Argentina: Liability From Breach Of Negotiations When Parties Are Trying To Reach An Agreement. A Perspective From The Argentine Civil And Commercial Code

Last Updated: 4 December 2017
Article by Natalia P. Guillén and Melisa Romero

The Argentine Civil and Commercial Code ("CCC")1, includes an express and specific regulation on liability due to failure in preliminary negotiations (i.e. when parties are negotiating before entering into an agreement). As a result, some dissenting opinions among legal scholars arose regarding the extent of the recoverable damage in such a hypothesis.

The debate generated due to these new stipulations of the CCC is focused on determining if compensation in cases of liability due to a break in preliminary negotiations shall include only damage to the negative interest or damage to the positive interest as well.

In general, the notion of positive interest is opposed to the negative interest and presumes clearly and simply the interest in the execution of the agreement. Unlike the notion of damage to the negative interest, positive interest presumes the existence of a valid contract among the parties.

1. Notions of damage to the positive interest and damage to the negative interest in order to determine the extent of the recoverable damages

Before the CCC entered in force, Argentine Courts, following the opinion of local and foreign legal scholars, have resorted to the notions of positive and negative interest in order to determine the extent of the recoverable damage in case of pre-contractual liability (i.e. liability due to breach in preliminary negotiations before the parties enter into an agreement), in spite of the fact that said notions were not foreseen in Argentine Law in the former Civil Code.

The National Civil Court of Appeals of the City of Buenos Aires has unanimously acknowledged that, in cases of liability due to failure in preliminary negotiations, the breaching party shall compensate only the expenses incurred by the other party during negotiations (for instance, expenses incurred in attorney's fees or experts fees)2. This criterion is based on the fact that the non-breaching party only has legitimate expectations regarding the execution of a future agreement. It does not have, on the other hand, the right to claim the execution or fulfilment of any agreement whatsoever.

The National Commercial Court of Appeals of the City of Buenos Aires has held a similar criterion to that of the civil courts regarding the extent of compensation of damages. However, in certain cases it has deemed convenient that also damages stemming from the loss of opportunity incurred by the non-breaching party for having rejected another business due to the negotiations eventually frustrated shall also be compensated.3

Thus, the majority opinion among legal scholars and courts, before the CCC entered in force, was that compensation in case of pre-contractual liability shall be limited only to compensating damages to the negative interest (expenses incurred by the non-breaching party). This criterion is based on bona fide grounds and, therefore, the non-breaching party shall be left in the same situation that it would have been if negotiations that led to a failed agreement had not occurred.4 In other words, compensation shall be limited to real expenses incurred due to the negotiations, and, in some cases, it shall compensate damages due to the loss of opportunity incurred by the non-breaching party for having rejected another business due to the negotiations eventually frustrated.5

To sum up, neither civil nor commercial courts ever admitted compensation for loss of profits, as if the parties have entered into a valid agreement.6

2. Pre-contractual liability in the CCC

The CCC includes specific regulations regarding the stage previous to entering into an agreement in Section 3, Chapter 3, of Title II, Book III, sections 990 to 992.

This regulation applies to the stage that commences with any act performed by any of the parties regarding a future agreement, aimed at its execution7 and that ends with the execution of the agreement or the definitive end of the negotiations.

The general principle prevailing in this stage is "freedom of negotiation". This freedom implies that, as set forth in section 990 of the CCC, "The parties are free to promote negotiations aiming at the execution of a contract and to terminate them up at any time".

At this point, the CCC Drafting Commission followed the European model,8 and the Unidroit Principles, as set forth in section 2.1.15: "Any of the parties is free to start negotiations and shall not be held liable if these do not end in an agreement".

Freedom to negotiate and to enter into an agreement, which have constitutional foundation on sections 14 and 17 of the Argentine Constitution, refer to the freedom to decide to contract or to refuse to do so; to decide with whom and, eventually, freedom to decide on the regulation of the agreement.

This freedom, like in any law, is not absolute. Specifically, in the stage previous to the formalization of an agreement, it has a limit in the obligation to act in good faith.9

Section 991 of the CCC sets forth that: "during preliminary negotiations, and even when no offer has been made, the parties shall act in good faith so as not to unreasonably frustrate those negotiations. Non fulfilment of this obligation generates liability of compensating the damages suffered by the affected party for having believed, without personal responsibility, that the agreement would be executed".

