- •Contents
- •Preface
- •Contributors
- •Abbreviations
- •General abbreviations
- •Introduction and Conclusions
- •Case studies: abbreviations by country
- •Austria
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •From the common law to the civil law: the experience of Israel
- •Note on translations of foreign language statutory provisions
- •1 Introduction
- •A. The Common Core Project
- •b. Method
- •2. Methodological criticism
- •a. Functionalism
- •b. Neutrality, scientific method and the politics of comparative law
- •B. The precontractual liability project
- •1. General
- •2. The questionnaire
- •a. Precontractual liability
- •b. Legal formants
- •3. The cases
- •4. The national reports
- •2 Case studies
- •Case 1: Negotiations for premises for a bookshop
- •Case 1
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 2: Negotiations for renewal of a lease
- •Case 2
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 3: Mistake about ownership of land to be sold
- •Case 3
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 4
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 5: A broken engagement
- •Case 5
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 6: An express lock-out agreement
- •Case 6
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 7: Breakdown of merger negotiations
- •Case 7
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 8: A shopping centre without a tenant
- •Case 8
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 9: Breakdown of negotiations to build a house for a friend
- •Case 9
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 10: Public bidding
- •Case 10
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 11
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 12: Confidential design information given during negotiations
- •Case 12
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •Case 13
- •Discussions
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •3 From the common law to the civil law: the experience of Israel
- •The dilemma
- •Israeli law under the common law: no rule of precontractual liability
- •Section 12 of the Contracts Law
- •Rule of precontractual liability
- •Civil law impact
- •Section 12 and other grounds of precontractual liability
- •Nature of liability under section 12
- •Evaluation of section 12
- •Analysis of cases
- •Case 1 Negotiations for premises for a bookshop
- •Case 2 Negotiations for renewal of a lease
- •Case 3 Mistake about ownership of land to be sold
- •Case 5 A broken engagement
- •Case 6 An express lock-out agreement
- •Case 7 Breakdown of merger negotiations
- •Case 8 A shopping centre without a tenant
- •Case 9 Breakdown of negotiations to build a house for a friend
- •Case 10 Public bidding
- •Case 11 A contract for the sale of a house which fails for the lack of formality
- •Case 12 Confidential design information given during negotiations
- •From a standard to rules: two categories of bad faith
- •Misrepresentation
- •Broken promises and frustrated expectations
- •Was there a price to be paid for the move?
- •4 A law and economics perspective on precontractual liability
- •The problem
- •Law and economics models of precontractual liability
- •An economic perspective on eight hypothetical cases
- •Case 1 Negotiations for premises for a bookshop
- •Case 2 Negotiations for renewal of a lease
- •Case 3 Mistake about ownership of land to be sold
- •Case 5 A broken engagement
- •Case 6 An express lock-out agreement
- •Case 8 A shopping centre without a tenant
- •Conclusion
- •5 Conclusions
- •The problem of precontractual liability
- •Peculiarity of the precontractual phase
- •Imposing liability in the precontractual phase: balancing the arguments
- •The negotiations: a legally significant relationship?
- •Expectation, reliance and shifting the economic risk of the negotiations
- •Placing the liability: contract, tort or tertium quid?
- •Two (extreme?) illustrations: English law and Dutch law
- •English law: the most restrictive?
- •Dutch law: the most expansive?
- •The range of solutions: similarity and difference in particular cases
- •Similarities of result?
- •Differences of result
- •Drawing together the threads
- •Different techniques in dealing with the precontractual phase
- •Influence of other legal practices and policies
- •Commercial context and risk allocation
- •Superficiality of similarity and difference in results
- •A common core?
- •Bibliography
- •1. General bibliography, introduction and conclusions
- •2. Case studies: bibliography by country
- •Austria
- •Denmark
- •England
- •Finland
- •France
- •Germany
- •Greece
- •Ireland
- •Italy
- •Netherlands
- •Norway
- •Portugal
- •Scotland
- •Spain
- •Sweden
- •Switzerland
- •3. From the common law to the civil law: the experience of Israel
- •Index
4A law and economics perspective on precontractual liability
eleonora melato and francesco parisi
The problem
Negotiations are the natural prelude to a binding agreement. During negotiations, parties evaluate contractual opportunities and define the terms of a mutually profitable transaction with an informal exchange. They speak with each other and communicate their respective interests and expectations regarding the potential transaction. During these interactions, the parties often preserve a certain degree of ‘freedom of negotiation’.1 Before entering into a binding contract, parties retain some freedom to change their mind, to negotiate with other prospective parties, to acquire information to verify the profitability of the proposed transaction, and to hold out if changes in the circumstances or some other aspect of the transaction make it unprofitable. A necessary consequence of the parties’ freedom of negotiation is the lack of binding force of their manifestations of intent. Expressions of intent during the negotiation phase do not bind the parties and generally cannot be used to obtain performance before a contract is finalised. Negotiations enable parties to test the feasibility of a mutually beneficial transaction.
During negotiations, as information is gathered and the prospective contract begins to take shape, it may become reasonable for parties to make some reliance investments. From an economic perspective, these reliance investments may indeed be beneficial (for one party or for both) because they can increase the value of the contract, if the parties enter into one.2 While potentially increasing the net private surplus
1E.A. Farnsworth, ‘Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations’ (1987) 87 Columbia Law Review 217, 221.
2R. Craswell, ‘Offer, Acceptance, and Efficient Reliance’ (1996) 48 Stanford Law Review 481, 495.
431
432 precontractual liability in european private law
from the transaction, these ‘relation-specific investments’, however, always involve some risk. Reliance investments increase the private loss of the investing party when the negotiations fail and do not yield to a binding contract. Furthermore, reliance investments create an opportunity for opportunistic bargaining by the other party.3 For example, it is possible that one party, having observed the investment of the other, may try to appropriate part of the surplus by asking for a greater price.
For each party, a reliance investment increases both the expected benefits and the expected costs of the transaction. Absent precontractual liability, the parties are free to retreat from negotiations, without legal consequence, at any time before entering into a contract. A regime of no precontractual liability puts the entire risk of losing reliance investments on the parties, thus creating an incentive to under-invest in reliance.
On the other hand, imposing strict precontractual liability, imposing liability on a party whenever that party retreats from an initiated negotiation, will probably lead to a moral hazard problem, because the other party, fully insured against the risk of unsuccessful bargaining, will not have any incentive to restrain its reliance investment. This may lead to an excessive reliance.4 Legal rules for precontractual liability should balance the need for parties’ freedom during the contract negotiation and the creation of incentives for optimal levels of reliance.
Economists may conceptualise the reliance investment decision as a cost-benefit analysis. The level of optimal investment can be determined by applying something analogous to the ‘Learned Hand’ test, generally used by law and economics writers for defining the efficient level of precautions in a negligence action. Briefly, investing is efficient whenever the potential benefit (weighted by the probability that the contract will be formed) exceeds the potential loss (weighted by the probability that the contract will not be formed).5
3Ibid. p. 490.
4This distortion will occur no matter what is the measure of damages required by the rule. Both expectation damages and reliance damages will create suboptimal incentives for investment, because the party will internalise the benefit of the investment but not the costs, which are fully borne by the retreating party.
5Hence, optimal reliance occurs where pB ¼ (1–p)L. The opportunity of using a Learned Hand type test in this context is generally recognised by law and economics scholars. See, e.g., Craswell, above n. 2, p. 491; A. Katz, ‘When Should an Offer Stick? The Economics of Promissory Estoppel in Preliminary Negotiations’ (1996) 105 Yale Law Journal 1249, 1271.