG7992

25 See the case Rechtbank Zutphen 22 november 2005, NJF 2006, 377 26 Hof ’s-Hertogenbosch 30 oktober 1989, NJ 1992, 429

27 C. Bollen, ‘Afbreken van onderhandelingen: de drie mythes van Plas/Valburg. Van drie fasen naar twee stadia in het onderhandelingsproces’, WPNR 2004, 6596, p. 4 and 5

For example when a concept-agreement has been established 28 HR 23 oktober 1987, NJ 1988, 1017 (VSH/Shell), par. 3.1

29 C. Bollen, ‘Afbreken van onderhandelingen: de drie mythes van Plas/Valburg. Van drie fasen naar twee stadia in het onderhandelingsproces’, WPNR 2004, 6596. P. 857-866

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for the other party in order to gain a job or assignment. When this is the case, the same requirement in the VHS/Shell case to establish whether breaking off negotiations is unjustified or not, applies.30

The other conclusion the Supreme Court came to in this case is that when trying to establish the justified trust of parties that a contract would come into existence, this no longer refers to both parties. Only the trust of the aggrieved party in the establishment of a contract is

important.

The next case is the De Ruiterij/MBO case, wherein the Supreme Court stated that the justified trust the aggrieved party has that a contract would come into existence, does not always mean that breaking off negotiations is unjustified. As concluded before in the VHS/Shell case, this is a minimum requirement.

In order to come to the conclusion whether the breaking off of negotiations is unjustified or not, the extent in which the defaulting party has attributed to the existence of justified trust plays a huge role, as well as the interest of this party.31

Furthermore the Supreme Court expressed that unforeseen circumstances play an important role in establishing liability, as it may hugely impact the decision of a party to break off negotiations and in some cases it can justify a party’s decision to break off negotiations.32_An

example of an unforeseen circumstance could be an economic situation that has suddenly became worse.

The author Hesselink believes that an offer of a third party after a situation of justified trust has been established, can also be a justifiable reason to break off negotiations, provided that it is a new offer that the defaulting party could not have known about before. He thinks this could also possibly be considered an unforeseen circumstance.33

The Supreme Court recognized in the ABB/De Staat case that judges have to take into account the fact that the justified trust of the aggrieved party that a contract will come into existence can diminish over time, especially if negotiations have continued over a long period of time and continued even after a change of circumstances. Therefore, judging whether or

30 HR 31 mei 1991, NJ 1991, 647 (Vogelaar/Skil) m.nt. P. van Schilfgaarde 31 HR 14 juni 1996, NJ 1997, 481 (De Ruiterij/MBO), par. 3.3

32 HR 14 juni 1996, NJ 1997, 481 (De Ruiterij/MBO), par. 3.6

33 M.W. Hesselink, De redelijkheid en billijkheid in het Europese privaatrecht, Deventer: Kluwer juridisch 1999, p. 78

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not the breaking off of negotiations was unjustified by reason of the justified trust a contract will come into existence, will have to be examined at the moment of the breaking off itself.34

2.1.4 The CBB/JPO case

In the CBB/JPO case, the two parties CBB and JPO are negotiating about developing an office building in the municipality of Arnhem. JPO would buy some land from the

municipality of Arnhem to sell this to CBB and JPO would receive compensation for these activities. The negotiations between JPO and the municipality of Arnhem are very laborious and time-consuming and CBB wants to lower the compensation because of this. CBB also wanted to know if the negotiations with the municipality would be fruitful, otherwise they would look for an office space themselves. JPO responds that the negotiations with the municipality have finished and they will receive an offer for the land soon. JPO does not agree with the lowering of the compensation. CBB informs JPO they want to stop the collaboration with them and eventually they buy land from the municipality of Arnhem themselves.

CBB demands compensation from JPO on the ground of an unlawful act, for keeping them waiting for too long, even though the negotiations with the municipality were doomed to fail from the beginning. JPO demands the recognizance of a contract between him and CBB and alternatively the recognizance that CBB acted unlawfully by breaking off negotiations in the last phase. JPO had justified trust that a contract would come into existence and wants the damage it occurred to be compensated.

The Supreme Court stressed that the liability following broken off negotiations should not be easily assumed. Both negotiating parties – who have to take each other’s legitimate interests into account – are free to break off negotiations, unless this is unjustified in the light of the justified trust of the other party that a contract would come into existence and/or other

circumstances35_{. Whether or not this is the case, will be judged based on the ‘essentials of the}

agreement’: parties must have agreed on all the key elements of the agreement. The following points will have to be taken into account when establishing this36_:

- the degree and the manner in which the defaulting party has helped to create a situation wherein justified trust existed37_;

34 HR 4 oktober 1996, NJ 1997, 65 (ABB/de Staat)

35 An example of ‘other circumstances’ is public interests that are being affected by the agreement, see J. Van den Brande, ‘de vrijheid om onderhandelingen af te breken’, Onderneming en Financiering (69) 2006, p. 7 36 HR 12 augustus 2005, NJ 2005, 467 (CBB/JPO), par. 3.6

37 This refers to a situation wherein the defaulting party promises an agreement will come into existence, even though both parties have not agreed on the essentials. Due to this statement, the defaulting party has created a

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- the legitimate interests of the defaulting party38_;

- the question whether unforeseen circumstances arose during the negotiations39_and

- if the negotiations lasted for an extensive period of time, you have to judge the justified trust parties had at the moment of the break off in the light of the entire course of the negotiations.40

In this case, the court does not systematically apply the phases from the Plas/Valburg case. In fact, it does not even mention these phases. Therefore, the discussions on the existence of the second phase mentioned earlier, have sparked up.

