The cessation of negotiations in the context of COVID-19 pandemic7 May 2020
Both on the local and the international market, the COVID-19 pandemic caught many ongoing transactions in different stages of negotiation or implementation, having various objectives. The economy’s destabilization may mean that certain transactions are no longer of interest and it may determine the participants to want to suspend negotiations or even to totally interrupt them. In this regard, taking into consideration the Romanian legislation, it is relevant to analyse the legal mechanisms and institutions which may be used in the event of interruption of ongoing negotiations.
Good and bad faith within negotiations. Analysis of the state of affairs caused by SARS-CoV-2 virus
The parties have the freedom to interrupt the negotiations and cannot be held responsible for their failure, but only in accordance with the requirements of good faith. The good or bad faith will be analysed on a case-by-case basis, depending on the stage of negotiation of the transaction, the position of the parties involved and other similar matters. This distinction becomes relevant when one of the parties interrupts the negotiations in bad faith and may be liable for the damages caused to the other party.
Even though the pandemic caused by the SARS-CoV-2 virus has affected most sectors of activity from an economic point of view, not all negotiations can be interrupted in good faith for this reason.
In the current context, a behaviour that would meet the requirements of good faith within negotiations may be represented by the conduct of the party who would propose the following: (i) to suspend the negotiations for a specified period; (ii) to continue the negotiations, taking into account new elements, or (iii) to re-evaluate the terms already established by taking concrete measures that would reduce a possible imbalance between the parties’ benefits.
If the target business becomes more profitable in the context of the pandemic (as an example – the company sells disinfectant products and it can be observed an increase of the demand on the market), it is very likely that the seller wants to increase the price or even to interrupt the negotiations. The seller may be considered to act in good faith when interrupting negotiations only by prior to carrying out its best efforts to highlight the changes and to renegotiate the essential aspects of the transaction accordingly.
A behaviour which is opposite to the requirements of good faith within negotiations is represented by the behaviour of the party who continues the negotiations without having the intention to conclude the agreement in the end. As an example, a party may be considered to act in bad faith when interrupts negotiations, although the impact of the pandemic on the smooth running of its business is not significant.
Can negotiations be interrupted when an offer has already been submitted?
The party who has submitted an offer before or during the COVID-19 pandemic may interrupt negotiations only under certain conditions, taking into account the type of offer submitted: binding offer or non-binding offer.
The binding offer is mandatory for the party who submitted it and cannot be withdrawn, at least not until a predefined deadline or until the intervention of a ground that makes it ineffective. As long as the parties did not foresee the occurrence of a pandemic as a reason to cancel the binding nature of the offer, its revocation will not be valid. In this regard, the agreement may be considered concluded if the other party accepts the offer without objection.
However, on a case-by-case basis, the state of affairs would allow to successfully invoke a case of force majeure, unforeseeable circumstance or hardship, resulting in connection with the COVID-19 pandemic, and the binding offer could be revoked and would lose its binding character even if the duration for its validity or other requirements regarding its expiry date are not met.
The non-binding offer may be withdrawn by the party who submitted it, unless it has been provided that it must be maintained for a certain period of time. Its acceptance by the recipient does not lead to the establishment of a legal relationship between the parties, but it is only a step towards which allows that the formalization of the agreement to be continued. This type of offer involves a major uncertainty and it is avoided in practice because it allows a change of mind of the tenderer, even if the recipient has accepted it without objection.
The binding and the revocation effects of the offers are variable on a case-by-case basis, given the right of the parties to establish the criteria that allow the revocation under flexible conditions, or, on the contrary, the possibility to confer a binding character of the offer. Regardless of their type, the offers may be withdrawn or waived, subject to the payment of a security that would be, in fact, the interruption of the negotiations in a formal framework.
What remedies can be used against the party who interrupts the negotiations in bad faith?
The injured party as a result of the interruption of negotiations in bad faith, in the context of the pandemic, will be able to file an action for tort liability through which may claim the court to recover the damage caused, as well as the advanced court costs. In order to establish the damage suffered, the plaintiff will have to present and to prove which were the expenses incurred during the negotiation. Damage caused as a result of waiving other certain offers which could have been exploited even in the circumstances caused by the pandemic may also be invoked in order to give priority to the interrupted transaction.
However, the party who wants to file such legal action will have to analyse also the risks to which it is exposed. For example, if the court states that the defendant was not in bad faith and the pandemic generated an objective reason to interrupt the negotiations, the plaintiff’s claims may be rejected. Furthermore, the plaintiff may also be obliged to pay the defendant’s advanced costs, as well as to pay compensation for damaging the defendant’s image by initiating the litigation.
It is recommended that companies which want to complete the negotiations initiated to assess carefully the effects of the COVID-19 pandemic and how it may affect the transaction. Under certain conditions, important elements of the transaction may be subject to renegotiation – such as the transaction price when one of the parties considers that the previously agreed price is no longer justified in relation to the current situation. In addition, the participants within a negotiation should also consider to include within the agreement which formally is reflecting the arrangements, of some specific clauses related to force majeure, unforeseeable circumstance or hardship to protect them from the consequences of the objective impossibility of fulfilling their obligations due to the pandemic.