A Cobr~~m'~LEGALS~DY OF PRELIMINARY
AGREEMENTS UM)ER FRENCHAND AMERICAN LAW.
by Claudia Pierrot
A thesis submitted to the Faculty of Graduate Studies and Research in partial h1fillment of the requirements for the degee of
Master of Laws (LL.M.)
[nstitute of Comparative Law McGill University Montreal. Québec Canada
Q Claudia Pierrot, 2000. Nationat Librery BibiiothBque nationale 1+1 ofcanada du Canada Acqvisiins and Acquisitions et Bibliagraphic SeMces services bibliographiques
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Acknowledgements
This thesis has been drafied under the supervision of Professor Patrick Glenn. Many thanks for his advice, support, supervishg and. above ail, for his tremendous patience.
Many th& to ail my family for their unconditionai support and love, for their help and kindness in my numerous moments of discouragement. Above al1 many thanks for their financial aid. i would have never been able to complete my thesis without it. This thesis is a comparative legal study of pretiminary agreements in French and -4merican law. At the negotiation process, a p~lirninaryagreement has numerous purposes. Tirose purposes Vary with the parties' wiii. The contrasteci concept of preliminary ageement and its hybnd legai nature give rise to fegal issues, such as interpretation, enforceability and liability. Those issues are diierentïy tackied in French and American Iaw. The arnbiguity of pre-agreements dlows the French and herican judges to play a decisive role in the interpretation of such agreements. In accordance with its definiteness and completeness, the pre-agreement may be considered as the final contract and binds the parties. Then. in case of non respect. the blameworthy party may be held liable. and courts rnay grant damages to the party who has suffered prejudice.
Ce mémoire est une étude juridique comparée des accords préliminaires en droit fiançais et américain. A la phase des nigociations, un accord préliminaire peut avoir plusieurs objectifs. Ces objectifs varient en fonction de la volonté des parties. Le caractère ambivalent des accords prkliminaires et leur nature juridique hybride donnent naissance a des problèmes juridiques majeurs tels que f'interprétation, la force juridique et I'éventueiie responsabilité. en cas de non respect du contrat préliminaire. Ces problèmes sont abordés de *on différente en droit français et américain. L'ambiguite des accords préidaires donne un larg,e pouvoir d'interprétation aux juges fiançais et amerÏcains. Si I'accord préliminaire est .sutEsamment précis et cornph celui-ci pourra être considéré comme raccord finai et Iiera Ies parties. En conséquence. en cas de non respect de l'accord, Ia partie défadante pourra etre responsable et condarnntie à dédommager la partie adverse si eiie a subit un préjudice. Table of content J
TABLE OF CONTENT
INTRODUCTION ...,...... ,...... ,, .....wuu..U....U.U-mUU..u...... 6
CHAPTER 1. THE SCOPE OF PRELlMiNARY AGREEMENTS ....-...-.....-...-. 8 A . THE GROWING IMPORTANCE OF PRELPIZINARY AGREEMENTS iN THE EGûTIAïiON PROCESS ...... 8
B . PllRPOSE OF PRELWARY AGREEMENTS...... 10 i . Frelimmary agreements orgmüing the nqotiatims...... 11 2. The c~naactta negoûate ...... II 5 . Letters of intent cMempiating a fume contract ...... 12 4 . Obligations qecific to the negotiation period ...... 13
CHAHXR Ii .PRELfMINARY AGREEMENTS AND THE PRINCLPLE OF GOOD FMHt6 ...... R.*...... *....*..*.....*.--.--.~.~-.- -. A . APPLICATION OF THE PRPlCIPLE OF GûûD FAmT AT TFiE NEGOTiATiON STAGE ...... 16 1. The p~cipleof@ M...... 16 a) The historical civil law app mach ...... 16 b) The American legd app mach ...... 19 2 . nie deciding role ofthe Fm& Civil Code and the Amencan UnifOrm Cornerciai Code m the imp ternemation of good faith ...... --77 a) Gdhith: an oveniding principte of Frai& conttact law ...... 73 b) The mle ofîhe UnifOrm Commercial Code m the United States ...... --7 C 3 . A particular appiication of Qoud Wh in the negoumon phase: the disclosure obligation ...... 29 4 . Good W:a flexible and evolvîng concept ...... 32
B. nIE EGAL WACTOF TCIE PRINCIPLE OF ûûûD F.4iTH ON PRELIMINARY AGFSEMENE ...... 34 1 . The contract to negotmte and the agreement wiih open tem...... 355 2 . The agreemem to negotiate in Qood fkith ...... 37 3 . The clause of best efforts...... 11
CAAPTER Ui. WE ENFORCEABILLTY OF PRELlMINARY AGREEMENTS ...... -45 A- PKELIMWAKY AGRE~AND E RlTLES OF CONIRACT FORiMA'iiON ...... 45 1. Contnct kcmarian in French and Americaa law ...... 45 2 . The Illadequacy ofthe classical des of contract fôrmation fbr the issue of prehaq agreemads...... 19
6. t?E [KfERPRETAlïCNOF THE COMMON WLLOF TIiE PARTES ...... 51 1. The subjective and objective theuries ...... ~~~~..~~~~~~.~..~~~.~~~~~~~..~...... 52 2. The use of extemat criteria ...... 56 Table of content 5
C . Tm LEGAL iMPLICAïïûN OF THE WORDiNG USR) IN THE PRELIMINARY AGREEMENT ...... 60 1 . The issue ofd&ïteuesç ...... 6û a) The consideration of the unequivocal laquage of the letter of intent ...... 60 b) Ambiguity and misunderstanding ...... 63 2 . The issue of completmess of pteliminary agreements ...... 71 a) Definmg essential ternis ...... 72 b) Supplying missing temis ...... 76
CUPTER W .LIABUITY AND DAMACES .._U__UuuI.uu.Iu...80 A. THE PRESOF4llUCTUAL FALlLT ...... 8 1
B. LEGAL BASIS OF LIRBILITY IN LEITER-ûF-DKENT SmAnONS ...... 85 L . The application of the law oftorts in France ...... 85 2. The use of misrepresemation. restitution and promissory estoppel in the United States ...... 87 3 . The non respect of pfôcontractual provisions ...... 94
C . DAMAGES...... 98 I. The awarding of reiiice damages ...... 98 2 . The refiisal of specific pehrmance ...... 103 3 . Damages for breach of a good-fkkh obligation ...... 104
TABLE OF CASES ...,...... -. -....-...... - ...... ,-.. 11 1 French cases ...... II1 herican cases ...... 112 Ennli_Fhcases ...... il6 introduction 6
INTRODUCTION
The purpose of the thesis is to study the legal concept of preliminary agreements in
the context of business negohations, under French and American Iaw.
Preliminary agreements are important instruments in the pre-contractuai process. By
definition, a prelirninary agreement is, in its essence, provisory and implies the subsequent
conclusion of a final and formai contract. The parties are bound only because they have
agreed to prepare a conmct that should follow the pre-agreement. However. a
prelinary agreement has several purposes that Vary with the parties' will. A prelirninary
agreement can be a simple declaration or an elaborate document resembline a contract.' It
is of a hybrid Iegal nature.
Preliminary agreements are drafted at the beginning of the negotiation process, most
tiequently by non-legal staff. The words used are often vague and ambiguous. At this
moment, parties are not preoccupied by legal issues and are not always aware of the
possible Iegai consequences of the si_gÛng of a pre-agreement. The evolution of the
negotiation process and the wording used by the parties may lead to the recognition of the
preliary agreement as the final contract. Consequently. the ambivalent and contrasted
concept of pretiminary agreement lads to numerous legal issues, such as interpretation,
enforceability and liabi.
Those issues are difFerentIy considered in the United States and in France. American
courts usuaily recognize restricted legai consequences to prelimùlary agreements, whereas
1 RB.L;ike and USnem Leners ofintent and Other Precontracnral Documenrs. Comparative =inafvsisand Fom(Stoneiilim, Mas.: Bunerworth Legai Pubüshers. 1989). rit 6. French courts hande those agreements with larger latitude. This différence results fiom the divergent view on contracts in the common Iaw and civil law systems. On the one han4 the Comrnon law emphasizes the bar-gain aspect and its inherent risks, and on the other hmd, Cid law leans toward the reiationship aspect. Chapter 1. The scope of preümhry agreements 8
Chapter 1. The scope of preliminary agreements
A. The growing importance of preliminary agreements in the
negotiation process
Modern negotiations are characterized by the multiplicity of preliminary agreements.
The drafüng of pre-contractuai agreements is an important phase preceding or coming
with the negotiation stage.
in the business world, pre-contractual instruments are named "Ietter of ïntent", "heads
of agreement". "memorandum of understanding". "memorandum of intent". "agreement in
principle" (accord de principe), LCagreememto negotiate" (accord clcl nigociarion) and
"protocoi" (prorocok d'accord). The term "letter of intent" is the one that is fiequently
used in France and the United tat tes.'
Those severai names given to preliminary agreements indicate that the parties are
dling to avoid the term "contract". Thus. for the parties, those preliminary documents
appear to be less constraining than a formal contra* at least psycholo~caUy.'
FLabarthe, La Notion de Document ContractueII (Paris: LGDJ. 1994). at 142- Chapter 1. The scope of preliminary agreements 9
A Ietter of intent is usually signecl at the beginning of the negotiations. It may be
unilateral or siged by both parties. The signhg of a document is psychologically very
important for the parties. Even if they do not want to fie1 bound, businessmen consider
the letter of intent to be ethically and moraily bindiig.' It officialiy shows the beginning of
the negotiations.
Business people are usually reluetant to involve lawyers at the beginning of the
negotiations. Lawyers seem to be an obstacie for a fiiendly first contact with the possible
tiiture commerciai partners. The use of letters of intent is a convenient way not to involve
lawyers at the beginning of the negotiation process. and to separate commercial terms
hmlegal terms that are viewed as the "arcane b~iler~late".~
Amencan courts are aware of the important role of preliminary documents in the
business world. in Schwanbrck v. FeJrraZ-Mogzcf CuT.,6 the Massachusetts Court of
Appeals highlights the tirne and efforts gained by the conclusion of preiiminary agxments
in a aim to reach a final contract.
The identifjing of key elements in pre-contractual documents acceterates the
formation of the contract- The letter of intent focuses attention. From an economic point
of view, the letter of intent constitutes the evidence that serious negotiations have been
Business people %udiy comply with mch agreements for a mriq of eainornic and p-hologid if mt sui* moral reasons." RB-Lake and U.Dr;retci~.supra note 1 at 10-1 t.
khwmbeck v. FederaI7tfogul Corp., 578 NE2d 789 (Mas. App. CL 1991). Chapter 1. The scope of prelunuiary agreements IO
undertaken and it may help to obtah hcidmeans and capital investment. It indicates
the seriousness of parties' intentions.'
In general, letters of intent encourage parties to have a constructive attitude during
the negotiations, Le., to negotiate with a view to reach a fin& contract.'
B. The purpose of preliminary agreements
Letters of intent can be very long and detailed, and may therefore have the
appearance of a contract. The tenn "letter of intent" is @vato many types of document.'
The difference between the various preliminary agreements is not made by their name.
but by their content. The scope of a prelinary agreement actualty varies with its content.
A letter of intem may refer to the conduct of the negotiations, or contain the
descriptions of items to be pwchased or services to be performed." It may serve to
impose confidentiaiity on information given during the negotiation process, or to impose
confidentiaiii on the evolution of the negotiaaons thernselves." They are essentiai for
!%xi J. Klein and C. Bachechi. -Premntracmd LiabiIity and the ci* ofgaod faith negotiaiion in internationai transactions*. (1994) 17 Hous. J. Int'l L 1. a 5.
Y P. Jotrrdain La bonne foi dans les relations encre parn'culiers- Dans la /ormabon du conrrar. Rapporr fiançais. Tnvnn; de i'Asio&ïon Henri Capiunt, Tome ,XLIü (Pans: Lixec 1992). at 127.
Y RB.iake and USraem. supro note 1 at 6.
1 I Jhil Lande and 1-Y Tmhon l%enegotiruing phase of international conuacts" (l9W 1 Wn. 3. at 3. Chapter 1. The scope of prelimïnary agreements 11
cornplex negotiations, as several consents 41be given on various points at different
stages of the negotiations. "
1. Preliminary agreements organizing the negotiations
Modem business transactions require the exchange of numerous documents (fa
memos, notes, letters, propositions,...).
Negotiations may invoive several documents reIating to different points or stages of
the final agreement. Those documents may comain hundreds of pages. The negotiation
process rnay also invoIve third parties such as financial institutions. govenunent agencies
or consultants. Under those circumstances, the pre-contractual agreement is necessary to
bring order in such a complexity." For instance, it rnay organize the timetable or lk the
share of the coas and expenses occurred during the negotiations.'J
2. The contract to negotiate
The contract to negotiate is aiso called "agreement to agreen and "contract to
bar-sain". '
': IbicL at 25-26. [n nich case. Ietten of inteni serve to record prelùninap consents that could be forgonen in the pmcess of cornpleu trrinsactians.
l3 RB.- "Letten of Intent: a Comprirritive EdtienUnder English US.. French and West Gmw Lawn:. (I9M) George WashJ. of Int'i Lm& Economics 33 1. at 333.
" I-M. Loncie and J-Y Trochoa supra note 11 at 5.
'j 'k of the verb form 70 bargain- (nther than "contract of bargainbargainor just 'bargain conact3 is intentionai in the hope af suesïng the pnicess of bargaining which remains to be performed nther than the agreement (if a*) which M11 resuIt therehm.' C.L.happ. "Enforcing the Contract to Bargaia" (1969) 44 N.Y.U.LRev. 685- Chapter 1. The scope of preliminary Fments 12
The contract to negotiate is a temporary contract, creating obligations oniy for the
pre-contractual period. Nonetheles, some obligations, like the duty not to disclose or to
use know-how, may be preserved &er the failure of the negotiations. in that case, the
duration of the obligations should be foreseen in the preliminary agreement. if not, the
duration of the obligation wiil be decided by the judge.I6 The parties can also foresee
damages in case of the breach of such obligations.
3. Letters of intent contemplating a future contract
This letter of letter of intent is defined as being "a pre-contractual written instrument
that reflects preliminary agreements or understandings of one or more parties to a hmre
contract."" Burton and Andersen define it as "one made dunng bargaining on the
assumption that fùrther negotiations will take place and resdt in a later, final contract.""
This letter of intent is considered as the foundation of a final contract. Those definitions
indicate that the Ietter of intent is of a pre-contractual nature and not contractual."
I6See. JSchmidt .\;épociation er Conchsion de Contrats. (Paris: Dalloz 1982). at 256-160.
'-RB.Lake and UJ>rrienrt. supra note 1 at 5.
1s S.J. bonand E.G. Andersen Contractuai Gwd Faith: Fornation. Perfrnance. Breach. E&rcemenf. (Boston: Lmle Bmm 1995). at 348-349. Chapter 1. The scope of prelirninary agreements 13
Those preIiminary agreements aim to prepare the hue~ontract.~ ïhey are normdy
temporary and are designed to be replaced by the final agreement. They usuaiiy comain
provisions stating the parties' intention and reflect the propsion of their will. These
documents have a great importance for the parties. The signing of a document, even if it
contains generai staternents, wiU symbolise the be-g of their eventual tiiture
commercial collaboration2'
Important obligations such as price or defective performance are usuaily lefi to the
final stage of negotiations.= Thus, it is not surprising to hd open terms in letters
conternplating a firture agreement. They are to be settled in the final agreement. Most of
time. a lawyer will undertake to later draft a more detailed document.'j
4. Obligations specific to the negotiatian periad
ïhe particular peRod of negotiations gives rise to specific obligations. Those specific
obligations are, among others: collaborating to reach a positive solution, acting to resolve
difficulties that may arise during the negotiations, making no unfair proposais."
Several specific clauses are systematicaily included in pre-contractual agreements.
LSchmi&SzaietiskiskiFrench repart. in E.H.Hondius. ed. Prrcontmctual liabili. Repris [O the .Whh congres. Internaiional kademy of Comparative h.MonueaL C&. L8-24 August 19Yû. (Deventer Kluwer Law and Tasation PubLishm. 1991). at 148.
" I-M. Loncle and 1-Y Trochan- supra note II rit 7. - - RB-Lakeand U.Dnem supra note 1 at IO.
I-M. Loncle and 1-Y Trocbon supra note 11 at 7.
'"Set 9.1- Con* des Notaires de France. Le Conaar. Liberté contracruelle er Sécurité juridique. (Lyon 17-20 mai 1998). at 32. [heminafrer 9.1'" Congrés da Notaires de France]. Chapter 1. The scope of preliminary agreements 14
The clause of exclusivity prevents the parties fiom negotiating with third parties. It
may require to negotiate on an exclusive reciprocal baskZ5The clause of sincerity obkes
the parties to reveal any negotiations with third
The clause of conîïdentiaiity obiigates the parties not to reveal the negotiations
undertaken. For instance, in the context of a derof a Company, the contracting parties
are wiiling not to worry their financiai partners, their staff and their clients. They prefer
being discret on the course of the negotiation~.~
The clause of confldentiality may aiso prevent the parties fiom discloshg confidentid
information exchanged during the negotiationsB
"Good faith" and %est efforts" clauses aim to impose on parties an obligation to
negotiate in good faith or to use best efforts to reach a finai contract."
The parties can ahcontempIate the failure of the negotiations. For instance, they
may foresee the disposai of documents iike anaiysis. expertise, plans.. . . that have been
created for the purpose of the deaL3' They can also specitj. that no damages couId be
cIaimed in case a final contract is not reached."
- -- --
144. Lonclc and J-Y Trocbon. supra note II at 3.
'5 P. Ioudah supra note 8. at 129.
C - 94" Congr& des Notaices de France. supra note N 3t 33.
P. kmdam supra note 8. rit 129.
See. ùr@a Chapter iL B. The le@ impact of the principle of good fion pdimbqagceemenfsfS
94'- Congrés des Notriires de France. supra note 24 at 35.
'' J-M. hncle and J-Y Tmchon supra note II at 8. Chapter 1. The scope of preliminary agreements LS
Mr. Pevtchin has made the fùrther statement on letters of mtent: 'You hdin it what
you have brought".j2 A lener of intent may have many purposes. Thus, it is dficuIt to
give a single and precise definition.
Several types of Ietter of intent and their purposes in the negotiation context wilI be
presented. The thesis will particularly focus on the following types of pretiminary
agreement: the contract to negotiate? the contract to negotiate in good faith. the
agreement with open terms and the letter of intent contemplating a future agreement.
Gh.tchin -La lettre d'intention (1979) Droit et htique du Commefce intematiad at 49. Chapter U. freiiaiinary agreements and the principle of good fith 16
Chapter II. Preliminary agreements and the principle of good
faiîh
Parties entering into negotiations are primady supposed to be willing to reach a finai
agreement. Bebaviars contrary to this purpose constitlite a deception. Parties are deemed
to act positively towards the conclusion of a contract- They are deemeci to behave in good
&th during the negotiation phase.
Arnerican and French !aw have a different approach towards the good faith duty at
the pre-contractual phase. This duty is more easily accepted in France than in the United
States.
In certain situations, the presence of a preliminary agreement may imply an obligation
to negotiate in good Euth. On the other hand some pre-agreements explicitly aim CO
impose on parties an obligation to negotiate in good faith.
A. The application of the principle of good faith at the negotiatïon stage
1. The principle of good faim
a) The historical civil law approach
Good f%th and fàk deaiing have ben, fiom rime immemocial, a fundamental
cornmanciment of social bebaviors. Chapter iI. Preliminary agreements and the principle of good faith 17
Ln the Christian world, long before the intervention of legai systems, hesswas the
basis of every dealing, imposed by ancient and rigid customs. "Good fàith in dealings and
negotiation practices was the element of binding value in these ancestrai societies, and
served as the religious basis for maintabhg the word given."'
The canonists considered good faith as a universal moral nolm rather than a social
nom. tn Canon Law, failing or reksing to keep one's promise was a breach of duty to
God. Thus everyone had to act in a reasonable manner. This was a subjective moral
standard based on individual honesty.j4
For the Greeks, good faith was a universal social force that joverned their social
interrelationships. Each citizen had an obligation to act in good faith with regard to alI
citizens."
The Carthaginians have related the following:
There is a country in Libya, and a nation beyond the Pillars of Heracles. which they are wont to visit, where they no sooner arrive but forthwith they unlade their wares, and, having disposed them afler an orderly fashion dong the beach Ieave them, and, returning aboard their ships, raise a great smoke. The natives, when they see the smoke, come dom to the shore, and, laying out to view so much gold as they think the worth of the wares, withdraw to a distance. The Carthaginians upon this come ashore and look. [fthey think the gold enough, they take it and go their way, but if it does not seem to them sufficiern, they go aboard the ship once more, and wait patiently. ïhen the others approach and add to their gold, tiIl the Carthaginians are content. Neither party deals unfairIy by the other: for they themselves never touch the
-- '' N. W.Pdmieri 'Good Faith Disdosures Required During Negotiritions-. ( 19%) 24 Seton W LM.70. Iit 80.