Applying the criteria give in this case is not easy, since a balance has to be made between the interest of the aggrieved and the defaulting party, when establishing whether breaking off is unjustified.41

2.1.5 Damages

The main reason to establish which phase negotiations are in, is to establish what the consequences of breaking off negotiations are. As mentioned before, it can be the duty to continue negotiations, establish a contract or pay damages.

Damage can consist of material loss and/or other loss.42_{However, not every loss will}

potentially be compensated. For example, it is expected that someone who wants to obtain a client is expected to put in some effort to do so. This effort is considered part of the business risk of the party and cannot be eligible for reimbursement.43

2.1.6 Conclusion

The first real important case in the Netherlands with regard to the breaking off of negotiations is the Plas/Valburg case. With the cases following the Plas/Valburg case, the Supreme Court has tried to clarify the rules on breaking off negotiations.

situation wherein justified trust exists.

38 E.g. costs that are as low as possible, the opportunity to quickly start negotiations with a third party if the negotiations with the aggrieved party do not work out

39 These could be circumstances from the outside, which make the conclusion of a contract not profitable any more

40 This has been addressed before in the ABB/De Staat case

41 J. van den Brande, ‘De vrijheid om onderhandelingen af te breken’, Onderneming & Financiering 2005, nr. 69, p. 8

42 For example the damage one party suffers when the other party misuses data that have been provided to her in the context of the negotiations

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According to the cases discussed in this research, it is clear that liability following broken off negotiations should not be easily assumed. The breaking off of negotiations has to be

unjustified, in order to hold the defaulting party liable and claim damages. Whether this is the case depends on the justified trust of the aggrieved party that a contract would come into existence and/or other circumstances. Parties must have agreed on the key elements of the agreement. This will be established whilst taking several factors into account: the extent in which the defaulting party has attributed to the existence of justified trust, as well as the interest of the defaulting party, the occurrence of unforeseen circumstances and what the degree of justified trust was at the moment of breaking off the negotiations. Since the interests of both parties have to be taken into account, a general outcome whether breaking off

negotiations is unjustified or not, is hard to predict. This does not promote legal certainty. Once it has been established a party can be held liable for breaking off negotiations, the consequences depend on the phase44_{the negotiations are in: in the first phase parties can break}

off negotiations without being held liable. In the second phase, parties can still break off negotiations, but not without possibly being held liable for the negative interests of the aggrieved party. In the third phase, parties cannot break off negotiations anymore. The defaulting party can be held liable for the positive interest of the aggrieved party or he can have a duty to continue negotiations or to establish a contract.

Even though the phases can provide courts with guidelines, it is not clear when negotiations enter which phase. In practice, it is hard to work with the system of the phases since the determination of which phase negotiations are in, mostly depends on the circumstances of the case. According to Dutch authors, this creates legal uncertainty.

In addition, judges do not apply the phases consequently; in CBB/JPO case the Dutch Supreme Court does not even mention the phases and this has led to a discussion amongst Dutch authors whether the phases still exists or not. Even though it is assumed the three phases do still exist, this cannot be said with absolute certainty, since the Supreme Court has not commented on this matter.

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2.2. What type of liability exists for breaking off negotiations?

In the previous chapter, I have set out when parties can be held liable for breaking off

negotiations and which consequences are attached to this. The Dutch Supreme Court does not mention what type of liability we are dealing with whenever this happens, not in the

Plas/Valburg case, nor in any later cases. This could be intentional, but one can only guess. In most legal systems, parties that break off negotiations can be held liable. However, this liability differs in the several member states. It can be either liability in tort, in contract or sui generis liability45_{. It is important to know what type of liability exists for example for the}

plaintiff, as it will tell him what he can sue for and what evidence he will have to provide for in a case. Furthermore, it can play a role with regard to the jurisdiction of a court when cross-border negotiations are involved.46

2.1 Proposal on article on pre-contractual liability

In 1992, a proposal for an article on pre-contractual liability in the Dutch Civil Code was made.47_{This article stated that parties are obliged to act in accordance with each other’s}

legitimate interests. Each of the parties is free to break off negotiations, unless this is

unacceptable on the ground of the legitimate expectations of the other party of the formation of a contract or with regard to other circumstances. However, this article was never

implemented, since the Dutch government felt it was too early to codify the jurisprudence. It wanted to give the courts the opportunity to develop the jurisprudence regarding

pre-contractual liability further.48

2.2 Liability based on good faith

The Dutch Supreme Court has not commented on what type of liability a party can be held liable for breaking off negotiations and compensating damages in any case. However, the literature states that the so called “redelijkheid and billijkheid” referred to by the lower courts,

45 The ground of this liability is the breach of mutual trust that existed during the negotiations between parties to conclude a contract.

