13 September 2021
HOW DO YOU MITIGATE FINANCIAL RISK IN AN INTERNATIONAL CONTRACT?Contracts
If you enter into an international contract and deliver goods to a foreign contractor, you face liability. This could be as a result of defects in the goods, a delay in delivery or other forms of improper performance.
If you are the manufacturer of the goods, then you have control over their quality. The risk of defects may be greater if you are not the manufacturer of the goods, but you resell goods that you previously purchased from the manufacturer or even from another intermediary. If you guarantee delivery on a certain date, you assume the risk that the goods will be ready when the time comes. You are responsible for ensuring that the carrier delivers them to the agreed place at the agreed time.
How can you, through contractual provisions, limit your liability when a counterparty demands a penalty, damages, or price refund?
Imagine that you failed to deliver the goods to your contractor on time. They, in turn, have failed to meet their obligation to the final customer and have been charged a contractual penalty or lost the contract.
To cut a long story short: a number of events could occur that could cause your counterparty to claim penalties, damages, or demand a price refund from you.
How can you limit your liability by including appropriate clauses in your contract?
This can be done in several ways.
- First, I recommend including limitation of liability clauses in international contracts. You can limit your liability to a certain amount in almost each type of contract. Simply write in the contract that the liability of the party (or both parties) under the contract will not exceed the agreed amount. In such a situation, if even your counterparty suffered a loss greater than that amount, your liability will be limited to the agreed-upon level. The remainder of the damage remains your counterparty's risk.
- Remember that you can exclude liability for certain forms of fault. For example, you can stipulate in the contract that one of the parties (or both) are only liable for willful misconduct and gross negligence. However, they are not liable for unintentional fault (i.e., recklessness and negligence). In this case, minor negligence will not put you at risk of liability. Remember, however, that this clause does not exclude liability for defects in the goods, as this is independent of fault. Remember also that liability for wilful misconduct, i.e. intentional, conscious acts, cannot be excluded by contract.
- Certain categories of damage may also be excluded. In Polish law, damages are divided into two categories: actual loss and lost profits. The actual damage is the money that went out of the aggrieved party's property because the contracting party did not properly perform the contract. Lost profits are the money that the injured party could have earned, but did not because of the opposite party’s breach. It is common to find contractual clauses which exclude liability for lost profits.
- In Anglo-Saxon law and in the Vienna Convention on Contracts for the International Sale of Goods there is a different division of the types of damage. There are direct damages, indirect damages, consequential damages, and those that are only slightly related to the event of non-performance of the contract. You may therefore exclude certain categories of damage in the contract. Agree to be liable for direct damages and exclude liability for indirect, consequential or incidental damages. This article is not the place to go into detail about the differences between these types of damages. Just remember that the more types of damages you exclude, the less contractual risk you assume.
- In B2B contracts, liability for defects in goods can also be excluded or limited entirely. You can do this by defining what is a defect and what is not a defect. You can limit the types of claims of the buyer, for example by agreeing that they will not be able to withdraw from the contract, but only reduce the price or conversely that they will not be able to reduce the price, but only withdraw from the contract. You may also simply state that you exclude completely the liability for defects in goods.
- Remember that if you agree on contractual penalties, it is worth introducing their maximum cap, e.g. 10% of the contract value. This is especially important when it comes to contractual penalties for delayed delivery. Such a limit prevents the situation in which a prolonged delay causes penalties to run indefinitely.
Finally, it is worth emphasizing that the above methods are effective not only when the contract is governed by Polish law, but also if for various reasons you have agreed to conclude a contract to which the law of another country applies. Although you are not familiar with the regulations of this foreign law, you can protect yourself from certain liability through such clauses.
13 September 2021 | Agata Adamczyk LL.M
Agata Adamczyk LL.M
Legal CounselHOW DO YOU MITIGATE FINANCIAL RISK IN AN INTERNATIONAL CONTRACT?