International Contracts Slide Set 8 Liability Limitation Clauses

International Contracts Slide Set 8 Liability Limitation Clauses General Contractual Damages Liability Liquidated Damages Matti Rudanko

Guarantee Terms 1: Usual Contents • 1. Role of inspection of the goods • 2. Terminology – warranty / guarantee / defects liability period • 3. Definition of defect – Defects existing at the time of risk passing (see Incoterms) – Materials, design, workmanship; not: “fair tear and wear” / misuse / abuse – Service and repair; must be authorized by the guarantor? • 4. The duration, start and end of guaranteee period • 5. Contents of guarantee liability – The seller is legally liable for defects even without any guarantee – The guarantee specifies the liability – Is it a limitation or extension of liability? It can be either International Contracts 8 2

Guarantee Terms 2 • Beginning of guarantee period (e. g. the following times) Delivery Inspection by the buyer Test results Acceptance of goods (buyer) • Extension of guarantee period – Defects arisen under but perceived only after the period: if the term allows such claims (matter of interpretation) – There may be special time limits for claims / bringing an action in court – Repairs at the end of the guarantee period International Contracts 8 3

Guarantee Terms 3 • Cf. Defects Liability Period • • The Defects Liability Period shall be a period of six months from the date of delivery. If any defect occurs during the Defects Liability Period, the Buyer shall forthwith inform the Seller stating in writing the nature of the defect. The Seller shall be responsible for making good with all possible speed any defect so notified which arises from defective materials, workmanship or design. The provisions of this clause shall apply to any Goods repaired, re placed or otherwise made good by the Seller, but not so as to extend the Defects Liability Period for more than twelve months from the commencement date of original defects liability period. International Contracts 8 4

Guarantee and Damages 1 • The duty of t he Seller to repair or replace defective items is the Seller’s only duty under this contract or otherwise, and the Seller shall not be liable to compensate the Buyer for any other loss of use of any Works belonging to the Buyer (whether complete or partial) or for any loss of any profit or for any indirect or consequential damage that may be suffered by the Buyer. • Restriction of the liability period and time for claims • Legal liability of the seller cannot be restricted with respect to consumers • The risk of adjusting the contract (also in B 2 B relations) The guarantee as a limitation of liability: International Contracts 8 5

Guarantee and Damages 2 The Guarantee as • The Seller shall indemnify a and hold harmless the Buyer specification against any loss or damage whether direct or indirect (or extension) suffered by the Buyer as the of liability result of defective or faulty (formulation goods delivered by the Seller. of a contracty term) International Contracts 8 6

Direct and indirect (consequential) loss Demurrage (down time) costs Costs of repair Damage to other property (caused by e. g. a broken machine) • Labour costs, fixed expenses • Cancellation costs (reliance interest; see slide set 9) • Lost profit International Contracts 8 7 Profit of lost projects Lost jobs etc.

Types of Liability Limitations International Contracts 8 8

Pros and Cons of Liability Limitations No effect on third parties Control of liability risks • Foreseeability • Risk borne by the efficient risk bearer Facilitates liability insurance coverage No effect on liability for intent (deliberate action) or gross negligence The binding force limited especially in standard terms of contract Rationalization of contracting Liability limitations cannot be set aside by referring to extra contractual liability (Carriage by Sea Act 9: 2 ja 3 etc. ) • • Unreasonableness (unfairness) Threshold of valid incorporation in a contract Surprising and strict terms not necessarily valid Interpretation: against the author; narrow interpretation ) Mandatory norms on contents • E. g. Consumer Protection Act International Contracts 8 9

Damages Liability, CISG (Common Rules for the Seller and the Buyer) • Damages is optionally additional to other remedies • Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. • Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. (CISG art. 74) International Contracts 8 10

Damages Liability, CISG (Cont. ) • Article 79 • (1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. International Contracts 8 11

The Structure of Damages International Contracts 8 12

The organization of damages International Contracts 8 13

The Significance of the Basic Distinction Contract Liability Tort Liability (pure) economic loss general rule: only physical injuries and damages to property burden of proof of negligence reversed on the tortfeasor burden of proof of negligence too lies on the injured person covers both employees and employed independent contractors covers only employees International Contracts 8 14

Liquidated Damages 1 • Formulation of a liquidated damages term – If the Seller fails to supply any of the Goods within the time period specified in the Contract, the Buyer shall notify the Seller that a breach of contract has occurred and shall deduct from the Contract Price per week of delay, as liquidated damages, a sum equivalent to one half percent of the delivered price of the delayed Goods until actual delivery up to a maximum deduction of 10 % of the delivered price of the delayed Goods. International Contracts 8 15

