Harmonization of Case Law on the Issue of Third-Party Claims for Damages Under a Contract

Can a third party to a contract assert, on the basis of tort liability, a breach of contract if that breach caused him or her damage?

The Court of Cassation recently ruled in this regard in a decision dated January 13, 2020, and cleared up the remaining uncertainties regarding the ability of a third party to a contract to invoke, on a tortious basis, a breach of contract that allegedly caused them harm (Cass. Plen. Jan. 13, 2020, No. 17-19.963).

Background. The Bourbon Sugar Company (the “Sugar Company”) and the Bois Rouge Sugar Company (the “Bois Rouge Company”) had entered into a memorandum of understanding to divide the industrial processing of sugarcane production on Réunion Island between two mills, with each factory operated by one of the companies. Following a fire that broke out in a thermal power plant—operated by the Compagnie Thermique de Bois Rouge, which supplied power to the Bois Rouge Company’s factory—the factory was shut down for four weeks. Sucrière then took on, at its own plant, a portion of the sugarcane processing that should have been carried out by the Bois Rouge plant, pursuant to a mutual assistance agreement for the sugarcane harvest season in the event of “a prolonged accidental shutdown of one of the mills,” concluded between the two sugar mills.

Sucrière, which suffered operating losses, filed an insurance claim with its insurer, who refused to cover the loss. The insurer was ultimately ordered by the Saint-Denis Court of Appeals to honor its coverage (Saint-Denis Court of Appeals, March 5, 2012, No. 10/02096). The appeal against this appellate ruling was not granted by the Court of Cassation. The insurer then filed a lawsuit with the Saint-Denis Mixed Commercial Court seeking an order requiring Bois Rouge and Compagnie Thermique to reimburse it for the compensation paid to Sucrière. In a judgment dated April 13, 2015, the Court dismissed this claim; this judgment was affirmed by the Saint-Denis Court of Appeal (decision of April 5, 2017 (No. 15/00876)). The court first held that the insurer could not base its subrogation claim on a breach of contract by Bois Rouge, as the latter could not be held liable due to the mutual assistance agreement between the two companies. Second, the Court of Appeals held that no action based on tort liability could be brought against Compagnie Thermique in the absence of fault.

An appeal to the Court of Cassation was filed against this ruling. The first ground for cassation, which raised the issue of contractual breach by Bois Rouge, was rejected. The second ground for cassation concerned the claim for damages against Compagnie Thermique. The Court of Cassation was asked to hold that the thermal power company was bound by an obligation of result, and that its failure to meet that obligation should be sufficient to constitute a breach of contract and to establish its liability toward Bois Rouge. This ground was based on the principle that third parties to a contract are entitled to invoke its defective performance when such performance has caused them harm, without having to provide further proof (an approach adopted, in particular, by the Court of Cassation’s decision of October 6, 2006, No. 05-13.255, known as the “Boot Shop” decision). Compagnie Thermique, on the other hand, argued that it did not follow from the “Boot Shop” decision that a breach of contract was necessarily a tortious act with respect to a third party. In this regard, it argued that the obligation to supply energy was a strictly contractual obligation of result. In light of the foregoing, can a third party to a contract, on the basis of tort liability, validly seek compensation for damages caused by a breach of contract attributable to one of the contracting parties? This was the question posed to the full bench. Under the terms of this ruling, the Court of Cassation held that a third party to a contract may, on the basis of tort liability, seek compensation for damages suffered as a result of a breach of contract by one of the contracting parties.

The Plenary Assembly of the Court of Cassation therefore quashed and set aside the judgment rendered by the Saint-Denis Court of Appeals pursuant to Articles 1165 and 1382 of the Civil Code (as in effect prior to Order No. 2016-131 of February 10, 2016).

First, the judgment reiterates the established legal principle by making specific reference to the “Boot Shop” decision, under which a third party to a contract may invoke, on the basis of tort liability, a breach of contract provided that such breach has caused the third party damage.

Second, the ruling reiterates the theory of the relative effect of contracts arising from the provisions of Article 1165 of the Civil Code (now Article 1199): agreements are effective only between the parties and do not affect third parties.

Third, the ruling cites the provisions of Article 1382 of the Civil Code, which states that “any act by a person that causes harm to another obligates the person at fault to provide compensation.”

Finally, the Court of Cassation states that

“a contracting party’s breach of a contractual obligation may constitute a tortious act with respect to a third party to the contract when it causes damage to that third party.”

Consequently, by affirming that “a third party to a contract may invoke, on the basis of tort liability, a breach of contract whenever such breach has caused him or her damage,” the Court of Cassation is consistent with the approach adopted in the “Boot Shop” decision. Despite numerous criticisms, doctrinal and jurisprudential debates, and, finally, attempts by the various civil chambers of the Court of Cassation to abandon the “Boot Shop” precedent, the Court of Cassation, sitting in plenary session, reaffirms its prior case law and thereby upholds the “Boot Shop” decision. In doing so, it puts an end to all debate and harmonizes the case law on the issue of a third party’s claim for damages under a contract.