United States: Limitations On Liability Exceptions For Gross Negligence And Willful Misconduct And The Implications For Outsourcing Agreements

In outsourcing agreements, parties typically limit their liability to each other. The parties often exclude from those limitations on liability damages caused by gross negligence or willful misconduct. The definitions of gross negligence and willful misconduct vary by state and the conduct that courts consider as falling under those defini­tions depends on the facts of each case. This article examines the definitions of gross negligence and willful miscon­duct, the difficulty in demonstrating to courts that a party's conduct meets the standards imposed by those definitions and the implications for outsourcing agreements. For purposes of this article, we focus on New York law, commonly selected as the governing law in large outsourcing transactions.


The definitions of gross negligence and willful misconduct vary by state and the conduct that courts consider as falling under those definitions depends on the facts of each case.


Limitation of Liability Provisions

Outsourcing agreements typically prohibit each party from being held liable for any incidental, consequen­tial, punitive, special or other indirect damages. In addition, these agreements typically place a cap on the total amount of damages for which either party can be liable in connection with the agreement. The result is to disallow a party from recovering the full damages caused by the actions of the other party. While such an allocation of risk may be acceptable in the case of an ordinary breach of contract by the other party, the allocation of risk is not typically considered acceptable when damages result from egregious action on the part of the other party or where the stakes of nonperfor­mance by the other party are so high that appropriate incentives need to be put in place to ensure that the other party fulfills its obligations under the agreement.

In such cases, the parties usually want the right to recover special, consequential and incidental damages and damages in an amount greater than the liability cap. Examples of exclusions from limitations of liability include losses resulting from a breach of confidentiality, refusal to provide services, death, bodily injury, damage to tangible property, violation of applicable law, gross negligence or willful misconduct.

While certain of the above exceptions may be proved relatively easily, prov­ing that a party's conduct constitutes gross negligence or willful misconduct is often more difficult. By understand­ing the definitions under the laws of the state governing the agreement and the courts' decisions on what conduct falls under the definitions, customers can better understand their rights and risks and the implications for a particular outsourcing agreement.


By understanding the definitions under the laws of the state governing the agreement and the courts' decisions on what conduct falls under the definitions, customers can better understand their rights and risks and the implications for a particular outsourcing agreement.


Enforcement of Limitation of Liability Provisions

With certain exceptions, courts enforce express agreements between parties that limit damages to be recovered in the event of a breach of contract.1 Parties are free to "bargain against liability for harm caused by their ordinary negligence in performance of contractual duty."2 Nevertheless, courts will not enforce an exemption from liability if it applies to "harm willfully inflicted or caused by gross or wanton negligence."3

New York courts generally enforce limitation of liability provisions since such provisions represent "the parties' Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed."4 However, even when parties limit liability but do not specifically exclude damages caused by willful misconduct or gross negligence, New York courts will not enforce the provision if the "misconduct for which it would grant immunity smacks of intentional wrongdoing"5 or if the provision will insulate a party from damages caused by its own grossly negligent conduct.6 Nevertheless, a party trying to overcome a limitation of liability provision by claiming that the other party engaged in willful misconduct or gross negligence must meet the standards described below.

What Are the Standards for Gross Negligence and Willful Misconduct?

The standards for proving gross negligence and willful misconduct are high.

Gross Negligence. Under New York law, miscon­duct that rises to the level of gross negligence must show "reckless indifference to the rights of others."7 The conduct must show a "failure to use even slight care or conduct that is so careless as to show com­plete disregard for the rights and safety of others."8 The gross negligence standard focuses on the sever­ity of a party's deviation from reasonable care.

Willful Misconduct. In New York, willful miscon­duct occurs when a "person intentionally acts or fails to act knowing that (his, her) conduct will probably result in injury or damage."9 Willful misconduct can also occur when "a person acts in so reckless a manner or fails to act in circumstances where an act is clearly required, so as to indicate disregard of (his, her) action or inaction."10 A party claiming willful misconduct must show an "intentional act of unreasonable character performed in disregard of a known or obvious risk so great as to make it highly probable that harm would result."11 The willful misconduct standard is similar to the gross negligence standard; however, it focuses more on the harm that a party's action or inaction caused.

What Conduct Meets the Standards of Gross Negligence and Willful Misconduct?