Liquidated Damages (agreed provision of damages) • No proof of the existence of damage or other legal prerequisites of liability, only the breach of contract – The standardised sum is available irrespective of the real damage – Usually the real damage exceeding the agreed sum is recoverable under general legal rules (depends on the agreed term) • Possibility of adjustment (up or down) • High (punishment or deterrent type) liquidate damages can be deemed null and void as penalty terms under the English doctrine • Liquidated damages attached to the non attainment of intermediate stages e. g. in building contracts are usually for control of anticipatory breaches of contract (unfavorable to the liable party, because timely completion of whole performance does not exempt from accrued intermediate sanctions) International Contracts 8 16

Late (Delayed) Delivery 1 • Art. 10 Late-delivery, non-delivery and remedies thereof • 10. 1 When there is delay in delivery of any goods, the Buyer is entitled to claim liquidated damages equal to 0. 5% or such other percentage as may be agreed of the price of those goods for each complete week of delay, provided the Buyer notifies the Seller of the delay. Where the Buyer so notifies the Seller within 15 days from the agreed date of delivery, damages will run from the agreed date of delivery or from the last day within the agreed period of delivery. Where the Buyer so notifies the Seller after 15 days of the agreed date of delivery, damages will run from the date of the notice Liquidated damages for delay shall not exceed 5% of the price of the delayed goods or such other maximum amount as may be agreed. International Contracts 8 17

Late (Delayed) Delivery 2 • 10. 2 If the parties have agreed upon a cancellation date in Box A 9, the Buyer may terminate the Contract by notification to the Seller as regards goods which have not been de livered by such cancellation date for any reason whatsoever (including a force majeure event). • 10. 3 When article 10. 2 does not apply and the Seller has not delivered the goods by the date on which the Buyer has become entitled to the maximum amount of liquidated damages under article 10 1, the Buyer may give notice in writing to terminate the Contract as regards such goods, if they have not been delivered to the Buyer within 5 days of receipt of such notice by the Seller. International Contracts 8 18

Late (Delayed) Delivery 3 • 10. 4 In case of termination of the Contract under article 10. 2 or 10. 3 then in addition to any amount paid or payable under article 10. 1, the Buyer is entitled to claim damages for any additional loss not exceeding 10% of the price of the non delivered goods. • 10. 5 The remedies under this article are exclusive of any other remedy for delay in delivery or non delivery. International Contracts 8 19

ICC Art. 11: Non-conformity of the Goods • 11. 2 Goods will be deemed to conform to the Contract despite minor discrepancies which are usual in the particular trade or through course of dealing between the parties, but the Buyer will be entitled to any abatement of the price usual in the trade or through course of dealing for such discrepancies • 11. 3 Where goods are non conforming (and provided the Buyer, having given notice of the lack of conformity in compliance with article 11, 1, does not elect in the notice to retain them), the Seller shall at his option, • (a) replace the goods with conforming goods, without any additional expense to the Buyer, or • (b) repair the goods, without any additional expense to the Buyer or • (e) reimburse to the Buyer the price paid for the non conforming goods and thereby terminate the Contract as regards those goods. International Contracts 8 20

ICC art. 11 cont. • The Buyer will be entitled to liquidated damages as quantified under artlcle 10, 1 for each complete week of delay between the date of notification of the non conformity according to article 11, 1 and the supply of substitute goods under article 11. 3 (a) or repair under artlele 11 3 (b) above. Such damages may be accumulated with damages (if any) payable under article 10. 1, but can in no case exceed in the aggregate 5% of the price of those goods. • 11. 4 If the Seller has failed to perform his duties under article 11, 3 by the date on which the Buyer becomes entitled to the maximum amount of liquidated damages according to that article, the Buyer may give notice in writing to terminate the Contract as regards the non conforming goods unless the supply of replacement goods or the repair is effected within 5 days of receipt of such notice by the Seller. International Contracts 8 21

ICC art. 11 cont. • 11. 5 Where the Contract is terminated under article 11. 3 (c) or article 11. 4, then in addition to any amount paid or payable under article 11, 3 as reimbursement of the price and damages for any delay, the Buyer is entitled to damages for any additional loss not exceeding 10% of the price of the non conforming goods. • 11. 6 Where the Buyer elects to retain non conforming goods, he shall be entitled to a sum equal to the difference between the value of the goods at the agreed place of destination if they had conformed with the Contract and their value at the same place as delivered, such sum not to exceed 15 % of the price of those goods. • 11. 7 Unless otherwise agreed in writing, the remedies under this article 11 are exclusive of any other remedy for non conformity. International Contracts 8 22