46 In the case ECJ 17 September 2002, C-334/00 (Tacconi) it was the question what the ground of the pre-contractual liability was with broken off negotiations. This was important to decide which court had jurisdiction, either the German or the Italian. The ECJ decided that the ground was a tort, art. 5 (3) EEX-regulation and this gave the Italian court jurisdiction.

47 Ontwerp 6.5.2.8 a Nieuw BW

48 Y.G. Blei Weissmann, Groene serie Verbintenissenrecht, aantekeningen bij 6:217 nr 3.2 (Art. 6.5.2.8a Ontwerp Nieuw BW) en ( 3.3 na schrapping art. 6.5.2.8a Ontwerp Nieuw BW) Kluwer 2010

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which would be translated into (objective) good faith,49_{can be seen as the ground for}

liability.50_{However, there are also authors that believe there are other types of liability.}51

The author Hesselink describes good faith as a norm whereof the content cannot be

established in an abstract way, but it depends on the circumstances of the case wherein the norm has to be applied and which has to be established by concretization.52

According to art. 6:2 Dutch Civil Code, parties are obliged to act in accordance with the requirements of good faith. In order to establish what these requirements are, it is necessary to take a look at art. 3:12 Dutch Civil Code. This article states that you have to take into account the generally recognized legal principles, the conception of law in the Netherlands and the social and individual interests that are involved in the given case. These requirements strongly depend on the circumstances of the case.

2.3 Liability based on tort

Another ground for liability is taken into consideration by authors in the Netherlands, namely the tort in art. 6:162 Dutch Civil Code.53_{These authors believe that the breaking off of}

negotiations itself should not be unjustified, but it will be if no damages are being offered. They consider good faith a criterion for the behaviour of parties, which is based on the rules of the tort.54_{The aggrieved party has the justified trust it is a potential candidate to acquire an}

agreement on which it is in negotiations with the defaulting party. Based on this justified trust, the aggrieved party makes costs that are higher than can reasonably be expected. If the

negotiations are broken off in this situation, the aggrieved party has the right to have the costs it incurred compensated.

Ruygvoorn takes the view that it is preferred to use the tort as a ground for liability, since good faith is a term that is too subjective and could lead to legal uncertainty, whereas the term of tort has been much more developed.55

49 M.W. Hesselink, De Redelijkheid en billijkheid in het Europese privaatrecht, Deventer: Kluwer juridisch 1999, p. 27

50 M.R. Ruygvoorn, Bestaat de ‘tweede fase’ uit Plas/Valburg nog?, Contracteren 2001/2, p. 44 51 W.J. Oostwouder, Management Buy-Out, Deventer: Kluwer 1996, p. 41-55

52 M.W. Hesselink, De Redelijkheid en billijkheid in het Europese privaatrecht, Deventer: Kluwer juridisch 1999, p. 37

53 Such as Ruygvoorn and Drion, see: M.R. Ruygvoorn, Afgebroken onderhandelingen en het gebruik van voorbehouden, serie Recht & Prakrijk, 173 (diss.), Deventer: Kluwer 2009, p. 134 e.v. and J. Drion, Een nieuwe koers in ’s Hoogen Raads jurisprudentie over de onrechtmatige daad, WPNR (1947), 3992

54 In the literature, this is referred to as the so called ‘constructie Drion’, see M.R. Ruygvoorn, Bestaat de ‘tweede fase’ uit Plas/Valburg nog?, Contracteren 2001/2, p. 44

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Not every author believes in the ‘constructie Drion’, such as Tjitkes and Hartkamp56_{and with}

the acceptance of good faith as a ground for liability by the lower courts, the ‘constructie Drion’ construction seems to be rejected.

2.4 Liability based on unjust enrichment

Unjust enrichment in art. 6:212 Dutch Civil Code is another possible ground for liability, discussed by the author Ruygvoorn.57_{An example of unjust enrichment is when an architect}

designs building plans for an individual that wants to construct a building and the latter breaks off negotiations. These building plans can be used in a contract with a third party, without the individual paying for it, which makes it an unjust enrichment.

However, Ruygvoorn believes it can be very hard for one party to prove the unjust enrichment of the other party,58_{even with the broadening of the term unjust enrichment by the Dutch}

Supreme Court in a fairly recent case.59_{Since this case, the term now entails both an obtained}

benefit and averted damage. According to Ruygvoorn, the challenging part will be to prove the defaulting party gained something at the expense of the aggrieved party and this will not be the case in most cases, according to Ruygvoorn.

2.5 Conclusion

The most accepted ground for liability on breaking off negotiations in the Netherlands is good faith, since the lower courts use this as a ground to hold parties liable when breaking off negotiations. However, as the author Hesselink stated, the meaning of this principle is not clear, since it depends on the circumstances of the case wherein the norm has to be applied. Even though it is a general norm, it cannot be applied generally. The absence of a concrete norm whose outcome can be predicted when applying it, can lead to legal uncertainty.

