December 11 2007
On May 10 2007(1) the Supreme Court's Second Division ruled on third parties' rights to recover damages for loss arising from breach of contract.
A building backing on to a cliff and surrounded by a retaining wall burned down on January 1 1993. The owners and their insurers conducted a survey and agreed on the compensation. However, the insurers refused to pay the compensation immediately, arguing that a criminal investigation was under way. The investigation was subsequently closed, but the insurers continued to withhold payment.
In the meantime, a secondary school annex building on the cliff experienced problems from March 1994. A survey by a court-appointed expert was ordered and on May 25 1994 a danger notice was issued ordering the school’s regional authority and the owners of the building to carry out urgent repair work. The regional authority had begun to carry out its share of the work when, on August 18 1994, a portion of the retaining wall collapsed, followed by the collapse of a portion of the school building.
The regional authority brought legal proceedings against the owners of the first building and their insurers. The regional authority argued that the collapse of the school building was caused by the inability of the first building’s owners to carry out the required work on the retaining wall because of the delayed insurance payment - hence the loss suffered by the regional authority was attributable to the insurers’ breach of contract and should be compensated.
The appeal court found that the insurers had committed a tort by not paying the agreed compensation, which had resulted in the damage to the school building.
The Supreme Court affirmed that third parties have standing to sue for loss caused by breach of an insurance contract.
The doctrine of privity of contract is enshrined in Article 1165 of the Civil Code. However, the courts hold that a breach of contract causing loss to third parties may constitute a tort for which aggrieved third parties are entitled to compensation.(2) The third parties need show merely that their loss was caused by the breach of contract.(3) The action is brought in tort even though the loss arose from breach of contract.
The decision clarifies the scope of third parties' rights to bring an action for damages based on breach of an insurance contract.
First, such actions do not preclude other remedies available to third parties to an insurance contract, such as a direct action,(4) which is an action that a party which has suffered loss caused by an insured party may bring directly against the latter’s insurer. The court held that these remedies are not mutually exclusive and may be combined. Thus, the action based on the right of a third party to recover damages for loss arising from breach of contract is an ordinary remedy - not specifically related to an insurance contract - and is therefore subject to a 10-year limitation period, whereas the limitation period for a direct action is two years.
Second, the Supreme Court upheld the appeal court’s ruling that the insurers were liable in tort to the regional authority, even though the loss arose from a breach of contract. The amount of damages awarded in an action based on breach of contract is assessed without reference to the exclusions and limits of liability specified in the breached contract, whereas a direct action is based on the contract.
The Supreme Court confirmed the appeal court’s finding that the retaining wall had collapsed because of the insurer’s delaying tactics (the characterization of the insurers’ conduct as delaying tactics was within the unfettered discretion of the trial and appeal courts). The insurers had had no reason to delay compensation payment for over a year. The appeal court and the Supreme Court considered that the damage to the school building was caused by the insurer's late payment and that damages should be awarded to the regional authority.
For further information on this topic please contact Carole Sportes at BOPS (SCP Bouckaert Ormen Passemard Sportes) by telephone (+33 1 70 37 39 00) or by fax (+33 1 70 37 39 01) or by email (firstname.lastname@example.org).
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