Parties to a contract should have a clear understanding of their rights and obligations under the Civil Code and craft contracts which reflect that writes Jose Arcila.
The cornerstone of Spanish contractual civil liability is Article 1101 of the Civil Code which states that a party privy to a contract incurs liability when it breaches its obligations or otherwise delays in performance.This is quite separate from liability issues arising from tort, product liability or consumer protection.
In terms of civil liability there is no provision under Spanish law limiting the damage exposure of a party.The Civil Code in fact establishes a principle of universal recourse where all assets of the parties, including future assets, are inevitably affected to the payment of damage compensation in case of breach, unless otherwise agreed upon by the parties in certain cases.While contractual liability is theoretically unlimited as to the amount, the parties may try to eliminate, limit or increase, as the case may be, their otherwise general exposure.
Furthermore, the principle of liability coexists with the traditional remedies available to a non-faulty party, such as the right to either request specific performance or enforce a right to terminate the broken contractual relation and request damage compensation.
Also the termination and damage compensation option remains a remedy available at all times despite the fact that the non-faulty party originally requested specific performance.This alternative remedy is available whenever performance subsequently becomes an impossible undertaking, for any reason.
As it is always the case in matters where a right has been violated or an obligation breached, a non-faulty party has the burden of proof as to the violation or the breach.The charged faulty party on the defence side may try to evidence that the breach of the obligation, if any, was not faulty. Unlike the trend in tort liability, where Spanish law evolved to a system based on strict liability, irrespective of negligence, contractual liability is generally predicated on the basis of fault or negligence, unless otherwise stipulated by the parties in a specific undertaking.
It is a clear principle of Spanish law that a breach of a contract does not automatically entail an obligation by the faulty party to pay compensation. Compensation can be claimed only if and when a non-faulty party has sustained damages. Moreover, a non-faulty party must exhaustively prove the existence of damages and the causeeffect relation between the breach and the damage. Failure to prove causation bars the action for damages.
In certain cases where proof of damages may turn out to be a complex issue, liquidated damages are often paid to the non-faulty party.
Wilful misconduct
The Civil Code establishes an across-the-board extension of liability in any circumstance where there is a finding of wilful misconduct in the action or omission of a faulty party. It specifically provides that the liability arising from wilful misconduct can be claimed at all times and that any waiver of that liability is null and void.
The level of negligence involved in each case can be determined by the courts which also calibrate the liability exposure. Historically, courts have taken into account situations where in spite of good faith faulty parties breached; cases where the breaching party mitigated damages after the breach; or, issues of contributory negligence.
Negligence is defined in the Code as the omission of an expected duty of care which standards are to be measured in view of the prevailing factual circumstances.These circumstances include the nature of the obligation, the peculiarities of the parties entering into the contract and other factual aspects as may be relevant in terms of analysing the various angles of breach or performance, as the case may be. Case law and scholars’ doctrine have historically drawn a distinction between simple negligence and gross negligence.
As a general principle a party will not be held responsible in cases of unexpected events or unavoidable events beyond their reasonable control, a force majeur.
Compensation for damages (direct and consequential) and loss of profit is identified as the general remedy in case of breach. In establishing damage compensation, the courts must proceed on the basis of a hypothetical comparison between the actual assets of a non-faulty party before breach and the assets that the non-faulty party would presumably have had if the faulty party would not have breached.
Moral damages meanwhile are increasingly, yet sluggishly, being accepted by the legal doctrine.The associated problem of moral damages in a traditionally nonlitigious society still pivots on the difficulty of establishing a fair monetary amount that would restore the victim to the position prior to the breach. Punitive and exemplary damages do not exist in Spain.
The compensation for which a faulty party may be held liable depends on the degree of its own negligence. Compensation in cases of wilful misconduct renders the faulty party fully responsible for any an all damages sustained by the non-faulty party. However, in cases involving negligence, compensation is limited to those damages that could have been reasonably foreseen at the time the obligation was undertaken. It is difficult to determine with precision what damages are included in the chain of effects triggered by a party who breached by fault or negligence.The general principle that those damages must be strictly limited to those that could have been reasonably foreseen is the golden rule. A breach involving wilful misconduct does not have the same limitations and exposes the party in breach to unlimited damages.
Liability exposure
Nothing under Spanish law would prevent parties to a contract negotiating the rules on their respective liability exposure. As a rule parties may freely agree on any terms and conditions provided these terms and conditions are not contrary to the law, the morality or public policy.
