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Pre-contractual liability in the Czech civil law – Non-conclusion of contract so far in contractual negotiations when its finalization is deemed to be very likely

Pre-contractual liability in the Czech civil law – Non-conclusion of contract so far in contractual negotiations when its finalization is deemed to be very likely

The topic of this article is devoted to third merit of pre-contractual liability lying in non-conclusion of contract so far in contractual negotiations when its finalization is deemed to be very likely. This merit is defined in Section 1729 (1) of the NCC (Act No. 89/2012 Coll., the New Civil Code) and applies to cases when one party will withdraw from the contract negotiation immediately prior to finalization of contract, despite the fact that the other party had reasonable expectations that the contract will be concluded and this is without any justifiable reasons to withdraw.

This merit to some extent overlaps with the first merit specified in Section 1728 (1) of the NCC. While the first one holds a party liable for initiating or continuing in contractual relations without a will to close the deal, this merit protects the parties from sudden withdrawal from contract negotiations without justifiable reason. The first case applies to any phase of the negotiation process, while the second case can occur only during a negotiation phase when the closing of the deal is highly probable.

Legal liability for withdrawing from contract negotiations will be established only if the party withdraws without any justified reason. In other words parties cannot be held liable for terminating the contract negotiations, their liability will be established only if they allow the contracting process to evolve so far that the other party reasonably expects the contract to be concluded, but the counterparty withdraws without any qualified reason to do so.

The law does not define “justified reason”. Obviously as justifiable will be any circumstances, which were known to the other party or could have been reasonably expected to be.  This uncertainty may cause many interpretation issues. Justifiable reason for legal entity may be for example objection against the completion of the deal from public authorities, its employees or trade unions, etc. Questionable may be issue of more favourable competing offer for the relevant contract.

The term loss from lost contact can be also quite problematic and vague. Parties may question whether the loss from the lost contract is the actual profit the party would make if the contract had been concluded. In case of dispute, it would be reviewed if an alternative contract was possible to be concluded and in such case the profits could be compared. If the alternative contract would be less favourable, the loss would be the difference between the reached profit from the alternative contract and the expected profit from the lost contract. If there is no alternative contract signed to the lost contract, the calculation of the actual damage sustained may be a bit more problematic. In this case the harmed party needs to investigate what is the profit in similar cases, which may be difficult for certain contract types or for contracts concluded for indefinite period of time.

In case one of the contracting parties will commit the above described action, it shall incur legal liability to compensate damages to the other party. It will be necessary in each individual case to assess the amount of the damage, taking into consideration the principle of autonomous will of contracting parties. Section 1729 (2) of the NCC also caps the liability by the maximum amount of the loss from the lost contract in similar cases.

By Jiří Spousta & Magda Stárková

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