Nullity Exception to Limitation Periods (American Case Note)

See below for authorship of this case comment

Nullity Exception Can Be Raised within Limitation Period Notwithstanding Performance
March 10 2009

FactsDecisionComment

In a decision dated December 4 2008 the Second Civil Division of the Court of Cassation has clarified the conditions under which insurers can assert the nullity exception to an insurance contract. The court held that nullity based on Article L113-8 of the Insurance Code can be raised as an exception within the two-year limitation period notwithstanding contractual performance by the insurer. This pragmatic decision clarifies the court's previous case law and is seemingly grounded on equity and policy considerations.

Facts

The company Ben's Garage du stade had subscribed to an AXA France comprehensive insurance policy. After a fire caused by arson, the insured made a claim against its insurer which, as compensation, made a provisional payment pursuant to the insurance contract. The insurer later denied the insured full coverage for the claim, asserting that it had resulted from a wilful misrepresentation, and further requested the reimbursement of the provisional payment. The insured sued the insurer, asserting payment of the claim by the insurer. The insurer used nullity of the contract as a defence.

The court of appeal denied the claim and ordered that the insurer be reimbursed with the amounts it had paid pursuant to the insurance contract.

The insured appealed, contending that the nullity exception can be raised to avoid performance of a contract only if the contract has not yet been fully or partially performed. The company further asserted that the court of appeal had breached Article L113-8 by granting the nullity exception even though the insurer had already made several payments under the insurance policy, with the effect that the insurance contract had been partially performed.

Decision

The Court of Cassation rejected the appeal and affirmed the court of appeal's decision, stating that:

"The nullity deriving from Article L113-8 of the Insurance Code can be raised as an exception within the two-year limitation period notwithstanding performance of the insurance contract."

Comment

According to the general principles of contract law, the nullity exception is perpetual.
In practice, this means that - unlike a nullity action, which must be brought within a certain limitation period - the nullity exception can be used at any time. A defendant can raise the defence that a contract is void without regard to a limitation period, even after a nullity action would be time-barred.

The purpose of this perpetuity is to prevent parties from waiting until the nullity action is time-barred in order to ask the court for enforcement of a void contract, without the defendant being able to oppose on the grounds of nullity.

However, this principle is subject to the condition that the contract has not yet been performed, whether fully or partially. Performance, or the beginning of performance, of a contract is considered to be an implicit confirmation of the contract even if it was otherwise void.

Case law has traditionally followed the same logic regarding insurance contracts, including the nullity grounded on Article L113-8, which provides that the insurance contract will be void in case of wilful misrepresentation on the part of the insured and falls within the two-year limitation period of Article L114-1.

According to the case law of the First Civil Division of the Court of Cassation, an insurer that has not yet performed a contract and has been aware of the insured's wilful misrepresentation for more than two years without denouncing the contract through a nullity action can still assert it by raising an exception in the course of any proceedings initiated by the insured. The right to assert the nullity of an insurance contract by way of an exception is therefore perpetual, subject to the condition that the contract has not yet been performed fully or partially.(1)

In another case(2) a court of appeal had granted an insurer's nullity exception, reimbursing the sums it had paid under a void contract and finding that the two-year limitation period provided for by Article L114-1 could not be used against an insurer that raised the nullity of the contract by way of an exception, notwithstanding that the insurer had voluntarily performed the contract before the insured sued for compensation under the insurance policy.

The Second Civil Division of the Court of Cassation quashed the court of appeal's decision, finding that "the nullity exception can be raised only to challenge the performance of a contract that has not yet been performed, whether fully or partially".

In light of these precedents, the insurer in this case should have been unable to raise the nullity exception as it had already partially performed the void insurance contract by making several payments to the insured pursuant to the contract.

However, the facts of that case were different from those in this case, as the nullity exception had been raised after the two-year limitation period. In this case, the exception was raised within the limitation period.

So the court has granted defendants a non-perpetual nullity exception which can be successfully raised even if a contract has already been partially performed, as long as it is raised within the two-year limitation period provided for in Article L114-1. The starting point of the limitation period is not expressly formulated in this decision, but it can be assumed that it starts to run from the moment the insurer is aware of the condition which affects the contract's validity.
Any alternative ruling would be inequitable and legally illogical as it would prevent the insurer from asserting the contract's nullity only because it did not initiate court proceedings. If a nullity action can be brought by an insurer that has partially performed an insurance contract, as long as it is exercised within the two-year limitation period, there seems to be no reason why the nullity could not be raised within the same limitation period by the same insurer as an exception in the course of proceedings initiated by the insured in order to recover payments under the void insurance contract.

Therefore, the decision cannot be considered to overrule previous case law. It clarifies it and provides a safer and more predictable legal environment for insurers, which now know that they will be able to recover payments made under a void insurance contract pursuant to Article L113-8, notwithstanding partial performance of the contract, provided that the exception is raised within two years of the insurer's discovery of the insured's wilful misrepresentation.

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 (carole.sportes@bopslaw.com). The BOPS website can be accessed at www.bopslaw.com.

Endnotes
(1) Cass Civ 1st, June 23 1993.
(2) Cass Civ 2nd, October 19 2006.