Crossing the Abyss: A Comparative Analysis of the Enforceability of Preliminary Agreements

Emory International Law Review Emory International Law Review

Volume 37 Issue 4

2023

Crossing the Abyss: A Comparative Analysis of the Enforceability Crossing the Abyss: A Comparative Analysis of the Enforceability

of Preliminary Agreements of Preliminary Agreements

Marta Infantino

Larry A. DiMatteo

Jingen Wang

Eleni Zervogianni

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Recommended Citation Recommended Citation

Marta Infantino, Larry A. DiMatteo, Jingen Wang & Eleni Zervogianni,

Crossing the Abyss: A Comparative

Analysis of the Enforceability of Preliminary Agreements

, 37 Emory Int'l L. Rev. 629 (2023).

Available at: https://scholarlycommons.law.emory.edu/eilr/vol37/iss4/3

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CROSSING THE ABYSS: A COMPARATIVE ANALYSIS OF

THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS

Marta Infantino



Larry A. DiMatteo



Jingen Wang



Eleni Zervogianni



ABSTRACT

A major unresolved issue in international business transactions relates to

the enforceability of preliminary agreements. Preliminary agreements cover a

long list of instruments commonly used in most sectors of the economy. The

common presumption is that these agreements are not enforceable. The correct

answer is much more nuanced. For example, a preliminary agreement may be

held to be unenforceable but at the same time be the basis for legal liability.

There are strong differences between the civil and common laws on the issues

of good faith negotiations and the enforceability of preliminary agreements, but

there is also sustained uncertainty within legal systems. This article reviews

Chinese, French, German, and Anglo-American law on the twin issues of

enforceability and liability. It shows that the trend has been in favor of greater

judicial scrutiny of such agreements that has led to greater enforceability and

the expansion of available remedies, whether an agreement is deemed to be

enforceable or unenforceable.

The issue of preliminary agreements and their place in the overall legal

scheme has become less clear as courts have recognized their necessity as

modern contract transactions have become more long-term and complex. The

countries selected for review provide a three-part taxonomy. First, preliminary

agreements are unenforceable due to the lack of certainty of terms and party



Associate Professor of Comparative Private Law, Political Science Department, University of Trieste.



Huber Hurst Professor of Contract Law, Warrington College of Business & Levin College Law at the

University of Florida.



Associate Professor of International Business Law at TSL Business School, Quanzhou Normal

University; Fellow at Center for International Banking Law & Practice, China University of Political Science &

Law.



Associate Professor of Civil Law, Faculty of Law, Aristotle University of Thessaloniki.

630 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

intent. Second, preliminary agreements that are detailed may be recognized as

enforceable contracts. Third, there is a broad middle area in which preliminary

agreements are unenforceable as a whole but can be the basis for liability for

independent obligations found in the agreements. These independent obligations

include an implied-in-law or an implied-in-fact obligation to negotiate in good

faith, duty of confidentiality, and duty of exclusivity to not negotiate with other

parties. It is in this middle area where there has been a convergence in legal

systems and, at the same time, where the issues of liability and remedies have

become more uncertain. Because of the ubiquity of these agreements, the

possibility of unexpected liability remains pronounced in international business

negotiations.

TABLE OF CONTENTS

I. INTRODUCTION ............................................................................... 631

A. Types of Precontractual Liability ............................................ 633

B. Civil-Common Law Divide ...................................................... 634

C. Preliminary Instruments (Agreements) .................................... 638

II. PRELIMINARY AGREEMENTS AND PRECONTRACTUAL

LIABILITY IN GERMAN LAW ............................................................ 640

A. Overview of the German Rules on Contract Formation ........... 641

B. Precontractual Liability .......................................................... 643

C. Types of Preliminary Agreements and Their Legal Effects ....... 645

1. Pre-contracts .................................................................... 645

2. Option Agreements ........................................................... 646

3. Pre-Emption Agreements .................................................. 646

4. Framework Agreements .................................................... 647

5. Letters of Intent ................................................................. 648

6. Instructions to Proceed ..................................................... 649

D. Matter of Interpretation .......................................................... 649

III. ENFORCEABILITY AND LIABILITY OF PRELIMINARY

AGREEMENTS IN FRENCH LAW ....................................................... 652

A. Overview of French Law on Contract Formation .................... 653

B. Negotiations and Preparatory Agreements .............................. 656

1. Pre-emption Agreements and Firm Offers ......................... 656

2. Framework Agreements and Agreements to Agree ............. 657

3. Letters of Intent and Agreements in Principle .................... 658

C. A Matter of Interpretation ....................................................... 659

IV. ENFORCEABILITY AND LIABILITY OF PRELIMINARY

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 631

AGREEMENTS IN CHINESE LAW ...................................................... 662

A. Preliminary Agreement in China: An Overview ....................... 662

B. Enforceability of Preliminary Agreements ............................... 664

C. Liability for Breach of Preliminary Agreement ........................ 666

1. Fault-based Liability and Strict Liability ........................... 666

2. Remedies for Breach of Preliminary Agreement ................ 667

V. PRELIMINARY AGREEMENTS IN ANGLO-AMERICAN LAW ................ 671

A. Introduction ............................................................................ 671

B. Negotiations and Preparatory Agreements .............................. 673

C. Matter of Interpretation .......................................................... 674

1. Presumption of Nonenforceability ..................................... 674

2. Content and Context ......................................................... 676

D. Spectrum of Preliminary Agreements ...................................... 677

1. Agreement to Negotiate in Good Faith or Agreement to

Agree ................................................................................ 678

2. Promise, Reliance Theory, and Promissory Estoppel ......... 682

VI. FINDINGS AND TRENDS.................................................................... 685

A. Enforceability of Preliminary Agreements ............................... 685

B. Remedies for Breach of Preliminary Agreements ..................... 687

CONCLUSION ............................................................................................. 688

I. INTRODUCTION

The word “abyss” in the current context refers to crossing the line from no

liability to full contractual liability. The abyss signifies that once a contract is

formed, there is no going back; if a party fails to perform, it is liable for

compensatory damages, including lost profits. Before that moment, there is no

contractual liability. Although elegant in theory, the line demarcating the

crossover is a blurry one and becomes exceptionally blurry whenever the parties

enter into some form of preliminary agreement. Given the common use of such

agreements in domestic and transnational business practice,

the issue of their

bindingness is of great importance.

The development of contract law is guided by numerous norms such as

freedom, justice, fairness, efficiency, and certainty.

This composite of norms is

Larry A. DiMatteo, Justice, Fault, and Efficiency in Contract Law, 3 ITALIAN L.J. 37, 42 (2017).

Id. at 38.

632 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

balanced differently throughout contract law. The areas of contract formation

and formalities (writing requirements) are heavily weighted to promote certainty

and predictability in the law. The genuineness of consent (coercion, mistake,

misrepresentation), principle of unconscionability, excuse, hardship, and the

duty of good faith are areas that advance the norms of justice and fairness.

There are numerous areas of contract law in which the normative composite

underlying its rules and principles remains unsettled. These areas are inflection

points where the tensions between rival norms are at their strongest. These

inflection points are most obvious when discussing divergences between the

civil and common laws but are also apparent across civil and common law legal

systems. These areas of law are characterized by uncertainty and variations in

judicial outcomes. This uncertainty continues through time as these areas remain

the focus of scholarly and judicial debate. It is exacerbated as the methods of

doing business and types of contracts continuously change, which increases

normative tensions. One of these areas concerns the precontractual stage.

The issue that arises relates to whether parties in precontractual negotiations

can be liable to each other and under what rules. This is the problem of

precontractual liability. While civil law countries recognize liability for bad faith

negotiations, the common law emphasizes the importance of formalities and the

freedom to terminate negotiations.

In complex transactions involving extensive

negotiations, the parties often create preliminary agreements. The issue then

arises whether the parties have crossed the abyss, that is, whether the preliminary

agreement can be enforced and to what extent. Here the tensions are between the

norms of certainty and predictability versus those of justice and fairness. To

provide certainty and predictability in contract law, there should be a bright line

rule that liability only attaches when a contract is formed weighs in favor of the

unenforceability of such agreements. On the other hand, harm may occur when

a party reasonably relies on the other party’s promises made during the

negotiation stage. A bad faith termination of negotiations or act by one of the

other parties may cause unnecessary harm to the other.

See ROBERT HILLMAN, RICHNESS OF CONTRACT: AN ANALYSIS AND CRITIQUE OF CONTEMPORARY

THEORIES OF CONTRACT LAW 4 (Aleksander Peczenik & Frederick Schauer eds., 1997); Larry A. DiMatteo, The

Norms of Contract: The Fairness Inquiry and the ‘Law of Satisfaction’—A Nonunified Theory, 24 HOFSTRA L.

REV. 349, 368–69 (1995).

See LARRY A. DIMATTEO, INTERNATIONAL BUSINESS LAW AND THE LEGAL ENVIRONMENT: A

TRANSACTIONAL APPROACH 313–316, 334–343 (4th ed. 2021); John Cartwright & Martijn Hesselink,

Conclusions, in PRECONTRACTUAL LIABILITY IN EUROPEAN PRIVATE LAW 449, 450–70 (John Cartwright &

Martijn Hesselink eds., 2008).

DIMATTEO, supra note 4, at 334–43.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 633

As the article will make clear through the comparison of German, French,

Chinese, and Anglo-American rules on precontractual liability, legal systems

adopt different criteria to determine the enforceability of preliminary agreements

and to assess precontractual liability. Differences across legal systems on this

issue are meaningful because they create the potential for unexpected liability

(in tort or contract) for parties from different legal systems. In some cases,

differences are so acute that they might surprise not only the negotiating parties

but also seasoned lawyers who are not familiar with the technicalities of foreign

jurisdictions. This becomes more problematic when parties create preliminary

agreements before agreeing on applicable law and forum for the resolution of

disputes. Potentially, these disputes may be brought before any court with

jurisdiction over the claim, which will use local conflict of law rules to determine

the applicable law. Businesspersons and lawyers drafting international

commercial contracts need to know when a preliminary agreement will be

deemed to be binding across jurisdictions. The focus of this article is a

comparative analysis of the law of four legal systems: Anglo-American,

Chinese, French, and German. They were chosen due to their economic

relevance and legal influence, as well as being representative of the civil law-

common law divide.

The rest of this introduction provides background for the article’s

examination of the enforceability of preliminary agreements across civil and

common law jurisdictions, including types of precontractual liability civil-

common law divides, and a review of types of preliminary instruments. Parts II-

IV will analyze, respectively, the German, French, and Chinese law of pre-

contractual liability. They will show that the law of preliminary agreements is

still developing, with the majority view being that such agreements include an

implied obligation to negotiate in good faith to conclude a final contract. Part V

examines Anglo-American common law. It discusses the emergence of

promissory estoppel in American law and a growing recognition of agreements

to negotiate in good faith in both American and English law.

Part VI presents

the findings of the comparative analysis of these civil and common law

countries.

A. Types of Precontractual Liability

The area of precontractual liability is divisible into two types of cases. The

first set of cases deals with impropriety in the negotiation of contracts. This area

See infra Section V.D.2.

634 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

of potential liability relates to the simple question of whether the parties have a

duty to negotiate in good faith. The second set of cases involves the use of

preliminary instruments or agreements

during the negotiation phase. The more

complicated question here is whether these preliminary instruments are

enforceable or, more broadly, if they can be the basis for liability. This article

focuses on the latter set of cases. That said, it is also important to note that the

question of good faith negotiations cannot be completely unlinked from the issue

of the enforceability of preliminary agreements. For instance, some courts have

discussed whether a preliminary agreement can be interpreted as a separate

agreement to negotiate in good faith. That is, is an agreement to negotiate in

good faith an enforceable contract?

B. Civil-Common Law Divide

The enforceability of preliminary agreements is a longstanding debate in

legal scholarship and, increasingly, in judicial decisions.

The differences

between civil and common law on this issue are often referred to as the civil-

common law divide.

The popular starting point is that the common law opposes

precontractual liability, while the civil law systems recognize cause of actions

related to the negotiation stage of contracting.

But the reality is much more

nuanced as will be seen in comparing the two common law systems (American

and English), two core civil law systems (France and Germany), as well as

China’s sui generis civil law system.

The article focuses on the evolution of a

The words “agreement” and “instrument” will be used interchangeably throughout the article. Instrument

is a broader, and plausibly a better term, than agreement for many preliminary instruments do not use the word

agreement. Nonetheless, nomenclature aside, all such instruments are based on some level of agreement.

Much litigation has arisen in recent years out of the practice of making preliminary agreements. See E.

ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS 189 (4th ed. 2004).

See, e.g., MATHIAS SIEMS, COMPARATIVE LAW 50–81 (3rd ed. 2022); THOMAS LUNDMARK, CHARTING

THE DIVIDE BETWEEN COMMON AND CIVIL LAW 37 (2012); KONRAD ZWEIGERT & HEIN KÖTZ, INTRODUCTION

TO COMPARATIVE LAW (3rd ed. 1998); H. PATRICK GLENN, LEGAL TRADITIONS OF THE WORLD 132–79, 236–

86 (5th ed. 2014).

See Bürgerliches Gesetzbuch [BGB] [Civil Code], § 311, para. 2 (Ger.) (recognizing culpa in

contrahendo or precontractual fault as potentially creating obligations); see also Reiner Schulze, § 311, in

GERMAN CIVIL CODE 470–72 (Gerhard Dannemann & Reiner Schulze eds., 2020) (explaining of doctrine of

culpa in contrahendo). Culpa in contrahendo is a Latin phrase meaning “fault in negotiating”; the notion has its

roots in Roman Law. Friedrich Kessler & Edith Fine, Culpa in Contrahendo, Bargaining in Good Faith, and

Freedom of Contract: A Comparative Study, 77 HARV. L. REV. 401, 407, 419 (1964).

On January 1, 2021, the Chinese first grand civil code went into effect, which aligns Chinese legal system

with the Western civil law tradition. ZHŌNGHUÁ RÉNMÍN GÒNGHÉGUÓ MÍNFǍ DIǍN [CIVIL CODE OF THE

PEOPLE’S REPUBLIC OF CHINA] [CCC] art. 1260 (promulgated by the Third Session of the Thirteenth National

People’s Congress, May 28, 2020, effective Jan. 1, 2021). However, Chinese law has also been impacted by the

common law. Chinese law has also recognized the importance of caselaw, first in the panwen case system prior

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 635

presumption against enforceability (common law) and in favor of enforceability

(civil law), the current state of the debate, and the recent and likely future

expansion of precontractual liability.

The increased likelihood of precontractual liability in civil law versus the

common law is due to the embrace, especially in the Germanic family of civil

law, of the duty of good faith, including during precontractual negotiations.

The common law rejects this duty based on the belief that parties should be

allowed to exit negotiations at any time, free of liability. The civil law’s view of

negotiations is partially based upon communitarian values of fairness,

cooperation, and solidarity,

while the common law sees negotiations as an

adversarial undertaking in which parties extract concessions as part of a zero-

sum game.

These perspectives are grounded in different normative composites

that explain the divergence between the civil and common laws. The civil law

composite recognizes the importance of free negotiations but also heavily

weighs its counterpoise as reflected in the norms of fairness, justice, and good

faith. The common law obsesses on safeguarding the freedom of negotiations,

which is interpreted as freedom to negotiate in bad faith, freedom of parties to

change their minds on agreed terms, and freedom to terminate negotiations prior

to the execution of a contract. However, common law judges are not impervious

to arguments of injustice and have moved the law away from absolute freedom

of negotiations.

The mix of norms discussed above is balanced differently within legal

systems, including those in the same legal tradition. For example, the United

States has long recognized an implied general duty of good faith in the

to 206 B.C. to 208 A.D. and in modern times in the “Guiding Opinions” issued by the Supreme People’s Court.

See Larry A. DiMatteo, ‘Rule of Law’ in China: The Confrontation of Formal Law with Cultural Norms, 51

CORNELL INT’L L.J. 391, 395–96 (2018); see also Mary Ip, The Revised Contract Law and Its Implications on

Consumerism in China, 9 INT’L J. BUS. 42, 45 (2004) (claiming that Chinese law “has adopted and modified

certain basic contract elements from the common law system”).

See BGB, supra note 10, at §§ 157, 162, 226, 242, 275, para. 2, & 311, para. 3.

These values are particularly reflected in the BGB in rules on the principle of good faith and on hardship.

BGB, supra note 10, at §§ 242, 275.

See Walford v. Miles [1992] 2 AC 128, 138 (HL) (appeal taken from Eng.).

See infra Sections V.E.1, V.E.2.

636 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

performance of contracts,

while English law rejects any such duty.

Regarding the enforceability of preliminary agreements, the two legal systems

are, on the surface, in sync. Neither system recognizes a duty of good faith

negotiations nor adopts a presumption of the non-enforceability of preliminary

agreements. In general, the common law “has rejected a general duty to negotiate

in good faith that exists in some civil law jurisdictions. This [is] based on

concerns that it would chill negotiations, create uncertainty, and add undue

pressure on parties to conclude their negotiations.”

But the Anglo and American systems diverge in their application of the

doctrine of promissory estoppel. While English courts exclusively apply

promissory estoppel defensively in order to overcome a missing contract

requirement (such as writings or consideration) to prevent an injustice resulting

from nonenforcement, American courts apply promissory estoppel both

offensively and defensively.

Promissory estoppel in American law has evolved

to include a cause of action to support liability based on a promise made during

negotiations but did not culminate in a contract. The seminal American case on

the use of promissory estoppel is Hoffman v. Red Owl Stores, Inc,

where a

party expended a considerable sum during the negotiation of a franchise

agreement. The court held the franchisor liable for damages based on the

expenditures of the prospective franchisee that were encouraged by the

franchisor.

A stark distinction can be drawn in the civil law’s recognition of bad faith

negotiations or culpa en contrahendo,

where liability is based on fault and the

The duty of good faith in the performance of contract is found in § 1-304 UCC (“Every contract or duty

within the [Act] imposes an obligation of good faith in its performance and enforcement.”). The UCC was

adopted by most US states by the early 1970s. It eventually was adopted by analogy in the common law of

contracts. See RESTATEMENT (SECOND) OF CONTRACTS § 205 (AM. L. INST. 1981) [hereinafter RESTATEMENT

SECOND].

“English law has hitherto declined to adopt a general principle of good faith.” Jack Beatson & Daniel

Friedmann, From ‘Classical’ to Modern Contract Law, in GOOD FAITH AND FAULT IN CONTRACT LAW 3, 14

(Jack Beatson & Daniel Friedmann eds., 1997).

Albert H. Choi & George Triantis, Designing and Enforcing Preliminary Agreements, 98 TEX. L. REV.

439, 446 (2020) (citing STEVEN J. BURTON & ERIC G. ANDERSON, CONTRACTUAL GOOD FAITH: FORMATION,

PERFORMANCE, BREACH, ENFORCEMENT 330–31 (1995)).

Infra Section V.C.2.

133 N.W. 2d 267 (1965).

Martin Hogg notes that the “Red Owl remedy has not been adopted in English law.” MARTIN HOGG,

PROMISES AND CONTRACT LAW 187 (2011).

German legal scholar Rudolf von Jhering created the concept of bad faith negotiations in his 1861 article

Culpa in Contrahendo. Rudolf von Jhering, Culpa in contrahendo oder Schadenersatz bei nichtigen oder nicht

zur Perfektion gelangten Vertr. . .gen [Culpa in Contrahendo or Damages for Contracts that are Void or Not

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 637

common law’s rejection of a duty to negotiate in good faith. Liability is premised

on a party intentionally, fraudulently, and in bad faith, preventing negotiations

from being consummated in a formal contract. Examples of fault include:

entering negotiations with no intention of concluding a contract, breaking off

negotiations without justification; withholding information vital to the

negotiation of the contract; engaging in fraudulent or coercive behavior;

concealing an illegal purpose; violating government regulations; and using

negotiations to obtain confidential information.

