Exemption Clauses in Contracts: Historical and Comparative Law Analysis, Study notes of Law

Download Exemption Clauses in Contracts: Historical and Comparative Law Analysis and more Study notes Law in PDF only on Docsity! Krasimir Mitev Exemption Clauses in Contracts: Historical and Comparative Law Analysis I. Setting the scene In general, exemption clauses are stipulations according to which one or both parties to a contract will not be liable in the case of breach1 of one or more of its (their) obligations. These clauses are also known as exculpatory, exone­ ration, limitation, or exclusion clauses. In the present paper I will use these words interchangeably. Exemption clauses aim to modify the rules of liability otherwise applicable in the case of breach, placing the obligor in a better posi­ tion. The doctrine of freedom of contract (and the related doctrine of autono­ my of will) is considered to be a fundamental principle of the law of contracts.2 Autonomy of will is, in addition, a justification of the presence of exemption clauses in contracts. But also in this field of the law of contracts a considerable movement towards the limitation of contractual freedom can be seen. Usually the law deals with exemption clauses in order to restrict their ap­ plication. The most comm on tools for this purpose are legal rules which provi­ de conditions for the validity of the contracts provision. Therefore, questions of the concept and validity of exculpatory clauses are interrelated, because the concept should be derived from legal rules. But the problems of validity are often mixed with questions of interpretation and incorporation of the clau­ 1 In the present paper I will use the term „breach” to describe the situation where the debtor has failed to perform his obligation. I will use the term „non-performance” in the same meaning. In Civil Law countries the usual definition of non-performance is non­ achieving of the due prestation. 2 For details see: Koetz, H., A. Flessner, European Contract Law , Oxford, Clarendon Press. 1997. pp. 7-15. 158 Krasimir Mitev ses at issue therefore these topics will also be the subject of my examination. Exemption clauses are problem worldwide and the comparative law m ethod seems to be suitable for their examination. The present study will examine the concept and the status of the exemption clauses in Civil and Common Law. For this purpose I have chosen to review how the doctrine and the judiciary resolve the issue in France, Germany and England. II. France 1. Statutory regulation and its interpretation The French Civil Code (CC) lacks a common provision [on exemption clauses] for all types of contract. There are only rules concerning specific con­ tracts. Historically, the first instances were contracts of sale and carriage. Art. 1643 CC provides that the seller is liable if the sold thing has hidden defects, in the case there is no provision to the contrary in the parties’ agreement. Art. L 133-1 from the Commercial Code regulates the causes for exemption from liability of the carrier confining them to force major and prohibits contrac­ tual deviation from this rule. On the grounds of these provisions the doctri­ ne admits validity of the exemption clauses. This is done two ways: (1) by in deduction from the principles of freedom of contract and autonomy of will or (2) by way of induction from art. 1643, which is considered to be just an example of the principle (of freedom of contract).3 2. Validity of the exemption clauses However, the freedom to insert in a contract an exculpatory clause is limi­ ted. The doctrine and the judiciary are of the comm on opinion that an exemp­ tion clause cannot exclude the liability of the obligor for the willful breach of contracts in advance, whether or not accompanied by an intention to cau­ se harm to the other party4,5. The usual explanation is that such a clause will 3 Fuhrman, G. Der Vertragliche Haftungausschluss im deutschen und franzoesischen rechts. Bonn. 1970, p. 35; Ghestin, J. (Ed.) Les Clauses limitatives ou exoneratoires de re- sponsibilite en Europe. Paris 1990, p. 9.; Nicholas, B. The French Law o f Contract. London. Butterworth.1982, pp. 227-229. 4 Nicholas, B. op. cit., pp. 227-229. 5 Here should be noted that when in a contract o f sale a professional seller deals with a non-professional buyer, the seller is always considered to know about the defects of the article sold. He cannot invoke an exemption clause because of the text o f art. 1645 CC which states that if the seller knows of the defects o f the article, he is, in addition liable to the restitution of the price which he received from him, for all the damages towards the buyer. This admission (the knowledge of the buyer) covers only the cases of hidden de­ Exemption Clauses in Contracts. 