Contractual Clauses Limiting a Supplier’s Liability for Intentional Breach Are Null and Void
⚖️ Ukraine | Commercial Disputes | Supply Contracts | Limitation of Liability
Case Details
Case No.: 910/18489/20
Proceedings No.: 12-46гс22
Court: Grand Chamber of the Supreme Court
Decision Date: 6 September 2023
Case Category: Commercial Law / Contract Law
Subject Matter: Limitation of Supplier’s Liability for Intentional Breach
Sub-Subject: Supply Agreement / Limitation of Liability / Defective Goods / Damages / Limitation Periods
Buyer: Potoky LLC
Supplier: Bühler Service LLC
Supply Agreement: No. GL/FU-17-03-2017 dated 17 March 2017
Goods: Sunflower seed preparation line
Key Issue: Whether parties to a commercial supply agreement may exclude or limit the supplier’s liability for an intentional breach of contractual obligations, and what limitation periods apply to claims concerning latent and apparent defects in goods covered by a warranty
Outcome: The Grand Chamber held that contractual provisions excluding or limiting a supplier’s liability for an intentional breach are null and void under Article 614(3) of the Civil Code of Ukraine. It also clarified that claims concerning latent defects in goods covered by a warranty are subject to a one-year limitation period, while claims concerning apparent defects are subject to a six-month limitation period.
Background of the Dispute
The buyer entered into a supply agreement with the supplier for a sunflower seed preparation line.
Under the agreement, the supplier was required not only to deliver the equipment but also to guarantee that, during operation, it would achieve specified quality and productivity parameters.
The buyer alleged that the supplied equipment failed to meet those guaranteed parameters.
According to the buyer, the supplier also failed to remedy the deficiencies. The buyer therefore acquired additional equipment, installed it and reconstructed its production premises in order to bring the production line to the performance parameters agreed in the supply contract.
The buyer subsequently brought proceedings seeking damages, a contractual penalty and relief concerning provisions of the supply agreement that restricted the supplier’s liability. The supplier filed a counterclaim seeking interest arising from the buyer’s delay in paying for the goods.
The Contract Contained Broad Limitations of Liability
The dispute concerned, among other provisions, clauses 6.7 and 7.3 of the supply agreement.
Clause 6.7 provided that the parties would not be liable to each other for production downtime, shutdown of the enterprise, lost profits, lost contractual advantages, financial or economic losses or consequential losses, irrespective of the legal basis of the claim.
Clause 7.3 generally limited any claims by the buyer to 5% of the total contract value, subject to specified exceptions.
The buyer argued that these provisions unlawfully restricted the supplier’s liability for failure properly to perform its contractual obligations.
The question before the Grand Chamber was therefore not simply whether commercial parties are generally entitled to negotiate limitations of liability, but whether contractual freedom extends to excluding or limiting liability for an intentional breach of an obligation.
Liability for Intentional Breach Cannot Be Contracted Away
The Grand Chamber relied on Article 614(3) of the Civil Code of Ukraine.
Under that provision, a transaction by which liability for an intentional breach of an obligation is cancelled or restricted is null and void.
The Court therefore concluded that the relevant provisions of the supply agreement, to the extent that they restricted the supplier’s liability for intentional breach, were null and void.
This places a mandatory statutory limit on the principle of freedom of contract.
Commercial parties may negotiate the allocation of contractual risks and may, within the limits permitted by law, agree liability caps, exclusions of particular categories of losses and other mechanisms restricting liability.
They cannot, however, use those contractual mechanisms to remove or restrict liability for an intentional breach.
The fact that a limitation was expressly negotiated and incorporated into a commercial agreement does not override Article 614(3) of the Civil Code.
A Null and Void Clause Does Not Need to Be Declared Invalid
An important procedural aspect of the judgment concerned the legal nature of the disputed clauses.
The buyer had asked the courts to declare clauses 6.7 and 7.3 invalid.
The Grand Chamber clarified that, insofar as those clauses limited liability for intentional breach, they were already null and void by operation of law under Article 614(3) of the Civil Code.
This distinction matters.
A contractual provision that is void by operation of law does not require a separate judicial declaration of invalidity in order to be deprived of legal effect.
The Grand Chamber therefore found that the appellate court had incorrectly approached the issue by granting the claim seeking a declaration that the relevant provisions were invalid. The appropriate legal analysis was that the provisions restricting liability for intentional breach were already null and void.
The Rule Is Not Limited to Manufacturers
The supplier also argued that the restriction contained in Article 216(3) of the Commercial Code should not apply because it was not the manufacturer of the equipment.
The Grand Chamber rejected that interpretation.
Article 216(3) establishes the principle that a commercial agreement cannot contain a reservation excluding or limiting the liability of a manufacturer or seller of products.
The Supreme Court held that this principle applies to a broader category of relationships than those governed specifically by legislation concerning damage caused by defective products.
Importantly, it applies both to manufacturers and sellers.
Accordingly, a supplier cannot avoid the relevant statutory restriction merely because it did not itself manufacture the goods that it supplied.
Contractual Damages Are Different from Product Liability
The Grand Chamber also addressed the supplier’s reliance on the Law of Ukraine “On Liability for Damage Caused by Defective Products.”
The Court distinguished the statutory product-liability regime from liability for breach of a supply agreement.
The dispute concerned losses allegedly caused because the supplied equipment failed to satisfy contractual requirements concerning its quality and productivity.
Such claims arise from the supplier’s alleged breach of its contractual obligations and may therefore fall within the contractual damages regime, including Article 623 of the Civil Code.
