Broken-off negotiations for startups: when does a promise become legally binding?

A partnership seems like a done deal. There is agreement on the main terms, both parties speak as if the deal is going ahead, and perhaps costs have even been incurred to facilitate execution. Then, the other party pulls out.

For a startup, this can have major consequences. Not only because a commercial opportunity is lost, but also because time, capacity, and money have been invested in the process. Think, for example, of a complex transaction where advisors were hired, preparatory work was done, or other opportunities were passed up.

The initial reaction is often: "But wasn't this agreed upon?"

Legally, that is exactly the interesting question. Because not every promise made during negotiations is automatically enforceable. At the same time, the absence of a fully signed contract does not automatically mean that the parties are not yet legally bound to anything.

In the case of broken-off negotiations, it must first be determined what stage the parties are in. Are they still in the process of reaching an agreement? Or has an agreement already been reached from a legal perspective?

That distinction is crucial.

Negotiating does not mean everything is non-binding

The starting point is freedom of contract. In principle, parties are free to decide with whom they enter into an agreement, what they contract about, and whether they want to enter into an agreement at all.

That freedom also plays an important role during negotiations. The starting point is therefore that a party may break off negotiations. This includes the principle that parties bear their own costs incurred in the context of those negotiations.

But freedom of contract is not unlimited.

Parties negotiating with each other must take each other's legitimate interests into account. As negotiations progress, the room to withdraw from the process without consequences may diminish.

That does not mean that every advanced negotiation automatically leads to an agreement. It does, however, mean that the legal position of the parties can change during the process.

For startups, it is therefore risky to simply view the negotiation phase as a period in which everything is non-binding until the signature is on the final contract.

That is legally too simplistic.

When does the pre-contractual phase begin?

The period before an agreement is reached is often referred to as the pre-contractual phase. It is generally accepted that this phase begins at the very least when parties enter into negotiations with each other.

Exactly where the line is drawn is not always easy to determine. Moreover, the pre-contractual phase and the actual negotiation phase do not necessarily have to be considered exactly the same.

For practical purposes, it is especially important that the legal framework does not only become relevant when parties have a nearly final contract in front of them. As soon as parties are actually in a process where they are working toward potential contractual agreements, their statements, conduct, and mutual expectations can become legally relevant.

This is important for startups. Many commercial processes start informally. Founders talk to a potential investor, strategic partner, supplier, or other contracting party and make increasingly concrete agreements along the way.

Just because something started with an informal conversation doesn't mean that everything that follows is legally insignificant.

The most important question: is there perhaps already an agreement in place?

When a party fails to keep a promise, it is tempting to look immediately at the rules regarding broken-off negotiations. But that is actually only the second step.

The first question is more fundamental:

Has a legal agreement perhaps already been reached?

If so, the primary issue is no longer whether negotiations could be broken off. The discussion then shifts to the contractual phase, and there may be contractual obligations that must be fulfilled.

An agreement is formed through offer and acceptance. In this process, the statements and conduct of the parties must ultimately be aimed at reaching a consensus.

That sounds simple, but in practice, this is precisely where disputes frequently arise.

An agreement does not always have to consist of a single document in which every detail is worked out. In principle, declarations of intent are not subject to formal requirements. They can be made explicitly, but under certain circumstances, they can also be inferred from conduct.

Therefore, we look at what the parties have said and done, what they have inferred from each other's actions, and what they could reasonably understand under the circumstances.

The reality of the negotiations is therefore more important than just the question of whether a document titled "final agreement" has already been signed.

No signature does not automatically mean no contract

This is an important point for startups to consider.

In commercial negotiations, it is often assumed that a party can safely continue negotiating as long as the final contract has not yet been signed. However, the absence of such a signature does not in itself provide a complete answer to the question of whether a legal agreement already exists.

For example, parties can reach agreement step by step on the most important parts of their deal during negotiations.

This raises a new question: were the remaining points still so important that no agreement could exist without them? Or had those remaining topics become subordinate to what had already been agreed upon?

This is where the so-called "core agreement" (rompovereenkomst) comes into play.

A core agreement: the deal may be done sooner than you think

A core agreement can arise when parties have reached consensus on the essential parts of their agreement, even if not every detail has been filled in yet.

This does not mean that any agreement on a few commercial points is sufficient. Whether a core agreement exists depends on the intentions of the parties and the specific circumstances.

In this context, it is relevant to consider which topics were essential to the parties.

For a simple transaction, it can be relatively quick to determine the essential components. For a complex commercial transaction, this may be different. The more complex and financially significant the agreement, the more topics may be part of what the parties must first negotiate.

In the case of a share acquisition, for example, it is not just the object and the price that may be relevant. Other important terms may also be part of the points on which the parties intended to reach an agreement.

The context therefore determines how much agreement is required before it can be said that an agreement actually exists.

What has already been settled and what has not?

