French Supreme Court strikes out limitation of liability provision from an IT contract where the software publisher breached a material obligation

04 June 2007

Sandrine Rambaud

In a recent decision, the Commercial Chamber of the French Supreme Court held that the breach of a material obligation in an IT contract resulted in the limitation of liability provisions being unenforceable. This is an important case for all parties entering into IT contracts under French law and makes it critical for parties to agree in the contract the list of obligations that should be considered material.

Limitation of liability clauses are intended to contractually limit the liability of the signing parties – most commonly by defining financial limits on the damages the parties can recover from each other in the event of breach and excluding liability for certain types of damages (loss of profit, indirect or consequential loss) altogether.

Under French law, these clauses are valid in theory, but cannot exclude or limit liability for gross misconduct or fraud. Clauses seeking to do so will be unenforceable. Furthermore, in a series of cases over recent years involving Chronopost (a French mail carrier), the French Supreme Court has looked at the enforceability of limitation of liability clauses in the event of breach of a material obligation of the contract. In the first (1996) and most recent (2006) cases, the Supreme Court held that in the event of breach of a material obligation a limitation of liability clause could be stricken from a contract as its application would contradict the scope and aim of the commitment. However, in the interceding cases (2002 and 2005), the Supreme Court enforced limitation of liability clauses on the basis that there was no gross misconduct (or fraud) and that gross misconduct could not result merely from a breach of a contractual obligation, however material, but must be based on the seriousness of the defendant’s actions.

Therefore, under previous French case law, there appeared to be two grounds on which a limitation of liability clause may be stricken: A breach of a material obligation, or gross misconduct (or fraud) which can only be assessed by taking into account the seriousness of the defendant’s actions.

The Supreme Court considered this topic again in the case of Faurecia v Oracle, Ineum Consulting and Franfinance in February 2007 (Case no. 05-17.407). In 1999, Faurecia entered into a series of contracts to upgrade its IT systems with a software supplier and a service provider – including software licences, implementation and maintainence agreements and training contracts. Faurecia was looking for a planned software version that had not yet been released and its Iberian sites were not Year 2000 compliant, therefore the parties decided to implement an interim solution.

There were problems with the implementation of this solution and the new software version was not provided so Faurecia stopped making payments for the licence fees. The software supplier had transferred the rights to the licence fees to Franfinance, and Franfinance filed a claim for payment of these fees. Faurecia responded by joining the software supplier and the service provider to the claim, and counter-claiming for the recission of the contracts on the basis of fraud, or alternatively the termination of the contracts for breach.

In its decision of 31 March 2005, the Court of Appeal ordered the partial rescission of the licence agreement, and the termination of the other contracts, considering in particular that the software publisher had not delivered the updated version of the software, despite its undertaking to do so. However, at the same time, it limited Faurecia's compensation by applying the limitation of liability clause as provided in the licence agreement. Faurecia had not claimed gross misconduct and as such the Court of Appeal held it could not strike out the limitation of liability clause. This was understandable given the uncertainty in the Supreme Court’s previous decisions as to whether breach of a material obligation can be grounds for striking out a limitation of liability clause. What was less understandable, as this formed the core subject matter of the contract, was the Court of Appeal’s decision that not delivering the new version of the software did not amount to breach of a material obligation – without providing any further explanation.

On 13 February 2007, the Supreme Court, having reiterated that pursuant to Article 1131 of the French Civil Code, a breach of a material obligation prevents application of a limitation of liability clause, partly overturned the Court of Appeal's decision. The Supreme Court held that, once the Court of Appeal had acknowledged that the software supplier (a) had undertaken to deliver the new version of the software and that this was the objective of the contracts executed, (b) had not fulfilled this obligation, and (c) was not in a position to claim force majeure, the Court of Appeal should have considered that this was a breach of a material obligation, and held that the limitation of liability clause should be stricken. According to the Supreme Court, the facts noted by the Court of Appeal could not result in any other decision.

The fact that the court maintained that the breach of a material obligation is grounds to strike out limitation of liability clauses is good news for all those who are seeking to strike out such clauses. This is particularly important in relation to IT contracts, where the parties' obligations are often interlinked and relatively complex, as it can be difficult to establish that the service provider's actions are sufficiently serious to constitute fraud or gross misconduct. It would also appear easier to establish that an obligation that is not met or is badly performed by the service provider was a material obligation. For example, the Supreme Court in the Securinfor case in 2001 struck out a limitation of liability clause in an IT maintenance contract due to breach of a material obligation (in this case, the breach of the undertaking to intervene "within 48 hours"). This case law highlights the necessity to include in contracts clauses which stipulate which obligations are material to the parties and should be taken into account by those, particularly IT suppliers, considering entering into contracts to be governed by French law.