Third-party effect of exoneration clauses in commercial contracts

Based on settled case law and pursuant to Dutch law, however, exceptions to this general rule may occur, as a result of which exoneration clauses may under certain circumstances have legal effects for third parties.  For example, contractual parties may successfully rely on exoneration clauses with regard to third parties: third-party effect of the exoneration clause to the prejudice of the third party.

How frequently this exception – i.e. third-party effect of the exoneration clause to the prejudice of the third party- occurs, and under which circumstances, is the subject of this blogpost.

Exoneration clauses and third parties

The general principle is that contractual clauses only have legal effects for the contractual parties themselves. Based on settled case law, exceptions to this general rule may occur if such an exception is justified in the given circumstances.

In the Gegaste Uien judgment, the Dutch Supreme Court ruled that third-party effect of an exoneration clause was justified. The Supreme Court ruled that the subcontractor (C) had successfully relied on the exoneration clause that the subcontractor and contractor had agreed upon, towards the client (A), who was the third party. It was important in this regard that the client (A) had given the contractor (B) a free hand in the project (which involved processing onions) with regard to the subcontractor (C). Moreover, the subcontractor (C) did not know that there was a third owner involved; namely the client (A). For this reason, the subcontractor (C) might have had the assurance that he could rely on the exoneration towards the client (A), the third party.

In total, the Supreme Court has delivered five standard judgments concerning the effects of exoneration clauses to the prejudice of a third party. However, there are no general rules as regards whether and on which ground exoneration clauses have legal effects for third parties. In the assessment of the third-party effect of exoneration clauses, the court considers the specific circumstances that are important to the case at hand.

In the Citronas judgement, the Supreme Court ruled that judges should take into consideration the following circumstances in the assessment of third-party effect of an exoneration clause (Supreme Court 20 June 1986, NJ 1987/35). Firstly, the judge has to take into account that third-party effect of specific contracts, is under certain circumstances, part of Dutch law. See for instance article 7:226 DCC and article 7:361 DCC; third-party effect of a tenancy agreement with regard to the successive owner of immovable property. Secondly, the judge has to take into consideration certain actions of the third party that created confidence amongst the contractual party that the contractual party could rely on the exoneration clause with regard to the third party. See for instance the Gegaste uien judgement, where the client (A) (the third party) had given the contractor (B) a free hand in the project with regard to the subcontractor, whereby the subcontractor (C) had the assurance that he could rely on the exoneration towards the client (A), the third party. Thirdly, the judge has to take into account the nature of the relationship between the third party and the contractual party who relied on the exoneration towards the third party. See for instance the Securicor judgment, where the relationship between the third party and the contractual party was a long-term relationship with reference to the transport of money. See Supreme Court 12 January 1979, NJ 1979/362 (Securicor).

Based on subsequent case law,  judges should also take into consideration the following aspects: (i) involvement in the contract, i.e. whether or not the third party was closely involved in the contract with the exoneration clause, (ii) the specific role of the unit of the group, i.e. whether or not the third party (a company) and the contractual party (a different company) belong to the same group  (3) prevalence of the exoneration clause, i.e. whether or not the exoneration clause is widespread in the sector, and (4) (un)familiarity with the exoneration clause, i.e. whether or not the third party is familiar with the exoneration clause. See also AG Huydecoper’s opinion (nr. 13-14) in Supreme Court 26 November 2010 ECLI:NL:HR:2010:BM9757  (Edco/X).

The existing case law is however rather casuistic and vague. Therefore, it is difficult to predict whether or not third-party effect of exoneration clauses is justified. However, it would appear from recent case law that judges are more frequently adopting third-party effect of exoneration clauses. Some writers argue that an extension of third-party effect of exoneration clauses is appropriate in some cases, considering current practice, for example the construction and transport practice. In these sectors, a lot of work is outsourced to small-scale operating experts. As experts in these sectors are in a lower position, both hierarchical and financial, third-party effect of exoneration clauses is important to them. Experts in these sectors cannot bear eventual financial risks.

In such cases, it is important that the third party could have reasonably understood that he accepted third-party effect of the exoneration clause by outsourcing the work to the expert in question. Third-party effect can be adopted more easily if the third party is a professional party, who concludes commercial contracts in these sectors more often.  See Court of Appeal 14 June 2011, ECLI:NL:GHARN:2011:BR0248. where the Court of Appeal ruled that professionalism of the third party was relevant to the question of whether third-party effect of an exoneration clause was justified.

Conclusion

Whether or not the third-party effect of exoneration clauses will be justified, is difficult to predict. The Supreme Court has defined relevant circumstances that judges should take into consideration in the assessment of third-party effect of exoneration clauses. The existing case law is however rather casuistic and vague. It would appear from recent case law that judges are more frequently adopting third-party effect of exoneration clauses. However, the general rule remains that exoneration clauses only have legal effects for the contracting parties themselves.