Prior to 1 January 2014, the Civil Code did not recognise the concept of pre-contractual liability (culpa in contrahendo). Nevertheless, certain legal deliberations on possible pre-contractual liability appeared in practice, but lacked support in law. In some respects, the new Civil Code effective from 1 January 2014 („NCC”), makes negotiating parties responsible for their actions in the contracting process and also establishes rules by which the parties must be governed. We will try to explain the real impact of these rules in the contracting process in this article.
1. Free contractual negotiations
The basic rule expressed in Section 1728 NCC is that “anyone may freely conduct negotiations for a contract and is not liable for the fact the contract is not concluded”. Therefore, as long as we are merely negotiating a contract and have not given clear indication that we are headed towards its conclusion (see point 3 below), we cannot be held liable for a failure to conclude any contract.
2. Pretended contractual negotiations
However, there is an exemption to the above rule, which apples if either party commences or continues in initiated negotiations for a contract with no intention of actually concluding a contract. This concerns cases where one of the parties needs to “buy time” for the conclusion of a contract with another competitor, or simply “waste the time” of the competition in the context of the competitive battle. In these cases, the party that led the other party on, will be liable for damages incurred as a result (costs incurred in connection with contractual negotiations – travel, expert reports, etc.).
In practice, however, it will be very difficult to prove the party’s intent not to conclude a contract and simply make it appear so. Therefore, the frequent enforcement of this liability cannot be expected.
3. Failure to conclude a contract contrary to the expectations of the other contracting party
As mentioned above (see point 1 above), the basic rule of contracting is that a party may conduct negotiations on a contract, without being in any way liable for these negotiations, unless it acted without any intention of concluding a contract (see point 2 above).
However, it is important to distinguish a situation in which the parties are merely in negotiation, but a final agreement is not reached. However, if negotiations have progressed to a point that the parties have already agreed on all, or most of the formalities of the undertaking and are in the phase “right before signing”, then this is a different situation, where pre-contractual liability may arise under the NCC.
If one of the parties ends negotiations for the conclusion of the contract at this stage (when the conclusion of the contract appears highly probable) (i) without a just reason and (ii) despite the other party’s legitimate expectations, then under Section 1729 NCC, it has acted dishonestly and the other party is entitled to damages incurred as a result of a failure to conclude the contract.
Limitations. This entitlement is limited, however, to the degree corresponding to the loss from contracts not concluded in similar cases, and does not constitute the loss from a failure to conclude the specific contract (namely, the one being negotiated by the parties).
In light of the above, major problems with the enforcement of pre-contractual liability can be expected, and it will be the task of case law to resolve these problems.
A particular problem can be expected with the interpretation of the term “just reason”, which would justify the party’s refusal to sign the contract without the risk of liability, even at the last minute.
In our opinion, this reason could be, for example, discovering the insolvency or bankruptcy of one of the parties. We also believe that the initiation of criminal proceedings against the other party for a crime even indirectly related to the subject of the contract could be such a reason. In the case of a natural person, the diagnosis of a serious, incurable disease, which could jeopardise the fulfilment of the contract by one of the parties as a result, could also be considered a just reason.
The real question, however, will be whether the fact one of the parties receives a better offer for the conclusion of a contract on the same or similar subject can be considered as a just reason. In the opinion of JUDr. Hulmák published in the comments on the NCC, the answer is no, although it must be pointed out that not a single argument is given to support this view. In contrast, in our opinion, the other party cannot reasonably expect the conclusion of a contract in a situation where there is a better offer on the market.
We can also expect problems with the interpretation of the stage of contracting, i.e. whether negotiations have already reached the stage where the conclusion of the contract is “highly” probable. It is evident that only a certain probability is not sufficient, and the plaintiff will have to prove circumstances indicative of high probability, which may be very difficult.
In addition to the plaintiff’s difficult situation when seeking entitlement under pre-contractual liability, the difficulty of proving the amount of “loss from contracts not concluded in similar cases” should also be pointed out, which will probably require an expert report, whose conclusions will doubtlessly be contested by the other party in the event of a dispute.
4. Duty to provide information and duty of nondisclosure
An analysis of contracting rules in relation to the duty to provide the other party with relevant information (§ 1728 (2) NCC) and the duty of nondisclosure of confidential information (§ 1730 (2) NCC) is beyond the scope of this article.
However, major interpretation problems can be expected even in these cases, especially with regard to the extent of the duty to provide information, respectively what you are required to tell the other party and, on the other hand, the problematic interpretation of the term “confidential information (data)”.
5. Conclusion
In view of the above, it can be concluded that the new legislation seeks to instil certain responsibility in contracting parties in the pre-contractual phase and set certain rules for this phase of the contracting process.
On the other hand, one cannot help notice that the enforcement of compliance with these rules will be a very difficult task for the plaintiff.
It can therefore be expected that contracting parties will not want to undergo such disputes. At least until case law sheds some light on the plaintiff’s uncertain position. However, this will require a determined plaintiff willing to undergo arduous litigation with an uncertain result.
For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.