161 The second limitation as regards the exemption clauses is the nature of the obligation for the breach for which the contractual provision is provided. If it is an essential obligation, the contractual exclusion of liability is banned. Last but not least, the kind of the suffered harm is of relevance - no contrac­ tual exclusion or limitations of damages are available for bodily injures. The process of the formation of a contract at least for the general contract law is of no relevance to the assessment of exemption clauses.16 The French doctri­ ne and judiciary put in the same position clauses which limit only with such provisions that completely exclude contractual liability. This position is in co­ herence with the rule that liability for grossly negligent or deliberate conduct cannot be excluded in advance, because the ratio behind this provision is the moral blame towards the obligor. III. Germany 1. Statutory regulation and its interpretation The German Civil Code (BGB) contains provisions as regards the exemp­ tion clauses in the general part of the law of obligations. Art. 276 (2) says that the obligor cannot be relieved of liability for deliberate acts or omissions in ad­ vance. There is no need to have an intention to cause the damage, to consider the conduct at issue as intentional one.17 Article 276 (2) obviously has a connec­ tion to the already mentioned Roman maxim that the parties’ agreement is not capable relieving the obligor when he acts deliberately. The German legislator has followed the provision of the Digest o f Iustinian strictly and has not accep­ ted the assimilation of dolus and culpa lata made in postclassical Roman law. Another provision of the BGB which is relevant to exclusion clauses is art. 278. It provides that art. 276 (3) of the BGB has no application in the cases when one is liable for „the fault of his statutory agent, and of persons whom he employs to perform his obligation.” According to this text the obligor is liable for the fault of his statutory agent and subcontractors to the same extent as for his own fault.18 Art. 278 in fine allows the parties to insert a provision that they will not be liable for even when the persons for whom they are responsible act 16 Neumayer, K. Contracting Subject to Standard Terms and Conditions. IECL, vol. VII, ch. XII. Dordrecht. Mohr Siebech.Tubungen.Martinus Nijhoff Publishers, p. 62: „French domestic law still does not distinguish between pre-formulated terms and ne­ gotiated clauses.” 17 Heinrichs, H. In: Palandt Bürgerliches Gesetzbuch. C. H. Bech. Muenchen. 1999, p. 331 18 Historically this liability was based on the concepts of culpa in eligendo and culpa in custodiendo. But it is obvious that these concepts are a mere fiction and it is more cor­ rect to regard the liability for the other s conduct as a strict one. 162 Krasimir Mitev deliberately. It is not in contradiction with the provision of art. 276 (3) because the liability of the obligor is a strict one, i.e. he is not relieved from his own fault. This opportunity is excluded in the case the stipulation is a part of standard form contract (art. 309 BGB) and for the executives of the legal persons.19 The BGB has also provisions concerning exemption clauses in its special part - chapters of sale, lease and work. The com m on feature of these provi­ sions is that they concern defective performance (the article sold, leased on created has defects). In that situation the law prevents parties from relying on an exculpatory provision if they fraudulently concealed the defect or if they have guaranteed the quality of the thing (articles 444,536 d, 639 BGB)20. They are based on the same idea as art. 276 (2) BGB. 2. E xem ption clauses an d s tan d a rd form con tracts The BGB specifically regulates exemption clauses - a part of the standard form contracts.21 These provisions were inserted in the BGB by the Moderni­ sation Act Law of Obligations (Schuldrechtsmodernisierungsgesetz) in force sin­ ce the 2002. But first they were invented by the judicial practice based on the famous provision of good faith (art. 242 BGB)22 and in 1977 the legislator co­ dified the case law in the AGB-Gesetz (Standard contract terms act). The recen­ tly enacted amendments of the BGB have been exclusively based on the provi­ sions of the former law (AGB-Gesetz). They also implement the requirements of the EU directives. The law invalidates the exclusion and limitation of liability clauses [con­ tained in standard form contracts] for losses arising out of death or injury to the body caused by a negligent breach of duty by the debtor, his statutory agent or a person employed by him to perform the contract (art. 309 (7a) of the BGB. The provisions of the standard form contract which aim to exclude the liability for gross negligence of either the obligor or persons employed by him are also null. 19 Heinrichs, H., In: Palandt Bürgerliches Gesetzbuch. C. H. Bech. Muenchen 1999, p. 356. 20 Pomponius - D. 19.1.6.9. 