The Basis of Liability in Contractual Negotiations
Liability in contractual negotiations and miscarriage of negotiations usually only arises, when one party has carried out the negotiations carelessly or dishonestly. The issue of liability usually becomes relevant, when one party has negligently, i.e. intentionally or recklessly, caused loss to the other party.
Contractual negotiations should observe good negotiation practice. There is, however, no clear definition of good negotiation practices. It is therefore easier to define what constitutes bad negotiation practice, e.g the giving of false information and carrying out negotiations without an intention to conclude a contract. For further information, see [Good Negotiation Practice].
Liability for costs incurred from negotiations may be justified on the basis of trust between the parties. The longer the negotiations take, the greater the fiduciary duty between the parties becomes. Fiduciary duties in this context mean that the parties must act honestly during the negotiations. At times, fiduciary duties have been regarded as requiring the disclosure of information to the other party. The duty to provide information usually becomes relevant where one of the parties clearly is in possession of more information than the other party. If one of the parties fails to disclose necessary information during the negotiations, it is justifiable to protect the other party’s reliance. The length of negotiations may also affect the liability for damages.
Negligence or bad faith in the negotiations may lead to liability for damages. If an agreement is not reached despite negotiations, the negligent party or the party in bad faith may be obligated to compensate the other party the costs and damage caused by the negotiations. According to a recent judicial precedent of the Finnish Supreme Court (KKO:2009:45), the party withdrawing from the negotiations regarding leasehold agreement in respect of commercial property after nearly one year was liable of compensating the owner of the property for rental revenue which the latter had lost when he, counting upon the formation of a new contract, had refused to extend the previous tenancy. According to the precedent the withdrawing party had during the negotiations acted in a way to give rise to justifiable expectations with the owner of the property regarding the formation of the leasehold agreement.