Authored By: Amal Machaka
Filière Francophone de Droit - Lebanese University
Abstract
Among the contract management stages, the pre-contract phase is crucial. Indeed, during this phase a general idea starts to germinate and it should not be taken lightly, given that acting in good faith during the pre-contractual responsibility phase is of great relevance. Under the principle of freedom of contract, the pre-contractual stage refers to the time prior to the conclusion of the contract, so the parties contact each other to conclude a contract, and each impact the rights and interests of the other parties by their act or omission. Thus, mastering pre-contractual obligations when negotiating multi-jurisdictional agreements is essential to ensure that your deal is a commercial success. This article sheds light on the context of pre-contractual liability, while aiming to compare the different functions of the principle of good faith and also to point out the main parallels and contrasts between Common Law and Civil Law systems in pre-contractual duties. Furthermore, this comparative analysis explores some international instruments developed in business transactions to facilitate the conclusion of an international contract under negotiation and to highlight the need for a more unified approach to pre-contractual liability in order to overcome the cross-border negotiations challenges.
Introduction
Pre-contractual responsibilities are arguably of the utmost importance in the realm of international business law because they are responsible for directing business transactions on a global scale and play a role in conducting the negotiating phase and the formation of contracts. It is possible that the absence of a particular legal criteria during the pre-contractual period leads to unfair results for bargaining parties. As a consequence, the relationships between the parties would need to be regulated. Perhaps the reasons that had led to the lack of legal regulation refer to the lack of need for negotiation in the past because of the simplicity of the contract. At present, the negotiations focus on operations marked by technical and legal complexities, involve serious risks for its parties and have significant financial values at the international economic level. At this time, globalization influenced all activities, the volume of trade increased, then it is no longer admissible to ignore the first stage that precedes the conclusion of a contract. Throughout this phase, a negotiator has to confirm seriousness, good faith and show a lot of guarantees considering that negotiations may continue for months or years and even may end without leading to something. As a result, most legal systems recognized the need to govern the parties’ relations at an early stage of contract formation. However, legal systems differ in how to regulate this relation. Hence, trans-national principles need to be set to govern international contracts. For instance, many efforts were made at the international level trying to harmonize the Common Law and Civil Law legal systems. Though, the desire of every system to emphasize its sovereignty and to be the basis and guideline for the imported legal systems especially in third world countries created a competition between civil code system, also known as romano-germanique, prevailing in the European continent and the Anglo-Saxon system prevailing in the Common Law countries. Besides, there are countries influenced by the Islamic law such as the laws of some Arab countries. As for comparing the responsibility prior to the conclusion of the contract in different legal systems, how does the international comparative law deal with a complex context in which the principle of good faith plays a role in confirming the liability and how international legal instruments help overcoming eventual legal gaps?
Background
As a matter of fact, navigating the maze of legal systems in international commerce can be quite difficult, particularly when two basic principles intersect in an ever-changing environment: the principle of freedom and the principle of good faith. Through the fulfillment of the obligation to negotiate in good faith, requiring parties to act fairly and transparently, social fairness and loyalty in commercial relationships are strengthened, which contributes to the maintenance of the integrity of contractual agreements.[1] In other words, contracts in normal circumstances serve as the foundation of partnerships and make it possible for parties to trade value with one another. Whereas in a globalized world, especially during the pre-contractual phase, the modern network of legal systems that govern these agreements, adds an additional layer of complication to the situation. In the field of international contracts, where parties from distinct nations may have different expectations concerning pre-contractual responsibilities, emerges a variety of challenges and opportunities because the legal landscape is not composed of a single entity; albeit it is more akin to a patchwork of many legal systems, each of which is characterized by its own set of principles and conventions. In addition, this lack of legal unity exposes important issues that need to be addressed thoroughly.