Even though good faith is most likely the ground for liability, this is not entirely sure since the Dutch Supreme Court has never ruled on this. Moreover, there is no article on liability for breaking off negotiations in the Dutch Civil Code, since the Dutch government wanted to give the jurisprudence more time to develop the concept of pre-contractual liability.

Next to good faith, some authors believe tort is a good contestant, others believe unjust enrichment is. So far, it seems that none of the options are excluded and all three could be possible grounds. Good faith, tort and unjust enrichment are all doctrines that are laid down in

56 R.P.J.L. Tjitkes, De afbraak van de aansprakelijkheid voor afgebroken onderhandelingen, in H.J. van Kooten (red.), Hartkampvariaties, Deventer: Kluwer 2006, p. 144 and Asser-Hartkamp 4-II (2005), nr. 166

57 M.R. Ruygvoorn, Bestaat de ‘tweede fase’ uit Plas/Valburg nog?, Contracteren 2001/2, p. 47 58 M.R. Ruygvoorn, Bestaat de ‘tweede fase’ uit Plas/Valburg nog?, Contracteren 2001/2, p. 47 59 HR 5 september 2008, NJ 2008, 481 (Verrijkte vrouw)

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the Dutch civil code, but there is no article stating that one of these doctrines is the ground on which you can hold a party liable for breaking off negotiations.

Even though more rules were developed by case law on the breaking off of negotiations, but my research has shown that this has not necessarily lead to a more developed concept of pre-contractual liability. The ground of liability is unclear, since the Supreme Court has refused to give any statements about this. Once again, this does not help to improve the legal certainty.

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3. What are the rules on breaking off negotiations in the United Kingdom?

3.1 When does breaking off negotiations give rise to liability and what are the consequences?

With a common law system60_{, the United Kingdom does not have a its rules laid down in a}

civil code, which means the rules on pre-contractual liability are also to be found in case law. As in the Netherlands, there is one case in the United Kingdom that is considered the leading case on pre-contractual liability, called Walford v. Miles.61

3.1.1 The Walford v. Miles case

In this case the parties Walford and Miles were negotiating about Miles’ business that was for sale. They had established a “lock-out” agreement, meaning that Miles would not enter into negotiations with third parties. Normally, a lock-out agreement lasts for a certain duration of time; the duration on which parties have agreed.62_{However, Walford and Miles had not}

agreed on the duration of time the lock-out agreement would last.

Despite the lock-out agreement, Miles broke off negotiations with Walford and sells the business to a third party. Walford is suing Miles for £1.000.000 on the ground of a breach of the lock-out agreement and misrepresentation. Walford and Miles negotiated on a price for the business of £2.000.000 even though the business was worth £3.000.000, therefore Walford claimed to have lost £1.000.000.

The House of Lords came to the conclusion that the “lock-out” agreement had not been breached, since there was no time limit attached to the agreement and therefore the agreement was too uncertain. Walford does not get awarded the £1.000.000, but £700 for the costs he had made during the negotiations, on the ground of misrepresentation: Miles had lied about not negotiating with other parties.

The most important statement came from Lord Ackner however, which was on the duty to negotiate in good faith. He believes that the concept of a duty to negotiate in good faith is impossible to apply in practice. Moreover, this is in conflict with the position that negotiating parties have against each other. Each party that is involved in the negotiations is entitled to look after his or her own interest, as long as he or she does not declare any misleading statements.

60 Common law is a legal system that is based on customary law. In this system case law is leading, which means that law is created by the decisions of judges.

61 House of Lords 23 January 1992, Walford v. Miles [1992] 1 All ER 453, [1992] 2 AC 128. 62 http://www.inbrief.co.uk/property-law/lock-out-agreements/

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In order to be able to look after your own interest, either party must be free to break off negotiations at any time or for any reason or to threat to break off negotiations, so a party can gain a better bargaining position.63_{Therefore, in general, parties cannot be held liable when}

breaking off negotiations.64_{The other Lords agreed with Lord Ackner’s judgement.}

3.1.2 Establishing liability

Even though there is no duty to negotiate in good faith and parties can break off negotiations at any time according to the Walford v. Miles case, there may be obligations in English law to act ‘reasonably’ or ‘fairly’. Whenever the courts think it is necessary, they can imply these obligation into the parties’ arrangement. The court will take into account the intentions of the parties and he will determine the obligation objectively.65

Next to that, there are several possibilities to hold the defaulting party liable for the damage the aggrieved party incurred. In the Interfoto-case, Bingham LJ. stated that English law does not have an general principle such as good faith, but it has created piecemeal solutions to situations wherein unfairness arose.66

The author Ruygvoorn mentions the following ‘piecemeal solutions’: tort, unjust enrichment, misrepresentation and proprietary estoppel.67

3.1.2.1 Liability based on tort

In English law there are two type of tort actions, namely fraud and negligent misstatement. It is not easy to prove fraud; five elements have to be established in order to claim damages on the ground of deceit:68

1. There must be a representation of fact made by words or conduct;

2. The representation must be made with the intention that it should be acted upon by the plaintiff, or by a class of persons which includes the plaintiff, in the manner which resulted in damage to him;