EMHolmes. -A Contevtual Study of Commercial Good Faith: Good-Faith Disciosure in Contract Formation-. (19723) 39 UR-Rev. 381, at 40343. Chapter II. Preliminary agreements and the priaciple of good faith 18
gold tiii it cornes up to the worth of heir goods, nor do the natives ever carry off the goods tU the gold is taken away.j6
ïhe concepts of good faith and fiimess of the exchange have been identified by the
natural law phiiosophy of Hugo Grotius" and Samuel ~ufendorf~'The nom of faimess
provides a fiindamentai bais for many doctrines deaihg with the notion of substantive
faimess. ïhe civil law notion of a "Fair contract" and the comrnon law doctrine of
unconscionabilifl corne tiom this hdamental basis.1°
The idea of bonafdes (good faith), conceived as loyalty and faimess, was the bais
for trade in the ius gentium. It was weii recogiized that the scope of bonnfidrs was much
broader, even though one of its most important aspects was its negation of bad faith. The
great Roman jurist Quintus Mucius Scaevola noticed that this duty permeated Roman law
in general and speciiïcaily Roman contract law.'"'
36 Sec. F.RB. CodoIphin cd & G. hwlinson tram., The Gmrk His~orians.îhe Complere and Cirobric&d Historical Rorh of Hemdohcs (New York Ran&m House. 1942).
'-Sec. Hugo Grotius. Francis W. Keky tr;uis.. ïhe Law oflFar and Peace- De Juri Belli oc Pacis. libri tres (Incihapolis: BoWs-Menïll. 1925).
3 See~Samuel Pufendorf. The Law o/.Vature and Xatiom- De Jure Jaturae et Gentium Libri Ocro (Mord: the Clarendon Press London K Milford 1934).
39 Unconscionabiiin. is as a term "so unre;wuably detrimental to the interest of a conmcting paq as to render the convaa unenforceable-- lhis ruIe is Godificd in Section 2-307 of the Cfniform Commercial Code: The basic test is whether. in the tight of the general commerciril background and the cornmerciai needs of the pticuiar mde or use. the daases ïnvohied are so one-~idedas to be miconscionable under the circumstyices e.risting at the time of the milking of the contnct"
" LA neo o. "An Intmtiooal Conuact Formula: The inforniillity of Internationai Business Transactions plus the intemtionaiiition of Contna Law Equds UnewedContnctual MiüC (1997) 23 S~ncuseI. Intl L. & Corn 67. at 88.
-1 1 N.W. Pdmieri supra note 33 at 81. Chaptw II. Preliminary agreements and the p~cipleof good faith 19
Good faith is primarily a question of intuition The parties have to respect moral des.
There are two aspects in good fiiith behavior first there is a subjective aspect in which
good faith combiies with loyalty, and second there is an objective aspect in which the
person that has a good faith behaviot is the one that acts reasonably."
b) The Arnerican legal approach
Severai American authors have attempted to !give a definition of good faith and fair
dealing. It has been variously defined as requiring decency as well as faimess and
D.Tallon. 'Le concept de bonne foi en droit fiançais & conat". Saggi. Conferenze e seminari. Rome tY94. ~Hm:ll~m.mr.i1/CRDCSITallon.htm>(km m&ed:30 OBcember 1999). The Reasoruble Man is "the one tvho imïlriably looks where he is going and is carehrl to esamine the inmediate foregound before he e~ecutesa leap or a buund: who neither sur-gazes nor is lost in mediation when appmaching mpdoon or the miugïn of a dock: who records in every case upon the counterfoils of cheques mch ample detils as are éesinbk scni@ous& substihiks the word Thder" for the wod -Beiuer-. crosses the inment-dc hyee or&-. and registers the package in rvhich il is dispatched: who na-er rnounts a moving omnibus. and does not alight hmiuty crtr while the tr;Un is in motion who investigates euhriustiveiy the bona fides of evev mendicuit before dimibuhg alms, and niii infonn himself of the aory and habits of a dog before administering a URSS who Meves no gossip. Itor repeats it without firm bÿsis for believing it to be me: who never drives his bal[ cil1 those in front of him have defiteiy tacated the puning-green which is his ona objective: who never hmone's y&s end m mther makes an e~cessivedemand upon his wifé. his neighbom. his servants. his ox or his ass. who in the rnqof business looks O@ for that mwmargin of profit which melve men such as himseif would reckon ro be -fiif. and contemplates his feilow-merchants. theu agents. and their goods. with the degree of nispiaon and distrust which the lm deems admirable: aho never swears gambles, or loses temper. who uses nothing evcepr in moderation. and even while he flogs his chiid is meditaring or& one the golden mean. Devoid in short of aq human weakness. nith not one sin&e saving vice. sans prejudïce.procrzistin;itioa üirtame. avarice. yid absence of mind as careful for his omn de& as he is for thof others. this escellent but adions cimacter stands like a monument in our Courts of Justice. vain& appeaiing to his fellowcitizens to order their lives after his otni euamples-. Funher the author deshe folloning observation: %ere is no singe mention of a reaoaable woman.' AP. Herben Lncommon Lmv. 1st ed (Garden Cip-.N.Y.: DoubIedq. Doma 1936). at 3-5. Chapter CI. Preliminary agreements and the principie of good faith 20
reasonableness,li fainiess," and comrnunity standards of fairness, decency and
rea~onableness.~~
Rather than trying to give a legal definition of good faith, some authors have
undertaken to define it in a negative way. They have identified bad faith behaviors.
For Professor Ellhingaus, good faith in law is "a standard rather than a rule, principle,
or concept and is closely related to residual categories.'*
In Farnswoth' words, good faith is 'ivhat remains aer the catezories of bad faith
have been exc~uded-'~~The National Labour Relations Act. requiring fair dealing in labor
negotiations, has inspired Professor Farnsworth who has identified several instances of
unfair dealing: refusal to negotiate, improper tactics, extreme infle'u'bility, unreasonabie
proposais. nondisclosure, parallel negotiations, reneging and. in some circumstances.
breaking off negotiations.
However, for Professor Farnsworth, the traditionai aieatory view should be the
principle at the stage of the negotiations. The traditionai cornmon law view of negotiations
holds that "mere participation in pre-contractual negotiations is not enough to create
" EA Famsworth. -Goai Faith and Commerciai Reasombleness under the Unifonn Commercial Code-. (1963) 30 U.ChiLAev. 666. at 667-668.
RA Wmaa Tolicùig Contract Modifutions under the U.C.C.: Good Faith and the Docvine of Economic Duress-. ( 1979) 64 Iowa L. Rev. 849. at 87ï.
" R ïhigpen -Good Faith Ferformance Under Percentrige Leases-. (1981) 51 Miss. L.I. 3 15 at 320.
" EAFanisworth. 'Precontncttd Li&@ and Reiimiap Agreements: Fair Dealing and Faiieci Neg~tiatio~(1987) 83 Colum 1. L Rw. 217- at 273-284. Chapter iI. Preiitninary agreements and the pnnciple of good faith 2 1
bineing obligations, even if the parties reach a prelimulary agreement."J8 hposing a fair
dealing duty does not simiift that the negotiations wiii effectiveiy take place in a fair
atmosphere. Moreover, such obligation migh discourage parties fiom entering into
neg~tiations.'~
Professor Summers argues that it is inappropriate ta ascribe any particular definition
to the term good faith and fair dealing. According to him, the concept of good faith and
fair dealing is an "excluder" in that it sirnply excludes certain bad faith behaviors. This
notion of "excludef has no precise meaning, but it serves to exclude man? heterogeneous
forrns of bad faith. Professor Summers has identitied six categories of bad faith behaviors:
evasion of the spirit of the deal, lack of diligence and "slacking OR" wilful rendering of
only "substantial performance," abuse of a power to specie terms, abuse of power to
determine cornpliance. and interference with or failure to cooperate in the other party's
perf~rmance.'~
Professor Knapp has descnied bad faith in the negotiation stage as "a unilateral
withdrawal from negotiations or at feast an insistence on terms so clearly unreasonable
that they could not have been advanced with any expectation of acceptance, coupled with
some demonstrable advantage to be gaineci by defendant in avoidiig the comemplated
tran~acti~~~~~~
81 J. Hein and C. Bachechi supra note 7 at 4-5.
49 E.A. Farnsn-orth supra no& 47 at 242-243-
Sec R S. Summers. - -Good Faim in the Generai Conuact Lmand the Sales Mons of the Udom Commercial Code*. ( 1%8) 54 Va. L W. 195.
51 CLhpp. supra note 15 at R3. Chapter II. Preliminary agreements and the principle of good faiui 22
Good faith imposes an obligation to negotiate with loyalty and honesty in view of
sec& and efficiency of the fbture transaction.
Because of the absence of a strict definition of good &th by courts and scholars, it is
not possible to determine if the concept of good faith is purely subjective, i-e., the party
honestiy beiieves that she is acting properly; or if the concept is purely objective, Le.,
besides the belief. the party acts in a remo~~ablemanner. The parties could determine the
standard themselves in a pre-agreement." but they usuaily neglect it and therefore the
definition is commonly made by the courts.53
2. The deciding rote of the French Civil Code and the Arnerican Uniform
Commercial Code in the implementation of good faith
a) Good faith: an ovemding ptinciple of French contract law
The concept of good faith is an essentiai component of the civil law systems. It
particularly plays a major role in contract law. It is a generai principle, overriding al1 the
rules of civil Iaw contracts.'"
For instance. Article 1372 of the Cid Code of Quebec provides that good faith shail
govern the conduct of the parties at the moment of the birth the execution or the
'' See. infia F'art B. 2. The contract to negotiate in good faiui
AE-Facmvoonh The Concept of Faith- in Anaeriun La", centm di studi e ricerche di diritto companto e suaniero (Rome 1993).
extinction of the obligation55The Civil Code of Netherlands, in its Article 6.2 para. 1, uses
the terms "reason and equity."
The French Cid Code (herehafter the Cd Code) is the product of legai scholars
and is based on many philosophicd concepts. The canonist tradition and the rnordist
conception of Natural Law have inspired the concept of good faith.% Mthough the
concept of good faith has aIways been considered as a hndarnentai notion of contract law
by the draflers of the Civil Code. the French Civil Code has no general principle rehting
to good faith. Article 1 134 para.3, relating to good faith, only concerns the execution of
con tract^.'^ However. it is comrnonly admitted, by the courts and the authors. that Article
1134 para.3 actually reflects the principle of pod fith in contract law in senerd and that
good faith is an ovemding principle of contract ~aw.~"
'' E.A Fanisworth. The Eason Weinmann Coiioquium on uitemtiond and Comparative Law: Duties of Good Faith and Fair Dealing under the üNiDROW RuicipIes. Relevant interiüitionai Comentions. and National Law-. (199% 3 Tui. 1. Int'l & Comp. L. 47. at 60.
" Article 1372 of the ch-il code of Quebec: "h bonne foi doit gouverner la conduite des parties tant au moment de la naissance de I'obIigatioa qu'i celui de son e~écutïonou de son extinction."
'6 D.Tallon supra note 42.
5- Anicle 1134: "les conventions Iegaiement fornies tiennent Lieu de loi à au.qui les ont faites -EUes ne peuvent être révoquées que de leur consentement muniel ou pour les causes que la loi autorise. -EU& doivent ètre exécutées & bonne foi* In the pmject of the civil cade of Year W (Code aviI & l'An VCI). there wuan article ptwiding ht conventions have CO be conduded and e~ecutedin gaod faith For a question of saucmre of the 6nal cM1code, the derence to good fith in the formation of contnct ha not been rwiewed The current @cIe 1134 is a part of the chapter The effect ofobiïgations-. D.Tailoa supro note 42-
" J. Schmidt supra note 16 at 206. Chapter II. Preliminary agreements and the principle ofgood faith ,J
To sum up, the application of a good f%th duty at the pre-contractual phase implies
the recognition of a gend ptinciple of good faith of which Article 1134 para3 is an
appfications9
Although good faith has always been a firndamental concept of contract Iaw. French
lawyers and judges have forsaken it for decades. It has gained importance in the siaies.
when the doctrine, as weii as the judges, have started to be anxious to protect the weak
parties in transactions. fn 1985. for the first tirne. the Cow de cassatiorrw accepted an
appeal based on Artide 1134 para.3 of the Civil ode.^' The Cmr de cmtron.
considering that it is a famal question refuses to define good faith and leaves this duty to
the courts oflower level." Lus. there is no unique definition of good hith in French case
law.
The concept of good faith is actualiy at the hem of the entire French contract law.
Freedom of contract has to take imo account justice and 10~alty.~'The sood faith doctrine
emphasizes the supremacy of contractual justice over contractual fieedoma
The courts admit the existence of a g,ood farth obligation at the stage of the
negotiations.
5.3 P. Van Ommeshgk La bonnehi dam les relorions entre particuliers- in Loformation du contraf. Rapport générai. Travaux de 1~4rsociorionHenri Copironr, Tome SLlIl (Pans: Litec. 1992). at 30.
60 The French Supreme Courl
61 Civ-L 20 mars L9W 9.1985 1.. m.102.
" The Cour de cassation dDes not judge the fkts of Lhe use. If onh; considers the application of law.
63 1-GhestinTraite L thifcivil- taFormation di Cuntmi., (LGDJ: hns 1993). at 4142. Chapter ii. Prel'MUiary agreements and the principle of good faith 25
Bad faitti and lack of loyaity characterite pre-contractual wrongfiil behaviors. in
practice, bad faith would consist of "any behavior that deceives the other party's
confidence": breach of negotiations (whereas the other party could reasonably expect the
contract to be concluded), disclosure or use of confidentid information on purpose in
order to deceive or to cause a prejudice to the opposite side, erroneous information given
about the elements of the negotiated on tract.^' It can also be characterized by: entering
into negotiations without any intention to conclude a contract. raising new and
unreasonable dernands during negotiations, rejecting systematically reasonable offers,
revoking offers previousl made. putting forward modications in order to continually
extend negotiations, requesting funher benefits or imposing new obligations on the other
PW.M
b) The role of the Uniform Cornmerciai Code in the United States
In 1766, Lord Mansfield referred to good faith as "the goveming principie ...
applicable to al1 contracts and dealingsgsn6'but this principle never took roots in En&nd.
The doctrine of good faith has been, however. adrnitted in the United States. The
conternporary reco-don of the doctrine of good faith began with Professor Kari
Llewellyn, Chief Reporter for the Uniform Commercial Code (hereinafler the u.c.c.).~~
68 J.Schmidt-Szaieivski. supra note 20 at 157.
65 IbUL at 152.
66 See. P. Van Ommeshphe. SUPM note 59 ar 41.
"r Carter v. Boehm. [I7&1 KB. 1162.1 LM. Eng Rep. 97.
E-A Fmsivorth supra note 43 at 667-668. Chapter II- Preliminary agreements and the principle of good fath 26
Professor Lleweiiyn, a former tacher at Leipzig in Germany, was inspird by the Treu
and Glauben provision of the German Civil Good fath, hoduceci in the U.C.C.,
has later reached a national importance in doctrine and in practice. However. it should be
mention& that a few States (notabiy, New York and California) had recognized good faith
before the adoption of the u.c.c."
The U.C.C. refers to good faith in at least 54 of its 400 sections, and it is specifically
referred to in each of its nine substantive articles. Section 1-201(I9) gives a general
definition of good faith, applicable to the entire U.C.C.:
'Good faith' means honesty in fact in the conduct or transaction concerned."
"4 Anicle 242 of the BGB.
" €.A Fmvorth supra note 43 iit 667.
-'. The 1949 di;iA of the U.C.C. imposed an objective obligation of good faith applicable to ail contracts and Mingmlhin the Co&: "Unless othemise a@ in this kt...'Good faith' meam honesty in fact in the conduct or uansactian concerneci Good faith includes good faith toward dl prior parties and observance by a prsan of the reasomble commercial standards of uiy business or mde in which he is engageci+- -in 1950. the committee on the Propused Commercial Code of the section on Coprasion B-g and Business Law of the Americrn Bar Association resommended that the general finition of good fith shodd be restrined to the subjective &@ of honesty in fact. The committee reasoned tiut the mtnge bus- or lamier would cbenae good faith as honeq in facr nther than commercial reasonableness. The Mersof tbe Code FoUowed the cornmittee's rmmmendationr removing the latter portion of the cirafi provision in 1952 and l&g the presem defhition of good faith set fonh in section 1-70 i( 19): - 'Gdfith' merias hone= in fact in the conchia or transaction concerneci U.C.C. 1-20 1( l9)(l989). This subjective obligation a€good fith wris made applicabte IO conmcts and dnties niulin the U.C.C. & section 1-203. Although some sections of the U.C.C. make ;in objective obligation of good f~thappiicabIe in certain situations. ;he gnemi requirement remaim that the parties behm honestiy in fan" N.W. Palmieri, wpra note 33 at 92-91.
For exampie. the follomùig sections hmthe U.C.C. refer to good hith: three sections hm Article I on gedprovisons (1-201(19). 1-203. 1-208): 11 sections hmAnide 2 on des (2-103(1)(b)2-305(2)- 2- 306( 1). 2-3 1l(1). 2-323(2)(b). 2-328(+). 2402(2), 2-.i03( 1)2-306(2). 2603(3). 2-6 l5(a). 2-706( 1). 2-706(5). 2-712(1)). Chapter 11. Preliminary agreements and the principle of good faith 27
But it emerges tiom the various dispositions related to good faith that ds application
is Limited to the phase of contract perf~rmance.~The duty of good faith in the pre-
contractuai stage of transactions is not explicitly addressed in the U.C.C.
However, this does not mean that a duty of good faith and fair dedis in pre-
contractual negotiations does not exist. In a general way, the U.C.C. reco-&es that
parties must perfonn their contracts in good faith. Such generality dernonstrates that
standards of good faith and fair deaiing should measure ail dealings, even those of a pre-
contractuai nat~re.~
During the last few years, courts have adrnitted that the duty of good faith and fair
deaiing existeci at the negotiation stage of the contract. at least as a principle encouraging
mutuai confidence between the parties.14
But in general, American courts tend to be reiuctant to expiicitly appiy a general duty
of good faith and fair deaiing to the precontractuai stage. Bargainine and bluffing are
common suatees and tactics that mle the negotiations." Therefore. the only way to
impose a duty of good faith in the pre-contractual stage is the conclusion of a vdid
... - The sedon 1-20; praides chat: -meq contract or du@ tvithin this Act imposes an obligation of good faith in irs performance.-
-3 See. N.W. rmmien. supra note 33 at 90-9 1.
-4 One mm kas euplicitiy held that there tvas a du5 of good faith during negotiations. In Chat case the court nated tbat because Section 1-20I( 19) of the U.C.C. defineci good faith id terms of conciuct or transactioa the ch@ of good faith lm also required in pmntractuaI dealings. notwithstanding the Ianguage in code seccion 1-103. Connecricur .Var'lBanR v. dndemon. No. 0053810,1991 WL 204359 (Com Super. CL On 1. 1991). !3ec E.A Fatll~worth.supra note 54 at 60.
-5 !W. V.Kusu&-Smick eds, Chired Siaredapan commercial lm and kade, (Arddq-on-Hudson, NY: Transnational Iuris publications, hc.. 1990). at 668. Chapter U. Prelinary agreements and the principle of good faith 28
prelirninary agreement to negotiate in good fath. The parties must conciude a formal
agreement stating the terms of pre-contractual d~ties.'~
Because of the presence of ethicai standards such as "course of deaiing,"n i'usage."78
"good- faity7' 'Lfair dea~ing.,~and "honesty in fact'"' in the U.C.C., courts and lawyen
became familiar with using flexi'ble and contextual terms.= The emergence of such
equitable concepts, also demonstrates that contract Iaw considen that parties cannot be
perfectly equai in terms of knowledge: expenence and natural ability to negotiate." It also
reflects a reaction of the changing nature of todayfs e~chges.~Some American COU~S*~
have referred to good faith in a very activist way: "as an independent source of oblilation.
-6 .J. Klein and C. Bachechi, supm note 7 at 16. See. Pan II. C. The legril impact of the principlc of good faith in preliminiwy agreement. -- Sce cg.. U.C.C.1-205(3).
Y See cg.. U.C.C. 1-102(2)(ù);urd 1-202.
'Y Seeag.. U.C.C. 1-201(19). 1-203.
Il) See ~g.. U.C.C. 24OX I)(b).
JI See cg.. U.C.C. 1-201( 19) and 2-103(I)(b).
5: G.R SheiL 'Substituting Ethiui Standards for Common Lnv Rules in Commercial Crises: an Emenging Tm&. ( 1988) 82 Nw. UL. Rev. 1198. at L20.t.
53 See cg., Gooriivin v. Agassiz. 186 N.E. 659.661 (Mass. 1993). See N.W- Palmien supra note 33 at 106407.
w See. L.A DiMatteo- The Nom of Conuact: The Friirness inqui- and the Law of Satisfaction: A Nomrnitied Theog--. ( 1993 24 HoMm L. Ra-. 349. at 368.
" Ieg., Kirke La Shelle Co. v. Paul dnnstrong Co.. 188 NE. 163 (N.Y. 1933). and Chtyler Corp. v. Quimby. 144 A2d 123 (Del. 1958). Cha ter II. Preli -
ofien to heIp redress market inequaiities.& This gïves substantial value to the concept of
gwd Wh.
in the United States and France, good faith and morality are increasindy being
recogked as necessary ingrdents for the determination of legal obiigations. The duty of
good faith imposed by law is gainhg acceptance."
