Pre-contractual liability for failure to conclude a contract

2020 | roadmap

Sections 1728 and 1729 of the Civil Code expressly stipulate the obligation to compensate damage caused by negotiating a contract without the intention to conclude it and by terminating contractual negotiations without just cause. This article examines how the courts currently interpret these provisions.

An example of potential pre-contractual liability is when the seller (developer), in response to specific demands from the interested buyer, performs landscaping work, prepares architectural designs and procures land-use decisions. To save time and costs, the contracting parties do not agree on the terms of sale of the land under a binding preliminary purchase contract, but only in a not entirely transparent e-mail communication or in the form of a (mostly) non-binding letter of intent.
If the interested buyer terminates the contractual negotiations without a reasonable explanation and the developer's investments (up to hundreds of thousands of euros) do not cause the value of the land to appreciate and have no benefit for another buyer, the developer will ask if the interested buyer already knew beforehand that it would not conclude the purchase contract and whether it had just cause to terminate the negotiations.
This situation may be subject to Section 1728 of the Civil Code, under which "everyone may conduct contractual negotiations freely and shall not be liable for a failure to conclude a contract unless it commences or continues such contractual negotiations without intending to conclude the contract."
The fundamental question in the application of this provision is at what point the interested party (in the above example the buyer) discovered that it would not intend to conclude the contract. The fact that a bank refused to provide acquisition financing for the project or that the interested party has entered into a similar "replacement" contract with another entity will probably not suffice to prove the intention of the interested party. Moreover, the party interested in concluding a contract can (usually quite legitimately) defend itself by arguing that it only just ascertained the benefits of the contractual terms for the other party (in the context of the ongoing contractual negotiations).
The above provision is followed by Section 1729 of the Civil Code, under which "if the parties' contractual negotiations go so far that the conclusion of the contract is highly probable, the party who, despite the legitimate expectation of the other party in the conclusion of the contract, terminates the contractual negotiation without just cause, is deemed to be acting dishonestly."
This provision of the Civil Code reflects the case law to Section 415 (general obligation to prevent damage) of the previous Civil Code (Act No. 40/1964 Coll.), which did not explicitly regulate pre-contractual liability.
The first condition that must be satisfied to consider liability for damages is that the conclusion of the contract must appear highly probable (when objectively assessed) to the injured party. This is possible at the earliest when at least the essential elements of the contract have been agreed. In this context, the case law also often refers to the requirement for the good faith of the victim. This is excluded in cases where the injured party knew of the other party's intention not to conclude the contract or itself did not intend to conclude the contract.
Another condition for liability under this provision is the absence of a just cause to terminate the negotiations. The courts interpret the term "just cause" quite broadly, i.e. to the detriment of the injured party. An interpretative rule is applied according to which the party interested in the conclusion of a contract is not, in principle, liable for damage caused by the non-conclusion of the contract and the occurrence of liability for damage is an exception to this rule. In addition, the Supreme Court of the Czech Republic stated in its judgment file no. 25 Cdo 856/2018 of 30 October 2018 that dishonest conduct cannot be inferred simply from the fact that the acting party did not inform the other party of the reasons for terminating the contractual negotiations.
Regarding the extent of the damages to be paid, the courts generally take the view that the normal (operating) costs which the contracting party must incur, irrespective of whether the intended contract is finally concluded, cannot be claimed. As a rule, only damage incurred as a result of the specific requirements of the party that ultimately refused to conclude the contract will be paid.
As can be seen from the above, it can be very difficult in practice to infer liability for damage caused by the non-conclusion of a contract. However, the occurrence of damage can in most cases be prevented by the timely conclusion of a letter of intent or other appropriate agreement.