21 Art. 305 of the BGB defines standard terms as „ (...) all contractual terms pre-es­ tablished for a multitude o f contracts which one party to the contract (the user) presents to the other party upon the conclusion of the contract. It is irrelevant whether the pro­ visions appear as a separate part o f a contract or are included in the contractual docu­ ment itself, how extensive they are, what script is used for them, or what form the con­ tract takes. Contractual terms do not constitute standard business terms where they have been individually negotiated between the parties”. 22 Hippel, E. The control o f exemption clauses - a comparative study. In: The Inter­ national A nd Comparative Law Quaterly, 1967, pp. 591 et seq. Exemption Clauses in Contracts. 163 There is also a general rule that provisions in standard forms are „in­ valid if, contrary to the requirem ent of good faith, they place the contrac­ tual partner of the user (of standard terms) at an unreasonable disadvan­ tage” (art. 307 BBG). In addition, the law contains a list of specific clauses which are in any case void (black list) and a list of clauses whose validity de­ pends on an appraisal (gray list) - art. 308, 309 of the BGB. The last m entio­ ned provisions are not applicable in the case the standard forms are presen­ ted to a businessperson, but the contract should still be in conform ity with the rule of art. 307 of the BGB. The exculpatory clauses - a part of the gene­ ral business conditions - are entirely barred when they exclude or lim it the liability of the user towards a non-businessperson. At the same tim e among businesspersons exemption clauses are valid even when they are a part o f the standard form contract but only in the case when good faith is not infringed. It can be seen that German law pays attention to specific features of standard form contracts - their content is usually not negotiated and it is noticeab­ le that the process of contract form ation influences the validity of exclusion clauses. In the case of consum er transaction the unconditional invalidity of the clauses at issue might be viewed as the awareness o f the fact that the con­ sumer has no ability to influence the content of the contract. 3. Validity and effect of exemption clauses A valid exclusion clause deprives (fully or partly) the creditor of the right to be compensated for the damage. In Germ an law the exemption clauses may also have an effect on to rt liability. The conditions for validity are the same as for the clause whose aim is to exclude or lim it contractual liability.23 This conclusion is based on a fragm ent of art. 276 of the BGB: the provisions from that part of the code (par. 241-305) are com m on for the all obligations regardless of the particular source (contract, to rt or unjust en­ richment). It is also im portant to emphasize the point that the concurrence of liabilities is admissible and the creditor has a choice between his delictu­ al and contractual claim. There is a shared opinion among the scholars and judges that exclusion and limitation clauses should be interpreted against the drafter (contra profe­ rentem interpretation24). The application of this rule is not limited to cases of standard form contracts.25 23 Mehren, A., op. cit, p. 46. 24 For more about contra proferentem interpretation see Koetz, H., op. cit., p. 114, 115. 25 Heinrichs, H., op. cit., p. 339. 166 Krasimir Mitev definition of an exclusion clause. Some contracts are excluded from the field of application of the act, for instance, international supply contracts and con­ tracts which concern interests in land. Certain provisions of the instrument apply only to „business liability”, which is defined as a breach of obligations, arisen in the course of business but the Act concerns both contractual and tort liability (sec. 2). The UCTA invalidates some of exemption clauses and other subjects to the test of reasonableness. In the first group there are exclusions of liability for a negligently caused death or injures to the body, exclusions of liability for a breach of statutory implied duties of the seller or the owner as to the title in sale or hire, purchase, and for a breach of statutory implied duties of the seller or the owner as to the conformity of goods in sale or hire purchase. As regards the requirement of reasonableness, the Act gives guidelines about the relevant factors. These are: (1) the relative bargaining position of the parties, (2) whether the customer has received an inducement to agree to the term or had an opportunity to contract with others on different basis, (3) whether the customer has known or ought reasonably to have known abo­ ut the exemption clause. Also relevant is the insurance question, i.e. who has been in a better situation to insure him against the risk (sec.l 1 (4)).33 The rea­ sonableness of the clause should be evaluated in the time of the contract for­ mation and one may make a conclusion that in regulating exoneration clauses the law in England concentrates on the process of the