Good faith in French law is a broad concept that bas much more duence than the
comparable provision of Article 1-203 of the u.c.c.~
The Common law views contract as a bargain and the civil Iaw views contract as
ageement and relationship. ïhese historicai and conceptual diEF'rences have for
consequences a different approach toward good fith in the pre-contractuai stage.m
3. A particular application of good faith in the negotiation phase: the
disclosure obligation
In France and the United States. the most significant trend of the application of good
faitit in the negotiation process is iilustrated by the obligation for the parties to
communiate dl information indispensable for the cornprehension of the fiiture agreement.
RJ. MW-, -The New Concepmrilism in Conact W. (1995) 74 Or. L Rev. Il3 1. ût 1179.
'' N-WPdmïeri supra note 33 at 84-85,
YB E.A Famworth, The 24th J.M Tucker- Jr. iechue in Civil Law: A Common Lan~er'sview of Civilian Colleagaes- (1996) 57 La L Ra.. 227. a 234435. Chapter II. Prelirninaxy agreements and the pnnciple of good EÜth 30
Fair and exhaustive information is necessary to give a final clear consent. 'The reasonable
man is free because he knows, he sees he decides and he actsn
The duty to disclose has gained importance because of the development of
transactions involving high technology and computer materiais. A party is not necessady
aware of ail technological matters.
Based on the p~cipleof good faith, the duty to disclose has been developed by the
Cour de cmtion and by some authors, independentiy from the legislation. Now. the
obligation to disclose some information has been introduced in the legislation for the
protection of consumer^.^' Some herican statutes explicith require good faith disclosure
in negotiations. For instance. the Tmth in Lending Act requires that creditors make
''meaninfil disclonire" in consumer credit negotiationsQ
in France, this disclosure obligation is Sited. The parties do not have the obligation
to disclose know-how and other technological secrets: they do not have to diilose al1
hancial or commercial information, they have to disclose determinant and relevant
information for the other party to give a clear consent. The disclosure duty is not absolute.
The parties must aiso be aware of hding information by thern~elves.~
91 J-M Loncle and J-Y Trochon supra note 1 1 at 18.
91 P. Van Ommesiaghe. supra note 59 at 35.
[S U.S.C.. section 1601(a) (1982). See. GM.Pews. The use of lies-. ( 1986) 48 Ohio St LI. 1. at 9-10.
" Y. Picod. -L'obligation de coopération dans i'e.xécution du conmt' ICP 1988.1.3318.
3t P. Van 0mmeSI;ghe. supra note 59 at 37. Chapter II. Preliminrtry agreements and the principle of good f%th 3 1
Thus, there is a graduation in the pre-contramai duty to disclose information. It
varies with the importance of the uiformation and with the evolution of the negotiations.
As long as there is no clear intention to enter hoa linal agreement, the parties have no
obligation to disclose sensitive informatio~.~
Under Ametican law, if one puty has specid knowledge about materid elements of
the negotiated contract and if the other party does not have or cannot practically know
those material elements, then the party with special knowledge has the duty to disclose
that knowledse to the other.%
The silence of a party will be sanctioned if it constitutes a huddent
misrepresentation. The violation of the duty to disclose can lead to damases. if the other
party wouid have contracted but under other conditions with the knowledge of the hidden
information. The silence can also lead to the cancellation of the contract. with the
possibility of damges, if the undisciosed information is so substantial that the other party
would not have contracted at
In this perspective, American negotiaton have an ethicai duty to disclose relevant
information. in the United States. Article 4.1 of the rules prornulgated by the .%nerian
I-U Loncle and i-Y Trochou. supra note I 1 at 19.
* E-MHohes. supm note 34 a J07. This cmbe üimmared & the En&h case Cmer v. Boehm- 3 Burr- 1095 at 1910-19IL. 97 Eng Rep. 1162 at 1164-1 165- supra note 67. - Good hith forbids either parry by conceaihg whar he privatee knows. to ctnw the derinto a bargin hm 6is ignorance of ht and his beliaing to che c0ntr;-... [The mie[ is adapted to nich hm as vqthe uiimre of the conmct which one priva* hows and the other is ignonm of. and has no reasoo to suspectsuspect
JAi. Lode and I-Y Trochoa supra note II at 19. Chapter II. Prehinary agreements and the principle of good Eùth 32
Bar Association Commission on Evaiuation of Professional Standards imposes on Iawyers,
who are ofien part of the business negotiations, a duty to disclose relevant fàcts:
Ln the course of representing a client a lawyer shdl not: a) knowingly make a false statement of fact or law to a third Party, or b) knowingiy fail to disclose a fact to a third pacty when (i) in the circumstances faiIure to make a disdosure is quivatent to making a materiai misrepresentation (. . .).%
4. Good faith: a flexible and evolving concept
In France and the United States, a uniform definition of the duty of good faith and fair
dealing, in the context of negotiations, does not exist.
Good faith is a flexiile concept and because of its vagueness, there is always a risk of
arbitrariness and u~certaint~.~For Professor Surnrners, by approaching the concept of
good faith in term of an "excIuder," it seems that it is primariiy a 'Yunctionai tool for
j~d~es."'~In a sidar way, Professor Burton has defined god &th as "a Iicense for the
exercise of judiciai discreti~n"'~'Since good faith cannot be precisely defïned, these
authors view it as a legai fiction for judiciaI expansion.'"'
'W Rule 8 of the Rofessional Conhct Handbook of the Canadian Bar "impses on a Im~erthe obligation to withdnw from negotiritions when it appe;lrs that its client se& to decenle the other paq by faise natements or dishonest conduas' J-M. Loncle and J-Y Tmchoioa supra note 1 1 at 21.
99 P. Van Ommesirrghe -ru note 59 at 28.
lou k R S. Summm supra note 50 at.206.
101 S.L Burton -3mch of Conm and the Common Law Du@ to Pedorm in Good Faith". (1980) Y+ Hm.L. Ra.. 369. at 370.
'O*- E.M.Hohes supra note 34 at UW). Chapter ii. PreIiminary agreements and the principle of good hith 33
Nonetheless, this concept should remain flexible in a aim to be applied in a Vanety of
situations, on a case-by-case basi~.'~'The flemile nature of the concept of good faith
aiiows this doctrine to achieve its goal: maintainhg or creating a fair and equitable
relationship between the parties.'a Good faith aims to give flexibility to contract law. It
allows to condenui certain behaviors. to moraliue the contract.lU5
MoraIity and ethical standards generaily play an important role in the formation and
the application of the law.'"
The concept of good faith reflects the code of fair play of everyday ethics that is
implied in the business world.''" It reflects what the law shouid be in light of the
continuing introduction of ethical standards in the business ~odd.'~'
Good fàith reveds a moraiization of contractual relations. This mordkation is present
in various areas of law. For instance, in most countries, the Iaws protecting consumers in a
aim to establish a fair balance between contracth parties, are gainin3 importance.lW
Today, the [aw evoives to a reinforcement of moral duty and ethical standards. This is
particuiarly true for commercial transactions.
O3 1 P. Vm Ommeslaghe. mpm note 59 at 28.
"Y See. N.W. Pihieri. supta mte 33 at 79-80.
'" D-Tdonsupra note 42.
10- RA Na4- ed. The Grneml Princtples of Ep@ in Equiy in rhe IfbrlrPs Lepal Svs~ems: -4 Comparative SMDedicared ro Rene Cassin- (Bnissels: E~blissementsEmiIe 6-lant 1973). 589. at 600- 608.
'" KW.Piilmieri supro note 33 a 181-182
104 P. JO& supra note 8. at 117 1. Chapter II. Preliminary agreements and the pcinciple ofgood faith 35
FMy, the principie of good f'aith may also indicate a revival of morality based on
religious precepts. Justice Antonin Scalia has said that the impLication of good faith in
contractual situations was "simply a rechristening of fundamental principles of contract
~aw."~'~
However, it appears that, so appiied, the good faith principle confiicts with the
concept of fieedom of contract. The parties shouid not be forced to enter a contractual
relation ifthey did not want it. In the same way, an obligation should not be imposed if the
parties did not clearly agree upon it. The security of commercial transactions is one of the
corollaries of contractual lieedom. "'
B. The legal impact of the principle of good faith on pneliminary
agreements
Certain Ietters of intent contain an obligation to negotiate in good faith, implicitly or
expticitiy.
On one hand, the contract to negotiate and the contract with open tenns implicitly
impose on parties a duty to negotiate in good faith. On the other han4 good faith and the
best efforts clause expiicitiy impose this duty.
110 Tvmeshare v. Covell. 727 F.Zd 1143. 1152 (D.C. Cir. 1984).
'IL F. Kessler and E. Fine. "Cdp in Conmhendo. Baqpinhg in Good Fitb. and Freedom of Contnct: a Comparative Sntdy". (1%) ï7 Hm.L. Rev. U) 1. nU)849. Chapter II. f%eliminaryagreements and the principle of good faith 35
1. The contract to negotiate and the agreement with open ternis.
The contract to negotiate is a contract by which a petson commits to undertake or to
pursue negotiations in a aim to reach a final agreement. "'
According to Professor Farnsworth, an agreement to negotiate imposes a generd
obligation of fair dealin%in the course of the negotiations."%ere are three fair dealing.
standards for the contract to negotiate: "(1) actuai negotiations with no imposition of
improper conditions; (2) disdosure of enourgh about parailel negotiations to give a
reasonable opporntnity to make competing proposals; (3) continueci negotiation until
impasse has been reached uniess there is another justification for breaking off the
nqotia~ions.~If thuse three requirements are respected. the conclusion of rhe deaI with a
third party does not constitute a breach of the fair dealing dusr;"' and i£ despite the
continuing negotiations. the parties do not reach a final contract. they wiiI not be
contracruaily bound.'I5
However, American courts are traditionaily reiuctant to admit the existence of an
impiied duty to negotiate in good faith because this concept is too vape to enforce and
too dificult to apply. The courts are aIso uncertain regarding the eventuai application of
an appropriate remedy."6 Some authors express the same reserve: according to Burton
'" J.SCM&mPra note 16 at 20 1.
'" E.A Farn.sworth supra note 47 at 263.
"6 RB-Lake and Ubmsupra note 89 ar W. It is interesting to note ktunder EngIish law. an -agreement Io amgreewhich is MC a priori enforceable. cm bear an impiied obligation to negotkte in good faith In the case Donn~nProducnom LI^ v ECll Films Lrd.. Chapter U. Preliminary agreements and the principle of good faith 36
and Andersen, a general duty to negotiate, without more, is too indefmite to be
edorced. '"
That is why Amencan parties often conclude a contract to negotiate in good faith,
indicating clearly their intent to introduce this duty in their nesotiations.
Under French law, the obligation to negotiate is twofold: (1) undertake the discussion
which is an obligation of result, and (2) conduct the negotiation in good faith which is an
obligation of means-"' Thus. the parties have to make senous propositions whiIe
nqotiating, and, in general. have a positive and active attitude toward the conclusion of a
finai contract.' l9
The gened principle is that an agreement in principle does not constitute an
obligation to contract, but it does constitute an obligation to negotiate in good faith even
if it is not expressly required by the pre-agreement.la' Thus, the parties are free to contract
but are obliged to negotiate in good hith.
. -- the court h;is decided bteven if nich an agreement ~asnot enîorce;tble -lit[ did not pment the imphcation of an od agreement one ri firm ageement aas in contemplation of a term that the parties ivouid negotiate in gdfaittr ribout CUrther terms to be knedin a dnenagreement- J-M. Lon& and J-Y Trochon. urpm noie 11 at 30-3 t .
Ir SI. Burton and EG Andersen supra nate 18. at 360. (citing Pinnac!e B(M~,Inc. v. HarIequin Enfers. Lrd. .. 519 F. Supp. 1 18. LX (S.D.N.Y. 1989). [R the siune ri., men if the parties intend to be bonnd a too incEe6nÏte pre-agreement motbe enlorceable because it may have for consquences a "surprise contrrictuai obligation that the @es nmer intendd- S.J. Won md E.G Andersen supra note 18. at 359. (quoting Teaches Im. & .-lnnuiy -45,551of .Am v. Tribune Co., 670 FSupp. 491,197 (SD.N.Y. 1987).
"%,infia B. 3. The chuse of best effam. lL9LSchmidt supra note 16 at 7M.
'" I.Floar mi J-L Aubert Les Oblig~rions~1. L 'actejuriddque. 8fh ed. (P;uis: ilColin, 199%). at YS. Chapter II. PreIiminary agreements and the phcipie of good hith 37
A contract to aegotiate makes the parties focus on the achievement of the final
agreement. The cornmitment to negotiate has usually no financh1 compensation.
However, a conmcting party may require a clause of exclusivity in rem."'
It is admittd under Amencan and French law, that an agreement with open terms
imposes two obligations: fim the parties have to respect and execute the deai even if no
agreement has been found on the open terms. Second, it imposes a general obligation to
negotiate the open ternis in good faith. '-
This contract commit~the parties to 'the obligation to negotiate the open issues in
good faith in an attempt to reach the dternate objective within the agreed hework." It
prevents the parties fiom (1) renouncing the dd, (2) abandonhg the negotiationq or (3)
insisting on conditions that do not conform to the preiiminary agreement. '"
2. The agreement to negotiate in good faith
Under French Iaw. the parties have the obligation to behve in good faith, al1 dong
the negotiation phase. This du6 is implied in the contract to negotiate. and is accepted by
the courts and the doctrine. Consequently, no distinction is made between the contract to
negotiate and the contract to negotiate in good €&th.
'" J.Schmicft svpm note 16 at 206.
[=Sec EA Fanisrvo~~yprrr note 47 at 253.
'" Trachem l~mceand-hnuig .-Lw-ocidon v. Tnbwier Co., supra note 1 17 at 498. Chapter II. Preliminary agreements and the principle of good faith 38
Under American law, there are geat advantages to conclude a contract to negotiate
in good faith or to include provisions concerning the oblization to negotiate in goud Faith.
By carefiilly drafting a contract to negotiate, the parties have the opportunity to define
their own standard of best efforts and good faith obligation. This avoids a wide and vage
definition of good faith by the courts and the imposition on parties of a large conception
of a good iàith ~bli~ation.'~'ïhe contract obliges the parties to respect certain standards
of conduct and not to behave as they please.'x A failure to conduct negotiation in a aim
to adhere to the agreed on timetable without sufficiem justification would be a violation of
the general good faith ~bli~ation.'~Above ail. the contract to negotiate in good faith
avoids the discussion on the existence of a duty to negotiate in good faith and obliges the
courts to admit and respect it.
However. to recognize a good faith obligation, American courts make a difference
between letters of intent that were contractuaily enforceable and the ones that were not.
In Rrprosystem v. B.F.: v. SCM ~otp..,'" an implied duty of good faith had been
found in the ietter of intent by the court of first Ie~e1.'~'The Second Circuit reversed the
decision on appeal'warguing that no obligation to act in good faith existed in the absence
[" R3.Wmd 1I.Dnetta supra note 1 at 233.
"Ibid. at 232-233.
l3 Reproqsfem. 727 F. 2d 257 (zdCir. 1984). Chapter II. Preliminary agreements and the pruicipk of good faith 39
of the formation of a contract." The court required that the preiiminaq agreement
constituted an enforceable contract in order to appIy a duty to negotiate in good fath.
Nevertheless, in Evans, Inc v. Tflany & Co.,131 an obligation to negotiate in good faith
has been found in the pdiminary document irrespective of the existence of a fonnai
contract. The defendant was found to have breactied the requirement to negotiate in good
Mh and the plaintiff was awarded fitU expectation damases.'" The case ilrcaciinn
Phosphates, Inc. v. Arcadkm a or^.,'" involved a breach of a preliminaq agreement to
sel1 a business. The court rehsed to hold the agreement enforceable but nevertheless
admitted that the preliminary agreement contained a promise to nezotiate in good faith. '"
The prelirninq agreement included the purchase price of the business, the timing and
amount of the payments, the assets to be purchased, a ctosing date. the bais for Eùrther
negotiations? and the parties' intention to "cooperate Myand work judiciously in order to
expedite the closing date and consumrnate the sale of the business."
channeiHomt! Cm. v. ~rosmim~''~is a significant case. Channel, a retail store. had
expendeci important amounts of money based on the promise of Goodmq the putative
lessor, to negotiate onIy with Channel toward a füiai Iease. A Ietter of intent was signed.
Later Grossman decided to terminate negotiations with Channel and concluded a lease
agreement with Mr- Good Buys. Channel argued that Grossman had acted in bad faith and
'" Ibid at 264.
13' Evm. Inc. v. EffiiG Co.. 416 F. Supp. 224 (ND.1 i 1- 1976).
13' DuL at 24).
'33 drcadian Phosphates. Inc. v. .-ircu&mr Corp.. 884 F-2669 (Zd Cu-1989).
'" nid at 70-71.
'35 Channel Home Cm v. Gmsmtan- 795 F.2d 291 (36 Cu. 1986). mereider Channe4 Chapter ïï. Prelirninary agreements and the principle of good fhïth 40
had breached bis promise. The court, however, held that the letter was not enf0rceab1e.l'~
On appeal, Channel argued that the letter was a binding agreement to negotiate in good
&th. To the appeiiees, the letter of intent was ody the evidence of preiiminary
negotiations and was unenforceable at law. The Court of Appeal finally held that the letter
of intent was a contract to negotiate in good faith; the parties had to use their best efforts
and had to negotiate in good fath to achieve a forma1 agreement. The letter of intent was
enforceable and had a legally binding effect."'
This case is interesting in that the Ietter of intent did not require expressly the parties
to negotiate in good faith; the letter of intent only contained a statement providing that the
parties agreed to negotiate. It shoutd be aiso highlighted that, for the fim time, the
concept of the contract to negotiate and its enf~rceabrtity''~were reco-&ed by a coun
althoug.!! Amencan authors had contempIated it for a long time.'39 Nonetheless. the
Chunnel case is not the recognition of an implied obligation to negotiate in good faith in
ail contracts to negotiate.
In Fei& v. Allengheny inrerr~ationai.'~the court found a letter of intent to be an
agreement to negotiate in good Eiith but did not admit the existence of an implied duty to
1 36 See. E.A Famworth and WS. Young. Connacts. Case and matenals. jth ed. (Westb-. NY: The foundation Press hc.. 1995) at 276-278.
'" Channel. supra note 135 at 799. See aiso. Chapter m. The enfocceability of prelimuian; agreements.
'" RB-Lake and UDraem supra note 89 at M2. The question of the enftonxabïhf.y of the contract to negotiate or the conact to bargain ha been analned by Pmfessor Knapp in his artîc1e: "Enforcing the Contract to Bargain- CLhapp. supra note 15.673.
Felhan ï. dllengheq International. 850 F2d 117(7th Cir. 1988). Chapter U. Preliminary agreements and the p~cipfeof good hith 4I
negotiate in good faith The letter of intent only required that the parties negotiate
exclusively with each 0th."" In A -SApthekernes Laboratomim v. IN. C. Chem. Gro11p>
the court held that the terms of a Ietter of intent could impose upon the parties an
obligation to negotiate in good faith.'"
The current trend is the recognition of a sood faith duty in letters of intent that do not
necessady constitute an enforceabIe contract. However the parties must have agreed
upon such an obligation, explicitly or implicitly.
3. The clause of best efforts
"Best endeavours". '%est of his ability" and in French "totrr en son po~rvoif'. "al1
mimx de son e-rperience" are equivalent expressions of %est efforts", and are deemed to
have the same implications and consequences. '"
Most of time, provisions contain an obligation to negotiate in good faith and to use
best efforts to reach a ha1 agreement.Lu Howeve. Professor Famsworth has
distin-&shed the standard of good faith fiom the standard of best efforts as fonows:
"Good faith is a standard that fias honesty and fairness at its core and that is imposed on
every party to a contract. Best effort is a standard that has diligence as its essence and is
imposed only on those contracting parties that have undertaken such performance." The
1 53 MFontaine. Droir des Contratr Infernarionatu. ri-Inatvst-et Rédacrion des Clauses. (FEC: bris. 1989). at 105. Chapter Il. PreIirrtinary agreements and the principle of gooâ faith 42
standard of best &orts is more precise.'" In Thompson v. Litpichimica of dmerica. Inc.,
the court stated that: "an agreement to use best efforts is a cIosed proposition, discrete
and actionable. Such an agreement does not require that the agreement sought be
acheved, but does require that the parties work to achieve it actively and in good
faith-7>146 In many cases, American courts have admitted the existence- in preliminary
agreements, of an obligation to use best efforts to mch a final agreement. even if it was
not explicitly specified.'"
In French law, it is an obbgation of rneans,'js i.e.. an obligation to act in a certain way
and not an obligation of res~lt,''~i-c, an obtigation to achieve a certain resuit. A Party
who has an obligation of means has the duty to use every appropriate rnean in a aim to
reach a given remit, without promising that she will effectively achieve it. This party may
be held liable if the other party demonstrates that she has not used eveq possible mean
that she did nat act with enou@ dtligence. The question at stake is what enou& diligence
is. For a long tirne, the diIigence has been appreciated by looking at an abstract model: the
'" RB.Lrike md U.Dnetta. arpra note 1 a1 10.
'" E.AFmorh-On T~ingio Keep One's Pro-: Tne Dun of Bcst EBons in Conrracr Law-. ( L9M) 46 U.PittL.b. 1, at 8.
1% Thompson v. Liquichimica of .dmerica. Inc. 4S 1 F. Supp. At 366.
