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Home , Liquidated damages, Statutory law, Warranty

Contract fundamentals How the position differs across Europe

Introduction Welcome to our overview of law fundamentals. Key contacts

We hope you find this guide helpful. The aim is to explore a number of UK important contractual issues under and compare the position in Victoria Gwynedd-Jones Knowledge Director France, Germany and the Netherlands. T +44 117 917 4440 [email protected] There is an important distinction under English law between a warranty and a representation – but what is the position in other European territories? Does France Alexandre Glatz the same distinction apply under German law, with the same consequences for Partner remedies? Is a duty of implied into commercial in France T +33 1 84 8 24576 and the Netherlands – and, if so, does this duty apply during the negotiation [email protected] period? In this interactive document, we explore these issues and more. Isabelle do Rego Associate If you have any questions, please feel free to contact the team of specialists in T +33 1 84 8 24546 the listed. [email protected] Germany Felix Hilgert , Maître en Droit T +49 221 5108 4160 [email protected]

The Netherlands Sophie den Held Associate T +31 20 702 8932 [email protected] UK France Germany The Netherlands

Is a duty of good faith implied into the performance There is no general duty of good There is an explicit duty of good A duty of good faith is implied into all Good faith forms a general principle of commercial contracts? faith implied into all commercial faith in all commercial contracts by contracts as a matter of statutory law. that applies to all types of legal contracts. virtue of article 1104 of the Civil Code, relationships and contracts, even to and this duty applies to all contracts the pre-contractual and negotiation But a duty of good faith will be of any nature which are subject to stage. implied into relational contracts. French law. These are long term contracts A party to a contract cannot enforce where the parties are committed to The duty of good faith applies to a contractual obligation or right collaborating with each other and all stages of a contract’s life from if it would be considered unfair or where they put trust and confidence negotiation to execution and unreasonable to do so under the in each other such as JVs, franchise performance. This duty is part of circumstances. agreements, and long term a public order which means that distribution agreements – there is the it cannot be waived by parties potential for other agreements to be contractually. deemed “relational”. Contracting parties are presumed to be acting in good faith. The burden of in relation to breach of the duty of good faith lies with the claimant. UK France Germany The Netherlands

Good faith does not simply mean No standard definition of good faith Acting in good faith means dealing The meaning of good faith is aligned “honesty”. It means refraining from has been provided by or case in a way that would be ethically with the principles of reasonableness conduct which would be regarded law. If we were to a definition acceptable to reasonable and fair and fairness, so a party must act What does “good faith” mean? as commercially unacceptable by it would be “the duty to act as your people and takes into account the reasonably and fairly towards its reasonable and honest people. counterparty can legitimately and interests of the counterparty. counterparty. reasonably expect you to act”. Transparency, co-operation, trust Whether or not certain conduct This applies during the negotiation and confidence are implicit. In practice, the notion of good faith is breaches the duty of good faith will period too, which means that a multifaceted and is determined on a be determined on a case by case party which walks away from a case by case basis by the . basis. There is an abundance of case transaction with a bidder at an law on the subject. advanced stage of negotiations The duty of good faith covers a (perhaps being aware much earlier wide range of obligations that Depending on the circumstances, it in the tender process that it did not vary depending on the stage of a can, for example, be considered bad intend to proceed with that bidder) contract’s life such as an obligation faith to abuse bargaining power, could be held liable for expenses to co-operate, to act loyally, to ensure to mislead in negotiations, to fail to incurred by the bidder in relation confidentiality, and to disclose meet expectations one has created to the negotiation, as a result of the information. for oneself, or to exercise a right party failing to act in good faith. In abusively. exceptional circumstances, a party Some concepts originally based on may also be held liable for loss of the general duty of good faith have profits of its potential counterparty also been codified, such as a right to (though, in practice, compensation require adjustments, or termination, for breaking off negotiations is very in the event of a fundamental rarely awarded by Dutch courts). change in circumstances for which Dutch law gives a negative neither party is responsible. understanding of good faith: a person has not acted in good faith, if he knew, or in the circumstances ought to have known, the facts or the law on which his good faith depends. Under Dutch law, a party bases its good faith on certain facts or circumstances and if that party is ill-informed, then that party is considered not to be acting in good faith. The implication of this is that a party may be under a duty to investigate. UK France Germany The Netherlands

