NDAs in real estate transactions: contractual penalty or liability under general rules?

Most transactions in the market for multifamily development land begin with the signing of a non-disclosure agreement (NDA). The seller wants to protect information about the property and the terms of sale; the buyer, its investment plans. It is usually a short document, but one provision can stall talks for weeks: the amount of the contractual penalty. We explain how to approach an NDA so that it genuinely protects the parties' interests rather than blocking the transaction at the very start.

Why an NDA in a land transaction

In the course of selling a plot, the parties exchange information whose disclosure could harm them: the location and details of the property, price expectations, capacity analyses, architectural concepts, due diligence results and sometimes even the very fact that talks are taking place. For the seller, disclosure that a plot is for sale can weaken its negotiating position. For the developer, disclosure of its acquisition plans can attract competition.

The contractual penalty – how it works

A contractual penalty (kara umowna, Article 483 of the Polish Civil Code) is a predetermined amount that a party will pay if it breaches an obligation. Its main advantage for the entitled party is that it does not have to prove the amount of damage – it is enough to prove the breach. This makes claims easier to pursue, because in the case of a breach of confidentiality the damage is usually hard to prove and quantify.

Non-monetary obligations only

The key limitation follows directly from Article 483 § 1 of the Civil Code: a contractual penalty may be stipulated only for non-performance or improper performance of a non-monetary obligation. A provision imposing a penalty for failing to pay, or paying late, a specified amount is invalid (Article 58 of the Civil Code). Late payment of a monetary obligation gives rise to interest, not a contractual penalty.

The typical obligations in an NDA – keeping information confidential, not using it for other purposes, returning or destroying documents, refraining from dealing with the other party without involving the intermediary – are non-monetary and may therefore be secured by a contractual penalty. The problem arises when the clause is badly drafted: for example, instead of a penalty for breaching the ban on circumventing the intermediary, it provides for an "obligation to pay the fee" or a penalty for non-payment of commission. In court, this is one of the first defences raised by the defendant – if the court finds that the penalty in substance secures a monetary obligation, the provision will be invalid and the entitled party will have to prove its damage under the general rules.

The clause should therefore clearly state which non-monetary obligation the penalty relates to and what conduct constitutes a breach.

A contractual penalty has other limitations too:

• it can be reduced by the court if it is grossly excessive or the obligation has been largely performed (Article 484 § 2 of the Civil Code),
• as a rule, it excludes claiming damages exceeding the penalty, unless the contract expressly allows it,
• a high penalty deters not only those who breach it, but also parties who are only considering signing the NDA.

Liability under general rules

The alternative is to drop the contractual penalty and leave liability to the general rules (Article 471 of the Civil Code). A party that breaches confidentiality is then liable for the damage caused to the other party – in full, but only if the injured party proves the damage, its amount and the causal link with the breach.

This solution is usually more readily accepted by both sides at an early stage of talks, when it is not yet known whether the transaction will go ahead. In our practice, it is a common compromise in land transactions when one party proposes a penalty disproportionate to the scale of the talks.

Penalty or general rules – how to choose

There is no single right answer. Consider:

1. The value and sensitivity of the information. In a large transaction with an extensive set of documents, a contractual penalty may be justified.
2. The stage of talks. At the preliminary stage, when basic information about the plot is exchanged, extensive sanctions are usually disproportionate.
3. A proportionate amount. The penalty should reflect the real risk. Amounts of several hundred thousand zlotys (PLN) per breach in an NDA at the offer stage often lead to protracted negotiations.
4. Reciprocity. If both parties share confidential information, the sanctions should be symmetrical.

NDA provisions that matter in practice

The dispute over the contractual penalty often overshadows other, equally important elements of the agreement:

• The definition of confidential information and exclusions – information that is publicly available, previously known, obtained independently or disclosed at the request of an authority should not be covered by confidentiality.
• Permitted recipients – board members, employees, legal and financial advisers, financing banks. A party should be able to share information with the people involved in analysing the transaction.
• Duration – usually from one to several years. Confidentiality without a time limit is often hard to accept.
• Return or destruction of documents after talks end.
• Non-circumvention – in transactions run by an adviser, the parties undertake not to negotiate while bypassing the intermediary who introduced them. If this ban is secured by a contractual penalty, the penalty should be linked to the breach of the ban (a non-monetary obligation), not to non-payment of the intermediary's fee.
• No obligation to transact – the NDA should not be read as an obligation to sell or buy.

Frequently asked questions

This article does not constitute legal advice. The content of an NDA in a specific transaction should be discussed with a lawyer.