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Limiting liability under your contract

Jason Rix

Last month, a group of us (Erwan Poisson, Joost Everaert, Julie Metois, James Freeman and I) gave some training on limiting liability in commercial contracts. So far so unsurprising. The sting in tail was that we were covering the topic under Belgian, French and English law. This served to highlight some legal and cultural differences which we thought worth sharing. To highlight them we have contrasted the English and French law positions.

  1. Under English contract law, the words used and the clarity of the drafting are probably what matter most. Pre-contractual negotiations and post contractual behaviour are not relevant to matters of interpretation (though they can be to misrepresentation, rectification, variation and estoppel). There is a broad degree of freedom on what one business can agree with another as long as the intent is clear and the parties are both professionally advised and of equal bargaining power (the Transocean decision is a good example of this). There are however some fetters: for example, the penalty rule on liquidated damages provisions and the Unfair Contract Terms Act 1977 on unreasonably excluding liability for negligence. There are also some “banana skins”: for example, the failure to appreciate the practical difference between direct loss and consequential loss coupled with the ease with which a long list of exclusions e.g. “loss of profit, loss of use, loss of production or any other indirect or consequential damage for any reason whatsoever” can get you into trouble. There are pros and cons to defining terms such as “gross negligence” and “wilful misconduct”. Finally, indemnities are a matter of interpretation like any other provision of a contract; the mere deployment of words like “hold harmless” or “indemnify” will not of themselves be determinative.
  2. In France, liability clauses are deemed valid except in specific situations.  For example for reasons of public policy (ordre public) or, since 1 October 2016, where there is said to be significant imbalance (déséquilibre significatif) between the parties to standard contracts). On the law as it stands, and interestingly from a common law perspective, contractual penalties are permitted as a type of liquidated damages clause (clause pénale). However, French courts have the power to review the clause and reduce (or increase) the amount of damages awarded under the liquidated damages clause, if this amount is considered to be manifestly disproportionate. There are currently on-going discussions to reform civil liability.  According to the last draft bill of law circulated by the French Ministry of Justice, this reform should not impact these principles. However, the draft suggests the introduction of a civil fine (amende civile), of a punitive nature which, currently, would be prohibited.

 

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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