In today’s world, it is not uncommon for contract negotiations to last for months. Several meetings, renegotiations and regular correspondence are necessary. It is not uncommon for costs to be incurred by one or both of the future contracting parties even before the contract is concluded. Notary and lawyer fees to set up the contract, the purchase of materials or the hiring of workers to prepare for the execution or just the workload of the contracting parties can lead to significant costs.

Of course, if the contract is executed as intended, these expenses serve their purpose. But if a contract that was thought to be certain does not materialize, they may become useless. A loss is incurred. The question regularly arises in retrospect as to who is responsible for the damage if one of the parties breaks off the contract negotiations without cause and thus prevents a contract that was believed to be secure from being concluded.

The Legal Regulations regarding Breaking Off Contract Negotiations without Cause

In principle, German law creates the possibility of liability for damages even though the final conclusion of the contract failed to materialize. Such liability arises according to the principles of “culpa in contrahendo” (c.i.c.).

A debt relationship does not arise exclusively through the conclusion of a contract; it can already occur through the commencement of contractual negotiations, the apparent initiation of a contract or other business contacts (§ 311 (2) German Civil Code- BGB). Such an obligation gives rise to a mutual duty to consider the rights or interests of the other party (§ 241 (2) BGB). The violation of such a duty can lead to claims for damages in the same way as the violation of a contractual obligation (§ 280 (1) BGB).

When does a Party become Liable for Damages?

The Federal Court of Justice has stipulated that the parties are generally entitled to refrain from concluding the contract until it has been completed. At this point, the parties make any related expenditures at their own risk. However, a party that rejects the conclusion of the contract without good cause can be found liable to reimburse damages in specific circumstances (BGH NJW 96, 1885). This liability arises only if the conclusion of the contract can be assumed to be certain after the negotiations and one of the parties to the contract has made expenditures in reliance thereon.

In practice, it is regularly disputed and difficult to prove when a conclusion of the contract is considered certain or when a party, in an attributable manner, raises confidence in its conclusion.

Therefore, a Letter of Intent (LOI) is often used, which is a declaration of intent by both parties that they intend to conclude a contract. The letter of intent proves that the parties are in negotiations. It usually contains a “no binding” clause, which states that the contents of the contract bind neither party. Still, it does not exclude the binding of consideration obligations and the binding of resulting compensation obligations.

To What Extent is the Breaching Party Liable?

In the next step, the question arises, for what is the party liable who culpably prevents the conclusion of the contract. According to the case law of the Federal Court of Justice (BGH NJW 81, 1673), the injured party can demand under § 249 (1) BGB to be placed in the position they would have been in without the damaging conduct of the other party. Consequently, they have a claim to their adverse interest, sometimes to compensation for wasted expenses or lost profits from other legal transactions that were rejected in reliance on the conclusion of the contract.

In contrast, they have no claim to a positive interest. This “positive interest” would include all profits that would have been earned if the legal transaction had taken place.

It is important to note that the breach of duty does not consist in the fact that the contract does not come into effect but in the fact that false confidence was aroused, on which expenditures were made that are now useless. Thus, the tortfeasor cannot demand to be put in the same position as if the contract had been concluded. Still, they can demand compensation for the damage caused by the arousal of false confidence in the conclusion of the contract. This is known as the loss of confidence.

Conclusion

In conclusion, it remains to be said that although each party has the choice, even up to the last second, whether or not to enter into a contract, the arousal of confidence in a safe conclusion of a contract may, however, oblige the other party to consider the interests of the other party in individual cases.

If you find yourself in a similar case or need help assessing possible liability under c.i.c., the lawyers at Brookes and Partners are at your disposal nationwide with many years of experience in cases involving all aspects of pre-contractual obligations and liability.