Overview
A warranty is a commitment to reach a certain outcome that is binding even in the event of force majeure. A no-warranty clause ("NWC") intends to fully exonerate a contracting party from its warranty obligations towards the other party.
NWCs must be distinguished from other similar provisions. They are different from limited liability clauses in that limited liability clauses aim at civil liability claims and not at warranty claims. NWCs also differ from defective product provisions by focusing on the special regime of the producer's liability and not all warranty claims. This QuickCounsel reviews the use on NWCs, the benefits and risks of the clauses, and their acceptance under the law.
Illustrations of NWCs
In Sales Contracts
In civil law countries, the seller has the legal obligation to warrant the buyer against eviction and hidden defects of the goods sold (Article 1625 French Civil Code, article 1475 Spanish Civil Code). However, the seller can restrict his obligation with an NWC. The NWC will permit the seller to avoid the consequences of unforeseeable circumstances ("cas fortuit") that he would normally be liable for.
An example of an NWC in an equipment sales contract would be: "With regard to hidden defects, the seller warrants the good condition of the automobile but does not warrant any defects that may arise in the engine."
In Leasing Contracts
In civil law countries, the lessor, like a seller, must warrant the lessee against eviction and hidden defects of the leased property (Articles 1721 and 1725 French Civil Code, article 1553 of the Spanish Civil Code). However, an NWC allows for derogations from these articles. In that case, the lessee will not be able to claim damages for hidden defects or for the disturbances which appeared during the performance of the contract.
An example of an NWC for hidden defects would be: "The lessor does not warrant against any humidity and any of its consequences to the leased property if it results from the premises or from a flood."
In Sale of Shares Contracts
A seller of shares may wish to insert an NWC when selling shares of a company. Under this type of clause, the seller may exclude its warranty for risks concerning the company whose shares are transferred. An example of an NWC in a sale of shares contract would be: "The seller does not warrant for any claim against the Company resulting from environmental harms caused by a third party."
In Patent Assignment Contracts
In the area of intellectual property, the NWC can exclude the warranty for hidden defects of the patent. When the effectiveness of the NWC is established, the assignor avoids any claim for compensation from the assignee.
An example of an NWC in patent assignment contracts would be: "The licensor will not be held accountable for any accident caused by introducing the patent into another product."
Opportunity for NWCs
For the seller, the lessor or the assignor, NWCs aim to transfer a risk from one contracting party to the other. Thus, an NWC insulates the seller from bearing the costs of any existing or potential risk. Risk in fact extends beyond liability. As an example, the mere threat of a legal action may create a risk whereas it would not create a liability. Moreover, the advantage of an NWC is that it even transfers risk in the case of force majeure. This protects a seller, a lessor or an assignor from compensating a party in the vast majority of situations. As a consequence, an NWC is more powerful than a limited liability clause and thus, a party should make use of its advantages.
Statutory Validity of NWCs
There are several statutory regimes concerning NWCs. Some are mandatory and thus parties may not derogate from them without rendering the clause ineffective. Others, however, provide more flexibility. The following sections will explore the validity of NWCs under the existing legal regulations.
In Sales Contracts: Warranty Against Eviction
Eviction is defined as the disturbance of a tenant's possession or his expulsion, which deprives him of the enjoyment of the premises, or any portion thereof, by title or by entry and act of the landlord (Ballentine's Law Dictionary 2010 LexisNexis).
The French Civil Code provides two warranties in the case of eviction: one when eviction is caused by an act of the seller and one when it is the fault of a third party.
Article 1628 of the French Civil Code prohibits the exclusion of a warranty of eviction when the eviction results from an act of the seller. Therefore, when drafting an NWC, it is important that its language is carefully crafted to avoid its qualification as a prohibited article 1628 clause.
Under article 1627 of the French Civil Code, NWCs are valid against an eviction caused by third party actions. However, certain limitations restrict these clauses. First, the clause is vitiated if the seller acts in bad faith. Second, there must not be any fraud in the inducement. Third, the clause may not negate the contract's main obligation. Finally, article 1629 states that a party may limit all of its obligations except reimbursement of the purchase price. Therefore, besides these four limitations, an NWC will be valid against third party actions.
In the Spanish Civil Code, article 1475 permits contractors to remove legal obligations of the seller. Nevertheless, a clause that exempts the seller from responding to eviction and is written in bad faith will be considered void.
Moreover, pursuant to article 1477 of the Spanish Civil Code, a seller's right to waive its warranty obligations is limited. In the case of eviction, a seller is required to reimburse the buyer. The reimbursement equals the value of the property at the time of eviction. The exemption to this is if the buyer had known the risks of eviction and failed to pursue appropriate measures.
In the Ukrainian Civil Code, NWCs for eviction are not permitted. According to Ukrainian law, once the product is sold, the seller waives all rights to it. Thus, an NWC for an act of the seller is invalid. Pursuant to article 661 of the Ukrainian Civil Code, the seller cannot exclude its warranty when an eviction is caused by a third party. Thus, the seller may be required to compensate the buyer in the event of an eviction caused by a third party.
