References without law book default to BGB.

Case - Letter of Intent and cic

Facts

D is a professional manufacturer of baseball equipment. He meets with F, the sole owner and director of Machinery Corp GmbH (M). D has been a long-time customer of M. On an individual appointment in M’s facilities, F presents D with a newly developed leather treatment and sewing machine for baseball gloves. D is interested in three of the machines. They discuss technicalities and negotiate about the price and delivery conditions for about thirty minutes. D leaves F, saying that he would get back to F to put the negotiations in writing.

The following morning, D sends F an e-mail, stating: “I am, in principle, willing to proceed with the purchase. I am happy about our discussions yesterday, which we left in the following state: Price of EUR 21,000 per machine. Delivery costs (unclear). Production capacity of M for delivery in about 2-4 months (unclear). Spare part availability for the machine (not yet secured). If there are any new developments, please come back to me.”

A week later, F gets back to D, stating that he could provide D with free delivery and that he has secured spare part availability for the next ten years. He is thus happy to confirm that the order for EUR 21,000 per machine will be delivered in three months. D thinks that he “did not order anything.” In the meantime, he has received an offer from M’s competitor, Hardware Inc GmbH (H). As the conditions were favorable, he ordered three machines for EUR 19,000 each.

When D tells F about it, F is furious. He has already ordered customized spare parts for EUR 5,000 and wants payment of EUR 5,000 for the useless customizations.

a) Have D and M (GmbH) formed a contract?
b) Does D need to pay the EUR 5,000?

Solution

Slides Solution

Part A: Contract Formation

• Issue: Have D and M GmbH formed a valid contract under § 433 BGB?
• Rule: A contract requires two matching declarations of intent: offer (§ 145 BGB) and acceptance (§ 147 BGB).
• Application:
  • (1) Offer during negotiation in the office: No information in the facts that a binding offer was made here. → (-)
  • (2) Offer by D’s email to F:
    • Essential elements: Parties (D and M), price (EUR 21,000 per machine), and goods (three machines) are clear. Other aspects (delivery costs, capacity, spare parts) were unresolved, but are not strictly essential for formation. → (+)
    • Intention to be legally bound: D’s email was a letter of intent (agreement to agree). He only wanted to formalize negotiations in a written statement, wanted to go ahead ‘in principle’, left important follow-up issues unresolved, and stated F should ‘come back to him first’. Objective third party would recognize D did not want to be legally bound yet. No valid declaration of intent. → (-)
  • **(3) Offer by F: F’s response a week later confirming the order is the offer. → (+)
  • (4) Acceptance by D: D clearly refused to accept F’s offer. → (-)
• Conclusion: D and M did not form a contract.

Part B: Pre-contractual Liability

• Issue: Can M claim EUR 5,000 as damages from D under §§ 280 I, 311 II 1, 241 II BGB?
• Rule: §§ 280 I, 311 II, 241 II BGB (c.i.c. / pre-contractual liability).
• Application:
  • A. Obligation: Under § 311 II 1 BGB, an obligation is created by the commencement of contract negotiations. M and D met and negotiated. → (+)
  • B. Breach of duty: Did D breach his pre-contractual duties under § 241 II BGB by abruptly ending negotiations?
    • Cons: F trusted D to go ahead. This trust was created by negotiations and deserves protection.
    • Pros: If ending negotiations was a breach, starting a negotiation would force D to contract. D would no longer be free to choose between commercial options. It is at M/F’s own risk to make expenses before a final contract is made. D clearly stated he only wanted to go ahead ‘in principle’ and F should come back first.
    • Consequence: D did not breach his duties. Getting a better commercial offer is a valid reason to end negotiations. → (-)
  • C. Fault & D. Damages: Irrelevant as there is no breach of duty.
• Conclusion: M cannot claim EUR 5,000 in damages from D.

Write-Up

Issue: Can M GmbH claim payment of the purchase price from D under § 433 II BGB, or damages under §§ 280 I, 311 II 1, 241 II BGB?

Part A: Claim for contract performance under § 433 II BGB

Issue: May the claimant, M GmbH, claim payment of the purchase price for the three sewing machines from the defendant, D, pursuant to § 433 II BGB?

1. Contract Formation
Rule: A claim under § 433 II BGB requires the formation of a valid sales contract. A contract requires two matching declarations of intent (DoIs) that agree on the essential terms of the contract (essentialia negotii): the contracting parties, the subject matter, and the purchase price. These matching declarations are typically made via an offer (§ 145 BGB) and a matching acceptance (§ 147 BGB).

a) Negotiation in the Office
Application: D and F negotiated in M’s facilities. There is no information in the facts indicating that either party made a binding offer with the intention to be legally bound during this meeting.

b) D’s Email to F
Rule: An offer must be made with the objective intention to be legally bound (Rechtsbindungswille).
Application: We must examine whether D’s email to F constitutes a valid offer under § 145 BGB. The email specified the parties, the price, and the goods. Although secondary terms were left unresolved, these are not strictly essential terms. However, D’s email explicitly stated that he was only willing to proceed ‘in principle’, that several key terms were still ‘unclear’, and that F should ‘come back to him first’. In commercial business practice, such declarations are understood as letters of intent intended to summarize negotiations, not to create a binding obligation. An objective third party in F’s position would recognize that D did not yet intend to be bound.
Conclusion: D’s email did not constitute a valid offer.

c) Order Confirmation by F
Application: F’s response a week later confirming the order and delivery terms represents a binding offer to enter into a contract with the intention to be legally bound.

d) D’s Reaction
Application: For a contract to be formed, D must have accepted F’s offer (§ 147 BGB). D did not accept the offer and instead ordered from a competitor.

e) Conclusion to Part A
Conclusion: Since there are no matching declarations of intent, no valid sales contract was formed. M has no claim for payment under § 433 II BGB.

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Part B: Claim for damages under §§ 280 I, 311 II No. 1, 241 II BGB (c.i.c.)

Issue: May M GmbH claim damages of EUR 5,000 from D under §§ 280 I, 311 II 1, 241 II BGB under the doctrine of culpa in contrahendo?

1. Pre-contractual Relationship (Obligation)
Rule: Under § 311 II No. 1 BGB, an obligation with duties under § 241 II BGB is created by the commencement of contract negotiations.
Application: F (acting for M) and D met in person and negotiated terms, which established a pre-contractual relationship.

2. Breach of Duty
Rule: Under § 241 II BGB, a pre-contractual relationship binds each party to respect the rights, legal assets, and interests of the other party. Breaking off contract negotiations can constitute a breach of duty if a party has induced a reasonable expectation that a contract will be concluded, and then abruptly ends negotiations without a valid reason.
Application: Here, D broke off negotiations after receiving a competitor’s offer for EUR 19,000 instead of EUR 21,000. In a market economy, the freedom of contract includes the freedom to choose the most favorable commercial offer. If starting negotiations forced a party to conclude a contract, the principle of freedom of contract would be undermined. Furthermore, D explicitly stated in his email that he only agreed ‘in principle’ and that key elements were still ‘unclear’. M was therefore on notice that the contract was not finalized. If M chose to buy components for EUR 5,000 before a binding contract was signed, M did so at its own commercial risk. D had a valid business reason (saving EUR 6,000 in total) to break off negotiations.
Conclusion: D did not breach his duties under § 241 II BGB.

3. Conclusion to Part B
Conclusion: Since there is no breach of duty, D is not liable. M cannot claim damages of EUR 5,000 under §§ 280 I, 311 II, 241 II BGB.