Bad faith negotiations
"A party which started or conducted negotiations infringing public decency, particularly without an intention to conclude a contract, shall be obligated to redress the damage that the other party suffered as a result of counting on conclusion of the contract"
- Art. 72(2) Polish Civil Code.
On occasion when I sit across the table from the other side in heated negotiations, I sometimes wonder if indeed the other party has any intention of actually signing an agreement with my client. Negotiations often span several months, if not years, depending on the motivation of the parties and the complexity of the transaction. And, as is sometimes the case, despite my best efforts, negotiations fail. The failure to reach a final agreement on terms acceptable to both parties is, to say the least, frustrating and costly, especially if one side has negotiated in good faith, while the other side has, to put it politely, acted in a less than professional manner. For the sake of clarity, my clients always negotiate in good faith. It is the other side that is guilty.
Apparently, I am not the only one who has experienced this problem. Responding to requests for help from both the business and legal communities, the Polish Civil Code has recently been amended to address the issue of bad faith negotiations. No longer is one party free to walk away from the negotiation table after months of discussion and expense without being liable to the other party for damages. In particular, if the other side negotiates in bad faith, meaning that he or she never really intended to reach agreement with my client, he or she will be liable for damages resulting from my client "counting on conclusion of the contract". In a very real sense, Art. 72 has introduced the concept of tort liability to contract law.
Wait a minute. Why would one party engage in negotiations if it had no intention of reaching agreement? Wouldn't this party also lose time and money? Yes and no. For example, a commercial tenant may enter into simultaneous negotiations with two or more different office building owners, one being my client, without disclosing the fact to all parties. After six months of negotiations with both landlords, the tenant selects one (or none) of the office buildings, leaving the other landlord with vacant office space and legal bills amounting to several thousand dollars. Obviously, the tenant had no intention of signing two different lease agreements when it began negotiations and, worst, did not disclose such a fact to the other party. In this instance, damages would not be limited to the expenses incurred by the second owner in negotiating for six months, but may, in especially egregious circumstances, also include lost rental income if the owner can prove that it could have secured another tenant during this six month period of negotiations if it had known that the commercial tenant had no intention of signing a lease agreement.
The above example is not limited to commercial real estate transactions. This is equally true for all kinds of sales and service agreements in all sectors of business, including manufacturing, transportation, energy, telecommunications, retail, banking, or securities, etc.
Liability is not limited to merely refusing to sign an agreement, but may also arise from withdrawing from negotiations without a valid reason; using delaying tactics to prolong negotiations; intentionally misleading the other party; refusing to provide requested information necessary to conduct negotiations; and, finally, making unrealistic demands designed to scuttle negotiations. To my colleagues in the legal profession, have you noticed 'delaying tactics in negotiations'? This applies not only to our clients, but also to us.
Art. 72 is not intended to create liability with respect to agreements or memorandums of understanding entered into in advance of concluding a final agreement, if the purpose of such preliminary agreements or understandings is to simply govern the conduct of future negotiations. In other words, a letter of intent, for instance, signed by one party setting forth the basic parameters to be included in a future contract, is not actionable. Nor is Art. 72 intended to create liability if the two sides sitting at the negotiation table are unable to reach agreement on all terms and conditions of an agreement after the culmination of negotiations in good faith.
The companion to Art. 72, that is Art. 72 (2), also imposes liability on the offending party if in the course of negotiations the 'bad faith' party discloses confidential information received from the 'good faith' party to a third party, or otherwise uses such information in a manner not agreed to by the good faith party. In this case, the bad faith party would be liable to redress any damage incurred by the good faith party resulting from the unauthorised disclosure of such confidential information, in addition to being liable to turn over any ill-gotten gains from the possession or disclosure of such information.
As these amendments to the Civil Code were only enacted last September, their true effectiveness is still to be proven. Based on my experience at the negotiation table over the last few months, I don't think the message has reached everybody. If you negotiate in bad faith, you are liable for damages incurred by the other party. If you sit across from me at the negotiation table, please remember that.
Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners.
- Art. 72(2) Polish Civil Code.
On occasion when I sit across the table from the other side in heated negotiations, I sometimes wonder if indeed the other party has any intention of actually signing an agreement with my client. Negotiations often span several months, if not years, depending on the motivation of the parties and the complexity of the transaction. And, as is sometimes the case, despite my best efforts, negotiations fail. The failure to reach a final agreement on terms acceptable to both parties is, to say the least, frustrating and costly, especially if one side has negotiated in good faith, while the other side has, to put it politely, acted in a less than professional manner. For the sake of clarity, my clients always negotiate in good faith. It is the other side that is guilty.
Apparently, I am not the only one who has experienced this problem. Responding to requests for help from both the business and legal communities, the Polish Civil Code has recently been amended to address the issue of bad faith negotiations. No longer is one party free to walk away from the negotiation table after months of discussion and expense without being liable to the other party for damages. In particular, if the other side negotiates in bad faith, meaning that he or she never really intended to reach agreement with my client, he or she will be liable for damages resulting from my client "counting on conclusion of the contract". In a very real sense, Art. 72 has introduced the concept of tort liability to contract law.
Wait a minute. Why would one party engage in negotiations if it had no intention of reaching agreement? Wouldn't this party also lose time and money? Yes and no. For example, a commercial tenant may enter into simultaneous negotiations with two or more different office building owners, one being my client, without disclosing the fact to all parties. After six months of negotiations with both landlords, the tenant selects one (or none) of the office buildings, leaving the other landlord with vacant office space and legal bills amounting to several thousand dollars. Obviously, the tenant had no intention of signing two different lease agreements when it began negotiations and, worst, did not disclose such a fact to the other party. In this instance, damages would not be limited to the expenses incurred by the second owner in negotiating for six months, but may, in especially egregious circumstances, also include lost rental income if the owner can prove that it could have secured another tenant during this six month period of negotiations if it had known that the commercial tenant had no intention of signing a lease agreement.
The above example is not limited to commercial real estate transactions. This is equally true for all kinds of sales and service agreements in all sectors of business, including manufacturing, transportation, energy, telecommunications, retail, banking, or securities, etc.
Liability is not limited to merely refusing to sign an agreement, but may also arise from withdrawing from negotiations without a valid reason; using delaying tactics to prolong negotiations; intentionally misleading the other party; refusing to provide requested information necessary to conduct negotiations; and, finally, making unrealistic demands designed to scuttle negotiations. To my colleagues in the legal profession, have you noticed 'delaying tactics in negotiations'? This applies not only to our clients, but also to us.
Art. 72 is not intended to create liability with respect to agreements or memorandums of understanding entered into in advance of concluding a final agreement, if the purpose of such preliminary agreements or understandings is to simply govern the conduct of future negotiations. In other words, a letter of intent, for instance, signed by one party setting forth the basic parameters to be included in a future contract, is not actionable. Nor is Art. 72 intended to create liability if the two sides sitting at the negotiation table are unable to reach agreement on all terms and conditions of an agreement after the culmination of negotiations in good faith.
The companion to Art. 72, that is Art. 72 (2), also imposes liability on the offending party if in the course of negotiations the 'bad faith' party discloses confidential information received from the 'good faith' party to a third party, or otherwise uses such information in a manner not agreed to by the good faith party. In this case, the bad faith party would be liable to redress any damage incurred by the good faith party resulting from the unauthorised disclosure of such confidential information, in addition to being liable to turn over any ill-gotten gains from the possession or disclosure of such information.
As these amendments to the Civil Code were only enacted last September, their true effectiveness is still to be proven. Based on my experience at the negotiation table over the last few months, I don't think the message has reached everybody. If you negotiate in bad faith, you are liable for damages incurred by the other party. If you sit across from me at the negotiation table, please remember that.
Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners.