When making an assessment, it is important to consider, among other things, which points have already been settled and which remain open.

Have the parties agreed on all essential components, and can the remaining points be considered relatively minor? If so, this may point toward a framework agreement.

Conversely, are there still fundamental issues open that the parties explicitly intended to negotiate further? If so, it is less likely that an agreement has already been reached.

The reason why parties stop negotiating can also be relevant.

Do the parties stop because they believe the main points have been agreed upon? That presents a different picture than if they stop because they are unable to reach an agreement on an essential part of the deal.

So, when can an obligation to perform already exist?

This brings us back to the question many startups come to us with: "Something was promised. Can I demand that the other party sticks to it?"

That cannot be answered solely by looking at the word "promise."

The real question is what has legally been established between the parties.

When there is sufficient agreement on the essential components of the agreement and it follows from statements, conduct, and circumstances that the parties intended to be bound, the situation may have already outgrown the pre-contractual phase.

In that case, an agreement may already exist.

And if an agreement exists, obligations to perform may arise from it.

This immediately makes it clear why startups should be careful with phrases like:

"The lawyers just need to draft it."

"We have reached a commercial agreement."

As far as we are concerned, the deal is done.

The rest is just details.

Such statements must always be viewed in context and do not automatically constitute an agreement in themselves. However, they do illustrate how statements made during negotiations can become part of the assessment of what parties have actually agreed upon.

Legal reality is not determined solely by the name parties themselves give to the stage of their discussions.

And what if there is no agreement yet?

If it is established that no agreement has been reached yet, the doctrine of broken-off negotiations comes into play.

The starting point remains that a party is free to break off negotiations.

That principle is important. If every party starting negotiations ran the risk of being forced to eventually close the deal, little would remain of true freedom of contract.

Therefore, liability for breaking off negotiations is approached with restraint.

Nevertheless, a moment may come when breaking off is no longer possible without legal consequences.

When can broken-off negotiations become legally problematic?

In principle, a party may terminate negotiations, unless doing so is unacceptable due to the other party's justified reliance on the agreement being reached, or due to other circumstances.

This is deliberately not a simple checklist.

It involves an assessment of the specific circumstances of the case.

An important factor is the trust that has developed during the negotiation process. Has one party, through its own statements or conduct, justifiably led the other party to believe that the agreement would be concluded?

In addition, other circumstances may be relevant.

In this regard, one must always keep in mind the principle that parties must remain free to contract or not to contract. Therefore, the mere fact that a startup really wanted the deal to go through is not enough.

The mere fact that negotiations have been ongoing for a long time does not automatically make breaking them off unacceptable.

It is all about the entire course of the negotiations and what the parties could reasonably expect from one another.

Advanced negotiations are no guarantee

This is precisely where a lot of confusion arises in practice.

One party might feel that a deal was "95 percent done." Legally, such a percentage means very little.

It is possible that almost every detail has been discussed, while that one remaining topic was essential to one of the parties. Conversely, a negotiation might still have several open points on paper, while the parties have already effectively committed themselves to the essential components.

Therefore, one should not only look at how many points remain open, but primarily at the importance of those points and the intent and conduct of the parties.

For startups, this means that a long email exchange, a series of meetings, or an advanced draft contract does not in itself provide a conclusive answer.

The content of the entire process counts.

Breaking off negotiations can be permitted and still cost money

There is another important nuance.

The legal analysis does not always stop when it is concluded that a party was allowed to break off negotiations.

Even when breaking off negotiations is not in itself unacceptable according to standards of reasonableness and fairness, circumstances may arise in which the party breaking off the negotiations is still obliged to reimburse part of the other party's costs.

This is particularly relevant when work performed by one party during the process has led to a benefit for the other party.

The question may then arise as to whether the party breaking off the negotiations has been unjustly enriched by that work.

That is a different legal route than simply claiming that the negotiations should not have been terminated.

For startups, that distinction is important.

A failed deal therefore does not only lead to two possible outcomes, namely "no agreement, so no rights" or "agreement, so performance." There can also be a middle ground where the other party was allowed to stop the negotiations, but cannot necessarily retain every benefit of the work performed by the startup free of charge.

Not every euro spent can be reclaimed

This does not mean that every startup can pass its legal fees, advisor costs, technical preparation, and internal hours on to the other party after a failed deal.

The starting point remains that, in principle, parties bear their own negotiation costs.

A reimbursement of costs therefore requires more.

When invoking unjust enrichment, it is relevant whether the other party has actually been enriched by the startup's work and whether that enrichment has occurred at the expense of the startup. Subsequently, it must be assessed whether that enrichment is unjustified and to what extent it is reasonable to compensate for damages.

Existing agreements between parties can also be relevant in this regard.

This makes the precise content of agreements, extension arrangements, and other commitments made during the process important for the final assessment.

Damages for unjustifiably broken-off negotiations

When negotiations are broken off in such a way that liability arises, compensation for damages may come into play.