Good faith is an essential principle in Argentine positive law. Section 991 of the CCC is a precise application of the rule set forth in section 9, as it states that "Rights shall be exercised in good faith".

In the stage previous to the formalization of the agreement, good faith stands as a behavioral standard, as a guideline to loyal and honest behavior in commercial relationships. This behavioral guideline, together with freedom to negotiate, shall not mean that negotiations shall necessarily lead to the execution of the agreement, but rather, that when negotiations commence, during their development and in case of failure, good faith shall rule all acts so as not to be held liable.

The exercise of a right in a way opposed to the obligation to act in good faith constitutes, as set forth by section 10 of the CCC, an abuse in the exercise of said right.

The CCC defines the existence of abuse in the exercise of the right of the freedom to negotiate, and this occurs when preliminary negotiations "are frustrated with no grounds".

What does it mean that preliminary negotiations are frustrated with no grounds? As a general rule, said circumstance occurs when one of the parties suddenly steps aside of the negotiations with no reason, thus hindering the execution of the agreement.

Nevertheless, it is important to bear in mind that stepping part from negotiations in a sudden way, is not enough for pre-contractual liability to arise. The CCC also requires the non-breaching party to have "trusted in the execution of the agreement with no personal fault".

The expectation that the agreement shall be entered into by the negotiating parties and executed is essential to determine the legitimacy of pre-contractual liability, as what is ruled is trust and the sincere belief of the party that has reasonable grounds to suppose that negotiations will be successful.

The existence of this legitimate expectation shall be analyzed on a case by case basis. Time frame, progress and intensity of negotiations and the behavior undertaken by both parties shall be taken into account. Specifically, it shall be necessary to determine if the breaching party led the other party to reasonably infer in good faith that the agreement would effectively be executed, and if the conduct undertaken by said party allows assuming that it reasonably believed in such a scenario, thus acting accordingly.

Regarding compensation due to non fulfilment in the obligation to act in good faith, said section 991 of the CCC sets forth that "Non fulfilment of this duty generates an obligation to compensate the damages suffered by the affected party for having trusted, with no personal fault, in the execution of the agreement".

In our opinion, compensation for sudden termination of the negotiations previous to the agreement shall be restricted only to the damage to the negative interest, and said compensation shall only include expenses incurred due to the negotiations (consequential damages) and damages incurred due to the loss of opportunity for having the non-breaching party rejected another business due to the negotiations eventually frustrated.

This is so because:

First, in the legal basis of the draft of the CCC, the Drafting Commission explained that they preferred to set forth general principles at the stage prior to the formalization of the agreement, due to the dynamism in this area and to wide development of legal opinion and case law on this matter.10

In other words, the Commission acknowledged the relevance and importance of the criteria laid down by national case law and legal scholar's opinion, and therefore, from our point of view, it can be reasonably inferred that it was not the intention of the Commission to step aside from said criteria. And prior to the moment the CCC become effective, there was consensus among legal scholars and in case law on that the extent of the compensation should be limited to damage to the negative interest.

Second, the general principle of full compensation regarding liability in the CCC is fully compatible with the limitation on compensation for damage to the negative interest in case of frustration of preliminary negotiations.

Section 1740 of the CCC sets forth that full compensation consists on "reverting the situation of the affected party to the status prior to the damage".

Which is the status of the affected party when preliminary negotiations are frustrated? The affected party only has legitimate expectations regarding the execution of a future agreement. It does not have, on the other hand, the right to claim the execution or fulfilment of any agreement whatsoever.

It is clear that under the full compensation principle, in no case the affected party shall be entitled to claim compensation as if the agreement had been executed and fulfilled.

This principle aims at placing the affected party in the same financial situation in which it would have been if negotiations had not commenced or if said party had not trusted the validity of the agreement eventually frustrated.

Third, the notion of positive interest is opposed to the negative interest and presumes clearly and simply the interest in the execution of the agreement. Unlike the notion of damage to the negative interest, positive interest presumes the existence of a valid contract among the parties.

This fundamental difference ends in our opinion with any possibility of extending the compensation in this preliminary stage to the damages derived from the frustrated agreement if this had existed. The answer is simple: there is no agreement.

Fourth: an opposing position —that is to say, granting indemnification for damages to the positive interest— would lead to the breaching party to bear the burden of having to pay an amount equal to the whole of the cost of the performance that should have occurred in favor of the claiming party without any existing agreement and consequently, without receiving any consideration in exchange. This extremely disproportionate result would entail an unjust enrichment of the claiming party; because said party would receive the "compromised" performance of the other party without providing in time any consideration and being thus allowed to use its time and resources in another profitable transaction.

