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The enforceability of a contractual liability limitation clause against a third party acting on the basis of tort liability

The enforceability of a contractual liability limitation clause against a third party acting on the basis of tort liability

Published on : 10/10/2024 10 October Oct 10 2024
Publications et Séminaires

In a recent ruling dated July 3, 2024, the French Supreme Court overturned a ruling by a court of appeal that had refused to apply to a third party the limitation of liability stipulated in a contract, considering that "a third party to a contract who invokes, on the basis of tort liability, a contractual breach that caused them harm, may be subject to the conditions and limits of liability that apply to the relations between the contracting parties" (French Supreme Court, July 3rd, 2024, No. 21-14.947).

This ruling is in direct line with previous case law of the Supreme Court, allowing third parties to a contract to invoke a contractual breach on the basis of tortious liability to seek reparation for the damage suffered as a result of such a breach. However, it now provides reassurance to contracting parties regarding the extent of their liability towards third parties.
 

The claim of a third party who suffers damage resulting from a contractual breach, brought against a contracting party on the basis of tortious liability

 
Previous case law already held that a third party could rely on a contractual breach to establish the tortious liability of a contracting party, provided that the breach caused them harm.
 
By way of exception to the principle of the privity of contracts, according to which "a contract creates obligations only between the parties" and that "third parties cannot either demand the performance of the contract or be compelled to perform it" (according to Article 1199 of the French Civil Code), the French Supreme Court, sitting in plenary session, held in the now famous Boot Shop case (Supreme Court, Oct. 6th, 2006, No. 05-13.255), that "a third party to a contract may invoke, on the basis of tortious liability, a contractual breach insofar as that breach has caused them damage." This position was reiterated in the recent Bois Rouge ruling (Supreme Court, Jan. 13th, 2020, No. 17-19.963).

Thus, while the provisions of Article 1240 (formerly Article 1382) of the French Civil Code establish that tortious liability requires the combination of damage, a causal link, and fault, the invocation by a third party to the contract of a "contractual breach" is now sufficient to demonstrate the "fault" required for the third party to obtain compensation for the breach (which causes them harm) on the basis of extra-contractual (or tortious) liability.
 
However, this 2020 ruling (criticized by the doctrine) introduced an imbalance between the creditor of the obligation and the third party, in that, under the principle of full compensation, the third party had the ability to claim reparation for the entire damage resulting from a contractual breach. Meanwhile, a contracting party invoking the same breach on the basis of contractual liability remained constrained by the contractual provisions, including any limitation of liability clauses, which clearly favoured the third party over the contracting party.
 
The Court adds that the contractual "conditions and limitations of liability" which would otherwise place the third party in a "more advantageous position ", should be enforceable against the third party
 
In this context, the July 3, 2024 decision clarifies that "In order not to frustrate the expectations of the debtor, who entered into the contract based on its overall economic balance, and to avoid placing the third party invoking the contract in a more advantageous position than that of the creditor itself", the third party invoking a contractual breach on the basis of tortious liability "may be subject to the conditions and limitations of liability that apply in the relations between the contracting parties."
 
However, uncertainty remains regarding the specific contractual clauses affected by this case law. The "conditions and limitations of liability" clearly refer to limitation of liability clauses, but what about penalty clauses or clauses related to the foreseeability of damage? A broad interpretation of "conditions and limitations of liability" suggests that these provisions could also be enforceable against third parties. Yet, according to established case law, contracting parties cannot limit tortious liability, which is a matter of public policy, and thus cannot pre-determine, for instance, within limitation of liability clauses, what will or will not apply to third parties.
 
But what about jurisdiction or applicable law clauses, the unenforceability of which against third parties would similarly place them in a more favourable position compared to the creditor of the obligation? Following the same logic, these provisions should also be enforceable against third parties. In fact, this is already the case when a direct action is brought by a sub-purchaser against the original seller (though this action is contractual in nature, even if the sub-purchaser did not sign the original contract). This can also be the case with an arbitration clause, whose binding effect may be extended to an action relating for tortious liability for negligence.
 

The contractual breach is not the only fault that a third party can invoke

 
Case law prior to the Boot Shop and Bois Rouge rulings did not entirely bar a third party from pursuing an action for harm caused by a contractual breach. However, it required the third party to demonstrate the existence of a fault "considered in itself, independently of any contractual context" (Supreme Court, Nov. 7th, 1962), understood as the violation of a general duty of care and diligence "independent” from the contract (Supreme Court, May 10, 2005, No. 02-11.759), in order to establish the tortious liability of a party.
 
This case law would regain its full significance with the July 3, 2024 ruling, which would allow a third party, on the basis of tortious liability, to:
  • Either demonstrate the existence of a fault "independent" of the contract and avoid being bound by the contractual provisions that could be enforced against them, while receiving full compensation for their damage;
  • Or invoke a contractual breach and take the risk of having certain contractual clauses enforced against them.
 
Ultimately, this ruling, handed down by the Commercial Chamber of the French Supreme Court, will likely need to be confirmed by the Civil Chamber or a mixed chamber for its scope to be definitively generalized.


What Altaïr Avocats can do for you

 
  • Drafting and negotiating commercial contracts, including limitation of liability clauses;
  • Contract audits, risk analysis of contractual obligations;
  • Assistance and advice in contentious proceedings before judicial authorities, in matters of contractual or tortious liability.

 
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