There has been a recent The concepts of reasonable There is no universal definition of the The term “reasonable endeavours” restatement of the meaning of endeavours and best endeavours term “reasonable endeavours”, but has no clear meaning under Dutch “reasonable endevours”: what are not recognised under French to analyse whether an endeavour law. It can be considered to be part would a reasonable and prudent law. is sufficient, German courts would of the obligation to perform to “the person acting properly in their own take all circumstances into account, best of one’s ability”. Under French law, one uses commercial interest and applying including the associated cost and What is the meaning of “reasonable endeavours”? “obligation de résultat” which Such an obligation will be their minds to their contractual effort, the state of the art where translates as the obligation to obtain interpreted in accordance with the obligation have done (to try to applicable, and the relationship a certain result, or “obligation de so-called Haviltex-formula (based on achieve the objective)? between the required effort to moyens” which translates as the settled ), which is intended achieve the goal and the importance Crucially, the obligor is not normally obligation to implement the means to fill any gaps in a contract based of the goal itself. required to sacrifice its own necessary to obtain a certain result. on the parties’ intentions and commercial interests. reasonable expectations. References to “reasonable endeavours” or “best endeavours” in a contract subject to French law would in all likelihood achieve the same result. Both terms would likely be considered as an “obligation de moyens” because they are not absolute obligations requiring the relevant party to achieve a certain result but instead they require that party to implement a certain standard or means necessary to achieve such result. UK France Germany The Netherlands

Best endeavours is more stringent The concepts of reasonable There is no universal definition of the There is no concrete difference than reasonable endeavours. endeavours and best endeavours term “best endeavours”. The analysis between “reasonable” and “best” are not recognised under French carried out by a German endeavours. The interpretation It may require the obligor to act law. would be similar as for “reasonable of such terms depends on the contrary to its commercial interests endeavours”, but less weight would circumstances of the case and and/or require expenditure by the Under French law, one uses likely be given to an argument that the meaning of such terms will be obligor. In Jet2.com v Blackpool “obligation de résultat” which a specific action was not required determined by the court. Airport Ltd the court held that an translates as the obligation to obtain because it was too onerous. What is the meaning of “best endeavours”? obligation on an airport to use best a certain result, or “obligation de endeavours to promote an airline’s moyens” which translates as the low-cost services required the airport obligation to implement the means to open outside of its normal working necessary to obtain a certain result. hours (to accommodate the airline’s References to “reasonable early morning and late evening endeavours” or “best endeavours” flights) despite the airport incurring in a contract subject to French law a loss in doing so. would in all likelihood achieve the same result. Both terms would likely be considered as an “obligation de moyens” because they are not absolute obligations requiring the relevant party to achieve a certain result but instead they require that party to implement a certain standard or means necessary to achieve such result. UK France Germany The Netherlands

Yes, there is an important difference. The concepts of warranties and German law does not distinguish No, there is no clear difference representations are not recognised between warranties and between representation (“feitelijke” A warranty is a contractual under French law. representations. mededeling) and warranty assurance from one party to the (“garantie”). other. Breach of a warranty gives Instead, one of the key distinctions Rescission or termination are available right to a claim for … but when drafting contractual for most breaches (albeit sometimes The “representations and warranties” not usually the right to terminate. obligations under French law is the only where the counterparty fails clause can be interpreted in two distinction between “obligation de to remedy the breach within a ways: A representation is a pre-contractual résultat” and “obligation de moyens” reasonable cure period). statement which induces the other (1) as a contractual obligation of as outlined above. party to enter the contract. Use of the However, there is an important a party that the information Is there a difference between a “warranty” and a term in a contract is the repetition of distinction between two German law provided is true and accurate; “representation”? a pre-contractual statement. If the concepts that can be hard to express and/or representation is false, and induced in the English language: (2) as a contractual warranty the contract, the remedies for “Gewährleistung” is a statutory (in Dutch: “garantie”) that, if are available: system of remedies which can be breached, will oblige a party to – Rescission: the contract is set aside contractually modified. Some of the damage caused. and treated as if it never existed. these remedies are triggered only if Breach of either a representation The parties are put back into the the breaching party is negligent (or or a warranty can entitle the other position in which they were before acting intentionally, which represents party to different remedies, being: the contract was made. a higher level of responsibility under German law), while others – Rescission of the contract based on – And/or damages: which may be are available even where the error (“dwaling”); and/or higher than damages for breach of breach occurs with no . contract, and are calculated on a Either These statutory remedies are often different (tortious) basis. referred to as a “warranty” in English (a) claim performance (which is language drafts under German law. often the remedy first sought under Dutch law); or “Garantie” implies unlimited, strict no-fault liability on the part of the (b) terminate the contract based on breaching party. This is sometimes non-conformity and/or default; referred to as “representation and and/or claim damages. warranty” in English language drafts under German law.

