On 29 June 2010, the French Cour de cassation, the country’s highest court for private and commercial matters, applied a limitation of liability clause to the breach of an essential obligation under an agreement at arms-length, Cass. com., 29 June 2010.

Introduction

After a long battle between lower courts and the Cour de cassation, the latter has finally decided to follow the former’s opinion and put an end to the famous Chronopost case law1 which set aside limitation of liability clauses in case of breach of an essential obligation. Initially, the Chronopost case law only applied to contracts between professionals and consumers, but was gradually extended to all types of contracts.

While the Cour de cassation seemed to have been reluctant to admit the application of limitation of liability clauses, it has now remarkably decided to recognize them and to give full force and effect to the parties’ intent.

Background

The dispute before the Cour de cassation arose from a group of contracts between a Software Editor (Editor) and its Client for the license and maintenance of an Enterprise Resource Planning (ERP) software2 and related training. The Editor first supplied a provisional solution to its Client then failed to deliver the agreed software. Consequently, the Client stopped paying the installments due under the contract and the factoring company, which bought the Editor’s receivables, launched legal proceedings for payment against the Client. The Client called the Editor into the proceedings and counterclaimed that the contracts should be held void for deceit or alternatively, cancelled for contractual breach.

In 2005, the Versailles Court of Appeal restricted the scope of the Editor’s liability pursuant to the limitation of liability clause provided in the contracts. In 2007, the French Supreme Court quashed this decision on the basis of the Chronopost case law, and held that the limitation of liability clause was not applicable due to the Editor’s failure to comply with its essential obligation under the contract, i.e., to provide the agreed software to the Client.

The case then went to the Paris Court of Appeal in 2008 for determination of the Editor’s liability and subsequent damages owed to its Client. The Paris Court of Appeal rejected the Cour de cassation ruling and held, as the Versailles Court of Appeal did, that the compensation of the Client was curbed by the existence of the limitation of liability clause.

The Cour de cassation’s Decision

On 29 June 2010, the Cour de cassation put an end to this almost endless judicial story and finally agreed with the lower courts’ decision to apply the limitation of liability clause to the Client’s claim. Consequently, the Editor was ordered to pay €200,000 to its Client (i.e., the maximum amount set forth by the liability cap under the contracts) when the Client was claiming €60 million in damages.

The Client relied on two main grounds: (i) that the Editor had breached its essential obligation under the contract and was hence not allowed to raise the existence of the limitation of liability clause; and (ii) that due to this breach, the Editor had committed a gross negligence, an additional reason for setting aside the liability cap. The French Supreme Court rejected both arguments.

The Cour de cassation held that only the limitation of liability clause, which would be in conflict with the essential obligation under the contract, should be set aside. In the 29 June 2010 case, the Cour de cassation deemed that the limitation of liability was balanced, inter alia, by the discount rate granted by the Editor and the favored position granted to the Client under the contract. Consequently, the Cour de cassation decided that the application of the limitation of liability clause would not void the essential duty under the contract.  

In addition, the Cour de cassation rejected the Client’s contention that the Editor’s breach of an essential obligation would necessarily amount to a gross negligence. It stated that gross negligence cannot stem from a mere breach of contractual duty, even if this duty was regarded as essential under the contract, but can only flow from the seriousness of the behavior at stake.

Analysis

The decision of the Cour de cassation strengthens the security of contracts by limiting the interference of the courts. According to the Cour de cassation, a limitation of liability clause should only be set aside if it deprives the essential obligation from all its effects because of a valueless compensation. Particularly, under this decision, the Cour de cassation adopts a more subjective approach and focuses on (i) the parties’ will and (ii) behavior.  

(i) According to the Cour de cassation, in the event of a breach of contract courts should consider the way the contract was drafted in order to decide whether a limitation of liability applies or not. Should the contract provide for sufficient compensation to the limitation of liability, for instance a reduced price for the services performed under the contract, the provision will be held valid. Such a solution, which abandons the idea that a mere contractual breach could be sufficient to set aside a limitation of liability, makes court decisions more foreseeable and hence protects the parties’ agreement3.  

Furthermore, such ruling should encourage lawyers to carefully draft limitation of liability clauses in order to justify that the amount agreed upon is balanced by sufficient compensation and/or advantages.  

(ii) According to the Cour de cassation, the only limit to the application of a limitation of liability clause remains in the parties’ behavior. A party found responsible for gross negligence or willful misconduct should not be entitled to claim the benefit of a limitation of liability clause.

Whereas gross negligence (faute lourde) and willful misconduct (dol) are generally analyzed with respect to the party’s behavior, the Cour de cassation did consider in the past that the effects of a breach or the importance of the duty at stake was sufficient to amount to gross negligence. The Cour de cassation overturned this approach in a previous case in 20054. Such an objective approach of gross negligence had indeed become useless since a breach of an essential obligation was sufficient to set aside the limitation of liability clauses under the 1996 Chronopost case.

The 20 June 2010 case is the first decision of the Cour de cassation which, at the same time, abandons the objective approach of the breach to an essential obligation and the objective approach of gross negligence in order to set aside the limitation of liability clauses. As a consequence, it consecrates the validity of such clauses, and provides some fair limits based on the parties’ will and behavior.