The promise of a
potential contract is often a tantalizing one, filled with hope and
anticipation for mutual benefit. Businesses invest time, resources, and energy
in meticulously crafting the terms of agreement, navigating complex
negotiations, and anticipating future collaborations. But what happens when those
negotiations collapse due to bad faith tactics? Thankfully, international
commercial law provides recourse, and the globally recognized UNIDROIT
Principles of International Commercial Contracts (UPICC) offer a powerful
framework for addressing such scenarios.
Specifically,
Article 2.1.15 of the UPICC 2016 addresses the crucial issue of good faith and
fair dealing in pre-contractual negotiations. It states that "A party who
negotiates or breaks off negotiations in bad faith is liable for the losses caused
to the other party." This seemingly concise statement carries significant
weight, underscoring the importance of ethical conduct throughout the
negotiation process and providing a remedy for those victimized by deceitful
tactics.
What Constitutes
Bad Faith Negotiation?
Identifying bad
faith in negotiation can be complex, as simply failing to reach an agreement is
not, in itself, a violation. The key lies in the conduct of the negotiating
parties. Some common indicators of bad faith include:
- Entering
Negotiations with No Intention of Concluding a Contract: This is perhaps the most egregious form of
bad faith. If a party engages in negotiations solely to gain confidential
information, tie up a competitor, or delay another project, without any
genuine intention of entering into a contract, they are acting in bad
faith.
- Abrupt
and Unjustified Termination of Negotiations: While
parties are generally free to withdraw from negotiations, a sudden and
unexplained termination, particularly after significant progress and
investment by the other party, can be indicative of bad faith, especially
if it serves the terminating party's ulterior motives.
- Misleading
the Other Party: Intentionally
providing false information, concealing crucial facts, or making promises
that cannot be kept demonstrates a lack of good faith and can be grounds
for liability.
- Dragging
Out Negotiations Unnecessarily: Deliberately
prolonging negotiations without genuine intent to reach an agreement can
be a tactic to prevent the other party from pursuing alternative
opportunities or to gain a competitive advantage.
- Unjustified
Renegotiation of Agreed-Upon Terms: Reopening
settled terms at the last minute, particularly with demands lacking any
reasonable basis, can be considered bad faith, especially if it derails
the entire negotiation process.
The Importance
of Proving Bad Faith:
It's crucial to
understand that the burden of proving bad faith rests on the party alleging it.
This often requires demonstrating a pattern of behavior, uncovering hidden motives,
and presenting evidence that contradicts the other party's stated intentions.
This is where diligent record-keeping, clear communication, and potentially,
the discovery of internal communications, become essential.
Recourse for the
Injured Party:
Article 2.1.15
provides a vital legal remedy for parties who have suffered losses due to bad
faith negotiations. The injured party may be entitled to recover damages, which
are typically aimed at compensating for the losses incurred as a direct result
of the bad faith conduct.
These damages can include:
- Expenses
Incurred During Negotiations: Costs associated
with travel, legal fees, technical consultations, and other expenses
directly linked to the negotiation process.
- Loss of
Alternative Opportunities: If the injured
party declined other potential deals due to the ongoing (but ultimately
futile) negotiations, they may be able to recover damages for the lost
profits or benefits associated with those opportunities.
- Loss of
Confidential Information: If confidential
information was disclosed during negotiations and subsequently misused by
the other party, damages may be awarded to compensate for the resulting
harm.
It's important
to note that the UPICC generally aims to compensate for actual losses, not to
punish the party acting in bad faith. Punitive damages are typically not
awarded under these principles.
The Wider
Implications of Article 2.1.15:
Article 2.1.15
of the UNIDROIT Principles serves as a powerful deterrent against unethical
negotiating practices. By clearly stipulating liability for bad faith conduct,
it promotes:
- Fairness
and Transparency: Encouraging parties
to negotiate openly and honestly, fostering a more ethical business
environment.
- Certainty
and Predictability: Providing a
framework for resolving disputes arising from broken negotiations,
increasing confidence in international commercial transactions.
- Protection
of Investments: Safeguarding the
time, resources, and efforts invested in the negotiation process, ensuring
that parties are not unfairly disadvantaged.