IF See eg.. -4moid Palmer GoifCo- v. Fuqua Indu.. k.541 F2d 584,588 (6th Cir. 1976).
i.ta Ur French -0bligatiott de moyens.'
'* In French ~Obiigationde résultat." in this case. the purpose of the obligation is suictiy detined The party hris promisai to reach a &-en renilt If the remit is not achieved. this fdm constinnes r breach of due and the pany is auto&* contncm;tlIy LiabIe. However. she has the parstity to pIead force majenreeore Chapter U. Prehninary agreements and the principIe of gwd faith 43
reasonable man ("k bon pire de famille"). Today, the reasonable man is defined as a
shrewd and circurnspect pwson of the same
Under Americon law, when the promisor possesses a special skiIl, courts refer to a
third person with this speciai skitf and ask what efforts this person wodd use if he were
the promisor. "'
The French concept of appropriate means can be considered as the counterpart of the
Amencan concept of best et fort^.'^'
Letters of intent that organize schedules of negotiations ofien contain a best effort
clause to reach an agreement on given points with respect to the tirnetable. This obligation
translates into an obliption of ~o-o~eration.'~~
Like the standard of good faith, the standard of best efforts rnay be used by the courts
to identiQ the existence of a breach of obhgation. For instance, a party cannot be held
liable if, despite her efforts to reach a final contract, those efforts have been
unsuccessfiil.'"
Letrers of intent containhg %est effortsn or "due diligence" ciauses are comrnon.
This requirement of a fiir conduct rnay be analysed as a "naturai" presence of ethic within
150 PMaurie and LA,imés. Droir civil. Les 0bligufÏon.s..8th ed. (Paris: &Cujas, 1998). rit W.
SI 1 EAFammonh supra note 145 at 9.
'" EAFmsworih. supra note 145 at 13-21). Chapter II. Pre Iiminary. agreements and the principle of good Faith u
the business worid or, on the contrary, as a necessary compensation for the 105s of moral
values and a necessq threat of sanction in case of non respect.'55
Letters of intent play a key role in imposing an obligation to act in good faith during
the negotiation phase.'"
155 I-M Loncle and I-Y Tmchoa supm note 1! at 9.
''6~.ilat II. Chapter m.The enforceability of preliminary agreements 45
Chapter III. The enforceability of preliminary agreements
The main issue raised by letters of intent is to determine if the parties are stilI in the
pre-contractuai phase, or if it can be considered that a vaiid contract has been concluded.
ir.. if the letter is exhaustive enough to constitute a valid contract. This issue arïses
because of the vagueness of the terms employed in the pre-agreements. Lawyers are not
systematicaily involved in the drafting of letters of intent and business people are not
dways arvare of the legai implications of this signeci document.'" Lawyers and business
people have a different view on the lesai nature of letters of intent. For commercial
reasons, business people tend to perform naturally their obligations, without minding of
the enforceability of the letter. They feel morally bound by the pre-contractual agreement.
A. Preliminary agreements and the rules of contract formation
1. Contract formation in French and Arnerican law
Under French law, the essence of contract law is the theory of the autonomy of dl.
According to this theory, Man, being innately fie7 can be bound onIy by his own will.
This will, which is independent fiom the law, mates the effects of the contract and
'" See. RB-Lake and UDnetta. supm note 1 at 10. Cbapter iU. The enforceability of prelimiaary agreements 46
sovereigdy determine its content. These iegd effects exkt only because they have ben
wanted and in the way they have been wanted by the an.'^'
A definition of contract is given by ArticIe 1101 of the French Civil Code: "A
contract is a convention by which one or more persons obiigate themselves, toward one or
more others, to give, to do, or not do ~omething"'~Thus. a contract is the result of an
agreement between the parties. The parties have to reach a meeting of minds upon the
essential elements of the supposed contract. Such a meeting of minds consists, in
principle, of "a meeting of two unilaterd acts of will: an offer to conclude the said
contract and the acceptance of this ~ffer."'~'The "meeting of minds" is necessary and
sufficient to make a contract. Meeting of minds can be translateci into manifestation of
mutuai assent.16'
The offer must be firm and precise enough to be accepted immediately. The Civil
Code does not require specific forms of acceptance but it must not be ambisyous.
Therefore, silence cannot imply acceptance. However. silence may be admitteci as a fonn
of acceptance under specitic circ~mstances.'~The existence of pnor business relations
between the parties may constitute a specgc circumstance to accept silence as a mean of
lSa LGheslla supra note 63 at 27.
159 Mcle 1101 of the civiï Code: -le contrat est une convention par iaqueiie une ou piusieurs personnes s'obligent. envers une ou plusieurs autres ii donner. 5 hüe ou à ne pas fiquelque chose.-
'" 1. Schnxidt-Szaienski. Fonnarion of contracts and Preconmual liabili&. (Paris: [CC PubIishing SA- 1990) a1 9 1.
'" E.MHolmes supra note 34 al W.
"'1. SdimidtSzalenskt supra note 160 aL 92. Chapter iü. The enforceability of preluninary agreements 47
acceptance.l" An old jurisprudence admits dut siience connitutes acceptance when the
offer is made for the exclusive advantage of the ~fferee.'~
Under Amencan law, the notion of "consideration" is a major element of contract
formation. Consideration is defined by the Restatement Second of Contracts (hereinafter
the 'Restatement Second") as foliows: it is "an act, or a forbearance, or a return promise,
bargaineci for or given in exchange for the promise."165Consideration is at the hem of the
conception of common law conuact. The contract is seen as a bafgaix~.'~~In contract
formation, the relation between consideration and intention is a close one. Both have an
important roie in defining promises that the law enforces and the ones that are not
enforceable.
The formation of an express contract requires an offer and the acceptance of this
offer. Acceptance must be clear and without ambiguity. Consequently, silence or inaction
by the offeree cannot create contractual ~bligation.'~' However, under some
i6t Cass.req.. Match 29. 1938. S. 1938. 1.380: D.P. 1939. 1.5. note Voirin.
165 Restatement (Second)of Contract don90 [ 1981).
1 66 -Under the concept as defined in the Remtement. a promisor must intend that the promise induce the promisee to give the remcongderatioa The common law requirement of considention does not require that courts consider the quantum or aciequaq of the consÏderarion @en" RB.Lake and U-Dnetta. supra note 1 at 37.
1 6- -if you propose goùig to see a particuiar füm this weekend and I do not answer. oucannot consuue my silence as acceptyice. At best rny dence indiutes that 1 have not made up my min& unies 1 inform ?ou later that I wouid üke to join you you cm infer that 1 wiii not be auendinp To be e..ct. my silence in this sinmion ïs not directiy a rejecùon of our offer. àut it effieiy operates as such Out of poiïteness. 1 do not mm to tum dowu your proposai in so many words. uistead 1 & not cespond. diowïng yon to infer that 1 do not wish to see the film with you because. if I did want to join you. 1 wuld have accepteci your proposai. This is the basic dein the law of contracts as weii. As phnsed by Corbk "it is an old ma.. thrit silence gïves consent bat this is not a deof Lw-." P. Tienma. The Language of Silence-- (1995) 48 bgesL. Rev. 1.. at 25. C hapter ILI. The ediorceability of prelùninary agreements 48
circumstances, silence or inaction can create contractual obligations. The Restatement
Second provides that "because of previous dedings or otherwise, it is reasonable that the
offeree should notifj the offeror if he does not intend to a~ce~t."'~~The analysis of
parties' behaviour in the past can detemiine if acceptance has been given. Course of
dealings between parties, usage, previous commercial transactions constitute evidences to
deduce acceptance fiom silence or inaction.'69
In French contract law, and in the civil law systems in generai, consideration, in its
common law sense, does not &st. A proper cmse is necessary to enforce a promise.In
An immoral cause cannot constitute the bais of a promise."1 Common law is oniy
concemed by the existence of a legal detriment and a bargain. The adequacy and the
faimess of the consideration is theoreticdky not questioned.
However, the French lesal notion of cmrse is close to the common law notion of
consideration. A cause consists "in an immediate economic counterpart, a service received
in the pas, any econornic interest. or even a moral interest of the debtor." The notion of
cause is broader than the notion of consideration, which basically consists of an economic
counterpart.'IZ
lai Restatement (Second)of Conuacls section 6Y( I)(c) ( 1986).
169 P. Tïersmn supra note 167 at 26.
I -0 Article 113 1 of the civil code: 'Lobiigation sans cause. ou nir une husse cause. ou sur une cause illicite. ne peut voir aucun &et'
' " Article 1 133 of the civü code: -La cause est illicite. quand elle est prohibée par la Ioi quand deest comaire nts bonnes mœurs ou a l'ordre pubIic- Chabter HI. The enforceabilitv of ~retgainarvmeements 19
The cIassicai contract doctrine is prirnarily concemed with determining when parties
have reached an agreement and what obligations have arisen.'73 Arnerican and French law
of contract formation are characterized by the fulfihent of express formaiities. Those
requirements are dear and precise, and it seerns that there can be no contract without the
hlfilment of such formalities.
2. The inadequacy of the classical rules of contract formation for the issue of
preliminary agreements.
Neither American Iaw nor French law considers the Iegd impficatiùns of letters of
intent. This can be eicplained by the fiybrid and numerous foms of letters of intent . it can
also be explaineci by the orim of the niles of contract formation in French and American
contract law. Cnitially, the classicaI rules of contract formation contemplated contracts that
contained obligations to be fUlfiiled immediateIy. ""
The Civil Code, the Restatement Second or the American Uniforrn Commercial Code
do not dethe negotiation process. nie negotiations are conducted freely by the parties.
The pre-contractuai process traditiondly consists of an exfiange of proposais and
counterproposals relating to the eIements of the contract. Under French law, the consent
is necessary and, in principk, suEcknt for the formation of a contract. 17' Linder Amencan
l3 M-D.Rosen What Has Happened To The Cornmon Lm ? Recent American Codifications. and ïheir Impact an ludicd Pcacuce md the Lm's Subseqwnt Development' (1994) Wi L. Rev. t t 19. ai LU9-12U).
1-4 RBMe and UDnena sypm note 1 at 18. Chapter Di. The enforceability of preliminary agreements 50
law, if the parties have reached an agreement on substantiai points of the Ietter of intent, ir
is sufficient for the formation of a formai contract.
French Iaw is les demanding concerning the proof of preliminary agreements than
Amencan Iaw. French judges will likely pridege the enforceability of such documents
because common sense presumes that business people sign agreements in an aim to create
binding obligations and not to create meaningiess instruments. Thus, informal, partial and
even oral promises can be declareci enforceable by the French judge. Article 109 of the
French Commercial Code States that 'hith respect to merchants, acts of commerce may
be proved by ail me an^.""^ Traditionaily, the common law does not accept that a party
could be involuntarily bound by an agreement. The most important point is the intent of
the parties. ln
Consequentiy, French judges are more iikely to declare the parties Iegaily bound at an
earlier stage of the negotiation process than courts in common Iaw countnes. According
to Klein and Bachechi "'the civil law concept of contract focuses on the reiationship
between the parties. The formal contract is not the dramatic event in civil law countries
that it is in common lavi c~untries.~'~
ln an article of 1992, Professor Tiersma has suggested to tackle the issue of complex
transactions by focussing on the concept of commitment rather than considering offer and
--
:-6 Amcle 109 of the French Commercial Code -A i'êgard des commeqmts. les actes de commerce peuvent se prouver par tous moyens 3 moins qu'il n'en soit autrement disposé par la loi.' LADiManeo. supm note U1 at 7142.
i -.J. Klein and C. Bachechi SUPM note 7 at 6. Chapter m.The enforceability of preliminary agreements 51
acceptance. According to Professor Tiersma, a complete proposal is made al1 dong the
negotiation process, through the exchange of various documents. Although it may be
impossible to clearly define when an offer has been made and when it has been accepted, it
is clear that a cornmitment exists. in Professor Tiersma's words "what is therefore critical
to the formation of a contract is not specifically offer and acceptance, or even agreement,
but some act of conunitment."'lg
Therefore, a preliminary agreement may be of a pre-contractual nature or of a
contractual nature. It depends on the worcüng used in the pre-agreement and of the
behaviors of the parties. In case of mbiguity, the French and Amencan judges determine
whether the parties have intended to be bound or not.Im
The rules of offer and acceptance are not in question in the issue of preliminary
agreements. The main issue at stake is the interpretation of the parties' wii and the
determination of their possible intent to be bound by the pre-agreement.'''
B. The interpretation of the common wiil of the parties
It may sometimes be difficult to determine the intention of the parties. To define the
parties' intentions, the French and American judges wiil interpret the parties' will
1-9 P. M Tiemna "-g Unihenl Conu;rcts: The Rote of Offer. Acœptance and Promisemise(1992) 16 U.C.h* L-Rev. 1, at 41.
"O See. hfio Chapter Di. The enfodityof prewagreements.
ISI See. EAFams~orth. supm note 47 1250. Chapter m. The dorceability ofprelimuiary agreements 52
expressed in the agreement, as well as the circumstances of the conclusion of the
preliminary agreement.'" The intemion of the parties is at the key eIement to determine if
a pre-contractual document is legdy binding
The issue of interpretation is not peculiar to contract law. A statute, a regdation or a
will, for instance, rnay aIso be concerned. The peculiar issue for the interpretation of a
contract is that it mvolves two parties who may mach dierem meanings to language.LSj
To determine the intentions of the parties, the .berican and the French methods
1. The subjective and objective theories
In France. contract law focuses on the relationships of the parties. According to
Article L i56 of the Civil code,'= the judge has to look, in the convention for the
common intention of the conuacting parties, rather than concentrating on the literai
meaning of the terms. According to Domat: "if the terms of a convention appear to be the
contrary of the obvious intention of the parties, this intention, rather than the tenns. has to
be re~~ected."'~~Thug the French judge has to discover the red will of the parties, the
spirit of their relationship that is not necessarily revealed by the words used in the
agreement- He has to consider their subjective intention Their writingi or other externa!
''' €.A Fmorthand W.F. Young strpru note 136 ar 277.
'W .Wcle 11%: -0n doit dans les conwnfions rechercher quelle a étc la commune intemion ckrs @es conmtsplmot que de s'arrèter nr sens hénl des termes-
''' See. JDomt Les lois civiles Gans ieur or& nanrrel. Lirle 1. titre L Section iL no.43. (Lu~emboarg: An& Clmalier- 1703). Chapter m.The enforceability of preliminary agreements 53
manifestations of intention are se~ondary~'~~The judge has to look for the common
intention of the parties because the contract has been drafied by them.
Demolombe, a French legai scholar, said on contract interpretation that: 7he contract
being the result of the common wiil of the contracting parties, its consequences should be
detennined in accordance with this common wiU. This is the aim of the interpretation and
not one of its means. Interpretation aiways aims to discover what the parties have really
~anted."'~
The American judge has an objective approach. He has to consider the meaning of the
words and the extemai manifestations of the parties' intention Le.. the objective intention.
According to the objective theory, the meaning attached to the language by the parties has
no importance. The rneaning is defined in accordance with objective standards.
Consequentiy, it can be different fiom the one of the parties.1S8
The objective and subjective doctrines are well described by Judge Learned Hand and
Judge Jerome Frankim According to Hand: "A contract has. strictly speakins nothing to
do with the personal, or individual, intent of the parties. A contract is an obligation
attached by the mere force of law to certain acts of the parties, usuaily words. wfiich
ordindy accompany and represent a known intent. If, however, it were proved by twenty
bishops that either party when he used the words intended something else chan the usual
RB.Lk and UDraeta supra note 1 at 338.
Ir C.Demolombe. Cours de Code .kapoléon. Tome LI. Trmré des Contrafi ou des Obligariom Conventionnelles en général. (Paris, Auguste Durand 1860) n 4.
EAFiunswonh and WI.Young. supra note 136 at 591. Chapter m.The enforceabïiity of preliminary agreements 54
meaning which the iaw imposes upon tham, he wodd still be held, unless there were some
mutual mistake or something else of the sort."'g0According to Frank: '7n the eariy days of
this century a struggle went on between the respective proponents of two theones of
contracts, (a) the "actuai intent" theory or "meeting of the minds" or "wiii" theol, and (b)
the so-called "objectiven theory. Without doubt, the tirst theory had been camed too far
Once a contract has been vaiidly made, the courts attach legai consequences of which the
parties usually never dreamed, as for instance, where situations arise which the parties had
not contemplated. As to such matters, the "actuai intent7' theory induced much fictionai
discourse which imputed to the parties intentions they plainly did not have. But the
objectivists also went too far. They tried (1) to treat virtually ail the varieties of
contractual arrangements in the same way. and (2), as to al1 contracts in ail their phases.
to exclude, as legally irrelevant. consideration of the actuai intention of the parties or
either of them, as distinguished &om the outward manifestation of that intention. At any
rate, the sponsors of complete "objectivity" in contracts largely won out in the wider
generalizations of the Restatement of Contracts and in some judicial pronouncements."'gi
The influence of the objective and subjective theories in contract formation is
illustrated by the Restatement First and the Restatement Second.
The Restatement First of Contracts reflects the position of Williston who prefers an
objective approach of contract interpretation: the expectations or the understanding of a
reasonable person is con~idered.'~The use of an objective standard allows the court.
1w Horchk c: Sational Ciff Bank 0f.h York 200 F-287 (S.D.N.Y.19 1 1).
IV'Rich-ertr v. Pen~fvaniaR. Co.. 153 F.2d 757 (2d Ci.1946).
'= Remtement First secrion 230: "The amciml of imapmation of an integmion. escept where it produces an ambiguous resuit or is evcIuded Chapter m.The enforceability of preîimky agreements 55
rather than the jury, to interpret the contract. This is a mean to lessen the uncertainty in
contract inlerpretati~n.'~
On the other hana Corbin has a subjective approach of contract interpretation: the
first step is to determine what the parties have subjectively intended. Ns opinion has ben
taken into account in the Restatement second." The subjective meaning or
understanding of the parties is considered in priority and this is a fictual issue lefi to the
concern of a jury. This approach has the virtue of enforcing a contract that reflects the real
intention and eqectations of the parties, regardles of certainty and efficiency.'%
Finally, the application ofthe subjective theory and of the objective theory Iikely leads
to the same consequences. Both theories aim to discover parties' intention. There are
great probabilities that a meaning given by a reasonable person to some circumstances and
what the parties rdy mean are actudiy the same. The ody distinction is the taking of
by a deof taw enablishing a Mnite &np is the meanhg ihat would bc amhed to the inkgration by r re3sonabIy intelligent penon accpünted nith di operative usages and knming dl the circumstluices prior to and ain~mpomneouswith the makllig of the interprerrition other than oral mtements the parues of what thq mten& it ta meam-
'03 C.D.Rohwer and G.D.Simk eds.. Conmcc in a mrtîh~IL3rd edition (Sc €àuL Mna: West RrbWing CO.. 1990). ai 150. [bereindter Contract in a nufshell, 3rd ed.1.
IPJRestament. Second. section 20 1: - (1) Where parties have auached the same meaning to a pmmise or agreement or a term thereol it is interpreted in accordance nith t4at &ng (2) Where the @es have auacheci Mirent nteanings CO a promise or agreanent or a term hemE it is interpreted in accordance rifth the muning mched by one ofthem ifat the the ihe agreement %vasmade (a) that pny cfid mt how of any ~~ m&g attached by the other. and the other knew the meaning iaached by the tkst part-: or (b) tht paq had no feason to laww af my Werem meaniog amcbed by the other- 3nd the other bdremon to know the meaaing attxhed by the p;-. (3) Excep as med in this Section neither par& is bound by the meaning mched by the other men thoagh the remit may be a faim of mmdassent" Chapter m. nie enforceab'i of preliminary agreements 56
Besides, the French subjective concept is not absolute The Cour de cassation has
developed the doctrine of the "clear and precise clausesn: the lower courts must not
inquire into the subjective intention of the parties when the meaning of a writing is clear
and precise.'%
2. The use of extemal criteria
In France and in the United States, the judge may use prôcontractual documentation
to determine in what extent the parties have intended to be bound by the provisions
contained in prelimgiary ageements.lg The surrounding Facts and circumstances also
serve to enlighten the parties' wiU.
The Amencan judge can take into account ail correspondence, prior transactions,
custorn and usage in trade,'" and any prior course of deaiingl* between the parties."00
'" Connacr in a nutshell. 3"' ed. srrpra note 133 ai 153-154.
'" RB.Lake and U.Dnettrt. supra note L at 41.
''- See. RB. Lake and U. Dnetia. supra note 1 at 26.
1% The section 1-205(2) of uie U.C.C. Mies -usage of vade- ris -imy pnctice or method of deaihg having such reguIanty of obsenma in a ph.vocation or vade as to jas@ an e-upectlition that it niii be observeci with respect to the ansaction in question.' Usage of vade refiects CO- practices. -Under such designaions as "custom-. -custom and usage- or -usage of the trade-. common law courts have recognized the necessirq' of learning how people usiililly ialk and what the- mdly mean by their Ianguage before one interprers their conmas- Connacr in a nutsheif,3d ed.. supra note 193 rit 160.
