Legal Eye: Bad faith and compensation in negotiation

Negotiations often span several months. And, as is sometimes the case, despite my best efforts, negotiations fail. The failure to reach 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.

Weeding out bad faith

Help is available, however, to compensate injured parties in negotiations that have ended (or those that never seem to end) with no agreement. The Polish Civil Code, in particular article 72, provides that if one party negotiates in bad faith, meaning that he or she never really intended to reach agreement with the other party, he or she will be liable for damages resulting from the innocent party "counting on conclusion of the contract."

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 a very real sense, article 72 has introduced the concept of tort liability to contract law.

Delaying tactics

Wait a minute. Why would one party engage in negotiations if it had no intention of reaching agreement? For example, a commercial tenant may enter into simultaneous negotiations with two or more different office-building owners, one being my client, without disclosing such fact to all parties. After six months of negotiations with both owners the tenant selects one (or none) of the office buildings, leaving the other landlord with vacant office space and a considerable legal bill. Obviously, the tenant had no intention of signing two different lease agreements when it began negotiations, and worst, did not disclose such 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 in fact the owner can prove that it could have secured another tenant during this six-month period of negotiations if it had known that the 'bad faith' tenant had no intention of signing a lease agreement.

The above example is not limited to commercial real estate transactions. It is equally true for all types of sales and service agreements in all sectors of business.

Unlimited liability

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 the negotiations. To my colleagues in the legal profession, did you notice "delaying tactics in negotiations"? This applies not only to our clients, but also to the lawyers.

 Article 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 article 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.

Cards on the table

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 keep this in mind.