Book V of the Belgian Civil Code introduced a new principle with regard to wrongful terminated negotiations, significantly impacting M&A transactions.
Book V of the Civil Code entered into force on January 1, 2023, marking the long-awaited update of the old (and outdated) contract law from the Code Napoléon of 1804. Although book 5 is to a very large extent a codification of the law as it was already being applied in practice, the legislator nevertheless chose to make some specific changes. Accordingly, article 5.17 regarding pre-contractual liability was modified and introduced new provisions on pre-contractual liability for wrongful termination of negotiations.
Freedom to contract = Freedom to terminate
The Civil Code upholds the principle of freedom to contract. Everyone is free to negotiate and to contract (or not contract) with whom they want. This freedom also implies that everyone is free to terminate ongoing negotiations. However, this needs to be nuanced as this freedom is not without any limitations.
Wrongful termination of negotiations
The law requires potential contracting parties to act prudently. Parties are expected to behave as a prudent and reasonable person placed in the same circumstances would behave during negotiations. If a party terminates the negotiations wrongful, this party is obliged to pay the incurred damages. What qualifies as “wrongful” is not concretized in the Code. The Belgian Civil Code does however stipulate which damages should be repaired.
Negative contract interest
The “negative contract interest” should be compensated which means that the wronged party should be placed back in the situation he/she would have been in had no negotiations taken place. More concretely, the costs incurred that have become useless and the loss of an opportunity of a contract with a third party (e.g. costs of consultants throughout the due diligence). This principle already existed in the old Civil Code.
Positive contract interest
New in the Civil Code is that in certain circumstances the “positive contract interest” should now also be taken into account if a party had legitimate expectations during the negotiations that the agreement would be concluded without any doubt. The wronged party should in this case be placed in the position as if the contract had been concluded as the “point of no return” has passed. This includes for example the recovery of the loss of the expected net benefits from the non-concluded agreement. It should be noted that the explanatory memorandum of the new Civil Code explains that such recovery is only possible in exceptional circumstances. Jurisprudence will have to interpret the notion of “positive contract interest” in concrete terms.
Book V of the Civil Code reshaped contract law, highlighting the need for prudent negotiation. As parties exercise the freedom to contract, they must also be aware of the risks of wrongful termination. Clear pre-contractual agreements are vital to mitigate potential damages in this new legal landscape.
Extra-contractual basis
It is important to not overlook the extra-contractual basis of article 5.17 of the Civil Code. The requirements of extra-contractual liability must in any case be met, being fault, damage and causal link.
The explanatory memorandum of the new Civil Code clarifies that only damages that are causally related to the wrongful termination of negotiations are eligible for compensation. Expenses that would have been incurred anyway are not eligible for reimbursement.
Pre-contractual agreements
This innovation has an impact on the pre-contractual phase of M&A transactions as it causes the parties who (could) terminate the negotiations to be at a disadvantage as the “positive contract interest” may now also be taken into account if a party had legitimate expectations during the negotiations that the agreement would be concluded without any doubt.
In the future, parties will have to exercise more caution when negotiating, as termination of the negotiation may lead to significant damages. To avoid undesirable consequences of terminated negotiations, certain pre-contractual agreements could be established in a preliminary agreement (e.g. Letter of Intent, Heads of Agreement, Memorandum of Understanding). In a pre-contractual agreement, the possibility of terminating negotiations can be limited or it can be stipulated that the negotiations are as non-binding as possible (by, for example, including a non-exclusivity clause). Given the amendment of the law as described above, parties would also be well advised to stipulate in their pre-contractual agreements that as long as the intended agreement has not been formally signed, none of the negotiating partners may legitimately assume that the intended agreement will be concluded “without any doubt”.
