A study of the legal aspects of abortive contract negotiations
University of British Columbia
Master of Laws - LLM
The problems which are to be dealt with in this paper have attracted relatively little attention in the literature. One of the reasons for this is undoubtedly the paucity of reported cases in which aggrieved negotiators have sought to recover for expenditures incurred during abortive negotiations. Nevertheless, the question of the rights of negotiating parties is becoming increasingly important in present day conditions, in view of the fact that much of the contracting of businessmen is now preceded by a period of protracted negotiation. The difficulty arises when one of the prospective contractors has incurred substantial expenditure in the course of negotiations, and the other unilaterally decides to resile, refusing to enter into a contract. As will be seen, there are a variety of reasons why the defendant may no longer wish to contract, and it is possible that these should, to some extent, be determinative of his liability to make recompense to the plaintiff, Not every refusal to conclude an agreement should culminate in a liability to recoup the other party for his expenses. This aspect will be pursued further at a later stage. For the most part, we will be confining ourselves to a discussion of the question when, if ever, an aggrieved negotiator has recourse against his co-negotiator for these various losses and expenditures. The somewhat similar problem of the case where parties have reached an agreement which makes payment conditional upon the occurrence of a future fact which the defendant prevents from materialising will be considered insofar as relevant to the negotiation cases. In both cases the plaintiff seeks to recover what is essentially remuneration for wasted time and expenses, the defendant having put it out of his power to recompense him for those in the mode originally contemplated, viz, under an expected contract in the one case, and on the fulfilment of a stipulated condition in the other. The picture will become clearer if some illustrations are given. Suppose two parties (say, a building contractor and a developer) enter into negotiations with a view to entering into a contract for the construction of a shopping centre. After initial discussion, it is apparent to each party that-he has found the "right man". The contractor is then instructed to carry out geological surveys of the proposed site, is advised that he should also prepare plans of the proposed buildings (which invariably involves the services of an independent architect), is requested to prepare quantities, to submit and resubmit tenders, and so forth. The cost of these various services runs into thousands of dollars, and the contractor devotes many months of his time to the project. He has bypassed the opportunity of entering into other contracts elsewhere. All along, the developer holds himself out as being ready and willing to contract. The contractor is sure the "deal is on", the only apparent question between the parties being when it will be consummated. The contractor's expectations of obtaining the contract are so strong that he may even go to extra expense without being specifically requested by the other party. So clear is the understanding that a contract is just about to be entered into. After having done this preparatory work for several months, and just when it appeared that a contract was about to be consummated, the developer announces that he no longer wishes to proceed with the proposed transaction, and he lets the project to another contractor or abandons it altogether. He does not even offer a reason for this sudden change of mind. What has happened has had severe financial implications for the contractor. If he is a "small" contractor, it may even have threatened the financial substratum of his entire business. The question now being asked, and which we shall attempt to answer in this paper, is whether the law affords the contractor any protection in such a case. An illustration of abortive negotiations resulting in considerable loss to a prospective contractor may be given in a different setting. X is approached by Y, who is the managing director of a large company. Y indicates that the board is desirous of having X join the company, and invites X to enter into negotiations with a view to securing that end. A course of protracted negotiations ensues between X and other company representatives with the object of settling the terms of his employment, his role in the management and internal affairs of the company, and so forth. Again there emerges a belief, apparently common to both parties, that X will be joining the company in due course. X sells his existing business at a loss. He also sells his house and moves with his family to the locality where the company's offices are situated, all at the urging or with the knowledge of company officials, and in reliance on the assurances which were given as to him being acceptable to the company. Were it not for the fact that X understood the position in the company to be his, it being, in his view, a matter of "ratification rather than a matter of selection", he would not have changed his position thus, even if encouraged to by company officials. No contract is in fact concluded, the defendants having changed their minds about engaging the plaintiff. Should the law give X a measure of protection in such a situation? On elementary principles of justice the answer must clearly be in the affirmative; a party should not be permitted with impunity to generate expectations in another party, and lead or direct him to act to his detriment when his expectations are thus raised, if the first party should now change his mind and withhold the contract. Fortunately, however, as will be seen shortly, many legal systems will, if certain conditions are satisfied, permit the plaintiff to recover his "reliance" expenditures in such a case. An attempt will be made in the following pages to analyse the English and Canadian pre-contract case law, and a comparison will be drawn with the relevant authority in Scotland and in the United States.
Law, Peter A. Allard School of