Taking counsel: Preliminary or master agreement?

  • 2006-12-13
  • by Sandra Bliuvaite
Under current market conditions, concluding a sale-purchase agreement, particularly the sale-purchase of real estate, usually involves negotiations. If negotiations are long-lasting and complex, parties seek to record previously reached results of the negotiations in order to secure their rights and interests. In Lithuania, it is quite common to conclude different kinds of precontractual documents for these purposes such as preliminary sale-purchase agreements.

Preliminary agreements were introduced in Lithuania in the Civil Code of 2000. Until recently, a rather uniform concept of a preliminary agreement had been formed by Lithuanian jurisprudence and case law. Therefore, market players could both assess the possible legal consequences of the conclusion and any performance and breach of preliminary agreements.

The Lithuanian courts considered a preliminary agreement as a preparatory arrangement to conclude another (master) agreement in the future under the conditions negotiated in the preliminary agreement. Consequently, it was concluded that the purpose of a preliminary agreement is to agree on the conditions for the conclusion of a master agreement.

Typical actions in a master agreement may not be the subject of a preliminary agreement. For example, under a preliminary sale-purchase agreement parties should not make any payments or transfer property. Otherwise the court would consider that the parties had concluded and performed a master agreement rather than a preliminary one. If a buyer under a preliminary agreement makes a down payment and a seller accepts the payment as well as takes actions to purchase a plot of land for sale, though afterwards the seller refuses to sell this land because of an increase in market prices, the court would recognize that a master sale-purchase agreement had been concluded and the plot of land should be transferred to the buyer.

However, the Supreme Court of Lithuania recently revised the interpretation of a preliminary agreement a ruling on Nov. 6, 2006.
The court resolved that the fact that the parties of a preliminary agreement performed actions that are typical to the performance of a master agreement does not always mean that a master agreement had been concluded. In the Supreme Court's opinion, there might be cases when parties had clearly expressed their will to consider the actions applicable to a master agreement as conditions of a preliminary agreement itself (e.g., to transfer property for the buyer's use in order to evaluate its quality). Therefore, the performance of such actions can not be considered as the conclusion of a master agreement.

Moreover, though the Supreme Court reconfirmed the previous case law that one does not make monetary payments under a preliminary agreement, the court emphasized that such a conclusion is not absolute. The freedom of contract principle allows parties to agree on any conditions that do not contradict the mandatory provisions of law, public order or good morals. Consequently, an agreement on the transfer of money before the conclusion of a master agreement is possible and does not mean the conclusion of a master sale-purchase agreement. Money transferred under a preliminary agreement could be considered as security for the discharge of an obligation (a fine or liquidated damages). If such a master agreement is concluded, the money transferred is in principle considered as an advance payment.

Under the previous case law, a buyer who had paid an advance expected to be protected against the seller acting in bad faith and to become the owner of the agreed property. However, as a result of this fundamental change in the interpretation of a preliminary agreement, even if the agreed property price is paid in full under a preliminary agreement, it is not sufficient ground to claim the ownership of the property.

Sandra Bliuvaite is associate advocate of the law partnership Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms include Teder, Glikman & Parterid in Tallinn and Kronbergs & Cukste in Latvia, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.