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 during negotiations may be warranted based on the trust established between the parties. As negotiations progress, the fiduciary duty between them intensifies. Fiduciary duties in this context entail acting honestly throughout the negotiations. There are instances where fiduciary duties necessitate the disclosure of information to the other party, especially when one party possesses more information than the other. Failure to disclose vital information during negotiations can justify safeguarding the other party's reliance. Additionally, the duration of negotiations can impact 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 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.