Concluding a contract? Tell the truth, or else!

Laws in the Czech Republic, as well as in many other countries, do not expressly stipulate liability for providing incomplete, incorrect or imprecise information to a future party in contractual negotiations. However, long ago courts in foreign countries reached the conclusion that the obligation to provide information before concluding a contract does exist and the Czech professional community has never doubted this fact.

The Supreme Court confirmed as much in one of its recent decisions. Under the principle of the general duty to mitigate (i.e. everybody must act in such a manner as to prevent loss) the Supreme Court considers it necessary to understand that parties negotiating a contract are obliged to notify one another of any circumstances that might be significant for the other negotiating party and that would constitute a risk to the other party.

Such circumstances include, in particular, information that, if made known to the negotiating party, would cause such party to refrain from entering into the contract. The very fact that the relevant party provided insufficient information that was significant for concluding the contract constitutes, according to the Supreme Court, a breach of its legal obligation.

In the future, the obligation to provide information before concluding a contract will be expressly stipulated in the new Civil Code, which provides that “in negotiations concerning the conclusion of a contract, the parties shall mutually inform one another of all factual and legal circumstances of which they are or must have been aware, so that each party may be sure of the possibility of entering into a valid contract and that its intention to enter into the contract is evident to each of the parties”.

Nevertheless even toady, if you are entering into a contract you must provide the counterparty with all necessary, undistorted information that, to the best of your belief and knowledge, is significant for deciding on whether to enter into the contract. If you fail to do so, the contractual party may successfully sue you for compensation for damages if he entered into the contract on the basis of incomplete, untrue or distorted information and if his intentions in concluding the contract were not made sufficiently clear.