Case 6: An express lock-out agreement

place and the other party has started to rely on the contract being concluded.1 Even breaking off the negotiation process in the very last minute and without giving any reason does not usually give rise to liability.2

In exceptional cases, however, liability for breaking off negotiations may arise from the doctrine of culpa in contrahendo. The explanation for precontractual liability in these cases lies in (a) reasonable and legitimate reliance of the one party that the partner will not break off the negotiation process and (b) lack of a good cause for breaking off by the other party.3

According to the prevailing view, the reliance of a party to negotiations is reasonable if two conditions are fulfilled.4 First, the major points (the essentialia negotii)5 of the envisaged contract have to be already agreed upon. Secondly, the reliance on the successful completion of the negotiations has to be foreseeable for the other party. Examples of foreseeable reliance are anticipated performance or the incurring of expenses which are apparently of use only if the contract is concluded. If, however, the party did not act in reasonable reliance on the successful completion of the negotiation process, this does not automatically mean that the party breaking off is not liable at all. In such a case, a duty of care may exist and its breach may give rise to liability.

Once there has been reliance by the other negotiating party, only a good cause may justify the breaking-off, thereby excluding liability. As in the stage of negotiations there is no contractual duty that is binding on the parties; the requirements for a proper reason for breaking off negotiations have to be more relaxed than those allowing the cancellation of a contract that has already been concluded. Thus, not only mistake or subsequent impossibility, but also the mere fact that going ahead with the contract in question would be unreasonable for the party breaking off under the present circumstances, constitute proper reasons for the breaking-off.6

In the present case, an agreement is reached only on the price, but not on other outstanding matters such as the continued employment of the whole workforce. As not all major points are settled, B’s reliance

4R. Reischauer in Rummel, Kommentar zum ABGB I, Vor §§918–933 N. 17.

5E.g. the price of a good or the exact description of a service.

6OGH 28 May 1991, JBl 1992, 120.

164 precontractual liability in european private law

that a final agreement is going to be reached is not reasonable and legitimate. Consequently, A is not liable to B for breaking off the negotiations. Because of this focus that Austrian law puts for the existence of an agreement on the essentialia negotii, the specific wording of the stipulations – that A would not negotiate with third parties – does not matter.

However, had A and B agreed on all central issues, including price and employment of the workforce, then A’s liability would depend on whether B incurred any expenses, which A could foresee, as a result of his reliance on the contract becoming perfected. Here, it was definitely foreseeable for A that B would incur accountants’ and lawyers’ fees when investigating A’s business. In consequence, A would be liable under the doctrine of culpa in contrahendo, because B’s reliance was reasonable and legitimate. A could only avoid liability for breaking off negotiations with B if he succeeds in advancing a proper reason for his conduct. According to the OGH, a reason for breaking off is regarded as proper if continuing the negotiations with B would be clearly unreasonable in the given circumstances.

In the present scenario, however, even though A has found a better opportunity elsewhere, continuing with the negotiations with B may not be found to be clearly unreasonable. Consequently, it is doubtful whether there is a ‘proper reason’ for his conduct. Only if there is not would A be liable to B for culpa in contrahendo.

Nevertheless, even in the absence of an agreement on the central issues, A may be held liable under Austrian law if the judge finds that A’s conduct amounts to a breach of his precontractual duty of keeping his partner informed of any foreseeable obstacles to the conclusion of an intended contract. If generously construed, the wording of both stipulations (not to negotiate with third parties, and to negotiate with B in good faith and only break off for a proper reason) could give rise to such a duty to inform. As a result, A might be found to have had a duty to inform B about his negotiations with C. If the judge so finds, he would have to impose liability on A for breaching his duty to keep B informed under the (expanding) doctrine of culpa in contrahendo. In any case, A would only be liable for B’s reliance interest, that is, accountants’ and lawyers’ fees; recovery of expectation interest losses would not be available. The imposition of a duty to inform the partner of all circumstances that may endanger or prevent reaching a final agreement must not be excessively assumed. That makes the result of a claim in the present case unpredictable.

Whether another remedy would be available to B is doubtful. He might have a claim in tort only if A is to blame for a violation of §1295(2) ABGB. That means that A must have acted against bonos mores (good morals, Handeln gegen die guten Sitten). Breaking off negotiations after having agreed not to break them off for three months except for a proper reason comes close to a violation of bonos mores. As B has suffered pure economic loss, A’s clear intention to cause damage to B is a requisite for imposing liability on A pursuant to §1295(2) ABGB. This condition may not be fulfilled in the present case, and it may not be possible to prove it.

Another remedy that may be cumulated with culpa in contrahendo could be found in regular contractual liability. The agreement not to break off negotiations could be regarded as a separate contract between A and B on how to proceed with the negotiations and breaking off the negotiations within a period of three months, or without a proper reason,7 would then amount to a violation of this separate contractual stipulation. The primary remedy under Austrian law would be an order to continue negotiations. However, as the contract with C has already been concluded, this may be inappropriate, so B could claim damages. As B suffered loss because of his relying on A’s performance of the ‘contract to negotiate’, he is entitled to reliance damages, that is, the accountants’ and lawyers’ fees he incurred.

B might claim both remedies, that is culpa in contrahendo and contractual liability cumulatively, but in both cases he will receive no more than reliance damages. It is most likely that damages would be claimed on the basis of culpa in contrahendo, but this is not easy to predict with certainty.

Denmark

A has contractually bound himself not to negotiate with others and this ‘letter of intent’ is binding. A Danish court would probably reimburse B his lawyers’ and accountants’ fees but, as there was no contract to sell A’s business to B, not his expectation interest in such a contract.

A promise by A to negotiate in good faith and only to break off the negotiations for a proper reason would probably entail a duty to discontinue or break off the negotiations with B as soon as A gets a serious offer from C. A better offer is certainly a good reason for breaking off negotiations.

7Whether there is ‘a proper reason’ for breaking off the negotiations, as referred to by A, is not entirely clear.