Negotiations represent the pre-contractual phase, during which prospective contracting parties shape their legally relevant contractual intent. In business practice, negotiations are usually shorter or longer processes, as it is rare for a contract to be concluded instantaneously.68 Legally relevant negotiations must include the essential elements of the future contract. However, negotiations are not a mandatory stage in contract formation, as some contracts are naturally concluded without prior negotiations.
A key legal characteristic of negotiations is that they are generally non-binding. Parties can terminate negotiations at any time. Entering negotiations does not obligate a party to conclude a contract,69 but they must act conscientiously and fairly.
If a party negotiates in bad faith, they may be subject to liability for damages, which constitutes an exception to the non-binding nature of negotiations. This applies in cases of unjustified withdrawal from negotiations or “sham” negotiations. A party that engages in negotiations without the intention of concluding a contract is liable for damages caused to the other party. Likewise, a party that initially intends to conclude a contract but later abandons that intent without a justified reason is also liable for damages suffered by the other party. 70
In business practice, letters of intent (“letter of intent”) frequently appear, though the OZ does not explicitly regulate them. Such letters are often used in various contexts, including business acquisitions, real estate leases, partnerships, and other business agreements. A letter of intent typically allows parties to establish a framework for further negotiations, define key terms, and set expectations without creating a legally binding obligation, thereby facilitating the negotiation process.
Exercise:
1. A, Ltd., negotiated with B, Ltd., for more than a year regarding the purchase of a property in Ljubljana. After more than a year, the negotiations between the companies were terminated.
- Are the parties bound by any obligations based on the negotiations?
- What can A, Ltd. do if it discovers that B, Ltd. withdrew from negotiations because it realised that its price calculations were incorrect?
2. Read the letter of intent.
LETTER OF INTENT
for the Implementation of a Strategic Sectoral Project
“FOREST AND WOOD FOR SUSTAINABLE DEVELOPMENT”
The signatories of this letter express their intent to cooperate in the project, coordinated by Association A of the Wood and Furniture Industry, with the aim to:
►Contribute to fulfilling Slovenia’s commitments to the EU’s sustainable development goals.
►Establish an understanding of the forest-wood sector as Slovenia’s leading sector for sustainable development.
►Increase the use of wood for high value-added products.
►Maximise added value and job creation based on forest resources.
►Implement structural redevelopment of the forest-wood sector to achieve global competitiveness.
►Enhance Slovenia’s recognition based on its preserved forests and high-quality wood processing industry.
The ultimate goal of the project is to implement the developmental restructuring of the sector, transitioning towards value creation based on knowledge and innovation, while also maximising the sector’s contribution to Slovenia’s environmental commitments.
The coordinator commits to preparing the project documentation after signing the contract and ensuring that all partners can participate in areas related to their core activities.
The project partners commit to actively participating in the agreed areas with their human resources and, when necessary, also with financial contributions. Additionally, they will strive to promote the project among their members and the public.
Specific agreements will be concluded by the coordinator with individual project partners or groups of partners after the project documentation has been finalised.
Ljubljana, 14 June 2024
- Does the letter of intent constitute a binding contract under the OZ? If yes, what obligations have the signatories undertaken? If no, why not?
- Does the signing of this letter create any legal obligations for any of the signatories (e.g., the sale of wood at a specific price)?
