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When does a commercial agreement become a legally binding agreement?

donderdag 21 oktober 2021

It may be that your commercial enterprise was still negotiating the terms of a commercial contract and the negotiations did not result in an agreed written contract. At least that is what you thought until you received an invoice. When does a commercial agreement become legally binding according to the Dutch Civil Code (DCC)?

An agreement is constituted by offer and acceptance, after an offer has been made which has been accepted (article 6:217 – 6:225 DCC).

This seems to be quite straightforward, but a lot of discrepancies can arise between an offer and acceptance, in addition to confusion as to whether the offer was a legally binding offer, or whether the acceptance was a legally binding acceptance. Under the DCC there are 3 requirements that need to be met before an offer or acceptance is legally binding and after which they constitute a legally binding agreement. These relate to the intention of the party making the offer, the manner in which it is declared and the alignment between the offer and the acceptance. Intention, declaration and alignment of the offer/acceptance all need to be in accordance with the legal requirements in the DCC and subsequent case law.

In order to establish whether the offer and the acceptance are aligned, the offer needs to be directed to the party for which it is intended. The offer and acceptance both consist of an intent and of a declaration which has been disclosed and has been understood by the receiving party in the same way as how it was intended by the disclosing party, based on the circumstances that the receiving party could reasonably have understood (3:33 and 3:35 DCC). The declaration is form free (3:37 DCC), so this can be verbally or in writing.

The alignment of the offer and acceptance is often the reason for a dispute between the parties, because of the parties have understood the offer or acceptance to have been something different. For example, you are contemplating selling your company and a buyer has appeared wanting to buy your company subject to certain terms and conditions to be agreed upon during the discussions. It may be that an agreement is in place already, and negotiations have not started yet or have not started at all. A consequence for the seller may be that he may no longer be permitted to sell the company to another party. A consequence for the buyer may be that he is under a duty to pay the purchase price plus delivery of what is being sold.

In some situations it may happen that the negotiations break down, and then the question is what are the consequences of stopping the negotiations?

There is set case law on this originating from Plas/Valburg where the Supreme court defined three defined pre-contractual stages, being the following:

  1. The negotiations have broken down without any obligation to compensate the costs of the other side.
  2. The negotiations have progressed to such a stage that stopping the negotiations would lead to substantial costs being incurred. In this stage, damages are due and payable by the withdrawing party.
  3. The negotiations are in such an advanced phase that stopping the negotiations would be in breach of good faith. The parties may each rely on the fact that the negotiations would have resulted in an agreement. The withdrawing party is then under an obligation to pay the costs incurred by the other party and in some cases even loss of profit.

This judgment had an enormous impact in the legal world and resulted in a draft amendment in the DCC which was never implemented, but was applied by the Supreme court in VSH/Shell. So, based on case law, it became more and more accepted to apply the above stages.

In the Supreme Court judgment CBB/JPO however, these phases were amended in such a way that the rights to compensation of the non-withdrawing party were reduced.  So the protection for the non-withdrawing party became less. Thereafter the Supreme Court ruled in Greenib/Van Dam that damages were payable for broken down negotiations. So, therefore re-instating the Plas/Valburg stages, whereby compensation for the costs incurred by the non-withdrawing are to be compensated by the withdrawing party.

The facts in this case were that the negotiations regarding a Hyundai dealership were in such a phase that the other party could reasonably have relied on the fact that a legal agreement would have been entered into. The court decided that negotiations could not just stop without any consequences, and therefore order the payment of damages to compensate the other party.

So, as you might understand, the formation of a legally binding agreement is quite complex and there are a lot of issues to take into consideration starting from the point where parties are commencing the negotiations to the point where both parties believe that a legally binding agreement has been entered into.

Are you negotiating the terms of an agreement, and are you concerned about any of the above, then please contact Madelon van Breemen.

Madelon van Breemen

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