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The Warsaw Voice » Real Estate » September 30, 2009
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Negotiating in Bad Faith
September 30, 2009   
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European legal authorities, especially those on the continent, have long held that the two sides in negotiations have an obligation of loyal behavior even before they sign an agreement. There is a host of acts capable of qualifying as a breach of good customs: making a proposal that is an obvious non-starter, intentionally misleading the other party, withholding key business information, and simultaneously engaging in negotiations with someone else.The issue of liability for unfair-or, strictly speaking, bad faith-negotiations is becoming increasingly important in Polish civil law. Art. 72 Section 2 of the Civil Code governs liability for conducting negotiations contrary to good customs (in bad faith). Specifically, a party is liable for negotiations conducted only for the sake of appearances-i.e. where one party is not really interested. In that case, the bad guy has to redress the damage "which the other party incurred by expecting to conclude an agreement." To succeed, the claimant must demonstrate a causal relationship between the damage and the negotiations.

On the other hand, the risk exists, under Art. 72 Sec. 1, that one of the contracting parties might get "trapped into an agreement so concluded" after all the essentials of the agreement have been agreed. The rules of interpretation lean toward the view that negotiations tend to create obligations, rather than just pave the way for signing an agreement. Interpreting Art. 72 Sec. 1 in a broad way, an agreement may be effectuated during negotiations, i.e. even before it is actually signed by the parties. Taking this approach, an agreement is concluded once all essential content has been agreed, i.e. all provisions discussed in the course of negotiations. The form an agreement is concluded in is a separate, important issue. As the Supreme Court noted in its judgment of Feb. 23, 2006, "the fact that the parties intended to conclude an agreement in writing does not suffice to claim that no agreement has been concluded, because the form of an agreement and the determination of whether it was concluded due to the parties having achieved a consensus are two different issues subject to a separate legal assessment."

The notion of negotiations might suggest that they do not trigger any effects and are devoid of any financial consequences if a party chooses to rescind the contractual terms agreed. In light of Art. 72 Section 2 of the Civil Code, such an approach to negotiations does not correspond to the law, in that any party proved guilty of culpa in contrahendo is obligated to make good any damage caused.

Persons negotiating, for instance, the sale of real estate should be aware that lawsuits regarding culpa in contrahendo are by no means rare. Typically, one of the parties demands that the other party redress the damage it suffered due to expecting to conclude an agreement, or it might apply for a ruling that the agreement was concluded "by negotiation." Conclusion of a final agreement in property or mergers and acquisitions transactions is preceded by a round of long, complex negotiations. Until the negotiations are over, and despite all essentials having been hammered out, the parties-usually the buyer in fact-are unsure whether the deal will go through. Sometimes, the buyer, in spite of agreement on all essentials of the agreement, fails to obtain the money needed to consummate a property deal. Faced with such a situation, the courts have to establish if one side intentionally misled the other.

The rules concerning negotiations vary between legal systems. German law recognizes the notion of the existence of a pre-contractual arrangement concluded by the parties at the start of negotiations. All parties are obligated to act in good faith by the very fact of starting negotiations and are bound from that point by a relationship of obligation. U.S. courts essentially reject negotiation agreements as ineffective. The parties themselves usually define the rules governing the pre-closing stage on their own. This is why there are a number of agreements on the confidentiality of negotiations, on exclusive negotiations with a specified party and on liability for bad faith negotiations. Negotiations are not treated as a single event; in fact, they are viewed as a whole sequence of events leading up to the final agreement. And one final remark: although the courts note that negotiations are usually face-to-face, email and other forms of communication can also qualify as avenues for negotiations.

Jarosław Grzywiński, attorney-at-law at Salans Real Estate Practice Team
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