International Contracts

Slide Set 8
Liability Limitation Clauses
General Contractual Damages Liability
Liquidated Damages
Matti Rudanko
Guarantee Terms 1: Usual Contents
• 1. Role of inspection of the goods
• 2. Terminology
– warranty / guarantee / defects liability period
• 3. Definition of defect
– Defects existing at the time of risk passing (see Incoterms)
– Materials, design, workmanship; not: “fair tear and wear” /
misuse / abuse
– Service and repair; must be authorized by the guarantor?
• 4. The duration, start and end of guaranteee period
• 5. Contents of guarantee liability
– The seller is legally liable for defects even without any guarantee
– The guarantee specifies the liability
– Is it a limitation or extension of liability? It can be either

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Guarantee Terms 2

• Beginning of guarantee period (e.g. the following times)

Inspection by Acceptance of
Delivery Test results
the buyer goods (buyer)
• Extension of guarantee period
– Defects arisen under but perceived only after the period: if the
term allows such claims (matter of interpretation)
– There may be special time limits for claims / bringing an action
in court
– Repairs at the end of the guarantee period

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Guarantee Terms 3

• Cf. Defects Liability Period

• The Defects Liability Period shall be a period of six months from the date of delivery.
• If any defect occurs during the Defects Liability Period, the Buyer shall forthwith
inform the Seller stating in writing the nature of the defect.
• The Seller shall be responsible for making good with all possible speed any defect
so notified which arises from defective materials, workmanship or design.
• The provisions of this clause shall apply to any Goods repaired, re-placed or
otherwise made good by the Seller, but not so as to extend the Defects Liability
Period for more than twelve months from the commencement date of original defects
liability period.

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Guarantee and Damages 1

The • The duty of t he Seller to repair or replace defective

items is the Seller’s only duty under this contract or

guarante otherwise, and the Seller shall not be liable to

compensate the Buyer for any other loss of use of
any Works belonging to the Buyer (whether
e as a complete or partial) or for any loss of any profit or
for any indirect or consequential damage that may

limitation be suffered by the Buyer.

• Restriction of the liability period and time for claims

of
• Legal liability of the seller cannot be restricted with
respect to consumers
• The risk of adjusting the contract (also in B2B
liability: relations)

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Guarantee and Damages 2

The
Guarantee
as a • The Seller shall indemnify
specification and hold harmless the Buyer
(or against any loss or damage
extension) of whether direct or indirect
liability suffered by the Buyer as the
(formulation result of defective or faulty
of a goods delivered by the Seller.
contracty
term)
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Direct and indirect (consequential) loss

Demurrage
(down-time) costs
Damage to other • Labour costs, fixed
property (caused expenses Profit of lost
Costs of repair Lost jobs etc.
by e.g. a broken • Cancellation costs projects
(reliance interest; see
machine) slide set 9)
• Lost profit

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Types of Liability Limitations
Maximum Own risk Damage Class Causes of Basis of
limits - consequential Damage Liability
- fixed losses -force - slight
- percentage Cf. hold majeure negligence
harmless terms
Carriage by Product SGA Bills of Damages
Sea Act 9:5, Liability Act Exchange Act 4:1
12; 10:5; 8,2 § Act 54 § (liability of
13:30 Cheques an
Act 48 § employee)

Cf. transfer of liability risk: subcontractors, insurances

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Pros and Cons of Liability Limitations

No effect on third parties

Control of liability
risks No effect on liability for intent
• Foreseeability Facilitates liability
• Risk borne by the insurance (deliberate action) or gross negligence
efficient risk bearer coverage
The binding force limited especially in
standard terms of contract
• Unreasonableness (unfairness)
Liability
limitations cannot • Threshold of valid incorporation in a contract
be set aside by • Surprising and strict terms not necessarily valid
Rationalization of referring to extra- • Interpretation: against the author; narrow
contracting contractual interpretation )
liability (Carriage
by Sea Act 9:2 ja
3 etc.) Mandatory norms on contents
• E.g. Consumer Protection Act

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Damages Liability, CISG (Common Rules
for the Seller and the Buyer)
• Damages is optionally additional to other remedies
• Damages for breach of contract by one party consist of
a sum equal to the loss, including loss of profit, suffered
by the other party as a consequence of the breach.
• Such damages may not exceed the loss which the party
in breach foresaw or ought to have foreseen at the time
of the conclusion of the contract, in the light of the facts
and matters of which he then knew or ought to have
known, as a possible consequence of the breach of
contract. (CISG art. 74)

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Damages Liability, CISG (Cont.)

• Article 79
• (1) A party is not liable for a failure to perform any of his
obligations if he proves that the failure was due to an
impediment beyond his control and that he could not
reasonably be expected to have taken the impediment
into account at the time of the conclusion of the contract
or to have avoided or overcome it or its consequences.