The legal consequences of bad

faith negotiations differ by country, with French law treating it as a tort action

and Chinese law considering it a form of liability falling somewhere between

tort and contract.

It is modeled on a pattern of contractual liability in German

law, although it is not contractual liability as such.

The differences among legal systems regarding this issue are noteworthy

because they can cause confusion, uncertainty, and unexpected liability for

negotiating parties. Comparative analysis of contract law often reveals that many

of the divergences between civil and common law are a matter of semantics

rather than substance. First, similar legal concepts, principles, or rules may be

shrouded by differences in the languages used to describe them and their

placement in different areas of law. Thus, someone researching a specific rule

within one legal system may not be able to find a counterpart in a foreign legal

system due to different terminology and legal categorization. Second, even if

rules in one system do not correspond to those in another, the underlying

rationale for the rules may still be satisfied in both systems, and they may act as

“functional equivalents.”

Finally, while formal rules may diverge between

legal systems, their application of those rules may not diverge as much. This is

the distinction between “law in the books” and “law in action,” or the difference

Brought to Perfection], in 4 JAHRBÜCHER FÜR DIE DOGMATIK DES HEUTIGEN RÖMISCHEN UND DEUTSCHEN

PRIVATRECHTS 1 (1861).

It is best practice in cases where negotiations involve the sharing of information that the parties enter

into a confidentiality agreement, which can appear as a provision in a preliminary agreement. Confidentiality

and non-disclosure agreements are generally considered to be binding obligations.

Infra Section III.A.

Infra Section IV.C.

Infra Section II.B.

The functional method of comparative law is premised upon the idea that apparent differences between

legal systems often disguise similar outcomes. Zweigert & Kötz explain that the principle of functionality rests

on the knowledge that “the legal system of every society faces essentially the same problems and solves these

problems by quite different means though very often with similar results.” ZWEIGERT & KÖTZ, supra note 9, at

34.

638 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

between formal and operative rules.

Divergences in black letter law may not

be replicated when applying those rules in practice. This article will assess

whether the divergences across legal systems are as severe as the formal law

seems to indicate.

C. Preliminary Instruments (Agreements)

The core issue to be examined is whether a preliminary agreement can be the

basis for liability.

Farnsworth uses “the term ‘preliminary agreement’ to refer

to any agreement, whether or not legally enforceable, that is made during

negotiations in anticipation of some later agreement.”

Preliminary agreements

include letters of intent,

commitment letters,

binders,

agreements in

principle,

memoranda of understandings,

and heads of agreement,

as well

See Elizabeth Warren, Formal and Operative Rules under the Common Law and Code, 30 UCLA L.

REV. 898 (1983); see also Larry A. DiMatteo & Bruce L. Rich, A Consent Theory of Unconscionability: An

Empirical Study of Law in Action, 33 FLA. ST. U. L. REV. 1067 (2006) (explaining that empirical analysis shows

that the doctrine of unconscionability, generally taught as a substantive fairness principle, is, in fact, a consent

doctrine).

It is well-settled that “the mere fact that the parties contemplate memorializing their agreement in a

formal document does not prevent their informal agreement from taking effect prior to that event.” V’Soske v.

Barwick, 404 F.2d 495, 499 (2d Cir. 1968); see also Bear Stearns Inv. Prods. v. Hitachi Auto. Prods. (USA), 401

B.R. 598, 618 (S.D.N.Y. 2009).

E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed

Negotiations, 87 COLUM. L. REV. 217, 249 (1987).

Letters of intent (LOI) are used in numerous industries. One common use is found in the commercial

leasing and commercial lending business. A borrower attempting to receive a commercial loan to build a

commercial building obtains a letter of credit from prospective tenants to encourage the bank to make the loan.

Commitment letters are found in the field of real estate financing and may be binding on the bank, but

not the borrower.

In the insurance industry, binders are temporary insurance policies that provide coverage until the

issuance of the full policy.

Agreement in principle occur when the parties agree on the general terms that will be used in the final

contract.

Memorandum of Understanding (MOU) are often used in large transactions, such as a merger of

companies. MOU is an agreement between parties outlined in a formal document, which is not legally binding

but signals the willingness of the parties to move forward with a contract.

Heads of Agreement, an English term, is a type of outline of an agreement. See Morton v. Morton [1942]

1 All ER 273 at 274 (Eng.); FARNSWORTH, supra note 8, at 249–50.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 639

as term sheets,

comfort letters,

attorney opinion letters,

and so forth.

Preliminary agreements are found in most sectors of business and industry. They

all have in common that they are preliminary to a more formal or follow-up

contract.

Preliminary agreements vary from generally and vaguely worded to highly

negotiated with detailed terms. Most preliminary agreements are not fully

enforceable, standalone contracts. Many are internally contradictory, using

promise and disclaimer of liability language.

Deciphering the meaning of their

language and, more importantly, the parties’ intent is also perplexing. In the end,

meaning and intent are implied through analyzing content and context.

Common law courts have favored treating such instruments as non-binding if

they contain any hint of disclaimer or intent to enter into a future, more formal

agreement.

Civil law courts have shown greater flexibility and willingness to

do a deeper analysis in determining if preliminary agreements contain binding

obligations.

Whether a preliminary agreement is binding, such as an agreement

to negotiate in good faith, is often based on the context of the agreement.

preliminary agreement in one industry or trade may be considered non-binding,

while it is viewed as binding in another.

For example, a missing material term in a preliminary agreement generally

leads to the conclusion of unenforceability due to indefiniteness. But this is not

always true. A California court held that a missing term alone is not enough to

render a preliminary agreement unenforceable.

The court reasoned that the

omission of the work and price terms was a commercial practice in the

Term sheets shows the terms or conditions of an investment. They are used by venture capitalists and or

by parties in a merger or acquisition.

Comfort letters are given by parent companies to encourage banks to lend money to an independent

subsidiary without giving a formal guarantee. See Larry A. DiMatteo & René Sacasas, Credit and Value Comfort

Instruments: Crossing the Line from Assurance to Legally Significant Reliance and Toward a Theory of

Enforceability, 47 BAYLOR L. REV. 357, 358 (1995); Jeffrey J. Gilbert, Comfort Letters: A Banker’s View, 64 J.

COM. BANK LENDING 48 (1982).

See ROBERT A. THOMPSON, REAL ESTATE OPINION PRACTICE (3d ed. 1993).

FARNSWORTH, supra note 8, at 231.

Larry A. DiMatteo, The CISG and the Presumption of Enforceability: Unintended Contractual Liability

in International Business Dealings, 22 YALE J. INT’L L. 111, 114 (1997) (“They are hypocritical instruments

intended to serve two masters. While wanting to avoid liability for nonperformance, the writer hopes the receiver

of the writing will enter into a legally binding transaction.”).

Infra Sections V.D.1, V.D.2.

Infra Section V.D.1.

Infra Sections II.D, III.C.

Infra Section V.D.2.

L.A. Unified Sch. Dist. v. Torres Constr. Corp., 57 Cal. App. 5th 480, 491 (2020).

640 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

construction industry and were often agreed upon after the signing of the

contract.

These internally conflicted agreements (promise and disclaimer) are

generally presumed to be unenforceable with two exceptions. In cases where the

parties intended to execute a subsequent contract, some courts have held that the

intent to formalize an agreement does not prevent a finding that the earlier

agreement is an enforceable contract.

The second and more interesting

exception is whether a preliminary agreement can bind the parties to continue to

negotiate in good faith. The enforceability of preliminary agreements tests the

two possible avenues of liability found in contract law—promise and reliance.

Contract law is primarily based upon the exchange of promises (or conduct) that

show a general intent of the parties to enter into a binding contract. A single

promise or assurance by one of the parties is insufficient to create a contract.

The challenge to this promise-based regime is when a party reasonably relies on

such a promise to its detriment, such as expending resources (time and

expenses). Should contract law protect such reliance and allow the relying party

a claim for damages if the promise is defaulted upon? This is the core question

that lies behind the debate on the enforceability of preliminary agreements and

is the focus of the current undertaking.

II. PRELIMINARY AGREEMENTS AND PRECONTRACTUAL LIABILITY IN

GERMAN LAW

The basic rules on contract formation are included in the “General Part”

(Allgemeiner Teil) of the German Civil Code, Bürgerliches Gesetzbuch (BGB),

of 1900 in sections 145 through 156.

This regulation is mainly based on the

model of offer and acceptance, subsequent to the negotiations of the parties.

When negotiations are lengthy, as is often the case in complex transactions, the

parties may conclude precontractual agreements that are not specifically

regulated in the law but have evolved in practice. The legal effects of these

arrangements are often unclear, as the line between binding and non-binding

See Alex Linhardt, Agreeing to Agree, 44 L.A. LAW. 20, 22–23 (2021).

See Sawabeh Info. Servs. v. Brody, 832 F. Supp. 2d 280 (S.D.N.Y. 2011) (holding that a preliminary

term sheet was a binding contract).

RESTATEMENT SECOND, supra note 16, § 75(“[E]nforcement of bargains is . . . extended to the wholly

executory exchange in which promise is exchanged for promise. . . . The promise is enforced by virtue of the

fact of bargain[.]”); id. § 90 (“It is fairly arguable that the enforcement of informal contracts in the action of

assumpsit rested historically on justifiable reliance on a promise.”).

BGB, supra note 10, at §§ 145, 156.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 641

preliminary agreements is blurry. Furthermore, non-binding agreements may

give rise to pre-contractual liability. The sections below will examine the main

rules on contract formation (section A) and pre-contractual liability (section B),

before reviewing specific types of preliminary agreements (section C) and the

way they are treated in judicial practice (D).

A. Overview of the German Rules on Contract Formation

Under German law, the sole requirement for the formation of a contract is

the meeting of the will (intent) of the parties to enter into a binding legal

relationship.

This follows from the principle of solus consensus obligat. Thus,

unlike common law or French law before its revision in 2016,

there are no

further prerequisites for the enforceability of contracts, such as consideration or

legitimate cause (purpose).

The BGB regulates how contracts are made by offer and acceptance. Offer

is the declaration of the will of one of the parties to the other, including all

elements or terms necessary to conclude a particular contract (essentialia

negotii).

Unless the offeror has stated otherwise, the offer is binding (cannot

be withdrawn)

for the time stated in the offer

or the time that can be inferred

by the circumstances.

A contract is concluded when the declaration of

HUGH BEALE ET AL., CASES, MATERIALS AND TEXT ON CONTRACT LAW 153 (2d ed. 2010). BGB Article

133 makes clear that the basis of a contract is subjective intent (meeting of minds) and not objective intent as

found in the common law. It states: “When a declaration of intent is interpreted, it is necessary to ascertain the

true intention rather than adhering to the literal meaning of the declaration.”

See infra, Sections V.B.1, III.A.

See, e.g., MANFRED WOLF & JÖRG NEUNER, ALLGEMEINER TEIL DES BÜRGERLICHEN RECHTS § 37, ¶¶

3–4 (11th ed. 2016); DIETER LEIPOLD, BGB I: ENFÜHRUNG UND ALLGEMEINER TEIL § 14, ¶ 2 (9th ed. 2017);

REINHARD BORK, ALLGEMEINER TEIL DES BÜRGERLICHEN GESETZBUCHS § 18, ¶¶ 711–12 (4th ed. 2016). The

offer is distinguished from the invitation to submit an offer (invitatio ad offerendum), which is not binding. The

person who reacts to an invitation to offer and declares the will to conclude the contract is the offeror, and the

contract is made after the acceptance of the offer by the person who had initiated the invitation. See, e.g.,

Bundesgerichtshof [BGH] [Federal Court of Justice] Jan. 12, 2011, Neue Juristische Wochenschrift

Rechtsprechungs Report [NJW-RR] 462 (2011) (Ger.); WOLF & NEUNER, supra, § 37, ¶ 6; BORK, supra, § 18,

¶¶ 705–09. The interpretation of the declaration is thus crucial. See DIETER MEDICUS & JENS PETERSEN,

ALLGEMEINER TEIL DES BGB ¶ 358 (11th ed. 2016); LEIPOLD, supra, § 14, ¶ 5.

See BGB, supra note 10, at §§ 145–46.

See BGB, supra note 10, at § 148.

Section 147 of the BGB contains specific criteria on the duration of the binding effect of the offer. In

the case of an offer made to a person who is present (orally or per telephone), the offeree should accept the offer

“immediately” (in complex transactions, the term “immediately” is interpreted broadly). WOLF & NEUNER,

supra note 53, § 37, ¶ 17; Reinhard Bork, § 147, in J. VON STAUDINGERS KOMMENTAR ZUM BÜRGERLICHEN

GESETZBUCH: STAUDINGER BGB - BUCH 1: ALLGEMEINER TEIL: §§ 139–63 ¶ 5 (Herbert Roth, Reinhard Bork &

Sebastian Herrler eds., 2020). For an offer made (for instance, by letter or email) to a person who is absent, the

642 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

acceptance, mirroring the offer and addressed to the offeror, reaches the latter in

a timely manner.

If the acceptance contains new or different terms from the

offer, it qualifies as a counter-offer.

In principle, silence does not equal acceptance, unless the parties have agreed

otherwise.

However, it is possible, depending on the circumstances and

considering the principle of good faith, that the non-rejection of an offer by the

recipient can be considered an acceptance.

Special rules may also give silence

a specific meaning. A characteristic example, drawn from customary law, is the

so-called “commercial letter of confirmation” (kaufmännische

Bestätigungsschreiben), more generally referred to as a written confirmation.

In business transactions, after the completion of negotiations, it is common for

one party to send correspondence that essentially states the content of the

agreement but may also include minor modifications or additions. If the recipient

does not object promptly, a contract is formed based on the terms of the

confirmation.

In practice, especially when negotiations are lengthy, it is difficult to discern

an offer from an acceptance. Moreover, complex transactions often deviate from

the offer-acceptance model. The parties (or a third party) partake in a continuous

drafting process, writing down the points they have agreed upon until all terms

have been agreed to and approved as a whole.

In the end, the conclusion of the

contract is dependent on the meeting of will of the parties on all the terms. Thus,

time the offeror would expect to receive the acceptance under ordinary circumstances is crucial. See WOLF &

NEUNER, supra note 53, § 37, ¶¶ 18–21 (analyzing the parameters that are considered in these cases); BORK,

supra note 53, ¶¶ 10–15.

According to §130(1) of the BGB, a declaration of will addressed to another party (here the acceptance)

becomes effective at the time it reaches him. Section 151 of the BGB provides that a contract is concluded

through mere acceptance, without the need to notify the offeror, only if such notification is not expected in usual

practice or the offeror has declared that there is no need of notification. See WOLF & NEUNER, supra note 53, §

37, ¶¶ 35–43; MEDICUS & PETERSEN, supra note 53, ¶¶ 382–86; BORK, supra note 53, ¶¶ 746, 749.

See BGB, supra note 10, §§ 150(1)–150(2) (explaining late acceptance and modified acceptance

respectively).

See WOLF & NEUNER, supra note 53, § 31, ¶ 14; MEDICUS & PETERSEN, supra note 53, ¶ 393.

See WOLF & NEUNER, supra note 53, § 31, ¶ 15, § 31, ¶¶ 29, 33; see also MEDICUS & PETERSEN, supra

note 53, ¶¶ 392–93; LEIPOLD, supra note 53, §14, ¶ 26.

See MEDICUS & PETERSEN, supra note 53, ¶ 440; WOLF & NEUNER, supra note 53, § 37, ¶ 48; LEIPOLD,

supra note 53, § 14 ¶ 28. Special forms of these commercial letters of confirmations are regulated in the German

Commercial Code. See, e.g., Handelsgesetzbuch [HGB] [Commercial Code], §§ 91a, 362 (Ger.).

See Detlef Leenen, Abschluß, Zustandekommen und Wirksamkeit des Vertrages, 188 DAS ARCHIV FÜR

DIE CIVILISTISCHE PRAXIS [ACP] 381, 399 (1988); see also MEDICUS & PETERSEN, supra note 53, ¶ 394; WOLF

& NEUNER, supra note 53, § 37, ¶ 2; BORK, supra note 53, ¶ 701.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 643

irrespective of the particular mode of contract formation, if the mutual consent

of the parties does not cover all terms, then the rules of dissent apply.

The BGB includes two provisions on dissent, which are significant for this

article. Section 154 addresses overt dissent and stipulates that, when in doubt,

the contract is not concluded if the parties have not agreed on all substantial

terms.

It further states that if the parties have expressed an intention to

conclude a contract in a formal writing, there is no binding agreement until the

execution of that contract.

But these rules of interpretation are immaterial if

the will of the parties indicates otherwise. As long as their agreement covers the

essential terms, then a binding contract is formed.

Section 155 refers to hidden

dissent, which provides that if the parties consider the contract concluded,

although they have not actually reached an agreement on particular terms, a

binding contract is formed.

The presumption is that, given the circumstances,

they would have still entered a contract despite not agreeing to the missing terms.

Any contractual gaps are then filled by means of interpretation or the application

of default rules.

B. Precontractual Liability

It has long been accepted in Germany that, in cases of prolonged contract

negotiations, the interests of the negotiating parties should be protected. Thus,

although the initial version of the BGB failed to include provisions relating to

precontractual liability, German case law embraced the doctrine of culpa in

contrahendo, initially developed by Rudolf von Jhering,

that gained the status

of customary law.

These rules were then codified in sections 311(2) and (3) of

See BGB, supra note 10, §154.

See WOLF & NEUNER, supra note 53, § 38, ¶ 11; LEIPOLD, supra note 53, § 14, ¶ 53; BORK, supra note

53, ¶ 776; Oberlandesgericht [OLG] [Higher Regional Court] Schleswig-Holstein, Feb. 27, 2015, 17 U 91-44,

juris (Ger.); infra II.D. If the form is required by law, BGB § 154(2) does not apply, and the contract is voided

under BGB § 125(1). See WOLF & NEUNER, supra note 53, § 38, ¶ 11.

See LEIPOLD, supra note 53, § 14, ¶ 52; BORK, supra note 53, ¶¶ 763, 766, 769, 771, 777; MEDICUS &

PETERSEN, supra note 53, ¶ 434.

See BGB, supra note 10, §155.

See LEIPOLD, supra note 53, § 14, ¶ 54; MEDICUS & PETERSEN, supra note 53, ¶ 434; BORK, supra note

53, ¶780; see also BGH, May 12, 2006, NJW 284 (2006) (explaining the priority of filling gaps by applications

of default rules); infra II.D.

Von Jhering, supra note 22.

WOLFGANG FIKENTSCHER & ANDREAS HEINEMANN, SCHULDRECHT, ALLGEMEINER UND BESONDERER

TEIL ¶ 86 (11th ed. 2017); Cornelia Feldmann, § 311, in J. VON STAUDINGERS KOMMENTAR ZUM BÜRGERLICHEN

GESETZBUCH: STAUDINGER BGB - BUCH 2: RECHT DER SCHULDVERH. . .LTNISSE: §§ 311, 311A-C ¶ 98 (Cornelia

Feldmann, Robert Schumacher & Dagmar Kaiser eds., 2018); Jan Busche, Vorbemerkung zu § 145, in 1

644 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

the BGB by the Reform of the Law of Obligations

(Schuldrechtsmodernisierung) of 2002.

Section 311(2) BGB extends to the

pre-contractual stage the obligation of negotiating parties to consider the rights

and interests of each other, as provided in section 241(2) of the BGB. Hence, the

opening of negotiations comes with various protective duties (Schutzpflichten or

Rücksichtspflichten), such as the duty to provide information, the duty of

loyalty,

and the duty to abstain from unjustified interruptions of the

negotiations,

which will be discussed below.

