Why preliminary contract?

Why preliminary contract?Yes – The preliminary contract can really be considered as a basis of the final one but it’s not concluded just to bring transparency in the relations between the parties and it represents much more than a simple draft. Legally, the preliminary contract is a significant legal figure; in fact, it may be seen as insurance. The following guidelines will examine the most common cases of preliminary agreements.

1.       The preliminary contract is known in practice as a promise for conclusion of contract. It is important to remember that despite the title of the contract, its nature is determined by its terms, rather than its name. The purpose of the preliminary contract is to make a promise to conclude a final agreement in future. So the preliminary contract is essentially a legal promise.

2.       The preliminary contract can be defined as a contract with a preparatory character. There are several cases in which preliminary contracts are usually concluded but the main goal is always the same – insurance of interests. This means that the parties want to achieve security in their contractual relationship.

3.       The preliminary contract is still a contract. To have a valid preliminary contract, the parties must reach an agreement on certain terms and conditions. The contract must show in absolutely unambiguous way what both parties want to achieve, what they promise each other.

4.       Any contract contains parties’ rights and obligations. The obligation here is the conclusion of the final contract. The right here is to require such performance, i.e. signing of the final contract.

5.        Despite it is called “preliminary” this contract is completely fit to create rights and obligations. This means that although “preliminary”, this contract is still mandatory. It binds both parties and between them it has the force of law.

6.       The preliminary contract prepares the conclusion of the final contract, which means several things:

• First, the preliminary contract must not contradict the law or morality (respect between both parties).

• Second, it must contain the essential provisions of the final contract. The explicit presence of these essential provisions is a requirement for the validity of the preliminary contract.

7.       In some hypotheses specific form is required. When the conclusion of the final contract requires a notarial act or signatures verified by a notary, the preliminary contract must be in written form (because contracts may be concluded orally as well).

This requirement is made for legal certainty.

8.       The preliminary contract is a promise to perform a certain action. But it can’t directly give rise to this action. Example: preliminary contract for sale of real estate. Preliminary contract represents an obligation to sell to the buyer in a subsequent, future moment this property. The preliminary agreement does not transfer ownership of this property in any way. But it may indirectly be a basis on which the property to be transferred (see below how and why).

9.       Each party can file an application to ask the court to order the conclusion of the final contract. Mandatory preconditions here are the essential provisions, which the preliminary contract should contain, as discussed in section 6. If the preliminary contract is not entirely evidential about the intentions of the parties or it doesn’t contain the essential provisions (e.g. number or price of the property), the court could not declare a conclusion of final contract. If the preliminary contract meets the requirements, the judgment will be considered as final contract, which is concluded from the moment when the decision enters into legal force (and going back to the example above, a preliminary contract for the sale of property: If the court grants the request for the conclusion of the final contract, the judgment immediately transfers the ownership!)

10.   If I ask the court to declare a final contract and my request is granted, I have two weeks to give the other party all that is necessary, i.e. everything that I  owe the other party (e.g. the buyer owes the money, the seller – the item). Otherwise, the judgment will be annulled.

So if I want the court to rule in my favor, I must be sure that I can meet the requirements and obligation under the contract – otherwise I’ll only pay legal fees, lose my time and won’t achieve the desired result .

And in the end? Why preliminary contract? Because in an indirect way, it gives me confidence that the provisions, named in the preliminary contract will become reality. But this works both ways – therefore I must be sure that I really want it and I’m willing to fulfill of my obligations, described in the preliminary contract.

(*) The article aims to explain basic rights under Bulgarian law and it is not to be considered as a legal advisor. We strongly advise you to hire a lawyer, if you experience trouble understanding and using these rights. (*)

 

Author:

Viara Moleva

 

Translated and edited by:

Nikolay Terziev

 

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§ Law on Obligations and Contracts

art. 19 on the preliminary contract

 

§ Code of Civil Procedure

art. 362 on the announcement of the preliminary contract to be a final one

 

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