New considerations on potential liability towards third parties resulting from a breach of contract

An Italian company specializing in the production of packaging machines had several units transported from Italy to France. A French affiliate of the Italian company entered into a contract with a third-party company for the handling and unloading of these machines. A machine was damaged in this process and the Italian company was indemnified by its insurer. As a result, the insurer, subrogated in the rights of the Italian company, brought an action in tort claiming to obtain damages against the contractor responsible for the damage.

The Paris Court of Appeal confirmed the insurer's claim, notably ruling – in accordance with previous case law – that ‘the liability limitation clauses contained in the general terms and conditions of the contract entered into between [the parties to the contract] do not apply [to the insurer]’ insofar as the insurer was acting in place of its insured, who was not a party to the contract. Pursuant to the interpretation of the courts prevailing at the time, it was possible for a third party to bring an action against a party to a contract on the grounds of contractual fault, provided that such fault has caused a prejudice to the third party, without the limitations of liability provided for in the contract being applicable.

The contractor appealed to the French Supreme Court. It argued ‘that when a third party invokes a breach of a contractual obligation on the basis of extra-contractual liability, the conditions and limitations of liability that apply between parties to the contract can be invoked against the third party’.

The French Supreme Court overruled the Paris Court of Appeal’s decision following a two-step reasoning.(Cass. Com., 3 juillet 2024, n°21-14947).

It first recalled the solution set out in its previous ‘Bootshop’ decision, stating that ‘The Cour de cassation (French Supreme Court) has ruled that a third party to a contract may rely on a breach of contract if that breach has caused him a loss or damage and sue in tort the contracting party in breach (Cass. Com., Ass. Plen., 6 Oct. 2006, no. 05-13.255) and that if it establishes a causal link between such breach of contract and the damage it suffers, it is not required to prove a tort, delict or quasi-delict separate from such breach (Cass. Com., Ass. Plen., 13 Jan. 2020, no 17-19.963)’.

It then went back over one of the consequences of its decision that allowed a third party to bring an action in tort without the limitations of liability provided for in the contract being applicable. Setting out a new precedent, it ruled that a third party suing a party to a contract in tort ‘may be subject to the conditions and limits of liability that apply in relations between contracting parties’. In short, the third party relying on a breach of contract may from now on be bound by the limitations of liability set out in the relevant contract.

The French Supreme Court’s decision thus shed some light on the requirements under which a party to a contract may incur extra-contractual civil liability towards a third party.

Although it continues to recognise the possibility of such extra-contractual civil liability towards third parties, the Supreme court limits the risk for the contracting party by admitting that the contractual limitations of liability are enforceable against third parties. This is clearly pointed out by the Supreme court which states that, ‘in order not to frustrate the expectations of the [contractual] debtor, which entered into the contract on the basis of the general economy of the contract, and not to put the third party which relies on the contract in a more advantageous situation than that of the [contractual] creditor itself’.

As a result, clauses limiting or excluding liability must now be considered as likely to be enforceable against third parties in any agreement, including, but not limited to, confidentiality agreements, share purchase agreements or shareholders’ agreements.

This decision improves legal certainty by clarifying that a third party action in tort will be subject to the same conditions and limits of liability that apply between contracting parties. It should also be reminded that with any breach of contract being a potential source of liability for the parties to a contract towards third parties, if the parties agree to amend some of their undertakings (which is often the case in practice in contracts such as shareholder’s agreements, whose performance takes place over a long period of time) or if one party agrees that the other party will be released from certain of its obligations, such amendments or waivers will have to be formalised in writing to prevent a third party from taking advantage of any alleged breach of contract.

Next steps

If you would like to discuss these updates and how they impact transactions and corporate engineering in more detail, please do not hesitate to get in touch with a member of our Paris Corporate & Finance and Litigation teams.

Authored by Xavier Doumen, Arthur Dethomas, Nicolas Rohfritsch, and Louis-Nicolas Ricard.