More specifically, the principle that each party is free to break off

negotiations without the need for justification is no longer considered applicable

when one of the parties has culpably led the other to trust that an agreement will

be reached. If the negotiations are then unjustifiably interrupted, there is a breach

of the pre-contractual duty of good faith.

The party whose expectations have

been frustrated may claim damages

covering its “negative interest,” meaning

reliance losses.

Precontractual liability is implied-in-law, irrespective of any

agreement of the parties, although the parties may concretize or enhance the

duties to each other.

MÜNCHENER KOMMENTAR ZUM BÜRGERLICHEN GESETZBUCH: BGB ALLGEMEINER TEIL §§ 1-240 BGB,

ALLGPERSÖNLR, PROSTG, AGG ¶ 58 (Claudia Schubert ed., 9th ed. 2021).

Gesetz zur Modernisierung des Schuldrechts, Nov. 26, 2001, BUNDESGESETZBLATT, TEIL I [BGBL. I] at

3138 (Ger.).

The duty of loyalty is “Treuepflichte” in German. See Volker Emmerich, § 311, in 3 MÜNCHENER

KOMMENTAR ZUM BÜRGERLICHEN GESETZBUCH ¶ 50 (8th ed. 2019); Busche, supra note 69, ¶ 58; BORK, supra

note 53, ¶ 49.

There are various types of protective duties. See Feldmann, supra note 69, ¶¶ 121–64; Emmerich, supra

note 71, ¶¶ 50, 60–70; FIKENTSCHER & HEINEMANN, supra note 69, ¶¶ 91–98.

See Emmerich, supra note 71, ¶¶ 176–78; Feldmann, supra note 69, ¶¶ 143–45; see also BGH, Feb. 22,

1989, NJW-RR 627 (1989) (Ger.).

BGB, supra note 10, § 280; see FIKENTSCHER & HEINEMANN, supra note 69, ¶ 88; LOTHAR HAAS ET

AL., DAS NEUE SCHULDRECHT 124–25 (2002); BORK, supra note 53, ¶ 686; Roland Schwarze, § 282, in J. VON

STAUDINGERS KOMMENTAR ZUM BÜRGERLICHEN GESETZBUCH: STAUDINGER BGB - BUCH 2: RECHT DER

SCHULDVERH. . .LTNISSE: BGB §§ 255-304 ¶ 32 (Georg Caspers, Cornelia Feldmann, Sebastian Kolbe & Roland

Schwarze eds., 2019) (Ger.).

See FIKENTSCHER & HEINEMANN, supra note 69, ¶¶ 104–05; MEDICUS & PETERSEN, supra note 53, ¶

454; HAAS ET AL., supra note 74, at 118; WOLF & NEUNER, supra note 53, § 36, ¶¶ 26, 38; Busche, supra note

69, ¶ 58. If the faulty interruption of negotiations prevents the formation of a valid contract that would otherwise

have been concluded, there is, in principle, no claim for the conclusion of the contract. Feldmann, supra note

69, ¶ 175. The question here is whether one party can bring a claim against the other party (who interrupted

negotiations) to force the latter to conclude the contract against its will (in German law this is called

Kontrahierungszwang).

See infra Section II.D.6.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 645

C. Types of Preliminary Agreements and Their Legal Effects

Prior to entering a final or formal contract, the parties may enter into various

preliminary agreements. The following review will discuss some significant

types of such agreements. These preliminary agreements come in two types:

agreements that are intended to lead to a final contract (Sections C.1.-C.5)

and

agreements that are meant to control or regulate the negotiation process (Section

C.6).

1. Pre-contracts

The most recognized binding preliminary agreement is the pre-contract

(Vorvertrag), by which the parties, or at least one of them,

assume the

obligation to conclude the main contract.

The Vorvertrag is not specifically

regulated in the BGB. In the explanatory memorandum of the first draft (Motive)

of the BGB, the regulation of the Vorvertrag was considered unnecessary since

it is a fully binding contract, and the general rules on contracts apply.

practice, such agreements are common, especially in sales of immovables or

contracts for work or services when parties agree to proceed with the contract

despite issues remaining to be negotiated. Their content needs to be sufficiently

specified, although not in every detail.

According to case law, a Vorvertrag

can be less definite than a formal contract,

where gaps can be filled through

interpretation.

If the party bound by the Vorvertrag fails to conclude the final

Infra Section C.1–C.5.

Infra Section C.6.

Pre-contracts may bind only one of the parties. See WOLF & NEUNER, supra note 53, § 36, ¶ 2; Busche,

supra note 69, ¶ 66; MATTHIAS CASPER, DER OPTIONSVERTRAG 80–81 (2005); see also BGH, May 12, 2006,

Neue Juristische Wochenschrift [NJW] 2843 (2006) (Ger.) (illustrated below under II.D).

See Martin Otto, § 145 BGB Bindung an den Antrag, in 1 JURIS PRAXIS KOMMENTAR-BGB:

ALLGEMEINER TEIL ¶ 49 (9th ed. 2020) (Ger.); BORK, supra note 53, ¶ 690. There is a presumption in favor of

finding a contract, but not a pre-contract. See BGH, June 8, 1962, NJW 1812 (1962) (Ger.); Bork, supra note

56, ¶ 53.

See Busche, supra note 69, ¶ 61; Reinhard Bork, Vorbemerkung zu § 145, in STAUDINGER BGB - BUCH

1, supra note 56, ¶ 51 (citing MOTIVE ZU DEM ENTWURFE EINES BÜRGERLICHEN GESETZBUCHES FÜR DAS

DEUTSCHE REICH I 178 (1888)).

A Vorvertrag includes the main terms of the final contract, and all of the other terms that the parties

consider important. See DIETER HENRICH, VORVERTRAG, OPTIONSVERTRAG, VORRECHTSVERTRAG 127 (1965)

(Ger.); BORK, supra note 53, ¶ 691; Busche, supra note 69, ¶ 63. In the case of an incomplete Vorvertrag, there

remains an obligation to proceed to further negotiations. See HENRICH, supra, at 213; see also infra Section II.D.

See BGH, Dec. 21, 2000, NJW 1285 (2001) (Ger.); Bork, supra note 81, ¶ 57; Busche, supra note 69, ¶

63 (giving a more critical explanation).

See BORK, supra note 53, ¶ 691; Busche, supra note 69, ¶ 64.

646 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

contract, the other party has a claim for specific performance.

The court, by

granting specific performance, substitutes for the declaration of the will and acts

to conclude the contract.

Because of its binding effect, the pre-contract is

subject to the same form requirements as found in final contracts of the same

type.

2. Option Agreements

Another form of a binding preliminary contract is the option agreement

(Optionsvertrag), which grants one party the unilateral right to conclude the

contract, the contents of which have been fully negotiated and incorporated into

the option agreement. For this reason, the option agreement (but not the exercise

of the right of option) is subject to the same form requirements as the main

contract.

A special form of the Optionsvertrag regulated in the BGB is the

Wiederkauf (§§ 456-462, which recognizes the seller’s right to repurchase the

object of the sale from the buyer. A functional equivalent of the option

agreement is the firm offer (Festofferte) that may be binding for a long period

of time.

Unlike the option agreement, the terms of the offer are not agreed upon

but are decided by the offeror alone. Finally, the option agreement is often

difficult to discern from a pre-contract (Vorvertrag) that is binding on only one

of the parties. The difference lies in the effect of the declaration of the will of a

party to conclude a main contract: if it leads directly to the conclusion of the

contract, then it is an Optionsvertrag, but if one party has a claim against the

other to proceed to the conclusion of the contract, then the agreement qualifies

as a Vorvertrag.

3. Pre-Emption Agreements

Pre-emption agreements (Vorrechtverträge) grant one of the parties

privileges over third persons if the other party decides to proceed to the

conclusion of a specific contract.

A specific type of pre-emption agreement is

See Zivilprozessordnung [ZPO] [Code of Civil Procedure], § 894 (Ger.).

Id.

See BGH, May 12, 2006, NJW 2843 (2006) (Ger.) (illustrated below under Section II.D); see also

Busche, supra note 69, ¶ 65; Bork, supra note 81, ¶ 60; WOLF & NEUNER, supra note 53, §36, ¶ 4.

See NJW 2843 (2006) (Ger.); Otto, supra note 80, ¶ 56; BORK, supra note 53, ¶ 697.

See WOLF & NEUNER, supra note 53, §36, ¶ 6; Otto, supra note 80, ¶ 57; BORK, supra note 53, ¶ 696;

Busche, supra note 69, ¶ 74.

See Bork, supra note 81, ¶ 69; CASPER, supra note 79, at 81–82; Christian Armbrüster, Vorbemerkung

vor § 145, in ERMAN BGB, KOMMENTAR ¶ 51a (16th ed. 2020).

See CASPER, supra note 79, at 82.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 647

a Vorhandveträge, which allocates to one party the obligation to grant a

preference to the other party. A Vorhandveträge can come in various forms,

which differ in terms of their binding effect. In their weakest version, a party

must notify the beneficiary of the intention to conclude the main contract,

allowing the beneficiary to make an offer that the former is free to accept or

deny.

The right of pre-emption is stronger when the beneficiary has the right

to finalize the contract. This is the case when either the beneficiary has the right

to claim the conclusion of a contract when its offer matches the best offer or

when the beneficiary has the right to be the first party to receive a binding offer

(Angebotsvorhand).

In the latter, the agreement between the parties is a type

of Vorvertrag binding upon one of the parties, provided the other party decides

to enter into the contract.

Another type of pre-emption agreement, regulated in the BGB, is a special

type of sales contract called a Vorkauf.

A Vorkauf allows the beneficiary to

exercise the right of pre-emption when the other party concludes a sales contract

with a third party.

As a result, a sales contract is concluded between the seller

and the holder of a Vorkaufsrecht on the same terms as the sales contract with

the third party.

4. Framework Agreements

The framework agreement (Rahmenvertrag) is considered preliminary to a

series of future contracts. Parties enter into such agreements when they intend

to establish a long-term business relationship where future contracts are formed

subject to the terms of the framework agreement. Framework agreements are

often used in factoring and franchising relationships.

The Rahmenvertrag

regulates the rights and obligations of the parties involved in the relationship as

well as issues relating to future contracts. As a rule, a party cannot bring a claim

for the failure to conclude future contracts. However, the unjustified denial to

See HENRICH, supra note 82, at 304–07; Bork, supra note 81, ¶ 78; Otto, supra note 80, ¶ 59.

See HENRICH, supra note 82, at 303; WOLF & NEUNER, supra note 53, § 36, ¶ 11.

See BGH, Dec. 17, 1987, NJW 1261 (1988) (Ger).

BGB, supra note 10, §§ 463–73.

Id. § 463.

BGB, supra note 10, § 464(2).

See Bork, supra note 81, ¶ 54; WOLF & NEUNER, supra note 53, § 36, ¶ 14; Armbrüster, supra note 90,

¶ 55.

648 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

conclude future contracts may constitute a breach of the framework agreement

and warrant a claim for damages.

5. Letters of Intent

Letters of intent are used primarily in complex transactions, such as sales of

businesses and investment projects. They come in different forms and feature

different content depending on the type of business or transaction.

100

A common

denominator is that one party expresses the non-binding, in principle, intention

to proceed with the conclusion of a contract under certain conditions.

101

A letter

of intent may also recite the terms on which the parties have already agreed,

called a Punktation,

102

as well as terms to be agreed upon.

The non-binding character of such promises or agreements is only the

starting point of the analysis. A bilateral letter of intent may include binding

agreements relating to the negotiation process, such as a duty of confidentiality,

commitment to exclusive negotiations, or obligations to pay break-up fees.

103

exceptional cases, the conclusion of a Vorvertrag or a final contract may be

inferred.

104

However, this inference is unlikely in cases where the parties make

clear their intention not to be bound unless performance has begun.

105

Even

without a binding effect, letters of intent enhance the recipient’s trust that the

negotiations will not be interrupted without sound reasons and support a claim

for breach of the duty of good faith negotiation.

106

Thus, there is always the

possibility that these agreements may result in pre-contractual liability,

including claims for damages for costs incurred (reliance damages).

107

See BGH, Apr. 30, 1992, NJW-RR 977 (1992) (Ger.); CASPER, supra note 79, at 87; WOLF & NEUNER,

supra note 53, § 36, ¶ 16; Armbrüster, supra note 90, ¶ 55.

100

See MARCUS LUTTER, DAS LETTER OF INTENT 3–4 (3d ed. 1998). The terminology is volatile and does

not clearly distinguish between letters of intent, memoranda of understanding, and instructions to proceed. See

Otto, supra note 80, ¶ 58; Busche, supra note 69, ¶ 60. According to Marcus Lutter, instructions to proceed falls

within the notion of letter of intent. LUTTER, supra, at 45.

101

See Busche, supra note 69, ¶ 59; LUTTER, supra note 100, at 37; CASPER, supra note 79, at 75; Bork,

supra note 56, ¶ 14.

102

See Busche, supra note 69, ¶ 60; Bork, supra note 56, ¶ 14; BGB, supra note 10, § 154(1), sentence 2

(also mentioned under Section II.A).

103

See infra Section II.C.6.

104

LUTTER, supra note 100, at 24–25; Busche, supra note 6969, ¶ 60.

105

See LUTTER, supra note 100, at 22–23.

106

See LUTTER, supra note 100, at 69–79; MEDICUS & PETERSEN, supra note 5353, ¶ 455; Bork, supra note

56, ¶ 14.

107

See Busche, supra note 69, ¶ 59; CASPER, supra note 79, at 76.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 649

6. Instructions to Proceed

The “instructions to proceed” are binding preliminary agreements that do not

refer to the negotiated contract’s contents but regulate the negotiating process

itself.

108

They include the obligations of confidentiality, exclusivity of

negotiations, and a duty to disclose information.

109

The breach of these

instructions or obligations leads to liability. Due to the difficulty in proving

damages, these agreements often stipulate the damages to be paid.

D. Matter of Interpretation

The distinctions between the different types of preliminary agreements

presented are not clear. This is because preliminary agreements differ in content,

so the title of the agreement is not dispositive of the nature of the agreement.

What is crucial for the binding character and the enforceability of the agreement

is interpretation. The starting point for interpretation is the subjective will or

intent of the parties.

110

If there is no such common will, then objective criteria,

such as good faith or trade usage, are used to determine intent.

111

The binding

nature of the declaration of the will of each party is determined through the

perspective of the reasonable third person (objektiven Empfängerhorizont).

112

Factors used in determining party intent include the wording of the agreement,

economic purpose of the agreement, interests of both parties, as well as any other

relevant circumstances.

113

If it remains doubtful whether the parties have

concluded a binding contract, section 154 of the BGB provides a presumption

against enforceability.

108

See CASPER, supra note 79, at 77; cf. WOLF & NEUNER, supra note 53, § 36, ¶ 13.

109

Such clauses may be also included in a letter of intent. See supra II.C.5.

110

The declaration of will is explained in BGB, § 133. BGB, supra note 10, §133; see Busche, supra note

69, ¶ 15; Hermann Reichold, § 133, in 1 JURIS PRAXIS KOMMENTAR-BGB, ¶ 18 (9th ed. 2020) (Ger.); Events

after the conclusion of the agreement can be also considered, which is important when the actions are inconsistent

with the declared will. Reichold, supra, ¶ 18; LEIPOLD, supra note 533, §15, ¶ 13.

111

See BGB, supra note 10, §157. The wording of the provision refers to the interpretation of contracts, but

it is generally accepted that it applies to a unilateral declaration of will addressed to another person as well. See

MEDICUS & PETERSEN, supra note 53, ¶¶ 321, 323; Reinhard Singer, § 133, in J. VON STAUDINGERS

KOMMENTAR ZUM BÜRGERLICHEN GESETZBUCH: STAUDINGER BGB - BUCH 1: ALLGEMEINER TEIL: §§ 90–124;

§§ 130–33 ¶ 3 (Malte Stieper, Steffen Klumpp, Reinhard Singer & Sebastian Herrler eds., 2021); Busche, supra

note 69, ¶ 9.

112

See Reichold, supra note 110, ¶ 12; MEDICUS & PETERSEN, supra note 53, ¶ 323; Busche, supra note

69, ¶ 12.

113

Reichold, supra note 110, ¶ 20–22; LEIPOLD, supra note 53, § 15, ¶¶ 10, 13, 17; Busche, supra note 69,

¶ 12.

650 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

Case law is generally reluctant to recognize the enforceability of agreements

that are deemed to be indeterminate. The seminal judgment of the Koblenz Court

of Appeal (OLG) of May 12, 2005, illustrates this point.

114

The defendant sent a

letter to the plaintiff-architect, declaring its intention to cooperate with her on a

future project involving the construction of a school, under the condition that the

architect draft construction plans without remuneration pending the State’s

approval of the project. In the same letter, the defendant stated that, in return, if

the project were approved, it would assign the architectural work to the

architect.

115

The defendant was awarded a public tender for the construction of

two buildings of the school. It then assigned the architectural work to another

architect. The plaintiff-architect brought a claim for lost profits.

The court ruled that there was no valid preliminary agreement between the

parties because the initial declaration was too vague and missing essential terms

(essentialia negotii) and, as such, did not qualify as a Vorvertrag.

116

The parties’

understanding lacked specifications on the building, the time performance, and

remuneration. Finally, the court noted there was a possible claim of plaintiff’s

reliance loss but left the issue undecided.

Agreement on essential terms is no guarantee that a binding agreement has

been concluded. The judgment of Schleswig-Holstein Court of Appeals (OLG)

from February 27, 2015, involved negotiations between an event agent and a

local organizer for the sale of a stage production.

117

The parties had reached an

agreement on the place and date of the event as well as on the fees that the

organizer would pay the agent. However, there were further issues to be decided,

such as liability insurance and safety measures. As the negotiations failed to

progress, the agent informed the organizer that it considered the agreement to be

binding. The organizer replied that a full agreement still needed to be concluded.

The agent waited two months before bringing a claim based on the alleged

agreement or, alternatively, for pre-contractual liability due to unjustified

interruption of the negotiations.

The court rejected the claim on both grounds.

118

It ruled that, although the

parties had agreed on the essentialia negotii of the contract, they had not reached

114

OLG Koblenz, May 12, 2005, 5 U 1408/04, juris (Ger.). Similar is the decision of OLG Frankfurt, Apr.

17, 2018, 5 U 32/17, juris (Ger.).

115

Id.

116

Id.

117

OLG Schleswig-Holstein, Feb. 27, 2015, 17 U 91/14, juris (Ger.).

118

Id.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 651

an agreement on other terms, one of which the organizer had declared to be

important. Therefore, according to section 154 of the BGB, no binding

agreement was concluded. The court emphasized that in a Vorvertrag the terms

must be precise enough so that, if a dispute arises, the court can ascertain

them.

119

Moreover, the parties had clearly expressed their intent to conclude the

agreement in a formal writing and, according to section 154(2) of the BGB, such

a writing would then be required.

120

The court also ruled that there was no pre-

contractual liability since the organizer’s behavior was reasonable and any

expenses incurred by the agent were its own.

121

These decisions show that the level of concretization (specification) of an

agreement is essential for its enforceability, given the presumption against the

binding character of incomplete agreements. This does not mean that a

preliminary agreement is deemed binding only if it is complete. On May 12,

2006, the Federal Court of Justice (BGH), the highest court of Germany, heard

a case about the owner of a plot of land with a commercial building, which the

owner leased for a term of ten years, with a lessee option to buy to be exercised

in writing.

