Contractual Guarantees and Exemption Clauses in Commercial Sales Contracts
Introduction
Legal systems create provisions that regulate a seller’s liabilities in sales agreements with respect to defects, as well as consequences thereto, in order to establish delivery of goods to the buyer under the conditions stipulated by the law and to prevent material, legal or economic defects that remove or substantially reduce the value of the goods, as well as the benefits expected therefrom. As these provisions are not of a mandatory nature, under the principle of freedom of contract, sellers may give contractual guarantees by undertaking risks that are not stipulated by the law, or they may reduce their risks by limiting their liability.
Contractual guarantees provide advantages to the buyer in case of defect, which are more extensive than those stipulated by the law, such as more speedy and simple legal remedies, prolonged validity periods for the rights of replacement or repair, removal of the requirement of the presence of legal conditions for defects liability, and removal or extension of the time limit for examination and inspection. In addition, these guarantees ease customer traction, enable the seller to determine its own guarantee conditions, rather than the regime, as stipulated by the law and, thus, to better understand its liabilities, and provide for the possibility to remove or limit the liability surrounding defects.
This Newsletter article explains the scope of contractual liabilities and specifically examines the validity of the provisions that remove or limit seller’s liability, and cases where such provisions are present within the standard sales terms of the seller in a general sense, within the framework of various legal systems. The subject of this article is limited to commercial sales between merchants and does not cover consumer sales.
Scope of the Contractual Guarantees
As is also the case in the Turkish law, the United Nations Convention on Contracts for the International Sale of Goods (“CISG” or “Convention”), as well as many other legal systems, stipulate optional rights, as well as the right to compensation for the buyer in the event of defect, such as rescission of the contract by notifying the seller that it is going to return the sold goods, request price reduction in proportion to the defect while retaining the goods, request free repair of the goods, which shall be covered by the seller, and request replacement of the goods with a defect-free similar good. The buyer is obliged to comply with the periods of examination and inspection that are stipulated in the applicable law. These rights may be extended, repeated, limited, or completely removed with the contractual guarantees stipulated in the sales contract.
In the event the parties are willing to apply contractual terms by removing the liability regime stipulated by the law, they must explicitly decide to do so; otherwise, the provisions regarding the defects liability shall continue to exist and compete with the claims that arise due to contractual guarantees[1]. For the sake of clarity, it must be stipulated under the sales contract that all of the provisions related to guarantee and liability, stipulated clearly or implicitly under the law be excluded and shall not be applied. In an unclear situation, interpretation shall be made in favor of the buyer[2].
Provisions that Limit or Remove the Seller’s Liability
The following examples may be given to the provisions that limit or completely remove liability: Provisions that completely remove seller’s liability; provisions that stipulate a compensation cap that shall be paid to the buyer (for example, indirect damages shall not be covered by the seller); provisions that limit the optional rights of the buyer (for example, not granting the right of rescission of the contract to the seller, granting only the rights of repair or replacement); provisions that shorten the time period for inspection of the sold goods, and notification of the seller regarding the defects or the period of limitation. As it is clear from the examples, limitation of liability not only refers to agreements that directly limit liability, but also to the agreements that aggravate the legal condition of the creditor under the legal regime that applies to liability[3].
In the doctrine, it is argued that a general contractual condition, which completely removes liability, shall not cover defects that fall beyond the scope of defects that the buyer could reasonably think of, and cannot be expected to be predicted by the buyer under the principle of good faith[4]. As well, a seller’s explicit notification of quality regarding the sold goods to the seller, while simultaneously concluding an agreement that generally removes liability, shall violate the contradictory conduct prohibition, and in that instance, provisions that remove liability shall be rendered invalid, in their entirety[5].
Validity of Exemption Clauses under Various Legal Systems
Provisions that limit or remove a seller’s liability in sales contracts qualify as “exemption clauses.” In many legal systems, exemption clauses are specifically regulated. Below, certain local laws and international conventions are examined in this respect:
- Turkish Law: Article 221 of the Turkish Code of Obligations numbered 6098 (“TCO”) is a special provision regarding exemption clauses in the sales contracts. Under this provision, if the seller is grossly negligent in delivering the defective goods, any agreement that removes or limits defects liability is invalid.
- Swiss Law: Under Article 100 of the Swiss Code of Obligations, any agreement purporting, in advance, to exclude or limit liability for unlawful intent, or gross negligence, is invalid.
- German Law: German law takes a more liberal approach to exemption clauses, and under Article 276/3 of the German Civil Code, these kinds of agreements are permitted, except in situations where the debtor deliberately violates the contract. In German law, there is a special regulation regarding exemption clauses under standard conditions, and this shall be examined in detail, below.
- English Law: Section 11 of the Unfair Contract Terms Act makes a stipulation for supervision regarding the reasonableness of the exemption clauses, and permits such clauses, to the extent they are reasonable.