Case
Illustration: Fonderie Officine Meccaniche Tacconi SpA vs Heinrich Wagner
Sinto Maschinenfabrik GmbH (HWS). Date: 17-09-2002, Court of Justice of the
European Communities
«Plaintiff, an Italian company, brought an action against Defendant,a
German company, before an Italian court claiming compensation for losses
suffered as a result of Defendant’s refusal to conclude a contract with X, an
Italian leasing company, for the sale of a moulding plant to be afterwards
leased to Plaintiff. According to Plaintiff Defendant, after lengthy
negotiations in which it refused all the proposals made by X, had broken off
the negotiations in bad faith thereby infringing Plaintiff's legitimate
expectations to have the sales contract between Defendant and X concluded.
The Corte di Cassazione decided to refer to the European Court of Justice
for a preliminary ruling on the questions as to whether an action seeking to
establish pre-contractual liability fall within the scope of matters relating
to tort, delict or quasi-delict (Article 5(3) of the Brussels Convention), or
whether it fall within the scope of matters relating to a contract (Article
5(1) of the Brussels Convention).
In his conclusions the Advocate General proposed that the Court decide in
favour of the first of the two alternatives, i.e. the delictual nature of
pre-contractual liability. He based his conclusions on the argument that the
duty to act in good faith during the negotiations and the liability for
breaking off negotiations in bad faith arises not from any agreement between
the parties but is imposed by law. In support of this he referred, with no
further explanation, above all to Art. 2.15(2) [Art. 2.1.15(2) of the 2004
edition] of the UNIDROIT Principles, according to which “a party who negotiates
or breaks off negotiations in bad faith is liable for the losses caused to the
other party”, and to the Comments to this article explaining at which point in
the negotiation process the parties are no longer free to break off
negotiations abruptly and without justification»[1]
Case Illustration: Walford
v. Miles [1992] 2 AC 128
While Walford v. Miles is
a UK House of Lords case, and not directly citing the UNIDROIT Principles, it
offers a compelling illustration of the issues surrounding good faith
negotiations and liability for damages. While English law traditionally resists
imposing a general duty of good faith in negotiations, the case highlights the
practical difficulties of proving bad faith and the limitations of claiming
damages.
In Walford v. Miles,
the plaintiffs (Walford) were negotiating to buy the defendant's (Miles)
photographic processing business. As part of the negotiations, Miles agreed to
enter into a "lock-out agreement," promising not to negotiate with
any other party for a specified period. Walford claimed that Miles breached
this lock-out agreement by subsequently selling the business to a third party.
While the House of Lords found
that the lock-out agreement was enforceable, they dismissed Walford's claim
because they found that the lock-out agreement was too uncertain. To be
enforceable, the lock-out agreement would have needed to require Miles to
negotiate in good faith with Walford. However, the House of Lords found that a duty
to negotiate in good faith was unworkable because it was too difficult to
determine what constituted “good faith” in this context.
Applying the Lessons
from Walford v. Miles to the UNIDROIT Principle
Although Walford v.
Miles did not directly address the UNIDROIT Principles, the case
highlights some of the challenges in applying Article 2.1.15. Namely, the
difficulties in defining and proving bad faith conduct. It demonstrates the
importance of concrete evidence of specific actions or representations that
clearly demonstrate a departure from honest and fair dealing.
Therefore, in a case governed
by the UNIDROIT Principles, if Walford could have shown that Miles actively
misrepresented his intention to sell to them, or that he deliberately prolonged
negotiations to prevent Walford from pursuing other opportunities, a claim for
damages under Article 2.1.15 might have been successful. The focus would be on
showing that Miles acted dishonestly and failed to act consistently with reasonable
commercial standards of fair dealing.
Conclusion
Article 2.1.15 of the UNIDROIT Principles provides a
valuable framework for promoting good faith in international commercial
negotiations. While proving bad faith can be challenging, as demonstrated by
the lessons learned from cases like Walford v. Miles, the provision offers a
remedy for parties who have suffered losses as a result of dishonest or unfair
conduct during negotiations. By reinforcing the importance of honesty and
transparency, the UNIDROIT Principles contribute to a more predictable and
reliable environment for international trade. Parties entering into
negotiations should be aware of this principle and conduct themselves
accordingly to avoid potential liability.