3. It must be proved that the plaintiff has acted upon the false statement; 4. It must be proved that the plaintiff suffered damage by so doing;

63 M.R. Ruygvoorn 2009, Het afbreken van onderhandelingen en het gebruik van voorbehouden, Deventer: Kluwer 2009, p. 8

64 However, there are exceptions that will be discussed below

65 J. Steadman and S. Sprague, Common Law Contract Law. A Pratical Guide For The Civil Law Lawyer, Ipsoa, 2015

66 Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd. [1989] 1 QB 433 (1987), 439 67 M.R. Ruygvoorn 2009, Het afbreken van onderhandelingen en het gebruik van voorbehouden (diss.), Deventer: Kluwer 2009, p. 11

68 Bradford Building Society v. Borders [1941] 2 All E.R. 205, 211, per Lord Maugham, summarized by W.V.H. Rogers in Winfield & Jolowicz on Tort, 281 (14th ed. Sweet & Maxwell 1994).

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5. The representation must be made with knowledge that it is or may be false. It must be wilfully false, or at least made in the absence of any genuine belief that it is true. With regards to the negligent misstatement, restitution of negative interests became possible after the Hedley Byrne & Co Ltd. v. Heller & Partners Ltd. The House of Lords decided that whenever the aggrieved party can prove there was a ‘special relationship’ of proximity between him and the defaulting party, the defaulting party will have to reimburse the negative interests of the aggrieved party.

This ‘special relationship’ of proximity usually exists if it meets the following conditions:

1) The advice given by the defaulting party to the aggrieved party is required for a purpose, which is made known, to the defaulting party at the time when the advice is given;

2) The defaulting party knows that his advice will be communicated to the aggrieved party, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose;

3) It is known that the advice so communicated is likely to be acted upon by the aggrieved party for that purpose without independent inquiry, and

4) It is so acted upon by the aggrieved party to his disadvantage.69

3.1.2.2 Liability based on unjust enrichment

Another ground on which parties can claim financial damages is unjust enrichment.70_{It can do}

so on the ground that the other party has gained something from the negotiations, therefore the aggrieved party should be compensated for its loss. This was the case in the William Lacey (Hounslow) Ltd v Davis case71_{: the aggrieved party was in negotiations with the defaulting}

party on the purchase of some buildings and had made costly preparations. The court came to the conclusion that the aggrieved party should be awarded quantum meruit: a reasonable value of services.72

69 House of Lords Caparo Industries Plc. v. Dickman [1990] 2 AC 605 70 House of Lords Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548 71 William Lacey (Hounslow) v. Davis [1957] 1 WLR 932

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In the case Regalian Properties Plc v London Docklands Development Corporation, the court stated that quantum meruit can only be awarded when the work that has been done during the negotiations clearly benefited the defaulting party financially.73

3.1.2.3 Liability based on misrepresentation

The defaulting party can be held liable for breaking off negotiations on the ground of misrepresentation when he makes a false statement to the aggrieved party which causes him to enter into a contract.74_{There are several conditions for misrepresentation:}

1. There has to be a statement, just keeping silent is not a ground for misrepresentation; 2. The statement has to be unambiguous;

3. The statement has to be false; and

4. The statement has to be addressed to the aggrieved party. 3.1.2.4 Liability based on proprietary estoppel

On the ground of proprietary estoppel, the aggrieved party can hold the defaulting party liable based on the promises or representations made by the defaulting party. According to Lord Denning in the Crabb v. Arun District Council case, if the defaulting makes a promise that he will not exercise his legal rights and the aggrieved party acts on this, then he cannot go back on that promise. An example would be that a landlord promises not to withdraw a leasing contract and relying on this promise the tenant spends money on renovating this apartment, then the landlord cannot take back this promise.75

The following conditions have to be met in order to claim damages based on proprietary estoppel:

1. There has to be a deliberate encouragement of reliance based on words, conduct or even inaction;

2. There has to be proof that the other party relied on the conduct or inaction to his disadvantage;

3. The disadvantaging reliance has to be reasonable in all circumstances; and 4. It has to be unfair to allow the defaulting party to go back his promise.76

However, this concept is quite recent and is not of significant meaning in English law.77

73 Regalian Properties Plc v London Docklands Development Corporation [1995] 1 WLR 212

74 E. McKendrick, ‘Contract Law Text Cases and Materials’, 2003, Oxford, Oxford University Press, p. 630 75 Court of Appeal Crabb v Arun District Council [1975] EWCA Civ 7

76 https://rslasut.wordpress.com/pre-contractual-phase-a-comparison-between-dutch-law-and-english-law-as-an-indication-of-an-alternative-approach-for-the-indonesian-practice/

77 H.L.E. Verhagen, ‘La responsabilité civile pour la rupture des négociations’, in: Les métamorphoses de la responsabilité, Presse universitaire de France, Paris 1997

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3.1.3 Damages

The damages that can be awarded are called reliance damages, in other words negative interest: they put the party in the financial position that it would have been in if it had not started the negotiations. However, the author Giliker assessed that English courts do not easily grant damages in cases on pre-contractual liability.78_{When compared to Dutch law, there is}

no such thing as an obligation for the defaulting party to continue negotiations or to establish a contract. Also, the possibility for the aggrieved party to claim positive interests does not exist in English law.

