In many business alliances, the negotiation of the terms and conditions of an agreement can take a significant amount of time. To avoid delays, one party may begin development activities—such as creating technology, software, or products—before the formal execution of the alliance agreement. However, if negotiations ultimately fail and the alliance is not formed, these development efforts may become futile. Can the party that started development before the agreement was signed claim reimbursement for its costs from the other party?

General Principle

As a rule, costs incurred before the formal execution of a business alliance agreement cannot be charged to the other party. Without a legally binding agreement in place, there is no enforceable obligation for cost-sharing.

Exceptions Considered by Japanese Courts

In certain circumstances, Japanese courts may require the other party to bear part of the development costs. These situations typically involve the following factors:

1. Preliminary Agreement at the Working Level

If the general outline of the alliance was agreed upon at the working level, and one party initiated development based on discussions with the other party’s employees, this may influence the court’s decision.

2. Knowledge and Tacit Approval by the Other Party

If the other party was aware of the development activities, did not raise objections, and implicitly benefited from or encouraged the early start (e.g., to expedite the potential alliance), the court may deem it reasonable to allocate a portion of the costs to them.

Best Practices to Mitigate Risk

To avoid disputes and financial losses arising from this situation, consider the following measures:

1. Execute a Letter of Intent (LOI) or Memorandum of Understanding (MOU)

Before commencing development, enter into an LOI or MOU that explicitly outlines:
– Whether development costs will be shared if the alliance is not finalized.
– The scope of activities permitted before the agreement is signed.
– Any conditions for reimbursement or cost allocation.

2. Obtain Written Acknowledgment

Ensure that the other party acknowledges and agrees to the commencement of development activities in writing. This can help clarify expectations and avoid misunderstandings.

3. Define Cost-Sharing Provisions Early

Even if a formal agreement is pending, preliminary documents can include provisions specifying how costs will be handled if the alliance is not executed.

Disclaimer:
This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.