Liability may be modified in various ways, directly and indirectly.Within certain limits and in certain cases the parties may attempt to limit their liability exposure by introducing in their contracts full exoneration clauses or clauses limiting their exposure. In other cases, they may try to increase the liability and aggravate their natural exposure.
On other occasions, the parties may indirectly limit their damage exposure by introducing clauses affecting the natural way to face contractual liability.These usually consist of clauses establishing minimum thresholds, limiting the time to bring action below the standard statute of limitation or restraining a plaintiff ability to attach certain assets of the defendant to the exclusion of others, thus revamping the principle of debtor unlimited assets recourse.
Freedom has its limits, however.Where the parties have originally agreed upon exoneration or limitation clauses that were in principle validly entered into, the mere finding of wilful misconduct by a court simply does away with any exoneration or limitation of liability clause which may have been otherwise freely and legitimately agreed upon by the parties.
It may be difficult to conciliate a clause where one of the parties exonerates from liability with the idea of a binding commitment.The reason for this is that if a party to a contract would know in advance and for certain that no matter what its behaviour may be in terms of performance it will never attain any liability in view of an exoneration of liability clause, there would be no legal reason (other than an ethical reason) to abide by a contract because its breach will be penalty-free.
This would ultimately mean that performance of a contract would become an arbitrary decision of one of the parties and therefore that a contract does not have any value as between the parties since the non-faulty party would never have a remedy in law to compensate for the unbalance which is inevitably involved in any breach.This would violate a basic principle of Spanish law according to which the performance of a contract cannot be left to the arbitrary decision of one of the parties. In a world where the value of a contract preserves the value of a business, the principle of freedom of contract permitting a party to exonerate from liability would ultimately have perverted that system of attribution of responsibility on which legal protection and free enterprise constitutional principles are predicated.
Probably the most accepted theory is that full exoneration clauses are unenforceable when the liability arises from gross-rated negligence. It is difficult to distinguish, however, between wilful misconduct and gross negligence and some case law has concluded that a distinction between one and the other will require knowledge as to the arcane intention of the fault feasor, which is humanly impossible. For this reason, generally gross negligence and wilful misconduct are assimilated for all practical purposes.
There is general agreement that a full liability exoneration clause is legally acceptable if the behaviour involves only simple negligence; that is, breach through failure to observe a duty which should and could have been avoided. Spanish Law allows parties to agree on standards of care and that only in lieu of an agreement in this regard, the standard of care to be used by the court will be that of a reasonable head of a household.
The question is, then, under what conditions is a less than a total exoneration of liability or a limitation of liability permitted under Spanish law in the absence of wilful misconduct?
Clauses limiting liability, however frequent in practice, are not always are fully enforceable.The key element rendering a limitation clause unenforceable does not depend only on the wording of the clause but on how the factual circumstances developed during the contract implementation and performance phases until the breach. Moreover, the time when the clause is intended to be enforced is also critical. For instance, while a clause limiting a party’s liability may be valid on paper, subsequent wilful misconduct behaviour will, as stated above, inevitably render the limitation unenforceable. In turn, a non-faulty party may not validly waive its rights against a party which breached its obligations because said non-faulty party will at all times after breach have a cause of action against the faulty party. However, nothing under Spanish law may preclude that non-faulty party from waiving its rights once the breach has taken place and the extent of the damage is known since nobody is obliged to pursue its rights in a court-of-law against a faulty party.
The ability of the parties in terms of negotiating clauses limiting (or by the same token aggravating or increasing) their liability is conceived by Spanish law as part of barter.The exchange cycle of the respective consideration of the parties is what ultimately supports the idea that a party may accept the limitation of liability of the other; hence, a restriction on its available remedies in case of breach.The law is satisfied when it assumes that a limitation of liability must have its counterpart value somewhere in the legal relation.That value may be a have money significance or may be found in related to socio-economic factors than legal reasons. For example, a party may legitimately and understandably not be willing to expose itself to unlimited damage because of state of the art reasons. In other cases, a party may be willing to enter into a contract only if there is a reasonable limitation of liability clause because it may feel uncomfortable with the highly discretionary nature of the notion of performance. Other reasons may involve market difficulties to find a reliable service or good provider who may not be willing to expose except if protected by limitation of liability clauses. All these may be good reasons why goods or services providers may not be willing to deliver the good or provide the service unless there is in place a tested clause limiting its risk.
Other clauses indirectly limiting the liability such as thresholds, time barring effect to bring action, limiting recourse to identifiable assets, establishment of obligations of means (as opposed to obligation of results) and other clauses intended to restrict legal liability exposure are variations of the same theme and therefore subject to scrutiny.
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.
