As we know, contractual negotiations do not always succeed. Businesses may invest time and money in preparing documentation, costings, and responding to the specific technical needs of the other party. At times, failure can be dismissed as bad luck in the face of keen competition. At other times, the negotiating party will suspect that they have been misled or even potentially induced to provide free information which can be used by the other party to contract elsewhere. The recent English commercial law case of Dowman Imports Ltd v 2 Toobz Ltd [2020] EWHC 291 (Comm) encapsulates many of these concerns—the claimant providing services in the development of a toy for almost two years in the expectation that it would be awarded the contract to produce the toy in due course. The claim in contract law failed—the defendant was free to walk away from the claimant and contract elsewhere. Nevertheless, its conduct was regarded as unconscionable giving rise to a claim for restitution for beneficial services rendered.
Professor Isabel Zuloaga's new book, based on her Oxford DPhil, seeks to examine this difficult area of commercial law, and provide insights based on her background as a comparative lawyer. Her focus is firmly on private law. While public procurement rules may offer a framework for regulation and sound commercial practice in public law, in private law, parties are left to the law of obligations. Where negotiations do not result in a contract, the question arises whether unsuccessful parties have a legal basis to claim for expenses and other costs incurred in the expectation of the award of a contract. Zuloaga chooses as her ‘paradigm case’ one she regards as the most contentious and divisive between common and civil law systems, namely: where no contract (not even a preliminary one) has been entered into; no preliminary works have been done, but expenses have been incurred. Here, she argues, liability should arise where one party during the negotiation process has been encouraged by the other party to rely on the expectation of the future conclusion of the contract (xxxiv). In so doing Zuloaga chooses four representative systems. For civil law, she chooses French law (the Romanistic legal tradition), German law (the Germanic legal tradition) and Chilean law (representative of Latin America and influenced by German and French law). Her ‘contrasting jurisdiction’ is the common law jurisdiction of England and Wales. These four systems provide the basis for a fascinating comparative study.
The book's goal is ambitious—to provide an innovative theoretical approach to the foundations of precontractual liability. As the title suggests, Zuloaga argues that it is reliance—taken loosely and encompassing elements of trust and expectation—which explains precontractual liability. Legitimate reliance, she argues, on the expectation of the future conclusion of the contract, induced or encouraged by the party who then breaks off negotiations ‘is the common fact that explains the rationale of this liability’ (1). This explanation faces, however, a number of obstacles: (i) some but not all the courts use this terminology; (ii) it overlaps potentially with other explanations such as good faith and abuse of rights; and (iii) it is not adopted by English law which rejects an overall theory of precontractual liability.
Zuloaga seeks to overcome all three obstacles by examining the reasoning used by national courts, looking behind terms such as ‘culpa in contrahendo’, ‘rupture abusive des pourparlers’ and ‘confianza legitima’ and, in particular, appraising the relationship between reliance and good faith. Her view is that trust-based reliance merges with the general principle of good faith and that expectation-reliance emanates from the trust dimension. She also argues (somewhat optimistically) that changing the terminology from ‘good faith’ to ‘reliance’ might even convince sceptical English lawyers of the merits of precontractual liability or at least reduce their opposition, rendering it easier to find common ground for harmonisation (see Chapter 7). While I suspect it will require more than this to convince the London Commercial Bar—which still tends to shudder at any mention of private law harmonisation and regards precontractual liability as ‘anti-competitive’—removing the contentious terminology of good faith would certainly be a good start!
Examining in turn German, French, Chilean and English law, Zuloaga provides a thoughtful, well-researched and accessible insight into the operation of the law in these jurisdictions. As a comparative lawyer based in a common law jurisdiction, what has always drawn me to this topic is the extent to which the answer in civil law jurisdictions rests with case law and, dare I say it, judicial precedents (weak ones, of course). The original versions of the French and German Civil Codes made no provision for precontractual liability and so it was left to a combination of academic scholarship and judicial intervention to create a basis for liability. The Codes nevertheless formed the background to legal development. In German law, as Zuloaga ably discusses, the restrictive tort law provisions of the BGB made resort to a notion of contractual fault the most logical mechanism for imposing an obligation of diligentia in contrahendo. Combined with codal provisions such as section 242 BGB on good faith, the courts were able to shape liability for wrongly breaking-off negotiations. Equally, the early work of Saleilles provided the foundation for precontractual liability in tort in France (the tort provisions of the Code civil being more flexible than those of contract law) and (in Spanish translation) in Chile. More recently, this has changed. The German Schuldrechtsreform in 2001 and the 2016 French ordonnance no 2016-131 (ratified by loi no. 2018-287) introduced codal provisions dealing with precontractual liability: see sections 311(2), (3) and 241(2) BGB and Articles 1104 and 1112 Cciv. Chile has yet to act. These provisions, however, primarily consolidate existing law. To understand the key justifications for liability we still need to look to the cases.
Zuloaga therefore in her study addresses the law as a combination of scholarship and judicial decision-making. For German law, culpa in contrahendo imposes obligations of protection and loyalty (Schutzpflichten) on contracting parties with a prominent place given to Vertrauen (which can be translated as trust or she argues, more loosely, as reliance). Liability rests on a ‘reliance-based relationship of obligation imposed by law’ (21). Zuloaga argues that while good faith historically served to explain the development and expansion of culpa in contrahendo, the modern doctrine can function independently of it. In contrast, French law focuses firmly on extra-contractual (tortious) fault which is subsumed under the general provisions of art.1240 Cciv. The reasonable negotiator acts ‘in an honest and loyal manner’ (63). While Zuloaga notes the problems of determining ‘fault’ where the criteria for a culpable break-off are regarded as questions of fact not law, she nevertheless highlights the significance of concepts such as ‘croyance ou confiance légitime’ in the French law debate. Despite the fact that the French code now expressly refers to the standard of good faith, Zuloaga distinguishes between form and theory, arguing that when courts refer to ‘good faith’ in this context what they are seeking are norms of conduct based on legitimate belief or trust. Chilean law also uses extra-contractual liability (although this is not a matter without debate given the influence of both French and German scholarship: (102–6)). Again Zuloaga identifies underlying tensions between ideas of reliance expressed in the notion of confianza with those of good faith and abuse of rights, and the role of the courts and scholars in shaping current law. Her conclusion for all three systems is that precontractual liability can be understood without resorting to good faith, although the doctrine does provide a valuable stimulant for identifying the need for liability. Chapter 6 draws these threads together to find functional convergence between the different systems, imposing liability where the parties share a precontractual relationship in the face of conduct regarded as ‘fault’/culpa. In making a strong doctrinal case for reliance as the underlying basis for precontractual liability, Zuloaga highlights the dynamism of the civil law courts, while acknowledging the lack of clarity which seems to result. While this is par for the course in the common law, it is interesting to see this manifest itself in a civil law context. Indeed, recent codifications of case-law developments in Germany and France have done little to clarify the theoretical and conceptual parameters of the law—it remains an area where case law is king and thereby a fascinating study for common and civil lawyers alike.
Where does this leave the ‘contrasting’ common lawyers? Chapter 7 concedes that English law does not impose liability in the paradigm case. Much lies, in her view, in common law opposition to good faith, with limited support for an ‘objective’ version (it would have helpful here to discuss in more detail the ‘invasion’ of good faith via the Unfair Contract Terms Directive (93/13/EEC) which is mentioned only briefly). If, as she argues, precontractual liability can be severed from good faith, the piecemeal solutions of English law do offer some support for a basis of liability resting on reliance. For a common lawyer, it is interesting at this point to note the frustration of a civil lawyer struggling with the narrowness of the common law causes of action. Her answer is to suggest expansion of negligence and estoppel (217–29). This reviewer does not, however, share Zuloaga's optimistic view that the English tort of negligence would be the strongest candidate for liability. The current law on the duty of care in negligence does not support expansion (see eg Robinson v Chief Constable of West Yorkshire [2018] UKSC 4) and it seems unlikely that even the arrival of Lord Leggatt (an advocate of good faith) in the UK Supreme Court will change this view.
In sum, this is a thorough, well-written and rigorous doctrinal study with a clear and well-argued thesis. Zuloaga makes her case persuasively. More was perhaps needed on how common lawyers approach this area of law. For example, the very limited treatment of remedies (170–82) and lack of emphasis on the potentially positive economic effects of risk in the negotiation process highlight the different ways in which common and civil lawyers approach this problem. The fact remains that commercial common lawyers, regardless of the good faith debate, are far more willing to see the precontractual period as one based primarily on risk, seeking a justification for liability rather than an opportunity for the courts to provide a framework of ‘duties’ and ‘obligations’ for the negotiating parties.
This is not, however, simply a book to interest commercial and contract lawyers. For comparative lawyers in general, Zuloaga's book raises fundamental questions about legal development in common and civil law systems. It highlights the tension between codal and case-law legal development, and the extent to which as lawyers we can reconcile commercial practice and judicial (or public) morality. It should also make us reconsider how we act as participants in a global legal community that makes contracts across the world. While ‘choice of law’ clauses mean that differences do, in practice, matter, this does not exclude a debate as to the theoretical bases for precontractual liability and the extent to which commercial law should not turn a blind eye to one party running roughshod over the legitimate expectations of another which they encouraged in the first place. It is a book therefore to make the reader think, as indeed any good comparative law text should do!
