A man’s word is his bond?

When is this the case?

An agreement on key points may have been reached even if the parties do not yet agree on some parts of the transaction. The parties' intentions are important here. For this, one should look at, for example:

1. What has already been agreed and what has not yet been agreed. Are the important elements of the agreement, the essentials (for example, the price in a simple purchase agreement), already fixed? If so, there may already be an agreement on essentials.
2. Is there still an intention to negotiate further? This is an indication that there is not yet an agreement on main points. And vice versa: if the parties do not negotiate further, this is in principle a sign that there is already an agreement.

Of course, when answering these questions, what type of agreement is involved is important. The more complicated the intended transaction and the more value it represents, the less likely there will be an agreement on key points. For buying a cake, pointing out the cake and agreeing on the price with the baker will be sufficient to speak of an agreement, but for a share transaction worth hundreds of thousands of euros, it will be less likely to be considered an agreement on main points.

Recent example

In the recent April 4 case of the Court of Appeal of Arnhem-Leeuwarden, the question arose as to whether there was already an agreement on key points. This case involved a transaction consisting of three parts: the transfer of two real estate properties and the transfer of all shares in a company by Royal Reesink B.V. and Reesink Industries B.V. (hereinafter jointly and singularly: "Reesink") to UTB Groep B.V. ("UTB"). The intended (total) sales price was of over 5 million euros.

The parties had agreed to work with so-called Term Sheets during the negotiations and exchanged various versions of Term Sheets. The agreement reached would also have to be included in a final Term Sheet. The claimant in the first instance, UTB, argues that a verbal agreement on the sale was allegedly reached on December 15, 2017. In fact, according to UTB, the parties would both be optimistic about the final breaking point of the negotiations: how to deal with land contamination on one of the two properties. A solution to this contamination also still required the written consent of the municipality, but this point would already be sufficiently established to speak of an agreement on key points and this would have been done during the December 15, 2017 conversation. In the process, the agreement would have been sealed with a handshake and the words "a man a man, a word a word" - a Dutch saying similar to the saying “a man’s word is his bond”.

The defendant in the first instance, Reesink, disputes this. Reesink states that it sent another (third) Term Sheet on December 19, 2017. Following contacts about this (third) Term Sheet, a director of Reesink informed UTB that in its view there was still no agreement. UTB sees this differently - as described above - and argues that there is an agreement on key points and takes the matter to court.

The District Court of Gelderland rejected UTB's claims. The Court of Appeal of Arnhem-Leeuwarden also agreed with Reesink: UTB was not entitled to rely on an agreement on key points because the parties had not yet agreed on one of the three essential main points that were inextricably linked to the purchase, namely the contaminated real estate. Moreover, further negotiation also became increasingly out of the picture because of time constraints at Reesink. In this case, that meant, because of the known time pressure, that UTB was less able to rely on the fact that an agreement had been or would be reached.

Tips and Tricks to avoid being tied to an agreement when negotiating

How do you avoid discussions about whether there is an agreement on the key points during negotiations? It sounds simple, but in practice it remains tricky: make very clear agreements in the preliminary phase. If use is made of a Term Sheet, Heads of Agreement or Letter of Intent, for example, make sure that these contain a clause that makes clear the nature of the Term Sheet, what exactly it regulates, when it expires and when there is a binding agreement (for example, by working with conditions precedent). Parties can also use so-called "subject to clauses" that state, for example, that an agreement is only formed when parties agree on all parts of the agreement ("subject to contract"), when all (authorized) parties have also signed the written agreement ("subject to signature"), or when the board has agreed to the agreement ("subject to board approval"). This can avoid uncertainty.

To learn more about term sheets, the tips above or to simply spar about the content of this blog, please contact Suzanne Poutsma and Merel van Bunge.