Legal News: Possibility for a third party to invoke a breach of contract that caused it damage – co-contractors need to be vigilant!

Endrös-Baum Associés > News > Legal News: Possibility for a third party to invoke a breach of contract that caused it damage – co-contractors need to be vigilant!

For several years now, French case-law has adopted a particularly favorable position for third parties to a contract. In order to obtain compensation for claimed damages, a third party can simply invoke a breach of contract based on tortious liability.

Therefore, co-contractors should be vigilant and take into account the risks associated with this principle equating a breach of contract with tortious liability, especially if they are foreigners and unfamiliar with this specialty of French law. Their lawyers will be able to advise them on this matter.

What are the risks?

In 2006, the Court of Cassation asserted in its Boot shop vs. Myr’ho decision that “a third party to a contract may invoke a breach of contract based on tortious liability as soon as this breach has caused it damage”[1]. This particular principle was recently reaffirmed by the French courts in 2020: a third party to an energy supply contract is authorized to invoke the contractual non-performance of an energy supplier, namely the interruption of the energy supply, in order to obtain compensation based on tortious liability[2].

The main problem lies in the position of the third party, which is more favorable than that of the co-contractor, who is the actual victim of the contractual non-performance. As no clarification is given by the decisions of 2006 and 2020, the doctrine considers that the clauses limiting or excluding liability, while they may deprive the co-contractor of its right of recourse, are not enforceable against third parties who may therefore sue for damages in tort[3]. In view of the situation of the co-contractor, this solution seems unfair and incoherent.

Moreover, the assertion that tortious liability can be derived from a contractual breach, undermines the predictability and legal certainty of contracts and legal transactions[4]: The liable party may potentially be sued by a person with whom he has no pre-existing contractual relationship[5] and be ordered to pay damages of an indefinite amount[6].

Nevertheless, there is no systematic recognition of the co-contractor’s liability towards a third party. First of all, if the third party wishes to invoke a breach of contract, it would still have to prove that the conditions for tortious liability are met, namely the existence of a fault (contractual breach of duty), damage and a causal link between the two.

 

Secondly, not every breach of contract is to constitute a liability in tort.

 

In the past, the Court of Cassation distinguished between three types of breaches[7]:

  1. “Obligations entered into for the sole benefit of the co-contractor and from which a third party cannot derive any benefit, such as the obligation of non-competition, which in principle only benefits the creditor of that obligation”: the third party will not be able to claim damages;
  2. “This same obligation may, in certain specific cases, benefit a third party which then becomes an “anonymous third party”, as in the case submitted before the Court of Cassation [in 2006] where the lessee-manager operated his business in premises belonging to the lessor so that he could take advantage of the lessor’s failings in the maintenance of the building.“: Depending on the specific circumstances of the case, a third party may become an “anonymous third party” and claim damages;
  3. Finally, “there are obligations which, due to their subject-matter, go beyond the mere contractual issue and which, as such, are likely to be of interest to all third parties insofar as they had to suffer from their non-compliance. This is the case where there is a security obligation “: the third party may claim damages for the breach of obligations that are “likely to concern all third parties to the extend that they had been harmed by that breach”.

In the same vein, Professor Jean-Sébastien Borghetti proposes that a distinction be made in contractual breaches between “obligations arising from the contract (a violation of which, in our view, is likely to constitute a fault (breach of duty) vis-à-vis all third parties, provided that it represents an act of negligence at the same time) and the binding effect of the contract (whose mere non-compliance cannot, in our view, constitute ipso jure a source of liability toward any third party).“[8]

Finally, the civil liability reform that is currently being discussed in Parliament plans to reinstate a distinction between contractual non-performance and the event giving rise to tortious liability. But this rule still reserves the possibility of invoking a breach of contract based on contractual liability where this has caused harm to a third party, if the third party has a legitimate interest in the proper performance of a contract and cannot make any other claim for compensation for the damage suffered as a result of its improper performance. Insofar as the third party then asserts claims based on contractual liability, the conditions and limitations of liability provided for in the contract will then be enforceable against it.

Civil Liability Reform Bill, n°678, registered at the Présidence du Sénat, July 29, 2020

 

“Art. 1234 – Where contractual non-performance causes harm to a third party, the latter may claim compensation for its consequences from the debtor only on the basis of non-contractual liability, provided that the debtor proves one of the events giving rise to liability mentioned in Section 2 of Chapter II of this subtitle.

“However, a third party who has a legitimate interest in the proper performance of a contract and which cannot make any other claim for compensation for the damage suffered as a result of its improper performance, may also invoke a breach of contract on the basis of contractual liability, if it has suffered damages as a result of that breach. The conditions and limitations of liability that apply in the relationship between the contracting parties are then applicable to that third party.[9]

 

As a result, even though the principle of equivalence between a breach of contract and tortious liability implies risks for the co-contractors, these risks can be limited by contract in terms of their effect on third parties and their implication in the occurrence of the damage. In the long run, the third party’s ability to bring an action should therefore be limited by the contractual framework.

 

Application in international disputes?

In the case of international disputes with one or more foreign aspects, the Court of Cassation has recently been asked whether a third party can invoke a breach of contract by the debtor.  In this context, it is necessary to exclude actions arising from a chain of ownership transfers which will therefore be of a contractual nature.

With regard to actions in tortious liability, the central issue has been that of locating the damage suffered by the third party as a result of the debtor’s contractual breach in order to determine the applicable law and the competent court. The latest decisions have led to the application of French law and the recognition of the jurisdiction of French courts. To this end, the judge looked for the place where the damage occurred, which he identified either at the place where the defective products were manufactured and tested, or at the place where the defective products were installed and used.

Finally, the court applies the principle developed in the Myr’ho vs. Boot shop judgment to international disputes, however its interpretation, in combination with the application of EU law to determine the competent court and the applicable law, still leads to many ambiguities and legal uncertainties.

 

Juliette CAMY, 25 May 2021

[1]Court of Cassation, United Chambers, October 06, 2006, n°05-13.255, published in the bulletin

[2]Court of Cassation, United Chambers, January 13, 2020, n°05-19.963, published in the bulletin

[3] J.-S. Borghetti, “Responsabilité des contractants à l’égard des tiers : pas de pitié pour les débiteurs ! [“Contractors’ liability regarding third parties: no mercy for debtors !”] “, Rec. Dall. 2020 p. 416

[4]P. Stoffel-Munch estimated thereupon that it is a “betrayal of the contractor’s expectations”, in “La relativité de la faute contractuelle” [“Relativity of contractual default”], RDC. n°2, p. 58.

[5]This overriding principle of French law, namely contractual relativity, leads nevertheless to “prohibition for the parties to set up obligations at the expense of or for the benefit of third parties”, in G. Viney, “Confirmation de l’arrêt Myr’ho-Boot shop” [Confirmation of the Myr’ho-Boot shop decision”], RDC.2020, n°2, p. 40

[6]J.-S. Borghetti, “Responsabilité des contractants à l’égard des tiers: Boot-shop en bout de course ? “, RDC 2017

[7]https://www.courdecassation.fr/publications_26/rapport_annuel_36/rapport_2006_2284/quatrieme_partie_jurisprudence_cour_2293/responsabilite_civile_assurances_2309/responsabilite_civile_10039.html

[8]J.-S. Borghetti, obs. Sous Cass. Com., 21 oct.  2008, n°07-18487: RDC 2009, p. 506. (“Jusqu’où ira la responsabilité à l’égard des tiers du fait d’un manquement contractuel ?” [“How far will liability to third parties for a breach of contract extend?”])

[9] https://www.senat.fr/leg/ppl19-678.pdf