The actual conclusion of a purchase contract is normally preceded by preliminary negotiations.

Under =A7 154, para. 1 of the German Civil Code, these preliminary negotiations have no legally binding effect on the parties unless otherwise provided in a special agreement. This means that pre-contractual negotiations themselves constitute no contractual obligations for the parties concerned.

The parties nevertheless have a duty of care during the contract negotiations based on the principle of a quasi contractual trust relationship. Any breach of such duties of care may possibly lead to a liability of the breaching party under the legal institution of "culpa in contrahendo" (cic).

In this case, the party culpably breaching pre-contractual duties is liable to the other party for the damages sustained by virtue of the said breach of duty. This liability is based on the so-called "negative interest" of the other party, i.e. the other party is to be placed in the position that he would have been in if no breach of duty had been committed. Such cic liability is not anchored in the German Civil Code by a specific regulation but it has nonetheless been recognised in jurisdiction and literature for many years and should at all events be observed when commencing contract negotiations for the purchase of a company. During pre-contractual negotiations for the purchase of a company, possible duties of care, a breach of which may constitute liability under cic, are particularly the duty to conduct contract negotiations in good faith and the duty of loyalty such confidentiality and disclosure obligations.

For further information please contact Dr Erich Michel, Wessing Berenberg-Gossler Zimmermann Lange, Freiherr-Vom-Stein-Strasse 24-26, Frankfurt am Maim 60323, Frankfurt, Germany- Tel: +496 997 1300, Fax: +496 997 130100.

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