Contracting out of liability for consequential loss under the proposed Common European Sales Law (CESL)

In the last entry it was noted that an innocent seller could have a ferociously disproportionate liability for consequential loss under the CESL and might have no right of redress against sellers further up the contractual chain. The question to be addressed now is whether the parties could contractually exclude or modify this liability. The example we can consider is the sale of an electric toaster by a retailer who receives it in a sealed package from a supplier and sends it on to the consumer. Indeed in some cases the retailer may never see even the package, which will be sent direct from the supplier further up the chain.  

There are three potential restrictions. All limit freedom of contract much more severely in business-to-consumer (B2C) contracts than in business-to-business (B2B) contracts.

The first potential restriction is the anti-cherry-picking rule in art. 8(3) of the Regulation introducing the CESL. This provides that “In relations between a trader and a consumer the Common European Sales Law may not be chosen partially, but only in its entirety”. There is no such restriction in B2B contracts. The effect in the present context is that a business selling an electric toaster to a consumer could not agree with the consumer that the CESL applied with the exception of the Section on Damages in Chapter 16. However, art. 8(3) would not prevent the parties from opting in to the CESL in its entirety but then modifying the effect of any non-mandatory provisions. The provisions on damages in Chapter 16 are non-mandatory.

The second potential restriction is the rule in art. 108 which provides that in a contract between a trader and a consumer the parties may not, to the detriment of the consumer, “exclude the application of this Chapter [i.e. Chapter 11 on the buyer’s remedies, not Chapter 16 on Damages] or derogate from or vary its effect before the lack of conformity is brought to the trader’s attention by the consumer”. The purpose of this provision is to allow the consumer to waive claims – e.g. as part of a settlement – after the event but to protect the consumer from being induced to waive them in advance.  It cannot be interpreted as ruling out contractual modification of the non-mandatory rules on damages in Chapter 16 because that would make some of the rules in the provisions on unfair contract terms redundant.

The third, and most relevant, restriction is in the provisions on unfair contract terms. In a B2C contract a term supplied by the business will not be binding on the consumer if it is unfair (art. 79). This applies only to terms which have not been individually negotiated (art. 83).

There is a list of terms which are regarded as always unfair. Of most relevance in the present context is any term designed to “exclude or limit the liability of the trader for death or personal injury caused to the consumer through an act or omission of the trader of someone acting on behalf of the trader” (art. 84(a). This, however, would not prevent a trader contracting out of liability for death or personal injury not caused by such an act or omission. Where a retailer merely supplies a reputable product in a sealed package, without having any opportunity to check or test the contents, it is difficult to see any act or omission on the retailer’s part which caused the death or injury, if “caused” is taken, as it surely should be, as referring to effective causation rather than “but for” causation.  Another kind of term which is always regarded as unfair is any term designed to “exclude or limit the liability of the trader for any loss or damage to the consumer caused deliberately or as a result of gross negligence”. This would clearly not apply to our innocent retailer. There is nothing else in the list of terms always regarded as unfair which could restrict the sort of contracting out under consideration.

There is also a list of terms which are presumed to be unfair. The only type of term in this list which is likely to be relevant here is a term whose object or effect is to “inappropriately exclude or limit the remedies available to the consumer against the trader… ” (art. 85(b) and (q)).  Here the key word is “inappropriately”. It would not, at first sight, seem inappropriate for an innocent retailer to try, in a completely transparent way, to limit a potential liability grossly disproportionate to the value of the transaction. Even if the term is presumed to be unfair the trader could rebut the presumption by showing that the term did not cause any significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer, contrary to good faith and fair dealing (art. 83(1)). The kind of term we are considering would be designed to remove a significant imbalance – namely the situation where a contract providing a profit of say 2 euros might result in a liability of 2 million euros for consequential loss for which the trader was not morally responsible, over which the trader had no control and in relation to which the trader might have no right of redress against any business further up the chain of supply. 

In B2B contracts there are hardly any limitations on contracting out.  A term would be regarded as unfair only if not individually negotiated and only if  “of such a nature that its use grossly deviates from good commercial practice, contrary to good faith and fair dealing” (art. 86(1)). The use of terms excluding or limiting liability for consequential loss would probably be regarded as in accordance with good commercial practice in many types of commercial sale contracts.

So it would be possible for an innocent retailer to contract “appropriately” out of excessive liability for consequential loss under the CESL.  Retailers’ organisations can be expected to raise this matter in the discussions on the drafting of model contracts for use under the CESL. However, it would be better to amend the basic rule in art. 161 so as to reduce the number of cases where contracting out would be needed.

It is interesting to note that in the USA the question of contracting out of liability for consequential damage is expressly regulated in section 2-719(3) of the Uniform Commercial Code. This provides that: 

 (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

 

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