Contractual Liability Clauses under French law

Vol. 28 No. 3

By

Salli Anne Swartz is Chair of the American Bar Association Section of International Law and is a partner with Phillips Giraud Naud & Swartz in Paris, France.

 

Negotiating liability clauses governed by French law can be compared to drinking Coca-Cola with a meal of foie gras: It may give you indigestion, but you will survive. This article will address the differences between damage clause issues under the U.S. and French legal systems and provide the American attorney with responses to the most frequently asked questions concerning damage clause negotiations. It also includes a list of helpful hints on negotiating such clauses successfully.

 

The Concept of Damages

Each of the civil and common law systems has established distinct methodologies for redressing injury resulting from the failure of one party to meet a contractual commitment to another party.

American common law damages. In U.S. common law, damages in the commercial context are designed to place the party in the position he or she would have been in had the breach not occurred. (The reader should carefully evaluate his or her cause of action because this “benefit of the bargain” analysis can result in a different remedy than a tort claim, which would put a party in the position he or she would have been in had the tort not occurred.) Contractual damages, therefore, attempt to provide the non-breaching party with the benefit of the bargain. To affect this goal, common law jurisprudence has developed a litany of terms and definitions covering a broad spectrum of degrees of causation.

Generally, damages can be viewed as (1) actual or compensatory, (2) consequential, (3) special, or (4) general. Punitive damages are also available in the U.S. system, but these damages designed to punish intentional or grossly negligent behavior are largely restricted to the tort context.

Consequential damages are those that do not flow directly and immediately from the act of the party but only from some of the consequences or results of such act. (In order to simplify this discussion, I will base this analysis on the definitions found in Black’s Law Dictionary, sixth edition, 1990.)

Special damages are those that are the natural but not necessarily the inevitable result of the wrongful act.

Actual or compensatory damages are those that are real, substantial, and just and are intended to compensate the complainant for actual and real loss or injury. They are intended to compensate the injured party for the injury sustained and nothing more. Actual/compensatory damages include both general and special damages.

General damages are those that are the immediate, direct, and proximate result of or that necessarily result or do in fact result from the injury or wrong (e.g., the breach of contract or obligation).

French civil law damages. The French Civil Code clearly sets forth the type and quantum of damages that can be recovered. With regard to contractual claims, Articles 1142, 1147, 1149, 1150, and 1151 of the French Civil Code read together permit plaintiffs to recover damages only when such damages are directly caused by a breach of or delay in the performance of defendant’s contractual obligations provided that (1) the breach or delay is not owing to an outside factor not attributable to the defendant and (2) the defendant did not act in bad faith.

To be recoverable, the plaintiff must prove that the damages incurred are the immediate and direct consequence of the breach by the defendant of the obligation in question. This excludes indirect damages. The amount of damages awarded will not generally exceed the amount of proved loss. This is the major reason why punitive damages are not permitted under French law.

With regard to tort claims, Articles 1382, 1383, and 1384 read together provide that a person who causes harm to a third party by his or her fault, negligence, or imprudence is responsible for remedying the harm. In order to recover damages, the plaintiff must prove a direct cause and effect between the fault and the act of negligence or imprudence and the harm that occurred.

Article 1384 defines the term “person” as not only the person who caused the fault or committed the acts of negligence or imprudence but also those persons under the control or responsibility of such persons. This would include, for example, teachers for their students, principals for their agents, and employers for their employees.

 

Contractually Excluding Categories of Damages

Cross-border negotiations between U.S. and French parties often hit a snag as the parties attempt to reconcile their different viewpoints regarding exclusionary clauses. The company usually wants language ensuring that it does not have to pay for damages that are alleged but not provable or that are not a direct result of the breach. It wants to avoid damages that are intended to punish (punitive damages), but it usually does not insist on a total waiver of those damages that would otherwise make the opposing party whole. As a result, the typical U.S. clause excludes all special, punitive incidental, indirect, or consequential damages, whether for breach of contract, breach of warranty, tort, or otherwise.

On the other hand, the French company usually wants to obtain language ensuring that it can claim and recover those damages that are sufficient to make it whole in the event of prejudice incurred owing to a contractual breach (i.e., what U.S. attorneys refer to as actual or compensatory damages). Thus, the typical French liability clause, if one exists at all, will either direct the parties to the French Civil Code generally for resolution or will specify that damages shall include all direct damages.

Negotiation blockage often occurs rather quickly as French and U.S. parties get stuck on the terms and do not look at the intentions and needs behind the words. However, if one looks behind the words, reality is somewhat less complicated than you might think—there is more common ground than the words belie.

 

Direct Damages and Compensatory Damages

Direct damages recoverable under French law will cover what U.S. attorneys refer to as actual, consequential, and special damages and can include intangible damages, such as financial loss.

Article 1149 of the French Civil Code, which applies to contract claims, specifically states that damages can include lost profit; Article 1150 limits the recovery of financial loss to that which was foreseeable or could have been foreseeable at the time the contract was concluded, but only if the damages were not caused by the defendant’s gross negligence or intentional fault.