'*ïhe section 1-2r)S(1) &es xourse ofdedhg" ris 3 sequence of pcwiaus conduct beween the parties to a piutïcular tramadon which is Fditiy to be tepied as establishing a common basis af understanding for interpreting their e2cpressions and ather con&" A private usage of traàe of the parties is considered and allonis to Qtermine what they r@- mean in their ~ansactions,An established course of dealuig MII prevaii upan a usage of trade ifboth are in contlict. lbid at 162. Chapter m. The dorceabiiof preliminaty agreements 57
Thus, despite the importance of the statute of fiauds, the American courts have used good
fàith, commercial practice and other objective standards to enforce uifonnal contracts
such as preiiiary agreements. Professor DiMatteo has noted that: "The finding of an
agreement should not be Eustrated where it is possible to reach a fair and just res~lt.~~'
To define the intentions of the parties, Amencan courts have also to look at the
relevant extemal manifestations of their intention. Besides, the language expressly used in
the agreement, the judge can consider the other correspondence and documentation, and
the actions of the parties.2u'
The French judge cm also refer to other cnteriq like good faith, equity and usase,
whenever the cornmon wiU appears to be diverghg."'
Two American judges have highlighted the diculty to interpret the parties' intention
during the negotiation process.
in United States v. ~rarotstein,~Judge Medina remarked: "It is true that there is
much room for interpretation once the parties are inside the fiamework of a contract, but
it seems that there is less in the field of offer and acceptance. Greater precision of
expression may be required, and tess help f?om the court given, when the parties are
riu C.D.Rohwcr and G.D.Shaber eds Connacr in a mrshell. 4& edition (St Paui Mm:West Publishing CO.. 1997). at II. [bereinafîer. Coniracr YI O nrctskell, 4" dl.
41 L.kDiMatte0. supra note M at 102.
33 J.Ghestia Les Obliganons. Les Efe~du Conrmr.. (LWPans. 1997). at 8-9.
Linited States v. Braunstein. 75 FSupp. 137 (S.D.N.Y. 1947)- Chapter m. The dorceability of prehimy agreenie~s 58
merely at the threshold of a contract." In Henry Simons Lumber Co. v. ~imons,~'another
judge said: "Because of strict rules governing oEer and acceptance, which require that an
acceptance be in tems of the offer, we are reluctant to foiiow by analogy rules laid dom
with respect to contracts already formed. in passing upon questions of offer and
acceptance. courts may wisely require greater exactitude than when they are trying to
salvage an existing contract. Where no contract has been completed and neither party has
acted to his detriment. there is no compulsion on a court to guess at what the parties
intended."
The existence of prelirninary documents may serve as evidence to determine if a
contract exits between the parties. But basically the judge will have to highiight the real
intention of the
The issue of the existence of a binding contract is a question of fact, left to the
discretion of the court. The American and the French judges play a key role in deterrnining
if. during the negotiations, the parties have reached an agreement that could be considered
to be enforceable. ïhey make a case-by-case interpretation. Thus, arbitrary decisions and
unequai treatments of simifar cases characterize the approach of titis issue by the French
and herican courts.
Judges may be tempted to favor contracruai justice rather than contractuai fieedom
ic,to introduce their own standard offaimess to decide ifthe parties are bound or not by
an agreement. The interpretation of the intem of the parties can be, doubtless, intluenced
'D5 Heny Simons Lumber Co. v. Simons. UN.W.ld 726 (Mim.t9M).
306 J-M. Loncle and J-Y Trochoa supru note II at 29. Chapter [II. The enfurceabity of prelirnmary agreements 59
by the judge7s conceptions on policy, weifâre, jusrice, ri&? and wrong, 'Wch notions
r* 207 often being inarucuiate and subconscious .
Taking into account the evolution of contract formation, Professor Atiyah has nnticed
the growing influence of contractuai justice L7 COURS. According to him, courts used to
enforce the will of the parties in a aim to effectiveiy realie their intention. Now. courts
justi@theu rei5sa.I to enforce promises by stating that the parties did not intend to mate
legal relations by their promises, which "appears to be merely a legal justification for
refbsing to enforce a promise which the courts think, for one monor another, it is unjust
or impolitic ta enf~rce.''~"
This situation creates uncertainty for, at least, one of the parties that may tàce
tremendous damages for the breach of a document that she has never considered as a
binding contract. The court should respect the economic interest in the successfid
negotiation of contracts and the preservation of the contractüd fi~edorn.~
AL-Corbin -mer and Accepmm and Sonte of the Resdtiag Legal Mations-. 16 (1917) YaIe L.S. k69. It206.
m UFurmstoa T-Norisach J.Poole Contract Formohon and Letrer of lnrent- (John Wdey and Sons Ltd: Chicheste. West Snsse.~19981. Chapter m. The dorceability of prelimlliary agreements 60
C. The legal implication of fhe wording used in the preliminary
agreement
in the process of determining whether the parties have entered into a contractua1
relationship, the language used by the parties is a key element. The legal force of a letter
depends mainiy on the precision of its wording.
The obligations of the parties result from the wording of their preliminary agreement
and ahFrom their fùrther behaviors and a~tions.''~
1. The issue of definiteness
Letters of intent and any other pre-contractual elements can serve as evidence of the
existence of an apement between the parties. on the condition that the terms are clear
and precise enougfi to demonsuate that the parties are bound by an obligation.
If the language of the letter of intent is clear, the French and herican judges wi1l
respect it.
a) The consideration of the unequivocal language of the Ietter of intent
In Terracm Dmlopmmt Groop, I~K,v. CoIeman Cabk & Wirr IO..'" the letter of
intent containeci the foUowin_~statement: Vhis letter of intent is expressly conditioned
"O R-BLalre and Uihaeaa supra note 1 at 5. Chapter Ui. The enforceability of preliminary agreements 61
upon Our entering into a mutuaüy satisfactory definitive written agreement in the form
satisfactory to our couasel." in accordance with the unambiguous langage of the letter of
intent, the court held that the preliminary agreement was not IegaUy entorceable.
in a case in 1987:'~ the Cmde Casaion decided that a compulsory obiisation
could be found in a preliagreement on the condition that the purpose of this
obligation was clear and precise."' On the comary. a French court has decided that a
document providing that: "this contract is the general legal hework identifjing the
basic terms which should govern the co-operation between the parties," did not have a
binding effect."" In a case in 1991, the Cotir de cassation held that a preliminary
agreement couid not be enforced because the drafler of the letter of intent had specified
t hat the su bsequent authorization of the executive board was necessary. Subsequently, the
executive board had disapproved.'15
The wording used by the parties in the preiiminary agreement may indicate that an
operative assent has not yet been @en and that fùrther actions are needed to reach a final
~ontract."~
"' Terracorn Developnrenr Group. Inc. v. Coleman Cable & Rire Cu. 50 III. App. 3d ï39. 365 N.E.Zd 1078 ( 1977).
=13 J-M.Londe md J-Y Trochon supra note II. at 10.
"C3ss.com S.CP 199 1- L no. LW.
'6 A-L-Cortnn revised edition by J.MPeriiio- Corbin On Coniract~~Fol. I Formation ofConnacrs- (St Paul Miiin: West PubIishuig. 1993) at 101. Chapter HI. The ediorceability of preliminary agreements 62 9 Concerning a letter of intent contemplating a tùture agreement, the French courts have the same position as the American courts. ifthe parties have expressly indicated that
the letter of intent is subject to the execution of a forma1 contract, the court dlrespect
their wi11."'
In the case SA Banqtte Rhûr~e Alpes v- Dirmez Frmzce, the Corrr de casi~4zior1
considered that the consent was not perfectIy €ormed because one party had claimed. since
the beginning, for the requirement of a definitive and detailed doc~ment."~In Arcadiar
Phosphates Inc. v. Arcudian ~orp,~'~the Arnerican judge examined the langage used in
the memorandum and discovered that two provisions referred to the eventuality of failed
negotiations and contemplated the issue of expenditures occurred during the negotiations.
The memorandum also referred to a binding agreement to be completed in the tùture. The
court then decided that no bindins ageement had been reached.
When a letter of intent contains a clear statement that the parties do not intend to be
bound. the judges will preclude the creation of an enforceable contract.
Comract law airns to protect the parties' reasonable expectations. If neither pany
intends or wants to be bound, the preliminary agreement should not be enf~rced.~This is
confinned by the comment a of Section 27 of the Restatement Second: "if either pmy
knows or has reason to how that the other party regards the agreement as incornpiete
"- RB.- supro note 13 at 342.
39 drcaaïan Phosphares Inc. v. -4rcaahn Corp - wpnr note 13 3.
"See. Contract in a nurshell- +& ed. supra nok LM)at 11. Homr. in Smith v. Onyx Oil & Chernical Co.. the defindant has been fomd to be bound by the agreemenf despite his reneging and repudiating. Srnith v. 0- Oil & Chemical Co. 2 18 F2d 104- 5û AL-R2d 2 16 (3d Cir. 1955). Chapter m. The eoforceability of prellminary agreements 63
and intends that no obligation shdi exist umil other terms are assenteci to or until the
whoIe has ben reduced to anotber written fonq the preliminary negotiations and
agreements do not constitute a contract."
Under French law, the paties may stipulate that the letter of intent is a non
contractual document. This precision rnay have influence on the court in determining if the
document is contractualiy bùldig. An Amencan court has deduced that the term "letter of
intent" used by the parties indicated that the document was not contractuai. In Chicago
Inv. Corp. v. Dollins. the court, referring to a document emitled letter of intent, stated
that "the title of the document suggests preliminary negotiations as opposed to a final
contra~t.'~'However, it is not the general rule.
In French law. the principle is that the preiiminary agreement does not constitute the
main contract unless there are provisions stating the ~~~osite.~Under American iaw. a
clear statement of the parties that a preüminary agreement has no legal effect is
enforceable under .4merican Iaw- unless elements of bad &th are present.z
b) Arnbiguity and misundemanding
In the negotiation phase, each party wants to be sure that some points. contained in
the letter of iment, wiii not be discussed again in the finai agreement. Unclear letters of
'' Chicago Im Corp. v. Dollins. 481 N-E2d712 (1985) rit 716.
*) -J-M. Loncle and J-Y Trochon srrpm note L 1 at 10. z!3 RBiake and UDraetta. supm note 1 at 61. Chapter III. The enforceability of prelirninary agreements a
intent are ofien due to divergent points of view: each party is wüiiig at the same rime, to
preserve his right to negotiate again some points, and to oblige the other party not to do
2-1 SO.
When the laquage of the letter of intent is not clear, the court examines the actions
and the words of the parties.
-5 In Frank Horton & CO. v. Cook EIectric Co.. the letter of intent contained a clause
providing that sorne equipment was necessary. Frank Horton made substantial
expenditures based on this clause. Subsequently. Cook declared that a formai contract
would not be executed. Regarding the terms of the prelirninary contract. the performance
commenced by Horton and other various factors. the court held that a contract was
formed aithough the letter of intent clearly stated that the parties contemplated a ultimate
forma1 contract.
In the case Field v. GoIden Triangle B~OCIC~CCLSI~~~~nc..~the Ietter of intent
contained a "subject to contract" clause. However, the court considered the terms and the
partial performance by the parties and held that the letter of intent embodied the essentiai
terms and constituted a binding contract. The "'subject to contract7' clause originally airns
to make the letter of intent a conditional contract. This clause is not conclusive: the nature
of the lettw of intent, the wordimg of the letter and its definiteness are factors that cm be
considered by the judge to admit the existence of a contract. Ln the case CVSoske v.
=" Ibid. at IO.
"Frank iforton & CO. v. Cook Electric Co. 356 F.2d 485 (7thCÏrJ. cerr. denied. 384 U.S. 952 (1966).
Field v. Golden Tiiangle Broadcasfing Inc.- 305 A2d 689 (1973). mt Denied 414 US 1158 (1974). Chapter m.The enforceability of preiiiagreements 65
Bmck, the court States that: The mere fâct that the parties contemplate mernorialking
their agreement in a final document does not prevent their informai agreement From taking
effect .
An American judgem has recently iisted two widely-accepted common law
principles, indicating the classical judicial tension between the concepts 'Lcontract arises
upon meeting of the minds, no binding contract absent a writing": "(a) that absent an
expressed intent that no contract shail exist, mutuai assent between the parties, even
though orai or informai. to exchange acts or promises is sufficient to create a binding
contract; (b) that to avoid the obligation of a bindiig contract, at least one of the parties
must express an intention not to be bound untii a writing is executed."
Under French law, since the reiationship between the parties is one of the
fundamental concepts of French contract law, a formai writing is not necessary to
establish the existence of a contract. Unless the parties have clearly showed a contrary
intention in their words and in their actions. contractuai rights and obli_gations cm aise
fiom an informai contra~t.~Moreover, according to para.2 of Article 12 of the French
civil procedure codeYE0the judge must give a correct legal definition to facts or acts
--- ?%ske v. BaM.ick. -IOI F.2d 493.499 (2d Cir. 1968).
Consarc Corpora~onv. .l.farine Jlidland Bank. .U..996 F2d 568 (2d Cir. 1993).
-9 RBMe. supra note 13 at 342-36.
30 Art i2 para2: le juge -doit donner ou restituer Ienr exacte qualinution au. faits et aiLu actes litigieu'c sans s'mêter i la dénomination que les prirties en aurait propoJéepoJée. Chapter III. The enforceability of preliagreements 66
regardles the originai denominaiion @en by the parties. Consequently, the French judge
has officiaüy the power to legally categorize a pre-contractual document."'
Thus, under French and Amencm law, the existence of a provision stating that the
parties contemplate the execution of a formal contract does not preclude the creation of a
legaliy enforceable contract.""'
The use of unciear language in the preliminary agreement may reveal a
misunderstanding between the parties. To avoid the appkation of a contract for which
both parties have a different interpretation, it is important to define whether either party
knows or has reason to know the meaning given by the party to the words and actions. In
the case Towne v. ~isner,"~Justice Holmes said that: "A word is not a crystal transparent
and unchanged, it is the skin of a Living thought and may vary greatly in color and cornent
according to the circumstances and the time in which it is used."
Under American law, if there is a misundemanding, if each party knows or has
reason to know that a different medg was &en to the agreement by the other. there is
Hmer. the article 12 pan 4 of the French civil pmcak code highlighting the princrple of Frecdom of convan states htthe judge motchange the narure of the conma he is bound by the denomination ghen @ the @es to the document. (Le juge -..* ne peur changer la denomination ou le fondemenr juridique lorsque les parties en vertu fun accord euprés et pour les droits dont enes ont la libre disposition. I'ont liés par les qualifications et points de droit au.~quelseUes entendent limiter le débat-.) Nonetheless. this article is conme& ainceming the Iihic the judge muid be bound by a -non conrncnial" mention. Arrording to some authors. it should be deni! mentioned in the document btthis mement binds the judge. Se94- Congrés des Notaires de France. svpra note 24 at 30.
"RB.Lake. snpm note 13 at 355.
23-?j Towne v. Eisner. 245 U.S. 418 (1918). Chapter III. The enforceabiiity of prelimiuary agreements 67
no mutual assent in accordance with Section 20 of the estat te ment."' In accordance with
comment a of Section 36 of the Second Restatement: " 'Reason to know' depends not
only on the words or other conduct, but aiso on the circurnstances, includmg the previous
communications of the parties and the usage of their community or iine of b~siness."~"
Under French law, when a party has, in good faitk an erroneous interpretation of the
intention of the opposite side, the party's intention is the one understood, in good faith, by
the opposite
Amencan courts distinguish according to the abiIity and capacity of the conuacting
parties. In the case Weifand Tocd & h,Ig. Co. v. WhitneYf'j7the court has interpreted an
agreement against the party that was represented by a laver. The court assumed that the
layer must have had the ability to express in concise and ciear English the interpretation
of his client and "since he did not do sol [the court] is hrther persuaded that this was not
35 (1) There is no manifestation of mutuai assent to rui exchange if the parties attach materidly différent meanings to their manifestlition luid (a) neither par@knows or has reason to know the meaning amched bv othea: or (b) eûch party knows or each parp has rezwn to know the meaning amched by other. (2) The manifestlitions by the parties are openùip in accordrincc with the m&g mched to them by one of the parties if (a) htparty does not know of any ciiffit dganached by the other. and the other knows the meaning attached by the fim p~:or (b) thai pqhas no reason to know of any ditferent m&g attacheci by the other. and the other had reason to know the m&g attached by the fim pam-. (cl "Sec AL-Corbin revised edition by JMFerüioOsupra note 216 at 107.
36 JSchmidt-Szrilmski supra note 20 at 155.
'jTWeiland Tml Co. v. FF'hitnqv. 251 NEJd242 (IlL1%9). Chapter m. The etiforceability of prelimiuary agreements 68
his intention" The court has interpreted the contract agaïnst the party represented by a
lawyer because this one is deemed to have special cirafting skill~.~~
In cases of unclear letters of inteut, some American courtsD9have referred to New
York law to enforce preliminary agreements of intent as finai comracts. This law is a four-
factor test, aiso cailed the Winston test. tn the case Winston v_ bfedicare &tertainment
Corp., the judrge gave guidance to determine whether the parties intended to be bound
before the haiiition of a formal contract: The factors are: "(1) whether there has been
an express reservation of the right not to be bound in the absence of a writing; (3) whether
there has been partial performance of the contract; (3) whether ail of the terms of the
alleged contract have been agreed upon; (4) whether the agreement at issue is the type of
contract that is usuaily comrnitted to riti in^."^^
The four-factor test has been appiied in the fmous case Trxnco Inc. v. Penzooil 'o.
The case involved two oiI companies: Penzoii and Texaco that were competing for the
purchase of a third Company, Getty 03.Penzoil and Getty had concluded an agreement by
which Penzoil undertook to purchase a major number of Getty's shares. The question at
stake was whether this agreement in p~ciplebomd the parties. After the signing of the
agreement, various entities of Getty Oil were soId to ~exaco."' Pennzoil fim attempted
This ~e350ningis the nme for adhesion conuacts. This kind of contract is interpreted aginst the cirafler who is ilssnmed to hne not ody spccial drafting skilis. but aiso economical and ptchologicai ahmtages mer the other m.Moreaver. mmof tirne. this ather p;.r bas no ponw to madi& the pisions.
Teachers 1ns11rance anddnnuiy.4ssociarion Y. Tribune Co.. supra note 1 17 at 499.
'w FEnsron v. Medicare Ehrertainmenr Corp.. 777 F. 26 78 (26 Cir. 1985).
'" AE FarnsworLh -Devdopment in Contnct Law During the 80s: the Top Ten"-(1990) JI Case W. Ra. 203. at 2 10. Chapter iiI. The enforceabiiity of preknary agreements 69
to sue Getty for breach of contract, but the action failed in the Delaware courts.242
Pennzoii then sued Texaco for tortious interference with an aiieged contract between
Pennzoii and the Getty stockhoiders, in Texas. In 1988, the Texas Court of Appeais
admitted that the parties were bound by the agreement in princip~e.'~~The Texas Court of
Appeals has outiiied the elements and facts necessary to consider that a preliminary
agreement binds the parties: "Several factors have been articulated to help determine
whether the parties intended to be bound oniy by a formal, signed writing: (1) whether a
party expressly reserved the right to be bound only when a written agreement is signed;
(2) whether there was any partial performance by one party that the party disclaiming the
contract accepted: (3) whether ail essential terms of the alleged contract had been apeed
upon; and (4) whether the cornplexity or magnitude of the transaction was such that a
formai, executed writing would normdiy be e~pected."'~
In Qrrake Comtn~ction,Inc. v. Americnn Airtirles, Inc., the judge Stamos. citing an
unknown authoc said that: "Because of their susceptibility to unexpected interpretations,
it is easy to understand why letters of intent have been characterised by at lem one
practitioner as 'an invention of the de~il.~~'~The parties have to be carefiil in the drafting
'" Pennzoil Co. v. WOilCo.. No. 7425 (Civ.) (M.Ch Feb. 6. 19û-i). online LEMS.
33 Te-raco Inc. v. Pennzoil Co.. 729 S.W.2d 768 (Tex CL App. 1987). CeR dismiseri 108 S. CL 1305 ( 1988). [hereinafîer Peuoq.
"'@de Construction. Inc. v. =Intericon .firiines, Inc.. Ilt IIld 28 1. 152 ïü.Dec.308. 565 N.E.2d 990. 1009 (1990). Chapter m. The eaforceability of preiiminary agreements 70
of the preliminary agreement in order that it perfectiy reflects theü wïii. Most of the, the
cornmitments are beyond the original wishV2&
The commencement of the performance is a key element for the judse to determine
the intentions of the parties. The parties' subsequent behaviors cm serve as evidence of
the rdnature of the letter of intent. For instance, a press release by the parties on their
aspiration to be contractually bound may be an evidence of their intent to be bound."'
In Atiderson v. Soiirce Epities, Oit..'* the court considered that the parties intended
to enter into a contract because they performed most of their obtigations described in the
preliminary document. In this case, the piaintiff s counsel had notifiecl the defendant that
the approval by his counsel was necessary to make the document valid. .;Uthou-& the
approvd had not been given, the court did not take it into account-
In a case of 1971, the Cour cie! cmntiorz said that the lower courts have to look for
the intention of the parties in their subsequent behaviours, and not only in the
con~ention."~
The drafting of the letter of intent rnay create ambiguity. Ambiguity is ofien due to
the fact-that they are cirafieci by non-legal staff, Le., commercial staff or en_&eers and not
'* J-M. Loncle and J-Y Trochon supra note 11 at 10.
'< EA Fzinisrvonh. supra note 47 at 262.