As an example, suppose that two parties – the principal and the distributor – start preliminary negotiations in order to enter into a distribution agreement and that they have already agreed on an indefinite term contract and a monthly price according to the quantity of goods placed in the market. If the principal frustrates the negotiations and if it is admitted that the distributor has the right to claim for compensation due to damage to the positive interest, then the principal should pay the distributor the monthly price agreed during the negotiations for an indeterminate period of time, which shall of course be reasonably determined by the court, without the distributor rendering any performance and being able to use his time and resources in another profitable transaction.

Finally, it is worth mentioning that the solution we promote agrees with the Unidroit principles. In the official comments to the second paragraph of section 2.1.15,11 which states the duty to indemnify for the damages caused to the other party in the stage prior to the formalization of the agreement, it is set forth that the affected party may claim redress for the expenses incurred due to the negotiations, as well as for the loss of opportunities of terminating an agreement with a third party; that is to say, the loss of trust or negative interest. It is specified that said affected party shall not be entitled to claim compensation for the benefits that it might have had if the original agreement had been executed and terminated (positive interest); though it is added that the parties may have expressly agreed on a duty to negotiate in good faith, foreseeing all the remedies for non fulfilment, including the right to demand fulfilment as well.

Acknowledgment of the relevance of the criterion set forth by legal scholars and case law by the CCC Drafting Commission allow us to conclude that, in spite of not having legislation contemplated the notion of damage to the negative interest, recoverable damage in hypothesis of sudden termination of preliminary negotiations includes only compensation for the expenses incurred during said negotiations, as well as for the loss of opportunity of terminating the agreement with a third party, if said opportunity were probable. An opposite approach would lead to an increase in transactional costs and would entail an unjust enrichment of the claiming party.

Footnotes

1. The Civil and Commercial Code entered in force in August, 1st, 2015.

2. National Civil Court of Appeals, Chamber F, 3.2.200, in re "Serra, Fernando H. et al vs. Piero S.A.I. y C", LA LEY 2000-E, 373, RCyS 2000, 754, DJ 2000-3, 267 ED 191, 559.

3. National Commercial Court of Appeals, Chamber C, 12.04.2012, in re "Ejberowicz Fernando Ariel et al vs. Grupo Suar S.R.L. on ordinary proceedings", elDial.com – AA7DCA.

4. National Commercial Court of Appeals, Chamber A, 04.12.207, in re "Coy J. vs. Coopers & Lybrand Harteneck K y Cía. Bertpra & Asoc. UTE on ordinary proceedings", Thomson Reuters, online quote: 35011258.

5. National Commercial Court of Appeals, Chamber D, 03.02.2010, in re "Bunker Diseños S.A. vs. IBM Argentina S.A.", LA LEY 06/03/2017, 7, LA LEY 2010-C, 542.

6. National Commercial Court of Appeals, Chamber D, 02.17.2010, in re "Neptan S.A. vs. International Container Terminal Services et al on ordinary proceedings", elDial.com – AA5E45.

7. Leiva Fernández, Luis F. P. Precontractual liability. Contributions to its study ("Responsabilidad precontractual. Aportes para su estudio"). LA LEY 1998-D, 1229, Civil Liabilty Essential Doctrine, Volume I, 985, AR/DOC/5650/2001.

8. The same criterion results from the Preliminary Draft of the European Agreement Code (section 2) and the Principles of European Agreement Law (section 1102).

9. Section 991 of the CCC sets forth that: "During preliminary negotiations and even when no offer has been made, the parties shall act in good faith so as not to frustrate them with no grounds...".

10. The Commission expressly stated that "it may look as a very simple set of regulations, but it is important to bear in mind that this is a very dynamic area, with a wide doctrinal and case law development, and in such a scenario, it is convenient to set general principles that allow said task. It shall also be taken into account that all the issues of the previous periods in consumer relationships has been widely dealt with in the third chapter. Thus, stemming from an appropriate appraisal of freedom to negotiate and good faith, solutions for liability in typical cases of negotiation among equals can be found".

11. Section 2.1.15, under the heading Negotiations in bad faith, states: "(1) Parties are free to negotiate the terms of an agreement and shall not liable for failure to reach it. (2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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