European Union: Top Tips For Contracting And Contractual Remedies Across Europe

The nature of business today and the increasing frequency of cross-border transactions means that UK companies need to be aware of the contractual requirements of other jurisdictions, when negotiating and performing contracts. In this article, Lawrence Graham LLP, with the assistance of some of its European contacts, takes a comparative look at some of these requirements with particular emphasis on some of the more unusual and therefore unexpected aspects of French, Italian, Dutch, Portuguese, Swiss, German and Belgian law.

Pre-contract negotiations and documents

During negotiations and prior to entering into a formal written contract, it is common for the parties to set out their intentions in a document containing the main principles of the proposed agreement (often known as a "memorandum of understanding", "letter of intent" or "heads of terms"). In general, this document, is not legally binding, however, different European jurisdictions hold this document and the negotiations surrounding it in different regard.

Under English law, if a formal written agreement is not subsequently signed then the parties will not normally be bound by the terms of the pre-contractual document. Moreover, the "parol evidence rule" provides that outside evidence cannot be admitted to vary a written contract once it is signed.

German law works on a similar basis in that, pre-contractual documents are, in general, not considered binding, however, it is possible, that the intention of the parties to be bound can be drawn from an interpretation of the pre-contractual document. There is also a duty to negotiate in good faith with a view to concluding a binding agreement, which can give rise to liability should one party withdraw from negotiations. This duty is common to a number of European jurisdictions including Portugal and the Netherlands, although its extent and nature may vary from country to country.

In Belgium, as in the UK, the binding nature of a pre-contractual agreement is determined by its content and making the pre-contractual document "subject to contract" is in itself not sufficient to prevent it from binding the parties.

Contractual Terms

Under English law, in the absence of express terms, certain provisions will be implied into a contract from various sources, including statutes and by common law. The parties may wish to exclude some or all of these terms and the extent to which they are able to do so will depend on a number of different factors, including statutory provisions and whether one of the contracting parties is a consumer. It is standard practice in all jurisdictions for businesses to attempt to limit their potential liability under contracts but they must ensure that such exclusions are not excessive and therefore potentially unenforceable.

When parties seek to limit their liability under English law, they must ensure that the limitations are reasonable and do not exclude liability for matters such as fraudulent misrepresentation and death or personal injury caused by the partys negligence. In contracts between businesses that are on the written standard terms of one party, that party can only exclude or restrict their liability for breach of contract to the extent that it is reasonable.

The laws of France and Germany follow similar principles. As with English law, particular care must be taken when attempting to limit either partys liability under a contract and in Germany, such a clause may be held to be invalid if it (a) limits the statutory liability for violation of a fundamental contractual obligation; (b) limits liability for damage to a persons health, body or life; or (c) excludes certain remedies for breach of warranty. In France, limits on liability are usually valid in the absence of gross negligence although it should be noted that if a provision seeks to limit liability in respect of essential obligations, it may be held to be invalid.

German law also provides that contractual provisions which have not been individually negotiated are subject to restrictive legislation and may be invalid if they deviate from the statutory rules in a way that is unreasonably disadvantageous to the other party.

In Italy, as in Germany and the UK, contracts which are based on a partys standard terms are governed by specific rules. They must not exclude or limit liability for wrongful intent, gross negligence or any statutory provisions which protect public order, and any other exclusions must be specifically accepted. As in the UK, special care must be taken when contracting with consumers and liability for death or personal injury cannot be limited or excluded, and neither can the total or partial non-performance of an obligation.

Under Portuguese law, the extent to which a court will allow the exclusion of implied terms, is entirely dependent on whether such exclusion would be detrimental to the other party or would be contrary to public policy or public interest.

Contracts concluded under Dutch law are governed by the principles of reasonableness and fairness which take priority over any express terms contained within the contract. Therefore, negotiated provisions and even mandatory law can be set aside, if they conflict with reasonableness and fairness.

Warranties and Indemnities

In contrast to laws of the European jurisdiction, English law draws a distinction between warranties and indemnities and the protection offered by each. A warranty is a contractual assurance about past or present facts, a breach of which may give the other party the right to claim in damages but not to terminate the contract. An indemnity is a promise by one party to the other to reimburse the other party for a particular type of liability that may arise in the future and would give the beneficiary an automatic right to payment.

