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Legal News : Persistence of the limitation of liability clauses at contract termination – Com, 7 February 2018 n°16-20.352

Persistence of the limitation of liability clauses at contract termination – Com, 7 February 2018 n°16-20.352

The Commercial Chamber of the French Supreme Court outlines in its judgement of 7 February 2018 the “fate” of the limitation of liability clauses in the case of contract termination.

In this present case, a service contract had been concluded between the operator of a power plant and a company which had to repair leaks in the boilers under this contract.

As the leaks persisted despite the company’s intervention, the plant operator sued the company in order to have the contract terminated, as well as to obtain compensation for material damage and operating losses. To oppose this claim, the contractor relied on a contractual limitation of liability clause.

The Court of appeal granted the claim for contract termination and refused to apply the limitation of liability clause because of the retroactive effect of such contract termination.

The Supreme Court overturned the appeal with a very clear reasoning stating that “in the event of termination for non-performance, the limitation of liability clauses shall remain applicable to the parties in order to remedy the consequences of such non-performance.”

This reasoning seems surprising in that the parties should find themselves in the same situation as before signing the contract considering the retroactive effect of the contract termination.

The Supreme Court has already validated the persistence of a contractual clause despite the termination of the contract, when these clauses relate to disputes that may arise from the contract, such as arbitration clauses (Civ 1ère, 6 May 2003, n°01-01.291) or penalty clauses (Com, 22 March 2011 n°09-16.66).

Just as the survival of penal clauses after termination of the contract is accepted, the survival of limiting clauses for compensation follows the same logic. In both cases, these are clauses which deal with the consequences of non-performance. Penalty clauses are favourable for the creditor of the obligation, limitation clauses for reparation are favourable for the debtor (provided that the non-performance is not a gross fault). By confirming the validity of this type of clauses after contract termination the Supreme Court restores the contractual balance.

It is legitimate to wonder why this position which was given under the rules existing prior to the new provisions of the civil code is maintained.

The new article 1230 of the French Civil Code provides Termination does not affect contract terms relating to dispute-resolution, nor those intended to take effect even in the case of termination, such as confidentiality or non-competition clauses.” The wording of this text is vague, mentioning confidentiality and non-competition clauses does not equal an exhaustive list. 

Are the limitation clauses for reparation covered by this article? Article 1230 mentions the clauses which intend to be effective even in the case of contract termination. It is reasonable to think that the clauses which provide for non-performance (which can lead to a contract termination in the case of serious non-performance) are part of the category of clauses intended to be effective even in case of contract termination.

The vague wording of article 1230 suggests that the position adopted by the Supreme Court regarding the clauses concerning the effects of non-performance in the event of termination will be maintained. This logic follows the same lines as the new provisions of the French civil code: limitation of the judge’s involvement in the contract.

Jessika Da Ponte                                                                                                      11 June 2018