Under Dutch Caribbean law, the relationship between parties in negotiations is governed by the principles of good faith, reasonableness and fairness. Generally, parties are free to break off negotiations unless they have led the other party to have justified expectations. The consequences of unilaterally terminating negotiations will depend on which phase the negotiations are in. In case law, different negotiating phases are identified. The first phase consists of introductory discussions, i.e. the discussions between the parties have not reached the stage where breaking off the negotiations would constitute a wrongful act and therefore the parties are free to terminate the negotiations at will without consequence. In the second phase, discussions between the parties have reached such a stage that breaking off the negotiations would constitute a wrongful act if the breaking party did not compensate the other party for its costs. In other words: negotiations may be terminated, but the terminating party may be required to compensate for the costs incurred by the other party. In the third phase, discussions between the parties have reached such a stage that the other party has developed a justified expectation that an agreement will be reached. If this is the case, then termination of the negotiations may result in liability for damages, including loss of profit. Another possible legal remedy is that the terminating party may be compelled to resume the negotiations by court order given in injunction proceedings. In the final phase, the parties have reached a binding agreement on the transaction. Note that under Dutch Caribbean law this phase may even be reached before the parties have executed a written agreement.
The parties are, however, free to specifically agree on the negotiations process to be followed and the stage at which binding obligations will arise, so that the aforementioned phases and accompanying rights and obligations do not apply. Typically, this would be agreed upon in writing through a letter of intent or similar document before negotiations commence. Such document may state that no binding obligations will arise until, for example, an agreement in writing is executed or certain specific conditions have been met. It should also be noted that these arrangements on the transaction process are also themselves subject to the requirements of reasonableness and fairness, and the fair expectations of the other party. Breach of these arrangements may again lead to liability for damages. If, for example, the letter of intent provides that no agreement will be deemed to have been reached until a written agreement has been executed, then walking away from the transaction may still constitute a wrongful act if all conditions precedent – e.g. satisfactory outcome due diligence – are fulfilled and the parties have reached full agreement on the wording of the agreement. In such case the terminating party has to have a good reason for breaking off the negotiations, e.g. an unexpected development of results or other unexpected (material) adverse change.
Generally speaking, specifically agreed conditions precedent will be upheld by the courts if they are objective conditions. Conditions precedent such as availability of bank financing, a satisfactory outcome of the due diligence and prior board or shareholder approval are common and will generally be upheld. However, invoking such conditions may still constitute a wrongful act if the withdrawing party has caused the non-fulfillment of the conditions, or if the justified expectation was created with the other party that conditions will be fulfilled. For instance, if the party invoking the conditions has throughout the process referred to the conditions as a mere formality, or if it becomes clear that the corporate body whose approval was required, was actively involved in the entire process, invoking the conditions may still constitute a wrongful act.