Section 1: The Scope of the Duty to Negotiate in Good Faith Concept in Pre-contract Phase in International Contracts
One of the potential sources of dispute in the area of international commercial law that occurs in the pre-contractual phase is related to the fact that different legal systems have varied approaches to interpreting and putting into practice the criterion of good faith. This principle is a cornerstone for creating mutual confidence and maintaining justice. Eventually, it is a significant component that plays a role in determining the behavior and responsibilities of parties all along the process of discussions to settle the terms of the contract. So, the function of ‘good faith’ is to conduct negotiations with honesty and fairness, highlight the necessity of maintaining clarity and consistency in order to guarantee that the agreements reached are legally binding and help to reduce the amount of legal ambiguity. It incorporates a more comprehensive sense of ethical responsibility in the context of negotiations and attempts to accomplish several goals such as its two main objectives, more precisely promoting justice and openness on equal footing. In the setting of pre-contractual liability, parties are free to discuss a contract under normal circumstances without incurring any obligation for the failure to reach an agreement[2] because the parties are subject to pre-contractual liability. Yet, parties that engage in international business are required to navigate not just the complexities of legal frameworks but also the cultural nuances and ethical issues that may differ from one jurisdiction to another. Furthermore, “culpa in contrahendo” refers to the situation in which one of the parties in the negotiation phase decides to cease the process without having any genuine intention of reaching an agreement. Thus, this party will most likely be held responsible for the losses experienced by the other party, taking into account the conditions that have arisen because of the situation.[3] The duty of good faith – to behave honestly and to consider the second party’s interests[4] – is threatened by a very flexible concept, i.e., unfair behavior at the pre-contractual stage. An unfair behavior evades clear definition but can be defined as a behavior that does not comply with the trust and fairness standard established between the parties by virtue of entering into negotiations. Just like the ways and means to negotiate are numerous, examples of practical actions performed in breach of a good faith duty during negotiations are also diverse. In general, each party should have the right to terminate negotiations procedure at any time. Nevertheless, the most common example of unfair behavior at the pre-contractual phase is the termination of negotiations by a party in the absence of any due cause. Then, such party should compensate damages caused to the other party. However, the party that terminates negotiations can still use various pretexts for such termination, such as suggesting contract terms and conditions that are obviously unacceptable. An additional example of unfair behavior is when a party acts in such a manner that negotiations become nearly impossible, undertaking a ‘take-it-or-leave-it’ position. In this specific case the risk of being held pre-contractually liable depends on the stage of negotiations, taking into consideration when the party attempted to break them off.[5] No liability will be imposed if the negotiations just have started, whereas if the agreement was close to be concluded compensation might be granted. Another example is the failure to disclose substantial information to the other party and affects contract formation while being aware of this.[6] Or even a further example is concealing an information about the circumstances that make the agreement impossible to be concluded or performed, opening the possibility to be held liable for unfair silence. One more example is parallel negotiations with potential counterparties, unless it is notified that the negotiations are not exclusive.
Section 2: Main Parallels and Contrasts in Pre-contractual Liability: A comparison between Common Law and Civil Law
Even though all legal systems are moving towards imposing pre-contractual liability and a duty of fair conduct during negotiations, pre-contractual duties have still been regulated differently by distinct legal regimes. Mostly civil law countries recognize the concept of pre-contractual duties. On the contrary, the common law countries tend not to mention these liabilities at all.
On the one hand, common law countries, illustrated by the legal frameworks in the United States and the United Kingdom, give weight to the flexibility of contracts. Indeed, parties have the freedom to engage in conversations, study the possibility of reaching an agreement, and cut off negotiations without any legal repercussions. Nonetheless, this freedom is not completely unrestricted because there are legal safeguards to deal with situations in which one party may suffer injury due to the actions or statements of the other party. For example, misrepresentation can lead to legal repercussions in courts, like when a party can be held accountable for making false statements or representations during the pre-contractual period that caused an injury to the other party. As well as negligence throughout the pre-contractual phase like failing to exercise reasonable care when making statements or disclosures, resulting in legal repercussions. Regarding the cautious position of the English and American Laws from the notion of good faith, it recognizes other names and concepts without using the term of good faith. Some of these concepts are used in courts under the name Piecemeal Solutions, such as: Mistake, Misrepresentation, Equity, Collateral promises, collateral warranties, collateral contracts, Duress, Undue influence, Warranties, conditions and in nominate terms, Waiver and estoppel, Fundamental breach, Fiduciary obligations, Unjust enrichment and restitution, Unconscionability promissory estoppels, etc.
On the other hand, civil law countries, usually in Europe and other regions of the world, take a more structured and codified approach to the law of contracts, imposing during the precontractual phase a greater degree of responsibility on the parties, emphasizing fair dealing and good faith. Hence, any violation of this obligation can lead to legal repercussions. In fact, this duty of good faith requires parties to act honestly, fairly, and cooperatively, ensuring that negotiations are transparent and responsible.[7] No doubt that, it is possible for the regulation of pre-contractual liability to differ even between countries that have comparable legal traditions. For instance, the French legislator took into account the pre-contractual period and the French Civil Code stipulates that contracts must be negotiated and executed in good faith. In parallel, the German legal system was extremely receptive to the concept of pre-contractual liability and the German Civil Code (BGB) imposes a duty of good faith during the entire process of contract formation. The Spanish Civil Code stipulates the accordance between rights and good faith, so pre-contractual liability is recognized in courts. Similarly, in Italy falls upon the parties an obligation of good faith in the prior phase to the conclusion of the contract. In Swiss law, the rule of good faith has been stipulated under the general provisions of the civil code and that means that this principle applies to all legal relationships.
While most Arab civil codes do not directly regulate precontractual liability, the 2023 Saudi Civil Transactions Law (SCTL) provides essential legal protection of parties’ interests during contract negotiations but limits precontractual liability to negative interests and does not address all situations of bad faith negotiation. Thus, a party who negotiates in bad faith may be liable in damages, excluding damages for unrealized revenue that the other party expected to gain from the negotiated contract. The SCTL also codifies the principle of good faith. As for good faith in Lebanese Law, parties may tend to neglect its importance but under the Lebanese legislation, this principle has a particular importance as the parties are obligated to act in good faith at every stage of the contract, from its negotiation to its termination.
