Lecture 5: Pre-Contractual Exchange Flashcards
Chapter 5 (28 cards)
What is pre-contractual documentation?
Written records or formal statements exchanged before a legally binding contract is finalized.
These documents outline the parties’ intentions, preliminary terms, and rules for further negotiation.
Common types include:
- Letter of Intent (LOI) – expresses interest in negotiating a deal.
- Memorandum of Understanding (MoU) – summarizes agreed points so far.
- Heads of Agreement (HoA) – outlines main deal terms.
- Non-Disclosure Agreement (NDA) – protects confidential information.
These documents can be binding, non-binding, or partly binding depending on wording, structure, and conduct of the parties.
What is an additional function of pre-contractual documentation?
It serves to document and evidence the pre-contractual behaviour of the parties, which is neccessary to argue any non-contractual liability pre-contract.
What are the two types of liability pre-contract?
- Contractual liability
- Non-contractual liability
What is contractual liability pre-contract?
This arises when parties become legally bound by obligations before signing a final contract, typically through:
- Formal exchange of pre-contractual documents (e.g., LOI, MoU, HoA) that include binding language or specific clauses (e.g., confidentiality, exclusivity).
- Clear mutual agreement on essential terms, even if informal (e.g., email, meeting, behavior).
- Conduct showing both parties acted as if a contract was in place.
Even if labeled “non-binding,” a court may still find liability if the document and behavior indicate intent to be bound.
Name some documents for the formal exchange in the pre-contract phase.
- Letter of Intent (LOI)
- Non-Disclosure Agreement (NDA)
- Memorandum of Understanding (MoU)
- Heads of Agreement (HoA)
Define ‘Letter of Intent (LoI)’. When can it be considered binding?
Outlines the aims and intentions of negotiations and shows commitment.
It is typically non-binding unless it contains binding language (e.g. ‘agree to’, ‘shall’) or binding clauses (e.g. confidentiality, exclusivity).
Define ‘Non-disclosure agreement (NDA)’.
A legally binding contract that ensures confidential information shared between parties remains undisclosed to third parties.
What is the difference between contractual confidentiality clauses and standalone NDAs?
Confidentiality clauses protect info within a contract.
NDAs protect broader or external info shared during negotiations. Both must be consistent to avoid legal conflict.
Define ‘Memorandum of Understanding (MOU)’. When it is created? When can it be considered binding?
A non-binding agreement between parties that outlines the terms and mutual understanding of a potential future deal or collaboration.
Often created mid-contractual negotiations to summarise the agreed terms so far during negotiations.
The agreement is binding if wording, content, and conduct support a contract-like commitment. Always include disclaimers if you want it to stay non-binding.
What factors influence whether a MoU is considered legally binding?
Key factors: use of binding language, whether all essential terms are included, and if parties act on the terms.
Clauses like ‘subject to contract’ help signal non-binding intent.
Define ‘Heads of Agreement (HoA)’. When can it be considered binding?
A document summarizing the key terms of a proposed agreement, serving as a basis for negotiation before drafting a formal contract.
A HoA is not automatically binding. The document is binding if wording, intent of parties and content (essential elements) support a contract-like commitment. Always include disclaimers if you want it to stay non-binding.
Summarise the four primary documents for formal exchange in the pre-contract phase.
1. Letter of Intent (LOI): Outlines the aims and intentions of negotiations.
2. Non-Disclosure Agreement (NDA): Agreement of confidentiality during negotiations (and after).
3. Memorandum of Understanding (MOU): Outlines the agreed terms so far during negotiations.
4. Heads of Agreement (HoA): Outlines all key terms agreed during negotiations.
When is pre-contractual documentation legally binding? When not? (generally)
Look for the four prerequisites:
- Offer and acceptance
- On essential elements
- Intention to be legally bound
(4. Consideration) - (5.) Formal requirements
Documents are legally binding when:
- Language: It uses clear binding language (e.g. “shall,” “agree to,” “must”).
- Essential elements: It includes essential terms (price, goods, delivery, etc.).
- Intention: Both parties show intent to be bound (e.g. by starting performance).
- Label: Clauses are labeled as binding (e.g. confidentiality, exclusivity, costs).
Documents are not legally binding when:
- It is marked “subject to contract” or “not legally binding.”
- It only outlines intentions or negotiation goals.
- It lacks essential terms or clear mutual obligations.
- Party conduct shows no intent to form a contract.
How can parties prevent a pre-contractual document from creating unintended legal obligations?
By using disclaimers like:
- Label as ‘subject to contract’
- Write a ‘No liability’ clause
- Write a ‘Split’ clause
Generally, avoiding binding language, and clearly stating the non-binding intent in the document is key!
How does one ensure that only some aspects of the contract is non-binding?
Using a ‘Split’ clause, where one part is binding and one part is non-binding.
Why might a court recognize a contract even if it was never formally signed?
If parties perform as if bound and the terms are clear, courts may find a contract exists despite no signature.
Name some of the types of informal exchange (agreements) in the pre-contract phase.
- Oral agreements
- Written exchange of terms
- Tacit behaviour
What does ‘tacit behaviour’ as a form of informal agreement mean?
Whenever one party starts executing what looks like a contract, one would assume that a contract has been signed.
What are other exchanges (other than the formal documents and informal agreements) should one be aware of in the pre-contractural phase?
Collateral agreements/side-agreements, which are contracts separate from but dependent on the main agreement
Prerequisites:
- Offering party intends the statement to be relied upon
- Offering party intends the statement to be correct
- Accepting party actually relies on statement
Example: If main agreement is signed, counterparty will be allowed access to party’s fleet services.
What is non-contractual liability pre-contract?
A party can be held legally responsible even if no final contract was signed.
This protects fairness during negotiations, even without a signed contract.
Compare the treatment of non-contractual liability in civil law vs. common law systems pre-contract.
Civil law recognizes good faith duties (e.g. culpa in contrahendo), making parties liable for bad-faith negotiations.
Common law generally rejects this but may apply promissory estoppel or specific document clauses.
Describe the concept of ‘good faith’.
Duty of the parties to make a serious and honest effort to reach agreement on negotiable items on the basis of a duty of mutual care.
Including the duty to:
- Not break off negotiations at once and unwarrented.
- Inform the other party of changed circumstances regarding the deal.
- Not continue negotiations if the conclusion of deal has become unlikely or unattractive for one party.
Discuss the role of good faith in pre-contractual negotiations under both legal traditions.
Civil law acknowledges and enforces good faith.
Common law generally rejects it, but accepts contractually agreed duties (e.g. best efforts, reasonable efforts).
Describe the concept of ‘promissory estoppel’.
Stops a party from backing out of a promise if the other party relied on it.
One sees negotiation as somewhat of a “promise” that includes reliance, but with no return consideration.
The longer the negotiation time, the higher expectation of the negotiation being concluded successfully (reaching an agreement).
If a party relies on a promise made during negotiations and suffers detriment, courts may enforce the promise under promissory estoppel.