122

The initial agreement specified the price and the time of

payment.

123

The lessee exercised the option in writing but subsequently failed to

proceed to the conclusion of the sales contract.

124

The owner brought a claim

against the lessee that included a detailed sale offer that the owner had drafted

and requested that the lessee accept the offer.

125

The court ruled that the option agreement was a Vorvertrag that bound the

owner if the lessee exercised its option to buy.

126

The fact that the option

provision lacked detail, but did cover the essential terms of the sales contract,

was sufficient for it to be binding.

127

Section 154 of the BGB’s presumption

against enforceability did not apply because the court found that the parties

showed an intent to enter into a binding agreement and had assumed the

obligation to negotiate the details at a later time.

128

Failure of the subsequent

negotiations gives each party the right to bring a claim by submitting a contract

119

Id. ¶¶ 68–69; see BGB, supra note 10, § 154(1), sentence 2.

120

OLG Schleswig-Holstein, Feb. 27, 2015, 17 U 91/14, ¶ 78, juris (Ger.).

121

Id. ¶¶ 81–82.

122

BGH, May 12, 2006, NJW 2843 (2006) (Ger).

123

Id. ¶ 3.

124

Id. ¶ 4.

125

Id.

126

Id. ¶ 13.

127

Id.

128

Id. ¶¶ 14–18.

652 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

proposal to the court. The court then decided the terms of the final contract based

on its interpretation of the Vorvertrag, the parties’ good faith duty to perform

the obligations derived from the Vorvertrag, and applicable trade usage.

129

III. ENFORCEABILITY AND LIABILITY OF PRELIMINARY AGREEMENTS IN

FRENCH LAW

An underdeveloped set of rules on contract formation were found in the

French Civil Code (FCC) of 1804. The FCC, in its original enactment, devoted

little attention to the matter of preliminary agreements. Over two centuries,

French courts have provided a complex and thick set of principles to fill the gaps

in the FCC. Many of these well-settled rules were codified and integrated into

the FCC through a major reform of contract law adopted in 2016.

130

Since one

of the main goals of the 2016 reform was to update the FCC’s text to align with

the judicial developments of the previous decades, French rules on contract

formation are now consistent between statutory formulae and judicial principles.

The revised provisions of the FCC dealing with negotiations and contract

formation (articles 1112–1124) acknowledge the duration of the contract-

making process.

131

The new FCC adopted existing case law governing the pre-

contractual stage and the requirements for the creation of valid contracts.

132

However, the new provisions do not cover all aspects of contractual negotiations

and the progressive formation of contracts, which continue to be regulated by

long-established case law. The next section reviews the basic features of the

French legal approach to contract formation and validity.

129

Id. ¶¶ 30–31.

130

Ordonnance n° 2016-131 du 10 fvrier 2016 portant rforme du droit des contrats, du rgime gnral et

de la preuve des obligations [Ordinance No. 2016-131 of February 10, 2016 Reforming Contract Law, the

General Regime and Proof of Obligations] Journal Officiel de la République Française [J.O.] [Official Gazette

of France] Feb. 11, 2016, Texte 26 (reforming contract law in the French Civil Code). The newly reformed rules

only apply to disputes arising out of contracts agreed upon after Oct. 1, 2016. Id. art. 9.

131

Laura Sautonie-Laguionie, The Creation of a Legal Theory of the Conclusion of the Contract, in THE

REFORM OF FRENCH CONTRACT LAW 69 (Bénédicte Fauvarque-Cosson & Guillaume Wicker eds., 2019); Ruth

Sefton-Green, Formation of Contract: Negotiation and the Process of Agreement, in THE CODE NAPOLÉON

REWRITTEN: FRENCH CONTRACT LAW AFTER THE 2016 REFORMS 59 (John Cartwright & Simon Whittaker eds.,

2017).

132

STÉPHANIE PORCHY-SIMON, DROIT DES OBLIGATIONS 65 (14th ed, 2021); Sautonie-Laguionie, supra

note 131, at 69–82; Sefton-Green, supra note 131, at 59.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 653

A. Overview of French Law on Contract Formation

From the perspective of the common law, the foremost distinguishing feature

of French contract law is that it does not require consideration to form a binding

contract. The notion of contrat under French law is much wider than the

corresponding notion of contract in the common law since French contract law

covers unilateral undertakings, such as gift promises.

133

Before the 2016 reform,

it was necessary that the contract rest upon a legitimate cause or causa for

bilateral and unilateral contracts to be valid, that is, on a lawful reason.

134

The

FCC of 2016 eliminated the requirement of cause, leaving agreement on a lawful

and specific content by parties with full capacity and willingness to be bound as

requirements to form a contract.

135

This new approach impacts the formation of

unilateral contrat or unilateral obligations by clarifying the role of silence as a

means of acceptance and providing for circumstances where offers are regarded

as firm offers.

Under French law, a bilateral or unilateral contract is defined by Article 1101

of the FCC as “the concordance of wills of two or more persons intended to

create, modify, transfer or extinguish obligations.”

136

This means that all parties

must consent to the transaction even if the agreement creates obligations for only

one of the parties. Article 1113 of the FCC states that a contract, whether

bilateral or unilateral, “is formed by the meeting of an offer and an acceptance

by which the parties demonstrate their will to be bound.”

137

A contract is concluded as soon as the acceptance reaches the offeror.

138

Mere silence by the offeree, under Article 1120 of the FCC, is not sufficient to

form a contract.

139

Article 1120, however, provides that silence may constitute

133

See also Code Civil [C. civ.] [Civil Code] arts. 1106–07 (Fr.) (defining unilateral and gratuitous contracts

respectively).

134

“Cause […] becomes a description of what might be called the generalized motivation of the transaction;

it does not require that the transaction, to be enforceable, contain an element of bargain or reciprocity.” Arthur

von Mehren, The French Civil Code and Contract: A Comparative Analysis of Formation and Form, 15 LA. L.

REV. 687, 688 n.3 (1955) (emphasis in original). Much ink has been spent on the similarities and differences

between the requirements of consideration and cause. See, e.g., id. at 698–711; James Gordley & Hao Jiang,

Causa and Consideration, in ELGAR ENCYCLOPEDIA OF COMPARATIVE LAW (Jan Smits, Catherine Valcke &

Jaakko Husa eds., forthcoming 2023); von Mehren, supra, at 698–711; Ernest G. Lorenzen, Causa and

Consideration in the Law of Contracts, 7 YALE L. J. 621 (1919).

135

C. civ. art. 1128 (Fr.).

136

Id. art. 1101.

137

Id. art. 1113.

138

Id. art. 1121.

139

Id. art. 1120.

654 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

acceptance “where so provided by legislation, usage, business dealings or other

particular circumstances.”

140

French courts have recognized that one of the

“other particular circumstances” is when the contract is beneficial to the

offeree—that is, the contract is unilateral and gives rise to obligations of the

offeror.

141

In principle, an offeror can withdraw the offer at any time, provided that the

revocation is communicated to the offeree.

142

An exception to this rule is when

either the offeror sets a period for acceptance or when such period results from

the circumstances of the case.

143

The withdrawal of the offer before the end of

that period exposes the offeror to extra-contractual liability for reliance damages

suffered by the offeree.

144

The withdrawal is effective to prevent the conclusion

of a contract, but the offeror is not relieved of liability.

145

The offeror might

make the offer irrevocable either for a consideration or gratuitously by entering

into a contract of promesse unilatérale, under which the offeror is bound to keep

its offer open for the period of time set in the offer.

146

In these cases,

“[r]evocation of the promise during the period allowed to the beneficiary

[(offeree)] to exercise the option does not prevent the formation of the contract”

if the beneficiary decides to accept.

147

In such a case, the withdrawal of the offer

is deemed to be unlawful and ineffective.

148

Even when gratuitous, the contract

of promesse unilatérale is binding upon the offeror, while leaving the offeree

free to decide whether to enter the contract.

149

A general feature of French law is its adherence to the principle of good faith,

which applies thought to the contract process. Article 1104(1) of the FCC states,

140

See id.

141

Cour de cassation [Cass.] [supreme court for judicial matters] req., Mar. 29, 1938, Dalloz Pratique 1939,

I, 5 (Fr.). The rule is considered applicable even after the 2016 reform. See CODE CIVIL 2021 ANNOTÉ 1355

(2020) [hereinafter CC ANNOTÉ].

142

This is the usual understanding of Articles 1115 and 1116 of the French Civil Code. See C. civ. art.

1115–16.

143

See id.

144

C. civ. art. 1116(1)-(3) (Fr.). Article 1116(3) in particular specifies that the offeror cannot be held liable

“for the loss of profits which were expected from the contract”—that is, the other party’s expectation interest.

The rule corresponds to a principle long established by French courts. See Cass. 1e civ., Dec. 17, 1958, Dalloz

1959, I, 33 (Chastan v. Isler).

145

See id.

146

C. civ. art. 1124(1)-(3) (Fr.).

147

Id. art. 1124(2).

148

See id.

149

See id.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 655

“[c]ontracts must be negotiated, formed and performed in good faith.”

150

This

provision is “a matter of public policy”

151

that cannot be excluded by the parties.

In comparison to the good faith principle in Germany, under French law, pre-

contractual breach of good faith is not considered a contractual breach due to the

principle of freedom of contract.

The balance between the principles of pre-contractual good faith and

freedom of contract is expressed in Article 1112(1) of the FCC: “[t]he

commencement, continuation and breaking-off of precontractual negotiations

are free from control. [However, t]hey must mandatorily satisfy the requirements

of good faith.”

152

This means that parties are free to negotiate without

restrictions if they behave in a good faith manner. Parties are free to stop

negotiations but are not free to suddenly withdraw from advanced negotiations

without a viable reason (rupture abusive des pourparlers).

153

Other illustrations

of behaviour contrary to good faith in negotiations are codified in Articles

1112(1) and 1112(2) of the FCC. Article 1112(1) establishes a pre-contractual

duty of one party to disclose important information to the other party that it is

reasonably unaware of or information that the party legitimately relies on for the

knowing party to provide the information.

154

Article 1112(2) establishes a duty

not to disclose confidential information that one party has obtained during

negotiations.

155

In these cases, any claims for damages would be in tort. The

party in breach of the pre-contractual duty of good faith is only liable for the

150

Id. art. 1104(1).

151

Id. art. 1104(2).

152

Id. art. 1121(1).

153

The leading cases, all affirming the liability in tort of the party who suddenly exited from the

negotiations, are Cass. com., Mar. 20, 1972, Bull. civ. IV, No. 96 (Fr.) (Gerteis v. Vilber-Lourmat); Cass. 3e

civ., Oct. 3, 1972, Bull. civ. III, No. 491 (Fr.) (Monoprix v. Résidence Bonaparte); Cass. com., Nov. 26, 2003,

Bull. civ. IV, No. 186 (Fr.) (Manoukian v. X). See also Cass. com., Jan. 7, 1997, N° de pourvoi 94-21.561, Inédit

https://www.legifrance.gouv.fr/juri/id/JURITEXT000007319876/ (Fr.) (Eurolactique & Co. v. Banque franco-

allemande); Cass. com., Apr. 22, 1997, N° de pourvoi 94-18.953, Inédit,

https://www.legifrance.gouv.fr/juri/id/JURITEXT000007333202/ (Mabo v. Iveco); Cass. com., Apr. 7, 1998,

N° de pourvoi 95-20.361, Inédit, https://www.legifrance.gouv.fr/juri/id/JURITEXT000007373338/ (Fr.)

(Laboratoires Sandoz v. Poleval); ISABEL ZULOAGA, RELIANCE IN THE BREAKING-OFF OF CONTRACTUAL

NEGOTIATIONS 55–98 (2019); Cartwright & Hesselink, supra note 4, at 449; PAULA GILIKER, PRE-

CONTRACTUAL LIABILITY IN ENGLISH AND FRENCH LAW 120–32 (2002); Patrice Jourdain, Rapport Français, in

LA BONNE FOI 121–32 (Association Henri Capitant ed., 1994); Joanna Schmidt, La période précontractuelle en

droit français, 42 REV. INT. DR. COMP. 545–66 (1990). See generally JOANNA SCHMIDT, NÉGOCIATIONS ET

CONCLUSION DE CONTRATS (1982).

154

C. civ. art. 1112(1) (Fr.).

155

PORCHY-SIMON, supra note 132, at 65–66; Sautonie-Laguionie, supra note 131, at 72–75; Sefton-Green,

supra note 131, at 61–69.

656 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

frustrated reliance interest rather than the expectation interest of the other

party.

156

B. Negotiations and Preparatory Agreements

The FCC acknowledges that parties during their negotiations may conclude

a variety of preliminary arrangements relating to a prospective final contract.

These arrangements have historically been grouped in French scholarship under

the category of preparatory agreements (contrats préparatoires) or pre-contracts

(avant-contrats).

157

The contrats préparatoires qualify as binding contracts, a

breach of which entails contractual (rather than tortious) liability. As stated in

doctrinal texts, when evaluating the behaviour of parties during negotiations, a

distinction should:

be made depending on whether a preparatory contract is concluded. In

the absence of such a contract, contractual freedom prevails, even if

obligations . . . are imposed on the negotiating parties, and the breach

of which will at least entail tortious liability. If a preparatory contract

is concluded, the binding nature of the contractual undertaking prevails

and justifies the protection [under contract law] of the undertaking

given, up to its specific performance in kind.

158

Again, the obligations created by the contrats préparatoires depend upon the

type of arrangement and its proximity to the final contract. These may range

from the obligation to enter the final contract to the more limited obligation of

negotiating and protecting the confidentiality of secret information. In sum, all

contrats préparatoires are binding insofar as they are contracts, but the breadth

of the binding content varies according to the closeness of the preparatory

agreement to the final contract.

1. Pre-emption Agreements and Firm Offers

Despite the numerous variations of contrats préparatoires acknowledged by

French case law and scholarship, the 2016 reform provides regulations for only

two specific types: the pacte de préférence (pre-emption agreement) and the

156

See C. civ. art. 1112(2) (Fr.).

157

There are different specific forms of arrangements that negotiating parties might enter into. See

L’AVANT-CONTRAT, ACTUALIT DU PROCESSUS DE FORMATION DES CONTRATS (Olivier Deshayes ed., 2008);

L’AVANT-CONTRAT (Jean-Marc Mousseron, Michel Guibal & Daniel Mainguy eds., 2001); FRANÇOIS COLLART-

DUTILLEUL, LES CONTRATS PRPARATOIRES  LA VENTE D’IMMEUBLES (1988); Alfred Rieg, La “punctation”

contribution à l’étude de la formation successive des contrats, in ÉTUDES OFFERTES  A. JAUFFRET 593 (1974).

158

Sautonie-Laguionie, supra note 131, at 71.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 657

promesse unilatérale (firm offer), covered by articles 1123 and 1124 of the

FCC.

159

The two provisions are placed immediately after the rules on pre-

contractual liability and formation of contract. The pacte de préférence is

defined as the bilateral or unilateral preparatory agreement through which a

party assumes the obligation, if the party decides to sell a property, to make the

first proposal to sell to the beneficiary of the pre-emption agreement.

160

The

promesse unilatérale (firm offer), as previously discussed,

161

is the obligation

by which a party promises to keep its offer open for a given period, whilst the

beneficiary has the option to decide whether they want to accept.

162

In both

cases, the FCC provides the beneficiary with remedies, such as specific

performance.

Despite the FCC’s narrow recognition of pre-emption agreements and firm

offers, there is judicial recognition of a variety of contrats préparatoires.

163

The

most common forms of preparatory agreements include the contrat-cadre

(framework agreement), the promesse synallagmatique de contrat (agreement

to agree), the lettre d’intention (letter of intent or memorandum of

understanding), and the accord de principe (agreement in principle).

2. Framework Agreements and Agreements to Agree

The contrat-cadre, widely used in the supply of goods and distribution

sectors, is the only agreement that is defined but not regulated under the FCC.

164

It states that a contrat-cadre is “an agreement by which the parties agree [upon]

the general characteristics of their future contractual relations.”

165

The breach of

a framework agreement, such as the refusal of one party to enter subsequent

contracts, gives rise to contractual liability.

166

Furthermore, when the framework

agreement defines essential terms with sufficient precision, its breach entitles

the non-breaching party to specific performance.

167

159

C. civ. art. 1123–24 (Fr.).

160

See C. civ. art. 1123 (Fr.).

161

See Section III.B.

162

See C. civ. art. 1124 (Fr.).

163

PORCHY-SIMON, supra note 132, at 72; PASCAL PUIG, CONTRATS SPÉCIAUX 145 (7th ed. 2017); Sefton-

Green, supra note 131, at 59.

164

C. civ. art. 1111 (Fr.).

165

Id. Puig and Giliker provide an explanation of the rules applicable to framework agreements under

French law. See PUIG, supra note 155, at 165–79; GILIKER, supra note 153, at 21–27.

166

PUIG, supra note 163, at 176–77.

167

Id.

658 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

Of a different nature is the promesse synallagmatique de contrat (agreement

to agree), which is a preparatory contract under which parties agree to enter a

contract on a future date.

168

The promesse synallagmatique de contrat is mostly

used in transactions involving the sale of immovable property.

169

A buyer and

seller may conclude a sale of real estate orally or in writing since real estate

contracts are simple contracts under French law, not requiring a written form.

170

The parties are assumed to commit themselves to concluding a further contract

before a notary or after the buyer’s funds clear.

171

The effect of a promesse

synallagmatique de contrat depends on the interpretation of the will of the

parties. If the parties consider notarization or the assurance of funding as

essential for the conclusion of the sale contract, the contract will be qualified as

a conditional sale and will cease to be effective if the conditions are not met. The

frustrated party, however, may be entitled to damages for pre-contractual

liability. If, by contrast, the parties did not consider the subsequent acts as

essential, the original contract is considered valid and fully effective. The key

point, therefore, lies in the interpretation of the parties’ understanding.

172

3. Letters of Intent and Agreements in Principle

The lettres d’intention and the accords de principe are preparatory

agreements considered far removed from the final contract.

173

The lettre

d’intention is commonly understood as the parties’ affirmation of their

willingness to negotiate: it states the terms upon which they agree and frame the

negotiation process for the terms yet to be agreed upon.

174

In this case too, the

key point is whether the parties had agreed on all the essential terms of the future

contract.

175

If they have agreed, the lettre d’intention can be deemed as

equivalent to the final contract—entitling the non-breaching party to contractual

damages and specific performance.

176

If there is no agreement on essential

168

PORCHY-SIMON, supra note 132, at 72; JEAN-LUC AUBERT & FRANÇOIS COLLART DUTILLEUL, LE

CONTRAT. DROIT DES OBLIGATIONS 70 (5th ed. 2017).

169

PORCHY-SIMON, supra note 132, at 72; AUBERT & DUTILLEUL, supra note 168, at 70.

170

ZWEIGERT & KÖTZ, supra note 9, at 369.

171

PORCHY-SIMON, supra note 132, at 72; AUBERT & DUTILLEUL, supra note 168, at 70.

172

Id.

173

PUIG, supra note 155, at 147–49; GILIKER, supra note 153, at 52–53. The lettre d’intention should not

be confused with the lettre d’intention (comfort letter) regulated by Article 2322 of the French Civil Code, which

is “the commitment to do or not to do, the purpose of which is to support a debtor in the performance of his

obligation towards his creditor.” C. civ. art. 2322 (authors’ translation).

174

PUIG, supra note 155, at 147–49; GILIKER, supra note 153, at 52–53.

175

PUIG, supra note 155, at 148–49; GILIKER, supra note 153, at 52–53.