'* CN.~.5 F&. 1971, D. lWI. at 28 1. 'U appartient am juges du fond de rechercher l'intention des parties contractantes dans les termes emploq-és pe enes comme dans tout comportement ultérieur de nature à la &esterester- Chapter III. The enforceabiiity of preliminary agreements 7~
by lawyers. They are drafted at a stage of the negotiations when legal issues are not
consideredZSOand are ambiguous because the drafters aim to drafl a document that will
commit them as littIe as possible, but that nevertheless will bind their partners.B'
Letters of intent are then considered as Iying in an "unclear grey zone," which is an
inappropriate situation for business people and their counselslc'.
Lndefkteness is a factor of complexity in determinhg if the parties have Uitended to
be bound, and even if the parties have intended to be bound, the incoherence of the
agreement may prevent the judge Eom enforcing it because of diculties raised by the
administration of such agreement.25s
To avoid the aleatov decision of the French and American judges, the parties shouid
clearly dehe the terms and conditions that will bind them.
2. The issue of completeness of preliminary agreements
The parties are fiee to stipulate conditions in their agreement that bill have to be
considered as essentid terms for the formation of a hd contract. Those conditions couid
be an agreement on price. the methods of payment. .. . or a format sanction of the final
RBUeand Li. hemsupra note 1 at IO.
J.GheStin. supra note 63 at 3 16.
"'RBMe and UDnetta. supra note 1 at IO.
33 AL-CoTbiLt reMSed edition by .J.MPeriiio. supra note 216 at 13 1. Cbapter KI. The enforceabi of prelirninary agreements R- contract by a ~aw~er.~~An agreement on essentiai terms is evidence to determine the
intention of the parties to be bo~nd.~~
Nonetheless, there may be a disapernent between the parties on the determination of
essential terms. A tenn may be essential for one paw and not for the other.
a) Definhg essentiai tenns
The conception and content of "essential terms" are a pure question of parties'
intention and are subject to ix~ter~retation~~The importance of the tem depends upon
the circurnstances of each transaction. The same tenn may be essential in one ageement
and subsidiary in another.
Under French law, Article 1583 of the Civil Code is related to the contract of sale and
provides that the sale "is penect when there is agreement on the thhg and the price.'"7
Therefore, unless the parties have explicitly specified upon which elements an agreement
is necessary to form the final contract, if the parties have reached an agreement on the
thing and the price. the contract is considered to be formed even if some points have still
'Y See, j.Schmicit. supm note 16 at 250.
RB- mi U-Dmem mpm note 1 at 71.
'5: Anicle 1583 of the French cNil Code decides thrit: -pa ventel est -te entre tes parties. et la Propneté est acqnise de droit à i'acheteur à i'égard & vaidem. dès qu'on est convenu & ia chose et & prix quoique ia chose n'ait pas encore et& iivrée ni te prix payé". Chapter m. The enforceabXi of prehhary agreements n
to be discus~ed.~~~In a case in 1980, the court held thar a contract was not a binding
agreement because no agreement was feached on prke and methods of payment.259
A letter of intent that contemplates a hure contract may contain settled tenns for
which the parties have come to an agreement. Those settled terms are ofien essential
tenns of the future contract. The letter of intent is not called a contract because the parties
contemplate a future formal agreement, drafted by Iawyers and completed by legalisms.
However, the intention of the parties to be bound may be questioned if a dispute arises
before the finaiiition of a final c~ntract.~As discussed above. the manifestation of an
intention to enter a subsequent contract is not a conclusive evidence to demonstrate that
the pre-contractual agreement is not enforceable."' The substantiality of the contemplated
contract is an element to determine if the pre-apement can be considered as the fina1
contract, although the judge cannot presuppose the existence of a contract when the
parties have specificaiiy mentioned the elements essemial for the definitive conclusion of
their contract and if the said elements are not agreed on.'^^
E.~~vonhand W.F. Young. svprn note 136 at 150.
Howver. in L'psal Street Real& Cu. v. Rubin. despite an agreement msreached on major termS- the Amaian jndge refused to enforce the proposed conuact kainse no i~greemntwas found on &ta.& L'paIStreer Real& Co. v. Rubin. 326 i?x 327.192 A: 481 (1937).
'67_P. Iourciiün sypm note 8 at 13 1. Chapter m. The enforceabibty of prewagreements 74
Professor Knapp has established methods of interpretation in order to determine to
what extent the clrafting of a formai contract would not be a mere reformatting of the
letter of Uitent, but wodd add substautial provisions.263
Professor Knapp has Listeci severai &ors aiming to demonstrate that a subsequent
contract is a mere formality and that a preliminary agreement, containine ail the essential
tem, is a binding agreement. These Eictors are: (1) no independent policy of the law
requires a wding for enforceabity or, if one does. that the parties satisfied the
requirement by means of exhanges or telexes and such, (2) the agreement is relatively
simple, not involving long-term obligations, (3) the subsequent written contract is a
standard form agreement, and (4) the parties have begun performance.w Those facts can
be illustrateci by oral evidence or other preliminary documents.
On the other side. Professor Knapp has also listed various factors aiming to
demonstrate that a preliminziry agreement was dependent on the concIusion of a
subsequent contract These factors are: (1) the agreement is of a type that requires a
writing for enforceabili under the statutes of huds; (2) the agreement involves large
sums of money; (3) the agreement has rnany details; (4) the agreement is an unusual one.
for which a standard fon agreement is not available or appropriate; and (5) the parties
were unwiliins to proceed prior to the execution of the subsequent wrinen c~ntract.~'
'63 RB& and U.hma. supra note I at 16-17.
'65 CL. bpp. supra nore 15 at 683.
'65 Ibid. at 682. Cbapter iU. The errforceatiility of preümiuary agreements 75
The particular French theory of ''prctation," inspireci by the German theory of
püncrutio, justifies that a Letter of intent may be found to be a finaI contract. The
punctation theory is not mled by the Cid Code.
The theory of prrncf~tionis the theory of a contract settled point by point. As
discussed above, several consents can be given on various points during the negotiation
process. Before the final conclusion of the agreement, successive written documents
record the various points on which the parties have reached an agreement. The legal force
of these documents varies: some documents are only secretarial documents and other
contain agreement on essential terms of the final contract. Therefore, a contract may be
concluded point by point and the judge may conclude that a final contract has been
reached. The French judge has competence to titifil rninor unsettled points. A
disagreement on secondary points does not prevent the concIusion of a contra~t.'~In a
case in 1962, the contracting parties agreed on the price and the purpose of a sale but
nothing was planned for the methods of payment. The judge held that a lack of agreement
on methods of payment couid not prevent the performance of the sale.%'
The ageement on essential and material terms characterizes the existence of a binding
comract in French and American law. This reasoning suBests that, today, and particularly
in American law and in common law in general, the question at stake is whether the
P_Malanne and LApk supra note 130 zit 2 16. Chapter III. The enforceabiity of preIiminary agreements 76
parties have entemi a contract, and not whether the parties have intended to make a on tract.^^*
tn situations where French and Amencan courts consider that parties have intended to
mate a contract, it may be necessary for the judges to fil1 gaps. i.e.? to construe rnissing
terms.
Misshg terms may indicate that the parties are still in negotiations and have not yet
reached a finai agreement. However. it does not necessarily prove that a contract does not
exist. According to Section 2-204(3) of the U.C.C., the contract exists in spite of missing
terms, ifthere is a reasonably certain basis for an appropriate re~ned~.~~Amencan courts
have the power to imply reasonable terms. They can supply terms relating to the price if it
has been lefk opened by the parties. 5 2-305 of the u.c.c.~gives diiections to determine
'68 P.At&h. An tnrmduction tu rhc law o/conrmt. 3rd ed. (Word: Chendon Press. 1% 1). at 7.
Undei Amriun i;tw the issue of manifémUon of intemion is closeIy Linked with the issue of certainty of teruts. The concept of cerrriimy of tenns is W in pan on die possbilip for the judge to determine 3n appropriate rem* from the contract provisions. The Won2-20.1(3) of the U.C.C. pides thrit: 'Even though one or more te- are Ieft open a contracr for sale does not fail for indetiniteness if the @es have intended to mke a convxt and there is a msonnblt. cxruin biisis for @ing an appropriate me@-.' The Section 33(2) of the Remtement Second also prwïcles that: The terms of a ainuact are reasonrib1y . - cenain if they provide a b3sis for detennunag the aWnœda breach and for &kg an appropriate rem@.'
ra ( 1) The parties if- so intend unconclude a contract for deevea thaugh the pria is nat settied. In such a case the pice is a rwsonable pice at the thne for deIïvery if (a) nothing is said ris to prÏce; or (b) the pice is i& IO be agreed by r6e parties and they faiI ui agreK or (c) the price is Co be Ered in mm of some agreed m;irket or orfier stand;ird ris sec or recorded ky the third or ag- and it is not so set or recorded (2) A price m be 6i~edbythe selIer or tp the &er mems a prie for him to be fiu in good faith Chapter iü. The docceab'i of preliminary agreements n
the pnce in a saIe contract. Under French law, if the parties have agreed upon the essential
terms and have recorded this agreement in a pre-contractuai document, the French courts
can use Article 1135 of the Cid code?' in order to complete the pre-agreement and to
settle the contract. In accordance with this article, the parties have to perfonn their
obligations not only in respect to the content of the contract, but aIso in respect to equity.
usage and law.
The issue of missing tenns oflen arises in cases involving letters of intent with open
tem. There is aiways a risk that no agreement be reached on open terms. Under
Amencan law, if no finai agreement is reached in spite of continuing negotiations, the
judge may supply the missing temis.= In severai cases, courts have supplied missing
terms because of the fàiture of the negotiations.'F For instance. in the case Amrricarr
Cvanamid C'o. v. Efimbcrh Ardetr &les Chp.. the court considered that the agreement
contained the essential tems and supplied the missing terms. Two of those terms were the
closing date and the date for the signing of a formai agreement.34
In French law, in case of fàiIure of negotiations on open terms, the partial contract is
still enforceable. Thus, bewuse of their initial agreement on the essentid terms, the parties
(3) When a price left to be fixd othernise than b- agreement of the prinies faik to be fixed thmugh fault of one part'; the other may at his option mt the contract as uncelecl or himlf filr a reasodle pricc.
-Y' Article 1135 of the Fmhcivil Code: 'Les conventions obligent non seulement ji ce qui y est exprimé. mis- encore à toutes les suites que Sicpité. l'usage ou la loi donnent i i'oblignion d'aprés sri name.- -'- E.A Faniswonh. stcpm note 47 at 250.
'j See aho. Purvis v. Lirited States. 344 F.2d 867 (9h Ci. 1963. E. A Fmmvortti, JW~Mnote 47 â~255. Chapter DI. The errforceability of preliminary agreements 78
are definitely and irrevocably bound. In a way, they are "condemned" to get on weILx5
The issue of indefinitmess is then supersedeci by the issue of the intent to be bour~d.~~The
partid agreement can be completed by a third Party: a judge or an arbitrator appointed by
the parties." The judge could refer to law, usage or the parties' wîU. The interpretation is
sometimes necessary to discover the parties' will, regarding the importance of the tem
not discussed.
Substantiai performance or the taking of materiai action bas& on the terms of the
preliminary agreement is an important factor in analyzing the completeness of the
agreementn In Morris v. Ballmd, the court said: "when a contract has been partly
performed by the plaintiff, and the defendant has received and enjoys the benefits thereot:
and the plaintiff wodd be virtually remediless unless the contract were enforced, the
court, from the plainest considerations of equity and common justice, does not regard
wÎth favor any objections raised by the defendant merely on the gound of the
incompleteness or uncertainty of the agreement.nm
The essential tems have to be interpreted in accordance with each transaction. The
position of the French and American courts varies with the content of the pre-contract.
75 J-Fiour. J-L AubeR supra note 120 at 103.
'-6 E.A. Fmsworth mpm note 47 at 2S6. -- -. ' The preiimimy agreement un contain a provision appointhg an arbïmtar mi mMg ht: 'in case of ctdiïcuities to mch a W agreement on the open terms we shd derto the arbitntion of .. .- JSchmidt wpm note 16 at 25 1-252.
AL.Cocbïn misededition by JMPeriiio. swpm note 216 rit 141.
Morris v. Bahrd, 16 F;2d 175.56 MD.C 383,49 AL-R 1461 (1926). Chapter iIi. The enforceabii of preliminary agreements 79
However, by )iling the gaps of the contract, there is a risk that the judge cirafts the
contract for the parties. Besides, the gaps are the bais of the judge's freedom to ïncIude
his own justice and social standards.
Parties should determine and set the different phases of the negotiations that wiii have
a bindins effect. These procedures will avoid fiirther misunderstandings, as to the bindiig
force of cornmitrnents, and wüi ailow to identifi the key elernents on which a consent is
necessary to create a fiiture contract. Chapter W.Liability and damages 80
Chapter IV. Liability and damages
Parties entering negotiations have to keep in rnind the possibility of a failure. In
Farnsworth' words: "a party that enters negotiations in the hope of a gain that wiii resuit
fiom dtimate agreement bars the risk of whatever loss resuits if the other party breaks
off the neg~tiations."2mHowever, although there is no obligation for the parties to reach a
final contract, the breaking off of negotiaîions without appropriate reason and in an abuse
manner, may cause prejudice to one party that may have legitimate belief that the contract
would be mon concluded.
In France and in the United States, an unfair breakdown of negotiations rnav lead to
liability in case of prejudice causai to a party. In France, if a pwty sufFers damase due to
the opposite parîy's LàuIt, compensation will be granted in tort. Arnerican courts use
restitution, misrepresentation and promissory estoppel to sentence inappropriate breaking
off negotiations.
Binding preliminary agreements or binding obligations, are considered to be of
contractual nature and thus are ded by contract law. A fdure to fÛifiI the pre-contractuai
obligations will lead to liability. The parties can foresee liability and damages in their
preliminary agreement. Thedore, the pre-contractuai provisions and contract law in
generd will dethe parties' relations."'
IR) E-A Fanisworth. supnote 47 at 221.
"' J. Schmidt-Wedci supra note 160 ar 93. Chaptw IV. Liabüity and damages 81
A. The pmcontractual fault
With respect to the concept of freedom of contract, unjustified interruption of
negotiations or paraüel negotiations with third parties are not generally prohibited.
However, it could become contrary to the duty of good faith when the parties have
reached an advanced stage in the negotiation process. This advanced involvement is
emphasised when a letter of intent, recording the points on which the parties already come
to an agreement, exists.'"
Under French and Amencan law, it is commonly recognized that, based on the
respect of a good faith behavior, the more the negotiations are gains on the less the
parties can rehse to finalue the contract. An acceptable behavior at the signature of a
letter of intent may be considered unfair at the end of the negotiations.2s3
In France, the Court of Apped of Riom said that: "fieedom is the pnnciple in
contractuai relations, including fieedom to imempt the negotiations at any time.
However, if, because of the length and the senousness of the negotiations. a party has
legitimately beIiwed that the other party would conclude a finai contract, the breaking off
constitutes a fault."=
RBMe and UDnecta. supm note 1 at 184-185.
193 I-U Loacle and J-Y Trochoa supra note 11 at 30-3 1.
"J CA Riom, RTD civ. 1993. at 343. Chapter IV. Liabity and damages 82
To determine pre-contractual liabihty at the negotiations phase, the French and
American courts examine the circumsrances of the breaking off and consider the duration
of the negotiations period.285
The parties' behavior is the utmost evidence for the American and French judges to
establish bad faith. Such behaviors could be: refùsing to disclose infonnation relevant to
the negotiations, rejectinj routine provisions, sWig bargainhg positions when
agreement is near, ensaging in dilatory tactics, or withholding agreement on trivial
mattes% The blameworthy party could be the one who has broken the negotiations with
goss negligence, who has engaged in wilful ~sconduct,~or who has entered into
negotiations with no intention to conclude a final contract, or with the only aim to take
advantage of the information &en by the opposite ide."^ A clause of coniidentiality airns
to protect information exchanged during the negotiations, such as know-how. commercial
and Financial information commercial strategies. List of ciients,. .. Those infonnation aim
to clear the parties' will to conclude or not a fina1 contract. The use of those information
for a purpose different than the conclusion of contract is aginst good faith and constitutes
a tiaud.
In France and in the United Stat- parties who have such bad faith behaviors are
likely held liable. For instance, in 1929. the Court of Appeai of Rennes sanctioned a party
"'See. JIM. Loncle and I-Y Trochan supra note 1 1 at 33.
96 E.A Fâi~~~~~orth.supra note 47 a 272-
'8- ïhe euâct French concept is -fite lourdee or Taute inrenrioneIIeC
'JS RB.kaod U. Draettri, srrpra note 89 at 849. Chapter W. Liabii and damages 83
that had lefi the negobations without legitimate rea~ons.~In G-y v. Eskirno Pie
corp.,lgOnegotiahg without an intent to conclude a deal in orda to obtain commercial
advantase over another has also ben held fiaudulent.
In France and in the United States, derthan an obligation to negotiate in good
faith it is tindly better to consider an obligation not to negotiate in bad faith.sl
Under French law, two elements are required to cunsider that the breakdown of the
negotiations consthtes a fault: first, the breakdown must be abrupt, unexpected and
second, the breakdown must be close to the conclusion of a Linai contra~t.~In a case in
1969,'~the Court of Appeal of Pau stated that "certain obIigations of honesty and fair
dealmg (recriturlt. I~~vat~ti)rest on the parties in the conduct of negotiations, but huit in
ndpa in coritrahendo must be obvious and beyond dispute. ûtherwise there wodd be
grave interference with Fieedorn of contract and the security of commercial transactions."
tt has been highIighed that most Arnerican courts are relucîant to find a senerai
obligation of fair dealing or a duty to negotiate in good faith during the stase of
contrama1 negotiation. For many American judges. bad faith and dishonesty are not
necessarily immoral in the negotiations process, if the purpose is not to mislead or
CA Remes 8 luly 1929. kmeil Périodique Hebdomadaire & Sirnspnidence. as 548.
90 Grqv e Eskirno Pie Corp.. 244 FSupp, 785,789-94 @. Del. 1%5).
I-M Loncle and I-Y Trochon supra note 1 1 at :O-; 1-
9.1"" Congrés des Notairrs de Fmsupta note 24 at 24. See genemüy. B. Nichok The French Law of Conmct. Inded. (New York: Clamuion Press Mord 1992). Chapter W.Liabii and damages 84
deceive.= In Beicher v. lmport ~urs,= the Court admitteci that the parties were ftee to
break off negotiations, in good or bad faitb, because no formai agreement was reached.
On the other hancl, some courts have imposed tiability on the withdrawing parties.m
The most significant case of the American courts' opinion is Ferldman v. AlIengherrq.
~ntemafionai.~In that case, the court held that self-interest cannot be terrned bad faith.
Accordiq to Justice Coffey, ''Good faith is no guide. In a business transaction both sides
presumably try to get the best of the deai. That is the essence of bargaining and the fiee
market." When a party has to face the bad faith behavior of the opposite side, the proper
course is 30 walk away fiom the bar~ai~ngtable. not to sue for 'bad faith' in
herican courts tend to privilege Freedom to contract. As long as an enforceable
agreement has not been reached, each party is fiee to leave and there is no contractual
liability.'gpIn accordance with the Arnerican "aieatory view" of negotiations, each party
has to be aware that there is a risk that no agreement be reached, despite time* money and
efforts investeci in the negotiation process.'OOMoreover. the cornmon law view also airns
-
gl Sec R S. Summers. supra note 50 at 20.1-205.
Belcher v. Import Cm. Lrd.. 246 So.2d 5S-i (Fia 1971).
% KKL. Te& -Whea Does the -Fat Lady' Sing 7: an Andysis of '.Agreements in Princïple' in Corporate Acquisitions-. 55 (19%) Ford L. Rev. 125. at 130. See kg.. Ped.supra note 213.
Feldnan v. dffenghe~International. supra note IN.
39EA Famworih and W.F. Young supra note 136 at 26).
90Q F.W.Claybrook kr..'Good Faith In The Terminrition And Fomtion Of Feded Contraas' (1997) 56 Md. L Rev. 359. at 582. Chapter IV. Liability and damages 85
to avoid the %ding of the existence of a contract based on perceived reprehensible
conduct rather than on the traditional benchmark of mutual e~~ectation.'"~'
In France, good faith gives to the judge a large discretion over private transactions,
and above dl, the power to determine what characterizes an unfar behavior in business
practices.jo2Liability is used by courts to the extent necessary to avoid an injustice.
B. The legal basis of liability in Ietteref-intenf situafions
1. The application of the law of torts in France
In most civil law countries, the doctrine of mIpa [FI con~ruhenciois the foundation of
a general theory of pre-contractual liabiIity.ju3C~dpa in contrcrhencio means "f'ault in
negotiation."
This doctrine comes fiom Gennany. thering, a Gennan legal scholar, deveioped this
doctrine for the first tirne in 186 1.'" It has been andyed as a reaction to the "formahic
nature of West German contract taw prior to the adoption of the Bürgerliches Gesetzbuch
"' I. Klein and C. Bachechi. supra note 7 at 4-5.
* G-R SheiL -Contracts in the Modem Supreme Court-. ( 1993) 81 CaL.Rev. 43 1. at 494493.
"RB-Lalce and UDraetta, supra note 89 a S5 1.
