Compensation for Damages in the Event of a Breakdown in Contract Negotiations

In complex decision-making processes, it is not uncommon for contract negotiations to last for months – in the form of meetings, renegotiations, and frequent correspondence. It is not unusual for notary and legal fees to be incurred. However, premature purchase of materials or hiring employees can also add considerably to the bill. If a contract that was thought to be completed does not materialise because one of the parties breaks off the contract negotiations, these expenses may be rendered useless. A loss is incurred.

The German law firm Schlun & Elseven Rechtsanwälte offers committed and authoritative legal assistance to provide our clients with the necessary clarity regarding claims for damages in such a situation. Our lawyers have in-depth expertise and extensive experience in dealing with the complex requirements of German and international contract law. They will be happy to advise you on the extent to which claims for damages can be asserted in your case. If necessary, we will represent you to enforce your rights and interests in court.

Cancellation of contract negotiations: Are there legal regulations for this?

Yes, the law generally opens up the possibility of liability for damages even though the contract was not finally concluded. Liability according to the principles of “culpa in contrahendo” (c.i.c.), Section 311 para. 2 of the German Civil Code (BGB).

An obligation does not arise exclusively through the conclusion of a contract. It can already occur through the commencement of contract negotiations, the apparent initiation of a contract or other business contacts (Section 311 (2) BGB). Such an obligation creates a mutual obligation to consider the rights or interests of the other party (Section 241 (2) BGB). The breach of such an obligation, like the breach of a contractual obligation, can lead to claims for damages (Section 280 (1) BGB).

Supreme Court Case Law on the Obligation to Pay Damages in the Event of Cancellation of Contract Negotiations

The German Federal Court of Justice (BGH) already decided in 1996 (BGH NJW 96, 1885) that a claim for damages is justified if

• the conclusion of a contract requiring a specific form is presented as certain,
• and the behaviour of the terminating party constitutes a serious breach of the obligation to act in good faith during the contract negotiations,
• which, as a rule, requires a finding of intentional behaviour in breach of duty.

In principle, each party has the right to withdraw from the envisaged conclusion of the contract until the contract is concluded. Services rendered up to that point are at the party’s own risk. Only if the conclusion of the contract can be assumed to be certain after the negotiations between the parties, and expenses for the execution of the contract have been incurred before its conclusion in confidence justified by this, can these be reimbursed by the negotiating party under the aspect of fault in the contract negotiations, if they later refuse to conclude the contract without good reason.

In 2018, the BGH rejected a claim for damages in a case in which the seller of a property increased the price during contract negotiations after the potential buyer had already concluded a financing agreement to finance the property to such an extent that the contract was not completed. The potential buyer suffered damages of €9,000 due to the cancellation of the financing contract. The court stated that strict requirements must be met for the breach of pre-contractual duties to protect in the case of a property purchase. A claim for damages only arises if there is a severe, usually wilful breach of fiduciary duty. As there is no legally binding effect before the notarization required for property purchases, asset dispositions are generally made at one’s own risk until notarization.

A court has also denied a claim for damages for failure to sign a rental agreement. If there is a written form requirement, there can be no trust in the conclusion of the contract before the contract is signed, which is why there is no liability arising from “culpa in contrahendo.”

Prerequisites for an Obligation to Pay Damages

Breaking off contract negotiations without good reason constitutes disregarding mutual consideration and, therefore, a breach of duty. If a relevant reason prevents the conclusion of the contract, there is no breach of duty, and no liability for damages arises. Furthermore, this only exists if the conclusion of the contract can be assumed to be certain after the cancelling party caused the negotiations and this assumption in an attributable manner. As case law has repeatedly ruled in Germany, in the case of contracts requiring a specific form – such as property purchases – intent is also necessary to generate a claim for damages.

In practice, it is regularly disputed and difficult to prove when the conclusion of a contract is considered certain or when a party, in an attributable manner, inspires confidence in the conclusion of the contract. A letter of intent is, therefore, often used as a declaration of intent by both parties that there is a willingness to endeavour to conclude a contract. The letter of intent proves that the parties are in negotiations. As a rule, it contains a “no binding” clause, which states that the contract’s content binds neither party. However, it does not exclude the binding nature of duties of consideration and the resulting liability for damages.

Damages: To what Extent is the Person in Breach of Trust Liable?

In the next step, the question arises as to what the party culpably prevents the contract’s conclusion is liable for. According to BGH case law (BGH NJW 81, 1673), the injured party can demand to be placed in the position they would have been in without the damaging behaviour of the other party following Section 249 (1) BGB. Consequently, they have a claim to their adverse interest, sometimes to compensation for futile expenses or lost profits from other legal transactions that were rejected in reliance on the conclusion of the contract.

However, they have no claim to the favourable interest. This includes all profits that would have been realised if the legal transaction had been concluded. Thus, the breach of duty does not consist in the fact that the contract does not materialise but in the fact that a false trust was created, because of which expenses were incurred that are now useless. The tortfeasor can, therefore, not demand to be placed in the same position as if the contract had been concluded, but they can demand compensation for the damage caused by the false trust in the conclusion of the contract. This is known as a loss of confidence.

Schlun & Elseven: Your Legal Counsel in German Contract Law

In conclusion, it should be noted that each party has the option of refraining from concluding a contract right up to the last second, but that in certain circumstances, the creation of trust in the secure conclusion of a contract requires consideration to be given to the interests of the other party.

If you find yourself in a comparable situation or need help assessing a possible liability risk in connection with the cancellation of a contract, we are always at your disposal with our expertise and extensive legal experience. Our lawyers will ensure that your rights and interests are always protected.