Exemption clauses grounds termination

07 September 2006

Wienke Zwier

Contracts generally contain clauses that exclude or limit one party’s liability to the other. In fact, a contract that does not contain any kind of limitation or exclusion of liability would often be considered incomplete. Despite careful drafting, however, exclusion clauses can often be the subject of disputes between the parties to a contract. The decision by the Dutch court which we analyse below, addresses such a dispute (Court of Hertogenbosch, 13 April 2005).

The case

Kluwer, a Dutch publisher of, amongst other things, legal publications, developed a piece of software called Fidura Office that was created specifically for law firms. Fidura is a module based programme that allows users to store and use efficiently documents, files, contacts, financial administration, staff administration and more. According to Kluwer’s publicity material, Fidura is very easy to use and perfectly suited to small and middle-sized firms.

In December 2001, Steinz, a Dutch law firm, bought a licence of Fidura Office and Kluwer installed the software package at Steinz’s offices. Fidura Office did not function as well as expected. In fact, Fidura proved to be incompatible with Steinz’ operating system (Windows 98) to such an extent that only two of the eight modules could actually be operated at the same time. As a result Steinz, suffered financial losses.

In September 2003, Steinz served a notice of default on Kluwer, requiring Kluwer to rectify the performance issues. When Kluwer failed to do so, Steinz rescinded the agreement and brought a claim for damages against Kluwer. Kluwer counter-claimed, demanding payment of outstanding invoices and invoking the exclusion clause that formed part of its standard terms and conditions.

In addition, Kluwer argued that Steinz did not have a right to rescind the agreement as the applicable terms and conditions gave this right to Kluwer alone. Steinz, Kluwer asserted, only had a right to terminate the agreement, which meant that amounts already paid could not be claimed back as they could be in case of rescission. The Parties argued in court over the issues of whether the exclusion clause was valid and whether the agreement had been validly rescinded by Steinz or whether it had merely been terminated. The court rules that the exclusion clause was valid and limited the amount of the damages recoverable by Steinz to the maximum level provided for in that clause. However, the court ruled that Steinz’s rescission of the agreement was valid, despite the fact that Steinz had no right to do so under the agreement.

Legal perspective

From a legal perspective, the case is of interest for at least two reasons. First, the court dismissed Steinz’ claim that the exclusion clause was unreasonable reasoning that Steinz, being a law firm, has to be considered to understand the significance of exclusion clauses. Although this ruling in itself is not surprising, the court then went on to decide that the fact that one of the parties was insured against the damages being claimed was not in itself sufficient to make the exclusion clause unreasonable. Steinz had argued that the exclusion clause should not apply since Kluwer was insured for the damages being claimed. In this respect, the decision is a refinement of earlier case law. Previously case law had established that third party insurance can be a very relevant factor in deciding on the validity of exclusion clauses.

The second point worth noting in this decision is the fact that the court determined that Steinz was allowed to rescind the agreement despite not having a contractual right to do so. The court based its decision on grounds of reasonableness.

As a consequence, both parties need to undo anything that had been done in the performance of the agreement so as to put the parties in the position they were prior to the agreement being signed. For Kluwer, this meant having to reimburse Steinz for the amounts already paid. For Steinz, this meant returning Fidura Office. The court did not, however, address the question of whether, and if so how much, Steinz should pay for the period that Steinz did in fact use the Fidura Office software. The general principle is that a party should pay a fair value for the benefit of any goods or services received. Whilst Steinz did not receive much benefit as the software never functioned properly, it seems odd that the issue was not even considered by the court.