Enough, I’m Done! – The Fine Line Between Negotiation and a Binding Contract?

Enough, I’m Done! – The Fine Line Between Negotiation and a Binding Contract?

Yair Aloni, Adv.
February 2, 2023

A young couple is interested in purchasing an apartment in the city center. Equipped with a lawyer, the couple begins to negotiate the commercial terms with the sellers. A day later, the parties already come to an understanding on most of the principle issues, set a date for signing and agreed that technical matters that remained open will be closed "on the spot". A day before the expected signing date, they announce that they changed their mind and seek to "withdraw" from the negotiations. Are the couple to be forced to purchase the apartment or compensate the sellers under such circumstances? Where lies the fine line between a "draft" and a binding contract?

A binding contract is concluded where a mutual consent regarding a particular offer has arisen between the offeror and the offeree. The main test is whether there is a meeting of wills between the parties and a mutual consent to establish the relationship in a binding contract. For a contract to be considered binding, it should also include the main details essential to the transaction (such as: details of the property, the nature of the transaction, the consideration, the dates of payment and delivery of possession and division of responsibility for payment of levies and taxes). When it comes to real estate transactions, the law also states that the contract must be in writing as a pre-condition for its validity. However, the parties’ signature, or even signature of one of them, is not a necessary an essential condition and in some cases, may be overcome.

In general, as long as no binding agreement is signed, each party may withdraw from the negotiations at any stage. However, the obligation to conduct negotiations in an acceptable manner and in good faith also applies to the manner of withdrawal . The answer to the question of whether the withdrawal was done in 'good faith' or not, is dynamic and may changes from case to case, inter alia, considering the stage the negotiations are and the reasons for the withdrawal. The closer the parties are to signing, the more likely it is that one party will expect the contract to be executed, and therefore it is necessary to present a more justified and based reason for withdrawal. Thus, for example, in the case heard in September, 2017, it was held that although the withdrawal from the agreement was made only two hours before the date set for the signing of the contract, it was legitimately based as it arose from substantive considerations relating to the loss of trust in the other party and due to the impression of his lack of seriousness.

Sometimes a "disappointed" party may demand to consider the final draft that was sent as a binding contract even though it was not signed at all. Thus, for example, in a case heard in July, 2019, the Court held that a contract was made to sell an apartment in Ramat Gan even though it was not signed by the purchasers. In that case, no less than nine contract drafts were exchanged between and several deadlines were set for the signing, which were repeatedly postponed by the purchasers. In addition, during the negotiations, the purchasers' lawyer confirmed in an email that "everything is ready" for signing the contract and in the last draft that was exchanged between the parties was “clean” and did not state that it was a "draft for negotiation purposes only, only a signed contract will bind the parties".

However, in another case heard in July, 2013, in which the parties' signatures on the contract were also absent, the Court held that it was not shown that the parties intended to view the draft as a binding contract. In that case, it was noted on the draft in a clear and unambiguous way, that in the absence of a signature on the contract, it would not be considered as binding and would be considered as "draft for negotiation purposes only". In another case heard in January, 2023, it was held that although the contract was detailed and included all the main and essential issues for the contract, the negotiation phase was not yet over. In that case, a one-day negotiation was conducted, and in this case as well, it was noted on the draft that it was subject to approval (which was not given at that time).

In general, the remedy that will be given in case of breach of the obligation to act in good faith in negotiations is "compensation for the damage caused due to the negotiations". However, in exceptional cases, the Court may grant compensation in the amount of the profit that would have been incurred if the agreement was enforced or even consider the draft as a binding contract and order its enforcement. In light of this, it is highly recommended to be cautious before making rash or impulsive decisions without receiving a legal advice from a lawyer specializing in the field of contracts and negotiations and it is also recommended that a professional will exclusively manage the correspondence with the negotiating party in order to minimize as much as possible "legal accidents" of any kind.