R Von Jhering -A Culpa in contnheado oder Schrtdensersn bei nichtigen oder nicht zur Perfection gdangten Vmgen". in Jahrbilcher Pr die ûopahk des heungen r6mischen und deurschen Rechts. [Yeadmks of the dogmatic of the modem romm and German private lawi (1861) VoI.4 at 101 12. Cbapter IV. Liability and darqes 86
in 189 L''OS According to niering's doctrine "a slip of the pen, an erroneous transmission
of an offer or acceptance, an essential unilateral mistake as to the idem of the other
party or of the subject matter, however impalpable, fatally aff'ected the vaiidity of the
contract."jo6The party who has caused the invalidity or the imperfection of the contract is
Iiable for the prejudice of the opposite party who has relied, in good faith on the
conclusion of the contract. ïhe doctrine of adpa Ir7 conirahendu States that damages
should be recoverable against the blameworthy party who has caused the failure of the
conclusion of the cor~tract.'~'It is le-gitimate for this par& to receive restitution and
reliance darnages. The blameworthy party is not entitled to any recovery."% The doctrine
of culpa in contrahendo is the logcal corollary of the duty to negotiate in zood faith. The
theory of Ihering assumes the implicit existence of a preliminary contract by which the
parties undertake to negotiate in accordance with the diligenfia in coriirahendo.
The theory of cttlpa in cmtrahendo has been rejected by the French doctrine."*
Under French law. if no binding pre-contract exists between the parti- the pre-
contractud liability is in torts.''0 This principle has been stated by the Cour de cassation in
1984."'
"" RB-Lakeand USnettri. supra note 89 ût 83 1-85?.
R Von Ihering. supra note 304.
3Q' laid
F. Kessier and E. Fine. supra note 1 11 at U) 149.
See generally. RSaIeilles. 'ïk la responsabilite précontracmeiie". (1907) Rev-uitil dr. Civ. 697.
3Lo/mtedélicîuelle.
"' Cass-mm lf Jan I9û.î. W.civ.. W.no.16. ût 13. Chapter IV. Liability and damages 87
Torts law is appiied if a party has dered damages because of the blameworthy
conduct of the opposite party. Such liability results from hicles 1382 and 1383 of the
Civil Code. Article 1382 provides: "hy act whatever of man which causes damage to
another obliges him by whose fault d occurred to make reparation7'."' -4rticle 1383
provides Tach one is Liable for the damage which he causes not only by his own act but
also by his negiigence or impnidence".3'3
In a pre-contractual situation, the fault is characterizai by a wronghl behavior that a
reasonable man, under the same circurnstances, would not have cornmitted. This fault
must be obvious and indisputable. The bad behavior need not be intenti~nal.~'''Pre-
contractual liability does not require the party's intention to cause a prejudice. Pre-
contractual liabihy only requires a hltand a bad faith behavi~r.~'
2. The use of misrepresentation, restitution and promissory estoppel in the
United States.
The doctrine of culpa in contruhendo has not gained acceptance in comrnon law
juri~dictions."~However. this does not mean that the party who has suffered prejudice
312 Article 1382 of the Chi1 Code: "Tout fait quelconque de l'homme. qui cause 3 aumi un dommage. oblige celui par la faute duquel ii est am\:& a le réparer."
313 Article 1383 of the CdCode: 'Chacun est respomble du clonmage qu'il a causé non seulement plu son fan. mais encore par sa négligence ou par son imprudence.- RB.Me and U.Draem supra note 89 at 849.
314 CA Pau. 14 Janq 1969. supra note 293.
315 J.Ghestin supra note 63 at 2%.
316 E-HHondius ed.. Preconrr~ctualIiabiIi&. Reports to rhe MUth congres. international hdemy of ComparatÎve Law Montreal. Cm& 18-34 August 1990. (Deventer Klwer Law and Taxarion Publishers. 199 1). at 5. Chapter IV. Liability and damages 88
remains without remdy.'" in the case Venture AsocsS Corp. W. Zenith Dutu Systems
Cap, the court said that: "injecting new demands, such as an increase in price, late in the
negotiating process cm constitute bad faith in sorne circum~tances.'~'~However,
Amencan courts tend to use rnisrepresentation, restitution or promissory estoppel rather
than the breach of the good faith duty to sanction unfair conducts and aiiow damages. The
Vhlurr case is an e~ce~tion.''~
Misrepresentation is characterized by "a false or misleadhg statement about a
material fact, which may be grounds for rescinding a comract or for the recovery of
damages in contract or ton?"
In the case GOOdmcu~v. ~icker?'*'liability and the awarding of damages were based
on rnisrepresentation. This case involved a disappointed applicant for a franchise who sued
the local distniutors on the gound that they had induced him to incur expenses with a
view to doing business under the franchise. The local distributor argued that even if the
fianchise had been granted, 'Tt would have been terminable at wiU and would have
imposed no duty upon t!!e manufàcturer to seU or [the applicant] to buy any hed number
of radios." The court wted the disappointed party S 1,150 to compensate the expenses
incurred to do business. The court held: "Justice and fair dealing require that one who acts
"- J. Klein and C. Bachechi, wpm note 7 at 7.
31' 31' ?énrrrre~-Isrocs- Corp. v. Zenirh Dura Sbstem Corp., 987 F.2d 429 (pCir. 1993).
319 Sce. N.E.N&eL 'A Cornpruritive Snidy of Good Faith. Fair Dealing luid Precontracnial Liability-. (1997) 12 TuîEnr.& CniL.F. 97. in 122.
31111 GiIben Lnv dictionay. (ûdmdo. Fi.: Hiuwurt Bnce and compamr- 1994). at 164. rJ Goodman v. Dicker. 169 F.2d 684 (D.C.Cir. 19$8). Chapter IV. Liability and damages 89
to his detriment on the faith of the conduct of the kind reveaied here should be protected
by estopping the party who has brought about the situation fiom allowing anything in
opposition to the natural consequences of this own course of condu~t.'~~
The Law of restitution, or unjust enrichment, cm also provide the basis for remedy in
case expenses have been incurred in the expectation of the conc~usionof a contract. The
plaintiff must demonstrate that his acts have resulted in an actual benefit to the
defendant.'= The necessary elements to support a clah for unjust enrichment include:
"(1) vaiuable services rendered, or materiais fimished; (2) to the party to be charged; (5)
the services or materials were accepted, used and enjoyed by the party, and (4) under
circumstances which reasonably notified the party to be charged." The evduation of the
damage for the plaintiff is panttrm memil, as much as he deserves.'"
The use of the theory of promissory estoppel is controverted.
Promissory estoppel is defined in 3 90 of the Restatement Second which provides
that:
"A promise which the promisor should reasonably expect to induce action or fohearance on the part of the prornisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy ganted for breach may be Limited as justice requires.'y*
--2- E..4 Fmvorthruid WS.Young, supra note 136 at 264.
E.M. Hondius wpm note 3 16 at 13.
Puncm Compw Inc.. v. KIoefiorn-Ballard Const..~Develop..Inc.. 720 P. Ld (WFO. 1986). D.C. Tunck .-lmerican report. in EHHondius. ed. Preconaacrual liabiliq. Reporfs ro the .Wh conp- hteniatiod Audcmy of Cornplrative Law. Monmai. Cana& 18-24 Augus 1990. @a-entcr: Hwer Lm and Taxation Riblishen 199 1). at 347-358.
SS RestaWnent (second) of contracts 90. (1981). Chapter IV. Liabiüty and damages 90
Under promissory estoppei, the promisor can be held liable if the promise has been
made to the promisee's detnment.
in Hofian v. Red ûwl ~iores,'~the parties had undertaken lengthy negotiations
with the aim to establish a franchise of a supermarket. On the request of Red Owl,
Hofhan spent large amounts of money. According to Red OwC the conclusion of the
ha1 contract was a formaIity. Later, Red Owl rehsed to execute the contract. Despite the
absence of a forma1 contract, the court granted Hokreliance da mage^.'^
In the Red Owl case, the claim for reliance damages of the disappointed party was
based on promissory estoppel. On apped, Red Owl argueci the enforceability of the
contract. He arged that "such promise must have the same degree of definiteness and
certainty as is required for ordinary bilateral contracts" to serve as the buis of promissory
est~~~ei.'*~This argument was rejected. This arSgunent has also ben rejected in other
cases."g Nonetheless, the Red ûwicase did not give precise indications to estimate how
much reliance was necessary to admit pre-contractual liability based on promissory
est~~~e~,~''
Hofj?Ïnanv. Red Owl Stores. 13 3 N. W2d 267,267 (Wis. 196%. mereinifter. Red ûwîl.
39 AppeUmts' Briefat 36, Red Owl supra note 326.
33See cg., R'treeler v. IFlrire. 398 S.W.M 93 (Te.. ;rnd.llorone v. .LIomne. 50 N.Y.2d 481.413 N.E.2d 1154429 N.Y.S.2d 592 (1980).
D.C.Tmck wpru note 324 t 346. Chapter IV. Liaùii and damages 91
This case has emphasiied the importance of good faith in nqotiations and the
protection of the reliance interest even in the Face of limired cornmitment."'
However and aithough the Red Owl case has been ded in other similar cases:'* the
use of promissory estoppel to resolve issues raised by Letters of intent has often been
.*. rejected by courts."" Courts are reluctant to use promissory estoppel in preliiary
agreement situations. This reluctance has been justifiai by the obligation to respect the
Statute of hud~,"~the non-existence of a promise to rely oq335or the unreasonableness
of the re1ian~e.j'~
As Professor Farnsworth has noticed: 'the impact of Red Owl has not lived up to its
promise". He suggests that a possibIe greater burden on the claimant to prove the
promise, the justification of reliance on the promise during negotiôtions. or the absence of
precise criteria to determine reliance damages couId be reasons For the lack of a geater
impact of the Red Owl case.'"
j3' J.M. Fein- -Pmmisso- Estoppl and ludiciai Methd. ( 1984) Y7 Han-. L. Ra-. 678. at 694.
332 See cg.. Ilerner v. .hsCorp.. 732 F2d 580 (71h Cir. L9û-l) and ligodu v. Denver [>ban Renewal -4urhon.. 646 P.Zd 900 (Colo. 1982)
333 See cg... Reproqstrm. supra note 127. RB-Lakeand UJ)netm supra note 89 at 847.
33.4 See cg., Chromallo~vilm.Corp. v. Liriversal Housing Svs. Ofi4m.. Inc.. 495 FSupp. SU (S.D.N.Y.) 1980). affd mem.. 697 F.Zd 289 (Zd Cir. 1982).
F3 See cg.. Reproqstrm. supra nate 127. See dm. Pacijk Cascade Corp. Y. -Vimmer. 3 Wasb App. 552-558.608 P.M 266-270 (198û). At Pacinc CascacEe's Nmer had executed a letter of inteni. In reliruice on rhis lener. Nmer undenook maq actions. But the court condudeci the letter of intent was not a promise dut could be relieci upon
See eg.. Conmnral Fin. Servs- v. First :bhf?lBoston Corp.. No-8-1505-'1: slip op. at 16 (D. h.hg. 30. 1984)-
"E.A Famworth_ supra note 47 at 238-239. Chapter IV. Liability and damages 92
The use of promissory estoppel in the pre-contractual pexiod raises controverted
reactions because it compIetely disregards the basic des of contract formation: the
existence of an offer and the acceptance of this offer. The Red Owl case did not even
involve an offer. Therefore, courts have often concluded that the defendam, and not the
plaintiffs, needed protection because they relied on the formal rules of offer and
acceptance, and because the plaintiffs should have foreseen that a risk e.sted until the
conclusion of a formal c~ntract.~~~The courts are also aware to avoid that parties be
bound by informai agreements made at the stage of the negotiations.""
Even though promissory estoppel has been apptied in cases involving a negotiation
situation with no thal agreement'" the general principle is that "an agreement that is too
indefinite to be enforced as a contract cmot serve as a bais for promissory e~to~~el.'"~'
The promise relied upon has to be definite- reasonable and foreseeable. The
reasonableness of the promise is a factual issue, detennined by a jury.'q
See. A Kae "When Shouid an Offer Sack '? The Economics of Promissory Estappel in Pr- LIegoWions- (1996) 105 Yde L.J. 1249. at 1254-1255.
-NI See eg.. Drennm v. Star Pavtng Co.. 51 Cal. 2d 109.33; P2d 757 (1958): RcynolrlS v. Texarkana Consrr. Co., 237 Puk 583.374 S.W.2dSl8 (1964).
"' See Original AppIachim ;IrrworkiF. Inc. v. Sch/ai&r .Vance dC Co.. 679 F. Supp. 1564. 1581 (ND. Ga 1987). See h.-4merican CXinp Con~acrorsv. Scnbner Equip. Co.. 745 €.Id 1365. 1373 (1 lth Cir. 1984) (findinght reiiance upon indefinite promises is not msooable and dws not give rise to wtoppd). Chapter IV. Liability and damages 93
The French concept of natural justice may be considered as the equivaient of the
American prornissory estoppel doctrine. This assertion is iilustrated by the application of
prornissory estoppet by the courts of Puerto Rico, where a Civil Code is in force.'"
In &mirez v. Gautier, the court explainecl that the American bbpromissoryestoppel
case Law acknowledges pre-contractual liability on gounds similar to those applied by
civil Iaw in notions of good faith and culpa in c~ntrahendo.'"~In other words, pmniissory
estoppel is an equitable theory that protects reliance in the negotiation and formation of
contracts. -4lthough the Cid Code of Puerto Rico does not explicitly admit the doctrine
of promissory estoppel, this doctrine has been incorporateci by judicial decisions in the law
of Puerto Rico.
The use of estoppel, misrepresentation, unjust enrichment, and the duty of good faith
as means of punishment of blarneworthy behavior. can be considered as the common law
expression of the doctrine of culpa in contrahendo. This doctrine has been andyzed as the
'iinderlyins philosophy" of the above concepts used by the American
U%ee E. Miils Holmes. 'Restatement of E%omissoryEstoppel". (1996) 32 Willmenc L. Rev. 163. at 45045 1. The courts of Puerto Rico justifieci the creation of promissoly estoppei by citing Anide 7 of the Puerto Rico CM1 Code, 3 1 LRRA 7 (1968). adopteci hmArticie 6 of the Spanish Civil Code. which pmvides: When there is no stanne appiicabIe to the case rit issue. the court sbaii decide in accordance nlth equity. which mem thrit naturai justice. as embOdied in the general prïncipies of jurispnidence and in accepteci and eslablished usages and cnstoms. stiaII k uken into consideratioa' The case Znirlpoul Corp. v. kLU.C.0. Intl Corp.. contains an extensive explation of the doctnne ofcuip in conuahendo and distinguishes it hmpromissoc estoppei. Khirlpool Corp. v. L-\LC.O.Inr'l Curp.. 748 F. Supp. 1557. 1562M (SD.Fia. 1990)
Ramirerr v. Gaurier. 87 PRR 470.481.493-95 & a16 (1963). in Puerto Rico. the civil law doctrine. punded on the values of cuip in contrahendo and good faith, is embodied in Artide 1802.3 1 LS.RA 5141 mhich strttes: 'A person who by an act or omission causes darmige to another through fauit or negiigence shail be abliged to repair the bgeso &neaeConcun~nt UnpniQnce of the pny so aggriddws not exempt hmLiribili@. but entruls a reduaion of the ïndemnity.'
5.1~F. ~esslerand E FE supu note 11 1 at US. Chapter W.Liabiiity and damages 94
The notion of good faith remains an imprecise concept t!!at can only be expressed
through legd concepts that are more precisely defined. Prornissory estoppei, unjust
enrichment, and misrepresentation are those concepts that give to good faith a legal
rnean.,g.'36 In generai, immorality and lack of ethics have been the on-& of many legai
causes of action.j4'
3. The non respect of pre-contractual provisions.
Parties can foresee any type of damages for any type of breaches of obligations in
their preliminary ageement. Such clauses avoid Wculties raised by the issue of pre-
contractual liability.'" The parties have the possibility to stipulate a liquidated damages
clause in case of breaches of certain obligations.
Parties may orgnize their relations, define their commitments and determine what
kind of behaviors shall be deemed to be unfair and shall lead to liability. The clauses have
to be precisely drafted. tt is essential to clearly determine the commitments and the
consequences of breaches of obligations. For instance, concerning a clause of
contidentidi, the parties wiii have to define exactly what will be confidential, who will
have access to the confidential information and under which conditions. which kind of
breaches will lead to damages and the amount of those da~nages.'~
!%e. PP.JO- supra note 8 at 132.
34- L.A DiManeo. supra note U) at 102-103.
W Wonmine. Formation of contracts and Preconrractual liabiliy. Concludng report. (Priris: ICC PubIishing S.A. 1990) at 351. Chspter IV. Liabiiity and damages 95
To avoid a risk of liabiiity, the parties can expressly mention in their letter of intent
that, in case of faim to reach a &al agreement or to pursue negotiations for whatsaever
reason, the failed party will not be exposed to any tiability.
Parties can aiso include in theu preliminary agreements provisions excludimg or
iimiting liability consequently to the breaking off negotiations. Under French and
Amencan law, such disclaimers are not effective in case of hudulent breaks in
negotiati~ns."~In French law, parties cannot totaily exclude good faith. -4s discussed
above, goad hith is a universal principle overriding contract law.
In the presence of a contract to negotiate, the breaking off of negotiations or the
refùsal to negotiate without serious intent may constitute a fault resulting in damages.
However, if no final agreement is reached and if no party has failed to fiifil her duty to
negotiate, the parties will not be bound by any agreement.'" The failure may be caused by
the expression of unacceptable proposais. either ridiculous or disproportionate.'52
In the context of an enforceable agreement with open terrns, a party may be held
liable by failing to tirifil her obligation to negotiate. she causes the failure of the final
ageement.jSj
In Franc. the contract to negotiate creates an obligation to negotiate in good faiui.
The breaking off negotiations without serious pnor discussion and formulation of
"' RB. Lake and U. Dr;tena supra note 1 at 177.
351 E. k Fynswortb. supra note 47 at 25 1.
3'P_ J.Schmi& snpra note 16 at 207.
353 €.A Farnswolth- snpnote 47 at 250. Chapter TV. Liabiii and damages %
counterpropods justifies the tennination of the contract to negotiate and the awarding of
damages.35JBesides, in the presence of a letter of inteni, parallel negotiations, even in the
absence of an express prohibition to conduct parallel negotiations, may be considered as
being contrary to the generd good f&h obligation.
The vagueness of the notion of fair dealing, good faith and best efforts may be a
reason for the court to retùse the enforcement of an agreement to negotiate in good faith
and to deny the awarding of reliance da mage^."^ However. as discussed above? today, the
concepts of good faith and best effons become more precise thanks to case law and
doctrine. Besides, the parties have the possibility to define those concepts in their
preliminary ageement .
The presence of a preliminary agreement, enforceable or not. facilitates the proof of
breaches of pre-contractual obligations.
For instance! in case of an unenforceable preliminary agreement to negotiate in good
faith. it is easier to sanction an drbehavior because the preiiiary agreement shows.
at least. that there is an explicit duty to nqotiate in good faitl~.'~~
'" Cas.civ.I. 8 Oaaber 1%3. BuU.CiY.L 110.419-at 359. I.Ghesti~supra note 63 at 3 18.
355 €.A Fmmvorth supra note 47 at 267. Chapter IV. Liability and damages 97
A case of September 21, 1995 of the Court of Appeai of ~aris'~'perfectiy illustrates
how letters of intent, even if not enforceable, strengthen the general obligation to behave
in good faith at the negotiation stage.
In this case, the Company Sandoz and the company Poleval had a project in comrnon.
For four yean, they exchanged letters of intent in order to Unplement the project. The
company Sandoz suddenly broke off the negotiations for reasons not Iinked to the project.
The company Poleval's claim for damages was based on the non-performance of an
implicit contract concluded by both parties, and on tort for misuse of negotiations. The
Court of Appd admitted the existence of a contract, particuiarly because of the exchange
of contract projects. It also admitted that Polevai had suffered damages based on the fact
that Sandoz had let Poleval hope for four years. The court found bad faith, @ven the
eqectations that Sandoz had generated. The prejudice was assessed at four million
French fiancs.js8The fault of Sandoz was characterized by the breaking off of long term
negotiations without serious reas~ns.'~~
Particuiar circumstances surrounding each negotiation make difficult the
determination of the moment the parties enter a fomal contract. Such imprecision allows
courts to protect and compensate?sometimes in discretion, the party who has re[ied.jW
-- -- - "- CA Versaiues. 2 1 September 1995. RlDA 2/96 no. 178.
'w J-M Loncle and J-Y Trochon srcpra note Ilat 30-3 1.
3M E.A Fanmuorth and WE-Young supm note 136 at 218. Chapter W.Liability and damages 98
C. Damages
As one English judge has expressed it, a negotiating party "undertakes this work as a
gambie, and its cost is part of the overhead expense of his business which he hopes will be
met out of the profits of such contracts as are made.'Y6' As neither party to contractuai
nqotiations is bound untii an offer has been accepted, there is a risk for the parties in
relying and acting in perspective of the tùture contract.
However, in French and American latv, a party who has suffered a prejudice because
of the fault behavior of the opposite side, is entitied to compensation. The plaintiff has to
demonarate the existence of a prejudice and its importance. The courts have to evaluate
the damages.
