The Development of the Concept of Pre-contractual Duties in Estonian Law

Author:Martin Käerdi
Position:Docent, University of Tartu

1. The nature of pre-contractual liability, between tort and contract - 2. Duty to negotiate in good faith - 3. Duty to ensure the validity of a contract - 4. Pre-contractual disclosure requirements and liability for incorrect information - 5. Pre-contractual disclosure requirements and liability under the contract - 6. Remedies for breach of pre-contractual disclosure requirements - 7. The... (see full summary)


Martin Käerdi

Docent, University of Tartu

The Development of the Concept of Pre-contractual Duties in Estonian Law

The knowledge that there are pre-contractual duties that could lead to a liability if breached is new to Estonian lawyers. The relevant regulation was introduced with the new Law of Obligations Act 1 , which entered into force on 1 July 2002 and thoroughly altered the existing understanding and concepts of contract law, torts, and other obligations.

The Law of Obligations Act (LOA) contains specific regulation on pre-contractual duties (LOA § 14 ). As a general rule, LOA § 14 (1) requires the parties who have started negotiations over the conclusion of a contract to "take reasonable account of each other's interests and rights". This leads specifically to an obligation to negotiate in good faith, which in turn amounts to a prohibition to start or continue negotiations without willingness to conclude a contract and precludes the party from ending the negotiations in bad faith without concluding a contract (LOA § 14 (3)). The general principle of acting in good faith during the pre-contractual relations in LOA § 14 (1) is also a source of specific disclosure requirements. The negotiating parties are first required to ensure that the information provided by them to the other party in the pre-contractual phase is true and correct (LOA § 14 (2), first sentence). This leads to liability for any incorrect information submitted during the negotiations, provided that such information influenced the decision to enter into contract or to do so under the agreed terms. The pre-contractual duties related to disclosure of information are not limited to the liability for incorrect information. In addition, the law requires the negotiating parties to actively disclose to the other party all information the knowledge of which is evidently material to the other party in consideration of the purpose of the contract (§ 14 (2), second sentence). The source of the regulation of pre-contractual duties in LOA § 14 has mainly been the German concept of liability under culpa in contrahendo, as set out in § 241 (2) and § 311 (2) of the BGB 2 , but the legislator was also influenced by the regulations of pre-contractual duties in the Principles of European Contract Law (articles 2:301 (4) and 2:302) and in the Principles of International Commercial Contracts (articles 2.1.15 and 2.1.16)3.

The existence of specific duties between the parties prior to conclusion of the contract was to some extent acknowledged also before the new LOA. Such specific pre-contractual duties were mainly recognised with respect to the disclosure requirements in the pre-contractual phase. However, such duties were largely accepted only where the negotiations had led to conclusion of a contract. In such cases, the duties were conceived not as pre-contractual but, rather, as duties arising under the contract. That the duties in question ought to have been performed prior to the conclusion of the contract was not considered to be important. As the liability for a possible breach of such duties was contractual by its nature, no specific discussion existed regarding the pre-contractual duties or liability. A good example is a case decided by the Civil Chamber of the Supreme Court in 20014. A buyer of a house, which was still under construction at the time it was bought, claimed damages from the seller. The claim was mainly based on the fact that the constructive elements of floors and ceilings of the house were made of timber and not from concrete. The buyer claimed that prior to the conclusion of the contract the seller had shown her the project details and blueprints of the house, which provided for a concrete structure. The notarised sales agreement that the parties concluded later on made no reference to the blueprints or specific characteristics of the house, which was sold on an 'as is' basis. Nonetheless, the buyer based her claim on defective performance and argued that the house did not conform to the contract. The Supreme Court obviously did not accept this argument, as it concluded that the mere fact that that the floors were constructed from timber and not from concrete did not amount to a defect of the house, as the floors conformed to the applicable construction standards. The Court was obviously of the opinion that the provision of the project providing for concrete floors did not become a part of the sales contract as a contractual promise regarding the quality characteristics of the house. This did not lead to dismissal of the claim, though, as the Court accepted the seller's liability on the basis of a different argument. The Supreme Court pointed out that, irrespective of whether there was an agreement on the nature of the floors, the seller, who had disclosed the blueprints, was under a duty to inform the buyer that the house was not constructed in accordance with these. The seller was hence found to be in breach of the contract. This conclusion seemed so evident that the court did not even bother to ponder on the existence of such disclosure requirements, nor did it reflect on their pre-contractual nature.

1. The nature of pre-contractual liability, between tort and contract

When the new LOA entered into force and introduced a thorough regulation of the duties arising in the pre-contractual phase, the practice had only limited understanding of the purpose of the pre-contractual duties, the cases wherein the breach of such duties would be relevant, and the nature of the liability arising thereunder5. It took some time before the courts and practising lawyers discovered the concept and its practical applications. The constant stream of case law in the last few years has shown that the regulation has not remained a mere concept on paper. A number of decisions from the Supreme Court have developed the concept of pre-contractual liability and amount to a growing legal certainty in the field.

The first issue the courts had to settle with respect to pre-contractual duties was the nature of the pre-contractual liability. Two principal concepts were discussed in the literature. The first of them saw the pre-contractual liability as part of tort law6. In accordance with this concept, the respective duties, listed in LOA § 14, were nothing more than a specific form of a general duty of care the breach of which leads to a liability under the general principles of tort law. A concurring concept entailed the opinion that the pre-contractual relationship and the specific duties arising under it between the negotiating parties leads to a specific legal relationship between the parties (an obligation, or võlasuhe in Estonian 7 ) the nature of witch lies between that of contract and tort8. This is, of course, a concept that is apparently similar to the German understanding of pre-contractual liability (culpa in contrahendo), which, as noted above, also served as a basis for the Estonian regulation.

It has to be admitted that, as far as the practical outcome is concerned, there is little difference in whether the breach of pre-contractual duties leads to the liability under a tort or to a quasi-contractual liability. The main difference between these two concepts in Estonian law is that the tort liability is a liability for negligence whereas the quasi-contractual liability for the breach of an obligation is strict liability where any breach leads to a liability except where the breach was attributable to force majeure and hence excusable. However, there cannot be very many cases in practice where such a fine distinction is of importance. This is largely because most of the pre-contractual duties can be breached only out of negligence. With respect to such duties, the tort law concept would not lead to a less 'strict' liability than the concept of a quasi-contractual liability, which does not require negligence as a precondition for liability. Nonetheless, there are situations where the choice of concept is indeed relevant. The most important among such cases is the liability for incorrect information provided to the other party during the pre-contractual negotiations. Under a tort concept, the party who provided such information could be held liable only if he knew or ought to have known that the information provided to the other party was incorrect or if it could at least be proved that the information provided was negligently left uncontrolled by that party. In the quasi-contractual strict liability regime, the risk of liability for incorrect information lies entirely with the party who provided the information, who would be liable irrespective of whether said party knew or could have known of the incorrectness or whether the incorrect information was provided negligently.

The nature of the pre-contractual liability was clarified by the Supreme Court in the decision regarding breach of the duty to negotiate in good faith (addressed in the following section of this paper). The Supreme Court supported the concept of the liability in pre-contractual relations being quasi-contractual and therefore not leading to a tort. Negotiations regarding the conclusion of a contract between the parties lead to creation of an obligation 9 between the parties negotiating. Under Estonian law, the breach of duties arising under an obligation created under the law entitles the parties to the same remedies as the breach of any contractual obligation. As a result, the liability for breach...

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