California Supreme Court Prohibits Contractual Limitation of Liability Clauses for Intentional Misconduct

In New England Country Foods, LLC v. VanLaw Food Products, Inc., the California Supreme Court recently held that California Civil Code section 1668 prohibits contractual limitation of liability clauses that limit liability for harm caused by intentional misconduct.

In pertinent part, Section 1668 provides:

“All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”

Manufacturer VanLaw was sued by a barbecue sauce company that it provided manufacturing services on behalf of, for for allegedly trying to copy its  barbecue sauce and sell it to Trader Joe’s.  New England Country Foods’ claims sounded both in contract and tort.  In response, VanLaw argued that a contract between the parties limited damages for injuries caused by intentional actions and were therefore against public policy.

In response, the plaintiff asserted that the contractual limitation of liability provision was not enforceable pursuant to California Civil Code Section 1668 because it it permitted the defendant to engaged in intentional tortious conduct with impunity.

The applicable limitation on damages clause stated, in pertinent part:

“In no event will either party be liable for any loss of profits, loss of business, interruption of business, or for any indirect, special, incidental or consequential damages of any kind, even if such party has been advised of the possibility of such damages.”

An indemnification provision further provided that “in no event shall either party be liable for any punitive, special, incidental or consequential damages of any kind (including but not limited to loss of profits, business revenues, business interruption and the like), arising from or relating to the relationship . . ., regardless of whether the claim under which such damages are sought is based upon breach of warranty, breach of contract, negligence, tort, strict liability, statute, regulation or any other legal theory or law.”

After its contract with Trader Joe’s had not been renewed, NECF allegedly discovered emails between VanLaw and Trader Joe’s that purportedly stated that the former intended to copy the barbecue sauce.  NECF  then initiated legal action against VanLaw seeking $6 million in lost profits and punitive damages.  NECF’s claims included breach of contract, intentional and negligent interference with prospective economic relations, intentional interference with contractual relations and breach of fiduciary duty.

The U.S. District Court for the Central District of California dismissed the plaintiff’s complaint, reasoning that the applicable contract limited the parties remedies to direct damages or injunctive relief.  The court permitted NECF to amended its complaint by seeking “remedies permitted under” the contract or “plead why the available remedies are unavailable or so deficient as to effectively exempt Defendant from liability.”

In its amended complaint, NECF stated, in pertinent part:

“Upon information and belief, all of Plaintiff’s harm from the wrongful conduct alleged herein is a form of lost profits (both past and future).  Further, the only possible harm to Plaintiff from the wrongs committed by Defendant are a loss of profits.”

Plaintiff further asserted that the contractual limitation of liability provision “would completely exempt Defendant from liability for the wrongs alleged.”  NECF asserted that the subject contractual provision was voidable as per California Civil Code Section 1668.

The complaint was once again dismissed by the district court which reasoned that the contractual provision substantially limiting damages for willful tortious conduct was valid and agreed upon.

NECF appealed to the case to the Ninth Circuit that, in turn, referred the issue to the California Supreme Court to determine whether the provision was enforceable pursuant to California Civil Code Section 1668.

According to the California Supreme Court explained, Section 1668 is intended to “vindicate social policy” by precluding parties from “granting themselves licenses to commit future aggravated wrongs.”  The court noted a different, recent California case similarly held that the existence of a contractual relationship between two parties does not mean one party can tortiously injure the other but limit its liability to a contract remedy.

The court opined that  it may be possible to release ordinary negligence, but not gross negligence or willful conduct.

For ordinary negligence claims, the court cited to legal precedent that previously held that contractual limitations of liability for ordinary negligence may be prohibited if they affect the public interest as assessed under various, enumerated factors.

Consequently, the California Supreme Court held that, regardless of the relative sophistication of the parties, the contractual limitation of liability clause was not enforceable because it violated public policy and Section 1668 of the California Civil Code.  Note, that the court stated that its holding applied only to the extent the claims at issue involve a tort claim independent of the parties’ contract.

Takeaway:  Parties negotiating contracts should be aware of this decision, particularly when considering choice of law provisions.  Parties may not contract away liability for willful injury. Whether the limitation on liability is partial or total makes no difference.  Limitation on liability provisions applied to intentional wrongdoing are invalid as against public policy regardless of the sophistication of the contracting parties.  It is irrelevant that any such provision “limits,” as opposed to completely bars, damages.  Section 1668 does not prevent parties from limiting their respective liability for breach of contract.  Liability for “ordinary negligence” may be released sometimes.  It depends upon a multi-factor analysis.  “Gross negligence” claims are generally precluded from being limitation because California public policy precludes enforcement of agreements that would remove obligations to adhere to minimal standards of care. 

Richard B. Newman is a TCPA attorney at Hinch Newman LLP. 

Informational purposes only. Not legal advice. This article is not intended to and should not be construed as legal advice. May be considered attorney advertising.