Both “Garantie” and “Gewährleistung” can be translated into English as “warranty” and therefore additional wording is strongly recommended in contracts to avoid ambiguity. UK France Germany The Netherlands

Yes, because without an entire Yes, it is advisable to include an It does not hurt to include an entire The Dutch courts have ruled that agreement clause, there is a risk entire agreement clause in order to agreement clause, but such a clause an entire agreement clause has no that statements made during prevent the presumption that other will not prevent a German court special meaning under Dutch law. negotiations, which are not contractual terms might apply, such from drawing on statements made Such a clause will not prevent Dutch included in the final agreement, as general terms of sale or previous during negotiations to interpret courts from taking into account may constitute additional terms or agreements entered into between ambiguous clauses or fill in gaps in pre-contractual statements, and the representations. the parties. the agreement. parties’ intentions and reasonable Such a clause generally consists of a There is no standardised language In this way, it is harder to prevent pre- expectations before, during and number of different elements: used in order to achieve this result. contractual statements from forming after entering into a contract. But part of a written agreement under the of the clause will be – Entire agreement statement: To German as opposed to English law. taken into account by the court prevent the presumption (that the while considering arguments of both written agreement contains all the parties. terms of the contract) from being Is it important to include an “entire agreement” displaced. clause in commercial agreements? – Exclusion of liability for : Most commonly a non-reliance statement, to prevent liability in misrepresentation arising, by creating a contractual .

– Express carve-out in respect of : Not legally necessary but usually included. UK France Germany The Netherlands

Not all losses that flow from a breach French law distinguishes between Generally, all losses caused by a In the case of , of contract are recoverable. The direct and indirect damages. breach are recoverable by the or , a party is entitled to party in breach is responsible for: Only direct damages (being innocent party, including loss of compensation for those losses damages that directly stem from profits, loss of goodwill and other that are closely connected to and – 1st limb (direct losses) – losses the contractual breach) are losses that might be considered caused by the fact on which liability “arising naturally … from the recoverable at law. The concepts “indirect” under English law. German is based. This causal connection is breach of contract”; and of “consequential”, “incidental”, law has no clear distinction between established by weighing the nature – 2nd limb (indirect losses) – losses “special” and “punitive” damages direct and indirect losses. Some limits of the liability (it being strict liability which “may reasonably be are not recognised and would not be apply, for example, legal fees can or liability based on negligence) supposed to have been in the awarded by a French court. usually be recovered only up to the and the damage, and whether contemplation of both parties at the statutory amount. the damage can reasonably be A conservative approach is time they made the contract”. attributed to the fact at hand. generally adopted. Unless the However, as a general rule the This is a potentially enormous contract provides otherwise, French innocent party must prove the There is no predetermined liability; and so parties seek to courts tend to limit recoverable amount of its loss. Under certain calculation method for damages impose limitations. damages to those material damages circumstances, a court can make for breach of contract. A has resulting directly and immediately estimates; and specific calculation considerable freedom to calculate or There are a number of recent cases What losses are recoverable at law following a from the relevant breach or failure methods exist for intellectual even estimate the damages and may where all of the loss suffered by the breach of contract? of the counterparty. Typically, loss infringements. include e.g.: claimant was held by the court to of business, loss of revenue and any be a direct loss; and therefore the German law does not award punitive – financial loss; consequential losses are deemed contractual exclusion of indirect loss damages and, as a matter of law, to be “indirect” and therefore not – loss of profits; and did not restrict the claim. German courts do not enforce recoverable. foreign punitive damage awards. – reasonable costs incurred in order However, it is possible to define to (i) prevent and limit damage, contractually what constitutes (ii) assess the damage and liability indirect and therefore non- and (iii) establish the claim in court. recoverable damages. This approach is recommended to avoid argument later in court.

