Apr 15, 2025
Pre-contractual Liability: When Negotiations Do Not Lead to an Agreement
In contractual negotiations, parties may incur significant expenses without an agreement being reached. As a general rule, each party must bear their own costs if negotiations break down. However, there are exceptions where a party can be held liable for the opposing party's expenses - the so-called pre-contractual liability. This article reviews the principles of this liability in Norwegian law, with a particular focus on culpa in contrahendo (fault in contract negotiations) and the principle of loyalty.
General Rule: Each Party Bears Their Own Costs
The starting point in Norwegian law is clear: Parties who negotiate are free to withdraw from negotiations without liability. Each party must cover their expenses for meetings, planning, and other costs incurred during the negotiation process. These expenses must be offset by the profit the party earns from other contracts that are actually concluded.
This principle is also expressed in UNIDROIT Principles Article 2.1.15(1): "A party is free to negotiate and is not liable for failure to reach an agreement."
Pre-contractual Liability: Exception to the General Rule
Culpa in Contrahendo as a Basis for Liability
There are situations where a party can still be held liable if they have acted reprehensibly during negotiations. This is called culpa in contrahendo (fault in contract negotiations) and leads to pre-contractual liability.
UNIDROIT Principles Article 2.1.15(2) and (3) express this exception as follows:
"A party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party."
"It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party."
Importance of the Loyalty Principle
The Norwegian Supreme Court has confirmed in several judgments that the duty of loyalty between contracting parties can also arise before a final agreement is concluded. This is evident, among other things, in Rt 2010 p 1478, where the Supreme Court states that "it is established in case law and theory that the duty of loyalty between parties in a contractual relationship can also apply before a final agreement is concluded."
The core of pre-contractual liability lies in the fact that the parties must adhere to certain norms of loyal conduct during the negotiations. Breaches of these norms can trigger liability.
Scope of Compensation: The Negative Contractual Interest
Negative vs. Positive Contractual Interest
Pre-contractual liability typically covers the negative contractual interest, also known as the reliance interest. This means that the injured party can claim compensation for expenses incurred in reliance on an agreement being reached.
The positive contractual interest (performance interest) can generally not be claimed in the pre-contractual phase. This is because the injured party, before the agreement is concluded, cannot be said to have had any entitlement to enter into the agreement.
A rare exception is in tender law, where it is possible that an overlooked bidder may be granted compensation for the positive contractual interest (Rt 2001 p 1062 - Nucleus).
Case Law on Pre-contractual Liability
Although no Norwegian Supreme Court decision has yet directly imposed pre-contractual liability, the Supreme Court has, in several decisions, assumed that such a liability form exists in Norwegian law.
Key Legal Decisions
The Kina-Hansen Case (Rt 1998 p 761) assumes that pre-contractual liability exists in Norwegian law. The Supreme Court states that it must "require reprehensible conduct during contract negotiations – disloyalty, dishonesty, deception or similar", but concluded that the conditions for liability were not present in the case at hand.
In The Stiansen-OBOS Judgment (Rt 1992 p 1110), the Supreme Court stated that the builder could not be completely free to reject a price offer from the contractor. The existing contract documents were deemed to obligate the builder to loyally assess the price offer, and a breach of these conditions could lead to liability.
Selsbakkhøgda Housing Cooperative (Rt 1995 p 543) is in the same vein, where the Supreme Court recognized the possibility that a contractor could claim compensation for their unmet expectation of receiving further work.
Nordic Examples
The first Supreme Court decision in Scandinavian law to impose pre-contractual liability is the Swedish Colombia Case (NJA 1963 p 105). The case concerned a person who, in reliance on a misleading statement about employment, resigned from their job in Sweden and traveled to Colombia. When necessary clearance for the employment could not be obtained, the company was held liable for the expenses incurred by the individual.
When Does Pre-contractual Liability Arise?
Requirement for Disloyalty
A leading viewpoint is that disloyal behavior must be present before liability arises – it is the abuse that is reacted against. This aligns with the fact that liability is an exception to the general rule of non-liability.
How far the negotiations have progressed also plays a role. The closer one is to an agreement, the more likely loyalty obligations and thus liability arise.
Categories of Liability Cases
Several situations can be identified where pre-contractual liability may be relevant:
Conditions at the Start of Negotiations: If a party has information about conditions that directly impact the likelihood of an agreement being reached, there may be a duty to inform the opposing party. Lack of information can lead to liability for all expenses incurred by the opposing party during the negotiation period.
Conditions During the Negotiation Process: If a negotiating party chooses a strategy of "protracted engagement" by demanding costly investigations to neutralize the opposing party while awaiting better offers from others, this can be disloyal and lead to liability.
Continuation of Futile Negotiations: If a party becomes aware that further negotiations are futile, for example, because they have decided to enter into an agreement with another party, it may trigger liability if they continue negotiations without disclosing this.
Parallel Negotiations: Whether conducting parallel negotiations with multiple parties can incur liability depends on industry practice. The general rule is that parallel negotiations do not trigger pre-contractual liability.
Letters of Intent and Loyalty Duty
The fact that the parties have entered into a letter of intent is not, in itself, decisive for liability to arise. What matters is whether the negotiations have progressed to the point where it is justified for one party to take into account the interests of the other.
In practice, the conclusion of a letter of intent often indicates that the parties have established certain lines of loyalty between them. Liability associated with letters of intent can have a deterrent effect: It signals that one cannot freely negotiate to obtain information about a business, only to break off negotiations and exploit the information for one's own purposes.
Concluding Remarks
Pre-contractual liability serves as an important "safety valve" in Norwegian contract law. Although the general rule remains that each party bears the risk of their own costs in negotiations that do not succeed, disloyal conduct can trigger liability for the negative contractual interest.
For commercial actors, it may be advisable to enter into confidentiality agreements prior to contract negotiations to prevent problems related to the use of sensitive information.
Pre-contractual liability is rooted in the principle of loyalty and represents a reasonable balance between the parties' interests: Freedom to negotiate combined with responsibility for disloyal behavior.
