The document that causes the most expensive surprises in Montenegrin deals is the one everyone thought did not matter: the letter of intent, the term sheet, the heads of terms, the "memorandum of understanding" signed to open a data room or to reserve a site. Foreign groups treat these as non-binding by definition. Montenegrin law does not. The Law on Obligations makes a contract exist as soon as the parties agree on its essential elements, without any form unless the law prescribes one, and fills the secondary points itself; it makes a party that breaks off negotiations without a justified reason, after leading the other to expect a contract, liable for the loss; it makes information exchanged in negotiations confidential without a clause; it gives a preliminary contract that contains the essential elements the force of a court order to conclude the main contract; and it attaches its own rules to the earnest money that changes hands at signing. I review these documents before they are signed because afterwards there is often nothing left to review, only a claim. This page sets out the rules from the statute and the drafting that keeps a letter of intent non-binding, or makes it binding on purpose.
Sources, checked 11 September 2026. Law on Obligations (Official Gazette of Montenegro 47/08, 4/11, 22/17, 123/24 and 94/26), Articles 19, 23, 25, 29, 30, 36 to 38, 40, 60, 75 to 79 and 86; Companies Act (90/25, 121/25, 44/26), Article 375; Law on Protection of Competition (46/2026), Article 63.
When a term sheet is already a contract
Article 19 of the Law on Obligations provides that a contract is concluded when the parties have agreed on its essential elements. Article 25 defines an offer as a proposal to a specified person containing all the essential elements, and provides that where the parties have agreed the essential elements and left secondary points for later, the contract is concluded and, if they do not agree the secondary points themselves, the court settles them having regard to the prior negotiations, the practice established between the parties and usage. Article 60 provides that contracts need no form unless the law prescribes one. A term sheet that names the parties, the object and the price, and that is signed or accepted by conduct under Article 34, is therefore a contract of sale, of supply or of lease under Montenegrin law unless it says clearly that it is not, and the words "subject to contract" or "non-binding" in the heading are what keep it from being one. Articles 36 to 38 add the mechanics: a reply that changes a material point, price, payment, quality, quantity, place or time of delivery or the extent of liability, is a counter-offer; a reply with immaterial changes is an acceptance unless the offeror objects at once; silence is not acceptance and a clause deeming it acceptance is void, except in a standing business relationship for specified goods; and a late acceptance is a new offer. Under Articles 29 and 30 an offer binds the offeror for the period stated, or for the time normally needed for an answer, and may be revoked only if the revocation arrives before or with the offer. The formation rules in full are on the standard terms page.
Negotiations: free to break off, at a price
Article 23 states the rule and its four exceptions. Negotiations preceding the conclusion of a contract do not bind, and either party may break them off whenever it wishes. A party that negotiated without the intention of concluding a contract is liable for the loss caused by the negotiations. A party that negotiated with the intention of concluding a contract and then abandoned that intention without a justified reason, causing the other party loss, is liable for that loss. Unless otherwise agreed, each party bears its own costs of preparing the contract and joint costs are shared equally. And a party that received confidential information in the negotiations, or was given access to it, may not, unless otherwise agreed, make it available to third parties or use it for its own interests, whether or not a contract is later concluded; liability for breach consists in compensation of the loss and the surrender of the benefit the breaching party obtained. Three consequences follow for a letter of intent. It should say what counts as a justified reason for walking away, because the statute does not; it should allocate the costs of due diligence and advisers, because the statute splits joint costs equally; and it may add to the statutory confidentiality duty but does not create it, so a group that discloses a target's data room to a competitor after the deal collapses is liable under Article 23(5) with or without a signed non-disclosure agreement.
| Instrument | Effect under Montenegrin law | Article |
|---|---|---|
| Term sheet with parties, object and price, accepted | A contract, unless expressly non-binding; secondary points filled by the court | 19, 25, 60 |
| Letter of intent marked non-binding | No contract; negotiations may be broken off, subject to liability for unjustified withdrawal and for confidentiality | 23 |
| Exclusivity, confidentiality and cost clauses in a non-binding letter | Binding as separate obligations if the letter says so | 23(4), (5) |
| Preliminary contract with the essential elements | Binding; the court orders the refusing party to conclude the main contract | 40(3), (4) |
| Preliminary contract for a contract that needs a form | Valid only in that form | 40(2) |
| Action to compel the main contract | Within six months of the agreed deadline, or of the time the contract should have been concluded | 40(5) |
| Changed circumstances | Preliminary contract ceases to bind | 40(6) |
| Earnest money given at signing | Contract deemed concluded; credited or returned on performance; no right to withdraw unless agreed | 75 |
| Withdrawal fee agreed | Either party may withdraw against payment until its own performance falls due, unless it has begun performing | 78, 79 |
The preliminary contract under Article 40
Article 40 defines a preliminary contract as one by which a party undertakes to conclude another, main contract later. The rules on the form of the main contract apply to the preliminary contract where the form is a condition of validity, so a preliminary contract for the sale of real estate needs the notarial form the sale itself needs. The preliminary contract binds if it contains the essential elements of the main contract. At the request of the interested party, the court orders the party that refuses to conclude the main contract to do so within a period the court sets. The conclusion of the main contract may be demanded within six months of the expiry of the period agreed for it or, where none was agreed, from the day on which the contract should have been concluded according to the nature of the transaction and the circumstances. And the preliminary contract does not bind where the circumstances have changed so much since its conclusion that it would not have been concluded had they existed at the time. The instrument is therefore stronger than the heads of terms of other systems: a document headed "letter of intent" that contains the essentials and a promise to sign is a preliminary contract, and the counterparty has six months to ask a court to make the promise good.
