Limitation and Exclusion of Liability in CISG Contracts: validity issues. Prof. Lauro Gama Jr. Pontifical Catholic University Rio de Janeiro, Brazil

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1 Limitation and Exclusion of Liability in CISG Contracts: validity issues Prof. Lauro Gama Jr. Pontifical Catholic University Rio de Janeiro, Brazil

2 Why do parties agree to exempt or limit their own liability under a contract? Remedies for Non-performance 5-year contract: sale of machinery for the production of computer chips A. Risk avoidance --- different mechanisms 1 Training 2 Risk transfer 3 Risk sharing B. Risk replacement Insurance policy

3 What are the legal grounds for limitation and exclusion agreements? Freedom of contract The parties are free to enter into a contract and to determine its content. UNIDROIT Principles (Art. 1.1) Contract for the sale and purchase of Brazilian iron 11.1 Neither the SELLER nor the BUYER shall be liable, whether in contract, tort or otherwise, for any indirect, punitive, consequential or special losses, damages or expenses of any kind directly or indirectly arising out of or in any way connected with the performance of this CONTRACT. General terms of sale and delivery (Liability limited to direct damages) In the event a Product is found defective, the Vendor shall be responsible only with for repair or replacement of that specific Product, pure and simple, by implementing logistical means as to which it shall be the sole judge, without any other form of recourse or compensation against the Vendor. (Remedy of price reduction excluded)

4 How do major legal traditions go about regulating exemption and limitation clauses? A. Validity explicitly recognized: U.S. (UCC 2-719) Germany (BGB s. 276) Russia (Civil Code art. 400) Quebec (Civil Code art. 1732) B. Clauses valid under the principle of freedom of contract: Switzerland, Brazil, France, England, China and S. Africa A limitation or exclusion clause is invalid or unenforceable (in general): a) where it lacks a formal requirement; (a signed writing for sales $500 UCC 2-201) b) where consent is lacking or defective; (incapacity; error/mistake; fraud; threat; gross disparity) c) where the law has established a protection in favor of the obligee (creditor) (to avoid unfair or unreasonable situations) Good faith and fair dealing (reasonableness) Public policy (which include mandatory rules)

5 What are the legal protections established in favor of the obligee (creditor)? Invalidity or unenforceability of the limitation or exemption clause as a protective measure: a) where the exempting party is the weaker contracting party; (double signature requirement Art Italian Civil Code) b) where the clause exempts the other party s intentional, negligent or reckless conduct; (Brazil; Quebec Art. 1474; Italy Art. 1229; Germany 309 7b) c) where the clause is unfair, unreasonable or contrary to good trade usages (Art UPICC; UK 1977 UCTA, Art. 2(2); Dutch Civ. Code) d) where it excludes liability for personal injury or death (Brazil; Quebec Art. 1474; Germany 309 7b) Limiting or exempting the obligor (debtor) Moral concerns Principle of full compensation Dominant position e) where it contravenes a mandatory rule; (Art. 39, Chinese Contract Law) f) where it limits or excludes an essential contract obligation; (French case law Chronopost and subsequent)

6 Does the CISG govern limitation and exclusion clauses? Q 1 : Why wouldn t it? A: The CISG (Part III) contains no specific rules on exemption and limitation of liability clauses. Q 2 : Isn t it an issue that relates to the parties rights and obligations? A: YES Art. 4, first sentence, CISG This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. ( ) Q 3 : Since there is a gap in the CISG, how can we fill it? A: Art. 7(2) CISG Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

7 Why does it matter to establish the CISG as the governing law of limitation clauses in international sales contracts? Practical importance for international business transactions Promotion of legal uniformity in the international trade of goods

8 Which CISG principles govern exemption and limitation of liability clauses? Freedom of contract Article 6 CISG Freedom from form requiremens Article 11 CISG Reasonableness thirty-seven CISG provisions "an ethical standard of behavior so that [one] must... be judicious and fair" Prohibition of inconsistent behaviour (venire contra factum proprium) Article 7 CISG

9 Which aspects of limitation and exclusion clauses are governed by CISG provisions? Incorporation of limitation clauses to the contract Articles CISG on formation of the contract (offer and acceptance) CISG-AC Opinion 13 Standard terms Formal validity Article 11 CISG (no form required) CISG CISG Otherwise applicable law or rules of law Interpretation Article 8 CISG (subjective test) Article 9 CISG (objective test)

10 What is left out for the otherwise applicable law or rules of law to govern? CISG Otherwise applicable l aw or rules of law Art. 4 CISG ( ) In particular, [this Convention] is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; CISG Issues regarding the substantive validity of limitation and exclusion clauses (in general): Lack of valid consent (incapacity, mistake, fraud) Protection of the obligee (gross negligence, intentional breach, personal injury or death) Violation of a mandatory norm

11 How do you determine the validity of a limitation clause in a CISG contract? In other words: what are the boundaries of the CISG territory vis-à-vis the reach of domestic laws governing the validity of limitation clauses? Prof. U. Schroeter s two-step approach: a domestic rule is displaced by the Convention if: 1) it is triggered by a factual situation to which the CISG also applies (the factual criterion ); and 2) it pertains to a matter that is also regulated by the CISG (the legal criterion ) Example: A German manufacturer sells precision machinery to a Brazilian paper mill. A performance guarantee is provided by the German seller. Seller and buyer agree to exclude the seller s liability for breach related to performance of the machines sold. A turbine explodes two months after being installed. The buyer suffers not only direct but also indirect damages (not covered by the performance guarantee). The seller invokes the exclusion clause. The otherwise applicable law (s. 444 German BGB) prohibits the contractual exclusion of liability if the seller has given a guarantee. Is the exclusion valid? 1) Factual situation = the prohibition set out in the BGB applies to a contract for the int l sale of goods to which the Convention also applies ( factual criterion OK) 2) Legal situation: does s. 444 BGB address the same particular risk addressed by the CISG and thereby allocated by the parties?

12 Conclusions (with regard to validity of limitation clauses) Art. 4 CISG is neither exclusive nor inclusive Art. 7 CISG is (also) important to determine validity issues CISG principles of party autonomy, freedom of form, and reasonableness are key to address validity issues

13 Thank you for your attention