NEWSLETTERS

Promissory Contract

The Portuguese Civil Code establishes the promissory contract concept which is set out in Article 410 of that legislation.
In the initial phase the parties define the terms of the final contract being descibed as promissory purchaser and vendor with the objective of signing the contract in the future.

In this phase, a number of rights and duties enter into their power.

The core of the promissory contract is the bilateral “promise” itself which in the case of purchase and sale of real estate, is the promise by the vendor to sell, and of the prospective purchaser to buy which is defined according to the terms of Article 410 and following clauses in the Civil Code. In this way each party gives a promise of the completion of the future deal.

ARTICLE 410º (Applicable regime) 1. Within the convention under which someone is committed to complete a certain contract, the legal terms regarding the promised contract are applicable, with the exception of those regarding form and those that, by their very reason, may not be considered extended to the promissory contract. 2. However the promise regarding the completion of a contract for which the law demands a document, whether officially authenticated, or private, will only be valid if it is a document signed by the party that is making the commitment or by both, dependent on whether the promissory contract is unilateral or bilateral. 3. In the case of a promise regarding the completion of a sales contract of transmission or constitution of a land right over a building, or autonomous fraction, already built, under construction or to be constructed, the document referred in the previous clause must be certified in front of a Notary by the signatures of the promissory party or parties, and the certification by the Notary, of the existence of the permit of use or construction; however, the party that promised to transmit or to constitute the right can only invoke the omission of such requirements when this has been done with intent by the other part.

Portuguese legislation accepts the signing of a promissory contract the objective of which is the transfer of an asset sometime in the defined future. Therefore, and in the case of the purchase and sale of real estate assets, it is possible to celebrate a promissory contract in respect of the sale of real estate that is not fully completed (still in construction or even with no physical existence at the time of signature of the contract).

The law establishes that the signature of the promissory contract should have the certification of the parties’ signatures before a Notary, at the same time producing the habitation permit or even the construction permit according to each situation. Nowadays we can argue the requirements of number 3 in Article 410 as it specifies the Notary as the entity to make the certification of the signatures. Following recent changes that can now also be done by Lawyers and Solicitors under the terms of the Law-Decree 76-A/2006, of the 29th March 2006.

The violation of this obligation (the certification of signatures) was introduced in an alteration to the Civil Code in 1986 in such a way to protect a purchaser from falling into purchases that may involve illegal constructions. However, the legislator did not establish the consequences of such an omission which gave rise to differing legal opinion. Between being void and annulled, some authors, such as Dr. Pires de Lima and Dr.Antunes Varela, hold the first option as true as a consequence of article 220.º of the Civil Code, being then the contract void and not producing any effects.

The promissory contract is only a contract, producing effect only between the parties. Nonetheless, in such case as the transmission of real estate assets, the law protects this as it values this type of assets in a particular manner, providing extra protection of the asset throughout the registration of the promissory contract (article 413.º). Therefore, the parties or party, may register the promissory contract of purchase and sale of real estate assets with the competent land office registration. This registration gives an effective right to the obligation assumed in the contract, which is to say that is it known to third parties – being, third parties to the deal, who cannot declare that they did not know the deal as it registered and therefore is public knowledge.

Normally, the signature of the promissory contract involves payment of a deposit – actually the law states that any amount delivered with or during the execution of the contract, is presumed (subject to proof in the contrary) as a DEPOSIT even if it was not designated as such in the terms of the contract.

ARTICLE 441º (Promissory contract of purchase and sale) In the promissory contract of purchase and sale it is presumed as a deposit any amount delivered by the promissory purchaser to the promissory buyer, even though it is intended as anticipation or beginning of the price payment.

When signing the contracts, the parties assume that they will, in the future, transmit that asset. From then onwards, the delay or the non fulfilllment of the contract will have the consequences defined by law, and the payment of the deposit will establish the applicable regime in the case of breach of the contract.

Therefore, the breach of the contract by the vendor, will open a range of options to the purchaser as it is in the terms of Number 2 of Article 442 of the Civil Code. If the breaching party is the purchaser, then the vendor will have the right to retain any amount received as his own. As an option to the choices presented by Number 2, the non breaching part may chose to insist on specific performance under the terms of Article 830 of the same Code.

ARTICLE 442º (Deposit) 1. Whenever there is a deposit, the thing delivered must be allocated in the due instalment, or returned when the allocation is not possible. 2. Whosoever, having made the deposit, ceases to fulfilll their obligation due to their own fault, then the other party has the right to retain the thing delivered; if the non fulfillment is due to default by the receiving party, then the depositor has the right to demand double of the amount paid, or, if there was delivery of the asset, to which the promised contract refers, its value, or the one of the right to transmit or to be constituted upon that asset, objectively determined on the date of the non fulfillment of the promise, with the deduction of the agreed price, being still returned the deposit and the part of the price already paid. 3. In any case above mentioned, the party that did not cause the non fulfilllment can, instead, request the specific performance of the contract under the terms of article 830º; if the non breaching party chooses the increase of the value of the asset or of the right as per the above clause, the other party can opt to oppose the execution of that demand, offering instead to fulfill the promise, to the exception of article 808.º 4. In the absence of alternative agreement, there will be no possibility, through the non fulfillment of the contract, of the right to any other indemnification, in such cases as the loss of the deposit or of the payment of double the deposit, or the increase of the value of the asset or of the right at the time of the non fulfillment.

The promissory contract must define certain elements as for example:
A)	Full identification of the parties;
B)	Identification of the object of the contract;
C)	Price and amount of the deposit;
D)	Maximum deadline for the execution of the definitive contract (which in the case of purchase and sale of real estate will be the deed of purchase and sale celebrated at the Notary).