- CISG: Exemption clauses are not explicitly regulated under the CISG. However, Article 6 of the Convention permits the parties to agree to exclude the application of the Convention or, derogate from, or vary, the effect of any of its provisions. Also, under Article 7/2 of the Convention, questions concerning matters governed by the Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. Accordingly, the parties may limit or remove seller’s liability. Also, under paragraph 4(a) of the CISG Advisory Council Opinion No. 17 on Limitation and Exclusion Clauses in CISG Contracts, it stipulates that the Convention does not preempt provisions of the applicable law, relying on notions, such as intentional or willful breach, gross negligence, breach of an essential term, gross unfairness, unreasonableness, or unconscionability, in cases where the Convention does not apply.
- Unidroit Principles 2016 (“Principles”): Under Article 7.1.6 of the Principles that regulate exemption clauses, exemption clauses may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract. In the Commentary to the said Article, the concept of “grossly unfair” is explained, and a term is defined as ‘grossly unfair,’ if it is inherently unfair, and its application, would lead to an evident imbalance between the performances of the parties. Moreover, according to the Commentary, again, even if the exemption clause is not in itself manifestly unfair, where the non-performance is the result of grossly negligent conduct, or where the aggrieved party could not have obviated the consequences of the limitation or exclusion of liability by taking out appropriate insurance, the exemption clause shall be invalid.
Exemption Clauses Included under the General Conditions of Sale
In practice, exemption clauses are generally included under a seller’s general conditions of sale. Standard conditions of sale are qualified as general terms and conditions. General terms and conditions are defined as “contract provisions that are prepared unilaterally in advance by the drafter for use in the future in numerous similar contracts and proposed to the other party” under Article 20 of the TCO. In a sales agreement, these conditions are generally stipulated by the seller, and requested to be signed by the seller as an annex to the sales agreement. Under Article 21 of the TCO, the general terms and conditions that are to the detriment of the opposing party shall be included within the scope of the contract only if the drafter informs the other party regarding the presence of that term, and gives the other party the option to review its content, and the other party so accepts. Otherwise, the general term and conditions shall be regarded as not having been made.
Article 25 of the TCO also regulates that the general terms and conditions shall not include terms detrimental to the other party in a manner contrary to good faith. For example, a standard term that stipulates that the buyer can use its right of replacement or repair only within three days following the sale, in the event the computer it has purchased is defective, should be considered invalid.
Article 307 of the German Civil Code is the provision that corresponds and makes clear the standard of good faith that Article 25 of the TCO aims to formulate[6]. In German law, which generally has a more liberal regime as to exemption clauses, there is a special provision for exemption clauses included under general terms and conditions. In the second sentence of the second paragraph of the Article, if the essential rights and obligations inherent in the nature of the contract are limited to such an extent that attainment of the purpose of the contract is jeopardized, it is accepted that the limitation unfairly aggravates the condition of the opposing party; and such an aggravation violates the principle of good faith, rendering it invalid.
Conclusion
Contractual guarantees given by the seller in sales contracts that replace the provisions of law related to the liability of defects is common practice. With contractual guarantees, optional rights of the buyer, such as rescission of the contract, repair, replacement and price reduction can be extended, repeated, limited, or completely removed from the contract. In the event the parties are willing to apply the provisions of the contract by removing the regime of liability foreseen in the law, this must be explicitly determined.
Provisions of sales contracts that limit or remove the liability of the seller qualify as “exemption clauses.” Exemption clauses are specifically regulated in many legal systems and international conventions, and are deemed invalid in cases of gross fault, willful neglect, or gross negligence of the seller, or when they are unreasonable or not proportionate.
In the event the exemption clauses are included under the seller’s standard terms of sales, and qualify as general terms and conditions, limitations that are to the detriment of the seller, and aggravate its condition in such a way that violates the principle of good faith, are considered as not having been made. Under German law, the general terms and conditions that restrict the inherent rights and obligations arising from the nature of the contract, to the extent that the purpose of the contract is jeopardized, are invalid.
[1] Kapancı, Kadir Berk: 6098 Sayılı Türk Borçlar Kanunu Açısından Satış hukukunda Ayıptan Doğan Sorumluluk ve Sözleşmesel Garanti Taahhütleri, İstanbul 2012, p. 187-188.
[2] Kapancı, p. 25.
[3] Kapancı, p. 24.
[4] Kapancı, p. 25; Aral, Fahrettin: Borçlar Hukuku Özel Borç İlişkileri, Ankara 2007, p. 152; Tandoğan, Haluk: Borçlar Hukuku Özel Borç İlişkileri, Cilt I, Ankara 1987, p. 175.
[5] Kapancı, p. 25; Akyol, Şener: Medeni Hukukta Çelişki Yasağı, Prof. Dr. Feyfi Feyzioğlu’nun Anısına Armağan, İstanbul 2007, p. 13 vd.; Gümüş, Alper Mustafa; Borçlar Hukuku Özel Hükümler, İstanbul 2008, p. 142; Yavuz, Cevdet: Satıcının Satılanın (Malın) Ayıplarından Sorumluluğu, İstanbul 1989, p. 98.
[6] Başalp, Nilgün: Sorumsuzluk Anlaşmaları, İstanbul 2011, p. 207.
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