Germany: The Purchase and Sale of Companies in Germany - 4.1.4 Pre-Contract - Preliminary

Last Updated: 4 December 1997
It is also possible to conclude preliminary contracts as part of the negotiations for the purchase of a company. A preliminary contract is a contract in which the parties concerned agree to conclude another contract, namely the main contract. A preliminary contract therefore constitutes a compulsion to conclude the main contract on a legal basis. Such a preliminary contract may commit one or both parties and is not normally unilaterally revocable.

A preliminary contract is normally concluded by the parties in order to attain a contractual commitment on the part of the parties even if the main contract is not yet ready for signing for legal or factual reasons. At the same time, the preliminary contract itself must generally satisfy all the prerequisites of a contract, i.e. in particular it must outline in adequate detail the substance of the main contract to be concluded by the parties.

This definitiveness requirement relates to the objective main and ancillary points of the main contract insofar as the parties wish to have them governed in the preliminary contract. If the preliminary contract is lacking in definitiveness, claims for breach of trust in the event of contract negotiations being terminated cannot be excluded based on the principles of cic.

A slight advantage of a preliminary contract is that no specific form is basically required. This is not the case only if the parties have selected a specific form for the main contract and if it is the will of the parties that the preliminary contract is to be concluded in the same form. A preliminary contract is also subject to the statutory form requirements if the main contract has to be concluded in compliance with certain form obligations. For example, a real estate contract can only be concluded in the presence of a notary under German law. If the parties to a preliminary contract undertake to convey real estate in the main contract, the preliminary contract also has to be concluded in the presence of a notary in accordance with =A7 313 of the German Civil Code. On the other hand, there is a compulsory form if the protection purpose of a specific form requirement also applies to the preliminary contract for example a precipitation protection for the benefit of one of the parties. This depends on the contents of the preliminary contract in question, however.

A preliminary contract constitutes extensive entitlements for the parties and may lead to considerable risks for both contracting parties. In most cases, legal or taxation matters have not been clarified by the parties when a preliminary contract is signed or they have not yet been identified. If this happens, the conclusion of a preliminary contract may significantly complicate the conclusion of the actual contract, especially if matters needing clarification subsequently arise and if a solution for these matters necessitates a change in the points which have already been contractually agreed in the preliminary contract. In addition, if matters requiring agreement in a preliminary contract are left open, this may result in them having no binding effect at all due to the lack of definitiveness or the matters left open may be completed by a ruling of the other contracting party, the court or by a judicial contract interpretation in accordance with =A7=A7 315 and 316 of the German Civil Code, thereby significantly curtailing the contractual freedom of the parties with regard to the conclusion of the main contract.

If a preliminary contract is nonetheless concluded, it commits one or both of the parties to conclude the main contract, as mentioned above. For this reason, the creditor party in a preliminary contract is able to sue for performance, i.e. for the conclusion of the main contract. In addition, he is able to demand general damages in accordance with =A7 326 of the German Civil Code in the event of culpable delay on the part of the liable party without having to have sued for the conclusion of the main contract beforehand. A prerequisite is normally the setting of a reasonable period of grace in order to discharge the obligation to conclude the main contract. If there is no interest in the conclusion of the main contract in view of the delay, the obligation to set a period of grace basically lapses. If the discharge of obligations under the preliminary contract is frustrated in any way, =A7=A7 280 and 325 of the German Civil Code applies in this respect and the creditor party is entitled to demand compensation.

In actual practice, the contents of a preliminary contract are re-negotiated by the parties if it transpires that the main contract cannot be concluded or at least cannot be concluded in line with the agreements of the preliminary contract.

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.

You may also wish to read through related Wessing Berenberg-Gossler Zimmermann Lange. You can view the entire archive via the Internet on Business Monitor Online (http://www.businessmonitor.co.uk), or via your online provider by entering "Wessing Berenberg-Gossler Zimmermann Lange" and "Business Monitor" as a free text search.

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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