Damages for tort claims can include amounts attributed to “moral prejudice.” Judges will award amounts for “moral prejudice” on a case-by-case basis. Prejudice such as loss of opportunity, loss of or damage to reputation, loss of the quality of life (i.e., resulting from a physical or mental handicap), and loss of life are often evaluated by an independent expert appointed by the judge, who usually accepts the expert’s evaluation.

The key to successful negotiations is to remember that direct damages under French law can include financial loss claims. As a result, such claims should to the extent possible be excluded, limited, and/or capped.

 

Further Limitations on Damages

Most parties try to limit their respective liability (of whatever nature) to the amount of the price of the goods or services supplied or rendered or to some stated monetary amount (liquidated damages).

Under French law, it is perfectly admissible to contractually cap damages. When capped at a specific amount, the clause is referred to as a clause penal. Article 1152 of the French Civil Code specifically authorizes the judge to reduce or increase the amount if he or she deems the amount manifestly excessive or insufficient.

Because there are no juries in French civil and commercial courts, as a practical matter the quantum of damages under both contractual and tortuous civil claims in France are fixed by the judge, who will often appoint a sole expert to evaluate the amount of damages. As a consequence of the conservative nature of this system, the damage awards tends to be significantly less than the amounts awarded by U.S. juries, even after review by appellate courts.

 

Impact of the Court Structure on Damages

Most U.S. attorneys blanch at the thought of having French law and the French courts govern a contract. There are several reasons supporting this reaction, but one of the most important is the feeling that French litigation is outside of the American party’s control. For example, in France there is no or limited discovery, few, if any, opportunities for witness testimony, and no ability to cross-examine. Moreover, the French judge’s dual role as arbitrator and fact finder can be viewed with suspicion. Finally, as noted above, the general principle that only one court-appointed independent expert is called on to evaluate the quantum of damage can lead U.S. lawyers to feel that they have been denied their full entitlement to make their case.

Although mandatory arbitration can provide a more comfortable middle ground, U.S. lawyers should not overlook the benefits that litigation in France can bring. For example, French damage awards tend to be much lower than damage awards in either the federal or state U.S. courts, even when jury trials are waived. Also, owing to the fact the discovery is very limited under French civil procedure, the process of litigating is much more rapid and less expensive than in either federal or state U.S. courts.

These differences can work to one party’s advantage or disadvantage depending on whether the client is supplying or purchasing equipment, giving or receiving representations or warranties, will be the payer or payee (think of where the assets are), and whether or not counsel believes that extended U.S. discovery and U.S. juries could, would, or should be beneficial to the case.

 

Tips for Negotiating Damage Clauses

If counsel is determined to keep any potential litigation in U.S. courts, one negotiating strategy is to describe the concept of American “long-arm” jurisdiction to the French company. Counsel can explain that under this established theory of jurisdiction, the French company could, despite its best efforts, end up in the U.S. courts anyway. Consequently, as opposed to fighting the inevitable, it may be to the French company’s advantage to accept more restrictive, protective language now.

However, if the parties have nevertheless decided to accept French law (voluntarily or otherwise), there are multiple negotiating dos and don’ts to bear in mind. Below are ten such tips:

  1. Do not immediately reject out of hand whatever language exists in the French draft if one is presented.
  2. Do not insist on language that may not be relevant if French law is going to govern the contract. Because consequential, incidental, and punitive damages do not exist under French law, there is no point insisting on this language.
  3. Do discuss your objectives by explaining which types of damages are acceptable and which types you must exclude. It is often helpful to give the French company a definition and examples of consequential, special, incidental, and punitive damages so that the other side understands why you are concerned with their exclusion. Providing the other side copies of the Black’s Law Dictionary definitions may assist in explaining the arguments.
  4. Do insist on the deletion of all references to indirect damages in all contractual documents; under French law, one can recover only direct damages.
  5. Do note that direct damages can include financial loss if such damages can be proved.
  6. Do try to negotiate for the exclusion of all types of financial or “intangible” damages, such as lost profit and damage to reputation.
  7. Do insist on a per occurrence and/or an annual cap on damages of whatever nature with a minimum claim amount so that you are assured that any claims are substantial ones.
  8. Do try to obtain the inclusion of the amount of any late payment or late delivery penalties within the cap on total damages and its deduction from any damage award.
  9. Do explain the difference between the remedies available during a warranty/guarantee period in a supply contract, and the remedies available during post-warranty periods, if relevant. Often, French companies worry that if the guarantee is a limited “repair-and-replace” guarantee, they cannot make a claim for damages after the expiration of the warranty period.
  10. Do consider walking away from the negotiating table if you are faced with an obstructive, arrogant attitude, but only after several negotiation meetings over several months. Sometimes (but not always) a show of attitude in response to a show of attitude will force the other party to escalate to a higher level or will allow you to do so, which often facilitates the resolution of some or all of the blocking points.

 

Conclusion

While there are differences between French and U.S. commercial laws and procedures, upon closer inspection, they are more similar than one might think at first glance. In negotiating exclusions of liability, both sides will benefit from understanding the context of the other side and, hopefully, recognizing that they share similar goals. 

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