Entities regularly enter into contractual relationships striving to exercise the rights and obligations specific for a particular relation, in a manner previously defined by the meeting of minds within the limits of mandatory regulations, public order and best practice. When concluding a contract and exercising rights and obligations from such relationship, the parties shall abide by the principles of fairness and diligence.
Article 17 para. 1 of the Law on Contracts and Torts of the Republic of Serbia (“LCT”) stipulates that the parties in a contractual relationship shall be obliged to fulfil their obligation and that they shall be responsible for its fulfilment. At the same time, the parties shall be obliged to fulfil their obligations with the diligence required for the particular contractual relation in a legal transaction, for the purpose of proper and timely fulfilment of obligations.
However, it often happens in practice that a legally perfect obligation from a valid contract is not fulfilled or it is fulfilled with delay, in which case the rule from Art. 17 para. 1 of the LCT raises a question of liability of the obligor concerned.
The principle of “causing no harm” (neminem laedere) contained in Art. 16 of the LCT establishes a general obligation to restrain from actions that may cause damage to other person. Failure to fulfil a contractual obligation or delayed fulfilment may cause damage to the obliged, hence this principle is applicable in the domain of contractual liability and it supplements the rule from Art. 17 para. 1 of the LCT.
The content of the contractual liability institute is defined in Art. 266 para. 2 of the LCT and it is exhausted by obligor’s obligation to compensate the creditor for damages caused by contract infringement. The obligor shall not be liable for such damages only in exceptional cases. If he failed to use the possibilities of contractual limitation and exclusion of liability, the obligor may be relieved of damage liability only by application of rules from Art. 263 of the LCT. This means that the obligor shall have to prove that the proper fulfilment of contractual obligation was impossible due to the circumstances that arose after the conclusion of contract which he could not prevent, eliminate or avoid.
Contractual extension of obligor’s liability
In accordance with Art. 264 para. 1 of the LCT, a contract may extend the obligor’s liability to include the cases that he is otherwise not liable for. In such cases, in regular circumstances and in the absence of special contractual provision, the obligor would not be liable by application of general i.e. legal basis for relief from liability. The obligor is here obliged, seemingly against his clear economic interest, to compensate the obliged for the damages even in situations when he might be relieved from such liability with reference to the legal provision on relief from such liability, and thus preserve certain value for his assets.
Nevertheless, such contractual provisions are often a response to special arrangements stipulated in the contract in the interest of the obligor (price, deadlines, etc.), wherefore the obligor undertakes enhanced liability. In order to prevent misuse related to these provisions, in para. 2 of the same Article the legislator limited the application of rules from para. 1 by stipulating that fulfilment of the provision on extension of liability may not be required if it would contravene the fundamental principles of diligence and fairness.
Therefore, in situations where contractual provision on extension of liability is not a consequence of reciprocity and exchange in a contractual relationship i.e. it is not agreed in good faith but rather results from misuse of power by one party, the law enables the obligor to use court mechanism and enforce protection against the other party’s request for damages in the part that exceeds lawful limits of liability.
Contractual exclusion of obligor’s liability
With regard to contractual exclusion of liability, the law undeniably permits exclusion only in relation to ordinary negligence. Obligor’s liability for intent and utmost negligence cannot be excluded in advance by contract, as per Art. 265 para. 1 of the LCT. What is more, the contractual provision on exclusion from liability relating to ordinary negligence may even be annulled in court at the request of the interested party, which will by default be the economically underprivileged obligor from the main transaction, given that such arrangement resulted from the monopoly position of the obligor or generally from the unbalanced relation between the parties.
Contractual limitation of obligor’s liability
The law recognises contractual limitation of liability according to the amount of compensation. Article 265 para. 3 of the LCT thus stipulates that the contractual provision specifying maximum compensation shall be valid if such amount is not in obvious disproportion to the damage and if not otherwise foreseen for a particular case. Although it may appear that this provision substantially relieves the obligor from obligation to prove the amount of sustained damages and that by its negotiation he would assume a more favourable position in court proceedings, this is nevertheless not the case.
The actual scope of Art. 265 para. 3 of the LCT is limitation of liability in terms of limiting the obligor’s liability for certain amount even when the real damages exceed it. In such case and in order to fully exercise his claim, the creditor would have to prove that he had sustained the damages up to the agreed limit because he voluntarily waived the possibility to claim damages that exceed such amount. By linguistic interpretation of the same provision, we came to the conclusion that maximum compensation (rather than the compensation as such) is agreed in this particular case, which means that the compensation amount may even be lower than the limited one if the sustained damage was less.
Therefore, by such contractual provision the burden of proof (that the damages sustained by the creditor were below the agreed limit) is not transferred to the obligor, but the creditor would still have to prove the amount of the damage sustained. This provision is favourable for the obligor in terms of limited liability and not for the creditor in terms of relief from the obligation to propose and present the evidence as regards the circumstance of damage amount.
Nevertheless, even in case of limited compensation amount, the creditor might still be entitled to full damage compensation if the inability to fulfil the obligation was caused on purpose or by gross negligence of the obligor (Art. 265 para. 4 of the LCT).
This article is to be considered as exclusively informative, with no intention to provide legal advice.
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By Ivana Ruzicic, Managing Partner, PR Legal