Earnest money and withdrawal fees
Articles 75 to 79 govern the money that changes hands at signing. Under Article 75, where one party gives the other a sum of money or fungible things at conclusion as a sign that the contract is concluded, the earnest money, the contract is deemed concluded when it is given, unless otherwise agreed; on performance it is returned or credited; and, unless otherwise agreed, the party that gave it may not withdraw by abandoning it, nor may the other withdraw by returning double, so that earnest money by itself is proof of the contract, not a way out of it. Under Article 76, where the party that gave the earnest money is responsible for non-performance, the other may demand performance if still possible, or damages with the earnest money credited or returned, or keep the earnest money; where the receiving party is responsible, the giver may demand performance, or damages and the return of the earnest money, or double the earnest money; damages for delay are added where performance is demanded; and the court may reduce excessive earnest money at the interested party's request. Under Article 77 partial performance prevents the creditor from keeping the earnest money outright. Under Article 78 the parties may agree a withdrawal fee that entitles one or both to withdraw by paying it; the party that declares withdrawal can no longer demand performance, must pay the fee at the same time, may withdraw until the deadline for its own performance unless a shorter period was agreed, and loses the right once it begins performing or accepting performance. Under Article 79, where a right to withdraw is agreed together with earnest money, the earnest money serves as the withdrawal fee: the giver who withdraws loses it, the receiver who withdraws returns double. A deposit paid on a letter of intent is therefore either earnest money that proves a concluded contract, or a withdrawal fee that prices the exit, and the document must say which.
Shares, real estate and merger control
A letter of intent for shares in a limited liability company cannot bypass the other members: Article 375 of the Companies Act requires the pre-emption offer to contain the essential elements of the transfer, an address for acceptance and a period, failing which the offer is treated as not made, and a transfer that ignores the pre-emption right can be annulled within six months of its registration, on the asset and share deals page. A preliminary contract for real estate takes the notarial form under Article 40(2), and a power of attorney to sign it takes the same form under Article 86 of the Law on Obligations. And under Article 63 of the Law on Protection of Competition of April 2026, a request for approval of a concentration may be filed as soon as the parties show a serious intention to conclude the contract by signing a letter of intent, which lets a buyer start the clearance clock before the purchase agreement is signed. Who may sign the letter for each side, and whether a regional manager's signature binds the company, is set out on the signing authority page.
Drafting a letter of intent that stays non-binding
State in the body, not only the heading, that the document creates no obligation to conclude any contract and that no contract exists until a written agreement is signed by the authorised representatives of both parties, in the form the law requires. Describe the commercial terms as the basis for negotiation, not as agreed terms, so that Articles 19 and 25 are not met. Make the clauses that are meant to bind, exclusivity, confidentiality, costs and governing law, expressly binding, and say that the rest is not. Set out what each party may treat as a justified reason for ending the negotiations, since Article 23(3) attaches liability to withdrawal without one, and allocate the costs, since Article 23(4) otherwise splits joint costs. Do not take a deposit, or if the commercial side insists, call it a withdrawal fee under Article 78 and say so. And keep the document out of the notarial form, since a notarised letter with the essential elements is the strongest evidence that Article 40 was meant.
Drafting a preliminary contract that binds
State the essential elements of the main contract, the parties, the object and the price, and the period for conclusion, because Article 40(3) and (5) turn on them. Use the form of the main contract where that form is a validity condition. Say whether earnest money is given and whether it also serves as a withdrawal fee, because Articles 75 and 79 give opposite results. Add the conditions on which the obligation to conclude depends, such as clearance, financing or due diligence, so that Article 40(6) is not the only way out. And attach the draft of the main contract, so that the court's order under Article 40(4) has a text to order.
When the document is tested
A dispute over a letter of intent is decided on three questions: whether the document contained the essential elements and was accepted, under Articles 19, 25 and 34; whether the party that walked away had a justified reason and what the other spent in reliance, under Article 23; and whether the money paid was earnest money or a withdrawal fee, under Articles 75 to 79. A preliminary contract is enforced by the action of Article 40(4) within the six months of Article 40(5). Penalties written into such documents follow the rules on the penalty clauses page, and the legal function these pages belong to is described on the outsourced legal department page.
Whose side we are on, and how we are paid
The counterparty's lawyer drafted the letter of intent with the essential elements in it and the word "non-binding" only in the heading. The broker asked for a deposit to show good faith and did not say what it was. The regional manager signed to open the data room and did not read Article 23. None of them is paid to tell you, before the signature, that the letter is a contract, that the deposit proves it, or that walking away from a negotiation you led the other side to rely on has a price.
We take no commission or referral fee from brokers, agents or counterparties, in any form, on any file. The fee you pay us is our only income from your matter, and it does not depend on whether the deal proceeds. Because our position does not move with the outcome, telling a buyer that its letter of intent binds it, or a seller that it is free to walk, costs us nothing to say.
One boundary, stated plainly. We are lawyers, not licensed investment advisers and not brokers. We do not decide whether the deal is worth doing. What we protect is the Montenegrin legal position: a document that binds exactly as much as you intended, a negotiation you can leave without a claim, information that stays confidential, and money at signing that means what you meant.
Before the next letter is signed
Send us the draft letter of intent, term sheet or preliminary contract, the correspondence that led to it and any deposit terms. We will tell you what it binds you to under Montenegrin law, what it exposes you to if you walk away, and what to change before signing. Our corporate work in Montenegro is described on the Montenegro lawyer page.
What this page does not settle
Option agreements, conditional contracts, agency and brokerage agreements, the notarial procedure for real estate preliminary contracts, the treatment of deposits held by agents, letters of intent governed by foreign law, and the conduct of litigation are separate subjects. Whether a reason for breaking off negotiations was justified is decided by the court on the facts.