The Law “On Liability for Damage Caused by Defective Products” does not govern claims for compensation for losses caused by a supplier’s breach of contractual requirements concerning the quality and productivity parameters of goods.
The distinction is significant because contractual liability and product liability protect different interests and operate under different legal conditions.
Contractual Penalty Arrangements Do Not Override the Mandatory Rule
Ukrainian commercial law permits parties, in certain circumstances, to regulate the relationship between damages and contractual penalties.
The supplier relied on those provisions in arguing that the parties were entitled to structure and limit the remedies available under their contract.
The Grand Chamber rejected the argument insofar as it concerned intentional breach.
Rules allowing parties to establish particular arrangements concerning penalties and damages do not displace the mandatory rule contained in Article 614(3) of the Civil Code.
Accordingly, an exclusive-remedy mechanism, contractual penalty or limitation of recoverable losses cannot be used to circumvent the statutory rule that liability for intentional breach cannot be excluded or restricted.
Different Limitation Periods Apply to Latent and Apparent Defects
The Grand Chamber also addressed the limitation period applicable to claims concerning defects in goods where a warranty period has been established.
The Court distinguished between latent defects and apparent defects.
In commercial relations, claims relating to latent defects in goods covered by a warranty are subject to a one-year limitation period under Article 681 of the Civil Code of Ukraine.
By contrast, claims concerning apparent defects in such goods are subject to a six-month limitation period under Article 269(8) of the Commercial Code of Ukraine. Вставлений текст
The distinction can be particularly important in disputes involving industrial machinery and technically complex equipment, where deficiencies may become apparent only after installation, commissioning or sustained operation.
Determining whether a defect was latent or apparent may therefore directly affect whether a buyer’s claim was brought within the applicable limitation period.
The Supreme Court’s Decision
The Grand Chamber clarified several principles relevant to Ukrainian commercial supply contracts.
First, contractual provisions cancelling or limiting liability for an intentional breach of an obligation are null and void under Article 614(3) of the Civil Code of Ukraine.
Second, the principle in Article 216(3) of the Commercial Code concerning the inadmissibility of contractual exclusion or limitation of liability is not confined to manufacturers. It extends to sellers of products as well.
Third, the Law of Ukraine “On Liability for Damage Caused by Defective Products” does not govern contractual claims for losses caused by a supplier’s failure to comply with agreed quality and productivity parameters.
Finally, the Court distinguished between the limitation periods applicable to latent and apparent defects in goods covered by a warranty: one year for latent defects and six months for apparent defects.
The judgment therefore provides guidance not only on liability clauses but also on the legal classification and timing of claims arising from defective goods.
Why This Decision Matters
The judgment demonstrates that contractual freedom in Ukrainian commercial law has mandatory limits.
Liability caps, exclusions of consequential losses and exclusive-remedy provisions are common in sophisticated commercial agreements. Their inclusion in a signed contract, however, does not necessarily mean that they will operate in every circumstance.
The decision is particularly relevant where:
a supply agreement contains an overall contractual liability cap;
a supplier seeks to exclude liability for lost profits, production downtime or consequential losses;
a contractual limitation is invoked in circumstances involving an alleged intentional breach;
a seller argues that statutory restrictions apply only to manufacturers;
industrial equipment fails to achieve expressly guaranteed quality or productivity parameters;
a buyer incurs additional expenditure to bring defective equipment into contractual compliance;
the parties dispute whether product-liability legislation or contractual damages rules apply; or
a dispute concerns whether a defect was latent or apparent for limitation purposes.
Lions Lawyers’ Analysis
The practical significance of this decision extends beyond disputes involving defective industrial equipment.
Limitation-of-liability provisions are routinely used in commercial contracts to allocate risk. They may establish a maximum aggregate liability, exclude particular categories of damages, restrict remedies to repair or replacement, or provide that contractual penalties constitute the exclusive financial remedy.
Under Ukrainian law, those clauses should not be treated as absolute.
The Grand Chamber confirms that intentional breach represents a statutory boundary that contractual drafting cannot overcome.
For businesses negotiating Ukrainian-law contracts, this means that a limitation-of-liability clause should be assessed not only by reference to its wording but also by reference to the type of breach to which a party later seeks to apply it.
The judgment is also important for foreign suppliers entering the Ukrainian market. A contractual liability structure derived from another jurisdiction or from a group's standard international terms may not necessarily produce the same legal effect under Ukrainian law. Mandatory provisions of Ukrainian civil and commercial legislation may override contractual risk allocation in particular circumstances.
The distinction between contractual damages and statutory product liability is equally important. A claim that equipment does not achieve contractually guaranteed capacity, productivity or quality parameters is not necessarily a product-liability claim merely because the dispute concerns allegedly defective goods. The contractual obligations undertaken by the supplier remain central to determining the applicable legal regime.
Finally, limitation periods should be assessed at an early stage of any dispute involving defective goods. Whether the alleged defect is classified as latent or apparent can determine whether the applicable period is one year or six months.
Lions Lawyers advises Ukrainian and international clients on commercial contracts and disputes in Ukraine, including supply agreements, limitation-of-liability clauses, defective goods, contractual damages, warranty claims, industrial equipment disputes and enforcement of contractual remedies. We provide full-service legal representation as well as standalone legal opinions, enabling clients to assess their existing strategy and, where appropriate, identify alternative legal approaches.
GET IN TOUCH FOR A FREE 1-HOUR INITIAL CONSULTATION.