Losses which are recoverable under French law are often referred to as “indemnifiable” losses; and those which are “non-recoverable” as “non-indemnifiable”. This does not mean that the losses are recoverable in the manner that they would be under an claim under English law. UK France Germany The Netherlands

1. Risks each party commonly 1. Liability for wilful misconduct, 1. In standard-form agreements, 1. Liability that cannot be excluded accepts without limit: fraud, gross negligence, and/ liability can be excluded only to the or limited: or liability for death or bodily following extent: – fraud/fraudulent – intent (“opzet”); and injury (even in the absence of misrepresentation; – liability must be unlimited for negligence) cannot be limited under – gross negligence intent (which includes fraud), gross – death/PI caused by negligence; contract. Any such limitation will not (“bewuste roekeloosheid”). negligence, , and be enforceable. – liability that can’t be excluded by under mandatory (such as Limitation or exclusion of liability law; Limitation of liability in the event of the German Act) must never be contrary to good third party claims for IP infringement morals or maintaining public order, – confidentiality breaches (tend – liability can be limited to typical and breach of data obligations is or unacceptable according to the to resist unlimited liability for and foreseeable damage for possible but not usual in French standards of reasonableness and DP breaches; and breaches of simple negligent breaches of contractual practice. fairness. applicable ); essential obligations Liability for confidentiality breaches – wilful default and abandonment; – liability can be excluded for and third party IP infringements are simple negligent breaches of non- – some e.g. third party regularly unlimited. essential obligations. IP infringement; breach of anti- corruption clause. (Note that unlike under English law, there are different levels Click here for Points 2-5 > of negligence under German What is a common B2B liability position? law – including simple and gross negligence – and the term “negligence” describes not a specific type of unlawful conduct, but the level of responsibility for a consequence, whether that consequence is a breach of contract or damage caused to another person outside or independently of a contractual relationship).

The wording of limitation of liability clauses needs to follow additional formal requirements, and therefore legal advice in drafting is strongly recommended. UK France Germany The Netherlands

2. Risks each party wholly excludes: 2. It is possible to define contractually 2. The position outlined in point 1 2. Liability generally excluded: what constitutes indirect damages has also become standard for Commonly, all indirect losses – indirect or consequential loss; and/ under a particular contract and individually negotiated agreements, are excluded (though may be or parties are advised to set out even though more stringent expressly accepted in relation to an expressly what constitutes indirect limitations are legally possible. – certain types of loss related to indemnity). and therefore irrecoverable specific risks included in the Depending on the parties’ Other heads of loss may be wholly damages when drafting a contract contract that would be considered bargaining power, individually excluded depending on bargaining in order to avoid later argument. indirect under . negotiated agreements may also position such as loss of profit, To the extent that a cap on direct contain: Please note that the concept of revenue, data, wasted costs and damage is included in a contract, indirect loss is not defined under anticipated savings. – an exclusion of all liability for such cap can be challenged in the Dutch law, nor well developed in simple negligence; courts if it “substantially deflates the Dutch case law. Best practice is to Click here for Points 3-5 > purpose of the agreement” (please – a cap on liability for simple specify in the contract exactly which see point 3). negligence (often a percentage of types of loss are recoverable and “fees paid” or “fees paid or payable which are excluded. in the contract year in which the damage occurs”, but also specified amounts); and/or

– a cap on liability for gross What is a common B2B liability position? negligence (though this is less common). UK France Germany The Netherlands

3. Limit/cap on remaining risks: 3. It is important to note that tortious 3. Common liability caps: liability cannot be limited by way of – aggregate agreement; and annual – aggregate agreement; and annual contract. caps – both common. caps – both common. It is possible to limit contractual – fixed monetary; fixed percentage – fixed monetary; fixed percentage liability for breach of contract of fees; “greater of” caps – all of fees; “greater of” caps – all under French law provided that common. common. such limitation does not “deflate substantially the purpose of the – may reflect the position. 4. Separate caps for specific losses: agreement”. A limitation may be – most commonly seen for loss or held to substantially deflate the 4. Caps for specific losses: damage to property risks. May purpose of the agreement if it – data protection risks (e.g. twice the reflect insurance position. results in the breaching party being normal cap). exposed to no real sanction as a – also seen for DP risks. result of that breach. This concept is – infringement of intellectual assessed by the courts on a case by property rights (which is often 5. Expressly recoverable/expressly case basis. uncapped). excluded losses: A liability cap which is equal to Customer: best practice is to state the amount paid during the prior any losses which can be recovered 12 months is usual practice in as express direct losses e.g. costs of What is a common B2B liability position? agreements subject to French law. selecting new supplier.

Supplier: best practice is to state 4. Separate caps are becoming any specific heads of loss which are more and more common for data irrecoverable. protection breaches.

