Digital : Enforceability of limitation of liability clauses against third parties

ENFORCEABILITY OF LIMITATION OF LIABILITY CLAUSES AGAINST THIRD PARTIES

Cour de cassation, Commercial Chamber, July 3, 2024, No. 21-14.947

On July 3rd, 2024, the Commercial Chamber of the French Judicial Supreme Court handed down a landmark ruling on the enforceability of limitation of liability clauses against third parties to a contract. Prior to this ruling, French case law generally held that a third party to a contract could invoke, based on tort liability, a contractual breach causing them damage without having to prove a tortious or quasi-tortious fault distinct from this breach.

This approach was problematic, as it allowed third parties to benefit from a more favorable position than the contracting parties themselves, since the third party’s compensation for damages was not contractually limited. In order to preserve the “economic balance of the contract” to which the contracting parties had committed themselves, the French Judicial Supreme Court, ruled in the present case that, the limitation of liability clause agreed by the contracting parties is also enforceable against third parties. Consequently, the contractual party was held liable in tort to a third party based on a breach of contract.

This decision aims to limit the risk of a party to a contract being held liable to a third party beyond the limits stipulated in the contract, on condition that the limitation of liability clause provided in the contract is applicable, for example in the absence of any gross negligence or intentional misconduct. With this ruling, the Court provides a welcome clarification, enhances the foreseeability of the parties and the legal certainty of their contractual relationships. However, as the decision was handed down in an insurance context, and the third party in question was an insurance company subrogated to the rights of a party to the contract, the question arises as to whether it could be generalized to other sectors.