The Belgian Civil Code, like the laws of most European countries, does not address the concept of warranties and indemnities separately, and they are instead combined in the general principles governing contractual liability. In practice however, Belgian contracts, under Anglo-Saxon influence, often include warranties and indemnities.

Under Portuguese law a breach of a warranty is, in principle, considered a breach of contract and entitles the non-breaching party to seek damages and, if the warranty was essential to the non-breaching party, to terminate the contract.

Breach of Contract and Remedies

Damages

Under English law, the main remedy for breach of contract is damages which are, in general, compensatory rather than punitive. In order to claim substantial (rather than nominal) damages, the claiming party must show that it has suffered a real loss which is not too remote. Damages are measured in three main ways:

(i) the "expectation measure" aims to return the claimant to the position they would have occupied had the contract been properly performed;

(ii) the "reliance measure" seeks to restore the victim to the position he was in before the breach; and

(iii) in exceptional cases, restitutionary damages may be awarded if the party in breach was unjustly enriched by their actions.

In the UK, as well as in other European jurisdictions, including Belgium, Italy and Switzerland, the party claiming damages must take steps to mitigate their loss, and the courts will not award damages for any loss that could have been avoided by the claimant taking reasonable actions.

In France, the purpose of damages is similarly to compensate for the direct loss suffered by a party due to the breach but not to punish the defaulting party. The assessment of damages usually takes into account the loss suffered by the victim, as well as any shortfall in earnings and there may be compensation for other specific losses depending on the situation.

Dutch law defines two types of damages that can be sought; additional and alternative. Alternative damages seek to remedy the breach of contract by compensating for the breach itself, and can only be claimed when performance of the terms of the agreement is impossible. Additional damages relate to losses suffered indirectly by the breach and the claimant does not need to prove the breach or that the contract cannot be performed.

In Italy, a breach of contract allows the "victim" to: terminate, if the breach is not significant; claim specific performance; or, claim damages in addition to termination but instead of specific performance. Damages are awarded for "positive loss" (similar to direct loss and includes costs and expenses incurred by the claimant) and "negative loss" (similar to indirect loss, and which includes lost profits).

Liquidated Damages and Penalty Clauses

The parties to an agreement may choose to simplify the mechanism by which damages can be claimed and include an express provision setting out exactly how much the parties can claim for specific breaches, regardless of the actual loss suffered and whether that loss can be proved. Such "liquidated damages" provide certainty and can also remove the need to go to court. However, in the UK parties must be careful that such damages are not construed as punitive penalty clauses which, under English law, are unenforceable. In order for an amount classed as liquidated damages to be enforceable, it must be a genuine pre-estimate of the anticipated loss that may be suffered.

German law also draws a distinction between liquidated damages and penalties. Liquidated damages are used to assist in determining and proving actual damages, whereas a penalty clause is used to secure the performance of contractual obligations. Both types of clauses are generally permissible. Dutch law is very similar to German law, in that parties are entitled to conclude contracts in any way they wish, which means that liquidated damages are permissible, subject always to the principles of reasonableness and fairness.

In Belgium, Portugal, Italy and France liquidated damages are permissible but may be reduced by the courts if they are where viewed as excessive. Under Swiss law, if liquidated damages are included in a contract in relation to non-performance or improper performance, the claimant may only claim either performance or liquidated damages (but not both) in the absence of an agreement to the contrary. Liquidated damages are payable even if there has been no loss, but if the actual damage suffered exceeds the amount of liquidated damages, then fault must be proved in order to claim the excess.

In conclusion&.

Whilst, this article has only taken a very brief look at some of the differences between the laws governing contracts in different European jurisdictions, it is clear that despite the close proximity of our European counterparts, their approaches to contract law and the rights of the parties can differ hugely. Therefore, it is crucial that businesses do not assume that, because a contract is governed by the laws of another European jurisdiction, the principles will be the same (or very similar) to those applicable in the country in which that business is based. Local legal advice should always be sought as soon as negotiations between the parties begin, in order to ensure that anomalies are not overlooked and to provide the parties with a clear view as to their rights and remedies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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