There is no legal figure for damages, but it can be claimed based on tort, unjust enrichment, misrepresentation and estoppel.

3.1.4 Conclusion

In the United Kingdom, there is no duty to negotiate in good faith, according to the case Walford v. Miles parties should be able to break off negotiations at any time, without being held liable. This does not mean the defaulting party can never be held liable: there are piecemeal solutions to situations wherein the defaulting party can be held liable and may be obligated to reimburse damages the aggrieved party has suffered. It is clear in which

situations this is the case: in case of a tort, misrepresentation, unjust enrichment and estoppel. There are specific conditions that have to be met in order to hold the defaulting party liable on one of these grounds. The damages that can be awarded is the negative interest, the positive interest is not possible.

4. What are the rules on breaking off negotiations in the Draft Common Frame

of Reference?

4.1 When and on what ground does breaking off negotiations give rise to liability and what are the consequences?

78 Paula Giliker, A Role For Tort In Pre-Contractual Negotiations? An Examination Of English, French, And Canadian Law, Int’l Comp. L. Q. (Oct. 2003), p. 974

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The DCFR is an academic text, drafted by the Study Group on a European Civil Code and the Research Group on Existing EC Private Law. It entails principles, definitions and model rules of European Private Law. The aim is to use the DCFR as an inspiration for a political

Common Frame of Reference. The DCFR also wants to demonstrate that a European Private Law already exists and most legal systems give the same answers to legal questions.

4.1.1 Duty to negotiate in good faith and fair dealing

The basic principle of the DCFR is the freedom of contract, which can be found in art. II.-1:102 DCFR. Next to that, art. II-3:301 sub 1 states that parties can enter into negotiations without the knowledge whether or not a contract will be established. A person can break off negotiations without giving a reason.

However, a duty to negotiate in accordance with good faith and fair dealing stems from art. II.-3:301 sub 2. A definition of good faith and fair dealing has been included in the DCFR: it is a code of conduct characterized by honesty, openness, and the consideration of the interests of the other party with whom the party is in negotiations with.79

4.1.2 Establishing liability

Liability is based on good faith and fair dealing, you cannot break off negotiations if it is in breach with these principles. Especially the entering into or continuing with negotiations with another party, without the intention to establish a contract, can be in breach of good faith and fair dealing.80

The breaking off of negotiations can be in breach of good faith and fair dealing when the aggrieved party offers the defaulting party his services in the process of constructing a new building. In doing so, the aggrieved party makes considerable expenses in making drawings. Just before they conclude a contract, the defaulting party contacts a third party, shows him the drawings and gives him the opportunity to do a lower bid. The third party does and the defaulting party breaks off negotiations with the aggrieved party. The aggrieved party should then be compensated for the costs it made when making the drawings.81

An example of entering into negotiations without the intention to establish a contract would be when one party applies for a job at a company in another country. This company offers to pay the costs for the travel to attend the job interview in the country of the company. The applicant says yes, only to go on a free trip to another country and without the intention to

79 DCFR Outline Edition 2009, p. 555 80 Art. II-3:301 sub 4 DCFR

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ever get a job at the foreign company. The applicant will then be held liable for the travel costs the company incurred.82

An example of continuing negotiations without the intention to enter into an agreement can be based on the first example. However, the applicant was very much interested in applying for the job and getting the interview. After the interview however, the applicant realizes he does not want the job anymore. He does agree with coming over again for a second interview and he lets the company pay his travel expenses again. The applicant can now be held liable for the travel costs the company incurred for the second trip. 83

4.1.3 Damages

Whenever breaking off negotiations is in breach with good faith and fair dealing, the

aggrieved party can claim damages for the negative interest, art. II-3:301 sub 3. This includes expenses incurred, work done and loss on transactions made in reliance of the expected contract. 84_{This is especially the case if the defaulting party is a professional, knowing that he}

will never establish a contract with the aggrieved party. The aggrieved party was not aware of this and must have incurred high costs.85_{The aggrieved party cannot claim positive damages,}

the continuation of negotiations or the establishment of a contract.

Damages incurred can be claimed under book VI: Non-contractual Liability arising out of Damage caused to Another.

4.1.4 Conclusion

In the DCFR, a general duty to negotiate in good faith and fair dealing exists. The entering into or continuing with negotiations with another party, without the intention to establish a contract, can be in breach with good faith and fair dealing.

When the breaking off of negotiations and the continuance of negotiations without the intention to establish a contract is in breach with good faith and fair dealing, the aggrieved party may get the negative interests it incurred reimbursed.

82 DCFR Full Edition 2009, p. 272 83 DCFR Full Edition 2009, p. 272 84 DCFR Full Edition 2009, p. 273 85 DCFR Full Edition 2009, p. 272

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5. Evaluation

5.1 What are the main differences?

In the previous chapters, the rules of pre-contractual liability in The Netherlands, England and the DCFR have been laid out. It became clear in this research that these systems wield

different rules when it comes to the breaking off of negotiations. The differences between these systems in the area of liability and damages will be described in this chapter.

