The signing of a contract is usually preceded by a period of negotiation between the parties. During this phase, ideas are exchanged and positions are gradually brought closer together until the elements that will shape the future contract are defined. All these acts aimed at reaching a binding agreement are called “preliminary negotiations” or “preparatory acts”.
Preliminary negotiations are not per se able to generate obligations for the parties, so in general, they may freely withdraw from the negotiations without the risk of incurring liability of any kind. However, as the negotiations develop and the parties are working out the details of their contractual relationship, it may be that, although the contract has not yet been formalised, the existence of a precontract can already be inferred from the set of acts or agreements reached by the parties.
The precontract, unlike the preliminary negotiations, constitutes a fully-fledged contract, and thus, obliges the parties to comply with its terms, under penalty of incurring contractual liability. It is therefore not another phase of the preliminary negotiations, but a subsequent stage, upon which preliminary negotiations are definitively concluded.
The line that separates preliminary agreements from precontracts is often an excessively blurred one. In this scenario, it becomes necessary in each case to analyse the legal nature of the relationship between the parties to determine whether we are dealing with a precontract or, failing that, with mere preliminary negotiations.
To this end, case law has established a set of criteria that can be applied to identify when we can infer there is a precontract in place. As an example, Spanish Supreme Court (“Tribunal Supremo”) Ruling 913/2021, of December 23rd, 2021, is particularly illustrative, as it establishes the following:
(i) A precontract is the draft of a contract in the sense that the parties, for the time being, are not willing or able to enter into the definitive contract, undertaking to conclude the definitive contract at a future time;
(ii) It already contains the elements of the definitive contract, the perfection of which the parties postpone;
(iii) It is already a complete contract, containing basic lines and all the requirements, and thus the parties having the obligation to collaborate in order to establish the definitive contract;
(iv) The obligational legal relationship arises in the precontract and at a subsequent time the definitive contract is put into effect;
(v) No further activity by the parties is required to develop the contractual bases contained in the precontract. The expression of will of the parties is sufficient for the contract to become firm and binding for the parties without the need for further acts.
Hence, there are two essential elements that must concur in order to consider that a precontract exists:
(1) The precontract must incorporate all the elements and stipulations of the definitive contract.
(2) The execution of the definitive contract does not require a further expression of consent by the parties, which is already expressed in the precontract.
In the case analysed by the Court, it was discussed whether the offer made by a company to an executive to occupy the position of member of the board of directors (which had been tacitly accepted by the latter), could constitute a precontract. The court held that it did, since the offer presented to the executive contained all the basic elements of the contract, i.e., the fact of his appointment as a director, the remuneration conditions of such appointment, the date on which the appointment was to take place, etc. Subsequently, the company sent some internal company information to the executive, which for the court definitively confirmed the existence of a formal and conclusive commitment by both parties that said person would occupy the position of director of the company.
In this case, in order for the agreement reached to be definitively perfected, namely, for the appointment to be formally carried out, it was first necessary for the company’s General Shareholders’ Meeting to approve the appointment and for the executive to formalise the termination of his employment contract with his company. The appointment did not take place, so the executive filed a lawsuit for breach of contract, which was upheld by the court.
The breach of a precontract entitles the aggrieved party to ask for either the performance of the precontract or its termination, with the corresponding compensation for damages. However, the right to damages does not arise directly from the non-performance of the contract, but is the product of the effective generation of said damages. Consequently, the aggrieved party who intends to claim compensation for breach of a precontract will be obliged to prove the existence of such damages.
Vilá Abogados
Joan Lluís Rubio
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2nd December 2022