176

PUIG, supra note 155, at 147–49; GILIKER, supra note 153, at 52–53.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 659

terms, the lettre d’intention may still obligate the parties to pursue negotiations

according to its terms—thus entitling the non-breaching party, in case of breach,

to contractual damages but not specific performance.

177

In an accord de principe (agreement in principle or contrat de négociation),

the parties agree to bind themselves to negotiating contractual terms, but the

conclusion of the contract remains uncertain.

178

Accords de principe are often

combined with conventions de confidentialité (confidentiality agreements),

through which the parties agree that certain information exchanged during

negotiations will remain confidential.

179

In sum, accords de principe give rise to

an obligation of negotiating a contract. Accordingly, the breach of an accord de

principe might give rise to contractual liability for breach of the duty to negotiate

or the duty to protect confidentiality.

180

C. A Matter of Interpretation

The enforceability of lettres d’intention and accords de principe, as well as

the other discussed preparatory agreements, is a matter of judicial interpretation

of the will of the parties.

181

If a French court concludes that the parties agreed

on all essential elements (terms), the preparatory agreement is a fully binding

contract.

182

If the court deems that an agreement on all essential elements was

not reached, the preparatory arrangement may qualify as binding on the parties

as to their obligations to negotiate in good faith.

183

The breach of the duty of

good faith entitles the frustrated party to claim damages in contract rather than

in tort.

184

Yet, since the conclusion of the contract is uncertain in these cases, the

breaching party will be limited to a claim for reliance damages as provided by

Article 1112 of the FCC.

185

The assessment of the will of the parties is thought to be a question of fact,

to be determined at the discretion of the court.

186

Courts will examine the parties’

177

PUIG, supra note 155, at 147–49; GILIKER, supra note 153, at 52–53.

178

PUIG, supra note 155, at 147–49; GILIKER, supra note 153, at 52–53.

179

AUBERT & DUTILLEUL, supra note 168, at 68–69; PUIG, supra note 155, at 149; GILIKER, supra note

153, at 42–45.

180

Id.

181

PUIG, supra note 155, at 145–49.

182

Id.

183

Id.

184

Id.

185

Id.

186

GILIKER, supra note 153, at 18–19.

660 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

behavior objectively but will also give relevance to what the parties considered

essential for the conclusion of the contract. The wording employed by the

parties—such as words of condition or the specification that the arrangement is

meant to be binding—is important but not decisive.

187

In Créations Nelson v. Camaieu International, two companies signed a

settlement agreement (accord transactionnel), according to which, Camaieu

undertook the obligation not to copy the products commercialized by Créations,

with the qualification that such an obligation was a “purely a moral obligation

whose violation will not be considered a breach of the present agreement.”

188

few weeks after the execution of the agreement, Créations accused Camaieu of

trademark infringement and brought suit for breach of the unilateral obligation

not to copy its products. The Court of Cassation held that the settlement

agreement contained a unilateral and binding obligation on Camaieu because

“by agreeing, even if only morally, not to copy the products of Créations, it

expressed an unequivocal and deliberate will to be bound.”

189

This case shows

that French courts accord enforceability to agreements that the parties

themselves qualified as non-binding.

190

The underlying rationale of this

tendency is that “anyone is free to decide whether to enter or not into a contract;

but nobody can decide to enter into a contract and escape the legal consequences

of this decision.”

191

In practice, French courts address the issue of whether a preparatory

agreement is binding through a two-step process. First, the court determines

whether the preparatory agreement contains all the necessary elements for

bilateral or unilateral contractual obligations to arise. If not, the courts must

determine whether the parties assumed pre-contractual obligations and assess

whether one party breached its obligation or the corresponding extra-contractual

obligation to negotiate in good faith. In negotiations between merchants, liability

will be affirmed only if the court determines there has been misbehaviour of the

breaching party and justified reliance by the other party. But whenever

negotiations advance far enough (duration of negotiations; close to final

agreement) and a party withdraws, the courts view that as a breach of the

187

AUBERT & DUTILLEUL, supra note 168, at 67–68; PUIG, supra note 155, at 149.

188

Cass.com., Jan. 23, 2007, 05-13.189, Bull. civ. IV, No. 12, 2007, p. 13 (Fr.) (authors’ translation).

189

Id. (authors’ translation).

190

AUBERT & DUTILLEUL, supra note 168, at 67–68; PUIG, supra note 155, at 148–49; James Gordley,

Comparisons, in THE ENFORCEABILITY OF PROMISES IN EUROPEAN CONTRACT LAW 337, 353–54 (James

Gordley ed. 2001).

191

AUBERT & DUTILLEUL, supra note 168, at 67.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 661

relationship of trust and confidence and impose liability.

192

This approach is

illustrated in the two following decisions.

In X v. Continentale d’entreprises,

193

the parties partook in a lengthy

negotiation for the purchase by X of shares of a chemical company owned by

Continentale d’entreprises before X and the chemical company commenced a

joint project. At the end of the negotiations, the parties signed a lettre-accord

(memorandum of agreement) in which they defined the quantity and the price of

the shares but also declared that the parties still had to agree on the seller’s

warranty relating to the debts of the company being sold. Soon thereafter, the

chemical company abandoned the project. Continentale d’entreprises

subsequently sold the company’s shares to a third party. X sued Continentale

d’entreprises for breach of the lettre-accord, characterizing it as a binding

contract of sale. The Court of Cassation held the lettre-accord was not

equivalent to a contract of sale since there was no agreement on an essential term

(seller’s liability for debt). In the words of the Court, the lettre-accord was “an

agreement in principle obliging the parties to carry out negotiations in good

faith.”

194

Given that Continentale d’entreprises had not violated that agreement,

no liability could be established against it.

195

In a similar and often quoted case, Manoukian v. X et Les Complices,

196

the

Court went in the opposite direction. It concluded that the preparatory

arrangement entered by the parties was not binding either as a final contract or

as an agreement to negotiate in good faith. Nonetheless, the Court held the

defendant liable for violation of the extra-contractual duty to negotiate in good

faith. The parties engaged in negotiations for the purchase of shares of another

company owned by one of the parties. A projet d’accord (draft agreement)

subject to conditions was entered into and subsequently revised on two

occasions. Soon thereafter, X transferred the shares to a third party. The Court

of Cassation determined that the parties viewed the agreement as conditional and

not binding. However, the Court held that, given the advanced stage of the

negotiations and X’s silence on the existence of parallel negotiations, a party’s

withdrawal from the negotiations breached the duty of good faith negotiations

192

ZULOAGA, supra note 153, at 130, 90. See also Cass. com., Jan. 7, 1997, 94-21.561 (Fr.); Cass. com.,

Apr. 22, 1997, 94-18.953 (Fr.).

193

Cass. 1e civ., May 29, 2013, 12-16.563 (Fr.).

194

Id. (authors’ translation).

195

Id.

196

Manoukian v. X, supra note 153.

662 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

and was liable for extra-contractual damages for rupture abusive des

pourparlers (abrupt termination).

197

IV. ENFORCEABILITY AND LIABILITY OF PRELIMINARY AGREEMENTS IN

CHINESE LAW

Chinese law recognizes that some preliminary agreements are enforceable,

requiring the parties to negotiate in good faith, as well as the existence of a

minority view that the parties may be required to enter into a final contract.

Chinese law also distinguishes between a general duty of good faith negotiations

and good faith negotiations stemming from a preliminary agreement.

A. Preliminary Agreement in China: An Overview

Before 2012, there were no specific rules in China governing the

enforceability of preliminary agreements.

198

Instead, the Chinese courts applied

general contract law rules by analogy.

199

In 2012, the Chinese Supreme People’s

Court promulgated the Judicial Interpretation on Sales,

200

which provides in

Article 2 a specific rule on preliminary agreements:

If a party signs a preliminary agreement such as letter of subscription,

letter of order, letter of reservation, letter of intent or memorandum,

which states that a sales contract will be entered into within a certain

197

Id.

198

Preliminary agreements are discussed in Articles 4 and 5 of Interpretation on Issues concerning the

Application of Law to the Hearing of Cases involving Disputes over Contracts for the Sale and Purchase of

Commodity House (2020 Amendment), Judicial Interpretation No. 17 [2020] (promulgated by Sup. People’s

Ct., Dec. 29, 2020, effective Jan. 1, 2021) [hereinafter Judicial Interpretation on Commodity House],

https://www.pkulaw.com/en_law/5f40f2e267eb9323bdfb.html (China). Article 4 states that, unless a party acts

badly, failure to enter a final contract requires only that the seller refund the earnest money, while Article 5 states

that where a preliminary agreement includes the principal terms of a contract for sale, as provided in Article 16

of the Administrative Measures for the Sale of Commodity Houses and the seller has accepted money for the

purchase, the agreement shall be considered a final contract. Id.

199

See e.g., Zhuhai Wanli Rd. Enter. Co. v. Zhuhai Chentai Real Estate Dev. Co., 广东珠海中级人民法

院(2008)珠中法民一终字第 104 号 [2008 ZZFMYZZ No. 104] (Guangdong Zhuhai Intermediate People’s Ct.

Nov. 20, 2008) (China) (applying Contract Law of the People’s Republic of China [CCL] Article 110 for denying

the non-breaching party’s claim for specific performance of a preliminary agreement); Beijing Uconia

Decoration Eng’g Co. v. Beijing Henrydai Furnishing Co., 北京第二中级人民法院(2007)二中民终字 01756

号[2007 EZMZZ No. 01756] (Beijing Second Intermediate People’s Ct. Mar. 19, 2007) (China) (applying CCL

Article 113 to award damages for breach of a preliminary agreement).

200

Interpretation on Issues Concerning the Application of Law in the Trial of Cases of Disputes over Sales

Contracts, Judicial Interpretation No. 8 [2012] (promulgated by Sup. People’s Ct., May 10, 2012, effective July

1, 2012) [hereinafter Judicial Interpretation on Sales],

https://www.pkulaw.com/en_law/deb83c1e931b15c1bdfb.html (China).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 663

period in the future, and a party fails to perform the obligation to enter

into the sales contract while the other party requests it to undertake the

liability for the breach of the preliminary agreement, or requests to

terminate the preliminary agreement and claims damages, the people’s

courts shall uphold such a request and claim.

201

The above provision was adopted in the Chinese Civil Code (CCC) of 2021

with minor changes. Under the CCC, a preliminary agreement is a legally

binding agreement in which the parties agree to conclude a final contract in the

future.

202

Preliminary agreements are found in all sectors of the economy

including commodity house purchases,

203

leases,

204

strategic cooperation,

205

and

so forth.

206

The enforceability of such agreements is recognized in CCC Article

495:

207

A letter of subscription, letter of order, letter of reservation, or the like,

in which the parties agree to conclude a contract within a certain period

of time in the future, constitutes a preliminary agreement. Where one

of the parties fails to perform the obligation to conclude a contract

agreed to in the preliminary agreement, the other party may request

such party to undertake the liability for breach of the preliminary

agreement.

208

The preliminary agreement provisions of the CCC are found in Part I

(General Provisions) in Book III (Contracts), which indicates that the provisions

regarding enforceability of preliminary agreements not only apply to sales

201

Id. art. 2.

202

CCC, supra note 11, art. 495; see also Chengdu Xunjie Commc’ns Chain Co. v. Sichuan Shudu Indus.

Co., 最高人民法院(2013)民提字第 90 号 [2013 MTZ No. 90] (Sup. People’s Ct. Nov. 14, 2013) (China)

(whether a contract is a final or a preliminary agreement depends on the parties’ intention, that is, whether the

parties intend to enter into a final contract in the future).

203

See Longda Real Est. Co. v. Zhang Mingjie, 河南高级人民法院(2020)豫民申 2776号 [2020 YMS No.

2776] (Henan High People’s Ct. June 10, 2020) (China).

204

See Shenzhen Fangu Dadi Inc. v. Shenzhen Baohuasen Indus. Co., 最高人民法院(2020)最高法民申

2164 号 [2020 ZGFMS No. 2164] (Sup. People’s Ct. June 30, 2020) (China).

205

See Beijing Zhongjing Logistics Co. v. Xinjiang Zhongyuan Guotie Logistics Co., 最高人民法院(2014)

民申字第 709 号 [2014 MSZ No. 709] (Sup. People’s Ct. 2014) (China).

206

See Zhang Yuqi v. Foshan Shunde Yinjing Real Est. Co., 最高人民法院(2016)最高法民申 200 号

[2016 ZGFMS No. 200] (Sup. People’s Ct. Mar. 31, 2016) (China); Shaoguan Nanfeng Prop. Mgmt. Co. v. First

Prop. Owners Comm. of Fu’ange, Qurenyuan, Shaoguan, 广东韶关中级人民法院(2021)粤 02 民终 1663 号

[2021 Y02MZ No. 1663] (Guangdong Shaoguan Intermediate People’s Court Sept. 26, 2021) (China).

207

CCC, supra note 11, art. 495.

208

Id. art. 495.

664 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

contracts but also to other types of transactions.

209

CCC Article 495 deletes the

phrases “letter of intent” and “memorandum” previously found in Article 2 of

the Judicial Interpretation on Sales.

210

Thus, Article 495 only applies to the

types of letters of intent or memorandums that constitute enforceable

preliminary agreements.

211

In determining whether a letter of intent,

memorandum, or similar instrument constitutes a legally binding preliminary

agreement, due consideration is given to all relevant circumstances, including

the content of the document, the process of negotiation, and the intent of the

parties. It is also important to consider whether the parties agreed to the payment

of earnest money and the legal consequences for breaching the agreement.

212

B. Enforceability of Preliminary Agreements

Once a preliminary agreement is concluded, the parties must perform their

obligations in accordance with the agreement. The primary obligation is to

conclude a final and complete contract.

213

Despite that obligation, there is a

debate over whether the parties are obliged to negotiate in good faith

214

versus

being bound to consummate a final contract.

215

The dominant view supported

209

COMMENTARY ON CHINESE CIVIL CODE: CONTRACTS 78 (Huang Wei ed. 2020). However, due to Article

174 of the CCC, preliminary agreement discussed in Article 2 of the Judicial Interpretation on Sales may be

applied by analogy to other types of bilateral contracts. CCC, supra note 11, art. 174.

210

UNDERSTANDING AND APPLICATION OF CHINESE CIVIL CODE: CONTRACTS 236–37 (Supreme People’s

Court ed., Vol. 1 2020); GUANGXIN ZHU, STUDY ON GENERAL PRINCIPLES OF CONTRACT LAW 31 (2018);

Chengwei Liu, A Study of Analytic Hierarchy on Preliminary Agreement, 6 LEGAL F. 33, 35 (2013); see also

Aohua Asset Management Co., Ltd. v. Yangpu Economic Development Zone Management Committee, 最高人

民法院(2014)民申字第 263 号 [2014 MSZ No. 263] (Sup. People’s Ct.) (China) [hereinafter UNDERSTANDING

AND APPLICATION OF CCC](finding that a letter of intent to invest is not a preliminary agreement due to its lack

of material terms and intent to be legally bound).

211

See Liu, supra note 210, at 35. However, it does not mean that the parties to the unenforceable

preliminary agreement may act in bad faith. Otherwise, the injured party may still claim compensation for its

out-of-pocket losses based on article 500 of the CCC (pre-contractual liability). See UNDERSTANDING AND

APPLICATION OF CCC, supra note 210, at 237; CCC, supra note 11, art. 500.

212

Interpretation on Issues Concerning Contracts of the Chinese Civil Code (I) (promulgated by the

Supreme People’s Court, draft version on Sept. 17, 2021) art. 9 [hereinafter Draft Judicial Interpretation on

Contracts].

213

In practice, the preliminary agreements may include other obligations relating to confidentiality,

disclosure, and exclusivity.

214

See Lihang Geng, Enforceability & Remedies of the Preliminary Agreements: Empirical Analysis &

idealistic Solution, 5 CHINESE J. L. 27, 32 (2016).

215

See Shandong Lingzhong Mech. & Elec. Equip. Co. v. PLA No. 3304 Factory, 最高人民法院(2013)民

申字第 1715 号 [2013 MSZ No. 1715] (Sup. People’s Ct. 2013) (China) (holding that the parties to the

preliminary agreement undertake a compulsory obligation to conclude the final contract).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 665

by the Supreme People’s Court is that the parties are only obligated “to negotiate

in good faith.”

216

The mainstream view recognizes acceptance under Chinese law of a general

duty to bargain in good faith.

217

However, the general duty to bargain in good

faith is narrowly construed to exclude certain acts of bad faith, such as engaging

in negotiations with malicious intention, including concealing material facts,

giving false information, failing to complete the procedures of applying for

necessary approvals or registrations, and disclosure or use of trade secrets or

confidential information obtained during the negotiations.

218

The parties’ good

faith obligation in preliminary agreements is broadly construed to include the

duty to make reasonable or best efforts to conclude a final contract.

219

Under this

duty, the parties are prohibited from changing terms previously agreed upon and

insisting on unfair terms or terms contrary to trade customs. Negotiations with

competing bidders are also an act of bad faith whenever exclusivity is

expected.

220

However, the failure to conclude a final contract itself is not a

sufficient indicator of bad faith.

221

In Dai Xuefei v. Huaxin International Urban Development Co., Ltd., the

court considered the enforceability of a preliminary agreement relating to the

purchase of a commodity house.

222

The court held that the significance of a

216

See Geng, supra note 214, at 32, 47; ZHU, supra note 210, at 31; see also JUDICIAL INTERPRETATION ON

SALES CONTRACT: UNDERSTANDING & APPLICATION 58 (Second Division of the Sup. People’s Ct. ed. 2016)

(parties to the preliminary agreement shall undertake the obligation to negotiate in good faith to conclude the

final contract. “Otherwise, the breaching party shall undertake the liability for breach of the preliminary

agreement, unless the breach is due to any reason not attributable to both parties”) (emphasis added).

217

CCC, supra note 11, art. 500.

218

CCC, supra note 11, arts. 500, 501; Interpretation on Certain Issues Concerning the Application of the

Contract Law of the People’s Republic of China (II) No. 5 [2009] (promulgated by the Sup. People’s Ct.,

repealed in 2020) art. 8.

219

Liming Wang, Several Issues on Preliminary Agreement: Commentary on Article 2 of the Judicial

Interpretation on Sales, 1 STUD. L. & BUS. 54, 60 (2014).

220

Liu, supra note 210, at 37–38; see also, Jiang Fei v. Weihai Hengxin Real Est. Co., 山东威海中级人民

法院(2021)鲁 10 民终 2163 号 [2021 L10MZ No. 2163] (Shandong Weihai Intermediate People’s Ct. Sep. 11,

2021) (finding that the breaching party requested a reduction of the price agreed to in the preliminary agreement).

221

See Hubei Lianrui Real Est. Co. v. Zhang Yunfang, 湖北鄂州中级人民法院(2021)鄂 07 民终 561 号

[2021 E07MZ No. 561] (Hubei Ezhou Intermediate People’s Ct. Jul. 20, 2021) (China); Xinghua Zhaotai Metal

Materials Co. v. Yang Zhaoshun, 江苏高级人民法院(2016)苏民终 178 号 [2016 SMZ No. 178] (Jiangsu High

People’s Ct. Oct. 26, 2016) (China) (holding that refusal to conclude a final contract does always constitute a

breach of the preliminary agreement).

222

Dai Xuefei v. Huaxin Int’l Urban Dev. Co., 2006 最高人民法院公报案例第 08 期 [2006 Sup. People’s

Ct. Gaz. 8] (Jiangsu Suzhou Intermediate People’s Ct. May 18, 2005) (China) (explaining a disagreement on the

following standard clause in the final contract: “[s]ample house is for reference only, the right to interpret the

contract shall reside in the seller”) (authors’ translation).