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The Structure of Damages

P r e r e q u is it e s
of
dam ages

D am age of N e g l ig e n c e (A d e q u a te )
c o m p e n s a b le ( b l a m e w o r t h i- causal
c a te g o ry n e s s ) (o r r e la tio n s h ip /
s t r ic t lia b ilit y ) p u rp o s e o f n o rm

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The organization of damages

T h e B a s ic D is t in c t io n o f D a m a g e s L a w

D am ages
Law

C o n tra c t L a w T o rt L a w
( C o n tr a c t b e tw e e n ( d a m a g e s o u ts id e
t h e in ju re d p a r ty c o n tra c tu a l
a n d th e to rtfe a s o r) r e la t io n s h ip s )

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The Significance of the Basic Distinction

Contract
Tort Liability
Liability

general rule: only

(pure) economic loss physical injuries and
damages to property

burden of proof of burden of proof of

negligence reversed on negligence too lies on
the tortfeasor the injured person

covers both employees

and employed
covers only employees
independent
contractors

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Liquidated Damages 1

• Formulation of a liquidated damages term

– If the Seller fails to supply any of the Goods within the time period
specified in the Contract, the Buyer shall notify the Seller that a breach
of contract has occurred and shall deduct from the Contract Price per
week of delay, as liquidated damages, a sum equivalent to one half
percent of the delivered price of the delayed Goods until actual delivery
up to a maximum deduction of 10 % of the delivered price of the
delayed Goods.

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 Liquidated Damages (agreed provision
of damages)
• No proof of the existence of damage or other legal prerequisites of
liability, only the breach of contract
– The standardised sum is available irrespective of the real damage
– Usually the real damage exceeding the agreed sum is recoverable
under general legal rules (depends on the agreed term)
• Possibility of adjustment (up or down)
• High (punishment or deterrent type) liquidate damages can be
deemed null and void as penalty terms under the English doctrine
• Liquidated damages attached to the non-attainment of intermediate
stages e.g. in building contracts are usually for control of
anticipatory breaches of contract (unfavorable to the liable party,
because timely completion of whole performance does not exempt
from accrued intermediate sanctions)

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Late (Delayed) Delivery 1

• Art. 10 Late-delivery, non-delivery and remedies thereof

• 10.1 When there is delay in delivery of any goods, the Buyer is
entitled to claim liquidated damages equal to 0.5% or such other
percentage as may be agreed of the price of those goods for each
complete week of delay, provided the Buyer notifies the Seller of
the delay. Where the Buyer so notifies the Seller within 15 days
from the agreed date of delivery, damages will run from the agreed
date of delivery or from the last day within the agreed period of
delivery. Where the Buyer so notifies the Seller after 15 days of the
agreed date of delivery, damages will run from the date of the
notice Liquidated damages for delay shall not exceed 5% of the
price of the delayed goods or such other maximum amount as may
be agreed.

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Late (Delayed) Delivery 2

• 10.2 If the parties have agreed upon a cancellation date in Box A-9,
the Buyer may terminate the Contract by notification to the Seller as
regards goods which have not been de livered by such cancellation
date for any reason whatsoever (including a force majeure event).
• 10.3 When article 10.2 does not apply and the Seller has not
delivered the goods by the date on which the Buyer has become
entitled to the maximum amount of liquidated damages under
article 10 1, the Buyer may give notice in writing to terminate the
Contract as regards such goods, if they have not been delivered to
the Buyer within 5 days of receipt of such notice by the Seller.

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Late (Delayed) Delivery 3

• 10.4 In case of termination of the Contract under article

10.2 or 10.3 then in addition to any amount paid or
payable under article 10.1, the Buyer is entitled to claim
damages for any additional loss not exceeding 10% of
the price of the non-delivered goods.
• 10.5 The remedies under this article are exclusive of any
other remedy for delay in delivery or non-delivery.

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ICC Art. 11: Non-conformity of the Goods

• 11.2 Goods will be deemed to conform to the Contract despite

minor discrepancies which are usual in the particular trade or
through course of dealing between the parties, but the Buyer will be
entitled to any abatement of the price usual in the trade or through
course of dealing for such discrepancies
• 11.3 Where goods are non-conforming (and provided the Buyer,
having given notice of the lack of conformity in compliance with
article 11,1, does not elect in the notice to retain them), the Seller
shall at his option,
• (a) replace the goods with conforming goods, without any additional
expense to the Buyer, or
• (b) repair the goods, without any additional expense to the Buyer or
• (e) reimburse to the Buyer the price paid for the non-conforming
goods and thereby terminate the Contract as regards those goods.

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ICC art. 11 cont.

• The Buyer will be entitled to liquidated damages as quantified under

artlcle 10,1 for each complete week of delay between the date of
notification of the non­-conformity according to article 11,1 and the
supply of substitute goods under article 11.3 (a) or repair under
artlele 11 3 (b) above. Such damages may be accumulated with
damages (if any) payable under article 10.1, but can in no case
exceed in the aggregate 5% of the price of those goods.
• 11.4 If the Seller has failed to perform his duties under article 11,3
by the date on which the Buyer becomes entitled to the maximum
amount of liquidated damages according to that article, the Buyer
may give notice in writing to terminate the Contract as regards the
non-conforming goods unless the supply of replacement goods or
the repair is effected within 5 days of receipt of such notice by the
Seller.

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ICC art. 11 cont.

• 11.5 Where the Contract is terminated under article 11.3 (c) or

article 11.4, then in addition to any amount paid or payable under
article 11,3 as reimbursement of the price and damages for any
delay, the Buyer is entitled to damages for any additional loss not
exceeding 10% of the price of the non-conforming goods.
• 11.6 Where the Buyer elects to retain non-conforming goods, he
shall be entitled to a sum equal to the difference between the value
of the goods at the agreed place of destination if they had
conformed with the Contract and their value at the same place as
delivered, such sum not to exceed 15 % of the price of those
goods.
• 11.7 Unless otherwise agreed in writing, the remedies under this
article 11 are exclusive of any other remedy for non-conformity.

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