The topic of this article is devoted to so called pre-contractual liability – one of the new institutes of the contract law and execution of contracts under the new Czech civil law as introduced by the New Civil Code (Act No. 89/2012 Coll., the “NCC”), effective as of 1st January 2014.
As this institute is a novelty to the Czech legal system and it is something everybody, who will enter into contractual negotiations, may face, we feel that it is useful to look at pre-contractual liability in more details and allow us to introduce its basic principles as well as conditions under which it can be enforced and what may be the consequences of its breach.
Former Czech civil law, i.e. the Act No. 40/1964 Coll., the Civil Code and the Act No. 513/1991 Coll., the Commercial Code, in force till 31st December 2013, did not provide for any compact regulation of this principle. One exception could be found in the Commercial Code where parties were obliged to keep confidentiality with respect to information being disclosed during contractual negotiations. However, this regulation had been specific and applicable only to commercial relations. For this reason the new Czech civil law provides as part of the recodification process exact rules for contractual negotiations, including the institute of pre-contractual liability.
The new Czech civil law is based on the mandatory principle of autonomous will of contracting parties, which gives to the parties freedom to decide whether they will enter into a contract, what will be the terms and conditions of such a contract and what form of contract they will use. In other words everybody is free to hold contractual negotiations and freely decide whether or not he will enter into the contract or not. At the same time such freedom is not unlimited and is defined by the pre-contractual liability. Under the new law the negotiating parties undertake certain rights and obligations throughout the contracting process, such as obligation to act in good faith, not to misuse it position or right, including right of contracting freedom and autonomy of will. A breach of an obligation to act in good faith and fairly represents pre-contractual liability (culpa in contrahendo).
The NCC defines four different merits for pre-contractual liability:
- Initiation of, or proceedings with, contractual negotiation without the will to finalize the contract (Section 1728 (1) of the NCC);
- Breach of information duty (Section 1728 (2) of the NCC);
- Non-conclusion of a contract when its finalization is deemed to be very likely (Section 1729 of the NCC);
- Misuse and disclosure of confidential information (Section 1730 of the NCC).
In summary the implementation of the pre-contractual liability institute into the NCC can be seen as a positive move, as it will bring a greater level of legal certainty to parties during their contractual negotiations. On the other hand the new law will without any doubt bring number of questions and interpretation issues as it uses vague terms such as “justified reason”, “loss from lost contract” and “confidential information”, etc. Difficulties can be also expected in proving the amount of suffered damage, casual relation between the breach of contractual liability and the occurrence of damage. The burden of prove lies with the harmed party.
All of the above can cause certain complications in practice and it will be necessary to wait for rulings of the relevant Czech courts to help with the law interpretation. The contracting parties have freedom to clarify areas which could be problematic right at the start of the negotiations process and if required sign confidentiality agreement. We also recommend keeping evidence of all negotiating correspondence and communication.
In following articles we will pay attention to particular, above stated, merits of pre-contractual liability.