What conduct do New York courts consider as meeting the standards for gross negligence or willful misconduct? The determination depends highly on the facts of each case. The following cases provide some insight into the decisions of New York courts making this determination.

In one case, a computer software developer licensed its base software to the customer and was under an obligation to provide enhancements thereto.12 The customer rejected two sets of enhancements provided by the developer and a fee dispute arose, after which the developer discontinued performance under the agreement. Under the agreement's limitation of liability clause, the developer was absolved from any liability for certain indirect damages. There was an exception to the limitation of liability for, among other things, damages arising out of the developer's willful acts or gross negligence. The court found that parties to the agreement did not intend for the developer's discontinuation of services to constitute a willful act or gross negligence and, therefore, upheld a decision to enforce the limitation of liability clause.

In another case, an airline entered into an agree­ment for the installation of infrastructure for in-flight Internet service.13 The airline alleged that, with the encouragement of the Internet service provider, it invested millions of dollars in installing the Internet service infrastructure while the service provider secretly considered terminating the in-flight Internet service. The service provider ultimately decided to terminate the service. The airline claimed that the service provider's actions constituted gross negligence and that, therefore, the contractual limitations on liability should not apply. The court found that the service provider's conduct did not meet the "reckless disregard" standard required to prove gross negligence and, accordingly, upheld the contract's limitation on liability provisions.


If a customer wants to ensure that a specific type of misconduct by a service provider falls outside of the limitation of liability clause, the customer should specifically describe such misconduct in the outsourc­ing services agreement.


A New York court found that a home inspector's failure to identify problems in a house constituted gross negligence in another case.14 The services agreement limited the home inspector's liability for any consequential, exemplary or incidental damages in the event of a breach or negligent inspection; however, the limitation did not apply to any grossly negligent conduct or willful misconduct. The home inspector failed to identify hazardous conditions during the inspection that endangered the lives of the homeowners. The court determined that the home inspector's conduct showed a complete disre­gard for the safety of the homeowners and, thus, the homeowners were entitled to obtain damages outside of the limitation.

Implications for Outsourcing Agreements

Customers need to carefully consider the excep­tions to the limitations on liability included in their outsourcing agreements. Although state law may imply an exception for gross negligence or willful misconduct, losses arising from such conduct should be an express exception to the limitations on liability in the outsourcing agreement in order to avoid the need to establish the public policy exception and research the issue under each state law. Moreover, a customer needs to consider how difficult and costly it will be to prove to a judge or jury that a service provider's conduct meets the high standards required to establish gross negli­gence or willful misconduct.

If a customer wants to ensure that a specific type of misconduct by a service provider falls outside of the limitation of liability clause, the customer should specifically describe such misconduct in the outsourcing services agreement. In two of the cases described above, excluding the service provider's refusal to provide services from the limitation of liability would have provided a clearer standard for the customer to prove. Since the limitation of liability provision has a significant impact on the allocation of risk between parties to an outsourcing agreement, customers should ensure that any specific losses or misconduct that should not be subject to contractual limitations on liability are clearly and sufficiently identified as exclusions to the limitation of liability provisions.

Endnotes

1 5 Corbin on Contracts § 1068 (1964).

2 6A Corbin on Contracts § 1472 (1962).

3 Id.

4 See Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, 643 N.E.2d 504, 507 (N.Y. 1994).

5 See Kalisch-Jarcho, Inc. v. New York, 448 N.E.2d 413, 416 (N.Y. 1983).

6 See id.

7 See id.

8 See Johnson v. Smith, 2006 N.Y. Misc. LEXIS 2618 at **37-38 (City Ct. of N.Y. (Jefferson County) Sept. 8, 2006).

9 See id. at *3 (quoting New York Pattern Jury Instructions § 2.10A).

10 See id. at *3 (quoting New York Pattern Jury Instructions § 2.10A).

11 See McDuffie v. Watkins Glen Int'l, Inc., 833. F. Supp. 197, 203 (W.D.N.Y., Sept. 3, 1993).

12 Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, 643 N.E.2d 504 (NY 1994).

13 See Deutsche Lufthansa AG v. Boeing Co., 2007 U.S. Dist. LEXIS 9519, 2007 WL 403301 (S.D.N.Y. Feb. 2, 2007).

14 See Johnson v. Smith, 2006 N.Y. Misc. LEXIS 2618 (City Court of New York (Jefferson County) Sept. 8, 2006).

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions