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

Author:Ms Natalia P. Guillén and Melisa Romero
Profession:M & M Bomchil
 
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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...

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