The awarding of damages by courts, in case of bad faith behavior causing prejudice
during the pre-contractuai process, dernonstrates the judges' concem to introduce moral
standards into the marketplace.'62
1. The awarding of reliance damages
Expectation damages are admitteci under French and American law. Eupectation
damages are the "darnages compensating the injured party for the loss of the benefits
xi' Wlliam Lacq (Hounslowj Lrd vL Davis. (195n 1 WLR932.934 (QB.1957).
Sec. N. W.P;ilmierï supra note 33 at 108-109. Chapter IV. Liability and damages 99
which that party would have received had the contract been performed.';6; However,
when a contract to negotiate is at stake, French and American courts are more likely to
award reliance darnages than expectation damages.ja The party who has reasonably reiied
upon the promise of the other party is entitied to be compensated. This is defined as the
reliance intere~t.'~'This reliance depends on the nature of the letter of intent. Reliance
darnages can be defined as follows:
They are measured by the amount of money necessary to compensate the innocent party for expenses or loss incurred in reasonable reliance upon the contract that was breached. [. . .]Reliance damages are designed to place [the victim] in the position he was in before the contract was made. Reliance damages are designed to restore the statu quo. The victim is not &en any profit or benefit of the contract but is merely being made wh01e.j~~
The reliance is likely reasonable and foreseeable when the parties have spent a long
time in negotiations.'67
The French judge considers that the damage cannot be based on expectation damages
because it would be a specuiation on an hypotheticd and non-existent contract. and thus a
violation of the parties' will. Moreover, it may be difficult to evaluate expectation
damages because, sometimes, essentid terms have not been negotiated.
The French law of torts requires two conditions for the damage to be compensated:
the concerned damage must be certain and not otherwise compensated. According to
"Conrruct in a ttunhell. 3d ed. supra note 193 at 24 1.
N-E-N&el. supm note 3 19 at 147.
365 Contraci in a nutshefl,3d ed. supra note 193 at 10J
366 lbid at 212.
367 NEiiedzei. supra note 3 19 at 133. Chapter IV. Liability and hqes 100
Article 1 149 of the Cid Code, the present loss (hmemergens) and the missed gain
(fucrtrmcessans) have to be considered and compen~ated.~~
In case of breach of negotiations, the damqe may conskt of loss of urne,
expenditures incurred by the negotiations or the missed gains.'w Loss occurred at the pre-
contractual stage is evaiuated on case-by-case basis- The rnethod usai by the courts to
mess the prejudice is not clear because the courts usuaüy do not outline the elements that
have served to appraise the da mage^.'^ The arnount of damages is sovereigdy evduated
by the lower courts. It is a factual issue that does not concem the cornpetencies of the
Cuw rir cassa~ior~.'"
The amount of damases is limited by the tenns of the agreement or by the foresetable
prejudi~e.:~The party cannot exclude or Lit the possible compensation in their
prehinary qeement . Compensation is a compulsory kgal
In Arnerican lawt expectation damages require cenainty and foreseeability."'
American courts are divided on the issue of awarding expectation or reliance damages in a
j6' AIficIe 1149: "Les dommages et intérêts dus au créancier sont en géned. de la Frte quïI a faite ct & gin dont il a été pn%& wui les excepiions m madifiaaons cï~prés.-
369 I.Schmi&-Szaiewski supra note 70 at 149. Bodiiy injuries OcEuzring during precontncturil negotiritions arc dso compensted in tom. For imance- the cour de cwution 3- damages to a deiiverer tht had ken injured whik sponmeausly hclping the clitmt ro mata piece of tirrniture. Criss.civ.U 15 Feb. 1YM: Buii.civ [L No.29: RA-.tr.dr.cRI. 1985. p.X%note Huet
r' According to Article Il50 ofthe civil cade dyiiltges iue limited to the foreseable preiudice. Artide 1150: "Le débiteur n'est tenu que des dommages et intéréts qui ont été préviis ou qu-on s pu prévoir lors du coatnt torsque ce n'est point par son do1 que L'obligation n*e.point e~écutée~" Chapter IV. Liabiiity and damages 101
prelimuiary agreement situation. They consider that expectation damages cannot be
recovered because no rasonable expectations have been ~reated."~On the other han&
courts rnay aiso not admit reliance damages because of the incompleteness of an
Because of the absence of a hal contract, Professor Farnsworth notes that pre-
contracnial liability cannot support evpectation da~na~es.'~~Only the expenses incurred
during the negotiations cm be compensated in case of breach of preliminary agreement.
He argues that as there is "no way of knowing what the terrns of the ulthate agreement
would have been. or even whether the parties would have arrived at an ultimate
He adds that "there is no possibiity of a claim for lost expectation under
such an ag~ement.'"~
On the contrary, Burton and Andersen observe that in many cases "it is praaical and
appropriate to ailow expectation damages based on the potential. but unrealized final
contract."jW In order to determine the economic los, Burton and Andersen expiain that
'fwhen the parties have worked out many of the principal economic terms of theu hai
3-2 See t-g.. Air Technologv Corp. v. Generol Elec. Cu.. 347 .Mas. 6 13. 199 NE2d 538 ( 1964).
3-6 See cg.. lfnghr v. CnitedStatesRubber Co.. 280 F-Supp. 616 (D. Ote. 1967). Howm~r.in the crise Stmarr E Schmarrss. the plriintiff mmed nlimce damrige whera the agreement nz not binding. Scewurt v. S~~~CIILFS~19 1 So. 2d 882 (LI. Cc. App. 1966).
3- Sec EA Fanisworth supra note 47 at 223.
S.J. Bmtoa and E.G. Andersen wpru note 18 at 364-366. Chapter IV. Liabiiity and damages 102
contract m detail, there is no obstacle to aüowing expectation damages based on the
bargain tentativeIy agreed to, but not con~ummated.~~~In cases deaiing with a loan
agreement,'" a commercial lea~e:~~and a manufactunng ~ntract,'~the courts have
granted expectation damages for the breach of a preliminary agreement."'
The French courts award compensation for loss of opportunities. In case of failure of
negotiations, the loss of an opportunity @erre d'me chance) is characterized by the loss
of an opportwiity to conclude the contract with a third Party. This theory is applicable to
al1 compensation in torts. The appraisal of the loss of chance is a factual question lefi to
the lower courts.'% Because of the uncertain result of the negotiations. the court cannot
consider the hypothetical final contract and can onIy compensate a Ioss of an opportunity.
To award compensation for the loss of an opponunity, the plaint8 has to clearly
demonstrate that he had the opportunity to conclude a similar contract with another Party.
For instance, in a case of 1987, the manager of a corporation was not able to continue
negotiations, due to a traffic accident. The corporation claimed compensation fiom the
3F- See cg, Teachers Im & dnrmity ds'n of4m. v. Cuarial C~mni~cationr.Inc.. 799 F. Supp. 16. 18-19 (SD.N.Y. 1992): Teachcrs Iris, & Rnnuip .4sr'n of Rm. v. Ormesa Georhcnnal. 79 1 F. Supp. -NI. 4 15-18 (SD-N.Y.199 1): Teachers Ins. & .4Nnri& dssh of ;lm. v. Butler. 626 F. Supp. 1229. 1236 (S.D.N.Y. 1986). Ail those cases anmle?ipectation &mages for bmch of a loan commitmenr
3s3 H3 cg., Evans, Inc. v. Tisi & Co, sypu note I3 1 at 24045. (annrding eqemtion damages for breach of a prehnhq to enter inro a commerd leasc).
jgl See eg. .. .lIiIex Pro&. Inc. v. Alra Lob.. Inc.. 603 N.E.2d 1226. 1235-37 (flL App. CL 1992) (amrdhg e-xpxtation damages for breach daprehïnq agreement to enter into a dcniNigcontract).
WS S.J. Bunon and E-G. Andersen wpra note 18 at 36366.
je6L Schmi&Szai~v&.supra note 160 at 95. Chapter W.Liabiiity and damages 103
author of the accident, for the damage consiSting in the non-conclusion of those contraas.
The action was dismissa because the damage was too hypothetical.'"
2. The refusal of specific performance
In French and American law, the non respect of a corttract to negotiate cannot lead to
specific performance, i-e.. to the forced execution of the oblisation to nezotiate. A forced
negotiation would have no chance to succeed.
The judge cannot go beyond the parties' will and cannot drafi the final contract for
the parties. A contract to negotiate leads to a final contract only if the negotiations
s~cceed."~Besides. Article 1142 of the Civil Code provides that specific performance is
prohibited for persona1 services (obligationde fmre).")
In AmerÏcan law. specific performance requires a sufficient certain- of the
contra~t.'~T'hus, specific performance is not an appropriate rernedy in a preliminary
agreement situation. Besides, the execution of a contract that is still in negotiation wouId
lead to the non respect of the parties' inten~on.'~'
38- Cassciv.II. IZ June 19a7: J.C.P. 1987. IV. 286: Rev.u+dr.civ..1988. p.103. obs. Mesue. I.Schmi&-SzaleMki-supra note 20 at 149.
Tds JSchmidt. supra note 16 at 207-208.
389 Artide 1142: Toute obligation de faire ou de ne pas taire se résout en dommages et intérés. en us d'inexécution de Isi part du dibitetu.- J. SchmidrSzaleMki supra note 160 at 155-156.
HLTemk supm note 2% at 163. Chapter IV. Liabii and damages 10-1
3. Damages for breach of a good-faith obligation
In France and in the United States, an unjustified termination of negotiations may lead
to damages when the preliminary agreement includes an obligation to make good faith
efforts to achieve a final contra~t.'~~For instance, in the American case Gray Lbrr of
Boston, Inc. v. Sheraton Boston corp..'% the court awarded damages because of a breach
of a promise to negotiate in good faith-'gJ
In the context of an agreement to negotiate, the only appropriate remedy for the
breach of a sood-faith obligation is reiiance damages. Those damages are the ones caused
by the injured party's reiiance on the agreement to negotiate.'" In French and American
law. damages must be proved with reasonable certainty which may be difficult because of
the lack of essential terms and the possible indefiniteness of the agreement.'" The
indefiniteness of the preliminary agreement may be an obstacle to obtain darnages.
in his criticism of the Pe~oilcase.jg Professor Famsworth has fictitiously
transposed the facts in a European civil law syaem.jg FiiPenzoil would have sued
395 Contracr in a mrtshelf. .)& ed.. supra noie 200 at 69
393 Gray Linc of Bosron. Inc. v. Sheraron Boston Corp.. 62 9.R 81 1 (Bakr. D. Mas 1986).
3% A f~vcourts have decided hta &ch of an iqlied @faith obiigtion could support a daim for emotiond distress or punitive darmiges. !h.eg.. ICellis v. Suprior Cuurr, 207 Cal- Rp&. 123 (Cal. CL App. 14M): Cie- v. .-lmerican-4irlines. hc.. 168 Cd. Rptr. 71(Cd. Ct. App 1980): Gares. 668 P2d 213: Ponsuck. 732 P.Zd 1364. RJ. MW-. supra note 86 at 1179.
395 EA Fmvorth supra note 47 at 267.
3% C.L. hpp. supra note 15 at 723.
39' in the Penzoil case, the Texas corn of hm instataces gnated idmast US S 11 billion to Penzoil. inciuduig an atrard of punitive damages of S 3 billion. in 1988. the Texas Coun of Appeais admitteci th the pries were bomd & the agreement in principle but temiced ihe munt of punitive mgesto one billion. T'nrenly-he Chapter IV. Liability and damages 10s
Getty rather than Texaco. This açtion would have been grounded either on the non-
respect of the preiiminaxy agreement or on the breach of a duty of good faitl~."~Second,
damages would have either consisted in the arnount of loss expectations for the breach of
the preiiminary agreement or, based on the breach of the duty ofgood faith, in the amount
of expenses incurred during the negotiations and compensation for lost ~~~ortunities.~In
France. if the partial agreement is found to be the final contract, the non performance of
this partial agreement leads to darnages pursuant to Article 1 142 of the Civil ode.^' In
this situation, the parties go fiom the negotiation phase to the performance phase, without
materialisation of the final c~ntract.~?
rnonths lacer. the ovo cornpanies agreed IO a seitlcment. Texam paid US S3.000 million in ahIO Pcmoil to cnd Ihe dispute. Penn-4. supra note 243.
3% AE Fmvonh, supru note 241 at 239-242.
399 !ke. E.A Fa~~1vorth.supru note 47 at 23942.
*ri Article 1142: " Toute obtigtion de f&re ou de ne pas friire se résout en dommges et intedts. en cas d'inexécution de la part du ddbiteur.'
w- J-ii Loncle and J-Y Trochon supm note 1 1 at E. Chapter TV. Liabi and damages 106
Those procedures wodd have avoided the long and complex actions endured by
Penzoil.
The recognition of an implied duty to negotiate in good faith facilitates the awarding
of damages. The party who has suffered the prejudice has ody to demonstrate the bad
faith behavior of the blarneworthy party and its consequences. The dernonstration of the
existence of a duty to negotiate in good faith is not at stake. Conclusion 107
The usefirlness of letters of intent in business negotiations is unquestionable.
In France and in the United States, preliminary agreements play a key role in the
recognition of parties' nghts.
Even if the preliminary agreement is not bindig, it rnay serve to demonstrate the
state of mind of the parties at the moment of the negotiations. A letter of intent shows a
greater cornmitment of the parties to nqotiate seriously to reach a final contract than no
letter at di. It may ahserve to evidence an incorrect breaking ofEM'
In -4rnetican cases. like the Pet~oilcase and the Arcudian case. the court would have
not taken into account the damages suffered by Penzoil and wodd have not imposed a
duty of good &th on Arcadian corp.* without preliminary agreements. The existence of
a preliminary agreement was primordial.
At the beghhg of the negotiations, pames are preoccupied by respective
performances and not by potentid Iiabiiity.'OS Nonetheless, the importance of pretiminary
a-geements in cornpiex negotiations and the major &s of pre-contractual liabiIity that
may anse fiom the lack of cf- in letter of intem justiQ that lawyers shodd not be Conclusion 108
excluded fiom the cirafting process at the beginning of the negotiations.M6A letter of
htent properly drafled does not have unexpected consequences and its bhding effect, in
part or entirely, reflects the parties' will."'
Unciear drafking and divergent intentions give rise to unexpected interpretations.
Parties may be bound by pre-contractual agreements, without having wanted such a result,
because of the indefiniteness and vagueness of the terms. The importance and the
complexity of today's transactions may reinforce the idea that a letter of intent and other
preliminary documents intend to be preiiiary ~nl~.*~However, in France and in the
United States, the more specific are the terms contained in the prelirninary agreement, the
more iiely the document will be enforced as a final contract, unless the parties have
clearly stated the contrary.-
The difficulties to tackle letters of intent under contract law are primarily due to their
hybrid legai nature induced by their muItipIe purposes. French and Amencan contract law
basicaliy consider the existence of an offer and the acceptance of this offer. However, the
classical doctrine of offer and acceptance does not reflect the complex and technicai
contemporary business practices. specifically the negotiation phase of elaborate
agreements.
* RBksupra note 13 at 353.
U1' RB.Lake and UDraetm supra note 89 at 835.
-4L.Corbi revised edition by l~io.supm note 216 at 152.
109 S.J. Burton and E-G Andersen- supra note 18 ai 361 Conclusion 109
The contemporary evolution of contract formation is illustrateci by the growing
number of parties involved in negotiations; whatever the size of the corporation, several
persom wiü be sent to the negotiation table: executives, experts, lawyers, accountants and
so on. It is also explained by the growing number of intermediary documents that are
signed before the final contract. In sophisticated transactions, the parties record their
consents step by step in pre-contractual documents before the Gnalization of the
contra~t.'"~The increase complexity of business transactions has given nse to a new way
to tackle contract formation for lawyers and business persons,
[n Farnsworth's words, "the law soveming the formation of contracts. however suited
these des may have been to the measured cadence of contracting in the nineteenth
centu y...have little to say about the complex processes that lead to major deals t~da~.'~''
Contract law cannot be restricted to the hai agreement and its perfornance. It is
necessary that the pre-contractual period as wel1 as the pre-contractuai documents be
considered by contract law.
Findly, in preliminary agreement situations, the main issue at stake is whether or not
the parties have entered a formai agreement during the negotiation phase. The thesis
demonstrates that, in France and in the United States, whenever the existence of a find
- -- '1° '1° E.A Fmorth. supra note 17 rit 218-219.
ibid Conclusion 110
contract is recognized, baseci on the parties' intent and behavior, it is because
circumstances have created a legitimate reliance that worrh protection by courts or
iegidation."*
"'J.Schmi&-Szaie~'ski supra note 20 at 156-157. TabIe of cases 11 1
TABLE OF CASES
French cases
CA Rennes, 8 July 1929, Recueil Périodique Hebdomadaire de Jurisprudence, at 548.
Cassxeq., March 29, 1938, S. 1938, 1,380; D.P.1939, i, 5. note VoirÜi-
Civ.I, 26 Nov. 1962, Bull.1, no.504.
Cas. crim. 3 December 1969, J.C.P. IgiQ, U. 163 53.
Civ.II?, 5 Feé. 1971, D. 1971, at 281.
Cass.com 9 June 1980, GazPal., 1980. 2. Somm.
Cass.com. 1 1 Jan. 1984, Bull.civ., IV, no. t6, at i3.
Cass.civ.fI, 15 Feb. 1984: Buii.civ II, No.29; Rev.tr.dr.civ., 1985, p.389, note Huet.
Cass.civ.1, March 20, 1984, Bd.1.n. 106.
Civ.L 20 mars 1985,B.L985 1.. no.102.
Cas-corn.?38 April t 987, Rev- Sociétés 1988.
Cass.civ.il, 12 June 1987: J.C.P.1987, TV, 286; Rev.tr.dr.civ., 1988, p. 103. obs. Mestre.
Cass.com. 1991, J.C.P.1991, I, no.LQ4.
CA Riom, 1993, RTD civ. 1993, at 343.
Cass.com, Apd 28 1994,3 f 1995) RTDA no.264. Table of cases 112
CA Versailles, 21 September 1995, WA2/96 no. I78.
American cases
Air Technology Corp. v. Generui EIec. Co.,347 Mas. 61 3, t 99 N.E.2d 538 ( L964).
American Cymmnid Co. P. Elisabefh Arden Sales Corp., 33 i F. Supp. 597 (S.D.N.Y. 1971).
Amcrican fiking Contractors v. Scribnw Epip. Co., 745 F.2d 1365, 1372 ( f 1th Cir. 1984).
Anderson v. Sotme Equities, Inc. 43 A.D.2d 921,353 N.Y.S.2d at 1-2 ( 1974).
Arcadkm Phosphates, Inc. v. ArcnJicm Corp., 884 F.3d 69 (2d Cir. 1989).
Arnold Palmer Golf Co. v. F~iquaIridtrs., Inc., 54 1 F.2d 584 (6th Cir. 1976).
A S Apotheken~eshborntorirrm P. IMC-Chem. Group, 873 F.3d 1 55, (7th Cir. 1989).
Belcher v. Irnpor~Cars. Lfd.,246 So.2d 584 (Fia. 197 1).
Chmnel Home Cfrs.v. Crossman, 795 F .2d 29 1 (3d Cu. 1986).
Chicago Inv. Corp. W. D~lIins~48 1 N.E.2d 71 2 (1 985).
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Chrysier Cop. v. @iim6yf 144 A2d 123 (Del. 19%).
Cleqv. Americm Airlines, hc., 168 Cal. Rptr. 732 (Cd-Ct. App. 1980).
Cormectic~itNat'l Bmk v. Anderson, No- 0053810 1991 WL 204359 (Corn. Super. Ct. Oct. k, 1991). Table of cases 113
Continental Fh Sem. v. Fim Nat '1 Boston Corp., No. 82-1505-T, slip op. at 16 @. Mass. Aug. 30, 1984).
Cox Brdcmting Corp. v. National Collegiate Athletic Ass 'R, 250 Ga. 39 1, 297 S.E.2d 733 (1982).
Drennan v. StarPavingCo., 51 Cal. 2d 109,333 Prd 757 (1958).
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Felcfmm v. AIIengheny Inremational, 850 F.2d 12 17 (7th Cir. 1988).
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Goouivin v. Agassiz. 186 N.E. 659,661 (Mass. 1993).
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Pac@ Cascade Coq. v. Nirnmer, 25 Wash. App. 552,608 P.2d 266 (1980).
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Reynolch V. Texarkana Constr. Co., 237 .WC.583,574 S.W.2d 8 18 (1 944).
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Rosnick v. Dinsmore. 235 Neb. 738,743-739,457 N.W.7d 793 (Neb.1990).
Schwanbeck v. Frderui-Mogui Corp., 578 N.E.2d 789 (Mass. App. Ct. 199 1).
Smith v. Orpr Oild Chernical Co. 218 F.3d [W.50 A.L.R.2d 316 (3d Cir. 1955).
Stewart v. Schmauss, 191 So. 2d 882 (La Ct. App. 1966).
Teachers Ins. & Anmrip Ass'n of Am. v. Bt&r7 626 F. Supp. 129(SD.N.Y. 1986).
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13rompson v. Licpichimica of Amerka, Inc. 48 1 F. Supp. 366.
Towne v. Eisnw, 145 U.S. 418 (1918).
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W-ight Y- United States Rrrbber Co., 280 F-Supp. 6 16 (D. Ore. 1967). Table of cases 116 a Enolish cases
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