No. IV.8.1 - Principle of pre-contractual liability

(a) A party is free to negotiate a contract and is not liable for failure to reach agreement with the other side.

(b) A party who breaks off contract-negotiations in bad faith is liable for the losses caused to the other party ("culpa in contrahendo").

(c) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party while leaving the other party under the justified assumption that a contract would be concluded. The same applies if a party insists on contract terms so clearly unreasonable that they could not have been advanced with any expectation of acceptance, provided that there is some demonstrable advantage to be gained for that party by avoiding the contemplated transaction.

1 Unless the parties have agreed otherwise, e.g. in a renegotiation clause, the fundamental Principle of freedom of contract includes a party's right to say "no", i.e. to reject a party's offer or to break off negotiations at any time. However, even the Principle of party autonomy must be balanced with the overriding Principle of good faith. Subsection (c) lists two cases in which breaking off of negotiations is against good faith and may make that party liable for losses incurred by the other side because of the breaking off of the negotiations.

2 In the first scenario, the party breaking off the negotiations has signalled to the other side before or during the negotiations that the contract will be concluded. This marks the "point of no return" after which the party may not simply say "no" and quit the negotiation table. The text requires that the expectation of the other side that the contract will be concluded is "justified". This requires an objective test, applying the standard of reasonableness. The question must be asked whether it was reasonable for the one party under the circumstances of the case and taking into account the conduct and statements of the other side to assume that the contract will be concluded, i.e. to rely in the conduct of the other side.

3 In the second scenario, one party played a game with the other side, misusing the negotiations in order to gain some advantage other than the advantage expected from the potential contract, without revealing that intention to the other side. There are two important qualifications for this test to be met. First, the contract terms suggested by that party must be "clearly" unreasonable. This means much more than that the suggested contract terms favour the party who suggests them. Rather, they must be obviously unreasonable from an objective perspective. Secondly, the advantage that the party wants to gain by breaking off the negotiations must be "demonstrable", i.e. can be easily proven.