666 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

preliminary agreement is to ensure negotiations continue under the principles of

fairness and good faith, with the goal of making a final contract. In negotiations

subsequent to a preliminary agreement, failure to comply with those principles

is grounds for liability for breach. Denying a previous agreement to settled

terms, setting forth an unreasonable condition, or refusal to negotiate further are

considered breaches of a preliminary agreement.

223

However, if, after fair

negotiations in good faith bargaining the parties fail to reach a consensus, neither

party is liable for breach.

C. Liability for Breach of Preliminary Agreement

This section reviews two views for the basis for liability in a breach of a

preliminary agreement: fault-based and strict liability.

1. Fault-based Liability and Strict Liability

The rationale for granting damages is different between the obligation to

negotiate in good faith and the duty to reach a final contract in a preliminary

agreement. In the first case, the breaching party’s liability for failing to conclude

the final contract is fault-based. The law recognizes a presumption of fault by

allocating the burden of proving reasonableness to the breaching party.

224

On the

other hand, the breaching party’s failure of the duty to conclude a final contract

results in strict liability.

225

Chinese courts support the obligation to negotiate in good faith.

226

As a

result, the courts prefer fault-based liability over strict liability, as shown in Dai

223

Id.; see also Zhong Chongqing v. Shanghai Jinxuandadi Real Est. Dev. Co., 2008 年最高人民法院公

报案例第 04 期 [2008 Sup. People’s Ct. Gaz. 4] (Shanghai Second Intermediate People’s Ct. Oct. 19, 2007)

(China) (demonstrating a party refusing to negotiate and denying the price provided in the preliminary

agreement).

224

Geng, supra note 214, at 33; Liu Juan v. Xu Yinyin, 陕西渭南中级人民法院(2020)陕 05 民终 2335 号

[S05MZ No. 2335] (Shaanxi Weinan Intermediate People’s Ct. Nov. 30, 2020) (China) (the breaching party

failed to prove that the failure to conclude the final contract was due to the reason not attributable to itself); see

also Judicial Interpretation on Commodity House, supra note 198, art. 4 (“[w]here a seller receives an earnest

money from the buyer by way of subscription, order or reservation, etc., as a guarantee for the conclusion of a

contract for sale and purchase of the relevant commodity house, if one of the parties for any reason is unable to

conclude the contract for sale and purchase of the commodity house, the rules on earnest money shall apply; if

for any reason not attributable to either party the contract for sale and purchase of the commodity house in

question cannot be concluded, the seller shall refund the earnest money to the buyer”) (authors’ translation,

emphasis added).

225

Geng, supra note 214, at 33; ZHU, supra note 210, at 697.

226

Geng, supra note 214, at 33; UNDERSTANDING AND APPLICATION OF CCC, supra note 210, at 58.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 667

Xuefei v. Huaxin International

227

and Zhanjiang Haixin Meikai Investment Co.,

Ltd. v. Xu Yanni.

228

In the latter case, the court held that since the parties failed

to reach an agreement on key terms and conditions, the buyer did not commit a

breach for failing to conclude a final contract. The court reasoned that the parties

undertook an obligation to negotiate in good faith. If, after a good faith

negotiation, a final contract is not concluded, the parties are free of any liability

based on the principle of good faith, including in cases where a party incurs

substantial costs in reliance on concluding a contract.

229

2. Remedies for Breach of Preliminary Agreement

This section reviews the availability of specific performance and the types

of recoverable damages available for breaches of preliminary agreements.

230

The specific performance remedy consists of a court order to compel the

breaching party to perform based on the terms of the preliminary agreement.

231

Chinese law regards damages and specific performance as ordinary and equal

remedies.

232

The claimant chooses whether to seek specific performance or to

collect damages. However, in practice, awards of specific performance are less

frequent than is commonly assumed. Chinese courts commonly reject claims for

specific performance due to a breach of a preliminary agreement.

233

227

Dai Xuefei v. Huaxin Int’l Urban Dev. Co., supra note 222.

228

Zhanjiang Haixin Meikai Inv. Co. v. Xu Yanni, 广东湛江中级人民法院 (2021)粤 08 民终 3140 号

[2021 Y08MZ No. 3140] (Guangdong Zhanjiang Intermediate People’s Ct. Aug. 30, 2021) (China).

229

Id.; see also Li Jiayuan v. Chongqing Baoxiang Real Est. Dev. Co., 重庆高级人民法院(2020)渝民终

37 号 [YMZ No. 37] (Chongqing High People’s Ct. Oct. 29, 2020) (China); Wang Kanghui v. Qingdao Zhonglei

Real Est. Dev. Co., 山东高级人民法院(2020)鲁民申 8588 号 [2020 LMS No. 8588] (Shandong High People’s

Ct. Nov. 30, 2020) (China).

230

CCC, supra note 11, art. 495; see also Judicial Interpretation on Sales, supra note 200, art. 2.

231

CCC, supra note 11, arts. 579, 580 (specific performance of monetary obligation and specific

performance of non-monetary obligation, respectively).

232

CCC, supra note 11, art. 577; Lei Chen, Damages and Specific Performance in Chinese Contract Law,

in CHINESE CONTRACT LAW: CIVIL & COMMON LAW PERSPECTIVES 401–02 (Larry A. DiMatteo & Lei Chen

eds., 2018).

233

An empirical study shows that in China damages are often favored over specific performance; judges

often exercise their power of persuasion to encourage the non-breaching party to accept damages. See Lei Chen

& Larry A. DiMatteo, Inefficiency of Specific Performance as a Contractual Remedy in Chinese Courts: An

Empirical and Normative Analysis, 40 NW. J. INT’L L. & BUS. 275, 302–03, 331 (2020); see, e.g., Zhang Yuqi

v. Foshan Shunde Yinjing Real Estate Co., Ltd., 最高人民法院(2016)最高法民申 200 号 [2016 ZGFMS No.

200] (Sup. People’s Ct. Mar. 31, 2016) (China).

668 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

The reasons given for not granting specific performance of preliminary

agreements is that it is contrary to the principle of freedom of contract

234

when

the agreement is missing important terms,

235

making the remedy “impossible de

jure”

236

and “not suitable for a compulsory performance.”

237

In Longda Real

Estate Co., Ltd., Hongfa Trade Group v. Zhang Mingjie, the Court held that “the

parties are entitled to enter into a [final] contract of their own free will, and no

person or unit may interfere unlawfully. If the breaching party does not

cooperate, the court may not violate the principle of free will by forcing it to

conclude the contract and therefore, claims for specific performance of the

preliminary agreement . . . lack legal base.”

238

The non-breaching party may claim damages by proving actual losses caused

by the breaching party’s failure to conclude the contract.

239

Article 495 of the

CCC authorizes the non-breaching party to request that the breaching party

“undertake liability for breach of the preliminary agreement.”

240

Other types of

pre-contractual liability such as culpa en contrahendo or bad faith negotiations,

is provided for in Article 500 of the CCC.

241

However, the non-breaching party

234

HUIXING LIANG, LECTURE NOTES ON GENERAL PRINCIPLES OF CONTRACT LAW 99 (2021); CCC, supra

note 11, art. 5; Yang Jieli v. Guangdong Yongyi Grp. Inc., 广东中山中级人民法院(2020)粤 20 民终 5067 号

[2020 Y20MZ No. 5067] (Guangdong Zhongshan Intermediate People’s Ct. Nov. 20, 2020) (China).

235

See Shen Wei, Liability Prior to Contract Formation in Chinese Contract Law, in CHINESE CONTRACT

LAW: CIVIL & COMMON LAW PERSPECTIVES 147 (Larry A. DiMatteo & Lei Chen eds., 2018); see also Zhang

Yuqi v. Foshan Shunde Yinjing Real Est. Co., 最高人民法院(2016)最高法民申 200 号 [2016 ZGFMS No.

200] (Sup. People’s Ct. Mar. 31, 2016) (China).

236

CCC, supra note 11, art. 580(1); LIANG, supra note 234, 99–100.

237

CCC, supra note 11, art. 580(2) (authors’ translation); Ma’anshan Dongrong Real Est. Co. v. Wang

Leilei, 安徽马鞍山中级人民法院(2021)皖 05 民终 1740 号 [2021 W05MZ No. 1740] (Anhui Ma’anshan

Intermediate People’s Court Oct. 29, 2021) (China); Wang Dian v. Anhui Jintaiyang Real Est. Inv. Co., 安徽滁

州中级人民法院(2021)皖 11 民终 1269 号 [2021 W11MZ No. 1269] (Anhui Chuzhou Intermediate People’s

Ct. May 6, 2021) (China). But see SHIYUAN HAN, THE LAW OF CONTRACT 93–94 (4th ed. 2018); 1 LIMING

WANG, CONTRACT LAW 18 (2d ed. 2021); YONGJUN LI, CONTRACT LAW 239 (5th ed. 2020) (all arguing that the

specific performance of the preliminary agreement is a suitable remedy).

238

Longda Real Est. Co. v. Zhang Mingjie, 河南高级人民法院(2020)豫民申 2776 号 [2020 YMS No.

2776] (Henan High People’s Ct. Jun. 10, 2020) (China) (authors’ translation); see also Shenzhen Fangu Dadi

Inc. v. Shenzhen Baohuasen Indus. Co., 最高人民法院(2020)最高法民申 2164 号 [2020 ZGFMS No. 2164]

(Sup. People’s Ct. May 30, 2020) (China); Luoyang Kaiyang Real Est. Dev. Co. v. Zhang Wujuan, 河南洛阳

中级人民法院(2021)豫 03 民终 755 号 [2021 Y03MZ No. 755] (Henan Luoyang Intermediate People’s Ct.

Mar. 1, 2021) (China); Zhang Yuqi v. Foshan Shunde Yinjing Real Est. Co., 最高人民法院(2016)最高法民申

200 号 [2016 ZGFMS No. 200] (Sup. People’s Ct. Mar. 31, 2016) (China) (all denying claims for specific

performance of preliminary agreements).

239

See, e.g., Hubei Lianrui Real Est. Co. v. Zhang Yunfang, supra note 221; Li Jiayuan v. Chongqing

Baoxiang Real Est. Dev. Co., 重庆高级人民法院(2020)渝民终 37 号 [2020 YMZ No. 37] (Chongqing High

People’s Ct. Oct. 29, 2020) (China) (both rejecting claims for the claimant’s failure to prove actual losses).

240

CCC, supra note 11, art. 584 (authors’ translation).

241

See id. art. 500.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 669

is precluded from claiming expectancy damages (loss profits) if the final

contract has not been concluded.

242

Thus, damages vary based upon whether

negotiations include the use of a preliminary agreement and whether the court

concludes that a final contract had been reached.

243

Unfortunately, Article 495 of the CCC provides no guidance as to whether

the non-breaching party should be awarded expectation damages (lost profits)

or reliance damages (out-of-pocket expenses). Most Chinese courts favor

granting reliance damages for breach of a preliminary agreement.

244

However,

reliance damages are more broadly construed in Chinese courts than those in the

common law countries. The non-breaching party may claim damages for

opportunities lost, which could result in compensation approximating

expectation damages.

245

In determining damages related to loss of

opportunities,

246

the courts consider a number of factors including: degree of

reliance, degree of certainty that a final contract would be concluded, damages

242

See Shenzhen Fangu Dadi Inc. v. Shenzhen Baohuasen Indus. Co., 最高人民法院(2020)最高法民申

2164 号 [2020 ZGFMS No. 2164] (Sup. People’s Ct. Mar. 30, 2020) (China).

243

See HAN, supra note 237, at 96; WANG, supra note 237, at 18; COMMENTARY ON CHINESE CIVIL CODE,

supra note 209, at 81; see also Shi Jian v. Zhengzhou Guorui Real Est. Dev., 河南郑州中级人民法院(2021)豫

01 民终 9948 号 [2021 Y01MZ No. 9948] (Henan Zhengzhou Intermediate People’s Court Aug. 27, 2021)

(China); Weifang Mingxuan Real Est. Co., Lechang Branch v. Weifang Mingxuan Real Est. Co., 山东潍坊中

级人民法院(2021)鲁 07 民终 5052 号 [2021 L07MZ No. 5052] (Shandong Weifang Intermediate People’s Ct.

Jul. 14, 2021) (China) (all denying damages for the loss of gains obtainable under the final contract).

244

UNDERSTANDING AND APPLICATION OF CCC, supra note 210, at 61–62; Draft Judicial Interpretation on

Contracts, supra note 212, art. 11; see also Outpatient Dep’t Wuhan Hongren Traditional Chinese Med. Hosp.

v. Wuhan Xintaiyang Tech. Co., 湖北武汉中级人民法院(2020)鄂 01 民终 8070 号 [2020 E01MZ No. 8070]

(Hubei Wuhan Intermediate People’s Ct. Nov. 10, 2020) (China). But see Wenzhou Golden Lion Real Est. Dev.

v. Yangfushan Tucun Econ. Coop., Binjiang St., Lucheng Dist., Wenzhou, 浙江温州中级人民法院(2020)浙

03 民终 5901 号 [2020 Z03MZ No. 5901] (Zhejiang Wenzhou Intermediate People’s Ct. Feb. 22, 2020) (China)

(awarding expectation interests, but holding that the non-breaching party must mitigate its losses).

245

See Liu, supra note 210, at 38; Zhong Chongqing v. Shanghai Jinxuandadi Real Est. Dev. Co., 2008 年

最高人民法院公报案例第 04 期 [2008 Sup. People’s Ct. Gaz. 4] (Shanghai Second Intermediate People’s Ct.

Oct. 19, 2007) (China); Zhongshan Changjiang Zhaoye Real Est. Dev. Co. v. Wu Ganghui, 广东中山中级人民

法院(2020)粤 20 民终 5586 号 [2020 Y20MZ No. 5586] (Guangdong Zhongshan Intermediate People’s Ct.

Nov. 18, 2020) (China) (both awarding reliance losses, including loss of opportunity damages). But see Hua

Zhang, Remedies for the Breach of Preliminary Agreement, 2 J. L. APPLICATION 66, 76 (2019) (arguing that no

losses of opportunities shall be awarded, otherwise there would be no substantial difference between the

expectation interests and reliance interests); Cao Canru v. Shanghai Laiyinsi Real Est. Co., 上海第二中级人民

法院(2010)沪二中民二(民)终字第 609 号 [2010 HEZMEZZ No. 609] (Shanghai Second Intermediate People’s

Ct. Oct. 15, 2010) (China) (denying compensation for the losses of opportunities due to lack of certainty).

246

Loss of opportunities refers to the loss of the non-breaching party ability to take advantage of other

contractual opportunities due to the preliminary agreement. See Liu, supra note 210, at 38.

670 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

foreseeable at the conclusion of the agreement, probability of entering into a

substitute contract, and the relative fault of the parties.

247

A preliminary agreement may require one party to make an earnest money

deposit to show its good faith intent to conclude a final contract.

248

If a party

fails to negotiate in good faith, then it is not entitled to a refund of the earnest

money. If the breaching party is the holder of the earnest money, then it is

required to refund twice the amount of the earnest money.

249

This use of deposits

is found in the doctrine of arrhes found in French law.

250

Where the earnest

money is not sufficient to compensate for the losses incurred by the non-

breaching party, additional damages may be claimed.

251

Finally, under the following two circumstances, a preliminary agreement

may be deemed to be equivalent to a final contract allowing for a claim for

specific performance or expectancy damages. First, if one party to the

preliminary agreement has performed the main obligations anticipated in the

future contract and the other party accepts the performance. Second, the

preliminary agreement incorporates all the material or essential terms of the

proposed transaction, including subject matter, quantity, price or remuneration,

time of performance, and so forth. In such cases, the execution of the final

contract is considered a mere formality.

252

247

Zhou Jingping v. Hubei Fengshuoyuan Real Est. Co., 湖北鄂州中级人民法院(2020)鄂 07 民终 308 号

[2020 E07MZ No. 308] (Hubei Ezhou Intermediate People’s Ct. Oct. 29, 2020) (China).

248

CCC, supra note 11, art. 586.

249

CCC, supra note 11, art. 587; Draft Judicial Interpretation on Contracts, supra note 212, art. 11; see

also Jiang Fei v. Weihai Hengxin Real Est. Co., 山东威海中级人民法院(2021)鲁 10 民终 2163 号 [2021

L10MZ No. 2163] (Shandong Weihai Intermediate People’s Ct. Sep. 11, 2021) (China) (holding no refund of

earnest money due to breaching party’s request for reduction of an agreed to price).

250

Section 1590 of the French Civil Code of 1804 states that in a contract to sell a “payment of a deposit

(arrhes)” is made; in the event the buyer withdraws then “the one who paid the deposit forfeits it;” if the

withdrawing party is holder of the deposit (seller), “the one who received, must return double the amount.”

251

See CCC, supra note 11, art. 588(2).

252

Draft Judicial Interpretation on Contracts, supra note 212, art. 10; Judicial Interpretation on Commodity

House, supra note 198, art. 5; see also Haikou Lvyuan Real Est. Dev. Co. v. Guo Jianxing, 海南海口中级人民

法院(2019)琼 01 民终 612 号 [2019 Q01MZ No. 612] (Hainan Haikou Intermediate People’s Ct. Apr. 16, 2019)

(China); Inner Mongolia Yuanda Real Est Co. v. Wang Laijun, 内蒙古呼和浩特中级人民法院(2019)内 01 民

终 3634 号 [2019 N01MZ No. 3634] (Inner Mongolia Hohhot Intermediate People’s Ct. Nov. 5, 2019) (China)

(both deeming a preliminary agreement containing the main terms of the final contract enforceable and granting

specific performance).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 671

V. PRELIMINARY AGREEMENTS IN ANGLO-AMERICAN LAW

This part examines the place of preliminary agreements in Anglo-American

law. It first examines the blurry line between precontract and contract. The

presumption is that such agreements are non-enforceable, but there is a trend

toward the implication of a duty to negotiate in good faith in some preliminary

agreements. This part will also examine the split between American and English

law on the use of the doctrine of promissory estoppel as the basis for a claim of

reliance on a promise or assurance.

A. Introduction

The divergence between the civil law’s recognition of a duty of good faith

negotiations and the common law’s rejection of such a duty is not as obvious in

the area of preliminary agreements. The pervasive application of the duty of

good faith in some civil law systems suggests that such a duty applies to

preliminary agreements. Even when a preliminary agreement has a disclaimer

of liability or indicates that the parties are not bound until the consummation of

a formal contract, the duty of good faith still applies. American common law

recognizes an implied duty of good faith in all contracts, while English law does

not.

253

Both jurisdictions agree that a duty of good faith does not apply to

negotiations, but there have been cracks in this rule as more courts have found

detailed agreements to be enforceable as is, and other courts have recognized

that some preliminary agreements require negotiation in good faith.

Professors Choi and Triantis, in a 2020 article Designing and Enforcing

Preliminary Agreements,

254

asserted that: “Preliminary agreements . . . often

create legal obligations, particularly a duty to negotiate in good faith . . . and yet

continues to be regarded as a confusing and unpredictable issue in contract

law.”

255

They further argue that preliminary agreements should “be thought of

as setting ground rules for negotiations, which may include obligations of

confidentiality, disclosure, and exclusivity.”

256

In such agreements, courts

should first attempt to determine the intent of the parties to be bound by a duty

253

Martin A. Hogg, The Implication of Terms-in-Fact: Good Faith, Contextualism, and Interpretation, 85

GEO. WASH. L. REV. 1660, 1660 (2017) (“U.S. contract law has a rich heritage of good faith jurisprudence. By

contrast, the good faith jurisprudence of the United Kingdom is relatively underdeveloped.”).

254

Choi & Triantis, supra note 18.

255

Id. at 439.

256

Id. at 440.

672 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

to negotiate in good faith.