formation of a contract. V. Conclusions 1. O ur initial definition was that the exculpatory provision was a stipulation, according to which one or both parties to a contract would not be liable in the case of a breach of one or more of its obligations. Therefore, an exonera­ tion clause should be a clause which regulates or remedies with different wor­ ds the consequences of the breach (non-performance), but not the primary contractual obligations. The review of the status of the exemption clauses in France, Germany and England shows that in English law the concept of exemption clauses is bro­ ader and fairly vague. Usually the definitions include phrases like „clauses which appear to exclude liability”34 or „clauses whose purpose is to negative terms normally applied in favor to the buyer”,35 etc. Listed as examples of exc­ lusion clauses in the textbooks are clauses varying from agreements which li­ 33 Furmston, M., op. cit., p. 212; see also Koetz, H., op. cit., pp. 146-147. 34 Halson, R., op. cit., p. 301. 35 Atiyah, P. S., op. cit., pp. 199-200. Exemption Clauses in Contracts. 167 mit the evidences to provisions which give one party a broad discretion as re­ gards the m anner and substance of the performance.36 W hen observing a judge making rules, one would see that their main con­ cern is to ensure a real agreement as to the terms.37 Even the reasonableness test of the Unfair Contract Terms Act is concentrated on the process of formation - the relevant factors are the relative bargaining position of the parties, whether the customer has received an inducement to agree to the term or had an op­ portunity to contract with others on different basis, whether the customer has known or ought reasonably to have known about the exemption clause. The sa­ me reasons for the rejecting enforceability of exemption clauses (non-negotia­ tion, inequality of bargaining power, test of reasonableness according to UCTA) might be equally relevant to other unreasonable and unfair contractual provi­ sions. And I would argue that the doctrines on exemption clauses in England are much more doctrines on unfair clauses than on exemption clauses.38 In the ju ­ dicial practice the cases of an unfair exoneration term were more often than not cases of unfairness of other terms which special attention have attracted to exc­ lusion clauses. Actually the English law lacks a concept of an exemption clause. 2. The situation in the Civil Law countries (in particular Germany and France) seems to be different. Both the German and the French legal systems have rules according to which, even if the process of a contract formation has been without any defects,39 the exoneration clause would be void (art. 276 BGB, art. 1643 of the CC).40 In these circumstances the need for a clear con­ cept of an exemption clause is more im portant, because it seems obvious that the freedom of contract is limited in that specific area and one needs to know the exact boundaries of this limitation. 36 Beale, H., W. Bishop and M. Furmston. Contract: Cases and Materials. London. Butterworths. 2001, pp. 960-961. 37 Whincup, M., Contract Law and Practice. The English System and Continental com­ parisons. Kluwer Law International. The Hague 2001, p. 192. 38 It is often said that UCTA has a misleading title, because it deals only with the ex­ clusion clauses. 39 The „defects” here are not only the traditional factors deviating the consent (mis­ take, duress and fraud) but they also cause inequality of bargaining positions whatever the reason is (economical, psychological etc.). 40 The Principles o f European Contract Law have also followed this approach (art. 8:109). According to the commentary art. 8: 109 applies only where there is a contractu­ al obligation but liability is excluded in the case of non-performance (O. Lando and H. Beale, op. cit., p. 385). But one should pay also attention to the way art. 8:109 is formu­ lated. It stresses than the invocation of the exemption clause rather, the clause itself, i.e. not the clause but the invocation of the clause by the debtor should be examined wheth­ er it contradicts to the good faith. The wording o f the text suggests that the evaluation of the clause will be made at the time is raised the provision. 168 Krasimir Mitev It will be helpful for our study to draw a conclusion from the basic Civil law - a rule that one cannot relieve itself in advance causes grave fault. It looks like the aim of the law is to deny the benefits and the protection to the debtor he would otherwise have but for the intentional or grossly negligent wrong­ doing. No doubt this position has strong moral foundations. It seems cohe­ rent with the above observations that in general the contract law in France and Germany shares the proposition that exoneration provisions aim to dis­ place optional rules of law as regards the consequences of the breach of con­ tract due to reasons for which the obligor caries the risk.