Section 3: The Role of International Instruments and the Need for Harmonization to fill in the Gaps of the Pre-Contract Phase on the International Level
The subject of pre-contractual liability in international business law presents a complex terrain due to the convergence and divergence of legal systems. Despite acknowledging the difficulty in establishing transnational principles to govern international contracts, but transnational laws are necessary to successfully address these concerns[8]. Although the Convention on Contracts for the International Sale of Goods (CISG) does not have explicit provisions adopting pre-contractual liability, gaps arising from Article 7(1) of the CISG may be filled according to Article 7(2) of the CISG by the application of the general principles on which the CISG is based. Thus, it is possible to interpret under the CISG that the parties would be held to pre-contractual liability which is derived from the duty of good faith. As for the responsibility of acting in good faith, it is acknowledged and expanded to cover the process of negotiation in both the Principles of International Commercial Contracts (PICC) and the Principles of European Contract Law (PECL). These documents, in an effort to bridge the gap between different legal systems and provide a common framework, describe the principles that govern international commercial contracts and since they were designed to address the situation in which an international uniform law such as the CISG lacks specific guidelines on an issue, relying on them will be useful to fill the gaps and will enable courts to find that good faith is a general principle of the CISG.[9] Another international legal instrument, more precisely the UNIDROIT Principles of International Commercial Contracts, harmonized standards for precontractual conduct and in its Article 1.7 explicitly stipulates that parties should negotiate in good faith and refrain from misleading the other party. Additionally, these principles place an obligation on the parties to keep the information they receive during the negotiations confidential and abstain from using such information until the negotiations end, whether the agreement was concluded or not. Apart from imposing pre-contractual liability, there are other means of protection of parties’ rights at the pre-contractual stage. Most legal systems suggest three additional means, from refusing to enforce party’s rights if it abuses such rights, to imposing an obligation to compensate unjust enrichment and imposing public-law liability on a party that behaved unfairly and thus violated competition and antitrust legislation. Whatever remedies suggested by private law; public law may also provide the parties with protections against unfair behavior. Despite these international instruments, obstacles remain and more efforts are needed to unify the expectations of parties from different jurisdictions.
Discussion
Overall, the main goal behind harmonization efforts is to create fundamental principles that can be used across diverse legal systems, resulting in the uniformity of international transactions. A flexible approach that can fit the variety of legal regimes is the technique of soft law initiatives that advocates for norms that are not legally binding and that parties have the option to follow freely. However, the consistency and enforcement will not be achieved in this case.[10] While a robust pre-contractual liability framework based on the responsibility of good faith adds an ethical and responsible approach to pre-contractual talks, mostly in the international arena where trust is the key to conduct successful business transactions.
Conclusion
To put it in a nutshell, two crucial ethical ideas guide parties through the pre-contractual stage: the necessity of acting in good faith and the obligation to treat people equitably. The diverse legal systems make successful regulation of international contracts hard to achieve. As a result, it is essential to establish effective transnational norms to govern international transactions[11] and adapt them to the digital age since virtual negotiation technologies influence contract formation and the application of pre-contractual liability standards.
Reference (S):
[1] Spagnolo, L. “Opening Pandora’s Box: Good Faith and Precontractual Liability in the CISG.” Temple International and Comparative Law Journal, 2007.
[2] “None of the parties may terminate negotiations without due cause, and, simultaneously, none of the parties should be forced to enter into the agreement if despite fair negotiations, the agreement cannot be concluded.” Knapp Enforcing the Contract to Bargain. 44 N.Y.U.L. Rev. 67 (1969).
[3] Alyona N. Kucher, “Pre-contractual Liability: Protecting the Rights of the Parties Engaged in Negotiations” (2004).
[4] Furntson M., Norisada T, Polle Jill Op. cit. P. 274.
[5] “When a moment comes after which you cannot turn back depends on the circumstances of each case, especially on whether the other party had any reasonable grounds to rely on execution of the agreement and on the number of issues relating to the future agreement on which the parties have already reached understanding”. Komarov A.S. UNIDROIT Principles of Commercial contracts. M. 1996. P. 59.
[6] Chestin J., Nicholas B. Pre-contractual Obligation to Disclose Information in Contract Law Today (Clarendon Press, 1989) ed. D. Tallon, J. Harris; Friedrich Kessler and Edith Fine. Op. cit. P. 405
[7] Aysel Erol. “The Concept of Pre-Contractual Duties and a Comparison between the Draft Common Frame of Reference, English and Turkish Legal Systems.” DergiPark, 2011.
[8] Pattarapas Tudursi, Angkanawadee Pinkaew “Formation of Contract, Enforceability, and Pre-Contractual Liability in Thailand” (Jan. 2018).
[9] Torsello, ‘Pre-contractual Liability and Preliminary Agreements’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014).
[10] Matthias Dietrich. “Illuminating the Development of Precontractual Liability in.” European Journal of Comparative Law and Governance, vol. 8, no. 1, 2021, pp. 1-26.
[11] Alan Schwartz & Robert E. Scott, “Pre-contractual Liability and Preliminary Agreements” (2007)
