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Good Faith and Fair Dealing in Negotiation: a Glance into Romanian Civil Code

Past and Present

Classic contracts used to have a simple formation procedure and were completed by an offer and acceptance merely. If negotiation was required, it was done in a short time period subsequent to the formation of the contract. But in modern times, contract formation procedure is complicated and requires negotiations.

In the past, due to the absence in the Romanian law of an express legal provision regarding the pre-contractual phase, difficulties have arisen with respect to assessing the liability of the parties during preliminary contractual negotiations. For that reason, it was not an easy task for the courts of law, while ruling decisions on certain disputes arisen between contracting parties, to set a balance between the contractual freedom (which entails the right to enter or not into an agreement) and the possibility to hold liable the party acting in bad-faith in negotiations.

This pre-contractual phase has been regulated under the Romanian law once the New Civil Code has been adopted in 2011 (“New Civil Code”). The most relevant provisions are laid down in Article 1170 of the New Civil Code which sets forth the principle of good – faith in negotiation, execution and performance of the agreements, and in Article 1183 of the New Civil Code which regulates the obligation to negotiate in good-faith and the consequences which might occur in case of failure to observe this principle of law.

From a practical perspective, the parties engaged in negotiation may be placed in two scenarios: either they sign a convention regulating the pre-contractual phase, case in which, they may be subject to contractual liability in case of a breach or they conduct negotiations outside a contractual frame, which gives them the right to claim damages in tort.

Trust and Fairness

By commencement of preliminary negotiations, a relation of trust and reciprocal fairness by either party are established. This is why the law prevents certain behaviours underlying pre-contractual bad-faith, namely:

  • initiating or continuing negotiations in absence of the intent to conclude the final contract (Article 1183 paragraph 3 of the New Civil Code),
  • sudden termination of negotiations (Article 1183 paragraph 4 of the New Civil Code),
  • breaching the confidentiality obligation by disclosing or using for one’s interest the confidential information obtained during negotiations by the other party (Article 1184 of the New Civil Code).

Although the failure to negotiate does not represent a tort per se, the failure to conclude an agreement might cause damages to one of the parties engaged in negotiations, if the negotiation process was conducted in bad-faith.

To this end, the courts of law will need to look to the facts of the case and search for proofs of false intelligence, formal negotiations and lack of intention to reach an agreement or the creation of an appearance of negotiations where there is no chance for conclusion of contract.

A Case Law Approach

A well-established approach of the courts is to check the reasonableness and fairness of the parties when negotiating, entering into and performing a contract. That means that parties may not be solely driven by self-interest but must take each other’s interests into account in determining their actions.

Courts of law ruled that in some decisions that, although the principle of contractual freedom represents the foundation of the legal assessment of the negotiation process, this liberty cannot be practically ensured unless the parties can be held liable for breaching the negotiations in bad faith and without any reasonable justification. In case the negotiations are in an advanced state and the other party has legitimate expectations as to the finalisation of the agreement, termination of the negotiations may no longer be permitted without compensating the other party. The scope of compensation is to put the injured party in the same position as that in which he or she would have been put by full performance of the contract.  

Direct damages and the loss of a chance

Fault, if proven, may lead to serious harm to individual autonomy and commerce flourish. The pre-contractual prejudice that is caused by the unfair negotiations is generally a direct, effective monetary damage, namely, a loss in value of the other party’s performance. To this, loss of profit might be added together with moral damages. In all cases, these damages must be proven in order to be certain. In order to establish the damage, the status of the negotiations must be considered as well as all external relevant circumstances.

The New Civil Code sets forth the right of the injured party to recover damages in the form of loss of a chance both in case of contractual liability (Article 1532 paragraph 2) and in case of torts (Article 1385 paragraph 4). Also, in the pre-contractual phase (e.g, initiating, continuing or terminating negotiations against the principle of good-faith), Article 1183 paragraph 4 covers the possibility to seek the recovery of the costs or expenses incurred in relation with the negotiations (damnum emergens) and the prejudice deriving from waiver to other offers/loss of a chance (lucrum cessans).

To sum up, the Romanian Civil Code of 2011 was an important step for regulating the parties relationship in pre-contractual phase and the negotiation process. The obligation to observe the principle of good-faith during negotiations, recognised by the doctrine in the past, has been turned into an imperative norm. Given the risk of being compelled to damages, one may expect that the conduct of the parties engaged in negotiations will be in line with the new principle of good faith, reasonableness and fairness.