5.1.1 Difference in liability between the Netherlands and the United Kingdom

The biggest difference between the rules on pre-contractual liability between the Netherlands and the United Kingdom, is that the United Kingdom does not have a general obligation to negotiate in good faith, instead it offers piecemeal solutions to cover particular events or actions of the parties during the negotiations.

There are several explanations why the United Kingdom does not have a duty to negotiate in good faith. First of all, the law ideally incorporates the society's view on justice. This means, that private law provisions and case law are based on what society thinks is fair. The English law basically does not recognize a duty of good faith in contract law. When it does not even recognize a duty of good faith to execute a contract, it would be contradicting to recognize such a duty in the pre-contractual phase. However, without a duty to care resulting from good faith, it is difficult to recognize remedies for breaking off-negotiations. Therefore, it is not surprising that the basic rule in English law is to allow breaking off negotiations at any time, without any negative consequences being attached to it.

This laissez-faire approach is consistent with the British underlying idea of political order. They pursue a libertarian approach: party autonomy and freedom of contract should always prevail. The law should inflict as little confinement of individual freedom as possible. The idea is that everybody has to look out for himself. The homo economicus will further his own interests and if all parties do so, this will in sum make everybody better off. This is why English law broadly relies on self-regulation.86

On the other side Dutch law recognizes a general duty of good faith while executing contracts. Therefore, it is less surprising that this principle is transferred into the pre-contractual phase. The values underlying this recognition differ from the English one. Another reason for the absence of good faith in the English legal system, is the fact that the English system applies the doctrine of consideration. This means that a contract cannot come

86 https://rslasut.wordpress.com/pre-contractual-phase-a-comparison-between-dutch-law-and-english-law-as-an-indication-of-an-alternative-approach-for-the-indonesian-practice/

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into existence without an exchange of benefits. It makes it harder for acts and statements to have a binding effect during negotiations, since there is no exchange of benefits yet.87

A second difference between the Dutch and English legal system is when negotiations are being broken off in the United Kingdom, this is not necessarily in breach with good faith, the fact that you enter into or continue with negotiations without the intention to enter into a contract, is. In the Netherlands, the breaking off of negotiations itself can be in breach with good faith, depending on the phase the negotiations are in.

In both the Netherlands and the United Kingdom there is uncertainty on the legal ground of liability, whereon the aggrieved party can claim damages. In the Netherlands, good faith is considered to be the leading doctrine, as this is confirmed by the lower courts. In the United Kingdom, legal grounds for liability are tort, unjust enrichment, misrepresentation and estoppel.

5.1.2 Difference in damages between the Netherlands and the United Kingdom

In the Netherlands, the aggrieved party can possibly claim damages for negative interest when negotiations have reached the second phase, and he can possibly claim damages for positive interest when negotiations have entered the third phase. It is considered to be in breach with good faith if a party breaks off negotiations in those phases. The English system offers

damages in case of a tort, unjust enrichment, misrepresentation and estoppel when it meets all the requirements of these concepts, but it only offers reimbursement of the negative interest. 5.1.3 Differences in liability between the Netherlands and the DCFR

In the Netherlands there is an obligation to negotiate in good faith. A similar concept can be found in the DCFR, except that it is not an obligation, but a duty and it has been expanded to a duty not only to negotiate in good faith, but also in fair dealing.

The meaning of good faith in the Netherlands and the DCFR also differs. In the Netherlands this means that parties have to take the legitimate interests of the other party into account. In the DCFR this means that a party cannot enter into or continue with negotiations without the intention to establish a contract with the other party.

The DCFR was developed as an instrument which member states should be able to identify with. Therefore, it is likely the duty to negotiate in good faith was stretched out to a duty to negotiate in good faith and fair dealing. For one, the UK does not have a duty to negotiate in

87 S. Banakas, ‘Liability for Contractual Negotiations in English Law: Looking for the Litmus Test’, InDret 1 2009, p. 4

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good faith, so it is more likely it will identify itself with the DCFR by adding a duty to negotiate in fair dealing.

The same applies for the meaning of good faith in the DCFR: that a party cannot enter into or continue with negotiations without the intention to establish a contract with the other party, otherwise it will be contrary to good faith. I think more member states can identify with this meaning as opposed to the meaning given in Dutch law. According to Dutch law, the breaking off itself of negotiations is also contrary to good faith, depending on the circumstances of the case. For English law, this would be way too far reaching.

5.1.4 Differences in damages between the Netherlands and the DCFR

As mentioned above, in the Netherlands, the aggrieved party can possibly claim damages for negative interest when negotiations have reached the second phase, and he can possibly claim damages for positive interest when negotiations have entered the third phase. It is considered to be in breach with good faith if a party breaks off negotiations in the third phase. The DCFR only allows for the reimbursement of negative interest: expenses incurred, work done and loss on transactions made in reliance of the expected contract.

