The Plas/Valburg case revisited – Leiden Law Blog

The case concerned the sale of two plots of land in Amsterdam by the landowners to property developers. The transfer was repeatedly delayed due to municipal impediments. To compensate this delay, the developers agreed to pay the sellers €10,000 per month and entered into negotiations with the municipality. However, while the parties were negotiating an extension of the purchase agreement, the sellers decided to withdraw. The sellers subsequently sold the plots to a third party at a higher price. The developers claimed damages for terminating the negotiations. The Dutch Supreme Court ruled that although it is not unacceptable to terminate negotiations, this does not mean that the terminating party is free to do so without compensating the other party’s costs. With this ruling, the Supreme Court brings clarity to the grey zone between freely ending negotiations and terminating them unacceptably.

Pre-contractual liability

When negotiations have not yet resulted in an agreement, the Dutch doctrine of the so-called ‘pre-contractual phase’ applies. This doctrine has been mainly shaped by case law. As early as 1957, the Dutch Supreme Court ruled in the Baris/Riezenkamp case that the ‘pre-contractual phase’ is governed by the standards of reasonableness and fairness. In this judgment, the Supreme Court established the basis for pre-contractual liability: parties may pursue their own interests during negotiations, but must take into account the legitimate interests of the counterparty. This contrasts with the legal practice in Anglo-Saxon jurisdictions, where liability for terminating negotiations is either not recognised or only accepted to a limited extent.

The subsequent Plas/Valburg judgment of 1982 elaborated on the principle of pre-contractual liability. The judgment introduced the so-called ‘three-stage doctrine’, which divides the liability of the aborting party in the pre-contractual phase into three stages. At the first stage, the parties are completely free to terminate negotiations. At the second stage, terminating is permitted but requires compensation for the costs incurred by the other party in the course of the negotiations. At the third stage, the party may no longer withdraw from the negotiations. Terminating negotiations at this stage is contrary to the standards of reasonableness and fairness, which may oblige the party to continue negotiations, reimburse the costs incurred or compensate for lost profits.

In the case law following the Plas/Valburg judgment, the emphasis has shifted more towards the freedom to negotiate, while liability for terminating negotiations has become less prominent. In 2005, the Dutch Supreme Court summarised the line of its case law in the CBB/JPO judgment, holding that liability arises only if terminating negotiations is deemed unacceptable according to standards of reasonableness and fairness. Such liability may arise from the counterparty’s legitimate expectation that a contract will be formed or from other circumstances of the case, such as contractual or statutory rights of first refusal or renegotiation clauses in the contract. The Supreme Court emphasised that a strict and restraining standard should be applied when assessing the obligation to pay damages.

Does the ‘second stage’ still exist?

The aforementioned three-stage doctrine led to considerable debate in Dutch literature, primarily because the Dutch Supreme Court did not confirm the existence of the ‘second stage’ in any judgment after the Plas/Valburg case (1982). Moreover, in the CBB/JPO case (2005), the Supreme Court seemed to distinguish only between the first stage (parties are free to terminate negotiations) and the third stage (terminating negotiations is deemed unacceptable). In this judgment, the Court did not address the potential obligation of the aborting party to compensate for the costs incurred by the counterparty in the course of the negotiations when termination is not considered unacceptable. In addition, uncertainty existed about which legal ground a party should invoke to claim damages in cases where the ‘unacceptability standard’ of the third stage was not met. While the Plas/Valburg judgment seems to have introduced the concept of a ‘lawful act’ (termination of negotiations is free, provided that the costs incurred are compensated; liability arises if such compensation is not made), subsequent case law has relied on the limiting effect of reasonableness and fairness, tort and unjust enrichment as grounds for compensation.

Yes, the ‘second stage’ still exists

In its judgment of 14 June 2024, the Dutch Supreme Court finally shed light on the legal ground and standard for the obligation of the party who terminates negotiations to compensate the costs incurred by the counterparty. The Supreme Court held that even when the termination of negotiations is not deemed unacceptable, circumstances may arise that require the terminating party to compensate (part of) the costs incurred by the counterparty in the course of the negotiations. In line with Advocate General Hartlief’s opinion, the Supreme Court identified unjust enrichment as a possible legal ground for this obligation. The Dutch Court of Appeal, in ruling that the developers were not entitled to compensation for costs incurred, failed to consider unjust enrichment as a ground for liability, instead focusing exclusively on the ‘unacceptability standard’ established in the CBB/JPO case. However, this standard imposes an excessively high threshold for situations classified by the Supreme Court 42 years ago as the ‘second stage’. The second and third stage should be understood as parallel situations, each with its own distinct ground for liability and standard, rather than as sequential stages. From this perspective, the ‘second stage’ of the Plas/Valburg judgment remains alive and kicking.

This blog was written for an assignment in the master’s course ‘Practicum: Civiel Recht’, taught by Dr Jeroen van der Weide. I wish to thank him for his valuable feedback and inspiring teaching. I also thank Menno Bruning, who represented one of the parties in this case, for his insightful lecture on the Supreme Court ruling that inspired this blog.