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Limitation of Liability and Penalty Clauses - International Law Office

International Law Office

Litigation - Colombia

Limitation of Liability and Penalty Clauses

July 03 2001


The usual limitation of liability clauses included in international contracts have been interpreted and given effect under Colombian law by courts and arbitration tribunals, even when it is decided that the relevant contract is subject to Colombian law. Such clauses usually limit the amount of damages and exclude liability for loss of profits and for indirect, consequential, incidental or punitive damages.

Under the Colombian Civil Code the indemnification for damages includes actual damages and loss of profits. 'Actual damages' are defined as the damages caused by the party not having complied with its obligations, or from imperfect or late performance. 'Loss of profits' is defined as the profits that the non-breaching party fails to obtain as a result of the breach(1).

In case of breach of contract, if the breaching party is not liable for wilful misconduct it will only be liable for the damages that were foreseen or could have been foreseen when the contract was entered into. If the given party is liable for wilful misconduct then it will be liable for all damages that are an immediate and direct consequence of the breach. The parties may agree to modify these rules. However, forgiveness of wilful misconduct is expressly prohibited(2).

The courts and arbitral tribunals have accepted that it is possible for the parties to a contract to limit either the extent of the liability or the amount for which a party could be liable in case of breach of contract.

As to the limitation of the extent of the liability, the Civil Code provides for certain rules regarding the liability of the parties to a contract(3), but indicates that the parties may modify these rules by mutual agreement. Since Article 1522 of the Civil Code expressly prohibits forgiveness of wilful misconduct the parties to a contract may agree on the extent of its liability, but they will always be liable for wilful misconduct.

In accordance with these rules, one may conclude the following under Colombian civil and commercial law:

  • It is legally possible to limit the degree of liability of one of the parties under an agreement, provided that such limitation does not imply a forgiveness of wilful misconduct and that the law does not expressly prohibit the limitation.

  • Even in the case of wilful misconduct, the breaching party will only be liable for the damages that are a direct and immediate consequence of the breach. Therefore, there is no obligation to indemnify for indirect or punitive damages.

  • Loss of profits is considered direct damages (ie, the loss must arise as a direct and immediate consequence of the breach). Therefore, they may be excluded, except in case of wilful misconduct.

  • Consequential damages may be validly excluded.

With respect to the limitation of the amount of the liability, Article 16 of Law 446 of 1998 provides that in any judicial or arbitral proceeding the valuation of damages must result in an equitable and integral repair thereof. This provision has been interpreted by some commentators to mean that one of the parties cannot validly limit the amount of damages to which the other party may be entitled. However, following these rules, if the parties have limited the amount of the liability a judge would have to follow the agreement of the parties unless:

  • there is wilful misconduct;

  • the limitation is expressly prohibited by law(4); or

  • the amount agreed as the limit of the damages is so low that it voids the right to an indemnity.

Penalty clauses are also permitted. One of the categories of clause is deemed an advanced liquidation of damages (not exactly a limitation on the amount of the damages). Pursuant to Article 1592 and following of the Civil Code, as interpreted by Colombian jurisprudence and doctrine, there are three different types of penalty clauses:

  • Penalty clauses as sanctions for delay. This type of penalty clause is payable in case of breach of contract or delay in the performance of an obligation. If expressly agreed in the given clause, it is payable without prejudice of the right of the non-breaching party to claim, in addition to the penalty, the performance of the contract or the termination thereof, in both cases with indemnification for damages.

  • Penalty clauses as guarantees. In this case, a third party undertakes to pay a penalty in case of breach of contract or delay in the performance of the obligations of one of the parties to an agreement.

  • Penalty clause as advanced liquidation of damages. Under this type of penalty clause, the parties agree to a sum for damages so that the sum to be paid for damages by either party in case of breach of contract would be the sum provided for in the contract. In this case, neither the party who has to pay the damages in case of breach could not claim that the real amount of the damages is lower; nor could the non-breaching party claim that the real amount of damages is higher.


For further information on this topic please contact Eduardo Zuleta at Zuleta, Garrido, Araque & Jaramillo Abogados by telephone (+571 310 6614) or by fax (+571 310 6286) or by e-mail (ezuleta@zulga.com).


Endnotes

(1) Civil Code, Article 1614.

(2) Civil Code, Articles 1614 and 1522.

(3) Article 1604 of the Civil Code provides that the debtor shall be only liable for wilful misconduct in contracts that only benefit the creditor, for ordinary negligence in contracts that benefit both parties and for slight negligence in contracts that only benefit the debtor.

(4) Certain provisions of the Commercial Code on transportation agreements forbid clauses limiting liability of the transporter.


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