Please cite as: "Commentary to Trans-Lex Principle ,"
Arbitral Awards
ICC Award No. 5953, Clunet 1990, at 1056 et seq.
ICC Award No. 6519, Clunet 1991, at 1065 et seq.
Court Decisions
Attorney-General of Hong Kong v. Humphreys Estate Ltd. [1987] 1 A.C. 114
BGH MDR 1961, 49 et sq.
BGH NJW 1967, at 2199
BGH, MDR 1961, 49
BGHZ 92, 164 et seq.
Crabb v. Arun District Council [1975] 3 All E.R. 865.
Fonderie Officine Meccaniche Tacconi SpA v Heinrich Wagner Sinto Maschinenfabrik GmbH (HWS), European Court reports 2002 p.  I-07357
Goodman et al. v. Dicker, 169 F.2d 684 (D.C. Cir. 1948)
Hoffmann v. Red Owl Stores, Inc., 133 N.W. 2d 267 (Wis. 1965)
OLG Köln NJW-RR 1995, at 29 et seq.
Waltons Stores (Interstate) Ltd. v. Maher (1988) 62 ALJR 110.
Black, Henry Campell, Black's Law Dictionary, 6th ed., St. Paul 1990
Blessing, Marc, Das neue internationale Schiedsgerichtsrecht der Schweiz - Ein Fortschritt oder ein Rückschritt?, in: Böckstiegel (ed.), Die internationale Schiedsgerichtsbarkeit in der Schweiz (II), Cologne, Berlin, Bonn, Munich 1989, at 13 et seq.
Bonell, Michael Joachim, An International Restatement of Contract Law, 2nd ed., New York 1997
Bonell, Michael Joachim, Vertragsverhandlungen und culpa in contrahendo nach dem Wiener Kaufrechtsübereinkommen, RIW 1990, at 693 et seq.
Domingo, Ortega, Rodriguez-Antolin, Zambrana, Principios de Derecho Global, Navarra, 2006
Ehricke, Ulrich, Zur Einführung: Grundstrukturen und Probleme der lex mercatoria, 30 JuS 1990, at 967 et seq.
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Farnsworth, Allan, Contracts, 2nd ed., Boston, Toronto, London 1990
Farnsworth, E. Allan, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 CLMLR 217
Friedl, Birgit, Haftung bei Abbruch von Vertragsverhandlungen im deutschen und anglo-australischen Recht, 97 ZVglRwiss 1998, at 161 et seq.
Gehrlein/Sutschet, in Beck'scher Online Kommentar (eds: Bamberger/Roth),  Comment on § 311, para. 62
Hartkamp, Arthur, Judicial Discretion Under the New Civil Code of the Netherlands, 40 Am.J.Comp.L. 1992, at 551 et seq.
Hondius, Ewoud H., Precontractual liability: reports to the XIIIth Congress, International Academy of Comparative Law Montreal, Canada, 18 - 24 August 1990, Deventer 1991
ICC (ed.), Formation of Contracts and Precontractual Liability, Paris 1993
Kahn, Philippe, La Vente Commerciale Internationale, Paris 1961
Kühne, Günther, Der Vertrauensgedanke im Schuldvertragsrecht, vergleichende Betrachtungen zum deutschen und anglo-amerikanischen Recht, 36 RabelsZ 1972, at 261 et seq.
Kühne, Günther, Promissory Estoppel and Culpa In Contrahendo, in: 10 Tel Aviv University Studies in Law, Tel Aviv 1990, at 279 et seq.
Küpper, Wolfgang, Das Scheitern von Vertragsverhandlungen als Fallgruppe der culpa in contrahendo, Berlin 1988
Kessler, Friedrich/ Fine, Edith, Culpa in Contrahendo, Bargaining in Good Faith and Freedom of Contract: A Comparative Study, 77 Harv.L.Rev. 1963/64, at 401 et seq.
Knapp, Charles L., Enforcing the Contract to Bargain, 44 NYULR 673 (1969)
Lando, Ole, When Will a Person be Liable or Bound When Negotiating a Contract?, in: And og rett - Festskrift til Birger Stuevold Lassen, Oslo 1997, at 623 et seq.
Lorenz, Stefan, Die culpa in contrahendo im französischen Recht, 2 ZEuP 1994, at 218 et seq.
Lutter, Marcus, Der Letter of Intent, 3rd ed., Cologne, Berlin, Bonn, Munich 1998
Marrella, Fabrizio, La nuova lex mercatoria, Principi Unidroit ed usi di contratti des comercio internazionale, CEDAM, Tratto di dritto commerciale e di dritto publico dell‘economia, Volume 30, Padova 2003
Medicus, Dieter, Schuldrecht I, 9th ed., Munich 1996
Mustill, Michael, The New Lex Mercatoria: The First Twenty-five Years, Arb.Int'l 1988, at 86 et seq.
Nirk, Rudolf, Rechtsvergleichendes zur Haftung für culpa in contrahendo, 17 RabelsZ 1953, at 310 et seq.
Omalu, Mirian Kene, Precontractual Agreements in the energy and natural resources industries - legal implications and basis for liability (civil law, common law and islamic law), in Journal of Business Law, 2000, Jul, 303-331
Osman, Filali, Les Principes Généraux de la Lex Mercatoria, Paris 1992
Rabello, Alfredo Mordechai, La Théorie de la "Culpa in Contrahendo" et la Loi Isreaélienne sur les Contrats 1973, R.I.D.C.1997, at 37-73
Sandrock, Otto / Ningelgen, Susanne/ Schmidt, Michael, Schadensersatzansprüche wegen gescheiterter Vertragsverhandlungen nach mexikanischem Recht, 91 ZVglRWiss 1992, at 61 et seq.
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National Legislation
Bürgerliches Gesetzbuch - German Civil Code
Italian Codice Civile
Principles / Restatements
Principles of European Contract Law - PECL
Principles of the Existing EC Contract Law (Acquis Principles)
Contract Clauses
1. Clause Expressly Excluding Pre-Contractual Liability
Sales & Purchase Contract

(...) due to the non-binding nature of this MOU {Memorandum of Understanding}, neither of the parties is obligated at any time, either during the Term of this MOU or thereafter, to continue to discuss or negotiate with regard to any portion or all of the matters or activities which form the subject(s) of this MOU, and neither party is obligated to conclude any further written agreements. Neither party is obligated to refrain from any independent discussions or agreements with third parties with respect to the subject(s) of this MOU
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