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News October 2024: about the value of limitation of liability clauses against third parties in a contract (whether international or not)

News October 2024: about the value of limitation of liability clauses against third parties in a contract (whether international or not)

 

 

 

 

  • Reminder:

Since both its former decisions, Bootshop (6 October 2006) and Sucrerie de bois rouge  (13 January 2020, 17-19.963), the French Supreme Court (Cour de cassation) has acknowledged that a third party to a contract may, on the basis of liability in tort: 

-  raise a contractual breach against a party to a contract and seek for an indemnification…

- ... provided that a causal link is established between said breach by the contracting party and the damage suffered by the third party.

While confirming those principles, a new ruling by the Cour de cassation on 3 July 2024 (appeal no. 21-14.947 ) substantially undermines though third parties' claims for compensation, where limitation of liability clauses are provided in the contract to which the third party is yet not a party. 

In a nutshell and by way of illustration, let us briefly review the facts giving rise to this decision of 3 July 2024: 


- an Italian company (Aetna Group) had contracted with a French transport company (Clamageran) for the transport, handling and unloading of its machines from Italy to France. 
- as the goods entrusted to Clamageran were damaged during the performance of the contract, Aetna Group reported the loss to its Italian insurer (Itas Mutua), which indemnified it directly. 

- since Itas Mutua was then subrogated in the rights of its insured client, but had no direct contractual link with Clamageran, it sued the latter (first on the basis of contractual liability and then in tort) for damages of 100,000 euros, claiming that Clamageran had breached the contract. 

- In its defense, Clamageran raised the limitation of liability clauses set forth in the contract, objecting to Itas Mutua's claim for damages.

Decision of the Cour de Cassation: while the Paris Court of Appeal ruled that the limitation of liability clauses were unenforceable towards the third-party insurer, the Cour de Cassation censured the appeal judgment, probably for the implicit purposes of granting a form of “legal safety” to the contract. 


Here is the motivation supporting the French Supreme Court’s decision: ‘in order not to deceive the expectations of the debtor who undertook the contract in consideration of its general economy, and in order to prevent the third party who invokes the contract from getting  a more advantageous position than that of the creditor itself, a third party to a contract who raises, on the basis of tort liability, a breach of contract which has caused damage may still be objected the conditions and limits of liability which apply between the contracting parties’.

It is rather difficult to say what the referring Court of Appeal will decide thereafter, but the Italian insurer's claims for compensation against Clamageran are likely to be considerably weakened. 

  • Main Take-aways of such decision:

The main interest of this decision is to highlight, from a new angle, the value of limitation of liability clauses in contracts, either of an international or domestic dimension. 

We are already well aware of the value of limitation of liability clauses between co-contractors, the validity of which is perfectly acceptable (even if their effectiveness may in fact be restricted - even between professionals - particularly if they deprive the essential obligation of the contract of its substance or create a significant imbalance). 

But this decision of 3 July 2024 also has the merit of underlining the importance of such provisions towards third parties. 

In the absence of such protective clauses, the liability of the defaulting contractor may be incurred not only by his co-contractor but also by a third party to the contract who has suffered damage as a direct result of the contractual breach, without any limit or capped amount, whatever the basis of its action may be. Indeed, the financial stakes for the contracting party being sued can be substantial if it has to compensate its contracting party as well as a third party, both of them having suffered distinct damage but potentially resulting from the same contractual breach.

To speak colloquially, since this decision of 3 July 2024, a third party is now ‘in the same boat’ as the co-contractor, or even the sub-contractor in a chain of contracts, and may be subject to the same limitations and exclusions as all the parties to the contract. 
Such limitation clauses still need to be properly drafted, in the light of the principles derived from case law, so that they can be fully effective in the event of a dispute.

In any case, as the Cour de cassation pointed out again very recently (in a judgment of 26 June 2024 - appeal no. 23-14.306), the application of a limitation of liability clause can always be set aside in case of gross negligence, which can be characterized - without having to be intentional - in the event of an serious material breach that could be regarded as fraud or demonstrating the debtor's inability to perform the contractual obligation it undertook  though. 

Similarly, the third party remains free to bring a legal action grounded on ‘pure’ liability in tort, without raising any breach of contract but by demonstrating that the required elements for liability in tort are met. 

Following this decision, it will therefore be up to the third-party plaintiff to examine strategically, and on a case-by-case basis, the best litigation approach and the most appropriate basis for bringing up an action, taking into account the one-sole liability rule. 

For its part, the defendant should make a wise use of the ‘shield’ of limitation of liability clauses. 

  • Practical tips :

In the light of this ruling by the Cour de cassation, it is highly recommended that limitation of liability clauses be included in B2B contracts, whether international or domestic, so as to protect the professional against contractual or tortious liability on the part of either its co-contractor or a third party (such as an insurer, for example). 


The content and form of this type of liability provisions require special expertise based on knowledge of the applicable laws and relevant case law, to ensure that they are valid and fully effective. 


 

Sarah Temple-Boyer                                                                                            Camille Morel

Avocat                                                                                                                 Legal trainee

Publié le 30/09/2024