The fact that the DCFR only allows for the reimbursement of negative interest makes sense, since the Netherlands is the only member state where positive interest can be awarded.

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5.2 Do these differences lead to different outcomes?

In the previous chapter it became clear that there are some differences in the rules on pre-contractual liability in the Netherlands, the United Kingdom and the DCFR. This does not automatically mean that when applying these rules, they have different outcomes as well. Whether this is the case or not will be discussed in this chapter.

5.2.1 Differences in liability between the Netherlands and the United Kingdom When we look at the obligation to negotiate in good faith in the Netherlands, no such obligation can be found in English law. However, there might be obligations to act ‘reasonably’ or ‘fairly’ in English law, which can be applied by the court into the parties’ arrangements. The court will take into account the intentions of the parties. Good faith laid down in the Dutch Civil Code entails that parties have to take the legitimate interests of the other party into account. This does not differ that much from the intentions that the English court takes into account when applying reasonableness and fairness. Even though the Dutch doctrine is clearly more far reaching, it is not the case that parties in the United Kingdom can behave in any manner they want during the negotiations.

Moreover, in the Netherlands, breaking off negotiations is in breach with good faith when the aggrieved party could rely on the fact that some sort or contract were to be established with the defaulting party. The United Kingdom does not have this rule, since it does not have a duty to negotiate in good faith, but the doctrine of proprietary estoppel is similar. This entails that when you make a promise to the other party, you have to keep this promise. If this

doctrine would develop more, e.g. to cover contractual negotiations in general instead of limit itself to promises relating to interests in land, it could become very similar to the Dutch doctrine. Then, a party can rely on the promise of the other party that a contract would come into existence, and this reliance will be the trigger for the estoppel.88

Authors in the Netherlands have different opinions on the legal ground of liability for breaking off negotiations. There are many Dutch authors that believe the current ground for liability is not the best one and they opt for another doctrine. In the Netherlands good faith is considered the leading doctrine, but other grounds for liability are also being considered. These are tort and unjust enrichment and these are also accepted as grounds for liability in the United Kingdom. Even though the United Kingdom has tried to find piecemeal solutions

88 Cambridge University Press, in Precontractual Liability in European Private Law, edited by John Cartwright and Martijn Hesselink, to be published by Cambridge University Press (© Cambridge University Press 2008), p. 17

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instead of incorporating a general principle, the Netherlands are considering the same grounds for liability.

5.2.2 Differences in damages between the Netherlands and the United Kingdom

In the Netherlands, there is an option for the aggrieved party to claim reimbursement of positive interest once the negotiations have arrived in the third phase. This may seem completely contrary to the rules in the United Kingdom, where no such claim is possible. In theory, it is true that this is contrary to the rules in the United Kingdom, but in practice, positive damages have almost never been awarded in the Netherlands. In practice, they would basically have the same outcome, despite the different grounds of liability: namely that only negative damages are awarded to the aggrieved party.

5.2.3 Differences in liability between the Netherlands and the DCFR

The DCFR has an expanded obligation to negotiate in good faith compared to the

Netherlands, namely that parties have a duty to negotiate in good faith and fair dealing. This has been done to strengthened the relevance of this principle.89_{The DCFR not only covers the}

liability when breaking off negotiations now, but also the liability when you start or continue negotiations without having the intention to establish a contract with the other party.

Next to that, the duty to negotiate in good faith in the Netherlands is an obligation and in the DCFR it is merely a duty. The difference in an obligation and a duty is that the remedies for non-performance of an obligation are not all available.90

5.2.4 Differences in damages between the Netherlands and the DCFR

The same things that were discussed under the differences between the Netherlands and the United Kingdom apply here, since the DCFR also only has the possibility to reimburse the negative interests and not the positive interests to the aggrieved party. As seen before, in practice there is not much difference with the Netherlands, since the positive damages have never been awarded.

The fact that the DCFR only allows for the reimbursement of negative interest can once again be attributed to the fact that it was trying to find a consequence that was equal to most

member states. The Netherlands is the only member state where positive interest can be awarded, even though it almost never has, so it would not make sense to incorporate the positive interest in the DCFR as well.

89 M. Mekki and M. Kloepfer-Pelèse, ‘Good faith and fair dealing in the DCFR’, ERCL 3/2008, p. 345 90 DCFR Full Edition 2009, p. 271

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5.2.5 Conclusion

Even though it seems like the Netherlands and the UK are on the other side of the spectrum regarding rules on pre-contractual liability, in practice the outcomes of these rules are not that different. The differences that do exist can be explained by a difference in culture: the UK feels that parties have to be able to stand on their own feet and rely on themselves. It is very market-oriented and do not want to obstruct the market with an abundance of rules. In the Netherlands the conception of the legislator looking out for the individual is much more alive. The differences between the DCFR and the Netherlands are likely to be explained by the fact that the rules concerning pre-contractual in the Netherlands are quite far-reaching, especially in theory. Therefore, the DCFR could have tried to look for rules that could apply to most member states, so these member states would be able to identify with the rules.

What insights can comparative law provide on the pre-contractual liability rule currently adopted in Dutch law?

Master Thesis