A distinction is made between different types of interests.

In short, the negative interest refers to the position the injured party would have been in had they not entered into the negotiation process. Costs incurred in connection with the negotiations, for example, may be relevant here.

The positive interest goes further. It focuses on the position the party would have been in had the intended agreement been executed.

This distinction is important because not every instance of liability automatically means that all expected benefits from the unfinalized agreement must be compensated.

Here, too, much depends on the legal basis and the specific circumstances.

For a startup, saying "we have suffered damages" is therefore only the beginning of the analysis. It must then be determined which damages are legally eligible for compensation.

Why this is especially relevant for startups and scale-ups

Startups often move quickly. Commercial opportunities are discussed while contract documentation is still being drafted. Management teams want to move forward, and legal formalization sometimes only follows after an agreement in principle seems to have been reached.

That pace is commercially understandable, but it makes the boundary between negotiating and contracting especially important.

The risk exists on both sides.

A startup that thinks nothing is binding yet may discover that its own statements and actions carry more legal weight than expected.

Conversely, a startup that assumes the deal is already done may find that essential points were still open, giving the other party more freedom to break off negotiations.

The solution is not to immediately lock down every conversation with twenty pages of legal terms. However, it is wise to remain aware of the legal status of the agreements being made throughout the process.

Document what has and has not been agreed upon

An important practical point to consider is clarity.

If parties reach an agreement on certain topics, document exactly what that agreement entails.

Are other points still subject to negotiation? Make that clear as well.

Are certain topics so important that there can be no final deal without agreement on them? If so, it is wise to keep that distinction visible throughout the process.

The same applies to expectations regarding further negotiations.

When it remains clear to all parties which topics still need to be discussed, it is less likely that an all-or-nothing dispute will arise later about whether the agreement had already been reached.

Pay attention to costs during long-term negotiations

Especially in long-term or complex processes, it is wise to consider the costs incurred by the parties.

Who pays for which preparations?

Is work being performed specifically for the other party?

Can the other party continue to use that work if the deal ultimately does not go through?

What happens to costs if the process is extended?

The legal relevance of this increases when one party performs substantial work from which the other party benefits.

Precisely because the starting point is that each party bears its own negotiation costs, it is wise not to wait until after a transaction has failed to think about the position of those costs.

Do not look only at the final draft contract

In the event of a conflict over broken-off negotiations, it is tempting to look only at the latest contract draft.

However, the assessment can be broader.

What did the parties say in earlier discussions? Which agreements were confirmed in the meantime? Why did negotiations continue? Which points were still considered essential? What expectations did the parties create for each other? What work has already been performed?

The legal qualification follows from the whole.

For founders and management teams, this means that commercial communication is not separate from the company's legal position.

An enthusiastic confirmation of the deal is not necessarily a contract. However, it is also unwise to assume that such communication is legally irrelevant simply because the final documentation has not yet been signed.

A promise during negotiations: ask these questions first

When another party goes back on a previous commitment, it is wise not to immediately jump to the question of how much compensation can be claimed.

Start a step earlier.

What exactly was promised? Was it a concrete offer or part of broader negotiations? How did the startup respond to it? Was there agreement on the essential terms? Which topics were still open? Were those remaining topics essential or merely further elaboration? Did the parties act as if the agreement already existed? And if no contract existed yet, what level of trust did the other party create during the process?

Next comes the question of what happened when the negotiations were broken off.

Was breaking them off still permitted? Were there circumstances that made it unacceptable? Were costs incurred? Did the other party benefit from work performed during the negotiations?

By asking these questions in the right order, it becomes clear which legal route might be relevant.

In summary

At Startup-Recht, we regularly see situations where startups are promised things that are ultimately not fulfilled. The logical question then is: can you do anything about it, and is there perhaps already a legal obligation to perform?

The answer begins with the question of whether the parties were still legally negotiating or if an agreement had already been reached. A fully drafted and signed contract is not necessary in every situation for legal binding to occur. If parties have reached sufficient agreement on the essential terms and their statements and conduct show that they intended to be bound, an agreement or a framework agreement may already exist under certain circumstances.

If no agreement exists yet, the starting point is that negotiations may be broken off. However, that freedom has its limits. The justified trust built up and other circumstances can lead to a situation where breaking off negotiations becomes unacceptable.

And even when breaking off negotiations is permitted, the matter is not always settled. Under certain circumstances, an obligation may still exist to reimburse certain costs, for example, if the party breaking off the negotiations has gained an unjustified advantage from the other party's work.

The most important lesson for startups is therefore simple: do not automatically treat the negotiation phase as a legal no-man's-land. The further discussions progress, the more important it becomes to clearly document what has already been agreed upon, what remains open, which points are essential, and what costs the parties are incurring during the process.

Because sometimes a "promise" turns out to be nothing more than part of a negotiation. But sometimes, much more has happened legally than the parties realize.

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