257

This intent may be implied based on trade usage,

such as whether the need for contractual formality (formal written contract) is

presumed in a particular industry.

258

For example, an intent to negotiate in good

faith is implied in numerous preliminary agreements including: intellectual-

property licenses, leases, bank loans, venture-capital financing, and corporate

mergers and acquisitions.

259

Some agreements commonly express obligations,

such as in letters of intent in M&A transactions which commonly include

express stipulations as to which provisions are binding (such as exclusivity,

confidentiality, and expense reimbursement).

260

The idea that a preliminary agreement may be considered a contract to

negotiate in good faith is still the exception among Anglo-American courts, even

though a theory of implying a good faith duty on the parties to a preliminary

agreement is a sound one. The context of the agreement is the key, and the focus

is on whether there was actual and substantial reliance of one party on the

conclusion of the contract.

261

The case for the implication of such a duty is

bolstered in cases where the relying party incurred substantial expenses to

continue the negotiations or would suffer substantial damages if a contract is not

concluded. When such harm is foreseeable and the termination of negotiations

was due to bad faith acts, some common law courts, especially in the U.S., have

recognized a cause of action for damages. The case law is far from clear as to

what type of preliminary agreement and context overcomes the presumption of

nonenforceability. What is clear is the likelihood of liability increases in cases

where the harm caused was foreseeable at the time of the execution of the

preliminary agreement, the agreement or promise given is more definite, and the

reliance is substantial.

262

Over the last few decades, there has been a trend in common law systems to

recognize a general implied duty of good faith. This applies not only in the

257

Id. at 446.

258

See, e.g., Brown v. Cara, 420 F.3d 148, 157 (2d Cir. 2005); Arcadian Phosphates, Inc. v. Arcadian Corp.,

884 F.2d 69, 72 (2d Cir. 1989).

259

Choi & Triantis, supra note 18, at 448.

260

Id. at 448 n.24.

261

One scholar suggests that “the disappointment of reliance is the common element of all doctrines relating

to precontractual liability.” ZULOAGA, supra note 153, at 1.

262

ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 8.9, at 45–58 (1963) (“The more free and more flexible

the court is willing to be in determining the extent of the recovery, the more variation is made possible in

applying such a requirement as that the conduct in reliance must be ‘substantial.’”).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 673

United States

263

but also in Canada

264

and Australia,

265

which have all aligned

with civil law in adopting the duty of good faith in the performance and

enforcement of contracts. It is plausible to argue that, in time, there will be a

greater recognition that some preliminary agreements create an obligation to

negotiate in good faith.

B. Negotiations and Preparatory Agreements

Nili Cohen rationalizes the nonenforceability of preliminary agreements

because enforcing them would be an affront to freedom from contract.

266

This

negative freedom to negotiate and not enter into a contract is based on the

recognition of formalities, such as the statute of frauds

267

and consideration, as

well as the adversarial nature of the common law.

268

Thus, reaching an

agreement is only one requirement in creating an enforceable contract. Cohen

further asserts that to impose liability prior to satisfying required formalities

“would be contradictory to the very existence of those requirements.”

269

The

common law’s hesitancy to recognize the enforceability of such agreements is

premised on two pillars of contract law: limited scope of irrevocable offers and

a rejection of a duty of good faith in the negotiations.

263

The duty of good faith has been part of American law since the adoption of the Uniform Commercial

Code in the late 1960s and early 1970s.

264

In 2014, the Supreme Court of Canada, in Bhasin v. Hrynew, affirmed an “organizing principle of good

faith” relating to the rights and obligations of contracting parties. Bhasin v. Hrynew, [2014] S.C.R. 494, para. 62

(Can.).

265

The Supreme Court of Australia recognized the implied duty of good faith in Renard Constrs (ME) Pty

Ltd v. Minister for Pub Works [1992] 26 NSWLR 234 (Austl.).

266

Nili Cohen, Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate, in GOOD FAITH AND

FAULT IN CONTRACT LAW, GOOD FAITH AND FAULT IN CONTRACT LAW 25–56 (Jack Beatson & Daniel

Friedmann eds., 1997).

267

The statute of frauds (requirement of written form) has been repealed in English law. While the general

rule in the U.S. is oral agreements are fully enforceable, the written form is required in certain types of contracts

(real estate, guarantees, wills and trusts, contract not performable within one year, sale of goods). See NEW YORK

STATE LAW OF OBLIGATIONS § 5-701.

268

Consideration is generally thought as a substantive law doctrine where the courts would weigh the

adequacy of the consideration being exchanged. In modern law, it is a mere formality that only requires sufficient

legal consideration (any consideration). See RESTATEMENT SECOND, supra note 16, § 79 (“If the requirement of

consideration is met, there is no additional requirement of equivalence of values.”). As to the adversarial nature

of common law bargaining, see Cohen, supra note 266, at 28 (citing Lord Ackner in Walford v. Miles [1992] 2

AC 128 (HL) 138).

269

Cohen, supra note 266, at 27.

674 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

C. Matter of Interpretation

Most contract disputes are caused and resolved by interpreting the meaning

of the contract’s terms and implication of terms to fill in gaps.

270

This is also the

case with preliminary agreements. Courts have to determine if an agreement

reaches the threshold of an enforceable contract, whether the parties intended to

be obligated to negotiate in good faith, or whether a party should be awarded

damages for harm caused by the reliance on the other party’s promises.

1. Presumption of Nonenforceability

The common law, premised on the norms of predictability and certainty, has

generally refused to find a duty to negotiate in good faith in preliminary

agreements where there are missing material terms, uses of disclaimer of liability

language, or preconditions liability on the execution of a formal contract. In the

first case, such instruments are considered to be too indefinite to enforce or

nudum pactum.

271

At the same time, the common law favors the enforcement of

agreements where there is an intent to be bound despite the uncertainty of

missing terms: “the law does not favor but leans against the destruction of

contracts because of uncertainty; and it will, if feasible construe agreements to

carry into effect the reasonable intentions of the parties.”

272

In American law,

this idea of enforceability is epitomized by Article 2 of the Uniform Commercial

Code (UCC), which has a narrow view of what constitutes a material term. In

essence, a sales contract is still enforceable despite missing terms or conflicting

terms in the offer and acceptance.

273

Often preliminary agreements incorporate contradictory language, such as a

disclaimer of liability and duty to negotiate in good faith. In the seminal English

case of Rose & Frank Co. v. JR Crompton & Bros.,

274

the House of Lords

considered a written memorandum, despite a litany of bargained for promises,

270

See J.W. CARTER, THE CONSTRUCTION OF COMMERCIAL CONTRACTS (2013) (explaining the process of

how law applies to the meaning of a contract).

271

See Hunt Investors v. Extengine Transp. Sys., 2010 Cal. App., LEXIS 8679, *2, *37–38 (Cal. App.

2010). The definiteness requirement of the common law requires the parties to reach agreement on all material

terms in order for the agreement to be enforceable. Even if the parties achieve the bargain element, the

incompleteness of important terms might preclude the bargain from being fully contingent. JP Kostritsky,

Bargaining with Uncertainty, Moral Hazard and Sunk Costs: A Default Rule for Precontractual Negotiations,

44 HAST. L.J. 621, 624, 705 (1993) (proposing that “the courts adopt a default rule imposing liability during

precontractual negotiations by incorporating the terms of the parties’ implicit bargain.”).

272

California Lettuce Growers v. Union Sugar Co., 45 Cal. 2d 474, 481 (Cal. 1955).

273

See U.C.C. § 2-207 (Am. L. Inst. & Unif. L. Comm’n 1977) (battle of the forms).

274

Rose & Frank Co. v. JR Crompton & Bros [1925] AC 445 (HL).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 675

which included a statement that the agreement was “not intended as a formal or

legal agreement.”

275

The court acknowledged the language of promise or

obligation stating that it is a “definite expression and record of the purpose and

intention of the parties concerned, to which they each honorably pledge

themselves in the fullest confidence—based on past business with each other—

that it will be carried through by each of the parties with mutual loyalty and

friendly co-operation.”

276

However, the court disregarded the more in-depth

language of commitment and held the agreement to be unenforceable because of

the use of the disclaimer language.

More recently, even though good faith is not implied to the negotiation

phase, American courts have responded to acts of bad faith in the negotiation of

contracts:

There is evidence that courts will respond to the element of bad faith

when it is clearly present. If the law persists in declaring bad faith

irrelevant in the negotiation process, the court which is faced with clear

bad faith conduct will be forced either to find a complete contract

where in the absence of bad faith no such contract would be found, or

else to write an opinion in which bad faith conduct is either condoned

or ignored.

277

Courts have also questioned the value of the presumption of nonenforceability.

In the English case of Capital Landfill (Restoration), Ltd. v. William Stockler &

Co.,

278

the court applied a heightened level of scrutiny that belied the existence

of a presumption of nonenforceability:

The question comes down to whether this letter was intended simply

as a comfort letter . . . or whether it was intended by the parties as a

legal document binding the company strictly to its terms. These are

questions that cry out to be clarified by oral evidence, and [cannot be]

based simply on the wording of this alleged undertaking.

279

275

Id.

276

Id.

277

Charles L. Knapp, Enforcing the Contract to Bargain, 44 N.Y.U. L. REV. 673, 727 (1969).

278

Capital Landfill (Restoration), Ltd. v. William Stockler & Co. [1991] Lexis Citation 1630 (AC) (appeal

taken from Eng.).

279

Id.

676 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

In the U.S., there is substantial case law recognizing preliminary agreements as

sufficiently complete to be binding contracts, even though the parties intended

to enter into a more formal contract.

280

2. Content and Context

As noted previously, the increased acknowledgement of contextual factors

has increased the likelihood of a court finding a binding duty to negotiate in

good faith in preliminary agreements.

An American court in Teachers Insurance and Annuity Association of

America v. Tribune Co.

281

recognized the following factors to be weighed in

determining whether an enforceable obligation exists: (1) review language of the

agreement “to determine whether a preliminary manifestation of assent should

be found to be a binding commitment”;

282

(2) “existence of open terms”;

283

(3)

extent of any reliance investments, such as partial performance;

284

and (4) the

customary practice regarding formalities such as, “whether in the relevant

business community, it is customary to accord binding force to the type of

informal or preliminary agreement at issue.”

285

In sum, the analysis of

preliminary agreements has become more nuanced, complicated, and contextual.

The movement away from a purely textual interpretation, such as recognizing

disclaimer language as pivotal, to a broader analysis opens greater possibilities

for finding binding obligations to negotiate in good faith.

Charles Knapp has noted that courts are not obligated to make a generalized

binary decision that a preliminary agreement is enforceable or unenforceable as

a standalone contract: “If [the parties] have made such an agreement, the law

has no business telling them their act of agreement was devoid of legal

significance. Nor is the court, in characterizing that agreement, obliged to choose

between only two labels, complete contract or mere negotiation.”

286

The court

should analyze the content and the context of a preliminary agreement that

280

See Valcold & Immunotherapy v. Cerami, No, 00-4024, 2002 U.S. Dist. LEXIS 1895, at *2, *12

(S.D.N.Y. 2002); Fairbrook Leasing Inc. v. Mesaba Aviation, Inc., 295 F. Supp. 2d 1063, 1069–71 (Dist. Ct.

Minn. 2003); Tiburzi v. Dept. of Justice, 269 F.3d 1346, 1352 (Fed. Cir. 2001); Scholastic Inc. v. Harris, 80 F.

Supp. 2d 139, 147 (S.D.N.Y. 1999); Shaftel v. Dadras, 39 F. Supp. 2d 217, 226 (E.D.N.Y. 1999).

281

Teachers Ins. & Annuity Ass’n of Am. v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987).

282

Id. at 498

283

Id. at 499, 501–02.

284

Id. at 502.

285

Id. at 503.

286

Knapp, supra note 277, at 728.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 677

causes real harm in determining the existence of binding obligations, such as a

duty to negotiate in good faith and the duty to keep any shared information

confidential. The more detailed the context, the more likely a court may provide

a claim to the harmed party. In the common law, the usual remedy is reliance-

based recovery.

287

As previously noted, the language of such agreements is often internally

contradictory or repugnant, in that there is language of promise along with

language of disclaimer from any liability.

288

The English court in Rose & Frank

Co. v. Crompton & Bros. held that an “honourable pledge” implies only a moral

and not a legal obligation.

289

English law subsequently developed to hold that

the existence of any disclaimer language rendered an agreement unenforceable,

no matter how detailed the language of promise or obligation. In Chemco

Leasing SpA v. Rediffusion Plc., Justice Staughton recalled Justice Vaisey’s

sardonic definition of such agreements as a “gentlemen’s agreement . . . which

is not an agreement, made between two persons neither of whom is a gentleman,

whereby each expects the other to be strictly bound without [itself] being bound

at all.”

290

But that is not the end of the story since other common law rules of

interpretation come into play in cases where the agreement is provided by one

of the parties and there is uncertainty as to the agreement’s enforceability. The

contra proferentem rule

291

holds that “in the case of ambiguity when all other

rules of construction fail, the doubt is removed by construing the document

adversely to the [drafter].”

292

The rule favors the receiving party of such an

instrument if the party subsequently makes a claim based on the agreement’s

enforceability.

D. Spectrum of Preliminary Agreements

The American Second Circuit court in Adjustrite Systems v. GAB Business

Services addressed what it sees as an important distinction in types of

preliminary agreements:

293

287

“The remedy granted for breach [of a promise] may be limited as justice requires.” RESTATEMENT

SECOND, supra note 16, § 90 (1). This has generally been interpreted to mean reliance damages, which covers

the costs expended by a party pursuant to the negotiations.

288

Rose & Frank Co., [1925] AC 445.

289

Id. at 446.

290

Chemco Leasing Spa v. Rediffusion Plc. [1985] Lexis Citation 1005 (QB).

291

Contra proferentem means “against the drafter” in Latin. In contract interpretation, it means any

ambiguity is to be interpreted against the drafting or in a way most favorable to the non-drafter.

292

See Glynn v. Margetson [1893] AC 351 (HL).

293

Adjustrite Systems, Inc. v. GAB Business Services, Inc., 145 F.3d 543, 548 (2d Cir. 1998).

678 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

[B]inding preliminary agreements fall into one of two categories. The

first is a fully binding preliminary agreement, which is created when

the parties agree on all the points that require negotiation (including

whether to be bound) but agree to memorialize their agreement in a

more formal document. Such an agreement is fully binding; it is

“preliminary only in form—only in the sense that the parties desire a

more elaborate formalization of the agreement.” The second type of

preliminary agreement, dubbed a “binding preliminary commitment”

by Judge Leval, is binding only to a certain degree. It is created when

the parties agree on certain major terms, but leave other terms open for

further negotiation. . . . In contrast to a fully binding preliminary

agreement, a “binding preliminary commitment” “does not commit the

parties to their ultimate contractual objective but rather to the

obligation to negotiate the open issues in good faith in an attempt to

reach the . . . objective within the agreed framework.” A party to such

a binding preliminary commitment has no right to demand

performance of the transaction. Indeed, if a final contract is not agreed

upon, the parties may abandon the transaction as long as they have

made a good faith effort to close the deal and have not insisted on

conditions that do not conform to the preliminary writing.

294

Thus, in 1998, an American appeals court recognized that a preliminary

agreement with missing terms, although not binding as a final contract, could be

the basis for implying a duty of good faith negotiation.

1. Agreement to Negotiate in Good Faith or Agreement to Agree

A California court in Copeland v. Baskin Robbins U.S.A.

295

made the

distinction between unenforceable agreements to agree and enforceable

agreements to negotiate. But such a distinction is a matter of semantics; as noted

above, the context of the agreement is as important as how the agreement is titled

or described. In practice, the terminology regarding preliminary agreements has

been inconsistent. For example, agreements to agree have been interpreted as

unenforceable, while other courts and scholars have used the term to support the

argument that such agreements are contracts to negotiate in good faith.

In some civil law countries, especially those influenced by the French legal

tradition, the duty to negotiate in good faith is found in the law of delict (tort).

296

One party to the negotiations or preliminary agreement is seen as having a duty

294

Id. at 548.

295

Copeland v. Baskin Robbins U.S.A., 96 Cal. App. 4th 1251, 1257 (Cal. Ct. App. 2002).

296

Supra Section III.A.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 679

of care to the other based on trust and good faith. Thus, an action in tort for bad

faith negotiations would be supported in cases where a party believed an

enforceable contract had been agreed upon, while the other party knew of the

other’s false belief because required formalities had not been met. In other

jurisdictions, such as in Germany, courts have reasoned that the party with

knowledge has a contractual duty to inform the other party of the needed

formalities.

297

This type of fault may be the basis for a remedy under the

principle of venire contra factum proprium (inconsistent behavior) or the

principle of culpa in contrahendo.

298

Similar to the civil law, the American

version of promissory estoppel allows for a claim based on reliance on a promise

in an otherwise unenforceable preliminary agreement.

299

A quandary occurs for the common law judge when parties expressly agree

to negotiate in good faith. On the one hand, freedom of contract favors the

enforcement of agreements where the parties show an intent to be bound, and on

the other hand, the common law rejects such a duty in the negotiations of

contracts. The English law approach “refuses to recognise a pre-contractual duty

to negotiate in good faith and will neither enforce such a duty when it is

expressly agreed upon nor imply it when it is not.”

300

Lord Denning in Courtney

& Fairbairn Ltd. v. Tolaini Brothers argued that since “the law does not

recognise a contract to enter a contract; it seems to me it cannot recognise a

contract to negotiate. The reason is because it is too uncertain to have any

binding force.”

301

Denning also notes that any such agreement would fail due to

the uncertainty in establishing damages. Denning seems to be alluding to

expectancy damages because there is no assurance that the parties would have

reached a final contract. Previously, Lord Ackner in Walford v. Miles stated that:

“The concept of a duty to carry on negotiations in good faith is inherently

repugnant to the adversarial position of the parties when involved in

negotiations.”

302

Thus, English law has been rigid in rejecting the bindingness

of a contract to negotiate in good faith.

297

Supra Section II.B.

298

ZULOAGA, supra note 153, at 49–54.

299

In referencing Section 90 of the RESTATEMENT SECOND, Yorio and Thel assert: “The section has had a

profound influence on the law of contracts because it ratifies cases enforcing a promise in the absence of

bargained-for consideration.” Edward Yorio & Steve Thel, The Promissory Basis of Section 90, 101 YALE L.J.

111, 111 (1991).

300

Little v. Courage Ltd. [1995] BCLC 164.

301

Courtney & Fairbairn Ltd. v Tolaini Bros. (Hotels) Ltd. [1975] 1 All ER 716, 720; see also Charles

Shaker v. Vistajet Group Holdings SA, [2012] EWHC (Comm) 1329 (Eng.).

302

Walford v. Miles [1992] UKHL, [1992] 2 AC 128 (HL) 138.

680 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

Hence, the vagueness of the language in precontractual agreements has been

the main rationale for English courts rejecting their bindingness. In Kleinwort

Benson Ltd. v. Malaysia Mining Corp.,

303

a parent company sent a letter of

assurance, often referred to as a comfort letter, to a bank contemplating the

giving of a loan to one of the parent’s subsidiaries. The letter stated that it was

the parent company’s “policy to ensure that [its subsidiary] is at all times in a

position to meet its liabilities . . . under [the loan facility arrangements.]”

304

The

court held that the language was merely a moral but not a contractual promise.

Another English case involved a letter of intent that provided for the delivery of

goods while the contract was still under negotiation.

305

The goods were never

paid for, leading the seller to bring a claim for breach of a unilateral contract.

The court focused less on the language of the letter of intent, but on what the

letter failed to say: since the parties “were still in a stage of negotiation, it is

impossible to say with any degree of certainty what the material terms of that

contract would be.”