5. There is no standard position in relation to losses which are expressly stated in commercial contracts as being recoverable, or excluded, and this is contract-specific. UK France Germany The Netherlands

There is a belief that claiming under Indemnity clauses are not common Depending on the drafting, an Indemnities are tools to allocate an indemnity gives quicker, easier practice under French law, and do indemnity is often considered a responsibilities absolutely, often and fuller recovery than available not make recovery easier. under German law, without regard to culpability. for breach of warranty, because: implying no-fault liability on the An advantage is that the indemnified No specific course of action exists part of the breaching party where party will in most cases only have – once the relevant event occurs, the under French law as regards to the – without this wording – statutory to show breach of the indemnity obligation to pay is enforceable by enforcement of indemnity clauses law would usually require at least to recover all losses caused as a means of a debt action; and the indemnified party would negligence in order to trigger a result. The wording of the indemnity have to go through standard – the contract principles of damages claim. This means that, determines the scope of losses that proceedings in the French courts to and foreseeability do not apply to broadly, it can be easier to make a are recoverable. enforce an indemnity clause – as it debt actions; and claim under an indemnity, which would in order to enforce a standard There are no statutory rules can be deemed to be a guarantee – the indemnified party has no contractual clause. governing indemnity clauses under German law, than under general duty to mitigate its loss. and precise drafting is therefore a standard contractual clause absolutely essential. But: case law is not consistent, because there is no requirement to and sometimes causation and demonstrate negligence or default remoteness may apply to an by the breaching party. indemnity claim. Recovery under a An indemnity obligation can also be particular indemnity will depend on drafted to: its drafting and the context. – limit other defences the indemnifying party may have (for What are the perceived advantages of an example, if made payable “upon indemnity? first request”, it has to be paid, regardless of any defences which may only be invoked in a for repayment); and/or

– extend the recoverable loss (for example, market-rate legal fees instead of only the statutory fees). UK France Germany The Netherlands

If a provision is found to be a penalty, French law does not draw a Contractual penalties are Both liquidated damages and it will be unenforceable. distinction between penalty and enforceable under German law, but penalty clauses are lawful. A liquidated damages clauses. are subject to reduction by courts if penalty clause can be used (i) as an A penalty is a contractual provision they are excessively high. incentive to perform, and/or (ii) to which imposes a detriment on A penalty or liquidated damages liquidate damages. the party in breach of a primary clause, a “clause pénale”, aims to Liquidated damages must be based obligation which is out of all ensure that the relevant party will on a good faith estimate of what the Unless expressly agreed by parties, proportion (or extravagant or perform the obligation as failure to typical actual damage would be. the following applies: unconscionable) to any legitimate do so will result in the payment of the Additional restrictions apply in – the other party cannot invoke a interest of the innocent party in the penalty as a form of pre-determined standard terms: the breaching party penalty clause and at the same performance of that obligation. damages. must expressly have the opportunity time request When agreed by sophisticated This type of clause must be carefully to prove that the actual damage was under the contract, unless the commercial parties, of equal drafted so that it is not considered lower than the liquidated damages penalty clause only serves as a bargaining power, a liquidated to be a limitation of liability clause (in which case the breaching party form of compensation for losses due damages clause does not need to be or a forfeiture clause (where a party only owes the actual loss suffered). to delays; and negotiated in minute detail, nor be can agree in advance to pay a – a party cannot claim (additional) an accurate pre-estimate of the loss certain sum in return for the right damages on top of a penalty. suffered, in order to avoid being an to disengage from an obligation unenforceable penalty. or from an agreement before its This means that a penalty clause will performance). replace any claim for performance Liquidated damages will likely only or damages unless the contract be held to be an unenforceable This is of importance as a judge has expressly states that the relevant penalty if they are exorbitant or the power to increase or decrease the party can claim damages in extravagant when compared with amount of the penalty in a “clause addition to the penalty. the greatest loss likely to be suffered. pénale” that it deems either obviously insufficient or excessive, whereas However, penalty clauses and What do we need to look out for when agreeing in relation to a limitation of liability liquidated damages are still subject to liquidated damages provisions? clause or a forfeiture clause, a judge the principles of reasonableness and cannot amend the level of the liability fairness and may be limited by the cap or the agreed sum but can only courts. The party relying on a penalty declare the clause void where the clause must prove that there is an relevant conditions are met. (attributable) breach of contract. The court can reduce the level of a penalty and parties cannot contractually exclude this mitigation by the court.

However, the threshold for mitigation by a judge is high and a judge may only use its ability to intervene sparingly. Osborne Clarke in numbers Our locations around the world

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