Insurance Law
Article L. 113-1 of the French Code of Insurance holds that NWCs for losses and damages caused by the insured party are valid. Their validity requires certain formal requirements and they must be limited in scope. The French Court of Cassation has ruled that a clause from an insurance contract excluding the insurer's liability in the case where the insured party was intoxicated, was neither sufficiently formal nor limited. The Court considered that it was not possible for the insured party to determine the minimal blood alcohol level above which the insurer would no longer cover the insured party. Therefore, the validity of an NWC is restricted by conditions of formality and a limitation of scope.
Consumer Law
Article L. 132-1 of the French Consumer Code addresses abusive provisions (clauses abusives) in contracts concluded between a professional and either a consumer or a professional acting outside of its business. This article holds that abusive provisions are clauses aimed at creating, or resulting in the creation of, a significant imbalance between the rights and obligations of the parties. The abusive nature of a provision is assessed by examining all of its surrounding circumstances, the contract's other clauses, and the parties' related contracts. Under article L. 132-1, a public order provision, abusive provisions are deemed unwritten. The annex of the Code also provides a non-exhaustive list of clauses that are considered abusive. According to this list, clauses which deprive the consumer of its legal rights are considered abusive provisions. NWCs fall under the list and, as a consequence, are deemed abusive and not written.
Article L. 211-1 of the French Consumer Code provides for the warranty of conformity of contractual goods. This article concerns consumers and professionals acting outside of their professional activity and only applies to warranties for the sale of tangible, movable property. This represents a new mandatory system on warranties. Indeed, according to article L. 211-17 of the French Consumer Code, any provision excluding buyers' rights is deemed nonexistent. However, this provision is only valid if the agreement to limit warranty was entered into after the buyer had already claimed nonconformity. Therefore, the NWC will be valid only if drafted between two professionals or between a professional and a consumer after the appearance of the nonconformity.
Validity Under Case Law
There are several cases concerning NWCs. Their holdings complement the previously discussed statutes. The following sections will explore the validity of NWCs under the existing case law.
In Sales Contracts: Warranty for Hidden Defects
Under article 1643 of the French Civil Code, the seller may remove its warranty for hidden defects that he could not have known. The French Court of Cassation held that NWCs are only valid between two professionals in the same business activity. (French Court of Cassation, November 6, 1978). The clause will not be enforceable for professionals in different activities such as a clause between an auto-mechanic and a truck driver (French Court of Cassation, July 21, 1987).
Finally, the French Court of Cassation has addressed the issue of NWCs in a group of contracts (with several sales and leasing contracts). It was held that the NWC inserted in the first contract of sale was not valid against the final purchaser (French Court of Cassation, June 22, 2011).
In the German Civil Code, article 444 also restricts the use of NWCs against hidden defects. This article states that a seller may not exclude the buyer's rights regarding a defect if the seller has either fraudulently concealed the defect, or warranted the quality of the product. The German Supreme Court held that when a seller does not expressly exclude its warranty and does not inform the buyer of the defect, the seller must warrant the product (German Supreme Court (BGH), September 23, 2011).
In the Spanish Civil Code, article 1485 concerns NWCs for hidden defects. Under this article, the parties may provide for an NWC. However, in the case where the seller knew of the defect, the clause is rendered invalid.
In Sale of Shares Contracts
The seller can provide for an NWC in order to expressly exclude certain liabilities of the company whose shares are sold. However, the French Court of Cassation held that an NWC is not valid if the seller knew and did not disclose the liabilities of the company whose shares were sold (French Court of Cassation, March 15, 2005). However, as there are no texts on NWCs in the case of a sale of shares contract, one cannot extract a general principle from this single case.
Efficiency of NWCs
Drafting Requirements of the Clause
The NWC has several drafting requirements. To facilitate the process, the parties should agree on the conditions of the NWC. The parties must consider the subjective and objective conditions of the clause. Subjective conditions refer to the people affected by the NWC. Objective conditions concern the warranty triggers (types of defects, types of goods, conditions of use, length of the warranty period, etc.). It is also possible to combine several limitations. For example, by excluding a certain type of defect and limiting the time to make a claim. It is also important to establish the conditions and time period to effectively claim the warranty right. Finally, the parties should determine the seller's resulting obligations.
The parties should carefully draft the wording of this clause. For example, an NWC concerning solely the authenticity of the goods has been interpreted to strictly apply to the authenticity and not to hidden defects (French Court of Cassation, November 24, 1993).
Therefore, an effective NWC will contemplate all the aforementioned conditions.
Invocation of the Clause
A seller may invoke the NWC by exercising its rights within the time and scope included in the clause. Therefore, in the case where the buyer claims warranty rights, its claim may not succeed.
Conclusion
Nowadays, due to the standardization of clauses and to the applicability of general conditions of sales and services between professionals, NWCs have become more common. However, their drafting is less flexible due to national statutory and jurisprudential limitations which exist in different countries. In order to provide for NWCs in different countries, the parties should add that the NWC is agreed upon "to the extent permitted by the applicable law." This QuickCounsel gives in-house counsel a broad understanding of the use, advantage, and limits of NWCs.
Additional Resources
- Clause de non-garantie et action directe exercée au sein d'une chaîne de contrats (Dalloz Etudiant, January 12, 2012) Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts Legifrance German Civil Code Spanish Civil Code (in Spanish and in English)