306

It was noted that the letter did not state the price, delivery

dates, and other applicable terms. The court held that the seller’s delivery was

in anticipation of a formal written contract, but that contract never came into

existence, and, therefore, no contractual obligations had been formed.

In an “agreement in principle,” the parties pronounce that they have an

agreement in hand on all material terms. The agreement in principle can be seen

as something well beyond mere negotiations and closer to a final contract.

Despite the resemblance to a formal contract, the common law still regards such

an agreement as a non-binding preparatory step and does not require the parties

to continue negotiations in good faith.

307

This distinction between vague

agreements and detailed ones shows that the courts choose form over substance.

For example, no matter how detailed the agreement in principle may be, the use

of “subject to” (signing a formal contract) language makes it non-binding.

308

The focus on form and labels creates a bright line rule that all preliminary

agreements are either enforceable or non-enforceable. It fails to recognize that

the line is always a blurry one that will need to be analyzed on a case-to-case

basis based on numerous factors. The American court in Vacold LLC v.

303

Kleinwort Benson Ltd. v. Malaysia Mining Corp., [1989] 1 All ER 785 (CA).

304

Id. at 785.

305

British Steel Corp. v. Cleveland Bridge & Engineering Co. [1984] 1 All ER 504 (QB).

306

Id. at 510.

307

BEALE ET AL., supra note 51, at 359.

308

Id.

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 681

Cerami,

309

proposed a three-factors analysis. The first factor is to analyze the

language of the agreement to see if it expressly states that the parties will not be

bound in the absence of a further, definitive written instrument.

310

If there is

language of disclaimer of liability, then the common law courts have

traditionally held the agreement to be unenforceable. However, in a factors

analysis, such language would be considered as just one factor. The second

factor looks extrinsically to the context of the negotiations. The context of the

negotiations may suggest that the parties sought “determinateness and certainty

. . . , not flexibility and optionality subject to the parties’ good-faith efforts to

reach agreement as to open issues.”

311

The third factor is the determination of

whether the parties intended a binding agreement with open terms.

312

The

existence of open terms (to be determined in the future) is evidence favoring a

finding of an enforceable agreement.

313

These factors are used to determine the

intent of the parties to be bound or not to be bound: if the parties intended to be

bound, “‘courts should not frustrate their achieving that objective or disappoint

legitimately bargained for expectations,’ provided that the agreement is not so

‘fragmentary’ as to be ‘incapable of sustaining binding legal obligations.’”

314

Charles Knapp argues that an agreement to agree is a “contract to

bargain,”

315

which “creates a present duty to bargain in good faith, in the process

of attempting to reach a final agreement.”

316

In Gillenardo et al v. Conner

Broadcasting Delaware Company,

317

the court held that in a letter of intent to

purchase a radio station, the parties intended to enter binding obligations “to

attempt in good faith to finalize the Sale Agreement,” a “duty to work diligently

to complete the Sale Agreement” and a “duty not to solicit, accept or entertain

any other offers while the letter of intent was in effect.”

318

RGC International

Investors, LDC v. Greka Energy Corp.

319

involved the merger of companies in

309

Vacold LLC v. Cerami, 545 F.3d 114 (2d Cir. 2008).

310

Id. at 125.

311

Id. at 128.

312

“A preliminary agreement with open terms sets out most of the terms of the deal and the parties agree to

be bound by these terms . . . [in the event the parties fail to agree on the open terms] the other matters are

governed by whatever terms a court will supply.” FARNSWORTH, supra note 8, at 232.

313

Vacold LLC, 545 F.3d at 128.

314

Id. (quoting Teachers Ins. & Annuity Ass’n of America v. Tribune Co., 670 F. Supp. 491, 497, 499

(N.Y.S.D. 1987).

315

Knapp, supra note 277, 684–86.

316

Id. at 685.

317

Gillenardo v. Conor Broad. Del. Co., 2002 Del. Super. LEXIS 402 (Del. Super. Ct. 2002).

318

Id. at *22.

319

RGC int’l Investors, LDC v. Greka Energy Corp., 2001 Del. Ch. LEXIS 107 (Del. Ch. 2001).

682 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

which the parties signed a term sheet, where the parties stated their mutual

agreement to negotiate in good faith. The court noted that the term sheet was a

“thoroughly negotiated, detailed document;” one party “materially altered their

position in reliance upon the accord outlined in the term sheet,” and the other

party “was responsible for the breakdown in the negotiations.”

320

The court

further noted that the one party had committed numerous acts of bad faith, such

as “purposefully and persistently ignore[ing] the obligations it had assumed

under the Term Sheet.”

321

Finally, in Horphag Research Ltd. v. Henkel Corp.

the court analyzed a settlement letter in which the terms were not complete or

definitive.

322

Nonetheless, the court held it could be sufficient to support a

finding that there was “an agreement on major terms with others to be

negotiated” and included an enforceable obligation to negotiate in good faith.”

323

In sum, an agreement to negotiate in good faith has increasingly been recognized

by American courts as creating binding obligations.

2. Promise, Reliance Theory, and Promissory Estoppel

Preliminary agreements challenge the promissory centered basis of contract

law, which focuses on the intent of the promisor. Reliance theory provides an

alternative avenue of liability based on the reliance of a party (promisee) on

another party’s promise.

324

Reliance damages are often awarded in order to

prevent an injustice when a non-contractual promise is given and relied upon.

Since the promise is non-contractual (not part of a binding contract), courts

generally award out-of-pocket expenses or reliance damages and do not award

lost profits or expectancy damages.

325

Alan Schwartz and Robert Scott further

argue that when there has been detrimental reliance on another party’s promise,

the promisor’s act of bad faith in terminating the negotiations should enhance

the possibility of liability.

326

320

Id. at *3–4.

321

Id. at *5.

322

Horphag Research Ltd. v. Henkel Corp., 115 F. Supp. 2d 455, 457 (S.D.N.Y.2000).

323

Id. at 458.

324

See Charles Knapp, Reliance in the Revised Restatement: The Proliferation of Promissory Estoppel, 81

COLUM. L. REV. 52 (1980); Jay Feinman, Promissory Estoppel and Judicial Method, 97 HARV. L. REV. 678

(1984).

325

Alan Schwartz & Robert Scott, Precontractual Liability and Preliminary Agreements, 120 HARV. L.

REV. 661, 663 (2007).

326

“The emerging legal rule requires parties to such preliminary agreements to bargain in good faith over

open terms.” Id. at 664. “The conventional wisdom among contemporary scholars is that courts will sometimes

impose liability for reliance investments undertaken before any agreement between the parties.” Id. at 668 (citing

RESTATEMENT (1981) § 205, cmt. c (1981) (“Bad faith in negotiation . . . may be subject to sanctions.”)).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 683

Anglo-American contract law has often used promissory estoppel, also

referred to as detrimental reliance, to fill in gaps in determining the

enforceability of a contract. Promissory estoppel has been used to satisfy

requirements needed to form contracts to prevent an injustice. Thus, an oral

agreement that needed to be in writing (such as in the sale of real estate) or a

contract lacking consideration may be saved by estopping the counter-party from

arguing the unenforceability based on the missing element. Justice Cardozo, in

the seminal case of Allegheny College v. National Chautauqua County Bank,

327

explained that “there has grown up of recent days a doctrine that [is] a substitute

for consideration or an exception to its ordinary requirements . . . found in what

is styled ‘a promissory estoppel.’”

328

The Allegheny case involved what was

previously an unenforceable gift promise or charitable subscription. Cardozo

found “the doctrine of promissory estoppel as the equivalent of consideration in

connection with [the] law of charitable subscriptions [and that new case law

recognizes] . . . . the doctrine of consideration as qualified by the doctrine of

promissory estoppel.”

329

Cardozo goes further by asserting that consideration as

a substantive requirement of contract had passe, and it now acted as a mere

formality, noting that it is “a concept which itself came into our law, not so much

from any reasoned conviction of its justice, as from historical accidents of

practice and procedure.”

330

He concluded that the notoriety gained by the donor

was sufficient consideration that created a bilateral contract.

331

Promissory estoppel became ensconced in American law by its recognition

in section 90 of the 1932 Restatement of Contract Law,

332

which states that “a

promise which the promisor should reasonably expect to induce action or

forbearance of a definite and substantial character on the part of the promisee,

and which does induce such action or forbearance is binding if injustice can be

avoided only by enforcement of the promise.”

333

Thus, the three requirements of

promissory estoppel are a promise or assurance, reasonable reliance on the

promise, and a finding that an injustice would be done if not enforced. Professor

Corbin, a major advocate for the insertion of section 90 into the Restatement,

discusses the four stages in the evolution of promissory estoppel: (1) use as

327

Allegheny College v. National Chautauqua County Bank, 159 N.E. 173 (N.Y. 1927).

328

Id. at 373–74.

329

Id. at 374.

330

Id. at 375.

331

Id. at 377.

332

The Restatements of the Law are a set of treatises, sponsored and published by the American Law

Institute, on legal subjects that seek to inform judges and lawyers about general principles of common law.

333

RESTATEMENT (FIRST) OF CONTRACTS § 90 (AM. L. INST. 1932) (emphasis added).

684 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

defensive and offensive form of equitable estoppel; (2) use as a consideration

substitute in contractual claims; (3) use as an independent claim for detrimental

reliance; and, finally, (4) use as an equitable tool, with solely equitable rights

and remedies.

334

The 1981 Restatement (Second) of Contracts (Restatement

Second) deletes the First Restatement’s requirement that the reliance be “of a

definite and substantial character.”

335

Thus, the newer version broadens the

scope of promissory estoppel because something less than substantial harm will

suffice.

The difference between English and American common law is that under

English law, promissory estoppel can only be used defensively, such as a

substitute for consideration. Stage 3 of Corbin’s analysis recognizes its use

offensively as a separate cause of action. Under the American version, a promise

may be enforced by a claim of damages if there has been reasonable reliance.

336

In Schmidt v. McKay, the court asserted that “[u]nder New York law the essence

of either a claim of promissory estoppel or a claim of breach of contract is a

claim of damages for breach of promise.”

337

As noted above, in the first case,

the party is limited to reliance damages (placing the party in the position it was

in before the negotiations) and, in the latter, expectancy damages (placing the

party in the future position it would have been if not for the breach) are awarded.

Most important for the current discussion, promissory estoppel can be used

to enforce promises made in unenforceable preliminary agreements.

Furthermore, promissory estoppel’s relationship with the implication of the duty

of good faith in preliminary agreements was noted by a California court

338

“just a different rubric for determining the enforceability of a contract to

negotiate an agreement.”

339

The court found that a party acted in bad faith when

it proposed new material terms on the day before the closing of the transaction.

Like most claims, a given fact pattern may support numerous causes of action.

334

CORBIN, supra note 262, § 8.11, at 45–58.

335

A court held that estoppel may overcome the writing requirement where the agreement induces or

permits “another party to the agreement to do acts, pursuant to and in reliance upon the agreement, to such an

extent and so substantial in quality as to irremediably alter his situation.” Philo Smith & Co. v. USLIFE Corp.,

554 F.2d 34, 36 (1977) (emphasis added) (quoting Woolley v. Stewart, 118 N.E. 847, 848 (N.Y. App. Ct. 1918)).

“For this reason, the doctrine of promissory estoppel is properly reserved for that limited class of cases where

‘the circumstances are such as to render it unconscionable to deny.’” Id. (emphasis added) (citing 3 WILLISTON

ON CONTRACTS § 533A, at 801 (3d ed. 1960)).

336

CORBIN, supra note 262, § 204; 1 SAMUEL WILLISTON & WALTER H.E. JAEGER, A TREATISE ON THE

LAW OF CONTRACTS § 140 (3d ed. 1957).

337

Schmidt v. McKay, 555 F.2d 30, 36 (2d Cir. 1977).

338

Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d 875 (2002).

339

Linhardt, supra note 47, at 22 (quoting Copeland, 117 Cal. Rptr. 2d at 1262).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 685

The court noted that the party may be liable on the grounds of fraud or

interference with contractual relations, promissory estoppel, as well as for

breach of an agreement to negotiate in good faith.

340

VI. FINDINGS AND TRENDS

This part presents a summary of the findings of the comparative analysis of

four major legal systems on the enforceability of preliminary agreements. It

maps out distinctions between the different systems in the areas of the

recognition of preliminary agreements as final contracts, preliminary

agreements as standalone contracts to negotiate in good faith, and the creation

of independent obligations despite the unenforceability of such agreements. It

also examines the remedies available for breaches related to the above three

scenarios. Finally, it concludes that the enforceability of such agreements has

increased across legal systems and this trend is likely to broaden in the future.

A. Enforceability of Preliminary Agreements

Ironically in civil law countries, at first, rules on precontractual liability were

found in case law and not the civil codes. The revisions of the codes studied in

this article—Germany BGB in 2002, French Civil Code in 2016, and the Chinese

Civil Code in 2021—now recognize this long brewing development in the case

law. The issues of the enforceability of preliminary agreements arose in the case

law due to a number of factors, including the civil law’s recognition of a duty of

good faith negotiations and the belief that freedom of contract should be

respected. The latter principle looks to the consent (solus consensus obligat) of

the parties and is often cited when courts rule that a preliminary agreement is in

itself a fully binding contract.

Both in German and in French legal practice, a broad range of preliminary

agreements are recognized and used. Some of these are regulated in the law

while others are not. Although in theory there exists a clear distinction between

agreements that have contractual characteristics and agreements that have no

contractual force, in practice, the distinction between contractual and non-

contractual agreements is blurry. The courts’ interpretation of the parties’ intent

or will may lead to outcomes ranging from the absolute unenforceability of the

parties’ undertaking to the finding that the parties assumed limited pre-

contractual duties (such as the duty to negotiate in good faith and the duty of

340

Linhardt, supra note 47, at 23.

686 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

confidentiality), to the recognition that the preparatory agreement is in fact a

binding contract. In German law, there is a presumption against contractual

commitment. The more detailed the terms of the agreement, the more probable

that this presumption will be rebutted. It should be noted that in both

jurisdictions, the general implied duty of good faith in contract negotiations may

be heightened where a preliminary agreement exists.

In China, the law on preliminary agreements is still in its infancy, given the

2021 enactment of the first comprehensive CCC. The CCC supports a

presumption in favor of enforceability; however, scholars and courts are far from

reaching a consensus on which types of preliminary agreements are enforceable

or the type of liability that should result from enforceability. There is a judicial

consensus in Chinese courts that parties to preliminary agreements owe, at a

minimum, a duty of good faith or reasonable best efforts to each other to

conclude a contract.

The starting point in Anglo-American contract law is there is no implied duty

of good faith in the negotiation of a contract, and the presumption is against the

enforceability of preliminary agreements. But this presumption has been

overcome more often in recent decades. The major trend is that good faith in

negotiations cannot be implied-in-law but can be implied-in-fact. The Delaware

Supreme Court, in a case involving a detailed letter of intent, held that “the

parties obligated themselves to ‘make every reasonable effort’ to agree upon a

formal contract, and . . . . each side [was required] to attempt in good faith to

reach final and formal agreement.”

341

Schwartz and Scott noted that there has

been “a major shift in doctrine; courts have relaxed the knife-edge character of

the common law by which parties are either fully bound or not bound at all.”

342

The presumption against enforceability and recognition of duties grounded in

preliminary agreements has been replaced by a new default rule that recognizes

“a mutual commitment to negotiate together in good faith in an effort to reach

final agreement.”

343

The major divergence in American and English common law involves the

use of the doctrine of promissory estoppel to enforce pre-contractual promises.

Both legal systems recognize promissory estoppel as akin to equitable estoppel

341

Itek Corp. v. Chicago Aerial Indus., Inc., 248 A.2d 625 (Del. 1968).

342

Schwartz & Scott, supra note 325, at 675 (citing R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69,

74 (2d Cir. 1984).

343

Schwartz & Scott, supra note 325, at 675 (citing Teachers Ins. & Annuity Ass’n of Am. v. Tribune Co.,

670 F. Supp. 491, 498 (S.D.N.Y. 1987)).

2023] THE ENFORCEABILITY OF PRELIMINARY AGREEMENTS 687

in preventing a party from raising a valid legal point that would ultimately result

in an injustice. A party may be estopped in raising the Statute of Frauds or a lack

of consideration when challenging the validity of a contractual obligation.

American law has taken promissory estoppel a step further by recognizing it not

only as a defensive mechanism but also as the basis of a cause of action. Thus,

a party who relies on another party’s non-contractual promise, such as in the

case of an unenforceable preliminary agreement, may bring a claim in

promissory estoppel if it reasonably relied on that promise.

B. Remedies for Breach of Preliminary Agreements

Since civil law views specific performance as an ordinary remedy in cases

where preliminary agreements are deemed to be binding, Chinese, French, and

German law, on the surface, allow the non-breaching party to obtain a specific

performance order. Technically, in German law, specific performance is the only

available remedy. A party may claim expectancy damages, including lost profits

under German law only when specific performance is shown to be unavailable

or impossible. But even non-binding preliminary agreements are not devoid of

legal consequences since they may still be the bases for the recognition of pre-

contractual obligations, which allows for a claim of reliance damages.

As noted above a major difference between civil law countries and Anglo-

American law is that the former recognizes a duty of good faith negotiations,

and the latter rejects any such duty. There are remedial consequences for this

divergence, namely, that bad faith negotiations in the civil law is the basis for an

action for damages. Culpa in contrahendo allows a party to sue for damages

when there is a bad faith termination of negotiations, especially when that

termination is done within the context of a preliminary agreement. It is at the

court’s discretion to choose from an array of damages from out-of-pocket

expenses (reliance) to loss of opportunity to expectancy damages.

In the common law, breach of an unenforceable preliminary agreement is not

actionable except for the independent obligations of confidentiality and

exclusivity. The exception is, that under American law, a cause of action in

promissory estoppel in cases where there has been a reasonable reliance on a

promise found in the unenforceable preliminary agreement is actionable.

However, damages are limited to reliance losses, but the court may also grant

restitution and loss of opportunity damages in some cases.

344

Finally, since

344

RESTATEMENT SECOND, supra note 16, §90.

688 EMORY INTERNATIONAL LAW REVIEW [Vol. 37:629

specific performance is considered an extraordinary remedy in the common law,

any such grant for breach of a preliminary agreement would be highly unusual.

CONCLUSION

The topic of the enforceability of preliminary agreements among

businesspersons and of the legal consequences arising out of the breach of such

(enforceable and unenforceable) preliminary agreements remains a daunting

challenge in the countries surveyed in this paper: United States, England, China,

France, and Germany. Preliminary agreements come in many sizes and shapes

in virtually all sectors of the economy. Under all the national laws herein

considered, rules about the enforceability of these agreements and on the liability

stemming from their breach are highly nuanced and unclear. This lack of clarity

is heightened across legal systems, due to the differences in the treatment of

these agreements.

Differences across common law and civil countries, in particular, are

significant. Our review has shown that there is a trend toward increased

enforceability and liability across legal systems. There has also been a good

degree of convergence with the Anglo-American recognition that parties may

agree to a contract to negotiate in good faith, as well as the American recognition

of the cause of action of promissory estoppel.

Nonetheless, differences remain, especially where the remedial scheme

continues to adjust in response to the increased recognition of the substance of

preliminary agreements. In recent times, these differences have become even

more important as the clear divergences in national laws have given way to a

murky middle ground. This lack of clarity is traceable to the common law’s

movement away from the presumption of non-enforceability of such agreements

and the uncertainty relating to the interpretation of the new Chinese Civil Code.

The current evolution in the area of pre-contractual liability should earn the

attention of anyone engaged in international transactions, especially transactions

characterized as long-term, complex, and technical.