By Dr Carlos Bugeja - Partner
It is an impression had by many that at the negotiation stage, and until a final contract is properly signed, there is absolutely no obligation on a party towards the other. Many think that they can just retract from negotiations, and that will be it. There is a widespread idea that during negotiations, one can act in bad faith, and suffer no consequences, just because ‘no contract has been signed’.
The truth cannot be more different than this. At negotiation stage, parties have some obligations at law, and may suffer consequences from breaching these obligations. In the legal world, the rules governing the negotiation stage are regulated under the principle of ‘precontractual liability’, or ‘culpa in contrahendo’. This doctrine acknowledges a duty of care on the negotiating parties, not to lead each other to detriment before a contract is formally concluded.
Precontractual liability is the legal discussion on how and when one party can be held liable for costs incurred by the other party preliminary to, or during negotiations, when negotiations fail.
For some time, prior to the famous judgment of Av. Peter Fenech noe vs Dipartiment tal-Kuntratti (finally decided by the Court of Appeal on 29 April 2016), our courts were reluctant to accept the existence of such a doctrine under Maltese Law, aided by the fact that there was no codified provision like for instance in the Italian, Belgian, and German laws. What was always accepted however was that there cannot be any talk of precontractual liability unless there is proof of bad faith of the party against whom the suit is brought. That is the first and most vital element. Secondly, the lamenting party must also prove that he or she made certain expenses in good faith, in the expectation of the conclusion of the formal agreement which the other party capriciously and in bad faith terminated prior to its conclusion.
An example of when precontractual liability may be found is when the potential buyer of property makes expenses (for example, to prepare architectural designs and applies for a planning permit) in anticipation of the conclusion of a promise of sale agreement, only to find out later that the seller never had the intention to sell the property to him, but had simply deceived him into thinking he would, for another nefarious reasons of his.
This doctrine sits somehow awkwardly between two very important principles of continental contract law; first, that every individual enjoys contractual freedom, that is a liberty to choose whether or not to enter into contract, with whom to contract, and what stipulations to agree upon, and second, that contracts are to be concluded in good faith. It does so buy allowing an ‘exception’ to contractual freedom only when there is no exercise a good faith. It makes it sufficiently difficult to prove so not every retracted potential agreement may trigger an action, thus retaining a measure of contractual freedom and the liberty of parties to negotiate without fearing liability, if they’re doing so in good faith.
The potential success of a suit under this doctrine very much depends on these two elements, and it is no easy feat for a plaintiff to prove his case well enough to get a favourable judgment, since it is commonplace in business for negotiations to fail. The first element (the bad faith) is most difficult to prove, as our courts have stated that ‘l-aġir ta' min waqqaf innegozjati irid ikun ekwivalenti għal dolus’.
Furthermore, our judgments speak on ‘negative interest’, in the sense that the remedy afforded to the plaintiff would not be what he would have ‘gained’ if the contract would have been concluded, but rather what he ‘would not have lost’ had the contracted been finalised. While at first this may look like a play on words, in reality, it may make a difference on the damages to be liquidated.
The cases involving a precontractual liability action are not commonplace under Maltese Law; as a result, the development of this doctrine is still at a relative early stage, and one hopes to see an evolution in legal thought which is reflective of the ever-changing negotiations traits and styles in private and commercial transactions alike.
Dr Carlos Bugeja is a Partner at PROLEGAL Advocates.
Disclaimer: This article is not to be construed as being legal advice, and is not to be acted on as such. Should you require further information or legal assistance, please do not hesitate to contact Dr Carlos Bugeja at carlos@prolegal.mt.