Promise is debt in the pre-contractual phase.
Offer and acceptance is the basic rule when entering into a contract. However, as always in law, reality is a little more nuanced. It will be familiar to many business owners that a long period of negotiations often underpins a contract. In this blog post, we will discuss these negotiations, also known as the pre-contractual phase. During the pre-contractual phase, the key issue is whether both parties can expect the contract to be entered into. The greater the expectation of agreement, the greater the legal consequences if you break off negotiations. For clarity, we divide the extent of expectations into three phases.
The exploratory phase:
The exploratory phase is first and the freest phase of negotiation. In this phase, freedom of contract is paramount and you can stop negotiations at will. This phase consists of requesting offers and getting to know potential contract partners. In this phase, you may also request offers and enter into negotiations with other parties.
The intermediate stage:
In the intermediate phase, you are concretely negotiating with the other party. In this phase, it is important that you take the interests of the other party into account; after all, you are busy negotiating. As a result, you cannot simply break off negotiations. If one of the parties does break off, it must reimburse the costs incurred by the other party. Consider, for example, the costs of producing building models. Taking into account the other party's interest also means that both parties should not negotiate or contract with other parties on the same deal.
The completion phase:
If, after negotiating, you agree with the other party on almost all points, you have reached the third phase: the finalisation phase. At this stage, both parties may assume that the contract will come to fruition. As a result, negotiations cannot simply be broken off. If a party does break off, it will have to reimburse both the costs incurred by the other party during the negotiations and possibly also the profit that the other party would have made if the contract had come about. The other party can also oblige the aborting party through the courts to still continue the negotiations.
Why do you need to know?
As you have read, you, or your counterparty, may have to reimburse costs without a contract in place. However, you can avoid this. During negotiations, you and your counterparty can agree that negotiations may be interrupted at any time without compensation being obligatory. You can also state that obligations are only created when the contract is signed. Finally, you can include a list of suspensive conditions in the contract to avoid binding either party before you are ready to sign the contract. These measures, if taken properly, can ensure that there cannot be a reasonable expectation on the part of the other party that the contract will be concluded.
Why at Marxman:
The different pre-contractual phases often complicate negotiations. Especially also because it is not always
clear which stage you are in. You may also continue to fluctuate between the three phases during negotiations. Team Commercial Contracting 's lawyers have extensive experience in the pre-contractual phase. They will help you navigate through the negotiations, even if the negotiations suddenly break down.